Copa Leveraging Emerging Market Air Travel Growth And Exceptional Operating Efficiency

Summary

• Copa's recent investor day highlighted multiple efforts to make an already very efficiency and profitable airline even more profitable, including streamlining the fleet and a company-wide cost reduction initiative.
• Copa remains leveraged to a market with good long-term fundamental growth characteristics, and management's focus on revenue and cost optimization don't seem to be compromising the customer experience.
• Copa shares continue to look undervalued, though the shares have historically shown more volatility than the underlining operations would otherwise suggest.

Copa (NYSE:CPA) shares have done alright since my last update, gaining a bit though not as much Azul (AZUL) or LATAM (LTM), the latter of which got a big boost from Delta (DAL) announcing its intention to invest in the airline. In any case, Copa continues to execute to a plan that has long proved successful – serve a broad selection of markets throughout Latin America with narrow-body jets using a hub-and-spoke model and focusing relentlessly on costs.

I do see some risk over the next few quarters as Copa looks to accelerate its fleet transformation (adding more Boeing (BA) MAX jets and retiring Embraer (ERJ) jets), but I think the risk is more to market perception and patience than any long-term issues for the business. With the shares still trading below my fair value, I’m bullish on an airline that is not only serving some attractive growth markets but also operating one of the most profitable models in the world.

Fleet Transformation Makes Sense, But It Will Require Capital And It Carries Some Risk

Between Copa’s third quarter earnings and December investor day, management made it clear that they are planning an accelerated transformation of its fleet.

The company will be accelerating its exit from the E190 jet, retiring nine in 2020 and the remaining five in the first half of 2021. Not only has the E190 had some issues, it costs more money for airlines to operate a more diverse fleet (crew training costs, inefficiencies in maintenance, et al) and eliminating the E190 will help drive a 6% reduction in cost/seat between 2019 and 2021.

Copa is also looking for the resumption of flights with the MAX in the first quarter of 2020 (previously management was hoping to resume flights in December), and expects 14 deliveries in 2020, bringing the total

Analyst’s Disclosure:I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.