Azul S.A. — 2019 Form 20-F Summary
Business context and reporting period
Annual report filed April 30, 2020, covering the fiscal year ended December 31, 2019; it is not a standalone fourth-quarter filing, and the text does not provide a complete Q4 income statement. Azul is a Brazilian airline with passenger, cargo, loyalty and travel businesses. Financial statements are audited and prepared under IFRS; comparative 2018 and 2017 figures were restated for the full retrospective adoption of IFRS 16.
Financial and operating performance
| Metric | 2019 | 2018 |
|---|---|---|
| Operating revenue | R$11.442bn | R$9.057bn |
| Operating income (loss) | (R$1.195bn) | R$1.194bn |
| Net income (loss) | (R$2.403bn) | (R$636m) |
| Operating cash flow | R$2.595bn | R$1.765bn |
| Cash and cash equivalents | R$1.648bn | R$1.169bn |
| Loans and financing, excluding lease liabilities | R$3.518bn | R$2.756bn |
| Lease liabilities | R$12.107bn | R$8.920bn |
| Equity | (R$3.519bn) | (R$1.150bn) |
Revenue rose 26.3%; passenger revenue increased 25.8% and cargo and other revenue 38.1%. Capacity (ASKs) grew 22.2%, load factor improved to 83.5% from 82.3%, PRASK rose 3.0%, and RASK rose 3.4%. Adjusted EBITDA, a non-IFRS measure, was R$3.623bn, with a 31.7% margin, versus R$2.704bn and 29.9% in 2018. Reported operating margin was approximately negative 10.4%; net loss margin was approximately negative 21.0%.
Operating cash flow was positive, but investing activities used R$1.187bn and financing activities used R$914m. The company reported R$3.108bn in total cash, cash equivalents and short- and long-term investments. Its reported total debt, including leases, was R$15.625bn; management cited adjusted net debt/adjusted EBITDA of 3.3x, including currency-swap effects and excluding specified non-recurring items. Net current liabilities were R$2.723bn at year-end.
Material changes and unusual items
- The net loss widened from R$636m in 2018 to R$2.403bn in 2019, and operating results shifted from income to loss. The filing attributes much of the reported deterioration to the accelerated E-Jet phase-out and related charges, alongside IFRS 16, higher capacity, the end of a 20% payroll tax relief, and real depreciation.
- Azul recorded a R$2.032bn impairment of E-Jet aircraft and related assets, a R$798m provision for onerous contracts, and additional write-offs and costs tied to the fleet transition. The filing describes total non-recurring losses of about R$3.2bn, including impairment, inventory write-offs, expected aircraft sale losses and early-termination costs. Adjusted EBITDA and other adjusted metrics exclude specified items and are not IFRS measures.
- IFRS 16 brought aircraft lease right-of-use assets and liabilities onto the balance sheet. Lease liabilities increased to R$12.107bn; this accounting change materially affects year-over-year balance-sheet and expense comparisons.
- The fleet grew to 142 operating aircraft, while ASKs rose 22.2%. Azul Cargo revenue grew 45% to approximately R$481m, and TudoAzul gross billings excluding the airline rose to R$1.298bn from R$988m.
Outlook, risks and contingencies
Management suspended its 2020 market projections after COVID-19 disrupted travel demand. On March 24, 2020, Azul announced a planned 90% reduction in April capacity, to 70 daily nonstop flights serving 25 cities. It announced salary reductions, hiring and discretionary-spending freezes, voluntary unpaid leave, aircraft grounding, suspension of deliveries, reduced capital spending, working-capital actions and discussions with creditors and lenders, including BNDES. Management said these actions were intended to support operations through a prolonged downturn, but could not guarantee their sufficiency or completion; the duration and financial impact of the pandemic were uncertain.
The filing also reports notices of default relating to certain aircraft leases and ongoing negotiations with lessors and other creditors. Key exposures include foreign-currency costs and debt, fuel prices, interest rates, airline demand and financing access, aircraft lease obligations, airport and slot access, supplier and partner dependence, and Brazilian economic and political conditions. Azul was compliant with its financial covenants at December 31, 2019. Legal contingencies include civil and labor claims and tax proceedings; the filing reports R$316.6m of reasonably possible tax, civil and labor claims for which no provision was recorded, in addition to provisions already recognized. The auditor issued an unqualified opinion on the financial statements and internal controls, while identifying aircraft impairment, IFRS 16 adoption, TAP bond valuation, maintenance reserves and passenger revenue as critical audit matters.
Most important facts for investors to verify
- Confirm the amount and nature of the approximately R$3.2bn of fleet-transition charges, and reconcile reported losses with management’s adjusted EBITDA and adjusted earnings claims.
- Assess liquidity after the post-year-end capacity collapse, lease-default notices and creditor negotiations; distinguish cash and investments from the broader R$3.108bn liquidity figure.
- Review lease commitments, aircraft purchase commitments and currency exposure. Year-end contractual aircraft purchase commitments were R$15.472bn, plus R$7.392bn related to lessor placement.
- Track COVID-19 developments and the status of fleet-delivery suspensions, lease renegotiations, the proposed TwoFlex acquisition and the TAP joint venture; these are subsequent events, not 2019 operating results.