Earnings Call Transcript - CPA Q1 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by and welcome to the Copa Holdings First Quarter Earnings Call. As a reminder, this call is being webcast and recorded on May 7, 2020. Now I will turn the conference call over to Raul Pascual, Director of Investor Relations. Sir, you may begin.

Raul Pascual, Director of Investor Relations

Thank you, Crystal, and welcome everyone to our first quarter earnings call. Joining us today are Pedro Heilbron, CEO of Copa Holdings; and Jose Montero, our CFO. First, Pedro will start with our first 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 also contain forward-looking statements, not limited to historical facts that reflect the company's current beliefs, expectations and/or intentions regarding future events and results. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially, and are based on assumptions subject to change. Many of these are discussed in our annual report filed with the SEC. Now, I'd like to turn the call over to our CEO, Mr. Pedro Heilbron.

Pedro Heilbron, CEO

Thank you, Raul. Good morning to all and thanks for participating in our first quarter earnings call. I hope that all of you and your families are doing well and staying safe. Today we won't spend much time going over our first quarter results and will focus mostly on the COVID-19 crisis and the many initiatives we have undertaken to ensure that Copa is one of the best positioned airlines to survive and prosper in a post-crisis world. Before we begin, I'd like to thank all of our coworkers for their commitment to our company and recognize their efforts and many sacrifices in response to this crisis. To them my utmost respect and admiration. We delivered strong operational and financial results for the month of January and February with operating margins above 20% for the two months. However, in the second week of March, we started seeing a significant and rapid deterioration in demand as the first COVID-19 cases were detected in our region. Furthermore, to slow down the outbreak, many governments including Panama imposed significant travel restrictions, which eventually led to a suspension of all our commercial flights on March 22. During the first quarter, passenger traffic decreased 16.3% year over year on a capacity reduction of 14.4%. This resulted in an 81.5% load factor, 1.9 percentage points lower year over year. Yields came in at $0.128, 5.8% higher than in the first quarter of 2019. On the cost side, ex-fuel unit cost came in at $0.066 or 8% higher year over year as a result of the significant cancellations in March due to the COVID-19 outbreak and later in the month, the suspension of the company's flights, resulting in a significant year-over-year capacity reduction. Our operating margin for the quarter came in at 16.6%. I will now address some of our actions in response to the COVID-19 crisis focusing on liquidity initiatives, capital preservation, network and fleet plan, and adjustments to our products. Even though we began the quarter with a strong cash position, with so much uncertainty regarding the long-term economic impact of this crisis, the timing and shape of the eventual recovery and the future availability of other liquidity sources, one of our main and immediate priorities was to further strengthen our liquidity. In March, we drew $144 million from unsecured short-term credit lines. In April, we obtained additional unsecured committed credit facilities for an aggregate amount of $150 million. And on April 30, we closed an offering for $350 million in senior unsecured convertible notes maturing in 2025. We continue working on additional liquidity sources, which Jose will provide more details on. In terms of capital preservation, we have canceled or deferred our capital expenditures that are deemed non-essential to our operations. Our Board of Directors has postponed dividend payment for the remaining quarters of 2020. We are working on cost reduction initiatives including renegotiating our main supplier contract and reevaluating our entire fixed cost structure. Most of our employees used their vacation time during the first month of the suspension of flights. Over 800 employees have opted for retirement or voluntary separation packages, and more than 700 have taken voluntary six-month or twelve-month unpaid leaves. For the month of May, more than 90% of our management and administrative workforce has taken a voluntary 50% pay cut. In terms of our network and fleet plans, assuming there are no further extensions to the air travel restrictions in Panama, we plan to restart our operations on June 1, with a scaled-down schedule equivalent to about 12% of our June 2019 capacity. Our current plan is to gradually spool up our network so that by December 2020, we're at about 40% of December 2019 capacity. We will adjust this trend according to market conditions, and intend to only schedule flights that can at a minimum cover variable expenses. We continued negotiating with Boeing and expect to reach an agreement on compensation for the MAX grounding and any delivery stream that takes into account the post-crisis reality. We continued with the plan to sell our Embraer-190s and are now evaluating the retirement or sale of our 14 737-700s. When we restart flights, we intend to focus our operations on a simple fleet consisting exclusively of Boeing 737-800s and MAX9s. We're also adjusting our product to ensure we meet our customer needs and expectations, including establishing a strong buyer safety protocol, which will be in place before we restart flights in June, including a much simplified onboard offering. Recognizing the impact this crisis is having on our most loyal customers, we have extended ConnectMiles status through February of 2022. We have waived all change penalties and provided flexibility to our customers by extending the expiration of travel credits until December 31, 2021. As you can see, we have proactively taken the necessary measures to manage this crisis in the best possible way, and will continue to do so in the months to come. Lastly, we have a very solid business model that is based on operating the best and most convenient network for intra-Latin America travel from our hubs of the Americas, leveraging Panama's advantageous geographic position, with the region's lowest unit costs, best on-time performance, and strongest balance sheet. Going forward, the company expects that its hub of the Americas will be an even more valuable source of strategic advantage, especially as fewer intra-Latin America markets are able to sustain direct point-to-point service. We believe our hub would be the best positioned to serve this market. Now I will turn it over to Jose, who will go over our financial results in more detail.

Jose Montero, CFO

Thank you, Pedro. Good morning everyone, and thanks for being with us today. I'd like to join Pedro in acknowledging our great Copa team, who through this unprecedented crisis, the worst in the history of the aviation industry, have truly shown their great spirit. You make us proud. I will start by briefly going over our first quarter results. Our capacity came in 14% below Q1 2019, mainly as a result of the suspension of our operations from March 22 because of the COVID-19 pandemic. Our load factor came in 1.9 percentage points lower at 81.5%, which, combined with a 6% increase in yields, resulted in a unit revenue improvement of 3.5% to $0.108. Excluding fuel, our unit cost came in at $0.066, which is higher year-over-year, mostly due to the suspension of operations during the latter part of March. Our operating margin came in 0.2 percentage points lower than Q1 2019 at 16.6%. Reported net income for the quarter came in at $74.3 million, which translates to earnings per share of $1.75. Looking forward to the remainder of the year, as Pedro mentioned, since March 22, our operations have been suspended by the Government of Panama due to the COVID-19 pandemic. As of now, the government has established a date of May 22 for the reopening of the country to commercial passenger operations, and we have published a return to service effective June 1. This schedule represents about 12% of 2019 capacity for the month of June and builds up to 40% by year-end 2020. As a worst-case scenario, if we are to assume a zero-revenue environment, we estimate that our cash burn would be around $85 million per month. This figure assumes reimbursement in cash of around half of our ticket sales liability and that our leased aircraft and debt commitments are paid in full. It also assumes certain reductions in our labor and other fixed expenses for the year. However, assuming a successful gradual restart of operations, we should be able to reduce our average monthly cash outflow to around $70 million for the remainder of 2020. Now I am going to spend some time discussing our balance sheet and our liquidity. We ended the first quarter with a very strong financial position. Assets totaled $4.4 billion, owners' equity was almost $2 billion. Our debt plus our lease liabilities totaled $1.5 billion. Our lease liability adjusted net debt to EBITDA ratio came in at 0.5 times. Our debt to equity ratio ended the quarter at less than 0.8 times. Both measures are among the strongest in the industry. 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 2.8%. This debt balance includes $145 million in revolving short-term credit lines, which we drew on during the month of March. As part of our liquidity sources, we also have available to us another $150 million in committed unsecured short-term lines of credit, which we have not drawn. As to cash short and long-term investments, we closed the quarter with $1.13 billion. There is another source of liquidity I'd like to highlight that we also have unencumbered assets with book values reaching $600 million. This includes 19 unencumbered aircraft, 9 spare engines, and our entire aircraft spare parts inventory among others. I want to turn now to the $350 million convertible note issuance, which we successfully completed last week. The notes have a tenure of five years, a coupon of 4.5% and a conversion strike price of $51.66 per share. In the current environment, where no one is sure about the duration of the effects of the COVID-19 crisis, we strongly believe that maximizing liquidity is one of the keys to our future. These convertible notes are part of our liquidity strategy, which is also composed of the $295 million in lines of credit, the launch of a secured revolving credit facility that would leverage a set of unencumbered assets that I discussed before, and the potential sale of several of our aircraft. Finally, as we announced last week during our Q1 earnings prerelease, due to the current environment, our Board of Directors decided to postpone the payment of the remainder of the 2020 dividend declared by the company, i.e., $0.80 per share for each of the three remaining quarters of 2020. So to summarize, we delivered good financial results for the first quarter of 2020, despite the fact that our operations were disrupted and eventually suspended during the latter part of March, given the COVID-19 pandemic. We ended the quarter with a strong financial position, having $1.13 billion in cash and equivalents. During the month of April, we obtained additional sources of liquidity including $350 million in proceeds from our convertible notes offering as well as $150 million in additional undrawn committed lines of credit. We are working to lower our fixed costs. Even under an assumption of zero revenues, we expect to burn around $85 million per month. Once we restart operations, which we expect will happen in June, this average cash burn figure could be in the range of $70 million per month for the rest of the year. Let me close by stating that once this terrible situation passes, we believe Copa's hub of the Americas will once again be the best connecting point for travel in the region, with a privileged location, an even more efficient business model, and the best team in the industry. We are working harder than ever with these goals in mind. Thank you. And with that, we'll open the call to some questions.

Operator, Operator

Thank you. Your first question comes from Savi Syth with Raymond James.

Savi Syth, Analyst

Hi, good morning. Jose, if I might clarify, you mentioned additional financing sources. What are the ones that you haven't updated here at your planning? I know you mentioned the potential sale of a couple of aircraft; I'm just wondering what's the attractiveness of capital raising opportunities out there? What are the loan to value ratios looking like these days? Thanks.

Jose Montero, CFO

Savi, we are working right now. I think the next step is working on a revolving credit facility that is in the final stages of being documented. It will be based initially on a subset of the unencumbered assets that we have. As of now, I'd say that a 60% loan to value range is a fair figure that we're seeing with that. I think that could potentially yield up to $200 million to $300 million in additional potential sources of liquidity. The facility is going to be relatively flexible in its form, and it will initially probably start at a lower level, but it has an accordion feature to it that we can grow and shrink depending on our needs.

Savi Syth, Analyst

That's helpful. And if I might, have you had discussions with Boeing? I know some other Boeing partners have received some payments and redone their fleet order book. Where are you in that process?

Jose Montero, CFO

Well, we are right now in negotiations with Boeing. We're in that process right now. So I think that's what we will say so far related to this.

Savi Syth, Analyst

Alright. Thank you.

Operator, Operator

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

Duane Pfennigwerth, Analyst

Hey, guys. How are you?

Jose Montero, CFO

Fine, Duane.

Duane Pfennigwerth, Analyst

Just on your capacity plan—12% of last year in June, growing to 40% of last year by year-end. Obviously, nobody knows; your guess is going to be far better than mine, but how wide is the range of outcomes by Q4? In other words, if you decide down 60% is way too low, how much flexibility do you have?

Pedro Heilbron, CEO

Yes, Duane. This is Pedro. Hope you're doing well. It's hard to tell. As you well said, no one really knows. We know that forward bookings are very weak right now, and this is industry bookings, not only Copa. We're monitoring the whole industry and there's not much out there. So our June 12% capacity, I think it's in line with what we're seeing. For the end of the year for December, it's really, really hard to tell, but we will retain enough flexibility to go up or down depending on demand, as demand builds up again. So that's a big part of our plan, retaining flexibility in terms of planes and crews.

Duane Pfennigwerth, Analyst

And then just a longer-term question about capacity and CASM. You guys have been one of the most flexible in terms of being able to preserve a really nice CASM profile despite the fact that whether your capacity assumptions change materially. So as you think about 2021, what's the baseline where you feel like you could get back to, say 2019 CASMx? Could you be down 20%, 30%, 40% and still have a hope of preserving a 2019 CASMx? Just how do you think about that into next year? Thanks for taking the questions.

Jose Montero, CFO

Duane, I think that it's too premature to determine what the CASM figure for next year is going to be. I think our focus right now is reducing our cost base as much as we can, both our fixed costs and eventually when we start flying again, our variable costs. So CASMx target right now is not our area of focus. It's just simply pure cost and reducing the total amount of cost that we have.

Duane Pfennigwerth, Analyst

Fair. I guess, just the potential. Could you manage to a business that's, call it, 30% smaller in 2021 versus 2019? It just feels like you'd have a much better shot at managing your cost to that level of capacity than, say, the average airline.

Jose Montero, CFO

Well, I think that we already started with a low base. And we are pulling all the levers that we need to pull to continue having a low unit cost. But there will be some pressures because of the lower level of ASM. But certainly, I think if anybody has that ability to produce our ASMs at a low cost, it's going to be us.

Duane Pfennigwerth, Analyst

Thank you, guys.

Operator, Operator

Your next question comes from the line of Hunter Keay with Wolfe Research.

Hunter Keay, Analyst

Hi, everybody. Good morning.

Pedro Heilbron, CEO

Good morning.

Hunter Keay, Analyst

Pedro, you talked about simplification a lot. You also mentioned a simpler onboard offering. I'm wondering how Copa or any broader interior configuration may factor into that discussion? And maybe it's also a question about these lie-flat seats. But it's overall just an aircraft configuration question. Thanks.

Pedro Heilbron, CEO

Yeah. Thanks, Hunter. So we are not planning to make any aircraft configuration changes. We don't think it's worth investing in; that would not be an essential investment for the company. So we're leaving configuration untouched. It's going to have more to do with product offering with a simplified onboard experience. We've always been a full-service airline. We deliver full service at low cost, lower than most other airlines. But going forward, we're going to simplify our onboard products to reduce that interaction between crews and passengers. But also we'll take advantage of opportunities that will make us even more cost-effective. Simplification comes from a single configuration of 737-800s and MAX9s.

Hunter Keay, Analyst

I'm sorry. I meant, longer term. That's my mistake. I realized that's not a near-term question. But I think when this thing is all done, how do you think about this over the next few years is what I was asking. Sorry.

Pedro Heilbron, CEO

Right. So we're going to have 737-800s with a simple unified configuration for, let's say, medium to short hauls. And then we'll have a MAX9 configuration with lie-flat seats for longer haul flights. I would think that would be a good guess of how we're going to look like in a few years.

Hunter Keay, Analyst

That's great. Thanks. And then to piggyback a little bit on Duane's second question: if you think about the opportunity for Copa, let's just say we're back to 2019 capacity levels in 2023, 2024, or whenever it may be, do you think we should expect margins to be in that high-teens, 18% to 20% range as well? Or are you making any other changes that you think maybe should make that move higher or lower when things return back to normal?

Pedro Heilbron, CEO

Hunter, it's hard to tell. There is like no way we can predict right now how things are going to look back in 2022, 2023, or 2024 from a demand point of view. What I can tell you is that we will take advantage of this really difficult crisis to make the airline even better and more competitive, make it leaner, make it more cost-effective. That's kind of how we do things. So we'll be in a better position than most everyone to take advantage of whatever opportunities are offered to us or to survive whatever is in front of us. But part of that mix depends on demand, and that's really hard to predict right now.

Hunter Keay, Analyst

Understood. Thank you.

Pedro Heilbron, CEO

Thanks a lot, Hunter.

Operator, Operator

Your next question comes from Joseph DeNardi with Stifel.

Joseph DeNardi, Analyst

Yes. Thanks. Good afternoon. Jose, can you just talk about the liquidity that you guys have now? Is that being raised because that's what you think you'll need to get through this, or that's what you want to have to be able to go on offense at some point?

Jose Montero, CFO

Well, Joe, this is I think a function of the uncertain environment where we are in. We are just building—I think we are starting this crisis with a position of strength in terms of the balance sheet. But given the uncertainty, we don't know how long this will last. And frankly, what other curve balls might be coming in the world over the next several months. We want to build just simply a fortress to be able to sustain the situation and be able to come out on the other side strengthened. So I wouldn't say that it's necessarily to give us the ability to play offense. We've always run our business in a way that is conservative from the standpoint of the balance sheet and with profitability in mind. So I think that's something that even in a very difficult operating environment, this is still our driving force.

Joseph DeNardi, Analyst

Okay. That's helpful. And then Pedro, sorry if you mentioned this in your prepared remarks. I was a little late getting on. But when you all start flying again, what does the passenger experience look like in the airport and onboard? What do those changes maybe in terms of floor utilization? What does that mean for the cost structure? I imagine that some of that may evolve over time, but to the extent that it doesn't, does that mean anything for the financials of the business? Thank you.

Pedro Heilbron, CEO

Yeah. In terms of what it means to the financials, we will stay within the range we've always been at. So we are not expecting to, let's say, spend more money or have higher unit costs—at least that's our plan right now. But we're still waiting for world standards, which are not very clear right now. We have been flying some special flights; not many, but a few special flights a week to get stranded passengers back home. We've been applying some of the safety protocols or bio-safety protocols that will become standard in the future. For example, we are requiring all passengers and all crews to wear masks. We're also checking passengers before they board. The way we board and the way we check-in passengers, all of those procedures have changed in our special flights. We expect most of that to remain once we start scheduled operations, hopefully in June. But then the product will be simplified, as I mentioned before, to reduce the interaction between crews and passengers. There will be some cost savings there too, which should offset the additional costs from bio-safety. But it's still hard to know exactly what all of that is going to look like.

Joseph DeNardi, Analyst

Thank you.

Operator, Operator

Your next question comes from the line of Connor Cunningham with Cowen.

Connor Cunningham, Analyst

Hey, guys. I appreciate the time. Just to piggyback on Duane's first question. I know you expressed obviously a wide range of expectations on Q4. But how quickly can you actually add capacity back? Like, is it a matter of weeks or months?

Pedro Heilbron, CEO

Yeah. It obviously depends on how much capacity we need to add. So we'll have extra lift, extra aircraft available to us for immediate flying. If it's one or two additional aircraft worth of flying that would be very easy. We will also have some aircraft in temporary storage. Getting those out of storage will take maybe a few weeks. So it depends on how many aircraft we need to bring back. But we will have enough flexibility to add or reduce capacity, because this could roll either way. We don't really know.

Connor Cunningham, Analyst

Okay. And then maybe—I mean I realize that the liquidity position looks pretty good. And you guys are adding more into that, and that's good to hear. But curious on what demand level you would need to see for you to get to cash flow breakeven? And I realize that's a hard question to answer, but just curious on like with your current expectations on capacity, what timeline or what quarter do you think you could achieve cash flow breakeven?

Pedro Heilbron, CEO

I'll start with that answer and Jose can back me up. There may be many moving parts here. It's hard to put a specific time to this. I know you're also asking what kind of demand. Our cash burn numbers imply really severe RASM reductions. Hitting RASM very hard in our predictions. Anything that gets us anywhere between probably zero to 20% RASM reductions probably gets us very close to cash neutral numbers.

Jose Montero, CFO

I think that's a key figure. If you're like in the teens in terms of RASM dilution, you're basically at cash breakeven. Now the question is, when does that happen and under what circumstance? That's, I think, left to be determined given how demand flows back over the next several months.

Pedro Heilbron, CEO

Of course I'll add to that. With time, time being years, we will be able to adjust the airline size and cost base to whatever future demand is. But that will take a few years.

Jose Montero, CFO

Yeah. That's assuming that we are carrying our entire, basically, fixed—not the entire fixed cost base, but our entire aircraft base right, in terms of debt and these airplanes etcetera. With time, you will be able to adjust that as well. But that's kind of where that lies.

Connor Cunningham, Analyst

Okay. And maybe just one quick one. I know that you're not running the operation right now, so there's probably not a ton of searching going on your website. But have you seen any upticks in searches in the last couple of weeks, just given there has been talk of reopening and all that stuff kind of globally? So just curious if you've seen anything there?

Pedro Heilbron, CEO

Yeah. Not much, nothing significant. That's not only on our website, but that's industry-wide numbers that we're monitoring, in Latin America, of course, in our region.

Connor Cunningham, Analyst

Okay. Great. Thank you.

Operator, Operator

Your next question comes from the line of Josh Milberg with Morgan Stanley.

Josh Milberg, Analyst

Hi everyone. Thank you guys for the call. My first one is a follow up on the capacity ramp-up and just on how you see the ASM being distributed geographically as you put them back, just also taking into account some of the big currency moves in the region? And I'm sure that those currency moves are part of what's behind your expectations for a big RASM hit.

Pedro Heilbron, CEO

Yes. Josh, of course, the economic impact situation in our region, including the currency devaluations are part of that mix, and it's all related of course. Our capacity, the way we're going to ramp up capacity from year to year end mirrors what our network was before the crisis. The percentages per region or per market are going to be very similar. However, we have flexibility to move capacity around. We serve markets that go all the way from VFR, visiting friends and relatives, business. We have a good balance in terms of the markets we serve. We will closely monitor how demand comes back in each of those segments and adjust capacity accordingly.

Josh Milberg, Analyst

Okay. That's very helpful. And could you guys also talk a little bit about the opportunity to take share coming out of the crisis? You mentioned some of the uncertainties there. But just given your competitors' difficulties, it seems like there would be a major opportunity. And a related question is if you could just address the degree of overlap you had with the largest rival in Colombia, just before COVID hit? At least for us, there has always been a little bit of murkiness on the degree of overlap that you've had with that competitor and other major competitors just because I think you compete in so many markets and because you've had this past focus on smaller markets that need a hub.

Pedro Heilbron, CEO

Right. So we do think that our much broader network and larger intra-America hub and intra-Latin America hub will put us in a good strategic position. Assuming many markets will have to shrink in size and won't be able to sustain direct point-to-point service. Panama being in the best geographic position and being the better and the most efficient connecting hub should see an advantageous position with those modern markets. And as you know, we run the company first and foremost for our shareholders. We do what's right for the company to be successful and profitable. We don't focus as much on our competitors, at least not in a way that sacrifices our own performance. We will take advantage of opportunities as part of the way we run the business. If we're in the best position to take advantage of market that will be abandoned or no longer sustain point-to-point service, or we're going to be in a position to be able to come back at a faster pace, we'll do it because it's good for the business. That will be the main reason, and that's the way it's been in the past, and it has worked very well for us.

Josh Milberg, Analyst

That's great. I suppose there really isn't an easy way to quantify what that opportunity would be in terms of just the magnitude?

Pedro Heilbron, CEO

Yeah. Hard to tell right now. You asked how much we overlapped with our main competitors. The Panama hub and the Bogota hub are the ones that overlapped the most. I would say that it's less than half of the market, where there is an overlap, probably more like a third of the market, where there is an overlap.

Josh Milberg, Analyst

Okay. That's great color. Thank you guys very much.

Pedro Heilbron, CEO

Thank you, Josh.

Operator, Operator

Your next question comes from the line of Mike Linenberg with Deutsche Bank.

Mike Linenberg, Analyst

Okay. Good morning, everyone. Just a few questions here. So look, I see you loaded your June schedule, I think in the last week or so. When I look at even some of your biggest city pairs, you're going to be flying less than daily, a lot of two-day-a-week type stuff for the time being, and then it slowly starts to ramp up. When I think about the success of Copa, it's all about connectivity, and so it does seem like at least initially your service is going to cater to the local market. It seems like it's going to be actually very difficult to construct connecting itineraries. My sense is that as you look out, as you go from this 12% to 40%, it seems like there will be a point where city pairs that are 2x or 4x a week will go to daily and will get to a step function where 500 or 700 itineraries will turn on and you'll get a jump in load. So presumably, your loads will start at a low level, not just because of the weakness that we're seeing across the region, but because historically you rely so much on connecting traffic. So your thoughts on that maybe initially, is it 90% local, 10% connect? What do you think—what month do you think you actually get to maybe the 50-50 point local versus connect? Because I think you're going to see that in your loads, and there will be a big jump, because I think my sense is that it will be a step function increase?

Jose Montero, CFO

Alright, Mike. There is a portion of it where you are correct, which is the fact that we're starting June with an itinerary that is less than daily in many markets. But we have actually crafted our itinerary precisely so that it connects. We've taken care from the standpoint of the overall—in frequencies in some of these cities understanding that aircraft utilization might not be the most efficient just simply so that the markets connect. So yeah, we are catering from the start that the hub is a connecting hub and we will continue building upon that. As time passes throughout the year, yes, there will be more connecting included because of both the number of frequencies and number of cities that we're adding. But from the start, you will have quite a bit of connectivity in the cities that we are starting with initially.

Mike Linenberg, Analyst

Okay.

Jose Montero, CFO

Yeah. So it does have quite a bit of connectivity in there. It's just simply that it's at less than daily frequency.

Pedro Heilbron, CEO

Correct.

Mike Linenberg, Analyst

I guess there's going to be some busy days; maybe every Friday and Sunday will be your busy days.

Pedro Heilbron, CEO

Yeah. Some of that, and there's something there in terms of how we are rotating aircraft etcetera. So we are very clever in the way that they build it.

Mike Linenberg, Analyst

Okay. Great. And then just another question as I think you talked about the compensation on the MAX with Boeing. Obviously you're still working through that. I think the last time I checked, I recall you having something— and I could be wrong on this number. But I recall you having something north of $450 million in pre-delivery deposits with Boeing. And so the question is, the fact that you're not taking airplanes, you have this conversation ongoing, can we look to that $450 million as a potential source of liquidity as you work through the compensation agreement?

Jose Montero, CFO

Yeah, Mike...

Mike Linenberg, Analyst

Let's just say liquidity, not financing, but liquidity.

Jose Montero, CFO

No, I understand your question. Yeah, the figure is in that ballpark in terms of the pre-delivery deposits that we have that are with Boeing. The reality is that we're in discussions with Boeing right now, but I'll leave it at that for now.

Mike Linenberg, Analyst

That's fine. I just wanted to get confirmation of that number.

Jose Montero, CFO

Yeah.

Mike Linenberg, Analyst

Just one last question. Jose, and this is probably again to you. When we look at your air traffic liability, it did come down a lot from December to March, which I know seasonally there are some changes here and there, but it was bigger. I suspect that because you did shut down with seven, eight days to go at quarter end, you must have gotten a flood of cancellations. You indicated earlier that your guidance assumes that 50% of your cancellations were basically refunded in cash. So presumably a lot of cash went out the door. As we look at that $412 million in ATL and we look at the June quarter, how much of that $412 actually covers? Would you have a sense of how much of that actually covers the June Q, since we've seen a lot of cancellations between now and then? Any color that you could give on that? Thanks.

Jose Montero, CFO

Yeah. I think, Mike, the majority of—there are a couple of components to the reduction in the ATL. One is, as you all mentioned, there is some seasonality in there, but mostly it's the fact that a lot of that ATL that we had in December basically flew in the first quarter. Sales essentially stopped coming in for the latter part of the first quarter. So more than necessarily a significant amount of cash going out because of reimbursements, it was mostly because of sales not coming in during the latter part of the quarter. Whereas we have an estimate that for the remainder of 2020, upwards of around half of that ATL balance will go out in reimbursement. One thing that had to be very clear as well is we have been very much forward in our opening of our flexibilization of tickets and credits for passengers and allowing them to use their tickets for future travel. So we've been very flexible on that and have minimized the cash out. So far we have not seen a significant amount of requests for reimbursements. But of course, that might change going forward. There is a portion of that ATL that is related to flying in the second quarter. In April and May, we have not flown, so there might be some additional pressure versus what we had observed right now. That's what is in our figures and the figures that we have put out, the cash burn figures that we've put out for the remaining part of the year.

Mike Linenberg, Analyst

So should we look at that 50% as then being conservative because of what you just said about reimbursements?

Jose Montero, CFO

From what I am observing right now, yes. But we don't know how that accelerates going forward, and what changes in behavior we might see. So far it is conservative in nature from what I'm seeing.

Mike Linenberg, Analyst

Yeah, that makes sense. And I would say that whatever schedule you put out for June that is obviously subject to being changed again. It's possible that you could scale that back from 12% to 8% based on the company's opening up or not over the next month.

Jose Montero, CFO

Yeah. Correct. That's exactly why we're trying to be fairly conservative with that assumption.

Mike Linenberg, Analyst

Yeah. No, that's super helpful. Thanks everyone.

Pedro Heilbron, CEO

Alright. Thank you, Mike.

Operator, Operator

Your next question comes from the line of Rogerio Araujo from UBS.

Rogerio Araujo, Analyst

Yeah. Hey, gentlemen. Thanks so much for the opportunity. I have a couple of questions here. First is a follow-up on Josh's question. And I would like to explore a little bit more about Colombia. So is this scenario possible? So if there is, for instance, a fast recovery of the domestic market versus international flights, and if there is a capacity hold on that market, can we imagine Copa exploring more of that market and the mix of domestic flights versus international flights increasing significantly in the upcoming months? So in other words, are you going to explore any market that is possible that may recover faster? So can we even expect maybe much less connectivity as a percentage of total flights for Copa in several months' time, if those domestic flights recover faster? That's my first question. Thank you.

Pedro Heilbron, CEO

It's Pedro here. Hey, Rogerio. I would say that a faster recovery does not mean that the market is going to be more profitable. So we usually look at both things. But I would say no, there will be no significant change in the next few months or from here to year-end. Even though, of course, we have our Colombian operation and we have Wingo in Colombia, which is a successful ULCC. But nothing is going to change overnight. I would not expect significant changes from here to year-end.

Rogerio Araujo, Analyst

What about in the long term? Can this be a possible scenario in which domestic flights increased significantly inside Copa if there is, for of course an opportunity there?

Pedro Heilbron, CEO

I mean, I don't want to speculate in long term, but we've always had the flexibility to take advantage of opportunities that may present along the way. But I don't want to speculate because we don't really know right now.

Rogerio Araujo, Analyst

Alright. Thank you. And my second question is regarding the convertible senior notes. So the stock sold off after this was announced. We received a lot of questions on that matter. It would be great if you could provide more details on the process for each of these notes. The release was decided within the management team. Why did the company decide to issue that now at the beginning of the crisis? Also, if a follow-on offer was also taken into consideration and why the first one was the chosen option? If there was a lot of demand for that note with the strike price of 51.66, if you can say how many times oversubscribed that was, if that was the case? In the case the notes are redeemed before the conversion period, which is as of October 24, will the company have to pay the equity upside from the potential conversion to the note holders? In other words, does that make whole premium include the equity upside as well? Thank you.

Pedro Heilbron, CEO

Yes, I don't know how much we can answer or one answer right now. We're going to try not to be a Monday morning quarterback. But we're doing what makes sense for Copa to come out of this crisis as one of the better prepared, most successful and poised to prosper in the future airlines. Doing what we think we need to do right now to have a solid and successful future as we've always had. This is a crisis like we've never seen before. I would say a few things. One, many of our Board members are significant shareholders in the company. So this is not a decision that was taken lightly. Also, there is enough uncertainty regarding future demand and the timing and shape of recovery for us to be very conservative and make sure we have a fortress liquidity position, which is what we're building, and we're building for the long run and not for the short term. There are also limits on what's going to be available going forward for an airline, being aviation one of the hardest hit markets. We take everything into account and conclude that building the cash fortress I mentioned via this note is a big decision to make sure that Copa comes out of this crisis in a strong position. We want to survive and give ourselves the best chance to remain successful.

Rogerio Araujo, Analyst

Yes, that's very clear. Thank you. So only a follow-up here, a question I've been receiving. Is there any related party in that transaction?

Jose Montero, CFO

No.

Rogerio Araujo, Analyst

Thank you so much, gentlemen. Have a great day, everyone.

Pedro Heilbron, CEO

Thank you.

Operator, Operator

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. Have a wonderful day. You may all disconnect.