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Copa Holdings SA (NYSE:CPA)

Q4 2013 Earnings Call

February 13, 2014 10:00 am ET

Executives

Rafael Arias

Pedro Heilbron - Chief Executive Officer and Director

Jose Montero - Chief Financial Officer

Analysts

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

Eduardo Siffert Couto - Morgan Stanley, Research Division

Duane Pfennigwerth - Evercore Partners Inc., Research Division

Jared Shojaian - Wolfe Research, LLC

Helane R. Becker - Cowen and Company, LLC, Research Division

Thomas Kim - Goldman Sachs Group Inc., Research Division

Pedro Balcão Reis - Santander, Equity Research

Stephen Trent - Citigroup Inc, Research Division

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Copa Holdings Fourth Quarter and Full Year Earnings Conference Call. [Operator Instructions] As reminder, this call is being webcast and recorded on February 13, 2014.

Now, I'll turn the conference over to Rafael Arias, Director of Investor Relations. Sir, you may begin.

Rafael Arias

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

Copa Holdings' fourth quarter financial results 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 fourth quarter earnings release, which has been posted on our company 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, Raffa. Good morning to all, and thank you for participating in our fourth quarter and full year 2013 earnings call.

I'd like to start, as usual, by congratulating our co-workers for their efforts in delivering an outstanding fourth quarter and a great year. 2013 was another excellent year in terms of financial and operational results, and would not have been possible without the hard work and dedication of our world-class team.

Our vision remains to be the best option for intra-Latin America travel by connecting passengers in Panama, the most complete and efficient hub in the region, by offering our customers great service and convenient schedules, and by delivering world-class operational standards, including world leading on-time performance, which ultimately results in industry-leading financial results.

Among our main highlights for 2013: We were able to deliver another year of very strong growth, as traffic increased 16% on 14% capacity expansion. We continued to strengthen our network by adding 2 new cities, Boston in July, and Tampa in December, our eighth and ninth destinations in the United States. So we ended the year serving 66 destinations in 29 countries in the Americas, by far the most complete and convenient network for Intra-Latin America travel. On top of these 2 new cities, during the year, we added frequencies to 13 of our existing destinations.

During the year, we continued enhancing our customer's travel experience by launching our fourth Copa Club in San Jose, Costa Rica. Despite considerable capacity expansion for the year and an increased length of haul, we were able to grow load factors, while maintaining yields. This resulted in very healthy unit revenues, which combined with very competitive unit cost, led to another year of strong financial results.

During 2013, we also took delivery of 7 Boeing 737-800 aircraft, to end the year with a consolidated fleet of 90 aircraft. Our deliveries featured the Boeing Sky Interior and came equipped with our new in-seat in-flight entertainment system and enhanced business class seats designed for our longer missions.

We also continued looking for efficiencies. We implemented an in-house heavy maintenance line and accomplished 8 C checks during the year, resulting in cost savings.

On the operational front, our team, once again, delivered very strong numbers, with Copa earnings on-time performance coming in close to 89% for international service. This, along with a flight completion factor of 99.6%, placed us, once again, among the best and most reliable airlines in the industry.

Last, but not least, we're proud to have received the 2013 Sky Track Awards for Best Airline and Best Cabin and Airport Staff in Central America and the Caribbean. So we continue to deliver what our passengers expect from us, a superior network for intra-Latin America travel with more choices, better schedules and a world-class product.

Now, looking at the main highlights for the fourth quarter. Excluding special items, we delivered an adjusted operating margin of 23.2% and an adjusted net margin of 20.4%, the best quarter all year. Passenger traffic came in very strong, increasing almost 11% year-over-year on 9.5% capacity expansion. Yields increased almost 6%, which led to a year-over-year increase in unit revenues of over 6%.

Additionally, on the cost front, adjusted unit costs came in slightly lower, mainly due to a lower fuel price year-over-year. In terms of our network, in the month of December, we added frequencies to several important markets, specifically: an eighth daily flight to San Jose, Costa Rica; a sixth daily flight to Cancun; a fifth daily to Cali, Columbia; a fourth daily to Punta Cana; a third daily to New York; and second daily frequencies to Las Vegas, Asuncion, Paraguay and Pereira, Colombia.

Looking at our fleet, we added 1 Boeing 737-800 during the quarter, ending the year with a fleet of 90 aircraft. For this year, we expect another year of double-digit capacity expansion as we will add 8 new Boeing 737-800 aircraft, closing the year with 98 total aircraft.

Similar to our 2013 strategy, this year's incremental capacity will be mainly focused on adding frequencies to existing markets. Our expansion plan for the first half of 2014 includes: Montréal, our second Canadian destination; Fort Lauderdale, our 10th city in the U.S; and Georgetown, Guyana, which will become the 30th country we serve. We will also be increasing frequencies to some of our larger markets, such as San Jose, Costa Rica and Bogotá, Colombia; and adding second daily frequencies to Brasília, Aruba and San Andres, Columbia.

In addition to our network expansion, we will continue implementing initiatives to improve our product and services, as well as generate efficiencies. This year, we will continue to improve our website and mobile capabilities as it tailors to further reductions and distribution cost. We will initiate construction of a new maintenance hangar to expand our heavy maintenance program. We will be the first airline in Latin America to implement Scimitar Winglets on our 8 2014 deliveries and we will retrofit 10 existing aircraft, which will generate approximately an additional 1.7% fuel reduction on this aircraft.

Another important initiative for 2014 will be to continue working with the airport in Panama in the design and construction of the South Terminal expansion project, which will add another 20 jet bridges to our connecting center. This expansion, which is currently ahead of schedule, should be ready in the second half of 2016, ensuring that our hub has the necessary infrastructure to accommodate our future growth.

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 to 2014. Traffic for the month came in very strong, growing 10.5% on 9.6% capacity expansion and our load factor of 80% was 0.6 percentage points higher year-over-year.

Now, turning to the economic front. Prospects for the region, while still quite favorable, have slowed down somewhat, yet reports indicate the region should grow around 3% in 2014, which will be similar to slightly better than 2013. Air traffic growth is expected to surpass GDP growth. So, overall, we remain positive on our region's growth prospects and the strength of our network.

Our home country, Panama, continues to outperform the region. For 2013, forecast calls for approximately 7.5% GDP expansion, and in 2014, Panama is expected to grow about 7%. 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. Our network continues to expand and its long-term growth prospects remain 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 product 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 financial results.

With this, I will turn it over to Jose, who will go over our financial results.

Jose Montero

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.

During 2013, we added 7 new 737-800s to our fleet, grew ASMs by more than 14%, added 2 new destinations to our network in addition to frequencies to several cities, increased revenues 16% and further strengthened our balance sheet to continue funding our growth and return value to our shareholders.

Undoubtedly, these results would have been impossible to achieve without the commitment of the whole Copa team. To all, thank you, and again, congratulations on an outstanding year.

Today, we're reporting $428.2 million in net income for full year 2013, which translates to earnings per share of $9.64 and an operating margin of 19.9%. However, not taking into account special items, which include a fourth quarter accounting non-cash intangible impairment charge of $31.2 million, underlying net income came in at $468.1 million, or adjusted earnings per share of $10.54, compared to an adjusted EPS of $7.57 last year. Full year adjusted operating margin was 21.1%, 3.2 percentage points higher than in 2012.

The impairment charge arises from an intangible asset booked in 2005 with the acquisition of Aero República, now Copa Airlines Colombia, linked to Colombia domestic route rights from their network. Given that we have significantly reduced capacity in the domestic market in favor of more profitable international flights and have plans to continue this strategy in 2014, an impairment was necessary.

We also had a very solid fourth quarter, with capacity in terms of ASMs increasing close to 10% year-over-year, as we continued strengthening our Hub of the Americas in Panama City.

Additionally, we continued to see strong demand for air travel during the quarter, as revenue passenger miles increased almost 11% year-over-year, resulting in a consolidated load factor of 76.5%, almost a full percentage point increase over Q4 2012.

Passenger yield came in almost 6% higher than last year, resulting in revenue growth of more than 16% year-over-year to almost $700 million. On the expense side, fourth quarter operating expenses, excluding special items, increased 8% year-over-year and our cost per available seat mile decreased about 1%. However, our adjusted x fuel CASM increased approximately 2% year-over-year to $0.069, mainly as a result of distribution costs, [indiscernible] related to higher revenues and aircraft rentals. These were partially offset by lower maintenance expense.

In terms of operating earnings, consolidated operating earnings for the fourth quarter, excluding special items, came in at $161.8 million, compared to $104.3 million in the fourth quarter of 2012, with our adjusted operating margin coming in at 23.2%.

Looking at non-operating income and expense, fourth quarter generated a net non-operating expense of $7.6 million, mainly consisting of $4.6 million corresponding to a non-cash foreign exchange impact and net interest expense of $3.5 million and a $2.6 million fuel hedge mark-to-market gain.

With respect to fuel hedges, in accordance with our fuel hedge policy, we currently have in place the following coverage: For 2014, we have coverage for 22% of our projected volume, with crude oil swaps and jet fuel swaps at an average equivalent price of $89 per barrel and $2.91 per gallon, respectively. And for 2015, we have already hedged 14% of our projected volume, with jet fuel swaps at an average of $2.73 per gallon.

Turning to the balance sheet, we continue to strengthen the company's position as assets reached $3.95 billion at the end of the year, for an increase of almost $500 million during the year. Owner's equity totaled approximately $1.9 billion; debt, plus capitalized leases, totaled $1.7 billion; and our debt-to-equity ratio came in at 0.6x, the lowest in our peer group and one of the best in the industry.

In terms of debt, we closed the year with approximately $1.1 billion in bank debt, half of 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 almost $1.2 billion in cash, short and long-term investments, which represents approximately 45% of last 12 months' revenues. However, $487 million of our cash is in Venezuela, pending repatriation.

Regarding Venezuela, the recent announcement made by the government there to move airlines from the CADIVI exchange rates to the Sicad rate applies only to sales not yet submitted for monthly repatriation. In other words, future sales made by airlines operating in Venezuela will use as a reference the exchange rate that results from the weekly auctions to government holds. This exchange rate currently stands at 11.36 bolivars per dollar. The government also indicated in its announcement that funds already submitted for repatriation will be honored at the 6.3 bolivar per dollar exchange rate. However, there is no official word from the government on how and when they plan to honor pending repatriation requests by airlines.

I'd like to point out that our cash position, excluding our exposure in bolivars, is very healthy, representing 26% of last 12 months' revenues. So this exposure, by no means, compromises our financial position. In fact, in accordance to our dividend policy, our Board of Directors approved our 2014 dividend in the amount of $3.84 per share. As a result, on March 15, we'll pay our first quarter dividend in the amount of $0.96 to shareholders of record as of February 28. You might recall that during 2013, our Board of Directors approved an increase to our dividend payout from 30% to 40% of previous year's net income and went from a yearly to a quarterly dividend payment schedule.

In terms of fleet for 2014, we have already taken care of the financing of 4 of our 8 deliveries for this year and expect to have sourced all our financing needs for the year in the coming weeks.

So going back to our results and to recap, we had another quarter and another year of strong capacity and revenue growth. We again delivered 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 are well-positioned to have another strong year in 2014.

In terms of our guidance for 2014, as in past years, last November, we provided preliminary guidance for the year ahead. Given the economic outlook in the region and the demand trends, we are reaffirming our 2014 full year guidance as follows: We are maintaining our capacity growth in terms of ASMs at plus or minus 10%; load factor is expected to come in at plus or minus 77%; we're keeping our RASM guidance at plus or minus $0.0137; we're maintaining CASM x fuel guidance at plus or minus $0.068; we are also maintaining our fuel price assumption for the year at an effective price per gallon, including intra-plane and net of hedges of approximately $3.15; and with respect to our operating margin, we continue to expect another strong year with operating margins in the range of 19% to 21%.

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

Pedro Heilbron

Thank you, Jose. Now, we will open up the call for some questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Mike Linenberg with Deutsche Bank.

Unknown Analyst

This is actually Bridget Tower [ph] filling in for Mike. Just a couple of questions. First, San Juan, Venezuela, can you give us some more figures around your business there? I mean, your revenue from the nation and how to think about the profitability generated from that operation?

Pedro Heilbron

I'm not sure exactly of -- of what you're asking for, but I can give you a general direction. You know we don't share a per route or per market profitability. But directionally, I can tell you that demand in Venezuela remains very strong. So the issue there is not one of demand, it's one of getting paid after selling in local currency. So that's -- and we had been paid on a regular basis, even though late, up to October of last year, so it's been a little bit over 3 months since most airlines have stopped receiving dollar funds. So -- but demand is not the issue, demand remains very strong. And obviously, with full flights and -- with full flights, you can revenue manage those -- so you would say that profitability in Venezuela is very healthy. Right now, around -- between 14% and 15% of our revenues last year came from Venezuela.

Unknown Analyst

That's helpful. And then just a little bit more on that, given that we've heard that some of your competitors are actually pulling out of -- pulling flights from that nation, have you benefited from that trend? Has the competitive environment actually improved, given that some of the smaller carriers have been pulling out?

Pedro Heilbron

Actually, I don't think anybody has pulled out of that market yet, plus we will not really benefit at all from that commercially, in the sense that our flights operate pretty full with high load factors. But, no, that hasn't happened yet.

Unknown Analyst

And then just generally on your capacity plan. I was wondering if you could tell us how much room you have to basically adjust your capacity plan if -- for instance, if you had to cut capacity because demand trends weren't holding up. I mean, how much wiggle room do you have there, with the leases coming due this year and the planes that you're getting?

Pedro Heilbron

We have always a number of other market's routes where we can initiate service or add frequencies. Plus, next year, in 2015, we have around 5 leases that come due, which we're planning to renew most of them, if not all, but that gives us a lot of flexibility.

Unknown Analyst

Okay, great. And Pedro, what about this year, do you have leases coming due?

Jose Montero

No. This year, basically our capacity in terms of aircraft is set. And as we've mentioned during our release and -- we're guiding for 10% capacity growth to this year and that...

Operator

Our next question comes from the line of Jim Parker with Raymond James.

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

Given such terrific earnings numbers, I apologize in advance for pursuing the Venezuelan issue a bit further, but just a couple of things in that regard. How can you say with confidence that you will be able to repatriate some or all of that cash that you have there? Just what are the political, economic reasons why you're optimistic about those funds eventually being repatriated?

Pedro Heilbron

Okay, I'll say a couple of things, Jim. This is Pedro again. First, I did not say -- I did not refer to that specifically. So I did not say that with confidence or optimism. What I said was that the issue is one mostly of repatriating those funds more than demand. The demand is there, there's more demand than supply. But I did not comment on repatriating the funds. But now that you ask, obviously, that is the kind of greatest [ph] uncertainty in the whole Venezuelan issue. But most airlines, if not all, operate based on international treaties that guarantee the repatriation of those funds. So -- but obviously, you can not comply with international treaties, but I have not seen that happen before. So we're hopeful that a solution needs to be reached because airlines are not going to operate indefinitely without getting funds. So -- and any country requires air service for its development and its growth, so I'm confident that a solution will be reached. But again, there is uncertainty there, of course.

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

Pedro, why not take some or all of your capacity out and redeploy it in other markets where you'll actually get paid?

Pedro Heilbron

Well, at first, remember that up to October, we were getting paid on a regular basis. Late, but getting paid on a regular basis, almost a monthly basis. So this is kind of a -- this is a recent development, relatively speaking, 3 -- a little bit over 3 months -- and we're still hoping on a solution. It's an important market. It's an important country. You don't want to just exit, abandon that and then see it fixed the following day and having difficulties going back in. We are owed that money, so we're hopeful that a solution will be reached. However, if that does not happen in the near future, we will consider any and all possibilities. And I would say that most airlines will be forced to do the same, it's just a matter of dollars and cents to get to a point where you cannot operate, if you're not getting your funds. So, again, this is relatively a new development, but it needs to be fixed in the near future. And I'm now not only talking about Copa, we're -- all the airlines are in the same boat. For some reason, a lot of the comments have been addressed towards Copa, but we're in the same boat as the rest of the industry. Hopefully, that will help.

Operator

Our next question comes from the line of Eduardo Couto with Morgan Stanley.

Eduardo Siffert Couto - Morgan Stanley, Research Division

Just like Jim, sorry for our focus on Venezuela's -- it has been the major subject we are getting from clients. Just a couple of other questions on Venezuela. Did you receive any cash at all in the fourth quarter from Venezuela because your cash position there grew $95 million, which is, more or less, 15% of the revenues that you mentioned you're doing in Venezuela. So I was just wondering if you got any cash out of the country during the fourth quarter?

Pedro Heilbron

So, yes. As I mentioned, the last payment was in October. So we got the...

Eduardo Siffert Couto - Morgan Stanley, Research Division

It was very small, no?

Pedro Heilbron

What's that?

Eduardo Siffert Couto - Morgan Stanley, Research Division

Probably it was very small, no, Pedro, because the cash position grew 15% of the revenue...

Pedro Heilbron

Okay, yes. Correct.

Eduardo Siffert Couto - Morgan Stanley, Research Division

Okay -- can you give us a color regarding the yield increase and what sort of margin you're getting there? Because -- and also, what effects you're using to translate the tickets sold in bolivar to U.S. Dollars when you do your consolidated numbers? What effects are you using?

Pedro Heilbron

Okay, again, we do not share specific route, P&L information. And before the decrease that was mentioned by Jose during his part, we used the official exchange rate up to that date, which was 6 30. And as of the decree at the end of January, we switched to the Sicad rate which stands right now at 11.

Jose Montero

36.

Pedro Heilbron

11.36.

Eduardo Siffert Couto - Morgan Stanley, Research Division

Okay, so for the fourth quarter it was -- all sales in Venezuela were to rate at [ph] 6 30.

Pedro Heilbron

Correct.

Operator

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

Duane Pfennigwerth - Evercore Partners Inc., Research Division

Just coming back to your RASM guidance. RASM was just up 6%. Can you give us a sense for -- to get to flat in 2014. Any sense for the cadence there? I mean, should we think about a first half that looks more like the second half of 2013? And then, given a lack of visibility into the second half, some conservative assumption, I'm just struggling to see how we -- if I look at sequential revenue trends, even sort of discounting it for some, obviously, Easter shift, I'm just struggling to get to flattish.

Jose Montero

This is Jose. We really are comfortable with our guidance on our revenue performance for 2014. It's still pretty early in the year. And as you mentioned yourself, we have limited visibility for the latter months of 2014. We are seeing the first quarter full of bookings to be good and -- but it's still pretty early in the year. And by the way, we're guiding to very strong operating margins for the full year, so we're pretty confident that our performance for the year should be very strong.

Duane Pfennigwerth - Evercore Partners Inc., Research Division

I appreciate that. So, I guess, just coming back to the cadence, by quarter, is it something where we should assume, kind of, up, up, down, down because we don't have the visibility in the second half or...

Jose Montero

I would say that it's a matter of visibility at this point. And as I mentioned, we're seeing that the first quarter is looking good in terms of for ourselves -- which is basically where we have our visibility and we're seeing first quarter performing well.

Pedro Heilbron

And this is Pedro, too, enough noise out there. It will be hard to predict if it's going to be up, down, down, up or what's going to happen in the next quarters.

Duane Pfennigwerth - Evercore Partners Inc., Research Division

Okay, appreciate that. And then, again, I echo Jim's apology. Just to come back to this a little bit. On the cash that's presently there, can you say how much of that relates to travel that's already been consumed versus kind of an advanced ticket liability?

Pedro Heilbron

I don't know if we have that. I don't know if we -- we owe you that one. I don't think we have that information with us right now. But I should say that we have probably the strongest cash position in the industry and we have a very strong cash position, even taking out the bolivar, the Venezuela exposure. I think that's also something important to highlight. And again, it's -- Venezuela is more an issue of when we're going to get paid and how, and we can argue how optimistic we're going to be about that or not, but demand is still there.

Jose Montero

And one thing I wanted to say, Duane, is that the cash that we have, according to the Venezuelan Regulations, should be honored at the 6 30 exchange rate, even if it has not been flown yet, because it was already submitted for repatriation to the Venezuelan government. So in that sense, once the issue of the repatriation gets settled, this cash, according to the Venezuelan regulatory [ph] that is out there, should be paid at the 6 30 exchange rate.

Duane Pfennigwerth - Evercore Partners Inc., Research Division

Certainly appreciate that. And it feels like it's honestly more than discounted -- more than discounted into your stock at this point. However, I think we all are struggling a little bit to understand, given the portfolio of opportunities that you have, why you'd continue to do any business with a country that doesn't pay you per agreements that you have already have in place. And I could just add to that, maybe you could just comment on this.

Pedro Heilbron

Sure. We'll comment. We have about 8 daily flights into Venezuela. And as you've been able to see, we're not the only airline that's staying put because it's a market where flights are full because there's not enough capacity. And when flights are full, you can revenue manage, sell wide fares, et cetera, fill up your business class, which means that it's a very profitable market for all airlines. This is something that happened a little over 3 months ago. And in our particular case, but I think it applies to the rest, but in our particular case, we're strong enough to be able to be a little bit patient and wait for a solution and not jump the gun and abandon a very profitable and important market that needs our service, to then regret it 2 or 3 months down the line. So that's kind of the chance every airline is taking. That's why we're being patient. But, obviously, that cannot go on forever.

Duane Pfennigwerth - Evercore Partners Inc., Research Division

Understood. I mean, clearly you've shown an owner's perspective in the time that we covered you.

Pedro Heilbron

And if we get another question, what we're going to do is hold our next Investor Day in Caracas.

Operator

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

Jared Shojaian - Wolfe Research, LLC

This is actually Jared Shojaian in for Hunter. I hate to be the one that goes back to this Venezuela issue. But just kind of a separate question on that. If I look at your capacity in Argentina and Venezuela, looks like it makes up roughly 5% or so, on a seat basis, but revenue, it looks like it's about 20% of your total revenue. So I guess -- are yields in these markets just so much stronger than the rest of your network? I mean, is that -- should we assume that profitability is kind of comparable to that ratio as well? Or how are you thinking about that?

Pedro Heilbron

Well, you should assume that -- again, we don't talk about specifics, probably -- but when we think about markets where capacity for all operators is restricted and where demand is very strong, you should assume that profitability is better than the share of revenues of that particular market.

Jared Shojaian - Wolfe Research, LLC

Okay, great. And then, I guess, just a general question here on cash deployment. When we see your stock declined 20% in a very short amount of time and we see these volatile day-to-day swings from macro-related noise and things that are really outside of your control, does it make you wish you had a buyback in place to be able to go in and support the stock? And I know in the past you've talked about your preference for a dividend over the buyback. So is it fair to say that you wouldn't even consider announcing a buyback at some point later this year? Or how are you thinking about that?

Jose Montero

Yes, indeed the stock has been hit in the recent weeks. You know what, our company's keen on returning value to its shareholder, right? I think we've proven that. As matter of fact, as we announced today, our Board approved a 40% dividend based upon 2013 net income, and that's following up with the dividend policy change that we did last year, bringing it up from 30% to 40%. And you know what, if we believe that there are opportunities to return initial value to our shareholders, we will consider options such as this one. But, for now, I think we're -- we believe that our 40% dividend payout is, I think, is something that we believe is returning value to our shareholder.

Operator

Our next question comes from the line of Helane Becker with Cowen.

Helane R. Becker - Cowen and Company, LLC, Research Division

Just in Panama itself, are you starting to see an increase in competition in that market or an increase in capacity from other providers?

Pedro Heilbron

Not really. I mean, there are more flights coming in, some from Europe, which are good for us. They bring unique feet to our hub. And the other airlines are coming in, but nothing really material -- materially different to what we've seen in the past. We still have, I think, around 85% of capacity at the airport and I don't see that changing going forward. So I would say that we have strong competitors. Some are increasing their flying, but competition in our region, it's also very rational right now. I mean, what's going to happen in the future, I don't know, but right now it's rational and we haven't seen a material change from the past.

Helane R. Becker - Cowen and Company, LLC, Research Division

Okay. And then my other question is related to, actually, the fuel price and the fuel surcharges that you are sometimes charging in the revenue lines. So at what price would jet fuel have to go to, I guess, because we've seen an increase a little bit in the past week or two, for you to add a fuel surcharge to revenue, to the ticket price?

Jose Montero

You know what, I would say historically -- first of all, we've been passing -- we've been able to pass on fuel increases to our ticket prices over the last several years, and I wouldn't say that, that is different in this particular case. I think, historically, I think we've been passing most of the increases in fuel that we've had over the last 2 to 3 years to the ticket price without much issues.

Pedro Heilbron

And I would add that fuel has been -- last year was very stable and we are guiding to something similar for fuel prices this year. So we really have not faced, at least not in the last 12 months, and we -- well, one never knows what's going to happen in the future. But projections are that it won't be happening this year. We have not been facing an unstable racing fuel environment. So -- I mean it could happen, we'll consider it at the time.

Operator

[Operator Instructions] Our next question comes from the line of Thomas Kim with Goldman Sachs.

Thomas Kim - Goldman Sachs Group Inc., Research Division

I just wanted to ask, what percentage of your revenue is originating outside of Panama?

Pedro Heilbron

The exact number? It's about 90%.

Thomas Kim - Goldman Sachs Group Inc., Research Division

90%, okay.

Pedro Heilbron

Above 90%.

Thomas Kim - Goldman Sachs Group Inc., Research Division

And then what percent of that is vulnerable to FX volatility?

Pedro Heilbron

Okay, so what's in dollars and what's in foreign currency, do we have that here?

Jose Montero

Basically, I would say that, in terms of revenue, about 40% are dollar-denominated revenues. And then again to complement that, Tom, we really haven't seen yet an impact on foreign exchange on demand, at least for the months where we have visibility here in the first quarter. And so, therefore, we -- I really see an impact on FX, on our demand on the major countries where we operate.

Pedro Heilbron

And I should add that, obviously, what we sell in older currencies, it's priced in dollars. So it's adjusted at the current exchange rate for each currency in which we sell.

Thomas Kim - Goldman Sachs Group Inc., Research Division

And can you remind us what percentage of your OpEx is in dollar terms?

Jose Montero

About 52%.

Thomas Kim - Goldman Sachs Group Inc., Research Division

Okay, great. So the net exposure is still relatively limited. And then to what extent are you hedged for that sort of 10 -- let's just call it 10% sort of short dollar position?

Pedro Heilbron

We don't hedge foreign currency. And again, remember that we price in dollars, so it's different and over 97 -- around 97% of our capacity is in either dollars or dollar-denominated currency, I mean, market. It's international, it's not domestic, where you have a greater issue with currency devaluation. It's when you're flying domestic, and your expenses are in hard currency, in dollars. Because when you fly domestic, you cannot price in a different currency. But since over 97% of our capacity is international, we always price in dollars, even if we sell in foreign currencies.

Thomas Kim - Goldman Sachs Group Inc., Research Division

All right, that's very, very helpful. And then just moving onto Brazil. Can you give us an idea of how yields have been trending there? And then to what extent can you comment on your capacity plans surrounding the World Cup? If it's not too early to be commenting on that?

Jose Montero

Okay. So we haven't really seen an impact on yields in the Brazil market. And these, again, given the visibility that we have for the first quarter, we haven't seen an impact on yields or traffic in the Brazil markets. They're performing well, to our expectations. As far as the World Cup is concerned, it's a contained event in a high-season month. It's high season anyways -- I don't think it will necessarily add any significant capacity, specifically for the World Cup. We're taking advantage of the high season and maybe one or two flights for the season, but nothing material.

Operator

Our next question comes from the line of Pedro Balcão with Santander.

Pedro Balcão Reis - Santander, Equity Research

Two quick questions, really. The first one, sorry, again on Venezuela. How come the demand is not affected by such a massive depreciation? I mean you were using exchange rates of 6 30 until a couple of weeks ago and now you are using 11? How does that not affect the demand? And the second question is actually very similar to a previous one. Your guidance for the margin for 2014 is flat versus 2013, but during 2013, what we saw was margins continuously improving. So does this mean that I should expect margins up year-on-year on the first half of the year and down year-on-year on the second half of the year?

Pedro Heilbron

I will go second first. I think you should expect what we're guiding to and depends on how you see first quarter and second quarter. I think it will be easier to figure out the remaining quarters of the year. But right now, we're only guiding for end of the year results, so we'll have to wait for first quarter and second quarter to have a better idea of how the second half comes. But now we will review our guidance every quarter so if we need to make any adjustments, we will, but I believe the guidance -- we're guiding to 19% to 21% operating margins are top in our industry. So I would not expect that to change on the outside that much. Those are very strong margins. In terms of your first question...

Jose Montero

It was ...

Pedro Balcão Reis - Santander, Equity Research

It was how come there is no impact in demand in Venezuela?

Pedro Heilbron

I don't want -- maybe this is a Freudian slip, I don't want to answer more than I said, but I'll answer anything. I don't want to speculate the reasons behind it, there are many reasons, but I'm giving you the facts. The fact is that demand in Venezuela is very strong at 11 30. It's as strong as it was at 6 30, it made no difference. And -- kind of a fact of the market, which kind of tells you a little bit about the right exchange rates and capacity and many other factors. But that's just a factor of the market right now.

Operator

Our next question comes from the line of Stephen Trent with Citi.

Stephen Trent - Citigroup Inc, Research Division

3 very quick questions, if I may, and I didn't -- just to make sure I caught everything correctly. You mentioned a heavy maintenance facility this year, and you mentioned retrofitting 10 aircraft with Scimitar's winglets. I was wondering if you highlighted any numbers around that? And I apologize, I had some trouble connecting. If you could give me some color on that?

Jose Montero

Well, actually, the Scimitar Winglet should be able to give us, for the aircraft where we installed them, around 1.7% fuel savings versus the current baseline. And of course, we will start the Scimitar Winglet program with the 8 deliveries that we have for this year and also we retrofit approximately about 10 aircraft. But they'll be done throughout the year, so the impact would be put in on a paced basis throughout the year. The aircraft that have the Scimitar Winglet will probably be put into our longer-haul flights. It should give us an absolute increase in or decrease in our fuel consumption. So just to clarify, this 1.7% fuel savings is on top of our current blended winglet savings that we have in the fleet. And in terms of maintenance in Panama, we've started, as Pedro mentioned, a C check program in our maintenance facility here in Panama, and that should be able to continue next year. The one thing that I have to say, also related to maintenance, is that in 2014, there are some specific timing of engine events that offset somewhat similar maintenance savings that we have in -- given our C check programs. And it's a little bit of a blended type of effect there in 2014 with this.

Pedro Balcão Reis - Santander, Equity Research

Okay, very helpful, Jose. And certainly, I'm not one to beat a dead horse, but just super quickly on Venezuela. First, the cash that's there, does it accumulate interest at all or -- to your knowledge -- or it just -- we're still just talking nominal terms?

Jose Montero

Yes. So the cash in Venezuela, first of all, it's in our own bank accounts in Venezuela and it accumulates very little interest. I would argue it's essentially almost 0 interest.

Operator

I'm not showing any further questions at this time. I'd like to turn the conference back over to Pedro for closing remarks.

Pedro Heilbron

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

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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