Hello, everyone, and welcome to Azul's second quarter 2019 results conference call. My name is Paula, and I'll be your operator for today. This event is being recorded, and all participants will be in listen-only mode until we conduct a question and answer session following the company's presentation. Should any participant need assistance during this call, please press star zero to reach the operator. I would like to turn the presentation over to Andrea Bottcher, Investor Relations Manager. Please proceed.
Thank you, Paula, and welcome all to Azul's second 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, and John Rodgerson, CEO. Alexandre Malfitani, our CFO, and Abhi Shah, our Chief Revenue Officer, are 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 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 and are discussed in detail in our earnings release. With that, I'll turn the call over to David. David?
Great. Thanks, Andrea. Welcome, everyone, and thanks for joining us on our second quarter 2019 earnings call. As always, I'd like to start by thanking our crew members for taking care of our customers on almost 900 daily flights. Thanks to their efforts, we have achieved record-setting quarter results in what is usually the weakest quarter of the year. We continue to strengthen Brazil's largest network, and since Q2 of last year, we have added 10 new destinations. We see many more opportunities to grow our network and plan to open six to eight new cities every year. Our focus is to grow in markets where we are strong. We are the only carrier in 72% of the routes we serve, and in the second quarter, we were the leader in terms of departures in an astounding 85% of our markets.
We ended the quarter with 29 next-generation aircraft, the largest fleet of fuel-efficient aircraft in South America, representing 39% of our ASKs. We are very happy with the performance of the A320 and could not be more excited about the introduction of the E2 starting in October. The E2s are truly a game changer. By the end of the year, our 46 next-generation aircraft, including six E2s, will represent 55% of our December ASKs, giving us great momentum going into 2020. We have also demonstrated our ability to grow while maintaining operational excellence and great customer service. In June, Skytrax awarded us for the ninth time in a row, the Best Regional Airline in South America, also the Best Staff in South America, a strong testament to our great customer service and management team.
In fact, our NPS score is one of the highest in the world at above 60, and this compares with some of the best brands in the world. As you can see on slide four, we have a ways to go in our margin expansion story. As I've just mentioned, we will start replacing E1s with E2s in October, and I couldn't be more excited with the impact these planes will have on our profitability. John will talk about this in more detail in his presentation. We have a regional growth plan that is centered on the transformation of our fleet. By upgauging our fleet, we will drive down costs, resulting in higher margins. The best news is that we are less than halfway through this process. Azul and Azul Cargo have grown significantly over the past few years, but we are only 50% on the way to our target.
The area I'm most excited about is the tremendous growth we have seen in our e-commerce business. We are uniquely positioned to take advantage of this high-margin business. We fly to 114 cities, and through our partnerships, we are able to reach more than 3,700 municipalities overnight. No other airline or logistics company in Brazil has this type of reach. The growth in e-commerce in this country is just getting started, and we are in the best position and company to take advantage of it. Very exciting stuff. Finally, we are on track to deliver on our promise to expand margins by 5 margin points between 2017 and 2020, even though we have faced a much tougher macro environment. On slide five, we show that our fleet transformation plan is consistent with our network.
By the end of the year, we will have, as I mentioned, brought 46 next-generation aircraft, mostly flying to routes where we are either the only carrier or the airports where we have a leadership position. As you can see in the graph, our dominant position continues to increase as we add more next-generation aircraft. We are confident about the future of the Brazilian aviation market and our ability to continue expanding margins, all while creating the best experience for our crew members and customers. Azul is not only getting bigger, but we are getting better in every way. Because of all the above, I have not sold any of my Azul stock. I believe the best is yet to come. With that, I'll pass it over to John to give you more details on the second quarter results.
Thanks, David. I also want to thank our crew members for all their hard work during the past quarter. Thanks to them, we delivered great results.
As you can see on slide six, we grew capacity by 16% in the second quarter while expanding our top-line revenue by 31% to BRL 2.6 billion. In addition to the double-digit growth in capacity, RASK increased 13.6%. Adjusting for the increase in stage lengths, RASK was up 15.1% year-over-year. This is the third year in a row that we increased capacity by double digits while increasing RASK. Operating income was a record BRL 340 million, up 70% year-over-year. In the second quarter, we received four A320neos and one A330neo. These aircraft provide significantly lower unit costs through more efficient fuel burn, low ownership costs, and provide more revenue per flight. In the second quarter, this allowed us to offset cost pressures from higher fuel prices, the devaluation of the Brazilian real, and the end of the payroll tax relief program.
We made significant investments in the quarter to be ready for the second half of the year, not only by adding new aircraft, but also by hiring and training pilots and flight attendants. Moving on to slide seven. As you can see, fuel and currency had a negative impact of BRL 133 million on our second quarter operating results, or approximately five margin points. We also had two margin points of negative impact from the end of the payroll tax relief program. Thanks to our margin expansion strategy, our ability to recapture revenue, and reduce costs, we recovered 160% of this impact, reaching an operating margin of 13% in what is seasonally the weakest quarter of the year. Moving on to slide eight. Azul maintained a strong growth pace during the second quarter, with gross billings up 31% year-over-year.
This is Azul's fourth consecutive year with over 30% growth. On the right side of the slide, you can see that our cargo business also performed extremely well. Revenue increased 47% year-over-year, benefiting from the expansion of our network and fleet. On slide seven, you can see the extensive outreach of our cargo network. As David mentioned, more than 100 airports today handle our cargo, and we have 240 stores nationwide serving 3,700 municipalities. We offer door-to-door deliveries through our franchisee model. This is a business with higher margins than our passenger transportation business that requires very little additional investment. We have a diversified customer base, including retailers, manufacturers, and online companies in Brazil who value our reliable and far-reaching logistics solution. E-commerce grew 314% year-over-year, by far the fastest-growing segment in our cargo business. Moving on to slide 10.
I'm proud to report that we ended the quarter with a very strong liquidity position, representing 42% of our last 12 months revenue. This is after growing total revenue by 31% year-over-year. Our balance sheet is further protected against currency fluctuation through assets such as our security deposits and maintenance reserves, totaling an additional BRL 1.5 billion, which are not included in our cash balance. On the right-hand side of the slide, we show an evolution of our leverage, which reached 3.1 times in June. With the new accounting standard, IFRS 16, when a new aircraft arrives, we immediately see an increase in debt on the balance sheet, reflecting the full term of the lease, but we do not yet see the earnings production. Adjusting for these five aircraft that we added during the quarter, our leverage would have been below three.
We expect this time and effect to level off as these aircraft become fully productive. On slide 11, you can see that in addition to the improvement of our operating results and reduction in leverage, our operating cash flow was over BRL 1 billion in the quarter, and we generated free cash flow of BRL 387 million. On slide 12, we present our updated 2019 outlook. We expect to grow our total ASKs between 20% and 22%, with most of this growth coming in the domestic market. Our domestic capacity growth is low risk and focused on strengthening our existing network by replacing smaller aircraft with larger aircraft on the routes we already serve. As you know, we made an attempt to acquire part of Avianca Brasil, which included some slots, aircraft, and employees.
As you are aware, other events happened, but we were able to acquire all 12 of their A320neos and are currently hiring many of their pilots and flight attendants. This investment has put some short-term pressure on our costs as we prepare to induct all of these aircraft into our fleet. As you know, the Convênios swap process is not yet complete. However, we already received 40% of the slots that secured all of their next-generation neos, hired many of their pilots and flight attendants, and preserved capital in the process. With the addition of these planes, we will end the year with approximately 55% of our capacity coming from next-generation aircraft, truly setting us up for a great 2020.
On the cost side, we expect CAPEX to remain flat to slightly up in 2019, mostly due to the investments we're making for our future growth and some macro headwinds that we've been facing since we released our original guidance in the beginning of the year. As we enter the second half of the year, which is seasonally the strongest, we feel confident about our guidance of 18%-20%. Moving on to slide 13. Looking ahead, we are very excited about the first delivery of our E2s that we put into operation in October and the margin expansion opportunities they provide. Looking at the chart, you'll see over 500 of our 870 daily flights are still flown by E1s. In the future, all of them will be flown by E2s, resulting in 14% lower trip cost and over 10% more revenue on each flight.
We couldn't be more excited about these planes and the margin cost contribution they will bring. We look forward to the coming years when we can replace all of our E1s for E2s. We're working very hard to accelerate this process. In summary, we feel confident about the opportunities that lie ahead of us.
We're executing on our fleet transformation plan. Our cargo and loyalty businesses are performing incredibly well, and we have upside in our investment in TAP, an important asset with further upside potential. Everything we have accomplished since our IPO has been done in an environment of a weakening real and low economic activity. Imagine what happens when the Brazil engine starts moving again. Before we open for questions, I would like to invite all of you to join us at our university in Campinas on October 14th for our second Azul Day. This is a great opportunity to meet with our management team, tour our facilities, and we'll have an E2 available where each of you can get to know that unbelievably great product we'll be taking on this year. With that, David, Ale, and I are available to take 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 touch-tone 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. Our first question comes from Savi Syth, Raymond James.
Hey. Good afternoon. This is maybe Abhi. As usual, starting off, if you could talk a little bit about the domestic versus international trends, especially international seems to be bottoming and improving. I am kind of curious if the slowing of the international capacity growth is still the right decision or if you're making some adjustments there.
Hey, it's Abhi. Abhi here. You're right. You've heard the sentiment from other operators in the region as well, talking about improving trends in the Latin. Copa yesterday, United as well. Yes, we have seen international unit revenues turn to the positives in the second quarter. The Brazil-U.S. market has capacity down for the rest of the year in the low teens, negative capacity, which is very promising. The dollar as well, it's run up recently, but it has stabilized. The international trend has definitely improved. The capacity situation has improved as well. I think we are definitely seeing positive unit revenues. We expect to see that for the end of the year as well for international. We're not changing our plan for international. It's very low risk. It's not adventurous at all.
I have no new destinations planned this year. Maybe only spring or summer next year. It is just frequencies, potentially connecting one dot with another dot very late in the year. Very low risk, just being very strong where we are in Brazil with Orlando, Fort Lauderdale, and Portugal. Argentina continues to struggle a little bit, but we have very low exposure there, only two daily flights basically, so it's not really a concern. Yes, it has gotten better. Unit revenues have turned to the positive, which is a very good sign. Our capacity discipline continues to be good, but no changes on our side in terms of a capacity plan.
Okay. Thanks, Abhi. Alexandre, if I might ask, could you provide an update of pilot training costs and how that's progressing and what that shape will be?
Sure.
When the growth might start to show up and scale benefits on the cost side?
I think we've always talked about the fact that this fleet transformation process does carry some startup costs, right? Even before we took the Avianca aircraft, we have about a point of margin when you consider the fact that, especially pilots, but also flight attendants, they're getting paid their salaries, but they're not producing ASKs. There's all the costs involved in the training itself. We do a lot of the training in our own university, but we also have to outsource some of this, which includes travel and the cost of the flight hours, the simulator hours in other facilities. That's about a margin point. One of the reasons why we wanted to acquire Avianca Brasil was that we were going to get pre-trained pilots, right? They would come in, and they would continue operating the certificate of the original airline.
Once they move from Avianca to Azul, we have the requirement to train them on our operating certificate. There's an additional maybe half a point of margin this year beyond what we usually have for the fleet transformation. There's about a point and a half this year, this quarter, of training, travel, and unproductive time in costs in our P&L.
When does that wind down? Ale, sorry. When does we get enough of the large enough fleet that some of those headwinds start to go away?
The Avianca-specific cost only in Q4 goes away. The one margin point, it will wind down. As the company gets bigger, it becomes less of an impact. It gradually decreases together with our fleet transformation, right? As we approach 100% of our fleet getting to next gen, you will start to see that cost getting less and less material. Sorry, John. One thing that obviously when you go from the E1 to an E2, the two-day difference is training. It's not the same thing.
Certainly, it'll still be there, but it's going to get a lot because as Alex said, we get bigger, but the training as we transform, take out 63 E1s and put in 63 E2s, it's minimal pilot.
Correct. Yeah. That's just the E1s in Azul, or if they're coming to Azul.
Right. Those are slowing down, and the E2s are accelerating.
That makes sense. Thank you.
Thank you, Savi.
The next question comes from Mike Linenberg, Deutsche Bank.
Hey everyone. Good morning. I guess two questions here. If we look at the Congonhas situation, I think you had 26 slots currently, and then you got 15 through this distribution or redistribution. Now you're at 41 total. Is that a sufficient number, call it 20 and a half round trips to participate in the Congonhas Santos Dumont shuttle? Can you clarify, there was a press report, there was something out saying that maybe you would work with one of the other smaller operators and join slots. Kind of a two-part question. I have one more. Thank you.
Hey, Mike, the process isn't over yet, and that's why we're not announcing what we're going to do with the additional slots. It still is a very concentrated airport. Still roughly 94% of the flights are concentrated with the duopoly, and so we're going to continue to kind of push to increase capacity at that airport. The process should be over this week, but there's some smaller operators that asked for slots on the main runway. All things indicate that they'll have to move to the auxiliary runway because the operations don't allow for them at the landing speed that's needed. I think you'll probably hear from us over the next week or so and determine what we're going to do with the slots that we received. We're continuing to force the issue with the government. We think that airport should be opened up.
We think that every airport in Brazil should be opened up. That airport today is significantly less in capacity than it was 10 years ago. Everything indicates that they can take more operations per hour, and that would help increase competition. We look forward to doing that over the next couple of years. Certainly getting some slots there is important. It's a high-profile airport. We don't talk a lot about Congonhas at the airline today because as you had indicated, 20 flights, we fly almost 900 flights a day. We don't want to overplay what Congonhas means, but any opportunity we can to get into that airport, we're going to do it.
Hey, John, you talked about the auxiliary runway, I know that as part of this redistribution, I do believe that there were some new slots created by ANAC for one of the carriers to actually do some service on the auxiliary runway. Are you suggesting, though, that maybe some of the other carriers, rather than using some of those slots, that they could just add more service to the auxiliary runway and then maybe freeing up more slots for everybody else? Did I hear you right on that?
DECEA and ANAC and the local authorities basically said that the ATR operators need to be able to land at 120 knots, ATR doesn't allow you to land at 120 knots. I think that it's still TBD, a lot of work being done with the agencies, and we're kind of standing by to see what happens. Certainly, there's a possibility, Mike, that those ATR operators move to the auxiliary runway, which is very beneficial overall for the consumer, right? Because it'll actually allow for more distribution on the main runway. It allows for more carriers to be at that airport. We're not against MAP and Tapajós getting into that airport. We think it's great overall. I think we want to use the most efficient use of the asset possible, which is using the main runway to fly larger aircraft.
That would be a fantastic development and certainly a win for the consumer. Hopefully the government goes that way. Just one for you, John. This is the second question. It is great that now you are up on the boards with a public rating, double B minus. Is there any sort of aspiration to get to an investment-grade rating? You are only a few notches away. There is probably only half a dozen airlines in the world that are at that level. Those who are at that level, there are a lot of interesting things that they can do. You are off to a good start. I know that you probably do not think that it is absolutely essential, but is there maybe internally a drive to get to an investment-grade rating? That would be pretty impressive for a carrier based down in South America to have that.
You know, Mike-
Thank you
Mike, I'll let Alex answer the question, but we're extremely competitive people, and anytime we can get our ratings up, we want to do, but I'll let Alex pick up.
Yeah. I think that's exactly right. It's a little bit of when we started talking about expanding margins by five margin points. Once people started seeing that we were on track to deliver, they started asking, "Okay, so what's next?" Right? Obviously, we're not going to just retire. We're going to continue pushing for higher margins to get the company bigger, more valuable. The same thing applies to leverage. The same thing applies to our rating. We have brought the leverage to a low 3s. I think if you do the math correctly, we're in the high 2s. Our margin expansion plan will allow us to continue reducing this to mid-2s, to low 2s, and then we'll see once we get there what we do.
I think we won't rest, and whenever we get to a target, we'll just see if that's sort of just the stepping stone for the next target that we're going to try to achieve. We believe very strongly that the best of Azul is yet to come, both on a margin basis, leverage, ratings, and so we're just going to continue working in that direction.
Okay, great. Thanks, Alex.
Thanks, Mike.
The next question comes from Rogério Araújo, UBS.
Hi, guys. Good afternoon. Thanks for the opportunity. I have a couple of questions. First, what is the oil price considered in the new guidance? Is there any upside from this recent drop in the past days? That's the first question. Thank you.
Sure. Our philosophy with guidance is, we update our forecast at least once a month, if not more often than that as required. When we do that, we look at the forward curve for heating oil, and we look at the focus survey for the dollar Real exchange rate. We did that a while ago when we closed the books on Q2. Since then, the Real has moved down, but oil has also moved down. As long as our expected midpoint of our guidance is within the range that we put out, we don't change the guidance. It is fair to say that since we did the math and we closed the books on Q2, the dollar went up and oil went down. I think it's roughly a wash since then. There's some bad guy from FX, but there's a good guy from oil.
In the end, I don't think it's much different from what we originally set out, which was a few weeks ago, looking at the forward curve and the focus survey. The focus survey, we actually put in a little bit of conservatism because I think there's a lot of optimism in the FX rate from the focus survey. We're a little bit more conservative than that. We don't exactly give out that number, but that's roughly sort of the philosophy of what we do with guidance. I think the current prices reflect roughly what we had when we closed the books and saw that we were going to reaffirm our EBIT margin guidance for the year.
Thanks, John. It's very clear. Second question is on the capacity expansion applied in the fleet plan. There is almost 20% fleet capacity expansion now in the second half of this year. I'd like to know if you could provide a little bit more color on the markets this capacity should be deployed, or even in the airports, if Guarulhos that Azul has been increasing capacity is one of the targets and what to expect in terms of any change in the focus for routes that are more regional or it's going to be the same focus. A little bit more color on that would be great. Thank you.
Hey, Rogério. Yeah, sure. I can actually give you more color on that. I'll give you some examples here. We'll give you an idea on how we're focusing on capacity. First of all, as David and John both said, we expect to end the year with 70%-71% of our routes alone, and that's the number that we started the year with. When all things considered, at the end of the day, that dominant position we have will not change, and that's an indication of where our focus is on the network side. I'll give you some examples here. We currently fly 226 nonstop routes, roughly. 24 of them are new. We didn't have them last year. Of these, only five of the 24 are former Avianca markets. Only three of the 24 are in Guarulhos.
That gives you an example of all of the places we've added new routes, and we haven't wanted to even add them in Guarulhos, for example. Only three of the 24 new routes we've added year-over-year are in Gru. In addition, we added capacity mostly by upgauging on another 77 routes. Of those, only 11 are former Avianca routes. Again, the vast majority of our growth has been in the Azul network. If you consider all of the capacity addition that we have done over the last one year, it's over 100 routes that have been impacted. Only nine of them, only nine of the 100 were in routes that have competition that was not former Avianca. As John said, we've taken a short-term opportunity here in terms of some of the Avianca demand, but it's still a very small percentage of our focus.
Avianca flew 59 routes. We're only in 20 of them. Out of the 226 routes that we have today, only 43 of them have any direct competition. We are well over 70% of our routes that we are alone. That trend is going to continue. These examples show that we have plenty of capacity growth, network growth opportunities in our own network, given our hubs, our focus cities. We've really made an amazing network platform over the last 10 years. The vast majority of our growth has been in our own network. Last data point here, the A320 are flying today in 42 nonstop routes. Only three of them are new and in Guarulhos. That's it. All the others, we flew those routes before, that's very consistent with our upgauging strategy. Our story has not changed, our strategy has not changed.
We continue to have this focus strengthen our network. As we said many times before, every time we add a larger aircraft in our own network, our network becomes even stronger, even more defensible, a lot more connecting traffic goes through it, and obviously much more efficient. That's going to continue, has been our focus, and will continue to be our focus.
I think, too, Rogério, it's important to note that, yeah, we have put some A320s in the Guarulhos airport because we have the most fuel-efficient aircraft in Latin America today, and with the lowest unit cost and lowest trip cost in this range. Obviously in more competitive markets, you're going to put your best-performing asset. What we look forward to is when we can put all those 320s into Campinas, into Recife, into Confins, into Cuiaba. There's a lot more places to deploy those assets.
Just ask.
Thanks for the incredibly detailed answer, Abhi.
Oh, but he prepared.
Sorry about that.
The next question comes from Lucas Barbosa, Morgan Stanley.
Good morning, everyone. Thanks for taking my question. I have two questions. The first one is kind of a follow-up to the first question, to the question Rogério just did regarding Azul's strategy in Guarulhos. If you could give us some color on how many slots Avianca Brasil used to have in that airport, and how much of them you were able to get. In addition, if you could just clarify, these three routes in Guarulhos are the ones that you already added, or if this includes the ones that you're still trying to launch in the second half. That's my first question. Thanks.
I thought Abhi was so detailed, we wouldn't have a follow-up Guarulhos question.
Well, actually, for all of you, I have more details. In terms of slots, Guarulhos is obviously not as constrained, but it's not as constrained as Congonhas, of course. Slots were available. Guarulhos is a non-slot-controlled airport, you can go and ask for slots. Everybody has done that, not just us. If you look at the public data, we have added, GOL has added, and LATAM has added as well. In many instances, they've added more than we have in Guarulhos, that's something to watch out for. The new markets we've added are Guarulhos, Fortaleza, Juazeiro and Salvador. Those are the only three new markets we have added that were former Avianca markets. I think that we are still, Guarulhos is still our fourth-largest base in terms of departures. Again, our focus is our network.
One advantage we have is when we add some capacity in Guarulhos, is we become a much more relevant and strong partner for our interline and codeshare partners. United, TAP, Copa, we all have codeshares with Ethiopian, Turkish. They're all enjoying great capacity thanks to us right now, and it's a very good incremental revenue for us. Again, it's our fourth-largest base in terms of departures. We continue to focus in our network itself. We did take some opportunities, as I explained, but it's been a small percentage of our year-over-year growth, and I'm not expecting that trend to change. One final anecdote, if you look at the capacity data, you'd see how focused our capacity has been in our own network. Look in Brasília, for example. We hardly have any growth in Brasília. Look in Rio, for example. We hardly have any growth there.
Look in other cities in the Northeast. We're really focusing where we are strong and where we see the opportunities. I think we are being very disciplined and being very true to our strategy.
Perfect. Thanks for the additional detail, Abhi. My second question is regarding the share of your network with no competition. It's actually a follow-up from the slide five in your presentation. Do you have an estimate of how much of your routes and % of ASKs will have no competition in 2020?
Yeah. In 2020, we expect the trends to be very similar to what we have today. As we are adding A320s in our own network, actually the percentage of revenue is growing in our own network with the upgrading of these aircraft in our own network, along with the ASKs. I'm not expecting significant changes in these percentages or these graphs from what we have today.
Perfect. Thanks very much for the color, Abhi.
Our next question comes from Daniel McKenzie, Buckingham Research.
Hey, good afternoon, guys. Congratulations on the results here. Couple questions. Abhi, one of your competitors has chosen to go down the path of no hub in the Northeastern Brazil. Going back to one of your earlier comments from the previous question. Can you talk about to what extent Azul's increased relevance in the Northeast is contributing to system RASM, and is it potentially at the expense of those with less network relevance in the Northeast?
Thanks, Dan. We're obviously very happy with our Recife hub, and we're very happy that we were able to invest in this hub much before anybody else even thought about a Northeast hub. We actually launched this hub in 2016. It has grown. Recife today is approaching what Belo Horizonte was maybe a year or two ago, and Belo Horizonte is approaching what Campinas was a couple of years ago. We have almost 70 departures in Recife. We connect all of the Northeast capitals. Of course, we connect Orlando and Fort Lauderdale as well. Yeah, I think we do have a disproportionate share of that demand because we have, as David likes to say, if you provide convenient service, they will fly more. One great example of this is a city called Mossoró that we started last year.
It has a great university there, now students are traveling more than ever, and it's a route that's doing really well. I don't have their numbers, so I don't know how much we're hurting them. What I can tell you is that it's a hub that's done very well for us. We're adding capacity this year, it continues to perform very well on a unit revenue basis. It's a focus for us, I think we have a lot of A320s flying there because of the distance. It's a perfect south-to-north A320 market. It makes us very efficient, it makes it really hard for anybody to gain a foothold. It's doing very well, we will continue to invest in it. Probably we have a disproportionate share of Northeast demand because of the strength of our Recife hub. That's probably true.
Dan, this is the first time in the history of Brazil that the Northeast has ever really been connected. It's connected regionally. It's connected to other capitals. In the past, if you were in another Northeast destination and wanted to go to another capital in the Northeast, you would have to go down to São Paulo or Brasília. We believe that people travel a lot more because of that. Brazil is much more connected today because of what we provide in the Northeast. It's even allowed us to strengthen the flights that tap into Recife. We actually have flights to Fort Lauderdale in there, and it's a really strong hub for us.
Yes. Understood. Well, thanks for that. Another question. Just given the volatility, the macro backdrop, the economic outlook in Brazil has gotten quite a bit worse from where we were at the beginning of the year. I am just wondering if you can address the potential for lumpier growth in 2020. I know, John, you talked about wanting to accelerate the E2s here. Go ahead and reorientate my thought process here, but rightly or wrongly, U.S. investors are just conditioned to believe that lumpy growth is bad just because of the stress it can put on the operation. Obviously with Avianca Brasil exiting, there has been some really unique opportunities this year that are pretty easy to digest. We are just looking ahead to 2020. Fleet growth does slow to 6%, and I am just wondering how squishy is that 6%?
Is it likely to be fleet growth closer to 10% or 15% if you can get the E2s that you want? I'm just wondering if you could just help us think about the lumpiness around the growth rate that we might see next year.
Yeah. First of all, on the macro, we've gone through a 5-year tough period in Brazil where GDP has been flat to negative almost every year over the last 5 years, and look at the results that we've been able to provide. I'm very optimistic with the new government. I'm very optimistic about the reforms. Just last night, the lower house finally approved the retirement reform. That's big news for Brazil. That's going to be a game changer. I'm optimistic that 2020 is going to have some real solid GDP growth here in Brazil. One thing that we think about, and we wanted to show that on the slide in the presentation, is the E1 to E2, that should happen in a depression, right? We need to do that. The faster that we can flip that fleet, the better.
The challenge that we've had is not finding enough homes for our E1s, but we want those E2s as quickly as possible. David highlighted, it's two days of training for our pilots, so it's plug and play. Those aircraft arrive from Saint-Nazaire, France, arrive at our headquarters, and we're flying them right away, and the pilots are ready to go, and they can fly the E2 and the E1 on the same day. You said it absolutely correct. It's only about a 6% increase in the fleet, but each one of these aircraft have 18 to 30 incremental seats. Azul's going to deliver over 10% more revenue on every single flight, lower ownership costs, lower fuel burn. I think you earn the right to grow, Dan, when you're expanding margins, and that's what we're doing.
If you're not expanding margins, you're not doing stuff that's bettering your business, then you shouldn't be growing. What we're doing is this network and this fleet gets stronger every single day. We look forward, close your eyes and wake up in 2021, 2022. We are certainly playing the long game. We are extremely excited about 2020 because our exit rate is 55% of our ASKs are our next-generation aircraft, and then every month that just gets stronger. We wanted to show you that 500 daily flights are happening on E-Jet. Those are not very economical aircraft. Okay? As you move on to what that looks like when you have the E-Jet E2, it's pretty remarkable what this airline can look like in a couple of years.
I'd add on the E1, E2 thing. The economics are so astoundingly different between those two airplanes that there's even an incentive for us to take some impairment and take those planes out quicker, and the payback is really quick. It's amazingly quick. Those are numbers we're running, but we have some hogs for now, but we could even accelerate it, but the profitability is completely different. As John said, if times really got tough, we should get rid of the E1s and get E2s on immediately because that really is an amazing kind of different airplane.
Okay. I appreciate the comprehensive answer, you guys. Thanks so much.
Thanks, Dan.
The next question comes from Marcos Barreto, Citi.
Hi, everyone. Thank you for taking my question. This is Marcos from Citi team. Just a couple of questions from my side. First, what's your thinking behind the deployment of E2s? Are there domestic routes that have become denser or now require more service? My second question is, when we think about the Congonhas slots, is it too naive to think that the E9 and Passaredo airplanes could satisfy minimum approach velocity requirements with lower loads?
Hey, Marcos. I'll start with the E2, and then I'll let John answer the Congonhas ATR question. Regarding the E2s, our strategy is very simple. It's replace the E1s. As John and David said, we have over 500 daily departures today that we want to replace. We were stuck in our hubs, we have many corporate routes flying out of Campinas. We fly to Brasília six times a day. We fly to Porto Alegre nine times a day. We fly to Curitiba 11 times a day. All of those will get replaced with E2s, and each one of those will have 14% less cost per flight, and I will have 18 to 30 more seats to sell. Our focus is going to be replacing E1 routes.
It's going to be a great airplane for the corporate customer, very efficient for us, and we just have so many of those high-frequency corporate markets, in Campinas, in Confins, in Recife, in Curitiba, in Porto Alegre, in Goiânia, Cuiabá, all those kinds of places. That's going to be our focus really for the first couple of years, is just replace all of those.
On the ATRs, we are the world's largest operator of ATR. Okay? As I meet with our safety team, and I meet with our operations team, the aircraft should not be landing at that speed. It's factual. It's not maybe. It's factual. What I find to be disappointing is you have a highly congested airport that has restraints on it, and you shouldn't be using the main runway to fly with ATR aircraft. There's an auxiliary runway that's provided for that. The best way to get fares down in São Paulo is to have more operations on the main runway. We're optimistic. This has been a long battle, and as I said before, we're playing the long game, and we believe the right thing will be done.
The more operations we can get at that airport on the main runway is the best thing for Brazil, it's the best thing for the consumer. We stand behind that. Having main runway operations from small operators only increases GOL and TAM's presence in that airport, and that's not good for anybody.
Okay. Thank you. That's great color. Just one quick last question. Are you aware of any foreign interest in domestic slots?
No, we are not aware. We haven't heard anything, no.
Okay. Thank you very much. I'll let someone else ask.
Our next question comes from Mike Linenberg, Deutsche Bank.
Oh, hey, just a quick follow-up, and Abhi, I think you answered my question, and it really had to do with the economics of the E2 versus the E1, the 14% lower trip cost, 10% more revenue. I just was trying to get a sense of the seating configuration and how much it actually differed. Abhi, you said eight to 30 differential, and I know you have multiple seating configurations on your E1s. The difference eight to 30 seems like a pretty wide range. Do you have one airplane that has 110?
Yeah.
Is that.
Yeah. Yeah, Mike, our E2s will have 136 seats.
Okay.
We have E90s today with 106, and we have 195 with 118. It's 18-30 seats.
That's perfect. That's great. Thanks for that. Thanks for clarifying. Take care.
David is yelling at me because he wanted 138, but that would mean we would put the equipment in the overhead bin, and my customers would hate it. It's 136.
He doesn't realize the overhead bins are enormous. You can fit bags in there on its end, but whatever. I think what's important in the E2, as we do all the numbers, and it looks like virtually the same C-mile cost as our 320s. You can imagine a plane with a C-mile cost as a 320neo, but with only 136 seats. The trip cost on that is going to be much better than the 320s. There'll be some routes that Abhi mentioned, like really high density business markets where we can put on extra frequency, which gives us additional power because we have that low trip cost from even the 320neos. One thing that's really important is the ownership cost on our E2s is less than our E1s. Significantly.
Yeah.
Yeah.
That's big. Okay, that's fantastic. Thanks for that. Thanks, everyone.
Thanks, Mike.
The next question comes from Matthew West, Barclays.
Hi. Thanks everyone for having me on. Just a quick question for me. As you've been focused on the domestic network and expansion there, has it made you kind of revisit some of the importance of growing some of your international relationships, to maybe kind of build the feed through the domestic network, whether it's expansion of current relationships or even the potential of an alliance? How important is that going to be in the strategy to really kind of maintain and continue to build the domestic network?
Hey, Matthew. It's really important. You're right. Frankly, it wasn't something that we had a lot of focus on the first five, six years of Azul. Now we do, which is great. We recently announced an interline with Avianca. We have codeshares with United, with TAP, with Ethiopian, with Turkish, with Copa, and we certainly have a great pipeline of new partners. Really what international partners want is network. Frankly, that's why some of our competitors have better partnerships than we do. We did not have the network. Now we do. That's really attracting partnerships to Azul. We have a pipeline that's very strong that we'll be announcing periodically, frequently, in fact. What's important, an additional level, as you move up the scale is joint ventures. We've talked a lot about a joint venture with TAP.
We're working very aggressively to make that happen. We'll announce something very soon on that. We've talked in the past about a joint venture with United and our partners, sort of Northern South America. That's something that's still very much in discussion and we're engaging on that as well. I think that as we grow out this network with the efficient aircraft, we will be more attractive to inbound partners. That's certainly something that we want to use to our benefit. We want to be a great partner to them as well. As we add frequencies, as we add routes in these airports, you will certainly see that share for us growing. We haven't focused on it before, but now we have the network and we have the airplane to do it.
Interline code shares are going to be very important and joint ventures is the next step after that. In terms of alliances, it's not a priority for us right now. I think we have some great partnerships already, especially United and TAP, and we're very happy with them. We're not really focused on alliances right now, but definitely interline code shares and joint ventures.
Okay, great. That's awesome. Very interesting. Thank you.
Thanks, Tom.
Our next question comes from Sava Syth, Raymond James.
Great. I was curious on the fleet side, what your appetite was for either the A321neo or the LR or the XLR?
Yeah. On the A321, Savi, we are definitely interested right now, at least in the domestic version. We have some slated to arrive. There are some delays on the A321 specifically, so we'll see how it goes, but we have a couple slated to arrive next year, and we are very interested in that aircraft for our domestic route network. The LRs and the XLRs we have looked at. The performance out of Brazil is not yet where we want it to be, but it certainly is a potential for us down the road. Right now what I can say is the 321 domestic, it's certainly something that I'm very interested in, yes.
Let me add to that a little bit. On the A321LR, Savi, came in kind of disappointingly with a shorter range than Airbus had projected. Much like kind of the European hub carriers can't really use the LR to fly to the United States, we're thrilled with our investment in TAP because they can fly the LR and hit Northeast of Brazil and Northeast of the United States. Similarly, some of the most important routes that we have with the LR are just beyond reach of what the LR can do. The XLR really means more to us. That thing's not coming until 2023. We're doing some work on the XLR and would expect that to work for us much better than the LR would. That's, like I said, still a few years away.
I don't understand how it takes them three years to change the fuel tank, but whatever. LR doesn't make as much sense. XLR makes more sense just like it does for Europe to the United States.
Yeah. If I could just give a quick update. David mentioned TAP, and we mentioned it briefly, but the A321LR is a real game changer for them. They're flying it to Boston today. They're flying it to Newark. A lot of what you're seeing in the fleet transformation that Azul is doing, TAP is doing as well. They had the oldest fleet in Europe. They now have the youngest fleet in Europe. Very exciting things that are happening at TAP.
The same margin trend. Same thing as it were for Azul here, we're seeing the margins go up at the same rate.
Makes sense. Actually, that kind of ties right into, so I think you've answered my follow-up. My second question on this is just what your objective for the TAP investment is and how that's going.
I'll just add a little bit. I mean, the thing that's good about TAP is that we have our management team there. Antonoaldo Neves, CEO, Rafa, who is here, you all know, he's the CFO. They're going by the same game plan. I think it's just making it better. We see projections going out through 2020 and 2021 and 2022 with same kind of, like I said, margin expansion. That's kind of a closed airport. I mean, it's very self-controlled. It's like going into Europe in a sense that even Ryanair can't really come in there. They have service in there, but they can't grow. We're engaging, bringing in new airplanes and so we're real excited about it. Now, there are lots of options going forward. Certainly have an IPO option, strategic partnership potentials yet, all kinds of things.
The best thing to do is to build a great company, and then you have even more options, and that's what we're in the process of doing.
Yeah. I think we wouldn't have increased our participation last quarter had we not believed in all the upside that exists there. We believe strongly with that.
Yeah. Thank you.
Ladies and gentlemen, as a reminder, if you would like to pose a question, please press the star key followed by the one key on your touchtone phone now. This concludes today's question and answer session. I would like to invite John to proceed with his closing statements. Please go ahead, sir.
Great. I want to thank everybody for your support, and we're working really hard to continue to deliver great results. As we said, we are playing the long game here. As we look at the balance of this year into 2020, 2021, we're very, very excited. We look forward to hosting all of you in Brazil at our facilities. You'll get to see the great E2. You'll get to meet a lot of our great crew members at Azul, get to meet our university and our expanded management team. Thank you all for your support, and as always, we're available for questions if any of you want to be on virtual calls with management team. Thank you.
Ladies and gentlemen, that does conclude the Azul's audio conference for today. Thank you very much for your participation, and have a good day.