Azul S.A. (AZUL) has been benefiting from improvement in air-travel demand (following the end of the pandemic and normalization of economic activities), fleet-modernization efforts and fuel efficiency gains. Rising operating expense act as headwinds.
Factors Favoring AZUL
AZUL’s top line benefited from a healthy demand environment and robust ancillary revenues in the third quarter of 2024. With more people taking to the skies, Azul’s passenger revenues, contributing 92.8% to the top line, grew 4% year over year. As a reflection of this, consolidated traffic, measured in revenue passenger kilometers, rose 4.3% year over year in third-quarter 2024. Consolidated available seat kilometers, measuring an airline's passenger-carrying capacity, increased 3.7% from the year-ago quarter. Since traffic outpaced the capacity expansion, the load factor (percentage of seats filled with passengers) grew 0.5 percentage points to 82.6%.
Azul's fleet-modernization efforts are commendable. The airline operates the most fuel-efficient and environment-friendly fleet in Brazil. By the end of the third quarter of 2024, AZUL derived approximately 83% of its capacity from next-generation aircraft, surpassing all regional competitors. As a result, fuel consumption per available seat kilometers (ASK) was down 2.9% from year-ago levels.
Other than the fuel efficiency gains, AZUL’s consistent focus on managing costs throughout its business has paid off. Evidently, cost per ASK (CASK) stayed almost flat compared with the third quarter of 2023 reported figure. CASK, excluding fuel, fell 2.8% year over year. This marks a solid improvement, given the 13.6% average depreciation of the Brazilian real against the US dollar and 4.2% inflation over the last 12 months.
AZUL also hopes to reduce its CASK with the help of its next-generation fleet, along with several other efficiency initiatives. To this end, AZUL has successfully reduced its full-time equivalent (FTE) employees by 1.5% sequentially, even with the airline growing 10%. This led to an improvement of FTE per ASK of 11.3%.
AZUL’s cost-cutting initiatives should boost profitability. Notably, in third-quarter 2024, AZUL reported an all-time record EBITDA of R$1.65 billion, increasing 6% year over year and 57.1% sequentially. EBITDA margin of 32% improved 50 percentage points from the year-ago quarter. Profitability amid increasing fuel cost per liter and higher average exchange rate is noteworthy.
Backed by a robust demand environment in both domestic and international markets, the positive trend in fuel prices and a higher number of fuel-efficient aircraft entering the fleet, Azul continues to anticipate its full-year EBITDA to be around R$6 billion. For 2025, AZUL anticipates EBITDA to be R$7.4 billion, driven by strong travel demand, a rational competitive environment, and robust growth in its business units. Additionally, the restructured financing plan (aimed at improving liquidity and cash generation and reducing leverage) is likely to enable Azul to achieve its target for 2025.
Key Risks
The northward movement in operating expenses is hurting AZUL’s bottom line and challenging its financial stability. Operating expenses in third-quarter 2024 grew 3.8% year over year owing to the 3.7% increase in total capacity, 13.6% depreciation of the Brazilian real against the US dollar and an 8.6% increase in fuel price, offset by higher productivity and cost-reduction initiatives.
Further, AZUL has a disappointing earnings surprise history. The company’s earnings lagged the Zacks Consensus Estimate in each of the last four quarters, delivering an average miss of 100.76%. Driven by this downbeat earnings performance, AZUL’s shares have plunged 84% over the past year, underperforming its industry.
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AZUL’s Zacks Rank and Stocks to Consider
AZUL currently carries a Zacks Rank #3 (Hold).
Some better-ranked stocks from the Zacks Transportation sector are C.H. Robinson Worldwide, Inc. (CHRW) and Expeditors International of Washington, Inc. (EXPD), each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
CHRW has an impressive earnings surprise history. The company's earnings outpaced the Zacks Consensus Estimate in three of the trailing four quarters (missed the mark in the remaining quarter), delivering an average surprise of 10.29%.
The Zacks Consensus Estimate for CHRW’s 2024 earnings has been revised 6.4% upward over the past 90 days. CHRW has an expected earnings growth rate of 33.3% for 2024. Shares of CHRW have gained 21.6% so far this year.
EXPD has an impressive earnings surprise history. The company's earnings outpaced the Zacks Consensus Estimate in two of the trailing four quarters (missed the mark in the remaining quarter and met in the other quarter), delivering an average surprise of 4.75%.
The Zacks Consensus Estimate for EXPD’s 2024 earnings has been revised 6.4% upward over the past 90 days. EXPD has an expected earnings growth rate of 8.38% for 2024. Shares of EXPD have lost 4.5% so far this year.
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