Good morning everyone. Welcome to Azul's first quarter 2017 results conference call. My name is Roberta. I will be your operator for today. This event is being recorded. All participants will be in a listen-only mode until we conduct a question-and-answer session following the company's presentation. Should any participant need assistance during this call, please press star zero to reach the operator. I would like to turn the presentation over to Andrea Ferreira, Investor Relations Manager. Please proceed, ma'am.
That's right. Go ahead. Good morning, everyone. Thank you, Roberta. Thanks for joining us on our first quarter earnings call. The results that we announced this morning, the audio of this call, and the slides that we reference to are available on our IR website. Presenting today will be David Neeleman, Azul's Chairman and CEO, and John Rodgerson, our CFO. Our senior leadership team is 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 matter 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 change. Also during the course of the call, we'll discuss non-IFRS performance measures, which should not be considered in isolation.
For reconciliation of these measures, please refer to our earnings call. With that, please, David, would you like to proceed?
Thanks, Andrea. Thank you everybody for joining us this morning for our first quarter earnings call. This is an exciting time for Azul, given the recent IPO. I'd like to start by thanking our crew members at our company. Their incredible dedication of taking care of our customers every day really is the real reason that we're all here today. Because of their great service and our customers returning, has really helped our growth over the last eight years. I think what's demonstrated by this is last month, TripAdvisor, actually on I think the day of our IPO, came out with the top rankings of all the airlines in the world, and Azul was number three just behind Emirates and Singapore.
That was particularly meaningful to us because that's a survey that's actually taken by consumers, people who actually are buying the product day to day as opposed to some of these other awards. We also were named the number one best on-time performance airline in South America over the last 12 months, through March 31st of 2017. I can't say enough of gratitude to our crew members and for the great job they're doing. If we go over to page five, slide five on the presentation. You can see our route map and all the places we fly. We have more than 100 destinations, which is nearly twice the amount of any other airline in Brazil. We are the only airline that flies on 72% of our routes.
If you add that to the routes where we have a frequency advantage, that's a total of 87%, we'll show you in a subsequent slide how that helps us. We also have listed there, kind of our growth plan going forward is we've got some new destinations that we just started flying listed on that page. We have some upcoming destinations. As we've said before, we intend on adding 30 new additional cities over the next five years or so. All of these 30 cities will be cities where there is no airline service today. That's really a huge part of our growth going forward. Going over to slide number six, you can see that the strong network that we have, serving twice as many routes as our nearest competitor.
This great service allows us to attract really high-yield business travelers who really value the convenience and frequent flights. Although we only have an 18% market share in terms of RPKs, our market share in terms of corporate revenue, which is, of course, the highest yielding traffic that there is according to Abracorp, which is the Brazilian Association of Corporate Travel Agencies, is at 29%. You can see that on that graph. If you go to the other side of that graph, you can see what that leads us to in average fares. We have an average fare higher than any of our other competitors. That's because we have less than 30% overlap in terms of ASKs on our route system, which allows us to get higher average fares. Going to page seven, you can see our fleet composition going forward.
One of the big stories of Azul is that we fly the right aircraft for each of the markets we serve. This is a huge competitive advantage for us. Over the next five years, the E-Jet will continue to be the backbone of our operation, mostly targeted on business routes, high-frequency business routes. The ATRs will be our choice of aircraft to explore those 30 new markets, the 30 new cities that I talked about earlier. They'll serve, of course, the lower density and shorter routes as well. We're continuing to add A320s. We have eight in the fleet today. We're going to add between six and eight deliveries a year. This will drive some growth that we have going forward. As you can see, you'll see later in our guidance that we're going to grow between 11% and 13% in 2017.
This will come primarily from upgrading as we move the A320s into the routes that are currently being flown by the E-jets. This will give us increased margin expansion going forward. Let me just flip over to page seven. I can give you Which slide is this? The next one?
Yeah. Slide seven.
Slide seven. Slide seven talks a little bit more in detail about what the A320neos are doing for our route system. If we have flights, the shortest routes, of course, are formed by the ATR and the lowest density routes. The medium routes, the business travel routes, where we have high-frequency flights that are under two hours, are flown primarily by the Embraer 195s. As I mentioned, we're starting to put the A320s on flights that are more than two hours. These aircraft, as you can see on this graph here, have a 30% unit cost advantage over the rest of our fleet. Really importantly for this, is that by adding these are very popular kind of leisure destinations, flying to the northeast and north of Brazil.
What it's really doing is helping our load factor overall, because we were being constrained on the other feeding routes on the shorter run. We've opened up the pipes, that's allowed us to have higher load factors, that's why we were able to get an 81% load factor in the first quarter, because not only did we fly high load factor on those A320 routes, but it allowed us to fly higher load factor on all the flights that are feeding those routes as well. It also is a big benefit for our ancillary revenue, where we can carry more cargo on these bigger airplanes. We can sell more travel packages. Our Azul Viagens, our packages division, was up 30% in business in the first quarter. Then also, we have more seats for our loyalty program.
Even though we fly a high load factor, in terms of absolute seats, we have more seats for the loyalty program because of the larger aircraft size. The A320s in the first quarter only represented 11% of our ASKs, and an ideal number for our route system today would be something around 35%-40%. We have a lot of margin expansion going forward, we feel, as we continue to add these A320s and replacing the E-Jets. The E-Jets will either come off lease or they'll enter some markets that the ATR, more mature markets where the ATR are flying, or at frequency that we need because of this increased load factor because of the feed from the A320s. We're very excited about that.
Our Chief Revenue Officer, Abhi's, been asking for these airplanes for a long time, they're really having a huge positive effect on the company. Turning over to the next page, slide nine. Our loyalty program continues to grow quickly. We reached more than 7.2 million members, representing an additional 1.2 million members over the last 12 months. We also increased the gross billings by 53% year-over-year, that primarily comes from banks that are buying points from us. We're very pleased with that. Of course, unlike other competitors who have loyalty programs in Brazil, our TudoAzul is 100% owned by the company, it is an important driver in our future margin expansion going forward. Lastly, before I turn the time over to John, I just wanted to tell everyone thanks for a really successful IPO.
We had a lot of investors that showed a lot of confidence in us. Obviously, it was oversubscribed, that allowed us to exercise the green shoe, also there was an overallotment of 20%, which was exercised. The total offering size was BRL 644 million. BRL 406 million of primary proceeds came into the company, which will boost our balance sheet and helping us reduce our working capital going forward. The stock traded well since our IPO, we look forward to further innovation and value creation for our shareholders. With that, I'll turn the time over to our CFO, John Rodgerson, to come and give you more details on the numbers.
Thanks, David, welcome everybody to the call. Going on to the slide, first quarter highlights. I have the privilege of sharing our financial numbers with you this morning. We had a very solid first quarter this year with an operating margin of 11%, 10.6 margin points higher than last year, despite the year-over-year increase in fuel prices. In addition to having a revenue growth of 12% year-over-year, our continued efforts towards having a low-cost structure also contributed to our strong performance, as we're able to grow our revenues 12% without increasing our costs. Our CASK ex-fuel decreased 6.9%, mostly due to the 20% appreciation of the Real and the introduction of the A320neos, which have 30% lower unit costs than our existing aircraft. We also had a significant reduction in financial expenses of 35% year-over-year, or BRL 76 million in the first quarter.
This was driven by our aggressive approach to paying down more expensive debt and interest rates in Brazil coming down year-over-year. Our EBITDAR for the first quarter totaled BRL 562 million, an increase of 36% year-over-year, and our EBITDAR margin was 30%, one of the highest in the industry. We also recorded a net profit of BRL 55 million, an improvement of BRL 122 million over last year. Going to the next slide and giving a quick look at our revenue figures. We had strong RASK performance in the first quarter, with an improvement of 9.4% year-over-year, driven by 5.5% increase in PRASK and almost a 40% increase in other revenue per ASK. Our PRASK increase was driven by 3.3-point load factor increase and a yield improvement of 1.2% over last year. Our stage length essentially remained flat at 881 km.
Looking at our ancillary revenue, our ancillary revenue on slide 14 increased 28% year-over-year. It actually increased 43%, but if you exclude the sublease revenue that we had in the first quarter. Sorry, we have window washers that are actually washing our windows during our first quarter earnings call. If you hear a little bit of background noise, I apologize for that. We had higher passenger-related ancillary revenue, such as the sale of our Espaço Azul, our even more legroom product that we have on board the aircraft, upgrades, and SkySofa. An increase of 7% in the number of passengers year-over-year. Other revenue represented 13% of our total revenue. Adjusted for the BRL 29 million revenue we received from the aircraft subleases, other revenue per passenger totals BRL 43.
Going forward, we expect ancillary revenue to remain flat at 13%-15% of total revenue, with growth coming from the higher passenger counts through the A320neos and the introduction of our baggage fees. Going to the EBIT margin bridge slide on slide 15, you can see a detailed breakdown of the key drivers that impacted our margin expansion year-over-year. Most of the increase in our margin is driven by the increase in revenue. You can see that we increased our revenue by BRL 205 million year-over-year in the first quarter. The 20% appreciation of the Brazilian real drove down cost by approximately BRL 77 million. Offsetting part of the increase in fuel, which is priced in U.S. dollars, reducing our aircraft rent as well as maintenance expenses, which are primarily USD-driven.
In the first quarter of 2016, we had aircraft redelivery expenses of BRL 39 million as a result of our fleet restructuring that took place in 2016. We obviously did not have those expenses in 2017. This improvement in cost was partially offset by an increase in fuel prices of 16% in BRL, from BRL 1.7 per liter to BRL 2 per liter. Salaries and other line items that are adjusted for inflation increased by 33% year-over-year. The growth in salaries is mostly due to the annual increase in wages negotiated with our union of 7.4%, which is indexed to the annual inflation rate. All airlines in Brazil essentially give the same increase year-over-year. Moving on to our balance sheet and liquidity position on the next slide, we ended the quarter with a solid cash position of BRL 1.5 billion.
Including receivables, our total liquidity position was BRL 475 million higher than March 2016, reaching BRL 2.1 billion. It is important to note that this does not include the proceeds from the IPO, which cash entered into the company in April. We amortized BRL 401 million in loans during Q1 2017, resulting in a debt position of BRL 3.7 billion and leverage ratio of 5.1. With the proceeds of the IPO received in April of approximately BRL 1.3 billion, or $406 million, our cash position was significantly strengthened and will be going forward as we lower our borrowing costs by paying down more expensive debt. Our pro forma leverage in Q1, including the IPO proceeds, would have been 4.4. That includes all of our debt. Going on to the outlook on slide, 2017 outlook.
I want to highlight, we are planning to increase our departures by 1%-2% this year. ASKs will be up 11%-13%. That is primarily driven by the upgauging that takes place as we take the A320neos. It is also important to note that the A320neos entered our fleet in December 2016. A lot of this growth is primarily removing aircraft on longer-haul routes that were being operated by 190s and 195s and replacing them with 320s. We expect our CASK ex-fuel to go down by 3.5%-5.5% as we continue to manage our cost structure at Azul. We expect to have an EBIT margin of 9%-11% for the year. With that, I think we will turn it over to the operator to answer your questions.
Excuse me, 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 touch tone 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 Michael Linenberg with Deutsche Bank.
Yeah. Hey, good morning, everybody. I guess I have a couple questions here. On your cost guidance of down 3.5%-5.5% for the year, now how much of that is the induction of the new A320neos versus the fact that I think there has been some cleanup and some restructuring going on at the carrier. For example, if I look at your operating fleet versus what you are contracted, I think you are still carrying maybe four or five excess airplanes. Can you talk about what are the various levers of cost reduction in 2017?
Mike, the majority of it is coming from the A320. As you know, the unit cost of those is about 30% below the operating cost of an E-Jet or an ATR. That's the primary driver. We do have some non-operating aircraft that are exiting the fleet. Just in Q2 alone, we're transferring four E195s to TAP. That's something that by the time we get into the third quarter, that will be cleaned up quite a bit. There's not a significant amount of carrying cost that we have. In fact, last year in 2016, we had more carrying costs as we did the fleet restructuring as we were getting ready for the A320s coming.
Okay, great. John, just on the total ancillary revenue, I think you had indicated going forward, the run rate is 13%-15% of total revenue, but I presume that that's excluding the TAP sublease revenue. Is that right?
That's correct. We wanted to show you the real number. Michael, if you take a look at what we did in terms of ancillary revenue in the fourth quarter versus the first quarter, it was basically in line. We grew ASKs from Q4 into Q1 by about 8%, and that's about what the ancillary revenue increase. The first quarter of 2017 is the first quarter that we didn't have a year-over-year comp to compare with because we started the sublease into TAP at the end of second quarter last year. Once again, in the second quarter of this year, it will be a big year-over-year increase because of the sublease.
Okay. Just so the sublease was BRL 29 million in the March quarter. What is that number when you add the four E195s? What does that number go to? This is just for modeling.
Michael, it's going to go up slightly, actually those four aircraft that we're sending to TAP, we're actually selling them. They're actually going to be exiting the fleet overall. It's a little bit different than the sublease. These aircraft are actually exiting. Two of the four are actually exiting the fleet entirely.
Okay. If I, just a follow-up on that, the ones that are exiting, is there going to be any sort of debt or lease reduction that comes with that?
Slightly. They were all owned aircraft, Michael, basically, what we're selling them for is roughly what the debt and what the book value was. I think in Q1, I think we recognized BRL 3 million-BRL 5 million worth of the gain, it was insignificant.
Okay. Very good. Okay. Thank you.
Thanks, Mike.
Our next question comes from Renato Salomone with Itaú BBA.
All right. Thanks for taking the question. Of the 5.8% yearly RASK growth, how much do you attribute to industry-wide capacity adjustments made in 2016, and how much to improved demand dynamics in domestic and international routes?
Hey, Renato. Abhi here. As we look at the quarter, I'll separate domestic and international. Domestically, I think that we had a pretty good January. Our year-over-year RASK improvement last year in the first quarter was not as high. In terms of comps, first quarter will be our easiest quarter in terms of comps. I think we had a pretty good January in terms of year-over-year. We had an Easter shift into April, so that affected the year-over-year comps for March. I would say that January and March in the quarter were probably the better months in terms of demand and domestic demand environment. Carnaval was late, was February 28th, so there was kind of a valley in the middle in between summer break and when Carnaval. Corporate didn't really get started, and leisure was kind of waiting for Carnaval.
In terms of demand, I would say January was pretty good, then we saw a bump post-Carnaval holiday in March, and that's domestic. International, I can't give you sort of the actual breakdown, but you heard on the calls from United, American, and Delta, they've all spoken very positively about their Brazil unit RASKs. I think that you can assume that the rising tide is lifting all the boats in that market. I think you'll probably hear something similar from LATAM as well. I think international, there's no question that the demand environment is strong. All of the airlines are seeing that, and that definitely played an important role in this unit revenue increase. Domestically, January and March were better. We definitely saw a little bit of a demand improvement post the Carnaval holiday in March.
Thanks, Abhi. If I may have a quick follow-up here. After this strong international figures and the low tax that we had in the first quarter, can we expect international routes to remain above breakeven even during low season months?
The international booking curve is further out than the domestic one, which is good because it gives us visibility. What we are seeing in terms of those trends continue to be very positive. Right now, we can even look as far as in July, for example, which I think is going to be very good. I think it's going to be very good for all of the airlines that are flying international in and out of Brazil. Yes, I think we're optimistic about that market, and as far as we can see, it's going to be good. As we look at our demand for international, I think it's going to be at these levels, and I think the margins are going to be strong.
Thank you.
For those of you that don't know, Abhi's our Chief Revenue Officer. We didn't introduce him, but obviously it was evident by his response to that.
Our next question comes from Daniela Bretthauer with Eleven Financial.
Good morning, everyone. Congratulations on your first quarter results. Quite solid. First question, I just want to follow up on Michael's question on the other revenues. Do you think that, John, the level going forward is going to be BRL 200 and something, like BRL 250, or in other words, around more towards the 15% of revenues?
Yeah. Daniella, I think so. I forgot to highlight, we grew cargo 34% year-over-year.
Exactly.
Our cargo business is doing phenomenally well. Obviously, this does not include bag fees and anything that you saw in the first or even in the second quarter because our bag fee is set to be rolled out on June 1st. I think it's around that number. I just would caution you a little bit, Dani, as you get into the second quarter. Second quarter is seasonally the weakest quarter for us. First quarter is a very strong demand environment. I think in that 13%-15% range is where we want to be, excluding the TAP revenue, obviously with bag fees and moving forward, we would expect that to go up a point or so because of that.
Okay, thanks a lot. That's clear now. You also mentioned, if you could provide some color on your cash position. You mentioned that the BRL 1.5 billion does not include the BRL 1.3 billion from the IPO proceeds, you did pay BRL 401 million in terms of working capital debt in Q1. What sort of cash position should we expect in the second quarter? Did you plan or are you planning to pay anything else during the second quarter? What sort of running rate in terms of cash can we model for Q2 and going forward?
Dani, I think this is an internal debate between myself and David. David would prefer to pay down all of our working capital debt. Just so everybody's aware, we have roughly BRL 1.7 billion of working capital debt that's very expensive. It's with the Brazilian banks. Our goal is to aggressively pay that down. We may swap that for some cheaper capital in the short term. We're not giving a forecast on cash right now. It's going to be in that 15%-20% range. What I will tell you is every time we pay down this more expensive debt, it frees up a tremendous amount of receivables and it opens a lot of options to us.
What I will tell you is since we went public, our phone has not stopped ringing of people that are wanting to do deals with us to refinance our more expensive debt. We're actively working that. We've got good debt on the balance sheet, which is our aircraft debt. We've already paid, just to give you an idea, another BRL 400 million with the IPO proceeds. That's something that we're very excited about. This is really a margin expansion story as we've proven in Q1, a de-leveraging story as we've strengthened the balance sheet considerably. We do get a lot of help from interest rates dropping in Brazil. The IPO proceeds are very accretive to us going forward.
Dani, I think whether we keep the money in cash and we're earning interest on it's not like a U.S. airline that's earning almost zero interest. Our interest rates that we make money on, what we pay for the working capital debt is like 1.25 or 1.5 different than what we're actually making. There's a very little difference between keeping the cash in the company really and paying it off. I love paying it all off, but it doesn't really affect the bottom line that much whether we keep it all in cash or we pay it off. We certainly paid off the most expensive and we'll continue to aggressively do that and keep a comfortable amount of cash in the company.
Just to recap, you've paid another BRL 400 million in debt in the second Q, and we can model cash position as a percentage of LTM revenues between 15%-20% going forward.
Yeah, that's right.
Okay.
We can give you more detail as we look at this going forward. The IPO proceeds really hit the bank end of April by the time everything closed, and we're now looking at more efficient capital structures going forward as well. You'll hear a lot more about that on our second quarter earnings call, Dani.
Thanks a lot and congrats again.
Thank you.
Our next question comes from Stephen Trent with Citigroup.
Hi, good morning, everybody, and thank you for taking my questions. Some of mine were already answered, just one or two others. When we look at your capacity growth for the year, your plans to grow capacity 11%-13%, any view to what extent some of that should come from longer average stage length?
Yeah. Hey, Steve, this is Abhi.
Hey, Abhi.
We can separate the 11%-13% in domestic international. The 11%-13% is overall, and you can expect that the domestic market is going to be in the range of 8%-10%. What's going to happen with our domestic capacity actually is that more than 100% of our domestic capacity is going to be the A320s. It's a combination of larger aircraft and longer stage length. We're actually reducing ASK on our E-jets as some of them go to TAP, as some of them come down into shorter haul markets, and we're reducing ASK on our ATRs. Domestically, you can think of all of it as A320s, a combination of larger aircraft and the longer stage length.
Okay. Thank you, Abhi. Very helpful. Just one other question. I know with your international partnerships, you've got some very interesting ones out there. I believe, for example, that you were looking to upgrade your interline agreement with Hainan Airlines maybe into a full [inaudible] code share, and I wasn't sure if that happened. Kind of curious, what's your strategy on the long-term relationship with Hainan and with TAP? I know you've got that asset on your balance sheet.
I can talk about the code share, and then maybe David can talk about the strategic aspect. We do plan to have a code share with Hainan. As you may or may not know, Beijing Capital Airlines is going to start a flight from Beijing to Lisbon. That will start in July. We intend to code share with them on their Beijing-Lisbon flight, and they will code share on our Campinas-Lisbon flight. We are in the process of a code share with Hainan, and hopefully we'll have that announced pretty soon. In terms of other agreements, we're absolutely doing agreements to feed airlines here in Brazil. Using our domestic network. Our two biggest partners, as you know, are United and TAP, and they're very important to us.
We're definitely open and we are talking to other airlines to feed them domestically here in Brazil. For our long-haul network, we use United and JetBlue in the U.S., both very important to us, and we use TAP, which is absolutely critical for us in Europe. That's the culture stuff. Dave, you want to talk about the strategic?
I think Abhi mentioned Beijing Capital Airlines. Hainan has several airlines in China. Beijing Capital Airlines is one of them that's based in Beijing, that's very strong and very well-positioned at the new Beijing airport. They're starting, I think, just three flights a week. I'm kind of encouraging them to increase that frequency, and hopefully they'll get that up to daily service. That's really important to us. I would also mention that TAP, the strength that we're seeing in international traffic is also TAP is seeing the same. They've got a lot more presence coming to Brazil than we have going to Lisbon. Maybe 10 or 11 or 12 times or 14 times more. They're seeing that strength. It's about 35%, 40% of all their revenue is Brazil related, they're seeing the same strength.
They're also seeing a lot of strength into North America as well. We're pleased with our investment at TAP and with the partnership and all the things that we're doing together. It's really a win-win for us.
Okay. That's very helpful, guys. Thanks very much for the time and happy to hear about the clean windows there for me.
It gives a good outlook, man. When the windows are clean, we can see clearly.
Well, actually, we stopped the cleaning, so we're going to end up with dirty windows by the next cleaning comes by, unfortunately.
Our next question comes from Daniel McKenzie with The Buckingham Research Group .
Hi. Good morning. Thanks, guys. I've got a few questions here. I guess just going back to an earlier question, John. I wonder if you'd be willing to share with us, if you take a look at the non-aircraft debt, that BRL 1.7 billion in the non-aircraft debt on the balance sheet, that average interest expense or average interest rate, pardon me, you're paying today versus some of the quotes that you're seeing. Is there any numbers that you could share with us, just at least based on what you're seeing so far?
Yeah, Dan. We have it in our earnings release. We're paying almost 14% in [inaudible] on that. The risk-free rate in Brazil is about 12%, 12.5%. Now that's coming down. Obviously we're being pitched by a lot of banks to do some unsecured debt or maybe securing up assets that we have not levered up in the past to get that down considerably. Again, paying down 14% debt is critical for us, and so we're going to do that as quickly as we can and replace it with a lot lower cost of debt. The majority of that BRL 1.7 billion is in that range, and so that's the average cost of debt there.
Well, the big focus from my side would be increasing earnings so that we can not trade debt, but just pay off debt.
Yeah.
That certainly makes us a lot stronger, and that's a big focus as well.
Yeah.
Okay. Understood. The quotes that you're getting for the revised interest rates will be obviously a lot lower than 14%.
Yeah. They're significantly lower than that, Dan. Obviously, those are banks just pitching to us at this point. As David said, over the next call it six months or so, we're going to just pay down more expensive debt. We'll see if there's an opportunity to swap some with a lot cheaper debt. Those are things that we're actively working, but we don't have anything concrete at this time to talk to you about. As soon as we do, we'll be more than happy to share that with you.
Understood. If I could go back to the full year growth rate. It did come in quite a bit higher than at least what I had been thinking about for this year. What's interesting to me is the economic outlook for Brazil still seems pretty weak, yet you guys are able to boost ticket prices on this higher growth. First of all, just a couple of questions tied to this. Does the growth at this point, it seems like it's vacillating, but does it contemplate any expectations for an economic stimulus package winding its way through the Brazilian Congress, first of all? Second of all, how does your outlook factor in the pace of leisure versus corporate travel recovery?
Hey, Dan. First, let me just break out the growth a little bit into domestic versus international. Overall, we're looking at 11%-13% ASK growth. Domestic, as I said just before, would be probably in the range of 8%-10%. We do have some flexibility there in terms of utilization. We can be on the low range there, on the high end of that, depends on demand. International is going to be up. The balance of that, it's going to be up 25% plus. It is a very small base. Although the number looks high, it's coming off a very small base. The markets are doing great, we're really looking to consolidate our position and strengthen our position. We aren't adding any new sort of destinations.
We're just connecting dots that we already have and increasing frequency on the international side. As you look at the overall capacity growth, 11%-13%, domestic is going to be 8%-10%, international is going to be the balance of that. We look at the 8%-10% domestic, again, more than 100% of it is the A320s. It's a combination of the larger aircraft and the longer stage lengths. Our departures, as we said, are really increasing very minimal, 1%-2%. Of course, you've seen the cost economics of the A320 and how really efficient they are on these 2.5, 3-hour flights. What we've seen so far as we've put in the first seven, eight aircraft is that they've really helped us, as we say internally here, widen the pipes on our trunk routes.
These were routes that are very desirable destinations in the northeast of Brazil, our aircraft was just too small. As we widen these pipes, not only are we more competitive on those local markets, but we're seeing a nice benefit on all of our connecting markets, our beyonds, and our before markets. Our ATR markets, smaller E-jet markets are really benefiting from that as well. Yes, you're right, it is 11%-13% ASK growth, 8%-10% domestic, more than 100% of that is just A320s, larger aircraft, very efficient and longer stage length. We're actually reducing capacity because stage length is coming down on the E-jets and the ATR.
Let me just say one thing as just follow on Dan's question about has Brazil come back yet, the answer to that question is no. It hasn't. We would've gone through the crisis much better had we had the A320s during the crisis. We basically were constrained on our most popular routes, which are more leisure. The crisis really consisted of business travelers traveling less. That was the highest yield in business traffic. We didn't have the high-yield business traffic during the crisis, we didn't have seats going to the northeast to the leisure market. Now we have these 320s opening the pipes and Abhi and I were just reviewing, last week, the year-over-year margin improvements on these routes where the A320s are flying, they're stunning. It's really the right plane for the right market.
That's what makes us really encouraged going forward, even without a recovery in Brazil. Now we're hopeful. We're seeing, be it stimulus package or we've got some reforms that are just about passing, be it the retirement reform or the worker reforms. We've already passed the cap on spending in Brazil. Leading indicators are kind of ticking up. Our cargo business is up, which is a good sign. We don't want anyone to think that Brazil's back to robust state, because it is definitely not. We're just running our business to cope with this and doing much better because of the A320s, because of lower debt, because of the proceeds from this IPO. That's what makes us very encouraged. If we get a strong recovery from Brazil, hallelujah, things are really going to be great.
I also want to just highlight, this is the lowest risk growth you could possibly have. Departures up 1%-2%, ASKs up 11%-13%. We're basically just putting a more efficient aircraft on our longer-haul routes. The A320s are not opening new markets for us. They're just widening the pipes.
Widening the pipes and then making it just a lot better. The economics on that route are just so much better.
Well, that's a very comprehensive answer. Thank you. John, I think that you sort of allude to this, but if we do get economic stimulus, it would sort of imply that things could be a little better. Are there A320 deals that you might be able to get your hands on or aircraft that
Dan, let's not go there right now. No. It's a very good question. I think we're committed to, like I said earlier, we could probably use 20, 25 of these airplanes. It's going to take us a few years to get there. To the extent that we can move some E-jets or move some airplanes or sell them or do whatever, then we certainly have the option of expediting that by moving, not adding incrementals, but moving our delivery positions forward. We've been approached by companies that want us to move them forward. We have that option if we can make the fleet work with replacing the E-jets for the 320s on those important long-haul routes.
That'll be it for me. Thanks, guys.
Thanks, Dan.
The next question comes from Victor Mizusaki with Bradesco BBI.
Hi. I have three questions here. The first one is more a follow-up on your cash position. Think about the second quarter, how much of your cash will be denominated in U.S. dollars? The second question, with regards to your guidance, I don't know if you can disclose the effects under the other parts of assumptions. The number three here, you mentioned that the A320 will represent something around 35%-40% of your total ASK. Is this for this year or next year?
Yeah. Just taking these in reverse order. 35% is kind of the optimal mix that we're not going to get to that for the next probably three years or so.
Okay.
It's going to be 20% at the end of this year. FX and oil, we basically use a forward curve. We take a look at what the forward curve for oil is and what the forward curve for FX is, and that's what we use in our projections to get to our EBIT margin of that 9%-11%. As for the IPO proceeds, we raised $406 million. We kept $100 million of it offshore in the U.S., so we'll opportunistically bring that back into Brazil, but that's kind of been our USD hedge. That'll be so over the next, call it 6 to 12 months. You'll see us use that to pay U.S. dollar-denominated expenses. That's roughly the order of magnitude that we've protected given the IPO proceeds. Hope that helps, Victor.
Yep. Perfect. Thank you.
Our next question comes from Bruno Amorim with Santander.
Hi, good morning all. I have a quick question. Actually, I just wanted to know how do you see capacity allocation in the Brazilian domestic market evolving the second half of the year? We know that your guidance implies an acceleration in ASK growth, mainly driven by the ramp-up of the A320s. What are your competitors doing in terms of capacity allocation from what you can see? Thank you.
Yeah. Hey, Bruno. Yes. Talking about our capacity first. Since we're up only 2.7% in the first quarter, and we're guiding to 11%-13% for the year, yes, you will see our year-over-year capacity growth numbers increase. For example, in the second quarter, we'll probably be in the high teens, and then we will be in the mid-teens for the third and the fourth quarters. Our second quarter is going to be the high watermark in terms of ASK growth because Azul, as well as the other airlines, cut a lot of capacity last year, second quarter, due to the crisis and the demand environment. For Azul, we will be in the high teens for second quarter, and then we'll probably be in the low to mid-teens for the third and the fourth quarter. And that includes domestic and international, combined for Azul.
For the competition, I'm not seeing anything substantially different in how they are positioning themselves. Numerically, the capacity growth in the market will be higher than last year, or the capacity reduction will be less. For example, Gol has already said they'll be down 0% to -2%, probably closer to 0% if I were to guess. LATAM last year was down 10%. They will be down 5% this year. It's hard to repeat 10 and 10 again. Avianca is growing as well. Numerically, yes, there will be less capacity reduction this year, although there will be a little bit more capacity growth. I think what's more important is how the airlines are positioning themselves. I do see good discipline in the market.
I see airlines sort of working in the geographies and in the markets where they are strong and working in the market that's working for them. I don't see incursions. For example, we are not entering anybody else's hub. We're not trying to take over other markets that we are not strong in. Overall, I do see good capacity discipline in the market. I do not expect that to change. At least from what I've seen so far, I have no major indications that that's going to change. I think overall, that's an optimistic sign for the industry. I think we should be encouraged by that. I also think that the unit revenue numbers, us and the competition, the two data points that you've seen so far this year are both positive.
They had a very high base in 1Q, they had a state grant increase, and still RASK was flat. I think that's a good sign for the market that we are able to produce those kinds of revenues. I think as the recovery gains momentum, as David says, it should bring good news. In terms of capacity, I'm seeing pretty good discipline across the board. As far as I can see, I think it's going to remain that way.
Perfect. Thanks very much.
Thanks, Bruno.
The next question comes from Savanthi Syth with Raymond James.
Hey, good morning. This is Matt Roberts on for Savanthi Syth. Actually, my phone completely cut out, so if I'm asking something that was already asked, please just let me know. I apologize there. First, in terms of the three-tier fare structure and baggage rollout on June 1st, how long exactly do you think that'll take to roll across the network? What type of contribution are you assuming from that in your EBIT guidance?
Yeah. Hey, Matt. In terms of the time it takes, there is no technical limitation to how long it takes. We could do it overnight if we wanted to, I think in terms of the technical limitations. I think we just want to take it a little bit slow because this has been a very hard-fought victory for the airlines, and we want to make sure that we implement this new concept for the Brazilian customer in a slow, organized, and deliberate manner. We're not going to be militant about this initially. We want the customer to be comfortable with the new fare-branded product and how they're experiencing that at the airports and at check-in and things like that.
I think the pacing item is going to be the customer receptiveness, how smoothly it comes across the airports and the check-in process and the boarding process and roller boards and carry-ons and things like that. We certainly want to do it as quickly as possible, but we're very cognizant that we want this to be a very positive experience for the customer, both in terms of having our lowest fares available and in terms of the experience when they actually fly. I would say that that's probably the biggest pacing item, and we'll have to see how it goes. My personal opinion is that I think the customer will be okay with it, and I think we'll be able to roll it out quicker than maybe anticipated.
Okay. Good. Well, thank you very much for the color there.
In terms of revenue in the guidance, we have nothing in there. Zero revenue from baggage fees in the guidance that we showed today.
Why in your EBIT guidance in terms of fuel and [inaudible] ?
Yeah, Matt. We basically just taken a forward curve and we're about 20% hedged for the balance of the year at fuel prices that are above the forward curve. Our EBIT margin guidance is basically looking at the forward curve for FX and for heating oil.
Great. Thank you so much for the time.
Thank you.
Excuse me, ladies and gentlemen. As a reminder, if you'd like to pose a question, please press star one. This concludes today's question and answer session. I'd like to invite David to proceed with his closing statement. Please go ahead, sir.
Great. I just wanted to close by saying, first of all, thank you to everyone in this room here who made this, I think, a very good call. Thank all of you who are on the call who are interested in Azul and those of you that represent investors. Just know that we're going to work very hard to increase value here. That's really what we want. Our interests are aligned, we want to make really the best company ever. Thanks again. If you have any questions, Andrea is always available. She can get questions to John. We just want to be upfront and share with you as much information as we can so you can see a very transparent picture of what's going on here at the company. I think that's our goal.
Thank you very much, and we'll talk to you next quarter.
Take care.
Bye-bye.
Ladies and gentlemen, that does conclude Azul's audio conference for today. Thank you very much for your participation. You may have a good day.