Azul S.A. (AZUL54) Earnings Call Transcript & Summary

[Presentation]

Hi, everyone. Welcome all to our Azul today. I'm Thais Haberli, the Head of IR of Azul. Has been over 6 years since our IPO. So it's great to be here at the New York Stock Exchange. So thank you all. Today, presenting, we have John Rodgerson, our CEO; Abhi Shah, our President; and Alex Malfitani, our CFO. The presentation is available in our IR website, and we have the Q&A after the presentation. So -- we have plenty of time for the questions. So I will turn the presentation over to John. John?

Thanks, Thais, and welcome, everybody, and especially all the people that are online kind of listening today. Thais highlighted it was just over 6 years ago that we took the company public. And in many aspects, this is a re-IPO of the company, right? And so on the backside of COVID, and so we're going to walk through everything we've done to build this unbelievably great airline and how much stronger we are today from that initial public offering that we did in 2017. So we're going to kind of walk you through kind of all those aspects. We're going to talk a lot about valuation today, obviously, kind of the restructuring of the balance sheet that we did, but more importantly, the strength of the core business and the core business is doing phenomenally well. And so Abhi will walk you through the revenue trends and very different than what you're seeing elsewhere in the world. But the Azul story really starts with the network that we have, the flexible fleet that we have, as well as our culture and our people, and we'll talk a lot about that today. And we are in the part of the world that's growing and growing substantially, and Brazil is still very underpenetrated, and we'll walk you through that. But take a look at this network, right? When we went public, I think we had just over 90 destinations served. And now there's 155 destinations domestically, 7 internationally, about 1,000 flights a day. And so this airline is significantly larger today than it was in 2016 and significantly stronger. But I think the key thing that I want to share with you is that we're the only carrier in 81% of our routes. And so a lot of people thought that as Azul grew, and Azul got larger narrow-body aircraft like the A320s and the A321s that we would have overlap with our competitors, the exact opposite has happened. And Abhi will kind of walk through our network strategy and how that works. Today, we're going to have the opportunity to talk about all these different business units that we have, right? Obviously, the core airline, but we also have a regional operation that provides pilots for us in tax relief inside of the country. We've launched Azul Tech Ops, our loyalty business, as well as our packaging business, vacations and our logistics business. And when we went public, a lot of these other businesses were very small. But now as we're kind of doing the re-IPO of Azul, we want to walk you through in detail everything that we've done and how we've grown these businesses. And so we're not talking anymore about COVID, we're not talking about any more about wearing masks. And so now we can talk about the core business. And it all starts with the strong airline and network that we have, but we're going to show you just how strong these businesses are around it. So just to kind of walk through the airline's history as a public company, we went public in 2017, as I talked about, we delivered -- or I should say we over-delivered on everything we committed to the market and the market rewarded us for that. And we're going to walk you through that then. We've been in 3 years of what I would call COVID hell -- but now we're on the backside of COVID hell, and now we have the opportunity to tell a story that's much better than the story we had in 2016 for this re-IPO. We were joking the other day that our existence. This airline is about 15 years old, but we've existed in COVID as a public company more than we've existed outside of COVID. Think about that for a second, right? Since we've gone public, we've lived in this COVID world for a lot longer than we've lived outside of the COVID world. And so I want to kind of just remind everybody, we have a lot of the sell-side analysts in the room here and online. But when we went public in 2016, that was the size of the airline in terms of ASKs -- that was the size of the revenue of the airline, and that was our EBITDA, okay? And what we told the market is that we would grow the business and we would grow the business in terms of ASKs, in terms of revenue, and in terms of EBITDA. And you can see we did that, right? So we grew the business in terms of seats in the market by about 56%, net revenues were up 71%, but take a look at what happened with EBITDA, right? There's not a lot of airline stories out there that have grown their businesses by 50%, but they've more than doubled EBITDA. And what that did was the stock reacted accordingly, right? And so the stock was up 3x from the day that we went public. And that's as a result of a company that delivered on its promises. A company that came out and said, "We're going to do this." and we actually did it -- and we actually did more than what the market was expecting. And so every time we had an earnings call, we delivered more than what the sell side was projecting. So now we just wanted to kind of share a little bit of where we are today, the size of the airline relative to where it was in 2016. So now the airline is 2x the size, you can see in terms of ASKs, our revenue is 3x. This airline is 3x larger than it was in 2016, and our EBITDA is 3x more right? And so -- and Alex likes to kind of say this, and we're going to be on the road for the next month kind of doing this re-IPO of the company, but you could buy the airline today. That's 3x the EBITDA for half the price of what we sold at the IPO, if you think about that, right? And so it's a phenomenal story as to where we are today. And what's contributing to this EBITDA, and what's contributing to the revenues to be so strong is a lot of these business units, right? So TudoAzul today is 6x the size it was in 2016, 6x the size. Azul Vacations, our packaging business, is 12x what it was. And Azul Cargo is also significantly larger at 8x what it was, okay? And so kind of going back to the story overall, this was our EBITDA trajectory from when we went public and that was our stock price, okay? Where we are today is quite different. Take a look at what's happened as our EBITDA has grown, our stock price hasn't moved yet because everybody's been focused on the balance sheet and what we've done and looking at trends in the United States with the weakening of the revenue environment. And so the airlines have been beat up quite a bit. So we're going to kind of walk you through this story and how much upside really you have in the Azul story going forward. Another kind of interesting thing that I wanted to highlight at the beginning, and you'll have the opportunity to kind of talk through some of this stuff is that, obviously, the stock price has not yet recovered to the levels it was pre-COVID. But take a look at this, right? That's what the stock had done -- that's where the stock is in USD today. But let's take a look at just trading multiples. And I understand that, obviously, trading multiples have compressed interest rates are higher, and that's happened across the board. But Azul today is a stock that's trading at a discount to a trading multiple that historically has traded at a premium to other Latin American peers. Doesn't really make sense, right, if you think about it. And so you can see no one is suggesting that we're going to be back to an 8 multiple tomorrow right? But that shows you how much runway the opportunity is and really what we're going to talk about today. But it all starts with Brazil. And I've been in Brazil for 15 years. I think the number one question we got on the road show for myself, Abhi and Alex was, so when are you leaving Brazil? When are you leaving Brazil? When are the gringos leaving? When are you leaving Brazil, right? And so the reality is, is every single one of us is still here. The same management team that took the company public in 2016 is still at the company because the opportunity in Brazil is better than ever, and we're going to kind of walk you through that really quickly. So take a look at this chart today. Brazilians travel less than Colombians, less than Chileans, less than Mexicans, and obviously, a lot less than the developed world in the United States and Europe. But 18% of the population is traveling via air and 82% on buses, right? It's a country folks, that's the size of the continental United States. That has over 220 million people. And it's a country where the GDP estimate has tripled from where it was a year ago. The GDP estimate has tripled from where it is a year ago. Tremendous opportunity. What does that mean for Azul, right? If we get the country to travel just as much as our Latin American peers, like Mexico, or Colombia, look at how many more aircraft we need. We need 3 more Azuls in the country just to get where it is in Colombia. It's pretty remarkable when you think about the growth potential that Brazil has today. And it's pretty remarkable when you see what our average fares have done in the recent months and see how much opportunity exists. And so with that, I'm going to hand it over to our President, Abhi, who's built best network in Brazil and I would say, in the world and have him walk you through the details of what our network looks like.

Thanks, John. Great to see you all today. I think all be over here. Obviously, the network is something that I think is one of our key competitive advantages. And it's something that was designed to be different, and we started it to be very, very different 15 years ago, and it -- I think it's only gotten stronger. It's a network that's very diversified. So our competition is very focused in 3 cities in Brazil. We are very diversified across all the geographies in the country. We access different demand via our flexible fleet and via our hub and spoke and our network structure. And we also access the parts of Brazil that are growing the fastest, and I'll show you that as well. So -- it's a network that's designed to be different. And as we have grown, continues to be different and continues to get stronger. Our route leadership. And this is something that, back then when we went public, people thought, well, as you grow, you will have to encroach upon the competition. You will have more competition and actually the opposite has happened. If you look at our leadership position in our network markets that we are alone routes that we have the most frequency. That percentage has actually increased over time. For a couple of reasons, as we have grown the network has gotten stronger, the connectivity that we offer is stronger. As we've gotten more fuel-efficient aircraft, it's harder and harder for the competition to enter, to attack us in our markets. And so we've actually gotten -- our network is more defensive, more robust, more resilient. And again, we want to fly -- our aim is to grow the market. Our aim is not to steal from the competition. Our aim is not to attack anybody anywhere else. It's to grow the market. And so it's different and we continue to grow in that philosophy. And that philosophy will continue for the years to come. You can see our strength where we fly. We like to fly where we are strong, and we like to be strong where we are fly -- where we fly. So the number of destinations that we have in our top 10 airports, our second largest city has more destinations served than the largest international airport in Sao Paulo, for example. And so we use this combination of destinations, of frequencies, of fleet flexibility, of connectivity to really drive that revenue performance. It gives us pricing power. It gives us loyalty among our customers and this really is a competitive and structural advantage that's very, very difficult to replicate. And the longer that we continue -- the more that we grow in these markets, the more entrenched we become, the harder it is, the more defensive we are and the harder it is for anybody to enter these markets. And so it really is a way of creating discipline in the market overall. This is a great map that shows where we grow, where our exposure is, is all over Brazil? If you look at the Midwest, that's the agro region of Brazil. The Northeast has infrastructure, has mining, leisure destinations. And the more traditional parts of Brazil, Sao Paulo, Rio, they always had great access to air service, right? 15 years ago, nobody said, well, Sao Paulo to Brasilia needs more flights. That wasn't the complaint. But where we fly to Campinas, by the horizontal Recife, where I'll show you later on, that's where the market was underserved. And that's what we have grown over the last 15 years. And if you look on this slide here, you can see how our growth is so distributed. It's not focused in just one geography, and this allows us to connect -- this is all part of the connectivity. It's all part of the flexible fleet, and it's all part of the fact that 86% of our routes continue to have no nonstop competition. And that number has only increased over time. So it is broad-based growth, broad-based connectivity, using the fleet as the tool to enable that to happen and really create something that's very, very different and very, very distinct and still has a lot of growth and a lot of profitable growth ahead of it. Our primary hub is in Campinas, which is the Newark of Sao Paulo, if you will. We have 3 hubs, 3 large hubs. You can compare them to Newark, to Houston and San Francisco, kind of East Coast, Mid-Continent and sort of a West Coast Northeast hub. And the key here, the key of each one of these is that they access different demand. They're not just replicating one to the other. They have different destinations. They have different equipment types. They have different routes, different demographics and each one is designed to do something different. So our Campinas, our Sao Paulo hub is for the South, Southeast of Brazil. It's where the majority of our international network is. The Southeast, Southwest and really accessing that corporate demand that exists in the Southern part of the country and taking it all over the country and on to the U.S. and Europe as well. 177 departures, 64 destinations by far the largest single airline hub, domestic hub in South America. Recife is our Northeast or West Coast hub, if you will, accessing all of the capitals in the Northeast of the country. Remember, as John said, Brazil is the size of the continental U.S. And so you have completely different demand, different demographics and different travel patterns from one hub to the other. We do have flights to the U.S. as well from Recife, but the job of the Northeast hub is to connect the Northeast region with itself, give it access to the rest of the country, but really allow convenient, flexible options in that region.

We talk about the competitive aspect of the hubs as well.

Yes. And you can see on the right in each of these graphs, Belo Horizonte here, Recife and Campinas, how we compare to our competition and how strong we are, how dominant we are. And again, there's some that was built over time in each of these locations. It's a combination of connectivity, combination of destinations and fleet flexibility. It's small airplanes connecting to medium-sized airplanes to connecting to large airplanes and even larger in the case of international. And you can see over time, -- and I think this is a merit actually to the discipline that's in the market, right? Each airline is focusing where they are strong. And you can see from these graphs, we're focusing where we are strong and the competition is focusing where they are strong. So it's a merit to our resiliency and how what advantages we have in our network, but also the fact that the industry overall is well disciplined and each airline is focusing on what works for them. And finally, Belo Horizonte is our Mid-Continent hub. A lot of mining demand, a lot of energy demand here and really a good gateway to the north of the country, slightly shorter distances and great demand to the U.S. as well and the Northeast of the U.S. as well. For the first time ever, Belo Horizonte will have over 100 daily departures. And again, 54 nonstop destinations is larger than the largest international airport in Sao Paulo in terms of destinations. So these 3 hubs really form the backbone of our network in terms of driving connectivity through the network, and it's a combination of destinations, frequencies and the fleet flexibility, which we'll talk about later. Finally, in Congonhas. This was a big addition to our network this year. We were always in Congonhas, but in somewhat of a timid manner. Thanks to new slot availability this year, we've now more than doubled our presence in the Sao Paulo downtown airport. Local demand, very strong corporate demand. And the key to Congonhas is it allows us to access customers that normally wouldn't fly Azul. Our presence in downtown Sao Paulo historically has been small. Now with this more than doubling our presence, we're able to access customers who can fly us for the first time whether it's from Congonhas to the capital Brazilian or to Rio or to any of the top corporate destinations that we fly. And the next week, they can go to Europe or they can go to the U.S. or access our loyalty program, our vacations business. And so I think of it as a way for customers to enter the Azul universe. It's a doorway for customers to try us, enrolling our program, in our vacations business, and really experience all of the products and services that we have to offer. So we have a great list of nonstop destinations, but also lots of connecting destinations. But really, it's a way to access great demographics and have these customers try us and enter into our universe. John talked about the fact that we've been here for the last 15 years and the E2 is one reason why I'm so excited that as we continue to explore and develop this market. We have 17 E2s now. We'll have 3 more by the end of this year, hopefully another 15 by the end of next year. And so this E2 really unlocks the next stage of network development in Brazil. It's going to allow us to fly routes that nobody could ever do before. And why is that? Fuel efficiency, fuel efficiency and size. 136 seats burning 18% less fuel. The fuel -- the overall cost per seat is significantly lower, but the overall cost per trip is significantly lower. You're talking about flying a larger airplane but spending less while you're doing it. And this allows us to access markets, access routes, access utilization of the aircraft that would otherwise not be possible. And so just right over here, we have 80 examples of routes that are not served by anyone today, and we will have the opportunity to do so over the next couple of years. And again, these routes are not in isolation. You cannot just add a route and hope it's going to work. It's part of the network structure. It's part of the multiple hubs and the broad growth and the destinations that we have all over the country. So it really is unlocking the potential of the network, the next level of the network within this amazing network and infrastructure that we've taken 15 years to create. The fuel burn of the E2 allows us to do 2 things: increase utilization and increased stage length. And I know that investors are asking a lot why stage length? Why is utilization not back to 2019 levels? Why? When, when is that going to happen? One thing to remember about utilization is that utilization happens when you stretch the day out, happens in early mornings on nights on weekends. Monday morning, 8:00 a.m., every aircraft is flying, right? That's when you have the best demand. But you need really fuel-efficient aircraft to make economic sense to fly more on weekends, to fly more at night, to fly more early in the day to fly routes that are longer but thinner. And so having the E2 which has more seats, 18 more seats than the E1 but significantly lower cost per trip allows us to do that. So you will see, over time, the stage length and the utilizations, especially increasing as we stretch the legs and we explore this previously unexplored parts of the country and routes simply because this technology didn't exist. And fitting that in into our existing network is really going to allow us to make that happen. Our domestic network, we continue to have a vision of 200 cities served. We're at 155, 160 right now. So we're well on our way, significantly higher than anybody else in the market, anybody else in the region. And again, it's different by design -- it's designed to be different and that allows us to continue to extend and build on our competitive advantage on the network. Internationally, we've also made some significant steps this year. We launched Paris at the end of April. It's doing very, very well. The European summer is very strong. Curacao as well in the Caribbean, it's doing well in addition to our U.S. and Lisbon flights, but really great progress on the international side. In terms of our international capacity, we will be 25% larger this year internationally than we were in 2019. We're larger domestically, but we're also larger internationally. So we are more than fully recovered on our domestic and our international network. We have a great set of partners around the world that feed us and we feed them from United, from JetBlue, from TAP, from Copa to Turkish to Air Europa. And we provide connectivity inside Brazil. And our competitive advantage is that we provide connectivity at different points in Brazil. It's not just in Sao Paulo. So if you have ambitions to fly in any other city other than Sao Paulo, then Azul will have the best connectivity for you. Our long-haul network to the U.S. is now 8 routes. Like I said, it's larger than what we had in 2019. Great connectivity inside the U.S. as well, 38 destinations in the U.S. and the Caribbean. Very, very convenient destinations, connection times to the Northeast to Boston to New York to Washington, the Caribbean as well, Cancun, those kinds of places. And the amazing thing about this is 0 airport, airport competition. Again, our international network is just an extension of the advantages that we built domestically. It's designed to be different. And so zero competition, bringing a lot of loyal customers to our network, great connectivity with our partners, from where we are strong in Brazil to where our partners are strong in the U.S., which is Orlando and Fort Lauderdale, and in Europe, which is Lisbon and now Paris as well. Great connectivity with TAP, Air Europa allows us to get all the capitals in Europe via our flight from Sao Paulo. So -- the network is designed to be strong to have competitive advantages. And so that's what we have delivered domestically and internationally. This is a beautiful photo of the Northeast of Brazil, if you haven't been. We have a vacations business, we can hook you up, but lots of great demand in Brazil. And right now, what we are seeing in terms of recent trends are very, very strong. We expect to do 30 million passengers this year, by far, our largest year ever. But really, the strength is in the domestic demand environment looking through the U.S. airline 2Q reports and what they're guiding for 3Q, we know that average fares are coming down, right? In Brazil, the opposite is happening. We actually are pushing as an industry average fares up because the demand is there to sustain it. And so we are seeing now record average fares. And in addition, we're heading into now our best seasonality, which is our spring and summer, which will take us through the end of 1Q, early 2Q next year. So the industry is set up very well to maintain and to take advantage of this demand environment that we are seeing. So record average fares domestically, strong demand, and you can see that on the unit revenue side as well. So record unit revenues for us across the industry as well. And as we look ahead, we look at the capacity environment, which is very, very disciplined. We look at the demand environment, which is strong and the overall pricing discipline, we're very encouraged by the trends that we are seeing. Ancillaries, there was a lot of noise in the U.S. a couple of years ago about basic economy and all that kind of stuff. In Brazil, the market is completely unbundled. We have unbundled the entire product without much noise. And so you pay for seat assignments, you pay for checked baggage, if you want to move up your flight, all those kinds of things. And so that's allowed us, in addition to other products like Sky Sofa, which only we have to offer international flights to really expand our ancillary revenues per passenger in a very, very meaningful way.

Yes, Abhi, just back on ancillary revenues. There's now 13% of our business but top line is significantly higher than it was as well, right? So you take a look at how much ancillary is contributing. And that's -- as a percentage, you don't really see the benefit as much as it's contributing to the bottom line.

Yes. That's because top line revenue has grown, right? Our 2Q revenue was over 60% larger than 2Q 2019. Some recent trends, very, very recent trends. We talked about this on our earnings call. August, our corporate revenue is now 100% recovered what we had in 2019. I'm pretty sure we are the first geography in the world where corporate revenue -- in terms of volume, remember, revenue was always -- not always, but has been above 2019 for the last 18 months because of average fares. But volumes are now recovered to 100%. And so what you're seeing is corporate volumes 100%. We know average fares are 40%, 50% higher. So corporate revenues are 50% higher than what we had in 2019. And so now as I like to say, we have the bingo card of complete recovery on the leisure side, which happened 2 years -- I mean 18 months ago, 2 years ago, almost. Again, Brazil was one of the first geographies where leisure travel recovered 100%. And now on the corporate side, we're at 100% as well. Again, we're just getting into our best season. So very, very favorable recent trends. And again, I talked about average fares. We've seen a strong movement in average fares, especially as fuel has moved over the last 30 days. The industry has done very well to keep up with those movements in fuel prices. So strong demand environment, strong fare environment and good capacity discipline is really setting us up to be -- have a very, very strong next couple of quarters. And with that, I'll turn it over to Alex.

Thanks, Abhi. So Abhi showed how we're much better on the revenue side, on the network side. And I also want to talk about how we're better on the fleet side. For those of you who don't know, right, this is a big part of our competitive advantage. And this is, again, why did so much better to be looking at Azul today than it was back when we IPO-ed because a lot of these were questions at the time of the IPO, right? Now these are facts. The questions have been answered. One of them -- is this a model that can be replicated? And if anything, this model has only become more exclusive than it was before, right? One question at the time was what if GOL or LATAM start buying aircraft to compete with you. They've actually done the opposite. And so -- and we have also continued to strengthen the business model. We didn't have Cessnas back then. We hardly had widebodies back then. So the strength of the demand, the strength of the network has only allowed us to lean in deeper and make the business model even more resilient, even stronger than it was before, and we're flying the right aircraft at the right market. That's what's unique about us, and that's what's so hard to replicate. Because if you want to compete with our -- with Azul, if you want to try to steal our customers, the only way you can do it is you try to replicate the entire business model. If you try to replicate the entire fleet, you try to replicate the entire network, right? And this is very, very hard to do. And that's why in practice, it's only moved in the opposite direction where we've all kind of intensified the business models that we have chosen, right? And you can see here just the types of cities that we can serve. And a lot of these cities are the cities that we serve alone and that we are -- where we see a lot of growth, right? So I think that slide that Abhi showed with all the blue regions, right? Average GDP growth for Brazil is expected to be around 3% this year, which is great. It started around 1% at the beginning of the year, and now everybody is kind of updating their forecast of 3%. But if you do a weighted average of the regions that we serve, you're probably talking about 5%, 6%, 8%, 10% because these regions have very small bases, and they grow very, very rapidly. Another exciting thing is just the huge head start that we have on flying fuel-efficient aircraft. We will be done with our fleet transformation by 2027. We're essentially 80% there today. And the competition will be maybe 10 years behind at best, if not more. For them to have a 100% next-gen fleet, it will take at least an incremental 10 years to us. That means we'll have 10 years where we're going to have a fuel burn advantage, 10 years where we're going to have a unit cost advantage to them, right? You just cannot snap your fingers and just get rid of all your old generation aircraft and replace it with next gen, especially in the environment we have today. Those of you that follow the OEMs know that if you go to Airbus and you asked for an A320neo after they stop laughing, they'll say, I'll see you in 2029 or something, right? So it's going to be very, very hard for anybody to try to even come close to the head start that we have on them. And the E2, Abhi talked about this, but it bodes repeating, right? This is really remarkable. Well, when we say that you're going to have fly more seats for less cost, I think a lot of you just think sure, less cost per seat. That makes sense. You're upgauging, right? You're getting in economies of scale. No, we're talking about absolute terms. We're talking about getting 18 extra seats for a negative cost, right? Those 18 incremental seats that we get on the E2 come in at a negative cost per seat. I can sell those seats for 0, and it's still better to fly an E2 than to fly in E1. But obviously, Abhi doesn't sell those seats for 0, he flies it for the opposite of 0, which is a very, very high fare. Right? That means it's all gravy, right? It's all money that's coming in and strengthening the bottom line because the 18% fuel burn advantage is not on a per seat basis. It's actually you fly from point A to point B with a bigger aircraft and you get to your destination having burned 18% fewer gallons of jet fuel than if you had flown on E1. Right? Which is really, really remarkable. Every airline in the world is going to go through fleet transformation. But the change of going from an E1 to an E2 is a transformation that no other airline that we know of is going to go through. Right? And it's already happening because when you look at what we've done since we went public, this is another thing that is much better for you to invest in Azul today than when we IPO-ed because we're already burning 24% less than -- fewer gallons per ASK than we were burning before, right? 24% fewer emissions, right? So this is -- again, back in 2016, this was a promise. This is ESG for neo. This is true, right, kind of proven, tested ESG. When we went public, this was a promise. We were just starting on our fleet transformation. We had just started taking delivery of A320neos. Now this is proven, this is working, and there's more upside. We didn't have a hanger when we went public, right? We have the biggest hanger in Latin America, which is allowing us to create a new business unit, not only we were able to insource a lot of the work that we did, we used to pay in USD for all of the work that we did in maintenance, now we're paying in Reais. We used to have to fly aircraft out of Brazil now that we can do it in our hub, right? They just taxi from one way of the runway to the other and then they can start getting overhauled. So the amount of savings that we got on this already paid for the hanger and then some. The hanger cost under BRL 200 million to build, and we already saved BRL 360 million since we started operating this hanger. Again, an asset that didn't exist when we went public in 2016. Look at the productivity. Each call center agent at Azul is twice as productive today than they were in 2016. Right? Twice. We're serving 104% more ASKs per call center agent than we were. And it's the same story with airports and even across the board, even in overhead, right? We're 40% more efficient today than we were in 2016. And there's more upside, right? Because we can say, okay, these are -- all these -- this data, all these figures are already in your 2Q numbers, they are, but there's a ton more upside coming. Because, for example, like Abhi said, on average, we're still going to fly the fleet about 9.4 hours this year. And we were flying at 11, 11.5 hours before COVID. And we believe we can get to 11.5 next year. How? We're going to fly more nights and weekends essentially, right? Because the fleet transformation, the reduction in fuel prices, the strengthening of the Brazilian Real, the gains in productivity that we're getting, they start a lot of the flying didn't make sense before to start make sense now. So we can make money in nights and weekends, and we can get incremental utilization from these aircrafts and bring the fleet back to what it was pre COVID. And this is pretty remarkable. Those of you that followed us since 2016, you kind of understood that our unit cost was higher than the competition, right? Why was that? Because you were looking at a blended unit cost right, where you have A320neos, we have low unit costs, which have low in cost with ATRs, which have high unit costs, right? So when you look at Azul's CASM, you're looking at a blend of high-CASM aircraft and low CASM aircraft. It's a mix, right? We don't break it up. When you look at GOL's CASM, when you look at LATAM's chasm, it's purely low CASM aircraft, right? They only have one fleet type. But now in spite of the fact that we have a blended CASM, in spite of the fact that we have a lower average aircraft size, our CASM is lower than the competition. So if we don't open up the CASM of our A320neos, but if our average blended CASM is lower than the CASM of a Boeing 737 at GOL or an A320neo at LATAM, that means that our A320neo CASM, which does compete with GOL and LATAM is much, much lower. It's a huge source of competitive advantage that not everybody is aware of. Yes. So John is going to talk about the operation here. But I think one thing that we don't get a lot of credit for is that we have this huge complexity and we do it still with the higher on-time performance and NPS than anybody else.

Yes. Just -- yes. I just want to go back to this. This is pretty remarkable what has happened since 2016. We now have the lowest CASK in the region and the highest NPS. That's pretty remarkable, right? Nobody else in the world can say that. No other airline in the world can say that they have the lowest CASK and the highest NPS, and that's what we have today. And it's a testament to running a great operation, having great people. And so many of you are aware that we're the most on-time airline in the world in 2022. That's because we have great people. And so when you go back, I just -- when you talk about being an on-time airline, that's being 40% more efficient than we were in 2016, and we're still delivering the most on-time airline in the world, okay? Compare that to the U.S. carriers. Compare that to the European carriers, right? Are they significantly more efficient than they were in 2016 and running a great on-time airline? You can see where we are this year. Year-to-date, we're #2 in the world behind Copa Airlines, and you could see that we have significantly more flights per day than they do. But we're very, very proud of the business that we run. And the strong culture at Azul delivers these great results, right? You don't drive an on-time performance like we have flying ATRs, E-Jets, E2s, 320s, 330s right? Without having the best people in the world. And then when you have a great operation, this is just some of the competition metrics that we have relative to our competition. So take a look at our complaints per 100,000 passengers compared to our competitors, take a look at our customer satisfaction compared to our competitors. So we significantly outpace our competition. That's what kind of leads to the highest NPS. And it's really done by our most important asset, which is our people. And we kind of had this thing between us up here today that we were not going to talk a lot about COVID, right? We were not going to talk about the dark days. But I want to remind everybody that there's 11,716 people. Many of them that are on this page here took an unpaid leave of absence to save the airline. Right? To protect the equity, to protect our debt holders, right? And so those same people are the ones that are delivering today. And just a few of the great stories. These are our pilots visiting a cancer center, right? Our pilots are actively contributing in the community. This is one of our flight attendants kind of having a baby, crying baby rocking to sleep onboard the aircraft. We have fantastic people. We have an event -- a running event on Saturday, I'm trying to get Alex to go with us, but -- so here's the running event. And all of our crew members come and we participate and we get to hang out together. This management team that you see this picture here of Alex and Jason, we're together often because we like what we do. We've built an unbelievably great culture. And I know Alex says, oh, the financial people don't give a s*** about culture. It matters, Trust me, it matters. That's what drives the on-time performance. That's what drives our low CASM or low CASK inside the airline. It's having an unbelievable great culture with an unbelievably great NPS. And when you have great people, that you're proud of, great brands want to partner with you, right? And so this is Walt Disney World. Look at all the aircraft that we have together with Walt Disney World. We're the largest seller of Walt Disney in all of South America, right? And so they've partnered with us and we started with one aircraft and now we're up to 4, and we're going to get the goofy aircraft, hopefully soon. And so unbelievably great brand -- so the Walt Disney World Corporation puts their brand on Azul's aircraft, right? And so it's that high quality that we deliver that brings great partners. Another great partner of ours Amazon, right? Amazon, that many of you know. We are the only airline in Brazil that flies for Amazon today. And we deliver thousands of packages a day for Amazon inside of Brazil today. And so we're proud. And these brands say, "Hey, I want to associate my name with Azul." And that's a pretty cool thing that we see. And that drives -- that was Walt Disney World, Amazon, they made those decisions in the middle of the pandemic, right? Think about that. They said, "Hey, we believe in Azul, we believe you guys are going to get through it, and we want to be associated with you." Before I pass it over to Abhi to go through the business units, I went here with my family as the Northeast of Brazil. We have direct flights to Florida. So those of you like Dan McKenzie, who live in Florida, you can fly directly to Porto de Galinhas. And so many amazing opportunities to visit Brazil, so many leisure destinations that Americans need to see. And we're not going to talk a lot about ESG today, but I do want to say we have direct flights into the middle of the Amazon today as well from Florida. And so I think the world is looking to save the Amazon, but I think the best thing we can do to save the Amazon is visit the Amazon, right? And so those direct flights in there get to see it, take your children, take your parents, go fishing in the Amazon, get to visit all the beauty that Brazil has. Abhi?

Thanks, John. Yes, I love that Disney and the Amazon airplane as well. Talking about our business units. TudoAzul is our loyalty program, our loyalty business, which really is having an outstanding year this year. In terms of growth, in terms of attractiveness, in terms of relevance. Remember, loyalty programs are all about the customer. The customer chooses which loyalty program they want to interact with? Where they want to send their points? Which credit card they want to sign up for? And the more relevant you are, the more -- the better you are, the more you're going to grow. And for us, 2 big events that happen in terms of our relevance. First was Congonhas and the fact that we're now in the downtown Sao Paulo, we serve all the large corporate markets, as I said, has really allowed customers to try us and enter into our program. And the second was internationally, having a destination like Paris, in the Caribbean like Curacao has given loyalty customers, great options to redeem their points or to earn their points. And what we see, which is quite incredible is that domestically, we have customers flying us from Congonhas, and then we see them in business class going to Lisbon or going to Orlando for their holidays. And so that crossover is really very, very powerful. And the loyalty program is the tool, it's the vehicle that allows that to happen. So we just crossed 16 million members and we should get to 17 million by the end of this year. So great growth in terms of members, in terms of gross billings, redemptions. Congonhas had a huge effect in terms of sign-ups and 80% increase in terms of sign-ups.

Go back, Abhi. You didn't say it. It's 6x larger than it was in 2016, 6x larger.

Yes, 6x larger. Congonhas has had a huge impact on our sign-ups. And again, it's all about relevance. Remember, the customer chooses -- the customer chooses where they want to send their points as the more relevant you are, the more options you give them. So Congonhas has been a huge impact in again, bringing customers into our universe and loyalty is the way to make that happen. Our credit card really has had an exceptional couple of years actually. We believe is the largest airline co-branded card in the country and some amazing statistics. 70% of all new credit card sign-ups are in the top 2 levels, which are Infinity or Platinum, high-yield customers. On an accumulated basis, 55% of our credit card base is now Infinity or Platinum status. And these are the customers that spend more, much more resilient in terms of macroeconomic scenario. You can see that average monthly spend for our credit card base, not on Azul, but in their daily lives is up 80% year-over-year. And it's this high-yield demographics that's now part of our universe with the credit card that I think is another competitive advantage. It's a level of resiliency, robustness that we have. An interesting stat, if you look at our credit card spend, it's equivalent to 0.5% the GDP of Brazil. So our credit card customers on a yearly basis spend 0.5% of the GDP Brazil. So a very, very relevant in a very, very powerful and influential customer base, and the credit card is really bringing them in to our universe. Our loyalty program has a great set of partners, financial partners, retail partners, airline partners as well. And we've diversified the options for our account members. So normally, 95% of redemptions are on the airline. We have diversified that, and now we're down to about 80% of redemptions are on the airline. Other redemptions are for retail, whether it's Apple AirPods or gift cards or our travel partners. And so we have a very unique offering when it comes to using points on other airline partners. Most loyalty companies have agreements, bilateral, one by one. We do as well, United, Copa, TAP, but we also have an additional layer of availability where we actually will go out into the market and with our corporate discounts and with our special negotiated fares, we'll buy fares and convert them into points behind the scenes and that allows our customers to fly intra-Europe, Asia Pacific, Middle East with airlines that not necessarily are yet our frequent flyer partners. And so we give really our customers the best of both worlds and a huge range of opportunities. As we look ahead, obviously, our fuel-efficient fleet is going to be a big driver of loyalty growth, strategic partners, whether it's other airlines, other banks, other retail partners, more relevance, our international growth, our domestic growth. And so we're very, very happy with the progress the loyalty program has made a huge opportunity ahead of us. Azul Viagens is our vacations business, which is having an outstanding year, and I'll -- and this is something that honestly, Azul struggled with for the first several years of our life. We were not very good at accessing leisure demand. We had Embraer E1s. We were great in the corporate market. We always overachieved in the corporate market. But because we didn't have A320neos, we didn't have the E2s, we didn't really have a network or the destinations that allowed us to access leisure demand. Now thanks to the fleet, the 50 Airbuses that with -- 55 Airbuses that we have and the E2s that are coming we're now able to enter and access the leisure market. And as you can see here, this business is 12x larger. It was much smaller than now really relevant this year. And again, it's because of our ability to access the leisure market with the fuel-efficient aircraft that we have. We have a network of stores around the country that we will double this year to over 100 stores, stores that are dedicate to Azul along with a network of travel agencies. But our secret sauce when it comes to our vacations business, is the network that we provide. Again, similar to what I said about the Azul network, it's designed to be different, and this is no different. So we have routes, we have markets that only Azul flies, only Azul ever flew that takes leisure customers to popular leisure to beach destinations, to mountain destinations from origins and cities that never before had any service. In fact, this morning, my planning team told me that for the next summer season, our Vacations business is responsible for 6% of the entire Azul network. And so it's really growing the physical presence of the stores, the online presence, the connection with the loyalty program and mostly the fuel-efficient fleet allows us to have a route network, a dedicated network that increases utilization on weekends and allows us to offer a product that nobody offers. So looking ahead, we see E2s. As I said, we have more than 80 potential new markets many of them leisure that allow us to continue to access and grow this market. New products and services like the luxury segment, the ecotourism segment, these are all segments that are still not explored that we're going to get into and for the -- on the international side. So huge opportunity on the vacation side. And finally, our Logistics business, Azul Cargo, had a great run significantly higher than 2016, 8x. Obviously, a huge run in the pandemic. Growth has leveled off compared to last year's, mostly on the international side. You're seeing this in FedEx, on UPS, Amazon as well. But we are still the largest domestic air logistics provider in Brazil. As John said, were Amazon's only air logistics provider in Brazil. We have a network of 300 franchises of stores around the country that allow us to access 5,000 ZIP codes. Many of them within 48 hours. Our average shipping time is 2.4 days. That's anywhere in Brazil to anywhere in Brazil. From any remote origin to any remote destination. And so we continue to see huge opportunity on the e-commerce side and other segments as well. So the flexible fleet is a huge part of this. 80% of what we carry in logistics is in the belly of the aircraft. That's where the margins are significantly higher, variable cost, variable margins. The aircraft is going anyway, but we also have a fleet of dedicated aircraft, 737s, E1s and the Cessna Caravans that allow us to extend our reach. And finally, logistics in Brazil. Is e-commerce is still -- it has low penetration in the market. You still have long delivery times that's not in Sao Paulo, that's not in Rio. So we see huge growth ahead, great opportunity and we see growth rebounding towards the end of this year and next year. Our subregional, our baby airline, Azul Conecta, our Caravan operation. Very, very efficient in terms of low cost. Very, very low trip cost allows us to access 79 destinations. None of them had air service, and none of them without us would have air service. So we're bringing new customers into our network, new demand, unexplored demand and we're doing it in a way that's very efficient on a trip cost basis. And as John said, lots of benefits in terms of fuel pricing, fuel tax initiatives. It really is a win-win. We grow service to the country, and we have some fuel incentives as well. So we're very excited about how this is going, 27 caravans and really exploring Brazil overall. And finally, our tech ops, our MRO operation. We launched it this year. As you know, over the world, very, very limited MRO capability. Our people have done an amazing job supporting us over the last 15 years being the most on-time airline, complex fleet, a different fleet. So we have a huge range of expertise of technical abilities that we're excited to share with the outside world. So we see this as a huge opportunity going forward. Alex?

Thanks. So hopefully, it's clear that this is a much better business than it's ever been. But let's talk about some numbers. We're still one of the most profitable airlines in the Americas, right? So all of that boils down to very high profitability as it should. If we have this network exclusivity, if demand is as strong, if we're that efficient, if our CASM is going down, right? Which should translate into higher profitability and it absolutely does. And this is consistent. If you go back to -- all the way to the IPO, right? We've had EBITDA margins in the high 20s, low 30s and always among the best in the Americas. Obviously, a big dip here in the pandemic. But look at what happened to EBITDA, since we created the airline, right? It's been a very consistent EBITDA expansion story, and we're kind of snapping back to the original story, right? If you kind of extrapolate from where we were in 2019 and when we are today, we're kind of back on track, which is very exciting. That means the business is solid. And back in 2016, a lot of these were questions. Again, these are now facts, right? The questions have been answered. And another question, I think that has been answered is the resilience of the business and the company and the management team, right? We've always said that, look, if there's a crisis, Azul is going to do better than our competitors. Now we have empirical evidence, In 2016, '17, '18, '19, these were theories. Now these are facts. How did we handle this? Well, we've been through the biggest test that I think any airline could have been -- essentially 2 years of revenue going away, right? The total impact of the pandemic was about BRL 20 billion. And our annual revenue in 2019 was BRL 11 billion. So this is almost -- it's 1.5 years to 2 years without revenue. No government funding compared to the U.S. or Europe. If we had gotten the financial rate that the U.S. carriers got, this would be equivalent to about $2 billion, right? BRL 10 billion. Imagine if Azul had BRL 10 billion more cash than what it has today, right? That's the equivalent support pro rata that the U.S. carriers got and we didn't get anything. But how did we deal with it, right? Again, this is a question that has been answered. How has this management team going to act on behalf of the stakeholders in case of a crisis? And I think we've demonstrated that. We went through hell and high water to protect the equity. We did everything we could, and we were -- if we were successful in protecting the debt right? Chapter 11 would have wiped out the equity. This is the path that other airlines that did not get government support chose to follow, and we didn't. Other airlines that didn't have government support and didn't file for Chapter 11, applied a haircut to their bondholders. We honored all of our debt, and we're paying back $1 on the dollar. We are very proud and we're very honored to get the support from our stakeholders throughout this process. But I think, again, if you're talking about ESG, if you're talking about governance, this is a true business case, a true real-world story of how this management team dealt with the biggest crisis that we could have gotten. And we're very happy with where we are, right? And we've been through a tough 6 months where the market was nervous. They didn't -- they weren't sure if we were going to get the support from our stakeholders. But the outcome is a huge reduction in lease liability. We're very, very excited about this. A huge reduction in annual lease payments. Our annual lease payment now starts with the 2, right? We're very excited about this because what this means is that -- and the way we did it was, again, honoring 100% of our commitments and in a way that not only protected the equity completely eliminated any stock overhang that you could be worried about. Think about these numbers. The worst point -- first, we're going to distribute -- those of you that know we swapped all of our -- a lot of our pandemic debt and also reduced our lease payments in exchange for a 2030 unsecured note and an equity instrument. This equity instrument is going to trickle in over 14 quarters, from -- a year from now, it's going to start a year from now and it's going to end at the end of 2027. And at the worst point in time it's going to be 6 million preferred shares. For a stock, 6 million preferred shares in a quarter that are going to be given to lessors -- for a stock that trades 23 million shares a day. 6 million shares a quarter for something that trades 23 million shares a day. It's nothing. It's a drop in the bucket. It's spread over 14 quarters, very, very stakeholder-friendly, exactly to minimize dilution and eliminate the overhang. And no debt repayments until the end of 2028. We don't have to worry about that, right? We are -- obviously, the cost of capital is high, right? So there is a high coupon payment, but we have a lot of options to pay -- to buy back this debt. Essentially every year, in 26, 27 and 28, we have a par call on one of our debt, right? So we'll be able -- as interest rates come down, as the cost of capital comes down, we will be able to refinance sooner than these maturities. But until the end of 2028, we have no maturities to worry about. So we've completely derisked the debt profile of the company. And what that does is, the market was worried about the gray bars here. Azul was going to have a BRL 3 billion cash burn in 2023. We transformed that into breakeven. And next year, which was going to be breakeven, we're actually going to generate cash, right? So this is something we're very excited about. And we're deleveraging. Not only we're protecting the cash balance, but in the process, we are paying down debt. And so we will have -- when we went public, again, in 2016, our leverage was 5.7x. And nobody worried about that. Everybody was excited. They knew we were a growing airline, and it was natural to have a high leverage and that leverage would come down. It did come down. We brought it down to 3.3x by the end of 2019. Obviously, with the pandemic, it went back up. But by the end of this year, we'll be essentially at the same leverage as we were in 2019. And by the end of next year, we will be below that. So there's not an issue with leverage either, right? And all of you that learned or that looked at the equity instruments that we're converting our leases into, it converts at BRL 36 a share. The shares are trading below BRL 15 a share. And how did we get the lessors to agree to BRL 36 share price. First, there's a floor and a cap, right, that we've talked about. But essentially, we're trying to make them hold, but trying to protect the dilution. So if the stock appreciates beyond these numbers, there won't be any additional dilution. In fact, the dilution is going to come down. But that's when you do the math of the restructured balance sheet, you get to BRL 36, not with an 8x multiple, which is what we've had every year since before the pandemic, but just with essentially a 6x to 6.5x multiple, depending if you treat the convertible equity -- the convertible instrument as equity, or you treat the convertible instrument as debt. And this is something that I think is worth kind of checking the numbers on a little bit, because a little bit through our fault, right? When you look at our balance sheet, on our total debt, you will see the convertible instruments there, right? We have a convertible debenture that shows up as debt on our balance sheet. But when you look at our fully diluted share count, the number of shares is also there, right? So if you just purely just take the debt number from our balance sheet and the fully diluted shares from our earnings release, you will double count. So we wanted to kind of give you these numbers, so that you can check your math to make sure -- look, you can discuss -- we can discuss on whether you should treat the convertible instruments as debt or you should treat the convertible instruments as equity, but you have to pick, right? You can't treat them as both. They will be one or the other, right? And so if you want to treat it as equity is the calculation on the left. Our net debt at the end of Q2, which is roughly what the net debt is going to be at the end of this year, is about BRL 17.7 billion. And with the expected EBITDA that we guided to of BRL 5.5 billion, you should use 495 million shares, which is the high number of shares, right? This is the number of shares after the convertible instruments have been issued, and you get to a price of BRL 36 a share with a multiple of about 6.5x.

Hey, Alex, if I could just highlight. That's based on 2023 EBITDA, right? And Alex walked through the vesting schedule, and when it actually vests, and why don't you go back to that, Alex. I think that's kind of important.

Yes, look at the average life of that conversion, right? It's essentially second quarter of '26. That's the valuation moment in time that you're looking at for the conversion of the equity instrument is second half of -- second quarter of 2026. So arguably, at that time you're going to be looking at 2026 EBITDA, right? We're doing this math with 2023 EBITDA, right? So just look at how much sort of wiggle room we have here. Chances are, in 2027, you're going to be saying we did a bad deal, that BRL 36 was too low a share price, right? And that's probably what's going to happen. But I think this is kind of a good way to kind of check the math and make sure that we're all kind of talking the same thing, and we're not accidentally misleading you by having you double count the convertibility. So just to recall, there are going to be 2 convertible instruments, right? There's a convertible debenture that shows up on our balance sheet, that's something we issued in 2020. It's still there. The lessor equity structure accounting requires us to treat it as debt until it gets converted. So it's going to show up as that, right? You can treat it as debt, you can treat it as equity, but you can't treat it as both.

And I would just encourage everybody, I'm going to say this again, to update your model. Sit down with us, talk to our IR team and kind of walk through these numbers, make sure you have them, because 9 times out of 10, we found double counting. I don't want to point out which sell-side analysts did it right, and which did it wrong, but 9 times out of...

Almost everybody in this room did it right. We know that. And look, our multiple hovers between kind of high 7s, low 9s since we went public, right? Now we're at mid-4s. At some point -- we're not going to -- like John said, we're not going to snap back to 8 right away, right? Cost of capital is up, risk aversion is up. Our debt structure is different from what it was. That's all fine. But we're not going to stay at 4.5x. And so gradually, even with the margin expansion, naturally, we're very confident that we're going to get to something north of 4.5x. It doesn't make sense. And then at some point, we're going to get to 6x and 8x. That's the long-term upside. Look, we love long-term investors. We know this is a volatile industry. We're an airline in Brazil, right? Every day, almost, we're either the stock that appreciated the most on the BOVESPA or the least. So it's volatile. So you have to be a long-term investor. But for those of you that are long-term investors, the upside here is just huge, and that's what we're excited about, because there's the margin expansion, and there is the multiple expansion, right? There are kind of 2 drivers of valuation. And look, we used to be BRL 3.6 billion in EBITDA in 2019. In 2016, we were at BRL 1.8 billion EBITDA -- BRL 1.6 billion, BRL 1.6 billion in EBITDA, right? We're BRL 5.5 billion in EBITDA now. We're a much more valuable company. And we're not even back to our pre-COVID enterprise value. Forget about the debt, forget about -- we're not even back to our enterprise value. And why? John showed you this, but I think it's worth highlighting. We've always traded at a premium to the industry, right? And this also eliminates the multiple argument. Again, cost of capital went up, so multiples went down, fine. Why are we trading at a discount to the industry when the business is so much stronger than it has ever been? If the business was coming out of the pandemic, with a problem, with some kind of legacy issue, right? Maybe we got smaller, maybe we have some huge legacy costs, right? Maybe we have a new investor, right? No, there's none of that. The business in every dimension is better than it used to be, and we're now trading at a discount to the industry when we used to trade at a premium, right? So this is just an invitation for you to take a look, right, and update your models, talk to us, get updated, get up to speed again on Azul, because we think it's obviously a great opportunity, right? And again, with a lot of the -- maybe -- a lot of the investment thesis in 2016 were thesis at the time, right? Were beliefs at the time. Now they are facts, right? The thesis that LATAM and GOL are not going to encroach on our territory. That was a thesis, that was a belief in 2016. Now it's a fact, right? The idea that we could do a 6x on TudoAzul, the idea that we could do a 12x on vacations. That was not even a thesis at the time, right? And now it's a fact, right? The fleet transformation, all of these are assets that when you buy Azul now, you get, and you didn't get it in 2016 when you bought it before. And in 2016, we IPO-ed at BRL 21 or $20, and now we're trading at $9 a share, right? That's why we said, it's 3x EBITDA for half the price.

Thanks, Alex. And just before we open it up to Q&A, obviously, very thankful for the team and everything that they've done to pull this all together. But think about this for a second. The last 3 years, our efforts were saving the airline for our stakeholders, right? For our debt holders, our equity holders, for our crew members. That's where we were focused, right? And so especially, Alex and myself, the last 6 months, this was 24/7 to do, right? Now we get to go run this great business. Now we get to -- so a lot of people say, "Well, you're at BRL 5.5 billion today. What's it going to be next year?" It's going to grow. It's obviously going to grow. Why wouldn't it grow? Now that we have our CFO, who used to run TudoAzul, dedicated back to the business day to day. He's no longer focused on day-to-day cash management, renegotiating with lessors...

In a month, right? For the next month, I'll be on the road, but after that...

And quite honestly, we have not been in front of our equity investors as much as we should be, right? Because we hadn't finished fixing the balance sheet. And now that that's done, we'll have the opportunity to be on the road a lot more often. We'll be in front of investors. And that's why I said dust your model off. Many of you that bought the company back in 2016 or 2017, made a lot of money on the IPO. The unbelievable difference today than we had when we went public is the volume on the stock is significantly higher than it was in 2017. I would argue it's 10x higher, right? And so, no this is not a re-IPO that we're doing, a primary or a secondary offering, right? So you're going to have to buy the stock in the market. But the volume on the stock today is 10x what it was back in 2017, 2018, 2019. So you can accumulate a position relatively quickly because we trade so much on a daily basis. But with that, we want to turn it over to questions. Thais will also be getting inbound questions from those of you that are online. And so we're here at your disposal for any questions that you may have.

Perfect. This is Pablo Monsivais from Barclays. I have 2 quick questions. The first one is, considering the increase in jet fuel that we have seen over the last few days, how confident are you in your ability to translate this into higher fares thinking that we're already in a very high level? And how do you think also the competition will behave? That's the first one. And the second one is more structural. And I was wondering why do you think that such underpenetration in trips per capita in Brazil still exists since you have been offering new services into these remote places? Is there any structural reason why Brazilians are traveling less? Or perhaps it will never be as comparable as Colombia or as Mexico or as Chile? Why do you think there's like these burdens to see a higher penetration?

Yes. So I think the industry is going to do everything it can, and I think this graph already shows that it is. If you look at capacity in the market, the capacity is coming out. Overall, the market is going to grow 5% versus 2019, which is very small over 4 years. The industry is taking fares. Demand, of course, is supporting that. So I think the industry is very disciplined. Now it takes time, right, because you have a booking curve, and great bookings will lead to great flown revenue, but you have a booking curve and you have to work through the booking curve. So you do have the effect of time, but I'm very confident in the industry. The industry, we're all facing the same challenges, right, whether it's fuel, interest rates, and I think everybody is very, very results oriented. If you look at LATAM post restructuring, the investors that came in and what they're after is results, right? When you look at GOL now with Abra, us, we've always been rational. So I think the industry is very disciplined. And the market -- the fares that we are today, I didn't think we'd be there 6 months ago.

Nor did any sell-side analyst, to be clear.

And so we are there now and the market is absorbing and the market is taking it. So there is no artificial limit. I think the industry is going to do what it takes. And it takes a little bit of time. And in terms of penetration, I think it was just a matter of not having service, right? Like I said, Sao Paulo to Rio never needed more service.

Yes. And to just go, it's 0.5% today, but when we started Azul, it was 0.3%, right? So we did transform it from 0.3% to 0.5%. So it is possible to take it to 0.8%, right? I'd love to take it to 2.6%, which is the U.S., but probably not in our lifetime, but just going from 0.3% -- from 0.5% to 0.8%, you're going to need 3 Azuls, right, instead of the one we have today.

Hey, Abhi, if I can just kind of highlight something. Jet fuel in Brazil is the most expensive in the world. Okay? And it's significantly more expensive than it is in Colombia and Mexico. And that's something the government is looking at, right? And so it's not in our forecast, but it's something that the government is certainly looking at. But if you go back and look at what Azul has done, and the network that Abhi built, he's connected 100 cities in Brazil that had never been connected before, 100 cities. So that's what took it from 0.3% to 0.5%. Abhi is not known for having low fares, okay? So we grew the Brazilian market through connectivity and not through fares. Okay? That's a big distinction. But as you go forward and you look at the E2s coming into the network, they have a 26% lower seat cost. So we actually have the ability to grow the market over the next 5 years with lower seat cost aircrafts. So he could technically lower the fare, right, and bring more travelers into the pool, right? So again, we connected Brazil and grew the market, but you also could stimulate it if the government goes after fuel prices in Brazil and you have a lower seat cost aircraft that we have coming on very strong over the next couple of years.

I believe that would be the second part, getting to the 0.8%, to lower fares?

It's going to be one of the drivers, right? So I think that -- so the question is, is that what's going to take it, right? It's a lot. We're working at every possible driver, right? We're very aligned in trying to stimulate more demand. But it's a combination of lower costs, for sure, a lower tax base, which the government has already showed that they are aligned, right? Because they eliminated the revenue tax in the aviation industry until the end of 2026, right? So I think there's interest from the government. There's interest from us. I think there's economics that are going to help. There are 200 cities. We're at 160 today, we're going to go to 200. Those incremental 40 are also going to help. So everything is going to help. And some of these are in our -- we're only talking about 2023 EBITDA, right? None of that is in the 2023 EBITDA.

Steve Trent from Citi. One or 2 for me. First, I was curious if you could maybe highlight if there have been some structural adjustments in demand in Brazil since the occurrence of the pandemic, whether that's a little less corporate on local shuttle, and how may have you adopted to that. And the second, if you could sort of, on a high level, address your pipeline for pilots and mechanics.

Thanks, Steve. In terms of demand, like I said, corporate volumes have come back to 100%. This is the first month that it happened. We are seeing a little bit of a change. Now Brazil was one of the first to come back to the office. It is more of a presential market, culturally, in the way we do business, the geography as well. And so we're seeing a little bit, for example, where the party size per trip has increased a little bit. So more people are going on the trip together. We're seeing a little bit of an increase in the length of stay. So people are staying an extra day, especially over weekends, if they take somebody. But Fridays continues to be the strongest day. Monday continues to be the second strongest day, Sunday, the third strongest day. So the day of week patterns are pretty intact. What's really been amazing is how quickly leisure came back. And we thought -- everybody thought it was pent-up demand, but it wasn't. It came back and it stayed, right? And now corporate has just come back to 100% volumes, and we expect it to stay as well. So some structural changes, but overall, Brazil has benefited from geography and sort of the culture in the market of coming back in person much quicker than anywhere else.

Steve, Brazil has got its own problems and pilot pipeline is not one of them, right? So that's a problem for the subsidized U.S. carriers that got billed out by the government, okay? So we have Azul Conecta, which is our subsidiary that's growing pilots for us. We have a huge pipeline in the country. And pilots want to work for an airline that's growing, right? And this year, we're going to promote over 100 of our pilots to be captains with the lowest upgrade time in Brazil. And so I think we continue to grow and that's just not one of our concerns. Mechanics is a little bit more of a concern in Brazil, right? And so we've partnered with several schools to produce more mechanics. Believe it or not, you can produce a pilot a lot faster in Brazil than you could produce a mechanic. And so that is a bit of an issue, but we've partnered with several schools in Campinas and Mina Gerais. And so I think we have a pretty good pipeline, and our HR team is working very closely with them.

Dan McKenzie from Seaport Global. A question on the balance sheet. I think you guys hit the nail on the head with respect to the concern about the valuation multiple. So for those investors that want to take a 2- to 3-year investment horizon, want to look at that, they have to square the corners on that balance sheet. So I wonder if you can just kind of help us lay out the balance sheet road map for the next, say, 3 years from now. What does the business look like? What does the gross debt look like? What does leverage look like? It looks like you've got a path to 3x. If you convert that debt, you get down to 2%. What does interest expense look like? If you can just kind of help us understand what that picture looks like 3 years from now?

Yes. The balance sheet is not that complicated. Most of our debt is aircraft leases, right? And I think that's where most of the work should be. Obviously, whichever methodology you use to account for operational leases, we're a much better airline today than we were during COVID, right? Because we've had a huge reduction in the lease payments, right, which became other items on the balance sheet, which are easier for you to look at, right, especially the 2030 note. But one question is, what is the lease liability? You'll see what the numbers are and -- go to that spreadsheet, John, with the BRL 17.7 billion. So we're already kind of telling you what the pro forma number for the debt in Q2 -- there you go -- in Q2 was, and it's very similar to what it will be at the end of Q4. And that takes care of the operating leases, takes care of the capital markets debt that we've issued. It takes care of the 2030 note. Everything is in there, right? We can kind of tell you or kind of help you kind of see the components of that if you're not getting to the BRL 17.7 billion, but the materials that we've provided on a pro forma basis, since we've finalized and throughout the whole negotiation with lessors, should help you get there. So that's it. The balance sheet is operating leases. It's the 2028 note that we just issued. The '29 and '30 notes that are the exchange notes, right? They were '24 and '26, became '29 and '30. And then the 2030 lessor note, which is an unsecured 7.5% coupon note. That's essentially all of our debt, right? The capital markets debt, the 2030 lessor note, those are all kind of very easy to calculate. It's essentially the principal. Those numbers are all out there. And then on the lease liability, it's really the question. So talking about the lease liability. Obviously, our balance sheet follows IFRS 16. I don't know if there are any IFRS 16 fans here. I'm certainly not one of them. I think it was a problem that didn't exist and they created a solution that ended up creating 18 other problems, right? But 7x is wrong. And we can go into why 7x is wrong, but it's very clear that 7x is wrong. One of the reasons why taking our rent and multiplying by 7 is wrong is, most of the criticism that we get on IFRS 16 is that our discount rate is too high, right? IFRS 16 requires us to use the incremental cost of borrow at the time that you're calculating the present value of the lease liabilities. So we had no choice than to use essentially 20%, right, which is what we're using. But if you use something like 10%, which I don't think anybody would say is an excessively high discount rate, right? Because our secured debt is trading around 12%. But if you discounted our lease liabilities using a 10% discount rate, you get to a 5x on rent, right? So if you take our annual rent and you multiply it by 5, that's equivalent to calculating the present value of our lease liabilities with a 10% discount rate. So probably the right multiplier for Azul is something like 4.5, right? Why isn't it 7, if it's 7 for the Northern Hemisphere carriers? Because if I borrow, if I do a capital lease on an aircraft, and an AAA airline does the same thing, we're going to have the same debt, right? Let's say, we both do a finance lease on an A320neo and it's, I don't know, $50 million. We're both going to have a principal of $50 million. Azul and the AAA airline are both going to have $50 million on their balance sheet. But my rent is higher than the AAA airline, right? I'm not going to pay the same rent as a AAA airline. So you can't apply the same multiple to my rent to get to the same number, right? So there are many reasons why 7x is the wrong number to use for Azul, right? We have the balance sheet. You can use 5x, and that's one of the conversations that we want to have over the next month. And that's why we ask you to kind of update your model, call us, let's discuss it and figure it out. But certainly, 7x is not the right number, but everything else, I think, is pretty straightforward.

And if I can just ask a second question, one more. Abhi, on the 80 new routes, what kind of growth -- if you can just help us understand how you're thinking about growth over the next 3 years? What's a sustainable growth rate? How long would it take you to get to these 80 markets?

Yes, Dan. I mean, I think, domestically, around 8% to 10%. There's a lot of slop in that number because of deliveries, right? So we have 17 E2s now. We should be at 20 by the end of the year. By the end of next year, it could be 28 or 34. We don't know, right? And so that kind of makes it a little bit difficult. But I would say that somewhere around 8% to 10% domestically is kind of what we're looking at.

Mainly coming from the upgauging, right? I mean, because every E2 has 18 more seats and will fly a higher utilization per day than the E1s, right? And so it's the right thing to do. And that's a big driver for margin expansion into '24, into '25, into '26, because that's what -- the E2s is the next phase of margin expansion going forward.

Mike Linenberg, Deutsche Bank. Great to see you guys. Congrats on the restructuring. Just a couple of questions here. I want to go to your utilization. I think it was on one of the charts, 9.4 hours this year, and I think the goal is, what, 11.4. Is that next year. And so the question is, that's a pretty sizable jump. I'd like to know what are sort of the key gating issues. It seems like pilots are not an issue. John, you mentioned mechanics. But again, that's pretty sizable. And again, that's sort of within the context of maintaining a balance on your revenue performance, right? You push too much into the system, you undermine your ability to generate high-quality revenue. So can you talk about the puts and takes? Because that's a big number, and it seemed like that, that type of utilization improvement would be what you would see over maybe a 3-, 4-, 5-year period, why 1 year?

Yes. A couple of things also, the base this year is also deflated, right? One of the reasons was, as we were coming off the huge run in fuel end of last year, early this year, we had to artificially bring down utilization, right? And so one thing is as -- I can't say fuel is low, because it's not, but it's lower than what we had around this time of last year. And so that allows us to have a little bit more opportunity. So one was this year is artificially deflated. We had to bring it down because of the way fuel was behaving. E2s, for sure, right? So a gating issue, absolutely, is the delivery of the E2s and how quickly we can get them and how Embraer is able to produce them. Obviously, we're working very closely with them. So we'll see how that goes. There will be some slop in that number. But having the E2s earlier, more of them, is going to allow us to bring that up. Third, a little bit, Mike, is philosophy of the network. So I'll give you an example. At our main hub in Campinas, we have about 4 big banks, connecting banks. Starting in November now, we're going to depeak our hub in Campinas and spread it out throughout the day. So that allows us to do a lot more back and forths. Right now, the aircraft waits for other aircraft and that increases ground times. And so we had something like -- 35%, 40% of our aircraft had ground times larger than the operationally minimum connect ground time, right? Because they were -- not because they were just doing nothing, but they were waiting for other aircraft to arrive in the bank. And because the bank was so big, you have to wait longer. And so the first aircraft that arrives is waiting more time. So we've depeaked a lot of our Campinas hub. We've brought all the ground times much closer to the minimum ground time. And so that allows us to do a lot more back and forths. The aircraft is on the ground time less. So a different philosophy a little bit on the network side as well to kind of enable the higher utilization. We're confident that, that's going to produce good revenue as well. So I would say this year is artificially high -- artificially low. E2s next year, and we are taking a little bit of a different philosophy and kind of network structure, especially in our big banks, depeaking them a little bit, having more back and forths, aircraft waits on the ground less that allows it to be in the air more. So that's kind of 3 things to help us get there.

Yes, Abhi, if I could just add 2 things to it. There's a constant tension between Abhi and Alex on do we need to be the most on-time airline in the world, right? I think, it's good thing that most of my crew members only speak Portuguese, because as we kind of push the operation a little bit, maybe we sacrifice a little bit on time, but we get the utilization up. But the other thing that Abhi kind of highlighted is the packaging business, the vacations business, is really that off-peak utilization flying that we really need to do. And lot of those cities don't make sense with E1s, but do make sense with E2s, right? And so that's a big difference, right? And so flying the E2 on Saturdays and Sundays and there are longer stays linked routes to the northeast of Brazil, I think that also takes it. So it's kind of let's push the operation now to see what we're capable of doing, kind of reducing our ground time a bit, and then let's make sure that we ramp up utilization on the weekends with our vacations business.

Okay. Great. And then just second question, sort of competitive questions. Can you just remind us, with Congonhas, is there not another phase where there's maybe additional slots? And then just touch on competition, because if we go back to 2019, 2020, even in the midst of COVID, JetSMART was going to take over the world. I think they were seeking a local license to operate domestically within Brazil. We had the Viva Group expanding, Ultra Air. I mean, there were a lot of low-fare carriers. They were going to eat your lunch. What happened? Maybe they couldn't keep up with inflation. Just run us through the competitive dynamic.

So Congonhas, I would say the vast majority of the slots have been distributed. There could be another couple of rounds, but it's going to be very minimal in terms of the actual slot expansion. The big jump in airport operations has pretty much happened. And that, together with the ex-Avianca Brasil slots, that was the big bulk of slots that got redistributed. So next 2 seasons, we could have a little bit of slots, but it's going to be a couple of operations an hour at most. In terms of competition, I can start, John can add. But we haven't seen, in Brazil, any movement, of course. You do have low-cost guys, JetSMART flying to Chile. Flying to Argentina, Flybondi as well. But I personally don't see anything domestically changing in the short to medium term.

I remember talking to the guy from the region, and he said, "I will never fly to Brazil ever again." Brazil is a tough place to do business. We've highlighted on several occasions, we have 3% of the world's flights, 90% of the world's lawsuits, right? And so you take an airline that says, ultra-low-cost carrier, says that they're going to come into Brazil, and they're going to get sued, right? And the litigious nature of Brazil today, without a cap on customer lawsuits, and so a lot of -- we run the best airline in the world, fewest complaints, and we still get sued significantly in Brazil. So that's a barrier to entry today, Mike. And so I think if the -- they opened up Brazil back in 2018 for foreign ownership and no one has come. But I think what's important to us, we have to have the lowest CASM in the country. And we do today. We have to have the most fuel-efficient fleet in the country, which we do today. And we have to have the most defensible network, right? And so that's kind of how we do it. To sit here and say they're never going to come, I think that would be a foolish statement to make. But there are significant barriers to entry as to why they're not in Brazil today, right? And I think you have -- when you talk about competition, everybody wants to talk about the ULCCs. I think you have a really good dynamic between GOL, Azul and LATAM today, right? All 3 airlines want to make money. All 3 airlines have a higher cost of capital today. 2 of the 3 airlines, right, are trying to go public in the next 12 months, if you think about that, right? And I'm doing my re-IPO today, okay? So everybody wants to focus on making money. And I think you're seeing that in terms of how we've gotten fares up to where they need to be given the new fuel prices. And so I think everybody kind of needs to get back to margin expansion and multiple expansion. And so I think the ULCCs for now, I think, are just a side show.

Yes. I remember, we were driving in from Connecticut to New York in 2008, for our first Board meeting, when we weren't -- we didn't even have a name or an aircraft. And Branson said he was starting an airline in Brazil, a domestic airline. This is 2008, right? It's 2023. Obviously, that never happened. I joke because why didn't it happen? I think it's because their financial planning and analysis team actually kind of scrubbed their financial model and said, what is really the competitive advantage that a ULCC can bring to the country. As I think Abhi said, we've already unbundled in Brazil, right? The ULCC has kind of had a freeway, right, to kind of grow in other markets because they had legacy carriers that didn't want to unbundle. And you could say, look, I'm going to offer you a very low fare that doesn't have bags, doesn't have seat assignment, doesn't have mileage, whatever, while the legacy carriers didn't want to unbundle. So there was a possibility that somebody was selling a full fare for $300 and somebody else was offering something for $49, right? That doesn't exist in Brazil because the unbundling has already happened. And when you go line item by line item, right, our biggest cost is fuel. A ULCC would pay more per liter -- per gallon of the jet fuel than we pay, because we have special regimes, because we fly to 200 destinations, we pay less fuel tax than somebody that just wants to fly a high-density A320neo from Sao Paulo to Brazil. They would pay full tax on fuel, and we don't, right? That's fuel. Labor, everybody is going to have the same. You have to hire in Brazil. You're going to have limitations on productivity. An American pilot can fly, I think, 1,000 fly hours a year, a Brazilian can only fly 850, right? That's for us, that's for JetSMART, that's for whoever comes in, right? And you go down every other line item, right? Are they going to spend less on maintenance? No, because most of their maintenance is probably going to be done outside of Brazil. Are they're going to pay less on ground handling? No, because it's a volume game, right? And you have to hire locally. Are they going to be less on airport fees? No, you don't have the dynamic in Brazil of a remote airport having lower cost to operate than the downtown airport. That doesn't exist in Brazil. I think the only thing they could do is densify their aircraft, right? I think we all, one way or another, have some kind of economy premium type of products in our fleet, but we do it because it makes money. The real estate that we give up is more than offset by the incremental revenue that we make. So we don't see -- obviously, we're not saying that we don't -- that we ignore the risk, right? We're paranoid about it. But we don't see where the competitive advantage of a ULCC would happen in Brazil specifically because of all these reasons.

Can you talk about your decision of buy versus lease aircraft going forward?

Sure. So we started the airline essentially leasing, right? Because the big advantage of an operating lease versus a finance lease is, you get to finance 100% of the aircraft purchase price. So there's no -- it's essentially like when you're buying a house, where normally the big sort of barrier for you to buy a house is the equity down payment, right? So when you start off as a young airline, you normally favor operating leases. And as you mature and you start generating cash, you move the needle a little bit more towards the finance lease. Pre-COVID we were about 1/3 finance leases and 2/3 operating leases, because we were already generating cash. So we were trying to kind of hit that sweet spot, that mix of finance leases versus operating leases. That provides a lot of operational flexibility because if you have to reduce capacity, having a portion of your fleet that is under finance leases is something that's very helpful, right? It's something that's very valuable, because it's very easy for you to sell an aircraft, pay down the debt and get rid of the capacity. It's very hard for you to get rid of an operating lease, right? So having a mix of operating leases and finance leases gives you some of that flexibility. During the 2015 recession in Brazil, and then during COVID, we sold a lot of our finance leased aircraft. And so today, we're at maybe 85% operating lease and 15% finance lease. And one of the things that we want to do, as we start generating cash again, as the cost of capital comes down, is to favor a little bit more of finance leases, but that's a decision we can make on an almost delivery-by-delivery basis, right? We can see an aircraft that's coming and then we can decide, okay, what's the best source of financing. We can look at the cost of capital of the operating lease. We can look at the cost of capital of the finance lease, see the difference, and see if the optionality is worth it. Over time, I think we'll gradually grow that mix back to 2/3, 1/3, but that's going to take a few years to get there.

Gabriel Rezende from Itaú has one question. Looking in the long term, what do you think about the structure, things that could happen in favor of the airline sector in Brazil? For example, higher exposure to foreign customers that are less sensitive to FX rates, or more BRL funding at fare costs coming from local institutions?

Yes, I'll take that. I think many of you may have seen the press about there's this program in Brazil to kind of make -- popularize flying, I don't if it's a word in English, but -- and we've opened up communication with the Brazilian government. And we've opened up communication on jet fuel prices, on litigation expenses in Brazil, and the cost of capital, right? And so if you think about it, BNDS, which is a development bank for Brazil today, is financing engines for Southwest Airlines, Alaska Airlines, it seems crazy, but have not provided capital to the Brazilian carriers in the last 5 years. It doesn't make sense, right? And so the government regime change, I think, has been very positive because today, in Brazil, for example, is import price parity. So what Petrobras does is, says, what's your next best option, John? Oh, you have to go to the U.S. Gulf Coast, drag the fuel all the way down to Brazil, import it, blah, blah, blah, ends up being 30% more expensive. But the new government is talking about what about export price parity? What if Brazil and Petrobras sold to Colombia, Chile, Mexico and others? They certainly couldn't sell it for 30% more expensive than what they have today, right? They'd have to get it down to be what the pricing is. So I think there's some structural changes in Brazil that are on the horizon. And I think President Lula, he thinks, and rightfully so -- during his first mandate, a lot more people started traveling. That was the beginning of Azul, when it was 0.3%, and we took it to 0.5%, and -- he wants to see more people traveling, and he wants to see more unique travelers in Brazil. And so he's asked the question, and he's been very vocal about it. He sent tweets about it. He wants more people traveling in the country. And so as airlines, we're going through what are those structural changes that need to happen. Number one is fuel price in Brazil, right? Number 2 is litigation in Brazil. Number 3 is cost of capital in Brazil today. The U.S. carriers today get capital in the U.S. market. The Brazilian banks do not lend to Brazilian airlines today. They don't do it. Nor does the Brazilian development bank. But I think driving incentives so that happens. We do so much good for the country, and so you can't not help the airlines during COVID and then also be disadvantaged on the back side of it. And I think as Alex said, we got a fuel tax reduction or a revenue reduction on PIS, COFINS. But I think there's a lot more work to be done to make the market a lot more competitive overall and it starts with fuel prices.

Thank you, John. Victor Mizusaki from Bradesco has some questions as well. So the first one is, how do you see the airline consolidation trend in Latin America? Do you want to answer this one, and then I go to the next one?

We tried. No, but I think pure consolidation, full M&A, I think, is probably off the table. But like I would not discredit cooperation agreements, code shares, joint ventures. I think, again, if you have an airline industry that's focused on making money and reducing cost to the consumer, I think there's always opportunity in that front. But in terms of full M&A, I don't see anything on the horizon. I don't know, Abhi, Alex, what your thoughts are.

And do you think that makes sense to spin off or IPO the subsidiaries?

No. I think -- it used to be fashionable, right? And now the pendulum has swung the other way. We always wanted to have the optionality, but we always knew it was an expensive source of capital because, in Brazil, when you spin off a subsidiary, if you have NOLs on the original company, and you don't have NOLs on the new company, you don't get to consolidate, right? So normally what happens is, if you keep the subsidiary in-house and you have NOLs, you're going to pay anywhere between 24% corporate tax, all the way down to 0% corporate tax, right? But if you spin it off and you have no NOLs in the NewCo, you're going to pay 34% corporate tax, no questions asked. So normally, there's a huge -- plus you have the dyssynergies, you have misalignment of incentives, right? You have noise. And so when we thought of, when it was fashionable to spin off loyalty programs, we looked at it. We did the math on the cost of capital. We saw that we have cheaper capital elsewhere. So we never did it. And then the other guys kind of think saw the same thing and unwound the spin-offs that they had done. I mean, never say never, right? So we always have to do the math. If for some reason it does make sense, we'll look at it. But today, I think when you look at the economics, there's no reason to do it.

Thank you, Alex. 123Milhas filed for Chapter 11. Do you see any change in airlines and to the Brazil environment because of that?

Yes. So just for those who don't know, there was a travel agency in Brazil called 123Miles that filed for Chapter 11. They never bought directly from any of the airlines. So there's no exposure to the airlines. They bought via travel agencies. So there is some exposure there. They got into trouble because they were selling tickets that didn't exist. I know it sounds a little bit crazy, but they would basically sell a ticket to Dubai in 2025 for price x. And then they would hope that until then, they'd be able to buy that ticket cheaper than what they sold it for. So it didn't happen. Air prices have gone up, and so that started the downward spiral to their bankruptcy. But overall, I generally see a more healthier industry.

Thanks, Abhi. The next one is, do you think that the Rio Airport can become a relevant hub like Viracopos, Guarulhos or Confins?

Yes. Another interesting discussion regarding Rio. I think that the challenge in Rio has never been sort of connectivity. It's demand, right? Rio is a beautiful city. It's a little bit like, it inbounds a lot of demand, but doesn't generate a lot of traffic. And so its geographical location also doesn't make it that suited for a hub. So I think it's going to be an important market or relevant market, but I don't see it taking the scale of some of our other hubs.

The next question comes from [ Betchino ] from UBS. How long do you think will last this competition dynamics? It has been tough in the past, but at the moment looks very healthy.

I think when we talk about competition dynamics, what messes up competition, right? Somebody going after market share, growing too quickly, or somebody trying to kill somebody else, right? And so first of all, the OEMs, if I said I want 20 aircrafts in the next 2 years, they don't exist. Alex kind of stated that. Not even the leasing companies have aircrafts to bring to the market. So I think it's going to keep discipline in terms of capacity for the next couple of years. And Abhi kind of highlighted where we're flying our hubs where our competitors are and in those same hubs, and likewise, too, right? Like for example, Guarulhos today, Abhi, is half of what he was in 2019, because Abhi is focusing on where we're strong and they're focusing on where they're strong. And so I think there's really good dynamics in the market. And again, I want to highlight, GOL is not going anywhere, LATAM is not going anywhere, Azul is not going anywhere. And every single airline has a higher cost of capital. They've levered themselves up with more expensive debt. And there's IPOs on the horizon. So I think -- if you take a look at the shareholding structure of the Abra Group, the shareholding structure with Sixth Street and SVP inside of LATAM, they need to -- they're capitalists, they need to make money, and that's what they're focused on. So I think the competitive dynamics in Brazil have never been better. And I think the facts are in the results that you're seeing, right? And I think that, that's something that not a single person, not even us here on stage, thought that we'd have fares where they are today in Brazil. Nobody thought they would, but that's where we're at today. And I think that it's a much healthier environment. And I think everybody is comfortable with where we are today. And again, fuel prices go up, fuel prices go down, and fuel prices went up and Abhi showed you what happened to fares when fuel prices went up, and that's what should happen.

Thank you, John. Guilherme from JPMorgan is asking how should we think about non-pax business in 2, 3 years in terms of revenues contribution to the Azul Viagens credit card and others?

Yes. Definitely going to grow faster than the airline itself. So the percentage is going to increase. I'm very, very optimistic about the loyalty program and the credit card, especially, and the quality of customers and account holders that they were bringing in. Cargoes had a tough year. Admittedly, worldwide it has been a tough year. We are growing in Brazil about 8% to 10%, but internationally, it's been tough. That's going to rebound next year. And vacations has a lot of room forward. So it's going to grow double the rate of what Azul is going to grow.

Thank you, Abhi. And how has been the ability to pass through prices following the recent oil spike? Do you sense that competitors had a similar approach? And how should we think about the hedging strategy going forward?

Yes. Talking about competitors and fares, I think everybody has a very, very similar approach. And again, we are entering the best season in Brazil, it's spring, summer. So we have good seasonality and good demand behind us right now.

I think there's a clear contrast to what you're seeing in the United States, right? And so you're seeing softness in the United States, but you're seeing strength in Brazil. Abhi showed that we have record average fares and our best bookings ever were the last couple of weeks going into the strongest part of the year.

Hedging is insurance, right? So we expect to lose money on insurance, a little bit, you lose that premium, right, to get that protection. And we expect to lose a little bit of money over time on hedges, right? I don't think anybody buys Azul because you think that the 3 of us know what the direction of energy prices in the world is going to be better than the overall market, right? So it should be insurance. And as insurance, you should try to price it competitively. And if it's cheap, you should buy more of it. If it's expensive, you should buy less of it. I think today, when you look at the industry overall, everybody is essentially under-hedged compared to historical levels. That's certainly the case in Brazil, where all are kind of in maybe the teens. And I think that's what makes sense given the cost of capital, the cost of credit limits. And really, I think the best hedge that we have is the fact that we're price makers on 81% of our routes, or maybe 91% of our routes, right? We determine the fares on those markets, and they need to be profitable. And if fuel prices are high, we're going to set fares at a level where we can make money. And if fuel prices are low, maybe we can fly a little bit more and set prices accordingly, right? So I think a robust network where you have the ability to price optimally is the best hedge that you can have.

Thank you. Lucas from BTG wants to understand more about our international strategy, especially regarding overlap with LATAM.

Yes. Again, like I said, we actually have no airport-to-airport competition. Obviously, they fly to Paris as well and Lisbon, but from a different airport, to a different airport in terms of Paris and Miami as well. So different partners, different types of service options. But again, for us, it's where we are strong, to where our partners are strong. No airport-to-airport competition. So I think you'll just see more of the same and continuing the philosophy we have domestically and internationally.

And keep in mind, there's 100 cities that Abhi connects internationally that are not served by any other airline in Brazil, right? And so if you're in one of those 100 cities and you want to go to Paris or you want to go to Fort Lauderdale or you want to go to Chicago or anywhere, the only way to get there is via Azul.

And the next one is, any additional comments regarding the tax reform and the Brazilian economy going forward.

Yes. So I think many of you locally may have seen, but there's a new tax reform going on in Brazil. we were pretty excited because regional aviation was included in that. That was something that we worked really hard on. I think we've partnered now with the other airlines to get general all aviation included in I think the importance of the industry. So we're very optimistic as an industry that all aviation will be included and maybe there'll be some special benefits to regional aviation, but I think we feel very good about where we're at. Again, I said at the beginning, but GDP has been revised up to be 3x what they thought it was going to be at the beginning of this year. So demand is strong in Brazil today. The economy is moving. And so I think we're pretty optimistic as to where the Brazilian market is relative to where we thought it was going to be, right? And so I still think it's growing a lot slower than most people would like it to grow. But relative to where it was supposed to grow this year, it's significantly better.

Thank you, John. Rogério Araújo from Bank of America has one question. Could you provide a best guess for 2024 EBITDA range? How much capacity growth versus 2023, assuming fleet upgauging and higher aircraft utilization? And what about yield variation?

Why don't you take that, Abhi, to start, and then I'll let Alex...

Yes. Capacity growth is going to be about 8% to 10%. Yields, I expect to be pretty similar to what we're seeing this year. Remember, our capacity growth is upgauging. It's in our markets. It's not in competitive markets. And so I think what we've been seeing all along, the unit revenues we are seeing now are pretty constant since Q3 of last year, and I think they'll be pretty steady through next year as well.

Yes. On EBITDA, we don't have formal guidance on 2024 yet. But I think we know what consensus is, right? We think consensus, as it's natural, it's a little bit more conservative than what we think is achievable. But I think everybody knows the direction, right? And that's why we're excited about the valuation and the equity instrument that there is a significant CAGR on EBITDA going forward, right? We had significant CAGR on EBITDA when we went public. That's why normally you see a higher multiple in Latin American carriers and we still have a significant CAGR on EBITDA. So '24 EBITDA will certainly be higher than '23 EBITDA and '25 EBITDA will be higher than '24. And I think that's what we see in all of your models as well because of all of the upside. So think about why is '24 EBITDA going to be higher than '23? We don't even have a full year of Congonhas in 2023. We started Congonhas at the end of March. There is some ramp up. There is some advertising, some awareness generation that needs to happen. So we're going to have a full year of Congonhas in '24, right? Fuel prices for '24 will be lower throughout the whole year versus the average of '23, right? That's another source of value. Like Abhi said, the business units all grow more than the airline, and the airline is also going to grow next year. That gives you the economies of scale, that gives you margin expansion. So there are a lot of drivers for why you can believe on a continuously growing EBITDA beyond 2023.

Alex is being cute because he was notified by the CVM because of comments he made to the press. But take our exit rate, take what we're going to do in the third quarter, take what we're going to do in the fourth quarter, look at the margin expansion drivers. And Alex kind of highlighted each of them, but those E2s coming on are really important to us. Once again, the fact that our entire senior management team is now focused on running the business, taking that utilization up. So I think it's pretty easy to see how we grow EBITDA from 2023 into '24, '25 and '26.

Thank you, guys. That's it.

Anybody else here? No? All right. Great. Thanks, everybody. We appreciate your time today. We've got some food and beverages here, and we'll be around to take any of your questions. Just for everybody that's listening, Alex and Thais and myself, we're going to be on the road for the next 3 weeks, and so meeting at many of the conferences. But feel free to reach out to our team. You can have Abhi at any time you want to talk fares and network expansion. So we're really excited about the business. This is truly a re-IPO of the business, a much stronger, a much better business. Again, our EBITDA is 3x what it was compared to when we went public. We're 40% more efficient as an airline. We now have the lowest CASM in the country by far. We have the highest margins. And so we're very excited, and we're not going anywhere. We're going to continue to grow this business, and thanks for your support.