Earnings Call: Q1 2017

May 15, 2017

Good morning, everyone, and welcome to Azul's First Quarter 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 would like to turn the presentation over to Andrea Boches, Investor Relations Manager. Please proceed, ma'am. Good morning, everyone. Thank you, Roberta. Thanks for joining us on our Q1 earnings call. The results that we announced this morning, the audio of this call and the slides that we referenced are available on our IR website. Presenting today will be David Mideland, AGCO's Chairman and CEO and John Laurjesen, our CFO. Our senior leadership team is also here for the Q and A session. Before turning 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 the 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 quarter's 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 like to speak. Thanks, Andrea. Thank you, everybody, for joining us this morning for our Q1 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 8 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 3 just behind Emirates and Singapore. And that was particularly meaningful to us because that's a survey that's actually taken by consumers, people who are actually 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 31, 2017. So we 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 5, Slide 5 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. And we are the only airline that flies on 72% of our routes. Now if you add that to the routes where we have a frequency advantage, that's a total of 87%. And we'll show you in a subsequent slide what 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've just started flying listed on that page. Also, we have some upcoming destinations. And as we've said before, we intend on adding 30 new additional cities over the next 5 years or so. And so this will and all of these 30 cities will be cities where there is no airline service today. So that's really a huge part of our growth going forward. Now going over to Slide number 6, 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 a 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 Albercore, which is the Brazilian Association of Corporate Travel Agencies, is at 29%. So you can see that on that graph. Also, if you go to the other side of that graph, you can see what that leads us to an average fares. We have an average fare higher than any of our other competitors. And 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 7, you can see our fleet composition going forward. And one of the big stories of Azul is that we fly the right aircraft for each of the markets we serve. And this is a huge competitive advantage for us. Over the next 5 years, the E Jet will continue to be the backbone of our operations, mostly targeted on business routes, high frequency business routes. The ATRs will be our choice of aircraft to explore those 30 new markets, 30 new cities that I talked about earlier. And they'll serve, of course, the lower density and shorter routes as well. Now we're continuing to add PACE320s. We have 8 in the fleet today. We're going to add between 68 deliveries a year. And so 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% 13% in 2017, but this will come primarily from upgrading as we move the A320s into the routes where they're currently being flown by the E Jets. And this I mean, ideally, this will give us increased margin expansion going forward. Now let me just flip over to Page 7, I can give you which slide is this, the Nekelharni? Yes, Slide 7. Slide 7. Slide 7 talks a little bit more in detail about what the A320neos are doing for our route system. Now if we go if we have flights, the shortest routes, of course, are 4 by the ATRs and the lowest density routes. The medium route, the business travel route, where we have high frequency flights that are under 2 hours are flown primarily by the Embraer 195s. And now as I mentioned, we're starting to put the 320s on flights that are more than 2 hours. And these aircraft, as you can see on this graph here, have a 30% unit cost advantage over the rest of our fleet. Now really importantly for this is that by adding these these are very popular kind of leisure destinations flying to the Northeast and North of Brazil. And what it's really doing is helping our load factor overall because we were being constrained on the other feeding routes on the shorter. And so we've opened up the pipes and that's allowed us to have higher load factors. And that's why we're able to get an 81% load factor in the Q1 because not only did we fly high load factor on those A320 routes, but 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 2 to Azulbayaging, our package division was up 30% in business in the Q1. And then also, we have more seats for our loyalty program because even though we have high load factor in terms of absolute seats, we have more seats for the loyalty program because of the larger aircraft size. And so the 320s in the Q1 only represented 11% of our ASKs. And an ideal number for our route system today would be something around 35% to 40%. And so we have a lot of margin expansion going forward. We feel as we continue to add these 320s and replacing the EJET. So in the EJETs will either come off lease or they'll enter some markets that the ATRs more mature markets where the ATRs are flying or add frequency that we need because of this increased load factor because of the speed from the 320. So we're very excited about that. Our Chief Revenue Officer, Avi, has been asking these airplanes for a long time and they're really having a huge positive effect on the company. Turning over to the next page, Page Slide 9. Our loyalty program continues to grow quickly. We reached more than 7,200,000 members, representing an additional 1,200,000 members over the last 12 months. We also increased the gross billings by 53% year over year and that primarily comes from selling banks that are buying points from us. So we're very pleased with that. And of course, unlike other competitors who have loyalty programs in Brazil, our Tudo is 100% owned by the company and it is 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 and that allowed us to exercise the green shoe and do the fully exercise the green shoe and also there was over allotment of 20%, which was exercised. The total offering size was 644,000,000 406,406,000,000 dollars primary proceeds came into the company, which will boost our balance sheet and helping us reduce our working capital going forward. The stocks traded well since our IPO, and we look forward to further innovation and value creation for our shareholders. So with that, I'll turn the time over to our CFO, John Rogerson, to kind of give you more details on the numbers. Thanks, David, and welcome, everybody, to the call. Going on to the slides, Q1 highlights, I have the privilege of sharing our financial numbers with you this morning. We had a very solid Q1 this year with an operating margin of 11 percent, 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 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 BRL76 1,000,000 in the Q1. 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 Q1 totaled BRL562 1,000,000, an increase of 36% year over year and our EBITDA margin was 30%, one of the highest in the industry. We also recorded a net profit of R55 $1,000,000 an improvement of R122 $1,000,000 over last year. Going to the next slide and taking a quick look at our revenue figures, we had strong RAS performance in the Q1 with an improvement of 9.4% year over year, driven by 5.5% increase in PrASP and almost a 40% increase in other revenue per ASK. Our PRASP increase was driven by 3.3. Low tractor increase and a yield improvement of 1.2% over last year. And our stage length essentially remained flat at 881 kilometers. 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 Q1 sorry, we have window washers that are actually washing our windows during our Q1 earnings call. If you hear a little bit of background noise, I apologize for that. With higher passenger related ancillary revenues such as the sale of our Sfosso Azul, our even more legroom product that we have on board the aircraft, upgrades and Sky Sofa, an increase of 7% in the number of passengers year over year. Other revenue represented 13% of our total revenue. Adjusted for the $29,000,000 revenue received from the aircraft subleases, other revenue per passenger totaled R43. Going forward, we expect ancillary revenue to remain flat at 13% to 15% of total revenue, with growth coming from the higher passenger count 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 $205,000,000 year over year in the Q1. The 20% appreciation of the Brazilian real drove down cost by approximately $77,000,000 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 Q1 of 'sixteen, we had aircraft redelivery expenses of 39,000,000 dollars 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 reais from R1.7 per liter to R2.3 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 potentially get 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 BRL1.5 billion. Including receivables, our total liquidity position was R475 $1,000,000 higher than March of 2016, reaching R2.1 billion dollars It's important to note that this does not include the proceeds from the IPO, which cash entered into the company in April. We amortized R401 $1,000,000 in loans during the Q1 of 'seventeen, resulting in a debt position of R3.7 billion dollars and leverage ratio of R5.1. Dollars With the proceeds of the IPO received in April of approximately R1.3 billion dollars or R406 $1,000,000,000 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 form a 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. Want to highlight we are planning to increase our departures by 1% to 2% this year. ASKs will be up 11% to 13%. That's primarily driven by the up gauging that takes place as we take the A320neos. It's also important to note that the A320neos entered our fleet in December of 2016. So a lot of this growth is primarily removing aircraft on longer haul routes that were being operated by 190s to 195s and replacing them with 320. We expect our CASK ex fuel to go down by 3.5% to 5.5% as we continue to manage our cost structure at Azul. And we expect to have an EBIT margin of 9% to 11% for the year. With that, I think we'll turn it over to the operator to answer your questions. Our first question comes from Michael Linenberg with Deutsche Bank. Yes. Hey, good morning, everybody. I guess I have a couple of questions here. I wanted on your cost guidance of down 3.5% to 5.5% for the year. Now how much of that is the induction of the new A320neos versus the fact that I think there's been some cleanup and some restructuring going on at the carrier? So like for example, if I look at your operating fleet versus what you're contracting, I think you're still carrying maybe 4 or 5 excess airplanes. Can you talk about like what are the various levers of cost reduction in 2017? Yes, Mike. The majority of it is coming from the A320s. As you know, the unit cost of those is about 30% below the operating cost of an E Jet or an ATR. So that's the primary driver. We do have some non operating aircraft that are exiting the fleet. And just in Q2 alone, we're transferring 4 E195s to TAP. And so that's something that by the time we get into the 3rd quarter, that will be cleaned up quite a bit. There's not a significant amount of carrying costs that we have. And in fact, last year in 2016, we had more carrying costs for the as we did the fleet restructuring as we were getting ready for the A320s coming. Okay, great. And then John, just on the total ancillary revenue, I think you had TAP sublease revenue, is that right? That's correct. We wanted to show you kind of the cap sublease revenue, is that right? That's correct. We wanted to show you kind of the real number. And if you take a look at Michael, if you take a look at what we did in terms of ancillary revenue in the Q4 versus the Q1, it was basically in line. We grew ASKs from Q4 into Q1 by about 8% and that's about what the ancillary revenue increased. And so the Q1 of 2017 is the Q1 that we didn't have a year over year comp to compare with because we started the sublease into TAP at the end of Q2 last year. Once again, in the Q2 of this year, it will be a big year over year increase because of the sublease. Okay. And then just so the sublease was BRL 29,000,000 in the March quarter. What is that number when you add the E190 the 4 E195s? What does that number go to? So this is just for modeling. Michael, it's going to go up slightly, but actually those 4 aircraft that we're sending to TAP, we're actually selling them. And so they're actually going to be exiting the fleet overall. And so that's it's a little bit different than the sublease. These aircraft are actually exiting 2 of the 4 actually exiting the fleet entirely. Okay. If I can 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. And so basically, what we're selling them for is roughly what the debt and what the book value was. So I think there was like in Q1, I think we recognized BRL 3,000,000 to BRL 5,000,000 worth of gain, It was insignificant. Okay, very good. Okay, thank you. Thanks, Mike. Our next question comes from Renato Salomoni with Itau BBA. Thanks for taking my question. Of the 5.8% year in gross growth, how much you attribute to industry wide capacity adjustments made in 2016? And how much to improve demand dynamics in domestic and international routes? Hey, Arnaud, it's Dhavi here. So 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 Q1 was not as high. And so we had in terms of comps, Q1 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 Easter shift into April. So that affected the year over year comps for March. But I would say that January March in the quarter were probably the better months in terms of demand and domestic demand environment. Carnival was late, was February 28. So it was kind of a valley in the middle in between summer break and when Carnival corporate didn't really get started and leisure was kind of waiting for Carnival. So in terms of demand, I would say January was pretty good and then we saw a bump post Carnival 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, very positively about their Brazil unit RASM. And I think that you can assume that the rising tide is lifting all the boats in that market. I think you would probably hear something similar from LatAm as well. So 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. And domestically, January March were better. And we definitely saw a little bit of a demand improvement post the Carnival holiday in March. Thanks, David. And if I may have a quick follow-up here. After this strong international figures and the low factor you had in the Q1. Can we expect international routes to remain above breakeven even during low season months? Yes. I mean, as the international booking curve is further out than the domestic one, which is good because it gives us visibility. And what we are seeing in terms of those trends continue to be very positive. And 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. So yes, I think we're optimistic about that market. And as far as we can see, it's going to be good. So 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 it's going to be strong. Thank you. For those of you that don't know, Abhi is our Chief Revenue Officer. We didn't introduce him, but obviously, it was evidenced by his response to that. Our next question comes from Daniela Brett Hoyer with 11 Financial. Good morning, everyone. Congratulations on your Q1 results, quite solid. First question, I just want to follow-up on Mike's question on the other revenues. Do you think that, John, the level going forward is going to be 200 and something like 250 or in other words around more towards the 15% of revenue? Yes. Dan, I think so. I forgot to highlight, we grew cargo 34% year over year. 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 1. And so but I think it's around that number. I just would caution you a little bit, Danny, as you get into the Q2. Q2 is seasonally the weakest quarter for us. And Q1 is a very strong demand environment. But I think in that 13% to 15% range is where we want to be, excluding the TAP revenue and obviously with bag season moving forward, would expect that to go up a point or so because of that. Okay. Thanks a lot. That's clear now. And you also mentioned I just wanted to if you could provide some color on your cash position. You mentioned that the $1,500,000,000 does not include the $1,300,000,000 from the IPO proceeds. And you did pay $401,000,000 dollars in terms of working capital debt in 1st Q. What sort of cash position should we expect in the second quarter? I mean, did you plan or are you planning to pay anything else during the Q2? And what sort of running rate in terms of cash can we model before 2nd Q and going forward? Danny, 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 is aware, we have roughly BRL 1.7 billion of working capital debt. That's very expensive. It's with the Brazilian banks. And our goal is to aggressively pay that down. And so we may swap that for some cheaper capital in the short term, but I'm we're not giving a forecast on cash right now, but I would it's going to be in a 15% to 20% range and we what I will tell you is every time we pay down this more expensive debt, it frees up a tremendous amount of receivables and gives us it opens a lot of options to us. And so, what I will tell you is since we went public, our phone has not stopped ringing people that are wanting to do deals with us to refinance our more expensive debt. And so we're actively working that. So we've got good debt on the balance sheet, which is our aircraft debt. And so we've already paid just to give you an idea another R400 $1,000,000 with the IPO proceeds. And so that's something that we're very, very excited about and you'll start this is really a margin expansion story as we've proven in Q1 and a deleveraging story as we've strengthened the balance sheet considerably. And we do get a lot of help from interest rates dropping in Brazil, but the IPO proceeds are very accretive to us going forward. And, Danny, I think whether we keep the money in cash and we're earning interest on it, 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. So 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. But 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. So just to recap, you paid another $400,000,000 in debt in the second Q and we can model cash position as a percentage of LTM revenues between 15% 20% going forward? Yes, that's right. And we can give you more detail as we look at this going forward. But 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. So you'll hear a lot more about that on our Q2 earnings call, Dan. 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, but just one or 2 others. When we look at your capacity growth for the year, your plans to grow capacity 11% to 13%. Any view to what extent some of that should come from longer average placement? Yes. Hey, Haseem, this is Avi. So we can separate the 11% to 13% in domestic international. So the 11% to 13% is overall and you can expect that the domestic market is going to be in the range of 8 to 10. So what's going to happen with our domestic capacity actually that more than 100 percent of our domestic capacity is going to be the A320s. So it's a combination of larger aircraft and longer stage length. We're actually reducing ASKs on our ejets, some of them go to TAP, some of them come down into shorter haul market and we're reducing ASKs on our ATRs. So domestically, you can think of it all of it as A320s, a combination of larger aircraft and the longer stage lift. Okay. Thank you, Avi. Very helpful. And just one other question. I know with your international partnerships, you've got some very interesting ones out there. And I believe, for example, that you were looking to upgrade your interline agreement with Hainan Airlines maybe into a full fledged codeshare. And I wasn't sure if that happened. So kind of curious kind of what's your strategy on the long term relationship with Hainan and with TAP? I know you've got that back on your balance sheet. Yes. I can talk about the co shares and then maybe David can talk about the strategic aspect. But yes, so we do plan to have a co 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. And so we intend to co share with them, on their Beijing Lisbon flight and they will co share on our convenient Lisbon flight. So we are in the process of a co share with Hainan and hopefully we'll have that announced pretty soon. In terms of other agreements, we're absolutely doing agreements for to feed airlines here in Brazil, so using our domestic network. Our 2 biggest partners, as you know, are United and TAP and they're very important to us. And but 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. So that's the closest update. We want to talk Yes, I think, Avi mentioned, Beijing Capital Airlines is Hainan has several airlines in China. Beijing Capital Airlines is one of them. It's based in Beijing. It's very strong and very well positioned with the new Beijing airport. So they're starting, I think, just 3 flights a week. I'm kind of encouraging them to increase that frequency, and hopefully, they'll get that up to daily service. So 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 saying 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, but they're seeing that strength. It's about 35%, 40% of all their revenue is Brazil related. And so they're seeing the same strength. We're also seeing a lot of strength into North America as well. So So 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. It gives a good outlook, man. When the windows are clean, we can see clearly. Well, actually, we stopped cleaning, so we're going to end up with dirty windows. The net cleaning comes right, unfortunately. Our next question comes from Dan McKenzie with Manhole Research. Hey, 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 SEK 1,700,000,000 of non aircraft debt in the balance sheet, that average interest expense or average interest rate target 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? Yes, Dan. We have it in our earnings release, but we're paying almost 14% in reais on that. The risk free rate in Brazil is about 12%, 12.5%. Now that's coming down. And so 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. And so 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. So that's the majority of that $1,700,000,000 is in that range. And so that's the average cost of debt there. And then a big focus from my side would be increasing earnings so that we can not trade debt, but just pay off debt. Yes, that certainly makes us a lot stronger and that's a big focus as well. Okay. Understood. And then the quotes that you're getting for the revised interest rates will be obviously a lot lower than 14 percent? Yes. They're significantly lower than that, Dan. Obviously, those are banks just pitching to us at this point. But as David said, over the next, call it, 6 months or so, we're going to just pay down more expensive debt. And we'll see if there's an opportunity to swap some with a lot cheaper debt. But those are things that we're actively working, but we don't have anything kind of concrete at this time to talk to you about. But as soon as we do, we'll be more than happy to share that with you. Understood. And 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. And 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. So first of all, just a couple of questions tied to this. So the growth at this point, it seems like it's factoring, but does it contemplate any expectations for an economic stimulus package winding its way through the Brazilian Congress, first of all? And then second of all, how does this the how does your outlook factor in the pace of leisure versus corporate travel recovery? Hey, Dan. So first, let me just break out the growth a little bit into domestic versus international. So overall, we're looking at 11% to 13% ASK growth. Domestic, as I said, just before would be probably in the range of 8% to 10%. So 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. It's going to be up the balance of that, so it's going to be up 25% plus. It is a very small base. So although the number looks high, it's coming off a very small base. But the markets are doing great. And so 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. Domestic is going to be 8 to 10 and international is going to be the balance sheet. So as you look at the overall capacity growth, 11 to 13, domestic is going to be 8 to 10 and international is going to be the balance of that. As we look at the 8 to 10 domestic, again, more than 100 percent of it is the A320s. It's a combination of the larger aircraft and the longer station. So our departures, as we said, are really increasing very minimal, 1% to 2%. And of course, you've seen the cost economics of the A320 and how really efficient they are on these 2.5, 3 hour flights. And what we've seen so far as we've put in the first 7, 8 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 on the northeast of Brazil and our aircraft was just too small. And so 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 beyond and our before market, our ATR market, smaller e jet market are really benefiting from that as well. So yes, you're right, it is 11% to 13% ASK growth, 8% to 10% domestic, but more than 100% of that is just A320s larger aircraft, very, very efficient and longer stage length. We're actually reducing capacity because stage length is coming down on the E Jets and the ATRs. Let me just say one thing, I'll just follow on Dan's question about has Brazil come back yet. And the answer to that question is no, it hasn't. But we would have 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 really where and that was the highest yielding business traffic. Well, we didn't have the high yield business traffic during the crisis and then we didn't have seats going to the Northeast of the leisure market. So now we have these 320s opening the pipes and if you Avi and I were just reviewing last week the year over year margin improvements on these routes where the A320s are flying and they're stunning and it's really the right plane for the right market. So 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, and we've already passed the cap on spending in Brazil. So leading indicators are kind of picking up our cargo business up, which is a good sign. But we don't want anyone to think that Brazil is 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 A320, because of lower debt, because of the proceeds from this IPO. That's what makes us very encouraged. And then if we get a strong recovery from Brazil, hallelujah, things are really going to be great. And I also want to just highlight, this is the lowest risk growth you could possibly have. Departure is up 1% to 2%, ASK is up 11% to 13%. So we're basically just putting more efficient aircraft on our longer haul routes. And so these are not the A320s are not opening new markets for us. They're just widening the pipes. Widing the pipes and then make it just a lot better, the economics on that router is just so much better. Well, that's a very comprehensive answer. Thank you. And John, I think that you sort of alluded to this, but if we do get economic stimulus, and would sort of imply that things could be a whole better, are there A320 meals that you might be able to get your hands on or aircraft? Any questions? Dan, let's not go there right now. I think it's a very good question. I mean, 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. But to the extent that we could move some e Jets, 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. And we've been approached by companies that want us to move them forward. And we have that option if we can make the fleet work with replacing the E Jets for the 320 done with an important longer haul route. That looks good 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. So 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 oil price assumptions. And the number 3 here, I mean, you mentioned that the A320 will represent something around to 35% to 40% of your total SKs. Is it for this year or next year? Yes. So just taking these in reverse order, 35% is kind of the optimal mix that we're not going to get to that for next probably 3 years or so. So it could be 20% at the end of this year. FX in oil, we are we basically use the forward curve. And so we said 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% to 11%. As for the IPO proceeds, we raised $406,000,000 We kept $100,000,000 of it offshore in the U. S. So we'll opportunistically bring that back into Brazil, but that's kind of our USD hedge and that will be so over the next call it 6 to 12 months. And so you'll see us use that to pay U. S. Dollar denominated expenses, but that's roughly the order of magnitude that we protected kind of given the ITIL proceeds. Hope that helps, Victor. Perfect. Thank you. Our next question comes from Bruno Morin with Santander. Hi, good morning. So 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. But what are your competitors doing in terms of capacity allocation from what you can see? Thank you. Yes. Hey, Bruno. Yes. So talking about our capacity first, since we're up only 2.7% in the Q1 and we're guiding to 11% to 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 3rd and the 4th quarters. 2nd 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 Q2 due to the crisis and the demand environment. So for Azul, we will be in the high teens for Q2 and then we'll probably be in the low to mid teens for the 3rd Q4. And that includes domestic and international combined for a Zoom. 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. So for example, GOL has already said, they'll be 0 to minus 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. And Avianca is growing as well. So numerically, yes, there will be less capacity reduction this year, although there will be a little bit more capacity growth. But 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 into 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. So 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. So I think overall, that's an optimistic sign for the industry. I think we should be encouraged by that. And 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 and they had a state length increase and still RASK was flat. And I think that's a good sign for the market that we are able to produce those kinds of revenues. And I think as this the recovery gains momentum, as David said, it should bring good news. So in terms of capacity, I'm seeing pretty good discipline across the board. And 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 Habib Ziff with Raymond James. Hey, good morning. This is Matt Roberts on for Savi Sykes. Actually, my phone quickly cut out. So if I I'm asking something that was already asked, please just let me know. I apologize there. But first, in terms of the 3 tier, they're structured back to rollout on June 1. How long exactly do you think that will take to roll across the network? And what type of contribution are you assuming from that in your EBIT guidance? Yes. Hey, Matt. So in terms of the time it takes, it really depends on so there is no technical limitation to how long it takes. We could do it overnight if we wanted to. I think that 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 spot 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 airport and at check-in and things like that. So I think it's going to be the pacing item is going to be the customer receptiveness, how smoothly it comes across the airport and the check-in process and the boarding process and roller boards and carry ons and things like that. So we certainly want to do it as quickly as possible, but we're very cognizant that we want this to be a very, 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. So 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 the media anticipated. Okay, great. Well, thank you very much for the color there. And in terms of revenue in the guidance, we have nothing in there, 0 revenue from baggage fees in the guidance that we showed today. Line your EBIT guidance in terms of fuel and AI levels? Yes, Matt. Just we basically just taken the forward curve and we're about 20% hedged for the balance of the year at fuel prices that are above the forward curve. But 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. 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. 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. And 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 our very hardest to increase value here. That's really what we want. Our interests are aligned, and we want to make really the best company ever. So thanks again. If you have any questions, Andrea is always available. She can get questions to John. And 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 as a company. I think that's our goal. So 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.