Azul: ‘After Americanas, debt became a bad word’ – 06/11/2023 – Market

Azul’s shares are the most valued among Ibovespa shares this year, according to Trademap. Since the beginning of 2023, the paper has appreciated by around 80%. That’s even with the company adding a gross debt of R$ 21.6 billion in the first quarter.

In the view of the company’s CEO, John Rodgerson, this is because the market is “finally” understanding the company’s strategies to get out of the crisis that plagued airlines at the beginning of the pandemic.

In March of this year, Azul announced that it signed commercial agreements with aircraft lessors, within the company’s plan to strengthen cash generation and improve its capital structure. The company’s idea is to return 100% of the amounts owed for leases that were not paid during the period with more restrictions from the pandemic in Brazil, in 2020. According to the company, lessors represent 80% of Azul’s nominal gross debt.

The executive perceives the market’s great fear of corporate indebtedness, especially after the crisis in Americanas. But he considers that a debt that affects the company’s working capital, as happened with the retailer, is different from Azul’s liabilities, which were contracted so that the company continued to generate revenue.

“After the Americanas case, debt became a bad word. But there are debts and debts. When you have a debt that is your working capital, it’s bad. But when I have a debt for an aircraft that will produce revenue and Ebitda [lucro operacional] for me for the next decade, that’s not bad debt, because I have an asset and I’m going to keep producing”.

In addition to the renegotiation of the airline’s debts, Rodgerson also says he is optimistic about Petrobras’ new pricing policy, since today fuel expenses represent 45% of Azul’s total costs. The executive also looks positively at the initiatives of the government of Luiz Inácio Lula da Silva (PT) aimed at increasing the population’s access to air travel. “In general, I think that the Lula government wants the C class and the poor to fly. It has always had this concern”, he says.

Azul’s shares are among the ten highest rises on the Ibovespa in the year. In your opinion, what is the motivation of investors? I think the market is understanding everything we did to fix Azul. Finally, the market is understanding that Azul has always been one of the most profitable companies in the world and one of the fastest growing companies. And what does the investor want? A company that is growing and profitable. And we’ve always had that.

When we went through the pandemic, Azul was one of the only airlines in the world that did not receive government support. So, if you look at Delta Air Lines, American Airlines, JetBlue… They all received government funding. And then there were other companies, such as Latam and Avianca, from Latin America, which filed for bankruptcy. So, people were looking at Azul and saying: ‘How is it possible that Azul will survive without a government contribution and without a judicial recovery?’.

Our stocks started to go down because people were saying, ‘How are they going to survive this?’ But what happened is that our creditors, especially those who lease aircraft to us, believe a lot in our management. They know that Covid, currency devaluation and the Ukraine War were not management’s fault. So what we did was: instead of going to the judge, we settled with our partners.

Azul is a very solid company. So what was Blue’s problem? She was carrying debt from 2020. We spent a year without revenue and financial obligations did not end in 2020. At the time, we said we would pay later. And the later came in 2023. We negotiated a great deal, which was beneficial to everyone. Without having to default on someone. Because judicial recovery is to default. Not paying 100% creditors is defaulting. And the way Azul negotiated its debts was very beneficial for shareholders. We made an agreement to change many of these debts to 2030, with interest at 7.5% per year, which is very low compared to the level that interest rates are in Brazil at the moment.

Was the financial market afraid that Azul would go bankrupt and now you see that it is not like that? There is a lot of fear in the financial market today, because, after the Americanas case, debt has become a dirty word. But there are debts and debts. When you have a debt that is your working capital, it’s bad. But when I have debt for an aircraft that will produce revenue and Ebitda [lucro antes de juros, impostos, depreciação e amortização] for me for the next decade, this is not bad debt, because I have an asset and I will continue to produce.

This is very different from what Americanas had. And another thing that I think the financial market didn’t realize is that we don’t depend on local banks. If you look at Itaú, Bradesco and other banks, less than R$500 million of our debt comes from them. It’s nothing. All these banks were lending money to Azul, it is true, with high interest rates, but we were not financing Azul through the local market. So these high interest rates are not impacting us that much, because this was not our source of capital. Our source of capital was from aircraft lessors. So, we had this big crisis with Covid and also the exchange rate devaluation —which strongly affects our sector. These factors are beyond our control. But when it comes to things that we can control, we did everything right. Our revenue in the first quarter is 75% higher than in the same period of 2019. We are more efficient as a company.

How is Azul dealing with the changes that came with the pandemic? Executive flights, for example, have not yet fully resumed. Today the demand for executive flights is 85% of what it was. But the revenue, the average tariff, is 50% above what it was. So, in terms of revenue, it’s back. But I want to show you something else, exemplifying what happens on the Carnival holiday. In the past, the average fare to go to Bahia on Carnival Friday was R$2,000. On Thursday, it was BRL 1,000 and on Wednesday, BRL 500. But nowadays, with the home office, those who cannot afford to pay BRL 2,000, but are able to pay BRL 500, can go on Wednesday and work those two days before Carnival there. That is, for those who were willing to pay BRL 2,000 before, it has not changed. But now, those who can only pay R$500 can go earlier. So, what was a bad day for us, which was the Wednesday before Carnival, turned into a profitable flight, due to the flexibility. That certainly must remain.

Mr. signaled that air ticket prices should stay high for a longer time, until there is a leap in flight supply. With the change in Petrobras’ pricing policy, and the possibility of more jet fuel price cuts, is there an expectation of a reduction in tickets soon? Not yet. But we are optimistic about this change at Petrobras. I’ll show you some data: 93% of the fuel we consume in the country comes from Brazil and 7% is imported. But how do these 7% arrive in Brazil? You have to put it inside a boat and take the boat to Brazil and then distribute it. What happens is that, in the end, this fuel is 25% more expensive than the fuel here. But do you know what they do? What is certain is that our price is 93% of the current cost plus the margin, but they place the premium for imported fuel above 100% for fuel in the country.

Brazilians pay more for fuel than Colombians, Mexicans, Americans, Europeans and anywhere else in the world. And speaking of travel, this affects the C class in Brazil more. As a result, Brazilians travel less than Colombians, and travel a third of what Chileans travel. This is a shame for the country compared to Brazil’s GDP.

Brazil’s fuel price is the most expensive in the world because of this parity price. When it comes to price parity, Brazil does not have it today. Price parity will only exist when Azul, Gol and Latam pay for fuel the same as foreign companies pay.

I am optimistic about the change at Petrobras. Azul lost money last year and do you know who won? Petrobras. Because the price of fuel has doubled, but Petrobras’ cost has not doubled. Today, 45% of Azul’s costs are fuel. So, the price of cheaper fuel makes Azul, Gol and Latam want to fly more, to increase the offer of flights. This is what will reduce ticket prices.

Do you see good will from the government in the dialogue with the airlines? Yes. In general, I think that the Lula government wants the C class and the poor to fly. He has always had this concern.

And what is missing for Brazil to be able to have a model similar to that of Europe, where there are so-called low-cost airlines, which offer flights at a lower cost? Brazil operates only 3% of all flights in the world, but 86% of all lawsuits in the world involving airlines are here in the country. Azul is the most punctual airline in the world. Not from Brazil, not from Latin America, but from the world! And look how much we spend on lawsuits. Let’s say I delay your flight and you file a lawsuit claiming you missed a very important appointment, like a job interview. The judge wins the case for you. Because it’s consumer law. It’s like saying you were on a Zoom job interview, then the call dropped and you’re going to sue Zoom because you missed that important event. This is a cancer that is affecting Brazil.

Another problem: in the United States, flights are canceled because of a hurricane, for example, and passengers are not reimbursed. It’s a natural event. If it were in Brazil, companies would have to pay for hotel, food, internet access and everything for passengers. Brazil is the only country that does this. When Santos Dumont airport, in Rio de Janeiro, closes, passengers have the right, guaranteed by Anac [Agência Nacional de Aviação Civil], the food, transport, hotel, internet access, telephone and rebooking. Now, if Ryanair [companhia aérea irlandesa low cost] come to Brazil … Go there, charge R$ 10 on a Rio-Sao Paulo flight. On the first canceled flight, even if the passenger doesn’t process it, the company will already spend R$700 because of all that I said. It has no conditions. So, there are two things that I think are a cancer in Brazil for the airline industry: the parity of the fuel import price and this cost of lawsuits.

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John Rodgerson, 46

Graduated in finance from Brigham Young University, he is one of the founders of Azul and the company’s CEO since July 2017. Before taking up the position, Rodgerson was CFO and Director of Investor Relations at Azul, being responsible for the areas of Planning and Financial Analysis, Treasury and Accounting of the airline. He also held the position of CEO of the company’s operating subsidiary, Azul Linhas Aéreas Brasileiras SA, between August 2019 and October 2022. Before joining Azul, Rodgerson was Director of Planning and Financial Analysis at JetBlue Airways, in addition to have worked for IBM Global Services.