Brazil's Azul Files For Chapter 11 Bankruptcy Protection, With A Twist

@lucky, The winning model here is a deeper partnership with both United and American. And neither airline should care about the other.

Combined (UA/AA) can send a good amount of flyers and expand their routes. But neither is going to invest heavily in those markets.

@ Miami305 -- I think the current challenge is that Azul's long haul hub is VCP rather than GRU, so that it makes it complicated for partnerships. I doubt AA or UA would move a material number of flights to VCP to enhance connectivity, so...

@Ben - Perhaps Azul will launch more flights to the US from VCP? Azul got rid of their A350s a few years ago due to the pandemic (after a short stint with the airline). Maybe we will see more A330neo orders? Right now they only fly to FLL and MCO in the US. I could see a daily flights to MIA and maybe DFW for AA, and IAH for UA. Or United could just hurry up and make MCO a hub already 😉

Actually, if United acquires JetBlue, then B6's MCO and FLL hubs go to UA, and Azul already offers flights to multiple cities from those hubs.....

@ JB -- For sure they could launch more US flights, but short of a joint venture, there's not much upside there for American or United, since there's not going to be material revenue sharing. American and United want people flying their metal to Latin America, and not on an interline or codeshare partner. For that matter, it's not like Azul could have a joint venture with both American and United.

I'm sure there's a strategy here, it's just not necessarily that apparent to me, at least based on what we know so far.

@Ben,
This is a Brazilian airline. Why are they coming to the US to declare bankruptcy??
Same thing happened with SAS a while ago, came to the US to declare bankruptcy!!

I can always count on you to cover the big stories, Ben, and this is one.

The C11 filing has been expected for years; Azul tried to power through the post covid era but the industry fundamentally changed and they were not able to turn things around despite several out of court attempts.

The real story is to see how the AA vs. UA competition for Azul's hand plays out. Many think that Azul will try to merge with Gol and I suspect that is why AA is jumping into the process since UA has had Azul as a partner for years - but w/ little benefit because VCP is not conducive to feeding US carrier networks.

This will be very interesting to watch play out.

It's where the debt is.

Azul is listed on the New York Stock Exchange but will be delisted as part of its chapter 11 filing.

Also, many foreign carrier finance transactions including for aircraft are denominated in USD so it makes sense to file for bankruptcy reorganization where the money behind the business actually is. And new capital will likely come in part from the US, including from AA and UA.

And US bankruptcy laws are some of the most conducive to restructuring of any country in the world; the goal is to rehabilitate businesses rather than put them out of business. Equity is wiped out and debt is exchanged for new equity as a means to give the airline a fresh start.

The chances are high that Azul will successfully restructure; AeroMexico and Latam went into C11 fairly early but are healthy now. How or if any mergers or partnerships happen will be what will be worth watching.

Probably important to mention Gol is majority owned by Avianca's parent Abra Group

AD has some presence also in GRU, a little bit smaller than Latam or Gol but still is relevant.
Also they are flying some leased A330 to cover flights from CNF and REC to the US. Could be the chance for UA and AA to take over these routes.

@ Ben - While Azul does have its biggest hub out of VCP, they also have a presence at GRU, which is relevant and better than nothing for AA and UA.

When I originally posted the UA-B6 merger comment above, I meant that as a joke. But thinking about it now, maybe that is UA's strategy? I do honestly believe that United is trying to go after B6. I mean, just look at Kirby's comments trying to get on the good side of the current US administration. The other day, it was reported that he said that the US "was the greatest nation in the history of the world ever". There is no intentional reason for a major airline CEO to say something like that unless there is a purpose behind it. However far the UA-B6 team up goes, UA will likely keep B6's huge presence at MCO and FLL, and build on that to make a hub in the Southeast US for the airline. I could see UA launching flights to VCP for connectivity to other cities in South America using Azul. It would kind of be like United's flights to Tokyo prior to the last HND slot reallocation, split between NRT and HND. They could keep GRU for traffic to Sao Paulo, and VCP for connecting traffic. That may not work from certain UA hubs, but it could definetly work from Orlando and South Florida, where there is a lot of traffic to South America. That's the angle that I see anyway for UA.

But maybe I am reading too much into this. UA already has Avianca and Copa, so I see them as only needing an interline partner in Brazil and the southern part of the continent, which is what the current UA-Azul partnership provides. While Azul's biggest network in Sao Paulo is out of VCP, they also have a presence at GRU. GOL has a larger presence at GRU, so if Azul and GOL merge, then that would also benefit UA if that partnership continued. If Azul went belly up, then UA would be extremely uncompeitive compared to AA and DL in South America. That is likely why they are willing to help out Azul.

As for AA, they also really need Azul to expand their reach in Latin America for connections since they lost LATAM. I believe AA has a bigger play in mind with Azul. Perhaps they want to expand the combined airline at GRU. Or, given AA's Latin America presence, I could also see AA flying to VCP from MIA, mainly serving for connections as well as the local population around VCP.

Any company with a substantial/reasonable business in the US can declare bankruptcy in US court.

They don't necessarily have to be of American origin or owned by an American.

Flying into different US airports is a business, leasing planes from different US based lessor is a business, taking large US loans.

Even a Chinese/Russian citizen with some form of business in the US can declare bankruptcy in the US.

There is no doubt in my mind that American will edge out United here.

Here's why:

UA have already promised to form a joint business venture in Latin America years ago, but haven't. United management is notorious for wanting to go it alone internationally. Clearly their partners down there aren't happy with how UAL got greedy and lied to them.

There is no reason to replicate that mistake again. Azul will partner with American.

I think you are pushing it regarding UA getting greedy.

AA was the one that thought it could have a joint venture even before the Chilean Supreme Court put an end to an AA-LA joint venture. The fact that it took the Chilean government to stop what would have been a consumer disaster is what is frightening. The US should have said "no" a long time earlier.

DL managed to get a JV with and equity in Latam and Argentina has just been added to the DL-LA JV so DL-LA are even larger to Latin America than before - larger than either AA or UA - which is why they both want a JV.

Many people think that the Brazilian airline industry will consolidate but I have a hard time believing that the Brazilian government will allow a single player to control over 50% of the market which is what will happen if any of the big 3 - including Azul - merges with anyone else.

AA and UA are trying to sway the decision; the real question is whether AA or UA will be left w/o a JV partner or w/ one that has no meaningful presence at the large US carrier gateways to Brazil.

The Brazilian government has outright said that it wanted consolidation. Heck, that's the reason Latam (Lan + Tam) exists in the first place.

Anyways, the fact that AAL managed to get involved in Azuls bankruptcy restructuring in the first place says a lot. UAL hasn't even put out a press release yet, if ever.

Lan and Tam were mergers of two airlines in different countries to produce Latam.

Azul and Gol are both large carriers; as much as some want to believe that they will be free to merge, I suspect the rest of the story has yet to be written. Brazil does some weird stuff but they have people that are smart enough to realize that allowing their domestic airline industry to consolidate into two major players, one of which has over 50% share, will increase costs for every Brazilian that travels.

I was under the impression Chapter 15 of 2005 was specifically designed for a cross border bankruptcy.

People also need to remember that Sao Paulo's real hub airport (in the sense of people actually connecting there) is Congonhas. When I was in FLN and had to catch an intercontinental flight from GRU, there was only one flight I could take there that wasn't stupidly timed, and it cost about four times what I paid to CGH where I could also choose among lots of departures on various airlines (one was even flying an ATR!). I did end up spending a few hours too many going across town and sitting around in the lounge, but I wasn't about to pay €500+ for a 90 minute flight.

If the aim is to build connectivity across Brazil (without worrying too much about the rest of the Cono Sur), VCP isn't at such a massive disadvantage compared to GRU. The O+D yields can be an issue, of course.

Attempts to get a fourth major carrier going have been made. Remember Avianca Brasil? Itapemirim? I'm not even going to mention Voepass, you'll definitely remember that one.

With the size, geography, and economy of the country, it's no surprise that intercity transport is dominated by coaches, some of which offer flat beds, getting you to your destination well rested and with the full day ahead of you. That's the real competition for airlines (at least to the South of Brasilia- not sure how things work in the bits which are further away and may have challenging terrain, few/no motorways etc), so consolidation absolutely doesn't have to result in significantly higher prices.

Azul is listed on the New York Stock Exchange and has debt that was issued in the US to US investors.

Yet the Lan Chile and Tam Brasil merger, which led to less competition between those two markets, was still approved. Go figure.

And again, the Brazilian government has literally said that it wants this merger. The industry there has been historically unstable, so less airlines is far more sustainable, a lesson recently learnt in the US.

A fact that should have been mentioned in the story for clarity!!

It is clear you "need" a Gol/ Azul merger but Lan Chile and Tam Brasil was an end on end merger that had little overlap but created S. America's largest single carrier.

Repeating yet another time, Azul and Gol are 2 of the 3 largest carriers in Brazil; it would be equivalent to thinking that AA could be acquired by DL or UA in the US. As much as some might want to see Gol and Azul merge, it is obvious that it will significantly reduce competition and raise fares throughout Brazil.
and all of the comments about wanting a merger were before the chapter 11 process for Azul; chapter 11 is a far more consumer-friendly way to make companies viable because it hurts the owners of the company and debtholders and allows costs to be reduced.

Let's see how this plays out but there is an incessant and unrealistic craving for mergers in airline social media and yet there is abundant evidence that consumer benefits have been limited to non-existent as the competitive environment has been reduced.

So what is the situation with the ADR stock AZUL ?

Yet repeating again, the Brasilian government has given the go ahead to the AD/G3 merger and you're still saying that they will block it LOL

Hello Steve,

Azul is undergoing a court-supervised restructuring to reduce debt and strengthen our financial position. As a result, we expect our shares will be delisted from NYSE, though they will continue to be traded over the counter.

For investors holding Azul shares on B3, there is no immediate change. Trading on the B3 continues as usual at this time.
Regards

Investor Relations