Form 20-F
As
filed with the Securities and Exchange Commission on March 16, 2010
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, 2009
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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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
(Address of Principal Executive Offices)
Joseph Putaturo
Complejo Business Park, Torre Norte
Parque Lefevre, Panama City, Panama
+507 304 2677 (Telephone)
+507 304 2535 (Facsimile)
(Registrants Contact Person)
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, 2009, there were
outstanding 43,344,978 shares of common stock, without par value, of which 30,566,853 were Class A
shares and 12,778,125 were Class B shares.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. þ Yes o No
If this report is an annual or transition report, indicate by check mark if the registrant is
not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934. o Yes þ No
Indicate by check mark whether the registrant (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 whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). o Yes o No
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer þ |
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Accelerated filer o
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Non-accelerated filer o (Do not check if a smaller reporting
company) |
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Smaller reporting company o |
Indicate by check mark which basis of accounting the registrant has used to prepare the
financial statements included in this filing:
U.S. GAAP þ IFRS o Other o
If Other has been checked in response to the previous question, indicate by check mark which
financial statement item the registrant has elected to follow:
o Item 17 o Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). o Yes þ No
INTRODUCTION
In this annual report, we use the term Copa Holdings to refer to Copa Holdings, S.A., Copa
or Copa Airlines to refer to Compañía Panameña de Aviación, S.A., a subsidiary of Copa Holdings,
S.A., and AeroRepública to refer to AeroRepública, S.A., a subsidiary of Copa Holdings, S.A. The
terms we, us and our refer to Copa Holdings, S.A. together with its subsidiaries, except
where the context requires otherwise. References to Class A shares refer to Class A shares of
Copa Holdings, S.A.
This annual report contains terms relating to operating performance that are commonly used
within the airline industry and are defined as follows:
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Aircraft utilization represents the average number of block hours operated
per day per aircraft for the total aircraft fleet. |
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Available seat miles or ASMs represents the aircraft seating capacity
multiplied by the number of miles the seats are flown. |
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Average stage length represents the average number of miles flown per
flight. |
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Block hours refers to the elapsed time between an aircraft leaving an
airport gate and arriving at an airport gate. |
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Break-even load factor represents the load factor that would have resulted
in total revenues being equal to total expenses. |
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Load factor represents the percentage of aircraft seating capacity that is
actually utilized (calculated by dividing revenue passenger miles by available seat
miles). |
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Operating expense per available seat mile represents operating expenses
divided by available seat miles. |
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Operating revenue per available seat mile represents operating revenues
divided by available seat miles. |
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Passenger revenue per available seat mile represents passenger revenue
divided by available seat miles. |
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Revenue passenger miles represents the number of miles flown by revenue
passengers. |
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Revenue passengers represents the total number of paying passengers
(including all passengers redeeming OnePass frequent flyer miles and other travel
awards) flown on all flight segments (with each connecting segment being considered a
separate flight segment). |
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Yield represents the average amount one passenger pays to fly one mile. |
Market Data
This annual report contains certain statistical data regarding our airline routes and our
competitive position and market share in, and the market size of, the Latin American airline
industry. This information has been derived from a variety of sources, including the International
Air Transport Association, the U.S. Federal Aviation Administration, the International Monetary
Fund and other third-party sources, governmental agencies or industry or general publications.
Information for which no source is cited has been prepared by us on the basis of our knowledge of
Latin American airline markets and other information available to us. The methodology and
terminology used by different sources are not always consistent, and data from different sources
are not readily comparable. In addition, sources other than us use methodologies that are not
identical to ours and may produce
results that differ from our own estimates. Although we have not independently verified the
information concerning our competitive position, market share, market size, market growth or other
similar data provided by third-party sources or by industry or general publications, we believe
these sources and publications are generally accurate and reliable.
ii
Presentation of Financial and Statistical Data
Included elsewhere in this annual report are our audited consolidated balance sheets as of
December 31, 2008 and 2009 and the audited consolidated statements of income, changes in
shareholders equity and cash flows for the years ended December 31, 2007, 2008 and 2009. The
consolidated financial information as of December 31, 2005, 2006 and 2007, and for the years ended
December 31, 2005 and 2006 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. 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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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; |
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our ability to obtain financing on commercially reasonable terms; and |
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the risk factors discussed under Risk Factors beginning on page 4. |
The words believe, may, will, aim, estimate, continue, anticipate, intend,
expect and similar words are intended to identify forward-looking statements. Forward-looking
statements include information
concerning our possible or assumed future results of operations, business strategies,
financing plans, competitive position, industry environment, potential growth opportunities, the
effects of future regulation and the effects of competition. Forward-looking statements speak only
as of the date they were made, and we undertake no obligation to update publicly or to revise any
forward-looking statements after the date of this annual report because of new information, future
events or other factors. In light of the risks and uncertainties described above, the
forward-looking events and circumstances discussed in this annual report might not occur and are
not guarantees of future performance. Considering these limitations, you should not place undue
reliance on forward-looking statements contained in this annual report.
iii
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 Item 5.
Operating and Financial Review and Prospects appearing elsewhere in this annual report.
The summary consolidated financial information as of December 31, 2008 and 2009 and for the
years ended December 31, 2007, 2008 and 2009 has been derived from our audited consolidated
financial statements included elsewhere in this annual report. The consolidated financial
information as of December 31, 2005, 2006 and 2007, and for the years ended December 31, 2005 and
2006 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.
We have acquired 99.9% of the stock of AeroRepública, a Colombian air carrier, and began
consolidating its results on April 22, 2005. As a result of this acquisition, our financial
information prior to and after the acquisition is not comparable.
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Year Ended December 31, |
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2005(21) |
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2006 |
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2007 |
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2008 |
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2009 |
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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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$ |
563,520 |
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$ |
798,901 |
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$ |
967,066 |
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$ |
1,217,311 |
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$ |
1,186,717 |
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Cargo, mail and other |
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45,094 |
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52,259 |
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60,198 |
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71,478 |
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66,370 |
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Total operating revenues |
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608,614 |
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851,160 |
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1,027,264 |
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1,288,789 |
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1,253,087 |
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Operating expenses: |
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Aircraft fuel |
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149,303 |
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217,730 |
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265,387 |
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404,669 |
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300,816 |
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Salaries and benefits |
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69,730 |
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91,382 |
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116,691 |
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139,431 |
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157,879 |
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Passenger servicing |
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50,622 |
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64,380 |
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82,948 |
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98,775 |
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110,768 |
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Commissions |
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45,087 |
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57,808 |
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65,930 |
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67,177 |
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57,565 |
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Reservations and sales |
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29,213 |
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38,212 |
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48,229 |
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54,996 |
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56,280 |
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Maintenance, materials and repairs |
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32,505 |
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50,057 |
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51,249 |
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66,438 |
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76,732 |
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Depreciation |
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19,857 |
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24,874 |
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35,328 |
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42,891 |
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47,079 |
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Flight operations |
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24,943 |
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33,740 |
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43,958 |
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56,425 |
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60,873 |
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Aircraft rentals |
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27,631 |
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38,169 |
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38,636 |
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43,008 |
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46,538 |
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Landing fees and other rentals |
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17,909 |
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23,929 |
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27,017 |
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32,467 |
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33,628 |
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Other |
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32,622 |
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44,758 |
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55,093 |
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58,521 |
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62,186 |
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Special fleet charges(1) |
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7,309 |
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19,417 |
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Gain from involuntary conversion(2) |
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(8,019 |
) |
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Total operating expenses |
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499,422 |
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685,039 |
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829,756 |
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1,064,798 |
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1,029,761 |
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Operating income |
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109,192 |
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166,121 |
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197,508 |
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223,991 |
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223,326 |
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Non-operating income (expense): |
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Interest expense |
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(21,629 |
) |
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(29,150 |
) |
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(44,332 |
) |
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(42,071 |
) |
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(32,938 |
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Interest capitalized |
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1,089 |
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1,712 |
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2,570 |
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1,921 |
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693 |
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Interest income |
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3,544 |
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7,257 |
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12,193 |
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11,130 |
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9,185 |
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Other, net(3) |
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395 |
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185 |
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10,987 |
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(58,843 |
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59,703 |
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Total non-operating expenses, net |
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(16,601 |
) |
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(19,996 |
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(18,582 |
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(87,863 |
) |
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36,643 |
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Income before income taxes |
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92,591 |
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146,125 |
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178,926 |
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136,128 |
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259,969 |
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Provision for income taxes |
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(9,592 |
) |
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(12,286 |
) |
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(17,106 |
) |
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(17,469 |
) |
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(19,610 |
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Net income |
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82,999 |
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133,839 |
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161,820 |
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118,659 |
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240,359 |
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BALANCE SHEET DATA |
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Total cash, cash equivalents and short-term
investments |
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$ |
114,490 |
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$ |
197,380 |
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$ |
308,358 |
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$ |
396,826 |
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$ |
352,068 |
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1
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Year Ended December 31, |
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2005(21) |
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2006 |
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2007 |
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2008 |
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2009 |
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(in thousands of dollars, except share and per share data and operating data) |
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Accounts receivable, net |
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46,533 |
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62,137 |
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74,169 |
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75,201 |
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80,791 |
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Total current assets |
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184,351 |
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290,651 |
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435,736 |
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522,464 |
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|
502,154 |
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Purchase deposits for flight equipment |
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52,753 |
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65,150 |
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64,079 |
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84,861 |
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|
198,697 |
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Total property and equipment |
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637,543 |
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|
862,283 |
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1,166,262 |
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1,337,669 |
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1,481,687 |
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Total assets |
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916,912 |
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1,255,015 |
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1,707,251 |
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1,954,225 |
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2,092,869 |
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Long-term debt |
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402,954 |
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529,802 |
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732,209 |
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800,196 |
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|
750,971 |
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Total shareholders equity |
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245,867 |
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371,669 |
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531,637 |
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632,432 |
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865,628 |
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Capital stock |
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29,223 |
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32,563 |
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37,372 |
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42,964 |
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48,244 |
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CASH FLOW DATA |
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Net cash provided by operating activities |
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$ |
115,368 |
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$ |
193,468 |
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$ |
221,941 |
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|
$ |
198,105 |
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$ |
282,436 |
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Net cash used in investing activities |
|
|
(159,886 |
) |
|
|
(258,980 |
) |
|
|
(334,758 |
) |
|
|
(322,780 |
) |
|
|
(151,451 |
) |
Net cash provided by financing activities |
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|
38,929 |
|
|
|
141,498 |
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|
228,295 |
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|
59,519 |
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(87,849 |
) |
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OTHER FINANCIAL DATA |
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EBITDA(4) |
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129,444 |
|
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|
191,180 |
|
|
|
243,823 |
|
|
|
208,039 |
|
|
|
330,108 |
|
Aircraft rentals |
|
|
27,631 |
|
|
|
38,169 |
|
|
|
38,636 |
|
|
|
43,008 |
|
|
|
46,538 |
|
Operating margin(5) |
|
|
17.9 |
% |
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|
19.5 |
% |
|
|
19.2 |
% |
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|
17.4 |
% |
|
|
17.8 |
% |
Weighted average shares used in computing net
income per share (basic)(6) |
|
|
42,812,500 |
|
|
|
43,517,489 |
|
|
|
43,782,386 |
|
|
|
43,822,879 |
|
|
|
43,910,929 |
|
Weighted average shares used in computing net
income per share (diluted)(6) |
|
|
42,812,500 |
|
|
|
43,517,489 |
|
|
|
43,782,386 |
|
|
|
43,822,879 |
|
|
|
43,910,929 |
|
Net income (loss) per share (basic)(6) |
|
$ |
1.94 |
|
|
$ |
3.08 |
|
|
$ |
3.70 |
|
|
$ |
2.71 |
|
|
$ |
5.47 |
|
Net income (loss) per share (diluted)(6) |
|
$ |
1.94 |
|
|
$ |
3.08 |
|
|
$ |
3.70 |
|
|
$ |
2.71 |
|
|
$ |
5.47 |
|
Dividends declared per share |
|
$ |
0.24 |
|
|
$ |
0.19 |
|
|
$ |
0.31 |
|
|
$ |
0.37 |
|
|
$ |
0.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING DATA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue passengers carried(7) |
|
|
4,361 |
|
|
|
5,741 |
|
|
|
6,015 |
|
|
|
6,485 |
|
|
|
7,182 |
|
Revenue passenger miles(8) |
|
|
3,824 |
|
|
|
5,017 |
|
|
|
5,861 |
|
|
|
6,717 |
|
|
|
7,397 |
|
Available seat miles(9) |
|
|
5,359 |
|
|
|
6,866 |
|
|
|
7,918 |
|
|
|
8,845 |
|
|
|
9,911 |
|
Load factor(10) |
|
|
71.4 |
% |
|
|
73.1 |
% |
|
|
74.0 |
% |
|
|
75.9 |
% |
|
|
74.6 |
% |
Break-even load factor(11) |
|
|
58.0 |
% |
|
|
58.0 |
% |
|
|
58.5 |
% |
|
|
67.1 |
% |
|
|
56.2 |
% |
Total block hours(12) |
|
|
103,628 |
|
|
|
130,818 |
|
|
|
157,200 |
|
|
|
182,692 |
|
|
|
206,720 |
|
Average daily aircraft utilization(13) |
|
|
9.8 |
|
|
|
9.8 |
|
|
|
9.6 |
|
|
|
9.6 |
|
|
|
10.1 |
|
Average passenger fare |
|
|
129.2 |
|
|
|
139.2 |
|
|
|
160.8 |
|
|
|
187.7 |
|
|
|
165.2 |
|
Yield(14) |
|
|
14.74 |
|
|
|
15.92 |
|
|
|
16.50 |
|
|
|
18.12 |
|
|
|
16.04 |
|
Passenger revenue per ASM(15) |
|
|
10.51 |
|
|
|
11.64 |
|
|
|
12.21 |
|
|
|
13.76 |
|
|
|
11.97 |
|
Operating revenue per ASM(16) |
|
|
11.36 |
|
|
|
12.40 |
|
|
|
12.97 |
|
|
|
14.57 |
|
|
|
12.64 |
|
Operating expenses per ASM (CASM)(17) |
|
|
9.32 |
|
|
|
9.98 |
|
|
|
10.48 |
|
|
|
12.04 |
|
|
|
10.39 |
|
Departures |
|
|
48,934 |
|
|
|
65,471 |
|
|
|
71,893 |
|
|
|
79,664 |
|
|
|
88,294 |
|
Average daily departures |
|
|
156.6 |
|
|
|
179.4 |
|
|
|
197.0 |
|
|
|
217.7 |
|
|
|
241.9 |
|
Average number of aircraft |
|
|
31.0 |
|
|
|
38.6 |
|
|
|
45.0 |
|
|
|
52.0 |
|
|
|
56.3 |
|
Airports served at period end |
|
|
36 |
|
|
|
42 |
|
|
|
46 |
|
|
|
51 |
|
|
|
51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SEGMENT FINANCIAL DATA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Copa: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue |
|
$ |
505,655 |
|
|
$ |
676,168 |
|
|
$ |
806,201 |
|
|
$ |
1,035,945 |
|
|
$ |
1,024,473 |
|
Operating expenses |
|
|
402,684 |
|
|
|
509,540 |
|
|
|
634,521 |
|
|
|
827,713 |
|
|
|
810,201 |
|
Depreciation |
|
|
19,242 |
|
|
|
23,732 |
|
|
|
30,710 |
|
|
|
38,107 |
|
|
|
43,174 |
|
Aircraft rentals |
|
|
22,096 |
|
|
|
23,842 |
|
|
|
27,756 |
|
|
|
31,271 |
|
|
|
26,037 |
|
Interest expense |
|
|
19,424 |
|
|
|
26,907 |
|
|
|
36,300 |
|
|
|
36,208 |
|
|
|
30,086 |
|
Interest capitalized |
|
|
1,089 |
|
|
|
1,712 |
|
|
|
2,570 |
|
|
|
1,921 |
|
|
|
693 |
|
Interest income |
|
|
3,376 |
|
|
|
6,887 |
|
|
|
11,720 |
|
|
|
10,514 |
|
|
|
8,121 |
|
Net income (loss) before tax |
|
|
89,745 |
|
|
|
155,533 |
|
|
|
165,571 |
|
|
|
119,355 |
|
|
|
254,346 |
|
Total assets |
|
|
851,075 |
|
|
|
1,168,121 |
|
|
|
1,546,623 |
|
|
|
1,823,512 |
|
|
|
1,918,964 |
|
AeroRepública: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue |
|
$ |
103,016 |
|
|
$ |
175,883 |
|
|
$ |
226,042 |
|
|
$ |
264,912 |
|
|
$ |
240,359 |
|
Operating expenses |
|
|
96,839 |
|
|
|
176,388 |
|
|
|
200,474 |
|
|
|
249,152 |
|
|
|
232,743 |
|
Depreciation |
|
|
615 |
|
|
|
1,142 |
|
|
|
4,618 |
|
|
|
4,783 |
|
|
|
3,905 |
|
Aircraft rentals |
|
|
5,535 |
|
|
|
14,604 |
|
|
|
14,760 |
|
|
|
22,732 |
|
|
|
26,187 |
|
Interest expense |
|
|
2,205 |
|
|
|
2,243 |
|
|
|
8,032 |
|
|
|
5,863 |
|
|
|
2,852 |
|
Interest capitalized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
168 |
|
|
|
370 |
|
|
|
473 |
|
|
|
616 |
|
|
|
1,064 |
|
Net income (loss) before tax |
|
|
2,846 |
|
|
|
(9,408 |
) |
|
|
13,354 |
|
|
|
5,277 |
|
|
|
5,229 |
|
Total assets |
|
|
98,091 |
|
|
|
132,872 |
|
|
|
256,349 |
|
|
|
258,562 |
|
|
|
318,906 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SEGMENT OPERATING DATA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Copa: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available seat miles(9) |
|
|
4,409 |
|
|
|
5,239 |
|
|
|
6,298 |
|
|
|
7,342 |
|
|
|
8,319 |
|
Load factor(10) |
|
|
73.4 |
% |
|
|
77.8 |
% |
|
|
78.4 |
% |
|
|
78.8 |
% |
|
|
76.0 |
% |
Break-even load factor |
|
|
56.8 |
% |
|
|
56.1 |
% |
|
|
58.7 |
% |
|
|
67.2 |
% |
|
|
53.2 |
% |
Yield(14) |
|
|
14.41 |
|
|
|
15.49 |
|
|
|
15.33 |
|
|
|
16.81 |
|
|
|
15.25 |
|
Operating revenue per ASM(16) |
|
|
11.47 |
|
|
|
12.91 |
|
|
|
12.80 |
|
|
|
14.11 |
|
|
|
12.31 |
|
CASM(17) |
|
|
9.13 |
|
|
|
9.73 |
|
|
|
10.08 |
|
|
|
11.27 |
|
|
|
9.74 |
|
Average stage length(19) |
|
|
1,123 |
|
|
|
1,158 |
|
|
|
1,207 |
|
|
|
1,216 |
|
|
|
1,214 |
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2005(21) |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
|
(in thousands of dollars, except share and per share data and operating data) |
|
On time performance(18) |
|
|
91.7 |
% |
|
|
91.0 |
% |
|
|
86.9 |
% |
|
|
87.5 |
% |
|
|
87.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AeroRepública:(22) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available seat miles(9) |
|
|
950 |
|
|
|
1,627 |
|
|
|
1,620 |
|
|
|
1,503 |
|
|
|
1,592 |
|
Load factor(10) |
|
|
62.0 |
% |
|
|
57.9 |
% |
|
|
57.2 |
% |
|
|
61.7 |
% |
|
|
67.5 |
% |
Break even load factor |
|
|
60.7 |
% |
|
|
61.9 |
% |
|
|
53.8 |
% |
|
|
62.0 |
% |
|
|
67.3 |
% |
Yield(14) |
|
|
16.53 |
|
|
|
17.79 |
|
|
|
22.74 |
|
|
|
26.31 |
|
|
|
20.71 |
|
Operating revenue per ASM(16) |
|
|
10.84 |
|
|
|
10.81 |
|
|
|
13.95 |
|
|
|
17.63 |
|
|
|
15.10 |
|
CASM(17) |
|
|
10.19 |
|
|
|
10.84 |
|
|
|
12.37 |
|
|
|
16.58 |
|
|
|
14.62 |
|
Average stage length(19) |
|
|
360 |
|
|
|
370 |
|
|
|
398 |
|
|
|
421 |
|
|
|
429 |
|
On time performance(20) |
|
|
70.4 |
% |
|
|
80.3 |
% |
|
|
72.8 |
% |
|
|
84.2 |
% |
|
|
90.1 |
% |
|
|
|
(1) |
|
Represents expenses related to costs associated with terms negotiated for the early
termination its MD-80 aircraft as a result of AeroRepúblicas transition to a more fuel
efficient all Embraer-190 fleet. |
|
(2) |
|
Represents gain on involuntary conversion of non-monetary assets to monetary assets related
to insurance proceeds in excess of aircraft book value. |
|
(3) |
|
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. |
|
(4) |
|
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, |
|
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
|
(in thousands of dollars) |
|
Net income |
|
$ |
82,999 |
|
|
$ |
133,839 |
|
|
$ |
161,820 |
|
|
$ |
118,659 |
|
|
$ |
240,359 |
|
Interest expense |
|
|
21,629 |
|
|
|
29,150 |
|
|
|
44,332 |
|
|
|
42,071 |
|
|
|
32,938 |
|
Income taxes |
|
|
9,592 |
|
|
|
12,286 |
|
|
|
17,106 |
|
|
|
17,469 |
|
|
|
19,610 |
|
Depreciation |
|
|
19,857 |
|
|
|
24,874 |
|
|
|
35,328 |
|
|
|
42,891 |
|
|
|
47,079 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
134,077 |
|
|
|
200,149 |
|
|
|
258,586 |
|
|
|
221,090 |
|
|
|
339,986 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest capitalized |
|
|
(1,089 |
) |
|
|
(1,712 |
) |
|
|
(2,570 |
) |
|
|
(1,921 |
) |
|
|
(693 |
) |
Interest income |
|
|
(3,544 |
) |
|
|
(7,257 |
) |
|
|
(12,193 |
) |
|
|
(11,130 |
) |
|
|
(9,185 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
|
129,444 |
|
|
|
191,180 |
|
|
|
243,823 |
|
|
|
208,039 |
|
|
|
330,108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $27.6 million in 2005, $38.2 million in 2006, $38.6 million in 2007, $43.0 million in 2008 and
$46.5 million in 2009. |
|
(5) |
|
Operating margin represents operating income divided by operating revenues. |
|
(6) |
|
All share and per share amounts have been retroactively adjusted to reflect the current
capital structure described under Description of Capital Stock and in the notes to our
consolidated financial statements. In 2009, we changed our method of calculating earnings per
share and adjusted prior period data accordingly. See Note 10 to our Consolidated Financial
Statements. |
|
(7) |
|
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. |
|
(8) |
|
Number of miles flown by scheduled revenue passengers, expressed in millions. |
|
(9) |
|
Aircraft seating capacity multiplied by the number of miles the seats are flown, expressed in
millions. |
|
(10) |
|
Percentage of aircraft seating capacity that is actually utilized. Load factors are
calculated by dividing revenue passenger miles by available seat miles. |
|
(11) |
|
Load factor that would have resulted in total revenues being equal to total expenses,
excluding the effect of fuel derivative mark-to-market and special fleet charges, this figure
would have been 57.9% in 2005, 57.7% in 2006, 58.6% in 2007, 63.0% in 2008 and 59.2% in 2009. |
|
(12) |
|
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. |
|
(13) |
|
Average number of block hours operated per day per aircraft for the total aircraft fleet. |
|
(14) |
|
Average amount (in cents) one passenger pays to fly one mile. |
|
(15) |
|
Passenger revenues (in cents) divided by the number of available seat miles. |
3
|
|
|
(16) |
|
Total operating revenues for passenger related costs (in cents) divided by the number of available seat miles. |
|
(17) |
|
Total operating expenses for passenger aircraft related costs (in cents) divided by the number of available seat miles. |
|
(18) |
|
Percentage of flights that arrive at the destination gate within fifteen minutes of scheduled arrival. |
|
(19) |
|
The average number of miles flown per flight. |
|
(20) |
|
Percentage of flights that depart within fifteen minutes of the scheduled departure time. |
|
(21) |
|
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. |
|
(22) |
|
AeroRepública has not historically distinguished between revenue passengers and non-revenue
passengers. Although we have implemented 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, 2006, 2007, 2008 and 2009 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 nine years. During the next several 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.
4
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. In recent years, the airline industry has experienced a pilot
shortage that has disproportionately affected smaller and regional carriers, such as Copa.
Expansion of our markets and flight frequencies may also strain our existing management resources
and operational, financial and management information systems to the point where they may no longer
be adequate to support our operations, requiring us to make significant expenditures in these
areas. In light of these factors, we cannot assure you that we will be able to successfully
establish new markets or expand our existing markets, and our failure to do so could harm our
business and results of operations, as well as the value of our Class A shares.
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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changes in economic or other governmental policies; |
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changes in regulatory, legal or administrative practices; or |
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other political or economic developments over which we have no control. |
Additionally, a significant portion of our revenues is derived from discretionary and leisure
travel which are especially sensitive to economic downturns. A continued recessionary environment
could result in a reduction in passenger traffic, and leisure travel in particular, as well as a
reduction in our cargo business, and could also impact our ability to raise fares, which in turn
would materially and negatively affect our financial condition and results of operations.
The cost of refinancing our debt and obtaining additional financing for new aircraft has increased
and may continue to increase.
We currently finance our aircraft through bank loans and operating leases. In the past, we
have been able to obtain lease or debt financing on terms attractive to us. 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 does not 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, 2009, we had $363.5 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 or at all. The
recent turmoil in the financial markets has tightened the availability of credit and has increased
the cost of obtaining lease or debt financing. If the cost of such financing continues to increase
or we are unable to obtain such financing, we may be forced to incur higher than anticipated
financing costs, which could have an adverse impact on the execution of our growth strategy and
business.
5
We are dependent on our alliance with Continental and cannot assure you that it will continue.
We maintain a broad commercial and marketing alliance with Continental Airlines, Inc., or
Continental, that has allowed us to enhance our network and, in some cases, offer our customers
services that we could not otherwise offer. If Continental were to experience severe financial
difficulties or go bankrupt, our alliance and service agreements may be terminated or we may not
realize the anticipated benefits from our relationship with Continental. While Continental recorded
net income of $459 million, for 2007, it has also suffered significant losses in recent years and
has indicated that several factors threaten its ability to sustain profitability, including high
fuel cost, the troubled global capital markets, industry competition and terrorism or other
international hostilities. We cannot assure you that Continental will be able to sustain its
profitability, and as a result, we may be materially and adversely affected by a deterioration of
Continentals financial condition.
Since we began the alliance in 1998, we have benefited from Continentals support in
negotiations for aircraft purchases, insurance and fuel purchases, sharing of best practices and
engineering support in our maintenance operations, and significant other intangible support. This
support has assisted us in our growth strategy, while also improving our operational performance
and the quality of our service. Our alliance relationship with Continental is the subject of a
grant of antitrust immunity from the U.S. Department of Transportation, or DOT. If our relationship
with Continental were to deteriorate, or our alliance relationship were no longer to benefit from a
grant of antitrust immunity, or our alliance or services agreements were terminated, our business,
financial condition and results of operations would likely be materially and adversely affected.
The loss of Copas codesharing relationship with Continental would likely result in a significant
decrease in our revenues. We also rely on Continentals OnePass frequent flyer program that we
participate in globally and on a co-branded basis in Latin America, and our business may be
adversely affected if the OnePass program does not remain a competitive marketing program. In
addition, our competitors may benefit from alliances with other airlines that are more extensive
than our alliance with Continental. We cannot predict the extent to which we will be disadvantaged
by competing alliances. Our relationship with suppliers depends in part on our alliance with
Continental.
During 2008, Continental Airlines announced its intention to leave the SkyTeam Alliance and
join the Star Alliance, effective the fourth quarter of 2009. Due to the long-standing alliance
relationship with Continental, and in order to ensure we remain fully aligned with Continental on a
number of important joint initiatives, we also exited the SkyTeam Alliance during the fourth
quarter of 2009. We are currently studying our global alliance options, including potentially
following Continental to Star Alliance or whether to remain independent of global alliances while
forming strong bilateral partnerships with multiple carriers. The absence of, or entrance into,
another airline alliance could involve significant risks because we may incur costs or a loss of
revenue and anticipated benefits may not be realized. These risks include an inability to join or a
delay in joining another alliance due to lack of applicable approvals or difficulty in satisfying
entrance requirements, including the requirement that we enter into certain bilateral agreements
with each member of another alliance and/or difficulties integrating our technology processes with
the other airline members of a prospective alliance. If any of these risks or costs materializes,
they could have a material adverse effect on our business, results of operations and financial
condition.
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. As demand for air
travel in Latin America increases, some of our competitors have initiated non-stop service between
destinations that we currently serve through our Panamanian hub. Non-stop service, which bypasses
our hub in Panama is more convenient and possibly less expensive, than our connecting service and
could significantly decrease demand for our service to those destinations. We believe that
competition from point-to-point carriers will be directed towards the largest markets that we serve
and such competition is likely to continue at this level or intensify in the future. As a result,
the effect of such competition on us could be significant and could have a material adverse effect
on our business, financial condition and results of operations.
6
The Panamanian Aviation Act and certain of the bilateral agreements under which we operate contain
Panamanian ownership requirements that are not clearly defined, and our failure to comply with
these requirements could cause us to lose our authority to operate in Panama or to the
international destinations we serve.
Under Law No. 21 of January 29, 2003, which regulates the aviation industry in the Republic of
Panama and which we refer to as the Aviation Act, substantial ownership and effective control
of our airline must remain in the hands of Panamanian nationals. Under certain of the bilateral
agreements between Panama and other countries pursuant to which we have the right to fly to those
other countries and over their territory, we must continue to have substantial Panamanian ownership
and effective control by Panamanian nationals to retain these rights. Neither substantial
ownership nor effective control are defined in the Aviation Act or in the bilateral agreements,
and it is unclear how a Panamanian court or, in the case of the bilateral agreements, foreign
regulatory authorities might interpret these requirements. In addition, the manner in which these
requirements are interpreted may change over time. We cannot predict whether these requirements
would be satisfied through ownership and control by Panamanian record holders, or if these
requirements would be satisfied only by direct and indirect ownership and control by Panamanian
beneficial owners.
At the present time, Corporación de Inverstiones Aereas, S.A., or CIASA, a Panamanian entity,
is the record owner of all of our Class B voting shares, representing approximately 29.1% of our
total share capital and all of the voting power of our capital stock.
On November 25, 2005, the Executive Branch of the Government of Panama promulgated a decree
stating that the substantial ownership and effective control requirements of the Aviation Act
are met if a Panamanian citizen or a Panamanian company is the record holder of shares representing
51% or more of the voting power of the company. Although the decree has the force of law for so
long as it remains in effect, it does not supersede the Aviation Act, and it can be modified or
superseded at any time by a future Executive Branch decree. Additionally, the decree has no binding
effect on regulatory authorities of other countries whose bilateral agreements impose Panamanian
ownership and control limitations on us. We cannot assure you that the decree will not be
challenged, modified or superseded in the future, that CIASA will continue to own a majority of the
Class B shares, or that record ownership of a majority of our Class B shares by Panamanian entities
will be sufficient to satisfy the substantial ownership requirement of the Aviation Act and the
decree. A change in the ownership of the Class B shares or a determination by the Panamanian Civil
Aviation Authority (the Autoridad de Aeronáutica Civil), which we refer to as the AAC, or a
Panamanian court that substantial Panamanian ownership should be determined on the basis of our
direct and indirect ownership, could cause us to lose our license to operate our airline in Panama.
Likewise, if a foreign regulatory authority were to determine that our direct or indirect
Panamanian ownership fails to satisfy the minimum Panamanian ownership requirements for a
Panamanian carrier under the applicable bilateral agreement, we may lose the benefit of that
agreement and be prohibited from flying to the relevant country or over its territory. Any such
determination would have a material adverse effect on our business, financial condition and results
of operations, as well as on the value of the Class A shares.
Our business is subject to extensive regulation which may restrict our growth or our operations or
increase our costs.
Our business, financial condition and results of operations could be adversely affected if we
or certain aviation authorities in the countries to which we fly fail to maintain the required
foreign and domestic governmental authorizations necessary for our operations. In order to maintain
the necessary authorizations issued by the AAC, the Colombian Civil Aviation Administration (the
Unidad Administrativa Especial de Aeronáutica Civil or UAEAC), and other corresponding foreign
authorities, we must continue to comply with applicable statutes, rules and regulations pertaining
to the airline industry, including any rules and regulations that may be adopted in the future. We
cannot predict or control any actions that the AAC, the UAEAC, 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, the UAEAC, and the
regulators of certain other countries to which we fly, any of which may in the future impose
restrictions on our fares.
7
We are also subject to international bilateral air transport agreements that provide for the
exchange of air traffic rights between each of Panama and Colombia, and various other countries,
and we must obtain permission
from the applicable foreign governments to provide service to foreign destinations. There can
be no assurance that existing bilateral agreements between the countries in which our airline
operating companies are based and foreign governments will continue, or that we will be able to
obtain more route rights under those agreements to accommodate our future expansion plans. A
modification, suspension or revocation of one or more bilateral agreements could have a material
adverse effect on our business, financial condition and results of operations. The suspension of
our permits to operate to certain airports or destinations, the cancellation of any of our
provisional routes or the imposition of other sanctions could also have a material adverse effect.
Due to the nature of bilateral agreements, we can fly to many destinations only from Panama, and to
certain destinations only from Colombia. 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 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, security measures, 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. Since April 2004, IASA has rated Panama as a Category 1 jurisdiction. 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. In addition, at its current utilization
level, Tocumen International Airport only has fuel storage capacity for three days worth of fuel.
In the event there is a disruption in the transport of fuel to the airport, we may be forced to
suspend flights until the fuel tanks can be refueled. A significant interruption or disruption in
service or fuel 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 3.5 million, whereas
the hub markets of our current competitors tend to be much larger, providing those competitors with
a larger base of customers at their hub.
8
Tocumen International Airport is operated by a corporation that is owned and controlled by the
government of the Republic of Panama. We depend on our good working relationship with the
quasi-governmental corporation that operates 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, we
do not have contractual recourse in the event the airport authority assigns new capacity to
competing airlines, reassigns our resources to other aircraft operators, raises fees or
discontinues investments in the airports maintenance and expansion. Any of these events could
result in significant new competition for our routes or could otherwise have a material adverse
effect on our current operations or ability for future growth.
We are exposed to increases in landing charges and other airport access fees and cannot be assured
access to adequate facilities and landing rights necessary to achieve our expansion plans.
We must pay fees to airport operators for the use of their facilities. Any substantial
increase in airport charges could have a material adverse impact on our results of operations.
Passenger taxes and airport charges have also increased in recent years, sometimes substantially.
Certain important airports that we use may be privatized in the near future which is likely to
result in significant cost increases to the airlines that use these airports. We cannot assure you
that the airports used by us will not impose, or further increase, passenger taxes and airport
charges in the future, and any such increases could have an adverse effect on our financial
condition and results of operations.
Certain airports that we serve (or that we plan to serve in the future) are subject to
capacity constraints and impose slot restrictions during certain periods of the day. We cannot
assure you that we will be able to obtain a sufficient number of slots, gates and other facilities
at airports to expand our services as we are proposing to do. It is also possible that airports not
currently subject to capacity constraints may become so in the future. In addition, an airline must
use its slots on a regular and timely basis or risk having those slots re-allocated to others.
Where slots or other airport resources are not available or their availability is restricted in
some way, we may have to amend our schedules, change routes or reduce aircraft utilization. Any of
these alternatives could have an adverse financial impact on us.
Some of the airports to which we fly impose various restrictions, including limits on aircraft
noise levels, limits on the number of average daily departures and curfews on runway use. In
addition, we cannot assure you that airports at which there are no such restrictions may not
implement restrictions in the future or that, where such restrictions exist, they may not become
more onerous. Such restrictions may limit our ability to continue to provide or to increase
services at such airports.
We have significant fixed financing costs and expect to incur additional fixed costs as we expand
our fleet.
The airline business is characterized by high leverage, and we have a high level of
indebtedness. We also have significant expenditures in connection with our operating leases and
facility rental costs, and substantially all of our property and equipment is pledged to secure
indebtedness. For the year ended December 31, 2009, our interest expense and aircraft and facility
rental expense under operating leases aggregated $94.0 million. At December 31, 2009, approximately
49% 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 December 31, 2009, we had firm commitments to purchase 29 Boeing 737-Next Generation,
with an aggregate manufacturers list price of approximately $2.3 billion. We will require
substantial capital from external sources to meet our future financial commitments. The credit
crisis and the related recessionary environment has increased and may continue to increase the
costs of such financing. In addition, the acquisition and financing of these aircraft will likely
result in a substantial increase in our leverage and fixed financing costs. A high degree of
leverage and fixed payment obligations could:
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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.
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 fail to successfully take delivery of or reliably operate new aircraft, our business could be
harmed.
In 2010, we expect to take delivery of eight Boeing 737-800 and we expect to continue to
incorporate new aircraft into our fleet. The decision to incorporate new aircraft is based on a
variety of factors, including the implementation of our growth strategy. Acquisition of new
aircraft involves a variety of risks relating to its ability to be successfully placed into service
including:
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manufacturers delays in meeting the agreed upon aircraft delivery schedule; |
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difficulties in obtaining financing on acceptable terms to complete our purchase
of all of the aircraft we have committed to purchase; and |
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the inability of new aircraft and their components to comply with agreed upon
specifications and performance standards. |
In addition, our fleet includes 26 Embraer 190 aircraft, which is a relatively new aircraft to the
industry. Although we have not had significant problems with this aircraft, we cannot predict the
reliability of the Embraer aircraft as the aircraft age.
If we fail to successfully take delivery of or reliably operate new aircraft, our business,
financial condition and results of operations could be harmed.
10
If we were to determine that our aircraft, rotable parts or inventory were impaired, it would have
a significant adverse effect on our operating results.
We perform impairment reviews when there are particular risks of impairment or other
indicators described in Statement of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, in order to determine whether we need to reduce the
carrying value of our aircraft and related assets with a related charge to our earnings. In
addition to the fact that the value of our fleet declines as it ages, any potential excess capacity
in the airline industry, airline bankruptcies and other factors beyond our control may further
contribute to the decline of the fair market value of our aircraft and related rotable parts and
inventory. If such impairment does occur, we would be required under U.S. GAAP to write down these
assets to their estimated fair market value through a charge to earnings. A significant charge to
earnings would adversely affect our financial condition and operating results. In addition, the
interest rates on and the availability of certain of our aircraft financing loans are tied to the
value of the aircraft securing the loans. If those values were to decrease substantially, our
interest rates may rise or the lenders under those loans may cease extending credit to us, either
of which could have an adverse impact on our financial condition and results of operations.
We rely on information technology systems, and we may become more dependent on such systems in the
future.
We rely upon information technology systems to operate our business and increase our
efficiency. We are highly reliant on certain systems for maintenance, reservations, check-in,
revenue management, accounting and cargo distribution. Other systems are designed to decrease
distribution costs through Internet reservations and to maximize cargo distributions. These systems
may not deliver their anticipated benefits. Also, in transitioning to new systems we may lose data
or experience interruptions in service, which could harm our business.
Our quarterly results can fluctuate substantially, and the trading price of our Class A shares may
be affected by such variations.
The airline industry is by nature cyclical and seasonal, and our operating results may vary
from quarter to quarter. We tend to experience the highest levels of traffic and revenue in July
and August, with a smaller peak in traffic in December and January. In general, demand for air
travel is higher in the third and fourth quarters, particularly in international markets, because
of the increase in vacation travel during these periods relative to the remainder of the year. We
generally experience our lowest levels of passenger traffic in April and May. Given our high
proportion of fixed costs, seasonality can affect our profitability from quarter to quarter. Demand
for air travel is also affected by factors such as economic conditions, war or the threat of war,
fare levels and weather conditions.
Due to the factors described above and others described in this annual report,
quarter-to-quarter comparisons of our operating results may not be good indicators of our future
performance. In addition, it is possible that in any quarter our operating results could be below
the expectations of investors and any published reports or analyses regarding our company. In that
event, the price of our Class A shares could decline, perhaps substantially.
Our reputation and financial results could be harmed in the event of an accident or incident
involving our aircraft.
An accident or incident involving one of our aircraft could involve significant claims by
injured passengers and others, as well as significant costs related to the repair or replacement of
a damaged aircraft and its temporary or permanent loss from service. We are required by our
creditors and the lessors of our aircraft under our operating lease agreements to carry liability
insurance, but the amount of such liability insurance coverage may not be adequate and we may be
forced to bear substantial losses in the event of an accident. Our insurance premiums may also
increase due to an accident or incident affecting one of our aircraft. Substantial claims resulting
from an accident in excess of our related insurance coverage or increased premiums would harm our
business and financial results. Moreover, any aircraft accident or incident, even if fully insured,
could cause the public to perceive us as less safe or reliable than other airlines which could harm
our business and results of operations. Our business would also be significantly harmed if the
public avoids flying our aircraft due to an adverse perception of the types of aircraft that we
operate arising from safety concerns or other problems, whether real or perceived, or in the event
of an accident involving those types of aircraft.
11
Fluctuations in foreign exchange rates could negatively affect our net income.
In 2009, approximately 71.0% of our expenses and 43.4% of our revenues were denominated in
U.S. dollars. The remainder of our expenses and revenues were denominated in the currencies of the
various countries to which we fly, with the largest non-dollar amount denominated in Colombian
Pesos due to our acquisition of AeroRepública in April 2005. If any of these currencies decline in
value against the U.S. dollar, our revenues, expressed in U.S. dollars, and our operating margin
would be adversely affected. We may not be able to adjust our fares denominated in other currencies
to offset any increases in U.S. dollar-denominated expenses, increases in interest expense or
exchange losses on fixed obligations or indebtedness denominated in foreign currency. We currently
have hedges in place with respect to some of our U.S. dollar / Colombian Peso exposure.
We are also exposed to exchange rate losses, as well as gains, due to the fluctuation in the
value of local currencies vis-à-vis the U.S. dollar during the period of time between the time we
are paid in local currencies and the time we are able to repatriate the revenues in U.S. dollars.
Although in most countries to which we fly this period is typically between one and two weeks, in
Venezuela, foreign companies, including airlines, have experienced increasing delays for approvals
by the Venezuelan government to repatriate funds. We have significant cash balances in Bolivars
subject to Venezuelan exchange controls. In recent periods, we have experienced up to a nine month
delay in repatriating funds. On January 8, 2010, the Venezuelan government announced its decision
to implement new fixed exchange rates effective January 11, 2010, which resulted in a significant
devaluation of the Bolivar against the U.S. dollar. As a result, we incurred losses of
approximately $21 million, which will be recorded in the first quarter of 2010 in accordance with
US GAAP. Given the uncertainty with respect to the exchange control regime in Venezuela, we
continue to be exposed in respect of our cash balance in Venezuelan Bolivares should there be a
further devaluation of the Bolivar.
Our maintenance costs will increase as our fleet ages.
The average age of our fleet was approximately 4.6 years as of December 31, 2009. In recent
years, our fleet average age has decreased significantly, mainly as a result of AeroRepúblicas
fleet renewal program which has replaced older MD-80 aircraft with new Embraer-190 aircraft. In
past years we have incurred a low level of maintenance expenses because most of the parts on our
aircraft were still covered under multi-year warranties. As our fleet ages and these warranties
expire, we expect that our maintenance costs will increase significantly, both on an absolute basis
and as a percentage of our operating expenses.
If we enter into a prolonged dispute with any of our employees, many of whom are represented by
unions, or if we are required to increase substantially the salaries or benefits of our employees,
it may have an adverse impact on our operations and financial condition.
Approximately 49% of the Companys employees belong to a labor union. There are currently five
unions covering our Copa employees based in Panama: the pilots union; the flight attendants
union; the mechanics union; the traffic attendants union; and a generalized union, which
represents baggage handlers, aircraft cleaners, counter agents, and other non-executive
administrative staff. Copa entered into collective bargaining agreements with its mechanics union
in April 2009, its general union in July 2008, its pilot union in November 2007 and its flight
attendants union in March 2010. Collective bargaining agreements in Panama are typically between
three and four year terms. We also have union contracts with our Copa employees in Brazil and Mexico.
AeroRepública is a party to collective bargaining agreements that cover all of AeroRepúblicas
pilots, co-pilots, and 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. 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.
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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 revenues depend on our relationship with travel agents and tour operators.
In 2009, approximately 52% 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, most of our below the
wing aircraft services are performed by third party contractors. Overhaul maintenance and
C-checks are handled by contractors in the United States, Panama and Costa Rica, and some line
maintenance 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.
We are subject to the risks of having a limited number of suppliers for our aircraft and
engines. One of the elements of our business strategy is to save costs by operating a simplified
aircraft fleet. Copa currently operates the Boeing 737-700/800 Next Generation aircraft powered by
CFM 56-7B engines from CFM International and the Embraer 190, powered by General Electric CF 34-10
engines. AeroRepública currently operates the Embraer 190, powered by General Electric CF 34-10
engines . 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.
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Our business would be significantly harmed if a design defect or mechanical problem with any
of the types of aircraft or components that we operate were discovered that would ground any of our
aircraft while the defect or problem was corrected, assuming it could be corrected at all. The use
of our aircraft could be suspended or restricted by regulatory authorities in the event of any
actual or perceived mechanical or design problems. Our business would also be significantly harmed
if the public began to avoid flying with us due to an adverse perception of the types of aircraft
that we operate stemming from safety concerns or other problems, whether real or perceived, or in
the event of an accident involving those types of aircraft or components.
We also depend on limited suppliers with respect to supplies obtained locally, such as our
fuel supply. These local suppliers may not be able to maintain the pace of our growth and our
requirements may exceed their capabilities, which may adversely affect our ability to execute our
growth strategy
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, Daniel Gunn, our Chief Operating
Officer, and Joe Mohan our Vice-President of Commercial and Planning. Competition for highly
qualified personnel is intense, and the loss of any executive officer, senior manager or other key
employee without adequate replacement or the inability to attract new qualified personnel could
have a material adverse effect upon our business, operating results and financial condition.
Our operations in Cuba, which has been identified by the U.S. Department of State as a state
sponsor of terrorism, may adversely affect our reputation and the liquidity and value of our Class
A shares.
We currently operate approximately eight daily departures to and from Cuba which provide
passenger, cargo and mail transportation service. For the year ended December 31, 2009, our
transported passengers to and from Cuba represented approximately 5.4% of our total passengers
carried. Our operating revenues from Cuban operations during the year ended December 31, 2009
represented approximately 7.1% of our total consolidated operating revenues for such year. Our
assets located in Cuba are insignificant.
Cuba has been identified by the United States government as a state sponsor of terrorism, and
the U.S. Treasury Departments Office of Foreign Assets Control (OFAC) administers and enforces
economic and trade sanctions based on U.S. foreign policy against Cuba and certain other targeted
foreign countries. You should understand that our overall business reputation may suffer as a
result of our activities in Cuba, particularly if such activities grow in the future. Certain U.S.
states have recently enacted legislation regarding investments by pension funds and other
retirement systems in companies, such as ours, that have business activities with Cuba and other
countries that have been identified as terrorist-sponsoring states. Similar legislation may be
pending in other states. As a result, pension funds and other retirement systems may be subject to
new reporting requirements and other burdensome restrictions with respect to investments in
companies such as ours. Pension funds and similar institutions represent an important source of
demand for our shares, and if their willingness to invest in and hold our shares were to diminish
as a result of any such requirements or restrictions, or for any other reason, it would likely have
a material adverse effect on the liquidity and value of our Class A shares.
Risks Relating to the Airline Industry
The airline industry is highly competitive.
We face intense competition throughout our route network. Overall airline industry profit
margins are low and industry earnings are volatile. Airlines compete in the areas of pricing,
scheduling (frequency and flight times), on-time performance, frequent flyer programs and other
services. 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.
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We compete with a number of other airlines that currently serve some of the routes on which we
operate, including American Airlines, Delta Air Lines, Mexicana and Avianca-Taca Limited
(Avianca-Taca), the entity created by the recent merger of two of our competitors, Aerovías del
Continente Americano S.A. (Avianca) and Grupo Taca. AeroRepúblicas results of operations, in
particular, are highly sensitive to competitive conditions in the Colombian domestic air travel
market. AeroRepúblicas rapid growth in recent years occurred during a period in which the
domestic market leader, Avianca, experienced severe financial difficulties that resulted in its
bankruptcy and the exit from the market of several other competitors. Avianca emerged from
bankruptcy with new management and an improved financial condition and recently consummated a
merger with Grupo Taca. In addition, Aerovías de Integración Regional, or Aires, a low-cost carrier
based in Bogotá, Colombia, has recently captured a significant portion of the domestic market in
Colombia. 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.
We must constantly react to changes in prices and services offered by our competitors to
remain competitive. The airline industry is highly susceptible to price discounting, particularly
because airlines incur very low marginal costs for providing service to passengers occupying
otherwise unsold seats. Carriers use discount fares to stimulate traffic during periods of lower
demand to generate cash flow and to increase market share. Any lower fares offered by one airline
are often matched by competing airlines, which often results in lower industry yields with little
or no increase in traffic levels. Price competition among airlines in the future could lead to
lower fares or passenger traffic on some or all of our routes, which could negatively impact our
profitability. We cannot assure you that any of our competitors will not undercut our fares in the
future or increase capacity on routes in an effort to increase their respective market share.
Although we intend to compete vigorously and to assert our rights against any predatory conduct,
such activity by other airlines could reduce the level of fares or passenger traffic on our routes
to the point where profitable levels of operations could not be maintained. Due to our smaller size
and financial resources compared to several of our competitors, we may be less able to withstand
aggressive marketing tactics or fare wars engaged in by our competitors should such events occur.
We may face increasing competition from low-cost carriers offering discounted fares.
Traditional hub-and-spoke carriers in the United States and Europe continue to face
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 or Gol, which
continues to grow both in Brazil as well as in other South American countries, Spirit, which serves
Latin America from Fort Lauderdale, JetBlue, which flies from Orlando to Bogota, Aires, which
recently has expanded aggressively in the domestic Colombian market and introduced flights between
Bogota and Fort Lauderdale, and a number of low-cost carriers which operate within 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 32.0% of our operating expenses in 2007, 38.0% in 2008 and 29.2% in 2009. Fuel prices
reached record levels during the middle of 2008, but decreased substantially in the second half of
2008. 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. If a
future fuel supply shortage were to arise as a result of production curtailments by the
Organization of the Petroleum Exporting Countries, or OPEC, a disruption of oil imports, supply
disruptions resulting from severe weather or natural disasters, the continued unrest in Iraq,
other conflicts in the Middle East or otherwise, higher fuel prices or further reductions of
scheduled airline services could result. We cannot assure you that we would be able to offset any
increases in the price of fuel by increasing our fares.
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We routinely enter into derivative contracts for a portion of our fuel needs to protect
against rising fuel costs, although in recent periods, we have entered into such arrangements on a
much more selective basis. These agreements provide only limited protection against increases in
the price of fuel or our counterparties inability to perform under the agreement, can be less
effective during volatile market conditions and may be unavailable to us in the event of a
deterioration in our financial condition. Because of the large volume of jet fuel that we consume
in our business, entering into derivative contracts for any substantial portion of our future
projected fuel requirements is costly. Fuel prices are likely to increase above their current
levels and may do so in the near future, which could materially and negatively affect our operating
results. Conversely, declines in fuel prices (such as those experienced in the last six months of
2008) may increase the costs associated with our fuel hedging arrangements to the extent we have
entered into swaps or collars. Swaps and put options sold as part of a collar obligate us to make
payments to the counterparty upon settlement of the contracts if the price of the commodity hedged
falls below the agreed upon amount. Historically, declining crude oil prices have resulted in our
being required to post significant amounts of collateral to cover potential amounts owed with
respect to swap and collar contracts that have not yet settled. Additionally, lower fuel prices
may result in lower fares through the reduction or elimination of fuel surcharges.
We may experience difficulty finding, training and retaining pilots and other employees.
In previous years, the airline industry has experienced a sustained pilot shortage caused by
extraordinary air traffic growth in the Persian Gulf, China and India; the rise of lucrative
low-cost carriers in Europe and Asia; and the sustained recovery of the U.S. airlines from the
industry recession caused by the September 11 terrorist attacks. This worldwide shortage of pilots
disproportionately affects smaller and regional carriers. Our need for qualified pilots has caused
us to hire a substantial number of non-Panamanian national pilots. We cannot assure you that we
will continue to attract or obtain government approvals for such pilots. Although the current
recessionary environment has provided some relief to the pilot shortage, as economies improve, the
inability to attract and retain pilots may adversely affect our growth strategy by limiting our
ability to add new routes or increase the frequency of existing routes.
The airline industry is a labor-intensive business. We employ a large number of flight
attendants, maintenance technicians and other operating and administrative personnel. The airline
industry has, from time to time, experienced a shortage of qualified personnel. In addition, as is
common with most of our competitors, we may, from time to time, face considerable turnover of our
employees. Should the turnover of employees sharply increase, our training costs will be
significantly higher. We cannot assure you that we will be able to recruit, train and retain the
qualified employees that we need to continue our current operations or replace departing employees.
A failure to hire and retain qualified employees at a reasonable cost could materially adversely
affect our business, financial condition and results of operations.
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.
In recent years, 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. In addition, air carriers
involved in reorganizations have historically undertaken substantial fare discounting in order
to maintain cash flows and to enhance continued customer loyalty. Such fare discounting could
further lower yields for all carriers, including us. Further, the market value of aircraft would
likely be negatively impacted if a number of air carriers seek to reduce capacity by eliminating
aircraft from their fleets.
Our business may be adversely affected by downturns in the airline industry caused by terrorist
attacks, war or outbreak of disease, which may alter travel behavior or increase costs.
Demand for air transportation may be adversely affected by terrorist attacks, war or political
and social instability, epidemics, natural disasters and other events. Any of these events in the
markets in which we operate could have a material impact on our business, financial condition and
results of operations. Furthermore, these types of situations could have a prolonged effect on air
transportation demand and on certain cost items.
The terrorist attacks in the United States on September 11, 2001, for example, have had a
severe and lasting adverse impact on the airline industry. Airline traffic in the United States
fell dramatically after the attacks and decreased less severely throughout Latin America. The
repercussions of September 11th, including increases in security, insurance and fear of similar
attacks, continue to affect us and the airline industry. Our revenues depend on the number of
passengers traveling on our flights. Therefore, any future terrorist attacks or threat of attacks,
whether or not involving commercial aircraft, any increase in hostilities relating to reprisals
against terrorist organizations, including an escalation of military involvement in the Middle
East, or otherwise and any related economic impact could result in decreased passenger traffic and
materially and negatively affect our business, financial condition and results of operations.
Public health threats, such as the H1N1 flu virus, the bird flu, Severe Acute Respiratory
Syndrome (SARs) and other highly communicable diseases, affect travel behavior and could have a
material adverse effect on the industry. During the second quarter of 2009, passenger traffic was
negatively affected as a result of the H1N1 flu crisis, which resulted in lower overall demand for
intra-Latin America travel, especially to and from Mexico. Although we quickly responded to the
crisis by reducing capacities to Mexico and the H1NI flu situation normalized by July 2009, we
cannot assure you that the adverse effects of future outbreaks of H1NI or other such health threats
will be able to be similarly contained. It is impossible to determine if and when such health
threats, or perceived health threats, will occur, when the resulting adverse effects will abate and
the extent to which they will further decrease demand for air travel, which could materially and
negatively affect our business, financial condition and results of operations.
Increases in insurance costs and/or significant reductions in coverage would harm our business,
financial condition and results of operations.
Following the 2001 terrorist attacks, premiums for insurance against aircraft damage and
liability to third parties increased substantially, and insurers could reduce their coverage or
increase their premiums even further in the event of additional terrorist attacks, hijackings,
airline crashes or other events adversely affecting the airline industry abroad or in Latin
America. In the future, certain aviation insurance could become unaffordable, unavailable or
available only for reduced amounts of coverage that are insufficient to comply with the levels of
insurance coverage required by aircraft lenders and lessors or applicable government regulations.
While governments in other countries have agreed to indemnify airlines for liabilities that they
might incur from terrorist attacks or provide low-cost insurance for terrorism risks, the
Panamanian government has not indicated an intention to provide similar benefits to us. Increases
in the cost of insurance may result in both higher fares and a decreased demand for air travel
generally, which could materially and negatively affect our business, financial condition and
results of operations.
Failure to comply with applicable environmental regulations could adversely affect our business.
Our operations are covered by various local, national and international environmental
regulations. These regulations cover, among other things, emissions to the atmosphere, disposal of
solid waste and aqueous effluents, aircraft noise and other activities that result from the
operation of aircraft. Future operations and financial results may vary as a result of such
regulations. Compliance with these regulations and new or existing regulations that
may be applicable to us in the future could increase our cost base and adversely affect our
operations and financial results.
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Risks Relating to Panama and our Region
We are highly dependent on conditions in Panama and, to a lesser extent, in Colombia.
A substantial portion of our assets are located in the Republic of Panama, 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. Political events in Panama may significantly affect our
operations. Although the Panamanian government is democratically elected and the Panamanian
political climate is currently stable, Panamanian elections were held in 2009, we cannot assure you
that current conditions will continue under the new administration.
During the second quarter of 2005, we completed our acquisition of AeroRepública. Most 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 in recent decades. Although the state of
affairs in Colombia has been steadily improving since 2002, continuing guerrilla activity, among
other factors, could cause a renewal of 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.
Although the economies of Panama and Colombia fared comparatively well during 2009, many of
the countries we serve are experiencing either economic slowdowns or recessions, which have
translated into a weakening of demand and may have an adverse effect on our business in the future.
According to International Monetary Fund estimates, both the Panamanian and Colombian economies
are expected to grow in 2010, however, if either economy experiences a sustained recession, or
significant political disruptions, our business, financial condition and results of operations
could be materially and negatively affected.
Any increase in the taxes we or our shareholders pay in Panama or the other countries where we do
business could adversely affect the value of our Class A shares.
We cannot assure you that we will continue to pay taxes at the current rate. Our provision for
income taxes was $17.1 million, $17.5 million and $19.6 million in the years ended December 31,
2007, 2008 and 2009, which represented an effective income tax rate of 9.6%, 12.8% and 7.5% 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 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 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 34% of income. Different countries calculate income in different
ways, but they are typically derived from sales in the applicable country multiplied by our net
margin or by a presumed net margin set by the relevant tax legislation. The determination of our
taxable income in certain countries is based on a combination of revenues sourced to each
particular country and the allocation of expenses of our operations to that particular country. The
methodology for multinational transportation company sourcing of 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. If taxes
were to increase, our financial performance and results of operations could be materially and
adversely affected. Due to the competitive
revenue environment, many increases in fees and taxes have been absorbed by the airline
industry rather than being passed on to the passenger. Any such increases in our fees and taxes
may reduce demand for air travel and thus our revenues.
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We have elected to calculate our Panamanian income tax with the gross tax method based on
Article 121 of the Panamanian Fiscal Code (as defined in Item 5A. Operating Results Subsequent Events), under which 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. If the
Panamanian tax authorities do not agree with our methods of allocating revenues, we may be subject
to additional tax liability. Dividends from our Panamanian subsidiaries, including Copa, are
separately subject to a 10% percent withholding tax on the portion attributable to Panamanian
sourced income and a 5% withholding tax on the portion attributable to foreign sourced income.
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.
In addition, Law 8
of 2010 (the Tax Reform), which modifies material sections of
the Panamanian Fiscal Code was approved and became effective on March 15, 2010. As a
result of this reform package, the airline industry will be subject to higher tax rates than
it has paid in the past. We estimate, however, that we will benefit from certain tax credits
in respect to taxes paid in foreign jurisdictions in 2010 and on a going-forward basis. We,
therefore, anticipate that our effective tax rate for the immediate future will remain within
the historical range of the past five years. As a result, we do not believe this tax reform is
likely to have a material adverse effect on our financial position, results of operations and cash
flows. Any future change in the Panamanian tax law increasing the taxes payable by us could have
materially adverse effects on our business, financial condition and
result of operations.
Political unrest and instability in Latin American countries to which we fly may adversely affect
our business and the market price of our Class A shares.
While geographic diversity helps to reduce our exposure to risks in any one country, we
operate primarily within Latin America and are subject to a full range of risks associated with our
international operations. These risks may include unstable political or economic conditions, lack
of well-established or reliable legal systems, exchange controls and other limits on our ability to
repatriate earnings and changeable legal and regulatory requirements. Although conditions
throughout Latin America vary from country to country, our customers reactions to developments in
Latin America generally may result in a reduction in passenger traffic, which could materially and
negatively affect our financial condition, results of operations and the market price of our Class
A shares.
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.
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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.
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 29.1% 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 supplemental 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 CIASA could cause the price of the Class A shares
to decrease.
CIASA owns all of our Class B shares, and those Class B shares will be converted into Class A
shares if they are sold to non-Panamanian investors. In connection with our initial public offering
in December 2005, Continental and CIASA reduced their ownership of our total capital stock from 49%
to approximately 27.3% and from 51% to approximately 29.2%, respectively. In a follow-on offering
in June 2006, Continental further reduced its ownership of our total capital stock from 27.3% to
10.0%. In May 2008, we, and CIASA, released Continental from its standstill obligations and they
sold down their remaining shares in the public market. CIASA holds registration rights with respect
to a significant portion of its shares pursuant to a registration rights agreement entered into in
connection with our initial public offering. The market price of our Class A shares could drop
significantly if CIASA further reduces its investment in us, other significant holders of our
shares sell a significant number of shares or if the market perceives CIASA or other significant
holders intend to sell them.
20
Holders of our common stock are not entitled to preemptive rights, and as a result you may
experience substantial dilution upon future issuances of stock by us.
Under Panamanian law and our organizational documents, holders of our Class A shares are not
entitled to any preemptive rights with respect to future issuances of capital stock by us.
Therefore, unlike companies organized under the laws of many other Latin American jurisdictions, we
will be free to issue new shares of stock to other
parties without first offering them to our existing shareholders. In the future we may sell
Class A or other shares to persons other than our existing shareholders at a lower price than the
shares already sold, and as a result you may experience substantial dilution of your interest in
us.
You may not be able to sell our Class A shares at the price or at the time you desire because an
active or liquid market for the Class A shares may not continue.
Our Class A shares are listed on the NYSE. During the three months ended December 31, 2009,
the average daily trading volume for our Class A shares as reported by the NYSE was approximately
252,084 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 in an amount ranging from 10% to 20% 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. On February 10, 2010, for example, our Board of Directors amended the dividend
policy to increase the level of dividends to its current range. 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 in amounts ranging from 10% to 20% of our annual consolidated net income.
Our Board of Directors has also reserved the right to amend the dividend policy, or pay dividends
in excess of the level circumscribed in the dividend policy. The aviation industry has cyclical
characteristics, and many international airlines are currently experiencing difficulties meeting
their liquidity needs. Also, our business strategy contemplates 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, or in excess of, our dividend policy, the money that we
distribute to shareholders will not be available to us to fund future growth and meet our other
liquidity needs.
Our Articles of Incorporation impose ownership and control restrictions on our company 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 the past (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 Airlines was terminated by mutual consent.
22
On May 6, 1998, Copa Holdings, the holding company for Copa and related companies was
incorporated as a sociedad anónima under the laws of Panama to facilitate the sale by CIASA of a
49% stake in Copa Holdings to Continental. In connection with Continentals investment, we entered
into an extensive alliance agreement with
Continental providing for code-sharing, joint marketing, technical exchanges and other
cooperative initiatives between the airlines. At the time of our initial public offering in
December 2005, Continental reduced its ownership of our total capital stock from 49% to
approximately 27.3%. In a follow-on offering in June 2006, Continental further reduced its
ownership of our total capital stock from 27.3% to 10.0%. In May 2008, Continental sold its
remaining shares in the public market.
Since 1998, we have grown and modernized our fleet while improving customer service and
reliability. Copa has expanded its fleet from 13 aircraft to 44 aircraft. In 1999, we received our
first Boeing 737-700s, in 2003 we received our first Boeing 737-800s, and in 2005 we received our
first Embraer 190. In the first quarter of 2005, we completed our fleet renovation program and
discontinued use of our last Boeing 737-200s. During the second quarter of 2005, we purchased
AeroRepública, the second-largest domestic air carrier in Colombia in terms of number of passengers
carried each year since 2005. During this same period, we have expanded from 24 destinations in 18
countries to 45 destinations in 24 countries. We plan to continue our expansion, which includes
increasing our fleet, over the next several years.
Our principal executive offices are located at Boulevard Costa del Este, Avenida Principal y
Avenida de la Rotonda, Urbanización Costa del Este, Complejo Business Park, Torre Norte, Parque
Lefevre, Panama City, Panama and our telephone number is +507 304-2677. The website of Copa is
www.copaair.com. AeroRepública maintains a website at www.aerorepublica.com.co. Information
contained on, or accessible through, these websites is not incorporated by reference herein and
shall not be considered part of this annual report. Our agent for service in the United States is
Puglisi & Associates, 850 Library Avenue, Suite 204, Newark, Delaware 19715, and its telephone
number is (302) 738-6680.
Capital Expenditures
During 2009, our capital expenditures were $202.7 million, which consisted primarily of
expenditures related to our purchase of one Boeing 737-800 aircraft, as well as to expenditures
related to advance payments on aircraft purchase contracts. During 2008, our capital expenditures
were $215.9 million, which consisted primarily of expenditures related to our purchase of four
Embraer 190 aircraft and one Boeing 737-800 aircraft, as well as to expenditures related to advance
payments on aircraft purchase contracts. During 2007, our capital expenditures were $366.1 million,
which consisted primarily of expenditures related to our purchase of nine Embraer 190 aircraft and
two Boeing 737-800 aircraft, as well as to expenditures related to advance payments on aircraft
purchase contracts.
B. Business Overview
We are a leading Latin American provider of airline passenger and cargo service through our
two principal operating subsidiaries, Copa and AeroRepública. Copa operates from its strategically
located position in the Republic of Panama, and AeroRepública provides service primarily within
Colombia complemented by international flights from various cities in Colombia to Panama, Venezuela
and Ecuador. We currently operate a fleet of 58 aircraft, 32 Boeing 737-Next Generation aircraft
and 26 Embraer 190 aircraft. We currently have firm orders, including purchase and lease
commitments, for 26 Boeing 737-Next Generation, and purchase rights and options for up to eight
additional Boeing 737-Next Generation and 11 additional Embraer 190s.
Copa currently offers approximately 152 daily scheduled flights among 45 destinations in 24
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 32 Boeing 737-Next Generation aircraft and 13 Embraer 190
aircraft. To meet its growing capacity requirements, Copa has firm orders, including purchase and
lease commitments, to accept delivery of 26 additional aircraft through 2015 and has purchase
rights and options that, if exercised, would allow it to accept delivery of up to 14 additional
aircraft through 2017. Copas firm orders, including purchase and lease commitments, are for 26
additional Boeing 737-Next Generation aircraft, and its purchase rights and options are for up to
eight Boeing 737-Next Generation aircraft and up to six 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.
In 2007, Copa joined the SkyTeam global alliance as an Associate Member, in part due to the
support and sponsorship of Continental. Continental Airlines left the SkyTeam Alliance and joined
the Star Alliance effective the fourth quarter of 2009. Due to the long-standing alliance
relationship with Continental, and in order to ensure Copa remains fully aligned with Continental
on a number of important joint initiatives, Copa also exited the SkyTeam Alliance during the fourth
quarter of 2009. Copa is considering various new alliance options to compliment its current
portfolio of alliance partnerships.
During the second quarter of 2005, we purchased AeroRepública, the second-largest domestic
carrier in Colombia in terms of number of passengers carried in 2005, which at the time provided
point-to-point service among 11 cities in Colombia. AeroRepública currently operates a fleet of 13
Embraer 190. As part of its fleet expansion plan, AeroRepública has options to purchase up to five
additional Embraer 190 aircraft through 2013.
Since January 2001, we have grown significantly and have established a track record of
consistent profitability. Our total operating revenues have increased from $290.4 million in 2001
to $1.3 billion in 2009, while our operating margins have also increased from 8.6% to 17.8% over
the same period.
Our Strengths
We believe our primary business strengths that have allowed us to compete successfully in the
airline industry include the following:
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Our Hub of the Americas airport is strategically located. We believe that Copas base
of operations at the geographically central location of Tocumen International Airport in
Panama City, Panama provides convenient connections to our principal markets in North,
Central and South America and the Caribbean, enabling us to consolidate traffic to serve
several destinations that do not generate enough demand to justify point-to-point service.
Flights from Panama operate with few service disruptions due to weather, contributing to
high completion factors and on-time performance. Tocumen International Airports sea-level
altitude allows our aircraft to operate without performance restrictions that they would be
subject to at higher-altitude airports. We believe that Copas hub in Panama allows us to
benefit from Panama Citys status as a center for financial services, shipping and commerce
and from Panamas stable, dollar-based economy, free-trade zone and growing tourism. |
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We focus on keeping our operating costs low. In recent years, our low operating costs
and efficiency have contributed significantly to our profitability. Our operating cost per
available seat mile, excluding costs for fuel and fleet impairment charges, was 6.53 cents
in 2005, 6.81 cents in 2006, 7.13 cents in 2007, 7.46 in 2008, and 7.36 in 2009. 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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We operate a modern fleet. Our fleet consists of modern Boeing 737-Next Generation and
Embraer 190 aircraft equipped with winglets and other modern cost-saving and safety
features. Over the next several years, we intend to enhance our modern fleet through the
addition of at least 28 additional Boeing 737-Next Generation aircraft. We believe that our
modern fleet contributes to our on-time performance and high completion factor (percentage
of scheduled flights not cancelled). We expect our Boeing 737-700s, 737-800s and Embraer
190s to continue offering substantial operational cost advantages in terms of fuel
efficiency and maintenance costs. Since December 2007, AeroRepública has taken delivery of
13 Embraer 190 aircraft and as of February 2010 has completed its fleet modernization and
expansion plan. |
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 year ended December 31, 2009, Copa Airlines statistic for
on-time performance was 87.6%, completion factor was 99.4% and baggage handling was 2.5
mishandled bags per 1000 passengers. Additionally, AeroRepúblicas statistics for on-time
performance was 90.1%, completion factor was 99.7% and baggage
handling was 1.1 mishandled
bags per 1000 passengers. 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 has individual objectives based on corporate goals that
serve as a basis for measuring performance. When corporate operational and financial
targets are met, employees are eligible to receive bonuses according to our profit sharing
program. See Item 6D. Employees. We also recognize outstanding performance of individual
employees through company-wide recognition, one-time awards, special events and, in the
case of our senior management, grants of restricted stock and stock options. Our
goal-oriented culture and incentive programs have contributed to a motivated work force
that is focused on satisfying customers, achieving efficiencies and growing profitability. |
Our Strategy
Our goal is to continue to grow profitably and enhance our position as a leader in Latin
American aviation by providing a combination of superior customer service, convenient schedules and
competitive fares, while maintaining competitive costs. The key elements of our business strategy
include the following:
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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. |
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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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Emphasize superior service and value to our customers. We intend to continue to focus
on satisfying our customers and earning their loyalty by providing a combination of
superior service and competitive fares. We believe that continuing our operational success
in keeping flights on time, reducing mishandled luggage and offering convenient schedules
to attractive destinations will be essential to achieving this goal. We intend to continue
to incentivize our employees to improve or maintain operating and service metrics relating
to our customers satisfaction by continuing our profit sharing plan and employee
recognition programs and to reward customer loyalty with the popular OnePass frequent flyer
program, upgrades and access to Presidents Club lounges. |
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Capitalize on opportunities at AeroRepública. We are seeking to enhance AeroRepúblicas
profitability through a variety of initiatives, including, expanding its international
routes, capitalizing on aircraft interchange with Copa, integrating its route network with
Copas and improving overall efficiency. |
25
AeroRepública
On April 22, 2005, we acquired
an initial 85.6% equity ownership interest in AeroRepública
which was followed by subsequent acquisitions increasing our total ownership interest in
AeroRepública to 99.9% as of December 31, 2009. AeroRepública is the second largest passenger air
carrier in Colombia in terms of revenue, with a market share of approximately 17% of the domestic
traffic on principal routes in 2009 and approximately 1,430 employees.
Our goal is to achieve growth at AeroRepública, 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.
We have centralized certain administrative functions common to Copa and AeroRepública. We have
also implemented e-ticketing at AeroRepública, and since the first quarter of 2006, AeroRepública
participates in the OnePass frequent flyer loyalty program.
Industry
In Latin America, the scheduled passenger service market consists of three principal groups of
travelers: strictly leisure, business and travelers visiting friends and family. Leisure passengers
and passengers visiting friends and family typically place a higher emphasis on lower fares,
whereas business passengers typically place a higher emphasis on flight frequency, on-time
performance, breadth of network and service enhancements, including loyalty programs and airport
lounges.
According to data from the International Air Transport Association, or IATA, Latin America
comprised approximately 7.6% of worldwide passengers flown in 2008, or 108 million passengers.
The Central
American aviation market is dominated by international traffic. According to data
from IATA, international traffic represented more than 81% of passengers carried and 90% of
passenger miles flown in Central America in 2008. International passenger traffic is concentrated
between North America and Central America. This segment represented 89% of international passengers
flown in Central America in 2008, compared to 4% for passengers flown between Central America and
South America and 7% for passengers flown between Central American countries. Total passengers
flown on international flights in Central America grew by 3.2% in 2008, and load factors on
international flights to and from Central America were 71% on average.
Domestic
traffic and traffic within Central American countries represented
approximately 19%
of passengers carried and 10% of passenger miles flown in 2008. Average load factors on domestic
flights and flights within Central America were 70% in 2008. The chart below details passenger
traffic in 2008.
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2008 IATA Traffic Results(1) |
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Passengers |
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Passenger |
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Carried |
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Miles |
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(Thousands) |
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Change (%) |
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(Millions) |
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Change (%) |
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ASMs (Million) |
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Change (%) |
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Load Factor |
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International Scheduled Service |
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North America Central America |
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34,327 |
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3.2 |
% |
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50,046 |
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3.1 |
% |
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64,979 |
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0.7 |
% |
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|
77.0 |
% |
North America South America |
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10,699 |
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5.0 |
% |
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32,076 |
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3.1 |
% |
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41,080 |
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3.0 |
% |
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78.1 |
% |
Central America South America |
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1,539 |
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8.5 |
% |
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2,216 |
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13.4 |
% |
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3,080 |
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8.6 |
% |
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|
72.0 |
% |
Within Central America |
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2,543 |
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0.2 |
% |
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1,431 |
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8.5 |
% |
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2,218 |
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13.8 |
% |
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64.5 |
% |
Within South America |
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12,437 |
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18.4 |
% |
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11,231 |
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14.9 |
% |
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15,263 |
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15.8 |
% |
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73.6 |
% |
Domestic Scheduled Service |
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Central America |
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8,693 |
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-16.7 |
% |
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5,636 |
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-12.9 |
% |
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8,085 |
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-18.3 |
% |
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69.7 |
% |
South America |
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38,119 |
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5.3 |
% |
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20,966 |
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8.5 |
% |
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29,858 |
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10.3 |
% |
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70.2 |
% |
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(1) |
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IATA passenger traffic data is not yet available for 2009. |
26
Panama serves as a hub for connecting passenger traffic between major markets in North, South,
and Central America and the Caribbean. Accordingly, passenger traffic to and from Panama is
significantly influenced by economic growth in surrounding regions. Major passenger traffic markets
in North, South and Central America experienced either decline or weak growth in their GDP in 2009
on both an absolute and per capita basis, after strong growth years in 2007 and 2008. In 2009, real
GDP increased by 1.8% in Panama and declined by 0.2% 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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2009 GDP |
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2009 GDP per Capita |
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Current Prices |
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2009 Real GDP |
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Current Prices |
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(US$bn) |
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(% Growth) |
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(US$) |
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Brazil |
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1,482 |
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-0.7 |
% |
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7,737 |
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Argentina |
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|
301 |
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-2.5 |
% |
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7,508 |
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Chile |
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|
150 |
|
|
|
-1.7 |
% |
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|
8,853 |
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Mexico |
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|
866 |
|
|
|
-7.3 |
% |
|
|
8,040 |
|
Colombia |
|
|
229 |
|
|
|
-0.2 |
% |
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|
4,661 |
|
Panama |
|
|
25 |
|
|
|
1.8 |
% |
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|
7,145 |
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USA |
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|
14,266 |
|
|
|
-2.7 |
% |
|
|
46,443 |
|
|
|
|
Source: |
|
International Monetary Fund, World Economic Outlook Database,
October 2009; real GDP growth calculated in local currency |
Panama has benefited from a stable economy with moderate inflation and steady GDP growth.
According to International Monetary Fund estimates, from 2000 to 2009 Panamas real GDP grew at an
average annual rate of 5.6% while inflation averaged 2.4% per year. The service sector represents
approximately 75% of total real GDP in Panama, a higher percentage of GDP than the service sector
represents in most other Latin American countries. The International
Monetary Fund currently estimates Panamas
population to be approximately 3.5 million in 2009, with the majority of the population
concentrated in Panama City, where our hub at Tocumen International Airport is located. We believe
the combination of a stable, service-oriented economy and steady population growth has helped drive
our domestic origin and destination passenger traffic.
Domestic travel within Panama primarily consists of individuals visiting families as well as
domestic and foreign tourist visiting the countryside. Most of this travel is done via ground
transportation, and its main flow is to and from Panama City, where most of the economic activity
and population is concentrated. Demand for domestic air travel is growing and relates primarily to
leisure travel from foreign and local tourist. The market is served primarily by two local
airlines, Air Panama and Aeroperlas, which operate turbo prop aircraft generally with less than 50
seats. These airlines offer limited international service and operate in the domestic terminal of
Panama City, which is located 30 minutes by car from Tocumen International Airport.
Colombia is the third largest country in Latin America in terms of population, with a
population of approximately 49.0 million in 2009 according to the International Monetary Fund, and
has a land area of approximately 440,000 square miles. Colombias GDP was approximately $229
billion in 2009, and per capita income was approximately $4.7 thousand (current prices) according
to the International Monetary Fund. Colombias geography is marked by the Andean mountains and an
inadequate road and rail infrastructure, making air travel a convenient and attractive
transportation alternative. Colombia shares a border with Panama, and for historic, cultural and
business reasons it represents a significant market for many Panamanian businesses.
Route Network and Schedules
Copa
As of December 31, 2009, Copa provided regularly scheduled flights to 45 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 that is more frequent than if each route were served directly.
27
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 four banks of flights during the day, with flights timed to arrive at the hub at
approximately the same time and to depart a short time later.
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, KLM, Gol, Aeroméxico and
Gulfstream International Airlines.
In 2007, Copa joined the SkyTeam global alliance as an Associate Member, in part due to the
support and sponsorship of Continental. Continental Airlines left the SkyTeam Alliance and joined
the Star Alliance effective the fourth quarter of 2009. Due to the long-standing alliance
relationship with Continental, and in order to ensure Copa remains fully aligned with Continental
on a number of important joint initiatives, Copa also exited the SkyTeam Alliance during the fourth
quarter of 2009. Copa is considering various new alliance options to compliment its current
portfolio of alliance partnerships.
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. Our Embraer 190
aircraft, together with the Boeing 737-Next Generation aircraft, allows us to improve our service
by increasing frequencies and service to new destinations with the right-sized aircraft.
Our plans to introduce new destinations and increase frequencies depend on the allocation of
route rights, a process over which we do not have direct influence. Route rights are allocated
through negotiations between the government of Panama and the governments of countries to which we
intend to increase flights. If we are unable to obtain route rights, we will exercise the
flexibility within our route network to re-allocate capacity as appropriate.
We do not currently provide any domestic service in the Republic of Panama, choosing instead
to focus entirely on international traffic. The following table shows our revenue generated in each
of our major operating regions.
Revenue by Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
Region |
|
2007 |
|
|
2008 |
|
|
2009 |
|
North America(1) |
|
|
18.9 |
% |
|
|
14.4 |
% |
|
|
14.4 |
% |
South America |
|
|
46.1 |
% |
|
|
55.4 |
% |
|
|
57.2 |
% |
Central America(2) |
|
|
26.2 |
% |
|
|
23.7 |
% |
|
|
21.7 |
% |
Caribbean(3) |
|
|
8.8 |
% |
|
|
6.6 |
% |
|
|
6.6 |
% |
|
|
|
(1) |
|
The United States, Canada and Mexico. |
|
(2) |
|
Includes Panama. |
|
(3) |
|
Cuba, Dominican Republic, Haiti, Jamaica, Puerto Rico, Trinidad and Tobago |
28
AeroRepública
AeroRepública currently provides scheduled service to the following cities in Colombia,
Panama, Venezuela and Ecuador:
|
|
|
|
|
Date Service |
Destinations Served |
|
Commenced |
Barranquilla |
|
Jun 1995 |
Bogotá |
|
Jun 1993 |
Bucaramanga |
|
May 1995 |
Cali |
|
Jun 1993 |
Caracas, Venezuela |
|
May 2008 |
Cartagena |
|
Jun 1993 |
Cúcuta |
|
Nov 2005 |
Leticia |
|
Nov 1993 |
Medellín |
|
Oct 1994 |
Montería |
|
Jul 1994 |
Panama City, Panama |
|
Dec 2005 |
Pereira |
|
Mar 2003 |
San Andrés |
|
Jun 1993 |
Santa Marta |
|
Jun 1993 |
Quito, Ecuador |
|
Dec 2009 |
In addition to the destinations described above, AeroRepública has periodically operated
charter flights to Margarita Island, Venezuela; Havana, Cuba; Punta Cana, Dominican Republic,
Puerto Plata, Dominican Republic, Santo Domingo, Dominican Republic, and Aruba.
Since its acquisition, AeroRepública has been granted the authorization to fly regular
services to Panama City from Bogota, Cali, Medellín, Bucaramanga, Pereira, Barranquilla and
Cartagena, Colombia. As a result, AeroRepública has added daily flights to Panama City from Bogota,
Medellin, and Cali; four frequencies per week from Bucaramanga and Pereira, as well as, three
frequencies per week from Cartagena and Barranquilla. In March 2007, AeroRepública was granted
authorization to operate a second frequency from Bogotá to Panama City. AeroRepública was also
granted the authorization to fly four frequencies per week from Medellín to Caracas and four
frequencies per week from Cartagena to Caracas.
During 2009, AeroRepública launched its third international destination, Quito, Ecuador.
AeroRepública was also granted the authorization to fly to Guayaquil, Ecuador and San Jose, Costa
Rica.
In addition to code-sharing with Copa, AeroRepública is leveraging Copas technology and
relationships to increase international traffic with other international carriers. Colombia has
open-skies agreements with the Andean Pact (Comunidad Andina) nations of Bolivia, Ecuador and Peru.
Airline Operations
Passenger Operations
Passenger revenue accounted for approximately $756.4 million in 2007, $973.2 million in 2008,
and $964.3 million in 2009 representing 93.8%, 93.9% and 94.1%, respectively, of Copas total
revenues, all earned from international routes. Leisure traffic, which makes up close to half of
Copas total traffic, tends to coincide with holidays, school vacations and cultural events and
peaks in July and August and again in December and January. Despite these seasonal variations,
Copas overall traffic pattern is relatively stable due to the constant influx of business
travelers. Approximately half 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.
Passenger revenue accounted for approximately $210.6 million in 2007, $244.1 million in 2008,
and $222.4 million in 2009 representing 93.2%, 92.1% and 92.5%, respectively, of AeroRepublicas
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.
29
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 $34.7
million in 2007, $41.5 million in 2008 and $35.6 million in 2009, representing 4.3%, 4.0% and
3.5%, respectively, of Copas operating revenues. We
primarily move our cargo in the belly of our aircraft, however, we also wet-lease and charter
freighter capacity when necessary to meet our cargo customers needs. In 2009, our cargo business
consisted of approximately 81.0% in freight; 15.6% in courier; and 3.4% in mail service.
Pricing and Revenue Management
Copa
Copa has designed its fare structure to balance its load factors and yields in a way that it
believes will maximize profits on its flights. Copa also maintains revenue management policies and
procedures that are intended to maximize total revenues, while remaining generally competitive with
those of our major competitors.
Copa charges slightly more for tickets on higher-demand routes, tickets purchased on short
notice and other itineraries suggesting a passenger would be willing to pay a premium. This
represents strong value to Copas business customers, who can count on competitive rates when
flying with Copa. The number of seats Copa offers at each fare level in each market results from a
continual process of analysis and forecasting. Past booking history, seasonality, the effects of
competition and current booking trends are used to forecast demand. Current fares and knowledge of
upcoming events at destinations that will affect traffic volumes are included in Copas forecasting
model to arrive at optimal seat allocations for its fares on specific routes. Copa uses a
combination of approaches, taking into account yields, flight load factors and effects on load
factors of continuing traffic, depending on the characteristics of the markets served, to arrive at
a strategy for achieving the best possible revenue per available seat mile, balancing the average
fare charged against the corresponding effect on our load factors. In 2005, Copa replaced its
revenue management software with Airmax, a more sophisticated revenue management system designed by
Sabre.
AeroRepública
Various improvements have been made to AeroRepúblicas revenue management, pricing
capabilities and systems since its acquisition in 2005. During the fourth quarter of 2007, for
example, we completed the implementation of the Airmax revenue management system at AeroRepública.
Relationship with Continental Airlines
It is common practice in the commercial aviation industry for airlines to develop marketing
and commercial alliances with other carriers in order to offer a more complete and seamless travel
experience to passengers. These alliances typically yield certain conveniences such as
code-sharing, frequent flyer reciprocity, and, where permitted, coordinated scheduling of flights
as well as additional joint marketing activities.
In May 1998, Copa Airlines and Continental Airlines entered into a comprehensive alliance
agreement, encompassing a broad array of activities such as Copas participation in Continentals
frequent flyer programs and VIP lounge; as well as agreements in other areas, such as trademarks.
These agreements were initially signed for a period of ten years. In November 2005, Copa and
Continental amended and restated these agreements and extended their term through the year 2015.
As a result of the Copa Continental alliance, we have benefited from Continentals expertise
and experience over the past decade. Copa has, for example, fully adopted Continentals OnePass
frequent flyer program and rolled out a co-branded joint product in much of Latin America, enabling
us to develop brand loyalty among our travelers. The co-branding of the OnePass loyalty programs
has helped to leverage the brand recognition that Continental already enjoyed across Latin America
and enables the two airlines to compete more effectively against regional competitors such as the
recently merged Avianca-Taca and the oneworld alliance represented by American Airlines and LAN
Airlines. We also share Continentals Sceptre inventory management software, which allows Copa to
pool spare parts with the larger airline and to 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. In
addition to the Sceptre system, we have
implemented several important information technology systems, such as the SHARES computer
reservation system in an effort to maintain commonality with Continental.
30
Building on the existing track-record of successful alliance accomplishments, Copa and
Continental have integrated, where appropriate, AeroRepública in aspects of the existing alliance
cooperation, beginning with AeroRepúblicas participation in the OnePass frequent flyer loyalty
program.
The Copa Continental alliance enjoys antitrust immunity in the United States which allows
the carriers to coordinate pricing, scheduling and joint marketing initiatives.
In 2007, Copa joined the SkyTeam global alliance as an Associate Member, in part due to the
support and sponsorship of Continental. Continental Airlines left the SkyTeam Alliance and joined
the Star Alliance effective the fourth quarter of 2009. Due to the long-standing alliance
relationship with Continental, and in order to ensure Copa remains fully aligned with Continental
on a number of important joint initiatives, Copa also exited the SkyTeam Alliance during the fourth
quarter of 2009. Copa is considering various new alliance options to compliment its current
portfolio of alliance partnerships.
Sales, Marketing and Distribution
Copa
Sales and Distribution. Approximately 69% of sales during 2009 were completed through travel
agents and other airlines while approximately 31% were direct sales via our city ticket offices
(CTOs), call centers, airport counters or website. Travel agents receive base commissions, not
including back-end incentive payments, ranging from 0% to 6% depending on the country. The weighted
average rate for these commissions during 2009 was 2.98%. In recent years, base commissions have
decreased significantly in most markets as more efficient back-end incentive programs have been
implemented to reward selected travel agencies that exceed their sales targets.
Travel agents obtain airline travel information and issue airline tickets through global
distribution systems, or GDSs, that enable them to make reservations on flights from a large number
of airlines. GDSs are also used by travel agents to make hotel and car rental reservations. Copa
participates actively in all major international GDSs, including SABRE, Amadeus, Galileo and
Worldspan. In return for access to these systems, Copa pays transaction fees that are generally
based on the number of reservations booked through each system.
Copa has a
sales and marketing network consisting of 89 domestic and international ticket
offices, including airport and city ticket offices. Copa has 33 CTOs co-branded with Continental
and 29 CTOs co-branded with AeroRepublica. During the year ended December 31, 2009, approximately
17% and 5% of its sales were booked through its ticket counters and call center, respectively.
The call center that operates Copas reservations and sales services handles calls from Panama
as well as most other countries to which Copa flies. 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, in three different languages.
We encourage the use of direct Internet bookings by our customers because it is our most
efficient distribution channel. In the third quarter of 2009, Copa introduced a new booking engine
in order to offer more functionality to customers and further reduce distribution costs; 10% of its
2009 sales were made via the website. Copas goal is to channel more of its total sales through the
website.
31
Advertising and Promotional Activities. Our advertising and promotional activities include
the use of television, print, radio and billboards, as well as targeted public relation events in
the cities where we fly. We believe that the corporate traveler is an important part of our
business, and we particularly promote our service to these customers by conveying the reliability,
convenience and consistency of our service and offering value-added services such as convention and
conference travel arrangements, as well as our Business Rewards loyalty program
for our frequent corporate travelers. We also promote package deals among the destinations
where we fly through combined efforts with selected hotels and travel agencies.
AeroRepública
AeroRepública successfully implemented the OnePass frequent flyer program in March 2006.
AeroRepública also implemented e-ticket in January 2006 and e-ticket interline with Copa and
Amadeus during the second quarter of 2006, complementing its call center, 24 city ticket offices
and 12 airport ticket offices. In February 2007, AeroRepublica was brought into Copas SHARES
reservations and check-in platform providing significant benefits in terms of costs and
functionality.
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 American Airlines, Delta Air Lines, Mexicana, and the newly combined
Avianca-Taca. Some of our competitors, such as American Airlines, have larger customer bases and
greater brand recognition in the markets we serve outside Panama, and some of our competitors have
significantly greater financial and marketing resources than we have. Airlines based in other
countries may also receive subsidies, tax incentives or other state aid from their respective
governments, which are not provided by the Panamanian government. The commencement of, or increase
in, service on the routes we serve by existing or new carriers could negatively impact our
operating results. Likewise, competitors service on routes that we are targeting for expansion may
make those expansion plans less attractive. We must constantly react to changes in prices and
services offered by our competitors to remain competitive.
Traditional hub-and-spoke carriers in the United States and Europe have in recent years faced
substantial and increasing competitive pressure from low-cost carriers offering discounted fares.
The low-cost carriers operations are typically characterized by point-to-point route networks
focusing on the highest demand city pairs, high aircraft utilization, single class service and
fewer in-flight amenities. As evidenced by the operations of Gol in Brazil and other South American
countries and several new low-cost carriers which have recently launched service, 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 sources of competition to Copa, and our alliance with Continental, come from the
newly combined Avianca-Taca and American Airlines, the U.S. airline with the largest Latin American
route network.
Avianca-Taca is the resulting entity from a merger consummated on February 2, 2010 between two
of our competitors, Avianca and Grupo Taca. Avianca-Taca will be the fourth largest airline group
in Latin America in terms of annual revenues. We cannot predict whether this newly combined entity
will prove successful or its impact on our financial results or operations.
Tacas, part of newly combined Avianca-Taca, strategy has been to develop hubs at San Jose,
Costa Rica, San Salvador, El Salvador and Lima, Peru, each of which competes with Copas hub at
Tocumen International Airport. Taca primarily operates a fleet of Airbus A320 family aircraft. We
have routes to several of the Central American and Caribbean countries where Taca has established
service, including Guatemala City, Havana, Managua, San Jose, San Salvador, San Pedro Sula, Santo
Domingo and Tegucigalpa.
American Airlines also offers significant competition. American Airlines attracts strong brand
recognition throughout the Americas and is able to attract brand loyalty through its AAdvantage
frequent flyer program. American Airlines competes with us through its hubs at Miami and San Juan,
Puerto Rico. American Airlines was a founding member of the Oneworld global marketing alliance.
32
LAN Airlines is another Oneworld alliance member that offers service to approximately 60
destinations, primarily in Latin America. LAN Airlines is comprised of LAN Chile, LAN Peru, LAN
Ecuador, LAN Argentina,
LAN Cargo and LAN Express. While we do not compete directly with LAN Airlines on many of our
current routes, LAN Airlines has grown rapidly over the past several years and may become a
significant competitor in the future.
Copa has significant presence in destinations where local airlines are less viable and
competitive, such as the Dominican Republic (Santo Domingo, Santiago de los Caballeros and Punta
Cana), Ecuador (Quito and Guayaquil) and Venezuela (Caracas, Maracaibo and Valencia). 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, part of the newly combined Avianca-Taca,
and other Colombian carriers in the Colombian domestic market. Avianca emerged from U.S. bankruptcy
protection in 2004, after being purchased by Brazils Synergy Group. Avianca has announced its
intention to transform Bogotá into a major international aviation hub which, if successful, will
compete directly with our hub at Tocumen International Airport. Avianca recently commenced a fleet
renovation project which includes the incorporation of the Boeing 787 and the Airbus A330 wide body
aircraft, as well as Airbus A320 and A319 narrow body aircraft.
We cannot predict whether Avianca will become more competitive in the future, if its increased
operations from Bogotá will prove successful or the impact of the merger on our financial results
of operations. We also experience competition from other Colombian carriers such as Aerolineas de
Antioquia, the state-owned airline Satena, Easy Fly and Aires, which has recent expanded
aggressively. Airlines that seek to compete in the Colombian air transportation market face
substantial barriers to entry, as the Colombian government requires an airline to operate at least
five aircraft and comply with extensive filing and certification requirements before it becomes
eligible to receive domestic route rights on certain Colombian routes between major cities. In
addition, the number of air carriers offering service on any route is currently regulated by the
Colombian Aviation Authority.
With respect to our cargo operations, we will continue to face competition from all of the
major airfreight companies, most notably DHL, which has a cargo hub operation at Tocumen
International Airport.
Aircraft
Copa
As of December 31, 2009, Copa operated a fleet consisting of 42 aircraft, including 20 Boeing
737-700 Next Generation aircraft, nine Boeing 737-800 Next Generation aircraft and 13 Embraer 190
aircraft. As of December 31, 2009, Copa had firm orders, including purchase and lease commitments,
for 28 additional Boeing 737-Next Generation aircraft. Copa also has options for an additional six
Embraer 190s and purchase rights and options for an additional eight Boeing 737-Next Generation
aircraft.
The current composition of the Copa fleet as of December 31, 2009 is more fully described
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of Lease |
|
|
Average |
|
|
|
|
|
|
Number of Aircraft |
|
|
Remaining |
|
|
Age |
|
|
Seating |
|
|
|
Total |
|
|
Owned |
|
|
Leased |
|
|
(Years) |
|
|
(Years) |
|
|
Capacity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Boeing 737-700 |
|
|
20 |
|
|
|
14 |
|
|
|
6 |
|
|
|
2.2 |
|
|
|
7.5 |
|
|
|
124 |
|
Boeing 737-800 |
|
|
9 |
|
|
|
7 |
|
|
|
2 |
|
|
|
5.3 |
|
|
|
3.3 |
|
|
|
160 |
|
Embraer 190 |
|
|
13 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
2.6 |
|
|
|
94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
42 |
|
|
|
34 |
|
|
|
8 |
|
|
|
3.0 |
|
|
|
5.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
We expect our Copa fleet to continue to center on the Boeing 737-700 model, although we expect
to continue to add Boeing 737-800s to our fleet to cover high-demand routes and Embraer 190s to
serve underserved markets as well as fly additional frequencies where we believe excess demand
exists. The table below describes the
expected size of our Copa fleet at the end of each year set forth below, assuming delivery of
all aircraft for which we currently have firm orders but not taking into account any aircraft for
which we have purchase rights and options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft Type |
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
737-700(1) |
|
|
20 |
|
|
|
18 |
|
|
|
13 |
|
|
|
13 |
|
|
|
13 |
|
737-800(2) |
|
|
17 |
|
|
|
22 |
|
|
|
27 |
|
|
|
31 |
|
|
|
35 |
|
Embraer 190(3) |
|
|
11 |
|
|
|
11 |
|
|
|
11 |
|
|
|
11 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fleet |
|
|
48 |
|
|
|
51 |
|
|
|
51 |
|
|
|
55 |
|
|
|
59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Assumes the return of leased aircraft upon expiration of lease contracts. |
|
(2) |
|
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. |
|
(3) |
|
Assumes that two additional Embraer 190 aircraft from Copa are transferred to AeroRepublica during 2010. |
The Boeing 737-Next Generation aircraft currently in our Copa fleet are fuel-efficient and
suit our operations well for the following reasons:
|
|
|
They have simplified maintenance procedures. |
|
|
|
They require just one type of standardized training for our crews. |
|
|
|
They have one of the lowest operating costs in their class. |
Our focus on profitable operations means that we periodically review our fleet composition. As
a result, our fleet composition changes over time when we conclude that adding other types of
aircraft will help us achieve this goal. The introduction of any new type of aircraft to our fleet
is only done if, after careful consideration, we determine that such a step will improve our
profitability. In line with this philosophy, after conducting a careful cost-benefit analysis, we
added the Embraer 190 aircraft because its combination of smaller size and highly efficient
operating characteristics made it the ideal aircraft to serve new mid-sized markets and to increase
frequency to existing destinations. The Embraer 190 incorporates advanced design features, such as
integrated avionics, fly-by-wire flight controls, and efficient CF34-10 engines made by General
Electric. The Embraer E190 has a range of approximately 2,000 nautical miles enabling it to fly to
a wide range of destinations from short-haul to certain medium-haul destinations. We have
configured Copas Embraer aircraft with a business class section similar to the business class
section we have on our Boeing 737-Next Generation aircraft.
Through several special purpose vehicles, we currently have beneficial ownership of 40 of our
aircraft, including 19 Embraer 190s. In addition, we lease six of our Boeing 737-700s and two of
our Boeing 737-800s under long-term operating lease agreements that have an average remaining term
of 3.0 years. Leasing some of our aircraft provides us with flexibility to change our fleet
composition if we consider it to be in our best interests to do so. We make monthly rental
payments, some of which are based on floating rates, but are not required to make termination
payments at the end of the lease. Currently, we do not have purchase options in any of our lease
agreements. Under our operating lease agreements, we are required in some cases to maintain
maintenance reserve accounts and in other cases to make supplemental rent payments at the end of
the lease that are calculated with reference to the aircrafts maintenance schedule. In either
case, we must return the aircraft in the agreed upon condition at the end of the lease term. Title
to the aircraft remains with the lessor. We are responsible for the maintenance, servicing,
insurance, repair and overhaul of the aircraft during the term of the lease.
To better serve the growing number of business travelers, we introduced business class (Clase
Ejecutiva) in November of 1998. Our business class service features twelve luxury seats in the
Boeing 737-700s with a 38-inch pitch, upgraded meal service, special check-in desks, bonus mileage
for full-fare business class passengers and access to VIP lounges. Our Boeing 737-800s are
currently configured with 14 business class seats. In 2010, we plan to reconfigure our Boeing
737-800 aircraft by adding two additional business class seats and three additional economy seats,
increasing the total number of seats from 155 to 160. Our Embraer 190s have 10 business class
seats in a three abreast configuration and 38-inch pitch.
34
Each of our Boeing 737-Next Generation aircraft is powered by two CFM International Model CFM
56-7B engines. Each of our Embraer 190 aircraft is powered by two CF34-10 engines made by General
Electric. We currently have seven spare engines for service replacements and for periodic rotation
through our fleet.
AeroRepública
As of December 31, 2009, AeroRepúblicas operated a fleet of one MD-83, six owned Embraer 190
and seven leased Embraer 190, with an average age of 3.2 years. All of AeroRepúblicas fleet is
configured as a single class, with the MD aircraft having a capacity of 157 seats and the Embraer
190 fleet having a capacity of 106 seats. AeroRepública has options to purchase up to five
additional Embraer 190 aircraft through 2013.
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. Copas line maintenance is performed by Copas own technicians at our base in
Panama and at stations outside Panama by Copa employees or third-party contractors. Heavy
maintenance consists of more complex inspections and overhauls, including C-checks, and servicing
of the aircraft that cannot be accomplished during an overnight visit. Maintenance checks are
performed as defined by the aircraft manufacturer. These checks are based on the number of hours or
calendar months flown. We have contract with certified outside maintenance providers, principally
with Panama Aerospace Engineering, a subsidiary of Singapore Aerospace Technologies, which is
certified as an authorized repair station by the FAA and the AAC, for heavy aircraft maintenance
services. Copa also has an exclusive long-term contract with GE Engines whereby they will perform
maintenance on all of its CFM-56 engines. There were 17 heavy maintenance events in 2009. When
possible, Copa attempts to schedule heavy maintenance during its lower-demand seasons in order to
maximize productive use of its aircraft.
Copa
employs 249 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 33
of our maintenance Professionals 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 twice a year the FAA inspects its facilities to
validate and renew the certification. Copas aircraft are initially covered by warranties that have
a term of four years, resulting in lower maintenance expenses during the period of coverage. All of
Copas mechanics are trained to perform line maintenance on both the Boeing 737-Next Generation and
Embraer 190s aircraft.
AeroRepública
Line maintenance for AeroRepúblicas aircraft is primarily performed by AeroRepúblicas
in-house maintenance staff, while C-checks on its fleet 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 (International Organization for
Standardization) quality certificates. All of AeroRepúblicas maintenance personnel are licensed by
the Aeronautica Civil of Colombia. In December 2007, AeroRepública received its IATA Operational
Safety Audit (IOSA) compliance certification.
35
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 (FDA) wherein the flight data
from every Copa flight is analyzed for safety or technical anomalies. During 2007, Copa
successfully completed its second IOSA.
On July 17, 2007, one of our AeroRepública Embraer 190s overran a wet runway at Santa Marta,
Colombia. As a result of this incident, six people suffered minor injuries and the aircraft
sustained damages that caused its permanent removal from service.
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. Panama is currently rated as Category 1, which indicates a strong level of
confidence in the safety regulation of the AAC.
Airport Facilities
We believe that our hub at Panama Citys Tocumen International Airport (PTY) is an excellent
base of operations for the following reasons:
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Panamas consistently temperate climate is ideal for airport operations. For
example, in recent years Tocumen was closed and unavailable for flight operations
for a total of less than two hours per year on average |
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Tocumen is the only airport in Central America with two operational runways.
Also unlike some other regional airports, consistent modernization and growth of
our hub has kept pace with our needs. The Tocumen airport recently began an
expansion project which is scheduled to be completed in 2011, and there is ample
room for further expansion. |
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Panamas central and sea level location provides a very efficient base to
operate our narrow body fleet, efficiently serving short and long-haul destinations
in Central, North and South America. |
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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. The
law that created this entity also provided for a significant portion of revenues generated at
Tocumen to be used for airport expansion and improvements. We do not have any formal, written
agreements with the airport management that govern access fees, landing rights or allocation of
terminal gates. We rely upon our good working relationship with the airports management and the
Panamanian government to ensure that we have access to the airport resources we need at prices that
are reasonable.
We worked closely with the airports management and consulted with the IATA infrastructure
group to provide plans and guidance for Phase I of an airport expansion that provided eight new
gate positions with jet bridges, six new remote parking positions, expanded retail areas and
improved the baggage-handling facilities. The government authorized $70 million to cover the costs
of this expansion. Work on Phase I was completed in the third quarter of 2006. Phase II of the
expansion which will add 12 additional jet bridge gates has begun and is expected to be completed
in 2011.
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.
36
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. The Presidents Club was recently expanded to
approximately one and half times its current size, utilizing space made available during the recent
expansion of the terminal.
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. As a
result of the worlds economic condition, 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.
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Aircraft Fuel Data |
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2005 |
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2006 |
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2007 |
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2008 |
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2009 |
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Copa |
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Average price per gallon of jet
fuel into plane (excluding hedge)
(in U.S. dollars) |
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$ |
1.87 |
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$ |
2.10 |
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$ |
2.29 |
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$ |
3.21 |
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$ |
1.84 |
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Gallons consumed (in thousands) |
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58,924 |
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70,770 |
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85,463 |
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100,266 |
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112,401 |
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Available seat miles (in millions) |
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4,409 |
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5,239 |
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6,298 |
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7,342 |
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8,319 |
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Gallons per ASM (in hundredths) |
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1.34 |
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1.35 |
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1.36 |
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1.37 |
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1.35 |
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AeroRepública(1) |
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Average price per gallon of jet
fuel into plane (excluding hedge)
(in U.S. dollars) |
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$ |
2.12 |
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$ |
2.24 |
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$ |
2.43 |
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$ |
3.49 |
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$ |
1.97 |
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Gallons consumed (in thousands) |
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17,887 |
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28,321 |
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26,984 |
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24,798 |
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25,617 |
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Available seat miles (in millions) |
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950 |
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1,627 |
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1,620 |
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1,503 |
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1,592 |
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Gallons per ASM (in hundredths) |
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1.88 |
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1.74 |
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1.67 |
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1.65 |
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1.61 |
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(1) |
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Since April 22, 2005. |
Since 2002, aircraft fuel prices have been rising. From 2004 to 2009, the average price of
West Texas Intermediate crude oil, a benchmark widely used for crude oil prices that is measured in
barrels and quoted in U.S. dollars, increased by 50% from $41.47 per barrel to $62.07 per barrel.
During 2008, fuel prices experienced significant volatility, with West Texas Intermediate crude
prices reaching the record price of approximately $145 per barrel in July. Prices then dropped
below $40 per barrel at the beginning of 2009, and then stabilized at approximately $70 per barrel
in the second half of 2009. While prices have significantly decreased since their peak in 2008, we
believe that fuel prices are likely to increase in the future. In 2009, we hedged 31% of our
requirements through the use of jet fuel and crude oil swap contracts, and crude oil zero-cost
collars. We have hedged approximately 24% and 11% of our anticipated fuel needs for 2010 and 2011,
respectively. 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.
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, our relative young, winglet-equipped fleet also
helps us mitigate the impact of higher fuel prices.
Insurance
We maintain passenger liability insurance in an amount consistent with industry practice, and
we insure our aircraft against losses and damages on an all risks basis. We have obtained all
insurance coverage required by the terms of our leasing and financing agreements. We believe our
insurance coverage is consistent with airline industry standards and appropriate to protect us from
material loss in light of the activities we conduct. No assurance can be given, however, that the
amount of insurance we carry will be sufficient to protect us from material losses. We have
negotiated low premiums on our Copa insurance policies by leveraging the purchasing power of our
alliance partner,
Continental. Copas hull and liability operations are insured under Continentals insurance
policy. We maintain separate insurance policies for our AeroRepública operations.
37
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 conducted, through a consulting firm, an
environmental audit of our hangar 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. We plan to implement all measures
required for compliance based on our environmental audit. 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 will also satisfy the requirements of the RAC. We have installed a water
treatment plant to serve part of our facilities and have formally submitted an Environmental
Remediation and Management Program (PAMA) in order to seek approval thereof by the Environmental
Authority. Such program sets forth an environmental compliance schedule. 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
Authorization and Licenses. 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. Copas aircraft must be
re-certified every year. This requirement does not apply to AeroRepúblicas aircraft which are
registered in Colombia.
The Panamanian government does not have an equity interest in our company. Bilateral
agreements signed by the Panamanian government have protected our operational position and route
network, allowing us to have 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. 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.
Safety Assessment. In May 2001, the FAA downgraded Panamas IASA rating from a Category 1
rating to a Category 2 rating due to alleged deficiencies in Panamanian air safety standards and
the AACs capacity to provide regulatory oversight. We collaborated with the Panamanian government
to restore the countrys Category 1 status, 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 the major initiative is to boost tourism in Panama. The countrys Category 1 status was
restored in April 2004.
38
Ownership Requirements. The most significant restriction on our company imposed by the
Panamanian Aviation Act, as amended and interpreted to date, is that Panamanian nationals must
exercise effective control over the operations of the airline and must maintain substantial
ownership. These phrases are not defined in the Aviation Act itself and it is unclear how a
Panamanian court would interpret them. The share ownership requirements and transfer restrictions
contained in our Articles of Incorporation, as well as the structure of our capital stock described
under the caption Description of Capital Stock, are designed to ensure compliance with these
ownership and control restrictions created by the Aviation Act. While we believe that our ownership
structure complies with the ownership and control restrictions of the Aviation Act as interpreted
by a 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.
Antitrust Regulations. In 1996, the Republic of Panama enacted antitrust legislation, which
regulates industry concentration and vertical anticompetitive practices and prohibits horizontal
collusion. The Consumer Protection and Free Trade Authority is in charge of enforcement and may
impose fines only after a competent court renders an adverse judgment. The law also provides for
direct action by any affected market participant or consumer, independently or 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 Restrictions. 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.
39
Colombia
The Colombian aviation market is heavily regulated by the Colombian Civil Aviation
Administration, Unidad Especial Administrativa de Aeronáutica Civil, or Aeronautica Civil. Colombia
is a Category 1 country under the FAAs IASA program. With respect to domestic aviation, airlines
must present feasibility studies to secure specific route rights, and no airline may serve the city
pairs with the most traffic unless that airline has at least five aircraft with valid airworthiness
certificate. In addition, Aeronautica Civil sets maximum fares for each route and a maximum number
of competing airlines for each route based on the size of the city pairs served. Airlines in
Colombia must also add a surcharge for fuel to their ticket prices. In addition, since November
2006, airlines must have to charge an administrative fee (Tarifa administrativa) for each ticket
sold through an airlines direct channels. Passengers in Colombia are also entitled by law to
compensation in the event of delays in excess of four hours, over-bookings and cancellations.
Currently, the San Andres, Bogotá, Pereira, Cali, Cartagena, Medellin, Monteria and Barranquilla
airports are under private management arrangements. Furthermore, the government is 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.
Colombia has open-skies agreements with Aruba and the Andean Pact nations of Bolivia, Ecuador
and Peru (Comunidad Andina). AeroRepública has been granted the use of 30 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. In addition, AeroRepública was granted
30 additional bilateral frequencies per week, 7 of these frequencies to Panama from Bucaramanga,
Pereira and Barranquilla, have yet to be utilized.
U.S.
Operations to the United States by non-U.S. airlines, such as Copa, are subject to Title 49 of
the U.S. Code, under which the DOT, the FAA and the TSA exercise regulatory authority. The U.S.
Department of Justice also has jurisdiction over airline competition matters under the federal
antitrust laws.
Authorizations and Licenses. The DOT has jurisdiction over international aviation with
respect to air transportation to and from the United States, including regulation of related route
authorities, the granting of which are subject to review by the President of the United States. The
DOT exercises its jurisdiction with respect to unfair practices and methods of competition by
airlines and related consumer protection matters as to all airlines operating to and from the
United States. 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 and was due to expire in February 2000. However, the authority remains in effect by
operation of law under the terms of the Administrative Procedure Act pending final DOT action on
the application we filed to renew the authority on January 3, 2000. There can be no assurance that
the DOT will grant the application. Our foreign air carrier permit has no expiration date.
Our operations to the United States are also subject to regulation by the FAA with respect to
aviation safety matters, including aircraft maintenance and operations, equipment, aircraft noise,
ground facilities, dispatch, communications, personnel, training, weather observation, air traffic
control and other matters affecting air safety. The FAA requires each foreign air carrier serving
the United States to obtain operational specifications pursuant to 14 CFR Part 129 of its
regulations and to meet operational criteria associated with operating specified equipment on
approved international routes. We believe that we are in compliance in all material respects with
all requirements necessary to maintain in good standing our operations specifications issued by the
FAA. The FAA can amend, suspend, revoke or terminate those specifications, or can temporarily
suspend or permanently revoke our authority if we fail to comply with the regulations, and can
assess civil penalties for such failure. A modification, suspension or revocation of any of our DOT
authorizations or FAA operating specifications could have a material adverse effect on our
business. The FAA also conducts safety audits and has the power to impose fines and other sanctions
for violations of airline safety regulations. We have not incurred any material fines related to
operations. The FAA also conducts safety International Aviation Safety Assessment (IASA) as to
Panamas compliance with International Civil Aviation Organization (ICAO) safety standards. Panama
is currently considered a Category 1 country that
complies with ICAO international safety standards. As a Class 1 country, no limitations are
placed upon our operating rights to the Unites States. If the FAA should determine that Panama
does not meet the ICAO safety standards, the FAA and DOT would restrict our rights to expand
operations to the United States. We can offer no assurance of Panamas continued compliance with
ICAO safety standards.
40
Security. On November 19, 2001, the U.S. Congress passed, and the President signed into law,
the Aviation and Transportation Security Act, (the Aviation Security Act). This law federalized
substantially all aspects of civil aviation security and created the TSA, an agency of the
Department of Homeland Security, to which the security responsibilities previously held by the FAA
were transitioned. The Aviation Security Act requires, among other things, the implementation of
certain security measures by airlines and airports, such as the requirement that all passenger,
their bags and all cargo be screened for explosives and other security related contraband. Funding
for airline and airport security required under the Aviation Security Act is provided in part by a
$2.50 per segment passenger security fee for flights departing from the U.S., subject to a $10 per
roundtrip cap; however, airlines are responsible for costs incurred to meet security requirements
beyond those provided by the TSA. The United States Government is considering increases to this fee
as the TSAs costs exceed the revenue it receives from these fees. Implementation of the
requirements of the Aviation Security Act has resulted in increased costs for airlines and their
passengers. Since the events of September 11, 2001, the U.S. Congress has mandated and the TSA has
implemented numerous security procedures and requirements that have imposed and will continue to
impose burdens on airlines, passengers and shippers.
Passenger Facility Charges. Most major U.S. airports impose passenger facility charges. The
ability of airlines to contest increases in these charges is restricted by federal legislation, DOT
regulations and judicial decisions. With certain exceptions, air carriers pass these charges on to
passengers. However, our ability to pass through passenger facility charges to our customers is
subject to various factors, including market conditions and competitive factors. The current cap on
passenger facility charges is $4.50 per segment, subject to an $18 per roundtrip cap; however,
there is legislation in Congress to raise the cap on passenger facility charges.
Airport Access. Two U.S. airports at which we operate, John F. Kennedy International Airport
in New York (JFK) and Reagan National Airport in Washington, D.C., have been designated by the
FAA as high density traffic airports. From time to time, operations at these airports have been
subject to arrival and departure slot restrictions during certain periods of the day. Although
slot restrictions at JFK were eliminated as of January 1, 2007, on January 15, 2008, the FAA issued
an order limiting the number of scheduled flight operations at JFK during peak hours to address the
over-scheduling, congestion and delays at JFK. In January 2008, the DOT also issued a notice of
proposed amendment to its Airport Rates and Charges policy that would allow airports to establish
non-weight based fees during peak hours and to apportion certain expenses from reliever airports
to the charges for larger airports in an effort to limit congestion. We cannot predict the outcome
of this potential rule change on our costs or ability to operate in congested airports.
Noise Restrictions. Under the Airport Noise and Capacity Act of 1990 and related FAA
regulations, aircraft that fly to the United States must comply with certain Stage 3 noise
restrictions, which are currently the most stringent FAA operating noise requirements. All of our
Copa aircraft meet the Stage 3 requirement.
Other Regulation. 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. In addition, all air carriers are subject to certain provisions of
the Communications Act of 1934, because of their extensive use of radio and other communication
facilities, and are required to obtain an aeronautical radio license from the Federal
Communications Commission (FCC). To the extent we are subject to FCC requirements, we have taken
and will continue to take all necessary steps to comply with those requirements. 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.
41
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. |
Copa is our principal airline operating subsidiary that operates out of our hub in Panama and
provides passenger service in North, South and Central America and the Caribbean. AeroRepública
S.A. is our operating subsidiary that is primarily engaged in domestic air travel within Colombia
and international service from various points in Colombia to Panama City and Caracas. Oval
Financial Leasing, Ltd. controls the special purpose vehicles that have a beneficial interest in
the majority of our aircraft.
D. Property, Plants and Equipment
Headquarters
In 2005, we moved into a newly built headquarters building located six miles away from Tocumen
International Airport. We have leased five floors consisting of approximately 104,000 square feet
of the building from Desarollo Inmobiliario del Este, S.A., an entity controlled by the same group
of investors that controls CIASA, under a 10-year lease at a rate of $106,000 per month during the
first three years, $110,000 per month during year 4 through year 6, $113,000 during year 7 through
year 9 and $116,000 per month in year 10, which we believe to be a market rate.
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 $88,000 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 $13,000 per month in the aggregate.
42
In each of our destination cities, we also lease space at the airport for check-in,
reservations and airport ticket office sales, and we lease space for CTOs in more than 34 of those
cities.
AeroRepública leases most of its airport and CTO. Owned properties include one city ticket
office, a warehouse close to the airport and one floor in a high-rise building in downtown Bogota.
See also our discussion of Aircraft and Airport Facilities above.
Item 4A. Unresolved Staff Comments
None.
Item 5. Operating and Financial Review and Prospects
A. Operating Results
You should read the following discussion in conjunction with our consolidated financial
statements and the related notes and the other financial information included elsewhere in this
annual report.
We are a leading Latin American provider of airline passenger and cargo service through our
two principal operating subsidiaries, Copa and AeroRepública. Copa operates from its strategically
located position in the Republic of Panama, and AeroRepública provides service primarily within
Colombia complemented by international flights from various cities in Colombia to Panama, Venezuela
and Ecuador. We currently operate a fleet of 58 aircraft, 32 Boeing 737-Next Generation aircraft
and 26 Embraer 190 aircraft. We currently have firm orders, including purchase and lease
commitments, for 26 Boeing 737-Next Generation and purchase rights and options for up to eight
additional Boeing 737-Next Generation and 11 additional Embraer 190s.
Copa currently offers approximately 152 daily scheduled flights among 45 destinations in 24
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 32 Boeing 737-Next Generation aircraft and 13 Embraer 190
aircraft. To meet its growing capacity requirements, Copa has firm orders, including purchase and
lease commitments, to accept delivery of 26 additional aircraft through 2015 and has purchase
rights and options that, if exercised, would allow it to accept delivery of up to 14 additional
aircraft through 2017. Copas firm orders are for 26 additional Boeing 737-Next Generation
aircraft, and its purchase rights and options are for up to eight Boeing 737-Next Generation
aircraft and up to six Embraer 190s.
Copa started its strategic alliance with Continental in 1998. Since then, it has conducted
joint marketing and code-sharing arrangements, and participated in the award-winning OnePass
frequent flyer loyalty program globally and on a co-branded basis in Latin America. We believe that
Copas co-branding and joint marketing activities with Continental have enhanced its brand in Latin
America, and that the relationship with Continental has afforded it cost-related benefits, such as
improving purchasing power in negotiations with aircraft vendors and insurers. Copas alliance and
related services agreements with Continental are in effect until 2015.
During the second quarter of 2005, we purchased AeroRepública, a Colombian air carrier that
was the second-largest domestic carrier in Colombia in terms of number of passengers carried in
2005, which at the time provided point-to-point service among 11 cities in Colombia. AeroRepública
currently operates a fleet of 13 Embraer 190 and has expanded its routes to include international
point-to-point service from various Colombian cities to Panama, Venezuela and Ecuador. As part of
its fleet expansion plan, AeroRepública has options to purchase up to five additional Embraer 190
aircraft through 2013.
43
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.
From 2004 to 2009, the average price of West Texas Intermediate crude oil, a benchmark widely used
for crude oil prices that is measured in barrels and quoted in U.S. dollars, increased by 50% from
$41.47 per barrel to $62.07 per barrel. During 2008, fuel prices experienced significant
volatility, with West Texas Intermediate crude prices reaching the record price of approximately
$145 per barrel in July. Prices then dropped below $40 per barrel at the beginning of 2009, and
then stabilized at approximately $70 per barrel in the second half of 2009. While prices have
decreased since their peak in 2008, we believe that fuel prices are likely to increase in the
future. In past years, we have managed to offset some of the increases in fuel prices by managing
load factors, fuel related price increases, which may take the form of fare increases or fuel
surcharges, and cost cutting initiatives. For example, we estimate that we were able to offset
approximately 100% of the increase in unit costs in 2008 as compared to 2007 through higher unit
revenues. Although there are other factors affecting unit costs, management considers the 100%
cost recoverability to be a fair estimate of the coverage of incremental fuel prices, as most of
the increase in unit costs is related to fuel price. We
have hedged 24% and 11% of our anticipated fuel needs for 2010 and 2011, respectively. 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 99.9% as of December 31, 2009. AeroRepública is the second-largest domestic
carrier in Colombia in terms of revenue, currently providing service among 12 cities in Colombia
and international service to cities in Panama, Venezuela and Ecuador with a point-to-point route
network.
We began to consolidate AeroRepúblicas results of operations in our consolidated financial
statements in April of 2005. We report AeroRepúblicas operations as a separate segment in our
financial statements and the related notes. See Note 17 to our audited financial statements
included elsewhere in this annual report for segment data for AeroRepública for the year ended
December 31, 2009. As a result of this acquisition and our consolidation of AeroRepúblicas results
as of April 22, 2005, our financial information prior to and after the acquisition is not
comparable.
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) decreased by 1.7%
in 2009 and grew by 4.1% in
2008. In recent years, the Panamanian economy has closely tracked the economies of the United
States and of Latin America. In 2009, however, the Panamanian economy grew in real terms by 1.8%
(versus 9.2% in 2008), according to the International Monetary Funds estimates. Inflation in
Panama rose 2.3% in 2009 (versus 8.8% in 2008). Additionally, the Colombian economy has experienced
relatively stable growth. According to the International Monetary Funds estimates, the Colombian
gross domestic product grew by 7.5% in 2007, 2.5% in 2008 and only slightly decreased by -0.2% in
2009 with inflation (as indicated by the consumer price index) rising by 5.5% in 2007, 7.0% in 2008
and 4.6% in 2009.
44
Revenues
We derive our revenues primarily from passenger transportation which represents 95% of our
revenues, with 5% 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 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
Copa Segment |
|
|
|
|
|
|
|
|
|
|
|
|
Capacity (in available seat miles, in millions) |
|
|
6,297.9 |
|
|
|
7,341.9 |
|
|
|
8,319.0 |
|
Load factor |
|
|
78.4 |
% |
|
|
78.8 |
% |
|
|
76.0 |
% |
Yield (in cents) |
|
|
15.33 |
|
|
|
16.81 |
|
|
|
15.25 |
|
AeroRepública Segment |
|
|
|
|
|
|
|
|
|
|
|
|
Capacity (in available seat miles, in millions) |
|
|
1,620.4 |
|
|
|
1,502.7 |
|
|
|
1,591.7 |
|
Load factor |
|
|
57.2 |
% |
|
|
61.7 |
% |
|
|
67.5 |
% |
Yield (in cents) |
|
|
22.74 |
|
|
|
26.31 |
|
|
|
20.71 |
|
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 2009, as a result of the location of its hub,
Copa purchased 57% of its aircraft fuel in Panama. Copa has over 15 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 2004 to 2009, the average price of West Texas Intermediate crude oil, a
benchmark widely used for crude oil prices that is measured in barrels and quoted in U.S. dollars,
increased by 50% from $41.47 per barrel to $62.07 per barrel. 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, our relatively young, winglet-equipped fleet also helps us mitigate the impact of
higher fuel prices. Historically, we have not hedged a significant portion of our fuel costs. We
have hedged 24% and 11% of our anticipated fuel needs for 2010 and 2011, respectively.
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft Fuel Data |
|
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
Copa Segment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average price per gallon of jet
fuel into plane (excluding hedge)
(in U.S. dollars) |
|
$ |
1.87 |
|
|
$ |
2.10 |
|
|
$ |
2.29 |
|
|
$ |
3.21 |
|
|
$ |
1.84 |
|
Gallons consumed (in thousands) |
|
|
58,924 |
|
|
|
70,770 |
|
|
|
85,463 |
|
|
|
100,266 |
|
|
|
112,401 |
|
Available seat miles (in millions) |
|
|
4,409 |
|
|
|
5,239 |
|
|
|
6,298 |
|
|
|
7,342 |
|
|
|
8,319 |
|
Gallons per ASM (in hundredths) |
|
|
1.34 |
|
|
|
1.35 |
|
|
|
1.36 |
|
|
|
1.37 |
|
|
|
1.35 |
|
AeroRepública(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average price per gallon of jet
fuel into plane (excluding hedge)
(in U.S. dollars) |
|
$ |
2.12 |
|
|
$ |
2.24 |
|
|
$ |
2.43 |
|
|
$ |
3.49 |
|
|
$ |
1.97 |
|
Gallons consumed (in thousands) |
|
|
17,887 |
|
|
|
28,321 |
|
|
|
26,984 |
|
|
|
24,798 |
|
|
|
25,617 |
|
Available seat miles (in millions) |
|
|
950 |
|
|
|
1,627 |
|
|
|
1,620 |
|
|
|
1,503 |
|
|
|
1,592 |
|
Gallons per ASM (in hundredths) |
|
|
1.88 |
|
|
|
1.74 |
|
|
|
1.67 |
|
|
|
1.65 |
|
|
|
1.61 |
|
|
|
|
(1) |
|
Since April 22, 2005. |
Salaries and benefits. Salaries and benefits expenses have historically increased at the rate
of inflation and by the growth in the number of our employees. In some cases, we have adjusted
salaries of our employees to correspond to changes in the cost of living in the countries where
these employees work. We do not increase salaries based on seniority.
Passenger servicing expenses. Our passenger servicing expenses consist of expenses for
liability insurance, baggage handling, catering, in-flight entertainment and other costs related to
aircraft and airport services. These expenses are generally directly related to the number of
passengers we carry or the number of flights we operate.
Commissions. Our commission expenses consist primarily of payments for ticket sales made by
travel agents and commissions paid to credit card companies. Travel agents receive base
commissions, not including back-end incentive programs, ranging from 0% to 6% depending on the
country. During the last few years we have reduced our commission expense per available seat mile
as a result of an industry-wide trend of paying lower commissions to travel agencies and by
increasing the proportion of our sales made through direct channels. We expect this trend to
continue as more of our customers become accustomed to purchasing through call centers and through
the internet. While increasing direct sales may increase the commissions we pay to credit card
companies, we expect that the savings from the corresponding reduction in travel agency commissions
will more than offset this increase. In recent years, base commissions paid to travel agents have
decreased significantly. At the same time, we have encouraged travel agencies to move from standard
base commissions to incentive compensation based on sales volume and fare types.
Maintenance, material and repair expenses. Our maintenance, material and repair expenses
consist of aircraft repair and charges related to light and heavy maintenance of our aircraft,
including maintenance materials. Maintenance and repair expenses, including overhaul of aircraft
components, are charged to operating expenses as incurred. As the age of our fleet increases and
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 Next Generation aircraft with lower thrust,
thus putting less strain on the engines.
Line maintenance for AeroRepúblicas fleet is performed by AeroRepúblicas in-house
maintenance staff. The average age of AeroRepúblicas fleet as of December 31, 2009 was 3.2 years.
46
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.
Flight operations and landing fees and other rentals are generally directly related to the
number of flights we operate.
Other includes publicity and promotion expenses, expenses related to our cargo operations,
technology related initiatives and miscellaneous other expenses.
Taxes
We pay taxes in the Republic of Panama and in other countries in which we operate, based on
regulations in effect in each respective country. Our revenues come principally from foreign
operations and according to the Panamanian Tax Code, including all regulations,
decrees and executives decrees (Panamanian Fiscal Code)
these foreign operations are not subject to income tax in Panama.
We have elected to calculate our Panamanian income tax with the gross tax method. Under this
method, based on the Panamanian Fiscal Code, 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.
Dividends from our Panamanian subsidiaries, including Copa, are separately subject to a 10% percent
withholding tax on the portion attributable to Panamanian sourced income and a 5% withholding tax
on the portion attributable to foreign sourced income.
We are also subject to local tax regulations in each of the other jurisdictions where we
operate, the great majority of which are related to the taxation of our income. In some of the
countries to which we fly, we do not pay any income taxes because we do not generate income under
the laws of those countries either because they do not have income taxes or due to treaties or
other arrangements those countries have with Panama. In the remaining countries, we pay income tax
at a rate ranging from 25% to 34% of our income attributable to those countries. Different
countries calculate our income in different ways, but they are typically derived from our sales in
the applicable country multiplied by our net margin or by a presumed net margin set by the relevant
tax legislation. The determination of our taxable income in several countries is based on a
combination of revenues sourced to each particular country and the allocation of expenses to that
particular country. The methodology for multinational transportation company sourcing of revenue
and expense is not always specifically prescribed in the relevant tax regulations, and therefore is
subject to interpretation by both ourselves and the respective tax authorities. Additionally, in
some countries, the applicability of certain regulations governing non-income taxes and the
determination of our filing status are also subject to interpretation. We cannot estimate the
amount, if any, of the potential tax liabilities that might result if the allocations,
interpretations and filing positions we use in preparing our income tax returns were challenged by
the tax authorities of one or more countries. It is possible that we may become subject to tax in
jurisdictions in which, for prior years, we had not been subject to tax and that, in the future, we
may become subject to increased taxes in the countries to which we fly.
47
Under a reciprocal exemption confirmed by a bilateral agreement between Panama and the United
States, we are exempt from the U.S. source transportation income tax derived from the international
operation of aircraft.
We paid taxes totaling approximately $16.6 million in 2007, $14.9 million in 2008 and $13.8
million in 2009.
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. Fares for tickets
that have expired and/or are more than one year old are recognized as passenger revenue upon
expiration.
Goodwill and indefinite-lived purchased intangible assets. In accordance with ASC Topic 350,
Intangibles-Goodwill and Other (ASC Topic 350), we perform impairment testing of goodwill
separately from impairment testing of indefinite-lived intangibles. We test goodwill for
impairment, at least annually, by comparing the book value to the fair value at the reporting
segment level and individually test indefinite-lived intangibles, at least annually, by comparing
the individual book values to fair values. Considerable management judgment is necessary to
determine the assumptions that marketplace participants would consider in determining the fair
value of these assets. We did not recognize any impairment charges for goodwill or intangibles
assets during the years presented. All of our goodwill and indefinite-lived intangible are
allocated in the AeroRepública segment and are tested annually for impairment. For the years ended
December 2009 and 2008, amounts of goodwill and intangible assets have changed due to exchange
effect.
Derivative instruments and hedging activities. We account for derivatives and hedging
activities in accordance with ASC Topic 815, Derivatives and Hedging (ASC Topic 815), which
requires entities to recognize all derivative instruments as either assets or liabilities in the
balance sheet at their respective fair values.
We only enter into derivative contracts that we intend to use in managing the variability in
market related values of a forecasted transaction or the variability of cash flows to be received
or paid related to a recognized asset or liability (cash flow hedge). For all hedging relationships
we formally document the hedging relationship and its risk-management objective and strategy for
undertaking the hedge, the hedging instrument, the hedged item, the nature of the risk being
hedged, how the hedging instruments effectiveness in offsetting the hedged risk will be assessed
prospectively and retrospectively, and a description of the method of measuring ineffectiveness. We
also formally assess, both at the hedges inception and on an ongoing basis, whether the
derivatives that are used in hedging transactions are highly effective in offsetting cash flows of
hedged items.
48
Changes in the fair value of a derivative that is highly effective and that is designated and
qualifies as a cash-flow hedge are recorded in accumulated other comprehensive income to the extent
that the derivative is effective as a hedge, until earnings are affected by the variability in cash
flows of the designated hedged item. The ineffective portion of the change in fair value of a
derivative instrument that qualifies as a cash-flow hedge or that is not designated as a hedge is
reported in earnings.
We discontinued hedge accounting prospectively when we determines that the derivative is no
longer effective in offsetting cash flows of the hedged item, the derivative expires or is sold,
terminated, or exercised, the derivative is de-designated as a hedging instrument because it is
unlikely that a forecasted transaction will occur, or management determines that designation of the
derivative as a hedging instrument is no longer appropriate.
In all situations in which hedge accounting is discontinued and the derivative is retained, we
continue to carry the derivative at its fair value on the balance sheet and recognize any
subsequent changes in its fair value in earnings. When it is probable that a forecasted transaction
will not occur, we discontinue hedge accounting and recognize immediately in earnings gains and
losses that were accumulated in other comprehensive income.
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 our aircraft lease
agreements, if there are excess amounts on deposit at the expiration of the lease, the lessor is
entitled to retain any excess amounts. The maintenance reserves paid under our lease agreements do
not transfer either the obligation to maintain the aircraft or the cost risk associated with the
maintenance activities to the aircraft lessor. In addition, we maintain the right to select any
third-party maintenance providers. Therefore, we record these amounts as prepaid maintenance
within Other Assets on our consolidated balance sheet and then recognize maintenance expense when
the underlying maintenance is performed, in accordance with our maintenance accounting policy.
Adopted and Recently Issued Accounting Pronouncement
Effective July 1, 2009, the Financial Accounting Standards Boards (FASB) Accounting
Standards Codification (ASC) became the single official source of authoritative, nongovernmental
generally accepted accounting principles (GAAP) in the United States. The historical GAAP
hierarchy was eliminated and the ASC became the only level of authoritative GAAP, other than
guidance issued by the Securities and Exchange Commission (Commission). Our accounting policies
were not affected by the conversion to ASC. However, references to specific accounting standards
in the footnotes to our consolidated financial statements have been changed to refer to the
appropriate section of ASC.
In March 2008, the Financial Accounting Standards Board (FASB) issued Statement No. 161,
Disclosures about Derivative Instruments and Hedging Activities an amendment of FASB Statement
No. 133 (SFAS 161). SFAS 161 requires entities that utilize derivative instruments to provide
qualitative disclosures about their objectives and strategies for using such instruments, as well
as any details of credit-risk-related contingent features contained within derivatives. SFAS 161
also requires entities to disclose additional information about the amounts and location of
derivatives located within the financial statements, how the provisions of SFAS 133 have been
applied, and the impact that hedges have on an entitys financial position, financial performance,
and cash flows. SFAS 161 is effective for fiscal years and interim periods beginning after November
15, 2008, with early application encouraged. This concept is contained in ASC Topic 815,
Derivatives and Hedging (ASC Topic 815). The adoption of this amendment did not have a material
impact on our Consolidated Financial Statements.
49
In September 2006, the FASB issued guidance which defines fair value, establishes a framework
for measuring fair value and expands disclosures about fair value measurements. This guidance is
contained in ASC Topic 820, Fair Value Measurements and Disclosures (ASC Topic 820). In
February 2008, the FASB deferred the effective date to January 1, 2009 for all nonfinancial assets
and liabilities, except for those that are recognized or disclosed at fair value on a recurring
basis (that is, at least annually). We adopted the deferred provisions of ASC Topic 820 on January
1, 2009. Application of the new rules affected our annual impairment testing goodwill and other
intangible assets.
In April 2009, the FASB issued additional guidance for estimating fair value in accordance
with ASC Topic 820. The additional guidance addresses estimating fair value when the volume and
level of activity for an asset or liability has significantly decreased in relation to normal
market activity for the asset or liability. We adopted the provisions of this guidance for the
fourth quarter of 2009. The adoption did not have a material effect on our Consolidated Financial
Statements.
In June 2009, the FASB issued guidance to change financial reporting by enterprises involved
with variable interest entities (VIEs). The standard replaces the quantitative-based risks and
rewards calculation for
determining which enterprise has a controlling financial interest in a VIE with an approach
focused on identifying which enterprise has the power to direct the activities of a VIE and the
obligation to absorb losses of the entity or the right to receive the entitys residual returns.
This accounting standard is effective for us on January 1, 2010. We are currently evaluating the
requirements of this pronouncement and have not determined the impact, if any, that adoption of
this standard will have on our Consolidated Financial Statements.
In October 2009, the FASB issued guidance that changes the accounting for revenue arrangements
with multiple deliverables. The guidance requires an entity to allocate consideration at the
inception of an arrangement to all of its deliverables based on their relative selling prices and
eliminates the use of the residual method of allocation. The guidance establishes a hierarchy for
determining the selling price of a deliverable, based on vendor-specific objective evidence,
third-party evidence or estimated selling price. In addition, this guidance expands required
disclosures related to a vendors multiple-deliverable revenue arrangements. This accounting
standard is effective for us on January 1, 2011. This guidance did not have a material impact on
our Consolidated Financial Statements.
Gain from Involuntary Conversion
In 2007, we recorded an $8.0 million gain on involuntary conversion of non-monetary assets to
monetary assets related to insurance proceeds in excess of aircraft book value.
Special Fleet Charges
In 2009, we decided to terminate early three MD-80 aircraft leases prior to their scheduled
expiration, in connection with the transition of AeroRepublicas fleet to Embraer 190. Fees paid
for early termination amounted to $10.5 million and were recognized as Special Fleet Charges in the
Consolidated Statements of Income.
In addition to the early lease termination, we wrote down amounts related property, plant and
equipment such as rotable parts, spare engines and tools totaling $4.9 million, and recognized a
loss of $4.0 million related to the scrapping of obsolete expendable parts.
In 2007, we decided to terminate early five MD-80 aircraft leases, in connection with the
transition of AeroRepúblicas fleet to Embraer 190. Penalties paid for early termination are
recognized as Special Fleet Charges in the Statement of Income.
50
Subsequent Events
Currency Devaluation
On Friday, January 8, 2010, the Venezuelan government announced its decision to implement new
fixed exchange rates effective Monday, January 11, 2010, which will result in a significant
devaluation of the Bolivar against the U.S. dollar.
Since 2005 the official exchange rate had been fixed at VEB 2.15 per U.S. dollar, however, the
new regime applies two official rates to different sectors of the economy. The first exchange rate,
applicable to imported goods characterized as essential, will be VEB 2.60 per U.S. dollar, and the
rate applicable to all other imported goods and services, including the aviation sector, will be
VEB 4.30 per U.S. dollar. At this time we are uncertain how this devaluation will affect future
demand for air travel in Venezuela and the results of our business.
In addition, we have significant cash balances in Bolivars subject to Venezuelan exchange
controls. Since 2003, under the Venezuelan foreign exchange control regime, foreign companies are
required to obtain Venezuelan government approval to exchange Bolivars into U.S. dollars at the
fixed official exchange rate for the purpose of transferring funds out of Venezuela. Furthermore,
since 2008 foreign companies with operations in Venezuela have experienced increasing delays in
obtaining such government approvals. As a result of these delays, as
of March 11, 2010, we have
approximately $92 million in Venezuelan Bolivares pending approval and repatriation. In
addition, on Wednesday, January 27, the Venezuelan government announced that it would apply the
exchange rate of VEB 2.60 per U.S. dollar to all funds pending approval by the Venezuela Central
Bank through January 8, 2010 and committed to a four month disbursement schedule for the
repatriation of these funds. As a result of the devaluation, we estimate that the Company will
incur losses of approximately $21 million, which will be recorded in the first
quarter of 2010 in accordance with US GAAP. Moreover, the exchange control situation in
Venezuela remains uncertain, and we cannot guarantee that we will be able to repatriate funds on a
timely basis and therefore continue to be exposed should there be a further devaluation of the
Bolivar before such approvals.
Tax Reform
Law 8 of 2010 (the Tax Reform), which modifies material sections of the Panamanian Fiscal Code
was approved and became effective on March 15, 2010. As a result of this reform, the airline
industry will be subject to higher tax rates than it has paid in the past. We estimate, however,
that we will benefit from certain tax credits in respect to taxes paid in foreign jurisdictions
in 2010 and on a going-forward basis. We, therefore, anticipate that our effective tax rate for
the immediate future will remain within the historical range of the past five years. As a result,
we do not believe this tax reform is likely to have a material adverse effect on our financial
position, results of operations and cash flows. Any future change in the Panamanian tax law
increasing the taxes payable by us could have materially adverse effects on our business,
financial condition and result of operations.
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, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
Operating revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Passenger revenue |
|
|
94.1 |
% |
|
|
94.5 |
% |
|
|
94.7 |
% |
Cargo, mail and other |
|
|
5.9 |
% |
|
|
5.5 |
% |
|
|
5.3 |
% |
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft fuel |
|
|
(25.8 |
)% |
|
|
(31.4 |
)% |
|
|
(24.0 |
)% |
Salaries and benefits |
|
|
(11.4 |
)% |
|
|
(10.8 |
)% |
|
|
(12.6 |
)% |
Passenger servicing |
|
|
(8.1 |
)% |
|
|
(7.7 |
)% |
|
|
(8.8 |
)% |
Commissions |
|
|
(6.4 |
)% |
|
|
(5.2 |
)% |
|
|
(4.6 |
)% |
Reservation and sales |
|
|
(4.7 |
)% |
|
|
(4.3 |
)% |
|
|
(4.5 |
)% |
Maintenance, materials and repairs |
|
|
(5.0 |
)% |
|
|
(5.2 |
)% |
|
|
(6.1 |
)% |
Depreciation |
|
|
(3.4 |
)% |
|
|
(3.3 |
)% |
|
|
(3.8 |
)% |
Flight operations |
|
|
(4.3 |
)% |
|
|
(4.4 |
)% |
|
|
(4.9 |
)% |
Aircraft rentals |
|
|
(3.8 |
)% |
|
|
(3.3 |
)% |
|
|
(3.7 |
)% |
Landing fees and other rentals |
|
|
(2.6 |
)% |
|
|
(2.5 |
)% |
|
|
(2.7 |
)% |
Other |
|
|
(5.4 |
)% |
|
|
(4.5 |
)% |
|
|
(5.0 |
)% |
Special fleet charges |
|
|
(0.7 |
)% |
|
|
|
|
|
|
(1.5 |
)% |
Gain from involuntary conversion |
|
|
0.8 |
% |
|
|
|
|
|
|
|
|
Total |
|
|
(80.8 |
)% |
|
|
(82.6 |
)% |
|
|
(82.2 |
)% |
Operating income |
|
|
19.2 |
% |
|
|
17.4 |
% |
|
|
17.8 |
% |
Non-operating income (expenses): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(4.3 |
)% |
|
|
(3.3 |
)% |
|
|
(2.6 |
)% |
Interest capitalized |
|
|
0.3 |
% |
|
|
0.1 |
% |
|
|
0.1 |
% |
Interest income |
|
|
1.2 |
% |
|
|
0.9 |
% |
|
|
0.7 |
% |
Other, net |
|
|
1.1 |
% |
|
|
(4.6 |
)% |
|
|
(4.8 |
)% |
Total |
|
|
(1.8 |
)% |
|
|
(6.8 |
)% |
|
|
(2.9 |
)% |
Income/(loss) before income taxes |
|
|
17.4 |
% |
|
|
10.6 |
% |
|
|
20.7 |
% |
Income taxes |
|
|
(1.7 |
)% |
|
|
(1.4 |
)% |
|
|
(1.6 |
)% |
Net income |
|
|
15.8 |
% |
|
|
9.2 |
% |
|
|
19.2 |
% |
51
Year 2009 Compared to Year 2008
Our consolidated net income in 2009 totaled $240.4 million, a 102.6% increase over net income
of $118.7 million in 2008. This increase was primarily due to a $58.0 million gain in the fair
value of fuel hedge instruments in 2009 as compared to a $54.8 million loss in the fair value of
fuel hedge instruments in 2008. We had consolidated operating income of $223.3 million in 2009, a
0.3% decrease from operating income of $224.0 million in 2008. Our consolidated operating margin in
2009 was 17.8%, an increase of 0.4 percentage points over an operating margin of 17.4% in 2008.
Operating revenue
Our consolidated revenue totaled $1.25 billion in 2009, a 2.8% decrease from operating revenue
of $1.29 billion in 2008 due to decreases in both passenger and cargo revenues.
Copa segment operating revenue
Copas operating revenue totaled $1.02 billion in 2009, a 1.1% decrease from operating revenue
of $1.04 billion in 2008 due to decreases in both passenger and cargo revenues.
Passenger revenue. Passenger revenue totaled $964.3 million in 2009, a 0.9% decrease over
passenger revenue of $973.2 million in 2008. This decrease resulted primarily from lower passenger
yield, which decreased by
9.3% to 15.25 in 2009, and lower load factor, which decreased by 2.8 percentage points to
76.0% in 2009. This decrease in yield and load factor was partially offset by the increase in
capacity as available seat miles increased by 13.3% in 2009 as compared to 2008 as a result of
increase in departures.
Cargo, mail and other. Cargo, mail and other revenue totaled $60.2 million in 2009, a 4.1%
decrease from cargo, mail and other revenue of $62.7 million in 2008. This decrease was primarily
the result of lower cargo revenue resulting from a decrease in cargo
volume and cargo unit prices.
AeroRepública segment operating revenue
AeroRepúblicas operating revenue totaled $240.4 million in 2009, a decrease of $24.6 million
from operating revenue of $264.9 million in 2008, resulting from a decrease in both passenger and
cargo revenues. This decrease resulted primarily from lower passenger yield (yield decreased from
26.31 cents in 2008 to 20.71 cents in 2009) during the period, partly due to a weaker Colombian
currency and lower ticket prices. The decrease in yield was partially offset by higher load factor
(load factor increased by 9.3 percentage points to 67.5% in 2009) and 5.9% more capacity.
Operating expenses
Our consolidated operating expenses totaled $1.03 billion in 2009, a 3.3% decrease from
operating expenses of $1.06 billion in 2008 that was primarily the result of savings due to lower
fuel cost, partially offset by higher operating cost due to growth in capacity.
In 2009, our operating expenses per available seat mile excluding aircraft fuel was 7.36
cents, a 1.5% decrease from operating expenses per available seat mile excluding aircraft fuel of
7.46 cents in 2008. Aircraft fuel per available seat mile was 3.04 cents in 2009, compared to 4.58
cents in 2008. In 2009, our total operating expenses per available seat mile was 10.39 cents, a
13.7% decrease from operating expenses per available seat mile of 12.04 cents in 2008.
An overview of the major variances on a consolidated basis follows:
Aircraft fuel. Aircraft fuel totaled $300.8 million in 2009, a 25.7% decrease from aircraft
fuel of $404.7 million in 2008. This decrease was primarily a result of lower fuel prices,
partially offset by 10.4% higher fuel consumption and a realized fuel hedge loss of $41.9 million
in 2009, as compared to a realized fuel hedge gain of $7.3 million in 2008.
52
Salaries and benefits. Salaries and benefits totaled $157.9 million in 2009, a 13.2% increase
over salaries and benefits of $139.4 million in 2008. This increase was primarily a result of an
overall increase in headcount to support our operations.
Passenger servicing. Passenger servicing totaled $110.8 million in 2009, a 12.1% increase
over passenger servicing of $98.8 million in 2008. This increase was primarily a result of an
increase in capacity and on-board passengers.
Maintenance, materials and repairs. Maintenance, materials and repairs totaled $76.7 million
in 2009, a 15.5% increase over maintenance, materials and repairs of $66.4 million in 2008. This
increase was primarily a result of increase in capacity and overhaul events.
The remaining operating expenses totaled $383.6 million in 2009, an increase of $28.1 million
over 2008.
Copa segment operating expenses
The breakdown of operating expenses per available seat mile is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
Percent |
|
|
|
2008 |
|
|
2009 |
|
|
Change |
|
|
|
(in cents) |
|
Operating Expenses per ASM: |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
1.48 |
|
|
|
1.50 |
|
|
|
1.4 |
% |
Passenger servicing |
|
|
1.11 |
|
|
|
1.12 |
|
|
|
0.9 |
% |
Commissions |
|
|
0.71 |
|
|
|
0.55 |
|
|
|
(22.3 |
%) |
Reservation and sales |
|
|
0.55 |
|
|
|
0.50 |
|
|
|
(10.0 |
%) |
Maintenance, materials and repairs |
|
|
0.63 |
|
|
|
0.77 |
|
|
|
23.4 |
% |
Depreciation |
|
|
0.52 |
|
|
|
0.52 |
|
|
|
0.0 |
% |
Flight operations |
|
|
0.64 |
|
|
|
0.62 |
|
|
|
(3.2 |
%) |
Aircraft rentals |
|
|
0.43 |
|
|
|
0.31 |
|
|
|
(26.5 |
%) |
Landing fees and other rentals |
|
|
0.33 |
|
|
|
0.30 |
|
|
|
(7.0 |
%) |
Other |
|
|
0.55 |
|
|
|
0.55 |
|
|
|
(0.1 |
%) |
|
|
|
|
|
|
|
|
|
|
Total operating expenses per ASM before
aircraft fuel |
|
|
6.94 |
|
|
|
6.75 |
|
|
|
(2.8 |
%) |
Aircraft fuel |
|
|
4.33 |
|
|
|
2.99 |
|
|
|
(30.9 |
%) |
|
|
|
|
|
|
|
|
|
|
Total operating expenses per ASM |
|
|
11.27 |
|
|
|
9.74 |
|
|
|
(13.6 |
%) |
|
|
|
|
|
|
|
|
|
|
Aircraft fuel. Aircraft fuel totaled $249.0 million in 2009, a 21.7% decrease from aircraft
fuel of $318.2 million in 2008. This decrease was primarily a result of a 29.9% decrease in the
all-in average price per gallon of jet fuel ($2.20 in 2009 compared to $3.14 in 2008) and the
consumption of 12.1% more fuel due to a 12.2% increase in departures. Aircraft fuel per available
seat mile decreased by 30.9% due to the decrease in average fuel cost per gallon.
Salaries and benefits. Salaries and benefits totaled $125.2 million in 2009, a 14.9% increase
over salaries and benefits of $108.9 million in 2008. This increase was mainly a result of an
overall increase in operating headcount to support increased capacity deployed during the year.
Salaries and benefits per available seat mile increased by 1.4%.
Passenger servicing. Passenger servicing totaled $92.9 million in 2009, a 14.3% increase over
passenger servicing of $81.2 million in 2008. This increase was primarily a result of Copas 13.3%
increase in capacity. Passenger servicing per available seat mile increased by 0.9%.
53
Commissions. Commissions totaled $45.9 million in 2009, a 12.0% decrease from commissions of
$52.1 million in 2008. This decrease was primarily a result of lower passenger revenue and lower
average commission rates. Commissions per available seat mile decreased by 22.3%.
Reservations and sales. Reservations and sales totaled $41.5 million in 2009, a 2.0% increase
over reservations and sales of $40.7 million in 2008. This increase was primarily a result of an
8.2% increase in on-board passengers. Reservations and sales expenses per available seat mile
decreased by 10.0%.
Maintenance, materials and repairs. Maintenance, materials and repairs totaled $64.2 million
in 2009, a 39.8% increase over maintenance, materials and repairs of $45.9 million in 2008. This
increase was primarily a result of a 13.3% increase in capacity and more overhaul events.
Maintenance, materials and repair per available seat mile increased by 23.4%. We recognize the cost
of overhaul events when they occur. Therefore, our maintenance cost will fluctuate due the timing
of these activities.
Depreciation. Depreciation totaled $43.2 million in 2009, a 13.3% increase over depreciation
of $38.1 million in 2008, as a result of higher depreciation attributable to our acquisition of
four new Embraer 190 and one new Boeing 737-800 in 2008, and one new Boeing 737-800 in 2009.
Flight operations, aircraft rentals and landing fees and other rentals. Combined, flight
operations, aircraft rentals and landing fees and other rentals increased from $101.9 million in
2008 to $102.5 million in 2009.
Combined flight operations, aircraft rentals and landing fees and other rentals per available
seat mile decreased by 11.2%, as the increase in the combined expense was offset by a 13.3%
increase in available seat miles.
Other. Other expenses totaled $45.9 million in 2009, a 13.2% increase over other expenses of
$40.6 million in 2008. This increase was primarily a result of an increase in OnePass frequent
flyer miles earned by customers during the period and higher technology related expenses. Other
expenses per available seat mile decreased by 0.1%.
AeroRepública segment operating expenses
AeroRepúblicas operating expenses totaled $232.7 million in 2009, a decrease of $16.4 million
from operating expenses of $249.2 million reported during 2008, primarily as a result of lower
aircraft fuel cost, partially offset by higher expenses related to 8.6% more departures and special
fleet charges related to the retirement of the older MD-80 aircraft.
Non-operating income (expense)
Our consolidated non-operating income totaled $36.6 million in 2009, an increase over
non-operating expenses of $87.9 million in 2008, attributable primarily to a $58.0 million gain in
the market value of fuel hedge instruments as compared to a $54.8 million loss in the market value
of fuel hedge instruments during 2008.
Copa segment non-operating income (expense)
Non-operating income totaled $40.1 million in 2009, an increase over non-operating expense of
$77.4 million in 2008, attributable primarily to a $53.1 million gain in the market value of fuel
hedge instruments.
Interest expense. Interest expense totaled $30.1 million in 2009, a 16.9% decrease from
interest expense of $36.2 million in 2008, primarily resulting from lower average interest rates
during the period. The average effective interest rates on our debt decreased by 76 basis points
from 4.68% during 2008 to 3.92% during 2009. At periods end, interest rate on 49% of our
outstanding debt was fixed at an average effective rate of 4.87%.
Interest capitalized. Interest capitalized totaled $0.7 million in 2009, a 63.9% decrease
from interest capitalized of $1.9 million in 2008, resulting from lower average monthly balance
relating to pre-delivery payments on aircraft.
54
Interest income. Interest income totaled $8.1 million in 2009, a 22.8% decrease from interest
income of $10.5 million in 2008. This decrease was mainly a result of lower average interest rates
during the period.
Other, net. Other, net income totaled $61.3 million in 2009, compared to a $53.6 million
other, net loss in 2008. This change was primarily the result of a $55.9 million gain in the market
value of fuel hedge instruments during 2009 as compared to a loss of $53.1 million during 2008.
AeroRepública segment non-operating income (expense)
Non-operating expense totaled $2.4 million in 2009, a decrease from non-operating expense of
$10.5 million in 2008, attributable primarily to a gain in the market value of fuel hedge
instruments during 2009, as compared to a loss in the market value of fuel hedge instruments during
2008.
Year 2008 Compared to Year 2007
Our consolidated net income in 2008 totaled $118.7 million, a 26.7% decrease from net income
of $161.8 million in 2007. This decrease was due to a $54.9 million loss in the fair value of fuel
hedge instruments. Operationally, we had a consolidated income of $224.0 million in 2008, a 13.4%
increase over operating income of
$197.5 million in 2007. Our consolidated operating margin in 2008 was 17.4%, a decrease of 1.8
percentage points from an operating margin of 19.2% in 2007.
Operating revenue
Our consolidated revenue totaled $1.29 billion in 2008, a 25.5% increase over operating
revenue of $1.0 billion in 2007 due to increases in both passenger and cargo revenues.
Copa segment operating revenue
Copas operating revenue totaled $1.04 billion in 2008, a 28.5% increase over operating
revenue of $806.2 million in 2007 due to increases in both passenger and cargo revenues.
Passenger revenue. Passenger revenue totaled $973.2 million in 2008, a 28.7% increase over
passenger revenue of $756.4 million in 2007. This increase resulted primarily from the addition of
capacity (ASMs increased by 16.6% in 2008 as compared to 2007) that resulted from an increase in
departures and, to a lesser extent, longer average stage length. Revenues also increased due to our
higher overall load factor (load factor increased from 78.4% in 2007 to 78.8% in 2008) during the
period and the simultaneous increase in passenger yield, which rose by 9.7% to 16.81 cents in 2008.
Cargo, mail and other. Cargo, mail and other revenue totaled $62.7 million in 2007, a 26.1%
increase over cargo, mail and other revenue of $49.8 million in 2007. This increase was primarily
the result of higher excess baggage fees and higher cargo revenue resulting from an increase in
belly space capacity available.
AeroRepública segment operating revenue
AeroRepúblicas operating revenue totaled $264.9 million in 2008, an increase of $38.9 million
over operating revenue of $226.0 million registered during 2007 resulting from an increase in both
passenger and cargo revenues. This increase resulted primarily from higher passenger yield (yield
increased from 22.74 cents in 2007 to 26.31 cents in 2008) during the period, partly due to a
stronger Colombian currency during the year and higher ticket prices.
55
Operating expenses
Our consolidated operating expenses totaled $1.06 billion in 2008, a 28.3% increase over
operating expenses of $829.8 million in 2007 that was primarily attributable to the growth of our
operations and higher fuel cost.
In 2008, our operating expenses per available seat mile excluding aircraft fuel was 7.46
cents, a 4.7% increase over operating expenses per available seat mile excluding aircraft fuel of
7.13 cents in 2007. Aircraft fuel per available seat mile was 4.58 cents in 2008, compared to 3.35
cents in 2007. In 2008, our total operating expenses per available seat mile was 12.04 cents, a
14.9% increase over operating expenses per available seat mile of 10.48 cents in 2007.
An overview of the major variances on a consolidated basis follows:
Aircraft fuel. Aircraft fuel totaled $404.7 million in 2008, a 52.5% increase over aircraft
fuel of $265.4 million in 2007. This increase was primarily a result of higher fuel prices and
higher fuel consumption.
Salaries and benefits. Salaries and benefits totaled $139.4 million in 2008, a 19.5% increase
over salaries and benefits of $116.7 million in 2007. This increase was primarily a result of an
overall increase in headcount to support our operations.
Passenger servicing. Passenger servicing totaled $98.8 million in 2008, a 19.1% increase over
passenger servicing of $82.9 million in 2007. This increase was primarily a result of an increase
in Copas capacity and on-board passengers.
Commissions. Commissions totaled $67.2 million in 2008, a 1.9% increase over commissions of
$65.9 million in 2007. This increase was primarily a result of higher passenger revenue offset by
lower average commissions.
The remaining operating expenses totaled $354.7 million in 2008, an increase of $55.9 million
over 2007.
Copa segment operating expenses
The breakdown of operating expenses per available seat mile is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
Percent |
|
|
|
2007 |
|
|
2008 |
|
|
Change |
|
|
|
(in cents) |
|
Operating Expenses per ASM: |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
1.45 |
|
|
|
1.48 |
|
|
|
2.4 |
% |
Passenger servicing |
|
|
1.09 |
|
|
|
1.11 |
|
|
|
1.6 |
% |
Commissions |
|
|
0.74 |
|
|
|
0.71 |
|
|
|
(3.6 |
%) |
Reservation and sales |
|
|
0.57 |
|
|
|
0.55 |
|
|
|
(2.6 |
%) |
Maintenance, materials and repairs |
|
|
0.62 |
|
|
|
0.63 |
|
|
|
0.6 |
% |
Depreciation |
|
|
0.49 |
|
|
|
0.52 |
|
|
|
6.4 |
% |
Flight operations |
|
|
0.58 |
|
|
|
0.64 |
|
|
|
8.7 |
% |
Aircraft rentals |
|
|
0.44 |
|
|
|
0.43 |
|
|
|
(3.4 |
%) |
Landing fees and other rentals |
|
|
0.32 |
|
|
|
0.33 |
|
|
|
1.8 |
% |
Other |
|
|
0.61 |
|
|
|
0.55 |
|
|
|
(8.8 |
%) |
|
|
|
|
|
|
|
|
|
|
Total operating expenses per ASM before
aircraft fuel |
|
|
6.90 |
|
|
|
6.94 |
|
|
|
0.5 |
% |
Aircraft fuel |
|
|
3.17 |
|
|
|
4.33 |
|
|
|
36.7 |
% |
|
|
|
|
|
|
|
|
|
|
Total operating expenses per ASM |
|
|
10.08 |
|
|
|
11.27 |
|
|
|
11.9 |
% |
|
|
|
|
|
|
|
|
|
|
56
Aircraft fuel. Aircraft fuel totaled $318.2 million in 2008, a 59.4% increase over aircraft
fuel of $199.7 million in 2007. This increase was primarily a result of a 37.0% increase in the
all-in average price per gallon of jet fuel ($3.14 in 2008 compared to $2.29 in 2007) and the
consumption of 16.6% more fuel due to a 18.9% increase in departures and an increase in average
stage length. Aircraft fuel per available seat mile increased by 36.7% due to the increase in
average fuel cost per gallon.
Salaries and benefits. Salaries and benefits totaled $108.9 million in 2008, a 19.4% increase
over salaries and benefits of $91.2 million in 2007. This increase was mainly a result of an
overall increase in operating headcount to support increased capacity deployed during the year.
Salaries and benefits per available seat mile increased by 2.5%.
Passenger servicing. Passenger servicing totaled $81.2 million in 2008, an 18.4% increase
over passenger servicing of $68.6 million in 2007. This increase was primarily a result of Copas
16.6% increase in capacity. Passenger servicing per available seat mile increased by 1.6%.
Commissions. Commissions totaled $52.1 million in 2008, a 12.3% increase over commissions of
$46.4 million in 2007. This increase was primarily a result of higher passenger revenue partially
offset by lower average commission rates. Commissions per available seat mile decreased by 3.6%.
Reservations and sales. Reservations and sales totaled $40.7 million in 2008, a 13.5%
increase over reservations and sales of $35.9 million in 2007. This increase was primarily a result
of a 15.4% increase in on-board passengers. Reservations and sales expenses per available seat mile
decreased by 2.6%.
Maintenance, materials and repairs. Maintenance, materials and repairs totaled $45.9 million
in 2008, a 17.2% increase over maintenance, materials and repairs of $39.2 million in 2007. This
increase was primarily a result of a 16.6% increase in capacity. Maintenance, materials and repair
per available seat mile increased by 0.6%.
Depreciation. Depreciation totaled $38.1 million in 2008, a 24.1% increase over depreciation
of $30.7 million in 2007, as a result of higher depreciation attributable to our acquisition of
five new Embraer 190 and two new Boeing 737-800 aircraft in 2007, and four new Embraer 190 and one
new Boeing 737-800 in 2008. Depreciation per available seat mile increased by 6.4%.
Flight operations, aircraft rentals and landing fees and other rentals. Combined, flight
operations, aircraft rentals and landing fees and other rentals increased from $84.7 million in
2007 to $101.9 million in 2008, primarily as a result of Copas 16.6% increase in capacity.
Combined, flight operations, aircraft rentals and landing fees and other rentals per available seat
mile increased by 3.1%.
Other. Other expenses totaled $40.6 million in 2008, a 6.4% increase over other expenses of
$38.1 million in 2007. This increase was primarily a result of an increase in OnePass frequent
flyer miles earned by customers during the period. Other expenses per available seat mile decreased
by 8.8%.
AeroRepública segment operating expenses
AeroRepúblicas operating expenses totaled $249.2 million in 2008, an increase of $48.7
million over operating expenses of $200.5 million reported during 2007 primarily due to higher
aircraft fuel cost and higher maintenance expenses related to the retirement of the older MD-80
aircraft.
Non-operating income (expense)
Our consolidated non-operating expenses totaled $87.9 million in 2008, an increase over
non-operating expenses of $18.6 million in 2007, attributable primarily to a $54.9 million loss in
the market value of fuel hedge instruments.
57
Copa segment non-operating income (expense)
Non-operating expense totaled $77.4 million in 2008, an increase over non-operating expense of
$6.1 million in 2007, attributable primarily to a $53.1 million loss in the market value of fuel
hedge instruments.
Interest expense. Interest expense totaled $36.2 million in 2008, a 0.3% decrease from
interest expense of $36.3 million in 2007, primarily resulting from lower average interest rates
during the period. The average effective interest rates on our debt decreased by 88 basis points
from 5.56% during 2007 to 4.68% during 2008. At periods end, interest rate on 47% of our
outstanding debt was fixed at an average effective rate of 4.89%.
Interest capitalized. Interest capitalized totaled $1.9 million in 2008, a 25.3% decrease
over interest capitalized of $2.6 million in 2007, resulting from lower average monthly balance
relating to pre-delivery payments on aircraft.
Interest income. Interest income totaled $10.5 million in 2008, a 10.3% decrease from
interest income of $11.7 million in 2007. This decrease was mainly a result of lower average
interest rates during the period, partially offset by a higher average cash and investment balance.
Other, net. Other, net loss totaled $53.6 million in 2008, compared to a $15.9 million other,
net income in 2007. This change was primarily the result of a $53.1 million loss in the market
value of fuel hedge instruments during the period.
AeroRepública segment non-operating income (expense)
Non-operating expense totaled $10.5 million in 2008, a decrease from non-operating expense of
$12.2 million in 2007, attributable primarily to lower interest expense.
B. Liquidity and Capital Resources
In recent years, we have been able to meet our working capital requirements through cash from
our operations. Our capital expenditures, which consist primarily of aircraft purchases, are funded
through a combination of our cash from operations and long-term financing. From time to time, we
finance pre-delivery payments related to our aircraft with medium-term financing in the form of
commercial banks loans and/or bonds privately placed with commercial banks. Our accounts receivable
at December 31, 2009 increased by $5.6 million compared with December 31, 2008, primarily as a
result of the growth in operating revenues.
Our cash, cash equivalents and short-term investments at December 31, 2009 decreased by $44.7
million to $352.1 million. At December 31, 2009, we had $6.4 million in restricted cash within
long-term investments as collateral for letters of credits. At December 31, 2009 we had available
committed lines of credit totaling $29.6 million under which there were no amounts outstanding and
uncommitted lines of credit totaling $60.0 million under which there was $20.0 million outstanding.
These lines of credit have been secured to bridge potential liquidity gaps and account for other
potential contingencies.
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 $282.4 million in 2009, $198.1
million in 2008 and $221.9 million in 2007. The increase in operating cash flows over these periods
was primarily due to the growth of our business.
58
Investing Activities
During
2009, our capital expenditures were $202.7 million, which consisted primarily of
expenditures related to our purchase of one Boeing 737-800 aircraft, as well as $151.7 million in
expenditures related to advance payments on aircraft purchase contracts for aircraft delivering in
2010, 2011 and 2012. During 2008, our capital expenditures were $215.9 million, which consisted
primarily of expenditures related to our purchase of four Embraer 190 aircraft and one Boeing
737-800 aircraft, as well as to expenditures related to advance payments on aircraft purchase
contracts. During 2007, our capital expenditures were $366.1 million, which consisted primarily of
expenditures related to our purchase of nine Embraer 190 aircraft and two Boeing 737-800 aircraft,
as well as to expenditures related to advance payments on aircraft purchase contracts.
Financing Activities
Financing
activities during 2009 consisted primarily of $103.8 million of financing of one
aircraft and aircraft pre-delivery payments, the repayment of
$175.4 million in short and long-term debt and
$16.3 million in dividends declared and paid.
Financing activities during 2008 consisted primarily of $160.2 million of financing for five
aircraft and aircraft pre-delivery payments, the repayment of $84.5 million in long-term debt and
$16.2 million in dividends declared and paid.
Financing activities during 2007 consisted primarily of $329.1 million of financing for 11
aircraft and aircraft pre-delivery payments, the repayment of $87.3 million in long-term debt and
$13.6 million in dividends declared and paid.
In past years we have generally been able to arrange medium-term financing for pre-delivery
payments through loans with commercial banks. In 2009, we financed our pre-delivery payments with
our own cash. As the aircraft are delivered and the financing for the aircraft is received, these
pre-delivery payments will be recovered by the company.
Although we have not experienced any difficulty obtaining financing, the current recessionary
environment, combined with other factors, has led to a tightening in the credit markets, which has
increased the cost of our lease and debt financing and we may not be able to continue to raise
financing on terms attractive to us, or at all, in the future.
We have financed the acquisition of 21 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-Im guarantee facilities typically offer an option to fix the applicable interest rate. We have
exercised this option with respect to $337.8 million as of December 31, 2009 at an average weighted
interest rate of 4.67%. The remaining $25.8 million bears interest at an average weighted interest
of LIBOR plus 0.03%. At December 31, 2009, the total amount outstanding under our Ex-Im-supported
financings totaled $363.5 million.
We have effectively extended the maturity of certain of our Boeing aircraft financing to 15
years through the use of a Stretched Overall Amortization and Repayment, or SOAR, structure which
provides serial draw-downs calculated to result in a 100% loan accreting to a recourse balloon at
the maturity of the Ex-Im guaranteed loan. The SOAR portions of our facilities require us to
maintain certain financial covenants, including an EBITDAR to fixed charge ratio, a long-term
obligations to EBITDAR ratio and a minimum unrestricted cash balance. To comply with the first
ratio, our EBITDA plus aircraft rent expense, or EBITDAR, for the prior year must be at least 2.0
times our fixed charge expenses (including interest, commission, fees, discounts and other finance
payments) for that year. To comply with the second ratio, our long-term obligations must be no more
than six times EBITDAR. Third, our cash, cash equivalents and short-term investment balance should
be at least $50 million. As of December 31, 2009, we complied with all required covenants. We also
pay a commitment fee on the unutilized portion of our SOAR loans.
59
We also have financed 10% of the purchase price of certain of our Boeing aircraft through
commercial loans. 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 2.0 times our finance charge expenses (including interest,
commission, fees, discounts and other finance payments). The second covenant limits our net
borrowings to 85% of our capitalization. The third covenant requires our tangible net worth to be
at least $120 million. The last covenant requires us to maintain a minimum of $50 million in
available cash (including cash equivalents and committed credit facilities). As of December 31,
2009, we complied with all required covenants.
Our Embraer aircraft purchases are not eligible for Ex-Im guaranteed financing. During 2005,
we secured a senior term loan facility in the amount of $134 million for the purchase of six
Embraer 190 aircraft. The loans have a term of twelve years. During 2005, we utilized $44 million
of this facility and the remaining $90 million was drawn during 2006. During 2006, we secured a
senior and junior term loan facility for a total $240 million for the purchase of ten Embraer 190
aircraft. The loans have a term of twelve years. During 2006, we utilized $24 million of this
facility and the remainder was drawn during 2007. During 2008, we secured a senior term loan
facility in the amount of $100 million for the purchase of four Embraer 190 aircraft. The loans
have a term of twelve years. During 2008, we utilized all of this facility. Under the 2006 loan
agreement we are required to comply with certain financial covenants. The first covenant requires
our EBITDAR for the prior year to be at least 2.5 times our fixed charge expenses (including
interest, commission, fees, discounts and other finance payments) for that year. The second
covenant requires a total liability plus operating leases minus operating cash to tangible net
worth ratio of less than 5.5 to 1. The third covenant requires our tangible net worth to be at
least $160 million. The last covenant requires us
to maintain a minimum of $75 million in available cash, cash equivalents and short-term
investments. As of December 31, 2009, we complied with all required covenants.
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.
As of December 31, 2009, we had placed firm purchase orders with The Boeing Company for 27
Boeing 737-Next Generation aircraft and we have purchase rights and options for an additional eight
Boeing 737-Next Generation aircraft. We also have options to purchase an additional 11 Embraer 190
aircraft. The schedule for delivery of our firm purchase orders is as follows: seven in 2010, five
in 2011, five in 2012, four in 2013, four in 2014, and two in 2015. 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 between two years
and 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.
We maintain available facilities for letters of credit with several banks with outstanding
balances of $25.7 million and $34.6 million at December 31, 2009 and 2008, respectively. These
letters of credit are pledged for aircraft rentals, maintenance and guarantees for airport
facilities. Of this total, $7.7 million are letters of credit opened on behalf of AeroRepública for
the same purposes listed above. In addition, we have committed lines of credit totaling $29.6
million, including one line of credit for $15.0 million with Banco General and an overdraft line of
credit of $10.0 million with Towerbank. We also had a non committed line of credit of $60.0 million
with Bladex. These lines of credit have been secured to bridge liquidity gaps and for other
potential contingencies. As of December 31, 2009, we had an outstanding balance of $20.0 million
with Bladex.
60
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 operations by adding frequencies and new routes with the addition of
eight new Boeing 737-800 aircraft to our fleet in 2010. For the remainder of 2010, we expect to
continue to concentrate on keeping our operating costs low and pursuing ways to make our operations
more efficient.
We intend to continue developing initiatives to improve the operations at both Copa and
AeroRepública, including a continued focus on on-time performance and completion factors. In
February 2010, as part of our plan to modernize AeroRepúblicas fleet, we completed the retirement
of our last remaining MD-80 aircraft. Additionally, we continue to seek further integration of
Copas and AeroRepúblicas network through codesharing and fleet interchange agreements.
We expect jet fuel prices will continue to be volatile in 2010 and expect to continue
evaluating fuel hedging programs to help protect us against short-term movements in crude oil
prices. We also expect some recovery of the regional economic environment during 2010.
We expect our operating capacity to increase approximately 10% in 2010, primarily as a result
of the addition of nine new aircraft throughout the year.
E. Off-balance sheet arrangements
None of our operating lease obligations are reflected on our consolidated 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, 2009 included the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009 |
|
|
|
|
|
|
|
Less than |
|
|
1-3 |
|
|
3-5 |
|
|
More than |
|
|
|
Total |
|
|
1 Year |
|
|
Years |
|
|
Years |
|
|
5 Years |
|
|
|
(in thousands of dollars) |
|
Aircraft and engine purchase commitments |
|
|
980,883 |
|
|
|
246,243 |
|
|
|
347,587 |
|
|
|
319,975 |
|
|
|
67,078 |
|
Aircraft operating leases |
|
|
226,557 |
|
|
|
46,670 |
|
|
|
79,433 |
|
|
|
53,038 |
|
|
|
47,416 |
|
Other operating leases |
|
|
35,935 |
|
|
|
9,741 |
|
|
|
13,536 |
|
|
|
9,396 |
|
|
|
3,262 |
|
Short-term debt and long-term debt(1) |
|
|
937,630 |
|
|
|
122,271 |
|
|
|
206,184 |
|
|
|
190,124 |
|
|
|
419,051 |
|
Total |
|
|
2,181,005 |
|
|
|
424,925 |
|
|
|
646,740 |
|
|
|
572,533 |
|
|
|
536,807 |
|
|
|
|
(1) |
|
Includes actual interest and estimated interest for floating-rate debt based on December 31, 2009 rates. |
61
Most contract leases include renewal options. Non-aircraft related leases have renewable terms
of one year, and their respective amounts included in the table above have been estimated through
2014, but we cannot estimate amounts with respect to those leases for later years. Our leases do
not include residual value guarantees.
The Company has a prepaid pension asset, but estimates that contribution payments to the plan,
which reflect expected future services, will be $1.2 million for 2010.
Item 6. Directors, senior management and employees
A. Directors and Senior Management
We are managed by our Board of Directors which currently consists of eleven members who serve
two-year terms and may be re-elected. The number of directors elected each year alternates between
six directors and five directors. Messrs. Pedro Heilbron, Osvaldo Heilbron, Ricardo A. Arias, Mark
Erwin, Alfredo Arias Loredo and Roberto Artavia were each re-elected for two-year terms at our
annual shareholders meeting held in May 2008. At our 2009 annual shareholders meeting held on
May 6, 2009, Messrs. Stanley Motta, José Castañeda Velez, Jaime Arias, Alberto C. Motta Jr., and
Joseph Fidanque were re-elected as directors until the 2011 annual shareholders meeting. Our
charter does not have a mandatory retirement age for our directors.
The following table sets forth the name, age and position of each member of our Board of
Directors as of February 26, 2010. 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
|
|
|
52 |
|
Stanley Motta
|
|
Chairman and Director
|
|
|
64 |
|
Osvaldo Heilbron
|
|
Director
|
|
|
84 |
|
Jaime Arias
|
|
Director
|
|
|
75 |
|
Ricardo Alberto Arias
|
|
Director
|
|
|
70 |
|
Alberto C. Motta, Jr.
|
|
Director
|
|
|
63 |
|
Mark Erwin
|
|
Director
|
|
|
54 |
|
Joseph Fidanque III
|
|
Director
|
|
|
43 |
|
Jose Castañeda Velez
|
|
Director
|
|
|
65 |
|
Roberto Artavia Loria
|
|
Director
|
|
|
51 |
|
Alfredo Arias Loredo
|
|
Director
|
|
|
63 |
|
Mr. Pedro Heilbron. See Executive 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 and distributor of 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., BG Financial Group, S.A., ASSA Compañía de Seguros, S.A., Televisora Nacional,
S.A., Inversiones Bahía, Ltd. and GBM Corporation. Mr. Motta is a graduate of Tulane University.
Mr. Osvaldo Heilbron has been one of the directors of Copa Airlines since 1986 and a director
of Copa Holdings, since it was established in 1998. Mr. Heilbron is the father of Mr. Pedro
Heilbron, our chief executive officer. He serves on the boards of directors of CIASA, Desarrollo
Costa Del Este, S.A., Harinas Panama, S.A., Televisora Nacional, S.A. and SSA Panama Inc.
Mr. Jaime Arias has been one of the directors of Copa Airlines since 1983 and a director of
Copa Holdings, since it was established in 1998. He is a founding partner of Galindo, Arias &
Lopez. Mr. Arias holds a B.A. from Yale University, a J.D. from Tulane University and legal studies
at the University of Paris, Sorbonne. He serves on the boards of directors of Televisora Nacional, S.A., ASSA Compañía de
Seguros, S.A., Empresa General de Inversiones, S.A., Petróleos Delta, S.A., Bac International Bank,
Inc., Direct Vision, S.A. and Promed, S.A.
62
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 is the former Panamanian 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.
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. Arias is a former Director and
President of the Panamanian Stock Exchange.
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., BG Financial Group, 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 President Corporate Development and Alliances of Continental Airlines 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. Erwin is a graduate of
Portland State University. Mr. Erwin has been appointed to our Board of Director pursuant to our
supplemental agreement with Continental (see Item 7.B Related Party and Certain Significant
Transactions Supplemental Agreement).
Mr. Joseph Fidanque III has been one of the directors of Copa Airlines since 2006. He is
President of Fidanque Hermanos e Hijos, S.A. and Star Contact, Ltd. He serves on the boards of
directors of Multiholding Corporation Panama, Fundación Filantrópica Fidanque, Colon Import and
Export and Sky Technologies Network. Mr. Fidanque holds a B.S. in Economics from Tufts University.
Mr. Roberto Artavia Loria is one of the independent directors of Copa Holdings. He is Chairman
of Viva Trust and Viva Services, President of the Fundación Latinoamérica Posible in Panama and
Costa Rica, Board Member and visiting professor of INCAE Business School, and Director of MarViva
Foundation in Panama. Mr. Artavia Loria is also an advisor to the governments of five countries in
Latin America, and a strategic advisor to Purdy Motor, S.A., the Panama Canal Authority, Coyol Free
Zone and Business Park, Grupo Nacion and FUNDESA, among other organizations in the region. Mr.
Artavia Loria also serves on the Board of Directors of the World Resources Institute and the
Foundation for Management Education in Central America, both in Washington, Compañía Cervecera de
Nicaragua, OBS Americas in Costa Rica, and IDC of Guatemala.
Mr. José Castañeda Velez is one of the independent directors of Copa Holdings. He is currently
director of MMG Bank Corporation, MMG Fiduciary & Trust Corp., and the Instituto de Gobierno
Corporativo de Panamá. Previously, Mr. Castañeda Velez was the chief executive officer of Banco
Latinoamericano de Exportaciones, S.A.BLADEX and has held managerial and officer level positions
at Banco Río de la Plata, Citibank, N.A., Banco de Credito del Peru and Crocker National Bank. He
is a graduate of the University of Lima.
Mr. Alfredo Arias Loredo is one of the independent directors of Copa Holdings. He is the
former Executive President of Cerveceria Nacional, S.A. Mr. Arias Loredo is a member of the Board
of Trustees of ANCON (Asociación Nacional para la Conservación de la Naturaleza). Mr. Arias Loredo
received a B.S. in Mechanical Engineering and an M.S. in Industrial Management, both from Georgia
Institute of Technology.
63
The following table sets forth the name, age and position of each of our executive officers as
of February 26, 2010. A brief biographical description of each of our executive officers follows
the table.
|
|
|
|
|
|
|
Name |
|
Position |
|
Age |
Pedro Heilbron
|
|
Chief Executive Officer
|
|
|
52 |
|
Victor Vial
|
|
Chief Financial Officer
|
|
|
44 |
|
Daniel Gunn
|
|
Senior Vice-President of Operations
|
|
|
42 |
|
Leo Marchosky
|
|
Vice-President of Human Resources
|
|
|
53 |
|
Joe Mohan
|
|
Vice-President of Commercial and Planning
|
|
|
40 |
|
Jaime Aguirre
|
|
Vice-President of Maintenance
|
|
|
47 |
|
Vidalia de Casado
|
|
Vice-President of On-Board Services
|
|
|
52 |
|
David Lindskoog
|
|
Vice-President of Flight Operations
|
|
|
59 |
|
Peter Diaz
|
|
Vice-President of Airport Services
|
|
|
43 |
|
Roberto Junguito Pombo
|
|
Chief Executive Officer of AeroRepública
|
|
|
39 |
|
Mr. Pedro Heilbron has been our Chief Executive Officer for 21 years. He received an M.B.A.
from George Washington University and a B.A. from College of the Holy Cross. Mr. Heilbron is the
son of Mr. Osvaldo Heilbron, a member of our Board of Directors. Mr. Heilbron is a Member of the
Board of Governors of IATA.
Mr. Victor Vial has been our Chief Financial Officer since 2000. From 1995 until 2000, Mr.
Vial served as our Director of Planning. Prior to his service at Copa, Mr. Vial was a Senior
Financial Analyst for HBO-Time Warner. Mr. Vial holds a B.B.A. in International Business from
George Washington University.
Mr. Daniel Gunn has been our Senior Vice-President of Operations since February 2009. Prior to
this Mr. Gunn had served as Vice-President of Commercial and Planning and Vice-President of
Planning and Alliances. Prior to joining Copa in 1999, 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.
Dr. Leo Marchosky has been our Vice-President of Human Resources since February 2008. Before
joining Copa, he was CEO and President of Novartis Mexico and previously held top management and
regional positions with the same company in Latin America, Asia and Europe. Dr. Marchosky has a
Master in Business Administration from the Sao Paulo Business School in Brazil, and is also an MD
with a specialty in Internal Medicine.
Mr. Joe Mohan has been our Vice-President of Commercial and Planning since February 2008.
Prior to joining Copa, he was the Senior Vice President of Sales at American Land Lease and held
several senior positions at Continental Airlines. Mr. Mohan received a B.A. in Economics from the
University of Florida and a M.B.A. with an emphasis on strategy from Georgetown University.
Mr. Jaime Aguirre has been our Vice President of Maintenance since 2002. Prior to that, he
served as our Director of Engineering and Quality Assurance. Before joining Copa, Mr. Aguirre was
the Technical Services Director at Avianca, S.A. Mr. Aguirre received a B.S. in Mechanical
Engineering from Los Andes University, a Master of Engineering with an emphasis on Engineering
Management from Javeriana University and a M.B.A. from the University of Louisville.
Ms. Vidalia de Casado has been our Vice-President of On-Board Services since January 2010. She
joined Copa in 1989, serving as Passenger Services Manager from 1989 to 1995 and Vice-President of
Passenger Services from 1995 to 2010. Prior to joining Copa, she spent seven years as Human
Resource and Service Director with Air Panama Internacional, S.A. Ms. de Casado received a B.S. in
Business from Universidad Latina and an M.B.A. from the University of Louisville.
Captain David Lindskoog has been our Vice-President of Flight Operations since 2008. Captain
Lindskoog has worked in the airline industry since 1981, both in line operations and in management.
Prior to joining Copa he held management positions at North American Airlines and ATA Airlines.
Captain Lindskoog received a B.S. in Professional Pilot Technology from Purdue University.
64
Mr. Peter Díaz has been our Vice-President of Airport Services since January 2010. Prior to
joining COPA he served as Vice-President of Primeflight Aviation Services and also held regional
positions with JetBlue Airways from 2003 through 2008. He received a B.S. in Business
Administration from Embry-Riddle University.
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 2009, we paid an
aggregate of approximately $2.7 million in cash compensation to our
executive officers. Although in 2006 we set aside $3.0 million for payment to senior management
related to covenants not to compete with us in the future, we have not set aside any other funds
for future payments to executive officers.
Members of our Board of Directors that are not officers of either Copa or Continental receive
$25,000 per year plus expenses incurred to attend our Board of Directors meetings. In addition,
members of committees of the Board of Directors receive $1,000 per committee meeting, with the
chairman of the audit committee receiving $2,000 per meeting of the audit committee. All of the
members of our Board of Directors and their spouses receive benefits to travel on Copa flights as
well.
Incentive Compensation Program
In 2005, the Compensation Committee of our Board of Directors eliminated the then existing
Long Term Retention Plan and approved a one time non vested stock bonus award program for certain
executive officers (the Stock Incentive Plan). Non vested stock delivered under the Stock
Incentive Plan may be sourced from treasury stock, or authorized un-issued shares. In March 2006,
in accordance with this program, the Compensation Committee of our Board of Directors granted
935,650 restricted stock awards. Senior management were granted 847,625 non vested stock awards,
which vest over five years in yearly installments equal to 15% of the awarded stock on each of the
first three anniversaries of the grant date, 25% on the fourth anniversary and 30% on the fifth
anniversary. Managers, officers and key employees, not on our senior management team, were granted
88,025 non vested stock awards which vest on the second anniversary of the grant date. In each of
March 2007, February 2008, and March 2009 the Compensation Committee of our Board of Directors
granted 16,955, 73,374 and 113,714 shares of non-vested stock awards, respectively, to certain
named executive officers, which vest over three years in yearly installments equal to one-third of
the awarded stock on each of the three anniversaries of the grant date. Non-vested stock awards
were measured at their fair value, which is the same amount for which a similarly restricted share
would be issued to third party, on the grant date. The fair value of these non-vested stocks award
was $22.05, $37.97, $53.14 and $21.10 for the 2009, 2008, 2007 and 2006 grants, respectively.
In March 2007, the Compensation Committee of our Board of Directors granted, for the first
time, 35,657 equity stock options to certain named executive officers, which vest over three years
in yearly installments equal to one-third of the awarded stock on each of the three anniversaries
of the grant date. The exercise price of the options is $53.14, which is the market price of the
Companys stock at the grant date. The stock options have a contractual term of 10 years.
The weighted-average fair value of the stock options at the grant date was $22.33, and was
estimated using the Black-Scholes option-pricing model assuming an expected dividend yield of
0.58%, expected volatility of approximately 37.8% based on historical volatility, weighted average
risk-free interest rate of 4.59%, and an expected term of 6 years calculated under the simplified
method.
65
The Compensation Committee plans to make additional equity based awards under the plan from
time to time, including additional non vested stock and stock option awards. While the Compensation
Committee will retain discretion to vary the exact terms of future awards, we anticipate that
future employee non-vested stock and stock option awards granted pursuant to the plan will
generally vest over a three year period and the stock options will carry a ten year term.
The total compensation cost recognized for non-vested stocks and options awards was $5.3
million, $5.6 million and $4.8 million in 2009, 2008 and 2007, respectively, and was recorded as a
component of Salaries and benefits within Operating Expense.
During first quarter of 2010 the Compensation Committee of our Board of Directors approved two
new stock compensation plans. Awards were granted under these new plans for 55,758 shares of
non-vested stock awards, which will vest over three years. We estimate the fair value of these
awards to be approximately $3.1 million and the 2010 compensation cost for these plans to be $1.0
million.
C. Board Practices
Our Board of Directors currently meets quarterly. Additionally, informal meetings with
Continental are held on an ongoing basis, and are supported by quarterly formal meetings of an
Alliance Steering Committee, which directs and reports on the progress of the Copa and
Continental Alliance. Our Board of Directors is focused on providing our overall strategic
direction and as a result is responsible for establishing our general business policies and for
appointing our executive officers and supervising their management.
Currently, our Board of Directors is comprised of eleven members. The number of directors
elected each year alternates between six directors and five directors. Messrs. Pedro Heilbron,
Osvaldo Heilbron, Alfredo Arias Loredo, Ricardo Arias, Mark Erwin, and Roberto Artavia were each
re-elected to two-year terms at our annual shareholders meeting held in May 2008. Messrs. Stanley
Motta, Jaime Arias, Alberto C. Motta Jr., Joseph Fidanque and José Castañeda were re-elected to
two-year terms at our annual shareholders meeting held in May 2009. Our charter does not have a
mandatory retirement age for our directors.
Pursuant to contractual arrangements with us and CIASA, Continental is entitled to designate
one of our directors.
Committees of the Board of Directors
Audit Committee. The primary function of the Audit Committee is to assist the Board of
Directors in fulfilling its oversight responsibilities by reviewing:
|
|
|
the integrity of financial reports and other financial information made
available to the public or any regulator or governmental body; |
|
|
|
the effectiveness of our internal financial control and risk management systems;
the effectiveness of our internal audit function, the independent audit process
including the appointment, retention, compensation, and supervision of the
independent auditor; and |
|
|
|
the compliance with laws and regulations, as well as the policies and ethical
codes established by management and the Board of Directors. |
The Audit Committee is also responsible for implementing procedures for receiving, retaining
and addressing complaints regarding accounting, internal control and auditing matters, including
the submission of confidential, anonymous complaints from employees regarding questionable
accounting or auditing matters.
Messrs. Jose Castañeda, Roberto Artavia and Alfredo Arias, all independent non-executive
directors under the applicable rules of the New York Stock Exchange, are the current members of the
committee, which is chaired
by Mr. Jose Castañeda. All members are financially literate and Messrs. Jose Castañeda and
Roberto Artavia have been determined to be financial experts by the Board of Directors.
66
Compensation Committee. Our Compensation Committee is responsible for the selection process
of the Chief Executive Officer and the evaluation of all executive officers (including the CEO),
recommending the level of compensation and any associated bonus. The charter of our Compensation
Committee requires that all its members shall be non-executive directors, of which at least one
member will be an independent director under the applicable rules of the New York Stock Exchange.
Messrs. Stanley Motta, Jaime Arias and José Castañeda are the members of our Compensation
Committee, and Mr. Stanley Motta is the Chairman of the Compensation Committee.
Nominating and Corporate Governance Committee. Our Nominating and Corporate Governance
Committee is responsible for developing and recommending criteria for selecting new directors,
overseeing evaluations of the Board of Directors, its members and committees of the Board of
Directors and handling other matters that are specifically delegated to the compensation committee
by the Board of Directors from time to time. Our charter documents require that there be at least
one independent member of the Nominating and Corporate Governance Committee until the first
shareholders meeting to elect directors after such time as the Class A shares are entitled to full
voting rights. Messrs. Ricardo Arias, Osvaldo Heilbron and Roberto Artavia are the members of our
Nominating and Corporate Governance Committee, and Mr. Ricardo Arias is the Chairman of the
Nominating and Corporate Governance Committee.
Independent Directors Committee. Our Independent Directors Committee is created by our
Articles of Incorporation and consists of any directors that the Board of Directors determines from
time to time meet the independence requirements of the NYSE rules applicable to audit committee
members of foreign private issuers. 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:
|
|
|
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.
67
Approximately 76% of Copas employees are located in Panama, while the remaining 24% are
distributed among our foreign stations. Copas employees can be categorized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
Pilots |
|
|
235 |
|
|
|
299 |
|
|
|
375 |
|
|
|
492 |
|
|
|
529 |
|
Flight attendants |
|
|
448 |
|
|
|
514 |
|
|
|
575 |
|
|
|
719 |
|
|
|
783 |
|
Mechanics |
|
|
200 |
|
|
|
155 |
|
|
|
213 |
|
|
|
247 |
|
|
|
249 |
|
Customer service agents, reservation
agents, ramp and other |
|
|
1,626 |
|
|
|
1,861 |
|
|
|
1,898 |
|
|
|
2,270 |
|
|
|
2,143 |
|
Management and clerical |
|
|
587 |
|
|
|
675 |
|
|
|
742 |
|
|
|
807 |
|
|
|
1,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total employees |
|
|
3,096 |
|
|
|
3,504 |
|
|
|
3,803 |
|
|
|
4,535 |
|
|
|
4,772 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 are based on
the companys performance and payment is typically a multiple of the employees weekly salary. The
bonus payments are approved by our compensation committee. We typically make accruals each month
for the expected annual bonuses which are reconciled to actual payments at their dispersal in the
first quarter.
We provide training for all of our employees including technical training for our pilots,
dispatchers, flight attendants and other technical staff. In addition, we provide recurrent
customer service training to frontline staff, as well as leadership training for managers. In 2005,
we leased a Level B flight simulator for Boeing 737-Next Generation training that served 80% of our
initial training, transition and upgrade training and 100% of our recurrent training needs relating
to that aircraft. During 2007, we upgraded this simulator to provide 100% of our initial training.
In 2008, we leased a similar flight simulator for Embraer 190 training that serves for all of our
initial and recurrent training needs.
We generally maintain good relations with our union and non-union employees and have not
experienced work stoppages during the past twenty years. Approximately 56% 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 (UGETRACO); and a generalized union, SIELAS, which represents ground personnel,
messengers, drivers, counter agents and other non-executive administrative staff. In November of
2007, Copa negotiated a new collective bargaining agreement with its pilot union that will remain
in effect for more than four years, with the next negotiation scheduled for August 2012. Copa
entered into new collective bargaining agreements with its general union, mechanics union and flight attendants union in
July 2008, April 2009, and March 2010 respectively. 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.
AeroRepúblicas pilots and flight attendants are represented by two separate unions. The
pilots union, Asociación Colombiana de Aviadores Civiles (ACDAC), represents AeroRepúblicas
pilots and co-pilots. The flight attendants union, Asociación Colombiana de Auxiliares de Vuelo
(ACAV), represents all of AeroRepúblicas flight attendants. AeroRepúblicas entered into a new
collective bargaining agreement with ACDAC on March 3, 2008 and will be effect until December 31,
2010. Typically, collective bargaining agreements in Colombia are valid for a period of two to
four years. AeroRepública has traditionally experienced good relations with its unions.
E. Share Ownership
The members of our Board of Directors and our executive officers as a group own 0.3% of our
Class A shares. See Item 7A. Major Shareholders and Related Party Transactions.
68
For a description of stock options granted to our Board of Directors and our executive
officers, see CompensationLong Term Incentive Compensation Program.
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 December 31, 2009 by each person known to us to beneficially own 5% or more of our
common shares and all our directors and officers as a group. Class A shares are limited voting
shares entitled only to vote in certain specified circumstances. See Item 10B. Additional
Information Memorandum and Articles of Association Description of Capital Stock.
|
|
|
|
|
|
|
|
|
|
|
Class A Shares |
|
|
|
Beneficially Owned |
|
|
|
Shares |
|
|
(%)(1) |
|
CIASA(2) |
|
|
|
|
|
|
|
|
Executive officers and directors as a group (20 persons) |
|
|
98,069 |
|
|
|
0.3 |
% |
Bank of America Corp. (3) |
|
|
2,243,288 |
|
|
|
7.3 |
% |
Others |
|
|
28,225,496 |
|
|
|
92.3 |
% |
|
|
|
|
|
|
|
Total |
|
|
30,566,853 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
(1) |
|
Based on a total of 30,566,853 Class A shares outstanding. |
|
(2) |
|
CIASA owns 100% of the Class B shares of Copa Holdings, representing 29.1% of our total capital
stock. |
|
(3) |
|
Based on a Schedule 13G filed with the SEC, dated February 2, 2010, in which Bank of America
Corp. and certain related parties, reported beneficial ownership of 2,243,288 Class A Shares. |
In June 2006, Continental reduced its ownership of our total capital stock from 27.3% to
10.0%. In May 2008, Continental sold down its remaining shares in the public market.
CIASA currently owns 100% of the Class B shares of Copa Holdings, representing all of the
voting power of our capital stock. CIASA is controlled by a group of Panamanian investors
representing several prominent families in Panama. This group of investors has historically acted
together in a variety of business activities both in Panama and elsewhere in Latin America,
including banking, insurance, real estate, telecommunications, international trade and commerce and
wholesale. Members of the Motta, Heilbron and Arias families and their affiliates beneficially own
approximately 90% of CIASAs shares. Our Chief Executive Officer, Mr. Pedro Heilbron, and several
of our directors, including Messrs. Stanley Motta and Alberto C. Motta Jr., Mr. Osvaldo Heilbron,
Mr. Jaime Arias and Mr. Ricardo Alberto Arias as a group hold beneficial ownership of approximately
78% of CIASAs shares.
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, this 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.
The address of CIASA is Corporación de Inversiones Aéreas, S.A., c/o Compañía Panameña de
Aviación, S.A., Boulevard Costa del Este, Avenida Principal y Avenida de la Rotonda, Urbanización
Costa del Este, Complejo Business Park, Torre Norte, Parque Lefevre, Panama City, Panama. The
address of Continental is Continental Airlines, Inc., 1600 Smith Street, Houston, Texas 77002.
69
B. Related Party and Certain Significant Transactions
Supplemental Agreement
Copa Holdings is a party to a supplemental agreement with CIASA and Continental entered into
in connection with Continentals May 2008 offering of our shares. The supplemental agreement
terminates the shareholders agreement between the Company, CIASA and Continental that existed
prior to Continentals exit and further amends the amended and restated registration rights
agreement between the parties. Pursuant to the
supplemental agreement, Continental has the right to appoint a member of its senior management
to our Board of Directors during the term of our alliance agreement with Continental.
Registration Rights Agreement
Under the registration rights agreement, as amended by the supplemental agreement, CIASA
continues to have the right to make up to two demands on us with respect to the registration and
sale of our common stock held by them. 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.
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 registration rights agreement
by CIASA or Copa Holdings, termination by Copa upon the material unremedied breach of 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.
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 registration rights agreement by Continental, certain changes of control of either of the
parties and certain significant operational service failures by the other airline.
70
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, 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 General, S.A.
We have a strong commercial banking relationship with Banco General, S.A., a Panamanian bank
partially owned by our controlling shareholders. We have obtained financing from Banco General
under short to medium-term financing arrangements for part of the commercial loan tranche of one of
the Companys Export-Import Bank facilities. We also maintain general lines of credit and time
deposit accounts with Banco General. Interest payments to Banco General totaled $0.2 million, $0.4
million and $0.6 million in 2009, 2008 and 2007, respectively, and interest received from Banco
General amounted to $1.4 million, $1.9 million and $4.5 million in 2009, 2008 and 2007,
respectively. The outstanding debt balance at December 31 amounted to $2.3 million, $4.1 million
and $4.8 million in 2009, 2008 and 2007, respectively. These amounts are included in Current
maturities of long-term debt and Long-term debt in the consolidated balance sheet.
ASSA Compañía de Seguros, S.A.
Panamanian law requires us to maintain our insurance policies through a local insurance
company. We have contracted with ASSA, an insurance company controlled by our controlling
shareholders, to provide substantially all of our insurance. ASSA has, in turn, reinsured almost
all of the risks under those policies with insurance companies around the world. The net payment to
ASSA, after taking into account the reinsurance of these risks, is approximately $30,000 per year.
Petróleos Delta, S.A.
During 2005, we entered into a contract with Petróleos Delta, S.A. to supply our jet fuel
needs. The price agreed to under this contract is based on the two week average of the U.S. Gulf
Coast Waterborne Mean index plus local taxes, certain third-party handling charges and a handling
charge to Delta. The contract has a one year term that automatically renews for one year periods
unless terminated by one of the parties. While our controlling shareholders do not hold a
controlling equity interest in Petróleos Delta, S.A., several of our directors are also board
members of Petróleos Delta, S.A. Payments to Petróleos Delta totaled $116.1 million in 2009, $185.8
million in 2008 and $126.0 million in 2007.
71
Desarollo Inmobiliario del Este, S.A.
During January 2006, we moved into our recently constructed new headquarters located six miles
away from Tocumen International Airport. We lease five floors consisting of approximately 104,000
square feet of the building from Desarollo Inmobiliario del Este, S.A., an entity controlled by the
same group of investors that controls CIASA, under a 10-year lease at a rate of $0.1 million per
month, which we believe to be a market rate. Payments to Desarrollo Inmobiliario del Este, S.A.
totaled $1.9 million, $2.0 million and $1.9 million in 2009, 2008 and 2007, respectively.
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. Payments to Galindo, Arias & Lopez totaled $0.4
million, $0.3 million and $0.4 million in 2009, 2008 and 2007, respectively.
Other Transactions
We also purchase most of the alcohol and some of the other beverages served on our aircraft
from Motta Internacional, S.A. and Global Brands, S.A., both of which are controlled by our
controlling shareholders. We do not have any formal contracts for these purchases, but pay
wholesale prices based on price lists periodically submitted by those importers. We paid
approximately $0.6 million in 2009, $0.7 million in 2008 and $0.6 million in 2007 to these
entities.
Our telecommunications services have been provided by Telecarrier. Some of the controlling
shareholders of CIASA have a controlling interest in Telecarrier. Payments to Telecarrier totaled
$0.9 million, $0.6 million and $0.6 million in 2009, 2008 and 2007, respectively.
The advertising agency that we use in Panama, Rogelio Diaz Publicidad (RDP), is owned by the
brother-in-law of our chief executive officer. Gross invoices for all services performed through
RDP totaled $1.0 million, $1.2 million and $1.6 million in 2009, 2008 and 2007, respectively.
We have received services from Call Center Corporation, a call center that operates Copas
reservations and sales services and handles calls from Panama as well as to most other countries to
which Copa flies. One of our directors, Joseph Fidanque III, is one of the owners of this call
center. Payments to Call Center Corporation totaled $3.3 million, $4.0 million and $2.6 million in
2009, 2008 and 2007, respectively.
C. Interests of Experts and Counsel
Not applicable.
Item 8. Financial Information
A. Consolidated Statements and Other Financial Information
See Item 3. Key InformationSelected Financial Data and Item 18. Financial Statements.
72
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 is 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, 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. The court of first instance
ruled in favor of Copa, but the defendant has appealed the decision and it is currently being
reviewed by the superior court. This case 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.
We are also plaintiffs in an action we
filed against INFRAERO, Brazil’s airport operator, in October of 2003
challenging the legality of the Additional Airport Tariffs (Adicional das
Tarifas Aeroportuárias, or ATAERO), which is a 50% surcharge imposed
on all airlines which fly to Brazil. Similar suits have been filed
against INFRAERO by other major airline carriers. In our case, the court of
first instance ruled in favor of INFRAERO and we have appealed the judgment.
During the pendency of the litigation, we continue to pay the amounts due
ATAERO into an escrow account and as of December 31, 2009, the aggregate
amount in such account totaled US$12 million. In the event we
receive a final unfavorable judgment, we will be required to release the
escrowed fund to INFRAERO and will not be able to recover such amounts. We do
not, however, expect the release of such amounts to have a material impact on
our financial results.
Dividends and Dividend Policy
The payment of dividends on our shares is subject to the discretion of our Board of Directors.
Under Panamanian law, we may pay dividends only out of retained earnings and capital surplus. So
long as we do not default in our payments under our loan agreements, there are no covenants or
other restrictions on our ability to declare and pay dividends. Our Articles of Incorporation
provide that all dividends declared by our Board of Directors will be paid equally with respect to
all of the Class A and Class B shares. See Item 10B. Additional Information Memorandum and
Articles of AssociationDescription of Capital StockDividends.
Our Board of Directors recently amended the dividend policy that had provided for the payment
of approximately 10% of our annual consolidated net income to shareholders as a dividend. Effective
February 10, 2010, the amended dividend policy allows the Board of Directors to provide our
shareholders with a dividend payment in an amount ranging from 10% to 20% of our annual
consolidated net income 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 6, 2009, our Board of Directors declared an annual dividend of $0.37 per share payable
June 15, 2009 to shareholders of record as of May 30, 2009 which represented an aggregate dividend
payment of $16.3 million. On May 7, 2008, our Board of Directors declared an annual dividend of
$0.37 per share payable June 15, 2008 to shareholders of record as of May 30, 2008 which
represented an aggregate dividend payment of $16.2 million. On May 9, 2007, our Board of Directors
declared an annual dividend of $0.31 per share payable June 15, 2007 to shareholders of record as
of May 31, 2007 which represented an aggregate dividend payment of $13.6 million.
B. Significant Changes
None
73
Item 9. The Offer and Listing
A. Offer and Listing Details
Our Class A shares have been listed on the New York Stock Exchange, or NYSE, under the symbol
CPA since December 14, 2005. The following table sets forth, for the periods indicated, the high
and low prices for the Class A shares on the NYSE for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
Low |
|
|
High |
|
2005 |
|
|
|
|
|
|
|
|
Annual(1) |
|
|
21.95 |
|
|
|
27.40 |
|
2006 |
|
|
|
|
|
|
|
|
Annual |
|
|
20.31 |
|
|
|
49.05 |
|
2007 |
|
|
|
|
|
|
|
|
Annual |
|
|
30.25 |
|
|
|
73.33 |
|
2008 |
|
|
|
|
|
|
|
|
Annual |
|
|
18.00 |
|
|
|
43.64 |
|
First quarter |
|
|
30.00 |
|
|
|
41.97 |
|
Second quarter |
|
|
27.53 |
|
|
|
43.64 |
|
Third quarter |
|
|
24.69 |
|
|
|
42.00 |
|
Fourth quarter |
|
|
18.00 |
|
|
|
34.00 |
|
2009 |
|
|
|
|
|
|
|
|
Annual |
|
|
20.36 |
|
|
|
56.78 |
|
First quarter |
|
|
20.36 |
|
|
|
33.10 |
|
Second quarter |
|
|
27.20 |
|
|
|
42.17 |
|
Third quarter |
|
|
38.15 |
|
|
|
46.70 |
|
Fourth quarter |
|
|
40.00 |
|
|
|
56.78 |
|
Last Six Months |
|
|
|
|
|
|
|
|
September 2009 |
|
|
38.66 |
|
|
|
46.70 |
|
October 2009 |
|
|
40.00 |
|
|
|
47.61 |
|
November 2009 |
|
|
41.13 |
|
|
|
51.35 |
|
December 2009 |
|
|
50.55 |
|
|
|
56.78 |
|
January 2010 |
|
|
50.33 |
|
|
|
58.37 |
|
February 2010 |
|
|
47.76 |
|
|
|
56.33 |
|
|
|
|
(1) |
|
Period beginning December 14, 2005 through December 31, 2005 |
B. Plan of Distribution
Not applicable.
C. Markets
Our Class A shares have been listed on the NYSE under the symbol CPA since December 14,
2005. Our Class B shares are not listed on any exchange and are not publicly traded. We are subject
to the NYSE corporate governance listing standards. The NYSE requires that corporations with
shares listed on the exchange comply with certain corporate governance standards. As a foreign
private issuer, we are only required to comply with certain NYSE rules relating to audit committees
and periodic certifications to the NYSE. The NYSE also requires that we provide a summary of the
significant differences between our corporate governance practices and those that would apply to a
U.S. domestic issuer. Please refer to Item 16 G. Corporate Governance for a summary of 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.
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
74
Item 10. Additional Information
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
Copa Holdings was formed on May 6, 1998 as a corporation (sociedad anónima) duly incorporated
under the laws of Panama with an indefinite duration. The Registrant is registered under Public
Document No. 3.989 of May 5, 1998 of the Notary Number Eight of the Circuit of Panama and recorded
in the Public Registry Office, Microfilm (Mercantile) Section, Microjacket 344962, Film Roll 59672,
Frame 0023.
Objects and Purposes
Copa Holdings is principally engaged in the investment in airlines and aviation-related
companies and ventures, although our Articles of Incorporation grant us general powers to engage in
any other lawful business, whether or not related to any of the specific purposes set forth in the
Articles of Incorporation.
Description of Capital Stock
The
following is a summary of the material terms of Copa Holdings capital stock and a brief
summary of certain significant provisions of Copa Holdings Articles of Incorporation. This
description contains all material information concerning the common stock but does not purport to
be complete. For additional information regarding the common stock, reference is made to the
Articles of Incorporation, a copy of which has been filed as an
exhibit to this Form 20-F.
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 December 31, 2009, we had
31,136,619 Class A shares
issued, 12,778,125 Class B shares issued and outstanding, 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; |
|
|
|
a merger, consolidation or spin-off of Copa Holdings; |
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|
|
a change of corporate purpose; |
|
|
|
voluntarily delisting Class A shares from the NYSE; |
|
|
|
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 |
|
|
|
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.
75
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 except to Class B holders,
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.
Restrictions on Transfer of Common Stock; Conversion of Class B Shares
The Class B shares may only be held by Panamanians, and upon registration of any transfer of a
Class B share to a holder that does not certify that it is Panamanian, such Class B share shall
automatically convert into a Class A share. Transferees of Class B shares will be required to
deliver to us written certification of their status as a Panamanian as a condition to registering
the transfer to them of Class B shares. Class A shareholders will not be required or entitled to
provide such certification. If a Class B shareholder intends to sell any Class B shares to a person
that has not delivered a certification as to Panamanian nationality and immediately after giving
effect to such proposed transfer the outstanding Class B shares would represent less than 10% of
our outstanding stock (excluding newly issued shares sold with the approval of our Independent
Directors Committee), the selling shareholder must inform the Board of Directors at least ten days
prior to such transfer. The Independent Directors Committee may determine to refuse to register the
transfer if the Committee reasonably concludes, on the basis of the advice of a reputable external
aeronautical counsel, that such transfer would be reasonably likely to cause a triggering event as
described below. After the first shareholders meeting at which the Class A shareholders are
entitled to vote for the election of our directors, the role of the Independent Directors described
in the preceding sentence shall be exercised by the entire Board of Directors acting as a whole.
Also, the Board of Directors may refuse to register a transfer of stock if the transfer
violates any provision of the Articles of Incorporation.
76
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:
|
|
|
authorize the issuance of additional Class B shares to Panamanians at a price
determined by the Independent Directors to reflect the current market value of such
shares or |
|
|
|
authorize the issuance to Class B shareholders such number of Class C shares as the
Independent Directors Committee, or the Board of Directors if applicable, deems
necessary and with such other terms and conditions established by the Independent
Directors Committee that do not confer economic rights on the Class C shares. |
Dividends
The payment of dividends on our shares is subject to the discretion of our Board of Directors.
Under Panamanian law, we may pay dividends only out of retained earnings and capital surplus. Our
Articles of Incorporation provide that all dividends declared by our Board of Directors will be
paid equally with respect to all of the Class A and Class B shares. Our Board of Directors has
adopted a dividend policy that provides for the payment of annual dividends, which range from 10%
to 20% 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.
77
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.
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.
78
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.
|
|
|
Panama |
|
Delaware |
|
|
|
Directors
|
|
|
|
Conflict of Interest Transactions.
Transactions involving a Panamanian
corporation and an interested
director or officer are initially
subject to the approval of the board
of directors.
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Conflict of Interest Transactions. Transactions
involving a Delaware corporation and an
interested director
of that corporation are
generally
permitted if: |
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At the next shareholders meeting,
shareholders will then have the
right to disapprove the board of
directors decision and to decide to
take legal actions against the
directors or officers who voted in
favor of the transaction.
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(1) the material facts as to the interested
directors relationship or interest are disclosed
and a majority of disinterested directors approve
the transaction;
(2) the material facts are disclosed as to the
interested directors relationship or interest
and the stockholders approve the transaction; or |
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(3) the transaction is fair to the corporation
at the time it is authorized by the board of
directors, a committee of the board of directors
or the stockholders. |
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Panama |
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Delaware |
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Terms. Panamanian law does not set
limits on the length of the terms
that a director may serve. Staggered
terms are allowed but not required.
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Terms. The Delaware General Corporation Law
generally provides for a one-year term for
directors. However, the directorships may be
divided into up to three classes with up to
three-year terms, with the years for each class
expiring in different years, if permitted by the
articles of incorporation, an initial by-law or a
by-law adopted by the shareholders. |
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Number. The board of directors must
consist of a minimum of three
members, which could be natural
persons or legal entities.
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Number. The board of directors must consist of a
minimum of one member. |
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Authority to take Actions. In
general, a simple majority of the
board of directors is necessary and
sufficient to take any action on
behalf of the board of directors.
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Authority to take Actions. The articles of
incorporation or by-laws can establish certain
actions that require the approval of more than a
majority of directors. |
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Shareholder Meetings and Voting Rights
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Quorum. The quorum for shareholder
meetings must be set by the articles
of incorporation or the by-laws. If
the articles of incorporation and
the notice for a given meeting so
provide, if quorum is not met a new
meeting can be immediately called
and quorum shall consist of those
present at such new meeting.
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Quorum. For stock corporations, the articles of
incorporation or bylaws may specify the number to
constitute a quorum but in no event shall a
quorum consist of less than one-third of shares
entitled to vote at a meeting. In the absence of
such specifications, a majority of shares
entitled to vote shall constitute a quorum. |
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Action by Written Consent.
Panamanian law does not permit
shareholder action without formally
calling a meeting.
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Action by Written Consent. Unless otherwise
provided in the articles of incorporation, any
action required or permitted to be taken at any
annual meeting or special meeting of stockholders
of a corporation may be taken without a meeting,
without prior notice and without a vote, if a
consent or consents in writing, setting forth the
action to be so taken, is signed by the holders
of outstanding shares having not less than the
minimum number of votes that would be necessary
to authorize or take such action at a meeting at
which all shares entitled to vote thereon were
present and noted. |
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Other Shareholder Rights
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Shareholder Proposals. Shareholders
representing 5% of the issued and
outstanding capital of the
corporation have the right to
require a judge to call a general
shareholders meeting and to propose
the matters for vote.
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Shareholder Proposals. Delaware law does not
specifically grant shareholders the right to
bring business before an annual or special
meeting. If a Delaware corporation is subject to
the SECs proxy rules, a shareholder who owns for at least one
year by the date of the proposal at
least $2,000 in market value, or 1% of the
corporations securities entitled to vote, may
propose a matter for a vote at an annual or
special meeting in accordance with those rules. |
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Appraisal Rights. Shareholders of
Panamanian corporation do not have
the right to demand payment in cash
of the judicially determined fair
value of their shares in connection
with a merger or consolidation
involving the corporation.
Nevertheless, in a merger, the
majority of shareholders could
approve the total or partial
distribution of cash, instead of
shares, of the surviving entity.
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Appraisal Rights. Delaware law affords
shareholders in certain cases the right to demand
payment in cash of the judicially-determined fair
value of their shares in connection with a merger
or consolidation involving their corporation.
However, no appraisal rights are available if,
among other things and subject to certain
exceptions, such shares were listed on a national
securities exchange or designated national market
system or such shares were held of record by more
than 2,000 holders. |
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Panama |
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Delaware |
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Shareholder Derivative Actions. Any
shareholder, with the consent of the
majority of the shareholders, can
sue on behalf of the corporation,
the directors of the corporation for
a breach of their duties of care and
loyalty to the corporation or a
violation of the law, the articles
of incorporation or the by-laws.
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Shareholder Derivative Actions. Subject to
certain requirements that a shareholder make
prior demand on the board of directors or have an
excuse not to make such demand, a shareholder may
bring a derivative action on behalf of the
corporation to enforce the rights of the
corporation against officers, directors and third
parties. An individual may also commence a class
action suit on behalf of himself and other
similarly-situated stockholders if the
requirements for maintaining a class action under
the Delaware General Corporation Law have been
met. Subject to equitable principles, a
three-year period of limitations generally
applies to such shareholder suits against
officers and directors. |
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Inspection of Corporate Records.
Shareholders representing at least
5% of the issued and outstanding
shares of the corporation have the
right to require a judge to appoint
an independent auditor to examine
the corporate accounting books, the
background of the companys
incorporation or its operation.
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Inspection of Corporate Records. A shareholder
may inspect or obtain copies of a corporations
shareholder list and its other books and records
for any purpose reasonably related to a persons
interest as a shareholder. |
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Anti-takeover Provisions
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Panamanian corporations may include
in their articles of incorporation
or by-laws classified board and
super-majority provisions.
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Delaware corporations may have a classified
board, super-majority voting
and shareholders
rights plan. |
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Panamanian corporation laws
anti-takeover provisions apply only
to companies that are:
(1) registered with the CNV for a
period of six months before the
public offering,
(2) have over 3,000
shareholders, and
(3) have a permanent office in
Panama with full time employees and
investments in the country for more
than $1,000,000.
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Unless Delaware corporations specifically elect
otherwise, Delaware corporations may not enter
into a business combination, including mergers,
sales and leases of assets, issuances of
securities and similar transactions, with an
interested stockholder, or one that
beneficially owns 15% or more of a corporations
voting stock, within three years of such person
becoming an
interested shareholder
unless: |
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These provisions are triggered when
a buyer makes a public offer to
acquire 5% or more of any class of
shares with a market value of at
least $5,000,000. In sum, the buyer
must deliver to the corporation a
complete and accurate statement that
includes
(1) the name of the company, the
number of the shares that the buyer
intends to acquire and the purchase
price;
(2) the identity and background of
the person acquiring the shares;
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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 |
81
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Panama |
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Delaware |
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(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;
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(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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(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; |
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(6) contracts, agreements, business
relations or negotiations regarding
securities issued by the company in
which the buyer is a party; |
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(7) contract, agreements, business
relations or negotiations between
the buyer and any director, officer
or beneficiary of the securities;
and |
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(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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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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Panama |
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Delaware |
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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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Once a share is issued, the
shareholders become entitled to the
rights established in the articles
of incorporation and such rights
cannot be taken away, diminished nor
extinguished without the express
consent of the shareholders entitled
to such rights. If by amending the
articles of incorporation, the
rights granted to a class of
shareholders is somehow altered or
modified to their disadvantage,
those shareholders will need to
approve the amendment unanimously. |
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C. Material Contracts
Commercial Agreements with Continental Airlines
Our alliance relationship with Continental is governed by several interrelated agreements. We
have amended and restated each of these agreements and extended them through 2015 in connection
with our initial public offering in December 2005.
Alliance Agreement between Continental and Copa Airlines. Under the alliance agreement, both
airlines agree to continue their codesharing relationship with extensions as they feel are
appropriate and to work to maintain our antitrust immunity with the DOT. In order to support the
codesharing relationship, the alliance agreement also contains provisions mandating a continued
frequent flyer relationship between the airlines, setting minimum levels of quality of service for
the airlines and encouraging cooperation in marketing and other operational initiatives.
Services Agreement between Continental and Copa Airlines. Under the services agreement, both
airlines agree to provide to each other certain services over the course of the agreement at the
providing carriers incremental cost, subject to certain limitations. Services covered under the
agreement include consolidating purchasing power for equipment purchases and insurance coverage,
sharing management information systems, pooling maintenance programs and inventory management,
joint training and employee exchanges, sharing the benefits of other purchase contracts for goods
and services, telecommunications and other services.
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.
83
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 February 2008.
Purchase Agreement between Empresa Brasileira de Aeronautica, S.A. and Copa Airlines
In 2003, Copa entered into a purchase agreement with Empresa Brasileira de Aeronautica, S.A
(Embraer) for the purchase of aircraft, customer support services and technical publications.
Purchase Agreement between Empresa Brasileira de Aeronautica, S.A. and Copa Holdings, S.A.
In February 2006, we entered into a purchase agreement with Empresa Brasileira de Aeronautica,
S.A (Embraer) for the purchase of aircraft, customer support services and technical publications.
D. Exchange Controls
There are currently no Panamanian restrictions on the export or import of capital, including
foreign exchange controls, and no restrictions on the payment of dividends or interest, nor are
there limitations on the rights of foreign stockholders to hold or vote stock.
E. Taxation
United States
The following summary describes the material United States federal income tax consequences of
the ownership and disposition of our Class A shares as of the date hereof. The discussion set forth
below is applicable to United States Holders (as defined below) that beneficially own our Class A
shares as capital assets for United States federal income tax purposes (generally, property held
for investment). This summary does not represent a detailed description of the United States
federal income tax consequences applicable to you if you are subject to special treatment under the
United States federal income tax laws, including if you are:
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a dealer in securities or currencies; |
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a financial institution; |
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a regulated investment company; |
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a real estate investment trust; |
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a tax-exempt organization; |
84
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a person holding our Class A shares as part of a hedging, integrated or conversion
transaction, a constructive sale or a straddle; |
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a trader in securities that has elected the mark-to-market method of accounting for
your securities; |
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a person liable for alternative minimum tax; |
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a person who owns 10% or more of our voting stock; |
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a partnership or other pass-through entity for United States federal income tax
purposes; or |
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a person whose functional currency is not the United States dollar. |
The discussion below is based upon the provisions of the Internal Revenue Code of 1986, as
amended (the Code), and regulations, rulings and judicial decisions thereunder as of the date
hereof, and such authorities may be replaced, revoked or modified so as to result in United States
federal income tax consequences different from those discussed below.
If you are considering the purchase, ownership or disposition of our Class A shares, you
should consult your own tax advisors concerning the United States federal income tax consequences
to you in light of your particular situation as well as any consequences arising under the laws of
any other taxing jurisdiction.
As used herein, United States Holder means a beneficial owner of our Class A shares that is
for United States federal income tax purposes:
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an individual citizen or resident of the United States; |
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a corporation (or other entity treated as a corporation for United States federal
income tax purposes) created or organized in or under the laws of the United States,
any state thereof or the District of Columbia; |
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an estate the income of which is subject to United States federal income taxation
regardless of its source; or |
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a trust if it (1) is subject to the primary supervision of a court within the United
States and one or more United States persons have the authority to control all
substantial decisions of the trust or (2) has a valid election in effect under
applicable United States Treasury regulations to be treated as a United States person. |
Taxation of Dividends
Distributions on the Class A shares (including amounts withheld to reflect Panamanian
withholding taxes, if any) will be taxable as dividends to the extent paid out of our current or
accumulated earnings and profits, as determined under United States federal income tax principles.
Such income (including withheld taxes) will be includable in your gross income as ordinary income
on the day actually or constructively received by you. Such dividends will not be eligible for the
dividends received deduction allowed to corporations.
With respect to non-corporate United States Holders, certain dividends received in taxable
years beginning before January 1, 2011 from a qualified foreign corporation may be subject to
reduced rates of taxation. A foreign corporation generally is treated as a qualified foreign
corporation with respect to dividends paid by that corporation on shares that are readily tradable
on an established securities market in the United States. United States Treasury Department
guidance indicates that our Class A shares, which are listed on the NYSE, are currently 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 at a later date. Non-corporate United States Holders that do not meet a minimum holding
period requirement during which they are not protected from the risk of loss or that elect to treat
the dividend income as investment income pursuant to Section 163(d)(4) of the Code will not be
eligible for the reduced rates of taxation regardless of our status as a qualified foreign
corporation. In addition, the rate reduction will not apply to dividends if the recipient of a
dividend is obligated to make related payments with respect to positions in substantially similar
or related property. This disallowance applies even if the minimum holding period has been met. You
should consult your own tax advisors regarding the application of these rules to your particular
circumstances.
85
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
generally will be treated as income from sources outside the United States and will generally
constitute passive income. Further, in certain circumstances, if you:
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have held Class A shares for less than a specified minimum period during which you
are not protected from risk of loss, or |
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are obligated to make payments related to the dividends, |
you will not be allowed a foreign tax credit for foreign taxes imposed on dividends paid on
the Class A shares, if any. The rules governing the foreign tax credit are complex. You are urged
to consult your tax advisors regarding the availability of the foreign tax credit under your
particular circumstances.
To the extent that the amount of any distribution exceeds our current and accumulated earnings
and profits for a taxable year, as determined under United States federal income tax principles,
the distribution will first be treated as a tax-free return of capital, causing a reduction in the
adjusted basis of the Class A shares (thereby increasing the amount of gain, or decreasing the
amount of loss, to be recognized by you on a subsequent disposition of the Class A shares), and the
balance in excess of adjusted basis will be taxed as capital gain recognized on a sale or exchange
(as discussed below under Taxation of Capital Gains). Consequently, such distributions in
excess of our current and accumulated earnings and profits would generally not give rise to foreign
source income and you would generally not be able to use the foreign tax credit arising from any
Panamanian withholding tax imposed on such distributions unless such credit can be applied (subject
to applicable limitations) against United States federal
income tax due on other foreign source income in the appropriate category for foreign tax
credit purposes. However, we do not intend to keep earnings and profits in accordance with United
States federal income tax principles. Therefore, you should expect that a distribution will
generally be treated as a dividend (as discussed above).
Passive Foreign Investment Company
We do not believe that we are a passive foreign investment company (a PFIC) for United
States federal income tax purposes (or that we were one in 2009), and we expect to operate in such
a manner so as not to become a PFIC. If, however, we are or become a PFIC, you could be subject to
additional United States federal income taxes on gain recognized with respect to the Class A shares
and on certain distributions, plus an interest charge on certain taxes treated as having been
deferred under the PFIC rules. Further, non-corporate United States Holders will not be eligible
for reduced rates of taxation on any dividends received from us in taxable years beginning prior to
January 1, 2011, if we are a PFIC in the taxable year in which such dividends are paid or the
preceding taxable year.
Taxation of Capital Gains
For United States federal income tax purposes, you will recognize taxable gain or loss on any
sale or exchange 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.
86
Any amounts withheld under the backup withholding rules will be allowed as a refund or a
credit against your United States federal income tax liability provided the required information is
timely furnished to the Internal Revenue Service.
Panamanian Taxation
The following is a discussion of the material Panamanian tax considerations to holders of
Class A shares under Panamanian tax law, and is based upon the tax laws and regulations in force
and effect as of the date hereof, which may be subject to change. This discussion, to the extent it
states matters of Panamanian tax law or legal conclusions and subject to the qualifications herein,
represents the opinion of Galindo, Arias & Lopez, our Panamanian counsel.
Taxation of dividends
Dividends paid by a corporation duly licensed to do business in Panama, whether in the form of
cash, stock or other property, are subject to a 10% withholding tax on the portion attributable to
Panamanian sourced income, and a 5% withholding tax on the portion attributable to foreign sourced
income. Dividends paid by a holding company which correspond to dividends received from its
subsidiaries for which the dividend tax was previously paid, are not subject to any further
withholding tax under Panamanian law. Therefore, distributions on the Class A shares would not be
subject to withholding tax 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. We have registered the Class A shares, with both the New York Stock Exchange and the
CNV.
Other Panamanian taxes
There are no estate, gift or other taxes imposed by the Panamanian government that would
affect a holder of the Class A shares, whether such holder were Panamanian or a national of another
country.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
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 such quarterly reports with the SEC within two months of each quarter of our fiscal
year, and we file annual reports on Form 20-F within the time period required by the SEC, which is
currently six months from December 31, the end of our fiscal year.
87
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, 2009 cost per gallon of fuel. Based on projected 2010 fuel consumption, such an
increase would result in an increase to aircraft fuel expense of approximately $29.2 million in
2010, not taking into account our derivative contracts. We have hedged approximately 24% and 11% of
our anticipated fuel needs for 2010 and 2011, respectively. We may enter into additional hedging
agreements in the future to reduce volatility of 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 2010 than they did during 2009, our interest expense would increase by approximately $0.3
million and the fair value of our debt would decrease by
approximately $0.4 million. If interest rates average 10% less in 2010 than they did in 2009,
our interest income from marketable securities would decrease by approximately $0.9 million and the
fair value of our debt would increase by approximately $0.4 million. These amounts are determined
by considering the impact of the hypothetical interest rates on our variable-rate debt and
marketable securities equivalent balances at December 31, 2009.
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 43% 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 11% of our operating revenues in 2009, except for the
Colombian Peso which represented 17%. Generally, our exposure to most of these foreign currencies,
with the exception of the Venezuelan Bolivar and Cuban Peso, is limited to the period of up to two
weeks between the completion of a sale and the conversion to U.S. dollars. The Colombian Peso is
the functional currency of AeroRepública, and therefore any revenue exposure is mitigated by the
operating expenses, which we also denominate in Colombian Peso.
2009 Revenues and Expenses Breakdown by Currency
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Revenue |
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Expense |
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Argentinean Peso |
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6.4 |
% |
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2.2 |
% |
Brazilian Real |
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6.3 |
% |
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3.4 |
% |
Chilean Peso |
|
|
2.6 |
% |
|
|
1.1 |
% |
Colombian Peso |
|
|
16.9 |
% |
|
|
12.5 |
% |
Costa Rican Colon |
|
|
2.2 |
% |
|
|
1.0 |
% |
Mexican Peso |
|
|
3.1 |
% |
|
|
1.4 |
% |
U.S. Dollar |
|
|
43.4 |
% |
|
|
71.0 |
% |
Venezuelan Bolivar |
|
|
11.4 |
% |
|
|
3.7 |
% |
Other(1) |
|
|
7.8 |
% |
|
|
3.7 |
% |
|
|
|
(1) |
|
Dominican Peso, European Euro, Guatemalan Quetzal, Jamaican Dollar,
Honduran Lempira, Haitian Gourde, Uruguayan Peso, Bolivian Boliviano,
Trinidad and Tobago Dollar |
88
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, 2009. There are inherent
limitations to the effectiveness of any system of disclosure controls and procedures, including the
possibility of human error and the circumvention or overriding of the controls and procedures.
Accordingly, even effective disclosure controls and procedures can only provide reasonable
assurance of achieving their control objectives. Based upon our evaluation, our chief executive
officer and chief financial officer concluded that our disclosure controls and procedures were
effective to provide reasonable assurance that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the applicable rules and forms, and that it is
accumulated and communicated to our management, including our chief executive officer and chief
financial officer, as appropriate to allow timely decisions regarding required disclosure.
Managements Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining effective internal
control over financial reporting as defined in Rules 13a-15(f) under the Securities Exchange Act of
1934. The Companys internal control over financial reporting is designed to provide reasonable
assurance to the Companys management and Board of Directors regarding the preparation and fair
presentation of published financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Therefore, even those systems determined to be effective can provide only
reasonable assurance with respect to financial statement preparation and presentation.
Management assessed the effectiveness of the Companys internal control over financial
reporting as of December 31, 2009. In making this assessment, management used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
ControlIntegrated Framework. Based on this assessment, management believes that, as of December
31, 2009, the Companys internal control over financial reporting is effective based on those
criteria.
The effectiveness of our internal controls over financial reporting as of December 31, 2009
has been audited by Ernst & Young, the independent registered public accounting firm who also
audited the Companys consolidated financial statements. Ernst & Youngs attestation report on the
effectiveness of the Companys internal controls over financial reporting is included herein.
Changes in internal control
No significant changes in our internal controls or in other factors that could significantly
affect these controls subsequent to the date of the evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses, were made as a result of the
evaluation.
90
Report of
Independent Registered Public Accounting Firm
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Board of Directors and Shareholders
COPA HOLDINGS, S. A.
We have audited Copa Holdings, S. A. (the Company) and its subsidiaries internal control over financial reporting
as of December 31, 2009, based on criteria established in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Comission (the COSO criteria). Copa Holdings, S. A. and its
subsidiaries management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Managements
Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the companys
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all material respects. Our audit included
obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A companys internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance
with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
In our opinion, Copa Holdings S. A. and its subsidiaries maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2009, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated balance sheets of Copa Holdings, S. A. and its subsidiaries as of December 31, 2009 and 2008,
and related consolidated statements of income, shareholders equity, and cash flows for each of the three years in the
period ended December 31, 2009 and our report dated March 12, 2010 expressed an unqualified opinion thereon.
/s/ Ernst and Young
March 16, 2010
Panama City, Republic of Panama
Item 16. Reserved
Item 16A. Audit Committee Financial Expert
Our Board of Directors has determined that Mr. José Castañeda and Roberto Artavia qualify as
an audit committee financial experts as defined by current SEC rules and meet the independence
requirements of the SEC and the NYSE listing standards. For a discussion of the role of our audit
committee, see Item 6C. Board PracticesAudit Committee.
91
Item 16B. Code of Ethics
Our Board of Directors has adopted a Code of Business Conduct and Ethics applicable to our
directors, officers, employees and consultants. The Code of Business Conduct and Ethics can be
found at www.copaair.com under the heading Investor RelationsCorporate Governance. Information
found at this website is not incorporated by reference into this document.
Item 16C. Principal Accountant Fees and Services
The following table sets forth by category of service the total fees for services performed by
our independent auditors Ernst & Young during the fiscal years ended December 31, 2008 and 2009:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2009 |
|
Audit Fees |
|
$ |
769,860 |
|
|
$ |
715,000 |
|
Audit-Related Fees |
|
|
|
|
|
|
|
|
Tax Fees |
|
|
|
|
|
|
|
|
All Other Fees |
|
|
|
|
|
|
538,991 |
|
Total |
|
$ |
769,860 |
|
|
$ |
1,253,991 |
|
Audit Fees
Audit fees for 2009 and 2008 included the audit of our annual financial statements and
internal controls, the review of our quarterly reports.
Audit-Related Fees
There were no audit-related fees for 2008.
Tax Fees
There were no tax fees.
All Other Fees
Other fees for 2009 included amounts paid for permitted consulting services performed by Ernst
& Young and pre-approved by our audit committee.
There were no other fees for services performed by Ernst & Young during 2008.
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 2009, 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
None.
Item 16E. Purchase of Equity Securities by the Issuer and Affiliated Purchasers
None.
Item 16F. Change in Registrants Certifying Accountant
None.
92
|
|
|
Item 16G. |
|
Corporate Governance |
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.
|
|
|
NYSE Standards |
|
Our Corporate Governance Practice |
Director Independence.
Majority of board of
directors must be
independent. §303A.01
|
|
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. |
|
|
|
|
|
Our Articles of Incorporation require us
to have three independent directors as
defined under the NYSE rules. |
|
|
|
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
|
|
There are no mandatory requirements under
Panamanian law that a company should hold,
and we currently do not hold, such
executive sessions. |
|
|
|
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
|
|
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. |
|
|
|
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
|
|
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 only one of the members of that
committee is independent. |
|
|
|
Equity compensation plans.
Equity compensation plans
require shareholder
approval, subject to limited
exemptions.
|
|
Under Panamanian law, shareholder approval
is not required for equity compensation
plans. |
93
|
|
|
NYSE Standards |
|
Our Corporate Governance Practice |
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. |
|
|
|
|
|
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. |
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.
|
|
|
|
|
|
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 |
94
|
|
|
|
|
|
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 between The Boeing Company and Copa Holdings, S.A. |
95
|
|
|
|
|
|
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 |
|
|
|
|
|
|
10.44 |
|
|
Supplemental Agreement No. 11 dated as of August 30, 2006 to the Boeing Purchase
Agreement Number 2191 dated November 25, 1998 between the Boeing Company and Copa
Holdings, S.A. |
|
|
|
|
|
|
10.45 |
|
|
Supplemental Agreement No. 12 dated as of February 26, 2007 to the Boeing Purchase
Agreement Number 2191 dated November 25, 1998 between the Boeing Company and Copa
Holdings, S.A. |
|
|
|
|
|
|
10.46 |
|
|
Supplemental Agreement No. 13 dated as of April 23, 2007 to the Boeing Purchase
Agreement Number 2191 dated November 25, 1998 between the Boeing Company and Copa
Holdings, S.A. |
|
|
|
|
|
|
10.47 |
|
|
Supplemental Agreement No. 14 dated as of August 31, 2007 to the Boeing Purchase
Agreement Number 2191 dated November 25, 1998 between the Boeing Company and Copa
Holdings, S.A. |
|
|
|
|
|
|
10.48 |
|
|
Supplemental Agreement No. 15 dated as of February 21, 2008 to the Boeing Purchase
Agreement Number 2191 dated November 25, 1998 between the Boeing Company and Copa
Holdings, S.A. |
|
|
|
|
|
|
10.49 |
|
|
Supplemental Agreement No. 16 dated as of June 30, 2008 to the Boeing Purchase
Agreement Number 2191 dated November 25, 1998 between the Boeing Company and Copa
Holdings, S.A. |
96
|
|
|
|
|
|
10.50 |
|
|
Supplemental Agreement No. 17 dated as of December 15, 2008 to the Boeing Purchase
Agreement Number 2191 dated November 25, 1998 between the Boeing Company and Copa
Holdings, S.A. |
|
|
|
|
|
|
10.51 |
|
|
Supplemental Agreement No. 18 dated as of July 15, 2009 to the Boeing Purchase
Agreement Number 2191 dated November 25, 1998 between the Boeing Company and Copa
Holdings, S.A |
|
|
|
|
|
|
10.52 |
|
|
Supplemental Agreement No. 19 dated as of August 31, 2009 to the Boeing Purchase
Agreement Number 2191 dated November 25, 1998 between the Boeing Company and Copa
Holdings, S.A |
|
|
|
|
|
|
10.53 |
|
|
Supplemental Agreement No. 20 dated as of November 19, 2009 to the Boeing Purchase
Agreement Number 2191 dated November 25, 1998 between the Boeing Company and Copa
Holdings, S.A |
|
|
|
|
|
|
12.1 |
|
|
Certification of the Chief Executive Officer, pursuant to Rules 13a-14 and 15d-14
under the Securities Exchange Act of 1934. |
|
|
|
|
|
|
12.2 |
|
|
Certification of the Chief Financial Officer, pursuant to Rules 13a-14 and 15d-14
under the Securities Exchange Act of 1934. |
|
|
|
|
|
|
13.1 |
|
|
Certification of Chief Executive Officer, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
13.2 |
|
|
Certification of the Chief Financial Officer, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
21.1 |
** |
|
Subsidiaries of the Registrant |
|
|
|
* |
|
Previously filed with the SEC as an exhibit and incorporated by reference from
our Registration Statement on Form F-1, filed June 15, 2006, File No.
333-135031. |
|
** |
|
Previously filed with the SEC as an exhibit and incorporated by reference from
our Registration Statement on Form F-1, filed November 28, 2005, as amended on
December 1, 2005 and December 13, 2005, File No. 333-129967. |
|
|
|
The Registrant was granted confidential treatment for portions of this exhibit. |
|
|
|
The Registrant has requested confidential treatment for portions of this exhibit. |
97
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:
March 16, 2010
98
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
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|
|
|
|
Pages |
|
|
|
|
|
|
Audited Consolidated Financial Statements |
|
|
|
|
|
|
|
|
|
|
|
|
F-2 |
|
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F-3 |
|
|
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F-5 |
|
|
|
|
|
|
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F-6 |
|
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F-7 |
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F-8 |
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|
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|
|
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
THE BOARD OF DIRECTORS AND SHAREHOLDERS
COPA HOLDINGS, S. A.
We have audited the accompanying consolidated balance sheets of Copa Holdings, S. A. (the Company) and its
subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of income, shareholders equity,
and cash flows for each of the three years in the period ended December 31, 2009. Our audits also included the
financial statement schedule included in Item 18. These consolidated financial statements and schedule are the
responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated
financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
consolidated financial position of the Company and its subsidiaries at December 31, 2009 and 2008, and the consolidated
results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, in
conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related consolidated financial
statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
As discussed in Note 10, Earnings per Share (Adjusted), in 2009, the Company changed its method of calculating earnings
per share.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the effectiveness of Companys internal control over financial reporting as of December 31, 2009, based on
criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission and our report dated March 12, 2010 expressed an unqualified opinion thereon.
/s/ Ernst and Young
March 16, 2010
Panama City, Republic of Panama
F-2
COPA HOLDINGS, S. A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In US$ thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
262,656 |
|
|
$ |
220,808 |
|
Short-term investments |
|
|
89,412 |
|
|
|
176,018 |
|
|
|
|
|
|
|
|
Total cash, cash equivalents and short-term investments |
|
|
352,068 |
|
|
|
396,826 |
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net of allowance for doubtful accounts
of $4,947 and $5,002 as of December 31, 2009 and 2008, respectively |
|
|
76,392 |
|
|
|
70,609 |
|
Accounts receivable from related parties |
|
|
4,399 |
|
|
|
4,592 |
|
Expendable parts and supplies, net of allowance for obsolescence
of $78 and $53 as of December 31, 2009 and 2008, respectively |
|
|
23,327 |
|
|
|
18,405 |
|
Prepaid expenses |
|
|
32,314 |
|
|
|
26,694 |
|
Other current assets |
|
|
13,654 |
|
|
|
5,338 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets |
|
|
502,154 |
|
|
|
522,464 |
|
|
|
|
|
|
|
|
|
|
Investments |
|
|
6,407 |
|
|
|
11,145 |
|
|
|
|
|
|
|
|
|
|
Property and Equipment: |
|
|
|
|
|
|
|
|
Owned property and equipment: |
|
|
|
|
|
|
|
|
Flight equipment |
|
|
1,439,759 |
|
|
|
1,372,352 |
|
Other |
|
|
61,339 |
|
|
|
55,291 |
|
|
|
|
|
|
|
|
|
|
|
1,501,098 |
|
|
|
1,427,643 |
|
Less: Accumulated depreciation |
|
|
(218,108 |
) |
|
|
(174,835 |
) |
|
|
|
|
|
|
|
|
|
|
1,282,990 |
|
|
|
1,252,808 |
|
|
|
|
|
|
|
|
|
|
Purchase deposits for flight equipment |
|
|
198,697 |
|
|
|
84,861 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Property and Equipment |
|
|
1,481,687 |
|
|
|
1,337,669 |
|
|
|
|
|
|
|
|
|
|
Other Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid pension asset |
|
|
2,227 |
|
|
|
1,486 |
|
Goodwill |
|
|
23,852 |
|
|
|
21,732 |
|
Other intangible assets |
|
|
34,973 |
|
|
|
31,865 |
|
Other assets |
|
|
41,569 |
|
|
|
27,864 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Assets |
|
|
102,621 |
|
|
|
82,947 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
2,092,869 |
|
|
$ |
1,954,225 |
|
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
F-3
COPA HOLDINGS, S. A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(In US$ thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt |
|
$ |
94,550 |
|
|
$ |
115,833 |
|
Accounts payable |
|
|
51,343 |
|
|
|
54,066 |
|
Accounts payable to related parties |
|
|
14,103 |
|
|
|
11,510 |
|
Air traffic liability |
|
|
183,344 |
|
|
|
182,490 |
|
Taxes and interest payable |
|
|
43,227 |
|
|
|
37,194 |
|
Accrued expenses payable |
|
|
49,058 |
|
|
|
40,642 |
|
Other current liabilities |
|
|
10,957 |
|
|
|
60,349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities |
|
|
446,582 |
|
|
|
502,084 |
|
|
|
|
|
|
|
|
|
|
Non-Current Liabilities: |
|
|
|
|
|
|
|
|
Long-term debt |
|
|
750,971 |
|
|
|
800,196 |
|
Post employment benefits liability |
|
|
2,370 |
|
|
|
2,072 |
|
Other long-term liabilities |
|
|
13,908 |
|
|
|
8,694 |
|
Deferred tax liabilities |
|
|
13,410 |
|
|
|
8,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Current Liabilities |
|
|
780,659 |
|
|
|
819,709 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
1,227,241 |
|
|
|
1,321,793 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A common stock - 31,136,619 and 31,031,129 shares issued,
30,566,853 and 30,416,441 outstanding in 2009 and 2008 |
|
|
20,864 |
|
|
|
20,761 |
|
Class B common stock - 12,778,125 shares issued
and outstanding, no par value |
|
|
8,722 |
|
|
|
8,722 |
|
Additional paid in capital |
|
|
18,658 |
|
|
|
13,481 |
|
Retained earnings |
|
|
817,649 |
|
|
|
594,004 |
|
Accumulated other comprehensive loss |
|
|
(265 |
) |
|
|
(4,536 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Shareholders Equity |
|
|
865,628 |
|
|
|
632,432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity |
|
$ |
2,092,869 |
|
|
$ |
1,954,225 |
|
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
F-4
COPA HOLDINGS, S. A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In US$ thousands, except share and per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Passenger revenue |
|
$ |
1,186,717 |
|
|
$ |
1,217,311 |
|
|
$ |
967,066 |
|
Cargo, mail and other |
|
|
66,370 |
|
|
|
71,478 |
|
|
|
60,198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,253,087 |
|
|
|
1,288,789 |
|
|
|
1,027,264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft fuel |
|
|
300,816 |
|
|
|
404,669 |
|
|
|
265,387 |
|
Salaries and benefits |
|
|
157,879 |
|
|
|
139,431 |
|
|
|
116,691 |
|
Passenger servicing |
|
|
110,768 |
|
|
|
98,775 |
|
|
|
82,948 |
|
Commissions |
|
|
57,565 |
|
|
|
67,177 |
|
|
|
65,930 |
|
Maintenance, material and repairs |
|
|
76,732 |
|
|
|
66,438 |
|
|
|
51,249 |
|
Reservations and sales |
|
|
56,280 |
|
|
|
54,996 |
|
|
|
48,229 |
|
Aircraft rentals |
|
|
46,538 |
|
|
|
43,008 |
|
|
|
38,636 |
|
Flight operations |
|
|
60,873 |
|
|
|
56,425 |
|
|
|
43,958 |
|
Depreciation |
|
|
47,079 |
|
|
|
42,891 |
|
|
|
35,328 |
|
Landing fees and other rentals |
|
|
33,628 |
|
|
|
32,467 |
|
|
|
27,017 |
|
Other |
|
|
62,186 |
|
|
|
58,521 |
|
|
|
55,093 |
|
Special fleet charges |
|
|
19,417 |
|
|
|
|
|
|
|
7,309 |
|
Gain from involuntary conversion |
|
|
|
|
|
|
|
|
|
|
(8,019 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
1,029,761 |
|
|
|
1,064,798 |
|
|
|
829,756 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
|
223,326 |
|
|
|
223,991 |
|
|
|
197,508 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating Income (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest costs |
|
|
(32,938 |
) |
|
|
(42,071 |
) |
|
|
(44,332 |
) |
Interest capitalized |
|
|
693 |
|
|
|
1,921 |
|
|
|
2,570 |
|
Interest income |
|
|
9,185 |
|
|
|
11,130 |
|
|
|
12,193 |
|
Other, net |
|
|
59,703 |
|
|
|
(58,843 |
) |
|
|
10,987 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,643 |
|
|
|
(87,863 |
) |
|
|
(18,582 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before Income Taxes |
|
|
259,969 |
|
|
|
136,128 |
|
|
|
178,926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for Income Taxes |
|
|
19,610 |
|
|
|
17,469 |
|
|
|
17,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
240,359 |
|
|
$ |
118,659 |
|
|
$ |
161,820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share, as adjusted: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
5.47 |
|
|
$ |
2.71 |
|
|
$ |
3.70 |
|
Diluted |
|
$ |
5.47 |
|
|
$ |
2.71 |
|
|
$ |
3.70 |
|
Denominator for basic and diluted earnings per share, as adjusted |
|
|
43,910,929 |
|
|
|
43,822,879 |
|
|
|
43,782,386 |
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
F-5
COPA HOLDINGS, S. A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(In US$ thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
(Non-par value) |
|
|
Issued Capital |
|
|
Paid in |
|
|
Retained |
|
|
Comprehensive |
|
|
|
|
|
|
Class A |
|
|
Class B |
|
|
Class A |
|
|
Class B |
|
|
Capital |
|
|
Earnings |
|
|
Income (Loss) |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2006 |
|
|
30,034,375 |
|
|
|
12,778,125 |
|
|
|
20,501 |
|
|
|
8,722 |
|
|
|
3,340 |
|
|
|
343,390 |
|
|
|
(4,284 |
) |
|
|
371,669 |
|
Issuance of stock |
|
|
125,344 |
|
|
|
|
|
|
|
85 |
|
|
|
|
|
|
|
(85 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
161,820 |
|
|
|
|
|
|
|
161,820 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in fair value of
derivative instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,998 |
|
|
|
3,998 |
|
Foreign currency translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,954 |
|
|
|
2,954 |
|
Actuarial loss, net of amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
168,770 |
|
Restricted stock plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,809 |
|
|
|
|
|
|
|
|
|
|
|
4,809 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50 |
) |
|
|
|
|
|
|
(50 |
) |
Dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,561 |
) |
|
|
|
|
|
|
(13,561 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007 |
|
|
30,159,719 |
|
|
|
12,778,125 |
|
|
|
20,586 |
|
|
|
8,722 |
|
|
|
8,064 |
|
|
|
491,599 |
|
|
|
2,666 |
|
|
|
693,457 |
|
Issuance of stock |
|
|
256,722 |
|
|
|
|
|
|
|
175 |
|
|
|
|
|
|
|
(175 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
118,659 |
|
|
|
|
|
|
|
118,659 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in fair value of
derivative instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,713 |
) |
|
|
(6,713 |
) |
Exchange effect on
intercompany long term
balance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,155 |
|
|
|
2,155 |
|
Foreign currency translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,503 |
) |
|
|
(2,503 |
) |
Actuarial loss, net of amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(141 |
) |
|
|
(141 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
111,456 |
|
Restricted stock plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,592 |
|
|
|
|
|
|
|
|
|
|
|
5,592 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(47 |
) |
|
|
|
|
|
|
(47 |
) |
Dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,207 |
) |
|
|
|
|
|
|
(16,207 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008 |
|
|
30,416,441 |
|
|
|
12,778,125 |
|
|
$ |
20,761 |
|
|
$ |
8,722 |
|
|
$ |
13,481 |
|
|
$ |
594,004 |
|
|
$ |
(4,536 |
) |
|
$ |
632,432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock |
|
|
150,412 |
|
|
|
|
|
|
|
103 |
|
|
|
|
|
|
|
(103 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
240,359 |
|
|
|
|
|
|
|
240,359 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in fair value of
derivative instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,509 |
|
|
|
1,509 |
|
Exchange effect on
intercompany long term
balance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,486 |
) |
|
|
(1,486 |
) |
Foreign currency translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,248 |
|
|
|
4,248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
244,630 |
|
Restricted stock plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,280 |
|
|
|
|
|
|
|
|
|
|
|
5,280 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(459 |
) |
|
|
|
|
|
|
(459 |
) |
Dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,255 |
) |
|
|
|
|
|
|
(16,255 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009 |
|
|
30,566,853 |
|
|
|
12,778,125 |
|
|
$ |
20,864 |
|
|
$ |
8,722 |
|
|
$ |
18,658 |
|
|
$ |
817,649 |
|
|
$ |
(265 |
) |
|
$ |
865,628 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
F-6
COPA HOLDINGS, S. A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In US$ thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
240,359 |
|
|
$ |
118,659 |
|
|
$ |
161,820 |
|
Adjustments for: |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes |
|
|
3,816 |
|
|
|
4,649 |
|
|
|
2,352 |
|
Depreciation |
|
|
47,079 |
|
|
|
42,891 |
|
|
|
35,328 |
|
Gain on sale of property, equipment and involuntary conversion |
|
|
|
|
|
|
|
|
|
|
(9,579 |
) |
Special fleet charges |
|
|
8,923 |
|
|
|
199 |
|
|
|
6,300 |
|
Provision for doubtful accounts |
|
|
55 |
|
|
|
3,230 |
|
|
|
4,276 |
|
Provision for obsolescence of expendable parts and supplies |
|
|
27 |
|
|
|
21 |
|
|
|
12 |
|
Derivative instruments mark to market |
|
|
(59,010 |
) |
|
|
53,290 |
|
|
|
(6,291 |
) |
Stock compensation |
|
|
5,278 |
|
|
|
5,593 |
|
|
|
4,809 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(4,280 |
) |
|
|
(4,459 |
) |
|
|
(14,805 |
) |
Accounts receivable from related parties |
|
|
524 |
|
|
|
(3,177 |
) |
|
|
1,256 |
|
Other current assets |
|
|
(12,781 |
) |
|
|
(6,346 |
) |
|
|
(14,149 |
) |
Restricted cash |
|
|
40,934 |
|
|
|
(39,803 |
) |
|
|
(1 |
) |
Other assets |
|
|
(11,831 |
) |
|
|
974 |
|
|
|
(7,835 |
) |
Accounts payable |
|
|
(3,669 |
) |
|
|
(2,074 |
) |
|
|
7,611 |
|
Accounts payable to related parties |
|
|
7,444 |
|
|
|
1,681 |
|
|
|
1,671 |
|
Air traffic liability |
|
|
(246 |
) |
|
|
32,090 |
|
|
|
35,215 |
|
Other liabilities |
|
|
19,814 |
|
|
|
(9,313 |
) |
|
|
13,951 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
282,436 |
|
|
|
198,105 |
|
|
|
221,941 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of investments |
|
|
(217,905 |
) |
|
|
(240,407 |
) |
|
|
(500 |
) |
Proceeds from redemption of investments |
|
|
268,314 |
|
|
|
132,586 |
|
|
|
17,495 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advance payments on aircraft purchase contracts |
|
|
(151,676 |
) |
|
|
(53,434 |
) |
|
|
(62,128 |
) |
Acquisition of property and equipment |
|
|
(50,994 |
) |
|
|
(162,479 |
) |
|
|
(304,013 |
) |
Disposal of property and equipment |
|
|
810 |
|
|
|
954 |
|
|
|
2,354 |
|
Insurance proceeds on involuntary conversion |
|
|
|
|
|
|
|
|
|
|
12,034 |
|
|
|
|
|
|
|
|
|
|
|
Net cash flows used in investing activities |
|
|
(151,451 |
) |
|
|
(322,780 |
) |
|
|
(334,758 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from loans and borrowings |
|
|
103,780 |
|
|
|
160,197 |
|
|
|
329,147 |
|
Payments on loans and borrowings |
|
|
(175,374 |
) |
|
|
(84,471 |
) |
|
|
(87,291 |
) |
Dividends declared and paid |
|
|
(16,255 |
) |
|
|
(16,207 |
) |
|
|
(13,561 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash flows (used) provided by financing activities |
|
|
(87,849 |
) |
|
|
59,519 |
|
|
|
228,295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate change on cash |
|
|
(1,288 |
) |
|
|
106 |
|
|
|
500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
41,848 |
|
|
|
(65,050 |
) |
|
|
115,978 |
|
Cash and cash equivalents at January 1st |
|
|
220,808 |
|
|
|
285,858 |
|
|
|
169,880 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at December 31 |
|
$ |
262,656 |
|
|
$ |
220,808 |
|
|
$ |
285,858 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information |
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid, net of amount capitalized |
|
$ |
34,170 |
|
|
$ |
40,383 |
|
|
$ |
40,108 |
|
Income taxes paid |
|
|
13,843 |
|
|
|
14,906 |
|
|
|
16,553 |
|
Investing and financing activities not affecting cash: |
|
|
|
|
|
|
|
|
|
|
|
|
Settlement of debt through insurance proceed on involuntary conversion |
|
|
|
|
|
|
|
|
|
|
22,820 |
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
F-7
COPA HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Corporate Information
Copa Holdings, S. A. (the Company) is a leading Latin American provider of international airline
passenger and cargo services. The Company was incorporated according to the laws of the Republic of
Panama. The Company owns 99.8% of the shares of Compañía Panameña de Aviación, S. A. (Copa
Airlines), 100% of the shares of Oval Financial Leasing, Ltd. (OVAL), and 99.9% of the shares of
AeroRepública, S.A. (AeroRepública).
Copa Airlines, 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
Airlines operates from its Panama City hub in the Republic of Panama, from where it offers
approximately 152 daily scheduled flights among 45 destinations in 24 countries in North, Central
and South America and the Caribbean. Additionally, Copa Airlines 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, 2009, Copa Airlines operates a fleet of 42 aircraft with an average age of 5.1
years; consisting of 29 modern Boeing 737-Next Generation aircraft and 13 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 40 aircraft, with a carrying value of
$1.1 billion, all of which are leased to either Copa Airlines or AeroRepública. 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.
AeroRepública is a domestic Colombian air carrier, which is incorporated according to the laws of
the Republic of Colombia and provides domestic service to 12 cities in Colombia with a
point-to-point route network as well as international service to Panama City, Ecuador and Venezuela
from seven (7) different cities. As of December 31, 2009, AeroRepública operates a fleet of 14
aircraft with an average age of 3.2 years; consisting of one leased MD-80s and 13 Embraer 190
aircraft.
A substantial portion of the Companys assets are located in the Republic of Panama, and a
significant proportion of the Companys flights operate through its hub at Tocumen International
Airport in Panama City. As a result, the Company depends on economic and political conditions
prevailing from time to time in Panama.
As used in these Notes to Consolidated Financial Statements, the terms the Company, we, us,
our and similar terms refer to Copa Holdings, S.A. and, unless the context indicates otherwise,
its consolidated subsidiaries.
F-8
COPA HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Basis of Presentation
These consolidated financial statements were prepared in accordance with U.S. generally
accepted accounting principles for financial reporting using the U.S. Dollar as the reporting
currency.
Principles of Consolidation
The consolidated financial statements comprise the accounts of the Company and its
subsidiaries. The financial statements of subsidiaries are prepared for the same reporting period
as the parent company, using consistent accounting policies. Subsidiaries are consolidated from
the date on which control is transferred to the Company and cease to be consolidated from the date
on which control is transferred from the Company. All intercompany accounts, transactions and
profits arising from consolidated entities have been eliminated in consolidation.
Use of Estimates
The preparation of the Consolidated Financial Statements requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents comprise cash at banks, short-term time deposits and U.S. Government
treasury securities with original maturities of three months or less when purchased.
Investments
The Company invests in short-term time deposits and U.S. Government treasury securities with
original maturities of more than three months but less than one year. Additionally, the Company
invests in long-term time deposits 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 short-term and long-term
investments and is held as collateral for letters of credit.
F-9
COPA HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Expendable Parts and Supplies
Expendable parts and supplies for flight equipment are carried at average acquisition cost and
are expensed when used in operations. An allowance for obsolescence is provided over the remaining
estimated useful life of the related aircraft, plus an allowance for expendable parts currently
identified as excess to reduce the carrying cost to net realizable value. These allowances are
based on management estimates, which are subject to change.
Property and Equipment
Property and equipment are recorded at cost and are depreciated to estimated residual values over
their estimated useful lives using the straight-line method. Jet aircraft, jet engines and aircraft
rotables are assumed to have an estimated residual value of 15% of original cost; other categories
of property and equipment are assumed to have no residual value. The estimated useful lives for
property and equipment are as follows:
|
|
|
|
|
|
|
Years |
|
Jet aircraft |
|
|
30 |
|
Jet engines |
|
|
30 |
|
Ground property and equipment |
|
|
5 to 10 |
|
Furniture, fixture, equipment and others |
|
|
5 to 10 |
|
Software rights and licenses |
|
|
3 to 8 |
|
Aircraft rotables |
|
|
10 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 from the use of those assets are less than the carrying amount of those assets.
Cash flows estimates are based on historical results adjusted to reflect the Companys best
estimate of future market and operating conditions. The net carrying value of assets not
recoverable is reduced to fair value. Estimates of fair value represent the Companys best estimate
based on industry trends and reference to assumptions that market participants would use in pricing
the asset and are subject to change.
Revenue Recognition
Passenger Revenue
Passenger revenue is recognized when transportation is provided rather than when a ticket is sold.
The amount of passenger ticket sales not yet recognized as revenue is reflected as Air traffic
liability in the Consolidated Balance Sheets. Fares for tickets that have expired and/or are one
year old are recognized as passenger revenue. A significant portion of the Companys ticket sales
are processed through major credit card companies, resulting in accounts receivable which are
generally short-term in duration and typically collected prior to when revenue is recognized. The
Company believes that the credit risk associated with these receivables is minimal.
F-10
COPA HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We are required to charge certain taxes and fees on our passenger tickets. These taxes and fees
include transportation taxes, airport passenger facility charges and foreign arrival and departure
taxes. These taxes and fees are legal assessments on the customer. As we have a legal obligation to
act as a collection agent with respect to these taxes and fees, we do not include such amounts in
passenger revenue. We record a liability when the amounts are collected and relieve the liability
when payments are made to the applicable government agency or operating carrier.
Cargo and Mail Services Revenue
Cargo and mail services revenue are recognized when the Company provides the shipping services and
thereby completes the earning process.
Other Revenue
Other revenue is primarily comprised of excess baggage charges, commissions earned on tickets sold
for flights on other airlines and charter flights, and is recognized when transportation or service
is provided.
Frequent Flyer Program
The Company participates in Continentals OnePass frequent flyer program, for which the Companys
passengers receive all the benefits and privileges offered by the OnePass program. Continental is
responsible for the administration of the OnePass program. Under the terms of the Companys
frequent flyer agreement with Continental, OnePass members receive OnePass frequent flyer mileage
credits for travel on Copa Airlines and AeroRepública 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. Continental pays Copa Airlines a per flown mile rate for every OnePass
Member that uses his/her miles to obtain reward tickets on Copa Airlines and AeroRepública
flights. These rates depend on the class of service, the flight length and the availability of the
reward.
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 and liabilities, which are translated at equivalent U.S. dollar costs at dates
of acquisition and maintained at historical rate. Results of operations are translated at average
exchange rates in effect during the period. Foreign exchange gains and losses are included as a
component of Other, net within Non-operating income (expense) in the Consolidated Statements of
Income.
F-11
COPA HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The financial statements of AeroRepública are measured using the Colombian Peso as the
functional currency; adjustments to translate those statements into U.S. Dollars are recorded in
other comprehensive income (loss).
In 2009,
approximately 71% of the Companys expenses and 43% of the Companys revenues were
denominated in U.S. Dollars. The remainder of the Companys expenses and revenues were denominated
in the currencies of the various countries to which the Company flies, with the largest non-dollar
amount denominated in Colombian pesos for which the Company hedges the risk of fluctuation from
time to time (see Note 7). Generally, the Companys 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 converted into
U.S. Dollars. As a result of exchange controls in Venezuela, cash generated from Venezuelan
operations may not be available to fund our cash obligations.
Derivative Instruments and Hedging Activities
The Company accounts for derivatives and hedging activities in accordance with ASC Topic 815,
Derivatives and Hedging (ASC Topic 815) which requires entities to recognize all derivative
instruments as either assets or liabilities in the balance sheet at their respective fair values.
The Company only enters into derivative contracts that it intends to use in managing the
variabilities in market related values of forecasted transaction or the variability of cash flows
to be received or paid related to a recognized asset or liability (cash flow hedge). For all
hedging relationships the Company formally documents the hedging relationship and its
risk-management objective and strategy for undertaking the hedge, the hedging instrument, the
hedged item, the nature of the risk being hedged, how the hedging instruments effectiveness in
offsetting the hedged risk will be assessed prospectively and retrospectively, and a description of
the method of measuring ineffectiveness. The Company also formally assesses, both at the hedges
inception and on an ongoing basis, whether the derivatives that are used in hedging transactions
are highly effective in offsetting cash flows of hedged items.
Changes in the fair value of a derivative that is highly effective and that is designated and
qualifies as a cash-flow hedge are recorded in accumulated other comprehensive income to the extent
that the derivative is effective as a hedge, until earnings are affected by the variability in cash
flows of the designated hedged item. The ineffective portion of the change in fair value of a
derivative instrument that qualifies as a cash-flow hedge or that is not designated as a hedge is
reported in earnings.
The Company discontinues hedge accounting prospectively when it determines that the derivative is
no longer effective in offsetting cash flows of the hedged item, the derivative expires or is sold,
terminated, or exercised, the derivative is de-designated as a hedging instrument because it is
unlikely that a forecasted transaction will occur, or management determines that designation of the
derivative as a hedging instrument is no longer appropriate.
In all situations in which hedge accounting is discontinued and the derivative is retained, the
Company continues to carry the derivative at its fair value on the balance sheet and recognizes any
subsequent changes in its fair value in earnings. When it is probable that a forecasted transaction
will not occur, the
Company discontinues hedge accounting and recognizes immediately in earnings gains and losses that
were accumulated in other comprehensive income.
F-12
COPA HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 leased aircraft. Under aircraft lease
agreements, if there are excess amounts on deposit at the expiration of the lease, the lessor is
entitled to retain any excess amounts. The maintenance reserves paid under our lease agreements do
not transfer either the obligation to maintain the aircraft or the cost risk associated with the
maintenance activities to the aircraft lessor. In addition, we maintain the right to select any
third-party maintenance providers. Therefore, we record these amounts as prepaid maintenance
within Other Assets on our Consolidated Balance Sheets and then recognize maintenance expense when
the underlying maintenance is performed, in accordance with our maintenance accounting policy. As
of December 31, 2009 and 2008, based on the experience of the Companys maintenance personnel and
industry available data, management determined that it was probable that all maintenance deposits
recorded as prepaid maintenance in the accompanying Consolidated Balance Sheets will be used to
fund the cost of maintenance events and are therefore recoverable.
Employee Profit Sharing
The Company sponsors a profit-sharing program for both management and non-management personnel.
For members of management, profit-sharing is based on a combination of the Companys performance as
a whole and the achievement of individual goals. Profit-sharing for non-management employees is
based solely on the Companys performance. The Company accrues each month for the expected
profit-sharing, which is paid annually in February. Amounts expensed for the Companys
profit-sharing program were $10.7 million, $7.7 million and $8.4 million in 2009, 2008 and 2007,
respectively.
F-13
COPA HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Advertising Costs
Advertising costs are expensed when incurred. The Company recognized as advertising expense
$6.2 million, $7.7 million, and $6.6 million in 2009, 2008 and 2007, respectively.
Income Taxes
Deferred income taxes are provided under the liability method and reflect the net tax effects of
temporary differences between the tax basis of assets and liabilities and their reported amounts in
the financial statements.
Goodwill and Intangibles
The Company performs impairment testing of goodwill, in accordance with ASC Topic 350,
Intangibles-Goodwill and Other (ASC Topic 350), separately from impairment testing of
indefinite-lived intangibles. The Company tests goodwill for impairment, at least annually, by
comparing the book value to the fair value at the reporting segment level and tests individually
indefinite-lived intangibles, at least annually, by reviewing the individual book values compared
to the fair value. Considerable management judgment is necessary to determine the assumptions that
marketplace participants would consider in determining the fair value of these assets. The Company
did not recognize any impairment charges for goodwill or intangibles assets during the years
presented.
All of the Companys goodwill and indefinite-lived intangibles are allocated to its AeroRepública
segment. Indefinite-lived intangible assets consist primarily of the fair value allocated to the
routes and the AeroRepública trade name, valued at $29.4 million and $5.6 million, respectively.
For the years ended December 2009 and 2008, amounts of goodwill and intangible assets have changed
due to exchange effects.
Gain from Involuntary Conversion
In 2007, the Company recorded an $8.0 million gain on involuntary conversion of non-monetary assets
to monetary assets related to insurance proceeds in excess of aircraft book value.
Concentration Risk
The Company attempts to minimize its concentration risk with regards to its cash, cash equivalents,
and its investment portfolio. This is accomplished by diversifying and limiting amounts among
different counterparties, the type of investment, and the amount invested in any individual
security. Even, the Companys exposure to other foreign currencies is limited to a period of up to
two weeks, there is some risk related to devaluation of some currencies where the Company has some
restrictions by law to convert our funds into U.S. Dollars. Due to exchange controls in Venezuela,
however, we often experience additional delays in repatriating cash generated Venezuelan Bolivares
to U.S. dollars. See also Note 16.
F-14
COPA HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Earnings per Share
Earnings per share information is determined using the two-class method, which includes the
weighted-average number of common shares outstanding during the period and other securities that
participate in dividends (participating securities). Our non-vested stock awards are considered
participating securities because they include non-forfeitable rights to dividends. In applying
the two-class method, earnings are allocated to both common stock shares and participating
securities based on their respective weighted-average shares outstanding for the period. Diluted
earnings per share information may include the additional effect of other securities, if dilutive,
in which case the dilutive effect of such securities is calculated using the treasury stock method.
2. Adopted and Recently Issued Accounting Pronouncements
Effective July 1, 2009, the Financial Accounting Standards Boards (FASB) Accounting Standards
Codification (ASC) became the single official source of authoritative, nongovernmental generally
accepted accounting principles (GAAP) in the United States. The historical GAAP hierarchy was
eliminated and the ASC became the only level of authoritative GAAP, other than guidance issued by
the Securities and Exchange Commission. Our accounting policies were not affected by the
conversion to ASC. However, references to specific accounting standards in the footnotes to our
consolidated financial statements have been changed to refer to the appropriate section of ASC.
In March 2008, the Financial Accounting Standards Board (FASB) issued Statement No. 161,
Disclosures about Derivative Instruments and Hedging Activities an amendment of FASB Statement
No. 133 (SFAS 161). SFAS 161 requires entities that utilize derivative instruments to provide
qualitative disclosures about their objectives and strategies for using such instruments, as well
as any details of credit-risk-related contingent features contained within derivatives. SFAS 161
also requires entities to disclose additional information about the amounts and location of
derivatives located within the financial statements, how the provisions of SFAS 133 have been
applied, and the impact that hedges have on an entitys financial position, financial performance,
and cash flows. SFAS 161 is effective for fiscal years and interim periods beginning after
November 15, 2008, with early application encouraged. This is contained in ASC Topic 815,
Derivatives and Hedging (ASC Topic 815). The adoption of this amendment did not have a material
impact on these Consolidated Financial Statements.
In September 2006, the FASB issued guidance which defines fair value, establishes a framework
for measuring fair value and expands disclosures about fair value measurements. This guidance is
contained in ASC Topic 820, Fair Value Measurements and Disclosures (ASC Topic 820). In
February 2008, the FASB deferred the effective date to January 1, 2009 for all nonfinancial assets
and liabilities, except for those that are recognized or disclosed at fair value on a recurring
basis (that is, at least annually). We adopted the deferred provisions of ASC Topic 820 on January
1, 2009. Application of the new rules affected our annual impairment testing for goodwill and
other intangible assets.
F-15
COPA HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In April 2009, the FASB issued additional guidance for estimating fair value in accordance with ASC
Topic 820. The additional guidance addresses estimating fair value when the volume and level of
activity for an asset or liability has significantly decreased in relation to normal market
activity for the asset or liability. We adopted the provisions of this guidance for the fourth
quarter of 2009. The adoption did not have a material effect on these Consolidated Financial
Statements.
In June 2009, the FASB issued guidance to change financial reporting by enterprises involved with
variable interest entities (VIEs). The standard replaces the quantitative-based risks and
rewards calculation for determining which enterprise has a controlling financial interest in a VIE
with an approach focused on identifying which enterprise has the power to direct the activities of
a VIE and the obligation to absorb losses of the entity or the right to receive the entitys
residual returns. This accounting standard is effective for us on January 1, 2010. We are
currently evaluating the requirements of this pronouncement and have not determined the impact, if
any, that adoption of this standard will have on these Consolidated Financial Statements.
In October 2009, the FASB issued guidance that changes the accounting for revenue arrangements
with multiple deliverables. The guidance requires an entity to allocate consideration at the
inception of an arrangement to all of its deliverables based on their relative selling prices and
eliminates the use of the residual method of allocation. The guidance establishes a hierarchy for
determining the selling price of a deliverable, based on vendor-specific objective evidence,
third-party evidence or estimated selling price. In addition, this guidance expands required
disclosures related to a vendors multiple-deliverable revenue arrangements. This accounting
standard is effective for us on January 1, 2011. We are currently evaluating the requirements of
this pronouncement and we have not determined the impact, if any on these Consolidated Financial
Statements.
3. Special Fleet Charges
In 2009, the Company decided to terminate early three MD-80 aircraft leases, in connection with the
fleet renovation plan of AeroRepública to Embraer -190 aircraft. Early termination charges
amounted to $10.5 million and were recognized as Special Fleet Charges in the Consolidated
Statements of Income.
In connection with the early lease terminations, the Company wrote off related property, plant and
equipment such as rotable parts, spare engines and tools that amounted to $4.9 million and
recognized a loss of $4.0 million related to the scrap of obsolete expendable parts. We estimated
the fair values based on current market conditions, the condition of our aircraft and our expected
proceeds from the sale of the assets, using unobservable inputs for which there is little or no
market data and which require us to develop our own assumptions about how market participants would
price the assets.
During 2007, the Company terminated five MD-80 aircraft leases, in connection with the fleet
renovation plan in AeroRepública. Early termination charges amounted to $7.3 million and were
recognized as Special Fleet Charges in the Consolidated Statements of Income.
F-16
COPA HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Long-Term Debt
At December 31, long-term debt consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
Long-term fixed rate debt |
|
$ |
347.2 |
|
|
$ |
363.8 |
|
(Secured fixed rate indebtedness due through 2019
Effective rates ranged from 3.95% to 6.75%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term variable rate debt |
|
|
498.3 |
|
|
|
504.4 |
|
(Secured variable rate indebtedness due through 2019
Effective rates ranged from 1.00% to 2.80%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medium-term variable rate debt |
|
|
|
|
|
|
47.8 |
|
(Unsecured variable rate indebtedness due in 2009
Effective rates ranged of 2.52% to 4.89%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total |
|
|
845.5 |
|
|
|
916.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less current maturities |
|
|
94.5 |
|
|
|
115.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt less current maturities |
|
$ |
751.0 |
|
|
$ |
800.2 |
|
|
|
|
|
|
|
|
Maturities of long-term debt for the next five years are as follows (in millions):
|
|
|
|
|
Year ending December 31, |
|
|
|
|
2010 |
|
$ |
|