Airline Leader Interview - Copa

Transcript

Dave Appleby:Good afternoon. Welcome to this final session on day 1 of the conference program here at CAPA's Latin American Aviation and LCC Summit in the beautiful city and state of Querétaro, Mexico. And to close today's content, We're truly delighted to have with us Mr. Pedro Heilbron, who is the CEO of Copa Holdings and Copa Airlines, the flag carrier of Panama. Pedro has been the CEO of Copa now for the past 35 years, surely one of the most longest-standing airline CEOs in the world. Copa, as we know, has been so successful over these years developing its strong business model, one Pedro himself actually described as being pretty boring. Which, you know, has connecting passengers north and south of the Americas over its hub at Tocumen International Airport in Panama City. Well, boring it may be, however, it's proved to be a very successful concept for Copa, which now operates to almost 90 destinations across the Americas. The airline uses the prime geographic location at sea level of Panama, right at the heart of the continent, to connect these flows north, to south and vice versa. Copa Holdings also created back in 2016 a low-cost subsidiary in the Colombian market using its AOC, which is called Wingo. And Wingo has been expanding a lot and has now reached over 20 destinations. So Pedro, welcome to CAPA, welcome to Querétaro, and thanks so much for being with us.

Pedro Heilbron:Thank you, thank you, Dave. Nice to be here.

Dave Appleby:And you were telling us it's your first time in, in Querétaro?

Pedro Heilbron:Yes, for sure.

Dave Appleby:Yeah, excellent.

Pedro Heilbron:I've been here before.

Dave Appleby:Well, I thought a good way to start the session would be maybe to get to know Pedro a little bit more and to understand a little bit more about his beginnings all those years ago. So as I mentioned before, Pedro, you started at Copa 35 years ago, which must surely make you one of, if not the longest-standing CEO of a major airline globally. Could you talk to us a little bit about sort of, you know, the time sort of prior to Copa and then how you came to take on the role, maybe describing to us a little bit about what Copa was like as an airline then when you took the reins and how it's been scaled up to be the airline we see today.

Pedro Heilbron:Right. So we're talking about 35 years ago, so I can hardly remember, but I'll try to, you know, think hard and come up with something. So, no, actually, Copa is only my second job ever. I mean, in terms of like full-time job, not counting summer jobs or things like that. And so my second job ever and actually working for the same person, for the same, let's say, chairman of the board. So right out of school, I worked for 7 years for the Motta family in Panama. That's where working directly with Stanley Motta in his family office. About 6 years into that job, they bought a majority position in Copa. They spent like a year and a half looking for a new CEO. In those cases, in that time, it was called general manager. And the company was so small, it was in so much trouble, was so crappy that actually no one took the job. So, you know, when no one wants the job, it's easy to get the job, right? So I took the job. I was kind of bored in what I was doing. I knew nothing about aviation, but it was something different. We had 2 thirdhand planes, 200 employees. Just, you know, what's today? Thursday? Today we would have had 3 flights the whole day. That was it. There was no connecting hub. But as they say, you know, I knew nothing about aviation, but in the land of the blind, the one-eyed man is king. So it was actually a great opportunity for me, and I was lucky that I was there and there was so much to do.

Dave Appleby:Excellent. And then sort of through that time then, sort of scaling up the—

Pedro Heilbron:Okay, so what happened since, in those days, I came in in '88, June '88. Panama was in a deep financial crisis. It was the last years of the Noriega dictatorship. Then came '89, December '89, when we were invaded by the US. And then came 1990, where we had no money, the country had no money. Neither did the airline. So we were going nowhere, doing nothing. We had to find something that made sense, a new direction. And what we saw at the time, actually in the late '80s, was that it was impossible to travel from South America to Central America or the Caribbean or any combination therefore. And people would say that there were no flights because no one wanted to travel among those regions. And we said, how can people travel if there are no flights when the distances are so long, the roads are bad, there are no trains? It's— there's no other way of traveling if it's not via air. And again, there were no flights. And Panama sits right in the middle. So we saw the opportunity. We had an airport with 2 runways which was way underutilized. Actually, half the airport was shut down, was not even being used. So, you know, we saw a great opportunity. In 1992, we started building a hub which is very strong and significant today, but it's the work of 35 years, little by little, you know, one step at a time. There have been a few inflection points along the way, like 1998 where we signed a very unique alliance with Continental, which then became United. We sold 49% of the airline back then. United is no longer an equity owner. We went public in the New York Stock Exchange and that's how Continental Sold its part. But that alliance, which remains today and is actually as strong as it was back then, was key to our development going from, you know, a kind of third-world crappy airline improving but not fast enough to an airline with modern airplanes, new systems, and a bunch of other things. And we've kept on growing since.

Dave Appleby:Excellent. A lot's been talked about today about the collaboration with governments, etc., to be successful. Is that something that's been pretty important to Copa over the years as well?

Pedro Heilbron:Well, it's been important, but it has its ups and downs. It's not always as easy or pretty as it looks from the outside. It takes a lot of work, but what is important though, for Panama at least, is that we are not an exporting country. We don't really manufacture much. We don't export— we export a few things, but it's not that significant. Panama is a country whose economy depends on international services and logistics. The Panama Canal is our main source of income and highest impact to the economy. That's all about international logistics. So is our commerce, our financial center, aviation, multinationals. It all depends on connectivity, be it sea and air. Aviation is appreciated in Panama and it's supported by our government because it's a key component of our economy.

Dave Appleby:Excellent. When, you know, to have that role for so many years, I mean, usually in an airline there's, you know, shareholders wanting maybe different directions and so forth. How is it that you've managed to maintain the role for 35 years? What's the longevity down to?

Pedro Heilbron:Well, I think a key aspect in that sense is that it's had the same controlling shareholders over the 35 years. People that, of course, I know very well from way, way back. And they're very predictable in the good sense of the word. They think long-term in terms of their investments. They invest back in the businesses. They are bottom-line oriented. They're not ego-oriented. They look at results and they know that no one is perfect. And no company is perfect, and there are going to be mistakes along the way, which we try to keep at the lowest level, of course.

Dave Appleby:Yes.

Pedro Heilbron:And I should say that in the last 35 years, we've been profitable 32 of those 35 years. And the 3 years we have not been profitable have been just very particular years, like 2020, of course. with the pandemic. And then the other 2 years were years when we spooled up our growth with like crazy numbers. And there were specific reasons why we did that. So of course, it was very hard to be profitable those years with so much investment and so much growth. But, you know, we, we kind of carry our own weight. That fits well how our board thinks. And, and I guess that's why we're still here.

Dave Appleby:So you've just mentioned there about sort of over the time taking decisions. Were there any sort of sliding doors moments, you know, where you think we should have done this or maybe we shouldn't have done this?

Pedro Heilbron:You know, I try not to second-guess ourselves, and I would say one reason I try not to second-guess ourselves is because our chairman, Stanley Mota, doesn't second-guess things. He's always looking forward. And as long as we learn from our mistakes and we move forward, that's how he thinks. So we're not pressured to second-guess. Actually, you know, when I'm second-guessing ourselves, he's always saying, well, we didn't know then what we know now.

Dave Appleby:Mm-hmm.

Pedro Heilbron:And I'll give you an example. So this month of September, next month, tomorrow, starting tomorrow, but I think in the second half of the month, we're going to pay back a convert debt we took on during the pandemic in April of 2020. Very expensive debt which we ended up not using and not needing, but it's going to cost us a bunch of money. So I'm with the board and I'm with our chairman, kind of second-guessing ourselves for having taken on that debt. And what's his answer? Well, you know, we did not know then how hard we were going to be hit, how long it was going to last. And luckily, we have the money to pay it. And that's it. Pass the page, move on. So if our chairman thinks that way, how can we not be the same way?

Dave Appleby:Absolutely. Is there any advice that you would give maybe to sort of, you know, up-and-coming CEOs of airlines, given your experience? You know, maybe more in those early days?

Pedro Heilbron:You know, I hate to give advice when, you know, especially like free advice. Like, why would I do that?

Dave Appleby:So no.

Pedro Heilbron:I guess I don't have much advice to give.

Dave Appleby:Well, looking a little bit more then at the internal workings of the airline. So a lot of the success has clearly been down to your leadership. And how have you managed to always maintain the focus of the team to always, you know, continue to meet the airline's mission and vision?

Pedro Heilbron:So again, you know what, What we have accomplished is the work, mostly the work of the last, of many people during the last 35 years, step by step. And, you know, it's a conversation we have often with stakeholders which are not directly a part of the airline who look at our success today or our size today and overlook You know, all it's taken to get here and the challenges we have to remain successful in the future. So I would say a few things. One, building a strong team, which has been refurbished along the way, strengthened, I should say, strengthened a lot of the way. So building a strong team, and we've been consistent in that sense. And I mean loyal, I would say both Both ways. And sending a consistent message, having a consistent vision, sending a consistent message, and just not changing, not shifting directions every day. I mean, we've done so when it's needed, when it's important, but, you know, it's not like a daily thing.

Dave Appleby:Yeah. So you did get some advice in the end.

Pedro Heilbron:What's that?

Dave Appleby:You did get some advice in the end.

Pedro Heilbron:I guess so.

Dave Appleby:We'll now move on then. We'll look a little bit more at Copa itself, the business. Having spent so many years at the helm, you've clearly passed through a lot of different geopolitical challenges that arguably affect the aviation industry more than any other. There's been wars, acts of terrorism that have spiked oil prices, and economic downturns, most recently global pandemics. Having gone through all of that over so many years, would you say that that experience of fighting fires has made them in any way easier to manage over time?

Pedro Heilbron:Yeah, it's actually, you know, during the pandemic, I was invited to participate in a panel about crisis management. I mean, not to talk or anything, just to attend the panel. And I told the person, are you crazy? I'll tell you about crisis management. So the dictatorship in Panama with the banks, the banking system closed for 3 months, then the invasion, then the narco-guerrilla wars in Colombia where our flights were empty, the civil wars in Central America.

Dave Appleby:Yeah.

Pedro Heilbron:The tequila crisis, H1N1, SARS, the fuel going up over $1.50 a gallon, the currency crisis in Argentina, which used to happen every 8 years, now it's a lot more often, recession in a lot of South America, etc., etc., etc. And then came the pandemic, like the mother of all crises. We were not expecting it, we were not prepared for that. But we had gone through enough things, enough crises to know that, you know, we needed to have cash in the bank, a lot of cash in the bank, and always a plan. Not for a pandemic, we never thought of that, but we had a crisis plan and we've always been very structured and very organized. So when the pandemic happened, we We worked immediately on 3 pillars. One was, in that order, one was to save the company. So we right away went out to get new lines of credit. We renegotiated over 700 contracts because a lot of our contracts were fixed-price contracts, and that works when there's revenues and when there are passengers, not when we're shut down. And also So yeah, so second pillar was the people side. So we had to protect our employees.

Dave Appleby:Yeah.

Pedro Heilbron:And many were unlicensed and on furlough. So we gave them— we kept their insurance, we kept their benefits, we gave them a monthly stipend. So we also covered them. And number 3 is taking care of our passengers with rescue flights. with cheap one-way fares and a bunch of things. So we just organized ourselves, started working on those pillars for the next 5 months while we were not flying, and we were busier than ever.

Dave Appleby:Yeah, well, thank you. And what we'll— I think we'll go on now looking, just obviously a bit conscious of the time, looking a little bit more now at the region as a whole. We've seen the demise of some some notable carriers of late, Viva Air, Ultra Air, and Aeromar in Mexico as well. And I just wanted to get you sort of thinking on what your opinions are as to why these airlines eventually collapsed, and especially in Colombia. Does that then present a big opportunity now for Wingo?

Pedro Heilbron:Well, yeah, it's— this is an unforgiving industry, an unforgiving business. Because a lot of costs are fixed and passengers are perishable. And flying with low load factors and flying with fares below cost or a combination of those matters, it's very costly. And it kind of, I don't know, it's— You know, I don't want to say too much, but I don't want to maybe talk specifically about Colombia because it happens everywhere and it happens all the time. So if there's overcapacity, airlines end up selling below cost, and selling below cost is a recipe for failure. It always happens. It's happened all the time. And it's also— and many times overcapacity happens for just, I don't know, wanting to be overly aggressive or for wanting to eat someone else's lunch or not understanding one's place in the industry. You know, one thing we always try to keep like top of mind is where we're needed, where we're valued, where our service makes sense. And when we're asked about flying, you know, in markets that are not our markets, that don't make sense for us, we tell them that's not even on our radar. When we're asked about why don't we fly widebodies to Europe, I say, well, that makes sense for many airlines. It doesn't make sense for us. So no, Panama is a very small market. There are European airlines that feed our market, feed our hub very well. We don't need to go in and compete with those airlines with very— so it's understanding one's place, how much capacity makes sense, and having a business that can sell fares above cost.

Dave Appleby:Okay.

Pedro Heilbron:So if one deviates from those basics, you know, it's obvious that the business is going to run into trouble and it's going to run out of money. And it happens everywhere, over and over. It seems simple, but it's, you know, those simple rules are not always followed.

Dave Appleby:And then we've also seen recently that Wingo has announced the creation of Wingo Panama and has entered service on domestic Panama routes. What's the thinking behind that business decision and why wasn't it just the network adapted under the Copa brand?

Pedro Heilbron:Yeah, so Panama is a small country. It's only 4 million people. It's not a huge aviation market. And there's just a few markets where we think there's a place for the ULCC model. Enough passengers, point-to-point for a ULCC model. And of course, all markets are well served by Copa with competitive costs and many daily frequencies. But we do see that there are a few markets where Wingo— that Wingo could serve and make a difference. Not many, but, you know, we need a Panamanian flag to fly those markets. And for example, Wingo started like a month ago Flying like the only domestic route, our only domestic market where a jet can actually provide service. They're flying just twice a week during the weekends. We fly twice a day daily every week. I mean every day of the week. We was doing only two flights a week during the weekend, but it's something the market needed: taking people out of the bus at low fares, and it makes sense. There might be a few other markets where Wingo might be able to fly twice a week, but not a lot more. Wingo Panama, it might be a single aircraft. I don't think it's going to be much more than that. It's a niche operation.

Dave Appleby:Okay, thank you. Now moving on to the competition angle in the region. Chapter 11 filings from Aeroméxico, from Avianca, from LATAM throughout those difficult periods. However, Copa didn't use bankruptcy protection, although you did mention the loan before. But do those more streamlined airlines, Avianca, LATAM, Aeroméxico, those are they now obviously lower-based, cost-based legacy carriers, do they pose more of a threat to Copa now than they did prior to the pandemic?

Pedro Heilbron:Well, they have been able to lower their cost, of course. We had a, I would say, a huge cost advantage before. That's no longer the case. Our unit costs are, you know, a lot more similar today. But we think we can keep our cost advantage. We're confident. But more important than that, you know, we think there's room for all of us. We've never thought that our success depends on, you know, the failures or the struggles of others or the demise of others. So we think there's room for them and there's room for us. We can all be successful if we do things the right way. Latin America is a vast continent with a population that hopefully is going to keep growing in terms of its purchasing power. So, you know, we think there's room for all. They can be successful. We plan to continue being successful, and we plan to, you know, keep on lowering our costs. So, but yeah, they're more competitive today, and, you know, they're all very good airlines. So, you know, we never, never lower our guards, and we never get too confident.

Dave Appleby:Yes. Now, looking to the future, and obviously we can't have this session without mentioning The matter of sustainability. And so how does Copa leverage the opening of new markets and adding more frequencies, etc., against the demands of sustainability and the effects of climate change? And how can the airline continue to grow whilst ensuring environment quotas are met, especially in areas like the Caribbean?

Pedro Heilbron:Yeah, well, you know, it's of course an important issue for the world. But we have to also think fairly about Latin America. We're an underdeveloped part of the world and aviation in particular is also underdeveloped in Latin America. I don't remember the exact figures but in terms of employment per population, we're at best a third of what you'll see in developed, more developed or in developed countries. We depend on aviation for economic growth and prosperity because of what I mentioned at the beginning: long distances, hard to connect by road, no rail service. Aviation is important. It would be very unfair to restrict the growth of aviation in Latin America while the rest of the world is already at a level where they have a fully developed industry and first-world economies. Latin America needs aviation. It needs it for business and commerce, for leisure, and for all other segments. We try to be as environmentally responsible as possible. The region, it's going to be part of this transformation. But we should not be in the same boat or in the same plane as the developed countries, and we should not be restricted for the reasons I've just mentioned.

Dave Appleby:Okay, and so we've actually only got 3 minutes left, so I'm gonna throw it out to the floor and see if there's any questions for Pedro before we fire in the last question. So, does anybody like to ask a question? Only one over there.

Pedro Heilbron:Only easy questions are allowed. You know, it's Thursday, it's past 5 PM, so—

Mike Powell:It's on? It's on, good. Pedro, thank you very much for your remarks. My name is Mike Powell. I work for AKTA Capital. We run a global aviation fund and I'm happy to say that Copa is one of our core holdings and we're very happy shareholders.

Pedro Heilbron:Good.

Mike Powell:With that, hopefully you'll forgive my next question. Simple question in many respects, but in the introduction it was mentioned how Copa's success is largely based on its location geographically and its cost advantage. But in theory, we know that, on paper at least, that there are It's possible to create airlines that have lower unit costs than Copa and maybe in locations that are arguably better located to handle the traffic that you handle today. How do you respond to that potential threat? How do you view it? Does it keep you awake at night? Who concerns you most? Who doesn't concern you at all?

Pedro Heilbron:Well, there are— there could be airlines with better cost, a newer airline. But we have to remember also that we have a full-service product with a business section which takes away density from the aircraft. So if we were to adjust for density, or we were to make density even, our cost would be a lot more similar than—

Mike Powell:I see.

Pedro Heilbron:Most any airline out there. I mean, we reported in the last quarter, you know, in the neighborhood of 5.9 CASM, ex-fuel CASM. And again, that's with a 2-class cabin with an average of 150-something seats, etc. So as long as we can get revenues from the front cabin to make up for the density difference, then we need to think about the cost in our economy cabin to be able to compare apples to apples. But of course, a newer ULCC carrier is going to have— should have a cost advantage. And then yes, there are new technologies, of course, and that also allow for markets that were not that could not be served before to be served now. We do some of that ourselves. In terms of geographic location, I mean, there are other good locations, but I would not say that there's a better location than Panama. I do not think there's a better location than Panama when we look at everything, but there are other good locations, of course. We do not have the exclusivity there. Knowing all of that, we work hard as hell to improve every day, to be a better airline in every aspect. We're far from perfect and we know it. And we work hard to always, you know, go in the right direction, be competitive. We've been dealing with competition all of our lives and we know that it will, you know, it would only get tougher in the future. So we have to continue reinventing our boring, you know, business model. Exactly.

Dave Appleby:And I don't know, have I got time to maybe ask one more? Is that okay? So this— we can't finish the session without asking a little bit about AI, the whole AI revolution. So how does Copa see the future of its data operations service? In terms of AI, and is AI maybe a threat to the industry's workforce?

Pedro Heilbron:Well, AI is so advanced that I'm not actually me. I'm actually back in Panama in the office.

Dave Appleby:You're a hologram.

Pedro Heilbron:Hologram. So the way we see it, well, a lot of the software as a service that we have already have an AI component. As we know, AI has been around for a while now. It just has exploded in the recent months because of big languages and all of that. But it's been around and it's, of course, developing at a fast pace. And the way we see it is that this could be one of those inflection points in our industry. In the sense that the airlines that stay behind, that do not have the right technologies aided by AI, will be at a disadvantage, be it producing revenues in terms of pricing and fare management or efficiencies which result in better costs. Etc., etc. So there are big changes coming, and we're in a way forced to implement them just to stay on top and not fall behind. And so I'm not an IT expert or anything like that, but it's a daily conversation.

Dave Appleby:Yeah, yeah. And this then, the very final question: of the 35 years, which moment has given you the most satisfaction?

Pedro Heilbron:Ooh, wow. That's a good question because, you know, if you had asked me about the hardest moments, I would have given you like 10 examples and it would have been easy. So if you ask my wife, so if you ask my wife, my wife of nearly 40 years, So she would tell you that I'm never satisfied. And that would be an— if you ask me about to criticize something about myself, and if you ask my team something negative about me, I mean, it would be a long list and I won't tell you about that list. But one of the things would be that I'm never satisfied. And that's the truth. So I'm having a hard time answering the question because I think my most satisfying moment is yet to come.

Dave Appleby:Brilliant. Well, thank you very much, Pedro Heilbron.

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