Copa Holdings Hits Turbulence on Latin America Weakness

Copa Holdings (CPA +0.02%) is seeing some of the economic and political upheaval in Latin America start to affect its business. Plane ticket prices are down over the past year and still there are fewer riders boarding aircraft. The result is pressure on revenue and a big drop in earnings.

The good news is that Copa Holdings continues to be one of the best operators in the business, with 89.7% on-time performance and 99.8% flight completion. Combined with low costs, being a reliable airline will keep the company flying even when the underlying economy in Latin America is weak. 

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Copa Holdings results: The raw numbers

Data source: Copa Holdings Q4 2018 earnings release. 

What happened with Copa Holdings this quarter? 

The net income and EPS numbers above don't quite tell the whole story about Copa Holdings' operations in the fourth quarter. Here are some airline operating metrics that show how the company is doing. 

• Revenue passengers carried increased by 2.8% to 2.55 million and revenue passenger miles rose 4.9% to 5.34 million in the quarter. This was largely due to a growing fleet of aircraft that's now up to 105 units. 
• Pricing is where Copa faced the most pressure. Revenue per average seat mile was down 7.7% to 10.2 cents. Load factor falling from 85.7% a year ago to 84.3% in the fourth quarter likely drove a lot of the pricing pressure. 
• Costs were also higher, and cost per average seat mile was up 32.3% to 12.2 cents. Excluding fuel, it was up 38.4% to 9.1 cents. Adjusted for one-time items, costs increased only 0.5% to 9.3 cents per average seat mile. 
• Fuel was another headwind, with the average price of a gallon rising 17.5% to $2.38. 
• The revenue and cost pressure led to a 46.9% drop in adjusted operating income to $58.9 million in the fourth quarter. 
• Despite the loss in the quarter, the board of directors approved a dividend payment of $0.65 per share to be paid on March 15, 2019. 

The large loss you see above was due in large part to what management calls "special items," which include a one-time fleet impairment charge of $188.6 million and an $11.4 million loss on foreign currency translation. The fleet impairment is related to the sale of up to six Embraer-190 aircraft, which was announced in its third-quarter results. Without these items, the company would have earned $44.0 million, or $1.04 per share. 

What management had to say

Latin America has had its share of turbulence in the past year, and management said in the earnings release that falling yield was "mostly due to currency weakness in Brazil and Argentina." Given the political and economic upheaval in the region, it's uncertain when those regions will see demand pick up again. 

Until demand does pick up, Copa will have to rely on its low costs to maintain an operating profit, but with rising fuel costs and falling yield, it's going to be a challenge.

Check out the latest Copa earnings call transcript. 

Looking forward

There are more questions than answers for Copa Holdings at the moment. The company is always reliant on the Latin American economy for demand, and when the economy is struggling like it is now, Copa feels the pain. As much as short-term earnings may be hurt by the economy, investors can fall back on Copa's low costs and high reliability as the core of the investment thesis for the stock. As long as operations are strong, there's no reason to jump ship after a bad quarter or two.