Copa Holdings Keeps Flying Along

It seems I'm obsessed with airlines these days. In April, I discussed some of the reasons why investors should own Ireland's Ryanair Holdings (Nasdaq:RYAAY), one of the best run airlines anywhere. Looking for a mid-cap to recommend, I came across Panama-based Copa Holdings (NYSE:CPA), a regional airline whose stock is up 300% since its IPO in December 2005. Copa's future looks as bright as Ryanair's. I'll explain some of the reasons why.

The airline got off the ground in 1947 when a group of Panamanian investors along with Pan American World Airways began flying three Douglas C-47 aircraft in the domestic market. In the 1960s it began serving nearby countries like Costa Rica, Jamaica and Colombia. Pan Am sold its stake in 1971 to other Panamanian investors who then sold to CIASA in 1986, a conglomerate owned by the Motta, Heilbron and Arias families. Today, CIASA owns 25.1% of the economic interest in Copa Holdings and 100% of the votes. What they say goes.

SEE: A Look At The Airline Industry

On a side note, I thought it would be interesting to determine the approximate return on Continental's $53 million investment in the company, which began in May 1998, and ended with the last shares being sold in May 2008. My estimate, taking into account the IPO and secondary offerings as well as the sale on the open market of the remaining 4.4 million shares, is a pre-tax profit of $482 million and a compound annual growth rate of 26%. That's not bad for a decade's investment. However, if it had kept the 21 million shares it owned as of the IPO in December 2005, it would be sitting on an equity investment valued at slightly less than $1.7 billion. It's not a huge difference when you factor in the four additional years, but I'm sure United Continental (NYSE:UAL) could find something useful to do with the cash.

Total revenues increased 29.5% to $543.3 million with operating income up 12% to $111.6 million. That's an operating margin of 20.5%, 320 basis points lower than in the first quarter of 2011. Fuel prices were the culprit in the quarter, up 19.5%. However, when compared to some of its peers like Southwest Airlines (NYSE:LUV), Delta Airlines (NYSE:DAL) and Chile's LAN Airlines (NYSE:LFL), it's doing fantastic. It even has a comfortable lead on Ryanair Holdings, whose reputation I alluded to in the opening paragraph. It finished the quarter with net debt of $452 million, which represents just 23% of its revenue in the trailing 12 months. This compares favourably with Delta at 34% and LAN at 62% and Southwest has a net cash position of approximately $600 million, which is excellent indeed. In a word, I'd describe Copa Holdings' Q1 performance as steady and that's all you can ask for these days.

SEE: 4 Reasons Why Airlines Are Always Struggling

Copa Holdings acts as a gateway between North and South America and all points in between. In business for 65 years, it's about time that Latin America became a beacon for well-run, profitable companies. It's not easy making money in the airline business; so to do it as routinely as this management team does is a clear indication they know what they're doing. Copa's entry to the Star Alliance (which includes its former equity partner Continental, Air Canada and Singapore Airlines) has been delayed by up to two months. Being part of the alliance will help it better serve its passengers and just enhances its position in Latin America. Panama is undergoing tremendous expansion and is the fastest growing country in Latin America. Boeing (NYSE:BA) forecasts that annual passenger traffic in Latin America will grow by 7% annually for the next 20 years. With the exception of Asia, there's no other place close in terms of future traffic. Flying four times daily to Miami, three times a day to Orlando and twice daily to both Los Angeles and New York, Copa Holdings will benefit greatly from the growing middle class in Latin America. The potential is tangible and real.

Richard Branson, founder of Virgin Atlantic, likes to tell the joke about becoming a millionaire by starting out as a billionaire and then opening an airline. Just as it's not easy to make money operating an airline, it's equally difficult to make money investing in them. There are very few airline stocks I'd consider owning. Ryanair Holdings is one and Copa Holdings is another.

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