Hello, everyone, welcome to Azul's first quarter 2018 results conference call. My name is Ravine, 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 participant need assistance during this call, please press star zero to reach the operator. I would like to turn the presentation over to Andrea Bottcher, Investor Relations Manager. Please proceed.
Thank you, Ravine, welcome everyone to Azul's first quarter earnings call. The results that we announced this morning, the audio of this call, the slides that we'll reference are available on our IR website. Presenting today will be David Neeleman, Azul's Founder and Chairman, John Rodgerson, our CEO. Alex Malfitani, our CFO, Abhi Shah, our Chief Revenue Officer, will also be 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, expected performance, constitute forward-looking statements. These statements are based on a range of assumptions that the company believes are reasonable, are subject to uncertainties and risks about discuss in detail in our CVM and SEC filings.
Also, during the course of the call, we'll discuss non-IFRS performance measures, which should not be considered in isolation. With that, I turn the call over to David. David?
Great. Thank you, Andrea. Hey. Thank you, everybody, for joining us on the call today, good afternoon. First of all, as I always do, I need to thank our crew members for just an outstanding quarter. Obviously, we couldn't do this without them, not just from the operations side, just taking such great care of our customers so that they come back they love Azul more than ever. Just recently, TripAdvisor announced that we again were named the number one airline in South America, probably in the Americas, top 10 in the whole world. We're very proud of them, obviously, having a great airline really helps revenue, our revenue has really never been stronger than it is now. Thank you again to them.
Obviously, what's on everyone's mind today is the FX rate spike in the fuel prices that we've had, and what effect they're having on Azul. As we go forward to the end of the year, our commercial team, and Abhi's on the phone. He'll talk to this a little bit later, and John. We're working hard to recapture, and we're working that, and we are getting a significant amount of recapture. Obviously, with the spike as it comes up quickly, it's a little harder in the very short term, but we're confident that we'll be able to do a lot of that recapture of revenue as the year moves on. We're also doubling down on costs and making sure that every single bit of cost of the company is out. John's working really hard with Alex Malfitani to make sure that happens.
I think what's important to know is that this company's almost 10 years old. We'll have our 10-year anniversary in this coming December. We've seen this before. We've had much higher fuel prices. We've had much weaker currency than we're seeing today. We really have never been more prepared for this spike than we are today. Our balance sheet's strong. We have a strong cash position, as you saw in our release. Regardless if this is the new normal or if it's just a spike and we go back, we are prepared for it. We're going to continue to look towards the future and drive our plan. What we told you when we were on the road show over a year ago, that this is a margin expansion story.
John will talk a little bit about the projection for this year, and we're going to keep the margin guidance intact. The reason that I'm so bullish on the company and the reason that I'm not. Obviously, we're always concerned when you see a spike, but our plan is, as you know, we're moving in Airbus A320s, and they're doing spectacularly well. We've got 14 flying now. Abhi's got the next 30 airplanes are already programmed. As you know, with that airplane, it's pretty much a very similar trip cost to the airplane we have today, but we're picking up 56 extra seats. That's really driving our margin expansion story. Those are working very well. Revenues on those airplanes are actually up year-over-year, even though we've added that extra capacity, which is really helping to balance our network. That's very exciting.
The second exciting thing is the E2 is starting to arrive next year. That's the new generation Embraer airplane. That airplane has lower fuel costs, which obviously, if this is the new normal with fuel prices, obviously is important as well as the NEOs on the 320. We have lower maintenance costs, we have lower ownership costs, and we have more seats. We're very excited about those airplanes. I've asked the team, investors in the company, myself, and as founder, "Let's build a formula of what the airline looks like if we had all E2s and we had all Airbus A320s." The numbers are really astonishing. Obviously, if it's the new normal, we're prepared for it because we're coming in with fuel-efficient airplanes, lower cost airplanes, and a lower CASM, which is something that I feel very, very good about.
We're going to continue to thrive. Just in summary, before I turn it over to John, we have exclusive markets with no competition in 71% of our markets, which allows us to do a greater job at recapturing. Future's bright. For that reason, I haven't sold a single share of stock because I'm convinced that this is a great value and a great investment for me personally going forward. With that, I'll turn the time over to John, and he'll give you more details on the quarter and talk a little bit more on how we're doing with the rest of the year. John?
Great. Thanks, David, and welcome everyone. I also want to thank our crew members for the solid results we had in the first quarter. We're very excited. Taking a look at the slides, as you can see on slide four, we started the year with a record performance for our first quarter with a net income of BRL 211 million and an operating profit of BRL 276 million. Even with a 21% increase in WTI during the period, we delivered an operating margin of 12.5% and an EBITDA margin of 31%, one of the highest in the industry. We grew capacity by 12% in the first quarter, while also expanding our top line by 18% and grew RASK by 5%. Our CASK was naturally affected by the increase in fuel prices and a 3% devaluation of the Real. The volatility in fuel and currency has been persistent since the fourth quarter.
As you can see from the margins in these last two quarters and from our revenue performance, Abhi and his team have done a great job in recapturing this extra cost in revenue. Our decision to replace older planes with more fuel-efficient aircraft makes even more sense in the current environment. The A320neo represented only 22% of our first quarter capacity and will account for more than 30% by the time we get to the fourth quarter. Moving on to the revenue performance slide on slide five, both our domestic and international markets are doing well. PRASK grew 5.1% in the first quarter. This is even more impressive considering that our stage length went up 15% and we grew capacity by over 12%. Adjusting for the longer stage length, our PRASK increased 12.5% year-over-year.
Our network advantage allowed us to increase our average fares by 19%, while at the same time increasing load factor by roughly one percentage point. Once again, we increased capacity, yield, and load factor at the same time. This shows the strength of our network. Moving on to slide six, our loyalty program, TudoAzul, maintained a strong growth pace during the first quarter, reaching more than nine million members. This represents an addition of two million members over the last 12 months. Gross billing, excluding Azul, went up 48% year-over-year, with the majority of this increase coming from sales to our banking partners and from our TudoAzul club, further increasing our share of the Brazilian loyalty market. We now have a 17% gross billing share, up from 13% just one year ago, and we still are well below our fair market share for TudoAzul.
Unlike other airlines in Brazil, TudoAzul is 100% owned by the company. This means that we have no tax inefficiency and benefit 100% from the cash flow generated by this high-growth, high-margin business. On the right-hand side of the slide, you can see that our cargo business is also performing very well. Revenue increased 61% year-over-year, mostly driven by the larger cargo compartments of the A320 and the growth of our international capacity. Moving on to the balance sheet on slide seven, I'm proud to report that we ended the quarter with a solid liquidity position of over BRL 3.4 billion, representing 42% of last 12 months revenue. We repaid BRL 141 million of debt in the quarter and ended with a leverage ratio of 3.9, compared to 5.1 in first quarter of 2017.
We use the industry standard of adjusted net debt to EBITDA, which capitalizes all of our leases at seven times and includes all of our debt. We also invested BRL 188 million in spare parts in the quarter, which will help us reduce future maintenance expenses. In addition to having one of the lowest leverage ratios in the region, you can see on slide eight that we have much lower exposure to foreign currency. Only 35% of our balance sheet is denominated in U.S. dollars, and virtually all of our working capital debt is denominated in local currency. As we mentioned during our last call, Alex hedged both the principal and interest of the $400 million unsecured bond we issued in October. This hedge resulted in an all-in interest rate in local currency below the risk-free rate, which is currently about 6.5%.
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, our deposits and maintenance reserves abroad, and our investment in TAP, surpass our dollar-denominated liabilities. That's excluding our aircraft engines and spare parts, which are not restated every quarter, 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 as the airline with the strongest balance sheet in Brazil. As we move on to slide nine, we believe that Brazil has a lot more room to grow. Over the last decade, we've gone through several periods of macro volatility, the Brazilian aviation market still doubled in size.
Brazilians are traveling significantly less than other Latin American countries, which makes us confident the market will keep growing over the next few years. While everyone is focused on the exchange rate headlines, please remember that GDP is expected to grow around 3% in 2018, with one of the lowest levels of interest rates and inflation seen in decades. We believe we are best positioned to continue growing our business over the next few years while delivering superior operating and financial results. In summary, as David had mentioned, we have the largest network in the country and are the only carrier in 71% of the routes we serve. We have a multi-year margin expansion plan, the backbone of which consists of transforming our fleet into next generation aircraft, A320neo and Embraer E2s.
We have a strong balance sheet with high liquidity and the lowest leverage ratio and lowest exposure to FX in the country. We also have strategic assets, including TudoAzul, our investment in TAP, and $1.3 billion in cash deposits held in dollars for maintenance reserves. The revenue environment is robust and the strongest we've seen in years. Although we're facing some macro headwinds, we continue to be very excited about the future. We're taking a careful look at capacity in the context of the macro environment. We've made and will continue to make adjustments as needed. We are also, as David mentioned, aggressively looking at other cost reduction opportunities. For that reason, we feel confident about our 2018 guidance range presented earlier this year. With that, we'd like to open it up for Q&A. I'll turn it back over to Ravine.
Thank you very much. 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. 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 Savanthi Syth with Raymond James. You may proceed.
Thanks so much. Good afternoon. I just wanted to ask on the margin guidance as you look at it and given the current fuel and currency. Clearly, as you mentioned, it is a question for investors. Just outside of looking for areas to improve on the cost side, would you need demand to hold so that you can push through the fare increases, or would you need an acceleration in current demand trends?
Yes. Savi, we're in the weakest quarter of the year, the second quarter. We're seeing robust demand. I'll let Abhi kind of talk to that. We have a plan in place that we believe we're going to deliver the margin guidance that we provided. Obviously, it always gets harder when fuel and currency are up. I think we've identified a lot of cost-saving opportunities to go after. When things happen like this, it gives us the opportunity to dig deeper. Abhi's going after additional revenue opportunities. I'll have him kind of talk to where he sees the demand currently.
Hey, Savi. Looking at the fundamentals of the market right now, you have three really good things happening at the same time. The first is macro demand is strong. It's significantly better than last year. There's no question about that. Close in corporate demand is good. Our close in corporate for the first quarter far outpaced our capacity growth, and that really helped push the RASK up. The macro demand environment is strong. We are in second quarter, and typically this market gets better in the third and fourth quarters, and I do expect that to happen this year again. That's been the seasonality for the last number of years. I think that we're at a good demand environment now, and I think it's going to get better as we go July and into the second half of the year. You look at fare discipline.
We're seeing really strong discipline across all the players in terms of public fares and private fares. Capacity discipline is very, very strong as well. I think airlines, as I've said many times before, are playing where they're strong. They're focusing on their markets. I think that the industry overall is set to recapture as much of this cost increase as possible. We're shooting for 100%. Azul has other advantages like not having overlap, we can react to a lot quicker than our competitors can. There's no need for us to wait for competitors to match our fares. Ancillary revenue is an opportunity that everyone is pushing quite strongly in the market in terms of charging for things like anticipate your flight and seat assignments and things like that.
I think the demand environment is good, and it's going to get better as we get into the second half of the year. I think the industry is very well disciplined to recapture this, and I think we have specific advantages like our network and the A320s, which are still very much in the process of ramping up. That's what gives us the confidence that we can still hit our guidance for the year.
That's super helpful. If I might ask, just the chart where you show Brazil demand in general maybe growing about 10% over the next few years. Is that the rate that we should kind of think Azul grow capacity will be growing? And then with that 71% mix, does that change over the next few years?
Yes, Savi. I think that our domestic capacity, I think it's going to be in the 8%-10% range over the next couple of years. I think last year was probably a little bit lower than that. I think this year will be 8%-10%. Next year will be in 10. Yes, I think that is the right range to think about in terms of domestic capacity. In terms of the 71% overlap I don't really see it changing that much, to be honest. Again, as we've said many times before, we're focusing our A320neos in our market, in our network, because we're really seeing the benefits of increased connectivity between our hubs and focus cities, and just having the 56 extra seats, as David said, for the same trip cost. I don't really expect that 71 to change materially.
I think that's going to continue for the next couple of years, yes.
All right, great. Thank you. Our next question comes from Michael Linenberg with Deutsche Bank. You may proceed.
Hey. Good afternoon, everybody. John, I want to go back to just in the press release, you talked about your ability to recapture most, if not all, the fluctuations, obviously fuel and FX. I know you were talking about historically, maybe the last quarter or two, then I think David talked about recapture going forward. I guess just given the rapidity in some of those input changes of late that maybe it's more difficult to capture all. Can you give us a sense how you're either measuring it or have you been able to recapture, call it 100% or maybe more than 100% the last quarter or two?
As we look into the June quarter, understandably, that is seasonally your low point for the year, and the fact that there is a lag in revenue catching up to cost, how should we think about the recapture in the June quarter and maybe as we move through 2018? I realize there's probably a philosophical element in how you think about this and how quickly you can change revenues to offset that, and maybe Abhi has some ideas, some views on that as well.
Yeah, Mike, let me start. I want to remind everybody that Azul is more profitable today with the exchange rate at 340, 350, 360 than we were when it was at 2 to 1. Okay? What makes up for the exchange rate differential is a good demand environment. As you mentioned, it moves quickly. We understand that it moves quickly in the second quarter, and we already had some revenue on the books. Maybe Abhi took some revenue early on when the exchange rate was a little bit lower than it is today, and that's natural. We want everybody focused on we're going to deliver our full-year results. That's what we have committed to. This is a multi-year margin expansion story, it's not linear. There's going to be times when we don't get all of it back inside of the same quarter.
If you're taking a 12 to 24-month look at Azul, we're executing on our plan. This is the fifth quarter that we've had calls with all of you, and I hope that we're building credibility slowly over time. This is an airline that we're thinking of 2019, 2020, as David mentioned, cycling through all of these old aircraft, bringing in all these fuel-efficient aircraft. Our competitive position, Mike, only gets better as we move forward. Right? It's not only just the 71% advantage that we have on our routes, but it's also the fact that we are going to have the fastest next-generation fleet way ahead of anybody else. That's a significant advantage in these environments. Believe it or not, demand is good. I'll let Abhi kind of talk to the specifics of the revenue recapture.
Of course, there's timing differences, we're very focused on continuing to execute on our plan.
Hey, Mike. In the shorter term, the actions that we take are sort of things that give immediate impact. Things like ancillary has very fast impact, if you will, almost instant gratification. That's a button that we're pushing aggressively right now to mitigate some of the short-term impact. Of course, we're looking at fares. Because we're alone in many markets, we're able to take fare increases much faster than our competition, and we're absolutely doing that. Things like fuel surcharges as well also have some instant gratification. We're doing everything we can to mitigate for the immediate term, if you will. We're just focused on the year. I think the last two quarters we have recaptured 100% or even more, and that's absolutely our target. It's absolutely our target for this year and for 2019 and beyond.
Of course, a key part of this, other than fares, ancillary surcharges and things like that, is capacity, right? We're taking a hard look at capacity. Nothing is off the table. Our capacity guidance for the year is 17%-20%. Previously, we would have thought to have been in the high end of that range. Now looking at this macro situation, we're going to be at the low end of that range with those changes coming in in the next two, three, four, five in the second half of the year. We're looking at capacity very aggressively. I think we'll end the year at the low end of our capacity range, and that's going to help us second half of the year and kind of beyond.
I think there are things that we can do to get to deliver some instant results to help in the short term. I think the longer term, capacity is going to come down a little bit. The A320s keep ramping up. It's going to be critical for us. More important than anything, it's a good revenue environment with really good industry discipline, and that's just really good fundamentals to have.
Mike, this is Alex here. If I can just butt in. I think clearly the recapture is a big part of how we are planning to face this volatility in FX and fuel. Cost is a big part as well, right? Not just cost from reducing CASK from implementing the next-generation aircraft, but
There are opportunities that are available to us now that weren't available in the past. We had to rent a lot of stuff, and we had to pay for a lot of stuff that today we can buy. With the lower cost of capital, with the de-leveraging, we have the ability to invest in spare parts, which is something that we did in this quarter. We're going to look at every opportunity that we have to take advantage of this low cost of capital to reduce operating expenses by insourcing some activities or by investing in ground equipment and things like that. Like Abhi said, nothing's off the table on capacity. Nothing's off the table on cost either. We're being very disciplined and very diligent about looking at every opportunity that we can, to both on revenue and costs, get to our guidance for the year.
Well, thanks for that, guys. Just switching gears, moving over to on the cargo side and the opportunity there. I noticed you highlighted the number of stores. Presumably, I guess, those are storefronts that you have throughout the country.
How should we think about the growth of those storefronts on one hand, and can you just update us on your conversations with the JV, with the postal service, and then also anything that you can share with some of the, I guess, reports that we saw that you may be being Amazon's distribution partner in Brazil, which when I saw that, the fact that you fly to all these cities that nobody else goes to, like you said, 71% of your network has no competition, would seem very natural for somebody like Amazon wanting to piggyback off of your footprint to gain better penetration into parts of the country that are difficult to get to. That made sense to me. I realize maybe it's sort of a two or three-part question. However you can answer that would be great. Thank you.
Yeah, Mike, appreciate the question. I've lived in Brazil now for 10 years, Brazil is not the place that you stick a package on your doorstep like it is in the United States. The point of having 200 stores around the country is getting closer to our customers. What we do is we deliver packages to those stores, and we get closer to the customer. As you think of an Amazon-type model, having points of delivery and points of contact for our customers all throughout the country is very important. They're points of sale for us. People that want to send packages, receive packages, it's a little bit of a different model. We're very excited about the joint venture with the Brazilian Post Office. Still needs to get it approved through regulatory here in Brazil with antitrust.
We should be fine with the authorities this week. We need to let them go through that process. As for the news reports that came out, obviously, we can't comment on any of that. What I will tell you is we have the best logistics solution in the country by far. Okay? We are serving more than 100 different cities in Brazil. We serve them with small aircraft like our ATRs, we serve them with medium-sized aircraft with our E-Jets, and we serve them with our A320s, and we just got 737s to serve on our trunk routes. As you look at many of our potential customers in the country, we have a logistics solution for all of them, and the world is changing. We're pretty excited to be able to take advantage of those opportunities.
Hey, John, just one follow-on. The 737s, I know that doesn't show up on your fleet information. At least I don't think it does. I know they're leases. How is that going to show up, or is it in the subsequent quarters?
Yeah. It hasn't arrived yet, Michael. We should get one in June, start flying it in the July timeframe. Just to remind everybody, these are roughly BRL 100 grand a month leases for five years. It frees up our A330 that we're flying domestically for cargo. It provides us with a lot more flexibility. Abhi's starting a second flight to Lisbon at the end of June. One of the ways that he was able to do that is that we have a cheap cargo aircraft that's flying to Manaus and to Recife for our bigger cargo contracts. We'll start to layer those into our fleet plan as we move forward. We wanted to make sure that we had the ability to talk to the market appropriately and make everybody aware as to what we're doing.
There's two aircraft that we should have in the fleet by the end of the third quarter.
Great. Thank you. Thanks, everyone.
Our next question comes from Peter Farris with Barclays. You may proceed.
Morning. Thanks for taking my question. First, can you please clarify on slide eight, you're talking about your current exposure. I'm just wondering, this non-aircraft debt, this mostly, well, 90% in the BRL. What was that? Is that operating leases or something else?
On slide eight, this is total debt and non-aircraft debt. It doesn't include leases, but practically the only dollar-denominated debt that we have on our balance sheet is aircraft debt. There's a small sliver here of 1% debt that the only single source of is about $5 million in debt that we have that's dollar-denominated. Everything else is either BRL denominated or hedged into BRL. The only debt that we have that's dollar-denominated in any practical term is aircraft debt, which has an aircraft against it, which is an asset that is priced in U.S. dollars. That's why I believe that we have by far the best balance sheet in terms of FX exposure because we borrow all of our working capital needs in BRL. Does that make sense?
Okay. I guess what I'm trying to get to from a leverage perspective, over 70% of your debt is on the balance sheet, and that's operating leases, and those are all denominated in USD. Is that right? Correct. Okay.
That's already in our leverage calculation that we provided. When we give you the adjusted net debt to EBITDA, that 3.9 capitalizes all those leases at 7x. I think what we're trying to highlight here on this slide, in slide eight, a lot of people forget, but we've prepaid for maintenance, and on the balance sheet today, it's BRL 1.3 billion. It's a U.S. dollar-denominated asset that's ours. We do not get to count that against cash, but it is essentially cash flow that will not go out of the company going forward. If you take our BRL 3.4 billion, you can add another BRL 1.3 billion for maintenance reserves and deposits that we have on the balance sheet, but we're not considering as part of our liquidity profile today.
Got it. Another question on your fuel exposure. Can you share how much of the fuel consumption this year is hedged, and that'll be helpful. Sure. Yeah. For the remainder of the year, our policy is to hedge up to 30% of the year, roughly. It's a little bit more front-loaded in the near quarters and a little bit lower on the far quarters. Out of this, we're at about a third of that maximum today. About 10% for the year is what we've hedged. There are three lines of defense that we consider when we talk about both fuel and FX. First line of defense is just the correlation between fuel and FX, which over the medium to long run is very strong and negative.
Obviously, it's not what's happening right now, but it is certainly what has happened over the majority of the last 10 or 15 years. The second line of defense is our hedging policy, as we talked about, and that we have implemented. The third is really our network. As Abhi mentioned, the fact that we're alone on 71% of our routes allows us to attempt recapture and pass-throughs a lot more easily with a lot less cost and a lot less risk than the competition. In the long run, if fuel or FX have a big move and they stay there, your hedge is only going to buy you time. The hedge is only a short-term solution. In the long run, you need to have a robust business model and a robust network that allows you to start operating under this new cost reality. Got it.
Another question. I wanted to understand a little better the working capital swing this quarter. It seems much higher than last quarter and similar to last year. I was just wondering if there's any more color and you expect to maybe give back some of that cash you spent in working capital.
Sure. John mentioned, I think, a couple of the big drivers here. We paid down BRL 141 million debt, and we invested BRL 188 million in spare parts . Those are two big numbers that you need to consider. Our receivable balance went up. We have plenty of cash, and in the past, we used to advance receivables. It's very easy to advance receivables in Brazil, but it costs you some money. It's not terribly expensive, but it does cost something.
We have advanced fewer receivables this quarter, there's about BRL 250 million of essentially an increase in receivable balance, which we could have advanced if we had maintained the same policy as in the past, but which we chose not to because we didn't need the cash, we didn't have to spend that interest. Seasonally, this is a quarter where deferred revenue goes up. There's about another BRL 80 million of deferred revenue because of the seasonality, which over time, kind of offsets itself, but in Q1 does take away cash. Those are kind of the four main numbers that you need to think about.
Great. Thanks a lot, and best of luck to you guys. Thank you.
Our next question comes from Leandro Fontanesi with Bradesco BBI. You may proceed.
Hi. Good afternoon. Thank you for the call. You commented about the domestic market. I would appreciate if you could comment a little bit on international markets. If you could comment how the profitability of the flights you are launching. Also, how you see the competitive scenario, given that some airlines have added back capacity. Finally, you gave us a little bit of a view of what could be the domestic capacity growth for the following years. If you could give us the same kind of figure for international. Thank you.
Yeah. Hi, Leandro. Overall, international did well in the quarter. We saw, obviously, a big capacity increase, but we also had a very healthy RASK increase as well. It was in the teens, the RASK increase. It was a nice increase in unit revenue, even with a large increase in capacity. We were quite happy with the international performance. As you mentioned, we launched a couple of new routes in December. We launched Belo Horizonte-Orlando, and we launched Belém-Fort Lauderdale with the A320. Both of which are doing well, both of which are exactly within our network plans for international, which is to fly from where we are strong in Brazil, where we have great local strength, where we're dominant in our hubs.
We have good connectivity, and we also have good connectivity with our partners in Fort Lauderdale. Very happy with the results for international in the first quarter. A revenue improvement in the high teens, even with a large capacity increase. We were quite happy with that. Going forward, clearly, the FX is going to have an impact. So far, bookings have been stable. I'm not concerned with the international performance in the short term, but it is something that we need to manage, going forward. I think it's all of the players in the market have to manage that. Clearly, there is a relationship between currency and Brazil point of sale. There are ways to manage that and mitigate those FX. For example, we're working very aggressively in the U.S. point of sale.
Our U.S. flights, for example, we're now seeing point of sale from the U.S. where customers buy in U.S. dollars upwards of 25%-30%. That's one strategy that we've implemented as a result of the currency increase, is to shift more bookings over to the U.S. Our European network, which is two daily Lisbon flights, is 50/50 between Brazil point of sale and European point of sale. That's something that certainly can help mitigate the impact of the higher currency. Of course, we will look at capacity, and as we're looking at capacity across our entire network, and we'll make adjustments. We've already made some adjustments, but we're going to look at that. Performance in the first quarter was strong for international. Our bookings have been stable, but obviously, we're managing the FX as we are with any other route in our network.
It's a great time to come to Brazil. Okay? There's the E-Visa. You can fly in one of the best airlines in the world, top 10 in the world, best business class in Latin America. All of you on the call that haven't visited us yet, we'd love to have you, and it's an exciting time to be down here.
The last part of your question was about international capacity growth. Our international capacity growth, in terms of percentages, will be higher than domestic only because of a much smaller base. In terms of what we're doing in terms of markets, it's quite conservative. As John mentioned, we're adding a second Lisbon daily flight starting in June. We're starting today, in fact, Recife to Fort Lauderdale. Our international expansion is going to be connecting dots. It's going to be increasing some frequencies. We have no new international cities planned for this year. It's going to be very conservative, and it's going to be based on where we're strong in Brazil with great connectivity to where our partners are strong in the U.S. or in Europe.
I also think, a lot of people thought we'd be flying to New York by now, we're flying from where we're strong to where our partners are strong. We're taking a cautious approach to it, we're going to do what makes money. It's sexy to fly to New York, in this environment, it's better that we strengthen our hubs in Campinas, Confins, and Recife.
Perfect. Great call. Thank you.
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 touch-tone phone now. Our next question comes from Natalia Serafim with Citibank. You may proceed.
Hi, thanks for taking my question. I just have one quick question, actually. Do you have an estimate regarding how much taxes you can avoid as a result to continue to 100% of your TudoAzul program?
Yes. We do. We know this number very well. We don't provide a lot of information in terms of individual TudoAzul margin, because obviously TudoAzul is not a spun-off company. We manage it as a spun-off company, but for Azul shareholders, the numbers that matter in terms of TudoAzul is our gross billings, right? The fact that our gross billings are growing 30%-40% year-over-year. This is a high-margin business, obviously. You can sort of get to a ballpark figure by just looking at the gross billings number, which is in the BRL 700 million-BRL 800 million. You can kind of extrapolate that from the information that we give on gross billings share. You can essentially set the margin of your TudoAzul program where you want it to be based on transfer price.
If you assume an average margin, then you assume what the 34% tax rate would be on that, you're talking about tens of millions of BRL a year of taxes that we don't save by keeping all of this in-house. Now, we're still growing and getting to our fair share, by managing it as a separate company. We have autonomy where it's required in terms of IT, in terms of sales force, in terms of pricing. As we're all working here on behalf of the Azul shareholder, we work to maximize the profitability of both the airline and the TudoAzul program for the Azul shareholder, and certainly keeping it in-house allows us to save a lot in taxes. Especially as long as we have NOLs in the airline.
One day in the future, we may run out of NOLs, then we may take another look at this decision. For now, the right decision for the Azul shareholder is to keep this in-house.
Okay, that's it. Thanks for taking my question.
Sure. Thank you.
Our next question comes from Lucas Bardotta with UBS. You may proceed.
Hey, good afternoon. Congratulations for the results. Just to follow up on the international routes discussion. Copa is mentioning that yields are getting weaker in Brazilian international routes due to capacity addition. Have you been seeing this effect, or given that you have less competition in international routes, you haven't been seeing that going in second quarter in bookings forward? Thank you very much.
Thanks, Lucas, for the question. Our international network is definitely more isolated than our competitors. In terms of head-to-head competition, we have very little to almost none in terms of these international routes. That's something that obviously is working for us, and it allows us to maintain the yields and maintain the volumes when you have local currency weakening. We also have great connectivity, right? Because we have 55 destinations in VCP, we have 40 destinations in Confins and 30 in Recife. We're able to use those connections to maintain the volumes and the yields if we're seeing the local market kind of getting weaker. Also VCP local market. Copa, for example, has a great connecting complex in Panama that we have the same in VCP, but we have great local demand in VCP.
The catchment area is more than 6 million within 40 miles, 70 km. That's something that comes to our advantage. We're alone in those routes. As I said, clearly, it would not be fair for me to say there's no impact. Clearly, as the BRL weakens, there will be a longer-term impact on Brazil point of sale. We have the tools to manage it in terms of our network, in terms of our connections, in terms of shifting point of sale from Brazil to the U.S. or to Europe. We're also looking at capacity and making those adjustments as needed. For me, I'm very comfortable with the way it is. I feel good about the bookings and the revenue, and we have the tools to manage this macro situation as needed.
Okay. Thank you very much. Have a good day.
Ladies and gentlemen, this concludes today's question and answer session. I would like to invite David to proceed with his closing statements. Please go ahead, sir.
Great. Well, thank you all for joining us on the call. I just want to congratulate our management teams as well, for really the work they're doing. Abhi and Alex and everyone else, for reacting. As I said earlier, we've seen this before. We're not new to this. We've been doing this for 10 years. We've seen higher currency, we've seen higher fuel. One of the things that I just want to highlight is that obviously, GDP growth in Brazil has a lot to do with the growing market in Brazil as well, regardless of what currency is. Brazil GDP does better when fuel prices are higher. That is another hedge that we have. We're moving forward.
We're excited for the future, and I'm going to keep beating on the team to see if we can expedite some of the switch to the new generation airplanes, because as I mentioned in my opening comments, it really makes a huge difference for us, kind of as we move this old fleet out and move the new fleet in. We'll talk to you next quarter, and we'll keep our heads down.
Hey, David, just to remind everybody, we're going to be in New York next week at our Azul Day, and we're hitting up a conference next week. We look forward to seeing a lot of you and kind of going through with further detail and talking about our futures.