Investors are starting to see the impact of the grounding of Boeing (BA +2.32%) 737 MAX aircraft, and Copa Holdings (CPA +2.21%) is one of the companies feeling the pinch. Flights were down in the second quarter of 2019, and if it weren't for rising yields and revenue per mile, we could have seen a bad quarter.
But operating conditions continue to be strong for the airline business in Latin America, and Copa is holding up well.
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Copa Holdings: The raw numbers
| Metric | Q2 2019 | Q2 2018 | Change |
|---|---|---|---|
| Sales | $645.1 million | $634.1 million | 1.7% |
| Net income | $50.9 million | $49.8 million | 2.1% |
| Diluted EPS | $1.20 | $1.17 | 2.1% |
Data source: Copa Holdings.
What happened with Copa Holdings this quarter?
The headline numbers aren't impressive on the surface, but when you dig into the decline in flights and miles because of the 737 MAX's grounding, it's impressive that revenue and earnings didn't plunge. Here are some key metrics for the quarter:
- Revenue passenger miles (RPM) fell 2.5% to 5.25 billion and available seat miles fell 4.3% to 6.17 billion. Departures also fell 0.5% to 32,676, and block hours dropped 4% to 106,425. All of these reductions were due to the grounding of the 737 MAX.
- Load factor was strong at 85.1%, up from 83.5% a year ago.
- Pricing was very solid with revenue per available seat mile up 6.3% versus a year ago, to 10.5 cents.
- Cost per available seat mile fell 2.5% to 9.1 cents overall with costs excluding fuel down 5.7% to 6.2 cents.
- The combination of rising prices and falling costs resulted in an operating margin expansion from 9.5% to 12.8%.
The quarter ended with 104 aircraft in the fleet, including six 737 MAXs that are expected to be out of the schedule until December, so you can see the drag that the grounding will have on operations. Still, Copa was able to generate cash and announced a dividend.
- Cash flow from operations over the first half of the year was $331.1 million, and total cash and investments were $893.3 million at the end of the quarter.
- Management announced a dividend of $0.65 per share, payable to shareholders of record on Aug. 30.
What management had to say
There are certainly challenges facing Copa Holdings, but management is encouraged by a solid pricing environment and its own ability to control costs. CEO Pedro Heilbron said this about the quarter: "Air travel demand in the region [Latin America] continues to improve, and our industry is also benefiting from a more rational capacity environment. Specifically, for Copa, we continue seeing the benefits of the many commercial initiatives that we have been implementing over the past years, generating incremental revenues from our frequent flyer program and ancillary products, as well as better revenue management practices."
Ironically, the reduction in supply due to the MAX's grounding is probably helping the pricing environment for Copa. And that's offsetting some of the challenges it faced in the second quarter.
Looking forward
Management also updated guidance for the full year, with some bullish indications. Operating margin is now expected to be 15% to 17%, with revenue per available seat mile of 10.8 cents and costs excluding fuel of 6.3 cents. That's similar to this quarter's cost structure. And if that holds, it'll lead to a good year, despite the grounding of the 737 MAX fleet.
