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

**SPEAKER_1** (0:00)
You're listening to TIP.

**Shawn O'Malley** (0:03)
Daniel, you've done it again. You got me looking at an industry that I don't want to look at. It's something Buffett would not approve. So you need to explain yourself, why are we looking at an airline today?

**Daniel Mahncke** (0:13)
You know, I'm the value guy. I got to do it because I know you won't. And Buffett actually keeps buying airlines, so I feel pretty good with him having my bag.

**Shawn O'Malley** (0:20)
I just never fully understood why though. It's so well documented that airlines are just historically bad businesses, and yet, Buffett can't stop buying them.

**Daniel Mahncke** (0:30)
Well, not all of them are that bad, right? I mean, there are these airlines. Actually, in all of those industries, there are outliers that are best in class operators. And I do think I found one, so I thought, you know, I got to pitch it.

**Shawn O'Malley** (0:41)
All right, well, I'm intrigued. We're supposed to be talking about Copa today, so should we do it?

**Daniel Mahncke** (0:45)
Let's go.

**SPEAKER_1** (0:49)
Since 2014, with more than 200 million downloads, we have interviewed the world's best investors, studied deeply the principles of value investing and uncovered many compelling investment opportunities. We focus on understanding businesses and intrinsic value, investing accordingly and sharing everything we learn with you.
This show is not investment advice. It's intended for informational and entertainment purposes only. All opinions expressed by hosts and guests are solely their own, and they may have investments in the securities discussed. Now for your hosts, Shawn O'Malley and Daniel Mahncke.

**Shawn O'Malley** (1:35)
We pride ourselves on looking at any industry sooner or later on this show, but there are some industries that are just generally in our too hard pile to begin with. And I realize again and again that with healthcare companies, that those businesses just fall right into that bucket for me. And another industry I usually have on my blacklist is the airline industry. And I'd say they have deservedly earned one of the worst reputations in all of value investing, right? Decades of bankruptcies, brutal, brutal price competition, almost no pricing power and truly enormous fixed costs. But I'm sure you wouldn't have brought today's company as a pitch if you didn't think the economics were different for them.

**Daniel Mahncke** (2:18)
I wouldn't have. And you actually don't make my case easier today. But I do have a similar bias here. And I didn't think that I would have a pitch in airline here on the show. But again, I do love best in class businesses. And I like them even more when I can buy them at what I consider to be a cheap valuation. And since most investors don't like to look at the airline industry, even the best businesses in that category tend to get punished from time to time. And those are always the interesting setups that I like to look for as a value investor. You have good companies that are being sold off because of the industry that they operate in. So just to give listeners a quick idea of why they should keep listening and why Copa, the company we're discussing today, is different from other airline competitors, you have, in my view, the single most profitable airline of any real scale in the Americas, trading at roughly eight times earnings. And you can compare that to the US airlines like Delta, like United. Those usually trade at multiples of 12, 13, 14, so the low teens, while operating at lower margins with much more volatility in earnings. And the important thing actually is that there are structural advantages to why Copa is more profitable than all these other airlines. So it's not just them having a good couple of years, but they actually have a value point that, in my opinion, other airlines simply can compete with. And that's why I brought Copa today as an airline to pitch here on the show.

**Shawn O'Malley** (3:39)
That does sound promising. You're getting me excited. But before you keep selling me on Copa as a standalone company, how about we dig a bit more into the industry? Because it really is one that we haven't looked at on the show in the past very much. And so it deserves some extra attention.
Now, I'm certainly no expert. So when I say that the airline industry is bad, I'm mostly just looking at the historical track record of them destroying shareholder returns, which is something that Buffett has famously called out a number of times at the annual shareholder meetings. But when there are outliers like Copa, they certainly deserve a closer look so we can figure out whether they will win, or whether the industry will win and suck them into their shareholder value destroying nature over time.