Azul - Q2 2022
August 11, 2022
Transcript
Operator (participant)
Hello everyone, and welcome to Azul's second 1/4 2022 results conference call. My name is Rena, 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. 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 Thais Haberli, Head of Investor Relations. Please proceed.
Thais Haberli (Head of Investor Relations)
Thank you, Rena, and welcome all to Azul's second 1/4 earnings call. The results that we announced this morning, the audio of this call, and the Slides that we reference are available on our IR website. Presenting today will be David Neeleman, Azul's Founder and Chairman, and John Rodgerson, CEO. Alexander Malfitani, our CFO, Abhi Shah, our Chief Revenue Officer, are 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 matters 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 a company believes are reasonable but are subject to uncertainties and risks that are discussed in detail in our CVM and SEC files.
Also, during the course of the call, we will discuss Non-IFRS performance measures, which should not be considered in isolation. With that, I will turn the call over to David.
David Neeleman (Founder and Chairman)
Thanks, Thais. Welcome everyone and thank you for joining us for our second 1/4 2022 earnings call. As always, I would like to start by thanking our crew members for taking care of each other and our customers on more than 1,000 daily flights. Abi tells me that number is going to 1,000 flights by October. Amazing.
Thanks to our crew members' dedication, we achieved record second 1/4 results in what is seasonally the weakest 1/4 of the year. I'd like to remind you that Azul is one of the fastest and most profitable recoveries in the world and is the only airline I know of to deliver top line revenue 50% above Pre-pandemic levels. We continue to strengthen Brazil's largest network. Since 2019, we've added 35 new destinations.
We're the only carrier in 80% of the routes and we serve and are the leader in terms of departures in 88% of our markets. Our future growth will continue this laser focus on our network and what makes us strong. Our service to over 150 destinations contributes significantly to Brazil's development by providing opportunity, employment, trade links, and promoting tourism all over the country.
Our network's capacity is unique and supported by a flexible fleet, enabling us to deploy the right aircraft in the right market at the right time, as you can see on Slide 4. As you can also see on Slide 4, we ended the 1/4 with the largest Fuel-Efficient fleet in the region, representing 70% of our ASKs. This reinforces our environmental commitment and our ability to grow efficiently and profitably.
We could not be more enthusiastic about the continued runway ahead in our fleet transformation program. The continued upgauging of the next generation aircraft will drive down costs and resulting in higher margins. More news will be coming next week on the fleet transformation program, new developments. Before I hand it over to John, I wanted to end on Slide 5 by showing you why I'm so proud of this team.
We ended the 1/4 as the most On-Time airline in the Americas and the 1/3 most On-Time in the whole world. Our customer satisfaction scores are Industry-Leading and higher than they've ever been. All this while generating 19% more ASKs when compared to 2019, serving more than 150 destinations. Finally, a more efficient airline that is generating 11% more ASKs per FTE than before.
A truly incredible achievement by the entire team. I'm confident about the future of Brazil's aviation market, our ability to grow profitably, all the while creating the best experience for our crew members and customers. We have created an incredible business that is generating billions and billions of cash flow from operations, and the best is yet to come. With that, I'll turn it over to John to give you more details on the second 1/4 results.
John Rodgerson (CEO)
Thanks, David. I also want to thank our crew members. As a result of their incredible work, we're able to share these great results with you today. As you can see on Slide 6, the second 1/4 proved once again the strength of our business. Our Top-Line revenue more than doubled compared to the same period last year, reaching BRL 3.9 billion, an All-T
ime record revenue for any 1/4 in our history. Even more impressive is that revenue was up 50% compared to Pre-pandemic levels in what is seasonally the weakest 1/4 of the year. This achievement was a direct result of the strong demand environment in our network. PRASK and RASK grew 57% and 44% respectively, even with a 60% growth in our total capacity year-over-year.
We were encouraged by the revenue performance in the second 1/4 and continue to see positive trends in yields and bookings going forward. As you can see on Slide 7, our EBITDA reached BRL 615 million in the 1/4, representing a margin of almost 16%. If we used hedge accounting, our EBITDA would have been BRL 880 million in the 1/4, 20% above the same period in 2019. Let me repeat, including our fuel hedging gains, our EBITDA for the 1/4 was higher than 2019. This is including the 112% increase in jet fuel prices and the 26% devaluation of the local currency.
While we're seeing a very positive trend in revenues, we also continue to efficiently manage our costs. As you can see on Slide 8, productivity measured in ASKs per full-time employee increased 43% compared to the same period last year, and 11% versus second 1/4 of 2019. Fuel consumption per ASK dropped 3% versus last year and 10% versus second 1/4 of 2019.
Our fleet today is 10% more fuel efficient than 2019, and will continue to get more efficient going forward. Compared to second 1/4 of 2021, CASK ex-fuel decreased 12%, mainly driven by our fleet transformation, cost reduction initiatives, and productivity gains. We made a promise to you that we would emerge as a more efficient airline, and that is exactly what we're doing. On Slide 9, you can see that our immediately...
Our immediate liquidity increased by BRL 530 million during the 1/4 without a capital raise, driven by our strong operational performance. Our operating cash inflows surpassed our outflows by more than BRL 2 billion.
Total liquidity remains strong at BRL 7 billion, and we ended the 1/4 with BRL 4 billion in immediate liquidity, even after paying down BRL 1.7 billion in leases, loans, deferral payments, interest, and capital expenses. As you can see on Slide 10, we reduced our leverage in the 1/4 by 1.5 points to 6.2, which puts us in a good position to finish the year starting with a 5. Our leverage is the lowest in the region, even when using 7 times rent when accounting for operating leases.
As a reminder, Azul has the largest fleet of new next generation aircraft in the region, and since rent and lease liabilities increase as newer aircraft enter your fleet, that effect is already reflected in our numbers. On Slide eleven, you can see the strong booking trends continued through the 1/4. Our network advantages allowed us to quickly adjust fares to the volatile cost environment.
This trend continues, and what we're seeing now is bookings and revenue coming in at record high average fares. On Slide twelve, you can see how these positive trends set us up so well for the rest of the year. It's fair to say that demand for Azul's products and services has never been stronger. As I mentioned, we're currently seeing bookings at high average fares, the highest in our history, in fact.
This, combined with the recent favorable movements in currency and fuel, gives you a sense of the operating leverage and margin opportunities for the rest of 2022 and into 2023. Moving on to Slide 13, our business units, Azul Cargo, TudoAzul, and Azul Viagens further extend our competitive advantages.
These Fast-Growing, High-Margin businesses contribute to expand our Industry-Leading margins by leveraging the strength of our network and the flexibility of our fleet. Our cargo business continues to perform extremely well, with revenue almost tripling compared to 2019. TudoAzul maintained a strong growth pace during the second 1/4, with gross billings ex-Azul up an impressive 60% year-over-year. Finally, Azul Viagens had a remarkable 1/4. Revenue increased 70% compared to 2019, benefiting from the expansion of our dedicated flights.
For this upcoming summer season, for example, we will operate 2,000 flights exclusively for Azul Viagens. Each of these business units had a record revenue 1/4, and each one is on pace to generate well over BRL 1 billion in bookings just this year. Moving to Slide 14, another important development during the 1/4 was this, the decision by the regulatory agency, ANAC, regarding the slot distribution at the Congonhas Airport.
The combination of this new rule, along with an increase in capacity ahead of its privatization, is very positive in encouraging competition at the airport, directly benefiting Azul customers. We believe that through these initiatives, Azul may more than double its daily departures at this airport over the next few years. To wrap up on Slide 15, I couldn't be proud of our entire Azul team. We are running an incredible operation, as David noted.
We're the most On-Time airline in the Americas. Our customers love to fly us, and our crew members love their work. We're executing on our fleet transformation plan, and the demand environment has never been stronger. Our business units are all producing record revenues, and we are emerging as a more efficient airline. We're truly excited about the opportunities ahead of us. With that, we'll turn it over for your questions.
Operator (participant)
Ladies and gentlemen, we now begin the Q&A session. If you want to ask a question, please press star one. Please hold while we gather the callers' requests. The first question comes from Savi Syth with Raymond James. Please go ahead. Please, Miss Syth, you may proceed.
Savi Syth (Managing Director, Global Airlines)
Hey, could you hear me?
John Rodgerson (CEO)
Yes.
Abhi Shah (CRO)
Yes. There we go.
John Rodgerson (CEO)
I can now.
Savi Syth (Managing Director, Global Airlines)
Oh, okay, great. I'm not sure what happened there. I was not on mute. Yeah, good afternoon, everybody. Just, Abhi is around. I'm just curious if you could share any color on the corporate demand recovery side and just the health of leisure demand. I am trying to understand, you know, just how sustainable, you know, the fare levels and the maybe the momentum that John talked about is here.
Abhi Shah (CRO)
Yeah. Hey, Savi. Abhi here. Yeah, absolutely. Look, overall, we were very happy with the performance in second 1/4. You know, increasing RASK 25.5% on a 19% ASK increase, you know, is obviously a very strong indication of demand levels. Actually, what's even more exciting is what we're seeing right now. Just the last 2 weeks, for example, as people have come back post-July holidays, the average fares the last 2 weeks have been the highest in our history in terms of the bookings, which has been very, very strong. It's been corporate and leisure. I'll give an example.
Our vacations business, Azul Viagens, actually had higher bookings in July than it did in June, even though July is the month that you actually travel. Which is a really good indication that the leisure market is strong and is already looking ahead to the second 1/2 of the year and the summer season. Corporate as well is coming back strong.
We are right now over 100% in corporate revenue, between 100 and about 130% in corporate revenue. Breaks down to about 80% in corporate volume and +50% in corporate average fares. Even with that great performance, there's still more corporate volume recovery that's going to happen in the second 1/2 of the year, which is seasonally the strongest. Lots of events.
Our group's revenue is right now the highest it's ever been. Our small and medium business revenue is higher than it's ever been. A lot of great events happening second 1/2 of the year and a lot of corporate movement. If you look at the Abracorp data, which is the corporation of the association of corporate travel agencies, in June, we had the highest revenue of the 3 airlines in Abracorp.
Our average fare, which already was the highest, actually grew the most as well. Even when you include that, we had an 81.8% load factor in July. We're not seeing any traffic pressures in terms of having to sacrifice fares to get traffic for the foreseeable future.
In fact, I think, you know, what we're talking internally with our teams is, let's keep testing the market. Let's see how much more there is in terms of demand, how much more there is in terms of average fares, because the average fares that we are seeing are very, very strong, and demand looks to be very sustainable. You know, I think everything is set up really well.
Finally, if you compare our average fares to the last week of February, which was the week before the war, heating oil is 15% above, the dollar is 2% down, and our fares are 52% above. That gives you an idea of given the seasonality, given this bookings and fare momentum and the macroeconomic support, you know, how much we can improve kind of going forward.
Savi Syth (Managing Director, Global Airlines)
That's very helpful and encouraging. If I might, you know, I realize that there was no EBITDA update in this call. Just curious, I know things have been volatile, and that's maybe a moving target given the moving parts. Curious if you have any updated thoughts there and any financing thoughts related to that.
John Rodgerson (CEO)
Yes, Abhi. You know, we debated it pretty heavily, and obviously fuel was up a lot in the second 1/4. These recent fuel price movements, you know, there's a lag in when they kind of come off, and we see the benefit. We just kind of want to reiterate the amazing revenue performance we're having right now, and we feel as strong as ever about this business going forward. Nothing has fundamentally changed. You know, is it gonna be BRL 4 billion? Is it gonna be slightly below that? You know, it's. We're not that far away. We still have 1/2 the year to go, and we feel very strong about the business overall.
We just didn't want to put a number out there given that we're 45 days away from an election and things like that. Nothing's fundamentally changed in our business. We feel very strong about where we are today. I think that, you know, that sets us up nicely for 2023 and beyond. We feel very good. I think the cash flow generation that we had in the 1/4 is a testament to just how strong this business is overall.
I think a lot of people were concerned about that and, you know, focused on that. You know, there's a lot of positive things in the seasonally weakest 1/4 of the year with, you know, fuel prices that have never been seen before in Brazil, right?
Remember, when fuel was at $140 a barrel, you know, 14 years ago, you know, the real was at 2 to 1. You know, now the real is at 5 to 1. We've been able to significantly increase fares.
Alexandre Malfitani (CFO and Investor Relations Officer)
Yes, Abi, this is Alexander. You know, we see, and I think a lot of you agree, and we see that in the models, this is essentially a steady state, 30% EBITDA business, right? You know, we see it when we talk to you. Some of you have us in the high twenties, some of you have us in the low thirties, but obviously not this year, right? I think that's the challenge. You know, we know that steady state, we are a business that can generate that much EBITDA, that much operational cash. With our size today, that would actually mean about BRL 5 billion of EBITDA in the year.
It is admittedly hard, you know, with everything that's going on with fuel, you know, with what we have, you know, 2 years of a pandemic, of kind of nailing down exactly how much of that recovery and how much of our full kind of, you know, profitability potential we can generate within a calendar year. When things happen, like we had, you know, on the day of our last earnings call, when we had the, you know, Russian invasion, you know, things shift around, right? As you mentioned.
Like John said, we discussed a lot. It's really about EBITDA. I mean, everything else in our guidance is very much on track. Probably our full, you know, EBITDA generation capability has shifted, you know, 3 or six months to the right.
The business remains very solid, and we're proving that we can pass through cost increases to fares. We proved that we can access cash. I think that's all clear in our Q2 financials.
Savi Syth (Managing Director, Global Airlines)
Appreciate that. Thank you, everyone.
Thanks, Abhi.
Operator (participant)
The next question comes from Josh Milberg with Morgan Stanley.
Josh Milberg (Analyst)
Hey, everyone, thank you for the call and also congrats on the results. This relates a little bit to Savi's question on the funding side, but related to the BRL 1.7 billion you highlighted in payments, leases, deferrals, and other items. I just wanted to ask if you could touch on, you know, what you're expecting over the remainder of the year and also the potential for new deferrals of payments to lessors and to suppliers. If you could, in a little more detail, I think this question is for Alexander.
Alexander, just give an update on, you know, the different funding options that you're looking at today and also touch on the status of the code share with United. If you could-
Alexandre Malfitani (CFO and Investor Relations Officer)
Sure.
Josh Milberg (Analyst)
If you could, you know, address that would be great.
Alexandre Malfitani (CFO and Investor Relations Officer)
Yeah. We'll talk about United. Josh, I think a lot of this is a bit of a circular reference, right? Because I think we've demonstrated that we'll adapt to whatever, you know, conditions are thrown at us. If we generate more EBITDA, you know, we can spend all of the CapEx that we, you know, want to spend, that we would like to spend to prepare for the future, and we don't need to access, you know, significant cash from banks or suppliers.
If we generate less EBITDA, then we can adjust on the CapEx side, and we can certainly access cash if we need to. Obviously, you know, and that's not even including the capital markets, right?
If the capital markets were available to us, which today we don't think they are, that's sort of the main avenue or the main source of capital. You know, if we do need cash more than we expect, and if the capital markets are not available to us, which at some time they will be, then, you know, we'll adjust. You know, we demonstrated, I think this 1/4, that we can access capital from our banks.
You know, we can maintain our payables around 100 days, which is the guidance that we gave you pretty much in the beginning of the pandemic, right? That, you know, payables would go up because we got a lot of support from our partners, but then they would gradually converge down to 100, which is roughly where they are today.
You know, they can go up maybe 10 days, go down about 10 days. You know, we know that's a reliable source of working capital. You know, we know that we can count on our suppliers because our suppliers can count on the heavy operational cash flow generation that we have. You know, they make a lot of money by supporting Azul.
You know, we can make a lot of money together going forward, and so we know that we can access. The answer, you know, Josh, I think is, you know, I think it's more on in the past than in the future because we got, you know, all the forecasts wrong. We underestimated how quickly demand could come back.
You know, nobody saw, you know, what could happen with oil prices and with the war in Europe. It's hard for us to predict in the future what is going to happen and what will need to happen. I think it's clear from the past, and especially from this 1/4, that whatever happens, we will be able to access whatever cash we need.
John Rodgerson (CEO)
Hey, Josh, I just want to reiterate a couple points. You know, this business is generating billions of operating cash flow. We showed a number today of BRL 4 billion in cash and immediate liquidity if you include our receivables. More than double what it was in 2019, right? We've positioned ourselves in a very good position going forward.
We, you know. If I were to tell you we were gonna be up 50% compared to 2019 in the year 2020 or 2021, you would have thought I was smoking something, right? We delivered way above the expectations of any analyst in terms of revenue, and we feel very strong about our business going forward. You know, I think we're very bullish, and I think our partners are as bullish as ever on Azul.
You know, I think the way we, you know, showed cash flow generation in the second 1/4, it beat everybody's model as well. We feel very strong about our ability to execute. Remember, Josh, we went through a period of eight months with no revenue, right? We got through it. You know, we had our crew members, everybody kind of rallied around.
This is a fantastic business that's delivering great results, delivering unbelievable on time performance, that's got crew members engaged. We feel very good about our business on a, on a go-forward basis. You know, cash will take care of itself as we continue to run a great operation and continue to raise revenue. As for United Airlines, United has been a great partner of ours. They've been a partner for a long time.
We're still talking to them, but there's also other great partners out there that we're talking to. You know, we see what's happening with, you know, JetBlue and Fort Lauderdale with Spirit, really important partner of ours as we add our international flights into Fort Lauderdale, right? There's a lot of feed that comes in there that strengthens our long-haul network. You know, we'll continue talking to our partners, but the code share with United stays in place, and I think they're happy with it, we're happy with it.
Josh Milberg (Analyst)
Okay, great. Thank you for all that color.
Alexandre Malfitani (CFO and Investor Relations Officer)
Thank you.
Operator (participant)
The next question comes from Alejandro Zamacona with Credit Suisse.
Alejandro Zamacona Urquiza (Associate, Equity Research)
Thank you. Hi, David, John. Hi, Alexander. Thank you for taking my questions. Regarding pricing and yield environment, I mean, is it fair to expect an even stronger yield for the second 1/2, considering that there is usually a lag to reflect the higher jet fuel costs? Also, do you have any expectations beyond what we can see in 2022, considering the eventual cost normalization in fuel?
John Rodgerson (CEO)
Yeah. Hi, Alejandro. You know, regarding the pricing environment, you know, good bookings at high fares will lead to, you know, great flown revenue at high fares. And also we're supported by the seasonality, second 1/2 of the year. In terms of flown revenue, yes, it is very much possible that you will see higher yields and higher average fares in 3Q and 4Q. And that's certainly what we're booking towards. And the seasonality, the corporate recovery, the demand environment, all of the economic activity that will happen in Brazil over the next six months definitely points to that. It's you know, we are getting into our peak season, our spring and summer.
Which is historically the best seasons of the year, which is very, very supportive of this current pricing environment and even a further improvement in the pricing environment.
Alexandre Malfitani (CFO and Investor Relations Officer)
Yeah. On the cost side, as you all know, there is a lag between, you know, what we're seeing on the screen in terms of oil prices and the currency and the price that we pay for jet fuel. You know, July and August jet fuel prices will probably be, you know, our peak from what we can see right now. But then you will see a downward trend in jet fuel prices, you know, assuming everything stays the way it is or even if things improve from where they are.
Right? You know, we could have a very favorable environment in the second 1/2 with fares going up due to the strong demand environment and the positive seasonality and fuel prices going down from the improvement that we have already seen taking place.
Alejandro Zamacona Urquiza (Associate, Equity Research)
Sure. Yeah. Okay. My second question, if I may. In terms of capacity, do you have any preliminary expectation for 2023?
Abhi Shah (CRO)
We haven't closed our plan yet, but you can expect something similar to what we're gonna do in 2022 versus 2019. You know, we expect to finish this year between 10% and 12% over 2019, so possibly something similar 2023 over 2022.
Alejandro Zamacona Urquiza (Associate, Equity Research)
Do you mean something similar in terms of the capacity?
Abhi Shah (CRO)
Yes
Alejandro Zamacona Urquiza (Associate, Equity Research)
... 2019 or in terms of growth?
Abhi Shah (CRO)
Oh, no. 2023 versus 2022 will be similar with,
Alexandre Malfitani (CFO and Investor Relations Officer)
Growth
Abhi Shah (CRO)
growth, 2022 versus 2019.
Alexandre Malfitani (CFO and Investor Relations Officer)
Yeah. Somewhere in the low teens, I think, you know, it would be kind of a working assumption. We still need to nail it down and, you know, we'll see if we provide some firmer guidance. I think that's. You know, with our fleet transformation, you know, if you remember, you know, we're going to be essentially replacing still a lot of old generation jets with next generation jets. They have more seats, they have lower rent, and they burn less fuel than the old generation aircraft.
We can increase capacity by keeping the fleet essentially stable. You will see more seats flying. We can get higher utilization of these assets. We could even, you know, stimulate fares with the lower unit cost that those aircraft will provide.
It's something we're very excited about and, you know, most of our growth comes from that, from the upgauging. Most of the growth, if not all of the growth, happens in the markets where we are strong, right? It's in the Azul network. It's not gonna steal share from other competitors. It's really upgauging in the routes that we already fly.
Alejandro Zamacona Urquiza (Associate, Equity Research)
Okay. Thank you.
Operator (participant)
The next question comes from Pablo Monsalve with Barclays.
Pablo Monsalve (Analyst)
Hi, guys. Thanks for taking my question. I have a quick question on the lease payables. I mean, I see the number that you provide in your financial statements, but I just... For modeling purposes and capital purposes, I wanted to see if that's the right number we should think about. Or, I remember there were some deferred payments that we have to take into consideration, and you have already talked about some negotiation with the lessors. Can you just shed some light on in terms of lease payments for next year? Thank you.
Alexandre Malfitani (CFO and Investor Relations Officer)
Sure. I think, you know, the easiest way to think about it, Pablo, is our steady state, you know, rent under current size and current foreign exchange is roughly kind of BRL 3.2 billion. You'll see that this year we're actually gonna pay more than that because we had the second wave negotiation with lessors, you know. The first time when we negotiated with lessors, we negotiated a big number with a big extension because obviously there was a big impact from the pandemic, from COVID-19.
But we didn't assume a second wave, right? When the second wave happened, we negotiated a shorter deferral for a shorter period of time, which was essentially shifting some rents from 2021 into 2022.
In 2022, we're already paying more than that BRL 3.2 billion, and we're paying roughly what we're going to pay in 2023. Because in 2023, we start paying the first deferral of leases, which will increase our steady state leases by about BRL 500-600 million, right? You know, essentially we're paying about BRL 3.8 billion this year, and we should be paying around BRL 3.8 billion next year as well. That's roughly, I think, a good way to model the annual rent payment.
Pablo Monsalve (Analyst)
Perfect. I have another question, if I may. I mean, we have asked a lot about the sustainability of your yields, they have been actually very impressive. How are you seeing the competitive environment? I mean, are the other guys actually following you? Are you seeing, like, a rational behavior? Or, do you think that some of your competitors may take advantage of just charging low fares to be more competitive and steal some market share? Thank you.
Abhi Shah (CRO)
Yeah. Hi, Pablo. You know, I think the industry overall is pretty competitive. I think that all of the competitors, all of the airlines are trying to do what's right, I think mostly within their own networks and within, you know, their strengths. I think that, you know, what the industry has achieved in terms of fares since the start of, you know, end of February has been great and remarkable actually.
You know, we have the benefit that we are alone in so much of our network, so we can always do it ourselves if we need to, and we do those changes all the time. So we are less dependent on them in controlling our own destiny. I would say the overall.
Alexandre Malfitani (CFO and Investor Relations Officer)
The industry has been pretty disciplined and, you know, I think we're continuing to be so. I think we're all looking for good results here.
John Rodgerson (CEO)
Pablo, I would just wanna add, you know, we're in a hostile fuel environment, and the guy that has the most nextGen aircraft is in a privileged position, right? If you say 70% of our ASKs are coming from NEOs and E2s, and our competitors, you know, are significantly less than that. They need higher fares, right? I think that, you know, we don't see anybody kind of doing crazy things, going after market share 'cause it's not in their best interest to do it, 'cause they would bleed significantly because they don't have the right aircraft type, kinda given the hostile fuel environment where we are today.
Alexandre Malfitani (CFO and Investor Relations Officer)
Super clear. Thank you very much, guys.
Operator (participant)
Thank you. Our next question comes from Daniel McKenzie, Seaport Global.
Daniel McKenzie (Senior Analyst)
Oh, hey, thanks, guys. Congrats on the 1/4 here. To put a finer point on the pricing feel, sequentially stronger yields in the back 1/2 of the year that, you know, you've kind of been referencing to prior questions, you know, can you get the profitability in the fourth 1/4? You know, just to put a finer point on cash, you know, excluding accounts receivable, so cash in the checking account, so to speak, short-term investments, you know, where do you expect to end the year?
Alexandre Malfitani (CFO and Investor Relations Officer)
Okay, let me start with the cash, Daniel. Thanks for the congratulations. You know, we really model our cash looking at you know, cash plus receivables because I can transform my receivables into cash. I would just waste money doing that by paying you know, interest expense that I don't need, right? You know, like we've said, and I think those of you that are familiar with the way you know, we sell tickets in Brazil, a lot of the tickets are sold in installments in credit cards.
That credit card you know, once we've flown that ticket, and we fly that ticket fairly quickly because Brazilians buy very close in, right? The majority of our credit card receivables, we've already flown that revenue.
I can call, you know, the bank in the morning, and by lunchtime, the money will be in my account. I'm gonna pay, you know, risk-free rate plus, you know, 1 or 2 percentage points, which, if I don't need to do that, I won't do that, right? You know, I think we mentioned that in the previous calls. I mean, you know, a lot of, you know, the cash position at the end of the year will depend on EBITDA, will depend on oil. We feel comfortable that we will have a cash position that is roughly where we ended 2019, if not above, right? We've been actually carrying more cash than we had Pre-pandemic.
If we have as much cash as we had Pre-pandemic, I mean, if some of you may remember that when we were before the pandemic, we were getting some, you know, suggestions from investors to actually start paying dividends and returning cash to shareholders. If we can end any 1/4 after the pandemic with as much cash as we have then, it is a very healthy cash position.
John Rodgerson (CEO)
Daniel, just to kinda highlight, you know, we were 1.5 turns down in leverage, Q1 into Q2. We're gonna be down again as we go into Q3 and into Q4. The use of the cash is to deleverage, right? You know, the operation, as I stated earlier, is generating an enormous amount of cash. Any cash uses above and beyond that is to deleverage the business, which is a good use of cash.
Alexandre Malfitani (CFO and Investor Relations Officer)
Yeah. The Q4 profitability goes to the EBITDA question, right? I mean, you know, if we delivered on 4 billion EBITDA, you know, that will tell you kinda what the Q4 profitability will be. I think our difficulty, again, with nailing down the short-term profitability kinda leads to, you know, a difficulty in saying is exactly how much.
But Q4 is normally our best 1/4 in the year. Everything that we see points that Q4 2022 should be the best 1/4 in the year in terms of profitability. You know, fares are going to be up because of seasonality and because of the strong demand environment. Assuming oil and FX stay where they are, fuel prices that we will be paying in the fourth 1/4 will be down from what we paid in Q2 and Q3.
That should point to a very profitable Q4, which should give us very great momentum into 2023 as well. Right? We're very excited about that.
John Rodgerson (CEO)
Brazil is expected to win the World Cup in the fourth 1/4 as well, Daniel. A lot of people celebrating after that happens. We're pretty excited about that.
Alexandre Malfitani (CFO and Investor Relations Officer)
Yeah.
Daniel McKenzie (Senior Analyst)
A lot to drive profitability there, right. Well, thanks for that. I appreciate that. In the script, you mentioned a fleet transformation announcement coming next week, so I'm not sure if the numbers are correct in the financial statements this morning. But as best I can tell, it looks like there's about 133 aircraft on firm order.
I guess my next question is, you know, how many are coming in 2023, how many in 2024, and, you know, how many do you plan to retire, and, you know, what does that imply for 2023 growth and CapEx? It, you know, from the financial statements, it looks like CapEx should be flat next year, but I'm not quite sure how to triangulate that with the script this morning.
John Rodgerson (CEO)
You know, Daniel, it's in our best interest to accelerate fleet transformation, and that's what we're gonna be looking at. There's opportunities in the market. You know, we have a lot of aircraft that are gonna do lease returns over the next 36 months, and so we're looking at ways to potentially accelerate that, and that's what David was referencing. David always gets ahead of himself and kind of pushes us there and so. There's a lot of good news on that front. You know, as we look to get into 2023, I think you're gonna see us flying more next generation aircraft, right?
As Alexander said, maybe net, we're about the same or up a couple of shelves, but with a lot more next generation ASKs in there, which again, further pushes our competitive advantage in the market.
Alexandre Malfitani (CFO and Investor Relations Officer)
Yeah, I think that's another source of flexibility that we, you know, negotiated during the pandemic. You know, I think we're comfortable keeping the fleet, you know, constant, I think, because we have the ability to accelerate deliveries, right? You know, there's certainly enough demand for us to keep the fleet constant.
Then, you know, we don't need to over-commit to capacity. As we see demand firming up, and with that we know that we can demand, you know, for a long period of time, then we can accelerate additional aircraft from our order book. I think that's a very, you know, rational way to manage the, you know, possible volatility that we can see in demand in Brazil, right?
Kind of, you know, have to be essentially short ASKs, but have the ability to increase ASKs easily once demand firms up.
Daniel McKenzie (Senior Analyst)
Understood. How do we think about CapEx next year?
Alexandre Malfitani (CFO and Investor Relations Officer)
I think if you assume something flat to this year, that's reasonable. As I think most of you know, you know, our CapEx is essentially maintenance CapEx. The delivery of aircraft in 2022 and 2023 will all be operating leases, so there's no cash outflow regarding those deliveries. It's really engine maintenance that we're talking about when we're talking about CapEx. You can assume something flat this year.
John Rodgerson (CEO)
A portion of that can always be financed as well, you know. I think that that's something that you need to keep in your model as well.
Daniel McKenzie (Senior Analyst)
Yep. Understood. Thanks for the time, you guys. Great job.
John Rodgerson (CEO)
Thanks.
Operator (participant)
Thank you. Our next question comes from Michael Linenberg, Deutsche Bank.
Shannon Doherty (Analyst)
Hi. Yes, this is actually Shannon Doherty on for Mike. Thanks for taking my questions and great job this 1/4. Alexander, maybe one for you. I think you know around this time last year, you were expecting your unit costs excluding fuel to be below 2019 levels for the full year. Now, obviously a lot has happened since then on the macro side and, you know, as mentioned before, you know. With the progress that Azul has made on productivity gains and the cost savings thus far, combined with the 10%-12% growth rate that you kind of outlaid for 2023, would you say that this target is achievable by next year?
Alexandre Malfitani (CFO and Investor Relations Officer)
Yes. I think so. There's certainly, you know, further improvement on our unit costs that we can get just by the fleet transformation. Like I said, we're going to pay less rent on each E2 that comes in than we pay on each E1 that leaves. They will generate more ASKs, they have more seats, and they burn less fuel, and they're more productive as well, right? We can get more productive at airports. We can get more productive with pilots and flight attendants, right?
We're gonna continue pursuing opportunities like we did over the last couple of years, right? I think we are encouraged by the fact that, you know, even though we consider ourselves an efficient airline, wherever you look, there is opportunity. You know, you can manage processes better, you can invest in technology.
There's just a lot of stuff that we're going to, you know, continue pursuing, essentially forever, right? To keep our costs as low as possible, because that is, you know, necessary, for us to continue, expanding margins. You can count on the unit cost reduction from fleet transformation, and you can count on us continue to pursue, other efficiency opportunities around the organization.
John Rodgerson (CEO)
You know, I just wanna highlight, we've got very engaged crew members. Engaged crew members help us deliver a fantastic experience. I mean, you see the problems that the U.S. carriers are having, the European carriers are having right now, and look at what a great operation we're running in more than 150 cities in Brazil with a diversified fleet type.
You know, a couple of things. You know, we're building new hangar, you know, in Confins, right? We saw all of the benefit that our hangar provided for us in Campinas. We're gonna do that again because we have more work to be done, so there's more things that we can bring in-house at a much cheaper cost.
I just think having great people that are very engaged in working with us, you know, provides for additional opportunities to make this airline a much more efficient airline going forward.
Shannon Doherty (Analyst)
Got it. Thanks. That's helpful. You know, maybe to Abhi or John, are you able to comment on how you plan to use the additional Congonhas slots that you expect to get over the, you know, coming years or quarters? I understand it's a busy airport in downtown São Paulo, but, you know, it also has a strong corporate foothold, so any color that you can add would be helpful.
Abhi Shah (CRO)
Yeah. Hey, Shannon. You know, we haven't obviously finalized our network, but you can expect, you know, the large business market that we don't currently fly to, and also flying to our hubs. You know, we'd like to connect downtown São Paulo to our hub because that provides connectivity and access to destinations that today those customers don't have. It'll be a combination of the 2. Some in the large business markets, but also some very much flying to our hubs that further strengthens our network.
John Rodgerson (CEO)
Hey, Shannon, if I could just add, you know, we've got several customers that experienced Azul for the first time when we went into Congonhas. Now they fly us to Lisbon, they fly us to Fort Lauderdale. They experienced the great product on board the aircraft, the free Wi-Fi, the snacks, the TV, and they said, "Wow, you know, I'm willing to go out to Viracopos, I'm willing to go to other destinations."
They get into your loyalty program, they get your credit card. So as you expand the Congonhas Airport, you know, there's just more and more people that Azul becomes their number one airline. I think that's fantastic for us going forward.
Shannon Doherty (Analyst)
Great. Thanks, guys.
Operator (participant)
Our next question comes from Stephen Trent, Citi.
Stephen Trent (Managing Director, Americas Airline Research)
Hi guys, good morning or afternoon, and thanks for taking my questions. I have 2 questions on my side. One is regarding a Non-ticket revenue. Could you share some your expectations on medium to long-term possibility of revenue generation and revenue growth in terms of those opportunities like cargo to Azul and et cetera? The second question is regarding expectations on more M&As in South America markets. Thanks.
Abhi Shah (CRO)
Yeah, I can start with the first part. Thanks for the question. Yeah, I mean, you know, our business units are growing faster than the airline overall, and so they will continue to contribute in a more meaningful way as we go forward. You know, cargo, for example, almost tripled in revenue from 2Q 2019 to 2Q 2022, and we've just actually started to put our E1s, our dedicated Embraer aircraft into service. We have 5 of them flying right now.
Hopefully we'll have more, you know, pretty soon. So we're excited about those opportunities, and as we've said before, there is a large road market that a lot of those goods could be converted to air. You know, for example, we just started with Shopee, for example.
You know, we're starting to onboard other large customers as well. We're excited about cargo, and we think that growth is gonna continue to be, you know, above average for the next few years. Our loyalty program hit a record in July in terms of monthly active users. Lot of engagement. Our billings, you know, ex-Azul are up, you know, 60%-70%.
We're seeing a lot of engagement. As we bring back the network, as we bring back our international network, those customers wanna redeem those points. You know, we saw in the pandemic, they were redeeming for coffee machines and AirPods, and now they're redeeming for travel and that trend is gonna continue. I think probably, you know, the highlight so far this year has been our vacations business.
We'll have 2,000 flights dedicated this summer season. It's almost gonna be doubling this year versus 2019. Just a lot of new city pairs, a lot of new network opportunities. As we've said before, this allows us to fly the aircraft on the weekends that other times that we don't have those opportunities. It's very accretive in other ways as well. I think those businesses are gonna grow at a faster rate than the airline overall and keep contributing.
John Rodgerson (CEO)
Yeah, as for the M&A, you know, we've never felt better about our standalone plan. You know, keep in mind this airline is 50% larger in terms of revenue than it was in 2019. We've got this new generation fleet coming on. We now have access to the Congonhas Airport, so we feel very good about where we are. Obviously, we'll always look at opportunities, right? That exist in the markets.
We think some of the moves that we've seen in Latin America are very healthy. We think all airlines in Latin America need to focus on profitability, and that's a good thing going forward. Really no news and we're focusing on our standalone business at this time.
Stephen Trent (Managing Director, Americas Airline Research)
Great. Many thanks for the answering that.
Operator (participant)
Thank you. Our next question comes from Lucas Barbosa, Santander.
Lucas Barbosa (Analyst)
Good afternoon, everyone. Congratulations for the results. John, I hope you're right about Brazil winning the World Cup. I have a question on balance sheet, maybe for Alexander. Is the ATL line expansion just a reflection of the normal business seasonality and future price expansion, or was there any campaign that accelerated forward bookings?
Maybe another way to ask it is, do you think you can maintain the BRL 4 billion of ATL by year-end, given the increase in ticket prices and higher capacity going forward? I'll do my second question later. Thank you very much.
Alexandre Malfitani (CFO and Investor Relations Officer)
Great. Thanks, Lucas. Yeah, I think if you look at the ATL in terms of, you know, days of sales, you're going to see that since fourth 1/4, it's essentially flat, right? It may go up a little bit, down a little bit, but it's kinda hovering around the same number. So most of the increase in ATL is the increase in sales, really. I mean, there's some seasonality, right? For example, normally in Q1, we don't sell a lot, but we fly a lot. Normally in Q2, we sell a lot but don't fly a lot. So it's normal also for you to see an increase in ATL in the quarters where sales are strong but, you know, we don't fly as much.
Yeah, we believe that, you know, if you look at the ATL in terms of, you know, days of sales, you can expect something pretty constant and something. That means that the balance in ATL should actually grow as we continue growing our revenues.
John Rodgerson (CEO)
Yeah. I just wanna highlight another thing, and Abhi will give the exact numbers, but, you know, what percentage of our international network was being sold in first 1/4 and second 1/4 versus 1/3 1/4 and fourth 1/4, right? As the restrictions to fly internationally have dropped in Europe and the United States, we've seen an uptick. As you go into the 1/3 and fourth 1/4, you know, international revenues come on very strong. We haven't talked about that. That's obviously very positive for ATL because those bookings are a lot farther out.
Abhi Shah (CRO)
Yeah. Overall, you know, we're gonna be finishing the first 1/2 of the year, we were probably at 40%-50% international recovery. We will finish the year closer to 80%-90% international recovery and getting to 100% by first 1/4 of 2023. That's gonna be very helpful in driving those forward bookings as well.
Lucas Barbosa (Analyst)
Super clear. Thanks for the answer. Since I raised the point on forward bookings, on the first question, can you give us some color on how you're seeing the pricing on forward bookings in the second 1/4? The PRASK was 20% higher than 2Q 2019. From what you're seeing on booking so far, can we see a comparison to Pre-COVID PRASK becoming even higher in the next quarters?
John Rodgerson (CEO)
Yes. Our expectation is that 3Q will be even higher than the 25% in 2Q.
Lucas Barbosa (Analyst)
Super clear. Thanks very much. John, I hope you're right about it, the World Cup. Thank you.
Operator (participant)
Our next question comes from Pablo Monsalve, Barclays.
Pablo Monsalve (Analyst)
Hi, guys. Apologies for asking one more question. I was just taking a look at your balance sheet, and you are putting something called debt or risk for BRL 660 million. I just want to have more color on what is exactly this metric that you're putting. Thank you.
Alexandre Malfitani (CFO and Investor Relations Officer)
Hey, Pablo. Yeah, it's you know what we mentioned you know a few answers ago. This is. We can get support from our suppliers, for example, you know, to get better terms. Sometimes, you know, there's a win-win that can happen for both us and the suppliers because we essentially pay a lower interest than our suppliers.
Sometimes suppliers have a much harder access to capital than we do, right? This is essentially supplier financing, where you know sometimes I can negotiate an extension with a supplier from 30 days to maybe as long as 120 days, but then that supplier can go and finance themselves you know with a bank. We're essentially using bank risk, so that also shows our access to credit you know directly with the banks, right?
It's essentially another source of capital, another source of, you know, cash that we can access if we need to.
Pablo Monsalve (Analyst)
Okay, thank you.
Operator (participant)
Our next question comes from Guilherme Mendes, J.P. Morgan.
Guilherme Mendes (Analyst)
Hey, guys. Good afternoon. A quick one here. Just in terms of fuel hedging, if you could comment on your fuel hedging strategy going forward, that would be great. Thank you.
Alexandre Malfitani (CFO and Investor Relations Officer)
Hey, Guilherme Mendes. We have a policy that we can hedge up to 40% of our next 12 months exposure. Right now we're at about high teens. Fifteen, a little bit over 15%. We've been using forward contracts up to this point.
That's the reason why you're seeing the big positive result that we had. This is actual cash that we can access if we need to. We look a lot at what the industry is doing, right? We're not trying to convince you that we're going to guess better than the market, whether oil prices are gonna go up or down.
We essentially want to protect the, you know, tickets that we have already sold, which have, you know, obviously their fares are already locked, and to any kind of volatility in fuel prices that we may have between selling that ticket and flying that ticket. We also look a lot at what the industry is doing, and the industry is fairly under-hedged right now.
I think overall, we look at hedging as insurance. You know, we expect to lose money in insurance. We expect to lose money in hedging. Not a lot on either one, you know, but it's not a profit, you know, line for any airline. You know, if you can make money guessing whether fuel prices are gonna go up or down, you know, you shouldn't be running an airline.
You know, I think you can expect a similar approach to fuel hedges, but we'll also be monitoring what the industry is doing overall.
We're just frustrated we didn't have hedge accounting in the 1/4, to be honest with you.
Guilherme Mendes (Analyst)
Yeah. Super clear. Thanks, guys.
Alexandre Malfitani (CFO and Investor Relations Officer)
Thank you.
Operator (participant)
Ladies and gentlemen, this concludes today's question and answer session. I would like to invite Mr. John Rodgerson to proceed with his closing statements. Please go ahead, sir.
John Rodgerson (CEO)
Thank you for joining us today. If you have any follow-up questions, obviously our IR team and Alexander, Abi, myself will be available. We appreciate your time today and look forward to meeting you at the conferences. Take care.
Operator (participant)
Thank you. This concludes Azul's audio conference call for today. Thank you very much for your participation. Have a good day.