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Coverage Initiation: Copa Holdings
Copa Holdings (CPA) is a holding company whose primary asset is the sole ownership of Copa Airlines, a leading provider of airline passenger and cargo service in Latin America. It operates through two subsidiaries: Copa, based primarily out of a hub in the Republic of Panama; and Copa Colombia, which provides service mostly within that country. The company was established in 1947 and went public in December of 2005, listing on the NYSE. Copa currently operates a fleet of 66 aircraft, and offers more than 170 daily scheduled flights among 50 destinations in 25 countries in North, Central, and South America, as well as the Caribbean. Its primary competitors include AMR (AMR), Delta Air (DAL), SkyWest (SKYW), US Airways (LCC), United Continental (UAL), United Parcel Service (UPS), FedEx (FDX), DHL, and a number of regional competitors.
Copa derives around 94% of its revenues from the sale of airline tickets to passengers, with the rest coming from various cargo and ancillary services. The company utilizes a hub-and-spoke system – whereby substantially all flights operate through its main Hub of the Americas, located in Panama City – which allows for the transportation of passengers and cargo among a large number of destinations with service that is more frequent than if each route were served directly.
In 1998, Copa entered a strategic alliance with Continental Airlines, by which the two companies conduct joint marketing and code-sharing arrangements, and share a frequent flyer loyalty program. In 2010, Continental merged with United Airlines, further strengthening Copa’s international network. The agreement, in effect until 2015 (with the possibility for further extension), contributes to both companies’ brands as well as networks of flight offerings.
Copa’s operations are subject to some seasonal and cyclical volatility; traffic tends to peak in July and August, and again in December and January, in accordance with certain holidays, school vacations and cultural events. Despite these seasonal variations, Copa’s overall traffic pattern is relatively stable due to the constant influx of business travelers. On a larger scale, passenger demand relies on consumer discretionary spending levels, as economic conditions tend to inform consumers’ discretionary travel spending.
Looking at the cost structure, the company’s single largest operating expense (around 30% in 2010) is fuel. Due to the high degree of oil-price volatility, Copa (like many other airlines) engages in hedging practices designed to mitigate the effects of wide price swings. However, due to the imperfect nature of these practices, rarely are the effects fully offset. As a result, quarterly earnings are prone to fluctuations depending on both the price-action of oil and the particulars of the relevant hedging activity.
Copa’s finances are in decent shape. Long-term debt represents a relatively low percentage (44%) of total capital compared to industry peers. Moreover, it has solid cash flow, and an ample supply of working capital. Finally, the company’s dividend (which currently yields around 2.3%), is well covered.
Performance and Investment Prospects
In contrast to many of its competitors, Copa weathered the 2007-2009 recession quite well. Although the stock took a dive between 2007 and 2008, the company’s top and bottom lines decreased for just one year before resuming their upward path. Moreover, the company has remained profitable since inception.
A large part of Copa’s recent resilience can be attributed to the expansion of certain emerging Latin American markets. Thanks to rising incomes, and consequently, numerous new business opportunities, demand for both leisure and business travel has remained strong, and, indeed, continues to grow at a fast clip.
In anticipation of growth to come, Copa intends to considerably increase its flight capacity over the next several years; in all, it expects to take delivery of an additional seven aircraft by the end of 2011. Furthermore, it has firm orders, including purchase and lease commitments, to accept delivery of 46 additional aircraft through 2017 and has purchase rights and options that, if exercised, would allow it to accept delivery of up to 22 additional aircraft through 2018.
The current outlook for Copa is favorable. Solid demand trends have been reflected in continued growth of passenger traffic (as measured by revenue passenger miles) and a higher level of capacity utilization (as measured by the load factor). Consequently, both yield per passenger mile and revenue per available seat mile have shown solid gains.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.