Q3 2021 Azul SA Earnings Call
Today eight of them are good.
And chairman, John Rodgerson, our CEO and I wish him, our chief revenue Officer.
Alex <unk>, our CFO is also here for the Q&A session.
Before I turn the call over to David I'd like to caution you regarding our forward looking statements.
Any matters discussed today that are not historical facts.
Really comments regarding the company's future plans objectives and expected performance constitute forward looking statements. These statements are based on a range of assumptions that the company believes are reasonable, but as objected to uncertainties and risks that are discussed in detail in our CPM and SEC filings.
So during the course of the call.
Because nobody ever asks the performance measures, which should not be considered in isolation with.
I will turn the call over to David David.
Thank you chase.
Hi, everyone. Thank you for joining us for third quarter 2021 earnings call.
As always I would like to start by thanking you.
Every izzo crew members for their passion and dedication thanks for their it takes to their efforts, we delivered industry, leading and industry, leading quarter with significant growth in our network revenue and earnings.
I'm really proud of our team and slide three shows why.
We had positive operating income in the quarter our EBITA.
It was the highest since the start of the pandemic and our unit revenue was higher than 2019, you see that again, our unit revenue was higher than in 2019.
You know you guys know how hard that that is and you know that very few airlines around the world have achieved this.
It is truly incredible.
In addition to all that we are seeing record bookings at record fairs, all the while our network is back to over 800 flights a day to 130 destination.
Which is also above.
<unk> pre pandemic levels speak.
Speaking of our network slide four shows.
How well we are aligned to a growing Brazil 13 years ago. When we started we started different airline with a unique fleet and network.
That focus on all of Brazil.
The whole country.
This focus enabled our growth pre crisis.
Two.
Enabled our growth pre crisis sustained us during the crisis.
And is the key to our future as we emerge even stronger.
Our broad and diverse network serves all of Brazil, and were especially strong where the country is growing the fastest this is why we present to you today industry, leading <unk> across the board.
Okay.
But we have a.
Another competitive advantage.
As you can see on slide five our logistics business continued its outstanding performance with another record quarter.
We're well on track to exceed our target of $1 billion of revenue this year and.
And the opportunities keep coming.
This week, we announced a unique partnership with Fedex My friend and neighbor Fred Smith have been discussing this for a while and we just announced that the zoo cargo locations now.
Now also become Fedex locations that gives Fedex unmatched distribution in Brazil, with our 300 stores that serve 4200 zip codes across the country for zoo cargo. It also gives us access to the Fedex Global network. When it comes to logistics, we are just getting started.
But wait there's more.
On slide six I wanted to talk about a project that is especially close to my heart.
As many of you know I got my start so I started my career selling vacation packages to Hawaii I've.
I've always believed that with Brazil's emerging travel market and amazing natural beauty that has all could do very well in the vacation business I have to say that I'd be nice team did not take me very seriously at first.
So now I get to tell them I told you so.
But what's important is is that our vacation business and our vacation business that we call it <unk>, which in Portuguese means azula vacations.
Is growing like Crazy, we're setting records every single month and breeding bringing unique value to our network. For example, during our low day mountain times on weekends.
When most other airlines bring down their schedules, we fly 200 fully dedicated flights to Zilvia edging advisory I'd be asking destinations. This is pure utilization flying.
The map you see on <unk> on slide six looks a little all over the place because it is we cannot big cities and small cities and others you've never heard of.
Non stop flights to the largest leisure destinations all over Brazil.
We are flying routes on weekends that we don't even served during the week.
You know at the current rate of growth.
We expect that <unk> will exceed $1 billion in revenue next year and not so with another $1 billion business, where you know and so this is just another reason why we have industry leading.
Leading margins.
Finally, I just wanted to say the team is all in before with <unk>.
Tremendous sacrifice I should say during the pandemic before during and now has reemerged in the pandemic our focus and dedication is driving these results and I could not be more grateful to the entire as a family.
And with that I'll pass the word under John he'll give you more details on the third quarter jump.
[laughter].
Thank you David I also want to thank our crew members for their hard work during the third quarter. Thanks to them, we were able to deliver an industry leading result.
As you can see on slide seven Brazil continues to make great progress on vaccinations with more than 90% of the adult population vaccinated with at least one dose is higher let me repeat higher than the United States or Europe. The progress continues not only our second those numbers very strong, but the country has already applied more than 11.
Million booster shots.
Moving to slide eight we are once again reminded that vaccines work and how incredible it was that the world got them so quickly.
Number of COVID-19 cases and deaths in Brazil has drastically declined sadly we had peaked at 4500 daily deaths in the second quarter, just one quarter ago, and we are now down 95%. The state of Sao Paulo recently had days with zero deaths, we talked about this during our second quarter earnings call how vaccinations.
Result in an inflection point in demand we prepared for this and I'm happy to say that I believe we are taking full advantage of a recovery in demand to give you more details, though let me turn it over to Avi for a bit.
Thanks, John as you can see on slide nine inflection in booking trend started in late July.
Back then as we noticed booking volume and vaccination rates, increasing we immediately turned our focus on average fares.
We prepared for this and want to make sure that we capture this demand at the highest quality possible.
Today as a result of that focus on work. We started back in July we are seeing record book to revenue that is directly driven by higher fares.
Onto slide you also noticed an important detail the recovery and book to revenue is ahead of the recovery in capacity.
That difference goes directly to RASK, which leads us to the strong flow and revenue we saw during the quarter.
Turning to slide 10, if you also remember during our second quarter call I said that the improvement in bookings will lead to better flow in racks in the quarters ahead.
I said over time the business booking curves initial.
Initially I thought that we would get to 2019 rats towards the end of the fourth quarter, but I'm really happy to report that we have accomplished that more than a quarter ahead of schedule.
Strong bookings together with an improvement in corporate revenue helped to achieve this.
On the slide you can see that sequential and consistent improvement in unit revenue.
<unk> above 2019 levels.
The exit rate for <unk> with even higher than the average of 1%, which feeds nicely into further improvement for the fourth quarter. This year.
Moving to slide 11, as David said, it isn't that common that an airline right now has recovered its pre crisis RASK.
Especially one with 90% or more capacity recovered so I'm really proud that we have.
One of the few around the world to have achieved this.
Revenue can be created or destroyed in the details and the team has worked really hard to capture as much as possible. As a result, we are optimistic about the trends we are seeing.
With that I'll turn it back over to John.
Thanks, Avi as you can see on slide 12, we grew our topline by 60% in the quarter to over $2 7 billion Reais, while operating expenses increased only 23%.
This shows the operating leverage available to us post pandemic and our commitment to emerging from this crisis more efficient airline.
Moving on to slide 13 for the first time since the onset of a pandemic, we generated positive operating income reaching $136 million in the quarter, which represents a margin of 5% EBITDA in the quarter was also a record since the onset of the pandemic at 486 million Reais, representing a margin of 18%.
Again from what we can see you are one of the few airlines around the world that not only have positive EBITDA, but also positive EBIT.
During these times of higher fuel prices. There are very few things more important than fuel efficient aircraft. As you know fleet transformation is a key part of our strategy and we have already made good progress as you can see on slide 14, compared to 2016, our fuel consumption per ask is down 20%.
Correspondingly our C O two emissions per SK are also down significantly over the same period. This progress is important as we reaffirm our commitment to sustainable growth. We already have the largest fleet of next generation aircraft in the region and Theres more to come.
As you can see on slide 15, our operations generated $1 1 billion in cash flow, which we used to deleverage the airlines in the form of rent payments and also had money to invest in capex for our future.
I'm happy to report that we ended the quarter with a strong immediate liquidity of $5 3 billion Reais.
Together with a total liquidity of $8 3 billion as a reminder, we entered the crisis in the first quarter 2020, with only 2 billion reais ending.
Ending with five ending this quarter with $5 3 billion Reais is truly remarkable.
Slide 16, you can see that <unk> had no significant debt repayments over the next two years.
This comfortable liquidity position ensures that we can focus on the many opportunities ahead of us that.
That we see in this market.
On slide 717, it's important that we show the world all the goods. We are doing for example in the quarter. Our passionate crew members supported and participated in more than 100 voluntary actions, helping thousands of people all over the country. We distributed more than 7000 donated pieces of clothing and over 520 Oregon's were transported on our aircraft helping save lives.
We also delivered more than 43 million vaccines, but some of the most remote parts of Brazil as part of our commitment to use our scheduled network and Carrie vaccine free of charge.
Looking forward, while currency and fuel are a challenge we're really excited about our business, we have unique competitive advantages and levers for earnings growth as you can see on slide 18. It begins with our fleet and network advantages complemented by our businesses such as the <unk> cargo <unk> and to those of our loyalty business. In addition, vaccinations.
Continue to increase Brazilian cities are now open companies are back to in person work in international border restrictions have been lifted as a result as a result of these developments along with current demand trends. We are full of confidence as we head into 2022, we plan to be one of the few airlines in the world to produce more EBITDA in 2022 than in <unk>.
That team with that David Alex Dobbin I are here to answer your questions.
Ladies and gentlemen, thank you well now begin the question and answer session.
It has a question please press <unk>.
Turkey, followed by the one key telephone now you could see any time, you would like to remove yourself from the questioning queue prices start you.
For those following the call via webcast, you'll meet post your questions on the platform and they will be either answered during the call.
The Investor Relations team.
The conference is finished.
The first question comes from Josh Milberg with Morgan Stanley.
Hi, everyone and thanks for the call and.
That's on the results. My first question is if you could revisit the guidance for 2022.
Given these results and also just given the shift in fuel and FX and then as a part of that question. It would be great to get your updated thoughts on capacity growth next year and what's the breakdown of this growth could be.
I think before you were contemplating a major expansion of route. So it's part of the plan on the domestic side and a rebound in 2019 levels on the international side.
Thanks, Josh.
Thanks for congratulating us, we're very happy with our revenue performance for sure in the quarter and.
As we look forward, obviously ahead of where he thought it would be and I think as we look into 2022, when we did our forecast I think previously we said we'd be $4 billion, plus obviously exchange rate and fuel prices impact that we feel very good about the revenue performance that we've been able to do so what we said is look we're gonna be above 2019, and so we have.
Given up on the $4 billion, but it's in that range. You tell me what fuel is going to be and where currency is going to be but I think the revenue performance is the most important thing you need to take away from this call is we're seeing very strong revenue performance. Obviously, we have a lot more to do and David highlighted a lot of the things that differentiate us all cargo right I mean, just the fact that it.
We're going to do $1 1 billion. This year next year, it's going to be a lot bigger than that.
The packaging business that Abbvie has developed over the last couple of years and Avi and Alex is going after cost and so we feel confident about 2022, we're not saying it's going to be.
Above $4 billion at this point, just because of currency and fuel, but we haven't given up on the 4 billion. Josh we feel very good about where we are we feel very good about how the team is working and the capacity that we've deployed in the revenue that obviously been able to bring in but to talk specifically about capacity for next year I'll turn it over to Avi.
Hey, Josh yes, so.
Nothing to do obviously domestic and international so happily we are now.
Going back into Orlando on December 1st and so December onwards, we will have a daily flight to Lisbon daily flight to Fort Lauderdale, and if they decide to Orlando I don't.
<unk> might change to that.
At least in the short to medium term at least through the first six months or so of July the revenue is good.
But I want to make sure that the sites do well and we keep the fares healthy.
So internationally I would say that we will only be close to 2019 levels by three Q4 Q of next year for the first six months, probably 50% in the next six months, 75% and getting to a 100% by the end of next year. So that's on the international side so as.
The total.
We will probably be just be just a little bit below 2019 for international for domestic we are going to be larger than 2019.
And the best estimate you can do for that is take what we have published right. Now you can take an average of January February March.
And then you know.
Take that times 12, basically our fleet is relatively stable for the most of the year Epicentral <unk>. So we're flying the fleet that we have and we're happy to do so we haven't done so in 18 months and.
It's very much going to be focused in arm in our market in our routes in our network. We are still 80% plus alone in our network.
We are larger than before and our hubs like a companion is likely to see like Belo Horizonte and that's where our focus is and.
A lot of the capacity is coming from up gauging.
We've taken since that 2000, 1980, $28 21 in <unk> and that's where the capacity is coming from so we're actually going to be lower in departures by we're going to be above in seats and stage length, which is actually really really efficient growth.
Given that it's all in our network, so domestic will be bigger well within our network.
Basically what we have today internationally I expect the three non stop flights that we have now at least for the short medium term.
That helps.
That does help and thanks for all that color and then my second question is.
If you could do.
Yeah.
This one is for John you your latest thoughts on the M&A possibility with Latam.
Wanted to hear if anything had changed in your perspective with the macro situation weitkamp weight its results or anything going on behind the scenes and I ask that in part just because I know Jon hasn't been.
So stepping back from the past, but would fully understand if you can't say much.
I've been timid John No I think I think I think the macro situation promotes consolidation.
That's the biggest story of all I think it is.
The buy side and sell side look at the at the market, it's a wow, even more opportunity for consolidation in the space and so you know obviously.
Obviously Latam is a process that we need to we need to respect, but we haven't given up on it we think it's in the best interest of creditors in best interest of our shareholders.
Alex and I talk often we have a fiduciary responsibility to pursue consolidation, but we have to do that and if everyone's working for the best interest of their shareholders and stakeholders and creditors. They should be pursuing that and I'm very confident that our plan has a better recovery overall.
So we're very engaged in the process and more news to come obviously I want to focus on this earnings report, which I think is very good and not only are you looking at it Josh but I think creditors are looking at it I think people are looking at Wow look at how these how they manage their business in Brazil, and what could that mean to a larger business. So I think a lot of people are paying attention to it.
So we're kind of excited to talk about our results today, but we're certainly haven't haven't given up on it because we think there's more to come as the exclusivity period expires in the next couple of weeks and so you'll hear more from us at that time.
Thank you so much.
Okay.
The next question comes from Savi <unk> with Raymond James.
Hey, good morning, everyone.
And maybe for IV like could you.
Provide a little bit more granularity on what you're seeing in the domestic market in terms of.
Leisure has kind of I think it was already around 100% like where are you seeing that and then just in terms of business travel recovery, what you're seeing and what you can expect heading into the into 2022.
Yeah, Hey, Savi. Thanks, Yeah. So you know as as I mentioned in the opening remarks, we are very bullish on the trends. We are seeing let me just step back a little bit because I think it's important to kind of highlight the transition that happened.
July onwards.
As as we July everybody feel kind of high load factors and we noticed the volumes were coming but the fares were low and thats. When we decided that we're going to pivot to higher fares and we did this in a couple of ways and one is really really small fare increases, but a lot of them and I think that was a departure from how.
The industry usually does it.
And it worked really well for us because it allowed us to keep getting demand every time, we took small increases and allows the market to remain stable in terms of you know.
Somebody worried about not being competitive many of those fare increases the industry, followed us Sunday did not but because we were 80% plus alone we have the flexibility to push the envelope. So that works really well for US and then we also took a hard look at the level of discounts that we have in the corporate market.
Agency market and we would actually surprised at how much revenue came out of that.
And it's something that's relatively underappreciated, but I think that that was something that we learned in this process as well and that keeping that discipline. How much revenue you can generate so both of those things have worked really well we are at.
So some of the highest fares the highest fares, we've actually ever been in terms of new bookings.
As well as book to revenue.
Direct channels, which we would call leisure are ahead.
More than 100% I mean overall, we're about 115, 220% of where we were so leisure is above that even.
The corporate market is recovering I would say that we're currently at 77 zero.
Corporate recovery.
And as you know our corporate presence is much more fragmented than just Sao Paulo, It's a lot of it is agro business a lot of it is <unk>.
Services energy oil and gas infrastructure.
And.
So we're at 70% and improving Sao Paulo is going to host a formula one race this weekend.
Looking ahead, we're seeing.
Positive comments from our commercial folks about events about training.
Events about the group bookings are very strong as well not just this year, but into next year as well so.
I think I think the trends are positive I think that.
The team has done an amazing job of putting us in a position where we can take advantage.
Yeah.
Trends are very good growth going forward.
I think one thing I just want to add Avi is that high end leisure demand is in Brazil right. Now you know there has always been the high end leisure Brazilians would go to Paris they'd go to London and they'd go to New York, They're actually spending money in Brazil in the south of Brazil last week.
City grow motto, you walk into the city you feel like Youre in Europe until Brazilians through the crisis had fallen in love with Brazil, I think that's fantastic. The devaluation of the currency is having people choose more flight inside of Brazil to leisure destinations keeping probably we have 850 flights a day 10 of those are outside of Brazil.
Meaning are inside of Brazil, and so having Brazilians kind of fall back in love with their country has been fantastic for US is really spring demand all throughout the country, which which has really been beneficial for <unk>.
All right that's helpful and.
If I might.
Clarify and I might be reading into this too much you think you can take a ruler or something it looks like funky you're asking is around 775% is that fair.
She did the rollout.
[laughter] wagon.
What I can say is that we exited three Q at a rate higher than the quarter. So I am fully expecting further improvement in <unk>, yes.
Okay, and if I might.
Just on the logistics side could you give an update on where you are an end to end logistics solution and we're just kind of Fedex partnership falls within that was that part of the kind of plan all along or is that something kind of new that that drives a higher view.
Yes, so we actually took a lesson from Fred Smith himself myself, John I'd record of logistics, maybe six months to a year ago.
He is sort of gave us a lesson for a couple of hours.
On diversifying on bringing on new customers and we've been talking to the to the Fedex team ever since and so this has been in the plan yes.
And it gives us access to their global network, which of course is amazing and for them. We serve 4200 ZIP codes in Brazil, and a thousand of them, we deliver within 48 hours. So it really is a win win for both sides and for US the logistics growth and which is which is what he told us is.
It really sustainable so.
50% of the incremental revenue we have year over year is not coming from our competition is coming from companies and customers that are switching their businesses from ground logistics to air logistics and that we think is a much more sustainable way to grow.
Logistics market is like 15 times larger than the air logistics market and their businesses are getting stronger they're delivering to their customers faster and so they're seeing the benefits as well and of course, we have the belly network, which can deliver these.
Delivery times, very very efficient at marginal cost and so that's really where the growth is coming from international has been strong as well.
And we expect that to continue through next year also so it was a combination of a couple of things.
We are excited about logistics and I think we're going to have another good year of growth going forward.
Appreciate it thank you.
It's funny Avi now he is cargo so.
He's got a 330 is flying domestically and so we're saying are we putting out Orlando and he's like I'm not going to sacrifice much like cargo domestically because he is doing so well and so it's kind of a it's an interesting dynamic that we have here at the company.
The next question comes from Michael I'm embark with Deutsche Bank.
Hey.
Good morning, everyone and yeah, I want to Echo Josh as commented congrats on a fantastic corner I, just I'm going to go back to that same RASK chart that savi.
Savi just referenced.
You see the 120% in four Q and.
If you think about sort of where your costs are right now and so I guess this is actually two to probably John and Alex If we think about costs and we're rash could be or where it's heading.
And yet we're dealing with the higher fuel even incorporating that it does feel like it is possible that we could see margins that approached double digits in the fourth corner or is that am I being too aggressive there and I realize fuel we're still we've got another whatever six weeks ago with respect to fuel prices and currency, but.
It does feel like that the math could move towards that towards that bogey.
Do you think.
Yeah, No I think you'd have the dynamics right Mike.
RASK as Avi indicated will expand from Q3.
Cash is probably going to be up but not as much and a lot of it is because of the dollar.
Fuel, but remember that there is a lag on fuel.
Of about 35 days right in terms of.
The way that oil prices behave and how long it takes for that to impact.
Jet fuel prices and Avi is always.
Attempting to maximize revenue and when the whole industry is facing cost pressures from fuel and FX those attempts to get to be a lot more effective right and so yes, we will expand margins into.
Q4, I'm not going to comment on the double digits, but.
We should see a continuing improvement in profitability and into 2022 and into 2023.
The dynamics that all be explained or are going to continue we're going to grow capacity, but we're not going to grow a ton of departures, we're going to grow very healthily on top of our network not going after the competition. So that is also very disciplined and very sustainable and we're very confident about like John said.
Having higher EBITDA in 'twenty two than we've ever had any time of our lives before 1 billion is challenged by feeling effects, but we're going to fight and we believe that the real has never prevented us from being profitable expanding margins and delivered.
Promises right. We started the company. We said this multiple times with a <unk> of $1 58 to one and we have always been able to deliver on our promises even with the real devaluing almost every year over the last 13 years right. So we know how to deal with FX pressures and most of that comes from.
The strength of the network the diversity of the fleet and the strength of the business model that we've built over these years and Mike. We're scrappy team I mean, you can see in our results I'll be increased revenue, 60% quarter over quarter, yet our ftes were up 1%. So it shows the leverage on the business, how we're really our managing or scrapping.
Look at what <unk> done together with David on the weekends with the Zilvia audience, putting in all of those flights finding pockets of demand that no. One else thought possible now that's done because of our diversified fleet you can't fly a 737% or $8 20 from Eidos subdued with reports of <unk>, but you can certainly do that with in Egypt, right and that's what we have.
And that those are the competitive advantage that we have when you take a look at the cargo network and why Fedex wants to partner with Azores, It's because they fly to so many different destination, but anybody can cloud the triangle anybody comply to the large northeast destination, but what we do is we extract value throughout the entire network and the network is where really where it all starts.
Now this is a great great responses guys. Just one one last one if I can just squeeze it in.
Can you just give us an update on.
The government and how they're you know I know that they've put out I guess I don't know if it's an RFP or an on slots at Gladstone.
Back in the day when I first started covering the sector. We used to see over you know I think it was like 42 or 44.
Operations per hour and it looks like we're going to go back up to that and so.
Thoughts on timing and is there an opportunity for you guys to get share at one of the most.
You know one of the most lucrative airports not just in Brazil, but probably in the western hemisphere thoughts on that thanks.
Yeah, <unk> Campinas is the most lucrative Mike but.
We're actually we're no we're very excited about going into so just for everybody's benefit that may not be watching it very closely the California as airports up for sale and before selling the airport. The Brazilian government is doing what's best for the Brazilian people, which is expanding operations going back to those levels that you talked about so the components, therefore will be approximately a third bigger.
<unk>, which opens up opportunity for resort opens up opportunity for other airlines and that very profitable downtown Airport I'll, let I'll kind of talk too specifically about it but yeah. We're very excited it's already in a consultation period in the market and so having more flights at that airport is very important and we just recently launched congonhas to front.
There's another one year.
The things that we can do is you know.
Absolutely phenomenal at that airport and when you talk about 2022, EBITDA, it's not even in our forecast right I mean anything that we get income growing at an additional slots and I think you saw the fight that we have with our other airlines in the region over what happened when Avianca went away. This is equivalent to I think for IV.
The increase was.
So it's a significant increase at that airport and so we're putting that doesn't mean it all goes towards all I think it's going to go to a lot of different airlines, but I think that's good it's good for Brazil, I think it's good for them to raise money.
Selling that asset and I think that the more the Brazilian government sells assets to more.
People have confidence in Brazil overall, so theres a lot of positives to it yes, Mike I think that's it argument of course is going to be about 200 incremental slots will become available so call. It 100 daily departures.
And.
Our argument is going to be very similar to 2019, which is we think that the airport is concentrated.
Yellow is concentrated in open is okay. Because you can enter in that flight, but it is closed which is unusual and so we think there should be more competition and.
We're going to make our case of course and asthma.
Going to play out in other airlines and we think are not going to listen and we think the regulator is in the mood to increased competition at <unk> because.
The airport is close to there and so that's going to be our case, we'll see how it goes.
But yes, it's an opportunity.
And mostly it's great for the public you're going to have more options.
I think today, what do you want to are you like 'twenty like two dozen departures a day of congrats I know you're relatively small niche the enbridge and maybe a few others. What is that just to put some context around the 100.
We are at 2020, one departures a day okay.
Okay, well, okay. That's a lot okay. That's super helpful. Thanks, guys.
Thanks, Mike.
The next question comes from on the hindrance on Mokoena Lewis Credit Suisse.
Hi, everyone.
Thank you for taking my question most of our questions have been answered.
I just have one question on the fuel efficiency I think it's pretty amazing what you have delivered so far so far.
We are curious on what extent.
You can continue to lower the fuel burn.
Okay.
Thank you guys.
Sure.
Yes, we have.
Dozens of each one still in the fleet that need to go away.
And the E. Two I mean, it's amazing just how well it's performing.
I don't want to make embraer too cocky, but it's over delivering on the fuel burn reduction that they promised to us.
So we can't wait to resume our fleet transformation and replace every single one of our EU ones with E twos and <unk> hundred 20 deals and that will continue.
Our fuel burn reduction that will continue the reduction in carbon emissions.
Reduce our cask dramatically by double digits.
It will allow us to stimulate demand with those extra seats because actually when you go from an E. One to E. Two for those of you that remember the economics of the fuel transferred the fleet transformation that we mentioned a few years ago. We these marginal seat these extra speeds come in at a negative cost what are you going to.
Spend less money to fly any to them to lease any too than we do on an <unk> and we get extra seats for it right. So they come in at a negative cost and were able to stimulate demand and reduced cask.
At the same time, so we're very excited about that also the pandemic, obviously delayed our fleet transformation plan by a couple of years like a delayed the whole world on pretty much everything by a couple of years, but we're going to resume it and we're going to and the transformation and we're going to be 100%.
Airline with capacity coming from next generation Jets for somewhere between six and nine years ahead of the competition, that's how quickly and how many years of competitive advantage, we're going to have a ahead of the competition on flying.
Youll efficient next generation jet.
Sometimes for those of you with maybe that just look at the cask number you may think that our cask is higher than the competition, but thats because youre comparing a cask for a single 737 to the cask of a blended fleet, which as you know.
Low cask aircraft like our <unk> hundred 20, Neo middle Cask aircraft like the Embraer and high cask aircraft like the ATR, but you have to remember that from a trip perspective, it's the other way around the APR has the lowest strip cost in the industry and then the embraer as much lower trip cost than the.
Boeing's or the air buses and our <unk> hundred 20, Neo cask is significantly lower than our competitor quote unquote low cost 737, cask right and our <unk> hundred 20 Neo is what we put to compete with a 737, we don't compete much with them, but when we do compete with <unk>.
Compete with me for 20 meal that has lower unit cost than the 737, but even then the 737 Max right. So that's important to remember.
Yes.
When you think about the U K.
Can you believe.
No Duane.
Hum.
Naval to reach.
Whats your thoughts on that.
No. We don't have a guidance number out there, but you can kind of project the reduction from the pace of replacement that we've had right you're essentially by that you can figure out every incremental E. Two how much does that reduce the fuel burn and then you can kind of estimate we're going to try as soon as we have a little bit more visibility.
We're going to provide more of a firmer projection on how quickly we can resume our fleet transformation and concluded.
But depending on your assumption of how quickly we do that you can figure out what the incremental fuel burn reduction is for every aircraft that is replaced.
And then you can figure out where we're going to get in terms of fuel burn reduction in carbon emissions.
Okay. Thank you.
Thank you.
Okay.
The next question comes from Joe normally with Goldman Sachs.
Hi, everybody I have two questions. Please so the first one on costs. The cask is 17% above 2019 levels in <unk> why our fleet size grew by 20% roughly in total afk's fell by 10% in the same periods, which suggest room for significant fix it.
Cost dilution.
And cost reduction is a F case B Cup. So when do you expect to reach ideal levels of utilization of the fleet. Considering you know the deliveries of aircraft and also the ramp up in a F case and the second question.
Domestic E S K.
He is now above 2019 levels international well below so to what extent does it just thoughts the RASK comparison versus 2019 or in other words was international RASK in 2019 significantly different from the domestic RASK. Thank you very much.
Yeah, Hi, Thanks for the question. So regarding fleet utilization were getting close but starting January onwards. So first quarter is when we're going to have our normal levels of fleet utilization. So.
As I said, we're flying the fleet that we already have we're flying it more and more every single month.
And January onwards, first quarter onwards is when we're going to have normalized levels of fleet utilization regarding the impact of stage length on RASK.
It's important to remember that our overall stage length is only five kilometers different so theyre actually.
The system wide level, there is no impact and the reason is youre right. We have a lot less international but our domestic stage length is significantly above our 2019 domestic stage length, because we're flying more leisure because we're flying more <unk> hundred 20, <unk> hundred 20 ones and we're flying more IMU is which fly longer.
<unk> Fi high utilization. So overall the impact is a wash as our overall stage length is only five kilometers different so the.
<unk> that youre seeing really the rack that's generated by the demand, but youre absolutely right. There is a lot of operating leverage going forward.
I'll be talking about the a S case and kind of put it into the first quarter, but as you go throughout 2022 and he puts more internationally. Its case you dilute the unit cost across all of those cases as well and so and you can see how we did it I already referenced it but increased significantly as case quarter over quarter, but you saw what happened to our.
Our unit costs as a result, and if you normalized for fuel and FX.
We're even we're even better.
Thank you very much.
Okay.
The next question comes from Chris <unk> with UBS.
Yeah, Hi.
Thank you for participating today.
Congrats on the results.
A couple here one.
I'd be could provide us more color on the he is the view of the sustainability of the.
<unk>.
So any any color could be helpful in terms of.
Maybe the I think that the demand that we have now for the leisure segment and then there is going to be.
A recovery of the corporate segment. So how does he think about.
This has been the ability after this kind of risk level.
For 2022 quarters.
And also Oh.
On the rest on the cask ex fuel.
For upcoming quarters, what to expect similar levels than in third Q.
I think that there is a carryover for higher.
Maybe.
Some higher prices on the BRL, but what do you expect in terms of.
Cask ex fuel levels in fourth Q and first Q2 thousand 22 into one.
Because so much.
Hi, Hi, Roger I'll start and then pass it over to Alex.
You know what we can see the booking curves for December January February March.
Lead us to believe that these trends will continue.
I was actually talking to my team. This morning to push the fares, even higher actually and they were kind of pushing back at me, but.
You know the commercial guys feel good about what they're hearing in the market.
In terms of events in terms of group bookings.
In terms of training seminars that companies are doing the rhythm of coming back to in person I mentioned formula one is happening this weekend.
So you know honestly from what I can see right now the trends continue.
We have no reason to believe.
Based on the booking curve that we have that.
At least.
From the visits that we have that is going to change so for assets, yes, full steam ahead, and and we think that we maintain this level of average fare and I think overall I.
I hope our colleagues as well are seeing something.
And we can be disciplined overall so.
You also mentioned.
Corporate revenue was only up 70% of what it was so the fact that he's got above 2019 <unk> levels in the third quarter is showing you.
Savi played the ruler game.
What he is looking at in the fourth quarter, but thats not with full corporate <unk>.
Demand back yet and so that's going to be the next push to get this back to the levels that we are above levels, where we need.
One moment.
Yeah.
Yeah.
Yeah.
Yeah.
Please you May proceed sir.
Yeah.
Sorry, we're back can you hear us.
Yes, we can hear you. Thank you.
Thank you stop it on.
My mother, saying that corporate segments should be the next push for us.
And that's interesting question because orbit revenue flights more local they fly more nonstop.
And they tend to buy closer in so it also has the impact of pushing up average fares as that continues to recover so.
Definitely there are some positive catalysts are yet to come.
Yeah and on the cask side Bruno.
Sure.
We lost the visibility you're going to have to do some math, but we've done a lot of progress on rebuilding as old as a more efficient airline as we committed right. So when you look at 2022 cask whats embedded in our expectation for EBITDA.
When we built the model bottom up.
Controlling for fuel and FX, we would be almost 10% lower on unit costs versus 2019 right.
And that value is still all there the problem is you're going to have to kind of dig through the change in fuel and FX to get to that number.
You will also need to layer on your expectation for fuel and FX.
And that number is all over the place and there are people that think that $5 50 is the Florida people are saying well the fundamentals of the currency should actually have it closer to $4 50 or 475. So you have to embed your numbers. When we usually use is the focus survey as well as the Bloomberg forward curve for oil right in <unk>.
Focus.
Before FX and that's what's embedded in our estimate for EBITDA and once you layer those expectations in that almost 10% cask reduction.
Actually turns positive right until you actually see a cost increase.
22 into 2019.
But like I said, that's consistent with EBITDA above the 2019 levels given what we're seeing on the demand side.
Very clear thanks, guys.
Thank you.
The next question comes from Stephen Trent with Citi.
Hey, good morning, everybody and thanks very much for taking my question and forgive me and its now afternoon for you guys, but.
Just.
One or two for me.
So first off.
One of your competitors, who have kind of making a bit of noise.
About a backlog.
Brazilians waiting to get.
U S visas.
As we see quarantine free.
Travel for vaccinated foreigners here are you seeing kind of any signs of that.
And that's my first question. Thanks.
Hey, Steve It's absolutely true I think what <unk> said is true, but I think that's awesome for us all right.
Often say you can't be in pneumonia in New York at the same time and so I think that's why Abbvie has not taken a full schedule back into the into the first quarter because of the demand that people think on international is not really there, but thats actually much better for Brazil. Overall, I think it's great for Golar I think its great. Brazil, I think it's I think it's good overall and that's why we've done.
Dedicated our network during the high season to fly locally.
No that's that Super John really really appreciate that and just one more really quick one for me, having a chat with a guy on the buy side is much smarter than me and we were talking about.
The domestic market in Brazil, and kind of the antitrust overlay and when I think back to 2019.
It looked like the <unk>.
I Trust authority over ruled a Nokia and those can go into this airport slots then when we think about whats happened since that time, there didn't seem to be any fuss about it.
It is all in Latam Airlines, Brazil, having.
Kind of that that join agreement until a few months ago.
Do you think that kind of sends a signal.
From the antitrust authorities that.
There is at least some modest room for more consolidation.
Absolutely Stephen I mean, we wouldn't be pursuing it if we didn't believe it was possible, but let's just back up for a second.
All U S carriers are subsidized by the U S government right now or are they not they've got subsidize money in the U S. Brazilian Airlines got no money from their government. That's a huge contrast, and at the same time the Brazilian market is 100% open so a subsidized U S carrier can start an airline in Brazil, a European subsidized carrier concern airline in Brazil, the overlap that we have with our <unk>.
Petition is very limited every airport that is little fly them today is open and can and can have additional capacity in that airport and so look I mean, I think there's going to be noise from certain people around this but I think it's in the best interest of Brazil, I think in the best interest of our consumers with the best interest of all of our stakeholders.
Not a real concern and then the one concentrated airport in Brazil.
Mike Lindenberg noted.
Turning up even further and so there'll be more competition. So I think it's.
Just to put things in context, if you go back three four years ago. The Brazilian market was closed foreign carriers could not operate inside of Brazil that is no longer the case and when you think about the support that all other countries gain to their airlines versus the financial support that Brazilian Airlines simply Didnt received you can see the case why you know antitrust.
You should be very favorable to consolidation in Brazil and in the rest of Latin America.
Okay. That's super helpful really appreciate that Jon I'll, let someone else ask a question.
The next question comes from Dan Mckenzie with Seaport Global.
Okay.
Oh, Hey, thanks, guys congrats.
Congrats on the quarter.
What I find interesting with revenue being 90% recovered.
Versus 2019 is that you're really missing your highest margin revenue. So I guess my first question is as you know how much corporate revenue was was missing exactly.
I'm pretty sure it was higher than you know that the remaining 10% of 2019, and then related to that what percent of the corporate clients are back in the office and what is the timeframe for getting back to 100% recovery in corporate revenue.
Is it really is at the first quarter is it or do we need a full recovery in international in the back half of 2022 before you really get there.
Yeah, Hey, Dan Thanks for the question, so yes I do.
As I mentioned.
Bookings in October new bookings, we saw about a 70% recovery in corporate revenue. So flown for the third quarter with less than that my guess is around 60% six zero. So there is at least 40% of that high value a revenue Miss.
Missing in terms of flow and revenue and PQ.
Which which you're right is going to start to fly over the next couple of quarters.
You know, it's hard to say what is the timeline for 100%.
We actually we are seeing differences in sectors I'll give you. An example, the financial sector.
They booked about 45% of 2019 revenue in October.
Which is still low, but it's up from 25% in July right. So they're recovering nicely.
And so I think that November is going to be better.
And then the 70% and then we get into the holiday season. So.
I think it's going to continue over the next couple of months and.
Our baseline.
Alex has a model for 2022 EBITDA doesn't assume a 100% just for us to be a little bit conservative and to the extent that it does come back.
Actually some upside to that as well so the fact that we're already at 70% I think is a really really good sign and the fact that sectors are improving.
So quickly month to month I think November is going to be another nice increase and then it will continue from there so.
And in terms of in person work.
We're seeing different trends from different companies.
But yes, I mean, I think that that momentum is growing I think when you have companies organizing training seminars you have companies organizing group events conferences, I think thats, a really really good precursor to bring their employees back in the office. So I would say the trends are.
Positive.
At 70% now and improving month to month.
Yeah, and I guess, where I'm going with this is you know the trends seem pretty positive, but I'm just you know if you.
Look at the trends today, how is that informing you know what you're thinking about normalized pretax margins you know in this next cycle, what's the timeframe for getting there. So as you just kind of think about you know what you want your targets to be how you're managing the business and then you know just going back to slide four as part of this question, it's pretty interesting how your time.
Did chunk of your growth to parts of Brazil that seem to be above GDP.
And so I'm just wondering you know what.
Percent of overall flying our revenue you know does this flying you now include or you know what percent of the revenue. We're flying is to these areas that seem to be doing a little bit better versus the rest of the country.
Yeah, I can start with that and I also want to add regarding the coming back to work kids are back in school right, which is a huge relief to all our spouses here for sure.
So that's obviously going to drive a lot of carnival as.
Countries in the world.
So and that's been driving a lot of back to work for in terms of our diversification.
About 37% of our capacity is.
In the triangle as we call it which is Sao Paulo, Rio and Brasilia. So we are 60% diversified which is how we like it and that's the part of our business that exposed to the fastest growing which is agro, which is infrastructure, which is oil and gas which is energy.
Those kinds of things and I'll, let Alex talk about the margins.
Hey, Dan.
It's tough to kind of talk about normalized margins because our margins in 2022.
In terms of percent margin versus 2019 are actually going to be lower but theyre going to be higher in 'twenty three and then when you layer on the fleet transformation. The continued growth that we're seeing in cargo you'll we're starting to see a potential in the vacation travel business that we never saw before.
There's a lot of upside so I think we're confident actually theres going to be margin expansion.
From 'twenty two into 'twenty three are from 'twenty to 'twenty, four and 'twenty five.
Be bumps along the road because Brazil throws you some curve balls, along the way with currency normally you would be seeing a negative correlation between oil and FX right. That's what happens 90% of the time unless you have some market some Brazil specific issues.
The increasing volatility of the real which is what's happening right now, but usually with oil prices, where they are in iron ore and soy and you know every commodity out there you would see a much stronger real that's why the economy is not necessarily where banks are traders, but economists say look the reality could be really at 475 or even.
The lower so.
We are confident that we're going to continue expanding margins and it doesn't and I'm going to say it doesn't matter what the reality is because obviously there is a little bit of a delay for avi to recapture.
<unk> increases to fares and we know that the Brazilian market would be a lot bigger.
If the real was at 475, because we wouldn't be able to offer lower fares and stimulate demand, but the real being where it is or even weaker does not prevent us from delivering on our promises, but it does inform and influence what margins. We can generate so there is a little bit of a circular reference here and John kind of alluded.
To address if you tell me what the reality is and what oil is I can tell you we have a lot more confidence what the margin is going to be.
Because there is that pass through from cost to fares that AGA has always been able to implement but you know you need to kind of.
Determined those estimates before you figure out what our revenue level is going to be what our capacity is going to be and what our margins are going to be hey, Dan I just want to highlight yes, we are going into an election year and theres been a lot of noise on Brazil outside of Brazil, We had a board meeting this week and one of our board members came down and he was telling their friends I'm going to Brazil like are you nuts, Oh, my gosh, it's falling apart.
<unk> actually.
It actually covers a lot better than some ball than it is in any major city in the United States right now there's more vaccinate people in Brazil, I think there's a lot of noise.
Our boots on the ground in Brazil, and we're seeing economic activity, we're seeing things happen throughout Brazil, and so I think.
Eventually you know U.
U S investors will start to look again towards Brazil, and the opportunities that exist because theres a lot of great things happening.
Yep.
Hey, Thanks for the comprehensive answers that was great. Thanks.
Yeah.
Yeah.
Ladies and gentlemen, this concludes today's question and answer session.
I'd like to invite John to proceed.
Statements. Please go ahead Sir.
I just want to thank everybody.
Very happy with what we did in the quarter, we look forward to talking to many of you over the next few days and over the coming months. So thank you and feel free to reach out at any time.
Okay.
Ladies and gentlemen that does conclude your conference for today. Thank you very much for your participation and have a good day.
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