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Copa Holdings, S.A. (NYSE:CPA) has enjoyed a resurgence in leisure travel as pent-up demand in the post-pandemic era has driven growth since the world has started to open up again.
While the company has been able, so far, to offset much of the increase in fuel costs, going forward that is likely to get harder to do, assuming they remain at high levels throughout 2023.
The company has a chance to boost growth in its corporate business because it still has room to grow from its pre-pandemic levels.
Taking everything into account, how the company performs over the next year or so will be determined by the length and depth of the recession and how consumers and businesses respond to it.
In this article we’ll look at the company’s recent performance, how things look for the next couple of quarters, and what to expect over the longer term.
Some of the numbers
In the third quarter, CPA generated revenue of $809.45 million, up 81.90 percent year-over-year, but missing estimates by $11.46 million. Revenues were up 14.3 percent from the third quarter of 2019.
Revenue per available seat mile (RASM) climbed 15.0 percent to 12.8 cents.
Passenger traffic, as measured by revenue passenger mile (RPMs), was up slightly by 0.8 percent compared to 3Q19, while capacity was down by 0.6 percent. Consequently, load factors in the third quarter climbed 1.2 percentage points to 86.8 percent.
Net profit in the reporting period was $115.9 million, or $2.93, beating by $0.21, compared to a net profit of $104 million, or $2.45 per share in the third quarter of 2019. Excluding special items the company would have had a net profit of $115.1 million or $2.91 per share.
Operating profit in the quarter was $143.7 million, with an operating margin of $17.8 percent. In the third quarter of 2019 operating profit was $132.9 million, with an operating margin of 18.8 percent.
Operating cost per available seat mile (CASM) was up 16.4 percent from 9.0 cents in the third quarter of 2019 to 10.5 cents in the third quarter of 2022, primarily as a result of higher fuel prices. Excluding fuel CASM was down 5.3 percent in the reporting period to 5.9 cents, compared to the third quarter of 2019.
At the end of the quarter the company had $1.1 billion in cash, short-term and long-term investments, with total debt of $1.7 billion.
In the quarter CPA added a Boeing 737 MAX 9 aircraft, bringing the total fleet to 95 aircraft. It also added one new route to Felipe Angeles International Airport in Mexico City.
Share price and momentum
Over the last two years CPA has been trading volatile, with its 52-week high of $97.63 being the high mark during that period of time. It also had a double top of $93.23 in 2021 and 2022, which I think will be the test for the company to see if it’s going to be able to break through that ceiling or pull back like it has in the past.
On June 13, 2022 it hit its 52-week low of $55.25, and since has made a nice run to $88.75.
As I write it’s trading a little under $89.00 per share, so it’s approaching the make-or-break level in my opinion, which will determine its share price over the next couple of quarters.
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Based upon its latest earnings report, I’m not seeing anything that would suggest it’s going to be able to sustainably break out above $100.00 per share, and if that’s how it plays out, it’s likely to take another dive after it’s almost 6-month upward run.
That said, it has had some recent momentum, and if that continues, it could surprise to the upside; but even if it does, I don’t think it’ll be able to hold it for a prolonged period of time.
What’s been driving its growth
The major driver of growth for CPA has been leisure travel, which has been a significant catalyst since pent-up demand from the pandemic started taking effect. That momentum has continued, but whether or not it’ll continue throughout 2023 has yet to be answered, based upon economic conditions that could change consumer spending habits.
One positive catalyst that could drive the company’s performance and share price higher is in its business segment. The company noted that it still hasn’t recovered from pre-pandemic levels and is still down 25 percent from that time.
If business is able to recover to close to 100 percent of pre-pandemic levels, it could help the company surprise to the upside if leisure continues to hold and the new route to Mexico is successful.
In the prior quarters business had been accounting for 20 percent of overall revenues, and in the third quarter that bumped up to 25 percent. So it appears there is positive momentum there, but the length and depth of the recession will determine corporate spending on travel during 2023. At this time I see it going either way.
Management stated that at this time demand and yields are strong, but there is uncertainty as to how long that’ll last. And its competition has been adding capacity on a gradual but consistent basis, which could cut into CPA’s market share.
Conclusion
Copa Holdings has had a nice run since June, but as it approaches the $90.00 per share level, it’s not certain it will be able to sustainably break through and make a run at the $100.00 per share mark. If it was able to and the company can continue to maintain momentum, it could possibly hold above $100.00 in the next couple of quarters.
On the other hand, if the recession deepens and inflation remains high, consumers and businesses will be forced to rethink their spending priorities, which would result in less travel in 2023.
Unless fuel prices drop on their own, I’m not sure if the company can continue to offset higher prices as it has been able to recently. So if prices and overall inflation remain high, it’s going to cut into the travel business.
It appears to me that the company may have another quarter or two of growth and momentum left in it, based upon current economic conditions and industry outlook. But I don’t think that’s going to continue on throughout 2023.
With that in mind, I think CPA is approaching a top after its upward run since June 2022. It has failed to sustainably break above the $93.00 per share price, and even if it does maintain some momentum in the current quarter, I think it’ll struggle to do so if the economy worsens and competitors continue to add to capacity.
For that reason, even if the company is able to continue momentum in the short term, I think it’s getting close to the time when it’s due for a correction. If so, that will be a great time to add to or take a position in the top regional airline.
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