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Azul: Dip In Capacity Expected, Investment Thesis Intact

Apr. 10, 2018 5:26 PM ETAzul S.A. (AZUL)2 Comments


  • Azul reported the slowest traffic growth rate since the company went public in April 2017, driven by lower domestic capacity.
  • But I believe the headwinds are short term in nature, and the fleet refresh should help push available seats and traffic up in the long run.
  • I continue to be as bullish on this stock as I have been for the past six months.

Despite the Brazilian stock market having ended the day up strongly this Tuesday, shares of Brazilian airline Azul (NYSE:AZUL) fared about four percentage points worse by comparison, following the company's most recent traffic update. Consistent with my goal of keeping a finger on the pulse of my November Idea of the Month, today, I assess whether the most recent figures disclosed might negatively impact my investment thesis.

Source: Airline Reporter

On the metrics

At first glance, the headline numbers were not the greatest. Azul's RPK (passenger traffic) YOY grew by 10% in the month of March. This figure may sound robust to most investors who follow the more mature U.S. airline industry. But in this case, it represented Azul's slowest traffic growth rate since the company went public in April 2017 (see graph below). Behind the seemingly soft numbers was a domestic business that, for the first time, saw a YOY contraction in traffic that came along with a correspondent drop in available seats as Azul continues to refresh its fleet.

In my model that conservatively predicts a 4% CAGR in passenger revenues through 2022, I assume that domestic capacity will eventually increase at a 6% clip over the next five years in a decelerating trend. I continue to believe that this scenario will materialize, as new A320 aircraft continue to be added to the asset base, possibly at a faster pace in 2018 and 2019. For now, I expect domestic capacity to reverse course and return to growth in the next few quarters, with the recent dip phasing away as the retirement of E-Jets tails off. As a consequence, traffic growth should also climb back into the teens.

Source: DM Martins Research, using data from company reports

Less concerning was total load factor, which once again improved YOY by 40

This article was written by

DM Martins Research profile picture
Tracking Economic Inflection Points To Guide Your Asset Allocation Strategy

Daniel Martins is a Napa, California-based analyst and founder of independent research firm DM Martins Research. The firm's work is centered around building more efficient, easily replicable portfolios that are properly risk-balanced for growth with less downside risk.

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Daniel is the founder and portfolio manager at DM Martins Capital Management LLC. He is a former equity research professional at FBR Capital Markets and Telsey Advisory in New York City and finance analyst at macro hedge fund Bridgewater Associates, where he developed most of his investment management skills earlier in his career. Daniel is also an equity research instructor for Wall Street Prep.

He holds an MBA in Financial Instruments and Markets from New York University's Stern School of Business.

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On Seeking Alpha, DM Martins Research partners with EPB Macro Research, and has collaborated with Risk Research, Inc.

DM Martins Research also manages a small team of writers and editors who publish content on several TheStreet.com channels, including Apple Maven (thestreet.com/apple) and Wall Street Memes (thestreet.com/memestocks).

Analyst’s Disclosure: I am/we are long AZUL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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