Filed by Bowne Pure Compliance
As filed with the
Securities and Exchange Commission on July 2, 2007
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
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o |
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REGISTRATION STATEMENT PURSUANT TO SECTION
12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF
1934 |
OR
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þ |
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ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2006 |
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
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o |
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SHELL COMPANY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 001-32696
COPA HOLDINGS, S.A.
(Exact name of Registrant as specified in its charter)
Not Applicable
(Translation of Registrants name into English)
Republic of Panama
(Jurisdiction of incorporation or organization)
Avenida Principal y Avenida de la Rotonda, Costa del Este
Complejo Business Park, Torre Norte
Parque Lefevre, Panama City
Panama
(+507 304 2677)
(Address, including zip code, and telephone number, including area code, of registrants principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act
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Title of each class:
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Name of each exchange on which registered |
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Class A Common Stock, without par value
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New York Stock Exchange |
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
Indicate
the number of outstanding shares of each of the issuers classes of capital or common
stock as of the close of the period covered by the annual report: At December 31, 2006, there were
outstanding 42,812,500 shares of common stock, without par value, of
which 30,034,375 were Class A
shares and 12,778,125 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. þ 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 þ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and non-accelerated filer
in Rule 12b-2 of Exchange Act. (Check one):
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Large Accelerated Filer o
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Accelerated Filer þ
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Non-accelerated Filer o |
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. þ Yes o No
Indicate by check mark which financial statement item the registrant has elected to follow.
o Item 17 þ 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 þ No
INTRODUCTION
In this annual report, we use the term Copa Holdings to refer to Copa Holdings, S.A., Copa
or Copa Airlines to refer to Compañía Panameña de Aviación, S.A., a subsidiary of Copa Holdings,
S.A., and AeroRepública to refer to AeroRepública, S.A., a subsidiary of Copa Holdings, S.A. The
terms we, us and our refer to Copa Holdings, S.A. together with its subsidiaries, except
where the context requires otherwise. 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:
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Aircraft utilization represents the average number of block hours operated
per day per aircraft for the total aircraft fleet. |
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Available seat miles or ASMs represents the aircraft seating capacity
multiplied by the number of miles the seats are flown. |
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Average stage length represents the average number of miles flown per
flight. |
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Block hours refers to the elapsed time between an aircraft leaving an
airport gate and arriving at an airport gate. |
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Break-even load factor represents the load factor that would have resulted
in total revenues being equal to total expenses. |
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Load factor represents the percentage of aircraft seating capacity that is
actually utilized (calculated by dividing revenue passenger miles by available seat
miles). |
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Operating expense per available seat mile represents operating expenses
divided by available seat miles. |
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Operating revenue per available seat mile represents operating revenues
divided by available seat miles. |
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Passenger revenue per available seat mile represents passenger revenue
divided by available seat miles. |
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Revenue passenger miles represents the number of miles flown by revenue
passengers. |
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Revenue passengers represents the total number of paying passengers
(including all passengers redeeming OnePass frequent flyer miles and other travel
awards) flown on all flight segments (with each connecting segment being considered a
separate flight segment). |
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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 and our
competitive position and market share in, 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.
ii
Presentation of Financial and Statistical Data
Included elsewhere in this annual report are our audited consolidated balance sheets at
December 31, 2005 and 2006 and the audited consolidated statements of income, changes in
shareholders equity and cash flows for the years ended December 31, 2004, 2005 and 2006. The
consolidated financial information as of December 31, 2003 and 2004, and for the years ended
December 31, 2002 and 2003 has been derived from our audited consolidated financial statements that
were prepared in accordance with accounting principles generally accepted in the United States, or
U.S. GAAP and which have not been included in this annual report. The consolidated financial
information as of December 31, 2002 has been derived from our audited consolidated financial
statements that were prepared under International Financial Reporting Standards and adjusted to be
presented on a basis consistent with U.S. GAAP and which have not been included in this annual
report.
Our audited and unaudited consolidated financial statements have been prepared in accordance
with U.S. GAAP and are stated in U.S. dollars. We began consolidating the results of our
AeroRepública operating subsidiary as of its acquisition date on April 22, 2005. Unless otherwise
indicated, all references in the annual report to $ or dollars refer to U.S. dollars, and all
references to Pesos or Ps. refer to Colombian pesos, the local currency of Colombia.
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:
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general economic, political and business conditions in Panama and Latin America and
particularly in the geographic markets we serve; |
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our managements expectations and estimates concerning our future financial
performance and financing plans and programs; |
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our level of debt and other fixed obligations; |
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demand for passenger and cargo air service in the markets in which we operate; |
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our capital expenditure plans; |
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changes in the regulatory environment in which we operate; |
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changes in labor costs, maintenance costs, fuel costs and insurance premiums; |
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changes in market prices, customer demand and preferences and competitive conditions; |
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cyclical and seasonal fluctuations in our operating results; |
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defects or mechanical problems with our aircraft; |
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our ability to successfully implement our growth strategy; |
iii
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our ability to obtain financing on commercially reasonable terms; and |
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the risk factors discussed under Risk Factors beginning on page 4. |
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.
iv
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
The following table presents summary consolidated financial and operating data for each of the
periods indicated. Our consolidated financial statements are prepared in accordance with U.S. GAAP
and are stated in U.S. dollars. You should read this information in conjunction with our
consolidated financial statements included in this annual report and the information under
Selected Financial Data and Item 5. Operating and Financial Review and Prospects appearing
elsewhere in this annual report.
The summary consolidated financial information as of December 31, 2005 and 2006 and for the
years ended December 31, 2004, 2005 and 2006 has been derived from our audited consolidated
financial statements included elsewhere in this annual report. The consolidated financial
information as of December 31, 2003 and 2004, and for the years ended December 31, 2002 and 2003
has been derived from our audited consolidated financial statements that were prepared under U.S.
GAAP and which have not been included in this annual report. The consolidated financial information
as of December 31, 2002 has been derived from our audited consolidated financial statements that
were prepared under International Financial Reporting Standards and adjusted to be presented on a
basis consistent with U.S. GAAP and which have not been included in this annual report.
We acquired 99.8% of the stock of AeroRepública, a Colombian air carrier, and began
consolidating its results on April 22, 2005. As a result of this acquisition, our financial
information prior to and after the acquisition is not comparable.
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Year Ended December 31, |
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2002 |
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2003 |
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2004 |
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2005(20) |
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2006 |
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(in thousands of dollars, except share and per share data and operating data) |
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INCOME STATEMENT DATA |
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Operating revenue: |
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Passenger revenue |
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$ |
269,629 |
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$ |
311,683 |
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$ |
364,611 |
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$ |
563,520 |
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$ |
798,901 |
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Cargo, mail and other |
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31,008 |
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30,106 |
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35,226 |
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45,094 |
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52,259 |
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Total operating revenues |
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300,637 |
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341,789 |
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399,837 |
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608,614 |
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851,160 |
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Operating expenses: |
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Aircraft fuel |
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40,024 |
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48,512 |
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62,549 |
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|
149,303 |
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217,730 |
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Salaries and benefits |
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39,264 |
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45,254 |
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51,701 |
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69,730 |
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91,382 |
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Passenger servicing |
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33,892 |
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36,879 |
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39,222 |
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50,622 |
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|
64,380 |
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Commissions |
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28,720 |
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27,681 |
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29,073 |
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|
45,087 |
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|
57,808 |
|
Reservations and sales |
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16,707 |
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|
18,011 |
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|
22,118 |
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29,213 |
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|
38,212 |
|
Maintenance, materials and repairs |
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|
20,733 |
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|
20,354 |
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19,742 |
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|
32,505 |
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|
|
50,057 |
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Depreciation |
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13,377 |
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|
14,040 |
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|
19,279 |
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|
19,857 |
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|
24,874 |
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Flight operations |
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|
14,567 |
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|
15,976 |
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17,904 |
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24,943 |
|
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|
33,740 |
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Aircraft rentals |
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|
21,182 |
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|
16,686 |
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|
14,445 |
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|
27,631 |
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|
38,169 |
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Landing fees and other rentals |
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|
8,495 |
|
|
|
10,551 |
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|
12,155 |
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|
|
17,909 |
|
|
|
23,929 |
|
Other |
|
|
19,166 |
|
|
|
25,977 |
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|
29,306 |
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|
|
32,622 |
|
|
|
44,758 |
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Fleet impairment charge(1) |
|
|
13,669 |
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|
|
3,572 |
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|
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|
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Total operating expenses |
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|
269,796 |
|
|
|
283,493 |
|
|
|
317,494 |
|
|
|
499,422 |
|
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|
685,039 |
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Operating income |
|
|
30,841 |
|
|
|
58,296 |
|
|
|
82,343 |
|
|
|
109,192 |
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|
|
166,121 |
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Non-operating income (expense): |
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Interest expense |
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(7,629 |
) |
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(11,613 |
) |
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(16,488 |
) |
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|
(21,629 |
) |
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|
(29,150 |
) |
Interest capitalized |
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1,114 |
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|
2,009 |
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|
963 |
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|
1,089 |
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|
1,712 |
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Interest income |
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|
831 |
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|
887 |
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|
1,423 |
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|
3,544 |
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|
7,257 |
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Other, net(2) |
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(1,490 |
) |
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|
2,554 |
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|
6,063 |
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|
|
395 |
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|
185 |
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Total non-operating expenses, net |
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(7,174 |
) |
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|
(6,163 |
) |
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(8,039 |
) |
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(16,601 |
) |
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|
(19,996 |
) |
Income before income taxes |
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23,667 |
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|
52,133 |
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|
74,304 |
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|
92,591 |
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|
146,125 |
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Provision for income taxes |
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(2,999 |
) |
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(3,644 |
) |
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(5,732 |
) |
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(9,592 |
) |
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(12,286 |
) |
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Net income |
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20,668 |
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|
48,489 |
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|
68,572 |
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|
82,999 |
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|
133,839 |
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1
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Year Ended December 31, |
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2002 |
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2003 |
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2004 |
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2005(20) |
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2006 |
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(in thousands of dollars, except share and per share data and operating data) |
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BALANCE SHEET DATA |
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Total cash, cash equivalents and short-term
investments |
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$ |
34,476 |
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$ |
61,432 |
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$ |
110,943 |
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$ |
114,490 |
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$ |
197,380 |
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Accounts receivable, net |
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|
24,006 |
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|
31,019 |
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|
27,706 |
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|
46,533 |
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|
62,137 |
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Total current assets |
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|
68,940 |
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|
103,523 |
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|
|
152,087 |
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|
|
184,351 |
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|
|
290,651 |
|
Purchase deposits for flight equipment |
|
|
55,867 |
|
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|
45,869 |
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|
|
7,190 |
|
|
|
52,753 |
|
|
|
65,150 |
|
Total property and equipment |
|
|
345,411 |
|
|
|
480,488 |
|
|
|
541,211 |
|
|
|
637,543 |
|
|
|
862,283 |
|
Total assets |
|
|
421,935 |
|
|
|
591,915 |
|
|
|
702,050 |
|
|
|
916,912 |
|
|
|
1,255,015 |
|
Long-term debt |
|
|
211,698 |
|
|
|
311,991 |
|
|
|
380,827 |
|
|
|
402,954 |
|
|
|
529,802 |
|
Total shareholders equity |
|
|
67,094 |
|
|
|
115,583 |
|
|
|
174,155 |
|
|
|
245,867 |
|
|
|
371,669 |
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CASH FLOW DATA |
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Net cash provided by operating activities |
|
$ |
55,543 |
|
|
$ |
73,479 |
|
|
$ |
98,051 |
|
|
$ |
115,368 |
|
|
$ |
193,468 |
|
Net cash used in investing activities |
|
|
(150,203 |
) |
|
|
(151,802 |
) |
|
|
(85,738 |
) |
|
|
(159,886 |
) |
|
|
(258,980 |
) |
Net cash provided by financing activities |
|
|
100,400 |
|
|
|
105,298 |
|
|
|
29,755 |
|
|
|
38,929 |
|
|
|
141,498 |
|
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|
|
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OTHER FINANCIAL DATA |
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EBITDA(3) |
|
|
42,728 |
|
|
|
74,890 |
|
|
|
107,685 |
|
|
|
129,444 |
|
|
|
191,180 |
|
Aircraft rentals |
|
|
21,182 |
|
|
|
16,686 |
|
|
|
14,445 |
|
|
|
27,631 |
|
|
|
38,169 |
|
Operating margin(4) |
|
|
10.3 |
% |
|
|
17.1 |
% |
|
|
20.6 |
% |
|
|
17.9 |
% |
|
|
19.5 |
% |
Weighted average shares used in computing net
income per share (basic)(5) |
|
|
42,812,500 |
|
|
|
42,812,500 |
|
|
|
42,812,500 |
|
|
|
42,812,500 |
|
|
|
42,812,500 |
|
Weighted average shares used in computing net
income per share (diluted)(5) |
|
|
42,812,500 |
|
|
|
42,812,500 |
|
|
|
42,812,500 |
|
|
|
42,812,500 |
|
|
|
43,234,553 |
|
Net income (loss) per share (basic)(5) |
|
$ |
0.48 |
|
|
$ |
1.13 |
|
|
$ |
1.60 |
|
|
$ |
1.94 |
|
|
$ |
3.13 |
|
Net income (loss) per share (diluted)(5) |
|
$ |
0.48 |
|
|
$ |
1.13 |
|
|
$ |
1.60 |
|
|
$ |
1.94 |
|
|
$ |
3.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING DATA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue passengers carried(6) |
|
|
1,819 |
|
|
|
2,028 |
|
|
|
2,333 |
|
|
|
4,361 |
|
|
|
5,741 |
|
Revenue passenger miles(7) |
|
|
1,875 |
|
|
|
2,193 |
|
|
|
2,548 |
|
|
|
3,824 |
|
|
|
5,017 |
|
Available seat miles(8) |
|
|
2,847 |
|
|
|
3,226 |
|
|
|
3,639 |
|
|
|
5,359 |
|
|
|
6,866 |
|
Load factor(9) |
|
|
65.9 |
% |
|
|
68.0 |
% |
|
|
70.0 |
% |
|
|
71.4 |
% |
|
|
73.1 |
% |
Break-even load factor(10) |
|
|
54.5 |
% |
|
|
52.8 |
% |
|
|
52.6 |
% |
|
|
57.9 |
% |
|
|
58.0 |
% |
Total block hours(11) |
|
|
58,112 |
|
|
|
64,909 |
|
|
|
70,228 |
|
|
|
103,628 |
|
|
|
130,818 |
|
Average daily aircraft utilization(12) |
|
|
8.8 |
|
|
|
9.0 |
|
|
|
9.3 |
|
|
|
9.8 |
|
|
|
9.8 |
|
Average passenger fare |
|
|
148.2 |
|
|
|
153.7 |
|
|
|
156.3 |
|
|
|
129.2 |
|
|
|
139.2 |
|
Yield(13) |
|
|
14.38 |
|
|
|
14.22 |
|
|
|
14.31 |
|
|
|
14.74 |
|
|
|
15.92 |
|
Passenger revenue per ASM(14) |
|
|
9.47 |
|
|
|
9.66 |
|
|
|
10.02 |
|
|
|
10.51 |
|
|
|
11.64 |
|
Operating revenue per ASM(15) |
|
|
10.56 |
|
|
|
10.60 |
|
|
|
10.99 |
|
|
|
11.36 |
|
|
|
12.40 |
|
Operating expenses per ASM
(CASM)(16) |
|
|
9.48 |
|
|
|
8.79 |
|
|
|
8.72 |
|
|
|
9.32 |
|
|
|
9.98 |
|
Departures |
|
|
23,361 |
|
|
|
25,702 |
|
|
|
27,434 |
|
|
|
48,934 |
|
|
|
65,471 |
|
Average daily departures |
|
|
64.0 |
|
|
|
70.4 |
|
|
|
75.0 |
|
|
|
156.6 |
|
|
|
179.4 |
|
Average number of aircraft |
|
|
18.1 |
|
|
|
19.8 |
|
|
|
20.6 |
|
|
|
31.0 |
|
|
|
38.6 |
|
Airports served at period end |
|
|
27 |
|
|
|
28 |
|
|
|
29 |
|
|
|
36 |
|
|
|
42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SEGMENT FINANCIAL DATA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Copa: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue |
|
$ |
300,637 |
|
|
$ |
341,789 |
|
|
$ |
399,837 |
|
|
$ |
505,655 |
|
|
$ |
676,168 |
|
Operating expenses |
|
|
269,796 |
|
|
|
283,493 |
|
|
|
317,494 |
|
|
|
402,684 |
|
|
|
509,540 |
|
Depreciation |
|
|
13,377 |
|
|
|
14,040 |
|
|
|
19,279 |
|
|
|
19,242 |
|
|
|
23,732 |
|
Aircraft rentals |
|
|
21,182 |
|
|
|
16,686 |
|
|
|
14,445 |
|
|
|
22,096 |
|
|
|
23,842 |
|
Interest expense |
|
|
7,629 |
|
|
|
11,613 |
|
|
|
16,488 |
|
|
|
19,424 |
|
|
|
26,907 |
|
Interest capitalized |
|
|
1,114 |
|
|
|
2,009 |
|
|
|
963 |
|
|
|
1,089 |
|
|
|
1,712 |
|
Interest income |
|
|
831 |
|
|
|
887 |
|
|
|
1,423 |
|
|
|
3,376 |
|
|
|
6,887 |
|
Net income (loss) before tax |
|
|
23,667 |
|
|
|
52,133 |
|
|
|
74,304 |
|
|
|
89,745 |
|
|
|
155,533 |
|
Total assets |
|
|
421,935 |
|
|
|
591,915 |
|
|
|
702,050 |
|
|
|
851,075 |
|
|
|
1,168,121 |
|
AeroRepública: (21) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
103,016 |
|
|
$ |
175,883 |
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96,839 |
|
|
|
176,388 |
|
Depreciation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
615 |
|
|
|
1,142 |
|
Aircraft rentals |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,535 |
|
|
|
14,604 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,205 |
|
|
|
2,243 |
|
Interest capitalized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
168 |
|
|
|
370 |
|
Net income (loss) before tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,846 |
|
|
|
(9,408 |
) |
Total assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98,091 |
|
|
|
132,872 |
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2002 |
|
|
2003 |
|
|
2004 |
|
|
2005(20) |
|
|
2006 |
|
|
|
(in thousands of dollars, except share and per share data and operating data) |
|
SEGMENT OPERATING DATA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Copa: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available seat miles(8) |
|
|
2,847 |
|
|
|
3,226 |
|
|
|
3,639 |
|
|
|
4,409 |
|
|
|
5,239 |
|
Load factor(9) |
|
|
65.9 |
% |
|
|
68.0 |
% |
|
|
70.0 |
% |
|
|
73.4 |
% |
|
|
77.8 |
% |
Break-even load factor |
|
|
54.5 |
% |
|
|
52.8 |
% |
|
|
52.6 |
% |
|
|
56.8 |
% |
|
|
56.1 |
% |
Yield(13) |
|
|
14.38 |
|
|
|
14.22 |
|
|
|
14.31 |
|
|
|
14.41 |
|
|
|
15.49 |
|
Operating revenue per ASM(15) |
|
|
10.56 |
|
|
|
10.60 |
|
|
|
10.99 |
|
|
|
11.47 |
|
|
|
12.91 |
|
CASM(16) |
|
|
9.48 |
|
|
|
8.79 |
|
|
|
8.72 |
|
|
|
9.13 |
|
|
|
9.73 |
|
Average stage length(18) |
|
|
1,010 |
|
|
|
1,028 |
|
|
|
1,047 |
|
|
|
1,123 |
|
|
|
1,158 |
|
On time performance(17) |
|
|
90.5 |
% |
|
|
91.4 |
% |
|
|
91.8 |
% |
|
|
91.7 |
% |
|
|
91.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AeroRepública:(21) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available seat miles(8) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
950 |
|
|
|
1,627 |
|
Load factor(9) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62.0 |
% |
|
|
57.9 |
% |
Break even load factor |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60.8 |
% |
|
|
61.9 |
% |
Yield(13) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16.53 |
|
|
|
17.79 |
|
Operating revenue per ASM(15) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.84 |
|
|
|
10.81 |
|
CASM(16) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.19 |
|
|
|
10.84 |
|
Average stage length(18) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
360 |
|
|
|
370 |
|
On time performance(19) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70.4 |
% |
|
|
80.3 |
% |
|
|
|
(1) |
|
Represents impairment losses on our Boeing 737-200 aircraft and related assets. |
|
(2) |
|
Consists primarily of changes in the fair value of fuel derivative contracts, foreign
exchange gains/losses and gains on sale of Boeing 737-200 aircraft. See Item 5. Operating
and Financial Review and Prospects and the notes to our consolidated financial statements. |
|
(3) |
|
EBITDA represents net income (loss) plus the sum of interest expense, income taxes,
depreciation and amortization minus the sum of interest capitalized and interest income.
EBITDA is presented as supplemental information because we believe it is a useful indicator of
our operating performance and is useful in comparing our operating performance with other
companies in the airline industry. However, EBITDA should not be considered in isolation, as
a substitute for net income prepared in accordance with U.S. GAAP or as a measure of a
companys profitability. In addition, our calculation of EBITDA may not be comparable to
other companies similarly titled measures. The following table presents a reconciliation of
our net income to EBITDA for the specified periods: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2002 |
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
|
2006 |
|
|
|
(in thousands of dollars) |
|
Net income |
|
$ |
20,668 |
|
|
$ |
48,489 |
|
|
$ |
68,572 |
|
|
$ |
82,999 |
|
|
$ |
133,839 |
|
Interest expense |
|
|
7,629 |
|
|
|
11,613 |
|
|
|
16,488 |
|
|
|
21,629 |
|
|
|
29,150 |
|
Income taxes |
|
|
2,999 |
|
|
|
3,644 |
|
|
|
5,732 |
|
|
|
9,592 |
|
|
|
12,286 |
|
Depreciation |
|
|
13,377 |
|
|
|
14,040 |
|
|
|
19,279 |
|
|
|
19,857 |
|
|
|
24,874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
44,673 |
|
|
|
77,786 |
|
|
|
110,071 |
|
|
|
134,077 |
|
|
|
200,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest capitalized |
|
|
(1,114 |
) |
|
|
(2,009 |
) |
|
|
(963 |
) |
|
|
(1,089 |
) |
|
|
(1,712 |
) |
Interest income |
|
|
(831 |
) |
|
|
(887 |
) |
|
|
(1,423 |
) |
|
|
(3,544 |
) |
|
|
(7,257 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
|
42,728 |
|
|
|
74,890 |
|
|
|
107,685 |
|
|
|
129,444 |
|
|
|
191,180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft rentals represents a significant operating expense of our business. Because we leased
several of our aircraft during the periods presented, we believe that when assessing our EBITDA
you should also consider the impact of our aircraft rent expense, which was $21.2 million in
2002, $16.7 million in 2003, $14.4 million in 2004, $27.6 million in 2005, and $38.2 million in
2006. |
|
(4) |
|
Operating margin represents operating income divided by operating revenues. |
|
(5) |
|
All share and per share amounts have been retroactively restated to reflect the current
capital structure described under Description of Capital Stock and in the notes to our
consolidated financial statements. |
|
(6) |
|
Total number of paying passengers (including all passengers redeeming OnePass frequent flyer
miles and other travel awards) flown on all flight segments, expressed in thousands. |
|
(7) |
|
Number of miles flown by scheduled revenue passengers, expressed in millions. |
|
(8) |
|
Aircraft seating capacity multiplied by the number of miles the seats are flown, expressed in
millions. |
|
(9) |
|
Percentage of aircraft seating capacity that is actually utilized. Load factors are
calculated by dividing revenue passenger miles by available seat miles. |
|
(10) |
|
Load factor that would have resulted in total revenues being equal to total expenses. |
|
(11) |
|
The number of hours from the time an airplane moves off the departure gate for a revenue
flight until it is parked at the gate of the arrival airport. |
|
(12) |
|
Average number of block hours operated per day per aircraft for the total aircraft fleet. |
|
(13) |
|
Average amount (in cents) one passenger pays to fly one mile. |
|
(14) |
|
Passenger revenues (in cents) divided by the number of available seat miles. |
|
(15) |
|
Total operating revenues for passenger aircraft related costs (in cents) divided by the
number of available seat miles. |
|
(16) |
|
Total operating expenses for passenger aircraft related costs (in cents) divided by the
number of available seat miles. |
3
|
|
|
(17) |
|
Percentage of flights that arrive at the destination gate within fifteen minutes of scheduled
arrival. |
|
(18) |
|
The average number of miles flown per flight. |
|
(19) |
|
Percentage of flights that depart within fifteen minutes of the scheduled departure time. |
|
(20) |
|
For AeroRepública operating data, this period covers from April 22, 2005 until December 31,
2005 which corresponds to the period that AeroRepública was consolidated in our financial
statements. |
|
(21) |
|
AeroRepública has not historically distinguished between revenue passengers and non-revenue
passengers. Although we are implementing systems at AeroRepública to record that information,
revenue passenger information and other statistics derived from revenue passenger data for the
year ended December 31, 2005 and 2006 has been derived from estimates that we believe to be
materially accurate. |
B. Capitalization and Indebtedness
Not applicable
C. Reasons for the Offer and Use of Proceeds
Not applicable
D. Risk Factors
An investment in our Class A shares involves a high degree of risk. You should carefully
consider the risks described below before making an investment decision. Our business, financial
condition and results of operations could be materially and adversely affected by any of these
risks. The trading price of our Class A shares could decline due to any of these risks, and you
may lose all or part of your investment. The risks described below are those known to us and that
we currently believe may materially affect us.
Risks Relating to Our Company
Our failure to successfully implement our growth strategy may adversely affect our results of
operations and harm the market value of our Class A shares.
We have grown rapidly over the past seven years. We intend to continue to grow our fleet,
expand our service to new markets and increase the frequency of flights to the markets we currently
serve. Achieving these goals is essential in order for 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 purchases or aircraft deposits as we add to our
fleet. We cannot assure you that we will have sufficient cash to fund such projects, and if we are
unable to successfully expand our route system, our future revenue and earnings growth would be
limited.
When we commence a new route, our load factors tend to be lower than those on our established
routes and our advertising and other promotional costs tend to be higher, which may result in
initial losses that could have a negative impact on our results of operations as well as require a
substantial amount of cash to fund. We also periodically run special promotional fare campaigns,
particularly in connection with the opening of new routes. Promotional fares may 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 our flight frequencies depend on our ability to identify
the appropriate geographic markets upon which to focus and to gain suitable airport access and
route approval in these markets. There can be no assurance that the new markets we enter will
provide passenger traffic that is 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 under bilateral agreements or the
inability to maintain our existing slots and obtain additional slots, could constrain the expansion
of our operations.
The expansion of our business will also require additional skilled personnel, equipment and
facilities. The inability to hire and retain skilled pilots and other personnel or secure the
required equipment and facilities efficiently and cost-effectively may adversely affect our ability
to execute our growth strategy. Expansion of our markets and flight frequencies may also 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. In light of these factors, we cannot assure you that we
will be able to successfully establish new markets or expand our existing markets, and our
failure to do so could harm our business and results of operations, as well as the value of our
Class A shares.
4
If we fail to successfully integrate the new Embraer 190 aircraft we have agreed to purchase into
our operations, our business could be harmed.
In October 2004, Copa announced an order to purchase ten new Embraer 190 aircraft with options
for an additional 20 new aircraft. Subsequently, Copa increased its firm orders for the Embraer 190
aircraft by exercising five of these options. Through the first quarter of 2007, Copa has accepted
delivery of six Embraer 190 aircraft. In March 2006, AeroRepública announced an order to purchase
five new Embraer 190 aircraft with options for an additional 10 new aircraft. Since then
AeroRepública has accepted delivery of four Embraer 190 aircraft. Acquisition of an all-new type of
aircraft, such as the Embraer 190, involves a variety of risks, including:
|
|
|
difficulties or delays in obtaining the necessary certifications from the
aviation regulatory authorities of the countries to which we fly; |
|
|
|
manufacturers 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 the new aircraft and its components to comply with agreed upon
specifications and performance standards. |
The Embraer 190 is a new aircraft and, although to date we have not had any significant
problems with this aircraft, certain other airlines have in the past experienced problems generally
associated with it, including difficulties with the software that operates the Embraer avionics
system. As a result, we may experience similar or other problems with the Embraer 190s that will be
delivered to us which could result in increased costs or service interruptions.
In addition, we also face risks integrating a second type of aircraft into our existing
infrastructure and operations, including, among other things, the additional costs, resources and
time needed to hire and train new pilots, technicians and other skilled support personnel. If we
fail to successfully take delivery of, place into service and integrate into our operations the new
Embraer 190 aircraft, our business, financial condition and results of operations could be harmed.
We are dependent on our alliance with Continental and cannot assure you that it will continue.
We maintain a broad commercial and marketing alliance with Continental Airlines, Inc., or
Continental, that has allowed us to enhance our network and, in some cases, offer our customers
services that we could not otherwise offer. If Continental were to experience severe financial
difficulties or go bankrupt, our alliance and service agreements may be terminated or we may not
realize the anticipated benefits from our relationship with Continental. While Continental recorded
net income of $343 million for 2006, it suffered significant losses following September 11, 2001,
and it has indicated that several factors threaten its ability to sustain profitability, including
competition from low-cost carriers and carriers emerging from bankruptcy protection, high fuel cost
and terrorism or other international hostilities. We cannot assure you that Continental will be
able to sustain its profitability, and as a result, we may be materially and adversely affected by
a deterioration of Continentals financial condition.
5
Since we began the alliance in 1998, we have benefited from Continentals support in
negotiations for aircraft purchases, insurance and fuel purchases, sharing of best practices and
engineering support in our maintenance operations, and significant other intangible support. This
support has assisted us in our growth strategy, while also improving our operational performance
and the quality of our service. Our alliance relationship with Continental is the subject of a
grant of antitrust immunity from the U.S. Department of Transportation, or DOT. If our relationship
with Continental were to deteriorate, or our alliance relationship were no longer to benefit from a
grant of antitrust immunity, or our alliance or services agreements were terminated, our
business, financial condition and results of operations would likely be materially and adversely
affected. The loss of Copas codesharing relationship with Continental would likely result in a
significant decrease in our revenues. We also rely on Continentals OnePass frequent flyer program
that we participate in globally and on a co-branded basis in Latin America, and our business may be
adversely affected if the OnePass program does not remain a competitive marketing program. In
addition, our competitors may benefit from alliances with other airlines that are more extensive
than our alliance with Continental. We cannot predict the extent to which we will be disadvantaged
by competing alliances. See Item 7. Major Shareholders and Related Party Transactions.
Our relationship with suppliers depends in part on our alliance with Continental. As a result
of our follow-on offering in June 2006, Continentals investment in our company diminished to
approximately 10% of our total outstanding capital stock. We cannot assure you that Continentals
reduced participation in our company will not have an adverse effect on our relationships with
suppliers or that the terms of our current or future supply agreements will not be affected by this
reduced participation.
Continentals economic interest in our continued success can be expected to further decline over
time.
In connection with our initial public offering in December 2005, Continental reduced its
investment in us from 49% to approximately 27.3% of our capital stock. Through a follow-on offering
in 2006, Continental further reduced its investment in us to approximately 10.0% of our capital
stock. Continental may seek to monetize its remaining investment in us. Continental has certain
rights pursuant to a shareholders agreement among Continental, Corporación de Inversiones Aéreas,
S.A., or CIASA, and us, including the right to appoint one of our directors so long as our alliance
agreement with Continental continues. As a result of Continentals right to appoint one member of
our board of directors and our dependence on the alliance between the airlines, Continental has the
ability to exercise significant influence over us. Nevertheless, Continentals interests will
likely diverge from those of our other shareholders as Continental reduces its investment in us
over time. Other than certain exclusivity provisions and a termination event for certain
competitive activities contained in our alliance agreement, we do not have any non-competition
agreement with Continental, and as Continental continues to reduce its economic stake in us, it may
take actions that are adverse to the interests of the majority of our shareholders. See Item 7.
Major Shareholders and Related Party Transactions.
We operate using a hub-and-spoke model and are vulnerable to competitors offering direct flights
between destinations we serve.
The structure of substantially all of our current flight operations (other than those of
AeroRepública) generally 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. With the passage of
time, and in particular as demand for air travel in Latin America increases, it is increasingly
likely that one or more of our competitors will initiate non-stop service between important
destinations that we currently serve through our Panamanian hub. By bypassing our hub in Panama,
any non-stop service would be more convenient and possibly less expensive, than our connecting
service and could significantly decrease demand for our service to those destinations. We believe
that future competition from point-to-point carriers will be directed towards the largest markets
that we serve. As a result, the effect of such competition on us could be significant and could
have a material adverse effect on our business, financial condition and results of operations.
6
The Panamanian Aviation Act and certain of the bilateral agreements under which we operate contain
Panamanian ownership requirements that are not clearly defined, and our failure to comply with
these requirements could cause us to lose our authority to operate in Panama or to the
international destinations we serve.
Under Law No. 21 of January 29, 2003, which regulates the aviation industry in the Republic of
Panama and which we refer to as the Aviation Act, substantial ownership and effective control
of our airline must remain in the hands of Panamanian nationals. 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
territory, we must continue to have substantial Panamanian ownership and effective control by
Panamanian nationals to retain these rights. Neither substantial ownership nor effective
control are defined in the Aviation Act or in the bilateral agreements, and it is unclear how a
Panamanian court or, in the case of the bilateral agreements, foreign regulatory authorities might
interpret these requirements. In addition, the manner in which these requirements are interpreted
may change over time. We cannot predict whether these requirements would be satisfied through
ownership and control by Panamanian record holders, or if these requirements would be satisfied
only by direct and indirect ownership and control by Panamanian beneficial owners.
At the present time, CIASA, a Panamanian entity, is the record owner of all of our Class B
voting shares, representing approximately 29.2% of our total share capital and all of the voting
power of our capital stock.
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 can 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. We cannot assure you that the decree will not be
challenged, modified or superseded in the future, that CIASA will continue to own a majority of the
Class B shares, or that record ownership of a majority of our Class B shares by Panamanian entities
will be sufficient to satisfy the substantial ownership requirement of the Aviation Act and the
decree. A change in the ownership of the Class B shares or a determination by the Panamanian Civil
Aviation Authority (the Autoridad de Aeronáutica Civil), which we refer to as the AAC, or a
Panamanian court that substantial Panamanian ownership should be determined on the basis of our
direct and indirect ownership, could cause us to lose our license to operate our airline in Panama.
Likewise, if a foreign regulatory authority were to determine that our direct or indirect
Panamanian ownership fails to satisfy the minimum Panamanian ownership requirements for a
Panamanian carrier under the applicable bilateral agreement, we may lose the benefit of that
agreement and be prohibited from flying to the relevant country or over its territory. Any such
determination would have a material adverse effect on our business, financial condition and results
of operations, as well as on the value of the Class A shares.
Our business is subject to extensive regulation which may restrict our growth or our operations or
increase our costs.
Our business, financial condition and results of operations 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 AAC 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. We cannot predict
or control any actions that the AAC or foreign aviation regulators may take in the future, which
could include restricting our operations or imposing new and costly regulations. Also, our fares
are technically subject to review by the AAC 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 Panama 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.
A 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 to certain airports or destinations, the cancellation of any of our
provisional routes or the imposition of other sanctions could also have a material adverse effect.
For example, recently, our third daily frequency to Mexico City, which was under provisional
permit, was not extended by the Mexican civil aviation authority. We do not expect this to have a
material adverse effect on our business, but it is indicative of the route changes to which we may
be subject. Due to the nature of bilateral agreements, we can fly to many destinations only from
Panama. We cannot
assure you that a change in a foreign governments 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.
7
We plan to continue to increase the scale of our operations and revenues by expanding our
presence on new and existing routes. Our ability to successfully implement this strategy will
depend upon many factors, several of which are outside our control or subject to change. These
factors include the permanence of a suitable political, economic and regulatory environment in the
Latin American countries in which we operate or intend to operate and our ability to identify
strategic local partners.
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, collision avoidance systems, airborne windshear avoidance
systems, noise abatement and other environmental issues, and increased inspections and maintenance
procedures to be conducted on older aircraft. We expect to continue incurring expenses to comply
with the FAAs regulations, and any increase in the cost of compliance could have an adverse effect
on our financial condition and results of operations. Additional new regulations continue to be
regularly implemented by the U.S. Transportation Security Administration, or TSA, as well.
The growth of our operations to the United States and the benefits of our code-sharing arrangements
with Continental are dependent on Panamas continued favorable safety assessment.
The FAA periodically audits the aviation regulatory authorities of other countries. As a
result of its investigation, each country is given an International Aviation Safety Assessment, or
IASA, rating. In May 2001, Panamas IASA rating was downgraded from Category 1 to Category 2 due to
alleged deficiencies in Panamanian air safety standards and AACs capability to provide regulatory
oversight. As a result of this downgrade, we were prevented from offering our Copa flights to any
new destinations in the United States and from certifying new aircraft for flights to the United
States, and Continental was no longer able to codeshare on our flights. In April 2004, after
extensive investment by the Panamanian government in the AAC and consultations among Copa, the AAC
and U.S. safety officials, Panamas IASA rating was restored to Category 1. We cannot assure you
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
Panamas IASA rating were to be downgraded in the future, it could prohibit us from increasing
service to the United States and Continental would have to suspend the placing of its code on our
flights, causing us to lose direct revenue from codesharing as well as reducing flight options to
our customers.
We are highly dependent on our hub at Panama Citys Tocumen International Airport.
Our business is heavily dependent on our operations at our hub at Panama Citys Tocumen
International Airport. Substantially all of our Copa flights either depart from or arrive at our
hub. The hub-and-spoke structure of our operations is particularly dependent on the on-time arrival
of tightly coordinated groupings of flights 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 and increased
security measures. Delays inconvenience passengers, reduce aircraft utilization and increase costs,
all of which in turn negatively affect our profitability. A significant interruption or disruption
in service at Tocumen International Airport could have a serious impact on our business, financial
condition and operating results. Also, Tocumen International Airport provides international service
to the Republic of Panamas population of approximately 3.0 million, whereas the hub markets of our
current competitors tend to be much larger, providing those competitors with a larger base of
customers at their hub.
8
Tocumen International Airport is operated by a corporation that is controlled by the
government of the Republic of Panama. We depend on our good working relationship with the
quasi-governmental corporation that operates 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 that govern rights to use the airports jetways or aircraft parking
spaces. Therefore, in connection with the ongoing or future expansion of the airport, the airport
authority could assign new capacity to competing airlines or could reassign resources that are
currently used by us to other aircraft operators. Either such event could result in significant new
competition for our routes or could otherwise have a material adverse effect on our current
operations or ability for future growth.
We are exposed to increases in landing charges and other airport access fees and cannot be assured
access to adequate facilities and landing rights necessary to achieve our expansion plans.
We must pay fees to airport operators for the use of their facilities. Any substantial
increase in airport charges could have a material adverse impact on our results of operations.
Passenger taxes and airport charges have also increased in recent years, sometimes substantially.
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 assure you
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 slot restrictions during certain periods of the day. We cannot
assure you that we will be able to obtain a sufficient number of slots, gates and other facilities
at airports to expand our services as we are proposing to do. 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.
Some of the airports to which we fly impose various restrictions, including limits on aircraft
noise levels, limits on the number of average daily departures and curfews on runway use. In
addition, we cannot assure you 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, and we have a high level of
indebtedness. We also have significant expenditures in connection with our operating leases and
facility rental costs, and substantially all of our property and equipment is pledged to secure
indebtedness. For the year ended December 31, 2006, our interest expense and aircraft and facility
rental expense under operating leases aggregated $76.1 million. At March 31, 2007, approximately
45% of our total indebtedness bore interest at fixed rates, and a small portion of our lease
obligations was determined with reference to LIBOR. Accordingly, our financing and rent expense
will not decrease significantly if market interest rates decline.
As of May 31, 2007, we had firm commitments to purchase ten Boeing 737-Next Generation and ten
Embraer 190s, with an aggregate manufacturers list price of approximately $1.1 billion. We have
arranged for financing for a significant portion of the commitment relating to such aircraft and
will require substantial capital from external sources to meet our remaining financial commitment.
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:
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limit our ability in the future to obtain additional financing for working
capital or other important needs; |
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impair our liquidity by diverting substantial cash from our operating needs to
service fixed financing obligations; or |
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limit our ability to plan for or react to changes in our business, in the
airline industry or in general economic conditions. |
9
Any one of these could have a material adverse effect on our business, financial condition and
results of operations.
The cost of refinancing our debt and obtaining additional financing for new aircraft could increase
significantly if the Export-Import Bank of the United States does not continue to guarantee our
debt.
We currently finance our aircraft through bank loans and, to a lesser extent, operating leases
and local bond offerings. In the past, we have obtained most of the financing for our Boeing
aircraft purchases from commercial financial institutions utilizing guarantees provided by the
Export-Import Bank of the United States. The Export-Import Bank provides guarantees to companies
that purchase goods from U.S. companies for export, enabling them to obtain financing at
substantially lower interest rates as compared to those that they could obtain without a guarantee.
The Export-Import Bank will not be able to provide similar guarantees in connection with financing
for our aircraft purchases from Embraer since those aircraft are not exports from the United
States. At December 31, 2006, we had $365.4 million of outstanding indebtedness that is owed to
financial institutions under financing arrangements guaranteed by the Export-Import Bank. We cannot
predict whether the Export-Import Banks credit support will continue to be available to us to fund
future purchases of Boeing aircraft. The Export-Import Bank may in the future limit its exposure to
Panama-based companies, to our airline or to airlines generally, or may encourage us to diversify
our credit sources by limiting future guarantees. Similarly, we cannot assure you that we will be
able to continue to raise financing from past sources, or from other sources, on terms comparable
to our existing financing. We may not be able to continue to obtain lease or debt financing on
terms attractive to us, or at all, and if we are unable to obtain financing, we may be forced to
modify our aircraft acquisition plans or to incur higher than anticipated financing costs which
could have an adverse impact on the execution of our growth strategy and business.
Our existing debt financing agreements and our aircraft operating leases contain restrictive
covenants that impose significant operating and financial restrictions on us.
Our aircraft financing loans and operating leases and the instruments governing our other
indebtedness contain a number of significant covenants and restrictions that limit our ability and
our subsidiaries ability to:
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create material liens on our assets; |
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take certain actions that may impair creditors rights to our aircraft; |
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sell assets or engage in certain mergers or consolidations; and |
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engage in other specified significant transactions. |
In addition, several of our aircraft financing agreements require us to maintain compliance
with specified financial ratios and other financial and operating tests. For example, our access to
certain borrowings under our aircraft financing arrangements is conditioned upon our maintenance of
minimum debt service coverage and capitalization ratios. See Item 5. Operating and Financial
Review and ProspectsLiquidity and Capital Resources. Complying with these covenants may cause us
to take actions that make it more difficult to execute successfully our business strategy, and we
may face competition from companies not subject to such restrictions. Moreover, our failure to
comply with these covenants could result in an event of default or refusal by our creditors to
extend certain of our loans.
10
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.
We perform impairment reviews when there are particular risks of impairment or other
indicators described in Statement of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived
Assets, in order to determine whether we need to reduce the carrying value of our aircraft and
related assets with a related charge to our earnings. In addition to the fact that the value of our
fleet declines as it ages, the excess capacity that currently exists 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. If such impairment
does occur, we would be required under U.S. GAAP to write down these assets to their estimated fair
market value 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.
We rely on information technology systems, and we may become more dependent on such systems in the
future.
We rely upon information technology systems to operate our business and increase our
efficiency. We are highly reliant on certain critical systems, such as the Sceptre and Visaer
systems for maintenance, the SHARES computer reservation and check-in system and the Airmax
revenue management system. Other systems are designed to decrease distribution costs through
Internet reservations and to maximize cargo distributions. These systems may not deliver their
anticipated benefits. Also, in transitioning to new systems we may lose data or experience
interruptions in service, which could harm our business.
Our quarterly results can 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. 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. 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
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 economic conditions, 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.
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. A short time prior to our
acquisition of AeroRepública, one of its aircraft slid off of a runway in an accident without
serious injuries to passengers; although, the aircraft was severely damaged and declared a total
loss by its insurers. 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 any
future accident. Our insurance premiums may also increase 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.
Our business would also be significantly harmed if the public avoids flying our aircraft due to an
adverse perception 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.
11
Fluctuations in foreign exchange rates could negatively affect our net income.
In 2006, approximately 71% of our expenses and 41% of our revenues were denominated in U.S.
dollars. The remainder of our expenses and revenues were denominated in the currencies of the
various countries to which we fly, with the largest non-dollar amount denominated in Colombian
Pesos. As a result of the acquisition of AeroRepública in April 2005, we have an increased exposure
to the Colombian Peso. 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. Copa currently does not hedge the risk of
fluctuation in foreign exchange rates. AeroRepública currently has hedges in place with respect to
some of its U.S. dollar / Colombian Peso exposure. We are exposed to exchange rate losses and gains
due to the fluctuation in the value of local currencies vis-à-vis the U.S. dollar during the period
of time (typically between 1 to 2 weeks) between the time we are paid in local currencies and the
time we are able to repatriate the revenues in U.S. dollars.
Our maintenance costs will increase as Copas fleet ages and as we perform maintenance on
AeroRepúblicas older fleet.
Because the average age of Copas aircraft was approximately 3.9 years as of May 31, 2007, the
fleet requires less maintenance now than it will in the future. We have incurred a low level of
maintenance expenses in recent years because most of the parts on Copas aircraft were still
covered under multi-year warranties. Our maintenance costs will increase significantly, both on an
absolute basis and as a percentage of our operating expenses as our fleet ages and these warranties
expire.
AeroRepúblicas fleet is considerably older than Copas fleet, having an average age of 13.1
years as of May 31, 2007. The MD-80 aircraft operated by AeroRepública will likely be less reliable
than Copas newer aircraft and can be expected to require significantly greater expenditures on
maintenance, which may lead to an overall increase in our consolidated 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 increase substantially the salaries or benefits of our employees,
it may have an adverse impact on our operations and cash flows.
Approximately 50% of the Companys employees belong to a labor union. There are currently five
unions covering our Copa employees based in Panama: the pilots union; the flight attendants
union; the mechanics union; the traffic attendants union; and a generalized union, which
represents baggage handlers, aircraft cleaners, counter agents, and other non-executive
administrative staff. Copa is scheduled to begin its next negotiations with the pilots union in
mid-2008. Copa entered into new collective bargaining agreements with its general union and its
flight attendants union on October 26, 2005 and April 3, 2006, respectively. After extensive
negotiations which did not lead to a mutually satisfactory resolution, Copa and the mechanics
union entered into a government-mandated arbitration, and a collective bargaining agreement was
agreed to on March 29, 2006 as a result of such arbitration proceedings. Previously, Copa has not
had to resort to arbitration to resolve negotiations with its unions. Collective bargaining
agreements in Panama are typically between three and four year terms. We also have union contracts
with our Copa employees in Brazil and Mexico. AeroRepública is a party to collective bargaining
agreements that cover all of AeroRepúblicas 126 pilots and co-pilots and all of AeroRepúblicas
178 flight attendants. A strike, work interruption or 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.
For example, in 2000 we experienced a brief localized pilots union work slow-down during contract
negotiations that was eventually resolved to our satisfaction. Any renegotiated collective
bargaining agreement could feature significant wage increases and a consequent increase in our
operating expenses. Employees outside of Panama that 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 and benefits 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.
12
Our investment in AeroRepública may not generate the benefits we sought when we purchased the
company.
In the second quarter of 2005, we purchased AeroRepública, a Colombian airline currently
providing point-to-point service among 12 cities in Colombia and to Panama City. AeroRepúblicas
results of operations are highly sensitive to competitive conditions in the Colombian domestic air
travel market. AeroRepúblicas rapid growth in recent years came during a period in which the
domestic market leader, Aerovías del Continente Americano S.A. (Avianca), experienced severe
financial difficulties that resulted in its bankruptcy and the exit from the market of several
other competitors. Avianca has emerged from bankruptcy with new management and an improved
financial condition. It is therefore likely that AeroRepública will face stronger competition in
the future than it has in recent years, and its prior results may not be indicative of its future
performance.
AeroRepúblicas results of operations are significantly less profitable than those of Copa.
AeroRepublica has experienced loses in recent periods and may have continuing net losses in future
fiscal periods. We may not be able to achieve the cost savings and other improvements we seek at
AeroRepública, and our failure to do so would harm our consolidated operating margins and results
of operations. Our investment in AeroRepública is subject to many risks and uncertainties that will
ultimately determine whether the acquisition will increase or reduce our overall profitability. See
Item 4B. Business OverviewAeroRepública.
The integration of AeroRepública into our business may require a significant amount of our
managements time and distract our management from our core operations.
Although we believe that our acquisition of AeroRepública represents an attractive
opportunity, substantial resources are needed to implement our plan to improve its profitability.
Implementation of our plan is subject to many uncertainties and may eventually require us to
dedicate a potentially significant portion of our limited management resources to this effort.
Inconsistencies in standards, internal controls, procedures, policies, business cultures and
compensation structures between Copa and AeroRepública, and the need to implement, coordinate and
harmonize various business-specific operating procedures and systems, as well as the financial,
accounting, information and other systems of Copa and AeroRepública, may result in substantial
costs and may divert a substantial amount of our managements resources from our core international
operations. Diversion of Copas resources could materially and negatively affect our financial
condition and results of operations.
Our revenues depend on our relationship with travel agents and tour operators.
In 2006, approximately 56% of our revenues were derived from tickets sold by travel agents or
tour operators. We cannot assure you 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:
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We rely on third parties to provide our customers and us with facilities and services that are
integral to our business.
We have entered into agreements with third-party contractors to provide certain facilities and
services required for our operations, such as heavy aircraft and engine maintenance; call center
services; and catering, ground handling, cargo and baggage handling, or below the wing aircraft
services. For example, at airports other than Tocumen International Airport, all of the below the
wing aircraft services for Copa flights are performed by contractors. AeroRepública contracts
ground handling equipment in eleven of the thirteen cities it serves and has contracted labor for
below the wing tasks in eleven of the thirteen cities. Overhaul maintenance and C-checks for
Copa are handled by contractors in the United States, Panama and Costa Rica, and some line
maintenance for Copa is handled at certain airports by contract workers rather than our employees.
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 harm our business and results of
operations. Further, our reliance on third parties to provide essential services on our behalf
gives us less control over the costs, efficiency, timeliness and quality of those services. A
contractors 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.
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We depend on 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
aircraft fleet. Copa currently operates the Boeing 737-700/800 Next Generation aircraft powered by
CFM 56-7B engines from CFM International and the Embraer 190, powered by General Electric CF 34-10
engines. AeroRepública currently operates the Embraer 190, powered by General Electric CF 34-10
engines and MD-80 fleet powered by Pratt & Whitney JT8D-219 engines. We currently intend to
continue to rely exclusively on these aircraft for the foreseeable future. If any of Boeing,
Embraer, CFM International or GE Engines were 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 assure you that any replacement aircraft would
have the same operating advantages as the Boeing 737-700/800 Next Generation or Embraer 190
aircraft 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 GE CF34-10. We may also incur substantial transition
costs, including costs associated with retraining our employees, replacing our manuals and adapting
our facilities. Our operations could also be harmed by the failure or inability of Boeing, Embraer,
CFM International or GE Engines to provide sufficient parts or related support services on a timely
basis.
Our business would be significantly harmed if a design defect or mechanical problem with any
of the types of aircraft or components that we operate were discovered that would ground any of our
aircraft while the defect or problem was corrected, 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 problems. Our business would also be significantly harmed
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 concerns or other problems, whether real or perceived, or in
the event of an accident involving those types of aircraft or components. Carriers that operate a
more diversified fleet are better positioned than we are to manage such events.
We are dependent on key personnel.
Our success depends to a significant extent upon the efforts and abilities of our senior
management team and key financial, commercial, operating and maintenance personnel. In particular,
we depend on the services of our senior management team, including Pedro Heilbron, our Chief
Executive Officer, Victor Vial, our Chief Financial Officer, Lawrence Ganse, our Chief Operating
Officer, Jorge Isaac García, our Vice-President, Commercial, and Daniel Gunn, our Vice-President,
Planning. Competition for highly qualified personnel is intense, and the loss of any executive
officer, senior manager or other key employee without adequate replacement or the inability to
attract new qualified personnel could have a material adverse effect upon our business, operating
results and financial condition.
Our operations in Cuba, which has been identified by the U.S. Department of State as a state
sponsor of terrorism, may adversely affect our reputation and the liquidity and value of our Class
A shares.
We currently operate approximately six daily departures to and from Cuba which provide
passenger, cargo and mail transportation service. For the year ended December 31, 2006, our
transported passengers to and from Cuba represented approximately 4.1% of our total passengers
carried. Our operating revenues from Cuban operations during the year ended December 31, 2006
represented approximately 7.0% of our total consolidated operating revenues for such year. Our
assets located in Cuba are insignificant.
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Cuba has been identified by the United States government as a state sponsor of terrorism, and
the U.S. Treasury Departments Office of Foreign Assets Control (OFAC) administers and enforces
economic and trade sanctions based on U.S. foreign policy against Cuba and certain other targeted
foreign countries. You should understand that our overall business reputation may suffer as a
result of our activities in Cuba, particularly if such activities grow in the future. Certain U.S.
states have recently enacted legislation regarding investments by pension funds and other
retirement systems in companies, such as ours, that have business activities with Cuba and other
countries that have been identified as terrorist-sponsoring states. Similar legislation may be
pending in other states. As a result, pension funds and other retirement systems may be subject to
new reporting requirements and other burdensome restrictions with respect to investments in
companies such as ours. Pension funds and similar institutions represent an important source of
demand for our shares, and if their willingness to invest in and hold our shares were to diminish
as a result of any such requirements or restrictions, or for any other reason, it would likely have
a material adverse effect on the liquidity and value of our Class A shares.
Risks Relating to the Airline Industry
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), on-time performance, frequent flyer programs and other
services. We compete with a number of other airlines that currently serve some of the routes on
which we operate, including Grupo TACA, American Airlines Inc., Mexicana and Avianca. Some of our
competitors, such as American Airlines, 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. 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. 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 often results 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 assure you 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 could not be maintained. Due to our smaller size
and 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.
We may face increasing competition from low-cost carriers offering discounted fares.
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 Gol Intelligent Airlines Inc., or Gol,
which continues to grow both in Brazil as well as in other South American countries, Spirit, which
has begun to serve Latin America from Fort Lauderdale, and a number of low-cost carriers which have
recently launched or are planning to start service in Mexico, among others, the low-cost carrier
business model appears to be gaining acceptance in the Latin American aviation industry. As a
result, we may face new and substantial competition from low-cost carriers in the future which
could result in significant and lasting downward pressure on the fares we charge for flights on our
routes.
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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 19.7% of our operating expenses in 2004, 29.9% in 2005 and 31.8% in 2006. Our fuel
prices increased very significantly in 2005 and are likely to increase further. As a result,
substantial increases in fuel costs may materially and adversely affect our operating results. Jet
fuel costs have been subject to wide fluctuations as a result of increases 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. Although we have
entered into hedging agreements for a portion of Copas fuel needs through the first six months of
2008 to hedge against fuel price volatility, these agreements provide only limited protection
against future increases in the price of fuel, and we may discontinue such agreements in the
future. Our current or future arrangements will not be adequate to protect us from further
increases in the price of fuel, and fuel prices are likely to increase above their current levels
and may do so in the near future. Indeed, numerous market experts and analysts have predicted that
fuel prices can be expected to increase further, perhaps significantly, from their already high
levels. If a future fuel supply shortage were to arise 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 Iraq, other
conflicts in the Middle East or otherwise, higher fuel prices or further reductions of scheduled
airline services could result. Significant increases in fuel costs would materially and negatively
affect our operating results. We cannot assure you that we would be able to offset any increases in
the price of fuel by increasing our fares.
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.
Airline bankruptcies could adversely affect the industry.
Since September 11, 2001, several air carriers have sought to reorganize under Chapter 11 of
the United States Bankruptcy Code, including some of our competitors such as Avianca and Delta.
Successful completion of such reorganizations could present us with competitors with significantly
lower operating costs derived from labor, supply and financing contracts renegotiated under the
protection of the Bankruptcy Code. For example, Avianca emerged from bankruptcy with a
significantly improved financial condition. In addition, air carriers involved in reorganizations
have historically undertaken substantial fare discounting in order to maintain cash flows and to
enhance continued customer loyalty. Such fare discounting could further lower yields for all
carriers, including us. Further, the market value of aircraft would likely be negatively impacted
if a number of air carriers seek to reduce capacity by eliminating aircraft from their fleets.
Our business may be adversely affected by downturns in the airline industry caused by terrorist
attacks, 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, epidemics, natural disasters and other events. Any of these events in the
markets in which we operate 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.
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For example, the terrorist attacks in the United States on September 11, 2001 had a severe
adverse impact on the airline industry. Airline traffic in the United States fell dramatically
after the attacks and decreased less severely throughout 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 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.
The combination of continued instability in the aftermath of the Iraq war and the publics
concerns about the possibility of an outbreak of a disease that can be spread by fellow commercial
air passengers (such as avian flu or Severe Acute Respiratory Syndrome) has continued to have a
negative impact on the publics willingness to travel by air. It is impossible to determine if and
when such adverse effects will abate and whether they will further decrease demand for air travel,
which could 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 insurance may result in both higher fares and a decreased demand for air travel
generally, which could materially and negatively affect our business, financial condition and
results of operations.
We may experience difficulty finding, training and retaining employees.
The airline industry is a labor-intensive business. We employ a large number of pilots,
flight attendants, maintenance technicians and other operating and administrative personnel. The
airline industry has, from time to time, experienced a shortage of qualified personnel. In
addition, as is common with most of our competitors, we may, from time to time, face considerable
turnover of our employees. Should the turnover of employees sharply increase, our training costs
will be significantly higher. We cannot assure you that we will be able to recruit, train and
retain the qualified employees that we need to continue our current operations or replace departing
employees. A failure to hire and retain qualified employees at a reasonable cost could materially
adversely affect our business, financial condition and results of operations.
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.
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Risks Relating to Panama and our Region
Our performance is heavily dependent on economic conditions in the countries in which we do
business.
Passenger demand is heavily cyclical and highly dependent on global and local economic growth,
economic expectations and foreign exchange rate variations. In the past, we have been negatively
impacted by poor economic performance in certain emerging market countries in which we operate. Any
of the following developments in the countries in which we operate could adversely affect our
business, financial condition and results of operations:
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Additionally, a significant portion of our revenues is derived from discretionary and leisure
travel which are especially sensitive to economic downturns. A worsening of economic conditions
could result in a reduction in passenger traffic, and leisure travel in particular, which in turn
would materially and negatively affect our financial condition and results of operations. Any
perceived weakening of economic conditions in this region could likewise negatively affect our
ability to obtain financing to meet our future capital needs in international capital markets.
We are highly dependent on conditions in Panama.
A substantial portion of our assets are located in the Republic of Panama, a significant
proportion of our customers are Panamanian, and substantially all of Copas 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. Panamas 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. Although the Panamanian government is democratically elected and
the Panamanian political climate is currently stable, we cannot assure you that current conditions
will continue. If the Panamanian economy experiences a recession or a reduction in its economic
growth rate, or if Panama experiences significant political disruptions, our business, financial
condition and results of operations could be materially and negatively affected.
We have paid low taxes in the past, and any increase in the taxes we or our shareholders pay in
Panama or the other countries where we do business would adversely affect the value of our Class A
shares.
We cannot assure you that we will not be subject to additional taxes in the future or that
current taxes will not be increased. Our provision for income taxes was $5.7 million, $9.6 million
and $12.3 in the years ended December 31, 2004, 2005 and 2006, which represented an effective
income tax rate of 7.7%, 10.4% and 8.4% for the respective periods. 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 six 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 tax or because of treaties or other arrangements those countries have with Panama. In the
remaining countries, we pay income tax at a rate ranging from 25% 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 several 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
revenue and expense 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. The low rate at which we pay income tax has been critical to
our profitability in recent years and if it were to increase, our financial performance and results
of operations would be materially and adversely affected.
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In the past, our expenses attributable to operations in Panama have consistently exceeded our
revenues attributable to operations in Panama. As a result, we have typically experienced losses
for Panamanian income tax purposes and were not subject to any income tax obligations. Beginning in
2004, we adopted an alternate method of calculating income tax in Panama. Under this alternative
method, allocation of revenues for operations in Panama is based on a general territorial
principle, not specifically defined in the tax regulations. If the Panamanian tax authorities do
not agree with our methods of allocating revenues, we may be subject to additional tax liability.
Airlines in Panama are currently not subject to any taxes relating specifically to the airline
industry other than the 4% tax collected from passengers on tickets sold in Panama for the benefit
of the Panamanian Tourism Bureau.
Any future change in the Panamanian tax law increasing the taxes payable by us could have
materially adverse effects on our business, financial condition and result of operations.
Political unrest and instability in Colombia may adversely affect our business and the market price
of our Class A shares.
We completed our acquisition of AeroRepública in the second quarter of 2005. Almost all of
AeroRepúblicas scheduled operations are conducted within Colombia. As a result, AeroRepúblicas
results of operations are highly sensitive to macroeconomic and political conditions prevailing in
Colombia, which have been highly volatile and unstable and may continue to be so for the
foreseeable future. In addition, terrorism and violence have plagued Colombia in the past.
Continuing guerrilla activity could cause political unrest and instability in Colombia, which could
adversely affect AeroRepúblicas financial condition and results of operations. The threat of
terrorist attacks could impose additional costs on us, including enhanced security to protect our
aircraft, facilities and personnel against possible attacks as well as increased insurance
premiums. As a result, we may encounter significant unanticipated problems at AeroRepública which
could have a material adverse effect on our consolidated financial condition and results of
operations.
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
which 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 directors 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 10B. Memorandum and Articles of AssociationDescription 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 assure you
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.
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Our controlling shareholder has the ability to direct our business and affairs, and its interests
could conflict with yours.
All of our Class B shares, representing approximately 29.2% of the economic interest in Copa
Holdings and all of the voting power of our capital stock, are owned by CIASA. 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
directors committee). Even after 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 your 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 you with an
opportunity to dispose of or realize a premium on your investment 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 delistings 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, subject to our shareholders agreement with Continental, 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 directors committee). See Item 10B. Memorandum and Articles of
AssociationDescription of Capital Stock. We cannot assure you that the Class A shares will ever
carry full voting rights.
Substantial future sales of our Class A shares by Continental or 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%
to approximately 27.3% and from 51% to approximately 29.2%, 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%. 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. The
market price of our Class A shares could drop significantly if Continental or 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 Continental, CIASA or other significant holders intend to sell
them. Continental has agreed, subject to certain exceptions, not to issue or transfer without the
consent of the underwriters, until June 29, 2007 any shares of our capital stock, any options or
warrants to purchase shares of our capital stock, or any securities convertible into, or
exchangeable for, shares of our capital stock. Continental has also agreed not to make any demand
for, or exercise any right with respect to, the registration of any Class A shares or any security
convertible into or exercisable or exchangeable for Class A shares until one year after the date of
the proposed offering. In addition, Continental has agreed, subject to the same exceptions, not to
issue or transfer without the consent of CIASA, until June 29, 2008 any shares of our capital
stock, any options or warrants to purchase shares of our capital stock or any securities
convertible into or exchangeable for shares of our capital stock. Nevertheless, these lock-up
agreements can be waived at any time and, in any event, after these lock-up agreements expire,
Continental will not be restricted from selling its shares in the public market.
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Holders of our common stock are not entitled to preemptive rights, and as a result you may
experience substantial dilution upon future issuances of stock by us.
Under Panamanian 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
will be free to issue new shares of stock to other parties without first offering them to our
existing 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 you may
experience substantial dilution of your interest in us.
You may not be able to sell our Class A shares at the price or at the time you desire 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 March 31, 2007, the
average daily trading volume for our Class A shares as reported by the NYSE was approximately
442,934 shares. We cannot predict whether an active liquid public trading market for our Class A
shares will be sustained. 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.
Our board of directors may, in its discretion, amend or repeal our dividend policy. You may not
receive the level of dividends provided for in the dividend policy or any dividends at all.
Our board of directors has adopted a dividend policy that provides for the payment of
dividends to shareholders equal to approximately 10% of our annual consolidated net income. Our
board of directors may, in its sole discretion and for any reason, amend or repeal 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 Financial Statements and Other Financial InformationDividend Policy.
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 adopted a dividend policy that provides for the payment of
dividends to shareholders equal to approximately 10% of our annual consolidated net income. The
aviation industry has cyclical characteristics, and many international airlines are currently
experiencing difficulties meeting their liquidity needs. Also, our business strategy contemplates
substantial 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 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 which ensure
that Panamanian nationals will continue to control us and that 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 the Panamanian Aviation Act, as amended and interpreted to date, 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 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 AssociationDescription of Capital Stock. These provisions
of our Articles of Incorporation may prevent change of control transactions that might otherwise
provide you with an opportunity to realize a premium on your investment in our Class A shares. They
also ensure that Panamanians will continue to control all the decisions of our company for the
foreseeable future.
21
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 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.
Developments in Latin American countries and other emerging market countries may cause the market
price of our Class A shares to decrease.
The market value of securities issued by Panamanian companies may be affected to varying
degrees by economic and market conditions in other countries, including other Latin American and
emerging market countries. Although economic conditions in emerging market countries outside Latin
America may differ significantly from economic conditions in Panama and Colombia or elsewhere in
Latin America, investors reactions to developments in these other countries may have an adverse
effect on the market value of securities of Panamanian issuers or issuers with significant
operations in Latin America. As a result of economic problems in various emerging market countries
in recent years (such as the Asian financial crisis of 1997, the Russian financial crisis of 1998
and the Argentine financial crisis in 2001), investors have viewed investments in emerging markets
with heightened caution. Crises in other emerging market countries may hamper investor enthusiasm
for securities of Panamanian issuers, including our shares, which could adversely affect the market
price of our Class A shares.
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 TACAs 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 was terminated by mutual consent. In May 1998, CIASA sold a 49% stake in
Copa Holdings to Continental and entered into an extensive alliance agreement with Continental
providing for code-sharing, joint marketing, technical ex-changes and other cooperative initiatives
between the airlines.
22
Since 1998, we have grown and modernized our fleet while improving customer service and
reliability. Copa has expanded its fleet from 13 aircraft to 30 aircraft. In 1999, we received our
first Boeing 737-700s, in 2003 we received our first Boeing 737-800s, and in 2005 we received our
first Embraer 190. In the first quarter of 2005, we completed our fleet renovation program and
discontinued use of our last Boeing 737-200s. During the same period, Copa has expanded from 24
destinations in 18 countries to 36 destinations in 21 countries. We plan to continue our expansion
in the future, and we plan to almost double our fleet over the next five years.
Copa Holdings was formed on May 6, 1998 as a corporation (sociedad anónima) duly incorporated
under the laws of Panama with an indefinite duration. Copa Holdings was organized to be a holding
company for Copa and related companies in connection with the acquisition by Continental of its 49%
interest in us at that time.
During the second quarter of 2005, we purchased AeroRepública, a Colombian air carrier that
was the second-largest domestic carrier in Colombia in terms of number of passengers carried in
2005, providing predominantly point-to-point service among 12 cities in Colombia and to Copas
Panama City hub.
Our principal executive offices are located at Boulevard Costa del Este, 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 +507 304-2677. The website of Copa is
www.copaair.com. AeroRepública maintains a website at www.aerorepublica.com.co. Information
contained on, or accessible through, these websites is not incorporated by reference herein and
shall not be considered part of this annual report. Our agent for service in the United States is
Puglisi & Associates, 850 Library Avenue, Suite 204, Newark, Delaware 19715, and its telephone
number is (302) 738-6680.
Capital Expenditures
During 2006, capital expenditures were $252.0 million, which consisted primarily of
expenditures related to our purchase of five Embraer 190 aircraft and two Boeing 737-700 aircraft,
as well as to expenditures related to advance payments on aircraft purchase contracts. During 2005,
capital expenditures were $112.8 million, which consisted primarily of expenditures related to our
purchase of two Embraer 190 aircraft, as well as to expenditures related advance payments on
aircraft purchase contracts. During 2004, capital expenditures were $82.1 million, which consisted
primarily of expenditures related to our purchase of three Boeing 737-Next Generation aircraft, as
well as to expenditures related to advance payments on aircraft purchase contracts.
B. Business Overview
We are a leading Latin American provider of airline passenger and cargo service through our
two principal operating subsidiaries, Copa and AeroRepública. Copa operates from its strategically
located position in the Republic of Panama, and AeroRepública provides service primarily within
Colombia complemented by international flights from various cities in Colombia to Panamas Tocumen
International Airport. We currently operate a fleet of 43 aircraft, 24 Boeing 737-Next Generation
aircraft, ten Embraer 190 aircraft and nine MD-80 aircraft. We currently have firm orders for ten
Boeing 737-Next Generation and 13 Embraer 190s, and purchase rights and options for up eight
additional Boeing 737-Next Generation and 22 additional Embraer 190s.
Copa currently offers approximately 108 daily scheduled flights among 36 destinations in 21
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 120 other destinations through codeshare
arrangements with Continental pursuant to which each airline places its name and flight designation
code on the others flights. Through its Panama City hub, Copa is able to consolidate passenger
traffic from multiple points to serve each destination effectively.
Copa operates a modern fleet of 24 Boeing 737-Next Generation aircraft and six Embraer 190
aircraft with an average age of approximately 3.9 years as of May 31, 2007. To meet its growing
capacity requirements, Copa has firm commitments to accept delivery of 19 additional aircraft
through 2012 and has purchase rights and options that, if exercised, would allow it to accept
delivery of up to 22 additional aircraft through 2013. Copas firm orders are for ten additional
Boeing 737-Next Generation aircraft and nine additional Embraer 190s, and its purchase rights and
options are for up to eight Boeing 737-Next Generation aircraft and up to 14 Embraer 190s.
23
Copa started its strategic alliance with Continental in 1998. Since then, it has conducted
joint marketing and code-sharing arrangements, and participated in the award-winning OnePass
frequent flyer loyalty program globally and on a co-branded basis in Latin America. We believe that
Copas co-branding and joint marketing activities with Continental have enhanced its brand in Latin
America, and that the relationship with Continental has afforded it cost-related benefits, such as
improving purchasing power in negotiations with aircraft vendors and insurers. Copas alliance and
related services agreements with Continental are in effect until 2015.
During the second quarter of 2005, we purchased AeroRepública, a Colombian air carrier that
was the second-largest domestic carrier in Colombia in terms of number of passengers carried in
2005, providing predominantly point-to-point service among 12 cities in Colombia and to Panama
City. AeroRepública currently operates a fleet of four Embraer 190 and nine MD-80s. As part of its
fleet modernization and expansion plan, AeroRepública has firm commitments to accept delivery of
four Embraer 190 aircraft through the end of 2007 and options to purchase up to eight additional
Embraer 190 aircraft through 2011.
Since January 2001, we have grown significantly and have established a track record of
consistent profitability, recording six consecutive years of increasing earnings. Our total
operating revenues have increased from $290.4 million in 2001 to $851.2 million in 2006, while our
net income has increased from $14.8 million to $134.0 million over the same period. Our operating
margins also improved from 8.6% in 2001 to 19.5% in 2006.
Our Strengths
We believe our primary business strengths that have allowed us to compete successfully in the
airline industry include the following:
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Our Hub of the Americas airport is strategically located. We believe that Copas 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 Airports sea-level
altitude allows our aircraft to operate without performance restrictions that they would be
subject to at higher-altitude airports. We believe that Copas hub in Panama allows us to
benefit from Panama Citys status as a center for financial services, shipping and commerce
and from Panamas stable, dollar-based economy, free-trade zone and growing tourism. |
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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 cost per
available seat mile, excluding costs for fuel and fleet impairment charges, was 7.59 cents
in 2002, 7.17 cents in 2003, 7.01 cents in 2004, 6.53 cents in 2005 and 6.81 cents in 2006.
See Item 5. Operating and Financial Review and Prospects for a reconciliation of our
operating cost per available seat mile when excluding costs for fuel and fleet impairment
charges to our operating cost per available seat mile. We believe that our cost per
available seat mile reflects our modern fleet, efficient operations and the competitive
cost of labor in Panama. |
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Copa operates a modern fleet. Copas fleet consists of modern Boeing 737-Next
Generation and Embraer 190 aircraft equipped with winglets and other modern cost-saving and
safety features. Over the next four years, Copa intends to enhance its modern fleet
through the addition of at least ten additional Boeing 737-Next Generation aircraft and
nine new Embraer 190s. We believe that Copas modern fleet contributes to its on-time
performance and high completion factor (percentage of scheduled flights not cancelled). We
expect our Boeing 737-700s, 737-800s and Embraer 190s to continue offering substantial
operational cost advantages in terms of fuel efficiency and maintenance costs.
AeroRepública is currently implementing a fleet modernization and expansion plan. Since
December 2006, AeroRepública has taken delivery of its first four Embraer 190 aircraft and
had firm commitments on four additional Embraer 190s and options for an additional eight
Embraer 190 aircraft. |
24
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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 three months ended March 31, 2007, Copa Airlines
statistic for on-time performance was 91.0%, completion factor was 99.8% and baggage
handling was 1.5 mishandled bags per 1000 passengers. Our goal is to apply our expertise in
these areas to improve AeroRepúblicas service statistics to comparable levels. Our focus
on customer service has helped to build passenger loyalty. We believe that our brand has
also been enhanced through our relationship with Continental, including our joint marketing
of the OnePass loyalty program in Latin America, the similarity of our aircraft livery and
aircraft interiors and our participation in Continentals Presidents Club lounge program. |
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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 at Copa has individual objectives based on corporate
goals that serve as a basis for measuring performance. When corporate operational and
financial targets are met, employees at Copa 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. Copas goal-oriented culture and incentive programs have contributed to a
motivated work force that is focused on satisfying customers, achieving efficiencies and
growing profitability. We seek to create a similar culture at AeroRepública. |
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:
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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. Copas Panama City hub allows us to consolidate
traffic and provide service to certain underserved markets, particularly in Central America
and the Caribbean, and we intend to focus on providing new service to regional destinations
that we believe best enhance the overall connectivity and profitability of our network.
With the addition of Embraer 190 aircraft and growth in overall capacity, we expect to have
more flexibility in scheduling our flights for our customers convenience. |
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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, including internet and call center sales, as
well as improving efficiency through technology and automated processes. |
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Introduce service with new Embraer 190 aircraft. We believe that the addition of the
Embraer 190 aircraft allows us to provide efficient service to new destinations in
underserved markets. In addition, we believe that the Embraer 190s enhance our ability to
efficiently match our capacity to demand, allowing us to improve service frequencies to
currently served markets and to redeploy our higher capacity aircraft to serve routes with
greater demand. |
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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 and to reward customer loyalty with the popular OnePass frequent flyer program,
upgrades and access to Presidents Club lounges. |
25
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Capitalize on opportunities at AeroRepública. We are seeking to enhance AeroRepúblicas
market share and profitability through a variety of initiatives, including modernizing its
fleet, integrating its route network with Copas and improving overall efficiency. We also
seek to increase customer loyalty by making further improvements at AeroRepública, such as
implementing the OnePass frequent flyer program and improving on-time performance, which
increased from 70.4% during the period from the date of our acquisition to December 31,
2005 to 80.3% during the year ended December 31, 2006. |
AeroRepública
On April 22, 2005, we acquired an initial 85.6% equity ownership interest in AeroRepública
which was followed by subsequent acquisitions increasing our total ownership interest in
AeroRepública to 99.8% as of May 31, 2007. The total purchase price we paid for our investment in
AeroRepública, including acquisition costs, was $23.4 million. According to the Colombian Civil
Aviation Administration, Unidad Especial Administrative de Aeronáutica Civil, AeroRepública is the
second largest passenger air carrier in Colombia, with a market share of approximately 24% of the
domestic traffic in Colombia in 2006 and approximately 1,236 employees.
Our goal is to achieve growth at AeroRepública through a combination of increasing Colombian
domestic passenger traffic volume and increasing market share, particularly in the business
travelers segment. We believe that Copas operational coordination with AeroRepública may create
additional passenger traffic in our existing route network by providing Colombian passengers more
convenient access to the international destinations served through our Panama hub.
Since our acquisition, AeroRepúblicas on-time performance has improved from 70.4% during the
period from the date of our acquisition to December 31, 2005 to 80.3% during the year ended
December 31, 2006. We have centralized certain administrative functions common to Copa and
AeroRepública. We have also implemented e-ticketing at AeroRepública, and since the first quarter
of 2006, AeroRepública participates in the OnePass frequent flyer loyalty program. Looking ahead,
we seek to continue aircraft interior renovations in our AeroRepública MD-80 aircraft and complete
our fleet renovation program.
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 7.6% of worldwide passengers flown in 2006, or 105 million passengers.
The Central American aviation market is dominated by international traffic. According to data
from IATA, international traffic represented more than 70.4% of passengers carried and 85.4% of
passenger miles flown in Central America in 2006. International passenger traffic is concentrated
between North America and Central America. This segment represented 85.9% of international
passengers flown in Central America in 2006, compared to 5.7% for passengers flown between Central
America and South America and 8.4% for passengers flown between Central American countries. Total
passengers flown on international flights in Central America grew by 5.8% in 2006, and load factors
on international flights to and from Central America were 73.0% on average.
Domestic traffic and traffic within Central American countries represented approximately 35.5%
of passengers carried and 17.2% of passenger miles flown in 2006. Average load factors on domestic
flights and flights within Central America were 63.9% in 2006. The chart below details passenger
traffic in 2006.
26
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2006 IATA Traffic Results |
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Passengers |
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Passenger |
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Carried |
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Miles |
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(Thousands) |
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Change (%) |
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(Millions) |
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Change (%) |
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ASMs (Million) |
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Change (%) |
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Load Factor |
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International Scheduled Service |
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North America Central America |
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22,453 |
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7.0 |
% |
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35,431 |
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8.8 |
% |
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48,176 |
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8.0 |
% |
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73.5 |
% |
North America South America |
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19,744 |
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4.8 |
% |
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39,505 |
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6.3 |
% |
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52,459 |
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2.4 |
% |
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75.3 |
% |
Central America South America |
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1,485 |
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-4.5 |
% |
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2,465 |
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-10.6 |
% |
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3,520 |
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-13.3 |
% |
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70.0 |
% |
Within Central America |
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2,192 |
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1.3 |
% |
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1,153 |
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5.8 |
% |
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1,818 |
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6.2 |
% |
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63.4 |
% |
Within South America |
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9,190 |
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10.5 |
% |
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8,869 |
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7.1 |
% |
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12,504 |
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5.1 |
% |
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70.9 |
% |
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Domestic Scheduled Service |
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Central America |
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11,000 |
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-4.2 |
% |
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6,700 |
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-4.2 |
% |
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10,472 |
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-0.3 |
% |
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64.0 |
% |
South America |
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38,826 |
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-3.4 |
% |
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19,983 |
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-3.3 |
% |
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28,246 |
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-5.3 |
% |
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70.7 |
% |
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. Major passenger traffic markets
in North, South and Central America experienced growth in their GDP in 2005 and 2006 on both an
absolute and per capita basis. In 2006, real GDP increased by 8.1% in Panama and by 6.8% in
Colombia, according to the International Monetary Funds estimates.
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GDP |
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GDP per Capita |
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2006 GDP |
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2006 GDP |
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per Capita |
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Current Prices |
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2005 Real GDP |
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Current Prices |
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(US$bn) |
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(% Growth) |
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(US$) |
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Brazil |
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1,067.7 |
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3.7 |
% |
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5,716.7 |
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Argentina |
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212.7 |
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8.5 |
% |
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5,458.0 |
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Chile |
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145.2 |
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4.0 |
% |
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8,864.3 |
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Mexico |
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840.0 |
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4.8 |
% |
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8,066.2 |
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Colombia |
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135.1 |
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6.8 |
% |
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2,887.9 |
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Panama |
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17.1 |
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8.1 |
% |
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5,210.6 |
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USA |
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13,244.6 |
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3.3 |
% |
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44,190.5 |
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Source: |
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International Monetary Fund, World Economic Outlook Database,
April 2007; real GDP growth calculated in local currency |
Panama has benefited from a stable economy with moderate inflation and steady GDP growth.
According to International Monetary Fund estimates, from 1998 to 2006 Panamas real GDP grew at an
average annual rate of 4.8% while inflation averaged 1.2% per year. The service sector represents
approximately 75% of total real GDP in Panama, a higher percentage of GDP than the service sector
represents in most other Latin American countries. The World Bank currently estimates Panamas
population to be approximately 3.2 million in 2005, with the majority of the population
concentrated in Panama City, where our hub at Tocumen International Airport 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 tourist 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 tourist. The market is served primarily by two local
airlines, Air Panama and Aeroperlas, which operate turbo prop aircraft generally with less than 50
seats. These airlines offer limited international service and operate in the domestic terminal 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 45.6 million in 2005 according to the World Bank, and has a land area
of approximately 440,000 square miles. Colombias GDP was approximately $135.1 billion in 2006, and
per capita income was approximately $2.9 thousand (current prices) according to the International
Monetary Fund. Colombias 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.
27
Route Network and Schedules
Copa
As of March 31, 2007, Copa provided regularly scheduled flights to 36 cities in North, Central
and South America and the Caribbean. Substantially all of our Copa flights operate through our hub
in Panama which allows us to transport passengers and cargo among a large number of destinations
with service which 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 a 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 point-to-point system.
We schedule a morning bank and an evening bank of flights, with flights timed to arrive at the
hub at approximately the same time and to depart a short time later.
The following table sets forth certain information with respect to our route system based on
our flight schedule in effect as of March 31, 2007:
Number of Passengers Carried
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
Region |
|
ASMs per Week |
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
North America |
|
|
26,221,945 |
|
|
|
395,497 |
|
|
|
487,852 |
|
|
|
591,486 |
|
Central America |
|
|
10,173,168 |
|
|
|
741,295 |
|
|
|
855,491 |
|
|
|
902,267 |
|
South America |
|
|
63,413,364 |
|
|
|
884,298 |
|
|
|
1,120,355 |
|
|
|
1,363,424 |
|
Caribbean |
|
|
13,893,987 |
|
|
|
290,372 |
|
|
|
339,975 |
|
|
|
484,551 |
|
As a part of our strategic relationship with Continental, Copa provides flights through
code-sharing arrangements to over 120 other destinations. Copa also provides flights through its
tactical and regional code-sharing arrangements with AeroRepública, Gol and Gulfstream
International Airlines.
In addition to increasing the frequencies to destinations we already serve, Copas 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 hub for intra-American traffic. We currently plan to introduce new destinations and to
increase frequencies to many of the destinations that Copa currently serves. The addition of the
Embraer 190 aircraft, together with the Boeing 737-Next Generation aircraft, allows us to improve
our service by increasing frequencies and service to new destinations with the right-sized
aircraft.
Our plans to introduce new destinations and increase frequencies depend on the allocation of
route rights, a process over which we do not have direct influence. Route rights are allocated
through negotiations between the government of Panama and the governments of countries to which we
intend to increase flights. If we are unable to obtain route rights, we will exercise the
flexibility within our route network to re-allocate capacity as appropriate.
We do not currently provide any domestic service in the Republic of Panama, choosing instead
to focus entirely on international traffic. The following table shows our revenue generated in each
of our major operating regions.
28
Revenue by Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
Region |
|
2004 |
|
|
2005 |
|
|
2006 |
|
North America(1) |
|
|
16.6 |
% |
|
|
17.2 |
% |
|
|
19.4 |
% |
South America |
|
|
37.2 |
% |
|
|
39.6 |
% |
|
|
41.5 |
% |
Central America(2) |
|
|
34.3 |
% |
|
|
31.6 |
% |
|
|
29.0 |
% |
Caribbean(3) |
|
|
11.9 |
% |
|
|
11.6 |
% |
|
|
10.1 |
% |
|
|
|
(1) |
|
The United States, Canada and Mexico. |
|
(2) |
|
Includes Panama. |
|
(3) |
|
Cuba, Dominican Republic, Haiti, Jamaica, Puerto Rico |
AeroRepública
AeroRepública currently provides scheduled service to the following cities in Colombia:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Passengers |
|
|
|
|
|
|
|
Departures |
|
|
Carried During the |
|
|
|
Date Service |
|
|
Scheduled |
|
|
Year Ended |
|
Destinations Served |
|
Commenced |
|
|
per Week(1) |
|
|
December 31, 2006 |
|
Barranquilla |
|
Jun 1995 |
|
|
28 |
|
|
|
103,502 |
|
Bogotá |
|
Jun 1993 |
|
|
247 |
|
|
|
1,017,558 |
|
Bucaramanga |
|
May 1995 |
|
|
20 |
|
|
|
85,156 |
|
Cali |
|
Jun 1993 |
|
|
67 |
|
|
|
250,073 |
|
Cartagena |
|
Jun 1993 |
|
|
39 |
|
|
|
210,211 |
|
Cúcuta |
|
Nov 2005 |
|
|
13 |
|
|
|
41,211 |
|
Leticia |
|
Nov 1993 |
|
|
7 |
|
|
|
37,112 |
|
Medellín |
|
Oct 1994 |
|
|
59 |
|
|
|
238,703 |
|
Montería |
|
Jul 1994 |
|
|
14 |
|
|
|
51,952 |
|
Panama |
|
Dec 2005 |
|
|
21 |
|
|
|
41,243 |
|
Pereira |
|
Mar 2003 |
|
|
13 |
|
|
|
52,811 |
|
San Andrés |
|
Jun 1993 |
|
|
37 |
|
|
|
204,504 |
|
Santa Marta |
|
Jun 1993 |
|
|
15 |
|
|
|
77,188 |
|
|
|
|
(1) |
|
As of March 31, 2007. |
In addition to the destinations described above, AeroRepública has periodically operated
charter flights to Margarita Island, Venezuela; Havana, Cuba; Punta Cana, Dominican Republic and
Montego Bay, Jamaica.
AeroRepública has been granted the authorization to fly regular services to Panama City from
Bogota, Cali, Medellín , Cartagena and San Andrés, Colombia. As a result, AeroRepública has added
daily flights to Panama City from Bogota, Medellin, Cali and Cartagena. In March 2007,
AeroRepública was granted authorization to operate a second frequency from Bogotá to Panama City,
in addition to routes from Panama City to Caracas (Venezuela), Panama to San José (Costa Rica),
Cali to Santa Marta and Cali to Barranquilla.
In addition to code-sharing with Copa, AeroRepública is leveraging Copas technology and
relationships to increase international traffic with other international carriers. Colombia has
open-skies agreements with the Andean Pact (Comunidad Andina) nations of Bolivia, Ecuador and Peru.
While Venezuela is no longer part of this agreement, it has preserved a bilateral open skies
agreement with Colombia.
Airline Operations
Passenger Operations
Passenger revenue accounted for approximately $364.6 million in 2004, $466.1 million in 2005
and $631.1 million, representing 91.2%, 92.2% and 93.3%, respectively, of Copas total revenues,
all earned from international routes. Leisure traffic, which makes up close to half of Copas total
traffic, tends to coincide with holidays, school vacations and cultural events and peaks in July
and August and again in December and January. Despite these seasonal variations, Copas overall
traffic pattern is relatively stable due to the constant influx of business travelers.
Approximately 48% of Copa 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.
29
AeroRepúblicas business is more concentrated on passenger service, which in 2006 accounted
for approximately 95.3% of its total revenues. The majority of AeroRepúblicas customers are
leisure travelers and travelers visiting friends and family, and traffic is heaviest during the
vacation months of July, August and the holiday season in December.
Cargo Operations
In addition to our passenger service, we make efficient use of extra capacity in the belly of
our aircraft by carrying cargo. Copas cargo business generated revenues of approximately $28.2
million in 2004, $31.0 million in 2005 and $33.2 million in 2006, representing 7.0%, 6.1% and 4.9%,
respectively, of Copas operating revenues. We sold our remaining dedicated Boeing 737-200
Freighter aircraft in April 2002. 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 2006, our cargo business consisted of approximately 87.1% in freight; 10.9% in
courier; and 1.9% in mail service. Of these sub-categories of service, courier traffic has shown
the most growth, and we expect that in the future it will constitute a larger share of our cargo
business.
Pricing and Revenue Management
Copa
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.
Copa charges slightly more for tickets 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 Copas business customers, who can count on competitive rates when
flying with Copa. 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 Copas forecasting
model to arrive at optimal seat allocations for its fares on specific routes. Copa uses a
combination of approaches, taking into account yields, flight load factors and effects on load
factors of continuing 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. In 2005, Copa replaced its
Revenue Management software with Airmax, a more sophisticated revenue management system designed by
Sabre.
AeroRepública
Various improvements have been made to AeroRepúblicas revenue management, pricing
capabilities and systems since its acquisition in 2005. We are currently implementing the Airmax
revenue management system in AeroRepública and expect completion to be in the third quarter of
2007.
Relationship with Continental Airlines
In recent years, many airlines have sought to form marketing alliances with other carriers.
Such alliances generally provide for code-sharing, frequent flyer reciprocity, coordinated
scheduling of flights of each alliance member to permit convenient connections and other joint
marketing activities. Such arrangements permit an airline to market flights operated by other
alliance members as its own. This increases the destinations, connections and frequencies offered
by the airline, which provide an opportunity for the airline to increase traffic on flight segments
which connect with those of the alliance partners.
30
In May 1998, Continental entered into an alliance agreement, as well as related services,
frequent flyer participation, trademark and other agreements with Copa. These agreements were
initially signed for a period of ten years. In November 2005, Continental and Copa amended and
restated these agreements through 2015.
Continentals continued ownership of our shares is not a condition to the ongoing
effectiveness of these agreements. We have started to involve AeroRepública in some aspects of
Copas alliance with Continental, beginning with AeroRepúblicas participation in the OnePass
frequent flyer loyalty program. Our alliance with Continental currently enjoys antitrust immunity
in the United States which allows us to coordinate pricing, scheduling and joint marketing
initiatives. In an effort to maximize the benefit from the relationship, Continental and Copa work
together on the following initiatives:
Product Positioning. Since the start of the alliance with Continental, Copa has introduced a
new image to align itself more tangibly with the U.S. carrier. Copas color scheme, logo, aircraft
interior and staff uniforms are similar to Continentals. With initiatives such as the introduction
of Copas business class product Clase Ejecutiva and a smoke-free cabin, the Copa in-flight
product was modeled on Continentals. Furthermore, Copas business class passengers enjoy access to
Continentals Presidents Club business lounges, and Copa jointly operates a co-branded Presidents
Club lounge with Continental at Tocumen International Airport.
Copa has also fully adopted Continentals OnePass frequent flyer program and rolled out a
co-branded joint product in much of Latin America which has enabled it to develop brand loyalty
among its travelers. The co-branding of the OnePass loyalty programs has helped it by leveraging
the brand recognition that Continental already enjoyed across Latin America and enabling the two
airlines to compete more effectively against regional competitors such as Grupo TACA and the
oneworld alliance represented by American Airlines and LAN Airlines.
Continental is currently sponsoring Copas proposed association with the Sky Team global
alliance network, which also includes Delta, Northwest, Aeromexico, Air France, Alitalia, KLM,
Korean Air, AeroFlot and CSA Czech and will soon include China Southern. In February 2007, Copa and
SkyTeam signed a formal adherence agreement. Copa is currently working with all Sky Team members
in order to join as an Associate Member by the second half of 2007.
Code-sharing. We currently place the Copa designator code on Continental operated flights
from Panama to Continentals two principal gateways in the U.S., Houston and Newark. In addition,
Continental flights carrying the Copa code operate to over 120 other Continental destinations.
Continentals flights from Guatemala City and Managua City to Houston, and from Guatemala City to
Newark also carry Copas code. In May 2001, the U.S. DOT awarded Copa antitrust immunity for our
code-share agreement, allowing Copa to deepen the alliance through, among other things,
coordinating schedules and pricing.
Aircraft Maintenance & Flight Safety. Continental and Copa have been cooperating closely to
integrate both airlines maintenance programs. Continental and Copas maintenance programs for the
Boeing 737-Next Generation are identical. We share Continentals Sceptre inventory management
software which allows Copa to pool spare parts with the larger airline and we rely on Continental
to provide engineering support for maintenance projects. We have also been able to take advantage
of Continentals purchasing power and negotiate more competitive rates for spare parts and
third-party maintenance work.
Sales & Revenue Management. The two airlines have implemented a co-branding of our city
ticket offices, or CTOs, throughout Latin America, and as a result both now enjoy greater access to
this important direct sales channel at little incremental cost. Joint corporate and travel agency
incentive programs are in place. We believe that we benefit from Continentals experience in
distribution costs and channel strategy studies, and management as a whole is gaining an intangible
benefit from the high level of cooperation with Continental.
Information Technology. By leveraging Continentals expertise and experience, we have
implemented several important information technology systems, such as the Sceptre system for
maintenance and the SHARES computer reservation system. In November 2000, we transitioned from
the SABRE reservation and airport check-in system to SHARES in an effort to maintain commonality
with Continental.
Fleet Modernization. All of Copas Boeing aircraft share nearly identical configurations to
Continentals configurations.
31
Sales, Marketing and Distribution
Copa
Sales and Distribution. Approximately 72% of sales during 2006 were through travel agents and
other airlines while approximately 28% were direct sales via our CTOs, call centers, airport
counters or website. Travel agents receive base commissions, not including back-end incentive
payments, ranging from 0% to 10% depending on the country. The weighted average rate for these
commissions during 2006 was 4.3%. In recent years, 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 obtain airline travel information and issue airline tickets through global
distribution systems, or 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 all major international GDSs, including SABRE, Amadeus, Galileo and
Worldspan. In return for access to these systems, Copa pays transaction fees that are generally
based on the number of reservations booked through each system.
Copa has a sales and marketing network consisting of 74 domestic and international ticket
offices, including airport and city ticket offices. Copa has 30 CTOs co-branded with Continental
and 24 CTOs co-branded with AeroRepublica. During the year ended December 31, 2006, approximately
16% and 5% of its sales were booked through its ticket counters and call center, respectively.
E-tickets, a key component of our sales efforts through the Internet and call centers, was
launched at the end of 2002 and, by December 2003, E-Ticketing for direct sales, non-revenue
passengers (company business, elite reward travel and promotional travel), as well as interline
tickets had been implemented with several airlines. E-tickets for travel agencies was implemented
in the second quarter of 2004.
The call center that operates Copas reservations and sales services handles calls from Panama
as well as most other countries Copa flies to. Such centralization has resulted in a significant
increase in telephone sales as it efficiently allowed for improvements in service levels such as
24-hour-a-day, 7-days-a-week service.
Copa encourages the use of direct Internet bookings by its customers because it is Copas most
efficient distribution channel. During mid 2002, Copa signed a contract with Amadeus to use their
booking engine to facilitate ticket purchases on www.copaair.com and launched the system on January
6, 2003. The cost of each booking via the website is roughly 25% the cost of a regular travel
agency booking. In 2004, Copa purchased a new booking engine in order to further reduce
distribution costs; 4% of its 2006 sales were made via the website. Copas goal is to channel more
of its total sales through the website.
Advertising and Promotional Activities. Our advertising and promotional activities include
the use of television, print, radio and billboards, as well as targeted public relation events in
the cities 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, as well as our Business Rewards loyalty program for our frequent
corporate travelers. We also promote package deals among the destinations where we fly through
combined efforts with selected hotels and travel agencies.
AeroRepública
AeroRepública successfully implemented the OnePass frequent flyer program in March 2006.
AeroRepública also implemented e-ticket in January 2006 and e-ticket interline with Copa and
Amadeus during the second quarter of 2006, complementing its call center, 26 city ticket offices
and 12 airport ticket offices. We believe e-ticketing will improve passenger convenience and reduce
commission costs. In February 2007, AeroRepublica was brought into Copas SHARES reservations and
check-in platform providing significant benefits in terms of costs and functionality.
32
Competition
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), on-time performance, frequent flyer programs and other
services. Copa competes with a number of other airlines that currently serve the routes on which we
operate, including Grupo TACA, American Airlines Inc., Mexicana and Avianca. Some of our
competitors, such as American Airlines, 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. 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 Gol in Brazil and several new low-cost
carriers which have recently launched service or planning to start service in Mexico, among others,
the low-cost carrier business model appears to be gaining acceptance in the Latin American
aviation industry, and we may face new and substantial competition from low-cost carriers in the
future.
The main source of competition to Copa, and our alliance with Continental, come from the
multinational Grupo TACA and American Airlines, the U.S. airline with the largest Latin American
route network. Colombian carrier Avianca is also a significant competitor.
Grupo TACAs strategy has been to develop three hubs at San Jose, Costa Rica, San Salvador, El
Salvador and Lima, Peru, which serve more than 35 cities in 20 countries and compete with Copas
hub at Tocumen International Airport. Grupo TACA primarily operates a fleet of Airbus A320 family
aircraft and they have announced their intent to take delivery of a significant number of new
Airbus aircraft between now and December 2009. We have routes to several of the Central American
and Caribbean countries where Grupo TACA has established service, including Managua, Nicaragua, San
Jose, Costa Rica, Guatemala and the Dominican Republic.
American Airlines also offers significant competition. American attracts strong brand
recognition throughout the Americas and is able to attract brand loyalty through its AAdvantage
frequent flyer program. American Airlines competes through its hubs at Miami and San Juan, Puerto
Rico. American Airlines was a founding member of the oneworld global marketing alliance.
LAN Airlines is another oneworld member that offers service to more than 50 destinations,
primarily in Latin America. LAN Airlines is comprised of LAN Chile, LAN Peru, LAN Ecuador, LAN
Argentina, LAN Cargo and LAN Express. While we do not compete directly with LAN Airlines on many of
our current routes, LAN Airlines has grown rapidly over the past several years and may become a
significant competitor in the future.
Copa has significant presence in destinations where the local airline is less viable and
competitive, such as the Dominican Republic (Santo Domingo and Santiago de los Caballeros), Ecuador
(Quito and Guayaquil) and Venezuela (Caracas and Maracaibo).
Copa has also established itself as a significant player on traffic to and from Colombia, with
strong market share on routes to and from Barranquilla, Bogotá, Cali, Cartagena, Medellin and San
Andres. AeroRepública competes more directly with Avianca and other Colombian carriers in the
Colombian domestic market. Avianca emerged from U.S. bankruptcy protection, after being purchased
by Brazils Synergy Group. The new owners of Avianca have announced their intention to increase
Aviancas market share and transform Bogotá into a major international aviation hub which, if
successful, will compete directly with our hub at Tocumen International Airport.
Avianca recently announced a fleet renovation project which includes the Boeing 787 and either
Boeing or Airbus narrow body aircraft.
33
We cannot predict whether Avianca will become more competitive under its new management, or if
their increased operations from Bogotá will prove successful. The other Colombian carriers against
which AeroRepública competes, Aires, Aerolineas de Antioquia and the state-owned airline Satena,
collectively accounted for approximately 19% of the domestic Colombian market in 2006. Airlines
that seek to compete in the Colombian air transportation market face substantial barriers to entry,
as the Colombian government requires an airline to operate at least five aircraft and comply with
extensive filing and certification requirements before it becomes eligible to receive domestic
route rights on certain Colombian routes between major cities. In addition, the number of air
carriers offering service on any route is currently regulated by the Colombian Aviation Authority.
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
Copa
As of May 31, 2007, Copa operated a fleet consisting of 30 aircraft, including 20 Boeing
737-700 Next Generation aircraft, four Boeing 737-800 Next Generation aircraft and six Embraer 190
aircraft. Copa currently has firm orders to purchase ten additional Boeing 737-Next Generation
aircraft and nine Embraer 190s. Copa also has options for an additional 14 Embraer 190s and
purchase rights and options for an additional eight Boeing 737-Next Generation aircraft.
The current composition of the Copa fleet as of May 31, 2007 is more fully described below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of Lease |
|
|
Average |
|
|
|
|
|
|
Number of Aircraft |
|
|
Remaining |
|
|
Age |
|
|
Seating |
|
|
|
Total |
|
|
Owned |
|
|
Leased |
|
|
(Years) |
|
|
(Years) |
|
|
Capacity |
|
Boeing 737-700 |
|
|
20 |
|
|
|
14 |
|
|
|
6 |
|
|
|
3.8 |
|
|
|
4.9 |
|
|
|
124 |
|
Boeing 737-800 |
|
|
4 |
|
|
|
3 |
|
|
|
1 |
|
|
|
5.5 |
|
|
|
3.0 |
|
|
|
155 |
|
Embraer 190 |
|
|
6 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
1.0 |
|
|
|
94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
30 |
|
|
|
23 |
|
|
|
7 |
|
|
|
4.0 |
|
|
|
3.9 |
|
|
|
|
|
We expect our Copa fleet to continue to center on the Boeing 737-700 model, although we expect
to continue to add Boeing 737-800s to our fleet to cover high-demand routes and Embraer 190s to
serve underserved markets as well as fly additional frequencies where we believe excess demand
exists. The table below describes the expected size of our Copa 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 |
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
737-700 |
|
|
21 |
|
|
|
22 |
|
|
|
22 |
|
|
|
22 |
|
|
|
22 |
|
737-800(1) |
|
|
7 |
|
|
|
8 |
|
|
|
8 |
|
|
|
10 |
|
|
|
12 |
|
Embraer 190 |
|
|
15 |
|
|
|
15 |
|
|
|
15 |
|
|
|
15 |
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fleet |
|
|
43 |
|
|
|
45 |
|
|
|
45 |
|
|
|
47 |
|
|
|
49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
We have the flexibility to choose between the Boeing 737-700 or
the Boeing 737-800 aircraft for most of the 737-700 aircraft
deliveries scheduled after 2006. |
34
The Boeing 737-700 and Boeing 737-800 aircraft currently in our Copa 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. The introduction of any new type of aircraft to our fleet
is only done if, after careful consideration, we determine that such a step will improve our
profitability. In line with this philosophy, after conducting a careful cost-benefit analysis, we
decided to add the Embraer 190 aircraft because its combination of smaller size and highly
efficient operating characteristics made it the ideal aircraft to serve new mid-sized markets and
to increase frequency to existing destinations. The Embraer 190 incorporates advanced design
features, such as integrated avionics, fly-by-wire flight controls, and efficient CF34-10 engines
made by General Electric. The Embraer E190 has a range of approximately 2,000 nautical miles
enabling it to fly to a wide range of destinations from short-haul to certain medium-haul
destinations. We have configured Copas Embraer aircraft with a business class section similar to
the business class section we have on our Boeing 737-Next Generation aircraft.
Through several special purpose vehicles, we currently have beneficial ownership of 23 of our
aircraft, including six Embraer 190s. In addition, we lease six of our Boeing 737-700s and one of
our Boeing 737-800s under long-term operating lease agreements that have an average remaining term
of 48 months. 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 are not required to make termination
payments at the end of the lease. Currently, we do not have purchase options in any of our lease
agreements. Under our operating lease agreements, we are required in some cases to maintain
maintenance reserve accounts and in other cases to make supplemental rent payments at the end of
the lease that are calculated with reference to the aircrafts 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.
To better serve the growing number of business travelers, we introduced business class (Clase
Ejecutiva) in November of 1998. Our business class service features twelve luxury seats in the
Boeing 737-700s with a 38-inch pitch, upgraded meal service, special check-in desks, bonus mileage
for full-fare business class passengers and access to VIP lounges. Our Boeing 737-800s are
currently configured with 14 business class seats. In 2008, we plan to reconfigure our Boeing
737-800 aircraft by adding two additional business class seats and three additional economy seats,
increasing the total number of seats from 155 to 160. Our Embraer 190s have 10 business class
seats in a three abreast configuration and 38-inch pitch.
Each of our Boeing 737-Next Generation aircraft is powered by two CFM International Model CFM
56-7B engines. Each of our Embraer 190 aircraft is powered by two CF34-10 engines made by General
Electric. We currently have four spare engines for service replacements and for periodic rotation
through our fleet.
AeroRepública
AeroRepúblicas operates a fleet of three leased MD-81s, four leased MD-82s, two leased MD-83s
and four owned Embraer 190 with an average age in excess of 13.1 years as of May 31, 2007. All of
AeroRepúblicas fleet is configured as a single class, with the MD fleet having an average capacity
of 157 seats and the Embraer 190 fleet having a capacity of 106 seats. AeroRepública has firm
commitments to accept delivery of four Embraer 190 aircraft through the end of 2007 and options to
purchase up to eight additional Embraer 190 aircraft through 2011.
35
Maintenance
Copa
The maintenance performed on our Copa 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, daily and overnight checks, A-checks and any diagnostics and
routine repairs. Most of Copas line maintenance is performed by Copas own highly experienced
technicians at our base in Panama. Some line maintenance is also carried out at the foreign
stations by Copa 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 as defined by the aircraft
manufacturer. These checks are based on the number of hours or calendar months flown. We have
contract with certified outside maintenance providers, principally with Panama Aerospace
Engineering, a subsidiary of Singapore Technologies Aerospace, which is certified as an authorized
repair station by the FAA and the AAC, for heavy aircraft maintenance services. Copa also has an
exclusive long-term contract with GE Engines whereby they will perform maintenance on all of its
CFM-56 engines. There were two heavy maintenance events in 2006. When possible, Copa attempts to
schedule heavy maintenance during its lower-demand season in April, May, October and November.
Copa employs over 200 maintenance professionals, including engineers, supervisors, technicians
and mechanics, who perform maintenance in accordance with maintenance programs that are established
by the manufacturer 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 22 of our mechanics are also
licensed by the FAA. Copas safety and maintenance procedures are reviewed and periodically audited
by the aircraft manufacturer, the AAC, the FAA, IATA and, to a lesser extent, every foreign country
to which its flies. Copas maintenance facility at Tocumen International Airport has been certified
by the FAA as an approved repair station, and each year the FAA inspects its facilities to renew
the certification. Copas 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 Copas
mechanics are trained to perform line maintenance on both the Boeing 737-Next Generation and
Embraer 190s aircraft.
AeroRepública
All line maintenance for AeroRepúblicas MD-80s and Embraer 190 is performed by
AeroRepúblicas in-house maintenance staff, while C-checks on the MD-80s are performed by FAA
certified third-party aviation maintenance companies. All of AeroRepúblicas maintenance and safety
procedures are performed according to Boeing standards (certified by the FAA), and certified by the
Aeronautica Civil of Colombia and BVQi, the institute that issues ISO quality certificates. All of
AeroRepúblicas maintenance personnel are licensed by the Aeronautica Civil of Colombia.
Safety
We place a high priority on providing safe and reliable air service. Copa has uniform safety
standards and safety-related training programs that cover all of its operations. In particular,
Copa periodically evaluates the skills, experience and safety records of its pilots in order to
maintain strict control over the quality of its pilot crews. All of Copas pilots participate in
training programs, some of which are sponsored by aircraft manufacturers, and all are required to
undergo recurrent training two times per year. We have a full time program of Flight Data Analysis
(FOQA) wherein the flight data from every Copa flight is analyzed for safety or technical
anomalies. During 2006, Copa completed a Line Operations Safety Audit under contract with
University of Texas researchers. Copa also recently successfully completed our second IATA
Operational Safety Audit (IOSA).
In the last ten years, Copa has had no accidents or incidents involving major injury to
passengers, crew or aircraft. Just prior to our acquisition of AeroRepública, one of its planes
slid off of a runway in an accident without serious injuries to passengers; however, the aircraft
was severely damaged and declared a total loss by its insurers.
36
The FAA periodically audits the aviation regulatory authorities of other countries. As a
result of their investigation, each country is given an International Aviation Safety Assessment,
or IASA, rating. In May 2001, Panamas IASA rating was downgraded from Category 1 to Category 2 due
to alleged deficiencies in the Panamanian governments air safety standards and AACs capability to
provide regulatory oversight. As a result of this downgrade, we were prevented from adding flights
to new destinations in the United States and from certifying new aircraft for flights to the United
States, and Continental was prevented from placing its code on our flights. On April 14, 2004, the
FAA upgraded the IASA rating for Panama from Category 2 to Category 1, which indicates a strong
level of confidence in the safety regulation of the AAC. The return to Category 1 allowed
Continental to reestablish placing its code on our flights and allowed us to add new U.S.
destinations to our network.
In order to recover Category 1 status, the Panamanian government passed a new law regulating
aviation; and the AAC issued new regulations compliant with standards of the International Civil
Aviation Organization, or ICAO. FAA inspectors and ICAO advisors were hired to help with training;
and the government approved a budget of $14 million for the AAC to comply with various regulations
of ICAO.
Airport Facilities
We believe that our hub at Panama Citys Tocumen International Airport (PTY) is an excellent
base of operations for the following reasons:
|
|
|
Panamas consistently temperate climate is ideal for airport operations. For
example, in recent years Tocumen was closed and unavailable for flight operations
for a total of less than two hours per year on average |
|
|
|
Tocumen is the only airport in Central America with two operational runways.
Also unlike some other regional airports, we are currently not constrained by a
lack of available gates/parking positions at Tocumen, and there is ample room to
expand Tocumen. |
|
|
|
From Panamas central location, our Boeing 737-Next Generation can efficiently
serve long-haul destinations in South American cities such as Santiago, Chile;
Montevideo, Uruguay; Buenos Aires, Argentina; Rio de Janeiro, Brazil; and São
Paulo, Brazil as well as short-haul destinations in Central and South America. |
|
|
|
Travelers can generally make connections easily through Tocumen because of its
manageable size and Panamas policies accommodating in-transit passengers. |
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. A
Copa executive, as a representative of the Panamanian Airline Association, holds a seat on the
board of this airport operator. The law that created this entity also provided for a significant
portion of revenues generated at Tocumen to be used for airport expansion and improvements. We do
not have any formal, written agreements with the airport management that govern access fees,
landing rights or allocation of terminal gates. We rely upon our good working relationship with the
airports management and the Panamanian government to ensure that we have access to the airport
resources we need at prices that are reasonable.
We worked closely with the airports management and consulted with the IATA infrastructure
group to provide plans and guidance for Phase I of an airport expansion that provided eight new
gate positions with jet bridges, six new remote parking positions, expanded retail areas and
improved the baggage-handling facilities. The government authorized $70 million to cover the costs
of this expansion. Work on Phase I was completed in the third quarter of 2006. A plan phase II of
the expansion of the terminal will add 10 to 12 additional jet bridge gates. Copa is actively
participating in the design definition of this expansion, and the project is scheduled for
completion in the second half of 2009.
We provide all of our own ground services and handling of passengers and cargo at Tocumen
International Airport. In addition, we provide services to several of the principal foreign
airlines that operate at Tocumen. At most
of the foreign airports where we operate, foreign airport services companies provide all of
our support services other than sales, counter services and some minor maintenance.
37
We lease a variety of facilities at Tocumen, including our maintenance hangar and our
operations facilities in the airport terminal. From our System Operations Control Center located
within our corporate headquarters building, we dispatch, track and direct our aircraft throughout
the hemisphere and respond to operational contingencies as necessary. We generally cooperate with
the airport authority to modify the lease terms as necessary to account for capital improvements
and expansion plans. Currently, our elite passengers have access to a Presidents Club at the
airport, which is jointly operated with Continental and was opened in March 2000. The Presidents
Club will be expanded to approximately one and half times its current size, utilizing space made
available during the recent expansion of the terminal.
Bogotas El Dorado Airport is AeroRepúblicas main operating terminal. It is also Colombias
main international and domestic terminal, with two operational runways. El Dorado has recently
completed a privatization process in which improvements are expected to the passenger and cargo
terminals. AeroRepública currently leases a variety of facilities at El Dorado, including counters,
maintenance and administrative and dispatch areas.
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.
Concurrent with the worlds economic recovery, demand for oil has surged, especially in
fast-growing China. This increase in demand coupled with limited refinery capacity and instability
in oil-exporting countries has led to a rapid increase in prices. When combined with the relative
weakness of the U.S. dollar, the currency in which oil is traded, these factors have caused a
record high price for oil in nominal dollar terms.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft Fuel Data |
|
|
|
2002 |
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
|
2006 |
|
Copa |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average price per gallon of jet
fuel into plane (excluding hedge)
(in U.S. dollars) |
|
$ |
0.86 |
|
|
$ |
1.01 |
|
|
$ |
1.32 |
|
|
$ |
1.87 |
|
|
$ |
2.10 |
|
Gallons consumed (in thousands) |
|
|
44,788 |
|
|
|
48,444 |
|
|
|
50,833 |
|
|
|
58,924 |
|
|
|
70,770 |
|
Available seat miles (in millions) |
|
|
2,847 |
|
|
|
3,226 |
|
|
|
3,639 |
|
|
|
4,409 |
|
|
|
5,239 |
|
Gallons per ASM (in hundredths) |
|
|
1.57 |
|
|
|
1.50 |
|
|
|
1.40 |
|
|
|
1.34 |
|
|
|
1.35 |
|
AeroRepública(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average price per gallon of jet
fuel into plane (excluding hedge)
(in U.S. dollars) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2.12 |
|
|
$ |
2.24 |
|
Gallons consumed (in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,887 |
|
|
|
28,321 |
|
Available seat miles (in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
950 |
|
|
|
1,627 |
|
Gallons per ASM (in hundredths) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.88 |
|
|
|
1.74 |
|
|
|
|
(1) |
|
Since April 22, 2005. |
Since 2002, aircraft fuel prices have been rising. During 2006, Copa paid an average
price, including plane charges, of $2.10 per gallon of jet fuel, a 12.2% increase from 2005s rate
of $1.87 per gallon.
We believe that fuel prices are likely to increase in the future and may do so in the near
future. In 2006, we hedged 19% of our requirements through the use of jet fuel swap contracts. We
have hedged approximately 27% of Copas anticipated fuel needs for 2007 and approximately 6% of
Copas projected fuel consumption from January 1, 2008 to June 30, 2008. Although AeroRepública
does not currently have a fuel price hedging policy, we may implement one in the future. We will
continue to evaluate various hedging strategies, and we may enter into additional hedging
agreements in the future. Any prolonged increase in the price of jet fuel will likely materially
and negatively affect our business, financial condition and results of operation.
AeroRepública is supplied by two fuel providers. The price for fuel is fixed by the Colombian
government on a monthly basis based on international fuel indices.
38
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 leasing and financing agreements. We believe our
insurance coverage is consistent with airline industry standards and appropriate to protect us from
material loss 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. We have
negotiated lower premiums on our Copa insurance policies by leveraging the purchasing power of our
alliance partner, Continental. Our Copa operations are insured under Continentals joint insurance
policy with Northwest Airlines. We maintain separate insurance policies for our AeroRepública
operations.
Environmental
Our operations are covered by various local, national, and international environmental
regulations. These regulations cover, among other things, emissions into the atmosphere, disposal
of solid waste and aqueous effluents, aircraft noise and other activities that result from the
operation of aircraft. Our aircraft comply with all environmental standards applicable to their
operations as described in this annual report. We have hired a consulting firm to conduct an
environmental audit of our hanger and support facilities at the Tocumen International Airport to
determine what, if any, measures we need to implement in order to satisfy the Panamanian effluent
standards and the General Environmental Law at those facilities. A base line study of our effluents
has been completed. We plan to implement all measures required for compliance once the audit is
finalized, notwithstanding the lapse of the grace period set forth in the regulations.
Additionally, the Panamanian Civil Aviation Code (RAC) contains certain environmental provisions
that are similar to those set forth in the General Environmental Law regarding effluents, although
such provisions do not contain compliance grace periods. In the event the AAC determines that our
facilities do not currently meet the RAC standards, we could be subject to a fine. The measures
that will be implemented pursuant to the environmental audit that is underway will also satisfy the
requirements of the RAC. We have installed a water treatment plant to serve part of our facilities
and seek to finalize the audit and have any other remediation measures that may be required in
operation by the end of 2007. While we do not believe that compliance with these regulations will
expose us to material expenditures, compliance with these or other environmental regulations,
whether new or existing, that may be applicable to us in the future could increase our costs. In
addition, failure to comply with these regulations could adversely affect us in a variety of ways,
including adverse effects on our reputation.
Regulation
Panama
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 the 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 be registered with the
Panamanian National Aviation Registrar kept by the AAC, and that the Panamanian National Aviation
authority certify the airworthiness of each aircraft in Copas fleet. This requirement does not
apply to AeroRepúblicas aircraft which are registered in Colombia. Copas aircraft must be
re-certified every year.
The government of the Republic of Panama does not have an equity interest in our company.
Bilateral agreements signed by the government of Panama have protected our operational position and
route network, allowing us to have in Panama a significant hub to transport intraregion traffic
within and between the Americas and the Caribbean. All international fares are filed and
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.
39
We cooperated with the government of Panama to restore the countrys Category 1 status after
it was downgraded to Category 2 in early May 2001 by the FAA, a status that is important both to
the operations of Copa
as an airline and the general perception of Panama as a country, particularly in view of the
fact that a major initiative is in place to boost tourism in Panama. The countrys Category 1
status was restored April 2004. In meeting the requirements for Category 1 status, the Panamanian
government approved $14 million for the AAC to comply with various regulations of the ICAO, and AAC
personnel have received training on Embraer airworthiness certification so they will continue to be
qualified to evaluate our pilots and aircraft.
Our status as a private carrier means that we are not required under Panamanian law to serve
any particular route and are free to withdraw service from any of the routes we currently serve as
we see fit, 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.
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 recent 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.
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
law described above that requires Panamanian control of our business.
During 1997, several Central American countries (including Panama) and the United States
signed an open-skies agreement allowing carriers from each country to initiate service in any
other. There is no bilateral agreement between Panama and either El Salvador or Costa Rica, the
nations in which Grupo TACA has its principal hubs. Panama only has reciprocity agreements with
these countries at present.
Antitrust regulation, enforcement
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 though 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 for
violations to $1,000,000 for per se violations and $250,000 for relative violations of antitrust
law.
Noise regulations effects
Panama has adopted Annex 16 of the ICAO regulations and the noise abatement provisions of
ICAO, through Book XIV of the Panamanian Civil Aviation Regulations (RAC). Thus, articles 227-229
of Book XIV of the RAC require aircraft registered in Panama to comply with at least Stage 2 noise
requirements, and all aircraft registered for the first time with the Panamanian Civil Aviation
Authority after January 1, 2003, to comply with Stage 3 noise restrictions. Currently, all the
airplanes we operate or have on order meet the most stringent noise requirements established by
both ICAO and the AAC.
40
Colombia
The Colombian aviation market is heavily regulated by the Colombian Civil Aviation
Administration, Unidad Especial Administrativa de Aeronáutica Civil, or Aeronautica Civil. Colombia
is a Category 1 country under the FAAs IASA program. 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 their airworthiness
certificates in force. In addition, Aeronautica Civil sets minimum and maximum fares for each route
and a maximum number of competing airlines for each route based on the size of the city pairs
served. Airlines in Colombia must also add a surcharge for fuel to their ticket prices. In
addition, since November 2006, airlines have to charge an administrative fee (Tarifa
administrativa) for each ticket sold through airlines direct channels. Passengers in Colombia are
also entitled by law to compensation in cases of delays in excess of four hours, over-bookings and
cancellations. Currently, the San Andres, Bogotá, Cali, Cartagena and Barranquilla airports are
under private management arrangements. Furthermore, the government has stated its intention of
privatizing other airports in order to finance necessary expansion projects and increase the
efficiency of operations, which may lead to increases in landing fees and facility rentals at those
airports.
AeroRepública may not have as much productive cooperation with the Colombian government over
the negotiation of route rights with other countries as we may enjoy in Panama. Colombia has
open-skies agreements with Aruba, Venezuela and the Andean Pact (Comunidad Andina) nations of
Bolivia, Ecuador and Peru. AeroRepública has been recently granted the use of 28 of the 56
available route rights for service by Colombian carriers between Colombia and Panama and, as a
result, began scheduled service between the two countries in late 2005. There are currently 12
route rights available to the United States from Colombia.
U.S.
Operations to the United States by non-U.S. airlines, such as Copa, 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 the federal
antitrust laws.
Authorizations and Licenses. The DOT has jurisdiction over international aviation with
respect to the United States and related route authorities, subject to review by the President of
the United States. The DOT also has jurisdiction with respect to unfair practices and methods of
competition by airlines and related consumer protection matters. We are 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). We hold 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. This exemption authority 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.
Our operations to the United States are also subject to regulation by the FAA with respect to
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 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 suspend temporarily or revoke
permanently 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.
41
Security. On November 19, 2001, the U.S. Congress passed, and the President signed into law,
the Aviation and Transportation Security Act, also referred to as the Aviation Security Act. This
law federalized substantially all aspects of civil aviation security and created the TSA to which
the security responsibilities previously held by the FAA were transitioned. The TSA is an agency of
the Department of Homeland Security. The Aviation Security Act requires, among other things, the
implementation of certain security measures by airlines and airports, such as the requirement that
all passenger bags be screened for explosives. Funding for airline and airport security required
under the Aviation Security Act is provided in part by a $2.50 to $4.50 per segment passenger
security fee for flights departing from the U.S., subject to a $10 per roundtrip cap; however,
airlines are responsible for costs incurred to meet security requirements beyond those provided by
the TSA. There is no assurance this fee will not be raised in the future as the TSAs costs exceed
the revenue it receives from these fees. The current administration has proposed to raise this fee
to $5.50, which is subject to approval by the U.S. Congress. 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.
Noise Restrictions. Under the Airport Noise and Capacity Act of 1990, or ANCA, 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.
FAA regulations also require compliance with the Traffic Alert and Collision Avoidance System,
approved airborne windshear warning system and aging aircraft regulations. Our fleet meets these
requirements.
Proposed Laws and Regulations. Additional 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 which 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.
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* |
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Includes ownership by us held through wholly-owned holding companies organized in the British
Virgin Islands. |
42
Copa 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. AeroRepública
S.A. is our operating subsidiary that is primarily engaged in domestic air travel within Colombia.
Oval Financial Leasing, Ltd. controls the special purpose vehicles that have a beneficial interest
in the majority of our aircraft. OPAC, S.A. owned the former corporate headquarters building
located in Panama City which was sold to a third party during the fourth quarter of 2006. OPAC,
S.A. is currently in the process of being dissolved.
D. Property, Plants and Equipment
Headquarters
In 2005, we moved into a newly built headquarters building located six miles away from Tocumen
International Airport. We have leased five floors consisting of approximately 104,000 square feet
of the building from Desarollo Inmobiliario del Este, S.A., an entity controlled by the same group
of investors that controls CIASA, under a 10-year lease at a rate of $106,000 per month during the
first three years, $110,000 per month from year 4 to year 6, $113,000 from year 7 to year 9 and
$116,000 per month in year 10, which we believe to be a market rate. During the fourth quarter of
2006, we sold to a third party our previous headquarters building in Panama City.
Other property
At Tocumen International Airport, we lease a maintenance hangar, operations offices in the
terminal, counter space, parking spaces and other operational properties from the entity that
manages the airport. We pay approximately $100,000 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 $6,000 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 more than 34 of those
cities.
AeroRepública
AeroRepública leases most of its airport and city ticket offices. Owned properties include one
city ticket office, a warehouse close to the airport and one floor in a high-rise building in
downtown Bogota.
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.
We are a leading Latin American provider of airline passenger and cargo service through our
two principal operating subsidiaries, Copa and AeroRepública. Copa operates from its strategically
located position in the Republic of Panama, and AeroRepública provides service primarily within
Colombia complemented by international flights from various cities in Colombia to Panamas Tocumen
International Airport. We currently operate a fleet of 43 aircraft, 24 Boeing 737-Next Generation
aircraft, ten Embraer 190 aircraft and nine MD-80 aircraft. We currently have firm orders for ten
Boeing 737-Next Generation and 13 Embraer 190s, and purchase rights and options for up eight
additional Boeing 737-Next Generation and 22 additional Embraer 190s.
43
Copa currently offers approximately 108 daily scheduled flights among 36 destinations in 21
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 120 other destinations through codeshare
arrangements with Continental pursuant to which each airline places its name and flight designation
code on the others flights. Through its Panama City hub, Copa is able to consolidate passenger
traffic from multiple points to serve each destination effectively.
Copa operates a modern fleet of 24 Boeing 737-Next Generation aircraft and six Embraer 190
aircraft with an average age of approximately 3.9 years as of May 31, 2007. To meet its growing
capacity requirements, Copa has firm commitments to accept delivery of 19 additional aircraft
through 2012 and has purchase rights and options that, if exercised, would allow it to accept
delivery of up to 22 additional aircraft through 2013. Copas firm orders are for ten additional
Boeing 737-Next Generation aircraft and nine additional Embraer 190s, and its purchase rights and
options are for up to eight Boeing 737-Next Generation aircraft and up to 14 Embraer 190s.
Copa started its strategic alliance with Continental in 1998. Since then, it has conducted
joint marketing and code-sharing arrangements, and participated in the award-winning OnePass
frequent flyer loyalty program globally and on a co-branded basis in Latin America. We believe that
Copas co-branding and joint marketing activities with Continental have enhanced its brand in Latin
America, and that the relationship with Continental has afforded it cost-related benefits, such as
improving purchasing power in negotiations with aircraft vendors and insurers. Copas alliance and
related services agreements with Continental are in effect until 2015.
During the second quarter of 2005, we purchased AeroRepública, a Colombian air carrier that
was the second-largest domestic carrier in Colombia in terms of number of passengers carried in
2006, providing predominantly point-to-point service among 12 cities in Colombia and to Panama
City. AeroRepública currently operates a fleet of four Embraer 190 and nine MD-80s. As part of its
fleet modernization and expansion plan, AeroRepública has firm commitments to accept delivery of
four Embraer 190 aircraft through the end of 2007 and options to purchase up to eight additional
Embraer 190 aircraft through 2011.
Fuel is our single largest operating expense and, as a result, our results of operations are
likely to continue to be materially affected by the cost of fuel as compared with prior periods.
Prices for jet fuel have risen significantly in 2006 and remained at historically high levels.
Copas fuel cost increased from $1.32 per gallon in 2004 to $1.87 per gallon in 2005 and $2.10 per
gallon in 2006. To date, we have managed to offset some of the increases in fuel prices with higher
load factors, fuel surcharges and fare increases. In addition, we entered into hedging agreements
with respect to approximately 19% of Copas fuel estimated needs for 2006 and have hedged
approximately 27% of Copas projected fuel needs for 2007 and approximately 6% of the estimated
needs for the first six months of 2008. We will continue to evaluate various hedging strategies,
and we may enter into additional hedging agreements in the future.
Our 2005 acquisition of AeroRepública has affected the comparability of our recent results of
operations.
On April 22, 2005 we acquired an initial 85.6% equity ownership interest in AeroRepública
which was followed by subsequent acquisitions increasing our total ownership interest in
AeroRepública to 99.8% as of May 31, 2007. The total purchase price we paid for our investment in
AeroRepública, including acquisition costs, was $23.4 million. According to the Colombian Civil
Aviation Administration, Unidad Especial Administrativa de Aeronáutica Civil, in 2006 AeroRepública
was the second-largest domestic carrier in Colombia in terms of number of passengers carried,
providing service among 12 cities in Colombia and to Panama City with a point-to-point route
network.
We began to consolidate AeroRepúblicas results of operations in our consolidated financial
statements beginning April 22, 2005. We report AeroRepúblicas operations as a separate segment in
our financial statements and the related notes. See Note 18 to our audited financial statements
included elsewhere in this annual report for segment data for AeroRepública for the year ended
December 31, 2006. As a result of this acquisition and our consolidation of AeroRepúblicas results
as of April 22, 2005, our financial information prior to and after the acquisition is not
comparable.
44
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 (drivers of our passenger revenue) and the
volume of trade between countries in the region (the principal driver of our cargo revenue).
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) grew by approximately 5.3% in 2006 and 4.5% in
2005, while the regions per capita gross domestic product is estimated to have risen by
approximately 3.8% in 2006. According to data from the International Monetary Fund, in the
sub-regions we serve gross domestic product rose in 2006 (in real terms) by approximately 5.8% in
the Mercosur countries, 7.3% in the Andean region, 5.7% in Central America, 4.1% in North America
and 5.2% in the Caribbean, with each region continuing to build on gains made during 2005 of
approximately 4.2% in the Mercosur countries, 6.3% in the Andean region, 3.8% in Central America,
3.0% in North America and 5.9% in the Caribbean. As is often the case, the regional economic
performance was closely tied to developments in the international economy. World economic activity
increased in 2006, resulting in estimated global GDP growth of approximately 5.4% (versus 4.9% in
2005). In recent years, the Panamanian economy has closely tracked the Latin American economy as a
whole, and in 2006 the Panamanian economy grew in real terms by approximately 8.1% (versus 6.9% in
2005), according to the International Monetary Funds estimates. Inflation in Panama rose
approximately 2.5% in 2006 (versus 2.9% in 2005). Additionally, the Colombian economy has
experienced relatively stable growth. According to the International Monetary Fund estimates, the
Colombian gross domestic product grew by approximately 4.9% in 2004, 5.3% in 2005 and 6.8% in 2006,
with inflation (as indicated by the consumer price index) rising by approximately 5.9% in 2004,
5.0% in 2005 and 4.3% in 2006.
Revenues
We derive our revenues primarily from passenger transportation which represents approximately
94% of our revenues, with approximately 6% derived from cargo and other revenues.
We recognize passenger revenue when transportation is provided and when unused tickets expire.
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 (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 revenue passenger miles (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. Our other revenue consists
primarily of excess baggage charges, ticket change fees and charter flights.
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. We believe that approximately 50% 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 50% of our passengers are tourists or
travelers visiting friends and family.
45
The following table sets forth our capacity, load factor and yields for the periods indicated.
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Year Ended December 31, |
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2004 |
|
|
2005 |
|
|
2006 |
|
Copa Segment |
|
|
|
|
|
|
|
|
|
|
|
|
Capacity (in available seat miles, in millions) |
|
|
3,639.4 |
|
|
|
4,408.8 |
|
|
|
5,239.1 |
|
Load factor |
|
|
70.0 |
% |
|
|
73.4 |
% |
|
|
77.8 |
% |
Yield (in cents) |
|
|
14.31 |
|
|
|
14.41 |
|
|
|
15.49 |
|
AeroRepública Segment(1) |
|
|
|
|
|
|
|
|
|
|
|
|
Capacity (in available seat miles, in millions) |
|
|
|
|
|
|
950.5 |
|
|
|
1,627.1 |
|
Load factor |
|
|
|
|
|
|
62.0 |
% |
|
|
57.9 |
% |
Yield (in cents)(2) |
|
|
|
|
|
|
16.53 |
|
|
|
17.79 |
|
|
|
|
(1) |
|
Since April 22, 2005. |
|
(2) |
|
AeroRepública has not historically distinguished between revenue
passengers and non-revenue passengers. While we are implementing
systems at AeroRepública to record that information, revenue passenger
information and other statistics derived from revenue passenger data
for the year ended December 31, 2005 has been derived from estimates
that we believe to be materially accurate. |
Seasonality
Generally, our revenues from and profitability of our flights peak during the northern
hemispheres 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, salaries and benefits,
passenger servicing, commissions, aircraft maintenance, reservations and sales and aircraft rent. A
common measure of per unit costs in the airline industry is cost per available seat mile (CASM),
which is generally defined as operating expenses divided by ASMs.
Aircraft 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 all 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 2006, as a result of the location of its hub,
Copa purchased approximately 50% of its aircraft fuel in Panama, where it was able to obtain better
prices due to volume discounts. Copa has over eleven 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. From
2002 to 2006, the average price of West Texas Intermediate crude oil, a benchmark widely used for
crude oil prices that is measured in barrels and quoted in U.S. dollars, increased by 153% from
$26.15 per barrel to $66.28 per barrel. Historically, we have not hedged a significant portion of
our fuel costs. We entered into hedging agreements with respect to approximately 19% of our fuel
needs for 2006, 27% for 2007 and approximately 6% of our projected fuel needs for the first six
months of 2008. During 2006, The Company began accounting for these
derivatives as cash flow hedges for
financial reporting purposes. They are recorded at fair value as a
component of prepayments and other current assets or other current
liabilities in the accompanying Consolidated Balance Sheets with the offset to Accumulated other
comprehensive loss, net of hedge ineffectiveness, and recognized as a component of fuel expense
when the underlying fuel being hedged is used. Hedge ineffectiveness included in Other non-operating income (expense)
in the Consolidated Statement of Income in 2006 was ($0.7) million. Our loss related to fuel
hedging instruments included in aircraft fuel in our Consolidated Statement of Income was ($3.1)
million in 2006. We may enter into additional hedging agreements in the future. Although
AeroRepública does not currently have a hedging policy, we may implement one in the future.
46
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Aircraft Fuel Data |
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2002 |
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2003 |
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2004 |
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2005 |
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2006 |
|
Copa Segment |
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|
Average price per gallon of jet
fuel into plane (excluding hedge)
(in U.S. dollars) |
|
$ |
0.86 |
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|
$ |
1.01 |
|
|
$ |
1.32 |
|
|
$ |
1.87 |
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|
$ |
2.10 |
|
Gallons consumed (in thousands) |
|
|
44,788 |
|
|
|
48,444 |
|
|
|
50,833 |
|
|
|
58,924 |
|
|
|
70,770 |
|
Available seat miles (in millions) |
|
|
2,847 |
|
|
|
3,226 |
|
|
|
3,639 |
|
|
|
4,409 |
|
|
|
5,239 |
|
Gallons per ASM (in hundredths) |
|
|
1.57 |
|
|
|
1.50 |
|
|
|
1.40 |
|
|
|
1.34 |
|
|
|
1.35 |
|
AeroRepública(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average price per gallon of jet
fuel into plane (excluding hedge)
(in U.S. dollars) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2.12 |
|
|
$ |
2.24 |
|
Gallons consumed (in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,887 |
|
|
|
28,321 |
|
Available seat miles (in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
950 |
|
|
|
1,627 |
|
Gallons per ASM (in hundredths) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.88 |
|
|
|
1.74 |
|
|
|
|
(1) |
|
Since April 22, 2005. |
Salaries and benefits. Salaries and benefits 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
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.
Passenger servicing expenses. Our passenger servicing expenses consist of expenses for
liability insurance, baggage handling, catering, in-flight entertainment and other costs related to
aircraft and airport services. These expenses are generally directly related to the number of
passengers we carry or the number of flights we operate.
Commissions. Our commission expenses consist primarily of payments for ticket sales made by
travel agents and commissions paid to credit card companies. Travel agents receive base
commissions, not including back-end incentive programs, ranging from 0% to 9% depending on the
country. The weighted average rate for these commissions during 2006
was 5.8%. 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 call centers and through the internet. 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.
Maintenance, material and repair expenses. Our maintenance, material and repair expenses
consist of aircraft repair and charges related to light and heavy maintenance of our aircraft,
including maintenance materials. Maintenance and repair expenses, including overhaul of aircraft
components, are charged to operating expenses as incurred. With an average age of only 3.9 years as
of May 31, 2007, our Copa fleet requires a low level of maintenance compared to the older fleets of
some of our competitors. We also currently incur lower maintenance expenses on our Boeing and
Embraer aircraft because a significant number of our aircraft parts remain under multi-year
warranties. As the age of our fleet increases and when our warranties expire, our maintenance
expenses will increase. We only conduct line maintenance internally and outsource heavy maintenance
to independent third party contractors. In 2003, we negotiated with GE Engine Services a
maintenance cost per hour program for the repair and maintenance of our CFM-56 engines which power
our Boeing 737 Next Generation fleet. Our engine maintenance costs are also aided by the sea-level
elevation of our hub and the use of winglets which allow us to operate the engines on our Boeing
737-700s with lower thrust, thus putting less strain on the engines.
Line maintenance for AeroRepúblicas MD-80s and Embraer fleet is performed by AeroRepúblicas
in-house maintenance staff. Heavy maintenance for the MD-80s is performed by FAA-certified
third-party aviation maintenance companies. The average age of AeroRepúblicas fleet as of May 31,
2007 was 13.1 years.
Aircraft rent. Our aircraft rental expenses are generally fixed by the terms of our operating
lease agreements. Currently, six of Copas operating leases have fixed rates which are not subject
to fluctuations in interest rates and the seventh is tied to LIBOR. All of AeroRepúblicas
operating leases have fixed rates which are not subject to fluctuations in interest rates. Our
aircraft rent expense also includes rental payments related to our wet-leasing of freighter
aircraft to supplement our cargo operations.
47
Reservations and sales expenses. Our reservations and sales expenses arise primarily from
payments to global distribution systems, such as Amadeus and Sabre, that list our flight offerings
on reservation systems around the world. These 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 costs. A portion of our reservations and sales expense 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.
Flight operations and landing fees and other rentals are generally directly related to the
number of flights we operate.
Other include publicity and promotion expenses, expenses related to our cargo operations,
technology related initiatives and miscellaneous other expenses.
Taxes
We are subject to income tax in Panama based on the principle of territoriality. Beginning in
2004, we adopted an alternate method of calculating tax in Panama. Based on Article 121 of
Executive Decree 170 of 1993, as amended in 1996, income for international transportation companies
is calculated based on a territoriality method that determines gross revenues earned in Panama by
applying the percentage of miles flown within the Panamanian territory against total revenues.
Under this method, loss carry-forwards cannot be applied to offset tax liability. Prior to 2004,
our Panamanian taxable income was estimated using revenues from passengers originating in or
destined for Panama which typically resulted in losses for purposes of Panamanian corporate income
tax. Dividends from our Panamanian subsidiaries, including Copa, are separately subject to a ten
percent tax if such dividends can be shown to be derived from Panamanian income that has not been
otherwise taxed.
We are also subject to local tax regulations in each of the 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 tax or due to treaties or other arrangements
those countries have with Panama. In the remaining countries, we pay income tax at a rate ranging
from 25% 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 the tax authorities of one or more
countries. It is possible that we may become subject to tax in jurisdictions in which, for prior
years, we had not been subject to tax and that, in the future, we may become subject to increased
taxes in the countries to which we fly.
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.
AeroRepúblicas taxes are based on Colombian income tax legislation which calculates tax based
on the higher of the ordinary and presumptive income. Ordinary income is defined as the
companys operating results under Colombian GAAP, and presumptive income is defined as 6% of net
assets under Colombian GAAP.
We paid taxes totaling approximately $4.3 million in 2004, $7.4 million in 2005 and $11.3
million in 2006.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements in conformity with U.S. GAAP requires
our management to adopt accounting policies and make estimates and judgments to develop amounts
reported in our consolidated financial statements and related notes. We strive to maintain a
process to review the application of our accounting policies and to evaluate the appropriateness of
the estimates required for the preparation of our
consolidated financial statements. We believe that our estimates and judgments are reasonable;
however, actual results and the timing of recognition of such amounts could differ from those
estimates. In addition, estimates routinely require adjustments based on changing circumstances and
the receipt of new or better information.
48
Critical accounting policies and estimates are defined as those that are reflective of
significant judgments and uncertainties and potentially result in materially different results
under different assumptions and conditions. For a discussion of these and other accounting
policies, see Note 1 to our annual consolidated financial statements.
Revenue recognition. Passenger revenue is recognized when transportation is provided rather
than when a ticket is sold. The amount of passenger ticket sales not yet recognized as revenue is
reflected in the Air traffic liability line on our consolidated balance sheet. Fares for tickets
that have expired and/or are more than one year old are recognized as passenger revenue upon
expiration.
Cargo and mail services revenue are recognized when we provide the shipping services and
thereby complete the earning process. Other revenue is primarily comprised of excess baggage
charges, commissions earned on tickets sold for flights on other airlines and charter flights and
is recognized when transportation or service is provided.
Frequent flyer program. We participate in Continentals frequent flyer program OnePass,
through which our passengers receive all the benefits and privileges offered by the OnePass
program. Continental is responsible for the administration of the OnePass program. Under the terms
of our frequent flyer agreement with Continental, OnePass members receive OnePass frequent flyer
mileage credits for travel on Copa and AeroRepública, and we pay Continental a per mile rate for
each mileage credit granted by Continental, at which point we have no further obligation. The
amounts due to Continental under this agreement are expensed by us as the mileage credits are
earned.
Goodwill and indefinite-lived purchased intangible assets. We review goodwill and purchased
intangible assets with indefinite lives, all of which relate to our acquisition of AeroRepública,
for impairment annually and whenever events or changes in circumstances indicate the carrying value
of an asset may not be recoverable in accordance with Statement of Financial Accounting Standard
No. 142, Goodwill and Other Intangible Assets (SFAS No. 142). The provisions of SFAS No. 142
require that a two-step impairment test be performed on goodwill. In the first step, we compare the
fair value of the AeroRepública reporting unit to its carrying value. If the fair value of the
AeroRepública reporting unit exceeds the carrying value of its net assets, goodwill is not impaired
and we are not required to perform further testing. If the carrying value of the net assets of the
AeroRepública reporting unit exceeds its fair value, then we must perform the second step of the
impairment test in order to determine the implied fair value of the AeroRepública reporting units
goodwill. If the carrying value of the goodwill exceeds its implied fair value, then we record an
impairment loss equal to the difference. SFAS No. 142 also requires that the fair value of the
purchased intangible assets with indefinite lives be estimated and compared to the carrying value.
We recognize an impairment loss when the estimated fair value of the intangible asset is less than
the carrying value. Determining the fair value of a reporting unit or an indefinite-lived purchased
intangible asset is judgmental in nature and involves the use of significant estimates and
assumptions. These estimates and assumptions include revenue growth rates and operating margins
used to calculate projected future cash flows, risk-adjusted discount rates, future economic and
market conditions, and determination of appropriate market comparables. We base our fair value
estimates on assumptions we believe to be reasonable but that are unpredictable and inherently
uncertain. Actual future results may differ from those estimates.
49
Maintenance and repair costs. Maintenance and repair costs for owned and leased flight
equipment, including the overhaul of aircraft components, are charged to operating expenses as
incurred. Engine overhaul costs covered by power-by-the-hour arrangements are paid and expensed as
incurred, on the basis of hours flown per the contract. Under the terms of our power-by-the-hour
agreements, we pay a set dollar amount per engine hour flown on a monthly basis and the third-party
vendor assumes the obligation to repair the engines at no additional cost to us, subject to certain
specified exclusions.
Additionally, although our aircraft lease agreements specifically provide that we, as lessee,
are responsible for maintenance of the leased aircraft, we do, under certain of our existing lease
agreements, pay maintenance reserves to aircraft and engine lessors that are to be applied towards
the cost of future maintenance events. These reserves are calculated based on a performance
measure, such as flight hours, and are specifically to be used to reimburse third-party providers
that furnish services in connection with maintenance of our leased aircraft. If there are
sufficient funds on deposit to pay the invoices submitted, they are paid. However, if amounts on
deposit are insufficient to cover the invoices, we must cover the shortfall because, as noted
above, we are legally responsible for maintaining the lease aircraft. Under four of our existing
aircraft lease agreements, if there are excess amounts on deposit at the expiration of the lease,
the lessor is entitled to retain any excess amounts. The maintenance reserves paid under our lease
agreements do not transfer either the obligation to maintain the aircraft or the cost risk
associated with the maintenance activities to the aircraft lessor. In addition, we maintain the
right to select any third-party maintenance providers. Therefore, we record these amounts as
prepaid maintenance within Other Assets on our balance sheet and then recognize maintenance expense
when the underlying maintenance is performed, in accordance with our maintenance accounting policy.
Any excess amounts retained by the lessor upon the expiration of the lease, which are not expected
to be material, would be recognized as additional aircraft rental expense when it becomes probable
that we would not benefit from such excess, mostly at expiration of the lease.
Recently Issued Accounting Pronouncement
In June 2006, the Financial Accounting Standards Board issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (FIN
48), which clarifies the accounting for uncertainty in income taxes recognized in financial
statements. FIN 48 requires the impact of a tax position to be recognized in the financial
statements if that position is more likely than not of being sustained upon examination by the
taxing authority. FIN 48 is effective for fiscal years beginning after December 15, 2006. The
cumulative effect of applying the provisions of FIN 48, if any, will be reported as an adjustment
to the opening balance of retained earnings in 2007. We are currently
evaluating the requirements of FIN 48 and its effect on our
consolidated financial statements.
In
September 2006, the FASB issued SFAS No. 157 Fair Value
Measurements (SFAS 157). SFAS 157 defines fair
value, establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about fair
value measurements. The provisions of this standard apply to other
accounting pronouncements that require or permit fair value
measurements. SFAS 157 becomes effective for the fiscal years
beginning after November 15, 2007. Upon adoption, the provisions
of SFAS 157 are to be applied prospectively with limited exceptions.
The Company is currently evaluating the potential impact, if any,
that the adoption of SFAS 157 will have on the consolidated financial
position or results of operations.
In
February 2007, the FASB issued SFAS 159, The Fair Value
Option for Financial Assets and Financial Liabilities. The
standard allows entities to voluntarily choose, at specified election
dates, to measure many financial assets and financial liabilities (as
well as certain non-financial instruments that are similar to
financial instruments) at fair value (the fair value
option). The election is made on an instrument-by-instrument
basis and is irrevocable. If the fair value option is elected for an
instrument, the Statement specifies that all subsequent changes in
fair value for that instrument shall be reported in earnings. SFAS
159 becomes effective for the fiscal years beginning after
November 15, 2007. The Company is currently evaluating the
potential impact, if any, that the adoption of SFAS 159 will have on
the consolidated financial position or results of operations.
50
Results of Operation
The following table shows each of the line items in our income statements for the periods
indicated as a percentage of our total operating revenues for that period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2004 |
|
|
2005(1) |
|
|
2006 |
|
Operating revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Passenger revenue |
|
|
91.2 |
% |
|
|
92.6 |
% |
|
|
93.9 |
% |
Cargo, mail and other |
|
|
8.8 |
% |
|
|
7.4 |
% |
|
|
6.1 |
% |
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft fuel |
|
|
(15.6 |
)% |
|
|
(24.5 |
)% |
|
|
(25.6 |
)% |
Salaries and benefits |
|
|
(12.9 |
)% |
|
|
(11.5 |
)% |
|
|
(10.7 |
)% |
Passenger servicing |
|
|
(9.8 |
)% |
|
|
(8.3 |
)% |
|
|
(7.6 |
)% |
Commissions |
|
|
(7.3 |
)% |
|
|
(7.4 |
)% |
|
|
(6.8 |
)% |
Reservation and sales |
|
|
(5.5 |
)% |
|
|
(4.8 |
)% |
|
|
(4.5 |
)% |
Maintenance, materials and repairs |
|
|
(4.9 |
)% |
|
|
(5.3 |
)% |
|
|
(5.9 |
)% |
Depreciation |
|
|
(4.8 |
)% |
|
|
(3.3 |
)% |
|
|
(2.9 |
)% |
Flight operations |
|
|
(4.5 |
)% |
|
|
(4.1 |
)% |
|
|
(4.0 |
)% |
Aircraft rentals |
|
|
(3.6 |
)% |
|
|
(4.5 |
)% |
|
|
(4.5 |
)% |
Landing fees and other rentals |
|
|
(3.0 |
)% |
|
|
(2.9 |
)% |
|
|
(2.8 |
)% |
Other |
|
|
(7.3 |
)% |
|
|
(5.4 |
)% |
|
|
(5.3 |
)% |
Total |
|
|
(79.4 |
)% |
|
|
(82.1 |
)% |
|
|
(80.5 |
)% |
Operating income |
|
|
20.6 |
% |
|
|
17.9 |
% |
|
|
19.5 |
% |
Non-operating income (expenses): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(4.1 |
)% |
|
|
(3.6 |
)% |
|
|
(3.4 |
)% |
Interest capitalized |
|
|
0.2 |
% |
|
|
0.2 |
% |
|
|
0.2 |
% |
Interest income |
|
|
0.4 |
% |
|
|
0.6 |
% |
|
|
0.9 |
% |
Other, net |
|
|
1.5 |
% |
|
|
0.1 |
% |
|
|
0.0 |
% |
Total |
|
|
(2.0 |
)% |
|
|
(2.7 |
)% |
|
|
(2.3 |
)% |
Income/(loss) before income taxes |
|
|
18.6 |
% |
|
|
15.2 |
% |
|
|
17.2 |
% |
Income taxes |
|
|
(1.4 |
)% |
|
|
(1.6 |
)% |
|
|
(1.4 |
)% |
Net income |
|
|
17.1 |
% |
|
|
13.6 |
% |
|
|
15.7 |
% |
|
|
|
(1) |
|
Includes results from our AeroRepública segment for the period from April 22, 2005 to December 31, 2005. |
Year 2006 Compared to Year 2005
Our consolidated net income in 2006 totaled $133.8 million, a 61.3% increase over net income
of $83.0 million in 2005. We had consolidated operating income of $166.1 million in 2006, a 52.1%
increase over operating income of $109.2 million in 2005. Our consolidated operating margin in 2006
was 19.5%, an increase of 1.6 percentage points over an operating margin of 17.9% in 2005,
primarily as a result of overall operating expenses growing slower than operating revenue.
Operating revenue
Our consolidated revenue totaled $851.2 million in 2006, a 39.9% increase over operating
revenue of $608.6 million in 2005 due to increases in our Copa segments passenger and cargo
revenues, and the full year effect of the consolidation of operating revenue from our AeroRepública
segment, acquired on April 22, 2005.
Copa segment operating revenue
Copas operating revenue totaled $676.2 million in 2006, a 33.7% increase over operating
revenue of $505.7 million in 2005 due to increases in both passenger and cargo revenues.
Passenger revenue. Passenger revenue totaled $631.1 million in 2006, a 35.4% increase over
passenger revenue of $466.1 million in 2005. This increase resulted primarily from the addition of
capacity (ASMs increased by 18.8% in 2006 as compared to 2005) that resulted from an increase in
departures and, to a lesser extent, longer average stage length. Revenues also increased due to our
higher overall load factor (load factor increased from 73.4% in 2005 to 77.8% in 2006) during the
period and the simultaneous increase in passenger yield, which rose by 7.5% to 15.49 cents in 2006.
51
Cargo, mail and other. Cargo, mail and other totaled $45.0 million in 2006, a 13.7% increase
over cargo, mail and other of $39.6 million in 2005. This increase was primarily the result of
higher cargo revenue resulting from an increase in belly space capacity available, and to a lesser
extent higher other operating revenue from excess baggage fees.
AeroRepública segment operating revenue
AeroRepúblicas operating revenue totaled $175.9 million in 2006, an increase of $72.9 million
over operating revenue of $103.0 million registered during 2005 primarily as result of the full
year effect of the consolidation of its results since it was acquired on April 22, 2005.
Operating expenses
Our consolidated operating expenses totaled $685.0 million in 2006, a 37.2% increase over
operating expenses of $499.4 million in 2005 that was primarily attributable to the growth of our
operations, higher fuel costs, and the full year effect of the consolidation of AeroRepública.
In 2006, our operating expenses per available seat mile excluding aircraft fuel was 6.81
cents, a 4.2% increase over operating expenses per available seat mile excluding aircraft fuel of
6.53 cents in 2005. Aircraft fuel per available seat mile was 3.17 cents in 2006, compared to 2.79
cents in 2005. In 2006, our total operating expenses per available seat mile was 9.98 cents, a 7.1%
increase over operating expenses per available seat mile of 9.32 cents in 2005.
An overview of the major variances on a consolidated basis follows:
Aircraft fuel. Aircraft fuel totaled $217.7 million in 2006, a 45.8% increase over aircraft
fuel of $149.3 million in 2005. This increase was primarily a result of higher fuel costs, higher
fuel consumption, and the full year effect of the consolidation of AeroRepública.
Salaries and benefits. Salaries and benefits totaled $91.4 million in 2006, a 31.1% increase
over salaries and benefits of $69.7 million in 2005. This increase was primarily a result of an
overall increase in headcount and the full year effect of the consolidation of AeroRepública.
Passenger servicing. Passenger servicing totaled $64.4 million in 2006, a 27.2% increase over
passenger servicing of $50.6 million in 2005. This increase was primarily a result of an increase
in Copas capacity, an increase in Copas on-board passengers, and the full year effect of the
consolidation of AeroRepública.
Commissions. Commissions totaled $57.8 million in 2006, a 28.2% increase over commissions of
$45.1 million in 2005. This increase was primarily a result of higher passenger revenue and the
full year effect of the consolidation of AeroRepública.
Maintenance, materials and repairs. Maintenance, materials and repairs totaled $50.1 million
in 2006, a 54.0% increase over maintenance, materials and repairs of $32.5 million in 2005. This
increase was primarily a result of more overhaul events at AeroRepública and the full year effect
of the consolidation of AeroRepública.
The remaining operating expenses totaled $203.7 million in 2006, an increase of $51.5 million
in 2006.
52
Copa segment operating expenses
The breakdown of operating expenses per available seat mile is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
Percent |
|
|
|
2005 |
|
|
2006 |
|
|
Change |
|
|
|
(in cents) |
|
Operating Expenses per ASM: |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
1.33 |
|
|
|
1.43 |
|
|
|
7.2 |
% |
Passenger servicing |
|
|
1.02 |
|
|
|
1.03 |
|
|
|
0.9 |
% |
Commissions |
|
|
0.81 |
|
|
|
0.77 |
|
|
|
(4.4 |
)% |
Reservation and sales |
|
|
0.57 |
|
|
|
0.58 |
|
|
|
1.3 |
% |
Maintenance, materials and repairs |
|
|
0.48 |
|
|
|
0.52 |
|
|
|
8.3 |
% |
Depreciation |
|
|
0.44 |
|
|
|
0.45 |
|
|
|
3.8 |
% |
Flight operations |
|
|
0.50 |
|
|
|
0.54 |
|
|
|
9.2 |
% |
Aircraft rentals |
|
|
0.50 |
|
|
|
0.46 |
|
|
|
(9.2 |
)% |
Landing fees and other rentals |
|
|
0.34 |
|
|
|
0.35 |
|
|
|
4.8 |
% |
Other |
|
|
0.62 |
|
|
|
0.64 |
|
|
|
1.9 |
% |
|
|
|
|
|
|
|
|
|
|
Total operating expenses per ASM before
aircraft fuel |
|
|
6.62 |
|
|
|
6.78 |
|
|
|
2.4 |
% |
Aircraft fuel |
|
|
2.52 |
|
|
|
2.95 |
|
|
|
17.1 |
% |
|
|
|
|
|
|
|
|
|
|
Total operating expenses per ASM |
|
|
9.13 |
|
|
|
9.73 |
|
|
|
6.5 |
% |
|
|
|
|
|
|
|
|
|
|
Aircraft fuel. Aircraft fuel totaled $154.3 million in 2006, a 39.2% increase over aircraft
fuel of $110.9 million in 2005. This increase was primarily a result of a 16.7% increase in the
all-in average price per gallon of jet fuel ($2.14 in 2006 compared to $1.84 in 2005) and the
consumption of 20.1% more fuel due to a 17.7% increase in departures and an increase in average
stage length. Aircraft fuel per available seat mile increased by approximately 16.9% due to the
increase in average fuel cost per gallon.
Salaries and benefits. Salaries and benefits totaled $74.9 million in 2006, a 27.4% increase
over salaries and benefits of $58.8 million in 2005. This increase was mainly a result of an
overall increase in operating headcount to support increased capacity deployed during the year as
well as during 2007, increased profit sharing expenses and the effect of the stock compensation
program that was implemented pursuant to the Companys initial public offering. Salaries and
benefits per available seat mile increased by 7.2%.
Passenger servicing. Passenger servicing totaled $54.2 million in 2006, a 19.9% increase over
passenger servicing of $45.2 million in 2005. This increase was primarily a result of Copas 18.8%
increase in capacity and an increase of 21.0% in on-board passengers. Passenger servicing per
available seat mile increased by 0.9%.
Commissions. Commissions totaled $40.4 million in 2006, a 13.6% increase over commissions of
$35.6 million in 2005. This increase was primarily a result of higher passenger revenue partially
offset by lower average commission rate. Commissions per available seat mile decreased by 4.4%.
Reservations and sales. Reservations and sales totaled $30.5 million in 2006, a 20.4%
increase over reservations and sales of $25.3 million in 2005. This increase was primarily a result
of a 25.2% increase in charges related to global distribution systems resulting from a 21.0%
increase in on-board passengers and a 3.6% increase in average rates. Reservations and sales
expenses per available seat mile increased by 1.3%.
Maintenance, materials and repairs. Maintenance, materials and repairs totaled $27.5 million
in 2006, a 28.6% increase over maintenance, materials and repairs of $21.3 million in 2005. This
increase was primarily a result of more flight hours and additional materials and repairs related
to the Boeing 737-NG fleet. Maintenance, materials and repair per available seat mile increased by
8.3%.
Depreciation. Depreciation totaled $23.7 million in 2006, a $4.5 million increase over
depreciation of $19.2 million in 2005, as a result of higher depreciation attributable to our
acquisition of two new Embraer 190 aircraft in 2005, five new Embraer 190 aircraft in 2006 and two
new Boeing 737-700 aircraft in 2006. Depreciation per available seat mile increased by 3.8%.
Aircraft rentals. Aircraft rentals totaled $23.8 million in 2006, a 7.9% increase over
aircraft rentals of $22.1 million in 2005. This increase was a result of the full year effect of
two additional leased Boeing 737-Next Generation aircraft in February 2005 and May 2005. Aircraft
rentals per available seat mile decreased by 9.2%.
53
Flight operations and landing fees and other rentals. Combined, flight operations and landing
fees and other rentals increased from $36.8 million in 2005 to $46.9 million in 2006, primarily as
a result of Copas 18.8% increase in capacity.
Other. Other expenses totaled $33.4 million in 2006, a 21.1% increase over other expenses of
$27.5 million in 2005. This increase was primarily a result of an increase in OnePass frequent
flyer miles earned by
customers during the period, as well as higher implementation fees related to the internal
controls requirements of the Sarbanes-Oxley Act. Other expenses per available seat mile increased
by 1.9%.
AeroRepública segment operating expenses
AeroRepúblicas operating expenses totaled $176.3 million in 2006, an increase of $79.5
million over operating revenue of $96.8 million reported during 2005 primarily as result of the
full year effect of the consolidation of its results since it was acquired in April 22, 2005.
Non-operating income (expense)
Our consolidated non-operating expenses totaled $20.0 million in 2006, a 20.5% increase over
non-operating expenses of $16.6 million in 2005, attributable primarily to higher interest expense.
Copa segment non-operating income (expense)
Non-operating expense totaled $11.1 million in 2006, a 16.1% decrease over non-operating
expense of $13.2 million in 2005, attributable primarily to higher interest income and higher other
non-operating income partially offset by higher interest expense.
Interest expense. Interest expense totaled $26.9 million in 2006, a 38.5% increase over
interest expense of $19.4 million in 2005, primarily resulting from the full year effect of the
financing related to aircraft purchased in 2005, as well as the effect of the financing related to
aircraft purchased in 2006. The average effective interest rates on our debt also increased by 74
basis points from 4.50% during 2005 to 5.24% during 2006. At periods end, approximately 57% of our
outstanding debt was fixed at an average effective rate of 4.66%.
Interest capitalized. Interest capitalized totaled $1.7 million in 2006, a 57.1% increase
over interest capitalized of $1.1 million in 2005, resulting from higher average debt balance
relating to pre-delivery payments on aircraft.
Interest income. Interest income totaled $6.9 million in 2006, a 104.0% increase over
interest income of $3.4 million in 2005. This increase was mainly a result of our higher average
cash balance over the year and higher interest rates during the period.
Other, net. Other, net income totaled $7.2 million in 2006, a $5.5 million increase over
other, net income of $1.7 million in 2005. This increase was primarily the result of lower
non-recurring expense related to our initial public offering in 2005.
Year 2005 Compared to Year 2004
Our consolidated net income 2005 totaled $83.0 million, a 21.0% increase over net income of
$68.6 million in 2004. We had consolidated operating income of $109.2 million in 2005, a 32.6%
increase over operating income of $82.3 million in 2004. Our consolidated operating margin in 2005
was 17.9%, a decrease of 2.7 percentage points over an operating margin of 20.6% in 2004, primarily
as a result of higher fuel prices and our consolidation of AeroRepúblicas results from its
acquisition on April 22, 2005.
Operating revenue
Our consolidated revenue totaled $608.6 million in 2005, a 52.2% increase over operating
revenue of $399.8 million in 2004 due to increases in our Copa segments passenger and cargo
revenues, and the consolidation of $103.0 million in operating revenues from our AeroRepública
segment.
54
Copa segment operating revenue
Copas operating revenue totaled $505.7 million in 2005, a 26.5% increase over operating
revenue of $399.8 million in 2004 due to increases in both passenger and cargo revenues.
Passenger revenue. Passenger revenue totaled $466.1 million in 2005, a 27.8% increase over
passenger revenue of $364.6 million in 2004. This increase resulted primarily from the addition of
capacity (ASMs increased by 21.1% in 2005 as compared to 2004) that resulted from an increase in
departures and, to a lesser extent, longer average stage length and the addition of larger
aircraft. Revenues also increased due to our higher overall load factor (load factor increased from
70.0% in 2004 to 73.4% in 2005) during the period and the simultaneous increase in passenger yield,
which rose by 0.7% to 14.41 cents in 2005.
Cargo, mail and other. Cargo, mail and other totaled $39.6 million in 2005, a 12.4% increase
over cargo, mail and other of $35.2 million in 2004. This increase was primarily the result of
higher cargo revenue resulting from an increase in belly space capacity available, and to a lesser
extent higher other operating revenue from excess baggage fees.
AeroRepública segment operating revenue
Since April 22, 2005, the date on which we began consolidating AeroRepúblicas results,
AeroRepública generated operating revenues of $103.0 million.
Operating expenses
Our consolidated operating expenses totaled $499.4 million in 2005, a 57.3% increase over
operating expenses of $317.5 million in 2004 that was primarily attributable to the growth of our
operations, higher fuel costs, and the consolidation of $96.8 million in operating expenses from
our AeroRepública segment.
In 2005, our operating expenses per available seat mile excluding aircraft fuel was 6.53
cents, a 6.7% decrease over operating expenses per available seat mile excluding aircraft fuel of
7.01 cents in 2004. Aircraft fuel per available seat mile was 2.79 cents in 2005, compared to 1.72
cents in 2004. In 2005, our total operating expenses per available seat mile was 9.32 cents, a 6.8%
increase over operating expenses per available seat mile of 8.72 cents in 2004.
An overview of the major variances on a consolidated basis follows:
Aircraft fuel. Aircraft fuel totaled $149.3 million in 2005, a 138.7% increase over aircraft
fuel of $62.5 million in 2004. This increase was primarily a result of higher fuel costs, higher
fuel consumption, and the consolidation of $38.4 million in AeroRepúblicas aircraft fuel expenses.
Salaries and benefits. Salaries and benefits totaled $69.7 million in 2005, a 34.9% increase
over salaries and benefits of $51.7 million in 2004. This increase was primarily a result of an
overall increase in headcount and the consolidation of $11.0 million in AeroRepública salaries and
benefits expenses.
Passenger servicing. Passenger servicing totaled $50.6 million in 2005, a 29.1% increase over
passenger servicing of $39.2 million in 2004. This increase was primarily a result of an increase
in Copas capacity, an increase in Copas on-board passengers, and the consolidation of $5.5
million in AeroRepública passenger servicing expenses.
Commissions. Commissions totaled $45.1 million in 2005, a 55.1% increase over commissions of
$29.1 million in 2004. This increase was primarily a result of higher passenger revenue and the
consolidation of $9.5 million in AeroRepública commission expenses.
The remaining operating expenses totaled $184.7 million in 2005, an increase of $49.7 million
in 2004, of which $32.4 million corresponded to the consolidation of AeroRepública.
55
Copa segment operating expenses
The breakdown of operating expenses per available seat mile is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
Percent |
|
|
|
2004 |
|
|
2005 |
|
|
Change |
|
|
|
(in cents) |
|
Operating Expenses per ASM: |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
1.42 |
|
|
|
1.33 |
|
|
|
(6.2 |
)% |
Passenger servicing |
|
|
1.08 |
|
|
|
1.02 |
|
|
|
(4.9 |
)% |
Commissions |
|
|
0.80 |
|
|
|
0.81 |
|
|
|
1.0 |
% |
Reservation and sales |
|
|
0.61 |
|
|
|
0.57 |
|
|
|
(5.6 |
)% |
Maintenance, materials and repairs |
|
|
0.54 |
|
|
|
0.48 |
|
|
|
(10.8 |
)% |
Depreciation |
|
|
0.53 |
|
|
|
0.44 |
|
|
|
(17.6 |
)% |
Flight operations |
|
|
0.49 |
|
|
|
0.50 |
|
|
|
1.0 |
% |
Aircraft rentals |
|
|
0.40 |
|
|
|
0.50 |
|
|
|
26.3 |
% |
Landing fees and other rentals |
|
|
0.33 |
|
|
|
0.34 |
|
|
|
0.9 |
% |
Other |
|
|
0.81 |
|
|
|
0.62 |
|
|
|
(22.4 |
)% |
|
|
|
|
|
|
|
|
|
|
Total operating expenses per ASM before
aircraft fuel |
|
|
7.01 |
|
|
|
6.62 |
|
|
|
(5.5 |
)% |
Aircraft fuel |
|
|
1.72 |
|
|
|
2.52 |
|
|
|
46.3 |
% |
|
|
|
|
|
|
|
|
|
|
Total operating expenses per ASM |
|
|
8.72 |
|
|
|
9.13 |
|
|
|
4.7 |
% |
|
|
|
|
|
|
|
|
|
|
Aircraft fuel. Aircraft fuel totaled $110.9 million in 2005, a 77.3% increase over aircraft
fuel of $62.5 million in 2004. This increase was primarily a result of a 54.0% increase in the
average price per gallon of jet fuel ($1.84 in 2005 compared to $1.19 in 2004) and the consumption
of 15.9% more fuel due to a 10.8% increase in departures and an increase in average stage length.
These increases were partially offset by our newer, more fuel-efficient aircraft. Aircraft fuel per
available seat mile increased by approximately 46.3% due to the increase in average fuel cost per
gallon.
Salaries and benefits. Salaries and benefits totaled $58.8 million in 2005, a 13.7% increase
over salaries and benefits of $51.7 million in 2004. This increase was primarily a result of an
overall increase of 12.5% in headcount at period end in 2005 versus the same period end in 2004,
mainly to cover increased operations. Salaries and benefits per available seat mile decreased by
6.2%.
Passenger servicing. Passenger servicing totaled $45.2 million in 2005, a 15.2% increase over
passenger servicing of $39.2 million in 2004. This increase was primarily a result of Copas 21.1%
increase in capacity and an increase of 20.2% in on-board passengers. Passenger servicing per
available seat mile decreased by 4.9% as a result of fixed costs being spread over a higher number
of available seat miles.
Commissions. Commissions totaled $35.6 million in 2005, a 22.3% increase over commissions of
$29.1 million in 2004. This increase was primarily a result of higher passenger revenue.
Commissions per available seat mile increased by 1.0%.
Reservations and sales. Reservations and sales totaled $25.3 million in 2005, a 14.4%
increase over reservations and sales of $22.1 million in 2004. This increase was primarily a result
of a 31.3% increase in charges related to global distribution systems resulting from a 20.1%
increase in on-board passengers and a 9.5% increase in average rates. Reservations and sales
expenses per available seat mile decreased by 5.6%.
Maintenance, materials and repairs. Maintenance, materials and repairs totaled $21.3 million
in 2005, a 8.1% increase over maintenance, materials and repairs of $19.7 million in 2004. This
decrease was a result of lower overhaul related costs and lower average maintenance costs due to
the replacement of the older Boeing 737-200s. Maintenance, materials and repair per available seat
mile decreased by 10.8% primarily as a result of the lower cost associated with the newer Boeing
737-Next Generation fleet.
56
Depreciation. Depreciation totaled $19.2 million in 2005, a negligible decrease over
depreciation of $19.3 million in 2004, as the higher depreciation attributable to our acquisition
of two new Embraer 190 aircraft in 2005 was partially offset by lower depreciation expenses related
to non-aircraft related assets. Depreciation per available seat mile decreased by 17.6%.
Aircraft rentals. Aircraft rentals totaled $22.1 million in 2005, a 53.0% increase over
aircraft rentals of $14.4 million in 2004. This increase was a result of three additional leased
Boeing 737-Next Generation aircraft in December 2004, February 2005 and May 2005. Aircraft rentals
per available seat mile increased by 26.3% as a result of the higher average lease rate of the
three aircraft received.
Flight operations and landing fees and other rentals. Combined, flight operations and landing
fees and other rentals increased from $30.1 million in 2004 to $36.8 million in 2005, primarily as
a result of Copas 21.1% increase in capacity.
Other. Other expenses totaled $27.5 million in 2005, a 6.0% decrease over other expenses of
$29.3 million in 2004. This increase was primarily a result of a 17.0% increase in OnePass frequent
flyer miles earned by customers during the period, as well as other miscellaneous administrative
expenses such as software licenses and legal expenses. Other expenses per available seat mile
decreased by 22.4% as result of administrative expenses growing slower than capacity.
AeroRepública segment operating expenses
Since April 22, 2005, the date on which we began consolidating AeroRepúblicas results,
AeroRepública generated operating expenses of $96.8 million.
Non-operating income (expense)
Our consolidated non-operating expenses totaled $16.6 million in 2005, a 106.0% increase over
non-operating expenses of $8.0 million in 2004 that was primarily attributable to the consolidation
of $3.3 million in non-operating expenses from our AeroRepública segment and higher expenses
related to our initial public offering in 2005.
Copa segment non-operating income (expense)
Non-operating expense totaled $13.2 million in 2005, a 64.5% increase over non-operating
expense of $8.0 million in 2004, attributable primarily to higher interest expense partially offset
by higher interest income and lower other non-operating income.
Interest expense. Interest expense totaled $19.4 million in 2005, a 17.8% increase over
interest expense of $16.5 million in 2004, primarily resulting from higher interest rates. The
average effective interest rates on our debt also increased by 29 basis points from 4.21% during
2004 to 4.50% during 2005. At periods end, approximately 65% of our outstanding debt was fixed at
an average effective rate of 4.46%.
Interest capitalized. Interest capitalized totaled $1.1 million in 2005, a 13.1% increase
over interest capitalized of $1.0 million in 2004, resulting from higher average interest rates on
debt relating to pre-delivery payments on aircraft.
Interest income. Interest income totaled $3.4 million in 2005, a 137.2% increase over
interest income of $1.4 million in 2004. This increase was mainly a result of our higher average
cash balance over the year and higher interest rates during the period.
Other, net. Other, net income totaled $1.7 million in 2005, a 71.4% decrease over other, net
income of $6.1 million in 2004. This decrease was primarily the result of approximately $3.7
million in expenses related to our initial public offering in 2005.
57
B. Liquidity and Capital Resources
In recent years, we have been able to meet our working capital requirements through cash from
our operations. 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 medium-term financing in the form of
commercial banks loans and/or bonds privately placed with commercial banks. Our accounts receivable
at December 31, 2006 increased by $15.6 million compared with December 31, 2005, primarily as a
result of the growth in operating revenues.
Our cash, cash equivalents and short-term investments at December 31, 2006 increased by $82.9
million to $197.4 million. At December 31, 2006 we had available credit lines totaling $34.5
million under which there were no amounts outstanding.
Operating Activities
We rely primarily on cash flows from operations to provide working capital for current and
future operations. Cash flows from operating activities totaled $193.5 million in 2006, $115.4
million in 2005 and $98.6 million in 2004. The increase in operating cash flows over these periods
was primarily due to the growth of our business.
Investing Activities
During 2006, capital expenditures were $252.0 million, which consisted primarily of
expenditures related to our purchase of five Embraer 190 aircraft and two Boeing 737-700 aircraft,
as well as to expenditures related to advance payments on aircraft purchase contracts. During 2005,
capital expenditures were $112.8 million, which consisted primarily of expenditures related to our
purchase of two Embraer 190 aircraft, as well as to expenditures related to advance payments on
aircraft purchase contracts. During 2004, capital expenditures were $82.1 million, which consisted
primarily of expenditures related to our purchase of three Boeing 737-Next Generation aircraft, as
well as to expenditures related to advance payments on aircraft purchase contracts.
Financing Activities
Financing activities during 2006 consisted primarily of financing for Embraer 190 aircraft,
two Boeing 737-700 aircraft and aircraft pre-delivery payments for $254.6 million ($27.5 million of
the proceeds of which were used to redeem privately-placed bonds used for pre-delivery payments
related to those aircraft), the repayment of $27.5 million in privately-placed bonds, the repayment
of $77.2 million in long-term debt and $8.3 million in dividends declared and paid.
Financing activities during 2005 consisted of $68.4 million, primarily to the financing of two
Embraer 190 aircraft, $27.5 million related to the financing of aircraft pre-delivery payments
through privately-placed bonds, the repayment of $46.9 million in long-term debt and $10.1 million
in dividends declared and paid.
Financing activities during 2004 consisted primarily of financing for three Boeing 737-Next
Generation aircraft for $101.2 million ($35.7 million of the proceeds of which were used to redeem
privately-placed bonds used for pre-delivery payments related to those aircraft), the financing for
aircraft pre-delivery payments with $6.4 million of privately-placed bonds, the repayment of $32.1
million in long-term debt and $10.0 million in dividends declared and paid.
We have generally been able to arrange medium-term financing for pre-delivery payments through
loans with commercial banks through a private issuance of bonds. Although we believe that financing
on similar terms should be available for our future aircraft pre-delivery payments, we may not be
able to secure such financing on terms attractive to us.
58
We have financed the acquisition of seventeen Boeing 737-Next Generation aircraft and three
spare engines through syndicated loans provided by international financial institutions with the
support of partial
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 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 originally bear interest at a floating rate linked to LIBOR. Our
Ex-Imguarantee facilities typically offer an option to fix the applicable interest rate. We have
exercised this option with respect to $325.4 million as of December 31, 2006 at an average weighted
interest rate of 4.66%. The remaining $40.0 million bears interest at an average weighted interest
of LIBOR plus 0.03%. At December 31, 2006, the total amount outstanding under our Ex-Im-supported
financings totaled $365.4 million.
We effectively extend the maturity of our Boeing aircraft financing to 15 years through the
use of a Stretched Overall Amortization and Repayment, or SOAR, structure which provides serial
draw-downs calculated to result in a 100% loan accreting to a recourse balloon at the maturity of
the Ex-Im guaranteed loan. The SOAR portions of our facilities require us to maintain certain
financial covenants, including an EBITDAR to fixed charge ratio, a long-term obligations to
tangible net worth ratio, a long-term obligations to EBITDAR ratio, a minimum net worth and a
minimum unrestricted cash balance. To comply with the first ratio, our EBITDA plus aircraft rent
expense, or EBITDAR, for the prior year must be at least 2.5 times our fixed charge expenses
(including interest, commission, fees, discounts and other finance payments) for that year. To
comply with the second ratio, our long-term obligations shall be no more than five times our
tangible net worth. Third, our long-term obligations must be no more than 6 times EBITDAR.
Fourth, our tangible net worth must be at least $50 million. Fifth, our cash, cash equivalents and
short-term investment balance should be at least $50 million. As of December 31, 2006, we complied
with all required covenants. We also pay a commitment fee on the unutilized portion of our SOAR
loans.
We also typically finance approximately 10% of the purchase price of our Boeing aircraft
through commercial loans which totaled $17.6 million as of December 31, 2006. Under the commercial
loan agreements for aircraft received in 2002, we are required to comply with four specific
financial covenants. The first covenant requires our EBITDAR for the prior year to be at least 1.9
times our finance charge expenses (including interest, commission, fees, discounts and other
finance payments) for the first year of the agreement and 2.0 times our finance charge expenses for
the remainder of the agreement. The second covenant limits our net borrowings to 92% of our
capitalization during the first two years, 90% during the next two years and 85% during the last
six years of the agreement. The third covenant requires our tangible net worth to be at least $30
million for the first two years, $70 million for the next three years and $120 million for the last
four years of the agreement. The last covenant requires us to maintain a minimum of $30 million in
available cash (including cash equivalents and committed credit facilities) for the first five
years and $50 million for the last five years of the agreement. As of December 31, 2006 we complied
with all required covenants.
Our Embraer aircraft purchases are not eligible for Ex-Im guaranteed financing. During 2005,
we secured a senior term loan facility in the amount of $134 million for the purchase of six (6)
Embraer 190 aircraft. The loans have a term of twelve years. During 2005, we utilized $43.8
million of this facility and the remaining $90.1 million was drawn during 2006.
During 2006, we
secured a senior and junior term loan facility in the amount of $239.6 million for the purchase of
ten Embraer 190 aircraft. The loans have a term of twelve years. During 2006, we utilized $23.8
million of this facility and the remainder of the facility will be drawn during 2007. This loan
agreement we are required to comply with certain financial covenants. The first covenant requires
our EBITDAR for the prior year to be at least 2.5 times our fixed charge expenses (including
interest, commission, fees, discounts and other finance payments) for that year. The second
covenant requires a total liability plus operating leases minus operating cash to tangible net
worth ratio of less than 5.5. The third covenant requires our tangible net worth to be at least
$160 million. The last covenant requires us to maintain a minimum of $75 million in available
cash, cash equivalents and short-term investments. As of December 31, 2006 we complied with
all required covenants.
During 2006, we secured a medium term loan facility in the amount of $34.3 million for the
financing of pre-delivery payments of two Boeing 737-800 aircraft having delivery months of August
and November 2007. We have granted, for the benefit of the bank, a first priority security interest
in the rights, title and interest over the two Boeing 737-800 aircraft. Interest on the loans is
paid on a quarterly basis with the principal balance to be repaid upon delivery of the aircraft.
During 2006, we
arranged a $22 million facility to consolidate and refinance AeroRepúblicas
existing debt with more favorable conditions.
59
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 credit
lines.
We have placed firm orders with The Boeing Company for ten Boeing 737-Next Generation aircraft
and we have purchase rights and options for an additional eight Boeing 737-Next Generation
aircraft. We have also placed firm orders with Embraer for 13 Embraer 190 aircraft and we have
options to purchase an additional 22 Embraer 190 aircraft. The schedule for delivery of our firm
orders is as follows: 11 in 2007, six in 2008, two in 2009, two in 2011 and two in 2012 . We meet
our pre-delivery deposit requirements for our Boeing 737-Next Generation aircraft by paying cash,
or by using medium-term borrowing facilities and/or vendor financing for deposits required 24 to 6
months prior to delivery. Pre-delivery deposits for our Embraer 190 aircraft are required 18, 12
and 6 months prior to delivery. We fund these deposits with our own cash.
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 and Copa Airlines
with the trademark office in Panama and have filed requests for registration in other countries,
including the United States. We license certain brands, logos and trade dress under the trademark
license agreement with Continental 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. AeroRepúblicas has registered its name as a trademark in Colombia for the next ten years,
and plans to register its trademark in Panama, Ecuador, Venezuela and Peru.
We operate a number of software products under licenses from our vendors, including our
booking engine, our automated pricing system from SMG Technologies, our SABRE revenue management
software and our Cargo Management system. Under our agreements with Boeing, we also use a large
amount of Boeings proprietary information to maintain our aircraft. The loss of these software
systems or technical support information from Boeing could negatively affect our business.
D. Trend Information
We seek to expand our Copa Airlines operation by adding frequencies and new routes with the
addition of seven new aircraft to our fleet in 2007, including two Boeing-737 Next Generation and
five Embraer 190 aircraft. New routes for 2007 include Guadalajara, Mexico; Punta Cana, Dominican
Republic; Cordoba, Argentina and Washington, D.C. For the remainder of 2007, we expect to continue
to concentrate on keeping our operating costs low and pursuing ways to make our operations more
efficient.
We intend to continue developing initiatives to improve the operations at AeroRepública. As
part of our plan to modernize AeroRepúblicas fleet, we currently expect to take delivery of four
Embraer aircraft in late 2007. We seek to make further improvements at AeroRepública, including a
continued focus on on-time performance, a renovation of aircraft interiors, further integration of
Copas and AeroRepúblicas network through codesharing agreements and improvement of overall
efficiency.
We expect jet fuel prices will continue to be high in 2007 and expect to continue evaluating
fuel hedging programs to help protect us against short-term movements in crude oil prices.
We expect our operating capacity to increase 19% in 2007, primarily as a result of the
addition of seven new aircraft to Copas fleet, and to a lesser extent due to the addition of
AeroRepublicas seven new aircraft.
E. Off-balance sheet arrangements
None of our operating lease obligations are reflected on our balance sheet and we have no
other off-balance sheet arrangements. We are responsible for all maintenance, insurance and other
costs associated with operating these aircraft; however, we have not made any residual value or
other guarantees to our lessors.
60
F. Tabular Disclosure of Contractual Obligations
Our non-cancelable contractual obligations at December 31, 2006 included the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2006 |
|
|
|
|
|
|
|
Less than |
|
|
1-3 |
|
|
3-5 |
|
|
More than |
|
|
|
Total |
|
|
1 Year |
|
|
Years |
|
|
Years |
|
|
5 Years |
|
|
|
(in thousands of dollars) |
|
Aircraft and engine purchase commitments |
|
|
518,691 |
|
|
|
312,574 |
|
|
|
206,117 |
|
|
|
0 |
|
|
|
0 |
|
Aircraft operating leases |
|
|
172,472 |
|
|
|
35,346 |
|
|
|
67,264 |
|
|
|
37,307 |
|
|
|
32,555 |
|
Other operating leases |
|
|
40,380 |
|
|
|
5,317 |
|
|
|
11,165 |
|
|
|
9,111 |
|
|
|
14,787 |
|
Short-term debt and long-term debt(1) |
|
|
756,384 |
|
|
|
125,422 |
|
|
|
140,742 |
|
|
|
132,532 |
|
|
|
357,688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,487,927 |
|
|
|
478,659 |
|
|
|
425,288 |
|
|
|
178,950 |
|
|
|
405,030 |
|
|
|
|
(1) |
|
Includes actual interest and estimated interest for floating-rate debt based on December 31, 2006 rates. |
Most contract leases include renewal options. Non-aircraft related leases have renewable
terms of one year, and their respective amounts included in the table below have been estimated
through 2011, but we cannot estimate amounts with respect to those leases for later years. Our
leases do not include residual value guarantees.
The
Company has a Prepaid Pension Asset, but estimates that contribution
payments to the plan, which reflect expected future services, will be
$0.8 million for 2007.
Item 6. Directors, senior management and employees
A. Directors and Senior Management
We are managed by our board of directors which currently consists of eleven members who serve
two-year terms and may be re-elected. The number of directors elected each year alternates between
six directors and five directors. Messrs. Pedro Heilbron, Osvaldo Heilbron, Ricardo A. Arias, Mark
Erwin and Roberto Artavia were each re-elected for two-year terms at our annual shareholders
meeting held in May 2006. At an extraordinary shareholders meeting held in December 2006, Mr.
Alfredo Arias Loredo was elected as an independent director to hold office until the 2008 annual
shareholders meeting. Also at the December 2006 meeting, Mr. Joseph Fidanque III was elected as a
director to hold office until the 2007 annual shareholders meeting. Mr. Fidanque filled the
vacancy left by George Mason who resigned on July 18, 2006. At our 2007 annual shareholders
meeting held on May 9, 2007, Mr. José Castañeda Velez was re-elected as an independent director
until the 2009 annual shareholders meeting. Also at the May 9, 2007 meeting, Messrs. Stanley
Motta, Jaime Arias, Alberto C. Motta Jr., and Joseph Fidanque were re-elected as directors until
the 2009 annual shareholders meeting. Our charter does not have a mandatory retirement age for our
directors.
The following table sets forth the name, age and position of each member of our board of
directors as of May 31, 2007. 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 |
|
49 |
Stanley Motta |
|
Chairman and Director |
|
61 |
Osvaldo Heilbron |
|
Director |
|
80 |
Jaime Arias |
|
Director |
|
71 |
Ricardo Alberto Arias |
|
Director |
|
67 |
Alberto C. Motta, Jr. |
|
Director |
|
60 |
Mark Erwin |
|
Director |
|
51 |
Joseph Fidanque III |
|
Director |
|
40 |
Jose Castañeda Velez |
|
Director |
|
63 |
Roberto Artavia Loria |
|
Director |
|
47 |
Alfredo Arias Loredo |
|
Director |
|
60 |
Mr. Pedro Heilbron. See Executive Officers.
61
Mr. Stanley 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 of alcohol, cosmetics, jewelry and other consumer goods. Mr. Motta
is the brother of our director, Alberto C. Motta Jr. He serves on the boards of directors of Motta
Internacional, S.A., Grupo Financiero Continental, S.A., ASSA Compañía de Seguros, S.A., Televisora
Nacional, S.A., Inversiones Bahía, Ltd. and GBM Corporation. Mr. Motta is a graduate of Tulane
University.
Mr. Osvaldo Heilbron has been one of the directors of Copa Airlines since 1986 and a director
of Copa Holdings, since it was established in 1998. Mr. Heilbron is the father of Mr. Pedro
Heilbron, our chief executive officer. He serves on the boards of directors of CIASA, Desarrollo
Costa Del Este, S.A., Harinas Panama, S.A., Televisora Nacional, S.A., Petroleos Delta, S.A., and
SSA Panama Inc.
Mr. Jaime Arias has been one of the directors of Copa Airlines since 1983 and a director of
Copa Holdings, since it was established in 1998. He is a founding partner of Galindo, Arias &
Lopez. Mr. Arias holds a B.A. from Yale University, a J.D. from Tulane University and legal studies
at the University of Paris, Sorbonne. He serves as an advisor to the President of the Republic of
Panama and serves on the boards of directors of Televisora Nacional, S.A., ASSA Compañía de
Seguros, S.A. , Empresa General de Inversiones, S.A., Petróleos Delta, S.A., Bac International
Bank, Inc., Direct Vision, S.A. and Promed, S.A.
Mr. Ricardo Arias has been one of the directors of Copa Airlines since 1985 and a director of
Copa Holdings, since it was established in 1998. He is a founding partner of Galindo, Arias &
Lopez. Mr. Arias currently serves as Panamas ambassador to the United Nations. Mr. Arias holds a
B.A. in international relations from Georgetown University, an LL.B. from the University of Puerto
Rico and an LL.M. from Yale Law School. He serves on the boards of directors of Banco General, S.A.
and Empresa General de Inversiones, S.A., which is the holding company that owns Banco General
S.A., and Empresa General de Petróleos, S.A. Mr. Arias is also listed as a principal or alternate
director of several subsidiary companies of Banco General, S.A. and Empresa General de Inversiones,
S.A.,
Mr. Alberto Motta, Jr. has been one of the directors of Copa Airlines since 1983 and a
director of Copa Holdings, since it was established in 1998. He is a Vice President of Inversiones
Bahía, Ltd. Mr. Motta attended the University of Hartwick. He is the brother of Mr. Stanley Motta.
He also serves on the boards of directors of Motta Internacional, S.A., Inversiones Costa del Este,
S.A., ASSA Compañía de Seguros, S.A., Petroleos Delta, S.A., Productos Toledanos, S.A., Financiera
Automotriz, S.A., Televisora Nacional, S.A., Hotel Miramar Inter-Continental and Industrias Panama
Boston, S.A.
Mr. Mark Erwin has been one of the directors of Copa Airlines and Copa Holdings since 2004. He
is the Senior Vice PresidentAsia/Pacific and Corporate Development of Continental Airlines and
the President and Chief Executive Officer and serves on the board of directors of Continental
Micronesia, Inc., the wholly owned western Pacific subsidiary of Continental Airlines, Inc. Mr.
Erwin held the position of Senior Vice President of Airport Services of Continental Airlines, Inc.
from 1995 through 2002.
Mr. Joseph Fidanque III has been one of the directors of Copa Airlines since 2006. He is
President of Fidanque Hermanos e Hijos, S.A., Mobilphone de Panama, S.A. and Star Contact, Ltd. He
serves on the boards of directors of Multiholding Corporation Panama, Fundación Filantrópica
Fidanque, Colon Import and Export and Sky Technologies Network. Mr. Fidanque holds a B.S. in
Economics from Tufts University.
Mr. Roberto Artavia Loria is one of the independent directors of Copa Holdings. He is the
former Chief Executive Officer of INCAE Business School where he now serves as Academic and
Business Consultant, Chairman of Asociacion MarViva de Costa Rica and Protector of Viva Trust. Mr.
Artavia Loria is also an advisor to the Interamerican Development Bank and to the governments of
nine countries in Latin America, and a strategic advisor to Purdy Motor, S.A., Grupo Nacion and
FUNDESA. Mr. Artavia Loria serves on the board of directors of INCAE Business School, Foundation
for Management Education in Central America, Asociación MarViva de Costa Rica, Viva Trust, Global
Foundation for Management Development, Compañía Cervecera de Nicaragua, SUMAQ Alliance OBS de Costa
Rica and OBS Americas.
62
Mr. José Castañeda Velez is one of the independent directors of Copa Holdings. He is currently
director of MMG Bank Corporation. 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 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. Alfredo
Arias Loredo is one of the independent directors of Copa
Holdings. He is the former Executive President of Cerveceria Nacional, S.A. Mr.
Arias Loredo is Chairman of the Board of Trustees of ANCON (Asociación Nacional para la
Conservación de la Naturaleza). Mr. Arias received a B.S. in Mechanical Engineering and an M.S. in
Industrial Management, both from Georgia Institute of Technology.
The following table sets forth the name, age and position of each of our executive officers as
of May 31, 2007. A brief biographical description of each of our executive officers follows the
table.
|
|
|
|
|
Name |
|
Position |
|
Age |
Pedro Heilbron |
|
Chief Executive Officer |
|
49 |
Victor Vial |
|
Chief Financial Officer |
|
41 |
Lawrence Ganse |
|
Senior Vice-President of Operations |
|
63 |
Jorge Isaac García |
|
Vice-President, Commercial |
|
47 |
Daniel Gunn |
|
Vice-President of Planning |
|
39 |
Jaime Aguirre |
|
Vice President of Maintenance |
|
44 |
Vidalia de Casado |
|
Vice President of Passenger Services |
|
50 |
Alexander Gianareas |
|
Senior Director of Human Resources |
|
54 |
Roberto Junguito Pombo |
|
Chief Executive Officer of AeroRepública |
|
37 |
Mr. Pedro Heilbron has been our Chief Executive Officer for 19 years. He received an M.B.A.
from George Washington University and a B.A. from Holy Cross. Mr. Heilbron is the son of Mr.
Osvaldo Heilbron, a member of our board of directors. Mr. Heilbron is a Member of the Board of
Governors of IATA.
Mr. Victor Vial has been our Chief Financial Officer since 2000. From 1995 until 2000, Mr.
Vial served as our Director of Planning. Prior to his service at Copa, Mr. Vial was a Senior
Financial Analyst for HBO-Time Warner. Mr. Vial holds a B.B.A. in International Business from
George Washington University.
Captain Lawrence Ganse has been our Senior Vice-President of Operations and Chief Operating
Officer since 2000. Captain Ganse has 40 years of experience in the airline industry, including
management positions at TWA, Northwest Airlines, and, most recently, Grupo TACA in El Salvador.
Captain Ganse received a B.B.A. in Aviation Administration from the University of Miami and an
M.B.A. in Management Science from California State University at Hayward.
Mr. Jorge Isaac García has been our Vice-President, Commercial since 1999. He has also served
as our Vice-President of Maintenance and as our Assistant to the President. Prior to joining Copa,
he was a Project Director at Petroleos Delta. Mr. Garcia received a B.S. in Mechanical Engineering
from Worcester Polytechnic Institute and an M.B.A. from Boston College.
Mr. Daniel Gunn has been our Vice-President of Planning and Alliances since 2002. He joined
Copa in 1999 and has served as our Director of Alliances and Senior Director of Planning and
Alliances. Prior to joining Copa, he spent five years with American Airlines holding positions in
Finance, Real Estate and Alliances. Mr. Gunn received a B.A. in Business & Economics from Wheaton
College and an M.B.A. with an emphasis in Finance and International Business from the University of
Southern California.
Mr. Jaime Aguirre has been our Vice President of Maintenance since 2002. Prior to that, he
served as our Director of Engineering and Quality Assurance. Before joining Copa, Mr. Aguirre was
the Technical Services Director at Avianca, S.A. Mr. Aguirre received a B.S. in Mechanical
Engineering from Los Andes University, a Master of Engineering with an emphasis on Engineering
Management from Javeriana University and a M.B.A. from the University of Louisville.
63
Ms. Vidalia de Casado has been our Vice-President of Passenger Services since 1995. She joined
Copa in 1989 and served as our Passenger Services Manager from 1989 to 1995. Prior to joining Copa,
she spent seven years as Human Resource and Service Director with Air Panama Internacional, S.A.
Ms. de Casado received a B.S. in Business from Universidad Latina and an M.B.A. from the University
of Louisville.
Mr. Alexander Gianareas has been our Senior Director of Human Resources since 2001. Prior to
joining Copa, he was the Director of Organizational Effectiveness for the Panama Canal Commission.
Mr. Gianareas received a B.S. in Electrical Engineering from Cornell University and an M.B.A. from
Nova Southeastern.
Mr. Roberto Junguito Pombo joined our company on November 8, 2005 as the Chief Executive
Officer of our AeroRepública operating subsidiary. Mr. Junguito previously spent two years with
Avianca, holding positions as the Vice President of Planning, Chief Operating Officer and Chief
Restructuring Officer. Avianca declared bankruptcy in March 2003. Mr. Junguito received a B.S. in
Industrial Engineering at the Universidad de Los Andes, an M.A. in International Studies from the
Joseph H. Lauder Institute of the University of Pennsylvania and an M.B.A. with an emphasis on
finance from the Wharton School of the University of Pennsylvania.
The business address for all of our senior management is c/o Copa Airlines, Avenida Principal
y Avenida de la Rotonda, Urbanización Costa del Este, Complejo Business Park, Torre Norte, Parque
Lefevre Panama City, Panama.
B. Compensation
In 2006, we paid
an aggregate of approximately $2.83 million in cash compensation to
our executive officers. During 2006, we also set aside
$3.0 million for payment to senior management related to
covenants not to compete with us in the future. We have not set aside
any other funds for future payments
to executive officers.
Members of our board of directors that are not officers of either Copa or Continental receive
$25,000 per year plus expenses incurred to attend our board of directors meetings. In addition,
members of committees of the board of directors receive $1,000 per committee meeting, with the
chairman of the audit committee receiving $2,000 per meeting of the audit committee. All of the
members of our board of directors and their spouses receive benefits to travel on Copa flights as
well.
Long Term Incentive Compensation Plan
The Compensation Committee of our board of directors approved a one time non vested stock
bonus for certain executive officers and eliminated the existing Long Term Retention Plan in 2005.
Non vested stock delivered under this award program may be sourced from treasury stock, or
authorized un-issued shares. In March 2006, in accordance with this program, the Compensation
Committee of our board of directors granted 935,650 restricted stock awards. Senior management were
granted 847,625 non vested stock awards, which vest over five years in yearly installments equal to
15% of the awarded stock on each of the first three anniversaries of the grant date, 25% on the
fourth anniversary and 30% on the fifth anniversary. Managers, officers and key employees, not on
our senior management team, were granted 88,025 non vested stock awards which vest on the second
anniversary of the grant date. The related compensation costs charged against income for this plan
was $3.3 million in 2006.
The Compensation Committee plans to make additional equity based awards under the plan from
time to time, including additional non vested stock and stock option awards. While the Compensation
Committee will retain discretion to vary the exact terms of future awards, we anticipate that
future employee non vested stock and stock option awards granted pursuant to the plan will
generally vest over a three year period and the stock options will carry a ten year term
During first quarter of 2007, the Compensation Committee approved two new plans to our named
executive officers. These new plans granted 15,969 shares of non vested stock and 38,003 options,
which will vested over three years. The Company estimates the 2007 compensation cost for these
plans is $0.6 million.
64
C. Board Practices
Our board of directors currently meets quarterly. Additionally, informal meetings with
Continental are held on an ongoing basis, and are supported by quarterly formal meetings of an
Alliance Steering Committee, which directs and reports on the progress of the Copa and
Continental Alliance. Our board of directors is focused on providing our overall strategic
direction and as a result is responsible for establishing our general business policies and for
appointing our executive officers and supervising their management.
Currently, our board of directors is comprised of eleven members. The number of directors
elected each year alternates between six directors and five directors. Messrs. Pedro Heilbron,
Osvaldo Heilbron, Ricardo Arias, Mark Erwin, and Roberto Artavia were each re-elected to two-year
terms at our annual shareholders meeting held on May 12, 2006. In December 2006, Mr. Alfredo Arias
Loredo was elected as an independent Director to hold office until the 2008 annual shareholders
meeting. Also, in December 2006 Mr. Joseph Fidanque III was elected as a Director to hold office
until the 2007 annual shareholders meeting. Mr. Fidanque filled the vacancy left by George Mason
who resigned on July 18, 2006. Messrs. Stanley Motta, Jaime Arias, Alberto C. Motta Jr., Joseph
Fidanque and José Castañeda were re-elected to two-year terms at our annual shareholders meeting
held on May 9, 2007. Our charter does not have a mandatory retirement age for our directors.
Pursuant to contractual arrangements with us and CIASA, Continental is entitled to designate
one of our directors and CIASA is entitled to designate seven of our directors.
Committees of the Board of Directors
Audit Committee. Our Audit Committee is responsible for overseeing the integrity of our
financial statements, the effectiveness of our internal financial control and risk management
systems, the effectiveness of our internal audit function, the independent audit process including
recommending the appointment and evaluating the performance of the independent auditor, and the
compliance with legal and regulatory requirements. The Audit Committee has implemented procedures
for receiving, retaining and addressing complaints regarding accounting, internal control and
auditing matters, including the submission of confidential, anonymous complaints from employees
regarding questionable accounting or auditing matters. The charter of our Audit Committee requires
that all its members shall be independent directors under the applicable rules of the New York
Stock Exchange. Messrs. José Castañeda, Alfredo Arias Loredo and Roberto Artavia are the current
members of our Audit Committee, and Mr. José Castañeda is the chairman of the audit committee as
well as our audit committee financial expert.
Compensation Committee. Our Compensation Committee is responsible for the selection process
of the Chief Executive Officer and the evaluation of all executive officers (including the CEO),
recommending the level of compensation and any associated bonus. The charter of our Compensation
Committee requires that all its members shall be non-executive directors, of which at least one
member will be an independent director under the applicable rules of the New York Stock Exchange.
Messrs. Stanley Motta, Jaime Arias and José Castañeda are the members of our Compensation
Committee, and Mr. Stanley Motta is the Chairman of the Compensation Committee.
Nominating and Corporate Governance Committee. Our Nominating and Corporate Governance
Committee is responsible for developing and recommending criteria for selecting new directors,
overseeing evaluations of the board of directors, its members and committees of the board of
directors and handling other matters that are specifically delegated to the compensation committee
by the board of directors from time to time. Our charter documents require that there be at least
one independent member of the Nominating and Corporate Governance Committee until the first
shareholders meeting to elect directors after such time as the Class A shares are entitled to full
voting rights. Messrs. Ricardo Arias, Osvaldo Heilbron and Roberto Artavia are the members of our
Nominating and Corporate Governance Committee, and Mr. Ricardo Arias is the Chairman of the
Nominating and Corporate Governance Committee.
Independent Directors Committee. Our Independent Directors Committee is created by our
Articles of Incorporation and consists of any directors that the board of directors determines from
time to time meet the independence requirements of the NYSE and the Securities Act. Our Articles of
Incorporation provide that there will be three independent directors at all times, subject to
certain exceptions. Under our Articles of Incorporation, the Independent Directors Committee must
approve:
65
|
|
|
any transactions in excess of $5 million between us and our controlling
shareholders, |
|
|
|
the designation of certain primary share issuances that will not be included in
the calculation of the percentage ownership pertaining to the Class B shares for
purposes of determining whether the Class A shares should be converted to voting
shares under our Articles of Incorporation, and |
|
|
|
the issuance of additional Class B shares or Class C shares to ensure Copa
Airlines compliance with aviation laws and regulations. |
The Independent Directors Committee shall also have any other powers expressly delegated by
the Board of Directors. Under the Articles of Incorporation, these powers can only be changed by
the Board of Directors acting as a whole upon the written recommendation of the Independent
Directors Committee. The Independent Directors Committee will only meet regularly until the first
shareholders meeting at which the Class A shareholders will be entitled to vote for the election
of directors and afterwards at any time that Class C shares are outstanding. All decisions of the
Independent Directors Committee shall be made by a majority of the members of the committee. See
Item 10B. Memorandum and Articles of AssociationDescription of Capital Stock.
D. Employees
We believe that our growth potential and the achievement of our results-oriented corporate
goals are directly linked to our ability to attract, motivate and maintain the best professionals
available in the airline business. In order to help retain our employees, we encourage open
communication channels between our employees and management. Our CEO meets quarterly with all of
our Copa employees in Panama in town hall-style meetings during which he explains the companys
performance and encourages feedback from attendees. A similar presentation is made by our senior
executives at each of our foreign stations. Our compensation strategy reinforces our determination
to retain talented and highly motivated employees and is designed to align the interests of our
employees with our shareholders through profit-sharing.
Our profit-sharing program at Copa reflects our belief that our employees will remain
dedicated to our success if they have a stake in that success. We identify key performance drivers
within each employees control as part of our annual objectives plan, or Path to Success.
Typically, we pay bonuses in February based on our performance during the preceding calendar year.
For members of management, 75% of the bonus amount is based on our performance as a whole and 25%
is based on the achievement of individual goals. Bonuses for non-management employees is based on
the companys performance, and is typically a multiple of the employees weekly salary. For 2006,
the non-management employees received up to seven weeks salary, depending on their position. The
bonus payments are at the discretion of our compensation committee. We typically make accruals each
month for the expected annual bonuses which are reconciled to actual payments at their dispersal in
February.
We maintain generally good relations with our union and non-union employees and have not
experienced work stoppages for the past twenty years. Approximately 75% of Copas employees are
located in Panama, while the remaining 25% are distributed among our stations. Copas employees can
be categorized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2002 |
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
|
2006 |
|
Pilots |
|
|
192 |
|
|
|
220 |
|
|
|
224 |
|
|
|
235 |
|
|
|
299 |
|
Flight attendants |
|
|
330 |
|
|
|
349 |
|
|
|
372 |
|
|
|
448 |
|
|
|
514 |
|
Mechanics |
|
|
203 |
|
|
|
209 |
|
|
|
189 |
|
|
|
200 |
|
|
|
155 |
|
Customer service agents, reservation
agents, ramp and other |
|
|
1,299 |
|
|
|
1,382 |
|
|
|
1,470 |
|
|
|
1,626 |
|
|
|
1,861 |
|
Management and clerical |
|
|
429 |
|
|
|
480 |
|
|
|
499 |
|
|
|
587 |
|
|
|
675 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total employees |
|
|
2,453 |
|
|
|
2,640 |
|
|
|
2,754 |
|
|
|
3,096 |
|
|
|
3,504 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We provide training for all of our employees including technical training for our pilots,
dispatchers, flight attendants and other technical staff. In addition, we provide recurrent
customer service training to frontline staff, as well as leadership training for managers. In 2005,
we leased a Level B flight simulator for B737-Next Generation training that will serve 80% of our
initial training, transition and upgrade training and 100% of our recurrent training needs relating
to that aircraft. We are planning to upgrade this simulator to provide 100% of our initial
training. We
have also entered into an agreement to lease a flight simulator for EMB-190 training, which
should be available for use in Panama at the beginning of 2008.
66
Approximately 60% of Copas employees are unionized. There are currently five unions covering
our Copa employees in Panama: the pilots union (SIPAC); the flight attendants union (SIPANAB);
the mechanics union (SINTECMAP); the traffic attendants union (UTRACOPA); and a generalized
union, SIELAS, which represents ground personnel, messengers, drivers, counter agents and other
non-executive administrative staff. Copa is scheduled to begin negotiations with the pilots union
in mid-2008. Copa entered into new collective bargaining agreements with its general union and its
flight attendants union on October 26, 2005 and April 3, 2006, respectively. After extensive
negotiations which did not lead to a mutually satisfactory resolution, Copa and the mechanics
union entered into a government-mandated arbitration and a collective bargaining agreement was
agreed to on March 29, 2006 as a result of such arbitration proceeding. Previously, we have not had
to resort to arbitration to resolve negotiations with our unions. Collective bargaining agreements
in Panama typically extend for four years. We also have agreements with our Copa employees in São
Paulo, Brazil and Mexico. We have traditionally experienced good relations with our unions, and we
generally agree to terms in line with the economic environment affecting Panama, our company and
the airline industry generally. Approximately 19% of Copas employees work part-time.
AeroRepúblicas pilots and flight attendants are represented by two separate unions. The
pilots union, Asociación Colombiana de Aviadores Civiles (ACDAC), represents AeroRepúblicas 126
pilots and co-pilots. The flight attendants union, Asociación Colombiana de Auxiliares de Vuelo
(ACAV), represents all of AeroRepúblicas 178 flight attendants. Contracts with both unions were
signed or affirmed in May 2005 with customary increases in wages and benefits that provide for
annual salary increases of two percent in addition to adjustments to reflect inflation. The
agreement with the pilots union will be in effect until June 2007, and the agreement with the
flight attendants union will be in effect until March 2008. In general our relationships with the
labor unions representing AeroRepúblicas employees are believed to be good as reflected by the
agreements reached this year.
E. Share Ownership
The members of our board of directors and our executive officers as a group own 2.5% of our
Class A shares. See Item 7A. Major Shareholders and Related Party Transactions.
Item 7. Major Shareholders and Related Party Transactions
A. Major Shareholders
The following table sets forth information relating to the beneficial ownership of our Class A
shares as of June 13, 2007 by each person known to us to beneficially own 5% or more of our common
shares and all our directors and officers as a group. Class A shares are limited voting shares
entitled only to vote in certain specified circunstances. See Item 10B. Additional Information
Memorandum and Articles of Association Description of Capital Stock.
|
|
|
|
|
|
|
|
|
|
|
Class A Shares |
|
|
|
Beneficially Owned |
|
|
|
Shares |
|
|
(%)(1) |
|
CIASA(2) |
|
|
|
|
|
|
|
|
Continental(3) |
|
|
4,375,000 |
|
|
|
14.1 |
% |
Executive officers and directors as a group (19 persons) |
|
|
771,725 |
|
|
|
2.5 |
% |
Others |
|
|
25,820,669 |
|
|
|
83.4 |
% |
|
|
|
|
|
|
|
Total |
|
|
30,967,394 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
(1) |
|
Based on a total of
30,967,394 Class A shares issued. |
|
(2) |
|
CIASA owns 100% of the Class B shares of Copa Holdings, representing 29.2% of our total capital stock. |
|
(3) |
|
Based on a Schedule 13G filed with the Securities and Exchange Commission, dated July 5, 2006, in
which Continental reported that it had sole voting and dispositive power over 4,375,000 of Class A
shares. |
67
CIASA currently owns 100% of the Class B shares of Copa Holdings, representing all of the
voting power of our capital stock. CIASA is controlled by a group of Panamanian investors
representing several prominent families in Panama. This group of investors has historically acted
together in a variety of business activities both in Panama and elsewhere in Latin America,
including banking, insurance, real estate, telecommunications, international trade and commerce and
wholesale. Members of the Motta, Heilbron and Arias families and their affiliates beneficially own
approximately 90% of CIASAs shares. Our Chief Executive Officer, Mr. Pedro Heilbron, and several
of our directors, including Messrs. Stanley Motta and Alberto C. Motta Jr., Mr. Osvaldo Heilbron,
Mr. Jaime Arias and Mr. Ricardo Alberto Arias as a group hold beneficial ownership of approximately
78% of CIASAs shares. This ownership includes 33.4% of the shares of CIASA acquired by Messrs.
Stanley Motta and Alberto C. Motta Jr., Mr. Osvaldo Heilbron, Mr. Jaime Arias, Mr. Ricardo Alberto
Arias, Mr. Pedro Heilbron and other CIASA shareholders in June 2005 from the controlling
shareholders of Copas principal Latin American competitor in a transaction valued at approximately
$60,000,000.
The holders of more than 78% of the issued and outstanding stock of CIASA have entered into a
shareholders agreement providing that the parties to the agreement will vote all of their shares
in CIASA together as a group on all matters concerning CIASAs holdings of Class B shares.
Additionally, the shareholders agreement restricts transfers of CIASA shares to non-Panamanian
nationals. Messrs. Stanley Motta and Alberto C. Motta Jr. together exercise effective control of
CIASA.
One of our directors, Mr. Erwin, is an officer of Continental and may be deemed to share
beneficial ownership with Continental of our Class A shares held by Continental, but Mr. Erwin
disclaims such beneficial ownership.
The address of CIASA is Corporación de Inversiones Aéreas, S.A., c/o Compañía Panameña de
Aviación, S.A., Boulevard Costa del Este, Avenida Principal y Avenida de la Rotonda, Urbanización
Costa del Este, Complejo Business Park, Torre Norte, Parque Lefevre, Panama City, Panama. The
address of Continental is Continental Airlines, Inc., 1600 Smith Street, Houston, Texas 77002.
B. Related Party Transactions
Shareholders Agreement
Copa Holdings is a party to the amended and restated shareholders agreement with CIASA and
Continental entered into in connection with our initial public offering. The amended and restated
shareholders agreement provides for, among other things:
|
|
|
a right of each of CIASA and Continental to designate a certain number of
directors to our board of directors for so long as they hold a certain amount of
our common stock. Of the 11 members of our board, CIASA initially had the right to
designate six directors and Continental initially had the right to designate two
directors, with the remaining three directors being independent under the rules
of the New York Stock Exchange. Continental has the right to designate one of our
directors and CIASA has the right to designate seven of our directors; |
|
|
|
certain limitations on transfers of our common stock by CIASA or Continental; |
|
|
|
subject to certain exceptions, a right of first offer in favor of CIASA to
purchase any shares of our common stock Continental proposes to sell to any third
party; and |
|
|
|
the ability of Continental to tag-along their shares of our common stock to
certain sales of common stock by CIASA to non-Panamanians or, in the case of
certain sales of Class B stock by CIASA to Panamanians, to receive additional
registration rights with respect to the shares they would otherwise have been able
to sell. |
68
Continental has entered into a lock-up agreement with CIASA which restricts its sale of common
stock, without the prior written consent of CIASA and subject to certain other exceptions, until
June 29, 2008.
A material uncured breach of the Shareholders Agreement by CIASA or Copa Holdings will
trigger rights of Continental in the Alliance Agreement, Services Agreement and Frequent Flyer
Agreement to terminate those agreements as described below.
Registration Rights Agreement
Copa Holdings is party to an amended and restated registration rights agreement with CIASA and
Continental pursuant to which CIASA and Continental were entitled to certain demand and piggyback
rights with respect to the registration and sale of our common stock held by them. The registration
rights agreement initially permitted each of CIASA and Continental to make up to two demands on us
to register certain shares of common stock held by them. Continental has used one of its two demand
rights in connection with the 2006 follow-on offering. Since the 2006 follow-on offering,
Continental no longer has the right to register any of our class A shares that it holds except in
the event that CIASA reduces its investment in us to a level below that of Continentals ownership
in us. One half of the registration expenses incurred in connection with the first demand
registration requested after the date hereof, which expenses exclude underwriting discounts and
commissions, will be paid ratably by each security holder participating in such offering in
proportion to the number of their shares that are included in the offering, and the balance of such
expenses will be paid by the Copa Holdings for such demand registrations. Thereafter, all such
expenses will be paid ratably by each security holder participating in such offering in proportion
to the number of their shares that are included in the offering. Continental entered into a lock-up
agreement with the underwriters which restrict its sale of our common stock until the first
anniversary of the 2006 follow-on offering.
A material uncured breach of the Registration Rights Agreement by CIASA or Copa Holdings will
trigger rights of Continental in the Alliance Agreement, Services Agreement and Frequent Flyer
Agreement to terminate those agreements as described below.
Commercial Agreements with Continental
Our alliance relationship with Continental is governed by several interrelated agreements
between Copa and Continental. Each of the agreements as amended and restated will expire only upon
three years written notice by one of the airlines to the other, which may not be given before May
2012. Other events of termination are set forth in the descriptions of the major alliance-related
agreements set forth below.
Alliance Agreement. Under our alliance agreement with Continental, both airlines agree to
continue their codesharing relationship with extensions as they feel are appropriate and to work to
maintain our antitrust immunity with the DOT. In order to support the codesharing relationship, the
alliance agreement also contains provisions mandating a continued frequent flyer relationship
between the airlines, setting minimum levels of quality of service for the airlines and encouraging
cooperation in marketing and other operational initiatives. Continental and Copa are prohibited by
the alliance agreement from entering into commercial agreements with certain classes of competing
airlines, and the agreement requires both parties to include each other, as practicable, in their
commercial relationships with other airlines. Other than by expiration as described above, the
agreement is also terminable by an airline in cases of, among other things, uncured material
breaches of the alliance agreement by the other airline, bankruptcy of the other airline,
termination of the services agreement for breach by the other airline, termination of the frequent
flyer participation agreement without entering into a successor agreement by the other airline,
termination by Continental upon the material unremedied breach of the shareholders agreement or the
registration rights agreement by CIASA or Copa Holdings, termination by Copa upon the material
unremedied breach of the shareholders agreement or the registration rights agreement by
Continental, certain competitive activities, certain changes of control of either of the parties
and certain significant operational service failures by the other airline.
69
Services Agreement. Under the services agreement, both airlines agree to provide to each
other certain services over the course of the agreement at the providing carriers incremental
cost, subject to certain limitations. Services covered under the agreement include consolidating
purchasing power for equipment purchases and insurance coverage, sharing management information
systems, pooling maintenance programs and
inventory management, joint training and employee exchanges, sharing the benefits of other purchase
contracts for goods and services, telecommunications and other services. Other than by expiration
as described above, the agreement is also terminable by an airline in cases of, among other things,
uncured material breaches of the alliance agreement by the other airline, bankruptcy of the other
airline, termination of the services agreement for breach by the other airline, termination of the
frequent flyer participation agreement without entering into a successor agreement by the other
airline, termination by Continental upon the material unremedied breach of the shareholders
agreement or the registration rights agreement by CIASA or Copa Holdings, termination by Copa upon
the material unremedied breach of the shareholders agreement or the registration rights agreement
by Continental, certain changes of control of either of the parties and certain significant
operational service failures by the other airline.
Frequent Flyer Participation Agreement. Under the frequent flyer participation agreement, we
participate in Continentals OnePass frequent flyer global program and on a co-branded basis in
Latin America. Customers in the program receive credit for flying on segments operated by us, which
can be redeemed for award travel on our flights and those of other partner airlines. The agreement
also governs joint marketing agreements under the program, settlement procedures between the
airlines and revenue-sharing under bank card affinity relationships. Further, if the Services
Agreement is terminated or expires, the compensation structure of the frequent flyer program will
be revised to be comparable to other of Continentals frequent flyer relationships. We also have
the right under the agreement to participate on similar terms in any successor program operated by
Continental. Other than by expiration as described above, the agreement is also terminable by an
airline in cases of, among other things, uncured material breaches of the alliance agreement by the
other airline, bankruptcy of the other airline, termination of the services agreement for breach by
the other airline, termination of the frequent flyer participation agreement without entering into
a successor agreement by the other airline, termination by Continental upon the material unremedied
breach of the shareholders agreement or the registration rights agreement by CIASA or Copa
Holdings, termination by Copa upon the material unremedied of the shareholders agreement or the
registration rights agreement by Continental, certain changes of control of either of the parties
and certain significant operational service failures by the other airline.
Trademark License Agreement. Under the trademark license agreement, we have the right to use
a logo incorporating a globe design that is similar to the globe design of Continentals logo. We
also have the right to use Continentals trade dress, aircraft livery and certain other Continental
marks under the agreement that allow us to more closely align our overall product with our alliance
partner. The trademark license agreement is coterminous with the Alliance Agreement and can also be
terminated for breach. In most cases, we will 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.
Agreements with our controlling shareholders and their affiliates
Our directors and controlling shareholders have many other commercial interests within Panama
and throughout Latin America. We have commercial relationships with several of these affiliated
parties from which we purchase goods or services, as described below. In each case we believe our
transactions with these affiliated parties are at arms length and on terms that we believe reflect
prevailing market rates.
Banco Continental de Panama, S.A.
We have a strong commercial banking relationship with Banco Continental de Panama, S.A., which
has been controlled by our controlling shareholders. In January 3, 2007 Grupo Financiero
Continental, S.A., the parent company of Banco Continental, agreed to merge the operations of Banco
Continental with Banco General to form Panamas largest privately owned bank. Following the
execution of the merger the shareholders of Grupo Financiero Continental S.A. will own
approximately 39% of the combined entity.
We have obtained financing from Banco Continental under short to medium-term financing
arrangements for part of the commercial loan tranche of one of the Companys Export-Import Bank
facilities. We also maintain general lines of credit and time deposit accounts with Banco
Continental. Interest payments to Banco Continental totaled $1.4 million, $1.6 million and $1.1
million in 2006, 2005 and 2004, respectively, and we received $1.5
million, $1.0 million, and $1.1 million in 2006, 2005 and 2004, respectively. The debt balance
outstanding at December 31 amounted to $8.5 million and $25.7 million in 2006 and 2005,
respectively.
70
ASSA Compañía de Seguros, S.A.
Panamanian law requires us to maintain our insurance policies through a local insurance
company. We have contracted with ASSA, an insurance company controlled by our controlling
shareholders, to provide substantially all of our insurance. ASSA has, in turn, reinsured almost
all of the risks under those policies with insurance companies around the world. The net payment to
ASSA, after taking into account the reinsurance of these risks, is approximately $30,000 per year.
Petróleos Delta, S.A.
During 2005, we entered into a contract with Petróleos Delta, S.A. to supply our jet fuel
needs. The price agreed to under this contract is based on the two week average of the U.S. Gulf
Coast Waterborne Mean index plus local taxes, certain third-party handling charges and a handling
charge to Delta. The contract has a one year term that automatically renews for one year period
unless terminated by one of the parties. While our controlling shareholders do not hold a
controlling equity interest in Petróleos Delta, S.A., one of our executive officers, Jorge Garcia,
previously served as a Project Director at Petróleos Delta, S.A. Payments to Petróleos Delta
totaled $77.9 million in 2006 and $26.5 million from August to December of 2005.
Desarollo Inmobiliario del Este, S.A.
During January 2006, we moved into our recently constructed new headquarters located six miles
away from Tocumen International Airport. We lease five floors consisting of approximately 104,000
square feet of the building from Desarollo Inmobiliario del Este, S.A., an entity controlled by the
same group of investors that controls CIASA, under a 10-year lease at a rate of $106,000 per month
during the first three years, $110,000 per month from year 4 to year 6, $113,000 from year 7 to
year 9 and $116,000 per month in year 10, which we believe to be a market rate.
Galindo, Arias & Lopez
Most of our legal work is carried out by the law firm Galindo, Arias & Lopez. Messrs. Jaime
Arias and Ricardo Alberto Arias, partners of Galindo, Arias & Lopez, are indirect shareholders of
CIASA and serve on our board of directors.
Other Transactions
We also purchase most of the alcohol and some of the other beverages served on our aircraft
from Motta Internacional, S.A. and Global Brands, S.A., both of which are controlled by our
controlling shareholders. We do not have any formal contracts for these purchases, but pay
wholesale prices based on price lists periodically submitted by those importers. We paid
approximately $0.5 million in 2006 and $0.4 million in 2005 and 2004 to these entities.
Since February 2003 our telecommunications services have been provided by Ziad Holding,
formerly Telecarrier, Inc. Some of the controlling shareholders of CIASA have a controlling
interest in Ziad Holding. Payments to Ziad Holding totaled $0.4 million, $0.4 million and $0.4
million in 2006, 2005 and 2004, respectively.
The advertising agency that we use in Panama, Rogelio Diaz Publicidad (RDP), is owned by the
brother-in-law of our chief executive officer. Gross invoices for all services performed through
RDP totaled $1.5 million, $1.5 million and $1.8 million in 2006,
2005 and 2004.
We have received services from Call Center Corporation, a call center that operates Copas
reservations and sales services and handles calls from Panama as well as to most other countries to
which Copa flies. One of our
directors, Joseph Fidanque III, is one of the owners of this call center. Payments to Call
Center Corporation totaled $2.4 million in 2006.
71
C. Interests of Experts and Counsel
Not applicable.
Item 8. Financial Information
A. Consolidated Statements and Other Financial Information
See Item 3. Key InformationSelected Financial Data and Item 18. Financial Statements.
Legal Proceedings
In the ordinary course of our business, we are party to various legal actions, which we
believe are incidental to the operation of our business. While legal proceedings are inherently
uncertain, we believe that the outcome of the proceedings to which we are currently a party are not
likely to have a material adverse effect on our financial position, results of operations and cash
flows. The Antitrust Administrative Agency (Comisión de Libre Competencia y Asuntos del Consumidor,
or CLICAC), together with a group of travel agencies, has filed an antitrust lawsuit against Copa,
Continental, American Airlines, Grupo TACA and Delta Airlines in the Panamanian Commercial Tribunal
alleging monopolistic practices in reducing travel agents commissions. The outcome of this lawsuit
is still uncertain and may take several years. We believe that in the worst scenario the airlines
could be required to pay up to $20 million. In addition, ACES, a now-defunct Colombian airline,
filed an antitrust lawsuit against Copa, Avianca and SAM, alleging monopolistic practices in
relation to their code-sharing agreements. This case is currently in the discovery period and could
take several years to be resolved. If Copa, Avianca and/or SAM were found at fault and in breach of
antitrust legislation, they could be potentially liable for up to $11 million.
Dividends and Dividend Policy
The payment of dividends on our shares is subject to the discretion of our board of directors.
Under Panamanian law, we may pay dividends only out of retained earnings and capital surplus. So
long as we do not default in our payments under our loan agreements, there are no covenants or
other restrictions on our ability to declare and pay dividends. Our Articles of Incorporation
provide that all dividends declared by our board of directors will be paid equally with respect to
all of the Class A and Class B shares. See Item 10B. Additional Information Memorandum and
Articles of AssociationDescription of Capital StockDividends.
Our board of directors has adopted a dividend policy that provides for the payment of
approximately 10% of our annual consolidated net income to shareholders as a dividend to be
declared at our annual shareholders meeting and paid shortly thereafter. Our board of directors
may, in its sole discretion and for any reason, amend or discontinue the dividend policy. Our board
of directors may change 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.
On May 9, 2007, our board of directors declared an annual dividend of $0.31 per share payable
June 15, 2007 to shareholders of record as of May 31, 2007 which will represent in an aggregate
dividend payment of $13.6 million. On May 11, 2006, our board of directors declared an annual
dividend of $0.19 per share payable June 15, 2006 to shareholders of record as of May 31, 2006
which will represent in an aggregate dividend payment of $8.3 million. In addition, we paid an
extraordinary dividend of $10 million to our shareholders in December 2004 and another
extraordinary dividend of $10 million in June 2005. Prior to the December 2004 dividend payment, we
had not paid a dividend since the formation of Copa Holdings in 1998.
B. Significant Changes
None
72
Item 9. The Offer and Listing
A. Offer and Listing Details
Our Class A shares have been listed on the New York Stock Exchange, or NYSE, under the symbol
CPA since December 14, 2005. The following table sets forth, for the periods indicated, the high
and low closing sale prices for the Class A shares on the NYSE for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
Low |
|
|
High |
|
2005 |
|
|
|
|
|
|
|
|
Annual(1) |
|
|
21.95 |
|
|
|
27.40 |
|
2006 |
|
|
|
|
|
|
|
|
Annual |
|
|
20.31 |
|
|
|
49.05 |
|
First quarter |
|
|
20.31 |
|
|
|
27.10 |
|
Second quarter |
|
|
20.95 |
|
|
|
24.25 |
|
Third quarter |
|
|
21.53 |
|
|
|
35.22 |
|
Fourth quarter |
|
|
33.15 |
|
|
|
49.05 |
|
Last Six Months |
|
|
|
|
|
|
|
|
January 2007 |
|
|
46.70 |
|
|
|
56.50 |
|
February 2007 |
|
|
53.47 |
|
|
|
66.47 |
|
March 2007 |
|
|
49.50 |
|
|
|
59.00 |
|
April 2007 |
|
|
50.54 |
|
|
|
63.23 |
|
May 2007 |
|
|
59.04 |
|
|
|
70.94 |
|
June 2007 |
|
|
59.33 |
|
|
|
71.00 |
|
|
|
|
(1) |
|
Period beginning December 14, 2005 through December 31, 2005. |
B. Plan of Distribution
Not applicable.
C. Markets
Our Class A shares have been listed on the NYSE under the symbol CPA since December 14,
2005. Our Class B shares are not listed on any exchange and are not publicly traded. We are subject
to the NYSE corporate governance listing standards. The NYSE requires that corporations with
shares listed on the exchange comply with certain corporate governance standards. As a foreign
private issuer, we are only required to comply with certain NYSE rules relating to audit committees
and periodic certifications to the NYSE. The NYSE also requires that we provide a summary of the
significant differences between our corporate governance practices and those that would apply to a
U.S. domestic issuer. We believe the following to be the significant differences between our
corporate governance practices and those that would typically apply to a U.S. domestic issuer under
the NYSE corporate governance rules.
In addition, companies that are registered in Panama are required to disclose whether or not
they comply with certain corporate governance guidelines and principles that are recommended by the
National Securities Commission (Comisión Nacional de Valores, or CNV). Statements below referring
to Panamanian governance standards reflect these voluntary guidelines set by the CNV rather than
legal requirements or standard national practices. Our Class A shares are registered with the CNV,
and we comply with the CNVs disclosure requirements.
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NYSE Standards |
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Our Corporate Governance Practice |
Director Independence.
Majority of board of directors must be
independent. §303A.01
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|
Panamanian corporate governance
standards recommend that one in
every five directors should be an
independent director. The
criteria for determining
independence under the Panamanian
corporate governance standards
differs from the NYSE rules. In
Panama, a director would be
considered independent as long as
the director does not directly or
indirectly own 5% or more of the
issued and outstanding voting
shares of the company, is not
involved in the daily management
of the company and is not a
spouse or related to the second
degree by blood or marriage to
the persons named above. |
73
|
|
|
NYSE Standards |
|
Our Corporate Governance Practice |
|
|
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|
Our Articles of Incorporation
require us to have three
independent directors as defined
under the NYSE rules. |
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Executive Sessions. Non-management
directors must meet regularly in
executive sessions without management.
Independent directors should meet alone
in an executive session at least once a
year. §303A.03
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There are no mandatory
requirements under Panamanian law
that a company should hold, and
we currently do not hold, such
executive sessions. |
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Nominating/corporate governance
committee. Nominating/corporate
governance committee of independent
directors is required. The committee
must have a charter specifying the
purpose, duties and evaluation
procedures of the committee. §303A.04
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|
Panamanian corporate governance
standards recommend that
registered companies have a
nominating committee composed of
three members of the board of
directors, at least one of which
should be an independent
director, plus the chief
executive officer and the chief
financial officer. In Panama, the
majority of public corporations
do not have a nominating or
corporate governance committee.
Our Articles of Incorporation
require that we maintain a
Nominating and Corporate
Governance Committee with at
least one independent director
until the first shareholders
meeting to elect directors after
such time as the Class A shares
are entitled to full voting
rights. |
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|
Compensation committee. Compensation
committee of independent directors is
required, which must approve executive
officer compensation. The committee must
have a charter specifying the purpose,
duties and evaluation procedures of the
committee. §303A.05
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|
Panamanian corporate governance
standards recommend that the
compensation of executives and
directors be overseen by the
nominating committee but do not
otherwise address the need for a
compensation committee.
While we maintain a compensation
committee that operates under a
charter as described by the NYSE
governance standards, currently
one of the members of that
committee is independent. |
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|
Equity compensation plans. Equity
compensation plans require shareholder
approval, subject to limited exemptions.
|
|
Under Panamanian law, shareholder
approval is not required for
equity compensation plans. |
|
|
|
Code of Ethics. Corporate
governance guidelines and a code of
business conduct and ethics is required,
with disclosure of any waiver for
directors or executive officers.
§303A.10
|
|
Panamanian corporate governance
standards do not require the
adoption of specific guidelines
as contemplated by the NYSE
standards, although they do
require that companies disclose
differences between their
practices and a list of specified
practices recommended by the CNV.
We have not adopted a set of
corporate governance guidelines
as contemplated by the NYSE,
although we will be required to
comply with the disclosure
requirement of the CNV. |
|
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|
|
|
Panamanian corporate governance
standards recommend that
registered companies adopt a code
of ethics covering such topics as
its ethical and moral principles,
how to address conflicts of
interest, the appropriate use of
resources, obligations to inform
of acts of corruption and
mechanism to enforce the
compliance with established rules
of conduct. |
74
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
Item 10. Additional Information
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
Copa Holdings was formed on May 6, 1998 as a corporation (sociedad anónima) duly incorporated
under the laws of Panama with an indefinite duration. The Registrant is registered under Public
Document No. 3.989 of May 5, 1998 of the Notary Number Eight of the Circuit of Panama and recorded
in the Public Registry Office, Microfilm (Mercantile) Section, Microjacket 344962, Film Roll 59672,
Frame 0023.
Objects and Purposes
Copa Holdings is principally engaged in the investment in airlines and aviation-related
companies and ventures, although our Articles of Incorporation grant us general powers to engage in
any other lawful business, whether or not related to any of the specific purposes set forth in the
Articles of Incorporation.
Description of Capital Stock
The following is a summary of the material terms of Copa Holdings capital stock and a brief
summary of certain significant provisions of Copa Holdings Articles of Incorporation. This
description contains all material information concerning the common stock but does not purport to
be complete. For additional information regarding the common stock, reference is made to the
Articles of Incorporation, a copy of which has been filed as an exhibit to the registration
statement of which this prospectus forms a part.
For purposes of this section only, reference to our or the company shall refer only to
Copa Holdings and references to Panamanians shall refer to those entities or natural persons that
are considered Panamanian nationals under the Panamanian Aviation Act, as it may be amended or
interpreted.
Common Stock
Our authorized
capital stock consists of 80 million shares of common stock without par value,
divided into Class A shares, Class B shares and Class C shares. As of
May 31, 2007, we had 30,967,394 Class A shares, 12,778,125 Class B shares and
no Class C shares issued. Class A and
Class B shares have the same economic rights and privileges, including the right to receive
dividends, except as described in this section.
75
Class A Shares
The holders of the Class A shares are not entitled to vote at our shareholders meetings,
except in connection with the following specific matters:
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a transformation of Copa Holdings into another corporate type; |
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|
|
a merger, consolidation or spin-off of Copa Holdings; |
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|
|
a change of corporate purpose; |
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|
|
voluntarily delisting Class A shares from the NYSE; |
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|
|
approving the nomination of Independent Directors nominated by our board of
directors Nominating and Corporate Governance Committee following our next annual
general shareholders meeting; and |
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any amendment to the foregoing special voting provisions adversely affecting the
rights and privileges of the Class A shares. |
At least 30 days prior to taking any of the actions listed above, we must give notice to the Class
A and Class B shareholders of our intention to do so. If requested by shareholders representing at
least 5% of our outstanding shares, the board of directors shall call an extraordinary
shareholders meeting to approve such action. At the extraordinary shareholders meeting,
shareholders representing a majority of all of the outstanding shares must approve a resolution
authorizing the proposed action. For such purpose, every holder of our shares is entitled to one
vote per share. See Shareholders Meetings.
The Class A shareholders will acquire full voting rights, entitled to one vote per Class A
share on all matters upon which shareholders are entitled to vote, if in the future our Class B
shares ever represent fewer than 10% of the total number of shares of our common stock and the
Independent Directors Committee shall have determined that such additional voting rights of Class A
shareholders would not cause a triggering event referred to below. In such event, the right of the
Class A shareholders to vote on the specific matters described in the preceding paragraph will no
longer be applicable. The 10% threshold described in the first sentence of this paragraph will be
calculated without giving effect to any newly issued shares sold with the approval of the
Independent Directors Committee.
At such time, if any, as the Class A shareholders acquire full voting rights, the Board of
Directors shall call an extraordinary shareholders meeting to be held within 90 days following the
date as of which the Class A shares are entitled to vote on all matters at our shareholders
meetings. At the extraordinary shareholders meeting, the shareholders shall vote to elect all
eleven members of the board of directors in a slate recommended by the Nominating and Governance
Committee. The terms of office of the directors that were serving prior to the extraordinary
shareholders meeting shall terminate upon the election held at that meeting.
Class B Shares
Every holder of Class B shares is entitled to one vote per share on all matters for which
shareholders are entitled to vote. Class B shares will be automatically converted into Class A
shares upon the registration of transfer of such shares to holders which are not Panamanian as
described below under Restrictions on Transfer of Common Stock; Conversion of Class B Shares.
Class C Shares
Upon the occurrence and during the continuance of a triggering event described below in
"Aviation Rights Protections, the Independent Directors Committee of our board of directors, or
the board of directors as a whole if applicable, are authorized to issue Class C shares to the
Class B holders pro rata in proportion to such Class B holders ownership of Copa Holdings. The
Class C shares will have no economic value and will not be
transferable, but will possess such voting rights as the Independent Directors Committee shall
deem necessary to ensure the effective control of the company by Panamanians. The Class C shares
will be redeemable by the company at such time as the Independent Directors Committee determines
that such a triggering event shall no longer be in effect. The Class C shares will not be entitled
to any dividends or any other economic rights.
76
Restrictions on Transfer of Common Stock; Conversion of Class B Shares
The Class B shares may only be held by Panamanians, and upon registration of any transfer of a
Class B share to a holder that does not certify that it is Panamanian, such Class B share shall
automatically convert into a Class A share. Transferees of Class B shares will be required to
deliver to us written certification of their status as a Panamanian as a condition to registering
the transfer to them of Class B shares. Class A shareholders will not be required or entitled to
provide such certification. If a Class B shareholder intends to sell any Class B shares to a person
that has not delivered a certification as to Panamanian nationality and immediately after giving
effect to such proposed transfer the outstanding Class B shares would represent less than 10% of
our outstanding stock (excluding newly issued shares sold with the approval of our Independent
Directors Committee), the selling shareholder must inform the board of directors at least ten days
prior to such transfer. The Independent Directors Committee may determine to refuse to register the
transfer if the Committee reasonably concludes, on the basis of the advice of a reputable external
aeronautical counsel, that such transfer would be reasonably likely to cause a triggering event as
described below. After the first shareholders meeting at which the Class A shareholders are
entitled to vote for the election of our directors, the role of the Independent Directors described
in the preceding sentence shall be exercised by the entire board of directors acting as a whole.
Also, the board of directors may refuse to register a transfer of stock if the transfer
violates any provision of the Articles of Incorporation.
Tag-along Rights
Our board of directors may refuse to register any transfer of shares in which CIASA proposes
to sell Class B shares pursuant to a sale at a price per share that is greater than the average
public trading price per share of the Class A shares for the preceding 30 days to an unrelated
third party that would, after giving effect to such sale, have the right to elect a majority of the
board of directors and direct our management and policies, unless the proposed purchaser agrees to
make, as promptly as possible, a public offer for the purchase of all outstanding Class A shares
and Class B shares at a price per share equal to the price per share paid for the shares being sold
by CIASA. 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.
Aviation Rights Protections
As described in RegulationPanama, the Panamanian Aviation Act, including the related
decrees and regulations, and the bilateral treaties between Panama and other countries that allow
us to fly to those countries require that Panamanians exercise effective control of Copa and
maintain significant ownership of the airline. The Independent Directors Committee have certain
powers under our Articles of Incorporation to ensure that certain levels of ownership and control
of Copa Holdings remain in the hands of Panamanians upon the occurrence of certain triggering
events referred to below.
In the event that the Class B shareholders represent less than 10% of the total share capital
of the company (excluding newly issued shares sold with the approval of our Independent Directors
Committee) and the Independent Directors Committee determines that it is reasonably likely that
Copas or Copa Holdings legal ability to engage in the aviation business or to exercise its
international route rights will be revoked, suspended or materially inhibited in a manner which
would materially and adversely affect the company, in each case as a result
of such non-Panamanian ownership (each a triggering event), the Independent Directors
Committee may take either or both of the following actions:
77
|
|
|
authorize the issuance of additional Class B shares to Panamanians at a price
determined by the Independent Directors to reflect the current market value of such
shares or |
|
|
|
authorize the issuance to Class B shareholders such number of Class C shares as the
Independent Directors Committee, or the board of directors if applicable, deems
necessary and with such other terms and conditions established by the Independent
Directors Committee that do not confer economic rights on the Class C shares. |
Dividends
The payment of dividends on our shares is subject to the discretion of our board of directors.
Under Panamanian law, we may pay dividends only out of retained earnings and capital surplus. Our
Articles of Incorporation provide that all dividends declared by our board of directors will be
paid equally with respect to all of the Class A and Class B shares. Our board of directors has
adopted a dividend policy that provides for the payment of approximately 10% of our annual
consolidated net income to Class A and Class B shareholders. Our board of directors may, in its
sole discretion and for any reason, amend or discontinue the dividend policy. Our board of
directors may change the level of dividends provided for in this dividend policy or entirely
discontinue the payment of dividends.
Shareholder Meetings
Ordinary Meetings
Our Articles of Incorporation require us to hold an ordinary annual meeting of shareholders
within the first five months of each fiscal year. The ordinary annual meeting of shareholders is
the corporate body that elects the board of directors, approves the annual financial statements of
Copa Holdings and approves any other matter that does not require an extraordinary shareholders
meeting. Shareholders representing at least 5% of the issued and outstanding common stock entitled
to vote may submit proposals to be included in such ordinary shareholders meeting, provided the
proposal is submitted at least 45 days prior to the meeting.
Extraordinary Meetings
Extraordinary meetings may be called by the board of directors when deemed appropriate.
Ordinary and extraordinary meetings must be called by the board of directors when requested by
shareholders representing at least 5% of the issued shares entitled to vote at such meeting. Only
matters that have been described in the notice of an extraordinary meeting may be dealt with at
that extraordinary meeting.
Vote required
Resolutions are passed at shareholders meetings by the affirmative vote of a majority of those
shares entitled to vote at such meeting and present or represented at the meeting.
Notice and Location
Notice to convene the ordinary annual meeting or extraordinary meeting is given by publication
in at least one national newspaper in Panama and at least one national newspaper widely read in New
York City not less than 30 days in advance of the meeting. We intend to publish such official
notices in a national journal recognized by the NYSE.
Shareholders meetings are to be held in Panama City, Panama unless otherwise specified by the
board of directors.
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Quorum
Generally, a quorum for a shareholders meeting is established by the presence, in person or
by proxy, of shareholders representing a simple majority of the issued shares eligible to vote on
any actions to be considered at such meeting. If a quorum is not present at the first meeting and
the original notice for such meeting so provides, the meeting can be immediately reconvened on the
same day and, upon the meeting being reconvened, shareholders present or represented at the
reconvened meeting are deemed to constitute a quorum regardless of the percentage of the shares
represented.
Proxy Representation
Our Articles of Incorporation provide that, for so long as the Class A shares do not have full
voting rights, each holder, by owning our Class A shares, grants a general proxy to the Chairman of
our board of directors or any person designated by our Chairman to represent them and vote their
shares on their behalf at any shareholders meeting, provided that due notice was made of such
meeting and that no specific proxy revoking or replacing the general proxy has been received from
such holder prior to the meeting in accordance with the instructions provided by the notice.
Other Shareholder Rights
As a general principle, Panamanian law bars the majority of a corporations shareholders from
imposing resolutions which violate its articles of incorporation or the law, and grants any
shareholder the right to challenge, within 30 days, any shareholders resolution that is illegal or
that violates its articles of incorporation or by-laws, by requesting the annulment of said
resolution and/or the injunction thereof pending judicial decision. Minority shareholders
representing at least 5% of all issued and outstanding shares have the right to require a judge to
call a shareholders meeting and to appoint an independent auditor (revisor) to examine the
corporate accounting books, the background of the companys incorporation or its operation.
Shareholders have no pre-emptive rights on the issue of new shares.
Our Articles of Incorporation provide that directors will be elected in staggered two-year
terms, which may have the effect of discouraging certain changes of control.
Listing
Our Class A shares are listed on the NYSE under the symbol CPA. The Class B shares and Class
C shares will not be listed on any exchange unless the board of directors determines that it is in
the best interest of the company to list the Class B shares on the Panama Stock Exchange.
Transfer Agent and Registrar
The transfer agent and registrar for our Class A shares is Mellon Investor Services LLC. Until
the board of directors otherwise provides, the transfer agent for our Class B shares and any Class
C shares is Galindo, Arias & Lopez which maintains the share register for each class in Panama.
Transfers of Class B shares must be accompanied by a certification of the transferee that such
transferee is Panamanian.
Summary of Significant Differences between Shareholders Rights and Other Corporate Governance
Matters Under Panamanian Corporation Law and Delaware Corporation Law
Copa Holdings is a Panamanian corporation (sociedad anónima). The Panamanian corporation law
was originally modeled after the Delaware General Corporation Law. As such, many of the provisions
applicable to Panamanian and Delaware corporations are substantially similar, including (1) a
directors fiduciary duties of care and loyalty to the corporation, (2) a lack of limits on the
number of terms a person may serve on the board of directors, (3) provisions allowing shareholders
to vote by proxy and (4) cumulative voting if provided for in the
articles of incorporation. The following table highlights the most significant provisions that
materially differ between Panamanian corporation law and Delaware corporation law.
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Panama |
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Directors
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Conflict of Interest
Transactions.
Transactions
involving a
Panamanian
corporation and an
interested director
or officer are
initially subject to
the approval of the
board of directors.
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Conflict of Interest Transactions. Transactions
involving a Delaware corporation and an interested
director of that corporation are generally
permitted if: |
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At the next
shareholders
meeting, shareholders
will then have the
right to disapprove
the board of
directors decision
and to decide to take
legal actions against
the directors or
officers who voted in
favor of the
transaction.
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(1) the material facts as to the interested
directors relationship or interest are disclosed
and a majority of disinterested directors approve
the transaction;
(2) the material facts are disclosed as to the
interested directors relationship or interest and
the stockholders approve the transaction; or |
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(3) the transaction is fair to the corporation at
the time it is authorized by the board of
directors, a committee of the board of directors or
the stockholders. |
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Terms. Panamanian law
does not set limits
on the length of the
terms that a director
may serve. Staggered
terms are allowed but
not required.
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Terms. The Delaware General Corporation Law
generally provides for a one-year term for
directors. However, the directorships may be
divided into up to three classes with up to
three-year terms, with the years for each class
expiring in different years, if permitted by the
articles of incorporation, an initial by-law or a
by-law adopted by the shareholders. |
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Number. The board of
directors must
consist of a minimum
of three members,
which could be
natural persons or
legal entities.
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Number. The board of directors must consist of a
minimum of one member. |
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Authority to take
Actions. In general,
a simple majority of
the board of
directors is
necessary and
sufficient to take
any action on behalf
of the board of
directors.
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Authority to take Actions. The articles of
incorporation or by-laws can establish certain
actions that require the approval of more than a
majority of directors. |
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Shareholder Meetings and Voting Rights
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Quorum. The quorum
for shareholder
meetings must be set
by the articles of
incorporation or the
by-laws. If the
articles of
incorporation and the
notice for a given
meeting so provide,
if quorum is not met
a new meeting can be
immediately called
and quorum shall
consist of those
present at such new
meeting.
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Quorum. For stock corporations, the articles of
incorporation or bylaws may specify the number to
constitute a quorum but in no event shall a quorum
consist of less than one-third of shares entitled
to vote at a meeting. In the absence of such
specifications, a majority of shares entitled to
vote shall constitute a quorum. |
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Action by Written
Consent. Panamanian
law does not permit
shareholder action
without formally
calling a meeting.
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Action by Written Consent. Unless otherwise
provided in the articles of incorporation, any
action required or permitted to be taken at any
annual meeting or special meeting of stockholders
of a corporation may be taken without a meeting,
without prior notice and without a vote, if a
consent or consents in writing, setting forth the
action to be so taken, is signed by the holders of
outstanding shares having not less than the minimum
number of votes that would be necessary to
authorize or take such action at a meeting at which
all shares entitled to vote thereon were present
and noted. |
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Other Shareholder Rights
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Shareholder
Proposals.
Shareholders
representing 5% of
the issued and
outstanding capital
of the corporation
have the right to
require a judge to
call a general
shareholders meeting
and to propose the
matters for vote.
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Shareholder Proposals. Delaware law does not
specifically grant shareholders the right to bring
business before an annual or special meeting. If a
Delaware corporation is subject to the SECs proxy
rules, a shareholder who owns at least $2,000 in
market value, or 1% of the corporations securities
entitled to vote, may propose a matter for a vote
at an annual or special meeting in accordance with
those rules. |
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Appraisal Rights.
Shareholders of
Panamanian
corporation do not
have the right to
demand payment in
cash of the
judicially determined
fair value of their
shares in connection
with a merger or
consolidation
involving the
corporation.
Nevertheless, in a
merger, the majority
of shareholders could
approve the total or
partial distribution
of cash, instead of
shares, of the
surviving entity.
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Appraisal Rights. Delaware law affords shareholders
in certain cases the right to demand payment in
cash of the judicially-determined fair value of
their shares in connection with a merger or
consolidation involving their corporation. However,
no appraisal rights are available if, among other
things and subject to certain exceptions, such
shares were listed on a national securities
exchange or designated national market system or
such shares were held of record by more than 2,000
holders. |
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Shareholder
Derivative Actions.
Any shareholder, with
the consent of the
majority of the
shareholders, can sue
on behalf of the
corporation, the
directors of the
corporation for a
breach of their
duties of care and
loyalty to the
corporation or a
violation of the law,
the articles of
incorporation or the
by-laws.
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Shareholder Derivative Actions. Subject to certain
requirements that a shareholder make prior demand
on the board of directors or have an excuse not to
make such demand, a shareholder may bring a
derivative action on behalf of the corporation to
enforce the rights of the corporation against
officers, directors and third parties. An
individual may also commence a class action suit on
behalf of himself and other similarly-situated
stockholders if the requirements for maintaining a
class action under the Delaware General Corporation
Law have been met. Subject to equitable principles,
a three-year period of limitations generally
applies to such shareholder suits against officers
and directors. |
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Inspection of
Corporate Records.
Shareholders
representing at least
5% of the issued and
outstanding shares of
the corporation have
the right to require
a judge to appoint an
independent auditor
to examine the
corporate accounting
books, the background
of the companys
incorporation or its
operation.
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Inspection of Corporate Records. A shareholder may
inspect or obtain copies of a corporations
shareholder list and its other books and records
for any purpose reasonably related to a persons
interest as a shareholder. |
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Anti-takeover Provisions
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Panamanian
corporations may
include in their
articles of
incorporation or
by-laws classified
board and
super-majority
provisions.
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Delaware corporations may have a classified board,
super-majority voting and shareholders rights
plan. |
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Panamanian
corporation laws
anti-takeover
provisions apply only
to companies that
are(1) registered
with the CNV for a
period of six months
before the public
offering,(2) have
over 3,000
shareholders, and(3)
have a permanent
office in Panama with
full time employees
and investments in
the country for more
than $1,000,000.
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Unless Delaware corporations specifically elect
otherwise, Delaware corporations may not enter into
a business combination, including mergers, sales
and leases of assets, issuances of securities and
similar transactions, with an interested
stockholder, or one that beneficially owns 15% or
more of a corporations voting stock, within three
years of such person becoming an interested
shareholder unless: |
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These provisions are
triggered when a
buyer makes a public
offer to acquire 5%
or more of any class
of shares with a
market value of at
least $5,000,000. In
sum, the buyer must
deliver to the
corporation a
complete and accurate
statement that
includes(1) the name
of the company, the
number of the shares
that the buyer
intends to acquire
and the purchase
price;(2) the
identity and
background of the
person acquiring the
shares;(3) the source
and amount of the
funds or other goods
that will be used to
pay the purchase
price;(4) the plans
or project the buyer
has once it has
acquired the control
of the company;(5)
the number of shares
of the company that
the buyer already has
or is a beneficiary
of and those owned by
any of its directors,
officers,
subsidiaries, or
partners or the same,
and any transactions
made regarding the
shares in the last 60
days;(6) contracts,
agreements, business
relations or
negotiations
regarding securities
issued by the company
in which the buyer is
a party;(7) contract,
agreements, business
relations or
negotiations between
the buyer and any
director, officer or
beneficiary of the
securities; and(8)
any other significant
information. This
declaration will be
accompanied by, among
other things, a copy
of the buyers
financial statements.
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(1) the transaction that will cause the person to
become an interested shareholder is approved by the
board of directors of the target prior to the
transactions;
(2) after the completion of the transaction in
which the person becomes an interested shareholder,
the interested shareholder holds at least 85% of
the voting stock of the corporation not including
shares owned by persons who are directors and also
officers of interested shareholders and shares
owned by specified employee benefit plans; or
(3) after the person becomes an interested
shareholder, the business combination is approved
by the board of directors of the corporation and
holders of at least 66.67% of the outstanding
voting stock, excluding shares held by the
interested shareholder. |
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If the board of
directors believes
that the statement
does not contain all
required information
or that the statement
is inaccurate, the
board of directors
must send the
statement to the CNV
within 45 days from
the buyers initial
delivery of the
statement to the CNV.
The CNV may then hold
a public hearing to
determine if the
information is
accurate and complete
and if the buyer has
complied with the
legal requirements.
The CNV may also
start an inquiry into
the case, having the
power to decide
whether or not the
offer may be made. |
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Regardless of the
above, the board of
directors has the
authority to submit
the offer to the
consideration of the
shareholders. The
board should only
convene a
shareholders meeting
when it deems the
statement delivered
by the offeror to be
complete and
accurate. If
convened, the
shareholders meeting
should take place
within the next 30
days. At the
shareholders
meeting, two-thirds
of the holders of the
issued and
outstanding shares of
each class of shares
of the corporation
with a right to vote
must approve the
offer and the offer
is to be executed
within 60 days from
the shareholders
approval. If the
board decides not to
convene the
shareholders meeting
within 15 days
following the receipt
of a complete and
accurate statement
from the offeror,
shares may then be
purchased. In all
cases, the purchase
of shares can take
place only if it is
not prohibited by an
administrative or
judicial order or
injunction. |
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The law also
establishes some
actions or recourses
of the sellers
against the buyer in
cases the offer is
made in contravention
of the law. |
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Panama |
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Previously Acquired Rights
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In no event can the
vote of the majority
shareholders deprive
the shareholders of a
corporation of
previously-acquired
rights. Panamanian
jurisprudence and
doctrine has
established that the
majority shareholders
cannot amend the
articles of
incorporation and
deprive minority
shareholders of
previously-acquired
rights nor impose
upon them an
agreement that is
contrary to those
articles of
incorporation.
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No comparable provisions exist under Delaware law. |
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Once a share is
issued, the
shareholders become
entitled to the
rights established in
the articles of
incorporation and
such rights cannot be
taken away,
diminished nor
extinguished without
the express consent
of the shareholders
entitled to such
rights. If by
amending the articles
of incorporation, the
rights granted to a
class of shareholders
is somehow altered or
modified to their
disadvantage, those
shareholders will
need to approve the
amendment
unanimously. |
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C. Material Contracts
Commercial Agreements with Continental Airlines
Our alliance relationship with Continental is governed by several interrelated agreements. We
have amended and restated each of these agreements and extended them through 2015 in connection
with our initial public offering in December 2005.
Alliance Agreement between Continental and Copa Airlines. Under the alliance agreement, both
airlines agree to continue their codesharing relationship with extensions as they feel are
appropriate and to work to maintain our antitrust immunity with the DOT. In order to support the
codesharing relationship, the alliance agreement also contains provisions mandating a continued
frequent flyer relationship between the airlines, setting minimum levels of quality of service for
the airlines and encouraging cooperation in marketing and other operational initiatives.
Services Agreement between Continental and Copa Airlines. Under the services agreement, both
airlines agree to provide to each other certain services over the course of the agreement at the
providing carriers incremental cost, subject to certain limitations. Services covered under the
agreement include consolidating purchasing power for equipment purchases and insurance coverage,
sharing management information systems,
pooling maintenance programs and inventory management, joint training and employee exchanges,
sharing the benefits of other purchase contracts for goods and services, telecommunications and
other services.
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Frequent Flyer Participation Agreement between Continental and Copa Airlines. Under the
frequent flyer participation agreement, we participate in Continentals OnePass frequent flyer
global program and on a co-branded basis in Latin America. Customers in the program receive credit
for flying on segments operated by us, which can be redeemed for award travel on flights and those
of other partner airlines. The agreement also governs joint marketing agreements under the program,
settlement procedures between the airlines and revenue-sharing under bank card affinity
relationships.
Trademark License Agreement between Continental and Copa Airlines. Under the trademark license
agreement, Copa has the right to use a logo incorporating a globe design that is similar to the
globe design of Continentals logo. Copa also has the right to use Continentals trade dress,
aircraft livery and certain other Continental marks under the agreement that allow us to more
closely align our overall product with our alliance partner.
Aircraft General Terms Agreement between The Boeing Company and Copa Airlines
In 1998, Copa entered into an agreement with the Boeing Company for the purchase of aircraft,
installation of buyer furnished equipment provided by Copa, customer support services and product
assurance. In addition to the aircraft supplied, The Boeing Company will provide maintenance
training and flight training programs, as well as operations engineering support. The agreement has
been amended several times since then, most recently in May 2007.
Purchase Agreement between Empresa Brasileira de Aeronautica, S.A. and Copa Airlines
In 2003, Copa entered into a purchase agreement with Empresa Brasileira de Aeronautica, S.A
(Embraer) for the purchase of aircraft, customer support services and technical publications.
Purchase Agreement between Empresa Brasileira de Aeronautica, S.A. and Copa Holdings, S.A.
In February 2006, we entered into a purchase agreement with Empresa Brasileira de Aeronautica,
S.A (Embraer) for the purchase of aircraft, customer support services and technical publications.
D. Exchange Controls
There are currently no Panamanian restrictions on the export or import of capital, including
foreign exchange controls, and no restrictions on the payment of dividends or interest, nor are
there limitations on the rights of foreign stockholders to hold or vote stock.
E. Taxation
United States
The following summary describes the material United States federal income tax consequences of
the ownership and disposition of our Class A shares as of the date hereof. The discussion set forth
below is applicable to United States Holders (as defined below) that beneficially own our Class A
shares as capital assets for United States federal income tax purposes (generally, property held
for investment). This summary does not represent a detailed description of the United States
federal income tax consequences applicable to you if you are subject to special treatment under the
United States federal income tax laws, including if you are:
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a dealer in securities or currencies; |
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a financial institution; |
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a regulated investment company; |
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a real estate investment trust; |
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a tax-exempt organization; |
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a person holding our Class A shares as part of a hedging, integrated or conversion
transaction, a constructive sale or a straddle; |
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a trader in securities that has elected the mark-to-market method of accounting for your securities; |
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a person liable for alternative minimum tax; |
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a person who owns 10% or more of our voting stock; |
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a partnership or other pass-through entity for United States federal income tax purposes; or |
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a person whose functional currency is not the United States dollar. |
The discussion below is based upon the provisions of the Internal Revenue Code of 1986, as
amended (the Code), and regulations, rulings and judicial decisions thereunder as of the date
hereof, and such authorities may be replaced, revoked or modified so as to result in United States
federal income tax consequences different from those discussed below.
If you are considering the purchase, ownership or disposition of our Class A shares, you
should consult your own tax advisors concerning the United States federal income tax consequences
to you in light of your particular situation as well as any consequences arising under the laws of
any other taxing jurisdiction.
As used herein, United States Holder means a beneficial owner of our Class A shares that is
for United States federal income tax purposes:
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an individual citizen or resident of the United States; |
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a corporation (or other entity treated as a corporation for United States federal
income tax purposes) created or organized in or under the laws of the United States,
any state thereof or the District of Columbia; |
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an estate the income of which is subject to United States federal income taxation
regardless of its source; or |
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a trust if it (1) is subject to the primary supervision of a court within the United
States and one or more United States persons have the authority to control all
substantial decisions of the trust or (2) has a valid election in effect under
applicable United States Treasury regulations to be treated as a United States person. |
Taxation of Dividends
Distributions on the Class A shares (including amounts withheld to reflect Panamanian
withholding taxes, if any) will be taxable as dividends to the extent paid out of our current or
accumulated earnings and profits, as determined under United States federal income tax principles.
Such income (including withheld taxes) will be includable in your gross income as ordinary income
on the day actually or constructively received by you. Such dividends will not be eligible for the
dividends received deduction allowed to corporations.
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With respect to non-corporate United States Holders, certain dividends received in taxable
years beginning before January 1, 2011 from a qualified foreign corporation may be subject to
reduced rates of taxation. A foreign corporation generally is treated as a qualified foreign
corporation with respect to dividends paid by that corporation on shares that are readily tradable
on an established securities market in the United States. United States Treasury Department
guidance indicates that our Class A shares, which are listed on the NYSE, are readily tradable on
an established securities market in the United States. There can be no assurance, however, that our
Class A shares will
be considered readily tradable on an established securities market in later years.
Non-corporate United States Holders that do not meet a minimum holding period requirement during
which they are not protected from the risk of loss or that elect to treat the dividend income as
investment income pursuant to Section 163(d)(4) of the Code will not be eligible for the reduced
rates of taxation regardless of our status as a qualified foreign corporation. In addition, the
rate reduction will not apply to dividends if the recipient of a dividend is obligated to make
related payments with respect to positions in substantially similar or related property. This
disallowance applies even if the minimum holding period has been met. You should consult your own
tax advisors regarding the application of these rules to your particular circumstances.
Subject to certain conditions and limitations, Panamanian withholding taxes on dividends may
be treated as foreign taxes eligible for credit against your United States federal income tax
liability. For purposes of calculating the foreign tax credit, dividends paid on the Class A shares
will be treated as income from sources outside the United States and will generally constitute
passive income. Further, in certain circumstances, if you:
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have held Class A shares for less than a specified minimum period during which you
are not protected from risk of loss, or |
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are obligated to make payments related to the dividends, |
you will not be allowed a foreign tax credit for foreign taxes imposed on dividends paid on
the Class A shares, if any. The rules governing the foreign tax credit are complex. You are urged
to consult your tax advisors regarding the availability of the foreign tax credit under your
particular circumstances.
To the extent that the amount of any distribution exceeds our current and accumulated earnings
and profits for a taxable year, as determined under United States federal income tax principles,
the distribution will first be treated as a tax-free return of capital, causing a reduction in the
adjusted basis of the Class A shares (thereby increasing the amount of gain, or decreasing the
amount of loss, to be recognized by you on a subsequent disposition of the Class A shares), and the
balance in excess of adjusted basis will be taxed as capital gain recognized on a sale or exchange
(as discussed below under Taxation of Capital Gains). Consequently, such distributions in
excess of our current and accumulated earnings and profits would generally not give rise to foreign
source income and you would generally not be able to use the foreign tax credit arising from any
Panamanian withholding tax imposed on such distributions unless such credit can be applied (subject
to applicable limitations) against United States federal income tax due on other foreign source
income in the appropriate category for foreign tax credit purposes. However, we do not intend to
keep earnings and profits in accordance with United States federal income tax principles.
Therefore, you should expect that a distribution will generally be treated as a dividend (as
discussed above).
Passive Foreign Investment Company
We do not believe that we are a passive foreign investment company (a PFIC) for United
States federal income tax purposes (or that we were one in 2006), and we expect to operate in such
a manner so as not to become a PFIC. If, however, we are or become a PFIC, you could be subject to
additional United States federal income taxes on gain recognized with respect to the Class A shares
and on certain distributions, plus an interest charge on certain taxes treated as having been
deferred under the PFIC rules. Further, non-corporate United States Holders will not be eligible
for reduced rates of taxation on any dividends received from us in taxable years beginning prior to
January 1, 2011, if we are a PFIC in the taxable year in which such dividends are paid or the
preceding taxable year.
Taxation of Capital Gains
For United States federal income tax purposes, you will recognize taxable gain or loss on any
sale, exchange or redemption of a Class A share in an amount equal to the difference between the
amount realized for the Class A share and your tax basis in the Class A share. Such gain or loss
will generally be capital gain or loss. Capital gains of individuals derived with respect to
capital assets held for more than one year are eligible for reduced rates of taxation. The
deductibility of capital losses is subject to limitations. Any gain or loss recognized by you will
generally be treated as United States source gain or loss.
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Information reporting and backup withholding
In general, information reporting will apply to dividends in respect of our Class A shares and
the proceeds from the sale, exchange or redemption of our Class A shares that are paid to you
within the United States (and in certain cases, outside the United States), unless you are an
exempt recipient such as a corporation. A backup withholding tax may apply to such payments if you
fail to provide a taxpayer identification number or certification of other exempt status or fail to
report in full dividend and interest income.
Any amounts withheld under the backup withholding rules will be allowed as a refund or a
credit against your United States federal income tax liability provided the required information is
timely furnished to the Internal Revenue Service.
Panamanian Taxation
The following is a discussion of the material Panamanian tax considerations to holders of
Class A shares under Panamanian tax law, and is based upon the tax laws and regulations in force
and effect as of the date hereof, which may be subject to change. This discussion, to the extent it
states matters of Panamanian tax law or legal conclusions and subject to the qualifications herein,
represents the opinion of Galindo, Arias & Lopez, our Panamanian counsel.
General principles
Panamas income tax regime is based on territoriality principles, which define taxable income
only as that revenue which is generated from a source within the Republic of Panama, or for
services rendered outside of Panama, but which, by their nature, are intended to directly benefit
the local commercial activities of individuals or corporations which operate within its territory.
Said taxation principles have governed the Panamanian fiscal regime for decades, and have been
upheld through judicial and administrative precedent.
Taxation of dividends
Distributions by Panamanian corporations, whether in the form of cash, stock or other
property, are subject to a 10% withholding tax for the portion of the distribution that is
attributable to Panamanian sourced income, as defined pursuant to the territoriality principles
that govern Panamanian tax law. Distributions made by a holding company which correspond to
dividends paid by its subsidiary for which the dividend tax was paid, are not subject to any
further withholding under Panamanian law. Therefore, distributions on the Class A shares would not
be subject to withholding taxes to the extent that said distributions are attributable to dividends
received from any of our subsidiaries.
Taxation of capital gains
As long as the Class A shares are registered with the CNV and are sold through an organized
market, Panamanian taxes on capital gains will not apply either to Panamanians or other countries
nationals. As part of the offering process, we have registered the Class A shares, with both the
New York Stock Exchange and the CNV.
Other Panamanian taxes
There are no estate, gift or other taxes imposed by the Panamanian government that would
affect a holder of the Class A shares, whether such holder were Panamanian or a national of another
country.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
87
H. Documents on Display
We are subject to the informational requirements of the U.S. Securities Exchange Act of 1934,
which is also known as the Exchange Act. Accordingly, we are required to file reports and other
information with the Commission, including annual reports on Form 20-F and reports on Form 6-K.
You may inspect and copy reports and other information to be filed with the Commission at the
Public Reference Room of the Commission at 100 F Street, N.W., Washington D.C. 20549, and copies of
the materials may be obtained there at prescribed rates. The public may obtain information on the
operation of the Commissions Public Reference Room by calling the Commission in the United States
at 1-800-SEC-0330. In addition, the Commission maintains a website at www.sec.gov, from which you
can electronically access the registration statement and its materials.
As a foreign private issuer, we are not subject to the same disclosure requirements as a
domestic U.S. registrant under the Exchange Act. For example, we are not required to prepare and
issue quarterly reports. However, we furnish our shareholders with annual reports containing
financial statements audited by our independent auditors and make available to our shareholders
quarterly reports containing unaudited financial data for the first three quarters of each fiscal
year. We file quarterly financial statements with the SEC within two months of each quarter of our
fiscal year, and we file annual reports on Form 20-F within the time period required by the SEC,
which is currently six months from December 31, the end of our fiscal year.
I. Subsidiary Information
Not applicable.
Item 11. Quantitative and Qualitative Disclosures about Market Risk
The risks inherent in our business are the potential losses arising from adverse changes to
the price of fuel, interest rates and the U.S. dollar exchange rate.
Aircraft Fuel. Our results of operations are affected by changes in the price and
availability of aircraft fuel. To manage the price risk, we use crude oil option contracts, zero
cost collars and swap agreements. Market risk is estimated as a hypothetical 10% increase in the
December 31, 2006 cost per gallon of fuel. Based on projected 2007 fuel consumption, such an
increase would result in an increase to aircraft fuel expense of approximately $23.0 million in
2007, not taking into account our derivative contracts. We currently have hedged approximately 27%
of our projected 2007 fuel requirements and 6% of our projected fuel consumption from January 1,
2008 to June 30, 2008. All existing hedge contracts settle by June 2008. We may enter into
additional hedging agreements in the future to reduce volatility in our fuel expenses.
Interest. Our earnings are affected by changes in interest rates due to the impact those
changes have on interest expense from variable-rate debt instruments and operating leases and on
interest income generated from our cash and investment balances. If interest rates average 10% more
in 2007 than they did during 2006, our interest expense would increase by approximately $0.9
million and the fair value of our debt would decrease by approximately $5.9 million. If interest
rates average 10% less in 2007 than they did in 2006, our interest income from cash equivalents
would decrease by approximately $0.9 million and the fair value of our debt would increase by
approximately $6.2 million. These amounts are determined by considering the impact of the
hypothetical interest rates on our variable-rate debt and cash equivalent balances at December 31,
2006.
Foreign Currencies. The majority of our obligations are denominated in U.S. dollars. Since
Panama uses the U.S. dollar as legal tender, the majority of our operating expenses are also
denominated in U.S. dollars. Our foreign exchange risk is limited as approximately 41% of our
revenues are in U.S. dollars. While a significant part of our revenues are in foreign currency, no
single currency represented more than 6% of our operating revenues in 2006, except for the
Colombian Peso which represented 25%. Generally, our exposure to most of these foreign currencies
is limited to the period of up to two weeks between the completion of a sale and the conversion to
U.S. dollars.
88
2006 Revenues and Expenses Breakdown by Currency
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
|
Expense |
|
Argentinean Peso |
|
|
4.5 |
% |
|
|
2.1 |
% |
Brazilian Real |
|
|
6.4 |
% |
|
|
3.3 |
% |
Chilean Peso |
|
|
3.5 |
% |
|
|
1.6 |
% |
Colombian Peso |
|
|
25.4 |
% |
|
|
13.5 |
% |
Costa Rican Colon. |
|
|
3.4 |
% |
|
|
1.6 |
% |
Mexican Peso |
|
|
4.1 |
% |
|
|
1.9 |
% |
U.S. Dollar |
|
|
41.2 |
% |
|
|
70.9 |
% |
Venezuelan Bolivar |
|
|
4.0 |
% |
|
|
1.7 |
% |
Other(1) |
|
|
7.6 |
% |
|
|
3.4 |
% |
|
|
|
(1) |
|
Dominican Peso, Euro, Guatemalan Quetzal, Jamaican Dollar, Honduran Lempira, Haitian Gourde, Uruguayan Peso |
Item 12. Description of Securities Other than Equity Securities
Not applicable.
89
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies
None.
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
None.
Item 15. Controls and Procedures
Disclosure controls and procedures
Disclosure controls and procedures are designed to ensure that information required to be
disclosed by the Company in reports filed or submitted under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified in the SECs rules
and forms. We carried out an evaluation under the supervision of our management, including our
chief executive officer and chief financial officer, of the effectiveness of the design and
operation of our disclosure controls and procedures as of December 31, 2006. There are inherent
limitations to the effectiveness of any system of disclosure controls and procedures, including the
possibility of human error and the circumvention or overriding of the controls and procedures.
Accordingly, even effective disclosure controls and procedures can only provide reasonable
assurance of achieving their control objectives. Based upon our evaluation, our chief executive
officer and chief financial officer concluded that our disclosure controls and procedures were
effective to provide reasonable assurance that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the applicable rules and forms, and that it is
accumulated and communicated to our management, including our chief executive officer and chief
financial officer, as appropriate to allow timely decisions regarding required disclosure.
Managements Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining effective internal
control over financial reporting as defined in Rules 13a-15(f) under the Securities Exchange Act of
1934. The Companys internal control over financial reporting is designed to provide reasonable
assurance to the Companys management and board of directors regarding the preparation and fair
presentation of published financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Therefore, even those systems determined to be effective can provide only
reasonable assurance with respect to financial statement preparation and presentation.
Management assessed the effectiveness of the Companys internal control over financial
reporting as of December 31, 2006. In making this assessment, management used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
ControlIntegrated Framework. Based on this assessment, management believes that, as of December
31, 2006, the Companys internal control over financial reporting is effective based on those
criteria.
Managements assessment of the effectiveness of internal controls over financial reporting as
of December 31, 2006 has been audited by Ernst & Young, the independent registered public
accounting firm who also audited the Companys consolidated financial statements. Ernst & Youngs
attestation report on managements assessment of the Companys internal controls over financial
reporting is included herein.
Changes in internal control
No significant changes in our internal controls or in other factors that could significantly
affect these controls subsequent to the date of the evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses, were made as a result of the
evaluation.
90
Report of Independent Registered Public Accounting Firm
THE BOARD OF DIRECTORS AND SHAREHOLDERS
COPA HOLDINGS, S. A.
We have audited managements assessment, included in the accompanying Managements Report on
Internal Control over Financial Reporting, that Copa Holdings, S.A.
and its subsidiaries (the Company) maintained effective internal
control over financial reporting as of December 31, 2006, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). The Companys management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on managements
assessment and an opinion on the effectiveness of the Companys internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion,
managements assessment that the Company maintained effective internal
control over financial reporting as of December 31, 2006, is fairly stated, in all material
respects, based on the COSO criteria. Also, in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2006,
based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of the Company as of December 31,
2006 and 2005, and the related consolidated statements of income, shareholders equity, and cash flows
for each of the three years in the period ended December 31, 2006 of the Company and our
report dated May 30, 2007 expressed an unqualified opinion thereon.
/s/ Ernst and Young
Panama City, Republic of Panama
May 30, 2007
91
Item 16. Reserved
Item 16A. Audit Committee Financial Expert
Our board of directors has determined that Mr. José Castañeda qualifies as an audit committee
financial expert as defined by current SEC rules and meets the independence requirements of the
SEC and the NYSE listing standards. For a discussion of the role of our audit committee, see Item
6C. Board PracticesAudit Committee.
Item 16B. Code of Ethics
Our board of directors has adopted a Code of Business Conduct and Ethics applicable to our
directors, officers, employees and consultants. The Code of Business Conduct and Ethics can be
found at www.copaair.com under the heading Investor RelationsCorporate Governance. Information
found at this website is not incorporated by reference into this document.
Item 16C. Principal Accountant Fees and Services
The following table sets forth by category of service the total fees for services performed by
our independent auditors Ernst & Young during the fiscal years ended December 31, 2005 and 2006:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2006 |
|
Audit Fees |
|
$ |
1,717,003 |
|
|
$ |
959,428 |
|
Audit-Related Fees |
|
|
|
|
|
|
|
|
Tax Fees |
|
|
|
|
|
|
|
|
All Other Fees |
|
|
|
|
|
|
|
|
Total |
|
$ |
1,717,003 |
|
|
$ |
959,428 |
|
Audit Fees
Audit fees for 2006 included the audit of our annual financial statements and internal
controls, the review of our quarterly reports, and $64 thousand related to services rendered in
connection with our follow-on offering of Class A shares in June 2006.
Audit fees for 2005 included the audit of our annual financial statements and
approximately $1.1 million related to services rendered in connection with our initial public
offering in December 2005.
Audit-Related Fees
There were no audit-related fees for 2006.
Tax Fees
There were no tax fees.
All Other Fees
There were no other fees for services performed by Ernst & Young during the fiscal years ended
December 31, 2005 and 2006.
Pre-Approval Policies and Procedures
Our audit committee approves all audit, audit-related services, tax services and other
services provided by Ernst & Young. Any services provided by Ernst & Young that are not
specifically included within the scope of the audit must be pre-approved by the audit committee in
advance of any engagement. Pursuant to Rule 2-01 of Regulation S-X, audit committees are permitted
to approve certain fees for audit-related services, tax services and other services pursuant to a
de minimis exception prior to the completion of an audit engagement. In 2006, none of the fees paid
to Ernst & Young were approved pursuant to the de minimis exception.
92
Item 16D. Exemptions from the Listing Standards for Audit Committees
None.
Item 16E. Purchase of Equity Securities by the Issuer and Affiliated Purchasers
None.
PART III
Item 17. Financial Statements
See Item 18. Financial Statements.
Item 18. Financial Statements
See our consolidated financial statements beginning on Page F-1.
Item 19. Exhibits
|
|
|
1.1**
|
|
English translation of the Articles of Incorporation (Pacto Social) of the Registrant |
|
|
|
2.1*
|
|
Form of Second Amended and Restated Shareholders Agreement among Copa Holdings, S.A., Corporación
de Inversiones Aéreas, S.A. and Continental Airlines, Inc. |
|
|
|
2.2*
|
|
Form of Amended and Restated Registration Rights Agreement among Copa Holdings, S.A., Corporación
de Inversiones Aéreas, S.A. and Continental Airlines, Inc. |
|
|
|
10.1**
|
|
Aircraft Lease Agreement, dated as of October 1, 1998, between First Security Bank and Compañía
Panameña de Aviación, S.A., in respect of Boeing Model 737-71Q Aircraft, Serial No. 29047 |
|
|
|
10.2**
|
|
Letter Agreement dated as of November 6, 1998 amending Aircraft Lease Agreement, dated October 1,
1998, between First Security Bank and Compañía Panameña de Aviación, S.A., in respect of One Boeing
Model 737-71Q Aircraft, Manufacturers Serial No. 29047 |
|
|
|
10.3**
|
|
Aircraft Lease Amendment Agreement dated as of May 21, 2004 to Aircraft Lease Agreement, dated
October 1, 1998, between First Security Bank and Compañía Panameña de Aviación, S.A., in respect of
Boeing Model 737-71Q Aircraft, Serial No. 29047 |
|
|
|
10.4**
|
|
Aircraft Lease Agreement, dated as of October 1, 1998, between First Security Bank and Compañía
Panameña de Aviación, S.A., in respect of Boeing Model 737-71Q Aircraft, Serial No. 29048 |
|
|
|
10.5**
|
|
Letter Agreement dated as of November 6, 1998 amending Aircraft Lease Agreement, dated as of
October 1, 1998, between First Security Bank and Compañía Panameña de Aviación, S.A., in respect of
Boeing Model 737-71Q Aircraft, Serial No. 29048 |
|
|
|
10.6**
|
|
Aircraft Lease Amendment Agreement dated as of May 21, 2003 to Aircraft Lease Agreement, dated
October 1, 1998, between First Security Bank and Compañía Panameña de Aviación, S.A., in respect of
Boeing Model 737-71Q Aircraft, Serial No. 29048 |
|
|
|
10.7**
|
|
Aircraft Lease Agreement, dated as of November 18, 1998, between Aviation Financial Services Inc.
and Compañía Panameña de Aviación, S.A., Boeing Model 737-700 Aircraft, Serial No. 28607 |
|
|
|
10.8**
|
|
Letter Agreement No. 1 dated as of November 18, 1998 to Aircraft Lease Agreement, dated November
18, 1998, between Aviation Financial Services Inc. and Compañía Panameña de Aviación, S.A., Boeing
Model 737-700 Aircraft, Serial No. 28607 |
|
|
|
10.9**
|
|
Letter Agreement No. 2 dated as of March 8, 1999 to Aircraft Lease Agreement, dated November 18,
1998, between Aviation Financial Services Inc. and Compañía Panameña de Aviación, S.A., Boeing
Model 737-700 Aircraft, Serial No. 28607 |
93
|
|
|
10.10**
|
|
Lease Extension and Amendment Agreement dated as of April 30, 2003, to Aircraft Lease Agreement,
dated November 18, 1998, between Aviation Financial Services Inc. and Compañía Panameña de
Aviación, S.A., Boeing Model 737-700 Aircraft, Serial No. 28607 |
|
|
|
10.11**
|
|
Aircraft Lease Agreement, dated as of November 18, 1998, between Aviation Financial Services Inc.
and Compañía Panameña de Aviación, S.A., Boeing Model 737-700 Aircraft, Serial No. 30049 |
|
|
|
10.12**
|
|
Letter Agreement No. 1 dated as of November 18, 1998 to Aircraft Lease Agreement, dated November
18, 1998, between Aviation Financial Services Inc. and Compañía Panameña de Aviación, S.A., Boeing
Model 737-700 Aircraft, Serial No. 30049 |
|
|
|
10.13**
|
|
Letter Agreement No. 2 dated as of March 8, 1999 to Aircraft Lease Agreement, dated November 18,
1998, between Aviation Financial Services Inc. and Compañía Panameña de Aviación, S.A., Boeing
Model 737-700 Aircraft, Serial No. 30049 |
|
|
|
10.14**
|
|
Lease Extension and Amendment Agreement dated as of April 30, 2003, to Aircraft Lease Agreement,
dated November 18, 1998, between Aviation Financial Services Inc. and Compañía Panameña de
Aviación, S.A., Boeing Model 737-700 Aircraft, Serial No. 30049 |
|
|
|
10.15**
|
|
Aircraft Lease Agreement, dated as of November 30, 2003, between International Lease Finance
Corporation and Compañía Panameña de Aviación, S.A., New B737-700 or 800, Serial No. 30676 |
|
|
|
10.16**
|
|
Aircraft Lease Agreement, dated as of March 4, 2004, between International Lease Finance
Corporation and Compañía Panameña de Aviación, S.A., New B737-700 or 800, Serial No. 32800 |
|
|
|
10.17**
|
|
Aircraft Lease Agreement dated as of December 23, 2004, between Wells Fargo Bank Northwest, N.A.
and Compañía Panameña de Aviación, S.A., in respect of Boeing B737-800 Aircraft, Serial No. 29670 |
|
|
|
10.18**
|
|
Embraer 190LR Purchase Agreement DCT-006/2003 dated as of May 2003 between Embraer Empresa
Brasileira de Aeronáutica S.A. and Regional Aircraft Holdings Ltd. |
|
|
|
10.19**
|
|
Letter Agreement DCT-007/2003 between EmbraerEmpresa Brasileira de Aeronáutica S.A. and Regional
Aircraft Holdings Ltd., relating to Purchase Agreement DCT-006/2003 |
|
|
|
10.20**
|
|
Letter Agreement DCT-008/2003 between EmbraerEmpresa Brasileira de Aeronáutica S.A. and Regional
Aircraft Holdings Ltd., relating to Purchase Agreement DCT-006/2003 |
|
|
|
10.21*
|
|
Embraer 190 Purchase Agreement COM 0028-06 dated February 2006 between EmbraerEmpresa Brasileira
de Aeronáutica S.A. and Copa Holdings, S.A. relating to Embraer 190LR aircraft |
|
|
|
10.22*
|
|
Letter Agreement COM 0029-06 to the Embraer Agreement dated February 2006 between EmbraerEmpresa
Brasileira de Aeronáutica S.A. and Copa Holdings, S.A. relating to Embraer 190LR aircraft |
|
|
|
10.23**
|
|
Aircraft General Terms Agreement, dated November 25, 1998, between The Boeing Company and Copa
Holdings, S.A. |
|
|
|
10.24**
|
|
Purchase Agreement Number 2191, dated November 25, 1998, between The Boeing Company and Copa
Holdings, S.A., Inc. relating to Boeing Model 737-7V3 & 737-8V3 Aircraft |
|
|
|
10.25**
|
|
Supplemental Agreement No. 1 dated as of June 29, 2001 to Purchase Agreement Number 2191 between
The Boeing Company and Copa Holdings, S.A. |
|
|
|
10.26**
|
|
Supplemental Agreement No. 2 dated as of December 21, 2001 to Purchase Agreement Number 2191
between The Boeing Company and Copa Holdings, S.A. |
|
|
|
10.27**
|
|
Supplemental Agreement No. 3 dated as of June 14, 2002 to Purchase Agreement Number 2191 between
The Boeing Company and Copa Holdings, S.A. |
|
|
|
10.28**
|
|
Supplemental Agreement No. 4 dated as of December 20, 2002 to Purchase Agreement Number 2191
between The Boeing Company and Copa Holdings, S.A. |
|
|
|
10.29**
|
|
Supplemental Agreement No. 5 dated as of October 31, 2003 to Purchase Agreement Number 2191 between
The Boeing Company and Copa Holdings, S.A. |
|
|
|
10.30**
|
|
Supplemental Agreement No. 6 dated as of September 9, 2004 to Purchase Agreement Number 2191
between The Boeing Company and Copa Holdings, S.A. |
94
|
|
|
10.31**
|
|
Supplemental Agreement No. 7 dated as of December 9, 2004 to Purchase Agreement Number 2191 between
The Boeing Company and Copa Holdings, S.A. |
|
|
|
10.32**
|
|
Supplemental Agreement No. 8 dated as of April 15, 2005 to Purchase Agreement Number 2191 between
The Boeing Company and Copa Holdings, S.A. |
|
|
|
10.33*
|
|
Supplemental Agreement No. 9 dated as of March 16, 2006 to the Boeing Purchase Agreement Number
2191 dated November 25, 1998 between the Boeing Company and Copa Holdings, S.A. |
|
|
|
10.34*
|
|
Supplemental Agreement No. 10 dated as of May 8, 2006 to the Boeing Purchase Agreement Number 2191
dated November 25, 1998 between the Boeing Company and Copa Holdings, S.A. |
|
|
|
10.35**
|
|
Maintenance Cost per Hour Engine Service Agreement, dated March 5, 2003, between G.E. Engine
Services, Inc. and Copa Holdings, S.A. |
|
|
|
10.36**
|
|
English translation of Aviation Fuel Supply Agreement, dated July 18, 2005, between Petróleos
Delta, S.A. and Compañía Panameña de Aviación, S.A. |
|
|
|
10.37**
|
|
Form of Guaranteed Loan Agreement |
|
|
|
10.38**
|
|
Form of Amended and Restated Alliance Agreement between Continental Airlines, Inc. and Compañía
Panameña de Aviación, S.A. |
|
|
|
10.39**
|
|
Form of Amended and Restated Services Agreement between Continental Airlines, Inc. and Compañía
Panameña de Aviación, S.A. |
|
|
|
10.40**
|
|
Form of Amended and Restated Frequent Flyer Program Participation Agreement |
|
|
|
10.41**
|
|
Form of Copa Holdings, S.A. 2005 Stock Incentive Plan |
|
|
|
10.42**
|
|
Form of Copa Holdings, S.A. Restricted Stock Award Agreement |
|
|
|
10.43**
|
|
Form of Indemnification Agreement with the Registrants directors |
|
|
|
10.44
|
|
Supplemental Agreement No. 11 dated as of August 30, 2006 to the Boeing Purchase Agreement Number
2191 dated November 25, 1998 between the Boeing Company and Copa Holdings, S.A. |
|
|
|
10.45
|
|
Supplemental Agreement No. 12 dated as of February 26, 2007 to the Boeing Purchase Agreement Number
2191 dated November 25, 1998 between the Boeing Company and Copa Holdings, S.A. |
|
|
|
10.46
|
|
Supplemental Agreement No. 13 dated as of April 23, 2007 to the Boeing Purchase Agreement Number
2191 dated November 25, 1998 between the Boeing Company and Copa Holdings, S.A. |
|
|
|
12.1
|
|
Certification of the Chief Executive Officer, pursuant to Rules 13a-14 and 15d-14 under the
Securities Exchange Act of 1934. |
|
|
|
12.2
|
|
Certification of the Chief Financial Officer, pursuant to Rules 13a-14 and 15d-14 under the
Securities Exchange Act of 1934. |
|
|
|
13.1
|
|
Certification of Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
13.2
|
|
Certification of the Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
|
|
|
21.1**
|
|
Subsidiaries of the Registrant |
|
|
|
* |
|
Previously filed with the SEC as an exhibit and incorporated by reference from
our Registration Statement on Form F-1, filed June 15, 2006, File No.
333-135031. |
|
** |
|
Previously filed with the SEC as an exhibit and incorporated by reference from
our Registration Statement on Form F-1, filed November 28, 2005, as amended on
December 1, 2005 and December 13, 2005, File No. 333-129967. |
|
|
|
The Registrant was granted confidential treatment for portions of this exhibit. |
|
|
|
The Registrant has requested
confidential treatment for portions of this exhibit. |
95
SIGNATURES
The Registrant hereby certifies that it meets all of the requirements for filing on Form 20-F
and that it has duly caused and authorized the undersigned to sign this annual report on its
behalf.
|
|
|
|
|
|
COPA HOLDINGS, S.A.
|
|
|
By: |
/s/
Pedro Heilbron |
|
|
|
Name: |
Pedro Heilbron |
|
|
|
Title: |
Chief Executive Officer |
|
|
Dated:
July 2, 2007
96
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Pages |
Audited Consolidated Financial Statements |
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
|
|
7 |
|
|
|
|
|
|
|
|
|
8 |
|
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
THE BOARD OF DIRECTORS AND SHAREHOLDERS
COPA HOLDINGS, S. A.
We have audited the accompanying
consolidated balance sheets of Copa Holdings, S. A. and its
subsidiaries (the Company) as of December 31, 2006 and 2005, and the related consolidated
statements of income, shareholders equity, and cash flows for each of the three years in the
period ended December 31, 2006. These consolidated financial statements are the responsibility of
the Companys management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company and its subsidiaries at
December 31, 2006 and 2005, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 2006, in conformity with U.S.
generally accepted accounting principles.
As
discussed in Note 10 to the consolidated financial statements, the Company adopted,
effective December 31, 2006, Statement of Financial Accounting Standard No. 158,
Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, an
amendment of FASB Statements No. 87, 88 and 106 and 132(R).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of the Companys internal control over financial reporting
as of December 31, 2006, based on criteria established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
May 30, 2007 expressed an unqualified opinion thereon.
/s/
Ernst and Young
Panama City, Republic of Panama
May 30, 2007
F-2
COPA HOLDINGS, S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In US$ thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
169,880 |
|
|
$ |
94,106 |
|
Short-term investments |
|
|
27,500 |
|
|
|
20,384 |
|
|
|
|
|
|
|
|
Total cash, cash equivalents and short-term investments |
|
|
197,380 |
|
|
|
114,490 |
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net of allowance for doubtful accounts of
of $7,305 and $4,911 as of December 31, 2006 and 2005,
respectively |
|
|
60,319 |
|
|
|
46,377 |
|
Accounts receivable from related parties |
|
|
1,818 |
|
|
|
156 |
|
Expendable parts and supplies, net of allowance for
obsolescence of
of $21 and $9 as of December 31, 2006 and 2005, respectively |
|
|
8,667 |
|
|
|
4,108 |
|
Prepaid expenses |
|
|
16,590 |
|
|
|
15,402 |
|
Other current assets |
|
|
5,877 |
|
|
|
3,818 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets |
|
|
290,651 |
|
|
|
184,351 |
|
|
|
|
|
|
|
|
|
|
Investments |
|
|
29,032 |
|
|
|
26,175 |
|
|
|
|
|
|
|
|
|
|
Property and Equipment: |
|
|
|
|
|
|
|
|
Owned property and equipment: |
|
|
|
|
|
|
|
|
Flight equipment |
|
|
857,598 |
|
|
|
628,876 |
|
Other |
|
|
43,713 |
|
|
|
35,899 |
|
|
|
|
|
|
|
|
|
|
|
901,311 |
|
|
|
664,775 |
|
Less: Accumulated depreciation |
|
|
(104,178 |
) |
|
|
(79,985 |
) |
|
|
|
|
|
|
|
|
|
|
797,133 |
|
|
|
584,790 |
|
|
|
|
|
|
|
|
|
|
Purchase deposits for flight equipment |
|
|
65,150 |
|
|
|
52,753 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Property and Equipment |
|
|
862,283 |
|
|
|
637,543 |
|
|
|
|
|
|
|
|
|
|
Other Assets: |
|
|
|
|
|
|
|
|
Prepaid pension asset |
|
|
645 |
|
|
|
1,261 |
|
Goodwill |
|
|
21,779 |
|
|
|
20,512 |
|
Other intangible asset |
|
|
31,933 |
|
|
|
31,298 |
|
Other assets |
|
|
18,692 |
|
|
|
15,772 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Assets |
|
|
73,049 |
|
|
|
68,843 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
1,255,015 |
|
|
$ |
916,912 |
|
|
|
|
|
|
|
|
F-3
COPA HOLDINGS, S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(In US$ thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Current maturities of long-term debt |
|
$ |
91,453 |
|
|
$ |
67,905 |
|
Accounts payable |
|
|
47,627 |
|
|
|
44,848 |
|
Accounts payable to related parties |
|
|
8,819 |
|
|
|
7,750 |
|
Air traffic liability |
|
|
116,812 |
|
|
|
85,673 |
|
Taxes and interest payable |
|
|
31,490 |
|
|
|
27,450 |
|
Accrued expenses payable |
|
|
32,104 |
|
|
|
14,780 |
|
Other current liabilities |
|
|
11,268 |
|
|
|
5,573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities |
|
|
339,573 |
|
|
|
253,979 |
|
|
|
|
|
|
|
|
|
|
Non-Current Liabilities: |
|
|
|
|
|
|
|
|
Long-term debt |
|
|
529,802 |
|
|
|
402,954 |
|
Post employment benefits liability |
|
|
1,701 |
|
|
|
1,602 |
|
Other long-term liabilities |
|
|
7,713 |
|
|
|
8,471 |
|
Deferred tax liabilities |
|
|
4,557 |
|
|
|
4,039 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Current Liabilities |
|
|
543,773 |
|
|
|
417,066 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
883,346 |
|
|
|
671,045 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
common stock - 30,951,425 shares authorized and issued, 30,034,375
shares outstanding |
|
|
20,501 |
|
|
|
20,501 |
|
Class B common stock - 12,778,125 shares authorized,
issued, and outstanding |
|
|
8,722 |
|
|
|
8,722 |
|
Additional paid in capital |
|
|
3,340 |
|
|
|
|
|
Retained earnings |
|
|
343,390 |
|
|
|
217,862 |
|
Accumulated other comprehensive loss |
|
|
(4,284 |
) |
|
|
(1,218 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Shareholders Equity |
|
|
371,669 |
|
|
|
245,867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity |
|
$ |
1,255,015 |
|
|
$ |
916,912 |
|
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
F-4
COPA HOLDINGS, S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In US$ thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Passenger revenue |
|
$ |
798,901 |
|
|
$ |
563,520 |
|
|
$ |
364,611 |
|
Cargo, mail and other |
|
|
52,259 |
|
|
|
45,094 |
|
|
|
35,226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
851,160 |
|
|
|
608,614 |
|
|
|
399,837 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft fuel |
|
|
217,730 |
|
|
|
149,303 |
|
|
|
62,549 |
|
Salaries and benefits |
|
|
91,382 |
|
|
|
69,730 |
|
|
|
51,701 |
|
Passenger servicing |
|
|
64,380 |
|
|
|
50,622 |
|
|
|
39,222 |
|
Commissions |
|
|
57,808 |
|
|
|
45,087 |
|
|
|
29,073 |
|
Maintenance, material and repairs |
|
|
50,057 |
|
|
|
32,505 |
|
|
|
19,742 |
|
Reservations and sales |
|
|
38,212 |
|
|
|
29,213 |
|
|
|
22,118 |
|
Aircraft rentals |
|
|
38,169 |
|
|
|
27,631 |
|
|
|
14,445 |
|
Flight operations |
|
|
33,740 |
|
|
|
24,943 |
|
|
|
17,904 |
|
Depreciation |
|
|
24,874 |
|
|
|
19,857 |
|
|
|
19,279 |
|
Landing fees and other rentals |
|
|
23,929 |
|
|
|
17,909 |
|
|
|
12,155 |
|
Other |
|
|
44,758 |
|
|
|
32,622 |
|
|
|
29,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
685,039 |
|
|
|
499,422 |
|
|
|
317,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
|
166,121 |
|
|
|
109,192 |
|
|
|
82,343 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating Income (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense |
|
|
(29,150 |
) |
|
|
(21,629 |
) |
|
|
(16,488 |
) |
Interest capitalized |
|
|
1,712 |
|
|
|
1,089 |
|
|
|
963 |
|
Interest income |
|
|
7,257 |
|
|
|
3,544 |
|
|
|
1,423 |
|
Other, net |
|
|
185 |
|
|
|
395 |
|
|
|
6,063 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,996 |
) |
|
|
(16,601 |
) |
|
|
(8,039 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before Income Taxes |
|
|
146,125 |
|
|
|
92,591 |
|
|
|
74,304 |
|
Provision for Income Taxes |
|
|
12,286 |
|
|
|
9,592 |
|
|
|
5,732 |
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
133,839 |
|
|
$ |
82,999 |
|
|
$ |
68,572 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
3.13 |
|
|
$ |
1.94 |
|
|
$ |
1.60 |
|
Diluted |
|
$ |
3.10 |
|
|
$ |
1.94 |
|
|
$ |
1.60 |
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
F-5
COPA HOLDINGS, S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(In US$ thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(US$Thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
(Non-par value) |
|
|
Issued Capital |
|
|
Paid in |
|
|
Retained |
|
|
Comprehensive |
|
|
|
|
|
|
Class A |
|
|
Class B |
|
|
Class A |
|
|
Class B |
|
|
Capital |
|
|
Earnings |
|
|
Loss |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2003 |
|
|
30,034,375 |
|
|
|
12,778,125 |
|
|
$ |
20,501 |
|
|
$ |
8,722 |
|
|
|
|
|
|
$ |
86,360 |
|
|
|
|
|
|
$ |
115,583 |
|
Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68,572 |
|
|
|
|
|
|
|
68,572 |
|
Dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,000 |
) |
|
|
|
|
|
|
(10,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2004 |
|
|
30,034,375 |
|
|
|
12,778,125 |
|
|
|
20,501 |
|
|
|
8,722 |
|
|
|
|
|
|
|
144,932 |
|
|
|
|
|
|
|
174,155 |
|
Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82,999 |
|
|
|
|
|
|
|
82,999 |
|
Other comprehensive
loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,218 |
) |
|
|
(1,218 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81,781 |
|
Dividends Declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,069 |
) |
|
|
|
|
|
|
(10,069 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2005 |
|
|
30,034,375 |
|
|
|
12,778,125 |
|
|
|
20,501 |
|
|
|
8,722 |
|
|
|
|
|
|
|
217,862 |
|
|
|
(1,218 |
) |
|
|
245,867 |
|
Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
133,839 |
|
|
|
|
|
|
|
133,839 |
|
Other comprehensive
loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Change in
fair value of
derivative
instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,998 |
) |
|
|
(3,998 |
) |
Foreign currency
translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,861 |
|
|
|
1,861 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
131,702 |
|
Restricted Stock Plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,340 |
|
|
|
|
|
|
|
|
|
|
|
3,340 |
|
Actuarial loss
(Adoption of
FAS 158), net
of tax of $84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(929 |
) |
|
|
(929 |
) |
Dividends Declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,311 |
) |
|
|
|
|
|
|
(8,311 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2006 |
|
|
30,034,375 |
|
|
|
12,778,125 |
|
|
$ |
20,501 |
|
|
$ |
8,722 |
|
|
$ |
3,340 |
|
|
$ |
343,390 |
|
|
$ |
(4,284 |
) |
|
$ |
371,669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
F-6
COPA HOLDINGS, S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In US$ thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(US$ Thousands) |
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
133,839 |
|
|
$ |
82,999 |
|
|
$ |
68,572 |
|
Adjustments for: |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes |
|
|
(328 |
) |
|
|
(885 |
) |
|
|
(519 |
) |
Depreciation |
|
|
24,874 |
|
|
|
19,857 |
|
|
|
19,279 |
|
(Gain) / Loss on sale of property and equipment |
|
|
(612 |
) |
|
|
(1,340 |
) |
|
|
(1,125 |
) |
Provision for doubtful accounts |
|
|
3,764 |
|
|
|
813 |
|
|
|
1,026 |
|
Provision for obsolescence of expendable parts and supplies |
|
|
12 |
|
|
|
3 |
|
|
|
6 |
|
Derivative instruments mark to market |
|
|
4,496 |
|
|
|
(165 |
) |
|
|
945 |
|
Stock compensation |
|
|
3,340 |
|
|
|
|
|
|
|
|
|
Changes in: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(15,317 |
) |
|
|
(11,256 |
) |
|
|
2,287 |
|
Accounts receivable from related parties |
|
|
(1,661 |
) |
|
|
(448 |
) |
|
|
|
|
Other current assets |
|
|
(8,690 |
) |
|
|
282 |
|
|
|
(3,317 |
) |
Restricted cash |
|
|
110 |
|
|
|
(3,698 |
) |
|
|
582 |
|
Other assets |
|
|
(3,412 |
) |
|
|
(7,601 |
) |
|
|
(1,430 |
) |
Accounts payable |
|
|
2,699 |
|
|
|
(4,336 |
) |
|
|
25 |
|
Accounts payable to related parties |
|
|
975 |
|
|
|
4,017 |
|
|
|
1,089 |
|
Air traffic liability |
|
|
30,658 |
|
|
|
27,766 |
|
|
|
6,200 |
|
Other liabilities |
|
|
18,721 |
|
|
|
9,360 |
|
|
|
5,013 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
193,468 |
|
|
|
115,368 |
|
|
|
98,633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of investments |
|
|
(32,988 |
) |
|
|
(48,298 |
) |
|
|
(38,082 |
) |
Proceed from redemption of investments |
|
|
22,906 |
|
|
|
20,662 |
|
|
|
30,639 |
|
Advance payments on aircraft purchase contracts |
|
|
(58,697 |
) |
|
|
(49,461 |
) |
|
|
(16,314 |
) |
Acquisition of property and equipment |
|
|
(193,330 |
) |
|
|
(63,308 |
) |
|
|
(65,764 |
) |
Disposal of property and equipment |
|
|
3,129 |
|
|
|
2,804 |
|
|
|
3,201 |
|
Purchase of AeroRepublica, net of acquired cash |
|
|
|
|
|
|
(22,285 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows used in investing activities |
|
|
(258,980 |
) |
|
|
(159,886 |
) |
|
|
(86,320 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from loans and borrowings |
|
|
254,559 |
|
|
|
68,423 |
|
|
|
101,198 |
|
Payments on loans and borrowings |
|
|
(77,247 |
) |
|
|
(46,929 |
) |
|
|
(32,125 |
) |
Issuance of bonds |
|
|
|
|
|
|
27,504 |
|
|
|
6,357 |
|
Redemption of bonds |
|
|
(27,503 |
) |
|
|
|
|
|
|
(35,675 |
) |
Dividends declared and paid |
|
|
(8,311 |
) |
|
|
(10,069 |
) |
|
|
(10,000 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash flows provided by financing activities |
|
|
141,498 |
|
|
|
38,929 |
|
|
|
29,755 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate change on cash |
|
|
(212 |
) |
|
|
29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
75,774 |
|
|
|
(5,560 |
) |
|
|
42,068 |
|
Cash and cash equivalents at January 1st |
|
|
94,106 |
|
|
|
99,666 |
|
|
|
57,598 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at December 31 |
|
$ |
169,880 |
|
|
$ |
94,106 |
|
|
$ |
99,666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information |
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid, net of amount capitalized |
|
$ |
26,779 |
|
|
$ |
21,126 |
|
|
$ |
16,021 |
|
Income taxes paid |
|
|
11,284 |
|
|
|
7,411 |
|
|
|
4,286 |
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
F-7
COPA HOLDINGS, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Corporate Information
Copa Holdings, S. A. (the Company) is a leading Latin American provider of international airline
passenger and cargo services. The Company was incorporated according to the laws of the Republic of
Panama. The Company owns 99.8% of the shares of Compañía Panameña de Aviación, S. A. (Copa),
100% of the shares of Oval Financial Leasing, Ltd. (OVAL), OPAC, S. A. (OPAC), and 99.8% of the
shares of AeroRepública, S.A. (AeroRepública).
Copa, the Companys core operation, is incorporated according to the laws of the Republic of Panama
and provides international air transportation for passengers, cargo and mail. Copa operates from
its Panama City hub in the Republic of Panama, from where it offers approximately 108 daily
scheduled flights among 36 destinations in 21 countries in North, Central and South America and the
Caribbean. Additionally, Copa provides passengers with access to flights to more than 120 other
international destinations through codeshare agreements with Continental Airlines, Inc.
(Continental) and other airlines. The Company has a broad commercial alliance with Continental
which includes joint marketing, code-sharing arrangements, participation in Continentals OnePass
frequent flyer loyalty program and access to Continentals VIP lounge program, Presidents Club,
along with other benefits such as improved purchasing power in negotiations with service providers,
aircraft vendors and insurers. As of December 31, 2006, Copa operated a fleet of 30 aircraft with
an average age of 3.5 years; consisting of 24 modern Boeing 737-Next Generation aircraft and six
(6) Embraer 190 aircraft. OVAL is incorporated according to the laws of the British Virgin Islands,
and controls the special-purpose vehicles that have a beneficial interest in 24 aircraft, with a
carrying value of $726 million, all of which are leased to either Copa Airlines or AeroRepublica.
The aircraft are pledged as collateral for the obligation of the special-purpose vehicles, which
are all consolidated by the Company for financial reporting purposes; however, the creditors of the
special-purpose vehicles have no recourse to the general credit of the Company or Copa. OPAC is
incorporated according to the laws of the Republic of Panama. OPAC owned the old corporate
headquarters building located in Panama City which was sold to a third party during 2006.
Additionally, during 2005 the Company purchased 99.7% of AeroRepública, a domestic Colombian air
carrier, which is incorporated according to the laws of the Republic of Colombia and operates a
fleet of ten (10) leased MD-80s and one (1) Embraer 190 aircraft as of December 31, 2006 (See Note
3).
On December 15, 2005, the Company concluded the initial public listing on the New York Stock
Exchange (NYSE) and its principal shareholders sold 18,112,500 shares of Class A common stock
held by them. Cost related to this initial public listing amounted $3.7 million which are included
as a component of Other, net within Non-operating income (expense) in the Consolidated Statements
of Income for 2005.
On June 28, 2006,
the Company concluded a follow-on offering on the NYSE whereby Continental
Airlines, one of the Companys principal shareholders, sold 6,562,500 shares of Class A common
stock at $21.75 per share. Proceeds of $136.0 million, net of the commissions and discounts of $6.8
million, were received directly by the selling shareholder with no proceeds being received by the
Company. Cost related to this follow-on offering amounted $0.3 million which are included as a
component of Other, net within Non-operating income (expense) in the Consolidated Statements of
Income for 2006.
F-8
COPA HOLDINGS, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A substantial portion of the Companys assets are located in the Republic of Panama, a significant
proportion of the Companys customers are Panamanian, and a significant proportion of the Companys
flights operate through its hub at Tocumen International Airport in Panama City. As a result, the
Company depends on economic and political conditions prevailing from time to time in Panama.
As used in these Notes to Consolidated Financial Statements, the terms the Company, we, us,
our and similar terms refer to Copa Holdings, S.A. and, unless the context indicates otherwise,
its consolidated subsidiaries.
1. Summary of Significant Accounting Policies
Basis of Presentation
These consolidated financial statements were prepared in accordance with U.S. generally accepted
accounting principles for financial reporting using the U.S. Dollar as the reporting currency.
Principles of Consolidation
The consolidated financial statements comprise the accounts of the Company and its subsidiaries.
The financial statements of subsidiaries are prepared for the same reporting period as the parent
company, using consistent accounting policies. Subsidiaries are consolidated from the date on
which control is transferred to the Company and cease to be consolidated from the date on which
control is transferred from the Company. All intercompany accounts, transactions and profits
arising from consolidated entities have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents comprise cash at banks, short-term time deposits, asset-backed commercial
paper and securities, and U.S. agency securities with original maturities of three months or less
when purchased.
Investments
The Company invests in short-term time deposits, asset-backed commercial paper and securities, and
U.S. government agency securities with original maturities of more than three months but less than
one year. Additionally, the Company invests in long-term time deposits and U.S. government agency
securities with maturities greater than 365 days. These investments are classified as short-term
and long-term investments respectively, in the accompanying Consolidated Balance Sheets. All of
these
investments are classified as held-to-maturity securities, and are stated at their amortized cost,
since the Company has determined that it has the intent and ability to hold the securities to
maturity. Restricted cash is classified within long-term investments, and is primarily held as
collateral for letters of credit.
F-9
COPA HOLDINGS, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Expendable Parts and Supplies
Expendable parts and supplies for flight equipment are carried at average acquisition cost and are
expensed when used in operations. An allowance for obsolescence is provided over the remaining
estimated useful life of the related aircraft, plus an allowance for expendable parts currently
identified as excess to reduce the carrying cost to net realizable value. These allowances are
based on management estimates, which are subject to change.
Property and Equipment
Property and equipment are recorded at cost and are depreciated to estimated residual values over
their estimated useful lives using the straight-line method. Jet aircraft, jet engines and aircraft
rotables are assumed to have an estimated residual value of 15% of original cost; other categories
of property and equipment are assumed to have no residual value. The estimated useful lives for
property and equipment are as follows:
|
|
|
|
|
|
|
Years |
Building |
|
|
40 |
|
Jet aircraft |
|
|
30 |
|
Jet engines |
|
|
30 |
|
Ground property and equipment |
|
|
10 |
|
Furniture, fixture, equipment and others |
|
|
5 to 10 |
|
Software rights and licenses |
|
|
3 to 8 |
|
Aircraft rotables |
|
|
7 to 30 |
|
Leasehold improvements |
Lesser of remaining lease term or useful life |
Measurement of Impairment of Long-Lived Assets
The Company records impairment losses on long-lived assets used in operations, consisting
principally of property and equipment, when events or changes in circumstances indicate, in
managements judgment, that the assets might be impaired and the undiscounted cash flows estimated
to be generated by those assets are less than the carrying amount of those assets. Cash flows
estimates are based on historical results adjusted to reflect the Companys best estimate of future
market and operating conditions. The net carrying value of assets not recoverable is reduced to
fair value. Estimates of fair value represent the Companys best estimate based on industry trends
and reference to market rates and transactions and are subject to change.
Revenue Recognition
Passenger Revenue
Passenger revenue is recognized when transportation is provided rather than when a ticket is sold.
The amount of passenger ticket sales not yet recognized as revenue is reflected as Air traffic
liability in the Consolidated Balance Sheets. Fares for tickets that have expired and/or are one
year old are
recognized as passenger revenue. A significant portion of the Companys ticket sales are processed
through major credit card companies, resulting in accounts receivable which are generally
short-term in duration and typically collected prior to when revenue is recognized. The Company
believes that the credit risk associated with these receivables is minimal.
F-10
COPA HOLDINGS, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We are required to charge certain taxes and fees on our passenger tickets. These taxes and fees
include transportation taxes, airport passenger facility charges and foreign arrival and departure
taxes. These taxes and fees are legal assessments on the customer. As we have a legal obligation to
act as a collection agent with respect to these taxes and fees, we do not include such amounts in
passenger revenue. We record a liability when the amounts are collected and relieve the liability
when payments are made to the applicable government agency or operating carrier.
Cargo and Mail Services Revenue
Cargo and mail services revenue are recognized when the Company provides the shipping services and
thereby completes the earning process.
Other Revenue
Other revenue is primarily comprised of excess baggage charges, commissions earned on tickets sold
for flights on other airlines and charter flights, and is recognized when transportation or service
is provided.
Frequent Flyer Program
The Company participates in Continentals OnePass frequent flyer program, for which the Companys
passengers receive all the benefits and privileges offered by the OnePass program. Continental is
responsible for the administration of the OnePass program. Under the terms of the Companys
frequent flyer agreement with Continental, OnePass members receive OnePass frequent flyer mileage
credits for travel on Copa and AeroRepublica and the Company pays Continental a per mile rate for each mileage credit
granted by Continental, at which point the Company has no further obligation. The amounts due to
Continental under this agreement are expensed by the Company as the mileage credits are earned.
Passenger Traffic Commissions
Passenger traffic commissions are recognized as expense when the transportation is provided and the
related revenue is recognized. Passenger traffic commissions paid but not yet recognized as
expense are included in Prepaid expenses in the accompanying Consolidated Balance Sheets.
Foreign Currency Transactions and Translation
The Companys functional currency is the U.S. Dollar, the legal tender in Panama. Assets and
liabilities in foreign currencies are translated at end-of-period exchange rates, except for
non-monetary
assets, which are translated at equivalent U.S. dollar costs at dates of acquisition and maintained
at historical rate. Operations are translated at average exchange rates in effect during the
period. Foreign exchange gains and losses are included as a component of Other, net within
Non-operating income (expense) in the Consolidated Statements of Income.
F-11
COPA HOLDINGS, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The financial statements of AeroRepública are measured using the Colombian Peso as the functional
currency; adjustments to translate those statements into U.S. Dollars are recorded in other
comprehensive loss.
In 2006, approximately 71% of the Companys expenses and 41% of the Companys revenues were
denominated in U.S. Dollars. The remainder of the Companys expenses and revenues were denominated
in the currencies of the various countries to which the Company flies, with the largest non-dollar
amount denominated in Colombian pesos for which the Company hedge the risk of fluctuation from time
to time (see Note 7). Generally, the Companys exposure to others foreign currencies is limited to
a period of up to two weeks, from the time a sale is completed to the time funds are converted into
U.S. Dollars.
Maintenance and Repair Costs
Maintenance and repair costs for owned and leased flight equipment, including the overhaul of
aircraft components, are charged to operating expenses as incurred. Engine overhaul costs covered
by power-by-the-hour arrangements are paid and expensed as incurred, on the basis of hours flown
per the contract. Under the terms of our power-by-the-hour agreements, we pay a set dollar amount
per engine hour flown on a monthly basis and the third-party vendor assumes the obligation to
repair the engines at no additional cost to us, subject to certain specified exclusions.
Additionally, although our aircraft lease agreements specifically provide that we, as lessee,
are responsible for maintenance of the leased aircraft, we do, under certain of our existing lease
agreements, pay maintenance reserves to aircraft and engine lessors that are to be applied towards
the cost of future maintenance events. These reserves are calculated based on a performance
measure, such as flight hours, and are specifically to be used to reimburse third-party providers
that furnish services in connection with maintenance of our leased aircraft. If there are
sufficient funds on deposit to pay the invoices submitted, they are paid. However, if amounts on
deposit are insufficient to cover the invoices, we must cover the shortfall because, as noted
above, we are legally responsible for maintaining the lease aircraft. Under four of our existing
aircraft lease agreements, if there are excess amounts on deposit at the expiration of the lease,
the lessor is entitled to retain any excess amounts. The maintenance reserves paid under our lease
agreements do not transfer either the obligation to maintain the aircraft or the cost risk
associated with the maintenance activities to the aircraft lessor. In addition, we maintain the
right to select any third-party maintenance providers. Therefore, we record these amounts as
prepaid maintenance within Other Assets on our Consolidated Balance Sheets and then recognize
maintenance expense when the underlying maintenance is performed, in accordance with our
maintenance accounting policy. Any excess amounts retained by the lessor upon the expiration of
the lease, which are not expected to be material, would be recognized as additional aircraft rental
expense when it becomes probable that we would not benefit from such excess, mostly at expiration
of the lease.
F-12
COPA HOLDINGS, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Employee Profit Sharing
The Company sponsors a profit-sharing program for both management and non-management personnel.
For members of management, profit-sharing is based on a combination of the Companys performance as
a whole and the achievement of individual goals. Profit-sharing for non-management employees is
based solely on the Companys performance. The Company accrues each month for the expected
profit-sharing, which is paid annually in February. Amounts expensed for the Companys
profit-sharing program for each of the three years in the period ended December 31, 2006 were $8.4
million, $5.8 million and $5.5 million respectively.
Advertising Costs
Advertising costs are expensed when incurred. The Company recognized as advertising expense $4.8
million, $3.7 million, and $2.8 million in 2006, 2005 and 2004, respectively.
Income Taxes
Deferred income taxes are provided under the liability method and reflect the net tax effects of
temporary differences between the tax basis of assets and liabilities and their reported amounts in
the financial statements.
Goodwill and Intangibles
The Company performs impairment testing, in accordance with SFAS No. 142, Goodwill and Other
Intangible Assets, of goodwill separately from impairment testing of indefinite-lived intangibles.
The Company tests goodwill for impairment, at least annually, by comparing the book value to the
fair value at the reporting segment level and tests individually indefinite-lived intangibles, at
least annually, by reviewing the individual book values compared to the fair value. Considerable
management judgment is necessary to evaluate the impact of operating and macroeconomic changes and
to estimate future cash flows to measure fair value. Assumptions used in the Companys impairment
evaluations are consistent with internal projections and operating plans. The Company did not
recognize any material impairment charges for goodwill or intangibles assets during the years
presented.
Reclassifications
Certain reclassifications have been made in the prior years consolidated financial statement
amounts and related note disclosures to conform with the current years presentation.
F-13
COPA HOLDINGS, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Recently Issued Accounting Pronouncement
In June 2006, the Financial Accounting Standards Board issued Interpretation No. 48, Accounting
for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (FIN 48), which
clarifies the accounting for uncertainty in income taxes recognized in financial statements. FIN 48
requires the
impact of a tax position to be recognized in the financial statements if that position is more
likely than not of being sustained upon examination by the taxing authority. FIN 48 is effective
for fiscal years beginning after December 15, 2006. The cumulative effect of applying the
provisions of FIN 48, if any, will be reported as an adjustment to the opening balance of retained
earnings in 2007. We are currently evaluating the requirements of FIN
48 and its effect on our consolidated financial statements.
In
September 2006, the FASB issued SFAS No. 157 Fair Value
Measurements (SFAS 157). SFAS 157 defines fair
value, establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about fair
value measurements. The provisions of this standard apply to other
accounting pronouncements that require or permit fair value
measurements. SFAS 157 becomes effective for the fiscal years
beginning after November 15, 2007. Upon adoption, the provisions
of SFAS 157 are to be applied prospectively with limited exceptions.
The Company is currently evaluating the potential impact, if any,
that the adoption of SFAS 157 will have on the consolidated financial
position or results of operations.
In
February 2007, the FASB issued SFAS 159, The Fair Value
Option for Financial Assets and Financial Liabilities. The
standard allows entities to voluntarily choose, at specified election
dates, to measure many financial assets and financial liabilities (as
well as certain non-financial instruments that are similar to
financial instruments) at fair value (the fair value
option). The election is made on an instrument-by-instrument
basis and is irrevocable. If the fair value option is elected for an
instrument, the Statement specifies that all subsequent changes in
fair value for that instrument shall be reported in earnings. SFAS
159 becomes effective for the fiscal years beginning after
November 15, 2007. The Company is currently evaluating the
potential impact, if any, that the adoption of SFAS 159 will have on
the consolidated financial position or results of operations.
3. Acquisition of AeroRepública
On April 22, 2005, the Company acquired a controlling ownership interest in AeroRepública, a
Colombian domestic airline. According to the Colombian Civil Aviation Administration, Unidad
Especial Administrativa de Aeronáutica Civil, in 2006 AeroRepública was the second-largest domestic
carrier in Colombia in terms of number of passengers carried, providing domestic service to 12
cities in Colombia with a point-to-point route network as well as international service to Panama
City from Bogota, Cali and Medellin. The acquisition of AeroRepública represents an attractive
opportunity to increase the Companys access and visibility to Colombia, one of the largest airline
passenger markets in Latin America with more than 45 million inhabitants, and to improve
AeroRepúblicas operational and financial performance. Colombia shares a border with Panama, and
for historic, cultural and business reasons it represents a significant market for many Panamanian
businesses. Management believes that operational coordination with AeroRepública may create
additional passenger traffic in the Companys existing route network by providing Colombian
passengers more convenient access to the international destinations served through the Companys
Panama hub.
Of the total estimated purchase price, approximately $50.7 million has been allocated to goodwill
and intangible assets with indefinite lives. Goodwill, approximately $20.1 million, represents the
excess of the purchase price of the acquired business over the fair value of the underlying net
tangible and intangible assets and is recorded in the AeroRepública segment. Intangible assets
with indefinite lives consist primarily of the fair value allocated to the routes and the
AeroRepública trade name, valued at $25.7 million and
$4.9 million, respectively. Goodwill was increased in 2006 for an adjustment to assume airport tax obligations of AeroRepublica.
As of December 2005, the investment in AeroRepública totaled $31.4M. During 2006 and first quarter
2007, the Company invested an additional $5.8 million and $5.8 million, respectively, in exchange
for 5.4 million and 6.4 million new shares of AeroRepública, respectively. As a result of these
transactions the Companys total investment increased to $43.0 million.
F-14
COPA HOLDINGS, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Long-Term Debt
At December 31, long-term debt consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Long-term fixed rate debt
|
|
$ |
347.6 |
|
|
$ |
292.5 |
|
(Secured fixed rate indebtedness due through 2017.
Effective rates ranged from 3.98% to 6.75%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term variable rate debt
|
|
|
247.4 |
|
|
|
150.9 |
|
(Secured variable rate indebtedness due through 2017.
Effective rates ranged from 5.40% to 19.76%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medium-term variable rate debt
|
|
|
26.3 |
|
|
|
|
|
(Unsecured variable rate indebtedness due in 2007
Weighted average rate of 5.86%, as of December
31, 2006) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private bond issuances
|
|
|
|
|
|
|
27.5 |
|
(Unsecured variable rate indebtedness due in 2006
Weighted average rate of 7.22%, as of December
31, 2005) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total |
|
|
621.3 |
|
|
|
470.9 |
|
|
|
|
|
|
|
|
|
|
Less current maturities |
|
|
91.5 |
|
|
|
67.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt less current maturities |
|
$ |
529.8 |
|
|
$ |
403.0 |
|
|
|
|
|
|
|
|
Maturities of long-term debt for the next five years are as follows (in millions):
|
|
|
|
|
Year ending December 31, |
|
|
|
|
2007 |
|
$ |
91.5 |
|
2008 |
|
$ |
43.7 |
|
2009 |
|
$ |
42.5 |
|
2010 |
|
$ |
42.4 |
|
2011 |
|
$ |
43.4 |
|
Thereafter |
|
$ |
357.8 |
|
As of December 31, 2006 and 2005, the Company had $365.4 million and $337.1 million of outstanding
indebtedness, respectively, that is owed to financial institutions under financing arrangements
guaranteed by the Export-Import Bank of the United States. The Export-Import Bank guarantees
support 85% of the net purchase price of the aircraft and are secured with a first priority
mortgage on the aircraft in favor of a security trustee on behalf of Export-Import Bank.
F-15
COPA HOLDINGS, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Companys Export-Import Bank supported financings are amortized on a quarterly basis, are
denominated in dollars and originally bear interest at a floating rate linked to LIBOR. The
Export-Import Bank guaranteed facilities typically offer an option to fix the applicable interest
rate. The Company has exercised this option with respect to $325.4 million as of December 31, 2006.
The Company effectively extends the maturity of its aircraft financing to 15 years through the use
of a Stretched Overall Amortization and Repayment, or SOAR, structure which provides serial
draw-downs calculated to result in a 100% loan accreting to a recourse balloon at the maturity of
the Export-Import Bank guaranteed loan which totaled $31.9 million as of December 31, 2006.
The Company also typically finances a portion of the purchase price of the Boeing aircraft through
commercial loans which totaled $17.6 million as of December 31, 2006.
During 2005, the Company secured a senior term loan facility in the amount of $134 million for the
purchase of six (6) Embraer 190 aircraft. The loans have a term of twelve years. During 2005, the
Company utilized $43.8 million of this facility and the remaining $90.1 million was drawn during
2006.
During 2006, the Company secured a senior and junior term loan facility in the amount of $239.6
million for the purchase of ten (10) Embraer 190 aircraft. The loans have a term of twelve years.
During 2006, the Company utilized $23.8 million of this facility and the remainder of the facility
will be drawn during 2007. In January 2007, the Company utilized $71.8 million of this facility.
During 2006, the Company secured a medium term loan facility in the amount of $34.3 million for the
financing of pre-delivery payments of two (2) Boeing 737-800 aircraft having delivery months of
August and November 2007. The Company has granted, for the benefit of the bank, a first priority
security interest in the rights, title and interest over the two (2) Boeing 737-800 aircraft.
Interest on the loans are paid on a quarterly basis with the principal balance to be repaid upon
delivery of the aircraft.
During 2006, the Company arranged a $22 million facility to consolidate and refinance
AeroRepúblicas existing debt with more favorable conditions.
Assets, primarily aircraft, subject to agreements securing the Companys indebtedness amounted to
$736.0 million and $536.1 million as of December 31, 2006 and 2005, respectively.
5. Investments
The Company invests in time deposits, asset-backed commercial paper and securities, and U.S.
government agency securities. These investments are classified within short-term and long-term
investments in the accompanying Consolidated Balance Sheets. Investments are classified as
held-to-maturity securities since the Company has the intent and the ability to hold them until
maturity. These investments are stated at their amortized cost which is essentially the same as
their fair value. Long-term investments mature within three (3) years. Restricted cash classified
within long-term investments, held in time deposits, amounted to $7.5 million and $7.7 million as
of December 31, 2006 and 2005, respectively.
F-16
COPA HOLDINGS, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Leases
The Company leases certain aircraft and other assets under long-term lease arrangements. Other
leased assets include real property, airport and terminal facilities, sales offices, maintenance
facilities, training centers and general offices. Most contract leases include renewal options.
Non-aircraft related leases, primarily held with local governments, generally have renewable terms
of one year. In certain cases, the rental payments during the renewal periods would be greater
than the current payments. Because the lease renewals are not considered to be reasonably assured,
as defined in SFAS No. 13, Accounting for Leases, the rental payments that would be due during
the renewal periods are not included in the determination of rent expense until the leases are
renewed. Leasehold improvements are amortized over the contractually committed lease term, which
does not include the renewal periods. The Companys leases do not include residual value
guarantees.
At December 31, 2006, the scheduled future minimum lease payments under operating leases that have
initial or remaining non-cancelable lease terms in excess of one year are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
Operating Leases |
|
|
|
Aircraft |
|
|
Non-Aircraft |
|
Year ending December 31,
2007 |
|
$ |
35.4 |
|
|
$ |
5.4 |
|
2008 |
|
|
36.8 |
|
|
|
5.9 |
|
2009 |
|
|
30.5 |
|
|
|
5.3 |
|
2010 |
|
|
20.3 |
|
|
|
4.8 |
|
2011 |
|
|
17.0 |
|
|
|
4.3 |
|
Later years |
|
|
32.6 |
|
|
|
14.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments |
|
$ |
172.6 |
|
|
$ |
40.5 |
|
|
|
|
|
|
|
|
Total rent expense was $38.1 million, $35.4 million and $20.0 million for the years ended December
31, 2006, 2005 and 2004, respectively.
7. Financial Instruments and Risk Management
Fuel Price Risk Management
The Company periodically enters into crude oil call options, jet fuel zero cost collars, and jet
fuel swap contracts to provide for short to mid-term hedge protection (generally three to eighteen
months) against sudden and significant increases in jet fuel prices, while simultaneously ensuring
that the Company is not competitively disadvantaged in the event of a substantial decrease in the
price of jet fuel. The Company does not hold or issue derivative financial instruments for trading
purposes. During 2006, the Company began accounting for these derivatives as cash flow hedges for financial reporting
purposes.
F-17
COPA HOLDINGS, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
They are recorded at fair value as a component of prepayments and other current assets or other current liabilities in the accompanying
Consolidated Balance Sheets with the offset to Accumulated other comprehensive loss, net of hedge
ineffectiveness. Hedge
ineffectiveness included in Other non-operating income (expense) in the accompanying Consolidated
Statement of Income was $(0.7) million in 2006. Our loss related to fuel hedging instruments
included in aircraft fuel in our Consolidated Statement of Income was $(3.1) million in 2006.
The fair value of hedge contracts amounted to $(6.1) million at December 31, 2006, and was recorded
in Other current liabilities in the Consolidated Balance Sheet. The Companys purchases of jet
fuel are made substantially from one supplier.
Prior to accounting for these derivatives as cash flow hedges, all changes in the fair value of such derivative contracts, which
amounted to $(1.8) million, $0.2 million and $(0.9) million in years 2006, 2005 and 2004,
respectively, were recorded as a component of Other, net within Non-operating income (expense).
As of December 31, 2006, the Company held derivative instruments on 20% of its projected 2007 fuel
consumption, as compared with derivatives held on 19% of actual fuel consumed in 2006.
Outstanding financial derivatives instruments expose the Company to credit loss in the event of
nonperformance by the counterparties to the agreements. However, the Company does not expect any
failure of the counterparties to meet their obligations, as the Companys policy to manage credit
risk is to engage in business with counterparties who are financially stable and well-versed in the
matters of energy risk management. The amount of such credit exposure is generally the unrealized
gain, if any, in such contracts.
Foreign Currency Exchange Risk Management.
In 2006, the Company began to use forward contracts to hedge against the risk associated with its
forecasted peso-denominated cash flows. This derivative does not qualify as hedges for financial
reporting purposes in accordance with SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. Accordingly, changes in the fair value of such derivative contracts, which
amounted to $(2.0) million were recorded as a component of Other, net within Non-operating income
(expense). The fair value of forward contracts amounted to $(2.1) million at December 31, 2006, and
was recorded in Accrued Expense Payable in the Consolidated Balance Sheets.
Debt
The fair value of the Companys debt with a carrying value of $621.3 million and $470.9 million as
of December 31, 2006 and 2005, respectively, was approximately $613.0 million and $469.0 million.
These estimates were based on the discounted amount of future cash flows using the Companys
current incremental rate of borrowing for a similar liability.
F-18
COPA HOLDINGS, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other Financial Instruments
The carrying amounts of cash, cash equivalents, restricted cash, accounts receivable and accounts
payable approximate fair value due to their short-term nature.
8. Cash and Stock Based Compensation Plans
The company has established equity compensation plans under which it administers restricted stock,
stock options and certain other equity-based awards to attract, retain and motivate executive
officers, certain key employees and non-employee directors to compensate them for their
contributions to the growth and profits of the company.
Adoption of SFAS 123R
We adopted Statement of Financial Accounting Standards (SFAS) No. 123R, Share-Based Payment
(SFAS 123R) effective January 1, 2006. This pronouncement requires companies to measure the cost
of employee services received in exchange for an award of equity instruments (typically stock
options) based on the grant-date fair value of the award or at fair value of the award at each
reporting date, depending on the type of award granted. The fair value is estimated using
option-pricing models. The resulting cost is recognized over the period during which an employee is
required to provide service in exchange for the award, which is usually the vesting period. For
those awards issued subsequent to the adoption of SFAS 123R that allow for acceleration of vesting
upon retirement, total compensation cost is recognized over the period ending on the first eligible
retirement date.
Prior to the adoption of SFAS 123R, this accounting treatment was optional with pro forma
disclosures required. Prior to 2006, the Company did not have stock-based compensation, therefore a
special transition method was not required for the accounting of prior years compensation cost.
Non-vested Stock
The Compensation Committee of our board of directors approved a one time non-vested stock bonus for
certain executive officers and eliminated the existing Long Term Retention Plan. Non-vested stock
delivered under this award program may be sourced from treasury stock, or authorized un-issued
shares.
In March 2006, in accordance with this program, the Compensation Committee of our Board of
Directors granted 935,650 non-vested stock awards.
Senior management were granted 847,625 non-vested stock awards which vest over five (5) years in
yearly installments equal to 15% of the awarded stock on each of the first three anniversaries of
the grant date, 25% on the fourth anniversary and 30% on the fifth anniversary. Managers, officers
and key employees, not on our senior management team, were granted 88,025 non-vested stock awards
which vest on the second anniversary of the grant date.
The related compensation cost charged against income for this plan was $3.3 million in 2006.
F-19
COPA HOLDINGS, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Compensation Committee plans to make additional equity based awards under the plan from time to
time, including additional non-vested stock and stock option awards. We anticipate that future
employee non-vested stock and stock option awards granted pursuant to the plan will generally vest
over a three year period and the stock options will carry a ten year term.
Non-vested stock awards were measured at their fair value, which is the same amount for which a
similarly restricted share would be issued to third party, on the
grant date. For the 2006 grants the fair value of these non-vested
stock awards was $21.10.
A summary of non-vested stock award activity under the plan as of December 31, 2006 and changes
during the year is as follows:
|
|
|
|
|
|
|
2006 |
|
|
|
Shares |
|
Outstanding at beginning of the year |
|
|
|
|
Granted |
|
|
935,650 |
|
Exercised |
|
|
|
|
Forfeited |
|
|
18,600 |
|
|
|
|
|
Outstanding at end of the year |
|
|
917,050 |
|
|
|
|
|
The Company uses the straight-line attribution method to recognize the compensation cost for awards
with graded vesting periods. The Company estimates that the remaining compensation cost, not yet
recognized for the non-vested stock plan, is $16.0 million with an weighted average remaining
contractual life is 2.5 years. Additionally, the Company estimates that the
2007 compensation cost related to this plan will be $4.4 million.
F-20
COPA HOLDINGS, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Earnings Per Share
The following is a reconciliation of the income and share data used in the basic and diluted
earnings per share computations for the dates indicated (in millions, except share and share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Income available to common
stockholders for both,
basic and diluted EPS |
|
US$ |
|
|
133.8 |
|
|
|
83.0 |
|
|
|
68.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
applicable to basic EPS |
|
|
|
|
|
|
42,812,500 |
|
|
|
42,812,500 |
|
|
|
42,812,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
US$ |
|
|
3.13 |
|
|
|
1.94 |
|
|
|
1.60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
applicable to diluted EPS |
|
|
|
|
|
|
42,812,500 |
|
|
|
42,812,500 |
|
|
|
42,812,500 |
|
Effect of dilutive shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested Stock Plan |
|
|
|
|
|
|
422,053 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted average
common shares outstanding
applicable to diluted EPS |
|
|
|
|
|
|
43,234,553 |
|
|
|
42,812,500 |
|
|
|
42,812,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|