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Copa Holding S.A. (NYSE:CPA)
Q4 2018 Earnings Conference Call
Feb. 13, 2018, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Copa Holdings Fourth Quarter and Full-Year Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterward, we will conduct a question-and-answer session. At that time, if you have a question, you will have to press *1 on your touchtone phone. As a reminder, this call is being webcast and recorded on February 14, 2019.

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

Raul Pascual -- Director of Investor Relations

Thank you very much, Victor, and welcome everyone to our fourth quarter and full-year earnings call. Joining us today are Pedro Heilbron, CEO of Copa Holdings; and Jose Montero, our CFO. First, Pedro will start with our fourth quarter and full-year highlights followed by Jose, 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 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. In addition, our discussion today will contain forward-looking statements, not limited to historical facts, that reflects 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 that are subject to change. Many of these risks and uncertainties are discussed in detail our annual report filed with the SEC.

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

Pedro Heilbron -- Chief Executive Officer

Thank you, Raul. Good morning to all and thanks for participating in our fourth quarter earnings call. First, I want to recognize all of our coworkers for their efforts during the year. Their ongoing dedication and commitment keep us at the forefront of Latin American aviation. As expected, during the fourth quarter we faced a soft unit revenue environment driven mostly by the continued yield weakness in Brazil and Argentina. Furthermore, we only saw a small benefit from the softening fuel prices as our effective jet fuel price started to decrease very late in the quarter. When compared to the fourth quarter of 2018, we had close to $30 million of additional expenses due to fuel prices alone.

Among the main highlights for the quarter, passenger traffic grew almost 5% year-over-year on a capacity growth of 5.5%. This resulted in an 82.8% load factor, 0.4 percentage points lower year-over-year. Yields came in at $0.118 or 7.7% lower than in the fourth quarter of 2017. Unit revenues, or RASM, decreased 7.7% year-over-year to $0.102 cents. On the cost side, our CASM excluding the one-time non-cash fleeting per min charge, came in at $0.093, 0.5% higher year-over-year due to higher fuel costs. However, adjusted ex-fuel CASM came in at $0.062 or 5.8% lower year over year. The resulting operating margin, excluding special items, came in at 9%. On the operational front, Copa Airlines delivered an on-time performance of 87.7% and a completion factor of 99.8%, again, industry-leading results.

Now turning to our main highlights for the full-year 2018. Unit revenues at $0.104 came in close to 1.6% lower year over year driven by a 2.1% decrease in yields, partly offset by a 0.2 percentage point increase in load factor. Adjusted CASM ex-fuel decreased 4.1% to $0.061, among the lowest very full-service airline. Despite the headwind of a soft unit revenue environment and higher-than-expected fuel prices, we reached an operating margin excluding special license of 12.5% for the year.

As for our network expansion, during 2018 we added five new destinations. Porto Alegre and Salvador in Brazil; Bridgetown, Barbados; Puerta Vallarta, Mexico; and Salta in Argentina, ending the year with 80 destinations in North, Central, South America and the Caribbean strengthening our position as the most complete and convenient hub in Latin America. In terms of fleet, during 2018 we returned one leased Embraer 190, and we took delivery of six aircraft. Two Boeing 737-800s and four 737-MAX9 aircraft ending the year with 105 aircraft. Within production of the 737-MAX9, we also launched our new business class product Green with lie-flat seats and other amenities for our longest flights which should help us increase yields in the front cabin in those routes.

On the operational front, we delivered an on-time performance of 89.7% for the year and were recently recognized by FlightStats for the sixth consecutive year as the most on-time airline in Latin America and by OAG as the most on-time airline in the world. I'd like to take this opportunity to thank our more than 9000 employees for everything they do to be number one and continuously deliver a great travel experience to our customers. Finally, Wingo continues to do well both operationally and financially. As mentioned in the third quarter earnings call, later in 2019 will be swapping their four 737-700s for four 737-800s which will further lower their unit cost and increase profitability. We also expect to transfer a fifth 737-800 to the Wingo fleet and most likely basin in Panama.

Turning now to 2019. Were still operating a soft yield environment driven mainly by Brazil and Argentina. So, we expect to continue seeing weak unit revenues in the first half of 2019 driven by low yields, especially when compared to a very strong first quarter in 2018. The currencies in these countries have been stable recently, and at least in the case of Brazil, the economic prospects are improving. As a matter of fact, the IMF is projecting for Brazil GDP growth of 2.5% compared to 1.3% in 2018. There has also been some rationalization of capacity in both markets, so we expect the demand environment to improve, but probably not sooner than the second half of the year. As a matter of fact, our recent sales data is showing improvement in yields across the network including positive year-over-year numbers for the second half of the year.

Also, fuel prices are lower than in 2018, so if this continues, it should certainly help our results for the year. As always, José will provide a detailed update on our 2019 guidance. While we're confident that the demand environment will continue to improve, we remain very focused on initiatives to make us even more resilient during these downturns. We continue driving initiatives to strengthen our top line and are focusing more than ever on maintaining extremely competitive unit cost.

We continue to make progress in ancillary revenues and loyalty program initiatives, including selling seat assignments and expanded second bag fee program, the selling of miles and upgrades among others. We have also made significant progress in deploying new technology tools which would help us enhance and accelerate these results by the end of the year. Our current plan includes implementing basic economy fares in the fourth quarter.

Regarding our fleet, during January we received one Boeing 737-MAX9, originally scheduled for December 2018 and close the sale of one Embraer 190. During the remainder of the year, we expect to receive eight 737-MAX9s and finalize the sale of four Embraer 190s to end the year with 109 aircraft. More than 10% will be MAX9 this should help us improve fuel efficiency, decrease our overall unit cost and increase our yields on longer haul routes thanks to the Dreams business class program. Finally, we recently announced a new destination Paramaribo in Suriname starting in July. By the end of the year, Copa provides service to 81 destinations in 33 countries in North, Central, South America and the Caribbean, by far the most complete and efficient network for intra-America travel.

To summarize, we expect a challenging revenue environment in the first part of 2019 based mostly on continued yield softness in Brazil and Argentina. We are being proactive in taking steps to moderate our growth to accommodate current market conditions. Our team continues to deliver world-leading operational results. We continued delivering efficiencies and savings which have further lowered our unit industry-leading unit cost. We also continue focusing on revenue opportunity including ancillary initiatives our aim at strengthening our results. Lastly, we're confident as ever in our business model and our financial strength. Even during a challenging year, we continued delivering a great product, leading unit cost and double-digit margins making us the best positions consistently delivering industry-leading results, especially, as the market conditions in our region continue to normalize.

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

 Jose Montero -- Chief Financial Officer

Thank you, Pedro, good morning everyone and thanks for joining us. As always, I'd like to join Pedro in acknowledging our great Copa team for all their achievements during a challenging year. I will start by going over our full year highlights. We delivered a load factor of 83.4% on an 8% capacity growth. Yields, however, came under pressure in the second half of the year due to continued weakness in the Brazilian real and Argentine peso pushing unit values down 1.6% to $0.104.

We decreased our ex-fuel unit cost by 4.1% to $0.061 cents, one of the lowest in the world for a full-service carrier. However, fuel prices increased about 25% year-over-year offsetting all of our ex-fuel CASM efficiencies and putting pressure in our operating margin which came in at 12.5%, net of special items.

On the operational front, we strengthen our network by adding five new destinations. We took delivery of our first 737-MAX aircraft. We continued delivering a world-class operating product and were recognized as the most on-time airline in the world. We've been closed before, so it is gratifying for the entire team to achieve the number one spot.

Reporting net income for the full year 2018 came in at $88.1 million which translates to earnings-per-share of $2.07. Excluding special items, mainly the non-cash and the non-recurring per min charge $188.6 million related to the Embraer 190 fleet, adjusted net income came in at $276.7 million for an adjusted earnings-per-share of $6.52, 23.5% lower than the adjusted net income of $361.2 million or adjusted earnings-per-share of $8.25 in 2017.

Now turning to our fourth quarter results. We grew capacity by 5.5% year-over-year while revenue passenger miles increased 4.9% year-over-year which resulted in a consolidated load factor of 82.8%, an 8.4 percentage point decrease versus Q4 2017. Use was also weaker coming in 7.7% below last year. This year-over-year decline was mostly driven by the continued weakness in the Brazilian real and the Argentine peso. Our Q4 2018 RASM came in $0.102 or 7.7% lower than the $0.11 reported for Q4 2017. Consolidated revenues decreased 2.7% year-over-year to $656 million.

On the expense side, excluding special items, our fourth-quarter operating expenses increased 6% year-over-year on the 5.5% capacity growth which resulted in our cost per available seat mile increasing .5% to $0.093, specifically as a function of higher jet fuel prices. For the quarter, are effective volume fuel price average $2.38 per gallon, an increase of 17.5% versus the $2.03 per gallon that we averaged Q4 of 2017. Our total fuel expense for the quarter was $36.7 million above Q4 2017 of which $29 million are related to the fuel price increase and the rest due to the additional capacity flown during the quarter. For the fourth quarter, our unit cost excluding fuel ex-fuel CASM came in 5.8% lower year-over-year, excluding special items, coming down from $0.066 in Q4 2017 to $0.062 in this quarter. This reduction in our unit cost for the fourth quarter came mainly due to lower maintenance expenses related to the return of leased aircraft as well as to the continued focus in the reduction of overhead expenses and lower bearable compensation expenses.

Consolidated operating earnings for the quarter came in 47% lower at $58.9 million resulting in operating margin of 9%, 7.5 percentage points lower than the 16.4% generated in Q4 2017. Looking at nonoperating income expense and excluding special items, the fourth-quarter generated a net nonoperating expense of $10.9 million compared to a $9.8 million loss reported in Q4 2017 mainly as a result of a firm currency fluctuation loss of $7.3 million realized in Q4 2018 compared to a $5.7 million loss in 2017.

In terms of net results, the quarter generated a net loss of $156 million or a loss per share of $3.67 compared to earnings-per-share of $2.39 in Q4 2017. Excluding special items, mainly the $188.6 million non-cash and nonrecurring per min charge related to the E190 fleet and an $11.4 million one-time foreign-currency adjustment that was included as part of our restated 2017 results, adjusted net income came in at $44 million or $1.02 per share compared to $2.11 per share in Q4 2017.

According to the balance sheet, we closed the quarter with a very strong financial position. Assets total $4.1 billion, owner's equity totaled $1.8 billion, debt plus capitalized leases total $2.1 billion, and our adjusted net debt to EBITDA ratio came in at a very strong 2X, by far the lowest in our peer group. Keep in mind, that starting in 2019 the nature of this calculation will change with the adoption of the leasing standard IFRS 16. We closed the quarter with approximately $1.3 billion in debt, more than 60% of which is fixed with a blended rate including fixed and floating rate debt over approximately 3.4%. In regard to cash, short and long-term investment, we closed the quarter with close to $860 million. The reduction in cash balance during the quarter was driven primarily by the early retirement of a portion of our debt related to the E190 aircraft. Our cash balance at the end of the quarter represents approximately 32% of the last 12 months revenues.

In terms of fleet, we received three 737-MAX9 aircraft during the quarter, ending the year with a total of 105 aircraft. The fifth MAX9, originally scheduled for December as per our fleet plan, was delivered early in January. Also, in January, we executed the sale of the first Embraer 190 to Azores Aviation. During the rest of 2019, we expect to take delivery of eight additional MAX9s and finalize the sale of four additional Embraer 190s to end the year with a fleet of 109 aircraft, 13 737-MAX9s, 68 737-800s, 14 737-700s, and 14 Embraer 190s. It is important to note that we have already secured the financing for all the aircraft we will take delivery of during 2019.

Finally, I'm pleased to announce that our Board of Directors has approved a quarterly dividend of $0.65 per share, corresponding to our dividend policy of 40% of prior years adjusted net income. The first quarterly dividend will be paid on March 15 to all shareholders of record as of February 28.

So, to summarize, the fourth-quarter performance was affected by the weakness in some of the currencies in the region as well as the increase in the price of jet fuel. However, we continue to deliver industry-leading unit costs, and we continue pursuing our cost-savings initiatives. Our network continues being the most convenient for travel within the Americas with world-class operational indicators. We have one of the strongest balance sheets in the industry, and we continue to return value to our shareholders.

Today, we are also providing guidance for 2019 based on our operating plan and expectations for air travel demand for the year. We're co-producing our capacity growth in terms of ASMs two approximately 2% and given the lower fuel price curve for the year; we're increasing our operating margin range to 12% to 14%. Our 2019 for your guidance is based on the following assumptions: load factor of approximately 84%, RASM of approximately $0.102, CASM ex-fuel of approximately $0.062, and a lower effective fuel price per gallon, including $0.28 of interplane and expenses, of approximately $2.15.

Thank you, and what that will open the call to some questions.

Questions and Answers:

Operator

Ladies and gentlemen, if you have a question at this time, please press *1 on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, please press #. Once again, that's *1 for questions, *1. Our first question from the line of Bruno Amorim from Goldman Sachs, you may begin.

Bruno Amorim -- Goldman Sachs -- Analyst

Yes, hi, good morning. I have a question on your cash position. I just like just to check with you if there is any of the countries where the currency has depreciated significantly in 2018 like Argentina, Venezuela, or Brazil where you have a significant cash position and if this is the case, what was the impact market to markets in the cash position? And also, I have a second question on your capacity growth, you have reduced your capacity growth guidance for this year is lively now together with the results, have you already made the adjustments that you had to make in the network now that you've reached this new capacity level or is this something that you're gonna do throughout the year and therefore could have an impact, not immediately, but throughout the year on your pricing and power? Thank you very much.

Jose Montero -- Chief Financial Officer

Hello Bruno, this is José here. So, in terms of cash, basically all of our cash is in US dollars, so we don't really maintain amounts of cash in our currencies. Once we perform our sales, we repatriate the currencies very quickly. So, there is very little impact in our cash balance related to that. Where you see the variation in our FX line, mostly its translational aspects related to payables and receivables in the particular countries more than specifically cash transactions related to the currencies.

And in terms of the capacity, we've already started making some adjustments to the network, mostly for the first half of the year related to frequencies and markets in South America, we did reduce some of our exposure to some of the deep South markets. Again, mostly driven by frequency into markets that we already serve. And so, yeah, the 2%, at least for the first half which is kind of the first part of the year, has Artie been out there and published.

Bruno Amorim -- Goldman Sachs -- Analyst

Thank you so much.

Operator

Thank you. Enter next question comes from the line of Savi Syth from Raymond James, you may begin.

Savanthi Syth -- Raymond James & Associates -- Analyst

Hey, good morning. I was wondering if you could share with us the RASM decline for Brazil and Argentina in the fourth quarter and can I pick up the -- in 1Q filled out so much stronger at tax levels, what's the trend that you're seeing currently, assuming nothing changes?

Pedro Heilbron -- Chief Executive Officer

Yeah, hi Savi, it's Pedro. So, in the fourth quarter in both markets we saw in Argentina industry sales were around 40% down year-over-year and that was mostly yield systems. Same with Brazil, with Brazil it was around 20% industry sales, agency sales down in Brazil. I mean in that range and that was very similar to what we've been seeing in the first quarter also. And again, mostly yield. However, we have seen in our current sales for future travel, we have seen networkwide improvement in yields, a gradual improvement in yields and more recently were starting to see actually positive yields year-over-year. But that could have an impact mostly in the second half of 2019.

Savanthi Syth -- Raymond James & Associates -- Analyst

Okay. And then if I -- just regarding Venezuela, have you seen any changes in the demand or supply there and just how your thinking about it given the latest developments?

Pedro Heilbron -- Chief Executive Officer

Right, so as usual, it's like a roller coaster ride. So, since the most recent crisis started, we have seen demand suffer quite a bit, and in fact we had scheduled additional capacity toward the end of last year, beginning of this year, and we took out that additional capacity and this month of February to react to the lower demand due to what's going on there.

Savanthi Syth -- Raymond James & Associates -- Analyst

Okay, got it, thank you, Pedro.

Jose Montero -- Chief Financial Officer

Hey Savi, one more thing here, this is José here. So, Venezuela, just in total in terms of ASMs represents around 2% of our ASMs. So, it's a minor portion of the total capacity that we have.

Savanthi Syth -- Raymond James & Associates -- Analyst

I was just wondering if there was opportunity there given that potentially things could improve, but it sounds like it's not there yet.

Pedro Heilbron -- Chief Executive Officer

Yeah, not right now. Yeah, hopefully, it will improve in the future.

Savanthi Syth -- Raymond James & Associates -- Analyst

Thank you.

Operator

Thank you, and our next question comes from the line of Duane Pfennigwerth from Evercore ISI, you may begin.

Duane Pfennigwerth -- Evercore ISI -- Analyst

Hey guys, thanks. I wonder if you could just expand a little bit on what you expect in the first quarter. Do you expect a similar decline, a greater decline, or less of the decline into the March quarter? And if you could size the Easter shift as you see that in the first quarter?

Jose Montero -- Chief Financial Officer

Hey Duane, I'd say that the first quarter it's going to be a difficult comp because Q1 of 2018 was very strong and so we're seeing a gap in a year-over-year basis in the low double digits, kind up the low teens in terms of RASM on a year-over-year basis, so that's how are seeing it. Having said that, as Pedro mentioned, I think we're starting to see, especially I think toward the latter part of the second quarter, some better forward yields in the bookings that we're seeing so I think that we're at least optimistic in the sense that perhaps toward the second half of the year we'll start seeing improvement on a year-over-year basis.

Duane Pfennigwerth -- Evercore ISI -- Analyst

I appreciate that detail. And then just for my follow-up, on the 190 fleet if you had to guess, how much longer will you be operating those 19 aircraft and what is the carrying value on the fleet today after the writedown? And thanks for taking the questions.

Pedro Heilbron -- Chief Executive Officer

Right, so I'll take the first part, this is Pedro. By the end of the year, the Embraer fleet will be down to 14 aircraft. We're selling five or we have sold five of which we have delivered one, and there are four more to be delivered. So, we should end the year with 14 Embraer's. We have not made that decision, a firm decision, yet in terms of how long we're gonna keep the Embraer's or if they're going to be replaced by similar hundred seaters or just operate a single Boeing fleet of 737s. We have not made that decision, we're looking closely at the numbers, and we will make a decision that is positive to our net results, but we're not there yet.

Jose Montero -- Chief Financial Officer

Yeah, and in terms of the carrying book value of the fleet, it's basically between the high 80s in terms of millions of dollars. So, that's kind of how it's left. But there's spare parts and spare engines, etc., as well in there, so there's some other components as well in there. The figure that I just mentioned is purely aircraft.

Duane Pfennigwerth -- Evercore ISI -- Analyst

Okay guys, thank you.

Operator

And our next question comes from the line of Hunter Keay from Wolfe Research. You may begin.

Mike Gunn -- Wolfe Research -- Analyst

Hi, this is actually Mike Gunn for Hunter. So, on basic economy, you said that's going to be coming 4Q? Just a couple thoughts if that's good to be limited to certain geographies, if it'll come out all at once, if it's good to be all the buckets are just a couple of them? Any thoughts you'd be willing to share. Thanks.

Pedro Heilbron -- Chief Executive Officer

Yeah, we haven't finalized what exactly it's gonna look like. So, we know are going to have the right technology and were implementing forward logic technology which should be implemented by the fourth quarter that's going to allow us to implement the basic affairs and that something we're going to do. We don't know exactly how it's gonna look but I would expect it to be in most markets for sure and we also expect a kind of very positive impact from being able to upsell, promote upselling, but also more effectively sell ancillary.

Mike Gunn -- Wolfe Research -- Analyst

Great, thank you.

Operator

In our next question comes from the line of Helane Becker from Cowan, you may begin.

Conner Cunningham -- Cowen and Company -- Analyst

Hey, guys, it's actually Conner Cunningham in for Helane. Is it safe to assume that the capacity adjustments are happening on the off days? And if so, can you just talk about the unit revenue trends for peak versus off-peak? Thanks.

Jose Montero -- Chief Financial Officer

Yeah, you can make an assumption that we are very aggressive in our capacity management during the low season periods. What we've also done is shifted some of the capacities away from some of the Brazilian and Argentinian markets and put it to fly in other parts of the network. So, there's also a little bit of that as well. So that's part of the ASM shift that's been driven by simply the shift in the shape of the network, but also indeed there is a very active management of our capacities during low season periods.

Pedro Heilbron -- Chief Executive Officer

And I would add to that that some of our secondary Brazilian and Argentinian markets, five of those markets in both countries, have capacity reductions in Q1 year-over-year in the 20% range.

Conner Cunningham -- Cowen and Company -- Analyst

Okay. And that actually kinda speaks to my follow-up. If you exclude Brazil and Argentina, how is the rest of the year network performing? I mean obviously you're putting more capacity into new markets, so is there a unit revenue headwind that you're kinda seeing their overall? Thanks.

Pedro Heilbron -- Chief Executive Officer

So, two things, or maybe three things. So, in terms of capacity, we are actually slowing growth and that 2% ASM growth we are guiding to for 2019 is pretty much across the board. I mean we are reinforcing capacity in some markets that are stronger, but not by a significant amount. So, it's pretty much kind of a network thing. There are certain other markets that have not obviously a collapse like Brazil and Argentina, they have not been subject to the currency devaluations and economic conditions, but that are under more capacity pressure. Like for example, in and out of Columbia, Columbia to North America to South America to the Caribbean. There has been a lot of capacity growth, not by us, by others. Also, from North America to Central America there has been quite a bit of capacity growth, and we're talking from the middle of last year at including this first quarter. So, those markets are under more competitive pressure and of course yields have suffered.

Conner Cunningham -- Cowen and Company -- Analyst

Okay. And then just a quick follow-up on Duane's question about the E190 fleet. Can you just talk about the earnings drag of operating two separate fleet types and if you do make a decision for that to go away, what with the positive impact be? Thank you.

Jose Montero -- Chief Financial Officer

Yeah, so when we issued notice of the Embraer, leasing Embraer's leaving, we were talking about there is a cash positive benefit about at least $10 million per year related to the replacement of those aircraft with 737 capacity. So, we're very bullish about that. And of course, there are further opportunities once the fleet is -- if we decided the fleet goes away, we go to a sole fleet, yeah, there's some complexity costs that will go away as well. So, yeah, those are certainly advantages we will seek to do while operating just 737 fleet.

Conner Cunningham -- Cowen and Company -- Analyst

Great, thank you.

Operator

And our next question comes from a line of Mike Linenberg from Deutsche Bank; you may begin.

Michael Linenberg -- Deutsche Bank -- Analyst

Yeah, hey everybody. Just a couple here. I guess José; you just highlighted the cash benefits of removing the 190s and the reduction in complexity. Are there any markets though that you serve of the 80+ markets today where if you get rid of the E190 that the 737-700 is just not suited for that market? You know I don't know if it's a now some of these flights that are less than daily?

Jose Montero -- Chief Financial Officer

Yeah, I think that the first thing I have to say is that is that we have not made the decision, the final decision yet to exit the fleet. So, these are things that we are looking at very closely right now and of course in light of what you mentioned, of what is the impact of the 190 in certain secondary markets where that is the right size of aircraft. So, we are very carefully evaluating what the particular impact will be of that and it could be that if we decide -- you know you have to take into account that if you decide to replace the 737-700 for an E190, you have to look at how demand would act on where the per trip benefit or profitability for a particular flight would improve or not with a 737. So, these are very thorough analyses that we perform audit ongoing basis, and we haven't finalized a decision. So, I would have to say that that's something that we're still looking at.

Michael Linenberg -- Deutsche Bank -- Analyst

Okay, great. And then just assort a second strategic type question, why the shift from the 737-700 to the 800 for Wingo, or was the 800 may be the right airplane from day one, but you needed MAX9s to come in to free up enough 800's to go into that business? And sort of a related question, you indicated that you're going to base one of the Wingo airplanes in Panama. Now is that Panama Pacifico or are you actually going to put a Wingo aircraft at Tucuman?

Pedro Heilbron -- Chief Executive Officer

Right, so this is Pedro, Mike.

Michael Linenberg -- Deutsche Bank -- Analyst

Hi Pedro.

Pedro Heilbron -- Chief Executive Officer

Yeah, the 800, we always knew the 800 was the right aircraft for Wingo. It has the right seat capacity and more importantly, had the right unit cost for an airline like Wingo. We started with a 700 for two reasons. One that it would reduce the risk, the downside risk, of an alpha start-up, and it did. So, the first year we did not have load factors that were so high that the 700 was not enough, so it did reduce the risk and reduce losses during the first year and the second reason we started with the 700 because we knew we could switch fleets at any time because we have enough 800s and we have use for our 700s. Especially now that we've sold Embraer's. So, the Embraer's we are selling, we are replacing with the Wingo 700s, so it's not a big growth in capacity. So, yes, the 800 is the right aircraft for Wingo, and we're doing it now when we are confident about the load factors in the future demand for Wingo.

In terms of basing an aircraft in Panama, it's going to be in Panama Pacifico where Wingo has all of its operations, and it's actually going to take registering a new airline in Panama so I can operate in and out of Panama Pacifico with its own route rights.

Michael Linenberg -- Deutsche Bank -- Analyst

Okay, should we assume this that that airplane is going to be used for Panama to routes to the South which is mostly Wingo? I mean I know I think you do fly Wingo up to Cancún and I believe Mexico City or is this something where you're going to be looking more northward with the Panama based aircraft?

Pedro Heilbron -- Chief Executive Officer

Right, so we think -- I won't be able to give you a firm answer, but what I can say is, it's not an exact answer, but there are a few markets that can sustain nonstop, point-to-point service from Panama. The rest depends on connectivity which is what we do. So, only a few can sustain, that's our opinion. So, Wingo is going to start operating a few of those markets and you know it could be to the north, it could be to the south, that's totally open. Where we see opportunity in those markets, where nonstop can be sustained, then Wingo might fly it.

Michael Linenberg -- Deutsche Bank -- Analyst

Okay, great. If I could just squeeze in just one more as it relates to IFRS16, I know most airlines are going to be moving over to that convention in 2019. Presumably, you will be doing that as well. I know for some airlines because of the punitive nature of capitalizing it seven times, some carriers have actually seen an improvement in their balance sheet and leverage moving over to the new accounting standard. I'm not sure José if you've done any early work on this, what your initial read, whether or not you're coming out with a potential benefit from a deleveraging perspective by moving to IFRS16. Any thoughts or comments, or is it still too early?

Jose Montero -- Chief Financial Officer

Yeah, that's a great question. Actually, IFRS16 is a mandated standard, so everybody is good to have to move even regardless if you are under IFRS or under US GAAP asset comparable accounting standard as well. So, all companies are going to have to go into it. It's not only airlines by the way. Yeah, for us, we are doing still the work preliminarily and having discussions with the auditors. There is a lot of debate in the industry related to the application of the standard, but in our case, case preliminarily we are seeing yes, a deleveraging effect on the balance sheet related to the capitalization of the leases.

Michael Linenberg -- Deutsche Bank -- Analyst

That's great to hear. Thanks, José, thanks, everyone.

Operator

And our next question comes from the line of Joseph DeNardi from Stifel; you may begin.

Joseph DeNardi -- Stifel Financial -- Analyst

Yeah, hey good morning everybody. Pedro, can you just talk about, as it relates to Brazil, some of the key milestones politically or from a reform standpoint that your kind of keeping an eye on over the next few months? Kind of gauge whether some of the enthusiasm down there is actually going to yield good positive results longer-term?

Pedro Heilbron -- Chief Executive Officer

Well, I think you could probably tell me. We are obviously hopeful, and we've seen how the currency has stabilized actually sounds like the middle of last year it has been pretty stable and the economic growth prospects for this year are close to double what it was in 2018. So, we think Brazil is going to recuperate much faster than maybe some people think. We are seeing a little bit of that right now, but you know we are cautiously optimistic. There is still a lot going on, and I don't want to be a Brazilian expert, but we are cautiously optimistic right now.

Joseph DeNardi -- Stifel Financial -- Analyst

Okay, yeah, fair enough. And then Pedro if you look out three or four years it seems like a significant amount of capacity between the US and South America is good to be controlled by three or so joint ventures, and I'm just wondering if you talk about how you think you fit into that longer term, whether that's good for you or bad for you, yeah, just kinda what your thoughts -- it seems like a very significant change occurring years and I'm just wondering how you fit into that. Thank you.

Pedro Heilbron -- Chief Executive Officer

So, as you know and as we announced in the latter part of last year, we joined, and we signed a JBA, a Joint Business Agreement with United and Avianca from Columbia that has to go for approval. The approval process has not yet started but it will start sometime this year, and it usually takes upwards to year and a half or so to get approved. So, we're talking and of 2020, maybe the beginning of 2021. It's hard to predict. But we're going to be part of one of three major JBAs in Latin American, and we think that will level the playing field and given our strategic position in Panama, right in the middle of Latin America, we think it's going to be net positive for us.

Joseph DeNardi -- Stifel Financial -- Analyst

Yeah, OK, Pedro. I mean if you think about the potential benefits of it do you think it's stability, does it improve the returns that you get going to North America? Does it allow you to grow more in North America? You mentioned it kinda levels the playing field; maybe you can expound on that just because your returns are kind of better than everybody else's, so, I'm not sure what leveling of the playing field means for you guys.

Pedro Heilbron -- Chief Executive Officer

Well, what I meant by leveling the playing field is not being left out and not having let's say a United who is our major partner even before we both joined Star Alliance, working with someone else and then the other US major carriers working with some of our competitors and having that advantage of working together in the US market and being able to cooperate in expanding your networks and offering more advantages to the passengers. So, we will probably, given the way our network is structured, which is basically international hub and spoke full-service, we would be in a way left out of the benefits of working together. And the benefits for the passengers; also, they would find probably more and more options in the other joint venture agreements or joint business agreements.

So, that's what I mean by leveling the playing field, not having to work against a much greater entity. So, we're gonna be at par but we retain, and this only applies to Latin America to US, not the rest of our networks, and we will also retain our cost advantage and other efficiencies including our world-leading on-time performance. So, we will still be out of that, but network wise and marketing wise, we'll be able to have some advantages that we think are going to be positive going forward.

Joseph DeNardi -- Stifel Financial -- Analyst

That's helpful, thank you.

Operator

Enter next question comes from the line of Josh Milberg from Morgan Stanley, you may begin.

Josh Milberg -- Morgan Stanley -- Analyst

Good morning everyone, thank you for the call. Just two quick ones from me. The first is that you mentioned a shifting capacity away from Brazil and Argentina and some markets within those countries seeing cuts biggest 20% early in the year if I'm not mistaken. I was hoping you would just give a little more detail on that and also maybe give an indication on what might be the full your capacity evolution in those two markets. Because I was just trying to reconcile your point about potential cuts with the other message that the overall growth should be uniform across different markets.

Pedro Heilbron -- Chief Executive Officer

Yeah, so this is Pedro. I'll start, and maybe José can pitch in. So, in terms of Argentina and Brazil, most of our ASM reductions or capacity reductions have been in secondary markets so like three secondary markets in Brazil, two in Argentina with cuts about 20% ASM in the first quarter of this year versus first quarter of the year before and overall in those markets is even adding the other, the trunk routes which are doing better, capacity is down in Brazil it's down in the high single digits. In Argentina it's flat, but I should say that right before the crisis and Argentina and currency devaluation, we had grown quite a bit, opening destinations and adding frequencies. So, we have pretty much brought back down all of that additional capacity, and we will have flat growth this year.

Jose Montero -- Chief Financial Officer

And I think that complementing that, the growth that we are seeing or that we are shifting away from these South America, from the Brazil Argentina secondary markets and granted, these are all frequencies that we fly into these markets. The capacity that we're placing is mostly in the northern parts of South America. So, the fact that these are shorter stationed flights creates a net reduction or a very slight growth in terms of essential flat year-over-year ASMs, and that's kinda how we project the overall behavior of the ASMs throughout the year. Actually, for example, in the first half of the year, for the first quarter, we're expecting overall ASM growth to be kind of in line with that 2% that we are guiding to for the full year and then Q2 might be flattish to slightly down to basically that one point flat range. So, that's kinda how the year is gonna be overall.

Josh Milberg -- Morgan Stanley -- Analyst

Okay, that was very clear, and my second question relates to the Embraer fleet impairment charge. It looks like the impairment itself was boosted to around $190 million from the $160 million level, and they just wanted to make sure that that was right and also if it is right, understand what drove that.

Jose Montero -- Chief Financial Officer

Yeah, Josh, so the prior figure that we had issued back was a preliminary figure and we were still performing a very detailed analysis around it and everything we had concurrent with that was [inaudible] of aircraft analysis related to the maintenance policy so once we concluded both analyses, the impact on the 190 fleet was higher than what we had calculated initially, so it was a little bit of kinda win both calculations were performed, a little bit more came into E190 impairment versus the [inaudible] adjustment that we had to make as well. So, that was the reason for it, it was mostly a preliminary figure and still under adjustment.

Josh Milberg -- Morgan Stanley -- Analyst

Understood, thank you.

Operator

And our next question comes from the line of Dan Mc Kenzie from Buckingham research; you may begin.

Daniel McKenzie -- Buckingham Research Group Inc. -- Analyst

Hey, thanks, guys. Just going back to the revenue commentary, the failure revised outlook for 2019 was a hair weaker than the last outlook and given the trend capacity, I would've expected it to be just a little stronger. So, his incremental weakness tied to some of the prior Q&A that you've already answered or is this something new or is it really just a rounding error?

Jose Montero -- Chief Financial Officer

I'd say that it's mostly related just, Dan, to this specific performance report 2019 of Q1 and yeah, workshop changes that we saw, but yeah, the performance very close into the beginning of 2019 has been a challenging Q1 but as we mentioned before, at this time we're seeing our bookings in the years that are coming with our bookings, especially during the second part of the second quarter improving and even though they won't close the year-over-year gap for the RASM for Q2, definitely for the second half of the year the potential for improvement right now.

Pedro Heilbron -- Chief Executive Officer

So, basically the sales are coming and right now for future travel are coming at better year-over-year yields, but obviously, we have sold a good percent of the second quarter at lower yield. But we've seen that throughout this year. We have seen a gradual improvement in yields year-over-year closing the gap we had at the beginning of the year, and we are seeing positive trends for the second half of the year.

Daniel McKenzie -- Buckingham Research Group Inc. -- Analyst

Got it. And then with respect to those positive trends in the back of the year that you are seeing, is that broad or widespread across all the network or is that simply tied primarily to Brazil and Argentina?

Pedro Heilbron -- Chief Executive Officer

It's overall. It's pretty much the whole network. There's always going to be ups and downs and positives and not so positives, but it's pretty much throughout the network.

Daniel McKenzie -- Buckingham Research Group Inc. -- Analyst

Very good. And then if I could just squeeze one last one here, with respect to the commentary on lie-flat seats and the positive impact to yields that you referenced in the opening remarks, I'm wondering if you could just help us peel back the onion a little bit there. I'm just kinda wondering what percent of the flying to the premium seats represent today, and what percent with a represent at the end of the year and what percent with a represent once you're fully up and running? I'm just trying to get at trend rate you know for how this premium revenue would come in.

Pedro Heilbron -- Chief Executive Officer

So, right now it's very little, I think it's 1% or 2%, something like that, very little. It will be 10% by year-end. And it will grow year after year, but it won't be -- let's say the whole premium network that will happen like in three or four years and even then, it's can it be maybe that will be a third of our flying four years down the line. So, by the end of this year, it will be 10%.

Daniel McKenzie -- Buckingham Research Group Inc. -- Analyst

Thanks, Pedro, perfect.

Operator

In our next question comes from the lineup Victor Mizusaki from Braseco BBI, you may begin.

Victor

Hi, thank you. I have two questions about your guidance for 2019. The first one, how much are you paying for jet fuel in the first quarter? In the second question also about fuel cost, how does this compare your guidance, I mean for the year you're assuming $2.15 per gallon, so, I'd like to understand how much you are paying today how does this compare with your guidance?

Jose Montero -- Chief Financial Officer

Yeah, I think that that is really close to where we are right now. I think it's in line with the full year, the $2.15 we're seeing. So, it's not, it might be a little higher than what we had, but it's not just significantly higher than what we are guiding for the full year. Yeah, they are telling me, I've just seen here, it's basically about a nickel below the full year. So, if Q1 is basically about $2.10 and the full year is about $2.15, but it's not significantly different from what we've guided to.

Victor Mizusaki -- Bradesco BBI -- Analyst

Okay and I don't know I don't know if you can disclose this but what's the W tariff forecast to support the $2.15 per gallon for the year?

Jose Montero -- Chief Financial Officer

Yeah, so the fuel, you're talking about the jet fuel basis that we are using for the $2.15 is about $1.87 of jet fuel per gallon and add to that $0.28 of interplane fees and that creates the $2.15 guidance for fuel.

Victor Mizusaki -- Bradesco BBI -- Analyst

Okay, thank you.

Operator

Thank you. And our last question comes from the line of Stephen Trent from Citi; you may begin.

Stephen Trent -- Citigroup -- Analyst

Thanks very much, guys and I appreciate the time. Just one or two from me actually. The first is a follow-up from Mike Linenberg's question. When we think about IFRS16, and we look at your margin guidance for this year versus last year's, any indication as to whether the accounting adjustment made a material difference, or can we assume that there's basically no margin difference because of the accounting?

Jose Montero -- Chief Financial Officer

Yeah, Steve, there is a tiny portion of the lease expenses that will come non-operating, but it is really very tiny. So, I would assume, or I would just say that the guidance for 2019 has that the IFRS16 included in there. But it's very, very minor on an operating versus non-operating basis.

Stephen Trent -- Citigroup -- Analyst

Okay, Jose, I appreciate that, and just one other last question, can you give us an update as to where we are now with Tucuman Airport's south wing?

Jose Montero -- Chief Financial Officer

Okay, Steve, so we have seen some progress over the last several months and we expect the first four gates to be operational in the month of April and we expect the terminal right now, it's still under construction and there's still some milestones to be completed, but we're talking about something for the latter part of the year, Q4 of this year for the terminal to be fully operational.

Stephen Trent -- Citigroup -- Analyst

Okay, I appreciate that Jose, thank you.

Raul Pascual - Director of Investor Relations

Okay, I think that concludes our earnings call, thank you all and thank you for being with us and thank you for your continued support. Have a great day.

Operator

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

Duration: 60 minutes

Call participants:

Raul Pascual - she is asleep, and I'm like not done in their wanting it in - Director of Investor Relations

Pedro Heilbron -- Chief Executive Officer

Jose Montero -- Chief Financial Officer

Bruno Amorim -- Goldman Sachs -- Analyst

Savanthi Syth -- Raymond James & Associates -- Analyst

Duane Pfennigwerth -- Evercore ISI -- Analyst

Mike Gunn -- Wolfe Research -- Analyst

Conner Cunningham -- Cowen and Company -- Analyst

Michael Linenberg -- Deutsche Bank -- Analyst

Joseph DeNardi -- Stifel Financial -- Analyst

Josh Milberg -- Morgan Stanley -- Analyst

Daniel McKenzie -- Buckingham Research Group Inc. -- Analyst

Victor Mizusaki -- Bradesco BBI -- Analyst

Stephen Trent -- Citigroup -- Analyst

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