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Copa Holdings SA (NYSE:CPA)

Q4 2012 Earnings Call

February 07, 2013 11:00 am ET

Executives

Joseph Putaturo

Pedro Heilbron - Chief Executive Officer and Director

Victor Vial - Chief Financial Officer

Analysts

Stephen Trent - Citigroup Inc, Research Division

Michael Linenberg - Deutsche Bank AG, Research Division

Duane Pfennigwerth - Evercore Partners Inc., Research Division

Hunter K. Keay - Wolfe Trahan & Co.

James D. Parker - Raymond James & Associates, Inc., Research Division

Eduardo Siffert Couto - Goldman Sachs Group Inc., Research Division

Bruno Amorim - Santander, Equity Research

Julie Biel

Augusto Ensiki - Morgan Stanley, Research Division

Operator

Ladies and gentlemen, thank you for standing by, and welcome to Copa Holdings Fourth Quarter and Full Year Earnings Call. [Operator Instructions] As a reminder, this call is being webcast and recorded on February 7, 2013. Now I will turn the conference call over to Joe Putaturo, Director of Investor Relations. Sir, you may begin.

Joseph Putaturo

Thank you very much, operator, and welcome, everyone, to our fourth quarter earnings call. Joining us today are Pedro Heilbron, CEO of Copa Holdings; and Victor Vial, our Chief Financial Officer. First, Pedro will start with our fourth quarter and full year highlights, followed by Victor, who will discuss our financial results. Immediately after, we'll open up the call for questions from analysts.

Copa Holdings' fourth quarter financial results have been prepared in accordance with International Financial Reporting Standards. In today's call, we'll discuss non-IFRS financial measures. A reconciliation of the non-IFRS to IFRS financial measures can be found in our fourth quarter earnings release, which has been posted on the company's website, copa.com.

In addition, our discussion 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 that are subject to change. Many of these risks and uncertainties are discussed in our annual report filed with the SEC.

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

Pedro Heilbron

Thank you, Joe. Good morning to all. Thank you for participating in our fourth quarter and full year 2012 earnings call. I'd like to start by congratulating our coworkers for their efforts in delivering another solid quarter and a great year. Our team began 2012 with an ambitious set of goals and objectives aimed at further consolidating our hub as the best option for intra-Latin American travel and improving the appeal of our product and our passengers' travel experience, all while delivering world-class financial results. I'm happy to inform that with the commitment and support of a world-class team, our objectives were once again accomplished.

Among our main highlights for 2012, we were able to deliver another year of very strong growth with consolidated capacity increasing 24% and traffic not far behind, growing nearly 23%. We continue to strengthen our network by adding 5 new cities this past June: Las Vegas, our seventh city in the U.S; Recife, also our seventh city in Brazil; Liberia, our second destination in Costa Rica; Iquitos, also our second destination in Peru; and Curacao, our 15th destination in the Caribbean. So we ended the year serving 54 destinations in 29 countries in the Americas, by far the most complete and convenient network for intra-Latin America travel.

On top of these 5 new destinations, during the year, we added close to 90 additional frequencies in 24 of our existing markets. In many cases, increasing recently launched markets from less-than-daily to daily service. Despite our strong capacity expansion for the year and an increased length of haul, we were able to maintain very healthy unit revenues, which, along with very competitive unit costs, allowed us to once again deliver industry-leading margins.

In the course of the year, we took delivery of 13 737-800 aircraft and returned 3 of our leased ones to end the year with a consolidated fleet of 83 aircraft. All of our deliveries this year featured the Boeing Sky Interior design and are equipped with our new in-seat in-flight entertainment system and enhanced business class seat design for our longer missions. In the first half of the year, Tocumen Airport concluded its north terminal expansion, which added 12 new jet bridges and will facilitate our medium-term growth. Last June, we formalized our entry into the Star Alliance. We're very pleased with how that is evolving and happy to be part of the largest and most comprehensive global airline alliance. Also during the year, our team once again delivered excellent operational performance, as Copa Airlines on-time performance came in at over 89%. This, along with a flight completion factor of 99.8% places us once again among the best and most reliable airlines in the world. So we continue to deliver what our passengers expect from us: a superior network for intra-Latin American travel with more choices, better schedules and a world-class product.

Now looking at the main highlights for our fourth quarter. For the quarter, we delivered an operating margin of 17.4%, which, although down year-over-year, still came in very strong. Passenger traffic came in very robust, increasing 21% year-over-year led by our international traffic, which expanded 24%. However, strength in load factors was offset by lower yields, which led to a small year-over-year decline in unit revenues. Additionally, on the cost front, unit costs came in slightly above our expectations mainly as fuel and passenger servicing costs came in higher than we expected.

In terms of our network, in the months of December, we added frequencies to several important markets, specifically a seventh daily flight to Bogota; a fifth daily to Cancun; a fourth daily flight to São Paulo; a third daily to Los Angeles; and second daily flights to Washington, D.C. and Santa Cruz, Bolivia.

Looking at our fleet, we added 1 net aircraft during the quarter, as we took delivery of 2 737-800s and returned 1 leased aircraft of the same type, ending the year with a fleet of 83 aircraft. For this year, we expect another year of double-digit capacity expansion. However, this year's incremental capacity will be more concentrated on adding frequencies to some of our most popular destinations which are markets that are performing quite well and where the capacity is needed. So slightly slower growth and less new destinations this year should allow the new destinations we have added in the last 2 years to spool up and increase their contribution.

Our expansion plans for the first half of 2013 includes Boston, our 65th destination and 8th city in the U.S. We will also be increasing frequencies in Orlando and Punta Cana from 3 to 4 daily flights, as well as increasing our flights to Port of Spain from daily to twice daily. We're very optimistic about adding a daily flight to Boston, which will offer very convenient schedules and be the only direct flight to Panama, with convenient connections to other important cities in South America. Additionally, the 3 markets where we're adding frequencies currently have very healthy demand and meet the increased capacity.

In addition to our network expansion, we will also continue with initiatives to improve our product and services. This year, we will continue to focus on our people, further developing our services and leadership academy. We hope to continue to grow our network's reach and connectivity through new and expanded culture agreements. We will be advancing a wide range of IT-driven initiatives from the launch of a new revenue optimizing system to expanded services in our mobile passenger and notification system. We will also open our fourth Copa Club in the region, which will be located in San Jose, Costa Rica, an important market that we serve with 7 daily flights.

Another important highlight for 2013 will be the initiation of the south terminal airport expansion project, which will add another 20 jet bridges to our connecting center, as well as a new control tower and more taxiways. This expansion, which should be completed in the next 4 years, will maintain the Tocumen Airport as 1 of the largest regional airports in terms of jet bridges, ensuring that our hub has the necessary infrastructure to accommodate our future needs.

Now turning to our current demand environment. And as you can see from the January traffic figures we just released, we're having a good start for the year. Traffic for the month came in very strong, growing more than 21% on similar capacity expansions, and our load factor came in at almost 80%. In addition, preliminary data indicate that length of haul adjusted yields are relatively flat year-over-year, so we're currently seeing good demand and a healthy unit revenue environment. Additionally, on a macro level, economic prospects for the region continue to be favorable. In fact, forecasts expect the region to grow close to 4% this year, which will be an improvement over 2012. On top of that, Panama's economy continues to outperform the region. For 2012, forecasts call for 10% to 11% GDP expansion. And in 2013, Panama is expected to grow about 8%, once again leading regional GDP growth. This should have a positive impact on the demand for our services, as we continue to expand and strengthen even more our network dominance for intra-Latin America travel.

So to summarize, we're pleased by our fourth quarter and full year results and this year's demand outlook. The overall economic outlook for our region remains positive and is expected to improve this year. Our network continues to expand, and its long-term growth prospects are very strong. Our team continues to deliver world-class operational performance, and we're implementing the necessary initiatives to strengthen even more our hub of the Americas, improve our products and maintain our operating efficiencies. So we're well positioned strategically, financially and operationally to take advantage of future opportunities while continuing to deliver world-class results.

Lastly, before turning it over to Victor, as you know, yesterday in our earnings release, we announced that after 17 years of service, Victor will be leaving the company effective March 15. During Victor's tenure, first as Head of Planning and then as Chief Financial Officer, Copa has moved from a small Panamanian carrier to become a regional and global benchmark for excellence in our industry, and a lot of that success was made possible in many ways thanks to Victor's leadership and support. In the name of the company and that of our Board of Directors, I would like to thank Victor for all of his efforts during the past 17 years and for his invaluable contribution to the success of Copa Airlines. Also, I'm pleased to announce that effective March 15, Victor will be joining our Board of Directors in the role of advisor to the board. We very much look forward to continuing to work with Victor and wish him well in his new role.

Now with that, I will turn it over to Victor who will go over our fourth quarter and full year results.

Victor Vial

Thank you, Pedro, and good morning, everyone. Thanks again for joining us. First and foremost, as always, let me begin by joining Pedro in congratulating the entire team for another strong year. Last year, we added 10 new 737-800s to our fleet, grew ASMs by more than 24%, added 5 new destinations to our network in addition to frequencies in several cities, increased revenue by almost 23% and further strengthened our balance sheet to continue funding our growth. On that, really these results would have been impossible to achieve without the hard work and dedication of the whole team at Copa Airlines. So to each and every one of them, thank you, and again, congratulations on a job well done.

Today, we're reporting $326.5 million in net income for full year 2012, which translates to an EPS of $7.35 and an operating margin of 17.9%. Excluding a $9.6 million fuel hedge mark-to-market loss for the year, underlying net income came in at $336.1 million or EPS of $7.57 compared to an EPS of $7.06 last year. With respect to the fourth quarter, we had another quarter of strong growth with capacity in terms of ASMs increasing close to 22% year-over-year, as we continue strengthening our Hub of the Americas in Panama City. We continue to see strong demand for air travel in the fourth quarter, as revenue passenger miles increased almost 24% year-over-year, resulting in a consolidated load factor of 75.7%, almost a full percentage point increase over Q4 '11 despite significant capacity expansion. On the other hand, passenger yield came in 4% lower than last year, resulting in revenue growth of approximately 18% year-over-year to $600 million.

On the expense side, fourth quarter operating expenses increased 25% year-over-year, and our cost per available seat mile increased close to 2%. However, our ex-fuel CASM decreased approximately 1% year-over-year to $0.068, mainly as a result of unit cost improvements in labor, maintenance and distribution costs, which were partly offset by higher unit costs related to passenger services and general administrative expenses.

In terms of operating earnings, consolidated operating earnings for the fourth quarter came in at $104.3 million compared to $111.5 million in Q4 '11, with our operating margin coming in at 17.4%. Looking at non-operating income and expense, fourth quarter generated a net non-operating expense of $7.4 million, mainly consisting of a net interest expense of $4.7 million and a $2.7 million fuel hedge mark-to-market loss.

With respect to fuel hedges within accordance with our hedge policy, we firmly have in place the following coverage: For the current year, 28% of our projected volume with crude oil swaps and jet fuel swaps had an average equivalent price in the range of $90 a barrel. As for next year, we have already hedged 10% of our projected volume with crude oil swaps at an average of $88 a barrel.

Turning now to the balance sheet. We continue to strengthen the balance sheet to -- of the company as assets reached $3.5 billion at the end of the year for an increase of more than $400 million during the year. Owner's equity totaled approximately $1.5 billion. Debt plus capitalized leases totaled $1.7 billion, and our debt-to-equity ratio came in at 0.8x, the lowest in our peer group and one of the best in the industry. In terms of debt, we closed the year with approximately $1.2 billion in bank debt; capital, which is fixed rate debt, with a blended rate including fixed and floating rate debt coming in at 2.5%. Looking at cash, we closed the year with $721 million of cash, short-term and long-term investments, which represent approximately 32% of last 12 months revenue and from liquidity to continue with our expansion plan.

So to recap, we had another quarter and another year of strong capacity and revenue growth. We consistently deliver some of the best profit margins in the industry. We have the balance sheet and liquidity to continue funding our growth, and most of all, we're well positioned to have another strong year. In terms of our guidance for the year, as in past years, last November, we provided preliminary guidance for the year ahead. Given our performance during the fourth quarter, the economic outlook in the region and the enhancements we're seeing, we are reaffirming our full year guidance as follows: We're maintaining our capacity growth in terms of ASMs at plus or minus 14%. Load cycle is expected to come in at plus or minus 76%. We're keeping our RASM guidance at plus or minus $0.137. We're also maintaining our CASM x fuel guidance at plus or minus $0.066. We're maintaining our fuel price assumptions for the year at an effective price per gallon including into-plane and net of hedges of approximately $3.30. And with respect to our operating margin, we continue to expect another strong year, with operating margins in the range of 18% to 20% as we indicated in our preliminary guidance.

Before turning it over to Pedro, since this will be my last earnings call at the -- for the company, I'd like to take this opportunity to thank Pedro, the Board of Directors and all of my coworkers for allowing me the privilege to be part of what I consider to be one of the finest teams in the airline industry. I'm proud of what today we have been able to accomplish and humbled on the support and trust I received during the past 17 years. I will miss working with the team but hope to continue contributing towards the success of the company in my new role as advisor to the Board of Directors.

Thank you, and with that, now I'll turn it over to Pedro for closing remarks.

Pedro Heilbron

Thank you, Victor. Now we'll open up the call for some questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question will come from Stephen Trent of Citi.

Stephen Trent - Citigroup Inc, Research Division

If I may ask, Victor, if you don't mind, just a little bit of color as to what motivated this move away from the CFO position?

Victor Vial

Sure. Thanks for asking that, Steve. I think that's a great a way to start, so we can get that out of the way. If you look at it, I've been with the company 17 years. The first 5, I was Head of Planning. The last 12 years, as CFO. The last 7, a CFO of a public company. And I'll tell you it's been a great experience, very exciting but also quite grueling at times. On the other hand, the company has never been in better shape. As Pedro mentioned earlier, financially speaking, every financial ratio we have only grown stronger in the past 5 years operationally. All of the metrics, the operational metrics we have, running a great company, and competitively speaking, we're in a better position also. So I couldn't think of a better time to move on. And I'm also looking forward to investing more time in my personal affairs, my personal business. And probably last but not least, maybe I'll have some time to play more golf, and I can bring my game up to the level of Jim Parker.

Stephen Trent - Citigroup Inc, Research Division

Well, fair enough, Victor, and certainly no argument that the carrier has done extremely well under your tenure.

Operator

The next question will be from Michael Linenberg of Deutsche Bank.

Michael Linenberg - Deutsche Bank AG, Research Division

On just, I guess, a few quick ones, and Victor, you're going to be missed. And I guess in that regard, I'll give you the first question. Just recently, I've noticed you've been a bit more active it seems like on the sale-leaseback front, and I'm just wondering how the financing market looks. I mean, I know in the past, I believe you were one of the carriers that took advantage of export credit financing, and since starting in January, we know that the costs have moved up. How much have they moved up? Have they moved up to the extent that you're going to look at other alternatives in financing the fleet going forward? I.e., should we see more sale-leaseback-type transactions, et cetera?

Victor Vial

Okay, yes. Yes, the prices have moved up since the new ASU aircraft sector understanding took effect. So now when you do the NPV, NPV analysis of leasing versus buying with [indiscernible] guarantees, obviously, the difference is a lot less. I think [indiscernible] bank financing is still very attractive, but when we looked at our fleet mix also, the fact that we were so heavy on loaned aircraft and then took into accounting the higher price, though still competitive or rates in financing, we arrived at a conclusion that it's not a bad idea to mix it up a little more and have more operating leases, which gives you, as you know, flexibility in your fleet plan, as it allows you to return aircraft when the lease expires or extend the lease and then manage your capacity with some flexibility. So you could expect you might be more sale-leaseback going forward. The mix now owned versus lease is now about 65%, 70% owned and 30% operating leases. We want to see that closer to 60% owned, 40% operating leases.

Michael Linenberg - Deutsche Bank AG, Research Division

Victor, are you -- the prices that you're getting on these sale-leasebacks, are we going to see you -- like how is that going to run through the P&L? Is that -- are we going to see you take gains that you'll then just amortize over the life of the lease? Or -- and I'm presuming you are taking gains on these sale-leasebacks given -- when you bought these airplanes? Is that -- I guess maybe I should start, is that safe? Is that a safe assumption?

Victor Vial

Well, it won't be anything material, Mike, because at the end of the day -- you take the gain, at the end of the day, you're going to be paying it back on lease rate. So no, anything that you will see, it won't be much to move the needle on the P&L.

Michael Linenberg - Deutsche Bank AG, Research Division

Okay, good. And then just sort of as -- on a second question, when we look at capacity growth for the year, how is that trending through the year? Do we start high and then it trends down by the time we get to the fourth quarter? Can you give us just some additional color on that?

Victor Vial

Yes, absolutely, yes. And as we mentioned in our guidance, we're expecting to grow 14% in terms of ASMs. Well, yes, the first half of the year will be somewhere around 17% to 18%. In the second half of the year, you'll see lower growth on a year-over-year basis. We'll be more like in the range of 11%.

Operator

The next question comes from Duane Pfennigwerth of Evercore Partners.

Duane Pfennigwerth - Evercore Partners Inc., Research Division

First, I want to say good luck to you, Victor. Anyway, with respect to unit revenue growth, I just wanted to ask you a general question. How much does that depend upon the price of fuel? I mean, if fuel is flat or even down, does that change at all the rationality you see from your competitors?

Victor Vial

Well, what we see in the past, Duane, is a very close correlation between fuel prices and fares. Probably the reason being is that we operate in a region of the world where a lot of these economies actually prosper if the commodity prices are clanked, which allows you then to raise fares. So I would expect this year to be not too different from that. That is fuel prices head up, we'll keep raising fares and fuel surcharges to compensate. We've been very successful in the past at doing that and I think we'll be successful going forward. And there is no fundamental change in that equation. So yes, fuel price is up, we'll raise fares and surcharges.

Duane Pfennigwerth - Evercore Partners Inc., Research Division

Okay. And then just second question, regarding the dividend you paid in 4Q, should investors view that as an early dividend or a special dividend?

Victor Vial

It was announced, reported as an early payment of the dividend we would have paid in June. Having said that, Duane, that doesn't mean that come May when we meet with the board that we will not be reviewing the cash situation, how the company's performing. And I think we've shown, in the past, that we're not reluctant at all to return value to shareholders. I mean, we've increased our dividend policy from 10% to 20% then to 30%. And then in December, we made an exception and we paid early dividends for the sake of our shareholders. So we'll look at it in May again.

Operator

The next question is from Hunter Keay of Wolfe Trahan.

Hunter K. Keay - Wolfe Trahan & Co.

Victor, congratulations, and a couple of questions for you. On the CASM x fuel, you guys reiterated your full year guidance in November obviously, and you came in above it on a full year basis. So I'm wondering, were there any costs that were pulled forward into the fourth quarter from early next year?

Victor Vial

That we've pulled forward into the fourth quarter? Not really. No, there's nothing that I can think of, no.

Pedro Heilbron

This is Pedro, Hunter. What did happen is there were some costs in the fourth quarter that were not expected. Some were timing, and some were just a -- I don't want to call them inefficiencies but areas of opportunity. So some were costs that we do not expect to have in the future if we do things well. So that's also part of the answer.

Hunter K. Keay - Wolfe Trahan & Co.

Appreciate it. And I guess as you talked about adding frequencies to routes that you already have going and going well with high demand, your system load factor is 75%, which is good, but it's not great for a hub-and-spoke carrier. So I'm wondering, I guess, how high can you get loads? And what are the load factors on the routes that you're adding frequencies to? Are they above the system average? And if so, by how much?

Pedro Heilbron

Yes, well, it's a good question and a tricky answer because you get to an average load factor by averaging out some flights that might be operating at 90-plus percent load factors and some that are traditionally low-load-factor route. But some of our low-load-factor routes have very high yields and return a very healthy profit. So we cannot look only at load factors. We usually manage unit revenues, manage RASM, look at yields and loads and make our decisions based on that. But yes, usually the flights where we're going to be adding frequencies have load factors that are going to be about 85% on average. That would be norm.

Victor Vial

And if I could just add to that, if you look at our business model for the past 5, 6 years and you look at our average load factor, it's pretty much in that range, 75%, 76%. And as I've said before in earlier calls, we really don't focus only on load factor. We're looking at the RASM of the company and especially given the fact that our break-even load factor is 61%. So we can -- we have a RASM premium because we have healthy fares. We prefer to move less passengers because there's a cost to moving each passenger, and we don't have to get to 80% like other airlines to break even.

Hunter K. Keay - Wolfe Trahan & Co.

Okay, great. That's helpful. And I guess just maybe one more quickly on yields and load and fuel. I mean you talked about this is the -- this is not a very often occurrence to see your yields come down in a period where your fuel prices go up. So you guys -- you can't fuel surcharge on all your routes, right? I mean, that is -- I believe that's the case. And was there any kind of sort of pricing? Did you drop the ball on a particular market or something like that? Or did you forecast lower fuel prices going into the quarter? What drove that mismatch between yields and fuel increase?

Victor Vial

Yes. A couple of things. I think -- sure, we were maybe a little bit optimistic on the fuel price assumption for the fourth quarter, but obviously, hindsight is 20-20. Right now looking at the graph of the price of jet fuel for the past 3 months and what I noticed was that in the 2 weeks before earnings call in November, there was a clear trend to lower prices, and then it started going up later in November and December. So yes, the other part of it is due to seasonality. A lot of the tickets that gets sold, for example, in December gets sold very early, so those flights get full early in the year. It's a holiday season. So that prevents you then from being able to react. If price of oil goes up more than you expected and then you want to raise prices, you won't make it in December. So that's part of it. And maybe to a certain extent, we could have done maybe a little bit better of a job revenue managing. We are very pleased with the performance of our revenue management team. But you know it's tough to bat 1.000. If we batted 1.000 we would have done a better job in the fourth quarter.

Operator

The next question is from Jim Parker of Raymond James.

James D. Parker - Raymond James & Associates, Inc., Research Division

All right. Maybe a question or 2 for Pedro. Just your neighboring countries, of course, what is going on in Venezuela regarding how much cash do you have there now because, of course, there speculation has been for some time that the bolivar would be devalued? So how much cash do you have at risk in Venezuela now?

Pedro Heilbron

I'll let Victor answer that one. When you get too specific, I need to have Victor answer.

Victor Vial

So in Venezuela, as you know, they have controls to be able to repatriate bolivars to dollars. And it's a very convoluted process, and it can take months. Most airlines, last information I saw, have between 5 to 6 months of lag. That's not unusual, but the wait is always between 3 to 6 months, and right now our balance there is somewhere between $180 million to $190 million accumulated. We should get approvals in the near future, but it's tough to predict. And the other thing is, I should add, that the last time there was an evaluation of the bolivar, airlines were treated in a special fashion in the sense that the funds that were in the pipeline for approval were, I guess, respected at a special rate. So I can't guarantee that will happen this year. There is an evaluation. But that's what happened in the past, and hopefully, that's what they'll do this year.

James D. Parker - Raymond James & Associates, Inc., Research Division

Okay. Pedro, with regard to Colombia, which is your largest market other than Panama, there is pretty heated competition going on between Avianca and LAN Colombia. Is that having any impact on Copa?

Pedro Heilbron

Not really because what we've been doing for the past 2 years is reducing our domestic presence in Colombia where most of that battle has been played out, and we are focusing on our hub on flying from Colombia to our fortress hub here in Panama. So in a way, we saw that coming and went in a different and more profitable direction. So we're pretty much staying out of that one.

James D. Parker - Raymond James & Associates, Inc., Research Division

Okay. And then I see that LAN Colombia, I think's going to put a 767 in from Bogota to Fort Lauderdale. Would that have any impact on Copa?

Pedro Heilbron

That's -- I think that's a question for Avianca because we are not really -- we don't fly that market. It's not important to us.

Operator

[Operator Instructions] The next question comes from Eduardo Couto of Goldman Sachs.

Eduardo Siffert Couto - Goldman Sachs Group Inc., Research Division

Most of my questions were already answered, but considering that, that's the last day of Victor, I'll shoot one more. Regarding the -- my main question is basically on yields. The -- Pedro mentioned that the good traffic numbers in January, was just wondering how are yields in January and if we may see some increase especially in the first quarter given that fuel prices this quarter is slightly higher than the fourth quarter. Just want to get some thoughts on that.

Victor Vial

Okay. And this is Victor, Eduardo. We're seeing a pretty decent demand environment, and yields are moving pretty good. So when you look at it on a year-over-year basis for January, adjusted unit revenues should be coming in almost flat. Obviously unit wear [ph] meaning RASM or PRASM. Which is a combination of load factor and yields. So like Pedro said, we're off to a good start. And I would add to that when look at what's going on in the macroeconomic environment in the region, Panama is having another year of 7-plus percent GDP growth. Obviously, that benefits us, and the region should have 3.5% to 4% GDP growth this year. That's great for us. There's no better way to get around in the region than our hub, so I would expect that demand will continue to be strong, and that should allow them to yield -- do a decent job with yield management.

Eduardo Siffert Couto - Goldman Sachs Group Inc., Research Division

Okay. No, I was just concerned, Victor, because this 17.5% margin in the fourth quarter and then we see some higher fuel prices since the beginning of the year. I was just wondering if the company can bring margins back to the -- closer to the 20% level already in the first quarter. Or you see more higher margins coming more in the second half of the year?

Victor Vial

Yes, well, I'll stay away from giving margin guidance by quarter because we never have before. But again, I'll say what I said before, that I don't see anything, any fundamental change in our business model. So you have strong demand, allows us to do good revenue management. The hub is the better option. The infrastructure is there. I don't see why not. Let's put it that way.

Pedro Heilbron

And then, Eduardo, this is Pedro, and I would add -- I will repeat something that Victor mentioned before and said a little bit about. We also feel that we could have done better on both yields and costs in the fourth quarter.

Operator

The next question is from Bruno Amorim of Santander.

Bruno Amorim - Santander, Equity Research

Given that growth rate should low along the year, is it fair to assume that higher margin should be obtained in the second half of the year as a result of higher load factors?

Victor Vial

Yes, well, there's also the seasonality also taken into account, right? Because traditionally this year should not be different. Our high season is in the third quarter, and the second strongest quarter is the first quarter. The fourth quarter, not lagging far behind and then second quarter is what we call the low season. So the margins will have a high correlation to that. And if you look at over the past 5 years, the quarterly margins, you'll see that clearly, I think.

Operator

The next question will come from Bob McAdoo of Imperial Capital.

Julie Biel

This is Julie Biel for Bob McAdoo. I had a question about passenger servicing and what are the components of that? And what were the increases that you saw? Or is that the area that you see opportunities for?

Victor Vial

Yes. Well, first of all, you have the passenger-related costs, and you have also aircraft handling fees or aircraft-related costs. The reason we had an increase during the quarter versus last year, half of it is basically volume, just all that growth that we've had, and the other half is related to obviously rates and a couple of other issues. The rate part of it has to do with some rate increases in meals, for example, in some of the markets we serve such as Panama. Panama growing at 10%, 11%, you'll see some inflation. Some of it comes from inflation. And then also, we are -- well, we move close to a higher load factor, so we have more passengers than others. That's part of the answer. And then we also have some higher rate airports where we're operating, such as, for example, JFK, which has a waiting lounge. The costs are pretty expensive. That's another part of it. When you move more passengers in these airports, that will then skew the total cost on a unit basis and on an absolute basis.

Julie Biel

Okay. That's really helpful. And if you could talk a little bit looking at the capacity additions that you have for 2013, how is that going to impact your stage length?

Victor Vial

Okay. When you look at -- well, as I said before, 14% ASM growth for the year. If you look at it in terms of fees, you're talking about 11%, and in terms of the stage length year-over-year, we should be seeing an increase in the neighborhood of around 5% or so. And again, as I mentioned earlier, with the heavier growth in ASMs coming in the first half to the tune of around 17% to 18% and then second half, around 11% on a year-over-year basis.

Operator

The last question will come from Augusto Ensiki of Morgan Stanley.

Augusto Ensiki - Morgan Stanley, Research Division

I just had a quick question regarding your capacity increase for the year. How much of the growth is coming from the full year effect of the new routes from last year and from the new frequencies to be added this year? I think you said this for last year as well. Could I just get that detail for 2013?

Victor Vial

Okay. Most of the growth actually comes from what we did last year, somewhere around 85% of the growth. When you look at the impact of new destinations, it's really minor. I mean, we're now reopening -- we already announced Boston. We may be announcing a couple more, but this year will be more of a frequency year. In terms of frequencies, around 10% of the growth will come from frequency. So new destinations will be less than 5% or so.

Operator

I would now like to turn the conference back for any further remarks to Mr. Pedro Heilbron. Please proceed.

Pedro Heilbron

Okay. Thank you. Thank you, all. This concludes our fourth quarter earnings call. Thank you for being with us, and thank you for your continued support. We will see you next time, and have a great day and a great weekend.

Operator

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

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