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Azul plans business combination proposal with Gol in three months

Negotiations progress on Gol’s future amid its U.S. restructuring efforts

05/07/2024

According to insiders, Azul is facing financial challenges, compounded by the weakened Brazilian real and escalating costs, as it negotiates with creditors — Foto: Divulgação

According to insiders, Azul is facing financial challenges, compounded by the weakened Brazilian real and escalating costs, as it negotiates with creditors — Foto: Divulgação

Azul intends to submit a business combination proposal with Gol to the United States Bankruptcy Court for the Southern District of New York within the next three months, sources told Valor. Currently, discussions are ongoing with Abra, the holding entity that owns Gol and Colombian airline Avianca.

The proposal’s submission to the New York Court is a required step due to Gol’s ongoing restructuring under Chapter 11 in the United States.

Gol’s participation in Chapter 11 has adversely affected its stock market performance, presenting a strategic opportunity for Azul, whose market capitalization is approximately six times greater than that of its competitor.

According to insiders, Azul is facing financial challenges, compounded by the weakened Brazilian real and escalating costs, as it negotiates with creditors.

Sources have indicated to Valor that negotiations between Azul and the shareholders of Abra have advanced. “What has been discussed is structural, governance, and transactional terms. The current market prices of Azul and Gol are not perceived as reflective of their true value, prompting extensive financial analyses to ascertain each company’s worth. This task is complicated by the volatile exchange rate [in Brazil],” one source explained.

Interest in a potential merger between Gol and Azul has intensified after they announced a codeshare agreement. However, the feasibility of such a merger raises questions about how it would be received by Brazil’s Administrative Council for Economic Defense (CADE).

Gol has initiated discussions with creditors and investors as part of its restructuring efforts. The proposed plan involves refinancing approximately $2 billion and securing a capital injection of $1.5 billion, potentially through issuing new shares.

However, there are mounting concerns in the market regarding Azul. Despite the airline finalizing an $800 million restructuring agreement with lessors, which includes provisions for payments to be partly made through share issuance at R$36—significantly above today’s share price of nearly R$7—there is growing unease about Azul’s financial stability. Payments under this restructuring are set to start in the third quarter of this year, totaling R$240 million for the semester. Yet, the strategy of converting these payments into shares at the initially agreed price is viewed unfavorably by stakeholders on both sides.

Simultaneously, the group is actively working to enhance its financial flexibility by launching a new debenture issue. Sources indicate that Azul aims to secure R$600 million through this debenture, which will be incorporated into a Credit Rights Investment Fund (FIDC).

However, Azul’s fundraising efforts are occurring amid a challenging market environment, heightened by President Lula’s critical comments towards the head of the Central Bank, Roberto Campos Neto, which have injected significant volatility. The debenture has been structured in multiple tranches, offering rates ranging from CDI + 3% to CDI + 8.5%—CDI being Brazil’s interbank short-term rate. To date, the average amount raised stands at R$300 million, at a rate of CDI + 6%.

This fundraising is crucial for bolstering Azul’s cash reserves, particularly as the airline sector faces escalating costs driven by the weakened real. Currently, there is limited scope within the industry to increase fares. Additionally, the crisis in Rio Grande do Sul has emerged as a particular point of concern, given that the state represents 10% of the sector’s overall demand.

As part of its Chapter 11 proceedings, Gol has been submitting its preliminary financial results on a monthly basis to the Southern District of New York, revealing signs of the broader challenges the industry faced in the second quarter.

“[In May], Gol’s EBITDA margin was 11%, which is considered weak, particularly in light of the issues in Porto Alegre that affected everyone’s results. Essentially, the sector started the second quarter on a weak footing and will continue to feel the impact of rising costs into the third quarter,” explained a source.

Market experts suggest that an EBITDA (earnings before interests, taxes, depreciation and amortization) margin of around 25% is considered healthy to effectively cover the cost of capital in Brazil.

The competitive landscape for Gol and Azul could become even more challenging as Latam, which currently holds over 40% of the Brazilian market share, is taking steps to solidify its position by bolstering its liquidity.

On March 3, Latam announced plans to conduct a secondary offering aiming to raise at least $200 million and is considering relisting its American Depositary Receipts (ADRs) in New York, which were previously suspended during the group’s restructuring phase.

Sources indicate that this financial strategy could enable Latam to reduce its fares by alleviating balance sheet pressures and paying off high-interest debts.

“By not reducing fares, Latam is inadvertently supporting Gol and Azul. If Latam manages to renegotiate its debts and gains financial leeway, it will disadvantage its rivals, who are burdened with higher debts and depleting cash. Latam has no current incentive to increase prices,” a source informed Valor.

Meanwhile, the prospect of government support for Brazilian airlines has faded. There has been longstanding discussion about utilizing the National Fund of Civil Aviation (FNAC) to secure loans, but progress has stalled. Despite multiple deadlines being set, no substantial actions have been taken.

Representatives from Gol, Abra, Latam, and Azul have all declined to comment on the matter.

*Por Cristian Favaro — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Azul, Gol codeshare raises merger speculation in Brazil

Codeshare does not require antitrust regulator’s approval; experts say operation tends to attract attention

05/27/2024

Partnership will combine the two carriers’ airline networks in Brazil through the codeshare system and involve both companies’ loyalty programs — Foto: Leo Pinheiro/Valor

Partnership will combine the two carriers’ airline networks in Brazil through the codeshare system and involve both companies’ loyalty programs — Foto: Leo Pinheiro/Valor

The cooperation agreement between Azul and Gol announced on Thursday (23) agitated the market, as experts saw the approach as the start of a consolidation process between the companies. On Friday (24), Gol rose 11.9% to R$1.41 on the B3, while Azul soared 5.18% to R$10.36—the biggest appreciation of companies in the benchmark stock index Ibovespa on that day.

The partnership will combine the two carriers’ airline networks in Brazil through the codeshare system and involve both companies’ loyalty programs. Customers purchasing airline tickets included in the codeshare can choose to which program they wish to allocate the points they are entitled to. Azul and Gol carry out around 1,500 flights daily. The agreement will create more than 2,700 travel opportunities with just one connection.

The market says the deal resembles a partnership signed by Latam and Azul in 2020. The agreement was abruptly terminated a year later due to Azul’s attempt to take over Latam after the latter filed for a court-supervised reorganization under Chapter 11 in the United States.

Behind the scenes, Azul is said to be in advanced talks with Gol for a merger. At the first moment, Azul was reportedly willing to acquire Gol. Now, the prevailing view in the market is that the airlines could join forces to create a new firm that would also include Abra—the holding company controlling Gol and Colombia-based Avianca—as a shareholder. It remains unclear who would be the controlling shareholder. Azul is currently controlled by businessman David Neeleman.

The codeshare does not require approval by the Administrative Council for Economic Defense (CADE), as it is regarded as a commercial agreement. However, experts point out that it tends to be handled as a different operation and attract the antitrust regulator’s attention.

Furthermore, the deal has a relevant background, which is the behind-the-scenes’ moves by Gol and Azul toward a possible consolidation. If the agreement is regarded as preparation for a future merger, it could raise a flag at CADE. Azul and Gol declined to comment.

When Latam entered into a codeshare with Azul in the past, Gol asked CADE to apply some type of penalty against the two companies for a practice that could harm consumers. However, the request did not advance as the industry was struggling with the effects of the COVID-19 pandemic.

Experts point out that CADE has the power to request an analysis of the operation although its history shows it did not require prior notification in previous codeshare cases.

The airline industry is under heavy public scrutiny due to the increase in ticket prices and has been in constant attrition with the Brazilian Congress. On May 14, during a hearing before being reappointed as the CADE’s general superintendent, Alexandre Barreto said the antitrust regulator is preparing “a broad investigation” into ticket prices.

In a report, Bradesco BBI analysts pointed out that the current agreement seems to be more robust than the one signed between Azul and Latam in August 2020. The previous agreement did not involve frequent-flyer programs and was limited to 64 domestic flights. The bank also emphasizes that the partnership appears to be the first step to a possible merger.

Itaú BBA expects the deal will benefit Azul as it gives the company access to a larger network connected to its regional operations.

*Por Cristian Favaro — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Azul plans to bid for rival Gol’s assets

Sources say talks are in the initial stages; airline had also approached Latam years ago

06/03/2024

Azul’s proposal is expected to be launched during the formulation of Gol’s exit financing—a type of financing granted to companies facing reorganization — Foto: Leo Pinheiro/Valor

Azul’s proposal is expected to be launched during the formulation of Gol’s exit financing—a type of financing granted to companies facing reorganization — Foto: Leo Pinheiro/Valor

Azul Airlines is considering making a bid to acquire the operations of its competitor Gol, which is in court-supervised reorganization (Chapter 11) in the United States. Sources say the company has hired Guggenheim Partners and Citi to put together a strategy to buy its rival. The news of the deal was first reported by Bloomberg News.

This is another attack by rivals on Gol, which reported R$20 billion in debt when it filed for protection from creditors in the United States. The company is at loggerheads with airline Latam for seeking aircraft from its lessors at the same time of the Chapter 11 filing, which began on January 25.

Talks are in the early stages and there is no formal proposal on the table, three sources told Valor. In recent weeks, Azul has been seeking legal information on the acquisition of assets included in the court-supervised reorganization.

Azul has always shown interest in advancing consolidation in the Brazilian market. During Latam’s Chapter 11 process, between May 2020 and the end of 2022, Azul engaged in a public dispute for Latam by making a proposal to the creditors of the Chilean group for its Brazilian assets. However, the plan did not go through, although it disrupted the competitor’s restructuring process.

A potential bid for Gol’s assets, which may or may not include Avianca, would need to be competitive to convince Gol’s current shareholders and creditors—who must determine throughout the process whether the operation is advantageous for them.

Azul’s proposal is expected to be launched during the formulation of Gol’s exit financing—a type of financing granted to companies facing reorganization. The purpose is to pay credits restructured by the reorganization plan and finance the debtor’s operations after the process closure.

According to a source, the structuring of this loan is expected to gain momentum in the second half.

During this period, however, there is a chance of a dispute over the composition of this loan, as it will determine the shareholding structure of the company after the Chapter 11 process.

Behind the scenes, Azul’s rationale mirrors what prompted its move against Latam to take over its operations in Brazil. Here, the greatest overlap occurs between Latam and Gol’s networks. Azul, with its strong regional appeal, operates approximately 70% of its routes independently.

The low overlap could serve as a mechanism to support arguments in a potential review by the antitrust watchdog CADE. With consolidation, the prospect of one less airline in the country may not sit well with the government, especially with plans to try to reduce fare prices.

In January, the domestic market was led by Latam with 36.7%, followed by Gol (34.1%) and Azul (28.7%), according to data by the National Civil Aviation Authority (ANAC).

There are doubts in the market about Azul’s ability to finance an operation of this size, given that the company also recently went through a debt renegotiation process.

Azul said in a statement to the market that it is always attentive to the strategic dynamics of the airline industry and possible partnership opportunities, and may hire consultants to assist the company in these endeavors. Azul also said that it has not negotiated or approved any specific transactions to date. Guggenheim Partners did not immediately reply to a request for comment. Gol, Citi, and Abra, the holding company that controls Gol and Avianca, declined to comment.

*Por Cristian Favaro, Mônica Scaramuzzo — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Azul to increase twofold operations in São Paulo’s regional airport

Airline “will be seen differently,” CEO John Rodgerson told Valor

10/19/2022

John Rodgerson — Foto: Divulgação

John Rodgerson — Foto: Divulgação

Azul will be able to increase twofold its operations in the Congonhas Airport as of March, which will make it easier for residents of the city of São Paulo, including those working in the financial industry, to start using the company’s services, CEO John Rodgerson told Valor.

The executive sees room for coexistence between business jets and airliners in Congonhas and said that the debate should focus on the need for regulatory improvements so that eventual accidents, such as the one that happened on October 9, can receive fast and efficient responses.

Currently, the company has the historical right to operate 26 slots in the airport, plus 15 it won temporarily. From March on, the number will increase to 84, according to market calculations based on the new rules of Anac, Brazil’s civil aviation agency.

“I have a thousand flights a day. Will the extra slots in Congonhas change [the environment financially]? No. But Azul will be seen differently. There are many people from São Paulo today who don’t fly with Azul. We don’t take the Faria Lima guy [São Paulo’s financial hub] who wants to go to Brasília. We have already participated in roadshows with investors who have never flown with Azul, because it is not in Congonhas. Azul was never an option. Now it will be,” he told Valor, during an event held by the Latin American and Caribbean Air Transport Association (ALTA), in Buenos Aires, Argentina.

The company’s operation at the airport will still be small if compared with leaders Gol and Latam, which have about 235 slots each. Azul offers free transportation from Congonhas to its main hub, Campinas, but the practicality of taking a taxi and boarding in Congonhas has won over São Paulo residents.

About 25% of trips in Brazil, or one in every four, are made by the state of São Paulo people. Of all the expenses made by Brazilian tourists on domestic trips, nearly 26% come from São Paulo, according to data from the state tourism office. By gaining more passengers in the capital, Azul is able to embrace a larger slice of this important market.

Before, the company operated flights from Congonhas to important cities like Porto Alegre, Brasília, and Curitiba. But after temporarily winning 15 slots from Avianca and expanding its operation at the airport, Azul decided to focus its efforts on the Rio-São Paulo route, Brazil’s most profitable one. Now, with more slots, the airline could be able to resume flights to those cities, which are also very important for São Paulo citizens in terms of demand.

On October 9, the tire of a small plane burst upon landing in Congonhas and caused controversy in the sector when the Brazilian Association of Airlines (ABEAR), which represents Gol and Latam, opposed the use of the airport by business jets. In total, about 230 flights were canceled. The CEO of Azul, however, argued that the case should stimulate debates to improve the sector’s regulation, not to prevent business jets from operating there.

Mr. Rodgerson recalled that in 2012 a Centrion cargo plane caused the Viracopos airport, in Campinas, to close for 46 hours after facing problems with the landing gear, jeopardizing 495 flights. “It’s the business risk. I can’t say that we can’t have more cargo transportation at the airport after an event like this,” he said. “We have to work to open the airport faster and manage events like this.”

One challenge today, according to the executive, is legal uncertainty. Airport operators end up at a legal crossroads when clearing the landing strip, since they can be held liable for any damage to aircraft during removal.

During ALTA’s event, Gol CEO Celso Ferrer even signaled his interest in Congonhas receiving international flights again – something that has not happened since 1985. In Mr. Ferrer’s view, the possibility would help to encourage tourism in the city of São Paulo during stopovers. International flights would be an important financial support to Aena, Congonhas Airport’s new concessionaire, since the taxes for domestic boarding total R$35, compared with R$120 for international flights.

Asked about the subject, Mr. Rodgerson said that an eventual international operation would not be Azul’s focus in Congonhas. “Our international focus is Campinas. It is more profitable for the concessionaire to do that … but it will not be our focus.”

* The reporter’s travel costs were covered by ALTA.

*By Cristian Favaro — Buenos Aires

Source: Valor International

https://valorinternational.globo.com/
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