Copa Holdings Stock

Copa Holdings, S.A. (Copa), through its subsidiaries, operates as a Latin American provider of airline passenger and cargo services.

The company’s two principal operating subsidiaries are Copa Airlines (Compañía Panameña de Aviación, S.A.) and AeroRepública, S.A. (AeroRepública). Copa Airlines operates from its strategically located position in the Republic of Panama. AeroRepública operates a low-cost business model, Wingo (AeroRepública and La Nueva Aerolínea, S.A.), within Colombia and various cities in the region.

As of December 31, 2022, the company operated a fleet of 97 aircraft, 77 Boeing 737-Next Generation aircraft, 20 Boeing 737 MAX 9 aircraft and one Boeing 737-800 BCF (Boeing Converted Freighter). As of December 31, 2022, the company had firm orders to purchase 66 Boeing 737 MAX aircraft to be delivered between 2023 and 2028.

Copa offers approximately 327 daily scheduled flights among 78 destinations in 32 countries in North, Central and South America and the Caribbean from its Panama City hub. Copa provides passengers with access to flights to more than 180 other destinations through code-share arrangements with UAL and other airlines pursuant to which each airline places its name and flight designation code on the other’s flights. Through its Panama City hub, Copa is able to consolidate passenger traffic from multiple points to serve each destination effectively.

Copa has a strategic alliance with United Airlines, or UAL or United that encompass joint marketing strategies and code-sharing arrangements, among other things. The company has been a member of Star Alliance since June 2012.

The company’s fleet consists of Boeing 737-MAX and Boeing 737-Next Generation aircraft equipped with winglets and other modern cost-saving and safety features. Over the next several years, the company intends to enhance its modern fleet through the addition of 66 Boeing 737 MAX aircraft to be delivered between 2023 and 2028.

Copa Airlines is the company’s principal airline operating subsidiary that operates out of its hub in Panama and provides passenger service in North, South and Central America and the Caribbean. Copa Airlines Colombia is the company’s operating subsidiary that provides air travel from Colombia to Copa Airlines Hub of the Americas in Panama, and operates a low-cost business model, Wingo, within Colombia and various cities in the region. Oval Financial Leasing, Ltd. controls the special purpose vehicles that have a beneficial interest in the majority of the company’s fleet.

Strategy

The key elements of the company’s business strategy are to expand its network by increasing frequencies and adding new destinations; and emphasize superior service and value to its customers.

Route Network and Schedules

As of December 31, 2022, Copa provided regularly scheduled flights to 78 cities in North, Central and South America and the Caribbean. These destinations represent 98% the number of cities served in 2019. The reduction in the number of cities served is due to the effects of the COVID-19 pandemic on the economies in the region. The majority of Copa flights operate through its hub in Panama City which allows the company to transport passengers and cargo among a large number of destinations with service that is more frequent than if each route were served directly.

Copa schedules its hub flights using a connecting bank structure, where flights arrive at the hub at approximately the same time and depart a short time later. In addition to increasing the frequencies to destinations the company already serves, Copa’s business strategy is also focused on adding new destinations across Latin America, the Caribbean and North America in order to increase the attractiveness of its Hub of the Americas at Tocumen International Airport for intra-American traffic. The company plans to introduce new destinations and to increase frequencies to many of the destinations that Copa currently serves. The company’s fleet allows it to improve its service by increasing frequencies and service to new destinations with the right-sized aircraft.

As a part of its strategic relationship with UAL, Copa provides flights through code-sharing arrangements to over 120 other destinations. In addition to codeshares provided with the company’s Star Alliance partners, Copa also has code-sharing arrangements in place with several other carriers, including Air France, KLM, Iberia, Air Europa, Emirates, Gol, Azul and Cubana.

In December 2016, the company launched a business model, Wingo, to diversify its offerings and to better compete with other low-cost carriers in the markets. Wingo serves domestic flights in Colombia and some international cities to and from Colombia.

Airline Operations

Passenger Operations

Leisure traffic, which makes up close to half of Copa’s total traffic, tends to coincide with holidays, school vacations and cultural events and peaks in July and August, and again in December and January. Approximately one third of Copa’s passengers regard Panama City as their destination or origination point, and most of the remaining passengers pass through Panama City in transit to other points on its route network.

Cargo Operations

In addition to its passenger service, the company makes efficient use of extra capacity in the belly of its aircraft by carrying cargo. The company primarily moves its cargo in the belly of its aircraft; however, it also wet-leases and charter freighter capacity when necessary to meet its cargo customers’ needs. In 2021, the company converted a Boeing 737-800 passenger aircraft into a cargo aircraft. In March 2022, the newly converted freighter aircraft, the Boeing 737-800 BCF with a capacity of 21.7 tons per flight, began operations.

Sales, Marketing and Distribution

Sales and Distribution: A significant portion of the company’s sales were completed through travel agents, including OTAs and other airlines while the rest came from direct sales via its city ticket offices, or CTOs” call centers, airport counters or website. In recent years, travel agents’ base commissions have decreased significantly in most markets as more efficient back-end incentive programs have been implemented to reward selected travel agencies that exceed their sales targets.

Copa has a sales and marketing network consisting of 32 ticket offices, including city ticket offices located in Panama, Colombia and other countries, in addition to the airports where it operates.

In September 2022, Copa implemented a channel differentiation strategy (Copa Connect) with the objective of shifting sales to more cost-efficient channels. This strategy adds a distribution surcharge to the fare for tickets purchased through the traditional travel agency GDS channel (known as EDIFACT) in order to partially offset the higher cost of this channel. For travel agencies, and their customers, who want to avoid the GDS distribution surcharge, the company has offered alternatives leveraging the IATA New Distribution Capability (NDC) standard. Agency adoption rates are uncertain because Copa Connect can require process and technology changes for travel agencies. Moreover, GDS suppliers, in some cases, also provide agencies with financial incentives based on the volume of bookings or tickets issued via the GDS so agencies may have a financial incentive to continue using the traditional channels. No distribution surcharge is included for tickets sold through copa.com, call center, or other direct Copa channels.

Advertising and Promotional Activities: In recent years, the company has increased its use of digital marketing, including social media via Facebook, Instagram and Twitter to enhance its brand image and engage customers in a new way. Although the majority of the company’s efforts are focused on digital channels, its advertising and promotional activities also include the use of television, print, radio and billboards, as well as targeted public relation events in the cities where it flies. The company promotes package deals for the destinations where it flies through combined efforts with selected hotels and travel agencies.

Aircraft

As of December 31, 2022, Copa operated a fleet consisting of 97 aircraft. As of December 31, 2022, Copa had firm orders to purchase 66 Boeing 737 MAX aircraft to be delivered between 2023 and 2028. In October 2018, Copa signed an aircraft sale and purchase agreement with Azorra Aviation for the sale of five Embraer 190 aircraft in 2019. In 2020, the company signed an aircraft sale and purchase agreement for the remaining Embraer 190 aircraft and announced the sale of the B737-700 fleet. In 2021, the deliveries of the Embraer 190 aircraft were completed by June 2021, and three B737-700 aircraft were sold. Due to an increase in demand in the region, the Board of Directors approved continuing to operate the remaining nine Boeing 737-700 aircraft for a period of three years. During 2022, the xompany sold two B737-700 airframes that were under a lease agreement to a third party.

As of December 31, 2022, the company had firm orders to purchase 66 Boeing 737 MAX aircraft to be delivered between 2023 and 2028. The 737 MAX provides additional benefits to the fleet such as fuel efficiency, longer range and additional capacity compared to the current Copa seat configuration.

Through several special purpose vehicles, the company has beneficial ownership of 67 of its aircraft. In addition, the company leases 30 of its aircraft under long-term lease agreements that have an average remaining term of 2.9 years.

To better serve its business travelers, the company offers a business class (Clase Ejecutiva) configuration in its fleet. The company’s business class service features upgraded meal service, special check-in desks, bonus mileage for full-fare business class passengers and access to VIP lounges. The company’s Boeing 737-800 aircraft has three different configurations: one with 16 business class seats with 38-inch pitch and a total of 160 seats, a second with 16 business class seats with 48-inch pitch seats and a total of 154 seats and a third with 16 business class seats and a total of 166 seats. The company’s Boeing 737 MAX 9 aircraft feature two configurations: one with 16 full lie-flat seats in business class (Dreams) and a total of 166 seats and another configuration with twelve full lie-flat seats in business class (Dreams) and a total of 174 seats. The company’s Boeing 737-700 aircraft have 12 business class seats and a total of 124 seats.

Also, within the Copa Holdings fleet, there are nine 737-800s dedicated to the operations of Wingo. These aircraft are equipped with 186 economy class seats.

Each of the company’s Boeing 737-Next Generation aircraft is powered by two CFM International Model CFM 56-7B engines. The company’s Boeing 737 MAX 9 aircraft are powered by two CFM International Leap 1B engines. The company has ten spare engines for service replacements and for periodic rotation through its fleet.

Airport Facilities

The company provides most of its own ground services and handling of passengers and cargo at Tocumen International Airport. In addition, the company provides services to several of the main foreign airlines that operate at Tocumen International Airport. In most of the other airports where it operate, airport support services are provided by external third parties.

The company uses a variety of facilities at Tocumen International Airport, including its maintenance hangars and its operations facilities in the airport terminal. The company’s Gold and higher PreferMember passengers have access to two Copa Clubs at the Tocumen International Airport in Panama, one located at Terminal 1 and the second located in the new Terminal 2. These passengers also have access to other Copa Clubs in the region, which are strategically located in San Jose, Guatemala City, Santo Domingo and Bogotá.

Environmental

The company maintains an Environmental Management and Adequacy Program (PAMA) in all its facilities located in Panama, including its maintenance hangar and support facilities at the Tocumen International Airport, Administrative Offices in Costa del Este and Training Center in Clayton. This program was approved by the Panamanian National Environmental Authority (ANAM) in 2013, a governmental entity named the Ministry of Environment (MiAmbiente), and includes actions, such as a recycling program, better use of natural resources and final disposition of the unfiltered water used for aircraft maintenance, among many others. The Copa Tocumen International Airport’s PAMA final report is presented to MiAmbiente on an annual basis to monitor and report the company’s environmental follow-up assessments. Copa Airlines is an active signatory company of the Global Compact of the United Nations with its local chapter of the Global Compact Network Panama, and has, thus, published the company’s Communication on Progress (COP) since October 2001.

Starting in 2019, Copa is reporting the fuel consumption burned during its annual flight operations and its gas emissions to the Panamanian Civil Aviation Authority (the Autoridad Aeronáutica Civil, or the ‘AAC’). As a result, Copa is in line with the global aviation effort led by the International Civil Aviation Organization, Colombia, and Panama Civil Aviation Authorities with the implementation of the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA).

Regulation

Panama

The most significant restriction on the company imposed by the Panamanian Aviation Act, as amended and interpreted as of December 31, 2022, is that Panamanian nationals must exercise ‘effective control’ over the operations of the airline and must maintain ‘substantial ownership’.

The United States

Operations to the United States by non-U.S. airlines, such as Copa Airlines, are subject to Title 49 of the U.S. Code, under which the U.S. Department of Transportation (DOT), the FAA, and the U.S. Transportation Security Administration (TSA) exercise regulatory authority.

Two U.S. airports at which the company operates, O’Hare International Airport in Chicago (O’Hare) and John F. Kennedy International Airport in New York (JFK), were formerly designated by the FAA as ‘high density’ traffic airports subject to arrival and departure slot restrictions during certain periods of the day.

Competition

The company competes with a number of other airlines that serve some of the routes on which it operates, including Avianca Holdings (Avianca), American Airlines, Delta Air Lines, Spirit, JetBlue, Azul, Aeromexico, Gol, Volaris, Viva Air and LATAM Group among others. In the past, several air carriers have merged and/or reorganized, including certain of the company’s competitors, such as LAN-TAM, Avianca-Taca, American-US Airways and Delta-Northwest.

History

Copa Holdings, S.A. was founded in 1947. The company was incorporated according to the laws of the Republic of Panama in 1988.