Azul SA (AZUL) 2018 Q2 法說會逐字稿

Hello, everyone, and welcome to Azul's Second Quarter 2018 Results Conference Call.

My name is Roberta, and I will be your operator for today.

This event is being recorded.

(Operator Instructions) I would like to turn the presentation over to Andrea Böttcher, Investor Relations Manager.

Please go ahead.

Thank you, Roberta, and welcome all to Azul's second quarter earnings call.

The results that we announced this morning, the audio of this call and the slides that we will 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, our Chief Revenue Officer, are also here for the Q&A session.

Before I turn the call over to David, I would 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 the company believes are reasonable but are subject to uncertainties and risks that are discussed in detail 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 and are discussed in detail in our earnings release.

With that, I'll turn the call over to David.

David?

Thanks, Andrea.

Welcome, everyone, for -- and thanks for joining us for our second quarter earnings call.

As always, I'd like to start by thanking our crew members, who work hard every day to provide our customers with the best travel experience in the industry.

I'm extremely pleased to report that we continue to run the best airline operation in Brazil.

We remain the most on-time airline and have recently received several awards attesting to the excellence of our customer service.

For the eighth time in a row, we were awarded the -- by Skytrax, the Best Regional Airline in South America, and also the Best Airline Staff in the region.

We were also recognized by consumer.gov (sic) [consumidor.gov] for having the highest standard of customer satisfaction with fewest customer complaints.

Each time I fly JetBlue, I get more excited -- I'm sorry, every time I fly Azul, I get more excited about the enthusiasm of our crew members, the quality of the service, which I think bodes really well for our future growth opportunities.

As you know, we are going through a fleet transformation process by adding larger jets and next-generation aircraft.

We are extreme -- they are extremely fuel-efficient and have the lowest trip cost.

That is also the best way to combat the fuel and currency headwinds we saw in the second quarter.

This is why we recently announced an additional order for 21 E2s, increasing our total firm orders for this type of aircraft to 51.

With the need to replace all of our current E1 aircraft, this order guarantees that Azul will have the newest, most fuel-efficient fleet in the industry, with the lowest CASK and the lowest trip cost, which is an unbeatable combination.

As you know, our A320neos have 56 extra seats compared to the E1s, with a similar trip cost, contributing to a CASK reduction of 29%.

The E2 story is very similar.

It has a lower cost of ownership, less fuel burn, lower maintenance cost and increased revenue potential from 18 additional seats.

This results in a CASK reduction of approximately 26% -- this results in a CASK reduction of approximately 26%.

Moreover, the E2 has a trip cost that is 14% lower than the E1.

So we are basically getting more seats for free and paying much less for each flight, which is astonishing.

Because the cost and revenue benefits of the E2 over the E1 are so significant, it makes total sense to aggressively remove the E1s from our fleet earlier than planned.

I have set an ambitious goal for our team to have this portion of the fleet transformation completed by the end of 2021.

We are working hard on it, and we will share more details with you soon.

This is absolutely possible because the E1 to E2 transformation process is significantly easier for Azul, as it has the same type of rating for our pilots -- same type rating, so our pilots can fly both aircraft at the same time.

It's just plug-and-play.

Our first E2 is scheduled to arrive next June, in June of next year, where we'll start seeing this margin expansion benefit from this fleet type.

In summary, we continue to focus on our margin expansion plan that we have communicated to the market.

We are well on our way to building a better company for our crew members and our customers and our shareholders.

With that, I'll pass the time to John, who will give you more details on the second quarter results.

Thanks, David, and hello, everyone.

I also want to start out by thanking our crew members for all their hard work during the past quarter.

As you can see on Slide 5, our adjusted EBITDAR increased 11% in the second quarter, and we recorded an adjusted net income of BRL 238 million, a record for second quarter.

Our operating results were impacted by the 20% increase in fuel and the 12% depreciation of the real.

Excluding special items related to the sale of 6 E jets and the truckers' strike, operating margin totaled 3.7% compared to 5.8% a year ago.

We grew capacity by almost 19% in the second quarter while also expanding our top line by 20.5% and our RASK by 1.6% on an adjusted basis.

Even with the 20% increase in fuel and the 12% devaluation of the real, total CASK increased only 3.9%.

CASK ex fuel was basically flat, and on an exchange-rate neutral basis, would have fallen 5.1%, a strong indicator that our fleet transformation strategy is working as expected.

As David mentioned in the beginning of the call, our decision to replace older planes with more fuel-efficient aircraft makes even more sense in the current environment.

The A320neos represented 24% of our total capacity in the second quarter and will account for 30% by the end of the year.

The E2s coming next year will help us accelerate the fleet's transformation even further.

Moving on to Slide 6, you can see that fuel and currency had a negative impact of approximately BRL 160 million in our second quarter operating results, which represents almost 8 margin points.

Thanks to our margin expansion strategy and ability of Abhi and his team to recapture revenue, we recorded a recurring operating margin of 3.7%, recovering 6 of the nearly 8 margin points.

We offset 85% of the fuel and currency headwinds during this seasonally weakest quarter of the year.

Moving on to the revenue performance on Slide 7, we continue to benefit from a healthy demand environment and robust ancillary revenues.

Considering that our average stage length increased 13% in the second quarter, our RASK adjusted for this increase rose 8.1% year-over-year.

Our network advantage allowed us to grow capacity by 19% while increasing our average fares by 16%, and at the same time, maintaining a stable load factor.

Once again, we increased capacity, yield and RASK at the same time.

This shows how much we needed the larger aircraft in our network.

Moving on to Slide 8, our loyalty program TudoAzul maintained a strong growth pace for the second quarter, reaching almost 10 million members.

Gross billings ex Azul went up 38% year-over-year, with the majority of this increase coming from TudoAzul Club and our banking partners, further increasing our share of the Brazilian loyalty market.

We now have 18% gross billing share, up 14% just 1 year ago and still well below our fair share of the market.

Unlike other airlines in Brazil, TudoAzul is wholly owned by the company.

This means that we have no tax inefficiencies and benefit 100% from the cash flow generated by this high-growth, high-margin business.

On the right side of the slide, you can see the cargo business is also performing extremely well.

Revenue increased 64% year-over-year, mostly driven by the larger cargo compartments of the A320neo and the growth of our international capacity.

We are excited to deploy dedicated cargo planes next quarter.

Clearly, our cargo team earned the right to get these planes into our network.

Moving on to the balance sheet on Slide 9. I'm proud to report that we ended the quarter with a solid liquidity position of BRL 3.8 billion, representing 45% of our last 12 months' revenue.

Even with a 12% depreciation in the real, we ended the quarter with leverage at 4, compared to 4.5 in the second quarter of 2017.

We use the industry standard of adjusted net debt to EBITDAR, which capitalizes all of our leases at 7x and includes all of our debt.

This result reflects our decision to hedge 100% of the principal and interest payment put on the $400 million denominated bond issued in 2017, protecting ourselves against currency risk.

At the end of the second quarter, this currency swap was recorded as a net asset of BRL 210 million under the long-term derivative financial instruments.

Alex, our CFO, deserves all the credit for this hedge.

Our low FX exposure is reflected on Slide 10.

Only 32% of our balance sheet is denominated in U.S. dollars and virtually all of our working capital debt is denominated in local currency.

Additionally, as you can see on the right side of the slide, we continue to be long dollar.

Our assets denominated in foreign currency, namely our cash, deposits and maintenance reserves abroad and our investment in TAP, surpass our dollar-denominated liabilities.

And that's excluding aircraft engines and spare parts, which are not restated to the exchange rate every quarter, but are also priced in dollars.

For this reason, in times of weakening currency, we are not nearly as impacted as our competition.

This reaffirms our position as the airline with the strongest balance sheet in Brazil.

Moving on to Slide 11, the movement in currency and fuel represents an increase in cost of BRL 800 million to BRL 900 million in 2018, representing a swing of up to 9 margin points.

However, as you know, we have a multiyear margin expansion plan.

Also, we continue to see positive demand environment, backed by the strength of our unique network, as you saw on our July traffic release.

Therefore, we are confident that we can offset most of these headwinds.

And as a result, are projecting an operating margin of 9% to 11% for 2018, excluding the impact of nonrecurring events.

We also think it's prudent to revise our capacity growth range to 16% to 18%, down slightly from 17% to 20%, by making adjustments in both our domestic and international networks.

We continue to replace older generation aircraft with A320neos, which as David mentioned, are key to combat rising fuel prices and the weakening of the real.

As a result, we expect CASK ex fuel to decrease between 1% and 3% year-over-year, even with a devalued currency.

Our plan of having a 5-point margin expansion to 15% from the time we went public has not changed.

Before the devaluation of the real, we were ahead of schedule, but we're still on track and feel confident that the pillars of our margin expansion plan are working just as expected.

With that, we'll turn the call over to the operator for Q&A.

(Operator Instructions) Our first question comes from Savi Syth with Raymond James.

I just wanted to follow up on the -- kind of the revenue environment, which seems strong and I was wondering if you can talk about -- I think it was really strong before the truck drivers' strike and maybe a couple of weeks after, strong, but then it kind of weakened.

Just curious what you're seeing today.

Clearly, you had a good recovery in fuel in the quarter and just wondering your thoughts on how that's continuing.

And if you can give a little bit more clarity, any color on domestic versus international, that would be great.

Savi, this is Abhi here.

So yes, you're right.

I mean, I think we started the second quarter in April with a strong demand environment combined together with really good fare and capacity discipline.

Of course, that was interrupted by the strike and then the World Cup.

But we've seen a good recovery after the end of the World Cup.

July recovered nicely in the last 2 to 3 weeks there and we had a very, very strong start to August.

So I feel good about the demand environment that I'm seeing.

Fare discipline is also very strong.

I've said this before, I think the capacity environment and the fare environment are the best that I've ever seen, basically.

And so I think that's really setting the industry up nicely for the second part of the year.

So our July traffic was strong.

We had good domestic and good international performance as well.

Domestically, corporates and agency demand is what's driving most of the pop in year-over-year RASM, and I expect that to continue.

When we had the strike and the World Cup, we sort of expected that there would be some repressed demand.

We experienced that the previous World Cup as well.

So I feel like that, that is coming back nicely online now for the second half of the year, which is seasonally the best part of the year.

So I feel good about domestic coming back strong, driven mostly by corporate, by agencies and by growth in demand.

On the international side, it's steady, as you could see on our traffic release.

Probably the one soft spot is Argentina, where luckily for us, we have low exposure, 2 to 3 daily flights at most.

And so that, we're pretty well-hedged against that.

Europe is doing well and the U.S. is steady.

Nevertheless, we have made some capacity adjustments for international for the second part of the year between August and November, our international capacity is down 12%, just to be prudent, given the currency and the fuel situation.

But overall, I feel good about it and I think domestic is really going to come back strong the second half of the year, backed by good fare and capacity discipline.

That's helpful.

And if I may follow up, on the domestic, you're kind of moderating growth as well.

Just any color on the type of markets that you're moderating in that growth?

Yes, we are.

Also between August and November, we're going to cut our domestic by 5%.

Basically for the entire period overall, we're cutting 7% of capacity, which takes our guidance -- really, our expected capacity for the year from something very close to 20, to something very close to 17 for the whole year.

It's a mix of domestic and international.

Domestically, it's a market that are obviously not doing well on a P&L basis, number one.

It's things that are not in and out of our hubs, so any market that over-flies a hub or under-flies a hub is probably the first to go.

So things, you know, so markets primarily outside our hub.

And internationally, it's, for example, we're cutting the daytime Fort Lauderdale flight.

So we'll keep the nighttime flight only and reducing some frequencies in Northeast of Brazil to Florida.

So it's anything that's sort of not core to our hub strategy is what we're cutting.

The next question comes from Michael Linenberg with Deutsche Bank.

It's actually Matt on for Mike.

You mentioned at your Investor Day that capacity discipline in the Brazilian domestic market was the best you've seen in a decade.

Is that still the case?

Any irrational or aggressive actions on the capacity or pricing front domestically?

Matt, no, I feel good about capacity, to be honest.

I think that -- I've talked about this before, that there's really been a structural change, I think, in how airlines in Brazil are allocating capacity.

We're not seeing airlines go after each other.

We're not seeing them chase each other in markets that, frankly, they should not be in, that they really don't have any chance of making money.

I think airlines are focusing where they're strong and where they can make their network stronger.

We're certainly doing that with the A320s.

And you can see in our traffic, we're putting them in our network.

We're seeing great traffic growth, connectivity growth.

And so I think we've set an example to the market as to how to allocate the capacity where it makes yourself better.

And I'm seeing that across the board in airlines really playing where they are strong.

So I think that's a very, very positive sign for the industry, and I think it's a structural change from what we had a couple of years ago.

Pricing as well, I think that whether it's fares or ancillary, I see airlines taking advantage of the opportunities, showing discipline in the market and really looking forward to taking advantage of the good demand that we usually have in the second half of the year.

And Matt, just to highlight, if you take a look, we were actually down in departures in the first half of the year, minus 2%.

So it's really the upgauging.

It's the fleet transformation.

It's getting these new assets that have more seats, utilizing them 14 hours a day, reducing our CASK, and so it's the right type of growth that you would want, in our existing markets that have been stimulated.

And once again, Abhi continues to increase capacity and expanding RASK.

And that's really a powerful combination because of what we're going to see on the cost side.

Great.

Just as a follow-up, what kind of impact are you seeing, if any, from the upcoming Brazilian election on either business or leisure traffic in Q3?

And anything you can quantify or...?

Yes, so and as I said before, demand right now is strong.

I would say that it's a little bit early to see the effect of the elections.

It's going to be towards the end of September and mostly in October.

So I think we'll know more when we get closer.

It is a distraction, clearly.

But at the same time, I think we also have some repressed demand from the strike and the World Cup.

So right now, we're seeing good trends.

And I think because so much of it is corporate, that tends to be close-in, we'll have a much better idea as we get closer to October.

The next question comes from Renata Faber with Itau.

And thank you, David, for talking about the economics of the E2.

If I'm not mistaken, I believe this is the first time we've talked about that and there is plenty of interesting information on what you said.

So I'm sorry to ask you to repeat it, but could you please talk again about how the E2 will help Azul increase margins?

Yes, sure.

I'll take that question because it's a real passion of mine, and I think I've got E2-itis right now.

I'm really excited about it.

This math is really pretty simple.

It's not difficult.

We got a lot of our E1s during crisis times, during '07 and later, and we were -- didn't have the credit that we do have today.

And so we ended up paying a lot for these E1s, particularly on sale leasebacks and to finance them.

So now we have a whole different situation with the company and so we bought the E2s and the financing is less.

The plane is at a very attractive price.

And so the first category is we have a lower cost on the airplane by a significant amount.

So that's number one.

Then number two, these new E2s have new-generation engines on them.

And the fuel burn savings is there, it's absolute.

The fuel -- the testing is going on.

It's like 13%, 14%.

And so that's absolute, that's it.

Then you move to maintenance.

We have a better deal for the engine maintenance than we do currently.

So that's a big portion of the maintenance cost.

The C check intervals are longer.

Then you have this period of warranty and kind of maintenance honeymoon that goes on for up to 5 years.

And so our maintenance costs will be significantly lower permanently, not just in the first 5 years.

And then we've got 18 additional seats.

And so with the high load factors we have, we assume that we sell half of those seats and have a price and we come up with a number.

And we add all that together and we time -- (inaudible) we just could magically be able to snap our fingers today and say let's -- if all of our 63 E1s were E2s and we had those flying today, we believe that, that difference in margin, it's an astounding number.

It's 9% difference of margin.

9 margin points.

9 margin points.

So 9 margin points over where we are today.

Now, obviously, things can change as far as fuel price and all that kind of stuff.

But I'm saying today, apples-to-apples, what that airplane will be, our cost to buy the airplane versus what we have today, it's 9 margin points.

Now that gives us a tremendous amount of flexibility and cushion.

Obviously, even if it was 5 margin points and we were able to lower fares, it's getting more traffic.

Or fuel spikes up, we've got the most fuel-efficient plane in the industry.

If the real is weak, then we have a plane that costs us a lot less money, so -- and we're spending less money on maintenance, which are dollar-denominated.

So that's why I push the team.

If it's impairments or whatever we have to do, we have -- we're working really close with Embraer to speed up the production to have them coming in sooner.

And that's why we've set this target to have all of the E1s gone by the end of 2021 and so you'll start seeing that benefit next year as the planes start arriving in June.

So I couldn't be more excited.

Dave's been here all week and driving us crazy.

And that -- and I told investors that I haven't sold a single share of stock.

Why would I, when I see that coming.

So I'm very excited about it.

Yes, so we're going to work to try to accelerate this.

It is a very exciting thing, especially kind of given the additional seats, the lower fuel burn.

We got a great price from Embraer, so we're very, very excited about it.

It's amazing what we've been able to do in spite of our costs on the E1.

Really, it's remarkable that this team's been able to pull this off.

So when we kind of get all of the assets -- and then we've got the neos coming, too, on top of that.

So very exciting news.

The next question comes from Dan McKenzie with Buckingham Research.

Corporate business is good.

I'm wondering if you can talk a little bit more about the leisure side of the business.

So on the one hand, it's the seasonally slowest time of the year for leisure traffic.

On the other, we've had some pretty sharp swings in foreign exchange.

And surely, that impacted that part of the business.

So I guess, the question really is twofold here.

First, to what extent was leisure demand impacted by moves from foreign exchange to the extent that you can peel that out?

And then secondly, how long does it typically take for pent-up demand to typically return?

Dan, it's Abhi here.

So overall, Azul historically has been pretty small in the leisure market.

And the reason has been we have not had the right airplane to really have a big position in that market.

We are starting to now with the A320neos.

We have 15 neos today, by the fourth quarter, it would be at 30% of our capacity will be A320neos.

So what's happening with the neos is twofold.

We're putting the neos in our network really connecting our hubs, so Campinas to Recife, for example.

Salvador, a little bit, some -- we're able to enter some leisure markets like Fortaleza, where historically, we've had very, very low presence.

We're obviously seeing a very good market reaction to that.

We're seeing unit revenue reductions much less than what we had talked about on the IPO roadshow, in a sub-10%, compared to a CASK reduction of 29%.

And so a part of this is leisure demand we're able to access that type of demand that we didn't have before.

We're able to stimulate local demand out of our hubs, whether it's Campinas, whether it's Belo Horizonte or Recife.

And we're able to drive a lot more connectivity in our network.

To give you an example, when we put in all A320s, between Campinas and Recife, we had an increase of 77% of connecting traffic.

Because it's not just the leisure that's using these airplane and these routes.

We have 50 destinations on one side and 40 on the other.

The route VCP-Recife has 500 different ONDs that flow over that route.

The route VCP-Belo Horizonte had 800 different ONDs.

So there's leisure demand that's helping us with this airplane, but it's also the base of our network, the breadth we have and the platform that's really strong.

So I would say that because we have so much connectivity, I think we're seeing good results with the A320, with some local stimulated leisure demand, we're also driving incredible connectivity through our network.

Does that make sense?

Yes, understood.

And I guess, just to follow up on that, Abhi, what's the biggest leading indicator for leisure demand?

Is it simply commodity prices?

Or is it some other measure of employment or commercial activity?

I know it's kind of a smaller part of your business, but as you think about turning on this part of the business, what are the leading sort of indicators that you look at?

Dan, this is John.

The exchange rate's devalued quite a bit, but the mood in Brazil is actually very positive.

I mean, if you go back to 2015, 2016, when the impeachment was going on, people were fearful of their jobs, and that's not the case right now.

I mean, there's good underlying demand.

People are traveling.

Companies are hiring.

The fear was in 2015, '16, is, am I going to have my job tomorrow.

So leisure really dried up, and corporate also dried up.

But it's a completely different feeling that we're seeing right now in the country.

It's just there's -- there's just a different vibe.

Now, of course, the exchange rate puts pressure on some international flying, to go to Disney World and things like that, but it's not nearly what it was before.

And there's actually good underlying demand in the country.

Yes, I think -- Dan, this is Alex.

We look at business confidence and consumer confidence.

I think those are good indicators of underlying demand.

The trend in unemployment, I think, is important.

Unemployment is, we believe, still high, but it's trending down slowly.

And I think that helps consumer confidence.

It's a very different story for you to decide to take your family to Florida if you think you're going to lose your job.

But if you're feeling pretty confident that you're going to keep your job and you're going to have a decent level of income, it's cheaper to fly to Florida, actually, and spend your vacation there than to sometimes spend your vacation down here.

And it's also cheaper to buy whatever you want to buy in the U.S. I'm an iPhone user and I've had a few iPhones, but I've never bought an iPhone in Brazil.

And for me to buy an iPhone in Brazil, the exchange rate has to go to 7. And until the exchange rate goes to 7, it doesn't make sense for you to buy an iPhone in Brazil.

You buy it in the U.S. By just flying to the U.S. and buying your iPhone there, you pay for the price of the ticket.

So I think that's what's happening.

Obviously, it's more expensive to go to Disney World with an exchange of 3.80 than 3.20, but if you're feeling confident about your prospects, I don't think that affects your decision.

The next question comes from Victor Mizusaki with Bradesco BBI.

I have 2 questions.

The first one, with regards to the losses of the E1, is there any risk of additional -- or the risk of potential liability that can show up with the replacement of -- the full replacement of the E1 by E2?

And the second question, with regards to your guidance, when we take a look on your guidance for CASK ex fuel, I mean for the full year, you are talking about a reduction of minus 1% to minus 3%, but year-to-date, it is plus 0.6%.

So this big reduction in the second half, it is just a matter of the introduction of the A320 or is there anything else here?

Victor, it's Alex here.

I wouldn't call it risk of additional E1s because, as David mentioned, the replacement of E1s for neos or E2s is very positive, and there may be an accounting effect from selling aircraft at a different price from what it's carried in our books for.

But these 6 E1s that we sold, we actually generated cash, because the market value of the aircraft was higher than the debt value that we had outstanding.

So it generated cash, and then it's going to generate all the benefit in additional revenue and reduced cost that David explained.

So we're going to continue to look for opportunities to remove E1s from the fleet and accelerate the entry of E2s and neos.

And if there is a book impact to whatever we do, we'll call it out, as we did this time.

But like I said, it should definitely be very beneficial and very accretive decision in terms of P&L.

And we understand that the faster we get there, the more competitive we are and the margins go up significantly.

And so that's why David is kind of going crazy in Brazil this week, he's like, "Move faster, move faster, move faster," because he understands that the quicker that we can replace -- David mentioned it, but I want to highlight it.

We're paying for some of the sins of the past, which is being a startup airline in Brazil during the financial crisis, flying E1s that wasn't a very liquid asset.

And so that was naturally all going to go away over the next 3- to 4-year period, but David's just saying, "Hey, let's bring it to the left, guys, and let's run faster."

And then on CASK guidance, Victor, it's really, both new E2 -- new neos that are coming in the second half, but also the run rate of the neos that we took before.

So like we said, we had 14% of our ASKs coming from next-generation aircraft in 2017, and we're going to have 27% this year.

But in Q4, it will be closer to 30%.

So you'll have almost 1/3 of our capacity coming from next-generation aircraft in Q4, which has a much lower CASK than what we used to have in the past.

So that's where we're going to see the reduction in carrying that, but that's already happening.

We talked about the total CASK reduction that we would have had adjusting for FX.

So the FX kind of clouds the benefit that we're getting from the neos, but once you adjust for that, you definitely see a huge reduction in CASK from the next-generation aircraft.

The next question comes from Bruno Amorim with Goldman Sachs.

I have just a very quick question on the price of jet fuel.

WTI is up by 40%, as you showed in your release, FX depreciated by 12%.

And even so, the price of jet fuel per liter rose by just 20% in the quarter.

So I just wanted to understand to what extent this fuel price was impacted by fuel hedges and what you expect going forward in a scenario of stable oil price and FX, as the hedges currently in place remain less relevant.

Sure, Bruno.

It's a number of different factors kind of all at the same time.

So we do have some direct hedges with Petrobras, where we essentially predetermine the price of fuel that we're going to pay ahead of time.

And when we buy that fuel, we pay the pre-upon-agreed price when we hedged it.

The -- you saw in our traffic release and you can see in our ASKs, the mix of international flying is going up significantly.

There's no ICMS on international flying, so that mix shifts more fuel consumption to fuel price per liter that doesn't have the ICMS burden.

So that affects the blended price as well.

We have begun additional flying in states where the state offers ICMS benefits if you fly to additional cities.

So Mossoró is a recent example of a small city where we start flying and that benefits not just the fuel consumption that we buy in that city, but everything that we buy in the whole state, so that helps as well.

So -- and there's a little bit of lag on -- between WTI and the Petrobras price as well.

So it's a number of small effects that account for the difference that you saw.

The next question comes from Savi Syth with Raymond James.

I actually have 2. On the fuel hedges, just following up on the previous one, are you able to -- given that you lock in prices, are you able to give some color as to what your fuel price looks like for the -- at least third quarter or the remainder of the year?

Yes, Savi, so most of the hedges that we have now are -- will affect below the line, they are financial hedges.

So essentially, you can consider that the price of the hedge that we have is the price at the end of Q2, that's what you're seeing here in our financials.

And any fluctuation beyond that will affect the numbers, based on that mark-to-market that we did at the end of Q2.

For the next 12 months, we have about 15% of our capacity hedged, which is roughly half of the maximum that we -- that the policy can hedge.

And it's -- if you want, if you're interested in knowing sort of where we built the hedging position, that would be kind of equivalent to about 205, 210 in heating oil.

But at the end of Q2, that all gets mark-to-market.

That's helpful.

And then if I might, any update on the cargo JV and the timing and rollout of that?

Yes, Savi, so we filed with the antitrust authorities about 10 days ago, and it seems to be progressing well.

It should be a 90- to 120-day process, and so we're anxious to hear back from them.

So we're still very excited about that.

And as you can see, cargo continues to outperform even TudoAzul and even Abhi's great revenue performance.

So Abhi's kind of lagging behind.

And then just one last question on the cost side.

The cost guidance, given the amount of pressure you're seeing, was actually quite impressive.

And I was just wondering, I know this year was supposed to be still high training cost related to pilots.

Where are you finding the savings?

Is it mostly driven by local currency savings or -- I'm just curious as to where you're finding the savings to kind of keep that cost guidance at such a level.

Savi, at the end of the first quarter, when we saw currency devalue and fuel go up, we kind of gathered around as a senior leadership team and started an initiative called change the business.

And so we've got 44 different projects across the board that our senior directors are managing to take costs out of the organization and kind of improve the operational performance.

So that's a big reason why we're feeling very confident, is -- I think times like this, when you do have spikes in fuel, you start to do new things that maybe weren't on the table before and so we're working aggressively at those, and that's part of it.

But I'll let Alex kind of give a little more detail overall on the third and fourth quarter.

Yes, and like we talked about, a lot of it is the ramp-up of our neo capacity and the change the business initiatives that John mentioned.

And I think once you account for -- we're talking about the 29% reduction in CASK from the neo.

There's just so much efficiency, both from the fact that it burns a lot less fuel, but one thing that is unique about Azul, a lot of companies will go through change in fleet.

They're going to go from old-generation jets to new-generation jets, but they're only going to get the fuel benefit.

We're getting the fuel benefit and we're getting the upgauging because we built a network over time that was actually asking for this size of an aircraft.

While we couldn't have started Azul with large narrow-bodies 10 years ago, but now we've built a network that has enough feed and enough traffic that can fill neos.

And so we're going to get the double benefit of improved fuel burn and more economies of scale.

As David mentioned, the miracle of Azul is we built what we built with the aircraft we had.

So now that the new-generation E2s are coming out, the A320neos, there's so much leverage on the business because of the aircraft that we had previously.

The next question comes from [Natalia Saratin], with [Citi].

I have 2 quick questions from my side.

The first one is, could you tell us more about the potential volume upside that could come from an alliance with the postal services?

And if you see any political (inaudible) given the confirmation on this agreement?

That's my first question.

So I think I -- I think we talked about this on previous calls, there's a logistics problem in Brazil.

And today, Azul serves 100 cities domestically.

We have 7 to 8 international cities, and we have 200 stores spread all throughout the country, and the Brazilian Post Office sends quite a bit of airfreight, anywhere from 600 to 800 million a year in airfreight.

And we believe that our joint venture could give them a significant reduction from what they have today and have those -- have that mail fly in the belly of our aircraft.

And so I think the big difference in Brazil is that today, all of that mail is palletized, and so it needs a specific aircraft type.

But that's not how it's done in Europe or the U.S. And so the fact that we always have some excess space in the belly of our aircraft.

And so if you think about we've grown our cargo business faster than we thought was possible and then you add in the partnership with the Brazilian Post Office and bringing in that incremental revenue that they provide.

And we are in 2,000 or 200 physical stores and they have thousands of physical stores throughout the entire country.

And so it's not like is in the United States, you don't send packages via Amazon to your doorstep, and so having physical pickup locations is key.

And so the opportunity that we're looking at is to provide a huge logistics solution for the country.

And I just want to remind everybody, it's not in our guidance and this is upside to the Azul case.

So we're excited about the future here.

And I think as you not only provide a logistics solution to the Brazilian Post Office, you're providing a logistics solution for many other e-commerce players in Brazil, and that's where a lot of the growth in our business is coming from.

And the Correios thinks it's important and if that happens, that's fantastic.

Even if it doesn't, our network is going to provide that to our customers.

And people like Amazon and others, that was in the news.

I mean, other people that need the logistics.

Brazil is logistically challenged, and no one is in a better position to help out than Azul.

Okay, and my second question?

Yes, go ahead.

I think she said it but we didn't hear it.

What was your second question?

Okay, yes, I think you didn't hear it, sorry.

My last question is quick.

Do you have any comment about the Norwegian Air Shuttle launch in Brazil to [disrupt price]?

Norwegian is -- looks like it's just going to fly from London to Brazil.

It's not surprising.

They fly to Buenos Aires.

They fly to Singapore.

They fly to New York, so no, it's not really a surprise.

And it doesn't really affect us that much in any way.

It's an international route for them and that's it, yes.

Yes, so we have a question on the webcast.

I'll just read it out here.

So the question is regarding the joint venture and the progress on that.

Of course, yesterday, Copa announced that they're in talks with United and Avianca on a Latin American U.S. joint venture.

I can't comment on their joint venture, but regarding with Azul and United, as we said before, now that Open Skies is signed, we are absolutely talking towards a U.S.-Brazil joint venture.

These things take time to negotiate, we're in the process, and they take even longer to get approved, actually.

And it looks like the DOT right now has a pretty full docket.

Nevertheless, there are opportunities for the customer for our joint business, so we're actively talking to them regarding a U.S.-Brazil joint venture with Azul United.

And this was always in the plan.

When United made their investment in Azul, even before Open Skies was approved, we knew that this was a possibility.

And so we kind of, we wrote that in the contract that we have with them, and United has been a fantastic partner of ours.

We love the fact that they bought a portion of the HNA shares a few months ago, which shows their confidence in our business as we move forward and it shows the upside that they believe in, in Azul.

(Operator Instructions) Ladies and gentlemen, this concludes today's question-and-answer session.

I'd like to invite John to proceed with his closing statements.

Please go ahead, sir.

Well, we'd like to thank everyone for joining us today.

And as always, if you have any follow-up questions, we're available.

We'll be doing calls all afternoon and certainly, follow up with Andrea.

And we're glad to continue to deliver on our plan.

Thanks, everybody.

See you next quarter.

That does conclude Azul's audio conference for today.

Thank you very much for your participation, and have a good day.