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Why Azul Stock Is Higher Today

By Lou Whiteman - May 26, 2021 at 12:17PM

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The Brazilian airline plans to consolidate its domestic market.

What happened

Earlier this week, Brazilian airline Azul (AZUL 7.78%) served notice it was looking to consolidate the Latin American airline market, and on Wednesday its reported target was identified. That has Azul shares gaining altitude, up more than 7% in late-morning trading.

So what

Airline stocks, and Latin American airlines in particular, were hit hard by the pandemic, but Azul has proved itself to be one of the healthiest in the region. The Brazilian company is now hoping to use that strength to its advantage, seeking to buy up some of its weaker rivals.

An airplane landing at night.

Image source: Getty Images.

On Monday, Azul said it was ending a partnership established last year with bankrupt LATAM Airlines Group designed to help ease competition during the pandemic. Azul CEO John Rodgerson called the codeshare arrangement "a unique solution in our pandemic response," he said the airline is now focused on what comes next.

"At the end of the first quarter of 2021, we hired financial advisors and are actively exploring consolidation opportunities," Rodgerson said. "Azul is emerging from this crisis in a leadership position in terms of liquidity, network recovery and competitive advantages."

On Wednesday, multiple reports named LATAM as Azul's preferred target. The Brazilian newspaper Valor Economico said that Azul has opened talks with LATAM's aircraft lessors to try to win support for a potential bid, while Reuters said that Azul was seeking to buy the Brazilian operation of LATAM.

Now what

A LATAM spokesperson told Reuters that the airline has not received any offer from Azul, and said that the company has no intention of selling any of its assets. In addition to its Brazil operations, LATAM operates in Chile, Peru, Ecuador, and Colombia, and has a large international network.

But given that LATAM is currently operating out of bankruptcy protection, there is only so much the company can do if Azul goes on the offensive. If Azul can convince creditors that it can make a compelling offer for the assets, a deal could get done over LATAM's objections.

A combination of Azul and LATAM Brazil would create a de facto domestic duopoly with GOL Linhas Aéreas Inteligentes (GOL 7.63%) in Brazil, which should improve pricing power and help long-term profitability. We're still early in the process, but on Wednesday at least, investors are applauding Azul's aggressiveness.

Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Azul S.A. Stock Quote
Azul S.A.
AZUL
$8.31 (7.78%) $0.60
Gol Linhas Aéreas Inteligentes S.A. Stock Quote
Gol Linhas Aéreas Inteligentes S.A.
GOL
$4.23 (7.63%) $0.30

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