TIP824: Copa Holdings (CPA): Is Buffett Right About Airline Stocks? w/ Daniel Mahncke & Shawn O’Malley

Copa Holdings trades at roughly eight times earnings, compared to twelve to fourteen times for US airlines like Delta and United. Daniel Mahncke argues Copa is the single most profitable airline of any real scale in the Americas, with higher margins and less earnings volatility than its US peers, and that this reflects structural advantages rather than a temporary run of good years. Shawn O'Malley declined to recommend adding it to the portfolio at current prices due to insufficient margin of safety, though he acknowledged he may be applying that standard partly to avoid adding the first airline to the portfolio.

Warren Buffett has described the airline industry as a death trap for investors, identifying the core problem as a combination of labor intensity, capital intensity, commodity-like pricing, and an economic structure where very low incremental costs per seat create constant temptation to sell the last seat at almost any price, which crushes pricing for every competitor. Because an unsold seat is permanently lost revenue once the plane is airborne, airlines face intense pressure to fill every seat at any price above zero. When airlines fail, their planes are sold cheaply to competitors, fueling further pricing battles, and carriers that restructure under Chapter 11 emerge leaner than rivals who paid their bills throughout the downturn.

Mahncke argues there are three ways to make money in airlines despite these structural headwinds: being the lowest cost producer, owning an uncopyable network position, or operating in a restructured competitive field. He contends Copa satisfies all three simultaneously. Copa's ex-fuel cost per available seat mile is approximately 5.8 cents, placing it better than 95 percent of airlines globally, with only Ryanair, Wizz Air, and two small Latin American carriers operating below 6 cents. Copa's wage bill was approximately 14 percent of revenues in 2025 compared to roughly 25 percent at large US airlines, a structural advantage that stems from paying Panamanian wages while collecting international ticket prices from a global customer base. Operating a single aircraft family, the Boeing 737, reduces costs through unified pilot training, a single spare parts inventory, and simplified maintenance.

Copa routes all flights through Tocumen Airport in Panama, serving approximately 85 cities across more than 30 countries. Panama sits at the narrowest point of the American continent at sea level, making it geographically central between North and South America, and because no Copa flight is ultra long haul, the airline avoids payload penalties and can operate exclusively Boeing 737s rather than expensive wide-body jets. Each new destination Copa adds creates connections to every existing city in the network, with 85 destinations generating over 5,000 marketable city pairs. Panama does not tax foreign source income, and because Copa's passengers are mostly flying between two other countries, nearly all of Copa's revenue qualifies as foreign source income. Panama also uses the US dollar, eliminating currency risk and capital controls common across Latin America. A competitor attempting to challenge Copa today would need to launch roughly 80 destinations and all frequencies simultaneously and absorb losses for years before network effects would begin to work in its favor.

Jet fuel represents approximately a quarter of Copa's revenue in costs, and Copa burns approximately 380 million gallons per year, meaning a one dollar per gallon move swings roughly 380 million dollars through operating profit against total operating profit of around 800 million dollars. Copa has a policy against hedging fuel costs, an approach Mahncke credits as one reason Copa did not go bankrupt during COVID, unlike peers locked into above-market fuel prices. O'Malley notes that Ryanair recently hedged its fuel exposure and was less hurt by the Iran conflict as a result, illustrating that neither approach is definitively correct and that greater uncertainty in fuel pricing today makes the hedging argument more compelling than usual.

Copa's single hub at Tocumen Airport is simultaneously its greatest competitive strength and its single biggest point of failure, with no geographic diversification to absorb a localized shock. Venezuela and Colombia together represent around twelve percent of Copa's capacity, and Venezuela flight suspensions began in July 2024 after a political dispute. Copa carries a large Boeing 737 MAX order book with approximately 900 million dollars in payments due over the next two and a half years, and Boeing's delivery record has been unreliable. CEO Pedro Heilbronn has held the role for approximately 38 years and as of mid-2025 also serves as chairman of the board, combining executive and governance control in one person, and voting control runs through super-voting shares held by a small group of Panamanian families with business relationships that create potential conflicts of interest.

Mahncke's valuation model uses seven percent revenue growth, a ten percent discount rate to account for Latin American risk, and a forward multiple of nine times earnings, producing an expected return of approximately fifteen percent including a five percent dividend yield. O'Malley would consider buying around one hundred dollars per share or five times earnings and expects Copa would appear on his buy list during the next major crisis. Both speakers agreed another opportunity to buy at five times earnings will likely arise and that they have done the research to act when it does, leaving Copa on the watch list rather than adding it now.