Q2 2022 Azul SA Earnings Call
No details in our CPM and also.
Also during the course of the call we will discuss non <unk>.
Ashford pharmacy measures, which should be considered in isolation with that I will turn the call over to Dave.
Welcome everyone and thank you for joining us for our second quarter 2022 earnings call as always I would like to start by thanking our crew members for.
Taking care of each other and our customers have more than 1000 daily flights. IV tells me that number's going to 1000 price of October amazing things.
Thanks to our crew members dedication.
We've achieved record second quarter results in what is seasonally the weakest quarter of the year.
To remind you that zoom has one is one of the fastest and most profitable recoveries in the world and is the only airline I know to deliver topline revenue, 50% above pre pandemic levels.
We continue to straighten, Brazil, strengthen Brazil's largest network.
Since 2019, we've got 35 new destinations.
Only carrier and 80% of the routes we serve and are the leader in terms of departures and 88% of our markets our future growth will continue.
This labor laser focus on our network and what makes us strong.
Our service to over 150 destination destinations contributes significantly to Brazil's development by providing opportunity employment trade links and promoting tourism all over the country are networks calculator.
As unique and supported by a flexible fleet, enabling us to deploy the right aircraft in the right market at the right time as you can see on slide four as you can also see on slide four we ended the quarter with the largest fuel efficient fleet in the region, representing 70% of our <unk> case, this reinforces our environmental commitment and our ability to grow.
Efficiently and profit and profitability.
We could not be more enthusiastic about the continued runway ahead in our fleet transformation program.
To continue up gauging of next generation aircraft will drive down costs, and resulting in higher margins more news will be coming next week on the fleet transformation program new developments.
And before I hand, it over to John I wanted to end on slide five by by showing why Im. So proud of this team we ended the quarter.
As the most on time airline in the Americas and the third most on time in the whole world.
Our customer satisfaction scores.
Our industry, leading at higher than they've ever been.
All of this while generating 19% more S case will compare to 2019, serving more than 150 destinations.
And finally, a more efficient airline that is generating 11% more edge case per FTE than before are truly incredible achievement by the entire team I am confident about the future of Brazil's aviation market, our ability to grow profitably all the while creating the best experience for our crew members.
We have created an incredible business that is generating that is generating billions and billions of cash flow from operations and the best is yet to come with that I'll turn the word over to John to give you more details on our second quarter results.
Thanks, David I also want to thank our crew members as a result of their incredible work, we're able to share. These great results with you today.
As you can see on slide six the second quarter proved once again the strength of our business our top line revenue more than doubled compared to the same period last year, reaching $3 9 billion Reais and all time record revenue for any quarter in our history, even more impressive impressive is that revenue was up 50% compared to prevent them.
Levels in what is seasonally the weakest quarter of the year. This achievement was a direct result of the strong demand environment and our network <unk> grew 57% and 44%, respectively, even with a 60% growth in our total capacity year over year.
We were encouraged by the revenue performance in the second quarter and continue to see positive trends in yields and bookings going forward.
As you can see on slide seven our EBITDA reached $615 million in the quarter, representing a margin of almost 16%. If we use hedge accounting our EBITDA would have been $880 million in the quarter, 20% above the same period in 2019, let me repeat including our fuel hedging gains our EBITDA for the quarter was higher than 2019.
This is including the 112%, 12% increase in jet fuel prices and the 26% devaluation of the local currency.
We're seeing a very positive trend in revenues. We also continue to efficiently manage our costs as you can see on slide eight productivity measure NASS case per full time employee increased 43% compared to the same period last year and 11% versus second quarter 2019 fuel consumption per SK dropped 3% versus last year and 10%.
Versus second quarter 2019, our fleet today is 10% more fuel efficient than 2019, and we'll continue to get more efficient going forward.
Compared to second quarter of 2021 cask ex fuel decreased 12%, mainly driven by our fleet transformation cost reduction initiatives and productivity gains we made a promise to you that we would emerge as a more efficient airline and that is exactly what we're doing.
On slide nine you can see that our immediately our immediate liquidity increased by $530 million during the quarter without a capital raise driven by our strong operational performance, our operating cash inflows surpassed our outflows by more than $2 billion total liquidity remains strong at $7 billion and we ended the quarter with four.
$1 billion in immediate liquidity, even after paying down $1 7 billion in leases loans deferral payments interest and capital expenses as you can see on slide 10, we reduced our leverage in the quarter by one five points to six two which puts us in a good position to finish the year starting with a five.
Our leverage is the lowest in the region, even when using seven times rent when accounting for operating leases as a reminder, <unk> has the largest fleet of new next generation aircraft in the region and since rent and lease liabilities increased as newer aircraft enter your fleet that effect is already reflected in our numbers on slide 11, you can see the <unk>.
<unk> booking trends continued through the quarter, our network advantages allowed us to quickly adjust fares to the volatile cost environment. This trend continues.
What we're seeing now is bookings and revenue coming in at record high average fares on.
On Slide 12, you can see how these positive trends set us up so well for the rest of the year is fair to say that demand for those products and services has never been stronger as I mentioned, we're currently seeing bookings at high average fares the highest in our history. In fact, this combined with the recent favorable movements in currency and fuel gives you a sense of the operating leverage and margin.
Opportunities for the rest of 2022 and into 2023.
Moving on to slide 13, our business units <unk> cargo <unk> and <unk> further extend our competitive advantages. These fast growing high margin businesses contribute to be to expand our industry, leading margins by leveraging the strength of our network and the flexibility of our fleet.
Our cargo business continues to perform extremely well with revenue almost tripling compared to 2019 <unk> maintained its strong growth pace during the second quarter with gross billings excisable up an impressive 60% year over year finally, as <unk> had a remarkable quarter revenue increased 70% compared to <unk>.
19, benefiting from the expansion of our dedicated flights for this upcoming summer season. For example, we will operate 2000 flights exclusively for us will be <unk>. Each of these business units had a record revenue quarter and each one is on pace to generate well over $1 billion in bookings just this year.
Moving to slide 14, another important development during the quarter was the decision by the regulatory agency or not regarding the slot distributions at the <unk> Airport.
The combination of this new rule, along with an increase in capacity ahead of its privatization is very positive and encouraging competition at the airport directly benefiting xul customers, we believe that through these initiatives.
More than double his daily departures at this airport over the next few years to wrap up on slide 15, I couldnt be proud of our of our entire <unk> team. We are running an incredible operation as David noted we are the most on time airline in the Americas, our customers love to fly us and our crew members love their work, we're executing on our fleet transformation plan.
<unk> and the demand environment has never been stronger our business units are all producing record revenues and we are emerging as a more efficient airline. We're truly excited about the opportunities ahead of us with that I will turn it over for your questions.
Yes.
Okay.
If you could hear is we're waiting for the moderator.
Yes.
Yes.
Ladies and gentlemen, we'll now begin the Q&A session.
<unk> asked a question please press star one.
Please hold while we gather with friends.
Pierre with banks.
Please go ahead.
Thank you Rajeev.
The first question comes from Savi <unk> with Raymond James. Please go ahead.
Thank you.
Okay.
Okay.
Please you May proceed.
We're obviously, having some technical difficulties here.
With the growth of college, so if you'd just bear with us for a minute.
Savi can you can you go again.
Hey can you hear me.
Yes, they are right now.
Okay great.
I'm not sure what happened there was not a niche.
And good afternoon, everybody just out and all of these around and just curious if you could share any color on the corporate demand recovery side, and just the health of leisure demand.
I'm trying to understand and it is how sustainable the fare levels and the negative momentum that John talked about is here.
Yeah, Hey, Savi Avi here is yes, absolutely.
Look overall, we were very happy with the performance in second quarter.
Increasing RASK 25, 5% on a 19% ASP increase.
There's obviously, a very strong indication of demand levels and actually what's even more exciting is what we're seeing right. Now. So just the last two weeks for example, as people have come back post July holidays.
The average fares the last two weeks have been the highest in our history in terms of the bookings.
Which has been very very strong it's been corporate and leisure and so I'll give an example, our vacations business as <unk> actually had higher bookings in July than it did in June even though July of the month that you actually travel.
Which is a really good indication that the leisure market is strong and is already looking ahead, the second half of the year and the summer season.
Corporate as well is doing is coming back strong we are right now over 100% of corporate revenue between 100, and about 130% and corporate revenue.
Breaks down to about 80% in corporate volume and plus 50% in corporate average fares, so even with that great performance there still more corporate volume recovery, that's going to happen in the second half of the year, which is seasonally the strongest lots of events. Our group's revenue is.
Right now the highest its ever been our small and medium business revenue.
Is higher than it's ever been so a lot of great events happening second half of the year and a lot of corporate movement and if you look at the Abra Corp, Ada, which is the operation of.
The association of corporate travel agencies in June we had the highest revenue after three airlines in Abra Corp.
And our average fare which already was the highest actually grew the most as well and so and even when you include that we added 81, 8% load factor in July so we're not seeing any traffic pressures in terms of having to sacrifice fares to get traffic.
But for the next for the foreseeable future and in fact, I think what we're talking internally with our teams is let's keep testing the market.
Let's see how much more there is in terms of demand how much more there is in terms of average fares because the average fair. Though we are seeing are very very strong and demand looks to be very sustainable. So I think everything is set up really well and finally, if you look if you compare our average fares for the last week of February which was the week before the.
The war.
Heating oil is 15% above the dollar is 2% down and our fares are 52% above and that gives you an idea of given the seasonality given this bookings in fare momentum and a macroeconomic support you know.
How much we can improve kind of going forward.
That's very helpful and encouraging.
Yes.
If I might and I realized that there was no EBITDA dates and in this call. Just curious I know things have been volatile and that it may be a moving target given the moving parts that are curious if if you have any updated thoughts there and.
Any financing thoughts related to that.
Yes Avi.
We debated it pretty heavily and obviously fuel was up a lot in the second quarter and these recent fuel price movement, you know theres, a theres a lag in when they kind of come off and we see that and we see the benefit but when you kind of want to reiterate the amazing revenue performance, we're having right now and we feel as strong as ever about this business going forward.
So nothing has fundamentally changed is it going to be 4 billion is going to be slightly below that.
We're not that far away, we still have half a year ago, and we feel very strong about the business. Overall, we just didn't want to put a number out there given that were 45 days away from an election and things like that but nothing fundamentally changed in our business. We feel very strong about where we are today and I think that that sets us up nicely for 2023 and beyond.
And so we feel very good I think the cash flow generation that we had in the quarter is a testament to just how strong. This business is overall and I think a lot of people were concerned about that.
Focus on that there is a lot of positive things in our seasonally weakest quarter of the year with fuel prices that have never been seen before in Brazil, right remember when fuel was at $140 a barrel.
14 years ago, the real was at two to one now the real net five to work until we've been able to significantly increase bears.
Yes, Savi this is Alex.
We we see and I think a lot of you agree and we see that in our models. This is essentially a steady state 30% EBITDA business right. We said when we talked to you. Some of you have us in the high 20. Some of you have us in the low thirty's, but obviously not this year right.
And I think that's the challenge and we know that steady state. We are a business that can generate that much EBITDA, but much operation operational cash.
And with our size today that would actually mean about 5 billion reais of EBITDA in the year, but it is admittedly hard now with everything that's going on with fuel.
With what we have two years of a pandemic of kind of nailing down exactly how much of that recovery and how much of our full kind of.
Your profitability potential we can generate within a calendar year and when things happen like we had you know on the day of our last earnings call. When we have the <unk>.
Russian invasion things.
Things shift around Brian as you mentioned, so like John said, we discuss a lot is really about EBITDA I mean everything else in our guidance.
It is very much on track.
Probably our full EBITDA generation capability has shifted.
Three or six months to the right, but the business remains very solid and we're proving that we can pass through cost increases affairs. We proved that we can access cash and I think that's all clear in our Q2 financials.
Appreciate that thank you.
Thanks Ali.
Sure.
The next question comes from Josh Milberg with Morgan Stanley .
Hi, everyone and thank you for the call and also congrats on the results.
Just.
And therefore relates a little bit to <unk> question on the funding side, but related to the $1 7 billion in new highlighted impairment belief of deferrals and other items I just wanted to ask if you could touch on what youre expecting over the remainder of the year and also the potential for new deferrals of payments to less.
<unk> and MTO suppliers, and if you could in a little more detail and I think this question for Alex Alex just given update on on the different funding options that you are looking at today.
And also touch on the status of the Codeshare with United.
Okay.
Address.
Okay.
We will talk about United.
Josh I think a lot of this is a bit of a circular reference right. Because we I think we've demonstrated that will adapt to whatever conditions are thrown at us.
If we generate more EBITDA, we can spend all of the capex that we want to spend that we would like to spend to prepare for the future and we don't need to access significant cash from banks or suppliers. If we generated less EBITDA than we can adjust on the capex side and we can certainly access.
Cash if we need to obviously and that's not even including the capital market side of the capital markets were available to us which today. We don't think they are that's sort of the main avenue the main source of capital, but if.
If we do need cash more than we expect and if the capital markets are not available to us which at some time. They will be then we'll we'll adjust.
We demonstrated I think this quarter that we can access capital from our banks, we can maintain our payables around the 100 days, which was the guidance that we gave you pretty much at the beginning of the pandemic right that payables would go up because we've got a lot of support from our <unk>.
Partners, but then they would gradually converge down to a 100, which is roughly.
Where they are today you know they can go up maybe 10 days go down about vendors, but we know that.
A reliable source of working capital and then you know.
We know that we can count on our suppliers because our suppliers can't count on the heavy operational cash flow generation that we have they make a lot of money by supporting US all we can make a lot of money together going forward until we know that we can access will be answered.
Josh I think as you know.
We I think it's more on in the past that in the future because we bought all you'll all the forecast wrong, we underestimated how quickly demand could come back.
Nobody saw what could happen with oil prices and with the with the war in Europe . So it's hard for us to predict in the future what is going to happen and what we will need to happen, but I think it's clear from the past and especially from this quarter of whatever happens, we will be able to access whenever country, Hey, Josh I just wanted to reiterate a couple of points.
This business is generating billions of operating cash flow. We showed a number today of $4 billion in cash and immediate liquidity. If you exclude or include our receivables more than double what it was in 2019 right and so we position ourselves in a very good position going forward.
If I were to tell you we were going to be up 50% compared to 2019 and the year 2020 or 2021, you would have thought I was smoking something right and so we delivered way above the expectations of any analysts in terms of revenue and we feel very strong about our business going forward and so I think we're very bullish and I think our partners are as bullish as ever on the solar.
And I think the way we.
<unk> cash flow generation in the second quarter, It beat everybody's model as well and so we feel very strong about our ability to execute remember Josh we went through a period of eight months with no revenue right and we got through it. We had we had our crew members everybody kind of rallied around this is a fantastic business that is delivering great results.
<unk> delivering unbelievable on time performance. That's got crew members engaged so we feel very good about our business on a go forward basis, and so cash will take care of itself as we continue to run a great operation and continue to raise revenue as for United Airlines, United has been a great partner of ours have been a partner for a long time, we're still talking to them, but there's also other great partners out there.
We're talking to we see what's happening with Jetblue and Fort Lauderdale Spirit really important partner of ours as we add our international flights into Fort Lauderdale, right. There's a lot of feed that comes in there that strengthens our long haul network and so we're going to continue talking to our partners, but the codeshare with United stays in place and I think theyre happy with it.
We're happy with it.
Okay, great. Thank you for all that color.
Thank you.
The next question comes from Alejandro Zama corner with credit Suisse.
Thank you Hi, David John Kerry Alex.
Thank you for taking my questions.
Gardening.
Icing and yield environment.
Is it fair to expect some even stronger.
Yields for the second half.
I'm, saying that there is usually a lag to reflect the carrier.
Net fuel costs.
And also.
Have any expectations.
Beyond what we can see 22 confirming that.
The eventual cost.
Normalization in Q.
Yeah, Hi, Alejandro regarding the pricing environment.
Good bookings at high fares will lead to.
Great flown revenue at high fares and also were supported by the seasonality.
Second half of the year. So in terms of loan revenue. Yes. It is very much possible that you will see higher yields and higher average fares in <unk> and <unk> and that's certainly what we're booking two words, Andy seasonality the corporate recovery the demand environment all of the economic activity that will happen in Brazil over the next six.
<unk> definitely points to that so it's a we are getting into our our peak season, our spring and summer, which is historically the best seasons of the year, which is very very supportive of this current pricing environment and even a further improvement in the pricing environment.
Yeah and on the cost side of you. We all know there is a lag between what we're seeing on the screen in terms of oil prices and the currency and the price that we pay for jet fuel. So July and August jet fuel prices will probably be ERP from what we can see right now, but then you will see a downward trend in Jeff.
Fuel prices.
You know assuming everything stays where it is or even if things improve from where they are right. So we could have a very favorable environment in the second half with.
Ill fares going up due to the strong demand environment, and a positive seasonality and fuel prices going down from the.
The improvement that we have already seen taking place.
Sure. Okay and then my second question, if I may in terms of capacity do you have any.
Preliminary.
Activision for drilling for new Treaty.
Yeah.
We haven't closed our plan yet, but you can expect something similar to what we're going to do in 2022 versus 2019.
We expect to finish this year between.
10, and 12% over 2019, so, possibly something similar Duane 23, Overclaimed Overclaimed Ranger.
Do you mean something similar in terms of.
The capacity in terms of Kathryn Lynn Dean or in terms of growth.
Brian 23 versus 2022 will be similar.
Growth growth Duane 22 versus 2019, so somewhere in the low teens revenue it would be what what kind of a working assumption, we still need to nail it down and we'll see if we provide some firmer guidance, but I think that's a with our fleet transformation. If you remember we're going to be essentially replacing still a lot of old generation jets with.
Next generation drugs, they have more seats, they have lower rent and they burn less fuel than the old generation aircraft. So we can increase capacity by keeping the fleet essentially stable you will see more seats flying we can get higher utilization of these assets.
And we could even stimulate fares with the lower unit cost that those aircraft will provide so it's something we're very excited about and most of our growth comes from that from the up gauging and most of the growth if not all of the growth happens in the markets, where we are strong right. It's in the yards all networks, it's not kind of stealing share from other compare.
It's really up gauging in the round so we already flagged.
Okay. Thank you.
The next question comes from Pablo <unk> with Barclays.
Hi, guys. Thanks for taking my question I have a quick question on the list payables I mean I see the number that you provided in your financial statements, but I just.
For modeling purposes, and caution on purpose and how you wanted to see if that's the right number we should think about or.
Remember the words on deferred payments that are.
We have to take into consideration and you have already talked about some.
Competition with the lessors could you just shed some light on in terms of lease payments for next year. Thank you.
Sure I think the way I think the easiest way to think about it all is our steady state rent under current size and current foreign exchange, it's roughly kind of $3 2 billion Reais Youll see that this year, we're actually going to pay more than that because we have we have the second wave negotiation with lesser.
You are aware the first time, where we've negotiated with our sort of negotiated a big number where the big expansion because obviously there was a big impact from the pandemic from COVID-19.
But we didn't assume a second wave right second wave happened, we negotiated a shorter deferral for a shorter period of time, which was essentially shifting some rents from 2021 into 2022. So it's worth 22, we're already paying more than the $3 two and we're paying roughly what we're going to pay in 2023, because in 'twenty two 'twenty three we start paying.
The first deferral of leases, which will increase our steady state leases by about five to 600 million Reais Rachel.
We're paying about three eight this year of which should be bringing your own three eight next year as well that's roughly I think a good way to model.
The.
The annual rent payments.
Perfect.
I have another question if I may.
I mean the question is have we have asked a lot about the sustainability of your jokes.
Covering actually very impressive how are you seeing the competitive environment I mean.
Are the other guys sexually following you are you seeing like a rationale behavior or.
Do you think that some of your competitors may take advantage of just.
Charging no first to reshape our competitive until some of market share. Thank you.
Yeah, Hi, Pablo I think the industry overall is pretty competitive I think that all of the competitors all of the airlines are trying to do what's right.
I think mostly within their own networks and within their strengths.
And I think that what the industry is achieved in terms of fares since the start of end of February has been has been great and remarkable actually we have the benefit that we are alone in so much of our network. So we can always do it ourselves if we need to do and we do those those changes all the time.
So we are less dependent on them in.
And controlling our own destiny, but I would say that overall the industry has been pretty disciplined and I think we'll continue to be so I think we're all looking for good results here and Pablo I would just want to add or in a hospital fuel environment and the guy that has the most nextgen aircraft isn't it isn't a privileged position right and so if you say.
70% of our Sks are coming from Neogen E twos, and our competitors are significantly less than that significantly less than that they need higher bears right and so I think that we don't see anybody kind of doing crazy things going after market share because it's not in their best interest to do it because they would bleed significantly because they don't have the right.
Aircraft type kind of given the hostile fuel environment, where we are today.
Super clear thank you very much.
Thank you. Our next question comes from Dan Mckenzie C bark robo.
Okay.
Hey, Thanks, guys congrats on the quarter here.
So to put a finer point on the pricing feel sequentially stronger yields in the back half of the year.
You've kind of been referencing to prior questions.
Can you get to profitability in the fourth quarter, and then just to put a finer point on cash excluding accounts receivable.
Cash in the checking account so to speak short term investments, where do you expect to end the year.
Okay, Let me start with <unk>.
With the cash there and thanks for the congratulations.
We really model our cash looking at cash flow receivables because I can transform my receivables into cash I would just waste money doing that by paying interest expense that I don't meet right, but like we've said I think those of you that are familiar with the way.
We sell tickets in Brazil, a lot of the tickets are sold installments and credit cards that credit card once we own that that ticket and we apply that ticket fairly quickly because brazilians by very close in right. So the majority of our credit card receivables, we've already flown that revenue and so I can call.
<unk> bank in the morning, and by lunchtime the money will be in my account, but I'm going to pay a risk free rate plus.
One or two percentage points, which if I don't need to do that I won't do that right. So what we are.
And I think we mentioned that in the previous calls I mean.
A lot of the cash position at the end of the year will depend on EBITDA will depend on oil prices.
We feel comfortable that we will have a cash position that is roughly where we ended.
2019, if not above right, we've been actually carrying more cash than we had pre pandemic if.
If we have as much cash as we had pre pandemic I mean, if some of you may remember that when we were before the pandemic we were getting some.
Your suggestions from investors to actually start paying dividends and returning cash to shareholders. So the cash position that we had pre pandemic was affected.
So if we can and any quarter. After the pandemic was as much cash as we have them. It is a very healthy cash position. So and then Dan just to kind of highlight we were one five turns down in leverage Q1 into Q2, we're going to be down again, as we go into <unk> and into <unk> and so the use of the cash.
<unk> is to deleverage right and so the operation as I stated earlier is generating an enormous amount of cash so any cash uses above and beyond that is to deleverage the business, which is a good use of cash.
<unk> profitability also the EBITDA question right I mean.
We delivered on 4 billion EBITDA.
That will tell you kind of what the <unk> profitability will be I think our difficulty again with nailing down the short term.
Profitability channel leads to.
A difficult him and say as to exactly how much but <unk> is normally our best quarter of the year everything that we see points that for 2022 should be the best quarter in the year in terms of profitability fares are going to be up because of the seasonality and because of the strong demand environment, assuming oil and FX stay where they are.
Fuel prices that we will be paying in the fourth quarter will be down from what we paid.
In Q2, and Q3, so that should point to a very.
Profitable Q4, which should give us very great momentum into 2023 as well. So we're very excited about that and Brazil is expected to win the World Cup in the fourth quarter as well.
[laughter] astellas celebrating after that happens so we're pretty excited about.
A lot to drive profitability there right.
Well, thanks for that I appreciate it.
In the script you mentioned a fleet transformation announcement coming next week, so I'm not sure if the numbers are correct and the financial statements. This morning.
But as best I can tell it looks like there's about 133 aircraft on firm order and I guess My next question is as you know how many are coming in 2023, how many in 2024.
And how many do you plan to retire and what does that imply for 'twenty three growth N and capex. It from the financial statements. It looks like Capex should be flat next year, but I'm not quite sure how to triangulate that with the script. This morning.
Dan It's in our best interest accelerate fleet transformation and that's what we're going to be looking at so there's opportunities in the market. You know we have a lot of aircraft that are going to do lease returns over the next 36 months and so we're looking at ways to potentially accelerate that and that's what David was referencing in and David always gets ahead of himself and kind of pushes us there and so.
But theres a lot a lot of there's a lot of good news on that front. So as we look to get into 2023, I think youre going to see us buying more next generation aircraft right and so as Alex said, maybe net net were about the same or up a couple of shelves, but with a lot more next generation S case in there, which again further pushes our competitive.
And the market and I think that's another source of flexibility that we have.
<unk> negotiated during the pandemic I think we're comfortable keeping the the <unk>.
<unk>.
Constant.
Because we have the ability to accelerate deliveries right.
There's certainly enough demand for us to keep the fleet Boston and then you know, we don't need to overcommit to capacity and as we see demand firming up and when we know that we can count.
For a long period of time, then we can accelerate it.
Additional aircrafts from our order book, So I think that's a very.
Rational way to manage.
Possible volatility there we can see in end demand.
In Brazil right.
Have you be essentially short assays, but have the ability to increase isk's easily once demand from zone.
Understood and then how do we think about Capex next year.
I think if you assume something flat to this year that there is a lesson as I think most of you know our capex is essentially maintenance capex, but delivery of aircraft.
In two.
2022, and 2023 will all be operating leases, so theres no cash outflow regarding those deliveries and so it's really engine maintenance that we're talking about when we're talking about capex. So you can assume something flat to this year on a portion of that can oversee finance as well.
Think that that's something that you need to keep in your model as well.
Understood. Thanks for the time, you guys great job. Thanks.
Thank you. Our next question comes from Michael Lindenberg of Deutsche Bank.
Hi, Yes. This is actually Shannon Doherty on for Mike. Thanks for taking my questions and great job. This quarter, Alex maybe one for you I think around this time last year you were expecting your unit costs, excluding fuel to be below 2018 levels for the full year now obviously a lot has happened since then on the macro side.
No.
As mentioned before.
With the progress that has always made on productivity gains and cost savings. Thus for combined with attend to 12% growth rate that you kind of outlay for 'twenty. Three would you say that this target is achievable by next year.
Yes, I think so.
There are certainly.
Further.
Improvement on our unit cost that we can get just by the fleet transformation with like I said.
We're going to pay less rent on each <unk> that comes in then we pay an HD one that leaves.
We'll generate more AFC is they have more seats and they burn less fuel and they're more productive as well right. So we can get more productive at airports, we can get more productive with pilots and flight attendants right and then we're going to continue pursuing.
Opportunities like we did over the last couple of years right. I think we are encouraged by the fact that even though we consider ourselves a inefficient airlines wherever you look there is opportunity.
Can manage processes battery you can invest in technology, there's just a lot of stuff that we're going to.
You're pursuing.
Essentially forever right to keep our costs as low as possible.
Because that is necessary for us to continue expanding margins. So you can count on.
Unit cost reduction from fleet transformation and.
You can count on us continue to pursue other efficiency opportunities around the organization.
I just want to highlight we've got very engaged crew members engaged crew members are.
Deliver a fantastic experience I mean, you see the problems with the U S carriers are having year parent carriers are having right now and look at what a great operation, we're running more than 150 cities in Brazil, with a diversified fleet type and so.
Couple of things you know, we're building new hangar in campaigns right and so we saw all of the benefit that that our hangar provided for us in Campinas, we're going to do that again, because we have more work to be done is more things that we can bring in house at a much cheaper cost and so I just think having great people that are very engaged and working with us it provides for additional opportune.
To make this airline and much more efficient airline going forward.
Got it thanks, that's helpful and maybe to Ami or John or you will comment on how you plan to use the additional thoughts that you expect to get over the coming years or quarters.
<unk>.
And I understand it's a busy airport and downtown Sao Paulo, but.
It also has a strong corporate foothold so any color that you can add there would be helpful.
Yeah, Hey, Shannon.
We haven't obviously finalize our network, but you can expect that.
Large business markets.
Now we don't currently Baidu and also applying to our hubs you know we'd like to connect downtown Sao Paulo to our hubs because that provides connectivity and access to destinations that today those customers don't have and so it'll be a combination of the do.
Some in some of the large business markets, but also some very much flowing through our hubs that further strengthens our network is Shannon if I could just add we've got several customers that experience is all for the first time, when we went into <unk> and now they fly as Elizabeth They fly to Fort Lauderdale experienced the great product onboard the aircraft the free Wi Fi.
By the snacks, the television and they said Oh Wow I'm willing to go out to that of course I'm willing to go to other destinations they get into your loyalty program that gives you a credit card and so as you expand the Congonhas airport.
As more and more people that absorbed becomes their number one airlines and I think that's fantastic for us going forward.
Great. Thanks, guys.
Our next question comes from Felipe <unk> City.
Hey, guys.
Good morning.
Alright.
And again, thanks for taking my question. So I have two questions on my side.
One is regarding <unk>.
Non ticket revenue.
Could you share some of your expectations on medium to long term.
For a possibility of.
Revenue generation and revenue growth in terms of those.
Those opportunities like cargo.
<unk> et cetera.
And the second question is regarding our expectations on more M&A in South America market.
Thanks.
Yes, I can start with the first part thanks for the question, Yes, I mean.
Our business units are growing faster.
Then the airline overall and so they will continue to contribute in a more meaningful way as we go forward.
Our cargo for example, almost tripled in revenue from <unk> 19 to <unk> 22, and we've just actually started to put our E ones. Our dedicated Embraer aircraft into service, we have five of them flying right now and hopefully we'll have more you know pretty soon.
So it's we're excited about those opportunities and as we've said before there is a large road market.
There are a lot of that none of those goods could be converted to air for example, we just started with choppy for example.
Where we're starting to onboard other large customers as well. So so we're excited about car then we think that that growth is going to continue to be above.
Above average for the next few years, our loyalty program I hit a record in July in terms of monthly active users lot of engagement.
Our billings Axa Xul are up 60, 70% and so we're seeing a lot of engagement and as we bring back the network as you bring back on international network those customers want to redeem.
Those points, we saw in the pandemic there were redeeming four for coffee machines, and Airpods and now the redeeming for travel and that trend is going to continue and I think probably the highlight so far this year has been our vacations business.
Whereas 2000 flight dedicated this summer season.
It's it's almost going to be doubling this year versus 2019, and just a lot of new city pairs, a lot of new network opportunities and as we've said before this allows us to fly the aircraft on the weekends at other times that we don't have those opportunities. So its very accretive in other ways as well so.
Yes, I think those businesses are going to grow at a faster rate than the airline overall and keep contributing.
As for the M&A, we've never felt better about our Standalone plan keep in mind. This airline is 50% larger in terms of revenue than it was in 2019, we got this new generation fleet coming on we now have access to the convenience airports, we feel very good about where we are obviously, we'll always look at opportunities that exist in the market as we see in some of the moves that we've seen.
And in Latin America are very healthy, we think all airlines in Latin America need to focus on profitability and Thats a good thing going forward and so really no news and we're focusing on our stand alone business at this time.
Great. Many thanks for the question you're.
Answering that.
Thank you. Our next question comes from Lucas Barbosa sits on there.
Good afternoon, everyone. Congratulations for the results John I Hope, you're right right about Brazil, winning the World Cup.
I have a question.
I have a question on balance sheet.
Maybe try Alex is the <unk> line expansion, just a reflection of the normal business seasonality and future price expansion or was there any campaign that accelerated forward bookings maybe another way to ask it is.
Do you think you can maintain the 4 billion has a retail by year end given the increase in ticket prices and higher perpetually going forward.
And I'll do my second question later, thank you very much.
Great. Thanks, Lucas, Yes, I think if you look at the ACL in terms of days of sales youre going to see that since fourth quarter. Its essentially flat right. It may go up a little bit down a little bit, but it is kind of hovering around the same number so most of the increase in ACL.
The increase in sales really if there is some seasonality right. For example, normally in Q1, we don't sell a lot, but we fly a lot of normally in Q2, we sell a lot, but don't fly a lot. So its normal also for you to see an increase in ACL in the quarters, where sales are strong but.
We don't fly as much. So yes, we are and we believe that the.
If you look at the <unk>.
<unk> in terms of days of sales you can expect something.
Pretty constant and something so that means that the balance in <unk> should actually grow as we continue growing our revenues and I just want to highlight another thing and Avi will give the exact numbers, but what percentage of our international network was being sold in first quarter and second quarter versus third quarter and fourth quarter right and so as the restrictions to fly internationally have drew.
Rob in Europe , and the United States, we've seen an uptick in as you go into the third and fourth quarter International revenues come on very strong we haven't talked about that that's obviously very positive for <unk> because those bookings are a lot farther out.
Yes, overall, we're going to be finishing.
The first half of the year, we were probably 40% to 50% international recovery.
We will finish the year closer to 80% to 90% international recovery.
And getting to a 100% by first quarter of 2023, so that's going to be very helpful. In driving those forward bookings as well.
Super clear and thanks for the answers and since they raised the point on forward bookings.
On the first question can you give us some color on how youre seeing the pricing on forward bookings in the second quarter, Nebraska was 20% higher than <unk> hundred 19.
From what Youre seeing on bookings so far can we see a comparison to pre COVID-19 profit, becoming even high end at the next quarters.
Yes.
Our expectation is that <unk> will be even higher than the number that the 25% in Tokyo.
Super clear, thank you very much and John I Hope Theyre right about it.
Okay. Thank you.
Our next question comes from Pablo most of her Barclays.
Hi, guys I apologize for asking one more question, but I was just taking a look at your financial.
And you are.
Softbank Corp, Dev risks for 660 right.
Wanted to have more color on what is exactly as is.
Mitch. Thank you. Thank you.
Hey, Pablo yet.
What we mentioned.
A few calls ago.
Answers ago. This we can get support from our suppliers for example to get better terms.
But sometimes there is a win win that can happen for both us and the suppliers because we have we essentially pay a lower interest than our suppliers and sometimes suppliers have a much harder.
Access to capital than we do right. So this essentially supplier financing, where sometimes by Jim negotiate an extension with the supplier from 30 days to maybe as long as 120 days, but then that supplier can go and finance themselves with a bank, we're essentially using bank risk. So that also shows our access to.
Credit.
Directly with the banks right. So it's essentially another source of capital and other sorts of.
No.
Cash that we can access if we if we need to.
Okay. Thank you.
Our next question comes from gladly Mendez Jpmorgan.
Hey, guys. Good afternoon, a quick one here just in terms of fuel hedge and if you could comment on your fuel hedging strategy going forward that would be great. Thank you.
Hey, Jeremy.
We have a policy that we can hedge up to 40% over the next 12 months exposure right now we're at about.
High teens.
<unk> all been over 15%.
We've been using <unk>.
Forward contracts up to this point.
And that's the reason why Youre seeing the big positive result that we had and this is actual cash that we can access.
If we need to we can we look a lot of what the industry is doing right. We were not trying to convince you that were going to guess better than the market whether oil prices are going to go up or down.
We essentially want to protect b.
Tickets that we have already sold with chef obviously their fares are already locked.
And to.
So any kind of volatility in fuel prices that we may have between selling that ticket and flying that ticket. While we also look a lot at what the industry is doing and the industry is fairly under hedged right. Now I think overall, we look at hedging as insurance, we expect to lose money in insurance, we expect to lose money on hedging not a lot on either one but it's not.
A profit line for any airline if you can make money guessing whether fuel prices are going to go up or down you shouldnt be running an airline so.
I think you can expect a similar fall a similar approach to fuel hedges, but we will also be monitoring what the industry is doing overall, we're just frustrated with no hedge accounting in the quarter to be honest with you.
Yeah.
Yeah very clear thank guys.
Thank you.
Ladies and gentlemen. This concludes today's question and answer session I would like to turn it back to Mr. John to proceed with his closing statements. Please go ahead Sir.
Thank you for joining us today, if you have any follow up questions, obviously, our IR team and Alexandra and myself will be available and we appreciate your.
Your time today and look forward to meeting you at the conferences take care.
Thank you this concludes.
Use audio conference call for today. Thank you very much for your participation have a good day.
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