Azul’s ‘Incredible’ Third Quarter

Edward Russell

November 15th, 2021 at 12:01 AM EST

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 Ft. Lauderdale, Lisbon, and Orlando 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 Airlines Group, 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 million 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

Gol Nears Full Recovery

Gol is joining the bandwagon to say the third quarter was the airline industry’s inflection point. But Gol goes one further, planning for an almost complete return of its pre-pandemic capacity by early next year.

CEO Paulo Kakinoff cited Brazil’s high rate of vaccination against Covid-19 as the main driver of the carrier’s prospects. More than half of Brazil’s population is fully vaccinated, and more than 70 percent has received a first dose. This positions Gol well for Brazil’s peak summer season, which is starting now.

Another factor in Gol’s favor is Brazil’s strong economic recovery, Kakinoff said. The country’s economy is growing at 5 percent annually, up from just over 1 percent last year, he said.

As with most carriers worldwide, leisure demand is leading the way. The carrier operated 53 percent of its 2019 capacity in the third quarter, but this was more than 80 percent more than it last year.  

But Kakinoff also was bullish on business demand and expects it to rebound in the first quarter of next year as Brazilian companies reopen their offices. Agribusiness and the petroleum industries have resumed travel. Gol is retooling its network back to more point-to-point flights to serve these communities. This is a shift from earlier in the pandemic, when the discounter switched to more connecting flights to serve leisure demand.

Gol is decidedly less bullish on international travel. First, given exchange rates, foreign travel had become more expensive for Brazilians and securing visas has been slowed by pandemic. Second, Kakinoff said he believed longhaul business travel may have undergone a structural change, and the market will be saturated with widebodies chasing after what little demand there is.

Gol could restart its U.S. flights by the second quarter of next year if demand returns. In the interim, it will rely on its codeshare agreement and expanding partnership with American Airlines for routes to the U.S., Kakinoff said.

The carrier used the pandemic to accelerate its transition to an all-Boeing 737 Max fleet. In August, it reached a deal with the airframer for 28 additional 737-8s, with deliveries expected to start next year. Gol expects the Max to comprise half its fleet by 2025. It could explore buying more, especially if Boeing is unloading white-tail aircraft, he said. Gol plans to end the year with 130 aircraft in its fleet, up from a planned 127.

As it takes Maxes, it will return 737-800s. Chief Financial Officer Richard Lark said the carrier has the bandwidth to induct two Maxes and divest two NGs every month over the next 12 months. Gol reported third-quarter revenues of 1.9 billion reais ($348 million), up 54 percent from last year. The carrier reported cash generation of 2 million reais per day, but it reported an adjusted net loss of 900 million reais for the quarter.

Madhu Unnikrishnan

Cargo Hands Korean Air Another Profitable Quarter

Korean Air is “getting ready to return to a more normal life,” as it tentatively adds flights as travel restrictions and quarantine requirements fall. But the carrier has the luxury to be tentative and gradual. It, unlike the vast majority of airlines around the world, has reported profits for several quarters since the early days of the pandemic.

The reason, of course, is cargo. Korean Air reported record third-quarter cargo revenues, beating its previous record by more than 100 billion won ($84 million). Korean Air’s reported 1.65 trillion won in cargo revenues for the quarter ($1.4 billion), up 62 percent from the second quarter. Cargo, in fact, accounted for the lion’s share of Korean Air’s $1.9 billion third-quarter revenue.

The trend is expected to continue. Korean Air cited maritime shipping’s capacity constraints, port congestion around the world, and worker shortages at both ports and shipping lines as reasons for the modal shift to air cargo. The carrier also is anticipating a busy holiday peak season for cargo and is building out capacity at its cargo hubs and developing new airports as logistics centers, it said in its third-quarter earnings report Friday.

Half of the company’s cargo revenue comes from the Americas, another 17 percent from Europe, and the remainder from the Asia-Pacific region, the Korean Air said.

Korean Air operates a fleet of 23 dedicated freighters (four Boeing 747Fs, seven 747-8Fs, and 12 777Fs) and at the end of the third quarter had converted 10 Boeing 777s and six Airbus A330s into “preighters.”

“Strong demand in cargo is not really satisfactory for us,” Korean Air Chairman and CEO Walter Cho said at the end of September. “I would really like passenger demand to come back up because that is the bulk of the business for us, and for the health of the industry.”

The airline expects “passenger demand to remain weak in the fourth quarter,” but it forecasts more countries will relax restrictions in the new year. Asia-Pacific remains the airline industry’s most challenging region, due to strict travel restrictions and quarantine requirements imposed by most of the region’s countries. Vaccination rates in Korea and the key market of Japan are rising, however, after a slow start earlier this year.

Korean Air has begun ramping up frequencies to popular leisure destinations that have relaxed quarantine requirements, the company said in its presentation. Korean Air began flying three times a week to Hawaii and four times a week to Guam in the quarter. It began offering charter vacation flights to Chiang Mai, Thailand, and Spain in the quarter. Passenger demand remains strongest to North America, followed by Korean Air’s domestic network.

The carrier’s acquisition of competitor Asiana is on track, after the company got regulatory approvals from the governments of Malaysia, Taiwan, Thailand, and Turkey. After securing approvals from all jurisdictions, Korean will acquire 63.9 percent of Asiana’s stock, with an aim to fully integrate that carrier into Korean Air within two years.

Korean Air reported a profit of $370 million in the third quarter, up 5,761 percent from last year. Revenues rose 44 percent to $1.9 billion.

Madhu Unnikrishnan

Frontier Looks Forward to Spring Break

U.S. discounter Frontier Airlines is looking past the holiday season to next spring for when the recovery will fully take root and begin to grow. Although its holiday bookings are strong, the periods around the holidays are soft, suggesting to management that the recovery is still fragile.

The Delta variant caused bookings to fall off in August and September, with lingering softness persisting into November, CEO Barry Biffle said during the company’s third-quarter earnings call. Office re-openings have been pushed back to the new year in many cities, crimping business travel, which sustains leisure-focused Frontier during the middle of the week. International travel remains low, due to travel restrictions and travelers being put off by the expense and hassle of PCR tests.

But Biffle believes new Covid-19 treatments in addition to more widespread vaccinations could spur demand, especially if countries drop testing requirements. Furthermore, by next spring most offices and schools will be back open, he said. By the time schools take their spring breaks next year, the recovery will be underway and lasting.

By then, Frontier will be a bigger airline, in capacity terms. It retired the last of its Airbus A319s in the quarter, and took delivery of five A320neos. It ended the quarter with 112 aircraft and has no deliveries scheduled for the rest of the year. Frontier will start taking delivery of the first of its 67 A321neos next year. In addition to the A321neos, Frontier has ordered 76 A320neos, with deliveries of both types expected to conclude in 2028.

The transition to a neo fleet has boosted the carrier’s fuel efficiency. The carrier gets 100 miles per seat for each gallon of jet fuel, or 100 ASMs per gallon. The four largest carriers in the country need between 35-40 percent more on average, Biffle said. The A321neos are expected to generate 110 ASMs per gallon.

Frontier is confident it can hire enough pilots and flight attendants to staff these new aircraft and the new routes the carrier has launched. It has had to raise wages and offer incentives for entry-level airport staff. But the workgroup that concerns Biffle the most is maintenance technicians. Given a national shortage of experienced maintenance technicians, Frontier is exploring ways to make its existing staff more efficient, Biffle said.

Frontier reported third-quarter revenues of $630 million, down from $669 million in 2019, but up from $245 million last year. The carrier reported an adjusted net loss of $24 million, when $72 million in CARES Act funding and other special items were excluded. For the fourth quarter, Frontier expects capacity to be 2-4 percent higher than 2019, but the carrier is projecting a loss for the period.

Madhu Unnikrishnan

In Other News

  • Latam Airlines Group narrowed its loss by 10 percent to $692 million in the third quarter from the quarter before. The Chilean group, which is operating under U.S. Chapter 11 bankruptcy protection, benefitted from strong demand in its domestic markets in South America, including Brazil and Chile. This helped lift revenues to $1.79 billion, a 156 percent year-over-year improvement though still down almost 51 percent compared to 2019. Cargo — like at many other carriers — was the sole bright spot in Latam’s third quarter results with revenues up by 44 percent to $361 million compared to two years ago. Unit revenues stood at 4.9 cents and unit costs excluding fuel 7.4 cents in the third quarter. Latam flew half of its 2019 capacity during the period with a fleet of 302 aircraft at the end of September.
  • AirAsia X creditors approved the long-haul low-cost carrier’s restructuring plan that will see it repay just 0.5 percent of its debt and end all existing contracts. As part of the restructuring, the airline cut its orders with Airbus to just 35 aircraft — 15 A330neos and 20 A321neos — from 108 planes, according to Reuters. Now, a court must approve the plan with the airline anticipating competing its recapitalization in the first quarter of 2022.
  • Singapore Airlines‘ first-half revenues rose 73 percent to S$2.8 billion ($2 billion), and the company narrowed its loss to S$619 million. Prospects are improving, as the airline’s home country has begun reopening to vaccinated travelers, allowing citizens from 14 countries to use the “vaccinated travel lanes.” Cargo remains a lifeline, with volumes up 56 percent from last year.
  • Turkish Airlines reported a $735 million third-quarter profit on revenues of $3.4 billion, which the carrier said is 15 percent below the same quarter in 2019. Capacity is back up to 81 percent of 2019 level. Cargo accounted for 28 percent of Turkish’s third-quarter revenue and is up 125 percent from 2019.

Edward Russell & Madhu Unnikrishnan

Edward Russell

November 15th, 2021 at 12:01 AM EST