Although the month is the last in the southern hemisphere's winter shoulder season, traditionally not a heavy traffic one, the recent trends in robust capacity and RPK (revenue passenger kilometers) growth have been reinforced. Management's expectation for a "healthy demand environment for the second half of this year" also appears to be intact and "continues to improve as we approach high season."
Credit: Credible Flight Reviews
As the charts below illustrate, RPK increased by 16% in September, a growth rate that's four times larger than the 2Q18 average of the major airlines in the United States. Compared to historical trends, Azul's traffic improvement was the least robust since May 2018, although I hardly find the dip in growth rate concerning.
The rise in traffic was accompanied by a comparable increase in ASK (available seat kilometers), ensuring that occupancy remained flat YOY -- represented by a solid, consolidated load factor of 83.2%. These metrics combined are encouraging, in my view, because they suggest that Azul's aggressive capacity growth strategy is meeting robust demand for the extra seats.
Source: DM Martins Research, using data from company's traffic updates
On the segment breakdown, Azul's international business once again looked the most pristine - despite the depreciation of the Brazilian Real that could have reasonably impacted international travel negatively. Traffic and capacity increased by a healthy 32% and 39%, respectively. The numbers look impressive to me, given that international ASK now accounts for a sizable one-fourth of total capacity (vs. only 18% when the company went public, in April 2017).
See domestic vs. international RPK breakdown below.
Still a tricky investment
As a current shareholder, I couldn't be more satisfied with the operational performance of Azul.
I continue to believe that the airline has the best-protected domestic business, the result of a diversified fleet that gives the company access to smaller but higher-margin markets. In addition, the international segment looks significantly better than key peer Gol's (GOL) - a smaller business (313 million RPK vs. Azul's 473 million in September) that continues to shrink month after month. In terms of valuation, AZUL looks inexpensive based on a couple of key metrics (see graphs below), despite the fundamentals that I believe to be superior.
Source: DM Martins Research, using data from company reports and Yahoo
As I have recently presented, however, Azul operates in an environment that's currently highly exposed to macro uncertainties. Brazilian elections are around the corner, and it's unclear whether the right-wing, market-friendly candidate will take over the President's seat in 2019.
Therefore, in the short run, I believe AZUL will react much more to the mood of the broad market than to the solid company fundamentals. For this reason, I believe the stock might be better suited for long-term investors who believe in the story, but who are less concerned that the stock may bounce around over the next few weeks or months, until the dust settles a bit.
Note from the author: I have recently concluded a study on the U.S. airline sector, and shared my findings first - along with my working Excel file containing all the details - with my Storm-Resistant Growth group. To access all the premium material and dig deeper into how I have built a risk-diversified portfolio designed and back-tested to generate market-like returns with lower risk, join the Storm-Resistant Growth community. Take advantage of the 14-day free trial, read all the content written to date and participate in the discussions.