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COPA. An airline that makes money!

15-May-2009

In an industry where sustainability is seen as a phantom, some of Latin America's airlines, a small but growing sector of the aviation marketplace, are unexpected bright spots. And many of the assumptions previously made about those airlines need revision. Panama's COPA is one such case, a profitable and expanding partner of Continental Airlines. With Continental about to move from SkyTeam to Star Alliance, COPA hopes to maintain its profitable path.

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Latin America reemerges with some big changes

The postwar history of global aviation has been heavily focused on the US and Europe. Those two regions have had an inordinate share of the money and technology required to build and operate large civil aircraft fleets. More recently, within the past decade, the Asia Pacific region has moved into the club and is projected to soon become the largest aviation market on the globe.

Despite the dominance of these three areas, ICAO and most other international organizations divide the globe into six regions with the remaining three being the Middle East, Africa and Latin America. Cumulatively these regions currently account for less than 15% of the world's aviation activity and hence often receive little attention outside their own borders. The Middle East markets, and particularly the powerful carriers in the Gulf, have grabbed headlines of late, as these airlines threaten to transform the marketplace with huge capacity infusions, especially on the Europe/Asia sector.

Meanwhile Africa and Latin America quietly motor along. Both regions have had unsettled political, social and economic histories. They also have traditionally had less of the world's wealth while simultaneously having to cope with complex geographies and colonial histories. The regions' airlines have shared in that turbulence. The focus for now will be Latin America, where some remarkable changes are occurring.

Latin American airlines emerging from anonymity

The region possesses some stars like the LAN group, and Brazil's TAM and GOL. But, unlike perhaps Europe or Asia, even most aviation professionals would be hard pressed to come up with a definitive list of Latin America's airlines or to provide much detail as to their specifics.

Some of those players have little recognition outside their home markets and many operate very old aircraft. In Bolivia, it is still possible to fly on a B727 with AeroSur and most of Venezuela's airlines have fleets with an average age of over 30 years.

And some capital cities are hardly plugged into the mainstream. Going pretty much anywhere from Ecuador's capital, Quito, involves stops and connections. Brasilia, the capital of booming Brazil, has only two daily flights beyond Brazil's borders - a TAP service to Lisbon and a TAM flight to Buenos Aires.

This general anonymity outside the region, however, masks some extraordinary carriers that are not only profitable, but stunningly so.

One such example is Panama's COPA. Based at Panama City's Tocumen Airport, the carrier flies to 45 destinations in 24 countries and has shown a steady but measured expansion over time. It has close ties to Continental and its holding company also owns and operates AeroRepública, Colombia's second largest airline.

This steady - and profitable - development is displayed in Chart 1, which tracks the airline's development over the past five years and includes the very recently released 2008 results.

Throughout the period the carrier has maintained a very respectable positive spread between its break-even load factor and its actual load factor. Average passenger fares, as well as passenger revenue per ASM have also shown steady increases. It is also clear that the 2004-2005 period was one of considerable growth, as both the number of aircraft and the daily departures showed major increases.

Most noteworthy, however, are COPA's consistently strong operating margins, enviable in most industries, but extraordinarily rare amongst airlines. These are consistently around 20%, even as the carrier has trebled its number of departures over the past five years.

Chart 1: COPA expansion and operating margins 2004-08

 

2004

2005

2006

2007

2008

Average daily aircraft utilization

9.3

9.8

9.8

9.6

9.6

Average passenger fare (USD)

156.3

129.2

139.2

160.8

187.7

Yield (US cents/mile)

14.31

14.74

15.92

16.5

18.12

Passenger revenue per ASM

10.02

10.51

11.64

12.21

13.76

Operating revenue per ASM

10.99

11.36

12.4

12.97

14.57

Load factor

70.00%

71.40%

73.10%

74.00%

75.90%

Break-even load factor

52.60%

57.90%

58.00%

58.60%

67.10%

Departures

27,434

48,934

65,471

71,893

79,664

Average daily departures

75

156.6

179.4

197

217.7

Average number of aircraft

20.6

31

38.6

45

52

Airports served at period end

29

36

42

46

51

Net income

68,572

82,999

133,839

161,820

118,659

Operating margin

20.60%

17.90%

19.50%

19.20%

17.40%

Of the two component parts of the holding company, COPA is by far the dominant carrier and the greater money-maker. It also posts better on-time operational statistics.

AeroRepública operates a fleet of E190s configured with 106 seats - as well as two almost-gone MD80s. This is a small offering when compared to the far greater frequency and larger aircraft represented in Avianca's schedules. What it provides, however, is access to Colombia's population of 45+ million and creates a viable alternative in that market, both domestically and over longer stretches, with a Panama connection.

For instance, the passenger from Cali, Colombia to Buenos Aires has a morning or evening flight option via Panama, as opposed to a single evening connection on Avianca over Bogota (OAG). The same pattern is true if headed for Sao Paulo, and Rio can be reached with a single connection via Tocumen, while Avianca presents only a double connection at Bogota and Sao Paulo.

Chart 2: COPA and AeroRepública operating comparisons

COPA:

2004

2005

2006

2007

2008

Available seat miles

3639

4409

5239

6298

7342

Load factor

70.0%

73.4%

77.8%

78.4%

78.8%

Break-even load factor

52.6%

56.8%

56.1%

58.7%

67.2%

Yield

14.31

14.41

15.49

15.33

16.81

Average stage length

1047

1123

1158

1207

1216

On time performance

91.80%

91.70%

91.00%

86.90%

87.50%

AeroRepública

Available seat miles

na

950

1627

1620

1503

Load factor

na

62.0%

57.9%

57.2%

61.7%

Break even load factor

na

60.7%

61.9%

54.1%

62.0%

Yield

na

16.53

17.79

22.74

26.31

Average stage length

na

360

370

398

421

On time performance

na

70.40%

80.30%

72.80%

84.20%

Nearly 80% of the carrier's revenues derive from South and Central America, with a diminishing proportion of operations actually touching on North America - where its Continental links are increasingly useful. Chart 3 provides ample evidence of COPA's primary market.

Chart 3: COPA revenue by region, CY2006-08

Region

2006

2007

2008

North America

19.40%

18.90%

14.40%

South America

41.50%

46.10%

55.40%

Central America

29.00%

26.20%

23.70%

Caribbean

10.10%

8.80%

6.60%

Evidence of these trends is further reinforced in the proportions of revenues and expenses by currency, shown in Chart 4. The US dollar is the de facto currency of Panama and consequently both the revenue and expense figures are highest for that currency. Next, with almost 20% of the revenue, is Colombia, a reflection of the business drawn from that market by AeroRepública.

And the weakness of the unstable Venezuelan aviation sector is clearly demonstrated by the considerable revenue generated (relative to expenses) in that nation; served from both Panama (COPA) and Colombia (AeroRepública).

Chart 4: Revenues/expenses by currency

Currency

Revenue

Expense

Argentinean Peso

6.40%

2.50%

Brazilian Real

7.10%

4.40%

Chilean Peso

3.20%

1.50%

Colombian Peso

19.50%

11.70%

Costa Rican Colon

2.70%

1.40%

Mexican Peso

3.30%

1.80%

U.S. Dollar

40.90%

69.70%

Venezuelan Bolivar

8.80%

3.00%

Other(1)

8.10%

3.90%

Even in difficult times, the airline remains profitable, as its results for Q109 illustrate. The adjusted net income for the first quarter of this troubled year is USD55.4 million, up 47% from the corresponding period in 2008, but down 15% from the preceding quarter (Q408), which posted a figure of USD65.2 million.

The financials present a company that is well established as a player in much of the region, providing a viable and desirable product for passengers. How much is this due to the successful model and how much to the competitive environment? A fair mix of each, apparently.

Maintaining higher yields

The yield and margins that COPA generates are noteworthy indeed. The question now is just how their fares compare to other carriers in the region with which they compete.

In its own region, COPA's primary hub competition is Colombia's Avianca, Panama's immediate southern neighbor. Avianca has a similar geographic advantage; straddling North and South American air routes, it operates an extensive network across North/Central/South America and the Caribbean; serving Europe as well. Consequently, the two carriers often find themselves vying for the same connecting traffic. Unlike COPA, Avianca is not linked to an alliance or closely tied to any other carrier in the way that COPA and Continental cooperate.

Online research was done in early May to compare fares on selected routes, for travel June 1 outbound with a June 8 return. In each case the lowest possible combination was used. In most cases the costs of available flight options were similarly priced - but on a few occasions the choice of a different flight would have significantly increased the total. Findings are recorded in Chart 5.

Miami-Panama City

On the Miami route - always a primary sector when dealing with Latin America, COPA (CM) was slightly more expensive. But it also provides meals at mealtimes, which American (AA) does not, so that there is some service differentiation.

However, the low price winner was Spirit (NK), operating from nearby Fort Lauderdale. The LCC's cost for the round trip was $140 - a per-mile cost half that of COPA. Presently, Spirit operates only three flights per week, necessitating a day's delay on the return. But with its rock-bottom pricing, Spirit is doubtless a contender for passenger hearts, minds and especially, wallets.

San Jose-Buenos Aires

Passengers traveling between San Jose, Costa Rica and Buenos Aires must connect somewhere, even though there is a through-numbered (change in Lima) option. For the dates chosen, COPA's fare is about 25% higher than that of Avianca (AV) as COPA's lowest fare category was unavailable. It must also be noted that the Avianca option included code-share flights between San Jose and Bogota.

Panama City-Bogota: remove competition and the price goes (way) up
Next I looked at fares between Panama City and Bogota. The results, which were for an advance purchase fare for a distance of less than 500 miles, were unexpected. Both fares hovered near $600 and provided yields double the lowest advance purchase Business Class fares between New York and London ($.033/mile) that we reviewed last month. Apparently, in the absence of other competition, the passenger pays dearly, helping cross-subsidise the transfer travelers no doubt.

Chart 5: Selected Fare/Yield Comparisons by route

Routing

mileage

carrier

fare

cost/mile

MIA/PTY

1163

AA

243

0.10

MIA/PTY

1163

CM

289

0.12

FLL/PTY#

1181

NK

140

0.06

SJO/BUE*

3504

CM

1275

0.18

SJO/BUE^

3504

AV

1000

0.14

PTY/BOG

473

AV

576

0.61

PTY/BOG

473

CM

601

0.64

SAO/BUE

1039

G3

357

0.17

SAO/POA

526

G3

166

0.16

Other markets

 

 

 

 

PHL/LHR

3544

US/BA

716

0.10

CHI/FMY

1104

WN

189

0.09

SIN/JKT

553

VF

66

0.06

SFO/SAN

456

UA

119

0.13

Comparing other yields in Latin America

The next question is just how the yields compare to other Latin American carrier yields - for example the fares of Brazil's GOL (G3) - a low-cost player.

Using the same dates for advance purchase fares from Sao Paulo, I researched (still Chart 5) two itineraries, one to Buenos Aires and the other to Porto Alegre. Expecting a more competitive response from the region's largest LCC, the results again were somewhat surprising. The GOL fares were unexpectedly high for the requested journeys.

And outside the region

Given the results of these limited examples, one might speculate that, in general, fares in Latin America are more costly than their counterparts in other markets.

So, I returned to the web to test that theory. The sampling is very small. But are there signs of a pattern? I looked at flights of comparative distance and in a number of geographies. The resultant passenger costs per mile (Chart 5, last 4 lines) were generally lower than the fares found in Latin America.

The highest of those was a United (UA) round-trip between San Francisco and San Diego - a legacy carrier operating along side Southwest in the market - and still pretty inexpensive. Valuair (VF) from Singapore to Jakarta came in at 6 cents per mile, albeit with no luggage allowed other than hand carry. A higher fare ($87 or S$128) allowed for two pieces to be checked, far below similar charges in Europe or the US.

Southwest (WN), as expected provided Chicago/ Fort Myers service at a very reasonable rate.

The low cost between Philadelphia and London on British Airways (BA) and US Airways (US) reflects the current yield reductions on the North Atlantic. However, even if the more normal seasonal pricing - maybe 50% more - were to apply, it would remain under many of the prices seen on Latin routes.

So COPA was a surprise; a smallish carrier operating very profitably in a marketplace with numerous and diverse competitors and - mostly - offering fares which are reasonably competitively in global terms. It operates in a segment of the global air transport market that is small but with great potential for both its own growth and the arrival of additional competitors (watch the likes of Spirit).

Leveraging the transfer traffic market - and moving to Star Alliance

With Panama's population of about 3.3 million inhabitants, the airline is already larger than would be warranted by origin/destination traffic alone. However, its strategic location makes it an ideal point of passenger collection and distribution throughout the region. In its annual report, the airline notes that roughly 50% of its traffic transits Panama, confirming the value of Tocumen's location.

One change is imminent. Having been nurtured by Continental, COPA will follow its mentor from SkyTeam to Star in the near future. Also soon joining Star are nearby TACA, with multiple Central American hubs and Brazil's TAM. These are both growing, dynamic players on the Latin American scene, and may raise some new challenges.

Exactly how the shift in focus and competition will evolve is as yet unclear. But we can be quite certain that it will present both advantages and disadvantages for the carrier as some of its strongest competitors become alliance partners.

The Latin American market is changing; moving from a traditional but unstable position into a more dynamic growth phase with multiple business models. Latin America (and Africa) are beginning this transition later than other regions. What we know is that those other geographies experienced considerable activity and upheaval as adjustments were made. It is likely that the Central and South American marketplace will also go through some turbulence. Meanwhile, there may be lessons that other airlines in the region can take away from the evolution of COPA and of others like it.


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