424b1
Filed pursuant to Rule 424(B)(1)
Registration
No. 333-135031
PROSPECTUS
6,562,500 Shares
Copa Holdings, S.A.
CLASS A COMMON
STOCK
The selling shareholder identified in this prospectus is
offering 6,562,500 shares of Class A common stock to
be sold in this offering.
The Class A shares are listed on the New York Stock
Exchange, or NYSE, under the symbol CPA. On
June 28, 2006, the reported last sale price of the
Class A shares was $22.03 per share on the NYSE.
Investing in the companys Class A shares involves
risks. See Risk Factors beginning on
page 13.
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Underwriting
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Discounts and
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Proceeds to Selling
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Price to Public
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Commissions
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Shareholder
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Per share
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$21.75
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$1.03
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$20.72
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Total
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$142,734,375
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$6,779,719
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$135,954,656
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Copa Holdings, S.A. will not receive any proceeds from the sale
by the selling shareholder of Class A common stock in this
offering.
The selling shareholder has granted the underwriters the right
to purchase up to an additional 984,375 shares of
Class A common stock to cover any over-allotments.
Neither the Securities and Exchange Commission nor any other
regulatory body has approved or disapproved these securities or
passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
The underwriters expect to deliver the shares of Class A
common stock to purchasers on July 5, 2006.
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Morgan
Stanley |
Merrill
Lynch & Co. |
Goldman, Sachs &
Co.
June 28, 2006
TABLE OF
CONTENTS
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Page
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ii
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iii
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iii
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1
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13
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F-1
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You should rely only on the information contained in this
prospectus. Neither we nor the selling shareholder have, and the
underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with
different or inconsistent information, you should not rely on
it. Neither we nor the selling shareholder are, and the
underwriters are not, making an offer to sell these securities
in any jurisdiction where the offer or sale is not permitted.
This document may only be used where it is legal to sell these
securities. You should assume that the information appearing in
this prospectus is accurate only as of the date on the front
cover of this prospectus, regardless of when this prospectus is
delivered or when any sale of the Class A shares occurs.
Our business, financial condition, results of operations and
prospects may have changed since that date.
In this prospectus, we use the term Copa Holdings to
refer to Copa Holdings, S.A., Copa or Copa
Airlines to refer to Compañía Panameña de
Aviación, S.A., a subsidiary of Copa Holdings, S.A., and
AeroRepública to refer to AeroRepública,
S.A., a subsidiary of Copa Holdings, S.A. The terms
we, us and our refer to Copa
Holdings, S.A. together with its subsidiaries, except where the
context requires otherwise. References to Class A
shares refer to Class A shares of Copa Holdings, S.A.
This prospectus 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.
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MARKET
DATA
This prospectus 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.
PRESENTATION
OF FINANCIAL AND STATISTICAL DATA
Included elsewhere in this prospectus are our audited
consolidated balance sheets at December 31, 2004 and 2005
and the audited consolidated statements of income, changes in
shareholders equity and cash flows for the years ended
December 31, 2003, 2004 and 2005. Also included herein are
our unaudited consolidated interim financial statements as of
and for the three-month periods ended March 31, 2005 and
2006. The consolidated financial information as of
December 31, 2003 and for the year ended December 31,
2002 has been derived from our audited consolidated financial
statements that were prepared in accordance with accounting
principles generally accepted in the United States, or
U.S. GAAP and which have not been included in this
prospectus. The consolidated financial information as of
December 31, 2001 and 2002 and for the year ended
December 31, 2001 has been derived from our audited
consolidated financial statements that were prepared under
International Financial Reporting Standards and adjusted to be
presented on a basis consistent with U.S. GAAP and which
have not been included in this prospectus.
Our audited and unaudited consolidated financial statements have
been prepared in accordance with U.S. GAAP and are stated
in U.S. dollars. We began consolidating the results of our
AeroRepública operating subsidiary as of its acquisition
date on April 22, 2005. Unless otherwise indicated, all
references in the prospectus to $ or
dollars refer to U.S. dollars, and all
references to Pesos or Ps. refer to
Colombian pesos, the local currency of Colombia.
Unless otherwise indicated, all information contained in this
prospectus assumes no exercise of the underwriters option
to purchase up to 984,375 additional shares of Class A
common stock to cover over-allotments.
Certain figures included in this prospectus 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.
ii
ENFORCEABILITY
OF CIVIL LIABILITIES
Copa Holdings is a corporation (sociedad anónima)
organized under the laws of the Republic of Panama. Most of our
directors and officers and certain of the experts named in this
prospectus reside outside of the United States, and all or a
substantial portion of the assets of such persons and ours are
located outside the United States. As a result, it may not be
possible for investors to effect service of process within the
United States upon such persons, including with respect to
matters arising under the Securities Act of 1933, as amended
(the Securities Act), or to effect the due process
necessary to enforce judgments of courts of the United States
against us or any of our directors and officers. We have been
advised by our Panamanian legal counsel, Galindo,
Arias & Lopez, that there is doubt as to the
enforceability, in original actions in Panamanian courts, of
liabilities predicated solely on the United States federal
securities laws. Any judgment rendered by a U.S. court may
be enforced in Panama through a suit on the judgment
(exequatur), would be recognized and accepted by the
courts of Panama and would be enforceable by the courts of
Panama without a new trial or examination of the merits of the
original action, provided due process had been granted to all
parties and that the obligation the judgment is seeking to
enforce is not illegal or against public policy in Panama.
SPECIAL
NOTE ABOUT FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements, principally
under the captions Summary, Risk
Factors, Managements Discussion and Analysis
of Financial Condition and Results of Operations,
The Industry and Business. 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 prospectus, could
cause our actual results to differ substantially from those
anticipated in our forward-looking statements, including, among
other things:
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general economic, political and business conditions in Panama
and Latin America and particularly in the geographic markets we
serve;
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our managements expectations and estimates concerning our
future financial performance and financing plans and programs;
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our level of debt and other fixed obligations;
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demand for passenger and cargo air service in the markets in
which we operate;
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competitive pressures on pricing;
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our capital expenditure plans;
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changes in the regulatory environment in which we operate;
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changes in labor costs, maintenance costs, fuel costs and
insurance premiums;
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changes in market prices, customer demand and preferences and
competitive conditions;
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cyclical and seasonal fluctuations in our operating results;
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defects or mechanical problems with our aircraft;
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our ability to successfully implement our growth strategy;
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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 13.
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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 we distribute this prospectus 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 prospectus 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 prospectus.
iv
SUMMARY
This summary highlights selected information about us and the
Class A shares being offered by the selling shareholder. It
may not contain all of the information that may be important to
you. Before investing in the Class A shares, you should
read this entire prospectus carefully for a more complete
understanding of our business and this offering, including our
audited and unaudited financial statements and the related notes
and the sections entitled Risk Factors and
Managements Discussion and Analysis of Financial
Condition and Results of Operations.
Overview
We are a leading Latin American provider of airline passenger
and cargo service through our two principal operating
subsidiaries, Copa and AeroRepública. Copa operates from
its strategically located position in the Republic of Panama,
and AeroRepública provides service primarily within
Colombia. Our fleet currently consists of 22
Boeing 737-Next Generation aircraft, two Embraer 190
aircraft, 11
MD-80
aircraft and two
DC-9
aircraft (one of which is currently retired). We currently have
firm orders for eight Boeing 737-Next Generation and
18 Embraer 190s and purchase rights and options for up
to nine additional Boeing 737-Next Generation and 35
additional Embraer 190s.
Copa was established in 1947 and currently offers approximately
92 daily scheduled flights among 30 destinations in 20 countries
in North, Central and South America and the Caribbean from its
Panama City hub. Copa provides passengers with access to flights
to more than 120 other destinations through codeshare
arrangements with Continental Airlines Inc., or
Continental, pursuant to which each airline places its name and
flight designation code on the others flights. Through its
Panama City hub, Copa is able to consolidate passenger traffic
from multiple points to serve each destination effectively.
Copa operates a modern fleet of 22 Boeing 737-Next
Generation aircraft and two Embraer 190 aircraft with an average
age of approximately 3.6 years as of May 31, 2006. To
meet its growing capacity requirements, Copa has firm
commitments to accept delivery of 21 additional aircraft through
2009 and has purchase rights and options that, if exercised,
would allow it to accept delivery of up to 24 additional
aircraft through 2009. Copas firm orders are for eight
additional Boeing 737-Next Generation aircraft and 13
additional Embraer 190s, and its purchase rights and options are
for up to nine Boeing 737-Next Generation aircraft and up
to 15 Embraer 190s.
Copa started its strategic alliance with Continental in 1998.
Since then, it has conducted joint marketing and code-sharing
arrangements, and participated in the award-winning OnePass
frequent flyer loyalty program globally and on a co-branded
basis in Latin America. We believe that Copas co-branding
and joint marketing activities with Continental have enhanced
its brand in Latin America, and that the relationship with
Continental has afforded it cost-related benefits, such as
improving purchasing power in negotiations with aircraft vendors
and insurers. Copas alliance and related services
agreements with Continental are in effect until 2015.
During the second quarter of 2005, we purchased
AeroRepública, a Colombian air carrier that was the
second-largest domestic carrier in Colombia in terms of number
of passengers carried in 2005, providing predominantly
point-to-point
service among 12 cities in Colombia and to Copas
Panama City hub. AeroRepública currently operates a fleet
of eleven leased MD-80s and two owned DC-9s (one of which is
currently retired). As part of its fleet modernization and
expansion plan, AeroRepública has firm commitments to
accept delivery of five Embraer 190 aircraft through 2007
and purchase rights and options to purchase up to 20 additional
Embraer 190 aircraft through 2011.
Since January 2001, we have grown significantly and have
established a track record of consistent profitability,
recording five consecutive years of increasing earnings. Our
total operating revenues have increased from $290.4 million
in 2001 to $608.6 million in 2005, while our net income has
increased from $14.8 million to $83.0 million over the
same period. Our operating margins also improved from 8.6% in
2001 to 17.9% in 2005.
1
Our
Strengths
We believe our primary business strengths that have allowed us
to compete successfully in the airline industry include the
following:
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Our Hub of the Americas airport is strategically
located. We believe that Copas base of
operations at the geographically central location of Tocumen
International Airport in Panama City, Panama provides convenient
connections to our principal markets in North, Central and South
America and the Caribbean, enabling us to consolidate traffic to
serve several destinations that do not generate enough demand to
justify
point-to-point
service. Flights from Panama operate with few service
disruptions due to weather, contributing to high completion
factors and on-time performance. Tocumen International
Airports sea-level altitude allows our aircraft to operate
without performance restrictions that they would be subject to
at higher-altitude airports. We believe that Copas hub in
Panama allows us to benefit from Panama Citys status as a
center for financial services, shipping and commerce and from
Panamas stable, dollar-based economy, free-trade zone and
growing tourism industry.
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We focus on keeping our operating costs
low. In recent years, our low operating costs and
efficiency have contributed significantly to our profitability.
Our operating cost per available seat mile was 8.72 cents
in 2004 and 9.30 cents in 2005. Our operating cost per
available seat mile excluding costs for fuel and fleet
impairment charges was 7.50 cents in 2001, 7.59 cents in 2002,
7.17 cents in 2003, 7.01 cents in 2004, 6.52 cents in 2005 and
6.37 cents for the three months ended March 31, 2006. See
Managements Discussion and Analysis of Financial
Condition and Results of OperationsResults of
Operations for a reconciliation of our operating cost per
available seat mile when excluding costs for fuel and fleet
impairment charges to our operating cost per available seat
mile. We believe that our cost per available seat mile reflects
our modern fleet, efficient operations and the competitive cost
of labor in Panama.
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Copa operates a modern fleet. Copa completed
the replacement of all of its Boeing 737-200 aircraft in
the first quarter of 2005 with Boeing 737-Next Generation
aircraft equipped with winglets and other modern cost-saving and
safety features. Copa also recently accepted delivery of its
first two Embraer 190 aircraft. Over the next four years,
Copa intends to enhance its modern fleet through the addition of
at least eight additional Boeing 737-Next Generation
aircraft and 13 new Embraer 190s. We believe that
Copas modern fleet contributes to its on-time performance
and high completion factor (percentage of scheduled flights not
cancelled). We expect our Boeing 737-700s and 737-800s and
our new Embraer 190s to offer substantial operational cost
savings over the replaced aircraft in terms of fuel efficiency
and maintenance costs. AeroRepública is currently
implementing a fleet modernization and expansion plan with firm
commitments on five new Embraer 190s and options for an
additional 20 Embraer 190 aircraft.
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We believe Copa has a strong brand and a reputation for
quality service. We believe that the Copa brand
is associated with value to passengers, providing world-class
service and competitive pricing. For the three months ended
March 31, 2006, Copa Airlines statistic for on-time
performance was 92.3%, completion factor was 99.7% and baggage
handling was 1.2 mishandled bags per 1000 passengers. Our goal
is to apply our expertise in these areas to improve
AeroRepúblicas service statistics to comparable
levels. Our focus on customer service has helped to build
passenger loyalty. We believe that our brand has also been
enhanced through our relationship with Continental, including
our joint marketing of the OnePass loyalty program in Latin
America, the similarity of our aircraft livery and aircraft
interiors and our participation in Continentals
Presidents Club lounge program.
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Our management fosters a culture of teamwork and continuous
improvement. Our management team has been
successful at creating a culture based on teamwork and focused
on continuous improvement. Each of our employees at Copa has
individual objectives based on corporate goals that serve as a
basis for measuring performance. When corporate operational and
financial targets are met, employees at Copa are eligible to
receive bonuses according to our profit sharing program. See
BusinessEmployees. We also recognize
outstanding performance of individual employees through
company-wide recognition, one-time awards, special events and,
in the case of our senior management, grants of restricted stock
and stock options. Copas goal-oriented culture and
incentive programs have contributed to a motivated work force
that is focused on satisfying customers, achieving efficiencies
and growing profitability. We seek to create a similar culture
at AeroRepública.
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2
Our
Strategy
Our goal is to continue to grow profitably and enhance our
position as a leader in Latin American aviation by providing a
combination of superior customer service, convenient schedules
and competitive fares, while maintaining competitive costs. The
key elements of our business strategy include the following:
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Expand our network by increasing frequencies and adding new
destinations. We believe that demand for air
travel in Latin America is likely to expand in the next decade,
and we intend to use our increasing fleet capacity to meet this
growing demand. We intend to focus on expanding our operations
by increasing flight frequencies on our most profitable routes
and initiating service to new destinations. Copas Panama
City hub allows us to consolidate traffic and provide service to
certain underserved markets, particularly in Central America and
the Caribbean, and we intend to focus on providing new service
to regional destinations that we believe best enhance the
overall connectivity and profitability of our network. With the
addition of Embraer 190 aircraft and growth in overall capacity,
we expect to have more flexibility in scheduling our flights for
our customers convenience.
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Continue to focus on keeping our costs low. We
seek to reduce our cost per available seat mile without
sacrificing services valued by our customers as we execute our
growth plans. Our goal is to maintain a modern fleet and to make
effective use of our resources through efficient aircraft
utilization and employee productivity. We intend to reduce our
distribution costs by increasing direct sales, including
internet and call center sales, as well as improving efficiency
through technology and automated processes.
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Introduce service with new Embraer 190
aircraft. We believe that the addition of the
Embraer 190 aircraft allows us to provide efficient service
to new destinations in underserved markets. In addition, we
believe that the Embraer 190s enhance our ability to efficiently
match our capacity to demand, allowing us to improve service
frequencies to currently served markets and to redeploy our
higher capacity aircraft to serve routes with greater demand.
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Emphasize superior service and value to our
customers. We intend to continue to focus on
satisfying our customers and earning their loyalty by providing
a combination of superior service and competitive fares. We
believe that continuing our operational success in keeping
flights on time, reducing mishandled luggage and offering
convenient schedules to attractive destinations will be
essential to achieving this goal. We intend to continue to
incentivize our employees to improve or maintain operating and
service metrics relating to our customers satisfaction by
continuing our profit sharing plan and employee recognition
programs and to reward customer loyalty with the popular OnePass
frequent flyer program, upgrades and access to Presidents
Club lounges.
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Capitalize on opportunities at
AeroRepública. We are seeking to enhance
AeroRepúblicas market share and profitability through
a variety of initiatives, including modernizing its fleet,
integrating its route network with Copas and improving
overall efficiency. We also seek to increase customer loyalty by
making further operational improvements at AeroRepública,
such as on-time performance which improved from 70.4% during the
six months ended December 31, 2005 to 81.9% during the
three months ended March 31, 2006, and in March 2006, we
implemented the OnePass frequent flyer program at
AeroRepública.
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Selling
Shareholder
Our equity structure provides for two classes of stock with
different voting rights. Class A shares initially have no
voting rights except in certain circumstances and Class B
shares are entitled to one vote per share on all matters.
Continental currently holds approximately 38.4% of our
Class A shares, representing approximately 27.3% of our
total capital stock. After the completion of this offering,
Continental is expected to hold approximately 17.3% of our
Class A shares, representing approximately 12.3% of our
total capital stock, assuming the underwriters
over-allotment option is not exercised. Corporación de
Inversiones Aéreas, S.A., or CIASA, holds all of our
Class B shares, representing approximately 29.2% of our
total capital stock and all of the voting rights associated with
our capital stock. CIASA is therefore entitled to elect a
majority of our directors and to determine the outcome of the
voting on substantially all actions that require shareholder
approval. See Description of Capital Stock.
3
Our
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.
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Copa is our principal airline operating subsidiary that operates
out of our hub in Panama and provides passenger service in
North, South and Central America and the Caribbean.
AeroRepública S.A. is our operating subsidiary that is
primarily engaged in domestic air travel within Colombia. Oval
Financial Leasing, Ltd. controls the special purpose vehicles
that have a beneficial interest in the majority of our aircraft.
OPAC, S.A. is a property holding company that owns our former
corporate headquarters facility.
Copa Holdings was formed on May 6, 1998 as a corporation
(sociedad anónima) duly incorporated under the laws
of Panama with an indefinite duration. Copa Holdings was
organized to be a holding company for Copa and related companies
in connection with the acquisition by Continental of its 49%
interest in us at that time.
Our principal executive offices are located at Boulevard Costa
del Este, Avenida Principal y Avenida de la Rotonda,
Urbanización Costa del Este, Complejo Business Park, Torre
Norte, Parque Lefevre, Panama City, Panama, and our telephone
number is
+507 304-2677.
The website of Copa is www.copaair.com. AeroRepública
maintains a website at www.aerorepublica.com.co. Information
contained on, or accessible through, these websites is not
incorporated by reference herein and shall not be considered
part of this prospectus. 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.
4
The
Offering
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Issuer |
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Copa Holdings, S.A. |
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Selling shareholder |
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Continental Airlines, Inc. |
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Shares offered |
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6,562,500 Class A shares, without par value. |
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Over-allotment option |
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The selling shareholder has granted the underwriters the right
for a period of 30 days to purchase up to an additional
984,375 Class A shares solely to cover
over-allotments, if any. |
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Offering price |
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$21.75 per Class A share. |
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Shares outstanding after the offering |
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Immediately following the offering (assuming the
underwriters over-allotment option is not exercised), the
number of shares of our capital stock will be as shown below: |
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Class A:
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Public, including management
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25,612,500 shares
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Continental
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5,359,375 shares
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Total Class A shares
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30,971,875 shares
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Class B:
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CIASA
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12,778,125 shares
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Total outstanding shares
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43,750,000 shares
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Voting rights |
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The holders of the Class A shares have no voting rights
except with respect to certain corporate transformations,
mergers, consolidations or spin-offs, changes of our corporate
purpose, voluntary delistings of the Class A shares from
the NYSE, approval of nominations of the independent directors
or amendments to the foregoing provisions that adversely affect
the rights and privileges of any Class A shares. Under
certain circumstances which we believe are not likely in the
foreseeable future, each Class A share will entitle its
record holder to one vote on all matters on which our
shareholders are entitled to vote. |
|
|
|
Each Class B share is entitled to one vote on all matters
for which shareholders are entitled to vote. |
|
|
|
See Description of Capital Stock. |
|
Controlling shareholder |
|
Following this offering, CIASA will continue to beneficially own
100% of our Class B shares which will represent all of the
voting power of our capital stock. CIASA will therefore be
entitled to elect a majority of our directors and to determine
the outcome of the voting on substantially all actions that
require shareholder approval. |
|
Ownership restrictions |
|
Our independent directors have the power under certain
circumstances to control or restrict the level of non-Panamanian
ownership of our Class B shares and the exercise of voting
rights attaching to Class A shares held by non-Panamanian
nationals in order to allow us to comply with Panamanian airline
ownership and control requirements. See Description of
Capital Stock. |
|
Tag-along rights |
|
Our board of directors may refuse to register any transfer of
shares in which CIASA proposes to sell Class B shares 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, |
5
|
|
|
|
|
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 CIASA
shares being sold. However, a proposed purchaser could acquire
control of Copa Holdings in a transaction that would not give
holders of Class A shares the right to participate,
including a sale by a party that had previously acquired control
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. See Description of Capital
StockTag-Along Rights. |
|
Use of proceeds |
|
We will not receive any proceeds from the sale of our
Class A shares by the selling shareholder. |
|
Dividends |
|
Holders of the Class A and Class B shares will be
entitled to receive dividends to the extent they are declared by
our board of directors in its absolute discretion. 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 contemplates the annual
payment of equal dividends to our Class A and Class B
shareholders in an aggregate amount approximately equal to 10%
of our consolidated net income for each year. This dividend
policy can be amended or discontinued by our board of directors
at any time for any reason. See Dividends and Dividend
Policy and Description of Capital Stock. |
|
Lock-up
agreements |
|
The selling shareholder has agreed, subject to certain
exceptions, not to issue or transfer without the consent of the
underwriters, until after the first anniversary (or 90 days
solely in the case of the over-allotment shares to the extent
such option is not exercised in full or at all) of the date of
this prospectus, any shares of our capital stock, any options or
warrants to purchase shares of our capital stock or any
securities convertible into or exchangeable for shares of our
capital stock. The selling shareholder has also agreed, subject
to the same exceptions, not to issue or transfer without the
consent of CIASA, until after the second anniversary of the date
of this prospectus, any shares of our capital stock, any options
or warrants to purchase shares of our capital stock or any
securities convertible into or exchangeable for shares of our
capital stock. In addition, we, our directors and executive
officers have agreed, subject to certain exceptions, not to
issue or transfer without the consent of the underwriters, until
90 days after the date of this prospectus, any shares of
our capital stock, any options or warrants to purchase shares of
our capital stock or any securities convertible into or
exchangeable for shares of our capital stock. CIASA has agreed,
subject to certain exceptions, not to issue or transfer without
the consent of the underwriters, until 180 days after the
date of this prospectus, any shares of our capital stock, any
options or warrants to purchase shares of our capital stock or
any securities convertible into or exchangeable for shares of
our capital stock. |
|
Listing |
|
The Class A shares trade on the NYSE. |
|
NYSE symbol for the Class A shares |
|
CPA. |
6
|
|
|
Risk factors |
|
See Risk Factors beginning on page 13 and the
other information included in this prospectus for a discussion
of certain important risks you should carefully consider before
deciding to invest in the Class A shares. |
|
|
|
|
|
Expected offering timetable:
|
|
|
|
|
Commencement of marketing of the
offering
|
|
|
June 22, 2006
|
|
Announcement of offer price and
allocation of Class A shares
|
|
|
June 28, 2006
|
|
Settlement and delivery of
Class A shares
|
|
|
July 5, 2006
|
|
7
Summary
Financial and Operating Data
The following table presents summary consolidated financial and
operating data as of the dates and for the periods indicated.
Our consolidated financial statements are prepared in accordance
with U.S. GAAP and are stated in U.S. dollars. You
should read this information in conjunction with our
consolidated financial statements included in this prospectus
and Managements Discussion and Analysis of Results
of Operations and Financial Condition appearing elsewhere
in this prospectus.
The summary consolidated financial information as of
December 31, 2004 and 2005 and for the years ended
December 31, 2003, 2004 and 2005 has been derived from our
audited consolidated financial statements included elsewhere in
this prospectus. The consolidated financial information as of
December 31, 2003 and for the year ended December 31,
2002 has been derived from our audited consolidated financial
statements that were prepared under U.S. GAAP and which
have not been included in this prospectus. The consolidated
financial information as of December 31, 2001 and 2002 and
for the year ended December 31, 2001 has been derived from
our audited consolidated financial statements that were prepared
under International Accounting Standards and adjusted to be
presented on a basis consistent with U.S. GAAP and which
have not been included in this prospectus.
The summary consolidated financial data as of and for the three
months ended March 31, 2005 and 2006 has been derived from
our unaudited interim consolidated financial statements for
these periods appearing elsewhere in this prospectus. The
results of operations for the three months ended March 31,
2006 are not necessarily indicative of the operating results to
be expected for the entire year ending December 31, 2006 or
for any other period.
We acquired 99.8% of the stock of AeroRepública, a
Colombian air carrier, and began consolidating its results on
April 22, 2005. As a result of this acquisition, our
financial information at and for the year ended
December 31, 2005 and for the three months ended
March 31, 2006 is not comparable to the information at and
for the year ended December 31, 2004 and for the three
months ended March 31, 2005, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
Three Months Ended
March 31,
|
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005(20)
|
|
|
2005
|
|
|
2006
|
|
|
|
(in thousands of dollars, except
share and per share data and operating data)
|
|
|
INCOME STATEMENT
DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger revenue
|
|
$
|
257,918
|
|
|
$
|
269,629
|
|
|
$
|
311,683
|
|
|
$
|
364,611
|
|
|
$
|
565,131
|
|
|
$
|
105,141
|
|
|
$
|
180,358
|
|
Cargo, mail and other
|
|
|
32,454
|
|
|
|
31,008
|
|
|
|
30,106
|
|
|
|
35,226
|
|
|
|
43,443
|
|
|
|
8,467
|
|
|
|
11,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
290,372
|
|
|
|
300,637
|
|
|
|
341,789
|
|
|
|
399,837
|
|
|
|
608,574
|
|
|
|
113,608
|
|
|
|
191,726
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft fuel
|
|
|
46,514
|
|
|
|
40,024
|
|
|
|
48,512
|
|
|
|
62,549
|
|
|
|
149,303
|
|
|
|
21,336
|
|
|
|
47,110
|
|
Salaries and benefits
|
|
|
38,709
|
|
|
|
39,264
|
|
|
|
45,254
|
|
|
|
51,701
|
|
|
|
69,730
|
|
|
|
13,385
|
|
|
|
19,446
|
|
Passenger servicing
|
|
|
32,834
|
|
|
|
33,892
|
|
|
|
36,879
|
|
|
|
39,222
|
|
|
|
50,622
|
|
|
|
10,431
|
|
|
|
14,634
|
|
Commissions
|
|
|
31,652
|
|
|
|
28,720
|
|
|
|
27,681
|
|
|
|
29,073
|
|
|
|
45,087
|
|
|
|
7,481
|
|
|
|
13,101
|
|
Reservations and sales
|
|
|
18,629
|
|
|
|
16,707
|
|
|
|
18,011
|
|
|
|
22,118
|
|
|
|
29,213
|
|
|
|
5,725
|
|
|
|
8,265
|
|
Maintenance, materials and repairs
|
|
|
25,369
|
|
|
|
20,733
|
|
|
|
20,354
|
|
|
|
19,742
|
|
|
|
32,505
|
|
|
|
4,714
|
|
|
|
10,287
|
|
Depreciation
|
|
|
13,325
|
|
|
|
13,377
|
|
|
|
14,040
|
|
|
|
19,279
|
|
|
|
19,857
|
|
|
|
4,739
|
|
|
|
5,417
|
|
Flight operations
|
|
|
13,887
|
|
|
|
14,567
|
|
|
|
15,976
|
|
|
|
17,904
|
|
|
|
24,943
|
|
|
|
4,972
|
|
|
|
7,713
|
|
Aircraft rentals
|
|
|
20,106
|
|
|
|
21,182
|
|
|
|
16,686
|
|
|
|
14,445
|
|
|
|
27,631
|
|
|
|
4,678
|
|
|
|
8,861
|
|
Landing fees and other rentals
|
|
|
8,451
|
|
|
|
8,495
|
|
|
|
10,551
|
|
|
|
12,155
|
|
|
|
17,909
|
|
|
|
3,343
|
|
|
|
5,555
|
|
Other
|
|
|
15,892
|
|
|
|
19,166
|
|
|
|
25,977
|
|
|
|
29,306
|
|
|
|
32,622
|
|
|
|
6,827
|
|
|
|
9,574
|
|
Fleet impairment
charge(1)
|
|
|
|
|
|
|
13,669
|
|
|
|
3,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
265,368
|
|
|
|
269,796
|
|
|
|
283,493
|
|
|
|
317,494
|
|
|
|
499,422
|
|
|
|
87,631
|
|
|
|
149,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
25,004
|
|
|
|
30,841
|
|
|
|
58,296
|
|
|
|
82,343
|
|
|
|
109,152
|
|
|
|
25,977
|
|
|
|
41,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
Three Months Ended
March 31,
|
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005(20)
|
|
|
2005
|
|
|
2006
|
|
|
|
(in thousands of dollars, except
share and per share data and operating data)
|
|
|
Non-operating income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(10,988
|
)
|
|
|
(7,629
|
)
|
|
|
(11,613
|
)
|
|
|
(16,488
|
)
|
|
|
(21,629
|
)
|
|
|
(4,557
|
)
|
|
|
(6,278
|
)
|
Interest capitalized
|
|
|
1,592
|
|
|
|
1,114
|
|
|
|
2,009
|
|
|
|
963
|
|
|
|
1,089
|
|
|
|
143
|
|
|
|
508
|
|
Interest income
|
|
|
701
|
|
|
|
831
|
|
|
|
887
|
|
|
|
1,423
|
|
|
|
3,584
|
|
|
|
687
|
|
|
|
1,262
|
|
Other,
net(2)
|
|
|
331
|
|
|
|
(1,490
|
)
|
|
|
2,554
|
|
|
|
6,063
|
|
|
|
395
|
|
|
|
2,196
|
|
|
|
(909
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-operating expenses, net
|
|
|
(8,364
|
)
|
|
|
(7,174
|
)
|
|
|
(6,163
|
)
|
|
|
(8,039
|
)
|
|
|
(16,561
|
)
|
|
|
(1,531
|
)
|
|
|
(5,417
|
)
|
Income (loss) before income taxes
|
|
|
16,640
|
|
|
|
23,667
|
|
|
|
52,133
|
|
|
|
74,304
|
|
|
|
92,591
|
|
|
|
24,446
|
|
|
|
36,346
|
|
Provision for income taxes
|
|
|
(1,822
|
)
|
|
|
(2,999
|
)
|
|
|
(3,644
|
)
|
|
|
(5,732
|
)
|
|
|
(9,592
|
)
|
|
|
(1,886
|
)
|
|
|
(4,066
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
14,818
|
|
|
|
20,668
|
|
|
|
48,489
|
|
|
|
68,572
|
|
|
|
82,999
|
|
|
|
22,560
|
|
|
|
32,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE SHEET
DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents and
short-term investments
|
|
$
|
28,385
|
|
|
$
|
34,476
|
|
|
$
|
61,432
|
|
|
$
|
110,943
|
|
|
$
|
114,490
|
|
|
$
|
111,143
|
|
|
$
|
114,819
|
|
Accounts receivable, net
|
|
|
30,210
|
|
|
|
24,006
|
|
|
|
31,019
|
|
|
|
27,706
|
|
|
|
49,492
|
|
|
|
32,372
|
|
|
|
58,096
|
|
Total current assets
|
|
|
69,040
|
|
|
|
68,940
|
|
|
|
103,523
|
|
|
|
152,087
|
|
|
|
184,793
|
|
|
|
158,876
|
|
|
|
198,919
|
|
Purchase deposits for flight
equipment
|
|
|
46,540
|
|
|
|
55,867
|
|
|
|
45,869
|
|
|
|
7,190
|
|
|
|
52,753
|
|
|
|
23,163
|
|
|
|
59,673
|
|
Total property and equipment
|
|
|
227,717
|
|
|
|
345,411
|
|
|
|
480,488
|
|
|
|
541,211
|
|
|
|
637,543
|
|
|
|
553,117
|
|
|
|
643,308
|
|
Total assets
|
|
|
300,121
|
|
|
|
421,935
|
|
|
|
591,915
|
|
|
|
702,050
|
|
|
|
916,912
|
|
|
|
721,862
|
|
|
|
936,429
|
|
Long-term debt
|
|
|
111,125
|
|
|
|
211,698
|
|
|
|
311,991
|
|
|
|
380,827
|
|
|
|
402,954
|
|
|
|
384,236
|
|
|
|
393,541
|
|
Total shareholders equity
|
|
|
46,426
|
|
|
|
67,094
|
|
|
|
115,583
|
|
|
|
174,155
|
|
|
|
245,867
|
|
|
|
196,715
|
|
|
|
278,090
|
|
CASH FLOW
DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
$
|
32,997
|
|
|
$
|
55,543
|
|
|
$
|
73,479
|
|
|
$
|
98,051
|
|
|
$
|
119,089
|
|
|
$
|
13,635
|
|
|
$
|
21,100
|
|
Net cash used in investing
activities
|
|
|
(39,473
|
)
|
|
|
(150,203
|
)
|
|
|
(151,802
|
)
|
|
|
(85,738
|
)
|
|
|
(163,570
|
)
|
|
|
(10,345
|
)
|
|
|
(10,368
|
)
|
Net cash provided by financing
activities
|
|
|
14,466
|
|
|
|
100,400
|
|
|
|
105,298
|
|
|
|
29,755
|
|
|
|
38,921
|
|
|
|
2,687
|
|
|
|
(6,640
|
)
|
OTHER FINANCIAL
DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA(3)
|
|
|
38,660
|
|
|
|
42,728
|
|
|
|
74,890
|
|
|
|
107,685
|
|
|
|
129,404
|
|
|
|
32,912
|
|
|
|
46,271
|
|
Aircraft rentals
|
|
|
20,106
|
|
|
|
21,182
|
|
|
|
16,686
|
|
|
|
14,445
|
|
|
|
27,631
|
|
|
|
4,678
|
|
|
|
8,861
|
|
Operating
margin(4)
|
|
|
8.6
|
%
|
|
|
10.3
|
%
|
|
|
17.1
|
%
|
|
|
20.6
|
%
|
|
|
17.9
|
%
|
|
|
22.9
|
%
|
|
|
21.8
|
%
|
Weighted average shares used in
computing net income per
share(5)
|
|
|
42,812,500
|
|
|
|
42,812,500
|
|
|
|
42,812,500
|
|
|
|
42,812,500
|
|
|
|
42,812,500
|
|
|
|
42,812,500
|
|
|
|
42,812,500
|
|
Net income (loss) per
share(5)
|
|
$
|
0.35
|
|
|
$
|
0.48
|
|
|
$
|
1.13
|
|
|
$
|
1.60
|
|
|
$
|
1.94
|
|
|
$
|
0.53
|
|
|
$
|
0.75
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
Three Months Ended
March 31,
|
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005(20)
|
|
|
2005
|
|
|
2006
|
|
|
|
(in thousands of dollars, except
share and per share data and operating data)
|
|
|
OPERATING
DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue passengers
carried(6)
|
|
|
1,794
|
|
|
|
1,819
|
|
|
|
2,028
|
|
|
|
2,333
|
|
|
|
4,361
|
|
|
|
636
|
(22)
|
|
|
1,321
|
(22)
|
Revenue passenger
miles(7)
|
|
|
1,870
|
|
|
|
1,875
|
|
|
|
2,193
|
|
|
|
2,548
|
|
|
|
3,831
|
|
|
|
736
|
(22)
|
|
|
1,155
|
(22)
|
Available seat
miles(8)
|
|
|
2,920
|
|
|
|
2,847
|
|
|
|
3,226
|
|
|
|
3,639
|
|
|
|
5,368
|
|
|
|
1,018
|
|
|
|
1,615
|
|
Load
factor(9)
|
|
|
64.0
|
%
|
|
|
65.9
|
%
|
|
|
68.0
|
%
|
|
|
70.0
|
%
|
|
|
71.4
|
%
|
|
|
72.3
|
%(22)
|
|
|
71.5
|
%(22)
|
Break-even load
factor(10)
|
|
|
58.7
|
%
|
|
|
54.5
|
%
|
|
|
52.8
|
%
|
|
|
52.6
|
%
|
|
|
57.9
|
%
|
|
|
52.1
|
%(22)
|
|
|
55.8
|
%(22)
|
Total block
hours(11)
|
|
|
59,760
|
|
|
|
58,112
|
|
|
|
64,909
|
|
|
|
70,228
|
|
|
|
103,628
|
|
|
|
18,928
|
|
|
|
31,483
|
|
Average daily aircraft
utilization(12)
|
|
|
9.1
|
|
|
|
8.8
|
|
|
|
9.0
|
|
|
|
9.3
|
|
|
|
9.8
|
|
|
|
9.9
|
|
|
|
9.7
|
|
Average passenger fare
|
|
|
143.8
|
|
|
|
148.2
|
|
|
|
153.7
|
|
|
|
156.3
|
|
|
|
129.6
|
|
|
|
165.3(22
|
)
|
|
|
136.5
|
(22)
|
Yield(13)
|
|
|
13.79
|
|
|
|
14.38
|
|
|
|
14.22
|
|
|
|
14.31
|
|
|
|
14.75
|
|
|
|
14.28(22
|
)
|
|
|
15.61
|
(22)
|
Passenger revenue per
ASM(14)
|
|
|
8.83
|
|
|
|
9.47
|
|
|
|
9.66
|
|
|
|
10.02
|
|
|
|
10.53
|
|
|
|
10.33
|
|
|
|
11.17
|
|
Operating revenue per
ASM(15)
|
|
|
9.94
|
|
|
|
10.56
|
|
|
|
10.60
|
|
|
|
10.99
|
|
|
|
11.34
|
|
|
|
11.16
|
|
|
|
11.87
|
|
Operating expenses per ASM
(CASM)(16)
|
|
|
9.09
|
|
|
|
9.48
|
|
|
|
8.79
|
|
|
|
8.72
|
|
|
|
9.30
|
|
|
|
8.61
|
|
|
|
9.29
|
|
Departures
|
|
|
23,742
|
|
|
|
23,361
|
|
|
|
25,702
|
|
|
|
27,434
|
|
|
|
48,934
|
|
|
|
7,096
|
|
|
|
15,826
|
|
Average daily departures
|
|
|
65.0
|
|
|
|
64.0
|
|
|
|
70.4
|
|
|
|
75.0
|
|
|
|
156.6
|
|
|
|
78.8
|
|
|
|
176.2
|
|
Average number of aircraft.
|
|
|
18.0
|
|
|
|
18.1
|
|
|
|
19.8
|
|
|
|
20.6
|
|
|
|
31.0
|
|
|
|
21.2
|
|
|
|
36.1
|
|
Airports served at period end
|
|
|
28
|
|
|
|
27
|
|
|
|
28
|
|
|
|
29
|
|
|
|
43
|
|
|
|
29
|
|
|
|
43
|
|
SEGMENT FINANCIAL
DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Copa:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue
|
|
$
|
290,372
|
|
|
$
|
300,637
|
|
|
$
|
341,789
|
|
|
$
|
399,837
|
|
|
$
|
505,655
|
|
|
$
|
113,608
|
|
|
$
|
151,602
|
|
Operating expenses
|
|
|
265,368
|
|
|
|
269,796
|
|
|
|
283,493
|
|
|
|
317,494
|
|
|
|
402,684
|
|
|
|
87,631
|
|
|
|
110,613
|
|
Depreciation
|
|
|
13,325
|
|
|
|
13,377
|
|
|
|
14,040
|
|
|
|
19,279
|
|
|
|
19,242
|
|
|
|
4,739
|
|
|
|
5,227
|
|
Aircraft rentals
|
|
|
20,106
|
|
|
|
21,182
|
|
|
|
16,686
|
|
|
|
14,445
|
|
|
|
22,096
|
|
|
|
4,678
|
|
|
|
5,858
|
|
Interest expense
|
|
|
10,988
|
|
|
|
7,629
|
|
|
|
11,613
|
|
|
|
16,488
|
|
|
|
19,424
|
|
|
|
4,557
|
|
|
|
5,678
|
|
Interest capitalized
|
|
|
1,592
|
|
|
|
1,114
|
|
|
|
2,009
|
|
|
|
963
|
|
|
|
1,089
|
|
|
|
143
|
|
|
|
508
|
|
Interest income
|
|
|
701
|
|
|
|
831
|
|
|
|
887
|
|
|
|
1,423
|
|
|
|
3,376
|
|
|
|
687
|
|
|
|
1,148
|
|
Net income (loss) before tax
|
|
|
16,640
|
|
|
|
23,667
|
|
|
|
52,133
|
|
|
|
74,304
|
|
|
|
89,745
|
|
|
|
24,446
|
|
|
|
37,032
|
|
Total assets
|
|
|
300,121
|
|
|
|
421,935
|
|
|
|
591,915
|
|
|
|
702,050
|
|
|
|
851,075
|
|
|
|
721,862
|
|
|
|
879,215
|
|
AeroRepública:
(21)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
102,976
|
|
|
|
|
|
|
$
|
40,246
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96,839
|
|
|
|
|
|
|
|
39,472
|
|
Depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
615
|
|
|
|
|
|
|
|
190
|
|
Aircraft rentals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,535
|
|
|
|
|
|
|
|
3,003
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,205
|
|
|
|
|
|
|
|
600
|
|
Interest capitalized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
208
|
|
|
|
|
|
|
|
114
|
|
Net income (loss) before tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,846
|
|
|
|
|
|
|
|
(686
|
)
|
Total assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98,091
|
|
|
|
|
|
|
|
90,740
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
Three Months Ended
March 31,
|
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005(20)
|
|
|
2005
|
|
|
2006
|
|
|
|
(in thousands of dollars, except
share and per share data and operating data)
|
|
|
SEGMENT OPERATING DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Copa:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available seat
miles(8)
|
|
|
2,920
|
|
|
|
2,847
|
|
|
|
3,226
|
|
|
|
3,639
|
|
|
|
4,409
|
|
|
|
1,018
|
|
|
|
1,216
|
|
Load
factor(9)
|
|
|
64.0
|
%
|
|
|
65.9
|
%
|
|
|
68.0
|
%
|
|
|
70.0
|
%
|
|
|
73.4
|
%
|
|
|
72.3
|
%
|
|
|
77.6
|
%
|
Break-even load factor
|
|
|
58.7
|
%
|
|
|
54.5
|
%
|
|
|
52.8
|
%
|
|
|
52.6
|
%
|
|
|
56.8
|
%
|
|
|
52.1
|
%
|
|
|
55.3
|
%
|
Yield(13)
|
|
|
13.79
|
|
|
|
14.38
|
|
|
|
14.22
|
|
|
|
14.31
|
|
|
|
14.41
|
|
|
|
14.28
|
|
|
|
15.01
|
|
Operating revenue per
ASM(15)
|
|
|
9.94
|
|
|
|
10.56
|
|
|
|
10.60
|
|
|
|
10.99
|
|
|
|
11.47
|
|
|
|
11.16
|
|
|
|
12.46
|
|
CASM(16)
|
|
|
9.09
|
|
|
|
9.48
|
|
|
|
8.79
|
|
|
|
8.72
|
|
|
|
9.13
|
|
|
|
8.61
|
|
|
|
9.09
|
|
Average stage
length(18)
|
|
|
1,023
|
|
|
|
1,010
|
|
|
|
1,028
|
|
|
|
1,047
|
|
|
|
1,123
|
|
|
|
1,115
|
|
|
|
1,158
|
|
On time
performance(17)
|
|
|
87.7
|
%
|
|
|
90.5
|
%
|
|
|
91.4
|
%
|
|
|
91.8
|
%
|
|
|
91.7
|
%
|
|
|
94.9
|
%
|
|
|
92.3
|
%
|
AeroRepública:(21)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available seat
miles(8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
950
|
|
|
|
|
|
|
|
399
|
|
Load
factor(9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62.0
|
%
|
|
|
|
|
|
|
53.1
|
%
|
Break even load factor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60.8
|
%
|
|
|
|
|
|
|
54.4
|
%
|
Yield(13)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16.61(22
|
)
|
|
|
|
|
|
|
18.32
|
(22)
|
Operating revenue per
ASM(15)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.74
|
|
|
|
|
|
|
|
10.10
|
|
CASM(16)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.10
|
|
|
|
|
|
|
|
9.90
|
|
Average stage
length(18)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
360
|
|
|
|
|
|
|
|
357
|
|
On time
performance(19)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70.4
|
%
|
|
|
|
|
|
|
81.9
|
%
|
|
|
|
(1)
|
|
Represents impairment losses on our
Boeing 737-200 aircraft and related assets. See Note 8 to
our consolidated financial statements.
|
|
(2)
|
|
Consists primarily of changes in
the fair value of fuel derivative contracts, foreign exchange
gains/losses and gains on sale of Boeing 737-200 aircraft. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations and the notes to our
consolidated financial statements.
|
|
(3)
|
|
EBITDA represents net income (loss)
plus the sum of interest expense, income taxes, depreciation and
amortization minus the sum of interest capitalized and interest
income. EBITDA is presented as supplemental information because
we believe it is a useful indicator of our operating performance
and is useful in comparing our operating performance with other
companies in the airline industry. However, EBITDA should not be
considered in isolation, as a substitute for net income prepared
in accordance with U.S. GAAP or as a measure of a
companys profitability. In addition, our calculation of
EBITDA may not be comparable to other companies similarly
titled measures. The following table presents a reconciliation
of our net income to EBITDA for the specified periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
Three Months Ended
March 31,
|
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
|
(in thousands of
dollars)
|
|
|
Net income (loss)
|
|
$
|
14,818
|
|
|
$
|
20,668
|
|
|
$
|
48,489
|
|
|
$
|
68,572
|
|
|
$
|
82,999
|
|
|
$
|
22,560
|
|
|
$
|
32,280
|
|
Interest expense
|
|
|
10,988
|
|
|
|
7,629
|
|
|
|
11,613
|
|
|
|
16,488
|
|
|
|
21,629
|
|
|
|
4,557
|
|
|
|
6,278
|
|
Income taxes
|
|
|
1,822
|
|
|
|
2,999
|
|
|
|
3,644
|
|
|
|
5,732
|
|
|
|
9,592
|
|
|
|
1,886
|
|
|
|
4,066
|
|
Depreciation
|
|
|
13,325
|
|
|
|
13,377
|
|
|
|
14,040
|
|
|
|
19,279
|
|
|
|
19,857
|
|
|
|
4,739
|
|
|
|
5,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
40,953
|
|
|
|
44,673
|
|
|
|
77,786
|
|
|
|
110,071
|
|
|
|
134,077
|
|
|
|
33,742
|
|
|
|
48,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest capitalized
|
|
|
(1,592
|
)
|
|
|
(1,114
|
)
|
|
|
(2,009
|
)
|
|
|
(963
|
)
|
|
|
(1,089
|
)
|
|
|
(143
|
)
|
|
|
(508
|
)
|
Interest income
|
|
|
(701
|
)
|
|
|
(831
|
)
|
|
|
(887
|
)
|
|
|
(1,423
|
)
|
|
|
(3,584
|
)
|
|
|
(687
|
)
|
|
|
(1,262
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
38,660
|
|
|
|
42,728
|
|
|
|
74,890
|
|
|
|
107,685
|
|
|
|
129,404
|
|
|
|
32,912
|
|
|
|
46,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft rentals represents a significant operating expense of
our business. Because we leased several of our aircraft during
the periods presented, we believe that when assessing our EBITDA
you should also consider the impact of our aircraft rent
expense, which was $20.1 million in 2001,
$21.2 million in 2002, $16.7 million in 2003,
$14.4 million in 2004, and $27.6 million in 2005.
|
|
|
(4)
|
|
Operating margin represents
operating income divided by operating revenues.
|
11
|
|
|
(5)
|
|
All share and per share amounts
have been retroactively restated to reflect the current capital
structure described under Description of Capital
Stock and in the notes to our consolidated financial
statements.
|
|
(6)
|
|
Total number of paying passengers
(including all passengers redeeming OnePass frequent flyer miles
and other travel awards) flown on all flight segments, expressed
in thousands.
|
|
(7)
|
|
Number of miles flown by scheduled
revenue passengers, expressed in millions.
|
|
(8)
|
|
Aircraft seating capacity
multiplied by the number of miles the seats are flown, expressed
in millions.
|
|
(9)
|
|
Percentage of aircraft seating
capacity that is actually utilized. Load factors are calculated
by dividing revenue passenger miles by available seat miles.
|
|
(10)
|
|
Load factor that would have
resulted in total revenues being equal to total expenses.
|
|
(11)
|
|
The number of hours from the time
an airplane moves off the departure gate for a revenue flight
until it is parked at the gate of the arrival airport.
|
|
(12)
|
|
Average number of block hours
operated per day per aircraft for the total aircraft fleet.
|
|
(13)
|
|
Average amount (in cents) one
passenger pays to fly one mile.
|
|
(14)
|
|
Passenger revenues (in cents)
divided by the number of available seat miles.
|
|
(15)
|
|
Total operating revenues for
passenger aircraft related costs (in cents) divided by the
number of available seat miles.
|
|
(16)
|
|
Total operating expenses for
passenger aircraft related costs (in cents) divided by the
number of available seat miles.
|
|
(17)
|
|
Percentage of flights that arrive
at the destination gate within fifteen minutes of scheduled
arrival.
|
|
(18)
|
|
The average number of miles flown
per flight.
|
|
(19)
|
|
Percentage of flights that depart
within fifteen minutes of the scheduled departure time.
|
|
(20)
|
|
For AeroRepública operating
data, this period covers from April 22, 2005 until
December 31, 2005 which corresponds to the period that
AeroRepública was consolidated in our financial statements.
|
|
(21)
|
|
We have not included financial
information for the three months ended March 31, 2005 which
preceded our acquisition of AeroRepública on April 22,
2005.
|
|
(22)
|
|
AeroRepública has not
historically distinguished between revenue passengers and
non-revenue passengers. Although we are implementing systems at
AeroRepública to record that information, revenue passenger
information and other statistics derived from revenue passenger
data for the year ended December 31, 2005 and the three
months ended March 31, 2006 has been derived from estimates
that we believe to be materially accurate.
|
12
RISK
FACTORS
An investment in our Class A shares involves a high
degree of risk. You should carefully consider the risks
described below before making an investment decision. Our
business, financial condition and results of operations could be
materially and adversely affected by any of these risks. The
trading price of our Class A shares could decline due to
any of these risks, and you may lose all or part of your
investment. The risks described below are those known to us and
that we currently believe may materially affect us.
Risks
Relating to Our Company
Our
failure to successfully implement our growth strategy may
adversely affect our results of operations and harm the market
value of our Class A shares.
We have grown rapidly over the past five years. We intend to
continue to grow our fleet, expand our service to new markets
and increase the frequency of flights to the markets we
currently serve. Achieving these goals is essential in order for
our business to benefit from cost efficiencies resulting from
economies of scale. We expect to have substantial cash needs as
we expand, including cash required to fund aircraft purchases or
aircraft deposits as we add to our fleet. We cannot assure you
that we will have sufficient cash to fund such projects, and if
we are unable to successfully expand our route system, our
future revenue and earnings growth would be limited.
When we commence a new route, our load factors tend to be lower
than those on our established routes and our advertising and
other promotional costs tend to be higher, which may result in
initial losses that could have a negative impact on our results
of operations as well as require a substantial amount of cash to
fund. We also periodically run special promotional fare
campaigns, particularly in connection with the opening of new
routes. Promotional fares may have the effect of increasing load
factors while reducing our yield on such routes during the
period that they are in effect. The number of markets we serve
and our flight frequencies depend on our ability to identify the
appropriate geographic markets upon which to focus and to gain
suitable airport access and route approval in these markets.
There can be no assurance that the new markets we enter will
provide passenger traffic that is sufficient to make our
operations in those new markets profitable. Any condition that
would prevent or delay our access to key airports or routes,
including limitations on the ability to process more passengers,
the imposition of flight capacity restrictions, the inability to
secure additional route rights under bilateral agreements or the
inability to maintain our existing slots and obtain additional
slots, could constrain the expansion of our operations.
The expansion of our business will also require additional
skilled personnel, equipment and facilities. The inability to
hire and retain skilled pilots and other personnel or secure the
required equipment and facilities efficiently and
cost-effectively may adversely affect our ability to execute our
growth strategy. Expansion of our markets and flight frequencies
may also strain our existing management resources and
operational, financial and management information systems to the
point where they may no longer be adequate to support our
operations, requiring us to make significant expenditures in
these areas. In light of these factors, we cannot assure you
that we will be able to successfully establish new markets or
expand our existing markets, and our failure to do so could harm
our business and results of operations, as well as the value of
our Class A shares.
If we
fail to successfully integrate the new Embraer 190 aircraft we
have agreed to purchase into our operations, our business could
be harmed.
In October 2004, Copa announced an order to purchase ten new
Embraer 190 aircraft with options for an additional 20 new
aircraft. Since then, Copa accepted delivery of two Embraer
aircraft in the fourth quarter of 2005 and increased its firm
orders for the Embraer 190 aircraft by exercising two of these
options in April 2005 and three of these options in April 2006.
In March 2006, AeroRepública announced an order to purchase
five new Embraer 190 aircraft with options for an additional 20
new aircraft. Acquisition of an all-new type of aircraft, such
as the Embraer 190, involves a variety of risks, including:
|
|
|
|
|
difficulties or delays in obtaining the necessary certifications
from the aviation regulatory authorities of the countries to
which we fly;
|
|
|
|
manufacturers delays in meeting the agreed upon aircraft
delivery schedule;
|
13
|
|
|
|
|
difficulties in obtaining financing on acceptable terms to
complete our purchase of all of the aircraft we have committed
to purchase; and
|
|
|
|
the inability of the new aircraft and its components to comply
with agreed upon specifications and performance standards.
|
The Embraer 190 is a new aircraft and, although to date we have
not had any significant problems with this aircraft, certain
other airlines have in the past experienced problems generally
associated with it, including difficulties with the software
that operates the Embraer avionics system. As a result, we may
experience similar or other problems with the Embraer 190s that
will be delivered to us which could result in increased costs or
service interruptions.
In addition, we also face risks in integrating a second type of
aircraft into our existing infrastructure and operations,
including, among other things, the additional costs, resources
and time needed to hire and train new pilots, technicians and
other skilled support personnel. If we fail to successfully take
delivery of, place into service and integrate into our
operations the new Embraer 190 aircraft, our business, financial
condition and results of operations could be harmed.
We are
dependent on our alliance with Continental and cannot assure you
that it will continue.
We maintain a broad commercial and marketing alliance with
Continental that has allowed us to enhance our network and, in
some cases, offer our customers services that we could not
otherwise offer. If Continental were to experience severe
financial difficulties or go bankrupt, our alliance and service
agreements may be terminated or we may not realize the
anticipated benefits from our relationship with Continental.
Continental has incurred significant losses since
September 11, 2001, primarily as a result of record high
fuel prices and decreased yields. Continental reported a net
loss of $68 million for 2005 and has indicated that losses
of the magnitude incurred since September 11, 2001 are not
sustainable if they continue. We cannot assure you that
Continentals results will improve, or that it will avoid
bankruptcy, and as a result we may be materially and adversely
affected by a continuing deterioration of Continentals
financial condition.
Since we began the alliance in 1998, we have benefited from
Continentals support in negotiations for aircraft
purchases, insurance and fuel purchases, sharing of best
practices and engineering support in our maintenance
operations, and significant other intangible support. This
support has assisted us in our growth strategy, while also
improving our operational performance and the quality of our
service. Our alliance relationship with Continental is the
subject of a grant of antitrust immunity from the
U.S. Department of Transportation, or DOT. If our
relationship with Continental were to deteriorate, or our
alliance relationship were no longer to benefit from a grant of
antitrust immunity, or our alliance or services agreements were
terminated, our business, financial condition and results of
operations would likely be materially and adversely affected.
The loss of Copas codesharing relationship with
Continental would likely result in a significant decrease in our
revenues. We also rely on Continentals OnePass frequent
flyer program that we participate in globally and on a
co-branded basis in Latin America, and our business may be
adversely affected if the OnePass program does not remain a
competitive marketing program. In addition, our competitors may
benefit from alliances with other airlines that are more
extensive than our alliance with Continental. We cannot predict
the extent to which we will be disadvantaged by competing
alliances. See Related Party Transactions.
Continentals
economic interest in our continued success can be expected to
further decline over time.
In connection with our initial public offering in December 2005,
Continental reduced its investment in us from 49% to
approximately 27.3% of our capital stock. After giving effect to
this offering, Continental is expected to further reduce its
investment in us to approximately 12.3% of our capital stock (or
10.0% if the over-allotment option is exercised). Continental
can be expected to seek to monetize its remaining investment in
us. Continental has certain rights pursuant to a
shareholders agreement among Continental, CIASA and us,
including the right to appoint one of our directors so long as
our alliance agreement with Continental continues. As a result
of Continentals right, following consummation of this
offering, to appoint one member of our board of directors and
our dependence on the alliance between the airlines, Continental
will continue to have the ability to exercise significant
influence over us following the offering. Nevertheless,
Continentals interests will likely diverge from those of
our other shareholders as Continental reduces its investment in
us over time. Other than certain exclusivity provisions and a
termination event for certain competitive activities contained
in our alliance agreement, we do not have any non-competition
agreement
14
with Continental, and as Continental continues to reduce its
economic stake in us, it may take actions that are adverse to
the interests of the majority of our shareholders. See
Related Party Transactions.
We
operate using a
hub-and-spoke
model and are vulnerable to competitors offering direct flights
between destinations we serve.
The structure of substantially all of our current flight
operations (other than those of AeroRepública) generally
follows what is known in the airline industry as a
hub-and-spoke
model. This model aggregates passengers by operating flights
from a number of spoke origins to a central hub
through which they are transported to their final destinations.
In recent years, many traditional
hub-and-spoke
operators have faced significant and increasing competitive
pressure from low-cost,
point-to-point
carriers on routes with sufficient demand to sustain
point-to-point
service. A
point-to-point
structure enables airlines to focus on the most profitable,
high-demand routes and to offer greater convenience and, in many
instances, lower fares. With the passage of time, and in
particular as demand for air travel in Latin America increases,
it is increasingly likely that one or more of our competitors
will initiate non-stop service between important destinations
that we currently serve through our Panamanian hub. By bypassing
our hub in Panama, any non-stop service would be more convenient
and possibly less expensive, than our connecting service and
could significantly decrease demand for our service to those
destinations. We believe that future competition from
point-to-point
carriers will be directed towards the largest markets that we
serve. As a result, the effect of such competition on us could
be significant and could have a material adverse effect on our
business, financial condition and results of operations.
The
Panamanian Aviation Act and certain of the bilateral agreements
under which we operate contain Panamanian ownership requirements
that are not clearly defined, and our failure to comply with
these requirements could cause us to lose our authority to
operate in Panama or to the international destinations we
serve.
Under Law No. 21 of January 29, 2003, which regulates
the aviation industry in the Republic of Panama and which we
refer to as the Aviation Act, substantial ownership
and effective control of our airline must remain in
the hands of Panamanian nationals. Under certain of the
bilateral agreements between Panama and other countries pursuant
to which we have the right to fly to those other countries and
over their territory, we must continue to have substantial
Panamanian ownership and effective control by Panamanian
nationals to retain these rights. Neither substantial
ownership nor effective control are defined in
the Aviation Act or in the bilateral agreements, and it is
unclear how a Panamanian court or, in the case of the bilateral
agreements, foreign regulatory authorities might interpret these
requirements. In addition, the manner in which these
requirements are interpreted may change over time. We cannot
predict whether these requirements would be satisfied through
ownership and control by Panamanian record holders, or if these
requirements would be satisfied only by direct and indirect
ownership and control by Panamanian beneficial owners.
At the present time, CIASA, a Panamanian entity, is the record
owner of all of our Class B voting shares, representing
approximately 29.2% of our total share capital and all of the
voting power of our capital stock.
On November 25, 2005, the Executive Branch of the
Government of Panama promulgated a decree stating that the
substantial ownership and effective
control requirements of the Aviation Act are met if a
Panamanian citizen or a Panamanian company is the record holder
of shares representing 51% or more of the voting power of the
company. Although the decree has the force of law for so long as
it remains in effect, it does not supersede the Aviation Act,
and it can be modified or superseded at any time by a future
Executive Branch decree. Additionally, the decree has no binding
effect on regulatory authorities of other countries whose
bilateral agreements impose Panamanian ownership and control
limitations on us. We cannot assure you that the decree will not
be challenged, modified or superseded in the future, or that
record ownership of a majority of our Class B shares by
Panamanian entities will be sufficient to satisfy the
substantial ownership requirement of the Aviation
Act and the decree. If the Panamanian Civil Aviation Authority
(the Autoridad de Aeronáutica Civil), which we refer
to as the AAC, or a Panamanian court were to determine that
substantial Panamanian ownership should be
determined on the basis of our direct and indirect ownership, we
could lose our license to operate our airline in Panama.
Likewise, if a foreign regulatory authority were to determine
that our direct or indirect Panamanian ownership fails to
satisfy the minimum Panamanian ownership requirements for a
Panamanian carrier under the applicable bilateral agreement,
15
we may lose the benefit of that agreement and be prohibited from
flying to the relevant country or over its territory. Any such
determination would have a material adverse effect on our
business, financial condition and results of operations, as well
as on the value of the Class A shares.
Our
business is subject to extensive regulation which may restrict
our growth or our operations or increase our
costs.
Our business, financial condition and results of operations
could be adversely affected if we or certain aviation
authorities in the countries to which we fly fail to maintain
the required foreign and domestic governmental authorizations
necessary for our operations. In order to maintain the necessary
authorizations issued by the AAC and other corresponding foreign
authorities, we must continue to comply with applicable
statutes, rules and regulations pertaining to the airline
industry, including any rules and regulations that may be
adopted in the future. We cannot predict or control any actions
that the AAC or foreign aviation regulators may take in the
future, which could include restricting our operations or
imposing new and costly regulations. Also, our fares are
technically subject to review by the AAC and the regulators of
certain other countries to which we fly, any of which may in the
future impose restrictions on our fares.
We are also subject to international bilateral air transport
agreements that provide for the exchange of air traffic rights
between Panama and various other countries, and we must obtain
permission from the applicable foreign governments to provide
service to foreign destinations. There can be no assurance that
existing bilateral agreements between the countries in which our
airline operating companies are based and foreign governments
will continue, or that we will be able to obtain more route
rights under those agreements to accommodate our future
expansion plans. A modification, suspension or revocation of one
or more bilateral agreements could have a material adverse
effect on our business, financial condition and results of
operations. The suspension of our permits to operate to certain
airports or destinations or the imposition of other sanctions
could also have a material adverse effect. Due to the nature of
bilateral agreements, we can fly to many destinations only from
Panama. We cannot assure you that a change in a foreign
governments administration of current laws and regulations
or the adoption of new laws and regulations will not have a
material adverse effect on our business, financial condition and
results of operations.
We plan to continue to increase the scale of our operations and
revenues by expanding our presence on new and existing routes.
Our ability to successfully implement this strategy will depend
upon many factors, several of which are outside our control or
subject to change. These factors include the permanence of a
suitable political, economic and regulatory environment in the
Latin American countries in which we operate or intend to
operate and our ability to identify strategic local partners.
The most active government regulator among the countries to
which we fly is the U.S. Federal Aviation Administration,
or FAA. The FAA from time to time issues directives and other
regulations relating to the maintenance and operation of
aircraft that require significant expenditures. FAA requirements
cover, among other things, collision avoidance systems, airborne
windshear avoidance systems, noise abatement and other
environmental issues, and increased inspections and maintenance
procedures to be conducted on older aircraft. We expect to
continue incurring expenses to comply with the FAAs
regulations, and any increase in the cost of compliance could
have an adverse effect on our financial condition and results of
operations. Additional new regulations continue to be regularly
implemented by the U.S. Transportation Security
Administration, or TSA, as well.
The
growth of our operations to the United States and the benefits
of our code-sharing arrangements with Continental are dependent
on Panamas continued favorable safety
assessment.
The FAA periodically audits the aviation regulatory authorities
of other countries. As a result of its investigation, each
country is given an International Aviation Safety Assessment, or
IASA, rating. In May 2001, Panamas IASA rating was
downgraded from Category 1 to Category 2 due to alleged
deficiencies in Panamanian air safety standards and AACs
capability to provide regulatory oversight. As a result of this
downgrade, we were prevented from offering our Copa flights to
any new destinations in the United States and from certifying
new aircraft for flights to the United States, and Continental
was no longer able to codeshare on our flights. In April 2004,
after extensive investment by the Panamanian government in the
AAC and consultations among Copa, the AAC and U.S. safety
officials, Panamas IASA rating was restored to Category 1.
We cannot
16
assure you that the government of Panama, and the AAC in
particular, will continue to meet international safety
standards, and we have no direct control over their compliance
with IASA guidelines. If Panamas IASA rating were to be
downgraded in the future, it could prohibit us from increasing
service to the United States and Continental would have to
suspend the placing of its code on our flights, causing us to
lose direct revenue from codesharing as well as reducing flight
options to our customers.
We are
highly dependent on our hub at Panama Citys Tocumen
International Airport.
Our business is heavily dependent on our operations at our hub
at Panama Citys Tocumen International Airport.
Substantially all of our Copa flights either depart from or
arrive at our hub. The
hub-and-spoke
structure of our operations is particularly dependent on the
on-time arrival of tightly coordinated groupings of flights to
ensure that passengers can make timely connections to continuing
flights. Like other airlines, we are subject to delays caused by
factors beyond our control, including air traffic congestion at
airports, adverse weather conditions and increased security
measures. Delays inconvenience passengers, reduce aircraft
utilization and increase costs, all of which in turn negatively
affect our profitability. A significant interruption or
disruption in service at Tocumen International Airport could
have a serious impact on our business, financial condition and
operating results. Also, Tocumen International Airport provides
international service to the Republic of Panamas
population of approximately 3.0 million, whereas the hub
markets of our current competitors tend to be much larger,
providing those competitors with a larger base of customers at
their hub.
Tocumen International Airport is operated by a corporation that
is controlled by the government of the Republic of Panama. We
depend on our good working relationship with the
quasi-governmental corporation that operates the airport to
ensure that we have adequate access to aircraft parking
positions, landing rights and gate assignments for our aircraft
to accommodate our current operations and future plans for
expansion. The corporation that operates Tocumen International
Airport does not enter into any formal, written leases or other
agreements with airlines that govern rights to use the
airports jetways or aircraft parking spaces. Therefore, in
connection with the ongoing or future expansion of the airport,
the airport authority could assign new capacity to competing
airlines or could reassign resources that are currently used by
us to other aircraft operators. Either such event could result
in significant new competition for our routes or could otherwise
have a material adverse effect on our current operations or
ability for future growth.
We are
exposed to increases in landing charges and other airport access
fees and cannot be assured access to adequate facilities and
landing rights necessary to achieve our expansion
plans.
We must pay fees to airport operators for the use of their
facilities. Any substantial increase in airport charges could
have a material adverse impact on our results of operations.
Passenger taxes and airport charges have also increased in
recent years, sometimes substantially. Certain important
airports that we use, such as Bogotas El Dorado airport,
may be privatized in the near future which is likely to result
in significant cost increases to the airlines that use these
airports. We cannot assure you that the airports used by us will
not impose, or further increase, passenger taxes and airport
charges in the future, and any such increases could have an
adverse effect on our financial condition and results of
operations.
Certain airports that we serve (or that we plan to serve in the
future) are subject to capacity constraints and impose slot
restrictions during certain periods of the day. We cannot assure
you that we will be able to obtain a sufficient number of slots,
gates and other facilities at airports to expand our services as
we are proposing to do. It is also possible that airports not
currently subject to capacity constraints may become so in the
future. In addition, an airline must use its slots on a regular
and timely basis or risk having those slots re-allocated to
others. Where slots or other airport resources are not available
or their availability is restricted in some way, we may have to
amend our schedules, change routes or reduce aircraft
utilization. Any of these alternatives could have an adverse
financial impact on us.
Some of the airports to which we fly impose various
restrictions, including limits on aircraft noise levels, limits
on the number of average daily departures and curfews on runway
use. In addition, we cannot assure you that airports at which
there are no such restrictions may not implement restrictions in
the future or that, where such restrictions exist, they may not
become more onerous. Such restrictions may limit our ability to
continue to provide or to increase services at such airports.
17
We and
our auditors identified a material weakness in our
internal controls over financial reporting in connection with
the preparation of our financial statements under
U.S. GAAP, and if we fail to remediate this material
weakness and achieve and maintain an effective system of
internal controls, we may not be able to accurately report our
financial results on a timely basis. As a result, current and
potential stockholders could lose confidence in our financial
reporting, which would harm our business and the trading price
of our Class A shares.
In connection with the preparation of our financial statements
under U.S. GAAP as of and for the year ended
December 31, 2005, we and our auditors identified a
material weakness (as defined under standards established by the
Public Company Accounting Oversight Board) in our internal
controls over financial reporting. A material weakness is a
significant deficiency, or combination of significant
deficiencies, that results in more than a remote likelihood that
a material misstatement of our annual or interim financial
statements will not be prevented or detected. Specifically, we
found that we did not have appropriate expertise in
U.S. GAAP accounting and reporting among our financial and
accounting staff to prepare our periodic financial statements
without needing to make material corrective adjustments and
footnote revisions when those statements are audited or
reviewed. In light of this material weakness, in preparing the
financial statements included in this prospectus, we performed
additional analyses and other post-closing procedures in the
course of preparing our financial statements and related
footnotes in accordance with U.S. GAAP.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002,
beginning with our Annual Report on
Form 20-F
for the fiscal year ending December 31, 2006, we will be
required to furnish a report by our management on our internal
control over financial reporting. This report will contain,
among other matters, an assessment of the effectiveness of our
internal controls over financial reporting as of the end of the
fiscal year, including a statement as to whether or not our
internal controls over financial reporting are effective. We
have contracted an additional accounting manager with experience
in preparing financial statements under U.S. GAAP, we have
engaged an internationally recognized accounting firm to assist
us in developing our procedures to comply with the requirements
of Section 404 and our management and audit committee are
developing other plans to prepare for our compliance with the
requirements of Section 404 and to correct the weakness
identified above. We will incur incremental costs as a result of
these efforts, including increased auditing and legal fees, the
magnitude of which we are not able to estimate at this time. We
may not be able to effectively and timely implement controls and
procedures that adequately respond to Section 404 or other
increased regulatory compliance and reporting requirements that
will be applicable to us as a public company. We cannot assure
you that we will not discover further weaknesses or deficiencies
as we continue to develop these procedures. In addition, we
cannot assure you that the steps we plan to take or the
procedures we plan to implement will be sufficient to ensure
that we will be able to prevent or detect any misstatements to
our financial statements in the future.
Any failure to implement and maintain the improvements in the
controls over our financial reporting, or difficulties
encountered in the implementation of these improvements in our
controls, could result in a material misstatement to the annual
or interim financial statements that would not be prevented or
detected or cause us to fail to meet our reporting obligations
under applicable securities laws. Any failure to improve our
internal controls to address the identified weakness could
result in our incurring substantial liability for not having met
our legal obligations and could also cause investors to lose
confidence in our reported financial information, which could
have a negative impact on the trading price of our Class A
shares.
We
have significant fixed financing costs and expect to incur
additional fixed costs as we expand our fleet.
The airline business is characterized by high leverage, and
accordingly we have a high level of indebtedness. We also have
significant expenditures in connection with our operating leases
and facility rental costs, and substantially all of our property
and equipment is pledged to secure indebtedness. For the year
ended December 31, 2005, our interest expense and aircraft
and facility rental expense under operating leases aggregated
$57.1 million. At March 31, 2006, approximately 62% of
our total indebtedness bore interest at fixed rates, and a small
portion of our lease obligations was determined with reference
to LIBOR. Accordingly, our financing and rent expense will not
decrease significantly if market interest rates decline.
As of May 31, 2006, we had firm commitments to purchase
eight Boeing 737-Next Generation and 18 Embraer 190s, with an
aggregate manufacturers list price of approximately
$1.1 billion. We have arranged for financing for a
significant portion of the commitment relating to such aircraft
and will require substantial capital from external
18
sources to meet our remaining financial commitment. The
acquisition and financing of these aircraft will likely result
in a substantial increase in our leverage and fixed financing
costs. A high degree of leverage and fixed payment obligations
could:
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limit our ability in the future to obtain additional financing
for working capital or other important needs;
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impair our liquidity by diverting substantial cash from our
operating needs to service fixed financing obligations; or
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limit our ability to plan for or react to changes in our
business, in the airline industry or in general economic
conditions.
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Any one of these could have a material adverse effect on our
business, financial condition and results of operations.
The
cost of refinancing our debt and obtaining additional financing
for new aircraft could increase significantly if the
Export-Import Bank of the United States does not continue to
guarantee our debt.
We currently finance our aircraft through bank loans and, to a
lesser extent, operating leases and local bond offerings. In the
past, we have obtained most of the financing for our Boeing
aircraft purchases from commercial financial institutions
utilizing guarantees provided by the Export-Import Bank of the
United States. The Export-Import Bank provides guarantees to
companies that purchase goods from U.S. companies for
export, enabling them to obtain financing at substantially lower
interest rates as compared to those that they could obtain
without a guarantee. The Export-Import Bank will not be able to
provide similar guarantees in connection with financing for our
aircraft purchases from Embraer since those aircraft are not
exports from the United States. At March 31, 2006, we had
$329.3 million of outstanding indebtedness that is owed to
financial institutions under financing arrangements guaranteed
by the Export-Import Bank. We cannot predict whether the
Export-Import Banks credit support will continue to be
available to us to fund future purchases of Boeing aircraft. The
Export-Import Bank may in the future limit its exposure to
Panama-based companies, to our airline or to airlines generally,
or may encourage us to diversify our credit sources by limiting
future guarantees. Similarly, we cannot assure you that we will
be able to continue to raise financing from past sources, or
from other sources, on terms comparable to our existing
financing. We may not be able to continue to obtain lease or
debt financing on terms attractive to us, or at all, and if we
are unable to obtain financing, we may be forced to modify our
aircraft acquisition plans or to incur higher than anticipated
financing costs which could have an adverse impact on the
execution of our growth strategy and business.
Our
existing debt financing agreements and our aircraft operating
leases contain restrictive covenants that impose significant
operating and financial restrictions on us.
Our aircraft financing loans and operating leases and the
instruments governing our other indebtedness contain a number of
significant covenants and restrictions that limit our ability
and our subsidiaries ability to:
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create material liens on our assets;
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take certain actions that may impair creditors rights to
our aircraft;
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sell assets or engage in certain mergers or
consolidations; and
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engage in other specified significant transactions.
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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
Managements Discussion and Analysis of Financial
Condition and Results of Operation Liquidity 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.
19
If we
were to determine that our aircraft, rotable parts or inventory
were impaired, it would have a significant adverse effect on our
operating results.
We perform impairment reviews when there are particular risks of
impairment or other indicators described in Statement of
Financial Accounting Standards No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, in order to
determine whether we need to reduce the carrying value of our
aircraft and related assets with a related charge to our
earnings. In addition to the fact that the value of our fleet
declines as it ages, the excess capacity that currently exists
in the airline industry, airline bankruptcies and other factors
beyond our control may further contribute to the decline of the
fair market value of our aircraft and related rotable parts and
inventory. If such an impairment does occur, we would be
required under U.S. GAAP to write down these assets to
their estimated fair market value through a charge to earnings.
A significant charge to earnings would adversely affect our
financial condition and operating results. In addition, the
interest rates on and the availability of certain of our
aircraft financing loans are tied to the value of the aircraft
securing the loans. If those values were to decrease
substantially, our interest rates may rise or the lenders under
those loans may cease extending credit to us, either of which
could have an adverse impact on our financial condition and
results of operations.
We
rely on information technology systems, and we may become more
dependent on such systems in the future.
We rely upon information technology systems to operate our
business and increase our efficiency. We are highly reliant on
certain critical systems, such as the Sceptre system for
maintenance, the SHARES computer reservation and
check-in system and our new revenue management system. Other
systems are designed to decrease distribution costs through
Internet reservations and to maximize cargo distributions. These
systems may not deliver their anticipated benefits. Also, in
transitioning to new systems we may lose data or experience
interruptions in service, which could harm our business.
Our
quarterly results can fluctuate substantially, and the trading
price of our Class A shares may be affected by such
variations.
The airline industry is by nature cyclical and seasonal, and our
operating results may vary from quarter to quarter. We tend to
experience the highest levels of traffic and revenue in July and
August, with a smaller peak in traffic in December and January.
In general, demand for air travel is higher in the third and
fourth quarters, particularly in international markets, because
of the increase in vacation travel during these periods relative
to the remainder of the year. We generally experience our lowest
levels of passenger traffic in April and May. Given our high
proportion of fixed costs, seasonality can affect our
profitability from quarter to quarter. Demand for air travel is
also affected by factors such as economic conditions, war or the
threat of war, fare levels and weather conditions.
Due to the factors described above and others described in this
prospectus,
quarter-to-quarter
comparisons of our operating results may not be good indicators
of our future performance. In addition, it is possible that in
any quarter our operating results could be below the
expectations of investors and any published reports or analyses
regarding our company. In that event, the price of our
Class A shares could decline, perhaps substantially.
Our
reputation and financial results could be harmed in the event of
an accident or incident involving our aircraft.
An accident or incident involving one of our aircraft could
involve significant claims by injured passengers and others, as
well as significant costs related to the repair or replacement
of a damaged aircraft and its temporary or permanent loss from
service. A short time prior to our acquisition of
AeroRepública, one of its aircraft slid off of a runway in
an accident without serious injuries to passengers; however, the
aircraft was severely damaged and declared a total loss by its
insurers. We are required by our creditors and the lessors of
our aircraft under our
20
operating lease agreements to carry liability insurance, but the
amount of such liability insurance coverage may not be adequate
and we may be forced to bear substantial losses in the event of
any future accident. Our insurance premiums may also increase
due to an accident or incident affecting one of our aircraft.
Substantial claims resulting from an accident in excess of our
related insurance coverage or increased premiums would harm our
business and financial results. Moreover, any aircraft accident
or incident, even if fully insured, could cause the public to
perceive us as less safe or reliable than other airlines which
could harm our business and results of operations. Our business
would also be significantly harmed if the public avoids flying
our aircraft due to an adverse perception of the types of
aircraft that we operate arising from safety concerns or other
problems, whether real or perceived, or in the event of an
accident involving those types of aircraft.
Fluctuations
in foreign exchange rates could negatively affect our net
income.
In 2005, approximately 72% of our expenses and 42% of our
revenues were denominated in U.S. dollars. The remainder of
our expenses and revenues were denominated in the currencies of
the various countries to which we fly, with the largest
non-dollar amount denominated in Pesos. As a result of the
acquisition of AeroRepública in April 2005, we have an
increased exposure to the Colombian Peso. If any of these
currencies decline in value against the U.S. dollar, our
revenues, expressed in U.S. dollars, and our operating
margin would be adversely affected. We may not be able to adjust
our fares denominated in other currencies to offset any
increases in U.S. dollar-denominated expenses, increases in
interest expense or exchange losses on fixed obligations or
indebtedness denominated in foreign currency. Copa currently
does not hedge the risk of fluctuation in foreign exchange
rates, and AeroRepública currently has only limited
hedging. We are exposed to exchange rate losses and gains due to
the fluctuation in the value of local currencies vis-à-vis
the U.S. dollar during the period of time (typically
between 1 to 2 weeks) between the time we are paid in local
currencies and the time we are able to repatriate the revenues
in U.S. dollars.
Our
maintenance costs will increase as Copas fleet ages and as
we perform maintenance on AeroRepúblicas older
fleet.
Because the average age of Copas aircraft was
approximately 3.6 years as of May 31, 2006, the fleet
requires less maintenance now than it will in the future. We
have incurred a low level of maintenance expenses in recent
years because most of the parts on Copas aircraft were
still covered under multi-year warranties. Our maintenance costs
will increase significantly, both on an absolute basis and as a
percentage of our operating expenses as our fleet ages and these
warranties expire.
AeroRepúblicas fleet is considerably older than
Copas fleet, having an average age of 20.4 years as
of May 31, 2006 (not taking into account our currently
retired DC-9
aircraft). The aircraft operated by AeroRepública will
likely be less reliable than Copas newer aircraft and can
be expected to require significantly greater expenditures on
maintenance which may lead to an overall increase in our
consolidated operating expenses.
If we
enter into a prolonged dispute with any of our employees, many
of whom are represented by unions, or if we are required to
increase substantially the salaries or benefits of our
employees, it may have an adverse impact on our operations and
cash flows.
Approximately 61% of our Copa employees belong to a labor union.
There are currently five unions covering our Copa employees
based in Panama: the pilots union; the flight
attendants union; the mechanics union; the traffic
attendants union; and a generalized union, which
represents baggage handlers, aircraft cleaners, counter agents,
and other non-executive administrative staff. Copa is scheduled
to begin its next negotiations with the pilots union in
mid-2008. Copa entered into new collective bargaining agreements
with its general union and its flight attendants union on
October 26, 2005 and April 3, 2006, respectively.
After extensive negotiations which did not lead to a mutually
satisfactory resolution, Copa and the mechanics union
entered into a government-mandated arbitration, and a collective
bargaining agreement was agreed to on March 29, 2006 as a
result of such arbitration proceedings. Previously, Copa has not
had to resort to arbitration to resolve negotiations with its
unions. Collective bargaining agreements in Panama are typically
between three and four year terms. We also have union contracts
with our Copa employees in Brazil and Mexico. AeroRepública
is a party to collective bargaining agreements that cover 95 of
AeroRepúblicas 109 pilots and co-pilots and all of
AeroRepúblicas 176 flight attendants. A strike,
21
work interruption or stoppage or any prolonged dispute with our
employees who are represented by any of these unions could have
an adverse impact on our operations. These risks are typically
exacerbated during periods of renegotiation with the unions. For
example, in 2000 we experienced a brief localized pilots
union work slow-down during contract negotiations that was
eventually resolved to our satisfaction. Any renegotiated
collective bargaining agreement could feature significant wage
increases and a consequent increase in our operating expenses.
Employees outside of Panama that are not currently members of
unions may also form new unions that may seek further wage
increases or benefits.
Our business is labor intensive. We expect salaries, wages and
benefits to increase on a gross basis, and these costs could
increase as a percentage of our overall costs. If we are unable
to hire, train and retain qualified pilots and other employees
at a reasonable cost, our business could be harmed and we may be
unable to complete our expansion plans.
Our
investment in AeroRepública may not generate the benefits
we sought when we purchased the company.
In the second quarter of 2005, we purchased AeroRepública,
a Colombian airline currently providing
point-to-point
service among 12 cities in Colombia and to Panama City.
AeroRepúblicas results of operations are highly
sensitive to competitive conditions in the Colombian domestic
air travel market. AeroRepúblicas rapid growth in
recent years came during a period in which the domestic market
leader, Aerovías del Continente Americano S.A. (Avianca),
experienced severe financial difficulties that resulted in its
bankruptcy and the exit from the market of several other
competitors. Avianca has emerged from bankruptcy with new
management and an improved financial condition. It is therefore
likely that AeroRepública will face stronger competition in
the future than it has in recent years, and its prior results
may not be indicative of its future performance.
AeroRepúblicas results of operations are
significantly less profitable than those of Copa. During the
first three months of 2006, AeroRepública had a net loss of
approximately $746,000 and may have continuing net losses in
future fiscal periods. We may not be able to achieve the cost
savings and other improvements we seek at AeroRepública,
and our failure to do so would harm our consolidated operating
margins and results of operations. Our investment in
AeroRepública is subject to many risks and uncertainties
that will ultimately determine whether the acquisition will
increase or reduce our overall profitability. See
BusinessAeroRepública.
The
integration of AeroRepública into our business may require
a significant amount of our managements time and distract
our management from our core operations.
Although we believe that our acquisition of AeroRepública
represents an attractive opportunity, substantial resources are
needed to implement our plan to improve its profitability.
Implementation of our plan is subject to many uncertainties and
may eventually require us to dedicate a potentially significant
portion of our limited management resources to this effort.
Inconsistencies in standards, internal controls, procedures,
policies, business cultures and compensation structures between
Copa and AeroRepública, and the need to implement,
coordinate and harmonize various business-specific operating
procedures and systems, as well as the financial, accounting,
information and other systems of Copa and AeroRepública,
may result in substantial costs and may divert a substantial
amount of our managements resources from our core
international operations. Diversion of Copas resources
could materially and negatively affect our financial condition
and results of operations.
Our
revenues depend on our relationship with travel agents and tour
operators.
In 2005, approximately 58% of our revenues were derived from
tickets sold by travel agents or tour operators. We cannot
assure you that we will be able to maintain favorable
relationships with these ticket sellers. Our revenues could be
adversely impacted if travel agents or tour operators elect to
favor other airlines or to disfavor us. Our relationship with
travel agents and tour operators may be affected by:
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the size of commissions offered by other airlines;
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changes in our arrangements with other distributors of airline
tickets; and
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the introduction and growth of new methods of selling tickets.
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22
We
rely on third parties to provide our customers and us with
facilities and services that are integral to our
business.
We have entered into agreements with third-party contractors to
provide certain facilities and services required for our
operations, such as heavy aircraft and engine maintenance; call
center services; and catering, ground handling, cargo and
baggage handling, or below the wing aircraft
services. For example, at airports other than Tocumen
International Airport, all of the below the wing
aircraft services for Copa flights are performed by contractors.
AeroRepública contracts ground handling equipment in eleven
of the thirteen cities it serves and has contracted labor for
below the wing tasks in eleven of the thirteen
cities. Overhaul maintenance and C-checks for Copa
are handled by contractors in the United States and Costa Rica,
and some line maintenance for Copa is handled at certain
airports by contract workers rather than our employees.
Substantially all of our agreements with third-party contractors
are subject to termination on short notice. The loss or
expiration of these agreements or our inability to renew these
agreements or to negotiate new agreements with other providers
at comparable rates could harm our business and results of
operations. Further, our reliance on third parties to provide
essential services on our behalf gives us less control over the
costs, efficiency, timeliness and quality of those services. A
contractors negligence could compromise our aircraft or
endanger passengers and crew. This could also have a material
adverse effect on our business. We expect to be dependent on
such agreements for the foreseeable future and if we enter any
new market, we will need to have similar agreements in place.
We
depend on a limited number of suppliers for our aircraft and
engines.
One of the elements of our business strategy is to save costs by
operating a simplified aircraft fleet. Copa currently operates
the Boeing 737-700/800 Next Generation aircraft powered by CFM
56-7B engines from CFM International and the Embraer 190,
powered by General Electric CF 34-10 engines. AeroRepública
has firm commitments to accept delivery of five Embraer 190
aircraft with options to purchase an additional 20 Embraer 190
aircraft. We currently intend to continue to rely exclusively on
these aircraft for the foreseeable future. If any of Boeing,
Embraer, CFM International or GE Engines were unable to perform
their contractual obligations, or if we are unable to acquire or
lease new aircraft or engines from aircraft or engine
manufacturers or lessors on acceptable terms, we would have to
find another supplier for a similar type of aircraft or engine.
If we have to lease or purchase aircraft from another supplier,
we could lose the benefits we derive from our current fleet
composition. We cannot assure you that any replacement aircraft
would have the same operating advantages as the Boeing
737-700/800 Next Generation or Embraer 190 aircraft that would
be replaced or that Copa could lease or purchase engines that
would be as reliable and efficient as the CFM 56-7B and GE
CF34-10. We may also incur substantial transition costs,
including costs associated with retraining our employees,
replacing our manuals and adapting our facilities. Our
operations could also be harmed by the failure or inability of
Boeing, Embraer, CFM International or GE Engines to provide
sufficient parts or related support services on a timely basis.
Our business would be significantly harmed if a design defect or
mechanical problem with any of the types of aircraft that we
operate were discovered that would ground any of our aircraft
while the defect or problem was corrected, assuming it could be
corrected at all. The use of our aircraft could be suspended or
restricted by regulatory authorities in the event of any actual
or perceived mechanical or design problems. Our business would
also be significantly harmed if the public began to avoid flying
with us due to an adverse perception of the types of aircraft
that we operate stemming from safety concerns or other problems,
whether real or perceived, or in the event of an accident
involving those types of aircraft. Carriers that operate a more
diversified fleet are better positioned than we are to manage
such events.
We are
dependent on key personnel.
Our success depends to a significant extent upon the efforts and
abilities of our senior management team and key financial,
commercial, operating and maintenance personnel. In particular,
we depend on the services of our senior management team,
including Pedro Heilbron, our Chief Executive Officer, Victor
Vial, our Chief Financial Officer, Lawrence Ganse, our Chief
Operating Officer, Jorge Isaac García, our Vice-President,
Commercial, and Daniel Gunn, our Vice-President, Planning. We
have no employment agreements or non-competition agreements in
place with members of our senior management team other than
Mr. Heilbron, our Chief Executive Officer.
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Competition for highly qualified personnel is intense, and the
loss of any executive officer, senior manager or other key
employee without adequate replacement or the inability to
attract new qualified personnel could have a material adverse
effect upon our business, operating results and financial
condition.
Risks
Relating to the Airline Industry
The
airline industry is highly competitive.
We face intense competition throughout our route network.
Overall airline industry profit margins are low and industry
earnings are volatile. Airlines compete in the areas of pricing,
scheduling (frequency and flight times), on-time performance,
frequent flyer programs and other services. We compete with a
number of other airlines that currently serve the routes on
which we operate, including Grupo TACA, American Airlines Inc.
and Avianca. Some of our competitors, such as American Airlines,
have larger customer bases and greater brand recognition in the
markets we serve outside Panama, and some of our competitors
have significantly greater financial and marketing resources
than we have. Airlines based in other countries may also receive
subsidies, tax incentives or other state aid from their
respective governments, which are not provided by the Panamanian
government. The commencement of, or increase in, service on the
routes we serve by existing or new carriers could negatively
impact our operating results. Likewise, competitors
service on routes that we are targeting for expansion may make
those expansion plans less attractive.
We must constantly react to changes in prices and services
offered by our competitors to remain competitive. The airline
industry is highly susceptible to price discounting,
particularly because airlines incur very low marginal costs for
providing service to passengers occupying otherwise unsold
seats. Carriers use discount fares to stimulate traffic during
periods of lower demand to generate cash flow and to increase
market share. Any lower fares offered by one airline are often
matched by competing airlines, which often results in lower
industry yields with little or no increase in traffic levels.
Price competition among airlines in the future could lead to
lower fares or passenger traffic on some or all of our routes,
which could negatively impact our profitability. Grupo TACA
lowered many of its fares over a year ago in an effort to
generate higher demand, and we were forced to respond by
adjusting our fares to remain competitive on the affected
routes. We cannot assure you that Grupo TACA or any of our other
competitors will not undercut our fares in the future or
increase capacity on routes in an effort to increase their
respective market shares as they have done in the past. Although
we intend to compete vigorously and to assert our rights against
any predatory conduct, such activity by other airlines could
reduce the level of fares or passenger traffic on our routes to
the point where profitable levels of operations could not be
maintained. Due to our smaller size and financial resources
compared to several of our competitors, we may be less able to
withstand aggressive marketing tactics or fare wars engaged in
by our competitors should such events occur.
We may
face increasing competition from low-cost carriers offering
discounted fares.
Traditional
hub-and-spoke
carriers in the United States and Europe have in recent years
faced substantial and increasing competitive pressure from
low-cost carriers offering discounted fares. The low-cost
carriers operations are typically characterized by
point-to-point
route networks focusing on the highest demand city pairs, high
aircraft utilization, single class service and fewer in-flight
amenities. As evidenced by the operations of Gol Intelligent
Airlines Inc., or Gol, in Brazil and several new low-cost
carriers planning to start service in Mexico, among others, the
low-cost carrier business model appears to be gaining acceptance
in the Latin American aviation industry. As a result, we may
face new and substantial competition from low-cost carriers in
the future which could result in significant and lasting
downward pressure on the fares we charge for flights on our
routes.
Significant
changes or extended periods of high fuel costs or fuel supply
disruptions could materially affect our operating
results.
Fuel costs constitute a significant portion of our total
operating expenses, representing approximately 17.1% of our
operating expenses in 2003, 19.7% in 2004, 29.9% in 2005 and
31.4% in the three months ended March 31, 2006. Our fuel
prices increased very significantly in 2005 and are likely to
increase further, perhaps significantly. As a result,
substantial increases in fuel costs may materially and adversely
affect our operating results. Jet fuel costs have been subject
to wide fluctuations as a result of increases in demand, sudden
disruptions in and other concerns
24
about global supply, as well as market speculation. Both the
cost and availability of fuel are subject to many economic,
political, weather, environmental and other factors and events
occurring throughout the world that we can neither control nor
accurately predict, including international political and
economic circumstances such as the political instability in
major oil-exporting countries in Latin America, Africa and Asia.
Although we have entered into hedging agreements for a portion
of Copas fuel needs through the first five months of 2007
to hedge against fuel price volatility, these agreements provide
only limited protection against future increases in the price of
fuel, and we may discontinue such agreements in the future. Our
current or future arrangements will not be adequate to protect
us from further increases in the price of fuel, and fuel prices
are likely to increase above their current levels and may do so
in the near future. Indeed, numerous market experts and analysts
have predicted that fuel prices can be expected to increase
further, perhaps significantly, from their already high levels.
If a future fuel supply shortage were to arise as a result of
production curtailments by the Organization of the Petroleum
Exporting Countries, or OPEC, a disruption of oil imports,
supply disruptions resulting from severe weather or natural
disasters, a further delay in the restart of the Gulf Coast
refineries as a result of weather disruptions, the continued
unrest in Iraq, other conflicts in the Middle East or otherwise,
higher fuel prices or further reductions of scheduled airline
services could result. Significant increases in fuel costs would
materially and negatively affect our operating results. We
cannot assure you that we would be able to offset any increases
in the price of fuel by increasing our fares.
Because
the airline industry is characterized by high fixed costs and
relatively elastic revenues, airlines cannot quickly reduce
their costs to respond to shortfalls in expected
revenue.
The airline industry is characterized by low gross profit
margins, high fixed costs and revenues that generally exhibit
substantially greater elasticity than costs. The operating costs
of each flight do not vary significantly with the number of
passengers flown and, therefore, a relatively small change in
the number of passengers, fare pricing or traffic mix could have
a significant effect on operating and financial results. These
fixed costs cannot be adjusted quickly to respond to changes in
revenues and a shortfall from expected revenue levels could have
a material adverse effect on our net income.
Airline
bankruptcies could adversely affect the industry.
Since September 11, 2001 several air carriers have sought
to reorganize under Chapter 11 of the United States
Bankruptcy Code, including some of our competitors such as
Avianca and Delta. Successful completion of such reorganizations
could present us with competitors with significantly lower
operating costs derived from labor, supply and financing
contracts renegotiated under the protection of the Bankruptcy
Code. For example, Avianca emerged from bankruptcy with a
significantly improved financial condition. In addition, air
carriers involved in reorganizations have historically
undertaken substantial fare discounting in order to maintain
cash flows and to enhance continued customer loyalty. Such fare
discounting could further lower yields for all carriers,
including us. Further, the market value of aircraft would likely
be negatively impacted if a number of air carriers seek to
reduce capacity by eliminating aircraft from their fleets.
The
2001 terrorist attacks on the United States have adversely
affected, and any additional terrorist attacks or hostilities
would further adversely affect, the airline industry by
decreasing demand and increasing costs.
The terrorist attacks in the United States on September 11,
2001 had a severe adverse impact on the airline industry.
Airline traffic in the United States fell dramatically after the
attacks and decreased less severely throughout Latin America.
Our revenues depend on the number of passengers traveling on our
flights. Therefore, any future terrorist attacks or threat of
attacks, whether or not involving commercial aircraft, any
increase in hostilities relating to reprisals against terrorist
organizations or otherwise and any related economic impact could
result in decreased passenger traffic and materially and
negatively affect our business, financial condition and results
of operations.
The airline industry experienced increased costs following the
2001 terrorist attacks. Airlines have been required to adopt
additional security measures and may be required to comply with
more rigorous security guidelines in the future. Premiums for
insurance against aircraft damage and liability to third parties
increased substantially, and insurers could reduce their
coverage or increase their premiums even further in the event of
additional terrorist attacks, hijackings, airline crashes or
other events adversely affecting the airline industry abroad
25
or in Latin America. In the future, certain aviation insurance
could become unaffordable, unavailable or available only for
reduced amounts of coverage that are insufficient to comply with
the levels of insurance coverage required by aircraft lenders
and lessors or applicable government regulations. While
governments in other countries have agreed to indemnify airlines
for liabilities that they might incur from terrorist attacks or
provide low-cost insurance for terrorism risks, the Panamanian
government has not indicated an intention to provide similar
benefits to us. Increases in the cost of insurance may result in
both higher airline ticket prices and a decreased demand for air
travel generally, which could materially and negatively affect
our business, financial condition and results of operations.
The
negative impact on the airline industry of the current global
state of affairs, including the aftermath of the Iraq war and
the threat of another outbreak of a communicable disease, may
continue or possibly worsen.
The combination of continued instability in the aftermath of the
Iraq war and the publics concerns about the possibility of
an outbreak of a disease that can be spread by fellow commercial
air passengers (such as avian flu or Severe Acute Respiratory
Syndrome) has continued to have a negative impact on the
publics willingness to travel by air. It is impossible to
determine if and when such adverse effects will abate and
whether they will further decrease demand for air travel, which
could materially and negatively affect our business, financial
condition and results of operations.
Risks
Relating to Panama and our Region
Our
performance is heavily dependent on economic conditions in the
countries in which we do business.
Passenger demand is heavily cyclical and highly dependent on
global and local economic growth, economic expectations and
foreign exchange rate variations. In the past, we have been
negatively impacted by poor economic performance in certain
emerging market countries in which we operate. Any of the
following developments in the countries in which we operate
could adversely affect our business, financial condition and
results of operations:
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changes in economic or other governmental policies;
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changes in regulatory, legal or administrative practices; or
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other political or economic developments over which we have no
control.
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Additionally, a significant portion of our revenues is derived
from discretionary and leisure travel which are especially
sensitive to economic downturns. A worsening of economic
conditions could result in a reduction in passenger traffic, and
leisure travel in particular, which in turn would materially and
negatively affect our financial condition and results of
operations. Any perceived weakening of economic conditions in
this region could likewise negatively affect our ability to
obtain financing to meet our future capital needs in
international capital markets.
We are
highly dependent on conditions in Panama.
A substantial portion of our assets are located in the Republic
of Panama, a significant proportion of our customers are
Panamanian, and substantially all of Copas flights operate
through our hub at Tocumen International Airport. As a result,
we depend on economic and political conditions prevailing from
time to time in Panama. Panamas economic conditions in
turn highly depend on the continued profitability and economic
impact of the Panama Canal. Control of the Panama Canal and many
other assets were transferred from the United States to Panama
in 1999 after nearly a century of U.S. control. Although
the Panamanian government is democratically elected and the
Panamanian political climate is currently stable, we cannot
assure you that current conditions will continue. If the
Panamanian economy experiences a recession or a reduction in its
economic growth rate, or if Panama experiences significant
political disruptions, our business, financial condition and
results of operations could be materially and negatively
affected.
We
have paid low taxes in the past, and any increase in the taxes
we or our shareholders pay in Panama or the other countries
where we do business would adversely affect the value of our
Class A shares.
We cannot assure you that we will not be subject to additional
taxes in the future or that current taxes will not be increased.
Our provision for income taxes was $3.6 million,
$5.7 million and $9.6 million in the years ended
26
December 31, 2003, 2004 and 2005, which represented an
effective income tax rate of 7.0%, 7.7% and 10.4% for the
respective periods. We are subject to local tax regulations in
each of the jurisdictions where we operate, the great majority
of which are related to the taxation of income. In six of the
countries to which we fly, we do not pay any income taxes,
because we do not generate income under the laws of those
countries either because they do not have income tax or because
of treaties or other arrangements those countries have with
Panama. In the remaining countries, we pay income tax at a rate
ranging from 25% to 35% of income. Different countries calculate
income in different ways, but they are typically derived from
sales in the applicable country multiplied by our net margin or
by a presumed net margin set by the relevant tax legislation.
The determination of our taxable income in several countries is
based on a combination of revenues sourced to each particular
country and the allocation of expenses of our operations to that
particular country. The methodology for multinational
transportation company sourcing of revenue and expense is not
always specifically prescribed in the relevant tax regulations,
and therefore is subject to interpretation by both us and the
respective taxing authorities. Additionally, in some countries,
the applicability of certain regulations governing non-income
taxes and the determination of our filing status are also
subject to interpretation. We cannot estimate the amount, if
any, of potential tax liabilities that might result if the
allocations, interpretations and filing positions used by us in
our tax returns were challenged by the taxing authorities of one
or more countries. The low rate at which we pay income tax has
been critical to our profitability in recent years and if it
were to increase, our financial performance and results of
operations would be materially and adversely affected.
In the past, our expenses attributable to operations in Panama
have consistently exceeded our revenues attributable to
operations in Panama. As a result, we have typically experienced
losses for Panamanian income tax purposes and were not subject
to any income tax obligations. Beginning in 2004, we adopted an
alternate method of calculating income tax in Panama. Under this
alternative method, allocation of revenues for operations in
Panama is based on a general territorial principle, not
specifically defined in the tax regulations. If the Panamanian
tax authorities do not agree with our methods of allocating
revenues, we may be subject to additional tax liability.
Airlines in Panama are currently not subject to any taxes
relating specifically to the airline industry other than the 4%
tax collected from passengers on tickets sold in Panama for the
benefit of the Panamanian Tourism Bureau.
Panama has historically afforded favorable tax treatment to
investors in publicly held companies and has exempted capital
gains on the sale of shares registered with the National
Securities Commission, or NSC, and sold in an exchange or other
organized market. From time to time, however, the Panamanian
legislature considers amendments to Panamas favorable tax
regime. For example, a proposed law was recently presented to
the Legislative Assembly that would have imposed a tax on the
sales of shares on exchanges outside of Panama, including the
NYSE. Although this proposal was revised within a week of its
initial presentation so as not to apply to the sale of shares
registered with the NSC, which includes our shares, we cannot
assure you that changes to Panamas current tax regime will
not be implemented in the future. Any future change in the
Panamanian tax law increasing the taxes payable by us or by
investors in our shares could have a material adverse effect on
the demand for, and the market value of, our Class A shares.
Political
unrest and instability in Colombia may adversely affect our
business and the market price of our Class A
shares.
We completed our acquisition of AeroRepública in the second
quarter of 2005. Almost all of AeroRepúblicas
scheduled operations are conducted within Colombia. As a result,
AeroRepúblicas results of operations are highly
sensitive to macroeconomic and political conditions prevailing
in Colombia, which have been highly volatile and unstable and
may continue to be so for the foreseeable future. In addition,
terrorism and violence have plagued Colombia in the past.
Continuing guerrilla activity could cause political unrest and
instability in Colombia, which could adversely affect
AeroRepúblicas financial condition and results of
operations. The threat of terrorist attacks could impose
additional costs on us, including enhanced security to protect
our aircraft, facilities and personnel against possible attacks
as well as increased insurance premiums. As a result, we may
encounter significant unanticipated problems at
AeroRepública which could have a material adverse effect on
our consolidated financial condition and results of operations.
27
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 Description of Capital
Stock.
If any of these remedial actions are taken, the trading price of
the Class A shares may be materially and adversely
affected. An issuance of Class C shares could have the
effect of discouraging certain changes of control of Copa
Holdings or may reduce any voting power that the Class A
shares enjoy prior to the Class C share issuance. There can
be no assurance that we would be able to complete an issuance of
Class B shares to Panamanian nationals. We cannot assure
you that restrictions on ownership by non-Panamanian nationals
will not impede the development of an active public trading
market for the Class A shares, adversely affect the market
price of the Class A shares or materially limit our ability
to raise capital in markets outside of Panama in the future.
Our
controlling shareholder has the ability to direct our business
and affairs, and its interests could conflict with
yours.
All of our Class B shares, representing approximately 29.2%
of the economic interest in Copa Holdings and all of the voting
power of our capital stock, are owned by CIASA. CIASA is in turn
controlled by a group of Panamanian investors. In order to
comply with the Panamanian Aviation Act, as amended and
interpreted to date, we have amended our organizational
documents to modify our share capital so that CIASA will
continue to exercise voting control of Copa Holdings. CIASA will
not be able to transfer its voting control unless control of our
company will remain with Panamanian nationals. CIASA will
maintain voting control of the company so long as CIASA
continues to own a majority of our Class B shares and the
Class B shares continue to represent more than 10% of our
total share capital (excluding newly issued shares sold with the
approval of our independent directors committee). Even after
CIASA ceases to own the majority of the voting power of our
capital stock, CIASA may continue to control our board of
directors indirectly through its control of our Nominating and
Corporate Governance Committee. As the controlling shareholder,
CIASA may direct us to take actions that could be contrary to
your interests and under certain circumstances CIASA will be
able to prevent other shareholders, including you, from blocking
these actions. Also, CIASA may prevent change of control
transactions that might otherwise provide you with an
opportunity to dispose of or realize a premium on your
investment in our Class A shares.
The
Class A shares will only be permitted to vote in very
limited circumstances and may never have full voting
rights.
The holders of Class A shares have no right to vote at our
shareholders meetings except with respect to corporate
transformations of Copa Holdings, mergers, consolidations or
spin-offs of Copa Holdings, changes of corporate purpose,
voluntary delistings of the Class A shares from the NYSE,
the approval of nominations of our independent directors and
amendments to the foregoing provisions that adversely affect the
rights and privileges of any Class A shares. The holders of
Class B shares have the power, subject to our
shareholders agreement with Continental, to elect the
board of directors and to determine the outcome of all other
matters to be decided by a vote of shareholders. Class A
shares will not have full voting rights unless the Class B
shares represent less than 10% of
28
our total capital stock (excluding newly issued shares sold with
the approval of our independent directors committee). See
Description of Capital Stock. We cannot assure you
that the Class A shares will ever carry full voting rights.
Substantial
future sales of our Class A shares by Continental or CIASA
after this offering could cause the price of the Class A
shares to decrease.
CIASA owns all of our Class B shares, and those
Class B shares will be converted into Class A shares
if they are sold to non-Panamanian investors. In connection with
our initial public offering in December 2005, Continental and
CIASA reduced their ownership of our total capital stock from
49% to approximately 27.3% and from 51% to approximately 29.2%,
respectively. CIASA holds registration rights with respect to a
significant portion of its shares pursuant to a registration
rights agreement entered into in connection with our initial
public offering. The market price of our Class A shares
could drop significantly if Continental or CIASA further reduces
its investment in us, other significant holders of our shares
sell a significant number of shares or if the market perceives
that Continental, CIASA or other significant holders intend to
sell them. In connection with this offering, Continental has
agreed, subject to certain exceptions, not to issue or transfer
without the consent of the underwriters, until the first
anniversary of the date of this prospectus, any shares of our
capital stock, any options or warrants to purchase shares of our
capital stock, or any securities convertible into, or
exchangeable for, shares of our capital stock. Continental has
also agreed not to make any demand for, or exercise any right
with respect to, the registration of any Class A shares or
any security convertible into or exercisable or exchangeable for
Class A shares until one year after the date of this
prospectus. In addition, Continental has agreed, subject to the
same exceptions, not to issue or transfer without the consent of
CIASA, until the second anniversary of the date of this
prospectus, any shares of our capital stock, any options or
warrants to purchase shares of our capital stock or any
securities convertible into or exchangeable for shares of our
capital stock. Nevertheless, these
lock-up
agreements can be waived at any time and, in any event, after
these
lock-up
agreements expire, Continental will not be restricted from
selling its shares in the public market.
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 being sold in this
offering, and as a result you may experience substantial
dilution of your interest in us.
You
may not be able to sell our Class A shares at the price or
at the time you desire because an active or liquid market for
the Class A shares may not develop.
Our Class A shares are listed on the NYSE. During the three
months ended March 31, 2006, the average daily trading
volume for our Class A shares as reported by the NYSE was
approximately 212,477 shares. We cannot predict whether an
active liquid public trading market for our Class A shares
will be sustained. Active, liquid trading markets generally
result in lower price volatility and more efficient execution of
buy and sell orders for our investors. The liquidity of a
securities market is often affected by the volume of shares
publicly held by unrelated parties.
Our
board of directors may, in its discretion, amend or repeal our
dividend policy. You may not receive the level of dividends
provided for in the dividend policy or any dividends at
all.
Our board of directors has adopted a dividend policy that
provides for the payment of dividends to shareholders equal to
approximately 10% of our annual consolidated net income. Our
board of directors may, in its sole discretion and for any
reason, amend or repeal this dividend policy. Our board of
directors may decrease the level of dividends provided for in
this dividend policy or entirely discontinue the payment of
dividends. Future dividends with respect to shares of our common
stock, if any, will depend on, among other things, our results
of operations, cash
29
requirements, financial condition, contractual restrictions,
business opportunities, provisions of applicable law and other
factors that our board of directors may deem relevant. See
Dividend Policy.
To the
extent we pay dividends to our shareholders, we will have less
capital available to meet our future liquidity
needs.
Our board of directors has adopted a dividend policy that
provides for the payment of dividends to shareholders equal to
approximately 10% of our annual consolidated net income. The
aviation industry has cyclical characteristics, and many
international airlines are currently experiencing difficulties
meeting their liquidity needs. Also, our business strategy
contemplates substantial growth over the next several years, and
we expect such growth will require a great deal of liquidity. To
the extent that we pay dividends in accordance with our dividend
policy, the money that we distribute to shareholders will not be
available to us to fund future growth and meet our other
liquidity needs.
Our
Articles of Incorporation impose ownership and control
restrictions on our company which ensure that Panamanian
nationals will continue to control us and that these
restrictions operate to prevent any change of control or some
transfers of ownership in order to comply with the Aviation Act
and other bilateral restrictions.
Under the Panamanian Aviation Act, as amended and interpreted to
date, Panamanian nationals must exercise effective
control over the operations of the airline and must
maintain substantial ownership. These phrases are
not defined in the Aviation Act itself and it is unclear how a
Panamanian court would interpret them. The share ownership
requirements and transfer restrictions contained in our Articles
of Incorporation, as well as the dual-class structure of our
voting capital stock are designed to ensure compliance with
these ownership and control restrictions. See Description
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
30
in these other countries may have an adverse effect on the
market value of securities of Panamanian issuers or issuers with
significant operations in Latin America. As a result of economic
problems in various emerging market countries in recent years
(such as the Asian financial crisis of 1997, the Russian
financial crisis of 1998 and the Argentine financial crisis in
2001), investors have viewed investments in emerging markets
with heightened caution. Crises in other emerging market
countries may hamper investor enthusiasm for securities of
Panamanian issuers, including our shares, which could adversely
affect the market price of our Class A shares.
USE OF
PROCEEDS
We will not receive any proceeds from the sale of our
Class A shares by the selling shareholder.
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 Description of
Capital StockDividends.
Our board of directors has adopted a dividend policy that
provides for the payment of approximately 10% of our annual
consolidated net income to shareholders as a dividend to be
declared at our annual shareholders meeting and paid
shortly thereafter. Our board of directors may, in its sole
discretion and for any reason, amend or discontinue the dividend
policy. Our board of directors may change the level of dividends
provided for in this dividend policy or entirely discontinue the
payment of dividends. Future dividends with respect to shares of
our common stock, if any, will depend on, among other things,
our results of operations, cash requirements, financial
condition, contractual restrictions, business opportunities,
provisions of applicable law and other factors that our board of
directors may deem relevant.
On May 11, 2006, our board of directors declared an annual
dividend of $0.19 per share payable June 15, 2006 to
shareholders of record as of May 31, 2006 which will
represent in an aggregate dividend payment of $8.3 million.
In addition, we paid an extraordinary dividend of
$10 million to our shareholders in December 2004 and
another extraordinary dividend of $10 million in June 2005.
Prior to the December 2004 dividend payment, we had not paid a
dividend since the formation of Copa Holdings in 1998.
MARKET
INFORMATION
Our Class A shares have been listed on the New York Stock
Exchange, or NYSE, under the symbol CPA since
December 14, 2005. The following table sets forth, for the
periods indicated, the high and low closing sale prices for the
Class A shares on the NYSE for the periods indicated.
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Low
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High
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2005
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Fourth
quarter(1)
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$
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20.00
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$
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27.30
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Last Six Months
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January 2006
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$
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22.20
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$
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27.10
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February 2006
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$
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20.90
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$
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23.75
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March 2006
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$
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21.10
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$
|
23.20
|
|
April 2006
|
|
$
|
21.20
|
|
|
$
|
23.13
|
|
May 2006
|
|
$
|
21.15
|
|
|
$
|
23.80
|
|
June
2006(2)
|
|
$
|
22.03
|
|
|
$
|
24.25
|
|
Source: FactSet Research Systems
|
|
|
(1)
|
|
Period beginning December 14,
2005 through December 31, 2005.
|
|
(2)
|
|
Period through June 28, 2006.
|
31
CAPITALIZATION
The following table sets forth our cash and cash equivalents,
short-term debt, long-term debt and total capitalization at
April 30, 2006 on an actual basis. As we will receive no
proceeds from the sale of the Class A shares by the selling
shareholder, there will be no change in our overall
capitalization as a result of this offering. You should read
this table in conjunction with Selected Financial and
Operating Data, Managements Discussion and
Analysis of Financial Condition and Results of Operations
and our financial statements and the related notes included
elsewhere in this prospectus. None of our indebtedness is
guaranteed by a third party.
|
|
|
|
|
|
|
At April 30, 2006
|
|
|
|
Actual
|
|
|
|
(in thousands)
|
|
|
Cash and cash equivalents
|
|
$
|
102,514
|
|
Indebtedness:
|
|
|
|
|
Copa
|
|
|
|
|
Secured indebtedness due through
2017
|
|
|
413,387
|
|
Unsecured indebtedness due through
2006
|
|
|
27,503
|
|
AeroRepública
|
|
|
|
|
Secured indebtedness due through
2012
|
|
|
14,635
|
|
Unsecured indebtedness due through
2010
|
|
|
4,792
|
|
Shareholders equity:
|
|
|
|
|
Class A shares (without par
value)
|
|
|
19,813
|
|
Class B shares (without par
value)
|
|
|
9,410
|
|
Additional paid in capital
|
|
|
303
|
|
Retained earnings
|
|
|
261,487
|
|
Accumulated other comprehensive
loss
|
|
|
(2,527
|
)
|
|
|
|
|
|
Total shareholders equity
|
|
|
288,486
|
|
|
|
|
|
|
Total capitalization
|
|
|
748,802
|
|
|
|
|
|
|
32
SELECTED
FINANCIAL AND OPERATING DATA
The following table presents summary consolidated financial and
operating data as of the dates and for the periods indicated.
Our consolidated financial statements are prepared in accordance
with U.S. GAAP and are stated in U.S. dollars. You
should read this information in conjunction with our
consolidated financial statements included in this prospectus
and Managements Discussion and Analysis of Results
of Operations and Financial Condition appearing elsewhere
in this prospectus.
The summary consolidated financial information as of
December 31, 2004 and 2005 and for the years ended
December 31, 2003, 2004 and 2005 has been derived from our
audited consolidated financial statements included elsewhere in
this prospectus. The consolidated financial information as of
December 31, 2003 and for the year ended December 31,
2002 has been derived from our audited consolidated financial
statements that were prepared under U.S. GAAP and which
have not been included in this prospectus. The consolidated
financial information as of December 31, 2001 and 2002 and
for the year ended December 31, 2001 has been derived from
our audited consolidated financial statements that were prepared
under International Accounting Standards and adjusted to be
presented on a basis consistent with U.S. GAAP and which
have not been included in this prospectus.
The summary consolidated financial data as of and for the three
months ended March 31, 2005 and 2006 has been derived from
our unaudited interim consolidated financial statements for
these periods appearing elsewhere in this prospectus. The
results of operations for the three months ended March 31,
2006 are not necessarily indicative of the operating results to
be expected for the entire year ending December 31, 2006 or
for any other period.
We acquired 99.8% of the stock of AeroRepública, a
Colombian air carrier, and began consolidating its results on
April 22, 2005. As a result of this acquisition, our
financial information at and for the year ended
December 31, 2005 and for the three months ended
March 31, 2006 is not comparable to the information at and
for the year ended December 31, 2004 and for the three
months ended March 31, 2005, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Year Ended
December 31,
|
|
|
March 31,
|
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005(20)
|
|
|
2005
|
|
|
2006
|
|
|
|
(in thousands of dollars, except
share and per share data and operating data)
|
|
|
INCOME STATEMENT DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger revenue
|
|
$
|
257,918
|
|
|
$
|
269,629
|
|
|
$
|
311,683
|
|
|
$
|
364,611
|
|
|
$
|
565,131
|
|
|
$
|
105,141
|
|
|
$
|
180,358
|
|
Cargo, mail and other
|
|
|
32,454
|
|
|
|
31,008
|
|
|
|
30,106
|
|
|
|
35,226
|
|
|
|
43,443
|
|
|
|
8,467
|
|
|
|
11,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
290,372
|
|
|
|
300,637
|
|
|
|
341,789
|
|
|
|
399,837
|
|
|
|
608,574
|
|
|
|
113,608
|
|
|
|
191,726
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft fuel
|
|
|
46,514
|
|
|
|
40,024
|
|
|
|
48,512
|
|
|
|
62,549
|
|
|
|
149,303
|
|
|
|
21,336
|
|
|
|
47,110
|
|
Salaries and benefits
|
|
|
38,709
|
|
|
|
39,264
|
|
|
|
45,254
|
|
|
|
51,701
|
|
|
|
69,730
|
|
|
|
13,385
|
|
|
|
19,446
|
|
Passenger servicing
|
|
|
32,834
|
|
|
|
33,892
|
|
|
|
36,879
|
|
|
|
39,222
|
|
|
|
50,622
|
|
|
|
10,431
|
|
|
|
14,634
|
|
Commissions
|
|
|
31,652
|
|
|
|
28,720
|
|
|
|
27,681
|
|
|
|
29,073
|
|
|
|
45,087
|
|
|
|
7,481
|
|
|
|
13,101
|
|
Reservations and sales
|
|
|
18,629
|
|
|
|
16,707
|
|
|
|
18,011
|
|
|
|
22,118
|
|
|
|
29,213
|
|
|
|
5,725
|
|
|
|
8,265
|
|
Maintenance, materials and repairs
|
|
|
25,369
|
|
|
|
20,733
|
|
|
|
20,354
|
|
|
|
19,742
|
|
|
|
32,505
|
|
|
|
4,714
|
|
|
|
10,287
|
|
Depreciation
|
|
|
13,325
|
|
|
|
13,377
|
|
|
|
14,040
|
|
|
|
19,279
|
|
|
|
19,857
|
|
|
|
4,739
|
|
|
|
5,417
|
|
Flight operations
|
|
|
13,887
|
|
|
|
14,567
|
|
|
|
15,976
|
|
|
|
17,904
|
|
|
|
24,943
|
|
|
|
4,972
|
|
|
|
7,713
|
|
Aircraft rentals
|
|
|
20,106
|
|
|
|
21,182
|
|
|
|
16,686
|
|
|
|
14,445
|
|
|
|
27,631
|
|
|
|
4,678
|
|
|
|
8,861
|
|
Landing fees and other rentals
|
|
|
8,451
|
|
|
|
8,495
|
|
|
|
10,551
|
|
|
|
12,155
|
|
|
|
17,909
|
|
|
|
3,343
|
|
|
|
5,555
|
|
Other
|
|
|
15,892
|
|
|
|
19,166
|
|
|
|
25,977
|
|
|
|
29,306
|
|
|
|
32,622
|
|
|
|
6,827
|
|
|
|
9,574
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Year Ended
December 31,
|
|
|
March 31,
|
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005(20)
|
|
|
2005
|
|
|
2006
|
|
|
|
(in thousands of dollars, except
share and per share data and operating data)
|
|
|
Fleet impairment
charge(1)
|
|
|
|
|
|
|
13,669
|
|
|
|
3,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
265,368
|
|
|
|
269,796
|
|
|
|
283,493
|
|
|
|
317,494
|
|
|
|
499,422
|
|
|
|
87,631
|
|
|
|
149,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
25,004
|
|
|
|
30,841
|
|
|
|
58,296
|
|
|
|
82,343
|
|
|
|
109,152
|
|
|
|
25,977
|
|
|
|
41,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(10,988
|
)
|
|
|
(7,629
|
)
|
|
|
(11,613
|
)
|
|
|
(16,488
|
)
|
|
|
(21,629
|
)
|
|
|
(4,557
|
)
|
|
|
(6,278
|
)
|
Interest capitalized
|
|
|
1,592
|
|
|
|
1,114
|
|
|
|
2,009
|
|
|
|
963
|
|
|
|
1,089
|
|
|
|
143
|
|
|
|
508
|
|
Interest income
|
|
|
701
|
|
|
|
831
|
|
|
|
887
|
|
|
|
1,423
|
|
|
|
3,584
|
|
|
|
687
|
|
|
|
1,262
|
|
Other,
net(2)
|
|
|
331
|
|
|
|
(1,490
|
)
|
|
|
2,554
|
|
|
|
6,063
|
|
|
|
395
|
|
|
|
2,196
|
|
|
|
(909
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-operating expenses, net
|
|
|
(8,364
|
)
|
|
|
(7,174
|
)
|
|
|
(6,163
|
)
|
|
|
(8,039
|
)
|
|
|
(16,561
|
)
|
|
|
(1,531
|
)
|
|
|
(5,417
|
)
|
Income (loss) before income taxes
|
|
|
16,640
|
|
|
|
23,667
|
|
|
|
52,133
|
|
|
|
74,304
|
|
|
|
92,591
|
|
|
|
24,446
|
|
|
|
36,346
|
|
Provision for income taxes
|
|
|
(1,822
|
)
|
|
|
(2,999
|
)
|
|
|
(3,644
|
)
|
|
|
(5,732
|
)
|
|
|
(9,592
|
)
|
|
|
(1,886
|
)
|
|
|
(4,066
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
14,818
|
|
|
|
20,668
|
|
|
|
48,489
|
|
|
|
68,572
|
|
|
|
82,999
|
|
|
|
22,560
|
|
|
|
32,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE SHEET
DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents and
short-term investments
|
|
$
|
28,385
|
|
|
$
|
34,476
|
|
|
$
|
61,432
|
|
|
$
|
110,943
|
|
|
$
|
114,490
|
|
|
$
|
111,143
|
|
|
$
|
114,819
|
|
Accounts receivable, net
|
|
|
30,210
|
|
|
|
24,006
|
|
|
|
31,019
|
|
|
|
27,706
|
|
|
|
49,492
|
|
|
|
32,372
|
|
|
|
58,096
|
|
Total current assets
|
|
|
69,040
|
|
|
|
68,940
|
|
|
|
103,523
|
|
|
|
152,087
|
|
|
|
184,793
|
|
|
|
158,876
|
|
|
|
198,919
|
|
Purchase deposits for flight
equipment
|
|
|
46,540
|
|
|
|
55,867
|
|
|
|
45,869
|
|
|
|
7,190
|
|
|
|
52,753
|
|
|
|
23,163
|
|
|
|
59,673
|
|
Total property and equipment
|
|
|
227,717
|
|
|
|
345,411
|
|
|
|
480,488
|
|
|
|
541,211
|
|
|
|
637,543
|
|
|
|
553,117
|
|
|
|
643,308
|
|
Total assets
|
|
|
300,121
|
|
|
|
421,935
|
|
|
|
591,915
|
|
|
|
702,050
|
|
|
|
916,912
|
|
|
|
721,862
|
|
|
|
936,429
|
|
Long-term debt
|
|
|
111,125
|
|
|
|
211,698
|
|
|
|
311,991
|
|
|
|
380,827
|
|
|
|
402,954
|
|
|
|
384,236
|
|
|
|
393,541
|
|
Total shareholders equity
|
|
|
46,426
|
|
|
|
67,094
|
|
|
|
115,583
|
|
|
|
174,155
|
|
|
|
245,867
|
|
|
|
196,715
|
|
|
|
278,090
|
|
CASH FLOW
DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
$
|
32,997
|
|
|
$
|
55,543
|
|
|
$
|
73,479
|
|
|
$
|
98,051
|
|
|
$
|
119,089
|
|
|
$
|
13,635
|
|
|
$
|
21,100
|
|
Net cash used in investing
activities
|
|
|
(39,473
|
)
|
|
|
(150,203
|
)
|
|
|
(151,802
|
)
|
|
|
(85,738
|
)
|
|
|
(163,570
|
)
|
|
|
(10,345
|
)
|
|
|
(10,368
|
)
|
Net cash provided by financing
activities
|
|
|
14,466
|
|
|
|
100,400
|
|
|
|
105,298
|
|
|
|
29,755
|
|
|
|
38,921
|
|
|
|
2,687
|
|
|
|
(6,640
|
)
|
OTHER FINANCIAL
DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA(3)
|
|
|
38,660
|
|
|
|
42,728
|
|
|
|
74,890
|
|
|
|
107,685
|
|
|
|
129,404
|
|
|
|
32,912
|
|
|
|
46,271
|
|
Aircraft rentals
|
|
|
20,106
|
|
|
|
21,182
|
|
|
|
16,686
|
|
|
|
14,445
|
|
|
|
27,631
|
|
|
|
4,678
|
|
|
|
8,861
|
|
Operating
margin(4)
|
|
|
8.6
|
%
|
|
|
10.3
|
%
|
|
|
17.1
|
%
|
|
|
20.6
|
%
|
|
|
17.9
|
%
|
|
|
22.9
|
%
|
|
|
21.8
|
%
|
Weighted average shares used in
computing net income per
share(5)
|
|
|
42,812,500
|
|
|
|
42,812,500
|
|
|
|
42,812,500
|
|
|
|
42,812,500
|
|
|
|
42,812,500
|
|
|
|
42,812,500
|
|
|
|
42,812,500
|
|
Net income (loss) per
share(5)
|
|
$
|
0.35
|
|
|
$
|
0.48
|
|
|
$
|
1.13
|
|
|
$
|
1.60
|
|
|
$
|
1.94
|
|
|
$
|
0.53
|
|
|
$
|
0.75
|
|
OPERATING
DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue passengers
carried(6)
|
|
|
1,794
|
|
|
|
1,819
|
|
|
|
2,028
|
|
|
|
2,333
|
|
|
|
4,361
|
|
|
|
636
|
(22)
|
|
|
1,321
|
(22)
|
Revenue passenger
miles(7)
|
|
|
1,870
|
|
|
|
1,875
|
|
|
|
2,193
|
|
|
|
2,548
|
|
|
|
3,831
|
|
|
|
736
|
(22)
|
|
|
1,155
|
(22)
|
Available seat
miles(8)
|
|
|
2,920
|
|
|
|
2,847
|
|
|
|
3,226
|
|
|
|
3,639
|
|
|
|
5,368
|
|
|
|
1,018
|
|
|
|
1,615
|
|
Load
factor(9)
|
|
|
64.0
|
%
|
|
|
65.9
|
%
|
|
|
68.0
|
%
|
|
|
70.0
|
%
|
|
|
71.4
|
%
|
|
|
72.3
|
%(22)
|
|
|
71.5
|
%(22)
|
Break-even load
factor(10)
|
|
|
58.7
|
%
|
|
|
54.5
|
%
|
|
|
52.8
|
%
|
|
|
52.6
|
%
|
|
|
57.9
|
%
|
|
|
52.1
|
%(22)
|
|
|
55.8
|
%(22)
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Year Ended
December 31,
|
|
|
March 31,
|
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005(20)
|
|
|
2005
|
|
|
2006
|
|
|
|
(in thousands of dollars, except
share and per share data and operating data)
|
|
|
Total block
hours(11)
|
|
|
59,760
|
|
|
|
58,112
|
|
|
|
64,909
|
|
|
|
70,228
|
|
|
|
103,628
|
|
|
|
18,928
|
|
|
|
31,483
|
|
Average daily aircraft
utilization(12)
|
|
|
9.1
|
|
|
|
8.8
|
|
|
|
9.0
|
|
|
|
9.3
|
|
|
|
9.8
|
|
|
|
9.9
|
|
|
|
9.7
|
|
Average passenger fare
|
|
|
143.8
|
|
|
|
148.2
|
|
|
|
153.7
|
|
|
|
156.3
|
|
|
|
129.6
|
|
|
|
165.3
|
(22)
|
|
|
136.5
|
(22)
|
Yield(13)
|
|
|
13.79
|
|
|
|
14.38
|
|
|
|
14.22
|
|
|
|
14.31
|
|
|
|
14.75
|
|
|
|
14.28
|
(22)
|
|
|
15.61
|
(22)
|
Passenger revenue per
ASM(14)
|
|
|
8.83
|
|
|
|
9.47
|
|
|
|
9.66
|
|
|
|
10.02
|
|
|
|
10.53
|
|
|
|
10.33
|
|
|
|
11.17
|
|
Operating revenue per
ASM(15)
|
|
|
9.94
|
|
|
|
10.56
|
|
|
|
10.60
|
|
|
|
10.99
|
|
|
|
11.34
|
|
|
|
11.16
|
|
|
|
11.87
|
|
Operating expenses per ASM
(CASM)(16)
|
|
|
9.09
|
|
|
|
9.48
|
|
|
|
8.79
|
|
|
|
8.72
|
|
|
|
9.30
|
|
|
|
8.61
|
|
|
|
9.29
|
|
Departures
|
|
|
23,742
|
|
|
|
23,361
|
|
|
|
25,702
|
|
|
|
27,434
|
|
|
|
48,934
|
|
|
|
7,096
|
|
|
|
15,826
|
|
Average daily departures
|
|
|
65.0
|
|
|
|
64.0
|
|
|
|
70.4
|
|
|
|
75.0
|
|
|
|
156.6
|
|
|
|
78.8
|
|
|
|
176.2
|
|
Average number of aircraft
|
|
|
18.0
|
|
|
|
18.1
|
|
|
|
19.8
|
|
|
|
20.6
|
|
|
|
31.0
|
|
|
|
21.2
|
|
|
|
36.1
|
|
Airports served at period end
|
|
|
28
|
|
|
|
27
|
|
|
|
28
|
|
|
|
29
|
|
|
|
43
|
|
|
|
29
|
|
|
|
43
|
|
SEGMENT FINANCIAL
DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Copa:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue
|
|
$
|
290,372
|
|
|
$
|
300,637
|
|
|
$
|
341,789
|
|
|
$
|
399,837
|
|
|
$
|
505,655
|
|
|
$
|
113,608
|
|
|
$
|
151,602
|
|
Operating expenses
|
|
|
265,368
|
|
|
|
269,796
|
|
|
|
283,493
|
|
|
|
317,494
|
|
|
|
402,684
|
|
|
|
87,631
|
|
|
|
110,613
|
|
Depreciation
|
|
|
13,325
|
|
|
|
13,377
|
|
|
|
14,040
|
|
|
|
19,279
|
|
|
|
19,242
|
|
|
|
4,739
|
|
|
|
5,227
|
|
Aircraft rentals
|
|
|
20,106
|
|
|
|
21,182
|
|
|
|
16,686
|
|
|
|
14,445
|
|
|
|
22,096
|
|
|
|
4,678
|
|
|
|
5,858
|
|
Interest expense
|
|
|
10,988
|
|
|
|
7,629
|
|
|
|
11,613
|
|
|
|
16,488
|
|
|
|
19,424
|
|
|
|
4,557
|
|
|
|
5,678
|
|
Interest capitalized
|
|
|
1,592
|
|
|
|
1,114
|
|
|
|
2,009
|
|
|
|
963
|
|
|
|
1,089
|
|
|
|
143
|
|
|
|
508
|
|
Interest income
|
|
|
701
|
|
|
|
831
|
|
|
|
887
|
|
|
|
1,423
|
|
|
|
3,376
|
|
|
|
687
|
|
|
|
1,148
|
|
Net income (loss) before tax
|
|
|
16,640
|
|
|
|
23,667
|
|
|
|
52,133
|
|
|
|
74,304
|
|
|
|
89,745
|
|
|
|
24,446
|
|
|
|
37,032
|
|
Total assets
|
|
|
300,121
|
|
|
|
421,935
|
|
|
|
591,915
|
|
|
|
702,050
|
|
|
|
851,075
|
|
|
|
721,862
|
|
|
|
879,215
|
|
AeroRepública:(21)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
102,976
|
|
|
|
|
|
|
$
|
40,246
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96,839
|
|
|
|
|
|
|
|
39,472
|
|
Depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
615
|
|
|
|
|
|
|
|
190
|
|
Aircraft rentals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,535
|
|
|
|
|
|
|
|
3,003
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,205
|
|
|
|
|
|
|
|
600
|
|
Interest capitalized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
208
|
|
|
|
|
|
|
|
114
|
|
Net income (loss) before tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,846
|
|
|
|
|
|
|
|
(686
|
)
|
Total assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98,091
|
|
|
|
|
|
|
|
90,740
|
|
SEGMENT OPERATING
DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Copa:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available seat
miles(8)
|
|
|
2,920
|
|
|
|
2,847
|
|
|
|
3,226
|
|
|
|
3,639
|
|
|
|
4,409
|
|
|
|
1,018
|
|
|
|
1,216
|
|
Load
factor(9)
|
|
|
64.0
|
%
|
|
|
65.9
|
%
|
|
|
68.0
|
%
|
|
|
70.0
|
%
|
|
|
73.4
|
%
|
|
|
72.3
|
%
|
|
|
77.6
|
%
|
Break-even load factor
|
|
|
58.7
|
%
|
|
|
54.5
|
%
|
|
|
52.8
|
%
|
|
|
52.6
|
%
|
|
|
56.8
|
%
|
|
|
52.1
|
%
|
|
|
55.3
|
%
|
Yield(13)
|
|
|
13.79
|
|
|
|
14.38
|
|
|
|
14.22
|
|
|
|
14.31
|
|
|
|
14.41
|
|
|
|
14.28
|
|
|
|
15.01
|
|
Operating revenue per
ASM(15)
|
|
|
9.94
|
|
|
|
10.56
|
|
|
|
10.60
|
|
|
|
10.99
|
|
|
|
11.47
|
|
|
|
11.16
|
|
|
|
12.46
|
|
CASM(16)
|
|
|
9.09
|
|
|
|
9.48
|
|
|
|
8.79
|
|
|
|
8.72
|
|
|
|
9.13
|
|
|
|
8.61
|
|
|
|
9.09
|
|
Average stage
length(18)
|
|
|
1,023
|
|
|
|
1,010
|
|
|
|
1,028
|
|
|
|
1,047
|
|
|
|
1,123
|
|
|
|
1,115
|
|
|
|
1,158
|
|
On time
performance(19)
|
|
|
87.7
|
%
|
|
|
90.5
|
%
|
|
|
91.4
|
%
|
|
|
91.8
|
%
|
|
|
91.7
|
%
|
|
|
94.9
|
%
|
|
|
92.3
|
%
|
AeroRepública:(21)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available seat
miles(8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
950
|
|
|
|
|
|
|
|
399
|
|
Load
factor(9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62.0
|
%
|
|
|
|
|
|
|
53.1
|
%
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Year Ended
December 31,
|
|
|
March 31,
|
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005(20)
|
|
|
2005
|
|
|
2006
|
|
|
|
(in thousands of dollars, except
share and per share data and operating data)
|
|
|
Break even load factor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60.8
|
%
|
|
|
|
|
|
|
54.4
|
%
|
Yield(13)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16.61
|
(22)
|
|
|
|
|
|
|
18.32
|
(22)
|
Operating revenue per
ASM(15)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.74
|
|
|
|
|
|
|
|
10.10
|
|
CASM(16)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.10
|
|
|
|
|
|
|
|
9.90
|
|
Average stage
length(18)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
360
|
|
|
|
|
|
|
|
357
|
|
On time
performance(19)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70.4
|
%
|
|
|
|
|
|
|
81.9
|
%
|
|
|
|
(1)
|
|
Represents impairment losses on our
Boeing 737-200 aircraft and related assets. See Note 8 to
our consolidated financial statements.
|
|
(2)
|
|
Consists primarily of changes in
the fair value of fuel derivative contracts, foreign exchange
gains/losses and gains on sale of Boeing 737-200 aircraft. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations and the notes to our
consolidated financial statements.
|
|
(3)
|
|
EBITDA represents net income (loss)
plus the sum of interest expense, income taxes, depreciation and
amortization minus the sum of interest capitalized and interest
income. EBITDA is presented as supplemental information because
we believe it is a useful indicator of our operating performance
and is useful in comparing our operating performance with other
companies in the airline industry. However, EBITDA should not be
considered in isolation, as a substitute for net income prepared
in accordance with U.S. GAAP or as a measure of a
companys profitability. In addition, our calculation of
EBITDA may not be comparable to other companies similarly
titled measures. The following table presents a reconciliation
of our net income to EBITDA for the specified periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
Three Months Ended
March 31,
|
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
(in thousands of
dollars)
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
14,818
|
|
|
$
|
20,668
|
|
|
$
|
48,489
|
|
|
$
|
68,572
|
|
|
$
|
82,999
|
|
|
$
|
22,560
|
|
|
$
|
32,280
|
|
Interest expense
|
|
|
10,988
|
|
|
|
7,629
|
|
|
|
11,613
|
|
|
|
16,488
|
|
|
|
21,629
|
|
|
|
4,557
|
|
|
|
6,278
|
|
Income taxes
|
|
|
1,822
|
|
|
|
2,999
|
|
|
|
3,644
|
|
|
|
5,732
|
|
|
|
9,592
|
|
|
|
1,886
|
|
|
|
4,066
|
|
Depreciation
|
|
|
13,325
|
|
|
|
13,377
|
|
|
|
14,040
|
|
|
|
19,279
|
|
|
|
19,857
|
|
|
|
4,739
|
|
|
|
5,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
40,953
|
|
|
|
44,673
|
|
|
|
77,786
|
|
|
|
110,071
|
|
|
|
134,077
|
|
|
|
33,742
|
|
|
|
48,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest capitalized
|
|
|
(1,592
|
)
|
|
|
(1,114
|
)
|
|
|
(2,009
|
)
|
|
|
(963
|
)
|
|
|
(1,089
|
)
|
|
|
(143
|
)
|
|
|
(508
|
)
|
Interest income
|
|
|
(701
|
)
|
|
|
(831
|
)
|
|
|
(887
|
)
|
|
|
(1,423
|
)
|
|
|
(3,584
|
)
|
|
|
(687
|
)
|
|
|
(1,262
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
38,660
|
|
|
|
42,728
|
|
|
|
74,890
|
|
|
|
107,685
|
|
|
|
129,404
|
|
|
|
32,912
|
|
|
|
46,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft rentals represents a significant operating expense of
our business. Because we leased several of our aircraft during
the periods presented, we believe that when assessing our EBITDA
you should also consider the impact of our aircraft rent
expense, which was $20.1 million in 2001,
$21.2 million in 2002, $16.7 million in 2003,
$14.4 million in 2004, and $27.6 million in 2005.
|
|
|
(4)
|
|
Operating margin represents
operating income divided by operating revenues.
|
|
(5)
|
|
All share and per share amounts
have been retroactively restated to reflect the current capital
structure described under Description of Capital
Stock and in the notes to our consolidated financial
statements.
|
|
(6)
|
|
Total number of paying passengers
(including all passengers redeeming OnePass frequent flyer miles
and other travel awards) flown on all flight segments, expressed
in thousands.
|
|
(7)
|
|
Number of miles flown by scheduled
revenue passengers, expressed in millions.
|
|
(8)
|
|
Aircraft seating capacity
multiplied by the number of miles the seats are flown, expressed
in millions.
|
|
(9)
|
|
Percentage of aircraft seating
capacity that is actually utilized. Load factors are calculated
by dividing revenue passenger miles by available seat miles.
|
|
(10)
|
|
Load factor that would have
resulted in total revenues being equal to total expenses.
|
|
(11)
|
|
The number of hours from the time
an airplane moves off the departure gate for a revenue flight
until it is parked at the gate of the arrival airport.
|
|
(12)
|
|
Average number of block hours
operated per day per aircraft for the total aircraft fleet.
|
|
(13)
|
|
Average amount (in cents) one
passenger pays to fly one mile.
|
|
(14)
|
|
Passenger revenues (in cents)
divided by the number of available seat miles.
|
|
(15)
|
|
Total operating revenues for
passenger aircraft related costs (in cents) divided by the
number of available seat miles.
|
36
|
|
|
(16)
|
|
Total operating expenses for
passenger aircraft related costs (in cents) divided by the
number of available seat miles.
|
|
(17)
|
|
Percentage of flights that arrive
at the destination gate within fifteen minutes of scheduled
arrival.
|
|
(18)
|
|
The average number of miles flown
per flight.
|
|
(19)
|
|
Percentage of flights that depart
within fifteen minutes of the scheduled departure time.
|
|
(20)
|
|
For AeroRepública operating
data, this period covers from April 22, 2005 until
December 31, 2005 which corresponds to the period that
AeroRepública was consolidated in our financial statements.
|
|
(21)
|
|
We have not included financial
information for the three months ended March 31, 2005 which
preceded our acquisition of AeroRepública on April 22,
2005.
|
|
(22)
|
|
AeroRepública has not
historically distinguished between revenue passengers and
non-revenue passengers. Although we are implementing systems at
AeroRepública to record that information, revenue passenger
information and other statistics derived from revenue passenger
data for the year ended December 31, 2005 and the three
months ended March 31, 2006 has been derived from estimates
that we believe to be materially accurate.
|
37
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We are a leading Latin American provider of airline passenger
and cargo service through our two principal operating
subsidiaries, Copa and AeroRepública. Copa operates from
its strategically located position in the Republic of Panama,
and AeroRepública provides service primarily within
Colombia. Our fleet currently consists of 22 Boeing
737-Next Generation aircraft, two Embraer 190 aircraft,
11 MD-80
aircraft and two
DC-9 aircraft
(one of which is currently retired). We currently have firm
orders for eight Boeing 737-Next Generation and
18 Embraer 190s, and purchase rights and options for
up to nine additional Boeing 737-Next Generation and 35
additional Embraer 190s.
Copa was established in 1947, and currently offers approximately
92 daily scheduled flights among 30 destinations in
20 countries in North, Central and South America and the
Caribbean from its Panama City hub. Copa provides passengers
with access to flights to more than 120 other destinations
through codeshare arrangements with Continental pursuant to
which each airline places its name and flight designation code
on the others flights. Through its Panama City hub, Copa
is able to consolidate passenger traffic from multiple points to
serve each destination effectively.
Copa operates a modern fleet of 22 Boeing 737-Next Generation
aircraft and two Embraer 190 aircraft with an average age of
approximately 3.6 years as of May 31, 2006. To meet
its growing capacity requirements, Copa has firm commitments to
accept delivery of 21 additional aircraft through 2009 and has
purchase rights and options that, if exercised, would allow it
to accept delivery of up to 24 additional aircraft through 2009.
Copas firm orders are for eight additional Boeing 737-Next
Generation aircraft and 13 additional Embraer 190s, and its
purchase rights and options are for up to nine Boeing 737-Next
Generation aircraft and up to 15 Embraer 190s.
Copa started its strategic alliance with Continental in 1998.
Since then, it has conducted joint marketing and code-sharing
arrangements, and participated in the award-winning OnePass
frequent flyer loyalty program globally and on a co-branded
basis in Latin America. We believe that Copas co-branding
and joint marketing activities with Continental have enhanced
its brand in Latin America, and that the relationship with
Continental has afforded it cost-related benefits, such as
improving purchasing power in negotiations with aircraft vendors
and insurers. Copas alliance and related services
agreements with Continental are in effect until 2015.
During the second quarter of 2005, we purchased
AeroRepública S.A., a Colombian air carrier that according
to the Colombian Civil Aviation Administration, Unidad
Especial Administrativa de Aeronáutica Civil, was the
second-largest domestic carrier in Colombia in terms of number
of passengers carried in 2005, providing predominantly
point-to-point
service among 12 cities in Colombia and to Copas
Panama City hub. AeroRepública currently operates a fleet
of eleven leased
MD-80s and
two owned
DC-9s (one
of which is currently retired). As part of its fleet
modernization and expansion plan, AeroRepública has firm
commitments to accept delivery of five Embraer 190 aircraft
through 2007 and purchase rights and options to purchase up to
20 additional Embraer 190 aircraft through 2011.
Fuel is our single largest operating expense and, as a result,
our results of operations are likely to continue to be
materially affected by the cost of fuel as compared with prior
periods. Prices for jet fuel have risen significantly in 2005
and remained at historically high levels during the first
quarter of 2006. Copas fuel cost increased from
$1.01 per gallon during 2003 to $1.32 per gallon in
2004, $1.87 per gallon in 2005 and $1.96 per gallon
for the three-month period ended March 31, 2006. To date,
we have managed to offset some of the increases in fuel prices
with higher load factors, fuel surcharges and fare increases. In
addition, we entered into hedging agreements with respect to
approximately 12% of Copas fuel needs for 2005 and have
hedged approximately 13% of Copas projected fuel needs for
2006 and approximately 5% of the needs for the first five months
of 2007. We will continue to evaluate various hedging
strategies, and we may enter into additional hedging agreements
in the future.
38
Our 2005
acquisition of AeroRepública has affected the comparability
of our recent results of operations.
On April 22, 2005 we acquired an initial 85.6% equity
ownership interest in AeroRepública which was followed by
subsequent acquisitions increasing our total ownership interest
in AeroRepública to 99.8% as of March 31, 2006. The
total purchase price we paid for our investment in
AeroRepública, including acquisition costs, was
$23.4 million. According to the Colombian Civil Aviation
Administration, Unidad Especial Administrativa de
Aeronáutica Civil, in 2005 AeroRepública was the
second-largest domestic carrier in Colombia in terms of number
of passengers carried, providing service among 12 cities in
Colombia and Panama City with a
point-to-point
route network.
We began to consolidate AeroRepúblicas results of
operations in our consolidated financial statements beginning
April 22, 2005. For the year ended December 31, 2005
and the three months ended March 31, 2006 and for future
periods, we are reporting AeroRepúblicas operations
as a separate segment in our financial statements and the
related notes. See Note 5 to our unaudited financial
statements and Note 14 to our audited financial statements
included elsewhere in this prospectus for segment data for
AeroRepública for the three months ended March 31,
2006 and the year ended December 31, 2005. As a result of
this acquisition and our consolidation of
AeroRepúblicas results as of April 22, 2005, our
financial information at and for the year ended
December 31, 2005 and for the three months ended
March 31, 2006 is not comparable to the information at and
for the year ended December 31, 2004 and for the three
months ended March 31, 2005, respectively.
Regional
Economic Environment
Our historical financial results have been, and we expect them
to continue to be, materially affected by the general level of
economic activity and growth of per capita disposable income in
North, South and Central America and the Caribbean (drivers of
our passenger revenue) and the volume of trade between countries
in the region (the principal driver of our cargo revenue).
According to data from The Preliminary Overview of the
Economies of Latin America and the Caribbean, an annual
United Nations publication prepared by the Economic Development
Division, the economy of Latin America (including the Caribbean)
grew by approximately 5.5% in 2004 and 1.9% in 2003, while the
regions per capita gross domestic product is estimated to
have risen by approximately 4% in 2004. According to data from
the International Monetary Fund, in the sub-regions we serve
gross domestic product rose in 2005 (in real terms) by
approximately 4.2% in the Mercosur countries, 6.3% in the Andean
region, 3.8% in Central America and 5.9% in the Caribbean, with
each region continuing to build on gains made during 2004 of
approximately 6.0% in the Mercosur countries, 7.8% in the Andean
region, 3.9% in Central America and 2.3% in the Caribbean. As is
often the case, the regional economic performance was closely
tied to developments in the international economy. World
economic activity increased in 2005, resulting in estimated
global GDP growth of approximately 4.8% (versus 4.0% in 2004).
In recent years, the Panamanian economy has closely tracked the
Latin American economy as a whole, and in 2005 the Panamanian
economy grew in real terms by approximately 5.5% (versus 7.6% in
2004), according to the International Monetary Funds
estimates. Inflation in Panama rose approximately 2.9% in 2005
(versus 0.5% in 2004). Additionally, the Colombian economy has
experienced relatively stable growth. According to the
International Monetary Fund estimates, the Colombian gross
domestic product grew by approximately 3.9% in 2003, 4.8% in
2004 and by 5.1% in 2005, with inflation (as indicated by the
consumer price index) rising by approximately 7.1% in 2003, 5.9%
in 2004 and 5.0% in 2005.
Revenues
We derive our revenues primarily from passenger transportation
which represents approximately 93% of our revenues, with
approximately 7% derived from cargo and other revenues.
We recognize passenger revenue when transportation is provided
and when unused tickets expire. Passenger revenues reflect the
capacity of our aircraft on the routes we fly, load factor and
yield. Our capacity is measured in terms of available seat miles
(ASMs) which represents the number of seats available on our
aircraft multiplied by the number of miles the seats are flown.
Our usage is measured in terms of revenue passenger miles (RPMs)
which is the number of revenue passengers multiplied by the
miles these passengers fly. Load factor, or the percentage of
our capacity that is actually used by paying customers, is
calculated by dividing RPMs by ASMs. Yield is the
39
average amount that one passenger pays to fly one mile. We use a
combination of approaches, taking into account yields, flight
load factors and effects on load factors of connecting traffic,
depending on the characteristics of the markets served, to
arrive at a strategy for achieving the best possible revenue per
available seat mile, balancing the average fare charged against
the corresponding effect on our load factors.
We recognize cargo revenue when transportation is provided. Our
other revenue consists primarily of excess baggage charges,
ticket change fees and charter flights.
Overall demand for our passenger and cargo services is highly
dependent on the regional economic environment in which we
operate, including the GDP of the countries we serve and the
disposable income of the residents of those countries. We
believe that approximately 50% of our passengers travel at least
in part for business reasons, and the growth of intraregional
trade greatly affects that portion of our business. The
remaining 50% of our passengers are tourists or travelers
visiting friends and family.
The following table sets forth our capacity, load factor and
yields for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
Three Months Ended
March 31,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
Copa Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capacity (in available seat miles,
in millions)
|
|
|
3,225.9
|
|
|
|
3,639.4
|
|
|
|
4,409.1
|
|
|
|
1,018.1
|
|
|
|
1,216.3
|
|
Load factor
|
|
|
68.0
|
%
|
|
|
70.0
|
%
|
|
|
73.4
|
%
|
|
|
72.3
|
%
|
|
|
77.6
|
%
|
Yield (in cents)
|
|
|
14.22
|
|
|
|
14.31
|
|
|
|
14.41
|
|
|
|
14.28
|
|
|
|
15.01
|
|
AeroRepública
Segment(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capacity (in available seat miles,
in millions)
|
|
|
|
|
|
|
|
|
|
|
950.0
|
|
|
|
|
|
|
|
398.7
|
|
Load factor
|
|
|
|
|
|
|
|
|
|
|
62.0
|
%
|
|
|
|
|
|
|
53.1
|
%
|
Yield (in
cents)(2)
|
|
|
|
|
|
|
|
|
|
|
16.61
|
|
|
|
|
|
|
|
18.32
|
|
|
|
|
(1)
|
|
Since April 22, 2005.
|
|
(2)
|
|
AeroRepública has not
historically distinguished between revenue passengers and
non-revenue passengers. While we are implementing systems at
AeroRepública to record that information, revenue passenger
information and other statistics derived from revenue passenger
data for the year ended December 31, 2005 and the three
months ended March 31, 2006 has been derived from estimates
that we believe to be materially accurate.
|
Seasonality
Generally, our revenues from and profitability of our flights
peak during the northern hemispheres summer season in July
and August and again during the December and January holiday
season. Given our high proportion of fixed costs, this
seasonality is likely to cause our results of operations to vary
from quarter to quarter.
Operating
Expenses
The main components of our operating expenses are aircraft fuel,
salaries and benefits, passenger servicing, commissions,
aircraft maintenance, reservations and sales and aircraft rent.
A common measure of per unit costs in the airline industry is
cost per available seat mile (CASM) which is generally defined
as operating expenses divided by ASMs.
Aircraft fuel. The price we pay for aircraft
fuel varies significantly from country to country primarily due
to local taxes. While we purchase aircraft fuel at all the
airports to which we fly, we attempt to negotiate fueling
contracts with companies that have a multinational presence in
order to benefit from volume purchases. During 2005, as a result
of the location of its hub, Copa purchased approximately 50% of
its aircraft fuel in Panama, where it was able to obtain better
prices due to volume discounts. Copa has over eleven suppliers
of aircraft fuel across its network. In some cases we tanker
fuel in order to minimize our cost by fueling in airports where
fuel prices are lowest. Our aircraft fuel expenses are variable
and fluctuate based on global oil prices. From 2002 to 2005, the
price of West Texas Intermediate crude oil, a benchmark widely
used for crude oil prices that is measured in barrels and
40
quoted in U.S. dollars, increased by 116.8% from
$26.15 per barrel to $56.70 per barrel. On March 31,
2006, the price was $66.63 per barrel. Historically, we
have not hedged a significant portion of our fuel costs. We
entered into hedging agreements with respect to approximately
12% of Copas fuel needs for 2005 and 13% for 2006 and
approximately 5% of Copas projected fuel needs for the
first five months of 2007. Additionally, because our derivatives
have historically not qualified as hedges for financial
reporting purposes in accordance with Statement of Financial
Accounting Standard No. 133, Accounting for
Derivative Instruments and Hedging Activities, changes
in the fair value of our derivative contracts are recorded
currently, rather than in the period in which the hedged fuel is
consumed, and recorded as a component of Other, net
within non-operating income (expense) in our statement of
operations. We may enter into additional hedging agreements in
the future. Although AeroRepública does not currently have
a hedging policy, we may implement one in the future.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft Fuel Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
March 31, 2006
|
|
|
Copa Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average price per gallon of jet
fuel into plane (excluding hedge) (in U.S. dollars)
|
|
$
|
0.95
|
|
|
$
|
0.86
|
|
|
$
|
1.01
|
|
|
$
|
1.32
|
|
|
$
|
1.87
|
|
|
$
|
1.96
|
|
Gallons consumed (in thousands)
|
|
|
46,669
|
|
|
|
44,788
|
|
|
|
48,444
|
|
|
|
50,833
|
|
|
|
58,924
|
|
|
|
16,368
|
|
Available seat miles (in millions)
|
|
|
2,920
|
|
|
|
2,847
|
|
|
|
3,226
|
|
|
|
3,639
|
|
|
|
4,409
|
|
|
|
1,216
|
|
Gallons per ASM (in hundredths)
|
|
|
1.60
|
|
|
|
1.57
|
|
|
|
1.50
|
|
|
|
1.40
|
|
|
|
1.34
|
|
|
|
1.35
|
|
AeroRepública
Segment(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average price per gallon of jet
fuel into plane (excluding hedge) (in U.S. dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2.12
|
|
|
$
|
2.08
|
|
Gallons consumed (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,887
|
|
|
|
7,080
|
|
Available seat miles (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
950
|
|
|
|
399
|
|
Gallons per ASM (in hundredths)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.88
|
|
|
|
1.78
|
|
|
|
|
(1)
|
|
Since April 22, 2005.
|
Salaries and benefits. Salaries and benefits
expenses have historically increased at the rate of inflation
and by the growth in the number of our employees. In some cases,
we have adjusted salaries of our employees to correspond to
changes in the cost of living in the countries where these
employees work. We do not increase salaries based on seniority.
Passenger servicing expenses. Our passenger
servicing expenses consist of expenses for liability insurance,
baggage handling, catering, in-flight entertainment and other
costs related to aircraft and airport services. These expenses
are generally directly related to the number of passengers we
carry or the number of flights we operate.
Commissions. Our commission expenses consist
primarily of payments for ticket sales made by travel agents and
commissions paid to credit card companies. Travel agents receive
base commissions, not including back-end incentive programs,
ranging from 0% to 9% depending on the country. The weighted
average rate for these commissions during 2005 was 4.9%. During
the last few years we have reduced our commission expense per
available seat mile as a result of an industry-wide trend of
paying lower commissions to travel agencies and by increasing
the proportion of our sales made through direct channels. We
expect this trend to continue as more of our customers become
accustomed to purchasing through our call center and through the
internet. While increasing direct sales may increase the
commissions we pay to credit card companies, we expect that the
savings from the corresponding reduction in travel agency
commissions will more than offset this increase. In recent
years, base commissions paid to travel agents have decreased
significantly. At the same time, we have encouraged travel
agencies to move from standard base commissions to incentive
compensation based on sales volume and fare types.
41
Maintenance, material and repair expenses. Our
maintenance, material and repair expenses consist of aircraft
repair and charges related to light and heavy maintenance of our
aircraft, including maintenance materials. Maintenance and
repair expenses, including overhaul of aircraft components, are
charged to operating expenses as incurred. With an average age
of only 3.6 years as of May 31, 2006, our Copa fleet
requires a low level of maintenance compared to the older fleets
of some of our competitors. We also currently incur lower
maintenance expenses on our Boeing and Embraer aircraft because
a significant number of our aircraft parts remain under
multi-year warranties. As the age of our fleet increases and
when our warranties expire, our maintenance expenses will
increase. We only conduct line maintenance internally and
outsource heavy maintenance to independent third party
contractors. In 2003, we negotiated with GE Engine Services a
maintenance cost per hour program for the repair and maintenance
of our CFM-56 engines which power our Boeing 737 Next Generation
fleet. Our engine maintenance costs are also aided by the
sea-level elevation of our hub and the use of winglets which
allow us to operate the engines on our Boeing 737-700s with
lower thrust thus putting less strain on the engines.
All maintenance for AeroRepúblicas DC-9s and line
maintenance for the MD-80s is performed by
AeroRepúblicas in-house maintenance staff. Heavy
maintenance for the MD-80s is performed by FAA-certified
third-party aviation maintenance companies.
Aircraft rent. Our aircraft rental expenses
are generally fixed by the terms of our operating lease
agreements. Currently, six of Copas operating leases have
fixed rates which are not subject to fluctuations in interest
rates and the seventh is tied to LIBOR. All of
AeroRepúblicas operating leases have fixed rates
which are not subject to fluctuations in interest rates. Our
aircraft rent expense also includes rental payments related to
our wet-leasing of freighter aircraft to supplement our cargo
operations.
Reservations and sales expenses. Our
reservations and sales expenses arise primarily from payments to
global distribution systems, such as Amadeus and Sabre, that
list our flight offerings on reservation systems around the
world. These reservation systems tend to raise their rates
periodically, but we expect that if we are successful in
encouraging our customers to purchase tickets through our direct
sales channels, these costs will decrease as a percentage of our
operating costs. A portion of our reservations and sales expense
is also comprised of our licensing payments for the SHARES
reservation and check-in management software we use, which is
not expected to change significantly from period to period.
Flight operations and landing fees and other rentals
are generally directly related to the number of flights we
operate.
Other include publicity and promotion expenses, expenses
related to our cargo operations, technology related initiatives
and miscellaneous other expenses.
Taxes
We are subject to income tax in Panama based on the principle of
territoriality. Beginning in 2004, we adopted an alternate
method of calculating tax in Panama. Based on Article 121
of Executive Decree 170 of 1993, as amended in 1996, income for
international transportation companies is calculated based on a
territoriality method that determines gross revenues earned in
Panama by applying the percentage of miles flown within the
Panamanian territory against total revenues. Under this method,
loss carry forwards cannot be applied to offset tax liability.
Prior to 2004, our Panamanian taxable income was estimated using
revenues from passengers originating in or destined for Panama
which typically resulted in losses for purposes of Panamanian
corporate income tax. Dividends from our Panamanian
subsidiaries, including Copa, are separately subject to a ten
percent tax if such dividends can be shown to be derived from
Panamanian income that has not been otherwise taxed.
We are also subject to local tax regulations in each of the
jurisdictions where we operate, the great majority of which are
related to the taxation of our income. In some of the countries
to which we fly, we do not pay any income taxes because we do
not generate income under the laws of those countries either
because they do not have income tax or due to treaties or other
arrangements those countries have with Panama. In the remaining
countries, we pay income tax at a rate ranging from 25% to 35%
of our income attributable to those countries. Different
countries calculate our income in different ways, but they are
typically derived from our sales in the applicable country
multiplied by our net margin or by a presumed net margin set by
the relevant tax legislation. It is possible that we may become
subject to tax in jurisdictions in which, for prior years, we
had not been subject to tax and that, in the future, we may
become subject to increased taxes in the countries to which we
fly.
42
AeroRepúblicas taxes are based on Colombian income
tax legislation which calculates tax based on the higher of the
ordinary and presumptive income.
Ordinary income is defined as the companys
operating results under Colombian GAAP, and
presumptive income is defined as 6% of net assets
under Colombian GAAP.
We paid taxes totaling approximately $2.4 million in 2003,
$4.3 million in 2004 and $7.4 million in 2005.
Internal
Controls
In connection with the preparation of our financial statements
under U.S. GAAP as of and for the year ended
December 31, 2005, we and our auditors identified a
material weakness (as defined under standards established by the
Public Company Accounting Oversight Board) in our internal
control over financial reporting. Specifically, we found that we
did not have appropriate expertise in U.S. GAAP accounting
and reporting among our financial and accounting staff to
prepare our periodic financial statements without needing to
make material corrective adjustments and footnote revisions when
those statements are audited or reviewed. This ineffective
control over the application of U.S. GAAP in relation to
our business could result in a material misstatement to the
annual or interim financial statements that would not be
prevented or detected. In light of this material weakness, in
preparing the financial statements in connection with our
initial public offering, we performed additional analyses and
other post-closing procedures in the course of preparing our
financial statements and related footnotes in accordance with
U.S. GAAP so that management would be able to come to the
conclusion that those financial statements fairly presented, in
all material respects, our financial condition, results of
operations and cash flows as of and for the periods presented.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002,
beginning with our Annual Report on
Form 20-F
for the fiscal year ending December 31, 2006, we will be
required to furnish a report by our management on our internal
control over financial reporting. This report will contain,
among other matters, an assessment of the effectiveness of our
internal controls over financial reporting as of the end of the
fiscal year, including a statement as to whether or not our
internal controls over financial reporting are effective. We
have contracted an additional accounting manager with experience
in preparing financial statements under U.S. GAAP, we have
engaged an internationally recognized accounting firm to assist
us in developing our procedures to comply with the requirements
of Section 404, and our management and audit committee are
developing other plans to prepare for our compliance with the
requirements of Section 404 and to correct the weakness
identified above. We expect that these plans may include hiring
additional personnel with appropriate levels of U.S. GAAP
experience and accounting expertise, requiring further education
and training in U.S. GAAP for our existing personnel and
engaging outside resources to assist in the design and
implementation of procedures for the testing of our internal
controls. We will incur incremental costs as a result of these
efforts, including increased auditing and legal fees, the
magnitude of which we are not able to estimate at this time.
Critical
Accounting Policies and Estimates
The preparation of our consolidated financial statements in
conformity with U.S. GAAP requires our management to adopt
accounting policies and make estimates and judgments to develop
amounts reported in our consolidated financial statements and
related notes. We strive to maintain a process to review the
application of our accounting policies and to evaluate the
appropriateness of the estimates required for the preparation of
our consolidated financial statements. We believe that our
estimates and judgments are reasonable; however, actual results
and the timing of recognition of such amounts could differ from
those estimates. In addition, estimates routinely require
adjustments based on changing circumstances and the receipt of
new or better information.
Critical accounting policies and estimates are defined as those
that are reflective of significant judgments and uncertainties
and potentially result in materially different results under
different assumptions and conditions. For a discussion of these
and other accounting policies, see Note 1 to our annual
consolidated financial statements.
Revenue recognition. Passenger revenue is
recognized when transportation is provided rather than when a
ticket is sold. The amount of passenger ticket sales not yet
recognized as revenue is reflected in the Air traffic
liability line on our consolidated balance sheet. Tickets
whose fares have expired
and/or are
more than one year old are recognized as passenger revenue.
43
Cargo and mail services revenue are recognized when we provide
the shipping services and thereby complete the earning process.
Other revenue is primarily comprised of excess baggage charges,
commissions earned on tickets sold for flights on other airlines
and charter flights and is recognized when transportation or
service is provided.
Frequent flyer program. We participate in
Continentals frequent flyer program OnePass,
through which our passengers receive all the benefits and
privileges offered by the OnePass program. Continental is
responsible for the administration of the OnePass program. Under
the terms of our frequent flyer agreement with Continental,
OnePass members receive OnePass frequent flyer mileage credits
for travel on Copa and AeroRepública, and we pay
Continental a per mile rate for each mileage credit granted by
Continental, at which point we have no further obligation. The
amounts due to Continental under this agreement are expensed by
us as the mileage credits are earned.
Impairment of long-lived assets. We record
impairment losses on long-lived assets used in operations,
consisting principally of property and equipment, when events or
changes in circumstances indicate, in managements
judgment, that the assets might be impaired and that the
undiscounted cash flows estimated to be generated by those
assets are less than the carrying amount of those assets. Our
cash flow estimates are based on historical results adjusted to
reflect our best estimate of future market and operating
conditions. The net carrying value of non-recoverable assets is
reduced to fair value if it is lower than carrying value. Our
estimates of fair value represent our best estimate based on
industry trends and reference to market rates and transactions
and are subject to change. We recognized impairment losses on
our Boeing 737-200 aircraft of $3.6 million during the year
ended December 31, 2003.
Goodwill and indefinite-lived purchased intangible
assets. We review goodwill and purchased
intangible assets with indefinite lives, all of which relate to
our acquisition of AeroRepública, for impairment annually
and whenever events or changes in circumstances indicate the
carrying value of an asset may not be recoverable in accordance
with Statement of Financial Accounting Standard No. 142,
Goodwill and Other Intangible Assets
(SFAS No. 142). The provisions of
SFAS No. 142 require that a two-step impairment test
be performed on goodwill. In the first step, we compare the fair
value of the AeroRepública reporting unit to its carrying
value. If the fair value of the AeroRepública reporting
unit exceeds the carrying value of its net assets, goodwill is
not impaired and we are not required to perform further testing.
If the carrying value of the net assets of the
AeroRepública reporting unit exceeds its fair value, then
we must perform the second step of the impairment test in order
to determine the implied fair value of the AeroRepública
reporting units goodwill. If the carrying value of the
goodwill exceeds its implied fair value, then we record an
impairment loss equal to the difference. SFAS No. 142
also requires that the fair value of the purchased intangible
assets with indefinite lives be estimated and compared to the
carrying value. We recognize an impairment loss when the
estimated fair value of the intangible asset is less than the
carrying value. Determining the fair value of a reporting unit
or an indefinite-lived purchased intangible asset is judgmental
in nature and involves the use of significant estimates and
assumptions. These estimates and assumptions include revenue
growth rates and operating margins used to calculate projected
future cash flows, risk-adjusted discount rates, future economic
and market conditions, and determination of appropriate market
comparables. We base our fair value estimates on assumptions we
believe to be reasonable but that are unpredictable and
inherently uncertain. Actual future results may differ from
those estimates.
Derivative instruments used for aircraft
fuel. In the past, we have periodically entered
into crude oil call options, jet fuel zero cost collars, and jet
fuel swap contracts to provide for short to mid-term hedge
protection (generally three to eighteen months) against sudden
and significant increases in jet fuel prices, while
simultaneously ensuring that we are not competitively
disadvantaged in the event of a substantial decrease in the
price of jet fuel. These derivatives have historically not
qualified as hedges for financial reporting purposes in
accordance with Statement of Financial Accounting Standard
No. 133, Accounting for Derivative Instruments and
Hedging Activities. Accordingly, changes in the fair value
of such derivative contracts, which amounted to
$0.2 million in 2005, ($0.9) million in 2004 and
$0.2 million in 2003, were recorded as a component of
Other, net within Other non-operating income
(expense). The fair value of hedge contracts amounted to
$0.3 million at December 31, 2005 and
$0.2 million at December 31, 2004, and was recorded in
the Other current assets line of our consolidated
balance sheet.
Maintenance and repair costs. Maintenance and
repair costs for owned and leased flight equipment, including
the overhaul of aircraft components, are charged to operating
expenses as incurred. Engine overhaul costs covered by
power-by-the-hour arrangements are paid and expensed as
incurred, on the basis of hours flown per contract. Under the
terms of our power-by-the-hour agreements, we pay a set dollar
amount per engine hour flown
44
on a monthly basis and the third-party vendor assumes the
obligation to repair the engines at no additional cost to us,
subject to certain specified exclusion
Additionally, although our aircraft lease agreements
specifically provide that we, as lessee, are responsible for
maintenance of the leased aircraft, we do, under certain of our
existing lease agreements, pay maintenance reserves to aircraft
and engine lessors that are to be applied towards the cost of
future maintenance events. These reserves are calculated based
on a performance measure, such as flight hours, and are
specifically to be used to reimburse third-party providers that
furnish services in connection with maintenance of our leased
aircraft. If there are sufficient funds on deposit to pay the
invoices submitted, they are paid. However, if amounts on
deposit are insufficient to cover the invoices, we must cover
the shortfall because, as noted above, we are legally
responsible for maintaining the lease aircraft. Under four of
our existing aircraft lease agreements, if there are excess
amounts on deposit at the expiration of the lease, the lessor is
entitled to retain any excess amounts. The maintenance reserves
paid under our lease agreements do not transfer either the
obligation to maintain the aircraft or the cost risk associated
with the maintenance activities to the aircraft lessor. In
addition, we maintain the right to select any third-party
maintenance provider. Therefore, we record these amounts as
prepaid maintenance within Other Assets on our balance sheet and
then recognize maintenance expense when the underlying
maintenance is performed, in accordance with our maintenance
accounting policy. Any excess amounts retained by the lessor
upon the expiration of the lease, which are not expected to be
material, would be recognized as additional aircraft rental
expense at that time.
45
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Year Ended
December 31,
|
|
|
March 31,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005(1)
|
|
|
2005(2)
|
|
|
2006
|
|
|
Operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger revenue
|
|
|
91.2
|
%
|
|
|
91.2
|
%
|
|
|
92.9
|
%
|
|
|
92.5
|
%
|
|
|
94.1
|
%
|
Cargo, mail and other
|
|
|
8.8
|
%
|
|
|
8.8
|
%
|
|
|
7.1
|
%
|
|
|
7.5
|
%
|
|
|
5.9
|
%
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft fuel
|
|
|
(14.2
|
)%
|
|
|
(15.6
|
)%
|
|
|
(24.5
|
)%
|
|
|
(18.8
|
)%
|
|
|
(24.6
|
)%
|
Salaries and benefits
|
|
|
(13.2
|
)%
|
|
|
(12.9
|
)%
|
|
|
(11.5
|
)%
|
|
|
(11.8
|
)%
|
|
|
(10.1
|
)%
|
Passenger servicing
|
|
|
(10.8
|
)%
|
|
|
(9.8
|
)%
|
|
|
(8.3
|
)%
|
|
|
(9.2
|
)%
|
|
|
(7.6
|
)%
|
Commissions
|
|
|
(8.1
|
)%
|
|
|
(7.3
|
)%
|
|
|
(7.4
|
)%
|
|
|
(6.6
|
)%
|
|
|
(6.8
|
)%
|
Reservation and sales
|
|
|
(5.3
|
)%
|
|
|
(5.5
|
)%
|
|
|
(4.8
|
)%
|
|
|
(5.0
|
)%
|
|
|
(4.3
|
)%
|
Maintenance, materials and repairs
|
|
|
(6.0
|
)%
|
|
|
(4.9
|
)%
|
|
|
(5.3
|
)%
|
|
|
(4.1
|
)%
|
|
|
(5.4
|
)%
|
Depreciation
|
|
|
(4.1
|
)%
|
|
|
(4.8
|
)%
|
|
|
(3.3
|
)%
|
|
|
(4.2
|
)%
|
|
|
(2.8
|
)%
|
Flight operations
|
|
|
(4.7
|
)%
|
|
|
(4.5
|
)%
|
|
|
(4.1
|
)%
|
|
|
(4.4
|
)%
|
|
|
(4.0
|
)%
|
Aircraft rentals
|
|
|
(4.9
|
)%
|
|
|
(3.6
|
)%
|
|
|
(4.5
|
)%
|
|
|
(4.1
|
)%
|
|
|
(4.6
|
)%
|
Landing fees and other rentals
|
|
|
(3.1
|
)%
|
|
|
(3.0
|
)%
|
|
|
(2.9
|
)%
|
|
|
(2.9
|
)%
|
|
|
(2.9
|
)%
|
Other
|
|
|
(7.6
|
)%
|
|
|
(7.3
|
)%
|
|
|
(5.4
|
)%
|
|
|
(6.0
|
)%
|
|
|
(5.0
|
)%
|
Fleet impairment charges
|
|
|
(1.0
|
)%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Total
|
|
|
(82.9
|
)%
|
|
|
(79.4
|
)%
|
|
|
(82.1
|
)%
|
|
|
(77.1
|
)%
|
|
|
(78.2
|
)%
|
Operating income
|
|
|
17.1
|
%
|
|
|
20.6
|
%
|
|
|
17.9
|
%
|
|
|
22.9
|
%
|
|
|
21.8
|
%
|
Non-operating income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(3.4
|
)%
|
|
|
(4.1
|
)%
|
|
|
(3.6
|
)%
|
|
|
(4.0
|
)%
|
|
|
(3.3
|
)%
|
Interest capitalized
|
|
|
0.6
|
%
|
|
|
0.2
|
%
|
|
|
0.2
|
%
|
|
|
0.1
|
%
|
|
|
0.3
|
%
|
Interest income
|
|
|
0.3
|
%
|
|
|
0.4
|
%
|
|
|
0.6
|
%
|
|
|
0.6
|
%
|
|
|
0.7
|
%
|
Other, net
|
|
|
0.7
|
%
|
|
|
1.5
|
%
|
|
|
0.1
|
%
|
|
|
1.9
|
%
|
|
|
(0.5
|
)%
|
Total
|
|
|
(1.8
|
)%
|
|
|
(2.0
|
)%
|
|
|
(2.7
|
)%
|
|
|
(1.3
|
)%
|
|
|
(2.8
|
)%
|
Income/(loss) before income taxes
|
|
|
15.3
|
%
|
|
|
18.6
|
%
|
|
|
15.2
|
%
|
|
|
21.5
|
%
|
|
|
19.0
|
%
|
Income taxes
|
|
|
(1.1
|
)%
|
|
|
(1.4
|
)%
|
|
|
(1.6
|
)%
|
|
|
(1.7
|
)%
|
|
|
(2.1
|
)%
|
Net income
|
|
|
14.2
|
%
|
|
|
17.1
|
%
|
|
|
13.6
|
%
|
|
|
19.9
|
%
|
|
|
16.8
|
%
|
|
|
|
(1)
|
|
Includes results from our
AeroRepública segment for the period from April 22,
2005 to December 31, 2005.
|
(2)
|
|
Does not include results from
AeroRepública as it was acquired on April 22, 2005.
|
46
Three
Months Ended March 31, 2006 Compared to Three Months Ended
March 31, 2005
Operating
revenue
Consolidated revenue for the three months ended March 31,
2006 totaled $191.7 million, a 68.8% increase over
operating revenue of $113.6 million in the same period in
2005, mainly due to the consolidation of $40.2 million of
operating revenues from AeroRepública and a 33.4% increase
in Copa Airlines operating revenues.
Copa
segment operating revenue
Copa Airlines operating revenues for the three months
ended March 31, 2006 totaled $151.6 million, a 33.4%
increase over operating revenues of $113.6 million in the
same period in 2005. This increase was primarily due to a 34.6%
increase in passenger revenue.
Passenger revenue. For the three months ended
March 31, 2006, passenger revenue totaled
$141.6 million, a 34.6% increase over passenger revenue of
$105.1 million in the same period in 2005. This increase
resulted primarily from the addition of capacity (ASMs increased
19.5% during the three months ended March 31, 2006 compared
to the same period in 2005), higher overall load factor (load
factor increased from 72.3% during the three months ended
March 31, 2005 to 77.6% during the three months ended
March 31, 2006), and a 5.1% increase in passenger yield
during the three months ended March 31, 2006 compared to
the same period in 2005.
Cargo, mail and other. Cargo, mail and other
totaled $10.0 million in the three months ended
March 31, 2006, an 18.5% increase over cargo, mail and
other of $8.5 million in the three months ended
March 31, 2005. This increase was primarily the result of
higher cargo rates.
AeroRepública
segment operating revenue
During the three months ended March 31, 2006,
AeroRepública generated operating revenues of
$40.2 million.
Operating
expenses
For the three months ended March 31, 2006, growth in Copa
Airlines operations, higher fuel prices, and the
consolidation of $39.5 million of operating expenses from
AeroRepública resulted in consolidated operating expenses
totaling $150.0 million, a 71.1% increase over operating
expenses of $87.6 million for the three months ended
March 31, 2005. Excluding the consolidation of
AeroRepública, operating expenses increased
$23.0 million or 26.2% compared to the three months ended
March 31, 2005.
For the three months ended March 31, 2006 our operating
expenses per available seat mile excluding aircraft fuel was
6.37 cents, a 2.2% decrease over operating expenses per
available seat mile excluding aircraft fuel of 6.51 cents in the
three months ended March 31, 2005. Aircraft fuel per
available seat mile was 2.92 cents for the three months ended
March 31, 2006, compared to 2.10 cents for the three months
ended March 31, 2005. For the three months ended
March 31, 2006, our total operating expenses per available
seat mile was 9.29 cents, a 7.9% increase over operating
expenses per available seat mile of 8.61 cents in the three
months ended March 31, 2005.
The following are the major variances on a consolidated basis:
Aircraft fuel. For the three months ended
March 31, 2006, aircraft fuel totaled $47.1 million, a
120.8% increase over aircraft fuel of $21.3 million in the
three months ended March 31, 2005. This was primarily a
result of a 28.0% increase in average fuel costs, higher fuel
consumption as a result of increased capacity and the
consolidation of $14.6 million of AeroRepúblicas
aircraft fuel expenses.
Salaries and benefits. For the three months
ended March 31, 2006, salaries and benefits totaled
$19.4 million, a 45.3% increase over salaries and benefits
of $13.4 million in the three months ended March 31,
2005. This increase was primarily a result of an overall
increase in operating headcount due to the increased capacity of
Copa Airlines and our consolidation of $4.0 million of
AeroRepúblicas salaries and benefit expenses.
Passenger servicing. For the three months
ended March 31, 2006, passenger servicing totaled
$14.6 million, a 40.3% increase over passenger servicing of
$10.4 in the three months ended March 31, 2005. This
increase was primarily a result of an increase in Copa
Airlines capacity, an increase in on-board passengers and
our consolidation of $2.7 million of
AeroRepúblicas passenger servicing expenses.
47
Commissions. For the three months ended
March 31, 2006, commissions totaled $13.1 million, a
75.1% increase over commissions of $7.5 million in the
three months ended March 31, 2005. This increase was
primarily a result of higher passenger revenue in Copa Airlines
and our consolidation of $3.9 million of
AeroRepúblicas commission expenses.
Maintenance, material and repairs. For the
three months ended March 31, 2006, maintenance, material
and repairs totaled $10.3 million, a 118.2% increase over
maintenance, material and repairs of $4.7 million in the
three months ended March 31, 2005. This increase was
primarily a result of an increase in Copa Airlines
capacity and the consolidation of $4.6 million of
AeroRepúblicas maintenance expenses.
Aircraft rentals. For the three months ended
March 31, 2006, aircraft rentals totaled $8.9 million,
an 89.4% increase over aircraft rentals of $4.7 million in
the three months ended March 31, 2005. This increase was
primarily a result of two additional leased Boeing 737-Next
Generation aircraft at Copa Airlines and the consolidation of
$3.0 million of AeroRepúblicas leasing expenses.
The remaining operating expenses totaled $36.5 million in
the three months ended March 31, 2006, an increase of
$10.9 million over $25.6 million in the three months
ended March 31, 2005 of which $6.6 million resulted
from our consolidation of AeroRepública.
Copa
segment operating expenses
The breakdown of operating expenses per available seat mile is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
March 31,
|
|
|
Percent
|
|
|
|
2005
|
|
|
2006
|
|
|
Change
|
|
|
|
(in cents)
|
|
|
|
|
|
Operating Expenses per
ASM:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
1.31
|
|
|
|
1.27
|
|
|
|
(3.4
|
)%
|
Passenger servicing
|
|
|
1.02
|
|
|
|
0.99
|
|
|
|
(3.7
|
)%
|
Commissions
|
|
|
0.73
|
|
|
|
0.75
|
|
|
|
2.5
|
%
|
Reservation and sales
|
|
|
0.56
|
|
|
|
0.56
|
|
|
|
(1.0
|
)%
|
Maintenance, materials and repairs
|
|
|
0.46
|
|
|
|
0.47
|
|
|
|
1.1
|
%
|
Depreciation
|
|
|
0.47
|
|
|
|
0.43
|
|
|
|
(7.7
|
)%
|
Flight operations
|
|
|
0.49
|
|
|
|
0.53
|
|
|
|
8.1
|
%
|
Aircraft rentals
|
|
|
0.46
|
|
|
|
0.48
|
|
|
|
4.8
|
%
|
Landing fees and other rentals
|
|
|
0.33
|
|
|
|
0.35
|
|
|
|
5.5
|
%
|
Other
|
|
|
0.67
|
|
|
|
0.60
|
|
|
|
(9.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses per ASM
before aircraft fuel
|
|
|
6.51
|
|
|
|
6.43
|
|
|
|
(1.3
|
)%
|
Aircraft fuel
|
|
|
2.10
|
|
|
|
2.67
|
|
|
|
27.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses per ASM
|
|
|
8.61
|
|
|
|
9.09
|
|
|
|
5.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Copa Airlines operating expenses per available seat mile
increased 5.6% to 9.09 cents in the three months ended
March 31, 2006, compared to the three months ended
March 31, 2005. Excluding fuel, operating expenses per
available seat mile decreased 1.3% from 6.51 cents in the three
months ended March 31, 2005 to 6.43 in the three months
ended March 31, 2006.
Aircraft fuel. For the three months ended
March 31, 2006 aircraft fuel totaled $32.5 million, a
52.2% increase over aircraft fuel expense of $21.3 million
in the same period in 2005. This increase was primarily a result
of a 27.7% increase in the average price per gallon of jet fuel
($1.95 in the three months ended March 31, 2006 compared to
$1.52 in the three months ended March 31, 2005) and
the consumption of 18.9% more fuel due to a 19.5% increase in
capacity. Aircraft fuel per available seat mile increased
approximately 27.4% primarily due to the 27.7% increase in
average fuel cost per gallon during this three-month period.
48
Salaries and benefits. For the three months
ended March 31, 2006, salaries and benefits totaled
$15.4 million, a 15.4% increase over salaries and benefits
of $13.4 million in the same period in 2005. This increase
was primarily a result of an overall increase in headcount at
period end in the three months ended March 31, 2006 versus
the same period end in the three months ended March 31,
2005, mainly to cover increased operations. Salaries and
benefits per available seat mile decreased by 3.4%.
Passenger servicing. Passenger servicing
totaled $12.0 million for the three months ended
March 31, 2006, a 15.1% increase over passenger servicing
of $10.4 million in the three months ended March 31,
2005. This increase was primarily a result of Copa
Airlines 19.5% increase in capacity and 25.1% increase in
on-board passengers. Passenger servicing per available seat mile
decreased by 3.7% as a result of fixed costs being spread over a
higher number of available seat miles.
Commissions. Commissions totaled
$9.2 million for the three months ended March 31,
2006, a 22.5% increase over commissions of $7.5 million in
the three months ended March 31, 2005. This increase was
primarily a result of a 34.6% increase in passenger revenue,
partially offset by lower average commissions rate.
Commissions per available seat mile increased by 2.5%.
Maintenance, materials and
repairs. Maintenance, materials and repairs
totaled $5.7 million in the three months ended
March 31, 2006, a 20.7% increase over maintenance,
materials and repairs of $4.7 million in the three months
ended March 31, 2005. This increase was primarily a result
of a 20.6% increase in block hours. Maintenance, materials and
repair per available seat mile increased by 1.1%.
Reservations and sales. Reservations and sales
totaled $6.8 million, an 18.2% increase over reservation
and sales of $5.7 million in the three months ended
March 31, 2005. This increase was primarily a result of a
34.6% increase in passenger revenue and a 2.5% increase in
average rates related to global distribution systems.
Reservations and sales expenses per available seat mile
decreased by 1.0%.
Aircraft rentals. Aircraft rentals totaled
$5.9 million in the three months ended March 31, 2006,
a 25.2% increase over aircraft rentals of $4.7 million in
the three months ended March 31, 2005. This increase was a
result of the addition of two leased Boeing 737-Next Generation
aircraft with delivery months of February 2005 and May 2005.
Aircraft rentals per available seat mile increased 4.8% as a
result of the higher average lease rate of the two aircraft
received.
Depreciation. Depreciation totaled
$5.2 million in the three months ended March 31, 2006,
a 10.3% increase over depreciation of $4.7 million in the
three months ended March 31, 2005. This increase was
primarily related to depreciation of two new Embraer 190
aircraft acquired in the fourth quarter of 2005. Depreciation
per available seat mile decreased by 7.7%.
Flight operations, landing fees and other
rentals. Combined, flight operations, landing
fees and other rentals increased from $8.3 million in the
three months ended March 31, 2005 to $10.6 million in
the same period in the three months ended March 31, 2006,
primarily a result of Copa Airlines 19.5% increase in
capacity.
Other. Other expenses totaled
$7.4 million in the three months ended March 31, 2006,
a 7.8% increase over other expenses of $6.8 million in the
three months ended March 31, 2005. Other expenses per
available seat mile decreased by 9.8% as a result of
administrative expenses growing slower than capacity.
AeroRepública
segment operating expenses
During the three months ended March 31, 2006,
AeroRepública generated operating expenses of
$39.5 million.
Non-operating
income (expense)
Consolidated non-operating expenses totaled $5.4 million in
the three months ended March 31, 2006, an increase of
$3.9 million over non-operating expenses of
$1.5 million in the three months ended March 31, 2005,
primarily attributable to higher interest expenses and lower
other non-operating income.
49
Copa
segment non-operating income (expense)
Interest expense. Interest expenses totaled
$5.7 million in the three months ended March 31, 2006,
a 24.6% increase over interest expense of $4.6 million in
the three months ended March 31, 2005, resulting from a
higher average debt balance carried and higher average interest
rates. The average effective interest rates for Copa
Airlines debt also increased by 0.65% from 4.42% during
the three months ended March 31, 2005 to 5.07% during the
the three months ended March 31, 2006. At the end of the
three months ended March 31, 2006 approximately 64% of Copa
Airlines outstanding debt was fixed at an average
effective rate of 4.46%
Other, net. Other, net income totaled
$0.1 million in the three months ended March 31, 2006
versus other, net income of $2.2 million in the three
months ended March 31, 2005.
AeroRepública
segment non-operating income (expense)
During the three months ended March 31, 2006,
AeroRepública generated non-operating expenses of
$1.5 million.
Year 2005
Compared to Year 2004
Our consolidated net income 2005 totaled $83.0 million, a
21.0% increase over net income of $68.6 million in 2004. We
had consolidated operating income of $109.2 million in
2005, a 32.6% increase over operating income of
$82.3 million in 2004. Our consolidated operating margin in
2005 was 17.9%, a decrease of 2.7 percentage points over an
operating margin of 20.6% in 2004, primarily as a result of
higher fuel prices and our consolidation of
AeroRepúblicas results from its acquisition on
April 22, 2005.
Operating
revenue
Our consolidated revenue totaled $608.6 million in 2005, a
52.2% increase over operating revenue of $399.8 million in
2004 due to increases in our Copa segments passenger and
cargo revenues, and the consolidation of $103.0 million in
operating revenues from our AeroRepública segment.
Copa
segment operating revenue
Copas operating revenue totaled $505.7 million in
2005, a 26.5% increase over operating revenue of
$399.8 million in 2004 due to increases in both passenger
and cargo revenues.
Passenger revenue. Passenger revenue totaled
$466.1 million in 2005, a 27.8% increase over passenger
revenue of $364.6 million in 2004. This increase resulted
primarily from the addition of capacity (ASMs increased by 21.2%
in 2005 as compared to 2004) that resulted from an increase
in departures and, to a lesser extent, longer average stage
length and the addition of larger aircraft. Revenues also
increased due to our higher overall load factor (load factor
increased from 70.1% in 2004 to 73.4% in 2005) during the
period and the simultaneous increase in passenger yield, which
rose by 0.8% to 14.41 cents in 2005.
Cargo, mail and other. Cargo, mail and other
totaled $39.6 million in 2005, a 12.4% increase over cargo,
mail and other of $35.2 million in 2004. This increase was
primarily the result of higher cargo revenue resulting from an
increase in belly space capacity available, and to a lesser
extent higher other operating revenue from excess baggage fees.
AeroRepública
segment operating revenue
Since April 22, 2005, the date on which we began
consolidating AeroRepúblicas results,
AeroRepública generated operating revenues of
$103.0 million.
Operating
expenses
Our consolidated operating expenses totaled $499.4 million
in 2005, a 57.3% increase over operating expenses of
$317.5 million in 2004 that was primarily attributable to
the growth of our operations, higher fuel costs, and the
consolidation of $96.8 million in operating expenses from
our AeroRepública segment.
50
In 2005, our operating expenses per available seat mile
excluding aircraft fuel was 6.52 cents, a 6.9% decrease over
operating expenses per available seat mile excluding aircraft
fuel of 7.01 cents in 2004. Aircraft fuel per available seat
mile was 2.78 cents in 2005, compared to 1.72 cents in 2004. In
2005 our total operating expenses per available seat mile was
9.30 cents, a 6.6% increase over operating expenses per
available seat mile of 8.72 cents in 2004.
An overview of the major variances on a consolidated basis
follows:
Aircraft fuel. Aircraft fuel totaled
$149.3 million in 2005, a 138.7% increase over aircraft
fuel of $62.5 million in 2004. This increase was primarily
a result of higher fuel costs, higher fuel consumption, and the
consolidation of $38.4 million in AeroRepúblicas
aircraft fuel expenses.
Salaries and benefits. Salaries and benefits
totaled $69.7 million in 2005, a 34.9% increase over
salaries and benefits of $51.7 million in 2004. This
increase was primarily a result of an overall increase in
headcount and the consolidation of $11.0 million in
AeroRepública salaries and benefits expenses.
Passenger servicing. Passenger servicing
totaled $50.6 million in 2005, a 29.1% increase over
passenger servicing of $39.2 million in 2004. This increase
was primarily a result of an increase in Copas capacity,
an increase in Copas on-board passengers, and the
consolidation of $5.5 million in AeroRepública
passenger servicing expenses.
Commissions. Commissions totaled
$45.1 million in 2005, a 55.1% increase over commissions of
$29.1 million in 2004. This increase was primarily a result
of higher passenger revenue and the consolidation of
$9.5 million in AeroRepública commission expenses.
The remaining operating expenses totaled $184.7 million in
2005, an increase of $49.7 million in 2004, of which
$32.4 million corresponded to the consolidation of
AeroRepública.
Copa
segment operating expenses
The breakdown of operating expenses per available seat mile is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
Percent
|
|
|
|
2004
|
|
|
2005
|
|
|
Change
|
|
|
|
(in cents)
|
|
|
|
|
|
Operating Expenses per
ASM:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
1.42
|
|
|
|
1.33
|
|
|
|
(6.2
|
)%
|
Passenger servicing
|
|
|
1.08
|
|
|
|
1.02
|
|
|
|
(4.9
|
)%
|
Commissions
|
|
|
0.80
|
|
|
|
0.81
|
|
|
|
1.0
|
%
|
Reservation and sales
|
|
|
0.61
|
|
|
|
0.57
|
|
|
|
(5.6
|
)%
|
Maintenance, materials and repairs
|
|
|
0.54
|
|
|
|
0.48
|
|
|
|
(10.8
|
)%
|
Depreciation
|
|
|
0.53
|
|
|
|
0.44
|
|
|
|
(17.6
|
)%
|
Flight operations
|
|
|
0.49
|
|
|
|
0.50
|
|
|
|
1.0
|
%
|
Aircraft rentals
|
|
|
0.40
|
|
|
|
0.50
|
|
|
|
26.2
|
%
|
Landing fees and other rentals
|
|
|
0.33
|
|
|
|
0.34
|
|
|
|
0.9
|
%
|
Other
|
|
|
0.81
|
|
|
|
0.62
|
|
|
|
(22.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses per ASM
before aircraft fuel
|
|
|
7.01
|
|
|
|
6.62
|
|
|
|
(5.5
|
)%
|
Aircraft fuel
|
|
|
1.72
|
|
|
|
2.51
|
|
|
|
46.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses per ASM
|
|
|
8.72
|
|
|
|
9.13
|
|
|
|
4.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft fuel. Aircraft fuel totaled
$110.9 million in 2005, a 77.3% increase over aircraft fuel
of $62.5 million in 2004. This increase was primarily a
result of a 54.0% increase in the average price per gallon of
jet fuel ($1.84 in 2005 compared to $1.19 in 2004 and the
consumption of 15.9% more fuel due to a 10.8% increase in
departures and an increase in average stage length. These
increases were partially offset by our newer, more
fuel-efficient aircraft. Aircraft fuel per available seat mile
increased by approximately 46.3% due to the increase in average
fuel cost per gallon.
51
Salaries and benefits. Salaries and benefits
totaled $58.8 million in 2005, a 13.7% increase over
salaries and benefits of $51.7 million in 2004. This
increase was primarily a result of an overall increase of 12.5%
in headcount at period end in 2005 versus the same period end in
2004, mainly to cover increased operations. Salaries and
benefits per available seat mile decreased by 6.2%.
Passenger servicing. Passenger servicing
totaled $45.2 million in 2005, a 15.2% increase over
passenger servicing of $39.2 million in 2004. This increase
was primarily a result of Copas 21.2% increase in capacity
and an increase of 20.2% in on-board passengers. Passenger
servicing per available seat mile decreased by 4.9% as a result
of fixed costs being spread over a higher number of available
seat miles.
Commissions. Commissions totaled
$35.6 million in 2005, a 22.3% increase over commissions of
$29.1 million in 2004. This increase was primarily a result
of higher passenger revenue. Commissions per available seat mile
increased by 1.0%.
Reservations and sales. Reservations and sales
totaled $25.3 million in 2005, a 14.4% increase over
reservations and sales of $22.1 million in 2004. This
increase was primarily a result of a 31.3% increase in charges
related to global distribution systems resulting from a 20.1%
increase in on-board passengers and a 9.5% increase in average
rates. Reservations and sales expenses per available seat mile
decreased by 5.6%.
Maintenance, materials and
repairs. Maintenance, materials and repairs
totaled $21.3 million in 2005, a 8.1% increase over
maintenance, materials and repairs of $19.7 million in
2004. This decrease was a result of lower overhaul related costs
and lower average maintenance costs due to the replacement of
the older Boeing 737-200s. Maintenance, materials and repair per
available seat mile decreased by 10.8% primarily as a result of
the lower cost associated with the newer Boeing 737-Next
Generation fleet.
Depreciation. Depreciation totaled
$19.2 million in 2005, a negligible decrease over
depreciation of $19.3 million in 2004, as the higher
depreciation attributable to our acquisition of two new Embraer
190 aircraft in 2005 was partially offset by lower depreciation
expenses related to non-aircraft related assets. Depreciation
per available seat mile decreased by 17.6%.
Aircraft rentals. Aircraft rentals totaled
$22.1 million in 2005, a 53.0% increase over aircraft
rentals of $14.4 million in 2004. This increase was a
result of three additional leased Boeing 737-Next Generation
aircraft in December 2004, February 2005 and May 2005. Aircraft
rentals per available seat mile increased by 26.2% as a result
of the higher average lease rate of the three aircraft received.
Flight operations and landing fees and other
rentals. Combined, flight operations and landing
fees and other rentals increased from $30.1 million in 2004
to $36.8 million in 2005, primarily as a result of
Copas 21.2% increase in capacity.
Other. Other expenses totaled
$27.5 million in 2005, a 6.0% decrease over other expenses
of $29.3 million in 2004. This increase was primarily a
result of a 17.0% increase in OnePass frequent flyer miles
earned by customers during the period, as well as other
miscellaneous administrative expenses such as software licenses
and legal expenses. Other expenses per available seat mile
decreased by 22.4% as result of administrative expenses growing
slower than capacity.
AeroRepública
segment operating expenses
Since April 22, 2005, the date on which we began
consolidating AeroRepúblicas results,
AeroRepública generated operating expenses of
$96.8 million.
Non-operating
income (expense)
Our consolidated non-operating expenses totaled
$16.6 million in 2005, a 106.0% increase over non-operating
expenses of $8.0 million in 2004 that was primarily
attributable to the consolidation of $3.3 million in
non-operating expenses from our AeroRepública segment and
higher expenses related to our initial public offering in 2005.
52
Copa
segment non-operating income (expense)
Non-operating expense totaled $13.2 million in 2005, a
64.5% increase over non-operating expense of $8.0 million
in 2004, attributable primarily to higher interest expense
partially offset by higher interest income and lower other
non-operating income.
Interest expense. Interest expense totaled
$19.4 million in 2005, a 17.8% increase over interest
expense of $16.5 million in 2004, primarily resulting from
higher interest rates. The average effective interest rates on
our debt also increased by 29 basis points from 4.21%
during 2004 to 4.50% during 2005. At periods end,
approximately 65% of our outstanding debt was fixed at an
average effective rate of 4.46%.
Interest capitalized. Interest capitalized
totaled $1.1 million in 2005, a 13.1% increase over
interest capitalized of $1.0 million in 2004, resulting
from higher average interest rates on debt relating to
pre-delivery payments on aircraft.
Interest income. Interest income totaled
$3.4 million in 2005, a 137.2% increase over interest
income of $1.4 million in 2004. This increase was mainly a
result of our higher average cash balance over the year and
higher interest rates during the period.
Other, net. Other, net income totaled
$1.7 million in 2005, a 71.4% decrease over other, net
income of $6.1 million in 2004. This decrease was primarily
the result of approximately $3.7 million in expenses
related to our initial public offering in 2005.
Year 2004
Compared to Year 2003
Our net income for 2004 was $68.6 million, a 41.4% increase
over net income of $48.5 million in 2003. We had operating
income of $82.3 million in 2004, a 41.2% increase over
operating income of $58.3 million in 2003. Our operating
margin in 2004 was 20.6%, an increase of 3.5 percentage
points over an operating margin of 17.1% in 2003.
Operating
revenue
Our operating revenue totaled $399.8 million in 2004, a
17.0% increase over operating revenue of $341.8 million in
2003 due to increases in both passenger and cargo revenues.
Passenger revenue. Passenger revenue totaled
$364.6 million in 2004, a 17.0% increase over passenger
revenue of $311.7 million in 2003. This increase resulted
primarily from the addition of capacity (ASMs increased by 12.8%
in 2004 as compared to 2003) that resulted from an increase
in departures and, to a lesser extent, an increase in average
departures per aircraft, higher average stage length and the
addition of larger aircraft. Revenues also increased due to our
higher overall load factor (load factor increased from 68.0% in
2003 to 70.0% in 2004) during the period and the
simultaneous increase in passenger yield, which rose by 0.7% to
14.31 cents in 2004. A general increase in passenger demand for
air travel in 2004, in part as a result of growing Latin
American and U.S. economies, allowed us to increase both
capacity and load factor without affecting yields.
Cargo, mail and other. Cargo, mail and other
totaled $35.2 million in 2004, a 17.0% increase over cargo,
mail and other of $30.1 million in 2003. This increase was
primarily the result of higher cargo revenue primarily resulting
from an increase in belly space capacity available as we
replaced four Boeing 737-200s with larger Boeing 737-Next
Generation aircraft during 2004, plus the full year effect of
four Boeing 737-Next Generation aircraft received in the second
half of 2003. There was also a general increase in demand for
courier services in the region during 2004.
53
Operating
expenses
Operating expenses totaled $317.5 million in 2004, a 12.0%
increase over operating expenses of $283.5 million in 2003.
The increase in operating expenses was primarily attributable to
a 12.0% increase in capacity, an increase in the average cost of
jet fuel and an increase in salaries and benefits expenses. The
breakdown of operating expenses per available seat mile is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
Percent
|
|
|
|
2003
|
|
|
2004
|
|
|
Change
|
|
|
|
(in cents)
|
|
|
|
|
|
Operating expenses per
ASM:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
1.40
|
|
|
|
1.42
|
|
|
|
1.3
|
%
|
Passenger servicing
|
|
|
1.14
|
|
|
|
1.08
|
|
|
|
(5.7
|
)%
|
Commissions
|
|
|
0.86
|
|
|
|
0.80
|
|
|
|
(6.9
|
)%
|
Reservation and sales
|
|
|
0.56
|
|
|
|
0.61
|
|
|
|
8.8
|
%
|
Depreciation
|
|
|
0.44
|
|
|
|
0.53
|
|
|
|
21.7
|
%
|
Maintenance, materials and repairs
|
|
|
0.63
|
|
|
|
0.54
|
|
|
|
(14.0
|
)%
|
Flight operations
|
|
|
0.50
|
|
|
|
0.49
|
|
|
|
(0.7
|
)%
|
Aircraft rentals
|
|
|
0.52
|
|
|
|
0.40
|
|
|
|
(23.3
|
)%
|
Landing fees and other rentals
|
|
|
0.33
|
|
|
|
0.33
|
|
|
|
2.1
|
%
|
Other
|
|
|
0.81
|
|
|
|
0.81
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses per ASM
before aircraft fuel and fleet impairment charges
|
|
|
7.17
|
|
|
|
7.01
|
|
|
|
(2.3
|
)%
|
Aircraft fuel
|
|
|
1.50
|
|
|
|
1.72
|
|
|
|
14.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses per ASM
before fleet impairment charges
|
|
|
8.68
|
|
|
|
8.72
|
|
|
|
0.5
|
%
|
Fleet impairment charges
|
|
|
0.11
|
|
|
|
0.00
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses per ASM
|
|
|
8.79
|
|
|
|
8.72
|
|
|
|
(0.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft fuel. Aircraft fuel totaled
$62.5 million in 2004, a 28.9% increase over aircraft fuel
of $48.5 million in 2003. This increase was primarily a
result of a 22.7% increase in the average price per gallon of
jet fuel ($1.19 in 2004 compared to $0.97 in 2003) and the
consumption of 4.9% more fuel due to a 6.7% increase in
departures. These increases were partially offset by our newer,
more fuel-efficient aircraft. Aircraft fuel per available seat
mile increased by approximately 14.3% due to the increase in
average fuel cost per gallon.
Salaries and benefits. Salaries and benefits
totaled $51.7 million in 2004, a 14.2% increase over
salaries and benefits of $45.3 million in 2003. This
increase was primarily a result of the full year effect of
employees hired throughout 2003, higher performance bonuses paid
as a result of our improved operating results and an overall
increase of 4.3% in full-time equivalent employees at period end
from 2003 to 2004, mainly to cover increased operations.
Salaries and benefits per available seat mile increased by 1.3%.
Passenger servicing. Passenger servicing
totaled $39.2 million in 2004, a 6.4% increase over
passenger servicing of $36.9 million in 2003. This increase
was primarily a result of our 12.8% increase in capacity and an
increase of 15.0% in on-board passengers. Passenger servicing
per available seat mile decreased by 5.7% as a result of fixed
costs being spread over a higher number of available seat miles.
Commissions. Commissions totaled
$29.1 million in 2004, a 5.0% increase over commissions of
$27.7 million in 2003. This increase was primarily a result
of higher passenger revenue, partially offset by lower average
commissions. Commissions per available seat mile decreased by
approximately 6.9% due to lower average commissions and more
direct sales.
Reservations and sales. Reservations and sales
totaled $22.1 million in 2004, a 22.8% increase over
reservations and sales of $18.0 million in 2003. This
increase was a result of a 15.0% increase in on-board
passengers, a 5.7% increase in average rates charged by global
distribution systems and the cost of terminating our
54
relationship with a General Sales Agent in Puerto Rico.
Reservations and sales expenses per available seat mile
increased by 8.8%.
Depreciation. Depreciation totaled
$19.3 million in 2004, a 37.3% increase over depreciation
of $14.0 million in 2003. This increase was primarily due
three new Boeing 737-Next Generation aircraft acquired in 2004
and the full year effect of four Boeing 737-Next Generation
aircraft acquired in 2003. Depreciation per available seat mile
increased by 21.7%.
Maintenance, materials and
repairs. Maintenance, materials and repairs
totaled $19.7 million in 2004, a 3.0% decrease over
maintenance, materials and repairs of $20.4 million in
2003. This decreased was a result of the replacement of four
Boeing 737-200 aircraft with newer Boeing 737-Next Generation
and the full year effect of disposing of two Boeing 737-200
aircraft in 2003, partially offset by beginning of the airframe
overhaul schedule for the first four of our Boeing 737-Next
Generation aircraft. Maintenance, materials and repair per
available seat mile decreased by 14.0%.
Aircraft rentals. Aircraft rentals totaled
$14.4 million in 2004, a 13.4% decrease over aircraft
rentals cost of $16.7 million in 2003. This decrease
resulted from new aircraft leases with better rates as we
experienced the effect of four lease contracts we renegotiated
in 2003. Aircraft rentals per available seat mile decreased by
23.3% due to higher capacity and the lower lease rates.
Flight operations and landing fees and other
rentals. As a group, flight operations and
landing fees and other rentals increased from $26.5 million
in 2003 to $30.1 million in 2004, or 13.3%, primarily as a
result of our 12.8% increase in capacity.
Other. Other expenses totaled
$29.3 million in 2004, a 12.8% increase over other expenses
of $26.0 million in 2003. This increase was primarily due
to technology initiatives related to improving our
telecommunications capabilities, non-recurring expenses related
to our evaluation of a potential acquisition that we chose not
to pursue and a 9.0% increase in publicity and promotion
resulting from higher OnePass frequent flyer miles earned by
customers. Other expenses per available seat mile remained
unchanged.
Non-operating
income (expense)
Non-operating expense totaled $8.0 million in 2004, a 30.4%
increase over non-operating expense of $6.2 million in
2003, attributable primarily to greater interest expense
partially offset by higher interest income and other
non-operating income.
Interest expense. Interest expense totaled
$16.5 million in 2004, a 42.0% increase over interest
expense of $11.6 million in 2003, resulting from a higher
amount of debt related to a greater number of owned aircraft.
The average effective interest rates on our debt also increased
by 57 basis points from 3.64% during 2003 to 4.21% during
2004. At the end of 2004, we had approximately 77% of our
outstanding debt fixed at an effective rate of 4.47%.
Interest capitalized. Interest capitalized
totaled $1.0 million in 2004, a 52.1% decrease over
interest capitalized of $2.0 million in 2003, resulting
from lower average debt relating to pre-delivery payments on
aircraft.
Interest income. Interest income totaled
$1.4 million in 2004, a 60.4% increase over interest income
of $0.9 million in 2003. This increase was mainly a result
of our higher average cash balance over the year and higher
prevailing interest rates during 2004.
Other, net. Other, net income totaled
$6.1 million in 2004, a 137.4% increase over other, net
income of $2.6 million in 2003. This increase was the
result of non-recurring adjustments and a gain of
$1.1 million resulting from the sale of two Boeing 737-200
aircraft, partially offset by a decrease in the market value of
fuel hedge instruments of $0.9 million.
55
Quarterly
Results of Operations
The following table sets forth, for each of our last five
quarters, selected data from our statement of income as well as
other financial data and operating statistics. The information
for each of these quarters is unaudited and has been prepared on
the same basis as the audited financial statements appearing
elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
|
(in thousands of dollars, except
share and per share data and operating data)
|
|
|
INCOME STATEMENT DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue
|
|
$
|
113,608
|
|
|
$
|
137,374
|
|
|
$
|
177,947
|
|
|
$
|
179,645
|
|
|
$
|
191,726
|
|
Operating expenses
|
|
|
87,631
|
|
|
|
117,083
|
|
|
|
141,874
|
|
|
|
152,834
|
|
|
|
149,963
|
|
Depreciation
|
|
|
4,739
|
|
|
|
4,996
|
|
|
|
5,109
|
|
|
|
5,013
|
|
|
|
5,417
|
|
Interest expense
|
|
|
4,557
|
|
|
|
5,152
|
|
|
|
6,046
|
|
|
|
5,874
|
|
|
|
6,278
|
|
Interest capitalized
|
|
|
143
|
|
|
|
201
|
|
|
|
313
|
|
|
|
432
|
|
|
|
508
|
|
Interest income
|
|
|
687
|
|
|
|
673
|
|
|
|
940
|
|
|
|
1,284
|
|
|
|
1,262
|
|
Net income before tax
|
|
|
24,446
|
|
|
|
17,986
|
|
|
|
31,172
|
|
|
|
18,987
|
|
|
|
36,346
|
|
Net income
|
|
|
22,560
|
|
|
|
15,111
|
|
|
|
27,675
|
|
|
|
17,653
|
|
|
|
32,280
|
|
OTHER FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA(1)
|
|
|
32,912
|
|
|
|
27,260
|
|
|
|
41,074
|
|
|
|
28,158
|
|
|
|
46,271
|
|
Aircraft rentals
|
|
|
4,678
|
|
|
|
7,236
|
|
|
|
7,437
|
|
|
|
8,280
|
|
|
|
8,861
|
|
Operating margin
|
|
|
22.9
|
%
|
|
|
14.8
|
%
|
|
|
20.3
|
%
|
|
|
14.9
|
%
|
|
|
21.8
|
|
Weighted average shares used in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
computing net income per
share(2)
|
|
|
42,812,500
|
|
|
|
42,812,500
|
|
|
|
42,812,500
|
|
|
|
42,812,500
|
|
|
|
42,812,500
|
|
Net income (loss) per
share(2)
|
|
$
|
0.53
|
|
|
$
|
0.35
|
|
|
$
|
0.65
|
|
|
$
|
0.41
|
|
|
$
|
0.75
|
|
OPERATING DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue passenger miles
|
|
|
736
|
|
|
|
875
|
|
|
|
1,131
|
|
|
|
1,088
|
|
|
|
1,155
|
|
Available seat miles
|
|
|
1,018
|
|
|
|
1,266
|
|
|
|
1,535
|
|
|
|
1,549
|
|
|
|
1,615
|
|
Load factor
|
|
|
72.3
|
%
|
|
|
69.1
|
%
|
|
|
73.7
|
%
|
|
|
70.2
|
%
|
|
|
71.5
|
%
|
Break-even load factor
|
|
|
52.1
|
%
|
|
|
58.1
|
%
|
|
|
58.4
|
%
|
|
|
60.9
|
%
|
|
|
55.7
|
%
|
Yield
|
|
|
14.28
|
|
|
|
14.49
|
|
|
|
14.73
|
|
|
|
15.30
|
|
|
|
15.61
|
|
Passenger revenue per ASM
|
|
|
10.33
|
|
|
|
10.02
|
|
|
|
10.86
|
|
|
|
10.75
|
|
|
|
11.17
|
|
Operating revenue per ASM
|
|
|
11.16
|
|
|
|
10.85
|
|
|
|
11.60
|
|
|
|
11.59
|
|
|
|
11.87
|
|
Operating expenses per ASM
|
|
|
8.61
|
|
|
|
9.25
|
|
|
|
9.25
|
|
|
|
9.86
|
|
|
|
9.29
|
|
SEGMENT FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Copa:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue
|
|
|
113,608
|
|
|
|
115,955
|
|
|
|
137,690
|
|
|
|
138,402
|
|
|
|
151,602
|
|
Operating expenses
|
|
|
87,631
|
|
|
|
96,260
|
|
|
|
106,941
|
|
|
|
111,852
|
|
|
|
110,613
|
|
Depreciation
|
|
|
4,739
|
|
|
|
4,770
|
|
|
|
4,833
|
|
|
|
4,900
|
|
|
|
5,227
|
|
Aircraft rentals
|
|
|
4,678
|
|
|
|
5,831
|
|
|
|
5,882
|
|
|
|
5,705
|
|
|
|
5,858
|
|
Interest expense
|
|
|
4,557
|
|
|
|
4,691
|
|
|
|
4,940
|
|
|
|
5,236
|
|
|
|
5,678
|
|
Interest capitalized
|
|
|
143
|
|
|
|
201
|
|
|
|
313
|
|
|
|
432
|
|
|
|
508
|
|
Interest income
|
|
|
687
|
|
|
|
656
|
|
|
|
851
|
|
|
|
1,182
|
|
|
|
1,148
|
|
Net income before tax
|
|
|
24,446
|
|
|
|
18,360
|
|
|
|
27,823
|
|
|
|
19,116
|
|
|
|
37,032
|
|
AeroRepública (since
April 22, 2005):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue
|
|
|
|
|
|
|
21,419
|
|
|
|
40,257
|
|
|
|
41,300
|
|
|
|
40,246
|
|
Operating expenses
|
|
|
|
|
|
|
20,823
|
|
|
|
34,933
|
|
|
|
41,083
|
|
|
|
39,472
|
|
Depreciation
|
|
|
|
|
|
|
226
|
|
|
|
276
|
|
|
|
113
|
|
|
|
190
|
|
Aircraft rentals
|
|
|
|
|
|
|
1,405
|
|
|
|
1,555
|
|
|
|
2,575
|
|
|
|
3,003
|
|
Interest expense
|
|
|
|
|
|
|
461
|
|
|
|
1,106
|
|
|
|
638
|
|
|
|
600
|
|
Interest capitalized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
|
17
|
|
|
|
89
|
|
|
|
102
|
|
|
|
114
|
|
Net income (loss) before tax
|
|
|
|
|
|
|
(374
|
)
|
|
|
3,349
|
|
|
|
(130
|
)
|
|
|
(686
|
)
|
|
|
|
(1)
|
|
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
airlines. However, EBITDA should not be
|
56
|
|
|
|
|
considered in isolation, as a
substitute for net income prepared in accordance with
U.S. GAAP or as a measure of a companys
profitability. In addition, our calculation of EBITDA may not be
comparable to other companies similarly titled measures.
The following table presents a reconciliation of our net income
to EBITDA for the specified periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
|
(in thousands of
dollars)
|
|
|
Net income (loss)
|
|
$
|
22,560
|
|
|
$
|
15,111
|
|
|
$
|
27,675
|
|
|
$
|
17,653
|
|
|
$
|
32,280
|
|
Interest expense
|
|
|
4,557
|
|
|
|
5,152
|
|
|
|
6,046
|
|
|
|
5,874
|
|
|
|
6,278
|
|
Income taxes
|
|
|
1,886
|
|
|
|
2,875
|
|
|
|
3,497
|
|
|
|
1,334
|
|
|
|
4,066
|
|
Depreciation
|
|
|
4,739
|
|
|
|
4,996
|
|
|
|
5,109
|
|
|
|
5,013
|
|
|
|
5,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
33,742
|
|
|
|
28,134
|
|
|
|
42,327
|
|
|
|
29,874
|
|
|
|
48,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest capitalized
|
|
|
(143
|
)
|
|
|
(201
|
)
|
|
|
(313
|
)
|
|
|
(432
|
)
|
|
|
(508
|
)
|
Interest income
|
|
|
(687
|
)
|
|
|
(673
|
)
|
|
|
(940
|
)
|
|
|
(1,284
|
)
|
|
|
(1,262
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
32,912
|
|
|
|
27,260
|
|
|
|
41,074
|
|
|
|
28,158
|
|
|
|
46,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
|
|
All share and per share amounts
have been retroactively restated to reflect the current capital
structure described under Description of Capital
Stock and in the notes to our consolidated financial
statements.
|
Liquidity
and Capital Resources
In recent years, we have been able to meet our working capital
requirements through cash from our operations. Our capital
expenditures, which consist primarily of aircraft purchases, are
funded through a combination of our cash from operations and
long-term financing. From time to time, we finance pre-delivery
payments related to our aircraft with medium-term financing in
the form of bonds privately placed with commercial banks. Our
accounts receivable at December 31, 2005 increased by
$21.8 million compared with December 31, 2004,
primarily as a result of the consolidation of $15.3 million
of AeroRepúblicas receivables and growth in operating
revenues.
Our cash, cash equivalents and short-term investments at
December 31, 2005 remained near the prior years level
at $114.5 million. Our cash, cash equivalents and
short-term investments increased to $114.8 million at
March 31, 2006. At March 31, 2006 we had available
credit lines totaling $38.5 million under which there were
no amounts outstanding.
Operating
Activities
We rely primarily on cash flows from operations to provide
working capital for current and future operations. For the first
three months of 2006, cash flow from operating activities
totaled $21.1 million. Cash flows from operating activities
totaled $119.1 million in 2005, $98.1 million in 2004,
and $73.5 million in 2003. The increase in operating cash
flows over these periods was primarily due to the growth of our
business.
Investing
Activities
During the first three months of 2006, capital expenditures were
$4.4 million and were primarily related to the acquisition
of aircraft components. During 2005, capital expenditures were
$63.3 million, which consisted primarily of expenditures
related to our purchase of two Embraer 190 aircraft. During
2004, capital expenditures were $65.8 million, which
consisted primarily of expenditures related to our purchase of
three Boeing 737-Next Generation aircraft. During 2003, capital
expenditures were $112.2 million, which consisted primarily
of expenditures related to our purchase of four Boeing 737-Next
Generation aircraft and one CFM 56-7B spare engine.
Financing
Activities
Financing activities during the first three months of 2006
consisted primarily of the issuance of $4.9 million in
commercial debt by AeroRepública, primarily related to the
refinancing of existing liabilities, and the repayment of
$11.6 million in long-term debt.
57
Financing activities during 2005 consisted of $68.4 million,
primarily to the financing of two Embraer 190 aircraft,
$27.5 million related to the financing of aircraft
pre-delivery payments through privately-placed bonds, the
repayment of $46.9 million in long-term debt and
$10.1 million in dividends declared and paid.
Financing activities during 2004 consisted primarily of
financing for three Boeing 737-Next Generation aircraft for
$101.2 million ($35.7 million of the proceeds of which
were used to redeem privately-placed bonds used for pre-delivery
payments related to those aircraft), the financing for aircraft
pre-delivery payments with $6.4 million of privately-placed
bonds, the repayment of $32.1 million in long-term debt and
$10.0 million in dividends declared and paid.
Financing activities during 2003 consisted primarily of
financing for four Boeing 737-Next Generation aircraft and a
spare engine for $140.7 million ($35.2 million of the
proceeds of which were used to redeem privately-placed bonds
used for pre-delivery payments related to those aircraft), the
financing for aircraft pre-delivery payments with
$21.7 million of privately-placed bonds and the repayment
of $22.0 million in long-term debt.
We have generally been able to arrange medium-term financing for
pre-delivery payments through loans with commercial banks
through a private issuance of bonds. Although we believe that
financing on similar terms should be available for our future
aircraft pre-delivery payments, we may not be able to secure
such financing on terms attractive to us.
We have financed the acquisition of fifteen Boeing 737-Next
Generation aircraft and three spare engines through syndicated
loans provided by international financial institutions with the
support of partial guarantees issued by the Export-Import Bank
of the United States, or Ex-Im, with repayment profiles of
12 years. The Ex-Im guarantees support 85% of the net
purchase price and are secured with a first priority mortgage on
the aircraft in favor of a security trustee on behalf of Ex-Im.
The documentation for each loan follows standard market forms
for this type of financing, including standard events of
default. Our Ex-Im supported financings amortize on a quarterly
basis, are denominated in dollars and originally bear interest
at a floating rate linked to LIBOR. Our Ex-Imguarantee
facilities typically offer an option to fix the applicable
interest rate. We have exercised this option with respect to
$285.8 million as of March 31, 2006 at an average
weighted interest rate of 4.46%. The remaining
$43.5 million bears interest at an average weighted
interest of LIBOR plus 0.03%. At March 31, 2006, the total
amount outstanding under our Ex-Im-supported financings totaled
$329.3 million.
We effectively extend the maturity of our Boeing aircraft
financing to 15 years through the use of a Stretched
Overall Amortization and Repayment, or SOAR, structure
which provides serial draw-downs calculated to result in a 100%
loan accreting to a recourse balloon at the maturity of the
Ex-Im guaranteed loan. The SOAR portions of our facilities
require us to maintain certain financial covenants, including an
EBITDAR to fixed charge ratio, a net debt to capitalization
ratio and minimum net worth. To comply with the first ratio, our
EBITDA plus aircraft rent expense, or EBITDAR, for the prior
year must be at least 2.5 times our fixed charge expenses
(including interest, commission, fees, discounts and other
finance payments) for that year. To comply with the second
ratio, our tangible net worth shall be at least five times our
long-term obligations. Third, our tangible net worth must be at
least $50 million. As of March 31, 2006, we complied
with all required covenants. We also pay a commitment fee on the
unutilized portion of our SOAR loans.
We also typically finance approximately 10% of the purchase
price of our Boeing aircraft through commercial loans which
totaled $62.2 million as of March 31, 2006. Under the
commercial loan agreements for aircraft received in 2002, we are
required to comply with four specific financial covenants. The
first covenant requires our EBITDAR for the prior year to be at
least 1.9 times our finance charge expenses (including interest,
commission, fees, discounts and other finance payments) for the
first year of the agreement and 2.0 times our finance charge
expenses for the remainder of the agreement. The second covenant
limits our net borrowings to 92% of our capitalization during
the first two years, 90% during the next two years and 85%
during the last six years of the agreement. The third covenant
requires our tangible net worth to be at least $30 million
for the first two years, $70 million for the next three
years and $120 million for the last four years of the
agreement. The last covenant requires us to maintain a minimum
of $30 million in available cash (including cash
equivalents and committed credit facilities) for the first five
years and $50 million for the last five years of the
agreement. As of March 31, 2006 we complied with all
required covenants.
58
Our Embraer aircraft purchases are not eligible for Ex-Im
guaranteed financing. We arranged financing for the six Embraer
aircraft to be delivered through the end of 2006, having
obtained a commitment for senior term loan facilities in the
amount of approximately $134 million from PK AirFinance US,
Inc., an affiliate of General Electric. The loans have a term of
twelve years.
Upon our acquisition of AeroRepública, we arranged a
commercial credit facility in the amount of $15.0 million,
primarily to refinance existing liabilities and to provide
AeroRepública with working capital. This facility was
divided in two tranches of $5.0 million and
$10.0 million with maturities of three and five years,
respectively. This facility is secured by credit card
receivables. The facility required AeroRepública to
maintain certain financial covenants such as a financial debt to
EBITDAR ratio of less than 4.5. AeroRepública is currently
in negotiations with lenders to restructure the existing two
tranche facility into a one tranche facility with more favorable
terms in the amount of approximately $15 million which will
be backed by a guarantee from Copa Holdings, S.A. The new
facility under negotiation will include revised covenants which
under the current facility are not being met by
AeroRepública as of December 31, 2005.
AeroRepública received a waiver from the lending
institution through July 2006.
Capital resources. We finance our aircraft
through long term debt and operating lease financings. Although
we expect to finance future aircraft deliveries with a
combination of similar debt arrangements and financing leases,
we may not be able to secure such financing on attractive terms.
To the extent we cannot secure financing, we may be required to
modify our aircraft acquisition plans or incur higher than
anticipated financing costs. We expect to meet our operating
obligations as they become due through available cash and
internally generated funds, supplemented as necessary by
short-term credit lines.
We have placed firm orders with The Boeing Company for eight
Boeing 737-Next Generation aircraft and we have purchase rights
for an additional nine Boeing 737-Next Generation aircraft. We
have also placed firm orders with Embraer for 18 Embraer 190
aircraft and we have options to purchase an additional 35
Embraer 190 aircraft. The schedule for delivery of our firm
orders is as follows: ten in 2006, eight in 2007, six in 2008
and two in 2009. We meet our pre-delivery deposit requirements
for our Boeing 737-Next Generation aircraft by paying cash, or
by using medium-term borrowing facilities
and/or
vendor financing for deposits required 24 to 6 months prior
to delivery. Pre-delivery deposits for our Embraer 190 aircraft
are required 18, 12 and 6 months prior to delivery. We
fund these deposits with our own cash.
Contractual
Obligations
Our non-cancelable contractual obligations at March 31,
2006 included the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2006
|
|
|
|
|
|
|
Rest of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Thereafter
|
|
|
|
(in thousands of
dollars)
|
|
|
Aircraft and engine purchase
commitments
|
|
$
|
733,970
|
|
|
$
|
233,588
|
|
|
$
|
286,473
|
|
|
$
|
171,961
|
|
|
$
|
41,948
|
|
|
$
|
|
|
|
$
|
|
|
Aircraft operating leases
|
|
|
134,989
|
|
|
|
24,834
|
|
|
|
31,941
|
|
|
|
28,791
|
|
|
|
22,483
|
|
|
|
12,600
|
|
|
|
14,340
|
|
Other operating leases
|
|
|
20,322
|
|
|
|
2,670
|
|
|
|
2,674
|
|
|
|
2,448
|
|
|
|
2,365
|
|
|
|
2,356
|
|
|
|
7,809
|
|
Short-term debt and long-term
debt(1)
|
|
|
566,840
|
|
|
|
77,990
|
|
|
|
56,259
|
|
|
|
54,132
|
|
|
|
50,550
|
|
|
|
47,211
|
|
|
|
280,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,456,121
|
|
|
$
|
339,082
|
|
|
$
|
377,347
|
|
|
$
|
257,332
|
|
|
$
|
117,346
|
|
|
$
|
62,167
|
|
|
$
|
302,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Includes actual interest and
estimated interest for floating-rate debt based on
December 31, 2005 rates.
|
Most contract leases include renewal options. Non-aircraft
related leases have renewable terms of one year, and their
respective amounts included in the table below have been
estimated through 2010, but we cannot estimate amounts with
respect to those leases for later years. Our leases do not
include residual value guarantees.
59
Off-Balance
Sheet Arrangements
None of our operating lease obligations are reflected on our
balance sheet and we have no other off-balance sheet
arrangements. We are responsible for all maintenance, insurance
and other costs associated with operating these aircraft;
however, we have not made any residual value or other guarantees
to our lessors.
Quantitative
and Qualitative Disclosures about Market Risk
The risks inherent in our business are the potential losses
arising from adverse changes to the price of fuel, interest
rates and the U.S. dollar exchange rate.
Aircraft Fuel. Our results of operations are
affected by changes in the price and availability of aircraft
fuel. To manage the price risk, we use crude oil option
contracts, zero cost collars and swap agreements. Market risk is
estimated as a hypothetical 10% increase in the
December 31, 2005 cost per gallon of fuel. Based on
projected 2006 fuel consumption, such an increase would result
in an increase to aircraft fuel expense of approximately
$17.6 million in 2006, not taking into account our
derivative contracts. We currently have hedged approximately 13%
of Copas projected 2006 fuel requirements and 5% of
Copas projected fuel consumption from January 1, 2007
to May 31, 2007. All existing hedge contracts settle by May
2007. We may enter into additional hedging agreements in the
future to reduce volatility in our fuel expenses.
Interest. Our earnings are affected by changes
in interest rates due to the impact those changes have on
interest expense from variable-rate debt instruments and
operating leases and on interest income generated from our cash
and investment balances. If interest rates average 10% more
in 2006 than they did during 2005, our interest expense would
increase by approximately $0.6 million and the fair value
of our debt would decrease by approximately $5.8 million.
If interest rates average 10% less in 2006 than they did in
2005, our interest income from cash equivalents would decrease
by approximately $0.4 million and the fair value of our
debt would increase by approximately $6.1 million. These
amounts are determined by considering the impact of the
hypothetical interest rates on our variable-rate debt and cash
equivalent balances at December 31, 2005.
Foreign Currencies. The majority of our
obligations are denominated in U.S. dollars. Since Panama
uses the U.S. dollar as legal tender, the majority of our
operating expenses are also denominated in U.S. dollars.
Our foreign exchange risk is limited as approximately 42% of our
revenues are in U.S. dollars. While a significant part of
our revenues are in foreign currency, no single currency
represented more than 6% of our operating revenues in 2005,
except for the Colombian Peso which represented 24%. Generally,
our exposure to most of these foreign currencies is limited to
the period of up to two weeks between the completion of a sale
and the repatriation to Panama in dollars.
2005
Revenues and Expenses Breakdown by Currency
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
Expense
|
|
|
Argentinian Peso
|
|
|
4.3
|
%
|
|
|
2.5
|
%
|
Brazilian Real
|
|
|
5.9
|
%
|
|
|
3.0
|
%
|
Colombian Peso
|
|
|
24.3
|
%
|
|
|
12.6
|
%
|
Costa Rican Colon
|
|
|
3.7
|
%
|
|
|
1.8
|
%
|
Mexican Peso
|
|
|
4.2
|
%
|
|
|
2.0
|
%
|
U.S. Dollar
|
|
|
42.2
|
%
|
|
|
71.9
|
%
|
Venezuelan Bolivar
|
|
|
3.9
|
%
|
|
|
1.7
|
%
|
Other(1)
|
|
|
11.6
|
%
|
|
|
4.5
|
%
|
|
|
|
(1)
|
|
Chilean Peso, Dominican Peso,
Guatemalan Quetzal, Jamaican Dollar, Honduran Lempira, Haitian
Gourde.
|
As a result of the acquisition of AeroRepública in April
2005, we have an increased exposure to the Colombian Peso than
that noted in the table above. AeroRepúblicas
revenues from April 22, 2005 to December 31, 2005
represent 16.9% of total consolidated revenues.
60
Outlook:
Remainder of 2006
We seek to expand our Copa Airlines operation by adding
frequencies and new routes with the addition of six new aircraft
to our fleet, including two Boeing-737 Next Generation and four
Embraer 190 aircraft. New routes for 2006 include Maracaibo,
Venezuela; Montevideo, Uruguay; San Pedro Sula, Honduras;
Port of Spain, Trinidad and Tobago; Manaus, Brazil; and
Santiago, Dominican Republic. For the remainder of 2006, we
expect to continue to concentrate on keeping our operating costs
low and pursuing ways to make our operations more efficient.
We intend to continue to apply our know-how to improve the
operations at AeroRepública. As part of our plan to
modernize AeroRepúblicas fleet, we currently expect
to take delivery of four Embraer aircraft in late 2006. We seek
to make further improvements at AeroRepública, including a
continued focus on on-time performance, a renovation of aircraft
interiors, further integration of Copas and
AeroRepúblicas network through codesharing agreements
and improvement of overall efficiency.
We expect jet fuel prices will continue to be high in 2006 and
expect to continue evaluating fuel hedging programs to help
protect us against short-term movements in crude oil prices. We
also expect interest rates to increase during the rest of 2006
which would increase the amount of interest expense related to
the 38% of our debt that bears interest at floating rates.
We expect our consolidated capacity to increase by approximately
21% in the last seven months of 2006 compared to our
consolidated capacity at May 31, 2006, primarily as a
result of six new aircraft scheduled to be received by Copa in
the last seven months of 2006.
61
BUSINESS
Overview
We are a leading Latin American provider of airline passenger
and cargo service through our two principal operating
subsidiaries, Copa and AeroRepública. Copa operates from
its strategically located position in the Republic of Panama,
and AeroRepública provides service primarily within
Colombia. Our fleet currently consists of 22 Boeing 737-Next
Generation aircraft, two Embraer 190 aircraft, 11 MD-80 aircraft
and two DC-9 aircraft (one of which is currently retired). We
currently have firm orders for eight Boeing 737-Next
Generation and 18 Embraer 190s, and purchase rights
and options for up to nine additional Boeing 737-Next Generation
and 35 additional Embraer 190s.
Copa was established in 1947 and currently offers approximately
92 daily scheduled flights among 30 destinations in 20 countries
in North, Central and South America and the Caribbean from its
Panama City hub. Copa provides passengers with access to flights
to more than 120 other destinations through codeshare
arrangements with Continental pursuant to which each airline
places its name and flight designation code on the others
flights. Through its Panama City hub, Copa is able to
consolidate passenger traffic from multiple points to serve each
destination effectively.
Copa operates a modern fleet of 22 Boeing 737-Next Generation
aircraft and two Embraer 190 aircraft with an average age of
approximately 3.6 years as of May 31, 2006. To meet
its growing capacity requirements, Copa has firm commitments to
accept delivery of 21 additional aircraft through 2009 and has
purchase rights and options that, if exercised, would allow it
to accept delivery of up to 24 additional aircraft through 2009.
Copas firm orders are for eight additional Boeing 737-Next
Generation aircraft and 13 additional Embraer 190s, and its
purchase rights and options are for up to nine Boeing 737-Next
Generation aircraft and up to 15 Embraer 190s.
Copa started its strategic alliance with Continental in 1998.
Since then, it has conducted joint marketing and code-sharing
arrangements, and participated in the award-winning OnePass
frequent flyer loyalty program globally and on a co-branded
basis in Latin America. We believe that Copas co-branding
and joint marketing activities with Continental have enhanced
its brand in Latin America, and that the relationship with
Continental has afforded it cost-related benefits, such as
improving purchasing power in negotiations with aircraft vendors
and insurers. Copas alliance and related services
agreements with Continental are in effect until 2015.
During the second quarter of 2005, we purchased
AeroRepública, a Colombian air carrier that was the
second-largest domestic carrier in Colombia in terms of number
of passengers carried in 2005, providing predominantly
point-to-point
service among 12 cities in Colombia and to Copas
Panama City hub. AeroRepública currently operates a fleet
of eleven leased MD-80s and two owned DC-9s (one of which is
currently retired). As part of its fleet modernization and
expansion plan, AeroRepública has firm commitments to
accept delivery of five Embraer 190 aircraft through 2007 and
purchase rights and options to purchase up to 20 additional
Embraer 190 aircraft through 2011.
Since January 2001, we have grown significantly and have
established a track record of consistent profitability,
recording five consecutive years of increasing earnings. Our
total operating revenues have increased from $290.4 million
in 2001 to $608.6 million in 2005, while our net income has
increased from $14.8 million to $83.0 million over the
same period. Our operating margins also improved from 8.6% in
2001 to 17.9% in 2005.
Our
Strengths
We believe our primary business strengths that have allowed us
to compete successfully in the airline industry include the
following:
|
|
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Our Hub of the Americas airport is strategically
located. We believe that Copas base of
operations at the geographically central location of Tocumen
International Airport in Panama City, Panama provides convenient
connections to our principal markets in North, Central and South
America and the Caribbean, enabling us to consolidate traffic to
serve several destinations that do not generate enough demand to
justify
point-to-point
service. Flights from Panama operate with few service
disruptions due to weather, contributing to high completion
factors and on-time performance. Tocumen International
Airports sea-level altitude allows our aircraft to operate
without performance restrictions that they would be subject to
at
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62
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higher-altitude airports. We believe that Copas hub in
Panama allows us to benefit from Panama Citys status as a
center for financial services, shipping and commerce and from
Panamas stable, dollar-based economy, free-trade zone and
growing tourism industry.
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We focus on keeping our operating costs
low. In recent years, our low operating costs and
efficiency have contributed significantly to our profitability.
Our operating cost per available seat mile was 8.72 cents in
2004 and 9.30 cents in 2005. Our operating cost per available
seat mile excluding costs for fuel and fleet impairment charges
was 7.50 cents in 2001, 7.59 cents in 2002, 7.17 cents in 2003,
7.01 cents in 2004, 6.52 cents in 2005 and 6.37 cents for the
three months ended March 31, 2006. See
Managements Discussion and Analysis of Financial
Condition and Results of OperationsResults of
Operations for a reconciliation of our operating cost per
available seat mile when excluding costs for fuel and fleet
impairment charges to our operating cost per available seat
mile. We believe that our cost per available seat mile reflects
our modern fleet, efficient operations and the competitive cost
of labor in Panama.
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|
Copa operates a modern fleet. Copa completed
the replacement of all of its Boeing 737-200 aircraft in
the first quarter of 2005 with Boeing 737-Next Generation
aircraft equipped with winglets and other modern cost-saving and
safety features. Copa also recently accepted delivery of its
first two Embraer 190 aircraft. Over the next four years, Copa
intends to enhance its modern fleet through the addition of at
least eight additional Boeing 737-Next Generation aircraft and
13 new Embraer 190s. We believe that Copas modern fleet
contributes to its on-time performance and high completion
factor (percentage of scheduled flights not cancelled). We
expect our Boeing 737-700s and 737-800s and our new Embraer 190s
to offer substantial operational cost savings over the replaced
aircraft in terms of fuel efficiency and maintenance costs.
AeroRepública is currently implementing a fleet
modernization and expansion plan with firm commitments on five
new Embraer 190s and options for an additional 20 Embraer 190
aircraft.
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|
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|
We believe Copa has a strong brand and a reputation for
quality service. We believe that the Copa brand
is associated with value to passengers, providing world-class
service and competitive pricing. For the three months ended
March 31, 2006, Copa Airlines statistic for on-time
performance was 92.3%, completion factor was 99.7% and baggage
handling was 1.2 mishandled bags per 1000 passengers. Our goal
is to apply our expertise in these areas to improve
AeroRepúblicas service statistics to comparable
levels. Our focus on customer service has helped to build
passenger loyalty. We believe that our brand has also been
enhanced through our relationship with Continental, including
our joint marketing of the OnePass loyalty program in Latin
America, the similarity of our aircraft livery and aircraft
interiors and our participation in Continentals
Presidents Club lounge program.
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|
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|
Our management fosters a culture of teamwork and continuous
improvement. Our management team has been
successful at creating a culture based on teamwork and focused
on continuous improvement. Each of our employees at Copa has
individual objectives based on corporate goals that serve as a
basis for measuring performance. When corporate operational and
financial targets are met, employees at Copa are eligible to
receive bonuses according to our profit sharing program. See
BusinessEmployees. We also recognize
outstanding performance of individual employees through
company-wide recognition, one-time awards, special events and,
in the case of our senior management, grants of restricted stock
and stock options. Copas goal-oriented culture and
incentive programs have contributed to a motivated work force
that is focused on satisfying customers, achieving efficiencies
and growing profitability. We seek to create a similar culture
at AeroRepública.
|
Our
Strategy
Our goal is to continue to grow profitably and enhance our
position as a leader in Latin American aviation by providing a
combination of superior customer service, convenient schedules
and competitive fares, while maintaining competitive costs. The
key elements of our business strategy include the following:
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|
Expand our network by increasing frequencies and adding new
destinations. We believe that demand for air
travel in Latin America is likely to expand in the next decade,
and we intend to use our increasing fleet capacity to meet this
growing demand. We intend to focus on expanding our operations
by increasing flight frequencies on our most profitable routes
and initiating service to new destinations. Copas Panama
City hub allows us to consolidate traffic and provide service to
certain underserved markets, particularly in Central
|
63
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America and the Caribbean, and we intend to focus on providing
new service to regional destinations that we believe best
enhance the overall connectivity and profitability of our
network. With the addition of Embraer 190 aircraft and growth in
overall capacity, we expect to have more flexibility in
scheduling our flights for our customers convenience.
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|
Continue to focus on keeping our costs low. We
seek to reduce our cost per available seat mile without
sacrificing services valued by our customers as we execute our
growth plans. Our goal is to maintain a modern fleet and to make
effective use of our resources through efficient aircraft
utilization and employee productivity. We intend to reduce our
distribution costs by increasing direct sales, including
internet and call center sales, as well as improving efficiency
through technology and automated processes.
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|
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|
Introduce service with new Embraer 190
aircraft. We believe that the addition of the
Embraer 190 aircraft allows us to provide efficient service to
new destinations in underserved markets. In addition, we believe
that the Embraer 190s enhance our ability to efficiently match
our capacity to demand, allowing us to improve service
frequencies to currently served markets and to redeploy our
higher capacity aircraft to serve routes with greater demand.
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|
Emphasize superior service and value to our
customers. We intend to continue to focus on
satisfying our customers and earning their loyalty by providing
a combination of superior service and competitive fares. We
believe that continuing our operational success in keeping
flights on time, reducing mishandled luggage and offering
convenient schedules to attractive destinations will be
essential to achieving this goal. We intend to continue to
incentivize our employees to improve or maintain operating and
service metrics relating to our customers satisfaction by
continuing our profit sharing plan and employee recognition
programs and to reward customer loyalty with the popular OnePass
frequent flyer program, upgrades and access to Presidents
Club lounges.
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Capitalize on opportunities at
AeroRepública. We are seeking to enhance
AeroRepúblicas market share and profitability through
a variety of initiatives, including modernizing its fleet,
integrating its route network with Copas and improving
overall efficiency. We also seek to increase customer loyalty by
making further operational improvements at AeroRepública,
such as on-time performance which improved from 70.4% during the
six months ended December 31, 2005 to 81.9% during the
three months ended March 31, 2006, and in March 2006, we
implemented the OnePass frequent flyer program at
AeroRepública.
|
History
Copa was established in 1947 by a group of Panamanian investors
and Pan American World Airways, which provided technical and
economic assistance as well as capital. Initially, Copa served
three domestic destinations in Panama with a fleet of three
Douglas C-47 aircraft. In the 1960s, Copa began its
international service with three weekly flights to cities in
Costa Rica, Jamaica and Colombia using a small fleet of Avro
748s and Electra 188s. In 1971, Pan American World Airways sold
its stake in Copa to a group of Panamanian investors who
retained control of the airline until 1986. During the 1980s,
Copa suspended its domestic service to focus on international
flights.
In 1986, CIASA purchased 99% of Copa, which was controlled by
the group of Panamanian shareholders who currently control
CIASA. From 1992 until 1998, Copa was a part of a commercial
alliance with Grupo TACAs network of Central American
airline carriers. In 1997, together with Grupo TACA, Copa
entered into a strategic alliance with American Airlines. After
a year our alliance with American was terminated by mutual
consent. In May 1998, CIASA sold a 49% stake in Copa Holdings to
Continental and entered into an extensive alliance agreement
with Continental providing for code-sharing, joint marketing,
technical ex-changes and other cooperative initiatives between
the airlines.
Since 1998, we have grown and modernized our fleet while
improving customer service and reliability. In 1999, we received
our first Boeing 737-700s and in 2003 we received our first
Boeing 737-800s. In the first quarter of 2005, we completed our
fleet renovation program and discontinued use of our last Boeing
737-200s. Since 1998, Copa has expanded from 24 destinations in
18 countries to 30 destinations in 20 countries. We plan to
continue our expansion in the future, and we plan to almost
double our fleet over the next five years.
64
AeroRepública
We acquired 85.6% of AeroRepública on April 22, 2005
and another 14.2% in a series of transactions ending in March
2006. We carried out the acquisition by purchasing substantially
all of the equity ownership interest in AeroRepública from
its several former shareholders for an aggregate purchase price
of approximately $23.4 million, including acquisition
costs. According to the Colombian Civil Aviation Administration,
Unidad Especial Administrative de Aeronáutica Civil,
AeroRepública is the second largest passenger air carrier
in Colombia, with a market share of approximately 25% of the
domestic traffic in Colombia in 2005 and approximately 1,238
employees.
Our goal is to achieve growth at AeroRepública through a
combination of increasing Colombian domestic passenger traffic
volume and increasing market share, particularly in the business
travelers segment. We believe that Copas operational
coordination with AeroRepública may create additional
passenger traffic in our existing route network by providing
Colombian passengers more convenient access to the international
destinations served through our Panama hub.
Since our acquisition, AeroRepúblicas on-time
performance has improved from 70.4% during the period from the
date of our acquisition to December 31, 2005 to 81.9%
during the three months ended March 31, 2006. We have
centralized certain administrative functions common to Copa and
AeroRepública, including information technology, corporate
planning and internal audits. We have also implemented
e-ticketing
at AeroRepública, and AeroRepública now participates
in the OnePass frequent flyer loyalty program. Looking ahead, we
seek to continue aircraft interior renovations in our
AeroRepública aircraft and complete our fleet renovation
program.
We believe that AeroRepúblicas revenues were
approximately $87 million for 2003 and approximately
$118 million for 2004. We also believe that during those
years AeroRepública operated with very low net operating
margins and experienced a net loss in 2003. However, in the
course of our due diligence investigations in connection with
the purchase, we and our external accounting advisors discovered
certain inconsistencies in AeroRepúblicas accounting
and internal controls that caused us to believe that its
published financial statements as prepared under Colombian GAAP
may not have accurately reflected its results of operations for
the years covered. Since we acquired AeroRepública, we have
retained an internationally recognized accounting firm to assist
us in the maintenance of accounting records, perform additional
analyses and post-closing procedures necessary for the
preparation of AeroRepúblicas financial statements
and provide other assistance in areas in which
AeroRepública had insufficient internal resources.
Additionally, our accounting personnel have been directly
involved in the preparation and review of
AeroRepúblicas financial information consolidated
into our financial statements subsequent to the acquisition. As
a result, we believe the financial information of
AeroRepública that is consolidated into our financial
statements has been prepared in accordance with U.S. GAAP
and that our interim financial statements for the periods
subsequent to our acquisition of AeroRepública are
materially correct. Our management and audit committee have
developed plans for the remediation of the deficiencies in
AeroRepúblicas internal controls. These plans include
additional oversight by our accounting personnel, further
education and training in U.S. GAAP for
AeroRepúblicas existing personnel and engaging
outside resources to assist in the design and implementation of
additional internal controls. We expect to continue to carry out
these plans during the next year in connection with our initial
assessment of our internal control over financial reporting as
of December 31, 2006, as required by Section 404 of
the Sarbanes-Oxley Act of 2002. The consolidation of
AeroRepública into our results of operations has
substantially increased our revenues and decreased our operating
margins and is likely to do so for the foreseeable future.
Industry
In Latin America, the scheduled passenger service market
consists of three principal groups of travelers: strictly
leisure, business and travelers visiting friends and family.
Leisure passengers and passengers visiting friends and family
typically place a higher emphasis on lower fares, whereas
business passengers typically place a higher emphasis on flight
frequency, on-time performance, breadth of network and service
enhancements, including loyalty programs and airport lounges.
65
According to data from the International Air Transport
Association, or IATA, Latin America comprised approximately 8.2%
of worldwide passengers flown in 2005, or 105 million
passengers. A significant percentage of this traffic consisted
of passengers flying between the United States and Latin America.
The Central American aviation market is dominated by
international traffic. According to data from IATA,
international traffic represented more than 69.2% of passengers
carried and 84.4% of passenger miles flown in Central America in
2005. International passenger traffic is concentrated between
North America and Central America. This segment represented
73.3% of international passengers flown in Central America in
2005, compared to 18.1% for passengers flown between Central
America and South America and 8.6% for passengers flown between
Central American countries. Total passengers flown on
international flights in Central America grew by 26.0% in 2005,
and load factors on international flights to and from Central
America were 72.8% on average.
Domestic traffic, or flights within Central American countries,
represented approximately 30.8% of passengers carried and 15.6%
of passenger miles flown in 2005. Average load factors on
domestic flights within Central America were 66.6% in 2005. The
chart below details passenger traffic in 2005.
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|
2005 IATA Traffic
Results
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|
Passengers
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|
|
|
|
Passenger
|
|
|
|
|
|
|
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|
|
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|
|
|
|
|
Carried
|
|
|
|
|
|
Miles
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands)
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|
|
Change (%)
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|
|
(Millions)
|
|
|
Change (%)
|
|
|
ASMs (Million)
|
|
|
Change (%)
|
|
|
Load Factor
|
|
|
International Scheduled
Service
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
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|
North
America Central America
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|
|
18,922
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|
|
|
4.1
|
%
|
|
|
27,855
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|
|
|
1.2
|
%
|
|
|
37,718
|
|
|
|
(2.1
|
)%
|
|
|
73.9
|
%
|
North
America South America
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|
|
19,377
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|
|
|
10.4
|
%
|
|
|
37,171
|
|
|
|
11.4
|
%
|
|
|
51,486
|
|
|
|
6.6
|
%
|
|
|
72.2
|
%
|
Central
America South America
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|
|
4,666
|
|
|
|
17.2
|
%
|
|
|
8,951
|
|
|
|
28.2
|
%
|
|
|
12,601
|
|
|
|
26.1
|
%
|
|
|
71.0
|
%
|
Within Central America
|
|
|
2,214
|
|
|
|
(5.6
|
)%
|
|
|
1,090
|
|
|
|
(16.9
|
)%
|
|
|
1,712
|
|
|
|
(27.4
|
)%
|
|
|
63.6
|
%
|
Within South America
|
|
|
8,595
|
|
|
|
21.8
|
%
|
|
|
10,862
|
|
|
|
12.3
|
%
|
|
|
14,771
|
|
|
|
7.2
|
%
|
|
|
73.5
|
%
|
Domestic Scheduled
Service
|
|
|
|
|
|
|
|
|
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|
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|
Central America
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|
|
11,487
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|
|
|
(4.4
|
)%
|
|
|
6,992
|
|
|
|
(3.7
|
)%
|
|
|
16,900
|
|
|
|
(7.7
|
)%
|
|
|
66.6
|
%
|
South America
|
|
|
40,183
|
|
|
|
19.7
|
%
|
|
|
20,657
|
|
|
|
18.4
|
%
|
|
|
48,010
|
|
|
|
13.9
|
%
|
|
|
69.2
|
%
|
Panama serves as a hub for connecting passenger traffic between
major North American, South American, Caribbean and Central
American markets. Accordingly, passenger traffic to and from
Panama is significantly influenced by economic growth in
surrounding regions. Major passenger traffic markets in North
America, South America and Central America experienced growth in
their GDP in 2005 on both an absolute and per capita basis. Real
GDP in our two most important markets also grew in 2004,
increasing by 7.6% in Panama and 4.0% in Colombia in 2004. In
2005, real GDP increased by 5.5% in Panama and by 5.1% in
Colombia, according to the International Monetary Funds
estimates.
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|
GDP
|
|
|
GDP per Capita
|
|
|
|
2005 GDP
|
|
|
|
|
|
2005 GDP per Capita
|
|
|
|
Current Prices
|
|
|
2005 Real GDP
|
|
|
Current Prices
|
|
|
|
(US$bn)
|
|
|
(% Growth)
|
|
|
(US$)
|
|
|
Brazil
|
|
|
792.7
|
|
|
|
2.3
|
%
|
|
|
4,315.7
|
|
Argentina
|
|
|
181.7
|
|
|
|
9.2
|
%
|
|
|
4,802.1
|
|
Chile
|
|
|
114.0
|
|
|
|
6.3
|
%
|
|
|
7,040.3
|
|
Mexico
|
|
|
768.4
|
|
|
|
3.0
|
%
|
|
|
7,297.6
|
|
Colombia
|
|
|
122.3
|
|
|
|
5.1
|
%
|
|
|
2,742.5
|
|
Panama
|
|
|
15.2
|
|
|
|
5.5
|
%
|
|
|
4,722.2
|
|
USA
|
|
|
12,485.7
|
|
|
|
3.5
|
%
|
|
|
42,101.3
|
|
|
|
|
Source: |
|
International Monetary Fund, World Economic Outlook Database,
April 2006; real GDP growth calculated in local currency |
66
Panama has benefited from a stable economy with moderate
inflation and steady GDP growth. According to World Bank
estimates, from 1999 to 2003 Panamas real GDP grew at an
average annual rate of 2.9% while inflation averaged
0.6% per year. The service sector represents approximately
76% of total real GDP in Panama, a higher percentage of GDP than
the service sector represents in most other Latin American
countries. The World Bank currently estimates Panamas
population to be approximately 3.2 million in 2004, an
increase of approximately 3.3% from 3.1 million in 2003,
with the majority of the population concentrated in Panama City,
where our hub at Tocumen International Airport is located. We
believe the combination of a stable, service-oriented economy
and steady population growth has helped drive our domestic
origin and destination passenger traffic. The World Bank
estimates that annual aircraft departures in Panama increased by
approximately 5.1% from 25,700 in 2003 to 27,000 in 2004.
Domestic travel within Panama primarily consists of individuals
visiting families as well as domestic and foreign tourist
visiting the countryside. Most of this travel is done via ground
transportation, and its main flow is to and from Panama City,
where most of the economic activity and population is
concentrated. Demand for domestic air travel is growing and
relates primarily to leisure travel from foreign and local
tourist. The market is served primarily by two local airlines,
Turismo Aereo and Aeroperlas, which operate turbo prop aircraft
generally with less than 50 seats. These airlines do not
offer international service and operate in the domestic terminal
of Panama City, which is located 30 minutes by car from Tocumen
International Airport.
Colombia is the third largest country in Latin America in terms
of population, with a population of approximately
45 million in 2004 according to the World Bank, and has a
land area of approximately 440,000 square miles.
Colombias GDP was approximately $122.3 billion in
2005, and per capita income was approximately $2,742 (current
prices) according to the International Monetary Fund.
Colombias geography is marked by the Andean mountains and
an inadequate road and rail infrastructure, making air travel a
convenient and attractive transportation alternative. Colombia
shares a border with Panama, and for historic, cultural and
business reasons it represents a significant market for many
Panamanian businesses.
Route
Network and Schedules
Copa
As of March 31, 2006, Copa provided regularly scheduled
flights to 30 cities in North, Central and South America
and the Caribbean. Substantially all of our Copa flights operate
through our hub in Panama which allows us to transport
passengers and cargo among a large number of destinations with
service which is more frequent than if each route were served
directly.
We believe our
hub-and-spoke
model is the most efficient way for us to operate our business
since most of the origination/destination city pairs we serve do
not generate sufficient traffic to justify a
point-to-point
service. Also, since we serve many countries, it would be very
difficult to obtain the bilateral route rights necessary to
operate a competitive
point-to-point
system.
We schedule a morning bank and an evening bank of flights, with
flights timed to arrive at the hub at approximately the same
time and to depart a short time later. Over the next few years,
as our hub expands to allow us to de-peak our schedules and with
the addition of two new banks to our hub, we intend to increase
the number of destinations and frequencies. Operating more banks
during the day will increase our asset utilization and allow us
to utilize the employees at our hub more efficiently since
periods of low activity without arriving or departing flights at
the hub will be shorter. Additional banks will also give us the
opportunity to provide more frequent service to many
destinations, allow some passengers more convenient connections
and increase the flexibility of scheduling flights throughout
our route network.
67
The following table sets forth certain information with respect
to our route system based on our flight schedule in effect as of
March 31, 2006:
Number of
Passengers Carried
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
Region
|
|
ASMs per Week
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
North America
|
|
|
22,961,778
|
|
|
|
335,294
|
|
|
|
395,497
|
|
|
|
487,852
|
|
Central America
|
|
|
8,900,633
|
|
|
|
655,726
|
|
|
|
741,295
|
|
|
|
855,491
|
|
South America
|
|
|
49,098,742
|
|
|
|
799,057
|
|
|
|
884,298
|
|
|
|
1,120,355
|
|
Caribbean
|
|
|
13,614,008
|
|
|
|
265,660
|
|
|
|
290,372
|
|
|
|
339,975
|
|
As a part of our strategic relationship with Continental, Copa
provides flights through code-sharing arrangements to over 120
other destinations. Copa also provides flights through its
tactical and regional code-sharing arrangements with
AeroRepública, Mexicana, Gol and Gulfstream International
Airlines.
In addition to increasing the frequencies to destinations we
already serve, Copas business strategy is also focused on
adding new destinations across Latin America, the Caribbean and
North America in order to increase the attractiveness of our Hub
of the Americas at Tocumen International Airport hub for
intra-American
traffic. We currently plan to introduce new destinations and to
increase frequencies to many of the destinations that Copa
currently serves. The addition of the Embraer 190 aircraft,
together with the Boeing 737-Next Generation aircraft, allows us
to improve our service by increasing frequencies and service to
new destinations with the right-sized aircraft.
Our plans to introduce new destinations and increase frequencies
depend on the allocation of route rights, a process over which
we do not have direct influence. Route rights are allocated
through negotiations between the government of Panama and the
governments of countries to which we intend to increase flights.
If we are unable to obtain route rights, we will exercise the
flexibility within our route network to re-allocate capacity as
appropriate.
We do not currently provide any domestic service in the Republic
of Panama, choosing instead to focus entirely on international
traffic. We divide our sales and marketing into the following
regions: North America; South America; Central America
(excluding Panama); the Caribbean; and Panama. The following
table shows our revenue generated in each of these regions.
Revenue
by Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
Region
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
North
America(1)
|
|
|
15.2%
|
|
|
|
16.6%
|
|
|
|
17.2%
|
|
South America
|
|
|
38.1%
|
|
|
|
37.2%
|
|
|
|
39.6%
|
|
Central
America(2)
|
|
|
34.6%
|
|
|
|
34.3%
|
|
|
|
31.6%
|
|
Caribbean(3)
|
|
|
12.1%
|
|
|
|
11.9%
|
|
|
|
11.6%
|
|
|
|
|
(1)
|
|
The United States, Canada and
Mexico.
|
|
(2)
|
|
Includes Panama.
|
|
(3)
|
|
Cuba, Dominican Republic, Haiti,
Jamaica, Puerto Rico
|
68
AeroRepública
AeroRepública currently provides scheduled service to the
following cities in Colombia:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Passengers
|
|
|
|
|
|
Departures
|
|
|
Carried During the
|
|
|
|
Date Service
|
|
Scheduled
|
|
|
Year Ended
|
|
Destinations Served
|
|
Commenced
|
|
per
Week(1)
|
|
|
December 31, 2005
|
|
|
Barranquilla
|
|
Jun 1995
|
|
|
26
|
|
|
|
102,252
|
|
Bogotá
|
|
Jun 1993
|
|
|
259
|
|
|
|
985,391
|
|
Bucaramanga
|
|
May 1995
|
|
|
20
|
|
|
|
84,025
|
|
Cali
|
|
Jun 1993
|
|
|
61
|
|
|
|
275,731
|
|
Cartagena
|
|
Jun 1993
|
|
|
50
|
|
|
|
193,255
|
|
Cúcuta
|
|
Nov 2005
|
|
|
14
|
|
|
|
5,347
|
|
Leticia
|
|
Nov 1993
|
|
|
7
|
|
|
|
31,667
|
|
Medellín
|
|
Oct 1994
|
|
|
69
|
|
|
|
213,758
|
|
Montería
|
|
Jul 1994
|
|
|
14
|
|
|
|
64,107
|
|
Panama
|
|
Dec 2005
|
|
|
14
|
|
|
|
4,839
|
|
Pereira
|
|
Mar 2003
|
|
|
14
|
|
|
|
40,500
|
|
San Andrés
|
|
Jun 1993
|
|
|
33
|
|
|
|
179,746
|
|
Santa Marta
|
|
Jun 1993
|
|
|
15
|
|
|
|
74,696
|
|
|
|
|
(1)
|
|
As of March 31, 2006.
|
In addition to the destinations described above,
AeroRepública periodically operates charter flights to
Margarita Island, Venezuela; Havana, Cuba; Punta Cana, Dominican
Republic and Montego Bay, Jamaica.
AeroRepública was granted the authorization to fly regular
services to Panama City from Cali, Medellín , Cartagena and
San Andrés, Colombia. As a result, AeroRepública
added international service to its schedule in December 2005,
with daily flights to Panama City from Medellin and Cartagena,
Colombia. We expect that AeroRepúblicas new service
on these routes will provide feeder traffic and complement
Copas existing service out of Panama City. In addition,
AeroRepública started operations on the routes from Cali,
Medellín and Bogotá to Cúcuta in December 2005
and November 2005, respectively. While AeroRepública
retains the right to operate the Cali to Medellín route,
service was temporarily discontinued in January 2006.
AeroRepública was also granted the authorization to fly
between Pereira and Panama, Pereira and San José
(Costa Rica), Panama and San José (Costa Rica) and
San Andrés and San José (Costa Rica).
AeroRepública has applied for authorization to fly routes
between Bogotá and Panamá and Bogotá and Armenia
(Colombia). In addition to code-sharing with Copa,
AeroRepública also has code-sharing agreements with Air
Plus Comet, which provides AeroRepública the ability to
offer expanded international service to its customers. Colombia
has open-skies agreements with the Andean Pact (Comunidad
Andina) nations of Bolivia, Ecuador, Peru and Venezuela.
Airline
Operations
Passenger
Operations
Passenger revenues accounted for approximately
$466.1 million or 92.2% of Copas total revenues in
2005, all earned from international routes. Leisure traffic,
which makes up close to half of Copas total traffic, tends
to coincide with holidays, school vacations and cultural events
and peaks in July and August and again in December and January.
Despite these seasonal variations, Copas overall traffic
pattern is relatively stable due to the constant influx of
business travelers. Approximately 40% of Copa passengers regard
Panama City as their destination or origination point, and most
of the remaining passengers pass through Panama City in transit
to other points on our route network.
AeroRepúblicas business is more concentrated on
passenger service, which in 2005 accounted for approximately
96.2% of its total revenues. The majority of
AeroRepúblicas customers are leisure travelers and
travelers visiting friends and family, and traffic is heaviest
during the vacation months of July, August and the holiday
season in December.
69
Cargo
Operations
In addition to our passenger service, we make efficient use of
extra capacity in the belly of our aircraft by carrying cargo.
Copas cargo business generated revenues of approximately
$24.1 million in 2003, $28.2 million in 2004 and
$31.0 million in 2005, representing 7.0%, 7.0% and 6.1%,
respectively, of Copas operating revenues. We sold our
remaining dedicated Boeing 737-200 Freighter aircraft in April
2002. However, we still wet-lease freighter capacity from time
to time to reliably meet our cargo customers needs. In
2005, our cargo business consisted of approximately 75.6% in
courier and freight; 22.4% in wet leases; and 2.0% in mail
service. Of these sub-categories of service, courier traffic has
shown the most growth, and we expect that in the future it will
constitute a larger share of our cargo business.
Pricing
and Revenue Management
Copa
Copa has designed its fare structure to balance its load factors
and yields in a way that it believes will maximize profits on
its flights. Copa also maintains revenue management policies and
procedures that are intended to maximize total revenues, while
remaining generally competitive with those of our major
competitors.
Copa charges slightly more for tickets on higher-demand routes,
tickets purchased on short notice and other itineraries
suggesting a passenger would be willing to pay a premium. This
represents strong value to Copas business customers, who
can count on competitive rates when flying with Copa. The number
of seats Copa offers at each fare level in each market results
from a continual process of analysis and forecasting. Past
booking history, seasonality, the effects of competition and
current booking trends are used to forecast demand. Current
fares and knowledge of upcoming events at destinations that will
affect traffic volumes are included in Copas forecasting
model to arrive at optimal seat allocations for its fares on
specific routes. Copa uses a combination of approaches, taking
into account yields, flight load factors and effects on load
factors of continuing traffic, depending on the characteristics
of the markets served, to arrive at a strategy for achieving the
best possible revenue per available seat mile, balancing the
average fare charged against the corresponding effect on our
load factors. Copa recently replaced its Revenue Management
software with Airmax, a more sophisticated revenue management
system designed by Sabre.
During 2002, Copa purchased an automated pricing system from SMG
Technologies that allows it to efficiently monitor its
competitors published, unpublished and web fares and
easily file fares with automated services. This gives Copa the
time to publish competitive fares to and from points in the
United States that it serves via its code-share agreement with
Continental and to analyze the impact of any change on revenue.
The system was fully implemented in February 2004.
AeroRepública
Improvements are being made to AeroRepúblicas revenue
management, pricing capabilities and systems that we expect will
be completely in place by late 2006. We are in the process of
implementing the Airmax revenue management system in
AeroRepública.
Relationship
with Continental Airlines
In recent years, many airlines have sought to form marketing
alliances with other carriers. Such alliances generally provide
for code-sharing, frequent flyer reciprocity, coordinated
scheduling of flights of each alliance member to permit
convenient connections and other joint marketing activities.
Such arrangements permit an airline to market flights operated
by other alliance members as its own. This increases the
destinations, connections and frequencies offered by the
airline, which provide an opportunity for the airline to
increase traffic on flight segments which connect with those of
the alliance partners.
70
In May 1998, Continental entered into an alliance agreement, as
well as related services, frequent flyer participation,
trademark and other agreements with Copa. These agreements were
initially signed for a period of ten years. Copa amended and
restated the major agreements in November 2005 and extended them
through 2015. Continentals continued ownership of our
shares is not a condition to the ongoing effectiveness of these
agreements. We have started to involve AeroRepública in
some aspects of Copas alliance with Continental, beginning
with AeroRepúblicas participation in the OnePass
frequent flyer loyalty program. Our alliance with Continental
currently enjoys antitrust immunity in the United States which
allows us to coordinate pricing, scheduling and joint marketing
initiatives. In an effort to maximize the benefit from the
relationship, Continental and Copa work together on the
following initiatives:
Product Positioning. Since the start of the
alliance with Continental, Copa has introduced a new image to
align itself more tangibly with the U.S. carrier.
Copas color scheme, logo, aircraft interior and staff
uniforms are similar to Continentals. With initiatives
such as the introduction of Copas business class product
Clase Ejecutiva and a smoke-free cabin, the Copa
in-flight product was modeled on Continentals.
Furthermore, Copas business class passengers enjoy access
to Continentals Presidents Club business lounges,
and Copa jointly operates a co-branded Presidents Club
lounge with Continental at Tocumen International Airport.
Copa has also fully adopted Continentals OnePass frequent
flyer program and rolled out a co-branded joint product in much
of Latin America which has enabled it to develop brand loyalty
among its travelers. The co-branding of the OnePass loyalty
programs has helped it by leveraging the brand recognition that
Continental already enjoyed across Latin America and enabling
the two airlines to compete more effectively against regional
competitors such as Grupo TACA and the oneworld alliance
represented by American Airlines and LAN Airlines.
Continental is currently sponsoring Copas proposed
association with the Sky Team global alliance network, which
also includes Delta, Northwest, Aeromexico, Air France,
Alitalia, KLM, Korean Air, AeroFlot and CSA Czech.
Code-sharing. We currently place the Copa
designator code on Continental operated flights from Panama to
Houston and Panama to Newark. In addition, Continental flights
carrying the Copa code operate to over 120 other Continental
destinations, primarily through Continentals gateways in
Houston and Newark. Continentals flights from Guatemala
City and Managua City to Houston, and from Guatemala City to
Newark also carry Copas code. In May 2001, the DOT awarded
Copa antitrust immunity for our code-share agreement, allowing
Copa to deepen the alliance through, among other things,
coordinating schedules and pricing. The downgrading of the
Panamanian AAC to IASAs Category 2 in 2001, although no
reflection on Copas own safety standards, resulted in the
suspension of its code-share status with Continental until
Category 1 status was restored in April 2004. See
Safety.
Aircraft Maintenance & Flight
Safety. Continental and Copa have been
cooperating closely to fully integrate both airlines
maintenance programs. Continental and Copas maintenance
programs for the Boeing 737-Next Generation are identical. We
share Continentals Sceptre inventory management software
which allows Copa to pool spare parts with the larger airline
and we rely on Continental to provide engineering support for
maintenance projects. We have also been able to take advantage
of Continentals purchasing power and negotiate more
competitive rates for spare parts and third-party maintenance
work.
Sales & Revenue Management. The two
airlines have implemented a co-branding of our city ticket
offices, or CTOs, throughout Latin America, and as a result both
now enjoy greater access to this important direct sales channel
at little incremental cost. Joint corporate and travel agency
incentive programs are in place. Also, a new revenue management
system and team were introduced at Copa under the direct
management of experts brought in from Continental. We believe
that we benefit from Continentals experience in
distribution costs and channel strategy studies, and management
as a whole is gaining an intangible benefit from the high level
of cooperation with Continental.
Information Technology. By leveraging
Continentals expertise and experience, we have implemented
several important information technology systems, such as the
Sceptre system for maintenance and the SHARES
computer reservation system. In November 2000, we transitioned
from the SABRE reservation and airport check-in system to
SHARES in an effort to maintain commonality with
Continental.
71
Fleet Modernization. All of Copas Boeing
aircraft share nearly identical configurations to
Continentals configurations. We have also been able to
take advantage of Continentals greater purchasing power
with its suppliers, including Boeing, thus enabling us to
negotiate lower purchase prices for these new aircraft.
Sales,
Marketing and Distribution
Copa
Sales and Distribution. Approximately 75% of
sales during 2004 were through travel agents and other airlines
while approximately 25% were direct sales via our CTOs, our call
centers, our airport counters or our website. Travel agents
receive base commissions, not including back-end incentive
payments, ranging from 0% to 12% depending on the country. The
weighted average rate for these commissions during 2005 was
4.9%. In recent years, base commissions have decreased
significantly in most markets as more efficient back-end
incentive programs have been implemented to reward selected
travel agencies that exceed their sales targets.
Travel agents obtain airline travel information and issue
airline tickets through global distribution systems, or GDSs,
that enable them to make reservations on flights from a large
number of airlines. GDSs are also used by travel agents to make
hotel and car rental reservations. Copa participates actively in
all major international GDSs, including SABRE, Amadeus, Galileo
and Worldspan. In return for access to these systems, Copa pays
transaction fees that are generally based on the number of
reservations booked through each system.
Copa has a sales and marketing network consisting of 78 domestic
and international ticket offices, including airport and city
ticket offices. Copa has 17 CTOs co-branded with Continental.
During the year ended December 31, 2005, approximately 21%
and 4% of its sales were booked through its ticket counters and
its call centers, respectively.
E-tickets, a
key component of our sales efforts through the Internet and
Copas call centers, was launched at the end of 2002 and,
by December 2003,
E-Ticketing
for direct sales, non-revenue passengers (company business,
elite reward travel and promotional travel), as well as American
Airlines and Continental interline tickets had been implemented.
E-tickets
for travel agencies was implemented in the second quarter of
2004.
The call center that operates Copas reservations and sales
services handles calls from Panama as well as most other
countries Copa flies to. Such centralization has resulted in a
significant increase in telephone sales as it efficiently
allowed for improvements in service levels such as
24-hour-a-day,
7-days-a-week
service.
Copa encourages the use of direct Internet bookings by its
customers because it is Copas most efficient distribution
channel. During mid 2002, Copa signed a contract with Amadeus to
use their booking engine to facilitate ticket purchases on
www.copaair.com and launched the system on January 6, 2003.
The cost of each booking via the website is roughly 25% the cost
of a regular travel agency booking. In 2004, Copa purchased a
new booking engine in order to further reduce distribution
costs; 2.3% of its 2005 sales were made via the website.
Copas goal is to channel more of its total sales through
the website.
Advertising and Promotional Activities. Our
advertising and promotional activities include the use of
television, print, radio and billboards, as well as targeted
public relation events in the cities where we fly. We believe
that the corporate traveler is an important part of our
business, and we particularly promote our service to these
customers by conveying the reliability, convenience and
consistency of our service and offering value-added services
such as convention and conference travel arrangements, as well
as our Business Rewards loyalty program for our frequent
corporate travelers. We also promote package deals among the
destinations where we fly through combined efforts with selected
hotels and travel agencies.
AeroRepública
AeroRepública successfully implemented the OnePass frequent
flyer program in March 2006. AeroRepública also implemented
e-ticket
host in January 2006 and expects to implement
e-ticket
interline with Copa and
e-ticket
with Amadeus during the second quarter of 2006, to complement
its call center, 26 city ticket offices and 12 airport ticket
offices. We believe
e-ticketing
will improve passenger convenience and reduce commission costs.
In 2005, approximately 76% of AeroRepúblicas sales
were made through travel agencies and 24% were made directly to
passengers.
72
Competition
We face intense competition throughout our route network.
Overall airline industry profit margins are low and industry
earnings are volatile. Airlines compete in the areas of pricing,
scheduling (frequency and flight times), on-time performance,
frequent flyer programs and other services. Copa competes with a
number of other airlines that currently serve the routes on
which we operate, including Grupo TACA, American Airlines Inc.
and Avianca. Some of our competitors, such as American Airlines,
have larger customer bases and greater brand recognition in the
markets we serve outside Panama, and some of our competitors
have significantly greater financial and marketing resources
than we have. Airlines based in other countries may also receive
subsidies, tax incentives or other state aid from their
respective governments, which are not provided by the Panamanian
government. The commencement of, or increase in, service on the
routes we serve by existing or new carriers could negatively
impact our operating results. Likewise, competitors
service on routes that we are targeting for expansion may make
those expansion plans less attractive. We must constantly react
to changes in prices and services offered by our competitors to
remain competitive.
Traditional
hub-and-spoke
carriers in the United States and Europe have in recent years
faced substantial and increasing competitive pressure from
low-cost carriers offering discounted fares. The low-cost
carriers operations are typically characterized by
point-to-point
route networks focusing on the highest demand city pairs, high
aircraft utilization, single class service and fewer in-flight
amenities. As evidenced by the operations of Gol in Brazil and
several new low-cost carriers planning to start service in
Mexico, among others, the low-cost carrier business
model appears to be gaining acceptance in the Latin American
aviation industry, and we may face new and substantial
competition from low-cost carriers in the future.
The main source of competition to Copa, and our alliance with
Continental, comes from the multinational Grupo TACA and
American Airlines, the U.S. airline with the largest Latin
American route network. Colombian carrier Avianca is also a
significant competitor.
Grupo TACAs strategy has been to develop three hubs at
San Jose, Costa Rica, San Salvador, El Salvador and
Lima, Peru, which serve more than 40 cities in 19 countries
and compete with Copas hub at Tocumen International
Airport. Grupo TACA primarily operates a fleet of Airbus A319
and A320 aircraft and they have announced their intent to take
delivery of a significant number of new Airbus aircraft between
now and December 2009. We have routes to several of the Central
American republics where Grupo TACA has established service,
including Managua, Nicaragua, San Jose, Costa Rica and
Guatemala.
American Airlines also offers significant competition. American
attracts strong brand recognition throughout the Americas and is
able to attract brand loyalty through its AAdvantage
frequent flyer program. American Airlines competes through its
hubs at Miami and San Juan, Puerto Rico. American Airlines
was a founding member of the oneworld global marketing alliance.
LAN Airlines is another oneworld member that offers service to
more than 50 destinations, primarily in Latin America. LAN
Airlines is comprised of LAN Chile, LAN Peru, LAN Ecuador, LAN
Argentina, LAN Cargo and LAN Express. While we do not compete
directly with LAN Airlines on many of our current routes, LAN
Airlines has grown rapidly over the past several years and may
become a significant competitor in the future.
Copa is also introducing service to and from destinations where
the local airline is less viable and competitive, such as the
Dominican Republic (Santo Domingo and Santiago de los
Caballeros), Ecuador (Quito and Guayaquil) and Venezuela
(Maracaibo). Several smaller airlines also compete in Central
America, such as Tikal Jets.
Copa has also established itself as a significant player on
traffic to and from Colombia, with strong market share on routes
to and from Barranquilla, Bogotá, Cali, Cartagena, Medellin
and San Andres. AeroRepública competes more directly
with Avianca and other Colombian carriers in the Colombian
domestic market. Avianca emerged from U.S. bankruptcy
protection, after being purchased by Brazils Synergy
Group. The new owners of Avianca have announced their intention
to increase Aviancas market share and transform
Bogotá into a major international aviation hub which, if
successful, will compete directly with our hub at Tocumen
International Airport. We cannot predict whether Avianca will
become more competitive under its new management, or if their
increased operations from Bogotá will prove successful. The
other Colombian carriers against which AeroRepública
competes, Aires, Aerolineas de Antioquia and the state-owned
airline Satena, collectively accounted for
73
approximately 21% of the domestic Colombian market in 2005.
Airlines that seek to compete in the Colombian air
transportation market face substantial barriers to entry, as the
Colombian government requires an airline to operate at least
five aircraft and comply with extensive filing and certification
requirements before it becomes eligible to receive domestic
route rights on certain Colombian routes between major cities.
In addition, the number of air carriers offering service on any
route is currently regulated by the Colombian Aviation Authority.
With respect to our cargo operations, we will continue to face
competition from all of the major airfreight companies, most
notably DHL, which has a cargo hub operation at Tocumen
International Airport.
Aircraft
Copa
As of May 31, 2006, Copa operated a fleet consisting of 24
aircraft, including 18 Boeing 737-700 Next Generation aircraft,
four Boeing 737-800 Next Generation aircraft and two Embraer 190
aircraft. Copa currently has firm orders to purchase eight
additional Boeing 737-Next Generation aircraft and thirteen
Embraer 190s. Copa also has options for an additional 15 Embraer
190s and purchase rights for an additional nine Boeing 737-Next
Generation aircraft.
The current composition of the Copa fleet as of May 31,
2006 is more fully described below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of Lease
|
|
|
|
|
|
|
|
|
|
Number of Aircraft
|
|
|
Remaining
|
|
|
Average Age
|
|
|
Seating
|
|
|
|
Total
|
|
|
Owned
|
|
|
Leased
|
|
|
(Years)
|
|
|
(Years)
|
|
|
Capacity
|
|
|
Boeing 737-700
|
|
|
18
|
|
|
|
12
|
|
|
|
6
|
|
|
|
4.8
|
|
|
|
4.4
|
|
|
|
124
|
|
Boeing 737-800
|
|
|
4
|
|
|
|
3
|
|
|
|
1
|
|
|
|
6.5
|
|
|
|
2.0
|
|
|
|
155
|
|
Embraer 190
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
0.5
|
|
|
|
96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
24
|
|
|
|
17
|
|
|
|
7
|
|
|
|
5.0
|
|
|
|
3.6
|
|
|
|
|
|
As of May 31, 2006, the Copa fleet consisted of 18 Boeing
737-700s (six of which we leased), four Boeing 737-800s (one of
which we leased) and two Embraer 190 aircraft. We expect our
Copa fleet to continue to center on the Boeing 737-700 model,
although we expect to continue to add Boeing 737-800s to our
fleet to cover high-demand routes and Embraer 190s to serve
underserved markets as well as fly additional frequencies where
we believe excess demand exists. The table below describes the
expected size of our Copa fleet at the end of each year set
forth below, assuming delivery of all aircraft for which we
currently have firm orders but not taking into account any
aircraft for which we have options and purchase rights:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft Type
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
737-700
|
|
|
20
|
|
|
|
20
|
|
|
|
20
|
|
|
|
20
|
|
737-800(1)
|
|
|
4
|
|
|
|
6
|
|
|
|
8
|
|
|
|
10
|
|
Embraer 190
|
|
|
6
|
|
|
|
11
|
|
|
|
15
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fleet
|
|
|
30
|
|
|
|
37
|
|
|
|
43
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
We have the flexibility to choose
between the Boeing 737-700 or the Boeing 737-800 aircraft for
most of the 737-700 aircraft deliveries scheduled after 2006.
|
74
The Boeing 737-700 and Boeing 737-800 aircraft currently in our
Copa fleet are fuel-efficient and suit our operations well for
the following reasons:
|
|
|
|
|
They have simplified maintenance procedures.
|
|
|
|
They require just one type of standardized training for our
crews.
|
|
|
|
They have one of the lowest operating costs in their class.
|
Our focus on profitable operations means that we periodically
review our fleet composition. As a result, our fleet composition
changes over time when we conclude that adding other types of
aircraft will help us achieve this goal. The introduction of any
new type of aircraft to our fleet is only done if, after careful
consideration, we determine that such a step will improve our
profitability. In line with this philosophy, after conducting a
careful cost-benefit analysis, we decided to add the Embraer 190
aircraft because its combination of smaller size and highly
efficient operating characteristics made it the ideal aircraft
to serve new mid-sized markets and to increase frequency to
existing destinations. The Embraer 190 incorporates advanced
design features, such as integrated avionics,
fly-by-wire
flight controls, and efficient CF34-10 engines made by General
Electric. The Embraer E190 is expected to have a range of
approximately 2,000 nautical miles enabling it to fly to a wide
range of destinations from short-haul to certain medium-haul
destinations. We have configured Copas Embraer aircraft
with a business class section similar to the business class
section we have on our Boeing 737-Next Generation aircraft.
Through several special purpose vehicles, we currently have
beneficial ownership of 17 of our aircraft, including two
Embraer 190s. In addition, we lease six of our Boeing 737-700s
and one of our Boeing 737-800s under long-term operating lease
agreements that have an average remaining term of
60 months. Leasing some of our aircraft provides us with
flexibility to change our fleet composition if we consider it to
be in our best interests to do so. We make monthly rental
payments, some of which are based on floating rates, but are not
required to make termination payments at the end of the lease.
Currently, we do not have purchase options in any of our lease
agreements. Under our operating lease agreements, we are
required in some cases to maintain maintenance reserve accounts
and in other cases to make supplemental rent payments at the end
of the lease that are calculated with reference to the
aircrafts maintenance schedule. In either case, we must
return the aircraft in the agreed upon condition at the end of
the lease term. Title to the aircraft remains with the lessor.
We are responsible for the maintenance, servicing, insurance,
repair and overhaul of the aircraft during the term of the lease.
To better serve the growing number of business travelers, we
introduced business class (Clase Ejecutiva) in November
of 1998. Our business class service features twelve luxury seats
in the Boeing 737-700s with a
38-inch
pitch, upgraded meal service, special check-in desks, bonus
mileage for full-fare business class passengers and access to
VIP lounges. Our Boeing 737-800s are configured with 14 business
class seats. Our Embraer 190s have 10 business class seats in a
three abreast configuration and
38-inch
pitch.
Each of our Boeing 737-Next Generation aircraft is powered by
two CFM International Model CFM 56-7B engines. We currently have
three spare engines for service replacements and for periodic
rotation through our fleet.
AeroRepública
AeroRepúblicas fleet consists of two owned DC-9s (one
of which is currently retired), five leased MD-81s, four leased
MD-82s and two leased MD-83s with an average age in excess of
20 years. All of AeroRepúblicas fleet is
configured as a single class, with the MD fleet having an
average capacity of 157 seats and the DC-9 fleet having an
average capacity of 110 seats. In the first quarter of
2006, we placed firm orders for five Embraer 190 aircraft with
purchase rights and options for up to 20 additional Embraer
aircraft. Delivery of four Embraer 190 aircraft is expected in
late 2006. The configuration of AeroRepúblicas
Embraer 190 will be single class with a capacity of 106
passengers.
75
Maintenance
Copa
The maintenance performed on our Copa aircraft can be divided
into two general categories: line and heavy maintenance. Line
maintenance consists of routine, scheduled maintenance checks on
our aircraft, including pre-flight, daily and overnight checks,
A-checks and any diagnostics and routine repairs.
Most of Copas line maintenance is performed by Copas
own highly experienced technicians at our base in Panama. Some
line maintenance is also carried out at the foreign stations by
Copa employees or third-party contractors. Heavy maintenance
consists of more complex inspections and overhauls, including
C-checks, and servicing of the aircraft that cannot
be accomplished during an overnight visit. Maintenance checks
are performed as defined by the aircraft manufacturer. These
checks are based on the number of hours or calendar months
flown. We contract with certified outside maintenance providers,
such as Goodrich Aviation Technical Services, Inc. in Everett,
Washington, which is certified as an authorized repair station
by the FAA and the AAC, for heavy aircraft maintenance services.
Copa also has an exclusive long-term contract with GE Engines
whereby they will perform maintenance on all of its CFM-56
engines. There were no heavy maintenance events in 2005. When
possible, Copa attempts to schedule heavy maintenance during its
lower-demand season in April, May, October and November.
Copa employs over 200 maintenance professionals, including
engineers, supervisors, technicians and mechanics, who perform
maintenance in accordance with maintenance programs that are
established by the manufacturer and approved and certified by
international aviation authorities. Every mechanic is trained in
factory procedures and goes through our own rigorous in-house
training program. Every mechanic is licensed by the AAC and
approximately 22 of our mechanics are also licensed by the FAA.
Copas safety and maintenance procedures are reviewed and
periodically audited by the aircraft manufacturer, the AAC, the
FAA, IATA and, to a lesser extent, every foreign country to
which its flies. Copas maintenance facility at Tocumen
International Airport has been certified by the FAA as an
approved repair station, and each year the FAA inspects its
facilities to renew the certification. Copas aircraft are
initially covered by warranties that have a term of four years,
resulting in lower maintenance expenses during the period of
coverage. As part of the purchase agreement for the new Embraer
190s, several of Copas mechanics are enrolled in a
comprehensive factory training course on the maintenance program
for the Embraer 190s. All of Copas mechanics will
eventually be trained to perform line maintenance on the Embraer
190s. As part of the purchase agreement for the new Embraer
190s, all of Copas mechanics have been qualified in
Embraer maintenance procedures through a comprehensive factory
training course as well as local on the job training in order to
perform line maintenance on the Embraer 190s.
AeroRepública
All maintenance for AeroRepúblicas DC-9s and line
maintenance for the MD-80s is performed by
AeroRepúblicas in-house maintenance staff, while
C-checks on the MD-80s are performed by FAA certified
third-party aviation maintenance companies. All of
AeroRepúblicas maintenance and safety procedures are
performed according to Boeing standards (certified by the FAA),
and certified by the Aeronautica Civil of Colombia and BVQi, the
institute that issues ISO quality certificates. All of
AeroRepúblicas maintenance personnel are licensed by
the Aeronautica Civil of Colombia.
Safety
We place a high priority on providing safe and reliable air
service. Copa has uniform safety standards and safety-related
training programs that cover all of its operations. In
particular, Copa periodically evaluates the skills, experience
and safety records of its pilots in order to maintain strict
control over the quality of its pilot crews. All of Copas
pilots participate in training programs, some of which are
sponsored by aircraft manufacturers, and all are required to
undergo recurrent training two times per year. We have a full
time program of Flight Data Analysis (FOQA) wherein the flight
data from every Copa flight is analyzed for safety or technical
anomalies. During 2005, Copa completed a Line Operations Safety
Audit under contract with University of Texas researchers. Copa
also recently successfully completed our IATA Operational Safety
Audit (IOSA).
76
In the last ten years, Copa has had no accidents or incidents
involving major injury to passengers, crew or aircraft. Over
thirteen years ago, we lost one aircraft and all of its
passengers in an accident believed to have been caused by
failure of a navigation instrument. Just prior to our
acquisition of AeroRepública, one of its planes slid off of
a runway in an accident without serious injuries to passengers;
however, the aircraft was severely damaged and declared a total
loss by its insurers.
The FAA periodically audits the aviation regulatory authorities
of other countries. As a result of their investigation, each
country is given an International Aviation Safety Assessment, or
IASA, rating. In May 2001, Panamas IASA rating was
downgraded from Category 1 to Category 2 due to alleged
deficiencies in the Panamanian governments air safety
standards and AACs capability to provide regulatory
oversight. As a result of this downgrade, we were prevented from
adding flights to new destinations in the United States and from
certifying new aircraft for flights to the United States, and
Continental was prevented from placing its code on our flights.
On April 14, 2004, the FAA upgraded the IASA rating for
Panama from Category 2 to Category 1,
which indicates a strong level of confidence in the safety
regulation of the AAC. The return to Category 1 allowed
Continental to reestablish placing its code on our flights and
allowed us to add new U.S. destinations to our network.
In order to recover Category 1 status, the Panamanian government
passed a new law regulating aviation; and the AAC issued new
regulations compliant with standards of the International Civil
Aviation Organization, or ICAO. FAA inspectors and ICAO advisors
were hired to help with training; and the government approved a
budget of $14 million for the AAC to comply with various
regulations of ICAO.
Airport
Facilities
We believe that our hub at Panama Citys Tocumen
International Airport (PTY) is an excellent base of operations
for the following reasons:
|
|
|
|
|
Panamas consistently temperate climate is ideal for
airport operations. For example, Tocumen was closed and
unavailable for flight operations for a total of less than two
hours in each of 2004 and 2005.
|
|
|
|
Tocumen is the only airport in Central America with two
operational runways. Also unlike some other regional airports,
we are currently not constrained by a lack of available
gates/parking positions at Tocumen, and there is ample room to
expand Tocumen.
|
|
|
|
From Panamas central location, our 124-seat Boeing
737-700s can efficiently serve long-haul destinations in South
American cities such as Santiago, Chile; Buenos Aires,
Argentina; and São Paulo, Brazil as well as short-haul
destinations in Central and South America.
|
|
|
|
Travelers can generally make connections easily through Tocumen
because of its manageable size and Panamas policies
accommodating in-transit passengers.
|
Tocumen International Airport is operated by an independent
corporate entity established by the government, where
stakeholders have a say in the operation and development of the
airport. A Copa executive, as a representative of the Panamanian
Airline Association, holds a seat on the board of this airport
operator. The law that created this entity also provided for a
significant portion of revenues generated at Tocumen to be used
for airport expansion and improvements. We do not have any
formal, written agreements with the airport management that
govern access fees, landing rights or allocation of terminal
gates. We rely upon our good working relationship with the
airports management and the Panamanian government to
ensure that we have access to the airport resources we need at
prices that are reasonable.
We have worked closely with the airports management and
consulted with the IATA infrastructure group to provide plans
and guidance for Phase I of an airport expansion that will
provide up to eight new gate positions with jet bridges, six new
remote parking positions, expand retail areas and improve the
baggage-handling facilities. The government has authorized
$70 million to cover the costs of this expansion. In April
2004, Leo A. Daly, an American company whose experience includes
the renovation of the Miami, Dallas and Washington, D.C.
(Reagan) airports, won the bid to remodel and expand the
terminal. Work on Phase I is expected to be completed in
the third
77
quarter of 2006. We are considering an increased role for Copa
in facilitating a planned Phase II of the airport expansion
that would add another five gates to the airport.
We provide all of our own ground services and handling of
passengers and cargo at Tocumen International Airport. In
addition, we provide services to several of the principal
foreign airlines that operate at Tocumen. At most of the foreign
airports where we operate, foreign airport services companies
provide all of our support services other than sales, counter
services and some minor maintenance.
We lease a variety of facilities at Tocumen, including our
maintenance hangar and our operations facilities in the airport
terminal. From our System Operations Control Center located
within our corporate headquarters building, we dispatch, track
and direct our aircraft throughout the hemisphere and respond to
operational contingencies as necessary. We generally cooperate
with the airport authority to modify the lease terms as
necessary to account for capital improvements and expansion
plans. Currently, our elite passengers have access to a
Presidents Club at the airport, which is jointly operated
with Continental and was opened in March 2000. The
Presidents Club will be expanded to approximately twice
its current size as part of the Tocumen International Airport
expansion project.
Bogotas El Dorado Airport is AeroRepúblicas
main operating terminal. It is also Colombias main
international and domestic terminal, with two operational
runways. El Dorado is undergoing a privatization process in
which improvements are expected to the passenger and cargo
terminals. AeroRepública currently leases a variety of
facilities at El Dorado, including counters, maintenance and
administrative and dispatch areas.
Fuel
Fuel costs are extremely volatile, as they are subject to many
global economic, geopolitical, weather, environmental and other
factors that we can neither control nor accurately predict. Due
to its inherent volatility, aircraft fuel has historically been
our most unpredictable unit cost. Concurrent with the
worlds economic recovery, demand for oil has surged,
especially in fast-growing China. This increase in demand
coupled with limited refinery capacity and instability in
oil-exporting countries has led to a rapid increase in prices.
When combined with the relative weakness of the
U.S. dollar, the currency in which oil is traded, these
factors have caused a record high price for oil in nominal
dollar terms.
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft Fuel Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
March 31, 2006
|
|
|
Copa
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average price per gallon of jet
fuel into plane (excluding hedge) (in U.S. dollars)
|
|
$
|
0.95
|
|
|
$
|
0.86
|
|
|
$
|
1.01
|
|
|
$
|
1.32
|
|
|
$
|
1.87
|
|
|
$
|
1.96
|
|
Gallons consumed (in thousands)
|
|
|
46,669
|
|
|
|
44,788
|
|
|
|
48,444
|
|
|
|
50,833
|
|
|
|
58,924
|
|
|
|
16,368
|
|
Available seat miles (in millions)
|
|
|
2,920
|
|
|
|
2,847
|
|
|
|
3,226
|
|
|
|
3,639
|
|
|
|
4,409
|
|
|
|
1,216
|
|
Gallons per ASM (in hundredths)
|
|
|
1.60
|
|
|
|
1.57
|
|
|
|
1.50
|
|
|
|
1.40
|
|
|
|
1.34
|
|
|
|
1.35
|
|
AeroRepública(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average price per gallon of jet
fuel into plane (excluding hedge) (in U.S. dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2.12
|
|
|
$
|
2.08
|
|
Gallons consumed (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,887
|
|
|
|
7,080
|
|
Available seat miles (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
950
|
|
|
|
399
|
|
Gallons per ASM (in hundredths)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.88
|
|
|
|
1.78
|
|
|
|
|
(1)
|
|
Since April 22, 2005.
|
Since 2004, the price of jet fuel has continued to climb. During
2005, Copa paid an average price, including plane charges, of
$1.87 per gallon of jet fuel, a 41.8% increase from
2004s rate of $1.32 per gallon. On a per unit basis,
Copas consumption did not increase in line with the rise
in the cost of jet fuel due to the replacement of older, less
fuel efficient Boeing 737-200s with new Boeing 737-Next
Generation aircraft. Based on our experience, the Boeing
737-Next Generation family is 15-20% more fuel efficient than
first generation Boeing 737 models. During the month ended
March 31, 2006, Copa paid an average of $1.96 per
gallon for jet fuel and AeroRepública paid an average of
$2.08 per gallon for jet fuel.
We believe that fuel prices are likely to increase in the future
and may do so in the near future. In 2005, we hedged 12% of our
requirements through the use of swap and zero-cost collar
transactions. We have hedged approximately 13% of Copas
anticipated fuel needs for 2006 and approximately 5% of
Copas projected fuel consumption from January 1, 2007
to May 31, 2007. Although AeroRepública does not
currently have a hedging policy, we may implement one in the
future. We will continue to evaluate various hedging strategies,
and we may enter into additional hedging agreements in the
future. Any prolonged increase in the price of jet fuel will
likely materially and negatively affect our business, financial
condition and results of operation.
AeroRepública is supplied by two fuel providers. The price
for fuel is fixed by the Colombian government on a monthly basis
based on international fuel indices.
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.
79
Our profit-sharing program at Copa reflects our belief that our
employees will remain dedicated to our success if they have a
stake in that success. We identify key performance drivers
within each employees control as part of our annual
objectives plan, or Path to Success. Typically, we
pay bonuses in February based on our performance during the
preceding calendar year. For members of management, 75% of the
bonus amount is based on our performance as a whole and 25% is
based on the achievement of individual goals. Bonuses for
non-management employees is based on the companys
performance, and is typically a multiple of the employees
weekly salary. For 2005, the non-management employees received
five or six weeks salary, depending on their position. The
bonus payments are at the discretion of our compensation
committee. We typically make accruals each month for the
expected annual bonuses which are reconciled to actual payments
at their dispersal in February.
We maintain generally good relations with our union and
non-union employees and have not experienced work stoppages for
the past twenty years. Approximately 76% of Copas
employees are located in Panama, while the remaining 24% are
distributed among our stations. Copas employees can be
categorized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Pilots
|
|
|
178
|
|
|
|
192
|
|
|
|
220
|
|
|
|
224
|
|
|
|
235
|
|
|
|
242
|
|
Flight attendants
|
|
|
334
|
|
|
|
330
|
|
|
|
349
|
|
|
|
372
|
|
|
|
448
|
|
|
|
442
|
|
Mechanics
|
|
|
154
|
|
|
|
203
|
|
|
|
209
|
|
|
|
189
|
|
|
|
200
|
|
|
|
213
|
|
Customer service agents,
reservation agents, ramp and other
|
|
|
1,248
|
|
|
|
1,299
|
|
|
|
1,382
|
|
|
|
1,470
|
|
|
|
1,626
|
|
|
|
1,589
|
|
Management and clerical
|
|
|
367
|
|
|
|
429
|
|
|
|
480
|
|
|
|
499
|
|
|
|
587
|
|
|
|
650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total employees
|
|
|
2,281
|
|
|
|
2,453
|
|
|
|
2,640
|
|
|
|
2,754
|
|
|
|
3,096
|
|
|
|
3,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We provide training for all of our employees including technical
training for our pilots, dispatchers, flight attendants and
other technical staff. In addition, we provide recurrent
customer service training to frontline staff, as well as
leadership training for managers. We recently invested in a
Level B flight simulator for 737-Next Generation training
that will serve 80% of our initial training, transition and
upgrade training and 100% of our recurrent training needs
relating to that aircraft.
Approximately 61% of Copas employees are unionized. There
are currently five unions covering our Copa employees in Panama:
the pilots union (SIPAC); the flight attendants
union (SIPANAB); the mechanics union (SINTECMAP); the
traffic attendants union (UTRACOPA); and a generalized
union, SIELAS, which represents ground personnel, messengers,
drivers, counter agents and other non-executive administrative
staff. Copa is scheduled to begin negotiations with the
pilots union in mid-2008. Copa entered into new collective
bargaining agreements with its general union and its flight
attendants union on October 26, 2005 and
April 3, 2006, respectively. After extensive negotiations
which did not lead to a mutually satisfactory resolution, Copa
and the mechanics union entered into a government-mandated
arbitration and a collective bargaining agreement was agreed to
on March 29, 2006 as a result of such arbitration
proceeding. Previously, we have not had to resort to arbitration
to resolve negotiations with our unions. Collective bargaining
agreements in Panama typically extend for four years. We also
have agreements with our Copa employees in São Paulo,
Brazil and Mexico. We have traditionally experienced good
relations with our unions, and we generally agree to terms in
line with the economic environment affecting Panama, our company
and the airline industry generally. Approximately 8% of
Copas employees work part-time.
AeroRepúblicas pilots and flight attendants are
represented by two separate unions. The pilots union,
Asociación Colombiana de Aviadores Civiles (ACDAC),
represents 96 of AeroRepúblicas 112 pilots and
co-pilots. The flight attendants union, Asociación
Colombiana de Auxiliares de Vuelo (ACAV), represents all of
AeroRepúblicas 178 flight attendants. Contracts
with both unions were signed or affirmed in May 2005 with
customary increases in wages and benefits that provide for
annual salary increases of two percent in addition to
adjustments to reflect inflation. The agreement with the
pilots union will be in effect until the end of 2006, and
the agreement with the flight attendants union will be in
effect until March 2008. In general our relationships with the
labor unions representing AeroRepúblicas employees
are believed to be good as reflected by the agreements reached
this year.
80
Insurance
We maintain passenger liability insurance in an amount
consistent with industry practice, and we insure our aircraft
against losses and damages on an all risks basis. We
have obtained all insurance coverage required by the terms of
our leasing and financing agreements. We believe our insurance
coverage is consistent with airline industry standards and
appropriate to protect us from material loss in light of the
activities we conduct. No assurance can be given, however, that
the amount of insurance we carry will be sufficient to protect
us from material losses. We have negotiated lower premiums on
our Copa insurance policies by leveraging the purchasing power
of our alliance partner, Continental. Our Copa operations are
insured under Continentals joint insurance policy with
Northwest Airlines. We maintain separate insurance policies for
our AeroRepública operations.
Intellectual
Property
We believe that the Copa brand has strong value and indicates
superior service and value in the Latin American travel
industry. We have registered the trademarks Copa and
Copa Airlines with the trademark office in Panama
and have filed requests for registration in other countries,
including the United States. We license certain brands, logos
and trade dress under the trademark license agreement with
Continental related to our alliance. We will have the right to
continue to use our current logos on our aircraft for up to five
years after the end of the alliance agreement term.
AeroRepúblicas has registered its name as a trademark
in Colombia for the next ten years, and plans to register its
trademark in Panama, Ecuador, Venezuela and Peru.
We operate a number of software products under licenses from our
vendors, including our booking engine, our automated pricing
system from SMG Technologies, our SABRE revenue management
software and our Cargo Management system. Under our agreements
with Boeing, we also use a large amount of Boeings
proprietary information to maintain our aircraft. The loss of
these software systems or technical support information from
Boeing could negatively affect our business.
Properties
Headquarters
We have recently moved into a newly built headquarters building
located six miles away from Tocumen International Airport. We
have leased five floors consisting of approximately
104,000 square feet of the building from Desarollo
Inmobiliario del Este, S.A., an entity controlled by the same
group of investors that controls CIASA, under a
10-year
lease at a rate of $106,000 per month during the first
three years, $110,000 per month from year 4 to year 6,
$113,000 from year 7 to year 9 and $116,000 per
month in year 10, which we believe to be a market rate. We
are in the process of selling our previous headquarters building
in Panama City and currently expect to complete the sale in 2006.
Other
property
At Tocumen International Airport, we lease a maintenance hangar,
operations offices in the terminal, counter space, parking
spaces and other operational properties from the entity that
manages the airport. We pay approximately $91,000 per month
for this leased property. Around Panama City, we also lease
various office spaces, parking spaces and other properties from
a variety of lessors, for which we pay approximately
$9,000 per month in the aggregate.
In each of our destination cities, we also lease space at the
airport for check-in, reservations and airport ticket office
sales, and we lease space for CTOs in more than 25 of those
cities.
81
AeroRepública
AeroRepública leases most of its airport and city ticket
offices. Owned properties include one city ticket office, a
warehouse close to the airport and one floor in a high-rise
building in downtown Bogota.
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 prospectus. We have
hired a consulting firm to conduct an environmental audit of our
hanger and support facilities at the Tocumen International
Airport to determine what, if any, measures we need to implement
in order to satisfy the Panamanian effluent standards and the
General Environmental Law at those facilities. A base line study
of our effluents has been completed. We plan to implement all
measures required for compliance once the audit is finalized,
notwithstanding the lapse of the grace period set forth in the
regulations. Additionally, the Panamanian Civil Aviation Code
(RAC) contains certain environmental provisions that are similar
to those set forth in the General Environmental Law regarding
effluents, although such provisions do not contain compliance
grace periods. In the event the AAC determines that our
facilities do not currently meet the RAC standards, we could be
subject to a fine. The measures that will be implemented
pursuant to the environmental audit that is underway will also
satisfy the requirements of the RAC. We have installed a water
treatment plant to serve part of our facilities and seek to
finalize the audit and have any other remediation measures that
may be required in operation by the end of 2007. While we do not
believe that compliance with these regulations will expose us to
material expenditures, compliance with these or other
environmental regulations, whether new or existing, that may be
applicable to us in the future could increase our costs. In
addition, failure to comply with these regulations could
adversely affect us in a variety of ways, including adverse
effects on our reputation.
Litigation
In the ordinary course of our business, we are party to various
legal actions, which we believe are incidental to the operation
of our business. While legal proceedings are inherently
uncertain, we believe that the outcome of the proceedings to
which we are currently a party are not likely to have a material
adverse effect on our financial position, results of operations
and cash flows. The Antitrust Administrative Agency
(Comisión de Libre Competencia y Asuntos del
Consumidor, or CLICAC), together with a group of travel
agencies, has filed an antitrust lawsuit against Copa,
Continental, American Airlines, Grupo TACA and Delta Airlines in
the Panamanian Commercial Tribunal alleging monopolistic
practices in reducing travel agents commissions. The
outcome of this lawsuit is still uncertain and may take several
years. We believe that in the worst scenario the airlines could
be required to pay up to $20 million. In addition, ACES, a
now-defunct Colombian airline, filed an antitrust lawsuit
against Copa, Avianca and SAM, alleging monopolistic practices
in relation to their code-sharing agreements. This case is
currently in the discovery period and could take several years
to be resolved. If Copa, Avianca
and/or SAM
were found at fault and in breach of antitrust legislation, they
could be potentially liable for up to $11 million.
82
REGULATION
Panama
Panamanian law requires airlines providing commercial services
in Panama to hold an Operation Certificate and an Air
Transportation License/Certificate issued by the AAC. The Air
Transportation Certificate specifies the routes, equipment used,
capacity, and the frequency of flights. This certificate must be
updated every time Copa acquires new aircraft, or when routes
and frequencies to a particular destination are modified.
Panamanian law also requires that the aircraft operated by Copa
be registered with the Panamanian National Aviation Registrar
kept by the AAC, and that the Panamanian National Aviation
authority certify the airworthiness of each aircraft in
Copas fleet. This requirement does not apply to
AeroRepúblicas aircraft which are registered in
Colombia. Copas aircraft must be re-certified every year.
The government of the Republic of Panama does not have an equity
interest in our company. Panamanian government officials have
typically worked closely with us to establish policies that
benefit both our company and the country. Bilateral agreements
signed by the government of Panama have protected our
operational position and route network, allowing us to have in
Panama a significant hub to transport intraregion traffic within
and between the Americas and the Caribbean. All international
fares are filed and technically subject to the approval of the
Panamanian government. Historically, we have been able to modify
ticket prices on a daily basis to respond to market conditions.
We cooperated with the government of Panama to restore the
countrys Category 1 status after it was downgraded to
Category 2 in early May 2001 by the FAA, a status that is
important both to the operations of Copa as an airline and the
general perception of Panama as a country, particularly in view
of the fact that a major initiative is in place to boost tourism
in Panama. The countrys Category 1 status was restored
April 2004. In meeting the requirements for Category 1 status,
the Panamanian government approved $14 million for the AAC
to comply with various regulations of the ICAO, and AAC
personnel are currently receiving training on Embraer
airworthiness certification so they will continue to be
qualified to evaluate our pilots and aircraft.
Our status as a private carrier means that we are not required
under Panamanian law to serve any particular route and are free
to withdraw service from any of the routes we currently serve as
we see fit, subject to bilateral agreements. We are also free to
determine the frequency of service we offer across our route
network without any minimum frequencies imposed by the
Panamanian authorities.
The most significant restriction on our company imposed by the
Panamanian Aviation Act, as amended and interpreted to date, is
that Panamanian nationals must exercise effective
control over the operations of the airline and must
maintain substantial ownership. These phrases are
not defined in the Aviation Act itself and it is unclear how a
Panamanian court would interpret them. The share ownership
requirements and transfer restrictions contained in our Articles
of Incorporation, as well as the structure of our capital stock
described under the caption Description of Capital
Stock, are designed to ensure compliance with these
ownership and control restrictions created by the Aviation Act.
While we believe that our ownership structure complies with the
ownership and control restrictions of the Aviation Act as
interpreted by a recent decree by the Executive Branch, we
cannot assure you that a Panamanian court would share our
interpretation of the Aviation Act or the decree or that any
such interpretations would remain valid for the entire time you
hold our Class A shares.
Although the Panamanian government does not currently have the
authority to dictate the terms of our service, the government is
responsible for negotiating the bilateral agreements with other
nations that allow us to fly to other countries. Several of
these agreements require Copa to remain effectively
controlled and substantially owned by
Panamanian nationals in order for us to use the rights conferred
by the agreements. Such requirements are analogous to the
Panamanian aviation law described above that requires Panamanian
control of our business.
During 1997, several Central American countries (including
Panama) and the United States signed an open-skies agreement
allowing carriers from each country to initiate service in any
other. There is no bilateral agreement between Panama and either
El Salvador or Costa Rica, the nations in which Grupo TACA has
its principal hubs. Panama only has reciprocity agreements with
these countries at present.
83
Antitrust
regulation, enforcement
In 1996, the Republic of Panama enacted antitrust legislation,
which regulates industry concentration and vertical
anticompetitive practices and prohibits horizontal collusion.
The Consumer Protection and Free Trade Authority is in charge of
enforcement and may impose fines only after a competent court
renders an adverse judgment. The law also provides for direct
action by any affected market participant or consumer,
independently or though class actions. The law does not provide
for the granting of antitrust immunity, as is the case in the
United States. In February 2006, the antitrust legislation was
amended to increase the maximum fines that may be assessed for
violations to $1,000,000 for per se violations and
$250,000 for relative violations of antitrust law.
Noise
regulations effects
Panama has adopted Annex 16 of the ICAO regulations and the
noise abatement provisions of ICAO, through Book XIV of the
Panamanian Civil Aviation Regulations (RAC). Thus,
articles 227-229
of Book XIV of the RAC require aircraft registered in Panama to
comply with at least Stage 2 noise requirements, and all
aircraft registered for the first time with the Panamanian Civil
Aviation Authority after January 1, 2003, to comply with
Stage 3 noise restrictions. Currently, all the airplanes we
operate or have on order meet the most stringent noise
requirements established by both ICAO and the AAC.
Colombia
The Colombian aviation market is heavily regulated by the
Colombian Civil Aviation Administration, Unidad Especial
Administrativa de Aeronáutica Civil, or Aeronautica
Civil. Colombia is a Category 1 country under the FAAs
IASA program. With respect to domestic aviation, airlines must
present feasibility studies to secure specific route rights, and
no airline may serve the city pairs with the most traffic unless
that airline has at least five aircraft with their airworthiness
certificates in force. In addition, Aeronautica Civil sets
minimum and maximum fares for each route and a maximum number of
competing airlines for each route based on the size of the city
pairs served. Airlines in Colombia must also add a surcharge for
fuel to their ticket prices. Passengers in Colombia are also
entitled by law to compensation in cases of delays in excess of
four hours, over-bookings and cancellations. Currently, the
Cali, Cartagena and Barranquilla airports are under private
management arrangements, as well as the runways of El Dorado
Airport in Bogotá. However, the government has stated its
intention of privatizing other airports in order to finance
necessary expansion projects and increase the efficiency of
operations, which may lead to increases in landing fees and
facility rentals at those airports.
AeroRepública may not have as much productive cooperation
with the Colombian government over the negotiation of route
rights with other countries as we may enjoy in Panama. Colombia
has open-skies agreements with Aruba and the Andean Pact
(Comunidad Andina) nations of Bolivia, Ecuador, Peru, and
Venezuela. AeroRepública has been recently granted the use
of 17 of the 56 available route rights for service by Colombian
carriers between Colombia and Panama and, as a result, began
scheduled service between the two countries in late 2005. There
are currently no route rights available to the United States
from Colombia.
U.S. Airline
Regulation
Operations to the United States by
non-U.S. airlines,
such as Copa, are subject to Title 49 of the
U.S. Code, under which the DOT, the FAA and the TSA
exercise regulatory authority. The U.S. Department of
Justice also has jurisdiction over airline competition matters
under the federal antitrust laws.
Authorizations and Licenses. The DOT has
jurisdiction over international aviation with respect to the
United States and related route authorities, subject to review
by the President of the United States. The DOT also has
jurisdiction with respect to unfair practices and methods of
competition by airlines and related consumer protection matters.
We are authorized by the DOT to engage in scheduled and charter
air transportation services, including the transportation of
persons, property (cargo) and mail, or combinations thereof,
between points in Panama and points in the United States and
beyond (via intermediate points in other countries). We hold the
necessary authorizations from the DOT in the form of a foreign
air carrier permit, an exemption authority and statements of
authorization to conduct our current operations to and from the
United States. The exemption authority was granted by the DOT in
February 1998. This exemption authority was due to expire in
February 2000. However, the authority remains in
84
effect by operation of law under the terms of the Administrative
Procedure Act pending final DOT action on the application we
filed to renew the authority on January 3, 2000. There can
be no assurance that the DOT will grant the application. Our
foreign air carrier permit has no expiration date.
Our operations to the United States are also subject to
regulation by the FAA with respect to safety matters, including
aircraft maintenance and operations, equipment, aircraft noise,
ground facilities, dispatch, communications, personnel,
training, weather observation, air traffic control and other
matters affecting air safety. The FAA requires each foreign air
carrier serving the United States to obtain operational
specifications pursuant to Part 129 of its regulations and
to meet operational criteria associated with operating specified
equipment on approved international routes. We believe that we
are in compliance in all material respects with all requirements
necessary to maintain in good standing our operations
specifications issued by the FAA. The FAA can amend, suspend,
revoke or terminate those specifications, or can suspend
temporarily or revoke permanently our authority if we fail to
comply with the regulations, and can assess civil penalties for
such failure. A modification, suspension or revocation of any of
our DOT authorizations or FAA operating specifications could
have a material adverse effect on our business. The FAA also
conducts safety audits and has the power to impose fines and
other sanctions for violations of airline safety regulations. We
have not incurred any material fines related to operations.
Security. On November 19, 2001, the
U.S. Congress passed, and the President signed into law,
the Aviation and Transportation Security Act, also referred to
as the Aviation Security Act. This law federalized substantially
all aspects of civil aviation security and created the TSA to
which the security responsibilities previously held by the FAA
were transitioned. The TSA is an agency of the Department of
Homeland Security. The Aviation Security Act requires, among
other things, the implementation of certain security measures by
airlines and airports, such as the requirement that all
passenger bags be screened for explosives. Funding for airline
and airport security required under the Aviation Security Act is
provided in part by a $2.50 per segment passenger security
fee for flights departing from the U.S., subject to a $10 per
roundtrip cap; however, airlines are responsible for costs
incurred to meet security requirements beyond those provided by
the TSA. There is no assurance this fee will not be raised in
the future as the TSAs costs exceed the revenue it
receives from these fees. The current administration has
proposed to raise this fee to $5.50, which is subject to
approval by the U.S. Congress. Implementation of the
requirements of the Aviation Security Act has resulted in
increased costs for airlines and their passengers. Since the
events of September 11, 2001, the U.S. Congress has
mandated and the TSA has implemented numerous security
procedures and requirements that have imposed and will continue
to impose burdens on airlines, passengers and shippers.
Noise Restrictions. Under the Airport Noise
and Capacity Act of 1990, or ANCA, and related FAA regulations,
aircraft that fly to the United States must comply with certain
Stage 3 noise restrictions, which are currently the most
stringent FAA operating noise requirements. All of our Copa
aircraft meet the Stage 3 requirement.
FAA regulations also require compliance with the Traffic Alert
and Collision Avoidance System, approved airborne windshear
warning system and aging aircraft regulations. Our fleet meets
these requirements.
Proposed Laws and Regulations. Additional
U.S. laws and regulations have been proposed from time to
time that could significantly increase the cost of airline
operations by imposing additional requirements or restrictions
on airlines. There can be no assurance that laws and regulations
currently enacted or enacted in the future will not adversely
affect our ability to maintain our current level of operating
results.
Other
Jurisdictions
We are also subject to regulation by the aviation regulatory
bodies which set standards and enforce national aviation
legislation in each of the jurisdictions to which we fly. These
regulators may have the power to set fares, enforce
environmental and safety standards, levy fines, restrict
operations within their respective jurisdictions or any other
powers associated with aviation regulation. We cannot predict
how these various regulatory bodies will perform in the future
and the evolving standards enforced by any of them could have a
material adverse effect on our operations.
85
MANAGEMENT
|
|
|
|
|
|
|
Name
|
|
Position
|
|
Age
|
|
Pedro Heilbron
|
|
Chief Executive Officer
|
|
|
48
|
|
Victor Vial
|
|
Chief Financial Officer
|
|
|
40
|
|
Lawrence Ganse
|
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Senior Vice-President of Operations
|
|
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62
|
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Jorge Isaac Garciá
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Vice-President, Commercial
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|
|
46
|
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Daniel Gunn
|
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Vice-President of Planning
|
|
|
38
|
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Jaime Aguirre
|
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Vice President of Maintenance
|
|
|
43
|
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Vidalia de Casado
|
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Vice President of Passenger
Services
|
|
|
49
|
|
Alexander Gianareas
|
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Senior Director of Human Resources
|
|
|
53
|
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Roberto Junguito Pombo
|
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Chief Executive Officer of
AeroRepública
|
|
|
36
|
|
Mr. Pedro Heilbron has been our Chief Executive
Officer for 18 years. He received an MBA from George
Washington University and a B.A. from Holy Cross.
Mr. Heilbron is a Member of the Board of Governors of IATA
and an Alternate Member of the Board of Directors of Banco
Continenal de Panama, S.A.
Mr. Victor Vial has been our Chief Financial Officer
since 2000. From 1995 until 2000, Mr. Vial served as our
Director of Planning. Prior to his service at Copa,
Mr. Vial was a Senior Financial Analyst for HBO-Time
Warner. Mr. Vial holds a B.B.A. in International Business
from George Washington University.
Captain Lawrence Ganse has been our Senior Vice-President
of Operations and Chief Operating Officer since 2000. Captain
Ganse has 39 years of experience in the airline industry,
including management positions at TWA, Northwest Airlines, and,
most recently, Grupo TACA in El Salvador. Captain Ganse received
a B.B.A. in Aviation Administration from the University of Miami
and an M.B.A. in Management Science from California State
University at Hayward.
Mr. Jorge Isaac Garciá has been our
Vice-President, Commercial since 1999. He has also served as our
Vice-President of Maintenance and as our Assistant to the
President. Prior to joining Copa, he was a Project Director at
Petroleos Delta. Mr. Garcia received a B.S. in Mechanical
Engineering from Worcester Polytechnic Institute and an M.B.A.
from Boston College.
Mr. Daniel Gunn has been our Vice-President of
Planning and Alliances since 2002. He joined Copa in 1999 and
has served as our Director of Alliances and Senior Director of
Planning and Alliances. Prior to joining Copa, he spent five
years with American Airlines holding positions in Finance, Real
Estate and Alliances. Mr. Gunn received a B.A. in
Business & Economics from Wheaton College and an M.B.A.
with an emphasis in Finance and International Business from the
University of Southern California.
Mr. Jaime Aguirre has been our Vice President of
Maintenance since 2002. Prior to that, he served as our Director
of Engineering and Quality Assurance. Before joining Copa,
Mr. Aguirre was the Technical Services Director at Avianca,
S.A. Mr. Aguirre received a B.S. in Mechanical Engineering
from Los Andes University, a Master of Engineering with an
emphasis on Engineering Management from Javeriana University and
is currently pursuing an M.B.A. from the University of
Louisville.
Ms. Vidalia de Casado has been our Vice-President of
Passenger Services since 1995. She joined Copa in 1989 and
served as our Passenger Services Manager from 1989 to 1995.
Prior to joining Copa, she spent seven years with Air Panama
Internacional, S.A. Ms. de Casado received a B.S. in
Business from Universidad Latina and an M.B.A. from the
University of Louisville.
Mr. Alexander Gianareas has been our Senior Director
of Human Resources since 2001. Prior to joining Copa, he was the
Director of Organizational Effectiveness for the Panama Canal
Commission. Mr. Gianareas received a B.S. in Electrical
Engineering from Cornell University and an M.B.A. from Nova
Southeastern.
Mr. Roberto Junguito Pombo joined our company on
November 8, 2005 as the Chief Executive Officer of our
AeroRepública operating subsidiary. Mr. Junguito
previously spent two years with Avianca, holding positions as
the Vice President of Planning, Chief Operating Officer and
Chief Restructuring Officer. Avianca declared bankruptcy in
March 2003. Mr. Junguito received a B.S. in Industrial
Engineering at the Universidad de Los Andes, an M.A. in
International Studies from the Joseph H. Lauder Institute of the
University of Pennsylvania and an M.B.A. with an emphasis on
finance from the Wharton School of the University of
Pennsylvania.
86
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.
Board of
Directors
|
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|
|
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Name
|
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Position
|
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Age
|
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Pedro Heilbron
|
|
Chief Executive Officer and
Director
|
|
|
48
|
|
Stanley Motta
|
|
Chairman and Director
|
|
|
60
|
|
Osvaldo Heilbron
|
|
Director
|
|
|
79
|
|
Jaime Arias
|
|
Director
|
|
|
70
|
|
Ricardo Alberto Arias
|
|
Director
|
|
|
66
|
|
Alberto C. Motta, Jr.
|
|
Director
|
|
|
59
|
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Mark Erwin
|
|
Director
|
|
|
50
|
|
George Mason
|
|
Director
|
|
|
59
|
|
Roberto Artavia Loria
|
|
Director
|
|
|
46
|
|
José Castañeda Velez
|
|
Director
|
|
|
61
|
|
Mr. Stanley Motta has been one of the directors of
Copa Airlines since 1986 and a director of Copa Holdings, since
it was established in 1998. Since 1990, he has served as the
President of Motta Internacional, S.A. an international importer
of alcohol, cosmetics, jewelry and other consumer goods.
Mr. Motta is the brother of our director, Alberto C. Motta
Jr. He serves on the boards of directors of Motta Internacional,
S.A., Banco Continental de Panama, S.A., ASSA Compañía
de Seguros, S.A., Televisora Nacional, S.A., Inversiones
Bahía, Ltd. and GBM Corporation. Mr. Motta is a
graduate of Tulane University.
Mr. Osvaldo Heilbron has been one of the directors
of Copa Airlines since 1986 and a director of Copa Holdings,
since it was established in 1998. He is Treasurer of Banco
Continental de Panama, S.A. Mr. Heilbron is the father of
Mr. Pedro Heilbron, our chief executive officer. He serves
on the boards of directors of CIASA, Desarrollo Costa Del Este,
S.A., Harinas Panama, S.A., Televisora Nacional, S.A., Petroleos
Delta, S.A., SSA Panama Inc. and Banco Continental de Panama,
S.A.
Mr. Jaime Arias has been one of the directors of
Copa Airlines since 1983 and a director of Copa Holdings, since
it was established in 1998. He is a founding partner of Galindo,
Arias & Lopez, the law firm passing on the validity of
the shares offered by this prospectus. Mr. Arias holds a
B.A. from Yale University, a J.D. from Tulane University and
legal studies at the University of Paris, Sorbonne. He serves as
an advisor to the President of the Republic of Panama and serves
on the boards of directors of Televisora Nacional, S.A., ASSA
Compañía de Seguros, S.A. , Empresa General de
Inversiones, S.A., Compañía General de Petróleos,
S.A., Banco Continental de Panama, S.A. and Bac International
Bank, Inc.
Mr. Ricardo Arias has been one of the directors of
Copa Airlines since 1985 and a director of Copa Holdings, since
it was established in 1998. He is a founding partner of Galindo,
Arias & Lopez, the law firm passing on the validity of
the shares offered by this prospectus. Mr. Arias currently
serves as Panamas ambassador to the United Nations.
Mr. Arias holds a B.A. in international relations from
Georgetown University, an LL.B. from the University of Puerto
Rico and an LL.M. from Yale Law School. He serves on the boards
of directors of Banco General, S.A. and Empresa General de
Inversiones, S.A., which is the holding company that owns Banco
General S.A., and Empresa General de Petróleos, S.A.
Mr. Arias is also listed as a principal or alternate
director of several subsidiary companies of Banco General, S.A.
and Empresa General de Inversiones, S.A.,
Mr. Alberto Motta, Jr. has been one of the
directors of Copa Airlines since 1983 and a director of Copa
Holdings, since it was established in 1998. He is a Vice
President of Inversiones Bahía, Ltd. Mr. Motta
attended the University of Hartwick. He is the brother of
Mr. Stanley Motta. He also serves on the boards of
directors of Motta Internacional, S.A., Grupo Financiero
Continental, S.A., Inversiones Costa del Este, S.A., ASSA
Compañía de Seguros, S.A., Petroleos Delta, S.A.,
Productos Toledanos, S.A., Financiera Automotriz, S.A.,
Televisora Nacional, S.A., Hotel Miramar Inter-Continental and
Industrias Panama Boston, S.A.
87
Mr. Mark Erwin has been one of the directors of Copa
Airlines and Copa Holdings since 2004. He is the Senior Vice
PresidentAsia/Pacific and Corporate Development of
Continental Airlines and the President and Chief Executive
Officer and serves on the board of directors of Continental
Micronesia, Inc., the wholly owned western Pacific subsidiary of
Continental Airlines, Inc. Mr. Erwin held the position of
Senior Vice President of Airport Services of Continental
Airlines, Inc. from 1995 through 2002.
Mr. George Mason has been one of the directors of
Copa Holdings since 1999. He was the Senior Vice President for
Technical Operations of Continental Airlines, Inc. from 1996
until his retirement in 2003. He has held officer level
positions at Piedmont Airlines, Inc., USAir and Midway Airlines.
He is a graduate of Grove City College and the University of
Pittsburgh.
Mr. Roberto Artavia Loria is one of the independent
directors of Copa Holdings. He is currently Chief Executive
Officer of INCAE Business School, Chairman of Asociacion MarViva
de Costa Rica and Protector of Viva Trust. Mr. Artavia
Loria is also an advisor to the Interamerican Development Bank
and to the governments of nine countries in Latin America, and a
strategic advisor to Purdy Motor, S.A., Grupo Nacion and
FUNDESA. Mr. Artavia Loria serves on the board of directors
of INCAE Business School, Foundation for Management Education in
Central America, Asociación MarViva de Costa Rica, Viva
Trust, Global Foundation for Management Development,
Compañía Cervecera de Nicaragua, SUMAQ Alliance OBS de
Costa Rica and OBS Americas.
Mr. José Castañeda Velez is one of the
independent directors of Copa Holdings. He is currently director
of MMG Bank Corporation. Previously, Mr. Castaneda 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.
Our board of directors currently meets quarterly. Additionally,
informal meetings with Continental are held on an ongoing basis,
and are supported by quarterly formal meetings of an
Alliance Steering Committee, which directs and
reports on the progress of the Copa and Continental Alliance.
Our board of directors is focused on providing our overall
strategic direction and as a result is responsible for
establishing our general business policies and for appointing
our executive officers and supervising their management.
Currently, our board of directors is comprised of ten members.
We expect to add an additional independent director to the board
of directors shortly after this offering. The additional
independent director will be appointed by the Nominating and
Corporate Goverance Committee of the board. Members of our board
of directors serve two-year terms and may be reelected. The
number of directors elected each year will alternate between six
directors and five directors. Messrs. Pedro Heilbron,
Osvaldo Heilbron, Ricardo Arias, Mark Erwin, and Roberto Artavia
were each re-elected to two-year terms at our annual
shareholders meeting held on May 12, 2006. Our
charter does not have a mandatory retirement age for our
directors.
Pursuant to contractual arrangements with us and CIASA,
Continental is entitled to designate two of our directors for so
long as it owns at least 19% of our common stock and is entitled
to designate one of our directors for so long as our alliance
agreement remains in effect. After giving effect to this
offering, Continental will be entitled to designate one of our
directors and CIASA will be entitled to designate seven of our
directors.
Corporate
Governance
The NYSE requires that corporations with shares listed on the
exchange comply with certain corporate governance standards. As
a foreign private issuer, we are only required to comply with
certain NYSE rules relating to audit committees and periodic
certifications to the NYSE. The NYSE also requires that we
provide a summary of the significant differences between our
corporate governance practices and those that would apply to a
U.S. domestic issuer. We believe the following to be the
significant differences between our corporate governance
practices and those that would typically apply to a
U.S. domestic issuer under the NYSE corporate governance
rules.
88
In addition, companies that are registered in Panama are
required to disclose whether or not they comply with certain
corporate governance guidelines and principles that are
recommended by the National Securities Commission
(Comisión Nacional de Valores, or CNV). Statements
below referring to Panamanian governance standards reflect these
voluntary guidelines set by the CNV rather than legal
requirements or standard national practices. Our Class A
shares are registered with the CNV, and we comply with the
CNVs disclosure requirements.
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NYSE Standards
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Our Corporate Governance
Practice
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Director Independence.
Majority of
board of directors must be independent. §303A.01
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Panamanian corporate governance
standards recommend that one in every five directors should be
an independent director. The criteria for determining
independence under the Panamanian corporate governance standards
differs from the NYSE rules. In Panama, a director would be
considered independent as long as the director does not directly
or indirectly own 5% or more of the issued and outstanding
voting shares of the company, is not involved in the daily
management of the company and is not a spouse or related to the
second degree by blood or marriage to the persons named above.
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Our Articles of Incorporation
require us to have three independent directors as defined under
the NYSE rules.
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Executive
Sessions. Non-management
directors must meet regularly in executive sessions without
management. Independent directors should meet alone in an
executive session at least once a year. §303A.03
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There are no mandatory
requirements under Panamanian law that a company should hold,
and we currently do not hold, such executive sessions.
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Nominating/corporate
governance
committee. Nominating/corporate
governance committee of independent directors is required. The
committee must have a charter specifying the purpose, duties and
evaluation procedures of the committee. §303A.04
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Panamanian corporate governance
standards recommend that registered companies have a nominating
committee composed of three members of the board of directors,
at least one of which should be an independent director, plus
the chief executive officer and the chief financial officer. In
Panama, the majority of public corporations do not have a
nominating or corporate governance committee.
Our Articles of Incorporation require that we maintain a
Nominating and Corporate Governance Committee with at least one
independent director until the first shareholders meeting
to elect directors after such time as the Class A shares
are entitled to full voting rights.
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Compensation
committee.
Compensation committee of independent directors is required,
which must approve executive officer compensation. The committee
must have a charter specifying the purpose, duties and
evaluation procedures of the committee. §303A.05
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Panamanian corporate governance
standards recommend that the compensation of executives and
directors be overseen by the nominating committee but do not
otherwise address the need for a compensation committee.
While we maintain a compensation committee that operates under a
charter as described by the NYSE governance standards, currently
one of the members of that committee is independent.
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Equity compensation
plans. Equity
compensation plans require shareholder approval, subject to
limited exemptions.
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Under Panamanian law, shareholder
approval is not required for equity compensation plans.
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89
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NYSE Standards
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Our Corporate Governance
Practice
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Code of
Ethics. Corporate
governance guidelines and a code of business conduct and ethics
is required, with disclosure of any waiver for directors or
executive officers. §303A.10
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Panamanian corporate governance
standards do not require the adoption of specific guidelines as
contemplated by the NYSE standards, although they do require
that companies disclose differences between their practices and
a list of specified practices recommended by the CNV.
We have not adopted a set of corporate governance guidelines as
contemplated by the NYSE, although we will be required to comply
with the disclosure requirement of the CNV.
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Panamanian corporate governance
standards recommend that registered companies adopt a code of
ethics covering such topics as its ethical and moral principles,
how to address conflicts of interest, the appropriate use of
resources, obligations to inform of acts of corruption and
mechanism to enforce the compliance with established rules of
conduct.
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We have adopted a code of ethics
applicable to our senior management, including our chief
executive officer, our chief financial officer and our chief
accounting officer, as well as to other employees.
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Committees
of the Board of Directors
Audit Committee. Our Audit Committee is
responsible for the coordination of the internal audit process,
appointment of the independent auditors and presenting to the
board of directors its opinion with respect to the financial
statements and the areas that are subject to an audit process.
Messrs. José Castañeda and Roberto Artavia are
the current members of our Audit Committee, and
Mr. José Castañeda is the chairman of the audit
committee as well as our audit committee financial expert. We
expect that our third independent director will also be a member
of the audit committee.
Compensation Committee. Our Compensation
Committee is responsible for the selection process of the Chief
Executive Officer and the evaluation of all executive officers
(including the CEO), recommending the level of compensation and
any associated bonus. Messrs. Stanley Motta, Jaime Arias
and José Castañeda are the members of our Compensation
Committee, and Mr. Stanley Motta is the Chairman of the
Compensation Committee.
Nominating and Corporate Governance
Committee. Our Nominating and Corporate
Governance Committee is responsible for developing and
recommending criteria for selecting new directors, overseeing
evaluations of the board of directors, its members and
committees of the board of directors and handling other matters
that are specifically delegated to the compensation committee by
the board of directors from time to time. Our charter documents
require that there be at least one independent member of the
Nominating and Corporate Governance Committee until the first
shareholders meeting to elect directors after such time as
the Class A shares are entitled to full voting rights.
Messrs. Ricardo Arias, Osvaldo Heilbron and Roberto Artavia
are the members of our Nominating and Corporate Governance
Committee, and Mr. Ricardo Arias is the Chairman of the
Nominating and Corporate Governance Committee.
Independent Directors Committee. Our
Independent Directors Committee is created by our Articles of
Incorporation and consists of any directors that the board of
directors determines from time to time meet the independence
requirements of the NYSE and the Securities Act. Our Articles of
Incorporation provide that there will be three independent
directors at all times, subject to certain exceptions. Under our
Articles of Incorporation, the Independent Directors Committee
must approve:
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any transactions in excess of $5 million between us and our
controlling shareholders,
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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
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the issuance of additional Class B shares or Class C
shares to ensure Copa Airlines compliance with aviation
laws and regulations.
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90
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 Description of Capital Stock.
Compensation
In 2005, we paid an aggregate of approximately
$2.42 million in cash compensation to our executive
officers. We have not set aside any funds for future payments to
executive officers.
The Compensation Committee of our board of directors has
approved increases in salaries and one time restricted stock
bonuses for certain executive officers and eliminated the
existing Long Term Retention Plan. The restricted stock awards
are granted pursuant to a new equity-based long-term incentive
compensation plan that was adopted in March 2006. The plan
provides for awards to our executive officers, certain key
employees and non-employee directors. The plan provides for the
grant of restricted stock, stock options and certain other
equity-based awards. A number of shares equal to five percent of
our aggregate outstanding shares as of December 14, 2005
has been reserved for future issuances that will be granted to
our employees. This includes a grant of restricted stock awards
under the plan to our executive officers that have an aggregate
value of $18.8 million. The restricted stock awards granted
to our named executive officers under the plan consist of
approximately 890,625 shares of restricted stock, which
will vest over five years in yearly installments equal to 15% of
the awarded stock on each of the first three anniversaries of
the offering, 25% on the fourth anniversary and 30% on the fifth
anniversary. We also intend to pay $3 million to management
that will be tied to an agreement not to compete with us in the
future. We also granted a small amount of restricted stock
having an aggregate value of approximately $989,063, to each of
our managers, officers and key employees that are not on our
senior management team which will vest on March 28, 2008.
The Compensation Committee plans to make additional equity based
awards under the plan from time to time, including additional
restricted stock and stock option awards. While the Compensation
Committee will retain discretion to vary the exact terms of
future awards, we anticipate that future employee restricted
stock and stock option awards granted pursuant to the plan after
the offering will generally vest over a three year period and
the stock options will carry a ten year term.
Members of our board of directors that are not officers of
either Copa or Continental receive $25,000 per year plus
expenses incurred to attend our board of directors meetings. In
addition, members of committees of the board of directors
receive $1,000 per committee meeting, with the chairman of
the audit committee receiving $2,000 per meeting of the
audit committee. All of the members of our board of directors
and their spouses receive benefits to travel on Copa flights as
well.
91
PRINCIPAL
AND SELLING SHAREHOLDERS
The following table sets forth information relating to the
beneficial ownership of our Class A shares as of June 8,
2006 by each person known to us to beneficially own 5% or more
of our common shares and all our directors and officers as a
group.
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Class A Shares
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Class A Shares
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Beneficially
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Beneficially
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Owned Prior to
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Owned After
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the Offering
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the Offering
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Shares
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(%)(1)
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Shares
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(%)(1)
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CIASA(2)
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Continental*(3)
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11,921,875
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38.4
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%
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5,359,375
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17.3
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%
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Executive officers and directors
as a group (18 persons)
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829,625
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2.8
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%
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829,625
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2.8
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%
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Others
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18,220,375
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58.8
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%
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24,782,875
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79.9
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%
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Total
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30,971,875
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100
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%
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30,971,875
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100
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%
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*
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Selling shareholder.
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(1)
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Based on a total of 30,971,875
Class A shares outstanding.
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(2)
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CIASA owns 100% of the Class B
shares of Copa Holdings before and after the offering,
representing 29.2% of our total capital stock.
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(3)
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Based on a Schedule 13G filed
with the Securities and Exchange Commission, dated
February 2, 2006, in which Continental reported that it had
sole voting and dispositive power over 11,921,875 of
Class A shares.
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CIASA currently owns 100% of the Class B shares of Copa
Holdings. After the completion of this offering, CIASA will
continue to own 100% of the Class B shares of Copa
Holdings, representing all of the voting power of our capital
stock. CIASA is controlled by a group of Panamanian investors
representing several prominent families in Panama. This group of
investors has historically acted together in a variety of
business activities both in Panama and elsewhere in Latin
America, including banking, insurance, real estate,
telecommunications, international trade and commerce and
wholesale. Members of the Motta, Heilbron and Arias families and
their affiliates beneficially own approximately 90% of
CIASAs shares. Our Chief Executive Officer, Mr. Pedro
Heilbron, and several of our directors, including
Messrs. Stanley Motta and Alberto C. Motta Jr.,
Mr. Osvaldo Heilbron, Mr. Jaime Arias and
Mr. Ricardo Alberto Arias as a group hold beneficial
ownership of approximately 78% of CIASAs shares. This
ownership includes 33.4% of the shares of CIASA acquired by
Messrs. Stanley Motta and Alberto C. Motta Jr.,
Mr. Osvaldo Heilbron, Mr. Jaime Arias,
Mr. Ricardo Alberto Arias, Mr. Pedro Heilbron and
other CIASA shareholders in June 2005 from the controlling
shareholders of Copas principal Latin American competitor
in a transaction valued at approximately $60,000,000.
The holders of more than 78% of the issued and outstanding stock
of CIASA have entered into a shareholders agreement
providing that the parties to the agreement will vote all of
their shares in CIASA together as a group on all matters
concerning CIASAs holdings of Class B shares.
Additionally, the shareholders agreement restricts
transfers of CIASA shares to non-Panamanian nationals.
Messrs. Stanley Motta and Alberto C. Motta Jr. together
exercise effective control of CIASA.
One of our directors, Mr. Erwin, is an officer of
Continental and may be deemed to share beneficial ownership with
Continental of our Class A shares held by Continental, but
Mr. Erwin disclaims such beneficial ownership.
The address of CIASA is Corporación de Inversiones
Aéreas, S.A., c/o Campañia 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.
92
RELATED
PARTY TRANSACTIONS
Agreements
with the Selling Shareholder
Shareholders
Agreement
Copa Holdings is a party to the amended and restated
shareholders agreement with CIASA and Continental entered
into in connection with our initial public offering. The amended
and restated shareholders agreement provides for, among
other things:
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a right of each of CIASA and Continental to designate a certain
number of directors to our board of directors for so long as
they hold a certain amount of our common stock. Of the 11
members of our board, CIASA initially had the right to designate
six directors and Continental initially had the right to
designate two directors, with the remaining three directors
being independent under the rules of the New York
Stock Exchange. Upon consummation of this offering, Continental
will have the right to designate one of our directors and CIASA
will have the right to designate seven of our directors;
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certain limitations on transfers of our common stock by CIASA or
Continental;
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subject to certain exceptions, a right of first offer in favor
of CIASA to purchase any shares of our common stock Continental
proposes to sell to any third party; and
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the ability of Continental to tag-along their shares
of our common stock to certain sales of common stock by CIASA to
non-Panamanians or, in the case of certain sales of Class B
stock by CIASA to Panamanians, to receive additional
registration rights with respect to the shares they would
otherwise have been able to sell.
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In connection with this offering, Continental entered into a
lock-up agreement with CIASA which restricts its sale of common
stock, without the prior written consent of CIASA and subject to
certain other exceptions, until the second anniversary of the
date of this prospectus.
A material uncured breach of the Shareholders Agreement by
CIASA or Copa Holdings will trigger rights of Continental in the
Alliance Agreement, Services Agreement and Frequent Flyer
Agreement to terminate those agreements as described below.
Registration
Rights Agreement
Copa Holdings is party to an amended and restated registration
rights agreement with CIASA and Continental pursuant to which
CIASA and Continental were entitled to certain demand and
piggyback rights with respect to the registration and sale of
our common stock held by them after this offering. The
registration rights agreement initially permitted each of CIASA
and Continental to make up to two demands on us to register
certain shares of common stock held by them. Continental has
used one of its two demand rights in connection with this
offering. Upon consummation of this offering, Continental will
no longer have the right to register any of our class A
shares that it holds except in the event that CIASA reduces its
investment in us to a level below that of Continentals
ownership in us. One half of the registration expenses incurred
in connection with the first demand registration requested after
the date hereof, which expenses exclude underwriting discounts
and commissions, will be paid ratably by each security holder
participating in such offering in proportion to the number of
their shares that are included in the offering, and the balance
of such expenses will be paid by the Copa Holdings for such
demand registrations. Thereafter, all such expenses will be paid
ratably by each security holder participating in such offering
in proportion to the number of their shares that are included in
the offering. In connection with this offering, Continental
entered into a
lock-up
agreement with the underwriters which restrict its sale of our
common stock until the first anniversary of the date of this
prospectus.
In addition, under the registration rights agreement, in
connection with a registered underwritten offering, CIASA has
agreed, if required by the underwriters of such offering, not to
effect any sale or distribution of any securities of Copa
Holdings for a period of up to 180 days after the effective
date of such registration, so long as we have agreed to cause
other holders of any securities of ours purchased from us (at
any time other than in a public offering) to so agree.
A material uncured breach of the registration rights agreement
by CIASA or Copa Holdings will trigger rights of Continental in
the alliance agreement, services agreement and frequent flyer
agreement to terminate those agreements as described below.
93
Commercial
Agreements with Continental
Our alliance relationship with Continental is governed by
several interrelated agreements between Copa and Continental.
Each of the agreements as amended and restated will expire only
upon three years written notice by one of the airlines to
the other, which may not be given before May 2012. Other events
of termination are set forth in the descriptions of the major
alliance-related agreements set forth below.
Alliance Agreement. Under our alliance
agreement with Continental, both airlines agree to continue
their codesharing relationship with extensions as they feel are
appropriate and to work to maintain our antitrust immunity with
the DOT. In order to support the codesharing relationship, the
alliance agreement also contains provisions mandating a
continued frequent flyer relationship between the airlines,
setting minimum levels of quality of service for the airlines
and encouraging cooperation in marketing and other operational
initiatives. Continental and Copa are prohibited by the alliance
agreement from entering into commercial agreements with certain
classes of competing airlines, and the agreement requires both
parties to include each other, as practicable, in their
commercial relationships with other airlines. Other than by
expiration as described above, the agreement is also terminable
by an airline in cases of, among other things, uncured material
breaches of the alliance agreement by the other airline,
bankruptcy of the other airline, termination of the services
agreement for breach by the other airline, termination of the
frequent flyer participation agreement without entering into a
successor agreement by the other airline, termination by
Continental upon the material unremedied breach of the
shareholders agreement or the registration rights agreement by
CIASA or Copa Holdings, termination by Copa upon the material
unremedied breach of the shareholders agreement or the
registration rights agreement by Continental, certain
competitive activities, certain changes of control of either of
the parties and certain significant operational service failures
by the other airline.
Services Agreement. Under the services
agreement, both airlines agree to provide to each other certain
services over the course of the agreement at the providing
carriers incremental cost, subject to certain limitations.
Services covered under the agreement include consolidating
purchasing power for equipment purchases and insurance coverage,
sharing management information systems, pooling maintenance
programs and inventory management, joint training and employee
exchanges, sharing the benefits of other purchase contracts for
goods and services, telecommunications and other services. Other
than by expiration as described above, the agreement is also
terminable by an airline in cases of, among other things,
uncured material breaches of the alliance agreement by the other
airline, bankruptcy of the other airline, termination of the
services agreement for breach by the other airline, termination
of the frequent flyer participation agreement without entering
into a successor agreement by the other airline, termination by
Continental upon the material unremedied breach of the
shareholders agreement or the registration rights agreement by
CIASA or Copa Holdings, termination by Copa upon the material
unremedied breach of the shareholders agreement or the
registration rights agreement by Continental, certain changes of
control of either of the parties and certain significant
operational service failures by the other airline.
Frequent Flyer Participation Agreement. Under
the frequent flyer participation agreement, we participate in
Continentals OnePass frequent flyer global program and on
a co-branded basis in Latin America. Customers in the program
receive credit for flying on segments operated by us, which can
be redeemed for award travel on our flights and those of other
partner airlines. The agreement also governs joint marketing
agreements under the program, settlement procedures between the
airlines and revenue-sharing under bank card affinity
relationships. Further, if the Services Agreement is terminated
or expires, the compensation structure of the frequent flyer
program will be revised to be comparable to other of
Continentals frequent flyer relationships. We also have
the right under the agreement to participate on similar terms in
any successor program operated by Continental. Other than by
expiration as described above, the agreement is also terminable
by an airline in cases of, among other things, uncured material
breaches of the alliance agreement by the other airline,
bankruptcy of the other airline, termination of the services
agreement for breach by the other airline, termination of the
frequent flyer participation agreement without entering into a
successor agreement by the other airline, termination by
Continental upon the material unremedied breach of the
shareholders agreement or the registration rights agreement by
CIASA or Copa Holdings, termination by Copa upon the material
unremedied of the shareholders agreement or the registration
rights agreement by Continental, certain changes of control of
either of the parties and certain significant operational
service failures by the other airline.
94
Trademark License Agreement. Under the
trademark license agreement, we have the right to use a logo
incorporating a globe design that is similar to the globe design
of Continentals logo. We also have the right to use
Continentals trade dress, aircraft livery and certain
other Continental marks under the agreement that allow us to
more closely align our overall product with our alliance
partner. The trademark license agreement is coterminous with the
Alliance Agreement and can also be terminated for breach. In
most cases, we will have a period of five years after
termination to cease to use the marks on our aircraft, with less
time provided for signage and other uses of the marks or in
cases where the agreement is terminated for a breach by us.
Agreements
with our controlling shareholders and their affiliates
Our directors and controlling shareholders have many other
commercial interests within Panama and throughout Latin America.
We have commercial relationships with several of these
affiliated parties from which we purchase goods or services, as
described below. In each case we believe our transactions with
these affiliated parties are at arms length and on terms
that we believe reflect prevailing market rates.
Banco
Continental de Panama, S.A.
We have a strong commercial banking relationship with Banco
Continental de Panama, S.A., a bank with approximately
$2.5 billion in assets and which is controlled by our
controlling shareholders. As of December 31, 2005, we owed
Banco Continental de Panama, S.A., approximately
$25.7 million under short to medium term financing
arrangements made to fund aircraft pre-payments and for part of
the commercial loan tranche of one of our Ex-Im facilities. We
also maintain general lines of credit and time deposit accounts
with Banco Continental.
ASSA
Compañía de Seguros, S.A.
Panamanian law requires us to maintain our insurance policies
through a local insurance company. We have contracted with ASSA,
an insurance company controlled by our controlling shareholders,
to provide substantially all of our insurance. ASSA has, in
turn, reinsured almost all of the risks under those policies
with insurance companies around the world. The net payment to
ASSA, after taking into account the reinsurance of these risks,
is approximately $30,000 per year.
Petróleos
Delta, S.A.
In July 2005, we entered into a contract with Petróleos
Delta, S.A. to supply our jet fuel needs. The price we pay under
this contract is based on the two week average of the
U.S. Gulf Coast Waterborne Mean index plus local taxes,
certain third-party handling charges and a handling charge to
Delta which is expected to aggregate between $2.5 million
and $3 million per year assuming we maintain a rate of fuel
consumption comparable to expected volumes for 2005. The
contract has a one year term that automatically renews for one
year periods unless terminated by one of the parties. While our
controlling shareholders do not hold a controlling equity
interest in Petróleos Delta, S.A., one of our executive
officers, Jorge Garcia, previously served as a Project Director
at Petróleos Delta, S.A., one of our directors, Alberto
Motta Jr., serves on its board of directors, one of our
directors, Osvaldo Heilbron, serves on the board of directors of
Empresa General de Petróleos, S.A., the holding company
that owns Petróleos Delta, S.A., and one of our directors,
Ricardo Arias, serves on the board of directors of Empresa
General de Inversiones, S.A., the holding company that owns
Empresa General de Petróleos, S.A.
Desarollo
Inmobiliario del Este, S.A.
We recently moved our headquarters to a new location six miles
away from Tocumen International Airport later this year. We are
leasing five floors consisting of approximately
104,000 square feet of the building from Desarollo
Inmobiliario del Este, S.A., an entity controlled by the same
group of investors that controls CIASA, under a
10-year
lease at a rate of $106,000 per month during the first
three years, $110,000 per month from year 4 to year 6,
$113,000 from year 7 to year 9 and $116,000 per month in
year 10, which we believe to be a market rate.
95
Galindo,
Arias & Lopez
Most of our legal work, including passing on the validity of the
shares offered by this prospectus, is carried out by the law
firm Galindo, Arias & Lopez. Messrs. Jaime Arias
and Ricardo Alberto Arias, partners of Galindo, Arias &
Lopez, are indirect shareholders of CIASA and serve on our board
of directors.
Other
Transactions
We also purchase most of the alcohol and some of the other
beverages served on our aircraft from Motta Internacional, S.A.
and Global Brands, S.A., both of which are controlled by our
controlling shareholders. We do not have any formal contracts
for these purchases, but pay wholesale prices based on price
lists periodically submitted by those importers. We pay
approximately $0.4 million per year to these entities.
Our telecommunications services have been provided by
Telecarrier, Inc. since February 2003. Some of the controlling
shareholders of CIASA have a controlling interest in
Telecarrier, Inc. Additionally, one of our directors, Ricardo
Arias, serves on the board of directors of Empresa General de
Inversiones, a holding company that has a minority interest in
Telecarrier, Inc. Payments to Telecarrier, Inc. totaled
$0.4 million, $0.4 million and $0.2 million in
2005, 2004 and 2003, respectively.
The advertising agency that we use in Panama, Rogelio Diaz
Publicidad (RDP), is owned by the
brother-in-law
of our chief executive officer. Gross invoices for all services
performed through RDP total approximately $1.3 million
annually.
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DESCRIPTION
OF CAPITAL STOCK
The following is a summary of the material terms of Copa
Holdings capital stock and a brief summary of certain
significant provisions of Copa Holdings Articles of
Incorporation. This description contains all material
information concerning the common stock but does not purport to
be complete. For additional information regarding the common
stock, reference is made to the Articles of Incorporation, a
copy of which has been filed as an exhibit to the registration
statement of which this prospectus forms a part.
For purposes of this section only, reference to
our or the company shall refer only to
Copa Holdings and references to Panamanians shall
refer to those entities or natural persons that are considered
Panamanian nationals under the Panamanian Aviation Act, as it
may be amended or interpreted.
Common
Stock
Our authorized capital stock consists of 80 million shares
of common stock without par value, divided into Class A
shares, Class B shares and Class C shares. As of
May 31, 2006, we had 30,971,875 Class A shares,
12,778,125 Class B shares and no Class C shares
outstanding. Class A and Class B shares have the same
economic rights and privileges, including the right to receive
dividends, except as described in this section.
Class A
Shares
The holders of the Class A shares are not entitled to vote
at our shareholders meetings, except in connection with
the following specific matters:
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a transformation of Copa Holdings into another corporate type;
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a merger, consolidation or spin-off of Copa Holdings;
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a change of corporate purpose;
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voluntarily delisting Class A shares from the NYSE;
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approving the nomination of Independent Directors nominated by
our board of directors Nominating and Corporate Governance
Committee following our next annual general shareholders
meeting; and
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any amendment to the foregoing special voting provisions
adversely affecting the rights and privileges of the
Class A shares.
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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.
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Class B
Shares
Every holder of Class B shares is entitled to one vote per
share on all matters for which shareholders are entitled to
vote. Class B shares will be automatically converted into
Class A shares upon the registration of transfer of such
shares to holders which are not Panamanian as described below
under Restrictions on Transfer of Common Stock;
Conversion of Class B Shares.
Class C
Shares
Upon the occurrence and during the continuance of a triggering
event described below in Aviation Rights
Protections, the Independent Directors Committee of our
board of directors, or the board of directors as a whole if
applicable, are authorized to issue Class C shares to the
Class B holders pro rata in proportion to such Class B
holders ownership of Copa Holdings. The Class C
shares will have no economic value and will not be transferable,
but will possess such voting rights as the Independent Directors
Committee shall deem necessary to ensure the effective control
of the company by Panamanians. The Class C shares will be
redeemable by the company at such time as the Independent
Directors Committee determines that such a triggering event
shall no longer be in effect. The Class C shares will not
be entitled to any dividends or any other economic rights.
Objects
and Purposes
Copa Holdings is principally engaged in the investment in
airlines and aviation-related companies and ventures, although
our Articles of Incorporation grant us general powers to engage
in any other lawful business, whether or not related to any of
the specific purposes set forth in the Articles of Incorporation.
Restrictions
on Transfer of Common Stock; Conversion of Class B
Shares
The Class B shares may only be held by Panamanians, and
upon registration of any transfer of a Class B share to a
holder that does not certify that it is Panamanian, such
Class B share shall automatically convert into a
Class A share. Transferees of Class B shares will be
required to deliver to us written certification of their status
as a 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.
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Aviation
Rights Protections
As described in RegulationPanama, the
Panamanian Aviation Act, including the related decrees and
regulations, and the bilateral treaties between Panama and other
countries that allow us to fly to those countries require that
Panamanians exercise effective control of Copa and
maintain significant ownership of the airline. The
Independent Directors Committee have certain powers under our
Articles of Incorporation to ensure that certain levels of
ownership and control of Copa Holdings remain in the hands of
Panamanians upon the occurrence of certain triggering events
referred to below.
In the event that the Class B shareholders represent less
than 10% of the total share capital of the company (excluding
newly issued shares sold with the approval of our Independent
Directors Committee) and the Independent Directors Committee
determines that it is reasonably likely that Copas or Copa
Holdings legal ability to engage in the aviation business
or to exercise its international route rights will be revoked,
suspended or materially inhibited in a manner which would
materially and adversely affect the company, in each case as a
result of such non-Panamanian ownership (each a triggering
event), the Independent Directors Committee may take either or
both of the following actions:
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authorize the issuance of additional Class B shares to
Panamanians at a price determined by the Independent Directors
to reflect the current market value of such shares or
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authorize the issuance to Class B shareholders such number
of Class C shares as the Independent Directors Committee,
or the board of directors if applicable, deems necessary and
with such other terms and conditions established by the
Independent Directors Committee that do not confer economic
rights on the Class C shares.
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Dividends
The payment of dividends on our shares is subject to the
discretion of our board of directors. Under Panamanian law, we
may pay dividends only out of retained earnings and capital
surplus. Our Articles of Incorporation provide that all
dividends declared by our board of directors will be paid
equally with respect to all of the Class A and Class B
shares. Our board of directors has adopted a dividend policy
that provides for the payment of approximately 10% of our annual
consolidated net income to Class A and Class B
shareholders. Our board of directors may, in its sole discretion
and for any reason, amend or discontinue the dividend policy.
Our board of directors may change the level of dividends
provided for in this dividend policy or entirely discontinue the
payment of dividends.
Shareholder
Meetings
Ordinary
Meetings
Our Articles of Incorporation require us to hold an ordinary
annual meeting of shareholders within the first five months of
each fiscal year. The ordinary annual meeting of shareholders is
the corporate body that elects the board of directors, approves
the annual financial statements of Copa Holdings and approves
any other matter that does not require an extraordinary
shareholders meeting. Shareholders representing at least
5% of the issued and outstanding common stock entitled to vote
may submit proposals to be included in such ordinary
shareholders meeting, provided the proposal is submitted at
least 45 days prior to the meeting.
Extraordinary
Meetings
Extraordinary meetings may be called by the board of directors
when deemed appropriate. Ordinary and extraordinary meetings
must be called by the board of directors when requested by
shareholders representing at least 5% of the issued shares
entitled to vote at such meeting. Only matters that have been
described in the notice of an extraordinary meeting may be dealt
with at that extraordinary meeting.
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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 publish such official notices in a national
journal recognized by the NYSE.
Shareholders meetings are to be held in Panama City,
Panama unless otherwise specified by the board of directors.
Quorum
Generally, a quorum for a shareholders meeting is
established by the presence, in person or by proxy, of
shareholders representing a simple majority of the issued shares
eligible to vote on any actions to be considered at such
meeting. If a quorum is not present at the first meeting and the
original notice for such meeting so provides, the meeting can be
immediately reconvened on the same day and, upon the meeting
being reconvened, shareholders present or represented at the
reconvened meeting are deemed to constitute a quorum regardless
of the percentage of the shares represented.
Proxy
Representation
Our Articles of Incorporation provide that, for so long as the
Class A shares do not have full voting rights, each holder,
by owning our Class A shares, grants a general proxy to the
Chairman of our board of directors or any person designated by
our Chairman to represent them and vote their shares on their
behalf at any shareholders meeting, provided that due
notice was made of such meeting and that no specific proxy
revoking or replacing the general proxy has been received from
such holder prior to the meeting in accordance with the
instructions provided by the notice.
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.
100
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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Conflict of Interest
Transactions.
Transactions involving a Panamanian corporation and
an interested director or officer are initially subject to the
approval of the board of directors. At the next
shareholders meeting, shareholders will then have the
right to disapprove the board of directors decision and to
decide to take legal actions against the directors or officers
who voted in favor of the transaction.
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Conflict of Interest Transactions.
Transactions involving a Delaware corporation and an
interested director of that corporation are generally permitted
if:
(1) the material facts as to the interested
directors relationship or interest are disclosed and a
majority of disinterested directors approve the transaction;
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(2) the material facts are disclosed as to the interested
directors relationship or interest and the stockholders
approve the transaction; or
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(3) the transaction is fair to the corporation at the
time it is authorized by the board of directors, a committee of
the board of directors or the stockholders.
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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
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Panama
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Delaware
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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
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Inspection of Corporate
Records. A
shareholder may inspect or obtain copies of a
corporations
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Panama
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Delaware
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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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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
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Panama
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Delaware
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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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104
INCOME
TAX CONSEQUENCES
United
States
The following summary describes the material United States
federal income tax consequences of the ownership and disposition
of our Class A shares as of the date hereof. The discussion
set forth below is applicable to United States Holders (as
defined below) that hold our Class A shares as capital
assets for United States federal income tax purposes (generally,
property held for investment). This summary does not represent a
detailed description of the United States federal income tax
consequences applicable to you if you are subject to special
treatment under the United States federal income tax laws,
including if you are:
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a bank;
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a dealer in securities or currencies;
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a financial institution;
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a regulated investment company;
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a real estate investment trust;
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an insurance company;
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a tax-exempt organization;
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a person holding our Class A shares as part of a hedging,
integrated or conversion transaction, a constructive sale or a
straddle;
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a trader in securities that has elected the
mark-to-market
method of accounting for your securities;
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a person liable for alternative minimum tax;
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a person who owns 10% or more of our voting stock;
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a partnership or other pass-through entity for United States
federal income tax purposes; or
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a person whose functional currency is not the United
States dollar.
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The discussion below is based upon the provisions of the
Internal Revenue Code of 1986, as amended (the
Code), and regulations, rulings and judicial
decisions thereunder as of the date hereof, and such authorities
may be replaced, revoked or modified so as to result in United
States federal income tax consequences different from those
discussed below. This discussion, to the extent that it states
matters of United States federal income tax law or legal
conclusions and subject to the qualifications herein, represents
the opinion of Simpson Thacher & Bartlett LLP, our
United States counsel.
If a partnership holds our Class A shares, the tax
treatment of a partner will generally depend on the status of
the partner and the activities of the partnership. If you are a
partner of a partnership holding our Class A shares, you
should consult your tax advisors.
If you are considering the purchase, ownership or disposition
of our Class A shares, you should consult your own tax
advisors concerning the United States federal income tax
consequences to you in light of your particular situation as
well as any consequences arising under the laws of any other
taxing jurisdiction.
As used herein, United States Holder means a holder
of our Class A shares that is for United States federal
income tax purposes:
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an individual citizen or resident of the United States;
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a corporation (or other entity treated as a corporation for
United States federal income tax purposes) created or organized
in or under the laws of the United States, any state thereof or
the District of Columbia;
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an estate the income of which is subject to United States
federal income taxation regardless of its source; or
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105
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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.
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Taxation
of Dividends
Distributions on the Class A shares (including amounts
withheld to reflect Panamanian withholding taxes) will be
taxable as dividends to the extent paid out of our current or
accumulated earnings and profits, as determined under United
States federal income tax principles. Such income (including
withheld taxes) will be includable in your gross income as
ordinary income on the day actually or constructively received
by you. Such dividends will not be eligible for the dividends
received deduction allowed to corporations.
With respect to non-corporate United States investors, certain
dividends received in taxable years beginning before
January 1, 2011 from a qualified foreign corporation may be
subject to reduced rates of taxation. A foreign corporation
generally is treated as a qualified foreign corporation with
respect to dividends paid by that corporation on shares that are
readily tradable on an established securities market in the
United States. United States Treasury Department guidance
indicates that our Class A shares, which are listed on the
NYSE, are readily tradable on an established securities market
in the United States. There can be no assurance, however, that
our Class A shares will be considered readily tradable on
an established securities market in later years. Non-corporate
holders that do not meet a minimum holding period requirement
during which they are not protected from the risk of loss or
that elect to treat the dividend income as investment
income pursuant to Section 163(d)(4) of the Code will
not be eligible for the reduced rates of taxation regardless of
our status as a qualified foreign corporation. In addition, the
rate reduction will not apply to dividends if the recipient of a
dividend is obligated to make related payments with respect to
positions in substantially similar or related property. This
disallowance applies even if the minimum holding period has been
met. You should consult your own tax advisors regarding the
application of these rules to your particular circumstances.
Subject to certain conditions and limitations, Panamanian
withholding taxes on dividends may be treated as foreign taxes
eligible for credit against your United States federal income
tax liability. For purposes of calculating the foreign tax
credit, dividends paid on the Class A shares will be
treated as income from sources outside the United States and
will generally constitute passive income. Further, in certain
circumstances, if you:
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have held Class A shares for less than a specified minimum
period during which you are not protected from risk of
loss, or
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are obligated to make payments related to the dividends,
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you will not be allowed a foreign tax credit for foreign taxes
imposed on dividends paid on the Class A shares. The rules
governing the foreign tax credit are complex. You are urged to
consult your tax advisors regarding the availability of the
foreign tax credit under your particular circumstances.
To the extent that the amount of any distribution exceeds our
current and accumulated earnings and profits for a taxable year,
as determined under United States federal income tax principles,
the distribution will first be treated as a tax-free return of
capital, causing a reduction in the adjusted basis of the
Class A shares (thereby increasing the amount of gain, or
decreasing the amount of loss, to be recognized by you on a
subsequent disposition of the Class A shares), and the
balance in excess of adjusted basis will be taxed as capital
gain recognized on a sale or exchange (as discussed below under
Taxation of Capital Gains). Consequently, such
distributions in excess of our current and accumulated earnings
and profits would generally not give rise to foreign source
income and you would generally not be able to use the foreign
tax credit arising from any Panamanian withholding tax imposed
on such distributions unless such credit can be applied (subject
to applicable limitations) against United States federal income
tax due on other foreign source income in the appropriate
category for foreign tax credit purposes. However, we do not
intend to keep earnings and profits in accordance with United
States federal income tax principles. Therefore, you should
expect that a distribution will generally be treated as a
dividend (as discussed above).
106
Passive
Foreign Investment Company
We do not believe that we are a passive foreign investment
company (a PFIC) for United States federal income
tax purposes (or that we were one in 2005), and we expect to
operate in such a manner so as not to become a PFIC. If,
however, we are or become a PFIC, you could be subject to
additional United States federal income taxes on gain recognized
with respect to the Class A shares and on certain
distributions, plus an interest charge on certain taxes treated
as having been deferred under the PFIC rules. Further,
non-corporate United States Holders will not be eligible for
reduced rates of taxation on any dividends received from us in
taxable years beginning prior to January 1, 2011, if we are
a PFIC in the taxable year in which such dividends are paid or
the preceding taxable year. Our United States counsel expresses
no opinion with respect to our statements of belief and
expectation contained in this paragraph.
Taxation
of Capital Gains
For United States federal income tax purposes, you will
recognize taxable gain or loss on any sale, exchange or
redemption of a Class A share in an amount equal to the
difference between the amount realized for the Class A
share and your tax basis in the Class A share. Such gain or
loss will generally be capital gain or loss. Capital gains of
individuals derived with respect to capital assets held for more
than one year are eligible for reduced rates of taxation. The
deductibility of capital losses is subject to limitations. Any
gain or loss recognized by you will generally be treated as
United States source gain or loss.
Information
reporting and backup withholding
In general, information reporting will apply to dividends in
respect of our Class A shares and the proceeds from the
sale, exchange or redemption of our Class A shares that are
paid to you within the United States (and in certain cases,
outside the United States), unless you are an exempt recipient
such as a corporation. A backup withholding tax may apply to
such payments if you fail to provide a taxpayer identification
number or certification of other exempt status or fail to report
in full dividend and interest income.
Any amounts withheld under the backup withholding rules will be
allowed as a refund or a credit against your United States
federal income tax liability provided the required information
is timely furnished to the Internal Revenue Service.
Panamanian
Taxation
The following is a discussion of the material Panamanian tax
considerations to holders of Class A shares under
Panamanian tax law, and is based upon the tax laws and
regulations in force and effect as of the date hereof, which may
be subject to change. This discussion, to the extent it states
matters of Panamanian tax law or legal conclusions and subject
to the qualifications herein, represents the opinion of Galindo,
Arias & Lopez, our Panamanian counsel.
General
principles
Panamas income tax regime is based on territoriality
principles, which define taxable income only as that revenue
which is generated from a source within the Republic of Panama,
or for services rendered outside of Panama, but which, by their
nature, are intended to directly benefit the local commercial
activities of individuals or corporations which operate within
its territory. Said taxation principles have governed the
Panamanian fiscal regime for decades, and have been upheld
through judicial and administrative precedent.
Taxation
of dividends
Distributions by Panamanian corporations, whether in the form of
cash, stock or other property, are subject to a 10% withholding
tax for the portion of the distribution that is attributable to
Panamanian sourced income, as defined pursuant to the
territoriality principles that govern Panamanian tax law.
Distributions made by a holding company which correspond to
dividends paid by its subsidiary for which the dividend tax was
paid, are not subject to any further withholding under
Panamanian law. Therefore, distributions on the Class A
shares being offered would not be subject to withholding taxes
to the extent that said distributions are attributable to
dividends received from any of our subsidiaries.
107
Taxation
of capital gains
As long as the Class A shares are registered with the CNV
and are sold through an organized market, Panamanian taxes on
capital gains will not apply either to Panamanians or other
countries nationals. As part of this offering process, we
will register the Class A shares, with both the New York
Stock Exchange and the CNV.
Other
Panamanian taxes
There are no estate, gift or other taxes imposed by the
Panamanian government that would affect a holder of the
Class A shares, whether such holder were Panamanian or a
national of another country.
108
UNDERWRITING
Under the terms and subject to the conditions contained in an
underwriting agreement dated the date of this prospectus, the
underwriters named below, for whom Morgan Stanley & Co.
Incorporated and Merrill Lynch, Pierce, Fenner & Smith
Incorporated are acting as representatives, have severally
agreed to purchase, and the selling shareholder has agreed to
sell to them the number of shares indicated below:
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Number of
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Class A
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Underwriter
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Shares
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Morgan Stanley & Co.
Incorporated
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3,239,906
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Merrill Lynch, Pierce,
Fenner & Smith
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Incorporated
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2,413,031
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Goldman, Sachs & Co.
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909,563
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Total
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6,562,500
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The underwriters are offering the Class A shares subject to
their acceptance of the Class A shares from the selling
shareholder and subject to prior sale. The underwriting
agreement provides that the obligations of the several
underwriters to pay for and accept delivery of the Class A
shares offered by this prospectus are subject to the approval of
specified legal matters by their counsel and to other
conditions. The underwriters are obligated to take and pay for
all of the Class A shares offered by this prospectus if any
such shares are taken. However, the underwriters are not
required to take or pay for the Class A shares covered by
the underwriters over-allotment option described below,
unless and until the option is exercised.
The underwriters initially propose to offer part of the
Class A shares directly to the public at the public
offering price listed on the cover page of this prospectus and
part to certain dealers at a price that represents a concession
not in excess of $0.56 a share under the public offering price.
After the initial offering of the Class A shares, the
offering price and other selling terms may from time to time be
varied by the representatives.
The selling shareholder has granted to the underwriters an
option, exercisable for 30 days from the date of this
prospectus, to purchase up to an aggregate of 984,375 additional
Class A shares at the public offering price listed on the
cover page of this prospectus, less underwriting discounts and
commissions. The underwriters may exercise this option solely
for the purpose of covering over-allotments, if any, made in
connection with the offering of the Class A shares offered
by this prospectus. To the extent the option is exercised, each
underwriter will become obligated, subject to certain
conditions, to purchase about the same percentage of the
additional Class A shares as the number listed next to the
underwriters name in the preceding table bears to the
total number of Class A shares listed next to the names of
all underwriters in the preceding table.
As joint book-running managers on behalf of the underwriting
syndicate, Morgan Stanley & Co. Incorporated and
Merrill Lynch, Pierce, Fenner & Smith Incorporated will
be responsible for recording a list of potential investors that
have expressed an interest in purchasing shares of common stock
as part of this offering.
The underwriters have informed us that they do not intend sales
to discretionary accounts to exceed five percent of the total
number of shares of Class A shares offered by them.
The selling shareholder, Copa Holdings, Copa Holdings
directors and executive officers and CIASA have agreed that,
without the prior written consent of the representatives of the
underwriters, Copa Holdings and they will not, until the first
anniversary after the date of this prospectus (or 180 days
in the case of CIASA and 90 days in the case of Copa
Holdings and Copa Holdings directors and executive
officers):
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offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase, lend or
otherwise transfer or dispose of directly or indirectly, any
Class A shares or any securities convertible into or
exercisable or exchangeable for Class A shares; or
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enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences
of ownership of the Class A shares,
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109
whether any transaction described above is to be settled by
delivery of Class A shares or such other securities, in
cash or otherwise. Copa Holdings and each such person also
agrees that, without the prior written consent of the
representatives on behalf of the underwriters, they will not,
during the one year period after the date of this prospectus (or
180 or 90 days, as applicable), make any demand for, or
exercise any right with respect to, the registration of any
Class A shares or any security convertible into or
exercisable or exchangeable for Class A shares. In
addition, the selling shareholder has agreed that, without the
prior written consent of CIASA and subject to the same
exceptions, not to issue or transfer, until the second
anniversary of the date of this prospectus, any shares of Copa
Holdings capital stock, any options or warrants to
purchase shares of Copa Holdings capital stock or any
securities convertible into or exchangeable for shares of Copa
Holdings capital stock.
The restrictions described in the immediately preceding
paragraph do not apply to:
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the sale of Class A shares to the underwriters;
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after 90 days, the sale of any Class A shares held by
Continental and subject to the over-allotment option, to the
extent such option is not exercised in full or at all;
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the sale of Class A shares held by Continental pursuant to
its tag-along rights in its Shareholders Agreement with
CIASA;
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transactions by any person other than Copa Holdings relating to
Class A shares or other securities acquired in open market
transactions after the completion of the offering of the
Class A shares; or
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any existing employee benefits plan.
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The twelve-month restricted period described in the preceding
paragraph will be extended if:
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during the last 17 days of the twelve-month (or 180 or
90 days, as applicable) restricted period, Copa Holdings
issues an earnings release or material news event relating to
Copa Holdings occurs, or
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prior to the expiration of the twelve-month (or 180 or
90 days, as applicable) restricted period, Copa Holdings
announces that it will release earnings results during the
16 day period beginning on the last day of the twelve-month
(or 180 or 90 days, as applicable) period,
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in which case the restrictions described in the preceding
paragraph will continue to apply until the expiration of the
twelve-month period beginning on the issuance of the earnings
release or the occurrence of the material news or material event.
The following table shows the underwriting discounts and
commissions that the selling shareholder is to pay to the
underwriters in connection with this offering. These amounts are
shown assuming both no exercise and full exercise of the
underwriters option to purchase additional Class A
shares.
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Paid by the Selling
Shareholder
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No Exercise
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Full Exercise
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Per Class A Share
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$
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1.03310
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$
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1.03310
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Total
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$
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6,779,718.75
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$
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7,796,676.56
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In order to facilitate the offering of the Class A shares,
the underwriters may engage in transactions that stabilize,
maintain or otherwise affect the price of the Class A
shares. Specifically, the underwriters may sell more shares than
they are obligated to purchase under the underwriting agreement,
creating a short position. A short sale is covered if the short
position is no greater than the number of shares available for
purchase by the underwriters under the over-allotment option.
The underwriters can close out a covered short sale by
exercising the over-allotment option or purchasing Class A
shares in the open market. In determining the source of shares
to close out a covered short sale, the underwriters will
consider, among other things, the open market price of
Class A shares compared to the price available under the
over-allotment option. The underwriters may also sell
Class A shares in excess of the over-allotment option,
creating a naked short position. The underwriters must close out
any naked short position by purchasing Class A shares in
the open market. A naked short position is more likely to be
created if the underwriters are concerned that there may be
downward pressure on the price of the Class A shares in the
open market after pricing that could adversely affect investors
who purchase in this offering. In addition, to stabilize the
price of the Class A shares, the underwriters may bid for,
and purchase, shares of Class A shares in the open market.
Finally, the underwriters may reclaim selling concessions
allowed to an underwriter or a dealer for distributing the
110
Class A shares in this offering, if the representatives
repurchase previously distributed Class A shares in
transactions to cover short positions or to stabilize the price
of the Class A shares. Any of these activities may
stabilize or maintain the market price of the Class A
shares above independent market levels. The underwriters are not
required to engage in these activities, and may end any of these
activities at any time.
Each of the underwriters has represented and agreed that:
(a) (i) it is a person whose ordinary activities
involve it in acquiring, holding, managing or disposing of
investments (as principal or agent) for the purposes of its
business and (ii) it has not offered or sold and will not
offer or sell the Class A shares other than to persons
whose ordinary activities involve them in acquiring, holding,
managing or disposing of investments (as principal or as agent)
for the purposes of their businesses or who it is reasonable to
expect will acquire, hold, manage or dispose of investments (as
principal or agent) for the purposes of their businesses where
the issue of the Class A shares would otherwise constitute
a contravention of Section 19 of the Financial Services and
Markets Act 2000 (the FSMA) by Copa Holdings;
(b) it has only communicated or caused to be communicated
and will only communicate or cause to be communicated an
invitation or inducement to engage in investment activity
(within the meaning of Section 21 of the FSMA) received by
it in connection with the issue or sale of the Class A
shares in circumstances in which Section 21(1) of the FSMA
does not apply to Copa Holdings; and
(c) it has complied and will comply with all applicable
provisions of the FSMA with respect to anything done by it in
relation to the Class A shares in, from or otherwise involving
the United Kingdom.
In relation to each Member State of the European Economic Area
(the European Union plus Iceland, Norway and Liechtenstein)
which has implemented the Prospectus Directive (each, a Relevant
Member State), each of the underwriters has represented and
agreed that with effect from and including the date on which the
Prospectus Directive is implemented in that Relevant Member
State (the Relevant Implementation Date) it has not made and
will not make an offer of Class A shares to the public in
that Relevant Member State prior to the publication of a
prospectus in relation to the Class A shares which has been
approved by the competent authority in that Relevant Member
State or, where appropriate, approved in another Relevant Member
State and notified to the competent authority in that Relevant
Member State, all in accordance with the Prospectus Directive,
except that it may, with effect from and including the Relevant
Implementation Date, make an offer of Class A shares to the
public in that Relevant Member State at any time:
(a) to legal entities which are authorised or regulated to
operate in the financial markets or, if not so authorised or
regulated, whose corporate purpose is solely to invest in
securities;
(b) to any legal entity which has two or more of
(1) an average of at least 250 employees during the last
financial year; (2) a total balance sheet of more than
43,000,000 and (3) an annual net turnover of more
than 50,000,000, as shown in its last annual or
consolidated accounts; or
(c) in any other circumstances which do not require the
publication by the Issuer of a prospectus pursuant to
Article 3 of the Prospectus Directive.
For the purposes of this provision, the expression an
offer of Class A shares to the public in
relation to any Class A shares in any Relevant Member State
means the communication in any form and by any means of
sufficient information on the terms of the offer and the
Class A shares to be offered so as to enable an investor to
decide to purchase or subscribe the Class A shares, as the
same may be varied in that Relevant Member State by any measure
implementing the Prospectus Directive in that Relevant Member
State and the expression Prospectus Directive means Directive
2003/71/EC and includes any relevant implementing measure in
each Relevant Member State.
Class A shares may not be offered or sold by means of any
document other than to persons whose ordinary business is to buy
or sell shares or debentures, whether as principal or agent, or
in circumstances which do not constitute an offer to the public
within the meaning of the Companies Ordinance (Cap. 32) of
Hong Kong, and no advertisement, invitation or document relating
to the Class A shares may be issued, whether in Hong Kong
or elsewhere, which is directed at, or the contents of which are
likely to be accessed or read by, the public in Hong Kong
(except if permitted to do so under the securities laws of Hong
Kong) other than with respect to Class A shares which are
or are intended to be disposed of only to persons outside Hong
Kong or only to professional investors
111
within the meaning of the Securities and Futures Ordinance (Cap.
571) of Hong Kong and any rules made thereunder.
This prospectus has not been registered as a prospectus with the
Monetary Authority of Singapore. Accordingly, this prospectus
and any other document or material in connection with the offer
or sale, or invitation for subscription or purchase, of the
Class A shares may not be circulated or distributed, nor
may the Class A shares be offered or sold, or be made the
subject of an invitation for subscription or purchase, whether
directly or indirectly, to persons in Singapore other than
(i) to an institutional investor under Section 274 of
the Securities and Futures Act, Chapter 289 of Singapore
(the SFA), (ii) to a relevant person, or any person
pursuant to Section 275(1A), and in accordance with the
conditions, specified in Section 275 of the SFA or
(iii) otherwise pursuant to, and in accordance with the
conditions of, any other applicable provision of the SFA.
Where the Class A shares are subscribed or purchased under
Section 275 by a relevant person which is: (a) a
corporation (which is not an accredited investor) the sole
business of which is to hold investments and the entire share
capital of which is owned by one or more individuals, each of
whom is an accredited investor; or (b) a trust (where the
trustee is not an accredited investor) whose sole purpose is to
hold investments and each beneficiary is an accredited investor,
shares, debentures and units of shares and debentures of that
corporation or the beneficiaries rights and interest in
that trust shall not be transferable for 6 months after
that corporation or that trust has acquired the Class A
shares under Section 275 except: (1) to an
institutional investor under Section 274 of the SFA or to a
relevant person, or any person pursuant to Section 275(1A),
and in accordance with the conditions, specified in
Section 275 of the SFA; (2) where no consideration is
given for the transfer; or (3) by operation of law.
Class A shares have not been and will not be registered
under the Securities and Exchange Law of Japan (the Securities
and Exchange Law) and each underwriter has agreed that it will
not offer or sell any Class A shares, directly or
indirectly, in Japan or to, or for the benefit of, any resident
of Japan (which term as used herein means any person resident in
Japan, including any corporation or other entity organized under
the laws of Japan), or to others for re-offering or resale,
directly or indirectly, in Japan or to a resident of Japan,
except pursuant to an exemption from the registration
requirements of, and otherwise in compliance with, the
Securities and Exchange Law and any other applicable laws,
regulations and ministerial guidelines of Japan.
Copa Holdings and the selling shareholder have agreed to
indemnify the several underwriters against certain liabilities,
including liabilities under the Securities Act or to contribute
to payments the underwriters may be required to make because of
any of these liabilities.
From time to time, certain of the underwriters have provided,
and may provide in the future, investment banking, commercial
banking and other financial services to Copa Holdings and
Continental for which they have received and may continue to
receive customary fees and commissions.
Under U.S. federal securities laws, Continental, as the
selling shareholder, may be deemed to be an underwriter.
112
EXPENSES
OF THE OFFERING
We estimate that the total expenses in connection with this
offering, other than underwriting discounts and commissions,
will be as follows:
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|
|
|
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|
|
|
|
|
|
|
|
|
Percentage of
|
|
|
|
|
|
|
Net Proceeds of
|
|
Expenses
|
|
Amount
|
|
|
This Offering (%)
|
|
|
Securities and Exchange Commission
registration fee
|
|
$
|
18,524.41
|
|
|
|
*
|
|
National Association of Securities
Dealers, Inc. filing fee
|
|
|
18,189.88
|
|
|
|
*
|
|
Printing and engraving expenses
|
|
|
86,000.00
|
|
|
|
*
|
|
Legal fees and expenses
|
|
|
300,000.00
|
|
|
|
*
|
|
Accountant fees and expenses
|
|
|
75,000.00
|
|
|
|
*
|
|
Miscellaneous costs
|
|
|
50,000.00
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
547,714.29
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
* We will not receive any of the net proceeds of this
offering.
All amounts in the table are estimated except the Securities and
Exchange Commission registration fee, and the NASD filing fee.
Pursuant to the Registration Rights Agreement among CIASA,
Continental and ourselves, Continental is required to pay
(i) all of the underwriting commissions, filing fees,
listing fees and legal fees and expenses (other than that of our
independent certified public accountant and of our counsel) and
(ii) 50% of all other expenses incurred by us in connection
with this offering. The total underwriting discounts and
commissions that the selling shareholder will be required to pay
will be $6,779,718.75 million or 4.75% of the gross
proceeds of this offering.
VALIDITY
OF SECURITIES
The validity of the Class A shares and other matters
governed by Panamanian law will be passed upon for us and the
underwriters by Galindo, Arias & Lopez, Panama City,
Panama. Certain matters of New York law will be passed upon for
us by Simpson Thacher & Bartlett LLP, New York, New
York. Messrs. Jaime Arias and Ricardo Alberto Arias,
partners of Galindo, Arias & Lopez, are indirect
shareholders of CIASA and serve on our board of directors.
EXPERTS
Our consolidated financial statements and schedule at
December 31, 2005 and 2004, and for each of the three years
in the period ended December 31, 2005, appearing in this
prospectus and registration statement have been audited by
Ernst & Young, Panama, independent registered public
accounting firm, as set forth in their reports and are included
in reliance upon Ernst & Youngs reports given on
their authority as experts in accounting and auditing.
WHERE YOU
CAN FIND MORE INFORMATION
We have filed with the Commission a registration statement
(including amendments and exhibits to the registration
statement) on
Form F-1
under the Securities Act. This prospectus, which is part of the
registration statement, does not contain all of the information
set forth in the registration statement and the exhibits and
schedules to the registration statement. For further
information, we refer you to the registration statement and the
exhibits and schedules filed as part of the registration
statement. If a document has been filed as an exhibit to the
registration statement, we refer you to the copy of the document
that has been filed. Each statement in this prospectus relating
to a document filed as an exhibit is qualified in all respects
by the filed exhibit.
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
113
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 an Internet 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 intend to furnish our
shareholders with annual reports containing financial statements
audited by our independent auditors and to make available to our
shareholders quarterly reports containing unaudited financial
data for the first three quarters of each fiscal year. We plan
to file quarterly financial statements with the SEC within two
months of the first three quarters of our fiscal year, and we
will 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.
114
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
THE BOARD OF
DIRECTORS AND SHAREHOLDERS
COPA HOLDINGS, S. A.
We have audited the accompanying consolidated balance sheets of
Copa Holdings, S. A. and its subsidiaries (the
Company) as of December 31, 2005 and 2004, and the
related consolidated statements of income, shareholders
equity, and cash flows for each of the three years in the period
ended December 31, 2005. These consolidated financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Companys internal control over financial
reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of the Company and its
subsidiaries at December 31, 2005 and 2004, and the
consolidated results of their operations and their cash flows
for each of the three years in the period ended
December 31, 2005, in conformity with U.S. generally
accepted accounting principles.
/s/ Ernst and Young
Panama City, Republic of Panama
April 28, 2006
F-2
COPA
HOLDINGS, S. A. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
As of
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In US$ thousands, except share
and per share data)
|
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
94,106
|
|
|
$
|
99,666
|
|
Short-term investments
|
|
|
20,384
|
|
|
|
11,277
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents and
short-term investments
|
|
|
114,490
|
|
|
|
110,943
|
|
Accounts receivable, net of
allowance for doubtful accounts of $4,911 and $2,622 as of
December 31, 2005 and 2004, respectively
|
|
|
49,044
|
|
|
|
27,706
|
|
Accounts receivable from related
parties
|
|
|
448
|
|
|
|
|
|
Expendable parts and supplies, net
of allowance for obsolescence of $9 and $1,739 as of
December 31, 2005 and 2004, respectively
|
|
|
4,070
|
|
|
|
2,333
|
|
Prepaid expenses
|
|
|
13,502
|
|
|
|
8,403
|
|
Other current assets
|
|
|
3,239
|
|
|
|
2,702
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
184,793
|
|
|
|
152,087
|
|
Long-term Investments
|
|
|
26,175
|
|
|
|
3,948
|
|
Property and
Equipment:
|
|
|
|
|
|
|
|
|
Owned property and equipment:
|
|
|
|
|
|
|
|
|
Flight equipment
|
|
|
628,876
|
|
|
|
593,825
|
|
Other
|
|
|
35,899
|
|
|
|
27,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
664,775
|
|
|
|
621,058
|
|
Less: Accumulated depreciation
|
|
|
(79,985
|
)
|
|
|
(87,037
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
584,790
|
|
|
|
534,021
|
|
Purchase deposits for flight
equipment
|
|
|
52,753
|
|
|
|
7,190
|
|
|
|
|
|
|
|
|
|
|
Total Property and Equipment
|
|
|
637,543
|
|
|
|
541,211
|
|
Other Assets:
|
|
|
|
|
|
|
|
|
Prepaid pension asset
|
|
|
1,261
|
|
|
|
1,153
|
|
Goodwill
|
|
|
20,512
|
|
|
|
|
|
Other intangible asset
|
|
|
31,298
|
|
|
|
|
|
Other assets, net
|
|
|
15,330
|
|
|
|
3,651
|
|
|
|
|
|
|
|
|
|
|
Total Other Assets
|
|
|
68,401
|
|
|
|
4,804
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
916,912
|
|
|
$
|
702,050
|
|
|
|
|
|
|
|
|
|
|
F-3
COPA
HOLDINGS, S. A. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS(Continued)
|
|
|
|
|
|
|
|
|
|
|
As of
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In US$ thousands, except share
and per share data)
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Current maturities of long-term
debt
|
|
$
|
67,905
|
|
|
$
|
30,573
|
|
Accounts payable
|
|
|
44,848
|
|
|
|
25,335
|
|
Accounts payable to related parties
|
|
|
7,750
|
|
|
|
3,733
|
|
Air traffic liability
|
|
|
85,673
|
|
|
|
53,423
|
|
Taxes and interest payable
|
|
|
27,450
|
|
|
|
16,269
|
|
Accrued expenses payable
|
|
|
14,780
|
|
|
|
12,848
|
|
Other current liabilities
|
|
|
5,573
|
|
|
|
830
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
253,979
|
|
|
|
143,011
|
|
Non-Current
Liabilities:
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
402,954
|
|
|
|
380,827
|
|
Post employment benefits liability
|
|
|
1,283
|
|
|
|
1,158
|
|
Other long-term liabilities
|
|
|
8,790
|
|
|
|
1,310
|
|
Deferred tax liabilities
|
|
|
4,039
|
|
|
|
1,589
|
|
|
|
|
|
|
|
|
|
|
Total Non-Current Liabilities
|
|
|
417,066
|
|
|
|
384,884
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
671,045
|
|
|
|
527,895
|
|
|
|
|
|
|
|
|
|
|
Shareholders
Equity:
|
|
|
|
|
|
|
|
|
Class A common
stock30,034,375 shares authorized, issued, and
outstanding
|
|
|
19,813
|
|
|
|
19,813
|
|
Class B common
stock12,778,125 shares authorized, issued, and
outstanding
|
|
|
9,410
|
|
|
|
9,410
|
|
Retained earnings
|
|
|
217,862
|
|
|
|
144,932
|
|
Accumulated other comprehensive
loss
|
|
|
(1,218
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Shareholders Equity
|
|
|
245,867
|
|
|
|
174,155
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and
Shareholders Equity
|
|
$
|
916,912
|
|
|
$
|
702,050
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
F-4
COPA
HOLDINGS, S. A. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In US$ thousands, except share
and per share data)
|
|
|
Operating Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger revenue
|
|
$
|
565,131
|
|
|
$
|
364,611
|
|
|
$
|
311,683
|
|
Cargo, mail and other
|
|
|
43,443
|
|
|
|
35,226
|
|
|
|
30,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
608,574
|
|
|
|
399,837
|
|
|
|
341,789
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft fuel
|
|
|
149,303
|
|
|
|
62,549
|
|
|
|
48,512
|
|
Salaries and benefits
|
|
|
69,730
|
|
|
|
51,701
|
|
|
|
45,254
|
|
Passenger servicing
|
|
|
50,622
|
|
|
|
39,222
|
|
|
|
36,879
|
|
Commissions
|
|
|
45,087
|
|
|
|
29,073
|
|
|
|
27,681
|
|
Maintenance, material and repairs
|
|
|
32,505
|
|
|
|
19,742
|
|
|
|
20,354
|
|
Reservations and sales
|
|
|
29,213
|
|
|
|
22,118
|
|
|
|
18,011
|
|
Aircraft rentals
|
|
|
27,631
|
|
|
|
14,445
|
|
|
|
16,686
|
|
Flight operations
|
|
|
24,943
|
|
|
|
17,904
|
|
|
|
15,976
|
|
Depreciation
|
|
|
19,857
|
|
|
|
19,279
|
|
|
|
14,040
|
|
Landing fees and other rentals
|
|
|
17,909
|
|
|
|
12,155
|
|
|
|
10,551
|
|
Other
|
|
|
32,622
|
|
|
|
29,306
|
|
|
|
25,977
|
|
Fleet impairment charges
|
|
|
|
|
|
|
|
|
|
|
3,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
499,422
|
|
|
|
317,494
|
|
|
|
283,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
109,152
|
|
|
|
82,343
|
|
|
|
58,296
|
|
Non-operating Income
(Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(21,629
|
)
|
|
|
(16,488
|
)
|
|
|
(11,613
|
)
|
Interest capitalized
|
|
|
1,089
|
|
|
|
963
|
|
|
|
2,009
|
|
Interest income
|
|
|
3,584
|
|
|
|
1,423
|
|
|
|
887
|
|
Other, net
|
|
|
395
|
|
|
|
6,063
|
|
|
|
2,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,561
|
)
|
|
|
(8,039
|
)
|
|
|
(6,163
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before Income
Taxes
|
|
|
92,591
|
|
|
|
74,304
|
|
|
|
52,133
|
|
Provision for Income Taxes
|
|
|
9,592
|
|
|
|
5,732
|
|
|
|
3,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
82,999
|
|
|
$
|
68,572
|
|
|
$
|
48,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
1.94
|
|
|
$
|
1.60
|
|
|
$
|
1.13
|
|
Shares used for computation
|
|
|
42,812,500
|
|
|
|
42,812,500
|
|
|
|
42,812,500
|
|
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
F-5
COPA
HOLDINGS, S. A. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
(No-par value)
|
|
|
Issued Capital
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
|
|
|
|
Class A
|
|
|
Class B
|
|
|
Class A
|
|
|
Class B
|
|
|
Earnings
|
|
|
Loss
|
|
|
Total
|
|
|
|
(In US$ thousands, except share
and per share data)
|
|
|
At December 31,
2002
|
|
|
30,034,375
|
|
|
|
12,778,125
|
|
|
$
|
19,813
|
|
|
$
|
9,410
|
|
|
$
|
37,871
|
|
|
|
|
|
|
$
|
67,094
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48,489
|
|
|
|
|
|
|
|
48,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
2003
|
|
|
30,034,375
|
|
|
|
12,778,125
|
|
|
|
19,813
|
|
|
|
9,410
|
|
|
|
86,360
|
|
|
|
|
|
|
|
115,583
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68,572
|
|
|
|
|
|
|
|
68,572
|
|
Dividends declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,000
|
)
|
|
|
|
|
|
|
(10,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
2004
|
|
|
30,034,375
|
|
|
|
12,778,125
|
|
|
|
19,813
|
|
|
|
9,410
|
|
|
|
144,932
|
|
|
|
|
|
|
|
174,155
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82,999
|
|
|
|
|
|
|
|
82,999
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,218
|
)
|
|
|
(1,218
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81,781
|
|
Dividends Declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,069
|
)
|
|
|
|
|
|
|
(10,069
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
2005
|
|
|
30,034,375
|
|
|
|
12,778,125
|
|
|
$
|
19,813
|
|
|
$
|
9,410
|
|
|
$
|
217,862
|
|
|
$
|
(1,218
|
)
|
|
$
|
245,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
F-6
COPA
HOLDINGS, S. A. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In US$ thousands)
|
|
|
Cash flows from operating
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
82,999
|
|
|
$
|
68,572
|
|
|
$
|
48,489
|
|
Adjustments for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
(885
|
)
|
|
|
(519
|
)
|
|
|
447
|
|
Depreciation
|
|
|
19,857
|
|
|
|
19,279
|
|
|
|
14,040
|
|
(Gain) / Loss on sale of property
and equipment
|
|
|
(1,340
|
)
|
|
|
(1,125
|
)
|
|
|
|
|
Fleet impairment charge
|
|
|
|
|
|
|
|
|
|
|
3,572
|
|
Provision for doubtful accounts
|
|
|
812
|
|
|
|
1,026
|
|
|
|
2,154
|
|
Provision for obsolescence of
expendable parts and supplies
|
|
|
3
|
|
|
|
6
|
|
|
|
938
|
|
Derivative instruments mark to
market
|
|
|
(165
|
)
|
|
|
945
|
|
|
|
(207
|
)
|
Changes in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(11,252
|
)
|
|
|
2,287
|
|
|
|
(9,167
|
)
|
Accounts receivable from related
parties
|
|
|
(448
|
)
|
|
|
|
|
|
|
|
|
Other current assets
|
|
|
278
|
|
|
|
(3,317
|
)
|
|
|
(2,130
|
)
|
Other assets
|
|
|
(9,321
|
)
|
|
|
(1,430
|
)
|
|
|
(402
|
)
|
Accounts payable
|
|
|
(4,330
|
)
|
|
|
25
|
|
|
|
295
|
|
Accounts payable to related parties
|
|
|
4,017
|
|
|
|
1,089
|
|
|
|
1,063
|
|
Air traffic liability
|
|
|
27,759
|
|
|
|
6,200
|
|
|
|
8,809
|
|
Other liabilities
|
|
|
11,105
|
|
|
|
5,013
|
|
|
|
5,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
119,089
|
|
|
|
98,051
|
|
|
|
73,479
|
|
Cash flows from investing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of investments
|
|
|
(48,294
|
)
|
|
|
(38,082
|
)
|
|
|
|
|
Proceed from redemption of
investments
|
|
|
20,658
|
|
|
|
30,639
|
|
|
|
19
|
|
Restricted cash
|
|
|
(3,698
|
)
|
|
|
582
|
|
|
|
82
|
|
Advance payments on aircraft
purchase contracts
|
|
|
(49,461
|
)
|
|
|
(16,314
|
)
|
|
|
(41,232
|
)
|
Acquisition of property and
equipment
|
|
|
(63,296
|
)
|
|
|
(65,764
|
)
|
|
|
(112,181
|
)
|
Disposal of property and equipment
|
|
|
2,803
|
|
|
|
3,201
|
|
|
|
1,510
|
|
Purchase of AeroRepublica, net of
acquired cash
|
|
|
(22,282
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows used in
investing activities
|
|
|
(163,570
|
)
|
|
|
(85,738
|
)
|
|
|
(151,802
|
)
|
Cash flows from financing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from loans and borrowings
|
|
|
68,416
|
|
|
|
101,198
|
|
|
|
140,732
|
|
Payments on loans and borrowings
|
|
|
(46,929
|
)
|
|
|
(32,125
|
)
|
|
|
(21,969
|
)
|
Issuance of bonds
|
|
|
27,503
|
|
|
|
6,357
|
|
|
|
21,736
|
|
Redemption of bonds
|
|
|
|
|
|
|
(35,675
|
)
|
|
|
(35,201
|
)
|
Dividends declared and paid
|
|
|
(10,069
|
)
|
|
|
(10,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows provided by
financing activities
|
|
|
38,921
|
|
|
|
29,755
|
|
|
|
105,298
|
|
F-7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In US$ thousands)
|
|
|
Net (decrease) increase in cash
and cash equivalents
|
|
|
(5,560
|
)
|
|
|
42,068
|
|
|
|
26,975
|
|
Cash and cash equivalents at
January 1st
|
|
|
99,666
|
|
|
|
57,598
|
|
|
|
30,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at
December 31
|
|
$
|
94,106
|
|
|
$
|
99,666
|
|
|
$
|
57,598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash
flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid, net of amount
capitalized
|
|
$
|
21,126
|
|
|
$
|
16,021
|
|
|
$
|
10,449
|
|
Income taxes paid
|
|
|
7,411
|
|
|
|
4,286
|
|
|
|
2,400
|
|
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
F-8
COPA
HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Corporate
Information
Copa Holdings, S. A. (the Company) is a leading
Latin American provider of international airline passenger and
cargo services. The Company was incorporated according to the
laws of the Republic of Panama. The Company owns 99.8% of the
shares of Compañía Panameña de Aviación, S.
A. (Copa), 100% of the shares of Oval Financial
Leasing, Ltd. (OVAL), OPAC, S. A.
(OPAC), and 99.7% of the shares of
AeroRepública, S.A. (AeroRepública).
Copa, the Companys core operation, is incorporated
according to the laws of the Republic of Panama and provides
international air transportation for passengers, cargo and mail.
Copa operates from its Panama City hub in the Republic of
Panama, from where it offers approximately 92 daily scheduled
flights among 30 destinations in 20 countries in North, Central
and South America and the Caribbean. Additionally, Copa provides
passengers with access to flights to more than 120 other
international destinations through codeshare agreements with
Continental Airlines, Inc. (Continental) and other
airlines. The Company has a broad commercial alliance with
Continental which includes joint marketing, code-sharing
arrangements, participation in Continentals OnePass
frequent flyer loyalty program and access to Continentals
VIP lounge program, Presidents Club, along with other
benefits such as improved purchasing power in negotiations with
service providers, aircraft vendors and insurers. As of
December 31, 2005, Copa operated a fleet of 24 aircraft
with an average age of 3.2 years; consisting of 22 modern
Boeing 737-Next Generation aircraft and two (2) Embraer 190
aircraft. OVAL is incorporated according to the laws of the
British Virgin Islands, and controls the special-purpose
vehicles that have a beneficial interest in 17 aircraft, with a
carrying value of $531 million, all of which are leased to
Copa. The aircraft are pledged as collateral for the obligation
of the special-purpose vehicles, which are all consolidated by
the Company for financial reporting purposes; however, the
creditors of the special-purpose vehicles have no recourse to
the general credit of the Company or Copa. OPAC is incorporated
according to the laws of the Republic of Panama, and owns the
old corporate headquarters building located in Panama City.
Additionally, during 2005 the Company purchased 99.7% of
AeroRepública, a domestic Colombian air carrier, which is
incorporated according to the laws of the Republic of Colombia
and operates a fleet of eleven leased MD-80s and two owned DC-9s
as of December 31, 2005 (See Note 2).
On December 15, 2005, the Company concluded the initial
public listing on the New York Stock Exchange (NYSE)
and its principal shareholders sold 18,112,500 shares of
Class A common stock held by them. Cost related to this
initial public listing amounted $3.7 million which are
included as a component of Other, net within
Non-operating income (expense) in the Consolidated Statements of
Income.
A substantial portion of the Companys assets are located
in the Republic of Panama, a significant proportion of the
Companys customers are Panamanian, and substantially all
of the Companys flights operate through its hub at Tocumen
International Airport in Panama City. As a result, the Company
depends on economic and political conditions prevailing from
time to time in Panama.
As used in these Notes to Consolidated Financial Statements, the
terms the Company, we, us,
our and similar terms refer to Copa Holdings, S.A.
and, unless the context indicates otherwise, its consolidated
subsidiaries.
1. Summary
of Significant Accounting Policies
Basis
of Presentation
These consolidated financial statements were prepared in
accordance with U.S. generally accepted accounting
principles for financial reporting using the U.S. Dollar as
the reporting currency.
Principles
of Consolidation
The consolidated financial statements comprise the accounts of
the Company and its subsidiaries. The financial statements of
subsidiaries are prepared for the same reporting period as the
parent company, using
F-9
COPA
HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
consistent accounting policies. Subsidiaries are consolidated
from the date on which control is transferred to the Company and
cease to be consolidated from the date on which control is
transferred from the Company. All intercompany accounts,
transactions and profits arising from consolidated entities have
been eliminated in consolidation.
Use of
Estimates
The preparation of the consolidated financial statements
requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ
from those estimates.
Cash
and Cash Equivalents
Cash and cash equivalents comprise cash at banks, short-term
time deposits, asset-backed commercial paper and securities, and
U.S. agency securities with original maturities of three
months or less when purchased.
Investments
The Company invests in short-term time deposits, asset-backed
commercial paper and securities, and U.S. government agency
securities with original maturities of more than three months
but less than one year. Additionally, the Company invests in
long-term time deposits and U.S. government agency
securities with maturities greater than 365 days. These
investments are classified as short-term and long-term
investments respectively, in the accompanying Consolidated
Balance Sheets. All of these investments are classified as
held-to-maturity
securities, and are stated at their amortized cost, since the
Company has determined that it has the intent and ability to
hold the securities to maturity. Restricted cash is classified
within long-term investments, and are primarily held as
collateral for letters of credit.
Expendable
Parts and Supplies
Expendable parts and supplies for flight equipment are carried
at average acquisition cost and are expensed when used in
operations. An allowance for obsolescence is provided over the
remaining estimated useful life of the related aircraft, plus an
allowance for expendable parts currently identified as excess to
reduce the carrying cost to net realizable value. These
allowances are based on management estimates, which are subject
to change.
F-10
COPA
HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Property
and Equipment
Property and equipment are recorded at cost and are depreciated
to estimated residual values over their estimated useful lives
using the straight-line method. Jet aircraft, jet engines and
aircraft rotables are assumed to have an estimated residual
value of 15% of original cost; other categories of property and
equipment are assumed to have no residual value. The estimated
useful lives for property and equipment are as follows:
|
|
|
|
|
Years
|
|
Building
|
|
40
|
Jet aircraft
|
|
25 to 30
|
Jet engines
|
|
10 to 30
|
Ground property and equipment
|
|
10
|
Furniture, fixture, equipment and
others
|
|
5 to 10
|
Software rights and licenses
|
|
3 to 8
|
Aircraft rotables
|
|
7 to 30
|
Leasehold improvements
|
|
Lesser of
|
|
|
remaining lease term
|
|
|
or useful life
|
Measurement
of Impairment of Long-Lived Assets
The Company records impairment losses on long-lived assets used
in operations, consisting principally of property and equipment,
when events or changes in circumstances indicate, in
managements judgment, that the assets might be impaired
and the undiscounted cash flows estimated to be generated by
those assets are less than the carrying amount of those assets.
Cash flow estimates are based on historical results adjusted to
reflect the Companys best estimate of future market and
operating conditions. The net carrying value of assets not
recoverable is reduced to fair value if lower than carrying
value. Estimates of fair value represent the Companys best
estimate based on industry trends and reference to market rates
and transactions and are subject to change.
Revenue
Recognition
Passenger
Revenue
Passenger revenue is recognized when transportation is provided
rather than when a ticket is sold. The amount of passenger
ticket sales not yet recognized as revenue is reflected as
Air traffic liability in the Consolidated Balance
Sheets. Tickets whose fares have expired
and/or are
one year old are recognized as passenger revenue. A significant
portion of the Companys ticket sales are processed through
major credit card companies, resulting in accounts receivable
which are generally short-term in duration and typically
collected prior to when revenue is recognized. The Company
believes that the credit risk associated with these receivables
is minimal.
Cargo and
Mail Services Revenue
Cargo and mail services revenue are recognized when the Company
provides the shipping services and thereby completes the earning
process.
Other
Revenue
Other revenue is primarily comprised of excess baggage charges,
commissions earned on tickets sold for flights on other airlines
and charter flights, and is recognized when transportation or
service is provided.
F-11
COPA
HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Frequent
Flyer Program
The Company participates in Continentals
OnePass frequent flyer program, for which the
Companys passengers receive all the benefits and
privileges offered by the OnePass program. Continental is
responsible for the administration of the OnePass program. Under
the terms of the Companys frequent flyer agreement with
Continental, OnePass members receive OnePass frequent flyer
mileage credits for travel on Copa and the Company pays
Continental a per mile rate for each mileage credit granted by
Continental, at which point the Company has no further
obligation. The amounts due to Continental under this agreement
are expensed by the Company as the mileage credits are earned.
Passenger
Traffic Commissions
Passenger traffic commissions are recognized as expense when the
transportation is provided and the related revenue is
recognized. Passenger traffic commissions paid but not yet
recognized as expense are included in Prepaid
expenses in the accompanying Consolidated Balance Sheets.
Foreign
Currency Transactions and Translation
The Companys functional currency is the U.S. Dollar,
the legal tender in Panama. Assets and liabilities in foreign
currencies are translated at
end-of-period
exchange rates, except for non-monetary assets, which are
translated at equivalent U.S. dollar costs at dates of
acquisition and maintained at historical rate. Operations are
translated at average exchange rates in effect during the
period. Foreign exchange gains and losses are included as a
component of Other, net within Non-operating income
(expense) in the Consolidated Statements of Income.
The financial statements of AeroRepública are measured
using the Colombian Peso as the functional currency; adjustments
to translate those statements into U.S. Dollars are
recorded in other comprehensive income.
In 2005, approximately 72% of the Companys expenses and
42% of the Companys revenues were denominated in
U.S. Dollars. The remainder of the Companys expenses
and revenues were denominated in the currencies of the various
countries to which the Company flies, with the largest
non-dollar amount denominated in Colombian pesos. The Company
currently does not hedge the risk of fluctuations in foreign
exchange rates; generally, its exposure to foreign currencies is
limited to a period of up to two weeks, from the time a sale is
completed to the time funds are repatriated into
U.S. Dollars.
Maintenance
and Repair Costs
Maintenance and repair costs for owned and leased flight
equipment, including the overhaul of aircraft components, are
charged to operating expenses as incurred. Engine overhaul costs
covered by
power-by-the-hour
arrangements are paid and expensed as incurred, on the basis of
hours flown per the contract. Maintenance reserves paid to
aircraft lessors in advance of the performance of major
maintenance activities are recorded as prepaid maintenance
within Other Assets and then recognized as maintenance expense
when the underlying maintenance is performed.
Employee
Profit Sharing
The Company sponsors a profit-sharing program for both
management and non-management personnel. For members of
management, profit-sharing is based on a combination of the
Companys performance as a whole and the achievement of
individual goals. Profit-sharing for non-management employees is
based solely on the Companys performance. The Company
accrues each month for the expected profit-sharing, which is
paid annually in February. Amounts accrued for the
Companys profit-sharing program as of December 31,
2005 and 2004 were $5.8 million and $5.5 million,
respectively.
Advertising
Costs
Advertising costs are expensed when incurred. The Company
recognized as advertising expense $3.7 million,
$2.8 million, and $3.4 million in 2005, 2004 and 2003,
respectively.
F-12
COPA
HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Income
Taxes
Deferred income taxes are provided under the liability method
and reflect the net tax effects of temporary differences between
the tax basis of assets and liabilities and their reported
amounts in the financial statements.
Goodwill
and Intangibles
The Company performs impairment testing, in accordance with
SFAS No. 142, Goodwill and Other Intangible
Assets, of goodwill separately from impairment testing
of indefinite-lived intangibles. The Company test goodwill for
impairment, at least annually on December 31, by reviewing
the book value compared to the fair value at the reporting
segment level and tests individually indefinite-lived
intangibles, at least annually, by reviewing the individual book
values compared to the fair value. Considerable management
judgment is necessary to evaluate the impact of operating and
macroeconomic changes and to estimate future cash flows to
measure fair value. Assumptions used in the Companys
impairment evaluations are consistent with internal projections
and operating plans. We did not recognize any material
impairment charges for goodwill or intangibles assets during the
years presented.
Reclassifications
Certain reclassifications have been made in the prior
years consolidated financial statements amounts and
related note disclosures to conform with the current years
presentation.
|
|
2.
|
Acquisition
of AeroRepública
|
On April 22, 2005, the Company acquired a controlling
ownership interest in AeroRepública, a Colombian domestic
airline. According to the Colombian Civil Aviation
Administration, Unidad Especial Administrativa de
Aeronáutica Civil, in 2005 AeroRepública was the
second-largest domestic carrier in Colombia in terms of number
of passengers carried, providing service to 11 cities in
Colombia with a
point-to-point
route network. As of the acquisition date AeroRepública
operated a fleet of seven (7) leased MD-80s and two
(2) owned DC-9s. The acquisition of AeroRepública
represents an attractive opportunity to increase the
Companys access and visibility to Colombia, one of the
largest airline passenger markets in Latin America with more
than 45 million inhabitants, and to improve
AeroRepúblicas operational and financial performance.
Colombia shares a border with Panama, and for historic, cultural
and business reasons it represents a significant market for many
Panamanian businesses. Management believes that operational
coordination with AeroRepública may create additional
passenger traffic in the Companys existing route network
by providing Colombian passengers more convenient access to the
international destinations served through the Companys
Panama hub.
The results of AeroRepúblicas operations have been
included in the Companys Consolidated Financial Statements
beginning April 22, 2005, the date the Company acquired an
initial 85.56% equity ownership interest in AeroRepública
and gained control of AeroRepública. The initial
acquisition was followed by subsequent acquisitions increasing
the total equity ownership interest in AeroRepública to
99.7% as of December 31, 2005. The total purchase price
paid through December 31, 2005 of $23.4 million,
including acquisition costs, was negotiated individually with
each of the respective selling parties and, largely due to the
factors described above, resulted in the recognition of
goodwill. The Company funded these acquisitions with a
combination of existing cash and short-term investments.
Under the purchase method of accounting, the total purchase
price is allocated to the net tangible and intangible assets of
AeroRepública based on their fair values as of the dates of
acquisition. Independent valuation specialists conducted an
independent valuation in order to assist management in
determining the fair values of a significant portion of these
assets. The work performed by the independent valuation
specialists has been considered in managements estimates
of the fair values reflected in the Consolidated Financial
Statements. This final valuation was based on the actual net
tangible and intangible assets of AeroRepública that
existed as of the date of acquisition.
F-13
COPA
HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The following table summarizes the Companys estimates of
the fair value of the assets acquired and liabilities assumed at
the date of acquisition (in millions).
|
|
|
|
|
Assets:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1.1
|
|
Accounts receivable
|
|
|
10.7
|
|
Prepaid expenses
|
|
|
2.6
|
|
Other current assets
|
|
|
4.7
|
|
Property, plant &
equipment
|
|
|
4.8
|
|
Goodwill
|
|
|
20.1
|
|
Intangibles
|
|
|
30.6
|
|
Other non-current assets
|
|
|
4.1
|
|
|
|
|
|
|
Total assets acquired
|
|
$
|
78.7
|
|
Liabilities:
|
|
|
|
|
Accounts payable
|
|
$
|
23.3
|
|
Air traffic liability
|
|
|
4.4
|
|
Accrued liabilities
|
|
|
7.6
|
|
Debt
|
|
|
10.2
|
|
Deferred tax liability
|
|
|
3.3
|
|
Other liabilities
|
|
|
6.5
|
|
|
|
|
|
|
Total liabilities
assumed
|
|
$
|
55.3
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
23.4
|
|
|
|
|
|
|
Of the total estimated purchase price, approximately
$50.7 million has been allocated to goodwill and intangible
assets with indefinite lives. Goodwill, approximately
$20.1 million, represents the excess of the purchase price
of the acquired business over the fair value of the underlying
net tangible and intangible assets and is recorded in the
AeroRepública segment. Intangible assets with indefinite
lives consist primarily of the fair value allocated to the
routes and the AeroRepública trade name, valued at
$25.7 million and $4.9 million, respectively.
AeroRepúblicas domestic route network within Colombia
was determined to have an indefinite useful life as the access
to each domestic city is limited to a set number of airline
carriers in addition to requiring the necessary permits to
operate within Colombia. The permit to fly into each city does
not have a set expiration date. The AeroRepública trade
name was determined to have an indefinite useful life due to
several factors and considerations, including the brand
awareness and market position, customer recognition and loyalty
and the continued use of the AeroRepública brand. In the
event that the Company determines that the value of goodwill or
intangible assets with indefinite lives has become impaired, the
Company will incur an accounting charge for the amount of
impairment during the period in which the determination is made.
During December 2005 and April 2006, the Company invested an
additional $8.0 million and $2.0 million in
AeroRepública, respectively, in exchange for
4.7 million and 1.2 million new shares of
AeroRepública, respectively. As a result of these
transactions the Companys total investment increased to
$33.4 million.
F-14
COPA
HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The following table presents pro forma financial information as
if the acquisition had occurred as of the beginning of each
period presented. The pro forma financial information is not
intended to represent or be indicative of the combined results
which would have occurred had the transaction actually been
consummated on the date indicated above and should not be taken
as representative of the consolidated results of operations
which may occur in the future (in millions except share data).
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(Unaudited)
|
|
|
Pro forma
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$
|
646.3
|
|
|
$
|
513.0
|
|
Operating Income
|
|
|
106.3
|
|
|
|
90.8
|
|
Income before income taxes
|
|
|
92.4
|
|
|
|
78.5
|
|
Net income
|
|
$
|
83.0
|
|
|
$
|
70.3
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
1.94
|
|
|
$
|
1.64
|
|
3. Long-Term
Debt
At December 31, long-term debt consisted of the following
(in millions):
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Long-term fixed rate debt
|
|
$
|
292.5
|
|
|
$
|
318.7
|
|
(Secured fixed rate indebtedness
due through 2017
|
|
|
|
|
|
|
|
|
Effective rates ranged from 3.98%
to 8.96%)
|
|
|
|
|
|
|
|
|
Long-term variable rate debt
|
|
|
150.9
|
|
|
|
92.7
|
|
(Secured variable rate
indebtedness due through 2017
|
|
|
|
|
|
|
|
|
Effective rates ranged from 4.15%
to 19.35%)
|
|
|
|
|
|
|
|
|
Private bond issuances
|
|
|
27.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unsecured variable rate
indebtedness due in 2006
|
|
|
|
|
|
|
|
|
Weighted average rate of 7.22%, as
of December 31, 2005)
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
470.9
|
|
|
|
411.4
|
|
Less current maturities
|
|
|
67.9
|
|
|
|
30.6
|
|
|
|
|
|
|
|
|
|
|
Long-term debt less current
maturities
|
|
$
|
403.0
|
|
|
$
|
380.8
|
|
|
|
|
|
|
|
|
|
|
Maturities of long-term debt for the next five years are as
follows (in millions):
|
|
|
|
|
Year ending December 31,
|
|
|
|
|
2006
|
|
$
|
67.9
|
|
2007
|
|
$
|
35.9
|
|
2008
|
|
$
|
35.4
|
|
2009
|
|
$
|
33.6
|
|
2010
|
|
$
|
31.9
|
|
Thereafter
|
|
$
|
266.2
|
|
F-15
COPA
HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
As of December 31, 2005 and 2004, the Company had
$337.1 million and $368.1 million of outstanding
indebtedness, respectively, that is owed to financial
institutions under financing arrangements guaranteed by the
Export-Import Bank of the United States. The Export-Import Bank
guarantees support 85% of the net purchase price of the aircraft
and are secured with a first priority mortgage on the aircraft
in favor of a security trustee on behalf of Export-Import Bank.
The Companys Export-Import Bank supported financings are
amortized on a quarterly basis, are denominated in dollars and
originally bear interest at a floating rate linked to LIBOR. The
Export-Import Bank guaranteed facilities typically offer an
option to fix the applicable interest rate. The Company has
exercised this option with respect to $292.5 million as of
December 31, 2005.
The Company effectively extends the maturity of its aircraft
financing to 15 years through the use of a Stretched
Overall Amortization and Repayment, or SOAR, structure
which provides serial draw-downs calculated to result in a 100%
loan accreting to a recourse balloon at the maturity of the
Export-Import Bank guaranteed loan which totaled
$23.0 million as of December 31, 2005.
The Company also typically finances portion of the purchase
price of the Boeing aircraft through commercial loans which
totaled $20.6 million as of December 31, 2005.
During 2005, the Company secured a senior term loan facility in
the amount of $134 million with PK AirFinance US, Inc., an
affiliate of General Electric, for the purchase of six
(6) Embraer 190 aircraft. The loans have a term of twelve
years. During 2005, the Company utilized $43.8 million of
this facility upon the delivery of two Embraer 190 aircraft, the
remainder of the facility will be drawn during 2006.
During 2005, the Company issued private bonds in the amount of
$27.5 million to fund advance delivery payments of two
(2) Boeing 737-700 aircraft having delivery months of May
and June 2006. The Company has granted, for the benefit of the
bondholders, a first priority security interest in the rights,
title and interest over the two (2) Boeing 737-700
aircraft. Interest on the bonds is paid on March 31,
June 30, September 30, and December 31 with the
balance of the bonds to be repaid upon delivery of the aircraft
for which the advance payments related.
See description of AeroRepúblicas debt in
Note 12.
Assets, primarily aircraft, subject to agreements securing the
Companys indebtedness amounted to $536.1 million and
$508.4 million as of December 31, 2005 and 2004
respectively.
4. Investments
The Company invests in time deposits, asset-backed commercial
paper and securities, and U.S. government agency
securities. These investments are classified within short-term
and long-term investments in the accompanying Consolidated
Balance Sheets. Investments are classified as
held-to-maturity
securities since the Company has the intent and the ability to
hold them until maturity. These investments are stated at their
amortized cost which is essentially the same as their fair
value. Long-term investments mature within three (3) years.
Restricted cash classified within long-term investments, held in
time deposits, amounted to $7.7 million and
$3.9 million as of December 31, 2005 and 2004,
respectively.
5. Leases
The Company leases certain aircraft and other assets under
long-term lease arrangements. Other leased assets include real
property, airport and terminal facilities, sales offices,
maintenance facilities, training centers and general offices.
Most contract leases include renewal options. Non-aircraft
related leases, primarily held with local governments, generally
have renewable terms of one year. In certain cases, the rental
payments during the renewal periods would be greater than the
current payments. Because the lease renewals are not considered
to be reasonably assured, as defined in SFAS No. 13,
Accounting for Leases, the rental payments
that would be due during the renewal periods are not included in
the determination of rent expense until the leases are renewed.
Leasehold improvements are amortized over the contractually
committed lease term, which does not include the renewal
periods. The Companys leases do not include residual value
guarantees.
F-16
COPA
HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
At December 31, 2005, the scheduled future minimum lease
payments under operating leases that have initial or remaining
non-cancelable lease terms in excess of one year are as follows
(in millions):
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
|
Aircraft
|
|
Non-Aircraft
|
|
Year ending December 31,
|
|
|
|
|
|
|
2006
|
|
$
|
33.4
|
|
$
|
3.6
|
2007
|
|
|
31.9
|
|
|
2.7
|
2008
|
|
|
28.8
|
|
|
2.4
|
2009
|
|
|
22.5
|
|
|
2.4
|
2010
|
|
|
12.6
|
|
|
2.3
|
Later years
|
|
|
14.3
|
|
|
7.8
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
143.5
|
|
$
|
21.2
|
|
|
|
|
|
|
|
Total rent expense was $35.4 million, $20.0 million
and $21.6 million for the years ended December 31,
2005, 2004 and 2003, respectively.
6. Financial
Instruments and Risk Management
Fuel
Price Risk Management
The Company periodically enters into crude oil call options, jet
fuel zero cost collars, and jet fuel swap contracts to provide
for short to mid-term hedge protection (generally three to
eighteen months) against sudden and significant increases in jet
fuel prices, while simultaneously ensuring that the Company is
not competitively disadvantaged in the event of a substantial
decrease in the price of jet fuel. The Company does not hold or
issue derivative financial instruments for trading purposes.
The Companys derivatives have historically not qualified
as hedges for financial reporting purposes in accordance with
SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. Accordingly,
changes in the fair value of such derivative contracts, which
amounted to $0.2 million, ($0.9) million and
$0.2 million in years 2005, 2004 and 2003 respectively,
were recorded as a component of Other, net within
Non-operating income (expense). The fair value of hedge
contracts amounted to $0.3 million and $0.2 million at
December 31, 2005 and 2004, respectively, and was recorded
in Other current assets in the Consolidated Balance
Sheets. The Companys purchases of jet fuel are made
substantially from one supplier.
As of December 31, 2005, the Company held derivative
instruments on 10% of its projected 2006 fuel consumption, as
compared with derivatives held on 12% of actual fuel consumed in
2005.
Debt
The fair value of the Companys debt with a carrying value
of $470.9 million and $411.4 million as of
December 31, 2005 and 2004, respectively, was approximately
$469.0 million and $438.5 million. These estimates
were based on the discounted amount of future cash flows using
the Companys current incremental rate of borrowing for a
similar liability.
F-17
COPA
HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Other
Financial Instruments
The carrying amounts of cash, cash equivalents, restricted cash,
accounts receivable and accounts payable approximate fair value
due to their short-term nature.
7. Issued
Capital and Corporate Reorganization
On November 23, 2005, the Companys Board of Directors
approved a reorganization of the Companys capital stock.
Following the reorganization, the Companys 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. Immediately
following the reorganization, there were 30,034,375 Class A
shares outstanding, 12,778,125 Class B shares outstanding,
all owned by CIASA (a Panamanian entity), and no Class C
shares outstanding. The reorganization did not impact the
operations or financial condition of the Company in any respect
and, as such, does not result in a new basis of accounting. All
share and per share information for all periods presented have
been restated to give retroactive effect to the reorganization.
Class A and Class B shares have the same economic
rights and privileges, including the right to receive dividends,
except that the holders of the Class A shares are not
entitled to vote at the Companys shareholders
meetings, except in connection with a transformation of the
Company into another corporate type; a merger, consolidation or
spin-off of the Company; a change of corporate purpose;
voluntarily delisting Class A shares from the NYSE;
approving the nomination of independent directors nominated by
the Companys Board of Directors Nominating and
Corporate Governance Committee; and any amendment to the
foregoing special voting provisions adversely affecting the
rights and privileges of the Class A shares.
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 the
Companys Class B shares ever represent fewer than 10%
of the total number of shares of the Companys common stock
outstanding and the Independent Directors Committee of the
Companys Board of Directors (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. 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 the
Companys 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.
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.
The Class C shares will have no economic value and will not
be transferable, but will possess such voting rights as the
Independent Directors Committee shall deem necessary to ensure
the effective control of the Company by Panamanians. The
Class C shares will be redeemable by the Company at such
time as the Independent Directors Committee determines that a
triggering event, as discussed below, shall no longer be in
effect. The Class C shares will not be entitled to any
dividends or any other economic rights.
The Panamanian Aviation Act, including the related decrees and
regulations, which regulates the aviation industry in the
Republic of Panama, requires that substantial
ownership and effective control of Copa remain
in the hands of Panamanian nationals. Under certain of the
bilateral treaties between Panama and other countries pursuant
to which the Company has the right to fly to those other
countries and over their territory, the Company must continue to
have substantial Panamanian ownership and effective control to
retain these rights. Neither substantial ownership
nor effective control are defined in the Panamanian
Aviation Act or in the bilateral treaties, and it is unclear how
a Panamanian court or, in the case of the bilateral treaties,
foreign regulatory
F-18
COPA
HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
authorities might interpret these requirements. 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 Panamanian 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
Panamanian 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 the Company. 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 the Independent Directors Committee) and
the Independent Directors Committee determines that it is
reasonably likely that the Companys 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 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
and/or
authorize the issuance to Class B shareholders such number
of Class C shares as the Independent Directors Committee,
or the Board of Directors if applicable, deems necessary and
with such other terms and conditions established by the
Independent Directors Committee that do not confer economic
rights on the Class C shares.
On December 15, 2005, the Companys primary
shareholders, Continental and CIASA, concluded the initial
public listing of the Company on the NYSE and selling
18,112,500 shares of Class A common stock at
$20.00 per share previously held by these shareholders.
Proceeds of $344.1 million, net of the commissions and
discounts of $18.1 million, were received directly by the
selling shareholders with no proceeds being received by the
Company.
8. Income
Taxes
The Company pays taxes in the Republic of Panama and in other
countries in which it operates, based on regulations in effect
in each respective country. The Companys revenues come
principally from foreign operations and according to the
Panamanian Fiscal Code these foreign operations are not subject
to income tax in Panama.
In the past, the Companys expenses attributable to
operations in Panama have consistently exceeded the revenue
attributable to operations in Panama. As a result, the Company
typically experienced losses for Panamanian income tax purposes
and did not recognize any Panamanian income tax obligations
through the year ended December 31, 2003. Beginning in
2004, the Company adopted an alternate method of calculating
income tax in Panama. Under this alternative method, based on
Article 121 of the Panamanian Fiscal Code, income for
international transportation companies is calculated based on a
territoriality method that determines gross revenues earned in
Panama by applying the percentage of miles flown within the
Panamanian territory against total revenues. Under this method,
loss carry forwards cannot be applied to offset tax liability.
Dividends from the Companys Panamanian subsidiaries,
including Copa Airlines, are separately subject to a ten percent
tax if such dividends can be shown to be derived from income
from sources in Panama.
The Company is also subject to local tax regulations in each of
the jurisdictions where it operates, the great majority of which
are related to the taxation of income. In some of the countries
to which the Company flies, the Company does not pay any income
taxes because it does not generate taxable income under the laws
of those countries or because of treaties or other arrangements
those countries have with Panama. In the remaining countries,
the Company pays income tax at a rate ranging from 25% to 35% of
income. Different countries calculate income in different ways,
but they are typically derived from sales in the applicable
country multiplied by the Companys net margin or by a
presumed net margin set by the relevant tax legislation. The
determination of the Companys taxable income in several
countries is based on a combination of revenues sourced to each
particular country and the allocation of expenses of the
Companys 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
F-19
COPA
HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
regulations, and therefore is subject to interpretation by both
the Company and the respective taxing authorities. Additionally,
in some countries, the applicability of certain regulations
governing non-income taxes and the determination of the filing
status of the Company are also subject to interpretation. The
Company cannot estimate the amount, if any, of the potential tax
liabilities that might result if the allocations,
interpretations and filing positions used by the Company in its
income tax returns were challenged by the taxing authorities of
one or more countries.
Under a reciprocal exemption confirmed by a bilateral agreement
between Panama and the United States the Company is exempt from
the U.S. source transportation income tax derived from the
international operation of aircraft.
The provision for income taxes recorded in the Consolidated
Statements of Income was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
|
2003
|
|
Panama
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
0.8
|
|
$
|
0.7
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
7.9
|
|
|
5.5
|
|
|
|
3.2
|
Deferred
|
|
|
0.9
|
|
|
(0.5
|
)
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9.6
|
|
$
|
5.7
|
|
|
$
|
3.6
|
|
|
|
|
|
|
|
|
|
|
|
The Company paid taxes of $7.4 million, $4.3 million
and $2.4 million in years 2005, 2004 and 2003, respectively.
Pretax income, based on the Copa Airlines internal route
profitability measures, related to Panamanian operations was
$32.3 million, $25.5 million, and $23.5 million
in 2005, 2004, and 2003, respectively, and related to foreign
operations was $60.3 million, $48.8 million, and
$28.6 million in 2005, 2004, and 2003, respectively.
AeroRepúblicas benefit from operating loss
carryforwards amounted to $1.8 million as of
December 31, 2005. The benefit from operating loss
carryforwards are available for a period of seven (7) years
from when they were realized.
Income tax returns for all companies incorporated in the
Republic of Panama are subject to review by tax authorities up
to the last three (3) years, including the year ended
December 31, 2005 according to current tax regulations. For
other countries where the Company operates, it is subject to
review by their respective tax authorities for periods ranging
from the last two (2) to six (6) years.
The amount of income tax expense incurred in Panama prior to
2004 varies from the Panamanian statutory rate because of the
excess of Panamanian source expenses over Panamanian source
revenues, and, beginning in 2004, the tax varies from the
statutory rate because of the Panamanian gross tax election.
Income taxes outside of Panama are generally determined on the
basis of net income or revenue, and all of the countries have
rates that vary from the Panamanian statutory rate.
F-20
COPA
HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The reconciliations of income tax computed at the Panamanian
statutory tax rate to income tax expense for the years ended
December 31 are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Percentage
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Provision for income taxes at
Panamanian statutory rates
|
|
$
|
27.8
|
|
|
$
|
22.3
|
|
|
$
|
15.6
|
|
|
|
30.0
|
%
|
|
|
30.0
|
%
|
|
|
30.0
|
%
|
Panamanian gross tax election
|
|
|
(8.9
|
)
|
|
|
(6.9
|
)
|
|
|
|
|
|
|
(9.6
|
)%
|
|
|
(9.3
|
)%
|
|
|
|
|
Impact of excess of Panamanian
source expenses over Panamanian source revenues
|
|
|
|
|
|
|
|
|
|
|
(7.0
|
)
|
|
|
|
|
|
|
|
|
|
|
(13.5
|
)%
|
Difference in Panamanian statutory
rates and non-Panamanian statutory rates
|
|
|
(9.3
|
)
|
|
|
(9.7
|
)
|
|
|
(5.0
|
)
|
|
|
(10.0
|
)%
|
|
|
(13.0
|
)%
|
|
|
(9.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
9.6
|
|
|
$
|
5.7
|
|
|
$
|
3.6
|
|
|
|
10.4
|
%
|
|
|
7.7
|
%
|
|
|
7.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes are provided under the liability method
and reflect the net tax effects of temporary differences between
the tax basis of assets and liabilities and their reported
amounts in the financial statements.
Significant components of the Companys deferred tax
liabilities and assets are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Maintenance reserves
|
|
$
|
(1.5
|
)
|
|
$
|
(1.5
|
)
|
Pension obligation
|
|
|
(0.1
|
)
|
|
|
(0.2
|
)
|
Other assets
|
|
|
(1.1
|
)
|
|
|
|
|
Others
|
|
|
(1.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(4.0
|
)
|
|
|
(1.7
|
)
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Post-employment benefit obligation
|
|
|
0.1
|
|
|
|
0.1
|
|
Allowance for doubtful receivables
|
|
|
0.8
|
|
|
|
|
|
Expendable parts and supplies
|
|
|
1.1
|
|
|
|
|
|
Prepaid expenses
|
|
|
0.5
|
|
|
|
|
|
Others
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
2.8
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
(1.2
|
)
|
|
$
|
(1.6
|
)
|
|
|
|
|
|
|
|
|
|
The Companys deferred tax assets recognized in the
Consolidated Balance Sheets, within other current assets, for
AeroRepública segment was $2.7 million for 2005.
9. Employee
Benefit Plans
The Company, in accordance with Panamanian labor laws, is
required to establish and fund both a severance fund and a
termination indemnity plan.
The Company contributes to the Severance Fund based on 1.92% of
applicable wages paid annually. Upon cessation of the labor
relationship, regardless of cause, the company is required to
pay the employee the amount accumulated up to the cessation of
the labor relationship. This plan is accounted for as a defined
benefit pension plan under SFAS No. 87,
Employers Accounting for Pensions,
whereby pension benefit expense is recognized over the
employees approximate service periods.
F-21
COPA
HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The Company contributes to the Termination Indemnity Plan based
on 0.33% of total applicable wages paid annually. Upon cessation
of the labor relationship due to termination, the Company is
required to pay 6.54% of applicable wages earned over the
duration of the employment period of the terminated employee.
This plan is accounted for as a post-employment benefit plan
under SFAS No. 112, Employers
Accounting for Postemployment Benefits, whereby
post-employment benefit expense is recognized over the
employees approximate service periods.
In Panama, all employees are covered by one or more of these
plans. In Colombia, all employees hired before April 1,
1994 are covered by a defined benefit pension plan. The benefits
under these plans are based on years of service and an
employees accumulated compensation. Pension obligations
are measured as of December 31 of each year.
Panama
Pension and Post Employment Plans
Pension
Plan
The following table sets forth the defined benefit pension
plans change in projected benefit obligation (in millions)
at December 31:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Accumulated benefit obligation
|
|
$
|
2.6
|
|
|
$
|
2.2
|
|
Projected benefit obligation at
beginning of year
|
|
$
|
2.5
|
|
|
$
|
2.1
|
|
Service cost
|
|
|
0.3
|
|
|
|
0.3
|
|
Interest cost
|
|
|
0.1
|
|
|
|
0.1
|
|
Actuarial losses
|
|
|
0.2
|
|
|
|
0.2
|
|
Benefits paid
|
|
|
(0.2
|
)
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at
end of year
|
|
$
|
2.9
|
|
|
$
|
2.5
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the defined benefit pension
plans change in the fair value of plan assets
(in millions) at December 31:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Fair value of plan assets at
beginning of year
|
|
$
|
2.9
|
|
|
$
|
2.4
|
|
Actual return on plan assets
|
|
|
0.0
|
|
|
|
0.1
|
|
Employer contributions
|
|
|
0.7
|
|
|
|
0.6
|
|
Benefits paid
|
|
|
(0.2
|
)
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end
of year
|
|
$
|
3.4
|
|
|
$
|
2.9
|
|
|
|
|
|
|
|
|
|
|
Pension cost recognized in the accompanying Consolidated Balance
Sheets at December 31 is computed as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Funded status of the plannet
over funded
|
|
$
|
0.5
|
|
|
$
|
0.4
|
|
Unrecognized net actuarial loss
|
|
|
0.8
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
Net asset recognized
|
|
$
|
1.3
|
|
|
$
|
1.2
|
|
|
|
|
|
|
|
|
|
|
F-22
COPA
HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The following actuarial assumptions were used to determine the
actuarial present value of projected benefit obligation at
December 31:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Weighted average assumed discount
rate
|
|
|
5.50
|
%
|
|
|
5.75
|
%
|
Weighted average rate of
compensation increase
|
|
|
3.25
|
%
|
|
|
3.50
|
%
|
Net periodic benefit expense for the years ended
December 31 included the following components
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Service cost
|
|
$
|
0.3
|
|
|
$
|
0.3
|
|
|
$
|
0.2
|
|
Interest cost
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
Expected return on plan assets
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit expense
|
|
$
|
0.3
|
|
|
$
|
0.3
|
|
|
$
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following actuarial assumptions were used to determine the
net periodic benefit expense for the year ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Weighted average assumed discount
rate
|
|
|
5.75
|
%
|
|
|
6.25
|
%
|
|
|
6.75
|
%
|
Expected long-term rate of return
on plan assets
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
Weighted average rate of
compensation increase
|
|
|
3.50
|
%
|
|
|
4.00
|
%
|
|
|
4.50
|
%
|
The Companys discount rate is determined based upon the
review of high quality corporate bond rates, the change in these
rates during the year, and year-end rate levels.
The Company holds its Seniority Premium funds with Profuturo, a
Panamanian pension fund management company backed by various
banks and insurance companies. The Seniority Premium is invested
in Proahorro, a conservative fund which invests in instruments
such as savings accounts (2.58%) and time deposits (97.4%), with
return on funds amounting to 4.4% in 2005. The expected return
on plan assets is based upon an evaluation of the Companys
historical trends and experience taking into account current and
expected market conditions.
Estimated future contribution and benefit payments, which
reflect expected future service, for the years ended
December 31, are as follows (in millions):
|
|
|
|
|
Future contribution payments:
|
|
|
|
|
2006
|
|
$
|
0.6
|
|
Future benefit payments:
|
|
|
|
|
2006
|
|
$
|
0.5
|
|
2007
|
|
$
|
0.5
|
|
2008
|
|
$
|
0.5
|
|
2009
|
|
$
|
0.5
|
|
2010
|
|
$
|
0.4
|
|
Remaining five years
|
|
$
|
2.1
|
|
F-23
COPA
HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Post-employment
Benefit Plan
For the years ended December 31, 2005, 2004, and 2003,
total expense for the post-employment benefits was
$0.4 million, $0.4 million, and $0.3 million,
respectively.
Colombia
Pension Plan
Pension
Plan
Colombian labor laws require that employers establish pension
plan for its employees. AeroRepública, based on this labor
laws, had establish two (2) defined benefit pension plans.
All employees hired before April 1, 1994 are covered by one
of these defined benefit pension plans, the future pension plan
or the pension bond plan. Additionally, AeroRepública has a
pension which is paid to widows. There are 9 members covered
under these programs.
The Companys unfunded benefit obligation recognized,
within other long term liabilities, for these plans is
$0.3 million at December 31, 2005.
|
|
10.
|
Fleet
Impairment Charges
|
In light of the impairment charge recorded in 2002, the downward
pressure realized on the value of Boeing 737-200s
thereafter, and the ongoing distress in the industry, the
Company re-evaluated the value of its Boeing
737-200
aircraft, rotable and expendable parts in accordance with
SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets in 2003. The Company
determined that the undiscounted future cash flows to be derived
by the fleet were not sufficient to recover the carrying value
of the fleet and therefore an impairment to their value existed.
As a result, the Company recorded an impairment charge in fiscal
2003 to write the aircraft down to their estimated fair value.
The Company estimated the undiscounted future cash flows to be
derived from the Boeing 737-200 fleet based on historical
results adjusted to reflect its best estimate of future market
and operating conditions. Estimates of the undiscounted future
cash flows were not sufficient to recover the carrying values of
the Boeing 737-200 aircraft in 2003. As a result, the net
carrying values of impaired aircraft and related items not
recoverable were reduced to their respective fair value and an
impairment charge of $3.6 million was recognized in 2003.
Estimates of fair value represent the Companys best
estimate based on industry trends and reference to market rates.
In 2004, the Company entered into a sales agreement for its
remaining Boeing 737-200 aircraft. Gains on the sale of the
aircraft of $1.1 million in each of 2004 and 2005 are
included within Non-operating income (expense). In 2005, the
Company sold parts related to its Boeing 737-200, resulting in a
gain of $0.3 million which is also included within
Non-operating income (expense).
|
|
11.
|
Related
Party Transactions
|
The following is a summary of significant related party
transactions that occurred during 2005, 2004 and 2003. Except as
otherwise discussed, the payments to and from the related
parties in the ordinary course of business were based on
prevailing market rates.
Continental Airlines. Since 1998, Continental
has implemented a comprehensive commercial and services alliance
with COPA. Key elements of the alliance include: similar brand
images, code sharing, co-branding of the OnePass frequent flyer
program in Latin America, joint construction and operation of
the Panama Presidents Club VIP lounge, joint purchasing,
maintenance and engineering support and a number of other
marketing, sales and service initiatives.
As a result of these activities, the Company paid Continental
$16.9 million, $14.1 million, and $13.5 million
in 2005, 2004 and 2003, respectively, and Continental paid COPA
$16.1 million, $12.3 million, and $14.1 million
in 2005, 2004 and 2003, respectively. The Company owed
Continental $2.3 million and $3.3 million at
December 31, 2005 and 2004, respectively. The services
provided are considered normal to the daily operations of both
airlines.
F-24
COPA
HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Banco Continental de Panamá, S.A. (Banco
Continental). The Company has a strong
commercial banking relationship with Banco Continental, which is
controlled by the Companys controlling shareholders. The
Company obtains financing from Banco Continental under short- to
medium-term financing arrangements to fund aircraft pre-payments
and for part of the commercial loan tranche of one of the
Companys Export-Import Bank facilities. The Company also
maintains general lines of credit and time deposit accounts with
Banco Continental.
Interest payments to Banco Continental totaled
$1.6 million, $1.1 million and $0.7 million in
2005, 2004 and 2003, respectively, and the Company received
$1.0 million, $1.1 million, and $0.5 million in
2005, 2004 and 2003, respectively. The debt balance outstanding
at December 31 amounted to $25.7 million and
$15.3 million in 2005 and 2004, respectively. These amounts
are included in Current maturities of long-term debt
and Long-term debt in the Consolidated Balance
Sheets.
ASSA Compañía de Seguros, S.A.
(ASSA). Panamanian law requires the
Company to maintain its insurance policies through a local
insurance company. The Company has contracted ASSA, an insurance
company controlled by the Companys controlling
shareholders, to provide substantially all of its insurance.
ASSA has, in turn, reinsured almost all of the risks under those
policies with insurance companies in North America. The net
payment to ASSA, after taking into account the reinsurance of
these risks totaled $0.03 million in each of 2005, 2004 and
2003.
Petróleos Delta, S.A. (Delta
Petroleum). During 2005, the Company
entered into a contract with Petróleos Delta, S.A. to
supply its jet fuel needs. The price agreed to under this
contract is based on the two week average of the U.S. Gulf
Coast Waterborne Mean index plus local taxes, certain
third-party handling charges and a handling charge to Delta. The
contract has a one year term that automatically renews for one
year period unless terminated by one of the parties. While the
Companys controlling shareholders do not hold a
controlling equity interest in Petróleos Delta, S.A., one
of the Companys executive officers, Jorge Garcia,
previously served as a Project Director at Petróleos Delta,
S.A. and one of the Companys directors, Alberto Motta,
served on its board of directors. Payments to Petróleos
Delta totaled $26.5 million from August to December of 2005.
Desarrollo Inmobiliario del Este, S.A. (Desarrollo
Inmobiliario). During January 2006, the
Company moved into its new headquarters, a recently constructed
building located six miles away from Tocumen International
Airport. The Company leases five floors consisting of
approximately 104,000 square feet of the building from
Desarollo Inmobiliario, an entity controlled by the same group
of investors that controls CIASA, under a ten-year lease at a
rate of $0.1 million per month. Payments to Desarrollo
Inmobiliario del Este, S.A. totaled $0.6 million in 2005.
Galindo, Arias & Lopez. Most of the
Companys legal work, including passing on the validity of
the shares offered, is carried out by the law firm Galindo,
Arias & Lopez. Certain partners of Galindo,
Arias & Lopez are indirect shareholders of CIASA and
serve on the Companys Board of Directors. Payments to
Galindo, Arias & Lopez totaled $0.3 million,
$0.1 million and $0.2 million in 2005, 2004 and 2003,
respectively.
Other Transactions. The Company purchases most
of the alcohol and other beverages served on its aircraft from
Motta Internacional, S.A. and Global Brands, S.A., both of which
are controlled by the Companys controlling shareholders.
The Company does not have any formal contracts for these
purchases, but pays wholesale prices based on price lists
periodically submitted by those importers. The Company paid
$0.4 million, $0.4 million and $0.5 million in
2005, 2004 and 2003, respectively.
The Companys telecommunications and other data services
have been provided by Telecarrier, Inc. since February 2003.
Some of the controlling shareholders of CIASA have a controlling
interest in Telecarrier, Inc. Payments to Telecarrier, Inc.
totaled $0.4 million, $0.4 million and
$0.2 million in 2005, 2004 and 2003, respectively.
F-25
COPA
HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
|
|
12.
|
Commitments
and Contingencies
|
Aircraft
Commitments
The Company has a purchase contract with Boeing for 17 Boeing
737-Next Generation aircraft, under which the Company has seven
(7) firm orders and ten (10) purchase rights.
Additionally, the Company has a purchase contract with Embraer
for 28 Embraer 190 aircraft, under which the Company has ten
(10) firm orders and 18 purchase options. The firm orders
have an approximate value of $719.3 million based on the
aircraft list price, including estimated amounts for contractual
price escalation and pre-delivery deposits.
During 2006, the Company entered into agreements to execute
three (3) Embraer 190 purchase options as well as one
(1) Boeing 737-Next Generation purchase right, and
additional firm commitments to purchase five (5) Embraer
190 aircraft to be operated by its AeroRepública
subsidiary. These additional firm orders have an approximate
value of $357.5 million based on the aircraft list price,
including estimated amounts for contractual price escalation and
pre-delivery deposits.
The following table summarizes the Companys firm orders
(in millions):
|
|
|
|
|
|
|
|
|
|
|
Expected Firm
|
|
|
|
|
|
|
Order Deliveries
|
|
|
Total
|
|
|
2006
|
|
|
8
|
|
|
$
|
308.8
|
|
2007
|
|
|
10
|
|
|
|
400.9
|
|
2008
|
|
|
6
|
|
|
|
245.6
|
|
2009
|
|
|
2
|
|
|
|
121.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
|
|
|
$
|
1,076.8
|
|
|
|
|
|
|
|
|
|
|
Covenants
As a result of the various contracts entered into by the Company
to finance Boeing 737-Next Generation aircraft that are
guaranteed by the Export - Import Bank of the United States, the
Company is required to comply with certain financial covenants.
These financing covenants, among other things requires us to
maintain, EBITDAR to fixed charge ratio of at least 2.5 times, a
tangible net worth of at least 5 times the long-term
obligations, minimum tangible net worth of $50 million,
EBITDAR for the prior year to be at least 1.9 times the finance
charge expenses for the first year of the agreement and 2.0
times the finance charge expenses for the remainder of the
agreement, net borrowings no more than 92% of the Companys
capitalization during the first two years, 90% during the next
two years and 85% during the last six years of the agreement,
tangible net worth of at least $30 million for the first
two years, $70 million for the next three years and
$120 million for the last five years of the agreement, and
to maintain a minimum of $30 million in available cash for
the first five years and $50 million for the last five
years of the agreement.
As of December 31, 2005, the Company was in compliance with
all required covenants.
A commercial credit facility requires AeroRepública to
maintain certain financial covenants such as a financial debt to
EBITDAR ratio of less than 4.5. The Company is currently in
negotiations with this institution to restructure the existing
two (2) tranche facilities with a one (1) tranche
facility at more favorable terms in the amount of approximately
$15 million which will be backed by a guarantee from Copa
Holdings, S.A. The new facility under negotiation will include
revised covenants which under the current facility are not being
met by AeroRepública as of December 31, 2005;
AeroRepública received a waiver from the institution
through July 2006.
If, upon the termination of the waiver noted above, the
covenants are still not being met and no other recourse exists
with this institution, the Company would provide the funds
necessary to repay the debt via other long-term borrowings or
from non-working capital funds.
F-26
COPA
HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Labor
Unions
Approximately 48% of the Companys 4,340 employees are
unionized. There are currently seven (7) union
organizations; five (5) covering employees in Panama and
two (2) covering employees in Colombia.
The five (5) unions covering employees in Panama include:
the pilots union (SIPAC); the flight attendants
union (SIPANAB); the mechanics union (SINTECMAP); the
traffic attendants union (UTRACOPA); and a generalized
union (SIELAS), which represents ground personnel, messengers,
drivers, counter agents and other non-executive administrative
staff. The two (2) unions covering employees in Colombia
include: the pilots union (ACDAC) and the traffic
attendants union (ACAV).
The Company finalized negotiations with SIELAS in 2005, and in
early 2006, it finalized negotiations with SIPANAB and an
arbitration proceeding with SINTECMAP; extending current
agreements with each of these labor unions for an additional
period of four (4) years.
Lines
of Credit for Working Capital and Letters of
Credit
The Company maintained available facilities for working capital
with several banks with year-end available balances of
$38.5 million and $9.4 million at December 31,
2005 and 2004, respectively.
The Company maintained available facilities for letters of
credit with several banks with outstanding balances of
$13.7 million and $10.8 million at December 31,
2005 and 2004, respectively. These letters of credit are pledged
for aircraft rentals, maintenance and guarantees for airport
facilities.
In June 2005, the Company and The International Finance
Corporation entered into an agreement for a $15.0 million
revolving line of credit available for working capital purposes.
This line of credit facility includes commitment fees of 0.50%,
plus availability fees of 0.25%.
In September 2005, the Company and Banco Continental entered
into an agreement for a $15.0 million revolving line of
credit available for working capital purposes. There are no
commitment fees or availability fees on this line of credit
facility.
Upon acquisition of AeroRepública, the Company arranged a
commercial credit facility in the amount of $15.0 million,
primarily to refinance existing liabilities and to provide
AeroRepública with working capital. This facility was
divided in two (2) tranches of $5.0 million and
$10.0 million with maturities of three (3) and five
(5) years, respectively. This facility is secured by credit
card receivables.
Termination
of General Sales Agent
The Company historically outsourced sales functions in some
outstations through agreements with general sales agents. Over
the past few years, the Company has been discontinuing existing
agreements in order to reduce distribution costs and take direct
control over these functions. As a result of this process, the
Company terminated general sales agent agreements in 2004 and
2003. In accordance with SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities, the Company recorded, within other
operating expenses, provisions amounting to $1.3 million
and $1.0 million in the years ending December 31, 2004
and 2003 respectively, when the general sales agreements were
terminated.
Payments relating to the termination of the general sales agent
agreements amounted to $1.3 million, $2.9 million, and
$0.1 million in 2005, 2004 and 2003, respectively.
The Company has no remaining GSA agreements with significant
termination contingencies.
F-27
COPA
HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Restricted
Stock Awards
In connection with the Companys 2005 initial public
offering, the Companys Board of Directors approved one
time restricted stock bonuses to executive officers, managers,
certain key employees and non-employee directors. The restricted
stock awards will be granted pursuant to a new equity-based
long-term incentive compensation plan that the Company adopted
in conjunction with the initial public offering, which provides
for grants of restricted stock, stock options and certain
equity-based awards.
On March 28, 2006, the Company granted approximately
937,500 shares of restricted stock awards which will vest
over periods ranging from two (2) to five (5) years.
The Company estimates the 2006 compensation cost related to this
plan will be $2.5 million.
Dividend
distribution (Unaudited)
On May 11, 2006, the Companys Board of Directors
approved a dividend distribution of approximately
$8.3 million, which represents 10% of the 2005 net income.
This distribution is expected to be paid in June 2006.
Debt
(Unaudited)
On May 15, 2006, the Company entered into a loan agreement
for $34.2 million to finance a portion of advanced delivery
payments on two Boeing 737-800 aircraft with delivery months of
August and November 2007. The Company has granted, for the
benefit of the borrower, a first priority security interest in
the rights, title and interest over these aircraft.
Prior to the acquisition of AeroRepública on April 22,
2005, the Company had one reportable segment. Upon the
acquisition of AeroRepública, as discussed in Note 2,
the Company determined it has two reportable segments, the Copa
segment and the AeroRepública segment, primarily because:
(1) management evaluates the financial and operational
results of the Copa segment and AeroRepública segment
separately for internal reporting and management performance
evaluation purposes; and (2) management intends to allow
AeroRepúblicas existing management to continue
operating the airline as a
point-to-point
Colombian carrier, without significant integration into the Copa
network. The accounting policies of the segments are the same as
those described in Note 1, Summary of Significant
Accounting Policies. General corporate and other assets
are allocated to the Copa segment.
Operating information for the Copa segment and the
AeroRepública segment for the period ended
December 31, 2005 (which includes the results of
AeroRepública only from the date of acquisition) is as
follow (in millions):
|
|
|
|
|
|
|
December 31,
2005
|
|
|
Operating Revenues:
|
|
|
|
|
Copa Segment
|
|
$
|
505.7
|
|
AeroRepública segment
|
|
|
103.0
|
|
Eliminations
|
|
|
(0.1
|
)
|
|
|
|
|
|
Consolidated
|
|
$
|
608.6
|
|
|
|
|
|
|
F-28
COPA
HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
|
|
|
|
|
|
|
December 31,
2005
|
|
|
Depreciation:
|
|
|
|
|
Copa Segment
|
|
$
|
19.3
|
|
AeroRepública segment
|
|
|
0.6
|
|
|
|
|
|
|
Consolidated
|
|
$
|
19.9
|
|
|
|
|
|
|
Aircraft Rentals:
|
|
|
|
|
Copa Segment
|
|
$
|
22.1
|
|
AeroRepública segment
|
|
|
5.5
|
|
|
|
|
|
|
Consolidated
|
|
$
|
27.6
|
|
|
|
|
|
|
Operating income:
|
|
|
|
|
Copa Segment
|
|
$
|
103.0
|
|
AeroRepública segment
|
|
|
6.1
|
|
|
|
|
|
|
Consolidated
|
|
$
|
109.1
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
Copa Segment
|
|
$
|
(18.3
|
)
|
AeroRepública segment
|
|
|
(2.2
|
)
|
|
|
|
|
|
Consolidated
|
|
$
|
(20.5
|
)
|
|
|
|
|
|
Interest income:
|
|
|
|
|
Copa Segment
|
|
$
|
3.4
|
|
AeroRepública segment
|
|
|
0.2
|
|
|
|
|
|
|
Consolidated
|
|
$
|
3.6
|
|
|
|
|
|
|
Income before income
taxes:
|
|
|
|
|
Copa Segment
|
|
$
|
89.8
|
|
AeroRepública segment
|
|
|
2.8
|
|
|
|
|
|
|
Consolidated
|
|
$
|
92.6
|
|
|
|
|
|
|
Total Assets at End of
Period:
|
|
|
|
|
Copa Segment
|
|
$
|
851.1
|
|
AeroRepública segment
|
|
|
98.1
|
|
Eliminations
|
|
|
(32.3
|
)
|
|
|
|
|
|
Consolidated
|
|
$
|
916.9
|
|
|
|
|
|
|
F-29
COPA
HOLDINGS, S. A. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Information concerning operating revenue by principal geographic
area for the period ended December 31 is as follow (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
North America
|
|
$
|
86.9
|
|
|
$
|
66.3
|
|
|
$
|
51.9
|
|
Central America and Caribbean
|
|
|
125.3
|
|
|
|
104.2
|
|
|
|
90.7
|
|
South America
|
|
|
303.2
|
|
|
|
148.8
|
|
|
|
130.4
|
|
Panama
|
|
|
93.2
|
|
|
|
80.5
|
|
|
|
68.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenue
|
|
$
|
608.6
|
|
|
$
|
399.8
|
|
|
$
|
341.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We attribute revenue among the geographical areas based upon
point of sales. Our tangible assets and capital expenditures
consist primarily of flight and related ground support
equipment, which is mobile across geographic markets and,
therefore, has not been allocated.
F-30
COPA
HOLDINGS, S.A. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
(In US$ thousands, except share
and per share data)
|
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
98,198
|
|
|
$
|
94,106
|
|
Short-term investments
|
|
|
16,621
|
|
|
|
20,384
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents and
short-term investments
|
|
|
114,819
|
|
|
|
114,490
|
|
Accounts receivable, net of
allowance for doubtful accounts of $5,662 as of March 31,
2006 and $4,911 as of December 31, 2005
|
|
|
57,358
|
|
|
|
49,044
|
|
Accounts receivable from related
parties
|
|
|
738
|
|
|
|
448
|
|
Expendable parts and supplies, net
of allowance for obsolescence and $10 as of March 31, 2006
and $9 as of December 31, 2005
|
|
|
4,930
|
|
|
|
4,070
|
|
Prepaid expenses
|
|
|
17,517
|
|
|
|
13,502
|
|
Other current assets
|
|
|
3,557
|
|
|
|
3,239
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
198,919
|
|
|
|
184,793
|
|
Long-term investments
|
|
|
29,124
|
|
|
|
26,175
|
|
Property and
Equipment:
|
|
|
|
|
|
|
|
|
Owned property and equipment:
|
|
|
|
|
|
|
|
|
Flight equipment
|
|
|
631,129
|
|
|
|
628,876
|
|
Other equipment
|
|
|
37,882
|
|
|
|
35,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
669,011
|
|
|
|
664,775
|
|
Less: Accumulated depreciation
|
|
|
(85,376
|
)
|
|
|
(79,985
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
583,635
|
|
|
|
584,790
|
|
Purchase deposits for flight
equipment
|
|
|
59,673
|
|
|
|
52,753
|
|
|
|
|
|
|
|
|
|
|
Total Property and Equipment
|
|
|
643,308
|
|
|
|
637,543
|
|
Other Assets:
|
|
|
|
|
|
|
|
|
Net pension asset
|
|
|
1,355
|
|
|
|
1,261
|
|
Goodwill
|
|
|
20,461
|
|
|
|
20,512
|
|
Intangible asset
|
|
|
31,220
|
|
|
|
31,298
|
|
Other assets
|
|
|
12,042
|
|
|
|
15,330
|
|
|
|
|
|
|
|
|
|
|
Total Other Assets
|
|
|
65,078
|
|
|
|
68,401
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
936,429
|
|
|
$
|
916,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt
|
|
$
|
70,678
|
|
|
$
|
67,905
|
|
Accounts payable
|
|
|
36,352
|
|
|
|
44,848
|
|
Accounts payable to related parties
|
|
|
7,635
|
|
|
|
7,750
|
|
Air traffic liability
|
|
|
85,796
|
|
|
|
85,673
|
|
Taxes and interest payable
|
|
|
27,122
|
|
|
|
27,450
|
|
Accrued expenses payable
|
|
|
18,842
|
|
|
|
14,780
|
|
Other current liabilities
|
|
|
3,601
|
|
|
|
5,573
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
250,026
|
|
|
|
253,979
|
|
Non-Current
Liabilities:
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
393,541
|
|
|
|
402,954
|
|
Post employment benefits liability
|
|
|
1,404
|
|
|
|
1,283
|
|
Other long-term liabilities
|
|
|
8,059
|
|
|
|
8,790
|
|
Deferred tax liabilities
|
|
|
5,309
|
|
|
|
4,039
|
|
|
|
|
|
|
|
|
|
|
Total Non-Current Liabilities
|
|
|
408,313
|
|
|
|
417,066
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
658,339
|
|
|
|
671,045
|
|
|
|
|
|
|
|
|
|
|
Shareholders
Equity:
|
|
|
|
|
|
|
|
|
Class A common
stock30,034,375 shares authorized, issued and
outstanding
|
|
|
19,813
|
|
|
|
19,813
|
|
Class B common
stock12,778,125 shares authorized, issued, and
outstanding
|
|
|
9,410
|
|
|
|
9,410
|
|
Retained earnings
|
|
|
250,142
|
|
|
|
217,862
|
|
Accumulated other comprehensive
(loss)
|
|
|
(1,275
|
)
|
|
|
(1,218
|
)
|
|
|
|
|
|
|
|
|
|
Total Shareholders Equity
|
|
|
278,090
|
|
|
|
245,867
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and
Shareholders Equity
|
|
$
|
936,429
|
|
|
$
|
916,912
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
F-31
COPA
HOLDINGS, S.A. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
(In US$ thousands, except share
and per share data)
|
|
|
Operating Revenue:
|
|
|
|
|
|
|
|
|
Passenger revenue
|
|
$
|
180,358
|
|
|
$
|
105,141
|
|
Cargo, mail and other
|
|
|
11,368
|
|
|
|
8,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
191,726
|
|
|
|
113,608
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
Aircraft fuel
|
|
|
47,110
|
|
|
|
21,336
|
|
Salaries and benefits
|
|
|
19,446
|
|
|
|
13,385
|
|
Passenger servicing
|
|
|
14,634
|
|
|
|
10,431
|
|
Commissions
|
|
|
13,101
|
|
|
|
7,481
|
|
Maintenance, material and repairs
|
|
|
10,287
|
|
|
|
4,714
|
|
Reservations and sales
|
|
|
8,265
|
|
|
|
5,725
|
|
Aircraft rentals
|
|
|
8,861
|
|
|
|
4,678
|
|
Flight operations
|
|
|
7,713
|
|
|
|
4,972
|
|
Depreciation
|
|
|
5,417
|
|
|
|
4,739
|
|
Landing fees and other rentals
|
|
|
5,555
|
|
|
|
3,343
|
|
Other
|
|
|
9,574
|
|
|
|
6,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
149,963
|
|
|
|
87,631
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
41,763
|
|
|
|
25,977
|
|
Non-operating Income
(Expense):
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(6,278
|
)
|
|
|
(4,557
|
)
|
Interest capitalized
|
|
|
508
|
|
|
|
143
|
|
Interest income
|
|
|
1,262
|
|
|
|
687
|
|
Other, net
|
|
|
(909
|
)
|
|
|
2,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,417
|
)
|
|
|
(1,531
|
)
|
Income before Income
Taxes
|
|
|
36,346
|
|
|
|
24,446
|
|
Provision for Income Taxes
|
|
|
4,066
|
|
|
|
1,886
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
32,280
|
|
|
$
|
22,560
|
|
|
|
|
|
|
|
|
|
|
Earnings per Share:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
0.75
|
|
|
$
|
0.53
|
|
Shares used for basic computation
|
|
|
42,812,500
|
|
|
|
42,812,500
|
|
Shares used for diluted computation
|
|
|
42,837,193
|
|
|
|
42,812,500
|
|
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
F-32
COPA
HOLDINGS, S.A. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
(No-par value)
|
|
|
Issued Capital
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
|
|
|
|
Class A
|
|
|
Class B
|
|
|
Class A
|
|
|
Class B
|
|
|
Earnings
|
|
|
Loss
|
|
|
Total
|
|
|
|
(In US$ thousands, except share
and per share data)
|
|
|
At December 31,
2004
|
|
|
30,034,375
|
|
|
|
12,778,125
|
|
|
|
19,813
|
|
|
|
9,410
|
|
|
|
144,932
|
|
|
|
|
|
|
|
174,155
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82,999
|
|
|
|
|
|
|
|
82,999
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,218
|
)
|
|
|
(1,218
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81,781
|
|
Dividends Declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,069
|
)
|
|
|
|
|
|
|
(10,069
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
2005
|
|
|
30,034,375
|
|
|
|
12,778,125
|
|
|
$
|
19,813
|
|
|
$
|
9,410
|
|
|
$
|
217,862
|
|
|
$
|
(1,218
|
)
|
|
$
|
245,867
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,280
|
|
|
|
|
|
|
|
32,280
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(57
|
)
|
|
|
(57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2006
(Unaudited)
|
|
|
30,034,375
|
|
|
|
12,778,125
|
|
|
$
|
19,813
|
|
|
$
|
9,410
|
|
|
$
|
250,142
|
|
|
$
|
(1,275
|
)
|
|
$
|
278,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
F-33
COPA
HOLDINGS, S.A. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
(In US$ thousands)
|
|
|
Cash flows from operating
activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
32,280
|
|
|
$
|
22,560
|
|
Adjustments for:
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
1,271
|
|
|
|
(27
|
)
|
Depreciation
|
|
|
5,417
|
|
|
|
4,739
|
|
(Gain)/Loss on sale of property
and equipment
|
|
|
|
|
|
|
(525
|
)
|
Provision for doubtful accounts
|
|
|
876
|
|
|
|
260
|
|
Allowance for obsolescence of
expendable parts and supplies
|
|
|
|
|
|
|
1
|
|
Derivative instruments mark to
market
|
|
|
(325
|
)
|
|
|
(644
|
)
|
Changes in:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(9,189
|
)
|
|
|
(4,780
|
)
|
Accounts receivable from related
parties
|
|
|
(290
|
)
|
|
|
(146
|
)
|
Other current assets
|
|
|
(4,870
|
)
|
|
|
(1,280
|
)
|
Other assets
|
|
|
3,267
|
|
|
|
(1,115
|
)
|
Accounts payable
|
|
|
(8,497
|
)
|
|
|
(2,003
|
)
|
Accounts payable to related parties
|
|
|
(115
|
)
|
|
|
691
|
|
Air traffic liability
|
|
|
123
|
|
|
|
(4,199
|
)
|
Other liabilities
|
|
|
1,152
|
|
|
|
103
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
21,100
|
|
|
|
13,635
|
|
Cash flows from investing
activities
|
|
|
|
|
|
|
|
|
Acquisition of investments
|
|
|
(5,499
|
)
|
|
|
|
|
Proceed from redemption of
investments
|
|
|
6,313
|
|
|
|
5,777
|
|
Restricted cash
|
|
|
|
|
|
|
(2
|
)
|
Advance payments on aircraft
purchase contracts
|
|
|
(6,920
|
)
|
|
|
(15,982
|
)
|
Acquisition of property and
equipment
|
|
|
(4,424
|
)
|
|
|
(938
|
)
|
Disposal of property and equipment
|
|
|
162
|
|
|
|
800
|
|
|
|
|
|
|
|
|
|
|
Net cash flows used in
investing activities
|
|
|
(10,368
|
)
|
|
|
(10,345
|
)
|
Cash flows from financing
activities
|
|
|
|
|
|
|
|
|
Proceeds from loans and borrowings
|
|
|
4,972
|
|
|
|
|
|
Payments on loans and borrowings
|
|
|
(11,612
|
)
|
|
|
(8,065
|
)
|
Issuance of bonds
|
|
|
|
|
|
|
10,752
|
|
|
|
|
|
|
|
|
|
|
Net cash flows (used in)
provided by financing activities
|
|
|
(6,640
|
)
|
|
|
2,687
|
|
Net increase in cash and cash
equivalents
|
|
|
4,092
|
|
|
|
5,977
|
|
Cash and cash equivalents at
beginning of period
|
|
|
94,106
|
|
|
|
99,666
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at
end of period
|
|
$
|
98,198
|
|
|
$
|
105,643
|
|
|
|
|
|
|
|
|
|
|
F-34
COPA
HOLDINGS, S.A. AND SUBSIDIARIES
Corporate
Information
Copa Holdings, S. A. (the Company) is a leading
Latin American provider of international airline passenger and
cargo services. The Company was incorporated according to the
laws of the Republic of Panama. The Company owns 99.8% of the
shares of Compañía Panameña de Aviación, S.
A. (Copa), 100% of the shares of Oval Financial
Leasing, Ltd. (OVAL), OPAC, S. A.
(OPAC), and 99.7% of the shares of
AeroRepública, S.A. (AeroRepública).
Copa, the Companys core operation, is incorporated
according to the laws of the Republic of Panama and provides
international air transportation for passengers, cargo and mail.
Copa operates from its Panama City hub in the Republic of
Panama, from where it offers approximately 92 daily scheduled
flights among 30 destinations in 20 countries in North, Central
and South America and the Caribbean. Additionally, Copa provides
passengers with access to flights to more than 120 other
international destinations through codeshare agreements with
Continental Airlines, Inc. (Continental) and other
airlines. The Company has a broad commercial alliance with
Continental which includes joint marketing, code-sharing
arrangements, participation in Continentals OnePass
frequent flyer loyalty program and access to Continentals
VIP lounge program, Presidents Club, along with other
benefits such as improved purchasing power in negotiations with
service providers, aircraft vendors and insurers. As of
March 31, 2006, Copa operated a fleet of 24 aircraft with
an average age of 3.5 years; consisting of 22 modern Boeing
737-Next Generation aircraft and two (2) Embraer 190
aircraft. OVAL is incorporated according to the laws of the
British Virgin Islands, and controls the special-purpose
vehicles that have a beneficial interest in 17 aircraft with a
carrying value of $531.0 million, all of which are leased
to Copa. The aircraft are pledged as collateral for the
obligation of the special-purpose vehicles, which are all
consolidated by the Company for financial reporting purposes;
however, the creditors of the special-purpose vehicles have no
recourse to the general credit of the Company or Copa. OPAC is
incorporated according to the laws of the Republic of Panama,
and owns the old corporate headquarters building located in
Panama City.
Additionally, during 2005 the Company purchased 99.7% of
AeroRepública, a domestic Colombian air carrier, which is
incorporated according to the laws of the Republic of Colombia
and operates a fleet of eleven leased MD-80s and two owned DC-9s
as of March 31, 2006.
On December 15, 2005, the Company concluded the initial
public listing on the New York Stock Exchange (NYSE)
and its principal shareholders sold 18,112,500 shares of
Class A common stock held by them.
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.
These unaudited consolidated interim financial statements were
prepared in accordance with U.S. generally accepted
accounting principles for interim financial reporting using the
U.S. Dollar as the reporting currency. Accordingly, they do
not include all of the information and footnotes required by
U.S. generally accepted accounting principles for complete
financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included.
The accompanying consolidated financial statements should be
read in conjunction with the audited consolidated financial
statements and footnotes for the year ended December 31,
2005.
|
|
2.
|
Stock
Compensation Plan
|
Restricted
Stock Awards
In connection with the Companys 2005 initial public
listing, the Companys Board of Directors approved one time
restricted stock bonuses to executive officers, managers,
certain key employees and non-employee directors. The restricted
stock awards will be granted pursuant to a new equity-based
long-term incentive compensation plan
F-35
COPA
HOLDINGS, S.A. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)(Continued)
that the Company adopted in conjunction with the initial public
listing, which provides for grants of restricted stock, stock
options and certain other equity-based awards.
On March 28, 2006, the Compensation Committee of our Board
of Directors approved 937,500 shares of the restricted
stock awards under two plans. The first plan consists of
890,625 shares which will vest over five (5) years in
yearly installments equal to 15% on each of the first three
anniversaries of the grant, 25% on the fourth anniversary and
30% on the fifth anniversary. Under the second plan,
46,875 shares will vest on the second anniversary of the
grant. The Company adopted Statement of Financial Accounting
Standard No. 123(R), Share-Based Payment (revised
2004), which requires it to account as an expense all
employee services received in share-based payment transactions,
using a
fair-value-based
method. The Company estimates the 2006 compensation cost related
to this plan will be $2.5 million. No compensation expense
has been recognized for the three months period ended
March 31, 2006, as the effect was immaterial.
Compensation cost related to restricted stock awards not yet
recognized on the Consolidated Statements of Income is
approximately $19.8 million and the weighted averaged
period remaining under the two plans is 4.71 years.
3. Commitments
and Contingencies
Aircraft
Commitments
The Company has a purchase contract with Boeing for
17 Boeing
737-Next
Generation aircraft, under which the Company has seven
(7) firm orders and ten (10) purchase rights.
Additionally, the Company has a purchase contract with Embraer
for 28 Embraer 190 aircraft, under which the Company
has ten (10) firm orders and 18 purchase options. The firm
orders have an approximate value of $719.3 million based on
the aircraft list price, including estimated amounts for
contractual price escalation and pre-delivery deposits.
During 2006, the Company entered into agreements to execute
three (3) Embraer 190 purchase options as well as one
(1) Boeing
737-Next
Generation purchase right, and additional firm commitments to
purchase five (5) Embraer 190 aircraft to be operated
by its AeroRepública subsidiary. These additional firm
orders have an approximate value of $357.5 million based on
the aircraft list price, including estimated amounts for
contractual price escalation and pre-delivery deposits.
The following table summarizes the Companys firm orders
(in millions):
|
|
|
|
|
|
|
|
|
|
|
Expected Firm
|
|
|
|
|
|
|
Order Deliveries
|
|
|
Total
|
|
|
2006
|
|
|
8
|
|
|
$
|
308.8
|
|
2007
|
|
|
10
|
|
|
|
400.9
|
|
2008
|
|
|
6
|
|
|
|
245.6
|
|
2009
|
|
|
2
|
|
|
|
121.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
|
|
|
$
|
1,076.8
|
|
|
|
|
|
|
|
|
|
|
Covenants
As a result of the various contracts entered into by the Company
to finance Boeing 737-Next Generation aircraft that are
guaranteed by the ExportImport Bank of the United States,
the Company is required to comply with certain financial
covenants. These financing covenants, among other things
requires us to maintain, EBITDAR to fixed charge ratio of at
least 2.5 times, a tangible net worth of at least 5 times the
long-term obligations, minimum tangible net worth of
$50 million, EBITDAR for the prior year to be at least 1.9
times the finance charge expenses for the first year of the
agreement and 2.0 times the finance charge expenses for the
remainder of the agreement, net borrowings no more than 92% of
the Companys capitalization during the first two years,
90% during the next two
F-36
COPA
HOLDINGS, S.A. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)(Continued)
years and 85% during the last six years of the agreement,
tangible net worth of at least $30 million for the first
two years, $70 million for the next three years and
$120 million for the last five years of the agreement, and
to maintain a minimum of $30 million in available cash for
the first five years and $50 million for the last five
years of the agreement.
As of March 31, 2006, the Company was in compliance with
all required covenants.
A commercial credit facility requires AeroRepública to
maintain certain financial covenants such as a financial debt to
EBITDAR ratio of less than 4.5. The Company is currently in
negotiations with this institution to restructure the existing
two (2) tranche facilities with a one (1) tranche
facility at more favorable terms in the amount of approximately
$15 million which will be backed by a guarantee from Copa
Holdings, S.A. The new facility under negotiation will include
revised covenants which under the current facility are not being
met by AeroRepública as of December 31, 2005;
AeroRepública received a waiver from the institution
through July 2006.
If, upon the termination of the waiver noted above, the
covenants are still not being met and no other recourse exists
with this institution the Company would provide the funds
necessary to repay the debt via other long-term borrowings or
from non-working capital.
Labor
Unions
Approximately 48% of the Companys 4,340 employees are
unionized. There are currently seven (7) union
organizations; five (5) covering employees in Panama and
two (2) covering employees in Colombia.
The five (5) unions covering employees in Panama include:
the pilots union (SIPAC); the flight attendants
union (SIPANAB); the mechanics union (SINTECMAP); the
traffic attendants union (UTRACOPA); and a generalized
union (SIELAS), which represents ground personnel, messengers,
drivers, counter agents and other non-executive administrative
staff. The two (2) unions covering employees in Colombia
include: the pilots union (ACDAC) and the traffic
attendants union (ACAV).
In early 2006, the Company finalized negotiations with SIPANAB
and an arbitration proceeding with SINTECMAP; extending current
agreements with each of these labor unions for an additional
period of four (4) years.
Letters
of Credit
During the first quarter 2006, the Company obtained new
facilities for letters of credit with several banks of
$10.0 million. These letters of credit are pledged for
aircraft rentals, maintenance and guarantees for airport
facilities.
AeroRepública
On April 2006, the Company invested an additional
$2.0 million in AeroRepública in exchange for
1.2 million new shares of AeroRepública. As a result
of these transactions the Companys total investment
increased to $33.4 million.
Dividend
distribution
On May 11, 2006, the Companys Board of Directors
approved a dividend distribution of approximately
$8.3 million, which represents 10% of the 2005 net income.
This distribution is expected to be paid in June 2006.
F-37
COPA
HOLDINGS, S.A. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)(Continued)
Debt
On May 15, 2006, the Company entered into a loan agreement
for $34.2 million to finance a portion of advanced delivery
payments on two Boeing 737-800 aircraft with delivery months of
August and November 2007. The Company has granted, for the
benefit of the borrower, a first priority security interest in
the rights, title and interest over these aircraft.
Prior to the acquisition of AeroRepública on April 22,
2005, the Company had one reportable segment. Upon the
acquisition of AeroRepública, the Company determined it has
two reportable segments, the Copa segment and the
AeroRepública segment, primarily because:
(1) management evaluates the financial and operational
results of the Copa segment and AeroRepública segment
separately for internal reporting and management performance
evaluation purposes; and (2) management intends to allow
AeroRepúblicas existing management to continue
operating the airline as a
point-to-point
Colombian carrier, without significant integration into the Copa
network. General corporate and other assets are allocated to the
Copa segment.
Operating information for the Copa segment and the
AeroRepública segment for the period ended March 31,
2006 is as follow (in millions):
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31, 2006
|
|
|
|
(Unaudited)
|
|
|
Operating Revenues:
|
|
|
|
|
Copa Segment
|
|
$
|
151.6
|
|
AeroRepública segment
|
|
|
40.2
|
|
Eliminations
|
|
|
(0.1
|
)
|
|
|
|
|
|
Consolidated
|
|
$
|
191.7
|
|
|
|
|
|
|
Depreciation:
|
|
|
|
|
Copa Segment
|
|
$
|
5.2
|
|
AeroRepública segment
|
|
|
0.2
|
|
|
|
|
|
|
Consolidated
|
|
$
|
5.4
|
|
|
|
|
|
|
Aircraft Rentals:
|
|
|
|
|
Copa Segment
|
|
$
|
5.9
|
|
AeroRepública segment
|
|
|
3.0
|
|
|
|
|
|
|
Consolidated
|
|
$
|
8.9
|
|
|
|
|
|
|
Operating income:
|
|
|
|
|
Copa Segment
|
|
$
|
41.0
|
|
AeroRepública segment
|
|
|
0.8
|
|
|
|
|
|
|
Consolidated
|
|
$
|
41.8
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
Copa Segment
|
|
$
|
(5.2
|
)
|
AeroRepública segment
|
|
|
(0.6
|
)
|
|
|
|
|
|
Consolidated
|
|
$
|
(5.8
|
)
|
|
|
|
|
|
F-38
COPA
HOLDINGS, S.A. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)(Continued)
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31, 2006
|
|
|
|
(Unaudited)
|
|
|
Interest income:
|
|
|
|
|
Copa Segment
|
|
$
|
1.2
|
|
AeroRepública segment
|
|
|
0.1
|
|
|
|
|
|
|
Consolidated
|
|
$
|
1.3
|
|
|
|
|
|
|
Income (loss) before income
taxes:
|
|
|
|
|
Copa Segment
|
|
$
|
37.0
|
|
AeroRepública segment
|
|
|
(0.7
|
)
|
|
|
|
|
|
Consolidated
|
|
$
|
36.3
|
|
|
|
|
|
|
Total Assets at End of
Period:
|
|
|
|
|
Copa Segment
|
|
$
|
879.2
|
|
AeroRepública segment
|
|
|
90.7
|
|
Eliminations
|
|
|
(33.5
|
)
|
|
|
|
|
|
Consolidated
|
|
$
|
936.4
|
|
|
|
|
|
|
Information concerning operating revenue by principal geographic
area for the period ended March 31 is as follow (in millions):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March
31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Unaudited)
|
|
|
North America
|
|
$
|
27.2
|
|
|
$
|
19.1
|
|
Central America and Caribbean
|
|
|
33.1
|
|
|
|
28.2
|
|
South America
|
|
|
103.2
|
|
|
|
43.5
|
|
Panama
|
|
|
28.2
|
|
|
|
22.8
|
|
|
|
|
|
|
|
|
|
|
Total operating revenue
|
|
$
|
191.7
|
|
|
$
|
113.6
|
|
|
|
|
|
|
|
|
|
|
We attribute revenue among the geographical areas based upon
point of sales. Our tangible assets and capital expenditures
consist primarily of flight and related ground support
equipment, which is mobile across geographic markets and,
therefore, has not been allocated.
F-39