Earnings Call Transcript - CPA Q2 2025

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Copa Holdings Second Quarter Earnings Call. As a reminder, this call is being webcast and recorded, August 7, 2025. And I will now turn the conference call over to Daniel Tapia, Director of Investor Relations. Sir, you may begin.

Daniel Tapia, Director of Investor Relations

Thank you, James, and welcome, everyone, to our second quarter earnings call. Joining me today are Pedro Heilbron, CEO of Copa Holdings; and Peter Donkersloot, our CFO. Pedro will begin with an overview of our second quarter highlights, followed by Peter, who will walk us through the financial results. After that, we'll open the call for questions from analysts. Copa Holdings' financial reports have been prepared in accordance with International Financial Reporting Standards. In today's call, we will discuss non-IFRS financial measures, which are reconciled to IFRS measures in our earnings release available on our website, copaair.com. Our discussion today will also contain forward-looking statements, not limited to historical facts that reflect the company's current beliefs, expectations and/or intentions regarding future events and results. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially and are based on assumptions subject to change. Many of these are discussed in our annual report filed with the SEC. With that, I'll turn the call over to our CEO, Mr. Pedro Heilbron.

Pedro Heilbron, CEO

Thank you, Daniel. Good morning, everyone, and thank you for joining us. I'd like to begin by recognizing the outstanding efforts of our entire team. Their dedication and professionalism continue to be key behind Copa's success and our ability to deliver strong results quarter after quarter. We're pleased to report another strong quarter with a 21% operating margin and a 17.7% net margin, both among the best in the industry. These results underscore the strength and resilience of our business model, which, combined with Copa's disciplined execution and cost leadership, enable us to consistently deliver industry-leading margins and solid financial results. Now I'll go over the key highlights for the quarter. Capacity increased by 5.8% year-over-year. Load factor reached 87.3%, an increase of 0.5 percentage points compared to Q2 '24. Passenger yields came in 4.1% lower year-over-year. Unit revenues or RASM declined 2.8% to $0.107. Unit cost or CASM decreased 4.6% to $0.085, while CASM, excluding fuel, increased 3.2% to $0.058. Operationally, Copa Airlines once again delivered a world-leading on-time performance of 91.5% and a flight completion factor of 99.8%. Furthermore, Copa was recently recognized by Skytrax for the 10th consecutive year as the Best Airline in Central America and the Caribbean, and received the award for Best Airline Staff in Central America and the Caribbean. I would like to take this opportunity to congratulate our more than 8,500 dedicated coworkers whose commitment to excellence enables us to consistently deliver a world-class travel experience to our passengers. In terms of our network, we continue to expand our Hub of the Americas in Panama with new service to San Diego, California, and we restarted flights to Caracas. Further, we recently announced plans to start service at the end of the year to Los Cabos, Mexico and Puerto Plata, Dominican Republic as well as restart flights to Santiago, also in the Dominican Republic and Salvador de Bahia in Brazil. Together with our earlier announcements of service to Salta and Tucuman in Argentina in September, this brings the total number of new and returning destinations announced so far this year to 8, further strengthening our position as the most complete and convenient connecting hub for travel in the Americas. Going forward, we continue to see a healthy demand environment and remain focused on our competitive advantages. The best geographic position with our Hub of the Americas in Panama, low unit cost and a strong balance sheet, and a passenger-friendly product with the best on-time performance. These pillars continue to drive our ability to consistently deliver industry-leading results. With that, I'll turn the call over to Peter, who will go over our financials in more detail.

Peter Donkersloot Ponce, CFO

Thank you, Pedro. Good morning, everyone, and thank you for joining our call today. I'd like to begin by echoing Pedro's appreciation for our team's continued commitment to delivering industry-leading results. For the second quarter, we delivered a net profit of $149 million or $3.61 per share, a 25% year-over-year increase in earnings per share. Operating income reached $177 million and an industry-leading operating margin of 21%, highlighting our ability to consistently generate strong profitability. On the cost side, CASM decreased 4.6% year-over-year to $0.085, driven primarily by a 17% reduction in the average fuel price per gallon. CASM ex fuel came in at $0.058, an increase of 3.2% compared to the second quarter of 2024, but consistent with our target for the year. This increase was mainly due to the nonrecurring benefit recorded in the second quarter of 2024 in the maintenance, materials and repair cost line associated with the return conditions of 9 aircraft lease extensions. This was partially offset by the decline in sales and distribution expense driven by the continued successful execution of our NDC strategy and a reduction in passenger servicing costs, which reflects the year-over-year impact of the MAX 9 grounding in 2024. On the balance sheet front, we ended the quarter with $1.4 billion in cash, short-term and long-term investments, representing 39% of last 12-month revenue. This figure excludes over $600 million in predelivery deposits for future aircraft. Additionally, we currently have 42 unencumbered aircraft, accounting for more than 1/3 of our fleet, further reinforcing our financial flexibility. Total debt stood at $2.1 billion, entirely related to aircraft financing. Our adjusted net debt-to-EBITDA ratio remained at an industry-leading 0.6x, and our average cost of debt continues to be highly competitive at 3.5%. With regards to the return of value to our shareholders, I'm pleased to announce that the company will make its third dividend payment of the year of $1.61 per share on September 15 to all shareholders of record as of August 29. Regarding our fleet, during the quarter, we took delivery of 3 Boeing 737 MAX-8 aircraft, bringing our total fleet to 115 aircraft. We remain on track to end 2025 with a fleet of 125 aircraft, and I'm pleased to share that we have secured financing for all of our 2025 deliveries. As for our 2025 outlook, we are reaffirming our full year operating margin guidance of 21% to 23%, supported by a healthy demand environment and continued cost discipline. We also maintain our expectation for capacity growth in ASMs in the range of 7% to 8% year-over-year. Our outlook is based on the following assumptions: load factor of approximately 87%, RASM of approximately $0.112, ex-fuel CASM of approximately $0.058 and an all-in fuel price of $2.45 per gallon. To finalize, we remain confident that our proven business model, robust balance sheet, and disciplined execution give us a solid foundation to continue delivering consistent growth, strong financial results, and industry-leading margins. Thank you, and we'll now open the call for questions from the analysts.

Operator, Operator

Our first question comes from Savi Syth from Raymond James.

Savanthi Nipunika Prelis-Syth, Analyst

I know you mentioned a healthy demand environment. But I was wondering if you could talk a little bit about what you're seeing in some of your biggest point-of-sale markets? And if there's any demand trends that stand out, good or bad in any of the particular markets or even passenger segments?

Pedro Heilbron, CEO

In terms of load factors, we are raising our load factor guidance, and most markets are experiencing strong or at least steady demand. In some cases, yields are slightly lower, and industry capacity in our region for the second half of the year is growing in the high single digits. However, we are still maintaining our load factors and, as mentioned, increasing our guidance in this area. This applies to nearly all of the markets we serve.

Savanthi Nipunika Prelis-Syth, Analyst

Got it. That's helpful. And I don't know if this is for Peter or for you, Pedro, but curious if you could share what you're seeing from Boeing. It seems like the aircraft are coming on time or early. And just any early thoughts into kind of 2026 capacity?

Pedro Heilbron, CEO

So far, our deliveries have been ahead of schedule. Each plane has arrived a week or two earlier than expected. While earlier projections suggest delays, the deliveries are on time this year. We have received 3 aircraft so far, and the remaining 10 will be delivered in the last 5 months of the year. Next year, we expect 6 deliveries, primarily in the first half of the year. Consequently, the majority of the available seat miles this year will have a more significant full-year impact in 2026, in addition to the 6 extra planes coming next year. We're not providing guidance for 2026 yet, but it's likely that capacity will trend slightly higher than this year's.

Operator, Operator

Our next question comes from the line of Duane Pfennigwerth from Evercore ISI.

Duane Thomas Pfennigwerth, Analyst

Maybe you could just remind us on FX, what the impacts are from a top line perspective, from a yield perspective and from a CASM perspective, when we get a slightly weaker dollar? Maybe you could just remind us of that. And any trends to call out in local currencies that you're seeing?

Pedro Heilbron, CEO

Yes. So most of the major currencies in South America and in Latin America, including Mexico, too, are up year-over-year and also up in the last 6 months and since the last quarter. You could call it weakness of the U.S. dollar or it doesn't really matter much. Most of our sales are south to north, so originating in the South. So we tend to benefit when the currencies in Latin America are stronger like the case now. But it's not a significant difference year-over-year. I mean they're slightly up. So it's good. That's positive, but I wouldn't say that it's significant enough to make a huge difference.

Peter Donkersloot Ponce, CFO

And I would add on the cost side, most of our costs are U.S. dollar based. We have our main cost base in Panama, where we have fuel and our salaries in U.S. dollars or most of our salaries in U.S. dollars. So that won't necessarily affect us on the FX side and cost.

Duane Thomas Pfennigwerth, Analyst

Got it. And then just for my follow-up, it's been a while since we've talked about it, but maybe just an update on airport capacity at PTY, any infrastructure projects that may be going on? And is there sufficient runway to support your growth plans in 2026, 2027 and beyond? What's the next kind of marker we should be looking at there?

Pedro Heilbron, CEO

Yes, definitely. The airport actually is right now working on an expansion plan, which includes work on both runways, repair work, but one runway will be extended. It also includes improvement to the taxiways and between 10 and 12 additional gates to the new T2. This should all happen in the next 3 to 4 years. There's already, let's say, a prework or preplan by an international consultant. They have the funds earmarked for this project and are working closely with the airlines and civil aviation. So we see this moving ahead, and it's going to give the airport, I think, another 10 years at least of runway.

Duane Thomas Pfennigwerth, Analyst

Okay. Congrats on the strong results.

Pedro Heilbron, CEO

Thank you, Duane.

Operator, Operator

Our next question comes from Guilherme Mendes from JPMorgan.

Guilherme G. Mendes, Analyst

The first one is looking into 2026. So assuming that the industry continues to grow, let's say, by mid- to high single digits into next year, is it fair to assume that yields can remain pretty much where they are right now? And the second point to Peter, it's on the buybacks. If you can update us on how much you have executed in the second quarter of the year and how much is left out of the $200 million?

Pedro Heilbron, CEO

Yes. I'll address your first question. So far, demand has been stable even though capacity has significantly increased in recent years. However, I should note that our yields and RASM have decreased. They were lower in 2025 compared to 2024, and lower in 2024 than in 2023. We've experienced a drop in yields as demand in our region has grown. At the same time, we've reduced our unit costs and compensated for much of that decline. We’ve been preparing for this situation for a long time, especially after the pandemic, to achieve strong results in a lower yield environment. That’s why we have been concentrating on cost efficiencies. We have met many of our objectives and we're committed to continuing this progress. Therefore, we are confident that we can succeed even with flat or lower yields like we are currently experiencing.

Peter Donkersloot Ponce, CFO

This is Peter here. So on the buybacks, as you stated, the Board has approved a $200 million program, and we have executed to date around half of that program, including around $10 million that we have executed year-to-date.

Operator, Operator

Our next question comes from Jens Spiess from Morgan Stanley.

Jens Spiess, Analyst

Congratulations on the strong results. I would like to ask about your cargo business, which continues to perform well. How do you see the future for this segment? Are you experiencing any slowdown in volumes due to increased tariffs and regional tensions? Do you have good visibility into that business, or is it limited? How far in advance can you actually predict the trends here?

Pedro Heilbron, CEO

Yes. Well, a few things. Yes, we do not have visibility in the long term is pretty much short term. But I would also mention, yes, Cargo has been very strong in Q2 and the first half of the year. Most of our cargo moves in the belly of our passenger aircraft. So let's call it, it's a low-risk cargo. It's not a bed we're making. It's very low risk and it's making the best of all of our capacity. We also operate one cargo aircraft, which has done very, very well, a 737-800 freighter. So we're bringing a second one this month. By the end of this month, we'll have a second 737-800 freighter. This one will be leased, an operating lease. So that will also contribute to more cargo volume. But again, it will still be mostly moved in the belly of our passenger aircraft.

Jens Spiess, Analyst

Okay. Perfect. And just assuming that demand remains healthy, how much should we expect in terms of an increase in cargo with the new freighter?

Pedro Heilbron, CEO

Nothing really. It's just a single 737-800 freighter. So the change will not be significant. It's a bump up, but it will not significantly affect our overall performance.

Operator, Operator

Our next question comes from Rogério Araújo from Bank of America.

Rogério Araújo, Analyst

Congratulations on the results. I have a couple of questions. First, regarding the fuel price, you are guiding for $2.45 per gallon, which we estimate is about 4% higher than what the current curve suggests. Does that make sense? Is the jet fuel price you've assumed in the guidance somewhat conservative? If it stays at that level, could there be potential upside risks to the margin guidance? Secondly, looking into the second half of the year, could you share an early perspective on the expected trend for CASM excluding fuel as we approach 2026? You've previously discussed capacity and potential RASM. Are there any anticipated changes in margin levels or trends that you could share? Thank you.

Peter Donkersloot Ponce, CFO

Okay, this is Peter here. To start, the fuel curve we used for our guidance is not updated daily. When we developed our guidance, the fuel price was about $2.45, which is the figure we based our estimates on. It might be slightly lower now, but we stick with the original fuel curve. Regarding CASM excluding fuel, we remain committed to the $580 target for the full year, and we do not anticipate any seasonality in CASM ex fuel; it should remain fairly flat throughout the year. We do not provide guidance for CASM ex fuel for 2026 yet, but we are working on several initiatives to ensure we stay cost-driven, maintaining both our absolute and relative competitive advantage on low CASM ex fuel. As for RASM, we continue to observe the same trend we noticed in the second half of last year, and we expect RASM for the second half of this year to mirror that period. Some markets may perform better while others may not, but overall, we anticipate it will average around the same level as last year’s second half, remaining flat year-on-year and consistent with our guidance of 11.2%.

Operator, Operator

Our next question comes from Michael Linenberg from Deutsche Bank.

Michael John Linenberg, Analyst

Nice job this quarter. I want to go back to Savi's question just about demand, strength and weakness across regions. We heard one of your competitors talk about Central America to the U.S. being pretty weak. And I know it's not a market that you've historically been all that big in. But when I think about all the routes, all the U.S. destinations, you're adding the Panama, I'm sure the utility of Central American passengers of that hub is going up. But also domestic Colombia because it looks like the domestic Colombia market is doing much better now. So sort of how that features into Wingo's results. So Pedro, if you could go into a little bit more detail or color on that, that would be great?

Pedro Heilbron, CEO

Yes. So we don't share a lot of specifics, but I can comment on the 2 markets that you're mentioning. So Central America to U.S. has received a lot of capacity in the past, let's say, in the past 2 years. There's been a lot of growth in that market. And then we have the other issues, the migration, visa issues on top. Luckily, it's not a huge market for us. We don't fly nonstop Central America, U.S. We connect through Panama, which is a little bit south of Central America. So it's not huge. But yes, Central America is one of our weaker markets right now, I would validate that. But again, not the most important market for us in that sense, especially at flow. We're very strong in Central America to South America, and we're very strong in Central America to the Caribbean. But to the U.S., that's not our #1 strength. And yes, domestic Colombia is doing well, and that has favored Wingo, no doubt.

Michael John Linenberg, Analyst

Great. My second question, Pedro, is about your positioning in the market. There aren't many premium product offerings where you operate, with perhaps only one or two other carriers. You seem to stand out above most of your competition. Borrowing from Delta, they consider their premium plus ancillary services to be their competitive advantage, with nearly 60% of their revenue coming from that category. As you expand your cargo services and develop a significant premium product, such as lie-flat seating on your MAX-9s, what is the current percentage of premium ancillary revenue, even in rough terms? How does that compare to five years ago, and where do you hope to see it in the future? I genuinely believe that premium plus ancillary services can be a strong competitive edge for you.

Pedro Heilbron, CEO

Thank you, Mike. You’re absolutely correct. We have a strong advantage with our premium products, particularly in our intra-regional, intra-Latin America narrow-body network where we lead the market. We are also finding ways to monetize our premium offering. Our performance in ancillary revenues, especially in premium categories like upgrades and our frequent flyer program, as well as our premium economy seating, has improved significantly. Each year, we continue to perform better than the last, and while we don’t disclose specific figures, we are seeing strong results this year with substantial potential for growth in the areas you've mentioned.

Operator, Operator

Our next question comes from Alberto Valerio from UBS.

Alberto Valerio, Analyst

I would like if you can talk a little bit about competition. You mentioned that some tough markets and others a little bit better. Last time we spoke, we were talking about Argentina, maybe some new routes there. Brazil now with Avianca in Chapter 11, LatAm with moderate growth. If you could talk a little bit about competition and the last one about Volaris, the partnership, the codeshare with Volaris, if you can provide some update on how you have been doing?

Pedro Heilbron, CEO

Thank you, Alberto. I won't mention specific airlines to avoid giving them free advertising. However, there has been significant new capacity in our region over the last two years, particularly expected in 2025. In the second half of this year, industry capacity is projected to increase by approximately 9%, which includes Copa. Some airlines have expanded considerably in intra-Latin America markets, and we've managed that successfully. Our load factors are improving, and although yields have slightly decreased, we've also reduced our unit costs, benefitting from lower fuel prices this year. Our business model is well-focused, featuring a strong product and better costs, positioning us excellently to compete effectively. Regarding our codeshare with Volaris, Mexico stands out as one of the largest aviation markets in the Americas, a crucial area for us. Previously, we lacked a partner in Mexico, but now we have Volaris. This codeshare is being developed further, and we expect it to be advantageous for both airlines, linking the significant Mexican market to our robust network in South America, Central America, and the Caribbean.

Operator, Operator

Our final question comes from Tom Fitzgerald from TD Cowen.

Thomas John Fitzgerald, Analyst

Just kind of going back to Mike's question, how do you view the role of technology or the role technology can play in your revenue journey and whether dynamic pricing or better data analysis? I appreciate any color there.

Pedro Heilbron, CEO

Yes. So a few things there. Since the pandemic, we have invested quite a bit in digital technology. A lot of it actually homemade, which also not only gives us the right digital technologies we need, but also a much better cost, not on a per passenger or per booking basis, like our Internet booking engine, which now is where most of our sales come through is Copa-owned, homemade, our app, which is right now in some international context, competing as one of the top five apps in the world, going against really, really top airlines for the #1 place. That's also homemade. And that's allowing us to better develop our ancillary revenues. Now in terms of, let's say, more sophisticated technologies that will allow for dynamic pricing, we work with third-party providers, we work with some of the best third-party providers. And I would say that we're in our infancy in terms of dynamic pricing and everything AI is going to provide for pricing in the future and revenue management. So we're not super developed there, but we're going that way, always in a very cost-conscious ROI-focused way, which is the Copa way.

Thomas John Fitzgerald, Analyst

I appreciate that, Pedro. That's really helpful color. And then just as a follow-up, would you mind reminding us where you are in your seat densification journey? Congrats on the nice results.

Pedro Heilbron, CEO

Yes, we are not as advanced as where we should have been right now, and that's because of the delivery delays, which have made us postpone a little bit. But we have, I think, a year to go. Out of our full fleet of 115 or so aircraft, we have 30 aircraft pending to take to 156 seats. So we have 30 aircraft pending in our densification project. And I should highlight that our densification project is not sacrificing any of the comfort product advantages we have. We're maintaining a full comfortable real business class with real business class seats of 16 passengers, we're maintaining our 4 rows of premium economy with 34 pitch and then the rest of the cabin with very comfortable seats that recline, headrest, and the whole thing. So we're not sacrificing that.

Operator, Operator

I am showing no further questions at this time. I would now like to turn it back to Pedro Heilbron for closing remarks.

Pedro Heilbron, CEO

Thank you, operator, and thank you, James. Thank you all for your questions and for participating in this call. We appreciate your continued interest and support, as always. And hopefully, very soon, we're going to be confirming an Investor Day date. It's going to be early, hopefully very early December in New York City. So stay tuned, and have a great day.

Operator, Operator

Thank you for participating in today's conference. This does conclude the program. You may now disconnect.