Earnings Call: Q2 2019

Aug 8, 2019

Hello, everyone, and welcome to Agung'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 a listen only mode until we conduct a question and answer session following the company's presentation. I would like to turn the presentation over to Andrea Bacher, Investor Relations Manager. Please proceed. Thank you, Paula, and welcome all to our 2nd quarter earnings call. The results that we announced this morning, the audio of this call and the slides I will reference are available on our IR website. Presenting today will be David Millerman, Agil's Founder and Chairman and John Robertson, CEO. Alex Maffitania, our CFO and Abi Shah, our Chief Revenue Officer, are also here for the Q and A session. Before I turn the call over to David, I would like to caution you regarding our forward looking statements. And the matters discussed today that are not historical facts, particularly comments regarding the top line'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 that are subject to uncertainties and risks that are discussed in detail in our QVM 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 other factors 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 Q2 earnings 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 second quarter results in what is 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. Which many more opportunities to grow our network and plan to open 6 to 8 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 Q2, 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 in October. The E-2s are truly a game changer. By the end of the year, 46 our 46 next generation aircraft, including 62s, 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 9th 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 4, 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 things 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 updating our fleet, we will drive down costs resulting in higher margins. The best news is that we are less than halfway through this process. 2U Azul and Azul Cargo have grown significantly over the past few years, but we're only 50% on the way to our target. The area I'm most excited about is the tremendous growth we are seeing 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're 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 a company to take advantage of it. Very exciting stuff. And finally, we are on track to deliver on our promise to expand margins by 5 margin points between 2017 2020, even though we have faced much tougher macro environment. On Slide 5, 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 at airports where we have a leadership position. As you can see in the graph, our dominant position continues to increase as we add a 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 light, at Will Stark. I believe the best is yet to come. And with that, I'll pass the word over to John to give you more details on the Q2 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 6, we grew capacity by 16% in the 2nd quarter, while expanding our top line revenue by 31% to BRL2.6 billion. In addition to the double digit growth in capacity, RAS increased 13.6%. Adjusting for the increase in stage life, RASK was up 15.1 percent year over year. This is the 3rd year in a row that we increased capacity by double digits while increasing RASK. Operating income was a record BRL340 1,000,000, up 70% year over year. In the 2nd quarter, we received 4 A320neos and 1 A330neo. These aircraft provide significantly lower unit cost through more efficient fuel burn, low ownership cost and provide more revenue per flight. In the Q2, 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 7. As you can see, fuel and currency had a negative impact of BRL 133 1,000,000 on our 2nd quarter operating results or approximately 5 margin points. We also had 2 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 8. TudoAzul maintained a strong growth pace during the Q2 with gross billings up 31% year over year. This is TudoAzul's 4th consecutive year with over 30% growth. On the right side of the slide, you can see that our Carbo business also performed extremely well. Revenue increased 47% year over year, benefiting from the expansion of our network and fleet. On Slide 7, you can see the extensive outreach of our cargo network. As David mentioned, more than 100 airports stay into 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 3 14% year over year, by the 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, and 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 $1,500,000,000 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 3.1x 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 5 aircraft that we added during the quarter, our leverage would have been below 3. We expect this timing effect to level off as these aircraft become fully productive. On Slide 7, you can see that in addition to the improvement of our operating results and reduction in leverage, our operating cash flow was over BRL 1,000,000,000 in the quarter, and we generated free cash flow of BRL 387,000,000. Dollars On Slide 12, we present our updated 2019 outlook. We expect to grow our total ASPs between 20% 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 Brazil, which included some slots, aircraft and employees. As you're aware, other events happened, but we were able to acquire all twelve of their A320neo 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 Congonius slot 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 cash 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% to 20%. Moving on to Slide 13. Looking ahead, we are very excited about the first delivery of our E2s that we put in the operation in October and the margin expansion opportunities they provide. Looking at the chart, you'll see over 500 of our 8 70 daily flights are still flown by E1s. In the future, all of them will be flown by E2s, resulting in 14% lower trip costs and over 10% more revenue on each flight. We couldn't be more excited about these planes and the margin comp 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 performing incredibly well, and we have upside in our investment path, 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 14 for our 2nd Azul Day. It's 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 products we'll be taking on this year. With that, David, Alts and I are available to take your questions. Ladies and gentlemen, thank you. We will now begin the question and answer session. Or by the Agua Investor Relations team after the conference is finished. Our first question comes from Stacy Stine, Raymond James. Hey, good afternoon. Maybe, Abi, as usual starting off, if you could talk a little bit about the domestic west international trends, especially international seems to be bottoming and improving. And I'm kind of curious if the slowing of the kind of international capacity growth is still the kind of the right decision or if you're making some adjustments there? Yes. It's Ami here. So yes, 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. So yes, we have seen international unit revenues turn to the positives in 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. And so the dollar as well, it's got run up recently, but it was has stabilized. And so the international trends have definitely improved. The capacity situation has improved as well. And so I think we are definitely seeing positive in the 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's just frequencies potentially connecting one dot with another dot very, very late in the year but very, 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 2 daily flights basically. So it's not really a concern. So yes, it has gotten better. Unit revenues have turned to the positive, which is very good sign. Our capacity discipline continues to be good, but no changes on our side in terms of our capacity plan. Thanks, Avi. And Alex, if I might ask, could you provide an update of pilot training costs and kind of how that's progressing and what that shape will be and when the growth might start to show up and kind of steel benefits on the cost side? Yes. 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 WTI aircraft, we have about 1 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. Plus, there's all the cost 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. So that's about a margin point. But then one of the reasons why we wanted to acquire Avianca Brasil was that we were going to get pre trained pilots, right? So they would come in, and they would continue operating the certificate of the original airline. Once we move from Avianca to Azul, we have the requirement to train them on our operating certificate. So there's an additional maybe 0.5. Of margin this year beyond what we usually have for the fleet transformation. So there's about 1.5 point this year this quarter of training, travel and unproductive time in costs in our P and L. And when does that wind down, Alex? Or when does P and L get enough of the large enough fleet that some of those headwinds start to go away? Avianca specific cost only in Q4 goes away. The one margin point, it will wind down. As company gets bigger, it becomes less of an impact, but it kind of gradually decreases together with our fleet transformation, right? So as we approach 100% of our fleet getting to next gen, you will start to see that cost getting less and less material. And it's up and sorry, John. One thing that obviously, when you go from E1 to an E2, it's a 2 day difference is training. So it's not the same thing. So it's going to as we approach 100%, certainly, it'll still be there, but it's going to be a lot because as Rob said, we get bigger, but the training as we transform, take out 63 E1s and put in 63 E2s, it's minimal power. Correct. Yes, that's just the E1s in yields or EBITDA in yields. Right. And that's those are slowing down and the E2s are accelerating. That makes sense. Thank you. Thank you, Charlie. The next question comes from Mike Nielenberg, Deutsche Bank. I guess two questions here. So if we look at the Tingoya situation, I think you had 26 slots currently and then you got 15 for this distribution or redistribution. So now you're at 41 total. Is that a sufficient number, call it 20, 20.5 round trips to participate in the Congolhas Santos Dumont shuttle? And then can you clarify, there was a press report, there was something out saying that maybe you would work with 1 of the other smaller operators and join slots. So kind of a 2 part question. And then I have one more. 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's still 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 ask 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. And so I think you'll probably hear from us over the next week or so in determining what we're going to do with the swap that we receive. And so we're continuing to kind of 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. And everything indicates that they can hit more operations per hour, and that would kind of help increase competition. And so we look forward to doing that over the next couple of years. But certainly, getting some slots there is important. It's a high profile airport. We don't talk a lot about Congonius at the airline today because as you indicated, 20 flights. We fly almost 900 flights a day. And so we don't want to overflow what can going this mean. But any opportunity we can to kind of get in that airport, we're going to do it. John, just should you talk about the auxiliary runway? And I know that as part of this redistribution, I do believe that there were some new slots created by Anake for 1 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. Is that did I hear you right on that? Yes. So to the say and the knock and the local quarry has basically said that the ATR operators need to be able to land at 120 knots, and ATR doesn't allow you to land at 120 knots. And so I think that it's still TBD. And so we'll a lot of work being done with the agencies, and we're kind of standing by to see what happens. But 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 actually allows for more distribution on the main runway. It allows for more carriers to be at that airport. We're not against MAPF and Pasedo getting into that airport. We think it's great overall. But I think we want to use the most efficient use of the asset possible, which is using the main runway to fly larger aircraft. Yes. No, that would be a fantastic development and certainly a win for the consumer. So hopefully, the government goes that way. Just one for you, John. This is second question. It's great that now you're up on the boards with a public rating, BB-. Is there any sort of aspiration to get to an investment grade rating? I mean, you're only a few notches away. There's probably only half a dozen airlines in the world that are at that level. But those who are at that level, there are a lot of interesting things that they can do. So you're off to a good start. I know that you probably don't think that it's 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 on South America to have that? Mike, I'll let Alex answer question, but we're extremely competitive people. And anytime we can get our ratings up, that's what we want to do. But I'll let Alex pick up his question. Yes. I think that's exactly right. It's all a bit of when we started talking about spending margins by 5 margin points. Once people started seeing that we were on track to deliver, they started asking, okay, so what's next? And obviously, we're not going to just retire. We're going to continue pushing for higher margins to get the company bigger, more valuable. And 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. And 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. But 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, right? And 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. Thanks, Alex. The next question comes from Jose de la Raulju, UBS. Hi, guys. Good afternoon. Thanks for the opportunity. I have a couple of questions. So first, what is the order 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. So our philosophy was guided to 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, right? And then so 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. And so 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. So there's some bad guy from FX, but there's a good guy from oil. But 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 focus survey. On 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. So 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. Thank you, Alex. Very clear. So second question is on the capacity expansion implied in the FEED plan. So there is almost 20% fleet capacity expansion now in the second half of this year. So I'd like to know if you could provide a little bit more color on the markets, which capacity should be deployed or even in the airports, if Guarul is there, Azul has been increasing capacity with one of the targets? And what you expect in terms of any change in the focus for routes that are more regional? Or it's going to be the same focus? So a little bit more color on that would be great. Hey, Rogerio. Yes, sure. I can certainly give you more color on that. So I'll give you some examples here. We'll give you an idea on how we're focused on capacity. First of all, as David and John both said, we expect to end the year with 70% to 71% of our routes alone, and that's the number that we started the year with. So when all things considered, 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. But I'll give you some examples here. We currently try 226 nonstop routes, roughly. 24 of them are new. We haven't been to. We didn't have them last year. Of these, only 5 of the 24 are former Avianca markets. Only 3 of the 24 are in Guadalaju. So that gives you an example of all of the places we've added new routes, and we haven't had to we haven't wanted to even add them in Guarulhos, for example. So only 3 of the 24 new routes we guided year over year are in we added capacity mostly by updating on another 77 routes. Of those, only 11 are former Adyankar routes. So again, the vast, vast majority of our growth has been in the Azul network. If you consider all of the capacity additions that we have done over the last 1 year, it's over 100 routes that have been impacted. Only 9 of them, only 9 of the 100 were in route that has competition that was not former Avianca. So 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, very small percentage of our focus. Avianca flew 59 routes. We're only in 20 of them. And out of the 226 routes that we have today, only 43 of them have any direct competition. So 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 is we've really made an amazing network platform over the last 10 years. And so the vast majority of our growth has been in our own network. And last data point here, the A320s are flying today in 42 nonstop routes. Only 3 of them are new and in Barudas. That's it. All the others, we threw those routes before, and that's very consistent with our upgrading strategy. So our story has not changed. Our strategy has not changed. We continue to have this focus, strengthen our network. As we've 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. So that's going to continue. It has been our focus and will continue to be our focus. And I think, too, El Dorado, it's important to note that, yes, we have system A320s in the areas airport because we have remote fuel efficient aircraft in Latin America today and do the lowest unit cost and those trip costs in this range. And so obviously, in more competitive markets, you're going to put your best performing asset. And so what we look forward to is when we could put all those 320s into Campinas and put it easy or the confin and the Cuyahubas. There's a lot more places to deploy those assets. Yes. Thanks for the incredibly detailed answer, The next question comes from Lucas Barbosa, Morgan Stanley. I have two questions. The first one is kind of a follow-up to the first question to the question Rogerio just did regarding the new strategy in Guarulhos. If you could give us some color on how many slots of Bianca Brasilhos used to have in that airport and how much of them you were able to get? In addition, if you could just clarify if these three routes in Guarulhos are the ones that you already added? Or if this includes the ones that you're still going to launch in the second half? That's my first question. Thanks. I thought Abi was so detailed with you. We wouldn't have a follow-up to Julio's question. Well, actually for all of you, I have more detail. NASH slot controlled airport, so you can go and ask for slots. And everybody has done that, not just us. If you look at the public data, we have added GOL has added and MatHem has added as well. And in many instances, they've added more than we have in Guarulhos. So that's something to watch out for. But the new markets we've added are Guarulhos, Fortaleza, Juarez, El Salvador. So those are the only 3 new markets we have added that were former Avianca Markets. And I think that we are still Guarados is still our 4th largest base in terms of departures. And again, it's our focus is our network. One advantage we have is when we add some capacity in Guarulhos is we become a much more share partners. So United, TAC, Copa, we all have co shares with Ethiopian Turkish. So they're all enjoying great capacity, thanks to us right now, and it's a very good incremental revenue for us. So again, it's our 4th 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. And 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 Brazil, for example. We hardly have any growth in Brazil. 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 opportunity. So I think we are being very disciplined and being very true to our strategy. Perfect. My second question is regarding the share of your network with no competition. So it's actually a follow-up from the Slide 5 in your presentation. Do you have an estimate of how much of your routes and percentage of ASKs will have no competition in 2020? Yes. So 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 updating of these aircraft in our own network along with the ASKs. So I'm not expecting significant changes in these percentages or these graphs on what we have today. Our next question comes from Daniel McKenzie, Buckingham Research. Hey, good afternoon, guys. Congratulations on the results here. A couple of questions. Abi, one of your competitors has chosen to go down the path of no hub in the Northeast of Brazil. So going back to one of your earlier comments in the previous question. 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 RPC hub. And we're very happy that we were able to invest in this hub much before anybody else even thought about our Northeast hub. We actually launched this hub in 2016. It has grown. I repeat it today, it's approaching what Bella Horizonte was maybe a year or 2 ago. And Bella Horizonte is approaching what Compillus was a couple of years ago. We have almost 70 departures or 70 departures in Recife. We connect all of the Northeast capitals. Of course, we connect Orlando and Fort Lauderdale as well. Yes, and 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. And one great example of this is a city called Mosoro that we started last year, has a great university there. And now students are traveling more than ever. And it's a route that's doing really, really well. So I don't know I don't have their numbers. I don't know how much we're hurting them. But what I can tell you is that it's a hub that's done very well for us. We're adding capacity this year, and it continues to perform very well on a unit revenue basis. It's a focus for us. And I think we'll keep 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, and it makes it really hard for anybody to gain a foothold. So it's doing very well, and we will continue to invest in it. And probably, we have a disproportionate share of Bluetooth demand because of the strength of our existing hub. That's probably true. And 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 Sao Paulo, Portfolio. And so we believe that people travel a lot more because of that. And so Brazil is much more connected today because of what we provide in the Northeast. And it's even allowed us to strengthen the flights that tap brings into its infancy. We actually have had flights to Fort Lauderdale in there, but it's a really, really strong upward. 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 just wondered if you can address the kind of the potential for a lumpier growth in 2020. So I know, John, you talked about wanting to accelerate the E2s here. And go ahead, 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. And obviously, with Avianca Brasil, actually, there has been some really unique opportunities this year that are pretty easy to digest. And we just looking ahead to 2020, fleet growth does grow to 6%. And I'm just wondering how squishy is that 6%? Is it likely to be fleet growth closer to 10% or percent if you can get the E2s that you want? I'm just wondering if you could just help us think about kind of the lumpiness around the growth rate that we might see next year. Yes, Dan. So first of all, on the macro, we've kind of 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. I mean, just last night, the lower house finally approved the retirement reform. That's good news for Brazil. That's going to be a game changer. And so I'm optimistic that 2020 is going to have some real solid GDP growth here in Brazil. But 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. And so 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 2 days of training for our pilots. So it's plug and play. Those aircraft arrive from sensitive to couples, arrive at our headquarters, and we're flying them right away, and the pilots are ready to go, and they can fly the E-two and the E-one on the same day. And so and as you look at, you said it absolutely correct. It's only about 6% increase in the fleet, but each one of these aircraft has 18 to 30 incremental seats. And so Avi is going to deliver over 10% more revenue on every single flight, lower ownership costs, lower fuel burn. And so 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. But what we're doing is this network and this fleet gets stronger every single day. And so 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 50 5% of our AFKs are our next generation aircraft, and then every month, that just gets stronger. And we wanted to show you that 500 daily flights are happening on E1. Those are not very economical aircraft, okay? And so as you move on to what that looks like when you have the E2, it's pretty remarkable what this airline could look like in a couple of years. I'd say on the E1 and E2 thing, the economics are so astoundingly different between those two airplanes that there's even incentive for us to take some impairment and take those things out quicker. And the payback is really quick. It's amazingly quick. So those are numbers we're running. But we have some hogs for it, but we can even accelerate it and the profitability is completely different. And as John said, the time is really tough, we should get rid of the E-1s and get the E-2s on immediately because that really is an amazing kind of different The next question comes from Marcos Barreto, Citi. Hi, everyone. Thank you for taking my question. Nimi Lampus from Citi joining the team. Just a couple of questions from my side. First, what's your thinking behind the deployment of H2s? Are there domestic routes that have become better or now require more service? And my second question is, when we think about the convoys flux, is it too naive to think that the map and the aerof airplanes could satisfy minimum approach velocity requirements with lower roads? Marcos, I'll start with the E2 and then I'll let John answer the Congonius ATR question. So regarding the E2s, our strategy is very simple. It replaced the T1s. So as John and David said, we have over 500 daily departures today that we want to replace. We will stop in our hubs. So we have many, many corporate routes flying out of Campinas. We fly to Brasilia 6 times a day. We fly to Porto Alegre 9 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. So 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 Carabinas, in Confin, in Recife, in Curitiba, in Port Alegre, in Guania, Cuyah Bar, all those kinds of places. And that's going to be our focus really for the 1st couple of years is just replace all of those. On the ATRs, we are the world's largest operator of ATR, okay? And so as I meet with our safety team and I meet with our operations team, the aircraft should not be landing at that speed. And so it's factual. It's not maybe it's factual. And so 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 HR aircraft. There's an auxiliary runway that's provided for that. The best way to get fares down in Sao Paulo is to have more operations on the main runway. And so we're optimistic. We 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. And 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. And that's we stand behind that. Having main runway operations from small operators only increases Doel and Pam's presence in that airport, and that's not good for anybody. Okay. That's great color. Just one quick last question. Are you aware of any foreign interest in domestic swaps? No. We are not aware. We haven't heard anything. No. Okay. Thank you very much. I'll ask someone to ask. Our next question comes from Mike Linenberg, Deutsche Bank. Just a quick follow-up. And Avi, 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. Now, Abhi, you said 8 to 30 differential. And I know you have multiple seating configurations on your E1s. But the difference 8 to 30 seems like a pretty wide range. What do you do you have one airplane that's like 110? Yes. Mike, our E2s will have 136 seats. We have E90s today with 106, and we have 195 with 118. So it's 18 to 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 the equipment would be the overhead bin and my customers would hate it. So it's 136. But you guys didn't realize the overhead bins are enormous. We could spend that in there on Kenwise, but whatever. I think what's important in our E2, as we do all the numbers and it looks like it's virtually the same female cost as our 320s. So you can imagine applying with female cost is the 320neo, but with only 136 seats. So the ship costs are now pretty much better than 320. So there'll be some routes, as Marvin mentioned, like a 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 2 20 NUs. So and one thing that's really important is the ownership cost on our EPs is less than our E1s, significantly less than E1s. Yes. That's a big that's it. Thanks for that. Thanks, everyone. Thanks, The next question comes from Matthew Vouniewski. 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 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 a 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? Yes. Matthew, yes, it's really important. You're right. And frankly, it wasn't something that we had a lot of focus on the first five, six years of Brazil. And now we do, which is great. So we recently announced an ATER line 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. And really, what international partners want is network. And frankly, that's why some of our competitors have better partnerships than we do. We did not have the network. Now we do. And that's really attracting partnerships to Azul. So we have a pipeline that's very strong that we'll be announcing periodically, frequently, in fact. And what's important in additional level as we move up the scale is joint ventures. So we've talked a lot about a joint venture with Gap. 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. So I think that as we grow out this network with these efficient aircraft, we will be more attractive to inbound partners. And that's certainly something that we want to use to our benefit. And we want to be a great partner to them as well. And as we have frequencies, as we have routes to these 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. And so interline co chairs 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. And so we're not really focused on alliances right now, but definitely, interline Co shares and joint ventures. Thanks, Jeff. Our next question comes from Savi Syth, Raymond James. I was curious on the fleet side what your appetite was for either the A321neo or the LR or the XLR? Yes. So on the A321, Charlie, 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 of units 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. But right now, what I can say is the 321 domestic, it's certainly something that I'm very interested in, yes. Let me just add a little bit. On the 321LR, side, we came in kind of disappointingly with a shorter range than Airbus had projected. And most like kind of the European hub carriers tend to use the LR to fly the United States different and tax different. And that's we're dealing with our investment in fact that they can fly the LR and hit Northeast of Brazil and Northeast United States. So similarly, some of the most important routes that we have with the LR are just beyond reach of what the LR can do. So the XLR really means more to us. And so I think that coming towards 2023. So we'll do some work on the XLR and would expect that to work for us up there than LRR would. So that's, like I said, still a few years away. I don't understand how it takes them 3 years to change the fuel tank, whatever. But so yes, LR doesn't make as much sense. XLR makes more sense just like it does for Europe to the United States. Yes. If I could just give a quick update. David mentioned TAP and he mentioned it briefly, but the 3/21LR is a real game changer them. They're flying it to Boston today. They're flying it to Newark. And a lot of what you're seeing in the fleet transformation that Azul is doing, TAP is doing as well. They have the oldest fleet in Europe. They now have the youngest fleet in Europe. And so very exciting things that are happening at TAP. The same margin and things that we're having here, we're seeing the margins go up at the same rate. Makes sense. And actually, that kind of ties right into it. So I think you've answered my question on this is just what your objective for the TAP investment is and how that's going. I'll just start a little bit. I mean, the thing that's scaled that talk is that we have our management team there. And Paul will know the CEO, Hoffa, who is here, you all know, he's the CFO, and they're going by the same game plan. And I think it's just making it better and we see projections going up in 2020 and 2021 and 2022 with same kind of like a fair margin expansion. That's kind of a closed airport. I mean, there's no it's very self controlled. It's like going into Europe and it says that you should get Ryanair can't really come in there. They have service in there, but they can't grow. And so we're engaging, bringing new airplanes. And so we're real excited about it. Now there's lots of options going forward. Certainly, we have an IPO option, strategic partnership potentials yet, all kinds of things. And so the best thing to do is to build a great company and then you have even more options and also in the process of doing it. And I think we wouldn't have increased our participation last quarter had we not believed in all the upside that it was there. So we believe strongly with that. This concludes today's question and answer session. I would like to invite John to proceed with these 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. And 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. You'll get to meet our university and our expanded management team. Thank you. Thank you all for your support. And as always, we're available for questions if any of you are on the on digital calls with management team. Thank you. Ladies and gentlemen, that does conclude the Aljunied Alt audio conference for today. Thank you very much for your participation and have a good day.