Hello, everyone, welcome to Azul's first quarter 2019 results conference call. My name is Paula, I will be your operator for today. This event is being recorded, all participants will be in a listen-only mode until we conduct a question-and-answer session following the company's presentation. Should any participants need assistance during the call, please press star zero to reach the operator. I would like to turn the presentation to Thais Haberli, investor relations manager. Please proceed.
Thank you, Paula, welcome all to Azul's first quarter earnings call. The results that we announced this morning, the audio of this call, the slides I will reference are available on our IR website. Presenting today will be David Neeleman, Azul's founder and chairman, John Rodgerson, CEO. Alex Malfitani, our CFO, 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, constitutes forward-looking statements. These statements are based on a range of assumptions that the company believes are reasonable 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 are discussed in detail in our earnings release. With that, I'll turn the call over to David. David?
Great. Thanks, Thais. Welcome, everyone, thanks for joining us for our first quarter 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 four years, we have created our ability to grow while maintaining our operational excellence great customer service. Of all the awards given out in our industry, I value the TripAdvisor awards most because it comes from 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 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, 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 three new destinations to our network and announced two additional destinations in the state of São Paulo. We are the largest airline in the state of São Paulo, thanks to Governor Doria's travel incentive program, we will now benefit from a reduction in the fuel taxes from 25% down to 12% starting on June the 1st.
This 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 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 five neos to our fleet, replacing four E-jets, and today we have 26 flying in our network. The 320neos represent only 34% of our first quarter capacity, 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 six 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, we haven't seen a decrease in RASK, which is really truly astonishing. This fact has helped us offset weaker currency and higher fuel prices.
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. I'm so proud to be part of this great company. With that, let me pass the word over to John to give you more details on the first quarter.
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 BRL 138 million while running a great operation.
As you can see on slide four, operating revenue increased 16% to BRL 2.5 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 results was mostly impacted by the 16% depreciation of the BRL 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 third quarter, we should continue to see a significant drop in our unit costs. Moving on to slide five, fuel and currency had a negative impact of BRL 74 million in our first quarter operating results, or approximately three margin points. We also had two margin point 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 recorded an operating margin of 13.2%, recovering three of the five margin points during the quarter. Moving on to slide six, our loyalty program, TudoAzul, maintained a strong growth pace during the first quarter, reaching more than 11 million members.
Gross billing TudoAzul 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 second 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 two years, showing that our margin expansion strategy is working.
As we look at a balance sheet on slide seven, 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 hundreds of millions 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 three. 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 arrive, 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 five new A320neos to our fleet during the first quarter 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 eight. As you know, as we've talked about many times, we have a multiyear margin expansion plan based on three pillars, the transformation of our fleet with next generation aircraft, our loyalty business, TudoAzul, 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 first quarter.
Our cargo business and our ancillary revenue business is only about 50% of the way there, 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, and increasing our efficiencies. 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, Abhi, and myself are available to take your questions.
Ladies and gentlemen, thank you. We will now begin the question and answer session. If you have a question, please press the star key followed by the one key on your touchtone phone now. If at any time you would like to remove yourself from the questioning queue, press star two. For those following the call via webcast, you may post your questions on the platform, and they will be either answered during this call or by the Azul investor relations team after the conference is finished. Our first question comes from Josh Milberg, 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. We saw that on a combined basis, your maintenance and D&A costs grew by less than revenues this period, and therefore, that without that effect, your EBIT margin might have come off a little further. That's my first question.
Sure. Hey, Josh, it's Alex here. Yeah, you got that exactly right. As you know, we implemented IFRS 16. We used to expense a lot of maintenance for our leased aircraft, and now that maintenance will be capitalized. Also, you remember from the previous quarters that we have started insourcing 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. You got that right. I think, the best way to think about it is that, given the current effects levels, you can expect depreciation to be around the same level as Q1 going forward. Maintenance maybe was a little bit lower than average.
Maybe something like BRL 70 million a quarter would be our expectation going forward. That should help you figure out what will be.
Okay. That's great, Alex. 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. C Checks, we're insourcing as well. There's a lot happening here, not IFRS. IFRS is important because it's a big difference from sort of the normal number for maintenance and depreciation that everyone has been used to seeing so far.
Okay, that's great. 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. 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 did in the last quarter or something you'll need to do in the coming quarters?
No. This quarter, we did exit 4 aircraft from the fleet. The maintenance, it's just an ongoing thing that's going to be happening. 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 non-recurrent or was extraordinary, 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. We will highlight that for you. We do provision that along with the lease.
Okay. Just sort of confirming, no big extraordinary values expected in the coming quarters related to those retirements.
Correct.
Okay. That's great. Thank you very much.
Thank you.
The next question comes from Savanthi Syth, Raymond James.
Hey, good morning, everyone. Thanks. 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, also maybe capacity getting rationalized. You can kind of give us a little bit of color on what you saw in 1Q and what you're seeing so far in 2Q?
Hey, Savi. It's Abhi here. 1Q, we actually had a very good January and February. Carnival was later this year. We always prefer Carnival earlier. It gets the country started. That affected us a little bit. Probably the back half of March was maybe a little bit slower than we thought. We've been off to a very strong start for second quarter. Bookings in April have been very good. Bookings in May so far, very high volumes. Sort of a good balance between volume and fare. The industry is pricing very rationally. The industry is taking advantage of the situation, is behaving rational. I'm not seeing any negative influences. 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. That's performing well also. Overall, I'm actually very happy with 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 a domestic ASK of 17. We're happy with that. You guys know we're not a low fare. We don't have the lowest fares, so the revenue's coming in good as well. 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. Thanks, Abhi. 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?
Yeah.
As you grow more domestic as the year goes by, do you kind of expect international to have a lower contribution?
Yeah. Specifically for Argentina, we have very low exposure to Argentina. Only two non-stop flights a day. It's a very small part of our business. International actually was a positive surprise in first quarter. 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. It's actually been better than I expected. There's a good discipline again on the capacity side. U.S., Brazil specifically, capacity is going to be down mid-teens May onwards. 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.
You'll see very disciplined on the international side. 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.
Very helpful. Thank you.
Our next question comes from Michael Linenberg. Deutsche Bank.
Yeah. Hey, good morning, everyone. A couple questions here. I realize the Avianca Brasil situation is somewhat fluid. Suppose there is no auction. How does it play out with respect to the assets? I'm just curious of your thoughts. 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 two participants who were approved for this reorganization plan. Where's that cash coming from? Just any thoughts on those topics would be great.
Yeah, Mike. Just quickly, it's a sad situation, unfortunately. Our hearts go out to the crew members of Avianca Brasil. There's 5,000 people that work for that company and they have great customer service and have been great competitors over the last few years. Unfortunately, the money has run out. As you said, it's a very fluid situation. From our read, payroll has not been paid yet this month. They're about five days late. The airline is significantly smaller than it was. There's been an injunction to stop the auction process because of a lot of people questioning the way it was done. I think overall it's a sad situation. I think it's positive for the industry overall.
As Abhi's kind of talking about what's happening with the revenue trends, we should benefit getting some slots in almost any scenario that we look at. We're watching it very closely. The outcome is very uncertain at this point in time. What we'd like to kind of highlight is we have an operation that runs 800 flights a day, Mike. We're going to continue growing over the next few years. This was really a Congonhas play. Congonhas would've been an incredible cherry on top of the cake for us to kind of show our product in that market. It's an important market in Latin America. We don't want to overstate that our business model never depended on that airport.
If we have a chance to get some additional flights in there, we're going to go for it. We're going to show what great customer service we have similar to what we've done elsewhere. We're going to continue to watch it. We're going to continue to look at it. We're hiring Avianca people every day because there's a lot of great people coming from that airline into the Azul family.
Great. John, can you update us just on the fleet plan? 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 Brasil. 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. If we can get a sense of maybe what the incremental fleet size will be, we can do that capacity calculation on our own. That would be great. Thank you.
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. We're interested in the next-gen assets that they have, the NEOs. You will see us add a few of those. The timing is uncertain as to when they exit and are ready to kind of come back in. 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 what happens with the auction process and what happens if something different happens. Sorry to kind of avoid the answer, Mike, 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. If I could just squeeze in one last one. This is probably more Abhi or maybe John. You look at your forward schedule and over the next, I don't know, four or five months, it does look like that some of your frequency between U.S. and Brazil are getting cut. It looks like they're getting scaled back. Is that a demand issue, or is that a delivery delay with the A330-900 NEOs that you're not getting them fast enough? You have to go back and cut the schedule a little bit? Demand or mainly OEM issues?
Hey, Mike. It's the A330neos have seen delays. We're probably going to be pushing out the second airplane towards second half of the year, late second half. That's affected some frequencies as well, specifically to the U.S.
Okay.
Again, I want to make sure we're disciplined, for example, some days of week where we don't need the second daytime Fort Lauderdale, we won't fly a second daytime Fort Lauderdale. We have had A330neo delays. The second one that was supposed to be sort of June, July timeframe is probably late second half of the year now.
That's great. Great answer. Thank you.
Thanks, Mike.
The next question comes from Bruno Amorim, Goldman Sachs.
Hi, good afternoon. I have a question on the guidance for this full year. You have delivered an EBIT margin of 13% now in the first quarter versus the guidance of 18%-20% for this full year. 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 that would be helpful. Thank you.
There's a lot of factors. I think, how we performed in the first quarter is exactly how we thought we'd perform in the first quarter. We're always stronger in the third and the fourth quarters. We're positively surprised at the performance we're seeing in the second quarter. We've got a lot more aircraft coming in that are the A320neo, and you've seen the growth in our ancillary business with cargo into Azul and the revenue trends are coming. We also have the E195-E2 that are coming on in the third and the fourth quarter, which add additional capacity with lower fuel costs. There's a lot of factors, and as we look at our margin expansion pillars that we showed you, first quarter is the toughest quarter, for the year-over-year comp.
Last first quarter, I think the exchange rate was 315, and this year it was around 390. You don't have that tough comp in the second quarter, third quarter, and then the fourth quarter. Abhi is performing extremely well on 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. 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.
Hey, Bruno, it's Abhi here. Just to add to that, our year-over-year RASK in the first quarter was flat, and we're expecting something like high single digits year-over-year in the second quarter. 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. That's really what's going to help also going forward.
Okay, that's clear. Thank you. 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 a tax on revenues. Has it impacted the net RASK as well or not?
Yeah, you could see that in our waterfall. We highlighted that, the exact amount that we benefited in the waterfall.
Okay, perfect. Thank you.
The next question comes from Rogério Araujo, UBS.
Hi. Good afternoon. Thanks very much for the opportunity. My first question is a follow-up on Bruno Amorim's question on guidance. Actually, when you do an adjustment for maintenance expenses, maintenance expense has been boosting margin by three percentage points. This was first Q. If you look at last quarter, was almost five percentage points and a historical level as well. When we adjust the guidance for this capitalization of maintenance expenses, actually, the proper range of the guidance, which is Atlantic percentage points EBIT margin, it becomes something between 15 and 17. I'm talking about ex maintenance expenses capitalization. In our accounting, we would say something between 9% and 11%. My question is the guidance conservative, especially considering the fleet of the GOL and all that is accelerating and also the surprise on yields as of the second Q?
That's my first question. Thank you.
Okay. Hey, Rogério. 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. On demand levels, economic activity, fuel effects, things like that. That's why we have a range. 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. As John mentioned, we've had headwinds on fuel and effects.
Certainly, they've moved against us since we've published the guidance, that would push us more towards the low end of the guidance. There's the upside from the revenue environment that has been much better than we expected. That's going to push it towards the other one. That's how we feel about it. 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. Thanks so much. My second question is also a follow-up on Avianca Brasil situation. There are these local news flow stating that the option may not occur as it was planned in the debt holder in the last meeting. My question is any possibility that Azul comes back with an agreement similar to that you published it or Azul completely discards now any kind of offer purchase of the assets of Avianca Brasil?
Thank you. It's Brazil, man. Everything's on the table. You never know. We're just watching the situation closely. It's actually been pretty entertaining to get to see the ups and downs. 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 air bridge, Rio-São Paulo. I think we stand behind that I think that's the best outcome for the country and for us. Again, we've got no comment on where we're at right now. We'll watch it closely, and we'll look for opportunities as they present themselves.
I think the thing that was most tragic, I think, for the people that work there is that the way the plan came down and the two people that got the slots were basically the ones that have 95% of the airport today. It's our belief, and reading even CADE's statements, that that plan never had a chance of being approved anyway. It almost looked like it was a 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-rated number of slots, which was really kind of sad for the people that are there now, even working without salaries today. Sometimes things work out the way they should have worked out. We'll see how it goes.
Thanks very much.
Our next question comes from Daniel McKenzie, Buckingham Research.
Oh, yeah. Hey, thanks, guys. 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. I'm just curious. It's unclear if an auction even goes forward, but if it did, with the assets that the airlines bid on, could they be at risk of being taken away by ANAC or CADE if it is viewed illegal? I'm just wondering if you could just help us understand sort of the timeline 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 we might know this might move forward or not.
Dan, we don't know, I think, as I said, anything's possible. As David highlighted, we believe that our competitors had a shutdown plan, 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. We'll see. I think other creditors realized, "Wait a second, this is not what we had originally thought." 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. We're going to continue running Azul.
We're going to continue growing our business, we'll look for opportunities to expand in that airport as they present themselves.
Okay. Yeah, understood. 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? Is that something you'd even want to do? I'm just wondering if you can just help kind of flesh out the fleet plan a little bit further and how you might deploy the planes.
Yeah. Dan, those aircraft aren't yet here or not yet closed, we're working through that. As I said, we want the next generation aircraft that Avianca Brasil had. You need to be able to crew them, we're working through that currently as part of our growth plan. We always have the ability to retire the E-Jets early, anytime we do that, market expansion comes even quicker, we'll continue to do that. 85% of the capacity of Avianca Brasil came out. They had about 13%-15% of the total market share in Brazil, there's a little bit of a vacuum that exists. 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.
It'll 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. It's overall very positive, we'll be opportunistic as we move forward. We need the aircraft to be delivered to us in our specs in order for us to take advantage of the opportunities that exist.
Hey, Dan,
I just want-
Go ahead, Abhinav. Sorry.
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? 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. We have 169 jet markets. That'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. We have a long way to go just in our own network in terms of upgauging. 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. That's been our focus all along.
Of all the A320 markets we've added, there's only one new market, that's a Campinas market. Our network is really broad. It's a huge platform of growth, that's what we're going to be focused on for a while.
No, that's perfect. Thanks, Fabio. I wonder 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 cost versus the ability to effectively market the new service out of the starting blocks. Is this potential incremental growth likely margin dilutive at first? Near term negative before becoming additive longer term or is this growth, Abhi, you think you can kind of hit the ground running on?
Yeah. 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, 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, I actually expect it to be very efficient capacity in terms of overhead and things that we already have. It should come in very efficiently.
Hey, Dan, our TripAdvisor awards mean our customers are out there screaming for us to enter more markets.
They do a great word of mouth marketing for us.
Understood. Thanks so much for the time, you guys.
Thank you.
The next question is from Renata Faber, Itaú BBA.
Hi. Thank you, operator, and congratulations on the results. Could you please talk a little bit about the cargo segment? Revenues increased substantially in the first quarter. I also understand that you started flying the dedicated cargo aircraft in Q4 last year. Can you talk a little bit about the growth perspectives in this segment and also the profitability now that you are flying the dedicated aircraft?
Yeah. Thanks, Renata. Actually, cargo is doing really well. One thing that we were doing is we're flying our 330 domestically just for some of our cargo contracts. What we've decided to do is with those new cargo aircraft, we can actually deploy our 330s on the appropriate routes. What we've seen is a significant increase in our e-commerce business. We had talked a lot about the Correios joint venture. When we sat down to negotiate with the Correios, we thought we were going to grow the business about 20%-25% a year. Now we're growing 50+% 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. 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? We're growing the overall business substantially. When you think about the logistics problem that exists in Brazil today and the fact that we're in 106 cities, we have over 240 stores. If you live in São Paulo or in the southeast of Brazil, logistics isn't a problem for you. You can buy stuff on Mercado Livre. It gets delivered to your house. If you live anywhere else in Brazil, I think that we are the only airline that truly covers all of Brazil. Our cargo network really is desirable to all of the e-commerce players. We will continue to build that over the coming years.
We do not see this slowing down. It's going to slow down on a percentage basis just because the base keeps getting bigger. We do not see our cargo business slowing down at all.
We serve 106 cities, we have 3,200 municipalities we serve. That's a much bigger number.
Okay. Thank you.
Our next question comes from Savi Syth, Raymond James.
Hey. I just had a follow-up question on the cost side. You said 1, 2 came in as expected. Could you give us an understanding of what the base is for the kind of the guidance you had provided for 2019 and just how much of that is going to be back-end loaded, and I'm guessing maybe you're thinking the weaker end of that given how the FX has moved. Just any color on the guidance and how we should think about it on a quarterly basis.
In terms of those assumptions that we use, normally for fuel, we use the forward curve, and for FX, we use the F ocus Survey. The Focus Survey seems to be a little optimistic these days. I think it's at BRL 3.75. Hopefully they're right. We decided to be a little bit conservative. Fuel and FX are kind of hovering around where they are today. That's how we forecast. 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. It's just the natural seasonality that we have, that second half is always much stronger than first half for us.
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, that's all as we expected. When we published the guidance, we saw that as well. We're kind of just moving along with some tailwinds and some headwinds, still moving towards delivering that guidance.
Got it. Thanks, Alex.
As a reminder, if you want to pose a question, please dial star one. Ladies and gentlemen, this concludes today's question and answer session. I would like to invite Mr. John to proceed with his closing statements. Please go ahead, sir.
I'd like to thank 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 Thais, 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 audio conference for today. Thank you very much for your participation, and have a good day.