MIAMI — Last week, Copa Airlines Holdings (NYSE: CPA), the parent company of Panama City based Copa Airlines, reported a $428.2 million net profit, or $9.64 per share, for calendar year 2014. The result marked a 31.1% increase year-over-year (YOY), despite the adverse effects of a non-cash asset revaluation charge of $31.2 million tied to the acquisition of AeroRepublica (now Copa Colombia) and a $13.9 million loss due to the devaluation of the Venezuelan Bolivar in February 2013.
Adjusted for these and other special effects, the carrier would have reported a net profit of $468.1 million, or $10.54 per share. For the fourth quarter, Copa recorded a net profit of $113.9 million ($2.57/share), up 31.5% YOY.
The carrier was buoyed by 16.0% revenue growth YOY to $2.61 billion thanks to its aggressive growth across the Americas. Passenger revenue was the primary driver behind the growth, growing 16.5% to $2.52 billion, while cargo and other revenues grew a softer 2.8% to $88.7 million.
While cargo yields and revenues around the world remain relatively soft, growth in this business segment will likely improve in 2014 as the US economy picks up. Longer term, there is an opportunity for Copa to jump into the business of selling frequent flyer miles to credit card companies, given the strength of their network (especially for leisure destinations). Over the long run, we believe that this could add between $60-80 million in annual revenues for Copa, especially given its sub-80 percent load factors.
Turning to unit revenue performance, PRASM grew a muted 1.8% YOY to 13.3 cents on aggressive 14.4% growth in capacity, with yields increasing a commensurate 0.2% YOY to 17.3 cents. Copa’s “Hub of the Americas” at Panama City continues to grow by leaps and bounds, with more than 150 peak day departures serving 65 destinations in 29 countries across the Americas. And in early 2014, the carrier has already announced new flights to Fort Lauderdale (its 10th American destination), Montreal, and Georgetown, Guyana.
On the expenses side, the major expense-line items declined on a per ASM basis in 2013, with fuel leading the way by declining 5.7% YOY on a per-ASM basis in increasing 7.9% to $783.1 million. Salaries and benefits rose 11.6% YOY to $276.2 million, but once again declined 2.4% on a per-ASM basis, as the carrier tapped into the natural increase in productivity that arises from pouring growth into a single-hub network (admittedly with a few point to point [p2p] operations inside Central America and a 27 departure/day focus city in Bogota). Another way to think about this productivity growth is that the number of ASMs produced per dollar of employee compensation grew 2.5% YOY. As far as expense increases, passenger servicing costs rose 0.8% YOY as the hub attracted more passengers.
On the unit costs front, cost per available seat mile declined 1.1% YOY to 11.0 cents (2.5% YOY to 10.9 cents if you exclude the one time asset valuation charge). However, CASM excluding fuel did rise 1.9% to 6.9 cents because of that one time charge, though excluding it, CASM ex. fuel dipped 0.5% YOY to 6.7 cents. With regards to CASM, one initiative that Copa is taking to reduce that headline figure is to utilize split scimitar winglets, recently introduced by United Airlines, on 8 new Boeing 737-800 deliveries in 2014 and 10 retrofitted aircraft. Copa expects these winglets to yield roughly a 1.7% improvement in fuel burn, with a commensurate decline in overall CASM of around 0.2 – 0.3 percentage points.
The major drag on Copa’s earnings in 2013 was certainly the rapidly deteriorating situation in Venezuela. Thanks to a persistent current account deficit and government currency controls, the world’s airlines have more than $3.3 billion in cash trapped in Venezuelan banks. Copa is one of the hardest hit carriers, with nearly $487 million trapped in Venezuelan banks.
While Copa Airlines expects to eventually get access to this currency, there is the added challenge of Bolivar depreciation, meaning that in real (currency equivalent) terms, Copa will receive 55.5% less revenue per Bolivar spent. Venezuela has long been a core market for Copa’s connecting complex due to proximity and a (rapidly eroding) base of wealthy clientele. But moving forward, without significant economic reform by or the removal of the Maduro regime, Venezuela’s contribution to Copa’s profitability appears to be at risk. And with Argentina appearing to slip into a Venezuela-esque pattern of economic mismanagement, it is no stretch to assume that this other core Copa market in South America might be the next proverbial domino to fall.
Turning to overall performance, fourth quarter operating margin was a splendid 18.7%, while full year margins came in at 19.9% on an operating profit of $518.5 million. Copa has the highest operating margins in the Americas, even better than most ultra-low cost carriers, which speaks to both the uniqueness of the business model, and its excellent execution. Return on equity came in at 22.5%, and the carrier will offer a $3.84 dividend per share in 2014. Copa ended the year with $1.17 billion in cash and investments, while total debt amounted to $1.1 billion, leaving the carrier with a negative net debt.
Looking forward into 2014, the carrier will continue its breakneck pace of growth, with consolidated capacity growth in the range of 10%, while RASM is expected to be roughly flat YOY. CASM ex-fuel is projected to rise 1% YOY, and Copa expects overall operating margins to be between 19 and 21%. In the longer term, Copa Airlines still has plenty of room to expand.
The expansion of the South Terminal at Panama City’s Tocumen International Airport will add 20 new gates to Copa’s hub, allowing it to nearly double the size of its current operation to more than 300 daily departures. There are still another 8-10 cities in North America, 5-6 in the Caribbean, and 12-15 in South America that can handle new service from Copa. And when combined with expanded frequencies on current flights, these new flights will truly position Copa as the “Emirates of the Americas,” with Panama City serving as a poor-man’s Dubai in the analogy.