Earnings Call: Q2 2018

Aug 9, 2018

Hello, everyone, and welcome to Agil's Second Quarter 2018 Results Conference Call. My name is Roberta, 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. I would like to turn the presentation over to Andrea Bocher, Investor Relations Manager. Please go ahead. Thank you, Roberto, and welcome all to Zuul's 2nd quarter earnings call. The results that we announced this morning, the audio of this call and the slides that we will reference are available on our IR website. Presenting today will be David Newman, Agil's Founder and Chairman and John Rogerson, CEO Alex Marcidani, 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, all of these 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 CDM 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 described in detail in our earnings release. With that, I'll turn the call over to David. David? Thanks, Andrea. Welcome, everyone, for and thanks for joining us for our Q2 earnings call. As always, I'd 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. I'm extremely pleased to report that we continue to run the best airline operation in Brazil. We remain the most on time airline and have recently received several awards attesting to the excellence of our customer service. For the 8th time in a row, we were awarded by Skytrax, the best regional airline in South America and also the best airline staff in the region. And we're also recognized by consumer.gov for having the highest standard of customer satisfaction and the fewest customer complaints. Each time I play JetBlue, I get more excited I'm sorry. Every time I fight, I roll. I get more excited about the enthusiasm of our approved numbers, the quality of the service, which I think bodes really well for our future growth opportunities. As you know, we are going through a fleet transformation process by adding larger next generation aircraft. We are extremely fuel efficient and have the lowest trip cost. That is also the best way to combat fuel and currency headwinds we saw in the Q2. This is why we recently announced an additional order for 21 E2s, increasing our total firm orders for this type of aircraft to 51. With the need to replace all of our current E1 aircraft, this order guarantees that Azul will have the newest, most fuel efficient fleet in the industry with the lowest cash and the lowest trip cost, which is an unbeatable combination. As you know, our A320neos have 56 extra seats compared to the E1s with a similar chip cost, contributing to a cash reduction of 29%. The E2 story is very similar. It has a lower cost of ownership, less fuel burn, lower maintenance costs and an increased revenue potential from 18 additional seats. This results in a cash reduction of approximately 26%. This results in a cash reduction of approximately 26%. Moreover, the E2 has a trip cost that is 14% lower than the E1. So we are basically getting more seats for free and paying much less for each flight, which is astonishing. Because the cost and revenue benefits of the E2O to E1 are so significant, it makes total sense to aggressively remove the E1s from our fleet earlier than planned. I have set an ambitious goal for our team to have this portion of the fleet transformation completed by the end of 2021. We're working hard on it and we will share more details with you soon. This is absolutely possible because E1 to E2 transformation process is significantly easier for Israel as it has the same type rating for our pilots same type rating. So our pilots can fly both aircrafts at the same time. It's just plug and play. Our first E-two is scheduled to arrive next June in June of next year when we will start seeing its margin expansion benefit from this fleet type. In summary, we continue to focus on our margin expansion plan that we have communicated to the market. We are well on our way to building a better company for our CREAM members and our customers and our shareholders. With that, I'll pass the time to John, who will give you more details on the Q2 results. Thanks, David, and hello, everyone. I also want to start out by thanking our crew members for all their hard work during the past quarter. As you can see on Slide 5, our adjusted EBITDAR increased 11% in the Q2 and we recorded an adjusted net income of 238,000,000 dollars a record for the Q2. Our operating results were impacted by the 20% increase in fuel and the 12% depreciation of the real. Excluding special items related to the sale of 6 VJET and the trucker strike, operating margin totaled 3.7% compared to 5.8% a year ago. We grew capacity by almost 19% in the 2nd quarter, while also expanding our top line by 20.5% and our RASK by 1.6% on an adjusted basis. Even with the 20% increase in fuel and the 12% devaluation of the real, total CASK increased only 3.9%. CASK ex fuel was basically flat and on an exchange rate neutral basis would have fallen 5.1%, a strong indicator that our fleet transformation strategy is working as expected. As David mentioned in the beginning of the call, our decision to replace older planes with more fuel efficient aircraft makes even more sense in the current environment. The A320neos represented 24% of our total capacity in the Q2 and will account for 30% by the end of the year. The E2s coming next year will help us accelerate the fleet transformation even further. Moving on to Slide 6. You can see that fuel and currency had a negative impact of approximately $160,000,000 in our 2nd quarter operating results, which represents almost 8 margin points. Thanks to our margin expansion strategy and the ability of Avi and his team to recapture revenue, we recorded a recurring operating margin of 3.7%, recovering 6 of the nearly 8 margin points. We offset 85% of the fuel and currency headwinds during the quarter. Our RASK adjusted for this increase rose 8.1% year over year. Our network advantage allowed us to grow capacity by 19% while increasing our average fares by 16% and at the same time maintaining a stable load factor. Once again, we increased capacity, yield and RASK at the same time. This shows how much we needed the larger aircraft in our network. Moving on to Slide 8. Our loyalty program, TudoAzul, maintained a strong growth base for the Q2, reaching almost 10,000,000 members. Gross billings ex Azul went up 38% year over year with the majority of this increase coming from TudoAzulClub and our banking partners, further increasing our share of the Brazilian loyalty market. We now have 18% gross billing share, up 14% just 1 year ago and still well below our fair share of the market. Unlike other airlines in Brazil, Super Bowl is wholly owned by the company. This means that we have no tax inefficiencies and benefit 100% from the cash flow generated by this high growth, high margin business. On the right side of the slide, you can see the cargo business is also performing extremely well. Revenue increased 64% year over year, mostly driven by the larger cargo compartment of the A320neo and the growth of our international capacity. We're excited to deploy dedicated cargo planes next quarter. Clearly, our cargo team earned the right to get these planes into our network. Moving on to the balance sheet on Slide 9. I'm proudly report that we ended the quarter with a solid liquidity position of R3.8 billion dollars representing 45% of our last 12 months' revenues. Even with a 12% depreciation in the real, we ended the quarter with leverage at 4 compared to 4.5 in the Q2 of 2017. We used the industry standard of adjusted net debt to EBITDA, which capitalizes all of our leases at 7x and includes all of our debt. This result reflects our decision to hedge 100 percent of the principal and interest payments for the $400,000,000 denominated bond issued in 2017, protecting ourselves against currency risk. At the end of the second quarter, this currency swap was recorded as a net asset of BRL210 1,000,000 under the long term derivative financial instruments. Alex, our CFO, deserves all the credit for this hedge. Our low FX exposure is reflected on Slide 10. Only 32% of our balance sheet is denominated in U. S. Dollars and virtually all of our working capital debt is denominated in local currency. Additionally, as you can see on the right side of the slide, we continue to be long dollar. Our assets denominated in foreign currency, namely our cash, deposits and maintenance reserves abroad and our investment in TAP surpass our dollar denominated liabilities, and that's excluding aircraft, engines and spare parts, which are not restated to the exchange rate every quarter but are also priced in dollars. For this reason, in times of weakening currency, we are not nearly as impacted as our competition. This reaffirms our position at the airline with the strongest balance sheet in Brazil. Moving on to Slide 11. The move in currency and fuel represents an increase in cost of BRL 8,000,000 to BRL 900,000,000 in 2018, representing a swing of up to 9 margin points. However, as you know, we have a multiyear margin expansion plan. Also, we continue to see positive demand environment backed by the strength of our unique network, as you saw in our July traffic release. Therefore, we are confident that we can offset most of these headwinds as a result of projecting an operating margin of 9% to 11% for 2018, excluding the impact of nonrecurring events. We also think it's prudent to revise our capacity growth range to 16% to 18%, down slightly from 17% to 20% by making adjustments in both our domestic and international networks. We continue to replace older generation aircraft with A320neos, which, as David mentioned, are key to combat rising fuel prices and the weakening of the real. As a result, we expect CASK ex fuel to decrease between 1% 3% year over year even with the devalued currency. Our plan of having a 5 point margin expansion to 15% from the time we went public has not changed. Before the devaluation of the rally, we were ahead of schedule, but we're still on track and feel confident that the pillars of our margin expansion plan are working just as expected. With that, we'll turn the call over to the operator for Q and A. Ladies and gentlemen, thank you. We will now begin the question and answer Our first question comes from Sabine Zvi with Raymond James. Hey, good morning. I just wanted to follow-up on the kind of the revenue environment, which seems strong. And I was wondering if you can talk about I think it was really strong before the truck driver strike and maybe a couple of weeks after strong, but then it kind of weakened. And just curious what you're seeing today. Clearly, you had a good recovery in fuel in the quarter. And just wondering your thoughts on how that's continuing. And you could give a little bit more clarity, any color on domestic versus international, that would be great. Hey, Sam. This is Abhi here. So yes, you're right. I mean, I think we started the Q2 in April with a strong demand environment combined together with really good fare and capacity discipline. Of course, that was interrupted by the strike and then the World Cup. But we've seen a good recovery after the end of the World Cup. July recovered nicely in the last 2 to 3 weeks there. And we had a very, very strong start to August. So I feel good about the demand environment that I'm seeing. Fair discipline is also very strong. I've said this before. I think the capacity environment and the fare environment are the best that I've ever seen basically. And so I think that's really setting the industry up nicely for the 2nd part of the year. So our July traffic was strong. We had good domestic and good international performance as well. Domestically, corporates and agency demand is what's driving most of the pop in year over year RASM, and I expect that to continue. When we had the strike and the World Cup, we sort of expected that there would be some repressed demand. We experienced that in the previous World Cup as well. So I feel like that, that is coming back nicely online now for the second half of the year, which is seasonally the best part of the year. So I feel good about domestic coming back strong, driven mostly by corporate, by agencies and by closing demand. On the international side, it's steady, as you could see on the on our traffic release. Probably the one soft spot is Argentina, where luckily for us, we have low exposure to the 3 daily flights at most. And so that we're pretty well hedged against that. Europe is doing well, and the U. S. Is steady. Nevertheless, we have made some capacity adjustments for international for the 2nd part of the year. Between August November, our international capacity is down 12%, just to be prudent given the currency and the fuel situation. But overall, I feel good about it. And I think domestic is really going to come back strong in the second half of the year, backed by good fare and capacity discipline. That's helpful. And if I may follow-up on the domestic, you're kind of moderating growth as well. Just any color on the type of markets where you're moderating that growth? Yes. We are. Also between August November, we're going to cut our domestic by 5%. Basically, for the entire period overall, we're cutting 7% of capacity, which takes our guidance really our expected capacity for the year from something very close to 20% to something very close to 17% for the whole year. It's a mix of domestic and international. Domestically, it's a market that are obviously not doing well on a P and L basis, number 1. It's things that are not in and out of our hubs. So any market that over flies a hub or under flies a hub is probably the first to go. So it's such a market primarily outside our hub. And internationally, it's for example, we're cutting the daytime Fort Lauderdale flight. So we'll keep the nighttime flight only and reducing some frequency in the Northeast Brazil to Florida. So if anything that's sort of not core to our hub strategy is what we're cutting. The next question comes from Michael Linenberg with Deutsche Bank. Hey guys, it's actually Matt on for Mike. How are you? You mentioned at your Investor Day that capacity discipline in the Brazilian domestic market was the best you've seen in a decade. Is that still the case? Any irrational or aggressive actions on the capacity or pricing front domestically? Matt, no, I feel good about capacity, to be honest. I think that the I've talked about this before, that there's really been a structural change, I think, in how airlines in Brazil are allocating capacity. We're not seeing airlines go after each other. We're not seeing them chase each other in markets that actually they should not be in, but they really don't have any chance of making money. I think airlines are focusing where they're strong and that they can make their network stronger. We're certainly doing that with the A320s And you can see in our traffic, we're putting them in our network. We're seeing great traffic growth, connectivity growth. And so I think we set an example to the market as to how to allocate the capacity where it makes yourself better. And I'm seeing that across the board in airlines really playing where they are strong. So I think that's a very, very positive sign for the industry. And I think it's fairs or ancillary, I see airlines taking advantage of the opportunities, showing discipline in the market and really looking forward to taking advantage of the good demand that we usually have in the second half of the year. And Matt, just to highlight, if you take a look, we were actually down in departures in the first half of the year, minus 2%. So it's really the upgating. It's the fleet transformation. It's getting these new assets that have more seats, utilizing them 14 hours a day, reducing our task until it's the right type of growth that you would want in our existing markets that have been stimulated. And once again, Hobby continues to increase capacity and expanding RASK. And that's really a powerful combination because of what we're going to see on the cost side. And great. Just as a follow-up, what kind of impact are you seeing, if any, from the upcoming Brazilian election on either business or leisure traffic in Q3? And is anything you can quantify? Or Yes. So as I said before, demand right now is strong. I would say that's a little bit early to see the effect of the elections. It's going to be towards the end of September and mostly in October. So I think we'll know more when we get closer. It is a distraction clearly. But at the same time, I think we also have some depressed demand from the strike in the World Cup. So right now, we're seeing good trends. And I think because so much of it is corporate, that tends to be closer and we'll have a much better idea as we get closer to October. Thanks, guys. The next question comes from Hinata Faber with Citiu. Hi. Thank you everyone for the call and congratulations on the results. And thank you, David, for talking about the economics of the issue. If I'm not mistaken, I believe this is the first time you talked about that and there is plenty of interesting information on what you said. So I'm sorry to ask you to repeat it, but could you please talk again about how the E2 will help as you increase margins? Yes, sure. Thank you very much. I'll take that question because it's a real passion of mine. And I think I've got E2 Idis right now, and I'm really excited about it. This math is really pretty simple. It's not difficult. We've got a lot of our E1s when during crisis times, during 'seven and later, and we didn't have the credit that we do have today. And so we ended up paying a lot for these E1s, particularly on sale leasebacks and to finance them. So now we have a whole different situation with the company. And so we've bought the E2s and the financing is less. The plane is at a very attractive price. And so the first category is we have a lower cost on the airplane by a significant amount. So that's number 1. Then number 2, these new E2s have new generation engines on them. And the fuel burn savings is there. It's absolute. The fuel testing is going on. It's like 13%, 14%. And so that's absolutely that's it. Then you move to maintenance. We have a better deal for the engine maintenance than we do currently. So that's a big portion of the maintenance costs. The C check intervals are longer. Then you have this period of warranty and kind of maintenance honeymoon that goes on for up to 5 years. And so our maintenance costs will be significantly lower permanently, not just in the 1st 5 years. And then we've got 18 additional seats. And so with the high load factors we have, we assume that we sell half of those seats and have a price and come up with a number. And we add all that together and time it's probably really just to magically be able to snap our fingers today and say, let's all of our 63 E1s were E2s, and we had those flying today. We believe that difference in margin, it's an astounding number. It's 9% difference of margin. 9 margin points. 9 margin points. So 9 margin points over where we are today. Now obviously, things can change as far as fuel price and all that kind of stuff. But I'm saying, today, apples to apples, what that airplane will be, cost of our airplane versus what we have today, it's 9 margin points. Now that gives us a tremendous amount of flexibility and cushion. Obviously, even if there was 5 margin points and we were able to lower fares, it's getting more traffic. Or fuel spikes up, we got the most fuel efficient plane in the industry. The reality is a week, and we have a plane that costs us a lot less money. So and we're spending less money on maintenance, which are dollar denominated. So that's why I push the team up. If it's impairments or whatever we have to do, we have we're working really close with Embraer to speed up the production that have been coming in sooner, and that's why we set this target to have all of the E lines gone by the end of 2021. And so you'll start seeing that benefit next year as the planes start arriving in June. So I couldn't be more excited. Cannot be that's here all week and driving us crazy. And I've told investors this. If I hadn't told the people share of stock, I would I, when I see that coming. So I'm very excited about it. Yes. So we're going to work to try to accelerate this. It is a very exciting thing, especially kind of given the additional fee to lower fuel burn. We got a great price from Embraer. So we're very, very excited about it. I mean, it's amazing we'll be able to do a slight cost on E1 really. It's remarkable that this team still will focus on. So when we kind of get all of the assets and then we've got the meals coming too on top of that. So very exciting news. Okay. Thank you. The next question comes from Dan McKenzie with Buckingham Research. Hey, good morning. Thanks guys. Corporate business is good. Wondering if you can talk a little bit more about the leisure side of the business. So on the one hand, it's the seasonally slowest time of the year for leisure traffic. On the other, we've had some pretty sharp swings in foreign exchange and surely that impacted that part of the business. So I guess the question really is twofold here. First, to what extent was leisure demand impacted by moves from foreign exchange to the extent that you can peel that out? And then secondly, how long does it typically take for pent up demand to typically return? Dan, it's Abin here. So overall, Zoom historically has been pretty small in the leisure market. And the reason has been we haven't not had the right airplane to really have a big position in that market. We're starting to now with the A320neos. We have 15neos today, By the Q4, we get 30% of our capacity with the A320neos. So what's happening with the neos is twofold. We're putting the Neos in our network, really connecting our hubs. So completeness to Recife, for example. Salvador a little bit. Some were able to enter some leisure markets like Portaleza, where historically we've had very, very low presence. We're obviously seeing a very good market reaction to that. We're seeing unit revenue reductions much less than what we had talked about on the IPO roadshow, sub 10% compared to a gas reduction of 29 percent. And so a part of this is leisure demand, we're able to access that type of demand that we didn't have before. We're able to stimulate local demand out of our hubs, whether it's computers, whether it's Bella Horizonte or Resifi. And we're able to drive a lot more connectivity in our network. To give you an example, when we put in all A320s between Campinas and Recife, we had an increase of 77% of connecting traffic because it's not just the leisure that's using this airplane and these routes. We have 50 destinations on one side and 40 on the other. The route VTP, Rafiki has 500 different OMDs that flow over that route. The route VTP Belo Horizonte has 800 different OMDs. So there's regional demand that's helping us with this airplane, but it's also the base of our network, the breadth we have and the platform that's really strong. So I would say that because we have so much connectivity, I think we're seeing good results with the A320 with some low stimulated leisure demand, but also driving incredible connectivity through our network. Does that make sense? Yes. Understood. And I guess just to follow-up on that, Avi, what's the biggest leading indicator for leisure demand? Is it simply commodity prices? Or is it some other measure of employment or commercial activity as you just I know it's kind of a smaller part of your business, but as you think about turning on this part of the business, what are the leading sort of indicators that you look at? Hey, Dan, this is John. The exchange rate devalued quite a bit, but the mood in Brazil is actually very positive. I mean if you go back to 2015, 2016 when the impeachment was going on, people were fearful of their jobs. And that's not the case right now. I mean, there's good underlying demand. People are traveling. Companies are hiring. The fear was in 2015, 'sixteen is I'm not going to have my job tomorrow. So leisure really dried up and corporate also dried up. But it's a completely different feeling that we're seeing right now in the country. It's just there's just a different vibe. Now of course, the exchange rate puts pressure on some international flying to go to Disney World and things like that, but it's not nearly what it was before. And there's actually good underlying demand in the country. Yes. I think that this is Alex. We look at business confidence and consumer confidence. I think those are good indicators of underlying demand. The trend in unemployment, I think, is important. Unemployment is, we believe, still high, but it's trending down slowly. And I think that helps consumer confidence, right? It's a very different story for you to decide to take your family to Florida if you think you're going to lose your job. But if you're feeling pretty confident that you're going to keep your job and you're going to have a decent level of income, it's cheaper to fly to Florida and actually spend your vacation there than to sometimes spend your vacation down here, right? And it's also cheaper to buy whatever you want to buy in the U. S, right? I'm an iPhone user, and I've had a few iPhones, but I've never bought an iPhone in Brazil. And for me to buy an iPhone in Brazil, the exchange rate has to go to 7. And until the exchange goes to 7, it doesn't make sense for you to buy an iPhone in Brazil, but in the U. S. We're just flying to the U. S. And buying your iPhone there, you pay for the price of the ticket. So I think that's what happened. Obviously, it's more expensive to go to the UK world with an exchange of $380,000,000 than $320,000,000 But if you're feeling confident about your prospects, no, I don't think that affects your decision. The next question comes from Victor Nicholasaki with Bradesco BBI. I have two questions. The first one with regards to the losses of the yuan, is there any risk of additional or the risk of potential liabilities that can show up with the replacement of the full replacement of the UN by V2? And the second question with regards to your guidance, when we take a look on your guidance forecast at Steel, I mean, for the full year, you have talked about a reduction of minus 1% to minus 3%, but year to date it is at like 2.6%. So this big reduction in the second half, is this just a matter of the introduction of the E320? Or is there anything else here? It's Alex here. I wouldn't call it risk of additional E-1 because as David mentioned, the replacement of E-1s for New Year's 'eighteen is very positive, right? There may be an accounting effect from us selling aircraft at a different price from what it's carried in our bookstore. But these V6 E1s that we sold, we actually generated cash because the market value of the aircraft was higher than the best value that we had outstanding. So it generated cash, and then it's going to generate all the benefit in additional revenue and reduce costs that David explained, right? So we're going to continue to look for opportunities to remove new ones from the fleet and accelerate the entry of E-2s and Nios. And if there is a book impact to whatever we do, we'll call it out as we did this time. But like I said, it should definitely be a very beneficial, a very accretive decision in terms of P and L. And we understand that the faster we get there, the more competitive we are and margins go up significantly. And so that's why David is kind of going crazy in Brazil this week. He's like go move faster, move faster, move faster because he understands that the quicker that we can replace David mentioned it, but I want to highlight it. We're paying for some of the sins of the past, which is being a start up airline in Brazil during financial crisis, flying E1 and that wasn't a very liquid asset. And so that was naturally all going to go away over the next 3 to 4 year period. But David's just saying, hey, let's bring it to the left guys, and we'll drive faster. Yes. And now on CAT's guidance, which is really both new E2 new neos that are coming in the second half, but also the run rate of the new that we took before. So like we said, we had 14% of our ASKs coming from next generation aircraft in 2017, and we're going to have 27% this year. But in Q4, it will be closer to 30%, right? So you'll have almost onethree of our capacity coming from next generation aircraft in Q4, which has a much lower CASK than what we used to have in the past. So yes, that's where you're going to see the reduction in carrying. That's already happening, right? We talked about the total CASK reduction that we would have had adjusting for FX, right? So the FX kind of clouds the benefit that we're getting from the mills. But once you adjust for that, you'll definitely see a huge reduction in CASK from the next generation aircraft. Okay. Thank you. Thanks, Victor. The next question comes from Bruno Amorim with Goldman Sachs. Hi, good afternoon. I have just a very quick question on the price of jet fuel. WTI is at like 40 percent as you showed in your release, FX depreciated by 12%. And even so, the price of jet fuel per liter rose by just 20% in the quarter. So just wanted to understand what extent this fuel price was impacted by fuel hedges and what you expect going forward in a scenario of stable oil price and FX as the hedge is currently in place remain less relevant? Thank you. Sure. Yes. Sure, yes. It's a number of different factors kind of all at the same time. So we do have some direct hedges with Petrobras, now where we essentially predetermine the price of fuel that we're going to pay ahead of time. And when we buy that fuel, we pay the pre electronic grid price when we have to. The you saw in our traffic release and you can see on our ASK, the mix of international flying is going up significantly. There's no ICMS on international flying. So that mix shifts more fuel consumption to fuel price per liter that doesn't have the ICMS burden. So that affects the blended price as well. We have begun additional flying in states where the state offers ICMS benefits if you fly the additional city. So most of all, the recent example of a small city where we start flying and that benefits not just the fuel consumption that we buy in that city, but everything that we buy in the whole state. So that helps as well. So and there's a little bit of lag on between the WTI and the petro gas price as well. So it's a number of small effects that account for the difference that you saw. The next question comes from Savi Zit with Raymond James. Hello, Ms. Zipp, your line is open. Thank you. Sorry about that. Thanks for the follow-up question. I actually have 2. On the fuel hedges, following up on the previous one, are you able to given that you lock in prices, are you able to give some color as to what your fuel price looks like for the for at least Q3 or the remainder of the year? So most, yes, most of the hedges that we have now will affect below the line, their financial hedges. So essentially, you can consider that the price of the hedge that we have is the price at the end of Q2. That's what you're seeing here in our financials. And any fluctuation beyond that will affect the numbers based on that mark to market that we did at the end of Q2. For the next 12 months, we have about 15% of our capacity hedged, which is roughly half of the maximum that the policy can hedge. So if you are interested in knowing sort of where we built the hedging position, that would be kind of equivalent to about 205, 210 in Illinois. But at the end of Q2, that all gets mark to market. That's helpful. And then if I might, any update on the cargo JV and the timing and rollout of that? Yes, Saudi. So we filed with the antitrust authorities about 10 days ago, and it seems to be progressing well. It should be a 90 to 120 day process. And so we're anxious to hear back from them. And so we're still very excited about that. And as you can see, cargo continues to outperform even to Azul and even Avi's great revenue performance. So Avi is kind of lagging behind. And then just one last question on the cost side. The cost guidance, given the amount of pressure you're seeing, was actually quite impressive. And I was just wondering, I know this year was supposed to be still high training costs related to pilots. Where are you finding the savings? Is it mostly driven by local currency savings? Or just curious as to where you're finding the savings to kind of keep that cost guidance at such a level? Hey, Sabi. At the end of the Q1, when we saw currency devalue and fuel growth, we gathered around as a senior leadership team and started an initiative called Change the Business. And so we've got 44 different projects across the board that our senior directors are managing to take cost out of the organization and kind of improve the operational performance. And so that's a big reason why we're feeling very confident is I think times like this when you do have Spice and Fuel, you start to do new things that maybe weren't on the table before. And so we're working aggressively at those. And that's part of it. I'll let Alex kind of give more detail overall on the 3rd Q1. Yes. And what we've talked about is a lot of it is the ramp up of new capacity and the change of business initiatives that John mentioned. And I think once you account for the we're talking about a 29% reduction in cost from the NIM, right? I mean, there's just so much efficiency, both from the fact that it burns a lot less fuel. But one thing that is unique about Azul, a lot of companies will go through a change in fleet, right? They're going to go from old generation jet to new generation jet, but they're only going to get the fuel benefit. We're getting the fuel benefit and we're getting the U. S. Staging because we built a network over time that was actually asking for this size of an aircraft. So we couldn't have started a zoo with large narrow bodies 10 years ago, but now we've built a network that has enough feed and enough traffic that can fill meals. And so we're going to get the double benefit of improved fuel burn and more economies of scale. As David mentioned, the miracle of Azul is we built what we built with the aircraft we had. And so now that the new generation E2s are coming out, the A320neos, there's so much leverage on the business because of the aircraft that we had previously. That's helpful. Thank you. The next question comes from Natalia Serafin, Citi. Hi, thanks for taking my question. I have two quick questions from my side. The first one is, can you tell us more about the potential volume upside that could come from an alliance with the postal services? And if you see any further color within the confirmation of these agreements? Thank you. That's my first question. Yes. So I think we talked about this on previous calls. There's a logistics problem in Brazil. And today Azul serves 100 cities domestically. We have 7 to 8 international cities, and we have 200 stores spread all throughout the country. And the Brazilian post office sends quite a bit of air freight, anywhere from $600,000,000 to $800,000,000 a year in air freight. And we believe that our joint venture could give them a significant reduction from what they have today and have those have that nail fly in the belly of our aircraft. And so I think the big difference in Brazil is that today, all of that nail is palletized, and so it needs specific aircraft types. But that's not how it's done in Europe or the U. S. And so the fact that we always have some excess space in the belly of our aircraft. And so if you think about we've grown our cargo business faster than we thought it was possible. And then you add in the partnership with the Brazilian post office and bringing in that incremental revenue that they provide. And we're in 2,000 or 200 physical stores, and they have thousands of physical stores throughout the entire country. And so it's not like it is in the United States. You don't send packages via Amazon to your doorstep. And so having physical pickup locations is key. And so the opportunity that we're looking at is to provide a huge logistics solution for the country. And I just want to remind everybody, not in our guidance. And this is upside to New Zealand case. And so we're excited about the future here. And I think as you not only provide a logistics solution to the Brazilian post office, you're providing a logistics solution for many other e commerce players in Brazil, and that's where a lot of the growth in our business is coming from. And the coherence things are important, and if that happens, that's fantastic. Even if it doesn't, our network is going to provide that to our customers and people like Amazon and others. That was in the news. I mean, other people that need this logistics, Brazil is a logistic challenge, and no one is in a better position to help that in Brazil. Okay. My second question. Yes, go ahead. I think she said it, but we didn't hear. What was your second question? Okay. Yes, I think you didn't hear. Sorry. My last question is, do you have any comment about the Norwegian mesh shuttle launching the ZQ rock side? Yes. So Norwegian looks like it's just going to fly from London to Brazil. It's not surprising. They fly to Buenos Aires. They fly to Singapore. They fly to New York. So no, it's not really a surprise. And it doesn't really affect us that much in any way. It's international route for them, and that's it. Perfect. Thanks for taking my questions. Yes. So we have a question on the webcast. I'll just read it out here. So the question is regarding the joint venture and the progress on that. Of course, yesterday, Copa announced that they're in talks with United and Avianca on a Latin American U. S. Joint venture. I can't comment on their joint venture, but regarding with Azul and United, as we said before, now that OpenSky is 8 timed, we are absolutely talking towards a U. S.-Brazil joint venture. These things take time to negotiate. We're in the process, and they take even longer to get approved actually. And it looks like the DOT right now has a pretty full docket. But nevertheless, there are opportunities for the customer for our joint business. So we're actively talking to them regarding a U. S.-Brazil joint Ozu and United. And this was always in the plan. When United made their investment in Azuul even before Open Skies was approved, we knew that this was a possibility. And so we kind of we wrote that in the contract that we have with them. And United has been a fantastic partner of ours. And we love the fact that they bought a portion of the H and A shares a few months ago, which shows their confidence in our business as we move forward and shows the upside that they believe in Azul. Ladies and gentlemen, this concludes today's question and answer session. I'd like to invite Don to proceed with his closing statements. Please go ahead, sir. Well, we'd like to thank everybody for joining us today. And as always, if you have any follow-up questions, we're available. We'll be doing calls all afternoon and certainly follow-up with Andre. And we're glad to continue delivering our plan. Thanks, everybody. See you next quarter. That does conclude as is all your conference for today. Thank you very much for your participation, and have a good day.