At the start of the pandemic, we saw several airlines file for bankruptcy protection, given the unprecedented challenges the industry faced. This was especially true in Latin America, where we’ve seen the four biggest airlines — Aeromexico, Avianca, GOL, and LATAM — all file for bankruptcy protection.
You can now add another airline to the list, as Brazil’s Azul has just filed for Chapter 11 bankruptcy protection in the United States.
In this post:
Azul files for Chapter 11, continuing to operate as usual
Azul has voluntarily filed for Chapter 11 bankruptcy in the United States, a legal process that will allow the airline to financially restructure under the supervision of a federal court, all while continuing to operate as normal. In the past several months, the airline has tried to restructure its (mostly pandemic-era) debt, with no luck.
Azul’s restructuring deal includes a commitment of $1.6 billion in financing, while eliminating $2 billion in debt. It also includes a further commitment of up to $950 million in equity financing upon emergence from Chapter 11.
Azul states that it has entered into agreements with its biggest financing stakeholders, including existing bondholders, and aircraft lessor AerCap. On top of that, strategic partners United Airlines and American Airlines are also supporting the restructuring (more on that in a bit).
With this process, we’ll see Azul reduce lease obligations and optimize its fleet, to emerge with greater flexibility and a more sustainable business and capital structure. Exact details of that remain to be seen. Keep in mind that Azul was founded by David Neeleman, the serial airline entrepreneur who is also behind JetBlue, Breeze, WestJet, etc.
Here’s how Azul CEO John Rodgerson describes this development:
“Azul continues to fly – today, tomorrow, and into the future. These Agreements mark a significant step forward in the transformation of our business – one that enables us to emerge as an industry leader in the main aspects of our business. With a collaborative approach and the support of our stakeholders, we have made a strategic decision to pursue a voluntary financial restructuring as a proactive move to optimize our capital structure – which was burdened by the COVID-19 pandemic, macroeconomic headwinds, and aviation supply chain issues. Our strategy is not just about financial reorganization. By using this process, we believe that we are creating a robust, resilient, industry-leading airline – one that Customers will continue to love flying, at which Crewmembers will continue to love working, and that will create value for our stakeholders.”
The American & United angle here is interesting
It’s worth understanding that while Azul hasn’t exactly been ultra profitable historically, one of the carrier’s biggest challenges has been settling its pandemic-era debt. As much as US airlines like to accuse some foreign airlines of being unfairly subsidized, the reality is that the US airline industry received the most financial support of anywhere in the world.
There’s a reason so many Latin American airlines have had to restructure, and it’s because they haven’t had as good of a setup for dealing with their debt. The industry isn’t exactly very profitable under the best of circumstances, let alone when there are sustained losses.
I think what’s so interesting about this Chapter 11 announcement is that both American and United are supporting the restructuring. For what it’s worth, United has historically partnered with Azul (rather loosely, given the lack of overlap in their networks), while American hasn’t. Instead, American has partnered with GOL, and even owns a stake in the airline.
So, what’s going on here? Keep in mind that in recent months, there was talk of Azul and GOL merging, to form a Brazilian mega-airline. American Vice Chair and Chief Strategy Officer has released the following statement regarding this announcement, which hints at closer cooperation:
“We are confident that Azul’s plan to strengthen its future will be extremely positive for the Brazilian aviation market and travelers to, from and across Brazil. American has served Latin America since 1942 and is proud to fly to 14 destinations in South America. Our service, including that of our partners GOL and JetSMART, combined with the strength and breadth of Azul’s network, will provide our customers another unique option for traveling between the Americas and even more connectivity in Brazil and throughout South America. We are excited to support this process and to be part of Azul’s future.”
“GOL remains a key partner to American. We are proud to have created the largest joint frequent flyer program in the Americas with the combination of American’s AAdvantage and GOL’s SMILES loyalty programs. Together, American and GOL offer customers access to 230 destinations in the United States served by American and more than 75 destinations in South America served by GOL. Through the strength of our partnership, our most loyal members enjoy a seamless experience with increased reciprocal benefits when traveling on the broadest and most rewarding network in the Americas. We are excited about the future of our partnership.”
It’s going to be very interesting to see how this all plays out. It sounds like American wants to partner more closely with Azul in the long run, but so does United. So we’ll put this in the “watch this space” category for now…
Bottom line
Brazilian airline Azul has filed for bankruptcy protection, as the airline hopes to eliminate around $2 billion in debt, all while getting fresh funding and renegotiating some lease obligations.
For passengers, it should be business as usual. When it comes to the long term strategy, there are more questions than answers as of now, especially when it comes to talk of the fleet being optimized, plus partnerships with both American and United.
What do you make of Azul filing for Chapter 11 bankruptcy protection?
So what is the situation with the ADR stock AZUL ?
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...
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...
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.
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...
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.
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.
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...
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.
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
Probably important to mention Gol is majority owned by Avianca's parent Abra Group
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...
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.
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...
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.
@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!!
It's where the debt is.
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.
I was under the impression Chapter 15 of 2005 was specifically designed for a cross border bankruptcy.
Azul is listed on the New York Stock Exchange and has debt that was issued in the US to US investors.
A fact that should have been mentioned in the story for clarity!!
@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...
@ 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.
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...
@ 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.
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...
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.