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Copa Airlines moves to a single fleet type to meet cost targets

Two years ago Copa Holdings made the decision to shrink its Embraer 190 fleet to 19 aircraft and decided that the subfleet would remain at that level during the next few years.

But in late 2018 Copa opted to sell six of its Embraer 190s and now the company plans to rid itself of the remaining 100-seat jets during the next 18 months. 

Although Copa will face some short term headwinds created by the acceleration of removing the Embraer 190 from its operations, the company believes those challenges are worth the longer term benefits, which include meeting its unit cost targets: a cost per available seat (CASM) excluding fuel below USD6 cents.

That is a benchmark cost performance for ULCCs worldwide. And while Copa’s business model is firmly entrenched in a full service offering, it is notable that its cost targets fall within the ULCC range. 

The decision to accelerate the Embraer 190 retirements along with the service re-entry of the Boeing 737 MAX will create a level of flux for Copa in 2020, but its preliminary margin guidance for the year remains robust. 

Summary

  • After whittling down its Embraer 190 fleet during the past couple of years, Copa Holdings is looking to shed its remaining 100-seat jets over the next 18 months. 
  • The focus on getting rid of its Embraer 190s, along with the resumption of Boeing 737 MAX operations, is creating a certain level of flux for Copa in 2020.
  • Despite the headwinds created by its fleet transitions, Copa expects a solid margin performance for 2020 and a USD6 cent or lower unit cost excluding fuel in 2021, once it transitions to a single fleet type. 

After whittling down its Embraer 190 fleet, Copa decides to move away from flying the model 

Copa Airlines has operated 100-seat Embraer 190s since 2005, and at one point the company had 27 of the smaller jets in its fleet.

During 2017 the airline’s management stated that it was shrinking the Embraer 190 fleet to 19, having decided that its small jet fleet would remain at that level for the next few years. The rationale was that many of the Embraer 190s “would be paid for” in that period. 

See related report: Copa Airlines shores up margins in 2017 as conditions in Latin America slowly improve 

At that time, Copa’s executives observed that “…Hypothetically, five years from now anything is possible”, and those possibilities included new 100-seat aircraft or examining the operation of a single fleet type. 

In late 2018 Copa sold six Embraer 190s to Azorra Aviation, and five were expected to exit its fleet in 2019. CAPA’s Fleet Database shows that as of mid Nov-2019 Copa had 14 Embraer 190s in operation and one of the jets in storage. 

Copa Holdings fleet summary, as of mid Nov-2019

Now Copa has decided to exit its Embraer 190 operations progressively over the course of the next 18 months, after determining that it could reap significant cost and revenue benefits from operating a single fleet type of current generation Boeing narrowbodies alongside the Boeing 737 MAX. Copa has removed the MAX from its schedule through mid Feb-2020. 

Copa has had six of its 737 MAX 9 aircraft idle since the worldwide fleet was grounded in Mar-2019. The airline was originally supposed to take delivery of three additional MAX narrowbodies during 1H2019 and four more of the jets in 2H2019. 

For now, Copa expects that a single fleet type will produce many advantages 

Copa has estimated that the accelerated exit of the Embraer 190s could result in a book loss of approximately USD90 million related to the aircraft’s sale and spare parts inventory.

Recently, Copa Holdings CEO Pedro Heilbron concluded that “…It’s going to be a little bit messy next year [2020]”, as the company deals with costs associated with getting rid of the Embraer 190s and the post-delivery modifications necessary for the 737 MAX 9s that Copa expects to add to its fleet. 

Copa also believes that even though there are some routes more suited for the Embraer 190, the company could fly some of those experimental type markets with larger gauge aircraft, even though they are less profitable with a higher density jet. 

“We’re at a point where we’re better off with a single fleet”, Mr Heilbron said. “There are many advantages, cost and operational advantages, from that commonality.” 

However, even as Mr Heilbron believes moving to a single fleet is the right decision for Copa at this point, he explained that Copa would not rule out examining other technologies in the future. 

Copa targets a USD6 cent unit cost performance by mid 2021 

Even with the flux created by the return of the MAX and the preparations to sell its Embraer 190s, Copa’s preliminary guidance for 2020 shows a 16% to 18% operating margin, which is in line with the company’s projected 16% operating margin for 2019 and up from the 13% operating margin it recorded in 2018. 

Copa decided not to offer preliminary cost guidance for 2020, given the uncertainty of its fleet heading into the start of the new year.

However, the company has declared that “By mid-2021, we should have a simplified and higher gauge fleet, which will be accretive to the business”, Copa CFO Jose Montero explained. “…which will contribute to our goal of reducing unit costs below [USD]0.06”. 

A unit cost performance excluding fuel below USD6 cents is widely regarded as a benchmark for an ultra low cost airline.

Obviously, Copa has built up a successful full service model connecting passengers through its hub at Panama City Tocumen and has no plans to alter its strategy. But it is worth noting that its cost targets fall within the ULCC range. 

Copa joins other airlines in the Americas that are getting out of Embraer 190 operations 

Copa joins other airlines operating in the Americas that have decided to exit operating smaller Embraer 190 jets, including Air Canada, JetBlue and Azul. Those airlines are at different phases of their Embraer 190 retirements, but ultimately their strategies have evolved and require different aircraft types. In the case of Azul, it has opted for the next generation E195-E2 jets, which at 136 seats have a higher density than its Embraer 190s. 

For now, Copa has decided that a single fleet type is the most favourable approach to meeting certain financial targets, which seems like a logical approach. But unsurprisingly, the company is leaving its options open for the future, since aircraft operating performance and an attractive sale price could create the right mix for Copa to consider a second fleet type over the long term. 

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