COVID-19. Copa Airlines: attempting to determine its optimal size

Summary

• Copa entered the crisis spurred by COVID-19 with a reasonably sound balance sheet. And while it continues to build liquidity, it has no plans to seek government support.
• The airline is planning a slow return to service as it works to adjust to the new reality ushered in by the COVID-19 pandemic.
• Copa's discussions with Boeing over compensation for the grounding of the 737 MAX continue, and the airline is also working with the airframer to craft a new delivery stream for the aircraft to reflect a post COVID-19 world.

Copa entered the COVID-19 crisis in solid shape, but is still building liquidity

Copa ended 1Q2020 with cash, short term, and long term investments of USD1.13 billion, which was approximately 43% of the company's trailing 12M revenues. Subsequently, Copa forged an unsecured credit facility with local banks totalling USD150 million, and the airline has also issued USD350 million in convertible senior notes.

The company is also working on a revolving credit facility, which could yield between USD200 million and USD300 million in additional potential sources of liquidity.

Copa is not seeking any financial assistance from Panama's government. "I think the government has bigger issues to deal with," company CEO Pedro Heilbron recently told analysts and investors.

"…We came in [the crisis] in a stronger position than others, and we're taking the necessary measures, some very difficult, of course, to be able to survive this crisis and prosper in the future using our own means", Mr Heilbron added.

Many airlines worldwide are seeking financial support from their respective governments in order to ensure they can achieve the right level of liquidity as they attempt to stave off cash burn.

Copa has calculated that under a scenario of zero revenue, it would burn USD85 million per month. Once the company restarts operations, cash burn will drop to approximately USD70 million per month for the remainder of 2020.

Unsurprisingly, Copa takes a cautious approach as it restarts operations

Copa ceased operating in late Mar-2020 after Panama's government banned all international operations. The airline uses Panama City Tocumen International airport as a major connecting point for north-south traffic flows between North America and South America, and also has a robust network in Central America.

When the airline does resume operations on 1-Jun-2020, it will operate approximately 12% of the capacity it deployed during Jun-2019. The airline is taking a gradual approach to adding capacity for the rest of 2020 and, compared to the year prior, is planning to operate 40% of that capacity in Dec-2020.

Copa has some flexibility if demand improves as 2020 progresses. The airline has an ability to add one or two aircraft worth of flying, and can take some aircraft out of temporary storage.

"We will have enough flexibility to add or reduce capacity because this could go either way", Mr Heilbron said. "We really don't know." He remarked that Copa's planned growth for Jun-2020 was "in line with what we are seeing".

However, Copa's management has stressed that the company intends only to schedule flights that can, at a minimum, cover variable expenses.

Copa casts an eye towards further fleet simplification in a post COVID-19 world

Copa is joining most airlines worldwide in attempting to determine the right size for the company as it moves past the COVID-19 crisis, and is examining opportunities for fleet simplification.

Before the onset of the COVID-19 crisis, Copa was planning to sell its 14 Embraer 190s, and those plans remain intact.

The airline is now examining the potential sale of 14 737-700s. The airline believes it could use its remaining 737-800s for short haul operations and its MAX-9 jets, which feature lie-flat seats, for longer haul flights.

"I think they would be a good guess of…how we're going to look like in a few years", Mr Heilbron said.

Copa fleet summary, as of mid-May-2020

Source: CAPA Fleet Database.

Copa is also holding discussions with Boeing about compensation for the grounding of the MAX and the timing of future deliveries of the next generation aircraft. The airline has six MAX 9 jets grounded, and was originally supposed to take delivery of seven additional jets in 2019. CAPA's fleet database shows that Copa has 35 MAX 9 aircraft on order and 15 orders for the -10 model.

See related report: Copa Airlines ups 2019 guidance, despite 737 MAX grounding

There is little doubt that Copa aims to push back some MAX deliveries as it works to reach a compensation agreement with Boeing. For now, the company states that it is simply working with Boeing to create a delivery stream that reflects the post-crisis reality. However, it is an unknown, but also possible, that Copa will ultimately opt to cancel some orders for the aircraft.

Recently Brazil's largest airline, GOL, reached a deal with the airframer to cancel 34 of its 737 MAX orders, which will reduce the total number of MAX aircraft in GOL's order book from 129 to 95, split between 73 of the -8 model and 22 of the -10.

Copa remains in a strong position to weather the COVID-19 crisis

There are few certainties for airlines attempting to create an optimal size for a post COVID-19 world, where it could take anywhere from two to five years for demand to return to 2019 levels.

Before the crisis, Copa was projecting an operating margin of 16% to 20% for 2020.

Although those forecasts are now a distant memory, Copa is in a solid position to weather the crisis, at the same time as facing the reality that it will take some time for whatever the new normal may be for the aviation industry to be evident, once the pandemic subsides.