Form 20-F
As filed with the Securities and Exchange Commission on May 17, 2011
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, 2010
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
OR
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o |
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SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 001-32696
COPA HOLDINGS, S.A.
(Exact name of Registrant as Specified in Its Charter)
Not Applicable
(Translation of Registrants Name Into English)
Republic of Panama
(Jurisdiction of Incorporation or Organization)
Avenida Principal y Avenida de la Rotonda, Costa del Este
Complejo Business Park, Torre Norte
Parque Lefevre, Panama City
Panama
(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, 2010, there were
outstanding 43,594,523 shares of common stock, without par value, of which 32,655,398 were Class A
shares and 10, 938,125 were Class B shares.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act.
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, or a non-accelerated filer. See definition of accelerated filer and non-accelerated filer
in Rule 12b-2 of Exchange Act. (Check one):
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Large Accelerated Filer þ
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Accelerated Filer o
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Non-accelerated Filer o |
Indicate by check mark which basis of accounting the registrant has used to prepare the
financial statements included in this filing:
U.S. GAAP o IFRS þ 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 Copa Colombia 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 statement of financial
position as of December 31, 2010 and 2009 and the related audited consolidated statements of
income, changes in shareholders equity and cash flows for the years ended December 31, 2010 and
2009.
The Companys consolidated financial statements have been prepared in accordance with
International Financial Reporting Standards (IFRS), as issued by the International Accounting
Standards Board (IASB). These are the Companys first consolidated financial statements prepared
in accordance with IFRS and IFRS 1 First-time Adoption of International Financial Reporting
Standards (IFRS 1) has been applied.
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. |
iii
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.
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
International Financial Reporting Standards (IFRS), issued by the International Accounting
Standards Board (IASB) and are stated in U.S. dollars. These are our first consolidated
financial statements prepared in accordance with IFRS and IFRS 1 First-time Adoption of
International Financial Reporting Standards (IFRS 1) has been applied. 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 for the years ended December 31, 2010 and
2009 has been derived from our audited consolidated financial statements included elsewhere in
this annual report.
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Year Ended December 31, (in |
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thousands of dollars, except share |
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and per share data and operating |
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data) |
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2009 |
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2010 |
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INCOME STATEMENT DATA |
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Operating revenue: |
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Passenger revenue |
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$ |
1,189,706 |
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$ |
1,338,581 |
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Cargo, mail and other |
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66,370 |
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76,225 |
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Total operating revenues |
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1,256,076 |
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1,414,806 |
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Operating expenses: |
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Aircraft fuel |
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300,816 |
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354,427 |
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Salaries and benefits |
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157,045 |
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178,845 |
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Passenger servicing |
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125,150 |
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133,718 |
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Commissions |
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47,457 |
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45,331 |
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Reservations and sales |
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56,280 |
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58,813 |
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Maintenance, materials and repairs |
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55,720 |
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62,229 |
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Depreciation and amortization |
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50,876 |
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62,962 |
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Flight operations |
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60,873 |
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70,648 |
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Aircraft rentals |
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46,538 |
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46,334 |
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Landing fees and other rentals |
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33,628 |
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40,320 |
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Other |
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62,190 |
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71,531 |
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Special fleet charges(1) |
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19,417 |
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0 |
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Total operating expenses |
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1,015,990 |
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1,125,158 |
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Operating income |
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240,086 |
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289,648 |
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Non-operating income (expense): |
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Interest expense |
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(32,938 |
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(29,981 |
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Interest capitalized |
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693 |
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0 |
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Interest income |
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9,185 |
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4,759 |
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Other, net(2) |
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58,955 |
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(4,403 |
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Total non-operating expenses, net |
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35,895 |
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(29,625 |
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Income before income taxes |
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275,981 |
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260,023 |
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Provision for income taxes |
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26,894 |
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18,966 |
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Net income |
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249,087 |
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241,057 |
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1
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Year Ended December 31, (in |
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thousands of dollars, except share |
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and per share data and operating |
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data) |
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2009 |
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2010 |
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STATEMENT OF FINANCIAL POSITION DATA |
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Total cash, cash equivalents and short-term
investments |
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$ |
352,068 |
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$ |
402,603 |
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Accounts receivable, net |
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80,791 |
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89,387 |
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Total current assets |
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503,022 |
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594,383 |
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Purchase deposits for flight equipment |
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198,697 |
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205,972 |
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Total property and equipment |
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1,480,172 |
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1,772,528 |
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Total assets |
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2,161,208 |
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2,555,997 |
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Long-term debt |
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750,971 |
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888,681 |
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Total shareholders equity |
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911,133 |
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1,109,969 |
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Capital stock |
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51,782 |
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55,867 |
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CASH FLOW DATA |
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Net cash provided by operating activities |
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$ |
291,299 |
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$ |
292,801 |
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Net cash used in investing activities |
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(160,314 |
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(445,432 |
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Net cash (used in) provided by financing
activities |
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(87,849 |
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95,520 |
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OTHER FINANCIAL DATA |
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EBITDA(3) |
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313,838 |
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324,482 |
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Aircraft rentals |
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46,538 |
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46,334 |
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Operating margin(4) |
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19.1 |
% |
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20.5 |
% |
Weighted average shares used in computing net
income per share (basic) |
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43,910,929 |
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43,995,671 |
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Weighted average shares used in computing net
income per share (diluted) |
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43,910,929 |
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43,995,671 |
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Net income per share (basic) |
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$ |
5.67 |
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$ |
5.48 |
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Net income per share (diluted) |
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$ |
5.67 |
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$ |
5.48 |
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Dividends declared per share |
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$ |
0.37 |
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$ |
1.09 |
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OPERATING DATA |
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Revenue passengers carried(5) |
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7,182 |
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7,998 |
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Revenue passenger miles(6) |
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7,397 |
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8,416 |
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Available seat miles(7) |
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9,911 |
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10,950 |
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Load factor(8) |
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74.6 |
% |
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76.9 |
% |
Break-even load factor(9) |
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55.3 |
% |
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61.9 |
% |
Total block hours(10) |
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206,726 |
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221,298 |
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Average daily aircraft utilization(11) |
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10.1 |
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10.16 |
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Average passenger fare |
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167.0 |
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168.8 |
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Yield(12) |
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16.08 |
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15.90 |
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Passenger revenue per ASM(13) |
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12.00 |
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12.22 |
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Operating revenue per ASM(14) |
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12.67 |
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12.92 |
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Operating expenses per ASM (CASM)(15) |
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10.25 |
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10.28 |
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Departures |
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88,294 |
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95,004 |
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Average daily departures |
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241.9 |
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260.3 |
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Average number of aircraft |
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56.3 |
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59.7 |
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Airports served at period end |
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51 |
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52 |
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SEGMENT FINANCIAL DATA |
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Copa: |
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Operating revenue |
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1,013,136 |
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1,163,993 |
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Operating expenses |
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780,466 |
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871,988 |
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Depreciation and Amortization |
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46,691 |
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55,208 |
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Aircraft rentals |
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25,507 |
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30,377 |
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Interest expense |
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30,086 |
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|
27,075 |
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Interest capitalized |
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(693 |
) |
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0 |
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Interest income |
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(8,121 |
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(3,908 |
) |
Income before income tax |
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271,997 |
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264,707 |
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Total assets |
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1,984,358 |
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2,386,169 |
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Copa Colombia: |
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Operating revenue |
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254,685 |
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|
269,974 |
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Operating expenses |
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248,178 |
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274,980 |
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Depreciation and amortization |
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4,186 |
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7,753 |
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Aircraft rentals |
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26,187 |
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|
27,199 |
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Interest expense |
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2,852 |
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|
2,906 |
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Interest capitalized |
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0 |
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0 |
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Interest income |
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(1,064 |
) |
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(851 |
) |
Income (loss) before income tax |
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4,120 |
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(4,685 |
) |
Total assets |
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321,852 |
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|
340,923 |
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2
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Year Ended December 31, (in |
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thousands of dollars, except share |
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and per share data and operating |
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data) |
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2009 |
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2010 |
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SEGMENT OPERATING DATA |
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Copa: |
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Available seat miles(7) |
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8,319 |
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|
9,228 |
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Load factor(8) |
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|
76 |
% |
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|
77.9 |
% |
Break-even load factor |
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51.9 |
% |
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|
57.1 |
% |
Yield(12) |
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15.07 |
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|
15.16 |
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Operating revenue per ASM(14) |
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12.18 |
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12.61 |
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CASM(15) |
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9.38 |
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9.45 |
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Average stage length(17) |
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1,214 |
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1,246 |
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On time performance(18) |
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87.6 |
% |
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90.6 |
% |
Copa Colombia:(19) |
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Available seat miles(8) |
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1,592 |
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1,722 |
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Load factor(9) |
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67.5 |
% |
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71.1 |
% |
Breakeven load factor |
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67.6 |
% |
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72.3 |
% |
Yield(13) |
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22.04 |
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20.28 |
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Operating revenue per ASM(15) |
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15.10 |
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15.06 |
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CASM(16) |
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14.62 |
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15.30 |
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Average stage length(18) |
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429 |
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|
435 |
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On time performance(19) |
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90.1 |
% |
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86.9 |
% |
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(1) |
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Represents expenses related to costs associated with terms negotiated for the early
termination its MD-80 aircraft as a result of Copa Colombias transition to a more fuel
efficient all Embraer-190 fleet in 2009. |
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(2) |
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Consists primarily of changes in the fair value of fuel derivative contracts and foreign
exchange gains/losses. |
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(3) |
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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 IFRS 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: |
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
249,087 |
|
|
$ |
241,057 |
|
Interest expense |
|
|
32,938 |
|
|
|
29,981 |
|
Income taxes |
|
|
(9,185 |
) |
|
|
(4,759 |
) |
Depreciation |
|
|
50,876 |
|
|
|
62,962 |
|
|
|
|
|
|
|
|
Subtotal |
|
|
323,716 |
|
|
|
329,241 |
|
|
|
|
|
|
|
|
Interest capitalized |
|
|
(693 |
) |
|
|
0 |
|
Interest income |
|
|
(9,185 |
) |
|
|
(4,759 |
) |
|
|
|
|
|
|
|
EBITDA |
|
|
313,838 |
|
|
|
324,482 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft rentals represent 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. |
|
(4) |
|
Operating margin represents operating income divided by operating revenues. |
|
(5) |
|
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. |
|
(6) |
|
Number of miles flown by scheduled revenue passengers, expressed in millions. |
|
(7) |
|
Aircraft seating capacity multiplied by the number of miles the seats are flown, expressed in
millions. |
|
(8) |
|
Percentage of aircraft seating capacity that is actually utilized. Load factors are
calculated by dividing revenue passenger miles by available seat miles. |
3
|
|
|
(9) |
|
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
54.0% in 2009 and 61.2 in 2010. |
|
(10) |
|
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. |
|
(11) |
|
Average number of block hours operated per day per aircraft for the total aircraft fleet. |
|
(12) |
|
Average amount (in cents) one passenger pays to fly one mile. |
|
(13) |
|
Passenger revenues (in cents) divided by the number of available seat miles. |
|
(14) |
|
Total operating revenues for passenger related costs (in cents) divided by the number of available seat miles. |
|
(15) |
|
Total operating expenses for passenger aircraft related costs (in cents) divided by the number of available seat miles. |
|
(16) |
|
Percentage of flights that arrive at the destination gate within fifteen minutes of scheduled arrival. |
|
(17) |
|
The average number of miles flown per flight. |
|
(18) |
|
Percentage of flights that depart within fifteen minutes of the scheduled departure time. |
|
(19) |
|
Has not historically distinguished between revenue passengers and non-revenue passengers. Revenue passenger information and other statistics derived from revenue
passenger data for the year ended December 31, 2009 and 2010 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
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 ten years. During the next several years we intend to
continue to grow our business. We intend to grow our fleet, having recently signed leases for ten
new Boeing 737-800 airplanes, five for delivery in 2011 and five during 2012. We also intend to
expand our service to new markets and to 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 banks and obtain additional slots and flight banks, 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, cost-effectively, and on a timely basis, 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. 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:
|
|
|
changes in economic or other governmental policies; |
|
|
|
changes in regulatory, legal or administrative practices; or |
|
|
|
other political or economic developments over which we have no control. |
Additionally, a significant portion of our revenues is derived from discretionary and leisure
travel which are especially sensitive to economic downturns. An adverse economic environment, such
as the one triggered by the 2008 global financial crisis, 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, 2010, we had $547.1 million of outstanding indebtedness that is owed
to financial institutions under financing arrangements guaranteed by the Export-Import Bank. We
cannot predict whether the Export-Import Banks credit support will continue to be available to us
to fund future purchases of Boeing aircraft. The Export-Import Bank may in the future limit its
exposure to Panama-based companies, to our airline or to airlines generally, or may encourage us to
diversify our credit sources by limiting future guarantees.
Similarly, we cannot assure you that we will be able to continue to raise financing from past
sources, or from other sources, on terms comparable to our existing financing or at all. The
recent turmoil in the financial markets, for example, tightened the availability of credit and
increased the cost of obtaining lease or debt financing. If the cost of such financing increases
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 United Continental Holdings and cannot assure you that it
will continue.
We have maintained a broad commercial and marketing alliance with Continental Airlines, Inc.,
or Continental, for the past 12 years. This alliance allowed us to enhance our network and, in
some cases, offer our customers services that we could not otherwise offer. Our alliance with
Continental has provided us with 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. On October 1, 2010,
Continental merged with United Airlines and became a wholly-owned subsidiary of United Continental
Holdings, Inc. (UAL). Although the airlines continue to operate separately until the integration
is complete, all of the benefits from our previous alliance with Continental have been recognized
by UAL.
If UAL 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 UAL. In addition, high fuel costs, slowdowns in the global capital markets,
industry competition and terrorism or other international hostilities may all affect UALs
profitability. We cannot assure you that UAL will be able to sustain its profitability, and as a
result, we may be materially and adversely affected by a deterioration of UALs financial
condition.
Our alliance relationship with Continental was the subject of a grant of antitrust immunity
from the U.S. Department of Transportation, or DOT. If our relationship with UAL, however, were
deemed unable to benefit from a grant of antitrust immunity, our business, financial condition and
results of operations would likely be materially and adversely affected. There are currently
appeals pending challenging the merger of Continental and United Airlines in the U.S. District
Court for the Northern District of California. We cannot assure you that these challenges will be
unsuccessful.
In addition, if our alliance with UAL or our service 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 UAL would likely result in a significant decrease
in our revenues. We also rely on UALs 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 UAL.
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 UAL.
We have decided to change our global airlines alliance, which could involve significant transition
and integration risks.
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 our 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. As a result, we are currently not affiliated with any global airline alliance.
In November 2010, Copa and Star Alliance jointly announced Copas intention to join Star Alliance.
Copa is currently in the process of complying with the requirements to join,with a target entry
date into Star Alliance of April 30, 2012. The process of joining an alliance like the Star
Alliance involves execution risks, including potential delays due to lack of applicable approvals
or difficulty in satisfying entrance requirements. In particular, we may be required to execute
bilateral agreements with members and integrate our technology processes. Delays in joining Star
Alliance or our inability to comply with these requirements could result in additional costs and
anticipated benefits may not be realized, which could have a material adverse effect on our
business, results of operations and financial condition.
6
We operate using a hub-and-spoke model and are vulnerable to competitors offering direct flights
between destinations we serve.
The structure of our flight operations follows what is known in the airline industry as a
hub-and-spoke model. This model aggregates passengers by operating flights from a number of
spoke origins to a central hub through which they are transported to their final destinations. In
recent years, many traditional hub-and-spoke operators have faced significant and increasing
competitive pressure from low-cost, point-to-point carriers on routes with sufficient demand to
sustain point-to-point service. A point-to-point structure enables airlines to focus on the most
profitable, high-demand routes and to offer greater convenience and, in many instances, lower
fares. As demand for air travel in Latin America increases, some of our competitors have initiated
non-stop service between destinations that we currently serve through our hub in Panama. 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.
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 25.1% 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.
7
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.
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.
8
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. Our growth strategy is therefore, at least in part, dependent on the completion of the
expansion of Tocumen International Airport expected to be completed in September 2011. We cannot
assure you that this expansion will be fully implemented in 2011, and thus cannot assure you that
our expansion will be implemented with the speed we have anticipated.
In addition, the hub-and-spoke structure of our operations is particularly dependent on the
on-time arrival of tightly coordinated groupings of flights (or banks) to ensure that passengers
can make timely connections to continuing flights. Like other airlines, we are subject to delays
caused by factors beyond our control, including air traffic congestion at airports, adverse weather
conditions 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 has limited fuel storage
capacity. 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.
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.
9
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, 2010, our interest expense and aircraft and facility
rental expense under operating leases aggregated $95.4 million. At December 31, 2010, approximately
61% 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, 2010, we had firm commitments to purchase 42 Boeing 737-Next Generation,
with an aggregate manufacturers list price of approximately $3.7 billion. We will require
substantial capital from external sources to meet our future financial commitments. In addition,
the acquisition and financing of these aircraft will likely result in a substantial increase in our
leverage and fixed financing costs. A high degree of leverage and fixed payment obligations could:
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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 2011, we expect to take delivery of ten 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; |
10
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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. Technical issues with our Embraer 190 aircraft would increase our maintenance
expenses, and we cannot predict the reliability of the Embraer aircraft as the aircraft matures.
If we fail to successfully take delivery of or reliably operate new aircraft, our business,
financial condition and results of operations could be harmed.
If we were to determine that our aircraft, rotable parts or inventory were impaired, it would have
a significant adverse effect on our operating results.
If there is objective evidence that an impairment loss on long-lived assets carried at
amortized cost has been incurred, the amount of the impairment loss is measured as the difference
between the assets carrying amount and the higher of its fair value less cost to sell and its
value in use, defined as the present value of estimated future cash flows (excluding future
expected credit losses that have not been incurred) discounted at the assets risk adjusted
interest rate. The carrying amount of the asset is reduced and the loss is recorded in the
consolidated statement of income. 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 IFRS to write down these assets through a charge to earnings. A significant charge
to earnings would adversely affect our financial condition and operating results. In addition, the
interest rates on and the availability of certain of our aircraft financing loans are tied to the
value of the aircraft securing the loans. If those values were to decrease substantially, our
interest rates may rise or the lenders under those loans may cease extending credit to us, either
of which could have an adverse impact on our financial condition and results of operations.
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.
11
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. The Copa brand name and our corporate reputation are important and valuable assets.
Adverse publicity (whether or not justified) could tarnish our reputation and reduce the value of
our brand. Adverse perceptions of the types of aircraft that we operate arising from safety
concerns or other problems, whether real or perceived, or in the event of an accident involving
those types of aircraft could significantly harm our business as the public may avoid flying our
aircrafts. In addition, as a result of the rebranding of AeroRepública to Copa Colombia, issues
related to, and perceptions of, Copa Colombia may negatively impact our brand and affect our
business or profitability.
Fluctuations in foreign exchange rates could negatively affect our net income.
In 2010, approximately 66.7% of our expenses and 42.0% 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 volume of business in Colombia. 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 Bolivar
Fuerte 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 Fuerte against the U.S. dollar. As a result, we incurred
losses of approximately $19.7 million. 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 Bolivar
Fuertes should there be a further devaluation of the Bolivar Fuerte
Our maintenance costs will increase as our fleet ages.
The average age of our fleet was approximately 4.8 years as of December 31, 2010. In recent
years, our average fleet age has decreased significantly, mainly as a result of our fleet renewal
program. Historically, we have
incurred low levels of maintenance expenses relative to the size of our fleet because most of
the parts on our aircraft are covered under multi-year warranties. As our fleet ages, these
warranties expire and the mileage on each aircraft increases, our maintenance costs may increase
significantly, both on an absolute basis and as a percentage of our operating expenses.
12
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 54% of the Companys employees belong to a labor union. There are currently five
unions covering our Copa employees based in Panama: the pilots union (UNPAC); the flight
attendants union (SIPANAB); the mechanics union (SITECMAP); the traffic attendants union
(UGETRACO); and a generalized union (SIELAS), which represents ground personnel, messengers,
drivers, 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. Recently, Copa closed the
negotiation of a final statement of alleged violations submitted by UNPAC. In such negotiations,
UNCAP also agreed to schedule the negotiations for the new collective bargaining agreements for
September 2011. Negotiations with generalized union (SIELAS) are expected to take place in
September 2013. In the event such negotiations do not lead to a mutually satisfactory resolution,
the government may require us to enter into arbitration proceedings and agree to terms that are
less favorable to us than our existing agreement. In the event the government does not mandate
arbitration, these negotiations may result in a prolonged dispute with our pilots. We also have
union contracts with Copa employees in Brazil. Copa Colombia is a party to collective bargaining
agreements that cover all of Copa Colombias 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.
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 2010, 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; 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 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 reliable equipment or essential services on our behalf gives us less control over the
costs, efficiency, timeliness and quality of our service. 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.
13
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. Copa Colombia 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.
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.
14
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 five daily departures to and from Cuba which provide
passenger, cargo and mail transportation service. For the year ended December 31, 2010, our
transported passengers to and from Cuba represented approximately 4.8% of our total passengers
carried. Our operating revenues from Cuban operations during the year ended December 30, 2010
represented approximately 6.6% 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.
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, Aero-México, Avianca-Taca and Aires.
Alliances, bankruptcy restructurings and industry consolidations characterize the airline industry
and tend to intensify competition. In recent years, several air carriers have sought to
reorganize, including certain of our competitors, such as Avianca-Taca and Delta, and have
benefited from lower operating costs and fare discounting in order to maintain cash flows and to
enhance continued customer loyalty. In addition, since 2008, the airline industry has experienced
increased consolidation and changes in international alliances, both of which have altered and will
continue to alter the competitive landscape in the industry by resulting in the formation of
airlines and alliances with increased financial resources, more extensive global networks and
altered cost structures. Although we intend to compete vigorously and maintain our strong
competitive position in the industry, Avianca-Taca and Aires represent a significant portion of the
domestic market in Colombia and have access to greater resources as a result of their recent
combinations. It is therefore likely that Copa Colombia 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.
15
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, San José, San
Juan, Santo Domingo, and Bahamas; Aires (recently acquired by LAN), 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 29.6% of operating expenses in 2009 and 31.5% in 2010. 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. Fuel prices reached record levels
during the middle of 2008, decreased substantially in 2009, and then began to increase once again
in 2010. 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.
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 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.
16
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.
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.
17
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.
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.
Copa Colombias 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 political unrest
and instability in Colombia could resume, which could adversely affect Copa Colombias 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 Copa Colombia, which could have a material adverse effect on our
consolidated financial condition and results of operations.
18
According to International Monetary Fund estimates, the Panamanian and Colombian economies are
expected to grow by 6.2% and 4.7%, respectively, in 2011 as measured by their GDP, 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 $26.9 million and $18.9 million in the years ended December 31, 2009 and 2010,
which represented an effective income tax rate of 9.7% and 7.3% 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.
As of 2010, the Panamanian tax code for the airline industry was amended, tax is now based on
net income earned for traffic whose origin or destination is the Republic of Panama. The
applicable tax rate for 2010 was 27.5%. For 2011 and going forward, the applicable tax rate will
be 25.0%. Dividends from our Panamanian subsidiaries, including Copa, are separately subject to a
10% percent withholding tax on the portion attributable to Panamanian sourced income and a 5%
withholding tax on the portion attributable to foreign sourced income. Additionally, a 7% value
added tax is levied on tickets issued in Panama for travel commencing in Panama and going abroad,
irrespective of where such tickets were ordered.
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.
19
Risks Relating to Our Class A Shares
The value of our Class A shares may be adversely affected by ownership restrictions on our capital
stock and the power of our Board of Directors to take remedial actions to preserve our operating
license and international route rights by requiring sales of certain outstanding shares or issuing
new stock.
Pursuant to the Panamanian Aviation Act, as amended and interpreted to date, and certain of
the bilateral treaties affording us the right to fly to other countries, we are required to be
substantially owned and effectively controlled by Panamanian nationals. Our failure to comply
with such requirements could result in the loss of our Panamanian operating license and/or our
right to fly to certain important countries. Our Articles of Incorporation (Pacto Social) give
special powers to our independent directors to take certain significant actions to attempt to
ensure that the amount of shares held in us by non-Panamanian nationals does not reach a level
which could jeopardize our compliance with Panamanian and bilateral ownership and control
requirements. If our independent directors determine it is reasonably likely that we will be in
violation of these ownership and control requirements and our Class B shares represent less than
10% of our total outstanding capital stock (excluding newly issued shares sold with the approval of
our independent directors committee), our independent directors will have the power to issue
additional Class B shares or Class C shares with special voting rights solely to Panamanian
nationals. See 10B. Memorandum and Articles of AssociationDescription of Capital Stock.
If any of these remedial actions are taken, the trading price of the Class A shares may be
materially and adversely affected. An issuance of Class C shares could have the effect of
discouraging certain changes of control of Copa Holdings or may reduce any voting power that the
Class A shares enjoy prior to the Class C share issuance. There can be no assurance that we would
be able to complete an issuance of Class B shares to Panamanian nationals. We cannot assure you
that restrictions on ownership by non-Panamanian nationals will not impede the development of an
active public trading market for the Class A shares, adversely affect the market price of the Class
A shares or materially limit our ability to raise capital in markets outside of Panama in the
future.
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 25.1% 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 UAL, 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.
20
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 25.1.2%, 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. In March 2010, CIASA converted a
portion of its Class B shares into 1.6 million non-voting Class A shares and sold such Class A
shares in a SEC registered public offering. In the event CIASA seeks to reduce its ownership below
10% of our total share capital, our independent directors may decide to issue special voting shares
solely to Panamanian nationals to maintain the ownership requirements mandated by the Panamanian
Aviation Act. As a result, the market price of our Class A shares could drop significantly if
CIASA further reduces its investment in us, other significant holders of our shares sell a
significant number of shares or if the market perceives CIASA or other significant holders intend
to sell them.
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, 2010,
the average daily trading volume for our Class A shares as reported by the NYSE was approximately
253,567 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 20% to 30% 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 May 4, 2011, 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.
21
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.
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.
22
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.
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 Airlines. In connection with Continental Airlines
investment, we entered into an extensive alliance agreement with Continental Airlines 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 Airlines reduced
its ownership of our total capital stock from 49% to approximately 27.3%. In a follow-on offering
in June 2006, Continental Airlines further reduced its ownership of our total capital stock from
27.3% to 10.0%. In May 2008,Continental Airlines sold its remaining shares in the public market.
In March 2010, CIASA sold 4.2% of its interest and as of December 31, 2010 held 25.1% of our total
capital stock.
Since 1998, we have grown and modernized our fleet while improving customer service and
reliability. Copa has expanded its fleet from 13 aircraft to 47 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 Copa
Colombia, the third -largest domestic air carrier in Colombia in terms of number of passengers
carried during 2010. Since 2005, we have expanded from 24 destinations in 18 countries to 46
destinations in 25 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. Copa Colombia maintains a website at www.aerorepublica.com. 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 2010, our capital expenditures were $348.7 million, which consisted primarily of
expenditures related to our purchase of three Boeing 737-800 aircraft, as well as to expenditures
related to advance payments on aircraft purchase contracts. During 2009, our capital expenditures
were $211.5 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.
23
B. Business Overview
We are a leading Latin American provider of airline passenger and cargo service through our
two principal operating subsidiaries, Copa and Copa Colombia. Copa operates from its strategically
located position in the Republic of Panama, and Copa Colombia provides service primarily within
Colombia complemented by international flights from various cities in Colombia to Panama,
Venezuela, Ecuador, México, Cuba, Guatemala and Costa Rica. We currently operate a fleet of 63
aircraft, 37 Boeing 737-Next Generation aircraft and 26 Embraer 190 aircraft. To meet its growing
capacity requirements, Copa has firm orders, including purchase and lease commitments, to accept
delivery of 56 additional aircraft through 2017 and has purchase rights and options that, if
exercised, would allow it to accept delivery of up to 22 additional aircraft through 2018.
Copas firm orders, including purchase and lease commitments, are for 56 additional Boeing
737-Next Generation aircraft, and its purchase rights and options are for up to sixteen Boeing
737-Next Generation aircraft and up to six Embraer 190s.
Copa currently offers approximately 166 daily scheduled flights among 46 destinations in 25
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 107 other destinations through codeshare
arrangements with UAL 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 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 which today continue with UAL have enhanced its
brand in Latin America, and that the relationship with UAL 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 UAL 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 UAL. Continental 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. In 2010, Continental merged with United Airlines. The combined carrier will take the United
Airlines name but will use Continentals logo. All of the service and alliance agreements we had in
place with Continental have been transferred to the combined UAL entity. We are currently in the
process of joining Star Alliance.
During the second quarter of 2005, we purchased AeroRepública, now known as Copa Colombia, 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. Copa Colombia currently
operates a fleet of 14 Embraer 190 and 2 Boeing 737-Next Generation. As part of its fleet expansion
plan, Copa Colombia has options to purchase up to three 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 $1.4 billion in 2010 while our operating margins have also increased from 8.6% to 20.5% 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. |
24
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We focus on keeping our operating costs low. In recent years, our low operating costs
and efficiency have contributed significantly to our profitability. Our operating cost per
available seat mile, excluding costs for fuel and fleet impairment charges, was 7.36 in
2009 and 7.52 in 2010. 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 56 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. |
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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, 2010, Copa Airlines statistic for
on-time performance was 90.6% and completion factor was 99.61%. Additionally, Copa
Colombias statistics for on-time performance was 85.85% and completion factor was 99.54%.
Baggage handling for Copa was 2.06 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 UAL, 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 UALs 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 Copa Colombia. We are seeking to enhance Copa Colombias
profitability through a variety of initiatives, including, expanding its international
routes, capitalizing on aircraft interchange with Copa, further integrating its route
network with Copas and improving overall efficiency. |
Copa Colombia
On April 22, 2005, we acquired an initial 85.6% equity ownership interest in Copa Colombia
which was followed by subsequent acquisitions increasing our total ownership interest in Copa
Colombia to 99.9% as of December 31, 2010. Copa Colombia is the third largest passenger air carrier
in Colombia in terms of revenue, with a market share of approximately 14.7% of the domestic traffic
on principal routes in 2010 and approximately 1,536 employees.
Our goal is to achieve growth at Copa Colombia, particularly in the business travelers
segment. We believe that Copas operational coordination with Copa Colombia 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 Copa Colombia. We have
also implemented e-ticketing at Copa Colombia, and since the first quarter of 2006, Copa Colombia
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 7.4% of worldwide passengers flown in 2009, or 107 million passengers.
The Central American aviation market is dominated by international traffic. According to data
from IATA, international traffic represented more than 84% of passengers carried and 92% of
passenger miles flown in Central America in 2009. International passenger traffic is concentrated
between North America and Central America. This segment represented 88% of international passengers
flown in Central America in 2009, compared to 5% for passengers flown between Central America and
South America and 8% for passengers flown between Central American countries. Total passengers
flown on international flights in Central America drop by 6.1% in 2009, and load factors on
international flights to and from Central America were 70% on average.
26
Domestic traffic and traffic within Central American countries represented approximately 16%
of passengers carried and 8% of passenger miles flown in 2009. Average load factors on domestic
flights and flights within Central America were 72.6% in 2009. The chart below details passenger
traffic in 2009.
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2009 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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31,860 |
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-5.1 |
% |
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51,186 |
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4.6 |
% |
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67,242 |
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6.0 |
% |
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76.1 |
% |
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North America South America |
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10,985 |
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1.9 |
% |
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32,199 |
|
|
|
-0.2 |
% |
|
|
41,610 |
|
|
|
0.0 |
% |
|
|
77.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central America South America |
|
|
1,692 |
|
|
|
-16.5 |
% |
|
|
3,327 |
|
|
|
-3.1 |
% |
|
|
5,011 |
|
|
|
2.6 |
% |
|
|
66.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within Central America |
|
|
2,741 |
|
|
|
-10.1 |
% |
|
|
1,500 |
|
|
|
-6.0 |
% |
|
|
2,263 |
|
|
|
-7.3 |
% |
|
|
66.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within South America |
|
|
13,068 |
|
|
|
5.1 |
% |
|
|
11,968 |
|
|
|
-6.5 |
% |
|
|
16,583 |
|
|
|
8.7 |
% |
|
|
72.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Scheduled Service |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central America |
|
|
7,101 |
|
|
|
-21.6 |
% |
|
|
4,735 |
|
|
|
-15.5 |
% |
|
|
6,526 |
|
|
|
-18.6 |
% |
|
|
72.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South America |
|
|
39,543 |
|
|
|
3.7 |
% |
|
|
22,757 |
|
|
|
8.5 |
% |
|
|
33,602 |
|
|
|
12.55 |
|
|
|
67.7 |
% |
|
|
|
(1) |
|
IATA passenger traffic data is not yet available for 2010. |
Panama serves as a hub for connecting passenger traffic between major markets in North, South,
and Central America and the Caribbean. Accordingly, passenger traffic to and from Panama is
significantly influenced by economic growth in surrounding regions. Major passenger traffic markets
in North, South and Central America experienced growth in their GDP in 2010. In 2010, real GDP
increased by 6.2% in Panama and by 4.7% in Colombia, according to the International Monetary Funds
estimates for 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GDP |
|
|
GDP per Capita |
|
|
|
2010 GDP |
|
|
|
|
|
|
2010 GDP per Capita |
|
|
|
Current Prices |
|
|
2010 Real GDP |
|
|
Current Prices |
|
|
|
(US$bn) |
|
|
(% Growth) |
|
|
(US$) |
|
Brazil |
|
|
2,023 |
|
|
|
7.5 |
% |
|
|
10,470 |
|
Argentina |
|
|
351 |
|
|
|
7.4 |
% |
|
|
8,662 |
|
Chile |
|
|
199 |
|
|
|
5.0 |
% |
|
|
11,587 |
|
Mexico |
|
|
1,004 |
|
|
|
4.9 |
% |
|
|
9,243 |
|
Colombia |
|
|
283 |
|
|
|
4.7 |
% |
|
|
6,220 |
|
Panama |
|
|
27 |
|
|
|
6.2 |
% |
|
|
7,712 |
|
USA |
|
|
14,624 |
|
|
|
2.6 |
% |
|
|
47,131 |
|
|
|
|
Source: |
|
International Monetary Fund, World Economic Outlook Database,
October 2010; estimated GDP growth calculated in local currency |
27
Panama has benefited from a stable economy with moderate inflation and steady GDP growth.
According to International Monetary Fund estimates, from 1999 to 2010 Panamas real GDP grew at an
average annual rate of 5.7% 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 World Bank currently estimates Panamas
population to be approximately 3.5 million in 2010, 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 a fleet primarily consisting of turbo prop
aircraft generally with less than 50 seats. These airlines offer limited international service and
operate in the domestic terminal of Panama City, which is located 30 minutes by car from Tocumen
International Airport.
Colombia is the third largest country in Latin America in terms of population, with a
population of approximately 45.0 million in 2010 according to the International Monetary Fund, and
has a land area of approximately 440,000 square miles. Colombias GDP was approximately $283
billion in 2010, and per capita income was approximately $6.2 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, 2010, Copa provided regularly scheduled flights to 46 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.
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. We are currently in the process of
adding two more banks per day to increase efficiency in the use of Hub infrastructure in addition
to providing more time of day choices to passengers.
As a part of our strategic relationship with UAL, Copa provides flights through code-sharing
arrangements to over 107 other destinations. Copa also provides flights through its code-sharing
arrangements with Copa Colombia, KLM, Gol, Aeroméxico and Gulfstream International Airlines.
28
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. We are currently in the process of joining Star Alliance, in which UAL is a
member.
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 |
|
2009 |
|
|
2010 |
|
North America(1) |
|
|
15.2 |
% |
|
|
15.1 |
% |
South America |
|
|
58.5 |
% |
|
|
55.0 |
% |
Central America(2) |
|
|
19.5 |
% |
|
|
23.4 |
% |
Caribbean(3) |
|
|
6.8 |
% |
|
|
6.5 |
% |
|
|
|
(1) |
|
The United States, Canada and Mexico. |
|
(2) |
|
Includes Panama. |
|
(3) |
|
Cuba, Dominican Republic, Haiti, Jamaica, Puerto Rico, Trinidad and Tobago |
Copa Colombia
Copa Colombia currently provides scheduled service to the following cities in Colombia,
Panama, Venezuela, Ecuador, Costa Rica, Guatemala, Mexico and Cuba:
|
|
|
|
|
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 |
Guatemala, Guatemala |
|
Ago 2010 |
Guayaquil, Ecuador |
|
Mar 2010 |
Havana, Cuba |
|
Dec 2010 |
México D.F., México |
|
Oct 2010 |
San José, Costa Rica |
|
Jun 2010 |
Cancún, México |
|
Dec 2010 |
29
In addition to the destinations described above, Copa Colombia has periodically operated
charter flights to: Havana, Cuba; Punta Cana, Dominican Republic and Cancun Mexico.
Since its acquisition, Copa Colombia 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, Copa Colombia has been operating four daily flights to Panama
City from Bogota, three from Medellin, and three from Cali; four frequencies per week from
Bucaramanga, Pereira and Cartagena, and five from Barranquilla. Copa Colombia has also been
operating four frequencies per week from Medellin to Caracas and one daily frequency from Bogota to
Quito.
During 2010, Copa Colombia launched service to six additional international destinations:
Guayaquil, Ecuador with four frequencies per week; San José, Costa Rica with six frequencies per
week; Guatemala, Guatemala with five frequencies per week; Mexico City, Mexico with daily flights;
and Havana, Cuba and Cancun, Mexico with one frequency per week. Copa Colombia was also granted
authorization to fly to San Juan, Puerto Rico, Managua, Nicaragua and San Pedro Sula, Honduras via
Panama, as well as to Mexico City, Mexico from Medellin and to Cucuta, Colombia via Panama.
In addition to code-sharing with Copa, Copa Colombia 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 $1,090 million in 2010, and $953 million in
2009, representing 93.7% 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 $248.2 in 2010, $236.7 million in 2009,
representing 92.0% and 92.9%,respectively, of Copa Colombias total revenues. The majority of Copa
Colombias customers are leisure travelers and travelers visiting friends and family, and traffic
is heaviest during the vacation months of July, August and the holiday season in December.
Cargo Operations
In addition to our passenger service, we make efficient use of extra capacity in the belly of
our aircraft by carrying cargo. Our cargo operations consist principally of freight service.
Copas cargo business generated a gain of approximately $35.6 million in 2009 and $40.7 million in
2010, representing 3.5% in both years, 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.
Pricing and Revenue Management
Copa has designed its fare structure to balance its load factors and yields in a way that it
believes will maximize profits on its flights. Copa also maintains revenue management policies and
procedures that are intended to maximize total revenues, while remaining generally competitive with
those of our major competitors. Copa uses Airmax, the revenue management software designed by
Sabre.
30
Copa charges 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 Copa`s
business customer, who need more flexibility with their flight plan. 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.
Relationship with UAL
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 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.
On October 1, 2010, Continental merged with United Airlines and became a wholly-owned
subsidiary of UAL. Although the airlines continue to operate separately until the integration is
complete, all of the benefits from our previous alliance with Continental have been recognized by
UAL in respect of the new entity, UAL.
As a result of our 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 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.
Building on the existing track-record of successful alliance accomplishments, Copa has
integrated, where appropriate, Copa Colombia in aspects of the existing alliance cooperation,
beginning with Copa Colombias participation in the OnePass frequent flyer loyalty program.
Our alliance relationship with Continental has enjoyed a grant of antitrust immunity from the
US Department of Transportation, or DOT. We are pleased to note that the DOT has issued a route
transfer order document whereby the existing antitrust immunity grant between Continental and Copa
Airlines is now in effect between UAL and Copa Airlines.
In 2007, Copa joined the SkyTeam global alliance as an Associate Member, in part due to the
support and sponsorship of Continental. Continental 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. We are currently in the process of joining Star Alliance, in which UAL is a member.
31
Sales, Marketing and Distribution
Copa
Sales and Distribution. Approximately 69% of sales during 2010 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 2010 was 2.54%. 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 141 domestic and international ticket
offices, including airport and city ticket offices located in Panama and Colombia. Copa has 36 CTOs
co-branded with UAL. During the year ended December 31, 2010, approximately 14% and 4% 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; 10.9% of
its 2010 sales were made via the website. Copas goal is to channel more of its total sales through
the website.
Advertising and Promotional Activities. Our advertising and promotional activities include
the use of television, print, radio and billboards, as well as targeted public relation events in
the cities where we fly. We believe that the corporate traveler is an important part of our
business, and we particularly promote our service to these customers by conveying the reliability,
convenience and consistency of our service and offering value-added services such as convention and
conference travel arrangements, as well as our Business Rewards loyalty program for our frequent
corporate travelers. We also promote package deals among the destinations where we fly through
combined efforts with selected hotels and travel agencies.
Copa Colombia
Copa Colombia successfully implemented the OnePass frequent flyer program in March 2006. Copa
Colombia 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, city ticket offices and airport
ticket offices. In February 2007, Copa Colombia was brought into Copas SHARES reservations and
check-in platform providing significant benefits in terms of costs and functionality.
32
Competition
We face considerable 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. Alliances, bankruptcy restructurings and industry consolidations characterize the
airline industry and tend to intensify competition.
Copa competes with a number of other airlines that currently serve the routes on which we
operate, including international air carriers such as American Airlines, Delta Air Lines; and
regional air carrier such as Aero-México, Avianca-Taca and Aires and low cost carriers such as
Gol. In order to remain competitive, we must constantly react to changes in prices and services
offered by our competitors.
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.
Airlines based in other countries may also receive subsidies, tax incentives or other state
aid from their respective governments, which are not provided by the Panamanian government. The
commencement of, or increase in, service on the routes we serve by existing or new carriers could
negatively impact our operating results. Likewise, competitors service on routes that we are
targeting for expansion may make those expansion plans less attractive. We must constantly react to
changes in prices and services offered by our competitors to remain competitive.
Traditional hub-and-spoke carriers in the United States and Europe have in recent years faced
substantial and increasing competitive pressure from low-cost carriers offering discounted fares.
The low-cost carriers operations are typically characterized by point-to-point route networks
focusing on the highest demand city pairs, high aircraft utilization, single class service and
fewer in-flight amenities. As evidenced by the operations of competitors in 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.
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.
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 Airlines
As of December 31, 2010, Copa operated a fleet consisting of 47 aircraft, including 18 Boeing
737-700 Next Generation aircraft, 17 Boeing 737-800 Next Generation aircraft and 12 Embraer 190
aircraft. As of December 31, 2010, Copa had firm orders, including purchase and lease commitments,
for 56 additional Boeing 737-Next Generation aircraft. Copa also has options for an additional
three Embraer 190s and purchase rights and options for an additional sixteen Boeing 737-Next
Generation aircraft.
33
The current composition of the Copa fleet as of December 31, 2010 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 |
|
|
18 |
|
|
|
14 |
|
|
|
4 |
|
|
|
2.3 |
|
|
|
8.3 |
|
|
|
124 |
|
Boeing 737-800 |
|
|
17 |
|
|
|
14 |
|
|
|
3 |
|
|
|
4.7 |
|
|
|
2.5 |
|
|
|
160 |
|
Embraer 190 |
|
|
12 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
3.7 |
|
|
|
94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
47 |
|
|
|
40 |
|
|
|
7 |
|
|
|
3.3 |
|
|
|
5.0 |
|
|
|
|
|
We expect our Copa fleet to continue to center on the Boeing 737-700/800 model. 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 |
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
2015 |
|
737-700(1) |
|
|
18 |
|
|
|
16 |
|
|
|
16 |
|
|
|
12 |
|
|
|
12 |
|
737-800(2) |
|
|
17 |
|
|
|
39 |
|
|
|
46 |
|
|
|
50 |
|
|
|
58 |
|
Embraer 190 |
|
|
12 |
|
|
|
12 |
|
|
|
12 |
|
|
|
12 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fleet |
|
|
47 |
|
|
|
67 |
|
|
|
74 |
|
|
|
74 |
|
|
|
79 |
|
|
|
|
(1) |
|
Assumes the return of leased aircraft upon expiration of lease contracts. |
|
(2) |
|
We have the flexibility to choose between the Boeing 737-700 and the Boeing 737-800
aircraft for most of the 737-700 aircraft deliveries. |
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 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.
34
Through several special purpose vehicles, we currently have beneficial ownership of 40 of our
aircraft, including 12 Embraer 190s. In addition, we lease four of our Boeing 737-700s and three of
our Boeing 737-800s under long-term operating lease agreements that have an average remaining term
of 3.3 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 reconfigured our Boeing 737-800
aircraft by adding two additional business class seats and three additional economy seats,
increasing the total number of seats from 155 to 160. Our Embraer 190s have 10 business class
seats in a three abreast configuration and 38-inch pitch.
Each of our Boeing 737-Next Generation aircraft is powered by two CFM International Model CFM
56-7B engines. Each of our Embraer 190 aircraft is powered by two CF34-10 engines made by General
Electric. We currently have eleven spare engines for service replacements and for periodic rotation
through our fleet.
Copa Colombia
As of December 31, 2010, Copa Colombias operated a fleet of 2 leased Boeing 737-700, seven
owned Embraer 190 and seven leased Embraer 190, with an average age of 4.1 years. Copa Colombias
fleet consists of Boeing 737-700s, which have a capacity of 124 seats and Embraer 190s, which
have a capacity of 106 seats. Copa Colombia has options to purchase up to three 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, such as
COOPESA,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 13 heavy maintenance
events in 2010. When possible, Copa attempts to schedule heavy maintenance during its lower-demand
seasons in order to maximize productive use of its aircraft.
Copa employs over 252 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 34 of our mechanics are also
licensed by the FAA. Copas safety and maintenance procedures are reviewed and periodically audited
by the aircraft manufacturer, the AAC, the FAA, IATA and, to a lesser extent, every foreign country
to which its flies. Copas maintenance facility at Tocumen International Airport has been certified
by the FAA as an approved repair station, and 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.
35
Copa Colombia
Line maintenance for Copa Colombias aircraft is primarily performed by Copa Colombias
in-house maintenance staff, while C-checks on its fleet are performed by FAA certified third-party
aviation maintenance companies. All of Copa Colombias 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 Copa Colombias maintenance personnel are licensed by
the Aeronautica Civil of Colombia. In December 2007, Copa Colombia received its IATA Operational
Safety Audit (IOSA) compliance certification.
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 security certification IOSA.
On July 17, 2007, one of our Copa Colombia 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:
|
|
|
Panamas consistently temperate climate is ideal for airport operations. For
example, in recent years Tocumen was closed and unavailable for flight operations
for a total of less than two hours per year on average |
|
|
|
Tocumen is the only airport in Central America with two operational runways.
Also unlike some other regional airports, consistent modernization and growth of
our hub has kept pace with our needs. Tocumen airport is currently in the process
of completing phase 2 of an expansion project which is scheduled for September
2011, and there is ample room for further expansion. |
|
|
|
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, as well as the Caribbean. |
|
|
|
Travelers can generally make connections easily through Tocumen because of its
manageable size and Panamas policies accommodating in-transit passengers. |
36
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 is expected to be completed in September
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.
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 UAL. 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. The
global economy has experienced increase demand for oil coupled with limited refinery capacity and
instability in oil-exporting countries has led to a rapid increase in prices.
|
|
|
|
|
|
|
|
|
|
|
Aircraft Fuel Data |
|
|
|
2009 |
|
|
2010 |
|
Copa Segment |
|
|
|
|
|
|
|
|
Average price per gallon of jet fuel into
plane (excluding hedge) (in U.S. dollars) |
|
$ |
1.84 |
|
|
$ |
2.35 |
|
Gallons consumed (in thousands) |
|
|
112,401 |
|
|
|
120,913 |
|
Available seat miles (in millions) |
|
|
8,319 |
|
|
|
9,228 |
|
Gallons per ASM (in hundredths) |
|
|
1.35 |
|
|
|
1.31 |
|
Copa Colombia(1) |
|
|
|
|
|
|
|
|
Average price per gallon of jet fuel into
plane (excluding hedge) (in U.S. dollars) |
|
$ |
1.97 |
|
|
$ |
2.53 |
|
Gallons consumed (in thousands) |
|
|
25,617 |
|
|
|
27,668 |
|
Available seat miles (in millions) |
|
|
1,592 |
|
|
|
1,722 |
|
Gallons per ASM (in hundredths) |
|
|
1.61 |
|
|
|
1.61 |
|
37
From 2005 to 2010, 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
40.3% from $56.64 per barrel to $79.48 per barrel. During 2008, fuel prices experienced
significant volatility, with West Texas Intermediate crude prices reaching the record price of
approximately $133.88 per barrel in June. Prices then dropped below $41 per barrel at the
beginning of 2009, and then stabilized at approximately $71 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. At the end of 2010, prices reached $89.15 per barrel. In 2010,
we hedged 27% of our requirements
through the use of jet fuel and crude oil swap contracts. We have hedged approximately 25% and
9% of our anticipated fuel needs for 2011 and 2012, 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 relatively 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, UAL. Copas hull and liability operations are insured under UALs insurance
policy. We maintain separate insurance policies for our Copa Colombia operations.
Environmental
Our operations are covered by various local, national, and international environmental
regulations. These regulations cover, among other things, emissions into the atmosphere, disposal
of solid waste and aqueous effluents, aircraft noise and other activities that result from the
operation of aircraft. Our aircraft comply with all environmental standards applicable to their
operations as described in this annual report. We 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.
38
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 Copa Colombias 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.
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. In
October 2010 Colombia was recertified as 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). Copa Colombia 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, Copa Colombia was granted
30 additional bilateral frequencies per week, seven of these frequencies to Panama from
Bucaramanga, Pereira and Barranquilla, have yet to be utilized. In November 2010, Colombia signed
open-skies agreements with United States, which will take effect in January 2013.
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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* |
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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. Copa Colombia
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
Our headquarters are 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 $118,700 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 $11,845 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.
Copa Colombia leases most of its airport offices and CTOs. 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 Copa Colombia. Copa operates from its strategically
located position in the Republic of Panama, and Copa Colombia provides service primarily within
Colombia complemented by international flights from various cities in Colombia to Panama,
Venezuela, Ecuador, México, Cuba, Guatemala and Costa Rica. We currently operate a fleet of 63
aircraft, 37 Boeing 737-Next Generation aircraft and 26 Embraer 190 aircraft.
Copa currently offers approximately 166 daily scheduled flights among 46 destinations in 25
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 code-share
arrangements with UAL 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 35 Boeing 737-Next Generation aircraft and 12 Embraer 190
aircraft. To meet its growing capacity requirements, Copa has firm orders, including purchase and
lease commitments, to accept delivery of 56 additional aircraft through 2017 and has purchase
rights and options that, if exercised, would allow it to accept delivery of up to 22 additional
aircraft through 2018. Copas firm orders are for 56 additional Boeing 737-Next Generation
aircraft, and its purchase rights and options are for up to sixteen Boeing 737-Next Generation
aircraft and up to six Embraer 190s.
Copa started its strategic alliance with UAL 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 UAL have enhanced its brand in Latin America, and
that the relationship with UALhas afforded it cost-related benefits, such as improving purchasing
power in negotiations with aircraft vendors and insurers. Copas alliance and related service
agreements with UAL are in effect until 2015.
During the second quarter of 2005, we purchased Copa Colombia, a Colombian air carrier that
was the third-largest domestic carrier in Colombia in terms of number of passengers carried in
2010, which at the time provided point-to-point service among 11 cities in Colombia. Copa Colombia
currently operates a fleet of 14 Embraer 190 and 2 Boeing and has expanded its routes to include
international point-to-point service from various Colombian cities to Panama, Venezuela and
Ecuador, México, Cuba, Guatemala and Costa Rica. As part of its fleet expansion plan, Copa Colombia
has options to purchase up to three 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 2005 to 2010, 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 40.3%
from $56.64 per barrel to $79.48 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. In 2010, prices
continued to rise, reaching $91.45 by the end of the year. 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 25% and 9% of our anticipated fuel needs for 2011 and 2012,
respectively. We will continue to evaluate various hedging strategies, and we may enter into
additional hedging agreements in the future.
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, but grew by 5.7% in
2010. In recent years, the Panamanian economy has closely tracked the economies of the United
States and of Latin America. In 2010, however, the Panamanian economy grew in real terms by 6.2%
(versus 3% in 2009), according to the International Monetary Funds estimates. Inflation in Panama
rose 3.4% in 2010 (versus 2.4% in 2009). Additionally, the Colombian economy has experienced
relatively stable growth. According to the International Monetary Funds estimates, the Colombian
gross domestic product grew by 0.83% in 2009 and by 4.7% in 2010 with inflation (as indicated by
the consumer price index) rising by 4.2% in 2009 and 2.4% in 2010.
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. 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.
44
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.
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2009 |
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2010 |
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Copa Segment |
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Capacity (in available seat miles, in millions) |
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8,319 |
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9,228 |
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Load factor |
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76 |
% |
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77.9 |
% |
Yield (in cents) |
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15.07 |
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15.16 |
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Copa Colombia |
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Capacity (in available seat miles, in millions) |
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1,592 |
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1,722 |
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Load factor |
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67.5 |
% |
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71.1 |
% |
Yield (in cents) |
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22.04 |
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20.28 |
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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 2010, as a result of the location of its hub,
Copa purchased 58% of its aircraft fuel in Panama. Copa has 18 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 2005 to 2010, 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 40.3% from $56.64 per barrel to $79.48 per barrel. To date, we have managed to offset some of
the increases in fuel prices with higher load factors, fuel surcharges and fare increases. In
addition, our relatively young, winglet-equipped fleet also helps us mitigate the impact of higher
fuel prices. Historically, we have not hedged a significant portion of our fuel costs. We have
hedged 25% and 9% of our anticipated fuel needs for 2011 and 2012, respectively.
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Aircraft Fuel Data |
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2009 |
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2010 |
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Copa Segment |
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Average price per gallon of jet fuel into plane
(excluding hedge) (in U.S. dollars) |
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$ |
1.84 |
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$ |
2.35 |
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Gallons consumed (in thousands) |
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112,401 |
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120,913 |
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Available seat miles (in millions) |
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8,319 |
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9,228 |
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Gallons per ASM (in hundredths) |
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1.35 |
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1.31 |
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Copa Colombia(1) |
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Average price per gallon of jet fuel into plane
(excluding hedge) (in U.S. dollars) |
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$ |
1.97 |
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$ |
2.53 |
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Gallons consumed (in thousands) |
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25,617 |
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27,688 |
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Available seat miles (in millions) |
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1,592 |
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1,722 |
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Gallons per ASM (in hundredths) |
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1.61 |
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1.61 |
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45
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. Passenger servicing expenses provide us
with a directional measurement of cost variances.
Commissions. Commission expenses are driven mainly by passenger revenues, indirect channel
penetration performance, and agreed commission rates, as opposed to ASM growth. 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. 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 Copa Colombias fleet is performed by Copa Colombias in-house
maintenance staff. The average age of Copa Colombias fleet as of December 31, 2010 was 4.1 years.
Aircraft rent. Our aircraft rental expenses are generally fixed by the terms of our operating
lease agreements. Currently, six of Copas operating leases have fixed rates which are not subject
to fluctuations in interest rates and the seventh is tied to LIBOR. All of Copa Colombias
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. The main variable involved in driving Reservations and Sales
Expenses is the number of bookings made through our global distribution channels, as opposed to
ASM. Our reservations and sales expenses arise primarily from payments to these 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.
46
Flight operations and landing fees and other rentals are generally directly related to the
number of flights we operate, with a component attributed to fixed costs relating to facility
rental expenses.
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 Fiscal Code these foreign operations are not subject to
income tax in Panama.
As of 2010, the Panamanian tax code for the airline industry was amended, tax is now based on
net income earned for traffic whose origin or destination is the Republic of Panama. The applicable
tax rate for 2010 was 27.5%. For 2011 and going forward, the applicable tax rate will be 25.0%.
Dividends from our Panamanian subsidiaries, including Copa, are separately subject to a 10% percent
withholding tax on the portion attributable to Panamanian sourced income and a 5% withholding tax
on the portion attributable to foreign sourced income. Additionally, a 7% value added tax is levied
on tickets issued in Panama for travel commencing in Panama and going abroad, irrespective of where
such tickets were ordered.
We 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. If taxes were to increase, our financial performance
and results of operations could be materially and adversely affected. Due to the competitive
revenue environment, many increases in fees and taxes have been absorbed by the airline industry
rather than being passed on to the passenger. Any such increases in our fees and taxes may reduce
demand for air travel and thus our revenues.
Under a reciprocal exemption confirmed by a bilateral agreement between Panama and the United
States, we are exempt from the U.S. source transportation income tax derived from the international
operation of aircraft.
We paid taxes totaling approximately $13.8 million in 2009 and $13.0 million in 2010.
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 Copa Airliness 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.
47
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements in conformity with IFRS as issued by
the IASB 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.
Goodwill and Intangible Assets. We have allocated goodwill and intangible assets with
indefinite lives acquired through business combinations for the purposes of impairment testing to a
single cash-generating unit. Goodwill is tested for impairment annually by comparing the carrying
amount to the recoverable amount of the cash-generating unit level that has been measured on the
basis of its value-in-use, by applying cash flow projections in the functional currency based on
the Companys approved business plan covering a five-year period followed by the a long-term growth
rate. Considerable judgment is necessary to evaluate the impact of operating and macroeconomic
changes to estimate future cash flows and to measure the recoverable amount. Assumptions in the
Companys impairment evaluations are consistent with internal projections and operating plans.
AeroRepublicca tradename and routes were
acquired as part of the AeroRepublica acquisition and were capitalized at fair value at that date.
The trade name and routes were considered to have an indefinite useful life (and are not amortized)
due to several factors and considerations, including the brand awareness and market position,
customer recognition and loyalty. The carrying values of the routes and trade names are reviewed
for impairment at each reporting date and are subject to impairment testing when events or changes
in circumstances indicate that carrying values may not be recoverable. The Company assesses at
each statement of financial position date whether intangibles assets with indefinite useful lives
are impaired using discounted cash flow analyses. In the third quarter of 2010, the company
changed the commercial name of AeroRepublica and began to operate under the brand Copa Colombia,
and an impairment has been recognized for $1.5 million during 2010. The remaining balance of this
intangible asset will be amortized over the 5 years. No impairment on goodwill and other
intangible assets was recognized.
Maintenance Deposit. Under its lease agreements, Copa pays maintenance deposits to lessors to
be applied to future maintenance events cost, calculated based on a performance measure, such as
flight hours, and are specifically to be used to reimburse 3rd-party maintenance providers. If
amounts on deposit are insufficient, Copa must cover shortfall since Copa is legally responsible
for maintaining leased aircraft. If there are excess amounts on deposit at expiration of lease, the
lessor is entitled to retain any excess amounts. Maintenance deposits paid under lease agreements
do not transfer either the obligation to maintain aircraft or cost risk associated with maintenance
activities to the lessor. Any excess amounts held by the lessor or retained by the lessor upon the
expiration of the lease, which are not expected to be significant, would be recognized as
additional aircraft rental expense at the time it is no longer probable that such amounts will be
used for maintenance for which they were deposited.
The Company makes payments for engine overhauls under power by the hour agreements (PBH).
These payments related to engine overhauls under PBH agreements are recorded as other assets.
These payments are capitalized and recorded as prepaid assets until the event occurs and then
will be amortized until the next event. Management performs regular reviews of the recovery of
maintenance deposits and believes that the values reflected in the consolidated statement of
financial position are recoverable.
48
Accounting for Property, Plant and Equipment. Property, plant and equipment, including
rotable parts, are recorded at cost and are depreciated to estimated residual values over their
estimated useful lives using the straight-line method. Each component of property, plant and
equipment that has a cost that is significant in relation to the overall cost of the item is
depreciated separately. Pre-delivery deposits refer to prepayments made based on the agreements
entered into with Boeing Company for the purchase of Boeing 737-800 Next Generation aircraft and
includes interest and finance charges incurred during the manufacture of aircraft and the leasehold
improvements.
Under IAS 16 Property, Plant and Equipment, major engine overhauls including replacement
spares and labor costs, are treated as a separate asset component with the cost capitalized and
amortized over the period to the next major overhaul. All other replacement spares and costs
relating to maintenance of fleet assets are charged to the income statement on consumption or as
incurred. Interest costs incurred on borrowings that fund progress payments on assets under
construction, including pre-delivery deposits to acquire new aircraft, are capitalized and included
as part of the cost of the assets through the earlier of the date of completion or aircraft
delivery.
49
In estimating the lives and expected residual values of its aircraft, the Company primarily
has relied upon actual experience with the same or similar aircraft types and recommendations from
Boeing and Embraer, the manufacturers of the Companys aircraft. Subsequent revisions to these
estimates, which can be significant, could be caused by changes to the Companys maintenance
program, changes in utilization of the aircraft (actual cycles during a given period of time),
governmental regulations related to aging aircraft, and changing market prices of new and used
aircraft of the same or similar types. The Company evaluates its estimates and assumptions each
reporting period and, when warranted, adjusts these estimates and assumptions. These adjustments
are accounted for on a prospective basis through depreciation and amortization expense, as required
by IFRS.
We evaluate annually whether there is an indication that our property, plant and equipment may
be impaired. Factors that would indicate potential impairment may include, but are not limited to,
significant decreases in the market value of the long-lived asset(s), a significant change in the
long-lived assets physical condition, and operating or cash flow losses associated with the use of
the long-lived assets. We have not identified any impairments related to our existing aircraft
fleet. As of 31 December 2010 and 2009, no impairment on property, plant and equipment assets was
recognized.
Lease accounting. Aircraft lease agreements are accounted as either operating or (finance
leases). When the risks and benefits of the lease are transferred to us, as lessee, the lease is
classified as a finance lease. Finance leases are accounted as an acquisition obtained through a
financing, with the aircraft recorded as a fixed asset and a corresponding liability recorded as a
loan. Finance leases are recorded based on the lesser of the fair value of the aircraft or the
present value of the minimum lease payments, discounted at an implicit interest rate, when it is
clearly identified in the lease agreement, or our incremental borrowing rate. The aircraft is
depreciated through the lesser of its useful life or the lease term. Interest expense is
recognized through the effective interest rate method, based on the implicit interest rate of the
lease. Lease agreements that do not transfer the risks and benefits to us are classified as
operating leases. Operating leases are accounted as a rent, and the lease minimum lease expense is
recognized through the straight line method.
Lease accounting is critical for us because it requires an extensive analysis of the lease
agreements in order to classify and measure the transactions in our financial statements and
significantly impacts our financial position and results of operations. Changes in the terms of
our outstanding lease agreements and the terms of future lease agreements may impact the accounting
for the lease transactions and our future financial position and results of operations.
Deferred taxes. Deferred taxes are calculated based on tax losses, temporary differences
between tax bases and carrying amounts for financial reporting purposes of our assets and
liabilities. Deferred taxes is a critical accounting policy for us because it requires a number of
assumptions and is based on our best estimate of our projections related to future taxable profit.
In addition, because the preparation of our business plan is subject to a variety of market
conditions, the results of our operations may vary significantly from our projections and as such,
the amounts recorded as deferred tax assets may be impacted significantly in the future.
50
Recently Issued Accounting Pronouncements
Standards issued but not yet effective
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IAS 24 Related Party Disclosures (Amendment) |
|
|
|
IAS 32 Financial Instruments: Presentation Classification of Rights Issues (Amendment) |
|
|
|
IFRS 9 Financial Instruments: Classification and Measurement |
|
|
|
IFRIC 14 Prepayment of a minimum funding requirement (Amendment) |
|
|
|
IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments |
Improvements to IFRSs (issued in May 2010)
The IASB issued Improvements to IFRSs, an omnibus of amendments to its IFRS standards. The
amendments have not been adopted as they become effective for annual periods on or after either 1
July 2010 or 1 January 2011. The amendments listed below are considered to have a reasonable
possible impact on the Group:
|
|
|
IFRS 3 Business Combinations |
|
|
|
IFRS 7 Financial Instruments: Disclosures |
|
|
|
IAS 1 Presentation of Financial Statements |
|
|
|
IAS 27 Consolidated and Separate Financial Statements |
|
|
|
IFRIC 13 Customer Loyalty Programmes |
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:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2010 |
|
Operating revenues: |
|
|
|
|
|
|
|
|
Passenger revenue |
|
|
94.7 |
% |
|
|
94.6 |
% |
Cargo, mail and other |
|
|
5.3 |
% |
|
|
5.4 |
% |
Total |
|
|
100 |
% |
|
|
100 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
Aircraft fuel |
|
|
(23.9 |
)% |
|
|
(25.1 |
)% |
Salaries and benefits |
|
|
(12.5 |
)% |
|
|
(12.6 |
)% |
Passenger servicing |
|
|
(10.0 |
)% |
|
|
(9.5 |
)% |
Commissions |
|
|
(3.8 |
)% |
|
|
(3.2 |
)% |
Reservation and sales |
|
|
(4.5 |
)% |
|
|
(4.2 |
)% |
Maintenance, materials and repairs |
|
|
(4.4 |
)% |
|
|
(4.4 |
)% |
Depreciation and amortization |
|
|
(4.1 |
)% |
|
|
(4.5 |
)% |
Flight operations |
|
|
(4.8 |
)% |
|
|
(5.0 |
)% |
Aircraft rentals |
|
|
(3.7 |
)% |
|
|
(3.3 |
)% |
Landing fees and other rentals |
|
|
(2.7 |
)% |
|
|
(2.8 |
)% |
Other |
|
|
(5.0 |
)% |
|
|
(5.1 |
)% |
Special fleet charges |
|
|
(1.5 |
)% |
|
|
(0.0 |
)% |
Total |
|
|
(80.9 |
)% |
|
|
(79.5 |
)% |
Operating income |
|
|
19.1 |
% |
|
|
20.5 |
% |
Non-operating income (expenses): |
|
|
|
|
|
|
|
|
Interest expense |
|
|
(2.6 |
)% |
|
|
(2.1 |
)% |
Interest capitalized |
|
|
0.1 |
% |
|
|
0.0 |
% |
Interest income |
|
|
0.7 |
% |
|
|
0.3 |
% |
Other, net |
|
|
4.7 |
% |
|
|
(0.30 |
)% |
Total |
|
|
2.9 |
% |
|
|
(2.1 |
)% |
Income/(loss) before income taxes |
|
|
22.0 |
% |
|
|
18.4 |
% |
Income taxes |
|
|
2.1 |
% |
|
|
1.3 |
% |
Net income |
|
|
24.1 |
% |
|
|
19.7 |
% |
Year 2010 Compared to Year 2009
Our consolidated net income in 2010 totaled $241.1 million, a 3.2% decrease from net income of
$249.1 million in 2009. This decrease was primarily due to a $58.0 million gain in the fair value
of fuel hedge instruments in 2009 as compared to a $11.7 million gain in the fair value of fuel
hedge instruments in 2010. We had consolidated operating income of $289.6 million in 2010, a
20.6% increase over operating income of $240.1 million in 2009. Our
consolidated operating margin in 2010 was 20.5%, an increase of 1.4 percentage points over an
operating margin of 19.1% in 2009.
51
Operating revenue
Our consolidated revenue totaled $1.4 billion in 2010, a 12.6% increase from operating revenue
of $1.3 billion in 2009, due to increases in both passenger and cargo revenue.
Copas segment operating revenue
Copas operating revenue totaled $1.2 billion in 2010, a 14.9% increase from operating
revenue of $1.0 billion in 2009 due to increases in both passenger and cargo revenues.
Passenger revenue. Passenger revenue totaled $1.1 billion in 2010, a 14.4% increase over
passenger revenue of $953.0 million in 2009. This increase resulted primarily from higher passenger
yield, which increased by 0.6% to 15.16 in 2010, and higher load factor, which increased by 1.9
percentage points to 77.9% in 2010. The increase in yield and load factor was in spite of the
increase in capacity as available seat miles increased by 10.9% in 2010 as compared to 2009.
Cargo, mail and other. Cargo, mail and other revenue totaled $73.6 million in 2010, a 22.5%
increase from cargo, mail and other revenue of $60.2 million in 2009. This increase was primarily
the result of higher cargo revenue.
Copa Colombia segment operating revenue
Copa Colombias operating revenue totaled $270.0 million in 2010, an increase of $15.3 million
over operating revenue of $254.6 million in 2009, resulting from an increase in both passenger and
cargo revenues. This increase resulted primarily from a stronger Colombian currency. There was a
decrease in yield that was partially offset by higher load factor (load factor increased by 3.6
percentage points to 71.1% in 2010) and 8.2% more capacity.
Operating expenses
Our consolidated operating expenses totaled $1.1 billion in 2010, an 10.7% increase over
operating expenses of $1.0 billion in 2009 that was primarily the result of higher fuel cost,
stronger currency and higher operating costs due to growth in capacity.
In 2010, our operating expenses per available seat mile excluding aircraft fuel was 7.04
cents, a 2.5% decrease from operating expenses per available seat mile excluding aircraft fuel of
7.22 cents in 2009. Aircraft fuel per available seat mile was 3.24 cents in 2010, compared to 3.04
cents in 2009. In 2010, our total operating expenses per available seat mile was 10.39 cents, a
0.3% increase from operating expenses per available seat mile of 10.35 cents in 2009.
An overview of the major variances on a consolidated basis follows:
Aircraft fuel. Aircraft fuel totaled $354.4 million in 2010, a 17.8% increase from aircraft
fuel of $300.8 million in 2009. This increase was primarily a result of higher fuel prices and
7.65% higher fuel consumption which was partially offset by a realized fuel hedge gain of $2.4
million in 2010, as compared to a realized fuel hedge loss of $41.9 million in 2009.
Salaries and benefits. Salaries and benefits totaled $178.8 million in 2010, a 13.9% increase
over salaries and benefits of $157.0 million in 2009. This increase was primarily a result of an
overall increase in headcount to support our operations.
Passenger servicing. Passenger servicing totaled $133.7 million in 2010, a 6.8% increase over
passenger servicing of $125.2 million in 2009. This increase was primarily a result of an increase
in capacity and on-board passengers.
52
Maintenance, materials and repairs. Maintenance, materials and repairs totaled $62.2 million
in 2010, a 11.7% increase over maintenance, materials and repairs of $55.7 million in 2009. This
increase was primarily a result of increase in capacity and overhaul events.
The remaining operating expenses totaled $395.9 million in 2010, an increase of $18.7 million
over 2009.
Copa segment operating expenses
The breakdown of operating expenses per available seat mile is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
|
|
December 31, |
|
|
Percent |
|
|
|
2009 |
|
|
2010 |
|
|
Change |
|
|
|
(in cents) |
|
Operating Expenses per ASM: |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
1.49 |
|
|
|
1.50 |
|
|
|
0.1 |
% |
Passenger servicing |
|
|
1.12 |
|
|
|
1.09 |
|
|
|
(2.0 |
)% |
Commissions |
|
|
0.43 |
|
|
|
0.40 |
|
|
|
(6.1 |
)% |
Reservation and sales |
|
|
0.50 |
|
|
|
0.46 |
|
|
|
(7.7 |
)% |
Maintenance, materials and repairs |
|
|
0.51 |
|
|
|
0.50 |
|
|
|
(2.6 |
)% |
Depreciation and Amortization |
|
|
0.56 |
|
|
|
0.60 |
|
|
|
6.6 |
% |
Flight operations |
|
|
0.62 |
|
|
|
0.63 |
|
|
|
2.0 |
% |
Aircraft rentals |
|
|
0.31 |
|
|
|
0.33 |
|
|
|
7.4 |
% |
Landing fees and other rentals |
|
|
0.30 |
|
|
|
0.32 |
|
|
|
4.1 |
% |
Other |
|
|
0.55 |
|
|
|
0.54 |
|
|
|
(1.8 |
)% |
|
|
|
|
|
|
|
|
|
|
Total operating expenses per ASM before
aircraft fuel |
|
|
6.39 |
|
|
|
6.36 |
|
|
|
(0.4 |
)% |
Aircraft fuel |
|
|
2.99 |
|
|
|
3.09 |
|
|
|
3.1 |
% |
|
|
|
|
|
|
|
|
|
|
Total operating expenses per ASM |
|
|
9.38 |
|
|
|
9.45 |
|
|
|
0.7 |
% |
|
|
|
|
|
|
|
|
|
|
Aircraft fuel. Aircraft fuel totaled $284.8 million in 2010, a 14.4% decrease from aircraft
fuel of $249.0 million in 2009. This increase was primarily a result of a 6.3% increase in the
all-in average price per gallon of jet fuel ($2.30 in 2010 compared to $2.20 in 2009) and the
consumption of 7.6% more fuel due to a 2.1% increase in departures. Aircraft fuel per available
seat mile increased by 3.1% due to the increase in average fuel cost per gallon.
Salaries and benefits. Salaries and benefits totaled $138.0 million in 2010, an 11% increase
over salaries and benefits of $124.3 million in 2009. 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 0.1%.
Passenger servicing. Passenger servicing totaled $100.9 million in 2010 compared to $92.9
million in 2009. This represented an 8.7% increase driven mainly by 9.0% increase in the number of
passengers transported during 2010. As a result, certain variable costs increased during the
period. Passenger meal expenses increased by 14.3%, passenger liability insurance increased by 21%
and handling by 7.5%. This was partially offset by better controls in the on board service process,
which decreased interrupted flights expenses by 26.7%. Passenger servicing per available seat mile
decreased by 2.0%.
Commissions. Commissions totaled $37.2 million in 2010, an 4.2% increase from commissions of
$35.8 million in 2009. This increase was primarily a result of 9% increase in on board passengers
which led to higher passenger revenue sold by travel agencies, which was somewhat offset by a lower
average commission rate. Commissions represented 3.2% of our operating revenue in 2010 compared to
3.5% in 2009.
Reservations and sales. Reservations and sales totaled $42.5 million in 2010, a 2.4% increase
compared to $41.5 million in 2009. This increase was primarily due to an 1.5% increase in our net
booking per passenger on our main global distribution systems. Reservations and sales represented
3.7% of our operating revenue in 2010 compared to 4.1% in 2009, a reduction of 0.5 percentage
points. Reservations and sales expenses per available seat mile decreased by 7.7%.
53
Maintenance, materials and repairs. Maintenance, materials and repairs totaled $45.8 million
in 2010, a 8.0% increase over maintenance, materials and repairs of $42.4 million in 2009. This
increase was primarily a result of a 10.9% increase in capacity and more overhaul events.
Maintenance, materials and repair per available seat mile decreased by 2.6%.
Depreciation. Depreciation totaled $55.2 million in 2010, a 18.2% increase over depreciation
of $46.7 million in 2009, as a result of higher depreciation attributable to our acquisition of
seven new Boeing 737-800.
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
2009 to $117.5 million in 2010. Flight operations amounted $57.9 million in 2010 compared to $51.2
million in 2009. This represented an 13.2% increase driven mainly by an increase of average daily
departures from 152 in 2009 to 155 in 2010. As a result, air to ground communications increased by
13%, from $32.5 million to $36.7 million. Landing fees amounted $29.1 million in 2010 compared to
$25.2 million in 2009. This represented an 15.5 % increased driven mainly by the same reasons,
which includes the effects of expanded operations in certain markets. Additionally, simulator
rental expense increased by 35% from $2.6 million in 2009 to $3.5 million in 2010.
Aircraft rental. Aircraft rental expense amounted to $30.4 million in the 2010 fiscal year, a
19.1% increase from $25.5 million reported in the 2009 fiscal year. This increase results from the
addition of one leased Boeing 737NG aircraft, bringing our total operating aircraft leased fleet to
16 aircraft which is comprised of both Boeing 737NG aircraft and EMB 190 aicraft.
Other. Other expenses totaled $50.0 million in 2010, an increase over other expenses of $45.9
million in 2009. 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 1.8%.
Copa Colombia segment operating expenses. Copa Colombias operating expenses totaled $274.9
million in 2010, an increase of $26.8 million from operating expenses of $248.2 million reported
during 2009, primarily as a result of higher aircraft fuel cost and currency appreciation.
Non-operating income (expense)
Our consolidated non-operating expense totaled $29.6 million in 2010, decrease from
non-operating income of $35.9 million in 2009, primarily as a result of an $11.7 million mark to
market gain of our fuel hedge contracts in 2010 compared to a $58.0M gain in 2009 and to a $19.7
million loss due to the devaluation of the Venezuelan Bolivar Fuerte in the first quarter of 2010.
Copa segment non-operating income (expense)
Non-operating expense totaled $27.3 million in 2010, a decrease from non-operating income of
$39.3 million in 2009, attributable primarily to a $19.7 million loss due to the devaluation of the
Venezuelan Bolivar Fuerte in the first quarter of 2010.
Interest expense. Interest expense totaled $27.1 million in 2010, a 10.0% decrease from
interest expense of $30.1 million in 2009, primarily resulting from lower average interest rates
during the period. The average effective interest rates on our debt decreased by 49 basis points
from 3.92% during 2009 to 3.43% during 2010. At periods end, interest rate on 69% of our
outstanding debt was fixed at an average effective rate of 4.44%.
Interest capitalized. Interest capitalized totaled $0 million in 2010, a 100% decrease from
interest capitalized of $0.7 million in 2009.
Interest income. Interest income totaled $3.9 million in 2010, a 51.9% decrease from interest
income of $8.1 million in 2009. This decrease was mainly a result of lower average interest rates
during the period.
54
Other, net. Other, net expense totaled $4.1 million in 2010, compared to a $60.6 million
other, net loss in 2009. This change was primarily the result of a loss of $19.7 million due to
Venezuela currency depreciation and mark to market gain of our $10.2 of fuel hedge contracts in
2010 compared to 2009.
Copa Colombia segment non-operating income (expense)
Non-operating income totaled $0.3 million in 2010, a decrease from non-operating expense of
$2.4 million in 2009, attributable primarily to a currency appreciation.
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, 2010 increased by $8.6 million compared with December 31, 2009, primarily as a
result of the growth in operating revenues.
Our cash, cash equivalents and short-term investments at December 31, 2010 increased by $50.5
million to $402.6 million. At December 31, 2010, we had $6.2 million in restricted cash within
long-term investments as collateral for letters of credits. At December 31, 2010 we had available
committed lines of credit totaling $ 79.0 million under which there were no amounts outstanding
and uncommitted lines of credit totaling $60.0 million. 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. Net cash flows provided by operations for the year ended December 31, 2010 were
$292.8 million, decreasing $1.5 million compared to the $291.3 million in 2009. The decrease in
cash flows from operations in 2010 is primarily due the increase in fuel costs.
Investing Activities
During 2010, our capital expenditures were $348.7 million, which consisted primarily of
expenditures related to our purchase of three Boeing 737-800 aircraft, as well as $157.3 million in
expenditures related to advance payments on aircraft purchase contracts for aircraft delivering in
2013. During 2009, our capital expenditures were $211.5 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.
Financing Activities
Financing activities during 2010 consisted primarily of $282.1 million of aircraft financing,
the repayment of $138.7 million in long-term debt and $47.9 million in dividends declared and paid.
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 long-term debt and
$16.3 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 2010, 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.
55
We have financed the acquisition of 26 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 $526.3 million as of December 31, 2010 at an average weighted interest rate of 4.27%.
The remaining $20.8 million bears interest at an average weighted interest of LIBOR plus 0.33%. At
December 31, 2010, the total amount outstanding under our Ex-Im-supported financings totaled $547.1
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
obligation 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, 2010, we complied with all required covenants. We also
pay a commitment fee on the unutilized portion of our SOAR loans.
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,
2010, we complied with all required covenants.
Our Embraer aircraft purchases are not eligible for Ex-Im guaranteed financing. 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, 2010, 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, 2010, we had placed firm purchase orders with The Boeing Company for 42
Boeing 737-Next Generation aircraft and we have purchase rights and options for an additional
sixteen Boeing 737-Next Generation aircraft. We also have options to purchase an additional 6
Embraer 190 aircraft. The schedule for delivery of our firm purchase orders is as follows: five in
2011, seven in 2012, four in 2013, four in 2014, eight in 2015, seven in 2016 and seven in 2017. 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.
56
We maintain available facilities for letters of credit with several banks with outstanding
balances of $26.8 million and $25.7 million at December 31, 2010 and 2009, respectively. These
letters of credit are pledged for aircraft rentals, maintenance and guarantees for airport
facilities. Of this total, $52.5 million are letters of credit opened on behalf of Copa Colombia
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, an overdraft line of
credit of $10.0 million with Towerbank, a line of credit of $20.0 million with Citibank, a line of
credit of $30.0 million with Banco Nacional de Panama and a line of credit of $4.0 million with
Banco Panama. 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, 2010, we had an outstanding balance of $13.0 million with Bladex.
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 UAL related to our alliance. We will have the right to continue to use our
current logos on our aircraft for up to five years after the end of the alliance agreement term.
Copa Colombias 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 ten
new Boeing 737-800 aircraft to our fleet in 2011. For the remainder of 2011, 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 Copa
Colombia, including a continued focus on on-time performance and completion factors. In February
2010, as part of our plan to modernize Copa Colombias fleet, we completed the retirement of our
last remaining MD-80 aircraft. Additionally, we continue to seek further integration of Copas and
Copa Colombias network through code-sharing and fleet interchange agreements.
Our maintenance expenses are dependent on a large number of factors, some of which can be
estimated, such as aircraft usage, aircraft destination and overhaul events, while many others
result from unforeseen events. In 2010, maintenance expenses increased by 18% and we estimate that
our maintenance expenses will increase by at least 13% in 2011.
We expect jet fuel prices will continue to be volatile in 2011 and expect to continue
evaluating fuel hedging programs to help protect us against short-term movements in crude oil
prices. We expect our operating capacity to increase approximately 20.0% in 2011, primarily as a
result of the addition of ten new aircraft throughout the year.
E. Off-statement of financial position arrangements
None of our operating lease obligations are reflected on our consolidated statement of
financial position, and we have no other off-statement of financial position 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.
57
F. Tabular Disclosure of Contractual Obligations
Our non-cancelable contractual obligations at December 31, 2010 included the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010 |
|
|
|
|
|
|
|
Less than 1 |
|
|
1-3 |
|
|
3-5 |
|
|
|
|
|
|
Total |
|
|
Year |
|
|
Years |
|
|
Years |
|
|
More than 5 Years |
|
|
|
(in thousands of dollars) |
|
Aircraft and engine purchase commitments |
|
|
1,632,071 |
|
|
|
164,041 |
|
|
|
383,382 |
|
|
|
588,339 |
|
|
|
496,309 |
|
Aircraft operating leases |
|
|
360,102 |
|
|
|
55,231 |
|
|
|
111,134 |
|
|
|
93,627 |
|
|
|
100,110 |
|
Other operating leases |
|
|
32,056 |
|
|
|
10,270 |
|
|
|
12,133 |
|
|
|
7,013 |
|
|
|
2,640 |
|
Short-term debt and long-term debt(1) |
|
|
1,079,245 |
|
|
|
143,617 |
|
|
|
264,641 |
|
|
|
284,453 |
|
|
|
386,534 |
|
Total |
|
|
3,103,474 |
|
|
|
373,159 |
|
|
|
771,290 |
|
|
|
973,432 |
|
|
|
985,593 |
|
|
|
|
(1) |
|
Includes actual interest and estimated interest for floating-rate debt based on December 31, 2010 rates. |
Most contract leases include renewal options. Non-aircraft related leases have renewable terms
of one year, and their respective amounts included in the table above have been estimated through
2015, 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 $1.4 million for 2011.
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 2010. Messsrs. Stanley Motta, José Castañeda Velez, Jaime
Arias, Alberto C. Motta Jr., and Joseph Fidanque were re-elected as directors at our annual
shareholders meeting held on May 4, 2011. In November 2010, Mr. Douglas Leo was elected as
director, filling the vacancy created by the resignation of Mr. Mark Erwin and serving for the
remainder of Mr. Mark Erwins term. Mr. Douglas Leos election was confirmed at our annual
shareholders meeting held on May 4, 2011. 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 March 30, 2011. 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 |
|
65 |
Osvaldo Heilbron |
|
Director |
|
85 |
Jaime Arias |
|
Director |
|
76 |
Ricardo Alberto Arias |
|
Director |
|
71 |
Alberto C. Motta, Jr. |
|
Director |
|
64 |
Douglas Leo |
|
Director |
|
51 |
Joseph Fidanque III |
|
Director |
|
44 |
Jose Castañeda Velez |
|
Director |
|
67 |
Roberto Artavia Loria |
|
Director |
|
52 |
Alfredo Arias Loredo |
|
Director |
|
64 |
Mr. Pedro Heilbron. See Executive Officers.
58
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.
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. Douglas Leo has been one of the directors of Copa Holdings since the end of 2010. He is Vice
President of Pricing and Revenue Management for United Airlines which is based in Chicago,
Illinois. Prior to joining United Airlines in 2005, Mr. Leo was Vice President of Worldwide Sales,
Distribution and the International Division for US Airways and also held several positions during a
17 year career at Northwest Airlines. Before joining the aviation industry, Mr. Leo worked at
Touche-Ross and Peat, Marwick and Mitchell. Mr. Leo has a bachelors degree from Minnesota State
University-Mankato and is a Certified Public Accountant. He has also been a guest lecturer at the
Sloan School of Business at M.I.T.
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.
59
Mr. José Castañeda Velez is one of the independent directors of Copa Holdings. He is currently
director of MMG Bank Corporation, MMG Trust S.A, and Multibank. 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.
The following table sets forth the name, age and position of each of our executive officers as
of March 30, 2011. 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 |
|
45 |
Daniel Gunn |
|
Senior Vice-President of Operations |
|
43 |
Leo Marchosky |
|
Vice-President of Human Resources |
|
54 |
Joe Mohan |
|
Vice-President of Commercial and Planning |
|
41 |
Ahmad Zamany |
|
Vice-President of Maintenance |
|
53 |
Vidalia de Casado |
|
Vice-President of On-Board Services |
|
53 |
David Lindskoog |
|
Vice-President of Flight Operations |
|
60 |
Peter Diaz |
|
Vice-President of Airport Services |
|
44 |
Glen Baker |
|
Vice-President of Technology |
|
52 |
Roberto Junguito Pombo |
|
Chief Executive Officer of Copa Colombia |
|
40 |
Mr. Pedro Heilbron has been our Chief Executive Officer for 22 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. Ahmad Zamany joined Copa Airlines in August of 2010 as Vice President of Technical
Operations, ultimately responsible for the Maintenance, Engineering and Technical Purchasing of the
Company. Mr. Zamany
started his aviation career with Pan Am and has held several key roles with other carriers. He
was previously with Atlas Air & Polar Air Cargo as Vice President of Technical Operations, and
Gemini Air Cargo as Senior Vice President and Chief Operating Officer. Mr. Zamany graduated from
Parks College of Saint Louis University with a bachelors degree in Aeronautics concentrated in
Aircraft Maintenance Engineering in 1985.
60
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.
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. Glen Baker has been our Vice-President of Technology since March 2011. Prior to joining
COPA he served as Chief Information Officer of ATA Airlines from 2001 through 2008. He also served
in the Government of the City of Indianapolis.
Mr. Roberto Junguito Pombo joined our company on November 8, 2005 as the Chief Executive
Officer of our Copa Colombia 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 2010, we paid an aggregate of approximately $3.5 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.
At the Compensation Committee meeting held in Feb 2011, the Chaiman announced members of our
Board of Directors that are not officers of either Copa or UAL will receive an increase of $15,000
per year to $40,000 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.
61
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 2007, 2008, 2009 and 2010 the Compensation Committee of our Board of Directors granted
16,955, 73,374, 113,714 and 52,567 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 $53.92 and $22.05, for the 2010, 2009, 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.
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 $4.0
million and $4.7 million in 2010 and 2009, respectively, and was recorded as a component of
Salaries and benefits within Operating Expense.
During first quarter of 2011, the Compensation Committee of our Board of Directors approved
four new stock compensation plans. Awards were granted under these new plans for approximately
319,000 shares of non-vested stock awards which will vest over a period of three to five years. We
estimate the fair value of these awards to be $18.1 million and the compensation cost in 2011 to
be $7.2 million.
C. Board Practices
Our Board of Directors currently meets quarterly. Additionally, informal meetings with UAL
are held on an ongoing basis, and are supported by annually formal meetings of an Alliance
Steering Committee, which directs and reports on the progress of the Copa and UAL Alliance. Our
Board of Directors is focused on providing our overall strategic direction and as a result is
responsible for establishing our general business policies and for appointing our executive
officers and supervising their management.
Currently, our Board of Directors is comprised of eleven members. The number of directors
elected each year alternates between six directors and five directors. Messrs. Pedro Heilbron,
Osvaldo Heilbron, Ricardo 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 2010. Messsrs.
Stanley Motta, José Castañeda Velez, Jaime Arias, Alberto C. Motta Jr., and Joseph Fidanque were
re-elected as directors at our annual shareholders meeting held on May 4, 2011. In November 2010,
Mr. Douglas Leo was elected as director, filling the vacancy created by the resignation of Mr. Mark
Erwin and serving for the remainder of Mr. Mark Erwins term. Mr. Douglas Leos election was
confirmed at our annual shareholders meeting held on May 4, 2011. Our charter does not have a
mandatory retirement age for our directors.
62
Pursuant to contractual arrangements with us and CIASA, UAL is entitled to designate one of
our directors and Mr. Douglas Leo is the UAL appointed director.
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.
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. |
63
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.
Approximately 79% of Copas employees are located in Panama, while the remaining 21% are
distributed among our foreign stations. Copas employees can be categorized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
Pilots |
|
|
492 |
|
|
|
529 |
|
|
|
612 |
|
Flight attendants |
|
|
719 |
|
|
|
783 |
|
|
|
949 |
|
Mechanics |
|
|
247 |
|
|
|
249 |
|
|
|
252 |
|
Customer service agents, reservation
agents, ramp and other |
|
|
2,270 |
|
|
|
2,143 |
|
|
|
2,376 |
|
Management and clerical |
|
|
807 |
|
|
|
1,068 |
|
|
|
1,200 |
|
|
|
|
|
|
|
|
|
|
|
Total employees |
|
|
4535 |
|
|
|
4,772 |
|
|
|
5,389 |
|
|
|
|
|
|
|
|
|
|
|
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.
64
We generally maintain good relations with our union and non-union employees and have not
experienced work stoppages during the past twenty years. Approximately 54% of Copas employees are
unionized. There are currently five unions covering our Copa employees in Panama: the pilots union
(UNPAC); the flight attendants union (SIPANAB); the mechanics union (SITECMAP); the traffic
attendants union (UGETRACO); and a generalized union (SIELAS), which represents ground personnel,
messengers, drivers, 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 pilots union in November 2007 and its flight attendants union in March 2010.
Collective bargaining agreements in Panama typically have a term of three to four years. Copa
recently finalized negotiations with UNCAP, where both parties agreed to schedule renegotiations
for the new collective bargaining agreements for September 2011. Renegotiations with Copas
general union are expected to take place in September 2013. In the event such negotiations do not
lead to a mutually satisfactory resolution, the government may require us to enter into arbitration
proceedings and agree to terms that are less favorable to us than our existing agreement. In the
event the government does not mandate arbitration, these negotiations may result in a prolonged
dispute with our general union. We also have agreements with our Copa employees in São Paulo,
Brazil. 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.
Copa Colombias pilots and flight attendants are represented by two separate unions. The
pilots union, Asociación Colombiana de Aviadores Civiles (ACDAC), represents Copa Colombias
pilots and co-pilots. The flight attendants union, Asociación Colombiana de Auxiliares de Vuelo
(ACAV), represents all of Copa Colombias flight attendants. Copa Colombias entered into a new
collective bargaining agreement with ACDAC on March 3, 2008 and will be effect until June 30, 2011.
Typically, collective bargaining agreements in Colombia are valid for a period of two to four
years. Copa Colombia 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 1.03% of our
Class A shares. See Item 7A. Major Shareholders and Related Party Transactions.
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, 2010 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) |
|
|
0 |
|
|
|
|
|
Executive officers and directors as a group (20 persons)(4) |
|
|
334,407 |
|
|
|
1.02 |
% |
Tempus Quo Capital Management, LLC. (3) |
|
|
1,912,323 |
|
|
|
5.9 |
% |
Others |
|
|
30,412,827 |
|
|
|
93.1 |
% |
|
|
|
|
|
|
|
Total |
|
|
32,659,557 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
(1) |
|
Based on a total of 32,659,557 Class A shares outstanding. |
|
(2) |
|
CIASA owns 100% of the Class B shares of Copa Holdings, representing 25.1% of our total capital stock. |
|
(3) |
|
Based on a Schedule 13G filed with the SEC, dated February 11, 2011, in which Tempus Quo Capital
Management, LLC. and certain related parties, reported beneficial ownership of 1,912,323 Class A
Shares. |
|
(4) |
|
Number of shares as of March, 2011. |
65
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. In March 2010, CIASA converted a portion of its Class B shares into 1.6 million non-voting
New York Stock Exchange listed Class A shares and sold such Class A shares in a SEC registered
public offering. As a result, CIASA ´s ownership decreased from 29.2% to 25.1% of our capital
stock. In the event CIASA seeks to reduce its ownership below 10% of our total share capital, our
independent directors may decide to issue special voting shares solely to Panamanian nationals to
maintain the ownership requirements mandated by the Panamanian Aviation Act.
The address of CIASA is Corporación de Inversiones Aéreas, S.A., c/o Compañía Panameña de
Aviación, S.A., Boulevard Costa del Este, Avenida Principal y Avenida de la Rotonda, Urbanización
Costa del Este, Complejo Business Park, Torre Norte, Parque Lefevre, Panama City, Panama. The
address of Continental is Continental Airlines, Inc., 1600 Smith Street, Houston, Texas 77002.
B. Related Party 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, UAL 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 one demand on us with respect to the registration and sale of
our common stock held by them. The registration expenses incurred in connection with the 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.
66
Commercial Agreements with UAL
Our alliance relationship with UAL is governed by several interrelated agreements between Copa
and UAL. 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 UAL, both entities 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. UAL 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, 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 entities 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 a party in cases of, among other things, uncured material breaches of the
alliance agreement by the other party , bankruptcy of the other party , termination of the
services agreement for breach by the other party , termination of the frequent flyer participation
agreement without entering into a successor agreement by the other party or certain changes of
control of either of the parties and certain significant operational service failures by the other
airline.
Frequent Flyer Participation Agreement. Under the frequent flyer participation agreement, we
participate in Continentals OnePass frequent flyer global program and on a co-branded basis in
Latin America. Customers in the program receive credit for flying on segments operated by us, which
can be redeemed for award travel on our flights and those of other partner airlines. The agreement
also governs joint marketing agreements under the program, settlement procedures between the
airlines and revenue-sharing under bank card affinity relationships. Further, if the services
agreement is terminated or expires, the compensation structure of the frequent flyer program will
be revised to be comparable to other of Continentals frequent flyer relationships. We also have
the right under the agreement to participate on similar terms in any successor program operated by
Continental. Other than by expiration as described above, the agreement is also terminable by a
party in cases of, among other things, uncured material breaches of the alliance agreement by the
other party , bankruptcy of the other party , termination of the services agreement for breach by
the other party , 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 party. After the merger of United
and Continental airlines, Continental and United airlines have maintained their individual frequent
flyer programs One Pass and Mileage Plus, respectively. While eventually the two airlines may
unify their frequent flyer programs, there is as of yet no concrete plan to do so.
Trademark License Agreement. Under the trademark license agreement, we have the right to use
a logo incorporating a design that is similar to the design of the new UAL 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.
67
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 $1.0 million and
0.2 million in 2010 and 2009, respectively, and interest received from Banco General amounted to $
0.1 million and $0.4 million and in 2010 and 2009, respectively. The outstanding debt balance
at December 31 amounted to $ 1.5 million and $2.3 million in 2010 and 2009 respectively. These
amounts are included in Current maturities of long-term debt and Long-term debt in the
consolidated statement of financial position
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 $170.7 million in 2010, $116.1
million in 2009.
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 $ 2.0 million and $1.9 million in 2010 and 2009 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 $0.6 million
and $0.4 million in 2010 and 2009 respectively.
68
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 $0.8 million in 2010, $0.6 million in 2009 in 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
$0.7 million, and $0.9 million in 2010, and 2009 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 $0.6 million, $1.0 million in 2010, and 2009 respectively.
We have received services from Call Center Corporation, a call center that operates one of
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 $3.8 million and $3.3 million in 2010
and 2009, 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.
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.
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 InformationMemorandum and
Articles of AssociationDescription of Capital StockDividends.
69
Effective February 10, 2010, our 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 5, 2010, our Board of Directors declared an annual dividend of $1.09 per share payable
June 15, 2010 to shareholders of record as of May 31, 2010 which represented an aggregate dividend
payment of $47.9 million. 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.
B. Significant Changes
None
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 |
|
2006 |
|
|
|
|
|
|
|
|
Annual |
|
|
20.31 |
|
|
|
49.05 |
|
2007 |
|
|
|
|
|
|
|
|
Annual |
|
|
30.25 |
|
|
|
73.33 |
|
2008 |
|
|
|
|
|
|
|
|
Annual |
|
|
18.00 |
|
|
|
43.64 |
|
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 |
|
2010 |
|
|
|
|
|
|
|
|
Annual |
|
|
42.06 |
|
|
|
63.08 |
|
First quarter |
|
|
47.76 |
|
|
|
61.74 |
|
Second quarter |
|
|
43.56 |
|
|
|
63.08 |
|
Third quarter |
|
|
42.60 |
|
|
|
55.95 |
|
Fourth quarter |
|
|
46.97 |
|
|
|
59.06 |
|
Last Six Months |
|
|
|
|
|
|
|
|
November 2010 |
|
|
49.04 |
|
|
|
56.62 |
|
December 2010 |
|
|
55.62 |
|
|
|
59.06 |
|
January 2011 |
|
|
55.88 |
|
|
|
59.92 |
|
February 2011 |
|
|
50.95 |
|
|
|
58.50 |
|
March 2011 |
|
|
56.01 |
|
|
|
58.50 |
|
April 2011 |
|
|
49.54 |
|
|
|
55.24 |
|
B. Plan of Distribution
Not applicable.
70
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.
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, 2010, we had
32,659,557 Class A shares issued, 10,938,125 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.
71
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:
|
|
|
a transformation of Copa Holdings into another corporate type; |
|
|
|
a merger, consolidation or spin-off of Copa Holdings; |
|
|
|
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.
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.
72
Restrictions on Transfer of Common Stock; Conversion of Class B Shares
The Class B shares may only be held by Panamanians, and upon registration of any transfer of a
Class B share to a holder that does not certify that it is Panamanian, such Class B share shall
automatically convert into a Class A share. Transferees of Class B shares will be required to
deliver to us written certification of their status as a Panamanian as a condition to registering
the transfer to them of Class B shares. Class A shareholders will not be required or entitled to
provide such certification. If a Class B shareholder intends to sell any Class B shares to a person
that has not delivered a certification as to Panamanian nationality and immediately after giving
effect to such proposed transfer the outstanding Class B shares would represent less than 10% of
our outstanding stock (excluding newly issued shares sold with the approval of our Independent
Directors Committee), the selling shareholder must inform the Board of Directors at least
ten days prior to such transfer. The Independent Directors Committee may determine to refuse to
register the transfer if the Committee reasonably concludes, on the basis of the advice of a
reputable external aeronautical counsel, that such transfer would be reasonably likely to cause a
triggering event as described below. After the first shareholders meeting at which the Class A
shareholders are entitled to vote for the election of our directors, the role of the Independent
Directors described in the preceding sentence shall be exercised by the entire Board of Directors
acting as a whole.
Also, the Board of Directors may refuse to register a transfer of stock if the transfer
violates any provision of the Articles of Incorporation.
Tag-along Rights
Our Board of Directors may refuse to register any transfer of shares in which CIASA proposes
to sell Class B shares pursuant to a sale at a price per share that is greater than the average
public trading price per share of the Class A shares for the preceding 30 days to an unrelated
third party that would, after giving effect to such sale, have the right to elect a majority of the
Board of Directors and direct our management and policies, unless the proposed purchaser agrees to
make, as promptly as possible, a public offer for the purchase of all outstanding Class A shares
and Class B shares at a price per share equal to the price per share paid for the shares being sold
by CIASA. While our Articles of Incorporation provide limited rights to holders of our Class A
shares to sell their shares at the same price as CIASA in the event that a sale of Class B shares
by CIASA results in the purchaser having the right to elect a majority of our board, there are
other change of control transactions in which holders of our Class A shares would not have the
right to participate, including the sale of interests by a party that had previously acquired Class
B shares from CIASA, the sale of interests by another party in conjunction with a sale by CIASA,
the sale by CIASA of control to more than one party, or the sale of controlling interests in CIASA
itself.
Aviation Rights Protections
As described in RegulationPanama, the Panamanian Aviation Act, including the related
decrees and regulations, and the bilateral treaties between Panama and other countries that allow
us to fly to those countries require that Panamanians exercise effective control of Copa and
maintain significant ownership of the airline. The Independent Directors Committee have certain
powers under our Articles of Incorporation to ensure that certain levels of ownership and control
of Copa Holdings remain in the hands of Panamanians upon the occurrence of certain triggering
events referred to below.
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In the event that the Class B shareholders represent less than 10% of the total share capital
of the company (excluding newly issued shares sold with the approval of our Independent Directors
Committee) and the Independent Directors Committee determines that it is reasonably likely that
Copas or Copa Holdings legal ability to engage in the aviation business or to exercise its
international route rights will be revoked, suspended or materially inhibited in a manner which
would materially and adversely affect the company, in each case as a result
of such non-Panamanian ownership (each a triggering event), the Independent Directors
Committee may take either or both of the following actions:
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authorize the issuance of additional Class B shares to Panamanians at a price
determined by the Independent Directors to reflect the current market value of such
shares or |
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authorize the issuance to Class B shareholders such number of Class C shares as the
Independent Directors Committee, or the Board of Directors if applicable, deems
necessary and with such other terms and conditions established by the Independent
Directors Committee that do not confer economic rights on the Class C shares. |
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
20% to 30% of our annual consolidated net income to Class A and Class B shareholders. Our Board of
Directors may, in its sole discretion and for any reason, amend or discontinue the dividend policy.
Our Board of Directors may change the level of dividends provided for in this dividend policy or
entirely discontinue the payment of dividends.
Shareholder Meetings
Ordinary Meetings
Our Articles of Incorporation require us to hold an ordinary annual meeting of shareholders
within the first five months of each fiscal year. The ordinary annual meeting of shareholders is
the corporate body that elects the Board of Directors, approves the annual financial statements of
Copa Holdings and approves any other matter that does not require an extraordinary shareholders
meeting. Shareholders representing at least 5% of the issued and outstanding common stock entitled
to vote may submit proposals to be included in such ordinary shareholders meeting, provided the
proposal is submitted at least 45 days prior to the meeting.
Extraordinary Meetings
Extraordinary meetings may be called by the Board of Directors when deemed appropriate.
Ordinary and extraordinary meetings must be called by the Board of Directors when requested by
shareholders representing at least 5% of the issued shares entitled to vote at such meeting. Only
matters that have been described in the notice of an extraordinary meeting may be dealt with at
that extraordinary meeting.
Vote required
Resolutions are passed at shareholders meetings by the affirmative vote of a majority of those
shares entitled to vote at such meeting and present or represented at the meeting.
Notice and Location
Notice to convene the ordinary annual meeting or extraordinary meeting is given by publication
in at least one national newspaper in Panama and at least one national newspaper widely read in New
York City not less than 30 days in advance of the meeting. We intend to publish such official
notices in a national journal recognized by the NYSE.
Shareholders meetings are to be held in Panama City, Panama unless otherwise specified by the
Board of Directors.
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Quorum
Generally, a quorum for a shareholders meeting is established by the presence, in person or
by proxy, of shareholders representing a simple majority of the issued shares eligible to vote on
any actions to be considered at such meeting. If a quorum is not present at the first meeting and
the original notice for such meeting so provides, the meeting can be immediately reconvened on the
same day and, upon the meeting being reconvened, shareholders present or represented at the
reconvened meeting are deemed to constitute a quorum regardless of the percentage of the shares
represented.
Proxy Representation
Our Articles of Incorporation provide that, for so long as the Class A shares do not have full
voting rights, each holder, by owning our Class A shares, grants a general proxy to the Chairman of
our Board of Directors or any person designated by our Chairman to represent them and vote their
shares on their behalf at any shareholders meeting, provided that due notice was made of such
meeting and that no specific proxy revoking or replacing the general proxy has been
received from such holder prior to the meeting in accordance with the instructions provided by the
notice.
Other Shareholder Rights
As a general principle, Panamanian law bars the majority of a corporations shareholders from
imposing resolutions which violate its articles of incorporation or the law, and grants any
shareholder the right to challenge, within 30 days, any shareholders resolution that is illegal or
that violates its articles of incorporation or by-laws, by requesting the annulment of said
resolution and/or the injunction thereof pending judicial decision. Minority shareholders
representing at least 5% of all issued and outstanding shares have the right to require a judge to
call a shareholders meeting and to appoint an independent auditor (revisor) to examine the
corporate accounting books, the background of the companys incorporation or its operation.
Shareholders have no pre-emptive rights on the issue of new shares.
Our Articles of Incorporation provide that directors will be elected in staggered two-year
terms, which may have the effect of discouraging certain changes of control.
Listing
Our Class A shares are listed on the NYSE under the symbol CPA. The Class B shares and Class
C shares will not be listed on any exchange unless the Board of Directors determines that it is in
the best interest of the company to list the Class B shares on the Panama Stock Exchange.
Transfer Agent and Registrar
The transfer agent and registrar for our Class A shares is Mellon Investor Services LLC. Until
the Board of Directors otherwise provides, the transfer agent for our Class B shares and any Class
C shares is Galindo, Arias & Lopez which maintains the share register for each class in Panama.
Transfers of Class B shares must be accompanied by a certification of the transferee that such
transferee is Panamanian.
Summary of Significant Differences between Shareholders Rights and Other Corporate Governance
Matters Under Panamanian Corporation Law and Delaware Corporation Law
Copa Holdings is a Panamanian corporation (sociedad anónima). The Panamanian corporation law
was originally modeled after the Delaware General Corporation Law. As such, many of the provisions
applicable to Panamanian and Delaware corporations are substantially similar, including (1) a
directors fiduciary duties of care and loyalty to the corporation, (2) a lack of limits on the
number of terms a person may serve on the board of directors, (3) provisions allowing shareholders
to vote by proxy and (4) cumulative voting if provided for in the
articles of incorporation. The following table highlights the most significant provisions that
materially differ between Panamanian corporation law and Delaware corporation law.
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Panama |
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Delaware |
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Directors
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Conflict of Interest Transactions.
Transactions involving a Panamanian
corporation and an interested director or
officer are initially subject to the
approval of the board of directors.
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Conflict of Interest
Transactions. Transactions
involving a Delaware
corporation and an
interested director of that
corporation are generally
permitted if: |
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At the next shareholders meeting,
shareholders will then have the right to
disapprove the board of directors decision
and to decide to take legal actions against
the directors or officers who voted in favor
of the transaction.
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(1) the material facts as
to the interested
directors relationship or
interest are disclosed and
a majority of disinterested
directors approve the
transaction; |
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(2) the material facts are
disclosed as to the
interested directors
relationship or interest
and the stockholders
approve the transaction; or |
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(3) the transaction is
fair to the corporation at
the time it is authorized
by the board of directors,
a committee of the board of
directors or the
stockholders. |
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Terms. Panamanian law does not set limits on
the length of the terms that a director may
serve. Staggered terms are allowed but not
required.
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Terms. The Delaware General
Corporation Law generally
provides for a one-year
term for directors.
However, the directorships
may be divided into up to
three classes with up to
three-year terms, with the
years for each class
expiring in different
years, if permitted by the
articles of incorporation,
an initial by-law or a
by-law adopted by the
shareholders. |
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Number. The board of directors must consist
of a minimum of three members, which could
be natural persons or legal entities.
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Number. The board of
directors must consist of a
minimum of one member. |
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Authority to take Actions. In general, a
simple majority of the board of directors is
necessary and sufficient to take any action
on behalf of the board of directors.
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Authority to take Actions.
The articles of
incorporation or by-laws
can establish certain
actions that require the
approval of more than a
majority of directors. |
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Shareholder Meetings and Voting Rights
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Quorum. The quorum for shareholder meetings
must be set by the articles of incorporation
or the by-laws. If the articles of
incorporation and the notice for a given
meeting so provide, if quorum is not met a
new meeting can be immediately called and
quorum shall consist of those present at
such new meeting.
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Quorum. For stock
corporations, the articles
of incorporation or bylaws
may specify the number to
constitute a quorum but in
no event shall a quorum
consist of less than
one-third of shares
entitled to vote at a
meeting. In the absence of
such specifications, a
majority of shares entitled
to vote shall constitute a
quorum. |
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Action by Written Consent. Panamanian law
does not permit shareholder action without
formally calling a meeting.
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Action by Written Consent.
Unless otherwise provided
in the articles of
incorporation, any action
required or permitted to be
taken at any annual meeting
or special meeting of
stockholders of a
corporation may be taken
without a meeting, without
prior notice and without a
vote, if a consent or
consents in writing,
setting forth the action to
be so taken, is signed by
the holders of outstanding
shares having not less than
the minimum number of votes
that would be necessary to
authorize or take such
action at a meeting at
which all shares entitled
to vote thereon were
present and noted. |
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Other Shareholder Rights
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Shareholder Proposals. Shareholders
representing 5% of the issued and
outstanding capital of the corporation have
the right to require a judge to call a
general shareholders meeting and to propose
the matters for vote.
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Shareholder Proposals.
Delaware law does not
specifically grant
shareholders the right to
bring business before an
annual or special meeting.
If a Delaware corporation
is subject to the SECs
proxy rules, a shareholder
who owns at least $2,000 in
market value, or 1% of the
corporations securities
entitled to vote, may
propose a matter for a vote
at an annual or special
meeting in accordance with
those rules. |
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Appraisal Rights. Shareholders of Panamanian
corporation do not have the right to demand
payment in cash of the judicially determined
fair value of their shares in connection
with a merger or consolidation involving the
corporation. Nevertheless, in a merger, the
majority of shareholders could approve the
total or partial distribution of cash,
instead of shares, of the surviving entity.
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Appraisal Rights. Delaware
law affords shareholders in
certain cases the right to
demand payment in cash of
the judicially-determined
fair value of their shares
in connection with a merger
or consolidation involving
their corporation. However,
no appraisal rights are
available if, among other
things and subject to
certain exceptions, such
shares were listed on a
national securities
exchange or designated
national market system or
such shares were held of
record by more than 2,000
holders. |
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Shareholder Derivative Actions. Any
shareholder, with the consent of the
majority of the shareholders, can sue on
behalf of the corporation, the directors of
the corporation for a breach of their duties
of care and loyalty to the corporation or a
violation of the law, the articles of
incorporation or the by-laws.
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Shareholder Derivative
Actions. Subject to certain
requirements that a
shareholder make prior
demand on the board of
directors or have an excuse
not to make such demand, a
shareholder may bring a
derivative action on behalf
of the corporation to
enforce the rights of the
corporation against
officers, directors and
third parties. An
individual may also
commence a class action
suit on behalf of himself
and other
similarly-situated
stockholders if the
requirements for
maintaining a class action
under the Delaware General
Corporation Law have been
met. Subject to equitable
principles, a three-year
period of limitations
generally applies to such
shareholder suits against
officers and directors. |
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Inspection of Corporate Records.
Shareholders representing at least 5% of the
issued and outstanding shares of the
corporation have the right to require a
judge to appoint an independent auditor to
examine the corporate accounting books, the
background of the companys incorporation or
its operation.
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Inspection of Corporate
Records. A shareholder may
inspect or obtain copies of
a corporations shareholder
list and its other books
and records for any purpose
reasonably related to a
persons interest as a
shareholder. |
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Anti-takeover Provisions
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Panamanian corporations may include in their
articles of incorporation or by-laws
classified board and super-majority
provisions.
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Delaware corporations may
have a classified board,
super-majority voting and
shareholders rights plan. |
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Panamanian corporation laws anti-takeover
provisions apply only to companies that are:
(1) registered with the CNV for a period of
six months before the public offering,
(2) have over 3,000 shareholders, and
(3) have a permanent office in Panama with
full time employees and investments in the
country for more than $1,000,000.
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Unless Delaware
corporations specifically
elect otherwise, Delaware
corporations may not enter
into a business
combination, including
mergers, sales and leases
of assets, issuances of
securities and similar
transactions, with an
interested stockholder,
or one that beneficially
owns 15% or more of a
corporations voting stock,
within three years of such
person becoming an
interested shareholder
unless: |
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These provisions are triggered when a buyer
makes a public offer to acquire 5% or more
of any class of shares with a market value
of at least $5,000,000. In sum, the buyer
must deliver to the corporation a complete
and accurate statement that includes
(1) the name of the company, the number of
the shares that the buyer intends to acquire
and the purchase price;
(2) the identity and background of the
person acquiring the shares;
(3) the source and amount of the funds or
other goods that will be used to pay the
purchase price;
(4) the plans or project the buyer has once
it has acquired the control of the company;
(5) the number of shares of the company that
the buyer already has or is a beneficiary of
and those owned by any of its directors,
officers, subsidiaries, or partners or the
same, and any transactions made regarding
the shares in the last 60 days;
(6) contracts, agreements, business
relations or negotiations regarding
securities issued by the company in which
the buyer is a party;
(7) contract, agreements, business relations
or negotiations between the buyer and any
director, officer or beneficiary of the
securities; and
(8) any other significant information. This
declaration will be accompanied by, among
other things, a copy of the buyers
financial statements.
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(1) the transaction that
will cause the person to
become an interested
shareholder is approved by
the board of directors of
the target prior to the
transactions;
(2) after the completion
of the transaction in which
the person becomes an
interested shareholder, the
interested shareholder
holds at least 85% of the
voting stock of the
corporation not including
shares owned by persons who
are directors and also
officers of interested
shareholders and shares
owned by specified employee
benefit plans; or
(3) after the person
becomes an interested
shareholder, the business
combination is approved by
the board of directors of
the corporation and holders
of at least 66.67% of the
outstanding voting stock,
excluding shares held by
the interested shareholder. |
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If the board of directors believes that the
statement does not contain all required
information or that the statement is
inaccurate, the board of directors must send
the statement to the CNV within 45 days from
the buyers initial delivery of the
statement to the CNV. The CNV may then hold
a public hearing to determine if the
information is accurate and complete and if
the buyer has complied with the legal
requirements. The CNV may also start an
inquiry into the case, having the power to
decide whether or not the offer may be made. |
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Regardless of the above, the board of
directors has the authority to submit the
offer to the consideration of the
shareholders. The board should only convene
a shareholders meeting when it deems the
statement delivered by the offeror to be
complete and accurate. If convened, the
shareholders meeting should take place
within the next 30 days. At the
shareholders meeting, two-thirds of the
holders of the issued and outstanding shares
of each class of shares of the corporation
with a right to vote must approve the offer
and the offer is to be executed within 60
days from the shareholders approval. If the
board decides not to convene the
shareholders meeting within 15 days
following the receipt of a complete and
accurate statement from the offeror, shares
may then be purchased. In all cases, the
purchase of shares can take place only if it
is not prohibited by an administrative or
judicial order or injunction. |
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The law also establishes some actions or
recourses of the sellers against the buyer
in cases the offer is made in contravention
of the law. |
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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 UAL Airlines
Our alliance relationship with UAL 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. As a result of the UAL merger, UAL succeeded Continental
as the contracting party in each of these commercial agreements.
Alliance Agreement between UAL and Copa Airlines. Under the alliance agreement, both parties
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 parties, setting minimum levels of quality of service for the airlines and
encouraging cooperation in marketing and other operational initiatives.
Services Agreement between UAL and Copa Airlines. Under the services agreement, both parties
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 UAL and Copa Airlines. Under the frequent flyer
participation agreement, we participate in Continentals OnePass frequent flyer global program and
on a co-branded basis in Latin America. Customers in the program receive credit for flying on
segments operated by us, which can be redeemed for award travel on flights and those of other
partner airlines. The agreement also governs joint marketing agreements under the program,
settlement procedures between the airlines and revenue-sharing under bank card affinity
relationships.
Trademark License Agreement between UAL 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 UALs logo. Copa also has the right to use UALs trade dress, aircraft livery and
certain other UAL 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 October 2010.
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.
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Purchase Agreement between Empresa Brasileira de Aeronautica, S.A. and Copa Holdings, S.A.
In February 2006, we entered into a purchase agreement with Empresa Brasileira de Aeronautica,
S.A (Embraer) for the purchase of aircraft, customer support services and technical publications.
D. Exchange Controls
There are currently no Panamanian restrictions on the export or import of capital, including
foreign exchange controls, and no restrictions on the payment of dividends or interest, nor are
there limitations on the rights of foreign stockholders to hold or vote stock.
E. Taxation
United States
The following summary describes the material United States federal income tax consequences of
the ownership and disposition of our Class A shares as of the date hereof. The discussion set forth
below is applicable to United States Holders (as defined below) that beneficially own our Class A
shares as capital assets for United States federal income tax purposes (generally, property held
for investment). This summary does not represent a detailed description of the United States
federal income tax consequences applicable to you if you are subject to special treatment under the
United States federal income tax laws, including if you are:
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a dealer in securities or currencies; |
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a financial institution; |
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a regulated investment company; |
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a real estate investment trust; |
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a tax-exempt organization; |
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a person holding our Class A shares as part of a hedging, integrated or conversion
transaction, a constructive sale or a straddle; |
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a trader in securities that has elected the mark-to-market method of accounting for
your securities; |
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a person liable for alternative minimum tax; |
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a person who owns 10% or more of our voting stock; |
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a partnership or other pass-through entity for United States federal income tax
purposes; or |
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a person whose functional currency is not the United States dollar. |
The discussion below is based upon the provisions of the Internal Revenue Code of 1986, as
amended (the Code), and regulations, rulings and judicial decisions thereunder as of the date
hereof, and such authorities may be replaced, revoked or modified so as to result in United States
federal income tax consequences different from those discussed below.
If you are considering the purchase, ownership or disposition of our Class A shares, you
should consult your own tax advisors concerning the United States federal income tax consequences
to you in light of your particular situation as well as any consequences arising under the laws of
any other taxing jurisdiction.
As used herein, United States Holder means a beneficial owner of our Class A shares that is
for United States federal income tax purposes:
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an individual citizen or resident of the United States; |
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a corporation (or other entity treated as a corporation for United States federal
income tax purposes) created or organized in or under the laws of the United States,
any state thereof or the District of Columbia; |
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an estate the income of which is subject to United States federal income taxation
regardless of its source; or |
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a trust if it (1) is subject to the primary supervision of a court within the United
States and one or more United States persons have the authority to control all
substantial decisions of the trust or (2) has a valid election in effect under
applicable United States Treasury regulations to be treated as a United States person. |
Taxation of Dividends
Distributions on the Class A shares (including amounts withheld to reflect Panamanian
withholding taxes, if any) will be taxable as dividends to the extent paid out of our current or
accumulated earnings and profits, as determined under United States federal income tax principles.
Such income (including withheld taxes) will be includable in your gross income as ordinary income
on the day actually or constructively received by you. Such dividends will not be eligible for the
dividends received deduction allowed to corporations.
With respect to non-corporate United States Holders, certain dividends received in taxable
years beginning before January 1, 2013 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.
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).
82
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 2010), 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, 2013, 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.
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.
83
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.
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, 2010 cost per gallon of fuel. Based on projected 2011 fuel consumption, such an
increase would result in an increase to aircraft fuel expense of approximately $38.4 million in
2011, not taking into account our derivative contracts. We have hedged approximately 25% and 9% of
our anticipated fuel needs for 2011 and 2012, 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 2011 than they did during 2010, our interest expense would increase by approximately $0.1
million and the fair value of our debt would decrease by
approximately $0.9 million. If interest rates average 10% less in 2011 than they did in 2010,
our interest income from marketable securities would decrease by approximately $0.5 million and the
fair value of our debt would increase by approximately $0.9 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, 2010.
84
Foreign Currencies. The majority of our obligations are denominated in U.S. dollars. Since
Panama uses the U.S. dollar as legal tender, the majority of our operating expenses are also
denominated in U.S. dollars. Our foreign exchange risk is limited as approximately 42% of our
revenues are in U.S. dollars. While a significant part of our revenues are in foreign currency, no
single currency represented more than 11% of our operating revenues in 2010, except for the
Colombian Peso which represented 15.7%. Generally, our exposure to most of these foreign
currencies, with the exception of the Venezuelan Bolivar Fuerte 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 Copa Colombia, and therefore any revenue exposure is
mitigated by the operating expenses, which we also denominate in Colombian Peso.
2010 Revenues and Expenses Breakdown by Currency
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
|
Expense |
|
Argentinean Peso |
|
|
6.5 |
% |
|
|
2.0 |
% |
Brazilian Real |
|
|
8.3 |
% |
|
|
4.2 |
% |
Chilean Peso |
|
|
2.9 |
% |
|
|
1.1 |
% |
Colombian Peso |
|
|
15.7 |
% |
|
|
11.5 |
% |
Costa Rican Colon |
|
|
2.1 |
% |
|
|
0.9 |
% |
Mexican Peso |
|
|
3.2 |
% |
|
|
1.6 |
% |
U.S. Dollar |
|
|
42.0 |
% |
|
|
66.7 |
% |
Venezuelan Bolivar Fuerte |
|
|
11.1 |
% |
|
|
8.5 |
% |
Other(1) |
|
|
8.1 |
% |
|
|
3.6 |
% |
|
|
|
(1) |
|
Dominican Peso, European Euro, Guatemalan Quetzal, Jamaican Dollar,
Honduran Lempira, Haitian Gourde, Uruguayan Peso, Bolivian Boliviano,
Trinidad and Tobago Dollar |
Item 12. Description of Securities Other than Equity Securities
Not applicable.
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, 2010. 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.
85
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, 2010. 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, 2010, 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, 2010
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.
Report of Independent Registered Public Accounting Firm
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, 2010, based on criteria established
in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (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 Management’s report. Our responsibility is
to express an opinion on the company’s 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 provide a reasonable basis for our opinion.
A company’s 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 company’s 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 company’s 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, 2010, 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 statements of financial position of Copa Holdings,
S.A. and its subsidiaries as of December 31, 2010 and 2009 and January 1,
2009 and related statements of income, comprehensive income, changes in equity
and cash flows for each of the two years in the period ended December 31,
2010 and our report dated May 13, 2011 expressed an unqualified opinion
thereon.
/s/ Ernst and Young
May 13, 2011
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.
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.
86
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, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2010 |
|
Audit Fees |
|
$ |
715,000 |
|
|
$ |
662,000 |
|
Audit-Related Fees |
|
|
|
|
|
|
|
|
Tax Fees |
|
|
|
|
|
|
|
|
All Other Fees |
|
|
538,991 |
|
|
|
205,000 |
|
|
|
|
|
|
|
|
Total |
|
$ |
1,253,991 |
|
|
$ |
867,000 |
|
Audit Fees
Audit fees for 2010 and 2009 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 2010.
Tax Fees
There were no tax fees for 2010.
All Other Fees
Other fees for 2010 and 2009 included amounts paid for permitted consulting services performed
by Ernst & Young and pre-approved by our audit committee.
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 2010, 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. Changes in Registrants Certifying Accountant
None
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.
87
|
|
|
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. |
88
|
|
|
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.
Item 19. Exhibits
|
|
|
|
|
|
1.1 |
** |
|
English translation of the Articles of Incorporation (Pacto Social) of the Registrant |
|
2.1 |
* |
|
Form of Second Amended and Restated Shareholders Agreement among Copa Holdings, S.A., Corporación
de Inversiones Aéreas, S.A. and Continental Airlines, Inc. |
|
2.2 |
* |
|
Form of Amended and Restated Registration Rights Agreement among Copa Holdings, S.A., Corporación
de Inversiones Aéreas, S.A. and Continental Airlines, Inc. |
|
10.1 |
** |
|
Aircraft Lease Agreement, dated as of October 1, 1998, between First Security Bank and Compañía
Panameña de Aviación, S.A., in respect of Boeing Model 737-71Q Aircraft, Serial No. 29047 |
|
10.2 |
** |
|
Letter Agreement dated as of November 6, 1998 amending Aircraft Lease Agreement, dated October 1,
1998, between First Security Bank and Compañía Panameña de Aviación, S.A., in respect of One Boeing
Model 737-71Q Aircraft, Manufacturers Serial No. 29047 |
|
10.3 |
** |
|
Aircraft Lease Amendment Agreement dated as of May 21, 2004 to Aircraft Lease Agreement, dated
October 1, 1998, between First Security Bank and Compañía Panameña de Aviación, S.A., in respect of
Boeing Model 737-71Q Aircraft, Serial No. 29047 |
|
10.4 |
** |
|
Aircraft Lease Agreement, dated as of October 1, 1998, between First Security Bank and Compañía
Panameña de Aviación, S.A., in respect of Boeing Model 737-71Q Aircraft, Serial No. 29048 |
|
10.5 |
** |
|
Letter Agreement dated as of November 6, 1998 amending Aircraft Lease Agreement, dated as of
October 1, 1998, between First Security Bank and Compañía Panameña de Aviación, S.A., in respect of
Boeing Model 737-71Q Aircraft, Serial No. 29048 |
|
10.6 |
** |
|
Aircraft Lease Amendment Agreement dated as of May 21, 2003 to Aircraft Lease Agreement, dated
October 1, 1998, between First Security Bank and Compañía Panameña de Aviación, S.A., in respect of
Boeing Model 737-71Q Aircraft, Serial No. 29048 |
|
10.7 |
** |
|
Aircraft Lease Agreement, dated as of November 18, 1998, between Aviation Financial Services Inc.
and Compañía Panameña de Aviación, S.A., Boeing Model 737-700 Aircraft, Serial No. 28607 |
89
|
|
|
|
|
|
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. |
|
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. |
90
|
|
|
|
|
|
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. |
91
|
|
|
|
|
|
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 |
|
10.54 |
|
|
Supplemental Agreement No. 21 dated as of May 28, 2010 to the Boeing Purchase Agreement Number 2191
dated November 25, 1998 between the Boeing Company and Copa Holdings, S.A |
|
10.55 |
|
|
Supplemental Agreement No. 22 dated as of September 24, 2010 to the Boeing Purchase Agreement
Number 2191 dated November 25, 1998 between the Boeing Company and Copa Holdings, S.A |
|
10.56 |
|
|
Supplemental Agreement No. 23 dated as of October, 2010 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. |
92
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: May 13, 2011 |
|
|
|
|
|
|
93
Consolidated Financial Statements
Copa Holdings, S. A. and Subsidiaries
Year ended December 31, 2010
with Independent Auditors Report
COPA HOLDINGS, S. A. AND SUBSIDIARIES
Contents
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F-24 |
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F-24 |
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F-25 |
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F-26 |
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F-26 |
|
COPA HOLDINGS, S. A. AND SUBSIDIARIES
Contents
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Pages |
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F-27 |
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F-30 |
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F-31 |
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F-31 |
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F-34 |
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F-64 |
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REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
The Board of Directors and
Shareholders
COPA HOLDINGS, S.A.
We have audited the accompanying
consolidated statements of financial position of Copa Holdings, S.A. and its
subsidiaries as of December 31, 2010 and 2009 and January 1, 2009,
and the related consolidated statements of income, comprehensive income,
changes in equity and cash flows for each of the two years in the period ended
December 31, 2010. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial
statements referred to above present fairly, in all material respects, the
consolidated financial position of Copa Holdings, S.A. and its subsidiaries at
December 31, 2010 and 2009 and January 1, 2009, and the consolidated
results of their operations and their cash flows for each of the two years in
the period ended December 31, 2010, in conformity with International
Financial Reporting Standards, as issued by the International Accounting
Standards Board.
We also have audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United
States), the effectiveness of Company’s internal control over financial
reporting as of December 31, 2010, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated May 13, 2011
expressed an unqualified opinion thereon.
/s/ Ernst and Young
May 13, 2011
Panama City,
Republic of Panama
F-2
COPA HOLDINGS, S. A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(In US$ thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
As of |
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
January 1, |
|
|
|
Notes |
|
2010 |
|
|
2009 |
|
|
2009 |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
4 |
|
$ |
207,690 |
|
|
$ |
262,656 |
|
|
$ |
220,808 |
|
Short-term investments |
|
5 |
|
|
194,913 |
|
|
|
89,412 |
|
|
|
176,018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents and
short-term investments |
|
|
|
|
402,603 |
|
|
|
352,068 |
|
|
|
396,826 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
6 |
|
|
88,774 |
|
|
|
76,392 |
|
|
|
70,609 |
|
Accounts receivable from related parties |
|
18 |
|
|
613 |
|
|
|
4,399 |
|
|
|
4,592 |
|
Expendable parts and supplies |
|
7 |
|
|
45,982 |
|
|
|
27,098 |
|
|
|
22,049 |
|
Prepaid expenses |
|
8 |
|
|
31,789 |
|
|
|
30,458 |
|
|
|
24,470 |
|
Other current assets |
|
9 |
|
|
24,622 |
|
|
|
12,607 |
|
|
|
4,571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets |
|
|
|
|
594,383 |
|
|
|
503,022 |
|
|
|
523,117 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments |
|
5 |
|
|
6,224 |
|
|
|
6,407 |
|
|
|
11,145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, Plant and Equipment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Flight equipment |
|
11 |
|
|
1,782,070 |
|
|
|
1,451,312 |
|
|
|
1,375,042 |
|
Other |
|
|
|
|
59,426 |
|
|
|
45,126 |
|
|
|
41,415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,841,496 |
|
|
|
1,496,438 |
|
|
|
1,416,457 |
|
Less: Accumulated depreciation |
|
11 |
|
|
(274,940 |
) |
|
|
(214,963 |
) |
|
|
(168,802 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,566,556 |
|
|
|
1,281,475 |
|
|
|
1,247,655 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase deposits for flight equipment |
|
12 |
|
|
205,972 |
|
|
|
198,697 |
|
|
|
84,861 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Property and Equipment |
|
|
|
|
1,772,528 |
|
|
|
1,480,172 |
|
|
|
1,332,516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid pension asset |
|
|
|
|
8,157 |
|
|
|
6,831 |
|
|
|
5,594 |
|
Goodwill |
|
13 |
|
|
25,475 |
|
|
|
23,852 |
|
|
|
21,732 |
|
Other intangible assets |
|
13 |
|
|
43,465 |
|
|
|
42,593 |
|
|
|
38,057 |
|
Other assets |
|
10 |
|
|
105,765 |
|
|
|
98,331 |
|
|
|
73,950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Assets |
|
|
|
|
182,862 |
|
|
|
171,607 |
|
|
|
139,333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
|
|
$ |
2,555,997 |
|
|
$ |
2,161,208 |
|
|
$ |
2,006,111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
COPA HOLDINGS, S. A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (CONTINUED)
(In US$ thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
As of |
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
January 1, |
|
|
|
Notes |
|
|
2010 |
|
|
2009 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt |
|
|
14 |
|
|
$ |
100,860 |
|
|
$ |
94,550 |
|
|
|
115,833 |
|
Accounts payable |
|
|
|
|
|
|
66,005 |
|
|
|
50,884 |
|
|
|
54,066 |
|
Accounts payable to related parties |
|
|
18 |
|
|
|
13,895 |
|
|
|
14,103 |
|
|
|
11,510 |
|
Air traffic liability |
|
|
|
|
|
|
208,735 |
|
|
|
180,957 |
|
|
|
178,818 |
|
Taxes and interest payable |
|
|
|
|
|
|
49,852 |
|
|
|
43,227 |
|
|
|
37,194 |
|
Accrued expenses payable |
|
|
15 |
|
|
|
47,614 |
|
|
|
49,058 |
|
|
|
40,642 |
|
Other current liabilities |
|
|
16 |
|
|
|
10,934 |
|
|
|
10,837 |
|
|
|
60,349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities |
|
|
|
|
|
|
497,895 |
|
|
|
443,616 |
|
|
|
498,412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Current Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
14 |
|
|
|
888,681 |
|
|
|
750,971 |
|
|
|
800,196 |
|
Post employment benefits liability |
|
|
|
|
|
|
5,733 |
|
|
|
5,285 |
|
|
|
4,606 |
|
Other long-term liabilities |
|
|
17 |
|
|
|
33,703 |
|
|
|
26,283 |
|
|
|
18,176 |
|
Deferred tax liabilities |
|
|
21 |
|
|
|
20,016 |
|
|
|
23,920 |
|
|
|
15,377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Current Liabilities |
|
|
|
|
|
|
948,133 |
|
|
|
806,459 |
|
|
|
838,355 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
|
|
|
|
1,446,028 |
|
|
|
1,250,075 |
|
|
|
1,336,767 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A common stock - 33,025,284 (2009 -
31,136,619) shares issued,
32,659,557 (2009 - 30,566,853) outstanding |
|
|
|
|
|
|
22,291 |
|
|
|
20,864 |
|
|
|
20,761 |
|
Class B common stock - 10,938,125 (2009 -
12,778,125) shares issued |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and outstanding, no par value |
|
|
|
|
|
|
7,466 |
|
|
|
8,722 |
|
|
|
8,722 |
|
Additional paid in capital |
|
|
|
|
|
|
26,110 |
|
|
|
22,196 |
|
|
|
17,613 |
|
Retained earnings |
|
|
|
|
|
|
1,051,692 |
|
|
|
858,543 |
|
|
|
625,711 |
|
Accumulated other comprehensive income (loss) |
|
|
|
|
|
|
2,410 |
|
|
|
808 |
|
|
|
(3,463 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Shareholders Equity |
|
|
|
|
|
|
1,109,969 |
|
|
|
911,133 |
|
|
|
669,344 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity |
|
|
|
|
|
$ |
2,555,997 |
|
|
$ |
2,161,208 |
|
|
$ |
2,006,111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
COPA HOLDINGS, S. A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In US$ thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
Notes |
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue: |
|
|
|
|
|
|
|
|
|
|
Passenger revenue |
|
|
|
$ |
1,338,581 |
|
|
$ |
1,189,706 |
|
Cargo, mail and other |
|
|
|
|
76,225 |
|
|
|
66,370 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,414,806 |
|
|
|
1,256,076 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
Aircraft fuel |
|
|
|
|
354,427 |
|
|
|
300,816 |
|
Salaries and benefits |
|
22 |
|
|
178,845 |
|
|
|
157,045 |
|
Passenger servicing |
|
|
|
|
133,718 |
|
|
|
125,150 |
|
Commissions |
|
|
|
|
45,331 |
|
|
|
47,457 |
|
Maintenance, material and
repairs |
|
|
|
|
62,229 |
|
|
|
55,720 |
|
Reservations and sales |
|
|
|
|
58,813 |
|
|
|
56,280 |
|
Aircraft rentals |
|
|
|
|
46,334 |
|
|
|
46,538 |
|
Flight operations |
|
|
|
|
70,648 |
|
|
|
60,873 |
|
Depreciation and amortization |
|
11,13 |
|
|
62,962 |
|
|
|
50,876 |
|
Landing fees and other rentals |
|
|
|
|
40,320 |
|
|
|
33,628 |
|
Other |
|
|
|
|
71,531 |
|
|
|
62,190 |
|
Special fleet charges |
|
27 |
|
|
|
|
|
|
19,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,125,158 |
|
|
|
1,015,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
|
|
289,648 |
|
|
|
240,086 |
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating expense (income): |
|
|
|
|
|
|
|
|
|
|
Interest costs |
|
|
|
|
29,981 |
|
|
|
32,938 |
|
Interest capitalized |
|
|
|
|
|
|
|
|
(693 |
) |
Interest income |
|
|
|
|
(4,759 |
) |
|
|
(9,185 |
) |
Exchange rate difference |
|
19 |
|
|
20,625 |
|
|
|
(208 |
) |
Mark to market fuel derivative |
|
|
|
|
(11,721 |
) |
|
|
(58,040 |
) |
Other, net |
|
|
|
|
(4,501 |
) |
|
|
(707 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,625 |
|
|
|
(35,895 |
) |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
|
|
260,023 |
|
|
|
275,981 |
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
21 |
|
|
18,966 |
|
|
|
26,894 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
$ |
241,057 |
|
|
$ |
249,087 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share (Basic and
diluted) |
|
23 |
|
$ |
5.48 |
|
|
$ |
5.67 |
|
The accompanying notes are an integral part of these consolidated financial statements.
F-5
COPA HOLDINGS, S. A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In US$ thousands)
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
Net income |
|
$ |
241,057 |
|
|
$ |
249,087 |
|
|
|
|
|
|
|
|
|
Other income and expense credited/charge to net
equity, net of tax |
|
|
|
|
|
|
|
|
Net change in fair value of derivative instruments |
|
|
(1,301 |
) |
|
|
1,509 |
|
Exchange effect on intercompany long term balance |
|
|
(1,062 |
) |
|
|
(1,486 |
) |
Foreign currency translation |
|
|
3,965 |
|
|
|
4,248 |
|
|
|
|
|
|
|
|
Other comprehensive income for the year |
|
|
1,602 |
|
|
|
4,271 |
|
|
|
|
|
|
|
|
Total comprehensive income for the year |
|
$ |
242,659 |
|
|
$ |
253,358 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-6
COPA HOLDINGS, S. A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(In US$ thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
(Non-par value) |
|
|
Issued Capital |
|
|
Paid in |
|
|
Retained |
|
|
Comprehensive |
|
|
|
|
|
|
Notes |
|
Class A |
|
|
Class B |
|
|
Class A |
|
|
Class B |
|
|
Capital |
|
|
Earnings |
|
|
Income (Loss) |
|
|
Total |
|
At January 1, 2009 |
|
|
|
|
30,416,441 |
|
|
|
12,778,125 |
|
|
$ |
20,761 |
|
|
$ |
8,722 |
|
|
$ |
17,613 |
|
|
$ |
625,711 |
|
|
$ |
(3,463 |
) |
|
$ |
669,344 |
|
Issuance of stock |
|
|
|
|
150,412 |
|
|
|
|
|
|
|
103 |
|
|
|
|
|
|
|
(103 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
249,087 |
|
|
|
4,271 |
|
|
|
253,358 |
|
Restricted stock plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,686 |
|
|
|
|
|
|
|
|
|
|
|
4,686 |
|
Dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,255 |
) |
|
|
|
|
|
|
(16,255 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009 |
|
|
|
|
30,566,853 |
|
|
|
12,778,125 |
|
|
$ |
20,864 |
|
|
$ |
8,722 |
|
|
$ |
22,196 |
|
|
$ |
858,543 |
|
|
$ |
808 |
|
|
$ |
911,133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock |
|
|
|
|
2,092,704 |
|
|
|
(1,840,000 |
) |
|
|
1,427 |
|
|
|
(1,256 |
) |
|
|
(171 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
241,057 |
|
|
|
1,602 |
|
|
|
242,659 |
|
Restricted stock plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,085 |
|
|
|
|
|
|
|
|
|
|
|
4,085 |
|
Dividends declared |
|
24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(47,908 |
) |
|
|
|
|
|
|
(47,908 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010 |
|
|
|
|
32,659,557 |
|
|
|
10,938,125 |
|
|
$ |
22,291 |
|
|
$ |
7,466 |
|
|
$ |
26,110 |
|
|
$ |
1,051,692 |
|
|
$ |
2,410 |
|
|
$ |
1,109,969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-7
COPA HOLDINGS, S. A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In US$ thousands)
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
241,057 |
|
|
$ |
249,087 |
|
Adjustments for: |
|
|
|
|
|
|
|
|
Provision for income tax |
|
|
18,966 |
|
|
|
26,894 |
|
Interest cost |
|
|
29,981 |
|
|
|
32,938 |
|
Interest income |
|
|
(4,759 |
) |
|
|
(9,185 |
) |
Depreciation and amortization |
|
|
62,962 |
|
|
|
50,876 |
|
Gain on sale of property and equipment |
|
|
(20 |
) |
|
|
|
|
Special fleet charges |
|
|
|
|
|
|
8,923 |
|
Provision for impairment |
|
|
(540 |
) |
|
|
55 |
|
Allowance for obsolescence |
|
|
36 |
|
|
|
25 |
|
Derivative instruments mark to market |
|
|
(13,555 |
) |
|
|
(59,010 |
) |
Stock compensation |
|
|
4,032 |
|
|
|
4,686 |
|
Impairment to the brand name |
|
|
1,500 |
|
|
|
|
|
Currency translation adjustment |
|
|
62 |
|
|
|
|
|
Income tax paid |
|
|
(13,041 |
) |
|
|
(13,843 |
) |
Interest paid |
|
|
(26,249 |
) |
|
|
(32,076 |
) |
Interest received |
|
|
3,319 |
|
|
|
8,304 |
|
|
|
|
|
|
|
|
|
|
Changes in: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(10,208 |
) |
|
|
(4,280 |
) |
Accounts receivable from related parties |
|
|
4,064 |
|
|
|
524 |
|
Other current assets |
|
|
(32,448 |
) |
|
|
(12,997 |
) |
Restricted cash |
|
|
182 |
|
|
|
40,934 |
|
Other assets |
|
|
(9,197 |
) |
|
|
(23,002 |
) |
Accounts payable |
|
|
13,207 |
|
|
|
(3,666 |
) |
Accounts payable to related parties |
|
|
(1,832 |
) |
|
|
7,444 |
|
Air traffic liability |
|
|
27,106 |
|
|
|
1,039 |
|
Other liabilities |
|
|
(1,824 |
) |
|
|
17,629 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
292,801 |
|
|
|
291,299 |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
Acquisition of investments |
|
|
(340,268 |
) |
|
|
(217,905 |
) |
Proceeds from redemption of investments |
|
|
234,768 |
|
|
|
268,314 |
|
Advance payments on aircraft purchase contracts |
|
|
(157,292 |
) |
|
|
(151,676 |
) |
Acquisition of property and equipment |
|
|
(191,437 |
) |
|
|
(59,857 |
) |
Disposal of property and equipment |
|
|
8,797 |
|
|
|
810 |
|
|
|
|
|
|
|
|
Net cash flows used in investing activities |
|
|
(445,432 |
) |
|
|
(160,314 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
Proceeds from loans and borrowings |
|
|
282,072 |
|
|
|
103,780 |
|
Payments on loans and borrowings |
|
|
(138,697 |
) |
|
|
(175,374 |
) |
Paid-in capital |
|
|
53 |
|
|
|
|
|
Dividends declared and paid |
|
|
(47,908 |
) |
|
|
(16,255 |
) |
|
|
|
|
|
|
|
Net cash flows provided (used) in financing activities |
|
|
95,520 |
|
|
|
(87,849 |
) |
|
|
|
|
|
|
|
|
|
Effect of exchange rate change on cash |
|
|
2,145 |
|
|
|
(1,288 |
) |
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
|
|
(54,966 |
) |
|
|
41,848 |
|
Cash and cash equivalents at January 1st |
|
|
262,656 |
|
|
|
220,808 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at December 31 |
|
$ |
207,690 |
|
|
$ |
262,656 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-8
COPA HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010
(In US$ thousands)
1. 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 99.9% 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. (Copa Colombia).
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 166 daily scheduled flights among 46 destinations in 25 countries in North, Central
and South America and the Caribbean. Additionally, Copa Airlines provides passengers with access to
flights to more than 130 other international destinations through codeshare agreements with United
Continental and other airlines. The Company has a broad commercial alliance with United Continental
which includes joint marketing, code-sharing arrangements, participation in United Continentals
OnePass frequent flyer loyalty program and access to United Continentals VIP lounge program,
Presidents Club, along with other benefits such as improved purchasing power in negotiations with
service providers, aircraft vendors and insurers. In 2010, Copa Airlines was accepted to become a
future member of the Star Alliance. Copa Airlines passengers, who are members of the frequent
flyer program, can earn OnePass miles on all flights operated by Star Alliance partners as well as
are eligible to redeem their OnePass miles for free reward tickets on any of Star Alliances 1,292
global destinations.
Copa Colombia 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 seven (7) cities. During the
third quarter 2010, AeroRepública, S, A. began to operate under Copa Colombia brand.
OVAL is incorporated according to the laws of the British Virgin Islands, and controls the special
purpose entities that have a beneficial interest in 47 aircraft, all of which are leased to either
Copa Airlines or Copa Colombia.
As of December 31, 2010, the Company operates a fleet of 63 aircraft with an average age of 4.79
years; consisting of 37 modern Boeing 737-Next Generation aircraft and 26 Embraer 190 aircraft.
F-9
COPA HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010
(In US$ thousands)
1. Corporate Information (continued)
The Companys 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, Republic of 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.
The consolidated financial statements have been authorized by Management for issue on May 13,
2011.
2. Summary of Significant Accounting Policies
The principal accounting policies adopted by the Company for the preparation of these consolidated
financial statements are as follows:
2.1 Basis of Presentation
The Companys consolidated financial statements have been prepared in accordance with International
Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board
(IASB). These are the Company first consolidated financial statements prepared in accordance
with IFRS and IFRS 1 First-time Adoption of International Financial Reporting Standards (IFRS 1)
has been applied.
The consolidated financial statements have been prepared on a historical cost basis, except for
certain assets and liabilities, which are measured at fair value, as set out in each specific
accounting policy for such assets and liabilities. The consolidated financial statements are
presented in United States dollars and all values are rounded to the nearest thousand U.S.$000,
except when otherwise indicated.
The Company has applied all IFRS standards that are effective as of December 31, 2010, the end of
its first IFRS financial reporting period.
An explanation of how the transition to IFRSs has affected the reported financial position,
financial performance and cash flows of the Company is provided in note 3.
F-10
COPA HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010
(In US$ thousands)
Standards issued but not yet effective
Standards issued but not yet effective up to the date of issuance of the Companys financial
statements are listed below. This listing is of standards and interpretations issued, which the
Company reasonably expects to be applicable at a future date. The Company intends to adopt those
standards when they become effective.
|
|
IAS 24 Related Party Disclosures (Amendment) The amended standard is effective for
annual periods beginning on or after 1 January 2011. It clarified the definition of a related
party to simplify the identification of such relationships and to eliminate inconsistencies in
its application. The revised standard introduces a partial exemption of disclosure
requirements for government related entities. The Company does not expect any impact on its
financial position or performance. Early adoption is permitted for either the partial
exemption for government-related entities or for the entire standard. The Company has not
early adopted this standard. |
|
|
IAS 32 Financial Instruments: Presentation Classification of Rights Issues
(Amendment) The amendment to IAS 32 is effective for annual periods beginning on or after 1
February 2010 and amended the definition of a financial liability in order to classify rights
issues (and certain options or warrants) as equity instruments in cases where such rights are
given pro rata to all of the existing owners of the same class of an entitys non-derivative
equity instruments, or to acquire a fixed number of the entitys own equity instruments for a
fixed amount in any currency. This amendment will have no impact on the Company after initial
application. |
|
|
IFRS 9 Financial Instruments: Classification and Measurement IFRS 9 as issued reflects
the first two phases of the IASBs work on the replacement of IAS 39 and applies to
classification and measurement of financial assets and financial liabilities as defined in IAS
39. The standard is effective for annual periods beginning on or after 1 January 2013. In
subsequent phases, the IASB will address hedge accounting and derecognition. The completion of
this project is expected in early 2011. The adoption of the first two phases of IFRS 9 will
have an effect on the classification and measurement of the Companys financial assets and
financial liabilities. The Company will quantify the effect in conjunction with the other
phases, when issued, to present a comprehensive picture. |
|
|
IFRIC 14 Prepayment of a minimum funding requirement (Amendment) The amendment to IFRIC
14 is effective for annual periods beginning on or after 1 January 2011 with retrospective
application. The amendment provides guidance on assessing the recoverable amount of a net
pension asset. The amendment permits an entity to treat the prepayment of a minimum funding
requirement as an asset. The amendment is not expected to have a material impact on the
financial statements of the Company. |
F-11
COPA HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010
(In US$ thousands)
2.2 New and Amended Accounting Pronouncements and Interpretations (continued)
|
|
IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments IFRIC 19 is
effective for annual periods beginning on or after 1 July 2010. The interpretation clarifies
that equity instruments issued to a creditor to extinguish a financial liability qualify as
consideration paid. The equity instruments issued are measured at their fair value. In case
that this cannot be reliably measured, the instruments are measured at the fair value of the
liability extinguished. Any gain or loss is recognized immediately in profit or loss. The
adoption of this interpretation is not expected to have a material effect on the financial
statements of the Company. |
Improvements to IFRSs (issued in May 2010)
The IASB issued Improvements to IFRSs, an omnibus of amendments to its IFRS standards. The
amendments have not been adopted as they become effective for annual periods on or after either 1
July 2010 or 1 January 2011. The amendments listed below, are considered to have a reasonable
possible impact on the Company:
|
|
IFRS 3 Business Combinations |
|
|
|
IFRS 7 Financial Instruments: Disclosures |
|
|
|
IAS 1 Presentation of Financial Statements |
|
|
|
IAS 27 Consolidated and Separate Financial Statements |
|
|
|
IFRIC 13 Customer Loyalty Programmes |
2.3 Principles of Consolidation
These consolidated financial statements comprise the financial statements 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 obtained by the Company and continue to be consolidated until the date
when control ceases. All intercompany accounts, transactions and profits arising from consolidated
entities have been eliminated in consolidation.
2.4 Significant Accounting Judgments, Estimates and Assumptions
The preparation of the Companys financial statements requires management to make judgments,
estimates and assumptions that affect the reported amounts of revenues, expenses, assets and
liabilities, at the reporting date. Actual results could differ from those estimates. However,
uncertainty about these assumptions and estimates could result in outcomes that could require a
material adjustment to the carrying amount of the related asset or liability in the future.
a) Judgments
In the process of applying the Companys accounting policies, management has made judgment, apart
from those involving estimations. The judgments that have the most significant effect on the
amounts recognized in the consolidated financial statements are operating lease commitments.
F-12
COPA HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010
(In US$ thousands)
2.4 Significant Accounting Judgments, Estimates and Assumptions (continued)
The Company has entered into lease contracts on the aircraft it operates. The Company has
determined, based on the terms and conditions of the arrangements, that all the significant risks
and rewards of ownership of the aircraft it operates are not transferred, so it accounts for the
contracts as operating leases.
b) Estimates and Assumptions
The estimates and associated assumptions are based on historical experience and various other
factors believed to be reasonable under the circumstances. These underlying assumptions are
reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in
which the estimate is revised.
The Company believes that the tax positions taken are reasonable. However, various taxing
authorities may challenge the positions taken resulting in additional liabilities for taxes and
interest that may become payable in future years as a result of audits by the tax authorities. The
tax positions involve considerable judgment on the part of management and tax positions are
reviewed and adjusted to account for changes in circumstances, such as lapsing of applicable
statutes of limitations, conclusions of tax audits, additional exposures based on identification of
new issues or court decisions affecting a particular tax issue. Actual results could differ from
estimates.
The Company assesses whether there are any indicators of impairment for all non-financial assets at
each reporting date. Goodwill and indefinite-lived intangible assets are tested for impairment
annually and at other times when such indicators exist. The recoverable amounts of cash-generating
units have been determined based on value-in-use calculations. The value in use is determined using
discounted cash flow assumptions established by management.
The Companys management has determined that the residual value of the aircraft components owned is
15% of the cost of the asset, so the depreciation of flight equipment is made accordingly.
Annually, management reviews the useful life and salvage value of each of these assets.
2.5 Cash and Cash Equivalents
Cash and cash equivalents comprise cash at banks, money market accounts and time deposits with
original maturities of three months or less when purchased.
For the purpose of the consolidated statement of cash flows, cash and cash equivalents consist of
cash net of outstanding bank overdraft.
F-13
COPA HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010
(In US$ thousands)
2.6 Financial Instruments Initial recognition and subsequent measurement
Financial instruments within the scope of IAS 39 are classified as: (a) financial assets and
liabilities at fair value through profit or loss, (b) receivables, (c) held to maturity investments
or as (d) derivatives designated as hedging instruments in an effective hedge, as appropriate. The
Company determines the classification of its financial assets at initial recognition.
All financial assets and liabilities are recognized initially at fair value plus directly
attributable transaction costs, in the case of investments not at fair value through profit and loss.
Subsequent measurement of financial assets and liabilities depends on their classification.
The Companys financial assets include cash and short-term and long-term deposits, trade and other
receivables and derivative financial instruments.
a) Held to maturity investments
The Company invests in short-term time deposits 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 one year. These investments are classified as short and long-term
investments, respectively, in the accompanying consolidated statement of financial position. All of
these investments are classify as held-to-maturity securities and are subsequently measured at
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.
b) Receivable
Accounts receivable, which generally have 30 days terms, are recognized and carried at original
invoice amount less a provision for impairment which approximates fair value given their short
term nature.
The Company records its best estimate of provision for impairment of receivables, on the basis of
various factors, including: varying customer classifications, agreed upon credit terms, and the age
of the individual debt.
F-14
COPA HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010
(In US$ thousands)
2.7 Impairment
a) Impairment of Financial Assets
Company assesses at the end of each reporting period whether there is objective evidence that a
financial asset or group of financial assets is impaired. A financial asset or group of financial
assets are impaired and impairment losses are incurred only if there is objective evidence of
impairment as a result of one or more events that occurred after the initial recognition of the
asset (a loss event) and that loss event (or events) has an impact on the estimated future cash
flows of the financial asset or group of financial assets that can be reliably estimated.
The criteria that the Company uses to determine that there is objective evidence of an impairment
loss include: significant financial difficulty of the issuer or obligor; a breach of contract, such
as default or delinquency in interest or principal payments; it becomes probable that the borrower
will enter bankruptcy or other financial reorganization; and observable data indicating that there
is a measurable decrease in the estimated future cash flows.
b) Impairment of Financial Assets Carried at Amortized Cost
For financial assets carried at amortized cost, the Company first assesses whether objective
evidence of impairment exists individually for financial assets that are individually significant,
or collectively for financial assets that are not individually significant. If the Company
determines that no objective evidence of impairment exists for an individually assessed financial
asset, whether significant or not, it includes the asset in a group of financial assets with
similar credit risk characteristics and collectively assesses them for impairment. Assets that are
individually assessed for impairment and for which an impairment loss is, or continues to be,
recognized are not included in a collective assessment of impairment.
If there is objective evidence that an impairment loss on assets carried at amortized cost has been
incurred, the amount of the impairment loss is measured as the difference between the assets
carrying amount and the present value of estimated future cash flows (excluding future expected
credit losses that have not been incurred) discounted at the financial assets original effective
interest rate. The carrying amount of the asset is reduced and the loss is recorded in the
consolidated statement of income.
c) Impairment of Non-Financial Assets
The Company assesses at each reporting date whether there is an indication that a non-financial
asset may be impaired. If any such indication exists, or when annual impairment testing for an
asset is required, the Company estimates the assets recoverable amount. An assets recoverable
amount is the higher of an assets or cash-generating units fair value less costs to sell and its
value in use.
F-15
COPA HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010
(In US$ thousands)
c) Impairment of Non-Financial Assets (continued)
Impairment losses of continuing operations are recognized in the consolidated statement of income
in those expense categories consistent with the function of the impaired asset, except for a
property previously revalued where the revaluation was taken to other comprehensive income. In
this case, the impairment is also recognized in other comprehensive income up to the amount of any
previous revaluation.
For assets, excluding goodwill and intangible asset with indefinite lives, an assessment is made at
each reporting date as to whether there is any indication that previously recognized impairment
losses may no longer exists or may have decreased. If such indication exists, the Company makes an
estimate of recoverable amount. If that is the case, the carrying amount of the asset is increased
to its recoverable amount. That increase cannot exceed the carrying amount that would have been
determined, net of depreciation, had no impairment loss been recognized for the asset in prior
years. Such reversal is recognized in the consolidated statement of income unless the asset is
carried at the revalued amount, in which case the reversal is treated as an increase the
revaluation reserve.
d) Impairment testing of goodwill and intangibles with indefinite lives
Goodwill result from business combinations, have indefinite lives and have been allocated to each
of the Company ´s cash generating units that are expected to benefit from the business combination
in which the goodwill arose.
The Company performed its annual impairment testing as of December 31, 2010. The Company considers
the determination of the terminal value based on the present value of the Company ´s cash flows in
perpetuity (see discussion of key assumptions below). The recoverable amount has been determined
based on a value in use calculation using cash flow projections form financial budgets approved by
management covering a five-year period.
Key assumptions used in value in use calculations
The calculations of value in use for the impairment testing are most sensitive to the following
assumptions:
Discount rates The discount factors are based on the Companys Weighted Average Cost of Capital
(WACC), and are applied using the mid-year convention. Mid-year convention assumes that cash
flows are generated evenly throughout the year, as opposed to in a lump sum at the end of the year.
Long-Term Growth Rate was determined by considering industry research, including analyst reports,
and various government studies which are believed to be reliable. Additionally, management
considered perpetual growth rate fairly represented the long-term growth prospects of the business.
F-16
COPA HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010
(In US$ thousands)
d) Impairment testing of goodwill and intangibles with indefinite lives (continued)
Terminal Value Determination of the terminal value is based on the present value of the
Companys cash flows in perpetuity. When estimating the cash flow for use in the residual value
calculation, it is essential to clearly define the normalized cash flow level, the appropriate
discount rate for the degree of risk inherent in that return stream and a constant future growth
rate for the related cash flows. To estimate the value, we have used the Gordon Growth Model.
2.8 Derecognition
a) Derecognition of Financial Assets
A financial asset (or, where applicable a part of a financial asset or part of a group of similar
financial assets) is derecognized when:
|
|
|
The rights to receive cash flows from the asset have expired; |
|
|
|
Company has transferred its rights to receive cash flows from the asset and
either has transferred substantially all risks and rewards of the asset, or has neither
transferred nor retained substantially all the risks and rewards of the asset, but has
transferred control of the asset. |
|
|
|
Company retains the right to receive cash flows from the asset, but has assumed
an obligation to pay them in full without material delay to third party under a pass
through arrangement. |
When the Company has transferred its rights to receive cash flows from an asset or has entered into
a pass through arrangement, and has neither transferred nor retained substantially all of the risks
and rewards of the asset nor transferred control of the asset, the asset is recognized to the
extent of the Company ´s continuing involvement in the asset.
In that case, the Company also recognizes an associated liability. The transferred asset and the
associated liability are measured on a basis that reflects the rights and obligations that the
Company has retained.
Continuing involvement that takes the form of a guarantee over the transferred asset is measured at
the lower of the original carrying amount of the asset and the maximum amount of consideration that
the Company could be required to repay.
b) Derecognition of Financial Liabilities
Financial liabilities are derecognized when the obligation under the liability is discharged,
cancelled or expired. When a financial liability is replaced by another from the same lender on
substantially different terms, or the terms of an existing liability are substantially modified,
such an exchange or modification is treated as a derecognition of the original liability and the
recognition of a new liability, and the difference in the respective carrying amounts is recognized
in the consolidated statement of income.
F-17
COPA HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010
(In US$ thousands)
2.9 Expendable Parts and Supplies
Expendable parts and supplies for flight equipment are carried at the lower of the average
acquisition cost or net realizable value, and are expensed when used in operations. The net
realizable value is the estimated selling price in the normal course of business, less estimated
costs of completion and the estimated costs necessary to make the sale.
The amount of expendable parts and supplies recognized as an expense was $13.6 million in 2010 and
$12.2 million in 2009.
2.10 Property, plant and equipment
Property, plant and equipment comprise mainly airframe, engines and other related flight
equipments. All property, plant and equipment is shown at cost, less subsequent depreciation and
impairment, if any. Subsequent costs are included in the assets carrying amount or recognized as
a separate asset, as appropriate, only when it is probable that future economic benefits associated
with the item will flow to the Company and the cost of the item can be measured reliably. All
other repairs and maintenance expenditures are charged to the statement of income during the
financial period in which they are incurred.
Depreciation is calculated using the straight-line method to allocate the cost of each asset to its
residual value over its estimated useful life as follows:
|
|
|
|
|
|
|
Airframe and engines |
|
30 years |
|
|
Aircraft components |
|
30 years |
|
|
Ground equipment |
|
10 years |
|
|
Furniture, fixture, equipment and other |
|
5 to 10 years |
|
|
Major maintenance events |
|
1 to 8 years |
|
|
Leasehold improvements |
|
lesser of remaining lease term or useful life |
The assets residual values and useful lives are reviewed, and adjusted if appropriate, at each
statement of financial position date. An assets carrying amount is written down immediately to
its recoverable amount if the assets carrying amount is greater than its estimated recoverable
amount. The carrying value of equipment and leasehold improvements are reviewed for impairment
when events or changes in circumstances indicate that the carrying value may not be recoverable.
Gains and losses on disposals are determined by comparing the disposal proceeds with the carrying
amount and are included in the income statement.
F-18
COPA HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010
(In US$ thousands)
2.10 Property, plant and equipment (continued)
Borrowing costs incurred for the construction of any qualifying asset are capitalized during the
period of time that is required to complete and prepare the asset for its intended use. Other
borrowing costs are expensed.
Under IAS 16 Property, Plant and Equipment, major maintenance events, including major engine
overhauls, are treated as a separate asset component with the cost capitalized and depreciated over
the period to the next major event. All other replacement spares and costs relating to maintenance
of fleet assets are charged to the income statement on consumption or as incurred.
2.11 Goodwill
Goodwill is initially measured at cost being the excess of the aggregate of the consideration
transferred over the net identifiable assets acquired and liabilities assumed of the acquired
subsidiary at the date of acquisition.
After initial recognition, goodwill is measured at cost less any accumulated impairment losses.
2.12 Intangible assets
Intangible assets acquired separately are measured on initial recognition at cost. The cost of
intangible assets acquired in a business combination is its fair value at the date of acquisition.
Following initial recognition, intangible assets are carried at cost less any accumulated
amortization and accumulated impairment losses, if any. Internally generated intangible assets,
excluding capitalized development costs, are not capitalized and the expenditure is reflected in
the statement of income in the year in which the expenditure is incurred.
Useful live of intangible assets are assessed as either finite or indefinite.
F-19
COPA HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010
(In US$ thousands)
2.12 Intangible assets (continued)
Intangible assets with finite lives are amortized over the useful economic life and assessed for
impairment whenever there is an indication that the intangible asset may be impaired. The
amortization period and method for an intangible asset with a finite useful life is reviewed at
least at the end of each reporting period. Changes in the expected useful life or the expected
pattern of consumption of future economic benefits embodied in the asset is accounted for by
changing the amortization period or method, as appropriate, and are treated as changes in
accounting estimates. The amortization expense on intangible assets with finite lives is recognized
in the statement of income.
Intangible assets with indefinite useful lives are not amortized, but are tested for impairment
annually, either individually or at the cash-generating unit level. The assessment of indefinite
life is reviewed annually to determine whether the indefinite life continues to be supportable. If
not, the change in useful life from indefinite to finite is made on a prospective basis.
Gain and losses arising from the derecognition of an intangible asset are measured as the
difference between the net disposal proceeds and the carrying amount of the asset and are
recognized in the consolidated statement of income when the asset is derecognized.
A summary of the Company ´s intangible assets and the policies applied is:
a) Computer Software
Acquired computer software licenses are capitalized on the basis of the costs incurred to acquire
and bring to use the specific software. These costs are amortized using the straight-line method
over their estimated useful lives (three to eight years).
Costs associated with developing or maintaining computer software programs are recognized as an
expense as incurred. Costs that are directly associated with the production of identifiable and
unique software products controlled by the Company, and that are estimated to generate economic
benefits exceeding costs beyond one year, are recognized as intangible assets. Direct costs include
the software development employee costs and an appropriate portion of relevant overheads.
Computer software development costs recognized as assets are amortized using the straight-line
method over their estimated useful lives.
Licenses and software rights acquired by the Company have finite useful lives and are amortized on
a straight-line basis over the term of the contract and the amortization is recognized in the
consolidated statement of income.
F-20
COPA HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010
(In US$ thousands)
b) Brand name and routes
Brand name and routes have an indefinite useful life and are carried at cost, less any accumulated
impairment. Annually they are tested for impairment.
During the third quarter 2010, AeroRepública began to operate under Copa Colombia brand, causing a
change in managements assumption from indefinite live to 5 years for the AeroRepúblicas brand
name. Based on the change of the commercial name, an impairment loss has been recognized for $1.5
million during 2010. The remaining balance of this intangible asset will be amortized over the 5
years.
2.13 Maintenance Deposit
Under lease agreement with aircraft lessors, Copa pays maintenance deposits, for two aircrafts, to
lessors to be applied to future maintenance event costs, calculated based on a performance measure,
such as flight hours, and are specifically to be used to reimburse 3rd-party maintenance providers.
If amounts on deposit are insufficient, Copa must cover the shortfall since Copa is legally
responsible for maintaining the leased aircraft. If there are excess amounts on deposit at
expiration of the lease, the lessor is entitled to retain any excess amounts. Maintenance deposits
paid under lease agreements do not transfer either the obligation to maintain the aircraft or cost
risk associated with maintenance activities to lessors.
The Company also makes payments for engine overhauls under power by the hour agreements (PBH).
Payments related to engine overhauls under PBH agreements as well as the maintenance deposits under
aircraft leases are capitalized as prepaid assets until the maintenance event occurs and are then
amortized over the expected period until the next event. Management performs regular
reviews of the recovery of maintenance deposits and believes that the values reflected in the
consolidated statement of financial position are recoverable.
2.14 Loans Payable
All borrowings and loans are initially recognized at fair value less any directly attributable
transaction costs. Subsequent to initial recognition, these liabilities are measured at amortized
cost using the effective interest rate method.
Gain and losses are recognized in the consolidated statement of income when the liabilities are
derecognized as well as through the amortization process.
F-21
COPA HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010
(In US$ thousands)
2.15 Other Financial Liabilities
Other financial liabilities are initially recognized at fair value, including directly attributable
transaction costs. Subsequent to initial recognition, they are measured at amortized cost using
the effective interest rate method.
Gain and losses are recognized in the consolidated statement of income when the liabilities are
derecognized as well as through the amortization process.
2.16 Provisions
For certain operating leases, the Company is contractually obliged to return aircraft in a defined
condition. The Company accrues for restitution costs related to aircraft held under operating
leases at the time the asset does not meet the return conditions criteria and throughout the
remaining duration of the lease. Provisions for costs, including restitution, restructuring and
legal claims and assessments are recognized when:
|
|
The Company has a present legal or constructive obligation as a result of past events; |
|
|
|
It is more likely than not that an outflow of resources will be required to settle the obligation; and |
The amount has been reliably estimated.
2.17 Revenue Recognition
Revenue is recognized to the extent that it is probable that the economic benefits will flow to the
Company and the revenue can be reliably measured, regardless of when the payment is being made.
Revenue is measured at the fair value of the consideration received or receivable, taking into
account contractually defined terms of payment and excluding taxes or duty. The following specific
recognition criteria must also be met before revenue is recognized:
a) Passenger Revenue
Passenger revenue is recognized when transportation is provided rather than when a ticket is sold.
The amount of passenger ticket sales but not yet recognized as revenue is reflected as Air traffic
liability in the consolidated statement of financial position. Fares for tickets that expire
unused are recognized as revenue based on historical data and experience. The Company performs
periodic evaluations of this liability, and any adjustments resulting therefrom, which can be
significant, are included in operations for the periods in which the evaluations are completed.
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-22
COPA HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010
(In US$ thousands)
a) |
|
Passenger Revenue (continued) |
The Company is required to charge certain taxes and fees on its passenger tickets. These taxes and
fees include transportation taxes, airport passenger facility charges and arrival and departure
taxes. These taxes and fees are legal assessments on the customer. As the Company has 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. The Company records a liability when the amounts are collected
and relieve the liability when payments are made to the applicable government agency or operating
carrier.
b) Cargo and Courier Services
Cargo and courier services are recognized when the Company provides the shipping services and
thereby completes the earning process.
c) 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.
d) Frequent Flyer Program
The Company participates in United Continentals OnePass frequent flyer program, for which the
Companys passengers receive all the benefits and privileges offered by the OnePass program.
United Continental is responsible for the administration of the OnePass program. Under the terms
of the Companys frequent flyer agreement with United Continental, OnePass members receive OnePass
frequent flyer mileage credits for travel on the Company, and the Company pays United Continental a
per mile rate for each mileage credit granted by United Continental, at which point the Company has
no further obligation. The amounts due to United Continental under this agreement are expensed by
the Company as the mileage credits are earned.
2.18 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 statement of financial
position.
F-23
COPA HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010
(In US$ thousands)
2.19 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 in the
exchange rate difference line in the consolidated statements of income for the year.
The financial statements of AeroRepública (Copa Colombia) are measured using the Colombian Peso as
the functional currency and are translated to U.S. Dollars as follows: for assets and liabilities
at the exchange rate prevailing at the reporting date and for income statement at average exchange
rate for each month. Exchange differences arising on the translation are recognized in other
comprehensive income (loss).
Any goodwill arising on the acquisition of a foreign operation is treated as asset of the foreign
operation and translated at the closing exchange rate.
2.20 Leases
Leases where lessor effectively retains substantially all the risks and benefits of ownership of
the leased item, are classified as operating leases. Operating lease payments are recognized as an
expense in the consolidated statement of income on a straight-line basis over the lease term.
The determination of whether an arrangement is, or contains a lease is based on the substance of
the arrangement at inception date of whether the fulfillment of the agreement is dependent on the
use of a specific asset or assets or the arrangement conveys a right to use the asset, even if that
right is not explicitly specified in an arrangement. A reassessment is made after inception of the
lease only if one of the following applies:
|
|
|
There is a change in contractual terms, other than a renewal or extension of
the arrangement; |
|
|
|
A renewal option is exercised or extension granted, unless the term of the
renewal or extension was initially included in the lease term; |
|
|
|
There is a change in the determination of whether fulfillment is dependent on a
specified asset; or |
|
|
|
There is a substantial change to the asset. |
Where a reassessment is made, lease accounting shall commence or cease from the date when the
change in circumstances gave rise to the reassessment. When a renewal option is exercised or
extension granted, lease accounting shall commence or cease at the date of renewal or extension
period.
F-24
COPA HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010
(In US$ thousands)
2.21 Taxes
a) Current Income Tax
The current income tax is calculated on the basis of the tax laws enacted or substantially enacted
at the reporting date. Income tax for the current period and for prior periods is recognized by
the Company as a liability to the extent that it has not been settled. If the amount already paid
in respect of the current period and of prior periods, exceeds the amount due for those periods,
the excess is recognized as an asset.
b) Deferred tax
Deferred tax is provided using the liability method on temporary differences at the reporting date
between the tax bases of assets and liabilities and their carrying amounts for financial reporting
purposes. Deferred tax liabilities are recognized for all taxable temporary differences, except:
|
|
Where the deferred tax liability arises from the initial recognition of goodwill or of
an asset or liability in a transaction that is not a business combination and, at the time of
the transaction, affects neither the accounting profit nor taxable profit or loss. |
|
|
In respect of taxable temporary differences associated with investments in
subsidiaries, associates and interests in joint ventures, where the timing of the reversal of
the temporary differences can be controlled and it is probable that the temporary differences
will not reverse in the foreseeable future. |
Deferred tax assets are recognized for all deductible temporary differences, carry forward of
unused tax credits and unused tax losses, to the extent that it is probable that taxable profit
will be available against which the deductible temporary differences, and the carry forward of
unused tax credits and unused tax losses can be utilized, except:
|
|
Where deferred tax asset relating to the deductible temporary difference arises from
initial recognition of an asset or liability in a transaction that is not a business
combination and, at the time of the transaction, affects neither the accounting profit nor
taxable profit or loss. |
|
|
In respect of deductible temporary differences associated with investments in
subsidiaries, associates and interests in joint ventures, deferred tax assets are recognized
only to the extent that it is probable that the temporary differences will reverse in the
foreseeable future and taxable profit will be available against which the temporary
differences can be utilized. |
The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the
extent that it is no longer probable that sufficient taxable profit will be available to allow all
or part of the deferred tax asset to be utilized. Unrecognized deferred tax assets are reassessed
at each reporting date and are recognized to the extent that it has become probable that future
taxable profits will allow the deferred tax asset to be recovered.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the
year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that
have been enacted or substantively enacted at the reporting date.
F-25
COPA HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010
(In US$ thousands)
2.21 Taxes (continued)
Deferred tax relating to items recognized outside profit or loss is recognized outside profit or
loss. Deferred tax items are recognized in correlation to the underlying transaction either in
other comprehensive income or directly in equity.
Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists
to set off current tax assets against current income tax liabilities and the deferred taxes relate
to the same taxable entity and the same taxation authority.
Tax benefits acquired as part of a business combination, but not satisfying the criteria for
separate recognition at that date, would be recognized subsequently if new information about facts
and circumstances changed. The adjustment would either be treated as a reduction to goodwill (as
long as it does not exceed goodwill) if it incurred during the measurement period or in profit or
loss.
2.22 Derivative financial instruments and hedging activities
Derivatives instruments are initially recognized at fair value on the date on which a derivative
contract is entered into and are subsequently re-measured at their fair value. Derivatives are
carried as financial assets when the fair value is positive and as financial liabilities when the
fair value is negative. The method for recognizing the resulting gain or loss depends on whether
the derivative is designated as a hedging instrument, and if so, the nature of the item being
hedged. The Company designates certain derivatives as cash flow hedges.
The Company documents at the inception of the transaction the relationship between hedging
instruments and hedged items, as well as its risk management objectives and strategy for
undertaking various hedging transactions.
The Company also documents its assessment both at hedge inception and on an ongoing basis, of
whether the derivatives that are used in hedging transactions are highly effective in offsetting
changes in fair values or cash flows of hedged items.
The fair values of various derivative instruments used for hedging purposes and movements on the
hedging reserve in shareholders equity are shown in note 16.
Any gain or loss on the hedging instrument relating to the effective portion of the hedge is
recognized in the consolidated statement of comprehensive income. The gain or loss relating to the
ineffective portion is recognized immediately in the consolidated statement of income.
2.23 Monetary unit
The consolidated financial statements are presented in U.S. Dollar, the legal tender of the
Republic of Panama. The Republic of Panama does not issue its own paper currency, instead, the
U.S. Dollar (US$) is used as legal currency.
F-26
COPA HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010
(In US$ thousands)
3. Application of IFRS 1
These consolidated financial statements related to the period ended December 31, 2010 are the
Companys first consolidated financial statements prepared in accordance with International
Financial Reporting Standards (IFRS). The Company has applied the provisions of IFRS 1 in
preparing its consolidated financial statements.
The Companys transition date is January 1, 2009, for which it has prepared its opening
consolidated statement of financial position under IFRS at that date.
In accordance with IFRS 1, all the mandatory exceptions and some of the optional exemptions from
retrospective application have been used in the preparation of these consolidated financial
statements. The most significant changes from its previous financial statements prepared in
accordance with accounting standards generally accepted in the United States (US GAAP) relate to
the following:
(a) Maintenance
Under US GAAP, maintenance events were expensed as incurred. Under IFRS, major maintenance of the
whole fleet is capitalized when it occurs and amortized until next event.
(b) Engine Overhaul under power by the hour agreements
Under US GAAP, payments related to engine overhauls under power by the hour agreements were
recorded as expenses when paid. Under IFRS, these payments are capitalized and recorded as prepaid
asset until the event occurs and then amortized until the next event.
(c) Leased Aircraft Return Conditions
Under US GAAP, return conditions were expensed upon return of the aircraft. Under IFRS, expenses
related to complying with return conditions are being accrued over the life of the lease.
(d) Stock Compensation
Under US GAAP, the straight-line attribution method was used to recognize the compensation cost for
awards with graded vesting periods. Under IFRS, only one method is used to book the compensation
cost for awards that vest in installments (graded vesting method).
F-27
COPA HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010
(In US$ thousands)
3. Application of IFRS 1 (continued)
(e) Revenue Recognition
Under US GAAP, for tourist package revenue was recognized only for the fare portion and a liability
was booked for the hotel and land portion. Under IFRS, the Company is recognizing the entire value
of the package as revenue and the hotel and land portion are recorded as a related cost. In
addition, under USGAAP, the Company recognized the revenue when unused ticket expires and / or are
more than one year old. Under IFRS, fares for tickets that expire unused are recognized as revenue
based on historical data and experience.
(f) Seniority Plan and Indemnity Plan
The Company has chosen to recognize all actuarial gains and losses accumulated at January 1, 2009.
IAS 19 specifies that a terminal accounting method must be used for Termination Indemnity Plan.
Under this method, only the obligation for those with benefits in pay status is reflected. Since
only lump sums are paid for the plan, the plan has no obligation for future benefits in pay status
once the lump sums are paid out and therefore the obligation is zero for accounting purposes. At
transition, this reduction in obligation produces a credit to beginning Retained Earnings for the
Indemnity Plan of $1.6 million.
(g) Deferred Tax
On the other hand, all the differences between US GAAP and IFRS transition that were booked, either
in retained earnings or in other comprehensive income, were subjected to the calculation and
booking of the corresponding deferred tax.
The reconciliations set out below show the quantification of the impact of the transition to IFRS
on the Company:
F-28
COPA HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010
(In US$ thousands)
3. Application of IFRS 1 (continued)
3.1.1 Reconciliation of net equity as of December 31, 2009
|
|
|
|
|
US GAAP |
|
$ |
865,628 |
|
|
|
|
|
|
|
|
|
|
Passenger revenue |
|
|
13,464 |
|
Stock compensation |
|
|
(3,539 |
) |
Additional paid in capital |
|
|
3,539 |
|
Pension |
|
|
1,711 |
|
Passenger servicing |
|
|
(14,382 |
) |
Maintenance events |
|
|
15,122 |
|
Overhaul repair |
|
|
54,345 |
|
Return conditions |
|
|
(11,576 |
) |
Depreciation |
|
|
(5,709 |
) |
Provision for income taxes |
|
|
(7,929 |
) |
Other |
|
|
459 |
|
|
|
|
|
Effect of transition to IFRS |
|
|
45,505 |
|
|
|
|
|
Net equity according to IFRS |
|
$ |
911,133 |
|
|
|
|
|
3.1.2 Reconciliation of net equity as of January 1, 2009
|
|
|
|
|
US GAAP |
|
$ |
632,432 |
|
|
|
|
|
|
|
|
|
|
Passenger revenue |
|
|
1,000 |
|
Stock compensation |
|
|
(4,132 |
) |
Additional paid in capital |
|
|
4,132 |
|
Pension |
|
|
1,477 |
|
Maintenance Events |
|
|
5,508 |
|
Overhaul repair |
|
|
40,280 |
|
Return conditions |
|
|
(8,911 |
) |
Depreciation |
|
|
(1,797 |
) |
Provision for income taxes |
|
|
(645 |
) |
Effect of transition to IFRS |
|
|
36,912 |
|
|
|
|
|
Net equity according to IFRS |
|
$ |
669,344 |
|
|
|
|
|
F-29
COPA HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010
(In US$ thousands)
3. Application of IFRS 1 (continued)
3.1.3 Reconciliation of comprehensive income for the period ended December 31, 2009
|
|
|
|
|
US GAAP-Net income |
|
$ |
240,359 |
|
|
|
|
|
|
|
|
|
|
Passenger revenue |
|
|
12,462 |
|
Stock compensation |
|
|
594 |
|
Pension |
|
|
235 |
|
Passenger servicing |
|
|
(14,382 |
) |
Maintenance Events |
|
|
9,614 |
|
Overhaul repair |
|
|
14,065 |
|
Return conditions |
|
|
(2,665 |
) |
Depreciation |
|
|
(3,912 |
) |
Provision for income taxes |
|
|
(7,283 |
) |
|
|
|
|
Effect of transition to IFRS |
|
|
8,728 |
|
|
|
|
|
Net income according to IFRS |
|
|
249,087 |
|
Comprehensive income according to US GAAP |
|
|
4,271 |
|
|
|
|
|
Comprehensive income according to IFRS |
|
$ |
253,358 |
|
|
|
|
|
4. Cash and Cash Equivalents
Cash and cash equivalents as of December 31, 2010, December 31, 2009 and January 1, 2009, are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
As of |
|
|
|
December 31, |
|
|
December 31, |
|
|
January 1, |
|
|
|
2010 |
|
|
2009 |
|
|
2009 |
|
Checking and saving accounts |
|
$ |
89,889 |
|
|
$ |
49,345 |
|
|
$ |
74,530 |
|
Time deposits of no more
than ninety days |
|
|
91,958 |
|
|
|
174,310 |
|
|
|
111,940 |
|
Overnight deposits |
|
|
17,097 |
|
|
|
18,271 |
|
|
|
16,972 |
|
Others |
|
|
8,746 |
|
|
|
20,730 |
|
|
|
17,366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
207,690 |
|
|
$ |
262,656 |
|
|
$ |
220,808 |
|
|
|
|
|
|
|
|
|
|
|
Time deposits earn interest based on rates determined by the banks in which the instruments are
held. The use of the time deposits depends on the cash requirements of the Company and bear
interest rates ranging between 0.20% and 4.00% as of December 31, 2010 and 2009.
As of December 31, 2010 and 2009 there were no restrictions for the use of cash and cash
equivalents.
F-30
COPA HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010
(In US$ thousands)
5. Investments
Investments as of December 31, 2010, December 31, 2009 and January 1, 2009, consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
As of |
|
|
|
December 31, |
|
|
December 31, |
|
|
January 1, |
|
|
|
2010 |
|
|
2009 |
|
|
2009 |
|
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits between 90
and 365 days |
|
$ |
194,913 |
|
|
$ |
89,412 |
|
|
$ |
176,018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
194,913 |
|
|
$ |
89,412 |
|
|
$ |
176,018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits of more than
365 days |
|
$ |
|
|
|
$ |
|
|
|
$ |
3,500 |
|
Restricted cash |
|
|
6,224 |
|
|
|
6,407 |
|
|
|
7,645 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,224 |
|
|
$ |
6,407 |
|
|
$ |
11,145 |
|
|
|
|
|
|
|
|
|
|
|
6. Accounts Receivable
Accounts receivable as of December 31, 2010, December 31, 2009 and January 1, 2009, are summarized
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
As of |
|
|
|
December 31, |
|
|
December 31, |
|
|
January 1, |
|
|
|
2010 |
|
|
2009 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Travel agencies and airlines
clearing house |
|
$ |
29,900 |
|
|
$ |
39,894 |
|
|
$ |
41,711 |
|
Credit cards |
|
|
32,248 |
|
|
|
19,966 |
|
|
|
13,043 |
|
Cargo and other travel agencies |
|
|
13,540 |
|
|
|
7,876 |
|
|
|
8,289 |
|
Mail |
|
|
2,035 |
|
|
|
2,019 |
|
|
|
1,738 |
|
Other |
|
|
15,241 |
|
|
|
11,367 |
|
|
|
10,613 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92,964 |
|
|
|
81,122 |
|
|
|
75,394 |
|
Provision for impairment |
|
|
(4,190 |
) |
|
|
(4,730 |
) |
|
|
(4,785 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
88,774 |
|
|
$ |
76,392 |
|
|
$ |
70,609 |
|
|
|
|
|
|
|
|
|
|