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This article looks at Azul’s execution and potential for profit. We also discuss the airline’s new cargo business, which is still in its infancy stages, and its solid credit profile. These factors make Azul a compelling stock to consider, even though its execution and profit potential is underrated. But before we get to those reasons, let’s talk about its recent transformation. Read on to learn more.

Azul’s execution and profit potential are underappreciated

As Brazil’s domestic air travel demand continues to decline, Azul is seeking a public offering to raise funds for its expansion plans. The company’s ASKs rose 18.6% last year, but that growth was curtailed to 2.4% in 2016. The airline calculates that domestic traffic fell 5.7% in 2016. Its share of Brazilian air travel dropped nearly a third in 2011, when the country enjoyed a booming economy. Since then, it has been posting annual losses.

After its TRIP acquisition, Azul’s strategic plan shifted from short-haul operations to long-haul service. The airline aimed to emulate TRIP’s model of low-cost, long-haul flights in Latin America. In late 2014, Azul started service from Campinas Viracopos to Fort Lauderdale. By 2016, it was the only airline operating from Brazil to Orlando International. Azul later shelved plans to add service to New York and started operating from Recife to Orlando.

Its operating costs have become more efficient

Despite being a small airline, Azul has managed to stay profitable despite a large increase in unit costs. In September, it became the only airline in the Americas to achieve a cash balance without raising additional funds. It ended the month with approximately R$2.30 billion in cash, accounts receivable, and short-term investments. The increase in cash represented a significant improvement over the previous quarter, when the airline burned around R$3 million per day.

In addition to the cost savings achieved from increased operational efficiency, Azul has significantly reduced its debt. Since the COVID-19 pandemic erupted, it has reached commercial agreements with lessors to extend the payment terms on its debt and remove R$657 million in short-term debt. Moreover, Azul’s passenger fleet consists of 139 aircraft, while its contract fleet includes 165. Those 26 aircraft are not operating, and they include 13 Embraer E-Jets that are being phased out of the fleet.

Its cargo business is in infancy stages of growth

The company has a few goals to reach before the end of its first year. It aims to double its cargo revenue by 2020, and it has already started to increase its investment in the business. As the Brazilian economy continues to grow, cargo demand should remain robust. According to IATA’s latest report, global air cargo shipments rose by a modest percentage in May. While this is still a modest increase from last year, it is a positive sign.

In the first half of the year, Azul’s cargo tonnage dropped by 43%, compared to a 54% decline for the entire Brazilian cargo industry. Nevertheless, the company was 40% higher in June than it was in May. Another notable development is the introduction of the world’s first Class F freighter aircraft. The company has developed this innovative initiative internally in partnership with LHColus Tecnologia. These efforts included conceptual design development, cabin preparation, concept proof, and development test flights. The aircraft was finally certified on February 1 by the Brazilian Aviation Authority.

Its credit profile is heading in the right direction

A recent upgrade from Moody’s to a B3 rating for Azul Airlines reflects the company’s improving financial position. While the airline’s weak credit metrics and fragile market position remain significant risks, the company has made significant progress in the past few years. The company has successfully built a substantial cash pile through aggressive market pricing and a rapidly growing logistics arm. Although its financial leverage remains high, its ability to raise capital through debt continues to be an important factor in determining the airline’s future financial health.

A recent upgrade from Moody’s Investors Service highlighted the company’s improving position relative to its global peers. The airline had a stronger position in the Brazilian regional market, a high operating margin, and a track record of strong liquidity ratios. However, these positive factors are tempered by ongoing business growth in Brazil and operational volatility. While Azul’s credit profile is heading in the right direction, it remains at a critical juncture and must be properly managed.