Azul SA (AZUL) 2019 Q2 法說會逐字稿

Hello, everyone, and welcome to Azul's Second Quarter 2019 Results Conference Call.

My name is Paola, 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 Bottcher, Investor Relations Manager.

Please proceed.

Thank you, Paola, 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'll 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?

Great.

Thanks, Andrea.

Welcome, everyone, and thanks for joining us on our second quarter 2019 earnings call.

As always, I'd like to start by thanking our crew members for taking care of our customers on almost 900 daily flights.

Thanks to their efforts, we have achieved record second quarter results in what is seasonally the weakest quarter of the year.

We continue to strengthen Brazil's largest network, and since Q2 of last year, we have added 10 new destinations.

We see many more opportunities to grow our network and plan to open 6 to 8 new cities every year.

Our focus is to grow in markets where we are strong.

We are the only carrier in 72% of the routes we serve, and in the second quarter, we were the leader in terms of departures in an astounding 85% of our markets.

We ended the quarter with 29 next-generation aircraft, the largest fleet of fuel-efficient aircraft in South America, representing 39% of our ASKs.

We are very happy with the performance of the A320 and could not be more excited about the introduction of the E2s starting in October.

The E2s are truly a game changer.

By the end of the year, our 46 next-generation aircraft, including 6 E2s, will represent 55% of our December ASKs, giving us great momentum going into 2020.

We have also demonstrated our ability to grow while maintaining operational excellence and great customer service.

In June, Skytrax awarded us, for the ninth time in a row, the Best Regional Airline in South America, also the Best Staff in South America, a strong testament to our great customer service and management team.

In fact, our NPS, which -- our NPS score is one of the highest in the world at above 60, and this compares with some of the best brands in the world.

As you can see on Slide 4, we have a ways to go in our margin expansion story.

As I've just mentioned, we will start replacing E1s with E2s in October, and I couldn't be more excited with the impact these planes will have on our profitability.

John will talk about this in more detail in his presentation.

We have a regional growth plan that is centered on the transformation of our fleet.

By upgauging our fleet, we will drive down costs, resulting in higher margins.

The best news is that we are less than halfway through this process.

TudoAzul and Azul Cargo have grown significantly over the past few years.

But we are only 50% on the way to our target.

The area I'm most excited about is the tremendous growth we are seeing in our e-commerce business.

We are uniquely positioned to take advantage of this high-margin business.

We fly to 114 cities, and through our partnerships, we are able to reach more than 3,700 municipalities overnight.

No other airline or logistics company in Brazil has this type of reach.

The growth in e-commerce in this country is just getting started, and we are the best-positioned company to take advantage of it.

Very exciting stuff.

In summary, we are on track to deliver on our promise to expand margins by 5 margin points between 2017 and 2020, even though we have faced a much tougher macro environment.

On Slide 5, we show that our fleet transformation plan is consistent with our network.

By the end of the year, we will have -- as I mentioned, we'll have 46 next-generation aircraft, mostly flying to routes where we are either the only carrier or at airports where we have a leadership position.

As you can see in the graph, our dominant position continues to increase as we add more next-generation aircraft.

We are confident about the future of the Brazilian aviation market and our ability to continue expanding margins, all the while creating the best experience for our crew members and customers.

Azul is not only getting bigger, but we are getting better in every way.

Because of all the above, I have not sold any of my Azul stock.

I believe the best is yet to come.

And with that, I'll pass the word over to John to give you more details on the second quarter results.

Thanks, David.

I also want to thank our crew members for all their hard work during the past quarter.

Thanks to them, we delivered great results.

As you can see on Slide 6, we grew capacity by 16% in the second quarter while expanding our top line revenue by 31% to BRL 2.6 billion.

In addition to the double-digit growth in capacity, RASK increased 13.6%.

Adjusting for the increase in stage length, RASK was up 15.1% year-over-year.

This is the third year in a row that we increased capacity by double digits while increasing RASK.

Operating income was a record BRL 340 million, up 70% year-over-year.

In the second quarter, we received 4 A320neos and 1 A330neo.

These aircraft provide significantly lower unit cost through more efficient fuel burn, lower ownership cost and provide more revenue per flight.

The second quarter has allowed us to offset cost pressures from higher fuel prices, the devaluation of the Brazilian real and the end of the payroll tax relief program.

We made significant investments in the quarter to be ready for the second half of the year, not only by adding new aircraft, but also by hiring and training pilots and flight attendants.

Moving on to Slide 7. As you can see, fuel and currency had a negative impact of BRL 133 million on our second quarter operating results or approximately 5 margin points.

We also had 2 margin points of negative impact from the end of the payroll tax relief program.

Thanks to our margin expansion strategy, our ability to recapture revenue and reduce cost, we recovered 160% of this impact, reaching an operating margin of 13% in what is seasonally the weakest quarter of the year.

Moving on to Slide 8. TudoAzul maintained a strong growth pace during the second quarter with gross billings up 31% year-over-year.

This is TudoAzul's fourth consecutive year with over 30% growth.

On the right side of the slide, you can see that our cargo business also performed extremely well.

Revenue increased 47% year-over-year, benefiting from the expansion of our network and fleet.

On Slide 7, you can see the extensive outreach of our cargo network.

As David mentioned, more than 100 airports today handle our cargo, and we have 240 stores nationwide serving 3,700 municipalities.

We offer door-to-door deliveries through our franchisee model.

This is a business with higher margin than our passenger transportation business that requires very little additional investment.

We have a diversified customer base, including retailers, manufacturers and online companies in Brazil who value our reliable and far-reaching logistics solution.

E-commerce grew 314% year-over-year, by far the fastest-growing segment in our cargo business.

Moving on to Slide 10.

I am proud to report that we ended the quarter with a very strong liquidity position representing 42% of our last 12 months revenue.

And this is after growing total revenue by 31% year-over-year.

Our balance sheet is further protected against currency fluctuation through assets such as our security deposits and maintenance reserves totaling an additional BRL 1.5 billion, which are not included in our cash balance.

On the right-hand side of the slide, we show an evolution of our leverage, which reached 3.1x in June.

With the new accounting standard, IFRS 16, when a new aircraft arrives, we immediately see an increase in debt on the balance sheet, reflecting the full term of the lease, but we do not yet see the earnings production.

Adjusting for these 5 aircraft that we added during the quarter, our leverage would have been below 3. We expect this timing effect to level off as these aircraft become fully productive.

On Slide 7 (sic) [11], you can see that in addition to the improvement of our operating results and reduction in leverage, our operating cash flow was over BRL 1 billion in the quarter and we generated free cash flow of BRL 387 million.

On Slide 12, we present our updated 2019 outlook.

We expect to grow our total ASKs between 20% and 22%, with most of this growth coming in the domestic market.

Our domestic capacity growth is low risk and focused on strengthening our existing network by replacing smaller aircraft with larger aircraft on the routes we already serve.

As you know, we made an attempt to acquire part of Avianca Brasil, which included some slots, aircraft and employees.

As you are aware, other events happened, but we were able to acquire all 12 of their A320neos and are currently hiring many of their pilots and flight attendants.

This investment has put some short-term pressure on our cost as we prepare to induct all of these aircraft into our fleet.

As you know, the Congonhas slot process is not yet complete.

However, we already received 40% of the slots, have secured all of their next-generation neos, hired many of their pilots and flight attendants and preserved capital in the process.

With the addition of these planes, we will end the year with approximately 55% of our capacity coming from next-generation aircraft, truly setting us up for a great 2020.

On the cost side, we expect CASK to remain flat to slightly up in 2019, mostly due to the investments we are making for our future growth and some macro headwinds that we've been facing since we released our original guidance in the beginning of the year.

As we enter the second half of the year, which is seasonally the strongest, we feel confident about our guidance of 18% to 20%.

Moving on to Slide 13.

Looking ahead, we are very excited about the first delivery of our E2s that we put in the operation in October and the margin expansion opportunities they provide.

Looking at the chart, you'll see over 500 of our 870 daily flights are still flown by E1s.

In the future, all of them will be flown by E2s, resulting in 14% lower trip cost and over 10% more revenue on each flight.

We couldn't be more excited about these planes and the margin contribution they will bring.

We look forward to the coming years when we can replace all of our E1s for E2s.

We're working very hard to accelerate this process.

In summary, we feel confident about the opportunities that lie ahead of us.

We're executing on our fleet transformation plan, our cargo and loyalty businesses are performing incredibly well and we have upside in our investment in TAP, an important asset with further upside potential.

Everything we have accomplished since our IPO has been done in an environment of a weakening real and low economic activity.

Imagine what happens when the Brazil engine starts moving again.

Before we open for questions, I would like to invite all of you to join us at our university in Campinas on October 14 for our second Azul Day.

It's a great opportunity to meet with our management team, tour our facilities, and we'll have an E2 available so each of you can get to know the unbelievably great product we'll be taking on this year.

With that, David, Alex, and I are available to take your questions.

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

Just maybe Abhi, as usual, starting off, if you could talk a little bit about the domestic versus international trends.

Especially international seems to be bottoming and improving, and I'm kind of curious if the slowing of the kind of international capacity growth is still kind of the right decision or if you're making some adjustments there?

Yes.

Hey, Savi.

Abhi here.

So yes, you're right.

You've heard this sentiment from other operators in the region as well, talking about improving trends in the Latin, Copa yesterday, United as well.

So yes, we have seen international unit revenues spill into the positives in second quarter.

The Brazil-U.

S. market has capacity down, but for the rest of the year, in the low teens, negative capacity, which is very promising.

And so the dollar as well, it's run up recently, but it was -- has stabilized.

And so the international trends have definitely improved, the capacity situation has improved as well.

And so I think we are definitely seeing positive unit revenues.

We expect to see that for the end of the year as well for international.

We're not changing our plan for international.

It's very low risk.

It's not adventurous at all.

I have no new destinations planned this year, maybe only spring or summer next year.

It's just about frequencies, potentially connecting one dot with another dot very, very late in the year.

But very, very low risk, just being very strong where we are in Brazil with Orlando, Fort Lauderdale and Portugal.

Argentina continues to struggle a little bit, but we have very low exposure there, only 2 daily flights basically.

So it's not really a concern.

So yes, it has gotten better.

Unit revenues have turned to the positive, which is a very good sign.

Our capacity discipline continues to be good, but no changes on our side in terms of our capacity plan.

And Alex, if I might ask, could you provide an update on the pilot training cost and kind of how that's progressing?

And what that shape will be and when the growth might start to show up and kind of feel benefits on the cost side?

I think yes, we've always talked about the fact that this fleet transformation process does carry some startup costs, right?

Even before we took these Avianca aircraft, we have about a point of margin when you consider the fact that especially pilots, but also flight attendants, they're getting paid their salaries, but they're not producing ASKs, plus there's all the costs involved in the training itself.

We do a lot of the training in our own university.

But we also have to outsource some of this, which includes travel and the cost of the flight hours, the simulator hours in other facilities.

So that's about a margin point.

But then one of the reasons why we wanted to acquire Avianca Brasil is that we were going to get pretrained pilots, right?

So they would come in and they would continue operating the certificate of the original airline.

Once they move from Avianca to Azul, we have the requirement to train them on our operating certificate, so there's an additional maybe 0.5 point of margin this year beyond what we usually have for the fleet transformation.

So there's about 1.5 points this year -- this quarter, of training, travel and unproductive time in costs in our P&L.

And when does that wind down, Alex?

Or when does -- can we get enough of -- the large enough fleet that some of those headwinds start to go away?

The Avianca-specific cost probably in Q4 goes away.

The 1 margin point, they will wind down.

As the company gets bigger, it becomes less of an impact.

But it kind of gradually decreases together with our fleet transformation, right?

So as we approach 100% of our fleet getting to next-gen, you will start to see that cost getting less and less material.

Sorry, John.

The other thing that -- obviously, when you go from an E1 to an E2, the 2-day difference is training.

So it's not the same thing.

So it's going -- as we approach 100%, certainly, it'll still be there, but it's going to get a lot -- because as Alex said, when we get bigger, the training as we transform, take out 63 E1s and putting 63 E2s, it's minimal probably.

Correct.

Just on E1s to neos -- A320neos.

And that -- those are slowing down and the E2s are accelerating.

The next question comes from Mike Linenberg, Deutsche Bank.

I guess 2 questions here.

So if we look at the Congonhas situation, I think you had 26 slots currently and then you got 15 for this distribution or redistribution.

So now you're at 41 total.

Is that a sufficient number, call it 20, 20.5 round trips, to participate in the Congonhas-Santos Dumont shuttle?

And then can you clarify, there was a press report, there was something out saying that maybe you would work with one of the other smaller operators and join slots?

So kind of a two-part question.

And then I have one more.

Mike, the process isn't over yet, and that's why we're not announcing what we're going to do with the additional slots.

It's still a very concentrated airport, still roughly 94% of the flights are concentrated with the duopoly.

And so we're going to continue to kind of push to increase capacity at that airport.

The process should be over this week, but there are some smaller operators that asked for slots on the main runway.

So all things indicate that they'll have to move to the auxiliary runway because there -- the operations don't allow for them at the landing speed that's needed.

And so I think you'll probably hear from us over the next week or so and determine what we're going to do with the slots that we receive.

And so we're continuing to kind of force the issue with the government.

We think that airport should be opened up.

We think that every airport in Brazil should be opened up.

That airport today is significantly less in capacity than it was 10 years ago.

And everything indicates that they can take more operations per hour, and that would kind of help increase competition.

And so -- and we look forward to doing that over the next couple of years.

But certainly, getting some slots there is important.

It's a high-profile airport.

We don't talk a lot about Congonhas at the airline today because, as you indicated, 20 flights, we fly almost 900 flights a day.

And so we don't want to overplay what Congonhas means.

But any opportunity we can to kind of get into that airport, we're going to do it.

John, you talked about the auxiliary runway, and I know that as part of this redistribution, I do believe that there were some new slots created by ANAC for one of the carriers to actually do some service on the auxiliary runway.

Are you suggesting though that maybe some of the other carriers, rather than using some of those slots, that they could just add more service to the auxiliary runway and then maybe freeing up more slots for everybody else?

Is that -- did I hear you right on that?

Yes.

So the (inaudible) and ANAC and (inaudible) and has basically said that the ATR operators need to be able to land at 120 knots, and ATR doesn't allow you to land at 120 knots.

And so I think that it's still TBD.

And so a lot of work is being done with the agencies, and we're kind of standing by to see what happens.

But certainly, there's a possibility, Mike, that those ATR operators move to the auxiliary runway, which is very beneficial overall for the consumer, right?

Because it'll actually allow for more distribution on the main runway, it allows for more carriers to be in that airport.

We are not against (inaudible) getting into that airport, we think it's great overall.

But I think, we want to use the most efficient use of the asset possible, which is using the main runway to fly larger aircraft.

Yes.

That would be a fantastic development and certainly a win for the consumer.

So hopefully, the government goes that way.

Just one for you, John, this is second question.

It's great that now you're up on the boards with the public rating BB-.

Is there any sort of aspiration to get to an investment-grade rating?

I mean you're only a few notches away, there's probably only a half dozen airlines in the world that are at that level, but those who are at that level, there are a lot of interesting things that they can do.

So you're off to a good start.

I know that you probably don't think that it's absolutely essential, but is there maybe internally a drive to get to an investment-grade rating?

That would be pretty impressive for a carrier based down in South America to have that.

Mike, I'll let Alex answer the question, but we're extremely competitive people.

And anytime we can get our ratings up, it's something we want to do, but I'll let Alex [do that].

Yes.

I think that's exactly right.

It's a little bit of when we started talking about expanding margins by 5 margin points.

Once people started seeing that we were on track to deliver, they started asking, okay, so what's next, right?

And obviously, we are not going to just retire.

We're going to continue pushing for higher margins to get the company bigger, more valuable, and the same thing applies to leverage, the same thing applies to our rating.

We have brought the leverage to low 3s.

I think if you do the math correctly, we are in the high 2s.

And our margin expansion plan will allow us to continue reducing this to mid-2s, to low 2s.

And then we'll see once we get there what we do.

But I think we won't rest.

And whenever we get to a target, we'll just see if that's sort of just the stepping stone for the next target that we're going to try to achieve, right?

And we believe very strongly that the best of Azul is yet to come, both on a margin basis, leverage, ratings, and so we're just going to continue working in that direction.

The next question comes from Rogério Araújo, UBS.

I have a couple of questions.

So first, what is the oil price considered in the new guidance?

Is there any upside from these recent drops in the past days?

That's the first question.

Sure.

Rogério, so our philosophy with guidance is we update our forecast at least once a month, if not more often than that, as required.

When we do that, we look at the forward curve for heating oil and we look at the Focus survey for the dollar-real exchange rate, right?

And then so we did that a while ago when we closed the books on Q2.

Since then, the real has moved down, but oil has also moved down.

As long as our expected midpoint of our guidance is within the range that we put out, we don't change the guidance.

And so it is fair to say that since we did the math and we closed the books on Q2, the dollar went up and oil went down.

It's the -- I think it's roughly a wash since then.

So there is some bad guy from FX, but there's a good guy from oil.

But in the end, I don't think it's much different from what we originally set out, which was a few weeks ago, looking at the forward curve and the Focus survey.

And the Focus survey, we actually put in a little bit of conservatism because I think there's a lot of optimism in the FX rate from the Focus survey, so we're a little bit more conservative than that.

We don't exactly give out that number, but that's roughly sort of the philosophy of what we do with guidance.

I think the current prices reflect roughly what we had when we closed the books and saw that we were going to reaffirm our EBIT margin guidance for the year.

Very clear.

So second question is on the capacity expansion in flight in the fleet plan.

So there is almost 20% seat capacity expansion now in the second half of this year.

So what I'd like to know, if you could provide a little bit more color on the markets this capacity should be deployed?

Or even in the airports, if Guarulhos, that Azul has been increasing capacity, is one of the targets?

And what do you expect in terms of any change in this focus for routes that are more regional?

Or it's going to be the same focus?

So a little bit more color on that would be great.

Hey, Rogério.

Yes, sure.

I can certainly give you more color on that.

So I'll give you some examples here.

We'll give you an idea on how we're focusing on capacity.

First of all, as David and John both said, we expect to end the year with 70% to 71% of our routes alone.

And that's the number that we started the year with.

So when all things considered end of the day, that dominant position we have will not change, and that's an indication of where our focus is on the network side.

But I'll give you some examples here.

We currently fly 226 nonstop routes, roughly.

24 of them are new.

We had them this year, we didn't have them last year.

Of these, only 5 of the 24 are former Avianca markets.

Only 3 of the 24 are in Guarulhos.

So that gives you an example of all of the places we've added new routes, and we haven't had to -- we haven't wanted to even add them in Guarulhos, for example.

So only 3 of the 24 new routes we've added year-over-year are in GRU.

In addition, we added capacity, mostly by upgauging, on another 77 routes.

Of those, only 11 are former Avianca routes.

So again, the vast, vast majority of our growth has been in the Azul network.

If you consider all of the capacity addition that we have done over the last 1 year, it's over 100 routes that had been impacted.

Only 9 of them, only 9 of the 100 were in routes that have competition, that was not former Avianca.

So as John said, we've taken a short-term opportunity here in terms of some of the Avianca demand, but it's still a very, very small percentage of our focus.

Avianca flew 59 routes.

We're only in 20 of them.

And out of the 226 routes that we have today, only 43 of them have any direct competition.

So we are well over 70% of our routes that we are alone.

That trend is going to continue.

These examples show that we have plenty of capacity growth, network growth opportunities in our own network, given our hubs, our focus cities.

We've really made an amazing network platform over the last 10 years.

And so the vast majority of our growth has been in our own network.

And last data point here, the A320s are flying today in 42 nonstop routes.

Only 3 of them are new and in Guarulhos.

That's it.

All the others, we flew those routes before, and that's very consistent with our upgauging strategy.

So our story has not changed, our strategy has not changed.

We continue to have this focus, strengthen our network.

As we said many times before, every time we add a larger aircraft in our own network, our network becomes even stronger, even more defensible.

A lot more connecting traffic goes through it.

And obviously, much more efficient.

So that's going to continue to -- has been our focus and will continue to be our focus.

I think too, Rogério, it's important to note that, yes, we have put some A320s in the Guarulhos airport because we have the most fuel-efficient aircraft in Latin America today, and is the lowest unit cost and lowest trip cost in this range.

And so obviously, in more competitive markets, you're going to put your best-performing asset.

And so what we look forward to is when we can put all those A320s into Campinas, into Recife, into Confins and Cuiabá.

There's a lot more places to deploy those assets.

The next question comes from Lucas Barbosa, Morgan Stanley.

I have 2 questions.

The first one is kind of a follow-up to the first question -- to the question Rogério just did, just regarding Azul's strategy in Guarulhos.

If you could give us some color on how many slots Avianca Brasil used to have in that airport and how much of them you were able to get?

In addition, if you could just clarify these 3 routes in Guarulhos are the ones that you already added?

Or if this includes the ones that you still plan to launch in the second half?

That's my first question.

I thought Abhi was so detailed, we wouldn't have a follow-up Guarulhos question.

Lucky for all of you, I have more details.

But in terms of slots, so Guarulhos is obviously not as -- it is constrained, but it's not as constrained as Congonhas, of course.

So slots were available.

Guarulhos is an ANAC-slot controlled airport, so you can go and ask for slots.

And everybody has done that, not just us.

If you look at the public data, we have added, GOL has added and LATAM has added as well.

And in many instances, they've added more than we have in Guarulhos.

So that's something to watch out for.

But the new markets we've added are Guarulhos, Fortaleza, Juazeiro and Salvador.

So those are the only 3 new markets we have added that was former Avianca markets.

And I think that we are still -- Guarulhos is still our fourth-largest base in terms of departures.

And again, it's -- our focus is our network.

One advantage we have is when we add some capacity in Guarulhos is we become a much more relevant and strong partner for our interline and codeshare partners.

So United, TAP, Copa, we all have codeshares with, Ethiopian, Turkish.

So they are all enjoying great capacity, thanks to us right now, and it's a very good incremental revenue for us.

So again, it's our fourth-largest base in terms of departures.

We continue to focus in our network itself.

We did take some opportunities, as I explained, but it's been a small percentage of our year-over-year growth, and I'm not expecting that trend to change.

And one final anecdote, if you look at the capacity data, you'll see how focused our capacity has been in our own network.

Look in Brasilia, for example, we hardly have any growth in Brasilia.

Look in Rio, for example, we hardly have any growth there.

Look in other cities in Northeast, we're really focusing where we are strong and where we see the opportunities.

So I think we are being very disciplined and being very true to our strategy.

Perfect.

My second question is regarding the share of your network with no competition.

So it's actually a follow-up from the Slide 5 in your presentation.

Do you have an estimate of how much of your routes and percentage of ASKs will have no competition in 2020?

Yes.

In 2020, we expect the trends to be very similar to what we have today.

As we are adding A320s in our own network, actually the percentage of revenue is growing in our own network with the upgauging of these aircraft in our own network along with the ASKs.

So I'm not expecting significant changes in these percentages or these graphs on what we have today.

Our next question comes from Daniel McKenzie, Buckingham Research.

Congratulations on the results here.

A couple of questions.

Abhi, one of your competitors has chosen to go down the path of no hub in the Northern -- Northeast of Brazil, so going back to one of your earlier comments in the previous question.

Can you talk about to what extent Azul's increased relevance in the Northeast is contributing to system RASM?

And is it potentially at the expense of those with less network relevance in the Northeast?

Yes.

Thanks, Dan.

We're obviously very happy with our Recife hubs, and we're really happy that we were able to invest in this hub much before anybody else even thought about a Northeast hub.

We actually launched this hub in 2016.

It has grown.

Recife today is approaching what Belo Horizonte was maybe a year or 2 ago.

And Belo Horizonte is approaching what Campinas was a couple of years ago.

We have almost 70 departures -- or 70 departures in Recife.

We connect all of the Northeast capitals.

Of course, we connect Orlando and Fort Lauderdale as well.

Yes, and I think we do have a disproportionate share of that demand because we have -- as David likes to say, if you provide convenient service, they will fly more.

And one great example of this is a city called Mossoró that we started last year, has a great university there.

And now students are traveling more than ever, and it's a route that's doing really, really well.

So I don't know -- I don't have their numbers, so I don't know how much we're hurting them.

But what I can tell you is that it's a hub that's done very well for us.

We're adding capacity this year, and it continues to perform very well on a unit revenue basis.

It's a focus for us.

And I think we'll keep -- we have a lot of A320s flying there because of the distance.

It's a perfect South-to-North A320 market.

It makes us very efficient and it makes it really hard for anybody to gain a foothold.

So it's doing very well, and we will continue to invest in it.

And probably, we have a disproportionate share of Northeast demand because of the strength of our Recife hub, that's probably true.

And Dan, this is the first time in the history of Brazil that the Northeast is ever really been connected.

It's connected regionally, it's connected to other capitals.

In the past, if you were in another Northeast destination and wanted to go to another capital in the Northeast, you would have to go down to São Paulo or Brasília.

And so we believe that people travel a lot more because of that.

So Brazil is much more connected today because of what we provide in the Northeast.

And it's even allowed us to strengthen the flights that TAP brings into Recife.

We actually have flights to Fort Lauderdale in there and so it's a really, really strong hub of ours.

Yes.

Understood.

Another question, just given the volatility of the macro backdrop, the economic outlook in Brazil has gotten quite a bit worse from where we were at the beginning of the year.

I'm just wondering if you can address the kind of the potential for a lumpier growth in 2020.

So I know, John, you'd talked about wanting to accelerate the E2s here.

And go ahead, reorientate my thought process here, but rightly or wrongly, U.S. investors are just conditioned to believe that lumpy growth is bad just because of the stress it can put on the operation.

And obviously, with Avianca Brasil exiting, there has been some really unique opportunities this year that are pretty easy to digest.

Yes, but just looking ahead to 2020, fleet growth does grow to 6%.

And I'm just wondering, how squishy is that 6%?

Is it likely to be fleet growth closer to 10% or 15% if you can get the E2s that you want?

I'm just wondering if you can just help us think about kind of the lumpiness around the growth rate that we might see next year.

Yes, Dan.

So first of all in the macro, we've kind of gone through a 5-year tough period in Brazil.

Our GDP has been flat to negative almost every year over the last 5 years, and look at the results that we've been able to provide.

I'm very optimistic with the new government, I'm very optimistic about the reforms.

I mean just last night, the lower house finally approved the retirement reform.

That's big news for Brazil.

That's going to make -- that's going to be a game changer.

And so I'm optimistic that 2020 is going to have some real solid GDP growth here in Brazil.

But one thing that we think about, and we wanted to show that on the slide in the presentation, is the E1 to E2, that should happen in a depression, right?

We needed to do that.

The faster that we can flip that fleet, the better.

And so the challenge that we have had is not finding enough homes for our E1s, but we want those E2s as quickly as possible.

David highlighted, it's 2 days of training for our pilots, so it's plug-and-play.

Those aircraft arrive from São José dos Campos, arrive at our headquarters and we're flying them right away, and the pilots are ready to go and they can fly the E2 and the E1 on the same day.

And so -- and as you look at -- you said it absolutely correct, it's only about a 6% increase in the fleet, but each one of these aircraft have 18 to 30 incremental seats.

And so obviously, it's going to deliver over 10% more revenue on every single flight, lower ownership cost, lower fuel burn.

And so I think you earn the right to grow, Dan, when you're expanding margins.

And that's what we're doing.

If you're not expanding margins, you're not doing stuff that's bettering your business, then you shouldn't be growing.

But what we're doing is this network and this fleet gets stronger every single day.

And so we look forward, close our eyes and wake up in 2021, 2022.

We are certainly playing the long game.

We are extremely excited about 2020 because our exit rate is 55% of our ASKs on next-generation aircraft, and then every month that just gets stronger.

And we wanted to show you that 500 daily flights are happening on E1s.

Those are not very economical aircraft, right?

And so as you move on to what that looks like when you have the E2s, it's pretty remarkable what this airline can look like in a couple of years.

And I'll just add on the E1 and E2 thing.

The economics are so astoundingly different between those 2 airplanes that there's even incentive for us to take some impairment and take those planes out quicker.

And the payback is really quick.

It's amazingly quick.

So those are numbers we're running.

But we have some (inaudible), but we could even accelerate it and the possibility is completely different.

And as John said, if times really got tough, we should get rid of the E1s and get the E2s on immediately because that's -- that really is an amazing kind of different airplane.

The next question comes from Marcos Barreto, Citi.

This is Marcos from Citi Transit team.

Just a couple of questions from my side.

First, what is your thinking behind the deployment of E2s?

Are there domestic routes that have become better or now require more service?

And my second question is when we think about the Congonhas slots, is it too naive to think that the (inaudible) airplanes could satisfy minimum approach velocity requirements with lower loads?

Hey, Marcos.

I'll start with the E2 and then I'll let John answer the Congonhas ATR question.

So regarding the E2s, our strategy is very simple.

It replace the E1s.

So as John and David said, we have over 500 daily departures today that we want to replace.

We will start in our hubs.

So we have many, many corporate routes flying out of Campinas.

We fly to Brasília 6x a day, we fly to Porto Alegre 9x a day, we fly to Curitiba 11x a day.

All of those will get replaced with E2s, and each one of those will have 14% less cost per flight, and I will have 18 to 30 more seats to sell.

So our focus is going to be replacing E1 routes.

It's going to be a great airplane for the corporate customer, very efficient for us and we just have so many of those high-frequency corporate markets in Campinas, in Confins, in Recife, in Curitiba, in Porto Alegre, in Goiânia, Cuiabá, all those kinds of places.

And that's going to be our focus, really for the first couple of years is just to replace all of those.

On the ATRs, we are the world's largest operator of ATR, okay?

And so as I meet with our safety team and I meet with our operations team, the aircraft should not be landing at that speed.

And so it is -- it's factual, it's not maybe, it's factual.

And so what I find to be disappointing is you have a highly congested airport that has restraints on it, and you shouldn't be using the main runway to fly with ATR aircraft.

There's an auxiliary runway that's provided for that.

The best way to get fares down in São Paulo is to have more operations on the main runway.

And so we are optimistic.

We -- this has been a long battle.

And as I said before, we're playing the long game and we believe the right thing will be done.

And the more operations we can get at that airport on the main runway is the best thing for Brazil and it's the best thing for the consumer.

And that's -- we stand behind that.

Having main runway operations from small operators only increases GOL and TAM's presence in that airport.

And that's not good for anybody.

Okay.

That's great color.

Just one quick last question.

Are you aware of any foreign interest in domestic slots?

No, we are not aware.

We haven't heard anything, no.

Our next question comes from Mike Linenberg, Deutsche Bank.

Just a quick follow-up.

And Abhi, I think you answered my question, and it really had to do with the economics of the E2 versus the E1, the 14% lower trip cost, 10% more revenue.

I just was trying to get a sense of the seating configuration and how much it actually differed.

Now Abhi, you said 8 to 30 [seat differential] and I know you have multiple seating configurations on your E1s.

But the difference, 8 to 30 seems like a pretty wide range, what -- do you have one airplane that's like 110?

Yes, Mike.

Our E2s will have 136 seats.

We have E90s today with 106 and we have E195s with 118.

So it's 18 to 30 seats.

That's perfect.

That's great.

Thanks for that.

Thanks for clarifying.

David is yelling at me because he wanted 138, but that would mean the emergency equipment would be in the overhead bin and my customers would hate it.

So it's 136.

But he doesn't realize the overhead bins are enormous.

You can fit bags in there on [pin lines], but whatever.

But I think what's important, in our E2, as we do all the numbers, and it looks like virtually the same seat mile cost as our 320s.

So you can imagine a plane with a seat mile cost as the 320neo, but with only 136 seats.

So trip cost of that's going to be much better than the 320.

So there will be some routes that, as Abhi mentioned, are really high density business markets where we can put on extra frequency, which gives us additional power because we have that lower trip cost from even the 320neos.

And one thing that's real important is the ownership cost on our E2s is less than our E1s, significantly less.

Yes.

Yes, significantly less.

The next question comes from [Matthew] (inaudible) Barclays.

Just a quick question for me.

As you've been focused on the domestic network and expansion there, has there -- has it made you kind of revisit some of the importance of growing some of your international relationships to maybe kind of build the feed through the domestic networks, whether it's expansion of current relationships or even a potential of an alliance?

How important is that going to be in the strategy to really kind of maintain and continue to build the domestic network?

Yes.

Hey, [Matthew].

Yes, it's really important, you're right.

And frankly, it wasn't something that we had a lot of focus on the first 5, 6 years of Azul.

And now we do, which is great.

So we recently announced an interline with Avianca, we have codeshares with United, with TAP, with Ethiopian, with Turkish, with Copa, and we certainly have a great pipeline of new partners.

And really, what international partners want is network.

And frankly, that's why some of our competitors have better partnerships than we do.

We did not have the network, now we do.

And that's really attracting partnerships to Azul.

So we have a pipeline that's very strong that we'll be announcing periodically, frequently, in fact.

And what's important, an additional level as we move up the scale, is joint ventures.

So we've talked a lot about a joint venture with TAP.

We're working very aggressively to make that happen.

We'll announce something very soon on that.

We've talked in the past about a joint venture with United and our partners sort of Northern, South America.

That's something that's still very much in discussion, and we're engaging on that as well.

So I think that as we grow out this network with these efficient aircraft, we will be more attractive to inbound partners.

And that's certainly something that we want to use to our benefit.

And we want to be a great partner to them as well.

And as we add frequencies, as we add routes to these -- in these airports, you will certainly see that share for us growing.

We haven't focused on it before, but now we have the network and we have the airplane to do it.

And so interlines, codeshares are going to be very important and joint ventures is the next step after that.

In terms of alliances, it's not a priority for us right now.

I think we have some great partnerships already, especially United and TAP, and we're very happy with them.

And so we're not really focused on alliances right now, but definitely interline, codeshares and joint ventures.

Our next question comes from Savi Syth, Raymond James.

Curious on the fleet side, what your appetite was for either the A321neo or the LR or the XLR?

Yes.

So on A321, Savi, we are definitely interested right now, at least in the domestic version.

We have some slated to arrive.

There are some delays on the A321s specifically, so we'll see how it goes.

But we have a couple slated to arrive next year, and we are very interested in that aircraft for our domestic route network.

The LRs and the XLRs, we have looked at.

The performance out of Brazil is not yet where we want it to be, but it certainly is a potential for us down the road.

But right now, what I can say is the 321 domestic, it's certainly something that I'm very interested in, yes.

Let me just add to that a little bit.

On the 321 LR, Savi, we came in kind of disappointingly with a shorter range than Airbus had projected.

And much like kind of the European hub carriers, you can't really use the LR to fly to the United States, different -- I mean, TAP is different, and that's -- we're thrilled with our investment in TAP because they can fly the LR and hit Northeast of Brazil and then Northeast of United States.

So similarly, some of the most important routes that we have with the LR are just beyond reach of what the LR can do.

So the XLR really means more to us.

And so that thing is not coming till 2023.

So we're doing some work on the XLR and would expect that to work for us much better than the LR would.

So that's, like I said, it's still a few years away.

I don't understand how it takes them 3 years to change the fuel tank, whatever.

But -- so -- yes, LR doesn't make as much sense, XLR makes more sense just like it does for Europe to the United States.

Yes, let me -- if I can just give a quick update, David mentioned TAP, and we mentioned it briefly, but the 321 LR is a real game changer for them.

They're flying it to Boston today, they are flying it to Newark.

And a lot of what you see in the fleet transformation that Azul is doing, TAP is doing as well, they had the oldest fleet in Europe.

They now have the youngest fleet in Europe.

And so very exciting things that are happening at TAP.

Same margin -- same thing as we're having here, we're seeing margins go up at the same rate.

That kind of ties right into -- so I think you've answered my follow-up.

My second question on this is just what your objective for the TAP investment is and how that's going?

Well, I would just expand a little bit.

I mean the thing that's great about TAP is that we have our management teams there, Antonoaldo Neves is CEO, [Rafa], who was here, you all know, is the CFO and they have gone about the same game plan.

And I think it's just making it better and we see projections going out through '20 and '21 and '22 with the same kind of, like I said, margin expansion.

That's kind of a closed airport.

I mean there's no -- it's very self-controlled.

It's like going inside of Europe and it says easyJet and Ryanair can't really come in there.

They have the service in there but they can't grow.

And so we're upgauging and bringing new airplanes and so we're really excited about it.

Now we've lots of options going forward, certainly have an IPO option, strategic partnership and potentials, yes, all kind of things.

And so the best thing to do is to build a great company and then you have even more options, and that's what we're in the process of doing.

And I think, yes, we wouldn't have increased our participation last quarter had we not believed in all the upside that exists there.

So we believe strongly on what's happening.

(Operator Instructions) This concludes today's question-and-answer session.

I would like to invite John to proceed with his closing statements.

Please go ahead, sir.

Great.

I want to thank everybody for your support, and we're working really hard to continue to deliver great results.

And as we said, we are playing the long game here.

As we look at the balance of this year into 2020, 2021, we're very, very excited.

We look forward to hosting all of you in Brazil at our facilities, you'll get to see the great E2, you get to meet a lot of our great crew members at Azul, you get to meet our university and our expanded management team.

Thank you all for your support.

And as always, we're available for questions if any of you want to do individual calls with the management team.

Thank you.

Ladies and gentlemen, that does conclude the Azul's audio conference for today.

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