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Copa Airlines ups 2019 guidance, despite 737 MAX grounding

Panama’s Copa Holdings is one of many Boeing 737 MAX operators worldwide navigating the grounding of the aircraft, and has stated that it assumes the aircraft will not resume service until mid Dec-2019 at the earliest. 

Similarly to other MAX operators, Copa is battling cost and revenue headwinds due to the grounding after being forced to deploy less efficient aircraft on routes previously operated by the MAX. The company is joining a chorus of operators outlining the costs and revenue challenges that they continue to face as the aircraft type remains inoperable. There is little doubt that the airline, and others, are preparing to have frank conversations with the airframer about proper compensation for the unexpected operational disruptions. 

Copa's operating environment remains relatively stable, and despite the challenges that the airline continues to face as its MAX jets remain grounded and deliveries of additional aircraft remain uncertain, the company has upped it 2019 margin guidance. 

Summary

  • The worldwide grounding of the Boeing 737 MAX has created cost and revenue pressure for Copa Holdings and the company does not expect its existing MAX jets to become operational until mid Dec-2019 at the earliest.
  • Copa has been forced to cut its capacity forecast for 2019 as a result of the groundings. Its capacity will fall 2% year-on-year – versus an earlier forecast of 3% growth. 
  • Despite the challenges associated with the 737 MAX, Copa has raised its margin guidance for 2019, since the demand environment seems relatively stable. 

Copa battles revenue and cost headwinds as a result of the 737 MAX grounding 

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

Copa Holdings fleet summary, as of mid-Aug-2019 

Company executives recently explained that the MAX jets had been operating on some of Copa’s longer haul routes, such as San Francisco and Buenos Aires. Now Copa is using other Boeing narrowbodies on those routes, and on certain days of the week and times of the year those aircraft incur weight penalties.

Additionally, the MAX jets feature lie-flat business class seats, which fetch higher revenue. The MAX are also higher gauge, making those aircraft more cost efficient. 

“…We’re taking a performance penalty, a business class carrying penalty, a number of seats penalty and a cost penalty in those markets”, Copa CEO Pedro Heilbron recently explained. “Obviously, the grounding of the MAX fleet is having a significant revenue and cost impact, which will become even more substantial in the second half of the year.” 

Copa’s unit cost excluding fuel grew 5.7% year-on-year in 2Q2019, to USD 6.2 cents, and the company projects full year unit cost excluding fuel of USD 6.3 cents. Although Copa would prefer a better cost performance, its unit costs are among the lowest in comparison with those of full service airlines worldwide. 

Copa works to determine how quickly it could get new MAX deliveries operational 

It remains to be seen when the MAX will return to service, but Copa’s management has offered some insight into the way the company would incorporate the aircraft back into its fleet. Mr Heilbron remarked that Copa could get the six grounded aircraft operational within a month, broadly speaking. 

The other aircraft awaiting delivery have to go through a post-delivery modification process to add certain elements such as entertainment systems. Mr Heilbron said that if the MAX is “ungrounded as scheduled, even with some room for delay that we have factored in mid-December forecast, we would expect to have the six flying by the end of the year”.

But the other aircraft yet to be delivered would be incorporated more gradually. 

If deliveries coincide with Copa’s high season in Dec-2019, Jan-2020 or Feb-2020, “we can fly all of them,” said Mr Heilbron. If deliveries occur during the low season, “we will make a gradual introduction,” he said. 

Pilots of the six grounded aircraft are flying other aircraft but are also flying fewer hours overall, “so in a way they are carrying some of the pain from this grounding”, Mr Heilbron said. Copa continues to train those pilots on the MAX simulator, even while they are operating other aircraft during the MAX grounding. 

Even with the MAX grounding, favourable conditions drive solid margins for Copa 

The MAX grounding drove a 4.3% drop in Copa’s capacity year-on-year in 2Q2019 and the company expects a 2% drop for all of 2019.

Before the grounding, Copa had planned 3% capacity growth year-on-year for 2019. At this point, Copa is not offering capacity guidance for 2020 as the re-entry of the aircraft into the company’s fleet remains uncertain.

The larger gauge MAX will drive seat growth for the airline, and frequencies will drive capacity increases as well. Copa’s management explained that the company had to reduce quite a number of frequencies because of the grounding of the aircraft. 

Even as Copa wrestles with diminishing capacity and rising costs due to the MAX groundings, the airline has revised its operating margin guidance upwards to 15% to 17%, from 12% to 14%.The revision places Copa’s margin performance at the company’s historical levels, after it had battled challenges in 2015 and 2016 that were driven by economic weakness in Latin America

Copa Holdings operating from 2013 to 2Q2018 

The company continues to see an improving demand environment. During 2018 Brazil and Argentina were particularly challenging for the company, but Copa’s management has concluded that demand in Brazil is improving as capacity on its routes to Brazil remains rational. Schedules from CAPA and OAG show that Copa’s network in Brazil includes Belo Horizonte, Manaus, Rio de Janeiro, Brasília, Porto Alegre, Salvador, São Paulo Guarulhos and Recife

Copa’s executives remarked that capacity had been reduced or was flat on most of the company’s markets, including Brazil.

Argentina is still producing negative year-on-year numbers, but Copa remarked that it was proactively managing capacity in the market. Copa’s routes to Argentina include Buenos Aires Ezeiza, Rosario, Córdoba, Salta and Mendoza

Copa shows a degree of public patience with Boeing over the MAX grounding 

Copa Holdings is joining other Boeing 737 MAX operators in dealing with unforeseen complexities due to the aircraft’s grounding. The company is joining a chorus of operators outlining the costs and revenue challenges that they continue to face as the aircraft type remains inoperable. 

Copa is joining most 737 MAX operators in showing a certain level of public patience with Boeing, but there is little doubt that the company and other airlines struggling to maintain scheduled integrity as a result of the grounding are preparing to have frank conversations with the airframer about proper compensation for the unexpected operational disruptions. 

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