Hello, everyone, and welcome to Azul's third quarter of 2017 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. Should any participant need assistance during this call, please press star zero to reach the operator. I'd like to turn the presentation over to Ms. Andrea Ferreira, Investor Relations Manager. Please proceed, ma'am.
Thank you, Roberta, and welcome all to Azul's third quarter 2017 earnings call. The results were announced this morning. The audio of this call and the slides that we'll reference are available on our IR website. Presenting today, we'll have David Neeleman, Azul's Founder and Chairman. John Rodgerson, CEO. Alex Malfitani, our CFO, and Abhi Shah, our Chief Revenue Officer, are also here for the Q&A session. Before I turn the call over to David, I'd like to caution you regarding our forward-looking statements. Any matters discussed today that are not historical facts, particularly comments regarding the company's future plans, objectives, and expected performance 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 CVM and SEC filings.
During the course of this call, we'll discuss non-IFRS performance measures, which should not be considered in isolation. With that, I'll turn the call over to David. David?
Great. Thanks, Andrea. Thanks, everybody, for joining us today for our third quarter earnings call. I'd like to start first by thanking our crew members who work hard every day and take care of our customers and in really giving the best travel experience in the industry. Thanks to their dedication, we delivered an outstanding quarter, which is one of the most profitable of all the airlines in Latin America. We're executing on our margin expansion plan by growing capacity double digits. I'm pleased to report that we had a record operating margin of 12.5% in the third quarter. We grew capacity 13% year-over-year, while also expanding top line 15%, which resulted in 83% load factor, our highest ever.
That's amazing considering that we're up-gauging aircraft a lot, and so to have these higher load factors, it's really amazing, and it's a testament to the story we told. It's really opening up our routes and increasing the load factor on a lot of routes that were constrained by smaller aircraft. We continue to grow ASK through, as I mentioned, up-gauging this fleet. We're going to add seven new A320neos between November and January. They're just in time for our Brazilian high season. We're moving full steam ahead on training crew members and getting ready to receive these aircraft. As we've explained before, this transformation that we're going through, where we're replacing E-Jets for neos, is unique in the airline business. Others may be replacing their E1s or Classics for neos or MAXs. We're going up 56 seats for very similar trip costs.
This is putting a little pressure on our non-fuel CASK because we've got so many pilots in training as we move this fleet over. We see this as a big investment in our future. As I mentioned on the last call, we're moving aggressively to speed up this transformation process. We're looking at selling some E-Jets at a faster rate and taking on more neos. We hope to have some good news on that front by next earnings call as we speed up the process. We're also making significant progress on de-levering our business since the conclusion of the IPO. We entered the quarter with an adjusted net debt-EBITDA ratio of 3.9, the lowest in South America.
We also were able to reduce our debt by BRL 737 million in the quarter to BRL 2.9 billion, while the cash remained stable at BRL 3.1 billion, representing 41% of our last 12 months revenue. We're also very active in the capital markets during the past couple of months. In September, we successfully concluded a secondary offering of 400 million shares, removing an overhang and increasing liquidity. It was quite a challenge to get some of our existing shareholders to sell because they're all on this earnings call, and they're loving the story going forward, and so they're wondering why they would be selling if the stock had so much upside. Last month we also successfully issued 400 million of unsecured senior notes at a 6% yield. John's going to talk more about this and how it's going to significantly improve our debt profile going forward.
We continue to run Brazil's most efficient airline operation. Year to date, our on-time percentage rate is 86.4. Completion factor reached 99%, one of the highest in the industry. These results are a testament to the hardworking crew members that are working across the system to raise the bar for our customers. This is an amazing accomplishment considering that we serve 104 cities, 97 in Brazil, 40 that nobody else serves. To be able to have these kinds of completion rates and on-time percentage is truly outstanding. I'm so proud of our crew members. We've added three new cities during the third quarter and 10 new destinations over the last 10 months. We start flying from Belém and Belo Horizonte to Fort Lauderdale by December and have recently announced plans to strengthen our Northeast hub in Recife in 2018 with four new destinations.
Looking ahead, this is really a margin expansion story. We're going to continue to do that through three strategic growth drivers, three areas in the company. As I mentioned, replacing smaller aircraft with larger, more fuel-efficient, next generation aircraft, the A320neos, growing our loyalty program, TudoAzul, which is already up to 8 million members, and expanding our ancillary revenue. Exciting quarter for us. With that, let me turn the time over to John, and he can give you some more details.
Thanks, David, and welcome everyone. I want to start off by thanking our crew members as well. We truly have the best crew members in the world, and that's how we're able to deliver such great results. As you can see on slide four, we had a very strong third quarter this year with an operating margin of 12.5% and an EBITDA margin of 31.7%, one of the highest margins in the industry. Capacity increased 13%, RASK went up 1.5%, hitting a record load factor of 83%. As David said, we're making significant investments in our fleet transformation, and even with these ramp-up costs and the increase in fuel prices, we had a 1.7% reduction in CASK while provisioning for profit-sharing for the fourth quarter. We also reduced our total debt by BRL 950 million year-over-year, resulting in a 42% reduction in our financial expenses.
Moving on to slide five, taking a look at our revenue. In the third quarter, our average fare increased 8% to BRL 308, and the load factor increased almost 200 basis points, reaching an all-time record high. This confirms what we've been telling you, that we had a significant need for these A320s in our fleet. Thanks to our differentiated business model and the fact that we're the only carrier on 71% of our routes, we were able to grow double digits in the third quarter 2017, at the same time, increase unit revenue. This increase is even more meaningful considering the almost 10% increase in stage length. Moving on to slide six, I'm very excited about the next couple of years.
Over the next few years, we expect to go through a fleet transformation as we invest in new generation aircraft, replacing our older generation aircraft with A320neos and Embraer E2s. In addition to being extremely fuel efficient, these aircraft have more seats than the older generation aircraft that they'll be replacing, contributing to a significant increase in margins going forward. Our A320s have the lowest CASK in Brazil and are currently flying an average of 14 hours a day. The neos have a 29% CASK advantage over the 195s that we're currently operating and are expected to represent 14% of our total ASK this year, and will represent 41% of our ASK in 2020. We also have an order for more than 30 Embraer E2s, which have a 24% lower CASK compared to the existing 195s that we're operating, supporting our fleet transformation strategy as we move forward.
As we look on slide seven, you'll see that TudoAzul maintained its strong growth during the third quarter, reaching 8.2 million members. We added 1.7 million members over the last 12 months. We also were able to increase our gross billing at Azul by 47% during the last 12 months, with the majority of this increase coming from the sales to banking partners, further increasing our share of the Brazilian loyalty market. 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. As David mentioned, in moving on to slide eight, we successfully concluded a secondary offering in the month of September.
As a result, we were able to increase our float from 29% to 46% and successfully address any concerns about liquidity as we more than doubled the liquidity of our stock. That was not the only transaction that we recently had. If you move on to slide nine, you can see a summarized term sheet of the bond that we issued in October. The deal ended up being 10 times oversubscribed and had the highest oversubscription ever for a first-time issuer. The debt holders truly understood the margin expansion and de-leveraging story. This seven-year U.S. dollar denominated bond with no financial covenants or collateral, and we expect to swap this into reais so we don't lose our competitive advantage of having the majority of our debt in local currency. As you move on to slide 10, you can see the need for this debt.
These resources of this transaction will be used to pay down more expensive secured loans, contributing to a significant extension of Azul's debt maturity from 2.2 years to 4.4 years on a pro forma basis. As we look at the balance sheet, I have to credit our new CFO. I'm proud to report that we ended the quarter with a solid liquidity position of BRL 2.3 billion. Including receivables, our total liquidity position reached BRL 3.1 billion at the end of the quarter, representing 42% of last 12 months revenue. We paid down BRL 677 million of debt while maintaining the same level of cash. As a result, we ended the quarter with a total debt position of BRL 2.9 billion and leverage ratio of 3.9. We have more cash and receivables than we have debt on the balance sheet today.
We're excited to have the highest cash position in South America and the lowest leverage ratio in the region. Moving on to slide 12. In addition to having higher margins and a stronger balance sheet, we also have valuable assets not found in other carriers, as you can see on slide 12. We own 100% of our loyalty program, which we do not intend to spin off in the future. We also have dollar-denominated deposits and maintenance reserves equivalent to BRL 1.2 billion. Which we do not consider as part of our cash balance. We also have our strategic investment in TAP with a carrying value of BRL 808 million. Moving on to slide 13 and just summarizing. David mentioned at the beginning of this presentation that we're successfully executing on our margin expansion strategy.
We continue to execute on upgauging to the A320neos and E2s, fully expanding our loyalty program, TudoAzul, which we just reached 8.2 million members, and executing on our cargo and ancillary business, including baggage fees to help us expand margins going forward. In addition to this margin expansion, we are also significantly de-levering the business, and we're currently executing on both of these fronts. As you move on to slide 14, you'll see we're reaffirming our 2017 EBIT guidance of 9%-11%. We're very excited about the future that holds for us at Azul. With that, we'll turn it over for questions.
Ladies and gentlemen, thank you. We will now begin the question-and-answer session. If you have a question, please press the star key followed by the one key on your touchtone phone now. If at any time you would like to remove yourself from the questioning queue, please press star two. Our first question comes from Savi Syth with Raymond James.
Hey, good morning. How are you? Sorry about that. Just looking at the capacity growth outlook, I was wondering if you could talk about as we go into 2018, how it might compare to 2017, either in growth levels or in terms of upgauging versus new market mix.
Hey, Savi. Good to have you here.
You can hear me now?
In terms of 2018, obviously we're not releasing our ASK guidance right now, but what I can tell you is that we're completely focused on the upgauging strategy. More than 100% of the ASK increase you see domestically is going to come from upgauging. We still have a lot of markets within our network that are really screaming for this larger aircraft. One thing that's really good for us, and it's our strategic advantage, is that we're so strong in so many different parts of the country. We're number one in Recife, we're number one in Porto Alegre, we're number one in the Midwest, in Cuiaba. In all of these different hubs and focus cities where we can put the A320. Our number one focus is upgauging. That's where you're going to see the vast majority of the ASK growth.
It's going to keep pushing up our stage length and the E-Jets are then going to focus on business routes, either increasing frequency or connecting some dots. In terms of magnitude, you can expect that the domestic ASK growth next year will be in the same magnitude as it is this year, and that's about the range that we're looking at. International is a smaller base, but domestic, which is 80% of our business, will be in the same magnitude of ASK growth as this year, driven largely by the upgauging strategy.
Keeping departures in that 1%-2% growth, and it's just truly coming from the upgauging.
That's helpful. If I look at fuel efficiency, you've seen some really great fuel efficiency gains this year with that strategy. Should we see that continuing into next year as well?
Absolutely. That's why we bought the A320neo, and it's an unbelievable fuel machine. We're very excited about it.
Yeah. Pre any additional deals to sell off more E-Jets or bring on neos any quicker, I think the number is 21 or 22 by the end of next year compared to We're getting a couple of airplanes now towards the end of the year, but it's a significant increase if you look at what we're ending this year with, what we're ending next year with. Savi, this year, 14% of our total ASKs will be A320neo. Next year, 27% of our ASKs will be A320neo. That's really going to make a nice jump for the network.
Makes sense.
That's pre any additional announcements we could make going forward.
On that, you're still looking to do more on the E190s if you can. Is that right?
Yeah. That's why I said in my remarks, we're moving aggressively. There's demand for the E-Jets in the world, and we're talking to several entities about selling them quicker and then bringing on some neos even quicker than what we have scheduled today. Our fleet department is hard at work at that.
Okay. All right, thank you.
We're getting close to some of those deals, so we'll let you know as soon as we get them completed.
Got it.
Our commitment is to try to stay metal neutral, but we want to have the more efficient aircraft in our fleet.
The next question comes from Dan McKenzie with Buckingham Research.
Hey. Good morning, guys. Actually, it's prime here, just good afternoon for you. I guess, John, first question here. What was the contribution from TudoAzul on third quarter operating income? Is this 30% of operating income growing at a steady clip as we look ahead over the next one to three years? It's something that you guys are putting a spotlight on, and it seems like a good part of the story. I just wonder if you can just help us put some numbers or help us think about it.
Yeah. Hey, Dan, we don't disclose TudoAzul separately for competitive reasons. What I will tell you is we have about 25% of the total revenue pie in Brazil, and we're only at about 15% of the pie for our banking revenue. One thing that we saw is we've got billings are up significantly and our average price is actually up as well year-over-year. As we talked about our margin expansion plan and getting to those 15% operating margins, we believe we're going to get one margin point just coming from TudoAzul. We expect to see that coming over the next couple of years. Just one quick thing, Dan.
I think this is important too, is that even though our load factor is going up, the number of empty seats that we have in absolute terms is actually greater because it's 83% of an airplane that has 172 seats instead of one that has 118 seats. We have more seats available. The reason this business is so high margin is that we can select where we want those customers to fly. We force them into certain routes and certain times of year and certain days of the week where we have the empty seats. That's what makes that business such a high-margin business.
Understood. If I could follow up with, from Savi's question here. The A320, 41% of the ASK as we look out a couple of years here. What are the non-fuel cost implications as we look longer term? Should we think about non-fuel costs being flat or declining as we look ahead over the next two to three years, just given the aging? Is there any perspective you can share about how to think about that?
Yeah, absolutely. Our CASM ex-fuel should be going down over the next couple of years as we deploy more and more of these aircraft. One great thing that I want to highlight is inflation in Brazil this year is about 2%-2.5%. We used to have the excuse of high inflation, but that no longer exists. The only kind of excuse we have now is investment in the future because we're investing in pilots and training to get ready for more of these aircraft coming. You should see our CASK going down over the next couple of years. Absolutely. That's why we bought these aircraft, and we need to execute on that. When you look at the reduction of CASK in the E2 with 27 or 29-
24, 27.
24 and 29. You could replace those airplanes going -24%, -29% going forward as they become a bigger and bigger part of the fleet. That non-fuel CASM number definitely should be dropping.
Very good. If I could squeeze one more in here. I guess, Abhi, with respect to the wide-body expansion, I'm just wondering if you can share how you get comfortable with the idea that there's the domestic critical mass there to support the international growth. In your mind, I guess, or in the outlook or in your plan, does the growth work even if the macro backdrop doesn't cooperate here?
Hey, Dan. I think this goes back to the point I was making a little bit with Savi, is that one thing that's really unique about our network and we've developed over the years is we have hubs and focus cities that serve different parts of the country. We're strong in various different geographies here in Brazil. For example, we announced Recife to Fort Lauderdale. Recife to Orlando, we already had. That's servicing a completely different demand base than our flight from Campinas is or our flight from Belém is going to. Because we have three big hubs, Campinas, Belo, and Recife, and other focus cities, we really have the opportunities to connect these hubs to where our partners are strong. Our Belo Horizonte-Orlando is designed to serve the local Belo market and the interior of Minas Gerais.
Recife is all about the Northeast, Belém is all about the North, and Campinas is all about São Paulo and the South. They're really servicing different parts of the country. We're special because we have the network to support that international service. We build the domestic networks first, and then we add on the international flights to make sure we have the connectivity and the feed. On the other side, we're partnering with really strong partners, whether it's JetBlue, whether it's United, or whether it's TAP over in Lisbon. If you just make the permutations and combinations of our hubs to where our partners are strong, I see a lot of opportunity for wide-body aircraft, and I feel pretty good that we're going to have more options than aircraft, and we can really choose the best of the markets.
Let me just add one more thing about the new aircraft that we bought, the A330-900. This is an airplane that has the new generation engines on it. The trip costs for that airplane on an operating cost basis are less than a 200 and has more seats. On average, depending on which configuration you look at, it's about 40 or 50 more seats on that aircraft. The lease payment on those airplanes are higher than the current aircraft that we have, but the seat mile costs are lower. As we deploy those five newer airplanes in our high utilization routes like Lisbon and Orlando and other places we fly, then the old airplanes that have a much lower cost gives us a lot of flexibility. If things went really bad like they did before, we can always put those planes on the ground.
Their lease payments are less than we have on a 320. We can fly them during peak season. It gives us a ton of flexibility in our fleet. Even though we have 12 wide-body aircraft, five are the more expensive, more efficient airplanes, seven are the cheaper, less efficient. We can go up and flex up and flex down. That flexibility is just really critical. All the factors that Abhi mentioned, we're very careful how we do international. When we did the Lisbon flight, for example, having the partners at both ends, it was almost immediately profitable when we started flying it. That's critical. Flexibility on fleet is also important.
Very good. Thanks for the color, guys.
The next question comes from Stephen Trent with Citigroup.
Hello, everybody, thanks very much for taking my questions. Just some have already been answered, but just one or two additional ones from me. HNA Group, I know that really doesn't have much to do with you guys. There was a bit of noise in the press not long ago about that company looking at its
financial and capital raising options. Am I correct in saying that HNA Group, in terms of Azul's day-to-day operations, doesn't really have much to do with you guys, and clearly you just very successfully tapped the capital markets without HNA's help. Am I correct in saying that any potential volatility at HNA doesn't necessarily have implications for Azul?
That is absolutely right. They are an investor. HNA invested money during the crisis when we needed it, and we are very grateful to them. They are a good partner. They sit on our board. We have a couple members that we had a board meeting yesterday, they were there. They are very happy with their investment. The value has increased significantly since they made the investment. Traditionally, they are long-term holders of companies, and they said they have no intention of selling shares, and so we are happy to have them sitting around the table with us. We do not need them on a day-to-day basis. We are very grateful to them and see them as valuable members of our team going forward, although we do not need them for anything. Just wanted to make that very clear.
It is a good relationship, but they are not involved in the day-to-day here, but they are very happy with their investment.
Okay. Very helpful. Appreciate that. Just one other thing from me. Your balance sheet has gotten a lot stronger. Your balance sheet liquidity, the revenues have gone north in a nice way. Any sort of medium-term thoughts with respect to whether you guys might consider starting a dividend program?
I mean, it is Alex Malfitani here. We are in growth mode right now, right? I think it is prudent for us to maintain a healthy cash balance as we continue to grow with this re-fleeting that we are doing. We like being the airline in the region that has the highest margin, the highest liquidity, the lowest leverage. Even though we are confident that Brazil is recovering, we are entering into, I think, a positive swing here in the economy. We always need to be prepared. It is a cyclical business here, and we want to have this robust position because we believe it is more defensive, and that is how we want to keep it. We are a couple years away from that. I think we went through a tough time. We accumulated some debt. Now we are expanding margins. We are increasing our cash flow.
We're paying down debt. A couple years from now, if we can get to mid-teens or even higher margins, and we have that cash flow to pay down our debt, certainly would be something we would consider in the future. Either that or buying back some stock. Those are certainly things on our to-do list. We're a couple years away from that. We've got some housecleaning to do, and we're going to continue to strengthen our position, and then we'll definitely consider that in the future.
Okay. Appreciated. Very clear and very helpful. Double thanks to you guys as well for having easy-to-understand earnings releases and financial statements.
Thanks, Steve.
Thank you.
The next question comes from, sorry, Michael Lorkowski with Deutsche Bank.
Hey. Good afternoon, guys. Hey, John, you mentioned with the E2s coming in that their cost is 24% better than the E190s that they're going to replace. Does that include full aircraft ownership costs? Like if you were to debt finance them, would that be the 24%?
Yeah. Mike, where it comes from is that the E2, the E195-E2 stretches itself a bit too, right? It can go up to 136 seats. We're currently at 118.
Okay.
You're getting 10% more seats in the aircraft, 15% lower fuel burn. For us specifically, one thing, we built this airline from zero, we've got a lot of expensive ownership on E1s. David often comes into my office and says, "What would the airline look like if we had current market E1 lease rates? What would the airline look like?" Obviously with our much-improved balance sheet and margins, the offers that we get for E2s today are significantly better than we were paying for E1s, that's with more seats, lower fuel burn. We're very excited about that aircraft. Now it's a 2019 and beyond story, we're still carrying with us the sins of being a startup carrier in Brazil from nine years ago.
I think you need to put that in perspective, and we're very excited about how profitable this airline will be as we look forward two to three years.
That's right.
That's how I felt when I came here based on where we've been, and what we're paying for our E1s today, it's crazy what we're paying for them. We don't have a problem getting the E2s for a very similar price going forward.
Agreed. That's great. Notwithstanding the comments, David, that you made about the A330neos. What are you guys seeing in the marketplace right now for pricing on the Airbus neo narrow bodies? I know that it's a very robust demand environment for air travel. We're seeing some of the highest numbers out there, yet we're seeing some real intense competition among many of these new lessors that have come onto the scene. We're hearing things like .6, .7 lease rate factors. I don't know if that's out of trying to bring on more A320neos sooner rather than later. If you could talk about maybe the cost of what you're seeing for some of these new airplanes, how that market looks like right now.
Hey, Mike, my job is to calm David down, okay? We're going to do it. We're going to take more A320 to the extent that we can exit E190s. We don't want to get ahead of ourselves. We want to make sure that we're trying to do this fleet transformation as fast as we can. You're absolutely right. There's a lot of competition out there from lessors, and there's aircraft that's available, not only on the narrow body side, even on the wide body side. We want to execute to an aggressive plan that we have now. Again, to the extent that we can exit aircraft from our fleet, we will be looking at adding additional aircraft to our fleet, to be consistent with our overall strategy.
What I don't want to do is I don't want to be just opportunistic and get somebody's leftovers. It's very important, our brand and how we treat our customers. We want to make sure that we have a fleet that's consistent and has a great customer experience.
Yeah. I'm sorry, you need me to expand on the fact that you're right. It's not just narrow bodies, it's wide body prices which have really fallen dramatically. It's an opportunity for us, and that's why, obviously, moving out of some of these E190s sooner may be some book implications. Certainly it's worth it for us. We've looked at it and said, "Oh, let's speed it up if we may have a book hit, but not a cash hit." It makes ton of sense when you look at the margins compared to these two aircraft on the route. When you replace one and stick another one, the margin just goes crazy. We have all the incentive in the world to speed that up. That's good. It sounds like the timing's really proficient.
If I could just squeeze in one more for Abhi on bringing on the A320neos. I know one of the positives, in addition to giving you additional seats to Azul. Just curious about what you're seeing on connections. I know one of the sort of side effects or consequences was that you'd be able to do a little bit more connecting, maybe by way of ECT. Are you seeing an increase in those connecting rates? If there's anything that you can give us, any numbers or even rough sense of how that has changed as you've brought the A320neos into your system, that'd be great. Thank you.
Hey, Mike. One thing we talked about a lot, about our story is we're widening the pipes on the trunk route, if you will. Because we have multiple hubs and we have multiple focus cities, we obviously flow a lot of connecting traffic in between these cities. Yes, you're exactly right. We are seeing connecting rates increase, I would say, in the range of five percentage points year-over-year. It's helping especially the smaller cities. I'll give you an example. Recife, which has 57 daily departures, has the same number of A320 operations as Campinas does because we have 27 cities, and we just need five daily Recife flights on 320s. All of our flights going into there need to be 320, so they can feed all of those destinations. All of the interior São Paulo cities, we're flying multiple ATR frequencies.
We're upgauging some of those to E-jets because the pipes are wider. Those smaller cities are really benefiting. These smaller cities usually have lower load factors. Historically, they have because of the nature of the market. Now we're seeing those load factors come up closer to the system average, and that's helping push up the overall load factors. The overall connectivity has increased about five percentage points, driven largely by the smaller cities. The befores and the afters, as we call them, have really benefited from the widening of the pipes.
That's great. Thanks, Abhi. Thanks, everybody.
The next question comes from Pedro Bruno with Santander.
Hi. Good morning. Thanks for taking the question. Well, the revenue trend you're showing looks impressive, like you mentioned, with unit revenue growing year-over-year despite the strong capacity addition. Could you give us an idea of how you're seeing both short term and a little bit going forward, the RASK ex the Airbus jets implementation, obviously mainly in the domestic market here in Brazil, just so we get an idea of the demand ex the implementation of the new jets. Thank you very much.
Hi, Pedro. Yeah. Obviously, we can't break down our domestic RASK publicly between A320s and non A320s. For example, this year, 14% of our ASK are A320s. 86% of our ASK are very dependent on good revenue performance from the E-jets and the ATRs. For us to be able to deliver this unit revenue improvement on 13% ASK and 10% stage length, it requires the E-jets and the ATRs to perform well also. It just cannot be the A320s, and it just cannot be international. Overall, we're seeing good demand this quarter. Started with leisure demand in July and some really good corporate demand in September and beyond. I think the E-jets and ATRs, the ATRs are benefiting a lot from the improved connectivity. The E-jets are focused on business markets, high-frequency markets, and they're benefiting from a recovery in corporate demand.
I think we can say that with some certainty, after a long time, that we're seeing corporate demand pick up. We had good closing demand in September. We saw it in October as well. This combined with the fact that the industry overall is showing good discipline, good capacity discipline, and good fare discipline as well. As I said on our last earnings call, the table is set for good revenue performance. I think the industry overall is taking advantage of that, and I do expect that to continue fourth quarter and as far as I can see. I think the E-jets are doing well also, and I think the industry overall is benefiting from good macro conditions and good discipline in the market.
Yeah. Thank you very much. Just one more question, also on the implementation of the A320. Is it fair to assume that the marginal positive impact should be lower at some point for these planes, as you're probably putting them where you most need them? You mentioned you still have a lot of routes that are craving for them, right? Does next year should already see any of these, let's say, decrease in the marginal positive effect, or next year should be similar to what you're seeing in the second semester of this year now? If you could give us an idea of maybe when this effect would play in. Thank you.
Pedro. Right now, we still have a lot of markets that we need to upgauge, and as we look at the list of markets, that'll probably take us until the middle of 2020. I have the first 30 airplanes, already know exactly where they're going to go, and it's going to be all upgauging in our network. In regards to is it going to be marginally worse after that, one thing to remember is the network effect, is as we're widening the pipes, as we're improving the markets, the smaller cities that go in and out of our hubs, it makes everything stronger. It's not necessarily true that the 31st, 32nd airplane is going to be weaker than the 25th or the 20th airplane because we've significantly strengthened our network in that process.
Not only do we see a lot of opportunity of upgauging, which I think will take us until 2020, but then we can connect dots, we can add new markets, all within a very, very strong network. I'm very excited about the opportunities for this airplane, and there's a lot of runway ahead of us in how we can use this aircraft.
Perfectly clear. Thank you.
Our next question comes from Victor Mizrachi with Bradesco BBI.
Hi. I have two questions. The first one, the federal government recently decided to reopen Pampulha Airport. I'd like to know if this decision will have any impact on your operations at Campinas. The second question, when we take a look on your investment in TAP, you book a gain of something around 4% quarter-to-quarter. I'd like to know if you can give some color on how TAP is performing.
Yeah. Hey, Victor Mizrachi. First one, Pampulha. It's very early in the process. I don't want to comment publicly on our plans or what we're going to do. It's obviously very strategic, it's early in the process. We're following it very closely, we'll take the appropriate action as needed and what makes sense.
I think that airport is not going to have a significant amount of movement, what we've created in Belo is significant. The size of Belo Horizonte today is the size that Campinas was for us 3, 4 years ago. We're going to continue to invest in the Belo Airport. It's a strategic hub of ours. We're now flying internationally from that hub, we don't see it to have any material impact on our hub. Plus the operations they've said are 2 per hour, 2 departures an hour is all that you can have out of there. No doubt we'll have some of those, when you combine that with what John Rodgerson just said, it's going to be a very small impact. As far as TAP goes, Portugal's on fire. Not literally. I shouldn't say that. Portugal is a destination.
I'd like to think TAP has had something to do with that, really, because Trey Urbahn, who's the Chief Revenue Officer over there, went over there and started this movement to put more flights into North America. They now serve Toronto and Boston and JFK. They didn't serve before. Daily JFK, Newark, which added additional service, Miami, more additional service. Created a stopover program where people can stop over and spend 2 or 3 days. You've actually seen the migration of people from Brazil moving to Portugal that are helping our flights. Revenue is just really booming over there big time. Now, we still have a lot of work to do on restructuring the costs, making good progress on that.
It takes a little longer in Europe to do that kind of stuff because working closely with the unions. We're very pleased with what's going on at TAP. The revenues, like I said, are doing great and hope that the costs will catch up. Expect TAP to be profitable this year and even more profitable in the years to come, so excited about it.
Okay, thank you. Just a last question. With regards to the decision to sell some E-jets, is this given or depend on the economic activities, or maybe you can postpone this decision?
Victor, our problem today is being able to crew all of the aircraft and the investment we're making in the fleet transition. Even with a stronger economic recovery next year, we still would prefer to exit a couple of E1s, and then you have a limited base of pilots, so we'd rather fly those with A320neos or Embraer E2s as you get into 2019 and 2020. To the extent that we can exit older generation aircraft from our fleet, that's our strategy. Older generation aircraft out, new generation aircraft in, try to stay as metal neutral as possible until we get a real Brazil recovery.
Okay. Thank you.
The next question comes from Petr Grishchenko with Barclays.
Hi, guys. Thanks a lot for taking my questions. As you grow the fleet, I was just wondering, it seems like it will necessarily lead to a more competitive environment with GOL and TAM. I'm wondering if you can just maybe quantify the overlap you have today versus what it's going to be once you extend the network.
Hey, Petr. Currently Azul has very limited overlap with our competitors. We are alone in 71% of our routes, and we're dominant in another 15%. I do not expect that this number to change significantly. The reason again goes back to the fact that we have multiple hubs in multiple geographies in Brazil where we are very strong. In Campinas, we're obviously very strong. In Belo Horizonte, we're very strong. In Recife, we're very strong. In the Midwest, in Cuiaba, we're very strong with limited overlap. Our goal all along for the A320 has been to strengthen our own network. It's been to improve the economics of the domestic long-haul flying, improve connectivity within our network.
We're really putting these airplanes within our network where we are strong in our hubs, in our focus cities, connecting those dots, adding frequencies, and up gauging. I do not expect this number to materially change due to our A320 actions. We have plenty of space within our own network where we can really efficiently and profitably deploy this airplane.
I just want to clarify something. Obviously, as he's putting it in the network, he's putting it on routes that we've had in the system for more than eight years. It's to flying to Salvador and flying to Recife, and we've been flying to these markets. It's one aircraft out, one aircraft in. This consistent model that we've deployed over the last eight years, that's what we're doing over the next couple of years. It's not only going into our network, but these A320s are not opening new cities and developing and not going head-to-head with our competitors. Even though we have the lowest CASK in the country, and we have the most efficient airline with 88 crew members per aircraft compared to our competitors, which are some are almost double that.
We don't fear competition, but we're putting them where we think we could be the most profitable, and that's just dedicating them on existing routes that we have today and just up gauging. Just to add what he said, when we do add a new city, it's a city that has no competition. It's a city that has no air service today. We do have a list of 30 new cities. We added 10 in the last 12 months, and we're going to continue to add new cities. These are all cities, these 30 cities that are on our list do not have any air service today. We will trickle down those E-jets that will be replaced. Some will sell, some will trickle down to the system, and some of the ATRs will go into brand new cities.
We see that those markets mature really quickly because we have such an extensive network to connect them to, both domestically and internationally.
Got it. It's fair to assume that the fleet becomes more diverse, I guess, right? As you go into more A320s versus phasing out, I guess, ATRs or E-jets?
Not really. It's actually becoming more consolidating because as we're moving into our two pilot groups, there'd be E1 and E2 pilot group, and then there'll be the 320 and 330. We're diversifying and getting more fuel efficient, cheaper, lower CASK airplanes like we talked about before. The complexity is actually becoming less.
Got it. The last question from me. Can you perhaps share your thoughts on the potential opportunity of flirting or selling your loyalty business? I don't know if you actually considered it as a possibility.
No. We have no plans to do that. We believe our focus now is to just grow into our fair share. Like John mentioned, we have about 15% revenue share today from the loyalty pie, but Azul has 25% of the revenue pie in aviation. We have a multi-year plan to grow there. We were very proud that we were able to go through the Brazilian crisis without having to sell this very valuable asset because not only would we give up a significant chunk of the cash flow, but we would also get tax inefficiencies. Today, we're very tax efficient and we're benefiting 100% from this cash flow. Obviously, it's great to have it and it's ready to be sold if we want to, we don't think we will in the near term.
Got it. Thank you very much. Best of luck.
Thank you.
The next question comes from Stephen Trent with Citi.
Hey, good afternoon again, guys, and thanks for taking my follow-up. Just very quickly, just one more from me. When I look at the quarter results with the passenger yields down one some odd % year-over-year nominally, with average stage length increasing almost 10% over that same period. I think it's fair to say, or maybe I'm oversimplifying this, Is it fair to say that some of the newer destinations you guys are servicing happen to be relatively passenger yield rich routes versus the ones you were servicing before? Just wanted to kind of get some color.
Hey, Steve. I really think it's more just a function of the ASK than the stage length. I mean, anytime you can increase ASK 13%, stage length is up 10%, aircraft size is getting bigger on average as well. You're still able to increase unit revenue, I think that's just pretty good. In terms of the new routes, as John said, a lot of the up gauging, most of the up gauging is going into existing routes. We're not really opening new point-to-point routes. We're just up gauging routes that we have been flying for a long time.
We have opened new cities, yes. These are cities that we serve with an ATR couple times a week or once a day. It makes up a pretty small percentage of the overall ASK contribution and the ASK growth as well. Most of the ASK growth is coming from upgauging, which again, with the ASK growth, 13% stage length up, aircraft size up, international having a larger contribution to the capacity story as well, which has an absolute lower RASK. It is still able to increase overall RASK, I think it is pretty good. I think it is just a matter of those metrics and not really sort of the new bases, which are still a very small percentage of our overall network. Does that answer the question?
Yes. Very helpful, Abhi. It just struck me that, if you back out the envelope stage into just the yield, it looks pretty strong given the amount of capacity you guys have put out there. I appreciate the color. Thanks.
The next question comes from Savi with Raymond James .
Hey, just a couple of follow-up questions on the cost side. I know, David, you mentioned the pilot training. I think you may have alluded to maybe this is kind of a one-year phenomenon. Is that fair, or are we now reaching a new higher level, or is it just kind of catching up with the growth, and once you have that pipeline, some of that cost starts to come down?
A couple of things. I think this is kind of a two-year phenomenon, it's somewhat lumpy, right? There are quarters where you will see this, there are quarters where you won't. If we adjust for it, you'd be seeing our costs going down by maybe 4%-5%, if you take out all the investment that we're doing on the fleet transition and also the provisioning for profit sharing that we did in this quarter.
Just explaining the lumpiness to it, right? This third quarter didn't take any A320s, we have six coming over the next three months, right? You have to do that. Depending on where the new aircraft come in, that's why you're going to see lumpiness to it. Overall, it's a consistent path to getting to a lower cost on a go-forward basis.
Makes sense. Alexandre, just on profit sharing, was that similar to last year? Was there any timing issues or?
No. Last year, because we didn't have as robust a result as we have this year, obviously that component was almost non-existent. We did provision in Q3, we will have some assuming everything goes the way it's planned and we're still getting a good Q4, there will be some provision on Q4 as well, kind of to the similar magnitude as Q3.
Just to be clear, we did not have profit sharing.
Yeah.
Got it. Yes. Makes sense. Okay, got it. Thank you.
Ladies and gentlemen, as a reminder, if you would like to pose a question, please press star one.
Great. No questions. Thanks everybody for the call. We're going to keep working really hard. Like John said, we're excited. The future's really bright here at Azul. Brazil's kicking up a little bit. We're seeing some improvement in the macro situation here. Either way, we're prepared. Great management team, great crew members. I couldn't be more thrilled to be founder of such a great company. And we're going to work really hard for our shareholders, because we're all in that category as well. Thank you again, and we'll talk to you next quarter. Bye-bye.
Take care.
Ladies and gentlemen, that does conclude Azul's audio conference for today. Thank you very much for your participation, and have a good day.