Azul - Q3 2022
November 10, 2022
Transcript
Operator (participant)
Hello everyone, and welcome to Azul's third quarter earnings call. My name is Octavio, and I will be your operator for today. This event is being recorded, and all participants will be in listen-only mode until we conduct a Q&A session following the company's presentation. If you have a question, click on the Q&A icon at the bottom of your screen and write your name and company. When your name is announced, please turn your microphone on and proceed. For those who are listening to the conference on the phone, press nine to join the queue and six to accept the audio when requested. I would like now to turn the presentation over to Thais Haberli, Head of Investor Relations. Please, Ms. Haberli, you have the floor. Proceed, please.
Thais Haberli (Head of Investor Relations)
Thank you, Octavio, and welcome all to Azul's third quarter 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; Alex Malfitani, our CFO; and Abhi Shah, the President of Azul, 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 here 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 subjected to uncertainties and risks that are discussed in details in our CVM and SEC filings.
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?
David Neeleman (Founder and Chairman)
Thanks, Thais. Welcome everyone, and thanks for joining us to our third quarter earnings call. Once again, I would like to start by thanking our more than 13,000 crew members. Thanks to them, Azul delivered another quarter of great results. Our crew members run an incredible operation and deliver exceptional customer service. Through their dedication and passion, we were the world's most on-time airline in March, July, and August, and we're amongst the world's most on-time airlines in the other months of 2022. In addition, our crew member satisfaction metrics hit another record in October and continue to lead the industry. ANAC recently reported that Azul has the highest customer satisfaction among all airlines operating in Brazil, foreign or domestic. We also had less than half of the customer complaints of any other competitor.
Our customers love to fly Azul, giving us incredibly high NPS scores, not only tops amongst all airlines, but other world-class companies as well that are outside our industry. All of this, as we continue to grow our network and serve more destinations than ever. We are now flying to over 150 destinations, 40 more compared to 2019, and triple the destinations of any other carrier in Brazil. I could not be more optimistic about our future growth, which has powered our competitive advantages, such as our unique network and flexible fleet. At the same time, as you'll see in slide four, we are delivering that growth in an efficient and sustainable way that continues to develop economic opportunities for our crew members and our customers.
Whenever an Azul plane touches down in any of our 150+ destinations that we serve, especially if it's in one of the 80 that we serve alone, we know that fundamentally we can improve the quality of life in that community with more access to jobs, education, and healthcare. We recently celebrated the fact that we now have more than 4,300 crew members registered as volunteers, and they are doing incredible work to help their neighborhoods and communities. In October, as we do every year, we conducted our Breast Cancer Awareness campaign. This year, it was our largest ever, impacting more than 7 million customers. Furthermore, our commitment to sustainable growth is anchored by our fleet transformation plan.
With fuel consumption for ASK down 8% and carbon emissions for ASK down 9% over the last three years, Azul is good for Brazil and is doing good in Brazil. Moving to slide five, our competitive advantages are not limited to our fleet or network. Our business units, Azul Viagens, TudoAzul, and Azul Cargo continue their compelling growth trajectories and are key contributors to our industry-leading margins. Meanwhile, Azul Viagens continues its outstanding performance, benefiting from the positive trend in leisure travel. It is on track to more than double bookings compared to 2019. TudoAzul ended Q3 with 15 million members and gross billings up 82% from Q3 2019 and is also on track to generate over BRL 2 billion in gross billings this year.
We are very excited about the increased relevance that this program will have starting in 2023, when we more than double capacity at Congonhas Airport, the downtown in downtown São Paulo. Our logistics business, Azul Cargo, has doubled revenue compared to the third quarter of 2019, driven by a strong demand for our end-to-end logistics solution and our exclusive network, with delivery times under 48 hours to over 2,500 cities in Brazil. I truly believe in our sustainable and profitable growth. We are creating the best experience for our crew members and customers, and contributing significantly to Brazil's development by providing opportunity, employment, and promoting tourism all over Brazil. As John will explain, we have a great business which generates billions upon billions in cash flow from operations.
I'm proud of what the team has built, and I'm even more excited about what is ahead, which lies ahead of us. With that, I'll pass the word over to John to give you more details on the quarter results. John?
John Rodgerson (CEO)
Thanks, David. I would also like to express my gratitude to our crew members, who once again delivered great results in the quarter. I'm proud of the fact that in 2022 alone, we internally promoted more than 1,500 crew members, providing career growth and life-changing opportunities for them and their families. Moving forward, as you can see on slide six, we delivered another all-time record revenue of BRL 4.4 billion in the quarter, up 44% versus the same period in 2019, while generating 6.5% more capacity and had a load factor of 82% in the quarter. In the third quarter, we delivered once again unit revenue around 40% higher than last year, with a 20% growth in capacity. As you know, when capacity grows, unit revenue normally goes down.
The fact that we grew unit revenues 40% demonstrates the strong demand environment in our network and our capacity discipline. Also, load factor in the quarter reached 82%, 2 percentage points higher year-over-year. We expect this strong demand to continue given the positive trends for economic activity in Brazil. Brazilians are benefiting from more flexible work arrangements, allowing them to travel for leisure more often, just like in the United States. We ended September with 14 consecutive months of leisure demand above 2019 levels, showing this was clearly not pent-up demand. This is the strength of the Brazilian leisure market, which is complementing the continued recovery in corporate demand. Corporate fares also reached new records at 150% of pre-pandemic levels, while traffic has only recovered 80%.
EBITDA in the quarter reached BRL 925 million, in line with third quarter 2019, even with a 138% increase in fuel prices, a 32% devaluation of our currency, and over 20% inflation in Brazil over the past three years. This clearly demonstrates the sustainable advantage and earnings power of our business model with our unique network, flexible fleet, and low cost structure. Moving to slide seven, our network advantages, combined with strong demand for our services, allowed us to raise fares by 43%, while stage length remained flat to 2019, a clear sign that we're allocating the capacity in the right markets at the right time. As you know, our RASK and yield in dollars are also up versus 2019, shown on slide eight.
The strong demand trends allowed us to increase fares and to overcome cost pressures from fuel and currency devaluation, to continue expanding margins and improve cash generation. On slide nine, you can clearly see the challenge presented by the steep increase in fuel prices. This is clearly our number one challenge today, and one more reason for us to remain disciplined in our capacity deployment and continue to take advantage of the strong demand environment at high yields. Slide 10 shows how critical it is to be the leading operator of next-generation aircraft in the region, with 70% of our ASKs flown by next-generation aircraft. Given that fuel prices in Brazil are about $1 per gallon higher than the United States, flying a young, fuel-efficient fleet is crucial here. The fact that our fleet transformation is so far ahead compared to our competitors is a clear competitive advantage.
In addition to making financial sense, it's also clearly a more sustainable way to grow, with our fuel consumption per RASK, ASK down 8% compared to third quarter 2019, and carbon emissions down an incredible 30% since 2016. When we compare the EBITDA we generated in the third quarter to the same period in 2019, the impact of fuel and foreign exchange rate is more than BRL 1.1 billion, as you can see on slide 11. However, thanks to the strong demand environment, which we expect to continue, given the positive trends of economic activity in Brazil, we're actually able to generate EBITDA in line with 2019. Moving to slide 12, you can clearly see the combination of capacity deployment, network design, and revenue generation.
We fly the most efficient aircraft over the shortest stage and charge the highest fares. We have clearly optimized our network and fleet for the current cost environment, in stark contrast to our competitors, directly leading to our industry-leading results. We have made significant progress to accelerate our fleet transformation plan and have announced the exit of 12 E1s from our passenger fleet through the end of 2023, giving us an opportunity to advance the delivery of next-generation aircraft and further expand our margins. Once again, we have the highest fares, the shortest stage length on the most fuel-efficient airplanes. We are at least five years ahead of our competitors in fleet transformation.
On slide 13, you can see that our immediate liquidity continues to be the strongest in the region, totaling BRL 3.4 billion, BRL 300 million higher compared to the same period in 2019, reflecting our commitment to sustainable growth and building long-term value. Cash inflows in the quarter surpassed our operating cash outflows by BRL 1.4 billion, and we continued our deleveraging process with BRL 1.4 billion in payments of current and deferred leases and repayments of debt.
Let me repeat that our cash inflow from operations on an annualized run rate generates over BRL 5 billion or around $1 billion in cash from operations annually. As you can see on slide 14, we reduced our leverage in the quarter by more than half a turn to 5.7, and 5.6 turns year-to-date, beating our guidance of finishing the year with a leverage below six, one quarter ahead of schedule. Our leverage is the lowest in the region, even when using 7x rent. Moving forward, we'll continue to delever our business. Throughout the pandemic, we have demonstrated our ability to access capital and are now in a better position than ever, exiting the crisis with operations generating billions and billions in cash and still having access to a variety of valuable unencumbered assets.
Finally, moving to slide 15, we are confident and optimistic in our business model and our sustainable competitive advantages. I would like to thank all of our stakeholders for their continued support, and we're excited to take advantage of all the great opportunities we see ahead of us. To finish, I would like to extend a special invitation for our Azul Day on December 7th. This year, the location is a very special one, the Congonhas Airport in downtown São Paulo. As we had mentioned before, we had expected to more than double our presence at the airport, and I'm pleased to let you know that we have officially received 84 slots at the airport. We'll put our expanded network for sale within the next few weeks and look forward to talking more about this and all things Azul at our Investor Day on December 7th.
With that, David, Alex, Abhi, and I are here to answer any of your questions.
Operator (participant)
Ladies and gentlemen, thank you. We will now begin the Q&A session. Remember that if you have a question, click on the Q&A icon at the bottom of the screen and write your name and company. When your name is announced, please activate your microphone and proceed. For those who are listening to the conference on the phone, press nine to join the queue and six to accept the audio when requested. Let's now go to our first question. Mr. Diego Serrano from Credit Suisse. Mr. Serrano, you have the floor. We'll now open the microphone for you. Go ahead, sir.
Diego Serrano (US Equity Research Analyst)
Hey, everyone. Thank you for the opportunity to ask questions. Just a couple from my side. First, regarding yields. I was wondering what could we expect for yields in the upcoming quarters? I mean, could we assume they have peaked during this quarter as fuel prices may have started to normalize, or could we expect the usual sequential increase from third to fourth quarter given the high seasonality? Also, what could we expect going forward into 2023?
Abhi Shah (President)
Yeah. Hi, Diego. Abhi here. We expect the trends to continue. The market, and we are pricing to demand. Demand continues to be strong. Corporate demand, in terms of revenue is over 100% 2019. Leisure is strong. What we are seeing in Brazil is similar to what we're seeing in the U.S. as well. The U.S. Airlines, you know, Scott Kirby, United, talked about business and leisure combination. We're seeing that here as well. No, our intention is to continue the yield progression, take advantage of seasonality, take advantage of demand, and continue on this path. I believe the industry will do as well. Frankly, that's how we've achieved record unit revenues in September.
I think November is gonna be another record in terms of unit revenues, and we're much focused on the yields to make sure we maximize revenue.
Diego Serrano (US Equity Research Analyst)
Okay, perfect. Thank you. A second one, if I may. I wanted to know about your capacity plan for 2023. I mean, I recall you mentioned low-teen year-over-year growth would be reasonable for 2023, but that you had not yet closed plans as you expected potentially upside coming from the increasing market share at Congonhas. In that sense, do you have any early expectations?
Abhi Shah (President)
Yeah, Diego. Yeah, I think that's mostly consistent with what we are planning around the low teens. Focusing on the domestic market. We have some international as well. As you mentioned, we have Congonhas coming in as well, end of March, early April. You will see higher growth in the first quarter only because this year we were impacted by Omicron, January, February. It's basically our current network coming full year with conversions between E2s and E1s. We will put more E2s into service. We will take out some E1s as part of our fleet transformation. Around low teens in terms of ASKs sounds about right.
John Rodgerson (CEO)
Yeah. I think it's important to highlight that every E2 has 18 more seats than the E1s that are exiting. Not only are they much more fuel-efficient aircraft, they generate more revenue. You know, departures are certainly not going up that much because it's an upgauging effect, which will help drive down our unit cost.
Diego Serrano (US Equity Research Analyst)
Okay, perfect. Thank you. Very clear.
Operator (participant)
We now have a question from Michael Linenberg, Sell-Side Analyst with Deutsche Bank. Michael, we'll open the microphone for you, and you can ask your question. Go ahead, sir.
Michael Linenberg (Sell-Side Analyst)
Can you guys hear me?
Operator (participant)
Yep, we hear you, Mike.
Michael Linenberg (Sell-Side Analyst)
Oh, good. Okay. I guess just two questions here. John, you talked about the 84 slots at Congonhas. Is that incremental to what you currently have, or is that the total amount? I guess we should think of those as, you know, one-way slots, right? You know, you'll be offering 42 flights, 42 round trips? I just wanna get a sense of your size.
Abhi Shah (President)
In terms of our current operation, Mike, we'll go from 20 departures a day to about 42 departures a day. We will slightly more than double.
John Rodgerson (CEO)
Mike, I think it's important to highlight for investors, I think everybody watched the drama of us trying to buy Avianca Brasil, everything that was done to prevent us from buying that company. It's actually been a blessing in disguise, right? You know, we didn't end up buying it. We actually got more slots than Avianca Brasil had, you know, so it's been a great thing. We didn't have to assume that debt. We didn't have to assume all of that liability, and so it actually ended up working out much better for Azul in the long run than had we acquired those slots via purchase of that airline.
Michael Linenberg (Sell-Side Analyst)
Oh, yeah. No, absolutely. It's a good deal. Then just to Alex, you know, I know you have no significant debt repayments over the next couple years, but I know that you start paying, you know, some of these lease deferrals. As I recall, you know, was it BRL 0.5 billion per year? Can you just update us on, you know, what that number is? I think it was over four years. Maybe it was like a total of BRL 2 billion, BRL 2.5 billion as we think about modeling some of the cash flows for next year. Thank you.
John Rodgerson (CEO)
Hey, Mike, I'm gonna jump in front of Alex and then pass it off to him, right? The key is.
Michael Linenberg (Sell-Side Analyst)
Yep.
John Rodgerson (CEO)
To have a great business that generates an enormous amount of operating cash flows, right? You know, you're talking about a number next year of BRL 5 billion. You know, we've got great partners in our, in our stakeholders. You know, if you take a look at everything that's been thrown at Azul, you know, between the pandemic, nine months without revenue, and look at how we've managed this, right? You think of our partners. You know, do we have to pay off everything over a two to three-year period, or is it more of a four to five-year period, right? I think, you know, we have a lot of flexibility with our partners going forward. The most important thing is that we run a fantastic operation that generates cash, and then we have a financiable business.
I'll let kinda Alex walk through the specific numbers.
Alex Malfitani (CFO)
Yeah. What's important, you know, there is. I think your recollection is right because there is sort of a second, you know, increase of deferrals in 2023, but we already have that effect in 2022, right? So you're not going to see an increase in cash outflow from rents between 2022 and 2023. The reason why that's happening is that in 2022, we paid for the second wave deferrals, and in 2023, we're gonna start paying for the first wave deferrals, right? So there is sort of a. You know, I think you remember that in 2023, the deferrals are gonna happen, but they already started in 2022. So you're not going to see increased pressure from deferrals in terms of rent into 2023.
Actually, you know, we've been dealing for the last three years with negative free cash flow if you assume no financing, right? If you look at EBITDA minus rent, minus CapEx, minus interest, minus debt, you know, that number has been negative in 2020, it has been negative in 2021, it was negative in 2022, and it'll be slightly negative in 2023. In fact, in 2023, it will be the lowest gap since the beginning of the pandemic, right? That number has been in, you know, shrinking every year. When you do sort of a cumulative calculation of everything that we had to deal with over the last three years plus the fourth year, you know, we've dealt with 85% of the problem, right? The cash gap in 2023 is the smallest that we've had so far.
As we've demonstrated over the last 30 months, we can access capital, you know, when and as needed, right? We'll get the right capital at the right cost at the right time. As John said, the beauty is that we have a highly financiable business because we have just a very profitable and cash-generating operation, right? You know, we'll deal with it as necessary, but the good news is that, you know, the sort of cash need for 2023 is the lowest out of all the four years that we've been dealing through this pandemic.
John Rodgerson (CEO)
The first six months of 2022 were not easy. We had the Omicron and the war in Ukraine that drove up fuel prices. We shared that, you know, fuel prices more than doubled compared to 2019. Look at the performance on the revenue side, right? The revenue has now made up for that, and we're delivering similar EBITDA that we had in 2019, and clearly, in 2023 will be well above 2019 levels. You know, the financing will take care of itself as we run a great company and generate operating cash flow.
Michael Linenberg (Sell-Side Analyst)
That's great. Yeah. Thanks. Thanks, gentlemen.
John Rodgerson (CEO)
Thanks, Mike.
Operator (participant)
Okay, the next question comes from Daniel McKenzie, Sell-Side Analyst with Seaport Global. You have the floor, Daniel. Go ahead and ask your question.
Daniel McKenzie (Sell-Side Analyst)
Mute. Okay. Hi, can you hear me?
Operator (participant)
Yes. Hey, Dan.
Daniel McKenzie (Sell-Side Analyst)
Yeah. Hey, good morning, guys. Thanks. That's a great place to actually pick up billions of reais in operating cash flow. As you know, look at getting back to sustained profitability, it seems like the pieces are there, you know. How committed are you to making the tough capacity decisions if you need? What is the thought process for, you know, when you're thinking that Azul can get back to sustained profitability?
Abhi Shah (President)
Hey, Dan. Abhi here. I can start with the capacity part. I think, you know, we have been very, very active in managing the capacity given the demand environment and given the fuel environment. If you look at our September traffic, we were actually down 2% in ASKs, September 2022 versus September 2021. If you look sequentially now going forward between what our capacity is in October, November to what your summer peak season in January, we actually have the lowest sequential increase, compared to our, the industry. If you look at our stage length, right? We have the lowest stage length, as John mentioned, and we have the highest corporate fares.
All of this with 70% of our ASKs with next gen aircraft. We actually are very, very active in adjusting the network as needed. We actually could fly more if we wanted to, but we're making sure that we're flying what makes sense, and we're keeping the quality of the revenue, as you can see on the RASK side, very, very high, and that continues to be our focus. Capacity will come with fuel, capacity will come with demand, and we're managing just to get the best results overall.
John Rodgerson (CEO)
You know, Dan, I just wanna highlight a couple of other things, right? I mean, you've seen us accelerate the fleet transformation, the retirement of the 12 E1s that were previously in our plan to operate all of 2023, and now they're exiting early, right? Going into next generation aircraft. You know, you take, you know, 12 aircraft, replace them with E2s, put Congonhas into your model, you know, maybe the crack spread kinda gives a little bit of relief, and you see the leverage that this company has going forward.
Daniel McKenzie (Sell-Side Analyst)
Yeah, very good. Thanks, guys. You know, picking up on working capital priorities for the coming 12 months, you know, thanks for the presentation, thanks for the prior comments. You know, if you could just help us understand sort of the biggest uses, how funded, you know, aircraft being returned, you know. Are the long-term maintenance reserves enough to cover those requirements from CapEx? You know, just given, you know, again, going back to billions of reais of operating cash flows, you know, how are you thinking about the cash position at year-end and the cash position at the end of 2023?
Alex Malfitani (CFO)
Hey, Dan. You know, I think you can compare 2022 and 2023. You have a huge increase in cash inflows from the expanding EBITDA. It's not that we are expecting a, you know, much better environment in 2023 than what we're seeing today, right? We're essentially just annualizing what we're seeing today. You know, if you have 12 months of the demand environment that we see, even with high fuel prices, even with the devaluation of the real, just the fact that we don't have Omicron, just the fact that we don't have an additional spike in fuel, will already generate a ton more cash from operations than what we generated this year. In terms of CapEx, it's basically flat. In terms of rent, it's basically flat.
In terms of interest, it's a little bit less than this year, but you can call it essentially flat. I think, you know, in terms of outflows, you don't see a big difference. We don't have a lot of debt maturing, you know. The debt that we have maturing this year, for example, we were able to roll because, you know, our creditors see the high performance of the business, right? They love, you know, the interest and the revenue that we can generate for them. Really the story, you know, of why 2023 is a much easier year in terms of cash flows than 2022 is the continued recovery and margin expansion.
In 2024, you know, you essentially get to breakeven, maybe slightly positive, depending on how John mentioned, if we get a couple of things going our way, instead of going against us.
John Rodgerson (CEO)
You know, Dan, I just wanna highlight a couple other things on the cash front, right? You know, we have BRL 2.4 billion of reserves and maintenance deposits, right? Inside the quarter, you know, there are two things I think you need to look at. The numbers that are really interesting is we spent BRL 300 million on CapEx in the quarter, and we also paid reserves or, excuse me, our reserve balance increased by BRL 300 million in the quarter, right? You know, that gives us more flexibility going forward with fleet transformation, working with our partners. You know, the BRL 1.4 billion that we paid is a deleveraging process, right?
You know, if you kind of say, "Hey, you know, if cash may get tight, you know, maybe deleverage a little slower," right? You know, those are opportunities. You know, I think we're. You know, I wanna keep in mind, you know, we are an unsubsidized airline compared to almost all U.S. carriers, compared to almost all European carriers. We've gotten through this, and we're exiting this pandemic with a lot of unencumbered assets, right? A very strong business. Not only did we not get help from the government, right? You know, our economy was devastated with the devaluation of the real and the increase in fuel prices.
You know, Alex and I look at each other and say, "Hey, you know, we've never seen Abhi deliver the revenue numbers that he's delivering today," right? You know, that is.
Daniel McKenzie (Sell-Side Analyst)
Yeah.
John Rodgerson (CEO)
An unbelievable blessing. That demand hasn't slowed. Abhi said to the earlier question that, you know, sequentially, it's actually gonna go up again. If you continue to have those numbers in there. Where you can be flexible is you can be flexible in your reserves, you can be flexible in your CapEx, you can look for financing opportunities on CapEx. You know, we didn't really finance much CapEx this year, right? There's lines and opportunities to do that.
Daniel McKenzie (Sell-Side Analyst)
Terrific. Thanks so much, you guys. Appreciate it.
Abhi Shah (President)
Okay. Our next question comes from Savanthi Syth, a Sell-Side Analyst with Raymond James. Mr. Syth, you have the floor. The mic is on for you, sir. Go ahead.
Savanthi Syth (Sell-Side Analyst)
Hey, good morning, everybody. If I might, just a quick follow-up on the capital and balance sheet side, but more from a cost perspective. Can you talk about, like, the number of aircraft that you're getting the next couple of years, and just kind of what you're seeing in terms of financing costs?
Alex Malfitani (CFO)
Hey, Savi. So the guidance stays essentially the same as we've discussed before. The fleet will stay basically flat, but you know, as E1s get to their end of lease or as we you know, are successful in additional negotiations you know, to accelerate the exit of the E1s, you know, we'll see the next generation aircraft, mainly the E2s, coming in, right? Just to remind everyone on the call, you know, John already mentioned that the E2s are bigger by 18 seats. You know, in terms of cargo capacity, they're bigger by about 50%. They burn you know, 15% less fuel in total, right? So about 30% less fuel per seat. You know, we are going to pay less rent on these aircraft than we pay on E1s, right?
In spite of the fact that we're taking these aircraft, you know, 12 years later than the original delivery of E1s. You know, we're paying less in rent. Most of those rents are already fixed, right? They're not going to be. We negotiated all those already. We don't have a, you know, bad guy in terms of cost of capital, in terms of the cost for the aircraft that's coming in. Which is actually a very great reminder because we do have competitors who are a lot behind us in the fleet transformation process, as John mentioned, and they will be exposed.
You know, they will be replacing aircraft that maybe today costs $150,000 a month with aircraft that may be costing them $400,000 a month, right? They will not see the upgauging, you know, that we're seeing because they're going to be essentially replacing like for like, right? Not only are we ahead of the curve, but I think even as we project forward, that advantage will continue.
John Rodgerson (CEO)
Yeah. That's absolutely critical, as Alex stated. You know, people that are embarking upon their fleet transformation now are gonna do it at a significantly higher cost than someone that's farther along on that journey. I think that's a reason that I think fares and capacity discipline will exist in Brazil as our competitors will have higher cost of ownership going forward.
Savanthi Syth (Sell-Side Analyst)
That's helpful, and that's good to know. I didn't realize they were kind of all fixed in. If I might, I don't want it to steal any thunder from the Investor Day, but just maybe high level with the Congonhas, the changes that are going on there. Could you talk about, like, what that might mean to stage length, utilization, yields or revenue, just how we should think that, you know, about how that might impact how we start modeling the P&L?
Abhi Shah (President)
Yeah. Hey, Savi. In general, it'll be lower stage length because it's more corporate stuff. Utilizations actually might even get better because today the slots that we have are not very efficient, right? We have to use a lot more airplanes than we'd like. Now, once you have more slots, you actually have more opportunities to improve aircraft rotations and so I think utilization will be flat or a little bit better. Stage length will come down a little bit, just the nature of the market. Most importantly for us, it's gonna allow us to access a customer that doesn't fly us today, right?
We are small in São Paulo, and we're really excited to access this customer because we know that they will fly us out of Congonhas one week, and the next week they'll fly us to Lisbon or Orlando, for example, or pick up our credit card. I think that's where there's just a lot of network and overall benefits to having access to this kind of customer which we haven't had. Now we're gonna be able to serve the top five, six markets out of Congonhas, which is gonna significantly increase our relevance overall.
Alex Malfitani (CFO)
One thing that's exciting about Congonhas for us is, you know, the way it fits with our flexible fleet, right? Because if you look at the demand in Congonhas, you do not need a large narrow body throughout the day, right? You need it early in the day, you need it maybe late, you know, in the evening. During the day, the best aircraft for that airport is the aircraft that we fly, right? We will be able to essentially get the same revenue as everybody else that's flying a large narrow body, but we will have a much lower cost per trip because the two and the, you know, even the one has much lower cost per trip than a large narrow body, right?
During the day, you're wasting a lot of that capacity because there just isn't enough demand for you to fill, you know, a large narrow body aircraft in Congonhas.
Savanthi Syth (Sell-Side Analyst)
Good point. All right. Thank you.
Operator (participant)
We now have a question from Bruno Amorim, Sell-Side Analyst with GS. Bruno, the mic's open for you now, sir. Go ahead and ask your question.
Bruno Amorim (Sell-Side Analyst)
Hi. Thank you very much. My question is a follow-up on the cash flow dynamic. Just wanted to validate the numbers behind it with you. First of all, if we look at the third quarter numbers, on an analyzed basis, EBITDA of BRL 925 million, on analyzed basis, BRL 3.7 billion. If we run the same analysis for CapEx, leasing and financial expenses, I'm getting to an annual cash burn of BRL 3 billion roughly, from a simplified cash flow calculation perspective. Which means that, you know, all else held constant, the company would have to increase annualized EBITDA from BRL 3.7 billion-BRL 6.7 billion. First of all, just wanted to confirm if this math makes sense to you. The cash neutral EBITDA would be around BRL 6.7 billion.
The second question also related to that is, how do you intend to finance the cash burn going forward? I understand the BRL 3 billion, which is the run rate, will decrease going forward as you have already mentioned, but it will still be negative. Is it possible to make it more explicit? How do you intend to finance this cash burn over the next 12 months? Thank you so much.
John Rodgerson (CEO)
Hey, Bruno. Just to kinda highlight, you know, obviously you can't take third quarter and project going forward because you miss Congonhas, you miss more E2s, you miss the strength of the network and the increase of fares, you know, that Abi's been doing and the growth in our subsidiaries, right? You know, what we're doing in Azul, what we're doing in our cargo business, and also what we're doing in our passenger business. You know, our number is BRL 5 billion in 2023, not the BRL 3.7 billion that you annualized. That already kinda takes your number in half. You know, a lot of what you're seeing in the cash burn is CapEx or paying down lessors faster than maybe we'll end up doing, right?
It's in the best interest of all of our stakeholders for Azul to remain a strong airline going forward, right? You know, do they need to get all their cash paid back in 2023 and 2024? Maybe that gets extended out, right? You know, we run a great business that's generating an enormous amount of operating cash flows. I think that's the way. If you look at it, right, you know, when you talk about financing, you know, we're spending all this cash in CapEx and haven't had the ability to finance it, right? Our team is working on, you know, the ability to finance CapEx, you know, engine overhauls and those type of things. But I'll let Alex give more color.
Alex Malfitani (CFO)
Yeah. You know, as John highlighted, you know, the EBITDA that we're projecting and the cash flow from operations that we're projecting for 2023, you know, starts with a five. It's much higher than the 3.7. Just annualizing what we're seeing today and adding on some things that are, you know, absolutely certain like, you know, the Congonhas slots or the fleet transformation, right? There's not a lot of additional optimism embedded in that projection. That makes the cash flow gap for this year, for 2023, smaller than 2022, right? We were able to finance the cash gap in 2022. Obviously, we didn't have access to the capital markets. I mean, the cash gap that we're talking about with, you know, stable, kind of normal capital markets would be one transaction, right?
Would be one debt deal like we did last year. It's very easy to finance that cash gap with normal and stable capital markets. Obviously, you're asking because capital markets are very volatile today, but we didn't have access to the capital markets in 2022 either, and we were able to finance a cash gap that was bigger than the cash gap that we will have in 2023. You know, and how are we gonna do that? I mean, we're gonna do it as we've been doing. I mean, we've been getting the question on cash and access to capital for, you know, the last two and a half years, and we understand, you know, the you know, where you're coming from.
The best way for you to get comfortable is just to see what we've done over the last two and a half years, right? We have had access to capital throughout. We raised debt when we had infinite liquidity. You know, so the fact that, you know, we're gonna have infinite leverage, right? We raised debt with infinite leverage. You know, the fact that we're reducing leverage and we're delivering our leverage guidance, you know, faster than we expected, shows that we are a financiable business. It's just that, you know, we have many different alternatives to finance our needs, and we're going to deploy them as necessary. It's just a very long list because that's how we've always operated, right? We've always had an A plan and a B plan and a C plan.
You know, I like to remind everyone that, you know, we planned to originally go public in 2011. We ended up going public in 2017, and we never slowed down our growth. We never deviated from our business plan because of lack of access to capital. It took six years longer than we thought to go public, but, you know, why didn't we slow down? How did we get to not slow down? Because we had a plan B and a plan C and a plan D, and that's always how we're going to continue to operate. You know, for you to get comfortable is just to look at the last two and a half years. That's how we've been managing throughout this pandemic.
Bruno Amorim (Sell-Side Analyst)
Thank you very much.
John Rodgerson (CEO)
You know, I just wanna highlight one other thing quickly is, you know, we exited the pandemic, no government subsidies, with our loyalty program 100% unlevered. Their packaging business. We have an investment in a European carrier. You know, all of these assets, we've never done a spare parts deal, right? You kind of look at it overall, you know, we still have a lot of options. We don't think we're going to need those, but I just. That should give you the comfort you need.
Bruno Amorim (Sell-Side Analyst)
Thank you. Thank you. If I may just, you know, a quick follow-up since you mentioned, you know, if we go with your number of BRL 5 billion EBITDA for next year under the current levels of CapEx, leasing, and financial expenses, that would show me an additional, you know, BRL 1.5-2 billion cash burn should be financed. At this point, do you know already how you're gonna do it, or you have plenty of options and you have to not made a decision on where to pull the trigger?
Alex Malfitani (CFO)
Exactly. I mean, we don't need it now, right? We'll, when we have to pull the trigger, look at the options that are available to us, and we'll choose the best one for Azul, you know, to preserve value for all stakeholders as we've done, you know, throughout the pandemic.
Bruno Amorim (Sell-Side Analyst)
Thank you very much.
Operator (participant)
Okay, our next question comes from Stephen Trent, Sell-Side Analyst with Citi. Stephen, the floor is yours. We're opening the mic. Go ahead, sir.
Stephen Trent (Sell-Side Analyst)
Thank you very much, everybody, and appreciate you taking my question. Just two quick ones, if I may. As you think about those incremental slots, you know, at Congonhas, you know, any high-level views on, you know, where you see an opportunity to grow out of there and, you know, sort of any color on the competitive body language, at that installation, you know, now that you guys are gonna have a bigger presence? Thank you.
Abhi Shah (President)
Yeah. Hey, Steve, Abhi here. We haven't announced our network yet. We'll put it for sale in a couple of weeks. Look, it's not gonna be too much of a surprise. It's the largest corporate markets that are out there. Again, as I said before, it's gonna allow us to have increased relevance in the São Paulo market, and it's gonna allow us to capture that customer, and then they can further sort of you know, navigate the Azul ecosystem. That's what the benefit is. I think honestly, the market is disciplined. I think the market has to be disciplined. I think it'll continue to be disciplined.
I think that all the airlines are, you know, doing what works for them, and you know, we're seeing good discipline in the fare environment. I expect that to continue overall. I don't think anybody has any, you know, empty space to kind of mess around a little bit. I think overall the market's gonna be disciplined. That's certainly our intention to continue to be that way.
Stephen Trent (Sell-Side Analyst)
Super. Appreciate that, Abhi. Just one very quick follow-up. You know, do you, when you guys think about, you know, sale leaseback opportunities, especially as you're, you know, onboarding newer planes, you know, do you think we could see kind of similar levels of activity going forward, even as I recognize the danger of trying to take 3Q and annualizing it because of seasonality? Thank you.
Alex Malfitani (CFO)
Yeah. We're seeing actually that market improving at the margin, Steve. You know, we have all of the aircraft that are coming are already financed, right? So there's no kind of uncertainty there. You know, for future orders that come directly from our order book, you know, sale leasebacks are certainly an option. We also have some owned aircraft still in the fleet, right? The announcement that we made of accelerating the fleet transformation with the exit of E1s involves some actual sale of aircraft, right? Actual outright sale of the aircraft, and we still have a few of those in the fleet as well that we can take advantage, right? Those are kind of within the many options that we have to finance our operation going forward.
Stephen Trent (Sell-Side Analyst)
Okay. Appreciate it. Thanks, Alex.
Alex Malfitani (CFO)
Thank you.
Operator (participant)
Okay, now we have Marcelo Arazi, Sell-Side Analyst with BTG Pactual. Please, Mr. Arazi, you have the floor. The mic is yours. Go ahead and ask your question.
Abhi Shah (President)
I think you may be on mute. Okay, well, we can read the question here. The question is, when will we start operating the new Congonhas routes? We will start flying the routes in the northern summer season, so that starts end of March. March twenty-eighth, two thousand twenty-three is when we start flying the routes.
Operator (participant)
Okay, now we have a question from Rogerio Araujo, Sell-Side Analyst with Bank of America. Rogerio, the mic is yours. Go ahead and ask your question, sir.
Rogerio Araujo (Sell-Side Analyst)
Thank you. Hi, gentlemen. Good afternoon. Thanks for the opportunity. I have a couple here. One is, you mentioned in the release a change in the provisioning policy for the return of aircraft. Could you please provide more details on this change? Also my second question is on sale and leaseback gains. Can you confirm if there was a BRL 321 million gain this quarter? And if so, if you could provide more details on that and what you expect for upcoming quarters, would be great. Thank you.
Abhi Shah (President)
It'd be fantastic if we had a BRL 321 million gain.
Alex Malfitani (CFO)
No, Rogerio. You know, we started, you know, obviously as a new airline with brand-new aircraft, and we didn't have a need to provision for deliveries for a very long time. As we get closer, and we're starting to deliver these aircraft, we implemented a provisioning policy. I think, if I'm not mistaken, Q4, we can get back to you if that's incorrect. Essentially, we're looking at the next 36 months and starting to provision for the cost of redelivering the aircraft that fall within that window. On a year-over-year comparison, you see a change there because we didn't have that provision of before. I think you're referring to the reversion of the impairment of the E1.
You know, it's very technical, but we're essentially the gain that there is that happened, you know, as a one-time gain today, this quarter on our results, is the comparison between the cash that we're getting on the sale of the aircraft versus what was provisioned. Both were provisioned both on the asset side and the liability side for these aircraft, right? You know, because of IFRS 16, you know, you have to provision the right of use asset for the aircraft. When we impaired it, we made an assumption of when these aircraft were going to leave, you know, what was going to be the incremental cash inflows that we were gonna get for those aircraft, what was the incremental and the continuing cash outflow that we're gonna get for those aircraft.
That ended up being a net number that we provisioned in our balance sheet. The impact, the gain that we saw is really the change between the number that was on our balance sheet and the cash that we're getting for these aircraft. On a more simple basis and maybe more relevant for the cash perspective, you know, we do have aircraft that we still own that have a market value that's higher than the debt that they still have on the balance sheet. That's really what matters, right? That is a potential source for additional cash in the future if we choose to utilize it.
Rogerio Araujo (Sell-Side Analyst)
Thank you, Alex. Yeah, actually there is a line in the cash flow in the release called proceeds from sale and leaseback. This is where I get the BRL 321 million. If you could check that, we can speak afterwards. Thanks very much.
Abhi Shah (President)
Okay, now we have a question from Josh Milberg from Morgan Stanley. Josh, you have the floor. The mic is yours. Go ahead and ask your question, sir.
Josh Milberg (Senior LatAm Transport, Infra and Capital Goods Analyst)
Hey, everyone. Thank you very much for the call. Just to follow up on the issue of the financing of your cash flow gap. You guys made reference to the TAP bonds. I don't think you touched on the issue of a potential renewal of the codeshare with United, and I was just hoping you could actually give a little bit of an update on both of those potential sources of liquidity, just some more detail on them and what you're thinking there.
John Rodgerson (CEO)
You know, Josh, the issue with United, and they've been a great partner with us, is that when they gave us capital seven years ago, it restricted our ability to do certain things. As you see us expand our network into Florida and our partnership with JetBlue, a lot of what you're seeing in those destinations wasn't possible under the old agreement with United Airlines, right? We still have a good relationship with them. We have a codeshare in place with them. You know, we're talking to them, but there's no urgency to do something at this time because we need to. When we did that original agreement, we didn't even fly internationally, right?
When you think about strengthening our network and doing stuff for the long term, you know, was there ability to maybe get something right up front and extend the contract? Probably. We need to do what's good for Azul long term and think about our long-term growth overall. That, that's what we're looking at. A very friendly relationship. United's still on our board, but we have opportunity to do other things with other airlines, more specifically JetBlue and Fort Lauderdale. If you think about what JetBlue is doing in Fort Lauderdale with Spirit, in our flights, you know, we have double dailies from Campinas. We have Manaus, Belém, and a lot of capacity going in there. That connectivity is really important to us going forward.
Alex Malfitani (CFO)
Yeah. I think, you know, those are two good examples, Josh, of opportunities that maybe are available to us and that aren't available to everybody else, right? You know, the TAP bond is a unique asset that, you know, has value, right? We have a view on what that value is, you know, and we're going to check the market to see if that view aligns with the market's view. If it does, you know, maybe we can sell that asset. It's not an asset that we're married to, right? We also don't want to. You know, like any assets, you know, we want to see it being recognized for the right value.
As John mentioned, you know, a potential exclusivity agreement, you know, has some value for cash, but it also has some, you know, strings attached to it, right? We're going to look at the value that the potential agreement brings, and we're gonna decide whether that's our best source of capital or look at the competing sources of capital and choose the best one for us at the moment that we need the capital, right? That's what we've been doing over the last two and a half years, and we're going to be very pragmatic, you know, and very, technical, you know, about making sure that whatever capital we access is priced, correctly.
John Rodgerson (CEO)
We're playing from a position of strength, right? I mean, you know, if we were out there, you know, kind of trying to get cash at any cost, that's really not, you know, for the good of long term of Azul, right? We wanna protect, you know, all of our stakeholders, you know, our shareholders, our debt holders. I think, you know, as a Sell-Side Analyst, Josh, you have to appreciate that that's what we do, and that's how we protect all of our stakeholders going forward. You know, making sure we have the right agreement in place is way more important than, you know, closing an agreement.
Josh Milberg (Senior LatAm Transport, Infra and Capital Goods Analyst)
Those are great, very detailed responses. Just on the JetBlue opportunity that you mentioned, could you detail a little further what, you know, what the nature of a potential exclusivity agreement might, you know, what form it might take?
Abhi Shah (President)
Hey, Josh. Look, with JetBlue, we have now connecting to over 25 cities in the U.S., six in the Caribbean. We just announced Nassau in The Bahamas this week. You know, they're a great partner of ours. We're a great partner of them. We're gonna have double dailies to Fort Lauderdale this summer. We have double daily to Orlando as well, another JetBlue hub, and we're excited about what they can do with Spirit as well in the future. You know, we're talking to them like we talk to everybody else about opportunities. You know, today we have a codeshare, a large codeshare with them. You know, frequent flyer, you know, hopefully is on the table as well. We have a good base of customers in South Florida.
They obviously have a huge base of customers in South Florida. That would be interesting as well. You know, we're looking to evolve those conversations and strengthen our partnership.
Josh Milberg (Senior LatAm Transport, Infra and Capital Goods Analyst)
Okay. Thank you guys very much.
John Rodgerson (CEO)
Thank you, Josh.
Operator (participant)
Well, that brings our Q&A session to a close. I would now like to give the floor back to John Rodgerson for his closing remarks. Mr. Rodgerson, please.
John Rodgerson (CEO)
We want to thank all of you for joining us today, and we'll be available for any of your questions and look forward to seeing you all in person on December 7th. Thanks, everybody.
Operator (participant)
Well, this concludes Azul's audio conference call for today. Thank you very much for your participation. Have a good day, everyone. Thank you.