Copa Holdings, S.A. Earnings: Latin America's Slump Continues to Be a Drag

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The weakness in Latin America's economy continues to be a drag on Copa Holdings, S.A. (CPA 1.06%) in 2016. But the company's low cost structure has shown its advantage, buffering investors from too big a loss in net income. Here's a look at what you should know about second-quarter earnings, released Wednesday after the market closed.

Copa Holdings results: The raw numbers

YOY = year over year. Data source: Copa Holdings earnings release. 

What happened with Copa Holdings this quarter?

Revenue declined in large part because of lower ticket prices, and net income was hurt as a result. But with airlines, the headline numbers rarely tell the true story. So, a few key metrics are worth exploring to show what's really going on in the business. 

• Adjusted net income, which pulls out gains from unrealized fuel hedge positions and currency hedges, fell 47.6% to $21.5 million, or $0.50 per share. This more accurately portrays how quickly falling revenue has hit the bottom line.
• Revenue passengers carried rose 8.1% to 2.0 million, and revenue passenger miles rose 6.2% to 4.2 billion.
• Pricing was the real problem for Copa Holdings in Q2. Yield fell 14% to 11.3 cents per seat mile, and operating revenue fell 7.7% to 9.3 cents.
• Operating cost per seat mile fell just 5.5% to 9.1 cents, driven by a 21.3% reduction in fuel prices to $1.81. This is why adjusted net income fell as much as it did.
• As a result of prices falling faster than operating costs, operating margin fell 2.2% to 6.9% and breakeven load factor increased 4.7% to 66.6%.

What management had to say

The weak economy in countries like Brazil, Venezuela, and Colombia is certainly hurting pricing for airline tickets, but demand to fly is still fairly strong, and Copa Holdings' low cost structure still allowed for a profit during the quarter. This low cost structure is the company's competitive advantage, and will allow it to adjust flights to markets where there's more profitable demand.

To that end, management recently opened service to two new destinations -- Chiclayo, Peru, and Holguin, Cuba -- in an effort to diversify.

Looking forward

Managing costs in the face of economic weakness will be key throughout 2016, and Copa Holdings has done a good job on that front, helped by lower fuel costs. Investors should watch for signs that the economies in Latin America may be starting to turn a corner, which is really what the company needs to return to growth.

One positive to fall back on is the continuation of the $0.51 quarterly dividend. For now, Copa Holdings is still generating enough income to cover the dividend without weighing down the balance sheet, giving investors a nice 3.2% dividend yield until the macro environment improves.