Azul optimistic post-IPO; touts new aircraft

São Paulo-based Azul Brazilian Airlines views more efficient aircraft joining its fleet—specifically the Airbus A320neo and Embraer E195-E2—and new revenue streams from ancillary fees as keys to what it is characterizing to investors as a “ton of upside” going forward.

Buoyed by an initial public offering (IPO) that raised $570 million in April, Azul executives said a more stable Brazilian economy helped it narrow its second quarter 2017 net loss by 71.7% year-over-year (YOY) to BRL33.9 million ($10.3 million) and swing to a BRL21.3 million net profit for the first half of the year compared to a BRL187.1 million net loss in the first six months of 2016.

“What you’re seeing is stability” in the Brazilian economy, Azul CEO John Rodgerson told analysts and reporters during an Aug. 14 conference call. “We’re not here to claim the recovery is in play yet, but we’re very optimistic for the second half of the year.”

The carrier added three more A320neos in the first half of 2017, bringing to eight the total number it has in its fleet, and will take delivery of another three A320neos in the second half of the year.

“We continue to be impressed with the performance of the A320neos,” Azul chairman David Neeleman said in written comments released with the carrier’s earnings report. “They have outstanding productivity with an average utilization rate of 14 block hours per day, and we are seeing strong growth in the margins of the routes they currently serve. As you know, we expect to increase capacity by up to 13% this year mostly through the introduction of 11 next-generation A320neos, replacing smaller aircraft on longer-haul routes that we already serve.”

Azul ordered a total of 55 A320neo family aircraft, including 10 A321neos. Azul’s current fleet is dominated by more than 70 E190/E195 aircraft.

Azul will additionally be the launch operator for the E195-E2, for which it has 50 firm orders, in 2019. “We expect to go through a significant fleet transformation,” Rodgerson said.

In addition to the newer aircraft, Azul believes it can drive revenue performance through the unbundling of its fares. While charging checked bag fees and other ancillary fees is a common practice for airlines in North America and Europe, it is new to the Brazilian market.

Azul started offering a fare that does not include a checked baggage allowance June 1. Passengers buying the fare can upsell to a ticket that includes a checked bag for BRL30 prior to the day of flight or pay a BRL50 checked bag fee at the airport. There has been “minimal customer disruption” from the change, Rodgerson said. “Charging for bags is just the first step in the unbundling of our product,” which the airline believes will lead to significant revenue gains in 2018 and beyond.

Azul chief revenue officer Abhi Manoj Shah added, “This is a big change for Brazilian customers, but we’ve seen little negative reaction.” He said about 50% of tickets sold since June 1 are the new fares that do not include a checked baggage allowance. “A relatively good percentage of those customers actually show up to the airport with a bag,” leading to added revenue, Shah said.

Azul’s second-quarter revenue rose 19.3% YOY to BRL1.7 billion while expenses increased 12.2% to BRL1.6 billion, producing operating income of BRL104.9 million, a significant expansion from an operating profit of BRL1.3 million in the prior-year period.

Azul’s second-quarter traffic increased 20.8% YOY to 4.8 billion RPKs on a 17.9% rise in capacity to 6 billion ASKs, producing a load factor of 80.9%, up 1.9 point.

Azul is 23.7%-owned by China’s Hainan Airlines and 5%-owned by Chicago-based United Airlines.