FORM 20-F
As
filed with the Securities and Exchange Commission on June 30, 2006
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, 2005 |
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, 2005, 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. o Yes þ 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 (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
ii
results that differ from our own estimates. Although we have not independently verified the
information concerning our competitive position, market share, market size, market growth or other
similar data provided by third-party sources or by industry or general publications, we believe
these sources and publications are generally accurate and reliable.
Presentation of Financial and Statistical Data
Included
elsewhere in this annual report are our audited consolidated balance
sheets as of
December 31, 2005 and 2004 and the audited consolidated statements of income, changes in
shareholders equity and cash flows for the years ended
December 31, 2005, 2004 and 2003. The
consolidated financial information as of December 31, 2003 and for the year ended December 31, 2002
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, 2001 and 2002 and for the year ended December 31, 2001 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 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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competitive pressures on pricing; |
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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 we distribute 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
¾Selected 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 2004 and for the
years ended December 31, 2005, 2004 and 2003 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 for the year ended December 31, 2002 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, 2001
and 2002 and for the year ended December 31, 2001 has been derived from our audited consolidated
financial statements that were prepared under International Accounting 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, S.A., or AeroRepública, a Colombian air
carrier, and began consolidating its results on April 22, 2005. As a result of this acquisition,
our financial information at and for the year ended December 31, 2005 is not comparable to the
information at and for the year ended December 31, 2004.
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Year Ended December 31, |
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2001 |
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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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(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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$ |
257,918 |
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$ |
269,629 |
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$ |
311,683 |
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$ |
364,611 |
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$ |
565,131 |
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Cargo, mail and other |
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32,454 |
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31,008 |
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30,106 |
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35,226 |
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|
43,443 |
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Total operating revenues |
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290,372 |
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|
300,637 |
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|
341,789 |
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399,837 |
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|
608,574 |
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Operating expenses: |
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Aircraft fuel |
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46,514 |
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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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Salaries and benefits |
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|
38,709 |
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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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Passenger servicing |
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32,834 |
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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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Commissions |
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|
31,652 |
|
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|
28,720 |
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|
27,681 |
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|
29,073 |
|
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|
45,087 |
|
Reservations and sales |
|
|
18,629 |
|
|
|
16,707 |
|
|
|
18,011 |
|
|
|
22,118 |
|
|
|
29,213 |
|
Maintenance, materials and repairs |
|
|
25,369 |
|
|
|
20,733 |
|
|
|
20,354 |
|
|
|
19,742 |
|
|
|
32,505 |
|
Depreciation |
|
|
13,325 |
|
|
|
13,377 |
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|
14,040 |
|
|
|
19,279 |
|
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|
19,857 |
|
Flight operations |
|
|
13,887 |
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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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Aircraft rentals |
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|
20,106 |
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|
21,182 |
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|
16,686 |
|
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|
14,445 |
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|
27,631 |
|
Landing fees and other rentals |
|
|
8,451 |
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|
|
8,495 |
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|
10,551 |
|
|
|
12,155 |
|
|
|
17,909 |
|
Other |
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|
15,892 |
|
|
|
19,166 |
|
|
|
25,977 |
|
|
|
29,306 |
|
|
|
32,622 |
|
Fleet impairment charge(1) |
|
|
|
|
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|
13,669 |
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|
3,572 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total operating expenses |
|
|
265,368 |
|
|
|
269,796 |
|
|
|
283,493 |
|
|
|
317,494 |
|
|
|
499,422 |
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|
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Operating income |
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|
25,004 |
|
|
|
30,841 |
|
|
|
58,296 |
|
|
|
82,343 |
|
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|
109,152 |
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Non-operating income (expense): |
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Interest expense |
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|
(10,988 |
) |
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|
(7,629 |
) |
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|
(11,613 |
) |
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|
(16,488 |
) |
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|
(21,629 |
) |
Interest capitalized |
|
|
1,592 |
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|
1,114 |
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|
|
2,009 |
|
|
|
963 |
|
|
|
1,089 |
|
Interest income |
|
|
701 |
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|
|
831 |
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|
887 |
|
|
|
1,423 |
|
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|
3,584 |
|
Other, net(2) |
|
|
331 |
|
|
|
(1,490 |
) |
|
|
2,554 |
|
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|
6,063 |
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|
395 |
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Total non-operating expenses, net |
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(8,364 |
) |
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(7,174 |
) |
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(6,163 |
) |
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(8,039 |
) |
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|
(16,561 |
) |
Income (loss) before income taxes |
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16,640 |
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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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Year Ended December 31, |
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2001 |
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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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(in thousands of dollars, except share and per share data and operating data) |
|
Provision for income taxes |
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(1,822 |
) |
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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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Net income (loss) |
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14,818 |
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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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BALANCE SHEET DATA |
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Total cash, cash equivalents and short-term
investments |
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$ |
28,385 |
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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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Accounts receivable, net |
|
|
30,210 |
|
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|
24,006 |
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|
|
31,019 |
|
|
|
27,706 |
|
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|
49,492 |
|
Total current assets |
|
|
69,040 |
|
|
|
68,940 |
|
|
|
103,523 |
|
|
|
152,087 |
|
|
|
184,793 |
|
Purchase deposits for flight equipment |
|
|
46,540 |
|
|
|
55,867 |
|
|
|
45,869 |
|
|
|
7,190 |
|
|
|
52,753 |
|
Total property and equipment |
|
|
227,717 |
|
|
|
345,411 |
|
|
|
480,488 |
|
|
|
541,211 |
|
|
|
637,543 |
|
Total assets |
|
|
300,121 |
|
|
|
421,935 |
|
|
|
591,915 |
|
|
|
702,050 |
|
|
|
916,912 |
|
Long-term debt |
|
|
111,125 |
|
|
|
211,698 |
|
|
|
311,991 |
|
|
|
380,827 |
|
|
|
402,954 |
|
Total shareholders equity |
|
|
46,426 |
|
|
|
67,094 |
|
|
|
115,583 |
|
|
|
174,155 |
|
|
|
245,867 |
|
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CASH FLOW DATA |
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|
|
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|
|
|
|
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Net cash provided by operating activities |
|
$ |
32,997 |
|
|
$ |
55,543 |
|
|
$ |
73,479 |
|
|
$ |
98,051 |
|
|
$ |
119,089 |
|
Net cash used in investing activities |
|
|
(39,473 |
) |
|
|
(150,203 |
) |
|
|
(151,802 |
) |
|
|
(85,738 |
) |
|
|
(163,570 |
) |
Net cash provided by financing activities |
|
|
14,466 |
|
|
|
100,400 |
|
|
|
105,298 |
|
|
|
29,755 |
|
|
|
38,921 |
|
|
|
|
|
|
|
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|
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OTHER FINANCIAL DATA |
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|
EBITDA(3) |
|
|
38,660 |
|
|
|
42,728 |
|
|
|
74,890 |
|
|
|
107,685 |
|
|
|
129,404 |
|
Aircraft rentals |
|
|
20,106 |
|
|
|
21,182 |
|
|
|
16,686 |
|
|
|
14,445 |
|
|
|
27,631 |
|
Operating margin(4) |
|
|
8.6 |
% |
|
|
10.3 |
% |
|
|
17.1 |
% |
|
|
20.6 |
% |
|
|
17.9 |
% |
Weighted average shares used in computing net
income per share(5) |
|
|
42,812,500 |
|
|
|
42,812,500 |
|
|
|
42,812,500 |
|
|
|
42,812,500 |
|
|
|
42,812,500 |
|
Net income (loss) per share(5) |
|
$ |
0.35 |
|
|
$ |
0.48 |
|
|
$ |
1.13 |
|
|
$ |
1.60 |
|
|
$ |
1.94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING DATA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue passengers carried(6) |
|
|
1,794 |
|
|
|
1,819 |
|
|
|
2,028 |
|
|
|
2,333 |
|
|
|
4,361 |
|
Revenue passenger miles(7) |
|
|
1,870 |
|
|
|
1,875 |
|
|
|
2,193 |
|
|
|
2,548 |
|
|
|
3,831 |
|
Available seat miles(8) |
|
|
2,920 |
|
|
|
2,847 |
|
|
|
3,226 |
|
|
|
3,639 |
|
|
|
5,368 |
|
Load factor(9) |
|
|
64.0 |
% |
|
|
65.9 |
% |
|
|
68.0 |
% |
|
|
70.0 |
% |
|
|
71.4 |
% |
Break-even load factor(10) |
|
|
58.7 |
% |
|
|
54.5 |
% |
|
|
52.8 |
% |
|
|
52.6 |
% |
|
|
57.9 |
% |
Total block hours(11) |
|
|
59,760 |
|
|
|
58,112 |
|
|
|
64,909 |
|
|
|
70,228 |
|
|
|
103,628 |
|
Average daily aircraft utilization(12) |
|
|
9.1 |
|
|
|
8.8 |
|
|
|
9.0 |
|
|
|
9.3 |
|
|
|
9.8 |
|
Average passenger fare |
|
|
143.8 |
|
|
|
148.2 |
|
|
|
153.7 |
|
|
|
156.3 |
|
|
|
129.6 |
|
Yield(13) |
|
|
13.79 |
|
|
|
14.38 |
|
|
|
14.22 |
|
|
|
14.31 |
|
|
|
14.75 |
|
Passenger revenue per ASM(14) |
|
|
8.83 |
|
|
|
9.47 |
|
|
|
9.66 |
|
|
|
10.02 |
|
|
|
10.53 |
|
Operating revenue per ASM(15) |
|
|
9.94 |
|
|
|
10.56 |
|
|
|
10.60 |
|
|
|
10.99 |
|
|
|
11.34 |
|
Operating expenses per ASM (CASM)(16) |
|
|
9.09 |
|
|
|
9.48 |
|
|
|
8.79 |
|
|
|
8.72 |
|
|
|
9.30 |
|
Departures |
|
|
23,742 |
|
|
|
23,361 |
|
|
|
25,702 |
|
|
|
27,434 |
|
|
|
48,934 |
|
Average daily departures |
|
|
65.0 |
|
|
|
64.0 |
|
|
|
70.4 |
|
|
|
75.0 |
|
|
|
156.6 |
|
Average number of aircraft |
|
|
18.0 |
|
|
|
18.1 |
|
|
|
19.8 |
|
|
|
20.6 |
|
|
|
31.0 |
|
Airports served at period end |
|
|
28 |
|
|
|
27 |
|
|
|
28 |
|
|
|
29 |
|
|
|
43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SEGMENT FINANCIAL DATA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Copa: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue |
|
$ |
290,372 |
|
|
$ |
300,637 |
|
|
$ |
341,789 |
|
|
$ |
399,837 |
|
|
$ |
505,655 |
|
Operating expenses |
|
|
265,368 |
|
|
|
269,796 |
|
|
|
283,493 |
|
|
|
317,494 |
|
|
|
402,684 |
|
Depreciation |
|
|
13,325 |
|
|
|
13,377 |
|
|
|
14,040 |
|
|
|
19,279 |
|
|
|
19,242 |
|
Aircraft rentals |
|
|
20,106 |
|
|
|
21,182 |
|
|
|
16,686 |
|
|
|
14,445 |
|
|
|
22,096 |
|
Interest expense |
|
|
10,988 |
|
|
|
7,629 |
|
|
|
11,613 |
|
|
|
16,488 |
|
|
|
19,424 |
|
Interest capitalized |
|
|
1,592 |
|
|
|
1,114 |
|
|
|
2,009 |
|
|
|
963 |
|
|
|
1,089 |
|
Interest income |
|
|
701 |
|
|
|
831 |
|
|
|
887 |
|
|
|
1,423 |
|
|
|
3,376 |
|
Net income (loss) before tax |
|
|
16,640 |
|
|
|
23,667 |
|
|
|
52,133 |
|
|
|
74,304 |
|
|
|
89,745 |
|
Total assets |
|
|
300,121 |
|
|
|
421,935 |
|
|
|
591,915 |
|
|
|
702,050 |
|
|
|
851,075 |
|
AeroRepública: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue |
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
|
$ |
102,976 |
|
Operating expenses |
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
96,839 |
|
Depreciation |
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
615 |
|
Aircraft rentals |
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
5,535 |
|
Interest expense |
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
2,205 |
|
Interest capitalized |
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
Interest income |
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
208 |
|
Net income (loss) before tax |
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
2,846 |
|
Total assets |
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
98,091 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SEGMENT OPERATING DATA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Copa: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available seat miles(8) |
|
|
2,920 |
|
|
|
2,847 |
|
|
|
3,226 |
|
|
|
3,639 |
|
|
|
4,409 |
|
Load factor(9) |
|
|
64.0 |
% |
|
|
65.9 |
% |
|
|
68.0 |
% |
|
|
70.0 |
% |
|
|
73.4 |
% |
Break-even load factor |
|
|
58.7 |
% |
|
|
54.5 |
% |
|
|
52.8 |
% |
|
|
52.6 |
% |
|
|
56.8 |
% |
Yield(13) |
|
|
13.79 |
|
|
|
14.38 |
|
|
|
14.22 |
|
|
|
14.31 |
|
|
|
14.41 |
|
Operating revenue per ASM(15) |
|
|
9.94 |
|
|
|
10.56 |
|
|
|
10.60 |
|
|
|
10.99 |
|
|
|
11.47 |
|
CASM(16) |
|
|
9.09 |
|
|
|
9.48 |
|
|
|
8.79 |
|
|
|
8.72 |
|
|
|
9.13 |
|
Average stage length(18) |
|
|
1,023 |
|
|
|
1,010 |
|
|
|
1,028 |
|
|
|
1,047 |
|
|
|
1,123 |
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2001 |
|
|
2002 |
|
|
2003 |
|
|
2004 |
|
|
2005(20) |
|
|
|
(in thousands of dollars, except share and per share data and operating data) |
|
On time performance(17) |
|
|
87.7 |
% |
|
|
90.5 |
% |
|
|
91.4 |
% |
|
|
91.8 |
% |
|
|
91.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AeroRepública: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available seat miles(8) |
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
950 |
|
Load factor(9) |
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
62.0 |
% |
Break even load factor |
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
60.8 |
% |
Yield(13) |
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
16.61 |
(21) |
Operating revenue per ASM(15) |
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
10.74 |
|
CASM(16) |
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
10.10 |
|
Average stage length(18) |
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
360 |
|
On time performance(19) |
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
70.4 |
% |
|
|
|
(1) |
|
Represents impairment losses on our Boeing 737-200 aircraft
and related assets. See Note 10
to our consolidated financial statements. |
|
(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, |
|
|
|
2001 |
|
|
2002 |
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
|
|
(in thousands of dollars) |
|
Net income (loss) |
|
$ |
14,818 |
|
|
$ |
20,668 |
|
|
$ |
48,489 |
|
|
$ |
68,572 |
|
|
$ |
82,999 |
|
Interest expense |
|
|
10,988 |
|
|
|
7,629 |
|
|
|
11,613 |
|
|
|
16,488 |
|
|
|
21,629 |
|
Income taxes |
|
|
1,822 |
|
|
|
2,999 |
|
|
|
3,644 |
|
|
|
5,732 |
|
|
|
9,592 |
|
Depreciation |
|
|
13,325 |
|
|
|
13,377 |
|
|
|
14,040 |
|
|
|
19,279 |
|
|
|
19,857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
40,953 |
|
|
|
44,673 |
|
|
|
77,786 |
|
|
|
110,071 |
|
|
|
134,077 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest capitalized |
|
|
(1,592 |
) |
|
|
(1,114 |
) |
|
|
(2,009 |
) |
|
|
(963 |
) |
|
|
(1,089 |
) |
Interest income |
|
|
(701 |
) |
|
|
(831 |
) |
|
|
(887 |
) |
|
|
(1,423 |
) |
|
|
(3,584 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
|
38,660 |
|
|
|
42,728 |
|
|
|
74,890 |
|
|
|
107,685 |
|
|
|
129,404 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $20.1 million in
2001, $21.2 million in 2002, $16.7 million in 2003, $14.4 million in 2004, and $27.6 million in
2005. |
|
(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. |
|
(17) |
|
Percentage of flights that arrive at the destination gate within fifteen minutes of scheduled
arrival. |
3
|
|
|
(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 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 five 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,
4
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.
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. Since then, Copa accepted delivery of two Embraer aircraft in
the fourth quarter of 2005 and increased its firm orders for the Embraer 190 aircraft by exercising
two of these options in April 2005 and three of these options in April 2006. In March 2006,
AeroRepública announced an order to purchase five new Embraer 190 aircraft with options for an
additional 20 new 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 in 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. Continental has incurred
significant losses since September 11, 2001, primarily as a result of record high fuel prices and
decreased yields. Continental reported a net loss of $68 million for 2005 and has indicated that
losses of the magnitude incurred since September 11, 2001 are not sustainable if they continue. We
cannot assure you that Continentals results will improve, or that it will avoid bankruptcy, and as
a result we may be materially and adversely affected by a continuing deterioration of Continentals
financial condition.
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
5
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.
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. After giving effect to the
proposed offering which we are currently making, Continental is expected to further reduce its
investment in us to approximately 12.3% of our capital stock (or 10.0% if the over-allotment option
is exercised). Continental can be expected to 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,
following consummation of the proposed offering, to appoint one member of our board of directors
and our dependence on the alliance between the airlines, Continental will continue to have the
ability to exercise significant influence over us following the proposed offering. 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.
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
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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, 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. If the Panamanian Civil Aviation Authority (the
Autoridad de Aeronáutica Civil), which we refer to as the AAC, or a Panamanian court were to
determine that substantial Panamanian ownership should be determined on the basis of our direct
and indirect ownership, we could 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 or the imposition of other sanctions
could also have a material adverse effect. 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.
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
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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.
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.
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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, such as Bogotas El Dorado airport, 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 and our auditors identified a material weakness in our internal controls over financial
reporting in connection with the preparation of our financial statements under U.S. GAAP, and if we
fail to remediate this material weakness and achieve and maintain an effective system of internal
controls, we may not be able to accurately report our financial results on a timely basis. As a
result, current and potential stockholders could lose confidence in our financial reporting, which
would harm our business and the trading price of our Class A shares.
In connection with the preparation of our financial statements under U.S. GAAP as of and for
the year ended December 31, 2005, we and our auditors identified a material weakness (as defined
under standards established by the Public Company Accounting Oversight Board) in our internal
controls over financial reporting. A material weakness is a significant deficiency, or combination
of significant deficiencies, that results in more than a remote likelihood that a material
misstatement of our annual or interim financial statements will not be prevented or detected.
Specifically, we found that we did not have appropriate expertise in U.S. GAAP accounting and
reporting among our financial and accounting staff to prepare our periodic financial statements
without needing to make material corrective adjustments and footnote revisions when those
statements are audited or reviewed. In light of this material weakness, in preparing the financial
statements included in this annual report, we performed additional analyses and other post-closing
procedures in the course of preparing our financial statements and related footnotes in accordance
with U.S. GAAP.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, beginning with our Annual Report on
Form 20-F for the fiscal year ending December 31, 2006, we will be required to furnish a report by
our management on our internal control over financial reporting. This report will contain, among
other matters, an assessment of the effectiveness of our internal controls over financial reporting
as of the end of the fiscal year, including a statement as to whether or not our internal controls
over financial reporting are effective. We have contracted an additional accounting manager with
experience in preparing financial statements under U.S. GAAP; we have engaged an internationally
recognized accounting firm to assist us in developing our procedures to comply with the
requirements of Section 404; and our management and audit committee are developing other plans to
prepare for our compliance with the requirements of Section 404 and to correct the weakness
identified above. We will incur incremental costs as a result of these efforts, including increased
auditing and legal fees, the magnitude of which we are not able to estimate at this time. We may
not be able to effectively and timely implement controls and
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procedures that adequately respond to Section 404 or other increased regulatory compliance and
reporting requirements that will be applicable to us as a public company. We cannot assure you that
we will not discover further weaknesses or deficiencies as we continue to develop these procedures.
In addition, we cannot assure you that the steps we plan to take or the procedures we plan to
implement will be sufficient to ensure that we will be able to prevent or detect any misstatements
to our financial statements in the future.
Any failure to implement and maintain the improvements in the controls over our financial
reporting, or difficulties encountered in the implementation of these improvements in our controls,
could result in a material misstatement to the annual or interim financial statements that would
not be prevented or detected or cause us to fail to meet our reporting obligations under applicable
securities laws. Any failure to improve our internal controls to address the identified weakness
could result in our incurring substantial liability for not having met our legal obligations and
could also cause investors to lose confidence in our reported financial information, which could
have a negative impact on the trading price of our Class A shares. Similar adverse effects could
result if our auditors express an adverse opinion or disclaim or qualify an opinion on managements
assessment or on the effectiveness of our internal control over financial reporting.
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 accordingly 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, 2005, our interest expense and aircraft and facility
rental expense under operating leases aggregated $57.1 million. At March 31, 2006, approximately
62% 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, 2006, we had firm commitments to purchase eight Boeing 737-Next Generation and
18 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. |
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, 2005,
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we had
$337.1 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.
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 an 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 system for
maintenance, the SHARES computer reservation and check-in system and our new revenue management
system. Other systems are designed to decrease
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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; however, 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.
Fluctuations in foreign exchange rates could negatively affect our net income.
In 2005, approximately 72% of our expenses and 42% 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 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, and AeroRepública currently has only limited hedging. 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.
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Because the average age of Copas aircraft was approximately 3.6 years as of May 31, 2006, 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 20.4
years as of May 31, 2006 (not taking into account our currently retired DC-9 aircraft). The
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 61% of our Copa 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 95 of AeroRepúblicas 109 pilots and co-pilots and all of AeroRepúblicas 176
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.
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.
During the first three months of 2006, AeroRepública had a net loss of approximately $746,000 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
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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 2005, approximately 58% 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 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.
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 has firm commitments to accept delivery of five Embraer 190 aircraft with
options to purchase an additional 20 Embraer 190
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aircraft. 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 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. 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. We have no employment agreements or non-competition agreements in place with members of
our senior management team other than Mr. Heilbron, our Chief Executive Officer. 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.
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 the routes on which we
operate, including Grupo TACA, American Airlines Inc. 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
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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. Grupo TACA lowered many of its fares over a year ago in an effort to
generate higher demand, and we were forced to respond by adjusting our fares to remain competitive
on the affected routes. We cannot assure you that Grupo TACA or any of our other competitors will
not undercut our fares in the future or increase capacity on routes in an effort to increase their
respective market shares as they have done in the past. 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,
in Brazil and several new low-cost carriers 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.
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 17.1% of our operating expenses in 2003, 19.7% in 2004 and 29.9% in 2005. Our fuel
prices increased very significantly in 2005 and are likely to increase further, perhaps
significantly. 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 five months of 2007 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, a further delay in the restart of the Gulf Coast refineries as a result of weather
disruptions, 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.
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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.
The 2001 terrorist attacks on the United States have adversely affected, and any additional
terrorist attacks or hostilities would further adversely affect, the airline industry by decreasing
demand and increasing costs.
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 airline industry experienced increased costs following the 2001 terrorist attacks.
Airlines have been required to adopt additional security measures and may be required to comply
with more rigorous security guidelines in the future. 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 airline ticket prices and a decreased demand for
air travel generally, which could materially and negatively affect our business, financial
condition and results of operations.
The negative impact on the airline industry of the current global state of affairs, including the
aftermath of the Iraq war and the threat of another outbreak of a communicable disease, may
continue or possibly worsen.
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.
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 $3.6 million, $5.7 million
and $9.6 million in the years ended December 31, 2003, 2004 and 2005, which represented an
effective income tax rate of 7.0%, 7.7% and 10.4% 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.
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.
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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.
Panama has historically afforded favorable tax treatment to investors in publicly held
companies and has exempted capital gains on the sale of shares registered with the National
Securities Commission, or NSC, and sold in an exchange or other organized market. From time to
time, however, the Panamanian legislature considers amendments to Panamas favorable tax regime.
For example, a proposed law was recently presented to the Legislative Assembly that would have
imposed a tax on the sales of shares on exchanges outside of Panama, including the NYSE. Although
this proposal was revised within a week of its initial presentation so as not to apply to the sale
of shares registered with the NSC, which includes our shares, we cannot assure you that changes to
Panamas current tax regime will not be implemented in the future. Any future change in the
Panamanian tax law increasing the taxes payable by us or by investors in our shares could have a
material adverse effect on the demand for, and the market value of, our Class A shares.
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 after the proposed offering
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. 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. In connection
with the proposed offering which we are currently making, Continental has agreed, subject to
certain exceptions, not to issue or transfer without the consent of the underwriters, until the
first anniversary of the date of the proposed offering, 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 the second anniversary of the date of the
proposed offering, 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 develop.
Our Class A shares are listed on the NYSE. During the three months ended March 31, 2006, the
average daily trading volume for our Class A shares as reported by the NYSE was approximately
212,477 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. In 1999, we received our first Boeing 737-700s and in 2003 we received our first
Boeing 737-800s. In the first quarter of 2005, we completed our fleet renovation program and
discontinued use of our last Boeing 737-200s. Since 1998, Copa has expanded from 24 destinations in
18 countries to 30 destinations in 20 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 +507 303-2677. 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 2005, capital expenditures were $63.3 million, which consisted primarily of
expenditures related to our purchase of two Embraer 190 aircraft. During 2004, capital expenditures
were $65.8 million, which consisted primarily of expenditures related to our purchase of three
Boeing 737-Next Generation aircraft. During 2003, capital expenditures were $112.2 million, which
consisted primarily of expenditures related to our purchase of four Boeing 737-Next Generation
aircraft and one CFM 56-7B spare engine.
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. Our fleet currently consists of 22 Boeing 737-Next Generation aircraft, two Embraer 190
aircraft, 11 MD-80 aircraft and two DC-9 aircraft (one of which is currently retired). We currently
have firm orders for eight Boeing 737-Next Generation and 18 Embraer 190s, and purchase rights and
options for up to nine additional Boeing 737-Next Generation and 35 additional Embraer 190s.
Copa was established in 1947 and currently offers approximately 92 daily scheduled flights
among 30 destinations in 20 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 22 Boeing 737-Next Generation aircraft and two Embraer 190
aircraft with an average age of approximately 3.6 years as of May 31, 2006. To meet its growing
capacity requirements, Copa has firm commitments to accept delivery of 21 additional aircraft
through 2009 and has purchase rights and options that, if exercised, would allow it to accept
delivery of up to 24 additional aircraft through 2009. Copas firm orders are for eight additional
Boeing 737-Next Generation aircraft and 13 additional Embraer 190s, and its purchase rights and
options are for up to nine Boeing 737-Next Generation aircraft and up to 15 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 Copas
Panama City hub. AeroRepública currently operates a fleet of eleven leased MD-80s and two owned
DC-9s (one of which is currently retired). As part of its fleet modernization and expansion plan,
AeroRepública has firm commitments to accept delivery of five Embraer 190 aircraft through 2007 and
purchase rights and options to purchase up to 20 additional Embraer 190 aircraft through 2011.
Since January 2001, we have grown significantly and have established a track record of
consistent profitability, recording five consecutive years of increasing earnings. Our total
operating revenues have increased from $290.4 million in 2001 to $608.6 million in 2005, while our
net income has increased from $14.8 million to $83.0 million over the same period. Our operating
margins also improved from 8.6% in 2001 to 17.9% in 2005.
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
industry. |
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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 was 8.72 cents in 2004 and 9.30 cents in 2005. Our operating cost per
available seat mile excluding costs for fuel and fleet impairment charges was 7.50 cents in
2001, 7.59 cents in 2002, 7.17 cents in 2003, 7.01 cents in 2004 and 6.52 cents in 2005.
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. Copa completed the replacement of all of its Boeing
737-200 aircraft in the first quarter of 2005 with Boeing 737-Next Generation aircraft
equipped with winglets and other modern cost-saving and safety features. Copa also recently
accepted delivery of its first two Embraer 190 aircraft. Over the next four years, Copa
intends to enhance its modern fleet through the addition of at least eight additional
Boeing 737-Next Generation aircraft and 13 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 and 737-800s and our new
Embraer 190s to offer substantial operational cost savings over the replaced aircraft in
terms of fuel efficiency and maintenance costs. AeroRepública is currently implementing a
fleet modernization and expansion plan with firm commitments on five new Embraer 190s and
options for an additional 20 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, 2006, Copa Airlines
statistic for on-time performance was 92.3%, completion factor was 99.7% and baggage
handling was 1.2 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 |
25
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programs and to reward customer loyalty with the popular OnePass frequent flyer
program, upgrades and access to Presidents Club lounges. |
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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 operational improvements at
AeroRepública, such as on-time performance which improved from 70.4% during the six months
ended December 31, 2005 to 81.9% during the three months ended March 31, 2006, and in March
2006, we implemented the OnePass frequent flyer program at AeroRepública. |
AeroRepública
We acquired 85.6% of AeroRepública on April 22, 2005 and another 14.2% in a series of
transactions ending in March 2006. We carried out the acquisition by purchasing substantially all
of the equity ownership interest in AeroRepública from its several former shareholders for an
aggregate purchase price of approximately $23.4 million, including acquisition costs. 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 25% of the domestic traffic in Colombia in 2005 and approximately 1,238 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 81.9% during the three months ended
March 31, 2006. We have centralized certain administrative functions common to Copa and
AeroRepública, including information technology, corporate planning and internal audits. We have
also implemented e-ticketing at AeroRepública, and AeroRepública now participates in the OnePass
frequent flyer loyalty program. Looking ahead, we seek to continue aircraft interior renovations in
our AeroRepública aircraft and complete our fleet renovation program.
We believe that AeroRepúblicas revenues were approximately $87 million for 2003 and
approximately $118 million for 2004. We also believe that during those years AeroRepública operated
with very low net operating margins and experienced a net loss in 2003. However, in the course of
our due diligence investigations in connection with the purchase, we and our external accounting
advisors discovered certain inconsistencies in AeroRepúblicas accounting and internal controls
that caused us to believe that its published financial statements as prepared under Colombian GAAP
may not have accurately reflected its results of operations for the years covered. Since we
acquired AeroRepública, we have retained an internationally recognized accounting firm to assist us
in the maintenance of accounting records, perform additional analyses and post-closing procedures
necessary for the preparation of AeroRepúblicas financial statements and provide other assistance
in areas in which AeroRepública had insufficient internal resources. Additionally, our accounting
personnel have been directly involved in the preparation and review of AeroRepúblicas financial
information consolidated into our financial statements subsequent to the acquisition. As a result,
we believe the financial information of AeroRepública that is consolidated into our financial
statements has been prepared in accordance with U.S. GAAP and that our interim financial statements
for the periods subsequent to our acquisition of AeroRepública are materially correct. Our
management and audit committee have developed plans for the remediation of the deficiencies in
AeroRepúblicas internal controls. These plans include additional oversight by our accounting
personnel, further education and training in U.S. GAAP for AeroRepúblicas existing personnel and
engaging outside resources to assist in the design and implementation of additional internal
controls. We expect to continue to carry out these plans during the next year in connection with
our initial assessment of our internal control over financial reporting as of December 31, 2006, as
required by Section 404 of the Sarbanes-Oxley Act of 2002. The consolidation of AeroRepública into
our results of
26
operations has substantially increased our revenues and decreased our operating margins and is
likely to do so for the foreseeable future.
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 8.2% of worldwide passengers flown in 2005, or 105 million passengers. A
significant percentage of this traffic consisted of passengers flying between the United States and
Latin America.
The Central American aviation market is dominated by international traffic. According to data
from IATA, international traffic represented more than 69.2% of passengers carried and 84.4% of
passenger miles flown in Central America in 2005. International passenger traffic is concentrated
between North America and Central America. This segment represented 73.3% of international
passengers flown in Central America in 2005, compared to 18.1% for passengers flown between Central
America and South America and 8.6% for passengers flown between Central American countries. Total
passengers flown on international flights in Central America grew by 26.0% in 2005, and load
factors on international flights to and from Central America were 72.8% on average.
Domestic traffic, or flights within Central American countries, represented approximately
30.8% of passengers carried and 15.6% of passenger miles flown in 2005. Average load factors on
domestic flights within Central America were 66.6% in 2005. The chart below details passenger
traffic in 2005.
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2005 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 (%) |
|
ASMs (Million) |
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Change (%) |
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Load Factor |
International Scheduled Service |
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North America Central America |
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18,922 |
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4.1 |
% |
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27,855 |
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1.2 |
% |
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37,718 |
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(2.1 |
)% |
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73.9 |
% |
North America South America |
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19,377 |
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|
10.4 |
% |
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37,171 |
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11.4 |
% |
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|
51,486 |
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|
6.6 |
% |
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|
72.2 |
% |
Central America South America |
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4,666 |
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17.2 |
% |
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8,951 |
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28.2 |
% |
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|
12,601 |
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26.1 |
% |
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|
71.0 |
% |
Within Central America |
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2,214 |
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(5.6 |
)% |
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|
1,090 |
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(16.9 |
)% |
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1,712 |
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(27.4 |
)% |
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|
63.6 |
% |
Within South America |
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8,595 |
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21.8 |
% |
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|
10,862 |
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12.3 |
% |
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14,771 |
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7.2 |
% |
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|
73.5 |
% |
Domestic Scheduled Service |
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Central America |
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11,487 |
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(4.4 |
)% |
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|
6,992 |
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(3.7 |
)% |
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16,900 |
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(7.7 |
)% |
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|
66.6 |
% |
South America |
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40,183 |
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19.7 |
% |
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20,657 |
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18.4 |
% |
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48,010 |
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13.9 |
% |
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|
69.2 |
% |
Panama serves as a hub for connecting passenger traffic between major North American, South
American, Caribbean and Central American markets. Accordingly, passenger traffic to and from Panama
is significantly influenced by economic growth in surrounding regions. Major passenger traffic
markets in North America, South America and Central America experienced growth in their GDP in 2005
on both an absolute and per capita basis. Real GDP in our two most important markets also grew in
2004, increasing by 7.6% in Panama and 4.0% in Colombia in 2004. In 2005, real GDP increased by
5.5% in Panama and by 5.1% 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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2005 GDP |
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2005 GDP 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$) |
Brazil |
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792.7 |
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2.3 |
% |
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|
4,315.7 |
|
Argentina |
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|
181.7 |
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|
9.2 |
% |
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|
4,802.1 |
|
Chile |
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|
114.0 |
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|
6.3 |
% |
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|
7,040.3 |
|
Mexico |
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|
768.4 |
|
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|
3.0 |
% |
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|
7,297.6 |
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GDP |
|
GDP per Capita |
|
|
2005 GDP |
|
|
|
|
|
2005 GDP per Capita |
|
|
Current Prices |
|
2005 Real GDP |
|
Current Prices |
|
|
(US$bn) |
|
(% Growth) |
|
(US$) |
Colombia |
|
|
122.3 |
|
|
|
5.1 |
% |
|
|
2,742.5 |
|
Panama |
|
|
15.2 |
|
|
|
5.5 |
% |
|
|
4,722.2 |
|
USA |
|
|
12,485.7 |
|
|
|
3.5 |
% |
|
|
42,101.3 |
|
|
|
|
Source: |
|
International Monetary Fund, World Economic Outlook Database,
April 2006; real GDP growth calculated in local currency |
Panama has benefited from a stable economy with moderate inflation and steady GDP growth.
According to World Bank estimates, from 1999 to 2003 Panamas real GDP grew at an average annual
rate of 2.9% while inflation averaged 0.6% per year. The service sector represents approximately
76% 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 2004, an increase of approximately 3.3% from 3.1 million in 2003, 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. The World
Bank estimates that annual aircraft departures in Panama increased by approximately 5.1% from
25,700 in 2003 to 27,000 in 2004.
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, Turismo Aereo and Aeroperlas, which operate turbo prop aircraft generally with less than
50 seats. These airlines do not offer 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 million in 2004 according to the World Bank, and has a land area of
approximately 440,000 square miles. Colombias GDP was approximately $122.3 billion in 2005, and
per capita income was approximately $2,742 (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.
Route Network and Schedules
Copa
As of March 31, 2006, Copa provided regularly scheduled flights to 30 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. Over the next few years, as
our hub expands to allow us to de-peak our schedules and with the addition of two new banks to our
hub, we intend to increase the number of destinations and frequencies. Operating more banks during
the day will increase our asset utilization and allow us to utilize the employees at our hub more
efficiently since periods of low activity without arriving or departing flights at the hub will be
shorter. Additional banks will also give us the opportunity to provide more frequent service to
many destinations, allow some passengers more convenient connections and increase the flexibility
of scheduling flights throughout our route network.
28
The following table sets forth certain information with respect to our route system based on
our flight schedule in effect as of March 31, 2006:
Number of Passengers Carried
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
Region |
|
ASMs per Week |
|
2003 |
|
2004 |
|
2005 |
North America |
|
|
22,961,778 |
|
|
|
335,294 |
|
|
|
395,497 |
|
|
|
487,852 |
|
Central America |
|
|
8,900,633 |
|
|
|
655,726 |
|
|
|
741,295 |
|
|
|
855,491 |
|
South America |
|
|
49,098,742 |
|
|
|
799,057 |
|
|
|
884,298 |
|
|
|
1,120,355 |
|
Caribbean |
|
|
13,614,008 |
|
|
|
265,660 |
|
|
|
290,372 |
|
|
|
339,975 |
|
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, Mexicana, 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. We divide our sales and marketing into the following
regions: North America; South America; Central America (excluding Panama); the Caribbean; and
Panama. The following table shows our revenue generated in each of these regions.
Revenue by Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
Region |
|
2003 |
|
2004 |
|
2005 |
North America(1) |
|
|
15.2 |
% |
|
|
16.6 |
% |
|
|
17.2 |
% |
South America |
|
|
38.1 |
% |
|
|
37.2 |
% |
|
|
39.6 |
% |
Central America(2) |
|
|
34.6 |
% |
|
|
34.3 |
% |
|
|
31.6 |
% |
Caribbean(3) |
|
|
12.1 |
% |
|
|
11.9 |
% |
|
|
11.6 |
% |
|
|
|
(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, 2005 |
Barranquilla |
|
Jun 1995 |
|
|
26 |
|
|
|
102,252 |
|
Bogotá |
|
Jun 1993 |
|
|
259 |
|
|
|
985,391 |
|
Bucaramanga |
|
May 1995 |
|
|
20 |
|
|
|
84,025 |
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Passengers |
|
|
|
|
|
|
Departures |
|
Carried During the |
|
|
Date Service |
|
Scheduled |
|
Year Ended |
Destinations Served |
|
Commenced |
|
per Week(1) |
|
December 31, 2005 |
Cali |
|
Jun 1993 |
|
|
61 |
|
|
|
275,731 |
|
Cartagena |
|
Jun 1993 |
|
|
50 |
|
|
|
193,255 |
|
Cúcuta |
|
Nov 2005 |
|
|
14 |
|
|
|
5,347 |
|
Leticia |
|
Nov 1993 |
|
|
7 |
|
|
|
31,667 |
|
Medellín |
|
Oct 1994 |
|
|
69 |
|
|
|
213,758 |
|
Montería |
|
Jul 1994 |
|
|
14 |
|
|
|
64,107 |
|
Panama |
|
Dec 2005 |
|
|
14 |
|
|
|
4,839 |
|
Pereira |
|
Mar 2003 |
|
|
14 |
|
|
|
40,500 |
|
San Andrés |
|
Jun 1993 |
|
|
33 |
|
|
|
179,746 |
|
Santa Marta |
|
Jun 1993 |
|
|
15 |
|
|
|
74,696 |
|
|
|
|
(1) |
|
As of March 31, 2006. |
In addition to the destinations described above, AeroRepública periodically operates
charter flights to Margarita Island, Venezuela; Havana, Cuba; Punta Cana, Dominican Republic and
Montego Bay, Jamaica.
AeroRepública was granted the authorization to fly regular services to Panama City from Cali,
Medellín , Cartagena and San Andrés, Colombia. As a result, AeroRepública added international
service to its schedule in December 2005, with daily flights to Panama City from Medellin and
Cartagena, Colombia. We expect that AeroRepúblicas new service on these routes will provide feeder
traffic and complement Copas existing service out of Panama City. In addition, AeroRepública
started operations on the routes from Cali, Medellín and Bogotá to Cúcuta in December 2005 and
November 2005, respectively. While AeroRepública retains the right to operate the Cali to Medellín
route, service was temporarily discontinued in January 2006.
AeroRepública was also granted the authorization to fly between Pereira and Panama, Pereira
and San José (Costa Rica), Panama and San José (Costa Rica) and San Andrés and San José (Costa
Rica). AeroRepública has applied for authorization to fly routes between Bogotá and Panamá and
Bogotá and Armenia (Colombia). In addition to code-sharing with Copa, AeroRepública also has
code-sharing agreements with Air Plus Comet, which provides AeroRepública the ability to offer
expanded international service to its customers. Colombia has open-skies agreements with the Andean
Pact (Comunidad Andina) nations of Bolivia, Ecuador, Peru and Venezuela.
Airline Operations
Passenger Operations
Passenger revenues accounted for approximately $466.1 million or 92.2% of Copas total
revenues in 2005, 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 40% 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.
AeroRepúblicas business is more concentrated on passenger service, which in 2005 accounted
for approximately 96.2% 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 $24.1
million in 2003, $28.2 million in 2004 and $31.0 million in 2005, representing 7.0%, 7.0% and 6.1%,
respectively, of Copas operating revenues. We sold our remaining dedicated Boeing 737-200
Freighter aircraft in April 2002. However, we still wet-lease freighter capacity from time to time
to reliably meet our cargo customers needs. In 2005, our cargo business consisted of approximately
75.6% in courier and freight; 22.4% in wet leases; and 2.0% 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.
30
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. Copa recently replaced its
Revenue Management software with Airmax, a more sophisticated revenue management system designed by
Sabre.
During 2002, Copa purchased an automated pricing system from SMG Technologies that allows it
to efficiently monitor its competitors published, unpublished and web fares and easily file fares
with automated services. This gives Copa the time to publish competitive fares to and from points
in the United States that it serves via its code-share agreement with Continental and to analyze
the impact of any change on revenue. The system was fully implemented in February 2004.
AeroRepública
Improvements are being made to AeroRepúblicas revenue management, pricing capabilities and
systems that we expect will be completely in place by late 2006. We are in the process of
implementing the Airmax revenue management system in AeroRepública.
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.
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. Copa amended and restated the major agreements in
November 2005 and extended them 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
31
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.
Code-sharing. We currently place the Copa designator code on Continental operated flights
from Panama to Houston and Panama to Newark. In addition, Continental flights carrying the Copa
code operate to over 120 other Continental destinations, primarily through Continentals gateways
in Houston and Newark. Continentals flights from Guatemala City and Managua City to Houston, and
from Guatemala City to Newark also carry Copas code. In May 2001, the DOT awarded Copa antitrust
immunity for our code-share agreement, allowing Copa to deepen the alliance through, among other
things, coordinating schedules and pricing. The downgrading of the Panamanian AAC to IASAs
Category 2 in 2001, although no reflection on Copas own safety standards, resulted in the
suspension of its code-share status with Continental until Category 1 status was restored in April
2004. See Safety.
Aircraft Maintenance & Flight Safety. Continental and Copa have been cooperating closely to
fully 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. Also, a new revenue management system and team were introduced at
Copa under the direct management of experts brought in from Continental. 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. We have also been able to take advantage of Continentals greater
purchasing power with its suppliers, including Boeing, thus enabling us to negotiate lower purchase
prices for these new aircraft.
Sales, Marketing and Distribution
Copa
Sales and Distribution. Approximately 75% of sales during 2004 were through travel agents and
other airlines while approximately 25% were direct sales via our CTOs, our call centers, our
airport counters or our website. Travel agents receive base commissions, not including back-end
incentive payments, ranging from 0% to 12% depending on the country. The weighted average rate for
these commissions during 2005 was 4.9%. In recent
32
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 78 domestic and international ticket
offices, including airport and city ticket offices. Copa has 17 CTOs co-branded with Continental.
During the year ended December 31, 2005, approximately 21% and 4% of its sales were booked through
its ticket counters and its call centers, respectively.
E-tickets, a key component of our sales efforts through the Internet and Copas 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 American
Airlines and Continental interline tickets had been implemented. 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; 2.3% of its 2005 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 host in January 2006 and expects to implement e-ticket
interline with Copa and e-ticket with Amadeus during the second quarter of 2006, to complement 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 2005, approximately 76% of
AeroRepúblicas sales were made through travel agencies and 24% were made directly to passengers.
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. 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
33
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 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, comes 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 40 cities in 19 countries and compete with Copas
hub at Tocumen International Airport. Grupo TACA primarily operates a fleet of Airbus A319 and A320
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
republics where Grupo TACA has established service, including Managua, Nicaragua, San Jose, Costa
Rica and Guatemala.
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 is also introducing service to and from 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 (Maracaibo). Several smaller airlines also
compete in Central America, such as Tikal Jets.
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. 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 21% of the domestic Colombian market in 2005. 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.
34
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, 2006, Copa operated a fleet consisting of 24 aircraft, including 18 Boeing
737-700 Next Generation aircraft, four Boeing 737-800 Next Generation aircraft and two Embraer 190
aircraft. Copa currently has firm orders to purchase eight additional Boeing 737-Next Generation
aircraft and thirteen Embraer 190s. Copa also has options for an additional 15 Embraer 190s and
purchase rights for an additional nine Boeing 737-Next Generation aircraft.
The current composition of the Copa fleet as of May 31, 2006 is more fully described below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of Lease |
|
|
|
|
|
|
Number of Aircraft |
|
|
|
|
|
Remaining |
|
Average Age |
|
Seating |
|
|
Total |
|
Owned |
|
Leased |
|
(Years) |
|
(Years) |
|
Capacity |
Boeing 737-700 |
|
|
18 |
|
|
|
12 |
|
|
|
6 |
|
|
|
4.8 |
|
|
|
4.4 |
|
|
|
124 |
|
Boeing 737-800 |
|
|
4 |
|
|
|
3 |
|
|
|
1 |
|
|
|
6.5 |
|
|
|
2.0 |
|
|
|
155 |
|
Embraer 190 |
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
0.5 |
|
|
|
96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
24 |
|
|
|
17 |
|
|
|
7 |
|
|
|
5.0 |
|
|
|
3.6 |
|
|
|
|
|
As of May 31, 2006, the Copa fleet consisted of 18 Boeing 737-700s (six of which we leased),
four Boeing 737-800s (one of which we leased) and two Embraer 190 aircraft. 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 options and purchase rights:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft Type |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
737-700 |
|
|
20 |
|
|
|
20 |
|
|
|
20 |
|
|
|
20 |
|
737-800(1) |
|
|
4 |
|
|
|
6 |
|
|
|
8 |
|
|
|
10 |
|
Embraer 190 |
|
|
6 |
|
|
|
11 |
|
|
|
15 |
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fleet |
|
|
30 |
|
|
|
37 |
|
|
|
43 |
|
|
|
50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. |
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
35
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 is expected to
have 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 17 of our
aircraft, including two 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 60 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
configured with 14 business class seats. 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. We currently have three spare engines for service replacements and for periodic
rotation through our fleet.
AeroRepública
AeroRepúblicas fleet consists of two owned DC-9s (one of which is currently retired), five
leased MD-81s, four leased MD-82s and two leased MD-83s with an average age in excess of 20 years.
All of AeroRepúblicas fleet is configured as a single class, with the MD fleet having an average
capacity of 157 seats and the DC-9 fleet having an average capacity of 110 seats. In the first
quarter of 2006, we placed firm orders for five Embraer 190 aircraft with purchase rights and
options for up to 20 additional Embraer aircraft. Delivery of four Embraer 190 aircraft is expected
in late 2006. The configuration of AeroRepúblicas Embraer 190 will be single class with a capacity
of 106 passengers.
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 contract
with certified outside maintenance providers, such as Goodrich Aviation Technical Services, Inc. in
Everett, Washington, 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
36
CFM-56 engines. There were no heavy maintenance events in 2005. 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. As part of the
purchase agreement for the new Embraer 190s, several of Copas mechanics are enrolled in a
comprehensive factory training course on the maintenance program for the Embraer 190s. All of
Copas mechanics will eventually be trained to perform line maintenance on the Embraer 190s. As
part of the purchase agreement for the new Embraer 190s, all of Copas mechanics have been
qualified in Embraer maintenance procedures through a comprehensive factory training course as well
as local on the job training in order to perform line maintenance on the Embraer 190s.
AeroRepública
All maintenance for AeroRepúblicas DC-9s and line maintenance for the MD-80s 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 2005, Copa completed a Line Operations Safety Audit under contract with
University of Texas researchers. Copa also recently successfully completed our 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. Over thirteen years ago, we lost one aircraft and all of its
passengers in an accident believed to have been caused by failure of a navigation instrument. 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.
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.
37
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, Tocumen was closed and unavailable for flight operations for a total of
less than two hours in each of 2004 and 2005. |
|
|
|
|
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 124-seat Boeing 737-700s can efficiently
serve long-haul destinations in South American cities such as Santiago, Chile;
Buenos Aires, Argentina; 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 have 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 will
provide up to eight new gate positions with jet bridges, six new remote parking positions, expand
retail areas and improve the baggage-handling facilities. The government has authorized $70 million
to cover the costs of this expansion. In April 2004, Leo A. Daly, an American company whose
experience includes the renovation of the Miami, Dallas and Washington, D.C. (Reagan) airports, won
the bid to remodel and expand the terminal. Work on Phase I is expected to be completed in the
third quarter of 2006. We are considering an increased role for Copa in facilitating a planned
Phase II of the airport expansion that would add another five gates to the airport.
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.
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
38
Presidents Club will be expanded to approximately twice its current size as part of the
Tocumen International Airport expansion project.
Bogotas El Dorado Airport is AeroRepúblicas main operating terminal. It is also Colombias
main international and domestic terminal, with two operational runways. El Dorado is undergoing 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 |
|
|
2001 |
|
2002 |
|
2003 |
|
2004 |
|
2005 |
Copa |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average price per gallon of jet
fuel into plane (excluding hedge)
(in U.S. dollars) |
|
$ |
0.95 |
|
|
$ |
0.86 |
|
|
$ |
1.01 |
|
|
$ |
1.32 |
|
|
$ |
1.87 |
|
Gallons consumed (in thousands) |
|
|
46,669 |
|
|
|
44,788 |
|
|
|
48,444 |
|
|
|
50,833 |
|
|
|
58,924 |
|
Available seat miles (in millions) |
|
|
2,920 |
|
|
|
2,847 |
|
|
|
3,226 |
|
|
|
3,639 |
|
|
|
4,409 |
|
Gallons per ASM (in hundredths) |
|
|
1.60 |
|
|
|
1.57 |
|
|
|
1.50 |
|
|
|
1.40 |
|
|
|
1.34 |
|
AeroRepública(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average price per gallon of jet
fuel into plane (excluding hedge)
(in U.S. dollars) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2.12 |
|
Gallons consumed (in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,887 |
|
Available seat miles (in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
950 |
|
Gallons per ASM (in hundredths) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.88 |
|
|
|
|
(1) |
|
Since April 22, 2005. |
Since 2004, the price of jet fuel has continued to climb. During 2005, Copa paid an
average price, including plane charges, of $1.87 per gallon of jet fuel, a 41.8% increase from
2004s rate of $1.32 per gallon. On a per unit basis, Copas consumption did not increase in line
with the rise in the cost of jet fuel due to the replacement of older, less fuel efficient Boeing
737-200s with new Boeing 737-Next Generation aircraft. Based on our experience, the Boeing 737-Next
Generation family is 15-20% more fuel efficient than first generation Boeing 737 models.
We believe that fuel prices are likely to increase in the future and may do so in the near
future. In 2005, we hedged 12% of our requirements through the use of swap and zero-cost collar
transactions. We have hedged approximately 13% of Copas anticipated fuel needs for 2006 and
approximately 5% of Copas projected fuel consumption from January 1, 2007 to May 31, 2007.
Although AeroRepública does not currently have a 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.
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
39
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.
Panamanian government officials have typically worked closely with us to establish policies that
benefit both our company and the country. 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.
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
40
various regulations of the ICAO, and AAC personnel are currently receiving 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.
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
41
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. 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 Cali, Cartagena and Barranquilla airports are under private
management arrangements, as well as the runways of El Dorado Airport in Bogotá. However, 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 and the Andean Pact (Comunidad Andina) nations of Bolivia,
Ecuador, Peru, and Venezuela. AeroRepública has been recently granted the use of 17 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 no
route rights available to the United States from Colombia.
U.S. Airline Regulation
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.
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 per segment passenger security fee
42
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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* |
|
Includes ownership by us held through wholly-owned holding companies organized in the British
Virgin Islands as of March 31, 2006. |
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
is our operating subsidiary that is primarily engaged in domestic air travel within Colombia.
Oval Financial Leasing, Ltd. controls
43
the special purpose vehicles that have a beneficial interest in the majority of our aircraft. OPAC,
S.A. is a property holding company that owns our former corporate headquarters facility.
D. Property, Plants and Equipment
Headquarters
We have recently 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. We are in the
process of selling our previous headquarters building in Panama City and currently expect to
complete the sale in 2006.
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 $91,000 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 $9,000 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 25 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. Our fleet currently consists of 22 Boeing 737-Next Generation aircraft, two Embraer 190
aircraft, 11 MD-80 aircraft and two DC-9 aircraft (one of which is currently retired). We currently
have firm orders for eight Boeing 737-Next Generation and 18 Embraer 190s, and purchase rights and
options for up to nine additional Boeing 737-Next Generation and 35 additional Embraer 190s.
Copa was established in 1947, and currently offers approximately 92 daily scheduled flights
among 30 destinations in 20 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.
44
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 22 Boeing 737-Next Generation aircraft and two Embraer 190
aircraft with an average age of approximately 3.6 years as of May 31, 2006. To meet its growing
capacity requirements, Copa has firm commitments to accept delivery of 21 additional aircraft
through 2009 and has purchase rights and options that,
if exercised, would allow it to accept delivery of up to 24 additional aircraft through 2009.
Copas firm orders are for eight additional Boeing 737-Next Generation aircraft and 13 additional
Embraer 190s, and its purchase rights and options are for up to nine Boeing 737-Next Generation
aircraft and up to 15 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 S.A., a Colombian air carrier
that according to the Colombian Civil Aviation Administration, Unidad Especial Administrativa de
Aeronáutica Civil, 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. AeroRepública currently operates a fleet of eleven leased
MD-80s and two owned DC-9s (one of which is currently retired). As part of its fleet modernization
and expansion plan, AeroRepública has firm commitments to accept delivery of five Embraer 190
aircraft through 2007 and purchase rights and options to purchase up to 20 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 2005 and remained at historically high levels.
Copas fuel cost increased from $1.01 per gallon during 2003 to $1.32 per gallon in 2004 and $1.87
per gallon in 2005. 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 12% of Copas fuel needs for 2005 and have hedged
approximately 13% of Copas projected fuel needs for 2006 and approximately 5% of the needs for the
first five months of 2007. 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 March 31, 2006. 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 2005 AeroRepública
was the second-largest domestic carrier in Colombia in terms of number of passengers carried,
providing service among 12 cities in Colombia and 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. For the year ended December 31, 2005 and for future periods, we are reporting AeroRepúblicas operations as a
separate segment in our financial statements and the related notes.
See Note 14 to our audited consolidated financial statements included elsewhere in this annual report for segment data for AeroRepública
for the year ended December 31, 2005. As a result of this acquisition and our consolidation of
AeroRepúblicas results as of April 22, 2005, our financial information as of and for the year ended
December 31, 2005 is not comparable to the information as of and for the year ended December 31, 2004.
45
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 5.5% in 2004 and 1.9% in
2003, while the regions per capita gross domestic product is estimated to have risen by
approximately 4% in 2004. According to data from the International Monetary Fund, in the
sub-regions we serve gross domestic product rose in 2005 (in real terms) by approximately 4.2% in
the Mercosur countries, 6.3% in the Andean region, 3.8% in Central America and 5.9% in the
Caribbean, with each region continuing to build on gains made during 2004 of approximately 6.0% in
the Mercosur countries, 7.8% in the Andean region, 3.9% in Central America and 2.3% 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 2005, resulting in estimated
global GDP growth of approximately 4.8% (versus 4.0% in 2004). In recent years, the Panamanian
economy has closely tracked the Latin American economy as a whole, and in 2005 the Panamanian
economy grew in real terms by approximately 5.5% (versus 7.6% in 2004), according to the
International Monetary Funds estimates. Inflation in Panama rose approximately 2.9% in 2005
(versus 0.5% in 2004). Additionally, the Colombian economy has experienced relatively stable
growth. According to the International Monetary Fund estimates, the Colombian gross domestic
product grew by approximately 3.9% in 2003, 4.8% in 2004 and by 5.1% in 2005, with inflation (as
indicated by the consumer price index) rising by approximately 7.1% in 2003, 5.9% in 2004 and 5.0%
in 2005.
Revenues
We derive our revenues primarily from passenger transportation which represents approximately
93% of our revenues, with approximately 7% 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.
The following table sets forth our capacity, load factor and yields for the periods indicated.
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Year Ended December 31, |
|
|
2003 |
|
2004 |
|
2005 |
Copa Segment |
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|
|
|
|
|
|
|
|
|
|
|
Capacity (in available seat miles, in millions) |
|
|
3,225.9 |
|
|
|
3,639.4 |
|
|
|
4,409.1 |
|
Load factor |
|
|
68.0 |
% |
|
|
70.0 |
% |
|
|
73.4 |
% |
46
|
|
|
|
|
|
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|
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|
|
|
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|
|
Year Ended December 31, |
|
|
2003 |
|
2004 |
|
2005 |
Yield (in cents) |
|
|
14.22 |
|
|
|
14.31 |
|
|
|
14.41 |
|
AeroRepública Segment(1) |
|
|
|
|
|
|
|
|
|
|
|
|
Capacity (in available seat miles, in millions) |
|
|
|
|
|
|
|
|
|
|
950.0 |
|
Load factor |
|
|
|
|
|
|
|
|
|
|
62.0 |
% |
Yield (in cents)(2) |
|
|
|
|
|
|
|
|
|
|
16.61 |
|
|
|
|
(1) |
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Since April 22, 2005. |
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(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 2005, 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 2005, the 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 116.8% from $26.15 per
barrel to $56.70 per barrel. Historically, we have not hedged a significant portion of our fuel
costs. We entered into hedging agreements with respect to approximately 12% of Copas fuel needs
for 2005 and 13% for 2006 and approximately 5% of Copas projected fuel needs for the first five
months of 2007. Additionally, because our derivatives have historically not qualified as hedges for
financial reporting purposes in accordance with Statement of Financial Accounting Standard No. 133,
Accounting for Derivative Instruments and Hedging Activities, changes in the fair value of our
derivative contracts are recorded currently, rather than in the period in which the hedged fuel is
consumed, and recorded as a component of Other, net within non-operating income (expense) in our
statement of operations. 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.
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Aircraft Fuel Data |
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2001 |
|
2002 |
|
2003 |
|
2004 |
|
2005 |
Copa Segment |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average price per gallon of jet
fuel into plane (excluding hedge)
(in U.S. dollars) |
|
$ |
0.95 |
|
|
$ |
0.86 |
|
|
$ |
1.01 |
|
|
$ |
1.32 |
|
|
$ |
1.87 |
|
Gallons consumed (in thousands) |
|
|
46,669 |
|
|
|
44,788 |
|
|
|
48,444 |
|
|
|
50,833 |
|
|
|
58,924 |
|
Available seat miles (in millions) |
|
|
2,920 |
|
|
|
2,847 |
|
|
|
3,226 |
|
|
|
3,639 |
|
|
|
4,409 |
|
Gallons per ASM (in hundredths) |
|
|
1.60 |
|
|
|
1.57 |
|
|
|
1.50 |
|
|
|
1.40 |
|
|
|
1.34 |
|
AeroRepública Segment(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average price per gallon of jet
fuel into plane (excluding hedge)
(in U.S. dollars) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2.12 |
|
Gallons consumed (in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,887 |
|
Available seat miles (in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
950 |
|
Gallons per ASM (in hundredths) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.88 |
|
|
|
|
(1) |
|
Since April 22, 2005. |
47
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 2005 was 4.9%. During the last few
years we have reduced our commission expense per available seat mile as a result of an
industry-wide trend of paying lower commissions to travel agencies and by increasing the proportion
of our sales made through direct channels. We expect this trend to continue as more of our
customers become accustomed to purchasing through our call center 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 3.6 years as
of May 31, 2006, 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.
All maintenance for AeroRepúblicas DC-9s and line maintenance for the MD-80s is performed by
AeroRepúblicas in-house maintenance staff. Heavy maintenance for the MD-80s is performed by
FAA-certified third-party aviation maintenance companies.
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.
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.
48
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. 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.
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 $2.4 million in 2003, $4.3 million in 2004 and $7.4
million in 2005.
Internal Controls
In connection with the preparation of our financial statements under U.S. GAAP as of and for
the year ended December 31, 2005, we and our auditors identified a material weakness (as defined
under standards established by the Public Company Accounting Oversight Board) in our internal
control over financial reporting. Specifically, we found that we did not have appropriate expertise
in U.S. GAAP accounting and reporting among our financial and accounting staff to prepare our
periodic financial statements without needing to make material corrective adjustments and footnote
revisions when those statements are audited or reviewed. This ineffective control over the
application of U.S. GAAP in relation to our business could result in a material misstatement to the
annual or interim financial statements that would not be prevented or detected. In light of this
material weakness, in preparing the financial statements in connection with our initial public
offering, we performed additional analyses and other post-closing procedures in the course of
preparing our financial statements and related footnotes in accordance with U.S. GAAP so that
management would be able to come to the conclusion that those financial statements fairly
presented, in all material respects, our financial condition, results of operations and cash flows
as of and for the periods presented.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, beginning with our Annual Report on
Form 20-F for the fiscal year ending December 31, 2006, we will be required to furnish a report by
our management on our internal control over financial reporting. This report will contain, among
other matters, an assessment of the effectiveness of our internal controls over financial reporting
as of the end of the fiscal year, including a statement as to whether or not our internal controls
over financial reporting are effective. We have contracted an additional
49
accounting manager with experience in preparing financial statements under U.S. GAAP, we have
engaged an internationally recognized accounting firm to assist us in developing our procedures to
comply with the requirements of Section 404, and our management and audit committee are developing
other plans to prepare for our compliance with the requirements of Section 404 and to correct the
weakness identified above. We expect that these plans may include hiring additional personnel with
appropriate levels of U.S. GAAP experience and accounting expertise, requiring further education
and training in U.S. GAAP for our existing personnel and engaging outside resources to assist in
the design and implementation of procedures for the testing of our internal controls. We will
incur incremental costs as a result of these efforts, including increased auditing and legal
fees, the magnitude of which we are not able to estimate at this time.
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.
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. Tickets whose
fares have expired and/or are more than one year old are recognized as passenger revenue.
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.
Impairment of long-lived assets. We record 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 that the
undiscounted cash flows estimated to be generated by those assets are less than the carrying amount
of those assets. Our cash flow estimates are based on historical results adjusted to reflect our
best estimate of future market and operating conditions. The net carrying value of non-recoverable
assets is reduced to fair value if it is lower than carrying value. Our estimates of fair value
represent our best estimate based on industry trends and reference to market rates and transactions
and are subject to change. We recognized impairment losses on our Boeing 737-200 aircraft of $3.6
million during the year ended December 31, 2003.
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
50
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.
Derivative instruments used for aircraft fuel. In the past, we have periodically entered 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 we are not
competitively disadvantaged in the event of a substantial decrease in the price of jet fuel. These
derivatives have historically not qualified as hedges for financial reporting purposes in
accordance with Statement of Financial Accounting Standard No. 133, Accounting for Derivative
Instruments and Hedging Activities. Accordingly, changes in the fair value of such derivative
contracts, which amounted to $0.2 million in 2005, ($0.9) million in 2004 and $0.2 million in 2003,
were recorded as a component of Other, net within Other non-operating income (expense). The
fair value of hedge contracts amounted to $0.3 million at December 31, 2005 and $0.2 million at
December 31, 2004, and was recorded in the Other current assets line of our consolidated balance
sheet.
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 at that time.
51
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, |
|
|
|
2003 |
|
|
2004 |
|
|
2005(1) |
|
Operating revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Passenger revenue |
|
|
91.2 |
% |
|
|
91.2 |
% |
|
|
92.9 |
% |
Cargo, mail and other |
|
|
8.8 |
% |
|
|
8.8 |
% |
|
|
7.1 |
% |
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft fuel |
|
|
(14.2 |
)% |
|
|
(15.6 |
)% |
|
|
(24.5 |
)% |
Salaries and benefits |
|
|
(13.2 |
)% |
|
|
(12.9 |
)% |
|
|
(11.5 |
)% |
Passenger servicing |
|
|
(10.8 |
)% |
|
|
(9.8 |
)% |
|
|
(8.3 |
)% |
Commissions |
|
|
(8.1 |
)% |
|
|
(7.3 |
)% |
|
|
(7.4 |
)% |
Reservation and sales |
|
|
(5.3 |
)% |
|
|
(5.5 |
)% |
|
|
(4.8 |
)% |
Maintenance, materials and repairs |
|
|
(6.0 |
)% |
|
|
(4.9 |
)% |
|
|
(5.3 |
)% |
Depreciation |
|
|
(4.1 |
)% |
|
|
(4.8 |
)% |
|
|
(3.3 |
)% |
Flight operations |
|
|
(4.7 |
)% |
|
|
(4.5 |
)% |
|
|
(4.1 |
)% |
Aircraft rentals |
|
|
(4.9 |
)% |
|
|
(3.6 |
)% |
|
|
(4.5 |
)% |
Landing fees and other rentals |
|
|
(3.1 |
)% |
|
|
(3.0 |
)% |
|
|
(2.9 |
)% |
Other |
|
|
(7.6 |
)% |
|
|
(7.3 |
)% |
|
|
(5.4 |
)% |
Fleet impairment charges |
|
|
(1.0 |
)% |
|
|
0.0 |
% |
|
|
0.0 |
% |
Total |
|
|
(82.9 |
)% |
|
|
(79.4 |
)% |
|
|
(82.1 |
)% |
Operating income |
|
|
17.1 |
% |
|
|
20.6 |
% |
|
|
17.9 |
% |
Non-operating income (expenses): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(3.4 |
)% |
|
|
(4.1 |
)% |
|
|
(3.6 |
)% |
Interest capitalized |
|
|
0.6 |
% |
|
|
0.2 |
% |
|
|
0.2 |
% |
Interest income |
|
|
0.3 |
% |
|
|
0.4 |
% |
|
|
0.6 |
% |
Other, net |
|
|
0.7 |
% |
|
|
1.5 |
% |
|
|
0.1 |
% |
Total |
|
|
(1.8 |
)% |
|
|
(2.0 |
)% |
|
|
(2.7 |
)% |
Income/(loss) before income taxes |
|
|
15.3 |
% |
|
|
18.6 |
% |
|
|
15.2 |
% |
Income taxes |
|
|
(1.1 |
)% |
|
|
(1.4 |
)% |
|
|
(1.6 |
)% |
Net income |
|
|
14.2 |
% |
|
|
17.1 |
% |
|
|
13.6 |
% |
|
|
|
(1) |
|
Includes results from our AeroRepública segment for the period from April 22, 2005 to December 31, 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.
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 21.2% 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
52
(load factor increased from 70.1% in 2004 to 73.4% in 2005) during the period and the
simultaneous increase in passenger yield, which rose by 0.8% 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 6.52
cents, a 6.9% decrease over operating expenses per available seat mile excluding aircraft fuel of
7.01 cents in 2004. Aircraft fuel per available seat mile was 2.78 cents in 2005, compared to 1.72
cents in 2004. In 2005 our total operating expenses per available seat mile was 9.30 cents, a 6.6%
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.
Copa segment operating expenses
The breakdown of operating expenses per available seat mile is as follows:
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
26.2 |
% |
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 |
|
|
|
2.51 |
|
|
|
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 21.2%
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.
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
54
December 2004, February 2005 and May 2005. Aircraft rentals per available seat mile increased
by 26.2% 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 21.2% 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.
Year 2004 Compared to Year 2003
Our net income for 2004 was $68.6 million, a 41.4% increase over net income of $48.5 million
in 2003. We had operating income of $82.3 million in 2004, a 41.2% increase over operating income
of $58.3 million in 2003. Our operating margin in 2004 was 20.6%, an increase of 3.5 percentage
points over an operating margin of 17.1% in 2003.
55
Operating revenue
Our operating revenue totaled $399.8 million in 2004, a 17.0% increase over operating revenue
of $341.8 million in 2003 due to increases in both passenger and cargo revenues.
Passenger revenue. Passenger revenue totaled $364.6 million in 2004, a 17.0% increase over
passenger revenue of $311.7 million in 2003. This increase resulted primarily from the addition of
capacity (ASMs increased by 12.8% in 2004 as compared to 2003) that resulted from an increase in
departures and, to a lesser extent, an increase in average departures per aircraft, higher average
stage length and the addition of larger aircraft. Revenues also increased due to our higher overall
load factor (load factor increased from 68.0% in 2003 to 70.0% in 2004) during the period and the
simultaneous increase in passenger yield, which rose by 0.7% to 14.31 cents in 2004. A general
increase in passenger demand for air travel in 2004, in part as a result of growing Latin American
and U.S. economies, allowed us to increase both capacity and load factor without affecting yields.
Cargo, mail and other. Cargo, mail and other totaled $35.2 million in 2004, a 17.0% increase
over cargo, mail and other of $30.1 million in 2003. This increase was primarily the result of
higher cargo revenue primarily resulting from an increase in belly space capacity available as we
replaced four Boeing 737-200s with larger Boeing 737-Next Generation aircraft during 2004, plus the
full year effect of four Boeing 737-Next Generation aircraft received in the second half of 2003.
There was also a general increase in demand for courier services in the region during 2004.
Operating expenses
Operating expenses totaled $317.5 million in 2004, a 12.0% increase over operating expenses of
$283.5 million in 2003. The increase in operating expenses was primarily attributable to a 12.0%
increase in capacity, an increase in the average cost of jet fuel and an increase in salaries and
benefits expenses. The breakdown of operating expenses per available seat mile is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
December 31, |
|
Percent |
|
|
2003 |
|
2004 |
|
Change |
|
|
(in cents) |
Operating expenses per ASM: |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
1.40 |
|
|
|
1.42 |
|
|
|
1.3 |
% |
Passenger servicing |
|
|
1.14 |
|
|
|
1.08 |
|
|
|
(5.7 |
)% |
Commissions |
|
|
0.86 |
|
|
|
0.80 |
|
|
|
(6.9 |
)% |
Reservation and sales |
|
|
0.56 |
|
|
|
0.61 |
|
|
|
8.8 |
% |
Depreciation |
|
|
0.44 |
|
|
|
0.53 |
|
|
|
21.7 |
% |
Maintenance, materials and repairs |
|
|
0.63 |
|
|
|
0.54 |
|
|
|
(14.0 |
)% |
Flight operations |
|
|
0.50 |
|
|
|
0.49 |
|
|
|
(0.7 |
)% |
Aircraft rentals |
|
|
0.52 |
|
|
|
0.40 |
|
|
|
(23.3 |
)% |
Landing fees and other rentals |
|
|
0.33 |
|
|
|
0.33 |
|
|
|
2.1 |
% |
Other |
|
|
0.81 |
|
|
|
0.81 |
|
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses per ASM before aircraft fuel and fleet impairment charges |
|
|
7.17 |
|
|
|
7.01 |
|
|
|
(2.3 |
)% |
Aircraft fuel |
|
|
1.50 |
|
|
|
1.72 |
|
|
|
14.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses per ASM before fleet impairment charges |
|
|
8.68 |
|
|
|
8.72 |
|
|
|
0.5 |
% |
Fleet impairment charges |
|
|
0.11 |
|
|
|
0.00 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses per ASM |
|
|
8.79 |
|
|
|
8.72 |
|
|
|
(0.7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft fuel. Aircraft fuel totaled $62.5 million in 2004, a 28.9% increase over aircraft
fuel of $48.5 million in 2003. This increase was primarily a result of a 22.7% increase in the
average price per gallon of jet fuel ($1.19 in 2004 compared to $0.97 in 2003) and the consumption
of 4.9% more fuel due to a 6.7% increase in departures. These increases were partially offset by
our newer, more fuel-efficient aircraft. Aircraft fuel per available seat mile increased by
approximately 14.3% due to the increase in average fuel cost per gallon.
Salaries and benefits. Salaries and benefits totaled $51.7 million in 2004, a 14.2% increase
over salaries and benefits of $45.3 million in 2003. This increase was primarily a result of the
full year effect of employees hired
56
throughout 2003, higher performance bonuses paid as a result of our improved operating results
and an overall increase of 4.3% in full-time equivalent employees at period end from 2003 to 2004,
mainly to cover increased operations. Salaries and benefits per available seat mile increased by
1.3%.
Passenger servicing. Passenger servicing totaled $39.2 million in 2004, a 6.4% increase over
passenger servicing of $36.9 million in 2003. This increase was primarily a result of our 12.8%
increase in capacity and an increase of 15.0% in on-board passengers. Passenger servicing per
available seat mile decreased by 5.7% as a result of fixed costs being spread over a higher number
of available seat miles.
Commissions. Commissions totaled $29.1 million in 2004, a 5.0% increase over commissions of
$27.7 million in 2003. This increase was primarily a result of higher passenger revenue, partially
offset by lower average commissions. Commissions per available seat mile decreased by approximately
6.9% due to lower average commissions and more direct sales.
Reservations and sales. Reservations and sales totaled $22.1 million in 2004, a 22.8%
increase over reservations and sales of $18.0 million in 2003. This increase was a result of a
15.0% increase in on-board passengers, a 5.7% increase in average rates charged by global
distribution systems and the cost of terminating our relationship with a General Sales Agent in
Puerto Rico. Reservations and sales expenses per available seat mile increased by 8.8%.
Depreciation. Depreciation totaled $19.3 million in 2004, a 37.3% increase over depreciation
of $14.0 million in 2003. This increase was primarily due three new Boeing 737-Next Generation
aircraft acquired in 2004 and the full year effect of four Boeing 737-Next Generation aircraft
acquired in 2003. Depreciation per available seat mile increased by 21.7%.
Maintenance, materials and repairs. Maintenance, materials and repairs totaled $19.7 million
in 2004, a 3.0% decrease over maintenance, materials and repairs of $20.4 million in 2003. This
decreased was a result of the replacement of four Boeing 737-200 aircraft with newer Boeing
737-Next Generation and the full year effect of disposing of two Boeing 737-200 aircraft in 2003,
partially offset by beginning of the airframe overhaul schedule for the first four of our Boeing
737-Next Generation aircraft. Maintenance, materials and repair per available seat mile decreased
by 14.0%.
Aircraft rentals. Aircraft rentals totaled $14.4 million in 2004, a 13.4% decrease over
aircraft rentals cost of $16.7 million in 2003. This decrease resulted from new aircraft leases
with better rates as we experienced the effect of four lease contracts we renegotiated in 2003.
Aircraft rentals per available seat mile decreased by 23.3% due to higher capacity and the lower
lease rates.
Flight operations and landing fees and other rentals. As a group, flight operations and
landing fees and other rentals increased from $26.5 million in 2003 to $30.1 million in 2004, or
13.3%, primarily as a result of our 12.8% increase in capacity.
Other. Other expenses totaled $29.3 million in 2004, a 12.8% increase over other expenses of
$26.0 million in 2003. This increase was primarily due to technology initiatives related to
improving our telecommunications capabilities, non-recurring expenses related to our evaluation of
a potential acquisition that we chose not to pursue and a 9.0% increase in publicity and promotion
resulting from higher OnePass frequent flyer miles earned by customers. Other expenses per
available seat mile remained unchanged.
Non-operating income (expense)
Non-operating expense totaled $8.0 million in 2004, a 30.4% increase over non-operating
expense of $6.2 million in 2003, attributable primarily to greater interest expense partially
offset by higher interest income and other non-operating income.
Interest expense. Interest expense totaled $16.5 million in 2004, a 42.0% increase over
interest expense of $11.6 million in 2003, resulting from a higher amount of debt related to a
greater number of owned aircraft. The
57
average effective interest rates on our debt also increased by 57 basis points from 3.64%
during 2003 to 4.21% during 2004. At the end of 2004, we had approximately 77% of our outstanding
debt fixed at an effective rate of 4.47%.
Interest capitalized. Interest capitalized totaled $1.0 million in 2004, a 52.1% decrease
over interest capitalized of $2.0 million in 2003, resulting from lower average debt relating to
pre-delivery payments on aircraft.
Interest income. Interest income totaled $1.4 million in 2004, a 60.4% increase over interest
income of $0.9 million in 2003. This increase was mainly a result of our higher average cash
balance over the year and higher prevailing interest rates during 2004.
Other, net. Other, net income totaled $6.1 million in 2004, a 137.4% increase over other, net
income of $2.6 million in 2003. This increase was the result of non-recurring adjustments and a
gain of $1.1 million resulting from the sale of two Boeing 737-200 aircraft, partially offset by a
decrease in the market value of fuel hedge instruments of $0.9 million.
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
bonds privately placed with commercial banks. Our accounts receivable at December 31, 2005
increased by $21.8 million compared with December 31, 2004, primarily as a result of the
consolidation of $15.3 million of AeroRepúblicas receivables and growth in operating revenues.
Our cash, cash equivalents and short-term investments at December 31, 2005 remained near the
prior years level at $114.5 million. At December 31, 2005 we had available credit lines totaling
$38.5 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 $119.1 million in 2005, $98.1
million in 2004, and $73.5 million in 2003. The increase in operating cash flows over these periods
was primarily due to the growth of our business.
Investing Activities
During 2005, capital expenditures were $63.3 million, which consisted primarily of
expenditures related to our purchase of two Embraer 190 aircraft. During 2004, capital expenditures
were $65.8 million, which consisted primarily of expenditures related to our purchase of three
Boeing 737-Next Generation aircraft. During 2003, capital expenditures were $112.2 million, which
consisted primarily of expenditures related to our purchase of four Boeing 737-Next Generation
aircraft and one CFM 56-7B spare engine.
Financing Activities
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
58
$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.
Financing activities during 2003 consisted primarily of financing for four Boeing 737-Next
Generation aircraft and a spare engine for $140.7 million ($35.2 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 $21.7 million of privately-placed
bonds and the repayment of $22.0 million in long-term debt.
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.
We have financed the acquisition of fifteen 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 $292.5 million as of December 31, 2005 at an average weighted
interest rate of 4.46%. The remaining $44.6 million bears interest at an average weighted interest
of LIBOR plus 0.03%. At December 31, 2005, the total amount outstanding under our Ex-Im-supported
financings totaled $337.1 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 net debt to capitalization ratio
and minimum net worth. 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 tangible net worth shall be at least five times our long-term obligations. Third,
our tangible net worth must be at least $50 million. As of December 31, 2005, 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 $64.4 million as of December 31, 2005. 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, 2005 we complied
with all required covenants.
Our Embraer aircraft purchases are not eligible for Ex-Im guaranteed financing. We arranged
financing for the six Embraer aircraft to be delivered through the end of 2006, having obtained a
commitment for senior term loan facilities in the amount of approximately $134 million from PK
AirFinance US, Inc., an affiliate of General Electric. The loans have a term of twelve years.
59
Upon our acquisition of AeroRepública, we arranged a commercial credit facility in the amount
of $15.0 million, primarily to refinance existing liabilities and to provide AeroRepública with
working capital. This facility was divided in two tranches of $5.0 million and $10.0 million with
maturities of three and five years, respectively. This facility is secured by credit card
receivables. The facility required AeroRepública to maintain certain financial covenants such as a
financial debt to EBITDAR ratio of less than 4.5. AeroRepública is currently in negotiations with
lenders to restructure the existing two tranche facility into a one tranche facility with more
favorable terms in the amount of approximately $15 million which will be backed by a guarantee from
Copa Holdings, S.A. The new facility under negotiation will include revised covenants which under
the current facility are not being met by AeroRepública as of December 31, 2005. AeroRepública
received a waiver from the lending institution through July 2006. If, upon the termination of the waiver noted above, the
covenants are still not being met and no other recourse exists with
this institution, we would provide the funds
necessary to repay the debt via other long-term borrowings or from non-working capital funds.
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 eight Boeing 737-Next Generation
aircraft and we have purchase rights for an additional nine Boeing 737-Next Generation aircraft. We
have also placed firm orders with Embraer for 18 Embraer 190 aircraft and we have options to
purchase an additional 35 Embraer 190 aircraft. The schedule for delivery of our firm orders is as
follows: ten in 2006, eight in 2007, six in 2008 and two in 2009. 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 six new aircraft to our fleet, including two Boeing-737 Next Generation and four
Embraer 190 aircraft. New routes for 2006 include Maracaibo, Venezuela; Montevideo, Uruguay; San
Pedro Sula, Honduras; Port of Spain, Trinidad and Tobago; Manaus, Brazil; and Santiago, Dominican
Republic. For the remainder of 2006, 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 to apply our know-how 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 2006. We seek to make further improvements at AeroRepública, including a
continued focus on on-time performance, a
60
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 2006 and expect to continue evaluating
fuel hedging programs to help protect us against short-term movements in crude oil prices. We also
expect interest rates to increase during the rest of 2006 which would increase the amount of
interest expense related to the 38% of our debt that bears interest at floating rates.
We expect our consolidated capacity to increase by approximately 21% in the last seven months
of 2006 compared to our consolidated capacity at May 31, 2006, primarily as a result of six new
aircraft scheduled to be received by Copa in the last seven months of 2006.
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.
F. Tabular Disclosure of Contractual Obligations
Our non-cancelable contractual obligations at December 31, 2005 included the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2005 |
|
|
|
|
|
|
|
Less than 1 |
|
|
|
|
|
|
|
|
|
|
More than 5 |
|
|
|
Total |
|
|
Year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
Years |
|
|
|
(in thousands of dollars) |
|
Aircraft and engine purchase commitments |
|
$ |
480,339 |
|
|
$ |
181,515 |
|
|
$ |
280,649 |
|
|
$ |
18,175 |
|
|
$ |
¾ |
|
Aircraft operating leases |
|
|
143,513 |
|
|
|
33,358 |
|
|
|
60,732 |
|
|
|
35,083 |
|
|
|
14,340 |
|
Other operating leases |
|
|
21,213 |
|
|
|
3,561 |
|
|
|
5,122 |
|
|
|
4,721 |
|
|
|
7,809 |
|
Short-term debt and long-term debt(1) |
|
|
576,243 |
|
|
|
90,645 |
|
|
|
109,013 |
|
|
|
96,524 |
|
|
|
280,061 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,221,308 |
|
|
$ |
309,079 |
|
|
$ |
455,516 |
|
|
$ |
154,503 |
|
|
$ |
302,210 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes actual interest and estimated interest for floating-rate debt based on December 31, 2005 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 2010, but we cannot estimate amounts with respect to those leases for later years. Our
leases do not include residual value guarantees.
Item 6. Directors, senior management and employees
A. Directors and Senior Management
We are managed by our board of directors which currently consists of ten members who serve
two-year terms and may be re-elected. We expect to add an additional independent director to the
board of directors shortly. The number of directors elected each year will alternate 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. 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, 2006. 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
|
|
|
48 |
|
Stanley Motta
|
|
Chairman and Director
|
|
|
60 |
|
Osvaldo Heilbron
|
|
Director
|
|
|
79 |
|
Jaime Arias
|
|
Director
|
|
|
70 |
|
61
|
|
|
|
|
|
|
Name |
|
Position |
|
Age |
Ricardo Alberto Arias
|
|
Director
|
|
|
66 |
|
Alberto C. Motta, Jr.
|
|
Director
|
|
|
59 |
|
Mark Erwin
|
|
Director
|
|
|
50 |
|
George Mason
|
|
Director
|
|
|
59 |
|
Roberto Artavia Loria
|
|
Director
|
|
|
46 |
|
Jose Castañeda Velez
|
|
Director
|
|
|
61 |
|
Mr. Pedro Heilbron. See ¾Executive Officers.
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., Banco Continental de Panama, 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. He is Treasurer of Banco Continental de Panama,
S.A. 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., SSA Panama Inc. and Banco Continental de Panama, S.A.
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., Compañía General de Petróleos, S.A., Banco
Continental de Panama, S.A. and Bac International Bank, Inc.
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., Grupo Financiero
Continental, 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. George Mason has been one of the directors of Copa Holdings since 1999. He was the Senior
Vice President for Technical Operations of Continental Airlines, Inc. from 1996 until his
retirement in 2003. He has held
62
officer level positions at Piedmont Airlines, Inc., USAir and
Midway Airlines. He is a graduate of Grove City College and the University of Pittsburgh.
Mr. Roberto Artavia Loria is one of the independent directors of Copa Holdings. He is
currently Chief Executive Officer of INCAE Business School, 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.
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.
The following table sets forth the name, age and position of each of our executive officers as
of May 31, 2006. A brief biographical description of each of our executive officers follows the
table.
|
|
|
|
|
|
|
Name |
|
Position |
|
Age |
Pedro Heilbron
|
|
Chief Executive Officer
|
|
|
48 |
|
Victor Vial
|
|
Chief Financial Officer
|
|
|
40 |
|
Lawrence Ganse
|
|
Senior Vice-President of Operations
|
|
|
62 |
|
Jorge Isaac García
|
|
Vice-President, Commercial
|
|
|
46 |
|
Daniel Gunn
|
|
Vice-President of Planning
|
|
|
38 |
|
Jaime Aguirre
|
|
Vice President of Maintenance
|
|
|
43 |
|
Vidalia de Casado
|
|
Vice President of Passenger Services
|
|
|
49 |
|
Alexander Gianareas
|
|
Senior Director of Human Resources
|
|
|
53 |
|
Roberto Junguito Pombo
|
|
Chief Executive Officer of AeroRepública
|
|
|
36 |
|
Mr. Pedro Heilbron has been our Chief Executive Officer for 18 years. He received an MBA from
George Washington University and a B.A. from Holy Cross. Mr. Heilbron is a Member of the Board of
Governors of IATA and an Alternate Member of the Board of Directors of Banco Continenal de Panama,
S.A.
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 39 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 Garciá 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.
63
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 is currently pursuing an M.B.A. from the University of Louisville.
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 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 2005, we paid an aggregate of approximately $2.42 million in cash compensation to our
executive officers. We have not set aside any 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 has approved increases in salaries and
one time restricted stock bonuses for certain executive officers and eliminated the existing Long
Term Retention Plan. The restricted stock awards are granted pursuant to a new equity-based
long-term incentive compensation plan that was adopted in March 2006. The plan provides for awards
to our executive officers, certain key employees and non-employee directors. The plan provides for
the grant of restricted stock, stock options and certain other equity-based awards. A number of
shares equal to five percent of our aggregate outstanding shares as of December 14, 2005 has been
reserved for future issuances that will be granted to our employees. This includes a grant of
restricted stock awards under the plan to our executive officers that have an aggregate value of
$18.8 million. The restricted stock awards granted to our named executive officers under the plan
consist of approximately 890,625 shares of restricted stock, which will vest over five years in
yearly installments equal to 15% of the awarded stock on each of the first three anniversaries of
the offering, 25% on the fourth anniversary and 30% on the fifth anniversary. We also intend to pay
$3 million to management that will be tied to an agreement not to compete with us in the future. We
also granted a small amount of restricted stock having an aggregate value of approximately
$989,063, to each of our managers, officers and key employees that are not on our senior management
team which will vest on March 28, 2008. The Compensation Committee plans to make additional equity
based awards under the plan from time to time, including additional restricted stock and stock
option awards. While the Compensation Committee will retain
64
discretion to vary the exact terms of
future awards, we anticipate that future employee restricted stock and stock
option awards granted pursuant to the plan after the offering will generally vest over a three
year period and the stock options will carry a ten year term.
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 ten members. We expect to add an additional
independent director to the board of directors shortly. The additional independent director will be
appointed by the Nominating and Corporate Goverance Committee of the board. Members of our board of
directors serve two-year terms and may be reelected. The number of directors elected each year will
alternate 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. 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
two of our directors for so long as it owns at least 19% of our common stock and is entitled to
designate one of our directors for so long as our alliance agreement remains in effect. After
giving effect to the proposed offering which we are currently making, Continental will be entitled
to designate one of our directors and CIASA will be entitled to designate seven of our directors.
Committees of the Board of Directors
Audit Committee. Our Audit Committee is responsible for the coordination of the internal
audit process, appointment of the independent auditors and presenting to the board of directors its
opinion with respect to the financial statements and the areas that are subject to an audit
process. Messrs. José Castañeda 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. We expect that our third independent director will also be a member of the audit
committee.
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. 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 2005,
the non-management employees received five or six 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 76% of Copas employees are
located in Panama, while the remaining 24% are distributed among our stations. Copas employees can
be categorized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
March 31, |
|
|
2001 |
|
2002 |
|
2003 |
|
2004 |
|
2005 |
|
2006 |
Pilots |
|
|
178 |
|
|
|
192 |
|
|
|
220 |
|
|
|
224 |
|
|
|
235 |
|
|
|
242 |
|
Flight attendants |
|
|
334 |
|
|
|
330 |
|
|
|
349 |
|
|
|
372 |
|
|
|
448 |
|
|
|
442 |
|
Mechanics |
|
|
154 |
|
|
|
203 |
|
|
|
209 |
|
|
|
189 |
|
|
|
200 |
|
|
|
213 |
|
Customer service agents, reservation agents, ramp and other |
|
|
1,248 |
|
|
|
1,299 |
|
|
|
1,382 |
|
|
|
1,470 |
|
|
|
1,626 |
|
|
|
1,589 |
|
Management and clerical |
|
|
367 |
|
|
|
429 |
|
|
|
480 |
|
|
|
499 |
|
|
|
587 |
|
|
|
650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total employees |
|
|
2,281 |
|
|
|
2,453 |
|
|
|
2,640 |
|
|
|
2,754 |
|
|
|
3,096 |
|
|
|
3,136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. We
recently invested in a Level B flight simulator for 737-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.
66
Approximately 61% 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 8% 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 96 of AeroRepúblicas
112 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 the end of 2006, 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 2.8% 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 8, 2006 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 |
|
|
Beneficially Owned |
|
|
Shares |
|
(%)(1) |
CIASA(2) |
|
|
|
|
|
|
|
|
Continental(3)(4) |
|
|
11,921,875 |
|
|
|
38.4 |
% |
Executive officers and directors as a group (18 persons) |
|
|
829,625 |
|
|
|
2.8 |
% |
Others |
|
|
18,220,375 |
|
|
|
58.8 |
% |
|
|
|
|
|
|
|
|
|
Total |
|
|
30,971,875 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Based on a total of 30,971,875 Class A shares outstanding. |
|
(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 February 2, 2006, in
which Continental reported that it had sole voting and dispositive power over 11,921,875 of Class A
shares.
f
(4) After giving effect to the proposed offering which we are currently making, Continental will own
5,359,375 Class A shares, representing 17.3% of our Class A shares. |
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
67
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 Campaia 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. After consummation of the proposed offering which
we are currently making, Continental will have the right to designate one of our
directors and CIASA will have the right to designate seven of our directors; |
|
|
|
|
certain limitations on transfers of our common stock by CIASA or Continental; |
|
|
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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 |
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|
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. |
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
the second anniversary of the date of the proposed offering.
68
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 proposed offering which we are currently making. Upon consummation of
the proposed offering, Continental will no longer have 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
has entered into a lock-up agreement with the underwriters which restrict its sale of our common
stock until the first anniversary of the proposed offering.
In addition, under the registration rights agreement, in connection with a registered
underwritten offering, CIASA has agreed, if required by the underwriters of such offering, not to
effect any sale or distribution of any securities of Copa Holdings for a period of up to 180 days
after the effective date of such registration, so long as we have agreed to cause other holders of
any securities of ours purchased from us (at any time other than in a public offering) to so agree.
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., a
bank with approximately $2.5 billion in assets and which is controlled by our controlling
shareholders. As of December 31, 2005, we owed Banco Continental de Panama, S.A., approximately
$25.7 million under short to medium term financing arrangements made to fund aircraft pre-payments
and for part of the commercial loan tranche of one of our Ex-Im facilities. We also maintain
general lines of credit and time deposit accounts with Banco Continental.
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.
In July 2005, we entered into a contract with Petróleos Delta, S.A. to supply our jet fuel
needs. The price we pay 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 which is expected to aggregate between $2.5 million and $3 million per year assuming we
maintain a rate of fuel consumption comparable to expected volumes for 2005. The contract has a one
year term that automatically renews for one year periods 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., one of our directors, Alberto Motta Jr., serves on its board of directors,
one of our directors, Osvaldo Heilbron, serves on the board of directors of Empresa General de
Petróleos, S.A., the holding company that owns Petróleos Delta, S.A., and one of our directors,
Ricardo Arias, serves on the board of directors of Empresa General de Inversiones, S.A., the
holding company that owns Empresa General de Petróleos, S.A.
Desarollo Inmobiliario del Este, S.A.
We recently moved our headquarters to a new location six miles away from Tocumen International
Airport later this year. We are leasing 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 pay
approximately $0.4 million per year to these entities.
Our telecommunications services have been provided by Telecarrier, Inc. since February 2003.
Some of the controlling shareholders of CIASA have a controlling interest in Telecarrier, Inc.
Additionally, one of our directors, Ricardo Arias, serves on the board of directors of Empresa
General de Inversiones, a holding company that has a minority interest in Telecarrier, Inc.
Payments to Telecarrier, Inc. totaled $0.4 million, $0.4 million and $0.2 million in 2005, 2004 and
2003, 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 total approximately $1.3 million annually.
C. Interests of Experts and Counsel
Not applicable.
71
Item 8. Financial Information
A. Consolidated Statements and Other Financial Information
See Item 3. Key Information¾Selected 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 7B. 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 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 $10 million in June 2005.
Prior to the December 2004 dividend payment, we had not paid a dividend since the formation of Copa
Holdings in 1998.
B. Significant Changes
On June 15, 2006, we filed a registration statement with the Securities and Exchange
Commission for a proposed offering of 6,562,000 shares of Class A common stock by a selling
shareholder, Continental, which includes an over-allotment option of up to 984,375 additional
shares. After completion of the proposed offering, Continental will hold approximately 12.3% of our
total capital stock (or 10.0% if the over-allotment option is exercised in full.
Item 9. The Offer and Listing
A. Offer and Listing Details
72
Our Class A shares have been listed on the New York Stock Exchange, or NYSE, under the symbol
CPA since December 14, 2005. The following table sets forth, for the periods indicated, the high
and low closing sale prices for the Class A shares on the NYSE for the periods indicated.
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Low |
|
High |
2005 |
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|
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Fourth quarter(1) |
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$ |
20.00 |
|
|
$ |
27.30 |
|
Last Six Months |
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|
|
|
|
|
|
January 2006 |
|
$ |
22.20 |
|
|
$ |
27.10 |
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February 2006 |
|
$ |
20.90 |
|
|
$ |
23.75 |
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March 2006 |
|
$ |
21.10 |
|
|
$ |
23.20 |
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April 2006 |
|
$ |
21.20 |
|
|
$ |
23.13 |
|
May 2006 |
|
$ |
21.15 |
|
|
$ |
23.80 |
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June 2006(2) |
|
$ |
22.03 |
|
|
$ |
24.25 |
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|
Source: FactSet Research Systems |
|
(1) |
|
Period beginning December 14, 2005 through December 31, 2005. |
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(2) |
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Period through June 28, 2006. |
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. |
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Our Articles of Incorporation
require us to have three
independent directors as defined
under the NYSE rules. |
73
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NYSE Standards |
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Our Corporate Governance Practice |
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.
|
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Under Panamanian law, shareholder
approval is not required for
equity compensation plans. |
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|
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. |
D. Selling Shareholders
74
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.
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, 2006, we had
30,971,875 Class A shares, 12,778,125 Class B shares and no Class C shares outstanding. 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.
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 |
75
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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.
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.
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
76
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:
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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 |
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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. |
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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.
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.
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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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Delaware |
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.
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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Conflict of Interest Transactions. Transactions
involving a Delaware corporation and an
interested director of that corporation are
generally permitted if: (1) the material facts as to the interested
directors relationship or interest are disclosed
and a majority of disinterested directors approve
the transaction; |
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(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. |
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. |
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. |
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. |
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. |
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. |
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. |
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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Panama |
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Delaware |
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. |
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. |
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: |
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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Panama |
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Delaware |
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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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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Delaware |
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 agreement 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.
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 2006.
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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 hold 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 bank; |
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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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an insurance company; |
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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. This discussion, to the
extent that it states matters of United States federal income tax law or legal conclusions and
subject to the qualifications herein, represents the opinion of Simpson Thacher & Bartlett LLP, our
United States counsel.
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If a partnership holds our Class A shares, the tax treatment of a partner will generally
depend on the status of the partner and the activities of the partnership. If you are a partner of
a partnership holding our Class A shares, you should consult your tax advisors.
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 holder 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) 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.
With respect to non-corporate United States investors, 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 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, |
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you will not be allowed a foreign tax credit for foreign taxes imposed on dividends paid on
the Class A shares. 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 2005), 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. Our United States counsel expresses no opinion with respect to our
statements of belief and expectation contained in this paragraph.
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.
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
87
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 being
offered 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 this offering process, we will register 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.
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 the first three
quarters 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.
88
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, 2005 cost per gallon of fuel. Based on projected 2006 fuel consumption, such an
increase would result in an increase to aircraft fuel expense of approximately $17.6 million in
2006, not taking into account our derivative contracts. We currently have hedged approximately 13%
of Copas projected 2006 fuel requirements and 5% of Copas projected fuel consumption from January
1, 2007 to May 31, 2007. All existing hedge contracts settle by May 2007. 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 2006 than they did during 2005, our interest expense would increase by approximately $0.6
million and the fair value of our debt would decrease by approximately $5.8 million. If interest
rates average 10% less in 2006 than they did in 2005, our interest income from cash equivalents
would decrease by approximately $0.4 million and the fair value of our debt would increase by
approximately $6.1 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,
2005.
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 42% 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 2005, except for the
Colombian Peso which represented 24%. 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 repatriation
to Panama in dollars.
2005 Revenues and Expenses Breakdown by Currency
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
Expense |
Argentinian Peso |
|
|
4.3 |
% |
|
|
2.5 |
% |
Brazilian Real |
|
|
5.9 |
% |
|
|
3.0 |
% |
Colombian Peso |
|
|
24.3 |
% |
|
|
12.6 |
% |
Costa Rican Colon |
|
|
3.7 |
% |
|
|
1.8 |
% |
Mexican Peso |
|
|
4.2 |
% |
|
|
2.0 |
% |
U.S. Dollar |
|
|
42.2 |
% |
|
|
71.9 |
% |
Venezuelan Bolivar |
|
|
3.9 |
% |
|
|
1.7 |
% |
Other(1) |
|
|
11.6 |
% |
|
|
4.5 |
% |
|
|
|
(1) |
|
Chilean Peso, Dominican Peso, Guatemalan Quetzal, Jamaican Dollar, Honduran Lempira, Haitian Gourde. |
As a result of the acquisition of AeroRepública in April 2005, we have an increased
exposure to the Colombian Peso than that noted in the table above. AeroRepúblicas revenues from
April 22, 2005 to December 31, 2005 represent 16.9% of total consolidated revenues.
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, 2005.
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 not effective as of December 31, 2005,
due to a material weakness (as defined under standards established by the Public Company
Accounting Oversight Board) in our internal controls over financial reporting. A material
weakness is a significant deficiency, or combination of significant deficiencies,
that results in more than a remote likelihood that a material misstatement
of our annual or interim financial statements will not be prevented or detected.
Specifically, we found that we did not have appropriate expertise in U.S. GAAP
accounting and reporting among our financial and accounting staff to prepare our
periodic financial statements without needing to make material
corrective adjustments and footnote revisions when those statements
are audited or reviewed. In light of this material weakness,
in preparing the financial statements included in this annual report,
we performed additional analyses and other
post-closing procedures in the course of preparing our financial
statements and related footnotes in accordance with U.S. GAAP.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, beginning
with our Annual Report on Form 20-F for the fiscal year ending December 31, 2006, we
will be required to furnish a report by our management on
our internal control over financial reporting. This report will contain,
among other matters, an assessment of the effectiveness of our internal
controls over financial reporting as of the end of the fiscal year,
including a statement as to whether or not our internal controls over financial reporting are effective.
Changes
in internal control
On April 22, 2005, we acquired a controlling ownership interest in
AeroRepública. AeroRepúblicas
assets and liabilities, and the results of its operations,
have been included in our consolidated financial statements beginning April 22, 2005. Also,
to remedy the material weakness described above,
we contracted additional accounting personnel with
experience in preparing financial statements under U.S. GAAP and
engaged an internationally recognized accounting firm to assist us in developing our procedures.
These matters had a material effect on our internal control over
financial reporting during the period covered by this report.
Additionally, our management, under the supervision of our audit
committee, is developing other plans to prepare for our compliance with the requirements of Section 404.
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 Practices¾Audit 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 Relations¾Corporate 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
Ernst & Young during the fiscal years ended December 31, 2004 and 2005:
|
|
|
|
|
|
|
|
2004 |
|
2005 |
Audit Fees |
|
$95,000 |
|
$ |
1,717,003 |
Audit-Related Fees |
|
¾ |
|
|
¾
|
Tax Fees |
|
¾ |
|
|
¾
|
All Other Fees |
|
¾ |
|
|
¾ |
Total |
|
$95,000 |
|
$ |
1,717,003 |
Audit Fees
Audit
fees included the audit of our annual financial statements and approximately $1.2 million
related to services rendered in connection with our initial public offering in December 2005. These
services included the review of our quarterly reports in 2005 as
well as other accounting consultations related to and the application of U.S. GAAP.
Audit-Related Fees
There were
no audit-related fees for 2005.
90
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, 2004 and 2005.
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 2005, none of the fees paid
to Ernst & Young were approved pursuant to the de minimis exception.
Item 16D. Exemptions from the Listing Standards for Audit Committees
The
NYSE listing standards mandated by Rule 10A-3(b)
of the Securities Exchange Act (which require, among
other things, that each member of the audit committee
of a listed company be independent) is operative with
respect to foreign private issuers, including us. Between
December 14, 2005 and the first anniversary of our IPO on
December 14, 2006, an exemption set forth in Exchange Act
Rule 10A-3(b)(1)(iv)(A) from compliance with the independence
requirements is available to us. Two out of our three audit
committee members are currently independent. We expect to
appoint a third independent audit committee member before
the first anniversary of our IPO.
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 |
91
|
|
|
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 |
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 |
92
|
|
|
|
|
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. |
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 |
12.1
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer |
12.2
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer |
13.1
|
|
Section 1350 Certification of Chief Executive Officer |
13.2
|
|
Section 1350 Certification of Chief Financial Officer |
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- |
93
|
|
|
|
|
129967. |
|
|
|
The Registrant was granted confidential treatment for portions of this exhibit. |
94
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:
June 30, 2006
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, 2005 and 2004, and the
related consolidated statements of income, shareholders
equity, and cash flows for each of the three years in the period
ended December 31, 2005. 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. We were not engaged to perform an
audit of the Companys internal control over financial
reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and 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, 2005 and 2004, and the
consolidated results of their operations and their cash flows
for each of the three years in the period ended
December 31, 2005, in conformity with U.S. generally
accepted accounting principles.
/s/ Ernst and Young
Panama City, Republic of Panama
April 28, 2006
F-2
COPA
HOLDINGS, S. A. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
As of
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In US$ thousands, except share
and per share data)
|
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
94,106
|
|
|
$
|
99,666
|
|
Short-term investments
|
|
|
20,384
|
|
|
|
11,277
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents and
short-term investments
|
|
|
114,490
|
|
|
|
110,943
|
|
Accounts receivable, net of
allowance for doubtful accounts of $4,911 and $2,622 as of
December 31, 2005 and 2004, respectively
|
|
|
49,044
|
|
|
|
27,706
|
|
Accounts receivable from related
parties
|
|
|
448
|
|
|
|
|
|
Expendable parts and supplies, net
of allowance for obsolescence of $9 and $1,739 as of
December 31, 2005 and 2004, respectively
|
|
|
4,070
|
|
|
|
2,333
|
|
Prepaid expenses
|
|
|
13,502
|
|
|
|
8,403
|
|
Other current assets
|
|
|
3,239
|
|
|
|
2,702
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
184,793
|
|
|
|
152,087
|
|
Long-term Investments
|
|
|
26,175
|
|
|
|
3,948
|
|
Property and
Equipment:
|
|
|
|
|
|
|
|
|
Owned property and equipment:
|
|
|
|
|
|
|
|
|
Flight equipment
|
|
|
628,876
|
|
|
|
593,825
|
|
Other
|
|
|
35,899
|
|
|
|
27,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
664,775
|
|
|
|
621,058
|
|
Less: Accumulated depreciation
|
|
|
(79,985
|
)
|
|
|
(87,037
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
584,790
|
|
|
|
534,021
|
|
Purchase deposits for flight
equipment
|
|
|
52,753
|
|
|
|
7,190
|
|
|
|
|
|
|
|
|
|
|
Total Property and Equipment
|
|
|
637,543
|
|
|
|
541,211
|
|
Other Assets:
|
|
|
|
|
|
|
|
|
Prepaid pension asset
|
|
|
1,261
|
|
|
|
1,153
|
|
Goodwill
|
|
|
20,512
|
|
|
|
|
|
Other intangible asset
|
|
|
31,298
|
|
|
|
|
|
Other assets, net
|
|
|
15,330
|
|
|
|
3,651
|
|
|
|
|
|
|
|
|
|
|
Total Other Assets
|
|
|
68,401
|
|
|
|
4,804
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
916,912
|
|
|
$
|
702,050
|
|
|
|
|
|
|
|
|
|
|
F-3
COPA
HOLDINGS, S. A. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS(Continued)
|
|
|
|
|
|
|
|
|
|
|
As of
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In US$ thousands, except share
and per share data)
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Current maturities of long-term
debt
|
|
$
|
67,905
|
|
|
$
|
30,573
|
|
Accounts payable
|
|
|
44,848
|
|
|
|
25,335
|
|
Accounts payable to related parties
|
|
|
7,750
|
|
|
|
3,733
|
|
Air traffic liability
|
|
|
85,673
|
|
|
|
53,423
|
|
Taxes and interest payable
|
|
|
27,450
|
|
|
|
16,269
|
|
Accrued expenses payable
|
|
|
14,780
|
|
|
|
12,848
|
|
Other current liabilities
|
|
|
5,573
|
|
|
|
830
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
253,979
|
|
|
|
143,011
|
|
Non-Current
Liabilities:
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
402,954
|
|
|
|
380,827
|
|
Post employment benefits liability
|
|
|
1,283
|
|
|
|
1,158
|
|
Other long-term liabilities
|
|
|
8,790
|
|
|
|
1,310
|
|
Deferred tax liabilities
|
|
|
4,039
|
|
|
|
1,589
|
|
|
|
|
|
|
|
|
|
|
Total Non-Current Liabilities
|
|
|
417,066
|
|
|
|
384,884
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
671,045
|
|
|
|
527,895
|
|
|
|
|
|
|
|
|
|
|
Shareholders
Equity:
|
|
|
|
|
|
|
|
|
Class A common
stock30,034,375 shares authorized, issued, and
outstanding
|
|
|
19,813
|
|
|
|
19,813
|
|
Class B common
stock12,778,125 shares authorized, issued, and
outstanding
|
|
|
9,410
|
|
|
|
9,410
|
|
Retained earnings
|
|
|
217,862
|
|
|
|
144,932
|
|
Accumulated other comprehensive
loss
|
|
|
(1,218
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Shareholders Equity
|
|
|
245,867
|
|
|
|
174,155
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and
Shareholders Equity
|
|
$
|
916,912
|
|
|
$
|
702,050
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In US$ thousands, except share
and per share data)
|
|
|
Operating Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger revenue
|
|
$
|
565,131
|
|
|
$
|
364,611
|
|
|
$
|
311,683
|
|
Cargo, mail and other
|
|
|
43,443
|
|
|
|
35,226
|
|
|
|
30,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
608,574
|
|
|
|
399,837
|
|
|
|
341,789
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft fuel
|
|
|
149,303
|
|
|
|
62,549
|
|
|
|
48,512
|
|
Salaries and benefits
|
|
|
69,730
|
|
|
|
51,701
|
|
|
|
45,254
|
|
Passenger servicing
|
|
|
50,622
|
|
|
|
39,222
|
|
|
|
36,879
|
|
Commissions
|
|
|
45,087
|
|
|
|
29,073
|
|
|
|
27,681
|
|
Maintenance, material and repairs
|
|
|
32,505
|
|
|
|
19,742
|
|
|
|
20,354
|
|
Reservations and sales
|
|
|
29,213
|
|
|
|
22,118
|
|
|
|
18,011
|
|
Aircraft rentals
|
|
|
27,631
|
|
|
|
14,445
|
|
|
|
16,686
|
|
Flight operations
|
|
|
24,943
|
|
|
|
17,904
|
|
|
|
15,976
|
|
Depreciation
|
|
|
19,857
|
|
|
|
19,279
|
|
|
|
14,040
|
|
Landing fees and other rentals
|
|
|
17,909
|
|
|
|
12,155
|
|
|
|
10,551
|
|
Other
|
|
|
32,622
|
|
|
|
29,306
|
|
|
|
25,977
|
|
Fleet impairment charges
|
|
|
|
|
|
|
|
|
|
|
3,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
499,422
|
|
|
|
317,494
|
|
|
|
283,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
109,152
|
|
|
|
82,343
|
|
|
|
58,296
|
|
Non-operating Income
(Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(21,629
|
)
|
|
|
(16,488
|
)
|
|
|
(11,613
|
)
|
Interest capitalized
|
|
|
1,089
|
|
|
|
963
|
|
|
|
2,009
|
|
Interest income
|
|
|
3,584
|
|
|
|
1,423
|
|
|
|
887
|
|
Other, net
|
|
|
395
|
|
|
|
6,063
|
|
|
|
2,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,561
|
)
|
|
|
(8,039
|
)
|
|
|
(6,163
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before Income
Taxes
|
|
|
92,591
|
|
|
|
74,304
|
|
|
|
52,133
|
|
Provision for Income Taxes
|
|
|
9,592
|
|
|
|
5,732
|
|
|
|
3,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
82,999
|
|
|
$
|
68,572
|
|
|
$
|
48,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
1.94
|
|
|
$
|
1.60
|
|
|
$
|
1.13
|
|
Shares used for computation
|
|
|
42,812,500
|
|
|
|
42,812,500
|
|
|
|
42,812,500
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
(No-par value)
|
|
|
Issued Capital
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
|
|
|
|
Class A
|
|
|
Class B
|
|
|
Class A
|
|
|
Class B
|
|
|
Earnings
|
|
|
Loss
|
|
|
Total
|
|
|
|
(In US$ thousands, except share
and per share data)
|
|
|
At December 31,
2002
|
|
|
30,034,375
|
|
|
|
12,778,125
|
|
|
$
|
19,813
|
|
|
$
|
9,410
|
|
|
$
|
37,871
|
|
|
|
|
|
|
$
|
67,094
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48,489
|
|
|
|
|
|
|
|
48,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
2003
|
|
|
30,034,375
|
|
|
|
12,778,125
|
|
|
|
19,813
|
|
|
|
9,410
|
|
|
|
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
|
|
|
|
19,813
|
|
|
|
9,410
|
|
|
|
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
|
|
|
$
|
19,813
|
|
|
$
|
9,410
|
|
|
$
|
217,862
|
|
|
$
|
(1,218
|
)
|
|
$
|
245,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In US$ thousands)
|
|
|
Cash flows from operating
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
82,999
|
|
|
$
|
68,572
|
|
|
$
|
48,489
|
|
Adjustments for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
(885
|
)
|
|
|
(519
|
)
|
|
|
447
|
|
Depreciation
|
|
|
19,857
|
|
|
|
19,279
|
|
|
|
14,040
|
|
(Gain) / Loss on sale of property
and equipment
|
|
|
(1,340
|
)
|
|
|
(1,125
|
)
|
|
|
|
|
Fleet impairment charge
|
|
|
|
|
|
|
|
|
|
|
3,572
|
|
Provision for doubtful accounts
|
|
|
812
|
|
|
|
1,026
|
|
|
|
2,154
|
|
Provision for obsolescence of
expendable parts and supplies
|
|
|
3
|
|
|
|
6
|
|
|
|
938
|
|
Derivative instruments mark to
market
|
|
|
(165
|
)
|
|
|
945
|
|
|
|
(207
|
)
|
Changes in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(11,252
|
)
|
|
|
2,287
|
|
|
|
(9,167
|
)
|
Accounts receivable from related
parties
|
|
|
(448
|
)
|
|
|
|
|
|
|
|
|
Other current assets
|
|
|
278
|
|
|
|
(3,317
|
)
|
|
|
(2,130
|
)
|
Other assets
|
|
|
(9,321
|
)
|
|
|
(1,430
|
)
|
|
|
(402
|
)
|
Accounts payable
|
|
|
(4,330
|
)
|
|
|
25
|
|
|
|
295
|
|
Accounts payable to related parties
|
|
|
4,017
|
|
|
|
1,089
|
|
|
|
1,063
|
|
Air traffic liability
|
|
|
27,759
|
|
|
|
6,200
|
|
|
|
8,809
|
|
Other liabilities
|
|
|
11,105
|
|
|
|
5,013
|
|
|
|
5,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
119,089
|
|
|
|
98,051
|
|
|
|
73,479
|
|
Cash flows from investing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of investments
|
|
|
(48,294
|
)
|
|
|
(38,082
|
)
|
|
|
|
|
Proceed from redemption of
investments
|
|
|
20,658
|
|
|
|
30,639
|
|
|
|
19
|
|
Restricted cash
|
|
|
(3,698
|
)
|
|
|
582
|
|
|
|
82
|
|
Advance payments on aircraft
purchase contracts
|
|
|
(49,461
|
)
|
|
|
(16,314
|
)
|
|
|
(41,232
|
)
|
Acquisition of property and
equipment
|
|
|
(63,296
|
)
|
|
|
(65,764
|
)
|
|
|
(112,181
|
)
|
Disposal of property and equipment
|
|
|
2,803
|
|
|
|
3,201
|
|
|
|
1,510
|
|
Purchase of AeroRepublica, net of
acquired cash
|
|
|
(22,282
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows used in
investing activities
|
|
|
(163,570
|
)
|
|
|
(85,738
|
)
|
|
|
(151,802
|
)
|
Cash flows from financing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from loans and borrowings
|
|
|
68,416
|
|
|
|
101,198
|
|
|
|
140,732
|
|
Payments on loans and borrowings
|
|
|
(46,929
|
)
|
|
|
(32,125
|
)
|
|
|
(21,969
|
)
|
Issuance of bonds
|
|
|
27,503
|
|
|
|
6,357
|
|
|
|
21,736
|
|
Redemption of bonds
|
|
|
|
|
|
|
(35,675
|
)
|
|
|
(35,201
|
)
|
Dividends declared and paid
|
|
|
(10,069
|
)
|
|
|
(10,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows provided by
financing activities
|
|
|
38,921
|
|
|
|
29,755
|
|
|
|
105,298
|
|
F-7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In US$ thousands)
|
|
|
Net (decrease) increase in cash
and cash equivalents
|
|
|
(5,560
|
)
|
|
|
42,068
|
|
|
|
26,975
|
|
Cash and cash equivalents at
January 1st
|
|
|
99,666
|
|
|
|
57,598
|
|
|
|
30,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at
December 31
|
|
$
|
94,106
|
|
|
$
|
99,666
|
|
|
$
|
57,598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash
flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid, net of amount
capitalized
|
|
$
|
21,126
|
|
|
$
|
16,021
|
|
|
$
|
10,449
|
|
Income taxes paid
|
|
|
7,411
|
|
|
|
4,286
|
|
|
|
2,400
|
|
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
F-8
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 99.7% 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 92 daily scheduled
flights among 30 destinations in 20 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, 2005, Copa operated a fleet of 24 aircraft
with an average age of 3.2 years; consisting of 22 modern
Boeing 737-Next Generation aircraft and two (2) 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 17 aircraft, with a
carrying value of $531 million, all of which are leased to
Copa. 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, and owns the
old corporate headquarters building located in Panama City.
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 eleven leased MD-80s and two owned DC-9s
as of December 31, 2005 (See Note 2).
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.
A substantial portion of the Companys assets are located
in the Republic of Panama, a significant proportion of the
Companys customers are Panamanian, and substantially all
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
F-9
COPA
HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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 are primarily held as
collateral for letters of credit.
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.
F-10
COPA
HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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
|
|
25 to 30
|
Jet engines
|
|
10 to 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 flow 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 if lower than carrying
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. Tickets whose fares 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.
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.
F-11
COPA
HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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 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.
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 income.
In 2005, approximately 72% of the Companys expenses and
42% 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. The Company
currently does not hedge the risk of fluctuations in foreign
exchange rates; generally, its exposure to foreign currencies is
limited to a period of up to two weeks, from the time a sale is
completed to the time funds are repatriated 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. Maintenance reserves paid to
aircraft lessors in advance of the performance of major
maintenance activities are recorded as prepaid maintenance
within Other Assets and then recognized as maintenance expense
when the underlying maintenance is performed.
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 accrued for the
Companys profit-sharing program as of December 31,
2005 and 2004 were $5.8 million and $5.5 million,
respectively.
Advertising
Costs
Advertising costs are expensed when incurred. The Company
recognized as advertising expense $3.7 million,
$2.8 million, and $3.4 million in 2005, 2004 and 2003,
respectively.
F-12
COPA
HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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 test goodwill for
impairment, at least annually on December 31, by reviewing
the book value compared 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. We 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 statements amounts and
related note disclosures to conform with the current years
presentation.
|
|
2.
|
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 2005 AeroRepública was the
second-largest domestic carrier in Colombia in terms of number
of passengers carried, providing service to 11 cities in
Colombia with a
point-to-point
route network. As of the acquisition date AeroRepública
operated a fleet of seven (7) leased MD-80s and two
(2) owned DC-9s. 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.
The results of AeroRepúblicas operations have been
included in the Companys Consolidated Financial Statements
beginning April 22, 2005, the date the Company acquired an
initial 85.56% equity ownership interest in AeroRepública
and gained control of AeroRepública. The initial
acquisition was followed by subsequent acquisitions increasing
the total equity ownership interest in AeroRepública to
99.7% as of December 31, 2005. The total purchase price
paid through December 31, 2005 of $23.4 million,
including acquisition costs, was negotiated individually with
each of the respective selling parties and, largely due to the
factors described above, resulted in the recognition of
goodwill. The Company funded these acquisitions with a
combination of existing cash and short-term investments.
Under the purchase method of accounting, the total purchase
price is allocated to the net tangible and intangible assets of
AeroRepública based on their fair values as of the dates of
acquisition. Independent valuation specialists conducted an
independent valuation in order to assist management in
determining the fair values of a significant portion of these
assets. The work performed by the independent valuation
specialists has been considered in managements estimates
of the fair values reflected in the Consolidated Financial
Statements. This
F-13
COPA
HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
final valuation was based on the actual net tangible and
intangible assets of AeroRepública that existed as of the
date of acquisition.
The following table summarizes the Companys estimates of
the fair value of the assets acquired and liabilities assumed at
the date of acquisition (in millions).
|
|
|
|
|
Assets:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1.1
|
|
Accounts receivable
|
|
|
10.7
|
|
Prepaid expenses
|
|
|
2.6
|
|
Other current assets
|
|
|
4.7
|
|
Property, plant &
equipment
|
|
|
4.8
|
|
Goodwill
|
|
|
20.1
|
|
Intangibles
|
|
|
30.6
|
|
Other non-current assets
|
|
|
4.1
|
|
|
|
|
|
|
Total assets acquired
|
|
$
|
78.7
|
|
Liabilities:
|
|
|
|
|
Accounts payable
|
|
$
|
23.3
|
|
Air traffic liability
|
|
|
4.4
|
|
Accrued liabilities
|
|
|
7.6
|
|
Debt
|
|
|
10.2
|
|
Deferred tax liability
|
|
|
3.3
|
|
Other liabilities
|
|
|
6.5
|
|
|
|
|
|
|
Total liabilities
assumed
|
|
$
|
55.3
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
23.4
|
|
|
|
|
|
|
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.
AeroRepúblicas domestic route network within Colombia
was determined to have an indefinite useful life as the access
to each domestic city is limited to a set number of airline
carriers in addition to requiring the necessary permits to
operate within Colombia. The permit to fly into each city does
not have a set expiration date. The AeroRepública trade
name was determined to have an indefinite useful life due to
several factors and considerations, including the brand
awareness and market position, customer recognition and loyalty
and the continued use of the AeroRepública brand. In the
event that the Company determines that the value of goodwill or
intangible assets with indefinite lives has become impaired, the
Company will incur an accounting charge for the amount of
impairment during the period in which the determination is made.
During December 2005 and April 2006, the Company invested an
additional $8.0 million and $2.0 million in
AeroRepública, respectively, in exchange for
4.7 million and 1.2 million new shares of
AeroRepública, respectively. As a result of these
transactions the Companys total investment increased to
$33.4 million.
F-14
COPA
HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The following table presents pro forma financial information as
if the acquisition had occurred as of the beginning of each
period presented. The pro forma financial information is not
intended to represent or be indicative of the combined results
which would have occurred had the transaction actually been
consummated on the date indicated above and should not be taken
as representative of the consolidated results of operations
which may occur in the future (in millions except share data).
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(Unaudited)
|
|
|
Pro forma
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$
|
646.3
|
|
|
$
|
513.0
|
|
Operating Income
|
|
|
106.3
|
|
|
|
90.8
|
|
Income before income taxes
|
|
|
92.4
|
|
|
|
78.5
|
|
Net income
|
|
$
|
83.0
|
|
|
$
|
70.3
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
1.94
|
|
|
$
|
1.64
|
|
3. Long-Term
Debt
At December 31, long-term debt consisted of the following
(in millions):
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Long-term fixed rate debt
|
|
$
|
292.5
|
|
|
$
|
318.7
|
|
(Secured fixed rate indebtedness
due through 2017
|
|
|
|
|
|
|
|
|
Effective rates ranged from 3.98%
to 8.96%)
|
|
|
|
|
|
|
|
|
Long-term variable rate debt
|
|
|
150.9
|
|
|
|
92.7
|
|
(Secured variable rate
indebtedness due through 2017
|
|
|
|
|
|
|
|
|
Effective rates ranged from 4.15%
to 19.35%)
|
|
|
|
|
|
|
|
|
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
|
|
|
470.9
|
|
|
|
411.4
|
|
Less current maturities
|
|
|
67.9
|
|
|
|
30.6
|
|
|
|
|
|
|
|
|
|
|
Long-term debt less current
maturities
|
|
$
|
403.0
|
|
|
$
|
380.8
|
|
|
|
|
|
|
|
|
|
|
Maturities of long-term debt for the next five years are as
follows (in millions):
|
|
|
|
|
Year ending December 31,
|
|
|
|
|
2006
|
|
$
|
67.9
|
|
2007
|
|
$
|
35.9
|
|
2008
|
|
$
|
35.4
|
|
2009
|
|
$
|
33.6
|
|
2010
|
|
$
|
31.9
|
|
Thereafter
|
|
$
|
266.2
|
|
F-15