Copa Airlines restarts flights backed by solid financial foundation

Summary

• Copa prepares to resume operations after being grounded for nearly five months, and projects operating up to 40% of 2019 capacity levels by YE2020.
• The airline is working to shrink its fleet through the retirement of Embraer 190s and Boeing 737-700s, and will likely engage in lease returns when contracts expire.
• Even as it has been grounded for months, Copa remains in a solid position to weather the COVID-19 crisis, whereas some of its larger peers in the Latin America have been forced into Chapter 11 bankruptcy protection.

Copa slowly builds back capacity after being sidelined for several months

Copa has been idled since Mar-2020, when many governments in Latin America closed off their borders in order to contain the spread of COVID-19. But the region remains a hotspot for the virus, with Brazil, Mexico, Peru, Chile and Colombia all in the top ten countries measured by confirmed cases (according to the Johns Hopkins Coronavirus resource centre).

The Panamanian government has authorised Copa to launch flights from Panama City Tocumen to ten destinations in Aug-2020 - Guayaquil and Quito in Ecuador; Santiago, Chile; Miami and New York in the US; Havana, Cuba; San Jose, Costa Rica; and routes to Mexico.

"Initially, we will serve 10 cities for passengers departing and connecting via Panama, while arrivals in Panama would be subject to specific approvals by the Panamanian government", Copa CEO Pedro Heilbron recently told analysts and investors.

The airline plans to expand operations in Sep-2020, and will operate approximately 10% of the capacity it deployed into the market in 2019. By Dec-2020, Copa projects it could operate 30% to 40% of its 2019 levels.

Unsurprisingly, Copa has little visibility into demand and booking patterns, given that it has been grounded for an extended period of time. "It's hard to predict right now, but short term demand, short term is down 90%", Mr Heilbron said. "And if we look, let's say, 5, 6 months ahead, it is down 75%. That's what we're seeing right now. And of course, our capacity is going to match demand, and it's going to get adjusted accordingly."

Copa projects that its fleet will need to shrink further in order to match demand

One way Copa aims to ensure it has the proper amount of capacity in the market is rightsizing its fleet, a tactic most airlines worldwide are using to navigate the COVID-19 crisis.

During Jul-2020 Copa finalised the sale of 14 Embraer 190s and has stated that it is selling 14 Boeing 737-700s, and will no longer operate those narrowbody jets.

Additionally, Copa seems poised to return aircraft as their leases expire. Mr Heilbron observed that even with the retirements of the Embraer jets and the Boeing narrowbodies, there are probably further fleet moves that Copa can make "to match where demand is".

Copa executives were queried about how the airline would approach its mix of leased versus owned aircraft. The company's CFO Jose Montero remarked that historically Copa's ratio has been two thirds owned, one third leased. Those decisions are based on several factors, he explained, including pricing at a particular moment in time for financing.

The fact that Copa has had a portion of its fleet leased has provided flexibility in the past, said Mr Montero. "But at the same time, ownership of aircraft has been cheaper for us…I would say that going forward, probably our preference is to own aircraft, but it's something that we consider, depending on what market conditions are at the time", he explained.

Copa remains on solid financial footing, despite being grounded for months

Copa ended 2Q2020 with approximately USD1.3 billion in cash and undrawn credit lines, and during the quarter repaid USD95 million of short term lines of credit. In Jul-2020 the company closed on a secured revolving credit facility of USD105 million, and now has USD255 million in committed credit.

The airline now anticipates that its average monthly cash burn for Jul-2020 to Dec-2020 should be USD66 million, compared with USD77 million in 2Q2020. It closed 2Q2020 with approximately USD1.3 billion in debt, and more than 28% of that amount has a blended rate, including fixed and floating rate debt of approximately 3%.

Copa's 2Q2020 results reflect the severity of the COVID-19 crisis on the airline industry. Its net losses were USD386 million, and excluding special items Copa recorded a loss of USD114.6 million, "our first quarterly loss on an underlying basis in 20 years", Mr Heilbron noted.

Similarly to most airlines worldwide, at the moment Copa remains focused on liquidity and cash burn. But Mr Heilbron projected that when the airline reached 70% of its 2019 capacity, "Our unit costs are going to be in the range of what we had before this crisis, what we had in 2019".

Copa's unit costs excluding fuel for the full year 2019 were USD6.6 cents.

Despite challenges created by the pandemic, Copa's fundamentals remain strong

Copa had a strong balance sheet heading into the COVID-19 pandemic and worked to strengthen its liquidity as the crisis dragged on. It has not had to rely on government aid, which has been virtually non-existent in Latin America. That situation has created a string of airlines in the region seeking Chapter 11 bankruptcy protection - Avianca, LATAM Airline Group and Aeromexico.

Although Copa faces the challenges of restarting operations when demand trends remain highly uncertain, the company's strong foundation will continue to be an asset.