Copa Holdings SA Q1 FY2025 earnings call

• Extended gratitude to coworkers for their commitment. - Reported strong Q1 financial results with 23.8% operating margin. - Key highlights: capacity increased 9.5% YOY, passenger traffic grew 10.1%, load factor 86.4%, unit revenues down 8.1%, unit costs (excluding fuel) down 4.3%. - Operational performance: on-time performance 90.8% and completion factor 99.9%. - Network expansion: announced service to San Diego, California starting in June; Salta and Tucuman in Argentina starting in September. - Wingo added a domestic Colombia route and will receive more 737-800s.

Copa Airlines: In Q1, capacity increased by 9.5% year-over-year (adjusted for MAX-9 grounding in Q1 2024, capacity would have increased by 4.6%). Passenger traffic grew by 10.1% compared to Q1 2024, load factor increased by 0.4 percentage points to 86.4%. Unit revenues (RASM) were $11.05, an 8.1% decrease compared to Q1 2024, mainly due to a 9.1% decrease in passenger yields. Unit costs excluding fuel (CASMx) were $5.08, a 4.3% decrease compared to Q1 2024, driven by lower sales and distribution expenses, reduction in passenger servicing costs related to MAX 9 grounding, and headcount/overhead management. Operating margin was 23.8%. Wingo: Added one new domestic Colombia route between Bucaramanga and Santa Marta during the quarter, and will receive additional 737-800s from Copa during the second half of the year, ending the year with a fleet of ten 737-800s.

• Increased 2025 operating margin guidance to a range of 21% to 23%, mainly driven by lower fuel cost outlook and steady passenger demand. - Expect to grow year-over-year ASM capacity within the range of 7% to 8%. - Assumptions: load factor of approximately 86.5%, unit revenues of approximately $0.112, CASM-ex fuel of approximately $5.8, and all-in fuel price of $2.40 per gallon.

• Industry capacity changes in the region, with some competitors growing at a faster pace than others. - Currency environment in certain Latin American countries affecting passenger yields. - Fuel price volatility which could impact financial results.

Q: Hey, good morning, everyone. I think, Peter, you mentioned that the demand environment is still healthy. And then clearly, the headlines have changed quite a bit. I'm just curious what if you've seen any kind of change in either U.S. point-of-sale strength or kind of any regional differences since the last earnings call? Or if it's just consistent with what you've been seeing before?

A: Hi Savi, it's Pedro here. We haven't seen any material change in the last few weeks, let's say. So we're still seeing steady demand but as we know, we only have visibility two to three months in the future. So what's coming in the second half of the year is hard to tell at this point.

Q: Hi guys, good morning. Just with respect to the distribution cost savings, can you remind us, sorry, of the baseball analogy, what inning you’re in that? Is there additional cost save to get? And are there other cost initiatives that, that can contribute incrementally from here?

A: So thank you for the question. I would say our distribution costs, we’re still seeing some full year effect of what we saw during the later part of the year. So we’re going to see some of that during the first quarter and on the first half of the year and more to come on savings on our distribution strategy, and that it will flatten out. But we’re still looking for additional initiatives, and we believe there is more. We are now at 85% direct or via NDC. So we feel that that’s a good place to be, and we expect that to be steady for the coming quarters.

Q: Hi, Pedro, Peter, Daniel, good morning. Thanks for taking my question. First one is a follow-up to the first question in terms of demand. If you could break it down between leisure VFR and corporate, how each of the segments have been performing? And the second point on the rosin RASM performance, you also mentioned we have been seeing that FX and competition has been impacting it, but can you try to better understand the breakdown between the two of them and the two effects, which was it's put more pressure on into RASM?

A: Yes. It's – okay. So I'll give you the breakdown, then if Peter needs to add anything. So business is around 20% right now and Q1. And then leisure is about 45%, I believe. Yes, it's 20% business, 45% leisure. Then the difference, of course, VFR in terms of the breakdown. In terms of our routes, well, I'll give you like an overview, a quick overview. So South America is doing fine with the exception of Brazil where we still have some yield weakness because of the currency situation. Load factors are healthy in Brazil, better than last year, but yields are still down in Brazil. The rest of South America is okay. North America and the Caribbean is okay also, demand yields are fine. Where we see a little bit more weakness mostly due to competitive capacity is in Mexico and Central America.

Q: Good morning, gentlemen and thanks very much for taking my question. Actually, first, just a quick follow-up on what Guilherme was asking. I appreciate the color on business versus leisure in VFR. Any high-level view on how that may have changed versus a year ago, considering now, for example, that there is no feed from the Venezuelan market? Or is Vene just too small to move the needle?

A: Right. It hasn't changed much. It hasn't really changed much. And actually, the Venezuela feed would have fit well with this breakdown. So no, we haven't seen any material changes.

Q: Hello. Thank you for taking my questions and congrats on the strong results. Just want to ask like a hypothetical question. In case that you do see a bit more weakness across markets, like how much flexibility do you have to potentially reduce capacity or not grow to the same extent?

A: Yes, okay. So I’ll say a few things there. Number one, we do have a lot of flexibility. We have 39 unencumbered aircraft, including the 737-700, nine of them were actually going to part out of one in the second half of the year because we have enough 737 MAX eight deliveries and we actually will make money parting out of that aircraft. We don’t need the extra capacity and the engines and other components are extremely valuable right now. So it can be a good business to part out of an aircraft if the capacity is not needed, we will save on the 20-year check. So we have nine 700 that we could park, use the engines, use components. We have another 39 unencumbered aircraft. So that gives us a lot of flexibility in terms of what we do with our fleet. But I think as important to that is that we have a very diversified network and we have a number of markets of routes where we actually could use more capacity. So if we see slow – a slowdown in certain markets, probably not going to be everywhere, and we can shift capacity around. One of the advantages we have is, we have a single 737 fleet and our aircraft can serve any of our routes. So we can move aircraft around in case one region slows down more than others. So we feel pretty comfortable. And I think we have demonstrated in the past that we can be flexible. We can adjust and continue delivering strong results under different environments.

Q: Hello, Pedro, Peter. Congratulations on the results. I have a couple here. First one, you are guiding $2.4 of fuel per gallon. But we estimate the current oil price curve would point to a little bit 10% lower than that. Does it make sense? And if so, would there be about 2 percentage points of incremental margin if oil remains as it is? That’s the first one. Thank you.

A: Thank you. So when we built our guidance, we took a curve it was a – we used a recent curve. And as you know, fuel is very volatile. So it can go up or down, and we don’t adjust our estimates daily. We feel comfortable right now with our fuel and RASM that we publish on the guidance. And we feel that that should go very well with our guidance on margins at this moment. And that’s what we see. Of course, everything can change tomorrow. But right now, with the current information we have, we feel comfortable with that combination of RASM and fuel.

Q: Hey good morning. Pedro, Peter and Daniel. I want to go back to just your assumptions for 2025. I thought it was interesting that even though we're going to see greater than a 10% cut in fuel, that's the new assumption, that the RASM change, it's only a modest deterioration. And I know that you called out yield pressures as being an issue in the March quarter. You talked about competitive capacity and FX pressuring yields. Pedro in the past, when we would see energy prices move up, when they were a function of an improving global economy. For the most part, you would always be able to pass on, call it, 100% of that fuel price increase into the fare structure. And now we're seeing it in reverse, but it looks like that you're actually holding the line on pricing. And I'm curious what gives you the confidence? And maybe the fact that you are growing very slowly this year, you're only going to grow about 6% in the back half of the year. Is that giving you the cushion and the ability to really maintain pricing firm despite the fact that things may be actually slowing down? Just thoughts on that.

A: Yes. I'll say a few things. First, that it's still early in the year, it's early in May. We have a lot of runway ahead of us to cover. So we're not getting ahead of ourselves. Our RASM guidance is based on what we can see right now for the next two months to three months is where we see some weakness. We have lowered our RASM, but not significantly, as you said. But it's the visibility we have today, a fuel in our curve is not as low as what it is today. Rogerio mentioned that. But that is what we saw kind of two weeks ago, a little bit more. So we're not like every day adjusting our guidance and our outlook because of the volatile – volatility in fuel. So if we think of where's our fuel guidance and we think of our bookings right now two months to three months in the future. Our RASM is in – our RASM takes that into account. And there's still other developments that can happen in the year, for example, well, we're growing not that fast, which is a point you raised, which is very true. So we're not actually dealing with overcapacity. We're actually tight in capacity. We wish we had a few more planes, but that's not our reality right now. And then Brazil could strengthen who knows and one day, Venezuela could come back. And so it's early in the year, we're not getting ahead of ourselves.

Q: Good afternoon from Brazil. Pedro and Peter thank you for taking my question. A follow-up on the previous questions about capacity. We see with the tariffs, some uncertainty on American carriers about receiving aircraft this year. Can this benefit Copa? Also China, if they do not receive the Boeing 737 MAX that they're expecting to receive? Can Copa anticipate some deliveries for this year or the beginning of next year?

A: Thank you, Alberto. We're not seeing that right now. Our deliveries are going to be what we have communicated. We don't really see an opportunity to advance. We would love to do so. But – and what the information we get from Boeing is that our deliveries are not really going to change at least they're not going to be earlier. I mean, they might be earlier by a few weeks or something, if Boeing has a little bit more available capacity, but nothing significant. Those are not the signals we're getting.

Q: Hi, thanks so much for the time. Quick one on other operating revenue. You called it an increase in ConnectMiles from non-air partners. Would you just mind elaborating on – was that like one partner in particular? Or what were some of the drivers behind that?

A: Yes. So we – our ConnectMiles program has been matured and it has been growing at a decent rate. It's not necessarily were one air partner in particular. It has been a non-air partner. It has been growing with different partners across the region and open up in different countries. So we see that it's been growing steady, and we're happy to see that growth continue.

Q: Hey. Thanks for squeezing me in guys. A couple of questions here. Going back to Savi's question, a follow-up on the U.S. Can you remind us of how it's performed historically, say, under a garden variety downturn, so stable, more volatile? And I think what's new, by the way, today is just a deeper relationship to Star, which I think is contributing to some premium revenue as well as investments in Latin America from other countries that are driving some growth in the region. So just trying to get a sense of puts and takes on U.S. demand and how that could potentially be offset elsewhere?

A: Yes. We're optimistic or cautiously optimistic. We never get too excited about anything. But when sometimes when the U.S. slows down, it becomes better and more affordable to fly shorter distances to other part of the world versus going to Europe or Asia. So that's one way we could see demand less affected than what one would expect. Also the currencies in Latin America strengthened we show more in, let's say, in South America, that in North America, although it's not as in balance as before, it's much more balanced. But then so if the currency strengthened in South America and the economies are doing well, then we can get more traffic going south to north. So we're very diversified in the type of our market and the type of our traffic, the countries we serve and very spread out also in a way. So in the past, we've been able to adjust capacity and the market has – demand has adjusted in the market by itself also has rebalanced. So we feel we're in a good position. And also, I should add that we have industry-leading low cost, which also allow us to be very competitive under any circumstance.

Q: And then second question here. And to the extent that you can comment on Star premium revenue as well. But the second question here on the schedules data, I am seeing some growth to some vacation destinations or at least it looks like that. So just a couple of questions on that. Can you remind us if Copa has a vacations package? And then if so, how that's contributing to the financials? And how would you think about the opportunity of that product in the future?

A: Yes, we don't really have – I mean we have – within our commercial department, we have – we have a team that looks after our, let's say, vacation wholesalers and we have good relationships with - a relationship with a group of wholesalers in South America mainly, but in other countries in the U.S. also. But we don't have a specific vacation focus. We do deal with the wholesalers, and we're very active. And yes. So nothing that I could highlight.