Copa Holdings Flies High On Panama's Boom, Air Hub


Panama's economy is booming. Its real estate market is on fire, and the Panama Canal is undergoing a $5 billion expansion.

Tocumen International Airport in Panama City is also undergoing a major expansion to handle all the new flights coming in and out of the small but growing Central American country's big airport hub.

No wonder Panama City-basedCopa Holdings' ( CPA ), parent of Copa Airlines, is flying high.

The country's booming economy and the airport's strategic location as a hub for connecting flights to locations throughout the Americas are fueling Copa's own rise.

Copa's revenue is expected to rise 15% this year to $2.6 billion, double what it was five years ago.

"The Panamanian economy continues to be a very important driver of the company's growth," said Citigroup analyst Stephen Trent.

The International Monetary Fund projects Panama's GDP will grow 9% this year.

Last year's route-building programs and technology upgrades kept Copa's profit in check with single-digit growth but earnings are expected to take off this year, climbing 30% to $9.81 a share.

Though Copa recently began new service to Boston and Tampa, most of its expansion this year will come from adding more frequent flights on existing routes. That means fewer start-up costs.

New Routes

Last year, it launched several new routes, which came with added costs that cut into profits.

From its centrally located Western Hemisphere hub in Panama City, Copa provides numerous connections to principal markets in North, Central and South America and the Caribbean. In the U.S., it now flies to nine cities including Miami, Orlando, New York and Los Angeles.

Many of its feeder routes into Panama City, particularly from Central America and the Caribbean, don't typically generate enough demand to justify point-to-point service.

Trent says that Copa transports 20 or fewer passengers on 74% of its routes.

That might sound like it's not worth the trouble. But profitability on those "thin routes" is "big time," Trent says.

Copa charges more than rivals on many of its flights because it saves passengers travel time by connecting them to their final destinations through Panama City rather than other hubs farther away.

"To go from Guatemala City to Maracaibo in Venezuela you can either transfer in Panama City or Bogota, Colombia. If you fly through Bogota it's 11 hours instead of eight hours through Panama City," Trent said.

Business travelers would rather pay more for the shorter trip on Copa, he says.

In a survey looking at four low-density routes in Central and South America late last year, he found that Copa passengers' average trip lasted half that of competitors. The four sampled trips required at least one stop.

Because of the shorter flight times, Copa burns less fuel than the competition on the same route.

"One of the reasons it does well is that it has the best and most centrally located hub. And it flies the shortest distance and charges the highest fare," Trent says.

About 45% of Copa's passengers are business travelers, a higher percent than most airlines.

Far from being a low-fare carrier, Copa is more similar to traditional hub-and-spoke carriers in the U.S.

"Spokes on the hub attract new customers rather than low fares," said analyst Bob McAdoo of Imperial Capital. "They don't have to attract new customers by cutting fares. That is different from the rest of the aviation world."

Copa competes with a number of other airlines such as theLatam Airlines Group ( LFL ) (Lan Airlines), Avianca, AeroMexico, American Airlines andDelta Airlines ( DAL ).

But in many of its markets, Copa has little or no competition, McAdoo says.

And its Panama City hub, he adds, is unmatched in that part of the world, and likely will be for some time due to facility and land limitations elsewhere.

"There is no other hub like that in Latin America so they have a monopoly in bringing in smaller and midsize cities into their hub," McAdoo said.

In June, Copa said its systemwide passenger traffic rose 19.5% over the prior year's same month while capacity grew 14.4%. The load factor was 76.7%, a 3.5 point increase over last year.

Combining figures from April through June, Trent figures that Copa's consolidated revenue per passenger mile for the second quarter grew 20.4% over the prior year.

Second-quarter results will be reported on Aug. 7. Analysts expect earnings to soar 33% over last year to $1.75 a share. Fuel prices are expected to be "tame," Trent says.

Analysts see second-quarter revenue rising 15% to $594 million.

Colombian Operation

Copa continues to shrink its Colombian domestic airline operation in favor of more profitable international routes. Domestic capacity on Copa Airlines Colombia accounted for 3.4% of Copa's total capacity in June, down from the high teens a few years ago.

Copa had acquired Colombia's second-largest air carrier, AeroRepublica, in 2005, later renaming it Copa Airlines Colombia.

The Colombian carrier flies to 10 cities within Colombia as well as to several cities outside the country, including Copa's Panama City hub.

Copa's fleet consists of nearly 90 planes, most of them relatively new Boeing 737 next-generation models and smaller Embraer-190 aircraft.

"It's a modern fleet, one of the youngest (in the industry)," Trent said.

Copa expects to take delivery of another 10 within two years.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Investing Ideas

Referenced Stocks: CPA , DAL , LFL

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