Azul S.A. — FY 2018 Form 20-F
Business context and reporting period. This annual report, filed April 30, 2019, covers the fiscal year ended December 31, 2018; it is not a standalone fourth-quarter report, and the filing text does not provide a clear set of Q4-only financial results. Azul is a Brazilian airline reporting under IFRS as issued by the IASB. Amounts below are in Brazilian reais (R$) unless stated otherwise.
Key financial and operating metrics
| Metric | 2018 | 2017 | Change / context |
|---|---|---|---|
| Operating revenue | R$9.153 billion | R$7.789 billion | +17.5% |
| Operating income | R$525 million | R$865 million | −39.3%; operating margin fell to 5.7% from 11.1% |
| Net income | R$420 million | R$529 million | −20.6%; 2018 included R$283 million of identified non-recurring items |
| Adjusted EBITDA | R$1.134 billion | R$1.165 billion | Non-IFRS measure |
| Adjusted EBITDAR margin | 28.7% | 30.1% | Non-IFRS measure; excludes aircraft rent |
| Operating cash flow | R$443 million | R$296 million | +49.9% |
| Cash and cash equivalents | R$1.169 billion | R$762 million | At year-end |
| Total liquidity | R$2.974 billion | R$2.643 billion | Company-defined total including cash, investments and restricted investments |
| Loans and financing | R$3.706 billion | R$3.490 billion | Gross debt; current portion was R$335 million |
- Revenue and demand: Passenger revenue rose 29.5% to R$8.670 billion; other revenue fell 55.8% to R$483 million, largely reflecting IFRS 15 reclassification of passenger-related ancillary fees. On the company’s pro forma IFRS 15 comparison, passenger revenue increased 17.2% and cargo and other revenue increased 29.3%.
- Airline indicators: ASKs rose 16.0%, load factor was 82.3% versus 82.1%, PRASK increased 11.6%, and RASK increased 1.3%. Total operating cost per ASK rose 7.4%; fuel cost per ASK rose 23.3%.
- Liquidity and leverage: Management reported net debt of R$732 million after cash and investments, and adjusted net debt to adjusted EBITDAR of 4.2x. These company measures are not IFRS measures and do not include the full economic burden of operating leases in the same way as balance-sheet debt.
Material changes versus 2017
- Revenue growth was outpaced by expense growth: operating expenses rose 24.6%, led by a 43.1% increase in fuel expense. Management cited a 30% rise in average fuel price and 14.8% average depreciation of the real against the U.S. dollar, which increased foreign-currency costs.
- Operating income declined despite higher capacity and passenger revenue. Reported net income also fell, although the result was supported by R$298 million of derivative gains and R$342 million of net gains from related-party transactions, primarily related to the TAP investment.
- Operating cash flow increased, but the filing attributes part of the improvement to working-capital timing, including extended supplier payment terms and forfaiting, as well as lower cash outflow for security deposits and maintenance reserves.
- IFRS 15 changed the classification and timing of certain ancillary revenues. IFRS 9 was also adopted in 2018; the company reported an immaterial initial adoption impact.
- Year-end cash and investments increased, while gross loans and financing rose 6.2%. Capital expenditure was R$855 million, and contractual aircraft purchase commitments totaled R$14.9 billion.
Outlook, risks and unusual items
- 2019 outlook: Management expected ASKs to grow 18%–20%, CASK to decline 1%–3%, and EBIT margin to reach 18%–20% under IFRS 16, compared with a stated 2018 IFRS 16-comparable margin of 15.1%. The filing’s 2018 reported IFRS operating margin was 5.7%; these figures use different lease-accounting bases and should not be compared without adjustment.
- Fleet and investment plans: Azul expected to end 2019 with 129 operating aircraft and continued fleet renewal. Firm orders described in the filing included 46 Embraer E2s, 50 A320neos and five A330-900neos for delivery through 2023. Delivery, financing and execution risks remain.
- IFRS 16: Effective January 1, 2019, the standard brings most operating leases onto the balance sheet and changes the timing and classification of rent, depreciation, interest and foreign-exchange effects. The filing’s illustrative 2018 application shows a materially different result, including a pro forma net loss; management cautioned that adoption estimates could change.
- Unusual 2018 items: Management identified R$283 million of non-recurring items, including a R$226 million loss related to the sale of six E-Jets and R$57 million of truckers’ strike impact (lost revenue and added expense). Management stated net income would have been R$704 million excluding these items.
- Principal operating risks: Fuel prices and supply, real/U.S. dollar exchange movements, interest rates, intense competition, airport capacity and landing slots, aircraft financing and supplier dependence, and Brazil’s economic and political conditions. Fuel represented 30.6% of operating expenses; 55.3% of expenses were denominated in or linked to foreign currency.
- Contingencies: Azul disclosed R$81 million of provisions for tax, civil and labor matters and R$266 million of reasonably possible claims without provisions. A labor prosecution claim sought about R$66 million; the company considered loss possible and was negotiating an agreement. Risks involving the Viracopos airport concession and operator reorganization could affect Azul’s main hub. The company said it complied with financing covenants at year-end.
- Other developments: Azul completed the purchase of an additional 6.1% economic stake in TAP after year-end; together with its convertible bonds, its potential TAP economic interest was stated as 47.35% if the bonds are converted. The non-binding Correios commercial plan was discontinued, with no expected 2019 results impact.
Most important facts for investors to verify
- Review the audited IFRS statements and IFRS 15 pro forma comparison to separate underlying growth from revenue reclassification.
- Reconcile the 2019 margin guidance with the 2018 IFRS 16-comparable baseline and examine the actual lease liabilities recognized after adoption.
- Assess debt service and liquidity alongside R$10.451 billion of undiscounted future operating lease payments and R$14.9 billion of aircraft purchase commitments.
- Test the quality and repeatability of cash generation, particularly the impact of supplier payment extensions, forfaiting and maintenance-reserve movements.
- Separate recurring operating performance from aircraft-sale losses, strike effects, derivative results and TAP-related fair-value gains.
- Monitor fuel, currency and interest-rate exposures, including hedge effectiveness, as well as the Viracopos concession, litigation and the Avianca Brasil restructuring’s effects on competition.
The financial statements received an unqualified audit opinion, and the auditor also gave an unqualified opinion on internal control over financial reporting as of December 31, 2018. EBITDA, adjusted EBITDA and EBITDAR are supplemental non-IFRS measures and should not be treated as substitutes for IFRS profit or operating cash flow.