TIVP078 (Video): Copa Holdings (CPA): Is Buffett right about Airline Stocks? w/ Daniel Mahncke & Shawn O’Malley

Sean O'Malley: When airlines come up, I immediately think of Buffett. I mean, he even called himself an aeroholic. And he repeatedly says how tough the industry is, though. And yet he keeps coming back to buy airlines.

Daniel Mahncke: It's one of the most interesting industries that I've studied in a while. And yes, most airlines are terrible businesses, but today's company is a real outlier. Highly profitable for decades. High returns on investment, high returns on equity, and a somewhat monopolistic position that shields it from facing the same headwinds as most other airlines.

Sean O'Malley: And it's trading at only 8 times earnings. Perhaps this is the one Buffett should buy next when he can't stop himself from investing in an airline.

Narrator: You're listening to the Intrinsic Value Podcast by the Investors podcast network. Since 2014, with over 180 million downloads, we've learned directly from the world's best investors. Now we're applying those lessons to analyze businesses and investment opportunities every week, helping you uncover intrinsic value. This show is not investment advice. It's intended for informational and entertainment purposes only. All opinions expressed by hosts and guests are solely their own and they may have investments in the securities discussed. And now, here are your hosts, Sean o' Malley and Daniel Munka.

Sean O'Malley: We pride ourselves on looking at any industry sooner or later on this show. But there are some industries that are just generally in our too hard pile to begin with. And I realize again and again that with healthcare companies that those businesses just fall right into that bucket for m. Me. And you know, another industry I usually have on my blacklist is the airline industry. And I, you know, I'd say they have deservedly earned one of the worst reputations in all of value investing.

Shawn O'Malley: Right?

Sean O'Malley: I mean, decades of bankruptcies, brutal, brutal price competition, almost no pricing power, and truly enormous fixed costs. But I'm sure you wouldn't have brought today's company as a pitch if you didn't think the economics were different for them.

Daniel Mahncke: I wouldn't have. And you actually don't make my case easier today. But I do have a similar bias here and I didn't think that I would ever pitch an airline here on the show. But again, I do love best in class businesses and I like them even more when I can buy them at what I consider to be a cheap valuation. And since most investors don't like to look at the airline industry, even the best businesses in that category tend to get punished from time to time. And those are always the interesting setups that I like to look for. As a value investor, you have good companies that are being sold off because of the industry that they operate in. So just to give listeners a quick idea of why they should keep listening and why Copa, the company we're discussing today, is different from other airline competitors. You have, in my view, the single most profitable airline of any real scale in the Americas, trading at roughly 8 times earnings. And, you know, you can compare that to the US Airlines like Delta, uh, like United. Those usually trade at multiples of, uh, 12, 13, 14, so the low teens while operating at lower margins with much more volatility in earnings. And the important thing, actually is that there are structural advantages to why COPPA is more profitable than all these other airlines. So it's not just them having a good couple of years, but they actually have a value prop that, in my opinion, other airlines simply can compete with. And that's why I brought COPA today as an airline to pitch you on the show.

Sean O'Malley: Well, that does sound promising. You're getting me excited. But before you keep selling me on Coppa as a standalone company, how about we dig a bit more into the industry because it really is one that we haven't looked at on the show in the past very much. And so it deserves some extra attention. And I'm certainly no expert. So when I say that the airline industry is bad, I'm mostly just looking at the historical track record of them destroying shareholder returns, which is something that Buffett has famously called out a number of times at the annual shareholder meetings. But when there are outliers like coppa, they certainly deserve a closer look so we can figure out whether they will win or whether the industry will win and, and suck them into their shareholder value, destroying nature over time.

Daniel Mahncke: Well, what do you say about just Buffett giving us an intro into the airline industry and why it's such a hard place to be in. I mean, Buffett's relationship with airlines, it is quite funny. He invests in them repeatedly, then he gets his hands burned repeatedly, and then he goes out again and buys airlines. So there's clearly something that he likes in the airline industry. Uh, so, yeah, I would say we just listen to him ranting on the industry in general.

Shawn O'Malley: It is, the airline industry has this situation where they have, uh, very, very, very low, uh, incremental cost per seat, you know, with enormous fixed costs. And the temptation to sell that last seat, uh, at a very low price is very high. And it's very, and sometimes it can be very difficult to distinguish between the last seat and other seats. So it's, it's a labor intensive, capital intensive Largely commodity type business. And it's been, as Bill, Bill Miller points out in that question, it's been, you know, a death trap for investors ever since Orville, uh, took off. I mean, as I've said, if there had been a capitalist at Kitty Hawk, he should have shot down Orville. And that is all a favor, but the, uh, but having neglected to do that, investors have poured money in to, uh, airline companies and aircraft manufacturing companies now for 100 years plus with terrible results. And, and if it ever gets down to where there's one airline and there's no regulation, it will be a wonderful business. And then the question is whether, having gotten down now through a lot of bankruptcies, uh, to a relatively few that are doing high percentage of the seat miles, whether it's a good business yet, uh, I don't know the answer to, but I'm skeptical. Charlie. Well, the last time we were presented with a similar opportunity was when the railroads did exactly what Bill Miller suggests. The railroads got down and consolidated and got better control of their labor costs, and it turned into a wonderful business. And what did we do? We missed it. And we stumbled in very late to the party. Right, Right. So we've proven ourselves to be slow learners in this field. And it's, it's conceivable, isn't it, that Bill Miller is right in what he suggests? Which way do you bet it goes? Into my too hard pile. Mine too.

Daniel Mahncke: Buffett and Munger say multiple interesting things in this short clip. So the first one, obviously, is that they point out how capital intensive this industry actually is. And to make it a bit simpler, we often talk about operating leverage. When you have a fixed cost base and low variable cost scale is an enormous benefit to you. So let's say you are a singer, okay? And you book a venue to give a concert where the Overall cost is $2,000. Now, for simplicity, let's say you sell a ticket for, I don't know, $1.

Sean O'Malley: Okay, wait a minute. Gosh. If any of our artists start selling tickets for $1 over at Universal Music Group, which is, uh, a holding in our portfolio, that is, uh, we're going to have real shareholders. Daniel.

Daniel Mahncke: Well, you know, that's fair. That's fair. But it's also, um, you know, it makes the math easier. So let me go with $1 here just for the sake of the episode here. So to break even, if the tickets are only $1, you would need to sell 2,000 tickets. But every sold ticket beyond that comes with a very high profit margin. So there are not a lot of variable costs for any one customer after that. So the more people you can bring in after you covered all the fixed costs, the more your margins improve. And that's basically operating leverage at scale and at work. So the best businesses in the world, and we've looked at a lot of them here on the show, they benefit massively from operating leverage. So think about our portfolio company, Adobe, for example, right? Most of the cost lies in developing the product suite once and then selling one more unit or subscription in their case. And that just adds pretty much no additional cost.

Sean O'Malley: It wouldn't be right to talk about operating leverage and not bring up Uber. I can't help myself, right, because they're always my case study on operating leverage. Anybody who's ever met me at a shareholder meetup or something like that, I'm always hyping up Uber's operating leverage just because it's so incredible to me what they've been able to do, right? So their operating margins on that business have gone from negative 43% in 2020 to nearly 12% positive today. So everyone, um, doing the math at home, that is a 55 percentage point swing in six years. And so they do have some incremental insurance and driver compensation costs. But basically, as they ramp up ride volumes, revenues can be spread across their overhead and software costs that don't scale one to one with each new ride or delivery. And so anyways, it requires a tremendous amount of volume to get to a profitable scale. But Uber has now proven that they not only can operate profitably at scale, but they can continue to improve those margins each year. And so again, to me, that is like the epitome of operating leverage in a business that nobody thought had operating leverage. And the same is probably true of airlines, right? You know, not so long ago, a lot of savvy investors would have argued that Uber could never generate a profit. But those naysayers dramatically underestimated the operating leverage hidden in this business model. And so I wonder if that's going to be a theme today with COPPA as we discuss their potential operating leverage as a business.

Daniel Mahncke: Well, I think the airline industry is slightly older than ride sharing, and I think it has proven over time that generally the industry itself is just not a good place to invest in. And part of that is that operating leverage works in both directions. And with airlines, it's even worse because the upside is capped, while the downside is quite big. So to give another example, let's assume you have an aircraft that has 100 seats now, as you can probably imagine, there are a lot of fixed costs involved in a flight. So the two major expenses are obviously fuel and labor, and those costs basically stay the same whether your flight is fully booked or half empty. So let's say you need 80 people to break even on the 100 person flight. Well, the problem then is that every flight with lower capacity is loss making, but at the same time you can't seat more than 100 people. So your operating leverage is also capped with relatively low upset, right? There's a maximum of 20 seats where you can actually make a profit from.

Sean O'Malley: And you also have to offer those loss making flights just to keep the business continuity intact, right? If a restaurant closed its doors on any slow afternoon just because they weren't making profitable money during those hours, then people would come to not know when the business is open and would start to second guess the schedule and then they would stop going there. And it's the same thing with the airlines, right? Like if there's a reliability and a consistency that has to be there no matter whether the business is turning a profit on those flights or not. Because, you know, if they reduce their options or are canceling flights last minute, you are going to go to competitors. And so, you know, as I'm saying here, with that competition, that just makes it even harder to make a, uh, profit because all of the airlines compete on price and therefore that pressures the margins even further.

Daniel Mahncke: To stick with this example, the lower an airline has to go on pricing to stay competitive, obviously also the more seats it needs to fill to still make a profit, right? So more and more price competition would mean that eventually you don't need 80 customers to break even, but maybe 85 customers, right? This makes it even more likely that you will lose money on a flight and it also caps your upside even further. And this is where another disadvantage comes into play. In the video a minute ago that we saw of Buffett, Buffett basically mentioned the problem that airlines sell their last seat at basically any price. And this is a pretty important detail because that dynamic crushes essentially the price for every competitor. So when I booked my ticket to Malta recently to visit one of our Mastermind members, who actually also told me that I should cover this stock because it's interesting, I didn't care which airline I booked the flight with, right? Like, the only thing I looked for was getting the cheapest flight with the best connection. So I don't like having two stops, obviously. But so, you know, direct flight or maybe one stop when I travel to Omaha for Example, but then the cheapest connection. So the first observation here is that flights are obviously a commodity. Like, I don't care which brand it is, I just care about price. And the direct flight in the best case. Not a huge surprise there. And the second is that my ticket price alarm, which actually set in this case was going down as the travel date got closer.

Sean O'Malley: The biggest issue here, Daniel, is that you didn't include me on your trip to Malta. I, I guess, though, this price, uh, alarm going down as the date gets closer, though, that's sort of an interesting thing.

Narrator: Right.

Sean O'Malley: And I, I guess this is. You mention it because of the operating leverage involved here.

Shawn O'Malley: Right.

Sean O'Malley: You know, once the threshold for breaking even on the flight is reached, airlines make basically a hundred percent pure profit on each additional seat sold. So they're thinking, if I can't sell it, uh, for $200, I'd rather sell it for $100 last minute than get no money at all.

Shawn O'Malley: Right.

Sean O'Malley: Is that sort of the right way

Daniel Mahncke: to think about it? Yes, that's basically the dynamic there. You know, when you, for example, book a hotel room and it's not sold for a single night. Right. And you can still sell it tomorrow or the night after. But a seat on a flight you can basically only make money with until, well, the plane is in the air. So if it's not sold by then, the airline basically missed out on the highest margin part of the entire flight. So airlines are under this enormous pressure to fill that last seat at any price above basically zero. Although, you know, technically, obviously they want some money, but it's a significantly lower price than, you know, maybe three months ago when you booked. And that's only because of this marginal cost of carrying one more passenger being so low.

Sean O'Malley: So as you're describing this dynamic, I can't help but think of our experience with our hotel rooms in Omaha recently for the Berkshire shareholder meeting.

Shawn O'Malley: Right.

Sean O'Malley: In May, we obviously booked our rooms for this year's event as soon as we possibly could. So almost a year out, because usually that's how you would think that you get the best prices. But this year, hotel rooms around Berkshire weekend, they had this similar problem to airline seats just because the demand was so much higher than any other time of the year, typically. But then at the same time, uh, hotels during Berkshire weekend in Omaha could historically be able to fill every single room. So that would be as if an airline had, you know, a fully booked flight, then they wouldn't make tickets cheaper over time, of course, because why would they do. So they have the sort of the leverage to raise prices for last minute purchases. But this time though, with Buffett not on stage and Greg Abel taking over as CEO, demand was lower than expected for attendance overall. And hotels ran into this airline problem. If they didn't sell their hotel rooms for the Berkshire nights, then demand would be way down afterward. So they would rather just sell out all the rooms, even if the price is at a lower rate than it would have been in prior years. And so anyway, long story short, Daniel and I booked a motel for probably the price of a four star hotel this year, while people who waited to do their bookings at the last minute got four star hotels at probably the same price or a better price.

Daniel Mahncke: Yeah, that was a tough one, I gotta say that. I mean, honestly, the room itself was not too shabby, but you know, the lobby and maybe also the breakfast service wasn't exactly a four star service, I gotta say that. And actually I saw the same thing happening with flights as well. I think I paid 1100 bucks for my flight to Omar last year and if I would have just waited six or seven months, I would have gotten a significantly cheaper price. So this time you actually saw the same dynamic with hotel rooms and then also the airplane tickets.

Sean O'Malley: Come on, don't tell me that you don't think that two day old stale muffins aren't the epitome of a great breakfast, Right? How about we dig a bit deeper though into the fixed costs so that we're not spending too much time talking about muffins. And after that we can get to some of the reasons why COPA doesn't face the same pressures and is able to earn profits while the competition is just getting hammered.

Daniel Mahncke: Sure, I think that makes sense. So we talked about the costs. Again, the main ones are fuel and labor. So for copa, for example, jet fuel is about a quarter of revenue in costs. It's a huge position. And the price of it is basically set by global oil markets, which means that the airlines have no control over it. And if they are smart and, or uh, lucky, it kind of depends on who you ask. They can hedge against that with long term contracts that basically enable them to buy fuel at a certain price for a period of time. Copper actually has a policy against doing that, against hatching. So they always buy it for the market price and you know, we can talk about that later on, but that's basically how you can do it. And you could certainly argue that especially in a time like today where there's a bit more uncertainty about the pricing, it would Be nice to hatch. But looking at the history and their track record of not hatching, to me, it appears like they generally make a good choice there. Ryanair, for example, has recently hatched its exposure to fluctuating prices, which is what hasn't been heard as much by the current Iran conflict. So, as you can see, there are two different approaches. I wouldn't say there's right or wrong. It's just whatever the culture of that company, then beyond those costs, you have many tens of millions that you pay for the fleet of, uh, the aircraft, the crew, the gate, the maintenance, all that sort of stuff. And as you said, that's basically all happening regardless of how many tickets you actually sell for a flight. And you definitely got to take that flight, because if I just go to the airport and they say, well, we only sold 50 tickets, and that's not making any sense for me anymore, we cancel the flight, that's obviously terrible customer service.

Sean O'Malley: So, one other thing that I have to say, and I promise after this, I'll give you the opportunity to tell us why COPPA is different. But looking at the airline industry, you just don't have the normal, natural, healthy cleanup mechanism that happens with bankruptcies. Right. You know, with forests, it's important to have these targeted burns to get rid of a lot of the dead wood, because otherwise it accumulates. And then when there is a fire, it's much, much worse. You get this massive wildfire. And that's like, sort of what I'm imagining here. That's a metaphor that people use for a lot of financial crises of these targeted burns to clear out the brush so that you have a, uh, healthier ecosystem overall, and you don't have that with airlines.

Shawn O'Malley: Right.

Sean O'Malley: And, you know, Buffett and Munger mentioned how railroads became much better businesses to own after a number of consolidations and bankruptcies happened, and these bad operators were taken out of the picture. And when airlines go bankrupt, though, the airline is often saved or restructured, and then it's just business as usual from there. Right. I mean, we just seen this happen with Spirit, and some other smaller airlines have been bailed out by the government after the fuel price increases brought them to the verge of bankruptcy. And yet you can see why this happens. There's, like, a too big to fail dynamic here.

Shawn O'Malley: Right?

Sean O'Malley: Airlines are essential to the global economy. And actually, I know you know this story, Daniel. I found myself at the center of this problem when my airline to Denmark went bankrupt right before I was making a business trip to visit our colleague Stigma. And, you know, let's just say that causes a lot of stress. The, uh, longer that operations are halted, the more people are impacted. And so it does become a compounding problem. So you can see why governments are so quick to want to step in and help out.

Daniel Mahncke: You know, usually it's not an advantage to live in Germany if you work for TIP and you think in terms of traveling, because most of the time it goes into the States and I have all the terrible travel stories. But, you know, I'm visiting Stake next week and I'm fortunate enough to have a pretty short trip, so I'm just taking the train. There's no stress with catching any planes or any airlines going bankrupt. But yes, basically what you described is a pretty vital part of the industry. And you know, it's generally another one of these vicious cycles in the airline industry, right? Usually you benefit when a competitor goes bankrupt. But when an airline goes bankrupt, as you said, you know, its planes usually get sold cheaply to somebody else, a competitor of yours, which once again fuels the pricing battle. Or the airline just restructured its debt and sheds its obligations and comes back roaring out of Chapter 11 bankruptcy. And then it's basically leaner than the competitors who actually paid their bills and were struggling to get through this phase or recession, for example. So the discipline that fixes other industries doesn't really work the same way with airlines. And then, you know, capital keeps getting destroyed and then capital keeps coming back for more. This is basically what Buffett described in this video as this bottomless pit, which basically the airline industry is.

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Sean O'Malley: And I know because we did that in our episode on Duolingo. There's millions more data points too, all updated within minutes of earnings, not days later. Like legacy platforms, you can export data, run screeners, pull earnings, call transcripts and Morningstar reports, track super investor holdings and compare companies head to head, just like me and Daniel do, and even plug fiscal AI, uh, into Claude to power your AI research with institutional quality data. Head to Fiscal AI Slash tivp. You'll get two weeks off Fiscal Pro Free and if you upgrade, that same link will save you 15% on any paid plan. Again, that's fiscal AI TIVP. If you're listening to this show, you're already doing the work most investors won't tearing into individual businesses, pondering intrinsic value and thinking in decades instead of quarters. At some point you start to want people to do that work with though. That's why we built the Intrinsic Value Mastermind group and you've probably heard me talk about the intrinsic value community before. And this is that same space with the name Refresh. It remains a home for serious long term investors committed to compounding their knowledge relationships and finding great stock ideas. And as a member, you'll join monthly video calls me, Kyle Grief and Daniel Maca, where we'll dig into what's actually happening in the markets and in individual businesses. You'll sit on private conversations with fund managers, business operators and authors that we respect. The kind of access that does not fit inside of a 90 minute, uh, podcast. And you'll have the chance to join us in roaming Omaha together during Berkshire Weekend too, one of my favorite weekends of the year. If you're looking to expand your circle of investor relationships, get smarter about assessing intrinsic value and are always looking for new stock ideas, then what are you waiting for? Apply for free now at uh, theinvestors podcast.com mastermind that's the investors podcast.com mastermind. And if your application stands out, I'll be reaching out to you personally to schedule a call. We've actually seen what happens when an industry does go through that cleanup with the railroads business, as we mentioned, and as Buffett and Munger have talked about at length, right? Buffett went big on BNSF because railroads basically finished their bankruptcy phase decades ago and consolidated down to a handful of players. And then you shift to an oligopolistic industry structure and the economics look very, very different, right? Those players got disciplined, the economics improved thanks to scale. And so railroads used to be just as bad as airlines. Too many operators, brutal pricing, everyone going under, too much debt and then they just got down to four or five disciplined operators working at scale without these kind of pesky, unprofitable operators on the margins ruining their business and the whole dynamic flipped and somehow airlines just never got there. So that's really something I would be so curious to wrap my head around more.

Daniel Mahncke: Well, Bill Miller, who most of our audience is probably Familiar with, actually bet on exactly that happening with airlines, too. Repeatedly. He invested in airlines in, I think it was 2008 and 2013, calling an airline renaissance driven by industry consolidation. Basically, what we've seen with railroads, it played out to some extent, but certainly not on the scale of railroads and what Buffett has experienced there. He continued investing in airlines again and again. Buffett did so as well. So I believe that some investors still hope for that to happen and eventually seen somewhat of a shift toward that actually happening and playing out. But then Covid came along and also kind of reshaped the entire industry again. So it just keeps being a pretty volatile and just uncertain place to be in.

Sean O'Malley: We were talking about this before the recording, but we have a tremendous amount of respect for Bill Miller, and he is actually a friend of the show, and he's been on the podcast previously. So when he makes a statement like this with his investments, you know, it's something we pay attention to. Right. And there does seem to be something about airlines that has attracted super investors repeatedly. And I think it's good that you bring it up now, because up until now, we've probably thoroughly convinced our audience never to touch this sector, which is probably not the best way to start a pitch for a stock that is in this sector. So maybe we can turn things around. You know, if the industry is this structurally cursed, how does anyone make money? Because some companies, and especially Coppa, clearly have, as I'm sure you'll tell me here shortly.

Daniel Mahncke: I will. I mean, I definitely have to say this is by far the. The hardest pitch I've ever done.

Shawn O'Malley: Right.

Daniel Mahncke: The airline industry is just a tough, uh, one to convince people of. But I do think there are a few ways to make money. So the most powerful one, and we already touched on it with Ryanair, is just being the cheapest player. If everyone is selling an identical product and, you know, prices keep getting pushed down to the floor, the only player who survives that floor and actually is making money there is the one with the lowest cost base. So Ryanair and Europe and perhaps Southwest, back in its prime, at least in the U.S. um, so these are the airlines that have consistently reinvented what is expected from an airline and saved costs wherever it's possible. Right. And the second one, which I personally find even more interesting, is owning a network position that competitors just can't copy. So that could be an airport where, you know, these slots are constrained and you control most of them. Or, uh, and this is actually the game that Copa plays, a geographic position where it doesn't make economic sense for a rival to even try to fly the same routes. We will get into that into detail later. But then there's also a third way that you can make money and be profitable. And that is a, uh, restructured competitive field. So the reason these big US Airlines became investable for a period and the reason Buffett, of all people, and then also Bill M. Miller got interested in them is because for a short period of time, this is what I said a minute ago. It looked like there will actually be mergers and, you know, consolidation in this industry. And then as I said, there was kind of COVID coming in and making it a bit more difficult.

Sean O'Malley: But that's not what happened, right? I mean, at least not in the

Daniel Mahncke: U.S. yeah, it did not. I mean, again, Berkshire bought the four big US airlines and then in the spring of 2020, again, Covid grounded the entire world and you know, Berkshire went out and sold on its entire basket, obviously at a loss, and basically said that the world has changed for airlines and probably for good. So even the most disciplined version of this industry, which it probably has been before COVID got taken out of the Wood chat by a single exogenous shock. So to be fair, I would say personally that many, many industries were hit hard when Covid happened. Obviously, you know, airlines were certainly up there, but I mean pretty much all industries were not selling things, except for the E commerce players maybe, but it was a tough period for all of them. And ah, we did see travel and we talked about it in our Transom episode. We did see travel pick up quite significantly after Covid. So I didn't think there was no lasting damage to the industry.

Sean O'Malley: Now I don't think there was a single industry that was probably hit harder than the airlines during the pandemic.

Shawn O'Malley: Right.

Sean O'Malley: Like, it's hard to imagine one, at least for me. But, uh, I do want to ask you about this other thing that I've always thought about when I fly and it's these loyalty programs and that sort of stuff. How does that factor in here, right? I mean, did that change the airline industry for the better?

Shawn O'Malley: Right.

Sean O'Malley: Whenever I fly, it's kind of amazing and also annoying to me. All the things that I can book in addition to my seats you're trying to sell me on, um, like extra luggage, better WI fi priority boarding, which I've never really cared about, Economy plus, economy super plus, you know, whatever that means. And then all these different miles programs. I just can't help but think like, they wouldn't be doing this if it didn't have some sort of positive impact on the economics.

Shawn O'Malley: Right?

Daniel Mahncke: Yeah, I think so. I actually thought about this just last time when I traveled back from Montana. There were all these different things that you could buy. And as you said, I don't know who pays for faster boarding. I just don't seem to think that it makes any sense. I mean, I was getting told that you can get your luggage in better positions. I don't know, maybe that's true. I probably won't spend an extra dime on that. But yes, generally these frequent flyer programs, the miles, and especially the co Burnet credit cards that, you know, are, uh, in partnership with these big banks and are coming out more often, those actually make the airline industry slightly better. So, you know, it's basically the first thing that is introducing somewhat of a switching cost mode into this industry. And obviously it's high margin, you know, it's relatively stable. And again, like, probably the only thing I can think of that gives it somewhat of a switching cost mode. If I have a miles program with, you know, United, most of the time that I fly to, for example, Omaha or New York City, I would choose United so I can get some miles on my card. And I actually recently talked to a friend who told me that he pays for two vacations a year just with the miles that he earns from flying. So I don't know. By now I'm flying so much that I'm thinking I maybe should give more thought to optimizing my miles and loyalty programs than I currently do. I should probably ask you. I mean, knowing how you trick the system with all your credit cards, you probably have some good tips for me on how I do the same with miles.

Sean O'Malley: No, uh, Daniel loves to tease me because I'm, I'm always looking for these like, personal finance hacks and they've worked pretty well for me, I gotta say. And you know, it is funny that you, you mentioned it because I don't think I've ever actually paid for a trip with miles, though. And maybe it's just because I'm a value investor, but I love to know exactly how much I'm getting back. So I always opt for the cash back cards where it's like, you know, you get 2% back, right? You spend $100, you're getting $2 back, right? Very tangible. I can understand that. But whenever you have these miles programs, they have these like, uh, crazy conversion rates. And I have no idea. They're like, if you spend this amount of money, you get 50,000 miles or points, I'm like, what does that mean? It drives me crazy. And so I just get lost. And I don't know. I want to know simply how much cash going to have in hand, what is this worth? And yeah, that's always been my approach to credit cards. But, you know, now I have a card that allows me to earn points on my mortgage payment and without any transaction fees. And so I might be redeeming those soon for a trip and, you know, maybe I'll have to come out to, uh, Hamburg and use some miles to do it.

Daniel Mahncke: Sounds good.

Sean O'Malley: But to, uh, no, to get back on track. I mean, let me take a shot at summarizing what we discussed up until now, right? We've covered a lot of ground. The airline industry has historically destroyed capital due to commoditization, perishable inventory, fixed costs, fuel costs and cyclicality. And the handful of ways to beat that are really just to be the low cost producer, own an uncopyable network position, operate in a very disciplined market structure, you'll milk out these loyalty programs and then carry a balance sheet that is strong enough to outlast any of these cyclical crises that emerge.

Daniel Mahncke: And that's essentially why I'm pitching COPPA today, because I do believe that COPPA isn't just one of those things, it's actually all of them. I mean, they are the lowest cost network carrier in the Americas. They sit in a geographic position that I don't see anyone replicate. And they've got by far the strongest balance sheet in Latin American aviation, which is also where they were the one airline in that region that didn't go bankrupt during COVID So I think to better understand why and how COPA is actually different, I guess it makes sense to take a look at its history. So it was founded back in 1947 as the national airline of Panama. For us, though, I think it starts to get more interesting about 40 years ago, when Pedro Halbron became the CEO of the company. And the remarkable part about that is that he is still CEO today, 38 years later, which is pretty much unheard of in the industry. And while he's not a founder, a tenure this long, in my opinion, at least to some extent makes up for that.

Sean O'Malley: No, I think that counts. And I'm just trying to think here, uh, do we have any companies in our portfolio with a CEO who's been at the company for longer than that? It's such a rare thing to find.

Daniel Mahncke: Yeah, maybe not anymore. I mean, last year we could have still pointed to Berkshire Obviously. And we looked at some companies that came close, like, you know, Mark Leonard at Constellation Software, for example, but I don't have anyone in mind right now.

Sean O'Malley: Oh, it's true. Well, we, uh, do have Andy Florence of Cosar, actually. He tops that. Right. He's been the CEO for something like 40 years, so I don't know how we could forget that. And when I think about the companies we've covered where the operating culture is really durable, like a Mark Leonard at Constellation software for 30 plus years, or a Buffett at Berkshire for 60 years, or Bernard Ernau at LVMH since what, the late 80s. And they all kind of have one thing in common, right. There's this one person who has been steering the strategy for decades and just refused to change course. Right. And very, very high conviction. And again, that was one of the things we liked about CoStar and why we own it in our portfolio, even though it's a smaller position. And it's just the consistency that you can get from that can really be enough to dominate some of the toughest industries. And you just don't get that from a CEO who's coming in as an outside consultant or that's trying to hit a number for the next bonus cycle. Usually having these long tenured CEOs means that they own a meaningful chunk of equity, and so they have skin in the game. And that goes hand in hand with how they run their business. There's a mindset, there's a principal agent dilemma that gets solved if you have a founder CEO with significant skin in the game running the business truly on behalf of shareholders, because they themselves are massive shareholders.

Daniel Mahncke: And that is certainly also true for coppa. But since the structure is somewhat complex, I would suggest that we save that for later, just for now. They do own the entire management team, owns a pretty significant chunk of the equity and the economic interest in the company. If we take another look at coppa's history, for now, there was another big turning point, because in 1998 Continental Airlines, which was this big U.S. carrier at the time, took a minority stake in Copa. And that partnership basically gave COPA the template for the hub and spoke model on which they then built their entire future.

Sean O'Malley: And that United relationship that, uh, everybody associates with COPA today, as I understand it, where does that come from? Is that related to this original partnership they had with Continental that was part

Daniel Mahncke: of the United and Continental merger which happened in 2010? So Copa's old continental alliance simply became a United alliance. And then in 2012, Copa formally joined the so called Star alliance, which is, you know, this global airline grouping anchored by United. And that's pretty important, actually, because the Star alliance membership of United is actually a big part of why Panama works so well as a hub for travelers, especially coming out of the United States.

Sean O'Malley: So walk me through the actual business here. You mentioned that the core of COPA is that it's a hub and spoke connector. And so what does that actually mean? Right, I mean, that's. There's some real jargon there. And also, why is that a better position to be in compared to the more traditional business model for airlines?

Daniel Mahncke: Yeah, so a hub and spoke model is basically a routing system where one central airport acts as the primary transfer point. So, for example, Chicago is one of United hubs in the US Where. So whenever I fly to Omaha, I go through Chicago. And for copa, the whole business is really about these connecting flights because they have a pretty special spot in Panama. So Panama sits right at the narrowest point of the whole American continent, basically the geographic center of the hemisphere where North America funnels down to meet South America. And copa's home airport, Tahcooman, sits at the sea level, pretty much in the middle of that. So they fly something like 85 cities in over 30 different countries, north and south, and they route all of them through that one airport.

Sean O'Malley: Oh, uh, I definitely could see how that location then seems like an advantage compared to other airlines and hubs. But is that so much of an advantage that they have a structurally more profitable business? I mean, as you mentioned, all the big airlines have their hubs too, and there are these strategic advantages that come with them.

Daniel Mahncke: That's true. But, uh, the location actually creates massive cost benefits for copa. And I'm actually, I'm getting quite excited about this. I think I told you before that I just love diving into the industry, and I didn't expect that before I did it. So, due to the positioning, COPA can use Boeing 737s, which are these small, cheap, and also the most efficient planes to reach essentially every single one of those 85 destinations from, I don't know, Buenos Aires in the deep south to Toronto in the far north, without a payload penalty.

Sean O'Malley: Payload penalty. Well, you know, I have to say I think we were both buzzing with excitement to do this call because it's something new for us. And, you know, after you've covered 70 plus businesses, things can get repetitive. And one of the interesting things about our pitches, though, is, uh, that there is always something new that we learn and would have never otherwise thought about. And so I have absolutely no idea what a payload penalty is. And I figure you probably had no idea what that was until like maybe two weeks ago. But I can feel the excitement in you as you talk about how COPPA is shielded from the payload penalty.

Daniel Mahncke: It's interesting. As you said two weeks ago, I didn't know about it, but yeah, again, I told you before the call that I really enjoyed diving into the airline industry. So I think it's just one of those things that we all know as consumers and many investors obviously know that's supposed to be this bad business, but few people actually know the economics behind it and why it is the way it is. And I just love to learn those things. Right, like how do they work? I would say that you sort of understand how the world works one company at a time. I feel like that's what we're doing here week in, week out. But anyway, to answer your question of what a payload penalty is, basically every plane has a maximum weight that it's allowed to take off at, and that weight has to cover obviously the plane itself, the fuel and everything paying, which means passengers, bags and cargo. So on a long route you need so much fuel on board that there's less weight left over for the paying load. So, you know, cargo and even passengers, for example. So in practice that means the airline carries less cargo in the belly. And on the very longest routes they actually have to sell fewer tickets than the plane can physically hold because if they sold every seat and loaded all the fuel needed, the plane would literally be too heavy to take off. So the longer the route, the more revenue you're literally leaving on the ground. And copa's geographic basically sidesteps that whole problem because Panama is so central. Again, none of copa's flights are actually ultra long haul, so there are all these medium length hops radiating out from the middle. So COPA gets to serve this continent spanning long haul looking network using these small, cheap, single aisle planes, the Boeing 737. Whereas if a competitor tried to connect say North America and South America directly, they would need big expensive widebody jets to do it just because they're not located in Panama. And there's also this compounding thing going on, which honestly looks like a form of network effect when I look at it. So every new destination Copa, uh, adds to the hub, doesn't just create one new route, it actually creates a whole lot of new routes, right? Many and many of them. So if COPA adds, I don't know, Puerto Iguazua in Argentina, which is a Destination they currently don't have, but are, uh, actually working on getting that onboarded. Then you can fly from dozens of different countries and starting points to Puerto I Goazoa, not just one point. So it sounds obvious, I know, but that's a pretty big thing for the economics. So Copa generates over 5,000 marketable city pairs out of those 85 destinations. That's what we're talking about here.

Sean O'Malley: Oh my gosh, you're really getting me excited here. I had no intention of being so excited about an airline stock heading into this, but I, uh, know you're getting me fired up. And I mean, the network effect here reminds me a little bit of CoStar. Right? Every new property added to CoStar's database makes the platform a little more valuable for existing customers. And so the value of the network compounds faster than the inputs, basically. And it's similar for copa, where each new destination COPA adds. It's not just one new route. Right. It adds a connection to every other city already in the network. And so, I don't know, it's pretty cool to see that dynamic in an airline, right? It's not really a mental model I would have been able to apply before I. If we hadn't have studied a lot of the businesses that we have. And so with all that, how about we dig a bit deeper into the financials here? Because to be honest, I only have a vague idea of what the revenue breakdown of an airline should look like and what the margins would actually be for the business. And that comes with some biases about having been told about what a terrible business airlines are. And I don't think that's entirely true with coppa.

Daniel Mahncke: Well, the revenue is actually as simple as one would think. So the overwhelming majority, which is around 95% revenue, is from selling seats to passengers. Then only about 3% is cargo, and the last 2% or so is all the rest. So, you know, that's where you find the loyalty program. For example, the great thing about cargo, and let's call them, um, value added services, so loyalty and all that sort of stuff is that they are high margins. So when Copa flies a passenger 737 from one city to another, the belly of that aircraft has space in it, which is sold to ship freight. And since it comes at no, uh, additional cost, that's pretty high margin revenue. Right? So COPA has also been leaning into cargo more deliberately lately. So they've added dedicated freighter aircraft. And cargo revenue has been growing quite nicely. I think we talk about 20% year over year in Recent quarters, it's still obviously small in the overall picture. Again, it's only 3% of the total, but it's basically free optionality, right? It's stuff that you just get by buying copa. It's not something that you bet on. I think it's pretty similar. So copa's loyalty program is called Connect Miles. And because COPA is part of this United Star alliance, those miles plug into the whole global alliance, which makes them way more useful. As if it would just be, you know, this small Panamanian airline. So on its own, a frequent flyer program is maybe a nice loyalty tool, but the real money is, as I said before, in this co branded credit card. And that's the deal where a bank issues a, uh, copper branded card, then customers spend on it basically everywhere, and then the bank pays COPPA for the miles that those cardholders earn.

Sean O'Malley: But for both of these segments, the problem is that they're pretty tiny, right? I mean, even when the core business only grows mid single digits, you've got Cargo growing at 20% plus. It's going to take a long time before that actually starts impacting overall revenue. And so I can imagine that also that there's still a limit to how much growth is achievable here, right? Since you only have so much space on a plane, you're operating with a very finite resource. And I would think in a way that it's similar to the loyalty program.

Daniel Mahncke: That's completely right. I mean, you can buy COPA thinking you will see some mix shift that turns this to really high margin credit card business, of which we own enough anyway. So you're still buying an airline at the end of the day. That's true.

Sean O'Malley: So I know that some of our Mastermind members have really wanted to see us cover Ryanair, which is also famous for being one of the few profitable airlines and it's probably known as maybe being the most efficiently run airline out there. And you know, they have a bit of a reputation for that efficiency. So that has led to them having very interesting social media presence, right, where they joke a lot about the accommodations that they cut out for passengers and it's become sort of a meme online. But, you know, how does Ryanair's efficiency and profitability profile compare to copa? I imagine COPA can't beat them on the social media front, but with the actual business, how does it compare, right? I mean, are they. Is COPA similarly efficient or does it not need to be as extreme in cost cutting thanks to these competitive advantages that it already has in terms of the business Positioning so it can compete

Daniel Mahncke: on the social media front. Probably the only company that can is, I don't know, Duolingo, which is also quite good at it. But yeah, this was actually one of the more interesting things that I came across when I started looking at it. So airlines all report a metric called CASM C A S M, which stands for cost per available seat mile, basically what it costs the airline to fly one seat one mile. And there's a version of this called X fuel qasm, which is the same number but obviously with the fuel cost taken out. And that's the one that actually matters when you're comparing airlines. And as you can see if you look at the numbers for Copa, they are better than 95% of airlines on that metric.

Sean O'Malley: So why strip out the fuel costs though? Because that is a real cost, right? Why would you not want to account for that?

Daniel Mahncke: It is a real cost, but every airline pays pretty much the same per gallon for fuel because the price is set by the global oil market, as I said before, and none of them really controls it. So what that means is that fuel costs go up and down for the entire industry at the same time, depending on where oil is trading. So if Copper's total cost looks great in one year and then bad in the next, that mostly just tells you about whether oil was cheap or expensive that year. So it doesn't really tell you anything about whether COPPA is actually a, uh, better or worse run business. So to figure out which airline has the better cost structure, you got to look at everything except fuel. And that's essentially what ex fuel chasm gives you. So COPA is currently at about 5.8 cents. And to put that into context, the only other airlines that I'm aware of that operate below six sends are Ryanair, which you mentioned, and Wizz Air. And then I think there are also two pretty small Latin American airlines that also operate, uh, sub six Sense. And COPA has been at that level for years now. So the fuel spike, the Max 9 grounding, which you know was a time in 2024 where a lot of those planes, especially the Boeing ones, had to stay on ground. All of that and even global wage inflation, all of that couldn't bring down the margins that copper was earning and didn't spike their cost structure. So it's not just one lucky year, it's actually something that they've built into the way the airline operates and they've

Sean O'Malley: done that by only flying one family of aircraft. This is what it sounds like, the Boeing 737. And I imagine that saves a ton on cost because they only need one type of pilot training, one set of spare parts to use, one really overall maintenance procedure, uh, and so on. And so if you compare that to a United or an American, they've got Boeing's, they've got Airbuses, they've got regional jets, they've got widebody jets, and they have to maintain all of that in parallel. So you just imagine how complicated and expensive the maintenance and the servicing and all of those different variables come in. And COPA just really doesn't have to deal with that.

Daniel Mahncke: It's only complex. We also remember who's a pilot and I don't want to say anything about the airline just because I don't know if we're allowed to. But he told me, when I told him that I will cover an airline, that he just does not understand how they can make it happen, that planes actually go up in the sky and come down on schedule all the time. Because he says there's so many things that go wrong all the time that him just sitting in the airplane, he has no idea how all of that works out. Which, um, if he's on the ground every single day is not the most encouraging thing that he could have said. But another advantage COPA has that Ryanair, for example, doesn't have, and especially over the US carriers is labor costs. So Panamanian wages are obviously lower than US or EU wages. And in 2025, Copa's wage bill was about 14% of revenues. And a big US airline would usually spend about 25% of revenue on those wages. And since most of Copa's customers aren't Panamanian, but just connecting through Panama on their way somewhere else. COPA is actually benefiting because they are collecting international ticket prices which, uh, tend to be higher from a global customer base while paying Panamanian wages to its crew. That's another global advantage for them. And then there's the so called completion factor, which I honestly hadn't even thought much about before I started researching all of this. The completion factor basically shows you how many flights actually go into the sky and make it to the ground. Safe. Of course, that's what it says.

Sean O'Malley: I know you have some experience with flights that don't make it off the

Daniel Mahncke: ground, Daniel, you won't let that go. Although you now also have the Denmark experience. Right. So just for context for the audience, last year when we traveled to Omaha, I was canceled on. I think it was three flights initially and you know, eventually had to spend an extra night in Frankfurt and was Canceled, even on my next flight the next day, for which I woke up at 5am in the morning, only to start flying six hours later.

Sean O'Malley: But it was brutal.

Daniel Mahncke: It was brutal. And I think I also mentioned it here on the podcast, like, six times. But now it should show you the PTSD I got from this experience. So, yeah, unfortunately, you know, I've got plenty of personal experience with that, but it's not just annoying for the passenger. It actually costs the airline a whole lot of money. So from what I read, a single cancellation can cost the airline something like 25 to $60,000 once you add up, you know, the crew you've already paid, the rebooking hotels, as, for example, me, the stranded passenger, in this case, all of that. And, you know, the plane never took off, so you made zero revenue on it, obviously. And on top of that, you spend a bunch of money cleaning up the mess. So, in this industry, the most profitable carrier, it's actually just the one that consistently brings its planes into the air and obviously selfies down again. So COPA is one of the best in the world at this. They are at a completion rate of about 99.8%. So out of every 1,000 flights scheduled, only two don't happen. Ryanair is also in a similar range. I think the big US legacy carriers tend to be at around 97 to 98%. And then you might think, well, okay, 99.8% compared to 97%. What's the big deal? But because airlines run so many flights, that gap is actually huge in practice. So if a carrier of COPPA size ran at 97% instead of 99.8%, that's something like 28,000 extra cancellations every single year. So at 40 grand a pop, you're talking about a billion dollars in extra costs just from cancellations. So this thing that sounds like a small operational detail is actually one of the biggest cost differences in the entire business.

Sean O'Malley: Sort of scary to think about how quickly all of these profits can just evaporate. And at the same time, there's no reason to believe that rate should go down in Coppa's case. You know, from everything you're telling me, it almost sounds like too good to be true, considering we're still looking at an airline, after all. But, you know, for me, it's all about figuring out the moat today, which is kind of cliche, but it is an important thing to think about. We know that the barriers to entry in the airline business are actually low, even though you might initially ask yourself, why? Because it's such a capital intensive industry, you would think that the barriers to entry would be very high. Right. I wouldn't know where to begin with starting an airline business tomorrow, but I have heard that it's actually comparatively easy to get financing for an airline compared to other projects of similar sizes. And why is that? Well, banks like to lend when there are high quality physical assets to lend against that are backing up the value of the loans. And so in this case, you couldn't really have higher quality collateral to lend against than new aircraft. Right. These are very valuable assets that have long lifetime uses. And so the depreciation is relatively slow, at least compared to, you know, you buy a car and then you drive it off the lot. And the old joke is that it loses half its value. And, uh, you know, as Buffett once said, there are a lot of people who want to be involved in the airline industry and, and that's why it keeps attracting capital. And so let's go ahead and jump to some comments that Buffett has made on that.

Shawn O'Malley: And people love doing it. It's exciting to people, and you can sell the idea. I've had probably a dozen proposals over the last 25 or 30 years from people that, that want to get into the airline business one way or the other. And a number of them have. It's sexy for some reason. I mean, you know, if you go to the office of some Mr. Big CEO and say, I want to talk to you about this new airplane, you get in the door. You know, I mean, if you want to talk to them about hauling coal or something, it's a little different. So is a business that attracts people and you can go out and raise money for a new airline.

Sean O'Malley: So when I look at a map, I see Costa Rica and perhaps Nicaragua that could have a similar geographical advantage over other airlines. And so my question is, is that a threat that could challenge Coppa's business model and their competitive advantages if somebody goes to one of these other geographies and just copies their playbook?

Daniel Mahncke: Actually, the first thing that I did was also just opening a map and seeing, okay, well, very naively, what other places could copy that business model just because they're close to Panama? And I would generally say it's very tough to do. And also, the geography is really only one part of the mode. I wouldn't call it a flywheel exactly, but there are a couple of things that work together to create the mode that I see for copa. So one of them is the geography, but only because it lets Copa fly the 737 and reach the whole hemisphere. So everything we already talked about. The bigger piece of the mode, in my opinion, is actually the first mover and the scale advantages they already have as the region's biggest hub. So a connecting hub is obviously only worth anything once it's already big. Right? So it's a kind of chicken and egg problem. You need a lot of travelers to create a dense system, but you need a dense system to attract a lot of travelers. So if you actually wanted to challenge COPA today, you would have to stand up something like 80 destinations and all the frequencies between them more or less at once, and just burn cash for years without any profits to show for it. So just to get the starting line where the network effect would eventually kick in.

Sean O'Malley: You know, it does remind me of the dynamic between Uber and Lyft, where generally speaking, they can both charge the same rate for a ride, yet for Uber that ride will add, um, profitably to their bottom line, whereas for Lyft it adds to their losses, which seems like it doesn't make sense. But the reason it happens is because Uber has reached a scale that Lyft hasn't. So the way the costs are spread out is, is more advantageous basically for Uber. But I don't want to drag us back into a discussion of operating leverage. But anyways, my conclusion from what you're describing is basically that this is a classic network effects trap where it's very, very hard to compete with a dominant competitor once they have an existing position in the market.

Daniel Mahncke: That's solely how the dynamic seems to be. And you know, it's also proven just by the track record of the financials. Right. They look fantastic for the last 20, 30 years, so it very apparently seems to be impossible to copy what they have. The second barrier, which is also really hard to disrupt, is pricing. As we said, Coppa has a sub 6 cent cost base based on Kasm, what we talked about earlier, this probably most important metric in the industry. So it would be almost impossible for competitor to actually run them more efficiently, which means you would be burning even more money trying to catch up, because copper can just bleed the competition out and undercut the prices the whole way. Obviously the downside there is that if companies should come in and be ready to burn a lot of money over a couple of years, it would still result in a margin drag for many years for copper. So even if copper survives and the competitor goes bankrupt eventually, there will be a series of years with margin pressure. And as we talked about before, bankruptcies don't happen in the airline industry as naturally as it does or as they do in other industries.

Sean O'Malley: Taxes and currency are also a big advantage. Panama doesn't tax foreign source income, which is basically all of copa's income because their passengers, uh, are mostly flying between two other countries. And so Panama also uses the US dollar, so there's no currency risk and no capital controls that you have to worry about. And, and that is a big difference maker when you're talking about an emerging markets region of the world.

Daniel Mahncke: No tax on foreign income. Sounds like I might need m to look at some house prices in Panama. I'm just kidding. It's not only true, it's an advantage, you know, that most competitors can obviously not compete with. And as you said before, that we always try to balance out our exposure to these emerging markets. So if you are in a market that actually uses US dollars and it's kind of packed to that system, um, it obviously helps a lot from an investor standpoint. Then last but not least, this is also a business built on trust and relationships. So you know, flight routes are uh, basically always negotiated government to government and generally require the airline to be nationally owned and controlled. So Panama has spent only decades building all of these relationships. And I just don't see Costa Rica or pretty much anyone else in the region to replicate that anytime soon. Actually you also see that Costa Rica is going in another direction. So they are growing their air capacity faster than Panama is right now, but mostly focus on tourism. So people fly to Costa Rica, uh, for vacation, not to pass through it, which is the case for Panama and

Sean O'Malley: I guess for many other Latin American countries. The political instability and the fact that many of them are already sanctioned in some way, shape or form makes it almost impossible for them to step up and take Panama's role in being central to air travel from north to South America.

Daniel Mahncke: That's how it looks. I mean, the one country I thought might have a shot is actually Puerto Rico, but uses the US legal system and the US dollar, but you don't have to pay US wages. So, you know, a very similar profile to Panama, although it's a bit of a detour to, you know, get there compared to Panama. And apparently American Airlines tried running a San Juan hub before and ended up shutting it down after a couple of years. So probably I think the biggest competitive risk is just ultra low cost carriers getting longer range airplanes and then start flying the most important routes point to point, basically skipping the hub entirely. So yeah, I think that's kind of a risk that I could think about. But then you again running into the problem that I described, uh, before, where you gotta fly these longer routes and then you basically have to leave people on the ground because otherwise your fuel is not enough to take the entire route. So this is just by nature, way less efficient than what COPA is doing. So it's not really about a competitor doing what COPA does better. It's more about the whole hub and spoke model becoming less relevant. Again, I don't think it's realistic anytime soon, but that's somewhat of a risk that I could see potentially in the future.

Sean O'Malley: And so it actually reminds me of something Ryanair CEO Michael o' Leary said in an interview that you shared with me earlier. And he basically said he will never be beaten at his own game, which is, you know, delivering the cheapest flights. But one day he will be disrupted by a company that invents beaming people from one place to another. So, uh, you know, obviously being facetious, but, you know, long haul flights without a stop in Panama is not really beaming. But, you know, you get the point. COPPA is unlikely to be beaten at, uh, its own game. But who says the game can't be reinvented?

Daniel Mahncke: Yeah, I mean, I think that's a great way to look at it. And Michael o' Leary interviews, they're just always fun to watch. That's why, you know, I said that interview to you. And we often talk about boring CEOs on this show, but he's definitely not one of them. And at the same time, he also doesn't give me this sketchy feeling that I often get when CEOs are, uh, bit more outgoing, maybe a bit too confident, but yeah, I mean, the fact that copa's yield, which is basically the average revenue an airline generates per paying passenger per mile flown, has been dropping over the last couple of years, does suggest that there's at least some more competitive pressure starting to show up.

Sean O'Malley: Perhaps it's a good time then to zoom in more on the risks.

Daniel Mahncke: Yep, we should do it. And we already talked about the industry, so I felt like a lot of the risks were covered by just COPA operating in an industry that we kind of ranted on for 30 minutes. But I would say the biggest one, by a long way, is fuel. I mean, we talked about this before, but fuel is a huge cost that airlines basically can't control. So for copa, jet fuel is again around a quarter of revenue. And the interesting thing is that COPA actually doesn't hedge its fuel, which is something that many other airlines do. Ryanair, again Being one of them, maybe

Sean O'Malley: you can just quickly explain for the audience what hedging fuel actually means and then why COPPA doesn't do it.

Daniel Mahncke: Hedging basically means buying financial contracts that lock in or cap what you will pay for fuel in the future. So you're essentially buying an insurance against the fuel price going up. And COPA has chosen as a matter of policy to just pay the spot market price for fuel, whatever that happens to be in. While hedging somewhat sounds like a, uh, no brainer, on paper, it can actually be quite costly because imagine, you know, fuel prices drop a lot, but you've got a contract that forces you to keep buying it at the old higher price. Your first instinct might be, well, you probably have chosen a price where you still earn a pretty good margin, so you should survive that. But the problem is because all the other airlines can now buy fuel cheaper, they can just undercut your own ticket pricing. So hedging has also some form of cost that comes from it. And many airlines have lost a lot of money over the years by hedging their exposure to fuel prices. So, again, there is no right or wrong answer about this. It's one of those tricky things about the airline business. And just to put some math behind it, COPA burns something like 380 million gallons of jet fuel a year. So if the jet fuel price moves by just $1 a gallon, that's roughly $380 million straight through, operating profit up or down. And Copper's total operating profit is in the range of 800 something million. So a $1 move in, the fuel price swings something like half of this company's entire operating income.

Sean O'Malley: Well, just to, uh, emphasize again, the potential downsides of hedging is that, you know, imagine Covid, right, they're probably in 2019 thinking, oh, man, if we can hedge oil prices so that we're paying, you know, an average of $60 per barrel in 2020, that's great, we've secured profitable economics for us. And then, well, guess what? Futures prices for oil went negative and in 2020. And so you're sitting there thinking that you get this great rate that you're locked into, and then all of a sudden prices could drop dramatically. And it's kind of like getting a mortgage, except you don't necessarily have the option to refinance. You're locking into a commitment on a rate, and then if rates fall, you're kind of like, oh, well, I'm stuck. And so for somebody who has no familiarity with jet fuel prices, which I know are derivative of the cost of oil, but I don't know if they're more volatile and exactly what the correlation is. And so I guess my question for you is, is a $1 swing in a barrel of jet fuel? Is that, uh, is that a lot? I mean, does it happen frequently? It doesn't sound crazy to me, but if that happens every few months, not hedging, that seems like economic suicide to me.

Daniel Mahncke: Yeah, no, a uh, $1 swing is quite extreme. So just for perspective, from 2005 to 2021, the price was always between $2 and $2.50 for the jet fuel. So then I think it spiked in April to $5 because of everything that happened in the world and is now coming down to the 350s apparently. So something like that, point being, a $1 swing usually happens only once every decade or so. Right. And you actually talked about how Covid was obviously a huge thing for everyone who did hedge the fuel costs. And COPA is one of the very few companies in the industry that didn't go bankrupt. Now, obviously part of that is because they didn't sit on a contract where they had to buy fuel 80% higher than, you know, currently trades at. They could just basically pull as much fuel as they wanted to put into the inventory and then obviously have a pretty good business for the next couple of years. Although obviously you also have a lot of uncertainty, especially out of COVID Now, looking back at it, it always seems easy and you would just bought as much fuel as you could because you know how it ends up going after two or three years. Back then there were a whole lot of people, I still remember that, that thought flying will not go back to where it has been for the next 10 or 20 years. So it turned out differently. But, you know, nobody knows. Another risk worth talking about is the Boeing relationship. So as I said, COPA has a big order book of 737 Max aircrafts stretching out over the next several years, which is a multibillion dollar commitment. And on one hand, those new planes are good for them because, you know, obviously they're more fuel efficient than what they are replacing and they help hold that famous cost line down. On the other hand, though, it is a huge capital commitment, right? And Boeing's recent, let's say, track record on, um, actually delivering an aircraft on time has been pretty shaky. So they have had to revise delivery targets more than just once. So COPA is partly dependent on a supplier that I would say cautiously, hasn't exactly been reliable both for, you know, its growth plan and also for fleet renewal. And we already saw, with the 2024 Max 9 grounding, what it looks like when a Boeing problem basically becomes copa's problem overnight.

Sean O'Malley: So I also heard there was something going on in Venezuela for Coppa's operations at some point. Uh, what is that all about?

Daniel Mahncke: Yeah, so on Venezuela, there was a flight suspension that started in July 2024, since the Venezuelan government felt that countries like Panama, or for example, also the Dominican Republic, interfered with their politics. And after that ban was lifted, there were more suspensions last year, obviously, after the US declared the airspace and no fly zone. So, without going into all the details, this is an emerging market play, and there can and most likely always will be surprises, I guess. So COPPA has played down, obviously, the Venezuela exposure over the years, and it's been written down and also dearest. So this is more of a known contained problem than something that's going to surprise anyone now investing into the company. But still, Venezuela and Colombia together are still around 12% of Copa's capacity. So any volatility there obviously is a factor for you as an investor. And then the other big risk that comes from this is concentration risk, which is really just the flip side of the bull case. So Coppa's biggest strength, having this one perfect hub at the perfect position, is also its single biggest point of failure, because the entire company basically depends on that one airport in one city, in one country. And anything that disrupts Tokuman or, uh, any kind of unfavorable shift in, let's say, the Panamanian government policy could change the way that the business works. Right. So there's no diversification to fall back on. So, in a way, the mode and the concentration risk are, uh, kind of the same fact, just looked at from two different sides. I think we just recently had a call in our Mastermind community about Universal, and we talked about that. Basically, many of the things that you looked at positively for the company could also be from another angle be looked at as a more negative point. So, for example, signing just, you know, the biggest artists, um, and you would say, you know, that's a positive thing, because if Taylor Swift is signed with Universal, a lot of these smaller artists also want to be in that ecosystem where somebody else could say, well, who cares about where Taylor Swift is signed? Fact of the matter is that that deal is most likely not profitable for Universal. So there are always, like, two sides of the same story.

Sean O'Malley: Yeah, absolutely. And, uh, you know, I have to say, though, it is remarkable how Copa handled all of these things in the past. And I think it certainly speaks to management's and the company's operational excellence. And it does seem like Copa was able to get out of the rat race that the average airline is consumed by it. I mean, looking at the returns on capital and equity, as well as the margins and growth. It's not a tech stock, but I would not have guessed that this was

Daniel Mahncke: an airline and they have been doing that for such a long time. I mean, if this was a five year track record, I would have discounted its value and said, you know, let's wait a couple of years and we will see it behave like pretty much every other airline eventually. But Copa is doing this for many decades now, so this model clearly works.

Sean O'Malley: Talking about the management team, how about we dig deeper into that and also the capital allocation and culture and all of those sort of things. And so you mentioned that the CEO, Pedro Helbron has been the CEO for 38 years in a row, which is incredible.

Daniel Mahncke: That would be an incredible achievement at any company. But it's even more impressive, at least in my books, if it does happen at an airline. Right. I don't know if there's a similar culture of firing coaches in basketball or American football, but in European football, it's relatively common for a coach to be let go of after only a year or two, if even, especially if, you know, he works at a struggling club. And I think it's somewhat similar in business. So surviving an airline for 38 years is kind of like surviving one of the most demanding and struggling clubs as a coach for decades. So, interestingly, and that's some unnecessary football trivia, but clubs that keep their coaches for a very long time tend to do better. And I do believe that it's the same in business. I believe that Heilbronn's tenure is pretty much the explanation for most of the things that we now admire for this business. So, you know, there's extreme consistency on keeping the costs low, the refusal to ever give off on the time crown, so the completion factor of the flights, and also the decision to, as we said, survive Covid intact rather than just restructure. And also maybe as the last point, with this expansion into markets like Europe or Asia, just for growth's sake, actually, I think we once joked on an earnings call that there is a loaded gun that should be used if they ever decide to go into the European market.

Sean O'Malley: That could have come from Michael O' Leary too, right?

Daniel Mahncke: It could have. 100%. I don't know. I think there seems to Be something about airline CEOs.

Sean O'Malley: They have a lot of personality. You have to have a sense of humor to decided to go into that business.

Daniel Mahncke: That must be it. That must be it. But no jokes aside, if you are a COPA shareholder, you must really trust this guy because he's not only the CEO, but since mid-2025 he's also the chairman of the board. So he controls a good portion of the voting shares of the stock too. So basically if you buy Copper, you have to trust him.

Sean O'Malley: Okay, so that implies that there's a dual share structure, is, is that right?

Daniel Mahncke: Yeah, exactly. So the shares that trade on the New York Stock Exchange, the ones that you or I could actually buy, those are ah, so called class A shares. But the voting control runs through a separate class of super voting class B shares. And all of those are held by a Panamanian entity called ciasa. And CIASA in turn is controlled by a small group of Panamanian families. So that's the Motta family, the Heilbronn family, the family of the CEO and the Arias families, plus some other allied shareholders. And those families are basically connected with Panamanian banking, insurance and also some other businesses that COPPA deals with. So it's, I don't know, somewhat of a different dynamic than what we're used to from Western company for example. So what I like I would say is that they're all pretty aligned with shareholders through their large insider stakes. They also make most of their money through dividends. So their pay itself is pretty small. I think the combined cash bonus, including stock grants for the entire management team is less than $10 million. So they make their money when you know either the stock is going up or when the dividend stays high.

Sean O'Malley: Going over to capital allocation, how has management done on that front in your

Daniel Mahncke: view since Copper operates in an industry that is prone to bankruptcies? I personally pay a lot of attention to the balance sheet first and COPA stocks pretty good. I mean its adjusted net debt to EBITDA, uh, is about 0.6 2.7 times. And to put that into perspective, most airlines are considered healthy when they sit at around um, two to three times net debt to ebitda, uh, and interest is also relatively low. So I think it's about 4% on the interest they have to pay. And considering the billion dollars of cash on the balance sheet and uh, the interest coverage ratio is about 9, which means nothing more than there's plenty of cash to service that and the interest.

Sean O'Malley: Yeah, that's right. And besides though, keeping some cash for rainy days where is COPA investing its money?

Daniel Mahncke: The first priority is certainly reinvesting into the fleet. Second I would say is then dividend, which I don't expect to change given that this is how the management team makes most of its money. And then if there's cash left over, they also occasionally buy back shares. So the fleet just cost them a lot of money. Recently we just talked about the order book with Boeing. So They've got this 737 Max order that we mentioned, which is about $900 million in order volume and it has to be paid over the next two and a half years. So that's also why free cash flow has seen a sharp drop this year and operating cash flow is still at all time highs. So there's no structural change to how the business works, even though obviously, if you just look at some cash flow metrics, it doesn't look as good anymore as it looked half a year ago.

Sean O'Malley: And do they plan to keep paying the dividend considering this big investment in the new fleet?

Daniel Mahncke: I'm pretty sure they will, yes. Again, like even through Covid, they still kept the dividend and they were paying it throughout. All of the other things we discussed, the max grounding and all of that sort of stuff. It's just an incentive, right? If you make most of your money with the dividend, if you're the management team, obviously you are hugely incentivized to keep that dividend alive and make sure that all of the decisions that you make in regards to investments and spending money do not threaten the dividend that, that you would pay.

Sean O'Malley: I, uh, Well, I think that covers the whole business now. And so we've talked about the industry, the moat, the risks, the management and capital allocation. And so that means that it's time to go to everybody's favorite question, and that is, what is this business worth? What is the intrinsic value? And do we actually want to buy an airline for our intrinsic value portfolio that we, you know, manage through this

Daniel Mahncke: show, I got to say I thought it might be hard to value an airline, which is basically part of why investing in airlines is so difficult. But copa's financials are so stable that it doesn't even feel like you're valuing. An airline in my base case is basically business as usual, which is, you know, a good thing to say whenever you can say with confidence that you underwrite the past financials. That's a pretty good thing to say. And that's actually what I expect for COPPA. So I have revenue growing at about 7%, which is the median growth rate of the last decade. And I keep margins more or less stable to potentially lower in the next two years because of what we currently see with the fuel prices. But I do expect that they would go back in the three years following that over uh, you know, my, my estimated five year time horizon. So I don't expect a mix shift towards more revenue from the loyalty program or the cargo. Maybe that happens and it's more meaningful than I anticipate, but I doubt that it will have a measurable impact on the business at least in the next five years. Then I have the dividend payout ratio at 40% which is also in line with where it's historically been. And then I use a discount rate of 10%, you know, slightly higher than the 8% we usually use because we talk about an airline and emerging markets. So you want to take the safe route. And then I apply a margin of safety discount of about 20%.

Sean O'Malley: Yeah, I mean the 10% discount makes sense because you're accounting for the different risks that come with operating in Latin America versus investing in a large cap US equity where there is also still risk but probably less so, uh, in terms of the sort of exogenous factors that you can't control.

Daniel Mahncke: And all of that is obviously also a huge part or influence on the multiple way. Like when I initially say that this company is trading at 8 times earnings, it seems like it's incredibly cheap. But compared to what other airlines trade at, especially in the emerging markets, it's actually pretty much in line with what I would also expect going forward. So I have a multiple of nine, which I believe is fair for such a high quality company. And if you have all of these assumptions, I get an expected return of about 15% including the 5% dividend yield that we currently see.

Sean O'Malley: Okay, that's pretty good. That's pretty good. So what about the bull and bear case? How do those factor in?

Daniel Mahncke: I did do both of them and you can find them in the model, which by the way, you can always find our models and our portfolio in our free investing newsletter. That's also where you can find updates and all of the portfolio holdings. So we do not only talk about a portfolio, we also share it. And I'm just saying that because I'm constantly getting asked why we won't share the portfolio that we always talking about in the episodes. We do share it, of course, and again it's in the intrinsic value newsletter. But I will also include a link to the Google sheets in the show notes of this episode. So you can find every single position that we own in the portfolio, you can find our performance, and you can also find our watch list. So all the companies that we covered on the show that haven't yet made it into the portfolio. But getting back to the variation, I don't think it's necessary to walk through the bull and the bear case here on this show in detail. Ultimately, I adjusted the growth rates and the margins in both cases. The way to lose money on coppa, if you just want to summarize it, is if net margins drop into the low teens range, and at that point the stock is only worth something in the 60 to $80 range. How could that happen? Well, either because this strategy of not hedging fuel costs turns out to be wrong in this environment, of all of the stuff that we discussed today suddenly stops working, which I consider to be highly unlikely.

Sean O'Malley: So I get the feeling, though, that you came away with a pretty positive feeling from your research about copa.

Daniel Mahncke: I did, yes. I mean, that doesn't mean that I will recommend adding COPA at these prices to our portfolio. I think I just need a bit of a bigger margin of safety on this. And I know I'm somewhat, you know, using as an excuse here to not add the first airline to our portfolio, but I don't know. There's still so much uncertainty about fuel costs right now. We have all of this geopolitical tension that certainly has a huge impact on the price. And again, COPA does not hedge it. With Rhinocero, for example, they already have a hedge in place, so, you know that at least for the next six months, they won't have a problem with costs. And I don't criticize COPPA for doing that because they've done that for 20, 30, 40 years, and it has always worked out in significantly more difficult times than today. But for me personally looking at this situation, and also the fact that the stock again has run up to a PE of like 8, I do think I would like a bit more of a margin of safety. And I personally think that at about $100 per share, this would be a highly interesting opportunity.

Sean O'Malley: Also, I, to be clear, never thought I would say this, but, uh, I could actually see myself investing in an airline with copa, but I would probably want to do it in the next crisis, right? The next time there's a big fear of global war, pandemic or financial crisis. I mean, COPPA would actually probably be on my list to buy based on how they've survived past crises. And, you know, if you'd bought the stock during any of those past dips. If you just look at the chart, you can see that you would have done incredibly well, to say nothing of the compounding benefit of this very appealing dividend at nearly a 5% yield and um, current prices. And that would only increase if the stock goes down further. And so for an airline to average a, ah, 14% total return CAGR over a decade, 14% a year, I mean, that's really surprising and it challenges my prior assumptions about the industry, honestly, or at least what can be possible in this industry despite all the bad things you hear. And with all that said, when I look at the company's PE multiple though, and more than 8 times earnings or 9 times earnings, while that does sound relatively cheap to the other companies we've covered where sometimes are, you know, 30, 40 times earnings, the multiple here is not historically cheap for Copa. So if you look back over the last 10 or 15 years, an 8x multiple is about exactly in line with the median valuation for the stock. And while I think the stock market can be distorted in the short term for a mature business, I see a lot of value actually in looking at the median valuation over a decade plus period. I find that to be pretty informative of what a fair valuation, fair multiple to pay for businesses over a decade. The market on average is probably more right about valuing the stock than it is wrong. And so I do think the stock at the moment is priced fairly, but also I think it's priced attractively at current levels. And then simultaneously for me to overcome my own biases against airlines, and this is really just a personal issue, and the fragility of their business model, especially with unhedged fuel costs, I just think I would need to feel like I was getting an absolute like bargain price. So if it was trading at 5 times earnings, for example, I would probably be all over this thing. But for now though, and I truly mean this, I would love to keep it on top of our watch list and revisit it perhaps down the road,

Daniel Mahncke: I couldn't have wished for more than turning one of the most bearish investors on airlines and to someone who could actually see themselves owning COPA in our portfolio. And I agree, I think especially for such an industry, there will be a chance to buy this company at five times earnings again. And when that's the case, we've done the work and, you know, we're willing to invest in it. So I'm pretty happy with how this turned out. Not only did I learn a ton about the industry that I didn't look at Prior. Um, also, I found a pretty good company. So with that, let me close it for today with a quote. I actually wanted to use one by Ryanair CEO Michael o', Leary, but I'm not kidding. I couldn't find one which didn't use the F word or insulted an entire country's people. So let's go with one by former Delta Airline CEO Colette Woolman, who said running an airline is like having a baby. Fun to conceive, but how to deliver.

Sean O'Malley: What a line. I guess it's true that all of these airline CEOs have a, uh, very special sense of comedy. But on that note, it's been a ton of fun. Daniel, I enjoyed the pitch. You've opened my eyes to the airline industry. Maybe some of the listeners feel the same way. We'll see you all again next time. Just a quick note before you go. This episode would not be possible if it weren't for our friends at Fiskel AI. It's our complete stock research terminal that Daniel and I use on every single episode and with every company we dig into, pooling 20 years worth of financials, digging into segment data, grabbing quotes from the latest earnings calls, and making use of real time institutional grade data all in one place. And if you want to try it yourself, well, head to Fiskel AI TIVP. That'll include two weeks of fiscal pro for free and 15% off if you upgrade to a paid plan. That's Fiscal AI tivp. Thanks for listening.

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