Description
NOTE: Figures above in header represent consensus
Summary: CPA is a niche network airline that historically has enjoyed a geographic moat in certain South/Central America markets. That moat is collapsing, due to new aircraft technology and new regional hubs that open the door to ULCC/LCC competition. What little advantage CPA’s business model retains has been sold off out of necessity to raise cash for a transition into commoditized and leisure-focused MAXs. We expect that CPA will not participate in the early stages of recovery and that street numbers will need to revise sharply down throughout the year. We see >50% downside through the end of 2021 as the divergence in recovery and economics between CPA vs. Latin Peers becomes clear.
Company Description:
· Network: ~83% of capacity is t/f Panama, 17% t/f Colombia. ~85% connecting traffic (per Tocumen data)
o Appx ASM by spoke: ~25% US, ~15% BR, ~9% AR, ~8% MX, ~7% CL, ~5-3%PE/CU/UY/EC
· Fleet:
o EOY 19: 102 aircraft: 6 B737 MAX (166 seat), 82 737-NG (155 avg. seats), and 14 E-190 (94 avg. seats)
o Aug 21: 81 aircraft: 13 B737 MAX, 68 737NG (+14 permanently parked), 0 E-190 (sold)
o Future: Firm orders for 60 737MAX for delivery 2021-2027; baseline plan 28 MAX/53 NG EOY 2023
· Network niche:
o CPA pools traffic in PTY from various commoditized ‘trunk routes’ (NYC-PTY-SAO, SAO-PTY-CUN)
o Trunk route traffic supports a dense schedule, allowing CPA to create connections where peers cannot:
o Niche 1: Routes with insufficient traffic for widebody direct service, but too far for narrow-body direct
o PTYs central location enable them to serve these routes with connections
o Niche 2: ‘Thin’ routes (<100 pax/day) ex. Chile-Ecuador/Venezuela/Cuba; Served by regional aircraft (E-190s)
Thesis Overview:
· Thesis Pt. 1: Demand recovery in CPAs network will drastically lag peers due to overexposure to corporate/intl
o Substantially all of CPAs traffic is international and business makes up ~1/3 of pax and >60% of rev
o Recent unrest/inflation have forced CPA out of lucrative Venezuela/Cuba/Argentina routes, increasingly into crowded BR-US/BR-MX routes
· Thesis Pt. 2: New aircraft capabilities enable competitors to disintermediate and ‘overfly’ CPAs hub
o The 737MAX and A321NEO enable narrowbody direct flights from South to North America
o LCC/ULCCs from Brazil/US/Colombia/Mexico have introduced substantial new capacity overflying CPAs hub and charging aggressive fares ~20% below CPAs fare w/ no connection (esp from Colombia)
· Thesis Pt. 3: Latin and US carriers have introduced substantial competitive capacity – a fare war to follow
o A slower recovery in Atlantic/Pacific + a competitive turf war for Florida have led AAL/DAL/UAL/SAVE to dump substantial excess capacity into Latin America sparking a fare war
· Thesis Pt. 4: CPA faces substantial capex commitments for an order book poorly suited for a leisure recovery
o CPA has firm orders for 60 MAXs 2021-2027 representing $3.4bn of capex net of deposits (above current mkt cap)
o These aircraft of very low density with a focus on business/premium seating – poorly positioned for post-COVID
o Capex guide (2021: $460m, 2022: $300m in the context of ~$700m per-COVID OCF)
o We struggle to a path back to positive OCF and expect CPA will have to raise capital
o CPA does not disclose quarterly cash flow statement – and we believe they buried a large Boeing compensation payment in Q1, presenting it as positive cash burn momentum. Also air-traffic liability disclosure suggests delayed refunds (which in turn boost headline revenue from changes in breakage assumptions)
Bull View:
· Bull Pt #1: CPA is a great cost performer and has reiterated pre-COVID CASMx target of mid-term <6 cents
o Regional fleet retirement increases flight distance (stage length) = low CASM, but also lower RASM and margin
· Bull Pt #2: CPA has meaningful local/non-connecting traffic
o Tocumen airport bond prospectus reveals >80% connections
· Bull Pt #3: Avianca/Latam/Aeromexico bankruptcies create an opportunity in CPAs network
o Expansions from ULCCs more-than-offset legacy competitor fleet reductions at aggressive prices
o Avianca is retrenching to fortify Bogota as a competing hub
Assumptions Underpinning Base Case
o FY22 ASMs -10% vs. 2019 (staff currently >-30%)
o FY22 RASM -21% vs. 2019 (competition, stage length mix)
o FY22 CASMx 6.1c (gives credit for cost execution)
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
Catalysts: Monthly traffic and quarterly earnings to disappoint in through summer; sell-side revisions thru reopening. Brazil and US carriers return to the North-South America corridor. Avia