Having appreciated 38% year to date, shares of airline Copa Holdings (NYSE:CPA) have outperformed those of most of its legacy and low-cost carrier peers so far in 2019. A localized focus on the Latin American market and manageable exposure to the grounded Boeing 737 MAX are two factors that have made Copa a popular choice among airline investors this year. Let's review below the company's third-quarter report, which was released after the close of trading on Wednesday. Note that all comparative numbers refer to those of the prior-year quarter.
Copa Holdings: The headline numbers
|Metric||Q3 2019||Q3 2018||Change|
|Revenue||$708.2 million||$672.4 million||5.3%|
|Net income||$104.0 million||$57.6 million||80.6%|
|Diluted earnings per share||$2.45||$1.36||80.1%|
Essential details from the report
- Yield per passenger mile improved by nearly 8% to 12.5 cents. The carrier's load factor rose 1.4 percentage points to 85.6%. Higher yield and load factor resulted in revenue per available seat mile, or RASM, that improved by 9.4% to 11.1 cents.
- Management pointed out that the higher load was achieved despite a 3.7% contraction in capacity (as measured in available seat miles, or ASMs) due to the MAX 737 grounding.
- Cost per available seat mile (CASM) inched up 0.5% to 9.0 cents, providing operating leverage from the higher revenue.
- Costs were held down as a 2.7% drop in gallons of fuel consumed, combined with a 10% decrease in average fuel cost per gallon (to $2.16), offset other operating expenses. CASM ex-fuel rose by 5.5% to 6.2 cents; the higher unit costs were impacted in part by the grounding of Copa's MAX 737 planes.
- Total operating expenses decreased by 3.2% to $575.3 million, helped by lower fuel expense, which fell by 12.6% to $177.6 million, as well as a dip in "other" operating and administrative expenses. Copa's revenue advance coupled with reduced overhead resulted in a leap of 7.2 percentage points in operating margin, to 18.8%.
Status of the 737 MAX and Embraer-190
In Copa's earnings press release, the company relayed to shareholders that it's removed its six Boeing 737 MAX 9 aircraft from its schedule until mid-February 2020 as part of the worldwide grounding of the MAX fleet. The company hasn't taken any deliveries of the MAX since the plane's initial grounding in March of 2019, though it was on schedule to receive seven more MAX planes by the end of 2019.
The carrier also disclosed that subsequent to quarter-end, management made the decision to speed up the exit of its Embraer 190 fleet, which was originally planned to occur over a three-year period. Copa now intends to sell its remaining 14 E-190s over an 18-month period. Management anticipates a possible $90 million charge against earnings related to the sale of the aircraft and spare parts inventory.
During Copa's earnings conference call, CEO Pedro Heilbron provided some context for the decision:
With regards to other fleet matters, we have made the decision to exit our remaining Embraer-190s, as we see significant cost and revenue benefits from operating a single Boeing fleet. So, while we will most likely end up taking a significant number of MAX aircraft next year, most of them will be used to replace the outgoing 100-seat Embraer aircraft. As such, we now expect our capacity to grow only by approximately 5% year-over-year, with the bulk of the growth coming in during the second half of the year.
Revisions to Copa's 2019 outlook and a first glance at 2020 projections
Given the continued limbo of the 737 MAX, Copa Holdings on Wednesday reduced its full-year 2019 capacity guidance to a year-over-year decrease of 3%, against the previous projected capacity decline of 2%. In addition, the company tightened its anticipated operating margin percentage for 2019 to 16%, against an earlier range of 15% to 17%.
The carrier also released its preliminary outlook for 2020. As CEO Heilbron mentioned in the excerpt above, Copa expects year-over-year capacity to improve by 5% in 2020; additionally, full-year operating margin is expected to range between 16% and 18%. The company anticipates that its jet fuel price per gallon will average $2.10 in 2020.
Initial 2020 estimates point to solid financial performance next year. Despite their surge in 2019, Copa's shares still trade for only 14 times forward earnings. As part of the cyclical airline industry, the company remains a value investment, as investors are currently uncertain about the potential impact of a slowing global economy on airline stocks next year. But if macroeconomic conditions brighten, Copa could well see a higher multiple assigned to its shares.