Earnings Call: Q3 2017

Nov 9, 2017

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. I'd like to turn the presentation over to Ms. Andrea Botcher, Investor Relations Manager. Please proceed, ma'am. Thank you, Alberto, and welcome also to Q3 2017 earnings call. The results we announced this morning, the audio of this call and the slides I will reference are available on our IR website. Presenting today, we'll have David Neeleman, Azul's Founder and Chairman Don Rogers on CEO Alex Malfitania, our CFO and Ali Shah, our Chief Revenue Officer, are also here for the Q and A session. Before I turn the call over to David, 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 that are subject to uncertainties and risks that are discussed in detail in our CVM and SEC filings. Also during the course of the call, we'll discuss non IFRS performance measures, that 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 Q3 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 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. And since we reported, we had a record operating margin of 12.5% in the 3rd quarter. We grew capacity 13% year over year, while also expanding top line 15%, which resulted in 82% load factor, the highest ever. Now that's amazing considering that we're up gauging aircraft a lot. And so to have these high and load factors, it's really amazing and it's a testament to the story we told. It's really opening up all the routes and increasing the load factor on a lot of routes that were constrained by smaller aircraft. So we continue to grow AFK through, as I mentioned, updating this fleet. We're going to need to add 7 new A320neos between November 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 CTOs or Class 6s for neos or MAXs, but we're going up 56 seats for very similar trip costs. This is putting a little pressure on our nonfuel CASK because we've got so many pilots in training as we move the fleet over, but 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 before at a faster rate and taking on more neos. And 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 delevering our business since the conclusion of the IPO. We ended the quarter with an adjusted net debt to EBITDA ratio of 3.9%, the lowest in South America. The debt we also were able to reduce our debt by $737,000,000 in the quarter to $2,900,000,000 while the cash remained stable at $3,100,000,000 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 that's took 400,000,000 shares, removing overhang removing an overhang and increasing liquidity. And it was quite a challenge to get some of our existing shareholders to sell because they're all on the Sony's call and they're loving the story going forward and so they're wondering why they wouldn't be selling if the stock ends on a job site. Last month, we successfully issued also last month, we also successfully issued $400,000,000 of unsecured senior notes at a 6% yield. John is 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%, and completion factor reached 99%, one of the highest in the industry. These results are a testament to the hard working crew members that are working across the system to raise the bar for our customers. And this is an amazing accomplishment considering that we serve 104 cities, 97 in Brazil, 40 that nobody else serves. So 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 got 3 cities during the Q3 and 10 new destinations over the last 10 months. We start flying from Belen and Bel Horizonte to Fort Lauderdale by December and have recently announced plans to strengthen our Northeast Hub and Recife in 2018 with 4 new destinations. So looking ahead, this is really a margin expansion story. So we're going to continue to do that through 3 strategic growth drivers 3 areas in the company. As I mentioned, replacing smaller aircraft with larger, more efficient next generation aircraft, the 320neos growing our loyalty program to do so, which is already up to 8,000,000 members and expanding our ancillary revenue. So exciting quarter for us. So with that, let me turn the time over to John, and he'll 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 4, we had a very strong Q3 this year with an operating margin of 12.5% and an EBITDAR margin of 31.7%, one of the highest margins in the industry. Capacity increased 13% and RASK went up 1.5%, hitting a record load factor of 82%. 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 in the for the Q4. We also reduced our total debt by BRL 950 1,000,000 year over year, resulting in a 42% reduction in our financial expenses. Moving on to Slide 5 and then taking a look at our revenue. In the Q3, our average fare increased 8% to BRL308 and a 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 the 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 Q3 '17 and at the same time, increased unit revenue. This increase is even more meaningful considering the almost 10% increase in stage life. Moving on to Slide 6. 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 E-2s. In addition to being extremely fuel efficient, these aircraft have more seats than the older generation aircraft that they will 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 195 that we're currently operating and are expected to represent 14% of our total ASKs this year and will represent 41% of our ASKs 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 7, you'll see that Tula Azul maintained a strong growth during the Q3, reaching 8,200,000 members. We added 1,700,000 members over the last 12 months. We also were able to increase our gross billing ex 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, and moving on to Slide 8, we successfully concluded a secondary offering in the month of September. As a result, we were able to increase our flow from 29% to 46% and successfully addressed 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 9, you can see a summarized term sheet of the bond that we issued in October. The deal ended up being 10x oversubscribed and had the highest oversubscription ever for a first time issuer. The debt holders truly understood the margin expansion and deleveraging story. This 7 year U. S. Dollar denominated bond with no financial covenants or collateral, and we expect to swap this in the eyes 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 contributed to a significant extension of Azul's debt maturity from 2.2 years to 4.4 years on a pro form a 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 $2,300,000,000 Including receivables, our total liquidity position reached 3,100,000,000 dollars at the end of the quarter, representing 42% of last 12 months revenue. We paid down $677,000,000 of debt while maintaining the same level of cash. As a result, we ended the quarter with a total debt position of $2,900,000,000 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 BRL1.2 billion, which we do not consider as part of our cash balance. And we also have our strategic investment in CAP with a carrying value of BRL808 1,000,000. 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 upgrading to the A320neos and E2s, fully expanding our loyalty program to the Azul, which just reached 8,200,000 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 delevering 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 $9,000,000 to $11,000,000 And we're very, very excited about the future that holds for us at Azul. And with that, we'll turn it over for questions. Ladies and gentlemen, thank you. We will now begin the question and answer session. Our first question comes from Savi Syth with Raymond James. Hey, good morning. How are you? Sorry about that. Just looking at the 2020 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 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. And so more than 100% of the AFK 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. And 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. So we're number 1 in Recife, we're number 1 in Port Alegre, we're number 1 in the Midwest in Cuyahaba. So we have all of these different hubs and focus cities where we can put the A320. So our number one focus is our gauging. 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 upgrading strategy. Keeping departures in that 1% to 2% growth and it's just truly coming from the upgrade. Got it. That's helpful. And then if I look at fuel efficiency then, 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. I mean, that's why we bought the 320 Neo. And it's an unbelievable fuel machine. And so we're very excited about it. Yes. And Preeti, any additional deals to kind of sell off mortgage jets or bring on Nios any quicker. I think the number is 21 or 22 by the end of next year compared to we're ending we're getting a couple 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. Savi, this year, 14% of our total ASKs will be A320neo. Next year, 27% of our ASKs will be A320neo. So that's really going to make a nice jump in our overall for the network. That's pretty any additional announcements we could make going forward. And so on that, you're still looking to do more on the E-190s if you can, is that right? Yes. And that's what 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 quicker and then bringing on some new even quicker than what we have scheduled today. So that's our fleet deployment is hard to work at that. 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. I guess, John, first question here, what was the contribution from TudoAzure on 3rd quarter operating income? And is this 30% of operating income growing at a steady clip as we look ahead over the next 1 to 3 years? It's something that you guys are putting a spotlight on, and it seems like a good part of the story. I'm just wondering if you can please help us put some numbers or help us think about it. Yes. Dan, we don't disclose TudoAzul separately for competitive reasons. But 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. And so 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. And so 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. And so we expect to see that coming over the next couple of years. And just one quick thing, and I think this is important to you, is that if there are load factors 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. So we have more seats available. And 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 in certain times of the year and certain days of the week where we have the empty seats. So that's what makes that business such a high margin business. Understood. And then if I could follow-up with from Sami's question here. The A320, 41% of the ASKs as we look out a couple of years here, what are the nonfuel cost implications as we look longer term? Should we think about nonfuel costs being flat for declining as we look at it over the next 2 to 3 years just given the up gauging and journey perspective you can share about how to think about that. Yes, 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%. So 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. But 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. Yes. When you look at those The reduction on CASK in the E-two with 27 or 29. 24 and 29. So you've replaced all those airplanes going negative 24, negative 20 29 going forward as they become a bigger and bigger part of the fleet at new CASM. That non fuel CASM number definitely should be dropping. Very good. If I could squeeze one more in here. I guess, Ami, 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. And in your mind, I guess, or in the outlook or in your plans, does the growth work even if the macro backdrop doesn't cooperate here? Dan, So 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. So we're strong in various different geographies here in Brazil. So for example, we announced HECI to Fort Lauderdale, HECI to Orlando we already had. Well, that's servicing a completely different demand base than our flight from Campinas' or our flight from Belem is going to. But because we have 3 big hubs, Campinas, Bello and Rafiki and other focus cities, we really have the opportunities to connect these hubs to where our partners are strong. So our Bello Horizonte Orlando is designed to serve the local Bello market and the interior of miniature rights. CECI is all about the Northeast, Belen is all about the North and Continis is all about Sao Paulo and the South. So they're really servicing different parts of the country. And we and 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. And 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. So 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. And let me start 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 $200,000,000 and has more seats. On average, depending on which configuration you look at, it's about 40 or 50 more seats on that aircraft. Sure, the lease payment on those airplanes are higher than the current aircraft that we have, but the seat mile costs are lower. So as we deploy those 5 newer airplanes and 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. So if things went really bad like they did before, can always put those points on the ground. Our lease payments are less than we have on a 320. And then we can fly them during peak season. So it gives us a ton of flexibility in our fleet. You know a lot of 12 wide body aircraft. 5 are the kind of more expensive, more efficient airplane. 7 are the cheaper, less efficient. And so we can go up and flex up and flex down based on so that flexibility is just really critical. And then all the factors that Avi mentioned with the we're very careful how we do international. When we did the Lisbon side, for example, having this partners at bolt in, it was almost immediately possible when we start flying it. So that's critical. But then flexibility on fleet is also important. The next question comes from Stephen Trent with Citi. Hello, everybody, and thanks very much for taking my questions. Just some have already been answered, but just one or two additional ones for me. H&A Group, I know that really there are not much to do with you guys. There was a bit of noise in the press not long ago about that company working with its financial and capital raising options. Am I correct in saying that H&A Group in terms of as soon as the operations doesn't really have much to do with you guys? And clearly, you just very successfully, the capital markets would have outstationed help. So am I correct in saying that any potential volatility in H and A doesn't necessarily have implications for us. That's absolutely right. They're an investor. They invested HAA invested money during the crisis when we needed it, and we're very grateful to them. They are a good partner. They we don't they sit on our Board. We have a couple of members that we had a Board meeting yesterday that were there. They are very happy with their investment. It's actually the value has increased significantly since they made the investment. Traditionally, they're long term holders of companies and they said they have no intention of selling shares. And so we're happy to have them kind of sitting around the table with us. We don't need them on a day to day basis, but we're very grateful to them and see them as valuable members of our team going forward, although we don't need them for anything. So just wanted to make that very clear. It's not it's a good relationship, but they're very they're not involved in the day to day here, and they're very happy with the investment. Okay. Very helpful. Appreciate that. And just one other thing from me, your balance sheet's gotten a lot stronger. Your balance sheet liquidity 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, hi, Steven, it's Alex here. I mean, we're in growth mode right now, right? So I think it's prudent for us to maintain a healthy cash balance as we continue to grow with this re fleeting that we're doing. And we like being the airline in the region that has the highest margin, the highest leverage and the other stuff. No, The highest liquidity is the lowest leverage. Because even though we're confident that Brazil is recovering, we're entering into a big a positive swing here in the economy. We always need to be prepared. It's a cyclical business here, and we want to have this robust position because we believe it's more defensive, and that's how we want to keep it. And we're a couple of years away from that. I mean, I think we went through a tough time. We accumulated some debt. Now we're expanding margins. We're increasing our cash flow. We're paying down debt. A couple of years from now, if we can get to mid teens or even higher margins and we have that cash flow, we pay down our debt, certainly would be something we would consider in the future, either that or we're buying back some stock. Those are certainly things on our to do list, but it's we're a couple of 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. Appreciate it. Very clear and very helpful. And double thanks to you guys as well for having eager to understand earnings release and financial statements. Thanks, Steve. Thank you. The next question comes from Mike Birkin with Deutsche Bank. Hey, good afternoon, guys. John, you mentioned that the E2 is coming in that their CASK is 24% better than the E1 that you said they're going to replace. Does that include full aircraft ownership costs? Like if you were to get financed on, would that be that 24 percent? Yes. So Mike, where it comes from is that the E-two, the 195 E-two stretches itself a bit too, right? So it can go up to 136 seats. We're currently at 180. So you're getting 10% more seats in the aircraft, 15% lower fuel burn. And then for us specifically, one thing that I we built this airline from 0. And so we've got a lot of expensive ownership on E1s. And so David often comes into my and says, what would the airline look like if we had current market E1 lease rates? So what would the airline look like? And so 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, and that's with more seats, lower fuel burn. And so we're very, very excited about that aircraft. Now it's a 2019 and beyond story. But we're still carrying with us the sins of being a start up carrier in Brazil from 9 years ago. And so I think you need to put that in perspective. And we're very, very excited about how profitable this airline will be as we look forward 2 to 3 years. Yes. It's always helpful, Jim. I'm 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, but it's we don't have a problem getting the E2s for a very similar price going forward. And then that's great. And then just notwithstanding the comments, David, that you made about the A330neos, but what are they seeing in the marketplace right now for pricing on the Airbus Neo narrowbodies? I mean, I know that it's a very robust demand environment, Adam, for air travel. I mean, we're seeing some of the highest numbers out there. And yet we're seeing some real intense competition among many of these new well sores that have come onto the scenes. And we're hearing things like 0.6.7 percent, lose rate factors. So I don't know if that's out of trying to bring on more E320neos sooner rather than later. But 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? My job is to calm David down, okay? So we're going to do it. We're going to take more 320 to the extent that we can exit 190s, but 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, but you're absolutely right. There's a lot of competition out there from well solders and there's aircraft that's available, not only on the narrow body side, but even on the wide body side. But we want to execute to an aggressive plan that we have now. And 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. And it's very, very important, our brand and how we treat our customers. And so we want to make sure that we have a fleet that's consistent and has a great customer experience. Yes. And to expand about the fact that you're right, it's not just narrow bodies, it's wide body prices have really fallen dramatically. So it's an opportunity for us. And that's why, obviously, moving out of 70 to 90 sooner may be some book implications, but certainly it's worth it for us. We've looked at it and said, let's speed it up if we can have a book hit, but not a cash hit. But it makes kind of sense when you look at the margins compared to these 2 aircraft on the routes. When we replace 1 and stick that along, the margin just goes crazy. And so we have always taken the world to speak that up. That's good. It sounds like the timing is really proficient. If I could just squeeze in one more for Avi on bringing out the A320neos, I know one of the positives in addition to giving you additional seats for 2 years old. 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 ECP. Are you seeing an increase in those connecting rates? And if there's anything that you can give us, any numbers or even rough sense of how that has changed to bucking 3, 20 years into your system, that would be great. Thank you. Yes. Hey, Mike. Yes. So I mean, one thing we talked about a lot about our story is we're widening the pipes on the trunk route, if you will. And so and because we have multiple hubs and we have multiple focus cities, we obviously flow a lot of connecting traffic in between these cities. So yes, you're exactly right. I mean, we are seeing connecting rates increase, I would say, in the range of 5 percentage points year over year. And it's helping especially the smaller cities. So 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 5 daily SCC flights on 320s. All of our flights going into there need to be 320s so they can feed all of those destinations. All of the interiors of all the cities, we're flying multiple ATR frequencies. We're up gauging some of those to e Jets because we're just because the pipes are wider. Those smaller cities are really benefiting. These smaller cities usually have lower load factors. Historically, they have because of nature of the market. But now we're seeing those load factors come up closer to the system average, and that's helping push up the overall growth factor. So the overall connectivity has increased about 5 percentage points, driven largely by the smaller cities, that the befores and the afters, as we call them, have really benefited from the widening of the pipes. 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 gas implementation mainly in the domestic, obviously, mainly in the domestic market here in Brazil, so we get an idea of the demand ex the implementation of the new jets? Thank you very much. Pedro, yes. So obviously, we can't break down our domestic rep publicly between A320s and non A320s. But for example, this year, 14% of our AFKs are A320s. So 86% of our AFKs are very dependent on good revenue performance from the E Jets and the ATRs. So for us to be able to deliver this unit revenue improvement on 13% ASKs and 10% stage length, it requires the eJETs and the ATRs to perform well also. It just cannot be the A320s and it just cannot be international. So overall, we're seeing good demand this quarter, started with major 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 vintage 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. And so I am this combined with the fact that the industry overall is showing good discipline, good capacity discipline and good fare discipline as well. So as I said on our last earnings call, the table is set for good revenue performance. And I think the industry overall is taking advantage of that. And I do expect that to continue Q4 and as far as I can see. So 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. Yes. Thank you very much. Just one more question also on the implementation of A320. Is it fair to assume that the marginal positive impact should be lower at some point for this planes as you're probably putting them where you most need them? And 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 2nd semester of this year now? Or if you could give us an idea of maybe when this effect would play in? Thank you. Yes, Pedro. So I mean, right now, we still have a lot of markets that we need to up gauge. And as we look at the list of markets, that will 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 up changing 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. So it's not necessarily true that the 31st, 32nd airplane is going to be weaker than the 25th or 20th airplane because we've significantly strengthened our network in that process. So not only do we see a lot of opportunity of updating, 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. So 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 Mizusaki with Bradesco BBI. Hi. I have two questions. The first one, the federal government recently decided to reopen Pampano Airport. So I'd like to know if the business unit will have any impact on your operations as it continues. And the second question, let me take a look on your investment in TAP. You booked again of something around to 12% quarter to quarter. So I'd like to know if you can give some color on how TAP is performing? Yes. Victor, first one from Puglia, 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, but it's early in the process. We're following it very closely. And obviously, we'll take the appropriate action as needed and what makes sense. But I think that airport is not going to have a significant amount of movements. And what we've created in Bello is significant. The size of Bello Horizonte today is the size that Campinas was for us 3, 4 years ago. And so and we're going to continue to invest in the Bello Airport. It's a strategic hub of ours. We're now flying internationally from that hub. And so we don't see it to have any material impact on our hub. Plus, the operations, they've set a 2 per hour, 2 departures an hour is all that you can have out of there. So no doubt we'll have some of those. And so it's when you combine that with what John just said, it's going to be a very small impact. As far as TAP goes, Portugal is on fire. I mean, it really not literally. I mean, I shouldn't say that. Portugal is a destination. I'd like to think tap has had something to do with that road because the Trey Bondrews, the Chief veteran 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 that weren't served before and debut JFK, Newark, which added additional service in Miami, more additional service, and then created a stopover program where people could 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. So revenue is just really turning 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, but working closely with the unions. And so we're very pleased with what's going on at TAP. The revenues, like I said, are doing great and hope that the cost will catch up. And so expect TAP to be profitable this year and even more profitable in the years to come. So excited about it. Okay. Thank you. And just last question. With regards to the decision to sell some ejets, is this given or depending on the economic activity 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. And so 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 2020. And so 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 we drove it fully, I'm just wondering, it seems like it will necessarily be through a more competitive environment with GOL and TAM. And 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? Yes. Peter, yes. So currently, Azul is has very limited overlap with our competitors. We are alone in 71% of our routes and we're dominant in another 15%. So I do not expect that this number to change significantly. And the reason again goes back to the fact that we have multiple hubs in multiple geographies in Brazil where we are very strong. So in Campinas, we're obviously very strong. In Bella Horizonte, we're very strong. In Hatifi, we're very strong. In the Midwest, in Cuiaba, we're very strong with limited overlap. So 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. So 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 updating. So 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 8 years. So it's to find a solider and find a seat. We've been flying to these markets. So it's one aircraft out, one aircraft in. And so this consistent model that we've deployed over the last 8 years, that's what we're doing over the next couple of years. So 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'll put them where we think we could be the most profitable. And that's just dedicating them on the existing routes that we have today and just upgauge And just to add what they said, when we do add a new city, it's a city that has no competition. So it's a city that has no air service today. So we have do have a list of 30 new cities. We are in the last 12 months, and we're going to continue that new cities. But these are all cities, the 30 cities out of this do not have any air service today. So we will trickle down those ejets that will be replaced. Some will sell, some will trickle down to the system and some of the ATRs then will go into brand new cities. And so we see that those markets mature really quickly because we have such an extensive network to connect into, both domestic and international. Got it. And it's fair to assume that the fleet becomes more diverse, I guess, as you go into more fleet clinics versus like saving out, I guess, EBITDA or EBITDA? Not really. It's actually becoming more actually more consolidating because we're moving into our 2 pilot groups, there'll be E1 and E2 pilot group and then there'll be 320 and 330. So it's not such. It's we're diversifying and getting more fuel efficient, cheaper lower cast airplane that we talked about before, but the complexity is actually becoming less. Got it. And the last question, if I may. Can you perhaps share your thoughts on the potential opportunity to explore selling your loyalty business? And 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 by Aviation. So we have a multiyear plan to grow there. And 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, right, 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, but we don't think we will all in the near Got it. Thank you very much and 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 for me. When I look at the quarter results with passenger yields down 1.5% year on year nominally would have a space range increasing almost 10% over that same period. Is it fair to say or maybe I know there's a good sign, but is it fair to say that some of the newer destinations you guys are servicing happen to be relatively passenger yield, which routes versus the ones you were servicing before? Just wanted to kind of get some color. Hey, Steve. No, I really think it's more just a function of the ASKs and 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 and you're still able to increase unit revenue, I think that's pretty good. In terms of the new routes, I mean, as John said, a lot of the upgaging, most of the upgaging is going to existing routes. So 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. And we have opened new cities, yes, but these are cities that we serve with an ATR couple of times a week or once a day. So 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 up gauging, 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. Is still able to increase overall RASK. I think it's pretty good. And so I think it's 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 the feedback at the envelope station suggest the yield, it was pretty strong during that of the past that you guys have put out there. So I appreciate the color. Thanks. The next question comes from Sabejit with Raymond James. Just a couple of follow-up questions on the cost side. Angharav, you mentioned the pilot training. I think you alluded to maybe this is kind of the one mix phenomenon. Is that fair? Or are we kind of 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 costs start to come down? So a couple of things. I think this is kind of a 2 year phenomenon, but it's somewhat lumpy, right? So there are quarters where you will see this. There are quarters where you won't. But if we adjust for it, you'd be seeing our cash going down by maybe 4% to 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. And just explain the lumpiness to it, right? This Q3 didn't take any A320s, but we have 6 coming over the next 3 months, right? And so you have to do that. And so depending on where the new aircraft come in, that's why you're going to see lumpiness to it. But overall, it's a consistent path to getting to a lower cap on a go forward basis. Makes sense. And then, Allison, your comment 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 nonexistent. We did provision in Q3, and 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 through a similar magnitude as Q3. And just to make sure we do not have profit sharing in Yes, yes. Yes. Okay, got it. Thank you. Great. Well, no questions. So thanks, everybody, for the call. We're going to keep working really hard. We're like John said, we're excited. The feature is really bright here at Azul. Brazil is kicking up a little bit. We're seeing some improvement in the macro situation here. So we're either way, we're prepared. So great management team, great crew members. I couldn't be more thrilled to be a founder of such a great company. So and we're going to work really hard for our shareholders because we're all in that category as well. So thank you again, and we'll talk to you next quarter. Bye bye. Ladies and gentlemen, that does conclude Azul's auto conference for today. Thank you very much for your participation and have a good day.