Copa Airlines: high-yield / low-cost airlines do exist.
Saying "no" 80% of the time. Or, an airline's guide to weathering regional economic challenges through a strict alignment of strategy and execution.
Panama City is a center of world commerce and trade and Copa Airlines has found a way to capitalize on its convenient location, benign climate, and international importance. As a bit of history, the airline was started in 1947 and initially seeded by Pan American World Airways, which went bankrupt in 1991. Copa went public in 2005 and has been led by Pedro Heilbron as CEO for the past 25 years; his tenure as CEO is one of the longest in the history of aviation. Today, almost six decades after its founding, Copa is one of the most admired and profitable airlines in the world and its success is primarily due to its commitment to keeping a close alignment between its business and operating models and a laser-like focus on execution.
Copa’s approach to running its business, according to a former executive, is centered on saying “no” about 80% of the time. What this means in practice is that the management is committed to staying disciplined about their business initiatives and objectives, while consistently communicating their values and performance metrics to all employees. There are a few elements of Copa’s business and business models that are particularly important in understanding how the airline has maintained a net margin of 13-16% over the past ten years, an achievement rarely seen in the commercial airline industry.
Hub-and-Spoke Approach
Panama City’s location gives Copa a few unique competitive advantages that the airline has had the continuous wherewithal to leverage. For one, the city is located between many destinations that, on their own, don’t have sufficient traveler demand to justify point-to-point service. Consequently, Copa has positioned itself as an “aggregator,” consolidating traffic and routing flights that connect these locations through its Panama City hub. Good weather year-round and a well-developed airport also help: the airline has a consistent on-time performance of 85-92% and a completion rate of 99.4-99.6%, statistics almost unheard-of among other carriers. Copa is so committed to serving its particular region that at the International Society of Transport Aircraft Trading (ISTAT) Latin America Forum Copa’s CEO said that despite the economic troubles plaguing many countries in South America, the airline has no intention of starting to serve Europe.
Fleet planning
No airline can succeed without a well-structured fleet. Given Copa’s business model’s focus on being the “connector” airline through its Panama City hub, the airline has focused on operating only two models of aircraft: Boeing 737 (-700 and -800) and Embraer 190. The distance these two aircraft can fly as well as their fuel consumption rates are well-matched with the destinations served by Copa, as well as with its financial objectives, which is why the airline has said “no” to other, “shinier,” aircraft types over the years. The management knows the needs of its customers and is meeting them in the most efficient manner possible. At the same ISTAT meeting mentioned above, the airline reaffirmed that it has no plans to expand its fleet to include larger aircraft. It’s worth noting, also, that limited fleet variety also helps the company control its maintenance costs, which are a large part of an airline’s expense structure.
Internal and external relationships
In addition to the CEO’s 25-year tenure at the company, Copa’s other senior management team members have also been with the airline for an average of a decade and a half. As a result, the team operates on a basis of friendship and trust and consistently works together to achieve the airline’s business objectives. One of these objectives is to maintain ongoing communications with Copa’s broader employee base. Given the airline’s focus on being cost-disciplined, employees know to avoid unnecessary complexity in their day-to-day operations and focus on executing the well-explained “game plan” as a cohesive unit. The team functions so well that Copa has been named twice as one of the top 10 best employers in Latin America.
In terms of external working relationships, Copa interacts closely with numerous partners and is extremely synergy-focused in its approach. For instance, by being one of the largest employers in Panama, with almost 6,000 local staff, Copa has a close relationship with the government’s country, which helps it navigate political and economic hurdles when they arise. Additionally, the airline is highly reliant on Panama City’s airport; together, the airport and the airline have worked to enlarge the existing infrastructure, thus helping Copa execute its hub-and-spoke strategy. To ensure continuing alignment, Copa has a representative on the airport’s corporation board. Lastly, Copa is an integral member of the Star Alliance. Previously, Copa was 49% owned by Continental airlines. Today, although United (which bought Continental) no longer has any ownership stake in Copa, the two airlines continue to share branding and marketing activities, benefiting both companies. To this day, when viewed side-by-side, Copa’s and United’s logos are exceptionally similar.
Overall, Copa’s strategy of sticking closely to its business model and objectives is executed through careful operational planning and communication with internal and external partners. I am quite excited to be flying with Copa via Panama City on my way down to my FIELD 2 project in Buenos Aires.
Sources:
Bell, Michael and Thomas, John. Airline Business. Nov. 2015, p. 48-49
Copa Airlines Website (http://www.copaair.com/sites/us/en/pages/homepage.aspx)
Karp, Aaron. Air Transport World. Nov.2014, Vol. 51 Issue 11, p30-33
Unnikrishnan, Madhu. Air Transport World. Dec. 2015. Online Blog: http://atwonline.com/airframes/panama-s-copa-pulls-back-fleet-expansion-weak-economy
I’m actually going to be flying with Copa to Lima for FIELD 2. Thanks for such a nice write-up concerning their business and operating models.
I was wondering if, in your research, you stumbled over any information regarding whether the re-engining options for their existing airplanes was something that the airline was looking at. Boeing is re-engining the 737 as a 737 MAX with more modern and efficient jet engines. This would be a great way for Copa to reduce operating costs while still using the right plane for its passengers.
I wrote about Surf Air who cannot benefit from these upgrades, but if you’re interested, check my post out!
Thanks for the question Mike and thanks for the Surf Air post. Really interesting stuff.
Re: reengining their fleet, I don’t have any specific data on it, but my theory is that Copa would only do it if it make sense economically, and with fuel prices as low as they are, airlines are a bit less focused at the moment on switching to higher-efficiency engines and aircraft models in general. I do expect though, with time, Copa will have to upgrade its fleet and if the MAX is the best option at the time and is aligned with where they’re flying, they’ll make the switch.
Let me know how you like flying them down to Peru! Bon Voyage!
Cool post. Have never flown the airline but seems like a great one. Heilbron’s tenure is truly amazing. It must sure help to achieve such great alignment…
Interesting post, Anna, and an exciting airline. The hub-and-spoke system certainly has its benefits, and many airlines use it for all the reasons you mentioned and more. But there are also many costs associated with the system (airport congestion, fuel inefficiency, etc) and, more-and-more, the industry seems to be moving away from hub-and-spoke toward point-to-point. I think the success of the B787 compared to the A380 is indicative of this trend. How, if at all, do you see this shift impacting Copa’s business?
Thanks for your question. I do think that the hub-and-spoke model is being slowly faded out in certain markets, but in Copa’s case I believe that it will remain central to their business plan for a while. As opposed to many of the world’s hubs, the Panama City appears to still have capacity available, which, I’m sure, is in part due to Copa’s cooperation with and presence on the airport’s board. Also, given Copa’s aim to serve as a connector between markets that have relatively low traffic, they almost have to keep using a hub to keep their load factors high and the airline profitable. With time, as cities in Latin America continue to grow and develop, I do believe it’s possible that Copa will introduce more point-to-point flights without the layover in PC.
For now…in order to get to Quito, Ecuador, I will first have to fly up to Panama City from Cartagena, Colombia and then head back south. Alas and alack, but I suppose writing this post makes me a bit more excited about this need to “backtrack.”
Cheers!
Interesting post! I flew 4 flights on Copa over Thanksgiving, and each of them was on-time and comfortable! Really impressed by a few thing here, especially the sustained success and consistent executive team over the past few decades.
I’d be interested in learning more about their relationship with United, and the range of activities they collaborate on. As someone who knows United planes far too well, I did notice that the interior of Copa’s planes looks exactly like a United plane – same seat fabrics, for instance, was one of the first things I noticed – are they buying old United planes? Would guess there’s a lot more to the relationship than simply marketing and branding efforts, and I think this relationship (as well as its relationships with the rest of Star Alliance) key drivers of their ability to keep revenues high and costs low.
Thanks for your question PMac. I asked an iteration of it on Thursday last week of some people at United and did not get a very clear answer. I think the similarity of planes comes from the fact that Continental (now absorbed by United) used to own 49% of Copa and, as a result, was basicially replicating itself in the Latin American carrier. They likely ordered similar designs of aircraft when they were setting their plane specs and, given the fact that the useful life of an aircraft is 25 years, those things will probably continue to fly for a few more years looking the way that they do. Your theory regarding buying old planes from United is also a possibility, although they would only do it if there was a price advantage, and airlines usually “redecorate” the planes they buy from other airlines. Branding and all…
I’ll keep you posted as I continue to investigate what’s really going on under the Copa / United current relationship “hood.”
Very interesting post Anna! While much of this year has been focused on examples of bold managers who made big risks in order realize huge rewards, it’s a sobering counterpoint to see how this company has succeeded by being aggressively conservative.