Section I: The Economics of the Business

A. Introductory Description of the Business and its markets

Copa Holdings member of Star Alliance, is a leading provider of airline passenger and cargo service through its two principal operating subsidiaries, COPA and Aero Republica. As of December 2012, the company operates a fleet of 83 passenger aircraft, with service to more than 63 destinations in 29 countries in North, Central, South America and the Caribbean. (See Appendix, Figure 1.1)

COPA provides services from the hub of the Americas in Panama City, Panama and Aero Republica provide service to major Colombian cities and international flights to Venezuela and Ecuador, positioning the brand as the leading airline provider in the Latin American region.

The company’s business strategy main goals are to continue to increase profit, improve its position as leader in the Latin American market by enhancing customer service, frequency programs though it’s affiliated airlines and provide convenient flight schedules at competitive fares with superior customer services, while maintaining low costs. An important component for Copa Airlines is their frequency program Mileage Plus, in conjunction with United Airlines. Through this program, the airline has managed to maintain sales up, increase customer loyalty, and differentiate from its competitors.

"We are pleased to be part of MileagePlus, a world-class frequent-flyer program," said Marco Antonio Ocando, Director of Marketing, Copa Airlines. "This step demonstrates our commitment to offer our passengers increased benefits and better connectivity (Appendix Figure 1.2) from Panama to the 63 destinations in 29 countries where we operate around the world. We continue to be a leader not only in on-time performance, but in world-class service."(copaair,2012) The key elements of the business strategy include the following:

 Expand by increasing frequencies and adding new destinations. Demand for air travel in Latin America is likely to expand in the next decade and to prepare for it. The company is acquiring and increasing fleet capacity.

 Continue to keep costs low. Reduce the cost per available seat mile (ASM) without sacrificing services valued. The goal is to maintain a modern fleet and to make effective use of resources through efficient aircraft utilization and employee productivity.

 Emphasize superior service and value to the customers. Focus on satisfying the customers and earning their loyalty by providing a combination of superior services and competitive fares. Keeping flights on time, reducing mishandled luggage and offering convenient schedules to attractive destinations will be essential to achieving this goal.

 Capitalize on opportunities at Aero Republica. Seeking to enhance Aero Republica’s profitability through a variety of initiatives, including modernizing its fleet, integrating its route network with Copa and improving overall efficiency.(Copa Airlines Website)

B. Macroeconomic environment of Panama: Copa Airline’s stepping stone

1. As a result of its geographic position, Panama serves as a point of transit, with more than 70% of GDP dedicated to services. This condition of a service-based economy and point of trade has allowed for a gradual self-discovery process over the last hundred years, which has resulted in the development and adoption of new technologies in order to provide customers with competitive advantages.
2. The economic and political stability reached in recent decades has contributed to this process and has allowed Panama to become one the highest-growing economies in the region, averaging 8.3% growth in the last five years having reached all-time highs of 12% in 2007 and 10% in 2008. This growth trend continues amidst the aftermath of the international financial crisis, positioning Panama as one of the highest-growing economies, and among the leading growth economy in Latin America in 2012.
3. The strength of