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Brazil’s Azul Buoyed by Strong Domestic Leisure Demand

Madhu Unnikrishnan
November 11th, 2021 at 4:01 PM EST

Azul Embraer E195

Brazil’s Azul pulled off a feat in 2021 that few airlines have done since the pandemic began. It reported unit revenues that were higher than 2019.

“Let me say that again, our unit revenue was higher than 2019,” founder David Neeleman said on the company’s third-quarter earnings call. “It’s truly incredible.” The carrier attributes its 13 percent quarterly increase in revenues per available seat-kilometer (RASK) to rebounding leisure demand in Brazil fueled by the country’s high rate of vaccination.

In the second quarter, Brazil was hit hard by a devastating surge of Covid-19. But since then, almost 90 percent of the country’s adults have had at least one dose of a vaccine. Starting in late July, Azul noticed an inflection point, when bookings started to accelerate along with the pace of vaccinations. Based on that, Azul had expected its RASK to exceed 2019 levels by the end of the fourth quarter, so it beat its own expectations by more than a quarter.

The carrier did so even when business travel remains 70 percent of its pre-pandemic level. The company’s executives were loath to predict when business travel will return in full, but noted that offices in Brazil’s major cities have re-opened and schools are back in session. Certain industries also have boosted the amount they travel. While the financial services industry is only traveling at about half of its pre-pandemic level, agribusiness, oil and gas, and infrastructure companies have been hitting the road again, encouraged by high commodity prices.

This tracks with what competitor Gol has seen in the market. But it benefits Azul particularly, as it has operates more routes to remote regions of the country. CEO John Rodgerson pointed out that Azul does not have major competition on 80 percent of its routes. Only 37 percent of Azul’s capacity operates the “Triangle” of São Paulo-Brasilia-Rio de Janeiro, while the remainder serves more remote routes.

Like Gol CEO Paulo Kakinoff, Rodgerson said a backlog of visas for Brazilian citizens is putting a damper on international travel. But Rodgerson observed that this is great for Brazil and for Azul. High-end leisure travelers who ordinarily would have gone to Miami, Paris, or London, are staying in Brazil for their vacations. “Brazilians through this crisis have fallen in love with Brazil,” he said.

And this shows in demand. Third-quarter leisure demand was 115 percent of 2019. Fares have risen as well, Chief Revenue Officer Abhi Shah said. The carrier has been raising fares slowly since the last wave of the pandemic receded. The carrier’s packaged-tour business has capitalized on this demand as well and allows Azul to utilize aircraft on weekends more than it did before the pandemic, Neeleman noted. System capacity was down 11 percent from 2019 but up 22 percent from the second quarter of this year.

International demand remains constrained. Azul will begin operating its Orlando, Ft. Lauderdale, and Lisbon flights daily from next month, but estimates international demand will remain about half of 2019 levels through the first two quarters of next year. If demand returns, Azul has the ability to bump up capacity, Shah said.

Rodgerson caused a stir earlier this month when he said Azul could seek to acquire all of Latam, and not just that carrier’s Brazil operations. He remains steadfast. “The macro situation promotes consolidation,” he said. “That’s the biggest story of all.” Rodgerson believes Azul’s strong third-quarter results will attract the attention of Latam’s creditors as it moves through the Chapter 11 bankruptcy process. “There will be more news to come,” he said.

Azul recently announced a partnership with FedEx that gives the U.S. cargo company access to Azul’s network and logistics operation, and allows Azul to ship packages on FedEx’s network. The partnership shows the continuing strength and growing importance of cargo to the carrier’s bottom line, Rodgerson said. Azul reported cargo revenues of 317 reais ($58 million), up 122 percent from 2019.

Azul reported third-quarter revenues of 2.7 billion reais, down 10 percent from 2019 but a 60 percent increase from last year. The carrier reported an operating income of 136 million reais, down 75 percent from 2019 and reversing a 400 million reais loss last year.

Madhu Unnikrishnan
November 11th, 2021 at 4:01 PM EST

Photo credit: Brazilians increasingly are taking vacations at home, fueling Azul's third-quarter results. Flickr / Alexandro Dias

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