Copa Holdings SA

NYSE:CPA

Earnings Call Transcript 2022-Q4

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to Copa Holdings Fourth Quarter Earnings Call. [Operator Instructions] As a reminder, this call is being webcast and recorded on February 16, 2023.

Now I will turn the conference over to Daniel Tapia, Director of Investor Relations. Sir, you may begin.

[Daniel Tapia, IR]

Thank you, Latif, and welcome, everyone, to our fourth quarter earnings call. Joining us today are Pedro Heilbron, 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, cpaair.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 filed with the SEC.

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

[Pedro Heilbron, CEO]

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 Copa 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 net fuel prices have added to our operating costs and other headwinds come on 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 stage.

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 $0.151 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 $0.137, a 23% increase compared to the fourth quarter of 2019. Adjusted fuel CASM decreased by 7% compared to Q4 2019 from $0.066 to $0.061. 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 $0.121 mainly driven by a 10.8% increase in yields. CASM ex fuel came in at $0.598, almost 5% lower than 2019. And the operating margin for the year came in at 15.2%. During the year, we started the flight 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 to Tocumen new Terminal 2. This new and modern facility provides our business class and preferred members with a world-class experience, while putting 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 Copa Connect option for travel agency to access coaters and other content via the IATA new distribution capability or NDC. At the same time, Copa introduced a cost recovery surcharge 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 OAG, Copa's on-time performance was again the highest of any carrier in the Americas.

Additionally, last year, Copa Holdings 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 coworkers 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 Copa fleet and ended the year with a total of 9 aircraft. Additionally, we continue this regional expansion and ended 2022 operating 31 routes will 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 15% as compared to 2022. We mentioned that we were expecting to receive 13 Boeing 737 MAX aircraft during the year. As you see 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 really 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 cost related to our engines and [indiscernible] turnaround time. We expect that this issue will add pressure on our unit cost for the year. Jose will provide more details around this.

This year, we expect to continue growing our top in terms of frequencies and new destinations. So far, we have announced new service to the cities of Manta in Ecuador and Baltimor and Austin in U.S. as part of this work. 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 confident as ever in our business model. In 2022, we delivered competitive unit cost 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.

[Jose Montero, CFO]

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 $0.121. Our unit cost came in at $0.598, 4.6% lower than in 2019.

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, mainly in unrealized mark-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 mark-to-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 $0.151.

As a result, unit revenues came in at $0.137 or 23.4% higher than in the fourth quarter of 2019. Driven by higher jet fuel prices, unit cost or CASM increased $0.103 or 10% more than the adjusted CASM in Q4 2019. And finally, our CASM excluding fuel came in at $0.061, a 7% decrease versus the adjusted CASM excluding fuel for Q4 2019.

I'm 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-EBITDA ratio of 0.8x.

Turning now to our fleet. During the fourth quarter, we received 2 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.

2/3 such of our fleet continue to be comprised of owned aircraft and 1/3 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 2 to 4 months of delays versus the original delivery date.

As to our outlook, based on the current demand environment and the expected delivery dates for our incoming aircraft, we can provide the following guidance for full year 2023. We expect to increase our capacity in ASMs versus 2022 within the 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 the range of $0.121, CASM ex 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 are expecting an all-in fuel price of $3.15 per gallon.

Thank you. And with that, we'll open the call to some questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Michael Linenberg of Deutsche Bank.

[Michael Linenberg, Deutsche Bank]

Congrats on the great results, team. Two questions here. I guess, first -- two questions here. Just the first, Pedro, can you actually update us on some of the shareholder initiatives, the share repurchase and where things stand with respect to dividend reinstatement? .

[Pedro Heilbron, CEO]

Yes. 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 repayment 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 -- yes, like a month or so. .

[Jose Montero, CFO]

Yes. 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 with the share repurchase program.

[Michael Linenberg, Deutsche Bank]

Okay. Great. And then just my second, 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 connecting the dots -- really not even connecting, 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 versus high risk type growth?

[Pedro Heilbron, CEO]

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 2020. 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 new entries, and we are hoping to announce an additional at least two, two or so for the end of the year.

[Michael Linenberg, Deutsche Bank]

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? Or are they completely new destinations?

Pedro Heilbron Copa Holdings, S.A. – CEO & Director

No, I meant to say new destinations. We still have about 8 destinations we haven't restarted from pre-COVID, and we hope to also reinstate some of those during the year.

[Operator]

Our next question comes from the line of Duane Pfennigwerth of Evercore ISI.

[Duane Pfennigwerth, Evercore ISI]

Just on the traditional pattern of margins 4Q to 1Q, typically, we actually see some pickup sequentially from 4Q to 1Q. And if you think about the kind of roughly 25% margin, that you posted here. How do you think about that into 1Q? And 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.

[Pedro Heilbron, CEO]

Right. So Duane, and of course, it's only February. So we're going to be cautious in how we try to forecast 9, what, 11 months we have ahead of us. But I should also say that was not necessarily a typical Q4, but I'll let Jose maybe get into more detail.

[Jose Montero, CFO]

Yes. Duane, 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 that 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 a maybe a slight reduction. 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 in so far.

[Duane Pfennigwerth, Evercore ISI]

Okay. I mean fuel is lower sequentially. Obviously, fuel has been all over the place, but it is lower sequentially, at least our view today 4Q-to-1Q. And then maybe just for the follow-up on the pilot contract announcement, can you speak to the magnitude of that, I assume that's in your full year cost guidance? How should we think about that?

[Pedro Heilbron, CEO]

Right, Duane. So this is a process we go through every 4 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 gets signed on the last and the due dates. And it was not much different to what we have signed in previous negotiations 4 years ago or 8 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.

[Jose Montero, CFO]

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

[Pedro Heilbron, CEO]

And it's in line with inflation in Panama also. Inflation in Panama is the 2% to 3% range. So it's also in line with that -- and I get very similar to what we have signed in the past. It's in the guidance, of course.

[Operator]

Our next question comes from the line of Rogério Araújo of Bank of America.

[Rogério Araújo, Bank of America]

I had 1 follow-up on maybe supply/demand. So there is a rest implied in the guidance that is about 12% of '93 level and fourth Q was 20%, 21% above '93 levels. So I would like you guys to comment what is driving that. So you already mentioned that some of the fourth Q tickets has been sold when oil price was at a higher level. But can you break down maybe 3 segments here. One is the higher frequencies from Copa, how it should impact expected yields. The higher -- the expected capacity expansion from competitors, and also demand, do you expect some 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 Copa’s supply, competitor supply and demand?

[Jose Montero, CFO]

Thank you, Rogério, for the question. I will start by saying that 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, demand environment continues being relatively strong versus what we saw in Q4. I think that for both on the unit revenue side and in the load factor side, 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.

From -- 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 unit revenues in, I would say about 2/3 of the movement is related to that. And then the other part is related to the capacity that we brought in. And we are increasing capacity for the full year by the range of 12% to 14%. So it is an important double-digit movement in capacity. So I would say those are the two movements, but it's -- again, fuel and capacity on our own capacity is what's driving the guidance for '23.

[Operator]

Our next question comes from the line of Savi Syth of Raymond James.

[Savi Syth, Raymond James]

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 it just based on kind of the routes that you're adding, do we -- may be shorter haul routes or anything around that, that may be causes fuel efficiency to maybe not improve despite the MAX delivery?

[Jose Montero, CFO]

Yes. 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 backloaded into the second half of the year. We're seeing for Q1, again, a growth on a sequential basis and low single digits versus Q4. And remember that in -- but also there's the impact of -- I mean, again, we're comparing against 22 in total. So there is also the impact of micron at the beginning of the year a little bit. So there's some noise in the base of 22 to 23. So it's mostly backloaded into the second half of the year. And yes, the benefits in terms of fuel consumption for the MAX is there. It's in the double-digit range versus low double-digit range versus the NG. So we're seeing that, and I think that's an assumption to make in the fuel consumption part of the the model.

[Pedro Heilbron, CEO]

Which is, of course, in our guidance.

[Jose Montero, CFO]

Yes, of course.

[Savi Syth, Raymond James]

Got it. And if I might, on the Wingo, increased 1 more aircraft. I don't know if that was kind of expected or not. Could you just talk about what's -- how you're thinking about Wingo and how that's evolving based on what you're seeing in the environment today?

[Pedro Heilbron, CEO]

Sure. So Wingo did go from 8 aircraft at the beginning of 2022 to 9 is 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 9 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 9 aircraft during the year.

[Operator]

Our next question comes from the line of Bruno Amorim of Goldman Sachs.

[Bruno Amorim, Goldman Sachs]

So the question is actually a follow-up on the outlook for '23. Just wanted to make sure that we got the right message. Is it fair to say that 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? Because I understand fourth quarter was particularly strong, but even if you look at third quarter, margin was 18% already much higher fuel prices, right? So it does seem that all else held constant, there was room for margins to be better in 2023?

[Pedro Heilbron, CEO]

Yes. So we -- 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 actions 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 remain higher than before. So we don't think that's sustainable, and we're seeing that -- and it's experience 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, but we won't have in October. So the rest will be very similar. And yield will be also slightly lower due to the fuel reduction. I don't know, if you want to add something to that Jose?

[Jose Montero, CFO]

The point is that we're also growing by 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 -- I think with the added growth is precisely as you mentioned, a portion of the strategy that we're pursuing in terms of capturing new market or recapturing our markets. .

[Operator]

Our next question comes from the line of Stephen Trent of Citi.

[Stephen Trent, Citigroup Inc.]

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. When you think about sort of broader capacity in the region? Do you see kind of medium- to longer-term upside for passenger capillarities through document?

[Pedro Heilbron, CEO]

Yes. Actually, the two examples you have alluded to are not really that -- don't have a significant impact in our network. 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 8 years ago or even 4 years ago. So that's, I think, the big change, which is kind of -- it has 2 sides. One side is, of course, we need to remain very focused on our costs and our efficiencies, et cetera; but secondly, we are like in most markets, the only full-service carrier, so that gives us certain uniqueness.

But in general terms, as I mentioned, competition right now in our network, it's mostly ULCC. And I would say that most airlines have brought back most of the capacity to pre-pandemic levels or very close to it.

[Stephen Trent, Citigroup Inc.]

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

[Jose Montero, CFO]

Yes, Stephen, on a quarter-over-quarter basis versus Q4, fuel is down by about 4%. Yes. So that's kind of how we're seeing it on again, Q4 versus Q1.

[Operator]

Our next question comes from the line of Helane Becker of Cowen.

[Helane Becker, Cowen and Company]

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, 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?

[Pedro Heilbron, CEO]

Right. So the 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 2.5%. 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 grade 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 and 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.

[Jose Montero, CFO]

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

[Helane Becker, Cowen and Company]

Okay. That's really helpful. 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?

[Jose Montero, CFO]

Yes, Helane, I would not necessarily get into details of particulars of the strategy. But yes, there is a call option that is available in April of 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 discussed, has 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 pursued. And we have different options available to us on the table to be able to minimize the effective liability for us.

[Operator]

Our last question comes from the line of Josh Milberg of Morgan Stanley.

[Joshua Milberg, Morgan Stanley]

Congrats on the results. I just wanted to ask if you could touch on your CASM ex outlook. And what factors could eventually enable you to beat the $0.06 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 CASM ex guidance on -- in terms of pilot crew salary adjustments. I joined the call a little bit late, so I'm sorry if you already addressed that.

[Jose Montero, CFO]

Yes, Josh, thank you for the question. The -- I'll answer the last portion first. And yes, in our 2023 guidance of $0.06, there we have included all the impact associated with all our salaried waste 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 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 CASM is remaining flat for 2023.

But as you will mention, 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 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 overflight 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 in our -- 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, [drive offs] and -- 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, densification going forward.

[Joshua Milberg, Morgan Stanley]

Okay. That's great, Jose. 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.

[Jose Montero, CFO]

Yes, it's still not fully recovered. I would say, right now, leisure VFR is about 3/4 of the total volume of passengers that we're serving and about 1/4 is related to business. So it is still not back to the sort of 2/3, 1/3 where it was pre-pandemic.

[Operator]

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

[Pedro Heilbron, CEO]

Yes. 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.

[Operator]

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