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Fuel Costs Sink Copa Holdings' Earnings

By Travis Hoium - Nov 21, 2018 at 8:19AM

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Higher revenue couldn't overcome the fuel headwind facing the airline industry today.

Copa Holdings, S.A. (CPA -2.77%) continues to grow on the top line as it slowly expands its fleet, which now stands at 102 aircraft. But the company is facing fuel costs that could make it tough to maintain the high margins the company experienced in the last few years. Recently released third-quarter results show some operating challenges that even could be out of management's hands. 

Here's a look at the high-level numbers for the third quarter and the operating metrics driving results.

Airplane flying high above the clouds in blue skies.

Image source: Getty Images.

Copa Holdings: The raw numbers

Metric Q3 2018 Q3 2017 Year-Over-Year Change
Revenue $672.4 million $538.0 million  2.1% 
Net income $57.7 million  $105.3 million  (45.2%) 
Diluted EPS $1.36  $2.48  (45.2%) 

Data Source: Copa Holdings, S.A. Q3 2018 earnings release. EPS = earnings per share.

What happened with Copa Holdings this quarter? 

Growth on the top line appears solid, but digging deeper into the numbers shows it's not as impressive as you might think. Aircraft aren't as full as they used to be, and margins on each customer are dropping. 

  • Revenue passenger miles increased 4.8%, to 5.59 billion, as the fleet expanded versus a year ago. But revenue per average seat mile fell 4.2%, to $0.101, which is why overall revenue was up only slightly. 
  • On the cost side, the biggest challenge was fuel. Cost per average seat mile excluding fuel was down 5.5%, to $0.06, but the average price of a gallon of fuel jumped 31.6%, to $2.40, driving overall cost per seat mile up 4.3%, to $0.09. 
  • Load factor, which measures the number of seats used on each plane, was down 140 basis points, to 84.3%. 
  • The metrics above drove a 730-basis-point drop in operating margin, to 11%. 

Weak economic and currency conditions in Brazil and Argentina drove some of the weakness, which shouldn't go unnoticed by investors. But when Latin America is your bread-and-butter market, you're at the whims of some of these macro market conditions. 

Despite declining results, management said the company would pay a dividend of $0.87 per share to shareholders of record November 30, 2018. 

What management had to say

CEO Pedro Heilbron summed up the quarter well on the conference call saying

On the expense side, we had more than $48 million of additional cost due to higher fuel prices and on the revenue front, we faced a deteriorating demand environment mainly driven by economic and currency weakness in Brazil and Argentina. This is not exclusive to Copa as International IATA BSP [International Air Transport Association's Billing and Settlement Plan] sales for the entire industry in these two markets measured in U.S. dollars were down about 25% and 40%, respectively, for the quarter.

Headwinds in Brazil and Argentina are more macro so they'll likely depress results for the foreseeable future. Fuel is up and down, so it'll be a headwind in some quarters and a tailwind in others, which is what investors should expect from airline stocks at this point. 

Looking forward

Fuel costs are down this quarter, so some of the margin pressure we're seeing may reverse in coming quarters. The bigger concern is the yield and demand for airline travel in key countries like Brazil and Argentina. 

On the upside, Copa Holdings has been able to control operating costs as revenue per seat mile has fallen, which is what investors should want to see. That's why this is one of the best airline operators in the world and still a stock to hold long term. 

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