After touching multiyear lows in late 2015, Copa Holdings' (NYSE:CPA) stock is finally taking off again. The Latin American airline's first-quarter earnings report showed unit revenue and operating margins trending back in the right direction, with upbeat guidance from management helping push the stock to a 24-month high.
As impressive as those gains have been, this ride looks far from over. The company's most recent Investor Day presentation highlighted several reasons that Copa's impressive performance looks likely to continue for years to come.
The Latin American economic recovery is underway
Throughout 2015 and 2016, demand in many of Copa's primary markets -- including Brazil, Colombia and Venezuela -- fell sharply due to deteriorating economic conditions and weakening currencies. Latin American GDP growth grew just 0.1% in 2015 and fell 1% in 2016.
Things have generally improved over the past couple of quarters, however, and a full recovery now looks to be underway. The International Monetary Fund is projecting Latin American GDP growth of 1.1% in 2017 and 2% in 2018. Copa's management says demand continues to strengthen in the second quarter, and expects this trend to continue for at least the remainder of this year.
As these economies stabilize, Copa expects additional traffic increases in the years ahead, noting that air traffic in Latin America has historically expanded at two to three times the rate of GDP growth. And according to Boeing and Airbus estimates, traffic within Latin America is expected to grow at around 6% a year for the next 20 years.
Location, location, location
Utilizing a hub-and-spoke model, the airline's hub in Panama City provides an ideal connection point for many travelers throughout Latin America -- and something of a competitive advantage as well.
With service to 75 destinations in 31 countries, Copa is focused on what it calls "underserved, thin markets," operating primarily in markets that carry 50 or fewer passengers per day each way. This means that most other carriers can't sustain service to these destinations and that in most cases, Copa's network is the most convenient option. As a result, Copa has at least 50% market share in 45% of its markets.
Panama City's Tocumen Airport -- where Copa already accounts for more than 80% of daily operations -- is also in the midst of a major expansion that should allow Copa to further capitalize on its geographic advantage. The new South Terminal, expected to open partially in 2018, will help fuel Copa's long-term growth with 20 additional available jet bridges.
Much higher margins on the way
Copa's ability to prudently manage its costs and capacity was on full display during the past couple of years. Even during the worst of its struggles, the airline managed to post operating margins of around 12% in both 2015 and 2016.
However, the good news for investors is that margins are expected to rebound significantly. Management has targeted cost reductions in areas like fuel management and maintenance that should result in recurring annual savings of $50 million by the end of 2018. Between recovering economies, the cost initiatives above, and other revenue opportunities, the airline believes it can boost operating margins by 9 to 11 percentage points over the next two to three years -- which, if successful, would be even better than the company's historical highs of 19%-plus. That won't happen overnight, but the company is guiding for 2017 operating margin of 15% -- already a significant improvement over last year.
A flexible approach to growth
Copa currently operates a fleet of 100 planes, which it plans to grow to 111 by 2019. However, the company has the ability to flex its fleet growth significantly up or down depending on how the future unfolds. On the high side, Copa says it could expand its fleet count up to 170 or so by 2024, or as low as 115 if the company needs to grow more conservatively. This nimbleness should allow Copa to react to an unexpected market boom (or downturn) more quickly than its competitors.
After the downright awful operating environment of the past couple of years, Copa appears to have emerged a stronger airline. With the Latin American economy now acting as a tailwind, Copa's geographic and low-cost advantages should come into sharper focus, helping the airline's business rise even higher over the next several years.