Copa Airlines Slides as Venezuela, Panama Clash - Analyst Blog

After Panama's ties with Venezuela broke, the tension spilled over to Copa Holdings SA's CPA subsidiary and prominent air carrier – Copa Airlines. Copa Holdings, which has strategic partnership with United Continental Holdings Inc. UAL, registered a steep fall in share price, ending 7.69% down on Thursday trade on NYSE.  

The stock got dumped by shareholders after news surfaced that Venezuela has cut off all diplomatic and political relations as well as frozen all trade and economic ties with Panama. To date, Copa Holdings has declined 26.3% since the beginning of Jan 2014. Colombia-based Avianca Holdings SA (AVH), a competitor of Copa, which operates flights in both nations also ended the day in red with a 2% in decline.

The Dispute

Venezuelan President Nicolas Maduro accused the Panamanian government of conspiring to bring down the present government. Panama has been accused of joining close ally – the present U.S. government – to topple the Venezuelan government by enforcing OAS (Organization of American States) intervention in domestic issues.

The Denial

Maduro's Panamanian counterpart Ricardo Martinelli denied all accusations and replied that it is in favor of OAS intervention to restore peace in the country, which has been facing anti-government protests since last month.

Three U.S. diplomats were expelled last month from Venezuela for conspiring against the country. Earlier, the U.S. had declared Venezuela's accusations against it as a means to distract people from its own undoing.

Copa's Headwind

Stopping of trade ties is not a good sign for Copa Airlines, which along with Copa Colombia provides domestic and international services to different Latin American countries including Venezuela. According to Bloomberg, Panama's flag carrier has $487 million trapped in Venezuelan Bolivars and is non-transferable under the current political turmoil.

For a company like Copa Airlines, this is quite some money as it represents around 19% of its 2013 operating revenue. However, the good news is that Copa Airlines management has announced that its flight to Venezuela is still operational. 

Our Analysis

We believe the controversy between the two countries can affect Copa Airline's performance and the quicker the dispute is resolved the better it will be for the Panama City based carrier. We thus remain cautious on the stock with a Zacks Rank #3 (Hold). Meanwhile, investors can consider better-ranked stocks like Southwest Airlines Co. LUV. Currently, Southwest Airlines sports a Zacks Rank #1 (Strong Buy).