Copa Holdings, S.A.

Ladies and gentlemen, thank you for standing by. Welcome to COPA Holdings' fourth quarter earnings call. During the presentation, all participants will be on a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, you will have to press star then one one on your touchtone phone. As a reminder, this call is being webcast and recorded on February 16th, 2023. Now I will turn the conference over to Daniel Tapia, Director of Investor Relations. Sir, you may begin.

Thank you, Latif. And welcome everyone to our fourth quarter Air News Call. Joining us today are Pedro Hebron, CEO of Copa Holdings, and Jose Montero, our CFO. First, Pedro will start by going over our fourth quarter and full year highlights, followed by Jose, who will discuss our financial results. Immediately after, we will open the call for questions from analysts. COPA Holdings financial reports have been prepared in accordance with international financial reporting standards. In today's call, we will discuss non-IFRS financial measures. A reconciliation of the non-IFRS to IFRS financial measures can be found in our earnings release, which has been posted on the company's website, copaair.com. Our discussion today will also contain forward-looking statements, not limited to historical facts, that reflect the company's current beliefs, expectations, and or intentions regarding future events and results. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially and are based on assumptions subject to change. Many of these are discussed in our annual report file with the SEC. Now I'd like to turn the call over to our CEO, Mr. Pedro Hedron.

Thank you, Daniel. Good morning to all and thanks for participating in our fourth quarter earnings call. Before we begin, I would like to extend my sincere gratitude to all our coworkers for their commitment to the company. Their continuous efforts and dedication have kept COPPA at the forefront of Latin American aviation. To them, as always, my highest regards and admiration. We're proud to report solid fourth quarter and full year results, despite the pressure higher jet fuel prices have added to our operating costs and other headwinds common to our business. Among the main highlights for the quarter, in terms of capacity, although we had a similar number of daily departures compared to 2019, we achieved 6% more ASMs than in Q4 2019, due to a higher average gauge. Revenue passenger miles increased by 7.5%, which led to an 86.6% load factor, a 1.4 percentage point increase when compared to the same period in 2019. Passenger yields came in at 15.1 cents, or 20% higher than in the first quarter of 2019, while cargo revenue, including the contribution from the operation of our Boeing 737-800 freighter, was 69% higher, resulting in unit revenues, or RASM, of 13.7 cents, a 23% increase compared to the first quarter of 2019. Adjusted fuel CASM decreased by 7% compared to Q4 2019, from 6.6 cents to 6.1 cents. And our operating margin came in at 24.7%. Now turning to our main highlights for the full year 2022, unit revenues increased 12.6% year-over-year to 12.1 cents, mainly driven by a 10.8% increase in yields. Casa Mixed Fuel came in at 5.98 cents almost 5% lower than 2019, and the operating margin for the year came in at 15.2%. During the year, we started flights to Barcelona, Venezuela, Santa Marta, Colombia, and to the Felipe Angeles Airport in Mexico City, ending the year operating to 77 destinations in 32 countries in North, Central, South America, and the Caribbean. strengthening our position as the most complete and convenient hub in Latin America. We inaugurated our new Copa Club in Tucumán's new Terminal 2. This new and modern facility provides our business class and preferred members with a world-class experience while traveling through our Panama Hub of the Americas. We also reactivated our Panama Stopover program, which promotes our home country as a tourist destination and we're seeing good results. In September, we launched our new distribution strategy, including the new COPPA Connect option for travel agencies to access COPPA First and other content via the IATA New Distribution Capability, or NDC. At the same time, COPPA introduced a cost recovery search source for bookings made through the legacy GDS technology known as EDIFACT. During Q4, we were pleased with both the adoption of Copa Connect among our agency partners and the increase in direct sales via Copa.com. We're still at an early stage, but these changes are helping us gain more control over our distribution strategy and offset and eventually lower our distribution costs. On the operational front, Copa delivered an on-time performance of 87.4% and was recently recognized by the official airline guide as the most on-time airline in Latin America in 2022. In fact, according to OIG, Copa's on-time performance was again the highest of any carrier in the Americas. Additionally, last year Copa Airlines was recognized by Skytrax for the seventh consecutive year as the best airline and the best airline staff in Central America and the Caribbean. I would like to once again express my recognition to our more than 7,000 co-workers who day in and day out deliver a world-class travel experience for our customers. Their contributions are key to our success. With regards to Wingo, Wingo received one additional 737-800 from Copacabana and ended the year with a total of nine aircraft. Additionally, it continued its regional expansion and ended 2022 operating 31 routes with service to 20 cities in 10 countries. Turning now to our expectations for 2023. During our last call in November, we shared preliminary capacity guidance for the year of close to 16% compared to 2022. and we mentioned that we were expecting to receive 13 Boeing 737 MAX aircraft during the year. As you saw in our earnings release, we are reducing our capacity growth guidance to a range of 12 to 14%, as it now looks like Boeing won't be able to maintain its regularly scheduled delivery dates. We now expect to receive 12 aircraft during the year instead of 13. Additionally, As is the case for the industry worldwide, we're experiencing higher maintenance costs related to our engines and increased shop visits and turnaround times. We expect that this issue will add pressure on our unit costs for the year. Jose will provide more details about this. This year we expect to continue growing our hub in terms of frequencies and new destinations. So far we have announced new service to the cities of Malta and Ecuador, and Baltimore and Austin in the U.S. starting this summer. With these additions, we will be serving 80 destinations in North, Central, South America, and the Caribbean by July of this year. To summarize, we delivered strong results in Q4 and for the full year 2022. Our team continues to deliver world-leading operational results, including, again, the best on-time performance in the Americas, We're reducing our capacity assumptions for the year, given the current delays in the aircraft delivery stream. And as always, we will continue looking for efficiencies and savings to further reduce our unit costs and strengthen our competitiveness going forward. Lastly, we're as confident as ever in our business model. In 2022, we delivered competitive unit costs and solid margins. while continuing to offer a great product to our passengers, making us the best positioned airline in our region to consistently deliver industry-leading results. Now I'll turn it over to Jose, who will go over our financial results in more detail.

Thank you, Pedro. Good morning, everyone. Thanks for being with us today. I'd like to join Pedro in acknowledging our great team for all their efforts to deliver a world-class service to our passengers. I will start by going over the main highlights for full year 2022. Our load factor came in basically flat versus 2019 at 85.1%. Driven by a 10.8% increase in yields, unit revenues improved by 12.6% versus 2019 to 12.1 cents. Our unit costs came in at 5.98 cents, 4.6% lower than in 2019. And due to an increase of 67% In jet fuel prices, our operating margin was 0.9 percentage points lower than in 2019 at 15.2%. Reported net income for full year 2022 came in at $348.1 million, which translates to earnings per share of $8.58. Excluding special items, namely an unrealized market-to-market net gain of $12.7 million related to the company's convertible notes, as well as changes in the value of financial investments, Adjusted net income came in at $335.4 million, or adjusted earnings per share of $8.26. Now turning to our fourth quarter results, net profits for the quarter came in at $88.3 million, or $2.23 per share. Excluding special items, net profits came in at $177.7 million, or $4.49 per share. Fourth quarter special items, are comprised of an unrealized market loss of $91.3 million related to the company's convertible notes and a $1.9 million unrealized market gain related to changes in the value of financial investments. We reported a quarterly operating profit of $219.7 million and an operating margin of 24.7%. Capacity came in at 6.5 billion available seat miles or approximately 6% higher than in Q4 2019. Load factor came in at 86.6% for the quarter, a 1.4 percentage point increase compared to the same period in 2019, while passenger yields increased 20.4% to 15.1 cents. As a result, unit revenues came in at 13.7 cents, or 23.4% higher than in the fourth quarter of 2019. During by higher jet fuel prices, unit costs or chasm increased 10.3 cents or 10% more than the adjusted chasm in Q4 2019. And finally, our chasm excluding fuel came in at 6.1 cents, a 7% decrease versus the adjusted chasm excluding fuel for Q4 2019. We're going to spend some time now discussing our balance sheet and liquidity. As of the end of the year, we had assets of close to $4.7 billion. And in terms of cash, short, and long-term investments, we ended the year with $1.1 billion, which represents 38% of last 12 months' revenues. As to our debt, we ended the year with $1.7 billion in debt and lease liabilities and achieved an adjusted net debt to a bid-buy ratio of 0.8 times. Turning now to our fleet during the fourth quarter, we received two Boeing 737 MAX 9s to end the year with a total of 97 aircraft, compared to 102 aircraft in our fleet at year-end 2019. In January of 2023, we received an additional 737 MAX 9 to bring our total fleet to 98 aircraft. With this addition, our total fleet is now comprised of 68 737-800s, 21 737 MAX 9s and nine 737-700s. These figures include one 737-800 freighter and the nine 737-800s operated by Wingo. Two thirds of our fleet continue to be comprised of owned aircraft and one third of our aircraft are under operating leases. During the remainder of 2023, we expect to receive 11 additional aircraft, all Boeing 737 MAX 9s. We have been informed by Boeing of additional delivery delays in our 2023 delivery stream, so we now expect all 11 aircraft pending to be delivered during the year to have between two to four months of delays versus the original delivery date. As to our outlook, based on the current demand environment and the expected delivery dates for incoming aircraft, we can provide the following guidance for full year 2023. We expect to increase our capacity in ASNs versus 2022 within a range of 12% to 14%, and we expect an operating margin within a range of 17% to 19%. We're basing our outlook on the following assumptions. Load factor of approximately 85%, unit revenues within a range of $0.121, CAS MX fuel to be in the range of $0.06, mainly due to the additional costs associated with our engines and the longer maintenance, shop, and turnaround times that we expect for this year. And finally, we're expecting an oil and fuel price of $3.15 per gallon. Thank you, and with that, we'll open the call to some questions.

Thank you. As a reminder, to ask a question, you will need to press star 1-1 on your telephone. Again, that's star 1-1 on your telephone to ask a question. Please stand by while we compile the Q&A roster. Our first question comes from the line of Michael Lindenberg of Deutsche Bank. Your question, please, Michael.

Oh, yeah. Hey, good morning, and congrats on the great results, team. Two questions here, I guess, first. Oh, you're welcome, Pedro. Two questions here. Just the first, Pedro, can you actually update us on some of the sharehold initiatives, the share repurchase and where things stand with respect to dividend reinstatement?

Yeah, okay. So I'll answer the second part and then I'll let Jose address the repurchase part. So the board met last week and decided to discuss the dividend reinstatement decision at an upcoming board meeting towards the second half of March, so this coming month, where we're going to present our budget, our capex need, our cash flow, et cetera. So they decided to make the decision then. So that will be in like a month or so. OK.

Yeah, Mike, in terms of the share repurchase program, we were active last year in the program. We have a currently approved $200 million program that is essentially halfway completed. And of course, the objective of the program is to maximize shareholder value. And the other component of the strategy behind the program is to have liability management vis-a-vis the convert as well. So that's kind of the strategy that we have. uh, with, with the charity purchase program.

Okay, great. And then, um, just, uh, my second, um, when we look at the 12 to 14% capacity growth, you've already announced three new cities, right? Baltimore, Austin, and Manta. Should we anticipate more cities? And as we think about the 12 to 14, is it mostly, you know, connecting the dots or really not even connecting it? Is it mostly adding frequency or depth to the schedule? Is it 50-50 new cities? I'm just curious about the type of growth and low risk versus high risk type growth.

Correct. So my answer, in a way, is all of the above. But 50% of the capacity growth in 2023 comes from the full year effect of the additions in 2022, both frequencies and new destinations added in 2022. Then the other 50% is mostly additional frequencies in current markets, and then a smaller part of that 50% is going to be new destinations. We have announced three, as you mentioned, and we are hoping to announce an additional at least two, two or so for the end of the year.

Um, Pedro, the two or so that you're looking to announce, are they some of the, are they some of the destinations that you served prior to COVID that you have yet to, to restart? Are they completely new destinations?

I mean, I, I meant to say new destinations. We still have about eight destinations. We haven't restarted from, from pre COVID and we hope to also reinstate some of those, uh, during the year.

Okay. Very good. Okay, thanks. Thank you very much. Thank you, Mike. Thank you.

Our next question comes from the line of Duane Finnegarworth of Evercore ISI. Your question, please, Duane.

Hey. Thanks. Good morning. Just on the traditional pattern of margins, 4Q to 1Q, you know, typically we actually see some pickup sequentially from 4Q to 1Q. And if you think about the kind of roughly 25% margin that you've posted here, how do you think about that into, you know, into 1Q? And, you know, I guess what we're trying to get a feel for is how much conservatism you've baked into the second half of the year because it just feels like a lot.

Right. So, Dwayne, And of course it's only February, so we're gonna be cautious in how we try to forecast, you know, nine, what, 11 months we have ahead of us. But I should also say that Q4 was not necessarily a typical Q4, but I'll let Jose maybe get into more detail.

Yeah, Duane, you know, Q4 was, particularly strong for a couple of reasons. One, there was a strong demand environment in the region. Number two, most of the sales that were performed for Q4 were made during a period where fuel was still high and then fuel came down during the quarter as well versus where it was in Q3. So that created a very, very strong result for the quarter. Your item, I think Pedro was kind of getting into this. We decided to go back to our yearly guidance, so we're providing a full year guidance. For Q1, I would say from a top line sort of RASM perspective, you could argue that in Q1 there is maybe a slight reduction, or the guidance assumes a slight reduction in the RASM versus the Q4 RASM that was very, very strong. But that's just a function of there's a little bit more capacity in the network, and the other item there is fuel is a little bit lower as well. So there's some of that dynamic going on there, but we expect Q1 to have a good development in terms of its profitability from what we're seeing so far.

Okay. I mean, fuel is lower sequentially. Obviously, fuel has been all over the place, but it is lower sequentially, at least, you know, our view today for Q21Q. And then maybe just for the follow-up on, you know, the pilot contract announcement, can you speak to, you know, the magnitude of that? Assume that's in, you know, in your full-year cost guidance. You know, how should we think about that?

Right. So this is a process we go through every four years. with all of our unions, including our pilot unions, you usually don't even find out because there isn't a lot of noise out there about it. It's usually a very professional and, I don't know, I don't want to say friendly, but professional and respectful negotiation. It wasn't any different this year, only that it got out in the news, so a little bit more noise was made out of this. The agreement was signed last week, as always. Usually it gets signed on the due date. And it was not much different to what we have signed in previous negotiations four years ago or eight years ago. Not very different. And it should not have an impact that we cannot cover with other efficiencies and growth and things like that.

It is, and just to be clear, it is included in our guide for 2023 in terms of ex-fuel chasm. And again, it's in line with what we have signed in the past with that group. And it was signed, you know, I think the conclusion to the negotiation was done in a very good spirit.

And it's in line with inflation in Panama also. Inflation in Panama is in the 2% to 3% range. So it's also in line with that. And again, very similar to what we have signed in the past. It's in the guidance, of course. Okay, very clear. Thanks for the time. Thank you.

Thank you. Our next question. Pardon me. Our next question comes from the line of Rogerio Arojo of Bank of America. Your line is open, Rogerio.

Thank you very much. Hey, gentlemen, thanks so much for being here. for the opportunity, I have one follow-up on maybe supply-demand. So there is a red implied in the guidance that is about 12% of 90-team level, and fourth Q was 20%, 21% above 90-team level. So I would like you guys to comment what is driving that. So you already mentioned that. Some of the fourth Q tickets have been sold when oil price was at a higher level. But can you break down in maybe three segments here? One is the higher frequencies from copper, how it should impact expected yields. The higher the expected capacity expansion from competitors. And also demand. Do you expect demand weakening? Is there... I don't know, maybe I think that the demand environment currently that is expected to be normalized. So how are you thinking about corpus supply, competitor supply and demand? Thank you.

Thank you, Rogerio, for the question. I will start by saying that, you know, this is early in the year, so the visibility towards the latter part of the year is still limited. But from what we're seeing, at least in Q1, the demand environment, continues being relatively strong versus what we saw in Q4. You know, I think that, you know, for both on the unit revenue side, you know, and in the low factor side, it looks relatively strong. Maybe a tad down versus, again, Q4, but in general terms, still very strong system-wide, and all regions seem to have that sort of same behavior. In terms of What we're seeing when you compare, let's say, the unit revenues for the second half of 2022 and the full year 2023 guidance that we've issued, I would say that the majority of the component in terms of the change in RASM is related to the fuel curve assumption that we have or the fuel curve that we have based our universities in. I would say about two-thirds of the movement is related to that. And then the other part is related to the capacity that we brought in. We were increasing capacity for the full year by the range of 12 to 14 percent, so it is an important double-digit movement in capacity. So I would say those are the two movements. But it's, you know, again, fuel and capacity on our own capacities is what's driving the guidance for 23. They're clear.

Thanks so much. Congratulations on the very strong results. Thank you, Rogerio.

Thank you.

Our next question comes from the line of Savi Sith of Raymond James. Your line is open, Savi.

Thank you. Good morning, everyone. If I might, on the capacity front, could you talk a little bit about just from a max delivery standpoint, how you expect that to kind of come throughout the year and kind of the capacity cadence there, which related to that is also kind of the fuel efficiency. Do you expect that to improve as we go through the year or is just based on kind of the routes that you're adding, do we, you know, maybe shorter haul routes or anything around that that may be causes fuel efficiency to maybe not improve despite the max delivery?

Yeah, I would say, Savi, that the cadence throughout the year, I would say that most of the growth will probably occur during the second half, so it will be more anything back-loaded into the second half of the year. You know, we're seeing for Q1, again, a growth on a sequential basis low single digits versus q4 and remember that in but also there's the impact of I mean again here we're comparing against 22 in total so there is also the impact of omicron at the beginning of the year a little bit so there's there's some noise in the base of 22 to 23 but say it's mostly back loaded into the second half of the year and yeah there you know the benefits in terms of fuel consumption for the max is there you know it's a in the double digit range versus low double-digit grain versus the ENG. So we're seeing that, and I think that's an assumption to make in the fuel consumption part of the model.

Which is, of course, in our guidance. Yes, of course.

Got it. And if I might, on the Wingo, you increased one more aircraft. I don't know if that was kind of expected or not. Could you just talk about what's... you know, how you're thinking about Wingo and how that's evolving based on what you're seeing in the environment today?

Sure. So Wingo did go from eight aircraft at the beginning of 2022 to nine, something we had planned for. However, the Colombia market is very competitive right now. I would say it has overcapacity. So we think that Wingo for 2023 is going to remain at nine aircraft. So we don't see Wingo growing much this year except for better utilization of its fleet. And they'll do a few things. They'll add some markets. They'll shift capacity around. But they will remain with nine aircraft during the year.

Helpful call. Thank you.

Thank you, Sari.

thank you our next question comes from the line of bruno omorum of goldman sachs your question please bruno hi can you hear me yes thank you so the question is actually a follow-up on the outlook for 23 um just wanted to make sure that we got the right message is it fair to say that um You know, you are taking advantage of the fact that margins are running above trend to stimulate some demand and bring margins back to what were the historical levels. You know, because I understand fourth quarter was particularly strong, but even if you look at third quarter, margin was 18% already with much higher fuel prices, right? So it does seem that, you know, all else held constant. There was room for margins to be better in 2023. Thank you.

I'll start and then let Jose finish the question. But in Q3, we were able to cover our fuel expense with higher yields. And of course, when fuel is up, most every airline is affected in the same way. And it's a lot easier to get fair action matched by everyone, which is what happened in the second half of the year. In Q4, we had a very strong month of October where load factor was about 90%. That's way above our high average. It's even above our high average. And then fuel started coming down in the latter part of the quarter while yields remained higher than before. So we don't think that's sustainable. And we're seeing that, and it's experienced from the past also, when fuel comes down, airlines are a little bit more aggressive in their pricing, and we've seen a lot of that, or some of that, I should say. So the expectation is for Q1 that demand will be slightly lower, but still very healthy, still very healthy, but we won't have an October, so the rest will be very similar. And yields will be also slightly lower due to the fuel reduction. Andres, you want to add something to that?

The point is that we're also growing by, you know, between 12% and 14%, which is a significant level of growth. And I think that that's also a driver of our strategy for the year is just simply to continue sort of rebuilding the hub to where it was pre-pandemic. And I think that the margin guidance that we're providing is at the high end of what we have delivered on a yearly basis over the last several years. So it is with the added growth is precisely as you mentioned, portion of the strategy that we're pursuing in terms of capturing a new market or recapturing our markets.

Thank you very much.

Thank you, Bruno.

Thank you. Our next question comes from the line of Stephen Trent of Citi. Your line is open, Stephen.

Good morning, gentlemen, and thank you very much for taking the time. I just had one or two quick follow-ups on the competitive environment. So it seems, for example, like Spirit Airlines has exited Florida, Panama, that may have had some trouble competing there. And then in Colombia, I know you also just mentioned it, but it looks like Viva Colombia is maybe looking a little wobbly from a competitive perspective. You know, when you think about sort of broader capacity in the region, do you see kind of medium to longer term upside for passenger capillarity through document? Thank you.

Yeah, actually, the two examples you have alluded to are not really that, don't have a significant impact in our networks. We don't compete much against either one, and we have very little overlap. So those exiting certain markets don't really have an impact. And what we have seen is a tilt towards more ULCC competition in our network versus what would have been eight years ago or even four years ago. So that's, I think, the big change, which is kind of, it has two sides. One side is, of course, we need to remain very focused on our costs and our efficiencies, etc. But secondly, we are, like in most markets, the only full-service carrier. So that gives a certain uniqueness. But in general terms, as I mentioned, competition right now in our network is mostly ULCC. And I would say that most airlines have brought back most of their capacity to pre-pandemic levels or very close to it.

Very helpful, Pedro. And as my follow-up, just really quickly, I know you guys gave very helpful guidance on the full year. I was wondering if you might have a high-level view as to how we might think about

uh sort of one q uh jet fuel kerosene sort of you know relatively where you you could see it again uh thank you yeah a stephen uh i think we're on a quarter or quarter basis versus q4 fuel is down by about four percent yeah so that's that's kind of how we're seeing it on again q4 versus q1 ah super jose thank you and let me leave it there thanks guys

Thank you. Thank you. Our next question comes from the line of Helaine Becker of Cohen. Your line is open, Helaine.

Thanks very much, operator. Hi, everybody, and thank you very much for the time. So just two questions here. The first question is with respect to cargo. can you just talk a little bit about what you're seeing right now um you know are you seeing similar declines to what others are seeing in the market how are you thinking about utilizing the the freight aircraft that you have right so first thing i should say is that cargo it's only about three percent of our revenues so it's not

that significant. I mean, it used to be two and a half. So it's above what it used to be, but not by a huge margin. But we are operating our 737-800 freighter. It's operating great with good load factors and yields. It's actually operating over 10 hours per day. So we're getting the most out of it. And yields have come down a little bit, but in our network, most of our cargo still moves in the belly of our passenger narrow-body fleet, and the freighter is doing well. So we're not a big cargo carrier, and we should continue seeing improvement in our numbers, in our cargo revenue numbers.

And it's contributing positively, I think, with those figures to the business. Yes.

Okay, that's really helpful. Thanks, guys. And then my follow-up question is, how are you thinking about the convert? I think you can start buying it back in April. So what are you thinking about with respect to that?

Yeah, Elaine, I would not necessarily get into details of particulars of the strategy, but yes, there is a call option that is available in April this year. the convert has a the due date of the converter is actually April 2025 but you know what we have been doing in the past several months as we discussed this been very active in our buyback program which also is and gives us optionality for the settlement of the convert as well. So it is kind of the strategy that we're pursuing. And we have different options available to us on the table to be able to minimize the effect of the liability for us.

Okay. That's very helpful. Thank you.

Thank you, Elaine.

Thank you. Our last question comes from the line of Josh Milberg. I'm Morgan Stanley. Your question, please, Josh.

Yes. Hi, everyone. Thank you very much for the call and congrats on the results. I just wanted to ask if you could touch on your ChasmX outlook and what factors could eventually enable you to beat the sixth cent level. And what I have in mind is eventually greater seat densification. And I know that in the past you've said you wouldn't be complacent about that level. And I also wanted to understand what's incorporated in your CASMX guidance in terms of pilot crew salary adjustments. I joined the call a little bit late, so I'm sorry if you already addressed that.

Yeah, Josh, thank you for the question. I'll answer the last portion first. And yes, in our 2023 guidance of six cents, there we have included all the impact associated with uh all our salary ways and benefits contracts etc and so it's all in there in terms of the guide for 2023 it does include an increase in uh maintenance costs associated with uh engine shop visits and and lease engine uh rentals that we have and so that that's basically the the driver that is offsetting some of the improvements that we have due to the capacity impact and due to the distribution benefits that we've achieved in the last quarter with our new distribution strategy. So that's kind of why the chasm is remaining flat for 2023. But as you all mentioned, we have still optionality related to the fleet densification program. We expect to conclude this portion of our fleet densification program during the middle part of the year, but there's another portion that is coming in subsequent years, and there's further opportunities in distribution and in others. The other component also that we're seeing growing a little bit in terms of unit cost this year that we're offsetting with some of the improvements that we are making is our flight fees are going up in a couple of countries in Colombia and Brazil this year that is driving some cost pressures upward. But again, we've been able to mitigate that with some of the other improvements that we've made just in the business. So again, to summarize, we're keeping a CASM expectation for this year flat versus 2022, again driven by some incremental maintenance expenses or flight fees and offset by some of the improvements that we made in distribution and the capacity impact that we have. And pending, of course, the densification going forward.

Okay, that's great, Jose. Thank you very much for that detailed response. And then if you could just touch very quickly on what you're seeing in terms of corporate versus leisure trends in the first quarter and in the first half. I know you guys always get that question.

Yeah, it's still not fully recovered.

I would say right now leisure VFR is about three-quarters of the total volume of passengers that we're serving. and about a quarter is related to business. So it is still not back to the sort of two-thirds, one-third where it was pre-pandemic.

Okay, great. Really appreciate it. Have a nice day.

Thank you, Josh.

Thank you, you too.

Thank you. At this time, I'd like to turn the call back over to Pedro Hebron for closing remarks. Sir?

Yeah, okay. Thank you. And thank you all. This concludes our earnings call. Thank you for being with us. Thanks for your continued support, and have a great day, have a great weekend, and we'll see you next time. Thank you very much.

Ladies and gentlemen, thank you for your participation. That concludes the presentation. You may disconnect and have a wonderful day.

The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 1 1. The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 1 1. Thank you. you Thank you. Thank you. Thank you. Thank you.

Ladies and gentlemen, thank you for standing by. Welcome to COPA Holdings' fourth quarter earnings call. During the presentation, all participants will be on a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, you will have to press star then one one on your touchtone phone. As a reminder, this call is being webcast and recorded on February 16th, 2023. Now, I will turn the conference over to Daniel Tapia, Director of Investor Relations. Sir, you may begin.

Thank you, Latif. And welcome, everyone, to our fourth quarter earnings call. Joining us today are Pedro Hebron, CEO of Copa Holdings, and Jose Montero, our CFO. First, Pedro will start by going over our fourth quarter and full year highlights, followed by Jose, who will discuss our financial results. Immediately after, we will open the call for questions from analysts. COPA Holdings financial reports have been prepared in accordance with international financial reporting standards. In today's call, we will discuss non-IFRS financial measures. A reconciliation of the non-IFRS to IFRS financial measures can be found in our earnings release, which has been posted on the company's website, copaair.com. Our discussion today will also contain forward-looking statements, not limited to historical facts, that reflect the company's current beliefs, expectations, and or intentions regarding future events and results. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially and are based on assumptions subject to change. Many of these are discussed in our annual report file with the SEC. Now I'd like to turn the call over to our CEO, Mr. Pedro Hedron.

Thank you, Daniel. Good morning to all and thanks for participating in our fourth quarter earnings call. Before we begin, I would like to extend my sincere gratitude to all our coworkers for their commitment to the company. Their continuous efforts and dedication have kept COPPA at the forefront of Latin American aviation. To them, as always, my highest regards and admiration. We're proud to report solid fourth quarter and full year results despite the pressure higher jet fuel prices have added to our operating costs and other headwinds common to our business. Among the main highlights for the quarter, in terms of capacity, although we had a similar number of daily departures compared to 2019, we achieved 6% more ASMs than in Q4 2019, due to a higher average gauge. Revenue passenger miles increased by 7.5%, which led to an 86.6% load factor, a 1.4 percentage point increase when compared to the same period in 2019. Passenger yields came in at 15.1 cents, or 20% higher than in the fourth quarter of 2019, while cargo revenue, including the contribution from the operation of our Boeing 737-800 freighter, was 69% higher, resulting in unit revenues, or RASM, of 13.7 cents, a 23% increase compared to the first quarter of 2019. Adjusted fuel CASM decreased by 7% compared to Q4 2019, from 6.6 cents to 6.1 cents. And our operating margin came in at 24.7%. Now turning to our main highlights for the full year 2022, unit revenues increased 12.6% year over year to 12.1 cents, mainly driven by a 10.8% increase in yields. Casa MexFuel came in at 5.98 cents almost 5% lower than 2019, and the operating margin for the year came in at 15.2%. During the year, we started flights to Barcelona, Venezuela, Santa Marta, Colombia, and to the Felipe Angeles Airport in Mexico City, ending the year operating to 77 destinations in 32 countries in North, Central, South America, and the Caribbean. strengthening our position as the most complete and convenient hub in Latin America. We inaugurated our new Copa Club in Tucumán's new Terminal 2. This new and modern facility provides our business class and preferred members with a world-class experience while traveling through our Panama Hub of the Americas. We also reactivated our Panama Stopover Program, which promotes our home country as a tourist destination and we're seeing good results. In September, we launched our new distribution strategy, including the new COPPA Connect option for travel agencies to access COPPA First and other content via the IATA New Distribution Capability, or NDC. At the same time, COPPA introduced a cost recovery search source for bookings made through the legacy GDS technology known as EDIFACT. During Q4, we were pleased with both the adoption of Copa Connect among our agency partners and the increase in direct sales via Copa.com. We're still at an early stage, but these changes are helping us gain more control over our distribution strategy and offset and eventually lower our distribution costs. On the operational front, Copa delivered an on-time performance of 87.4% and was recently recognized by the official airline guide as the most on-time airline in Latin America in 2022. In fact, according to OIG, Copa's on-time performance was again the highest of any carrier in the Americas. Additionally, last year Copa Airlines was recognized by Skytrax for the seventh consecutive year as the best airline and the best airline staff in Central America and the Caribbean. I would like to once again express my recognition to our more than 7,000 co-workers who day in and day out deliver a world-class travel experience for our customers. Their contributions are key to our success. With regards to Wingo, Wingo received one additional 737-800 from Copacabana and ended the year with a total of nine aircraft. Additionally, it continued its regional expansion and ended 2022 operating 31 routes with service to 20 cities in 10 countries. Turning now to our expectations for 2023. During our last call in November, we shared preliminary capacity guidance for the year of plus 16% compared to 2022. We mentioned that we were expecting to receive 13 Boeing 737 MAX aircraft during the year. Due to our earnings relief, we are reducing our capacity growth guidance to a range of 12 to 14%, as it now looks like Boeing won't be able to maintain its regularly scheduled delivery dates. We now expect to receive 12 aircraft during the year instead of 13. As is the case for the industry worldwide, we're experiencing higher maintenance costs related to our engines and increased shop visits and turnaround buying. We expect that this issue will add pressure on our unit costs for the year. Jose will provide more detail about this. This year, we expect to continue growing our hub in terms of frequencies and new destinations. So far, we have announced new service to the cities of Malta and Ecuador, and Baltimore and Austin in the U.S. starting this summer. With these additions, we will be serving 80 destinations in North, Central, South America, and the Caribbean by July of this year. To summarize, we delivered strong results in Q4 and for the full year 2022. Our team continues to deliver world-leading operational results, including, again, the best on-time performance in the Americas, We're reducing our capacity assumptions for the year, given the current delays in the aircraft delivery stream. And as always, we will continue looking for efficiencies and savings to further reduce our unit costs and strengthen our competitiveness going forward. Lastly, we're as confident as ever in our business model. In 2022, we delivered competitive unit costs and solid margins. while continuing to offer a great product to our passengers, making us the best positioned airline in our region to consistently deliver industry-leading results. Now I'll turn it over to Jose, who will go over our financial results in more detail.

Thank you, Pedro. Good morning, everyone. Thanks for being with us today. I'd like to join Pedro in acknowledging our great team for all their efforts to deliver a world-class service to our passengers. I will start by going over the main highlights for full year 2022. Our load factor came in basically flat versus 2019 at 85.1%. Driven by a 10.8% increase in yields, unit revenues improved by 12.6% versus 2019 to 12.1 cents. Our unit costs came in at 5.98 cents, 4.6% lower than in 2019. And due to an increase of 67%, In jet fuel prices, our operating margin was 0.9 percentage points lower than in 2019 at 15.2%. Reported net income for full year 2022 came in at $348.1 million, which translates to earnings per share of $8.58. Excluding special items, namely an unrealized market-to-market net gain of $12.7 million related to the company's convertible notes, as well as changes in the value of financial investments, Adjusted net income came in at $335.4 million, or adjusted earnings per share of $8.26. Now turning to our fourth quarter results, net profits for the quarter came in at $88.3 million, or $2.23 per share. Excluding special items, net profits came in at $177.7 million, or $4.49 per share. Fourth quarter special items, are comprised of an unrealized market loss of $91.3 million related to the company's convertible notes and a $1.9 million unrealized market gain related to changes in the value of financial investments. We reported a quarterly operating profit of $219.7 million and an operating margin of 24.7%. Capacity came in at 6.5 billion available seat miles, or approximately 6% higher than in Q4 2019. Load factor came in at 86.6% for the quarter, a 1.4 percentage point increase compared to the same period in 2019, while passenger yields increased 20.4% to 15.1 cents. As a result, unit revenues came in at 13.7 cents, or 23.4% higher than in the fourth quarter of 2019. During by higher jet fuel prices, unit costs or chasm increased 10.3 cents or 10% more than the adjusted chasm in Q4 2019. And finally, our chasm excluding fuel came in at 6.1 cents, a 7% decrease versus the adjusted chasm excluding fuel for Q4 2019. We're going to spend some time now discussing our balance sheet and liquidity. As of the end of the year, we had assets of close to $4.7 billion. And in terms of cash, short, and long-term investments, we ended the year with $1.1 billion, which represents 38% of last 12 months' revenues. As to our debt, we ended the year with $1.7 billion in debt and lease liabilities and achieved an adjusted net debt to a bid-buy ratio of 0.8 times. Turning now to our fleet during the fourth quarter, we received two Boeing 737 MAX 9s to end the year with a total of 97 aircraft, compared to 102 aircraft in our fleet at year-end 2019. In January of 2023, we received an additional 737 MAX 9 to bring our total fleet to 98 aircraft. With this addition, our total fleet is now comprised of 68 737-800s, 21 737 MAX 9s, and 9 737 700s. These figures include one 737-800 freighter and the nine 737-800s operated by Wingo. Two-thirds of our fleet continue to be comprised of owned aircraft, and one-third of our aircraft are under operating leases. During the remainder of 2023, we expect to receive 11 additional aircraft, all Boeing 737 MAX 9s. We have been informed by Boeing of additional delivery delays in our 2023 delivery stream, so we now expect all 11 aircraft pending to be delivered during the year to have between two to four months of delays versus the original delivery date. As to our outlook, based on the current demand environment and the expected delivery dates for incoming aircraft, we can provide the following guidance for full year 2023. We expect to increase our capacity in ASNs versus 2022 within a range of 12% to 14%, and we expect an operating margin within the range of 17% to 19%. We're basing our outlook on the following assumptions. Load factor of approximately 85%, unit revenues within a range of 12.1 cents, CASM ex-fuel to be in the range of 6 cents, mainly due to the additional costs associated with our engines and the longer maintenance, shop, and turnaround times that we expect for this year. And finally, we're expecting an all-in fuel price of $3.15 per gallon. Thank you, and with that, we'll open the call to some questions.

Thank you. As a reminder, to ask a question, you will need to press star 1-1 on your telephone. Again, that's star 1-1 on your telephone to ask a question. Please stand by while we compile the Q&A roster. Our first question comes from the line of Michael Lindenberg of Deutsche Bank. Your question, please, Michael.

Oh, yeah. Hey, good morning, and congrats on the great results, team. Two questions here, I guess, first. Oh, you're welcome, Pedro. Two questions here. Just the first, Pedro, can you actually update us on some of the sharehold initiatives, the share repurchase and where things stand with respect to dividend reinstatement?

Yeah, okay. So I'll answer the second part and then I'll let Jose address the repurchase part. So the board met last week and decided to discuss the dividend reinstatement decision at an upcoming board meeting towards the second half of March, so this coming month, where we're going to present our budget, our capex need, our cash flow, et cetera. So they decided to make the decision then. So that will be in like a month or so. OK.

Yeah, Mike, in terms of the share repurchase program, we were active last year in the program. You know, we have a currently approved $200 million program that is essentially halfway completed. And, you know, of course, the objective of the program is to maximize shareholder value. And the other component of the strategy behind the program is to have liability management vis-a-vis the convert as well. So that's kind of the strategy that we have. uh, with, with the charity purchase program.

Okay, great. And then, um, just, uh, my second, um, when we look at the 12 to 14% capacity growth, you've already announced three new cities, right? Baltimore, Austin, and Manta. Should we anticipate more cities? And as we think about the 12 to 14, is it mostly, you know, connecting the dots or really not even connecting it? Is it mostly adding frequency or depth to the schedule? Is it 50-50 new cities? I'm just curious about the type of growth and low risk versus high risk type growth.

Correct. So my answer in a way is all of the above. 50% of the capacity growth in 2023 comes from the full year effect of the additions in 2022, both frequencies and new destinations added in 2022. Then the other 50% is mostly additional frequencies in current markets, and then a smaller part of that 50% is going to be new destinations. We have announced three, as you mentioned, and we are hoping to announce an additional, at least two, two or so for the end of the year.

Pedro, the two or so that you're looking to announce, are they some of the destinations that you served prior to COVID that you have yet to restart? Are they completely new destinations?

I meant to say new destinations. We still have about eight destinations we haven't restarted from pre-COVID, and we hope to also restate some of those during the year.

Okay. Okay. Very good. Okay, thanks. Thank you very much. Thank you, Michael.

Thank you. Our next question comes from the line of Duane Finnegarworth of Evercore ISI. Your question, please, Duane.

Hey. Thanks. Good morning. Just on the traditional pattern of margins, 4Q to 1Q, you know, typically we actually see some pickup sequentially from 4Q to 1Q. And if you think about the kind of roughly 25% margin that you've posted here, how do you think about that into, you know, into 1Q? And, you know, I guess what we're trying to get a feel for is how much conservatism you've baked into the second half of the year because it just feels like a lot.

Right. So, Dwayne, And, of course, it's only February, so we're going to be cautious in how we try to forecast, you know, nine, what, 11 months we have ahead of us. But I should also say that Q4 was not necessarily a typical Q4. But I'll let Jose maybe get into more detail.

Yeah, Dwayne, you know, Q4 was special. particularly strong for a couple of reasons. One, there was a strong demand environment in the region. Number two, most of the sales that were performed for Q4 were made during a period where fuel was still high and then fuel came down during the quarter as well versus where it was in Q3. So that created a very, very strong result for the quarter. Your item, I think Pedro was kind of getting into this. We decided to go back to our yearly guidance, so we're providing a full year guidance. For Q1, I would say from a top line sort of RASM perspective, you could argue that in Q1 there is maybe a slight reduction, or the guidance assumes a slight reduction in the RASM versus the Q4 RASM that was very, very strong. But that's just a function of there's a little bit more capacity in the network and the other item there is fuel is a little bit lower as well. So there's some of that dynamic going on there, but we expect Q1 to have a good development in terms of its profitability from what we're seeing so far.

Okay. I mean, fuel is lower sequentially. Obviously, fuel has been all over the place, but it is lower sequentially, at least, you know, our view today for Q21Q. And then maybe just for the follow-up on, you know, the pilot contract announcement, can you speak to, you know, the magnitude of that? Assume that's in, you know, in your full-year cost guidance. You know, how should we think about that?

Right, Duane. So this is a process we go through every four years. with all of our unions, including our pilot unions, you usually don't even find out because there isn't a lot of noise out there about it. It's usually a very professional and, I don't know, I don't want to say friendly, but professional and respectful negotiation. It wasn't any different this year, only that it got out in the news, so a little bit more noise was made out of this. The agreement was signed last week, as always. Usually it gets signed on the due date, and it was not much different to what we have signed in previous negotiations four years ago or eight years ago. Not very different, and it should not have an impact that we cannot cover with other efficiencies and growth and things like that.

It is, and just to be clear, it is included in our guide for 2023 in terms of ex-fuel chasm. And again, it's in line with what we have signed in the past with that group. And it was signed, and I think the conclusion to the negotiation was done in a very good spirit.

And it's in line with inflation in Panama also. Inflation in Panama is in the 2% to 3% range. So it's also in line with that. And again, very similar to what we have signed in the past. It's in the guidance, of course. Okay. Very clear. Thanks for the time. Thank you.

Thank you. Our next question. Pardon me. Our next question comes from the line of Rogerio Arojo of Bank of America. Your line is open, Rogerio.

Thank you very much. And hey, Jasmine, thanks so much for being here. For the opportunity, I have one follow-up on maybe supply-demand. So there is a RAS implied in the guidance that is about 12% of 90-team level, and fourth Q was 20%, 21% above 90-team level. So I would like you guys to comment what is driving that. So you already mentioned that. Some of the fourth Q tickets have been sold when oil price was at a higher level. But can you break down in maybe three segments here? One is the higher frequencies from copper, how it should impact expected yields. The higher the expected capacity expansion from competitors. And also demand. Do you expect demand weakening? Is there... I don't know, maybe I think that the demand environment currently that is expected to be normalized. So how are you thinking about COPPA's supply, competitor supply and demand? Thank you.

Thank you, Rogério, for the question. I will start by saying that, you know, this is early in the year, so the visibility towards the latter part of the year is still limited. But from what we're seeing, at least in Q1, the demand environment continues being relatively strong versus what we saw in Q4. You know, I think that, you know, for both in the unit revenue side, you know, and in the low factor side, it looks relatively strong. Maybe a tad down versus, again, Q4, but in general terms, still very strong system-wide, and all regions seem to have that sort of same behavior. In terms of What we're seeing when you compare, let's say, the unit revenues for the second half of 2022 and the full year 2023 guidance that we've issued, I would say that the majority of the component in terms of the change in RASM is related to the fuel curve assumption that we have, or the fuel curve that we have based our universities in. I would say about two-thirds of the movement is related to that. And then the other part is related to the capacity that we brought in. We were increasing capacity for the full year by the range of 12 to 14%, which is an important double-digit movement in capacity. So I would say those are the two movements But it's, you know, again, fuel and capacity on our own capacities is what's driving the guidance for 23. They're clear.

Thanks so much. Congratulations on the very strong results. Thank you, Rogerio.

Thank you.

Our next question comes from the line of Savi Sith of Raymond James. Your line is open, Savi.

Thank you. Good morning, everyone. If I might, on the capacity front, could you talk a little bit about just from a max delivery standpoint, how you expect that to kind of come throughout the year and kind of the capacity cadence there, which related to that is also kind of the fuel efficiency. Do you expect that to improve as we go through the year or is just based on kind of the routes that you're adding, do we maybe short a haul route or anything around that that maybe causes fuel efficiency to maybe not improve despite the max delivery?

Yeah, I would say, Sabi, that the cadence throughout the year, I would say that most of the growth will probably occur during the second half, so it will be more anything back-loaded into the second half of the year. You know, we're seeing for Q1, again, a growth on a sequential basis uh low single digits versus q4 and remember that in but also there's the impact of i mean again here we're comparing against uh uh 22 in total so there's also the impact of omicron at the beginning of the year a little bit so there's there's a some noise in the base of uh 22 to 23 let's say it's mostly back loaded into the second half of the year and yeah there you know the benefits in terms of fuel consumption for the max uh is there um you know it's uh in the double digit range versus low double-digit grain versus the ENG. So we're seeing that, and I think that's an assumption to make in the fuel consumption part of the model.

Which is, of course, in our guidance. Yes, of course.

Got it. And if I might, on the Wingo, you increased one more aircraft. I don't know if that was kind of expected or not. Could you just talk about what's – you know, how you're thinking about Wingo and how that's evolving based on what you're seeing in the environment today?

Sure. So Wingo did go from eight aircraft at the beginning of 2022 to nine, something we had planned for. However, the Colombia market is very competitive right now. I would say it has overcapacity. So we think that Wingo for 2023 is going to remain at nine aircraft. So we don't see Wingo growing much this year except for better utilization of its fleet. And they'll do a few things. They'll add some markets. They'll shift capacity around. But they will remain with nine aircraft during the year.

Helpful call. Thank you.

Thank you. Sorry.

thank you our next question comes from the line of bruno omorum of goldman sachs your question please bruno hi can you hear me yes thank you so the question is actually a follow-up on the outlook for 23 um just wanted to make sure that we got the right message is it fair to say that um You know, you are taking advantage of the fact that margins are running above trend to stimulate some demand and bring margins back to what were the historical levels. You know, because I understand fourth quarter was particularly strong, but even if you look at third quarter, margin was 18% already with much higher fuel prices, right? So it does seem that, you know, all else held constant. There was room for margins to be better in 2023. Thank you.

So I'll start and then let Jose finish the question. But in Q3, we were able to cover our fuel expense with higher yields. And of course, when fuel is up, most every airline is affected in the same way. And it's a lot easier to get fair action matched by everyone, which is what happened in the second half of the year. in in q4 we had a very strong month of october where load factor was about 90 that's way above our high average it's even above our high average and and then fuel start started coming down in the latter part of the of the quarter while yields remain remain higher well remain higher than before so we don't think that's sustainable And we're seeing that, and it's experienced from the past also, when fuel comes down, airlines are a little bit more aggressive in their pricing, and we've seen a lot of that, or some of that, I should say. So the expectation is for Q1 that demand will be slightly lower, but still very healthy, still very healthy, but we won't have an October, so the rest will be very similar. And yields will be also slightly lower due to the fuel reduction. I don't know if you want to add something to that.

The point is that we're also growing by, you know, between 12% and 14%, which is a significant level of growth. And I think that that's also a driver of our strategy for the year is just simply to continue sort of rebuilding the hub to where it was pre-pandemic. And I think that the margin guidance that we're providing is at the high end of what we have delivered on a yearly basis over the last several years. With the added growth is precisely, as you mentioned, a portion of the strategy that we're pursuing in terms of capturing a new market or recapturing our markets.

Thank you very much.

Thank you, Bruno.

Thank you. Our next question comes from the line of Stephen Trent of Citi. Your line is open, Stephen.

Good morning, gentlemen, and thank you very much for taking the time. I just had one or two quick follow-ups on the competitive environment. So it seems, for example, like Spirit Airlines has exited Florida, Panama, that may have had some trouble competing there. And then in Colombia, I know you also just mentioned it, but it looks like Viva Colombia's maybe looking a little wobbly from a competitive perspective. You know, when you think about sort of broader capacity in the region, do you see kind of medium to longer term upside for passenger capillarity through document? Thank you.

Yeah, actually, the two examples you have alluded to are not really that, don't have a significant impact in our networks. We don't compete much against either one, and we have very little overlap. So those exiting certain markets don't really have an impact. And what we have seen is a tilt towards more UOCC competition in our network versus what would have been eight years ago or even four years ago. So that's, I think, the big change, which is kind of, it has two sides. One side is, of course, we need to remain very focused on our costs and our efficiencies, etc. But secondly, we are, like in most markets, the only full-service carrier. So that gives a certain uniqueness. But in general terms, as I mentioned, competition right now in our network is mostly ULCC. And I would say that most airlines have brought back most of their capacity to pre-pandemic levels or very close to it.

Very helpful, Pedro. And as my follow-up, just really quickly, I know you guys gave very helpful guidance on the full year. I was wondering if you might have a high-level view as to how we might think about sort of 1Q jet fuel kerosene sort of, you know, relatively where you could see it tettling in. Thank you.

Yeah. Stephen, I think we're on a quarter-over-quarter basis versus Q4. Fuel is down by about 4%. Yeah. So that's kind of how we're seeing it. Again, Q4 versus Q1.

Super, Jose. Thank you. Let me leave it there. Thanks, guys.

Thank you. Thank you. Our next question comes from the line of Helaine Becker of Cohen. Your line is open, Helaine.

Thanks very much, operator. Hi, everybody, and thank you very much for the time. So just two questions here. The first question is with respect to cargo. Can you just talk a little bit about what you're seeing right now? You know, are you seeing similar declines to what others are seeing in the market? How are you thinking about utilizing the freight aircraft that you have?

Right. So first thing I should say is that cargo, it's only about 3% of our revenues. So it's not that significant. I mean, it used to be two and a half. So it's above what it used to be, but not by a huge margin. But we are operating our 737-800 freighter. It's operating great with good load factors and yields. It's actually operating over 10 hours per day. So we're getting the most out of it. And yields have come down a little bit, but in our network, most of our cargo still moves in the belly of our passenger narrow-body fleet, and the freighter is doing well. So we're not a big cargo carrier, and we should continue seeing improvement in our numbers, in our cargo revenue numbers.

And it's contributing positively, I think, with those figures to the business.

Okay, that's really helpful. Thanks, guys. And then my follow-up question is, how are you thinking about the convert? I think you can start buying it back in April. So what are you thinking about with respect to that?

Yeah, Elaine, I will not necessarily get into details of particulars of the strategy, but yes, there is a call option that is available in April this year. The convert has the due date of the convert is actually April 2025. But what we have been doing in the past several months, as we've discussed, is been very active in our buyback program, which also gives us optionality for the settlement of the convert as well. So it is kind of the strategy that we're pursuing. And we have different options available to us on the table to be able to minimize the effect of the liability for us.

Okay. That's very helpful. Thank you.

Thank you, Elaine.

Thank you. Our last question comes from the line of Josh Milberg. I'm Morgan Stanley. Your question, please, Josh.

Yes. Hi, everyone. Thank you very much for the call and congrats on the results. I just wanted to ask if you could touch on your ChasmX outlook and what factors could eventually enable you to beat the sixth cent level. And what I have in mind is eventually greater seat densification. And I know that in the past you've said you wouldn't be complacent about that level. And I also wanted to understand what's incorporated in your CASMX guidance in terms of pilot crew salary adjustments. I joined the call a little bit late, so I'm sorry if you already addressed that.

Yeah, Josh, thank you for the question. I'll answer the last portion first. And, yes, in our 2023 guidance of six cents, There we have included all the impact associated with our salary, ways and benefits, contracts, et cetera. And so it's all in there. In terms of the guide for 2023, it does include an increase in maintenance costs associated with engine shop visits and lease engine rentals that we have. And so that's basically the definition driver that is offsetting some of the improvements that we have due to the capacity impact and due to the distribution benefits that we've achieved in the last quarter with our new distribution strategy. So that's kind of why the chasm is remaining flat for 2023. But as you all mentioned, we have still optionality related to the fleet densification program. We expect to conclude this portion of our fleet densification program during the middle part of the year, but there's another portion that is coming in subsequent years, and there's further opportunities in distribution and in others. The other component also that we're seeing growing a little bit in terms of unit cost this year that we're offsetting with some of the improvements that we are making is our flight fees are going up in a couple of countries in Colombia and Brazil this year that is driving some cost pressures upward. But again, we've been able to mitigate that with some of the other improvements that we've made just in the business. So again, to summarize, we're keeping a CASM expectation for this year flat versus 2022, again driven by some incremental maintenance expenses or flight fees and offset by some of the improvements that we made in distribution and the capacity impact that we have. And pending, of course, the densification going forward.

Okay, that's great, Jose. Thank you very much for that detailed response. And then if you could just touch very quickly on what you're seeing in terms of corporate versus leisure trends in the first quarter and in the first half. I know you guys always get that question.

Yeah, it's still not fully recovered.

I would say right now leisure VFR is about three-quarters of the total volume of passengers that we're serving. and about a quarter is related to business. So it is still not back to the sort of two-thirds, one-third where it was pre-pandemic.

Okay, great. Really appreciate it. Have a nice day.

Thank you, Josh.

Thank you, you too.

Thank you. At this time, I'd like to turn the call back over to Pedro Hebron for closing remarks. Sir?

Yeah, okay. Thank you. And thank you all. This concludes our earnings call. Thank you for being with us. Thanks for your continued support, and have a great day, have a great weekend, and we'll see you next time. Thank you very much.

Ladies and gentlemen, thank you for your participation. That concludes the presentation. You may disconnect and have a wonderful day.