Earnings Call Transcript - CPA Q3 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to Copa Holdings Third Quarter Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. As a reminder, this call is being webcast and recorded on November 19, 2020. Now, I will turn the conference call over to Raul Pascual, Director of Investor Relations. Sir, you may begin.

Raul Pascual, Director of Investor Relations

Thank you, Sara, and welcome, everyone, to our third quarter earnings call. Joining us today are Pedro Heilbron, CEO of Copa Holdings; and José Montero, our CFO. First, Pedro will start by going over the actions the company has taken to mitigate the impact of the COVID-19 crisis and the restart of our operations followed by José who will discuss our financial results. Immediately after, we will open up the call for questions from analysts. Copa Holdings' financial reports have been prepared in accordance with International and Financial Reporting Standards. In today’s call, we will discuss non-IFRS financial measures. A reconciliation of the non-IFRS to IFRS financial measures can be found in our earnings release, which has been posted on the company’s website, copa.com. Our discussion today will also contain forward-looking statements, not limited to historical facts that reflect the company’s current beliefs, expectations and/or intentions regarding future events and results. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially and are based on assumptions subject to change. Many of these are discussed in our Annual Report filed with the SEC. Now, I’d like to turn the call over to our CEO, Mr. Pedro Heilbron.

Pedro Heilbron, CEO

Thank you, Raul. Good morning to all and thanks for participating in our third quarter earnings call. I hope that all of you and your families are doing well and staying safe. Before we begin, I’d like to thank all of our coworkers for their commitment to the company and recognize their continuous efforts and many sacrifices during these very difficult times. To them, as always, my utmost respect and admiration. As expected, due to different government restrictions in your region related to the COVID-19 pandemic, we were not able to provide service for the first 45 days of the quarter. On August 14, after five months of virtually no operations, Copa was allowed by the government of Panama to start operations with restrictions on the number of flights and the entry into Panama for non-citizens and non-residents. It began with a twice-a-week operation serving eight destinations. Since then, the company has been gradually ramping up its network, starting with destinations and adding frequency as quickly as the easing of restrictions and air travel demand has permitted. We ended the quarter with service to fifteen destinations. Although September only amounted to 3% of pre-crisis capacity, the gradual restart of flights allowed us to become even more proficient in the new, more complex operating procedures and enhanced biosafety protocols, demonstrating our readiness to operate safely and reliably. On October 11, the Panamanian government lifted restrictions on citizens and non-residents, which as expected had a positive effect on our ability to continue building up the network, ending the month with service to 30 destinations, representing close to 15% of ASM compared to October 2019. We project to end the year having restarted service to more than 50 destinations and plan to operate approximately 40% of 2019 capacity in December. In August and September, while the traffic restrictions were still in place, our loads were approximately 60%. In October, after the aforementioned restrictions were lifted, we saw healthier loads approaching 70% for the entire month. Based on the slowing traffic over the past three months and the bookings we are receiving for the near future, we believe demand will be able to sustain our current capacity plan for the remainder of 2020. In terms of financial results, with only 1.5% of our pre-crisis capacity, this was a very challenging third quarter. We recorded a net loss excluding special items of $121.6 million, making this our second quarterly loss on an underlying basis in 20 years, the other being the second quarter of this year. However, by exercising great cost discipline and better-than-expected sales and refund performance in the quarter, we were able to keep our cash consumption well below our original expectations, to about $36 million per month. Despite the encouraging progress in vaccine development efforts, we continue preparing for what we believe will be a challenging 2021, as our region could still be subject to new infection rates, with the possibility of further solid restrictions and a weakened demand environment, especially while we wait for vaccines to become widely available. That being the case, we have taken many steps to strengthen the company and maintain one of the strongest financial positions in the industry. As of today, we have adjusted the size of the company to better match our future capacity and continue working on cost reduction efforts, as we believe keeping a competitive cost structure and a strong financial position will keep us among the best prepared to come out ahead once this crisis is over. We have delivered the first four Embraer aircraft to the new owner and expect to have delivered the entire fleet by June 2021. We signed a Letter of Intent to sell the first two Boeing 737-700s and continue actively marketing the remaining twelve aircraft. We have a plan in place to comply with all new requirements and are turning our six Boeing 737 MAX 9 aircraft back to service, which will allow us to offer a more competitive product on our longer segments. We're also in advanced discussions with Boeing and expect to reach a settlement agreement soon. Regarding our expiring leases, we have agreed to extend some of our leases to a power-by-the-hour basis, which adds even more flexibility to our fleet plan in case the market recovers faster than expected. In terms of liquidity, we obtained new credit facilities for an aggregate amount of $155 million, bringing our total committed undrawn credit facility to $305 million and total available liquidity to $1.3 billion at the end of the quarter. Lastly, I'd like to reiterate that we have a proven and very strong business model based on operating the best and most convenient network for intra-Latin America travel from our Hub of the Americas, leveraging Panama’s advantageous geographic position with the region’s lowest unit cost for a full-service carrier, best on-time performance, and strongest balance sheet. Going forward, the company expects that its Hub of the Americas will be an even more valuable source of strategic advantage. It's likely that fewer intra-Latin American markets will be able to sustain direct point-to-point service. So we believe the Hub of the Americas will be best positioned to serve this market. Now, I’ll turn it over to José who will go over our financial results in more detail.

Jose Montero, CFO

Thank you, Pedro. Good morning everyone. I hope that you and your families are safe and doing well. Thanks for being with us today. I'd like to join Pedro in acknowledging our great Copa team for all their efforts and great team spirit during these very challenging times. As Pedro mentioned, we restarted scheduled commercial service in mid-August and have slowly been increasing capacity ever since. For the third quarter, the contribution from these operations is still very modest, as we only operated about 1.5% of the capacity compared to the same period last year. Nonetheless, we finally started flying again and we’ve put a lot of effort into rebuilding our hub and look forward to having more substantial operations in the fourth quarter. Looking at third-quarter results, we reported a net loss of $118.1 million, or a loss of $2.78 per share. Excluding special items, mainly we realized a $3.6 million mark-to-market gain related to the convertible notes, we would have reported a net loss of $121.6 million, or a loss of $2.86 per share. Our cash consumption for the second quarter came in at $36 million per month. This excludes $22 million in proceeds, mainly related to tax credit reimbursements, as well as the sale of one Embraer-190 aircraft. It also excludes a $50 million payment we made on a short-term credit line. This cash consumption is significantly lower than our prior estimates as we delivered more savings than planned and generated higher proceeds from sales and lower cash refunds than we originally expected. In terms of capacity for the remainder of the year, we expect to continue ramping up our operations. October came in at approximately 15% of October 2019 capacity and we expect November and December to help push that to 30% and 40% respectively year-over-year. Assuming this gradual ramp-up of our operations, we should be able to keep our cash consumption to about $25 million per month for the fourth quarter of the year. This figure assumes that our leased aircraft and debt commitments are paid in full and we stay current on all of our obligations, not including proceeds from aircraft sales. The improvement in our cash consumption estimate for the remainder of the year is a function of our short focus on the reduction of our cost base, as well as improving sales figures, which are on pace with the projected ramp-up of operations. I’m going to spend some time now discussing our balance sheet and liquidity. As of the end of the third quarter, assets totaled $3.9 billion, and owners’ equity was almost $1.5 billion. Our debt, plus our lease liabilities, totaled $1.5 billion, and our lease liability-adjusted net debt to EBITDA ratio came in at 2.3 times. We closed the quarter with approximately $1.2 billion in debt. As I mentioned before, during the quarter, we repaid $50 million of our short-term credit facilities, and currently all of our committed credit facilities remain undrawn. In terms of cash, short and long-term investments, we closed the quarter with $1 billion. During the quarter, we took many steps to further strengthen our liquidity position. As previously reported, in July, we closed a secured revolving credit facility for an initial aggregate amount of $105 million. In August, we established a new unsecured committed facility for $59 million, which remains undrawn. Including this and other previously established facilities, the company ended the quarter with an aggregate amount of $305 million in unutilized committed credit facilities, which added to our cash equates to more than $1.3 billion in total available liquidity. During the quarter, we finalized the sale and delivery of the first of 14 Embraer-190 aircraft. As of today, we have delivered three additional Embraer aircraft and expect to have delivered the entire fleet by June 2021. This month, we also signed an LOI for the sale of two Boeing 737-700s, which we expect to deliver during January 2021. Aside from the E-190 and Boeing 737-700 fleets, which are classified in our balance sheet as assets held for sale, we ended the quarter with 74 aircraft: 68 Boeing 737-800s and six MAX 9s. During December, we expect to receive two MAX 9 aircraft to end the year with a fleet of 76 aircraft. Including these figures are 16 737-800s, which will remain in temporary storage. Let me close by stating that once this most challenging situation passes, we believe Copa’s Hub of the Americas will remain the best connecting point for travel in the region, with a privileged location, an even more efficient business model with lower costs, and the best team in the industry. Thank you. With that, we’ll open the call to some questions.

Operator, Operator

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

Duane Pfennigwerth, Analyst

Can you talk about what percentage of your markets are open now? Not necessarily the markets that you're flying because that could be a subset of that. But what percentage of your markets are you technically able to fly to? And then generally speaking, what are the entry requirements? For example, do you have to present a negative test? Can you highlight any recent changes? So just to give us a sense for the number of markets that are reopening and what sort of entry requirements are in place?

Pedro Heilbron, CEO

Okay, Duane. It’s Pedro. One of the challenges we are all facing, and when I say 'we are all,' I mean that aviation worldwide is that conditions are all over the place in terms of their entry requirements. So in terms of open markets, I would say most of them are open in one way or another; most are 100% open. There are others that are restricting the number of flights they allow in or restricting slots. For example, Colombia is restricting the number of flights per hour. So there are only so many slots available. Other countries are still restricting the entry of nationals and residents versus foreigners or visitors. Some countries are requesting a negative PCR test within 72 hours. Others have recently lifted that restriction like Costa Rica and Colombia. So it's all over the place again. But I would say in summary, most countries are open.

Duane Pfennigwerth, Analyst

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

Pedro Heilbron, CEO

Yes. It's hard to tell. Once a market reopens, there's pent-up demand that needs to be satisfied. It's usually VFR (visiting friends and relatives) traffic. So, if people are meeting to get back or visit family or for personal reasons in general, I would say no big surprises there. We're starting to see leisure traffic picking up a little, such as from South America to the Caribbean. Obviously, it’s a fraction of what it used to be, but it's starting to pick up a little. Although business traffic is the weakest right now, we’re also starting to see companies needing to get their executives back in the air visiting their markets. So, there's a little bit of that starting, but it's mostly VFR still.

Operator, Operator

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

Alejandro Zamacona, Analyst

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

Jose Montero, CFO

Yeah, Alejandro, this is José. There are, I’d say, three components to the improvement that we saw in our cash consumption for the third quarter. The first one is, of course, costs. We've been very focused since the onset of the crisis on reducing our costs to the greatest extent and negotiating all the contracts that we had. We have also reduced the size of the company to match the new reality that we expected. This was done through offering packages for a subset of our employees, and also offering voluntary unpaid leaves for employees. But in essence, we looked at every single cost base, and I think that we've been able to accelerate some of the improvements that we initially expected or that we've been seeing in the second quarter or into the third quarter and beyond. The second one is that we’ve seen a reduced number of cash refunds compared to what we expected. That's a function of the flexible travel date policy we’ve set in place for customers. That has resulted in a significant reduction in our cash refund obligations. Finally, we are seeing better-than-expected sales coming in during the quarter. I’d say those are the three main levers for improvement and also our improvement going into the fourth quarter as well.

Alejandro Zamacona, Analyst

If I may have a second question. Can you give a quick update on the institutional plan announced in the last semester?

Pedro Heilbron, CEO

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

Operator, Operator

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

Unidentified Analyst, Analyst

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

Jose Montero, CFO

Yes, so it's one of the most difficult things right now. Talking long-term because the booking curve has shortened, and we are navigating unchartered waters. It's all new, but there are, of course, very encouraging news with the vaccines coming out. It seems like there is a bright light at the end of the tunnel and there will hopefully be a point soon when it’s going to be a lot easier to predict future demand. However, for December and the end of this year, we are talking about 40% of ASM versus 2019, while the previous call we were discussing a range between 30% and 40%. So we're on the positive side of that range, and that's a good sign. In terms of our bookings, we believe we can sustain those capacity plans with decent load factors. We hope to build upwards from that gradually as demand allows. But January will be a little bit better than December in terms of performance. However, beyond January, bookings are not strong enough to know, and there is still so much uncertainty out there with the virus and everything else that it's very difficult for us to say anything related to the full year in 2021.

Pedro Heilbron, CEO

You could argue that it's going to be in the range of the low 40s of pre-COVID capacity. I think the other component of that is simply forced flexibility. We have been working quite a bit on maintaining that flexibility for 2021. But it is still premature to say anything related to the full year of 2021.

Unidentified Analyst, Analyst

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

Pedro Heilbron, CEO

Yes, there have been negotiations over the last couple of months with some of our restart plans. They give us a lot of flexibility, because that flexibility is immediate. We extended some of the expiring leases we have for 2021. Actually, over the next two years, we have about eleven leased airplanes that are going out. We can gain some flexibility with these Embraer-Buyer agreements we're entering into. Having said that, in terms of the number of aircraft that you could expect for next year at the end of the year, it will be in the mid-80s in terms of the total number of aircraft. As I mentioned in my prepared remarks, there will be a portion of them that will be in storage. There's going to be a range of possibilities in terms of the available number of aircraft that we have in the network for next year, depending on how demand ultimately behaves.

Jose Montero, CFO

Just to add to that, we have a sizable order for MAX aircraft. I’m sure we can work with Boeing if there is a need to change delivery dates. There will be production issues, but we think we have enough flexibility with the leased aircraft and the expiring leases. We can adjust capacity as needed, both upwards or downwards, depending on how the market behaves. That’s something we've been able to manage very well.

Unidentified Analyst, Analyst

Certainly. Well, thank you all very much.

Operator, Operator

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

Helane Becker, Analyst

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

Pedro Heilbron, CEO

Yeah. There's no sticking point. It just happens that neither side has been in a big rush. It's not like we needed the money to survive. We want to agree to the right deal knowing when we're clean, we're going to be back in service, which facilitates things. So it's just the way it works. I don't think I have much to add to that.

Helane Becker, Analyst

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

Pedro Heilbron, CEO

Yeah. We have six MAXs grounded in Panama and then there are seven that were built but not delivered; those are somewhere in Seattle. We expect to be flying at least two of our six MAXs by the end of this year. That's our expectation right now. There are a series of technical matters, like upgrading the new software, and that only takes a few hours. We have to retrain pilots because they haven't flown the airplane for a while. However, I should say that the new training requirements are basically the same as we were doing before the aircraft was grounded. Copa has always done more than the minimum required; we had the MAX simulator and were conducting simulator sessions. The new requirements are basically the same as we were doing before that was not our problem. However, we have to put the pilots through that training program again. In terms of maintenance, it's going to take us about two weeks per aircraft to bring them up to the right maintenance level, which includes conducting a few tests without passengers to ensure all components are operational. When an airplane has been grounded for nearly two years, there's a lot of maintenance work needed even though we've been preserving them following Boeing’s recommendations.

Jose Montero, CFO

One thing I'll add is that Panama's regulations, of course, follow the framework established by the FAA, which facilitates the process once this has been lifted by the FAA as well.

Helane Becker, Analyst

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

Operator, Operator

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

Hunter Keay, Analyst

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

Pedro Heilbron, CEO

Okay. Hunter, yeah, so this is Pedro. First thing I should say is that we haven't deferred any cost. That's very important. The costs we're showing are our complete costs for the month or for the quarter. Nothing is going to come back to bite us later on. No leases, no nothing. We're paying for everything. We have renegotiated a bunch of fixed costs and now we have brought down our fixed costs. As José mentioned before, there are variable costs that are down because of volumes. We expect that as ASMs come back, our unit costs will improve. Our plan has been that, when everything is over we’re not sure what’s going to be our size and how long it’s going to take us to get back to 2019 level, but we want to ensure we are as successful as before even before we get back to 100%. This means we need a lower fixed cost base to achieve that, and I think we're already there.

Jose Montero, CFO

From my point of view, when we are back to 80% of pre-COVID capacity, we may have a CASM that we had last year. I think we've found significant levels of efficiencies in this exercise that we have been making over the last several months. We are in a good place right now in terms of that. Of course, that won't come in while ASMs are still at a relatively low level, but once ASMs are again back at around that level, we’ll be achieving our target for fixed CASM ex-fuel that we were aiming for prior.

Hunter Keay, Analyst

No. Wow. Thank you. You mentioned a bit of green shoots on corporate travel. I know it's very early. But I also recall that you mentioned previously that about a third of your volume was corporate travel before; is that true? Is it a third of your volume? When will you get an idea of how your corporates are thinking about their 2021 spend? Is that a January conversation, or are you having those conversations now? I would imagine you should have some degree of visibility on how your corporates should spool throughout the year.

Pedro Heilbron, CEO

I’ll start with the second part. We have started those conversations, but our corporate accounts don’t really know what their travel plans will be for next year. In most cases, people want to get back in the air. It may not be to the same degree as before, but pretty much everyone wants to get back in the air to do their regular business. I think that also applies to people who have been locked at home for so many months; they want to get out and travel for leisure or for visiting friends and family. In terms of our traffic, I would say we ended up in roughly a third VFR, a third leisure, and a third business. It’s not strictly corporate, but business in general. In Latin America, not all business means corporate; we also have other smaller companies that don't have corporate accounts.

Operator, Operator

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

Rogério Araújo, Analyst

Yeah. Hey guys, thanks for the opportunity. A couple of questions. The first one: is it too early to map out opportunities left by competitors that are shrinking capacity in some of Copa’s markets? Can the domestic market in Colombia become more relevant in the future? A while back, we saw that Colombia's domestic market was pretty relevant to the company, and this has reduced over time. What are your thoughts on potential opportunities left in the market?

Pedro Heilbron, CEO

Right. It's too early to tell. Every airline is pulling up in at a different pace for different reasons, including restrictions in their home markets, etc. It's very difficult to tell right now which opportunities are going to be left open in the future. However, we do believe that many markets will not be large enough to sustain direct point-to-point service as it was the case before. Every market will be reduced for the next few years. So, there will be some opportunities for our Hub of the Americas to become more valuable, but it's still early to know. In terms of Colombia domestic and Wingo, I think Wingo will remain opportunistic; that’s a very competitive market. We will see Wingo trying to grow aggressively, but we will remain careful in how much we grow and where we grow. Wingo recently received a fifth airplane. We have extra planes that we only need right now. They will deploy that capacity with a lot of care.

Rogério Araújo, Analyst

Okay. Thank you. Very clear. My second question is on connectivity. How does the lower number of flights impact connection times for passengers? Are you mapping out the average connection time with passengers now versus before? Additionally, there was an increase in the maximum number of hours that a passenger can wait in Panama from six to 12 hours. How does this change the demand? Was this a huge restriction before when it was settled at six hours?

Pedro Heilbron, CEO

The minimum hours for connection were lifted, so that restriction is no longer there, and we are back to whatever we had before. We’ve flown so little up to now that we have prioritized only providing connections where we're currently flying, not focusing on connection times. There’s so much lack of service in multiple markets that passengers will wait as long as needed to get their flights. So short connections are not a priority right now until we build back to something like what we had before.

Operator, Operator

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

Bert Subin, Analyst

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

Pedro Heilbron, CEO

What we meant by coming out ahead can be summarized in two aspects. First, is what José mentioned earlier about lowering our fixed costs to a point where we could be as successful as before with much lower ASM. This means that as we increase ASMs to levels more similar to 2019, we will do better than 2019. That’s number one. Number two is the value of the Hub of the Americas advantage in a marketplace where many markets will not be able to sustain direct point-to-point service. That will become even more valuable. I would say those are the two things that we're looking at.

Bert Subin, Analyst

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

Pedro Heilbron, CEO

Most of our cargo is daily cargo. We don't operate freighters, although we might do ad hoc freighter charters here and there, but we do not operate freighter aircraft. The opportunities in the cargo market right now are limited.

Bert Subin, Analyst

Thanks for the time.

Pedro Heilbron, CEO

Thank you, Bert.

Operator, Operator

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

Dan McKenzie, Analyst

Hey, thanks. Good morning, guys. Going back to your commentary on the challenging 2021, because the region could be subject to further travel restrictions, is that concern tied to the timing of the rollout of vaccines in key end markets? I'm wondering what you can share here. Also, related to your thoughts on corporate travel, I know accounts can't share what they'll be doing right now. While I know people want to get back in the air, I'm just wondering what you can share about your starting assumptions as you think about planning for 2021, maybe your best estimate of what it could look like?

Pedro Heilbron, CEO

Dan, I think it's correct to say we're being very careful and conservative in our assumptions. We really don’t know how long it’s going to take for vaccines to be widely available, especially in our region. So we're preparing for anything in 2021 towards the end of the year. It’s really hard to tell at this point. Meanwhile, anything can happen; we’ve seen in the US and Europe that second wave spending has impacted air traffic. We are being careful and conservative as we usually are, and I think that’s being reflected in the numbers we’re sharing.

Jose Montero, CFO

Keeping flexibility open is critical for us in 2021.

Dan McKenzie, Analyst

Understood. And I guess just focused on VFR traffic, what can you share about the profile or demographic of people who are willing to travel right now? Are these primarily millennials not caring about the virus? Do we get to a place where demand plateaus at, say, 50%, or is the thought that the recovery will increase steadily each month sequentially as we move forward?

Pedro Heilbron, CEO

In our 2021 thinking, I wouldn’t exactly call it a prediction, but we’re assuming that there’s a plateau before the vaccines are widely available that will be acceptable. We just don’t know at what level we’re going to hit that plateau, but we are preparing and planning for that. We’ve seen that in other parts of the world. People want to travel. I’m positively surprised by what people tell me, but the percentage is still a question.

Dan McKenzie, Analyst

Okay. Understood. Thanks for your time, guys.

Pedro Heilbron, CEO

Thank you.

Operator, Operator

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

Mike Linenberg, Analyst

Hey, good morning, everyone. Pedro, how are you today? I have two questions here. You indicated in the release that you hit 38 destinations in November. I think José, I heard you say 50 by year-end. Pre-COVID, I think you were at 80 destinations. The reason I'm bringing this up is that you made this decision a year ago to exit your 100-seater and 124-seater aircraft. Given that your small shell is about 160 seats or so plus or minus a few, when that decision was made, I suspect that you thought that maybe a few cities would lose service because of the size of the gauge or maybe it would lose frequency, and it may not make economic sense. With COVID now and the impact it has had on demand, has that led you to reconsider operating smaller aircraft, maybe a 737-700 Max for example? I realize that goes against the grain of what you want to do from a unit cost perspective. But I would think by getting out of the smaller shells, you're going to preclude yourself from serving more than just a few of the cities you served pre-COVID. Any thoughts on that?

Pedro Heilbron, CEO

Matt, first thing I'll say is that we're very happy with how we have simplified our fleet and how quickly we’ve been able to do so. Our flight operations team is even happier. The maintenance team is delighted, and our costs should improve with a simplified fleet and a larger gauge. So our unit costs are also happy. There will be some smaller markets that on paper could suffer. Our plan, regardless of our pre-pandemic or current plans, is that we can adjust frequency where needed in smaller markets. Usually, those smaller markets where we don't serve many frequencies are primarily leisure-based, and leisure can be stimulated with pricing. A larger aircraft can allow us to offer much better pricing due to much lower costs. So we believe by adjusting frequency and pricing for leisure, we can make the capacity work and that the financials should work better as well.

Mike Linenberg, Analyst

That makes sense. My second question is regarding the power by the hour agreements you entered into. You've been a standout when it comes to meeting your liabilities and making your payments, not deferring aircraft rent up until this point. From what we’ve seen in these power by the hour deals, they were initiated by lessors who came from a point of weakness and needed assistance. I sense from your conversations that you were negotiating from a position of strength. Is that the right interpretation?

Jose Montero, CFO

I would say that it was a mutual discussion. We've been having discussions with our lessors for several months, and I think it was a win-win situation. They don't get an airliner just dropped on them in a very difficult moment for them. At the same time, we win by getting immediate benefits from this negotiation. So, I would say that it's been a win-win for everyone.

Pedro Heilbron, CEO

We felt that much better on those terms. We believe in the strength of our position and that the market recovery will come sooner than expected.

Mike Linenberg, Analyst

That's great. Just one quick squeeze in just one more on the Boeing negotiation. From a modeling perspective, as we think about your cash out over the next year, some carriers in their discussions with Boeing have seen net results that are beneficial in relation to ownership costs, while others have received vendor support or payments in return. Is there anything you can share about your cash modeling perspective regarding your agreement with Boeing?

Pedro Heilbron, CEO

I'm not going to get into the details of the nature of the negotiations due to their confidential nature. I will say that it is not included in our cash flow projections shared with the market. Our expectation for cash consumption does not include any assumptions related to anything concerning Boeing. We have been very strict in ensuring we project our cash consumption straightforwardly; we're not adding extraordinary items into it.

Operator, Operator

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

Stephen Trent, Analyst

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

Pedro Heilbron, CEO

I believe we have the most overlap with Avianca. The Bogota hub and the Panama hub have the most overlap versus others. But destination-wise, Panama serves nearly twice the number of destinations compared to what Avianca offers from Bogotá, so we have that advantage.

Stephen Trent, Analyst

Great. Appreciate that, Pedro. Just one follow-up: when you think about longer-term opportunities, are you thinking any differently with respect to potential M&A, or with respect to setting up that joint business agreement with United Airlines? I just wanted to get your temperature on those opportunities.

Pedro Heilbron, CEO

The joint business agreement was never filed, but it's still a possibility. It hasn't ended either. However, given the current situation with one of our competitors in Chapter 11, that has thrown everything into flux and made it difficult; we need to wait until they understand their future better, and when their Chapter 11 proceedings are more advanced. We expect to continue those conversations at some point, but it's hard to tell what will happen right now.

Stephen Trent, Analyst

Understood. Appreciate that, Pedro, and hope you all stay safe and healthy.

Pedro Heilbron, CEO

Thank you, Stephen. Thank you.

Operator, Operator

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

Pedro Heilbron, CEO

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

Operator, Operator

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