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Azul S.A. American Depositary Shares (NYSE: AZUL)
Q1 2018 Earnings Call
Aug. 9, 2018, 12 a.m. EDT

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Second-Quarter 2018 Results Conference Call. My name is Roberta and I will be your operator for today. This event is being recorded, and all participants will be on listen-only mode until we conduct a question-and-answer session following the company's presentation. Today, any participant needing assistance during this call, please press star zero to reach the operator. I would like to turn the presentation over to Andrea Bottcher, investor relations manager. Please go ahead.

Andrea Bottcher -- Investor Relations Manager

Thank you, Roberta, and welcome all to Azul Second-Quarter Earnings Call. [inaudible] we announced this morning the audio of this call and the slides that we'll reference 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 here for the Q&A session. Before I turn over the call to David, I'd like to caution you regarding our [inaudible] statements.

Any matters discussed today that are not [inaudible] particularly comments regarding the company's future plans, objectives, and expected performance [inaudible] statements. [inaudible] are based on [inaudible] assumptions that the company [inaudible] consistency than this will be discussed in detail in our CVM and SEC filings. Also during the course of this call, we will discuss non-IFRS performance measures, which should not be considered in isolation, and I'll discuss in detail in our earnings [inaudible] . With that I'll turn the call over to David. David?

David Neeleman -- Founder and Chairman

Thanks, Andrea. Welcome, everyone, and thanks for joining us for our second-quarter earnings call. As always, I'd like to start by thinking 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 [inaudible] of our customer service. For the eighth time in a row, we were awarded by Skytrax as the best regional airline in South America. And also the best airline staff in the region. We are also recognized by consumer.gov for having the highest standard of customer satisfaction [inaudible] customer complaints.

Every time I fly with Azul, I get more excited at the enthusiasm of our members, the quality of the service which I think bodes really well for our future growth opportunities. As you know, we're going through a Fleet Transformation Process by adding Rodger Jets' next-generation aircraft. We are extremely fuel efficient and have low trip cost; hat 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, what this order guarantees is that we will have the newest, most fuel-efficient fleet in the industry -- with the lowest CASK and the lowest cost, which is an unbeatable combination. As you know, our A320neos have 56 extra seats compared to the E1s, with the trip cost contributing to a cash reduction of 29%. [inaudible] story is very similar. It has a lower cost of ownership, less fuel burn, lower maintenance cost, and an increased revenue potential from 18 additional seats.

This results in a cash and cash reduction of approximately 26%. This resulted in a cash 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 pay much less for each flight, which is astonishing. Because the cost and revenue benefits of the E2 over the E1 are so significant, that 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 as a free transformation completed by the end of 2021. We're 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 [inaudible] as it has the same type rating, so our pilots could fly both aircraft at the same time. It's just plug-and-play.

Our first E2 is scheduled to arrive next June, which is June of next year, where we will start seeing this margin expansion benefit from this fleet type. In summary, we pursue the present plan on [inaudible] plan that we communicated to the market. We're well on our way to building a better company for our team 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.

John Rodgerson -- CEO

Thanks David and hello everyone. I also want to start up 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 $238 million, a record for the second quarter. Our operating results were impacted by the 20% increase in fuel and a 12% depreciation of the riyal, excluding special items related to the sale of six E-Jets and the truckers strike, operating margins 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 riyal, total cap increased only 3.9%. CASK ex-fuel was basically flat, in that 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 transformation even further. Moving on to slide 6, you can see that fuel and currency had a negative impact of approximately a $160 million in our second-quarter operating results, which represents almost 8 margin points. [inaudible] 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 fix of the nearly eight margin points. We offset 85% of fuel and currency headwinds during the seasonally weakest quarter of the year.

Moving onto the revenue performance on slide 7, we continue to benefit from a healthy demand environment and robust [inaudible] revenue. Considering that our average stage length increased 13% in the second quarter, our [inaudible] adjusted for this increase will 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 to Azul maintained a strong growth base for the second quarter, reaching almost 10 million members.

Gross billings [inaudible] Azul went up 38% year over year, with the majority of this increase coming from Azul club and our banking partner, further increasing our share of the Brazilian loyalty markets. We now have 18% gross billings share, up 14% just one year ago, and still well below our fair share of the market. Unlike other airlines in Brazil, to Azul wholly owned but accompanying. This means that we have no tax inefficiency and benefit 100% from the cash flow generated by the 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 A320neos and the growth of our international capacity. We're excited to deploy dedicated cargo planes next quarter. Clearly our cargo team earned the right to get these planes into our network.

Moving onto the balance sheet on slide nine, I'm proud to report that we ended the quarter with a solid liquidity position of $3.8 billion AI, representing 45% of our last 12-month revenue. Even with a 12% depreciation in the Riyal, we ended the quarter with leverage at four, compared to 4.5 in the Second Quarter of 2017. We used the industry standard of adjusted net debt to EBITDA, which capitalizes over leases to seven times, and includes all of our debt. This result reflects our decision to hedge 100% of the principal and interest payments for the $400 million, the nominated bond issued in 2017 protecting ourselves against currency risk. At the end of the second quarter, this currency swap with recorded a net asset of $210 million AI under the long-term derivative financial instruments. Alex our CFO deserves all the credit for this.

Our low FX exposure as 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 currencies namely our cash, deposits, and maintenance reserve abroad and our investment in tap, surpass are dollar denominated liabilities and that's excluding aircraft engines and spare parts, which are not restated to the exchange rate every quarter or offer price in dollars. For this reason in times of weakening currencies, we're not nearly as impacted as our competition. It's reaffirmed our position that the airlines with the strongest balance sheets in Brazil.

Moving on to slide 11. The moving currency and fuel represents an increase in cost of $800 million to $900 million AI in 2018. Representing a swing of up to nine margin points. However, as you know we have a multi-year margin expansion plan. Also we continue to see positive demand environment backed by the strength of our unique network as you saw in our July traffic release. Therefore we're confident that we can offset most of these headwinds as a result of predicting an operating margin of 9% to 11% for 2018 excluding the impact of non-recurring event.

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 network. We continue to replace older generation aircraft with A320neos which as David mentioned our key to combat rising fuel prices and the weakening of the reality. As a result, we expect CASM ex-fuel to decrease between 1% and 3% year-over-year even with a devalued currency. Our plan of having a five point margin expansion to 15% from the time we went public has not changed. Before the devaluation of the route we were ahead of schedule but we're still on track and feel confident that the pillars of our margin expansion plans are working just as expected. With that we'll turn the call over to the operator for Q&A.

Questions and Answers:

Operator

Ladies and gentlemen thank you. We will now begin the question-and-answer session. If you have a question, please press the star key followed by the one key on your touch-tone phone now. If at any time we would like to remove yourself from the question in queue, please press star two. For those following the call via webcast, you may post your questions on the platform, and they will be answered during the call or by investor relations team after the conference is finished. Our first question comes from Savi Syth with Raymond James.

Savi Syth -- Raymond James -- Analyst

Good morning. I just wanted to follow up on the revenue environment we've seen strong and I was wondering if you can talk about. I think this was really strong before the truckers strike, and many a couple of weeks after [inaudible] curious what you're seeing today. Clearly had a good recovery in fuel in the quarter, and just wondering if you could give a little bit more clarity. Any color on domestic [inaudible] and national [inaudible]. Thank you.

Alex Malfitani -- CFO

[inaudible] Yes, you're right we've done it in a second quarter in April. With the strong demand environment combined together with really good, fair, and capacity discipline that was interrupted by the strike and then the World Cup. We've seen a good recovery after the end of the World Cup, July recovered nicely. And the last two to three weeks there, and we've had a very strong start to August. So I feel good about the demand environment that I'm seeing.

Fare discipline is also very strong, and I've said this before: I think the capacity environment and the fare environment are the best that I've ever seen, basically. So I think that's really setting the industry up nicely for the second part of the year. So, our direct traffic was strong. We had a good domestic and good international performance as well. Domestically, corporate and agency demand is what's driving most of the cost in year-over-year RASM, and I expect that to continue. When we had the strike and the World Cup, we further expected that there would be some repressed demand. We've seen that the previous World Cup as well.

But I feel like that that is coming back nicely online now for the second half of the year, which is usually the best part of the year. So I feel good about domestic coming back strong, driven mostly by corporate, by agencies, and by closing 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 to the three daily flights at most, and so 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. Other national capacity is down 12%, just to be prudent given the currency and the field situation. But overall, I feel good about it. I think domestic is really going to come back strong the second half of the year. Back like, good fair, and capacity discipline.

Savi Syth -- Raymond James -- Analyst

That's helpful, and it's a nice follow-up for me. On the domestic here, we can have moderating growth as well. Any cover on the types of markets that you're mastering in that growth?

Alex Malfitani -- CFO

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. Ideally, our expected capacity for the year, from something very close to 20 to something very close to 17 for the whole year. That is a mix of domestic and international. Domestically, it's the market that are obviously not doing well, honestly. Now, basis is number one, it's things that are not even out of our hub so any market that overflies a hub or underflies a hub is probably the first to go to market primarily outside our hub. Internationally, for example, we're cutting the daytime Fort Lauderdale flight to keep the nightime flight only and reducing some frequency, the Northeast Brazil to Florida. So, if anything, that sort of not core to our hub strategy is [inaudible] .

Savi Syth -- Raymond James -- Analyst

That's very helpful. Thank you. The next question comes from Michael Linenberg with voice [inaudible] .

Matt -- Analyst

You guys, it's actually Matt [inaudible] . How are you?

John Rodgerson -- CEO

Hey, Matt.

Matt -- Analyst

You mentioned that you're [inaudible] domestic market is the best in this decade. Is that still the case, any irrational or aggressive actions in the capacity or pricing front domestically?

Alex Malfitani -- CFO

Thank you, Matt. No, I feel good about capacity, to be honest. 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 market that they should not be in, but they 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 are certainly doing that with the A320s. You can see in our traffic, we're putting them in our network. We're seeing great traffic growth, connectivity growth.

I think we've set an example to the market as to how to allocate the capacity well. It makes yourself better. 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. I think the 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.

John Rodgerson -- CEO

Matt, just to highlight, if you take a look, we were actually down in departures from the first half of the year minus 2%, so it's really the updating, it's the fleet transformation, it's getting these new assets that have more seats, utilizing them 14 hours a day, reducing our task, it's the right type of growth that you would want in our existing markets that have been stimulated.

Once again we obviously continue to increase capacity and expanding routes. That's really a powerful combination because of what we're going to see on the cost side.

Matt -- Analyst

That's great. Just a follow up, what kind of impact are you seeing, if any, from the upcoming election on either business or [inaudible] in Q3, and can you quantify or?

John Rodgerson -- CEO

Yes. So, as I said before our demand right now is strong. I would put it a little bit early to see the effect of the elections. It's going to be toward the end of September and mostly in October. I think we'll know more when we get closer near the distraction clearly. But at the same time we also have some repressed demand from the strike in 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 closer. We'll have a much better idea as we get closer to October.

Matt -- Analyst

Okay.

Operator

The next question comes from Renata Faber with Itau.

Renata Faber -- Itau -- Analyst

Hi. Thanks everyone for color [inaudible] on the results. Thank you David for talking about the economic [inaudible] first time you talk about that and there was some interesting information me on what [inaudible] said. [inaudible] could you please talk again about how the E2 has [inaudible] margin.

David Neeleman -- Founder and Chairman

Yes sure. Thank you very much [inaudible] . I'll take that question because it's a real caution in mine and I got this right now and I'm really excited about it. This math it's really pretty simple, it's not difficult. We've got a lot of our E2 and E1s during crisis times during 07 and we didn't have the credit that we do have today and so we ended up paying lots of these E1s particularly on sale leasebacks in the financing. So now we have a whole different situation with the company and so when we bought the E2s and financing left. The plane is has very attractive price and so the first category is we have a low cost on the airplane by significant amount, so that's number one.

Then number two you have new-generation engines on them and the fuel burn savings is there, the fuel, the test is going on. It's like 13% to 14%. So that's absolute that's it. Then you move to maintenance, we have a perfect deal for the engine maintenance than we do currently. So that's a big portion of the maintenance costs [inaudible] are longer than you have this period of warranty and kind of made the [inaudible] that goes on for up to five years. Until our maintenance cost will be significantly lower permanently not just in the first five years. 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 come up with a number.

We add all that together and we timed it, [inaudible] be able to snap our figures today and say let's all of our 63 E1s. [inaudible] with E2. We had those flying today. We believe that difference in margin is astounding number, it's 9% different of margin.

John Rodgerson -- CEO

Nine margin.

David Neeleman -- Founder and Chairman

Nine margin point. From nine 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 better plan will be. Our cost by airplanes as to what we have today it's nine margin points. That gives us a tremendous amount of flexibility intuition. Obviously even if it was five margin points we were able to [inaudible] fairs. More traffic for fuel spikes up we got those most fuel-efficient planes in the industry it's reality [inaudible] a weekend and we have a plan to cost us a lot less money.

So we're spending less money on maintenance which dollars are denominated. So that's why I persecuting up if it's impairments the way that we have to do, we're working really close with Embraer. Speed up the production that have been coming in sooner and that's why we set this target. All the E1s gone by the end of 2021 and you'll see you'll start seeing that benefit next year as the planes are arriving in June. So I couldn't be more excited and cannot be [inaudible] all we can drive them as crazy.

Okay, I told investors as I haven't sold a single share of stocks, I would not see that coming, so I'm really excited about it. We're going to work to try to try to accelerate business. It is a very exciting thing, especially kind of given the additional seats to lower fuel burn. We got a great price for Embraer, so we're very, very excited about it. It's amazing what they have to do in spite of all costs when you realize it. It's remarkable that the [inaudible] pulled this off so when we kind of get all the assets and then we've got the neos coming to on top of that, so very exciting news.

Operator

Okay, thank you. The next question comes from Dan McKenzie with Buckingham Research.

Dan McKenzie -- Buckingham Research -- Analyst

Hello, good morning. Thanks, guys. [inaudible] wondering if you can talk a little bit more about the [inaudible] side of the business. So, normally, [inaudible] slowest time of the year for danger traffic on the other [inaudible] foreign exchange, it's really that impacted, that part of the business. I guess question [inaudible] first, to what extent is your user demand impacted by these for foreign exchange to fill that out? Then, secondly, how long is it typically paid for pent-up demand to typically return?

Abhi Manoj Shah -- Chief Revenue Officer

Hey, Dan, it's Abhi here. So overall, Azul, historically, has been pretty small in the leisure market and the reason that has been we haven't had the right airplane to really have a big positions that market. We're starting to now with the A320neos. We have 15 neos today, but the fourth quarter, we have 30% of our capacity with the A320neos. So what's happening with the neos is twofold. We're putting the neos in knocking our network, really connecting our hub, so convenient to SEP, for example. Salvador, little bit able to enter some leisure markets like Fortaleza, where, historically, we've had very, very low presence. We're obviously seeing a very great market reactions to that.

We're seeing unit revenue reduction from that net, and what we adopt the box on the IPO road show, stop 10% compared to what gas reduction of 29. So a part of this 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 convenient, whereas [inaudible] you have a TV. We're able to drive a lot more connectivity in our network. To give you an example, when we put in all weekly to any [inaudible] , we had an increase of 77% of connecting traffic because it's not just a leisure that's using the airplane and these routes. We have 50 patients on one side, and 40 on the other.

The route of BTP and [inaudible] had 500 different [inaudible] over that route. The route VTP Belo Horizonte has 800 different [inaudible] . So, there's leisure demand that's helping us with this airplane, but it's also the base of our network that's what we have on 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 80-20. With some local-stimulated leisure demand, we're also driving incredible connectivity through our network. Does that make sense?

Dan McKenzie -- Buckingham Research -- Analyst

Yes, understood. I'd like just to follow up on that. What [inaudible] indicator for the commodity prices or some other measure of employment or commercial activities? I know it's kind of the core partner business, but when you think about turnaround that's part of approval, what are the [inaudible] kind of indicators that you look at?

David Neeleman -- Founder and Chairman

[inaudible] just jobs. The exchange rates devalued quite a bit but the mood in Brazil is actually very positive. I mean, if you go back to 2015 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 and '16, "I'm not going have my job tomorrow," so leisure really dried up. Corporate also dried up. But it's a completely different feeling with that we're seeing right now in the country. It's just- 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. There's actually good underlying demand in the country.

Alex Malfitani -- CFO

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 is 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.

Then it's also cheaper to buy whatever you want to buy in the U.S. I am 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 seven. And until the exchange rate goes to seven, it doesn't make sense for you to buy an iPhone in Brazil, you buy it in the U.S. Just flying to the U.S. and buying your iPhone there, you paid for the price of the ticket. So, I think that's what 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 frost-belt, I don't think that will affect your decision.

Dan McKenzie -- Buckingham Research -- Analyst

That's great perspective. Thanks guys.

Operator

The next question comes from Victor McClusky with Bradesco BBI.

Victor Mizusaki -- Bradesco BBI -- Analyst

Hi! I have two questions: The first one with regards to the losses with the U. N, is there any reasonable call for additional [inaudible] of the risk of potential IBD Chairman show up with the replacement of [inaudible] . The second question with regards to your guidance, how many people come on your [inaudible] ex-fuels for the 3-year [inaudible] channel for minus 1% to minus 3%, year-to-date duties of like 2.6%. So, do you think we can venture on the second half with just a metal [inaudible] will there be anything else to it.

Alex Malfitani -- CFO

Hey, Victor, it's Alex here. I wouldn't call it risk for additional E1 because as David mentioned, the replacement of the E1s for [inaudible] is very positive. There may be an accounting effect from selling aircraft that are of different price from what is carried in our books for, but with these fixed E1 that we sold we actually generated cash, because the market value of the aircraft was higher than the value that we had outstanding. We 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 [inaudible] , and there is a book impact to whatever we do. We'll call it out as [inaudible] this time, but like I said, it should definitely be all very beneficial and very accretive decision in terms of PNO.

John Rodgerson -- CEO

And we understand that the faster we get there, the more competitive we are in margins go up significantly. That's why David is had it going crazy in Brazil this week because it is like "Move faster! Move faster! Move faster!" so they'd 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 start-up airline in Brazil during the financial crisis, flying E1 that wasn't a very liquid asset, and so that would naturally all going to go away over the next three to four year period, but David just saying "Hey! Let's bring to the left guys and won't run faster. ".

Alex Malfitani -- CFO

I am now on CAFD guidance [inaudible] . It's really both new E2 and the new neos that are coming in the second path, but also the runway of the neos that we took before. Like we said, we had 14% of our U.S. case coming from next-generation aircraft in 2017 and we're going to have a 27% this year, but in Q4, you will be closer to 30%, so you will have almost a third of our capacity coming from next-generation aircraft in Q4 which has a much lower CAFD than what we used to have in the past. So, that's where you're going to see the reduction in pricing. That's already happening, right? We talked about the total CAFD reduction that we would've had adjusting for FX. 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 CAFD from the next-generation aircrafts.

Victor Mizusaki -- Bradesco BBI -- Analyst

Okay, thank you.

Alex Malfitani -- CFO

Thanks, Victor.

Operator

The next question comes from Bruno Amorim with Goldman Sachs.

Alex Malfitani -- CFO

Goldman now.

Bruno Amorim -- Goldman Sachs -- Analyst

Hi. Good afternoon, I have just a very quick question on the price of jet fuel WTI is up by 40% additional near relief effect depreciated by 12% and even though the price of the fuel per liter rose by just 20% in the quarter. So, just wanted to understand try to explain this fuel price will be impacted by fuel hedges and what to expect going forward in a scenario of stable all your price and effects at the hedges currently inflate remain less valuable. Thank you.

Alex Malfitani -- CFO

Sure. Sure [inaudible] there's a number of different factors kind of roll at the same time. So, we do have some direct hedges with Petrobras where we essentially predetermine the price of fuel but we're going to pay ahead of time and when we buy fuel we paid the fees upon agreed price when we exit. You saw in our traffic relief and can see on our ASKs the mix of international flying is going up significantly there's no ICMS on international flying. So, that makes 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, most of our 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 and so that helps as well. So, and there is a little bit of lag on between WTI and the Petrobras prices. So, it's a number of small effect that account for the different preset.

Bruno Amorim -- Goldman Sachs -- Analyst

Thank you very much.

Operator

The next question comes from Savi Syth with Raymond James. Hello Miss Syth, your line is open.

Savi Syth -- Raymond James -- Analyst

Thank you. Sorry about that. I just have a follow up questions. Actually I have two. On the fuel hedges following up on the previous one. Are you considered [inaudible] given that you're all given prices. Are you able to give some color to what your fuel price looks like for at least third quarter of the remaining year?

David Neeleman -- Founder and Chairman

So, most yes. The most of the hedges that we have now. [inaudible] effects below-the-line their 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 members based on that mark-to-market that we did at the end of Q2 and for the next 12 months we have about 50% of our capacity hedge which is roughly half the maximum that the policy thing can have. So, if you are very interested in how we sort of where we built the hedging position that would be kind of equivalent to about 205 210 in [inaudible] at the end of Q2 that all gets mark-to-market.

Savi Syth -- Raymond James -- Analyst

That's helpful. Thank you. And if I may ask, the [inaudible] and the timing and [inaudible] ?

Alex Malfitani -- CFO

Yes, we filed within a trip authorities about 10 days ago and progressing well it should be a 90 to 120-day process and so we're we're anxious to hear back from them. So we're still very excited about that as you could see cargo continued to outperform even [inaudible] all these great revenue performance. Will obviously lagging behind.

Savi Syth -- Raymond James -- Analyst

My question on the CAFD side. The CAFD guidance even though you're seeing was actually quite impressive and I was just wondering, I know this [inaudible] still high training cost related to pilot. Where are you finding the savings. Mostly driven by local currency savings [inaudible] .

Alex Malfitani -- CFO

It's obviously one of the first quarter when we saw currencies [inaudible] and fuel go up, we gathered around as a senior leadership team in certain initiatives help change the business. And so we've got 44 different projects across-the-board that our senior directors are managing to take cost out of the organization and kind of improve the operational performance and so that's a big reason why we're feeling very confident. I think times like this when you do have some fuel you start to do new things that maybe weren't on the table before and so we're working aggressively at those that's part of it [inaudible] overall in the third quarter.

David Neeleman -- Founder and Chairman

Like we've talked about it a lot of it is the ramp of [inaudible] capacity than the change-the-business initiatives though John mentioned. Once you're account for the timing that we're talking about a 29% reduction in cash. Rather than just so much efficiency. Both from the fact that it burn a lot less fuel but one thing that is unique about this rule, a lot of companies will go through a change in fleet identical from old generation jet for new-generation jets. But they're only going to get the benefit. We're getting a fuel benefits and we're getting the up-gauging because we built a network over time that was actually asking for this size of an adequate.

But we could have started a rule with large nobody's ten years ago the growth and network that has enough feed and enough traffic that can fill meals until we're going to get a double benefit, improved fuel burn and more economies of [inaudible] .

John Rodgerson -- CEO

As David mentioned the [inaudible] rules we built what we filled with the aircraft we had some now that the new-generation they're coming out the A320neos. There's so much leverage on a business. Because of the aircraft that we had previously.

Savi Syth -- Raymond James -- Analyst

That's helpful. Thank you.

Operator

The next question comes from Natalia Serafim from City.

Natalia Serafim -- City Bank -- Analyst

Hi. Thanks for taking my [inaudible] . I have two quick questions from [inaudible] . Can you tell us more about [inaudible] and you see any equalizer [inaudible] disagreements. Thank you very much [inaudible] .

John Rodgerson -- CEO

I think about this something as called, there's a logistics problem in Brazil and today is rule for 100 cities domestically, we have 78 international cities and we have 200 stores spread all throughout the country, and the Brazilian post office, it's quite a bit of airfreight anywhere from $60 million to $100 million a year and airfreight, and we believe that our joint venture could give them a significant reduction from what they have today and 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 [inaudible] and so it needs specific aircraft type, but that's not how it's done in Europe or the U.S. And so, the fact that we owe them some excess space in the value of our aircraft, and so if you think about it, 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 your bringing in that incremental revenue that they provide.

We're in 200 physical stores and they have thousands of physical stores throughout the entire country, and so it's not like it is in 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 not in our guidance and this is outside to this location.

So, we're excited about the future here and I think as you not only provide the 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.

David Neeleman -- Founder and Chairman

In our invest in physical health it's important and you have to have things that are 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 music, other people that need this logistics that Brazil was easily challenged, then no one is in a better position to help after this.

Natalia Serafim -- City Bank -- Analyst

Thanks. My second question.

John Rodgerson -- CEO

Yes, go ahead.

David Neeleman -- Founder and Chairman

I think she said it but we didn't hear. What was your second question?

Natalia Serafim -- City Bank -- Analyst

Okay, yeah, I think you didn't hear, sorry. My last question is quicker, do you have any comment about the Norwegian ship that was launched in Brazil to France?

John Rodgerson -- CEO

Yes, I saw. Norwegian, it looks like is just going to fly from London to Brazil. Not surprising, deep by the Buenos Aires, it's way to Singapore, you fly to New York. So, no it's not really surprising. It doesn't really affect us that much in any way, international route for them and that's it.

Natalia Serafim -- City Bank -- Analyst

Perfect. That answers my question.

David Neeleman -- Founder and Chairman

Yes. So, we have a question on the webcast, [inaudible] . So, the question was regarding the joint venture and the progress on that, of course it gets an equal announced that their [inaudible] with United and Avianca on a Latin American U.S. joint venture. I can't comment on their joint venture but we're guiding with Azul and United. As you said before, now the open skies you signed.

We are absolutely talking toward 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 [inaudible] right now has a pretty full docket. But 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 meet their investment in [inaudible] even before open skies was approved, we knew that this was a possibility and so we wrote that in the contract that we have with them, and it's been a fantastic partner of ours. We love the fact that they bought a portion of the HNA shares a few months ago shows their confidence in our business as we move forward and showed the upside that they believe in Azul.

Operator

Ladies and gentlemen, this concludes today's question-and-answer session. I'd like John to proceed with his with closing statements. Please, go ahead sir.

John Rodgerson -- CEO

I would like to thank everybody 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 call up with Andrea and we're glad to deliver our plan. Thanks everybody.

David Neeleman -- Founder and Chairman

Next quarter.

Operator

That just conclude as our conference for today. Thank you very much for your participation and have a good day.

Duration: 46 minutes

Call participants:

Andrea Bottcher -- Investor Relations Manager

David Neeleman -- Founder and Chairman

John Rodgerson -- CEO

Savi Syth -- Raymond James -- Analyst

Alex Malfitani -- CFO

Matt -- Analyst

Renata Faber -- Itau -- Analyst

Dan McKenzie -- Buckingham Research -- Analyst

Abhi Manoj Shah -- Chief Revenue Officer

Victor Mizusaki -- Bradesco BBI -- Analyst

Bruno Amorim -- Goldman Sachs -- Analyst

Natalia Serafim -- City Bank -- Analyst

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