Copa Holdings SA

NYSE:CPA

Earnings Call Transcript 2020-Q3

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to Copa Holdings Third Quarter Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this call is being webcast and recorded on November 19, 2020.

Now, I will turn the conference call over to Raul Pascual, Director of Investor Relations. Sir, you may begin.

[Raul Pascual, Director, IR]

Thank you, Sara, and welcome, everyone, to our third quarter earnings call. Joining us today are Pedro Heilbron, CEO of Copa Holdings; and José Montero, our CFO. First, Pedro will start by going over the actions the company has taken to mitigate the impact of the COVID-19 crisis and the restart of our operations followed by José who will discuss our financial results. Immediately after, we will open up the call for questions from analysts.

Copa Holdings' financial reports have been prepared in accordance with International and 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, copa.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 this discussed in our Annual Report filed with the SEC.

Now, I’d like to turn the call over to our CEO, Mr. Pedro Heilbron.

[Pedro Heilbron, CEO]

Thank you, Raul. Good morning to all and thanks for participating in our third quarter earnings call. I hope that all of you are and your families are doing well and staying safe. Before we begin, I’d like to thank all of our coworkers for their commitment to the company and recognize their continuous efforts and many sacrifices during these very difficult times. To them, as always my utmost respect and admiration.

As expected, different government restrictions in your region related to the COVID-19 pandemic we were not able to provide service for the first 45 days of the quarter. On August 14, after five months of virtually no operations, Copa was allowed by the government of Panama to start operations with restrictions on the number of flights and the entry into Panama’s non-citizens and non-residents. It began with a twice a week operation serving eight destinations.

Since then, the company has been gradually pulling up its network which starting destinations and adding frequency as quickly as the easing of restrictions and air travel than men has permitted. We ended the quarter with service to fifteen destinations. Although September only amounted to 3% of pre-crisis capacity, the gradual restart of flights allowed us to become even more proficient in the new more complex operating procedures and enhanced biosafety protocols, and to demonstrate our readiness to operate safely and reliably.

On October 11, the Panamanian government restrictions among citizens, non-residents, a number of flights were lifted which as expected had a positive effect on our ability to continue both building up the network ending the month with service to 30 destinations representing close to 15% of ASM compared to October 2019. We project to end the year having restarted service to more than 50 destinations and planned to operate in December approximately 40% of 2019 capacity.

In August and September while the restrictions were aimed on Panama traffic were still in place those taxes were approximately 60%. In October after the above mentioned restrictions were lifted we saw healthier loads approaching 70% for the entire month. Based on the slowing traffic over the past three months and the bookings we're receiving for the near future we believe demand will be able to sustain our current capacity plan for the remainder of 2020.

In terms of financial results with only 1.5% of our pre-crisis capacity, this was a very challenging third quarter. We recorded a net loss excluding special items of $121.6 million making this our second quarterly loss on an underlying basis in 20 years with the other being the second quarter of this year. However, by exercising great cost discipline and a better than expected sales and refund performance in the quarter, we were able to keep our cash consumption well below our original expectations to about $36 million per month.

Despite the encouraging progress in the vaccine development efforts we continue preparing for what we believe will be a challenging 2021 as our region could still be subject to new infection rates with the possibility of further solid restrictions and a weakened demand environment, especially while we wait for the vaccines to become widely available. That being the case we have taken many steps to strengthen the company and maintain one of the strongest financial positions in the industry.

As of today we have adjusted the sites of the company to better match our future capacity and continue working on the cost reduction efforts as we believe keeping a competitive cost structure and on a strong financial position will keep us amongst the best procurement to come out ahead once this crisis is over. We have delivered the first four Embraer aircrafts to the new owner and expect to have delivered the entire fleet by June 2021.

We signed a Letter of Intent to sell the first two Boeing 737-700 and continue actively marketing the remaining 12 aircrafts. We have a plan in place to comply with all new requirements and we turn our six Boeing 737 MAX 9 aircrafts to service allowing us to offer a more competitive product in our longer segments. We're also in advanced discussions with Boeing and expect to reach a settlement agreement soon.

Regarding our expiring leases we have agreed to extend some of our leases and are powered by the hour basis, which adds even more flexibility to our fleet plan in case the market recovers faster than expected. And in terms of liquidity, we obtained new credit facilities for an aggregate amount of $155 million, bringing our total committed undrawn credit facility to $305 million and total available liquidity to $1.3 billion at the end of the quarter.

Lastly, I'd like to reiterate that we have a proven and very strong business model which is based on operating the best and most convenient network for intra-Latin America travel from our Hub of the Americas leveraging Panama’s advantageous geographic position with the region’s lowest unit cost for a full service carrier, best on-time performance and strongest balance sheet. Going forward the company expects that its Hub of the Americas will be an even more valuable source of strategic advantage.

It's likely that fewer intra-Latin American markets will be able to sustain direct point to point service. So we believe the Hub of the Americas will be the best positioned to serve this market.

Now, I’ll turn it over to José who will go over our financial results in more detail.

[Jose Montero, CFO]

Thank you, Pedro. Good morning everyone. I hope that you and your families are safe and doing well. Thanks for being with us today. I'd like to join Pedro acknowledging our great Copa team for all their efforts and great team spirit during these very challenging times.

As Pedro mentioned we restarted scheduled commercial service in mid-August and have slowly been pulling up capacity ever since. For the third quarter, the contribution from these operations is still very modest as we only operated about 1.5% of the capacity compared to the same period last year. Nonetheless, we finally started flying again and we’ve put a lot of effort into rebuilding our hub and look forward to having more substantial operations in the fourth quarter.

Looking at third quarter results, we reported a net loss of $118.1 million or a loss of $2.78 per share. Excluding special items mainly we realized $3.6 million mark-to-market gain related to the convertible notes. We would have reported a net loss of $121.6 million or a loss of $2.86 per share. Our cash consumption for the second quarter came in at $36 million per month.

This excludes $22 million in proceeds mainly related to tax credit reimbursements as well as the sale one Embraer-190 aircraft. It also excludes a $50 million payment we made on a short-term credit line. This cash consumption is significantly lower than our prior estimates as we delivered more savings than planned and generated a higher proceeds from sales and lower cash refunds than we originally expected.

In terms of capacity for the remainder of the year, we expect to continue spooling up our operations. October came in at approximately 15% of October 2019 capacity and we expect November and December to help push 30% and 40% respectively year-over-year. Assuming this gradual spool of our operations, we should be able to keep our cash consumption to about $25 million per month for the fourth quarter of a year.

This figure assumes that our leased aircraft and debt commitments are paid in full and we stay current in all of our obligations or not including the proceeds from aircraft sales. The improvement in our cash consumption estimate for the reminder of the year is a function of our short focus on the reduction of our cost base as well as improving sales figures, which are on pace with the projected spool of operations.

I’m going to spend some time now discussing our balance sheet and liquidity. As of the end of the third quarter, assets totaled $3.9 billion, owners’ equity was almost $1.5 billion. Our debt plus our lease liabilities totaled $1.5 billion, and our lease liability adjusted net debt to EBITDA ratio came in at 2.3 times. We closed the quarter with approximately $1.2 billion in debt. As I mentioned before, during the quarter, we’ve repaid $50 million of our short-term credit facilities, and currently all of our committed credit facilities remain undrawn.

As to cash, short and long-term investments, we closed the quarter with $1 billion. During the quarter, we took many steps to further strengthen our liquidity position. As previously reported, in the month of July, we closed a secured revolving credit facility for an initial aggregate amount of $105 million. And in the month of August, we establish a new unsecured committed facility for $59, which remains undrawn.

Including this and other previously established facilities, the company ended the quarter with an aggregate amount of $305 million in unutilized committed credit facilities, which added to our cash equates to more than $1.3 billion in total available liquidity. During the quarter, we finalized the sale and delivery of the first of 14 Embraer-190 aircraft. As of today, we have delivered three additional Embraer craft and expect to have delivered the entire fleet by June 2021.

This month, we are also signed an LOI for the sale of two Boeing 737-700s, which we expect to deliver during the month of January at 2021. Aside from the E-190 and Boeing 737-700 fleets which are classified in our balance sheet as assets held for sale we ended the quarter with 74 aircraft, 68 Boeing 737-800s and six MAX 9s. During the month of December, we expect to receive two MAX 9 aircraft to end the year with a fleet of 76 aircraft. Including these figures are 16 737-800s which will remain in temporary storage.

Let me close by stating that once this most challenging situation passes, we believe Copa’s Hub of the Americas will remain as the best connecting point for travel in the region, with a privileged location, an even more efficient business model with lower cost, and the best team in the industry.

Thank you. With that, we’ll open the call to some questions.

[Operator]

Thank you. [Operator Instructions] Our first question comes from the line of Duane Pfennigwerth with Evercore ISI. Your line is now open.

[Duane Pfennigwerth, Evercore ISI]

Can you talk what percentage of your markets are open now not necessarily the markets that you're flying because that could be a subset of that but what percentage of your markets are you technically able to fly to? And then generally speaking what are the entry requirements for example you have 2% with a negative test or whatever? What are the entry requirements and can you highlight any recent changes? So just to give us a sense for the number of markets that are reopening and what sort of entry requirements are in place?

[Pedro Heilbron, CEO]

Okay. Duane. It’s Pedro. So one of the challenges we are all facing. And when I say, we are all, and meaning that aviation worldwide is that conflicts are all over the place in terms of their entry requirement. So in terms of open market I would say most of them are open in one way or another mostly are 100% open. There’s others that are restricting the number of flights they are allowed in or restricting slots.

For example, Colombia is restricting the number of flights per hours. So there are only so many slots available. And other countries are still restricting the entry of nationals and residents versus a foreigners or visitors. Some countries are requesting a PCR negative test within 72 hours. Others have recently lifted that restriction like Costa Rica and Colombia. So it's all over the place again. But I would say in summary most, most countries are open.

[Duane Pfennigwerth, Evercore ISI]

And then I totally appreciate it. It's early days here but is there any relative trends you could highlight markets where maybe you've been surprised at the level of demand recovery in a positive way versus markets that remain very restrictive? And thanks for taking the questions.

[Pedro Heilbron, CEO]

Yes. It's hard to tell. Once the new market opens or it's not a new market but once a market reopens, they chose pent-up demand that needs to be satisfied. It's usually VFR traffic, so, if people are meeting to get back or visit families or personal reasons in general, so I would say no, no big surprises there. We're starting to see a leisure traffic picking up a little, like from South America to the Caribbean.

Obviously, it’s a fraction of what it used to be, but it's starting to pick up a little. And although business traffic is the weakest right now, we’re also starting to see companies and -- companies that need to get their executives back in the air visiting their markets. And so, there's a little bit of that starting. But it's mostly VFR still.

[Operator]

Thank you. Our next question comes from the line of Alejandro Zamacona with Credit Suisse. Your line is now open.

[Alejandro Zamacona, Credit Suisse]

Hello, Pedro, José, Raul, thank you for the call, and thank you for taking my questions. And on the cash burn management, during the second quarter, you reported a monthly cash burn of $77 million. For this third quarter, we saw a monthly cash burn of $36 million. So, it’s a significant improvement. So, I'm curious on what's behind this significant decrease, or what additional initiatives are you deploying to deliver this improvement. Thank you.

[Jose Montero, CFO]

Yeah, Alejandro, this is José. There is I’d say three components to the improvement that we saw in our consumption of cash for the third quarter. The first one is of course costs. We've been very focused since the onset of the crisis in reducing our cost to the greatest extent, and negotiating all the contracts that we had.

We have also frankly reduced the size of the company to match the size of the new reality that we expected. And this was done through offering packages for a subset of our employees, and offering also voluntary unpaid leaves for employees as well. But in essence, we looked at every single cost base, and I think that we've been able to accelerate some of the improvements that we initially expected or that been seeing in the second quarter or into the third quarter and beyond.

The second one is our -- we've seen I think a reduced number of cash refunds what we expected. And that's I think is a function of the policy that we've set in place to flex it -- make more flexible the travel dates for customers. And that has resulted I think in a significant reduction in our ATL refund reduction. And then finally we are seeing better than expected sales coming in during the quarter. And I'd say, those are the three main sort of levers for improvement, and also our improvement going through the fourth quarter as well.

[Alejandro Zamacona, Credit Suisse]

And if I may, have a second question. Just can you -- can you give a quick update on the institution plan announced in the last semester?

[Pedro Heilbron, CEO]

Yeah. It’s Pedro here. You know with the pandemic, all investments were pretty much frozen on that -- of an essential nature. So, those are projects that we have to take up again. And we're starting to talk about those projects, so that was put in freeze. And we haven't really done much. We went into lowering CapEx and saving We went into it lowering CapEx and saving a cash, but it's and of course load factors are down and demand is weaker. So we wouldn't have the same thing necessity to rush into higher density planes, but I think that will happen eventually and we'll pick it up again, but that was delayed.

[Operator]

Thank you. Our next question comes from the line of Savi Syth with Raymond James. Your line is now open.

[Unidentified Analyst]

Hey, good morning everyone. This is actually Matt on for Savi. Appreciate the color you provided with expectations for to demand going up with capacity. But could you maybe provide a longer term look. I know we've got a lot of vaccine news out recently as well. What are some of the potential capacity recovery costs that you're considering for 2021?

[Jose Montero, CFO]

Yes, so it's one of the most difficult things right now. It’s talking long term because the booking curve has shortened. And we are navigating unchartered waters. It's all new, but they're of course very encouraging news with the vaccines are coming out. So it seems like there is a bright light at the end of the tunnel and there will be a point hopefully soon when it's going to be a lot easier to predict future demand. However, for December for the end of this year and the month of December we are talking now about 40% of ASM versus 2019 while the previous call we were talking of a range between 30% and 40%.

So we're on the opposite side of that range and that's a good sign between 30% and 40% but we’re in the opposite side of that range, and that’s a good sign. And as I mentioned, our bookings support that -- that ASM levels our bookings makes us to believe that we can sustain those pay attempts, with a decent load factors. And we think that from then on well we hope from then on to build our way attempts gradually as the man allows us.

But January will be a little bit better than December in terms of way attempt and not a lot but a little bit better, beyond January bookings are not strong enough to know. And there's so much uncertainty out there with the virus and everything else that it's very difficult for us to say anything you know a beyond January.

[Pedro Heilbron, CEO]

I would say that, you could argue that it's going to be a you know in that range of time that Pedro just mentioned somewhere in the low 40s of pre-COVID capacity. I say that the other component of that just simply forced to maintain flexibility. And I think that we have been working quite a bit in terms of flexibility that we have in 2021. But it is still premature as you could probably imagine to say anything related to the full year of 2021.

[Unidentified Analyst]

Certainly anybody to guess but I appreciate that color nonetheless. Sir and for my second question if I'm looking at your fleet plan, it seems like the two additional max is coming in December and five remaining but not yet delivered. It seems like you can get back to just about 95% of 2019 capacity in 2021 if you wanted to So, could you provide a little bit more detail around your expectations around the Boeing 737-800. I know you said some of them on the Embraer-Buyer agreements. Could you maybe talk about redelivery expectations or just some more color on the duration of those Embraer-Buyer agreements certainly that pertains to?

[Pedro Heilbron, CEO]

Yeah. There's been a some negotiations that we've been making over the last couple of months with some of our restart plans. They give us a lot of flexibility, because that flexibility kicks right away. So, we extended some of the expiring leases that we have for in the 2021 range. And actually over the next two years, we have about 11 leased airplanes that are going out. And so, we can gain some flexibility with these Embraer-Buyer agreements that we're doing.

Having said that, in terms of number of aircraft that you could expect for next year at the end of the year, it will be in the mid-80s in terms of total number of aircraft. And so, as I mentioned in my prepared remarks, there's a portion of them that are going to be in storage. So, I think there's going to be a range of possibilities in terms of the available number of aircraft that we in the network for next year depending on how demand ultimately behaves.

[Jose Montero, CFO]

And just to add to that, we have a sizable order for MAX aircraft. And I'm sure we can work with Boeing if there is a need to change delivery date. I mean, there would be production issues, but we think we have enough flexibility with the leased aircraft, the expiring leases had to be renewed they’re powered by the shorter aircraft and our MAX order, where we can adjust a capacity as needed. And it could be upwards or downwards depends -- depending on how the market behaves. So that's I think that -- that's one thing we've been able to manage very well.

[Unidentified Analyst]

Certainly. Well, thank you all very much.

[Operator]

Thank you. Our next question comes from the line of Helane Becker with Cowen. Your line is now open.

[Helane Becker, Cowen]

Thanks very much, Pedro. Hi everybody, and thank you very much for the time. Not sure you can talk about this, but is there a specific sticking point with respect to the negotiations with Boeing, or is it just taking a long time because it's hard to get back and forth?

[Pedro Heilbron, CEO]

Yeah. There's no sticking point. And yeah, I mean it's just the way it's happened. It's not maybe neither -- neither side has been in a big rush. It's not like we needed a money to survive. And you know we want to agree to the right deal knowing when we're clean, we're going to be backing service that facilitate things. So it's not just the way it work. It's a -- yeah, I don't think I have much to add to that.

[Helane Becker, Cowen]

Okay. Well, that's a fair response actually. And then I was just wondering if you could talk about what you need to do to return the MAX to service, now that the USFA approved it. Can you just maybe update us on what has to happen now?

[Pedro Heilbron, CEO]

Yeah. We have -- as you know we have six MAXs in Panama rounded in Panama and then there are seven that were build but not delivered those are somewhere in Seattle we expect to be flying at least two of our six MAXs by the end of this year that's our expectation right now and there is a series of let's say technical matters like upgrading the new software and uploading the new software whereas that it only takes a few hours.

We have to retrain pilots because they haven't flown the airplane for a while. However I should say that the new training requirements are basically the same that we were doing before the aircraft was grounded. Copa was always -- had always done more than well what was the minimum required we had the MAX simulator we're doing the simulator sessions so the new requirements are basically the same thing we were doing before that that's not our problem but we have to put the pilots through that training program again then maintenance wise it's going to take us like about two weeks per aircraft to bring them up to the right -- the right maintenance level which includes doing a few flights without passengers a few tests like without passengers to make sure all the pots are out.

When a flight -- when an airplane has been grounded for nearly two years and it doesn't know what they're built for there's a lot of maintenance work even though we've been preserving them following a Boeing’s -- Boeing’s recommendation.

[Jose Montero, CFO]

And there one thing I'll add there Helane as well as that Panama [indiscernible] of course was the FAA has issued so from the regulatory standpoint that's something that the facilitates also the process once this has been lifted by the FA as well.

[Helane Becker, Cowen]

Okay. Thanks, José. I really appreciate that. Thanks Pedro for your detailed response. Have a nice day, guys.

[Operator]

Thank you. Our next question comes from the line of Hunter Keay with Wolfe Research. Your line is now open.

[Hunter Keay, Wolfe Research]

Thanks for having me on. So on costs, you've shown an impressive amount of variability as you've been cutting capacity. How do you think about those coming back as you -- as you slowly add capacity back? I mean trying to think about the balance here between what's been sort of deferred, and what's truly variable in nature, and then thinking about maybe incremental efficiencies that you could drive from some operating leverage. It’s really ultimately just a question about when we can start talking about that sub-6 and CASM number again? So any color on that would be pretty…

[Pedro Heilbron, CEO]

Okay. Hunter, yeah, so this is Pedro. I’d start to give José a little bit of time. But first thing I should say that we haven't deferred any cost. And that's very important. The cost we're showing are our complete cost for the month or for the quarter. Nothing is going to come back to bite us later on. And no leases, no nothing. We're paying for everything. We have renegotiated a bunch of fixed costs, plural number of contracts. We have brought down our fixed cost as José mentioned before. And then of course there are the variable costs that are down because of volumes.

So we expect that as AFMs come back, our unit costs of course are going to improve. And our plan and the way we have approached this Is that no one is, when everything is over, we’re not sure what’s going to be our site and how long it’s going to take us to get back to 2019 level but we want to make sure that we can be a successful as before even before we get back to 100% which means that we need a lower fixed cost base to be able to accomplish that. And I think -- I think we're there already.

[Jose Montero, CFO]

Yeah. No. Hunter, we -- we by the way that I'm seeing it is that when we are back to 80% of pre-COVID capacity, okay, we'll be back at the CASM that we had back in maybe last year. So I think we -- we have found significant levels of efficiencies in this exercise that we’ve been making over the last several months. And so, we're -- we're I think in a good -- good place right now in terms of -- of course that's not going to come in while the ASMs are still at a relatively low level but once the ASMs are again back to around that level some 80% of pre-COVID levels, we’ll be achieving, are sort of around fixed CASM ex-fuel that we -- were embarked on before.

[Hunter Keay, Wolfe Research]

No. Wow. Thank you. And then you mentioned a little bit of green shoots on corporate travel obviously it's -- it's very early. But I also think you mentioned previously that about a third of your volume was corporate travel before, is that true? Is it a third of your volume? And then the second sort of component of that question is when will how your corporates are thinking about their 2021 spend? Or is that a January conversation or are you having those conversations now? Because I would imagine it should be some degree of visibility on how your corporate -- your structured corporate stuff should spool throughout the year.

[Pedro Heilbron, CEO]

So I’ll start with the second part, so we have started those conservations, but our corporate account don’t really know, what their travel plans will be for next years, and but in most cases people want to get back into air. It may not be to the same degree as before but pretty much everyone wants to get back in air and get -- get you know get back to doing their regular business. And I think that also applies to people who have being locked at home for so many months that one end go out and travel for leisure or for visiting friends and family.

But in terms of our traffic it's the way -- the way we would want in the recent path, we've ended up in, I would say a third a VFR a third leisure and a third a business not, not just corporate but the business corporate is much modernly business in general, and Latin America is not everything -- not everything business means that it's corporate, which are other smaller companies that don't have corporate accounts but it's a third each.

[Operator]

Thank you. Our next question comes from the line of Rogério Araújo with UBS. Your line is now open.

[Rogério Araújo, UBS]

Yeah. Hey guys thanks a lot for the opportunity. A couple of questions here, the first one, is it too early to map out opportunities left by competitors that are shrinking capacity in some of Copa’s market. And can domestic market in Colombia become more relevant in the future. So, we saw already like that could ago to Colombia domestic market was pretty relevant to the company and this has reduced over time and to your broad [indiscernible]. So could this be an opportunity and any order potential opportunities left by the market? That's the first question. Thank you.

[Pedro Heilbron, CEO]

Right. So the -- it's too early to tell. And every yielding it's pulling up in at a different pace for different reasons including restrictions in their home markets et cetera. So it's very, very hard to tell right now to which opportunities are going to be left open in the future, but we do believe that a number of markets a rule will not be large enough to sustain direct point-to-point service as it was the case before it goes. I mean pretty much every market will be reduced for the next few years.

So there's a number of markets are going to fall below that minimum level for direct point-to-point. So if so there will be some opportunities for the hope to have even more value, but early to know. In terms of Colombia domestic and Wingo, I think Wingo will remain opportunistic, that's a very competitive market. So we'll see Wingo just going wild and trying to grow with aggressive net that we will remain opportunistic and careful in how much we grow and where we grow.

But Wingo did get a fifth airplane recently and we have extra planes that we only need right now. So we got the fifth plane and they will get a fixed plane by the end of the year. So in a few months or so, I said in a month. So they have extra capacity, but they will deploy that capacity again as I mentioned before with a lot of care where it makes sense and even if their utilization is down for a while we're fine with that.

[Rogério Araújo, UBS]

Okay. Yeah. Thank you. Very clear. So my second question is on connectivity, so how the lower number of fly impacts this -- the connectivity -- the connection time for the passengers? Is there a, is there like a, are you mapping out the connection time, the average connection time with passengers now versus before? And also there was an increase -- in the maximum number of hours that a passenger can wait in Panama from six to 12 hours? How does this change the demand? So was this a huge restriction before when it was settled at six hours? So if you could speak about -- about that connectivity with lower capacity would be great as well? Thank you.

[Pedro Heilbron, CEO]

Yeah. Well, the minimum hours connect that was lifted, so that restriction is not there any longer. So we're back to whatever we had before and we've flown so little up to now that that the -- the priority has been just providing connections where we're flying, not worrying about how long that connectivity is. And there's so much lack of service in multiple markets that passengers -- passengers will wait as long as -- as long as it’s needed -- as it’s needed to make their flights. So that not a short connections are not a priority right now until we build back to something like what we had before.

[Operator]

Thank you. Our next question comes from the line of Bert Subin with Stifel. Your line is now open.

[Bert Subin, Stifel]

Yeah. Good morning. You mentioned in your prepared remarks that you think you would come out ahead of the pandemic. What do you see is the single greatest opportunity that Copa has in a post-vaccine world?

[Pedro Heilbron, CEO]

So, what we meant by coming ahead, I would summarize it in two aspects. First, is what José mentioned a few minutes ago about lowering our fixed costs to a point where we could be as successful before with much lower ASM. Which means that as we increase ASMs to a level more similar to 2019, we will do better than 2019. So, that’s number one what we mean by coming out ahead. So a better cost structure.

And number two is the value of the -- of the Copa Hub of the America advantage in a marketplace where a lot of market will not be able to sustain -- markets won’t be able to sustain a direct point-to-point service. So, that would be even more valuable. So, I would say those are the two things that we're looking at.

[Bert Subin, Stifel]

Okay. Yeah. That's helpful. Thank you. I know this is a smaller part of your business, but have you seen any opportunity in the cargo market just as capacity has been significantly curtailed across both South and Central America? Or do you sort of expect that to just come back like it was last year?

[Pedro Heilbron, CEO]

And most of our cargo is daily cargo. We don't operate freighters although we might do ad hoc freighter charters here and there, but we do not operate a freighter craft. So, the opportunity in the cargo market right now are limited.

[Bert Subin, Stifel]

Thanks for the time.

[Pedro Heilbron, CEO]

Thank you, Bert.

[Operator]

Thank you. Our next question comes from the line of Dan McKenzie with Seaport Global Securities. Your line is now open.

[Dan McKenzie, Seaport Global Securities]

Hey, thanks. Good morning, guys. Going back to the commentary of the challenging 2021 because of the region could be subject to further travel restrictions. Is the -- is that concern tied to the timing of the rollout in vaccines and in key end markets. I'm wondering what you can share here. And you know just related this going back to you know kind of your thoughts on corporate travel. I know accounts can't share what they're doing or what they're going to do right now.

And I know people want to get back in the air, but I'm just wondering you know what you can share about your starting assumptions as you think about planning for 2021, you know maybe your best estimate of what it could look like?

[Pedro Heilbron, CEO]

Yeah, so I think, Dan I think it's correct to think that we're being very careful and conservative in our assumptions. It really know and I know there are still risks out there. The vaccine news are very encouraging. But we're unsure of how long it's going to take for the vaccines to be widely available especially in our region.

So we've got to have been made 2021 or towards the end of 2021. It's really hard to tell. And in the meantime anything can happen that we've seen in the US and in Europe, we've seen the second wave spending and the effect that it had on air traffic in the US and Europe. So we're being careful and we're being conservative as we usually are. I would say that that's kind of what you're seeing in the numbers we're sharing.

[Jose Montero, CFO]

And keeping flexibility open I think that again the other thing is flexibility then it's critical for 2021.

[Dan McKenzie, Seaport Global Securities]

Understood. And I guess just related to VFR traffic you know what can you share about the people that are willing to travel right now, so you know kind of their profile or demographic are these primarily millennials we just don’t care about the virus. And I guess you know kind of where I’m going with the question is, I am just wondering you know do we get to a place where demand plateaus at say 50% you know vaccines are rolled out or is the thought as you think about 2021 you know that the recovery and this goes back to your response to a prior question that it could just increase you know kind of at a steady clip or a steady rate each month sequentially as we move forward.

[Pedro Heilbron, CEO]

In our 2021 thinking, I would not even call it a prediction, but in our 2021 thinking we're assuming that there is a platform before the vaccines are widely available that there will be acceptable. We just don't know at what level we're going to hit that plateau, but we are expecting and we're planning for that. We've seen that in other parts of the world. People want to travel. And actually I'm surprised on a positive way by what people tell me, but still that's just the percentage, so where’s that plateau, that's the big question and that's why again we’ll be so careful.

[Dan McKenzie, Seaport Global Securities]

Okay. Understood. Thanks for the time guys.

[Pedro Heilbron, CEO]

Thank you.

[Operator]

Thank you. Our next question comes from the line of Mike Linenberg with Deutsche Bank. Your line is now open.

[Mike Linenberg, Deutsche Bank]

Hey, good morning everyone. Pedro, how is today. Hey, two questions here. So you know as you indicated in the release you hit 38 destinations in November. And I think Jose, I heard you say 50 by year end. Pre-COVID I think you were at 80 destinations. And the reason I'm sort of bringing this up is that you know you made this decision a year ago to get out of your 100 seaters and your 124 seaters. So if your small shell is about 160 seats or so plus or minus a few.

When we look at -- when that decision was made, I suspect that you probably thought that maybe a few of the cities would lose service given the size of the gauge or maybe it would lose frequency, maybe it wouldn't make economic sense. With COVID now the impact that that has had on demand is that -- has that led you as an organization to maybe reconsider operating a smaller aircraft, maybe a 737-7 Max for example. I realize that that goes against the grain of what you want to do from a unit cost perspective. But I would think that by getting out of the smaller shells that you're going to preclude yourself from serving more than just a few of the 80 cities that you serve pre-COVID, any thoughts on that?

[Pedro Heilbron, CEO]

Yeah. So Matt first thing I'll say is that we're very happy with the way we have simplified the fleet and how quickly we've been -- how quickly we've been able to do that. We’re very happy. I mean obviously our -- our -- our flight operations team is even happier. The maintenance team is delighted and our costs are going to also be better with a simplified fleet and a larger gauge. So our unit cost is happy also.

[Jose Montero, CFO]

The finance team is also very happy.

[Pedro Heilbron, CEO]

The finance team is also, everybody is happy.

[Mike Linenberg, Deutsche Bank]

Okay.

[Pedro Heilbron, CEO]

As you will say, there will be some smaller markets that -- that on paper, could, could suffer. Our plan, it’s one to our pre-pandemic plan or our current plan or whatever you want to call it, is that we can adjust frequency as needed in some smaller markets. But also usually our small -- small markets, where we don't serve with that many frequencies are mostly leisure and leisure can be stimulated with pricing and a larger -- larger gauge aircrafts can allow us to offer a much better pricing because that's at much, much lower cost. So we think we will think that the adjusting frequency and pricing for leisure we can make the capacity work and actually the financials should work better also.

[Mike Linenberg, Deutsche Bank]

All right. Now that makes sense. And then just my second question on the power by the hour agreements that you entered into. You've been very good or you've been a bit of a standout when it comes to meeting your liabilities making your payments not deferring aircraft rent up until this point any call that at least I've been on these power by the hour deals were ones that were initiated by the lessors who are coming from a point where call it their negotiation leverage was somewhat weak and they needed some assistance.

I get the sense from the conversations or what went on here is that this was from a point of strength where the lessors source came to you and realized that they didn't want to have all these Boeing 737-800s coming back and so as a company you were able to extract something very attractive to you from an aircraft ownership perspective is that the right interpretation here?

[Jose Montero, CFO]

Well Mike I would say that it was a mutual discussion and we've been having discussions with our lessors for the last several months and that the one thing is that -- yeah I think it was a win-win in the sense that yeah they don't get an earthling drop in a very difficult moment for them. And at the same time we win by the fact that we get immediate benefits from this negotiation that we made so I say that it's a negotiation that we made. So I say that it's a it was a win -- win for all along.

[Pedro Heilbron, CEO]

And my page review our thoughts were probably bullish and feel that, that much better and having those strength part with no crying which are in alpha continue taking good care of the plane and probably bullish in the [indiscernible] that, that maybe the recovery in their mind will come sooner and those hours are going to be thrown and paid for, so it’s the win, win also it’s mentioning.

[Mike Linenberg, Deutsche Bank]

That's great. Can I guess just once quick squeeze in just one more on just the Boeing negotiation. And this is just you know from a modeling perspective as we think about your cash out over the next year or so some carriers have in their discussions with Boeing. We've seen somewhere you know the net result has been a future benefit as it relates to ownership cost for others we've seen them receive you know one or multiple payments, you know what they call vendor support or vendor payments in return. Is there anything that you can tell us at least from you know from a cash modeling perspective what we should anticipate with respect to the agreement with Boeing.

[Pedro Heilbron, CEO]

Yeah Mike I'm not going to get into the details of the nature of the negotiations because of confidential nature.

[Mike Linenberg, Deutsche Bank]

Okay.

[Pedro Heilbron, CEO]

The one thing is that it is not included in our cash flow projections that we've shared with the market. And our expectation for -- for cash consumption do not include any, any assumptions of anything related Boeing. I mean we've been very, very keen on making sure that we project our cash consumption in a very straight way.

And so, we’re not adding sort of these extraordinary items into it.

[Operator]

Thank you. Our last question comes from the line of Stephen Trent with Citi. Your line is now open.

[Stephen Trent, Citi]

Thank you very much guys, and I appreciate the time. I just had one or two quick follow-ups if I may. When we think about Copa’s passenger flow overlap with the likes of Avianca or Aero Mexico, sort of -- what sort of overlap did you guys have on a pre-pandemic basis just thinking about if you have that exposure?

[Pedro Heilbron, CEO]

I think, with Avianca we have the most overlap. The Bogota hub and the Panama hub have the most overlap versus others. But destination sort of Panama were close to twice the number that if our third [ph] from Bolívar. So we had that advantage. Those are the two that -- the two hubs that overlap the most.

[Stephen Trent, Citi]

Great. Appreciate that, Pedro. And just one really quick follow-up, and I know it's early days and I know there are a whole bunch of moving parts here. But when you think about longer-term opportunities, how are you thinking any differently with respect to potential M&A or with respect to you know down the line setting up that joint business agreement with United Airlines? Just sort of wanted to you know take your temperature on those opportunities if I may.

[Pedro Heilbron, CEO]

I mean the joint business agreement, it was never filed, but it's still a possibility of course, it hasn't been ended either. But if we know our [indiscernible] in a Chapter 11 process so that kind of throws everything overboard and so we have to not necessarily start from scratch but we take those conversations when they have their -- when they understand your future better, when the Chapter 11 proceedings are more advanced. So we expect to continue those conversations at some point. But hard to tell what's going to happen right now.

[Stephen Trent, Citi]

Understandable. Appreciate that Pedro and hope you guys all stay safe and healthy.

[Pedro Heilbron, CEO]

Thank you Stephen. Thank you.

[Operator]

Thank you. This concludes today's question-and-answer session. I would now turn the call back to Pedro Heilbron for closing remarks.

[Pedro Heilbron, CEO]

Okay. Thank you all. This concludes our earnings call. Thank you for being with us. Thank you for your continued support. We'll talk again. Have a -- have a much better end of the year than what we have experienced in the last few months and we of course a great day and a great weekend. So hope to see you soon. Thank you.

[Operator]

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