Good morning, everyone. Welcome to Azul's second quarter 2017 results conference call. My name is Natalie. I'll be your operator for today. This event is being recorded. All participants will be in a listen-only mode until we conduct a question and answer session following the company's presentation. Should any participant need assistance during this call, please press star zero to reach the operator. I'd like to turn the presentation over to Andrea Bottcher, Investor Relations Manager. Please proceed.
Thank you, Natalie. Welcome all to Azul's second quarter 2017 earnings call. The results that we announced this morning, the audio of this call, and the slides that we'll reference are available on our IR website. Presenting today will be David Neeleman, Azul's Founder and Chairman, and John Rodgerson, the 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 SEC filings.
During the course of the call, we will discuss non-IFRS performance measures, which should not be considered in isolation. For reconciliation of these measures, please refer to our earnings release. With that, I'll turn the call over to David. David?
Thanks, Andrea. Thanks, everybody, for joining us this morning. We are excited to announce our second quarter results today in a really traditionally weak quarter. We achieved record second quarter earnings. First of all, I'd like to thank our crew members for doing such an outstanding job. There's no way this company would be in the position where it is today without the dedicated effort of more than 10,000 people that serve our customers every day and those that are behind the scenes taking care of our crew members. A huge thank you for that. I think what this shows, as I said, the second quarter is a really traditionally weak quarter for the industry in Brazil. To have a really good operating profit shows that we have a resilient business model with more stable earnings profile throughout the year.
Certainly looking forward to now the third and fourth quarter. As you can see on slide three in our presentation that we gave you, we grew capacity in the second quarter by 18%, and our revenue increased by 19%. It's amazing to see you can increase capacity that much and the revenue can follow along. We even actually increased our load factor year-over-year. Our market expansion strategy is working. We continue to add the low-cost A320s that are really bringing in our low costs, and you'll see how that's affecting our cash going forward. We continue to build Brazil's largest network. We've added 11 cities since June of last year. If you go back to slide three, all those red dots that you have on that slide are all cities that we've successfully added since June of last year.
We had an operating margin of 6.1% and an EBITDA margin of an incredible 28%, really which cements us as, certainly confirms our position as the most profitable airline in Brazil. We also ended the quarter as the most capitalized airline in Brazil, where we're solidly liquid with BRL 3 billion in cash, representing 42% of our last 12 months revenue. We also had the highest on-time percentage of any other airline in Brazil in the second quarter with an 86.4% on-time percentage. We're delivering a great product to our customers. That obviously is evident in the fact that Skytrax just awarded us for the seventh year in a row, the best low-cost airline in South America.
For the second time in a row, the best staff in South America, in all of South America, which really shows that our people are doing a fantastic job of taking care of our customers. All of that on top of our third in the world ranking at TripAdvisor, which came out three months ago. We're very pleased about that. We don't do this for awards, but it's nice to get the recognition for our crew members. I'm also excited about the recent management changes that we've made here at Azul. John Rodgerson, who's our new CEO, I've known him for 15 years. He made the decision to leave JetBlue and come down to Azul and help found this company. He's one of our founders. He's very passionate about this business, and he's going to do a great job as CEO.
Alex, who's also a founder, Alex Malfitani, who's our new CFO, and he's going to be fantastic in that role, and he's worked with John since the beginning as well. They work really great together. I think a lot of the comments on the road show were, "Are all the Americans leaving?" This certainly proves that that's not the case. John is committed and will be here for a long time to come as the new CEO of the airline. It's also great to have Antonoaldo Neves move to TAP. As you know, we have a significant investment and upside in TAP, it's good to have him over there. He's a great talent, and he'll do great for TAP in his position. We continue to be on track to create superior value for our shareholders. That's very important to us.
We have a differentiated business model and a great management team. We're very excited about the business. Doing all this when Brazil still hasn't recovered. There are still difficult times in Brazil, you can only imagine how things would change if Brazil actually recovers one day. With all of that, I will turn the time over to John Rodgerson to give you more detail on these numbers that I've shared with you so far. John, it's all yours.
Thanks, David. Good morning, everyone. As David mentioned, as you can see on slide four, we had a very strong quarter this year with an operating margin of 6.1%, six margin points higher than last year, and an EBITDA margin of 28%, one of the highest in the industry. I'm very proud of our CASK ex fuel performance, which decreased 8.1% in the quarter, while total CASK decreased 4.9%, and that's with an 11% increase in fuel prices. This reduction was mostly due to the introduction of the A320neos in our fleet, which have roughly 29% lower unit costs. We also reduced our financial expenses by BRL 60 million by paying down more expensive debt. Over the second half of the year, some of the debt prepayment penalties will expire. We'll continue to de-lever and reduce our financial expenses going forward.
Moving on to slide five, you can see our revenue performance in the quarter. The fact that we're the only carrier on 73% of our routes allowed us to grow double digits in the second quarter, and at the same time increase unit revenue by 2%. This increase is even more meaningful considering the 9% increase in stage length. Average fare also increased 8% to BRL 280, and our load factor increased almost 200 basis points. Moving to slide six, we talked a lot about this on the roadshow, which was our margin expansion strategy. I want to go through each of these pillars with you, just reminding everyone on the call what these are. First was the A320neo, upgauging our fleet to the A320neo aircraft, which has 56 incremental seats, essentially the same trip cost and 29% lower unit cost.
The second pillar was expanding TudoAzul, our loyalty program, which currently has 7.6 million members. The third pillar was increasing our ancillary revenues through our cargo business, which grew 49% year-over-year in the second quarter, our packaging business, and our initiatives to start charging for bags and unbundling the product. You will see in the next few slides, we are successfully executing on each of these pillars, and that's with the macroeconomic backdrop, as David mentioned, that hasn't yet started to improve. Once Brazil starts growing again, we are very well positioned to benefit from an improved macro scenario. Moving to slide seven, we continue to be impressed with the performance of our A320neos. They have amazing productivity. With an average utilization rate of 14.2 block hours per day, we're seeing strong margin expansion on the routes they currently serve.
Our A320neos are being deployed on our longer haul routes, replacing the Embraer E195, which is more suited for our high-frequency business markets. As I mentioned previously, with the A320neo, we're able to add 56 incremental seats at practically no extra cost. A very low-risk growth strategy moving forward. The introduction of the larger aircraft in these longer haul routes allows us to drive increased connectivity throughout our network. As we widen the pipes on these trunk routes, these aircraft will also help us grow our ancillary revenue, specifically in TudoAzul, cargo, and our travel packaging division. Most of our capacity growth this year is coming from the A320neo. Over the next few years, we expect to go through a significant fleet transformation process as we replace older generation aircraft with next-gen aircraft, namely the A320neo and the Embraer E2 starting in 2019.
Moving on to slide eight, you can see the performance of our loyalty program in the second quarter. Our loyalty program, as I stated previously, reached 7.6 million members. This represents an addition of 1.4 million members over the last 12 months. We increased gross billings ex Azul by 48% during the last 12 months, with the majority of this increase coming from sales to our banking partners, further increasing our share of the Brazilian loyalty market. As we stated many times to you previously, 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 going forward. Moving on to slide nine, Azul was a leader in the industry with charging for bags.
We were the first ones to implement the bag fee starting on June 1st. We implemented the new baggage policy with minimal operational or customer disruption and are seeing bag fee revenue ramping up as expected. We are upselling by charging BRL 30 in advance for the first bag online and BRL 50 at the airport. Charging for bags is just the first step of unbundling of our product. Bag fees and product unbundling will be an important source of ancillary revenue in 2018 and beyond. Moving quickly to slide 10, you will see that our strong network and great customer service allow us to attract high-yield business travelers. Although we had an overall market share in terms of RPKs of 19% in the second quarter, our market share in terms of corporate revenue, according to Abracorp, the Brazilian Association of Corporate Travel Agencies, is as high as 30%.
This is further evidenced on the graph on the right, which shows our pricing power advantage. This, again, mostly thanks to our network, which has less than 30% overlap in terms of ASKs with our competitors. Taking a quick look at our balance sheet on slide 11, we ended the quarter with a solid liquidity position of BRL 2.2 billion. Including receivables, our total liquidity position reached BRL 3 billion at the end of the quarter, representing 42% of last 12 months revenues. Certainly one of the highest in the industry. We amortized BRL 200 million in loans during the second quarter, resulting in a debt position of BRL 3.6 billion and a leverage ratio of 4.5. By the end of the year, we expect to reach a leverage ratio closer to four.
With the proceeds of the IPO received in April of approximately BRL 1.3 billion, our cash position was significantly strengthened. Going forward, we will be able to lower our borrowing costs by paying down our more expensive debt. In addition to having the lowest leverage in the country, we also have much lower exposure to foreign currency. Only 46% of our debt is denominated in U.S. dollars, and virtually all of our working capital debt is denominated in local currency. As you look to slide 12, we are now long dollar, which is very unique for a Latin American airline. Our dollar-denominated assets, namely our cash that we hold in dollars, deposits on aircraft, and maintenance reserves abroad, and our investment in TAP, now surpass our dollar-denominated liabilities by over BRL 500 million.
If you add to that the aircraft engines and spare parts, which are not restated to the exchange rate every quarter but are U.S. dollar-denominated assets, we have more than twice the asset U.S. dollar compared to our liability. This is a major development which reaffirms our position as the airline with the best balance sheet in Brazil. We're very excited about the quarter. With that, we'll turn it over for questions.
Ladies and gentlemen, thank you. We'll now begin the question-and-answer session. If you have a question, please press the star key followed by the one key on your telephone now. If at any time you would like to remove yourself from the questioning queue, press star two. Our first question comes from Michael O'Reilly with Deutsche Bank.
Good morning, gentlemen. This is actually Catherine Bryan filling in for Mike. First, for me, can you speak a little bit about how the rollout of bag fees is going? It sounds like it's in line with expectations, but maybe you can give us a little more color on what the take rates are like and what kind of growth you think we can expect to see in ancillary revenue in the back half of 2017.
Okay. Hey, Kate its Abhi. We started selling fares without baggage on June 1st, and initially, we did it in markets that we were alone, which is obviously a big part of our network. Gol came in on June 20, which rounded out the rest of the competitive landscape. LATAM was a week after that. By June 27, pretty much the bag-less fares were implemented network-wide for Azul, Gol, and LATAM. As John said, the implementation has been very smooth. I want to thank all our crew members. It's a big change for Brazilian customers, but we've seen very little operational disruption and very little negative feedback. Currently, we're selling two product fares. One is called Azul, which is without checked baggage, and one is called Mais Azul, which has a 23-kilo per passenger allowance for checked baggage for BRL 30.
If you buy the Azul fare and you show up at the airport with a bag, for whatever reason, you pay BRL 50 at our counter or the kiosk or on the app. I don't want to be too specific, but we're seeing something like 50%-60% of our customers buying the fare without checked baggage. We're seeing a relatively good percentage of those customers actually show up to the airport with a bag. They could have saved BRL 20, actually, if they had bought it, but for whatever reason, they changed their mind or something happened. We're seeing a meaningful percentage of those customers then coming to the airport and checking a bag, which gives us BRL 50. As John said, what's really interesting about this is that it's just the start of unbundling, as you've seen in the U.S.
In Europe. The typical things that come with unbundling are seat assignment, things like anticipate your flight, things like less points or no points for different types of fares. Those are the kinds of products that we will explore in the second half of the year and into 2018. It is ramping up as expected, slowly. We feel good about the BRL 100 million number that we gave you last time for 2018. That's really what we're focused on. This year, we just want to make sure the smooth rollout continues and the ramp-up happens as we expect.
Okay, great. Thanks, Avi. If I could just squeeze maybe one more in. How quickly are these A320neo flights ramping up? Maybe just in general, how do margins compare on these flights compared to your system average? Is everything still going in line with expectations now that we're starting to see capacity get added back between the U.S. and Brazil after the deep cuts made last year?
Avi can talk about the routes, but I'm really pushing the team to get them as soon as possible. What we're seeing today is far exceeding what we had actually thought. When we were on the road trip talking about this, Avi had said if we could snap our fingers and have 25 of them today, we'd do that. We see that number is actually significantly higher than that. We expect to have around 20 by the end of next year. We have eight today, and I'm actually pushing the team to see if we can move out some of the other airplanes quicker and bring them in faster. It's top of our priority right now, and it's what we're really focused on.
Just getting to 20 by the end of next year is going to be a great accomplishment, and you'll see it in our numbers. We'll significantly improve our numbers. I thought it was interesting that I was reading through one of our competitor's earnings release, and it showed on a per ASK basis, it showed how we have a really high rental cost and really high maintenance costs for ASK. They're totally right, we do. That's just upside for our investors. I was going to put that as an exhibit in our presentation and use their source. We do. That just means that, hey, we have smaller planes with shorter routes to bring us higher revenue.
They were doing that on the longer routes, and now we're going to be able to put the right plane on the right route over the next two to three years, and that's what we're really excited about. That's what's really moving and having a seat change here to do.
Yeah. Thanks, David. Katie, regarding the margin, our seat cost, as we've said many times on these airplanes, is going to be 29% lower than the Embraer E195 on like for like routes. We're definitely seeing that. On the margins, I can't be too specific, but what I can say is that we are seeing a unit revenue reduction significantly lower than that number. If it were not that much lower, it would have kind of affect our overall numbers more. We are seeing very, very healthy margin expansion in these routes. In terms of is it going as expected, I would say it's probably going better than we expected in terms of the operation and as well as how it's helping the network, how it's helping cargo, how it's helping loyalty.
As David Neeleman said, we're anxious to get these implemented and ramped up as soon as we can.
Katie, I think it's important, we've needed these aircraft for a couple of years. When you talk about ramping these in, these markets needed the larger capacity over the last couple of years, it's a blessing that we now have them in the fleet. There's not a significant ramp-up that's happening because these markets needed 174 seats, not 118 seats.
Katie, I missed your question on international. Do you mind saying it again, please?
Oh, yeah, sure. Thanks for all that color, too. That was great. Just on some of these routes where you're adding to the U.S., we're starting to see capacity get added back. I just didn't know if maybe that had impacted your projections at all or if things are still going as expected.
It's going as expected. You are right that some capacity is coming back. The market we think is still strong. It's going as expected. As you know, we announced two routes on Friday. One is Belo Horizonte, Orlando, and one is Belém to Fort Lauderdale, which David has been mildly encouraging me to do for a while now.
Finally.
It's going as expected. We're excited about them, and overall, we're happy with international.
Let me just say one thing about these Northern Brazil to Florida routes. The ability for us to kind of fly those airplanes still at 18 hours a day or 14 hours a day, going back and forth with the low cost. What we've seen at TAP is the high market share they have flying to Europe from the Northern Brazil cities. We think there's a big opportunity. This will be a good experiment for us to be flying Belém to Orlando. People up north are going to love it, not have to come all the way down to São Paulo to catch a flight to the north.
Great. Thank you so much for all the time.
Thanks, Katie.
The next question comes from Savanthi Syth with Raymond James.
Okay. Hi, guys. I was wondering, to follow up a little bit on Katie's question, on the international side, I was wondering how much of your revenue international is today, and what kind of unit revenue trends are you seeing between kind of domestic versus international that's netting out to the up 2% here?
Yeah. Hey, Savi. We're not breaking out the breakout between domestic and international. The main reason being because the absolute numbers are different because of the aircraft size and the stage length, it can lead to incorrect conclusions if you try and do the math without having all the details. What I can tell you is that American said that their Latin was up 43% in second quarter. LATAM just reported July. The international load factor was 88 or something like that. International is strong. The unit revenues are up year-over-year. As we come out of the crisis of last year, the strengthening of the local currency is definitely encouraging Brazilians to travel more to the U.S. and Europe. I think all of the airlines flying internationally are benefiting and reporting good year-over-year unit revenue.
That being said, we wouldn't have been able to have a [CASK] up almost 2% year-over-year if domestic was terrible. International isn't that big to single-handedly carry us over the line in that way. Our domestic has been hanging in there. It's stable. We're seeing solid numbers with the A320s. I think as Gol said, there was acceleration of domestic demand in the end of second quarter, that is true, driven mostly by leisure, which makes sense given the July holidays, and it led into a pretty nice July overall for us. Now we'll see typically corporate revenue improve second half of the year. International is strong. Strong for everybody, strong for us. That being said, single-handedly, it's not enough. Domestic has had to be pretty solid as well, and it is.
The other thing about international is it's really helped by networks, right? That's why it's so hard when you have over 50% of your customers connecting on your domestic network to go to your international network in a lot of our markets then they're very intertwined, and they help each other out. They're very synergistic.
Good point. Just on Abhi, just to follow up on that corporate comment you made. Are you seeing the corporate demand recover, or is it still too early to say how the corporate demand is going to be post the leisure demand season?
I would say yes, but it's too attached early. The first week of August is like a hangover week. People still coming back from July, getting settled in. This week, next week, as we get into September, prior to the September 7th holiday, are going to be important to get a feel for that. What we are seeing, and typically second half of the year is always better than the first half, are driven mostly by corporate, at least until November. You have a lot of event activity. You have a lot of expos, exhibitions, conferences, that kind of stuff really help to drive that kind of demand. My sales team is telling me that we are seeing good momentum with events and those kinds of things picking up in the September, October, November timeframe. Our fare discipline is good, capacity discipline is good.
I think the table is set for a corporate recovery, given a macro that's steady, if you will, slow and steady. It's a little bit early to say, but I think the conditions are right for a good corporate recovery. I think we'll know more next couple of weeks.
Very helpful. John, if I may quickly ask you, on the working capital debt, could you elaborate a little bit on what's happening there?
Sorry. It's Alex here.
Yes.
Thanks for the question. As you know, we had the very successful IPO in April. With that, we got a lot of additional liquidity on the balance sheet. With that, we had the luxury of having more options on what to do with our cash and with our working capital line item. Essentially, we just did a lot less receivable advancing in Q2, and we also had the ability to negotiate with suppliers to advance payments in exchange for very favorable commercial terms and better conditions. With that, we saved over BRL 20 million in interest expense. If we had maintained the same sort of cash management policy as we had before, we would've had an additional BRL 300 million of cash on the balance sheet.
Got it. Thanks, Alex. Thanks, guys.
The next question comes from Daniel McKenzie , BMO Capital Markets.
Oh, hey. Good morning, guys. Thanks for the time. Alex, if I can go back to your last point. Plenty of liquidity is the message we're getting this morning, much better credit. Was the incremental BRL 300 million in liquidity you just referenced, was that in reference to potentially some renegotiation in the maintenance reserves? If not, if you are able to potentially, given your better credit status, give some of that cash back, how might you think about using some of that incremental liquidity?
Yeah, I'll start and I think John wants to add to that as well. The BRL 300 million that I mentioned, Stephen, is more receivable advancing. As you know, we sell with credit cards, and with that, we build a balance of receivables, which are very easy to advance. Oh, sorry, Dan. Yeah. Because we had plenty of cash on the balance sheet, we could not advance those receivables. Had we advanced them, we would have an additional BRL 300 million on the balance sheet, but we would've spent some interest to do so. In terms of the additional liquidity on the balance sheet, we're absolutely seeing an improvement in credit. We did renew a BRL 200 million debt with one of our banks, and we mentioned that on our earnings with very favorable terms. Lower interest rate and longer payment terms.
We are also working with all of our suppliers in order to get better conditions on maintenance reserves and cash performances as well.
Yeah, Dan, I just think it's opened up a whole new world for us since going public. once we brought the cash on the balance sheet, we've talked about a lot, we've got about BRL 2 billion of debt on the balance sheet, which is good debt, which is aircraft debt. The BRL 1.6 billion, which is the remaining, is that's what we're aggressively attacking, and we're looking at various options that are afforded to us, and we'll be talking with you about that over the next couple of quarters. You should have an expectation that that total debt number should be coming down.
Understood. I guess the second question here is for you, Abhi. I imagine there was a sharp fall off in bookings that created a temporary revenue hole around May 19th, around sort of the political corruption indictment and the FX volatility that surrounded that. Obviously it looks like you're able to close it in the quarter, but I'm wondering, what could have revenue been without that booking hole in? I guess I'm just trying to get a sense of how big a revenue headwind you had to overcome in this in the quarter.
Yeah. Hey, Dan. First of all, second quarter was a pretty tricky quarter overall. April, Brazil had three consecutive long weekend holidays, we actually had four consecutive four-day weeks, because we had three holidays, then we had some labor reform stuff and we had to strike on a Friday. It was hard for corporate demand to get in any sort of rhythm in the month. Then, as you say, on May, we had the JBS news. What I will say is that the demand drop off, as much as I would like to say it was a big hole and we kind of made it up and there's potentially some upside there, but I would say that I think the demand was actually pretty resilient in the face of bad news.
We've seen demand drop off much more significantly a year or 18 months ago, when news like that comes out. This time, was it a distraction? Yes.
Did it affect us for a week, especially in terms of closing corporates? Yes, it did. It was not as steep as we have seen previously. I think that it was pretty resilient in the face of that kind of news. It did affect overall a little bit. It was a distraction for sure. Obviously, we'd prefer not to have that. In terms of the overall impact, it's hard to say. June definitely did perform better than May on a year-over-year basis. There is some impact from there. In terms of RASM for the entire quarter, I don't know. I would say it's in 0.5%, maybe something like that. Just a ballparking. Overall, I would say that the impact was not as sharp as perhaps you were imagining. It was more resilient than what we've seen before.
Dan, you and I have talked about this as well. The market's recovered significantly since May 19th when that incident happened. What you're seeing in Brazil, where you haven't seen a recovery yet, you're seeing stability. Right? You've seen the currency trade in a pretty narrow band. We're seeing stable bookings. Again, we're not here to claim that the recovery is in play yet, but we're very optimistic for the second half of the year. The fact that the market digested the JBS news so quickly and got back to where it was previous to the news, I think is a very positive signal.
Very good. Thanks for that, guys.
The next question comes from Stephen Trent with Citi.
Good day, everybody, and thanks very much for taking my question. Just two from me. I was first curious about what your thoughts are on the international side. You are moving a little closer to working more directly with Hainan Airlines, and you continue to be, I guess, somewhat further integrated in terms of fleet strategy, at least with TAP Air Portugal. I'm just wondering how your thinking has evolved on what that should all look like on a long-term basis.
Hey, Steve, thanks for the question. I think Hainan is a great partner. They put a plug into Lisbon, which is fantastic for us. We are working very closely with TAP, and we are trying to get our fleet to be very similar to theirs, which gives us flexibility. I think having flexibility is a great competitive strength in this market, the ability to move assets relatively quickly across the group. We've proven to be able to do that with TAP. We've done that with Hainan, and I think that has allowed us to exit the crisis in Brazil a lot quicker from our competition. It's a competitive strength that we have that we can move a lot quicker, and the more we align ourselves with our partners I think the better. I'll let Abhi talk to the revenue side of it.
Yeah. Hey, Steven. What we said all along about international is we want to fly from where we are strong to where our partners are strong. That explains Viracopos-Orlando, Belo Horizonte-Orlando, SSP-Orlando, explains Viracopos-Lisbon. Belém and Fort Lauderdale as well. JetBlue is very strong in Fort Lauderdale. We're building up a little bit of a connecting complex there as well. That's our thinking. That hasn't changed. We still have plenty of opportunities within that space from where we are strong. We have multiple hubs in Brazil to where our partners are strong, Fort Lauderdale, Orlando, Lisbon, and kind of where JetBlue, United, and TAP are strong. That hasn't changed, and that's kind of how we're seeing it evolve in the next couple of years.
Okay. Very helpful, guys. Just one other question for me, kind of switching to the domestic market. Admittedly, kind of a dumb question on my part, but when I think about at least some potential for the government to reduce jet fuel taxation on domestic flights, there's no reason to believe that a fuel reduction measure that will somehow lose your advantages on the regional market, at least from what I can see. It seems like a function of servicing smaller airports with smaller planes under the laws of physics and not fuel tax policy. I'd love to hear your thoughts on that.
Yeah, you're absolutely right, Stephen. It doesn't necessarily change the fact that we've got ICMS agreements in a lot of the states because of the aircraft type that we fly, and we have the ability to serve a lot more cities and states than our competitors can because they have the one fleet type. I think overall, the ICMS cap at 12% is very positive for the industry. We're certainly supporting it jointly with ABEAR, and we've been working very closely. It got close to a vote this week, looks like it's been postponed for a couple of weeks, but we'll be looking at that very closely. It might tighten the gap a little bit because if São Paulo comes down from 25 to 12. Overall, it's very positive from an industry perspective, and we have no intention of losing our individual ICMS agreements.
Since we started doing these agreements, we've yet to have a governor in any state in Brazil remove the benefit to us because it brings a tremendous amount of activity for their state and economic development for their state. It's very important to us. Our flights are the lifeblood of these cities. In some states we serve eight cities in their state. Some of these, frankly, are cities we wouldn't fly if we didn't get the benefit. There is a bit of a trade-off there. It's not completely a benefit to us. It's a win-win for the states and for us. Any tinkering they do with these taxes, we still have the governors that are still on our side and making sure that we're going to be able to fly to the cities they want us to fly to.
That's kind of the underlying principle.
Okay. That's very helpful. I appreciate the color, [Dave].
Ladies and gentlemen, as a reminder, if you'd like to pose a question, please press star one. The next question comes from Pedro Bruno with Santander.
Good morning. Thanks for taking my question. If you could just give us some color on your guidance. I don't know if you can share with us what the premises are underneath for FX and fuel on the guidance that you reiterated in this quarter. Thank you very much.
Hey, Pedro. We look at the forward curves. We're looking at the forward curve for both currency and fuel. That's what we put in. If you just go to Bloomberg, we're fairly confident that we're going to be able to hit our guidance. We're excited. A lot of people ask us, are we changing it? We still got six months to go. We're working really hard. We intend to deliver our guidance.
Okay, thank you.
The next question comes from Victor Mizusaki with Bradesco BBI.
Hi, good morning. I have two questions here. The first one, can you give any color on how TAP is performing? The second question, I think that Abhi mentioned a little bit about unbundling this year, next year. I don't know if you can comment a little bit more on what kind of service do you expect to charge?
Okay. First Victor, this is David. On TAP's doing well. Good summer season. Flights are full. The Brazil international recovery that we've seen is also something that TAP is seeing. Planes are full. Europe's doing well. There is still a restructuring that needs to be taken there on costs. That takes a little bit of time. That's a two or three-year ongoing process. We're very, very pleased with the revenues and feel very confident that the costs are coming in and will continue to come in. It's not something that we can do quickly, but we're getting a lot of support from all the crew members there, and everyone's working together. The government, us, those that privatized it, the crew members, everyone knows how important TAP is to Portugal, and so everyone's working together.
Hey, Victor. About the ancillary, it's stuff that you've seen other airlines do. For example, anticipate your flight. That's something that airlines around the world charge for. In Brazil, you can do that for free. That's something that maybe only customers paying the higher fares should be able to do. Seat assignments. Azul has not had a middle seat so far, so we haven't seen much value in charging customers for seat assignments, but with the A320 in the U.S., in Europe, customers absolutely pay for not having to sit in the middle seat. Things like points. If you want extra points or if you want points on your purchase, maybe the promotional fares, the weekend sale fares, the discounted fares, maybe you get less points or no points. It's things that have been done around the world that other airlines are doing, and they've had success with.
Obviously, we want to make sure we do it in a very customer-friendly way. We want to do it in a way that doesn't upset our customers, doesn't upset our brand positioning and kind of the loyalty that our customers have to us and we have to them. These are all tools and products that we'll look at over the next six months and into 2018.
Okay, thank you.
This concludes today's question and answer session. I'd like to invite David to proceed with his closing statements. Please go ahead, sir.
Great. Well, thank you all for joining us on the call today. Like I said, we're excited about our business. We feel like we have a ton of upside going forward. Just like once again, Dave, to thank all of our crew members, particularly those that worked on this release and all of the numbers and all of this work. You're very much appreciated. Really, it takes a lot of people to make a great airline, and I couldn't be happier with the direction that we're headed. We'll talk to you next quarter, and we'll continue to increase shareholder value. That's what we're here for. Thank you very much.
That does conclude the Azul audio conference for today. Thank you very much for your participation, and have a good day.