Q3 2019 Earnings Call
Okay.
Hello, everyone and welcome to <unk> third quarter 2019 results conference call.
My name is batteries and I would be operator for today disease man is being recorded and all participants will be in at least in only mode until we conduct a question and answer session. Following the company's presentation should any participant needed she's done during this call. Please press star zero truest operator.
Likes it turned to present they show over two and that's what's your best relationship manager. Please proceed.
Thank you bad shape and welcome all type of third quarter earnings call. It is also we announced this morning. The audio is called Anda slide.
Our available on our IR website, presenting today will be paid of Neeleman, founder and chairman and John Richardson CEO , Alex Nazi penniless CFO Annabi, Charlotte Chief Credit Officer, I'll be here for the Q any fashion.
Turning to call over to David I'd like to caution regarding forward looking statements and that is just go today that are not just sorry, okay, particularly comments regarding the company's future plans objectives and expected performance constitutes forward looking statements. These statements are based on the range of assumptions that the company beneath the reasonable, but it's subject to uncertainties on this.
And I discussed in detail in our PBM and actually see fine also during the course of the call. We will discuss nine <unk> and all right assortments measures, which should not be considered an isolation with that open the call over to David David I <unk>.
Welcome everyone and thanks for joining us our third quarter 2019 earnings call as always I'd like to stop I congratulate our crew members and thanking them for another great quarter, certainly couldn't do without [noise].
Thanks to their efforts, we continue to deliver on the IPO promise of expanding margins well. We didnt have ended up at the time of the IPO is that in addition to expanding margins.
Also increased revenue by more than 70% since the time of the appeal.
This year alone revenue should increase by more than 25% compared to last year.
So the combination of expanding margins and growing revenue.
And a growing revenue base has led to EBITDA.
More than doubled since our IPO in 2016, that's incredible.
He said, we always told you would expand margins.
I guess, we forgot they've gotten part we were going to grow so.
Bottom line is really growing.
More importantly, we have demonstrate our ability to grow while maintaining operational excellence and great customer service this quarter surge in a row readers of my bodies Destino Wonder Brazil's largest travel sites elected as old.
The best airline in the country and to do is all that's the best loyalty program.
Hi, True Testament to our commitment to customer satisfaction. We're also proud to be ranked number one.
In all categories by decline, making a customer satisfaction website, including best airline that's loyalty program and best travel package program.
One of my most excited about this quarter, what the delivery of our very first do you too you've been talking about that for a while the first months finally here.
I have another 50, plus several older it'd be delivered over the next few years eat twos, how about as we've gotten telling you have a lower cost.
It is 14% lower than the ones, we're actually getting better fuel performance and we've been anticipated.
It comes with the 18 additional seats, so larger cost 18 additional seats that nirvana for the airline business.
It also gives us flexibility to connect docs have never been connected before in Brazil.
Now these are long stand routes.
You know like I said I've never been Plum before just has the flexibility. We also had additional frequencies in our business markets very exciting airplane.
By the end of 20 Twond, we shot 76 next generation aircraft in our fleet, including 320, Neos and the two representing 61% of our S case.
As we've been telling the market.
With the addition of easy to use and the 320, New House, we will continue to reduce unit cost for producing more revenue per aircraft.
As you can see on slide four we sell a long way to go and our margin expansion story the best news.
We are less than halfway complete.
As I just mentioned.
We have just started switching he wants with the twos in October and we have roughly 500 twice a day to replace.
We're also thrilled with what the growth of our business units.
Cargo suicidal, both which grew more than 40% in the corner.
On slide five you'll see that our latest network.
We now have no no flight 214 destinations incredible and have more than 900 daily flights.
I'll be working had that thousand flight and he'd guarantees me, it's coming up in the not too distant future.
And in Q3, we also started flying the average between some follow Unreal with 14 daily frequencies.
This is the fourth largest market in the world and the largest in the Americas in terms of passengers. We're very pleased with the results we are sitting on this.
In summary, we continue to live on our promises of expanding margins, while growing our topline by double digits network is as strong as it's ever been.
And I couldn't be and I couldn't be more excited about the opportunities that lie ahead of us as we continue to benefit from our fleet transformation.
I'm certain that it will create a great value for our shareholders crew members and customers and with John but that I will turn family John to give you more details on the floor.
Thanks, David I also want to thank our crew members for all their hard work during the past quarter. Thanks to them. We continued to deliver great result.
As you could see on slide six we grew our topline revenue by 25% to over 3 billion here for the quarter and also expanding EBIT margin to 18.5% EBITDA reached a record 936 million up 24% year over year.
Raskin to states like the adjusted basis increased 1.7%, while cask decreased 1.5%.
Excluding the impact at the end of the payroll tax relief program cast would have fallen 4%.
We had net income of 441 million up 57% year over year, if you remove the noncash impact of currency variation.
Moving on to slide seven our cargo business maintained its strong growth with revenue increasing 42% year over year benefiting from the expansion of our network in fleet in August we signed a commercial agreement with me probably agree like Latin America's largest ecommerce player becoming their exclusive direct provider of air shipments for ecommerce in Brazil through.
This partnership Mocatta leveraged will have the faster shipping times of any ecommerce player reaching more than 3700 municipalities nationwide with the risk with the support of our extensive network.
Ecommerce represented almost 20% of as all cargo revenue in Threeq Q2 thousand 19 up from 9% in the same period last year.
In addition to the growth in E. Commerce were also growing our corporate customer base, reaching a domestic cargo market share of 22%. The second highest in Brazil to do is all also had a great performance during the quarter with gross billings exercisable, increasing 40% year over year. This is to the dual fourth consecutive year with over 30% growth.
And as David highlighted it is once again elected the best loyalty program in Brazil, congratulations to the entire to utilize all team for their great work.
Moving on to slide eight I'm proud to report that we ended the quarter with a strong liquidity position, representing 41% of our last 12 months revenue and this is while growing revenue by 25% year over year, our balance sheet is further protected against currency fluctuations through our assets such as our security deposit and maintenance reserves totaling 1.6 Bill.
Yes. These are not included in our cash balance.
And the right side of the slide we show an evolution of our leverage which reached 3.3 in July with your new accounting standard when a new aircraft arise we immediately see an increase in debt, reflecting the full term sublease without the benefit of the EBITDA. These aircraft will produce adjusting for these five aircraft that we added during the quarter our leverage would have been three.
We expect this timing effect to level off at these new York aircraft become fully productive.
On slide nine you could see that in addition to the improvement of our operating results and solid balance sheet. Our operating cash flow was almost 1 billion high and we generated free cash flow of 187 million in the quarter.
Moving on to slide nine.
We wanted to highlight.
The significant investments, we're making in our future.
Adding new aircraft hiring pilots and flight attendants, we added 14 aircraft year to date, including five planes in the third quarter. In Q4, we expect to add 12 next generation aircraft. We also elected to convert some of our Priory 320 orders to Athree 21, allowing us to further up gauge our fleet in the March.
And accretive way next week, we'll receive our first day 321 meal and we plan to receive a total of 12 by 2022.
You know we've been actively marketing the he wants to accelerate our transition into an all next generation fleet. We sold one anyone in the third quarter and also sold one in the fourth quarter, we're happy to share with you that we've recently signed a nimble you with an airline for the sublease of up to 32 easy ones over the next few years.
The 195, you won 95 served their purpose that visible, but once new technology came out it's important we transition as quickly as possible.
System with our aircraft sales to sublease will most likely result in a noncash onetime book loss in the fourth quarter, we'll finalize the exact amounts over the coming weeks and we'll update you as soon as the numbers final also consistent with the aircraft sales given the great economics of the next generation aircraft. This transaction is cash positive and margin accretive.
We also invested in the construction of a new hangar what are the largest and most modern in Latin America. The facility accommodates the Athree twentyneos for two Athree hundred Thirtys and will help reduce our maintenance costs as we will be in sourcing all of our narrow body C checks.
We're also excited with our investment tap as it continues to make progress on its own fleet transformation plan. The recent consolidation events in Europe further reinforced the value of our investment given tap strategic location and leadership position in traffic between Brazil and Europe .
In addition, today Weve submitted for shareholders approval a proposal for our commercial joint venture with cap, which we believe will be revenue accretive for both carriers in the coming years.
Wrapping up on slide 12, we present, our updated 2019 outlook, we expect our capacity to grow approximately 20% 2019 and remain confident unexpected operating margin for the year of around 18% in summary, we are building the best airline for our crew members customers and shareholders.
This is a multi year margin expansion story I'm excited with what the company will look like one year from now three years from now even five years from now as we continue to build and invest in the best airline in the World just keep in mind, we still have 500 daily flights being flown by 81.
Finally, I would like to thank our shareholders for their continued support will work to keep your confidence and expect to continue making progress on growing our business profitable profitably with that David myself and I'll be analysis are here to answer any of your question, Let me turn it over the operator.
Ladies and gentlemen, thank you we will now begin to question and answer session. If you'll have a question. Please press the star Q followed by the one key on your Touchtone phone now if at any time, you would like sure move yourself from the question in queue brass starts you.
Following the call via webcast you may poster questions on the platform and they will be either answer during this call our body. So investor relations team. After the conference finished.
Our first question comes from seems to.
Raymond James.
Hey, good afternoon, everyone and.
The <unk>.
Capacity for 29, P.M. coming at the kind of towards the lower end I'm. Just curious if that's a function of aircraft timing or if you can I just reacting to the environment and.
Yeah with the it seems to imply maybe it did have a moderation in the fourth quarter. So should should talk you can radnets via a similar level to what you're seeing in threeq here. Thanks.
It's probably I'll answer the first part and then pass over to hobby.
Airbus as well as Embraer has experienced some delivery delays I come from what they originally.
Gave to us and so that's primarily the difference in capacity as we look in the fourth quarter Airbus has not yet caught up and even embraer has been delayed a bit on on some delivery. So that's really what the differences from what we had previously forecasted.
Hey, Todd I'll be here, yet so it was.
We had the a delivery that John talked about we also have a couple of embraers.
Dying to exit the fleet for the for the exit process and that's happening in Fourq, you and down.
So is mostly fleet related some exit two aircraft exiting the fleet to begin the exit process and the new airplanes coming in with the date sliding around I'd also is a minor impact with the timing up in November holiday the holidays on Wednesday, and so we've kind of made adjustments are on that but it's mostly fleet stuff.
In terms of the right the guidance has come down.
Did the lower end in terms of unit revenues for Q, Yeah, I mean, I expect them to be up close to zero again.
Keep in mind, we have two very very strong effects when it comes to year over year RASK.
The first one is you had a very high base from last year.
Last year every month August September October and November were on a record months before I do in terms of Iraq, and so we have a very high base that we're trying to.
Get even higher this year and we have the impact of the aircraft mix that we've talked about a dozen today just the fact that our eightytwenty weve now represent so much more off our network than they did last year, they haven't give up about 100% in capacity year over year.
There are obviously, they fly doubled the stage lengths and there are 50% bigger and different factors not really included in the stage length adjustment. So the fact that they're flying much longer they're much bigger the on absolute terms they have a lower rats.
Despite the effect of bidding the mathematical the fact off the aircraft mix is it seven to eight point system wide RASK impact and so I.
I think in Fourq, you will be again rats are very close to zero as well, but in actuality were actually up seven to eight point, because we're making up for the effect of the aircraft mix. So hopefully that answered the question.
That makes sense I helpful. And then just given the new E are you one announcement.
Any color on how we should think about growth next year is that still pretty consistent or or should we think about.
Or faster growth next year.
Yeah, I think you can expect growth for next year very consistent to what you have this year.
It's it's going to biased more towards the two is obviously this year was loaded with the Iraqi ones and because the ones that primarily in our network in our hubs in our corporate markets.
They does the swapping out or be he wants to eat do is it's going to be focused in our network in our largest corporate markets, where we have 910 11 flights a day audits competing that's out of below is on geography SIFI. So the focus next year is gonna be too is the skin number is going to be similar to what do you have what we have this year and that's going to.
Maybe just focused on swapping he wants freighters.
Hi, Thank you.
Our next question comes from Michael lining Burke Deutsche Bank.
Hey, just a few housekeeping questions and then a bigger picture question. The 321 Neo is how many seats are they going to have.
Hey, Mike I'd be here, it's good to anyone's have 214 do one for okay to one for okay, great and that's also going to include you're sort of.
Exit extra room upfront type product that you have on the.
Okay great.
It's it's a domestic 80 21 of the extra legroom upfront.
Okay, Great and then just a quick second here I saw that you know you were reporting earnings per HDR and I know in the past I think list for Ats was there on did you have any sort of like a legal change on the on the Theres struck the share structure I realize this is.
Minor.
No we use those interchangeably jars and I guess, there's no no no difference okay, great and then Alex actually since you answered that a quick question just on the accounting.
The difference between your reported loss and then you had.
Kind of net income as adjusted.
You added back the foreign current foreign currency exchange, but are there any tax implication. So as a result of adding that back is that just the street add back or should we assume no apply some sort of tax rate to.
Getting to like a true after tax number maybe maybe it's not even applicable.
You want even apply taxes to that I know, it's a pretty even if it's a pretty straight add back of for the impact of FX through all were.
<unk> dollar denominated debt, which isn't real data as you know that these days markets, mainly be capitalized leases right. So.
Fortunately with our first extreme volatility to earnings with FX are going to increase because all of those are leased cash flows good capitalize on a balance sheet and they get translated to realize every quarter data on the a quarter end effect. So it's a good but but they don't when you calculate tax.
Well income that FX volatility does not apply right. So you know protectable income or the revenue service already kind of disregard the FX volatility and so you don't need to worry about FX impact when you added back to that income okay. Great. That's helpful. And then just lastly, maybe this is more of a question to David you know you you referenced.
You know recent consolidation in Europe , and you know we now have another marker out there for a carrier which in this case. It is a carrier that well had it was had a decent presence between Latin America, and Europe , and yet when I look at the numbers.
I believe tap is actually a larger carrier, maybe a point or two of share larger than air Europa just thoughts about that transaction and you know kind of how it in a sort of how do you think about it vis-a-vis tap.
Absolutely I think every rope is.
Maybe a bit stronger in the rest of Latin American and that's really strong and Brazil, <unk> I think if you were to take.
What we have scheduled for next year and you know between understand JV between Captisol I'd like 100 weekly departures going to Europe from Brazil, which as far away the largest carrier.
I think we haven't about 30% of all of them all of the passengers apply between Brazil in Europe , which is quite amazing nobody even comes close to that including every well pay if you even out of them to.
I'd. So no. It's I think it's great I mean, I think are you wrote the had sales of 2.1 billion and that's why I read.
And I think you know tap this year is gonna be.
You know close to three and half billion so allow were significantly.
The price that was paid no. There's not equivalent do you know, maybe that's a little bit different or something but it certainly.
No. It was encouraging for us we thought it was a great transaction and and interesting the antitrust implications of that you know with both the carries bringing Madrid, but obviously feel confident that that's going to be approved so certainly opens up a mixed our investment more more valuable no doubt about it we're pretty excited about.
Yeah, no absolutely it's great to see another marker in a in the marketplace anyway I'm good job this quarter everyone. Thank you.
Thanks, Mike I'm, just just remind everybody that if you were take the shares it is who owns the convertible and all that it's about 48% atop so it's a significant I'm proud of.
But far away the largest shareholder so.
Yeah. So when you talk about those numbers you can take about half of that and that's where there's a little.
He is value in captures.
[noise].
Our next question comes from then Mckenzie of Buckingham Research.
Okay. Thanks few questions your hobby.
You could talk about the velocity demand that you've seen over the past couple of months and you know what I'm getting at is we've had some pretty big developments in Brazil, including the passage of pension reform and you know it seems the privatization. The state owned companies has has picked up here and I'm. Just wondering what does that all mean for a dual or you see the more confident consumer or less confident consumer I'm just you know one.
During how that all filters down to two a dual.
Yeah, Hey, Dan Yeah, I mean, we felt pretty good and by demand. Obviously, we reported our October traffic yesterday, it was very strong.
Strong internationally and very very strong domestically.
I think the industry is.
Feeling pretty good about it overall.
Combining that with the good capacity discipline.
Our discipline as well.
Not seeing Coolmini strange things are aggressive things on the corporate discounts and a private fares and all those kinds of games. So yeah I think that.
The corporate demand has been good the second half of the year.
We're expecting now to have October was pretty good.
October last year had elections, so we actually had a good comp as well for October November we have a very difficult gone back on Nov has started out well also so certainly I think the domestic front.
Oh, we're seeing strong number isn't I think the numbers you will see from our from our friends in domestic market I'm gonna be could as well so suddenly reasons to be optimistic.
Here on the other domestic side and beyond just the just to highlight and you know this pension reforms, a big deal for Brazil, and ill and mistakes will be included soon and one thing that we saw as we saw Brazilians going to the street asking for pension reform.
Unheard of in Latin America, and people pushing for it I think there's a new found optimism in the country. I think you know the economic team and administers that are in place right. Now are doing all the right things for Brazil, Brazil headed very much in the right direction. The fact that we're seeing this demand in our flights being full and able to add this capacity you know before Brazil takes off.
All right I mean, we believe that Brazil will start to grow again, you know over the next couple of years and we're really poised to take advantage that growth, yeah, and I guess to reiterate Dan I mean.
This was our second best ever third quarter RASK into history of Brazil.
And with this mission by 0.5% so on by far our largest ever yes kids and so that gives an idea I know you know the demand is there for this capacity.
Yes.
And then just you know to follow up here on the cost side, Alex I wondered if you can just to clarify the pressured the FX pressure that that put on cask ex fuel. So you know if we could just look at cost that are Cas, excluding feel on an on an FX neutral basis, what would that have looked like than in the third quarter.
So that's what the unique quartered them in which the average FX rate.
It was fairly flat year over year, but the final FX rate.
The end of quarter FX rate was pretty big year over year, and also quarter over quarter right for operating expense. The average FX rate is more of a good indicator as to how our expenses are affected by FX and so you know year over year I don't think FX is as big of a.
Either a headwind or tailwind for operating expense. There was some help from a oil prices rights will fuel prices in dollars were down and that help.
But you know even if you adjust for.
FX, which was with didn't which shouldn't have a lot of effect.
We'll end the payroll tax we did see a decrease in cash so what we call normalized gaskill normalized for these kind of.
Out of control a lot of our control factors are cast would've gone down by about a point in a half right, which is just the natural result that you would expect from our up gauging. The fact that we're bringing in aircraft that has essentially the same trip costs are lower trip costs, but a lot more seats, which match.
Really reduce cash spread so I think this quarter, we didn't talk too much about the normalized cast because the normalized gas, which we always point to near to try to control for all these.
Macro factors it was pretty similar to be a accounting cats right. So one one of 5% reduction I think that tells the story of what's happening with our operating expense.
That's right.
He just squeeze in one last one here the 500 departures with the ones. It would be helpful to know what percent of the revenue where the flying that is because I mean, the way to think about that obviously is you got a chunk of revenue I don't know if that's you know, 20%, 10% or 30% you know where you're gonna see margins improved but I think if you can help size.
Part of that margin improving story that would be helpful. Anything you can share there.
Yes, Dan I'll I'll get back to when the exact number but.
These departures are in our hubs so in a bit on goalpost. For example, you know we fly 11 times the data to the Chiba or same tempted to put the legrand things like that in Belo Horizonte in the SIFI inquiry about and so.
A lot of big corporate markets.
That have higher than average yields higher than average rat.
And so it would be a higher than average for sure revenue representation, Ben just what the it scales are so because these are our highest yielding a corporate markets would that with the high frequencies. So obviously the exact number but it would be a higher representation in terms of revenue then it is.
In terms of our a escape so it's going to be very significant when it comes down to our bottom line, yes, but again, it's just that ran says it's not just the revenue side I'll be talking about revenues the cost side. So you take 500 flights and you take 15% or.
So off of that cost all those 500 flights that's really significant and then you add to the revenue on top of that because you have 18 more seats. You know we've got some numbers internally that are pretty eye popping and obviously moves the needle quite significantly on our margins and that's why we're you know expediting the ones as quickly as possible and taking deliveries.
Seasoned book was possible as we've been talking about for few quarters now, but now we're actually doing it.
Understood. Thanks for the time.
[noise] do them.
Our next question comes from but if somebody with too yes.
Hi, Thank you very much for taking my question I would like to understand better the depreciation decreased quarter over quarter, we saw that depreciation be created around 5% player of acquired but at the same time, we have seen increases in <unk> payments. So if you could provide some color on that would be very helpful.
And I just have one second question regards regarding the competition outlook on regional votes, especially after the start of operations all facilities when not.
That's it some n. Thank you.
Great I'll start with the depreciation and I'll be will pick the.
The regional routes yeah. So I appreciate your as you can see obviously went up a year over year.
I'm sorry.
Some of it from the fleet transformation, but more of it from maintenance. The truth is if he's got takes a while ROE or new aircraft to really start impacting.
Depreciation significantly you know the way for our 16 words you know your.
Looking to present value of all the payments or you're gonna have over the course of 12 years or 144 months, you're calculating the present value or that you know using our discount rate, which is fairly well, it's higher than the risk free rate.
So that gets you a smaller number and they divide that by 844, you can do the math and you'll see that as every each aircraft gets added it doesn't really impact depreciation all that much it impacts back more significantly because but that takes the full.
On top.
Of the present value and also it affects leverage you always we always talk about because you get the leverage you get the debt impact on the leverage but you don't get the EBITDA generation, yet right, Doug will come overtime no sold so you shouldn't expect a huge growth quarter over quarter over quarter, you know certainly not as we're seeing into growth will be a scale.
For example, because like I said it takes a while for these new records to start impacting a depreciation also this year. What we did is because we have to change in RF, whereas we have all these new aircraft coming in we where are we made a small change to the timing of when we recognize when we start recognizing the depreciation.
The new aircraft that change was all within the year of 29 team right. So that's why you're seeing due to higher than Q3, because we've got to change that follows two in Q3. So you wouldn't really means this Q1 was a little bit higher.
And with this new policy Q2, a little bit higher than with this new policy and then we reversed that we're in Q3, and that's where you see or does the reduction in Q3 versus Q2, but it's all what do you look at the full year number it's all consistent.
And regarding the question about the reason allowed yeah, we have popped NATO just starting.
Hi, somebody who are outside of can going if you.
So in terms of our direct overlap with them, we still have very very little direct overlap with them I believe maybe one or two routes total.
We're not seeing any impact from their flights I in in our numbers.
It represents a very small percentage of our network and so it's not something that it's a big impact that we are seeing not something we're noticing on a day to day basis, we're watching it and but in terms of the impact we're not seeing anything.
Significant to report or to go to notice I just want to put in perspective I think.
So there, though had five to 680 ours and Mopey had two to three Trc, you're talking about in total seven to nine EPA ours and a lot of them. They dedicated to the convenience airport to fly the new schedule exit a lot of routes that Mopey was flying in amazonians and when you fly incumbent on us.
And for you to keep the schedule, there and a lot of the market that they fly our local markets that we don't compete with them on a like for example, convenience day, but I'm Presto and I think they have direct competition with love Tam on that route, but we don't fly it and so very very small airline overall, even after combining the two airlines, it's very small until it's it's pretty insignificant and the big scheme, but.
And I think you know.
Keep in mind, we're taking you know 12 aircraft in the fourth quarter that are you know three X the size of their largest aircraft and so it's pretty small relative to the to the business that we have.
That's very helpful. Thank you very much.
Our next question comes from Stephen Trent City.
Yes, Hi, it's actually Brian Roberts on for Steve Trent.
You've taken the question if we could go back to your stake in tapped through the converts a is it fair to say that is little could monetize this holding a if approach Brian strategic souter worth cap or decide to IPO.
And of course, that's where we own it I mean, you know we are a good investment and we think it.
Certainly is continuing increase in value.
As we as I mentioned as John mentioned in his script.
That's undergoing the same kind of fleet transformation.
We're doing here, they're replacing three.
332, hundreds for 330 deals they.
We're able to they already have 15.
And this year, though no accident year roughly 75%.
Have their new generation airplanes on the widebody fleet and then they're starting to narrow body. They started to find the 321 L.R. which is.
Used to be called a lot of 321 stood for a long range, but we changed it to Lisbon range, because it kind of works best for listening into other capital in Europe and to the XLR comes along.
So we start applying that to bell language and started applying it to Washington for the off season, we're saying.
Tension on margins with with those airplanes. So.
Things are looking great top and so we're excited about our investment there.
And well also talked about strategic value of having this Jack could you Jay joint venture that we announced today that will provide board yesterday, so the ability to kind of what was going to be huge synergies between both of us being able to coordinate schedules and coordinate fares and do all those things.
But also within investment and you know if we you know.
So many in Boston had or purchases that we certainly have upside for all of that because of our ownership and I think it's important that having the commercial agreement and the joint venture in place means that we can monetize the asset and still have all the strategic value associated with it and so that's why the sequencing is happening. It. So it's very important for us to get the commercial.
Joint venture in place before before we talk about the alternatives for liquidity that you address.
Great. Thank you and then if we could just switch gears given your partnership with Meli is it possible that we might see other partnerships with other ecommerce companies like Amazon et cetera. Thank you.
No we're not naming.
Amazon or any of the other players right now, but we are significantly investing in our logistics network in Brazil, right and so we'll continue to invest a lot of our management time is focused on it and I think you'll hear a lot about this over the coming year or so and so we're very excited it's a new phase in Brazil and.
The fact that we can deliver packages and 3700 municipalities in the country. It's very powerful you know our network is our greatest strength and we're going to leverage that as much as we can.
In the accomplished.
Great. Thank you.
Yeah.
Our next question comes from Josh Milberg Morgan Stanley .
Good afternoon, everyone and thanks for the call you guys have already covered a lot of ground today, but I wanted to ask about the issue of hidden assets that Alex had touched on it at your Investor day in and just the potential for prepaid maintenance expenses to go down longer term.
I think it's maybe not too surprising to see that that line in your balance sheet was up this quarter, but I was just hoping you could give a little more perspective on how it could evolve in the next two years and or how we might project that upside.
Thanks.
I think the way to projected.
Dan or is that Josh is.
I think our fleet a slam is probably a good proxy because the payment of maintenance reserves is by and large shape phenomenon from our old IWAN leases right and that's why we're confident that they will go down overtime because.
The ones leave and they will leave a it's just a matter of time, we will see the.
Deadline going down now we are the reason why it may go up or down until them as more of a question of the maintenance events that you ones, we'll we'll go through or not right and in some quarters, where you have a lot of maintenance events, we may be kind of dip into that balance to pay for the you know to pay for the maintenance events.
And then if there was a quarter with not a lot of you warm events that we may have the payments for the majors reserves that go together with the lease payments, but not the drawdown right. So no I think would go where you will really as we haven't had a lot of you once leaving but we're very excited about the recent progress that we've made with the you ones because we.
We.
We sold one in and in Q3, we sold one in Q4, we have you ever will you have to start accelerating their exit and that's when you're going to skew the balance of start to come to think that drives that balances FX right. We will not only for hit a massive in terms of prepaid cash that has already left the company, but that bad.
Alan is all in dollars and so as the currency fluctuates, you'll see that balance going up and down as well just wanted to benefit you get with the sub leases of these 30 to 81 is that the redelivery conditions now transfer to the new lessee right and so that's one of the benefits that you have is they use the aircraft.
For the remaining term of the lease they're responsible for their portion of the of the return conditions.
Okay very clear response, thank you very much.
Oh.
Our next question comes from Pablo most device Barclays.
Hello, Hi, guys. Congrats on the result, I have one follow up question can you. Please piece.
Sure. We've also what is.
Putting some pressure on unit revenues into third quarter on probably into fourth quarter well for 2019 discussing your lower margin guidance. Despite a better unit cost performance is there anything incremental here that we should be I world. Thanks.
Hey, Bob lobby here, yes, or as I kind of talked about you know they aren't in the call.
There was sort of two effects that are.
Putting pressure on RASK on a year over year basis, one is the higher base from last year, we had a record month almost every month last years second half of the year, including September October November but.
But the biggest effect that we're having is the effect of the aircraft mix.
The elite Twentys are flying double the average stage length.
And they are 50% bigger so on an absolute basis.
That aircraft the lower absolute RASK then the other aircraft. If you look at our RASK for each and every equipment type. They all actually went up year over year. Our 80, Twentys went up in capacity, 100% and our RASK was up more than 5% on the 80 twentys, but however.
Because they have a lower absolute number as they become a larger and larger percentage.
Dozens of SK waiting in the in the network that brings down the overall wrath of the airline and so that's why we're looking at Threeq you in Fourq you ran off goes to zero goes to zero actually means that we are recovering seven to eight points of rack odd that's a headwind due to the.
Aircraft mix, so actually think revenues being very well I wasn't able to implement the capacity and the demand is there as I said. This is our second back every third quarter in the history of absorb wouldn't by far the most E skis in the history of result, so the revenue environment because of strong we're just having the effects.
In terms of year over year RASK due to this strong base last year and the effect of the aircraft mix.
I also think you know we never promised to forever increase wrapped in fact, these new generation aircraft can allow us to reduce RASK over the coming years and expand margins I mean, that's the whole key of bringing in an aircraft as unit costs that are 25 in 29% lower than our actual aircraft, it's really going to strengthen the network as we move forward and.
So the fact that the market was able to accept all the capacity that we put into it and to have RASK up 1.7% onstage not adjusted basis I think is a strength to the network that we have.
Perfect. Thank you very much.
Ladies and gentlemen, as a reminder, if you would like to pose the question. Please press these Turkey followed by one.
Yeah.
Yeah.
Our next question comes from Lukas purpose of Morgan Stanley .
Good afternoon, everyone. Thanks for taking my question.
So my question is on the Athree 21, new deals can you walk us through the strategy for these aircraft I can imagine they will be allocating the highest density rule routes in the domestic market, but any color you can give from where they will be allocated will help a lot also if you could give any color and how they're units cost compared to the athree.
20 news that would be great. Thanks very much.
Hey, look I see so in terms of B, where to put these aircraft I'm, obviously very excited to have this airplane into our network one of the unique benefits, though we have in our network as we have a hub in a in Sao Paulo income Peanuts, we have a hub in Belo Horizonte Oh, we have a hub in receive fee.
All of which are you know very meaningfully sized hogs has SIFI approaching 80 departures a day.
<unk> Belo Horizonte approaching 100 departures a day to 45 destinations and of course, I suppose Campinas with Dom you know hundred inspection departures a day. So I'm just connecting the hubs to each other is going to be the first emission up the 80 21.
And that does not only helps the economics of those routes, but it helps the economics of all of the other mouse that connect so we're able to drive a lot more connectivity with each in one of those flights than we were before are similar to what we did with E. 133, 20, we can now do with the Threetwenty.
To the Athree 21, so so the first job is just to connect the hubs to each other and then of course, we have our focus cities likely about like in Midland actually to achieve like both the legacy that indeed themselves have connectivity.
We didn't them so that didn't so there's lot of opportunity as well so.
Given how broad our network is.
And how broad the platform is throughout the different country.
Throughout the country. They just a lot of opportunity for us I would be 80 21.
In terms of the cost economics, you know.
We're very excited we think that the cost of the 80 21 is just going to be slightly higher and then back of the Athree 20, and that's with 40 additional seats, so you're going to see additional our unit cost and leverage for us as we use this aircraft I couldn't help but lower unit cost.
Further and given the strength of the network and how broad the network is I'm very confident that we can protect the revenue and actually improved revenue across the network I would just airplane.
Okay. Thanks, very much that makes a lot of sense.
[noise]. Our next question comes from saved it Raymond James.
[noise], Bobby excuse me safe.
Your line is open.
Sorry about that and hi.
A follow up on the and all you for the anyone.
How quickly do you envision those aircraft, leaving the fleet were kind of the prior expectation now that you have there.
Yeah Savi there's.
As many as 10 next year alone in 2020, and then we have our natural lease returns as well and and as Alex You know said, we've also sold one in the fourth quarter of this year and so it's going to be a significant you know transition out of the ones and so as you look at 2021 to 2022, I think you're going to see almost all of our E. One.
During our fleet in that in that period of time and saw the one thing that I think it's good to clarify. Thanks for the question is the fleet plan that we have on our institutional back that's our expected delivery time right. That's not the contractual time. So the success that we've had you know it may accelerate one year, but you know a lot of it is already in Corp.
So I think you know like John said, there's such a big exit in 2020 that maybe we're going to kind of beat the fleet plan in 2020, but.
Thats already.
Jack if of offers right that's not the contractual delivery schedule. It's actually what we believe we can accomplish with all the marketing effort that we're doing in order to sell our own Oh, you ones and to sublease. The the least you ones and Embraer has the ability to pull forward our deliveries for the two screens.
You too.
Make sense and ended the Airbus do you expect some catch up next year or you expect on these delays kind of continuing into the following year.
Got it better right [laughter], we've been here that for awhile, but you know you know we expect them to get to get back I think you know the Athree 20 ones have been a lot more delayed than the at your 20 meals, but you know hopefully we're down to you know two three month delay as opposed to six muscle is what we've seen so I mean.
Pretty flexible I mean, we are able to get rid of you ones quicker.
Even.
In 2021, they can you know they can give us more into deliveries to speed that up even quicker. So.
We're working really hard that not just with December you bet with others as well.
Got it Oh, all very helpful. Thank you.
But I.
Sentiment as a reminder, if it would like suppose that question. Please press star one.
Ladies and gentlemen. This concludes today's question and answer session I would like Chief I jumped to proceed with his closing statements. Please go ahead Sir.
Thanks for joining us today, we appreciate your support and I look forward to talking with you over the next couple of days. If you have further questions about our results. Thanks everybody.
Ladies and gentlemen that does conclude that <unk> audio conference for today. Thank you very much for participation and have a good day.
[noise].
[noise].
[noise].
[noise].
[noise].
[noise].