Hello everyone, welcome to Azul's Investor Update call. My name is Paula, and I'll be your operator for today. This event is being recorded, and all participants will be in listen-only mode until we conduct a question and answer session following the company's opening remarks. Should any participants need assistance during this call, please press star zero to reach the operator. I would like to turn the call over to Andrea Bottcher, Investor Relations Manager. Please proceed.
Thank you, Paula, thanks everyone for participating on such short notice. Joining me today are David Neeleman, Azul's Founder and Chairman, John Rodgerson, CEO, Alex Malfitani, CFO, and Abhi Shah, our Chief Revenue Officer. Before I turn the call over to John, I would 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 20-F and SEC filings. With that, I'll turn the call over to John. John?
Thanks, Andrea. It was important for us to get in front of our investors today and give a little bit more clarity on the situation in Brazil, and also give you an update on the aircraft sale. As all of you are aware, truck drivers went on strike in Brazil against rising diesel prices on May 21st, causing significant disruption in the economy over the last 10 days. Our industry was not immune to this. Only two airports in the country, the Guarulhos Airport in São Paulo and Galeão in Rio, are fed by pipelines. All other airports in Brazil depend on fuel trucks. Some of the other airports which are supplied by fuel trucks had jet fuel shortages. In addition, during this period, gas stations all over the country ran out of fuel, making it difficult for customers and crew members to reach our airports.
While we recognize that the country is still recovering, we can say that the worst is over, and that we'll be back to flying our full schedule as of Monday, June 3rd. During the strike, we canceled 169 flights as the operations team did an incredible job in keeping more than 95% of our flights operating during this difficult environment. In addition, because of the reduced travel demand during the peak of the strike, we also proactively reduced our schedule by 523 flights. In total, we estimate that this truck strike will have a non-recurring impact of approximately BRL 50 million on our second quarter operating results. Since the beginning of the strike, we implemented several initiatives to minimize the impact, including tankering fuel, technical refueling stops, waiving change and cancel fees for all flights, and offering shuttle services to help our crew members reach the airport.
This experience has been very similar to what a U.S. carrier goes through when there is a hurricane. Our team did a fantastic job, and I want to express my deep gratitude for their incredible efforts in taking care of our customers, our operation, and each other during the last 10 days. In addition to the update on the strike, we wanted to provide you an update on our fleet plan. I am pleased to let you know that we have been able to sell six E-Jets this quarter, which will be replaced with A320neo. As you know, the replacement of older generation aircraft with larger next-generation fuel-efficient aircraft is key to support our cash reduction and margin expansion plan going forward.
The sale is expected to generate net cash gain of approximately BRL 55 million, resulting not only in better liquidity, but also in a reduction of our dollar-denominated aircraft debt of approximately BRL 244 million. It will also reduce our leverage. Our goal is to accelerate this process as much as we can, as this will allow us to be a much more profitable airline in the future. We also want to make sure that we hold frequent and transparent communication with our investors. We were with you in New York as well as São Paulo in the last couple of weeks, but times have significantly changed in Brazil, so we wanted to give everybody an update. We wanted to make it very clear nothing has changed in our business plan. I have never been more excited about our future.
We have the best crew members, the best network, the best customer experience, and have a solid plan to continue to deliver superior value to our shareholders as we move forward. We wanted to open the time up to you to ask any specific questions you may have as it relates to the fuel strike or the aircraft sale and make ourselves available. I will turn it over to the operator.
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 1 key on your touchtone phone now. If at any time you would like to remove yourself from the questioning queue, press star 2. For those following the call via webcast, you may post your questions on the platform, and they will be either answered during this call or by the Azul Investor Relations team after the conference is finished. Our first question comes from Savi Syth, Raymond James.
Thank you. Good afternoon. Can you provide a little bit more granularity on where the impact has been the greatest? Is it in a specific region? Has it been just countrywide? Maybe is there a difference between how domestic versus international got impacted?
Yes, Abhi. As you know, we serve over 100 cities in the country. I think our impact is probably slightly more than our competitors. Obviously, the logistics of getting fuel in some of the more remote cities was even more challenging during this period of time. I'll let Abhi speak to the revenue impact and how he trimmed the network in response. Overall, it was the logistics of getting the fuel to all the various airports around the country.
Hey, it's Abhi here. Just do the second half first. Domestic versus international. The impact was on the domestic network. We saw very little impact on international bookings or international demand. Our international flights, we operated every single one of them. We had some tech stops, but it was a slight diversion. The no-show rates and the cancel down for international was normal, did not change. The impact was on domestic. Just to give some more color on what we saw, I think that by the time the strike was on Wednesday, Thursday of last week, as we started to see the fuel shortages in some of our airports away from São Paulo and Rio, like Cuiabá in the Midwest, Recife in the Northeast. I think the operations team did a great job of getting their hands around the operation. We did cancel some flights.
We also had tech stops and bunkering. We were able to figure out the operation pretty quick. The part that really was big was the cancel down of reservations. Customers basically giving up on travel due to the uncertainty of not being able to get to the airport or conduct business at the origin or the destination. To give an example, we would have a day with booked to 84% load factor the day before. The morning of, we'd be at 80%, and we end up flying a 72% load factor. Really significant numbers in terms of reservations being canceled, as well as no-show rates that were 15% in some cities, much, much higher than what we normally have. That's what prompted us to take the significant three-month schedule, basically for the remainder of the month through this Sunday.
I think if we had not done that, I think we'd be flying 60% load factor. I think it was the right decision based on what we were seeing in terms of reservations being canceled and the high no-show rates. It was primarily on the domestic network. The international impact was minimal.
That's helpful. If I just might, a second question on the, do you see any kind of implications on maybe the payroll tax break being reversed sooner or any other risk of higher fees or taxes with what's going on in Brazil currently?
Yeah. There's been a few measures that have taken place, both the House and the Senate passed the payroll tax that would help the industry. Temer vetoed us along with all other industries, with the exception of one or two. Now it goes back to the Senate. I think that's still up for debate, Savi. If it does get passed without the inclusion of our industry, it would go into place in 90 days. We've already gotten the benefit already this year and then even into the third quarter. We're working as an industry organization as well as with many other industries that were vetoed, and I'm quite positive that we should see a change there. At this time, we don't have any news to report.
All right. Thanks.
The next question comes from Mike Linenberg, Deutsche Bank.
Oh, hey. Thanks for doing this, everybody. Just a couple questions here. The BRL 50 million hit, presumably the way I think about it, that's maybe a BRL 50 million hit to EBIT. If that's the case, how should we think about the underlying components? Like, if we think about potential hit to revenue and then offset by a reduction in your variable expense. If we were to think about the top-line hit, is it like a BRL 75 million hit to top line offset, say, by, I don't know, BRL 25 million of variable cost? Can you just drill down into that number if you have that?
Yeah. Hey, Mike, Abhi here. Yeah.
Hi, Abhi.
I would say that. Hey. Yes, in terms of the biggest drivers of the 50 is absolutely top-line revenue due to the distraction. We had a drop in bookings clearly at the end of last week and the first part of this week. Large numbers of reservation canceled and high no-show rates. That's why we took the measures to slim down our schedule because we knew customers were not able to make it and didn't really want to fly this week. Yeah, I don't have the exact breakdown for you, but yes, the biggest piece by far is revenue. We will have some savings in terms of variable. Because these are closed and canceled, you save the fuel, and you save the landing fees. You don't necessarily save a lot in terms of crew because they were already scheduled.
You definitely save the fuel and landing fees and the passenger provisions.
Mike.
Yeah.
Mike, I think it's important as you take a look on the cost side of things. Obviously, cost is down because of it. What we ended up doing as you know, in the state of São Paulo, fuel is 25% ICMS, and other states around Brazil is significantly less than that. What we were doing is we were bringing fuel from high-cost states into other states where we actually have fuel incentives. That, it's not as much of a reduction as you would think on the cost side. That's.
Okay.
Also, Abhi had said we had no impact on our international flights. That's correct from a passenger standpoint. We operated, to kind of give you an idea, we flew Campinas, Galeão, Lisbon, Campinas, Galeão, Orlando. There was incremental fuel burn and incremental landing fees and just to kind of maintain the schedule. There's a little bit of both in here. We did everything we could to make sure all the customers were protected during this.
Okay. Now that's helpful. If I do the math on the BRL 50 million, [high] hit, that's based on what we think your revenue's going to be for the year, that's, call it, a half a margin point. If I think back to your range for the year, whether we include this in it or not, it seems like that the range would still be intact because it's only about a half a point of margin in total. Is that a fair way to look at it?
Yeah, I think that's true, Mike Linenberg. We reiterated our guidance a couple of weeks ago. Obviously, this is something that happened. I think as we look at, we're going to have the aircraft sale that's going to have a book loss. We typically like to set these things aside, but we still feel very confident in our 11%-13%.
Okay, great. Just one last one. The fact that you have cancellations as a result of this event, combined with the fact that these six airplanes are going out, should we come away from this with the view that originally the range was 17%-20%, and you were hinting that you're going to be toward the lower end. Is it now somewhat more formal that we can come away from this and say 17% capacity growth is probably going to be the right number for 2018?
Hey, Mike. Yeah.
Yeah.
Two points on that. Yeah, I think as we said last week, we've already made schedule adjustments for the rest of the year that take us from the high end, 20 range to about the 17.5 range.
Okay.
This certainly will bring down a little bit more. To give you an idea, for the month of May, our completion factor was 97.5%, and normally our completion factor is 99.5%. It's about a 2% hit for the month of May, and you can annualize that. I would say yes, in terms of our capacity guidance for this year, we're going to be at the low end of the range, definitely much closer to 17 than we are much closer to 20, in the low 17s, basically. The other thing that's been very encouraging over the last week, I want to highlight to the market, is that we're starting to see competitive capacity adjustments as well come through on the tape. I'm starting to see the industry start to make capacity adjustments that are encouraging in competitive markets and other markets.
That really is the right sign, and I think it sets up the industry and all of us well as we exit second quarter and get into July and beyond.
Great.
Hey, Mike, one other thing too that I'd like to highlight. These E-Jet were parked since the beginning of the year as we prepped them for sale. This is the formal announcement because we actually came to an agreement with the leasing company that's going to buy the aircraft. The removal of these E-Jet was part of our plan originally.
Okay.
We're excited to be able to pay down the debt and bring in the cash proceeds as a result.
Very good. All right. Hey, thanks, everybody. Really appreciate it.
The next question comes from Alberto Valerio, Citi.
Hi. Thank you. Take my question. Just one that remind for me, any color on who is buying the E195 Embraers? Thank you.
Usually, as you've seen as we've gone through our fleet transformation, Alberto, the demand for E1 aircraft usually comes from E1 operators. There are plenty of E1 operators around the world. Obviously, the Embraer is a very successful aircraft. We've moved aircraft in the past to TAME and other E1 operators. These ones in particular, the six are being bought by a lessor called Nordic, and they will be flown by locked in both.
Okay. Thank you very much.
Ladies and gentlemen, as a reminder, if you would like to pose a question, please press the star key followed by the one key on your touchtone phone now.
Great. I don't think there's any more questions coming in. We'd be more than happy to take individual calls from investors or analysts that would like to talk to any of the management team. We appreciate everybody taking the call today on such a short notice. We're working hard. We're going to do all we can to make up for the BRL 50 million hit that we took. We got a lot more to do. We're just starting on kind of executing on our multi-year margin expansion story. We're pretty excited. Thank you everybody for your time.
Ladies and gentlemen, that does conclude the Azul's audio conference for today. Thank you very much for your participation and have a good day.