Copa Holdings, S.A. (CPA)

TOP CONTRIBUTORS

Scott Myers

Tim Plaehn

Copa Holdings, S.A. (NYSE:CPA) is a Latin American airline with the brands Copa, an inernational airline based in Panama City, and AeroRepublica, a domestic airline in Colombia. The company continues to expand its capacity and, as of August 2008, has plans for 45 international destinations by the end of 2008. ^[1] Copa Holdings has avoided net income drops by increasing yield, or how much passengers pay per mile that they fly. ^[2]

Currency fluctuations also represent a risk for Copa Holdings. As of 2007, 69% of the company's expenses were incurred in US Dollars while only 40% of its revenues were in US Dollars, meaning the company benefits when the U.S. dollar is strong. The company's remaining revenues were denominated in Columbian Pesos or the many foreign currencies of the countries that it serves. ^[3] Fuel prices represent 32% of operating expenses for the company, which is only a 3% increase overall since 2005. This percentage increase has been minimal because the company's other operating expenses have increased proportionally to its increases in fuel expenses and because the company hedged, or purchased options to purchase fuel at a set cost, 29% of its fuel needs for 2007. ^[4] The Panama City based company has also benefited from the 4-8% GDP growth rates of various Latin American economies over the past three years.^[5]

Copa Holdings has historically had a very close relationship with Continental Airlines. Continental held 49% of Copa Airlines at the point of Copa's initial public offering in 2005. The companies have historically been able to market together, set prices together, offer codeshare flights, and Copa Holdings has benefited from Continental's advising and assistance in negotiations for better [fuel] agreements and in other administrative affairs; however, as Continental reduces its stake held in Copa Holdings, it is unclear what the future of the relationship between the airlines will be. ^[6]

Copa Airlines has been named Best Airline in Latin America for five years in a row by the independent research organization Skytrax. ^[7]

Corporate Overview

Copa Holdings operates primarily through the subsidiaries Copa and AeroRepublica. ^[8] Although the operating statistics are provided for each of the subsidiaries separately, it is important to note that because Copa operating revenues are 78% of all of the company's revenues, it constitutes the great majority of Copa Holding's business and its operating statistics are thus more important. ^[8]

Copa Holdings' revenues, operating income, and net income have all been increasing since 2005 although the relatively large increases in 2005 are due to the acquisition of the Columbian domestic air carrier AirRepublica in that year. ^[9] In 2007, $149m (93%) of net income came from Copa Holdings and $12m (7%) from AeroRepublica. ^[10]

Copa 2007 Revenue by Subsidiary ^[8]

Copa 2007 Net Income by Subsidiary ^[10]

Copa Airlines

Copa offers approximately 125 daily scheduled flights between Panama City and over 40 destinations throughout North, Central, and South America and 120 other destinations through codeshare agreements with Continental. ^[8] Copa is expanding the number of cities served to 45 by the end of 2008. ^[1] The airline operated 26 Boeing 737, 18 Embraer 190 aircraft, and six MD-80 airplanes with an average age of 3.7 years as of the end of 2007. The airline’s marketing agreements with Continental ends in 2015.^[8] From its hub in Panama City, Copa flies directly to all of the airline's destinations, which creates connections between North, Central and South America. This hub did not have enough slots for Copa to rapidly increase its capacity as of 2007; however, is set to be expanded in 2008. ^[8] The 2008 expansion of the Panama City hub has allowed Copa to announce additional plans to expand its operations further. ^[11]

Copa Airlines has a load factor (percentage of its available seat miles that are filled with passengers) of approximately 78.4%, which is significantly higher than its break even load factor of 58.7%. Although its operating costs per available seat mile have increased, its yield has also increased to offset these increased costs.^[12]

AeroRepublica

Copa operates seven Embraer 190 and six MD-80s to 12 destinations in Colombia through the marketing name AeroRepública. ^[7] The airline is replacing all of its MD-80 aircraft with the more fuel efficient Embraer 190 aircraft. ^[13] This makes it the second largest domestic carrier in Colombia in terms of passengers carried after competitor Avianca. ^[8] The airline operates on a point-to-point system whereby flights go directly from the origin to the destination within Columbia. ^[8]

AeroRepublica has a load factor of 57.2%, approximately 20% less than the load factor of Copa, higher costs per available seat mile, and lower margins as seen in the difference between its break-even load factor and its load factor. ^[12] The load factor has also decreased almost 5% since 2005. ^[12]

Business Segments

In addition to breaking down its business into its two subsidiaries, Copa holdings also breaks down its revenues into two categories. In 2007, its passenger revenue category was $967.0m (94%) of total revenues while the [[cargo revenue|cargo[[, mail, and other segment was 6% of total revenues. ^[9] The company uses its extra cargo space to transport these goods and cargo; however, the company does not agressively pursue the latter segment. ^[9]

Copa 2007 Revenue by Segment ^[9]

Continental and Skyteam

Copa Holdings has historically had a very close relationship with Continental Airlines. Continental held 49% of Copa Airlines at the point of Copa's initial public offering in 2005; however, Continental has since liquidated its shares in Copa to 10% in order to have cash to compensate for its own losses. ^[14] The companies have historically been able to market together, set prices together, offer codeshare flights, and Copa Holdings has benefited from Continental's advising and assistance in negotiations for better fuel agreements and in other administrative affairs; however, as Continental reduces its stake held in Copa Holdings, it is unclear what the future of the relationship between the airlines will be. ^[6]

As a part of this alliance with Continental, Copa is also a participant in the SkyTeam alliance, a marketing group of airlines that lets customers to redeem frequent flier miles on other alliance members' flights.^[6] Being in the Skyteam has allowed Copa to share its frequent flier program along with major airlines around in the world including Delta, Air France-KLM, Aeroflot, and Aeromexico. Together, these airlines serve over 841 destinations, meaning that customers can collect and redeem frequent flier miles on any of the member airlines on all of these destination routes. ^[15] Although Copa does not report added revenues that it has received through the agreements made with the Skyteam, the airline reports that its agreements with Continental and the Skyeam have helped it increase sales. ^[6] By being in the Skyteam; however, Copa cannot be a part of any other airline marketing alliance. ^[15]

Key Trends and Forces

Regional economic growth spurs sales

Copa 2007 Revenues by Region^[16]

Copa Holdings reports that its earnings have had a historical correlation with the growth rates of disposable income within Latin American economies, where much of their revenues are derived. The economies of Latin American countries have consistently grown between 4-8% over the past three years. ^[5] Because 39% of the company's revenues originate in South America and 32% of its revenues in Central America, Copa Holdings is dependent upon the continued economic development of the region in order to continue the growth of passengers. ^[5] As Copa Holdings reports, if there were to be a severe economic downturn in the region, it would greatly decrease revenues. ^[5]

Fuel prices increase expenses

From the period of 2005 to 2007, crude fuel expenses were $265 million (29%), $218 million (31%), and $149 million (32%) respectively of operating expenses for Copa Holdings. ^[4] In response to rising fuel costs, Copa Holdings hedged 29% of its fuel needs for 2007, 14% of its fuel needs for 2008, and 3% of its projected fuel consumption for the first quarter of 2009 although the company does not state the price at which the fuel was hedged. Copa Holdings has been able to avoid waning margins on its flights by increasing yield as well. ^[2] The company also attempts to offset the increased cost of fuel through the use of higher load factors, fuel surcharges, and winglet-equipped planes. ^[4]

Exchange rate fluctuations increase dollar reported revenue risk

In 2007, approximately 69% of Copa's expenses and 40% of its revenues were denominated in U.S. dollars while the rest of its revenues and expenses are distributed among the currencies of the countries to which the company flies. ^[3] As a result of the acquisition of AeroRepública in April 2005, the company has an increased exposure to the Colombian Peso.^[3] Because more of Copa's expenses are in dollars than are its revenues, if the dollar increases in value against the Columbian Peso and the other currencies to which it is exposed, Copa's net income will decrease. ^[3]

Subsidiary Copa does not have any hedges in place to protect against currency fluctuations; however, subsidiary AeroRepublica does hedge to reduce risk of currency fluctuations between the U.S. Dollar and the Columbian Peso. ^[3]

Competitors

Copa 2007 Scheduled Flights (in RPM) by Destination ^[17]

Although there is no single airline or competitor which serves all of the routes that Copa does, it is possible to examine the competitors on a basis of region in which the flights take place. ^[17] Within Copa's largest market of domestic South American flights, Avianca (a Colombian airline) is its largest competitor. ^[18] In its second largest market, the North American market, the largest competitors in terms of market share in RPM are American Airlines and US Airways Group. ^[19] The company's largest competitors on its overall route network are as listed.

• Grupo TACA is an airline group based out of El Salvador in Latin America which competes in all of Copa's major destinations although it does not compete in the domestic Columbian network. ^[20]
• American Airlines (AMR) is based out of the United States and offers competition in the routes between Latin America and the United States as well as on the domestic US code share agreement flights that Copa operates with Continental. ^[19]
• Mexicana Airlines is an airline based out of Mexico City, Mexico. It offers competition on routes between Latin America and North and South America, but does not compete in the domestic Columbian market. ^[21]
• Avianca is a Columbian airline that offers domestic and international flights mainly from Columbia. ^[22]
• US Airways Group (LCC) is an American carrier that competes on both routes between the US and Latin America as well as US-South America and US domestic routes. ^{[23] [19]}

References

1. ↑ ^{1.0 1.1} Wall Street Journal, "Copa Holdings Reports Q2 Earnings," August 14, 2008
2. ↑ ^{2.0 2.1} Yahoo News, "Shares of Copa Holdings Jump," August 14, 2008
3. ↑ ^{3.0 3.1 3.2 3.3 3.4} 2008 CPA SEC Filings 20-F, Item 1, Pg. 12
4. ↑ ^{4.0 4.1 4.2} 2008 CPA SEC Filings 20-F, Item 4, Pg. 38
5. ↑ ^{5.0 5.1 5.2 5.3} 2008 CPA SEC Filings 20-F Item 5, Pg. 44
6. ↑ ^{6.0 6.1 6.2 6.3} 2008 CPA SEC Filings 20-F Item 4, Pg. 31
7. ↑ ^{7.0 7.1} MarketWatch, "Copa Airlines is Named Best Airline in Central America and the Caribbean by Skytrax", Sept. 8, 2008
8. ↑ ^{8.0 8.1 8.2 8.3 8.4 8.5 8.6 8.7} 2008 CPA SEC Filing 20-F Item 5, Pg. 43
9. ↑ ^{9.0 9.1 9.2 9.3 9.4 9.5} 2008 CPA SEC Filings 20-F Section 1, Pg. 1
10. ↑ ^{10.0 10.1} 2008 CPA SEC Filings Item 1, Pg. 2
11. ↑ Wall Street Journal, "Copa Airlines Announces Plans to Expand," August 6, 2008
12. ↑ ^{12.0 12.1 12.2 12.3 12.4} 2008 CPA SEC Filings Item 1, Pg. 3
13. ↑ New York Times, "Aero Republica Receives Embraer Aircraft," August 27, 2008
14. ↑ Cleveland Business "Continental expected to report loss Thursday," August 16, 2008
15. ↑ ^{15.0 15.1} About Skyteam
16. ↑ 2007 CPA SEC Filings 20-F Item 1, Pg. 29
17. ↑ ^{17.0 17.1} 2008 CPA SEC Filings F-20
18. ↑ IATA Membership
19. ↑ ^{19.0 19.1 19.2} 2008 CPA SEC Filings, Item 1, Pg. 15
20. ↑ Google Finance: Grupo Taca
21. ↑ Google Finance: Mexicana
22. ↑ Google Finance: Avianca
23. ↑ Google Finance: Ticker LCC