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Copa Holdings SA (NYSE:CPA)
Q2 2019 Earnings Call
Aug 8, 2019, 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 Second Quarter Earnings Call.[Operator Instructions].

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

Raul E. Pascual -- Director of Investor Relations

Thank you, Garmin, and welcome everyone to our second quarter earnings call. Joining us today are Pedro Heilbron, CEO of Copa Holdings; and Jose Montero, our CFO. First, Pedro will start with our second quarter 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, copa.com.

Our discussion today will 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 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 thank you for participating in our second quarter earnings call. First, I would like to congratulate our coworkers for their efforts during the quarter, and especially their ongoing hard work to minimize the impact of the MAX grounding on our customers. Our team's commitment and dedication keeps us at the forefront of Latin American aviation.

Today we're pleased to report solid results for the second quarter and more importantly an improved outlook for the rest of the year. Air travel demand in the region continues to improve and our industry is also benefiting from a more rational capacity environment. Specifically, for Copa, we continue seeing the benefits of the many commercial initiatives that we have been implementing over the past years, generating incremental revenues from our frequent flyer program and ancillary products, as well as better revenue management practices.

Also, despite the MAX fleet grounding, which puts tremendous pressure on our operations and unit costs, we have been able to keep costs under control while delivering world-class operational numbers. I'd like to take this opportunity to again thank our entire corporate team for their efforts and results.

Among the main highlights for the quarter, driven by the MAX fleet grounding, our capacity measured in ASMs decreased year over year by 4.3%. RPMs decreased only 2.5% resulting in an 85.1% load factor, 1.6 percentage points higher year over year. Yields came in at $0.118, 4.1% higher than in the second quarter of 2018. These higher loads and yields resulted in unit revenues, or RASM, of $0.105, a 6.3% year-over-year increase.

On the cost side, ex-fuel unit costs came in at $0.062, higher year over year due to the MAX fleet grounding and the timing of certain expenses, but still among the best in the industry for a full-service carrier. As a result, our operating margin came in at 12.8%, 3.3 points higher year over year in what's our weakest quarter.

And on the operational front, Copa Airlines delivered an on-time performance of almost 91% and a completion factor of 99.8%; again, among the very best in the world. As a reminder, we have six grounded MAX9 aircraft, and we were supposed to have taken delivery of another three during the first half of the year, as well as four more in the second half. In response to this situation, we continue making the necessary schedule changes and cancellations, assuming none of our MAX aircraft will be in service before the middle of December.

Obviously, the grounding of the MAX fleet is having a significant revenue and cost impact, which will become even more substantial in the second half of the year. It is important to note, however, that this impact is included in the operating margin and capacity figures provided in our guidance, which Jose will discuss in more detail.

On the bright side, the demand environment continues to improve. We're seeing strong booking patterns and improving yields in much of our network. Looking back at 2018, Brazil and Argentina stood out as the most challenging markets with a tough economic and demand environment. Now demand in Brazil is improving and should continue benefiting from a more rational capacity landscape. However, in the case of Argentina, we're still seeing negative year-over-year numbers, and we have been proactive managing our capacity in that market.

As I mentioned, we're making good progress on our ancillary revenue efforts. We're on track to achieve our incremental revenue targets for the year and continue rolling out new products and expanding and optimizing our current offerings. In fact, we've just recently expanded our second bag fee to our entire network.

We also continue benefiting from developing our own IT solutions. Earlier this year we launched our new web and mobile check-in system with great reviews from our passengers. And we're now beta-testing our new Copa App, which was completely redesigned. These developments, which allow us to be more responsive to our customers, while further lowering our unit costs, are part of the Company's strategy to develop more proprietary IT solutions. We're also advancing as planned with implementation of the Farelogix platform to deliver merchandising and distribution capabilities across all channels.

Finally, Wingo, although a very small 2% of our revenue, continues to do well, both operationally and financially. In the fourth quarter, we'll start upgauging the Wingo fleet to 800, which will further lower unit costs and improve profitability. Wingo's fifth aircraft, which will be based in Panama and was originally scheduled for late 2019, has now been postponed to Q2 2020 due to the MAX grounding.

To summarize, we delivered solid second quarter results and are seeing an improving demand environment for the rest of the year. We continue making progress on our ancillary revenue initiatives and are on track to achieve our 2019 targets. Our team continues to deliver world-class operational performance while achieving industry-leading unit costs despite the challenges presented by the MAX grounding.

Finally, we're as confident as ever in our business model and our financial position. We have the strongest network for travel within the Americas, exceptional operational performance that results in high customer satisfaction, and extremely flexible fleet plan, the lowest unit cost, a very strong liquidity position with low leverage, and a highly committed team.

Before turning it over to Jose, I'd like to invite you to our Investor Day which will be held in Panama December 3rd and 4th. For the 4th. For those interested in attending, we will post a registration link in the Events & Presentations section of our IR webpage in the upcoming weeks. We look forward to hosting you in Panama.

Now I'll turn it over to Jose 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. Let me begin by joining Pedro in congratulating our entire team for all their outstanding achievements during the quarter.

Due to the grounding of the MAX fleet, our capacity for the second quarter was 4.3% lower year over year, while revenue passenger miles decreased only 2.5%, which resulted in a consolidated load factor of 85.1%, a 1.6 percentage point increase versus Q2 2018. Passenger yield showed a recovery and came in 4.1% higher year over year, which combined with a strong load factor resulted in a unit revenue increase of 6.3% from $0.098 in Q2 2018 to $0.105 in Q2 2019. Consolidated revenues increased 1.7% to $645 million.

On the expense side, our second quarter operating expenses decreased 2% year over year on the 4.3% capacity reduction, which resulted in our cost per available seat mile increasing 2.5% to $0.091. For the quarter, our effective all-in fuel price averaged $2.22 per gallon, a decrease of 5.3% versus the $2.35 per gallon that we averaged in Q2 2018. The cost per available seat miles, excluding fuel, ex fuel CASM, increased 5.7% from $0.059 in Q2 2018 to $0.062 in Q2 2019, mainly due to the costs associated with the grounding of the MAX fleet, including the resulting lower capacity output as well as the timing of certain expenses.

Operating earnings for the quarter came in 36.7% higher at $82.6 million, resulting in an operating margin of 12.8%, 3.3 percentage points higher than Q2 2018. Looking at non -operating income and expense, the second quarter generated a net non-operating expense of $11.9 million, mainly driven by a net interest expense of $7.5 million and a $2.2 million translation of foreign currency loss related mostly to the Argentinian and Colombian currencies.

Our tax expense for the quarter also came in higher at $19.9 million related to the timing of certain tax payments in Panama. For the full year, we expect our effective tax rate to be in the range of 13%.

In terms of net results, net earnings for the quarter came in at $50.9 million, or earnings per share of $1.20, 2.1% higher than the earnings per share reported in Q2 2018.

I will now turn to the balance sheet. We closed the second quarter with a very strong financial position. Assets totaled $4.5 billion. Owners' equity totaled $1.9 billion. Our debt plus our lease liability totaled approximately $1.6 billion. And our lease liability adjusted net debt to EBITDA ratio came in at 1.1 times, one of the strongest in the industry.

Keep in mind that we are now adjusting the net debt by including the lease liability line from our balance sheet. We closed the quarter with approximately $1.2 billion in debt, more than 60% of which is fixed with a blended rate including fixed and floating rate debt of approximately 3.1%. In regards to cash, short- and long-term investments, we closed the quarter with close to $900 million. During the quarter, our free cash flow generation was close to $140 million and our cash balance at the end of the quarter represents approximately 34% of last 12 months' revenues.

In terms of fleet, we ended the quarter with 104 aircraft: 68 737-800s, 14 737-700s, 16 Embraer-190s, and 6 MAX 9s. We had originally planned for seven additional MAX aircraft to be delivered during 2019. Once the MAX grounding is lifted, we'll be able to determine the revised delivery stream for these aircraft. Finally, I'm pleased to announce that our Board of Directors has ratified the third quarterly dividend of $0.65 per share to be paid on September 13 to all shareholders of record as of August 30th.

So going back to our results and to recap, we delivered solid financial results for the second quarter. We expect demand for air travel in our region to continue improving during the second half of the year. Despite the grounding of the MAX fleet, we're still delivering competitive unit costs, which we expect to continue improving once the MAX grounding is lifted. We have one of the strongest balance sheets in the industry, and we continue to return value to our shareholders.

Today, we're also updating our guidance for 2019. Please keep in mind that our guidance makes certain assumptions regarding the impact of the grounding of the MAX fleet, including an assumed return to service of the six aircraft currently in our fleet in the middle part of December. Any changes in these assumptions could influence the guidance for the year.

That said, we're adjusting our full-year capacity outlook to reflect a year-over-year ASM reduction of approximately 2%. And given the significant improvement in our unit revenue outlook, we are increasing our operating margin range to 15% to 17%. Our 2019 full-year guidance is based on the following assumptions: load factor of approximately 85%, higher RASM of approximately $0.108, CASM ex fuel of approximately $0.063 driven by the reduced number of ASMs for the year related to the grounding of the MAX fleet, and an effective fuel price per gallon, including into-plane, of approximately $2.15.

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

Questions and Answers:

Operator

Thank you. [Operator Instructions]. And our first question is from Josh Milberg with Morgan Stanley.

Joshua Milberg -- Morgan Stanley Corretora de Valores Mobiliarios SA -- Analyst

Good afternoon, Pedro, Jose. Thank you for the call and congrats on the numbers. I know it's difficult to break it down, but I was hoping you could talk about how much you think that the MAX grounding itself drove your better unit revenue performance as opposed to discipline from other players in the region and also better demand.

And I also wanted to see if you could comment a little further on what's happening in the individual markets. You mentioned Brazil improving, Argentina still failing to. Are those two countries still 90% of what's going on, or have you seen some important evolution in Colombia or in some of your other markets?

Jose Montero -- Chief Financial Officer

Josh, thank you for the question. I'm going to answer the first part and specifically relate to the RASM impact of the MAX. I'd say the majority of the RASM improvement that we're seeing and the adjustment to the guidance is really driven by the environment, both the macro and the competitive environment. We're seeing an improving environment in terms of revenues. So I'd say the majority of the increase in our guidance is related to that. So the MAX I'd say is probably I wouldn't say more than a point out of the -- or of the 4-point increase that we have in terms of RASM versus the prior guidance.

Pedro Heilbron -- Chief Executive Officer

Hi, Josh. This Pedro. So in terms of your second question. So Brazil has seen probably the highest improvement year over year compared to most markets, but that's also because the comps are much easier in Brazil, given how tough was the second half of 2018. But still, I think a healthy on its own merits even with each year comes. And most of the markets are also showing a healthy improvement.

I should also say that capacity, it's been either flat or down in most markets, including Brazil. In the case of Argentina, it's still down, not by the same percentages as in 2018, but obviously 2018 was a big drop, so the comps are very easy, but still negative year-over-year. So we're not seeing much improvement there. So I would say that overall, most markets are doing well, except that one exception that I just mentioned.

Joshua Milberg -- Morgan Stanley Corretora de Valores Mobiliarios SA -- Analyst

Okay, that's great color. And if I could just squeeze one more question and related -- also related to the MAX. Assuming that it comes back into service when you now expect at the end of the year. Could you just give us a little bit of an idea of what range of capacity growth we might see or we could see in 2020? And also how that might be distributed in the different markets?

Jose Montero -- Chief Financial Officer

Yeah, Josh. So we're not -- we're going to leave our 2020 guidance for the November or preliminary guidance for 2020. So we're not going to provide a growth profile for 2020. But yeah, there's going to be a backfill of the capacity that we gave up because of the MAX, and so there's going to be a filling up of frequencies that we had to cancel because of the MAX so far. So that's going to be kind of the first order of business. And there I think we will then introduce the fleet, especially during the high season period, so that I think will be a good thing in terms of the total capacity outlook. And to be honest, in 2020 we still have a lot of flexibility in our fleet plan, so we can adjust and we will only grow what we consider to be profitable growth in 2020. But it will be, of course, a -- there will be some growth in the 2020 fleet plan from where we're seeing it in terms of ASMs.

Joshua Milberg -- Morgan Stanley Corretora de Valores Mobiliarios SA -- Analyst

Okay. I think in the past you guys have talked about a fleet count growth of 2% to 7%. Would that apply next year?

Jose Montero -- Chief Financial Officer

Yeah, you could say that. That's accurate. Of course, that's more seats, so the density of seats is higher. So you might see a little bit more of an impact in terms of ASMs.

Joshua Milberg -- Morgan Stanley Corretora de Valores Mobiliarios SA -- Analyst

Okay, that's great perspective. Thank you, guys.

Operator

Thank you. And our next question comes from Savi Syth with Raymond James.

Savanthi Syth -- Raymond James & Associates, Inc. -- Analyst

Hey. Good morning. Just to follow up a little bit on Josh's question on the MAX. Could you talk about just how many aircraft maybe a month you can induct? Just wanted to understand like how quickly, once the MAX is kind of ungrounded, you can start to take in kind of the MAX aircraft. And also just any thoughts on capex given that you probably won't take many MAXs this year?

Pedro Heilbron -- Chief Executive Officer

Right. So I'll

Jose Montero -- Chief Financial Officer

Right. So I'll start with the first question, Savi. Hey, hi. We can -- obviously it depends on when Boeing -- when the FAA ungrounds the aircraft. So that's going to have an impact. We were supposed to have received seven aircraft this year ...

Incremental aircraft.

Pedro Heilbron -- Chief Executive Officer

... seven incremental MAX aircraft this year. And right now we're not sure, but it might be somewhere between four or five if they're ungrounded as scheduled or as announced, and that's on top of the six that we're already operating.

So the six that we have here, we think we can get those back in the air in a month. So in a four-week period, we should be able to have those six in the air. Then the other ones that have yet to be delivered, go through a post-delivery modification process. There are certain things we add, like the entertainment system, etc. So those take us around -- probably it's going to take us around three weeks to get those back in the air.

So if the MAX is ungrounded as scheduled even with some room for delay that we have factored in, in our mid-December forecast, we would expect to have the six flying [Phonetic] by the end of this year, but then the others we might receive would be gradually incorporated. And if it coincides with our December, January and February high season, we can fly all of them. If it's later and it hits our low season, then we might not fly them all right away. We will make a gradual introduction.

Jose Montero -- Chief Financial Officer

And Savi, in terms of capex for this year, it is still to be determined in terms of total capex, because we have not yet a 100% clarity in terms of the number of aircraft that we will receive this year. It all depends on ultimately when the MAX gets ungrounded. But in terms of cash capex, I'd say it's most likely are around $150 million for the full-year 2019. And remember that we financed 100% of the assets, so therefore, I think that the important figure is cash capex. I would say it's about $150 million.

Savanthi Syth -- Raymond James & Associates, Inc. -- Analyst

Got it. And if I just, Jose, might ask a follow-up on the non-fuel cost side, between 3Q and 4Q, are there any timing items that we should be mindful about related to either maintenance or kind of performance bonuses?

Jose Montero -- Chief Financial Officer

No, no. I think that the trend that we're seeing now, for the full year, we will end up somewhere around $0.063. And there's some timing of expenses toward the final part of the year. So maybe in Q4 you'll see a little bit more than other quarters, but it will ultimately translate into a $0.063 CASM ex fuel for full year.

Savanthi Syth -- Raymond James & Associates, Inc. -- Analyst

All right, thank you both.

Operator

Thank you so much. And next question comes from Duane Pfennigwerth with Evercore.

Duane Pfennigwerth -- Evercore Group LLC -- Analyst

Hey, thanks. Maybe just a hypothetical question for me to start with on the tail-end of earnings season. If you can expand yields and load factors enough to offset non-fuel cost pressure and expand your margins while shrinking, why not continue shrinking? Assuming you had total aircraft flexibility next year, why does it make sense to grow at all?

Pedro Heilbron -- Chief Executive Officer

Well, I'll start with that one and maybe Jose can help me, Duane. So there would be a hit to EPS. Our EPS for the quarter would have been higher if we would have had our full capacity available. And obviously, there are seasons during the year. So there are times when we can handle better shrinking a little. But we will not do nearly as well in the higher seasons. And overall for the full year, when we're projecting growth it's because we think it's going to be profitable growth and it's going to be accretive to our EPS.

Jose Montero -- Chief Financial Officer

And not just in the quarter, in the long term, right. We have to also consider that. But yeah, we have a lot of flexibility and we are always looking at overall EPS impact on our measures.

Duane Pfennigwerth -- Evercore Group LLC -- Analyst

Those are fair answers. With respect to next year, sorry if you already said it, but how should we be thinking about at least preliminarily 2020 growth?

Jose Montero -- Chief Financial Officer

Yeah. Again, we're not to going to go there yet because it's still very early. There's some certainty still in terms of what the delivery stream of aircraft is going to be. And so there's some uncertainty in that sense out there. But it could be, when you're considering -- when you consider the base of where we are, kind of that 2019 base which is smaller than the 2018 base, the growth profile could be all the way up into the double -- low double digit range. But again, there's still embedded a lot of flexibility in the plan, depending on how demand is and also in terms of what the ultimate delivery stream of aircraft is going to be. That's a key factor that we still are -- it's very early on in the game still.

Duane Pfennigwerth -- Evercore Group LLC -- Analyst

Understood. And then just lastly, on the non-op, your net interest expense plus some of the FX gains and losses. Can you give us a sense for your outlook on that line for the remainder of the year? In the first half, pre-tax margin was a couple of percentage points lower than your op margin. So should we be thinking about pre-tax margins in the kind of 13% to 15% range given your op margin guidance? And thanks for taking the question.

Jose Montero -- Chief Financial Officer

There's some timing, especially in the FX, and I think that the interest lines should be basically behaving in the same way. There is some timing in the FX line that moved specifically in Argentina and in Colombia, and it was mostly related to the way that the currency ended in the quarter, and so this is more -- I think these are translational effects.

I'd say that those -- I think that line would probably see a -- I want to say a little bit of a lower movement because of some second half of the year FX that we are expecting, but I don't see a significant sort of change in the way that they're shifting. And in terms of the other aspect, which is the tax lying there, we had a particular impact during the quarter because of timing of some payments here in Panama. And we expect the full-year tax rate to be about 13%.

Duane Pfennigwerth -- Evercore Group LLC -- Analyst

Okay, thank you.

Pedro Heilbron -- Chief Executive Officer

Thank you.

Jose Montero -- Chief Financial Officer

Thanks, Duane.

Operator

Thank you. Our next question comes from Hunter Keay with Wolfe Research.

Hunter Keay -- Wolfe Research LLC -- Analyst

Hi, everybody. Good morning. Jose, can you talk a little bit about how you're able to demonstrate so much cost flexibility? I'm looking at the wages line, which was down year on year. But if you want to maybe sort of take that into a bigger conversation about how much your costs are variable versus fixed, [Indecipherable] costs, of course, I'm just curious to know how you're able to show such flexibility with such short notice on some of these line items on the cost side. Thanks.

Jose Montero -- Chief Financial Officer

Yeah. Yeah, Hunter. So I have to start by saying that given this MAX situation, we basically fast forward a lot of the cost savings efforts that we had been working on over the last several months. And so we froze new expenditures and we look at all of our overheads and really did a lot of work on that. And I have to give a lot of credit to the corporate team in general that they really worked very hard at this. And there's an ongoing sort of effort that we have.

And in terms of the salaries line, yeah, there is a portion of that that is variable in the [Indecipherable] anything, but I'd say that the majority of the effort is truly a group effort that we have in terms of our discipline that we have shown in the past and that we showed right now. It was really a team effort here in terms of the cost savings that we delivered.

Hunter Keay -- Wolfe Research LLC -- Analyst

Okay, yeah. And my follow-up to that is sort of related. I don't want to get ahead of the 2020 guides you shared. But how much of the cost, if there's a number you want to put out that'd be great, but how much of the cost improvement relative to the change in capacity you think is sort of a one-time thing that will come back? You talked a little bit about maybe double-digit capacity growth next year. I'm not going to hold you to that, of course. But how much of that cost is going to come back? How much of this cost is really just kind of core repeatable stuff that we might sort of be surprised with the upside in 2020? Thanks.

Jose Montero -- Chief Financial Officer

Yeah, Hunter, let me put it to you this way. I think that if the MAX -- we increased the CASM ex guidance to $0.063. I think if the MAX grounding would have not occurred or it would have been a shorter amount of time, we would have beaten our $0.062 guidance. We would have come inside the $0.062 guide that we were going to put out -- or we put out this earlier in the year. So I think we're very confident in terms of our cost savings going forward. And we've done this, again, not just in terms of our overheads, etc, we've also worked on distribution efforts and efforts in many aspects of the operation. So it's an ongoing effort that we do all the time, all the time, constantly.

Pedro Heilbron -- Chief Executive Officer

So, Hunter. Pedro here. So what Jose is saying is that the trend or the direction we're working toward and putting a lot of effort into this is to move toward $0.06 and below in that direction, not in the opposite direction.

Hunter Keay -- Wolfe Research LLC -- Analyst

Okay. Thank you very much.

Jose Montero -- Chief Financial Officer

Yeah.

Operator

Thank you. Our next question comes from Matthew Wisniewski with Barclays.

Matthew Wisniewski -- Barclays Capital, Inc. -- Analyst

Hi. Thanks for having me on and perhaps on a good quarter. I just wanted to quickly [Indecipherable] kind of reiterate on a few questions that were asked, but given the raise in the margin guidance, should we just be viewing this as kind of just a short-term thing, or is there something that management can really do despite the elevated growth next year to keep this level of margins going forward?

Pedro Heilbron -- Chief Executive Officer

Yes, Matthew. The margins we're guiding to are very much Copa like. It's what we've done over time consistently. And even in the very, very difficult 2015 and 2016 years. Yes, Matthew. The margins we're guiding to are very much Copa like. It's what we've done over time consistently. And even in the very, very difficult 2015 and 2016 years in Latin America, if you remove the bad hedges, fuel hedges, we had, we will get to margins very similar to what we're guiding to this year. So we're very confident that it is something that we can do sustainable. And we have evolved as a company, especially in terms of our unit costs, which we have been lowering consistently to become a company that can do well even in a lower unit revenue environment.

Matthew Wisniewski -- Barclays Capital, Inc. -- Analyst

Okay, great. That's helpful. And then there's been several questions about growth next year. I was hoping maybe you could talk a little bit qualitatively about what the growth would be. Is there a backlog of new markets? Is there just a lot of demand in current routes? Anything you can share about what the growth is going to look like next year outside of just specific percentages? Thank you.

Pedro Heilbron -- Chief Executive Officer

Yeah, Matthew, I think there are couple of aspects of the growth for next year. One is gauge where the MAX9s are large airplanes. So there's going to be a portion of the growth coming directly from gage and then the other is frequency. This year with the MAX grounding we've had to reduce quite a bit of frequencies into markets where we operate. And those frequencies are going to come back as we put it in the fleet again.

Matthew Wisniewski -- Barclays Capital, Inc. -- Analyst

Okay, great. Thank you.

Pedro Heilbron -- Chief Executive Officer

Thanks a lot.

Operator

Thank you. Our next question is from Helane Becker with Cowen.

Helane Becker -- Cowen and Company LLC -- Analyst

Thanks, operator. Hi, gentlemen. Thanks very much for the time. Just two questions here. The first question that I have is, Jose or Pedro, on the pilots that were flying the MAX? Are they -- what are they doing? Are they flying other aircraft? And is everybody just flying less or how are you absorbing those guys and gals?

Pedro Heilbron -- Chief Executive Officer

Yes, our -- and girls, you're right. We have a very, very, very high percent of -- relative to the industry of female pilots, which is great. Our MAX pilots fly the 800s also, the NG fleet also. So they're all flying but less hours, of course. So in a way, they are carrying some of the pain from this grounding. But they're all flying. And we keep training them in our MAX simulator. And the whole thing -- they're being kept current on the MAX, even though they're flying the NGs right now.

Helane Becker -- Cowen and Company LLC -- Analyst

Okay. And then my other question is, you guys didn't talk about anything with Avianca. I know -- I thought you guys were talking to them and United about a deal. And I was just wondering if there is any update?

Pedro Heilbron -- Chief Executive Officer

Yeah, the only conversations we have with them are in regards to the joint business agreement, the three-way joint business group agreement, United, Avianca and Copa, which has not been filed yet. That has been delayed for many reasons. Can't say with certainty when it will be filed, but we continue talking to them and United about that JBA, which we do hope to file that one point hopefully in the coming months.

Helane Becker -- Cowen and Company LLC -- Analyst

Okay. All right. Well, thanks very much. We'll see you soon.

Pedro Heilbron -- Chief Executive Officer

Thank you, Helane.

Jose Montero -- Chief Financial Officer

Thanks, Helane.

Operator

Thank you. And our next question is from Joseph DeNardi with Stifel.

Joseph DeNardi -- Stifel, Nicolaus & Co., Inc. -- Analyst

Yeah, good morning. Jose, I think a year or two ago at your Investor Day, you talked about the margin contribution you're expecting from the loyalty programs. Just wondering if you could update us on just maybe in terms of 2019, how much of the full-year margin guidance is a function of the loyalty program and whether what you've seen from that business makes you more or less confident that maybe it can contribute more going forward.

Jose Montero -- Chief Financial Officer

Yeah, Joe. We I think mentioned that the loyalty program will contribute around 1 point to 1.5 points of margin and that's I think been completed. We're very happy with the program, with the growth of the program, and it's actually provided quite a bit of value for us. And I think it's still growing. It still has a lot of growth potential in terms of what we can do with it, not only in terms of number of customers, but also in terms of all the -- just the promotions and value that the program can provide for Copa.

Pedro Heilbron -- Chief Executive Officer

And Joseph, let me add to this answer. When I answered Matthew's question a minute ago about if our margins were sustainable, and I was talking about how we have evolved as a company, how we have continuously lowered a unit cost to be able to have the same success of the past in a lower-yield environment, I should have added that the frequent flyer contribution, which is new, which your question is very relevant, and to that I should also add ancillary revenues, which we had very little before, and today, it's an important contribution to our margins, very similar to what we had promised a few years ago.

Jose Montero -- Chief Financial Officer

And we still have a lot of potential for future growth.

Joseph DeNardi -- Stifel, Nicolaus & Co., Inc. -- Analyst

Got it. That's helpful. And then Pedro, since you brought it up, you mentioned CASM ex below $0.06 at some point. What's the timeframe you think for being able to get there? Thanks for the question.

Pedro Heilbron -- Chief Executive Officer

I'm going to ask going to ask for our relief pitcher to help me here. Jose?

Jose Montero -- Chief Financial Officer

No, no, I was just going to say that that's a great intro for our Investor Day in December. So when you come to our Investor Day, we can give you plenty of our plans going forward for our CASM ex reduction. So it's great that you're going to be able to listen to that here.

Pedro Heilbron -- Chief Executive Officer

Yeah. And maybe we can ask our Hall of Fame pitcher, Mariano, to be present, too. But it's in the short term. It's not mid- to long-term. We're talking short-term, but we'll share a lot during the Investor Day.

Jose Montero -- Chief Financial Officer

Yeah, and there's a lot of opportunity there. And it's very -- it's a lot of work, but we're already working toward that end, as Pedro mentions.

Joseph DeNardi -- Stifel, Nicolaus & Co., Inc. -- Analyst

Thank you.

Pedro Heilbron -- Chief Executive Officer

All right.

Operator

Thank you. Our next question is from Dan McKenzie with Buckingham Research.

Daniel McKenzie -- The Buckingham Research Group -- Analyst

Yeah. Hey, good morning, guys. Okay. Twist her arm, we'll come to Panama. Question here on the revenue side ...

Pedro Heilbron -- Chief Executive Officer

We need to continue boosting tourism, Dan.

Daniel McKenzie -- The Buckingham Research Group -- Analyst

Yeah, that's right. On the revenue side, it seems like there has been a sharp acceleration in business demand in the Panama. And I'm just wondering what's driving that? I wonder if there's certain industries that are doing well? Is it new demand? Is it just existing corporate customers that simply are traveling with more frequency? Just trying to understand if there is a dynamic in Panama that's new or just kind of might be off the radar of investors here.

Pedro Heilbron -- Chief Executive Officer

No, I'm not sure that -- I'm not sure that's exactly what's happening. We do have a new government since July, and there are very high expectations for the economy growing faster. It's been the fastest growing economy for a number of years in Latin America, but it kind of slowed down last year. So there are lot of expectations. There's going to be new investment, and so yeah. So it's a number of things I would say, not maybe one particular reason.

Daniel McKenzie -- The Buckingham Research Group -- Analyst

Okay, very good. With respect to the development and the faster growth in Panama, are there certain industry sectors that he's focusing on that might be driving some of that kind of initial investment today?

Pedro Heilbron -- Chief Executive Officer

Yeah, not sure I can mention one in particular, but remember that Panama is also a business destination and safe haven for our neighboring countries. So there's some of that also. Sometimes investment moves here from countries that are more challenged around us. So there is a little bit of that also. But in terms of the economy in general, a large copper mine just opened recently a few months ago and that has generated a lot of growth for the economy and international traffic also. Plus, logistics is a very important factor in our economy also.

Daniel McKenzie -- The Buckingham Research Group -- Analyst

Very good. Okay. On the MAX cancellations this year, can you remind us of kind of where you had planned to deploy them? Were these long-haul markets? And I guess where I'm going is just the percent of MAX flying this year that has gotten cut, say, in peak day revenue versus off-peak. I'm just trying to get a sense of how to think about the revenue loss there. The cost impact was addressed earlier, but it seems to me there is a revenue impact here as well. And I'm just sort of thinking -- I was trying to get a sense of how to really think about that.

Pedro Heilbron -- Chief Executive Officer

So our first MAX we're flying our longest haul routes like San Francisco and Buenos Aires were in some days of the week and of the year. We're actually weight-penalized when we fly the NGs, like we're doing now. So we have a revenue loss due to that, but also the MAX have our flat business class seats, which command higher revenues. So we're also penalized by not having that, and of course, more seats at lower costs. So we are taking a performance penalty, a business-class carrying penalty, a number of seats penalty, and a cost penalty on those markets.

Daniel McKenzie -- The Buckingham Research Group -- Analyst

Yeah, understood. If I could squeeze one last one in here. Ancillary revenue in the back half of the year, I think a lot of these initiatives were expected to sort of buildup and scale a little bit more materially in the back-half of the year. Can you just remind us how they're ramping up relative to plan and what's coming on in 2020 that's potentially new here?

Jose Montero -- Chief Financial Officer

Yeah, I think we mentioned that our plan for this year was to increase our ancillaries total in service by about $20 million. And we're well on track to achieve that. Mostly, I'd say that the changes have been implemented recently are related to our bag fees we rolled out, second bag fees, essentially throughout the network as of now. So there is -- that provided a good boost to our ancillaries, and it will carry us into 2020 as well. I think we'll have a full-year effect of the second bag fee, and in addition to that we have, of course, the growth embedded in next year. So we expect it to grow at least by $20 million in 2020 as well.

Daniel McKenzie -- The Buckingham Research Group -- Analyst

And the ITs are -- with respect to helping to drive incremental ancillary revenues as well?

Jose Montero -- Chief Financial Officer

Absolutely. That's the big component of ASR merchandising engine that is going to come into -- in line at the end of this year, we expect to start getting the benefits of that during -- I want to say the latter part of the first quarter of next year for families and the like. And so that's going to be a really good boost into our ancillary capabilities as well.

Pedro Heilbron -- Chief Executive Officer

Plus, our in-house developments, our in-house developed web check-in and mobile check-in app, and Manage My Trips and all the tools we're developing tied to the Farelogix merchandising engine and gives us a lot more control and speed to market. So that's going to make a big difference also.

Daniel McKenzie -- The Buckingham Research Group -- Analyst

Yeah. Thanks for the time you guys.

Jose Montero -- Chief Financial Officer

No problem, Dan.

Pedro Heilbron -- Chief Executive Officer

Thank you.

Operator

Thank you. Our next question is from Bruno Amorim with Goldman Sachs. Bruno, your line is open. I will move to the next question. Alberto Valerio from UBS, your question please.

Rogerio Araujo -- UBS Brasil CCTVM SA -- Analyst

Yeah. Hi, everyone. This is actually Rogerio speaking. Thanks for the opportunity. A very quick question on our side. So could you provide the impact of IFRS 16 on the margin this year? And also, how much is operating lease payments this quarter? And is there any place where Copa is providing this figure? That's it. Thank you.

Jose Montero -- Chief Financial Officer

Yeah. Okay, Rogerio, I would say there's really very little impact in IFRS 16 -- in our adoption of IFRS 16. And by the way, we adopted IFRS 16 in full retrospective methods. So when you're comparing 2019 to our 2018 figures, I think in our 20-F from 2018, you have also a table there that that shows the comparison.

There is really very little impact in terms of the adoption. And everything is in the depreciation and amortization line. There's a portion of the lease payments that are actually going as non-operating expenses because the standard mandate's that you have to break up the lease payment into an operating part and a non-operating part.

So there is really no real place to put an actual lease payment as such into the financial statements right now, because the standard mandates for it to be in the portion of depreciation and amortization and the other portion into an interest expense that you have to construct out of the estimated cost of thereof of the release itself.

Rogerio Araujo -- UBS Brasil CCTVM SA -- Analyst

Yes, thank you. Any way you could provide this figure in any note in the report? So when you look at the other companies in the region, they continue to provide the lease expenses either in the ITR or 6-K reports or even in the earnings release. So I think it's a -- for investors that are adjusting for IFRS 16, I think this could be useful.

Jose Montero -- Chief Financial Officer

Okay. We'll consider it, but as I mentioned, I think that it also depends on what method you use for the adoption. And we use the full retrospective method that when the financials are reproduced, comparing 2019 to 2018 also include IFRS 16 in 2018. So we're comparing apples to apples in our financials. So everything has the effect of IFRS 16 in what we have. But we'll consider the suggestion and thank you very much for it.

Rogerio Araujo -- UBS Brasil CCTVM SA -- Analyst

That's great. Thank you. Have a good day.

Pedro Heilbron -- Chief Executive Officer

Thank you.

Operator

Thank you. And we have a question from the line of Bruno Amorim with Goldman Sachs.

Bruno Amorim -- Goldman Sachs do Brasil CTVM SA -- Analyst

Yes. Hi, good morning, everyone. So I have a follow-up question on unit revenue RASM, your guidance actually. So if we simply apply seasonality going into third quarter and fourth quarter, using second quarter as a reference, we can easily get to your RASM guidance of $0.108. So are you not expecting any additional improvements in revenue trends going forward? Or is it fair to say that this is kind of conservative guidance on the revenue side? Thank you very much.

Jose Montero -- Chief Financial Officer

No, I think that on a year-over-year basis, we are seeing an improvement in year over year RASM for the second half of the year in the double-digit range. So yeah, it's pretty significant, I think, on a year-over-year basis. I mean, are you're comparing Q3, Q4.

Bruno Amorim -- Goldman Sachs do Brasil CTVM SA -- Analyst

Yeah, my question is more sequentially. If you start from second quarter and you just apply the usual seasonality going into third quarter and fourth quarter, you can get to your guidance. So sequentially do you think second quarter is kind of normalized level of unit revenue. And so, going forward, we're going to just see seasonality playing out, or could we eventually see an additional improvement?

Jose Montero -- Chief Financial Officer

I think, again, the way that we see it is on a year-over-year basis, and yeah, there is -- of course, the second half of the year is more stronger than the first half. And so there is some seasonality put in there. But we -- I think when you look at it, the year-over-year improvement of the second half is larger than the year-over-year improvement that you saw in the second quarter.

Pedro Heilbron -- Chief Executive Officer

And I think, Bruno, I think it's worth adding that we're not saying that Latin America is all back to its strongest peak point and that everything is fixed. There are still weaknesses in the market. So, of course, there's a lot of upside if Latin America gets stronger, and there's a lot of room for that. But we're not waiting for that or counting on that. We are, as I mentioned before, lowering costs, increasing ancillary revenues, FFP, doing all those things. But yes, we're not saying that our economies and our unit revenues are back to where they -- to normal.

Jose Montero -- Chief Financial Officer

An example of that is Argentina. Argentina is actually still, when you look at it on a going-forward basis, is still -- it's worse off versus where it was several months ago. So that's an example of it.

Bruno Amorim -- Goldman Sachs do Brasil CTVM SA -- Analyst

No, totally understandable. Is it fair to say that you have already made all the adjustments you intended in the network? So I understand maybe the macro will not improve going forward, but from your perspective, have you made all the adjustments going into the second quarter? Or could we see any further adjustments in capacity that could lead to even better unit revenue in the future?

Pedro Heilbron -- Chief Executive Officer

Well, for the rest of the year, I think we've pretty much made all the adjustments. So there should be no changes for the rest of the year. In 2020, we're still working on that and there's still uncertainty in when we're going to get aircraft deliveries. So we're still working that.

Bruno Amorim -- Goldman Sachs do Brasil CTVM SA -- Analyst

Understood. Thank you very much.

Jose Montero -- Chief Financial Officer

All right, thanks a lot, Bruno.

Operator

Thank you. Our next question is from Kush Patel with Deutsche Bank.

Michael Linenberg -- Deutsche Bank Securities, Inc. -- Analyst

Hey, guys. It's actually Mike Linenberg. I just -- I have a [Indecipherable] here. I think Pedro and Jose, it's clear that the grounding of the MAX has been RASM positive for you, although I think, Pedro, you highlighted the fact that your flagship product is obviously not in service, so you're taking a revenue penalty there. So maybe it's not as RASM positive as we'd like. And then there's clearly a cost penalty as well. Have you come out with a number or maybe another way to think about it is, what is the margin drag of the MAX. And maybe when I think about sizing, I think American's out there saying that through November the hit to them is $400 million. That's 24 airplanes plus some subsequent deliveries. You're roughly one quarter of that. So I don't know, maybe it's $100 million hit that's probably a few margin points. Like, how do you think about the margin drag here? And as good as this 15% to 17% is for the full year, there's probably 1-, 2-, 3-, maybe 4-point margin drag due to MAX. Where are you on that? Can you just tell me where my math is right or where it's off? Thank you.

Pedro Heilbron -- Chief Executive Officer

Yeah, there's not a lot of information we want to share there yet. There is an EPS drag which is probably higher than the margin drag. There's, of course, a margin drag, but the reduced capacity in a way compensates for some of that. So there is a smaller margin drag than EPS drag. But we don't want to -- we're still working our numbers, and we don't want to get ahead of that curve.

Michael Linenberg -- Deutsche Bank Securities, Inc. -- Analyst

No, that's fair enough. That's a negotiation with Boeing, so I get that. Pedro, you mentioned that the capacity -- one of the things that's been helping you on a unit revenue basis is that in many of your markets you talked about capacity being flat or down. And when I think about your markets, in many cases, it's not markets that are tuned [Phonetic] from Panama, but it's really the markets that overfly Panama. And so my question is, are you seeing a discernible improvement in yields or PRASM/RASM presence in connect markets versus local markets? And so is that what's been driving the improvement and what you're expecting to see for the second half of 2019? Is it more about your connecting markets? Or are the local markets just as good as the connecting markets? Any color on that would be great. Thank you.

Jose Montero -- Chief Financial Officer

Yeah, Mike. This is Jose here, and I'd say it's both, both connecting and markets to Panama are performing better and improving. Of course, again, there are exceptions to this. There are some portion of the network that are still not improving. But in general terms, yes, we are seeing an overall improvement in both markets.

Michael Linenberg -- Deutsche Bank Securities, Inc. -- Analyst

Okay, great. And then just one quick one here, and this is a personal request. Is there any way that you can push forward the MAX into the schedule to December 7 or December 3rd?

Pedro Heilbron -- Chief Executive Officer

That's a good one. We're going to ask you, Mike, to do a few things for us [Indecipherable] agree?

Jose Montero -- Chief Financial Officer

That's a very, very valid and good point and we'll take note of it, yeah.

Michael Linenberg -- Deutsche Bank Securities, Inc. -- Analyst

Great job, guys. Thank you.

Pedro Heilbron -- Chief Executive Officer

Thanks.

Operator

Thank you. And our last question comes from Marcos Barreto with Citi.

Marcos Barreto -- Citigroup Global Markets, Inc. -- Analyst

Hi, everyone. Thanks for taking my question. I just wondered to see if you could provide a little bit more color on if there was a specific market that drove the second quarter's unit revenue improvement.

Jose Montero -- Chief Financial Officer

Any specific market? Well, I'd say I think we're seeing good movement in Brazil. Brazil has been doing relatively well. I think that -- I would say that's the one where they had been not doing well in prior periods, and that is improving. And so that's, I think, a good, good story there.

Pedro Heilbron -- Chief Executive Officer

But it's not the only one.

Jose Montero -- Chief Financial Officer

In the US.

Pedro Heilbron -- Chief Executive Officer

Yes. It's most market -- most markets with the exception of Argentina, but obviously, Brazil has maybe a higher year-over-year a difference because the comp was much easier.

Jose Montero -- Chief Financial Officer

And the portion of the network as well, the point of sale of Brazil is a little higher as well. So, yeah, I would say that's the low-down there.

Marcos Barreto -- Citigroup Global Markets, Inc. -- Analyst

Okay. Thank you very much.

Jose Montero -- Chief Financial Officer

Thank you, Marcos.

Operator

And there are no further questions in the queue.

Pedro Heilbron -- Chief Executive Officer

Okay. Thank you all. This concludes our earnings call. Thank you for being with us and thank you for your continued support. We hope to see you in Panama in early December and please have a great day.

Operator

[Operator Closing Remarks].

Duration: 58 minutes

Call participants:

Raul E. Pascual -- Director of Investor Relations

Pedro Heilbron -- Chief Executive Officer

Jose Montero -- Chief Financial Officer

Joshua Milberg -- Morgan Stanley Corretora de Valores Mobiliarios SA -- Analyst

Savanthi Syth -- Raymond James & Associates, Inc. -- Analyst

Duane Pfennigwerth -- Evercore Group LLC -- Analyst

Hunter Keay -- Wolfe Research LLC -- Analyst

Matthew Wisniewski -- Barclays Capital, Inc. -- Analyst

Helane Becker -- Cowen and Company LLC -- Analyst

Joseph DeNardi -- Stifel, Nicolaus & Co., Inc. -- Analyst

Daniel McKenzie -- The Buckingham Research Group -- Analyst

Rogerio Araujo -- UBS Brasil CCTVM SA -- Analyst

Bruno Amorim -- Goldman Sachs do Brasil CTVM SA -- Analyst

Michael Linenberg -- Deutsche Bank Securities, Inc. -- Analyst

Marcos Barreto -- Citigroup Global Markets, Inc. -- Analyst

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