A View Of Azul Linhas Aereas Strengths And Challenges

On Thursday, Azul Linhas Aéreas filed with the US Securities and Exchange Commission (SEC) its Form 20-F report for the fiscal year ended 2022. This has allowed us to take a look at a view of the company’s strengths and challenges. Azul’s strengths The Brazilian carrier closed last year with record operating revenue, although it posted a 722 million reais loss for the year. It was the only carrier in the country to rebound in terms of traffic compared to pre-pandemic levels. Azul is known for having the largest network in the South American country in terms of departures and cities served. It has around 1,000 daily departures to 158 destinations (more than 300 non-stop routes at the end of last year). In comparison, GOL and LATAM had 58 and 53 destinations each. This has made Azul the market leader in 92% of all its routes. [caption id="attachment_72469" align="alignnone" width="555"] Photo: Azul.[/caption] Last year, passenger revenue was 14.59 billion reais. This represented 91.5% of the company’s net revenue. The company intends to select new domestic destinations through a disciplined approach, employing its diverse fleet (composed of many aircraft types, from nine-seat Cessna to widebody-Airbus A330s and A350s). Strategic partnerships Going beyond the Brazilian borders, Azul has long-term strategic partnerships with United Airlines and TAP Air Portugal. United has about 8% of shares in Azul. As a result of Azul’s codeshare agreements with both carriers, customers have access to more than 200 additional destinations globally. Azul additionally has codeshare agreements with nine other airlines and 26 interline agreements globally. [caption id="attachment_72470" align="alignnone" width="580"] Photo: Azul.[/caption] In terms of fleet, Azul closed last year with 194 operating passenger aircraft. Going forward, the company intends to continue adding next-generation, more fuel-efficient aircraft, replacing older-generation jetliners. The airline expects to add approximately 32 Embraer E2 aircraft between 2024 and 2025, as well as 37 Airbus A320neo family by 2029, three additional A330neos between 2023 and 2026, and some A350s, although the exact number was not announced. Going forward, the airline also has a strategic partnership with Lilium to build an eVTOL network in Brazil. This potential commercial arrangement has a total value of up to US$1 billion and includes a fleet of 220 Lilium eVTOL aircraft. The anticipated delivery would commence no earlier than 2025 if it goes through. Azul’s challenges As happens with many airlines globally (and particularly in the Latin American region), Azul faces challenges and risks. One of the main challenges is the price of fuel. In 2022, Azul consumed 1.2 billion liters of fuel, with an average price of 5.44 reais per liter. The price per liter had a 5.44% increase compared to 2021. Due to the volatile oil prices, Azul has entered into derivative future contracts in the past and may do so from time to time. The airline also has the possibility of negotiating customized hedging products directly with fuel distributors, with the purpose of locking in the cost of the jet fuel the company consumes in the future. Other challenges include the high dependence of Azul on its three main hubs at Viracopos, Confins, and Recife. A material disruption at any of these hubs could adversely impact the company. In terms of risks related to Brazil, Azul points out exchange rate instability, the significant influence of the Brazilian government over the economy, and the deficiencies in Brazilian infrastructure, particularly in airports.

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