Earnings Call: Q1 2019

May 9, 2019

Hello, everyone, and welcome to Azul's First Quarter 2019 Results Conference Call. My name is Paula, and I will 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. Would like to turn the presentation to Andrea Bottcher, Investor Relations Manager. Please proceed. Thank you, Paula, and welcome all to Azul's Q1 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 Millman, Admiral's Founder and Chairman and John Rogers, our CEO Alex Malfitani, our CFO and Abhi Shah, our Chief Revenue Officer, are also here for the Q and 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 CGM 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 for our Q1 2019 earnings call. As always, I would like to start by thanking our crew members who work hard every day to provide our customers with the best travel experience in the industry. Over the past 4 years, we have created our ability to grow while maintaining our operational excellence and great customer service. Of all the awards given out in our industry, I value the TripAdvisor awards most because it comes from our the actual travelers, not some judges somewhere. Last month, once again, we were selected by TripAdvisor as one of the top 10 airlines in the world and received a record six awards: Best Airline in Brazil, Best Airline in Latin America, Best Low Cost Airline in Latin America, Best Economy Class airline in Latin America and best business class airline in Latin America. It was a clean sweep. We won every single award. This is a true testament to the strong culture of the 12,000 crew members that show incredible dedication in taking care of our customers on every single day and on every single flight. In addition to having a strong culture and excellence in customer service, we have the strongest network in Brazil, and it's getting stronger. Today, we fly 113 cities. We are by far the largest airline in Brazil by number of flights and destinations served. During the quarter, we added 3 new destinations to our network and announced 2 additional destinations in the state of Sao Paulo. We are the largest airline in the state of Sao Paulo. And thanks to Governor Dorria's travel in city program, we will now benefit from a reduction in the fuel taxes from 25% down to 12% starting on June 1, which is really great news. The Brazilian market has a lot more room to grow. Over the past decade, we have gone through several periods of macro volatility in Brazil, and the aviation market has doubled in size. Brazilians will travel significantly Brazilians still travel significantly less than other Latin American countries, which makes us confident that the market will continue growing over the next decade as we continue to add more convenient and economical travel options for our customers. This is why I couldn't be more excited about our fleet transformation plan. As I have been telling John and the team, my goal is to accelerate the introduction of the A320neos and the E2s as fast as we can. The weak real and the higher fuel prices make these planes even more valuable to us. This quarter alone, we added 5 neos to our fleet, replacing 4 ejets. And today, we have 26 flying in our network. The 320neos represent only 34% of our first quarter capacity. So our fleet transformation plan is just beginning, just a little over 25%. We got a lot to go. Our 320neos are flying more than 14 hours a day, one of the highest utilization rates in the world. The E2s will start coming around September, and we should have 6 of them by the end of the year. I've been in this industry a long time, and I'm truly surprised by the impact the 320neos have made in our network. We continue to add capacity, and we haven't seen a decrease in RASK, which is really, truly astonishing. And this fact has helped us offset weaker currency and higher fuel prices. So it's amazing to have that surge in revenue to help us get over these macro bumps. We added 34% ASKs since 2016, and our revenue has increased 50%. That really is truly amazing. Like I said earlier, our network is performing better than ever and better than I could have ever imagined. In summary, Azul is not only getting bigger, but we're getting better in every way. I couldn't be happier with the great job our management team and our crew members are doing. It is, I'm so proud to be part of this great company. And with that, let me pass the word over to John to give you more details on the Q1. Thanks, David. I also want to thank our crew members for all their hard work during the past quarter. We started the year with a more challenging macro backdrop compared to 2018. Nevertheless, we delivered a net income of BRL138 1,000,000 while running a great operation. As you can see on Slide 4, operating revenue increased 16% to BRL2.5 billion. We added 16% more capacity and saw a healthy domestic demand environment. RASK adjusted for stage length increased 1.8% year over year. As we look at bookings for the next few months, we are very optimistic with our revenue outlook. Over the last 30 days, a lot has changed in the competitive landscape as 85% of Avianca Brasil's capacity has exited the market. As a result, we expect to see healthy increase of RASK year over year going forward for the rest of the year. Our operating result was mostly impacted by the 16% depreciation of the real and the end of the payroll tax relief program and the 8% increase in fuel. CASK adjusted for these items dropped 2.4%. As we continue to add more fuel efficient aircraft to our fleet, With the addition of more next generation aircraft to our fleet, including the E2s starting in the Q3, we should continue to see a significant drop in our unit cost. Moving on to Slide 5. Fuel and currency had a negative impact of BRL 74,000,000 in our first quarter operating results or approximately 3 margin points. We also had 2 margin point negative impact from the end of the payroll tax release program. Thanks to our margin expansion strategy, our ability to recapture revenue and reduce costs, we recorded an operating margin of 13.2%, recovering 3 of the 5 margin points during the quarter. Moving on to Slide 6. Our loyalty program, TudoAzul, maintained a strong growth pace during the Q1, reaching more than 11,000,000 members. Gross billings ex Azul were up 31% year over year as we continue to focus and grow this business. On the right side of the slide, you can see that our cargo business continues to perform extremely well. Revenue increased 41% year over year, benefiting from the expansion of our network and fleet. Among the passenger airlines in the country, we are already the 2nd largest in terms of cargo revenue, and our volume share increased from 13% to 19% year over year. We told you that our margin expansion story is a multiyear growth story. We wanted to highlight that TudoAzul and cargo revenue have doubled over the last 2 years, showing that our margin expansion strategy is working. As we look at the balance sheet on Slide 7, I'm proud to report that we ended the quarter with a very strong liquidity position, representing 42% of our last 12 months revenue. Our receivable balance increase shows the strength of our cash position. We could have advanced 100 of 1,000,000 of receivables but chose not to given our cash balance. If we were to advance all of our receivables, our leverage would have been below 3. Our balance sheet is further protected against currency fluctuations through assets such as our security deposits, maintenance reserves and our TAP convertible bonds, which are priced in strong currencies. With the new accounting standard, IFRS 16, when new aircraft arrives, we immediately see an increase in debt on the balance sheet, reflecting the full term of the lease, but we don't yet see the earnings. The addition of 5 new A320neos to our fleet during the Q1 contributed to a disproportionate amount of debt and leverage without the benefit of the additional earnings. This will be compensated over time as these aircraft will become fully productive in terms of earnings generation. Moving on to Slide 8. As you know and as we've talked about many times, we have a multiyear margin expansion plan based on 3 pillars: the transformation of our fleet with next generation aircraft our loyalty business to do Azul and the expansion of our cargo and ancillary revenue business. As you can see on the bottom of the slide, we're just getting started. On the fleet transformation, only 34% of our ASKs were on next generation aircraft in the Q1. And cargo our cargo business and our ancillary revenue business is only about 50% of the way there. And TudoAzul also continues to perform well. As we look forward to the remainder of the year, we continue to focus on running a great operation, executing our margin expansion plan increasing our efficiency. 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. In summary, we're confident with the guidance we provided earlier this year. Given the situation with Avianca Brasil, we may make some adjustments to our capacity, and we'll update the market once we have more visibility on the outcome of Avianca's judicial recovery process. With that, David, Alex, Abi and myself are available to take your questions. Ladies and gentlemen, thank you. We will now begin the question and answer session. Or by the Azul Investor Relations team after the conference is finished. Our first question comes from Josh Neuberge, Morgan Stanley. Good morning, everyone. Thank you very much for the call. I had wanted to ask you if you could talk a little bit about the big drop off in your maintenance expenses in the period and the change of your accounting treatment there. But we saw that on a combined basis, your maintenance and D and A costs grew by less than revenues this period. And therefore, without that effect, your EBIT margin might have come off a little further. That's my first question. Sure. Josh, it's Alex here. Yes, that's you got that exactly right. As you know, we implemented IFRS 16. We used to spend a lot of maintenance for our leased aircraft, and now that maintenance will be capitalized. Also, we remember from the previous quarters that we have started in sourcing some of our maintenance activities, spare parts inventory, given the economies of scale that we have today and also our lower cost of capital. So that plays into that as well. And so you got that right. You got to look at from 2019 on, maintenance OpEx will go down and depreciation will go up. But I think the best way to think about it is that given the current FX levels, you can expect depreciation to go to be around the same levels as Q1 going forward. Maintenance maybe was a little bit lower than average, maybe something like $70,000,000 a quarter would be our expectation going forward. So that should help you figure out what will be. Okay. That's great, Alex. But that change in accounting treatment was not about IFRS 16 because we saw that you had restated your first quarter numbers. Is that correct? Correct. Yes. Yes. So C Check, we're in sourcing as well. So there's a lot happening here, but not IFRS. But IFRS is important because of the big difference from sort of the normal number for maintenance and depreciation that everyone has been used to seeing so far, 500. Okay. That's great. And then just while on the topic of maintenance expenses, you guys mentioned that the reduction of the 4 E Jets in your operating fleet this period. And I just wanted to ask if you could talk a little bit about your policy for provisioning for maintenance related to the retired aircraft? I mean is that something you've done did in the last quarter or something you'll need to do in the coming quarters? No. So this quarter, you don't we did exit 4 aircraft from the fleet. But the maintenance, it's just an ongoing thing that's going to be happening. So nothing to highlight. If we highlight as we've done in the past, remember at some point when we had a big number that really was nonrecurrent or was extraordinary, then we'll highlight it. We will be replacing the ones in our fleet. Some of that depends on market conditions and where we can find homes for these aircraft, and we will highlight that for you. But yes, we do provision that along with the lease. Okay. But just sort of confirming, no big extraordinary values expected in the coming quarters related to those retirements? Correct. The next question comes from Savi Syth, Raymond James. Good afternoon. Just on the domestic front, I was wondering if you can expand on kind of what you're seeing on the pricing side given that you have fuel and FX kind of going against you, but then also maybe capacity getting rationalized. So you can give us a little bit of color on what you saw in 1Q and what you're seeing so far in 2Q. Savi, it's Savi here. Yes. So 1Q, we actually had a very good January February. Carnival was later this year. We always prefer Carnival earlier. It gets the country started. So that affected us a little bit. And then probably the back half of March was maybe a little bit slower than we thought. But we've been off to a very strong start to the Q2. Bookings in April have been very good. Bookings in May, so far, very high volumes. Sort of a good balance between volume and fare. So the industry is pricing very rationally. So the industry is taking advantage of the situation, is behaving rational. I'm not seeing any negative influences. So strong, strong revenue, strong volumes. Probably the year over year increases in revenue, maybe half of it is volume, half of it is average fare. I'm also seeing a very good balance between the revenue coming from travel agencies and the revenue coming direct to our channels. So that's performing well also. So overall, I'm actually very happy with the domestic industry and very optimistic actually. That's been our focus. You could see from the April traffic results how well our April traffic did. It was strong, 23% RPK growth on domestic ASKs of 'seventeen. So we're happy with that. You guys know we're not a low fare. We don't have the lowest fares. So the revenue is coming in good as well. So summary, strong April, strong May, seeing good revenue trends, strong revenue trends, equally balanced between fare and volumes and equally balanced between sort of corporate and on the direct channel side. That's helpful. And then if I might, just on the international side. What's happening there, especially with Argentina and the uncertainty, how much of a drag is that? And as you grow more domestic as the year goes by, do you kind of expect international to have a lower contribution? Yes. So our specifically for Argentina, we had very low exposure to Argentina, only 2 nonstop flights a day. So it's a very, very small part of our business. International actually was a positive surprise in Q1. If you remember, I said that I thought it would only become RASM positive second half of the year. It actually is going to start to become RASM positive second quarter and onwards. So it's actually been better than I expected. Good discipline again on the capacity side. U. S, Brazil specifically, capacity is going to be down mid teens May onwards. So that's going to be positive for everybody. I'm not expecting anything different from us on the international. Very disciplined. No major network changes. We just have Porto starting in June. But other than that, no new destinations, just managing some frequencies here and there. But you'll see very, very disciplined on the international side. And yes, as we grow domestic, it is going to become a smaller part of our overall business, which honestly, given the current dollar scenario and the fuel scenario, as I said before, I think the opportunity for us with our fleet is on the domestic side. Our next question comes from Michael Weinberg, Deutsche Bank. A couple of questions here. And I realize the Avianca Brazil situation is somewhat fluid. But suppose there is no auction, how does it play out with respect to the assets? I'm just curious of your thoughts. And by the way, who is funding that company right now? Because it seems like that they've probably burnt through all the cash that was going to be offered up by at least the 2 participants who were approved for this reorganization plan. Where is that cash coming from? Just any thoughts on those outfits would be great. Yes, Mike. Just quickly, it's a sad situation, unfortunately. And our hearts go out to the crew members of Avianca Brazil. And there's 5,000 people that work for that company and have great customer service and have been great competitors over the last few years. Unfortunately, the money has run out. And as you said, it's a very fluid situation. From our read, payroll has not been paid yet this month, and they're about 5 days late. And so the airline is significantly smaller than it was, and there's been an injunction to stop the auction process because a lot of people questioned the way it was done. And so I think overall, it's a sad situation, but I think it's positive for the industry overall. As Avi is kind of talking about what's happening with the revenue trends, and we should benefit getting some slots in almost any scenario that we look at. And so we're watching it very closely. The outcome is very uncertain at this point in time. But what we'd like to kind of highlight is we have an operation that runs 800 flights a day, Mike, and we're going to continue growing over the next few years. And this is really a Congonhas play, and Congonhas would have been an incredible cherry on top of the cake for us kind of show our product in that market, and it's an important market in Latin America. But we don't want to overstate that our business model never depended on that airport. And so if we have a chance to get some additional flights in there, we're going to go for it, and we're going to show what great customer service we have and similar to what we've done elsewhere. But we're going to continue to watch it. We're going to continue to look at it. And we're hiring Avianca people every day because there's a lot of great people coming from that airline into the Azul family. Great. And then John, can you update us just on the fleet plan? Because can you tell us what that fleet plan was on the last call since subsequent to that you have picked up some additional airplanes and I think you've sort of earmarked some of the assets from Avianca Brazil. Like where was the fleet going to and where is it going to now just based on maybe pending transactions or transactions that have been completed? Because you did mention that your capacity forecast, it was a little bit up in the air. We all understand that there's a lot of moving parts here. But if we can get a sense of maybe what the incremental fleet will the size will be, we can do that capacity calculation on our own. That would be great. Well, Mike, that's a fluid situation as well. I think you saw our capacity growth. Obviously, we're watching very closely what happens with Avianca. We're interested in some of their assets, as you know, and we're interested in the next gen assets they have, the neos. And so you will see us add a few of those, but the timing is uncertain as to when they exit and are ready to kind of come back in. And so I think you'll see an update from us in the next 30 to 60 days on kind of what our new capacity plan will be based on kind of what happens with the auction process and what happens if something different happens. And sorry to kind of avoid the answer, Mike, but it's pretty fluid because we're working through that with each lessor right now. We don't want to lose leverage with some of these negotiations as we move forward. That's a fair answer. I could just squeeze in one last one. This is probably more Avi or maybe John. You look at your forward schedule and over the next, I don't know, 4, 5 months, it does look like that some of your frequency between U. S. And Brazil are getting cut. They seem to be it looks like they're getting scaled back. Is that a demand issue or is that a delivery delay with the A330, 900neos that you're not getting them fast enough and you have to go back and gut the schedule a little bit, demand or manual OEM issues? Yes. Mike, it's yes. So it's V330s, neos have seen delays. We're probably going to be pushing out the 2nd airplane towards second half of the year, late second half. So that's affected some frequencies as well, specifically to the U. S. And again, I want to make sure we're disciplined. And so for example, some days of week where we don't need the 2nd daytime Fort Lauderdale, we won't fly a 2nd daytime Fort Lauderdale. But we have had A330neo delays. The second one that was supposed to be sort of June, July time frame is probably late second half of the year now. The next question comes from Bruno Amorim, Goldman Sachs. Hi, good afternoon. So I have a question on the guidance for the full year. You have delivered an EBIT margin of 13% now in the Q1 versus the guidance of 18% to 20% for the full year. So what should drive much higher margins in upcoming quarters in your view? Is it the Avianca Brasil situation? Is it something else? Any color in that sense would be helpful. So there's a lot of factors. I mean I think how we performed in the Q1 is exactly how we thought we'd perform in the Q1. So we're always stronger in the 3rd and the 4th quarters. We're positively surprised at the performance we're seeing in the 2nd quarter. But we've got a lot more aircraft coming in that are the A320neos, and you've seen the growth in our ancillary business with cargo and 2 Azul, and revenue trends are coming. We also have the E2s that are coming on in the 3rd and the 4th quarter, which add additional capacity with lower fuel costs. And so there's a lot of factors. And as we look at our margin expansion pillars that we showed you, 1st quarter is the toughest quarter for the year over year comp. Last Q1, I think the exchange rate was 3.15, and this year, it was around 3.90. And so you don't have that tough comp in the Q2, Q3 and then the Q4. And so so and Aphi is performing extremely well in the revenue trends, and we're growing the business and executing exactly how we thought. Obviously, currency and fuel prices are a little bit of headwinds. But I think when a competitor takes 85% of their capacity out of the market, it makes up for a lot. So I think there's a lot of factors that go into it. And we're very early in the year, and we're feeling very good about our ability to execute and to continue delivering. Bruno, it's Abhi here. Just to add to that, our year over year RASK in the Q1 was flat, and we're expecting something like high single digits year over year in the Q2. So that's going to be a nice boost on the revenue side, coupled with the capacity increase that's going to help the unit cost. So that's really what's going to help also going forward. Okay. That's clear. And could you please just confirm if your RASK was also positively impacted by the end of the payroll tax benefit? I understand you had to pay affect some revenues. Has it impacted the net RASK as well or not? Yes. You could see that in our waterfall. We highlighted that, the exact amount that we benefited in the waterfall. The next question comes from Rogerio Araujo, UBS. My first question is a follow-up on Bruno Morin's question on guidance. Actually, when you do an adjustment for maintenance expenses, so maintenance expense has been boosting margin by 3 percentage points. This was 1st Q. If you look at last quarter, it was almost 5 percentage points and historical level as well. So when we adjust the guidance for this capitalization of maintenance expenses, actually, the top range of the guidance, which is 20 percentage points EBITDA margin, it becomes something between 16% 17%. So I'm talking about ex maintenance expenses capitalization. In all accounting, we would say something between 9% 11%. So my question is, is the guidance conservative, especially considering the split of the Gauguin and all that is accelerating and also the surprise on yields as of the second Q. So that's my first question. Thank you. Okay. Let me just tell you a little bit how we kind of treat guidance and how we think about when we provide it. Usually, when we give guidance, we know obviously there are some implied assumptions together with the guidance, right, on demand levels, economic activity, fuel effects, things like that. And that's why we have a range, right, for a reasonable change in these assumptions, you can see us getting closer to the bottom end of the range or the higher end of the range. Usually, when we publish guidance, we are shooting for something in the middle of the range. If things change and we are still landing within that guidance, we maintain guidance, right? And as John mentioned, we've had headwinds on fuel and FX. Certainly, they've moved against us since we published the guidance. That would push us more towards the low end of the guidance. But there's the upside from the revenue environment that has been much better than we expected, right? So that's going to push it towards the other one. And so that's kind of how we feel about it. So we feel that our total EBIT margin for the year still our expected value for that margin still lands within the range that we provide. Okay. And my second question is also a follow-up on Avianca Brazil situation. So there is local news flow stating that the option may not occur as it was planned in the debt holder in the last meeting. So my question is, any possibility that Azul comes back with an agreement similar to that partnership? Or has you completely discards now any kind of purchase of the assets of Avianca Brasil? It's Brazil, man. Everything's on the table. You never know. I mean, we're just watching the situation closely. It's actually been pretty entertaining to kind of see the ups and downs. And so I think what we had stated was the way that the company was divided before, we didn't have much interest in it because if we went for Avianca Brasil, we needed a schedule that allowed us to compete in the average Rio Sanpaolo. And I think we stand behind that, that I think that's the best outcome for the country and for us. But again, we've got no comments on where we're at right now, but we'll watch it closely, and we'll look for opportunities as they present themselves. I think the thing that was, I think, most tragic, I think, for the people that work there is that the way the plan came down and the 2 people that will got the slots were basically the ones that have 95% of the airport today. So it's our belief and reading even CADE's statements at that time never had a chance of being approved anyway. So it almost looked like it was kind of a shutdown plan to us. It was just a way for them to shut down the company so that they would get their pro rata number of slots, which was really kind of sad for the people that are there now even working without salaries today. So I mean sometimes things work out the way they should have worked out. So we'll see how it goes. Our next question comes from Daniel McKenzie, Buckingham Research. My question was actually on the Avianca auction as well. I believe there was a suggestion by regulatory authorities that it was potentially an illegal auction. And I'm just curious, it's unclear if it auction even goes forward. But if it did, is there I mean, would the assets that the airlines bid on, could they be at risk of being taken away by ANAC or Kaji if it is viewed illegal? And I'm just wondering if you could just help us understand sort of the kind of the time line or how things would work here. I don't know if there's a decision that would be expected on that or if there's one. I guess I'm just trying to get a sense of when or how this we might know this might move forward or not. Dan, we don't know. And I think there's, as I said, anything is possible. As David highlighted, we believe that our competitors have a shutdown plan, and I think that's kind of where things are playing out. I think that people are kind of seeing through that now. It took a little bit of time to see through that, but we'll see. I think other creditors realize, wait a second, this is not what we had originally thought. And so we'll just have to let things play out. I think the authorities are looking at this very closely because when you have 5,000 people without salaries and a situation that's very complicated, we'll let the judges and lawyers and antitrust kind of work through that stuff. But we're going to continue running Azul. We'll continue growing our business, and we'll look for opportunities to expand in that airport as they present themselves. Okay. Yes. Understood. And then just following up on an earlier question just regarding the aircraft deliveries. I believe you guys have got 10 aircraft deliveries coming from Avianca right now. Can you just talk about the flexibility to early retire more E1s without penalty? How many more? Is that something you'd even want to do? I'm just wondering if you can just help kind of flush out the fleet plan a little bit further and how you might deploy the planes. Yes. So Dan, those aircraft aren't yet here or not yet closed. And so we're working through that. As I said, we want the next generation aircraft that Avianca Brazil had. You need to be able to crew them, and so we're working through that currently as part of our growth plan. We always have the ability to retire the E Jets early, and any time we do that, margin expansion comes even quicker. And so we'll continue to do that. 85% of the capacity of Avianca Brasil came out. They had about 13% to 15% of the total market share in Brazil. And so there's a little bit of a vacuum that exists. And we believe that in all scenarios, only about half of that capacity will ever be put back into the market, which I think is very healthy overall for Brazil. And it will be done with much more rational pricing. As you take a look at where our competitors are pricing and where we price, it's much more rational capacity. So it's overall very positive. And so we are we'll be opportunistic as we move forward, but we need the aircraft to be delivered to us Ashdag in order for us to take advantage of the opportunities that exist. Hey, Dash. Go ahead, Saket. Yes. In terms of kind of how we're going to use these airplanes, actually, it's how we're going to use any airplane, right? I mean just to give you an idea, our A320s today, we have 26 of them, but they're only flying daily or more in 21 markets. And we have 169 jet markets. So it's a long way to go. If I look at all of my hub to hub or hub to focus city routes, 40% of those flights are still being flown by Embraer's. So we have a long way to go just in our own network in terms of updating. So in terms of how would we use A320s, it's in our own network To make our network even stronger, as David said, every airplane is just driving more traffic. So that's been our focus all along. All the A320 markets we've added, there's only one new market, and that's a continuous market. So our network is really broad. It's a huge platform of growth, and that's what we're going to be focused on for a while. That's perfect. I'm wondering if I could squeeze one last one in here. If we could just assume you guys get some slots from Avianca, growth is going to go up. I'm just wondering if you can help us connect the dots on increased costs versus the ability to effectively market the new service side of the starting blocks. Is this potential incremental growth likely margin dilutive at first, so near term negative before becoming additive longer term? Or is this growth how do you think you can kind of hit the ground running on? Yes. I mean, no, I think that we can hit the ground running. Our network and the traffic it generates does a lot of sales and marketing for us. It does a lot of distribution for us. And so you should not expect any bump in marketing costs or distribution costs special just to sell this. I'm very confident that given the broad base of demand that we already have and our reach in the domestic market, this will be plug and play and actually expect it to be very efficient capacity in terms of overhead and things that we already have. So it should come in very, very efficiently. Dan, our TripAdvisor awards mean our customers are out there screaming for us to enter more markets. And they do a great word-of-mouth marketing for us. The next question is from Renata Faber, Itau BBA. Thank you, operator, and congratulations on the results. Could you please talk a little bit about the SCARGO segment? Revenues increased substantially in the Q1. And I also understand that you started flying the dedicated cargo aircraft in Q4 last year. So can you talk a little bit about the growth perspective in this segment and also the profitability now that you are flying the dedicated aircraft? Yes. Thanks, Renata. It's actually cars are doing really, really well. And I mean one thing that we were doing is we were flying our 330s domestically just for some of our cargo contracts. And so what we've decided to do is with those new cargo aircraft, we can actually deploy our 330s on the appropriate routes. And so what we've seen is a significant increase in our e commerce business. And when we we have talked a lot about the Correios joint venture. But when we sat down to negotiate with the Correios, we thought we were going to grow the business about 20% to 25% a year. And now we're growing 50% -plus last year, 41% this year. That's one of the reasons why we stepped away from it because we know that going it alone, we can do much better. And so this is a very important part of our business. You'll see us continue to dedicate resources to it. Our cargo team wants additional aircraft because they have demand. The problem is it's very difficult for us to crew it, right, because we're growing the overall business substantially. But when you think about the logistics problem that exists in Brazil today and the fact that we're in 106 cities, we have over 2 40 stores, If you live in Sao Paulo or in the southeast of Brazil, logistics isn't a problem for you. You can buy stuff on MercadoLibre, and it gets delivered to your house. But if you live anywhere else in Brazil, and I think that we are the only airline that truly covers all of Brazil. And our cargo network really is desirable to all of the e commerce players. And so it will continue to build that over the coming years. And so we do not see this slowing down. It's going to slow down on a percentage basis just because the base keeps getting bigger, but we do not see our cargo business slowing down at all. I mean, we serve 106 cities, but we have 3,200 municipalities we serve. So that's a much bigger number. Our next question comes from Savi Syth, Raymond James. I just had a follow-up question on the cost side. You said kind of 1Q came in as expected. Can you give us an understanding of what the base is for the kind of guidance you had provided for 2019? And just how much of that is going to be kind of back end loaded? And maybe I'm guessing maybe you're thinking kind of the weaker end of that given how the FX has moved. But just any color on kind of the guidance and how we should think about it on a quarterly basis. It's Avi. Yes. So in terms of sort of those assumptions that we use, normally for fuel, we use the forward curve. And for FX, we use the Focus survey. Now the Focus survey seems to be a little optimistic these days. I think it's at 3.75%. Hopefully, they're right, but we decided to be a little bit conservative. And so fuel and FX are kind of hovering around where they are today. And so that's how we forecast. But like as we mentioned, I think the big changes that you will see towards the end of the year as we go from this point on until the end of 2019, it's a lot of the capacity that's coming in from next gen aircraft. It's the new demand environment that we're seeing, and it's just the natural seasonality that we have. That second half is always much stronger than first half for us. So I think going back to what Bruno asked prior, obviously, the implied EBIT margin that we have to meet our guidance is higher than what we delivered in Q1, but that's all as we expected. When we published the guidance, we saw that as well. And so we're kind of just moving along with some tailwinds and some headwinds, but still moving towards delivering that guidance. Alex. Ladies and gentlemen, this concludes today's question and answer session. I would like to invite Mr. Jean to proceed with his closing statement. Please go ahead, sir. Thank you, everybody, for joining us today. We're very excited about the future and look forward to talking to you individually or at conferences. Feel free to reach out to Andrea and the team, and if you have any further questions. We have a lot of work to do, and we're going to continue delivering. Thanks. That does conclude the Azul's audio conference for today. Thank you very much for your participation, and have a good day.