What happened
Brazilian airline Azul (AZUL -3.62%) lost more money than expected in the last three months of 2022, but investors are more focused on an announcement that the airline has reworked its agreements with aircraft lessors. Shares of Azul climbed more than 50% on Monday morning, and shares of domestic rival Gol Linhas Aereas Inteligentes (GOL -7.71%) are up more than 20% on hope that conditions are improving in this major aviation market.
So what
Airline stocks have been hit by a lot of turbulence in recent years. The pandemic caused travel demand to evaporate, leaving companies scrambling to cut costs. While conditions have improved dramatically in the United States, in other parts of the world, including Brazil, the recovery has been more choppy.
Azul lost 610.5 million reais ($117.7 million) in the fourth quarter, significantly more than the 436 million reais it lost in the fourth quarter of 2021 and worse than the 562 million reais loss that analysts had expected. Total operating revenue was up 19.4% in the quarter to 4.45 billion reais ($860 million), but that was slightly below forecast.
The losses are substantial, but Azul said it sees strong demand in 2023. The company also announced agreements with aircraft lessors responsible for 90% of its obligations to swap equity and tradable debt in exchange for lower payments. Azul said the deals should allow it to be cash flow positive in 2024 and beyond.
"The leasing community has recognized that supporting Azul is an intelligent, revenue maximizing business decision, yet we are still honored and grateful for their valuable support," Chief Financial Officer Alex Malfitani said in a statement. "No aircraft have left the fleet throughout this negotiation, and in fact our partners have delivered 12 additional new aircraft to us over the past five months."
Now what
Azul CEO John Rodgerson said, "we are encouraged by the strong demand environment and important milestones in our route network," including restarting a lot of higher-margin international routes. The company expects to generate 20 billion reais ($3.86 billion) in revenue in 2023 and EBITDA of more than 5 billion ($960 million) reais, which would be about 40% above 2019.
The news is specific to Azul, but the demand commentary should apply to other Brazilian airlines including Gol Linhas as well. And the leasing community's willingness to work with Azul can be viewed as a positive indicator from an outside source about the Brazilian aviation market, helping to support sector equities.
Even with Monday's gains, shares of Azul and Gol Linhas are both still down more than 80% since the start of 2020. These companies are still early in their recoveries, but investors are viewing the news from Azul as a positive sign they are at least heading in the right direction.
