Hello, everyone, and welcome to Azul's third quarter 2021 results conference call. My name is Simone, and I'll be your operator for today. This event is being recorded, and all participants have been placed in listen-only mode until we conduct a question-and-answer session following the company's presentation. Should any participants need assistance during this call, please press star zero to reach the operator. I would like to turn the presentation over to Thais Haberli, Investor Relations Manager. Please proceed.
Thank you, Simone, and welcome all to Azul's third 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. Presenting today will be David Neeleman, Azul's Founder and Chairman, John Rodgerson, our CEO, and Abhi Shah, our Chief Revenue Officer. Alex Malfitani, our CFO, is also here for the Q&A session. Before I turn the call over to David, 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. These statements are based on a range of assumptions that the company believes are reasonable but are subjected 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 David. David?
Thank you, Thais. Hi, everyone. Thank you for joining us for our third quarter 2021 earnings call. As always, I would like to start by thanking every Azul crew member for their passion and dedication. Thanks for their efforts, we delivered an industry-leading quarter with significant growth in our network revenue and earnings. I am really proud of our team, and slide three shows why. We had positive operating income in the quarter. Our EBITDA was the highest since the start of the pandemic, and our unit revenue was higher than 2019. Let me say that again. Our unit revenue was higher than in 2019. You know, you guys know how hard that is, and you know that very few airlines around the world have achieved this. I think it is truly incredible.
In addition to all that, we are seeing record bookings at record fares. All the while, our network is back to over 800 flights a day to 130 destinations, which is also above pre-pandemic levels. Speaking of our network, slide four shows how well we are aligned to a growing Brazil. 13 years ago, when we started a different airline with a unique fleet and network that focused on all of Brazil. That's the whole country. This focus enabled our growth pre-crisis, sustained us during the crisis, and is the key to our future as we emerge even stronger. Our broad and diverse network serves all of Brazil, and we are especially strong where the country is growing the fastest. This is why we present to you today industry-leading across the board.
We have another competitive advantage. As you can see on slide five, our logistics business continued its outstanding performance with another record quarter. We are well on track to exceed our target of BRL 1 billion of revenue this year, and the opportunities keep coming. This week, we announced a unique partnership with FedEx. My friend and neighbor, Fred Smith, have been discussing this for a while, and we just announced that Azul Cargo locations now also become FedEx locations. That gives FedEx unmatched distribution in Brazil with our 300 stores that serve 4,200 zip codes across the country. For Azul Cargo, it also gives us access to the FedEx global network. When it comes to logistics, we are just getting started. Wait, there's more. On slide six, I wanted to talk about a project that is especially close to my heart.
As many of you know, I got my start. I started my career selling vacation packages to Hawaii. I've always believed that with Brazil's emerging travel market and amazing natural beauty that Azul could do very well in the vacation business. I have to say that Abhi's team did not take me very seriously at first, so now I get to tell them, "I told you so." What's important is that our vacation business—in our vacation business that we call Azul Viagens, which in Portuguese means Azul vacations—is growing like crazy. We're setting records every single month and bringing unique value to our network. For example, during our low-demand times on weekends, when most other airlines bring down their schedules, we fly 200 fully dedicated flights to Azul Viagens destinations. This is pure utilization flying.
The map you see on slide six looks a little all over the place because it is. We connect big cities and small cities and others you've never heard of with nonstop flights to the largest leisure destinations all over Brazil. We are flying routes on weekends that we don't even serve during the week. You know, at the current rate of growth, we expect that Azul Viagens will exceed BRL 1 billion in revenue next year, and that, so another billion-dollar business. You know, and so this is just another reason why we have industry-leading margins. Finally, I just wanted to say, the team is all in. Before, with tremendous sacrifice, I should say, during the pandemic.
Before, during, and now as we emerge from the pandemic, our focus and dedication is driving these results, and I could not be more grateful to the entire Azul family. With that, I'll pass the word on to John, who'll give you more details on the third quarter. John?
Thank you, David. I also want to thank our crew members for their hard work during the third quarter. Thanks to them, we were able to deliver an industry-leading result. As you can see on slide seven, Brazil continues to make great progress on vaccinations, with more than 90% of the adult population vaccinated with at least one dose. This is higher, let me repeat, higher than the United States or Europe. The progress continues. Not only are second dose numbers very strong, but the country has already applied more than 11 million booster shots. Moving to slide eight, we are once again reminded that vaccines work, and how incredible it was that the world got them so quickly. The average number of COVID-19 cases and deaths in Brazil has drastically declined.
Sadly, we had peaked at 4,500 daily deaths in the second quarter, just one quarter ago, and we are now down 95%. The state of São Paulo recently had days with zero deaths. We talked about this during our second quarter earnings call, how vaccinations would result in an inflection point in demand. We prepared for this, and I'm happy to say that I believe we are taking full advantage of the recovery and demand. To give you more details, though, let me turn it over to Abhi for a bit.
Thanks, John. As you can see on slide nine, the inflection in booking trends started in late July. Back then, as we noticed booking volume and vaccination rates increasing, we immediately turned our focus on average fares. We prepared for this and wanted to make sure that we captured this demand at the highest quality possible. Today, as a result of that focus and work we started back in July, we are seeing record book-to-revenue that is directly driven by higher fares. On the slide, you also notice an important detail. The recovery in book-to-revenue is ahead of the recovery in capacity. That difference goes directly to RASK, which leads us to the strong flown revenue we saw during the quarter.
Turning to slide 10, if you also remember during our second quarter call, I said that the improvements in bookings will lead to better flown RASK in the quarter ahead. It takes a little time to build those booking curves. Initially, I had thought that we would get to 2019 RASK towards the end of the fourth quarter, but I'm really happy to report that we have accomplished that more than a quarter ahead of schedule. Strong close in bookings together with improvement in corporate revenue helped to achieve this. On the slide, you can see the sequential and consistent improvement in unit revenue with 3Q2 above 2019 levels. The exit rate for 3Q was even higher than the average of 1%, which feeds nicely into further improvement for the fourth quarter this year.
Moving to slide 11, as David said, it isn't that common that an airline right now has recovered its pre-crisis RASK, especially ones with 90% or more capacity recovered. I'm really proud that we are one of the few around the world to have achieved this. Revenue can be created or destroyed in the detail, and the team has worked really hard to capture as much as possible. As a result, we are optimistic of the trends we are seeing. With that, I'll turn it back over to John. John?
Thanks, Abhi. As you can see on slide 12, we grew our top line by 60% in the quarter to over BRL 2.7 billion, while operating expenses increased only 23%. This shows the operating leverage available to us post-pandemic and our commitment to emerging from this crisis a more efficient airline. Moving on to slide 13. For the first time since the onset of the pandemic, we generated positive operating income, reaching BRL 136 million in the quarter, which represents a margin of 5%. EBITDA in the quarter was also a record since the onset of the pandemic at BRL 486 million, representing a margin of 18%. Again, from what we can see, we're one of the few airlines around the world that not only have positive EBITDA, but also positive EBIT.
During these times of higher fuel prices, there are very few things more important than fuel-efficient aircraft. As you know, fleet transformation is a key part of our strategy, and we have already made good progress. As you can see on slide 14, compared to 2016, our fuel consumption per ASK is down 20%. Correspondingly, our CO2 emissions per ASK are also down significantly over the same period. This progress is important as we reaffirm our commitment to sustainable growth. We already have the largest fleet of next-generation aircraft in the region, and there's more to come. As you can see on slide 15, our operation generated BRL 1.1 billion in cash flow, which we used to deleverage the airline in the form of rent payments and also had money to invest in CapEx for our future.
I'm happy to report that we ended the quarter with a strong immediate liquidity of BRL 5.3 billion, together with a total liquidity of BRL 8.3 billion. As a reminder, we entered the crisis in the first quarter of 2020 with only BRL 2 billion. Ending this quarter with BRL 5.3 billion is truly remarkable. On slide 16, you can see that Azul has no significant debt repayments over the next two years. This comfortable liquidity position ensures that we can focus on the many opportunities ahead of us that we see in this market. On slide 17, it's important that we show the world all the good we are doing. For example, in the quarter, our passionate crew members supported and participated in more than 100 voluntary actions, helping thousands of people all over the country.
We distributed more than 7,000 donated pieces of clothing, and over 520 organs were transported on our aircraft, helping save lives. We also delivered more than 43 million vaccines to some of the most remote parts of Brazil as part of our commitment to use our scheduled network and carry vaccines free of charge. Looking forward, while currency and fuel are a challenge, we are really excited about our business. We have unique competitive advantages and leverage for earnings growth, as you can see on slide 18. It begins with our fleet and network advantages, complemented by our businesses such as Azul Cargo, Azul Viagens, and TudoAzul, our loyalty business. In addition, vaccinations continue to increase. Brazilian cities are now open. Companies are back to in-person work, and international border restrictions have been lifted.
As a result of these developments, along with current demand trends, we are full of confidence as we head into 2022. We plan to be one of the few airlines in the world to produce more EBITDA in 2022 than in 2019. With that, David, Alex, Abhi, and I are here to answer your questions.
Ladies and gentlemen, thank you. We'll now begin the question and answer session. If you have a question, please press the star key followed by the one key on your touchtone phone now. If at any time you would like to remove yourself from the questioning queue, press star two. For those following the call via webcast, you may post your questions on the platform, and they will be either answered during this call or by the Azul investor relations team after the conference is finished. The first question comes from Josh Milberg with Morgan Stanley.
Hey, everyone, and thanks for the call and big congrats on the results. My first question is if you could revisit the guidance for 2022, given these results and also just given the shift in fuel and FX. Then as a part of that question, it would be just great to get your updated thoughts on capacity growth next year and what the breakdown of this growth could be. I think before you were contemplating a major expansion of routes as part of the plan on the domestic side and a rebound to 2019 levels on the international side.
Thanks, Josh. Thanks for congratulating us. We're very happy with our revenue performance for sure in the quarter. As we look forward, you know, Abhi is ahead of where he thought he'd be. I think as we look into 2022, when we did our forecast, I think previously we said we'd be $4 billion plus. Obviously, exchange rate and fuel prices impact that, but we feel very good about the revenue performance that we've been able to do. What we said is, "Look, we're gonna be above 2019." You know, we haven't given up on the $4 billion, but, you know, it's in that range. You tell me what fuel is gonna be and what currency is gonna be.
I think the revenue performance is the most important thing you need to take away from this call, is we're seeing very strong revenue performance. Obviously, we have a lot more to do, and David highlighted a lot of the things that differentiate Azul. Azul Cargo, right? I mean, just the fact that it's gonna do $1.1 billion this year. Next year, it's gonna be a lot bigger than that. You know, the packaging business that Abhi's developed over the last couple of years, and obviously, and Alex is going after cost. And so, you know, we feel confident about 2022. You know, we're not saying it's gonna be, you know, above $4 billion at this point just because of currency and fuel, but we haven't given up on the $4 billion, Josh. We feel very good about where we are.
We feel very good about how the team is working and the capacity that we've deployed and the revenue that Abhi's been able to bring in. To talk specifically about capacity for next year, I'll turn it over to Abhi.
Hey, Josh. I'll divide it up into two, obviously, domestic and international. Happily, we are now going back into Orlando on December 1st . December onwards, we will have a daily flight to Lisbon, a daily flight to Fort Lauderdale, and a daily flight to Orlando. I don't expect much change to that, at least in the short to medium term, at least through the first six months or so of July. The revenue is good, but I wanna make sure that the flights do well and, you know, we keep the fares healthy. Internationally, I would say that we will only be close to 2019 levels by 3Q, 4Q of next year.
For the first six months, probably 50%, and the next six months, you know, 75%, and getting to 100% by the end of next year. That's on the international side. As a total, we will probably be just a little bit below 2019 for international. For domestic, we are gonna be larger than 2019, and the best estimate you can do for that is take what we have published right now. You can take an average of January, February, March, and then just you know take that times 12, basically. Our fleet is relatively stable through most of the year, you know, except through 3Q. We're flying the fleet that we have, and we're happy to do so. We haven't done so in 18 months.
It's very much gonna be focused in our markets, in our routes, in our network. We are still 80% plus alone in our network. We are larger than before in our hubs, like Campinas, like Recife, like Belo Horizonte, and that's where our focus is. A lot of the capacity is coming from upgauging. We've taken, you know, since 2019, A320, A321s and E2s, and that's where the capacity is coming from. We're actually gonna be lower in departures, but we're gonna be above in seats and stage length, which is actually really, really efficient growth, given that it's all in our network. Domestic will be bigger, well within our network. Basically kind of what we have today.
International, I expect, the three non-stop flights that we have now, at least for the short, medium term. Hope that helps.
That does help and thanks for all that color. Then my second question is if you could give this—I think this one is for John, your latest thoughts on the M&A possibility with LATAM. I just wanted to hear if anything had changed in your perspective with the macro situation, LATAM's latest results or anything going on behind the scenes. I ask that in part just because I know John hasn't been timid about discussing that in the past, but would fully understand if you can't say much.
I've been timid, Josh. No, I think the macro situation promotes consolidation. I mean, that's the biggest story of all. I think the buy side and sell side look at the market, it's like, wow, you know, even more opportunity for consolidation in the space. You know, obviously LATAM has a process that we need to respect, but we haven't given up on it. We think it's in the best interest of creditors and best interest of our shareholders. You know, Alex and I talk often, we have a fiduciary responsibility to pursue consolidation, right? That we have to do that. If everyone's working for the best interest of their, you know, shareholders and stakeholders and creditors, they should be pursuing that.
You know, I'm very confident that our plan has a better recovery overall. We're very engaged in the process and more news to come. Obviously, I wanna focus on this earnings report, which I think is very good. Not only are you looking at it, Josh, but I think creditors are looking at it. I think people are looking at, wow, look at how they manage their business in Brazil and what could that mean, you know, to a larger business. I think a lot of people are paying attention to it, and so we're kind of excited to talk about our results today, but we certainly haven't given up on it because we think there's more to come as the exclusivity period expires in the next couple of weeks.
You'll hear more from us at that time.
Good. Thank you guys so much.
The next question comes from Savanthi Syth with Raymond James.
Hey, good morning, everyone. Maybe for Abhi Shah, like, could you provide a little bit more granularity on what you're seeing in the domestic market in terms of, you know, leisure has I think was already around 100%. Like, where are you seeing that? T hen just in terms of business travel recovery, what you're seeing and what you kind of expect heading into 2022.
Hey, Savanthi, thanks. Yeah. So, you know, as I mentioned in the opening remarks, we are very bullish on the trends we are seeing. Let me just step back a little bit because I think it's important to kind of highlight the transition that happened, sort of July onwards. You know, July, everybody flew kind of high load factors, and we noticed the volumes were coming, but the fares were low. That's when we decided that we're gonna pivot to higher fares. We did this in a couple of ways, and one is really small fare increases, but a lot of them. I think that was a departure from how the industry usually does it.
It worked really well for us because it allowed us to keep testing demand every time we took small increases and allowed the market to remain stable in terms of, you know, somebody worried about not being competitive. Many of those fare increases, the industry followed us. Some they did not. Because we were 80% plus alone, you know, we have the flexibility to push the envelope. That worked really well for us. We also took a hard look at the level of discounts that we have in the corporate market and travel agency market, and we were actually surprised at how much revenue came out of that.
It's something that's relatively underappreciated, but I think that was something that we learned in this process as well, and that keeping that discipline, how much revenue you can generate. Both of those things have worked really well. We are at the highest fares we've actually ever been in terms of new bookings, as well as booked revenue. Direct channels, which we would call leisure, are ahead more than 100%. I mean, overall, we're about, you know, 115%-120% of where we were. Leisure is above that even. The corporate market is recovering. I would say that we're currently at 70% corporate recovery. As you know, our corporate presence is much more fragmented than just São Paulo.
It's a lot of it is agribusiness, a lot of it is services, energy, oil and gas, infrastructure. We're at 70% and improving. São Paulo is gonna host a Formula One race this weekend. Looking ahead, we're seeing positive comments from our commercial folks about events, about training, events, about groups. Bookings are very strong as well, not just this year, but into next year as well. I think the trends are positive. I think that the team's done an amazing job of putting us in a position where we can take advantage. Yeah, I think the trends are very good going forward.
I think one thing I just wanna add, Abhi, is that high-end leisure demand is in Brazil right now.
You know, there's always been the high-end leisure, you know. Brazilians would go to Paris, they'd go to London, they'd go to New York. They're actually spending money in Brazil. You know, I was in the south of Brazil last week at a city, Gramado. You walk into the city, you feel like you're in Europe. Brazilians, through the crisis, have fallen in love with Brazil. I think that's fantastic. You know, the devaluation of the currency is having people choose more, you know, flights inside of Brazil for leisure destinations. You know, keep in mind, we have 850 flights a day-
10 of those are outside of Brazil, the remaining are inside of Brazil. Having Brazilians kind of fall back in love with their country has been fantastic for us and is really spurring demand all throughout the country, which has really been beneficial for Abhi's RASK.
That's helpful. If I might clarify, and I might be reading into this too much, if I could take a ruler or something, it looks like full-year RASK is around 7%-7.5%. Is that fair?
She did the ruler.
What I can say is that we exited 3Q at a rate higher than the quarter. I am fully expecting further improvement in 4Q. Yeah.
Okay. If I might, just on the logistics side, could you give an update on where you are in end-to-end logistics solution and where this kind of FedEx partnership falls within that? Was that part of the kinda plan all along, or is that something kinda new that drives a higher view?
Yeah. We actually took a lesson from Fred Smith himself, myself, John, our director of logistics, maybe six months to a year ago. He sort of gave us a lesson for a couple of hours on, you know, on diversifying, on bringing on new customers. We've been talking to the FedEx team ever since. This has been in the plan, yes. It gives us access to their global network, which of course is amazing. For them, you know, we serve 4,200 zip codes in Brazil, and 1,000 of them we deliver within 48 hours. It really is a win-win for both sides. For us, the logistics growth, which is what he told us, it's really sustainable.
You know, 50% of the incremental revenue we have year-over-year is not coming from our competition, it's coming from companies and customers that are switching their businesses from ground logistics to air logistics. That we think is a much more sustainable way to grow because the ground logistics market is like 15 times larger than the air logistics market. Their businesses are getting stronger, they're delivering to their customers faster, and so they're seeing the benefits as well. Of course, we have the belly network, which can deliver these delivery times very, very efficient at marginal cost. That's really where the growth is coming from. International has been strong as well, and we expect that to continue through next year also.
It's a combination of a couple of things, but we are excited about logistics, and I think we're gonna have another good year of growth going forward.
Appreciate it. Thank you.
It's funny, Abhi, now he has cargo, so you know, he's got his A330s flying domestically, and so we're saying, "Abhi, put another Orlando on." He's like, "I'm not gonna sacrifice my cargo domestically," 'cause it's doing so well. It's kind of an interesting dynamic that we have here at the company.
The next question comes from Michael Linenberg with Deutsche Bank.
Hey. Good morning, everyone. Yeah, I want to echo Josh's comment. Congrats on a fantastic quarter. I want to go back to that same RASK chart that Savi just referenced, you know, to see the 120% in 4Q. If you think about sort of where your costs are right now, I guess this is actually to probably John and Alex. If we think about costs and where RASK could be or where it's heading, yet, you know, we're dealing with the higher fuel, even incorporating that, it does feel like that it is possible that we could see margins that approach double digits in the fourth quarter. Is that? Am I being too aggressive there? I realize fuel, we're still...
You know, we got another, whatever, six weeks to go with respect to fuel prices and currency. It does feel like that the math could move toward that bogey. What do you think?
Yeah. No, I think you have the dynamics right, Michael. RASK, as Abhi indicated, will expand from Q3. You know, CASK is probably gonna be up, but not as much. A lot of it is because of dollar and fuel. Remember that there is a lag on fuel of about 35 days, right? You know, in terms of the way that oil prices behave and how long it takes for that to impact jet fuel prices. Abhi is always attempting to maximize revenue. When the whole industry is facing cost pressures from fuel and FX, those attempts get to be a lot more effective, right? Yes, we will expand margins into Q4.
You know, I'm not gonna comment on the double digits, but we, you know, should see a continuing improvement in profitability and into 2022 and into 2023, right? You know, the dynamics that Abhi explained are going to continue. We're gonna grow capacity, but we're not gonna grow a ton of departures. We're gonna grow very healthily on top of our network, not, you know, going after the competition. That is also very disciplined and very sustainable. We're very confident about, like John said, having higher EBITDA in 2022 than we've ever had any time of our lives. You know, the BRL 4 billion is challenged by fuel and FX effects, but we're gonna fight and we believe that. Look, the real has never prevented us from being profitable, expanding margins, and delivered on our promises, right?
We started the company, we said this multiple times, with a real of 1.58 to 1, and we have always been able to deliver on our promises even with the real devaluing. Almost every year over the last 13 years, right? So we know how to deal with FX pressures. You know, most of that comes from the strength of the network, the diversity of the fleet, and the strength of the business model that we've built over these years.
Michael, we're a scrappy team. I mean, you could see in our results. Abhi increased revenue 60% quarter-over-quarter, yet our FTEs were up 1%.
Right.
It shows the leverage on the business, how we're managing. We're scrappy. Look at what Abhi has done, you know, together with David on the weekends with Azul Viagens. You know, putting in all of those flights, finding pockets of demand that no one else thought possible. Now, that's done because of our diversified fleet. You can't fly a 737 or A320 from Marabá to Tubarão to Sobral. You can certainly do that with an E-Jet, right? That's what we have. That those are the competitive advantage that we have. When you take a look at the cargo network and why FedEx wants to partner with Azul, it's because we fly to so many different destinations, right? Anybody can fly to the triangle. Anybody can fly to the large Northeast destinations.
What we do is we extract value throughout the entire network, and the network is really where it all starts.
Yeah. No, those are great responses, guys. Just one last one if I can just squeeze it in. Can you just give us an update on, you know, the government and how they're. You know, I know that they've put out, I guess, I don't know if it's an RFP or on slots at Congonhas. You know, back in the day when I first started covering the sector, you know, we used to see over, you know, I think it was like 42 or 44 operations per hour, and it looks like we're gonna go back up to that.
Thoughts on, you know, timing and is there an opportunity for you guys to get share at one of the most lucrative airports, not just in Brazil, but probably in the Western Hemisphere? Thoughts on that. Thanks.
Yeah. Well, Abhi will remind you if, you know, Campinas is the most lucrative, Mike. N o. No, we're very excited about Congonhas. You know, just for everybody's benefit that may not be watching it very closely, the Congonhas Airport is up for sale. Before selling the airport, the Brazilian government is doing what's best for the Brazilian people, which is expanding operations, going back to those levels that you talked about. The Congonhas Airport will be approximately a third bigger, which opens up, you know, opportunities for Azul. It opens up opportunities for other airlines in that very profitable downtown airport. I'll let Abhi kind of talk to you specifically about it. W e're very excited. It's already in a consultation period in the market, and so, you know, having more flights at that airport is very important.
We just recently launched, you know, Congonhas to Fernando de Noronha. I mean, the things that we can do is, you know, absolutely phenomenal at that airport. When you talk about, you know, 2022 EBITDA, it's not even in our forecast, right? I mean, you know, anything that we get in Congonhas and additional slots, and I think you saw the fight that we had with our other airlines in the region over, you know, what happened when Avianca went away.
This is, you know, equivalent to, I think, four Aviancas. You know, is what the increase was. So it's a significant increase at that airport, and so we're pretty excited. That doesn't mean it all goes to Azul. I think it's gonna go to a lot of different, you know, airlines, but I think that's good. I think it's good for Brazil.
I think it's good for them to raise money, you know, selling that asset. I think that, you know, the more the Brazilian government sells assets, the more, you know, people have confidence in Brazil overall. There's a lot of positives to it.
Yeah, Mike. I think that's it. Our argument, of course, is gonna be about 200 incremental slots will become available. Call it 100 daily departures.
Mm-hmm.
You know, our argument is gonna be very similar to 2019, which is we think that the airport is concentrated and closed, right?
Yep.
Concentrated and open is okay because you can enter and add flights, but it's closed, which is unusual. We think there should be more competition, and we're gonna make our case, of course, and as other players and other airlines. We think ANAC is gonna listen. We think ANAC, the regulator, is in the mood to increase competition at Congonhas because the airport is closed today. That's gonna be our case. We'll see how it goes. It's an opportunity. Mostly it's great for the public. You're gonna have more options.
Abhi, today, what are you up to? Are you like 20, like 24 departures a day at Congonhas? I know you're relatively smaller. It's the Ponte Aérea and maybe a few others. What is it? Just to put some context around the 100 that are gonna be added.
We are at 21 departures a day.
Okay. Wow. Okay. That's a lot. Okay. That's super helpful. Thanks, guys.
Thanks, Mike.
The next question comes from Alejandro Zamacona with Credit Suisse.
Hi, everyone. Thank you for the call. Thank you for taking my question. Most of our questions have been answered, but I just have one question on the fuel efficiency. I think it's pretty amazing what you have delivered so far. We are curious on to what extent you believe you can continue to lower the fuel burn in this case. Thank you, guys.
Yeah, Alejandro Zamacona, sure. Yeah, we have dozens of E1s still in the fleet that need to go away. The E2, I mean, it's amazing just how well it's performing. You know, I don't wanna make Embraer too, you know, cocky, but, you know, it's over-delivering on the fuel burn reduction that they promised to us. So we can't wait to resume our fleet transformation and replace every single one of our E1s with E2s and A320neos. That will continue the fuel burn reduction. It will continue the reduction in carbon emissions. It will reduce our CASK dramatically, you know, by double digits. It will allow us to stimulate demand, you know, with those extra seats.
Because actually when you go from an E1 to an E2, for those of you that remember the economics of the fleet transformation that we mentioned a few years ago, you know, these marginal seats, these extra seats come in at a negative cost. We're gonna spend less money to fly an E2 and to lease an E2 than we do on an E1, and we get extra seats for it, right? So they come in at a negative cost, and we're able to stimulate demand and reduce CASK all at the same time. So we're very excited about that. Also, the pandemic obviously delayed our fleet transformation plan by a couple of years, like it delayed, you know, the whole world on pretty much everything by a couple of years.
We're going to resume it, and we're gonna end the transformation, and we're gonna be 100% airline with capacity coming from next-generation jets. We're somewhere between 6-9 years ahead of the competition. That's how quickly and how many years of competitive advantage we're gonna have ahead of the competition on flying fuel-efficient next-generation jets. You know, for those of you maybe that just look at the CASK number, you may think that our CASK is higher than the competition. That's because you're comparing a CASK for a single, you know, 737 to the CASK of a blended fleet, which has, you know, low CASK aircraft like our A320neo, you know, middle CASK aircraft like the Embraer and high CASK aircraft like the ATRs.
You have to remember that from a trip perspective, it's the other way around. The ATR has the lowest trip cost in the industry, and then the Embraer has much lower trip cost than the Boeings or the Airbuses. Our A320neo CASK is significantly lower than our competitor, you know, quote-unquote, "low-cost" 737 CASK, right? Our A320neo is what we put to compete with a 737. We don't compete much with them, but when we do compete, we compete with an A320neo that has lower unit cost than the 737, even than the 737 MAX, right? That's important to remember.
Yeah. No, really useful. When you think about the fuel liters per ASK, do you believe low twenties is a fair level to reach? High twenties? Any thoughts on that?
No, we don't have a guidance number out there, but you can kind of project the reduction from the pace of replacement that we've had, right? Essentially by that you can figure out every incremental E2, how much does that reduce the fuel burn? You can kind of estimate. As soon as we have a little bit more visibility, we're gonna provide more of a firmer projection on how quickly we can resume our fleet transformation and conclude it. Depending on your assumption of how quickly we do that, you can figure out what the incremental fuel burn reduction is for every aircraft that is replaced. You can figure out where we're gonna get in terms of fuel burn reduction and carbon emissions.
Okay, thank you.
Thank you.
The next question comes from Bruno Amorim with Goldman Sachs.
Hi, everybody. I have two questions, please. The first one on costs. The CASK is 17% above 2019 levels in 3Q, while fleet size grew by 20% roughly, and total ASK fell by 10% in the same period, which suggests room for significant fixed cost dilution, and CASK reduction as ASK pick up. When do you expect to reach ideal levels of utilization of the fleet, considering, you know, the deliveries of aircraft and also the ramp-up in ASK? The second question, you know, domestic ASK is now above 2019 levels, international well below. To what extent does it distort the RASK comparison versus 2019? Or in other words, you know, was international RASK in 2019 significantly different from the domestic RASK? Thank you very much.
Hi. Thanks for the question. Regarding fleet utilization, you know, we're getting close, but starting January onwards, first quarter is when we're gonna have our normal levels of fleet utilization. As I said, we're flying the fleet that we already have. We're flying it more and more every single month, and January onwards, first quarter onwards is when we're gonna have normalized levels of fleet utilization. Regarding the impact of stage length on RASK, it's important to remember that our overall stage length is only five km different. There actually is no impact at the system-wide level.
The reason is, you're right, we have a lot less international, but our domestic stage length is significantly above our 2019 domestic stage length because we're flying more leisure, because we're flying more A320s, A321s, and we're flying more E2s, which fly longer and fly higher utilization. Overall, the impact is a wash as our overall stage length is only 5 km different. The RASK that you're seeing really is the RASK that's generated by the demand.
You're absolutely right, Bruno. There's a lot of operating leverage going forward. You know, Abhi's talking about the ASK he's gonna put in in the first quarter, but as you go throughout 2022, and he puts more international ASK, you dilute the unit cost across all of those ASK as well. You can see how we did it. You know, I already referenced it, but we increased significantly ASK quarter-over-quarter, but you saw what happened to our unit cost as a result. If you normalize for fuel and FX, you know, we're even better.
Thank you very much.
The next question comes from Rogério Araujo with UBS BB.
Yeah. Hi. Hi, guys. Thank you for the opportunity. Congrats on the results. A couple here. One, if Abhi could provide us more color on his view of the sustainability of the fourth Q RASK. So any color could be helpful in terms of maybe the pent-up demand that we have now for the leisure segment, and then there is gonna be a recovery of the corporate segment. So how does he think about the sustainability of this kind of RASK level for 2022 quarters? And also, on the CASK ex fuel for upcoming quarters, what to expect, similar levels than third Q?
I think there is a carryover of a higher, maybe, some higher prices on the BRL, but what to expect in terms of CASK ex fuel levels in fourth Q and first Q 2022, and so on. Thank you so much.
Hi. Hi, Rogério. I'll start then pass it over to Alex. You know, what we can see in the booking curves for December, January, February, March lead us to believe that these trends will continue. I was actually talking to my team this morning to push the fares even higher, actually. They were kind of pushing back at me. You know, the commercial guys feel good about what they're hearing in the market in terms of events, in terms of group bookings, in terms of training seminars that companies are doing, the rhythm of coming back to in-person. I mentioned Formula One is happening this weekend. You know, honestly, from what I can see right now, the trends continue.
We have no reason to believe, based on the booking curves that we have that you know, at least, from the visibility that we have that it's gonna change. For us, it's yeah full steam ahead, and we think that we maintain this level of average fare. I think overall, I hope our colleagues as well are seeing something, and we can be disciplined overall. So
Rogério, yeah, Abhi also mentioned, you know, corporate revenue is only at 70% of what it was. The fact that he's got above 2019 RASK levels in the third quarter is showing you know, Savi played the RASK game, you know, what he's looking at in the fourth quarter. That's not with full corporate, you know, demand back yet. That's gonna be the next push to get this back to the levels or above levels where we need.
One moment, please. Please, you may proceed, sir.
Sorry, we're back. Can you hear us?
Yeah. We can hear you. Thank you. I think you stopped it on John Rodgerson saying that corporate segment should be the next push for you.
Yeah. That's interesting, Rogério, because corporate revenue flies more local. They fly more nonstop, and they tend to buy closer in. So it also has the impact of pushing up average fares as that continues to recover. Definitely there are some positive catalysts yet to come.
Yeah. On the CASK side, Bruno or Rogério, sorry. We lost, you know, the visibility. You're gonna have to do some math, but we've done a lot of progress on rebuilding Azul as a more efficient airline as we committed, right? So when you look at 2022 CASK, well, what's embedded in our expectation for EBITDA and, you know, when we build the model bottom up, controlling for fuel and FX, we would be almost 10% lower on unit costs versus 2019, right? That value is still all there. The problem is you're gonna have to, you know, kind of dig through the change in fuel and FX to get to that number. You'll also need to layer on your expectation for fuel and FX.
You know, that number is all over the place. There are people that think that 5.50 is the floor. There are people saying, "Well, the fundamentals of the currency should actually have it closer to 4.50 or 4.75." You have to embed your numbers. What we usually use is the Focus Survey as well as the Bloomberg forward curve for oil, right? Focus Survey for FX. That's what's embedded in our estimate for EBITDA. Once you layer those expectations in, that, you know, almost 10% CASK reduction, you know, actually turns positive, right? You actually see a CASK increase, 2022 into 2019. Like I said, that's consistent with EBITDA above the 2019 levels, given what we're seeing on the demand side.
Very clear. Thanks, guys.
Thank you.
Thank you.
The next question comes from Stephen Trent with Citi.
Hey, good morning, everybody. Thanks very much for taking my question, and forgive me, it's now afternoon for you guys, but just one or two from me. First off, you know, one of your competitors was kind of making a bit of noise.
About a backlog of Brazilians waiting to get, you know, U.S. visas, as we see, you know, quarantine-free travel for vaccinated foreigners here. Are you seeing kind of any signs of that? That's my first question. Thanks.
Hey, Stephen Trent, it's absolutely true. I think what Alexandre Malfitani said is true, but I think that's awesome for Azul, right? I often say you can't be in Noronha and New York at the same time. I think that's why Abhi Shah is not taking a full schedule back into the first quarter, because the demand that people think on international is not really there. That's actually much better for Brazil overall. I think it's great for GOL. I think it's great for Azul. I think it's good overall, and that's why we've dedicated our network during the high season to fly locally.
No, that's super, John. Really appreciate that. Just one more really quick one from me. Having a chat with a guy on the buy side who's much smarter than me, and we were talking about the domestic market in Brazil and kind of the antitrust overlay. When I think back to 2019, you know, it looked like the antitrust authorities had overruled ANAC on those Congonhas Airport slots. When we think about, you know, what's happened since that time, there didn't seem to be any fuss about, you know, Azul and LATAM Airlines, Brazil having, you know, kind of that joint agreement until a few months ago. Do you think that kind of sends a signal from the antitrust authorities that, you know, there is at least some modest room for more consolidation?
Absolutely, Stephen. I mean, we wouldn't be pursuing it if we didn't believe it was possible. Let's just back up for a second. You know, all U.S. carriers are subsidized by the U.S. government right now. Are they not? They got subsidized money in the U.S. Brazilian airlines got no money from their government. That's a huge contrast. At the same time, the Brazilian market is 100% open. A subsidized U.S. carrier can start an airline in Brazil. A European-subsidized carrier can start an airline in Brazil. The overlap that we have with our competition is very limited. Every airport that Azul flies in today is open and can have additional capacity in that airport.
Look, I mean, I think there's gonna be noise from certain people around this, but I think it's in the best interest of Brazil. I think it's the best interest of our consumers. It's the best interest of all of our stakeholders. You know, it's not a real concern. The one concentrated airport in Brazil, as Mike Linenberg noted, is, you know, opening up even further. There'll be more competition. I think. You know, you have to put things in context. If you go back three, four years ago, the Brazilian market was closed. Foreign carriers could not operate inside of Brazil. That is no longer the case.
You know, when you think about, you know, the support that all other countries gave to their airlines versus the financial support that Brazilian airlines simply didn't receive, you can see the case why, you know, antitrust, you know, should be very favorable to consolidation in Brazil and in the rest of Latin America.
Okay, that's super helpful. Really appreciate that, John. I'll let someone else ask a question.
The next question comes from Daniel McKenzie with Seaport Global.
Oh, hey, thanks, guys. Congrats on the quarter. You know, what I find interesting with revenue being 90% recovered, you know, versus 2019, is that you're really missing your highest margin revenue. I guess my first question is, you know, how much corporate revenue was missing exactly? You know, I'm pretty sure it was higher than, you know, the remaining 10% of 2019. Related to that, what percent of the corporate clients are back in the office? You know, what is the timeframe for getting back to a 100% recovery in corporate revenue? Is it really? You know, is it the first quarter, or is it, or do we need a full recovery in international in the back half of 2022 before we really get there?
Yeah. Hey, Dan, thanks for the question. Yes, as I mentioned, bookings in October, new bookings, we saw about a 70% recovery in corporate revenue. Flown for the third quarter was less than that. My guess is around 60%, 60. There's at least 40% of that high-value revenue that was missing in terms of flown revenue in 3Q, which you're right, is going to start to fly over the next couple of quarters. You know, it's hard to say what is the timeline for 100%. We are seeing differences in sectors. I'll give you an example. The financial sector, they booked about 45% of 2019 revenue in October, which is, you know, still low, but it's up from 25% in July, right?
They're recovering nicely. I think that November is gonna be better than the 70%, and then we get into the holiday season. I think it's gonna continue over the next couple of months. Our baseline, you know, that Alex has modeled for 2022 EBITDA doesn't assume 100% just for us to be a little bit conservative. To the extent that it does come back, there's actually some upside to that as well. The fact that we're already at 70%, I think is a really good sign. The fact that sectors are improving so quickly month to month, I think November is gonna be another nice increase, and then it'll continue from there.
In terms of in-person work, you know, we're seeing different trends from different companies. Yes, I mean, I think that momentum is growing. I think when you have companies organizing training seminars. You have companies organizing group events, conferences. I think that's a really good precursor to bring their employees back in the office. I would say the trends are positive. We're at 70% now and improving month-to-month.
I guess, you know, where I'm going with this is, you know, the trends seem pretty positive. I'm just you know, if you know, look at the trends today, how is that informing, you know, what you're thinking about normalized pre-tax margins, you know, in this next cycle? You know, what's the timeframe for getting there? You just kinda think about, you know, what you want your targets to be, how you're managing the business. Then, you know, just going back to slide four as part of this question, it's pretty interesting how you're tying, you know, a good chunk of your growth to parts of Brazil that seem to be above GDP.
I'm just wondering, you know, what % of overall flying or revenue, you know, does this flying, you know, include or, you know, what % of the revenue or flying is to these areas that seem to be doing a little bit better versus the rest of the country?
Yeah. I can start with that. I also wanna add regarding the coming back to work, kids are back in school, right? Which is a huge relief to all our spouses here for sure. That's obviously gonna drive a lot of-
One of the last countries in the world.
Yeah, that's gonna drive a lot of back to work. In terms of our diversification, you know, we are about 37% of our capacity is in the triangle as we call it, which is São Paulo, Rio, and Brasília. We are 60% diversified, which is how we like it. That's the part of our business that's exposed to the faster growing, which is agro, which is infrastructure, which is oil and gas, which is energy, those kinds of things. I'll let Alex talk about the margins.
Hey, Dan. You know, it's tough to kinda talk about normalized margins because our margins in 2022, you know, in terms of % margins versus 2019 are actually gonna be lower, but they're gonna be higher in 2023. Then when you layer on the fleet transformation, the continued growth that we're seeing in cargo, you know, we're starting to see a potential in the vacation travel business that, you know, we never saw before. I mean, there's a lot of upside. I think there's, you know, or we're confident actually there's gonna be margin expansion from 2022 into 2023, from 2023 into
2024 and 2025. You know, there's gonna be bumps along the road because Brazil, you know, throws you some curveballs along the way with currency. You know, normally you would be seeing a negative correlation between oil and FX, right?
That's what happens 90% of the time, unless you have some market, you know, some Brazil specific issues, you know, increasing volatility of the real, which is what's happening right now. Usually with oil prices where they are and iron ore and soy and, you know, every commodity out there, you would see a much stronger real. That's why economists, not necessarily, you know, banks or traders, but economists say, "Look, the real should be really at 4.75 or even lower.
Mm-hmm.
We are confident that we're gonna continue expanding margins, and I'm not gonna say it doesn't matter what the real is, you know, because obviously there is a little bit of a delay for AB to recapture cost increases to fares. We know that the Brazilian market would be a lot bigger if the real was at 4.75 because we would be able to offer lower fares and stimulate demand. The real being where it is or even weaker does not prevent us from delivering on our promises. It does inform, and it does influence what margins we can generate. There is a little bit of a circular reference here, and John kind of alluded to it, right?
You know, if you tell me what the Real is and what oil is, I can tell you with a lot more confidence what the margin is going to be, because there is that pass-through from cost to fares that AB has always been able to implement. You know, you need to kind of determine those estimates before you figure out what our revenue level is going to be, what our capacity is going to be, and what our margins are going to be.
Hey, Dan, I just wanna highlight. Yeah, we're going into an election year, and there's been a lot of noise on Brazil outside of Brazil. We had a board meeting this week, and one of our board members came down, and he was telling his friends he was going to Brazil. They're like, "Are you nuts? Oh my gosh, it's falling apart." It's like, actually, COVID is a lot better in São Paulo than it is in any major city in the United States right now, right? There's more vaccinated people in Brazil. I think there's a lot of noise, but our boots are on the ground in Brazil, and we're seeing economic activity. We're seeing things happen throughout Brazil.
You know, I think, you know, eventually, you know, U.S. investors will start to look again towards Brazil and the opportunities that exist because there's a lot of great things happening.
Yeah. Hey, thanks for the comprehensive answers. That was great. Thanks.
Yeah.
Ladies and gentlemen, this concludes today's question and answer session. I would like to invite John to proceed with his closing statements. Please go ahead, sir.
I just wanna thank everybody, you know, and we're very happy with what we did in the quarter. We look forward to talking to many of you over the next few days and over the coming months. Thank you and feel free to reach out at any time.
Ladies and gentlemen, that does conclude the Azul audio conference for today. Thank you very much for your participation, and have a good day.