Azul
Azul
The
Click here
to view the prospectus.
https://www.sec.gov/Archives/edgar/data/1432364/000119312517084945/d278992df1a.htm
Company
Overview
They are the largest airline in Brazil in terms of
departures and cities served, with 784 daily departures serving 102
destinations, creating an unparalleled network of 203 non-stop routes as of December
31, 2016. As the sole airline on 70% of
their routes, they are the leading airline in 66 Brazilian cities in terms of
departures and carried approximately 21 million passengers in 2016. They
are a low cost carrier and have generated a PRASK premium of at least 35%
relative to their main competitor since their first year of operations. They
derive this PRASK premium from their network, optimized fleet, operating
efficiencies and high quality product offering. Complementing their extensive
domestic network, they fly to select international destinations, including
Azul was founded in 2008 by entrepreneur David
Neeleman, founder of JetBlue, as his fourth successful airline venture, to
capture the market opportunities created by the expansion of the Brazilian
aviation market. David Neeleman is their controlling shareholder as well as
Chairman and Chief Executive Officer. In addition, they have a diverse group
of key strategic shareholders, such as United and Hainan (a subsidiary of the
HNA Group, a Fortune Global 500 conglomerate and the largest private airline
operator in
They have the most extensive route network in
They
operate a young, fuel-efficient fleet that they believe is better tailored for
the Brazilian market than those of their main competitors as it allows them to
serve cities with different demographics, ranging from large capitals to smaller cities. Their operating fleet of
123 aircraft as of December 31, 2016, comprised of 74 Embraer E-Jets, 39 ATR
aircraft, five next-generation Airbus A320neos, and five Airbus A330s. Their
fleet has an average age of 4.8 years, which is significantly younger than that
of their main competitors. In December 2016, they began operating
fuel-efficient, next-generation Airbus A320neos on longer, high demand domestic
segments. They believe that their diversified fleet is optimized to efficiently
match capacity to demand. This enables them to offer superior connectivity as
well as more convenient and frequent non-stop service to more airports than their
main competitors, which exclusively operate larger aircraft.
A key driver of their profitability is their
management team’s extensive experience in implementing a disciplined, low cost
operating model. Their optimized fleet yields lower trip costs than their
main competitor. In 2016, their average trip cost was R$24,179, which
was 31% lower than that of Gol. With the introduction of the
next-generation Airbus A320neos to their fleet, they expect to maintain their
market-leading low trip cost advantage. In addition, their FTEs per aircraft
were the lowest in
They have built a strong brand by offering what they
believe is a superior travel experience, based on a culture of customer service
provided by a highly-motivated and well-trained team of crewmembers. Their
service features include passenger seat selection, leather seats, individual
entertainment screens with free live television at every seat in all their
jets, extensive legroom with a pitch of 30 inches or more, complimentary
beverage and snack services, and free bus service to key airports they serve.
As a result of their strong focus on customer service, according to surveys they
have conducted, 90% of their customers would recommend or strongly recommend
Azul to a friend or relative as of December 31, 2016. In 2016 they were
named “Best Low Cost Carrier in South America” for the sixth consecutive
year and “Best Staff in South America” by Skytrax.
They continue to invest in and expand their loyalty
program, TudoAzul, which had approximately 7.0 million members
and 76 program partners as of December 31, 2016. TudoAzul has
been the fastest growing loyalty program in terms of members in Brazil for the
past three years compared to Smiles and Multiplus, the loyalty programs of Gol
and LATAM, respectively, and was elected “Best Loyalty Program in
Brazil” in 2016 by a survey of 25,000 readers of Melhores Destinos, the
largest web portal of airline fare promotions and loyalty programs in Brazil.
Given their network strength, the expected growth of passenger air travel,
credit card penetration and usage and customer loyalty in
They generate a PRASK premium from their unparalleled
network, optimized fleet, operating efficiencies and high quality product
offering, which resulted in revenues of R$6.7 billion in 2016. In addition
to their PRASK premium, they remain focused on their disciplined low cost
operating model as evidenced by having the lowest number of FTEs per aircraft
and trip cost advantage compared to their main competitor as of
December 31, 2016.
IPO
Detail
This is the initial public offering of Azul
|
The global offering |
24,000,000
ADS, representing 72,000,000
preferred shares, to be offered in an international offering and a Brazilian
offering, of which 63,000,000 preferred shares will be offered by them and
9,000,000 preferred shares will be offered by the Selling Shareholders. The
number of preferred shares offered in the international offering and the
Brazilian offering is subject to reallocation between the offerings. The
closings of the international offering and the Brazilian offering are
conditioned upon each other. |
\
|
Brazilian offering |
Concurrently with the
international offering, they and the Selling Shareholders are offering
preferred shares through the Brazilian underwriters to investors in |
|
Shares outstanding after this global
offering |
928,965,058 common shares
and 317,571,266 preferred shares. After applying the 75 : 1 conversion
ratio, solely for the purposes of calculating each shareholder’s economic
interest in their capital, they would have 329,957,468 preferred shares
outstanding after this global offering on a theoretical fully-converted basis |
Each ADS represents three preferred shares and may be represented by American
depositary receipts, or ADRs.
At their request, the underwriters have reserved for sale, at the initial
public offering price, up to an aggregate of 5% of the ADSs offered in this
offering (assuming no exercise of the underwriters’ option to purchase
additional shares) to persons who are their directors, officers or employees,
or who are otherwise associated with them, through a directed share program.
Between 10% and 20% of the preferred shares offered
in the global offering, calculated assuming the full exercise of the
underwriters option to purchase additional shares and the hot issue, will be
offered to non-institutional investors. Their and Azul Linhas’ directors,
officers or employees will have priority to purchase up to 50% of these
preferred shares under a special allocation program in the Brazilian retail
offering in amounts starting at R$1,000.
Use of
Proceeds
They estimate that the net proceeds to them from
the sale of preferred shares, including in the form of ADSs, in this global
offering will be approximately R$1,26 billion (US $396.9 million). They intend to use the net proceeds from this global offering for
the following purposes:
|
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• |
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Approximately R$315 million
to repay indebtedness; and |
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• |
|
the balance for general
corporate purposes. |
They intend to use a portion of the
proceeds from this global offering to pay down approximately R$315 million of
debt with maturities ranging from April 2017 to December 2017 and an average weighted
interest cost per annum of 120% of the CDI Rate, which was approximately 14.6%
per annum as of the date of this prospectus. During the year ended December 31,
2016, proceeds from loans and debentures, which totaled R$620.5 million, were
used principally to finance their fleet optimization, to substitute debts that
were due for repayment and general corporate purposes. In addition to obtaining
the resources to pay indebtedness through this offering, they expect to obtain
additional funds to pay the indebtedness set forth above through cash
generation from their operations.
They will not receive any
proceeds from the sale of preferred shares, including in the form of ADSs, by
the Selling Shareholders.
Competition
|
Company |
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Stock Symbol |
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Exchange. |
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Gol
Linhas Aereas Inteligentes SA (ADR) |
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GOL |
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NYSE |
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LATAM
Airlines Group SA (ADR) |
|
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LFL |
|
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NYSE |
|
. Avianca Holdings SA |
|
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AVH |
|
|
NYSE |
They currently are the only carrier in Viracopos
airport that offers non-stop service to the
Market
Despite the recent
Brazilian economic recession, they believe
In
Air travel
per capita still remains relatively low in
The recent growth in
the Brazilian middle class led to significantly increased demand for
international air travel by Brazilians. As air transportation has become more
affordable, Brazilians are allocating a larger portion of their disposable
income to international travel. The number
of domestic revenue enplanements in
Statements of Operations Data
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For the Years Ended December 31, |
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2016 |
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2016 |
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2015 |
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2014 |
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2013 |
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2012 |
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(US$)(1) |
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(R$) |
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(R$) |
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(R$) |
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(R$) |
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(R$) |
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(in thousands, except amounts per share and %) |
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Operating revenue |
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Passenger revenue |
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1,775,585 |
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5,786,809 |
|
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|
5,575,344 |
|
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5,129,613 |
|
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4,667,542 |
|
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2,454,651 |
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Other revenue |
|
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270,959 |
|
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|
883,082 |
|
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|
682,522 |
|
|
|
673,440 |
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|
|
566,613 |
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|
262,704 |
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Total revenue |
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2,046,544 |
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6,669,891 |
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6,257,866 |
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5,803,053 |
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5,234,155 |
|
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2,717,355 |
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Operating expenses |
|
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|
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Aircraft fuel |
|
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(478,728 |
) |
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(1,560,223 |
) |
|
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(1,917,606 |
) |
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(1,955,036 |
) |
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(1,779,300 |
) |
|
|
(1,073,261 |
) |
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Salaries, wages and benefits |
|
|
(335,022 |
) |
|
|
(1,091,871 |
) |
|
|
(1,042,119 |
) |
|
|
(991,449 |
) |
|
|
(803,331 |
) |
|
|
(510,435 |
) |
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Aircraft and other rent |
|
|
(356,206 |
) |
|
|
(1,160,912 |
) |
|
|
(1,171,325 |
) |
|
|
(689,055 |
) |
|
|
(532,498 |
) |
|
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(229,393 |
) |
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Landing fees |
|
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(135,833 |
) |
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(442,692 |
) |
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(382,610 |
) |
|
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(314,402 |
) |
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(285,709 |
) |
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(156,468 |
) |
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Traffic and customer servicing |
|
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(100,423 |
) |
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(327,289 |
) |
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(307,926 |
) |
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(240,783 |
) |
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(206,459 |
) |
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(130,076 |
) |
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Sales and marketing |
|
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(84,748 |
) |
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(276,203 |
) |
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(258,214 |
) |
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(239,359 |
) |
|
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(207,759 |
) |
|
|
(131,708 |
) |
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Maintenance, materials and repairs |
|
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(217,465 |
) |
|
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(708,739 |
) |
|
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(643,897 |
) |
|
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(353,339 |
) |
|
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(331,725 |
) |
|
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(126,817 |
) |
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Depreciation and amortization |
|
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(92,418 |
) |
|
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(301,201 |
) |
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(217,983 |
) |
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(197,755 |
) |
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(200,067 |
) |
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(106,013 |
) |
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Other operating expenses, net |
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(140,062 |
) |
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(456,475 |
) |
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(483,773 |
) |
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(420,949 |
) |
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(419,065 |
) |
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(244,543 |
) |
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(1,940,905 |
) |
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(6,325,605 |
) |
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(6,425,453 |
) |
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(5,402,127 |
) |
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(4,765,913 |
) |
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(2,708,714 |
) |
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Operating income (loss) |
|
|
105,638 |
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|
344,286 |
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(167,587 |
) |
|
|
400,926 |
|
|
|
468,242 |
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|
|
8,641 |
|
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Financial result |
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— |
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Financial income |
|
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15,669 |
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|
|
51,067 |
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|
|
43,178 |
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|
|
41,518 |
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|
|
61,692 |
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|
|
9,715 |
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Financial expense |
|
|
(224,356 |
) |
|
|
(731,200 |
) |
|
|
(685,919 |
) |
|
|
(460,049 |
) |
|
|
(316,462 |
) |
|
|
(162,675 |
) |
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Derivative financial instruments, net |
|
|
3,314 |
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|
10,800 |
|
|
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(82,792 |
) |
|
|
4,245 |
|
|
|
(12,027 |
) |
|
|
10,009 |
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Foreign currency exchange, net |
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|
55,128 |
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|
179,668 |
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(184,305 |
) |
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(74,104 |
) |
|
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(105,262 |
) |
|
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(37,659 |
) |
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Result from related party transactions, net |
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|
50,028 |
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|
163,045 |
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— |
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— |
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— |
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— |
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Net income (loss) before income tax and social
contribution |
|
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5,421 |
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|
17,666 |
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(1,077,425 |
) |
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(87,464 |
) |
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|
96,183 |
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|
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(171,969 |
) |
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Income tax and social contribution |
|
|
2,679 |
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|
|
8,731 |
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(1,366 |
) |
|
|
(4,368 |
) |
|
|
(81,437 |
) |
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— |
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For the Years Ended December 31, |
|
|||||||||||||||||||||
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|
|
2016 |
|
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2016 |
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2015 |
|
|
2014 |
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|
2013 |
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|
2012 |
|
||||||
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|
|
(US$)(1) |
|
|
(R$) |
|
|
(R$) |
|
|
(R$) |
|
|
(R$) |
|
|
(R$) |
|
||||||
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(in thousands, except amounts per share and %) |
|
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Deferred income tax and social contribution |
|
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(46,857 |
) |
|
|
(152,711 |
) |
|
|
3,886 |
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|
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26,792 |
|
|
|
5,965 |
|
|
|
1,127 |
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Net (loss) income for the year |
|
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(38,757 |
) |
|
|
(126,314 |
) |
|
|
(1,074,905 |
) |
|
|
(65,040 |
) |
|
|
20,711 |
|
|
|
(170,842 |
) |
|
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Basic and diluted (loss) income for the year per
common share R$/US$ |
|
|
(0.00 |
) |
|
|
(0.01 |
) |
|
|
(0.07 |
) |
|
|
(0.00 |
) |
|
|
0.01 |
|
|
|
(0.02 |
) |
|
Basic and diluted (loss) income for the year per
preferred share R$/US$ |
|
|
(0.17 |
) |
|
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(0.55 |
) |
|
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(5.42 |
) |
|
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(0.35 |
) |
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|
0.12 |
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(1.27 |
) |
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Other financial data (unaudited): |
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EBITDA |
|
|
238,972 |
|
|
|
778,833 |
|
|
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(449,148 |
) |
|
|
437,601 |
|
|
|
547,762 |
|
|
|
61,395 |
|
|
Adjusted EBITDA |
|
|
198,057 |
|
|
|
645,487 |
|
|
|
50,396 |
|
|
|
598,681 |
|
|
|
668,309 |
|
|
|
114,654 |
|
|
Adjusted EBITDAR |
|
|
554,263 |
|
|
|
1,806,399 |
|
|
|
1,221,721 |
|
|
|
1,287,736 |
|
|
|
1,200,807 |
|
|
|
344,047 |
|
|
Adjusted EBITDAR Margin (%) |
|
|
27.1% |
|
|
|
27.1% |
|
|
|
19.5% |
|
|
|
22.2% |
|
|
|
22.9% |
|
|
|
12.7% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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|
|
|
|
|
|
As of December 31, |
|
|||||||||||||||||||||
|
|
|
2016 |
|
|
2016 |
|
|
2015 |
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
||||||
|
|
|
(US$)(1) |
|
|
(R$) |
|
|
(R$) |
|
|
(R$) |
|
|
(R$) |
|
|
(R$) |
|
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|
|
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(in thousands) |
|
|||||||||||||||||||||
|
Cash and cash equivalents |
|
|
168,502 |
|
|
|
549,164 |
|
|
|
636,505 |
|
|
|
388,959 |
|
|
|
546,283 |
|
|
|
271,116 |
|
|
Total assets |
|
|
2,577,524 |
|
|
|
8,400,409 |
|
|
|
7,839,164 |
|
|
|
6,239,199 |
|
|
|
5,612,784 |
|
|
|
4,751,785 |
|
|
Loans and financing(2) |
|
|
1,237,917 |
|
|
|
4,034,495 |
|
|
|
4,810,945 |
|
|
|
3,259,184 |
|
|
|
3,034,695 |
|
|
|
2,989,175 |
|
|
Equity |
|
|
307,443 |
|
|
|
1,001,987 |
|
|
|
(392,169 |
) |
|
|
416,495 |
|
|
|
476,313 |
|
|
|
351,031 |
|
|
Total liabilities and equity |
|
|
2,577,524 |
|
|
|
8,400,409 |
|
|
|
7,839,164 |
|
|
|
6,239,199 |
|
|
|
5,612,784 |
|
|
|
4,751,785 |
|
Target
Markets
Adding new destinations, larger aircraft and
increasing flight frequencies They
intend to continue identifying, entering into and rapidly achieving leading
market presence in new markets or underserved markets with high growth
potential. They also intend to continue to grow by adding new destinations to
their network, further connecting the cities that they already serve with
new non-stop service, increasing frequency in existing markets, and using
larger aircraft in markets that they have developed over the
years. Finally, they intend to apply their disciplined approach of
selecting new destinations that can be served by their ATR or Embraer aircraft,
with a continued focus on Brazilian cities where they believe there is the
greatest opportunity for profitable growth, and on select destinations in
They believe
there are significant opportunities to connect the cities they currently serve
with non-stop service where none existed before. They believe that their
Embraer fleet is the ideal fleet type to connect such cities due to the combination
of seat count and low trip costs. For example, Azul is the only airline
flying non-stop between
On existing routes
that they believe present additional demand, they intend to increase the number
of daily flights with their E-Jets to achieve or further increase schedule
superiority over their competitors. For
example, they increased their daily departures on the Campinas—Rio de Janeiro
route from three to 19 between March 2009 and December 2016, and their daily
departures on the Campinas—Belo Horizonte route from four to 13 between August
2009 and December 2016. By providing this additional convenience to their
customers, they aim to continue stimulating demand for their products and
services.
They have
also begun to introduce next–generation Airbus A320neos, which have 56 more
seats than their current E-Jets, for longer-haul leisure and peak hour
focus-city to focus-city service. For the longer distance leisure domestic
markets, they believe the next-generation Airbus A320neo gives them industry
leading low seat costs to compete in these markets. For example, in
December 2016, they started flying between their main hub in
They plan to focus
their international growth on connecting their strong presence in
Continue to unlock value
from their TudoAzul loyalty program As a result of the growth of their network, they believe there is an
opportunity to further unlock value from their TudoAzul loyalty
program. With approximately 7.0 million members as of December 31,
2016, TudoAzul has been the fastest growing loyalty program
among the three largest programs in
In September
2014, they also launched an Azul-branded credit card in partnership with Banco
Itaucard S.A. In addition, in December 2015, they launched Clube
TudoAzul, an innovative, subscription-based product through which members
pay a fixed recurring amount per month in exchange for TudoAzul points,
access to promotions and other benefits. They also offer members the ability to
buy points to complete the amount required for a reward, or pay a fee to renew
expired points or transfer points to a different member’s account. They
believe that their international flights and strategic partnerships with
international carriers, including United and TAP, provide their TudoAzul members
with a broad range of attractive redemption options.
They offer
last-seat availability to TudoAzul members and have
significant flexibility to price redemptions in a way that is competitive with
other loyalty programs, thus helping to maximize TudoAzul’s
attractiveness. They actively manage the price of their redemptions, offering
very competitive fares in points when seat availability is high and optimizing
margin in peak, high-demand flights. They have also developed an exclusive,
proprietary pricing system, which provides ample flexibility to price
redemptions within a given flight. This allows them to sell seats using several
combinations of points and money. It also allows them to customize pricing
using a number of different factors, such as a member’s elite tier, membership
in Clube TudoAzul, and age (allowing them to offer lower prices to
infants and children). They are confident that this proprietary system
offers more flexibility than those of their main competitors, therefore
allowing them to create promotions, stimulate cross-sell of other TudoAzul products,
and more accurately price redemptions so as to maximize profitability.
Direct sales
of points to TudoAzul members via monthly subscriptions
to Clube TudoAzul members, internet direct point sales and
other means have been the fastest-growing revenue segment for TudoAzul,
with a monthly growth rate from direct sales of 23% since December 31,
2015. This source of revenue is extremely attractive as it diversifies their
customer base, with direct sales representing a significant volume of over 10%
of TudoAzul’s external gross billings (excluding points sold to the
airline), as of December 31, 2016. These direct sales generate recurring
revenues and they expect to grow this segment by enhancing their customer
offerings and introducing new products to their members.
In an effort
to maximize the value creation potential of TudoAzul, they have
been managing the program through a dedicated team since mid-2015. On a
standalone basis, TudoAzul’s gross billings totaled
R$708.7 million in 2016. Given the number of exclusive destinations they
operate, their network strength, and the expected growth of passenger air travel,
credit card penetration and usage and member loyalty in
Continue to establish and
extend strategic partnerships
As of December 31, 2016, they had
a code-share agreement with United and TAP, as well as 18 interline and
code-share agreements with a number of other international airlines, allowing them
to handle passengers traveling on itineraries that require multiple flights on
multiple airlines. As part of their plans to expand globally, over the last
two years, they have established strategic partnerships with United,
They view their
partnerships as critical to their global connectivity but also as a way to
addressing macroeconomic pressures in
Continue to increase ancillary and other
revenue They
intend to continue growing their ancillary and other revenue, by both
leveraging their existing products and introducing new ones. They intend to
focus on deriving further value from their existing ancillary and other revenue
streams, which represented R$42.8 per passenger as of December 31, 2016 and
included revenue from cargo services, passenger-related fees, upgrades, sales
of advertising space in their various customer-facing formats, commissions on
travel insurance sales, and revenues from airport parking at Viracopos airport.
Since the launch of their international routes and aircraft with multi-class
cabins in December 2014, they have been able to increase their ancillary
revenue per passenger from R$31.3 as of December 31, 2015 to R$42.8 as of
December 31, 2016, mostly due to the sale of upgrades to their “Espaço Azul”,
“Economy Xtra”, “SkySofa” and business class sections. As a result of the
introduction of the next-generation Airbus A320neos to their fleet, they expect
to have more seat availability for their TudoAzul loyalty
program and their Azul Viagens travel package business as well
as additional cargo capacity.
Company's
Unique Strengths
Largest network in Brazil They have the largest network in
Their optimized fleet enables them to
efficiently serve their target markets Their fleet strategy is based on optimizing the type of aircraft for
the different markets they serve. Their diversified fleet of ATR, E-Jets and
Airbus aircraft enables them to serve markets that they believe their main
competitors, who only fly larger narrow-body aircraft, cannot serve profitably.
They believe their current fleet of aircraft allows them to match capacity to
demand, achieve high load factors, provide greater convenience and frequency,
and serve low and medium density routes and markets in Brazil that are not
served by their main competitors. According to ANAC, 67% of the flights in
Their fleet plan
focuses on maintaining a trip cost advantage relative to their main competitors
while also providing them with flexibility for growth into new markets both
domestically and internationally. They expect to
add up to 58 new next-generation Airbus A320neos between 2017 and 2023, and 33
next-generation E-195-E2 aircraft starting in 2019 to replace older generation
aircraft and serve high-density markets. These new generation aircraft are more
fuel-efficient than older generation aircraft. They expect that their fleet
plan will allow them to maintain market-leading trip costs and to reduce their
CASK, both in absolute terms and relative to their main competitors.
Industry-leading PRASK They utilize a proprietary yield management system
that is key to their strategy of optimizing yield through dynamic fare
segmentation and demand stimulation. They target both business
travelers, to whom they offer convenient flight options, and cost-conscious
leisure travelers, to whom they offer low fares to stimulate air travel and to
encourage advanced purchases. This segmentation model has enabled them to
achieve a market-leading PRASK of 25.3 real cents in 2016. In
addition, in 2016, their PRASK represented a 35% premium compared to Gol. They
believe their superior network and product offering allows them to attract
high-yield and frequent business travelers. According to ABRACORP, they held a
29% share in terms of Brazilian business-focused travel agency revenue,
compared to a 17% market share in terms of RPKs as of December 31, 2016. In
2016, their average business-focused travel agency ticket price was 27% higher
than their main competitor and their total average fare was 6% higher than
their main competitor.
The
increase in flights from
Most efficient cost structure in the
Brazilian market They have
leveraged their management team’s experience by implementing a disciplined, low
cost operating model to achieve their operational efficiencies. They believe they
have achieved these operational efficiencies primarily through:
·
Optimized aircraft for markets and routes served
|
As a result, they
have achieved lower trip costs than their main competitor. In 2016, their average trip cost was R$24,179,
which was 31% lower than that of Gol. In addition, their FTEs per aircraft
were the lowest in |
They have a
robust and scalable operating platform that features advanced technology such
as ticketless reservations, an Oracle financial system and electronic check-in
kiosks at their main destination airports. They believe that their scalable
platform provides superior reliability and safety and will generate economies
of scale as they continue to expand.
Strategic global partnerships Over the
last two years, they have established long-term strategic partnerships with
United,
In August
2016,
As part of
the privatization process of TAP, a consortium of private investors (including their
principal shareholder) acquired a stake in TAP, and they invested
€90 million in exchange for TAP bonds convertible into up to a 41.25%
economic interest in TAP. Such economic interest is equivalent to up to 6% of
TAP’s voting rights and, if converted, would make them TAP’s largest
shareholder in terms of economic interest. As of December 31, 2016, TAP served
more than 75 destinations, including 10 destinations in
As a result of their
existing code-share agreements with United and TAP, their customers have access
to more than 133 additional destinations worldwide. In October 2016, Hainan announced flights between
High-quality customer experience through
product and service-focused culture They believe they provide a high-quality, differentiated travel
experience and have a strong culture focused on customer service. Their
crewmembers are trained to be service-oriented, focusing on providing the
customer with a travel experience that they believe is unique among Brazilian
airlines. They provide extensive training for their crewmembers that emphasizes
the importance of both safety and customer service. They strive to hold their
employees accountable to maintain the quality of their crew and customer
service.
Their service
features include passenger seat selection, leather seats, individual entertainment
screens with free live television at every seat in all their jets, extensive
legroom with a pitch of 30 inches or more, complimentary beverage and snack
service, free bus service to key airports they serve (including between the
city of São Paulo and Viracopos airport) and a fleet younger than Gol and
LATAM.
They focus on
meeting their customers’ needs and had one of the best on-time performance
records among
Well-recognized brand They believe they have been successful in building
a strong brand by using innovative marketing and advertising techniques with
low expenditures that focus on social networking tools to generate
word-of-mouth recognition of their high quality service. As a result of their
strong focus on customer service, surveys that they have conducted indicate
that, as of December 31, 2016, 90% of their customers would recommend or
strongly recommend Azul to a friend or relative. The strength of their brand
has been recognized in a number of awards
Company's
Unique Risks
The Brazilian government has exercised, and
continues to exercise, significant influence over the Brazilian economy.
This involvement as well as
The ongoing economic uncertainty and
political instability in
Exchange rate instability may have adverse
effects on the Brazilian economy, them and the price of their preferred shares,
including in the form of ADSs. The
Brazilian currency has been historically volatile and has been devalued
frequently over the past three decades. Throughout this period, the
Brazilian government has implemented various economic plans and used various
exchange rate policies, including sudden devaluations, periodic
mini-devaluations (during which the frequency of adjustments has ranged from daily
to monthly), exchange controls, dual exchange rate markets and a floating
exchange rate system. Although long-term depreciation of the real is
generally linked to the rate of inflation in
Inflation and certain measures by the
Brazilian government to curb inflation have historically adversely affected the
Brazilian economy and Brazilian capital market,
and high levels of inflation in
the future would adversely affect them and the price of their preferred shares,
including in the form of ADSs.
Deficiencies in Brazilian infrastructure,
particularly in airports and ports, may adversely affect them.
Substantial fluctuations in fuel costs or the
unavailability of fuel, which is mostly provided by one supplier, would have an
adverse effect on them. Fuel expenses, which at times in 2007
and 2008 were at historically high levels, constitute a significant portion of their
total operating expenses, accounting for 24.7% of their operating expenses for
the year ended December 31, 2016 and 29.8% for the year ended
December 31, 2015.
Because the airline industry is characterized
by high fixed costs and relatively elastic revenues, airlines cannot quickly
reduce their costs to respond to shortfalls in expected revenue and this may harm their ability to attain their
strategic goals.
Increases in labor benefits, union disputes,
strikes, and other worker-related disturbances may adversely affect them,
including their ability to carry
out their normal business operations. Their business is labor intensive. Their
expenses related to their workforce (salaries, wages and benefits) represented
17.3%, 16.2% and 18.4% of their total operating expenses for the years ended
December 31, 2016, 2015, and 2014, respectively. All Brazilian airline
employees, including theirs, are represented by regional aviation unions and by
two national labor union. The Labor Prosecution’s Office has
recently filed a lawsuit against them claiming that they have allegedly
violated certain labor regulations, including limitations on daily working
hours and rest periods. It claims approximately R$66 million in
punitive damages. It also requested the grant of an injunction limiting
overtime and enforcing legally required breaks, under penalty of R$5,000 per
breach. This injunction has been denied by the court. Such claims could
adversely affect them.
They rely on partner airlines for code-share
and loyalty marketing arrangements and the loss of a significant partner through
bankruptcy, consolidation, or otherwise, could adversely affect them.
Their controlling shareholder has the ability
to direct their business and affairs, and its interests may conflict with
yours. Upon
completion of this global offering, assuming full exercise of the underwriters’
option to purchase additional shares, their controlling shareholder will own,
directly and indirectly, 67% of their voting capital and 50.6% of their total
capital. On economic terms, their
controlling shareholder’s holdings equaled 7.4% prior to this global offering
and will equal 6.0% after this global offering, assuming the full exercise of
the underwriter’s option to purchase additional shares. In particular, due to
their capital structure, the capital contributions made by the holders of their
common shares to date were considerably lower than those made by the holders of
their preferred shares, which means that their controlling shareholder has the right
to direct their business having considerably less economic interest to the
results of their activities than holders of their preferred shares.
Their controlling shareholder is entitled to
receive significantly less dividends than holders of their preferred shares,
which may cause his decisions on the distribution of
dividends to conflict with your interests. Holders of their common shares are entitled to receive an amount of
dividends equivalent to 75 times less than the amount of dividends paid to holders
of their preferred shares. The fact that their controlling shareholder
receives a small portion of their dividends in each distribution in comparison
to the amount of dividends to which holders of their preferred shares are
entitled may influence his decisions on the distribution of dividends, which
may differ from interests of the holders of their preferred shares.
Bottom Line
In 2016, they recorded operating income
of R$344.3 million, representing an operating margin of 5.2%, and a net loss of
R$126.3 million. Despite the contraction of the Brazilian economy, which
started in 2014 and deepened in 2015 into the first half of 2016, they began to
see a recovery during the second half of 2016, and recorded operating income of
R$166.0 million for the three months ended September 30, 2016 and operating
income of R$170.0 million for the three months ended December 31, 2016,
representing an operating margin of 9.6% and 9.3%, respectively.
As the sole
airline on 70% of their routes, they are the leading airline in 66 Brazilian
cities in terms of departures and carried approximately 21 million
passengers in 2016. They wholly own their loyalty program TudoAzul, a
strategic revenue-generating asset, which had approximately 7.0 million members
as of December 31, 2016.
Despite the
recent Brazilian economic recession, they believe
They intend
to continue identifying, entering into and rapidly achieving leading market
presence in new markets or underserved markets with high growth potential. They
also intend to continue to grow by adding new destinations to their network.
Their ATR aircraft give them a significant strategic advantage in the ability
to enter new cities and access previously untapped demand, since these aircraft
only have 70 seats and, therefore, require fewer passengers for the flight to
become profitable. They plan to focus their international growth on connecting
their strong presence in
They have the
largest network in
The Brazilian government has
exercised, and continues to exercise, significant influence over the Brazilian
economy. This involvement as well as