Q2 2023 Azul SA Earnings Call
Capital opposite optimization plan, leading to a successful conclusion in July .
John and Alex together with their skillful teams successfully implemented our plan, which included new agreements with lessors and Oems.
And exchange offer and new money and our new money rates, Joe will give you more details later.
There is absolutely incredible what they were able to achieve.
All of this is just a six month window.
I also want to thank all of our partners and investors.
Who supported us throughout this process together, we have delivered a true win win solution that we promised on the outset.
When that is.
As value maximizing for all stakeholders.
I. Thank you.
For your vote of confidence and in our company and in our future. Finally, most importantly, I have to thank our passionate crew members, who continued to deliver excellence everyday.
Without our industry, leading operations customer service and a company that produces over $1 billion EBITDA per year, none of this would've been possible. Thanks to their continued efforts we are now.
And in a position where we can put the crisis behind us we can focus on the future.
Turning to slide four you can see that our network is stronger than ever our superior our superior business model.
And structured competitive advantage allows us to connect all of Brazil, we are the only carrier in 81% of our routes and flight to over 160 destinations three times more than our competition.
We are the leader in more than 90% of our routes, which supports our industry leading profitability. During the second quarter. We launched our expanded can go into service more than doubling the daily departures now serving all of all of the top corporate destinations. In addition, we launched our newest international destinations Paris.
In Curacao both of these are off to a very strong start.
On slide five you can see the outstanding performance of our business units this quarter, our loyalty program <unk> more than doubled in gross billings versus 2019 and is clearly benefiting from our new <unk> flights sign ups to the program have increased more than 80% since we launched our expanded.
<unk> schedule.
I could not be prouder of our vacations business wishes had another exceptional quarter with more than a 40% growth in gross billings compared to the second quarter of 2022.
Now this business is now four times the size in terms of net revenue than in 2019.
<unk> is the second largest vacations agency in all of Brazil, and we continue with our strong growth expecting to double our stores to more than 100 by the end of this year.
As little cargo our logistics business continues to be the largest air logistics provider with the market share with the domestic market share of 34%.
And with net revenues more than doubled compared to 2019.
As I said.
This is an important quarter for us I could not be prouder of how the entire team has pulled together to deliver these amazing results for our shareholders with that I'll pass the time to John to give you more details on our second quarter results.
Thanks, David I would also like to thank our crew members for their incredible work everyday every day I see how passionate and carrying our people are for each other and our customers.
Is this special culture that will fuel our company for years to come turning to the numbers I would like to highlight our record results as you can see on slide six in the second quarter, we achieved record revenues for our second quarter of $4 3 billion Reais, 9% up versus second quarter of 2022 revenue in the second quarter 'twenty three was up.
An impressive 63% compared to the same period in 2019, yielding rasp were also second quarter Records at 46, eight and 44 cents respectively.
Our EBITDA grew a remarkable 88% year over year, reaching an all time record for our second quarter of $1 2 billion Reais with one of the highest margins in the industry at 27% 11, four percentage points higher year over year.
As you can see on slide seven our EBITDA increased 58% versus second COVID-19, even with a 60% increase in fuel prices. This is a clear demonstration of the strength and the resiliency in our business our structural competitive advantages combined with our rational and profitable growth allow us to expand earnings and any.
Macroeconomic scenario.
On slide eight you can see that average fares were up 6% versus last year, while fuel prices dropped 24% year over year. This is a very positive sign when we are in the as we transition into the seasonally strongest part of the year under a very constructive demand and pricing environment. In contrast to what youre seeing in other regions in the world.
As you can see on slide nine we continued to effectively manage our costs with a 10% decrease in cask year over year. This is mainly driven by the reduction in fuel prices and by our cost reduction initiatives and productivity gains just to give you. An example, a record 76% of our customers now use automated self service tools.
For their checking in addition productivity measured by Isk's per full time employee as also increase with the company now generating 13% more S case per FTE than in 2019, and this is with an on time performance of 87% no small feat. In addition, our fleet transformation of fuel savings initiatives.
Resulted in a 4% reduction in fuel consumption per <unk> compared to last year.
We have the lowest cask in the region, even with a diversified fleet and lower average aircraft size. As we promised you we are now more efficient airline and better than ever.
<unk> has one of the highest EBITDAR margins in the industry as you can see on slide 10, the strength of our revenue performance efficiency of our next Gen fleet growth in our business units and World class customer service directly led to these results as David mentioned in the opening remarks, we've now concluded our capital optimization plan. This was an.
<unk> achievement in such a short period of time, and I joined David and thinking our teams our partners for their dedication and their support.
On slide 11, we remind you of the pillars of our plan as announced before we successfully reached agreements with lessors Oems to exchange Covid deferral payments into a combination of debt and equity. We also agreed with our lessors to make mark to market adjustments on our leases with any differences to the original lease rates also being in exchange for a combination of debt and.
Equity lessors and Oems agreed to receive an unsecured tradable note maturing in 2030 with a coupon of seven 5% a year and an equity instrument convertible into preferred shares to be issued quarterly installments commencing starting at the end of 2024 with all issuances to be completed by the <unk>.
End of 2027, and minimal dilution to our shareholders of roughly 17%.
The next step in the plan was the restructuring of our debt obligation, which is why in June we launched a par for par exchange offer to extend the maturities of our 2024 and 2026 notes to 2029 and 2030. We successfully concluded this offer in July with an aggregate acceptance rate of 86% of the principle.
Outstanding.
The final step with the new capital raise which was concluded in July with the issuance of $800 million in bonds maturing in 2028. The offer was three times covered enabling us all to obtain the lowest coupon among our peers in the region.
The success of our comprehensive plan clearly demonstrates <unk> ability to execute and represents a significant vote of confidence in our company by the market and all of our stakeholders.
Just want to remind everyone that this entire process was done amicably with our partners and stakeholders based on the guiding principle that our partners would receive 100% of what was committed to them. We always believed that this was the value maximizing solution for all and I'm happy to say that this is what we have achieved.
On Slide 12, we show you the updated amounts related to the reduction in our lease payments, resulting from our lessor negotiations as you can see we are reducing our annual lease payments by $1 5 billion Reais in 2023 and over $1 billion in 2020 for taking a recurring annual rent to below 3 billion Reais.
In summary, the plan delivered the lease payment reductions, we were targeting to optimize our cash flow and enable our future growth.
On Slide 13, you can clearly see the runway that we have created we have no significant maturities for the next five years another key targeted outcome from our plan.
Both in terms of yearly cash flow and future debt maturities, we over achieved versus what we expected. We now have a strong balance sheet and liquidity to match our industry, leading operating performance.
As you can see on slide 14 in the second quarter leverage organically decreased a full turn from five 2% to $4 two as we paid down debt and increased our EBITDA. This is even more impressive considering it does not yet reflect the reduction in leverage expected from our capital optimization plan.
The reduction in lease liabilities from our successful agreements with lessors, our deleveraging process will accelerate you can see that by the end of the year leverage will reduce.
Almost another full turn to three five in.
In line with the guidance, we gave last quarter. We also remain with our expectations to end 2024 with a leverage of three in line with our pre pandemic levels. This leverage also includes the 2028 senior secured notes issued in July and the 2000 2030 unsecured notes to be issued to lessors no later than September .
As a result of the optimization plan all three rating agencies have already upgraded Azores, reinforcing our financial health going forward.
On slide 15, we show our view Unabsorbed valuation with our optimized balance sheet positive cash flows high liquidity and earnings growth. Our current multiple should be closer to our historical levels versus the four 5%. We are trading at now there is significant upside in our market valuation.
I truly believe this I look forward to having this discussion with all of you and our investors in the days and weeks to come.
Wrapping up on slide 16.
I just want to remind everybody that our senior leadership team spent countless hours on this plan and having successfully concluded. It we can now turn our efforts to our business and all of the opportunities ahead of US our fundamentals are strong our business model is unique our upside is clear and most importantly for me our crew members are as passionate as ever.
Once again I want to thank all of our crew members, our partners and our stakeholders and our investors for all their support what we have achieved together is remarkable and the best presume is yet to come with that we're here to take your questions.
Ladies and gentlemen, thank you we will now begin the Q&A session remembering that if you had a question click on the Q&A icon at the bottom of risk screening and write your name and company.
<unk> announced please activate your microphone and proceed for those who are listening to the conference onto form press nine to join the queue and seeks to accept your audio when requested.
Let's move on to the first question is from Felipe Nielsen sell side analysts from CD. Please <unk> your microphone. So you can ask a question.
Yes.
Let alone arm.
Okay.
Hey, guys can you hear me.
Yes, we can hear you. Please go ahead.
Thank you. Thank you very much guys and thanks for taking my question. So I have two questions on my side and congrats on the results.
The first one would be on the international corridors.
I saw that.
Now that we have in Brazil, some backlog of U S visa tourists.
Lisa.
Allowing for people to issue new visas.
But we know as well that.
There are some corridors that might be performing.
Performing well and we saw in this quarter you guys shifting continuing to shift aircrafts from our cargo to international corridors using wide body, so I'd like to understand which which are the markets, where you see more opportunities.
In terms of international.
And the second question would be in terms of the the adjustments that you made on EBITDA.
This quarter.
Just wanted to.
Hearing their thoughts and some extra clarification about the adjustments.
And the EBITDA so thank you.
Yeah, Hi, Philippe I'll be here I can start with the first part about the international So youre right.
We are happy with the performance of the International network, our international capacity.
In 2023 will be larger than 2019. So we are fully recovered and more in our international capacity. You are also right that last year, especially we had some wide bodies flying dedicated cargo missions to Brussels to Fort Lauderdale, and even domestically in Brazil, we have now shifted them.
Through our international long haul passenger network.
And the market is holding up very well.
In general what Youre hearing from other airlines.
It's true for us as well the European market is doing better, but the U S market is.
As strong as well, we have great partnerships with Jetblue and United in the U S and with GAAP and air Europa in Europe .
<unk> allows us to feed lots and lots of cities beyond our gateways. So.
We have competing as our main hub, but we also have received fee in Belo Horizonte. So we're connecting our strongest hubs through the strongest hubs of our partners as well so.
Overall, we're very happy unit revenues are significantly higher.
This year than 2019, and we expect that to continue so.
Overall, we're fully recovered and larger and we're happy with the results of the International network.
And fully via on the adjustments.
They are mainly tied to the capital optimization plan that we talked about.
There were as you know a lot of negotiations with lessors.
Some of these negotiations we were actually able to early deliver some aircraft that we did not want on our fleet. The <unk> you all know how excited we are about our fleet transformation.
How we want to replace all of our old generation Embraer switch worked great for us to start the company, but now we have much better aircraft on the Embraer E. Two NDA for 'twenty meals.
And with the demand the way. It is today there were some opportunities for us to accelerate the exit of some aircraft. When you do that you have some costs that are nonrecurring. So you have to adjust for example, we expect to write a few still you would had on that aircraft do you expect that the aircraft to remain on the fleet. So for a certain number of years.
And all of a sudden it's not going to stay for that number of years that creates a one time impact on the P&L that is not recurring so we removed that from the results. So that you can have a better perspective on what the results of the company will be going forward. When we don't have that effect anymore.
We are proud of having followed the approach that we did with our restructuring as opposed to a more combative and longer and also more expensive approach that some of our competitors took but there is still some cost stride youll still have some advisers and lawyers.
One time fees involved infrastructure. So we also removed those those are mainly.
The main.
Drivers of the adjustment that we had this quarter.
<unk> has 185 aircrafts in almost every single aircraft was renegotiated and as Alex said some were redelivered early.
It's just kind of part of the process and so but we feel very good about where we're at we have the ability to have a few he wants to exit earlier. So we're very confident that going forward, we'll be able to continue to kind of expand margins even further.
Great. Thank you very much guys.
The next question comes from Victor.
Our sell side analysts, but this could be by Victor burglary to open your August one that you can ask a question. Please proceed.
Okay.
Alright. Thank you congrats for the resorts on the restructuring.
Two questions here.
The first one is related to your fleet plan right. So now that you conclude the all these restructurings so I'm going to have to kind of give additional details about the fruit for dessert that acts.
And my second question is related to block hours right. So.
We have shown an improvement but.
Compared with pre Covid level.
You were talking about something that's around 11 hours per day and now it's time for <unk>.
So how fast do you believe that's possible to do.
These kind of.
Assets to the divisional level. Thank you.
It is starting quickly on our fleet, obviously, all the Oems are late including Embraer and Airbus and others.
We expect embraer to fix most of their issues by the end of this year and into next year. So we have a significant amount of he choose coming in to replace older generation aircraft and every time, we take a need too is currently the most profitable thing we do because we get rid of the ones, we upgrades that aircrafts, even further from 118.
130, <unk> with fuel burn and that's about 25% lower per seat. So we're pretty excited about that and so the next couple of years is really the E. Two years for zoro, and so youre going to see a significant improvement in the fleet going forward, but I'll, let <unk> talk to the utilization Yeah, Hi, Victor.
We did make improvements in utilization year over year up 687%.
Which is a very good sign it's a reflection of the fuel prices coming down as well, which allows us to add more flying on weekends more flights at night are stretched.
Stretching out the date.
We are making our way back to pre pandemic Utilizations, we will continue to see sequential improvement in this number in <unk> and <unk> as well as we design the network.
We take advantage of all of the buckets of opportunity out there, we do have to be a little bit careful because fuel is still higher compared to pre pandemic levels and so we want to make sure that as we stretch the day out we don't lose the quality of the revenue. So that is the balance that we're striking when it comes to utilization, but I fully.
<unk> going to continue to make progress and over the next quarter as you will see us get closer to that 11 hours number but this is the big debate internally, Alex and I'll be have this every single day and so we know thats. The greatest leverage we have increasingly utilization is going to decrease our cask overall and make us a more profitable company going forward.
Thank you.
Thank you. The next question will come from <unk> sell side analyst frontline.
PPA.
We're going to open your microphone. So that you can ask your question nobody else. Please proceed.
Yeah.
Thanks, and congrats on the results guys I would like to talk a little bit about profitability given the strong China, 7% OIBDA margin that we saw in the second quarter. So.
On that front.
You managed to reach this strong level, despite the second quarter weak seasonality factor. So if you could just touch on the <unk>.
On your view on what levels should we be thinking about in terms of EBITDA margins looking forward considering the improving operational leverage you might reach in the second semester that would be great.
And also on the subject if you could provide a little bit more color on our personal expenses.
Personnel expenses.
26% increase year on year, which was higher than the increase in escaping the pure both quarter on quarter and year on year. So should we expect the level to be maintained in the next quarters as well or was there. Some one off effect in the second quarter that should not repeat going forward.
Those are my two questions.
Yes.
We are confident on the $5 5 billion EBITDA guidance that we gave out the guidance that we gave on EBITDA on capacity and on leverage are all still valid we had things moving in different directions right. We had the fiscal fees. There was approved which is positive we had the fuel curve moving up.
Which obviously is a headwind.
Like John said, we have so much opportunity that we want to tackle that we're confident that we can deliver on our $5 5 billion EBITDA for this year and Thats what were going to be working on for the next few months and then make sure that we have great momentum going into the next year, where the EBITDA can expand even further.
Starting with a six.
Which is something that we're very excited about.
The second half is where most of our profitability comes from because that's how our seasonality works as you pointed out the second quarter is the weakest quarter in the year and now we're entering a third quarter, which was going to be better than the second and then a fourth quarter thats going to be better than the third.
Which is something thats very exciting and still in terms of EBITDA production. We are at a record as we pointed out but there is still upside on the margin. We are still working to recover margins. Our <unk> margin was still lower than through Q1 19.
And even delivering under $5 5 billion EBITDA for the year it will still be a lower margin than the margin that we had in 2019. That's why we're excited about 'twenty four and beyond because we want to get back to that EBITDA margin that we had in 2019 and we think we can go even farther right because we didn't have the.
Performance in 2019 of the business units that we have today, we didn't have the 80% plus of next generation.
Capacity.
We didn't have compliance and so there is a lot of opportunity for us to go even beyond the margin that we delivered in.
In 2019 and Youre also.
<unk> said in the script, but we now have the full focus of our management team on running the business as opposed to fixing the balance sheet right and so as you look at how do we fully optimized to resume how we fully optimized the utilization levels of the airline how do we get to extract as much out of all of these business units and so that's how we're going to move.
Forward, but again as I said previously on the fleet plan question Theres a lot of it was coming and those issues are very profitable there's more <unk> hundred twenty's coming we're exiting out we still fly more E. One flight a day then we flight E. Two flights a day right. So that's a significant amount of upside going forward.
Yeah and on the personnel side, let me give you some guidance us equally help you.
With your estimates for the rest of the year. It is a tough comp in <unk> because of what happened in <unk> 'twenty two we had.
Phantom options as part of our long term incentive plan.
They are very volatile that's one of the reasons that we are going back to regular options as part of a long term reserve it but last year the stock price went down in the second quarter.
The market was getting nervous and that actually reduced our personnel expense because we recognize the reduction in the long term incentive.
<unk> accruals that should not happen anymore going forward right now with actual stock options as part of our long term incentive you just calculate the cost of those options and then recognize that over time the volatility is a lot lower.
We're also going to get economies of scale right. Because obviously, we're going to fly a lot more avi talked about the increased utilization, we're going to get in Q3 and Q4. So you can look forward to a reduction in labor cask from Q2 to Q3 and Q4, probably in the mid to high single digits, you will see our labor cost going down.
Into the back end of the year.
Thanks, Alex notice very clear thanks.
Thank you.
Okay.
Okay. So let's move on to the next question, which will come from Savi <unk>.
That analyst Raymond James.
Savi your eventual opening your microphones. So that you can ask a question. Please proceed.
Hey, good morning, everyone.
I was curious on the domestic market I appreciate the time, you get Philippe on the international side.
Mark I was wondering if you could provide a little bit more color on leisure versus business.
No disconnect that capacity is being mostly kind of a trend that you've got cross year ends I just updated thoughts on kind of capacity growth you know in the domestic market.
Hey, Savi absolutely.
So yeah, we feel really good about the trends that we're seeing.
Coming out of <unk> into second half seasonality July , especially was very resilient.
In terms of flowing unit revenues and bookings as well so in terms of demand domestic demand.
For example, the last four weeks.
Two of them corporate volumes had been 100% of 2019. So this is the first time I can confidently say that we've actually recovered a 100% of corporate volume now average fares are up 40%, 50%. So corporate revenue is up 43%, but in terms of volume it's very very.
Good to see that we have now recovered 100% and this is a sample of four weeks.
Two out of these four going to be very close.
In terms of pricing environment.
I think the industry is doing everything.
Correctly.
In terms of what needs to be done to take advantage of second half seasonality, obviously, the run up in fuel as well.
Our booked average fares for the month of July were higher than last year and thats, what the reduction in fuel year over year or booked average fares.
Now our 30% above what we were seeing back in May and so I think.
The trends are very positive and finally on the capacity side.
As you correctly said capacity is being trimmed year over year capacity in the second half of the year is actually lower than what we saw in <unk>. So we're going to be coming into a favorable demand environment, a favorable pricing environment.
The industry. This year domestically is going to grow less than what the U S. Domestic market is doing we're going to grow about 3% versus 2019, 3% growth over four years, it's about about roughly half what the U S market is doing and.
That's why we feel good about continuing to increase our RASK last year Caf comps all time record rash, but we think things are set up to kind of repeat that this year. So our demand environment very solid pricing environment solid and a favorable capacity discipline as well.
That's super helpful.
If I might ask just I know the cargo environment has softened that seems like it helped.
Healthy.
Just curious what the.
The revised plan is for setting up the logistics here.
I thought you were working towards.
Yes look you are right its international cargo, especially that is weak and you've seen reports from Latam Avianca Turkish.
In our international UBS.
It's mostly international cargo that is down, especially on the yield side.
Our domestic logistics business keeps growing.
Growing about mid to high single digits, and Thats still very encouraging and also remember that our freighter exposure is very very limited we have two 737 freighters in a couple of.
Four E jets here in Brazil, So all of our for domestic purposes. So we still continue to believe that resolute cargo will transform logistics in Brazil definitely.
A huge opportunity in getting ecommerce out to the rest of the country.
And so domestically, it's still growing not as fast as last year, but we still have about two five times bigger than 2019 International is a challenge it is going to be a challenge, but we're 85% domestic and that's.
<unk> continues to be our focus.
<unk> also saw the I think there was a boom post COVID-19 international that everybody got to ride that wave, but its the network. We've built domestically, which is the strength of our cargo business and Thats. The greatest advantage. We have the fact that we fly to 160 cities in Brazil compared to 50, our next closest competitor and the majority of those 50.
Cities that are competitors slide two is really truck cargo right and so we're flying all throughout Brazil, and Thats the advantage that we have.
Super helpful. Thank you.
The following question will come from Michael Lindbergh sell side analyst at Deutsche Bank regarding Triple microphone, Michael So that you can ask your question you May proceed.
Can you guys hear me now.
Now we can.
Okay, sorry about that.
Let's see here.
Sorry, I'm getting just the echo on this.
Well done.
Alright, I'm going to try this.
Sorry about that.
Let's see.
With respect to.
Even with the release Alexey talk about.
Finalizing in September your agreements with.
The lessors and the Oems, presumably that's just dotting. Your is crossing your T's is there anything else that we should expect like with respect to Capex. Later this year, what your Capex plans are for next year.
What else needs to get done.
No other than maybe what you've shown in the release here. Thanks.
Thanks, Mike not much.
It is a bit of body the eyes and crossing the Ts. It's also issuing the unsecured 2030 notes that's part of the.
The negotiation with the resource.
Implementing the equity instrument that we negotiated so those are all kind of condition subsequent to all of the agreements though.
<unk> signed but then now we need to deliver on those mechanisms in terms of Capex. This year is still going to be.
Lower than sort of our recurrent capex here in terms of recurrent capex for your modeling I mean, we've talked about something in the $1 8 billion to 2 billion Reais.
To remind everyone. This is all maintenance capex, we don't have capex coming from new aircraft because we most of the aircraft that are coming are going to be under operating leases over time.
I would like to do some capital.
Finance leases, but you don't need to expect any cash outflow from new aircraft. It's all about may.
Maintenance, especially engine overhauls, Hey, Mike if I could just add one thing although the documentation is still being finalized we're paying the new rents were acting under the new agreements. We've already had celebratory dinners with of course on the agreement because of the capital raise happened in July and this all.
Follow suit from there and so no issues at all in for full disclosure, we have one lessor, we didn't get over the line represents less than 4% of our of our total leases. It's actually somebody just pointed out that is two 7% and scope.
And we're still talking to them, but we're done we've turned the page we're moving forward.
One other can you just.
Tell me what your liquidity will be in rough numbers at the end of September I mean, if I use sort of a $5 5 billion reais as a base, which was the end of June .
You incorporate $800 million Theres, probably some puts and takes there what what would be a good liquidity Guy you can provide us.
Yes, yes.
We have some.
Payments that we made right on the 2024 notes, but there wasn't anything yet.
17% Paydown on who accepted the exchange we have some advances that we had gotten from one of our lessors, we are paying down some of our convertible debenture. So when you kind of bake all of that and we're going to be between four and four 5 billion.
Okay.
And then just one quick last one your other revenue has obviously been an area of strength for you when I think about your vacation business and <unk>. It is down year over year, that's obviously being driven by cargo can you tell us if we were to pull.
All cargo out of that.
What the other ancillary businesses would be up on a revenue basis, maybe rough numbers. Thanks for taking my questions.
Yes, so Mike just on that line essentially thats, all cargo theres, a little bit of charter on it.
Everything else in terms of Sudan, or <unk> is on the passenger side right. So.
It was always growing a lot although the Aussie is growing a lot cargo domestic is growing like Avi mentioned, but that line is basically cargo and charters.
Great. Thank you.
Okay.
Okay. So moving on to the next question will come from <unk> sell side analyst Jpmorgan, Hey, Let me we will open your microphone. So that you can ask a question. Please proceed.
Good morning, everyone. Thanks for taking my question I have two follow up question is actually related to yield feel so but.
To your point on passing through a few costs I mean, how fast do you think you manage to pass through a potential additional increase on.
Prices.
And on the same topic, how do you guys think about your hedging strategy going forward. Thank you.
Yeah, Hey, Jeremy look I think the industry has at every turn.
Try to do the right things and done the right things in terms of recapturing. These costs. We of course have additional benefits in terms of controlling our own destiny, because so much of our network is by ourselves and so we can always be testing and always be our managing our own not having to wait for the industry to catch up.
So I'm I'm optimistic I mean, just look at what we were able to achieve in terms of average fares and do QA seasonally weaker Q versus.
Verses, a post omicron <unk> last year, and we still had higher average fares and so.
With with corporate demand coming back strong our corporate survey tells us that corporations are will fly more at the second half of the year.
Capacity discipline that we are seeing.
It's a continuous process.
But I am confident that the industry and us are going to do the right things to make it happen.
Yeah and on the hedging side I think your question makes a lot of sense because they do go together right the more.
Our pricing ability we have to pass through.
Cost increases to first the less hedging we need to do right I don't think any airlines going to tell you that they are able to predict whether oil prices are going to go up or down better than the market. If they say that thats their competitive advantage right.
Kind of run away from from that because your hedging as insurance, we expect insurance to cost us a little bit of money and we expect hedging to cost us a little bit of money in terms of the premium. So we always monitor our ability to pass through.
Cost increases to fares together with our hedge position now that we see demand continuing to be strong and we see a seasonally strong quarter coming coming in.
Don't need to be hedged as much.
Around 15, 16% right now I think the whole industry is somewhat light on hedges and I think that makes a lot of sense, we want to urge the inventory that we had already have already sold that inventory, we cannot do anything about but the future inventory, we're very confident on our ability to continue expanding.
Margins to try to get back at least two to 2019 levels because yes. It is true that fuel prices went down significantly year over year, but they did go up from last quarter.
But there is still much higher than they were in 2019 or anything it is important to remember that there is so much higher than 2019.
Super clear guys. Thank you have a great day.
Thank you.
Okay.
Going on to the next question will come from Neil Glynn sell side analysts Eric control tower.
Neal we will open your microphone. So that you may ask your question.
You can proceed.
Yeah.
Thank you for taking the questions.
If I could ask two please.
With respect to the recent negotiations on capital optimization. So the first one on currency really.
Back at the end of the first quarter, you were hoping for $2 9 billion or 1 billion Reais.
Lease payments in 2024 and I notice.
The rally has obviously strengthened against the dollar since this time, so I am just interested as to whether the updated payments fully reflect recent recovery of their AI against the dollar and if you could give us some feel for your exposure to potential further re higher recovery.
On the dollar for these lease payments.
And then the second question security deposits and maintenance reserves are obviously, a large part of your balance sheet of about $2 6 billion at June .
Should the lateral where negotiations that are now largely done or resolved impact. This part of the balance sheet and should that have any ramifications for cash flows over the course of the next few months. Thank you.
Thanks Neil.
The lease payments that we provided on the.
A presentation. They do reflect an exchange rate of 482, which is the exchange rate at the end of Q2. So they are all dollar denominated and they do fluctuate with the exchange rate.
Fraser is roughly where the exchange rate is today, if you see further strengthening of the real those numbers can come down if you compare those numbers to be.
Communications are we sent out last quarter, which also had the breakdown of the 23% and 34 lease payments. The changes that you see there are mainly from FX, but also from additional aircraft that we took delivery of.
In the in that timeframe.
But those numbers should be the latest information with the latest FX.
FX right and then in terms of security deposits.
Maintenance reserves, yes, those were part of the negotiations with the lessors as well.
There is a change there and normally you would see that balance increasing over time as we increase the size of the fleet and also as the fleet ages.
Right now you should see them staying stable and then as we.
Execute on maintenance events are return aircraft those maintenance balance will go down it will take a few years for those maintenance balance to go down, but they will happen because we negotiated that we won't add to the balance of the maintenance reserves and then we will draw upon those maintenance reserves as the.
Maintenance events are delivered on the aircrafts are return I think that's one big thing Big difference that is not reflected in the market is that not only did we do mark to market on the leases not only did we deal with the Covid related deferrals. We also dealt with security deposits and maintenance reserves on a going forward basis as well so that's not a <unk>.
P&L impact, but its certainly a cash impact over the next five years and so as we became a much better credit profile for the lessors. They understand that that's good for us and so there is a reduction significant reduction going forward in those payments and so thats additional benefit to our cash flow over the coming.
In years.
Okay.
Okay.
Alright.
Moving on to the next question will come from Lucas Barbosa sell side analysts something there Lucas for branch opening your microphone. So that you can ask your question. Please proceed.
Yes, Lucas emphasis a question.
Online so I think I can I can really essentially.
Essentially he would like to know more on the Capex line related to aircraft.
Maintenance and checks.
It was around $140 million this quarter.
<unk> <unk> 23, it was much lower than in <unk> 'twenty two it was lower as well.
If there was any concentration of maintenance this quarter and what these levels should be in the.
Coming quarters.
Yes.
So I think too, especially <unk> was particularly low I mean, we were preserving cash we knew that we were going to <unk>.
Have negotiations with lessors and Oems, we're going to have new commercial terms with both of those groups of stakeholders.
And so I think it was more of that <unk> was low I think <unk> is still like I said I think you should project in total Capex, which includes this line.
<unk> between $1 8 billion to 2 billion Reais on a go forward basis.
Gross.
[laughter].
Okay.
Okay.
So this closes our Q&A session now.
Now move on to John for closing remarks.
Thanks, everybody and we appreciate your time today on the call Alex myself <unk> will be on the road meeting with many of you in the upcoming months to kind of further update you on the story. We're excited about where we are seasonally strongest part of the year ahead of us and full dedication of this management team to continue to build the greatest airline in the world. Thanks, everybody.
<unk>.
Thank you. This concludes his audio conference call for today. Thank you very much for your participation and has a great day.