By Allan Ravagnani
The sky for Brazilian airlines is closed. In the midst of a storm formed by unfavorable exchange ratethe increased costs and the lack of planes, Azul, Gol and Latam seek ways to keep their operations online. The scenario is marked by sharp drops in the value of shares, rating downgrades and accumulated losses. While the government tries to alleviate pressure with financing packages, companies face the challenge of balancing income and expenses in different currencies and renegotiating billion-dollar debts with lessors.
Faced with this threatening cumulus nimbus, Azul, Gol and Latam struggle to balance their operations amid a combination of factors that include rising fuel and aircraft leasing costs, which are linked to the dollar, while they have revenues in reais. The impact of the devaluation of the Brazilian currency, in addition to logistical and operational problems, puts even more pressure on the sector.
Recently, the risk rating agencies Fitch and Moody’s downgraded Azul’s ratings, highlighting the company’s difficulty in accessing new financing to improve its cash flow.
Gol and Latam are also experiencing operational challenges, although with different consequences.
• Latam, for example, managed to renegotiate its debts after going through a judicial recovery process in the United States, Chapter 11. Latam also brought good news to its investors last Tuesday (1), by announcing a debt securities with guarantees on the international market worth US$1.4 billion, at an annual interest rate of 7.9%, maturing in 2030, which generated demand of more than five times the value of supply . With this refinancing, the group will reduce its debt cost to a significantly lower interest rate than the current one, generating annual savings of US$83 million in lower interest payments.
•Gol is still in the middle of this process, with the expectation of exiting judicial recovery by the end of this year, while seeking to renegotiate contracts with lessors to ensure the continuity of operations.
To Hayson Silva, analyst at Nova Futura Investimentosthis situation creates a financial “snowball”, as companies need to renew their fleets, but face a compromised supply chain and difficulty in rolling over debt. “Airlines have a high demand for flights, but are unable to keep up with the expansion of the sector due to the lack of aircraft on the market”, commented Silva.
Furthermore, the global adjustment in the aircraft manufacturing sector, forced by the pandemic and the problems faced by Boeing, directly affects the companies’ ability to increase their operations. “Today there is a deficiency in the supply of aircraft, which generates a dispute between competitors for new units and worsens financing conditions and debt rollover”adds the expert. The lack of planes and the need to renegotiate leasing contracts have put pressure on companies’ cash flow, which, in addition to dealing with the devaluation of the real, need to deal with the rise in the price of aviation fuel, influenced by Brent, another factor outside of control.
Latam managed to refinance and lengthen part of the debt, which will generate savings of US$83 million per year with lower interest payments
Second Ilan Arbetman, analyst at Ativa Investimentosthe situation is delicate, but there is still alternatives for Azul besides judicial recoverysuch as renegotiating contracts with creditors. “The main point today is negotiation with creditors. Much of airline debt comes from aircraft leasing. Before embarking on judicial recovery, there is always the possibility of bilateral negotiation with these partners”explained Arbetman.
Gol saw its shares fall 86% in 2024. The company negotiates with creditors to improve its financial conditions. In the second quarter of this year, the company recorded a loss and a 5% drop in net revenue compared to the same period last year, impacted by the floods in Rio Grande do Sul and non-recurring costs related to Chapter 11. Still, the company managed to renegotiate leasing contracts with AerCapone of your main aircraft suppliers, which can help alleviate some of your financial obligations.
Faced with this scenario, the federal government approved a package of R$5 billion in credit for the airline sector, to be distributed through the FNAC (National Civil Aviation Fund).
• The measure, sanctioned by President Lula, aims to expand credit to airlines, allowing them to finance the purchase of aircraft and other investments.
• Furthermore, the government authorized the use of these resources to subsidize the purchase of aviation kerosene on routes in the Legal Amazon, a region that heavily depends on air transport for mobility and access to services.
• However, experts agree that, despite being positive, this aid package does not solve all of the companies’ problems.
“This aid does not solve all problems, but it contributes to the companies’ cash flow”says Arbetman. The analyst also highlights that Azul has made efforts to avoid judicial recovery, opting for bilateral negotiations whenever possible.
For the BTG Pactualwhich closely monitors the airline situation, the market is paying attention to the evolution of these variables, especially in the case of Azul, which saw the grace period for converting its debt expire and is now looking for alternatives to avoid greater pressure on its cash. According to analysts, airlines have faced a real “tug of war” between the high demand for flights and the limitations imposed by the lack of aircraft and the increase in operating costs.
While Azul and Gol struggle to reorganize, Latam, which emerged from the judicial recovery process, shows a more comfortable position, with a 7% increase in the value of its shares in 2024. All in search of brigadeiro heaven.
Boeing remains in turmoil
In Boeing’s flight plan, the sky becomes increasingly cloudy. The aviation giant, which had long been facing a series of operational challenges, now finds itself facing an even more delicate scenario. THE workers strikewhich began in September, directly affects the company’s production capacity. It is estimated that, for each day of shutdown, Boeing is losing up to US$150 million. With the 737 Max production haltedthe loss already totals US$ 1.8 billion. This impact occurs at a time when the company is trying to rebalance its cash to avoid credit downgrades. In the organizational field, the change of command also adds a layer of complexity. Kelly Ortberg, the new CEOtook office amid the strike and has already been forced to take drastic measures, such as placing executives on temporary leave to contain expenses.
Meanwhile, the company’s public image, already weakened by safety problems with the 737 Max, continues to suffer. Public support for the strike intensifies the company’s reputation problems, which, in addition to dealing with financial losses, sees its ability to deliver aircraft damaged. This reverberates globally, impacting the supply chain and airlines awaiting deliveries. On the stock market, the reflection of this turbulence is clear. The Chicago company’s shares are down around 40% throughout 2024, and analysts disagree on its future. Goldman Sachs, despite having reduced its target price from US$232 to US$202, still maintains a “buy” recommendation.
“Despite current obstacles such as the strike and rising costs, Boeing continues to have strong long-term recovery potential”evaluates the analyst Noah Poponak. On the other hand, Wells Fargo takes a more pessimistic view. Matthew Akers downgraded the recommendation to “sell”, adjusting the price target to $119. “The duration of the strike, combined with financial and operational pressures, places the company in a delicate position, and the risks are not fully priced”he explained. The opinions reflect the division in the market regarding Boeing’s ability to overcome current challenges.
The uncertain scenario largely depends on union negotiations and the resumption of production without costs increasing further. Finally, the crisis of confidence. Formerly American pride, the manufacturer finds itself in the midst of a crisis of confidence after repeated accidents with the 737 MAX model, with two crashes and a door ejected mid-flight, due to a failure in the quality control system. Kayak, an airline ticket search website, has already noticed an increase in searches for flights in the US that are not Boeing planes – a previously non-existent issue.
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