As filed with the Securities and Exchange Commission on April 29, 2024
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 20-F
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| REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED | |||||
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
| SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
Commission file number: 001-32696
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(Exact name of Registrant as Specified in Its Charter)
____________________
Not Applicable
(Translation of Registrant’s Name Into English)
Republic of Panama
(Jurisdiction of Incorporation or Organization)
(Address of Principal Executive Offices)
+507 304 2774 (Telephone)
(Registrant’s Contact Person)
| Securities registered or to be registered pursuant to Section 12(b) of the Act | ||||||||||||||
| Title of Each Class: | Trading Symbol(s) | Name of Each Exchange On Which Registered | ||||||||||||
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
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Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: As of December 31, 2023, there were outstanding 42,039,814 shares of common stock, without par value, of which 31,101,689 were Class A shares and 10,938,125 were Class B shares.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. x Yes o No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. o Yes x No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer” and “emerging growth company” in Rule 12b-2 of Exchange Act.:
Accelerated Filer o | Non-accelerated Filer | o | |||||||||
| Emerging Growth Company | |||||||||||
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. x
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. o
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). o
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP o | Other o | |||||||
| by the International Accounting Standards Board | ||||||||
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:
o Item 17 o Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No
Table of Contents
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Introduction
In this annual report on Form 20-F, unless the context otherwise requires, references to “Copa Airlines” are to Compañía Panameña de Aviación, S.A., the consolidated operating entity, “Wingo” refers to the low-cost business model offered by AeroRepública and La Nueva Aerolínea, S.A., and references to “Copa”, “Copa Holdings”, “we”, “us” or the “Company” are to Copa Holdings, S.A. and its consolidated subsidiaries. References to “Class A shares” refer to Class A shares of Copa Holdings, S.A.
This annual report contains terms relating to operating performance that are commonly used within the airline industry and are defined as follows:
•“Aircraft utilization” represents the average number of block hours operated per day per aircraft for the total aircraft fleet.
•“Available seat miles” or “ASMs” represents the aircraft seating capacity multiplied by the number of miles the seats are flown.
•“Average stage length” represents the average number of miles flown per flight segment.
•“Block hours” refers to the elapsed time between an aircraft leaving an airport gate and arriving at an airport gate.
•“Load factor” represents the percentage of aircraft seating capacity that is actually utilized (calculated by dividing revenue passenger miles by available seat miles).
•“Operating expense per available seat mile” represents operating expenses divided by available seat miles.
•“Operating revenue per available seat mile” represents operating revenues divided by available seat miles.
•“Passenger revenue per available seat mile” represents passenger revenues divided by available seat miles.
•“Revenue passenger miles” represents the number of miles flown by revenue passengers.
•“Revenue passenger kilometers” represents the number of kilometers flown by revenue passengers.
•“Revenue passengers” represents the total number of paying passengers (including all passengers redeeming frequent flyer miles and other travel awards) flown on all flight segments (with each connecting segment being considered a separate flight segment).
•“Yield” represents the average amount one passenger pays to fly one mile.
Market Data
This annual report contains certain statistical data regarding our airline routes, our competitive position, market share and the market size of the Latin American airline industry. This information has been derived from a variety of sources, including the International Air Transport Association, the U.S. Federal Aviation Administration, the International Monetary Fund and other third-party sources, governmental agencies or industry or general publications. Information for which no source is cited has been prepared by us on the basis of our knowledge of Latin American airline markets and other information available to us. The methodology and terminology used by different sources are not always consistent, and data from different sources are not readily comparable. In addition, sources other than us use methodologies that are not identical to ours and may produce results that differ from our own estimates. Although we have not independently verified the information concerning our competitive position, market share, market size, market growth or other similar data provided by third-party sources or by industry or general publications, we believe these sources and publications are generally accurate and reliable.
Presentation of Financial and Statistical Data
Included in this annual report are our audited consolidated statement of financial position as of December 31, 2023 and 2022, and the related audited consolidated statements of profit or loss, comprehensive income or loss, changes in equity and cash flows for the years ended December 31, 2023, 2022 and 2021.
The details of the changes in accounting policies or presentation are disclosed in note 5 of our annual consolidated financial statements.
Our consolidated financial statements have been prepared in accordance with International Financial Reporting Standards or “IFRS,” as issued by the International Accounting Standards Board, or “IASB.”
Unless otherwise indicated, all references in the annual report to “$” or “dollars” refer to U.S. dollars.
Certain figures included in this annual report have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be an arithmetic aggregation of the figures that precede them.
Special Note About Forward-Looking Statements
This annual report includes forward-looking statements, principally under the captions “Risk Factors,” “Business Overview” and “Operating and Financial Review and Prospects.” We have based these forward-looking statements largely on our current beliefs, expectations and projections about future events and financial trends affecting our business. Many important factors, in addition to those discussed elsewhere in this annual report, could cause our actual results to differ substantially from those anticipated in our forward- looking statements, including, among other things:
•general economic, political and business conditions in Panama and Latin America and particularly in the geographic markets we serve;
•our management’s expectations and estimates concerning our future financial performance and financing plans and programs;
•our level of debt and other fixed obligations;
•demand for passenger and cargo air service in the markets in which we operate;
•competition;
•our capital expenditure plans;
•changes in the regulatory environment in which we operate;
•changes in labor costs, maintenance costs, fuel costs and insurance premiums;
•changes in market prices, customer demand and preferences and competitive conditions;
•cyclical and seasonal fluctuations in our operating results;
•defects or mechanical problems with our aircraft;
•our ability to successfully implement our growth strategy;
•our ability to obtain financing on commercially reasonable terms; and
•the risk factors discussed under “Risk Factors” beginning on page 3.
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The words “believe,” “may,” “will,” “aim,” “estimate,” “continue,” “anticipate,” “intend,” “expect” and similar words are intended to identify forward-looking statements. Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, industry environment, potential growth opportunities, the effects of future regulation and the effects of competition. Forward-looking statements speak only as of the date they were made, and we undertake no obligation to update publicly or to revise any forward-looking statements after the date of this annual report because of new information, future events or other factors. In light of the risks and uncertainties described above, the forward- looking events and circumstances discussed in this annual report might not occur and are not guarantees of future performance.
Considering these limitations, you should not place undue reliance on forward-looking statements contained in this annual report.
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PART I
Item 1. Identity of Directors, Senior Management and Advisers
Not applicable.
Item 2. Offer Statistics and Expected Timetable
Not applicable.
Item 3. Key Information
A.Selected Financial Data
Not applicable.
B.Capitalization and Indebtedness
Not applicable.
C.Reasons for the Offer and Use of Proceeds
Not applicable.
D.Risk Factors
Risks Relating to our Company
Failure to successfully implement our business strategy may adversely affect our results of operations and harm the market value of our Class A shares.
We intend to continue expanding our service to new markets as well as increasing the frequency of flights to the markets we currently serve. Achieving these goals allows our business to benefit from cost efficiencies resulting from economies of scale. We expect to have substantial cash needs as we expand, including cash required to fund aircraft acquisitions or aircraft deposits as we add to our fleet. If we do not have enough cash to fund such projects, we may not be able to successfully expand our route system, therefore, our future revenue and earnings growth would be limited.
As we restart routes, add new frequencies to existing routes or add new routes, our advertising and other promotional costs generally increase, which may result in initial losses that could have a negative impact on our results of operations as well as require substantial amounts of cash. We also periodically run special promotional fare campaigns. Promotional fares can have the effect of increasing load factors while reducing our yield on such routes during the period that they are in effect. The number of markets we serve and flight frequencies depend on available demand and on our ability to identify the appropriate geographic markets upon which to focus and to gain suitable airport access in addition to route approval in the aforementioned markets. There can be no assurance that the markets we enter will yield passenger traffic at the expected fares that will be sufficient to make our operations in those new markets profitable. Any condition that would prevent or delay our access to key airports or routes, including limitations on the ability to process more passengers, the imposition of flight capacity restrictions, the inability to secure additional route rights or renew existing route rights that we ceased to use during the pandemic, under bilateral agreements or the inability to maintain our existing slots, flight banks and obtain additional slots, could constrain the expansion of our operations.
Our business also requires skilled personnel, equipment and facilities. The inability to hire, train and/or retain pilots and other personnel or secure the required equipment and facilities efficiently, cost-effectively, and on a timely basis, could adversely affect our ability to execute our plans. It also could strain our existing management resources and operational, financial and management information systems to the point where they may no longer be adequate to support our operations, requiring us to make significant expenditures in these areas. Difficulties obtaining necessary equipment could also affect our business. Considering these factors, we cannot ensure that we will be able to successfully establish new markets or expand our existing markets, and our failure to do so could have an impact on our business and results of operations, as well as the value of our Class A shares.
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Our performance is heavily dependent on economic and political conditions in the countries in which we do business.
Travel expenditures are sensitive to personal and business discretionary spending levels and tend to grow more slowly or decline during economic downturns. A substantial portion of our assets is located in Panama and a significant portion of our passengers’ trips either originate or end in Panama. Furthermore, a large majority of Copa’s flights operate through our hub at Tocumen International Airport. As a result, we depend on economic and political conditions prevailing from time to time in Panama.
In the fourth quarter of 2023, Panama experienced significant political and economic disruption due to the Panamanian government’s contract with a Canadian mining company, First Quantum, which led to widespread protests that caused disruptions in various key sectors, including transportation and retail. Additionally, the upcoming 2024 Panamanian general elections may generate further uncertainty, as political shifts could lead to changes in economic or regulatory policies that could affect the business environment in Panama. Additionally, loss of investor confidence or a downgrade of Panama’s investment grade credit rating could result in increases to financing costs and adversely affect our operations in Panama.
We also derive a substantial portion of our revenues from Colombia, Brazil, the United States, Argentina, and other countries in Latin America. We have been negatively impacted by poor economic performance in certain emerging market countries in which we operate, as well as by weaker Latin American currencies.
For example, the recent political shift in Argentina’s government could lead to significant policy reforms, which might include a potential change in the national currency. A new currency or further devaluations of the Argentine Peso could increase the cost of our operations and the value of our assets in the country. The uncertainty associated with political and economic shifts might also impact our investment decisions and long-term strategy in Argentina.
In addition, Venezuela has experienced difficult political conditions and declines in the rate of economic growth in recent periods as well as governmental actions that have adversely impacted businesses operating there. In December 2020, we cancelled flights between Panama and Venezuela, due to the Venezuelan government’s restrictions on air travel aimed at controlling the spread of COVID-19 pandemic. We resumed service between Panama and Venezuela in January 2021 after the Venezuelan government lifted the passenger flight restrictions. On May 15, 2019, the Homeland Security Department of the United States announced a suspension of all commercial passenger and cargo flights between the United States and Venezuela. The U.S. Department of Transportation (DOT) concurred with this determination and issued an order suspending all foreign air transportation for passengers or cargo to or from any airport in Venezuela.
Any of the following developments (or a continuation or worsening of any of the following currently in existence) in the countries in which we operate could adversely affect our business, financial condition, liquidity and results of operations:
•changes in economic or other governmental policies, including exchange controls;
•changes in regulatory, legal or administrative practices; or
•other political or economic developments over which we have no control.
Additionally, a significant portion of our revenues are derived from discretionary and leisure travel, which are especially sensitive to economic downturns and political conditions. An adverse economic and/or political environment, whether global, regional or in a specific country, could result in a reduction in passenger traffic, and leisure travel in particular, as well as a reduction in our cargo business, and could also impact our ability to raise fares, which in turn would materially and negatively affect our financial condition and results of operations.
The cost of financing our aircraft may increase, or the availability of financing could be limited, which could negatively impact our business.
We have historically been able to achieve favorable financing terms through commercial and US Export-Import bank guaranteed loans, sale-leasebacks, as well as operating leases. We have also been able to obtain financing through Japanese Operating Leases with Call Options (“JOLCOs”), which are a form of tax financial leases obtained from Japanese lenders. If the JOLCO market were to substantially decrease or become unavailable, this could limit our financing options and negatively impact our overall business.
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Aviation financing costs have increased significantly in recent periods, in particular for financing denominated in U.S. dollars, as a result of central bank responses to inflation and global macroeconomic trends. If the costs of such financing increase or we are unable to obtain such financing, we may be forced to incur higher than anticipated financing costs, which could have an adverse impact on our business, including the execution of our growth strategy.
If we are unable to successfully operate new aircraft due to safety concerns, in particular our new Boeing 737 MAX aircraft, our business could be harmed.
We fly and rely on Boeing aircraft. As of December 31, 2023, we operated a fleet of 106 Boeing aircraft. In 2024, we expect to take delivery of three additional Boeing 737 MAX 9 aircraft and twelve additional Boeing 737 MAX 8 aircraft.
In the future we expect to continue incorporating new aircraft into our fleet. This is based on a variety of factors, including the implementation of our business strategy. Acquisition of new aircraft involves a variety of risks relating to their ability to be successfully placed into service including:
•manufacturer’s delays in meeting the agreed upon aircraft delivery schedule;
•difficulties in obtaining financing on acceptable terms to complete our purchase of all of the aircraft we have committed to purchase; and
•the inability of new aircraft and their components to comply with agreed upon specifications and performance standards.
In addition, we cannot predict the reliability of our new fleet as the aircraft matures. In particular, we cannot predict the reliability of the Boeing 737 MAX aircraft, powered by LEAP 1B engines, which first entered commercial service in May 2017. The LEAP 1B engine was developed by Safran Aircraft Engines and GE through their joint company, CFM International, to power the next generation of single-aisle commercial jets. The LEAP 1B has been selected by Boeing as the exclusive power plant for the new 737 MAX single-aisle jetliner.
Following the Ethiopian Airlines accident involving a Boeing 737 MAX 8 aircraft on March 10, 2019, we suspended operations of our six Boeing 737 MAX 9 aircraft, after authorities in Panama and other countries grounded the 737 MAX fleet worldwide. On November 18, 2020, the FAA rescinded its grounding order, issued an airworthiness directive, and published various new requirements and operating procedures specific to the MAX aircraft. In January 2021, we resumed operations of our Boeing 737 MAX fleet after the authorization of the AAC.
However, the recent incident on January 5, 2024, involving an Alaska Airlines Boeing 737 MAX in Portland, Oregon, raised concerns over the 737 MAX’s operational safety. Following this incident, the FAA issued directives leading to the temporary grounding of certain Boeing 737 MAX 9 aircraft, including 21 of our planes. From January 6 to January 29, a total of 1,788 flights were cancelled. After undergoing the technical inspections required by regulators, most of these aircraft have returned to our flight schedule. We cannot estimate any reputational and commercial impact that may have resulted from the grounding of Boeing MAX aircraft. Technical issues with our aircraft would increase our maintenance expenses and could lead to flight cancellations and other disruptions in our services.
We have historically operated using a hub-and-spoke model and are vulnerable to competitors offering direct flights between destinations we serve and/or opening new hubs.
The general structure of our flight operations follows what is known in the airline industry as a “hub-and-spoke” model. This model aggregates passengers by operating flights from a number of “spoke” origins to a central hub through which they are transported to their final destinations. In recent years, many traditional hub-and-spoke operators have faced significant and increasing competitive pressure from low-cost, point-to-point carriers on routes with sufficient demand to sustain point-to-point service. A point-to-point structure enables airlines to focus on the most profitable, high-demand routes and to offer greater convenience and, in many instances, lower fares. As demand for air travel in Latin America increases, some of our competitors have initiated non-stop service between destinations that we currently serve through our hub in Panama. Additionally, newer aircraft models, such as Boeing 737 MAX and Airbus 320-NEO, allow nonstop flights in certain city pairs that could not be served with prior generation narrow-body aircraft and may bypass our hub. Airbus will also launch the A321 XLR: a new model of the Airbus 320 family that will extend the range of the current Airbus 320 NEO allowing competitors to explore new competitive routes overflying our Hub. It is expected to be released in 2024. Competitors are also opening new international hubs, especially in Brazil. Competitive services, which bypass our hub in Panama, may be more convenient and possibly less expensive than our services and could significantly decrease demand for our service to those destinations. In December 2016, we launched a low-cost business model, Wingo, to
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diversify our offerings and to better compete with other low-cost carriers, or “LCCs,” in the market. However, our traditional hub-and-spoke model remains our primary operational model and we believe that competition from point-to-point carriers will be directed towards the largest markets that we serve and is likely to continue at this level or intensify in the future. As a result, the effect of competition on us could be significant and could have a material adverse effect on our business, financial condition and results of operations.
We may not realize benefits from Wingo, our low-cost business model.
Wingo is our low-cost business model, which is operated by AeroRepública, S.A. During 2021, we incorporated a new operator based in Panama, La Nueva Aerolínea S.A., which started operating under the Wingo brand during the third quarter of 2023. As of December 31, 2023, Wingo operated nine of our Boeing 737-800s, each configured with 186 seats in a single class cabin.
During recent years, we have successfully operated our Wingo low-cost business model, with better results than initially expected. As a result, we decided to change the Boeing 737-700s fleet to Boeing 737-800s, with a greater seat density and lower unit costs, which should make our competitive position stronger. Even though we have gained knowledge regarding the low-cost business model over recent years, we have limited experience operating it, and we may not be able to accurately predict its impact on our main line services. In particular, if demand for Wingo flights is not substantial, or cannibalizes Copa´s mainline flights, if our pricing strategy does not adequately align with our cost structure, or if Wingo does not meet customer expectations, Wingo’s operations could have a negative impact on our reputation or our operating results.
Currently, the Wingo passenger service is provided through a Colombian Air Operator Certificate (“AOC”) and serves mostly the Colombian domestic and international markets; therefore, the local economic and competitive environment could affect its operating results.
Our business is subject to extensive regulation which may restrict our growth, our operations or increase our costs.
Our business, financial condition and operational results could be adversely affected if we or certain aviation authorities in the countries to which we fly fail to maintain the required foreign and domestic governmental authorizations necessary for our operations. In order to maintain the necessary authorizations issued by the Panamanian Civil Aviation Authority (the Autoridad Aeronáutica Civil, or the “AAC”), the Colombian Civil Aviation Administration (the Unidad Administrativa Especial de Aeronáutica Civil, or the “UAEAC”), and other corresponding foreign authorities, we must continue to comply with applicable statutes, rules and regulations pertaining to the airline industry, including any rules and regulations that may be adopted in the future. In addition, Panama is a member state of the International Civil Aviation Organization, or “ICAO,” a United Nations specialized agency. ICAO coordinates with its member states and various industry groups to establish and maintain international civil aviation standards and recommended practices and policies, which are then used by ICAO member states to ensure that their local civil aviation operations and regulations conform to global standards. We cannot predict or control any actions that the AAC, the UAEAC, the ICAO or other foreign aviation regulators may take in the future, which could include restricting our operations or imposing new and costly regulations or policies. Also, our fares are subject to review by the AAC, the UAEAC, and the regulators of certain other countries to which we fly, any of which may in the future impose restrictions on our fares.
We are also subject to international bilateral air transport agreements that provide for the exchange of air traffic rights between each of Panama and Colombia, and various other countries, and we must obtain permission from the applicable foreign governments to provide service to foreign destinations. There can be no assurance that existing bilateral agreements between the countries in which our airline operating companies are based and foreign governments will continue, or that we will be able to obtain more route rights under those agreements to accommodate our future expansion plans. Any modification, suspension or revocation of one or more bilateral agreements could have a material adverse effect on our business, financial condition and results of operations. The suspension of our permits to operate in certain airports or destinations, the cancellation of any of our provisional routes, the inability for us to obtain favorable take-off and landing rights at certain high-density airports or the imposition of other sanctions could also have a negative impact on our business. We cannot be certain that a change in a foreign government’s administration of current laws and regulations or the adoption of new laws and regulations will not have a material adverse effect on our business, financial condition and results of operations.
The most active government regulator among the countries to which we fly is the U.S. Federal Aviation Administration, or “FAA”. The FAA from time to time issues directives and other regulations relating to the maintenance and operation of aircraft that require significant expenditures. FAA requirements cover, among other things, security
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measures, collision avoidance systems, airborne wind shear avoidance systems, noise abatement and other environmental issues, and increased inspections and maintenance procedures to be conducted on older aircraft. For example, following the Ethiopian Airlines accident involving a Boeing 737 MAX 8 aircraft on March 10, 2019, we suspended operations of our six Boeing 737 MAX 9 aircraft, after authorities in Panama and other countries grounded the 737 MAX fleet worldwide, during the investigation into the cause of the accident. We partially covered our operation with other aircraft in our fleet, with significant cancellations and delays. On November 18, 2020, the FAA rescinded its grounding order, issued an airworthiness directive, and published training requirements enabling the Company to begin modifying certain operating procedures, implementing enhanced pilot training requirements, installing FAA-approved flight control software updates and completing other required maintenance tasks specific to the MAX aircraft. In January 2021, we resumed operations of our Boeing 737 MAX fleet after the authorization of the AAC. On January 6, 2024, following the Airworthiness Directive issued by the FAA, we suspended operations of 21 Boeing 737 MAX 9 aircraft. From January 6 to January 29, 2024, a total of 1,788 flights were cancelled. After undergoing the technical inspections required by regulators, most of these aircraft have returned to our flight schedule. See “—If we are unable to successfully operate new aircraft due to safety concerns, in particular our new Boeing 737 MAX aircraft, our business could be harmed.” If the FAA or the U.S. Transportation Security Administration, or “TSA”, were to issue additional regulations on aircraft, our ability to carry out regular operations could be negatively impacted. As we expand our presence on routes to and from the United States, we expect to continue incurring expenses to comply with the FAA’s and TSA’s regulations, and any increase in the cost of compliance could have an adverse effect on our financial condition and results of operations.
Copa Airlines is authorized by the DOT to engage in scheduled and charter air transportation services, including the transportation of persons, property (cargo) and mail, or combinations thereof, between points in Panama and points in the United States and beyond (via intermediate points in other countries). Copa Airlines holds the necessary authorizations from the DOT in the form of a foreign air carrier permit, an exemption authority and statements of authorization to conduct our current operations to and from the United States. The exemption authority was granted by the DOT in February 1998 and was due to expire in February 2000. However, the authority remains in effect by operation of law under the terms of the Administrative Procedure Act pending final DOT action on the application we filed to renew the authority on January 3, 2000. There can be no assurance that the DOT will grant the application. Our foreign air carrier permit has no expiration date. A modification, suspension or revocation of any of our DOT authorizations or FAA operating specifications could have a material adverse effect on our business.
The growth of our operations to the United States and the benefits of our code-sharing arrangements with UAL are dependent on Panama’s continued favorable safety assessment.
The FAA periodically audits the aviation regulatory authorities of other countries. As a result of this inspection, each country is given an International Aviation Safety Assessment, or “IASA,” rating. As of 2018, Panama was rated a Category 1 country under the IASA program, which means that Panama complies with the safety requirements set forth by ICAO. Furthermore in 2022, Copa Airlines and Copa Colombia successfully completed IOSA audits by external providers. We cannot guarantee that the government of Panama and the AAC in particular, will continue to meet international safety standards, and we have no direct control over their compliance with IASA guidelines. If Panama’s IASA rating were to be downgraded in the future, it could prevent us from increasing service to the United States and could affect our code-share arrangement with UAL.
We are highly dependent on our hub at Panama City’s Tocumen International Airport.
Our business is heavily dependent on our operations at our hub at Panama City’s Tocumen International Airport. Most of our Copa flights either depart from or arrive at our hub. Our operations and business strategy is therefore dependent on its facilities and infrastructure, including the success of its multi-phase expansion projects, certain of which have been completed while others are underway. Terminal 2 started operating a few gates during the early part of 2019. On June 22, 2022, we moved our ticket counter and baggage claim operations to Terminal 2 and began using 20 fully equipped gates in this new terminal. We also opened a new 20,720 square foot Copa Club in the new terminal. Our operations were not affected by the transition between terminals.
In addition, the hub-and-spoke structure of our operations is particularly dependent on the on-time arrival of tightly coordinated groupings of flights (or banks) to ensure that passengers can make timely connections to continuing flights. Like other airlines, we are subject to delays caused by factors beyond our control, including air traffic, congestion at airports, adverse weather conditions, power outages and increased security/health measures. Delays affect passengers, reduce aircraft utilization and increase costs, all of which in turn negatively affect our profitability.
Tocumen International Airport is operated by a corporation that is owned and controlled by the government of the Republic of Panama. We depend on our good working relationship with the quasi-governmental corporation that operates
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the airport to ensure that we have adequate access to aircraft parking positions, landing rights and gate assignments for our aircraft to accommodate our current operations and future plans for expansion. The corporation that operates Tocumen International Airport does not enter into any formal, written leases or other agreements with airlines to govern rights to use the airport’s jet ways or aircraft parking spaces. Therefore, we would not have contractual recourse if the airport authority reassigned needed resources in peak times to other airlines, materially raised fees or discontinued investments in the airport’s maintenance and expansion. Any of these events could have a material adverse effect on our current operations or capacity for future growth.
We are exposed to increases in airport charges, taxes and various other fees and cannot be assured access to adequate facilities and landing rights necessary to achieve our business strategy.
We must pay fees to airport operators for the use of their facilities. Any additional fees or substantial increase in current airport charges, including at Tocumen International Airport, could have a material adverse impact on our results of operations. Passenger taxes and airport charges have increased in recent years, sometimes substantially, particularly since the beginning of the pandemic. For example, in 2020 the industry experienced materially higher effective rates related to airport services in North America. Certain important airports that we use may be privatized in the near future, which is likely to result in significant cost increases to the airlines that use these airports. We cannot ensure that the airports used by us will not impose, or further increase, passenger taxes and airport charges in the future, and any such increases could have an adverse effect on our financial condition and results of operations.
Certain airports that we serve (or that we plan to serve in the future) are subject to capacity constraints and impose various restrictions, including slot restrictions during certain periods of the day, limits on aircraft noise levels, limits on the number of average daily departures and curfews on runway use. We cannot be certain that we will be able to obtain a sufficient number of slots, gates and other facilities at airports to expand our services in line with our growth strategy. It is also possible that airports not currently subject to capacity constraints may become so in the future. In addition, an airline must use its slots on a regular and timely basis or risk having those slots re-allocated to others. Where slots or other airport resources are not available or their availability is restricted in some way, we may have to amend our schedules, change routes or reduce aircraft utilization. Any of these alternatives could have an adverse financial impact on us. In addition, we cannot ensure that airports at which there are no such restrictions may not implement restrictions in the future or that, where such restrictions exist, they may not become more onerous. Such restrictions may limit our ability to continue to provide or to increase services at such airports.
We have significant fixed financing costs and expect to incur additional fixed costs as we expand our fleet.
The airline business is characterized by high leverage. We have significant fixed expenditures in connection with our operating leases and facility rental costs, and a significant portion of our property and equipment is pledged to secure indebtedness. For the year ended December 31, 2023, our finance cost totaled $158.2 million. As of December 31, 2023, approximately 71.1% of our total indebtedness bore interest at fixed rates and the remainder was determined with reference to the Secured Overnight Financing Rate (“SOFR”). Most of our aircraft lease obligations bear interest at fixed rates. Given worldwide increases in interest rates and benchmark rates, we expect our financing cost to increase in future periods.
As of December 31, 2023, the Company had one purchase contract with Boeing involving 57 firm orders of Boeing 737 MAX aircraft, agreed to be delivered between 2024 and 2028. The aircraft under this contract have an approximate value of $2.8 billion based on contractual obligations net of discounts and pre-delivery payments, including estimated amounts for contractual price escalation. We will require substantial capital from external sources to meet our future financial commitments. In addition, the acquisition and financing of these aircraft will likely result in a substantial increase in our leverage and fixed financing costs. A high degree of leverage and fixed payment obligations could:
•limit our ability in the future to obtain additional financing for working capital or other important needs;
•impair our liquidity by diverting substantial cash from our operating needs to service fixed financing obligations; or
•limit our ability to plan for or react to changes in our business, in the airline industry or in general economic conditions.
Any one of these factors could have a material adverse effect on our business, financial condition and results of operations.
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If we were to determine that our aircraft, rotable parts or inventory were impaired, it would have a significant adverse effect on our operating results.
If there is objective evidence that an impairment loss on long-lived assets carried at amortized cost has been incurred, the amount of the impairment loss is measured as the difference between the asset’s carrying amount and the higher of its fair value less cost to sell and its value in use, defined as the present value of estimated future cash flows (excluding future expected credit losses that have not been incurred) discounted at the asset’s risk adjusted interest rate. The carrying amount of the asset is reduced and the loss is recorded in the consolidated statement of profit or loss. In addition to the fact that the value of our fleet declines as it ages, any potential excess capacity in the airline industry, airline bankruptcies and other factors beyond our control may further contribute to the decline of the fair market value of our aircraft and related rotable parts and inventory. When these impairments occur, we are required under IFRS to write down these assets through a charge to earnings. A significant charge to earnings would adversely affect our financial condition and operating results. In addition, the interest rates on and the availability of certain of our aircraft financing loans are tied to the value of the aircraft securing the loans. If those values were to decrease substantially, our interest rates may rise or the lenders under those loans may cease extending credit to us, either of which could have an adverse impact on our financial condition and results of operations.
During 2020, we announced the sale of our B737-700 fleet, which resulted in a non-cash impairment charge of $191.2 million. In 2021, we sold three B737-700 aircraft, and 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. The Company reclassified these aircraft to property plant and equipment since the classification of assets held for sale is no longer met. This reclassification resulted in a reversal of impairment losses of $5.4 million.
During 2022, we sold two B737-700 airframes that were under a lease agreement to a third party, and no significant additional gain or loss was recognized on the sale.
No impairment indicators were identified in 2023 and 2022 in the property and equipment or inventory.
We rely on information and other aviation technology systems to operate our businesses and any failure or disruption of these systems may have an impact on our operational and financial results.
We rely upon information technology systems to efficiently operate our business. We are highly reliant on certain systems for flight operations, aircraft maintenance, check-in, boarding, baggage handling, revenue management and pricing, reservations, accounting, and cargo. Other systems are designed to decrease distribution costs through internet reservations and to maximize cargo distributions, crew utilization and flight scheduling. These systems may not deliver their anticipated benefits.
In the ordinary course of business, we may upgrade or replace our systems or otherwise modify and refine our existing systems to address changing business requirements. In particular, our digital channels rely on continuously changing technology and, as this technology is updated, older technology may become obsolete. Our operations and competitive position could be adversely affected if we are unable to upgrade or replace our systems in a timely and effective manner once they become outdated, and any inability to upgrade or replace our systems could negatively impact our financial results.
Any transition to new systems may result in a loss of data or service interruption that could harm our business. Information systems could also suffer disruptions due to events beyond our control, including natural disasters, power failures, terrorist attacks, cyber-attacks, data theft, equipment or software failures, computer viruses or telecommunications failures. We cannot ensure that our security measures or disaster recovery plans are adequate to prevent failures or disruptions. Substantial or repeated website, reservations systems or telecommunication system failures or disruptions, including failures or disruptions related to our integration of technology systems, could reduce the attractiveness of our Company versus our competitors, materially impair our ability to market our services and operate flights, result in the unauthorized release of confidential or otherwise protected information, and result in increased costs, lost revenue, or the loss or compromise of important data.
We make extensive use of online services and centralized data processing, including through third-party service providers. The secure maintenance and transmission of customer and employee information is a critical element of our operations. Our information technology and other systems, or those of service providers or business partners that maintain and transmit customer information, may be particularly vulnerable to cyberattacks, including ransomware. Our
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systems may also be compromised by a malicious third-party penetration of our security measures or of a third-party service provider or business partner, or impacted by deliberate or inadvertent actions or inactions by our employees or those of a third-party service provider or business partner. As a result, personal information may be lost, disclosed, accessed or taken without consent.
Future cybersecurity requirements in compliance with applicable laws could increase our costs and our reputation and business may be harmed and we may be subject to legal claims if there is a loss, unlawful disclosure or misappropriation of, or unsanctioned access to, our customers’, employees’, business partners’ or our own information, or if there are any other breaches of our information security.
We transmit confidential credit card information throughout secure private retail networks and rely on encryption and authentication technology licensed from third parties to provide the security and authentication necessary to effectively secure transmission and storage of confidential information, such as customer credit card information. The Company has made significant efforts to secure its data network. If our security or network were compromised in any way, it could have a material adverse effect on the reputation, business, operating results and financial condition of the Company and could result in a loss of customers. Additionally, any material failure by the Company to achieve or maintain compliance with the Payment Card Industry security requirements or rectify a security issue may result in fines and the imposition of restrictions on the Company’s ability to accept credit cards as a form of payment.
As a result of these types of risks, we regularly review and update procedures and processes to prevent and protect against unauthorized access to our systems and information and inadvertent misuse of data.
However, it is difficult or impossible to defend against every risk being posed by changing technologies as well as acts of cyber-crime. Increasing sophistication of cyber criminals and terrorists make keeping up with new threats difficult and controls employed by our information technology department and cloud vendors could prove inadequate. As a result, we cannot be certain that we will not be the target of attacks on our networks and intrusions into our data, particularly given continuous advances in the technical capabilities of potential attackers, and increased financial and political motivations to carry out cyber-attacks on physical systems, gain unauthorized access to information, make information unavailable for use through, for example, ransomware or denial-of-service attacks, and otherwise exploit new and existing vulnerabilities in our infrastructure. Such a cyber-attack could lead to significant costs or other material financing impacts, which may not be covered by or may exceed the coverage limits of, our cyber insurance, and such costs and impacts may have material adverse effect on our business, reputation, financial condition, cash flows and operating results. The risk of a data security incident or disruption, particularly through cyber-attack or cyber intrusion, including by computer hackers, foreign governments, criminal organizations and cyber terrorists, has increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. Also, since the COVID-19 pandemic, there is increased reliance on employees working remotely, which has increased the risk of malicious actors exploiting vulnerabilities in their devices.
Furthermore, in response to data security threats and to data privacy concerns, there has been heightened legislative and regulatory focus on attacks on critical infrastructures, including those in the transportation sector, and on data security and privacy in Panama, Brazil, the United States and other countries where we operate, including requirements for varying levels of data usage consent and data subject notification in the event of a data security incident. This regulatory environment is increasingly complex and may lead to material obligations to our business, including significantly expanded compliance demands and related costs.
Any such loss, disclosure or misappropriation of, or access to, customers’, employees’ or business partners’ information or other breach of our information security could result in legal claims or legal proceedings, including regulatory investigations and actions, may have a negative impact on our reputation and may materially adversely affect our business, operating results and financial condition. Furthermore, the loss, disclosure or misappropriation of our business information may materially adversely affect our business, operating results and financial condition.
Our liquidity could be adversely impacted in the event one or more of our credit card processors were to impose material reserve requirements for payments due to us from credit card transactions.
We currently have agreements with organizations that process credit card transactions arising from purchases of air travel tickets by our customers. Credit card processors have financial risk associated with tickets purchased for travel that can occur several weeks after the purchase. Our credit card processing agreements provide for reserves to be deposited with the processor in certain circumstances. We do not currently have reserves posted for our credit card processors. If circumstances were to occur requiring us to deposit reserves, the negative impact on our liquidity could be significant, which could materially adversely affect our business.
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The Company has agreements with financial institutions that process customer credit card transactions for the sale of air travel and other services. Under certain of the Company’s credit card processing agreements, the financial institutions in certain circumstances have the right to require that the Company maintain a reserve equal to a portion of advance ticket sales that has been processed by that financial institution, but for which the Company has not yet provided the air transportation. Such financial institutions may require additional cash or other collateral reserves to be established or additional withholding of payments related to receivables collected if the Company does not maintain certain minimum levels of unrestricted cash, cash equivalents and short-term investments (collectively, “Unrestricted Liquidity”).
Our quarterly results could fluctuate substantially, and the trading price of our Class A shares may be affected by such variations.
The airline industry is by nature cyclical and seasonal, and our operating results may vary from quarter to quarter. In general, demand for air travel is higher in the third and fourth quarters, particularly in international markets, because of the increase in vacation travel during these periods relative to the remainder of the year. We tend to experience the highest levels of traffic and revenue in July and August, with a smaller peak in traffic in December and January. We generally experience our lowest levels of passenger traffic in April and May. Given our high proportion of fixed costs, seasonality can affect our profitability from quarter to quarter. Demand for air travel is also affected by factors such as disease outbreaks, economic conditions, capacity additions by competitors, war or the threat of war, fare levels and weather conditions.
Due to the factors described above and others described in this annual report, quarter-to-quarter comparisons of our operating results may not be good indicators of our future performance. In addition, it is possible that in any quarter our operating results could be below the expectations of investors and any published reports or analyses regarding our Company. In that event, the price of our Class A shares could decline, perhaps substantially.
Our reputation and financial results could be harmed in the event of an accident or incident involving our aircraft or the type of aircraft that we operate.
An accident or incident involving one of our aircraft could involve significant claims by injured passengers and others, as well as significant costs related to the repair or replacement of a damaged aircraft and its temporary or permanent loss from service. We are required by our creditors and the lessors of our aircraft under our operating lease agreements to carry liability insurance, but the amount of such liability insurance coverage may not be adequate and we may be forced to bear substantial losses in the event of an accident. Our insurance premiums may also increase, or we may lose our eligibility for insurance, due to an accident or incident affecting one of our aircraft. Substantial claims resulting from an accident in excess of our related insurance coverage or increased premiums would harm our business and financial results.
Moreover, any aircraft accident or incident, even if fully insured, could cause the public to perceive us as less safe or reliable than other airlines, which could harm our business and results of operations. The Copa brand name and our corporate reputation are important and valuable assets. Adverse publicity (whether or not justified) could tarnish our reputation and reduce the value of our brand. Adverse perceptions of the types of aircraft that we operate arising from safety concerns or other problems, whether real or perceived, or in the event of an accident involving those types of aircraft, could significantly harm our business as the public may avoid flying on our aircraft. See “—If we are unable to successfully operate new aircraft due to safety concerns, in particular our new Boeing 737 MAX aircraft, our business could be harmed.”
Fluctuations in foreign exchange rates could negatively affect our net income.
In 2023, approximately 64.3% of revenues and 79.2% of expenses were denominated in U.S. dollars (for 2022, U.S. dollar-denominated revenues and expenses were 63.3% and 77.3%, respectively). A significant part of our revenue is denominated in foreign currencies, including the Colombian peso, Brazilian real, Argentinian peso and Mexican peso, which represented 10.0%, 7.7%, 5.1% and 3.5%, respectively (for 2022, these foreign currencies-denominated revenues were 12.1%, 8.0%, 4.6% and 2.6%, respectively). If any of these currencies decline in value against the U.S. dollar, our revenues, expressed in U.S. dollars, and our operating margin would be adversely affected. We may not be able to adjust our fares denominated in other currencies to offset any increases in U.S. dollar-denominated expenses, increases in interest expense or exchange losses on fixed obligations or indebtedness denominated in foreign currency.
We are also exposed to exchange rate losses, as well as gains, due to the fluctuation in the value of local currencies against the U.S. dollar between the times we are paid in local currencies and the time we are able to repatriate the revenues in U.S. dollars. Typically, this process takes between one and two weeks in most countries to which we fly.
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Changes in accounting standards could adversely affect our financial results.
The IASB, or other regulatory authorities, periodically introduce modifications to financial accounting and reporting standards or issue new financial accounting and reporting standards under which we prepare our consolidated financial statements. These changes can materially affect the way we present our financial condition and results of operations. We may also be required to retroactively apply new or revised standards, which would require us to restate previous financial statements.
Our maintenance costs will increase as our fleet ages.
The average age of our fleet was approximately 9.7 years as of December 31, 2023. Historically, we have incurred low levels of maintenance expenses relative to the size of our fleet because most of the parts on our aircraft are covered under multi-year warranties. As our fleet ages, these warranties expire and the time flown by each aircraft increases, and our maintenance costs will increase, both on an absolute basis and as a percentage of our operating expenses.
If we enter into a prolonged dispute with any of our employees, many of whom are represented by unions, or if we are required to substantially increase the salaries or benefits of our employees, it may have an adverse impact on our operations and financial condition.
Approximately 64.2% of our 7,625 employees are unionized. There are currently five unions covering our employees based in Panama: the pilots’ union, the flight attendants’ union, the mechanics’ union, the passenger service agents’ union, and an industry union, which represents ground personnel, messengers, drivers, passenger service agents, counter agents and other non-executive administrative staff.
We entered into collective bargaining agreements with the flight attendants’ union in March 2023, the pilot’s union in February 2023, the mechanics’ union in May 2022 and the industry union in March 2022. We do not have a collective bargain agreement negotiated with UGETRACAS, an aviation industry union in Panama, because they do not have the eligible amount of employees. Collective bargaining agreements in Panama typically have four-year terms.
In addition to unions in Panama, there are unions in Colombia, Brazil and Argentina that cover our employees in these countries. In Colombia there are four unions covering employees. In Brazil, all airline industry employees in the country are covered by the industry union agreements. In Argentina airport employees are affiliated with an industry union (UPADEP).
A strike, work interruption, stoppage or any prolonged dispute with our employees who are represented by any of these unions could have an adverse impact on our operations. These risks are typically exacerbated during periods of renegotiation with the unions, which typically occurs every two to four years depending on the jurisdiction and the union. Any renegotiated collective bargaining agreement could feature significant wage increases and a consequent increase in our operating expenses. Any failure to reach an agreement during negotiations with unions may require us to enter into arbitration proceedings, use financial and management resources and potentially agree to terms that are less favorable to us than our existing agreements. Employees who are not currently members of unions may also form new unions that may seek further wage increases or benefits.
Our business is labor-intensive. We expect salaries, wages, benefits and other employee expenses to increase on a gross basis, and these costs could increase as a percentage of our overall costs. If we are unable to hire, train and retain qualified pilots and other employees at a reasonable cost, our business could be harmed and we may be unable to complete our expansion plans.
Our revenues depend on our relationship with travel agents and tour operators and we must manage the costs, rights and functionality of these third-party distribution channels effectively.
In 2023, a portion of our revenues were derived from tickets sold through third-party distribution channels, including those provided by conventional travel agents, online travel agents (“OTAs”) or tour operators. We cannot assure that we will be able to maintain favorable relationships with these ticket sellers. Our revenues could be adversely impacted if travel agents or tour operators elect to favor other airlines or to disfavor us. Our relationship with travel agents and tour operators may be affected by:
•the size of commissions offered by other airlines;
•changes in our arrangements with other distributors of airline tickets; and
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•the introduction and growth of new methods of selling tickets.
These third-party distribution channels, along with global distribution systems (“GDSs”) that travel agents, OTAs and tour operators use to obtain airline travel information and issue airline tickets, are more expensive than those we operate ourselves, such as our website. Certain of these distribution channels also effectively restrict the manner in which we distribute our products generally. To remain competitive, we need to successfully manage our distribution costs and rights, increase our distribution flexibility and improve the functionality of third-party distribution channels, while maintaining an industry-competitive cost structure. These initiatives may affect our relationships with our third-party distribution channels. Any inability to manage our third-party distribution costs, rights and functionality at a competitive level or any material diminishment or disruption in the distribution of our tickets could have a material adverse effect on our business, results of operations and financial condition.
In September 2022, Copa Airlines 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 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, we have offered alternatives leveraging the IATA “New Distribution Capability” (NDC) standard.
We rely on third parties to provide our customers and us with services that are integral to our business.
We have several agreements with third-party contractors to provide certain services primarily outside of Panama. Maintenance services include aircraft heavy checks, engine maintenance, overhaul, component repairs and line maintenance activities. In addition to call center services, third-party contractors also provide us with airport services. At airports other than Tocumen International Airport, most of our aircraft services are performed by third-party contractors. Substantially all of our agreements with third-party contractors are subject to termination on short notice. The loss or expiration of these agreements or our inability to renew these agreements or to negotiate new agreements with other providers at comparable rates could negatively impact our business and results of operations. Further, our reliance on third parties to provide reliable equipment or essential services on our behalf could lead us to have less control over the costs, efficiency, timeliness and quality of our service. A contractor’s negligence could compromise our aircraft or endanger passengers and crew. This could also have a material adverse effect on our business. We expect to be dependent on such agreements for the foreseeable future and if we enter any new market, we will need to have similar agreements in place.
We depend on a limited number of suppliers.
We are subject to the risks of having a limited number of suppliers for our aircraft and engines. One of the elements of our business strategy is to save costs by operating a simplified fleet. Copa currently operates a fleet of Boeing 737-800/700 Next Generation aircraft powered by CFM 56-7B engines from CFM International and Boeing 737MAX 9, powered by Leap 1B engines, from CFM International. If any of Boeing, CFM International or General Electric are unable to perform their contractual obligations, or if we are unable to acquire or lease new aircraft or engines from aircraft or engine manufacturers or lessors on acceptable terms, we would have to find another supplier for a similar type of aircraft or engine.
If we have to lease or purchase aircraft from another supplier, we could lose the benefits we derive from our current fleet composition. We cannot ensure that any replacement aircraft would have the same operating advantages as the Boeing 737-800 Next Generation or Boeing 737-MAX 9 that would be replaced or that Copa could lease or purchase engines that would be as reliable and efficient as the CFM 56-7B and Leap 1B. We may also incur substantial transition costs, including costs associated with acquiring spare parts for different aircraft models, retraining our employees, replacing our manuals and adapting our facilities. Our operations could also be harmed by the failure or inability of Boeing, CFM International or General Electric to provide sufficient parts or related support services on a timely basis.
Our business would be impacted if a design defect or mechanical problem with any of the types of aircraft, engines or components that we operate were discovered that would ground any of our aircraft while the defect or problem was being addressed, assuming it could be corrected at all. The use of our aircraft could be suspended or restricted by regulatory authorities in the event of any actual or perceived mechanical or design issues. For example, following the Ethiopian Airlines accident involving a Boeing 737 MAX 8 aircraft, the FAA and other regulatory bodies around the world grounded the aircraft, and on November 18, 2020 the FAA rescinded this order. On January 6, 2024, following the Airworthiness Directive issued by the FAA, we suspended operations of 21 Boeing 737 MAX 9 aircraft. From January 6 to January 29, 2024, a total of 1,788 flights were cancelled. After undergoing the technical inspections required by regulators, most of these aircraft have returned to our flight schedule. Our business would also be negatively impacted if the public began to avoid flying with us due to an adverse perception of the types of aircraft that we operate stemming from safety
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concerns or other problems, whether real or perceived, or in the event of an accident involving those types of aircraft or components.
We also depend on a limited number of suppliers with respect to supplies obtained locally, such as our fuel. These local suppliers may not be able to maintain the pace of our growth and our requirements may exceed their capabilities, which may adversely affect our ability to execute our day-to-day operations and our growth strategy.
Our business could also face disruptions due to external factors beyond our control, such as delays in aircraft deliveries. Notably, Boeing has experienced delays in delivering its aircraft. This has been partly due to increased regulatory scrutiny and quality lapses at key suppliers. Such delays in receiving new aircraft could affect our operational efficiency and growth strategy.
Our business financial condition and results of operations could be materially affected by the loss of key personnel.
To a significant extent, our success depends on the ability of our senior management team and key personnel to operate and manage our business effectively. Most of our employment agreements with key personnel do not contain any non-competition provisions applicable upon termination. Competition for highly qualified personnel is intense. If we lose any executive officer, senior manager or other key employee and are not able to obtain an adequate replacement, or if we are unable to attract and retain new qualified personnel, our business, financial condition and results of operations could be materially adversely affected.
The COVID-19 pandemic has had and is expected to continue to have a material adverse impact on our business.
The COVID-19 pandemic led to significant reductions in demand due to travel restrictions and bans implemented globally. This has affected our business, financial condition, and operating results, and may continue to do so even after the virus is contained, especially if there are lasting changes in economic conditions, government regulation, and consumer attitudes toward air travel that impact our business models.
The future impact of COVID-19 on our operations and financial performance is uncertain and will depend on various factors, including the scope and severity of the pandemic, travel advisories and restrictions, the availability and effectiveness of vaccines, and the overall demand for air travel. Additionally, positive COVID-19 tests among our employees could result in flight cancellations or reduced services. Lasting travel restrictions or a significant decrease in operations could materially adversely affect our results and long-term sustainability.
In addition, an outbreak of another disease or a resurgence of COVID-19 could have a similar adverse impact on our business, potentially leading to increased government restrictions and regulations that could further affect our operations.
Risks Relating to the Airline Industry
An outbreak of disease or similar public health threat, such as the COVID-19 pandemic, could have a material adverse impact on the Company’s business, operating results and financial condition.
An outbreak of disease or similar public health threat, or fear of such an event, that affects travel demand or travel behavior could have a material adverse impact on the Company’s business, financial condition and operating results. In addition, outbreaks of disease could result in travel bans or restrictions, increased government restrictions and regulation, including quarantines of our personnel or an inability to access facilities or our aircraft, which could adversely affect our operations. The global COVID-19 pandemic has caused travel restrictions that have had a significant impact on the airline industry. See “Risks Relating to our Company.”
The airline industry is highly competitive.
We face intense competition throughout our route network. Overall airline industry profit margins are low and industry earnings are volatile. Airlines compete in the areas of pricing, scheduling (frequency and flight times), frequent flyer programs, on-time performance, and other services. Some of our competitors have larger customer bases and greater brand recognition in the markets we serve outside Panama, and some of our competitors have significantly greater financial and marketing resources than we have. Airlines based in other countries may also receive subsidies, tax incentives or other state aid from their respective governments, which are not provided by the Panamanian government. In addition, the commencement of or increase in service on the routes we serve by existing or new carriers could negatively impact our
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operating results. Likewise, competitors’ service on routes that we are targeting for expansion may make those expansion plans less attractive.
We compete with a number of other airlines that currently serve some of the routes on which we operate, including Avianca, American Airlines, Delta Air Lines, Aeromexico, and LATAM Group among others. Strategic alliances, bankruptcy restructurings and industry consolidations characterize the airline industry and tend to intensify competition. In the past, several air carriers have merged and/or reorganized, including certain of our competitors, such as LAN-TAM, Avianca-Taca, American-US Airways and Delta-Northwest.
Traditional hub-and-spoke carriers in the United States and Europe continue to face substantial and increasing competitive pressure from LCCs offering discounted fares. The LCC business model is gaining acceptance in the Latin American aviation industry. The LCCs’ operations are typically characterized by point-to-point route networks focusing on the highest demand city pairs, high aircraft utilization, single class service and fewer in-flight amenities. As a result, we may face new and substantial competition from LCCs in the future, which could result in significant and lasting downward pressure on the fares we charge for flights on our routes. Current LCCs such as Avianca, Volaris, Spirit, JetBlue, Azul and Gol are adding pressure to our fares and are also exploring new competitive routes overflying our Hub. We also expect more competition in the market from newer players such as JetSmart, Sky and Arajet.
In December 2016, Copa’s subsidiary in Colombia, AeroRepública, launched Wingo, a low-cost business model to serve domestic destinations and some point-to-point international leisure markets, to improve Copa’s position within Colombia and better compete with low unbundled prices from LCCs. In 2021, we incorporated a new Wingo operator based in Panama, La Nueva Aerolínea, S.A., and in 2023, we started operating one 737-800 aircraft. Although we intend to compete vigorously and maintain our strong competitive position in the industry, Avianca and LATAM represent a significant portion of the domestic market in Colombia and have access to greater resources as a result of their larger size. Therefore, Copa faces stronger competition now than in recent years, and its prior results may not be indicative of its future performance.
We must constantly react to changes in prices and services offered by our competitors to remain competitive. The airline industry is highly susceptible to price discounting, particularly because airlines incur very low marginal costs for providing service to passengers occupying otherwise unsold seats. Carriers use discount fares to stimulate traffic during periods of lower demand to generate cash flow and to increase market share. Any lower fares offered by one airline are often matched by competing airlines, which tend to result in lower industry yields with little or no increase in traffic levels. Price competition among airlines in the future could lead to lower fares or passenger traffic on some or all of our routes, which could negatively impact our profitability. We cannot be certain that any of our competitors will not undercut our fares in the future or increase capacity on routes in an effort to increase their respective market share. Although we intend to compete vigorously and to assert our rights against any predatory conduct, such activity by other airlines could reduce the level of fares or passenger traffic on our routes to the point where profitable levels of operations cannot be maintained. Due to our smaller size and lesser financial resources compared to several of our competitors, we may be less able to withstand aggressive marketing tactics or fare wars engaged in by our competitors should such events occur.
Significant changes or extended periods of high fuel costs or fuel supply disruptions could materially affect our operating results.
Fuel costs constitute a significant portion of our total operating expenses, representing approximately 37.6% of operating expenses in 2023, 41.9% of operating expenses in 2022 and 28.2% in 2021. Jet fuel costs have been subject to wide fluctuations as a result of fluctuations in demand, sudden disruptions in and other concerns about global supply, as well as market speculation. Both the cost and availability of fuel are subject to many economic, political, weather, environmental and other factors and events occurring throughout the world that we can neither control nor accurately predict, including international political and economic circumstances such as the political instability in major oil-exporting countries in Latin America, Africa and Asia. For example, the conflict between Russia and Ukraine beginning in February 2022 led to an increase in fuel costs. Due to the evolving nature of the conflict, we can neither predict the duration of the increasing fuel costs nor the extent of its impact on our business operations. Any future fuel supply shortage (for example, as a result of production curtailments by the Organization of the Petroleum Exporting Countries, or “OPEC,” a disruption of oil imports, supply disruptions resulting from severe weather or natural disasters, the continued unrest in the Middle East or otherwise could result in higher fuel prices or further reductions in scheduled airline services). We cannot ensure that we would be able to offset any increases in the price of fuel by increasing our fares.
As of December 31, 2023, the Company was not a party to any outstanding fuel hedge contracts and has adopted a strategy of remaining unhedged, while regularly reviewing its policies based on market conditions and other factors. For 2024, although we have not hedged any part of our anticipated fuel needs, we continue to evaluate various
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hedging strategies and may enter into hedging agreements in the future, as any substantial and prolonged increase in the price of jet fuel will likely materially and negatively affect our business, financial condition and results of operation.
We may experience difficulty recruiting, training and retaining pilots and other employees.
The airline industry is a labor-intensive business. We employ a large number of flight attendants, maintenance technicians and other operating and administrative personnel. The airline industry has, from time to time, experienced a shortage of qualified personnel. As is common with most of our competitors, considerable turnover of employees may occur and may not always be predictable. When we experience higher turnover, our training costs may be higher due to the significant amount of time required to train each new employee and, in particular, each new pilot. If our pilots terminate their contracts earlier than anticipated, we may be unable to successfully recoup the costs spent to train those pilots. We cannot be certain that we will be able to recruit, train and retain the qualified employees that we need to continue our current operations to replace departing employees. A failure to hire, train and retain qualified employees at a reasonable cost could materially adversely affect our business, financial condition and results of operations.
Under Panamanian law, there is a limit on the maximum number of non-Panamanian employees that we may employ. Our need for qualified pilots has at times exceeded the domestic supply and as such, we have had to hire a substantial number of non-Panamanian national pilots. However, we cannot ensure that we will continue to attract Panamanian and foreign pilots. The inability to attract and retain pilots, or a change in Panamanian regulations, may adversely affect our growth strategy by limiting our ability to add new routes or increase the frequency of existing routes.
Because the airline industry is characterized by high fixed costs and relatively elastic revenues, airlines cannot quickly reduce their costs to respond to shortfalls in expected revenue.
The airline industry is characterized by low gross profit margins, high fixed costs and revenues that generally exhibit substantially greater elasticity than costs. The operating costs of each flight do not vary significantly with the number of passengers flown and, therefore, a relatively small change in the number of passengers, fare pricing or traffic mix could have a significant effect on operating and financial results. These fixed costs cannot be adjusted quickly to respond to changes in revenues, and a shortfall from expected revenue levels could have a material adverse effect on our net income.
Our business may be adversely affected by downturns in the airline industry caused by terrorist attacks, political unrest, war or outbreak of disease, which may alter travel behavior or increase costs.
Demand for air transportation may be adversely affected by terrorist attacks, war or political and social instability, an outbreak of a disease or similar public health threat, natural disasters, cyber security threats and other events. Any of these events could cause governmental authorities to impose travel restrictions or otherwise cause a reduction in travel demand or changes in travel behavior in the markets in which we operate. Any of these events in our markets could have a material impact on our business, financial condition and results of operations. Furthermore, these types of situations could have a prolonged effect on air transportation demand and on certain cost items, such as security and insurance costs.
The terrorist attacks in the United States on September 11, 2001, for example, had a severe and lasting adverse impact on the airline industry, in particular, a decrease in airline traffic in the United States and, to a lesser extent, in Latin America. Our revenues depend on the number of passengers traveling on our flights. Therefore, any future terrorist attacks or threat of attacks, whether or not involving commercial aircraft, any increase in hostilities relating to reprisals against terrorist organizations, including an escalation of military involvement in the Middle East, or otherwise, and any related economic impact could result in decreased passenger traffic and materially and negatively affect our business, financial condition and results of operations.
Increases in insurance costs and/or significant reductions in coverage would harm our business, financial condition and results of operations.
Following the 2001 terrorist attacks, premiums for insurance against aircraft damage and liability to third parties increased substantially, and insurers could reduce their coverage or increase their premiums even further in the event of additional terrorist attacks, hijackings, airline crashes or other events adversely affecting the airline industry abroad or in Latin America. In the future, certain aviation insurance could become unaffordable, unavailable, or available only for reduced amounts of coverage that are insufficient to comply with the levels of insurance coverage required by aircraft lenders and lessors or applicable government regulations. While governments in other countries have agreed to indemnify airlines for liabilities that they might incur from terrorist attacks or provide low-cost insurance for terrorism risks, the Panamanian government has not indicated an intention to provide similar benefits to us. Increases in the cost of
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insurance may result in higher fares, which could result in a decreased demand and materially and negatively affect our business, financial condition and results of operations.
Events such as the conflict between Russia and Ukraine, the political unrest in Sudan, and the ongoing crisis in Israel have put upward pressure on aviation insurance premiums, particularly in the Hull War sector of the airline insurance market. In fact, the conflict between Russia and Ukraine could lead to one of the largest ever aviation claims of US$10 billion to US$15 billion, significantly higher than the claims resulting from 9/11. Such geopolitical events, and any other conflicts that may arise, may continue to impact claims and premiums going forward.
Failure to comply with applicable environmental regulations could adversely affect our business.
Our operations are covered by various local, national and international environmental regulations. These regulations cover, among other things, emissions to the atmosphere, disposal of solid waste and aqueous effluents, aircraft noise and other activities that result from the operation of aircraft. Future operations and financial results may vary as a result of such regulations. Compliance with these regulations and new or existing regulations that may be applicable to us in the future could increase our cost base and adversely affect our operations and financial results.
Combatting climate change has been the focus of regulators from regional to international governing bodies. For example, in 2018, the ICAO council adopted “SARPs” (Standards and Recommended Practices) laying out the criteria for Carbon Offsetting and Reduction Scheme for International Aviation (“CORSIA”) and issuing the first edition of the CORSIA to address the increase in total CO2 emissions from international aviation. As Colombia and Panama are member states of ICAO, the Civil Aviation Authorities (“CAAs”) of Panama and Colombia have developed new regulations to implement CORSIA. Under CORSIA, airplane operators must annually report the fuel consumption of their international commercial operations and the corresponding CO2 emissions (domestic operations are excluded from these requirements and need to be managed according to the local regulatory entity requirements). Although, the impact of CORSIA cannot be fully predicted, it is still expected to result in increased operating costs for airlines that operate internationally, including COPA. Copa Airlines and AeroRepública began presenting their CO2 emissions reports from the operations in 2019 and onwards. The CO2 emissions reports are presented to the Civil Aviation Authorities in the month of May after having been audited by an accredited auditing company. Copa Airlines and AeroRepública presented the Emission Monitoring Plan (“EMP”) required by CORSIA to their respective CAAs.
Carbon emissions by the airline industry and their impact on climate change have become a particular focus in the international community, including in the countries where we operate. There are various regulations currently in place in the jurisdictions where we operate, and we would expect additional regulations in this matter in the future. Other than as described in this annual report, to date those regulations have neither applied to nor had a material effect on our operations. However, our operations may become subject to additional regulation in any of the jurisdictions where we operate, which could lead to an impact on our operations and result in increased costs, which could be material. We expect to continue to monitor and evaluate the potential impact of any additional regulation regarding climate change.
In addition to encouraging CO2 emissions reductions, CORSIA will require airline operators to offset CO2 emissions through payments to authorized carbon banks, which will invest in environmental projects to reduce the global carbon footprint. Copa Airlines and AeroRepública will not be subject to the emissions offsetting requirements until 2027, because Panama and Colombia are not participating in the voluntary first phase of CORSIA. However, it is possible that various national and regional regulators will enforce their own varying emission restrictions due to concerns over climate change, and even individual airports could adopt climate-related goals around greenhouse gas emission.
In January 2021, the U.S. Environmental Protection Agency (EPA) adopted greenhouse gas emission standards for new aircraft engines designed to implement the ICAO standard, aligned with the 2017 ICAO airplane engine GHG emission standards. The final EPA standards would not apply to engines on in-service aircraft. States and environmental groups have challenged the standards. The outcome of the legal challenge cannot be predicted. On September 9, 2021, the U.S. Department of Energy, the U.S. Department of Transportation, and the U.S. Department of Agriculture launched the Sustainable Aviation Fuel Grand Challenge to scale up the production of sustainable aviation fuel, reduce greenhouse gas emissions from aviation, and replace all traditional aviation fuel with sustainable aviation fuel by 2050.
Our business could face future regulatory challenges due to evolving sustainability standards and carbon emission reduction targets. Although Panama, the United States, and other countries we operate in have not yet adopted the new Sustainability Standards IFRS S1 and IFRS S2, the global trend towards enhanced sustainability reporting and accountability suggests potential future compliance requirements. These standards focus on comprehensive sustainability reporting, which could necessitate changes in our operational and reporting processes.
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Additionally, we are aware of the growing emphasis on environmental impact and the risk posed by potential regulations aimed at reducing carbon emissions. The recent CAAF/3 resolution, which targets a 5% reduction in carbon emissions by 2030, exemplifies this trend. While not currently binding on us, such resolutions could pave the way for mandatory measures, including carbon taxes or stricter operational regulations to curb emissions.
These potential developments may lead to increased operational costs, necessitate investment in newer, more environmentally friendly technologies, and require strategic shifts in our business practices. Failure to adapt to these changes or comply with new regulations could result in financial penalties, reputational harm, and a competitive disadvantage.
We are subject to risks associated with climate change, including increased regulation of our carbon emissions, changing consumer preferences and the potential increased impacts of severe weather events on our operations and infrastructure.
As customers become more aware of the risks of climate change, their preferences around flying may also change, which can pose a risk to our results of operations. For example, customers may choose to fly less in order to decrease their negative impact to the environment and climate. Customers may also decide to choose airlines they perceive to be operating and conducting business in a more environmentally sustainable manner based on the airline’s reputation or who permit customers to pay for the emissions caused by their flights. Additionally, customers may opt to take a high-speed rail instead of a flight or opt out of traveling entirely by engaging in virtual meetings instead. Debt and equity investors may also make investment decisions based on environmental, social and governance considerations, which could increase our cost of capital, to the extent we do not comply with certain criteria.
In addition, climate change may cause severe weather such as increased storms and flooding, rising sea level, and excessive heat. For example, Panama has been facing a severe drought, affecting the Panama Canal’s operations and, by extension, the national economy. These varying climate conditions could negatively impact our operations and infrastructure. The operational impact can include flight cancellations, flight delays, increased fuel prices, among others. Climate change may even make destinations less attractive for visitors if the destination becomes more prone to extreme weather events. All of these factors could result in loss of revenue. We are not able to predict accurately the materiality of any potential losses or costs associated with the physical effects of climate change.
All the countries that are party to the Paris Agreement have agreed to limit the average increase in global temperature to 2 degrees Celsius compared to pre-industrial levels, to maximize efforts not to exceed an increase of 1.5 degrees by the end of this century and to achieve climate neutrality in 2050. We are subject to various environmental regulations in the markets where we operate and may become subject to further new regulations in the future. See “—Failure to comply with applicable environmental regulations could adversely affect our business.” Even though future requirements resulting from climate change-related regulation are unknown, it is likely that they will adversely affect the business resulting in emission reduction requirements, the need to purchase new Sustainable Aviation Fuels (SAF) or new equipment or technologies, and other increases to operating costs.
The deployment of new 5G wireless communications systems by major telecommunications service providers could result in a disruption to or otherwise adversely affect our operations.
The deployment of new 5G systems could cause, among other consequences, operational and security issues, interference with critical aircraft instruments and adverse impact to low-visibility operations. This could potentially result in flight cancellations, diversions and delays, or could result in damage to our aircraft and other equipment and a diminished margin of safety in airline operations. On January 18, 2022, major U.S. telecommunications companies agreed to delay the implementation of 5G near airports until July 5, 2022 while working with the FAA to develop long-term mitigations to support safe aviation operations. On June 17, 2022, the FAA announced that the major U.S. telecommunications companies have agreed to continue to keep 5G mitigations beyond July 5, 2022, but simultaneously announced their expectation that the U.S. mainline commercial fleet to have radio altimeter retrofits or other enhancements in place by July 2023. To date, neither Panama nor other countries where we operate have announced similar arrangements.
The FAA is working with the Federal Communications Commission, major telecommunications providers and airlines to reduce effects of this potential disruption. There is, however, a high level of uncertainty regarding the timing of extent of any requirements or restrictions imposed on airlines by the FAA, the FCC or other government agencies. Any sustained impact to our operations due to the deployment of 5G wireless communications system or as a result of requirements or restrictions by governmental authorities as a result thereof could adversely affect our business, results of operations and financial condition.
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Risks Relating to Panama and our Region
We are highly dependent on conditions in Panama and, to a lesser extent, in Colombia.
A substantial portion of our assets are located in the Republic of Panama and a significant proportion of our passengers’ trips either originate or end in Panama. Furthermore, substantially all of Copa’s flights operate through our hub at Tocumen International Airport. As a result, we depend on economic and political conditions prevailing from time to time in Panama. Panama’s economic conditions in turn highly depend on the continued profitability and economic impact of the Panama Canal. Control of the Panama Canal and many other assets were transferred from the United States to Panama in 1999 after nearly a century of U.S. control. Political events in Panama may significantly affect our operations.
Wingo’s results of operations are also highly sensitive to macroeconomic and political conditions prevailing in Colombia and any political unrest and instability in Colombia could adversely affect Wingo’s financial condition and results of operations.
Panama and Colombia have experienced significant economic growth over the last several years. However, like other countries in the region and around the world, the economies of Panama and Colombia have been adversely affected by the COVID-19 pandemic. According to International Monetary Fund estimates, during 2024 the Panamanian and Colombian economies are expected to grow 4.0% and 2.0% respectively, as measured by their GDP at constant prices, even with preliminary figures indicating that real GDP increased by 6.0% in Panama and by 1.4% in Colombia in 2023. However, if either economy experiences a sustained recession, or significant political disruptions, our business, financial condition or results of operations could be materially and negatively affected.
Any increase in the taxes we or our shareholders pay in Panama or the other countries where we do business could adversely affect our financial performance and results of operations.
We cannot ensure that our current tax rates will not increase. Our income tax expenses were $97.0 million, $40.2 million and $10.5 million in the years ended December 31, 2023, 2022 and 2021, respectively, which represented an effective income tax rate of 15.9%, 10.4% and 19.3%, respectively. We are subject to local tax regulations in each of the jurisdictions where we operate, the great majority of which are related to the taxation of income. In some of the countries to which we fly, we are not subject to income taxes, either because those countries do not have income tax or because of treaties or other arrangements those countries have with Panama. In the remaining countries, we pay income tax at rates ranging from 7% to 35% of income.
Different countries calculate income in different ways, but they are typically derived from sales in the applicable country multiplied by our net margin or by a presumed net margin set by the relevant tax legislation. The determination of our taxable income in certain countries is based on a combination of revenues sourced to each particular country and the allocation of expenses of our operations to that particular country. The methodology for multinational transportation company sourcing of revenues and expenses is not always specifically prescribed in the relevant tax regulations, and therefore is subject to interpretation by both us and the respective taxing authorities. Additionally, in some countries, the applicability of certain regulations governing non-income taxes and the determination of our filing status are also subject to interpretation. We cannot estimate the amount, if any, of potential tax liabilities that might result if the allocations, interpretations and filing positions used by us in our tax returns were challenged by the taxing authorities of one or more countries. If taxes were to increase, our financial performance and results of operations could be materially and adversely affected. Due to the competitive revenue environment, many increases in fees and taxes have been absorbed by the airline industry rather than being passed on to the passenger. If we were to pass any of these increases in fees and taxes onto passengers, we may no longer compete effectively as those increases may result in reduced customer demand for air travel with us, thereby reducing our revenues. If we were to absorb any increases in fees and taxes, the additional costs could have a material adverse effect on our results of operations.
The Panamanian tax code for the airline industry states that tax is based on net income earned for passenger and cargo traffic with an origin or final destination in the Republic of Panama. The applicable tax rate is currently 25%. Dividends from our Panamanian subsidiaries, including Copa, are separately subject to a 10% percent withholding tax on the portion attributable to Panamanian-sourced income and a 5% withholding tax on the portion attributable to foreign-sourced income. Additionally, a 7% value added tax is levied on tickets issued in Panama for travel commencing in Panama and going abroad, irrespective of where such tickets were ordered. If such taxes were to increase, our financial performance and results of operations could be materially and adversely affected.
We received notifications from the tax authorities in Panama in February 2020 and in Colombia in November 2020 and March 2016. We, along with our tax advisors, have concluded that it is unlikely that we will need to allocate
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resources to settle these claims. This conclusion is based on the strength of our defense arguments and the fact that both cases are in the preliminary stages.
In February 2020, we received two notifications from the tax authorities in Panama related to a tax audit process that began in 2019. The notifications include potentially significant adjustments to the reported dividend tax for the years 2012 to 2016 and income tax for the year 2016. We have filed an administrative appeal, which is the first legal stage under Panamanian laws. We, along with our tax advisors, have concluded that is probable that our tax position will be upheld. As a result, it is not probable that we will incur any significant additional tax as a result. According to Panamanian laws, the statute of limitations is three and 15 years for income tax and dividend tax claims, respectively.
We may face increased taxes in future periods as a result of the global minimum tax, a critical element of the Base Erosion and Profit Shifting (“BEPS”) initiative. On October 8, 2021, 136 countries, including Panama, reached an agreement for a two-pillar approach to international tax reform, integral to the BEPS project. Among other things, Pillar One proposes a reallocation of a proportion of taxes to market jurisdictions, while the Pillar Two Global anti-Base Erosion rules (“GloBE Rules”) propose four new taxing mechanisms under which multinational enterprises (“MNEs”) would pay a minimum level of tax (“Minimum Tax”). The Subject to Tax Rule is a tax treaty-based rule that generally proposes a Minimum Tax on certain cross-border intercompany transactions that otherwise are not subject to a minimum level of tax. The Income Inclusion Rule (IIR), the Under Taxed Payments Rule (UTPR), and the Qualified Domestic Minimum Top-up Tax (QDMT) generally propose a Minimum Tax of 15% on the income arising in each jurisdiction in which an MNE operates.
On December 18, 2023, Pillar Two legislation was enacted in Ireland, the jurisdiction of the special purpose vehicles owned by the Company that beneficially own 75 aircraft of the Company's fleet. The income inclusion rule (IIR) and qualified domestic minimum top-up tax (QDMTT) provisions will apply for fiscal years beginning on or after December 31, 2023. The undertaxed profits rule (UTPR) will apply for fiscal years beginning on or after December 31, 2024 and will come into effect beginning January 1, 2024.
Since the Pillar Two legislation was not effective as of the reporting date, the Company has no related current tax exposure. The Company applies the exception to recognizing and disclosing information about deferred tax assets and liabilities related to Pillar Two income taxes, as provided in the amendments.
At the date when the financial statements were authorized for issue, no other of the jurisdictions in which the Company operates had enacted or substantively enacted the tax legislation related to the top-up tax.
As of December 31, 2023, the Company did not have sufficient information to determine the potential quantitative impact. The impact of changes in corporate tax rates on the measurement of tax assets and liabilities depends on the nature and timing of the legislative changes in each country.
Political unrest and instability in Latin American countries in which we operate may adversely affect our business and the market price of our Class A shares.
While geographic diversity helps reduce our exposure to risks in any one country, we operate primarily within Latin America and are thus subject to a full range of risks associated with our operations in these regions. These risks may include unstable political or economic conditions, lack of well-established or reliable legal systems, exchange controls and other limits on our ability to repatriate earnings and changeable legal and regulatory requirements. In Venezuela, for example, we and other airlines and foreign companies may only repatriate cash through specific governmental programs, which may effectively preclude us from repatriating cash for periods of time. In addition, Venezuela has experienced difficult political conditions and declines in the rate of economic growth in recent periods as well as governmental actions that have adversely impacted businesses that operate there. For the year ended December 31, 2023, revenue from the Company’s flights to Venezuela, including connecting traffic, represented about 6.8% of consolidated revenues and direct flights between Panama and Venezuela. Inflation, any decline in GDP or other future economic, social and political developments in Latin America may adversely affect our financial condition or results of operations.
Although conditions throughout Latin America vary from country to country, our customers’ reactions to developments in Latin America generally may result in a reduction in passenger traffic, which could materially and negatively affect our financial condition, results of operations and the market price of our Class A shares.
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Risks Relating to Our Class A Shares
The value of our Class A shares may be adversely affected by ownership restrictions on our capital stock and the power of our Board of Directors to take remedial actions to preserve our operating license and international route rights by requiring sales of certain outstanding shares or issuing new stock.
Pursuant to the Panamanian Aviation Act, as amended and interpreted to date, and certain of the bilateral treaties affording us the right to fly to other countries, we are required to be “substantially owned” and “effectively controlled” by Panamanian nationals. Our failure to comply with such requirements could result in the loss of our Panamanian operating license and/or our right to fly to certain important countries. Our Articles of Incorporation (Pacto Social) give special powers to our independent directors to take certain significant actions to attempt to ensure that the amount of shares held in us by non-Panamanian nationals does not reach a level that could jeopardize our compliance with Panamanian and bilateral ownership and control requirements. If our independent directors determine it is reasonably likely that we will be in violation of these ownership and control requirements and our Class B shares represent less than 10% of our total outstanding capital stock (excluding newly issued shares sold with the approval of our independent director’s committee), our independent directors will have the power to issue additional Class B shares or Class C shares with special voting rights solely to Panamanian nationals. See “Item 10B. Memorandum and Articles of Association—Description of Capital Stock.”
If any of these remedial actions are taken, the trading price of the Class A shares may be materially and adversely affected. An issuance of Class C shares could have the effect of discouraging certain changes of control of Copa Holdings or may reduce any voting power that the Class A shares enjoy prior to the Class C share issuance. There can be no assurance that we would be able to complete an issuance of Class B shares to Panamanian nationals. We cannot be certain that restrictions on ownership by non-Panamanian nationals will not impede the development of an active public trading market for the Class A shares, adversely affect the market price of the Class A shares or materially limit our ability to raise capital in markets outside of Panama in the future.
Our controlling shareholder has the ability to direct our business and affairs, and its interests could conflict with those of other shareholders.
All of our Class B shares, representing approximately 26.0% of the economic interest in Copa Holdings and 100% of the voting power of our capital stock, are owned by Corporación de Inversiones Aéreas, S.A., or “CIASA,” a Panamanian entity. CIASA is in turn controlled by a group of Panamanian investors. In order to comply with the Panamanian Aviation Act, as amended and interpreted to date, we have amended our organizational documents to modify our share capital so that CIASA will continue to exercise voting control of Copa Holdings. CIASA will not be able to transfer its voting control unless control of our Company will remain with Panamanian nationals. CIASA will maintain voting control of the Company so long as CIASA continues to own a majority of our Class B shares and the Class B shares continue to represent more than 10% of our total share capital (excluding newly issued shares sold with the approval of our independent director’s committee). Even if CIASA ceases to own the majority of the voting power of our capital stock, CIASA may continue to control our Board of Directors indirectly through its control of our Nominating and Corporate Governance Committee. As the controlling shareholder, CIASA may direct us to take actions that could be contrary to other shareholders’ interests and under certain circumstances CIASA will be able to prevent other shareholders, including you, from blocking these actions. Also, CIASA may prevent change of control transactions that might otherwise provide an opportunity to dispose of or realize a premium on investments in our Class A shares.
The Class A shares will only be permitted to vote in very limited circumstances and may never have full voting rights.
The holders of Class A shares have no right to vote at our shareholders’ meetings except with respect to corporate transformations of Copa Holdings, mergers, consolidations or spin-offs of Copa Holdings, changes of corporate purpose, voluntary delisting of the Class A shares from the NYSE, the approval of nominations of our independent directors and amendments to the foregoing provisions that adversely affect the rights and privileges of any Class A shares. The holders of Class B shares have the power to elect the Board of Directors and to determine the outcome of all other matters to be decided by a vote of shareholders. Class A shares will not have full voting rights unless the Class B shares represent less than 10% of our total capital stock (excluding newly issued shares sold with the approval of our independent director’s committee). See “Item 10B. Memorandum and Articles of Association—Description of Capital Stock.” We cannot assure that the Class A shares will ever carry full voting rights.
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Substantial future sales of our Class A shares by CIASA could cause the price of the Class A shares to decrease.
CIASA owns all of our Class B shares, and those Class B shares will be converted into Class A shares if they are sold to non-Panamanian investors. In connection with our initial public offering in December 2005, Continental and CIASA reduced their ownership of our total capital stock from 49.0% to approximately 27.3% and from 51.0% to approximately 25.1%, respectively. In a follow-on offering in June 2006, Continental further reduced its ownership of our total capital stock from 27.3% to 10.0%. In May 2008, we and CIASA released Continental from its standstill obligations and they sold down their remaining shares in the public market. CIASA holds registration rights with respect to a significant portion of its shares pursuant to a registration rights agreement entered into in connection with our initial public offering. In March 2010, CIASA converted a portion of its Class B shares into 1.6 million non-voting Class A shares and sold such Class A shares in an SEC-registered public offering. In the event CIASA seeks to reduce its ownership below 10% of our total share capital, our independent directors may decide to issue special voting shares solely to Panamanian nationals to maintain the ownership requirements mandated by the Panamanian Aviation Act. As a result, the market price of our Class A shares could drop significantly if CIASA further reduces its investment in us, other significant holders of our shares sell a significant number of shares or if the market perceives that CIASA or other significant holders intend to sell their shares. As of December 31, 2023 CIASA owned 26.0% of Copa Holdings’ total capital stock.
Holders of our common stock are not entitled to preemptive rights, and as a result, shareholders may experience substantial dilution upon future issuances of stock by us.
Under Panamanian corporate law and our organizational documents, holders of our Class A shares are not entitled to any preemptive rights with respect to future issuances of capital stock by us. Therefore, unlike companies organized under the laws of many other Latin American jurisdictions, we are free to issue new shares of stock to other parties without first offering them to our existing Class A shareholders. In the future we may sell Class A or other shares to persons other than our existing shareholders at a lower price than the shares already sold, and as a result, shareholders may experience substantial dilution of their interest in us.
Shareholders may not be able to sell our Class A shares at the price or at the time desired because an active or liquid market for the Class A shares may not continue.
Our Class A shares are listed on the NYSE. During the three months ended December 31, 2023, the average daily trading volume for our Class A shares as reported by the NYSE was approximately 295,625 shares. Active, liquid trading markets generally result in lower price volatility and more efficient execution of buy and sell orders for our investors. The liquidity of a securities market is often affected by the volume of shares publicly held by unrelated parties. We cannot predict whether an active liquid public trading market for our Class A shares will be sustained.
Our operations in Cuba may adversely affect the market price of our Class A shares.
We currently offer passenger, cargo and mail transportation services to and from Cuba. For the year ended December 31, 2023, our transported passengers to and from Cuba represented approximately 2.7% of our total passengers. Our operating revenues from Cuban operations during the year ended December 31, 2023 represented approximately 0.4% of our total consolidated operating revenues for the year. Our assets located in Cuba are not significant.
The United States administers and enforces broad economic and trade sanctions and restrictions against Cuba, and groups opposed to the Cuban regime may seek to exert pressure on companies doing business in Cuba. U.S. policy towards Cuba has been in flux in recent years and uncertainty remains over the future of U.S. economic sanctions against Cuba and the impact such sanctions will have on our operations, particularly if the United States imposes additional relevant sanctions. While we believe our operations in Cuba are in compliance with all applicable laws, any violations of U.S. sanctions could result in the imposition of civil and/or criminal penalties and have an adverse effect on our business and reputation. Additionally, Title III of the Cuban Liberty and Democratic Solidarity (Libertad) Act of 1996 (the Helms-Burton Act) provides a cause of action for U.S. nationals to bring claims against any person who traffics in property expropriated by the Cuban Government. The scope of any potential claims under the Helms-Burton Act are uncertain and companies with commercial dealings in Cuba have faced claims for damages; we could face such claims in the future.
Certain U.S. states have enacted or may enact legislation regarding investments by state-owned investors, such as public employee pension funds and state university endowments, in companies that have business activities with Cuba. As a result, such state-owned institutional investors may be subject to restrictions with respect to investments in companies such as ours, which could adversely affect the market for our shares.
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Our Board of Directors may, in its discretion, amend or repeal our dividend policy. Shareholders may not receive the level of dividends provided for in the dividend policy or any dividends at all.
In February 2016, the Board of Directors approved a change to the dividend policy to limit aggregate annual dividends to an amount equal to 40% of the previous year’s annual consolidated underlying net income, to be distributed in equal quarterly installments subject to board ratification each quarter. Our Board of Directors may, in its sole discretion and for any reason, amend or repeal any aspect of this dividend policy. Our Board of Directors may decrease the level of dividends provided for in this dividend policy or entirely discontinue the payment of dividends. Future dividends with respect to shares of our common stock, if any, will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions, business opportunities, provisions of applicable law and other factors that our Board of Directors may deem relevant. See “Item 8A. Consolidated Statements and Other Financial Information—Dividend Policy.” On April 26, 2020, given the challenges presented by the COVID-19 pandemic, the Board decided to postpone payment of dividends for the remainder of 2020, 2021 and 2022. On March 22, 2023, the Board of Directors of Copa Holdings approved a 2023 dividend payment corresponding to 40% of the adjusted consolidated net income of 2022.
To the extent we pay dividends to our shareholders, we will have less capital available to meet our future liquidity needs.
Our Board of Directors has reserved the right to amend the dividend policy or pay dividends in excess of the level circumscribed in the dividend policy. The aviation industry has cyclical characteristics, and many international airlines are currently experiencing difficulties meeting their liquidity needs. Also, our business strategy contemplates growth over the next several years, and we expect such growth will require a great deal of liquidity. To the extent that we pay dividends in accordance with, or in excess of, our dividend policy, the money that we distribute to shareholders will not be available to us to fund future growth and meet our other liquidity needs.
Our Articles of Incorporation impose ownership and control restrictions on our Company that ensure that Panamanian nationals will continue to control us and these restrictions operate to prevent any change of control or some transfers of ownership in order to comply with the Aviation Act and other bilateral restrictions.
Under Law No. 21 of January 29, 2003, as amended and interpreted to date, or the “Aviation Act”, which regulates the aviation industry in the Republic of Panama, Panamanian nationals must exercise “effective control” over the operations of the airline and must maintain “substantial ownership”. Under certain of the bilateral agreements between Panama and other countries pursuant to which we have the right to fly to those other countries and over their territories, we must also continue to have substantial Panamanian ownership and effective control by Panamanian nationals to retain these rights. On November 25, 2005, the Executive Branch of the Government of Panama promulgated a decree stating that the “substantial ownership” and “effective control” requirements of the Aviation Act are met if a Panamanian citizen or a Panamanian company is the record holder of shares representing 51% or more of the voting power of the Company. Although the decree has the force of law for so long as it remains in effect, it does not supersede the Aviation Act, and it could be modified or superseded at any time by a future Executive Branch decree. Additionally, the decree has no binding effect on regulatory authorities of other countries whose bilateral agreements impose Panamanian ownership and control limitations on us. These phrases are not defined in the Aviation Act itself or in the bilateral agreements to which Panama is a party, and it is unclear how a Panamanian court or, in the case of the bilateral agreements, foreign regulatory authorities, would interpret them.
The share ownership requirements and transfer restrictions contained in our Articles of Incorporation, as well as the dual-class structure of our voting capital stock, are designed to ensure compliance with these ownership and control restrictions. See “Item 10B. Memorandum and Articles of Association—Description of Capital Stock”. At the present time, CIASA is the record owner of 100% of our Class B voting shares, representing approximately 26.0% of our total share capital and all of the voting power of our capital stock. These provisions of our Articles of Incorporation may prevent change of control transactions that might otherwise provide an opportunity to realize a premium on investments in our Class A shares. They also ensure that Panamanians will continue to control all the decisions of our Company for the foreseeable future.
The protections afforded to minority shareholders in Panama are different from and more limited than those in the United States and may be more difficult to enforce.
Under Panamanian law, the protections afforded to minority shareholders are different from, and much more limited than, those in the United States and some other Latin American countries. For example, the legal framework with respect to shareholder disputes is less developed under Panamanian law than under U.S. law and there are different
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procedural requirements for bringing shareholder lawsuits, including shareholder derivative suits. As a result, it may be more difficult for our minority shareholders to enforce their rights against us or our directors or controlling shareholder than it would be for shareholders of a U.S. company. In addition, Panamanian law does not afford minority shareholders as many protections for investors through corporate governance mechanisms as in the United States and provides no mandatory tender offer or similar protective mechanisms for minority shareholders in the event of a change in control. While our Articles of Incorporation provide limited rights to holders of our Class A shares to sell their shares at the same price as CIASA in the event that a sale of Class B shares by CIASA results in the purchaser having the right to elect a majority of our board, there are other change of control transactions in which holders of our Class A shares would not have the right to participate, including the sale of interests by a party that had previously acquired Class B shares from CIASA, the sale of interests by another party in conjunction with a sale by CIASA, the sale by CIASA of control to more than one party, or the sale of controlling interests in CIASA itself.
Item 4. Information on the Company
A.History and Development of the Company
General
Copa was established in 1947 by a group of Panamanian investors and Pan American World Airways, which provided technical and economic assistance as well as capital. Initially, Copa served three domestic destinations in Panama with a fleet of three Douglas C- 47 aircraft. In the 1960s, Copa began its international service with three weekly flights to cities in Costa Rica, Jamaica and Colombia using a small fleet of Avro 748s and Electra 188s. In 1971, Pan American World Airways sold its stake in Copa to a group of Panamanian investors who retained control of the airline until 1986. During the 1980s, Copa suspended its domestic service to focus on international flights.
In 1986, CIASA purchased 99% of Copa, which was controlled by the group of Panamanian shareholders who currently control CIASA. From 1992 until 1998, Copa was a part of a commercial alliance with Grupo TACA’s network of Central American airline carriers. In 1997, together with Grupo TACA, Copa entered into a strategic alliance with American Airlines. After a year our alliance with American Airlines was terminated by mutual consent.
On May 6, 1998, Copa Holdings, S.A., the holding company for Copa and related companies was incorporated as a sociedad anónima under the laws of Panama to facilitate the sale by CIASA of a 49% stake in Copa Holdings to Continental. In connection with Continental’s investment, we entered into an extensive alliance agreement with Continental providing for code-sharing, joint marketing, technical exchanges and other cooperative initiatives between the airlines. At the time of our initial public offering in December 2005, Continental reduced its ownership of our total capital stock from 49% to approximately 27.3%. In a follow-on offering in June 2006, Continental further reduced its ownership of our total capital stock from 27.3% to 10.0%. In May 2008, Continental sold its remaining shares in the public market. In March 2010, CIASA sold 4.2% of its interest and as of December 31, 2023 held 26.0% of our total capital stock.
Since 1998, we have grown and modernized our fleet while improving customer service and reliability. Our operational fleet has grown from 13 aircraft in 1998 to 106 aircraft as of January 1, 2024. In 1999, we received our first Boeing 737-700s, followed by our first Boeing 737-800 in 2003 and our first Embraer 190 in 2005. We discontinued the use of our last Boeing 737-200 in 2005. In 2018, we took delivery of our first four Boeing 737 MAX 9 aircraft. In addition, continuing our fleet optimization and efficiency efforts, in 2020, we signed an aircraft sale and purchase agreement for the remaining Embraer 190 fleet. In 2021, we sold three B737-700 aircraft. During 2022, we sold two B737-700 airframes, restored capacity to pre-pandemic levels and expanded our network with new frequencies and routes.
On April 22, 2005, we acquired an initial 85.6% equity ownership interest in AeroRepública, which was one of the largest domestic carriers in Colombia in terms of passengers carried. Through subsequent acquisitions, we increased our total ownership interest in AeroRepública to 99.9% by the end of that year. In December 2016, we launched a low-cost business model, Wingo, to diversify our offerings and to better compete with other low-cost carriers in the markets. We believe that Copa Airlines creates additional passenger traffic in our existing route network by providing Colombian passengers more convenient access to the international destinations served through our Panama hub and by offering direct domestic and international service through our low-cost business model, Wingo. In 2021, we incorporated a new Wingo operator based in Panama, La Nueva Aerolínea, S.A., and in 2023, we started operating one 737-800 aircraft.
In July 2015, we elected to cease co-branding the MileagePlus frequent flyer program in Latin America and launched our own frequent flyer program, ConnectMiles. We believe that establishing our own direct relationship with our customers is essential to better serve them. Copa and UAL will remain strong loyalty partners through our participation in Star Alliance.
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Our registered office is located at Avenida Principal y Avenida de la Rotonda, Urbanización Costa del Este, Complejo Business Park, Torre Norte, Parque Lefevre, Panama City, Panama and our telephone number is +507 304-2774. The website of Copa Airlines is www.copaair.com. Information contained on, or accessible through, this website is not incorporated by reference herein and shall not be considered part of this annual report. Our agent for service of process regarding SEC securities filings in the United States is Puglisi & Associates, 850 Library Avenue, Suite 204, Newark, Delaware 19715, and its telephone number is +(302) 738-6680. Also, the SEC maintains an internet site (www.sec.gov) that contains reports, proxy and information statements and other information about the Company that the Company has filed electronically with the SEC.
Capital Expenditures
During 2023, our capital expenditures were $572.1 million, which consisted of advance payments and reimbursements on aircraft purchase contracts and acquisition of property and equipment, that correspond mainly to 8 aircraft that arrived during 2023, compared to capital expenditures of $526.9 million in 2022 and $412.9 million in 2021.
B.Business Overview
We are a leading Latin American provider of airline passenger and cargo service through our two principal operating subsidiaries, Copa Airlines and AeroRepública. Copa Airlines operates from its strategically located position in the Republic of Panama, and AeroRepública operates a low-cost business model, Wingo, within Colombia and various cities in the region. As of December 31, 2023, we operate a fleet of 106 aircraft, 76 Boeing 737-Next Generation aircraft, 29 Boeing 737 MAX 9 aircraft and one Boeing 737-800 BCF (Boeing Converted Freighter). As of December 31, 2023, we had one purchase contract with Boeing entailing 57 firm orders of Boeing 737 MAX aircraft. These aircraft are scheduled for delivery between 2024 and 2028.
Copa currently offers approximately 375 daily scheduled flights among 82 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 encompasses joint marketing strategies and code-sharing arrangements, among other things. We have been a member of Star Alliance since June 2012.
Our Strengths
We believe our primary business strengths that have allowed us to compete successfully in the airline industry include the following:
•Our “Hub of the Americas” airport is strategically located. We believe that Copa’s base of operations at the geographically central location of Tocumen International Airport in Panama City, Panama provides convenient connections to our principal markets in North, Central and South America and the Caribbean, enabling us to consolidate traffic to serve several destinations that do not generate enough demand to justify point-to-point service. Flights from Panama operate with few service disruptions due to weather, contributing to high completion factors and on-time performance. Tocumen International Airport’s sea-level altitude allows our aircraft to operate without the performance restrictions they would be subject to in higher altitude airports. We believe that Copa’s hub in Panama allows us to benefit from Panama City’s status as a center for financial services, shipping and commerce and from Panama’s stable, dollar-based economy, free-trade zone and growing tourism.
•We focus on keeping our operating costs low. In recent years, our low operating costs and efficiency have contributed significantly to our profitability. Our operating CASM, excluding costs for fuel, was 5.97¢ in 2023. We believe that our cost per available seat mile reflects our modern fleet, efficient operations and the competitive cost of labor in Panama.
•We operate a modern fleet. Our 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, we intend to enhance our modern fleet through the addition of 57 firm orders of Boeing 737 MAX aircraft, agreed to be delivered between 2024 and 2028. . We
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believe that our modern fleet contributes to our on-time performance and high completion factor (percentage of scheduled flights not cancelled).
•We believe Copa has a strong brand and a reputation for quality service. We believe that the Copa brand is associated with value to passengers, providing world-class service and competitive pricing. For the year ended December 31, 2023, Copa’s statistic for on-time performance, according to DOT standard methodology of arrivals within 14 minutes of scheduled arrival time, was and its completion factor was 89.5%. We believe our focus on customer service has helped to build passenger loyalty. In addition, the excellent response to our new loyalty program, ConnectMiles, demonstrates the strong affinity Copa customers have for the brand. In January 2024, for the ninth year, we received recognition from The Cirium 2023 On Time Performance (OTP) Review, as the most on-time airline in Latin America.
•Our management fosters a culture of teamwork and continuous improvement. Our management team has been successful at creating a culture based on teamwork and focused on continuous improvement. Each of our employees has individual objectives based on corporate goals that serve as a basis for measuring performance.
When corporate operational and financial targets are met, employees are eligible to receive bonuses according to our profit-sharing program. See “Item 6D. Employees”. We also recognize outstanding performance of individual employees through company-wide recognition, one-time awards, special events and, in the case of our senior management, grants of restricted stock and stock options. Our goal-oriented culture and incentive programs have contributed to a motivated work force that is focused on satisfying customers, achieving efficiencies and growing profitability.
Our Strategy
Our goal is to continue to grow profitably and enhance our position as a leader in Latin American aviation by providing a combination of superior customer service, convenient schedules and competitive fares, while maintaining competitive costs. The key elements of our business strategy include the following:
•Expand our network by increasing frequencies and adding new destinations. We believe that demand for air travel in Latin America is likely to expand in the next decade, and we intend to use our increasing fleet capacity to meet this growing demand. We intend to focus on expanding our operations by increasing flight frequencies on our most profitable routes and initiating service to new destinations. Copa’s Panama City hub allows us to consolidate traffic and provide non-stop or one-stop connecting service to over 5,000 city pairs, and we intend to focus on providing new or increased service to destinations that we believe best enhance the overall connectivity and profitability of our network.
•Continue to focus on keeping our costs low. We seek to reduce our cost per available seat mile without sacrificing services valued by our customers as we execute our growth plans. Our goal is to maintain a modern fleet and to make effective use of our resources through efficient aircraft utilization and employee productivity. We intend to reduce our distribution costs by increasing direct sales as well as improving efficiency through technology and automated processes.
•Emphasize superior service and value to our customers. We intend to continue to focus on satisfying our customers and earning their loyalty by providing a combination of superior service and competitive fares. We believe that continuing our operational success in keeping flights on time, reducing mishandled luggage and offering convenient schedules to attractive destinations will be essential to achieving this goal. We intend to continue to incentivize our employees to improve or maintain operating and service metrics relating to our customers’ satisfaction by continuing our profit-sharing plan and employee recognition programs. We will continue to reward our customer loyalty with, ConnectMiles awards, upgrades and access to our Copa Club lounges.
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Industry
In Latin America, the scheduled passenger service market consists of three principal groups of travelers: strictly leisure, business and travelers visiting friends and family. Leisure passengers and passengers visiting friends and family typically place a higher emphasis on lower fares, whereas business passengers typically place a higher emphasis on flight frequency, on-time performance, breadth of network and service enhancements, including loyalty programs and airport lounges.
According to data from the International Air Transport Association, or “IATA”, Latin America comprised approximately 12.1% of international worldwide passengers flown in 2022.
The Central American aviation market is dominated by international traffic. According to data from IATA, international revenue passenger kilometers, or “RPKs”, are concentrated between North America and Central America. This segment represented 79.8% of international RPKs flown to and from Central America in 2022, compared to 14.7% RPKs flown between Central America and South America and 5.6% for RPKs flown between Central American countries. Total RPKs flown on international flights to and from Central America increased 68.1%, and load factors on international flights to and from Central America were 83% on average.
The chart below details passenger traffic between regions in 2022:
2022 IATA Traffic Results | |||||||||||||||||||||||||||||||||||
Passenger Kms Flown | Available Seat Kms | Passenger Load Factor | |||||||||||||||||||||||||||||||||
| (Million) | Change (%) | (Million) | Change (%) | Load Factor | Change (%) | ||||||||||||||||||||||||||||||
| North America - Central America / Caribbean | 162,466 | 45.5 | 200,427 | 27.7 | 81.1 | % | 9.9 p.p. | ||||||||||||||||||||||||||||
| North America - South America | 97,333 | 64.3 | 117,730 | 29.5 | 82.7 | % | 17.5 p.p. | ||||||||||||||||||||||||||||
| Within South America | 22,898 | 315.4 | 29,131 | 254.2 | 78.6 | % | 11.6 p.p. | ||||||||||||||||||||||||||||
| Central America/Caribbean - South America | 29,875 | 99.4 | 37,568 | 79.4 | 79.5 | % | 8.0 p.p. | ||||||||||||||||||||||||||||
| Within Central America | 11,341 | 81.9 | 14,556 | 68.7 | 77.9 | % | 5.6 p.p. | ||||||||||||||||||||||||||||
Panama serves as a hub for connecting passenger traffic between major markets in North, South, and Central America and the Caribbean. Accordingly, passenger traffic to and from Panama is significantly influenced by economic growth in surrounding regions. Preliminary figures indicate that real GDP increased by 6.0% in Panama and by 1.4% in Colombia, according to data of the World Economic and Financial Survey conducted by the International Monetary Fund (“IMF”).
| GDP (in US$ billions) | GDP per Capita | ||||||||||||||||
| 2022 Current Prices (US$) | 2022 Real GDP (% Growth) | 2022 Current Prices (US$) | |||||||||||||||
| Argentina | 622 | -2.5 | 13,297 | ||||||||||||||
| Brazil | 2,127 | 3.1 | 10,413 | ||||||||||||||
| Chile | 344 | -0.5 | 17,254 | ||||||||||||||
| Colombia | 364 | 1.4 | 6,976 | ||||||||||||||
| Mexico | 1,811 | 3.2 | 13,804 | ||||||||||||||
| Panama | 82 | 6.0 | 18,493 | ||||||||||||||
| USA | 26,950 | 2.1 | 80,412 | ||||||||||||||
Source: International Monetary Fund, World Economic Outlook Database, October 2023.
According to IMF estimates, from 2016 to 2023, Panama’s real GDP grew at an average annual rate of 4.1%, while inflation averaged 0.8% per year. The IMF currently estimates Panama’s population to be approximately 4.5 million in 2023, with the majority of the population concentrated in Panama City, where our hub at Tocumen International Airport
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is located. We believe the combination of a stable, service-oriented economy and steady population growth has helped drive our domestic origin and destination passenger traffic.
Domestic travel within Panama primarily consists of individuals visiting families as well as domestic and foreign tourists visiting the countryside. Most of this travel is done via ground transportation, and its main flow is to and from Panama City, where most of the economic activity and population is concentrated. Demand for domestic air travel is growing and relates primarily to leisure travel from foreign and local tourists. Since January 2015, Copa has operated daily flights to the second-largest city in Panama, David in the province of Chiriqui. The remaining market is served primarily by one local airline, Air Panama, which operates a fleet consisting of mainly turbo prop aircraft generally with less than 50 seats. This airline offers limited international service and operates in the secondary Marcos Gelabert airport of Panama City, which is located 30 minutes by car from Tocumen International Airport.
Colombia is the third largest country in Latin America in terms of population, with a population of approximately 52.2 million in 2023 according to the IMF and has a land area of approximately 440,000 square miles. Colombia’s GDP is estimated to be $363.8 billion for 2023, and per capita income was approximately $7.0 thousand (current prices) according to the IMF. Colombia’s geography is marked by the Andean mountains and an inadequate road and rail infrastructure, making air travel a convenient and attractive transportation alternative. Colombia shares a border with Panama, and for historic, cultural and business reasons it represents a significant market for many Panamanian businesses.
Route Network and Schedules
As of December 31, 2023, Copa provided regularly scheduled flights to 82 cities in North, Central and South America and the Caribbean. The majority of Copa flights operate through our hub in Panama City which allows us to transport passengers and cargo among a large number of destinations with service that is more frequent than if each route were served directly.
We believe our hub-and-spoke model is the most efficient way for us to operate our business since most of the origination/destination city pairs we serve do not generate sufficient traffic to justify point-to-point service. Also, since we serve many countries, it would be very difficult to obtain the bilateral route rights necessary to operate a competitive network-wide point-to-point system.
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 June 2011, we increased our banks of flights from four to six a day. This allowed us to increase efficiency in the use of hub infrastructure in addition to providing more time-of-day choices to passengers.
In addition to increasing the frequencies to destinations we already serve, 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 our Hub of the Americas at Tocumen International Airport for intra-American traffic. We currently plan to introduce new destinations and to increase frequencies to many of the destinations that Copa currently serves. Our fleet allows us to improve our service by increasing frequencies and service to new destinations with the right-sized aircraft.
As a part of our strategic relationship with UAL, Copa provides flights through code-sharing arrangements to over 120 other destinations. In addition to codeshares provided with our 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, we launched a low-cost business model, Wingo, to diversify our 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. In 2021, we incorporated a new Wingo operator based in Panama, La Nueva Aerolínea, S.A., and in 2023, we started operating one 737-800 aircraft.
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Revenue by Region
The following table shows our revenue generated in each of our major operating regions.
Year Ended December 31, | ||||||||||||||||||||
| Region | 2023 | 2022 | 2021 | |||||||||||||||||
| North America (1) | 38.9 | % | 32.7 | % | 28.9 | % | ||||||||||||||
| South America | 36.1 | % | 37.4 | % | 37.6 | % | ||||||||||||||
| Central America (2) | 23.3 | % | 28.0 | % | 32.0 | % | ||||||||||||||
| Caribbean (3) | 1.6 | % | 1.9 | % | 1.5 | % | ||||||||||||||
(1)Includes USA, Canada and Mexico
(2)Includes Panama
(3)Includes Cuba, Dominican Republic, Haiti, Jamaica, Puerto Rico, Aruba, Curaçao, St. Maarten, Bahamas, Barbados and Trinidad and Tobago
Airline Operations
Passenger Operations
Passenger revenue accounted for approximately $3.3 billion in 2023, $2.8 billion in 2022, and $1.4 billion in 2021, representing 95.9%, 95.3%, and 93.5%, respectively, of Copa’s total revenues. 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 our route network.
Cargo Operations
In addition to our passenger service, we make efficient use of extra capacity in the belly of our aircraft by carrying cargo. Our cargo operations consist principally of freight service. Copa’s cargo business generated revenues of approximately $97.1 million in 2023, $101.8 million in 2022, and $71.6 million in 2021, representing 2.8%, 3.4%, and 4.7% respectively, of Copa’s operating revenues. We primarily move our cargo in the belly of our aircraft; however, we also wet-lease and charter freighter capacity when necessary to meet our cargo customers’ needs. In 2021, we 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.
Pricing and Revenue Management
Copa has designed its fare structure to balance its load factors and yields in a way that it believes will maximize profits on its flights. Copa also maintains revenue management policies and procedures that are intended to maximize total revenues, while remaining generally competitive with those of our major competitors. In 2020, Copa implemented the PROS Revenue Management system, replacing the system formerly used by the company.
Copa charges higher fares for tickets sold on higher-demand routes, tickets purchased on short notice and other itineraries suggesting a passenger would be willing to pay a premium. This represents strong value to Copa’s business customers, who need more flexibility with their flight plans. The number of seats Copa offers at each fare level in each market results from a continual process of analysis and forecasting. Past booking history, seasonality, the effects of competition and current booking trends are used to forecast demand. Current fares and knowledge of upcoming events at destinations that will affect traffic volumes are included in Copa’s forecasting model to arrive at optimal seat allocations for its fares on specific routes. Copa uses a combination of approaches, taking into account yields, load factors and other factors, depending on the characteristics of the markets served, to arrive at a strategy for achieving the best possible revenue per available seat mile, balancing the average fare charged against the corresponding effect on our load factors.
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Relationship with UAL
In May 1998, Copa Airlines and Continental Airlines entered into a comprehensive alliance agreement to offer a more complete and seamless travel experience to passengers. The agreement encompassed a broad array of activities, including Copa’s participation in Continental’s frequent flyer programs and VIP lounges, codesharing, other joint business activities, as well as trademark agreements. Continental became a subsidiary of UAL after its merger with United Airlines in 2010, and UAL has continued its longstanding cooperation with Copa Airlines through a series of renewed agreements.
As a result of our alliance, we have benefited from Continental’s and UAL’s expertise and experience over the years. For example, prior to July 2015 when we launched our own frequent flyer program, ConnectMiles, we adopted Continental’s OnePass (now UAL’s MileagePlus) frequent flyer program and rolled out a co-branded joint product in most of Latin America, which enabled Copa to develop brand loyalty among travelers. The co-branding of the OnePass (now MileagePlus) loyalty program helped Copa to leverage the brand recognition that Continental already enjoyed across Latin America and has enabled Copa to compete more effectively against regional airlines. We also have adopted several important information technology systems, such as the SHARES computer reservation system in an effort to maintain commonality with UAL.
Our alliance relationship with UAL enjoys a grant of antitrust immunity from the U.S. Department of Transportation, or “DOT”. The alliance agreement expires in 2026 and is terminable by either airline in cases of, among other things, uncured material breaches of the alliance agreement, bankruptcy, termination of the services agreement for breach, termination of the frequent flyer participation agreement without entering into a successor agreement, certain competitive activities, certain changes of control of either of the parties and certain significant operational service failures.
Trademark License Agreement. Under our trademark license agreement with UAL, we have the right to use a logo incorporating a design that is similar to the design of the UAL logo. We also have the right to use UAL’s trade dress, aircraft livery and certain other UAL marks under the agreement that allow us to more closely align our overall product with our strategic alliance partner. The trademark license agreement is coterminous with the alliance agreement and can also be terminated for breach. In most cases, we have a period of five years after termination to cease to use the marks on our aircraft, with less time provided for signage and other uses of the marks or in cases where the agreement is terminated for a breach by us.
Sales, Marketing and Distribution
Sales and Distribution. A portion of our sales were completed through travel agents, including OTAs and other airlines while the rest came from direct sales via our 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.
Travel agents may obtain airline travel information and issue airline tickets through a direct connection program that we launched on September 1, 2022 using the New Distribution Capability (NDC) Level 4 standard or through the traditional GDSs that enable them to make reservations on flights from a large number of airlines. GDSs are also used by travel agents to make hotel and car rental reservations. Copa participates actively in major international GDSs, including SABRE, Amadeus and Travelport. In return for access to these GDS systems, Copa pays transaction fees that are generally based on the number of segments booked through each system and a portion of these transaction fees are now passed on to the passenger in the form of a distribution cost recovery surcharge.
Copa has a sales and marketing network consisting of 30 ticket offices, including city ticket offices located in Panama, Colombia and other countries, in addition to the airports where we operate.
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, we have offered alternatives leveraging the IATA “New Distribution Capability” (NDC) standard.
Advertising and Promotional Activities. In recent years, we have increased our use of digital marketing, including social media via Facebook, Instagram and Twitter to enhance our brand image and engage customers in a new way. Although the majority of our efforts are currently focused on digital channels, our advertising and promotional activities also include the use of television, print, radio and billboards, as well as targeted public relation events in the cities
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where we fly. We believe that the corporate traveler is an important part of our business, and we particularly promote our service to these customers by conveying the reliability, convenience and consistency of our service and offering value-added services such as convention and conference travel arrangements. We also promote package deals for the destinations where we fly through combined efforts with selected hotels and travel agencies.
Competition
We face considerable competition throughout our route network. Overall airline industry profit margins are relatively low and industry earnings are volatile. Airlines compete in the areas of pricing, scheduling (frequency and flight times), on-time performance, frequent flyer programs and other services. Strategic alliances, bankruptcy restructurings and industry consolidations characterize the airline industry and tend to intensify competition.
Copa competes with a number of other airlines that currently serve the routes on which we operate, including Avianca, American Airlines, Delta Air Lines, Spirit, JetBlue, Azul, Aeromexico, Gol, Volaris, Viva Air and LATAM, among others. In order to remain competitive, we must constantly react to changes in prices and services offered by our competitors.
The airline industry continues to experience increased consolidation and changes in international alliances, both of which have altered and will continue to alter the competitive landscape in the industry by resulting in the formation of airlines and alliances with increased financial resources, more extensive global networks and altered cost structures.
The airline industry is highly susceptible to price discounting, particularly because airlines incur very low marginal costs for providing service to passengers occupying otherwise unsold seats. Carriers use discount fares to stimulate traffic during periods of lower demand to generate cash flow and to increase market share. Any lower fares offered by one airline are often matched by competing airlines, which frequently results in lower industry yields with little or no increase in traffic levels. Price competition among airlines could lead to lower fares or passenger traffic on some or all of our routes, which could negatively impact our profitability.
Airlines based in other countries may also receive subsidies, tax incentives or other state aid from their respective governments, which are not provided by the Panamanian government. The commencement of, or increase in, service on the routes we serve by existing or new carriers could negatively impact our operating results. Likewise, competitors’ service on routes that we are targeting for expansion may make those expansion plans less attractive. We must constantly react to changes in prices and services offered by our competitors to remain competitive.
Traditional hub-and-spoke carriers in the United States and Europe have in recent years faced substantial and increasing competitive pressure from low-cost carriers offering discounted fares. The low-cost carriers’ operations are typically characterized by point-to-point route networks focusing on the highest demand city pairs, high aircraft utilization, single class service and fewer in-flight amenities. As evidenced by the operations of competitors in South and Central American countries it is clear that low-cost carriers are gaining acceptance in the Latin American aviation industry.
With respect to our cargo operations, we will continue to face competition from all of the major airfreight companies, most notably DHL, which has a cargo hub operation at Tocumen International Airport.
Aircraft
As of December 31, 2023, Copa operates a fleet consisting of 106 aircraft. As of December 31, 2023, Copa has firm orders to purchase 57 Boeing 737 MAX aircraft to be delivered between 2024 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, we signed an aircraft sale and purchase agreement for the remaining Embraer 190 aircraft and announced the sale of the B737-700 fleet. In 2021, we completed the sales of the Embraer 190 aircraft and the three B737-700 aircraft. 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 Company sold two B737-700 airframes that were under a lease agreement to a third party.
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The current composition of the Copa fleet as of December 31, 2023 is fully described below:
Average Term of Lease
| Number of Aircraft | Leased | Remaining (Years) | Average Age (Years) | Seating Capacity | |||||||||||||||||||||||||||||||
| Total | Owned | ||||||||||||||||||||||||||||||||||
| Boeing 737 MAX | 29 | 25 | 4 | 6.9 | 2.3 | 166/174 | |||||||||||||||||||||||||||||
| Boeing 737-700 | 9 | 9 | 0 | 0 | 20.2 | 124/126 | |||||||||||||||||||||||||||||
| Boeing 737-800 | 68 | 41 | 27 | 3.4 | 11.4 | 154/160/166/186 | |||||||||||||||||||||||||||||
| Total | 106 | 75 | 31 | 3.8 | 9.7 | — | |||||||||||||||||||||||||||||
The table below describes the expected size of our fleet at the end of each year set forth below, assuming delivery of all aircraft for which we currently have firm orders but not taking into account any aircraft for which we have purchase rights and options:
| Aircraft Type | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | |||||||||||||||||||||||||||||||||||||
| 737-700 | 9 | 9 | 6 | 5 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||||||||
| 737-800 | 68 | 59 | 56 | 55 | 47 | 47 | 43 | |||||||||||||||||||||||||||||||||||||
737-MAX(1) | 38 | 54 | 70 | 79 | 86 | 86 | 83 | |||||||||||||||||||||||||||||||||||||
| Total Fleet | 115 | 122 | 132 | 139 | 133 | 133 | 126 | |||||||||||||||||||||||||||||||||||||
(1)We have the flexibility to choose between the different members of the 737 MAX family. The delivery schedule above reflects contractual commitments.
The Boeing 737 aircraft currently in our fleet are fuel-efficient and suit our operations well for the following reasons:
•They have simplified maintenance procedures.
•They require just one type of standardized training for our crews.
•They have one of the lowest operating costs in their class.
Our focus on profitable operations means that we periodically review our fleet composition. As a result, our fleet composition changes over time when we conclude that adding other types of aircraft will help us achieve this goal. Following our strategy, as of December 31, 2023, we have firm orders to purchase 57 Boeing 737 MAX aircraft to be delivered between 2024 and 2028. The 737 MAX provides additional benefits to the current fleet such as fuel efficiency, longer range and additional capacity compared to the current Copa seat configuration. Following the Ethiopian Airlines accident involving a Boeing 737 MAX 8 aircraft, we suspended operations of our six Boeing 737 MAX 9 aircraft as regulatory authorities around the world grounded the aircraft. On November 18, 2020 the FAA rescinded its grounding order, issued an airworthiness directive, and published training requirements enabling the Company to begin modifying certain operating procedures, implementing enhanced pilot training requirements, installing FAA-approved flight control software updates, and completing other required maintenance tasks specific to the MAX aircraft. On January 2021, we resumed operations of our Boeing 737 MAX fleet after the authorization of the Autoridad Aeronáutica Civil de Panama. On January 6, 2024, following the Airworthiness Directive issued by the FAA, we suspended operations of 21 Boeing 737 MAX 9 aircraft. From January 6 to January 29, 2024, a total of 1,788 flights were cancelled. After undergoing the technical inspections required by regulators, most of these aircraft have returned to our flight schedule.
Through several special purpose vehicles, we currently have beneficial ownership of 75 of our aircraft. In addition, we lease 31 of our aircraft under long-term lease agreements that have an average remaining term of 3.8 years. Leasing some of our aircraft provides us with flexibility to change our fleet composition if we consider it to be in our best interests to do so. We make monthly rental payments, some of which are based on floating rates, but we are not required to make termination payments at the end of the lease. Currently, we do not have purchase options under any of our operating lease agreements. Under our operating lease agreements, we are required to make supplemental rent payments at the end of the lease that are calculated with reference to the aircraft’s maintenance schedule. In either case, we must return the aircraft in the agreed-upon condition at the end of the lease term. Title to the aircraft remains with the lessor. We are responsible for the maintenance, servicing, insurance, repair and overhaul of the aircraft during the term of the lease.
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To better serve our business travelers, we offer a business class (Clase Ejecutiva) configuration in our fleet. Our business class service features upgraded meal service, special check-in desks, bonus mileage for full-fare business class passengers and access to VIP lounges. Our Boeing 737-800 aircraft currently have 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. Our 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. Our Boeing 737-700 aircraft have 12 business class seats and a total of 124 and 126 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 our Boeing 737-Next Generation aircraft is powered by two CFM International Model CFM 56-7B engines. Our Boeing 737 MAX 9 aircraft are powered by two CFM International Leap 1B engines. We currently have twelve spare engines for service replacements and for periodic rotation through our fleet.
Maintenance
The maintenance performed on our aircraft can be divided into two general categories: line and heavy maintenance. Line maintenance consists of routine, scheduled maintenance checks on our aircraft, including pre-flight, service visits, “A-checks” and any diagnostics and routine repairs. Copa’s line maintenance is performed by Copa’s own technicians at our main base in Panama and/or at the out stations by Copa Airlines and/or AeroRepública employees or third-party contractors. Heavy maintenance consists of more complex inspections and overhauls, including “C-checks,” and servicing of the aircraft that cannot be accomplished during an overnight visit. Maintenance checks are performed intermittently as determined by the aircraft manufacturer through Copa Airlines AAC approved maintenance program. These checks are based on the number of hours, departures or calendar months flown. Historically we had contracted with certified outside maintenance providers, such as COOPESA. In October of 2010, Copa decided to begin performing a portion of the heavy maintenance work in-house. The hiring, training, facility and tooling setup, as well as enhancing certain support shops, were completed during a ten-month period. Ultimately, Copa acquired the required certifications by the local authorities to perform the first in-house C-Check in August 2011, followed by its second C-check in October of the same year. Today we are performing a continuous line of C-Checks in-house for the entire year, and on January 20, 2017 we held the ground-breaking of our new maintenance facility at Tocumen International Airport which allows us to perform up to three complete continuous lines of C-checks, as required. The new facility commenced operations in January 2019. In 2023, 17 heavy maintenance checks were successfully performed in-house. When possible, Copa attempts to schedule heavy maintenance during its lower-demand seasons in order to maximize productive use of its aircraft.
Copa has exclusive long-term contracts with GE Engines whereby they perform maintenance on all of our CFM-56 engines.
In October of 2014, Copa Airlines established its own maintenance technician training academy. Through this program, we recruit and train technicians through on-the-job training and formal classes. These future technicians stay in the program for four years total. After the first two years, each trainee receives their airframe license and becomes a mechanic. After the next two years, each trainee receives their power plant license and is released as a mechanic into our work force.
Copa Airlines and AeroRepública employ, system-wide, around 679 maintenance professionals, who perform maintenance in accordance with maintenance programs that are established by the manufacturers and approved and certified by international aviation authorities. Every mechanic is trained in factory procedures and goes through our own rigorous in-house training program. Every mechanic is licensed by the AAC and approximately 24 of our mechanics are also licensed by the FAA. Our safety and maintenance procedures are reviewed and periodically audited by the AAC (Panama), UAEAC (Colombia), the FAA (United States), IATA (IOSA) and, to a lesser extent, every foreign country to which we fly. Copa Airlines’ maintenance facility at Tocumen International Airport has been certified by the FAA as an approved repair station, under FAR Part 145, and once a year the FAA inspects this facility to validate and renew the certification. Copa’s aircraft are initially covered by warranties that have a term of four years, resulting in lower maintenance expenses during the period of coverage. All of Copa Airlines’ and AeroRepública’s mechanics are trained to perform line maintenance on each of the Boeing 737-Next Generation and Boeing 737 MAX.
All of AeroRepública’s’s maintenance and safety procedures are certified by the Aeronáutica Civil of Colombia and Bureau Veritas Quality International (“BVQI”), the institute that issues International Organization for Standardization, or “ISO,” quality certificates. All of AeroRepública’s maintenance personnel are licensed by the
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Aeronáutica Civil of Colombia. In December 2017, AeroRepública received its IATA Operational Safety Audit, or “IOSA,” compliance certification, which will remain valid until December 2024.
Safety
We place a high priority on providing safe and reliable air service. We are focused on continuously improving our safety performance by implementing internationally recognized best practices such as Safety Management System, or “SMS,” Flight Data Analysis (FDA), internal and external operational safety audits, and associated programs.
Our SMS provides operational leaders with reactive, proactive, and predictive data analyses that are delivered on a frequent and recurring basis. This program also uses a three-tiered meeting structure to ensure the safety risk of all identified hazards are assessed and corrective actions (if required) are implemented. At the lowest meeting level, the Operational Leaders review the risk assessments, assign actions, and monitor progress. At the middle meeting level, the Chief Operations Officer meets with the Operational Leaders to ensure all cross-divisional issues are properly addressed and funded. At the highest meeting level, the Chief Executive Officer monitors the performance of the SMS program and ensures the safety risk is being properly managed.
The SMS is supported by safety investigations and a comprehensive audit program. Investigations are initiated either by operational events or analyses of relevant trend information, such as via our Flight Data Analysis program. These investigations are conducted by properly qualified and trained internal safety professionals. Our audit program consists of three major components. The first serves as the aircraft maintenance quality assurance program and is supported by six dedicated maintenance professionals. The second team consists of an internal team dedicated to conducting standardized audits of airport, flight operations, and associated functions. The third component of our audit program is a biennial audit of all operational components by the internationally recognized standard IOSA (IATA Operational Safety Audit). In 2022 Copa Airlines and AeroRepública successfully completed IOSA audits by external providers.
Airport Facilities
We believe that our hub at Panama City’s Tocumen International Airport (PTY) is an excellent base of operations for the following reasons:
•Panama’s consistently temperate climate is ideal for airport operations.
•Tocumen International Airport is the only airport in Central America with two operational runways. Also, unlike some other regional airports, consistent modernization and growth of our hub has kept pace with our needs. In 2012, Tocumen International Airport completed Phase II of an expansion project of the existing terminal. In 2013, Tocumen International Airport awarded the bid for the construction of a new terminal (“Terminal 2” or “T2”), with an additional 20 gates and eight remote positions. Terminal 2 started operating a few gates during the early part of 2019. On June 22, 2022, we moved our ticket counter and baggage claim operations to Terminal 2 and began using 20 fully equipped gates in this new terminal. We also opened a new Copa Club, spanning 20,720 square feet, in the new Terminal. The transition between terminals did not impact our operations.
•Panama’s central and sea level location provides a very efficient base to operate our narrow body fleet, efficiently serving short and long-haul destinations in Central, North and South America, as well as the Caribbean.
Tocumen International Airport is operated by an independent corporate entity established by the government, where stakeholders have a say in the operation and development of the airport. The law that created this entity also provided for a significant portion of revenues generated at Tocumen International Airport to be used for airport expansion and improvements. None of the airlines operating at Tocumen International Airport have any formal, written agreements with the airport management to govern access fees, landing rights or allocation of terminal gates. We rely upon our good working relationship with the airport’s management and the Panamanian government to ensure that we have access to the airport resources we need at prices that are reasonable.
We provide most of our own ground services and handling of passengers and cargo at Tocumen International Airport. In addition, we provide services to several of the main foreign airlines that operate at Tocumen International Airport. In most of the other airports where we operate, airport support services are provided by external third parties.
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We use a variety of facilities at Tocumen International Airport, including our maintenance hangars and our operations facilities in the airport terminal. In January 2019, we opened a new hangar next to our existing maintenance facility. This new hangar has an area of approximately 90,000 square feet and can accommodate up to three narrow body aircraft simultaneously.
Our Gold and higher PreferMember passengers have access to two Copa Clubs at the Tocumen International Airport in Panama, one located in Terminal 1 and the second located in Terminal 2. These passengers also have access to other Copa Clubs in the region, which are strategically located in San José, Guatemala City, Santo Domingo and Bogotá.
Fuel
Fuel costs are extremely volatile, as they are subject to many global economic, geopolitical, weather, environmental and other factors that we can neither control nor accurately predict. Due to its inherent volatility, aircraft fuel has historically been our most unpredictable unit cost. In the past, rapid increases in prices have come from increased demand for oil coupled with limited refinery capacity and instability in oil-exporting countries.
Aircraft Fuel Data
| 2023 | 2022 | 2021 | |||||||||||||||
| Average price per gallon of jet fuel into plane (excluding hedge) (in U.S. dollars) | $ | 3.02 | $ | 3.60 | $ | 2.14 | |||||||||||
| Gallons consumed (in millions) | 327.6 | 291.4 | 177.4 | ||||||||||||||
| Available seat miles (in millions) | 27,700 | 24,430 | 14,934 | ||||||||||||||
| Gallons per ASM (in hundredths) | 1.18 | 1.19 | 1.19 | ||||||||||||||
In 2023, the average price of West Texas Intermediate or “WTI” crude oil, a benchmark widely used for crude oil prices that is measured in barrels and quoted in U.S. dollars, decreased by 18.2% from $94.9 per barrel to $77.6 per barrel. In 2023, we did not hedge any of our fuel needs, and we have not hedged any part of our fuel needs for 2024. Although we have not added hedge positions since August of 2015, we continue to evaluate various hedging strategies and may enter into additional hedging agreements in the future, as any substantial and prolonged increase in the price of jet fuel will likely materially and negatively affect our business, financial condition and results of operation. In the past, we have managed to offset some of the increases in fuel prices with higher load factors, fuel surcharges and fare increases. In addition, our relatively young, winglet-equipped fleet and robust fuel conservation measures also help us mitigate the impact of higher fuel prices.
Additionally, global geopolitical events, such as the conflict between Russia and Ukraine beginning in February 2022, led to an increase in fuel costs which may negatively impact our business operations. Due to the evolving nature of such events, we are unable to predict the extent of the impact on our business.
Insurance
We maintain passenger liability insurance in an amount consistent with industry practice, and we insure our aircraft against losses and damages on an “all risks” basis. We have obtained all insurance coverage required by the terms of our leases. We believe our insurance coverage is consistent with airline industry standards and appropriate to protect us from material losses in light of the activities we conduct. No assurance can be given, however, that the amount of insurance we carry will be sufficient to protect us from material losses. By leveraging the purchasing power of our alliance partner, UAL, we have been able to negotiate lower premiums than those we would get if we were to purchase a standalone Hull and Airline Liability Insurance policy.
Environmental
Our operations are covered by various local, national, and international environmental regulations. These regulations cover, among other things, gas emissions into the atmosphere, disposal of solid waste and aqueous effluents, aircraft noise, and other activities that result from the operation of aircraft and our aircraft comply with all environmental standards applicable to their operations as described in this annual report. Currently, we maintain an Environmental Management and Adequacy Program (“PAMA”), in all our facilities located in Panama, including our 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, governmental entity now named Ministry of Environment (“MiAmbiente”), and includes actions such as a recycling
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program, better use of natural resources and final disposition of the unfiltered water used for aircraft maintenance, among many others. Currently, the Copa Tocumen International Airport’s PAMA final report is presented to MiAmbiente on an annual basis to monitor and report our 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 have, thus, published our Communication on Progress (“COP”) since October 2001. This Global Compact agreement requires us to implement measures like maintaining a young fleet, incorporating new navigation technologies such as RNAV to reduce fuel consumption, installing latest generation winglets and scimitars in our planes to reduce fuel consumption and recycling, among many others.
Starting in 2019, Copa is reporting the fuel consumption burned during its annual flight operations and its gas emissions to the AAC. As a result, Copa is in line with the global aviation effort led by ICAO, Colombia, and Panama Civil Aviation Authorities with the implementation of the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA). The first gas emissions report corresponding to 2019 operations was successfully delivered to the AAC on October 2020, after passing the audit by our external Verification Body of greenhouse gas emissions accredited by ICAO. The Gas Emissions Report (ER) corresponding to 2022 operations was delivered to the AAC on May 2023.
In 2022, we were able to collect a total of 168 tons of recycling materials in Panama’s Copa facilities and avoid sending waste to the landfill. During the same period, we recycled vehicle oil and aircraft fuel, for which we outsourced the collection of 11,375 gallons of hydrocarbons for use as alternative fuel for other industries, thus avoiding the contamination of natural resources. We also outsourced the collection of 590,801 gallons of water contaminated with chemicals generated during aircraft cleaning and painting operations, and from vehicle maintenance processes. The subsequent treatment of the collected water made it possible to recover 95% of the volume treated returning 561,261 gallons of water to nature. We have properly disposed of a total of 28,299 kilograms of chemical waste from Aircraft Maintenance operations. Additionally, we have collected 361,000 gallons of waste from beverages on board, which were treated by a supplier and safely returned to nature.
Regulation
Panama
Authorizations and Certificates. Panamanian law requires airlines providing commercial services in Panama to hold an Operation Certificate and an Air Transportation License/Certificate issued by the AAC. The Air Transportation Certificate specifies the routes, equipment used, capacity, and frequency of flights. This certificate must be updated every time Copa acquires new aircraft, or when routes and frequencies to a particular destination are modified.
Panamanian law also requires that the aircraft operated by Copa Airlines be registered with the Panamanian National Aviation Registrar kept by the AAC, and that the AAC certifies the airworthiness of each aircraft in the fleet.
The Panamanian government does not have an equity interest in our Company. Bilateral agreements signed by the Panamanian government have protected our operational position and route network, allowing us to have a significant hub in Panama to transport traffic within and between the Americas and the Caribbean. All international fares are filed and, depending on the bilateral agreement, are technically subject to the approval of the Panamanian government. Historically, we have been able to modify ticket prices on a daily basis to respond to market conditions. Copa Airlines’ status as a private carrier means that it is not required under Panamanian law to serve any particular route and is free to withdraw service from any of the routes it currently serves, subject to bilateral agreements. We are also free to determine the frequency of service we offer across our route network without any minimum frequencies imposed by the Panamanian authorities.
Ownership Requirements. The most significant restriction on our Company imposed by the Panamanian Aviation Act, as amended and interpreted to date, is that Panamanian nationals must exercise “effective control” over the operations of the airline and must maintain “substantial ownership.” These phrases are not defined in the Aviation Act itself and it is unclear how a Panamanian court would interpret them. The share ownership requirements and transfer restrictions contained in our Articles of Incorporation, as well as the structure of our capital stock described under the caption “Description of Capital Stock”, are designed to ensure compliance with these ownership and control restrictions created by the Aviation Act. While we believe that our ownership structure complies with the ownership and control restrictions of the Aviation Act as interpreted by a decree by the Executive Branch, we cannot assure you that a Panamanian court would share our interpretation of the Aviation Act or the decree or that any such interpretations would remain valid for the entire time you hold our Class A shares.
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Although the Panamanian government does not currently have the authority to dictate the terms of our service, the government is responsible for negotiating the bilateral agreements with other nations that allow us to fly to other countries. Several of these agreements require Copa to remain “effectively controlled” and “substantially owned” by Panamanian nationals in order for us to use the rights conferred by the agreements. Such requirements are analogous to the Panamanian Aviation Act described above that requires Panamanian control of our business.
Antitrust Regulations. In 1996, the Republic of Panama enacted antitrust legislation, which regulates industry concentration and vertical anticompetitive practices and prohibits horizontal collusion. The Consumer Protection and Free Trade Authority is in charge of enforcement and may impose fines only after a competent court renders an adverse judgment. The law also provides for direct action by any affected market participant or consumer, independently or through class actions. The law does not provide for the granting of antitrust immunity, as is the case in the United States. In February 2006, the antitrust legislation was amended to increase the maximum fines that may be assessed to $1,000,000 for violations and $250,000 for minor infractions of antitrust law. In October 2007, the antitrust legislation was amended again to include new regulations.
Colombia
Even though the Colombian aviation market continues to be regulated by the Colombian Civil Aviation Administration, Unidad Especial Administrativa de Aeronáutica Civil, or “Aeronáutica Civil,” the government policies have become more liberal in recent years.
Colombia has expanded its open-skies agreements with several countries in the last years. In addition to Aruba and the Andean Pact nations of Bolivia, Ecuador and Peru, open-skies agreements have been negotiated with Costa Rica, El Salvador, Panama and Dominican Republic. In the framework of liberalization between Colombia and Panama, any airline has the right to operate unlimited frequencies between any city pair of the two countries. As a result, Copa offers scheduled services between eleven cities in Colombia and Panama. In November 2010, Colombia signed an open-skies agreement with the United States, which took effect in January 2013. With respect to domestic aviation, airlines must present feasibility studies to secure specific route rights, and no airline may serve the city pairs with the most traffic unless that airline has at least five aircraft with valid airworthiness certificates. While Aeronáutica Civil has historically regulated the competition on domestic routes, in December 2012 it revoked a restriction requiring a maximum number of competing airlines on each domestic route.
In October 2011, Aeronáutica Civil announced its decision to liberalize air fares in Colombia starting April 1, 2012, including the elimination of fuel surcharges. However, airlines are required to charge an administrative fee (tarifa administrativa) for each ticket sold on domestic routes within Colombia through an airline’s direct channels. Passengers in Colombia are also entitled by law to compensation in the event of delays in excess of four hours, over-bookings and cancellations. Currently, the Bogotá, Pereira, Cali, Cartagena, Medellin, Bucaramanga, Barranquilla, Santa Marta and Cucuta airports, among others, are under private management arrangements. The government’s decision to privatize airport administration in order to finance the necessary expansion projects and increase the efficiency of operations has increased airports fees and facility rentals at those airports.
Authorization and Certificates. Colombian law requires airlines providing commercial services in Colombia to hold an operation certificate issued by the Aeronáutica Civil, which is renewed every five years. AeroRepública’s operation certificate was renewed in 2023.
Safety Assessment. On December 9, 2010, Colombia was re-certified as a Category 1 country under the FAA’s IASA program.
Ownership Requirements. Colombian regulations establish that an airline satisfies the ownership requirements of Colombia if it is registered under the Colombian Laws and Regulations.
Antitrust Regulations. In 2009, an antitrust law was issued by the Republic of Colombia; however, commercial aviation activities remain under the authority of the Aeronáutica Civil.
Airport Facilities. The airports of the major cities in Colombia have been granted to concessionaries, who impose charges on the airlines for the rendering of airport services. The ability to contest these charges is limited, but contractual negotiations with the concessionaries are possible.
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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 DOT, the FAA and the TSA exercise regulatory authority. The U.S. Department of Justice also has jurisdiction over airline competition matters under federal antitrust laws.
Authorizations and Licenses. The DOT has jurisdiction over international aviation with respect to air transportation to and from the United States, including regulation of related route authorities, the granting of which are subject to review by the President of the United States. The DOT exercises its jurisdiction with respect to unfair practices and methods of competition by airlines and related consumer protection matters as to all airlines operating to and from the United States. Copa Airlines is authorized by the DOT to engage in scheduled and charter air transportation services, including the transportation of persons, property (cargo) and mail, or combinations thereof, between points in Panama and points in the United States and beyond (via intermediate points in other countries). Copa Airlines holds the necessary authorizations from the DOT in the form of a foreign air carrier permit, an exemption authority and statements of authorization to conduct our current operations to and from the United States. The exemption authority was granted by the DOT in February 1998 and was due to expire in February 2000. However, the authority remains in effect by operation of law under the terms of the Administrative Procedure Act pending final DOT action on the application we filed to renew the authority on January 3, 2000. There can be no assurance that the DOT will grant the application. Our foreign air carrier permit has no expiration date.
Copa Airlines’ operations in the United States are also subject to regulation by the FAA with respect to aviation safety matters, including aircraft maintenance and operations, equipment, aircraft noise, ground facilities, dispatch, communications, personnel, training, weather observation, air traffic control and other matters affecting air safety. The FAA requires each foreign air carrier serving the United States to obtain operational specifications pursuant to 14 CFR Part 129 of its regulations and to meet operational criteria associated with operating specified equipment on approved international routes. We believe that we are in compliance in all material respects with all requirements necessary to maintain in good standing our operations specifications issued by the FAA. The FAA can amend, suspend, revoke or terminate those specifications, or can temporarily suspend or permanently revoke our authority if we fail to comply with the regulations, and can assess civil penalties for such failure. A modification, suspension or revocation of any of our DOT authorizations or FAA operating specifications could have a material adverse effect on our business. The FAA also conducts safety audits and has the power to impose fines and other sanctions for violations of airline safety regulations. We have not incurred any material fines related to operations. The FAA also conducts safety International Aviation Safety Assessment, or “IASA,” as to Panama’s compliance with ICAO safety standards. Panama is currently considered a Category 1 country that complies with ICAO international safety standards. As a Category 1 country, no limitations are placed upon our operating rights to the Unites States. If the FAA should determine that Panama does not meet the ICAO safety standards, the FAA and DOT would restrict our rights to expand operations to the United States.
Security. On November 19, 2001, the U.S. Congress passed, and the President signed into law, the Aviation and Transportation Security Act or the “Aviation Security Act”. This law federalized substantially all aspects of civil aviation security and created the TSA, an agency of the Department of Homeland Security, to which the security responsibilities previously held by the FAA were transitioned. The Aviation Security Act requires, among other things, the implementation of certain security measures by airlines and airports, such as the requirement that all passengers, their bags and all cargo be screened for explosives and other security-related contraband. Funding for airline and airport security required under the Aviation Security Act is provided in part by a $2.50 per segment passenger security fees for flights departing from the United States, subject to a $10 per roundtrip cap; however, airlines are responsible for costs incurred to meet security requirements beyond those provided by the TSA. The United States government is considering increases to this fee as the TSA’s costs exceed the revenue it receives from these fees. Implementation of the requirements of the Aviation Security Act has resulted in increased costs for airlines and their passengers. Since the events of September 11, 2001, the U.S. Congress has mandated, and the TSA has implemented numerous security procedures and requirements that have imposed and will continue to impose burdens on airlines, passengers and shippers.
Passenger Facility Charges. Most major U.S. airports impose passenger facility charges. The ability of airlines to contest increases in these charges is restricted by federal legislation, DOT regulations and judicial decisions. With certain exceptions, air carriers pass these charges on to passengers. However, our ability to pass through passenger facility charges to our customers is subject to various factors, including market conditions and competitive factors. Passenger facility charges are capped at $4.50 per flight segment with a maximum of two PFCs charged on a one-way trip or four PFCs on a round trip, for a maximum of $18 total, respectively.
Airport Access. Two U.S. airports at which we operate, O’Hare International Airport in Chicago (O’Hare) and John F. Kennedy International Airport in New York, or “JFK”, were formerly designated by the FAA as “high density”
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traffic airports subject to arrival and departure slot restrictions during certain periods of the day. From time to time, the FAA has also issued temporary orders imposing slot restrictions at certain airports. Although slot restrictions at JFK were formally eliminated as of January 1, 2007, on January 15, 2008, the FAA issued an order limiting the number of scheduled flight operations at JFK during peak hours to address the over-scheduling, congestion and delays at JFK. We cannot predict the outcome of potential future rule changes to address congestion on our costs or ability to operate at JFK.
On July 8, 2008, the DOT also issued a revised Airport Rates and Charges policy that allows airports to establish non-weight based fees during peak hours and to apportion certain expenses from “reliever” airports to the charges for larger airports in an effort to limit congestion.
Noise Restrictions. Under the Airport Noise and Capacity Act of 1990 and related FAA regulations, aircraft that fly to the United States must comply with certain Stage 3 noise restrictions, which are currently the most stringent FAA operating noise requirements. All of our Copa aircraft meet the Stage 3 requirement.
Other Regulation. U.S. laws and regulations have been proposed from time to time that could significantly increase the cost of airline operations by imposing additional requirements or restrictions on airlines. There can be no assurance that laws and regulations currently enacted or enacted in the future will not adversely affect our ability to maintain our current level of operating results.
Other Jurisdictions
We are also subject to regulation by the aviation regulatory bodies that set standards and enforce national aviation legislation in each of the jurisdictions to which we fly. These regulators may have the power to set fares, enforce environmental and safety standards, levy fines, restrict operations within their respective jurisdictions or any other powers associated with aviation regulation. We cannot predict how these various regulatory bodies will perform in the future, and the evolving standards enforced by any of them could have a material adverse effect on our operations.
C.Organizational Structure
The following is an organizational chart showing Copa Holdings and its principal subsidiaries.
*Includes ownership by us held through wholly-owned holding companies organized in the British Virgin Islands.
Copa Airlines is our principal airline operating subsidiary that operates out of our hub in Panama and provides passenger service in North, South and Central America and the Caribbean. Copa Airlines Colombia is our 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 our fleet.
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D.Property, plants and equipment
Headquarters
Our headquarters are located six miles away from Tocumen International Airport. We have leased five floors consisting of approximately 105,9811 square feet of the building from Desarollo Inmobiliario Del Este, S.A., an entity controlled by some of the investors that controls CIASA, under a ten-year lease that began in January 2015 at a rate of $0.2 million per month.
Other Property
At Tocumen International Airport, we lease two maintenance hangars, operations offices in the terminal, counter space, parking spaces and other operational properties from the entity that manages the airport. We pay approximately $286,799 per month for this leased property. Around Panama City, we also lease various office spaces, parking spaces and other properties from a variety of lessors, for which we pay approximately $112,418 per month in the aggregate.
In each of our destination cities, we also lease space at the airport for check-in, reservations and airport ticket office sales, and we lease space for CTOs in those cities.
AeroRepública leases most of its airport offices and CTOs. Owned properties only include one CTO and a warehouse close to the Bogota airport.
See also our discussion of “Aircraft” and “Airport Facilities” above.
Item 4A. Unresolved Staff Comments
None.
Item 5. Operating and Financial Review and Prospects
A.Operating Results
You should read the following discussion in conjunction with our consolidated financial statements and the related notes and the other financial information included elsewhere in this annual report. Discussions of year-over-year comparisons between 2022 and 2021 that are not included in this Form 20-F can be found in Part I, Item 5, Operating and Financial Review and Prospects” of our Form 20-F for the fiscal year ended December 31, 2022.
We are a leading Latin American provider of airline passenger and cargo service through our two principal operating subsidiaries, Copa Airlines and AeroRepública. Copa Airlines operates from its strategically located position in the Republic of Panama, and AeroRepública operates a low-cost business model within Colombia and various cities in the region.
Copa currently offers approximately 375 daily scheduled flights among 82 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 our Star Alliance partners and other carriers including Air France, KLM, Iberia, Emirates, Gol, Azul, Tame, Cubana and Aeromexico. Through its Panama City hub, Copa Airlines is able to consolidate passenger traffic from multiple points to serve each destination effectively.
As of December 31, 2023, Copa Airlines and Wingo operate a modern fleet of 106 Boeing 737 aircraft. To meet growing capacity requirements, we have firm orders, including purchase and lease commitments. As of December 31, 2023, the Company has firm orders to purchase 57 Boeing 737 MAX aircraft to be delivered between 2024 and 2028.
Factors Affecting Our Results of Operations
Fuel
In 2023, the average price of WTI crude oil, a benchmark widely used for crude oil prices that is measured in barrels and quoted in U.S. dollars, decreased by 18.2% from $94.9 per barrel to $77.6 per barrel. In 2023, we did not hedge any of our fuel needs. For 2024 although we have not hedged any part of our anticipated fuel needs, we continue to evaluate various hedging strategies and may enter into hedging agreements in the future, as any substantial and prolonged
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increase in the price of jet fuel will likely materially and negatively affect our business, financial condition and results of operation. In the past, we have managed to offset some of the increases in fuel prices with higher load factors, fuel surcharges and fare increases. In addition, our relatively young, winglet-equipped fleet and robust fuel conservation measures also help us mitigate the impact of higher fuel prices.
Additionally, global geopolitical events, such as the conflict between Russia and Ukraine beginning in February 2022, have led to an increase in fuel costs which may negatively impact our business operations. Due to the evolving nature of such events, we are unable to predict the extent of the impact on our business.
Regional Economic Environment
Our historical financial results have been, and we expect them to continue to be, materially affected by the general level of economic activity and growth of per capita disposable income in North, South and Central America and the Caribbean, which have a material impact on discretionary and leisure travel (drivers of our passenger revenue) and the volume of trade between countries in the region (the principal driver of our cargo revenue).
In Colombia, real GDP, at constant prices, increased 1.4% in 2023. Average inflation of consumer prices in Colombia was approximately 11.4 in 2023, according to the IMF.
According to data from The Preliminary Overview of the Economies of Latin America and the Caribbean, an annual United Nations publication prepared by the Economic Development Division, the economy of Latin America (including the Caribbean) is estimated to increase by 1.9%% in 2024. Preliminary figures, according to the IMF, for 2023 indicate that the Panamanian economy increased by 6.0% (versus 10.8% increase in 2022). Headline inflation in Panama was 1.5% compared to 2.9% in 2022.
Revenues
We derive our revenues primarily from passenger transportation, which represented 95.9% of our revenues for the year ended December 31, 2023. In addition, 2.8% of our total revenues are derived from cargo and 1.3% from other activities.
We recognize passenger revenue from tickets when transportation is provided rather than when a ticket is sold. Passenger revenues reflect the capacity of our aircraft on the routes we fly, load factor and yield. Our capacity is measured in terms of available seat miles, or “ASMs”, which represents the number of seats available on our aircraft multiplied by the number of miles the seats are flown. Our usage is measured in terms of RPMs, which is the number of revenue passengers multiplied by the miles these passengers fly. Load factor, or the percentage of our capacity that is actually used by paying customers, is calculated by dividing RPMs by ASMs. Yield is the average amount that one passenger pays to fly one mile. We use a combination of approaches, taking into account yields, flight load factors and effects on load factors of connecting traffic, depending on the characteristics of the markets served, to arrive at a strategy for achieving the best possible revenue per available seat mile, balancing the average fare charged against the corresponding effect on our load factors.
We recognize cargo revenue when transportation is provided. Historically our other revenue consists primarily of commissions earned on tickets sold for flights on other airlines, special charges, non-air frequent flyer program revenue and services provided to other airlines.
Overall demand for our passenger and cargo services is highly dependent on the regional economic environment in which we operate, including the GDP of the countries we serve and the disposable income of the residents of those countries. Approximately 25% of our passengers travel at least in part for business reasons, and the growth of intraregional trade greatly affects that portion of our business. The remaining 75% of our passengers are tourists or travelers visiting friends and family.
The following table sets forth our capacity, load factor and yields for the periods indicated.
| 2023 | 2022 | 2021 | |||||||||||||||
| Capacity (in available seat miles, in millions) | 27,700 | 24,430 | 14,934 | ||||||||||||||
| Load factor | 86.8 | % | 85.1 | % | 78.6 | % | |||||||||||
| Yield (in cents) | 13.79 | 13.59 | 12.04 | ||||||||||||||
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Seasonality
Generally, revenues and profitability of our flights peak during the northern hemisphere’s summer season in July and August and again during the December and January holiday season. Given our high proportion of fixed costs, this seasonality is likely to cause our results of operations to vary from quarter to quarter.
Operating Expenses
The main components of our operating expenses are aircraft fuel, wages, salaries, benefits and other employees’ expenses, sales and distribution and airport facilities and handling charges. A common measure of per unit costs in the airline industry is cost per available seat mile, or “CASM”, which is generally defined as operating expenses divided by ASMs.
Fuel. The price we pay for aircraft fuel varies significantly from country to country primarily due to local taxes. While we purchase aircraft fuel at most of the airports to which we fly, we attempt to negotiate fueling contracts with companies that have a multinational presence in order to benefit from volume purchases. During 2023, as a result of the location of its hub, Copa purchased 52% of its aircraft fuel in Panama. Copa has 26 suppliers of aircraft fuel across its network. In some cases, we tanker fuel in order to minimize our cost, by fueling in airports where fuel prices are lowest. Our aircraft fuel expenses are variable and fluctuate based on global oil prices.
Aircraft Fuel Data
| 2023 | 2022 | 2021 | |||||||||||||||
| Average price per gallon of jet fuel into plane (excluding hedge) (in U.S. dollars) | $ | 3.02 | $ | 3.60 | $ | 2.14 | |||||||||||
| Gallons consumed (in millions) | 327.6 | 291.4 | 177.4 | ||||||||||||||
| Available seat miles (in millions) | 27,700 | 24,430 | 14,934 | ||||||||||||||
| Gallons per ASM (in hundredths) | 1.18 | 1.19 | 1.19 | ||||||||||||||
Wages, salaries and other employees’ expenses. Salary and benefit expenses have historically increased at the rate of inflation and by the growth in the number of our employees. In some cases, we have adjusted the salaries of our employees to correspond to changes in the cost of living in the countries where these employees work. We do not increase salaries based on seniority. Our profit-sharing variable compensation program reflects our belief that our employees will remain dedicated to our success if they have a stake in that success. We typically make accruals each month for the expected annual bonuses, which are reconciled to actual payments at their dispersal within the first half of the following year. The bonus payments are approved by our compensation committee.
Passenger servicing. Our passenger servicing expenses consist of catering, in-flight entertainment and liability insurance among others. These expenses are generally directly related to the number of passengers we carry or the number of flights we operate.
Airport facilities and handling charges. Our airport facility and handling charges consist of take-off/landing charges, aircraft parking charges, baggage handling, and airport security charges. These charges are mainly driven by the number of flights we operate.
Sales and distribution. Our sales and distribution expenses are driven mainly by passenger revenues, indirect channel penetration performance, agreed commission rates, and from payments to global distribution systems “GDS”, such as Amadeus and Sabre. Our commission expenses consist primarily of payments for ticket sales made by travel agents and commissions paid to credit card companies, depending on the country. During the last few years we have reduced our commission expense per available seat mile as a result of an industry-wide trend of paying lower commissions to travel agencies and by increasing the proportion of our sales made through direct channels. We expect this trend to continue as more of our customers become accustomed to purchasing through our website at www.copaair.com, mobile app, and call centers. While increasing direct sales may increase the commissions we pay to credit card companies, we expect that the savings from the corresponding reduction in travel agency commissions will more than offset this increase. In recent years, base commissions paid to travel agents have decreased significantly. At the same time, we have encouraged travel agencies to move from standard base commissions to incentive compensation based on sales volume and fare types. In addition, the GDS or reservation systems tend to raise their rates periodically, but we expect that if we are successful in encouraging our customers to purchase tickets through our direct sales channels, these costs will decrease as a percentage of our operating
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costs. A portion of our reservations and sales expenses is also comprised of our licensing payments for the SHARES reservation and check-in management software we use, which is not expected to change significantly from period to period.
Maintenance, materials and repairs. Our maintenance, materials and repairs expenses consist of aircraft repair expenses and charges related to the line maintenance of our aircraft, including maintenance materials, and aircraft return costs. As the age of our fleet increases and our warranties expire, our maintenance expenses will increase. We conduct line and heavy maintenance internally and outsource some of the heavy maintenance to independent third-party contractors.
Depreciation, amortization and impairment. These expenses correspond primarily to the depreciation of aircraft owned by the company, engines, maintenance components, other related flight equipment and the depreciation of the right of use on leased assets.
Flight operations. These expenses are related to the charges that the countries which we overfly levy on our aircraft as overflight charges. These fees are generally related to the number of flights we operate.
Other operating and administrative expenses. Other expenses include cargo and courier expenses, overhead expenditures and miscellaneous expenses. Also includes the expense for contract services, variable lease payments, short term and low value leases.
Taxes
We pay taxes in the Republic of Panama and in other countries in which we operate, based on regulations in effect in each respective country. Our revenues come principally from foreign operations, and according to the Panamanian Fiscal Code income from these foreign operations are not subject to income tax in Panama.
The Panamanian Fiscal Code for the airline industry states that tax is based on net income earned for traffic whose origin or final destination is the Republic of Panama. The applicable tax rate is currently 25%. Dividends from our Panamanian subsidiaries, including Copa, are separately subject to a 10% percent withholding tax on the portion attributable to Panamanian sourced income and a 5% withholding tax on the portion attributable to foreign sourced income. Additionally, a 7% value added tax is levied on tickets issued in Panama for travel commencing in Panama and going abroad, irrespective of where such tickets were ordered.
We received notifications from the tax authorities in Panama in February 2020 and in Colombia in November 2020 and March 2016. We, along with our tax advisors, have concluded that it is unlikely that we will need to allocate resources to settle these claims. This conclusion is based on the strength of our defense arguments and the fact that both cases are in the preliminary stages.
In February 2020, we received two notifications from the tax authorities in Panama related to a tax audit process that began in 2019. The notifications include potentially significant adjustments to the reported dividend tax for the years 2012 to 2016 and income tax for the year 2016. We have filed an administrative appeal, which is the first legal stage under Panamanian laws. We, along with our tax advisors, have concluded that is probable that our tax position will be upheld. As a result, it is not probable that we will incur any significant additional tax as result. According to Panamanian laws, the statute of limitations is three and 15 years for income tax and dividend tax claims, respectively.
We are also subject to local tax regulations in each of the other jurisdictions where we operate, the great majority of which are related to the taxation of our income. In some of the countries to which we fly, we do not pay any income taxes because we do not generate income under the laws of those countries either because they do not have income taxes or due to treaties or other arrangements those countries have with Panama. In the remaining countries, we pay income tax at rates ranging from 7% to 35% of our income attributable to those countries. Different countries calculate our income in different ways, but they are typically derived from our sales in the applicable country multiplied by our net margin or by a presumed net margin set by the relevant tax legislation.
The determination of our taxable income in several countries is based on a combination of revenues sourced to each particular country and the allocation of expenses to that particular country. The methodology for multinational transportation company sourcing of revenue and expense is not always specifically prescribed in the relevant tax regulations, and therefore is subject to interpretation by both ourselves and the respective tax authorities. Additionally, in some countries, the applicability of certain regulations governing non-income taxes and the determination of our filing status are also subject to interpretation. We cannot estimate the amount, if any, of the potential tax liabilities that might result if the allocations, interpretations and filing positions we use in preparing our income tax returns were challenged by
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the tax authorities of one or more countries. If taxes were to increase, our financial performance and results of operations could be materially and adversely affected. Due to the competitive revenue environment, many increases in fees and taxes have been absorbed by the airline industry rather than being passed on to the passenger. Any such increases in our fees and taxes may reduce demand for air travel and thus our revenues.
Under a reciprocal exemption confirmed by a bilateral agreement between Panama and the United States, we are exempt from the U.S. source transportation income tax derived from the international operation of aircraft.
Our income tax expense totaled approximately $97.0 million in 2023, $40.2 million in 2022 and $10.5 million in 2021.
Results of Operation
The following table shows each of the line items in our statement of profit or loss for the periods indicated as a percentage of our total operating revenues for that period:
| 2023 | 2022 | 2021 | |||||||||||||||
| Operating revenues: | |||||||||||||||||
| Passenger revenue | 95.9 | % | 95.3 | % | 93.5 | % | |||||||||||
| Cargo and mail revenue | 2.8 | % | 3.4 | % | 4.7 | % | |||||||||||
| Other operating revenue | 1.3 | % | 1.3 | % | 1.7 | % | |||||||||||
| Total operating revenues | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||||
| Operating expenses: | |||||||||||||||||
| Fuel | 28.8 | % | 35.5 | % | 25.4 | % | |||||||||||
| Wages, salaries, benefits and other employees expenses | 12.6 | % | 12.8 | % | 17.1 | % | |||||||||||
| Passenger servicing | 2.6 | % | 2.4 | % | 2.4 | % | |||||||||||
| Airport facilities and handling charges | 6.4 | % | 6.5 | % | 8.7 | % | |||||||||||
| Sales and distribution | 6.6 | % | 7.6 | % | 8.6 | % | |||||||||||
| Maintenance, materials and repairs | 3.8 | % | 3.5 | % | 2.8 | % | |||||||||||
| Depreciation, amortization and impairment | 8.9 | % | 9.0 | % | 15.9 | % | |||||||||||
| Impairment of non financial assets | — | % | — | % | (0.4) | % | |||||||||||
| Flight operations | 3.2 | % | 3.3 | % | 3.7 | % | |||||||||||
| Other operating and administrative expenses | 3.8 | % | 4.2 | % | 5.8 | % | |||||||||||
| Total operating expenses | 76.6 | % | 84.8 | % | 89.9 | % | |||||||||||
| Operating income | 23.4 | % | 15.2 | % | 10.1 | % | |||||||||||
| Non-operating income (expense): | |||||||||||||||||
| Finance cost | (4.6) | % | (3.0) | % | (5.0) | % | |||||||||||
| Finance income | 1.5 | % | 0.6 | % | 0.7 | % | |||||||||||
| Gain (loss) on foreign currency fluctuations | 0.1 | % | (0.3) | % | (0.4) | % | |||||||||||
| Net change in fair value of derivatives | (2.8) | % | 0.6 | % | (1.5) | % | |||||||||||
| Other non-operating income (expense) | 0.2 | % | — | % | (0.2) | % | |||||||||||
| Total non-operating income (expense) | (5.7) | % | (2.1) | % | (6.5) | % | |||||||||||
| Profit before income taxes | 17.7 | % | 13.1 | % | 3.6 | % | |||||||||||
| Income taxes | (2.8) | % | (1.4) | % | (0.7) | % | |||||||||||
| Net profit | 14.9 | % | 11.7 | % | 2.9 | % | |||||||||||
Year 2023 Compared to Year 2022
Our consolidated net profit in 2023 totaled $514.1 million, compared to a net profit of $348.1 million in 2022. In addition, we had consolidated operating profit of $807.2 million in 2023, compared to an operating profit of
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$450.4 million in 2022. Our consolidated operating margin in 2023 was 23.4%, an increase of 8.2 percentage points versus 2022. These results were driven by passenger demand increase with higher average fares.
Operating revenue
Our consolidated revenue totaled $3.5 billion in 2023, a 16.6% increase over operating revenue of $3.0 billion in 2022, mainly due to a 18.1% increase in passenger traffic, offset by a decrease of 0.6% in passenger average fare, and lower cargo volumes and rates.
Passenger revenue. Passenger revenue totaled $3.3 billion in 2023, a 17.4% increase over passenger revenue of $2.8 billion in 2022. This was driven by a 18.1% increase in passengers, partially offset by a decrease of 0.6% in passenger average fare.
Cargo and mail revenue. Cargo and mail revenue totaled $97.1 million in 2023, a 4.6% decrease from cargo and mail revenue of $101.8 million in 2022, related to lower cargo volumes and rates.
Other operating revenue. Other operating revenue totaled $43.5 million in 2023, a 13.0% increase from other revenue of $38.5 million in 2022 driven by an increase in frequent flyer program partnership revenues.
Operating expenses
Our consolidated operating expenses totaled $2.6 billion in 2023, a 5.4% increase over operating expenses of $2.5 billion in 2022. This is mainly as a result of 13.4% increase of ASMs versus 2022, offset by lower fuel costs.
An overview of the major variances in operating expenses on a consolidated basis follows:
Fuel. Aircraft fuel totaled $995.9 million in 2023, a 5.4% decrease from aircraft fuel of $1,052.6 million in 2022, mainly due to a 16.1% lower effective fuel price, offset by a 12.4% increase in block hours.
Wages, salaries and other employees’ expenses. Salaries and benefits totaled $436.5 million in 2023, a 14.7% increase over salaries and benefits of $380.4 million in 2022, mainly as a result of an increased headcount to support additional capacity, as well as salary adjustments and provisions for variable compensation.
Passenger servicing. Passenger servicing totaled $89.1 million in 2023 compared to $70.1 million in 2022. This represented a 27.3% increase driven by 18.1% more passengers and a higher effective rate per passenger that resulted from an upgrade in the onboard product offering.
Airport facilities and handling charges. Airport facilities and handling charges totaled $221.9 million in 2023, a 15.2% increase over $192.6 million in 2022. This increase was driven mainly by a 14.1% increase in departures and higher effective rates related to handling charges and airport services.
Sales and Distribution. Sales and distribution totaled $227.2 million in 2023, a 1.2% increase compared to $224.5 million in 2022, driven mainly to 9.1% more sales, offset by a reduction in our distribution costs as a result of higher penetration of both direct sales and the lower-cost travel agency channels.
Maintenance, materials and repairs. Maintenance, materials and repairs totaled $132.5 million in 2023, a 27.3% increase over $104.1 million in 2022, primarily a result of an increase of major component repairs and materials consumption related to 11.7% more flight hours in 2023 versus 2022, partially offset by an adjustment in the company’s provision related to the future return of leased aircraft.
Depreciation, amortization and impairment. Depreciation totaled $306.1 million in 2023, a 14.3% increase over $267.7 million in 2022, mainly related to additional aircraft and more maintenance events.
Flight operations. Flight operations amounted to $109.9 million in 2023, an 13.0% increase compared to $97.3 million in 2022, mainly due to 12.4% more block hours and higher overflight rates.
Other operating and administrative expenses. Other expenses totaled $130.7 million in 2023, a 4.1% increase from $125.4 million in 2022, mostly related to an increase in overhead expenses mainly related to IT costs.
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Total Non-operating Income (Expense)
Non-operating expense totaled $196.1 million in 2023, as compared to non-operating expense of $62.2 million in 2022 mainly due to a translational loss in fair value derivatives in our convertible notes as a result of the settlement.
Finance cost. Finance cost totaled $158.2 million in 2023 mainly comprised of the interest expense related to the amortization of the debt principal and debt issuance costs associated with the convertible notes retired during the period, loan interest and commission expenses, discount rate utilized for the calculation of leased aircraft charges, interest charges related to operating leases and other interest charges. This represents a 80.6% increase over finance cost of $87.6 million in 2022.
Finance income. Finance income totaled $50.2 million in 2023, an 178.6% increase over finance income of $18.0 million in 2022 mainly due to higher interest rates.
Gain (loss) in foreign currency fluctuations. Gain in foreign currency fluctuations totaled $3.1 million in 2023, an 131.5% decrease over loss in foreign currency fluctuations of $9.8 million in 2022, this result mainly driven by the Colombian peso strengthening throughout the year 2023.
Net change in fair value of derivatives. Net fair value of derivatives totaled $98.3 million loss in 2023, a 671.9% decrease over $17.2 million income in 2022, related to the Company’s convertible notes as a result of the settlement.
Other non-operating income (expense). Other non-operating expense totaled $7.2 million income in 2023, compared to $0.1 million income in 2022 mainly due to changes in the value of financial investments.
B.Liquidity and Capital Resources
Our cash, cash equivalents, and short-term investments at December 31, 2023 decreased by $19.6 million compared to December 31, 2022, to $915.2 million. As part of our financing policy, we expect to meet our liquidity needs with cash from operations, cash on hand and the utilization of committed credit facilities, if needed. As of the date hereof, our current unrestricted cash exceeds our forecasted cash requirements to carry out operations, including payment of debt service, for fiscal year 2024.
Our cash, cash equivalent and short-term investment position represented 26.5% of our revenues for the year ended December 31, 2023 and 17.6% of our total assets and 43.1% of our total equity as of December 31, 2023, which we believe provides us with an adequate liquidity position.
In recent years, we have been able to meet our working capital requirements through cash from our operations. In 2023, we experienced an increase in our operational net cash inflow of $286.2 million compared with the previous year. Our ability to meet our liquidity needs in the future is subject to numerous risks and uncertainties, including the levels of cash refunds of customer deposits, the results of contract negotiations with suppliers and whether we take delivery of aircraft pursuant to existing commitments as well as the terms on which we do so and the terms of any related financing available to us.
Our capital expenditures, which consist primarily of aircraft purchases, are funded through a combination of our cash from operations and long-term financing. From time to time, we finance pre-delivery payments related to our aircraft with short or medium-term financing in the form of commercial bank loans and/or bonds privately placed with commercial banks, as well as resorting to a deferred pre-delivery schedule from the aircraft manufacturer.
Copa Holdings, S.A., through its subsidiaries, has aggregate uncommitted unsecured credit facilities of $325.0 million as of December 31, 2023.
Operating Activities
We rely primarily on cash flows from operations to provide working capital for current and future operations. Our net cash flows provided by operating activities for the year ended December 31, 2023 were a net operating cash inflow of $1,044.8 million, an increase of $286.2 million compared to a net operating cash inflow of $758.5 million in 2022. Our principal source of cash is receipts from ticket sales to customers, which for the year ended December 31, 2023 increased by $358 million over receipts in the year 2022.
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Investing Activities
Net cash flow used in investing activities was $543.0 million in 2023 compared to a net cash flow used in investing activities of $552.2 million in 2022. During 2023, we made capital expenditures of $572.1 million, which consisted of expenditures related to acquisition of property and equipment and net of advance payments and reimbursements on aircraft purchase contracts, related to the arrival of 8 Boeing 737 MAX during 2023, compared to $526.9 million in 2022. In 2023, the Company had $53.7 million from net proceeds of investments compared to $14.3 million used in acquisition and redemption from investments in 2022. Also, in 2023, we had proceeds from sale of property and equipment of $5.1 million, compared to $7.4 million in 2022. We also had expenditures of $29.7 million in acquisition of intangible assets in 2023 compared to $18.5 million in 2022.
Financing Activities
Net cash flow used in financing activities was $394.0 million in 2023 compared to net cash flow used in financing activities of $273.7 million in 2022. During 2023, $428.3 million of proceeds from borrowings were offset by the repayment of $350.0 million of the convertible notes, repayment of $152.3 million in debt, $134.2 million in dividends paid, $105.9 million in repurchase of treasury shares and $80.0 million in payment of lease liability. During 2022, $222.5 million of proceeds from borrowings were offset by the repayment of $249.5 million in debt, $167.6 million in repurchase of treasury shares and $79.0 million in payment of lease liability.
Over the years, we have financed the acquisition of Boeing 737-Next Generation aircraft through syndicated loans provided by international financial institutions with the support of guarantees issued by the Export-Import Bank of the United States, or “Ex-Im”, with repayment profiles of 12 years. The Ex-Im guarantees support 80%-85% of the net purchase price and are secured with a first priority mortgage on the aircraft in favor of a security trustee on behalf of Ex-Im. The documentation for each loan follows standard market forms for this type of financing, including standard events of default. Our Ex-Im supported financings amortize on a quarterly basis, are denominated in dollars and can bear interest at a floating rate linked to SOFR or be set at a fixed rate. As of December 31, 2023 the Company had $416.6 million (2022: $466.6 million) of long-term fixed rate debt of outstanding indebtedness that is owed to financial institutions under financing arrangements guaranteed by the Export-Import Bank of the United States. At December 31, 2023, the total amount outstanding under our Ex-Im-supported financings totaled $416.6 million.
Since 2014, we have financed our aircraft through a mix of Japanese Operating Leases with Call Options, or “JOLCO”, and sale-leasebacks.
JOLCO is a Japanese-sourced lease transaction that provides for 100% financing and is typically used to finance new aircraft and has a minimum lease term of 10 years. In a JOLCO, the aircraft is purchased by a Japanese equity investor. The Japanese equity investor funds approximately 30% of the acquisition cost of the aircraft and becomes the owner of the aircraft via a Special Purpose Entity. An international bank with onshore lending capabilities provides the balance of the aircraft purchase price via a senior secured mortgage loan. JOLCOs have a call option, which lessees often expect the lessor to exercise. Under IFRS, these transactions are accounted for as financings. We have financed 29 Boeing 737 Next Generation and 737 MAX aircraft since 2014 through JOLCO financing. As of December 31, 2023, JOLCO financed debt outstanding was $1.0 billion.
Capital resources. We finance our aircraft through long-term debt and operating lease financings. Although we expect to finance future aircraft deliveries with a combination of similar debt arrangements and financing leases, we may not be able to secure such financing on attractive terms. To the extent we cannot secure financing, we may be required to modify our aircraft acquisition plans or incur higher than anticipated financing costs. We expect to meet our operating obligations as they become due through available cash and internally generated funds, supplemented as necessary by short-term or medium-term credit lines.
As of December 31, 2023, we have firm orders to purchase 57 Boeing 737 MAX aircraft to be delivered between 2024 and 2028. The aircraft under this contract have an approximate value of $2.8 billion based on contractual obligations net of discounts and pre-delivery payments, including estimated amounts for contractual price escalation.
We meet our pre-delivery deposit requirements for our Boeing 737 MAX aircraft by using cash from operations, or by using short or medium-term borrowing facilities and/or vendor financing for deposits required between three years and six months prior to delivery.
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The Company maintained letters of credit with several banks with a value of $31.3 million as of December 31, 2023 (compared to 2022: $32.3 million, as of December 31, 2022). These letters of credit are pledged mainly for operating lessors, maintenance providers and airport operators.
The Company has aggregate unsecured credit facilities of $325.0 million (2022: 355.0 million). These credit facilities are in place for contingency and working capital purposes. As of December 31, 2023, the Company does not have any outstanding borrowings under these credit facilities.
C.Research and Development, Patents and Licenses, etc.
We believe that the Copa brand has strong value and indicates superior service and value in the Latin American travel industry. We have registered the trademarks “Copa”, “Copa Airlines”, “Wingo” and “Hub of the Americas” with the trademark offices in Panama, the United States, and the majority of the countries in which we operate. We license certain brands, logos and trade uniforms under the trademark license agreement with UAL related to our alliance. We will have the right to continue to use our current logos on our aircraft for up to five years after the end of the alliance agreement term. “Copa Colombia”, “Copa Airlines Colombia”, “Wingo” and “Hub of the Americas” are registered names and trademarks in Colombia, Panama, Ecuador, Venezuela, Mexico, Dominican Republic, and Guatemala.
We operate many software products under licenses from our vendors, including our passenger services system, booking engine, revenue management software and our cargo management system. Under our agreements with Boeing, we also use a large amount of Boeing’s proprietary information to maintain our aircraft. The loss of these software systems or technical support information from our vendors could negatively affect our business.
D.Trend Information
Since 2020, the COVID-19 pandemic has had a material adverse impact on the airline industry and the Company’s operations. Despite the recent significant economic improvements due to more passenger demand and less travel restrictions, the extent of the future impact of the COVID-19 pandemic on the Company’s operational and financial performance will depend on future developments, including, but not limited to, the scope and severity of the pandemic related travel advisories and restrictions, the availability and effectiveness of vaccines, the effectiveness of available vaccines against variants of the virus, the duration and severity of the impact of the COVID-19 pandemic on overall demand for air travel, and the ongoing economic recession, all of which are highly uncertain and cannot be predicted. See “Risks Relating to our Company”.
Additionally, global geopolitical events, such as the conflict between Russia and Ukraine beginning in February 2022 and the conflict between Israel and Hamas beginning in October 2023, have led to an increase in fuel costs which may negatively impact our business operations. Due to the evolving nature of such events, we are unable to predict the extent of the impact on our business. While we do not expect that the conflict will be directly material to us, collateral effects of the geopolitical instability, such as the imposition of sanctions against Russia and Russia’s response to such sanctions, could adversely affect the global economy or domestic markets where we operate. Also, global macroeconomic conditions, such as inflation and recession, in key markets where we operate can negatively impact our business and we cannot predict the severity or duration of such conditions or their effect.
E.Critical Accounting Estimates
Not applicable.
Item 6. Directors, senior management and employees
A.Directors and Senior Management
Currently, our Board of Directors is comprised of eleven members. The number of directors elected each year varies. Pedro Heilbron, Alvaro Heilbron, Carlos A. Motta, John Gebo, Andrew Levy, Julianne Canavaggio and Makelin Arias were each re-elected for two-year terms at our annual shareholders’ meeting held in 2022. Carlos Mario Giraldo was elected as independent director for two-year terms and Stanley Motta, José Castañeda, and John Connor were each re-elected as directors for two-year terms at our annual shareholders’ meeting held in 2023.
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The following table sets forth the name, age and position of each member of our Board of Directors as of February 29, 2024. A brief biographical description of each member of our Board of Directors follows the table:
| Name | Position | Age | ||||||
| Pedro Heilbron | Chief Executive Officer and Director | 65 | ||||||
| Stanley Motta | Chairman and Director | 78 | ||||||
| Alvaro Heilbron | Director | 58 | ||||||
| Carlos A. Motta | Director | 51 | ||||||
| John Gebo | Director | 53 | ||||||
| José Castañeda Velez | Director | 79 | ||||||
| Andrew Levy | Director | 54 | ||||||
| Josh Connor | Director | 50 | ||||||
| Julianne Canavaggio | Director | 42 | ||||||
| Makelin Arias | Director | 58 | ||||||
| Carlos Mario Giraldo | Director | 63 | ||||||
Mr. Pedro Heilbron. See “—Executive Officers”.
Mr. Stanley A. Motta has been one of the directors of Copa Airlines since 1986 and a director of Copa Holdings since it was established in 1998. Since 1990, he has served as the President of Motta Internacional, S.A. an international importer and distributor of consumer goods. Mr. Motta is father of Mr. Carlos A. Motta. He serves on the boards of directors of Motta Internacional, S.A., Grupo ASSA and ASSA Compañía de Seguros, S.A., Inversiones Bahía, Ltd. and GBM Corporation and also serves as a director in numerous other privately held companies. Mr. Motta is a graduate of Tulane University.
Mr. Alvaro Heilbron was elected as director of Copa Holdings in 2012. He is the brother of Mr. Pedro Heilbron, our chief executive officer. Mr. Heilbron is the Co-Founder and President at Gotuuri, an online marketplace for Experiences and Activities. He co-founded and serves on the board of Editora del Caribe, S.A. He also serves on the board of Grupo PTM Panama, S.A., and Inversiones Haripasa. Mr. Heilbron holds a B.S. in Business Administration from George Washington University, and a Post-Graduate degree in Management from INCAE Business School. Mr. Heilbron also served as Vice-President of Commercial for Copa Airlines between the years of 1988 and 1999.
Mr. Carlos A. Motta was elected as a director of Copa Holdings in 2014. He has held several positions within Motta Internacional, S.A. and is currently a director and part of the executive committee. He is the son of Mr. Stanley Motta. Mr. Motta serves on the board of Inversiones Bahia, Copa Holdings, ASSA Compañía de Seguros, S.A, Banco General, Motco Inc., Fundación Alberto C. Motta, IFF Panama (Panama Film Festival), and Junior Achievement Worldwide among others. Mr. Motta is a member of YPO (Young Presidents Organization); AGLN (The Aspen Global Leadership Network); CEAL (Consejo Empresarial de America Latina). Mr. Motta received a bachelor’s degree in marketing from Boston College and an MBA from Thunderbird (The American Graduate School of International Management).
Mr. John Gebo was elected as a director of Copa Holdings in 2015. He is Senior Vice President of Transformation for United Airlines. Prior to his current position, Mr. Gebo was United’s Senior Vice President of Alliances, and Senior Vice President of Financial Planning and Analysis. Mr. Gebo joined United in 2000, and has held positions of increasing responsibility in finance, investor relations, and alliances. Prior to joining United, Mr. Gebo worked at General Motors Corporation in manufacturing engineering. Mr. Gebo received his bachelor’s degree in mechanical engineering from the University of Texas and his master’s degree in business administration from the University of Michigan. Mr. Gebo has also been a member of the board of directors of Azul S.A. and served for eight years on the board of directors of Alliant Credit Union, one of the largest credit unions in the United States, last serving as Vice Chairman in 2018.
Mr. José Castañeda Velez is one of the independent directors of Copa Holdings. He is currently a director on the boards of MMG Bank Corporation and MMG Trust S.A. Previously, Mr. Castañeda Velez was the chief executive officer of Banco Latinoamericano de Exportaciones, S.A.—BLADEX and has held managerial and officer level positions
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at Banco Río de la Plata, Citibank, N.A., Banco de Credito del Peru and Crocker National Bank. He is a graduate of the University of Lima.
Mr. Andrew Levy was elected as a director of Copa Holdings in 2016. Mr. Levy is currently Chairman and CEO of Avelo, Inc. and its wholly owned subsidiary Avelo Airlines, a new ultra-low-cost carrier focused on the US domestic market. Previously, he served as Executive Vice President and Chief Financial Officer of United Airlines from 2016 to 2018. He also served as President, Chief Operating Officer, Chief Financial Officer, Treasurer and as a member of the Board of Directors of Allegiant Travel Company, parent company of US ultra-low-cost carrier Allegiant Air, from 2001 to 2014. Mr. Levy started his airline career in 1994 at ValuJet Airlines, Inc. and then joined Savoy Capital, an investment banking and advisory firm specializing in the airline industry in 1996, also joined the board of AerSale (NASDAQ listed ASLE) in April 2023 and currently is a member of their audit committee. He holds a Juris Doctor degree from Emory University School of Law and a BA degree in Economics from Washington University in St. Louis.
Mr. Josh Connor is the founding partner of Connor Capital SB, LLC, an investment firm founded in December 2015. Since April 2017, he has served as a managing director and co-portfolio manager of infrastructure investing at Oaktree Capital Management, an asset management firm specializing in alternative investment strategies. From October 2013 to July 2015, Mr. Connor served as a managing director and co-head of the industrials banking group at Barclays Capital Inc., an international investment bank. While at Barclays, Mr. Connor also served as global head of transportation banking from April 2011 to October 2013. Prior to joining Barclays, Mr. Connor was with Morgan Stanley, an international investment bank, for 15 years, where he served as co-head of the global transportation and infrastructure investment banking group. Mr. Connor has served on the board of Frontier Airlines since August 2015, on the board of managers of Watco Companies LLC since December 2018, on the board of U.S. Rail & Logistics since June 2021, and as chairman of the board of Neighborhood Property Group, LLC since November 2020. Mr. Connor holds a B.A. in Economics from Williams College.
Ms. Julianne Canavaggio was elected as an independent director of Copa Holdings in 2019. She is a Managing Director at Cuestamoras, a family office in Central America. Prior to joining Cuestamoras, Ms. Canavaggio served in various leadership positions at Lazard (NYSE:LAZ) a global financial advisor, including CEO of Latin America, Chief of Staff to the CEO of Financial Advisory, and Head of Central America and the Caribbean. Prior to joining Lazard, Julianne established a successful legal career in mergers and acquisitions across a variety of industries. Ms. Canavaggio currently serves on the board of directors of a real estate development conglomerate in Colombia, Panama and Mexico, a telecommunications company in Costa Rica, as well as independent and non-independent director positions in various privately held companies and investment vehicles. She also serves on the board of trustees of the Panamerican Development Foundation, a nonprofit organization established by the Organization of American States. Ms. Canavaggio holds a BA from Harvard University and a JD from Tulane University.
Mrs. Makelin Arias was elected as a director of Copa Holdings in 2022. She is the Executive Vice President of Human Resources and Corporate Services for Banco General, S.A., and its subsidiaries. She joined Banco General in 2007 after a merger with Banco Continental. Her current responsibilities include managing human capital, administration & real estate, coordinating the compliance of the Corporate Governance guidelines, and implementing the Corporate Social Responsibility strategy for the bank. Currently, her main focus is the constant strengthening of the organizational culture, professional and personal development of human capital, and assuring compliance with the corporate governance guidelines based on the values that are the backbone of the organization. Before joining the financial industry, Mrs. Arias worked for Copa Airlines for ten years, where she held the positions of Courier Services Manager, Purchasing Manager, and Director of Human Capital. During her tenure in the company, her main achievements included: participating in the definition of the company’s Strategic Vision in 1994, being part of the Copa Airlines and Continental Airlines’ integration team, implementing a model based on targeted objectives for evaluating management, and being responsible for maintaining healthy labor and union relations. Mrs. Arias holds a BA in Economics and Philosophy from Boston College.
Mr. Carlos Mario Giraldo was elected as an independent director of Copa Holdings in 2023. He is currently the CEO of Grupo Exito, the main retailer in Colombia and Uruguay, a position he has held for ten years. Previously, he worked at Nutresa Group for thirteen years, the main producer of processed food in Colombia, holding the position of President of Noel Biscuit Division. He serves as a board member of the National Association of Retailers in Colombia and the Consumer Goods Forum at the global level. Mr. Giraldo holds a law degree from the University of Medellin and an LLM from Tulane University.