Copa Holdings (CPA 1.10%), operator of Latin American airline Copa Airlines, reported its second-quarter earnings earlier this month, with all its important metrics continuing to move in the right direction. As positive trends in passenger demand fueled strong revenue gains, Copa managed to beat analyst expectations on the top line, raised its full-year operating margin guidance, and announced a dividend increase to boot.
An improving Latin American economic picture
The second quarter saw demand continuing to strengthen throughout Copa's network, with CEO Pedro Heilbron noting, "[W]e're seeing overall positive growth in almost every market." The countries showing the most rapid growth were Brazil and the U.S., while Heilbron mentioned that a little unit revenue pressure remains in Central America --- which isn't a significant percentage of Copa's overall business. Heilbron also said that the currency fluctuations that helped pummel its results over the last couple of years seem to have abated for now. Perhaps most important, positive Latin American GDP growth after two years of recession is fueling more demand for air travel as well.
Image source: Copa Holdings.
Revenue growth accelerated
Powered by recovering economies in its key markets, Copa's revenue growth in the second quarter surged 16.8% year over year to $578.1 million, which handily beat analyst estimates of $564.1 million. And everywhere you look, there are encouraging signs that Copa's business is getting healthier by the quarter.
Copa's quarterly load factor (the percentage of seats filled by paying passengers) remained strong at 82.2%, up from 78.3% last year. Yields (the average fare paid per passenger, per mile) increased 3%, and unit revenue (revenue per available seat mile) increased 7.5%, easily meeting the "mid-single digits" growth expectations Copa had set after Q1. Both of these numbers increased more on a percentage basis than they did last quarter, which also helped Copa's top line accelerate beyond the 10.6% growth it achieved in Q1.
Operating margins and earnings were way up
Copa's ability to control its operating costs shone through once again this quarter. The company's CASM ex-fuel (cost per available seat mile, excluding fuel) was 6.3 cents. While that was flat compared to last year, it's still among the lowest for a full-service airline. With unit revenue expanding and unit costs remaining flat, Copa's operating margin came in at 14.4%, up significantly from 7% last year. This operating margin expansion helped propel earnings per share to $1.48, nearly tripling from the $0.51 Copa reported last year.
The company also raised its operating margin guidance for the year -- from 15%-17% to a new range of 16%-18%. Beyond that, Copa says its ambitions are to eventually get back to margins in the 20% range, and possibly even higher.
Surprise -- a bigger dividend is on the way
The cherry on top for investors this quarter was an unexpected dividend increase. Copa's standing dividend policy is to pay out 40% of the previous year's adjusted net income, in equal quarterly installments. The dividend for the first two quarters of 2017 was $0.51 per quarter.
In a shareholder-friendly move, the company broke with this policy and -- citing its strong cash position and continued solid financial results -- raised the quarterly dividend nearly 50%, from $0.51 to $0.75 per share for the remainder of 2017.
After another very solid quarter, the sky looks like the proverbial limit for Copa. Shareholders who have hung in through a couple of very difficult years are now being rewarded -- in terms of both the share price and a dividend that should continue to rise in the years ahead. As for why shares have fallen a bit since earnings were reported, perhaps the stock got a little ahead of itself -- it's still up nearly 50% over the past 12 months, and up 37% year to date. Regardless, Copa looks to be in a great position to benefit from increased air travel as long as Latin America returns to sustained economic growth.
