Azul Traffic Update: Landing The Best Off-Season Month Ever

About: Azul S.A. (AZUL)
by: D.M. Martins Research

May could be considered Azul's best low-season month in the airline's two-year history as a public company.

I was impressed to see domestic traffic growth reach an all-time high, while the international business showed signs of having a pulse.

I maintain my original price target of $45/ADS even if shares travel through quite a bit of turbulence between here and there.

May could be considered Azul's (AZUL) best low-season month in the airline's two-year history as a public company. Total traffic was not only the highest ever of a non-vacation month (and the fourth overall) but YOY traffic growth also reached a record high of nearly 27% - driven by the domestic business and likely propelled by the bankruptcy of Avianca Brasil.

Credit: CH-Aviation

The graph below depicts total traffic and capacity trends since the 2017 IPO. Notice that both supply and demand rose by levels not seen since the third quarter of last year. Since growth in the latter outpaced that of the former, load factor improved substantially YOY, by over four percentage points to 84.3%.

Source: DM Martins Research, using data from multiple monthly traffic reports

As is usually the case, Azul's operational performance told two distinct stories. On the one hand, the domestic business continues to impress, with traffic growth in the home country having reached an all-time peak of nearly 33%. At play here is not only the exit of Avianca Brasil from the market but also the longer-term growth trends driven by Azul's fleet and route expansion in Brazil. Domestic occupation rate increased by a solid five percentage points to 83.3%.

On the flip side of the coin is Azul's international business, only now showing signs of having a pulse. The once thriving operation has seen traffic growth nosedive from more than 70% YOY around this time in 2018 to enter contraction mode last month - driven in great part by a sputtering Brazilian economy and the rise of the dollar relative to the local currency. In May, international ASK (available seat kilometers) and RPK (revenue passenger kilometers) both reversed course and increased in the low teens, with healthy load factor levels of 87.8% reaching a 2019 peak.

On the stock

Azul's May figures were probably the most impressive set of numbers that I have seen the company release since I started covering it (back in November 2017, share price $26). A tight domestic market and potentially recovering international business, combined with (1) new legislation passed that lifts restrictions on foreign investment in the Brazilian airline sector and (2) declining crude oil prices, sent AZUL up nearly 40% in less than one month.

Chart Data by YCharts

Despite the new 52-week highs, I continue to find this stock a good buy at current levels. First, valuation seems compelling within the peer group, as the graph above suggests, while next-year earnings growth estimate of 37% YOY looks highly encouraging. But also, Azul is faced with a number of positive catalysts, both short term (e.g. drop in fuel prices, exit of Avianca Brasil from the domestic market) and long term (e.g. upgrade of fleet that has already started to result in lower operational costs) in nature.

It is true that AZUL and Brazilian stocks, in general, will likely continue to be highly volatile, as one should expect of the airline sector and emerging markets. Yet, I maintain my original price target of $45/ADS, which I believe can materialize within the next 18-24 months, even if shares travel through quite a bit of turbulence between here and there.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.