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Copa Holdings SA (NYSE:CPA)

Q3 2012 Earnings Call

November 08, 2012 4:00 pm ET

Executives

Joseph Putaturo

Pedro Heilbron - Chief Executive Officer and Director

Victor Vial - Chief Financial Officer

Analysts

Michael Linenberg - Deutsche Bank AG, Research Division

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

Hunter K. Keay - Wolfe Trahan & Co.

Duane Pfennigwerth - Evercore Partners Inc., Research Division

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

Daniel Spilberg - Barclays Capital, Research Division

Stephen Trent - Citigroup Inc, Research Division

Augusto Ensiki - Morgan Stanley, Research Division

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Copa Holdings Third Quarter Earnings Call. [Operator Instructions] As a reminder, this call is being webcast and recorded on November 8, 2012. 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 third 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 third quarter highlights, followed by Victor, who will discuss our financial results. Immediately after, we'll open up the call for questions from analysts.

Copa Holdings' third quarter financial results have been prepared in accordance with IFRS. 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 third 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 afternoon, and thank you all for participating in our third quarter earnings call. Last night, we reported our third quarter results. And as always, I want to congratulate our team for another quarter of solid growth and financial results. Among the main highlights for the quarter, demand was strong as passenger traffic grew almost 24% on 27% capacity expansion. Passenger revenues kept pace, growing 25%. We did see a slight year-over-year decrease in unit revenues as a result of lower load factors, which were partly offset by higher yields.

Unit costs were up slightly, less than 1% year-on-year, but significantly lower quarter-over-quarter. As a result, operating margin came in at 19.3%, which once again, places us among the most profitable airlines in the industry.

In terms of fleet, for the quarter, we took delivery of 2 737-800 aircraft to end the quarter with 82 aircraft. As you can see, during the quarter, we saw strong capacity expansion, which was mostly as a result of new frequencies and destinations we added last June before the start of our high season. If you recall, we added 4 cities to our network in June: Las Vegas, our seventh destination in the U.S.; Recife, also our seventh city in Brazil; Liberia, serving the province of Guanacaste, our second destination in Costa Rica; and Curacao, our 15th Caribbean destination. We also continued increasing frequencies to important markets such as Lima, Medellin, Miami, Cancun, Guayaquil, Quito, San Juan and Cartagena and increased 2 daily service in several new markets such as Asunción, Brasília, Porto Alegre and Santa Cruz, Bolivia.

In addition, in July, we launched service to Iquitos, our second destination in Peru. So with these 5 new cities, our network now covers 64 destinations in 21 -- 29 countries, and the leadership of our hub continues to grow. Our network expansion will resume in December, when we will be adding frequencies to several important markets, including a fifth daily flight to Cancun, a fourth daily to São Paulo, a third daily to LA, a second daily to Santa Cruz, Bolivia, as well as seasonal frequencies to several other markets. As you know, our transition from 4 to 6 connecting banks last year required growth at above-average rates during 2011 and 2012 to bolster connectivity within these expanded banks.

Despite this accelerated growth, our business model has been able to sustain industry-leading margins while maintaining a very strong balance sheet. Having successfully concluded this transition, in 2013, we will be growing around 14%, which is more in line with our yearly growth in the 3 years prior to implementing the sixth bank hub. And this capacity expansion will be more geared to our frequencies rather than new destinations.

With regard to our current business environment, and as you can see by our recently released October traffic figures, demand for our services continues to be strong and is keeping track with our capacity expansion. Additionally, we still see healthy trends in forward bookings for the quarter, which would allow us to achieve our unit revenue guidance for the year.

We also expect to have lower year-over-year x fuel unit cost in the fourth quarter, which also gives us confidence we can reach our full year unit cost and operating margin guidance. Victor will provide more detail on our preliminary guidance for 2013, but directionally, solid but more moderate growth in 2013 in terms of overall capacity and fewer new destinations should be positive for unit revenues as we give some opportunity for the 14 new destinations we have added in the last 18 months to mature, even more so when we consider that around 70% of next year's capacity growth will result from the full year effect of capacity that is being added this year.

In terms of fleet, next year, we will take delivery of 7 aircraft, all 737-800s, and plan to end the year with a consolidated fleet of 90 aircraft.

Now looking at the macroeconomic environment, the outlook for our region and for Panama in particular still remains very positive. In general terms, Latin American economies continue to grow and show resilience in the face of some global economic uncertainty. The IMS now expects the region to grow 3.2% in 2012, slightly below its previous forecast. However, several countries in which we operate are projected to grow above this average, including Bolivia, Colombia, Costa Rica, Chile, The Dominican Republic, Ecuador, Mexico, Peru, Uruguay and Panama. Furthermore, recent forecasts expect the region to grow faster in 2013, closer to 4%, mainly as a result of a faster-growing Brazilian economy.

I'm also pleased to say that Panama's economy is doing quite well. During the first semester, our economy grew 10.6% and is on track to lead the region for its second year in a row, led by robust activity in sectors such as transportation, logistics, communications, construction, commerce and tourism and also supported by large capital investment projects, which include the expansion of the Panama Canal and the construction of a metro system. There's no doubt that a continued prosperity of Panama and its consolidation as a regional business and logistics hub will provide us significant growth opportunities for years to come.

Continuing with the government investment agenda, they recently awarded 2 important contracts, which should be positive for our country. First, the contract to build a modern convention center with a capacity for 20,000 people, which seeks to place Panama as a prominent location for regional conferences and conventions. This convention center will be located on the Pacific side of the Panama Canal, near the soon-to-be inaugurated biodiversity museum, which was designed by the famous architect Frank Gehry. Second, but more important, was the contract awards for the construction of the Tocumen South Terminal. The project will add another 20 jet bridges, a new control tower, more taxiways and a 4-lane independent access road. This expansion, which should be completed in the next 4 years, will make Tocumen Airport one of the largest regional airports in terms of jet bridges, ensuring that our hub has the necessary infrastructure to accommodate our future needs.

So there seems to be a convergence between this and previous government's visions of the country as a regional logistics and business hub and our company's growth plan and infrastructure needs. Without a doubt, our network and its connectivity is one of Panama's unique competitive advantages in an increasingly integrated region.

So to summarize, the fundamentals of our business model are very strong. We operate in growing and mostly underserved markets, where in most cases, point-to-point service is not an option and markets can only be served efficiently through a hub. Our Panama airport has the best geographic location and infrastructure to serve the entire Latin American market and accommodate our future growth. The scope and convenience of our network with far more destinations and frequencies continues to make us the best option for travel in the region. We're benefiting from favorable demographic trends and regional integration that will drive growth for the foreseeable future. We continue to implement the necessary initiatives to improve our passengers' experience while maintaining very competitive costs. And most importantly, we have a very committed and dedicated team who, day in and day out, win the preference of our passengers through world-class operational performance and customer service. With that said, we feel confident of the opportunities ahead and our ability to continue delivering industry-leading results.

Thank you. Now I will turn it over to Victor, who will go over our third quarter results.

Victor Vial

Thank you, Pedro, and good afternoon, everyone. Thanks, again, for joining us. First, congratulations again to the whole team for another strong quarter. And as always, thanks for the hard work.

Last night, we reported yet another quarter of solid results as reported net income for the third quarter came in at $112 million or EPS of $2.52 compared to last year's reported net income of $70.3 million or EPS of $1.59. Excluding a fuel hedge mark-to-market gain of $14.3 million, underlying net income for the quarter remained at $97.5 million compared to last year's third quarter underlying net income of $90.2 million, which excludes a fuel hedge mark-to-market loss of $19.8 million.

With respect to traffic, revenue passenger miles increased 24% year-over-year, driving the load factor for the quarter to 75.4%, a 1.7 percentage-point drop, as expected compared to last year's third quarter load factor. On the other hand, yields increased 1.1% year-over-year, while length of haul adjusted yields increased almost 3% as our average length of haul increased 2.7%.

In terms of unit revenues, RASM decreased 1.7% year-over-year. However, on a length of haul adjusted basis, RASM came in virtually flat. Operating revenues for the quarter totaled $590 million for a 25% year-over-year increase on 27% capacity growth. A solid revenue performance, especially when considering that during the past 2 years alone, we have expanded our haul from 50 destinations to 64 and have increased frequencies to more than 30 cities.

On the expense side for the quarter, operating expenses increased 27% year-over-year, in line with capacity. And as a result, our cost per available seat mile came in flat year-over-year at $0.109. Ex-fuel CASM also came in flat year-over-year at $0.066 as unit cost improvements in labor landing fees, depreciation and distribution were mainly offset by unit cost increases in passenger service and maintenance and rentals.

Moving on to operating earnings, consolidated operating earnings for the quarter came in at $114 million or a 15% year-over-year increase, resulting in an operating margin of 19.3% compared to last year's third quarter operating margin of 20.9%.

In terms of non-operating income and expense, third quarter results reflect a net non-operating gain of approximately $8.9 million, consisting mainly of a net interest expense of $4.9 million and a $13.8 million gain in the other net line related mostly to the gain in fuel hedge mark-to-market. As far as fuel hedging is concerned, we currently have coverage for 30% of our projected volume for the year using crude oil swaps at an average price of $88 a barrel. For next year, 24% at an average of $89, and for 2014, another 10% at an average price of $88 a barrel.

With respect to our balance sheet, we continue to strengthen it as assets increased within the year through September approximately $385 million to reach $3.5 billion. Cash and cash equivalents increased year to date by more than $180 million to a total of $796 million, which represented 37% of last 12-months' revenues. Owners' equity totaled approximately $1.5 billion, and total debt amounted to $1.2 billion, with the company's debt-to-equity ratio reaching a very solid 0.8x at the end of the quarter.

Regarding our fleet during the third quarter, we took delivery of an additional 2 new 737-800s to end the quarter with a fleet of 82 aircraft, 38 737-800s, 18 700s and 26 E-190s. In terms of future deliveries in the fourth quarter, we will be receiving 2 737-800s, and we'll be returning a leased 800 to end the year with a fleet of 83 aircraft.

So to recap, demand for air travel in our region remains strong. We have another quarter of strong growth and outstanding results. We continue to strengthen our hub with more frequencies and destinations, and we're once again looking at another year of strong earnings.

In terms of our guidance for 2012, given our year-to-date performance and our outlook for air travel in the markets we serve, we are adjusting our guidance for the year as follows: ASM year-over-year growth of 24% compared to our previous guidance of 23%. We're maintaining our full year load factor guidance of 75%. We're also maintaining our RASM guidance at approximately $0.136. CASM x fuel also remains unchanged at plus or minus $0.067. With respect to fuel, we're now assuming for the year an expected price per gallon including into-plane and net of hedges of approximately $3.23 compared to $3.20 per gallon in our previous guidance. And with respect to operating margin, we're narrowing our guidance to approximately 19% compared to our previous guidance of 18% to 20%.

In addition, today, we're also providing preliminary guidance for next year, 2013, based on our operational plan and demand outlook for the year. As such, we expect another year of solid growth as ASMs are expected to come in 14% higher than last year. Load factor is expected in the range of 76%. RASM is estimated to remain slightly higher at plus or minus $0.137. We expect to continue reducing our unit cost with CASM x fuel expected to come in at plus or minus $0.066. With respect to fuel, we're assuming for the year an expected price per gallon including into-plane and net of hedges of approximately $3.30. And with respect to our operating margin, we expect it to remain between 18% and 20%.

Thank you. And with that, 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] Our first question is from Mike Linenberg of Deutsche Bank.

Michael Linenberg - Deutsche Bank AG, Research Division

I guess 2 questions. One, as you add all of the additional frequency in key markets like 3x to LAX and 4x to São Paulo. I think you mentioned 5x to Cancun. What is -- what are you seeing with respect to the mix of connect versus local? You would think that your connect mix has to be going up. And I know it has been constant for some time, but from 4 to 6, going from 4 to 6 banks, you would think that you would really start to see a lot more connecting traffic. And I'm not saying that, that's a bad or anything, but I'm curious on how those numbers have evolved of late.

Pedro Heilbron

Mike, this is Pedro. Well, first of all, we are obviously adding capacity where we have the highest load factor, where there is need for that capacity. And what we have seen over the past 5 years is that the mix has actually tilted towards more a Panama-based traffic. These are originating in Panama or ending the trip in Panama, so having Panama as a destination. Overall, we don't see that mix changing that much. Today, the mix is around 48% that has Panama as origin or destination. And the other 52% either connects or flies between other cities. And we don't see big changes there.

Michael Linenberg - Deutsche Bank AG, Research Division

Okay. And then just my second question, and I'm sure others are probably going to ask this. But when you reported your results and when we saw that cash position and a percent of revenue, it has to be -- you're almost at 40%. It's got to be one of the highest among any carrier out there. In the U.S., what we're seeing are some companies in advance or in anticipation of dividend tax rates potentially going up. We are hearing of companies potentially doing a special dividend before year end. What are your thoughts -- I mean, you've been very good about dividend payouts and increasing the payout over the years. I think it's been at least 2, if not -- maybe even 3x since you've raised it since you've gone public. What are the feelings with respect to a special dividend? And then thoughts about a share repurchase? Because you are sitting on a lot of cash, and I feel like with next year's capacity growth slowing a bit, I feel like you're going to have a little bit more capital that will be freed up rather than being deployed to a larger CapEx program. Your thoughts on that?

Victor Vial

Okay, this is Victor, Mike. Yes, obviously, with the kind of performance we've been seeing from the company in recent years, the cash position of the company is really strong. 59% of last 12 months' revenue is a very strong cash position. I would say yes, you're right in the sense that we have revised our dividend policy in the past. So I think that shows the market shareholders that we're not hesitant to review and adjust according to the situation. Our dividend policy used to be 10% of net income. We raised that to 20%, and now it's 30% of net income. So yes, we'll look at it. We haven't made a decision vis-à-vis a dividend increase or a special dividend. But it's something that we're quite aware of, and obviously, we're reviewing. And then you mentioned stock buyback. All options are on the table, Mike. So that is a possibility. We haven't made a decision on that yet, but it is an option that is still on the table.

Operator

Our next question is from Jim Parker of Raymond James.

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

Just Victor or Pedro, you're forecasting oil next year at $3.30, I believe. And I'm curious, if oil is, say, $3.10, if you would expect unit revenue to be -- rather than being up slightly, it might be down. Can you comment on how lower oil might impact your unit revenue?

Victor Vial

Well, and that's a good question because we have in the past -- this is Victor by the way, Jim. Yes, we're assuming $3.30 for next year. And we have been, in the past, very close correlation between oil prices and our fares, our yields. So sure, if oil prices come down, we would expect unit revenues to come down some if that correlation holds. And in fact, that we've seen it to be almost 1:1. That is a possibility. I would just add to that, that we continue to see a lot of demand in the markets we serve, and the economies where we operate continue to grow at a nice pace. So despite that, we might be able to squeeze out a high yield. But yes, the fuel prices come down, fuel surcharges come down, there might be a lower unit revenue.

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

Okay. A question for Pedro. This is on Canal employment. And can you talk about the trend? Are we in the expansion of the Canal and all the people that have been hired? And what is the outlook as the Canal expansion is completed? When will it be completed? And what do you think is going to happen to those employees once that rather large project is finished?

Pedro Heilbron

Right. Well, yes, Panama today has, for all practical purposes, full employment, very, very low unemployment rate, the Canal expansion being one of the projects that's driving it. It's supposed be finished by the end of 2014, although what's being rumored lately, that's going to be more like 2015, like first half of 2015. So we still have another 2 full years of major Canal work. And there's also a number of other projects and both public and private investments that are going to continue to drive employment in Panama for years to come. So actually, probably a slight slowdown of the demand, of the employment demand in Panama, will not be a totally bad thing because there's a -- companies have a hard time finding a laborer right now. So we're not really worried about what's going to happen when the Canal expansion work starts slowing down.

Operator

Our next question comes from Hunter Keay of Wolfe Trahan.

Hunter K. Keay - Wolfe Trahan & Co.

So when you signed the distribution agreement with Sabre a couple of months ago, there was a line in there about how it should improve your ability to merchandise or merchandising. And I'm curious, every airline has their own definition of merchandising, and I'm wondering what you mean by that specifically. Are we talking about maybe some ancillary revenue initiatives? Or just broadly, how are you thinking about that in context with the new agreement with Sabre?

Pedro Heilbron

Yes, it's flexibility we get from the new agreement. But it's not that we have plans to change our business model in any significant way. So I don't think it's going to be really material to our performance in 2013. It just gives us certain flexibility with ancillary revenues and initiatives that we do not do today but we could implement tomorrow. So we don't want to say what we may or may not do because we haven't really announced publicly anything. It gives us flexibility. But again, it's not going to be materially different to what we do today.

Hunter K. Keay - Wolfe Trahan & Co.

Okay. Yes. I guess -- well, it's actually -- let's move on to a different topic. Curious to know if you're going to have any, maybe, growth or network opportunities stemming from any changes to the United pilot contract. I know it's early and nothing has been ratified yet up there, but specifically as it relates to any kind of changes that you're expecting in their scope provisions. Would this -- do you think this might open the door if, in fact, they do relax their scope at a broader level after the merger and this can potentially open the door to a broader degree of cooperation between you guys?

Pedro Heilbron

No, we see no relationship there, no impact on how we conduct our business, so no.

Operator

Our next question comes from Duane Pfennigwerth of Evercore Partners.

Duane Pfennigwerth - Evercore Partners Inc., Research Division

I'm wondering if you could comment on any regional strength in the third quarter or maybe a rebound regionally that you saw versus the second quarter. And maybe if you could comment specifically on what you're seeing in Brazil.

Victor Vial

Duane, this is Victor. Well, as you know, the third quarter is our high season. So when you compare it to the second quarter, obviously you're going to see a lot more demand in the third quarter versus the second quarter. And I think it's evident in the results that we reported. In terms of yields, they weren't that different from what we saw in the second quarter. We came in at $0.173 on a year-over-year basis. That's 1.1% higher and slightly higher than what we saw in the second quarter. But I think the main impact that we saw in the third quarter is really a seasonal impact, the high season kicking in and the robust demand environment obviously resulting in a very good performance of the company because of sales.

Duane Pfennigwerth - Evercore Partners Inc., Research Division

I guess excluding seasonal impacts, were there any regions that sort of felt stronger to you that maybe felt a bit weaker excluding seasonality?

Victor Vial

Not really, no. We didn't see anything worth mentioning. Besides the seasonal effect, it was pretty much partly because of what we've seen in previous quarters.

Duane Pfennigwerth - Evercore Partners Inc., Research Division

Okay. And then just a cost question. Just looking at your wages line, how do you grow that slower than departure growth with inflation running mid-single digits in Panama? It looks like your CASM, your labor CASM, was down about 8% year-to-year. Is there a currency dynamic there x Panama? How do we think about that?

Pedro Heilbron

I mean, we get affected by inflation and by rising costs of labor in Panama and other countries. But we keep our overhead as tight as possible. So as we grow capacity the way we've been growing over the past few years and overhead is kept, again, as tight as possible, we get a labor CASM advantage. So we're growing operationally as much as we have. We have the effect of inflation that Victor mentioned, but we have a good value on the overhead -- on the overhead side.

Operator

[Operator Instructions] Our next question is from Renato Stollberger [ph] of Goldman Sachs.

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

This is actually Eduardo. I have 2 questions. The first one on capacity, just trying to understand a little bit better the 14% growth for next year. Can you guys tell how much of this growth would come from carryover of this year, how much is additional frequencies and how much is new destinations that you guys should launch next year? Just if you could give more color in the 14% growth.

Victor Vial

Sure. Eduardo, this is Victor. Yes, 14% ASM growth next year, about 70%, 7-0 percent, of the growth is basically a carryover, the full year effect of what we did in 2012. In terms of frequencies, around 10% of the growth is due to frequencies. And then the remainder is split between gauge of aircraft, bringing more 737-800s to our fleet, and new destinations, which as you know, we're advertising more frequencies next year than new destinations that we have as opposed to what we have done in the past couple of years.

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

And how many aircraft are you adding next year, Victor?

Victor Vial

We're adding 7 aircraft to our fleet next year. So we're closing this year with 83 aircraft, and then we're closing next year with 90 aircraft.

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

Okay. And just another question regarding more short-term outlook. The numbers for October were quite strong, the fuel prices are coming down. So can we expect probably a very strong fourth quarter '12 and also a strong first quarter next year? Or are you guys seeing something different?

Victor Vial

Sure, you can expect that. That's what I put in my guidance.

Operator

Our next question is from Daniel Spilberg of Barclays.

Daniel Spilberg - Barclays Capital, Research Division

We are seeing that GOL recently launched some routes from Brazil to the U.S., stopping in either Venezuela or Santo Domingo. So my question is whether you identified any source of competitive concerns from competing hubs in the region. Or in other words, what are your thoughts in using either Caracas or Santo Domingo as a hub to replicate the hub-and-spoke model to connecting to Americas.

Pedro Heilbron

Okay. Well, concerns, I mean, we deal with competition every day from strong consolidated airlines. And so that's not anything new, including airlines that fly nonstop to some of the markets that you mentioned. So we always are aware of that, and we always take action as needed. But I would say that is not a concern out of the ordinary. The service they have announced is not materially significant when we look at the size of the market that we're talking about. And I don't know, building a hub in Santo Domingo is very different to what they have announced so far, which -- what they have announced so far is crisscrossing a 737, which is something very different.

Daniel Spilberg - Barclays Capital, Research Division

Okay. And then Caracas, your thoughts?

Pedro Heilbron

Yes, kind of the same opinion. And you mean, the GOL flight from Caracas up north, right?

Daniel Spilberg - Barclays Capital, Research Division

Yes, the GOL flight or whether that hub could be a competing hub or what would it need to take for that to happen.

Pedro Heilbron

Right. It's very -- it's a very large market. It's actually underserved right now. And routes are not easy to come by. Infrastructure is limited. So we don't see much changing in that market in the foreseeable future.

Operator

Our next question is from Pedro Balcão from Santander.

Unknown Analyst

[indiscernible] from Santander. It's really a follow-up. I mean, regarding your 2013 guidance and considering that, as you said, 70% of the 14% growth target for capacity for 2013 is just carryover, would you say that the 14% is actually a minimum level? Or is it really your central-case scenario?

Victor Vial

14% ASM growth, is it a minimum level or is there upside in more capacity? Is that your question?

Unknown Analyst

My question is, if the 14% can be considered a minimum level. Or is it your central-case scenario? I mean, my question is, what is the upside for that 14% growth target?

Victor Vial

No, no, that's the base scenario. That's not a minimum. If there is an upside, it will be not material. We have our fifth planning place, our operational planning place, and don't expect to see anything much different from 14. Maybe 15, but that will be as high as it can get. So that is a base case, and we have an operational plan to back it.

Operator

Our next question is from Stephen Trent of Citi.

Stephen Trent - Citigroup Inc, Research Division

Most of my questions have been answered, but just one more. You mentioned the next phase of Tocumen Airport expansion, I believe the south wing where, if I caught you correctly, 22 new jet bridges. Could you just refresh my memory as to how we should think about how those jet bridges are allocated?

Pedro Heilbron

Yes, Stephen, this is Pedro. Today, we have 34 jet bridges. The new South Terminal is going to add another 20. So it's new immigration, customs, ticket -- check-in counters, et cetera. So it's going to be more than just 20 gates. But it's going to take the airport to 54 gates. And the way it works is that it's basically first come, first served. No one owns the gate. The airport is operated by a government-owned corporation. And obviously, we are -- today, we're 85% of the passenger movement. And by the time the South Terminal is inaugurated, we'll be probably around 90%. And it's first come, first served. So no one is really restricted from gaining access to a gate or a slot unless it's at a peak period where they're all taken by airlines that were there before. And this expansion is being built because of our growth plans, because we need it. So we'll take up most of it, if not all.

Operator

Our next question comes from Augusto Ensiki of Morgan Stanley.

Augusto Ensiki - Morgan Stanley, Research Division

Two quick questions. Firstly, on the capacity growth for next year, is it right to assume then that the current trend, the 20-plus percent, passenger growth will continue early on in the year and then slowing throughout the year? And then secondly, if you could give us some more detail on your hedges, if you could give us the average strike prices per period.

Victor Vial

Yes, this is Victor. If you look at the ASM growth for next year on a quarter-by-quarter basis, the first couple of quarters versus previous years are at around 18% to 19% growth rate. And then when you go into the second half of the year, you're looking more at a 10% or so growth rate year-over-year for each one of the quarters. So yes, it is low in the second half than the first half. In terms of the hedges, as I mentioned, we have hedges already in 2013 to the tune of 24%, and that's at a price range averaging around $88 to $89 a barrel. And then we already have hedges also for the following year, for 2014, at roughly 10% of our volume at around $86 per barrel.

Augusto Ensiki - Morgan Stanley, Research Division

Sorry, $86?

Victor Vial

That was $86, yes.

Operator

I'm showing no further questions at this time. I would now like to turn the conference back over to Pedro Heilbron for closing remarks.

Pedro Heilbron

Okay. Thank you all. This concludes our third quarter earnings call. Thank you for being with us, and thank you for the continued support. We will see you next time. Have a great time.

Operator

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

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