Azul (AZUL), the largest airline in Brazil, is trading higher today on positive June traffic data. The company reported that consolidated passenger traffic (RPKs) increased 21.6% yr/yr on a capacity increase (ASKs) of 14.7%, resulting in a load factor of 83.6%, an increase of 4.8 percentage points.
Domestic passenger traffic increased by 28.7% on a 20.3% increase in capacity, resulting in a load factor of 82.3%, 5.4 percentage points higher yr/yr. For all of Q2, load factor was 84.1%, an increase of 4.0 percentage points. It's always a good sign to see traffic grow faster than capacity. That shows that growth is not simply being driven by an increase in the number of flights in the air, but flights also are having fewer empty seats.
The stock has been making a strong move since mid-May as the airline has now reported back-to-back strong traffic months in May and June.
Brazil saw a major change in its political climate in recent months when Jair Bolsonaro, a far right candidate, won the country's presidential election and assumed office on January 1, 2019.
His campaign platform included calls for a smaller state government, lowering taxes, and privatizing state companies to reduce corruption. The theme in Brazil, as well as other South American elections, is that if you vote left, we will become Venezuela. Whether that's fair or not, the message seems to have taken hold during election season.
Azul represents one way to play the continued hope for improvements to Brazil's economy. Azul focuses more on the low-cost side of the market. It was founded in 2008 by entrepreneur CEO David Neeleman, founder of JetBlue (JBLU), as his fourth successful airline venture, to capture the market opportunities created by the expansion of the Brazilian aviation market.
As the sole airline on 71% of its routes, Azul is the leading airline in 71 Brazilian cities, per its latest annual report. It also flies to select international destinations, including Fort Lauderdale, Orlando, and Lisbon. Furthermore, it last year started offering non-stop flights from Sao Paulo to Paris via a codeshare agreement with French carrier Aigle Azur.
Azul is serving a growing market in Brazil. It makes the argument that Brazil is geographically similar in size to the continental US. However, Brazil's air travel market continues to be significantly underpenetrated and is expected to increase to 131 mln domestic passengers by 2021.
Azul has the most extensive route network in Brazil, serving 100 domestic destinations, or about twice as many as its main competitors GOL Linhas (GOL) and LATAM Airlines (LTM), which respectively served 53 and 45 destinations last year. Also, Azul is the only carrier in 41 of its domestic destinations. Finally, Azul operates a young, fuel-efficient fleet that is better tailored for the Brazilian market than those of its main competitors because it allows Azul to efficiently serve cities with diverse capacity needs.
In sum, the June traffic data was another positive data point for Azul. Perhaps the new administration is making some early progress in terms of improving the economy and, perhaps more importantly, is generating confidence among the Brazilian people such that they feel more economically secure to book more flights. Finally, just as important as the June data, Azul said that it expects its strong traffic patterns to continue in July, which is a high season month for Azul.