Brazilian operator Azul has reached an agreement with the majority of its lessors to reduce its lease payments by BRL5.4 billion ($1.1 billion) during the next four-and-a-half years.
The airline first announced the restructuring in March and supplied more information to the investment community on May 15. Previously the airline said it entered negotiations after its capital structure was burdened by the effects of the COVID-19 pandemic.
Azul CFO Alex Malfitani told analysts and investors during an earnings discussion that back in March the company had reached agreements with more than 90% of its lessors, and “now we’re closer to 95%,” he said. “We’re talking again to every lessor that hasn’t committed to the commercial agreement yet, so we still believe that it is possible for us to reach 100%.”
The deal included the elimination of lease payment obligations that were deferred during the coronavirus pandemic, a permanent reduction in lease payments from original contractual rates to agreed upon current market rates, and the deferral of certain lease payments to lessors and original equipment manufacturers (OEMs).
Other elements of the agreement include improved end-of-lease compensation obligations and aircraft return conditions, the elimination of future maintenance reserve payments, and the negotiated early termination of certain aircraft leases.
The lessors and OEMs have agreed to receive an unsecured traceable note maturing in 2030 with a coupon of 7.5% per year and an equity investment convertible into preferred shares at BRL36.00 per share. Dilution from the equity instrument is estimated at 17.5%.
Azul said the reduction in lease payments covers the second quarter through the fourth quarter (Q4) of 2023 to 2027 and beyond.
Malfitani said operating leads represent almost 80% of Azul’s nominal debt, “so this significantly reduced our debt burden and improves our cash flow.” The company expects to have a breakeven cash flow performance in 2023 and generate positive free cash flow in 2024.
Azul’s leverage should also improve. Its net debt to the last 12 months EBITDA [earnings before interest, taxes depreciation and amortization] excluding the equity instrument and convertible debentures was reported as 5.2x in the first quarter (Q1), but the estimate after the deal with lessors and OEMs is 4.6x for the quarter. It projects leverage of 3.0x in 2024.
The company expects fuel prices in Q4 2023 to fall by 29% compared to Q1, which is resulting in a forecast of BRL5.5 billion in EBITDA this year, 52% higher than 2019.
Planned capacity growth for Azul in 2023 is 14% year-over-year, split between 6% domestic and 8% international.
During Q1, Azul’s revenue increased 40.3% year-on-year to BRL4.5 billion and expenses grew by 28.6% to BRL4 billion. The airline posted an adjusted net loss of BRL727.6 million compared with BRL808.4 million in Q1 of 2022.
