report of excel

files below

I was told it’s important to have the graphs on the right or left that same way, and to use the company colors like in the example

And that we need around 30-40 graphs, with at least half of them being original and made from the excel sheet

CFA Institute Research Challenge
hosted by

CFA Society Toronto and CFA Society Ottawa
University of Waterloo

The CFA Institute Research Challenge is a global competition that tests the equity research and valuation,
investment report writing, and presentation skills of university students. The following report was prepared in
compliance with the Official Rules of the CFA Institute Research Challenge, is submitted by a team of
university students as part of this annual educational initiative and should not be considered a professional
report.

Disclosures:
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The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company.

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the content or publication of this report.

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The author(s), or a member of their household, does not serve as an officer, director, or advisory board member of the subject

company.

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The author(s) does not act as a market maker in the subject company’s securities.

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The information set forth herein has been obtained or derived from sources generally available to the public and believed by the

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should not be considered to be a recommendation by any individual affiliated with CFA Society Toronto, CFA Institute, or the CFA

Institute Research Challenge with regard to this company’s stock.

Figure 4: CJT 5-year Stock Chart

Executive Summary

Sector: Transportatio

Buy Recommendation

Target Price: $150 (23% Upside)

Current Price as of January 12, 2023: $122.3

CJT is a high-quality business at a critical inflection point
We initiate coverage on Cargojet Inc (CJT) with a BUY recommendation

based on a 12-month price target of $150 using both intrinsic and relative

valuation methods. This target price represents a 23% upside from the last

close price of $122.38 on January 12, 2023.

CJT is Canada’s largest pure play dedicated air cargo freighter, providing

time-sensitive overnight air cargo services for leading domestic and

international transportation and logistics (T&L) businesses. A recent

strategy shift positions CJT to drive strong ROIC and FCF improvements

with excess cash flow being returned to shareholders through a growing

dividend and NCIB program. We view CJT as a highly stable business with

excellent competitive positioning and attractive growth opportunities that

indicate an inflection point in its ability to generate returns.

Investment Thesis Highlights
Upon valuing CJT using a DCF and comparable companies analysis, we

believe CJT presents an attractive investment opportunity with a low risk-

return profile.

Thesis #1: CJT has a domestic monopoly with minimal threat of

competition and churn

CJT services 90%+ of Canadian overnight air cargo deliveries at a 99%+

on-time performance rating. Minimal competition combined with 75%+ of its

domestic revenue from long-term contracts with high minimum volume

guarantees creates a highly stable business. The extreme cost and

challenge of insourcing middle mile freight alongside strategic agreements

with DHL and Amazon minimizes customer churn and will allow CJT to

capitalize on the growth of its customers. Given its dominant competitive

positioning, we view CJT as an extremely defensible business with a strong

competitive moat and track record of retaining customers.

Thesis #2: CJT’s high operating leverage will drive margin expansion

due to its growth opportunities

We believe the market may be pricing in modest growth and margin

expansion despite the high growth and high operating leverage nature of

the business. Amazon’s focus on Canada as a key market is likely to drive

above market growth for CJT while a partnership with DHL provides them

with access to fast-growing and resilient markets in Latin America (LatAm)

and Southeast Asia (SEA). As 85% of direct costs are fixed, volumes drive

margins and CJT is poised to benefit greatly from its customers’

expansion.

Thesis #3: CJT is at an inflection point and is poised to drive

significantly higher returns

CJT has historically invested in growth at the cost of returns. Now, CJT is

at a critical inflection point where a shift in strategy to focus on profitability

and cash flow generation will drive strong ROIC improvement, as all

operating cash flows generated will go directly to shareholders through

increasing dividends and an active NCIB program. We believe this will lead

to a re-rating of CJT’s multiple and drive sustainable returns.

Figure 1: Company Data

Last Close $122.38

Market Cap $2.11B

Shares Outstanding 17.2M

52-Week High $135.27

52-Week Low $76.5

EV/NTM EBITDA

Figure 2: Valuation Results

DCF – Terminal Growth $158

DCF – Exit Multiple $167

Comps – EV / NTM EBITDA $98

Target Price $1

Implied Return 2

Note 1: Revenue excludes fuel surcharge

Figure 3: Financial Data

22A 23E 24E 25E

Rev.

($M)1 $713 $708 $771 $89

Rev.

Growth
21% (1%) 9%

16%

Adj.

EBITDA

($M)

$327 $309 $343 $41

Adj.

EBITDA

Margin

45.8% 43.7% 44.5% 46.9%

“CJT is an extremely well positioned
business with industry-leading

customers that will drive strong growth
for them. I don’t think there are any
players who can disrupt CJT without

immense levels of investment over the
next few years” – Expert F, freight

leader at a regional airline

Cargojet Inc (TSX: CJT)

Source: Capital IQ/Team 4 Analysis, 202

Source: Team 4 Analysis

Source: Company Filings

/Team 4 Analysis, 2023

$122

$50

100

$150

200

$250

Jan-19 Jan-20 Jan-21 Jan-22 Jan-23

Industry Overview

Business Overview

Founded in 2002 and headquartered in Mississauga, Ontario, CJT is

Canada’s leading middle mile provider of time-sensitive overnight air cargo

freight, servicing 90%+ of the Canadian market through its network of

facilities across 16 city centers and an extensive fleet comprised of 41

leased and owned freighter planes.

Key operating segments
CJT operates 71+ routes across three main segments; 1)

Domestic

Overnight; 2) ACMI, providing aircraft, crew, maintenance, and insurance;

3) Charter, supplying aircraft on ad hoc charter basis (Figure 5).

Revenue

for the domestic overnight network is generated through customers pre-

purchasing a guaranteed space and weight allocation with contracts

featuring high minimum revenue guarantees and full fuel cost pass through.

Any remaining capacity is sold on an ad hoc basis (Figure 6). For ACMI,

CJT is paid a fixed rate to operate a flight with variable costs fully covere

by the customer (Figure 7). Charter flights are sold “all-in” with customers

paying a single, inclusive fixed amount.

Strong position in the transportation value chain
As a middle mile air freight operator, CJT picks up goods from first-mile

carriers at an airport and flies them to last-mile couriers at a different airport

(Figure 8). Consistently meeting the often-volatile nature of cargo demand

establishes a symbiotic relationship between CJT and its customers, by

enabling cost reductions and risk mitigations. Emphasizing service, quality,

and punctuality, CJT has earned industry recognition through winning

numerous industry awards with a 99.4% on-time performance record drives

growth and stability in their customer base and overnight freight volume.

CJT’s recurring revenues and history of growth
A key factor in CJT’s success is its long-standing customer relationships.

~75% of domestic volumes are secured under long-term contracts through

2029 (Appendix 2), including full fuel cost pass through and minimum

volume guarantees. CJT currently services 400+ customers, and has global

relationships with leading couriers, freight forwarders, specialty shippers,

and international airlines. Key customers include Amazon, DHL, Canada

Post/Purolator, and other leading T&L businesses, with Amazon and DHL

aligned through warrants (Appendix 4).

To form a view on the air freight industry, we interviewed 12 experts across

the value chain. These experts include former executives, senior advisors,

and freight leaders at competitors and customers, as well as lawyers, and

consultants who have significant exposure to the industry (Appendix 1).

Monopoly in a mature industry – Positive
Air freight plays a critical role in providing fast, flexible transportation

services and is heavily tied to trade and the global economy. Air freight

caters to the transport of high-value goods, time-sensitive documents,

perishables, pharmaceuticals, and more. In Canada, there are limited

players due to the significant infrastructure investment, logistics expertise,

and anchor customers required to operate effectively. CJT operates a

monopoly on domestic air freight with Air Canada Cargo and WestJet

fulfilling most of their volumes internationally (Appendix 3).

Essential to e-commerce – Positive
Air freight is essential to uphold the value proposition of e-commerce giants

like Amazon. Expedited freighters bring goods with unmatched speed and

reliability, allowing for same- and next-day delivery in a geographically

dispersed country like Canada. As e-commerce penetration continues to

rise due to behavioural shifts in consumers, dedicated freighters support

growth aspirations and uphold customer expectations. In Canada, the e-

commerce market is expected to grow at an 8% CAGR from 2023-2027,

mainly driven by Canada’s quickly growing population (Figure 9).

ACMI lessor (CJT)

ACMI lessee (DHL)

Block

Hour

ACMI

Rate

Lessor provides

the aircraft, crew,

maintenance,

insurance

Figure 7: ACMI/

Charter

Business

Model Overview

Figure 8: Air Freight Value

Chain

Figure 9: Canadian Retai

E-Commerce Market ($B)

Determine Chargeable Weight

The Greater of (Metric Shipping):

Actual Weight: Measured in KG

Volumetric Weight: LxWxH (cm) / 6,000

Multiplied by Air Freight Rate

$42 $46
$49

$53
$58

$62

2022 2023 2024 2025 2026 2027

Figure 5: 2023 Q3

Revenue

Segments

Figure 6: Domestic Business

Model Overview

First Mile: Goods are

transported to the airport

Middle Mile: Goods are

transported by air (CJT)

Last Mile: Goods transported

to final destination

Source: Company Filings, 2023

Source: StatsCan, 2023

42%

29%

12%

17%

Domesti

Overnight

ACMI

Charters

Fuel Surcharge

Investment Summary

Competitive Positioning

Ongoing freight recession – Negative
There is a global freight recession that stemming from the global supply

and demand imbalance, due to softening volumes, and industry-wide over-

investment (Appendix 5). The recession has caused freight businesses to

conduct large-scale layoffs and cost-cutting initiatives to defend against the

competitive landscape, lower prices, and declines in the volume of goods.

Based on our conversations with customers and freight forwarders, the

industry is expected to recover in H2 2024 with volumes beginning to

stabilize (Figure 10) and rates are expected to recover shortly (Figure 11).

High-barrier and strict regulatory environment – Positive
Domestically, a significant level of investment and expertise is required to

operate, reducing the threat of new entrants. Internationally, cabotage laws

restrict non-Canadian businesses from transporting goods between two

points in Canada, creating high-barriers for foreign air freight players.

No substitute for other transportation forms – Positive
Air freight is defensible, domestically, against other transportation methods

due to its speed and less capacity restrictions. Freight customers care

about reliability and on-time performance and compared to rail and truck,

air freighters are faster and typically more reliable, entrenching the industry.

Note 1: Commercial, Note 2: Maintenance

CJT is the only scaled overnight carrier in

Canada

Our meetings with freight leaders at Canadian and international airlines,

indicate that the only way a dedicated air freight business can run profitably

is by having anchor customers. Canada Post, Amazon, and other leading

T&L customers create a consistent stream of volumes that sustain CJT’s

operations; which other players do not have. As CJT has recently renewed

contracts with all large-scale customers, it is very unlikely that other airlines

will pursue dedicated freight, especially as passenger businesses struggle.

Customers cannot leave and CJT gives them no reason to
Customers using dedicated overnight freight primarily care about one thing:

on-time performance. CJT has leading on-time performance and experts do

not foresee any reason for customers to leave. In addition to the lack of

desirable air freight substitutes, customers will be challenged to replace

CJT in their operations due to the differences between belly and dedicated

freight (Figure 12), as few competitors exist. Our analysis also indicates a

customer would need to individually carry more than 30% of national

domestic volume to break-even on insourcing their middle mile (Figure 13).

CJT has entrenched its top customers
Warrants with Amazon and DHL have created moats for the business by

strategically aligning world class customers. These warrants create strong

disincentives for these customers to leave and further entrench CJT as an

industry leader in Canada and a credible player internationally.

Thesis #1: CJT has a domestic monopoly with minimal

threat of competition and churn
CJT operates cargo fundamentally different from passenger airlines who

move freight in their unused belly space. With leading reliability, strong

customer entrenchment, and minimal competition, CJT is well positioned.

CJT faces minimal competition for dedicated overnight

freight

As a direct result of the anchor customers required to effectively run such a

capital-intensive business, CJT faces minimal competition in the domestic

overnight business (Figure 14). Passenger airlines who attempt to compete

using belly cargo space cannot ship large volumes of cargo, are liable to

have packages bumped, have no capacity for ad-hoc deliveries, and cannot

run dedicated freighters profitably. Attempts to branch into overnight cargo

by Air Canada and WestJet have been unsuccessful (Appendix 3).

Figure 10: Global Air Freight

Volume YoY Change (2023)

(15%)

(10%) (11%)

(5%)
(3%) (2%)

D
e

J
a

F
e
b

M
a
r

A
p
r

M
a
y

J
u

A
u
g

S
e
p

O
c
t

N
o

D
e

Figure 13: Cost of Insourcing

Figure 12: Dedicated Freight vs

Passenger Belly

Freight

Criteria

Dedicated

Freight

Belly

freight

Time-

sensitive

deliveries

Reliable on-

time

performance

Large

volumes of

cargo

“As a former customer of CJT, they were
always the only option we looked at for

anything domestic in Canada” – Expert D,
CFO at an international freight forwarder

J
a
n

-1
8

J
u
l-
1

J
a
n

-1
9

J
u
l-
1

J
a
n

-2
0

J
u
l-
2

J
a
n

-2
1

J
u
l-
2

J
a
n

-2
2

J
u
l-
2

J
a
n

-2
3

J
u
l-
2

Figure 11: Air Freight Rates

($/kg)

1 2

“There are no real alternative competitors for
dedicated freight in Canada and no

customers do enough volume to sustain their
own freight operation” – Expert C, senior

executive at an international freight
association

($535M)

Source: Baltic Exchange, 2024

Source: DHL, 2023

Source: Team 4 Analysis

Note 1: The question asked was ‘Do you value shopping online more than you value shopping in person?’ 1 being strongly prefer in person

shopping, 5 being that you are indifferent and 10 being that you strongly prefer online shopping. N = 97
5

CJT’s customers will not leave, and CJT has full power in the value chain

Cabotage insulation, lack of significant domestic competition (Figure 14),

and customer dependence on air transport leave CJT as an irreplicable

component of the air freight supply chain. This enables CJT to structure

contracts on terms that are favourable to them, with full fuel cost pass

through, clear block-hour requirements, dedicated time periods to use

planes, and minimum guaranteed revenues. Beyond CJT’s power as a sole

monopoly in a high-barrier to entry industry, the extreme cost and logistical

challenge associated with fulfilling middle mile services deters customers

from churning, as experts believe no customers have enough volume to

fulfill their own demand in an efficient and profitable manner.

CJT has strategic alignment with key customers

Experts interviewed believe customers are highly satisfied with CJT’s on-

time performance and have no interest in leaving. For larger customers like

Amazon and DHL, CJT issued warrants for greater strategic alignment, an

incentive to solidify revenues, and to further reduce the risk of replacement.

CJT plays an important role in Amazon and DHL’s expansive e-commerce

strategies both in Canada and abroad. Warrants that will vest to Amazon

and DHL owning 14.9% and 9.5% of the business, respectively, further

entrench CJT as an industry leader.
<

Thesis #2: CJT’s high operating leverage will drive margin

expansion due to its growth opportunities
CJT has a high degree of operating leverage with 85% of direct costs being

fixed. These costs are largely driven by facility and fleet expansion, which

we believe is unlikely as CJT has excess capacity due to significant levels

of investment during COVID. High operating leverage combined with strong

growth from its industry leading customers will drive margin expansion.

A reverse DCF indicates the market seems to be pricing in modest revenue

growth and subtle margin expansion

Holding all other assumptions constant, it appears the market is pricing in

revenue growth at a 6.0% CAGR and slight margin expansion (Appendix

12). This is much lower than e-commerce growth rates within Canada and

other CJT focused regions. Stronger than priced-in growth combined with

CJT’s high operating leverage will drive margin expansion that we believe

this is not reflected in CJT’s current share price.

Domestic growth opportunities remain attractive due to shifting consumer

behaviour and a quickly growing population

Amazon has marked Canada as one of its most important markets due to

its low e-commerce penetration (Figure 15) and high population growth.

Throughout COVID, consumer habits have pivoted to favour online

shopping in a meaningful way (Figure 16). This behaviour shift has caused

Amazon and other customers to invest heavily in Canada to capitalize on

the growth (Appendix 6), which will subsequently drive strong volumes to

CJT at low incremental costs.

CJT’s international exposure through DHL is in highly attractive regions

with globally leading e-commerce growth

DHL’s executive leadership has emphasized CJT’s important role in their

global expansion plans, paving the way for significant growth opportunities

over the long-term (Appendix 6). DHL comprises 95% of CJT’s ACMI

business and their warrants anticipate $2.3B in revenue over seven years.

Given their strategic priority to heavily invest in SEA and LatAm (Appendix

7), we expect CJT will capitalize on cargo routes to these high growth

regions (Figure 17). CJT fulfills numerous routes for DHL through SEA,

Europe, and LatAm and will benefit strongly from DHL’s recent total $1.3B

investment in the regions. We believe DHL’s market leadership will drive

sustained volumes to CJT as they are strategically partnered with leading

e-commerce marketplaces and will capture significant growth.

Figure 14: Full-Size Dedicated

Cargo Total Fleet

Figure 15: Global E-Commerce

Penetration

12%

13%

14%

16%

31%

32%

47%

Canada

Russia

Japan

Singapore

Mexico

S. Korea

Indonesia

China

Figure 16: Team 4 E-Commerce

Behaviour Survey1

“Despite spending cuts in the US, Amazon has
made significant investments into Canada
near CJT hubs, due to the attractiveness of

the Canadian e-commerce market” – Expert
B, consultant with 15+ years of air freight

experience

Figure 17: E-Commerce

Growth Rates

“Cargojet is an important aviation partner of
DHL… its versatile cargo fleet and high on-

time reliability position us well to capitalize
on the dynamically growing e-commerce
market” – Mike Parra, CEO, DHL Americas

Source: Company Filings, 2024

Source: Team 4 Analysis

Source: Oberlo, 2023

Source: Americas Market Intelligence, DHL, 2023

17%

33%

27%

22%

35%

22%

Brazil

Mexico

Colombia

Argentina

Chile

Peru

Southeast Asia

6.5

7.8

Pre-COVID Post-

COVID

7 4

Valuation

6Note 1: Atlas Air was acquired by Apollo (Appendix 16)

We conducted both an intrinsic and relative valuation to arrive at a 12-

month target price of $150 per share, a 23% upside from CJT’s closing

price of $122.38 on January 12, 2024 (Figure 22). Our methodology

assigns a weighting of 80% on our DCF (exit multiple and terminal growth)

and a 20% weight on our comparable companies analysis (

EV/NTM

EBITDA) due to the uniqueness of CJT’s operations and competitive moat.

DCF with 5-year projection period
We valued CJT using a 5-year DCF model. CJT’s disclosure is limited, so

forecasting volumes, rates and costs by segment is unreliable as there are

complexities and nuances in the business. Instead, we have forecasted

revenue by percentage growth for each segment to reflect the underlying

drivers of the different segments.

Revenue growth
As CJT represents 90%+ of the domestic overnight market, growth has

historically been strongly correlated to the growth of e-commerce in

Canada. We forecast growth in the domestic business at a 6.6% CAGR, to

126%
153%

139%

51%

95%

187%

2017

2018 2019 2020 2021 2022

CJT Atlas ATSG

Figure 18: Capex / Adj. EBITDA

13%

2017A 2019A 2021A 2023E
WACC ROIC

Figure 20: Historical ROIC

28 31 39 43 43

$200

400

2020A 2021A 2022A 2027E 2028E

Revenue/Capacity(lbs) Fleet Size

Figure 21: CJT Revenue per

Lb. of Cargo Volume

Figure 19: Capex Spend ($M)

Figure 22: Target Price Ranges

Current | $122 Target | $150

“CJT’s pursuit of growth and leadership has
come at the sacrifice of returns. The business
is now at a critical inflection point where it no
longer needs to invest in its fleet to maintain

its leadership and keep pace with future
demand and excess cash flows will go
straight to shareholders” – Expert A,

consultant with 20+ years of air freight
experience

Comps – EV/NTM
EBITDA (20%)

DCF – Terminal
Growth (40%)

DCF – Exit

Multiple

(40%)

52-Week Range

Source: Capital IQ, 2024

Source: Company Filings, 2024

Source: Company Filings/Team 4 Analysis, 2024

Source: Team 4 Analysis

Thesis #3: CJT is at an inflection point and is poised to

drive significantly higher returns
CJT’s pursuit of growth and industry leadership led to sacrifices in FCF and

ROIC (Appendix 8). Now at a key inflection point, CJT no longer requires

significant fleet investments, resulting in minimal capex. This shift promises

higher ROIC, with excess cash flowing directly to shareholders.

CJT’s past investments have focused on growth, putting pressure on ROIC

CJT’s proportional capex spend has consistently surpassed dedicated

freight peers (Atlas1 and ATSG) over the last five years (Figure 18). In

2022 alone, capex spend represented approximately 32% of CJT’s

cumulative capex since 2005 (Figure 19). CJT has made significant

investments in its fleet to consolidate the Canadian market and capture the

surge in e-commerce. Consequently, excluding the COVID period, CJT has

consistently produced subpar ROIC due to its investment in growth (Figure

20). This has led to CJT’s stock trading down, reflecting concerns regarding

FCF generation and poor ROIC in a higher cost of capital environment.

CJT’s investment in its fleet has led to excess capacity

As announced during a January 15th, 2024, press conference, CJT has

excess capacity. During CJT’s growth period, they expanded from 22

aircrafts in 2016 to 41 in 2023, moving away from those with limited

payload capacity to wide-body planes, allowing for more efficient volume

reconsolidation, driving margin improvements. Analysis of CJT’s total

capacity across its fleet reveals that revenue per pound of cargo volume

will not exceed pre-pandemic levels (Figure 21). This means fixed costs

will remain highly stable and there is minimal need for growth capex. This

will lead to greatly reduced capex spend and stronger returns.

Strategic shift: prioritizing cash flow and capital return to shareholders

CJT is streamlining its fleet and pausing its expensive international

expansion strategy. This shift will reduce future growth capex by $450M.

CJT has canceled all of the initially planned eight 777 freighters and listed

four Boeing 757s for sale. These adjustments showcase management’s

agility and are forecasted to result in strong positive FCF and ROIC (Figure

28). To underscore this strategic focus towards shareholder value, CJT

announced a NCIB program to buy back 8.7% of public float by the end of

2024 and a 10% increase in quarterly dividends. CJT has already

repurchased 2.1% of public float. These initiatives signal a long-term

emphasis on returning capital to shareholders and were received positively

by the market, as CJT has traded up 45% since the announcement. We

strongly believe that combined with CJT’s strong growth potential, its

strategy shift will drive long-term, sustainable returns for shareholders.

reflect a conservative view on the 8.0% CAGR of the e-commerce market

in Canada. As DHL represents 95% of CJT’s ACMI business, we have

forecasted growth in the segment to reflect the nature of CJT’s relationship

with DHL. CJT is an important part of DHL’s expansion into LatAm and will

benefit greatly from 20%+ CAGR’s expected in the region (Figure 17).

Through strategic warrants, DHL is expected to deliver $2.3B in revenue to

CJT by 2029 (Appendix 4). We have taken a conservative view on a mix of

LatAm growth and the expected revenue from DHL to forecast growth at a

12.0% CAGR in the ACMI business. The charter business performed

strongly during COVID due to the high volume of emergency flights. CJT

fulfilled emergency PPE flights for the Canadian Government and rescue

flights for the Hawaii wildfires. We do not believe growth in the segment is

sustainable and is forecasted to contract to pre-COVID levels to reflect a

normalized level of charter demand.

Management’s strategy shift
As outlined in Thesis #3 on p. 5, CJT has undergone a recent strategy shift.

Management plans to complete its capex plan by 2025 with the focus

shifting to cost optimization to drive higher margins. This has been reflected

in our valuation as we have forecasted minimal growth capex after 2025.

Due to the high operating leverage nature of CJT’s business (85% of direct

costs are fixed excluding, fuel), margins are largely driven by volume

growth. We have conviction in CJT’s growth prospects and margin

expansion, driving modest EBITDA margin growth over the projection

period from 44% in 2023E to 48% in 2028E (Figure 24).

WACC
Cost of Debt: We considered three methodologies to calculate the cost of

debt: 1) the rate used to calculate the PV of hybrid debentures, 2) weighted

average interest rate on hybrid debentures, and 3) credit spreads. We

believe the rate of 7% used to calculate the PV of hybrid debt reflects the

long-term borrowing capabilities of CJT more than the weighted average

borrowing cost of 5.5% and is a more conversative view on their cost of

debt. CJT does not have a reported credit rating, as such, we could not

benchmark CJT’s cost of borrowing against similarly rated peers.

Cost of Equity: CJT’s beta of 1.17 was derived from relevering its peers’

unlevered beta at CJT’s target capital structure1. This is a less aggressive

view than CJT’s 5-year monthly beta of 1.04. We used CAPM to calculate

cost of equity as, in a higher rate environment, CAPM is reflective of

investors’ return requirements. CAPM derives an implied cost of equity of

9.10%, which is similar to CJT’s 5-year average return on equity of 8.82%.

WACC: CJT is at its target leverage ratio, extrapolating at its current D/E

level using a cost of equity of 9.10% with an after-tax cost of debt of 5.11%

implies a WACC of 8.20% (Figure 26).This is conservative in relation to

Damodaran’s industry average cost of capital for air transport of 6.98%2.

Terminal growth and exit multiple
We assumed a terminal growth rate of 2.25% given the strong correlation

between GDP growth and the Canadian 10-year government bond yields of

3.25%. Our chosen exit multiple is 9.0x which is a strong discount to CJT’s

historical 5-year EV/NTM EBITDA multiple of 11.0x (Appendix 17). As a

result of CJT’s competitive moat and attractive FCF generation potential,

we believe CJT should trade closer to its long-term average when

combined with the premium it historically traded at above other pure plays.

Comparable companies analysis
We have chosen a peer set comprising of businesses that have similar

underlying drivers as CJT. Based on our comp set with criteria outlined in

Appendix 15, CJT currently trades at a premium to peers implying a 20%

downside (Figure 27). We have chosen to weigh comps at 20% of our

valuation due to the uniqueness of CJT’s business and competitive moat.

CJT is a domestic monopoly in a high-barrier industry with long-term

contracts that include high minimum revenue guarantees. We have not

included FCF multiples as CJT has historically been cash flow negative and

complex balance sheet items skew earnings-based multiples.

7Note 1: Excludes outliers ATSG and Chorus Aviation, Note 2: Source (Aswath Damodaran)

Figure 23: Segmented Revenue

$327 $309 $343

$473
$543

46% 44% 45% 47% 48%

30.00%

35.00%

40.00%

45.00%

50.00%

55.00%

60.00%

65.00%

70.00%

75.00%

$100

$200

300

$400

500

$600

2022A 2023E 2024E 2026E 2028E

Adj.

EBITDA

Adj. EBITDA Margin %

Figure 24: EBITDA

Forecast

$714 $708 $771
$1,000

$1,124

2022A 2023E 2024E 2026E 2028E

Domestic ACMI Charter

Pre-tax Cost of Debt 7.00%

Tax Rate 27%

After-tax cost of debt 5.11%

Figure 26: WACC Buildup

Risk-free rate 3.25%

Market risk premium 5.00%

Levered beta 1.

Cost of Equity 9.

10%

Net debt $764M

Market value of equity $2,598M

Enterprise value $3,361M

WACC 8.

20%

4.8x 5.

8.5x

11.2x

12.2x

9.5x

Average: 8.2x

Figure 27: EV / NTM EBITDA

Figure 25: Case Scenarios

Criteria

Bear Base Bull

Revenue

CAGR
5.3% 8.0% 10.8%

EBITDA

Margins

44%

->43%

44%

->48%

44%

->52%

Implied

Return

3% 33%

100%

Source: Team 4 Analysis

Source: Capital IQ/Team 4 Analysis, 2024

13%

13%
4%

23%

Bear Base Bull

Financial Analysis

Stronger than anticipated post-COVID growth
COVID was a perfect storm for CJT. Massive supply/demand imbalances

due to the cancellation of passenger flights and the boom in e-commerce

meant CJT benefited from excess demand and a lack of capacity. While

COVID growth rates are not sustainable, we believe CJT has significant

growth opportunities post COVID through their top-quality customers, as

outlined in Thesis #2 on p. 4.

Margins stabilize above pre-COVID levels
Net operating profit margins increased during COVID as e-commerce grew

significantly and capacity diminished due to a lack of passenger flights. CJT

filled the gap for cargo traditionally transported in passenger aircrafts and

shipped critical goods such as PPE and COVID test-kits, which drove

higher margins due to increasing volumes. These tailwinds were unique,

and top-line will not grow as rapidly as it did during the pandemic. However,

in the future, we expect margins to stabilize above pre-pandemic levels as

CJT has already managed their largest cost driver, capacity utilization. By

selling off smaller aircrafts and consolidating cargo volume, CJT now

avoids suboptimal routes, reducing operating costs. Margins are expected

to expand to drive higher FCF in a sustainable manner.

Increasing returns for investors
Management’s strategy shift is anticipated to drive higher ROIC for

investors. While it is too early to see any impact from the strategy shift, our

analysis indicates it will drive ROIC improvement above pre-pandemic

levels by 2025 (Figure 29). Improved operating efficiency and growth

spending reductions combined with growing dividends (Figure 30) and an

NCIB program (Figure 31) will drive higher returns for investors despite

entering a higher cost of capital environment. As this has been a

historical

concern for investors, we believe it will be a catalyst for stock

performance.

Strong sustainable cash flows
Despite the possibility of increased capital expenditures resulting from

significant volume growth, CJT’s lean operations and sizeable margins will

persist, ensuring the generation of substantial FCF. Furthermore, as a

monopolistic middle mile air freight operator, we believe that CJT’s

forecasted steady FCF profile is sustainable.

Improving credit profile
CJT has made meaningful strides in reducing its leverage, seen in its

increasing interest coverage ratio and decreasing debt/EBITDA ratio

(Figure 32) to its target leverage levels. The company is maintaining a

strong balance sheet through its asset sales and reduction in capex. CJT’s

level of debt capacity also enables them to pursue aggressive growth

should market conditions be optimal for it and historically, CJT has

performed extremely well during times of expansive market conditions

related to e-commerce, especially during COVID.

Figure 31: Share Buybacks

Figure 29: ROIC Forecast

COVID

Figure 32: Debt/EBITDA

4.1x
4.8x

2x
1.4x

2.2x
2.6x

’17A ’18A ’19A ’20A ’21A ’22A ’23E

Target leverage:
1.5x-2.5x

Figure 30: Dividend Growth

$0.19 $0.21 $0.21 $0.23
$0.26 $0.28

$0.31

’17A ’18A ’19A ’20A ’21A ’22A ’23A

NCIB announced and approved

on November 7, 2023

CJT can acquire a maximum of

1.5M shares, representing

8.72% of outstanding shares

Ends November 8, 2024

Source: Company Filings, Team 4 Analysis

Source: Team 4 Analysis

Source: Company Filings, 2023

Source: Company Filings/ Team 4 Analysis, 2023

2019A 2020A 2021A 2022A 2023E 2024E 2025E 2026E 2027E 2028E

DuPont Analysis

Gross Margin 32.8% 45.2% 39.4% 34.7% 22.7% 24.8% 30.5% 33.2% 34.8% 35.1%

EBITDA Margin 43.1% 16.8% 58.6% 55.2% 41.4% 42.4% 45.1% 45.8% 46.4% 46.9%

Adjusted EBITDA Margin 32.2% 52.1% 49.3% 45.8% 43.7% 44.5% 46.9% 47.4% 47.8% 48.3%

Net Profit Margin 2.4% -13.1% 22.1% 19.5% 8.4% 5.7% 10.6% 13.3% 14.7% 14.9%

Asset Turnover 0.4x 0.6x 0.6x 0.6x 0.5x 0.5x 0.5x 0.6x 0.6x 0.5x

Return on Assets 1.1% -7.8% 12.9% 11.4% 3.8% 2.7% 5.7% 7.6% 8.3% 7.8%

Financial Leverage (A/E) 4.0x 5.8x 3.5x 2.4x 2.5x 2.4x 2.1x 1.8x 1.6x 1.5x

Return on Equity 4.2% -44.8% 45.6% 27.6% 9.5% 6.4% 11.9% 13.8% 13.6% 12.1%

Return on Invested Capital 5.0% 12.7% 11.5% 8.5% 3.9% 5.3% 8.8% 11.3% 12.6% 12.8%

Liquidity

Current Ratio 0.6x 0.5x 2.0x 0.8x 0.8x 0.7x 0.9x 2.1x 3.1x 4.5x

Quick Ratio 0.6x 0.5x 2.0x 0.7x 0.7x 0.7x 0.8x 2.0x 3.0x 4.4x

Debt Ratios

Interest Coverage Ratio 1.4x 4.3x 5.6x 5.1x 1.7x 2.6x 4.9x 7.4x 8.5x 8.

Debt / Adj. EBITDA 4.0x 2.0x 1.4x 2.2x 2.6x 2.1x 1.4x 1.0x 1.0x 0.9x

Figure 28: DuPont Analysis

Investment Risks

Risk #1: Customer concentration risk
Customer concentration poses a notable risk as 80% of CJT’s revenue is

derived from its top 10 customers (Figure 35), a consequence of the

oligopolistic nature of Canadian delivery services. Potential alternatives

such as rail, passenger plane belly cargo space, or inshoring by key

customers could adversely impact revenues and influence other customers

to seek better contracts or leave.

Mitigant: Despite the risk, CJT benefits from a lack of alternatives in the

market. Customers have few viable alternatives as other methods of freight

lack the timeliness required and passenger belly freight is unreliable. The

stable nature of revenues is attributed to world-class anchor customers with

long-term contracts, creating a scenario where customers are locked in and

satisfied, reducing the incentive for churn. Additionally, the sheer cost of

insourcing the middle mile creates strong disincentives to customer churn

as it is highly unlikely customers could profitably insource their middle mile.

Risk #2: Inability to turn around ROIC
CJT’s historical struggle to drive ROIC above a minimum return threshold

concerns investors as they enter a higher cost of capital

environment.

Investors are concerned about management’s ability to generate returns as

rates continue to rise and the macro environment for freight softens.

Mitigant: CJT’s track record of flexible capital management, evident in

selling planes even during recessions, supports our view of their ability to

manage through a higher cost of capital environment. Management’s

commitment to completing growth capex plans by 2025 (Figure 36),

combined with ongoing cost-cutting measures and optimized capacity

utilization, mitigates the risk of inefficiency. Attractive growth avenues at

minimal incremental cost combined with high operating leverage will likely

lead to sustained margin expansion and cash flow growth.

Risk #3: Heightened International Competition
Although the threat of new entrants is low, DHL and Amazon have their

own dedicated air freight businesses through ACMI agreements with other

airlines. This would limit CJT’s sole focus on high-growth areas. Market

share growth is constrained domestically, and international expansion is

highly challenging. The primary growth source lies in the expanding e-

commerce market (Figure 37 / Appendix 6/7).

Mitigant: Despite domestic limitations, CJT is well-positioned to stay

strategically aligned based on a proven track record that maintains top

performance. We can expect CJT to capitalize on DHL’s expected double-

digit growth in SEA and LatAm. CJT’s high quality customers are leaders in

their respective markets and are partnered with leading local e-commerce

players which will continue to drive strong volumes for CJT, despite

slowdowns in the macro environment.

Figure 33: Risk Matrix

Note 1: Adj. EBITDA Margins based on revenue incl. fuel surcharge

57%23%

20%

Top 3 Top 10 Other

Figure 35: Customer

Concentration

L
ik

e
li
h

o
o

Impact

Figure 37: Amazon

Investments in Canada

Figure 36: CJT Capex

Breakdown ($M)

45
65

2021 Present

While Canadian facilities grew 40%,

facilities in the United States decreased

by 8% in the same period

Management plans to

complete majority of

its growth capex plan

by 2025E

Superior EBITDA margins against peers
As evident by Figure 34, CJT has consistently stronger margins than

peers. This is due to CJT’s strong competitive moat and monopolistic

characteristics in Canada and favourable agreements with customers. We

believe CJT’s margin advantage is sustainable as the business continues

to focus on cost optimization efforts to further enhance profitability.

2019 2020 2021 2022 LTM

Cargojet 32% 44% 39% 34% 35%

Atlas Air 18% 26% 25% 19% n/a

ATSG 30% 32% 31% 31% 27%

Chorus Airways 25% 36% 26% 24% 28%

Figure 34: Peer Adj. EBITDA Margins1

Source: Company Filings, 2023

Source: Company Filings/Team 4 Analysis, 2023

$84
$165

$482

$31 $32 $31 $0

’20A ’21A ’22A ’23E ’24E ’25E ’26E

Maintenance Capex Growth Capex

Source: Capital IQ, 2024

Meeting

Date Ease

Change

1/31/2024 18.6% 81.4%

3/20/2024 77.2% 22.8%

5/1/2024 97.0% 3.0%

6/12/2024 100.0% 0.0%

7/31/2024 100.0% 0.0%

9/18/2024 100.0% 0.0%

With the upward trend in the importance of and efforts toward achieving

sustainability, CJT’s ESG profile impacts stakeholder views on the

business. CJT is rated as a medium risk by ESG rating agencies (Figure

39), with environment and social being weaker components as there is less

disclosure on initiatives (Appendix 17). Based on our internal analysis of

the most important and industry relevant ESG factors (Figure 40), CJT

does not lag peers in any category. Our scorecard method is further

detailed in Appendix 18.

Environmental
CJT engages in initiatives led by the Canadian government,

sustainability

regulatory bodies, and is aligned with the global aviation industry.

Global aviation industry goals: The aviation industry contributes about

11% of the world’s emissions, which is why the United Nations Climate

Change Conference committed to net-zero greenhouse gas (GHG)

emissions by 2050. CJT joins industry players in improving their fuel

efficiency, carbon-neutral growth, and reduction in net aviation CO2

emissions. CJT is in line with dedicated freight peers with respect to their

emissions score, creating no cause for concern.

Sustainable Aviation Fuel: As a founding member of the Canadian

Council for Sustainable Aviation Fuels (C-SAF), CJT’s role is to accelerate

the commercial production and use of Canadian-produced low-carbon SAF.

While SAF is seen as a costly method to decarbonize, there is currently no

alternative that is as universally implementable or effective. However, with

the current regulatory limits and production capabilities for SAF, C-SAF

activism may not be as impactful for CJT’s GHG emissions in the next year.

Carbon capture and offsetting: CJT is a participating airline under the

Carbon Offsetting and Reduction Scheme for International Aviation

(CORSIA) and is required to monitor, report carbon emissions, as well as

purchase carbon offsets. Furthermore, CJT plans to adopt small-scale

Carbon Capture Utilization and Storage technology to capture residual

emissions once these devices become available. However, this is highly

dependent on the technology development and availability of devices.

Fleet modernization and optimization: CJT recognizes the challenges

they face due to the inherently carbon inefficient air cargo model of

converting old passenger planes, thus taking a multi-pronged approach by

modernizing their fleet, implementing the Fleet Efficiency and Optimization

Program, and implementing the Aircraft Maintenance and Load Control

Program to minimize GHG emissions unrelated to customer flying hours.

Social

CJT is in line with regulations and has management support to promote

safety and diversity in their workforce.

Figure 39: ESG

Scorecard

Overall

Score
Environ. Social Gov.

LSEG 37/100 21 47 44

Morningstar 27.1/40+

Bloomberg 3.39/10 2.72 2.47 6.2

Team 4 3.5/5 3.4 3.2 3.8

3.4

3.2

3.7

3.5

0 1 2 3 4 5

Environment

Social

Governance

Overall

CJT ATSG FedEx UPS

DHL

ESG

Overall

Rating

CEO

Approval

Would Rec.

to a Friend

CJT 4.1 88% 84%

Atlas Air 3.7 99% 70%

Air Canada 3.6 69% 67%

WestJet 3.4 39% 57%

Figure 41: Employee Reviews

Figure 40: Team 4 ESG

Scorecard

Risk #4: Prolonged impact of the freight recession
The current freight recession, triggered by post-pandemic interest rate

hikes leading to decreased consumer spending combined with industry-

wide over-investment in freight capacity poses a threat to CJT’s financial

performance. As consumer spending diminishes, demand for cargo

services may remain subdued, impacting volumes and, consequently,

revenue. The prolonged nature of this recession could exacerbate the

challenge, leading to sustained financial pressure.

Mitigant: CJT’s ability to weather the impact of the freight recession is

supported by its strong performance throughout the ongoing freight

recession as well as its geographically diversified revenue streams,

operational flexibility, and high-quality customer base. While the business

may experience a slowdown, the company’s established relationships with

major players like Amazon and DHL and high minimum volume

guarantees, CPI-based price escalations and full fuel cost pass through

provide a level of stability and resilience. Figure 38 also demonstrates

investors believe interest rates will decline, providing relief for CJT.

Figure 38: Interest Rate

Forecast

Source: Apollo Global Management, 2023

Source: Company Websites/Team 4 Analysis, 2023

Source: Team 4 Analysis, 2024

Source: Glassdoor, 2024

Workplace health & safety: All CJT employees receive mandatory health

and safety training at onboarding and refresher training every three years

per regulation guidance. In addition, CJT also provides a Non-Punitive

Safety Reporting system that all employees can access to report incidents,

a whistleblower program, and an Employee Assistance Program for

employee well-being and safety.

Workforce: CJT discloses the diversity of their workforce, with 16%

identifying as female, 27% as a visible minority, and 2.1% as persons with

disabilities; similar to their diversity in the prior year. As an air cargo carrier,

CJT employs around 300 pilots and 1,500 logistics and warehousing

personnel. These careers have been pre-dominantly male; with only around

6% of pilots globally being women and 7% in Canada. Considering the

industry diversity, CJT’s workforce is much more diverse than initially

implied. Overall employee reviews of CJT are more positive than other

airline peers, with a high CEO approval and likeliness to recommend the

company to a friend (Figure 41). CJT has one group of unionized

employees, pilots, that are represented by the Airline Pilots Association

(ALPA). CJT’s collective bargaining agreement expires in 2026 and from

our discussions with lawyers that have experience with dealing with airline

unions, we believe there is a low likelihood of an adverse outcome.

Governance
CJT has strong corporate governance practices and policies that align

management interests with its stakeholders.

Shareholder ownership: CJT is currently majority owned by institutional

investors and as part of passive mutual funds (Figure 42). RBC Dominion

Securities is the only current shareholder that owns more than 10% with

Amazon and DHL poised to own 14.9% and 9.5% of CJT respectively if

their warrants are exercised (Appendix 4). We do not believe there are any

shareholders that will exercise significant or negative influence over CJT.

Executive Compensation: Executives are compensated through a base

salary, a STIP, and an LTIP, with 74% of compensation being variable in

2022 (Figure 43). STIP and LTIP are based on CJT’s adjusted EBITDA for

the year, annual absolute ROIC, and relative total shareholder return, which

strongly aligns management with CJT’s strategy. On a relative basis,

executive compensation is greater than peers (Figure 44), however, CJT’s

total compensation in the past five years is significantly lower despite

generating higher shareholder returns compared to the majority of peers

(Figure 45), indicating strong and effective pay for performance links and

excellent management. We have strong conviction in management’s ability

to execute on their strategy shift due to their alignment through STIP and

LTIP, as well as their ability to generate above average returns in recent

years compared to peers.

Management: CJT’s newly appointed co-CEOs, Jamie Porteous and

Pauline Dhillon, have been with CJT since its inception. The management

team is comprised of highly experienced individuals, with decades of

relevant industry experience and prior executive experience, ensuring CJT

is well-positioned to execute on the opportunities ahead (Appendix 19).

With the industry experience and familiarity with CJT’s historical growth

strategies and successes, CJT’s management is very well-positioned to

execute on the ongoing strategy shift. The co-CEO transition will benefit

from the involvement of Dr. Ajay Virmani, the founder of CJT, who will

remain involved in the business as the Executive Chairman.

Board of Directors: The tenure of the Board, excluding their newest

member, ranges from 5 to 17 years, with strong shareholder approval

ratings in 2022. With the addition of the new member, there is a 40%

female representation on CJT’s Board, surpassing both the average

representation of women on Canadian boards and that on the boards of

other airlines. The diversity of industry experience across the Board

members and years of experience in management positions and other

board positions positively reflects on the abilities of CJT’s Board (Appendix

20).

Figure 43: Executive Historical

Compensation Mix

11Note 1: Does not incorporate CEO change

Figure 45: Executive Comp. vs

Shareholder Returns

Figure 44: Executive

Compensation Benchmarking

83% 82% 88%
65% 74%

2018 2019 2020 2021 2022

Fixed Variable

$53 $

$183
$2

$118

68%

(30%)

46%
62%

85%

-120%

-70%

-20%

30%

80%

100

200

300

400

500

Cargojet ATSG FedEx UPS DHL

Total Comp. ($M) 5Y-Return

$0.98

$16.

$1.64

$90.

1.20% 0.11% 0.34% 0.04%

–

50%

–

40%

-30%

-20%

-10%

10%

20%

30%

40%

50%

100

Cargojet Air
Canada

Air
Transat

FedEx

Annual Revenue ($B)

% of Annual Revenue

“Cargojet’s management team is highly
capable and having Ajay stay involved in the

business will massively support the success of
the strategy shift” – Expert A, consultant with

+20 years of air freight experience

Figure 42: Shareholder

Ownership Assuming Amazon

and DHL Warrants are

Exercised

Source: Capital IQ/Company Filings, 2023

Source: Company Filings, 2023

Source: Capital IQ, 2023

37%

35%

15%

10%
3%

Institutions

Public

Amazon

DHL

Insiders

Appendix 1: Expert Interviews Conducted1

Segment breakdown and revenue generation Key customers

Domestic Network: The domestic air cargo network generates revenue

primarily through customers pre-purchasing a guaranteed space and

weight allocation on CJT’s fleet network. As a result, a significant amount

of domestic revenues are contracted (over 75% of domestic volumes) due

to guaranteed allocations but will fluctuate with customer volume. The

remaining capacity in the domestic network is sold on an ad hoc basis to

varying contract and non-contract customers.

ACMI: Under an ACMI agreement, CJT provides aircraft, crew,

maintenance and insurance to a customer. Variable flight costs such as

fuel, navigation fees and landing fees are borne by the customer. CJT is

paid a fixed amount to operate the flight priced as a rate per block hour.

Charter: CJT provides dedicated aircraft to customers on an ad hoc and

scheduled basis typically in the daytime and on weekends for cargo and

passenger charters. Charter flights are sold at an “all-in” basis where the

customer will pay a single, all inclusive fixed amount per flight.

Fuel Surcharge: CJT’s domestic customer contracts contain variable

surcharges for uncontrollable costs with the ability to pass through 100% of

fuel costs on to customers.

Domestic Network: CJT has

signed long-term agreements with

Amazon, Canada Post and UPS

who are key customers in the

domestic segment. Other customers

include leading T&L businesses like

FedEx, TFI International and others.

ACMI: CJT has a long-term ACMI/

CMI agreement with DHL through

2029 to support their international

expansion.

Charter: Demand in this segment is

variable, with examples including

carrying COVID test kits and PPE

for the Canadian Government.

$249 $264 $300 $325 $361
$121 $124 $115 $167

$267
$176

$240
$439 $487

$669 $758
$981

2018 2019 2020 2021 2022

Domestic Surcharge & Other ACMI Charters

Expert A • Consultant with 20+ years in air cargo at a leading global consulting firm

Expert B • Consultant with 15+ years in air cargo at a leading global consulting firm

Expert C • Senior executive at an International Freight Association

Expert D • CFO at a leading international freight forwarder

Expert E • Freight leader at an international airline

Expert F • Freight leader at a regional airline

Expert G • Senior freight leader at a top 10 customer of CJT

Expert H • Board director at an air freight company with 30+ years of experience in air freight

Expert I • Former IT executive at an international airline

Expert J • Senior leader at a law firm that has previously covered airline union disputes

Expert K • Freight leader at a Latin American airline

Expert L • Consultant with project experience advising transportation and logistics companies on ESG matters

Expert M • Consultant with project experience advising airports on cargo expansion strategies

Appendix 2: Breakdown of Business Segments

Source: Company Filings, 2023

Note 1: Experts are not named due to requests to maintain confidentiality

Appendix 3: Competitor Profiles

Note 1: UPS, FDX, DHL, 2. CNR, CP, UNP, 3. ATSG, CHR, 4. SAIA, JBHT, KNX, ODFL, MTL, TFI, XPO

Appendix 4: Amazon and DHL Warrants

Appendix 5: Peer Performance/Freight Recession Overview

Amazon Warrants to acquire 9.9% + 5.0% of

CJT – August 23, 2019:

Share Price: $102.

Strike Price: $91.78

Status: Vesting

Terms: $400M in revenue delivered during 2019 –

2026 period

DHL Warrants to acquire 9.5% of CJT – March

29, 2022

Share Price: $185.03

Strike Price: $158.92

Status: Vesting

Terms: $2.3B in revenue from 2022 –2029

Lower Risk of

Replacement

Warrants significantly reduce the risk of key

customer churn while creating incentives for

increased economic activity.

Cash Inflow
Assuming warrants are exercised, CJT can use the

cash for Capex, debt paydowns and buybacks.

Guaranteed

Revenue

Financial incentives encourages major customers

to invest alongside CJT and continue to grow with

them.

Aligned

Interests

In similar agreements, Amazon has held shares

after exercising and has acted as a strategic

partner to ATSG and Atlas.

• Operates a diverse fleet that moves

cargo in the belly of passenger planes.

• Operates 7/200 planes as dedicated

cargo freighters.

• Prioritizes passenger baggage,

special deliveries, urgent shipments,

temperature sensitive goods, human

remains, and humanitarian aid above

cargo.

• Unable to offer time-sensitive

guarantees to customers and is not

focused on expedited overnight freight.

• Cancelled plans to add two B777s to

their fleet of dedicated freighters after

underperforming in Q2 2023.

• Attempted the conversion of four

passenger planes to dedicated cargo,

the completion of which took over a

year for regulatory approval.

• Experienced low bookings on

dedicated cargo planes and have been

unsuccessful so far.

• Unable to guarantee timeliness to

customers for belly-cargo business due

to the likelihood of being bumped by

higher priority packages.

• Few long-term contracts with

important customers and no anchor

customer exists to provide volume

certainty.

• There are a few small dedicated

freighters focused on fulfilling select

routes for single customers.

• Morningstar Air Express supports

some FedEx volume but is primarily

focused on charters.

• Buffalo Airways services a dedicated

freighter route between Edmonton and

Yellowknife and is focused exclusively

in Northern Canada.

• There are no other scaled, nationwide

players that are focused on domestic

overnight.

Since 2022, the cargo market has been suffering from an imbalance of supply and demand, resulting in a

freight recession. Although freight volumes have been more robust than expected during an economic recession,

overcapacity has led to lower freight spot rates, more competitive pricing, and changing dynamics in cargo

movement between dedicated freighters and the belly of passenger airlines. This recession has caused many

peers in the air freight and transportation industries to perform poorly, while having to navigate an economic

environment where growth is difficult to achieve.

(100%)

(50%)

50%

100%

150%

200%

250%

300%

Dec-18 Jun-19 Dec-19 Jun-20 Dec-20 Jun-21 Dec-21 Jun-22 Dec-22 Jun-23

CJT Integrators Rail Dedicated Freight Less-Than-Truckload1 2 3 4

Source: Company Filings, 2023

Source: Capital IQ, 2024

DHL

• September 2021: By John C. Munro International Airport, CJT’s main base in Hamilton, DHL invested $100M

CAD to build a facility to meet the needs of increased shipping volumes to Canada.

• July 2023: DHL has announced an investment of $562M into LatAm over the next five years given the strong

growth in the region, requiring rising supply chain management services.

• October 2023: DHL will be deploying $370M in capital over the next five years within SEA to boost their

warehousing capacity, workforce, and sustainability initiatives.

• November 2023: DHL has invested $410M in the expansion of their Hong Kong Hub to increase the capacity of

their only warehouse in East Asia.

Amazon

• April 2022: Adjacent to John C. Munro Hamilton International Airport, Amazon opened its most advanced

robotics facility to extend the reach and capability of their expansion plan in Canada.

• August 2023: Amazon business has begun to creep up in Canada, driven by CJT operating a new 40,000-

square-foot cargo terminal at Vancouver International Airport, which has enabled CJT to add a direct flight out of

its base in Hamilton to Vancouver with one of two Amazon-provided 767s.

• August 2023: Over the past two to three years, Vietnamese enterprises have led SEA in garnering the highest

international sales via Amazon. The value generated from e-commerce in Vietnam is expected to continue its

robust ascent.

• September 2023: Amazon has launched its biggest last-mile delivery center in Mexico City to expedite

deliveries in the densely populated area. This expansion is part of Amazon’s $3B investment in Latin America,

aimed at strengthening its market presence and competing with regional and global players.

• November 2023: Amazon announced its fourth renewable energy project in Canada. These projects will help

power Amazon’s operations in Alberta, including its fulfilment centers, sortation centers, delivery and more.

• Q4 2024: Amazon had announced the development a sorting centre in Windsor. In August 2023, after

reevaluating their needs, they stated the facility would be 50% larger than officially announced 16 months ago.

Appendix 7: E-Commerce Growth in LatAm and SEA

Appendix 6: DHL and Amazon’s Expansion

Eight of the top ten countries ranked by retail e-commerce growth

globally are located in LatAm and SEA. The surge in e-commerce

across these regions is driven by technological and demographic

shifts. Increased internet and mobile device penetration have

provided a solid foundation for digital marketplaces, with both

regions witnessing widespread adoption of online shopping,

especially among the younger, tech-savvy populations. The rapid

urbanization in these areas has also facilitated a more consolidated

consumer base, making the logistics of e-commerce more viable.

Simultaneously, economic expansion has bolstered consumer

spending power, thus fueling demand for the convenience and

variety that online shopping platforms offer. The COVID pandemic

has been a significant catalyst, expediting the shift from brick-and-

mortar stores to online retail. Innovative payment options have

emerged, while government initiatives to support the digital

economy have encouraged entrepreneurial ventures and

investments. The e-commerce sector in these regions is poised for

sustained growth, with a notable shift in consumer purchasing

behaviors towards online platforms. In mature e-commerce markets,

70% of sales come from marketplaces, this is lower in North and

Latin America and as these markets mature marketplace penetration

will increase. As seen on the left, CJT’s customers are either leading

marketplaces or are partnered with top marketplaces.

CJT’s competitors have been investing heavily in globalization. International expansion provides significant benefits

through increased volumes and exposure to high quality freight. DHL and Amazon have focused on regions such

as Canada, LatAm, and SEA. Trade routes from manufacturing hubs in SEA and Europe to LatAm prefer to pivot

through Canada due to lower exchange rates and faster customs times, which positions CJT well to capitalize on

international growth opportunities and increased investment in Canada and nearby regions.

Improving Infrastructure

MercadoLibre (#1 ranked LatAm e-

commerce marketplace) and Shopee (#1

ranked SEA e-commerce marketplace)

are both strategic partners of DHL

Source: Company Filings, 2023

Shifting Consumer
Behaviours

Mobile-First Society

Source: Americas Market Intelligence, DHL, Company Filings

Appendix 8: Historical ROIC

Appendix 9: Fleet Assessment

Appendix 10: Cost Optimization

Aircraft Model Capacity (lbs) 2021A 2022A 2023E 2024E 2025E

B767-300 125,000 16 18 21 22 23

B767-200 100,000 3 3 3 3 3

B757-200 80,000 9 13 17 15 15

B767-200 100,000 1 1 – – –

Challenger 601 6,000 2 2 – – –

Cessna 750 2,375 – 1 – – –

Beechcraft 1900D 4,375 – 1 – – –

Total 31 39 41 40 41

Fiscal Year Total Capacity (lbs)

2019A 2,352,000

2020A 2,802,000

2021A 3,132,000

2022A 3,708,750

2023E 4,285,000

2024E 4,250,000

2025E 4,375,000

2026E 4,375,000

The main fleet initiative was CJT selling off its smaller passenger aircraft. In 2023, to adapt to lower market demand,

the company sold the entirety of its passenger fleet including a non-converted B767-200, two Challenger 601’s, a

Cessna 750, and a Beechcraft 1900D. The latter three aircrafts each had total payload capacity of less than 10,000

pounds. This decision also enabled CJT to reposition pilots and implement a new long-term incentive plan to maintain

industry-leading pilot retention. These changes led to aircraft and crew costs in aggregate being cut by $1.8M. By

streamlining their fleet, CJT is now able to focus on repositioning with larger aircraft by selling its 757s. Performing a

detailed fleet analysis allowed us to determine that total payload capacity (lbs) will significantly exceed pandemic

levels, eliminating the necessity for increased growth capex to meet growing demand.

2013A 2014A 2015A 2016A 2017A 2018A 2019A 2020A 2021A 2022A

NOPAT Margin 2.8% -2.7% 0.6% 6.5% 8.6% 10.2% 9.0% 18.6% 16.8% 13.0%

Invested Capital Turnover 1.9x 1.1x 1.2x 1.1x 1.0x 0.7x 0.6x 0.7x 0.7x 0.7x

Return on Invested Capital 5.1% -3.0% 0.7% 7.2% 8.4% 7.1% 5.0% 12.7% 11.5% 8.5%

The relationship between CJT’s NOPAT Margin (net operating profit after tax / sales) and invested capital turnover

(sales / average invested capital) provides greater clarity into the firms historically underperforming ROIC. Net PP&E

accounts for approximately 90% of CJT’s average invested capital. Invested capital has been steadily increasing due

to CJT’s significant year-over-year investments in growth capex, which has reduced their turnover. When combined

with poor operating margins, CJT has failed to drive a reasonable return on invested capital in the past. However, the

need for further growth capex spend is no longer present, and with a stable PP&E base, margin improvements will

directly lead to a higher ROIC. From the high degree of operating leverage, route optimization, and increasing

volumes, CJT will be able to drive higher margins and ROIC.

For dedicated air cargo carriers such CJT, suboptimal capacity utilization translates to diminished yields and

revenues. This occurs as the number of block hours and the associated cost per block hour remain constant, but

the revenue generated declines with lower capacity utilization. CJT leverages robust customer relationships

fortified by strategic long-term contracts and a stellar on-time track record. This approach enables CJT to engage

closely with customers, steering clear of suboptimized routes. This, in turn, leads to a reduction in block hours and

associated costs. CJT’s ability to move away from suboptimal routes is a core strength, demonstrating superior

cost management capability compared to competitors within the domestic overnight market. This can be directly

observed by calculating CJT’s direct cost per block hour (excl. fuel costs/D&A). CJT has been able to drive direct

costs per block hour lower than pre-COVID levels with ongoing efforts expected to drive further declines.

$5,296

$4,745
$5,016 $5,061 $5,125 $5,064

$5,283
$5,502

$5,179 $5,245

2019 2020 2021 2022 Q1 2022 Q2 2022 Q3 2022 Q4 2023 Q1 2023 Q2 2023 Q3

Direct Cost per Block Hour (Excl. Fuel Costs/D&A)

Source: Company Filings, 2023

Source: Company Filings/Team 4 Analysis, 2023

Appendix 11: Valuation Support (Base Case)

Source: Team 4 Analysis

Discount Terminal Growth Rate

Rate 1.75% 2.00% 2.25% 2.50% 2.75%

7.2% 46.9% 54.3% 62.5% 71.5% 81.6%

7.7% 31.7% 37.8% 44.4% 51.8% 59.8%

8.2% 18.8% 23.9% 29.4% 35.4% 42.0%

8.7% 7.7% 12.0% 16.7% 21.7% 27.2%

9.2% (1.9%) 1.8% 5.8% 10.1% 14.7%

Discount Exit Multiple (EV/EBITDA)

Rate 8.0x 8.5x 9.0x 9.5x 10.0x

7.2% 27.0% 34.9% 42.8% 50.7% 58.6%

7.7% 24.2% 32.0% 39.7% 47.5% 55.3%

8.2% 21.5% 29.1% 36.7% 44.3% 52.0%

8.7% 18.8% 26.3% 33.7% 41.2% 48.7%

9.2% 16.2% 23.5% 30.9% 38.2% 45.5%

Valuation Takeaway

CJT discloses few details about revenue which makes a detailed revenue build challenging. Due to the nature of

disclosure, it is challenging to have conviction over an implied level of volume and average rate charged by

segment. We have chosen to forecast revenue by segment using a % growth approach in order to reflect the

fundamental drivers of each segment. Costs have been forecasted by category based on the fixed or variable

nature as well as using a % of approach.

Free Cash Flow Projections

Terminal Growth Method

Basic S.O 17.21

(+) In-the-money options 0.00

(-) Shares repurchased from proceeds 0

(+) Warrants Outstanding 4.02

Fully diluted shares outstanding 21.23

Exit Multiple Method

Terminal Growth Method

WACC 8.20%

Terminal Growth Rate 2.25%

Implied Exit Multiple 8.5X

PV of UFCF $718

Terminal Year UFCF $4,629

PV of Terminal Year $3,122

EV $3,839

Less: Debt & Leases ($773)

Less: Minority Interest $0

Add: Cash $43

Equity Value $3,109

S.O 21.2

Implied Price $146

1-Yr Target $158

Current Price $122

Implied Return 29%

Exit Multiple Method

WACC 8.20%

Exit Multiple 9.0X

Implied Growth Rate 2.55%

PV of UFCF $718

Terminal Year EBITDA $4,886

PV of Terminal Year $3,295

EV $4,013

Less: Net Debt ($773)

Less: Minority Interest $0

Add: Cash $43

Equity Value $3,283

S.O 21.2

Implied Price $155

1-Yr Target $167

Current Price $122

Implied Return 37%

Shares Outstanding Cost of Equity Methodologies

Cost of Equity (DDM)

Annual dividend per share 1.28

Current share price $122.38

Sust. Dividend growth 10%

Cost of Equity 11.05%

Cost of Equity (CAPM)

Risk-free rate 3.25%

Market risk premium 5.00%

Levered beta 1.17

Cost of Equity 9.10%

Historical Forecast CAGR

2019A 2020A 2021A 2022A 2023E 2024E 2025E 2026E 2027E 2028E ‘19-’22 ‘23-’28

Domestic Revenue $264 $300 $325 $361 $350 $378 $427 $470 $498 $513 8.1% 6.6%

ACMI Revenue $66 $132 $176 $240 $259 $298 $373 $436 $488 $513 37.9% 12.0%

Charter Revenue $33 $122 $90 $113 $99 $95 $93 $94 $95 $98 36.1% (0.0%)

Revenue (Excl. FS) $363 $554 $591 $713 $708 $771 $893 $1,000 $1,082 $1,124 18.4% 8.0%

% Growth 52.5% 6.6% 20.7% (0.7%) 8.9% 15.8% 12.0% 8.2% 3.9%

Gross Profit $119 $251 $232 $248 $161 $191 $272 $332 $377 $394

Gross Margin % 32.8% 45.2% 39.4% 34.7% 22.7% 24.8% 30.5% 33.2% 34.8% 35.1%

Adjusted EBITDA $157 $289 $291 $327 $309 $343 $419 $473 $518 $543 20.1% 9.8%

Adjusted EBITDA Margin % 43.2% 52.1% 49.3% 45.8% 43.7% 44.5% 46.9% 47.4% 47.8% 48.3%

EBIT $59.7 $169.1 $172.9 $172.9 $96 $122 $199 $254 $294 $308

Operating Margin % 16.4% 30.5% 29.3% 24.2% 13.5% 15.8% 22.3% 25.4% 27.2% 27.4%

NOPAT (Net Operating Profit After Taxes) $44 $123 $126 $126 $70 $89 $145 $186 $215 $225

(+) D&A $92 $98 $114 $140 $183 $205 $204 $203 $207 $2

(-) Capex ($218) ($147) ($278) ($611) ($262) ($181) ($184) ($156) ($222) ($172)

(-) Change in NWC $34 ($36) $3 $0 ($18) ($12) ($8) ($6) ($2)

Unlevered Free Cash Flow ($82) $108 ($73) ($342) ($10) $95 $153 $224 $193 $269

Discount Rate 8.20% 8.20% 8.20% 8.20% 8.20% 8.20%

Discount Period 1.00 2.00 3.00 4.00 5.00

Present Value of Unlevered Free Cash Flow $88 $130 $177 $141 $182

Appendix 12: Reverse DCF

Reverse DCF Takeaway

To understand the level of growth the market may be pricing in, we conducted a reverse DCF. After adjusting

revenue growth and direct cost assumptions until our model arrived at CJT’s current price, it is evident that the

market seems to be pricing in modest growth and margin expansion. We believe this is not reflective of the

opportunities CJT has at hand and have conviction that top line strong growth will drive margin expansion given the

high level of operating leverage in the business.

$363

$554 $591
$713 $708 $771

$893
$1,000

$1,082 $1,124

43.2%
52.1% 49.3% 45.8% 43.7% 44.5% 46.9% 47.4% 47.8% 48.3%

20. 0%

40. 0%

60. 0%

80. 0%

100 .0%

120 .0%

140 .0%

$20 0

$40 0

$60 0

$80 0

$1, 000

$1, 200

2019A 2020A 2021A 2022A 2023E 2024E 2025E 2026E 2027E 2028E

Revenue excl. fuel surcharge Adj. EBITDA Margin %

Base Case Graphic

Reverse DCF Graphic

$363

$554 $591
$713 $708 $773

$850 $915 $970 $1,003

43.2%
52.1% 49.3% 45.8% 43.7% 44.8% 44.5% 45.9% 46.0% 46.4%

20. 0%

40. 0%

60. 0%

80. 0%

100 .0%

120 .0%

140 .0%

$20 0

$40 0

$60 0

$80 0

$1, 000

$1, 200

2019A 2020A 2021A 2022A 2023E 2024E 2025E 2026E 2027E 2028E

Revenue excl. fuel surcharge Adj. EBITDA Margin %

Appendix 13: Cost Breakdown

81% 83% 81% 83% 85%

19% 17% 19% 17% 15%

2021 2022 2023 Q1 2023 Q2 2023 Q3

CJT Fixed vs Variable Cost Trends CJT’s fixed direct costs include aircraft costs, D&A,

maintenance costs, crew costs, ground services, and

SG&A (mainly fixed salaries). Fixed costs constitute a

larger share of direct costs and are influenced by the scale

of Cargojet’s aircraft fleet. Consequently, CJT experiences

a high degree of operating leverage. Given that fixed costs

make up a portion of the operating expenses for each

flight route, the costs associated with individual flight

routes do not fluctuate in direct proportion to the number

of shipments handled by Cargojet. We maintained this

cost trend through the forecast period with fixed costs

grown at a nominal rate of 5% annually. Variable costs are

directly related to the volume of flight activity, determined

by the level of customer demand and are therefore

forecasted as a % of revenue. Fuel costs are variable

costs that are completely passed through, leaving no

impact to cash flows.

Source: Team 4 Analysis

Source: Company Filings, 2023

Target Acquirer Date

Transaction

Value (USD $M)

EV/NTM

EBITDA

Equity

Premium

Aug 4, 2022 $5,117.7 4.7x 57%

Appendix 15: Comparable Companies Analysis Criteria

Note: 1. ATSG, CHR. 2. DHL, UPS & FedEx. 3. SAIA, JBHT, ODFL, XPO, KSX, MTL, TFII. 4. CNR, CPKC, UNP

Appendix 16: Dedicated Freight Precedent Transactions

Appendix 17: Historical EV/NTM EBITDA Multiple

Appendix 14: Bull, Bear and Base Case Assumptions

Domestic

Revenue

ACMI

Revenue

Charter

Revenue
Overall

Bull 10.5% 13.5% 3.3% 10.8%

Base 6.6% 12.0% (0.0%) 8.0%

Bear 4.9% 7.9% (2.0%) 5.3%

Revenue CAGR EBITDA Margins Implied Return

11x

13x

15x

17x

19x

Dec-18 Dec-19 Dec-20 Dec-21 Dec-22 Dec-23

Cargojet Dedicated Freight Integrators Less-Than-Truckload Rail

Average

Current

Multiple

Cargojet 11.0x 9.5x

Dedicated

Freight1
5.9x 5.1x

Integrators2 8.9x 8.8x

Less-Than-

Truckload3 10.1x 12.2x

Rail4 14.4x 15.3x

‘23E ‘24E ‘26E ‘28E

Bull 44.3% 45.8% 50.0% 52.3%

Base 44.3% 44.5% 47.4% 48.3%

Bear 44.3% 40.8% 42.1% 43.2%

Implied

Target Price

Implied

Return

Bull $244 100%

Base $163 33%

Bear $126 3%

A Demand for time-sensitive freight (e-commerce) Freight volume/capacityB

C Government fiscal stimulus Globalization of supply chainsD

Key

Performance

Drivers

E Fuel Costs Fleet / equipment capex spendingF

G Labour and workforce costs Regulatory compliance costsH

Key Cost

Drivers

Segment Performance Drivers Cost Drivers Included in Comps

Dedicated Freighters A, B, C, D E, F, G, H ATSG, Chorus Aviation

Integrators A, B, C, D E, F, G, H DHL, FedEx, UPS

Less-than Truckload A, B, C E, F, G, H TFI International

Commercial Airlines C E, F, G, H None Included

Railways B, C E, F, G, H None Included

Source: Team 4 Analysis

Source: Capital IQ, 2023

Appendix 18: ESG Scorecard

Source: Company Filings, Team 4 Analysis, Note: 1. Glassdoor

Rating Description Team 4 Assessment

0 N/A No or lack of evidence of effort to achieve criterion.

1 Laggard Evidence of some effort but little success to achieve criterion.

2 Satisfactory Evidence of effort and a level of success to achieve criterion.

3 Average Effort and success in line with industry standards for criterion.

4 Excellent Higher level of effort and success in achieving criterion.

5 Leader Innovator for industry initiatives and high level of effort and success.

Approach & Rationale

With the lack of standardization on ESG reporting and CJT’s unique position as a firm, CJT has been penalized or

rewarded by ESG rating agencies for the industry assigned. We consulted the LSEG, Bloomberg, and MSCI rating

rationale and selected peers that best represented the mix of each of the ESG factors for CJT to develop our own

scorecard. Our ratings and rationale for the factors that are most relevant to our analysis are below:

Criteria Cargojet ATSG FedEx UPS DHL

GHG Emissions

Committed to net

zero by 2050 and

invested heavily in

SAF and

modernizing their

fleet.

No specified

commitment to a

net zero target, but

clear path to

reduce emissions

with past results.

Committed to

carbon neutral

operations by 2040

and clear path to

achieve their

commitment.

Committed to

carbon neutrality

by 2050 with

intermediate goals.

Committed to net

zero by 2050 with a

clear path to

achieve their

commitment and

past results.

Target Reduction 3.0 0.0 4.0 3.0 3.0

Plan & Execution 4.0 4.0 4.0 4.0 4.0

Use of clean energy 4.0 4.0 4.0 4.0 4.0

Disclosure

Annual ESG

reports disclose

relevant

environmental

concerns and

activities. Also

discloses GHG

emissions.

Annual ESG

reports disclose

clear and concise

details on

environmental

activities and

impacts as a direct

result of changing

practices.

Annual ESG

reports disclose

details on past

actions and impact

as well as detailed

plans and

objectives, with

additional data in

an appendix.

Annual

sustainability

reports disclose

major plans and

objectives and

historical

achievements in

environmental

activities.

Annual ESG

reports disclose

plans and

objectives.

Additional

downloadable data

including GHG

emissions.

Timeliness 3.0 3.0 4.0 3.0 3.0

Relevance & Specificity 3.0 4.0 5.0 4.0 5.0

Environment 3.4 3.0 4.2 3.6 3.8

Criteria Cargojet ATSG FedEx UPS DHL

Workplace Health &

Safety

Required

onboarding and

refresher training

for all employees

with standard

incident response

protocols.

Ongoing training

and emergency

practice drills with

13 safety

programs

to assess and

mitigate risks.

Required

onboarding training

for all employees.

Tracked key

metrics and

employee

engagement on

safety procedures.

USD$343M

investment in

training in the past

year with details on

types of training

available. Standard

incident response

protocols.

EUR€193M

investment in staff

development but

no details on

frequency of

training. Standard

incident response

protocols.

Training 3.0 3.0 3.0 4.0 3.0

Incident Response 3.0 4.0 4.0 3.0 3.0

Workforce

Required diversity

training for

employees on how

to create an

inclusive work

environment.

Workforce

satisfaction from 58

reviews.

Required diversity

training for

employees and

surveys to

measure progress

and set diversity

goals. Workforce

satisfaction from 24

reviews.

Required diversity

training.

Contributions to

create

opportunities in

and around the

company.

Workforce

satisfaction from

10.9k reviews.

Not disclosed

whether diversity

training is required

for all employees,

but workforce is

diverse. Workforce

satisfaction based

on 238 reviews.

Not disclosed

whether diversity

training is required

but workforce is

diverse and

meaningful actions

are taken.

Workforce

satisfaction based

on 4.7k reviews.

Diversity & Inclusion 3.0 4.0 5.0 3.0 4.0

Satisfaction1 4.1 4.1 3.7 3.0 3.9

Disclosure

Annual ESG

reports disclose

social activities and

programs

undertaken to

foster a healthy

work environment.

Annual ESG

reports disclose

social activities and

programs

Annual ESG

reports disclose

social activities and

programs with

additional data in

an appendix.

Annually published

reports with

detailed disclosure

on social activities;

however,

disclosure is

scattered.

Annually published

reports with

detailed disclosure

on social activities

with additional

downloadable data

for tracked metrics.

Timeliness 3.0 3.0 3.0 3.0 3.0

Relevance & Specificity 3.0 3.0 4.0 3.0 4.0

Social 3.2 3.5 3.8 3.2 3.5

20Source: Company Filings, Team 4 Analysis

Criteria Cargojet ATSG FedEx UPS DHL

Board of Directors

All

members are

independent and

have relevant

experience. High

gender and

moderate ethnic

diversity.

All members are

independent and

have relevant

experience.

Almost all

members are

independent and

have relevant

experience.

Almost all

members are

independent and

have relevant

experience. High

gender and ethnic

diversity.

Almost all

members are

independent and

have relevant

experience.

Independence 4.0 4.0 3.0 4.0 3.0

Experience 4.0 4.0 4.0 4.0 4.0

Diversity 5.0 3.0 4.0 5.0 3.0

Management

Management have

relevant

industry

knowledge and

compensation

heavily tied to

performance.

Management have

relevant industry

knowledge with

compensation

below market and

is influenced by

company

performance.

Newer

management team,

but with relevant

industry

knowledge.

Compensation tied

to company

performance vs

market.

Management have

relevant industry

knowledge with

compensation

above market but

tied to company

performance.

Management have

relevant industry

knowledge with

compensation tied

to company

performance.

Experience & Competence 4.0 4.0 3.0 4.0 4.0

Diversity 4.0 4.0 4.0 4.0 3.0

Compensation Structure 4.0 4.0 3.0 3.0 4.0

Shareholder Rights

Currently no

concern as one

class of shares

with 97%

owned by

institutions or the

public. However,

there is concern

with the warrant

execution.

One class of

shares with 97%

owned by

institutions,

Amazon, or the

public.

One class of

shares with 92%

owned by

institutions, private

corporations, or the

state.

One class of

shares with

99.04% owned by

institutions, the

state, or the public.

One class of

shares completely

owned by

institutions, private

corporations, or the

public.

Voting Rights 3.0 5.0 5.0 5.0 5.0

Audit Committee

Independent

members familiar

with compliance

requirements.

Independent

members familiar

with compliance

requirements.

Independent

members familiar

with compliance

requirements.

Independent

members familiar

with compliance

requirements.

Independent

members familiar

with compliance

requirements.

Independence 3.0 3.0 3.0 3.0 3.0

Experience 3.0 3.0 3.0 3.0 3.0

Disclosure

Relevant financial

reporting and

human capital are

disclosed, including

impact of

outstanding

derivative

securities.

Relevant financial

reporting and

human capital data

are disclosed.

Relevant financial

reporting disclosed.

Lack of concise

disclosure on

human capital.

Relevant financial

reporting and

human capital data

are disclosed.

Relevant financial

reporting and

human capital data

are disclosed.

Financial Reporting 3.0 3.0 3.0 3.0 3.0

Human Capital 3.0 3.0 2.0 3.0 3.0

Governance 3.7 3.6 3.4 3.7 3.5

Overall 3.5 3.4 3.8 3.6 3.6

Appendix 19: Management’s Bios

Name & Position

Years of

Industry

Experience

Background

Jamie Porteous

Co-CEO
38

Jamie served as CJT’s Chief Strategy Officer prior to being appointed as a co-CEO in

January 2024. Jamie has been with CJT since its inception but began his career in cargo

at Air Canada.

Pauline Dhillon

Co-CEO
23

Pauline started her career at CJT in 2001 and served as CJT’s Chief Corporate Officer

prior to being appointed as a co-CEO in January 2024.

Scott Calver

CFO
18

Scott was the CFO of Trimac Transportation prior to joining CJT as its CFO in May 2022.

He has over 19 years of experience in transportation and logistics and held financial roles

in the manufacturing sector.

Overall ESG ratings are calculated with Environment and Governance weighted at 40% each and Social weighed at

20%, due to the relative importance of the categories to businesses in the industries examined. CJT does not lag in

any one area compared to peers but does not lead either. CJT’s ESG does not create any cause for concern.

Name & Position Since
Prior Board

Experience?
Background

Dr. Ajay Virmani

2005 Yes

Dr. Virmani has served as the President and CEO of CJT since inception, and

recently entrusted Jamie Porteous and Pauline Dhillon to be co-CEOs of the

company starting January 1, 2024. He has served as a Director of CJT’s Board

since its IPO in 2005 and had a 97.57% approval by shareholders in 2022. Dr.

Virmani currently also serves as a Director on the Board of TD Bank.

Arlene Dickinson

Chair of the Audit

Committee (AC)

2018 Yes

Arlene has served on CJT’s Board since 2018 and had a 95.17% approval by

shareholders in 2022. She is the Founder and Managing General Partner of

District Ventures Capital, Founder of District Ventures Accelerator, and CEO and

sole owner of Venture Communications Ltd., with extensive experience working

with Canadian brands. Arlene has also served on numerous public and private

boards, but currently hold no other public company directorships.

Mary Traversy 2023 Yes
Mary was appointed as a Director in 2023. She spent 35 years at Canada Post,

retiring in 2019, and served as the Chief Operating Officer prior to her retirement.

Paul Godfrey

Chairman of the Board

Chair of the Corporate

Governance Committee

2009 Yes

Paul has served on CJT’s Board since 2009 and had an 82.17% approval by

shareholders in 2022. He currently serves as Founder and Special Advisor to the

CEO and Board of Postmedia Network, where he previously served as Executive

Chairman until 2022 and CEO until January 2019. Paul had served on the Board

of and as the CEO of several other organizations since 1964. He has served on

the Bragg Gaming Group Inc.’s Board since January 12, 2021.

John Webster

Chair of the

Compensation &

Nomination Committee

2005 Yes

John has served on CJT’s Board since its IPO in 2005 and had a 76.71% approval

by shareholders in 2022. He also has been the President and CEO of Scotia

Mortgage Corporation since 2006, and the President and CEO of Maple Trust

Company since 1989 prior to its acquisition by the Scotia Mortgage Corporation.

John has been the CEO and COO for regulated financial institutions for over 30

years, overseeing internal and external audits as a member of senior management

and as a board member. He does not hold other public company directorships.

Appendix 20: Board of Directors’ Bios

Sanjeev Maini

VP Finance
19

Sanjeev served as CJT’s Corporate Controller prior to his role as VP Finance and was the

interim CFO for CJT from June 2021 to May 2022.

Paul Rinaldo

Sr VP Fleet Management

and Support Services

35
Paul has over 33 years of experience in aviation management for major Canadian carriers,

including Wardair Canada and Air Transat. He joined CJT in April 2003.

Shane Workman

Sr VP Flight Operations
31

Shane has over 30 years in the aviation industry and over 13,600 flight hours. He was an

executive at Swoop, Sunwing, Enerjet, and joined CJT in August 2022.

George Sugar

Sr VP Regulatory

Compliance

22
George held management and supervisory positions at other airlines and was the Chief

Pilot for CJT since 2002 prior to his current position he began in January 2006.

Gord Johnston

Sr VP Strategic

Partnerships Sales

30
Gord has over 30 years of commercial aviation industry experience, including at American

Airlines Cargo and Air Canada Cargo, prior to joining CJT in 2005.

Leo Cordeiro

Sr VP Maintenance and

Engineering

35
Leo has over 35 years of experience in the aviation sectors, including 30 years with Air

Canada and Air Canada Express. He joined CJT in 2019.

Vito Cerone

Sr VP Sales and Customer

Experience

Vito has over 31 years of experience in the aviation industry, including over 31 years with

Air Canada. He was the VP for Cargo Sales and Commercial Strategy at Air Canada

Cargo prior to joining CJT in September 2021.

Appendix 21: References
About Us. Cargojet. (2024, January 9). https://cargojet.com/about-us/

Airfreight Rates – Baltic Exchange Airfreight Index. AirCargoNews. (2024, January 4). https://www.aircargonews.net/data-hub/airfreight-rates-tac-index/

Airways Mag. (2023, March 8). https://airwaysmag.com/country-highest-female-pilots/#:~:text=According%20to%20the%20International%20Society,of%20pilots%20worldwide%20are%20women.

Annual Reports. DHL. (n.d.). https://www.dhl.com/global-en/home/our-divisions/supply-chain/about-dhl-supply-chain/annual-reports.html

Daily Spark, Apollo Global Management (2023) https://apolloacademy.com/the-daily-spark/

E-Commerce & Logistics. IATA. (2023, November 13). https://www.iata.org/en/programs/cargo/cargo-operations/e-commerce-logistics/

ESG Risk Ratings. Morningstar. (n.d.). https://www.sustainalytics.com/esg-rating/cargojet-inc/2000226976

ESG Scores. LSEG (n.d.). https://www.lseg.com/en/data-analytics/sustainable-finance/esg-scores

Financials Page. Cargojet. (2023, November 7). https://cargojet.com/financials-page/

Glassdoor. (n.d.). https://www.glassdoor.ca

Investor Relations. Air Canada (n.d.). https://aircanada.investorroom.com/shareholder-meetings

Kulisch, E. (2022). Canada’s 3 largest airlines make big push in cargo. FreightWaves. https://www.freightwaves.com/news/big-3-canadian-airlines-bulk-up-on-cargo

Latin America E-Commerce Market Projections, 2023-2026. Americas Market Intelligence (2023, November 31). https://americasmi.com/insights/latin-america-e-commerce-market-projections-2024/

LinkedIn. (n.d.). https://www.linkedin.com/

Lin, Y. (n.). Ecommerce as a Percentage of Retail Sales by Country. https://www.oberlo.com/statistics/ecommerce-as-a-percentage-of-retail-sales-by-country

S&P Capital IQ. (n.d.). https://www.capitaliq.com/

SEC Filings. ATSG. (2024, January 3). https://www.atsginc.com/investors/reports-and-filings/sec-filings

SEC Filings. FedEx. (n.d.). https://investors.fedex.com/financial-information/sec-filings/default.aspx

SEC Filings. UPS. (n.d.). https://investors.ups.com/sec-filings

StatsCan (2023), https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=2010005603

Stephenson, Amanda. (2023). Amazon’s first Canadian wind farm project to be located in Alberta. The National Post. https://nationalpost.com/news/canada/amazon-first-canadian-wind-farm-project-alberta

Tan, C. (2024). DHL Air Freight State of the Industry – December 2023. DHL. https://lot.dhl.com/air-freight-state-of-the-industry-december-2023/?view=1,

Source: Company Filings

https://investors.ups.com/sec-filings

https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=2010005603

CFA Institute Research Challenge

Hosted in

Central America
Barna Business School

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BARNA BUSINESS SCHOOL STUDENT RESEARCH 2017This report is published for educational purposes only by students competing in The CFA Institute Research Challenge

Copa Holdings, S.A.

HIGHLIGHTS
We issue a BUY recommendation with a 1-year target price of $115.41 per class A share; representing
26.06% upside from its January 4th, 2017 closing price of $91.55. Our valuation is based on a 70/30 mix
of EV/EBITDAR multiple analysis and the Free Cash Flow to Equity Model. Our recommendations lays
on the following key catalysts:
CPA CAPITALIZES ON LATIN AMERICAN ECONOMIC RECOVERY
Recent implementation of initiatives from CPA:efficient allocation of Capacity, reduction of Cost per
Available Seat Miles (CASM), the launch of a Low-Cost Carrier (Wingo) and ConnectMile in-house
loyalty program, will boost profitability under a more favorable Latin America market. Economic activity
pickup in key Latin American countries that were affected by negative shock during the last two years
are now recovering, translating into an stronger air travel demand restoration and the cease of pressure
on yields.CPA has been very effective moving capacity to more profitable markets in Latin America, as
well as opening new destinations in North America, which are growing at a higher pace. The top line
was 4%, higher during 3Q16 thanin previous year same quarter. During 2017 and forward , the
combination of better passenger demand outlook and stabilizing yields will lock the path to sustained
growth that the company has exhibited in the last 4Qs.
EFFICIENT COST MANAGEMENT WITH HIGH PREMIUM SERVICE
Ex-fuel Cost per Available Seat Miles (CASM) is following a downtrend in conjunction with maintaining
a Premium Service. CPA has one of the lowest CASM among its peers (6.53 cents per ASM 5-years
average for CPA vs 7.63 5-years average for peers) and continues to allocate investments in lower cost
maintenance assets, such as modernization of their fleet. An average fleet age of 7 years, contributes to
lower fuel costs and more Available Seat Miles per block hours. Altogether, CPA will compete in a
robust position as it continues to increase cash for shareholders due to lower CASM and higher assets
turnover.
STRONGER LOAD FACTOR:
CPA has been able to adapt to a low yield environment faster than other carriers in the region and has
managed to tailor its operations to this context being able to increase the load factor to a historical high

of 84% in 3Q16. A more disciplined capacity growth
plan and commercial strategies are also in motion.
We expect CPA to keep capitalizing from those
measures in the near future.
In addition, CPA stock significantly outperformed
the S&P 500 over the past year: 88.21% of CPA vs.
9.54% of the Index. Furthermore, an improvement
in dividends per share is expected this year due to
last period positive net income estimates (US$2.89
per share). For the following five years, an increase in
dividend per share is foreseen.

Profile Class A Shares
CLOSING

PRICE

(JAN 4TH, 2017)

OUTSTANDING SHARES

36 MONTH DAILY PX

BETA

ENTERPRISE VALUE

91.5

42.01 MM

1.18

3.8 BN
Sources: Bloomberg, Beta

Source: Team Analysis

FINANCIAL LEVERAGE & VALUE SNAPSHOT

DEBT+ OP LEASES/CAPITAL

EV/ EBITDAR

62.9

6.98x

Source: Team Analysis

Valuation Date Jan 4th 20

METHODOLOGY

FCFE

PEERS: EV/EBITDAR

12 MONTH TARGET

PRICE

TARGET PRICE UPSIDE RETURN%

2017 DIVIDENDS

TOTAL 12 MONTH RETURN %

WEIGHT

70%

PRICE

109.66

117.87

115.41

26.0

2.89

29.2

Source: Team Analysis

Valuation Date: January 4th 2017
Current Price: $91.

Ticker:

CPA

Recommendation: BUY
Target Price: $115.41
Upside: 26.06%

Stock Exchange: (NYSE)
Sector: Industrials
Industry: Airlines

SUMMARY: CPA is a commercial aviation provider of passenger and cargo flights to
countries in South, Central and North America and the Caribbean.

RPM: Revenue Passenger by mile
ASM: Available seats per mile
CASM: Cost per available seat mile
Passenger Yield: Average fare per
mile per passenger
RASM: Revenue per available seat
mile
Block Hours: time between an
aircraft leaving a gate and arriving
to another

INDUSTRY METRICS

Source: Company Annual Report

Figure 1

Figure

Figure 3

Figure 4

Key Financials 2017 F 2018 F 2019 F 2020 F

2021 F

EBITDAR Margin 27.7% 25.7% 25.0% 24.7% 24.

ROA 7.8% 6.9% 6.8% 7.0% 7.0%
Revenue Growth 8.2% 5.8% 7.0% 7.4% 7.3%
Ex-Fuel Cost to Revenue 60.2% 59.3% 58.5% 57.5% 56.6%
Dividend per share 2.89 3.02 2.85 2.98 3.27
Dividend yield 2.6% 2.7% 2.5% 2.6%

2.9%

Debt/Capital 31.2% 29.9% 28.7% 27.5% 26.4%

Source: Team Estimates For further details and explanations please see appendix 24.

2
BARNA BUSINESS SCHOOL STUDENT RESEARCH 2017This report is published for educational purposes only by students competing in The CFA Institute Research Challenge

Figure 8 Class A Shares, Ownership Structure

75.2%
Institutional

Holders

24.8%
Mutual Fund

Holders

Source: The Wall Street Journ

BUSINESS DESCRIPTION
Copa Holdings S.A. (NYSE: CPA) is a foreign private issuer with headquarters in Panama City, Panama.
CPA is the parent company of Copa Airlines, and Copa Airlines Colombia (1), which operate under the
Hub & Spoke network model1. During 4Q16, the company launched WINGO, a low-cost carrier, which
is autonomous but operates under Copa Airlines Colombia. Through each airline, the company acts as
a commercial aviation provider of passenger and cargo scheduled flights to countries in the Caribbean,
South, Central and North America. Founded in 1947, it operated as a privately owned company until its
IPO in 2005. CPA is considered a leading commercial aviation provider of the region and is recognized
as the most-on-time carrier in Latin America by FlightStats, providing 360 daily scheduled flights, on 74
destinations in 31 countries.
FLEET AND SERVICE DESCRIPTION Copa Holdings operated a fleet of 99 aircrafts by the end of 2015,
14 of them Boeing 737-700, 64 Boeing’s 737-800 and 21 Embraer’s 190. (Figure 5) As of 2016, aircraft
leases represented one-third of the fleet with an average maturity of 4.3 years. They usually return leased
fleet upon fulfillment. The modern fleet, such as Boeing Max-9, contributes to the achievement of a
strong and elevated completion factor (scheduled flights not canceled), and allows them to optimize
their CASM, bringing more efficiency and profitability (Appendix 22). At the moment, CPA provide
access to more than 200 destinations through its alliances. Strategic destinations are placed with
convenient schedule, on-time performance and competitive fares, which increases passenger loyalty
along with the frequent flyer program, ConnectMiles.
GEOGRAPHIC LOCATION Panama is one of the fastest growing economies in Latin America due to
high public and private investment, an increase of multinational companies headquarters instauration
and substantial touristic dynamism. The country has the second largest containers port in the region.
Furthermore, Tocumen International Airport (PTY) in Panama City, enables connections to major
markets, consolidating traffic to serve destinations that do not generate enough demand for a
point-to-point service(2). Moreover, Copa’s hub in Panama allows the benefit of a free-trade zone and
stable, dollar-based economy. The company’s hub helps their strategy of providing its service to
regional destinations in Central America and the Caribbean by enhancing the overall connectivity and
profitability of their network. Copa considers their intra-latin American network is the most convenient
option for them to expand as 65% of their passengers derive from 45% of the underserved markets in
which they are present. According to Copa’s investors presentation of September 2016, there still are
more than 25 underserved new destinations in America that could be included in its network.
COMPANY STRATEGIES
EXPAND NETWORK CPA is seeking to integrate route networks to enhance profitability with both,
Copa Airlines and Wingo. They are focusing on increasing frequencies of more profitable routes, as well
as adding new destinations to meet growing demand on markets that need a hub. A concrete action
to reach new markets and improve network presence was the launch of Wingo; through which they
added domestic and international destinations not completely covered by existing low-cost carrier
competitors in Colombia. Their strategy rests on their proven choice of using Panama’s Tocumen
International Airport as Hub, and complementing it with their new low cost business line in Colombia.
INCREASE COST EFFICIENCY: MODERN FLEET & REDUCE DISTRIBUTION COSTS The company has
aircraft orders and lease agreements with Boeing and Embraer for the next eight years. The size of the
fleet is expected to slightly increase starting 2017. Firm ordered aircrafts are expected to be delivered
between 2017 and 2025, aiming to to replace 31 leased aircrafts maturing along the same time frame,
and to cover expected demand increment. The new aircrafts promise to cost less than 8.17 cents per
nautical mile, considerably below than 14.12 cents and 9.52 cents of current planes. (Appendix 22) In
addition, CPA is aiming to decrease its distribution costs through direct sales. To reduce transactions
fees paid to travel agents is a priority. In order to do so, new technology and automated process are
planned to be implemented.
FOCUS ON QUALITY SERVICE AND LOYALTY The company places great emphasis on making its
brand associated with quality through their operational differentiation from other airlines, mainly by
on-time performance and offering convenient and attractive schedules and destinations. Also, adding
more services for their customer such as the new program ConnectMiles, were members are eligible
to earn and redeem miles to any of the destinations within the Star Alliance, adding more value for
their clients.
CORPORATE GOVERNANCE
SHAREHOLDER STRUCTURE CPA’s authorized capital stock consists of Class A, Class B, and Class C
shares, 80 million shares of common stock without par value. Class A shares represent 73.7% of
economic interest of CPA and is the only Class listed on NYSE (Figures 8 & 9). Class A and Class B shares
posses the same economic rights and privileges, including dividends. CIASA (Corporación de
Inversiones Aéreas, S.A.), a group of Panamanian investors, currently owns 100% of Class B shares, which
grants them voting power within the company. Class A shares are entitled to vote only on specific
matters like changes affecting their rights and privileges, a transformation, merger, acquisition, spin-off
or change in the corporate purpose of the company. Class A shares have limited voting power under
certain particular circumstances, for instance, a proxy representation and tag-along rights. As of March

Other South American countries

Brazil

Panama

Central America

Colombia

Venezuela

North America

13% 23%

13%

17%

Figure 6 Revenue by Geography

So
ur

ce
: C

om
pa

ny
D

at
a

MONTREAL

TORONTO

BOSTON
CHICAGO

WASHINGTON
NEW YORK

NEW ORLEANS

FORT LAUDERDALE
MIAMI

HOUSTON
LAS VEGAS

LOS ANGELES

SAN FRANCISCO

HAVANA

MONTERREY
GUADALAJARA

CANCUN
MEXICO CITY HOLGUIN

PUNTA CANABELIZE CITY
GUATEMALA KINGSTON

CURACAO
ARUBA

BARRANQUILLA

PANAMA CITY
DAVID

CALI BOGOTA

CARACAS

PORT OF SPAIN

QUITO
GUAYAQUIL

MANAUS

CHICLAYO

LIMA

BRASILIA

GEORGETOWN

RECIFE

SANTA CRUZ

SAO PAULO
RIO DE JANEIRO

BELLO HORIZONTE

ASUNCION

PORTO ALEGRE

BUENOS AIRES
ROSARIO

CORDOBA
SANTIAGO

Source: Company Data

SHAREHOLDERS SHARES %

CLASS A 20,924 73.7

CLASS B 7,466 26.3

TOTAL 28,390 10

Source: Company Data

AIRCRAFT TYPE

CAPACITY 2014 2015 20

EMB-190 94 PAX 26 23 21

737-700 124 PAX 18 14

737-800 154/160 PAX 54 63 64

MAX-9 173 PAX 0 0 0

98 100

Source: Company Data

Figure 5

Figure 7

Figure 9

3
BARNA BUSINESS SCHOOL STUDENT RESEARCH 2017This report is published for educational purposes only by students competing in The CFA Institute Research Challenge

45.1%

16.8%

15.4%

12.2%

0.6%

FMR, LLC

Baillie Giffordd & CO.

Fairponte Capital LLC

Orbis Allan Gray Ltd.

Other Inst. Holders

Figure 10 Top Institutional Holders
So

ur
ce

: T
he

W
al

l S
tre

et
J

ou
rn

AMC Managers Fairpointe Mid Cap Fund

Fidelity Series Emerging Markets Fund

DFA US Small Cap Value Series

Brandes Emerging Markets Value Fund

Other Mutual Fund Holders

39.8%32.7%

11.2%9.3%
6.9%

Figure 11 Mutual Fund Holders

So
ur

ce
: T

he
W

al
l S

tre
et

J
ou

rn
al

List of Board of Directors

Pedro Heilbron
Stanley Motta
Alvaro Heilbron
Jaime Arias
Ricardo A. Arias
Alberto C. Motta Jr.

Carlos A. Motta
John Gebo
José Castañeda Velez
Roberto Artavia Loria
Josh Connor
Andrew C. Levy

Source: Company Data

31, 2016, there were 249 holders of Class A shares. According to CPA Holdings profile on The Wall Street
Journal, Institutions have 75% of ownership and Mutual Funds 25%. (3)

CORPORATE MANAGEMENT The team of directors is diverse regarding experience. Stanley Motta,
Chairman and Director, has been with the company since 1998 and Pedro Heilbron, the CEO, has been
through every transition of the business since 1988 and was elected at the end of 2016 as Chairman of
the Star Alliance. On the other hand 83.33% of executives have relevant experience in the airline
industry, not only with CPA but with other important airlines in the continent such as American Airlines,
United Airlines, and Northwest Airlines. For the recent launch of Wingo, the company chose Catalina M.
Breton as General Manager. She has occupied leadership positions for Avianca and Jet Blue for 12 years,
focusing specially in Latin America and the Caribbean. While in Avianca, she implemented new routes
and major network changes which resulted in market share gains and EBITDA improvement. Also,
with several implementations of communication mechanisms, Catalina led Avianca’s employees
towards a common goal. Executive Officers have demonstrated to make the necessary changes to
keep up with customer’s needs and industry changes, creating with this a competitive advantage.
CORPORATE GOVERNANCE CPA has a Board of Directors of twelve members, with four different
committees: Audit, Compensation, Nominating Corporate Governance and Independent. Incidentally,
corporate governance differences take place between NYSE Standards and companies registered in
Panama. CPA Board of Directors has four independent members (33.33%), not considering
specifications under the NYSE Standards. However, they do have a Nominating and Corporate
Governance Committee, even though it is not mandatory in Panama(4). Moreover, the company does
not hold executive sessions nor equity compensation plans and related individuals conform the
structure of the Board of Directors, (Appendix 8) which we believe allows the company to focus on
long-term growth opportunities. Historically, this can be one of the main reasons of how rapidly the
company has implemented changes, innovations, and improvements to adapt to market changes.
Consequently, according to Chong and Lopez-de-Silanes, very high levels of ownership, voting rights
concentrations and solid governance structures are common in Latin American companies.
SOCIAL RESPONSIBILITY CPA’s efforts towards their pillars of youth education and the environment
led them to understand it is everyone’s task to acknowledge and transmit sustainable development.
One of the company’s programs is intended to improve the communities in which they operate with
social and educational initiatives, thus benefiting more than 25,000 children. On the other hand, the
company has implemented the 3 R’s (Reduce, Recycle and Reuse) program to reduce the impact of
CO2 emissions. The company believes that, for them to be successful, they depend on helping the
nearby communities. This is the reason they encourage the Corporate Volunteerism, led by employees
to help nearby communities on topics such as education, childhood, and environment. According to
CPA, they helped to train 150 public school professors, benefited more than 100 children from the Jr.
Achievement Program and more than 250 thousand dollars were invested in scholarships for
employees and their children.

INDUSTRY OVERVIEW & COMPETITIVE POSITIONIN

The Airline Industry is characterized for its aggressive competition, thin margins and high sensitivity to
economic changes of the regions in which it operates, volatility of oil prices, and variation in consumer
trends. In 2015, the industry mobilized more than 3.5B passengers and 51MM metric tons of cargo
worldwide, with a workforce of 10MM employees in an average of 100,000 flights a day in over 51,000
routes (5). During the same year, for the first time, the airline industry as a whole managed to generate
a return on invested capital that surpassed the cost of capital, with US$33.5B in net profits (6). Even
though 2015 proved to be a challenging year for carriers in Latin America, mainly due to a economics
shocks in Brazil, Colombia and Venezuela, the company was efficient in analyzing the region’s
environment and making strategic decisions to improve its results in 2016 by managing its capacity
and growth plans. Overall operational efficiency seems to be at the top of the agenda for airlines
around the world, including CPA who managed to achieve their highest load factor yet (84.2%) in the
3Q of 2016.
MACROECONOMICS
One of air travel demand’s key drivers is raising per capita income, as rising purchasing power translates
into more travel experiences. Industry’s growth has historically been about twice the annual GDP
growth of a country or region (7). IATA expects 0.9% of world’s GDP to be spent on air transport on 2017,
or the equivalent of approximately US$769 billion. Economic factors have given the air transportation
industry a significant boost, such as increasing connections between cities and more available prices
for passengers and cargo services. At the same time, high fuel cost has provoked airlines to replace less
efficient aircraft to increase aircraft’s fuel efficiency.
LATIN AMERICA’S ECONOMY EXPECTED RECOVERY ON 2017 AND FORWARD According to the
latest IMF’s projections for 2016, aggregated real growth of the Latin America region is projected to
decline by 0.7%, a downturn drove mainly by the recession of Brazil and Argentina as their size
represent a significant share of the LAC region aggregate (8). Also, currencies in commodities export

Figure

List of Executive Officers

Pedro Heilbron
José Montero
Daniel Gunn
Dennis Cary
Vidalia de Casado
Julio Toro
Ahmad Zamany
Rulon J. Starley
Michael Ne

Michael Hinckley
Edwin García
Eduardo Lombana

CEO
CFO
Senior VP of Operations
Senior VP of Commercial
VP of Human Resources
VP of Technology
VPof

Maintenance

VP of Flight Operations
VPof Safety
VP of Frequent Flyer Program
VP of Airport Services
CEO of Copa Colombia

Source: Company Data

4
BARNA BUSINESS SCHOOL STUDENT RESEARCH 2017This report is published for educational purposes only by students competing in The CFA Institute Research Challenge

Brazil Colombia Panama United States

1980 1985 1990 1995 2000 2005 2010 2015 20

-5

-10

-15

Source: IMF Data and Projections

Figure 16 GDP Growth Latin American
Countries

07 08 09 10 11 12 13 14 15

15%

10%

-5%

-10%

%change over year Index of business confidence (50= no change)

Growth in RPKs (YoY) Business confidence index

Figure 18 Global air travel and
business confidence index

Source: IATA

25%

20%

15%

10%

-5%

20
07

20
08

20
09

20
10

20
12

20
13

20
14

20
15

20
16

F
20

16
F

20
18

F
20

19
F

20
20

F
20

21
F

Figure 14 Rpm Growth Vs Gdp

Growt

RPM GROWT

USA GDP GROWTH

LATAM GDP GROWTH

Source: Company Data, IMF, Team Estimates

countries like Brazil and Colombia have depreciated 21% and 27% respectively with FX rates affecting
consumer capacity via the pass-through effect, and ultimately yield of the industry. Nevertheless most
countries in the region are projected to grow at positive rates.
Some of the region’s largest economies that recently experienced slowdown have turned the corner.
(Figure 16). In 2017, a recovery of the regional outlook is expected as a result of a slightly recovery of
commodity prices and a political environment with less uncertainty. Thus, a better fiscal position to
implement reforms and public spending necessary to medium term and long term growth (9). As a
result aggregated GDP is expected to grow by 1.6% in 2017 and 2.6% for 2019. Brazil, which makes up
34% of the region’s GDP and 18% of CPA’s revenue at 2015, is expected to grow 0.5% for 2017. Similarly,
Colombia’s output is expected to recover as international commodities prices start to slightly recover
and easy up the pressure on the currency during 2017.
Given the expected recovery in the South American economies, we anticipate CPA will capitalize on
revenue and CASM implementations that took place this year to counter effect the soft demand
economy from late-2014 to mid-2016. In the midst of softer demand environment in the first three
quarters of 2016, CPA was able to obtain levels of profitability similar to previous years, through a
disciplined management of capacity and reduction of CASM.
PANAMA’S ECONOMY According to the World Bank, Panama, a dollar-based economy, has been one
of the fastest growing economies worldwide, the economy grew 5.8% and 6.0% during 2015 and 2016
respectively (10). By 2013, the aeronautical industry, which contributed 4.2 % of GDP in Panama,
sustained more than forty thousand jobs and had paid more than US$170MM in taxes (11). Furthermore,
Panama is in an excellent geographic point for one of the most complete connecting hubs of the
Americas, and the more positive outlook of the Latin America region as whole increases passenger
traffic to and from Panama.
NORTH AMERICA’S ECONOMY The USA is growing slowly, but healthier than in previous years and
close to full employment. Traffic between North America and Latin America continues to grow despite
economic difficulties in the region (Figure 15). According to the Federal Aviation Administration of the
United States, Latin America is still the largest international destination from the USA, and it will
continue to be the market with higher grow for USA travel (12). Another important driver for traffic
between the regions is the growing Latino Community currently living in the USA, which reached
56MM in 2015. Considering the circumstances, CPA has added more North American destinations
throughout the years and, consequently, the revenue generated by this region has consistently
increased, representing 25% of CPA’s revenue for 2015. As a result of a more stable economy, the
Federal Reserve of the United States, decided to raise the “target range for the federal funds rate from
0.5% to 0.75%” (13). This decision has the potential to trigger down into the debt market and affect the
cost of borrowing for CPA.
DRIVERS
WORLD TRAVEL GROWTH: As a region’s economy becomes stronger, air traffic demand is proven to
grow. Even though Latin America’s GDP growth forecast is modest for 2017, according to Airbus Global
Market Forecast, traffic growth to/from/within Latin America and the Caribbean is expected to expand
at an annual 4.7% rate, above the 4.6% world annual rate. Global air travel has grown 5% on average per
year on the last 30 years, with important variation between each year due to “changing economic
conditions and differences in economic growth in different regions of the world” (14). On that line, even if
Copa Holdings RPM growth has not presented a linear growth, it has consistently increased YoY.
TRADE BETWEEN COUNTRIES IN THE REGION: Is the primary driver for cargo revenue. During 2016,
world trade leveled off and, in consequence, global trade forecasts for 2016-2017 have been
downgraded. This is consistent with evidence of a deterioration in the relationship between world trade
and activity. In consequence, Freight Tonne Kilometers (FTKs) are expected to decrease in forthcoming
years. (Figure 17)
ANCILLARY REVENUE: Airlines generate additional revenue for extra services such as on-board sales,
ticket change fees, excess baggage or seats with extra leg room. With the incorporation of Wingo, we
expect CPA’s ancillary revenue to increase in the next years due to the Low Cost business model.
BUSINESS CONFIDENCE: Consumer Confidence is a leading indicator of spending power and overall
confidence of consumers. It is particularly pertinent in the airline industry because consumers are more
willing to spend on leisure services when the index is strong (Figure 18). According to Nielsen’s Global
Consumer Confidence Report, sentiment in Latin America is moving in a positive direction despite the
economic difficulties of the region, notably in Perú, Colombia, Mexico and Brazil. The last three
countries mentioned before are important markets for CPA.
JET FUEL
Aircraft fuel is the most critical operating expenses for airlines. Jet fuel, the most common fuel, is highly
correlated to oil prices. In the last five years, the industry has been affected by a high volatility due to
many different global factors, such as geopolitical, environmental and economic. During 2016, oil prices
averaged $43.29 dollars per barrel (Oklahoma WTI Spot Price) which is the lowest yearly average since
2004. Under these circumstance, the Organization of the Petroleum Exporting Countries (OPEC), on
November 2016, agreed to a daily production target of 32.5 million barrel per day or a 3% decreased to

Figure 17 Air freight vs. Global
Trade Growth

Sources: IATA, BIS, IMF

-5

-10

-15

%
y

ea
r o

n
ye

20
00

20
01

20
02

20
03

20
04

20
05

20
06

20
07

20
08

20
09

20
10

20
11

20
12

20
13

20
14

20
15

WORLD TRADE INDUSTRY FTKs

2005 2006 2007 2008

2009 2010 2011 2012 2013 2014 2015

100

M
ill

io
n

s
o

f
P

as
se

n
g

er
s

Figure 15
Number of Latin American Air Traffic
Passengers traveling to or from the

USA

Sources: US Department of Transportation,
Federal Aviation Administration

5
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1.6%
Other

3.6%
Earning
Rewards

57.4%
Saving Money

37.5%
Receiving Rewards

Source: Technology Advice

Figure 21 Why costumers participate
in Reward Programs

HIGH MEDIAN LOW

LO
W

M
ED

IU
M

H
IG

COPA

WINGO

INDUSTRY APPEAL

C
O

M
PE

TI
TI

VE
P

O
SI

TI
O

N
IN

Invest Balance Retire
Source: Team estimates

Ja
n

M
ay

1
9

Se
p

Ja
n

M
ay

1
1

Ja
n

M
ay

1
2

Se
p

Ja
n

M
ay

1
3

Ja
n

M
ay

1
4

Se
p

Ja
n

M
ay

1
5

Ja
n

M
ay

1
6

Se
p

Ja
n

160

140

120

100

Source: Platts, Oanda

Figure 19 Jet Fuel and Crude
Oil Price ($/barrel)

Jet Fuel Price Crude Oil Price (Brent)

increase oil prices on the international market15. Also, Non-OPEC countries (notably the United Sates)
reduced supply in 2016 due to cutbacks in investment in 2015 and 2014 (16).
In contrast, recent developments in the productivity of shale companies in the United States can boost
production and mitigate the effect of supply cuts. In effect fuel oil production in the United States
increase in the second part of 2016 similar to the grow from 2012 to 2014 when fuel production of oil
increase an average of 15% YoY (17). Furthermore, a weaker than expected demand, especially from the
Asian countries can downside the risk of higher oil prices. CPA, as other companies in the industry,
mitigates the risk of the price of oil by fuel hedging. Companies are also focusing its efforts on
improving fuel efficiency by replacing existing fleet with modern aircraft and better operations.
REGULATIONS
Within the industry, established regulations vary by markets where a carrier operates, representing a
key aspect of defining the performance of an airline in a particular market. Regulations have a profound
impact on international routes to which an airline serves, creating agreements in regards of flight
frequency and fairs. Agreements based on negotiations between countries are usually based on
reciprocity. Equally, the access to different airports in a connected network, such as CPA’s network,
portrays a crucial factor to ensure an efficient operation. Consequently, other regulatory restrictions
comprise ownership limitations of the aeronautical companies. Notably, the “Panamanian Aviation
Act” establishes ownership and effective control of the company must remain within Panamanian
nationals to continue operating under the benefits of agreements between Panama and other
countries. Furthermore, CPA acts under other markets regulations with international entities such as
the US Federal Aviation Administration, by which CPA covers requirements related to security
measures, safety standards, environmental issues and maintenance procedures.
TRENDS
LOW-COST CARRIERS have grown at impressive rates well over 10% per year. (Figure 20 ) LCC’s strategy
is to offer point to point routes that are much more cost efficient compared to the Hub & Spoke model
used by Copa. LCC share growth in South America boosted connections to new underserved
destinations and additional frequencies. As a result, at the end of 2016, CPA launched Wingo, a low-cost
option that operates administratively and functionally under Copa Airlines Colombia unit, with
completely free structures for its commercialization, distribution systems, and customer service.
MERGES, INVESTING AND ALLIANCES Many airlines in the industry use strategies of partial ownership,
alliances or acquisition to improve their share and service in a particular region or market. Latin America
is no exception to this rule, in 2015-2016 many strong European and North American carriers invested in
regional carriers. According to Bloomberg, Air France and Delta Airlines (16%) invested in GOL Linhas
Aéreas Inteligentes S.A, United (5%) and HNA group (24%) in Azul, Delta partially owns Aeromexico and
Avianca is rumored to be in a spot for a near future merge or acquisition. As stated by CPA’s CEO, Pedro
Heilbron, the company does not have plans in the near future to incur in any of merger and acquisition
strategies. However, CPA belongs to the Star Alliance, which conveys a connection with many top
international aviation companies and regional airlines such as Lufthansa, Turkish Airlines, United
Airlines, Avianca and Air Canada. The alliance is an advantage because of the joint marketing,
code-sharing arrangements and cost-related benefits as they have more purchasing power in
negotiations with aircraft vendors and insurers. CPA has alliances with Air France, KLM Royal Dutch
Airlines, United Airlines, Gol, Cubana de Aviación and recently Emirates which will allows the company
to take advantage of new markets. In fact, CPA just renewed alliance agreement with United Airlines
(UAL) for another five years.
LOYALTY PROGRAMS are an important factor in the decision-making process of consumers in the
industry. In 2015, CPA cease to co-branding with MileagePlus and launched its frequent flyer program
ConnectMiles. Through their new program, members are eligible to earn and redeem miles to any of
the destinations within the Star Alliance, adding more value for their clients. The program has had an
excellent response from consumers who demonstrate their affinity and acceptance of the brand.
According to Heilbron, the program is strengthening the relationship and value propositions with
customers. Frequent flyer programs are a solution to the entire industry situation of customer churn, to
satisfy their needs and show they know their clients, as churn occurs mainly because of inadequate
services or high prices.
COMPETITIVE POSITIONING
The airline industry is characterized for strong rivalry among competitors and a significant suppliers and
customers power. (Appendix 9) CPA sustains an unyielding competitive position in Latin America. Copa
Airlines, the biggest company in the holding, is recognized as one of largest airline carriers in the region,
conferring CPA a strong bargaining power with industry suppliers and an advantage regarding
customer airline selection.( Appendix 8) On the other hand, their recent addition to the holding, Wingo,
allows them to be a part of the low-cost playfield which has shown incredible growth in the region and
will expectantly help them boost their market share in Colombia.
COPA AIRLINES COMPETITIVE POSITIONING Copa Airlines maintains a leadership position in Latin
America focusing on underserved thin markets that cannot sustain point to point service. Hence,
Copa’s network is in many cases the most favorable option. These markets make up for 65% of Copa’s

01 05 10 15

Figure 20 Low Cost Carriers Market Share (%)

Figure 22 Mc. Kenzie Matrix

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So
ur

ce
: T

ea
m

in
ve

st
ig

at
io

ns
(s

ee
a

pp
en

di
x

x) 65.2%

22
.7

COPA

AVIANCA

GOL

LATAM

Figure 25 Positioning Among
Consumers In The Region

passengers. CPA’s value proposition focuses on offering a world-class product (world’s 2nd best on-time
carrier by FlightStats), supported by a robust infrastructure through an extensive network of routes
which allows them to become one of the most trustable and known carriers in the region. This is a
favorable trait to have in a highly competitive industry. (Appendix 8)
Our analysis has identified the following main competitors: LATAM Airlines Group S.A., Avianca Taca
Holdings S.A., United Airlines, American Airlines and Delta Air Lines, due to the similarities inf markets,
routes, and destinations where they operate. We based our analysis on a competitor’s assessment
taking into consideration key success factors and weighted each one by importance. The purpose of
the assessment is to measure the overall competitive strength for each rival. Our presented key factors
are customer service, reputation, price/value, employee satisfaction, time efficiency and others
(Appendix 12). According to our analysis CPA enjoys a competitive advantage based on the overall
strength rating.
WINGO COMPETITIVE POSITIONING Wingo, the newest venture of CPA, is a low-cost carrier focused in
a younger segment, offering cheaper traveling without compromising quality. Wingo’s point to point
operation is centralized in Colombia servicing 16 cities in 10 countries throughout Latin America and the
Caribbean. Its launch is a strategic response to Colombia’s dynamic market opportunities. Wingo’s
main competitor is Viva Colombia, a Colombian low-cost carrier partly owned by Ryanair (Europe’s
biggest LLC). They compete directly on four domestic and two international routes.

INVESTMENT SUMMARY
INVESTMENT THESIS
We issue a BUY recommendation on Copa Holdings (CPA) with a target price of $115.41 per Class A
shares, representing an 26.06% upside from closing price of US$91.55 per share of January 4th, 2017. Our
target price is based on a mix of the Discounted Cash Flow to Equity Model and EV/EBITDAR multiples,
attributing 30% and 70% weighting respectively to each methodology.. The key drivers for our
recommendation are:
KEY POTENTIAL DRIVERS
STEPPING UP REVENUES: GDP GROWTH RECOVERY Activity pickup in some Latin American
countries that have been affected by negative shocks on their economies could boost air travel
demand and ease off the pressure on Yield. CPA has been very effective moving capacity to more
profitable markets in Latin America, as well as opening new destinations in North America, which are
growing at a higher pace. CPA operates in some markets, such as Panama, South America (except
Brazil) and others, which are projected to grow at higher rates than world average. IMF projections
estimate an average GDP growth of 2.60% over the next five years for the region and 2.20% for the
United States. Based on this outlook, during 2017 we expect Copa’s RPM to grow 4.74% due to the
correlation between GDP growth and RPM growth; for the following years an average of 6.49% RPM
increase is forecasted. The soft demand environment and high depreciation of some currencies in the
region have deteriorated the passenger yield during the last few years. Nevertheless, a yield recovery is
expected in the short term.
STRONG LOAD FACTOR Copa have been able to adapt faster than other carriers in the region to this
scenario. As yields have suffered during the last few years due to a higher competitive environment,
CPA has been able to efficiently accommodate to these conditions and was capable of increasing the
load factor to a historical high of 84% in 3Q 2016. The company has taken important actions reveals its
fast operational adaptability to changes produced by external shocks on key streams as yield;
evidenced by a more disciplined capacity growth plan and the successful commercial plans in place.
We expect Copa to grow an average of 6.9% YoY in ASM, balancing the estimated RPM growth and
higher load factor.
EFFICIENT COST MANAGEMENT Ex fuel Cost per Available Seat Miles (CASM) is in a decreasing trend.
(Appendix X) Even if the company’s value proposition contemplates to provide quality service, they still
have the lowest CASM among peers and competitors. Their investments has been allocated in lower
cost maintenance assets, such as modern fleet, contributing to lower fuel costs and more ASM per
block hours. In addition, sustained improvement in daily aircraft utilization is foreseeable.

VALUATION
Our valuation arrives at a $115.41 target price, driven by 30% of our DFCF to Equity model price of $109.66
and 70% of EV/EBITDAR multiple analysis price of $117.87. The 70% assigned to relative valuation was
based on the fact that FCFE model has a significant weight on terminal value. We considered it to be
more accurate to provide more weight on multiples due to a suitable amount of comparable
companies to CPA, allowing us to build a sound analysis. In addition, the comparable method allowed
us to workaround the volatility of business cycles.
INTRINSIC VALUATION: FREE CASH FLOW TO EQUITY FCFE model was selected because CPA has a
stable Free Cash Flow to Equity expected to increase over time which reflects the fundamentals of the
company. This method consists of a two-stage growth model. The first phase is based on a specific year
to year forecast up to 2021 and the second phase of a constant growth of 2.44%. Based on our FCFE
analysis, the estimated price is $109.41. (Appendix 23)
COST OF EQUITY was calculated through the Capital Asset Pricing Model adjusted to country risk

Figure 24 Positioning Matrix

Leyend:
0 No threat
1 Very Low
2 Low
3 Moderate
4 High
5 Very High

RIVALRY WITHIN
THE INDUSTRY

BARGAINING POWER
OF SUPPLIERS

THREAT OF NEW
ENTRANTS

BARGAINING POWER
OF CUSTOMERS

THREAT OF
SUBSTITUTES

5
4
3
2
1
0

Figure 23 Porter 5 Forces

EV/EBITDAR (with Premium) 7.85
Projected EBITDAR 2017 665
Enterprise Value 4,956
Total Debt 1,2

Cash & Cash Equivalents 1,008
Market Cap 4,956
Outstanding Shares 42.05
Price Relative Valuation 117.87
Weight of Relative Valuation 7

0.0%

PV FCFE 1,159
Terminal Value 3,4

Equity Value 4,611
Outstanding Shares 42.05
Price FCFE Valuation 109.66
Weight of FCFE Valuation 30.0%

TARGET PRICE 115.41
Source: Team analysis

Relative Valuation (M)

Free Cash Flow to Equity Valuation (M)

Figure 26

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premium. The 10-years US Government bond rate was used as risk-free rate,, estimated at 2.44%. We
determined CPA’s beta by using four years weekly prices vs S&P 500 index in a regression analysis,
resulting in a 1.48 beta; above the airline industry average 1.12. The expected market risk premium was
defined to be 5.69.% (Damodaran), which lead us to a 10.86% preliminar cost of equity. On the other
hand, as CPA has considerable risk exposure to economies in Latin, Central and South America, we
considered appropriate to include an additional country risk premium of 2.81%. This country risk
premium is a weighted average premium of countries where CPA has business exposure (Figure 27).
We obtained a Cost of equity of 13.68%.
TERMINAL GROWTH VALUE The projected Latin America and US GDP growth rates for 2030 are
2.86% and 2.67% respectively. By weighting them into CPA current geographically revenue
composition, we obtained a GDP growth of 2.72%. However, we considered the 10-year US
Government Bond yield to be a more assertive proxy for CPA Terminal Growth Rate as its implicitly
reflects the nominal growth of the economy. At Valuation date, the 10-y US Gov Bond rate was 2.44%.
(Appendix 16)
RELATIVE VALUATION: PEER ANALYSIS We identified Enterprise Value (EV) to Earnings before
Interest, Taxes, Depreciation, Amortization and Rent (EBITDAR) as the most appropriate multiple to
compare CPA to its peers. We used EV/EBITDAR mainly because the airline industry is a capital
intensive business comprised by companies with complex financial leverage, substantial depreciation,
amortization and rent or leasing expenses. As Rent is equivalent to operating leases, subtracting Rent
from EBITDA is healthy for industries where operating leases are heavily used as financing alternative.

This adjustment enables a fair relation of the company’s value with actual earnings exclusive of
non-cash expenses. The peer group is comprised of major and regional airlines companies with a
comparable size (Small & Mid Market Cap. only). Our peer analysis lead us to a 1 year horizon target price
of $117.87, which weighs 70% of the total valuation analysis. (Appendix 18)
We did not consider exclusively airlines within the same market as a comparison factor for the peer
valuation as we understand airlines with similar behavior and composition in other markets can also be
considered. Likewise, airlines such as United Continental Holdings Inc, American Airlines, Southwest
Airlines nor Delta Air Lines Inc have been contemplated because of their size regarding the factors we
considered: revenue growth and market cap.
CPA’s EV/EBITDAR has had a premium over its peers for 8 out of the last 10 years; fact we took into
consideration in our analysis. This premium has been a reflection of higher ROI than the rest and lower
risk profile (beta).

FINANCIAL ANALYSIS
REVENUE GROWTH: RPM & YIELD: CPA has historically shown consistent growth rates, with only two
exceptions: 2009 and 2015, due to unusual economics shocks produced in specific countries. In spite of
this, through 2016 quarterly results, growth rates have improved. Clear signs of recovery are perceived
with a 12.7% passenger traffic (RPM) increase, leading to 4% YoY revenue growth during 3Q16. Revenue,
conformed by multiplying the RPM and yield metrics, is directly impacted by GDP growth. We foresee
a 4.75% RPM increment for Copa Holdings on 2017, as the result of CPA’s GDP/RPM growth relation
and the predicted GDP of each country where the company operates. (Appendix 19).
For 2017, yields are expected to preserve (stay flat) and break the previous downtrend they were
experiencing given a healthier travel demand and the expected economic recovery in Latin America
(18). Our forecast contemplates the last four quarters yield weighted average by the RPMs per quarter,
resulting in a weighted average annual yield of 0.1202 cents. We are not contemplating any further
increase in yield for the following years. Considering this, if the weighted average annual yield falls below
0.1161 cents our recommendation would be HOLD, if it plunges below 0.1140 levels, our
recommendation would be a SELL.
Cargo revenue stream has followed a decreasing trend from 6.14% in 2006 to 3.70% in 2015. In line with
commercial airline industry tendency of contracting from 8.72.% weight in 2010 to 5.85%. For the
future, we expect cargo to maintain a similar proportion of total revenues.
FUEL COSTS: CHANGES IN JET FUEL: Fuel Costs as proportion of revenue has been decreasing during

Cost of Equity
RISK FREE RATE

BETA

MARKET RISK PREMIUM

CAPM

COUNTRY RISK PREMIUM

ADJUSTED CAPM

2.44%

1.48

5.69%

10.86%

2.81%

13.68%

Sources: Team Analysis

AVH

ADR

JBLUE

LFL

SKYW

WJA

Avianca Holdings SA

Gol Linhas Aereas Inteligents

Hawaiian Holdings Inc

JetBlue Airways Corp

Latam Airlines Group SA

SkyWest Inc

WestJet Airlines Ltd

0.05

6.40

57.85

22.65

8.42

37.45

23.73

5.47%

-9.44%

13.

36%

6.19%

3.63%

2.72%

9.43%

12.83%

8.57%

12.16%

11.

84%

22.17%

3.20%

10.08%

1.16

0.59

3.10

6.73

5.60

1.87

2.70

TICKER PEER NAME PRICE (JAN 4TH) ROI (5Y) GROWTH (5Y) MKT CAP ($US BN)

Source: Bloomberg

8.72%
7.93%

7.15% 6.64% 6.57%
5.85%5.39%

4.58%
3.83% 3.40% 3.15%

3.70%

10%

12%

2009 2010 2011 2012 2013 2014 2015

Figure 28 Cargo Weight on Total Revenues

Industry

CPA

Source: Bloomberg & Team Analysis

500

1,000

1,500

2,000

2,500

3,000

3,500

2013 2014 2015 2016 E 2017 F 2018 F 2019 F 2020 F

Revenue

Source: Company Data & Team Estimates

–

20.0%

-1

5.0%

–

10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

2021 F

Growth

Figure 27

Figure 27 Revenue

8
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Figure 29 Operating Expenses 2016E

Salaries

Passenger
servicing

Commisions

Maintenance

Reservations and
sales

Aircraft rentals

Flight operations

Dep., Amort., Imp.

Landing fees Other

Fuel Costs

Source: Company Data, Team Estimates

the last 5 years from 32.3% in 2012 to 23.8% in 2016. Jet fuel prices are estimated based on oil, given a
92% correlation between jet fuel and oil prices. For 2017, changes in oil prices were determined using
futures commodity prices, since the current price of futures reflects the pricing expectation at the
maturity of each contract. For the following years, we used an average per year of oil prices forecast of
three strong references: World Bank, International Monetary Fund, and Economist Intelligence Unit.
PASSENGER SERVICING AND SALARIES: Salaries represented 14.59% of total operating expenses in
2015, placing them in an important position. Even if several situations have raised over the past two
years with employees, from which 58% are unionized, there are no major issues on the horizon that
could impact or provoke unusual wages increase. They have historically increased at the rate of inflation
and number of employees.CPA has a significant lower labor cost per ASM than Peers average. (0.83 vs.
2.05 cents), and below the industry media of 1.80 cents.
Passenger servicing represents the third most important expense, right after fuel costs and salaries with
13.02% of total revenues in 2015. They comprise the costs related to dependent of airport and aircraft
services such as baggage handling, insurance, catering, entertainment and others. The costs are usually
related to the passengers they transport or the flights they serve and directly associated to the level of
service provided. It is expected to continue its moderate uptrend.
MARGIN: Copa Holdings last five years average EBITDAR Margin has been the higher between its peers
(Figure 34). Considerably higher than the global industry average, 22.5% CPA vs 15.9% Industry.
(Appendix 20) The main reason being the remarkable balance between RASM and CASM. We
understand their business model is consistent and profitable. Excluding 2015 as an unusual year
(Appendix 24), during the previous ten years the EBITDAR Margin averaged 26.2%, similar levels to what
we expect for the following years.
CASH GENERATION: The company’s business model allows them to be a sound cash generator. The
average collection period prowl below 17 days while the average payable days usually surpasses 100
days. This gap allows CPA to have available cash to make considerable short-term investments along
the year and generate interest income. During the last few years, Copa Airlines has been able to meet
their working capital requirements through cash for operations. Consequently, in the last ten years, net
cash provided by operating activities was never under 14% over sales. For upcoming years, a similar
behavior is expected. Also, CPA shows a healthy current ratio, allowing them to meet their short term
commitments with current assets as cash and short term investments. Compared to peers, they are in
a very competitive position.
CAPITAL EXPENDITURE: CapEx is primarily focused on aircraft purchases, flight, and related ground
support equipment. As they are set in advance, they are predictable. During the last five years, the
company generated more from its main activity than spending on maintaining or expand them. The
CapEx Ratio has been above 1.5 over the same period (Figure 32). For our forecast, we took in
consideration the shift tendency to a more efficient and modern fleet; contributing to optimize their
Revenue per Available Seat Mile (RASM) hence maintaining a high load factor. In addition, we
considered the use of operating leases for further expansion.
OPERATING & FINANCIAL LEASES: At the end of 2015, 40.17% of total adjusted CPA’s debt
corresponded to operating and financial leases, from which 59.2% were operating leases. This
financing method allows for reductions in their CapEx requirements, to have more flexibility over their
fleet plan and to mitigate the aircraft residual value risk. During the last few years, they mainly finance
these leases with JOLCO. CPA had 28 of their 33 operating leased aircraft at fixed rate, which is positive
in the current rates uptrend context. As operating leases impact financial statements, they should be
contemplated for valuation purposes. In our relative valuation, we used EV/EBITDAR multiple,
considering operating leases (Rent) to have a more objective comparison with peers. On the other
hand, according to Damodaran, there is no effect on free cash flow to equity on reclassifying operating
lease expense as financing expense.
CAPITAL STRUCTURE: Debt+Op.Leases/Capital ratio for the closing previous fiscal year amounted
62.9%, considerably below the same market peers Avianca, LATAM, and Gol, with 78.3%, 85.9% and
138.4% respectively (Figure 35)This reflects that, if growth opportunities arise, there is enough room for
leverage. Up to 3Q16, all debt is related to aircraft financing. Our forecast proposes an increase in the
ratio as they have an active profile and contemplates an increase in financial expenses due to FED rate
hikes expectations up to 2021. Additionally, we understand CPA can confront this level of debt
considering an average five-year Altman Z-score of almost 3, which is positive, as it is the Z-score
considered by investors when purchasing a stock. (Appendix 7)
REPORTED EARNINGS: Annual audits have been conducted by EY, expressing that consolidated
financials objectively present CPA’s financial position. We performed the 8 variable Beneish M-score
analysis for the last five year-end financial statements to evaluate CPA’s earnings quality. Based on the
variables, the company has a low likelihood of manipulating earnings. We notice an average of an
M-score of -3.74 during the last five years, which is below the -2.22 indicator. The lower the indicator, the
less likely is the firm to manipulate earnings results. (Appendix 6)

RISKS TO TARGET PRICE
MONTE CARLO SIMULATION AND SENSITIVITY ANALYSIS: Alterations in our assumptions variables

HAWAIIAN 17%

LATAM 17%

INDUSTRY AVERAGE 16%

GOL 13%

COPA 23%

SKYWEST 22%

WESTJET 21%

JETBLUE 19%

AVIANCA

18%

Figure 34 5yrs. Average EBITDAR Margin

Source: Bloomberg

14.74% 13.40% 13.21% 13.70% 14.59% 15.26%

11.12% 11.76% 11.99% 12.31% 13.02% 13.40%

2011 2012 2013 2014 2015 2016 E

Figure 31 Salaries & Passenger
Servicing as % Of Op. Expenses

Salaries

Passenger Servicing

Source: Bloomberg and Team Analysis

Current Ratio 2016 3Q 2015 2014 2013
Avianca 0.63 0.66 0.70

0.78

Copa 1.10 0.92 1.03 1.35
Gol 0.42 0.44 0.71 1.03
Latam 0.49 0.50 0.62 0.77
Hawaiian 1.03 0.96 0.83

0.92

JetBlue 0.80 0.60 0.62 0.56
SkyWest 1.48 1.35 1.89 2.36
WestJet 1.31 0.97 1.29 1.09

Figure 33 Current Ratio

32.3% 30.0% 30.3%
26.8%

23.8% 23.1%

2012 2013 2014 2015 2016 2017 E

Figure 30 Total Fuel Costs as % of revenue

Source: 20F and Team Estimates

4.87

1.53

3.80

3.03

8.82

3.62

3.87
3.24

2009 2010 2011 2012 2013 2014 2015 2016 E

Figure 32 CapEx Ratio

Source: 20F and Team Estimates

9
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could distress our target price and may halter our BUY recommendation. We developed two
independent approaches to evaluate the impact these potential variables and how different results
might change our recommendation.
MONTE CARLO SIMULATION: We executed a Monte Carlo Simulation to understand the sensitivity of
our model to variations in our adopted assumptions. For this, we tested the variables related to income,
such as yield and growth in Latin America and the United States economies. Second, regarding
operating expenses, we stressed oil prices, increase in wage prices and the services to
passengers/revenues ratio. Finally, within the operative variables, we measured load factor, average
aircraft utilization growth and the percentage of decreased in block hour vs ASM due to the changing
composition of the company’s fleet. After running the simulation, we observed a 68.5% potential of
obtaining a target price above 10% upside or $100 per share. Lastly, a 8.38% probability of the stock
downgraded to a SELL.
From the simulation’s result, we concluded that the most sensitive variables in our model are oil prices,
yield and load factor. Hence the importance of continuing mitigating the risk of oil through hedges and
reducing the fuel cost
through new airplanes. This
last one also allows CPA to
have more ASM with the
same block hours and sustain
the advantage of CASM
which allows more space to
maneuver on yield. In
addition,keeping the
improvement on the capacity
allocation achieved on 2016 is
crucial.
SENSITIVITY ANALYSIS: Based on our insights, we also performed a sensitivity analysis on the primary
variables of the model emphasizing on testing values for oil prices and passenger yield. Oil prices have
to increase US$10 dollars per barrel yearly over the next five year to change our recommendation to a
SELL. Given the volatility in recent years on oil prices and the impact on our operating expenses, this is
one of the main risks of our model. Similarly, reductions of 7% in yield can deteriorate the company’s
revenue and change our recommendation. Given that, yield is operating at its lowest level in more than
a decade and there is no foreseeable pressure on the demand side, we do not expect a deterioration of
this metric to continue, we understand it ismore likely to recover.

INVESTMENT RISKS
MARKET RISK:
MK 1: SYSTEMIC DETERIORATION OF LATIN AMERICAN ECONOMIES (IMPACT: HIGH\ PROBABILITY:
LOW) The primary market of CPA comes from passengers from Latin America. If we measure it by
revenue, 75% comes from Latin American economies. A deterioration of Latin American economies
has a direct impact on the number of passengers and puts pressure on yield, which is already low. We
consider a systemic decline in most of these markets an unlikely event. Mitigant: CPA has been able to
rapidly move its available capacity from markets with low profitability to other potential markets. For
example, according to Copa Holdings CEO, Pedro Heilbron, in 2015 the company moved around 30%
of its available capacity in Brazil to others markets. Second, CPA’s revenue is diversified across the
different countries of Latin America and North America.
MK 2 : INCREASE COST IN JET FUEL PRICES (IMPACT: HIGH\ PROBABILITY: MEDIUM) Oil price on
international market has a direct effect on income through higher operating expenses. Operational
results may be affected by the volatility of fuel prices considering it accounted for 27% and 24% of
operating expenses on 2015 and 2016 respectively. Recent announcement by members of the
Organization of the Petroleum Exporting Countries (OPEC) to cut output from 33.0 to 32 barrels per day
can put pressure on the oil price. Non-OPEC countries (notably the United Sates), reduced supply in
2016 due to cutbacks in investments in the past couple of years. Recently, developments in the
productivity of shale companies in the United States and slightly higher prices can boost the
production and mitigate the effect of supply cuts. Furthermore, a weaker than expected demand,
especially from Asian countries can downside the risk for CPA of higher oil prices16. Mitigant: Hedging
decisions are the point on which future pricing will have to balance budget decisions, subsequently
affecting forecasted profits. Notwithstanding, a sudden and steady lower fuel price can increase price
competition, resulting in a decrease in revenues for all carriers affected. For an attempt at reduction of
exposure to changes in fuel prices, CPA periodically enters into derivatives instrument contracts.
MK 3: PROTECTIONISM AND MITIGATION POLICIES IN THE UNITED STATES AND EUROPE (IMPACT:
MEDIUM\ PROBABILITY: MEDIUM) The recent change in the United States government and
uncertainty about Europe’s political landscape can affect free trade policies these countries have
pursued over the years. This turnaround can impact Latin American economies recoveries, such as
Mexico and Colombia, where 80% and 28% of total exports are directed to the USA (data taken from

Figure 35 Debt + Op. Leases/capital

COPA 62.9%

AVIANCA 78.3%

LATAM 85.9%

GOL 138.4%

Source: Companies Data, Team Estimates

2013 2014 2015 2016 2017 2018 2019 20202021

Figure 37 Crude Oil Prices Current Prices

Projection – Crude Oil $/bbl Real – Crude Oil $/bbl

Source: World Bank Commodities Projections

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

23 30 36 43 50 57 64 71 78 85 92 99 106 113 119 126 133 140 147 154 161 168 175 182 189

68.5% probability
of a BUY

Target Price: 115.41

Lo
w

M
ed

iu
m

H
ig

ytilibaborP

IMPACT

F3 M2

OP1

M1
F2

OP2

OP3

Market Risk
Operational
and Business
Risk

Financial Risk

Low Medium High

Figure 36 Risk Matrix

Source: Team Analysis

10
BARNA BUSINESS SCHOOL STUDENT RESEARCH 2017This report is published for educational purposes only by students competing in The CFA Institute Research Challenge

WTI World Bank). Negotiation of trade agreements can add uncertainty and, eventually, reduce
investments in the short term. Mexico and Central American countries, where CPA does not have a
strong presence, have a higher exposure to this risk.
The second cause of concern is a change in the US immigration policies as it adds uncertainty to latin
immigrants which can cause lower spending. Related to CPA’s revenue, North America’s segment is
consistently increasing its share and changes in this market can have a modest future impact future
revenue growth. Mitigant: CPA has been able to rapidly move its available capacity from markets with
low profitability to other potential markets.
FINANCIAL RISK
FI 1: INTEREST RATE- FINANCIAL RISK (IMPACT: LOW\ PROBABILITY: HIGH) Most of the company’s
long-term debts are international syndicated loans related to aircraft acquisitions. Recent
announcements from the Federal Reserve of the United States, to increase the Federal Funds to 1.1% in
2017 and subsequently increments can impact the availability of CPA to incur in debt at a low-interest
rate13. Mitigant: CPA has kept a significant portion of its debt in fixed-rate instruments. At 3Q of 2016,
60% of its debt was in fixed income instrument. Also, CPA is recurring to mitigating the risk by Interest
Rates Swap contracts to hedge against market rate fluctuations.
FI 2: AVAILABILITY OF CREDIT/LIQUIDITY- FINANCIAL RISK (IMPACT: HIGH\PROBABILITY: LOW) Lack
of capability of the company to fulfill its contracted obligations, originating financial losses for CPA. Also,
it maintains sufficient cash on hand and in banks or equivalents of easy realization into cash. The
company also has lines of credit in financial institutions that allow them to withstand potential cash
deficit to fulfill financial commitments. Conducting business with strong financial institutions with
liquidity indicators above the market average is a possible mitigant for the risk in reference.
FI 3: CURRENCY FLUCTUATION- MARKET RISK (IMPACT: LOW\PROBABILITY\MEDIUM) As of 2016,
45.7% of revenues and 67.9% of expenses are in U.S. dollars. However, Colombian peso, Brazilian real,
Argentine peso and Mexican peso represented 13.4%, 11.6%, 5.6% and 3.5%, respectively in 2015. The
period of exposure to most foreign currencies is limited to two weeks between the sale and the
conversion to U.S. dollar. (Excluding Venezuela). As a result of inflation and devaluation, focusing on the
US dollar could lead to a decrease in revenue from foreign countries. According to IATA, FX changes
impact the airlines by the composition of passenger demand and its sensitivity that varies from market
to market. Approximately 60% of CPA’s passengers are driven by leasure factors, being this segment
the most sensitive. Mitigant: the company is increasing sales in US dollar and opting for factoring
agreements on credit card sales and receivables outstanding.
BUSINESS AND OPERATIONAL RISK:
OP1: LABOUR RELATIONS AND COST OF LABOUR -OPERATIONAL RISK (IMPACT:
MEDIUM\PROBABILITY: HIGH) The industry is labor intensive, demanding a large number of pilots,
flight attendants, mechanics and other personnel. Under Panamanian law there is a limit to the
maximum number of non-Panamanians a company can employ. Panama median salaries have
increased on average 8.1% YoY from from 2011 to 2016. Additional increments can put pressure on
CASM consequently in the EBITDAR margin of CPA. Likewise, approximately 60% of CPA workforce is
unionized; strikes or labor disagreements may harmfully disturb the ability to operate normally. On the
other hand, the company is dependent on the experience and industry knowledge of its officers and
pilots and other key employees to implement the business plans. Mitigant: CPA has been active in
bargaining with the 9 different unions that covered their employees. Also, CPA sponsors “Escuela
Latinoamericana de Aviacion Superior” and aviation school to attract and stimulate future pilots for the
company.
OP2: NEW COMPETITORS IN THE MARKET\LOW COST CARRIER (IMPACT: MEDIUM\PROBABILITY:
LOW) The threat of new entrants in the airline industry is low due to a large amount of capital needed
to operate. New entrants are a consequence of more Joint Ventures, Mergers, and Acquisition to target
international growth. In addition, expansion of the LCC’s business model heightens aggressive
competition. CPA reacted recently to this risk by launching Wingo. Mitigant: Copa is becoming a
connected airline through alliances with airlines from the same region and worldwide.
OP3: OTHER UNFORESEEABLE RISK-OTHER RISKS (IMPACT: HIGH\PROBABILITY: LOW) Events
outside the company’s control such as natural disasters and terrorist attacks can hinder the business.
As an example, terrorist attacks on September 11, US passenger traffic dropped 25%. After every major
air disaster, the airline industry usually experiences a decrease in air traffic, leading to a crisis. Latin
American countries are not especially in danger of a terrorist attack, but attacks on other nations as the
United States where CPA has substantial revenues, can meaningfully reduce the demand for air travel.
If a CPA aircraft is involved in a crash, the company acknowledges it as a significant liability. If insurance
is not adequate, they will be forced to bear substantial losses from the accident. Furthermore, any
accident concerning an alliance aircraft, public perception unreliability or unsafely could be created,
harming the company’s brand image and reputation as a result of air travelers being unwilling to fly on
CPA’s fleet. The company holds a liability insurance as a contingency for this kind of events. (Appendix
26)

0.6%

1.4%

2.1%

2.9%

3.0%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

1/1/2016 1/1/2017 1/1/2018 1/1/2019 1/1/2020 1/1/2021

FED-Fund Rate

Source: Board of Governor of the Federal Reserve System

412.2
464.9

514.9 539.7 574.6 593.2
656

100

200

300

400

500

600

700

2010 2011 2012 2013 2014 2015 2016

Figure 39 Panama Average Salary- Median

Source: Economic Report from the Panamanian Ministry
of Economics and Finance

Figure 38 Federal Fund Rate

11
BARNA BUSINESS SCHOOL STUDENT RESEARCH 2017

Appendix 1: Glossary

Industry Metrics:

Aircraft utilization: represents the average number of block hours operated per day per aircraft for the total
Fleet. The metric is calculated by dividing block hours by the number of aircraft days.
ASM: Available Seats per Mile metric captures the total flight passenger capacity of an airline in miles. It is
acquired by multiplying the total number of seats available for scheduled passengers and the total number
of kilometers in which those seats were flown. ASK are Available Seat per Kilometer
Block Hours: number of hours of an aircraft from the moment it pushes back from the departure gate until
it arrives at the gate following its landing. Represents the industry standard measure of aircraft utilization.
CASM: Cost per Available Seat Mile reflects the costs incurred by an airline to fly a single seat one mile. Unit
of measurement used to compare the efficiency of various airlines. Normally, the lower this metric, the more
profitable and efficient the airline.
Load Factor: industry metric that measures how much of an airline’s passenger carrying capacity is used
(utilization). Airlines always try to maximize their Load Factor and take decisions about pricing, capacity, and
frequency of flights based on this key performance indicator. It is basically the ratio of RPM to ASM.
Passenger Yield: Represents average fare paid per mile, per passenger. It is calculated dividing passenger
revenue by RPM. The measure is expressed in cents per mile and is useful in evaluating changes in fares over
time.
RASM: A unit of measurement used to compare the efficiency of various airlines. Obtained by dividing
operating income by ASM. Mostly, the higher the RASM, the more profitable the airline.
RPM: Revenue Passenger by Mile is a transportation industry metric that shows the number of miles traveled
by paying passengers, calculated by multiplying the number of paying passengers by the distance traveled.
RPK are Revenue Passengers Kilometers.

Organizations and Programs:

JOLCO (Japanese Operation Lease with Call Option): tax/financing structure, funded by a Japanese investor
or an equity sourced from Japan with the purpose of providing airlines with 10 – 12 years of low-cost aircraft
funding. There is a solution for foreign carriers in the form of JOL and JOL with a call option (JOLCO). The
Japanese investor, with tax liability, puts up a minority portion of equity funding with the upside of tax
benefits associated with the aircraft. The JOLCO allows a purchase option in which the aircraft is sold to the
airline at a fixed price (21).

Jr. Achievement Program: is the world’s largest organization devoted to educating students about
entrepreneurship, work readiness, and financial knowledge through experiential, practical programs.
International Air Transportation Association (IATA): is the trade association for the airlines of the world. They
represent 265 airlines (83% of total air traffic) supporting many areas of aviation activity and assisting in
formulating industry policy on critical aviation issues. IATA is led by Alexandre de Juniac, Director General &
CEO since September 2016.
Oxford Economics: one of the world’s leading independent global advisory firms, providing reports, forecasts,
and analytical tools to 200 countries, 100 industrial sectors and over 3,000 cities. It is a key adviser to
corporate, financial and government decision-makers and thought leaders.
Panamanian Aviation Act: Law with the purpose of regulating the Panamanian civil aviation regarding
activities directly related to air transport services of passengers, cargo, and mail. Also, activities concerning
other aircraft with scientific, industrial, touristic, sanitary and other resolutions.
Skytrax: is a United Kingdom-based consultancy which runs an airline and airport ranking and review site. It
conducts research for commercial airlines and conveys surveys from international travelers on many different
factors. The site hosts flight reviews, flight checks, and satisfaction surveys and the company holds annual
World Airline Awards and World Airport Awards.

Source: Investopedia & Organizations webpage

12
BARNA BUSINESS SCHOOL STUDENT RESEARCH 2017

Appendix 2: Balance Sheet

2012 2013 2015 2016E 2017F 2018F 2019F 2020F 2021F

76 139 205 200 361 502 656 836 1,030
575 993 480 589 648 706 765 823 881
266 269 223 212 232 249 266 284 306
2,285 2,349 2,651 2,630 2,692 2,731 2,802 2,880 2,960
277 203 157 154 148 142 135 129 123
3,480 3,953 3,715 3,786 4,080 4,329 4,624 4,951 5,301

136 156 246 198 203 205 211 217 223
270 307 388 311 331 350 373 397 422
383 578 352 361 391 413 442 475 509
1,070 914 1,055 1,047 1,071 1,087 1,115 1,146 1,178
84 95 87 114 125 137 146 154 164
1,943 2,051 2,128 2,030 2,121 2,192 2,287 2,389 2,497

30 30 28 28 28 28 28 28 28
41 47 57 66 72 79 85 91 98

(136) (136) (136) (136) (136) (136) (136)
1,458 1,821 1,639 1,798 1,994 2,166 2,360 2,579 2,814
8 4 (1) – – – – – –

1,537 1,902 1,587 1,756 1,959 2,137 2,337 2,562 2,804
3,480 3,953

2014

221
545
245
2,505
563
4,080

188
386
408
929
94
2,005

28
53
(18)
2,011

2,075
4,080 3,715 3,786 4,080 4,329 4,624 4,951 5,301

IN MILLIONS US$

ASSETS
Cash and cash equivalents
Short-term Investments
Other Current Assets
Property, plant and equipment
Other non – current assets

Total assets
Liabilities
Current maturities of long-term debt
Other Current Liabilities
Air traffic liability
Long-term debt
Other long- term liability

Total liabilities
Equity’
Common Stock
Additional paid in capital
Treasury. Stock
Retained earnings
Accumulated other comprehensive
income

Total Equity
Total liabilities and equity

ASSETS 2012 2013 2014 2015 2016E 2017F 2018F 2019F 2020F 2021F

Cash and cash equivalents 2% 4% 5% 6% 5% 9% 12% 14% 17% 19%
Short-term Investments 17% 25% 13% 13% 16% 16% 16% 17% 17% 17%
Other Current Assets 8% 7% 6% 6% 6% 6% 6% 6% 6% 6%
Property, plant and equipment 66% 59% 61% 71% 69% 66% 63% 61% 58% 56%
Other non – current assets 8% 5% 14% 4% 4% 4% 3% 3% 3% 2%

Total assets 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Liabilities
Current maturities of long-term debt 7% 8% 9% 12% 10% 10% 9% 9% 9% 9%
Other Current Liabilities 14% 15% 19% 18% 15% 16% 16% 16% 17% 17%
Air traffic liability 20% 28% 20% 17% 18% 18% 19% 19% 20% 20%
Long-term debt 55% 45% 46% 50% 52% 51% 50% 49% 48% 47%
Other long- term liability 4% 5% 5% 4% 6% 6% 6% 6% 6% 7%

Total liabilities 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Equity’
Common Stock 2.0% 1.6% 1.4% 1.8% 1.6% 1.4% 1.3% 1.2% 1.1% 1.0%
Additional paid in capital 2.6% 2.5% 2.6% 3.6% 3.8% 3.7% 3.7% 3.6% 3.6% 3.5%
Treasury. Stock 0.0% 0.0% -0.9% -8.6% -7.8% -7.0% -6.4% -5.8% -5.3% -4.9%
Retained earnings 94.9% 95.7% 96.9% 103.2% 102.4% 101.8% 101.4% 101.0% 100.7% 100.4%
Accumulated other comprehensive
income 0.5% 0.2% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Total Equity 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

14
BARNA BUSINESS SCHOOL STUDENT RESEARCH 2017

Appendix 3: Income Statement

In US$ Millions 2012 2013 2014 2015 2016E 2017F 2018F 2019F 2020F 2021F

Revenue
Passenger 2,163 2,520 2,620 2,167 2,131 2,314 2,450 2,622 2,813 3,019
Cargo 86 89 85 83 89 89 92 99 109 116
Revenue 2,249 2,608 2,705 2,250 2,220 2,403 2,542 2,721 2,921 3,135
Total Fuel Costs 726 783 821 603 529 555 648 721 798 884
Salaries and Benefit 247 276 299 290 296 307 319 332 345 358
Passenger servicing 217 251 269 258 260 280 296 318 341 366
Commissions 89 104 99 89 86 89 93 99 105 111
Maintenance, material and repairs 92 93 101 111 121 108 110 121 126 132
Reservations and sales 85 100 94 88 101 94 99 106 114 123
Aircraft rentals 72 90 112 122 126 129 131 134 138 142
Flight operations 105 122 132 131 131 151 160 171 184 1

Depreciation, amort. and impairment 89 137 115 135 143 133 137 138 142 146
Landing fees and other rentals 46 50 54 57 56 58 61 65 70

Other 77 85 88 101 90 96 101 108 116 125
Total Operating Expenses (1,847) (2,091) (2,184) (1,984) (1,938.47)(2,000.40) (2,156) (2,314) (2,479) (2,658.85)
Operating profit 403 518 521 266 281 403 386 407 443 476
Finance cost 33 30 30 33 38 49 59 70 73 75
Finance income (12) (13) (18) (26) (13) (19) (26) (34) (37) (40)
Other Expenses (Income) 15 11 111 451 (88) 16 17 19 20 21
Total Other Expenses 36 29 123 458 (63) 46 50 55 56 57
(Loss) profit before taxes 366 489 398 (192) 344 357 336 352 387 419
Income tax expense 40 61 37 33 40 39 37 39 43 46

Net (Loss) profit 326 427 362 (225) 304 317 299 313 344 373

In % 2012 2013 2014 2015 2016E 2017F 2018F 2019F 2020F 2021F
Revenue
Passenger
Cargo
Revenue
Total Fuel Costs 32.3% 30.0% 30.3% 26.8% 23.8% 23.1% 25.5% 26.5% 27.3% 28.2%
Salaries and Benefit 11.0% 10.6% 11.1% 12.9% 13.3% 12.8% 12.6% 12.2% 11.8% 11.4%
Passenger servicing 9.7% 9.6% 9.9% 11.5% 11.7% 11.6% 11.7% 11.7% 11.7% 11.7%
Commissions 4.0% 4.0% 3.7% 3.9% 3.9% 3.7% 3.7% 3.6% 3.6% 3.5%
Maintenance, material and repairs 4.1% 3.6% 3.7% 4.9% 5.4% 4.5% 4.3% 4.4% 4.3% 4.2%
Reservations and sales 3.8% 3.8% 3.5% 3.9% 4.6% 3.9% 3.9% 3.9% 3.9% 3.9%
Aircraft rentals 3.2% 3.5% 4.1% 5.4% 5.7% 5.4% 5.1% 4.9% 4.7%

4.5%

Flight operations 4.7% 4.7% 4.9% 5.8% 5.9% 6.3% 6.3% 6.3% 6.3% 6.3%
Depreciation, amort and impairment 4.0% 5.3% 4.3% 6.0% 6.5% 5.6% 5.4% 5.1% 4.9% 4.7%
Landing fees and other rentals 2.1% 1.9% 2.0% 2.5% 2.5% 2.4% 2.4% 2.4% 2.4% 2.4%
Other 3.4% 3.2% 3.2% 4.5% 4.1% 4.0% 4.0% 4.0% 4.0% 4.0%
Total Operating Expenses -82.1% -80.2% -80.7% -88.2% -87.3% -83.2% -84.8% -85.0% -84.8% -84.8%
Operating profit 17.9% 19.8% 19.3% 11.8% 12.7% 16.8% 15.2% 15.0% 15.2% 15.2%
Finance cost 1.5% 1.2% 1.1% 1.5% 1.7% 2.0% 2.3% 2.6% 2.5% 2.4%
Finance income -0.5% -0.5% -0.7% -1.2% -0.6% -0.8% -1.0% -1.2% -1.3% -1.3%
Other Expenses (Income) 0.7% 0.4% 4.1% 20.0% -3.9% 0.7% 0.7% 0.7% 0.7% 0.7%
Total Other Expenses 1.6% 1.1% 4.5% 20.4% -2.8% 1.9% 2.0% 2.0% 1.9% 1.8%
(Loss) profit before taxes 16.3% 18.7% 14.7% -8.5% 15.5% 14.8% 13.2% 12.9% 13.2% 13.4%
Income tax expense 1.8% 2.3% 1.4% 1.5% 1.8% 1.6% 1.5% 1.4% 1.5% 1.5%
Net (Loss) profit 14.5% 16.4% 13.4% -10.0% 13.7% 13.2% 11.8% 11.5% 11.8% 11.9%

15
BARNA BUSINESS SCHOOL STUDENT RESEARCH 2017

Appendix 4

Appendix 5

In US$ Millions 2012 2013 2014 2015 2016E 2017F 2018F 2019F 2020F 2021F

Net Income 326.48 427.47 361.67 (224.97) 304.32 317.40 299.17 313.37 344.17 372.93
Adjustment 171.76 242.68 296.63 631.68 78.59 185.91 189.08 195.02 200.90 206.37
Current Assets and Current Liabilities 39.80 160.12 (273.41) (89.84) 15.04 (11.04) (17.66) (11.72) (9.11) (12.25)
Operating Cash Flow 538.03 830.27 384.89 316.86 397.94 492.27 470.59 496.67 535.96 567.05
Investment
Net Cash Investment (282.17) (386.57) 140.63 52.11 (108.16) (58.43) (58.43) (58.43) (58.43) (58.43)
Acquisition of PPE (372.44) (179.15) (119.49) (19.72) (116.79) (195.01) (175.42) (209.75) (220.34) (226.41)
Net Cash Flow From Investing (654.61) (565.72) 21.15 32.38 (224.95) (253.44) (233.84) (268.18) (278.77) (284.84)
Financing Activities
Net Proceeds from Borrowing 138.14 (137.02) (127.23) (91.91) (55.86) 29.17 18.41 33.73 37.03 38.03
Dividends declared and paid (192.44) (64.25) (170.77) (147.59) (121.66) (107.47) (113.59) (108.13) (115.10) (125.34)
Repurchase of Treasyrt Shares (18.43) (117.96)
Net cash flows provided in financing
activities (54.30) (201.27) (316.42) (357.47) (177.52) (78.31) (95.18) (74.40) (78.07) (87.32)
Cash at Beginning of the Period 243.80 76.09 139.11 221.44 204.72 200.19 360.71 502.28 656.38 835.50
Cash Flow (170.88) 63.28 89.62 (8.22) (4.53) 160.53 141.57 154.09 179.12 194.90
Effect of FX 0.26 7.29 (8.51)
Cash at the end of the Period 72.92 139.63 236.02 204.72 200.19 360.71 502.28 656.38 835.50 1,030.4

Valuation Assumptions

1. Load Factor was calculated applying 2.33 standard deviations of the previous last 6 years to 2016 estimated load
factor.

3. Fleet for upcoming years was projected with a relationship between RPM growth and ASM with the
assumption that CPA will maximize RASM and Load Factor. Also taking into account the trend in higher
aircraft utilization hour and Bloc Hour per ASM. Both are operating measures that allow CPA to have a
better ASM without necessarily adding the same fleet than in previous years.

2. 2016Q4 RPM, ASM and Financial Statements were estimated through a calculated historic seasonality
index and the result of the first three quarters of 2016.

Assumptions 2012 2013 2014 2015 2016 2017 E 2018 E 2019 E 2020 E 2021 E

RPM 12,499,000 14,533,000 15,913,000 16,310,000 17,759,000 18,600,549 19,701,549 21,107,295 22,653,563 24,312,447
ASM 16,567,000 18,950,000 20,757,000 21,675,000 21,973,000 23,479,612 24,869,413 26,643,897 28,595,763 30,689,784
Block Hour 313,321 348,882 376,903 388,355 428,547 446,482 461,088 481,637 503,998 527,382
Block Hour / RPM 2.51% 2.40% 2.37% 2.38% 2.41% 2.26% 2.25% 2.23% 2.19% 2.17%
Block Hour / ASM 1.89% 1.84% 1.82% 1.79% 1.95% 1.90% 1.85% 1.81% 1.76% 1.72%
Load Factor 75.45% 76.69% 76.66% 75.25% 80.82% 79.22% 79.22% 79.22% 79.22% 79.22%
Fleet 79 86 93 98 100 102 103 106 109 112
Yield 0.1731 0.1734 0.1646 0.133 0.12 0.1202 0.1202 0.1202 0.1202 0.1202
RASM 0.1358 0.1376 0.1303 0.1038 0.1010 0.1023 0.1022 0.1021 0.1022 0.1021
CASM 0.1115 0.1103 0.1052 0.0915 0.0882 0.0852 0.0867 0.0868 0.0867 0.0866
CASM Ex-fuel 0.0677 0.0690 0.0657 0.0637 0.0641 0.0616 0.0606 0.0598 0.0588 0.0578
Passenger Servicing as %ASM 1.31% 1.32% 1.29% 1.19% 1.26% 1.19% 1.19% 1.19% 1.19% 1.19%
Commision as % Revenue 3.97% 3.98% 3.66% 3.94% 3.77% 3.72% 3.67% 3.63% 3.58% 3.53%

Operating Expenses as % of revenue 2012 2013 2014 2015 2016 2017 E 2018 E 2019 E 2020 E 2021 E
Total Fuel Costs 32.26% 30.02% 30.34% 26.79% 23.83% 23.09% 25.50% 26.51% 27.32% 28.20%
Salaries and Benefit 11.00% 10.59% 11.06% 12.87% 13.33% 12.79% 12.56% 12.19% 11.80% 11.42%
Passenger servicing 9.65% 9.61% 9.94% 11.48% 11.70% 11.64% 11.66% 11.67% 11.67% 11.67%
Commissions 3.97% 3.98% 3.66% 3.94% 3.86% 3.72% 3.67% 3.63% 3.58% 3.53%
Maintenance, material and repairs 4.10% 3.57% 3.75% 4.94% 5.43% 4.51% 4.32% 4.44% 4.31% 4.23%
Reservations and sales 3.78% 3.83% 3.47% 3.91% 4.56% 3.91% 3.91% 3.91% 3.91% 3.91%
Aircraft rentals 3.22% 3.46% 4.14% 5.43% 5.67% 5.36% 5.14% 4.93% 4.72% 4.52%
Flight operations 4.67% 4.67% 4.89% 5.82% 5.88% 6.28% 6.29% 6.30% 6.29% 6.

29%

Depreciation, amortization and impairment 3.97% 5.27% 4.26% 5.99% 6.46% 5.55% 5.37% 5.09% 4.86% 4.66%
Landing fees and other rentals 2.06% 1.93% 1.99% 2.52% 2.54% 2.40% 2.40% 2.40% 2.40% 2.40%
Others 3.43% 3.24% 3.25% 4.48% 4.06% 3.99% 3.99% 3.99% 3.99% 3.99%
Total Operating Expenses 82.10% 80.16% 80.74% 88.17% 87.32% 83.25% 84.80% 85.04% 84.85% 84.82%
Total Ex Fuel Operating Expenses 49.84% 50.13% 50.40% 61.38% 63.49% 60.15% 59.30% 58.54% 57.53% 56.62%

13
BARNA BUSINESS SCHOOL STUDENT RESEARCH 2017

Appendix 6: M Score Analysis

INPUT VARIABLES 2011 2012 2013 2014 2015 2016
Net Sales 1,831 2,249 2,608 2,705 2,250 2,220
Costs of Goods Sold (COGS) 1,232 1,580 1,794 1,890 1,696 1,631
Net Receivables 143 136 135 122 106 104
Current Assets (CA) 754 917 1,401 1,011 908 1,022
Property Plant and Equiptment 2,000 2,285 2,349 2,505 2,651 2,630
Depreciation 75 89 137 115 135 143
Total Assets (TA) 3,066 3,480 3,953 4,080 3,715 3,806
SGA Expenses 356 422 480 492 466 483
Net Income 310 326 427 362 (225) 304
Cash Flow from Operations (CFO) 498 538 830 385 317 418
Current Liabilities 659 789 1,042 981 986 889
Long-term Debt 981 1,114 965 987 1,110 1,115
Working Capital – Cash – Depreciation (224) (37) 83 (307) (418) (231)

Variables to Calculate M Score 2012 2013 2014 2015 2016

DSRI= Day’s Sales Receivables Index 0.78 0.85 0.87 1.04

1.00

GMI= Gross Margin Index 0.98 1.01 0.99 0.97 1.01
AQI= Asset Quality Index 0.78 0.64 2.69 0.31 0.96
SGI= Sales Growth Index 1.23 1.16 1.04 0.83 0.99
DEPI= Depreciation Index 0.97 0.68 1.26 0.91 0.94
SGAI= SGA expenses Index 0.96 0.98 0.99 1.14

1.05

LVGI=Leverage Index 1.02 0.93 0.95 1.17 0.93
Total Accruals/ Total Assets -0.17 -0.19 -0.17 -0.20 -0.17

M-Score – 8 variable model

Results: CPA is not likely to be manipulating its earnings results, based on the M-Score
Analysis assessed.

The Beneish’s M- score analysis, created in 1999 by Dr Messod Beneish, was used by our team to verify CPA’s earnings
quality in their financial results, in regards of earnings manipulation detection. The method contemplates different
variables which identify any earnings manipulation or financial distortions incurred by the firm. For interpretation
needs, with an M-score lower than -2.22,the firm is not likely to be a manipulator of earnings. However, an M-score
greater than -2.22 indicates it is likely that the firm is.

The formula for the 8 variable model is:
Mscore= -4.84 + (0.92*DSRI) + (0.528*GMI) + (0.404*AQI) + (0.892*SGI) + (0.115*DEPI) – (0.172*SGAI) – (0.327*LVGI) + (4.679
*Accrual to TA)

-3.36 -3.51 -2.63 -3.90 -3.30

Source: Company Data & Team Analysis

16
BARNA BUSINESS SCHOOL STUDENT RESEARCH 2017

Appendix 7: Altman Z-Score Analysis
The Altman Z-Score Analysis indicates a company’s financial health and, consequently, the probability of filing for
bankruptcy. With the specified formula, the indicator shows a score, in which below of 1.80 indicates a firm has a
high probability of bankruptcy and a score of aproximately 3.00, indicates a firm is far from a high bankruptcy prob-
ability. The formula is (1.2*X1) + (1.4*X2) + (3.3*X3) + (0.6*X4) + (1.0*X5).

RESULT: Considering the financial information for the period 2012-2016, CPA has LOW probabilities of filing for
bankruptcy

IMPUT VARIABLES
Current Assets
Current Liabilities
Total Liabilities
Total Assets
Retained Earnings
Revenues
Operating Income
Market Capitalization
Working Capital

2012
917
789

1,943
3,480
1,458
2,249

403
4,826

129

2013
401

1,042
2,051
3,953
1,821

2,608
518

6,987
359

2014
1,011
981

2,005
4,080

2,011
2,705

521
4,523

2015
908
986

2,218
3,715
1,639

2,250
266

2,025
(78)

2016
1,022

889
2,050
3,806
1,798
2,220

281
3,850

133

DERIVED VARIABLES
X1. Working Capital / Total Assets

X2. Retained Earnings/ Total Assets

X3. EBIT/ Total Assets

X4. Market Capitalization/ Total Liabilities

X5. Revenue/ Total Assets

2012
0.04

0.59

0.38

1.49

0.65

2013
0.11

0.64

0.43

2.04

0.66

2014
0.01

0.69

0.42

1.35

0.66

2015
-0.03

0.62

0.24

0.57

0.61

2016
0.04

0.66

0.24

1.13

0.58

OUTPUT
ALTMAN Z-SCORE 3.15 3.89 3.14 2.01 2.66

Source: Company Data & Team Analysis

17
BARNA BUSINESS SCHOOL STUDENT RESEARCH 2017

Appendix 8: Governance Assessment

1. AUDIT AND RISK OVERSIGHT
a. Non audit fees represent what percentage of total fees
b. No adverse opinion by the auditor in the past year
c. No regulatory initiated enforcement action against the company
d. No changes in audit firm due to invalid or questionable reasons
e. 12 directors serve on the board

2. BOARD STRUCTURE
a. No women on the Board
b. 33.33% are independent director composition of the Board
c. 58.33% of the board consists of immediate family members
d. Maintains a formal Nominating, Compensation and Audit Committee
e. The executives serve on an excessive number of outside boards
f. The CEO does not serve on outside board but the Chairmen do.
3. SHAREHOLDER RIGHTS AND TAKEOVER DEFENSES
a. Has classes of stock with different voting rights, absolute voting right
ceiling and ownership ceilings for specific parties
b. CIASA have priority rights
c. Ownership factors affect takeover defenses
d. Directors are not elected annually
e. Has controlling shareholders and no tag-along rights for minority
shareholders.
f. There are RPTs of significant Board Members

4. COMPENSATION AND RENUMERATION
1. Has an equity-based compensation plan
2. What are the pricing conditions for stock options granted to executives?
3. Non-executive directors participate to performance related remuneration
4. Does not disclose details on executives’ remuneration
5. The company does not disclose a performance measure for stock options
plans, restricted share/stock award plans or other long term plans for execs

SCORE WEIGHT CALCULATION
10/10 25% 25%

5.49/10 35% 19%

6.25/10 25% 16%

3.5/10 15% 5%

6.3/10 100% 60.3%TOTAL CORPORATE GOVERNANCE SCORE

CORP. GOVERNANCE ASSESSMENT

Insignificant threat to Shareholders
Low threat to Shareholders

10
8

Moderate threat to Shareholders
Significant threat to Shareholders

6
4

2 High Threat to Shareholders

BOARD HIGHLIGHTS
BOARD
INDEPENDENCE

RELATED PARTY
TRANSACTIONS

EXCESSIVE NUMBER
OUTSIDE BOARDS

COMMITTEES

SHAREHOLDER
RIGHTS

The independent directors of the Board represent 33.33% and the totally of the other 66.67% directors
are family related with another Board member. The Chairman serves on other 6 outside boards.
They all sit either on the Compensation Committee or the Corporate Governance Committee. CPA’s
strongest bank relation is with Banco General SA, in which Ricardo Arias is a member of the Board and of
their subsidiaries. The insurance company used is the ASSA Compañía de Seguros, in which late Alberto
C Motta Jr, Stanley Motta, Jaime Arias and Ricardo Arias are members of the board. Petróleos Delta SA
provides the fuel needs, Jaime Arias and late Alberto C Motta Jr are members of the Board. The floors for
headquarters are leased to Desarrollo Inmobiliario del Este, SA, which is controlled by the same group of
investors controlling the CIASA. Galindo Arias & Lopez are their lawyers, in which Jaime and Ricardo Arias
are members of the board. The suppliers of drinks and food are Motta Internacional SA and its affiliate
Global Brands. Stanley Motta and late Alberto C Motta Jr sit on the board.
6/10 non-executives serve on other boards. (7 board- Jaime Arias, Carlos A Motta. 2 boards- Ricardo
Arias, 9 boards- Alberto Motta Jr. (passed away), 6 boards- Stanley Motta, 4 boards- Robert Artavia. 0
boards- Alvaro Heilbron, Andrew Levy, Jose Castañeda, John Connor.)
Even if not required by the Panamanian Act, they have four formal committees: Nominating, Audit,
Compensation and Independent Committees
Class A shares are limited voting shares entitled only to vote in certain specified circumstances. Voting
power of capital stock, are owned by CIASA, every Class B share, 26.1%. The Board members of Copa
and some family members own 78% of CIASA shares

The Institutional Shareholder Services (ISS) Rating methodology was the selected scoring tool applied to identify and
assess the risks involved in CPA’s Corporate Governance structure.

Source: Team Analysis

18
BARNA BUSINESS SCHOOL STUDENT RESEARCH 2017

Appendix 9: SWOT Analysis

� One of the most recognized brands in Latin
America’s airline industry
� Strong sales and distribution channels
� Specialized and skilled workforce
� Skilled and experienced management and
workforce
� Centralized Location: Hub in Panama.
� Focus on lowering operating costs
� Recent introduction to low cost carriers
market with Wingo
� Lowest CASM among it peers
� Modern Fleet

� Overly dependent on jet fuel prices
� Still weak presence in North America
� Hub and spoke system. Makes it less
attractive if direct flights are an option

� New underserved markets to operate
� Growth of direct distribution sales
� Latin America’s economic growth
� Technology advances can result in cost
savings and increased revenue
� Industry consolidation: alliances or mergers.
� Global expansion to other regions

� New regulations or taxes.
� Operating expenses rises, mainly fuel and labor.
� Increase in interest rates.
� A global downturn can result in a decrease on
leisure and business travel.
� Upward spike in jet fuel price can destabilize the
business model.
� Terrorism or health epidemics
� Difficult situations between Heilbron, Motta and
Arias families.

� New industry entrants that may affect
competitiveness.

Source: Team Analysis

A SWOT Analysis was prepared in furtherance of the evaluation of internal and external factors that influence CPA’s
current situation. Positive characteristics that differentiate CPA from competitors are described; factors that increase
competitive disadvantage; issues beyond the company’s controls that could make them succeed or set the business
at risk.

19
BARNA BUSINESS SCHOOL STUDENT RESEARCH 2017

Appendix 10: Porter’s Analysis

5
4
3
2
1
0

THREAT OF NEW ENTRANTS- LOW
The threat of new entrants in the airline industry is low due to the large amount of capital needed to operate. The industry
also leverages the efficiencies and the synergies from the economies of scale and hence, the entry barriers are high. A firm
has to go through a year process to become licensed and then they have to be constantly regulated by multiple
organizations (19), mainly for international routes where special licensing is mandatory and countries have bilateral
agreements regarding the capacity for providers in specific routes in order to protect national players and air space (20).
Retaliation is another key factor in the industry’s entry barriers, with established airlines willing to incur in losses or by
lowering fares so they maintain competitiveness.
According to an interview to managers of airlines across Europe, access to slots at airports is considered as one of the main
barriers of entry for new players in this market, since it limits the frequency and timetable in which an airline can serve that
route and are mainly allocated according to the history of ownership, limiting the availability of spaces for new players.

BARGAINING POWER OF CUSTOMERS- HIGH
There are two different groups of buyers, the individual flyers and the travel agencies and third party booking websites
(OTA’s). The later, work with several airlines to give customers the best mix of options to choose from to meet their needs.
Each customer requires important information about flight details such as time, schedule, service provided and cost to make
a decision.
As previously mentioned, switching costs in the industry are very low. which gives buyers a strong power over the industry
which is now even more affected due to the increasing popularity of third party booking websites and apps, in which buyers
can just compare fares and choose the most inexpensive and convenient ones.

THREAT OF SUBSTITUTES -VERY LOW
Threat of substitutes is very low. The only possible substitute would be the magnetic levitation train (Maglev). However,
currently there isn’t any technology or mean of transportation that is as fast and reliable as an airplane in the region.
Regarding business traveling, webcast services and other technologies are considered an indirect substitute because they
have minimized to some extent the necessity of managers to fly regularly. Nevertheless the level of convenience and
efficiency of the airline service cannot be provided by any other service of transportation. The airline industry beats any other
means of transportation by decreasing the customer’s cost of time, convenience and service. However, the customer will
evaluate other means for short distances because of the fact that it is often less expensive.

BARGAINING POWER OF SUPPLIERS- HIGH
The main suppliers for the industry are the airplane manufacturers (Boeing and Embraer in the case of CPA). Due to the
limited number of manufacturers and high switching costs, the bargaining power of suppliers in considered high. By
switching suppliers or defaulting on covenants CPA could loose the benefits derived by long term agreements and the
transition costs in training and adapting facilities will be extremely high. Most of the inputs are standardized as most
airplanes are fairly similar, however, amenities differentiate each airline.

RIVALRY AMONG EXISTING COMPETITORS-VERY HIGH
Rivalry is very intense because of numerous factors such as a staggered industry, which seems to have arrived to its mature
stage. This has happened with almost the same quantity of competitors in the long run, a lack of proof of undercapaticy or
overcapacity and high fixed costs.
Pricing strategies and wars are very common in the industry and are in part guilty of the poor yield environment for which
the airline industry is charachterized,

Leyend:
0 No threat
1 Very Low
2 Low
3 Moderate
4 High
5 Very High

RIVALRY WITHIN
THE INDUSTRY

BARGAINING POWER
OF SUPPLIERS

THREAT OF NEW
ENTRANTS

BARGAINING POWER
OF COSTUMERS

THREAT OF
SUBSTITUTES

Source: Team Analysis

20
BARNA BUSINESS SCHOOL STUDENT RESEARCH 2017

Appendix 11: Latin American Airlines
Consumer Survey
As part of our competitve analysis we developed this survey to obtain first hand insights from consumers in the
region, their perception about carriers, and CPA in particular, to better understand their positioning among
consumers and the drivers behind their decisions. Here are the most important insights extracted of the survey:

of consumers will
choose COPA to travel

with

in the region

66.7%

83.3%

of consumers think that
COPA is the best airline

in the region

65.2%The most important factors consumers take into
consideration when purchasing a ticket are:

LOYALTY PROG.

PRICE

CONVENIENT ITINERARY

QUALITY OF SERVICE

CARRIER

PUNTUALITY

NO LAYOVERS

LOYALTY PROG.
would travel on
COPA for leisure
trips

63.6%

would travel in
COPA for business
trips

36.4%

of respondents have
traveled in COPA before

Sample of survey: 385 respondents
Age range: 20-60
Average income: +70K a year
Geographic Location: Central America and the Caribbean (59%), United States (18%),
Venezuela (10.6%), Panama (7.6%), Colombia (2%), Other (3%)

PRICE

According to consumers COPAs most
important benefits are:

PUNTUALITY

CONVENIENT ITINERARY

QUALITY OF SERVICE

HUB IN PANAMA

PRICE

21
BARNA BUSINESS SCHOOL STUDENT RESEARCH 2017

Appendix 12: Competitors Assessment

Key Success Factors Weight
Strenght

Rating
Weighted

Score

Strenght

Rating
Weighted

Score
Strenght

Rating
Weighted

Score
Strenght

Rating
Weighted

Score
Strenght

Rating
Weighted

Score
Strenght

Rating
Weighted

Score

Customer Service

Brand / Reputation

Price / Value

Employee Satisfaction

Cos Reduction Strategies

Aircraft maintenance
Safety

Time Eficciency

Environmental initiatives

0.25

0.10

0.20

0.05

0.15

0.10

0.05

6.00

10.00

8.00

7.14

9.16

6.00

0.60

2.00

0.40

1.07

0.92

0.30

5.00

6.00

8.00

7.00

9.29

6.90

7.80

0.50

0.60

1.60

0.35

1.39

0.69

0.39

6.00

8.00

7.00

10.00

6.20

6.00

0.60

1.60

0.35

1.50

0.62

0.30

3.00

4.00

8.00

7.00

10.00

7.81

6.80

0.30

0.40

1.60

0.35

1.50

0.78

0.34

5.00

6.00

8.00

7.00

8.54

6.40

0.50

0.60

1.60

0.40

1.05

0.85

0.32

4.00

8.00

10.00

7.84

6.70

0.40

1.60

0.40

1.50

0.78

0.34

6.49 6.02 6.17 5.57 5.82 5.82

Strenght
Rating

Weighted
Score

5.00

6.00

8.00

7.00

8.91

6.47

0.50

0.60

1.60

0.40

1.05

0.89

0.32

5.86

Copa LATAM Avianca American Delta United

Aeromexico

Sum of weights

Overall weighted
competitive strenght rating

1.00

Source: SKYTRAX, indeed.com, airlineratings.com, transtats.bts.gov., atmostfair.de, oag.com & Team Analysis.

Company Business
Model Main Markets Alliances Skytrax Score AWARDS 2016

COPA

AVIANCA

LATAM

UNITED

AMERICAN

AEROMEXICO

DELTA

WINGO

VIVA COLOMBIA

GOL

Network Carrier

Star Alliance

Network Carrier

Legacy Airlines

Network Carrier

Low Cost Carrier

Star Alliance

One World

Star Alliance

One World

Sky Team

N/A

6/10

5/10

4/10

3/10

5/10

N/A

Colombia Panama, USA,
Brasil, México

Colombia, USA, El Salvador,
Peru

Chile, Perú, Argentina,

Brasil

USA, Mexico

Mexico, USA

USA, Mexico

Colombia

Brasil

2nd 2016’s On-Time Airline & Airport Rankings
OAG Punctuality League. 1st in Latin America

World Travel Awards “South American Leading
Airline”

Dream Employer of the Year in the Asia Best
Employer Brand Awards 2016

World Travel Awards “Mexico and Central
America Leading Airline”2016

Ranked 2nd J.D. Power North American Airline
Satisfaction Study among traditional carriers

Acknowledgement in the “Electronic
Commerce and Internet Business Hall of Fame”
as winners of the eCommerce Award more
than three times.

To strengthen our competitive analysis we identified our main competitors in the region and measured their overall
competitiveness taking into account important criteria in the industry such as customer service, brand awareness, pricing,
cost strategies, efficiencies and environmental initiatives. Is important to clarify that even though a numerous amount of
small carriers in the region exist, our analysis only took into consideration those that have an important share in the markets
where we compete and that were comparable in overall structure.

Source: Team Analysis, Skytrax and Competitors Company Data

22
BARNA BUSINESS SCHOOL STUDENT RESEARCH 2017

Appendix 13:

Avianca Holdings S.A: (NYSE:AVH) is a holding, created from the
merger of Avianca and TACA in 2010, headquartered in Colombia. This
company is a subsidiary of Synergy Group. Avianca Holdings, has 10
subsidiaries of its own in different countries in South and Central
America. They operate with a fleet of 157 aircrafts, providing over 100
destinations in America and Europe. Company’s industry yield is 11.57,
load factor 79.38, a Market Cap of 0.42B and a $9.83 stock price.

LATAM Airlines Group S.A (NYSE:LFL) is a holding, born from the
merger of LAN Airlines and TAM Airlines, headquartered in Santiago,
Chile and also located in Brazil, Argentina, Colombia, Ecuador
Paraguay and Peru. LATAM operates a fleet of 350 aircrafts and
provides 133 destinations in 23 countries for passenger service and 15
aircrafts to 149 destinations in 28 countries for cargo services. LATAM
holds a 9.65 yield, 80.65 load factor, Market Cap of 5.60B and stock
price of $9.22.

Hawaiian Airlines: (NASDAQ:HA) is the largest commercial airline in
Hawaii and the 8th largest in USA. Frequently awarded top on-time
carrier in USA, fewest cancellations and oversales of baggage handling
situation. It serves 28 destinations within several Asia-Pacific countries
with 52 passenger aircrafts and 3 cargo. HA’s yield is 8.84, load factor of
82.93, a Market Cap of 3.10B and a $57.55 stock price.

WestJet Airlines Ltd: (TSE:WJA) LCC that became second largest air
carrier in Canada. Operates 425 flights with 45,000 passengers per day,
providing 100 destinations with 119 aircrafts in 20 countries. WJA’s
yield is 10.72, load factor 80.92, a Market cap of 2.70B and a CAD$23.23
stock price (USD$17.72)

SkyWest Airlines (NASDAQ: SKYW): is an american airlines headquar-
tered in Utah. It is considered a major airline; however, it operates on a
regional level, serving as a feeder airline operating under contacts with
other major airlines. The airline manages 360 aircraft flying to 203
destinations in North America. SKYW operates a load factor of 83.4, a
market cap of 1.88B and a $36.30 stock price.

Gol Linhas Aereas Inteligentes S.A (NYSE:GOL) is the largest LCC in
South America and is headquartered in Brazil. Gol purchased Varig
Linhas Aereas and Webjet Linhas Aereas. The fleet size is 145 aircrafts
flying to 75 different destinations. Gol meets a 10.22 yield, 71.72 load
factor, a Market Cap of 0.36B and $17.60 stock price.

JetBlue Airways Corp.: (NASDAQ:JBLU) is an American low-cost
airline and the 6th largest airline in United States, headquartered in
Long Island City, New York with its main base at the JFK Airport.
JBLU’s yield is 8.39, the lad factor is 83.33, Market Cap of 6.73B and the
stock price is $

21.76

Source: Yahoo Finance, Bloomberg and Team Analysis

23
BARNA BUSINESS SCHOOL STUDENT RESEARCH 2017

Appendix 14

Gol Linhas Aereas

Avianca Taca Holding S.A.

Westlet Airlines

Hawaiian Holdings Inc.

Copa Holdings S.A.

LATAM Airlines Group S.A.

JetBlue Airways

Brazi;

Colombia

Canada

USA

Panama

Chile

USA

145

157

119

350

227

100

133

Smiles

LifeMiles

Westlet Rewards

Hawaiian Miles

ConnectMiles

LATAM Pass

TrueBlue

0.36

0.42

2.70

3.10

3.97

5.60

6.73

(0.81)

(1.02)

0.92

(0.21)

1.17

0.51

0.09

71.72

79.38

80.92

82.93

76.22

80.65

83.33

10.22

11.57

10.72

8.84

10.09

9.65

8.39

17.6

9.83

17.72

57.55

94.44

9.22

21.76

Type of
Airline

PEERS Fleet Destinations Frequent Flyer
Program

Market Cap.
(B)

RASM-
CASM

Load
Factor

Yield

USD
Stock
Price

32%

Total Passengers
2015: 38.4 MM

Aeromexico

84%

Total Passengers
2015: 13.4 MM

Copa Airlines

Total Passengers
2015: 17.6 MM

LATAM

Avianca

53%
21%

64%

Total Passengers
2015: 30 MM

Avianca

65%

Total Passengers
2015: 17.2 MM

LATAM

México DF

Panama

Bogota

Lima/Peru

Santiago
de Chile

Buenos Aires

Total Passengers
2015: 10.3 MM

LATAM

Aerolineas
Argentinas18%

18%

Såo Paulo

36%

29%

Total Passengers
2015: 38.3 MM

LatamGOL

Rio de Janeiro

46%

Total Passengers
2015: 38.4 MM

GOL

Appendix 15 Main Airports in
Latin America

Copa Holdings occupies 84% of
Tocumen International Airport, Panama,
which presents a higher percentage of
presence than any other competitor in
the region in their respective principal
airports. This strong presence gives them
power in their relationship with airports’
management and gives them leverage
to be consulted and to recommend or
reject strategic changes. An example is
the expansion of a terminal that will be
completely occupied by Copa.

Source: El Pais Global Newspaper

Source: Bloomberg and Team Analysis

24
BARNA BUSINESS SCHOOL STUDENT RESEARCH 2017

Appendix 16: Weighted Average Country
Risk Premium

Appendix 17: Terminal Growth

Appendix 18: EV/EBITDA Peers Multiple
Analysis

The GDP Growth rate was taken as the expected
next 15 years growth by the Inter-American
Development Bank for Latin America (IADB) and
by the Economic Research Service of United States
Department of Agriculture (USDA ERS), weighted
by the proportion of revenue of each of them.

We obtained a 2.72% rate. Nevertheless, we prefered to use the 10-year US bond as a more assertive proxy
because as the risk free rate is the sum of the expected inflation and the expected real interest rate, and the real
interest rate is what borrowers agree to compensate to lenders in real goods/services (Damodaran), then we can
conclude that when we use the risk free rate we are implicitly assuming the nominal growth in the economy.

In order to get a weighted average country risk
premium for our adjusted cost of equity, we
used the 2015 CPA geographic revenue
composition to weight each country. The risk
premium for Panama, Brazil and Colombia
were obtained from NYU Damodaran. For the
latin america risk premium, the spread of the
LATAM Emerging Market Bond Index (EMBI)
published by JP Morgan was used.

Country Revenue
Comp. Weight

Country Risk
Premium

Weighted Risk
Premium

Panama 17% 1.92% 0.32%
USA 25% 0.00% 0.00%
Brazil 13% 3.95% 0.51%
Colombia 8% 2.51% 0.19%
Other Latam 38% 4.73% 1.79%

Weighted Ave. Country Risk Premium 2.81%

Sources: Damodaran, EMBI and Team Analysis

GDP Growth W of Revenue GDP x W
USA 2.86% 25% 0.72%
Latam 2.67% 75% 2.00%

2.72%
Jan 4th 10y US bond 2.44%

Sources: IADB, USDA ERS and Team Analysis

EV / EBITDAR Peers 2011 2012 2013 2014 2015
Avianca Holdings SA 3.60 4.98 4.13 5.07 4.61
Gol Linhas Aereas Inteligentes 8.29 27.22 3.68 4.12 5.40
Hawaiian Holdings Inc 2.20 1.87 2.72 4.33 3.24
JetBlue Airways Corp 4.79 4.82 5.21 6.68 4.91
Latam Airlines Group SA 10.86 16.58 8.22 7.27 6.13
SkyWest Inc 2.84 2.12 2.17 3.18 3.14
WestJet Airlines Ltd 1.98 2.67 4.00 4.40 2.29

Medium 3.60 4.82 4.00 4.40 4.61

Copa Holdings SA 6.13 8.75 9.40 6.56 5.05

(Discount) or Premium 70.22% 81.45% 135.% 49.26% 9.38%

Premium Medium 70.22%

7.85EV/EBITDAR CPA Multiple

Sources: Companies 20-F and 10-K’s Annual reports
and team analysis

25
BARNA BUSINESS SCHOOL STUDENT RESEARCH 2017

Appendix 19: RPM Growth Assumptions

Appendix 20: CPA EBITDAR Margin
Vs. Peers

Latin America and US GDP Growth projections were provided by the IMF World Economic Outlook (Oct. 2016).

∙CPA 2015 20F Composition of Revenue of Latam and USA were used.
∙ BSS Team calculated the historical correlation over the past 5 years of GDP vs RPM Growth resulting in 3.30 for
∙ Latin America and 1.43 for the United States. In total, under a 75%LATAM/25%US composition, the RPM growths
∙ 2.82 times what GDP increases. Please see details below:

A B C D E F (A.B.C) + (D.E.F)

Year Latam GDP
Growth

Latam %
of REV

US GDP
Growth US % of Rev. Weighted Ave.

CPARPM Growth

2017 F 1.6% 2.2% 4.74%
2018 F 2.1% 2.1% 5.92%
2019 F 2.6% 3.30 1.9% 7.14%
2020 F 2.7% 1.7% 7.33%
2021 F 2.7% 1.6% 7.32%

1.43 75.0% 25.0%

5y LatAm GDP/
PPM Growth
Ave. Relation

5y US GDP/
PPM Growth
Ave. Relation

Sources: Team Analysis

EBITDAR Margin 5y Ave 2010 2011 2012 2013 2014 2015
Copa 23% 28.9 27.8 24.7 27.9 23.1 3.1
SkyWest 22% 27.4 17.2 21.3 21.9 15.8 25.8
WestJet 21% 19.4 19.4 21.4 21.1 21.0 25.0
JetBlue 19% 17.7 15.5 15.9 16.0 20.7 26.4
Avianca 18% 21.0 19.3 17.3 17.7 16.8 17.6
Hawaiian 17% 20.8 7.8 15.9 15.5 17.4 27.5
Latam 17% 23.6 18.3 11.8 14.8 15.6 18.0
Industry Ave 16% 19.9 14.2 8.3 14.4 15.9 22.5
Gol 13% 22.1 9.5 (0.1) 18.1 17.1 9.4
Source: Bloomberg

2.5%

1.6%
2.2%

1.7%
2.4% 2.6%

4.5%

2.9%

1.0%

2.3%
2.7%

5.3%

2010 2011 2012 2013 2014 2015
US GDP GROWTH RPM Growth in RPM

US GDP/RPM GROWTH RELATION

1.43 Ave. relation

6.13%
4.64%

3.01% 2.92%
1.03% – 0.03%

12.4%
11.3%

9.4%

6.3% 7.0% 7.6%

2010 2011 2012 2013 2014

LAT GDP GROWTH RPM Growth in RPK

3.30 relation

LATAM GDP/RPM GROWTH RELATION

26
BARNA BUSINESS SCHOOL STUDENT RESEARCH 2017

Appendix 21: Jet Fuel Assumptions

Appendix 22: Fuel Efficiency by Aircraft

Assumptions about CPA and Jet Fuel Consumptions:
1. Gallons consumed were correlated with the projection of ASM.
2. Gallon per ASM were projected with a downward trend due to the last tendency and a modern fleet.
3. Continue to Hedge Fuel at around 30% of total Fuel Consumption.
4. Direct relationship between Oil and relationship of Jet Fuel.
5. Oil Prices for the following years projection taken from World Bank Commodity Markets Outlook

Year 2014 2015 2016

2017 2018 2019 2020 2021

Gallons consumed 268,500 277,100 283,451.7 300,539.04 315,841.6 335,713.1 357,447 380,553.3
Gallons / ASM 0.0129 0.0128 0.0129 0.0128 0.0127 0.0126 0.0125 0.0124
Hedged Fuel 26% 28% 29% 29% 29% 29% 29% 29%
Hedged Price per gallon 3.0829 3.0570 1.8300 1.4656 1.9734 2.0378 2.0892 2.1504
Unhedged Price per gallon 3.0500 1.8300 1.4656 1.9734 2.0378 2.0892 2.1504 2.2107
Hedged Fuel needs 69,810 77,588 81,729 86,655 91,068 96,797 103,064 109,726
Unhedged Fuel needs 198,690 199,512 201,723 213,884 224,774 238,916 254,383 270,827
Ave Oil bbl 93.17 48.66 39 56.00 58.00 60.00 62.00 64.00
Ave Jet Fuel bbl 113.30 64.02 48.47 69.59 72.08 74.56 77.05 79.53
Ave Jet Fuel gallon 2.70 1.52 1.15 1.66 1.72 1.78 1.83 1.89
Fuel Hedge total cost (2,300) (95,200) (29,779) 44,004 5,859 4,981 6,307 6,610
Core fuel cost 818,925 507,093 415,435 593,093 643,611 701,379 768,659 841,271
Change in Jet Fuel Costo -12% 3.80% 16.15% 9.20% 9.47% 9.48%

Source: Team Analysis

Projected Oil Consumption

CAPACITY CPA FLEET
QTY DIFFERENCE

2016-2018E
MAX RANGE

NAUTICAL MILE
FUEL COST/

NAUTICAL MILE
FUEL COST (PER
SEAT PER NM)

EMB-190 94 pax Decreasing 20-19 1850 NM $13.84 14.12¢

737-700 124 pax Maintaining 14 3440 NM $11.99 9.52¢

737-800 154/160 pax Increasing 64-68 3115 NM $13.24 8.17¢

737 MAX-9 173 pax* Increasing
(orders)

0-5 3630 NM* 11.33* 6.29¢*

Pax=Passengers
*Boeing estimates
Source: Boeing, AxleGeeks: The Research Engine For Things That Go

AIRCRAFT TYPE

27
BARNA BUSINESS SCHOOL STUDENT RESEARCH 2017

Appendix 24 Key Financial Ratios

Appendix 23

The decrease in EBITDAR Margin is mainly driven by the forecasted increase of fuel cost. Nevertheless, even if it is
following a downtrend that smooths after the third year, the EBITDAR Margin continues to be very attractive and
above peers. Due to oil increasing projections, ROE is expected to be below 15% after 2019.

Despite this fact that, in comparison with peers and industry, CPA future ROE remains attractive. For the next two
years ROE is above current Cost of Equity.

2015 was affected by a realized losses of Venezuela currency that they move from short and long term
investment to net losses from Exchange rate difference. CPA is negotiating with the Venezuela government and
has been able to recover part of this loss in 2016. Second, non-cash related losses of mark-to-market of hedge
fuel contracts.

2017 2018 2019 2020 2021

Operating Cash Flow 492,273 470,590 496,668 535,960 567,051
CAPEX Cash Flow (195,014) (175,416) (209,752) (220,340) (226,412)
Net Borrowing 29,167 18,412 33,730 37,031 38,027

Free Cash Flow to
Equity 326,427 313,586 320,646 352,651 378,665

Cost of Equity 13.68%
Sustainable Earning
Growth Rate 2.44%

PV – FCFE Terminal Value MARKET CAP
Cantidad Acciones Price

Free Cash Flow to
Equity

1,158,809 3,452,270 4,611,079 42,049 109.6585

Source: Team Analysis

FREE CASH FLOW TO EQUITY

Key Financials 2011 2012 2013 2014 2015 2016E 2017F 2018F 2019F 2020F 2021F

ROE 22.3% 21.2% 22.5% 17.4% -14.2% 17.3% 16.2% 14.0% 13.4% 13.4% 13.3%

Source: Team Analysis & Company Data

28
BARNA BUSINESS SCHOOL STUDENT RESEARCH 2017

Appendix 25: Montecarlo Simulation

61.20%

-24.90%

8.60%

2.80%

-1.20%

-0.90%

-40.00% -20.00% 0.00% 20.00% 40.00% 60.00% 80.00%

Yield

Oil Growth

Load Factor

Utilization Hour Growth

Salaries and Benefits

Passenger Servicing

Trials 1,000,000
Base Case 115.41
Mean 111.45
Median 111.62
Standard Deviation 22.87
Variance 523.21
Skewness -0.0459
Kurtosis 2.75
Coeff. of Variation 0.1988
Minimum 20.94
25% Percentile 95.48
75% Percentile 127.62
Maximum 193.77

Simulation Statistic

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

23 30 36 43 50 57 64 71 78 85 92 99 106 113 119 126 133 140 147 154 161 168 175 182 189

68.5% probability
of a BUY

Target Price: 115.41

Variable Minimum Base Case Maximum
Growth in Utilization Hour -1.40% 1.80% 5.00%
Interest Rate -1.40% 0.00% 1.40%
LAT – GDP Growth -0.10% 0.00% 0.10%
Load Factor 75.20% 79.20% 83.30%
Oil Change YoY -5.40% 4.70% 14.70%
Passenger Servicing/Revenue 1.10% 1.20% 1.30%
Salaries increased YoY 3.00% 3.90% 10.00%
USA – GDP Growth 0.00% 0.00% 0.00%
Yield -1.00% 0.00% 1.00%

We performed a Monte Carlo Simulation to understand the sensitivity of our model to variations in our adopted
assumptions. We tested two variables related to income (1) yield and (2) growth in Latin America and United States
economies. Regarding operating expenses, we stressed (3) oil prices, (4) increase in wage prices and (5) services to
passengers/revenues ratio. Finally, within the operative variables, we measured (6) load factor, (7) average aircraft
utilization growth and (8) percentage of decreased in block hour vs ASM due to the composition of its fleet. For (1)
Yield, (3) oil prices and (4) load factor and (5) increase in wage prices, we tested the variables looking into historic data
and our own insight. For the other variables we used the Base Case plus two standard deviations.

After executing 1 million simulation we observed a 68.5% potential of obtaining a target price above 10% upside or
US$100.7 per share. Finally, a 8.38% probability of the stock downgraded to a sell.

From the simulation’s result, we
concluded that the most sensitive
variables in our model are oil prices,
yield and load factor. Hence the
importance of continuing mitigating
the risk of oil through hedges and CPA
advantage over it peers in CASM which
allow more space to maneuver on Yield.
Finally, the importance of maintaining
the improvement on the capacity
allocation that they achieve on 2016.

29
BARNA BUSINESS SCHOOL STUDENT RESEARCH 2017

Appendix 26: RISK ASSESMENT
Lo

Low Medium High

M
ed

iu
m

H
ig

Systemic deterioration of
GDP Growth in Latin
America Economies

Availability of Credit

ytilibaborP

IMPACT

Currency Fluctuations

Higher Jet Fuel PricesUS-LATAM Trade
uncertainty because of
elected US Gov.

Cost of Labor

New Competitors in
the market

Accidents, terrorism
and natural disasters.

Higher Interest Rate

Market Risk Operational and
Business risk Financial Risk

Source: Team Analysis

30
BARNA BUSINESS SCHOOL STUDENT RESEARCH 2017

Appendix 27: Endnotes
(1) Copa Holdings S.A. (2016, 10 20). Investor Relations. Retrieved 11 9, 2016, from

http://investor.shareholder.com/copa/releasedetail.cfm?ReleaseID=994553.

(2) Oxford Economics. (2015, 12). Economic Benefits from Air Transport in Panama. International Air Transport

Association (IATA)

(3) WSJ. (2017, 1 11). The Wall Street Journal. Retrieved from quotes.wsj.com:

http://quotes.wsj.com/CPA/company-people

(4) Copa Holdings, S.A. (2016, 11 11). Investor Relations. Retrieved from Corporate Governance:

http://investor.shareholder.com/copa/governance.cfm

(5) International Air Transport Association (IATA). (2016). Economic Performance of the Airline Industry.

(6) International Air Transport Association (IATA). (2016). Annual Review 2016. Dublin.

(7) Belobaba, P., Odoni, A., & Barnhart, C. (2016). The Global Airline Industry. John Wiley & Sons, Ltd

(8) International Monetary Fund (IMF). (2016). World Economic Outlook October 2016.

(9) World Bank. (2016). Global Prospect Report June

(10) The World Bank. (2016, 09 29). Panama. Retrieved from

http://www.worldbank.org/en/country/panama/overview

(11) Oxford Economics. (2015, 12). Economic Benefits from Air Transport in Panama. International Air Transport

Association (IATA)

(12) Federal Aviation Administration. (2016). FAA Aerospace Forecast: Fiscal Year 2016-2036. Retrieved from

https://www.faa.gov/data_research/aviation/aerospace_forecasts/media/FY2016-36_FAA_Aerospace_Forecast

(13) Federal Reserve. (2016, 12,14). Press Release Meeting. Retreived from

https://www.federalreserve.gov/newsevents/press/monetary/20161214a.htm

(14) International Civil Aviation Organization (ICAO), North and Central American and Caribbean (NACC), South

American Regional Officers (SAM). (2015). The Americas: Leveraging a uniquely cooperative spirit in the quest for a

safer and more efficient Regional airspace. Canada

(15) Organization of the Petroleum Exporting Countries(OPEC). (2016). Press Release from the 171st meeting.

Vienna.

(16) World Bank. (2016). Projection of Commodity Markets Outlook Report

(17) Data from the U.S. Energy Information Administration.

(18) International Air Transport Association (IATA). (2017) Outlook: Another Strong Years for Airline Profits in 2017

http://www.iata.org/pressroom/pr/Pages/2016-12-08-01.aspx

(19) Federal Aviation Administration. (12 de 11 de 2016). Airline Certificate Information. Retrieved from

https://www.faa.gov/licenses_certificates/airline_certification/

(20) Gonzalez, A. (2015). Study on Air Passenger Transport Market in Latin America. Santiago de Chile: Economics

Department.

(21) Mills, G. (2017). The Airline Revolution: Economic analysis of airline performance and public policy. New York:

Routledge

(22) Copa Holdings S,A. (2016). Copa Holdings Reports Financial Results for the Third Quarter of 2016. Panama

City.

(23) Ernst & Young. (2016). Copa Holdings, S.A. Form 20-F

(24) Public Economist Intelligence Unit report: Global Outlook Summary. January 2016. Forecast closing date:

December 8th, 2016. Page 6. http://gfs.eiu.com/ ; World Bank Commodity Forecast Price Data, October 2016 ; IMF

Commodity Price Forecasts, 2017-2022.

(25) International Air Transportation Association (IATA). (2015). Exchange rates and aviation: examining the links.

Disclosures:
Ownership and material conflicts of interest:
The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company. The
author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the
content or publication of this report.
Receipt of compensation:
Compensation of the author(s) of this report is not based on investment banking revenue.
Position as a officer or director:
The author(s), or a member of their household, does not serve as an officer, director or advisory board member of the subject
company.
Market making:
The author(s) does not act as a market maker in the subject company’s securities.
Disclaimer:
The information set forth herein has been obtained or derived from sources generally available to the public and believed by the
author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or
completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This
information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report
should not be considered to be a recommendation by any individual affiliated with CFA Institute or the CFA Institute Research
Challenge with regard to this company’s stock.

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