Azul (AZUL), which made its IPO debut in April 2017, reported Q2 results this morning. In terms of quick background, Azul is the largest airline in Brazil by number of cities and departures, offering 739 daily flights to 102 destinations. With a fleet of 123 aircraft and more than 10,000 crewmembers, the company has a network of 202 non-stop routes. It focuses more on the low cost side of the market.
Azul 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 70% of its routes, Azul is the leading airline in 66 Brazilian cities. It also flies to select international destinations, including Fort Lauderdale, Orlando, and Lisbon.
Brazil is geographically similar in size to the continental US and is currently the fourth largest market for domestic airline passengers in the world. However, it is still significantly underpenetrated. Since 2008, the number of domestic airline passengers carried in Brazil has increased by more than 90% to 96 mln in 2015. That is expected to increase to 131 mln domestic passengers by 2021.
Azul has the most extensive route network in Brazil, about twice as many as its main competitors LATAM Airlines (LFL) and GOL Linhas (GOL). Of note, Azul is the leading airline at Viracopos airport, one of the Sao Paulo area's principal airports and the largest domestic hub in South America in terms of non-stop destinations served.
A key driver of Azul's profitability is its use of a disciplined, low cost operating model. Its optimized fleet yields lower trip costs than its main competitor. In 2016, its average trip cost was R$24,179, which was 31% lower than Gol. With the introduction of the next-generation Airbus A320neos to its fleet, Azul expects to maintain its market-leading low trip cost advantage.
Turning to the Q2 results, which are presented in Brazilian reais (R$), Azul reported a loss of R$(0.30) per ADS, which was better than market expectations. While AZUL is unprofitable, it does report positive EBITDAR, which increased 41% to R$476.1 mln, representing a margin of 27.6%. Revenue rose 19.3% YoY to R$1.72 bln, which was a bit light of expectations.
Passenger traffic (RPKs) increased 21% over a capacity increase of 18% resulting in a higher load factor of 80.9%, 1.9 percentage points higher than in 2Q16. In addition to the double-digit growth in capacity, total revenue per ASK (RASK) and passenger revenue per ASK (PRASK) increased 1.2% and 1.7% year over year totaling 28.93 cents and 24.92 cents, respectively.
In sum, with the stock trading modestly higher today, it seems investors are pretty pleased with the Q2 results overall. It has been a bit of a roller coaster ride since Azul made its IPO debut. The deal priced at $20.06, it fell in May on a somewhat disappointing Q1 report, but had rebounded in recent weeks. Azul is a name to watch in the future as Brazil is geographically similar in size to the continental US but remains significantly underpenetrated so there is potential here.