Azul(AZUL) - 2022 Q4 - Annual Report

Introduction Glossary of Airline and Other Terms This section defines key airline industry terms, operational metrics, regulatory bodies, and company-specific entities - Key operational metrics are defined, such as ASKs (Available Seat Kilometers), RPKs (Revenue Passenger Kilometers), CASK (Cost per ASK), and Load Factor[10][11][13] - Major Brazilian regulatory and industry bodies are identified, including ANAC (National Civil Aviation Agency), INFRAERO (airport infrastructure company), and CADE (antitrust authority)[10] - Company-specific terms are clarified, such as ALAB (the main operating subsidiary), TudoAzul (the loyalty program), and key partners like TAP and United[10][13] Operating Data This section summarizes key unaudited operating and financial statistics for 2020-2022, including fleet, network, and performance metrics Key Operating Statistics (2020-2022) | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Operating passenger aircraft at end of period | 194 | 161 | 162 | | Cities served at end of period | 158 | 147 | 112 | | Available seat kilometers (ASKs) (millions) | 39,579 | 31,386 | 20,395 | | Revenue passenger kilometers (RPKs) (million) | 31,561 | 24,851 | 16,311 | | Load Factor (%) | 79.7% | 79.2% | 80.0% | | Passenger revenue (BRL thousand) | 14,594,945 | 8,811,044 | 5,039,607 | | CASK adjusted (BRL cents) | 37.42 | 31.63 | 35.57 | | CASK ex-fuel adjusted (BRL cents) | 20.85 | 21.26 | 28.17 | Forward-Looking Statements This section cautions that forward-looking statements are subject to significant risks and uncertainties, including economic, political, and industry factors - The report's forward-looking statements are based on current expectations and are subject to numerous risks and uncertainties[27] - Key risk areas identified include the economic impact of COVID-19, Brazilian political and economic policies, fuel costs, competition, and regulatory changes[27] - The company explicitly disclaims any obligation to update forward-looking statements, and investors are warned not to place undue reliance on them[28] PART I Item 3. Key Information This section outlines principal investment risks related to Brazil's economy, the airline industry, and the company's preferred shares and ADSs Risk Factors This subsection details material risks, categorized by Brazil, aviation industry, and equity securities, including political instability, fuel prices, and COVID-19 impact - The Brazilian government's significant influence over the economy, coupled with political instability and currency fluctuations, poses a major risk to the company's financial performance[33][40][48] - The airline industry's high fixed costs, sensitivity to economic conditions, and substantial fluctuations in fuel prices create significant operational and financial challenges[89][95][100] - The company's controlling shareholder has the ability to direct business affairs, which may conflict with the interests of other shareholders, particularly holders of preferred shares who have limited voting rights[240][241][248] - The COVID-19 pandemic has had, and may continue to have, a material adverse effect on business, financial condition, and results of operations due to reduced travel demand and market volatility[127][128][140] Item 4. Information on the Company This section provides a comprehensive overview of Azul S.A., detailing its history, business operations, organizational structure, and key properties History and Development of the Company Founded in 2008, Azul has grown to Brazil's largest airline by departures and cities served, expanding through acquisitions and strategic partnerships - Azul was founded on January 3, 2008, by David Neeleman and began operations on December 15, 2008[271] - The acquisition of TRIP in 2012 substantially increased the company's network, making it a leader in Brazil's regional aviation market[273] - In 2020, Azul acquired the regional carrier TwoFlex, rebranding it as Azul Conecta, to further expand its network to smaller cities and gain slots at Congonhas airport[275][276] - A strategic partnership with Lilium was announced in 2021 to build an exclusive eVTOL (electric vertical take-off and landing) network in Brazil, with a potential order of 220 aircraft[277] Business Overview Azul is Brazil's largest airline by departures and cities served, leveraging a diversified fleet, loyalty program, and cargo business, with strong recovery from the pandemic - As of December 31, 2022, Azul is the largest airline in Brazil in terms of departures and cities served, with around 1,000 daily departures to 158 destinations, and is the sole airline on 84% of its routes[282] - The company operates a diversified fleet of ATR, Embraer E-Jets, and Airbus aircraft, which allows it to efficiently serve markets of varying sizes, a key differentiator from competitors who use larger, single-type narrow-body aircraft[301] - Strategic business units are significant revenue drivers. The loyalty program, TudoAzul, had over 15 million members as of year-end 2022, while Azul Cargo's net revenue grew 10.5% to BRL1.4 billion in 2022[287][288] - The company has recovered strongly from the COVID-19 pandemic, achieving record net revenue of BRL15.9 billion in 2022[288] Organizational Structure Azul S.A. operates as a holding company, with its primary flight operations conducted through its subsidiary ALAB, which owns other specialized entities - Azul S.A. is a holding company that owns 100% of its two main subsidiaries: ALAB (Azul Linhas Aéreas Brasileiras S.A.) and IntelAzul S.A[557] - ALAB is the primary operating subsidiary for all flight activities and owns other specialized subsidiaries, including Azul Conecta for sub-regional flights and ATS Viagens e Turismo for travel packages[559][560] Property, Plant and Equipment The company leases all operational facilities, including headquarters, maintenance hangars, and training centers, with property and equipment recorded at cost and reviewed for impairment - The company's primary corporate headquarters are leased in Barueri, São Paulo, under agreements expiring in December 2025[565] - Key maintenance facilities are leased, including four hangars in Belo Horizonte (expiring 2023-2035), one in Campinas (expiring 2042), and its UniAzul training facility (expiring 2027)[566] - The company evaluates its property and equipment for impairment annually, or when indicators suggest that the book value may not be recoverable[568] Item 5. Operating and Financial Review and Prospects This section provides a detailed management discussion and analysis of Azul's financial condition and operating results, covering key performance factors, liquidity, and capital resources Operating Results This subsection details operating results, analyzing principal performance factors like the Brazilian economy, fuel costs, and competition, with year-over-year financial comparisons Comparison of Operating Results (BRL thousand) | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Total Revenue | 15,948,067 | 9,975,729 | 5,744,126 | | Passenger revenue | 14,594,945 | 8,811,044 | 5,039,607 | | Other revenues | 1,353,122 | 1,164,685 | 704,519 | | Total Operating Expenses | (14,518,512) | (9,920,934) | (7,143,207) | | Aircraft fuel | (6,561,288) | (3,257,223) | (1,508,750) | | Operating profit (loss) | 1,429,555 | 54,795 | (1,399,081) | | Loss for the year | (722,367) | (4,213,208) | (10,834,709) | - In 2022, total revenue increased by 59.9% year-over-year, driven by a 65.6% rise in passenger revenue due to strong demand recovery and higher fares. However, operating expenses grew 46.3%, largely due to a 101.4% increase in aircraft fuel costs[614][615][618] - In 2021, the company showed significant recovery from the pandemic's impact in 2020, with total revenue increasing by 73.7%. This was primarily due to a 74.8% increase in passenger revenue as demand began to normalize[632][633] Liquidity and Capital Resources This subsection details the company's liquidity, capital resources, and debt profile, including cash flow analysis and recent agreements to strengthen its capital structure Cash Flow Summary (BRL thousand) | Cash Flow Activity | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | 2,437,315 | (310,616) | 976,230 | | Net cash used in investing activities | (639,852) | (684,890) | (403,833) | | Net cash (used in) provided by financing activities | (4,203,587) | 812,635 | 933,506 | - As of December 31, 2022, the company's total debt was BRL23,219.2 million. Excluding convertible debentures, total debt decreased by 4.9% compared to year-end 2021[657] - In March 2023, Azul reached commercial agreements with lessors for over 90% of its lease liabilities to reduce payments and restructure its balance sheet, exchanging concessions for a tradeable note and equity[648][649] - Gross capital expenditures were BRL1,451.1 million in 2022, up from BRL776.8 million in 2021, primarily related to the acquisition of new aircraft and engines[662] Trend Information This subsection discusses key business trends, including air travel demand recovery, ongoing uncertainties from global events, and management's expectations for 2023 growth - The company has seen a recovery in air travel demand post-COVID-19 but acknowledges that the pandemic and global economic downturn may continue to affect demand, especially for corporate travel[667] - Significant external risks persist, including political uncertainty in Brazil, volatile oil prices exacerbated by the Russia-Ukraine conflict, and turmoil in the global banking sector[668] - Despite uncertainties, management expects demand for air travel to increase steadily in 2023, with a particular focus on growth in the international market[668] Item 6. Directors, Senior Management and Employees This section details the company's leadership, including the Board of Directors and Executive Officers, management compensation, board committees, and employee culture Directors and Senior Management This subsection outlines the composition and responsibilities of the Board of Directors and Executive Officers, whose election is governed by the Shareholders' Agreement Board of Directors (as of Dec 31, 2022) | Name | Title | | :--- | :--- | | David Gary Neeleman | Chairman | | Sérgio Eraldo de Salles Pinto | Vice-Chairman | | Carolyn Luther Trabuco | Independent Member | | Michael Paul Lazarus | Independent Member | | José Mario Caprioli dos Santos | Independent Member | | Decio Luiz Chieppe | Independent Member | | Renan Chieppe | Independent Member | | Gilberto de Almeida Peralta | Independent Member | | Patrick Wayne Quayle | Independent Member | | Peter Allan Otto Seligmann | Independent Member | | Renata Faber Rocha Ribeiro | Independent Member | Board of Executive Officers | Name | Title | | :--- | :--- | | John Peter Rodgerson | Chief Executive Officer | | Alexandre Wagner Malfitani | Chief Financial Officer and Investor Relations Officer | | Abhi Manoj Shah | Chief Revenue Officer | | Antônio Flávio Torres Martins Costa | Chief Technical Officer | Management Compensation This subsection details management compensation, including fixed salaries, performance-based bonuses, and long-term stock-based incentive plans, with aggregate compensation figures disclosed Aggregate Management Compensation | Year | Aggregate Compensation (BRL million) | | :--- | :--- | | 2022 | 41.3 | | 2021 | 43.1 | | 2020 | 66.8 | - The company has multiple stock-based incentive plans, including four stock option plans, two restricted share unit (RSU) plans, and a virtual stock option (Phantom Shares) plan to align management interests with long-term corporate goals[703][715][720] - Short-term variable compensation is based on achieving targets for operating margin, customer satisfaction, crewmember satisfaction, and on-time performance[700] Board Practices This subsection describes the structure and functions of the Board of Directors' key committees: Audit, Compensation, and ESG, outlining their roles and responsibilities - The Audit Committee is composed of three independent members and is responsible for overseeing independent auditors, reviewing internal controls, and monitoring related-party transactions[725] - The Compensation Committee, composed of three members, reviews corporate goals and recommends compensation and incentive plans for executives[726] - The ESG Committee, composed of four members, is responsible for evaluating the company's ESG strategy, reviewing the Code of Ethics, and providing opinions on related-party transactions and significant financial obligations[728] Employees This subsection details the company's workforce, emphasizing a service-oriented culture, extensive training, good labor relations, and employee headcount Employee Headcount by Year | Year | Total Employees | | :--- | :--- | | 2022 | 14,247 | | 2021 | 13,163 | | 2020 | 12,004 | - The company emphasizes a strong, service-oriented culture and provides extensive training for all crewmembers, including pilots, flight attendants, and maintenance technicians[729][731] - As of December 31, 2022, the company had 77 Full-Time Equivalent (FTE) employees per aircraft, which it believes provides a cost advantage over peers[467][733] Item 7. Major Shareholders and Related Party Transactions This section details the company's ownership structure, including major shareholders and the Shareholders' Agreement, and outlines significant related-party transactions Major Shareholders This subsection presents the beneficial ownership of the company's capital stock, identifying major shareholders and their respective holdings Beneficial Ownership as of December 31, 2022 | Shareholder | % of Outstanding Common Shares | % of Outstanding Preferred Shares | % of Total Capital Stock | | :--- | :--- | :--- | :--- | | David Neeleman | 67.00% | 2.18% | 49.80% | | Chieppe family | 14.97% | 1.76% | 11.47% | | Caprioli family | 18.03% | 2.61% | 13.93% | | Calfinco (United) | 0.00% | 8.04% | 2.13% | Related Party Transactions This subsection details related-party transactions, including the Shareholders' Agreement, aircraft subleases, and strategic partnerships with entities connected to major shareholders - The Shareholders' Agreement governs the election of board members, granting specific appointment rights to David Neeleman, TRIP's former shareholders, and Calfinco (United)[751][752][754] - The company has subleased three Embraer E1 aircraft to Breeze Airways, an airline founded by controlling shareholder David Neeleman[763] - A strategic partnership with United Airlines includes a commercial cooperation agreement covering code-sharing, loyalty programs, and marketing[764] - During 2022, the company entered into aircraft sale and lease agreements with Azorra Aviation, where David Neeleman serves as an independent board member[767] Item 8. Financial Information This section covers key financial information, including ongoing legal proceedings, provisions for claims, and the company's dividend policy based on Brazilian corporate law and bylaws Legal Proceedings and Dividend Policy This subsection details the company's exposure to legal proceedings, with provisions for civil, labor, and tax claims, and outlines its dividend policy Provisions for Legal Proceedings (as of Dec 31, 2022) | Proceeding Type | Provisioned Amount (BRL million) | | :--- | :--- | | Civil Claims | 108.0 | | Labor Proceedings | 121.8 | | Tax Proceedings | 263.5 | - The company's bylaws require a minimum mandatory dividend of 0.1% of annual adjusted net income[791] - No dividends were distributed for the fiscal years ended December 31, 2022, 2021, and 2020[743] Item 9. The Offer and Listing This section details the trading markets for Azul's preferred shares and ADSs on the B3 and NYSE, and describes the regulatory framework and corporate governance requirements - Azul's preferred shares are traded as ADSs on the NYSE under the symbol "AZUL" and as preferred shares on the B3 under "AZUL4"[797] - The company is listed on the Level 2 segment of the B3, which requires adherence to enhanced corporate governance practices beyond standard Brazilian law[804] - Level 2 requirements include granting tag-along rights to all shareholders, providing limited voting rights to preferred shares on key matters, and maintaining a board with at least 20% independent directors[805] Item 10. Additional Information This section provides further details on the company's corporate structure, shareholder rights, Brazilian exchange controls, and tax consequences for non-resident holders Memorandum and Articles of Association This subsection summarizes key provisions of the company's bylaws and Brazilian corporate law, detailing shareholder rights and differences in corporate governance practices - Preferred shares are non-voting but have priority in capital refunds and receive dividends 75 times greater than common shares[831] - As a Level 2 listed company, preferred shareholders have voting rights on specific matters, including mergers, certain related-party transactions, and changes to key bylaw provisions[840] - Significant differences exist between Azul's governance practices and NYSE standards, particularly concerning the majority independence of the board and the composition of nominating and compensation committees, for which Azul follows Brazilian regulations and exemptions for foreign private issuers[852][854] Taxation This subsection describes material Brazilian and U.S. federal income tax consequences for non-resident holders of preferred shares and ADSs - Under current Brazilian law, dividends paid to Non-Resident Holders are not subject to withholding income tax, while interest on shareholders' equity is subject to a 15% withholding tax[870][874] - Capital gains from the sale of shares on a Brazilian stock exchange by a Non-Resident Holder registered under CMN Resolution 4373 are generally exempt from income tax, provided the holder is not in a low-tax jurisdiction[884] - For U.S. Holders, distributions are generally treated as dividend income. The company does not expect to be classified as a Passive Foreign Investment Company (PFIC), but this is an annual determination[906][916] Item 11. Quantitative and Qualitative Disclosures About Market Risk This section outlines the company's exposure to market risks, including interest rate, foreign currency, and commodity price risks, and details its hedging strategies - The company is exposed to market risks from fluctuations in interest rates (on variable-rate debt), foreign exchange rates (as over half of operating expenses are U.S. dollar-linked), and commodity prices (primarily aviation fuel)[935][937][939] - Azul uses derivative contracts, such as interest rate swaps, currency forwards, and commodity forwards, to hedge against these risks. The company's policy prohibits speculative trading in derivatives[933][935][937] Sensitivity Analysis of Net Exposure (Adverse Scenario - 25% Worsening) | Risk Factor | Impact on Profit or Loss (BRL thousand) | | :--- | :--- | | Interest Rate (CDI) | (24,284) | | Exchange Rate (USD appreciation) | (5,753,616) | | Aircraft Fuel Price | (1,640,322) | Item 12. Description of Securities Other Than Equity Securities This section focuses on American Depositary Shares (ADSs), detailing their structure, rights of holders, and applicable fees and tax obligations - Each American Depositary Share (ADS) represents three of the company's preferred shares and is registered and delivered by Citibank, N.A., as the depositary[943] - ADS holders may instruct the depositary on how to vote the underlying preferred shares on matters where preferred shares have voting rights. If no instructions are received, the depositary may, upon the company's request, grant a discretionary proxy to a person designated by the board[960][962] Key Service Fees for ADS Holders | Service | Fee | | :--- | :--- | | Issuance of ADSs | Up to US$0.05 per ADS | | Cancellation of ADSs | Up to US$0.05 per ADS | | Cash distribution | Up to US$0.05 per ADS held | | Depositary operation and maintenance | Up to US$0.05 per ADS held | Item 15. Controls and Procedures This section addresses disclosure controls and internal control over financial reporting, noting material weaknesses in ITGC and ongoing remediation efforts - Management identified material weaknesses in internal control over financial reporting as of December 31, 2022[996] - The weaknesses are related to information technology general controls (ITGC) and the reliability of underlying data used in financial reporting processes[997] - Despite the material weaknesses, management completed additional procedures and concluded that the consolidated financial statements fairly present the company's financial position in all material respects[995] - A remediation plan is in progress for 2023 to continue improving internal controls, review IT and financial reporting procedures, and ensure compliance with Sarbanes-Oxley requirements[999] Item 16. Corporate Governance and Other Disclosures This section covers corporate governance, including the Audit Committee's financial expert, Code of Ethics, accountant fees, and differences from NYSE listing standards - The board has determined that Sérgio Eraldo de Salles Pinto, a member of the audit committee, qualifies as an "audit committee financial expert"[1001] Principal Accountant Fees (BRL thousand) | Fee Category | 2022 | 2021 | | :--- | :--- | :--- | | Audit Fees | 4,634 | 4,395 | | Audit-Related Fees | 338 | 1,613 | | Tax Fees | — | — | | Total | 4,972 | 6,008 | - As a foreign private issuer, Azul follows home country practices which differ from NYSE standards, notably in not requiring a majority-independent board or having nominating/compensation committees composed entirely of independent directors[1008][1009][1011] PART III Item 18. Financial Statements This section contains the audited consolidated financial statements for 2020-2022, prepared under IFRS, with an unqualified auditor opinion on financials but an adverse opinion on internal controls Consolidated Statement of Operations Highlights (BRL thousand) | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Total Revenue | 15,948,067 | 9,975,729 | 5,744,126 | | Operating profit (loss) | 1,429,555 | 54,795 | (1,399,081) | | Loss for the year | (722,367) | (4,213,208) | (10,834,709) | Consolidated Statement of Financial Position Highlights (BRL thousand) | Metric | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Assets | 18,721,293 | 18,533,473 | | Total Liabilities | 37,728,793 | 36,866,476 | | Total Equity (Deficit) | (19,007,500) | (18,333,003) | - The independent auditor issued an adverse opinion on the company's internal control over financial reporting as of December 31, 2022, due to material weaknesses in IT general controls[1037][1054] - Despite the internal control issues, the auditor issued an unqualified (clean) opinion on the consolidated financial statements, stating they present fairly, in all material respects, the financial position and results of operations[1036]