Cuba Airlines: A Tough Buying, But Taking Back Business Travel May Help (NYSE: CPA)

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Copa Airlines reported earnings on May 11. The Panamanian airline reported results that were hit by a hit in COVID-19 cases, but remains optimistic about its future results. In this report, I will look at the results and expectations Cuba Airlines.

Strong results for Copa Airlines

Copa Airlines Q1 2022 results

Copa Airlines Q1 2022 results (Copa Airlines)

Copa Airlines had first-quarter revenue of $571.6 million. This was 85% of revenue for the first quarter of 2019 (pre-pandemic). Revenue was lower primarily due to lower capacity of 12.4% and slightly lower revenue per available seat mile, partially offset by higher freight and mail revenue.

Fuel prices rose 12.4% as a result of 18.1% lower gallon consumption, offset by a 37.4% increase in jet fuel prices. The lower gallons consumed were driven by fewer mass hours. Fleet-specific simplifications and reductions have reduced depreciation and amortization, as well as maintenance costs. The increase in expenditures was mainly driven by rising fuel costs. Overall, Copa Holdings reported net profit of $19.8 million and operating profit of $44.8 million reflecting lower capacity, reduced headcount, fleet streamlining and an increase in fuel costs. Compared to 2019 figures, this is down from 60 to 80 percent because Copa Airlines continues to generate lower revenue at cost levels in line with 2019.

Sequentially, there was a slight decrease in revenue due to Omicron, but Copa Airlines was not willing to provide any figure for Omicron’s impact on revenue. Costs rose 27% mainly due to increased aviation activity while fuel costs jumped, accounting for approximately 37% of the increase in fuel costs. So, sequentially, there were some headwinds as the increased flight did not translate into base growth.

Copa Airlines Q1 2022 unit results

Copa Airlines Q1 2022 unit results (Copa Airlines)

It is also interesting to look at what happens at the unit level sequentially as well as at the level of one or more years (pre-pandemic). Over three years, passenger numbers have fallen about 12% and revenue per available seat mile is down 2.7% while cost per available seat mile, or CASM, is up 7.5% and down -1.6% excluding fuel. Therefore, fuel prices led to a rise in CASM.

Sequentially, there were some headwinds from a spike in omicron infection. Therefore, the 10% increase in capacity has put pressure on revenue per available seat miles and pressured load factors. Cost per available seat mile or CASM jumped 15.7%. Excluding special items, CASM increased by 4.2% and excluding fuel, CASM decreased by 1.7%.

What should be kept in mind is that increased capacity can lead to lower unit costs, but if there is no demand to fill seats, it will create headwinds for unit revenue, which is what happened to Copa Airlines in the first quarter of the year.

Expectations of a margin of pressure on fuel prices

Copa Airlines Q2 2022 Directive

Copa Airlines Q2 2022 Directive (Copa Airlines)

Copa Airlines is holding off on full-year guidance, but expects 98% of its capacity to run for 2019 and CASM to be 5.9 cents, which is CASM excluding fuel. This means that the actions taken to restructure the airline are expected to reduce unit costs by 3.2%, while operating at 100% capacity and improving aircraft utilization could reduce costs in the future.

Boeing 737 Max 9 from Cuba Airlines

Air Cuba Boeing 737 Max 9 (Copa Airlines)

The forecast for the second quarter of 2022 looks rather realistic. Demand is good enough to run 96% of capacity with strong pent-up demand that should result in significantly higher returns. However, fuel price increases will eat up half of the yield premium before they reach the bottom line. The airline expects profit margins of 3 to 5 percent, which is somewhat disappointing because it means that the top-line improvement will not translate into strong marginal expansion. These estimates are based on 86% load factor and $4 jet fuel per gallon. Traffic figures for April showed load factors of 84.9%, while IATA fuel control showed $3.89 a gallon, up 5% from last week but over 5% more than last month.


Copa Airlines’ results show that the company has been able to reduce unit costs, excluding fuel. The airline has several levers to further improve its profits. These levers include taking advantage of Copa Airlines’ only 50% reimbursed business flight recovery, expanding capacity and improving aircraft utilization.

However, what is clearly visible in the forecast is the challenging environment where fuel prices are on the rise. That will actually bring margins down from about 8% to 3 to 5% in the second quarter. At the moment, there is a lot of optimism about profitability, as the demand for air travel is so strong that it will outpace the growth of the fuel bill of many airlines. However, if oil prices continue to rise, the current rise in demand for air travel may not be enough for airlines to maintain strong margin levels. While I believe Copa Airlines is a buy based on its ability to reduce ex-CASM fuel below levels seen in 2019, the environment of high fuel prices, inflation and the temporary nature of pent-up demand provide a difficult backdrop for Copa Airlines to rebuild margins.

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