Azul Q1 2025 Earnings Report

Azul EPS Results

• Actual EPS: -$2.18
• Consensus EPS: $0.03
• Beat/Miss: Missed by -$2.21
• One Year Ago EPS: N/A

Azul Revenue Results

• Actual Revenue: $923.68 million
• Expected Revenue: $5.31 billion
• Beat/Miss: Missed by -$4.38 billion
• YoY Revenue Growth: N/A

Azul Announcement Details

• Quarter: Q1 2025
• Date: 5/15/2025
• Time: Before Market Opens
• Conference Call Date: Wednesday, May 14, 2025
• Conference Call Time: 11:00AM ET

Azul (NYSE:AZUL), together with its subsidiaries, provides air transportation services in Brazil and internationally. As of December 31, 2023, the company operated approximately 1,000 daily departures to 160 destinations through a network of 300 non-stop routes with an operating fleet of 183 aircraft and a passenger contractual fleet of 189 aircraft. It is involved in the cargo or mail, passenger charter, intellectual property owner, frequent-flyer program, airline operations, travel packages, funding, and aircraft financing activities; and provision of maintenance and hangarage services for aircraft, engines, parts and pieces. The company was incorporated in 2008 and is headquartered in Barueri, Brazil.

Azul Q1 2025 Earnings Call Transcript

Key Takeaways

• Operational excellence was restored in Q1 with irregular operations down 65% and customer hotel nights down 75% year-over-year, reflecting significant reliability improvements.
• High-margin Beyond the Metal business units drove BRL480 million in incremental EBITDA (35% of total) via loyalty (19 million members), vacations (up 56%), and cargo (revenue +20%, EBITDA doubled).
• Azul delivered Q1 revenue of BRL 5.4 billion with flat RASK and 16% capacity growth, achieving BRL 1.4 billion EBITDA (26% margin) despite operational and FX headwinds.
• Currency devaluation (average USD/BRL up ~20%) and irregular operations added over BRL 300 million to Q1 costs, pressuring non-fuel unit costs.
• Macro tailwinds include a 9.3% appreciation of the Brazilian real and a 17% drop in fuel prices since January, which could boost 2025 EBITDA and cash flow.

Presentation

[Operator]

Hello, everyone, and welcome to Azul's First Quarter Earnings Call. My name is Zach, and I will be your operator for today. This event is being recorded and all participants will be in a listen only mode until we conduct a Q and A session following the company's presentation. If you have a question, click on the Q and A icon at the bottom of your screen and write your name and company. When your name is announced, please turn your microphone on and proceed.

[Operator]

I would like to turn the presentation over to Thais Heberle, Head of Investor Relations. Please proceed, Thais.

[Thais Haberli, Capital Markets Director at Azul]

Thank you, Zach, and welcome all to Azul's first quarter earnings call. The results that we announced this morning, the audio of this call and the slides that we reference are available on our IR website. Presented today will be John Rogerson, CEO Alex Moffittoni, our CFO and Avi Sham, Chief Revenue Officer and President of Azul, are also here for the Q and A session. Before I turn the call over to John, I'd like to caution you regarding our forward looking statements. Any matters discussed today that are not historical facts, particularly comments regarding the company's future plans, objectives, and expected performance constitute forward looking statements.

[Thais Haberli, Capital Markets Director at Azul]

These statements are based on a range of assumptions that the company believes are reasonable but are subject to uncertainties and risks that are discussed in detail in our CVM and SEC filings. Also, during the course of the call, we will discuss non IFRS performance measures, which should not be considered in isolation. With that, I will turn the call over to John.

[John Rodgerson, CEO & Member of Board of Executive Officers at Azul]

Thank you, Taiz. Welcome, everyone, and thank you for joining us today. First, let me begin by thanking our incredible crew members for their passion and dedication. The first quarter for Azul brought a return to operational excellence that our customers expect. As we shared many times before, in 2024, we did not run the best operation due to significant OEM issues we experienced.

[John Rodgerson, CEO & Member of Board of Executive Officers at Azul]

This was tough on our customers, our crew members, and had an impact on our results. I'm happy to report now that towards the end of the first quarter, our operation is back. I will give you more details later on this call. But for now, I just wanna thank our crew members for their perseverance and hard work. Turning to slide three, I wanna just highlight the sustainable competitive advantages of the Azul business model.

[John Rodgerson, CEO & Member of Board of Executive Officers at Azul]

The combination of a differentiated network with unique fleet flexibility, our high growth business units, our lowest unit cost in the region, together with passionate crew members and supportive stakeholders, is what allowed us to deliver the results we present to you today. On slide four, I wanna start with our network, one which we are constantly optimizing with a singular focus on profitability and the best use of our assets, our aircraft. This network that is different by design with no nonstop competition in 82% of our routes, representing 77% of our revenue, a remarkable competitive advantage. Still, we're constantly making changes to make it even better. This quarter was particularly active.

[John Rodgerson, CEO & Member of Board of Executive Officers at Azul]

In the month of March, we suspended service to 14 cities. This was in response to the high fuel environment combined with the revenue performance in these markets. At the same time, we increased service in many other markets, upgauging to fuel efficient Embraer e two aircraft, especially at our Vela Horizonte hub. These are just some examples of how we continuously strive to extract the best possible results from our network. On Slide five, you can see that we're excited to report another strong first quarter.

[John Rodgerson, CEO & Member of Board of Executive Officers at Azul]

Revenue of BRL5.4 billion with a RASK of $0.42 flat year over year with a 16% increase in capacity. Our EBITDA for the quarter was BRL1.4 billion with a margin of 26% and EBIT of BRL571 million. In the first quarter, we were impacted significantly higher than expected because the devaluation of local currency and irregular operations, which I will address later on this call. Turning to Slide six, I want to share the details on our revenue performance. Overall, we maintained unit revenue flat with a 16% growth in capacity, a strong result overall.

[John Rodgerson, CEO & Member of Board of Executive Officers at Azul]

Even more impressive, given the fact that the major part of our year over year increase in capacity was in our international network due to low base from last year. Normally, this would have an effect on lower unit revenues due to longer stage lengths. But thanks to the demand environment and the contribution from our ancillary and business units, we were able to overcome that effect. We are also actively using technologies in the area of revenue management. Tools make recommendation on pricing, yield management, and ancillary revenue on a quasi real time basis, further allowing us to maximize our unit revenue.

[John Rodgerson, CEO & Member of Board of Executive Officers at Azul]

Turning to our business units, I want to highlight their revenue contribution and impressive performance this quarter. Our business units have done a great job of growing beyond the metal, finding new and unique ways to increase our revenue outside of just ticket revenue. On slide seven, you can see the contribution of our high margin business units, UnraSK, which grew from 19% in first quarter 'twenty four to a very strong 23 in first quarter 'twenty five. All units combined resulted in positive impact of more than $480,000,000 in the quarter, accounting for 35% of our total EBITDA in the quarter. On Slide eight, you could see the continued high growth from each of our Beyond the Metal business units.

[John Rodgerson, CEO & Member of Board of Executive Officers at Azul]

Our loyalty program now boasts 19,000,000 members and a record high monthly active users. Flown revenue was up 65% year over year, and net unit revenue contribution was double compared to first quarter of twenty four. The combination of our domestic and international network, airline, hotel, retail, and banking partners has resulted in record engagement and results in our loyalty program. Our vacations business continues to grow with gross billings up 56% year over year. Upcoming network additions such as Porto, Mendoza, Berlocci, and Madrid will continue to propel growth in this leisure focused business for years to come.

[John Rodgerson, CEO & Member of Board of Executive Officers at Azul]

Finally, Azul Cargo, our logistics business, had a very strong quarter. Total revenue up 20% year over year, international revenue up 62%, and most importantly, our EBITDA doubled compared to first quarter twenty twenty four. During the quarter, we entered into service our two A321 freighters, and they are becoming a key driver of revenue and margin expansion in the business. As we have always said, our business units are a key part of our strategy and a driver of unit revenue and earnings expansion going forward. On slide nine, I wanna highlight the improvements we have made in our ancillary revenue.

[John Rodgerson, CEO & Member of Board of Executive Officers at Azul]

Overall, ancillary revenue was up a very strong 22% year over year, and ancillary revenue per packs was up 14%. These increases were driven by the growth in our premium products such as business class and extra legroom seats, together with the record activity in our loyalty program. We continue to see opportunities in improving merchandising, CRM, and pricing, so we expect continued growth in the ancillary revenue per passenger metric. On slide 10, I wanna highlight another key competitive advantage, our cobranded credit card with Itau. We believe we have the strongest cobranded program in the country with the highest percentage of premium cardholders.

[John Rodgerson, CEO & Member of Board of Executive Officers at Azul]

We already had the Visa Infinity card that was incredibly popular with spending of about one half of 1% of Brazil's GDP. And this April, we're proud to launch the Mastercard Black Skyline premium credit card. This product further positions Azul as a premium airline in Brazil and expanding even further our base of high yield demand and revenue. On slide 11, I want to turn to the cost side of the business. We continue to be the lowest cost provider in Brazil.

[John Rodgerson, CEO & Member of Board of Executive Officers at Azul]

This includes the effects I mentioned on the cost we're facing from operational impacts and OEM challenges. As I mentioned in the opening and will show on the next few slides, we're significantly improving our operation, and those inefficiencies are coming out of our business. We also continue to be laser focused on efficiency, whether that is in our aircraft utilization or our headcount productivity, round time at airports. We are focused focusing Azul into a lean operating airline. We have made significant progress so far, but there's still more we can do.

[John Rodgerson, CEO & Member of Board of Executive Officers at Azul]

Turning to slide 12, you will see two great examples of operational improvements that led to efficiency. Despite all OEM challenges faced in the latter part of 2024 and early twenty twenty five, we were able to increase our aircraft utilization by almost 5%. This is a result of a combination of factors, including our network optimization strategy I mentioned before, more new generation fuel efficient aircraft flying in our network, and a significant improvement in our operational reliability. In addition to a higher utilization, leading to more efficient ASK generation, the airline is also more efficient, delivering additional ASKs with less headcount. Our efforts to optimize processes, develop new automation technologies alongside our passionate crew members, resulted in a productivity being up 18.9% year over year.

[John Rodgerson, CEO & Member of Board of Executive Officers at Azul]

On slide 13, you will see the impact on ASK generation from all of the challenges we faced in 2024. I would like to highlight two major factors. We began the year with the unfortunate floods in Southern Brazil, a devastating natural phenomenon that turned 10% of our network offline overnight in one of the most profitable basis. Shortly after, the constant OEM challenges we faced throughout the year worsened with several unscheduled engine removals and longer recovery time impacting our ASKs for the second half of twenty twenty four. These impacts were a loss of close in ASKs, which had a devastating impact to our customers and operation overall.

[John Rodgerson, CEO & Member of Board of Executive Officers at Azul]

However, since early twenty twenty five, working together with the OEMs and our partners, we're seeing improvements in all operational areas. We've been able to close the gap and get back on track to our planned capacity generation. On slide 14, I would like to highlight two examples of impacts disruptions trigger to our operations and customers that have been significantly that that we've been able to significantly improve over the past few months. Our irregular operations as a percentage of departures has decreased by over 65% in the first quarter and continues to be a downward trend. Such in directly to another great indicator, which is the average nights customers spend in hotels due to the impacts to their booked flights.

[John Rodgerson, CEO & Member of Board of Executive Officers at Azul]

During the past quarter, we reduced our average customer hotel nights by 75%. Even though we made significant improvements during the first quarter, we were still impacted by the additional cost generated by the irregular operations and the customer litigation caused by it. Looking forward, we see a positive trend and expect these costs to improve during 2025. Going forward on slide 15, you can see the improvements in the macro scenario to support our EBITDA generation in 2025 and beyond. The real has appreciated 9.3% in 2025, which reduces our dollar denominated debt and expenses and improves our cash flow generation and reduces the cash outflow to pay down aircraft lease, CapEx, and interest.

[John Rodgerson, CEO & Member of Board of Executive Officers at Azul]

We're also seeing improvement in the heating oil curve, which is down more than 17% compared to the January peak. Using the current spot price, fuel expenses would have been 200,000,000 lower in the first quarter, showing the potential upside to improve EBITDA and cash flow generation in the coming quarters. Turning to our final slide, I must highlight how the first quarter really shows how much Azul has overcome a challenging year and is already generating positive results. Our unique business model has once again proved the value generation this airline has at its core. Our enhanced approach to our network strategy are beyond the metal beyond the metal business units and improved operation have resulted in improved more efficient ASK generation at the lowest CASK in the country while sustaining a strong unit revenue.

[John Rodgerson, CEO & Member of Board of Executive Officers at Azul]

I'm certain that our competitive advantages will continue to prove how Azul is the strongest airline in the region and yield positive results on a consistent basis. I can't thank enough our entire crew member base for bringing back to our usual levels of operational excellence. I'm proud of the unique business model we have built together. With that, Abhi, Alex, and I are available to take your questions.

[Operator]

Ladies and gentlemen, thank you. We will now begin our q and a session, remembering that if you have a question, click on the Q and A icon at the bottom of the screen and write your name and company. We will now go to the first question that will come from Savi Syth, sell side analyst Raymond James. Savi, we're going to open your microphone so you may ask your question. Please proceed.

[Savanthi Syth, MD - Airlines & Advance Air Mobility at Raymond James Financial]

Hey. Good good morning, everyone. If I might just you know, there's a lot improvement that you called out here on the cost side, just operations, FX, fuel. Could you talk about how you're feeling about EBITDA for the year and and how it should progress from here? Because I it seems like maybe seasonality might be a little bit different this year just given the movements in in macro and operations.

[Alexandre Malfitani, CFO, Investor Relations Officer & Member of Board of Executive Officers at Azul]

Sure. Hi, Savi. Yeah. So q one, I think we you know, was worse than we expected, but it's early enough. And also, we saw significant improvement going forward.

[Alexandre Malfitani, CFO, Investor Relations Officer & Member of Board of Executive Officers at Azul]

Right? So when you look at the forward curve for oil, when you see where the real is and there has been already some recapture in the first quarter. Right? So, you know, fuel alone the fuel expense line alone, like we said, was over 200,000,000 reais of a bad guy. When you add effects, that's another hundred million and then the irregular operations.

[Alexandre Malfitani, CFO, Investor Relations Officer & Member of Board of Executive Officers at Azul]

But everything is improving. Right? All of those items, fuel effects and irregular operations are all are also are all improving, and we are still getting benefits on the demand side. You know, we're seeing strong RASK even with high capacity growth. So when you combine all that, we're gonna work, you know, and we think we have enough time to still, deliver as high an EBITDA generation as we can even with the impacts in q one.

[Savanthi Syth, MD - Airlines & Advance Air Mobility at Raymond James Financial]

Understood. I appreciate that. And I wonder and maybe a question for Avi. Could you elaborate a little bit what you're seeing on the on the demand side just between corporate and leisure? It doesn't seem like, you there's been much of a hit with some of the macro headlines that we've had, but curious what you're seeing.

[Abhi Shah, Chief Revenue Officer & Member of Board of Executive Officers at Azul]

Yeah. Hey, Savi. Yeah. You're right. Know, you know, I mean, nothing compared to what you're anecdotally hearing in The US.

[Abhi Shah, Chief Revenue Officer & Member of Board of Executive Officers at Azul]

Right? Ex Brazil point of sale demand has been has been strong. Even with the noise in The US, we didn't see any oscillations in our US business. Our international network is a high end leisure network. I think we are more insulated in that sense.

[Abhi Shah, Chief Revenue Officer & Member of Board of Executive Officers at Azul]

On the corporate side in Brazil, it's been very, very steady. We haven't seen you know, obviously, we've grown and and the revenue has grown with us. And so we are maintaining maintaining that pace. We had, you can check the corporate travel agency shares. You know, we had a 34% revenue share, the last the last report.

[Abhi Shah, Chief Revenue Officer & Member of Board of Executive Officers at Azul]

This is public data from corporate travel agencies. So it's been the Brazil sort of local environment has been solid, has been very steady. Brazil point of sale internationally has been good as well. And we're actually seeing a growth year over year in ex Brazil point of sale, which is revenue that's coming in euros and coming in dollars, both for our international network as well as our domestic network. So, you know, I I think you'll see unit revenues expansion in 2Q, which is good. So I think overall, a pretty steady demand environment.

[Savanthi Syth, MD - Airlines & Advance Air Mobility at Raymond James Financial]

Very helpful. Thank you.

[John Rodgerson, CEO & Member of Board of Executive Officers at Azul]

Thanks, Savi.

[Operator]

Thank you. The next question comes from Andre Fiera, sell side analyst, Bradesco. Andre, we will open your audio so that you can ask your question. Please proceed.

[Andre Ferreira, Capital Market Analyst at Banco Bradesco]

Hi. Good morning. Thank you for the space here. So two questions from my side. The first, if you could comment on your thinking regarding the $200,000,000 equity raise in terms of time line whether there are talks, for an anchor investors.

[Andre Ferreira, Capital Market Analyst at Banco Bradesco]

And, my second question is, Alex, you you you mentioned that fuel was, 200, million. The tractor FX another 200. And from the other cost line, which had the 303 hundred and 30,000,000 higher costs, year over year, in in the release, you mentioned that it's mainly from the performance issues. How much of the, $3.30 was, you know, the performance issues alone? And, is there a chance that Azul will be compensated for it by the OEMs? That's it. Thank you.

[Alexandre Malfitani, CFO, Investor Relations Officer & Member of Board of Executive Officers at Azul]

Yeah. Thanks. So on the equity raise, I think just to, remind everyone of, the timeline. Right? We've reached, an agreement with our bondholders, lessors, OEMs, and, part of that agreement called for an equitization of debt to happen in April.

[Alexandre Malfitani, CFO, Investor Relations Officer & Member of Board of Executive Officers at Azul]

Right? We actually had three equity offers over the last few months. One to equity the lessors, one for the controlling shareholders to bring in new money into the company, and more recently, the equitization of 35% of our, twenty nine and thirty notes. So we've been implementing the plan as agreed, and that's why we had an equity offer in April. Now, you know, the markets didn't, you know, favor the timing.

[Alexandre Malfitani, CFO, Investor Relations Officer & Member of Board of Executive Officers at Azul]

We didn't get incremental equity raise, but we were successful in equitizing a significant amount of debt and, you know, reducing our leverage. Right? We are we obviously, it would it would make sense for us to bring in additional equity capital, but we'll find the right time to do that. Right? I think there's a lot of noise in the market both in macro terms and understanding our overall restructuring.

[Alexandre Malfitani, CFO, Investor Relations Officer & Member of Board of Executive Officers at Azul]

And so I think things will come down over time, and we'll, you know, continue to evaluate that opportunity. On the cost side, you know, yes. Fuel about 208, dollar about a hundred. Other was impacted, like we said about, you know, irregular operations. And just think about what that entails.

[Alexandre Malfitani, CFO, Investor Relations Officer & Member of Board of Executive Officers at Azul]

Right? When you're unable to fly and when you have close in, impacts, you know, from OEMs like we did, you know, that creates a lot of disruption in terms of us having to reaccommodate our customers, you know, in terms of meals, hotels, transportation, sometimes, you know, transportation on other airlines that close in fares. But so that was a big part of the increase in, the other line. Also, the other line, that has a lot of components that are dollar denominated, and the average dollar between q one of twenty four and q one of twenty five was almost 20% up. Right?

[Alexandre Malfitani, CFO, Investor Relations Officer & Member of Board of Executive Officers at Azul]

Now, obviously, as we have demonstrated, the operations have improved significantly, so we should see a reduction in customer reaccommodations and legal contingencies going forward. But that absolute number is not that far from what's consistent with our guidance as well. Right? So even though there was a big increase year over year, the improvement that we see in irregular operations, would be enough for us to continue on the path that we had outlined.

[John Rodgerson, CEO & Member of Board of Executive Officers at Azul]

Yeah. And as for the OEM claims, we are in constant discussions with them. I mean, we had eight wide body engine removals in the span of six weeks in the fourth quarter. Right? And and, you know, that had a significant impact to our customers.

[John Rodgerson, CEO & Member of Board of Executive Officers at Azul]

Avi was unable to sell close in revenue because we were just reaccommodating customers. And when you, you cancel people's flights, on international, you're putting up in hotels and and moving people around. So, yeah, there is out there to the OEMs for sure, and we're and we're seeking compensation similar to what you've seen with other airlines around the world, and we'll continue to and we'll continue to do that. But we wanted to show, as Alex mentioned in the chart shows, there's been significant improvement in that, you know, just in the last sixty days alone. So we have more spare aircraft, available to us, more spare engines, and more engines leaving the shop.

[John Rodgerson, CEO & Member of Board of Executive Officers at Azul]

And so we expect a significant improvement going forward, in this line item.

[Andre Ferreira, Capital Market Analyst at Banco Bradesco]

Very clear. Thank you.

[Operator]

Thank you. The next question now will come from, Michael Lindbergh, Cellside Analyst, the Deutsche Bank. Michael, we will open your audio, so you may ask your question. Please proceed.

[Shannon Doherty, Analyst at Deutsche Bank]

Hi, this is Shannon Darity on for Mike. Thank you for taking my question. Maybe for the first one, a follow-up on Savi's question. Are you officially reiterating the BRL7.4 billion in EBITDA this year? I understand that's gonna be back half loaded, but just wanna know if you're, like, walking away from the guidance.

[John Rodgerson, CEO & Member of Board of Executive Officers at Azul]

Yeah. We're not changing guidance at this time.

[Shannon Doherty, Analyst at Deutsche Bank]

Okay. Understood. And, for the second one, know, just so we know going forward, what is the share count that we should be using for the next quarter assuming a net profit? I know in your footnotes, in the release, it says that the share count doesn't include dilution, and you did get a bunch of transactions done post quarter end. Just an update on share count would be helpful.

[Alexandre Malfitani, CFO, Investor Relations Officer & Member of Board of Executive Officers at Azul]

Yeah. The current number of shares outstanding after the equitization that we have done is 980,000,000 preferred equivalent shares.

[Shannon Doherty, Analyst at Deutsche Bank]

Thank you.

[Operator]

If you have a question, click on the q and a icon at the bottom of your screen and write your name and company. When your name is announced, please activate your microphone and proceed. For those who are calling from the from their cell phone, press 9 to join the queue and 6 to accept the audio when requested. The next question now will come from Ojeri Oraujo, sell side analyst Bank of America. Agaru, we're going to open your audio so that you may ask your question. Please proceed.

[Rogerio Araujo, Director at Bank of America]

Yeah. Hey, John, Alex, Abi. Thanks a lot for the opportunity. I have a couple here. The first one on liquidity, second key is usually at the third quarter in terms of seasonality and cash flow.

[Rogerio Araujo, Director at Bank of America]

So if you could update us on any potential credit line from the government that has been spoken in the past, if there is an update there. Also, we saw the TAPS bond going to a, actually, short term asset in the balance sheet. It expires in March 26, if I'm not mistaken. So what to expect with TEP's bond? Will it become a cash position same amount as in the balance sheet in March?

[Rogerio Araujo, Director at Bank of America]

Is there any way that it could be repurchased by TEP before that? Would that require a haircut? So how can we think about that line? And my second question of actually, it's a follow-up from the equity offering. I understand there is an anti dilution clause for creditors that are converting that into equity.

[Rogerio Araujo, Director at Bank of America]

And at this price an offer could trigger further dilution to investors. So how can we think about this potential equity offering in terms of this clause? What to expect? Could that be revised? Is there other alternative?

[Rogerio Araujo, Director at Bank of America]

Because I understand that this has to be concluded for the third phase and the restructuring to be concluded as well. Thank you so much.

[John Rodgerson, CEO & Member of Board of Executive Officers at Azul]

Roger, we're gonna take it take it in pieces. You know, first of all, second quarter, you know, as we build up the summer and sell the summer peak, usually, there's improvement in cash flow in the second quarter compared to compared to the first quarter. But your question about the government line, I think we've seen, movement for sure. They passed through, initial approvals for the FGE line, which, you know, could be, you know, a couple hundred million dollars worth of liquidity to the airline to each airline. And so we're very positive on that.

[John Rodgerson, CEO & Member of Board of Executive Officers at Azul]

We've been in in constant conversations with the government around that line. So, you know, all things indicate that that'll get approved fully in the next week or two, which which that's exciting. As for as for the equity offering, I'll let Alex kinda give more color. But, obviously, that anti dilutive clause was not helpful. And so as we went through the process, you know, we needed to equitize the debt that they have.

[John Rodgerson, CEO & Member of Board of Executive Officers at Azul]

And and what I would say, which I do is we're in constant conversations with the bondholders. And so, you know, they asked for something initially that was to protect them, and it actually didn't protect them. It didn't didn't protect and sustain the stock. And so, yeah, we're in we're in constant conversations with them on a better approach because we do need to delever the business even further. And, you know, that clause is not helpful for sure.

[Alexandre Malfitani, CFO, Investor Relations Officer & Member of Board of Executive Officers at Azul]

Yeah. That's right. On the liquidity, you know, sometimes I think people, you know, mix up, you know, the the strength of the quarter in terms of revenue versus the strength in terms of cash. Right? Q one is a very good quarter in terms of demand and revenue, but it's flown revenue.

[Alexandre Malfitani, CFO, Investor Relations Officer & Member of Board of Executive Officers at Azul]

But most of that flown revenue was booked in previous quarters. So in terms of cash, q one is actually probably our worst quarter, seasonally speaking. Q two is our worst quarter in terms of demand, traffic, you know, usually, you know, RASK. But it is a good quarter in terms of cash because you're starting to build both revenue into the July season and the second half of the year, which is obviously the stronger in terms of demand. You know, it's not exactly, you know, like that, but usually, the strongest quarters in terms of revenue are the weakest quarters in terms of cash flow and vice versa.

[Alexandre Malfitani, CFO, Investor Relations Officer & Member of Board of Executive Officers at Azul]

Right? The weakest quarter in terms of revenue is the strongest quarter in terms of cash. It's not exactly like that, but q two is not a bad quarter in terms of cash generation. In terms of the tab bonds, yeah, I mean, they are within a year from maturity, so that's why they are in in short term. And we we expect to to be paid.

[Alexandre Malfitani, CFO, Investor Relations Officer & Member of Board of Executive Officers at Azul]

That's a debt that has never been in question. You know, there are discussions obviously on the collateral and the interest calculation, but, you know, no discussion on the existence of the debt. So we'll be discussing with with TAP and the Portuguese government, obviously, you know, directly with them. And any news, we will share with the market as as soon as possible.

[Rogerio Araujo, Director at Bank of America]

Fair enough. That's very helpful. Thank you.

[John Rodgerson, CEO & Member of Board of Executive Officers at Azul]

Thanks, Rogerio.

[Operator]

Thank you. The next question will now come from Gilenmi Meng, Saleside Analyst, JPMorgan. Gilenmi, we will open your audio, so you may ask your question. Go ahead.

[Guilherme Mendes, Executive Director - Equity Research at JP Morgan]

Hey, John, Alex, Abhi. Thanks for taking the time. First one, it's on the M and A, the potential M and A with Go. The company now is expected to exit Chapter 11 probably in June, and you are evolving your own liability management. So if there's anything that you can share on the exchange ratio or at least timing for it to be announced.

[Guilherme Mendes, Executive Director - Equity Research at JP Morgan]

And the second one, just a follow-up on the guidance. Are you guys formally withdrawing the guidance or just not updating it? Thank you.

[Abhi Shah, Chief Revenue Officer & Member of Board of Executive Officers at Azul]

Hi. On the m and a, you know, we as we have said before, we continue we continue to be in conversations with Abra. They always made it clear that Gold was going to exit first, so that was always always a always part of the plan. But the the discussions continue, and they they continue on on many parallel fronts, including valuation, including antitrust documentation, all those kinds of things. So the discussions continue.

[John Rodgerson, CEO & Member of Board of Executive Officers at Azul]

And as for guys, there's no change. So

[Guilherme Mendes, Executive Director - Equity Research at JP Morgan]

Perfect. Thank you.

[Operator]

Okay. Thank you. And the next question comes from Savi, our sell side balance Raymond James. So, Savi, we will open your audio, so you may proceed.

[Savanthi Syth, MD - Airlines & Advance Air Mobility at Raymond James Financial]

Hey. Thanks for the follow-up. I just given the kinda outlook hasn't changed, I'm guessing your views on capacity haven't changed much. But could you talk a little bit again about how you're thinking about that, for the rest of the year and and in between domestic and international? Thanks.

[Abhi Shah, Chief Revenue Officer & Member of Board of Executive Officers at Azul]

Yeah. Hey, Savi. Yeah. It hasn't changed a lot. You know, as John said, we are making changes to the network.

[Abhi Shah, Chief Revenue Officer & Member of Board of Executive Officers at Azul]

But overall, I see about in the in the in the domestic industry, I see about 8% growth. On a year over year basis, it will it will peak in the second quarter. So you will see higher growth from everybody in the second quarter, and then you will see lower year over year growth from everybody in the back half of the year. So as we go LatAm are kind of all following that same trend. And and for us, yeah, we're we're on plan.

[Abhi Shah, Chief Revenue Officer & Member of Board of Executive Officers at Azul]

I would say domestic around 8%. International is gonna be higher only because some of the OEM issues that we faced last year led us to have an artificially low base. So you will see high international now in February, and then you will see higher international again in 4Q because of the OEM. But I would say, Azul overall, you know, around 10%, domestic will be around 8%.

[Savanthi Syth, MD - Airlines & Advance Air Mobility at Raymond James Financial]

That's helpful. Thank you.

[Operator]

Okay. Thanks. The next question comes from Daniel McKenzie, Seaport. Daniel, we will open your audio. So please proceed with your question.

[Daniel McKenzie, Equity Research Analyst at Seaport Research Partners]

Oh, hey. Thanks. Good morning, guys. Really, the the the questions that I have really are around hardening the business model to handle the macro swings that, you know, that can cause revenue to move pretty hard, FX and fuel. And and so I'm just curious in the context of of hardening the business model going forward, you know, you guys have done a lot to to to build a really impressive airline.

[Daniel McKenzie, Equity Research Analyst at Seaport Research Partners]

But, you know, the traditional way has been to slow capacity, cut capacity. I'm just curious, you know, how you're prioritizing the levers, looking ahead. And then just related to that, you know, what leverage metric metrics are you targeting end of this year and and end of next? And, you know, what's the pathway to the the optimal balance sheet that you'd like to see?

[Alexandre Malfitani, CFO, Investor Relations Officer & Member of Board of Executive Officers at Azul]

Hey, Dan. Yeah. I mean, as an airline in Brazil, you know, we we always say that we are an imported service in a way. Right? And so we are exposed to the cost of importing the inputs that allow us to produce a seat in Brazil.

[Alexandre Malfitani, CFO, Investor Relations Officer & Member of Board of Executive Officers at Azul]

Right? We have aircraft that are denominated in dollars. The financing for the aircraft is mainly in in dollars. Even the working capital. For an airline, as a capital intensive business, usually for you to be able to borrow the significant amounts of capital that the business requires for the for a longer term, that capital is usually provided by US or foreign investors that want a return in dollars.

[Alexandre Malfitani, CFO, Investor Relations Officer & Member of Board of Executive Officers at Azul]

Fuel in Brazil, unfortunately, is dollar denominated. We don't think it should, but but it is. And then a lot of other items, right, like, you know, GDS fees and IT and spare parts and maintenance and insurance. And so, yes, you know, that exposure is intrinsic to the to the business. I think the lever we pull, I wouldn't say as much capacity, but I think the main one is fares, right?

[Alexandre Malfitani, CFO, Investor Relations Officer & Member of Board of Executive Officers at Azul]

We see that fares are essentially back to the dollar with a bit of a lag. They're not indexed to dollar, but we've demonstrated that over time, even though the real has, you know, significantly devalued since we started Azul. You know, the real was at $1.60 to one when we started Azul, and I I don't think anybody had in their forecast that it would reach, you know, $6.30 to to one. But over time, we have been able to more than offset that currency devaluation with fares through the strength of our network and our fleet and the customer experience that we deliver. We've always also made the company a lot more efficient.

[Alexandre Malfitani, CFO, Investor Relations Officer & Member of Board of Executive Officers at Azul]

Right? And we're gonna do that regardless of the dollar. We'll be, you know, constantly pursuing more efficiently more efficiency, more productivity, you know, higher aircraft utilization. Right? You just need to be constantly looking for opportunities to reduce cost.

[Alexandre Malfitani, CFO, Investor Relations Officer & Member of Board of Executive Officers at Azul]

And even though we've made a lot of progress, if you look at everything that's under our control, which is employee productivity, aircraft utilization, ancillary revenues, you know, the revenue that come from our business units, everything that's in our control is doing really well. But, unfortunately, you know, the things that are outside of our control such as fuel and FX were big headwinds in q one. But the positive news is that they should be much better for the remainder of the of the year. Right? But also one thing that we had in the past, Dan, you may remember, we kinda had to use it up during, you know, the the the Brazilian recession in '16 and then, you know, through the pandemic is that we are able to finance our fleet in reals.

[Alexandre Malfitani, CFO, Investor Relations Officer & Member of Board of Executive Officers at Azul]

Right? We are the only operators of Embraer in Brazil. And in the past, we had about a third of our fleet that was debt financed and a lot of those aircraft were financed in reals. That is a great hedge. Unfortunately, it's not one hedge that we can just reset and rebuild overnight, but we will absolutely do that going forward.

[Alexandre Malfitani, CFO, Investor Relations Officer & Member of Board of Executive Officers at Azul]

The beauty of that is that the aircraft, when it's financed in reais, it continues to be valued in dollars. And if you need to reduce capacity, you can sell that asset, pay down the debt, and the debt will be constant. Right? We'll not have increased because of the devaluation while the value of your asset will. Right?

[Alexandre Malfitani, CFO, Investor Relations Officer & Member of Board of Executive Officers at Azul]

We had that cushion that we built over time. We had to use it up over a couple of crisis that we we faced, and we're going to rebuild it going forward. And that will be another competitive advantage that Azul has, which no other competitor can match.

[John Rodgerson, CEO & Member of Board of Executive Officers at Azul]

Yeah, Dan. A couple of things. You know, just the FX alone is gonna improve and leverage, but a couple of things that Alex said, I just wanna reiterate. We're down year over year in head count. Absolute FTEs were down, yet we're up 15% in ASKs.

[John Rodgerson, CEO & Member of Board of Executive Officers at Azul]

So we are building a more efficient airline. Real denominated debt, we have the ability to finance our e twos. The government line is also something. We need to have less US dollar denominated debt on our balance sheet. We need to delever, and that's why we're talking to our partners about doing.

[Daniel McKenzie, Equity Research Analyst at Seaport Research Partners]

Yeah. Yeah. Thanks for that comprehensive answer. A follow-up to that is, Alex, can you speak to CapEx this year and next, you know, just big round numbers? You know, how should we think about that?

[Daniel McKenzie, Equity Research Analyst at Seaport Research Partners]

And then, you know, given everything that you just shared, how can we tie that you know, what kind of leverage metrics should we think about for Azul as we look ahead one to three years?

[Alexandre Malfitani, CFO, Investor Relations Officer & Member of Board of Executive Officers at Azul]

So CapEx, I think you remember back in, I think November, we put out a a walk through of our free cash flow to to firm. You know, that number is dollar denominated. The dollar has fluctuated somewhat. So depending on what your dollar assumption is for the year, you need to adjust that CapEx number going forward. Also, you know, the OEM issues that we had may require a little bit, you know, more engines to be sent to to overhauls.

[Alexandre Malfitani, CFO, Investor Relations Officer & Member of Board of Executive Officers at Azul]

But, you know, we we we don't have guidance on CapEx, and we don't have guidance on leverage either. But you can use, like, kind of those old numbers as a as a guideline, you know, for you to come up with your with your estimates. Now, you know, we we want to reduce leverage. I think that is something that all stakeholders of Azul would like to see. We've we've done a lot of progress on reducing that leverage, and, unfortunately, some of that leverage came back through the devaluation, but it's coming back.

[Alexandre Malfitani, CFO, Investor Relations Officer & Member of Board of Executive Officers at Azul]

Right? So we will continue working on everything that's within our powers to generate more cash, pay down debt, and that's also something that is always permeating our conversations with all of our stakeholders.

[John Rodgerson, CEO & Member of Board of Executive Officers at Azul]

Hey, Dan. I just wanna reiterate one other thing, which is a which is a competitive advantage that Azul has is that all of our next generation aircraft are under PBH contracts and engine agreements overall. So while CapEx will be up in the short term because of the reliability of the new engines, you know, you're gonna get that back over time. It's just a pull forward, if you will, because all of our engines are under a power by the hour contract. And that that's a competitive advantage that we have that, quite frankly, the OEMs aren't offering anymore.

[John Rodgerson, CEO & Member of Board of Executive Officers at Azul]

Right? And and so as we look forward, you know, we would have that advantage, going into the next few years.

[Alexandre Malfitani, CFO, Investor Relations Officer & Member of Board of Executive Officers at Azul]

Yeah. And it is an asset that Azul owns. Right? Because as John said, that that contract is not being offered anymore, and it is providing significant protection because the cost of engine overhauls with all these supply chain issues and OEO and MRO capacity issues is obviously going up significantly.

[Daniel McKenzie, Equity Research Analyst at Seaport Research Partners]

Mhmm. Yeah. Thanks for the time, you guys.

[John Rodgerson, CEO & Member of Board of Executive Officers at Azul]

Thanks, Dan.

[Operator]

Thank you. I will now turn it over to John for closing remarks.

[John Rodgerson, CEO & Member of Board of Executive Officers at Azul]

I'd just like to thank everybody for your time today and thank our crew members for all their work in the quarter. And we look forward to talking to you. Feel free to reach out to our IR team if you have any additional questions. Thanks, everybody.

[Operator]

Thank you. This concludes the Azul's audio conference call for today. Thank you very much for your participation, and have a great day.

Participants

Executives

• Thais Haberli, Capital Markets Director
• John Rodgerson, CEO & Member of Board of Executive Officers
• Alexandre Malfitani, CFO, Investor Relations Officer & Member of Board of Executive Officers
• Abhi Shah, Chief Revenue Officer & Member of Board of Executive Officers

Analysts

• Savanthi Syth, MD - Airlines & Advance Air Mobility at Raymond James Financial
• Andre Ferreira, Capital Market Analyst at Banco Bradesco
• Shannon Doherty, Analyst at Deutsche Bank
• Rogerio Araujo, Director at Bank of America
• Guilherme Mendes, Executive Director - Equity Research at JP Morgan
• Daniel McKenzie, Equity Research Analyst at Seaport Research Partners