Brazilian carrier Azul has cut its international flight network as a result of lower demand due to the global coronavirus crisis, and is closely monitoring its liquidity and expenditures as the crisis drags on.
The low-cost airline, Brazil’s largest in terms of destinations, says that its domestic routes, which make up 97% of its network, have been less affected by the pandemic than flights to Europe and North America.
“We have seen a clear reduction in international demand since about two weeks, certainly due to the virus as well as the strengthening of the dollar,” chief revenue officer Abhi Manoj Shah tells analysts on the company’s fourth quarter earnings call on 12 March. The airline reduced its international capacity by about 30%, including suspending flights and reducing frequencies to Europe and North America.
The airline has, for example, stopped flights from Campinas to Porto, Portugal, cut down frequencies to Lisbon from twice-daily service to once, and reduced its frequencies from Brazil to Orlando and Fort Lauderdale, in Florida, as well as to Argentina. Shah adds that Azul will focus its capacity in Campinas, as it is the strongest point of local demand for the carrier.
The US dollar has climbed against the Brazilian currency over the past month as investors have shifted assets into dollars as the virus has spread globally.
“We will do what’s needed to be done,” he adds. “Both on international and domestic [capacity], there are no brownie points for bravery, and there is no reason to fly things that don’t make sense.”
Executives say that Azul’s domestic operations have not been as affected as other airlines, for example in Europe. That said, Azul is trying to streamline its operations within Brazil also by cutting flights that serve multiple hubs, Shah says.
“We are no stranger to difficult times,” Azul president David Neeleman adds. “The difficulty with dealing with this virus is the uncertainty.”
The drop-off in demand will also affect incremental spending, chief executive John Rodgerson tells analysts. Nevertheless, the airline will continue to take delivery of its Embraer E195 E2 aircraft as planned. The airline ended 2019 with 47 next-generation aircraft, representing 42% of its capacity.
“By 2022 we expect our entire narrowbody fleet will be next-generation, resulting in significant cost savings and reduction in fuel consumption, years ahead of our competition,” Rodgerson says. “The coronavirus has not changed those expectations.”
“We have 28 aircraft going off property today, so we have some contractual commitments to replace those with E2s, but expect no net growth in deliveries this year,” Neeleman adds. “We can’t take aircraft out of our fleet and not backfill that with E2.”
The airline reported a 35.6% increase in net income for the full year 2019, to R1.2 billion ($585 million). Operating revenues rose 26.3% to R11.4 billion.
“In 2019 passenger demand grew at a healthy 24% led by the strength of our network, a more positive macroeconomic scenario and consolidation in the Brazilian airline sector,” the company says. The airline ended the year with a total liquidity of $4.2 billion, enough to weather the storm that is approaching, executives say.
“Brazil has one of the youngest and healthiest populations in the world,” Neeleman adds, saying he is confident the government will be able to handle any potential health crisis, especially in light of the country’s climate, and experience with tropical diseases. “We remain confident in our long-term targets and will act swiftly if the situation in Brazil deteriorates.”
“We are flying our 320neos 16 hours a day, our E2s 12 hours a day. That is the highest in the world,” says Neeleman. “So there is significant amount of capacity that can be ratcheted down if need be.”
