This is part I of a two-part story about 2020 for the major airlines in Brazil in alphabetic order: Azul, GOL and LATAM Brasil. Part I gives a brief introduction about the arrival of the COVID-19 crisis within the industry in the country, the macroeconomic challenges for the country going forward and the year review for Azul.

Click here to read the 2019 recap.

Looking back to AirlineGeeks’ 2019 recap of Brazilian aviation and its predictions for this year, one may think that, besides being an unfunny joke, it was written 10 years ago. Such were the difficulties of 2020, the year that didn’t end, particularly for the airline industry.

Obviously, nobody predicted a bombshell would raze the industry as COVID-19 did, and the reasons to be bullish in Januarywre plentiful. A positive macroeconomic scenario and efficient, profitable airlines seemed to bode well for the year ahead.

The Arrival of the Crisis

As March came, chaos kicked off. The first major warning started with LATAM Brasil, the only Brazilian airline to serve Italy — more specifically Milan — the center of the first COVID-19 hotspot in Europe.

“We started to feel a drop in the number of passengers that boarded; despite having the ticket, [they] stopped showing up at the flight. And I clearly remember, on a Saturday, that I looked at the number of passengers that boarded in that Saturday, the flight left with 40% of the passengers [booked]. Then we said: ‘there’s something wrong,'” recalled Jerome Cadier, CEO of LATAM Brasil, in an interview in May.

The following Monday, LATAM canceled flights from São Paulo to Milan. And as cases starting popping up in Brazil, the industry went downhill very quickly.

At first, Azul’s top executives tried to play down the effects of the coronavirus in the domestic market. In an interview to O Estado de São Paulo, CEO John Rodgerson said domestic demand was still stable.

“We are more worried about the dollar [exchange rate] than with the coronavirus here. The Brazilian is more afraid of traveling when the [U.S.] dollar is at 4.75 Brazilian Reals than with the virus itself,” Rodgerson said. “Brazil has been through worse things than this. There’s the normal flu, dengue. We have to do the right thing, like washing hands, cleaning the aircraft, do everything, but continue with normal life.”

In the same interview, Chairman and founder David Neeleman added that with “each day that passes, people are more comfortable with the risk.”

The interview was published on March 11. $1 was valued at 4.72 Reals, up from 4.32 Reals a month before.

Exactly a week later, O Estado de São Paulo published another interview with Rodgerson, and this time his answers showed the airline industry was on its knees. The dollar was still skyrocketing, sitting at 5.11 Reals, COVID-19 cases were following suit and restrictions were being applied by authorities across the country.

“[The demand drop] was profound. I’ve never seen anything like this,” he said, stressing the need for a rescue by the federal government to provide airlines with working capital.

This paints a brief picture of how quickly the downfall happened in the Brazilian market. March punctuated by cuts as airlines tightened their belts, and for April airlines launched an “Essential Air Network” to avoid a full shutdown, down 95% from 2019 capacity figures. From then on, a recovery started to build.

A GOL 737-700 lines up at São Paulo/Congonhas Airport. (Photo: AirlineGeeks | João Machado)

Already in March, the government issued a Provisional Measure that, among other measures, allowed airlines to refund passengers in 12 months. It became a law in August. Besides that, airlines and the government spent months discussing a bail-out. In the later part of the year, there was an offer on the table for airlines. Finding the terms unfavorable, the three major airlines opted for raising cash in the private market only.

The Economic Background Going Forward

Looking again at the present, the scenario for Brazil’s economy looks still uncertain, even considering the roll-out of a vaccine. This is largely because there is still not a unified plan for mass vaccination by the federal government and some health specialists believe the population will not be completely vaccinated in 2021, something crucial to reach the level of immunity necessary for more travel.

But even if COVID-19 in Brazil is contained during 2021, the future will not be easy, requiring massive efforts by governments at all levels to handle the fiscal situation. The government has registered budget deficits since 2014, and the public debt trajectory has begun to worry investors. To address these concerns that prevent investments requires economic reforms that usually require constitutional amendments, which are difficult to pass and require huge political efforts.

One of the most important of these amendments — the Pension Reform — was passed in 2019. But the massive spending required to face the COVID-19 emergency further stressed the need to pick up the pace of reforms, as the public debt potentially reaching a debt-to-GDP ratio of 100% this year.

However, some investors are afraid the government’s commitment to fiscal health is low.

“Brazil’s fiscal situation is the largest worrying by investors for some time now,” said analysts Carlos Sequeira and Osni Carfi, from BTG Pactual bank, in a letter about perspectives for 2021, O Estado de São Paulo reported. “Now the market is worried mainly with the inability and/or the lack of will from the government and the Congress to cut spending and pass structural reforms to consolidate the country’s accounts.”

Amongst the main structural reforms on the table are the Tax Reform, the Administrative Reform and the privatization plan, the latter being one significant promise of the federal government that hasn’t yet been achieved in the first half of President Jair Bolsonaro’s term.

And these expectations are deeply linked with forecasts for the airline industry. First, on the cost side, most airline costs in Brazil depend on the price of the dollar. If the government signals a lack of commitment to fiscal responsibility, the dollar tends to go up as investors take their investments elsewhere. This affects the airlines’ balance sheets very negatively. Secondly, on the demand side, the halting of investments generated by an irresponsible federal government cools the demand for air travel, directly affecting the airlines’ revenues.

As a result, 2021 will prove to be as challenging of a year for Brazilian airlines, although in its own way.

Azul

In January, before COVID-19 hit the Brazilian economy, Azul announced it was acquiring TwoFlex, one of the largest commuter operators of the country. The carrier, which owned a fleet of 16 Cessna Caravans, would help to increase the airline’s capillarity even further.

A TwoFlex C208B in São José do Rio Preto, Brazil. (Photo: Alex Pelicer)

But more than that, the takeover had other advantages. First, TwoFlex owned 14 slots in the highly-constrained Congonhas Airport in São Paulo, the most in-demand airport in the country.

Second, TwoFlex holds a number of tax exemptions over fuel across Brazil. Before the take-over, GOL used TwoFlex to connect smaller cities, and for that — in partnership with state governments — it received fuel tax discounts in its operations in the rest of the state. This generated important cost savings across GOL’s network. Azul not only robbed GOL of these discounts, but it also started to benefit from such exemptions itself.

Third, a number of TwoFlex’s aircraft have a full-cargo configuration, further increasing Azul Cargo Express’ strength across Brazil.

Such were the advantages that even during the uncertainties brought by COVID-19, Azul proceeded with the investment. In August, the commuter carrier was rebranded as Azul Conecta, helping in Azul’s efforts to revive its network during the year.

Two of Azul Conecta’s Cessna Grand Caravans fly over the state of São Paulo. (Photo: Azul | Gianfranco “Panda” Beting)

During the airline’s investor day earlier this month, the airline seemed very enthusiastic with Azul Conecta.

“We just signed [an agreement] this week with Rio Grande do Sul, the southernmost state of Brazil, we’re going to serve 15 destinations because of the Caravans in that state,” said Abhi Shah, the company’s Chief Revenue Officer. “It’s pretty remarkable. And it’s going to take fuel taxes [in the state] from 18% down to 4%, that’s a competitive advantage that only Azul has.”

The Caravans will also help, the airline says, Azul to reach the mark of 200 cities served. And during Azul Day, it said it expects to increase the utilization of the turboprops by 68% in 2021, from 22,566 hours — 3.85 hours per aircraft per day — to 37,829 — 6.48.

On the mainline front, the airline’s biggest feat was closing a codeshare agreement with LATAM Brasil to help drive connectivity in both companies’ domestic flights. This allowed Azul’s codeshare bookings to more than double comparing November 2020 to November 2019, and more recently instilled the ire of GOL, which complained about the partnership to CADE, Brazil’s antitrust authority.

Azul was not as exposed to the long-haul market as LATAM Brasil — before COVID-19, it basically deployed its eight A330-200s and two A330-900neos in international sectors only. With COVID-19, it currently maintains one daily rotation from its fortress hub in Campinas, Brazil, to Fort Lauderdale and three weekly to Lisbon.

Azul’s first Airbus A330-900neo resting at the gate before its first passenger flight. (Photo: AirlineGeeks | Joao Machado)

The widebody fleet grew — one Airbus A330-200 was returned to the lessor, but two Airbus A330-900neos were delivered. Beside these ten weekly international rotations, this fleet is dedicated to trunk routes from Campinas within Brazil, benefitting from the growing domestic demand and from hotter cargo demand.

Azul Cargo Express is one unit of the business that will leave this crisis stronger than it entered. Though Azul’s passenger revenues are expected to fall 42% this year, cargo revenue is expected to grow 28%, even with the reduced passenger capacity holding the cargo capacity down — as Azul Cargo Express extensively uses Azul’s passenger aircraft cargo bellies. Azul even reconfigured four Embraer 195 to carry cargo in the passenger area, a first in the world with this aircraft model.

Fleet-wise, in January Azul started operations with the Airbus A321neo. It currently operates three of the type. But it has drastically halted its delivery commitments, with more than 100 deliveries — Airbus A320neo family and Embraer E195-E2 included — postponed to 2023 and beyond, although it has the flexibility to take these aircraft before if demand requires it.

For 2021, something that is true for any of the three major airlines is that their performance will depend on the way domestic demand will behave, as it is clear that international demand will take much longer to recover.

Regardless, Azul seems the most prepared of the three airlines to respond to any increases or drops in the market’s appetite for travel. As it has the most fleet flexibility, with aircraft ranging from 9 to 298 seats, it can react more quickly to demand oscillations.

Meanwhile, to weather the crisis, Azul raised 1.7 billion Reals ($327.3 million) in debentures, with an option for 550 million Reals to endure the next months of adversity as well as invest in strategic opportunities.

Azul’s cash position as per the “Azul Day” PowerPoint presentation.

During Azul Day, the airline informed the airline’s liquidity position was at around 3.9 billion Reals. Burning 1.5 million Reals per day, during this quarter, it would have enough cash to survive for seven years if nothing improved.

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João Machado

João has loved aviation since he was six-years-old when he started visiting his home airport in Porto Alegre, southern Brazil. As he always loved writing, in 2011, at age 10 he started his very own aviation blog. Many things have happened since then, and now he is putting all his efforts into being an airline executive in the future. João currently lives in Siena, Italy, where he studies Economics and Management at Unisi.

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