While many investors are loth to invest in airline equities, by
employing a pair trade, investors can mitigate some of the inherent
risk associated with aviation companies. Like in any other sector,
it's always a good idea to be long a thriving company and short a
struggling one when creating a pair trade.
[caption id="attachment_67305" align="alignright" width="300"
COPA is soaring"]
The pitfalls of investing in airlines - especially ones from
developed countries - are well known: high labor costs, volatile
fuel prices, and fluctuating demand, to name a few.
However, some emerging market airlines are able to avoid these
unattractive facets of airline investing. Panamanian carrier COPA (
) has been able
to be consistently profitable
while providing decent service and keeping low labor costs low. The
company's hub in Panama City is ideally locating to serve
connecting traffic between North, Central, and South America, a
rapidly growing market. Because the company generates income from
dozens of countries, COPA is not overly exposed to a single
currency. At a forward P/E of around ten, COPA offers good
On the other hand, Brazilian low-fare carrier Gol Linhas Aereas
) does not benefit from the same advantages that COPA does.
Competition in the Brazilian domestic market is fierce; while
observers had hoped that the consolidation from GOL's merger with
Webjet would see more airline profitability, AviancaTaca's
expansion and concomitant rising market share ensured that the
Brazilian market remains as competitive as ever.
As a result, GOL has had to shed capacity in order to maintain
profitability. According to reports from Brazil, this strategy has
yet to pay dividends; GOL's planes are flying with only a
64.9% load factor
, well below market leader LATAM (
) at 75.1%. Furthermore, labor costs are rising, GOL is overexposed
to a weakening real, and the company has little exposure to more
lucrative international routes. As the company contracts,
it's hard to see a scenario in which the company returns to
over the next few quarters.
Fundamentally, COPA appears better positioned to move higher
than GOL; technically, the Panamanian carrier is also in a superior
position. COPA is currently holding around its 52-week high. If the
stock can make a new high, COPA could move significantly further
Conversely, GOL is in a short-term downtrend, hovering just
above its 100-day moving average; a technical breakdown could see
the stock fall much lower.
Savvy traders should consider putting on this pair trade.
Traders can take advantage of a well-run company with an attractive
valuation by going long COPA while shorting a less fundamentally
sound company in GOL without worrying about being overly exposed to
the pitfalls of the airline industry thanks to the long/short
nature of a pair trade.