Aug 12, 2018
Executives
Andrea Bottcher - IR Manager David Neeleman - Chairman John Rodgerson - Chief Executive Officer Alex Malfitani - Chief Financial Officer Abhi Shah - Chief Revenue Officer
Analysts
Savanthi Syth - Raymond James Renata Faber - Itaú Dan McKenzie - Buckingham Research Victor Mizusaki - Bradesco Bruno Amorim - Goldman Sachs
Operator
Hello, everyone, and welcome to Azul's Second Quarter 2018 Results Conference Call. My name is Roberta, and I will be your operator for today.
This event is being recorded. And all participants will be in a listen-only mode until we conduct a question-and-answer session following the company's presentation.
[Operator Instructions] I would like to turn the presentation over to Andrea Bottcher, Investor Relations Manager. Please go ahead.
Andrea Bottcher
Thank you, Roberta, and welcome all to Azul's second quarter earnings call. The results that we announced this morning, the audio of this call and the slides that we'll reference are available on our IR Web site.
Presenting today will be David Neeleman, Azul's Founder and Chairman; and John Rodgerson, CEO, Alex Malfitani, our CFO, and Abhi Shah, our Chief Revenue Officer, are also here for the Q&A session. Before I turn the call over to David, I'd like to caution you regarding our forward-looking statements.
Any matters discussed today that are not historical facts, particularly comments regarding the company's future plans, objectives and expected performance, constitute forward-looking statements. These statements are based on a range of assumptions that the company believes are reasonable but are subject to uncertainties and risks that are discussed in detail in our CVM and SEC filings.
Also during the course of this call, we'll discuss non-IFRS performance measures, which should not be considered in isolation and are discussed in detail in our earnings release. With that, I'll turn the call over to David.
David?
David Neeleman
Thanks Andrea. Welcome everyone and thanks for joining us for our second quarter earnings call.
As always, I would like to start by thanking our crew members who work hard every day to provide our customers with the best travel experience in the industry. I'm extremely pleased to report that we continue to run the best airline operation in Brazil.
We remain the most on-time airline and have recently received several awards a testament to the excellence of our customer service. For a eighth time in a row, we were awarded by SkyTracks the best range of airline in South America.
And also the best airline staff in the region. We are also recognized by consumer.gov for having the highest standard of customer satisfaction and the fewest customer complaints.
Each time I fly Azul I get more excited. I'm sorry.
I get more excited about the enthusiasm of our crew members, the quality of the service which I think bodes really well for our future growth opportunities. As you know, we are going through a free transformation process by adding Rodger Jets next generation aircraft.
With our extremely fuel efficient and have a low trip cost that is also the best way to come back fuel and currency headwinds we saw in the second quarter. This is why we recently announced an additional order of 21 E2s increasing our total firm orders for this type of aircraft to 51.
With the need to replace all of our current E1 aircraft, this order guarantees that Azul have a newest most fuel efficient free in the industry. With the lowest CASK and the lowest trip cost, which is an unbeatable combination.
As you know, our A320neo's have 56 extra seats compared to the E1s with the similar trip cost contributing to a fast reduction of 29%. The E2 story is very similar.
It has a lower cost of ownership, less fuel burn, lower maintenance cost and an increased revenue potential from 18 additional seats. This result in a cost reduction of approximately 26%, these results in a cost reduction of approximately 26%.
More over the E2 has a trip cost that is 14% lower than the E1, so we are basically getting more seats for free and paying much less for each flight, which is astonishing because the cost and revenue benefits of the E2 over the E1 are so significant, it makes total sense to aggressively remove the E1s from our fleet earlier than planned. I have set an ambitious plan goal for our team to have this position of the free transformation completed by the end of 2021.
We are working hard on it and we will share more details with you soon. This is absolutely possible because the E1 to E2 transformation process is significantly easier for Azul as they have the same type of [indiscernible], so pilots can fly both the aircrafts at the same time, which is quite impressive.
Our first E2 schedule to arrive in June of next year, when we will start seeing this margin expansion benefit from this fleet type. In summary, we continue to focus on our margin expansion plan as we have communicated the market, we are well on our way to building to a better company to our crew members and our customers and our shareholders.
With that, I will pass the time to John, who will give you more details on the second quarter results.
John Rodgerson
Thanks, David, and hello, everyone. I also want to start up by thanking our crew members for all their hard work during the past quarter.
As you can see on Slide 5, our adjusted EBITDA increased 11% in the second quarter and we recorded an adjusted net income of R$238 million, a record for the second quarter. Our operating results were impacted by the 20% increase in fuel and the 12% depreciation of the real.
Excluding special items related to the sale of six E-Jets and the truckers strike, operating margin totaled 3.7% compared to 5.8% a year ago. We grew capacity by almost 19% in the second quarter, while also expanding our top-line by 20.5% and our RASK by 1.6% on an adjusted basis.
Even with the 20% increase in fuel and the 12% devaluation of the real, total CASK increased only 3.9%. CASK x-fuel was basically flat and our exchange rate neural basis would have fallen 5.1% a strong indicator that our fleet transformation strategy is working as expected.
As David mentioned at the beginning of the call, our decision to replace all the planes with more fuel efficient aircraft makes even more sense in the current environment. A320neo has represented 24% of our total capacity in the second quarter and will account for 30% by the end of the year.
The E2 is coming next year will help us accelerate the fleet transformation even further. Moving on to Slide 6, you can see that fuel and currency had a negative impact of approximately R$160 million in our second quarter operating results, which represents almost 8 margin points.
Thanks to our margin expansion strategy and ability of Abhi and his team to recapture revenue. We recorded a recurring operating margin of 3.7%, recovering six of the nearly 8 margin points.
We offset 85% of the fuel and currency headwinds during the [Technical Difficulty] quarter, our RASK adjusted for this increase rose 8.1% year-over-year. Our network advantage allowed us to grow capacity by 19%, while increasing our average fares by 16% at the same time maintaining a stable load factor.
Once again, we increased capacity, yield and RASK at the same time. This shows how much we needed the larger aircraft in our network.
Moving on to Slide 8, our loyalty program, TudoAzul, maintained a strong growth pace for the second quarter, reaching almost ten million members. Gross billings, ex-Azul, went up 38% year-over-year, with the majority of this increase coming from TudoAzul Club and our banking partners, further increasing our share of the Brazilian loyalty market.
We now have 18% gross billings share, up 14% just one year ago, still well below our fair share of the market. Unlike other airlines in Brazil, TudoAzul is wholly-owned by the company, this means that we have no tax inefficiency and benefit 100% from the cash flow generated by this high-growth, high-margin business.
On the right-hand side of the slide, you can see the cargo business is also performing extremely well. Revenue increased 64% year-over-year, mostly driven by the larger cargo compartment of the A320neo and the growth of our international capacity.
We have started to deploy dedicated cargo planes next quarter. Clearly, our cargo team earned the right to get these planes into our network.
Moving on to the balance sheet on Slide 9, I'm proud to report that we ended the quarter with a solid liquidity position of R$3.8 billion. representing 45% of last 12 months revenues even with a 12% depreciation in the real, we ended the quarter with leverage F4 compared to 4.5 in the second quarter of 2017.
We use the industry standard of adjusted net debt to EBITDAR, which capitalizes all of our leases at 7x and includes all of our debt. This result reflects our decision to hedge 100% of the principal on the interest payment R$400 million [Technical Difficulty] denominated bond issued in 2017, by our checking ourselves against currency risk.
At the end of the second quarter, this currency swap was recorded a net asset of R$210 million under the long-term derivative financial regiment. Alex, our CFO deserves all those credits for this test.
Our low FX exposure is reflecting on Slide 10, only 32% of our balance sheet denominated in U.S. dollars and virtually all of the working capital is denominated in local currency.
Additionally, as you can see on the right side of the slide, we continue to be long dollar, our assets denominated in foreign currency mainly our cash, deposits and maintenance reserve abroad and our investment in TAP surpass our dollar denominated liability and that's excluding aircraft engine and spare parts, which are not stated to be a strange rate every quarter, but also price dollars. For this reason and time to weakening currency, these are not nearly have impacted as our competition.
This reaffirms our position at the airline with the strongest balance sheet in Brazil. Moving on to Slide 11, the moving currency and fuel represents an increase in cost of R$800 million and R$900 million in 2018 representing a swing of up to 9 margin points.
However, as you know we had a multiyear margin expansion plan, also we continue to cause the demand environment back for the strength of our unique network as you saw in our July traffic reviews. We are confident that we can offset most of these headwinds as a result of projecting an operating margin of 9% to 11% for 2018, which will impact of non-recurring events.
We also think it's prudent to revise our catastrophe growth range to 16% to 18% down slightly from 17% to 20% by making adjustments in both our domestic and international networks. We continue to replace older generation aircraft with A320neo, which David mentioned our key to combat rising fuel prices and the weakening of the real.
As a result, we expect cash x-fuel to decrease between 1% and 3% year-over-year even with the devalued currency. Our [indiscernible] having 5 point margin expansion to 15% from the time we run public has not changed.
Before the devaluation of real, we are ahead of schedule. But, we are still on track and feel confident that the pillars of our margin expansion plan are working just as expected.
With that, we'll turn the call over to the operator for Q&A.
Operator
[Operator Instructions] Our first question comes from Savanthi Syth with Raymond James.
Savanthi Syth
Hey good morning. I just wanted to follow-up on the kind of the revenue environment which seems strong and I was wondering if you can talk about, I think it was really strong before the truck driver strike and maybe a couple of weeks after a strong, but then it kind of weakened.
And just curious what you're seeing today clearly had a good recovery and fuel in the quarter and just wondering your thoughts on how that's continuing and if you could give a little bit more clarity. Any color on domestic or national that would be great.
Thank you.
Abhi Shah
Hey, Savanthi. It's Abhi here.
So, yes, you're right. I mean I think we started the second quarter in April with a strong demand environment combined together with really good fare and capacity discipline.
Of course that was interrupted by the strike and then the World Cup. But we've seen a good recovery after the end of the World Cup, July recovered nicely in the last two to three weeks there.
And we've had a very, very strong start to August. So I feel good about the demand environment that I'm seeing.
Fare discipline is also very strong. And I said this before I think the capacity environment and the fare environment are the best that I have ever seen basically.
And so I think that's really setting the industry up nicely for the second part of the year. So I do like that, it was strong, we had a good domestic and international performance as well.
Domestically corporate and agency demand is what's driving most of the soft in year-over-year horizon. And I expect that to continue.
When we had the strike and the World Cup, we thought of expected that there would be some repressed demand. We've seen that in the previous World Cup as well.
So I feel like that that is coming back nicely online now for the second half of the year, which is seasonally the best start of the year. So, I feel good about domestic coming back strong, driven mostly by corporate by agencies and by closing demand.
On the international side, it's steady as you could see on our traffic really probably the one soft spot is Argentina where luckily for us we have low exposure two to three daily flights at most and so that we're pretty well hedged against that. Europe is doing well and the U.S.
is study. Nevertheless, we have made some capacity adjustments for international for the second part of the year between August and November, our national capacity is down 12%.
Just to be prudent given the currency and the fuel situation, but overall I feel good about it and I think domestically this is really going to come back strong second half of the year backed by good fare and capacity discipline.
Savanthi Syth
That's helpful. And if I may follow-up on the domestic you are kind of moderating growth as well just any cover on the type of market that you are marketing in that growth?
Abhi Shah
Yes. We are also between, August and November.
We're going to cut our domestic by 5% basically for the entire period overall we are cutting 7% of capacity which takes our guidance -- we really are expecting the capacity for the year from something very close to 20 to something very close to 17 for the whole year. It's a mix of domestic international.
Domestically, it's the markets that are obviously not doing well on a P&L basis number one. Things are not that are in and out of our hearts still in any market that over fly their hub or under fly their hub, it's probably the first to go.
So markets primarily outside our hub and internationally for example we're cutting the day time for lot of flights to keep the nighttime flight only and reducing some frequencies in northeast Florida. So it's anything that's sort of not core to our hub strategy is what we're cutting.
Unidentified Analyst
Hey, guys, it's actually Matt on for Mike. How are you?
You mentioned that your investment capacity discipline in the Brazilian domestic market was the best you've seen in a decade. It's still the case any rational or aggressive actions on the capacity of pricing front domestically?
Abhi Shah
No, I feel good about capacity to be honest. I think that I talked about this before, it's really been a structural change I think in how airlines in Brazil are allocating capacity.
We're not seeing airlines go after each other. We're not seeing them chase each other in markets that frankly they should not be in, but they don't have any chance of making money.
I think airlines are focusing where they are strong and where they can make that network stronger. We're certainly doing that with A320s and you can see in our traffic.
We are quoting them in our network. We are seeing great traffic growth, connectivity growth, and I think we set an example to the market, how they allocate the capacity well.
It makes yourself better and I'm seeing that across the board in airlines really playing where they are strong. So, I think that's a very, very positive sign for the industry.
And I think the structural change from what we had a couple of years ago. Pricing is well I think that whether it's fares or ancillary, taking advantage of the opportunities, showing discipline in the market and really looking forward to taking advantage of the good demand that we usually have in the second half of the year.
John Rodgerson
And just a highlight, if we take a look we're actually down in departures in the first half of the year minus 2%. So it's really the up gating, it's the fleet transformation, it's getting these new assets that have more seats, utilizing them 14 hours a day, reducing our capacity with the right type of growth that you would want in our existing market that has been stimulated and once again, continues to increase capacity and expanding RACK.
And that's really a powerful combination because of what we're going to see on the cost side.
Unidentified Analyst
Great. This is a follow-up, what kind of impact are you seeing if any from the upcoming Brazilian election on either business or leisure traffic in Q3, anything you can quantify or?
Abhi Shah
Yes. As I said before demand right now is strong.
I would say that's a little bit early to see the effect of the elections, it's going to be towards the end of September and mostly in October. I think we'll know more when we get closer.
It is a distraction clearly. But, at the same time I think we also have some repressed demand from the strike and the World Cup.
So right now, we're seeing good trends and I think because so much of that is corporate that tends to be closer, we've got a much better idea, as you get closer to October.
Unidentified Analyst
Thanks guys.
Operator
The next question comes from Renata Faber with Itaú.
Renata Faber
Hi. Thanks everyone for the call and congratulations on the results.
Thank you, Abhi for taking about this economics of the E2, talking about [indiscernible] first time you talk about that and there was plenty of interesting information on what was said. So, I'm sorry to ask you a related question, could you please just talk again about how the E2 will have improved margin?
John Rodgerson
Thank you very much. I will take that question, it's a real passion of mine.
And I think, I got E2 right now. I'm really excited about it.
This math is really pretty simple. It's not difficult.
We got a lot of our E2, E1's during crisis times, during '07 and later and we didn't have the credit that we do have today. And so we ended up paying a lot for these pretty easy ones particularly on salaries, tax and financing.
So now we have a whole different situation with the company and so what we've bought, we have the E2s and the financing is less the plane is at a very attractive place. And so the first category is, we have a lower cost on the airplane by a significant amount.
So that's number one. Then number two, these new E2s have new generation engine time.
And the fuel burn savings is, there its absolute the fuel test is going on to take 13%, 14%. So that's absolute that's it.
Then we move to maintenance, we have -- for the engine maintenance that we do currently. So that's a big portion of the maintenance cost.
The few check intervals are longer than we have this period of working kind of maintenance honeymoon that goes on for up to 5 years. So, our maintenance cost could be significantly lower, permanently not just in the first five years.
And then, we've got 18 additional seats. And so with the high low buckets we have, we assume that we sell half of those seats and have a price and come up with a number.
We add all that together. And we time it, probably just magically be able to snap our fingers today and say that's all of our 63 new ones were E2s.
And we had those fine today, we believe that difference in margin is a discounting number, it's 9% difference margin.
Renata Faber
Nine margin points.
John Rodgerson
Nine margin points over where we are today. Now obviously things can change as far as fuel price and that kind of stuff.
But, I think today apples-to-apples, what that F1 will be our cost as far as and what we have today with 9 margin parts. And that gives us a tremendous amount of flexibility and cushion, obviously, even if there was 5 margin points that we are able to low there, still more traffic.
For fuel spikes up, we got the most efficient plane in the industry. The reality is we can -- we have to find the cost is a lot less money.
So we're spending less money on maintenance. I wish the dollars are denominated.
So that's why I push the team, if it's impairment, so what we have to do, we have been working with Embraer to speed up the production that have been coming sooner and that's why we set this target, have all of the E1s gone by the end of 2021. And so you'll start to see that benefit next year as the planes start arriving in June.
So we are more excited. That's how we have been driving this crazy.
I told them, I haven't sold the people's share stock, why would I, not see that coming so, I'm very excited about it.
David Neeleman
So have to work and try to accelerate this. It is a very exciting thing especially kind of given the additional fee to lower fuel burn and we've got great price from Embraer.
So we're very, very excited about that.
John Rodgerson
It's amazing what they have in June, in spite of all cost on E1 really. It's remarkable with these things we are going to focus on.
So when we kind of get out the assets and then we got the neo coming to on top of that. So, it's very exciting.
Renata Faber
Okay. Thank you.
Operator
The next question comes from Dan McKenzie with Buckingham Research.
Dan McKenzie
Hey good morning. Thanks guys.
Corporate Business is good. Wondering if you can talk a little bit more about the leisure side of the business.
So on the one hand, it's seasonally slowest time of the year for leisure traffic. On the other, we've had some pretty sharp swings in foreign exchange, surely that impacted that part of the business.
So I guess the question really is two-fold here. First to what extent was leisure demand impacted by moves from foreign exchange to the extent that you can peel that out?
And then, secondly how long does it typically take for pent up demand to typically return?
Abhi Shah
Hey Dan. It's Abhi here.
So overall Azul historically has been pretty small in the leisure market and the reason must have been -- we have not had the right airplane to really have a big business in that market. We're starting to now with A320neo.
We have 15 neos today, by the fourth quarter would be 30% of our capacity will be A320neo. So what's happening with the neos two-fold.
We're putting the neos in our network really connecting our hubs, so compliant us to SEC, for example, Salvador a little bit, so we're able to enter some leisure markets like Port Eliza, where historically we have very, very low presence. We're obviously seeing a very good market reaction to that.
We're seeing unit revenue reductions much less than what we had talked about on the IPO road show in the sub-10% compared to what gas reduction of 29. And so a part of this is leisure demand, we are able to access that type of demand that we didn't have before.
We're able to stimulate local demand out of our hubs whether it's competing us [indiscernible]. And we are able to drive a lot more connectivity in our network.
Give you an example, when we put in all A320s between [indiscernible], we had an increase of 77% of connecting traffic because it's not just the leisure that's using this airplane and these routes. We have 50 destinations on one side and 40 on the other.
Their route of [VPP HCC] [ph] has 500 different own lease that flow over that route. The route [VPP Belarus] [ph] 800 different ONGs.
So their leisure demand that's helping us with this airplane, but it's also the date of our network the breadth we have and the platform that's really strong. So I would say that because we have so much connectivity, I think we're seeing good results with A320 with some local stimulated leisure demand.
We are also driving incredible connectivity through our network. Does that make sense?
Dan McKenzie
Yes. Understood.
And I guess just to follow up on that Abhi. What's the biggest leading indicator for leisure demand, is it simply commodity prices or is it some other measure of employment or work commercial activity as you just -- I know it's kind of a smaller part of your business, but as you think about turning on this part of the business, what are the leading sort of indicators that you look at?
John Rodgerson
Hi, Dan. This is John.
The exchange rate the value quite a bit. But, the mood in Brazil was actually very positive.
I mean if you go back to 2015/16, when the impeachment was going on and people were fearful of their jobs and that's not the case right now. I mean there's good underlying demand.
People are traveling, companies are hiring. The fear was in 2015/16 is I'm not going to have my job tomorrow.
So leisure really dried up and corporate also dried up. It's a completely different feeling that we're seeing right now in the country.
There is just a different volume, now of course, the exchange rate puts pressure on from international flying sort of Disney World and things like that. But it's not nearly what it was before and it's actually good underlying demand in the country.
Alex Malfitani
Hi, Dan. This is Alex.
We look at business confidence and consumer confidence, I think those are good indicators of underlying demand. The trend in unemployment I think is important.
Unemployment is we believe still high but it's trending down slowly. And I think that helps consumer confidence a very different story for you to decide to take your family to Florida.
If you think you're going to lose your job, but if you're feeling pretty confident that you're going to keep your job and you are going to have a decent level of income, it's cheaper to fly to Florida actually now and spend your vacation there and to sometimes spend vacation down here. And it's also cheaper to buy whatever you want to buy in the U.S., an iPhone user, have a few call.
But I have never bought an iPhone in Brazil. And for me to buy an iPhone in Brazil, the exchange rate, that goes to 7.
And that exchange go 7, doesn't make sense for you to buy an iPhone in Brazil. You buy it U.S.
Just flying through U.S. and buying your iPhone there, you pay for the price of the ticket.
So now that -- I think it's more expensive to go to Disney World with an exchange of 380 than 320. But if you are feeling confident about your prospects, no, I don't think that's actually your decision.
Dan McKenzie
That's great perspective. Thanks guys.
Operator
The next question comes from Victor Mizusaki with Bradesco.
Victor Mizusaki
Hi. I have a few questions.
The first one mutual [indiscernible] correct me, if I'm wrong, additional or [indiscernible] E2? And the second question with regards to your guidance, wanting to go look on your organic forecast x-fuel for the full year, you talk about a range of [1% to 3%] [ph], but year-to-date it's like 3.6%.
So, big reduction in second half, this is just a matter of introduction of A320 or anything else here?
Alex Malfitani
Hi, Victor. It's Alex here.
I wouldn't call it risk evolution because as David mentioned the replacement of A320 is very positive. There may be an accounting effect from selling aircraft for different cost from where it's carried in our bookstore.
But, the six ones that we sold with actually generally the cash because the market value of the aircraft is higher than the book value that we ha outstanding. So generating cash and then it's going to generate all the benefit in additional revenue and reduces cost that David explained.
So we're going to continue to look for opportunities to so we move on from the fleet and accelerate the entry of E2s and neos and if there is a book impact to the other deal, we call it out as we did this time. But like I said, it should definitely be a very beneficial, very accretive decision in terms of P&L.
John Rodgerson
And we understand the faster we get there, the more competitive we are and the margins go up significantly. And so that's why David kind of going crazy in Brazil this week, move fast, move fast, move fast, because he understands that the quicker that we can replace.
David mentioned but I want to highlight here, we're paying for some of the sins of the past which is being a start up airline in Brazil during the financial crisis, flying E1 and that wasn't really liquid asset. And that would naturally all going to go away over the next three to four year period.
But, David just saying, hey, let's bring it to the last guy. We will turn faster.
David Neeleman
Now on cash drivers, it's really, -- new E2 -- new neos that are coming in the second half, but also the run rate of the neos that we took before. So, like we said, we have 14% of ESK is coming next generation air craft in 2017.
And we're going to have 27% this year but in Q4, it will be closer to 30%. So you have all of the third of our capacity come from next generation aircraft in Q4, which has a much lower cost than what we used to have in the past.
So that's already going to see the reduction in time that already happened. You talked about the total CASK reduction they would have had adjusting for FX, so the FX kind of clouds the benefit that we are getting from the neos.
But, once you adjust with that, you definitely see a huge reduction in cash from the next generation air craft
Victor Mizusaki
Okay. Thank you.
John Rodgerson
Thanks Victor.
Operator
The next question comes from Bruno Amorim with Goldman Sachs.
Bruno Amorim
Hi, good afternoon. I have just a very quick question on the price of jet fuel WTI it's like 40% additional FX depreciated by 12% and using fuel price of -- just few per liter rose by just 20% in the quarter.
So, just wanted to understand try to explain these fuel price was impacted by fuel hedges and what you expect going forward in the scenario of stable oil price and FX, hedge and currency in place remain less. Thank you.
David Neeleman
Sure. Yes.
It's a number of different factors kind of all at the same time, so we do have some direct hedges with Petrobras. Now are we essentially predetermined the price of fuel that we're going to pay ahead of time.
And when we buy that fuel, pretty -- it's on agreed price when we have it. You saw in our statistical release, the mix of international flying is going up significantly.
There's no ICMS on international flying. So that mix shifts more fuel consumption to fuel price per liter that doesn't have the ICMS burden.
So that affects the blended price as well. We have begun additional flying in states where the state offers ICMS benefits if you fly additional cities, so must of that -- the recent example of a small city where we started flying and that benefits not just the fuel consumption in that city but everything they buy in the whole state, so that helps as well.
So there's a little bit of lag on the pre-WTI and the Petrobras price as well. So it's a number of small that could account for the difference that you saw.
Bruno Amorim
That's clear. Thanks very much.
Operator
The next question comes from Savanthi Syth with Raymond James. Hello Savanthi.
Your line is open.
Savanthi Syth
Thank you. Sorry about that.
Thanks for the follow up question. I actually have two, on the fuel hedges following up on the previous one.
Are you -- given that your locking prices are you able to give some color to what your fuel price looks like for at least third quarter or the remainder of the year?
Alex Malfitani
The most of the hedges that we have now will affect below the line their financial hedges. So essentially you can consider that the price of the hedge that we have is -- the price at the end of Q2.
That's what you're seeing here in our financials and any fluctuation beyond that will affect the numbers based on that mark-to-market that we did at the end of Q2. For the next 12 months, we have about 15% of our capacity hedge, which is half of the maximum that [indiscernible] can hedge.
So if you want -- if you are interested, know we sort of where we did the hedging position, that would be kind of equivalent to about 205, 210 in oil, but, at the end of Q2 that all those mark-to-market.
Savanthi Syth
That's helpful. Thank you.
And then if I might --any update on the cargo TV and the timing and rollout of that?
David Neeleman
Yes. So we filed with the antitrust authorities about 10 days ago and since we are progressing well it should be a 90 to 120 day process.
So we're anxious to hear back from them. So we're still very excited about that as you can see your cargo continues to outperform even to Azul and even of these great revenue performance.
So obviously, kind of lagging in the earnings.
Savanthi Syth
And then, just one last question on the cost side. The cost guidance given the amount of pressure that you're seeing was actually quite impressive and I was just wondering, I know this year was supposed to be still high training costs related to pilots.
Where are you finding the savings, is it mostly driven by local currency savings or just curious as to where you find the savings to kind of keep that cost guidance at such a level.
John Rodgerson
Hi, Savanthi. The first quarter when we saw currency devalue and fuel grew up we kind of gathered around as a senior leadership team and started initiatives that changed the business.
So we got 44 different projects across the board that our senior directors are managing to take half at the organization and tend to improve the operational performance. And so that's a big reason why we're feeling very confident.
I mean times like this when you do have spikes in fuel you start to do new things that maybe weren't on the table before and so we're working aggressively at those and try to roll it out and to give more detail overall on the third and first quarter.
Alex Malfitani
We've talked about -- with a lot of it is the ramp up of neo capacity and the change initiatives that I mentioned. And then, I think once you account for -- we are talking about the 29% reduction in cap under neo.
There's just so much efficiency both from the fact that it burns a lot less fuel. But one thing that is unique about Azul, yes, a lot of companies will go through change in fleet, either going from old generation jet to new generation jets, but they're always going to get the full benefit.
We're getting the full benefits and we're getting the planes because we've built a network over time. I was actually asking for this side of America.
So we couldn't get started Azul. We're large 10 years ago but now with the open network that have enough feed and enough traffic that can fill neos, and so we're going to get the double benefit into fuel burn and more economies of scale.
John Rodgerson
And as David mentioned, the miracle was closely built, what we built with the air craft we had. And so now that the new generation is coming out, A320neos, there's so much leverage on the business because of the aircraft that we had previously.
Savanthi Syth
That's helpful Thank you.
Operator
The next question comes from [indiscernible] Citi.
Unidentified Analyst
Hi. Thanks for taking my question.
I have just quick question from inside, the first one, can you tell us more about the potential problem upside that could come from [indiscernible] fully confirmation on earnings. Thank you.
That's my Second question.
John Rodgerson
I think we talked about this on previous call. There is a logistics problem in Brazil.
And today's group serves 100 cities domestically we have 7 to 8 international cities. And we have 200 stores spread all throughout the country.
And the Brazilian post office says quite a bit of airfreight. Anywhere from $60 million to $100 million a year in airfreight, and we believe that our joint venture could give them a significant reduction from what they have today.
And those have that -- have that mail fly in the belly of our aircraft. And so I think the big difference in Brazil is that today all of that mail is palletized.
And so it needs specific aircraft type. But that's not how it's done in Europe or the U.S.
And so the fact that we own estimate that space in the belly of our aircraft. And so if we think about we've grown our cargo business faster than we thought was possible.
And when you add in the partnership with the Brazilian post office and bringing in that incremental revenue that they provide in the end, we're in 200 physical stores and they have 1000s of physical stores throughout the entire country. And so it's not like -- it is in the United States you don't send packages via Amazon to your doorstep and so having physical pick up locations is key.
And so the opportunity that we're looking at is to provide a huge logistics solution for the country and that's why I remind everybody, it's not in our guidance and this is outside of this location. So we're excited about the future here and I think as you not only provide a logistics solution to the Brazilian post office you're providing a logistic solution for many other e-commerce players in Brazil and that's where a lot of the growth in our business is coming.
David Neeleman
[indiscernible] fantastic. Even if it doesn't, our network it can provide that our customers and people like Amazon and others that was in the deck.
The other people that need it, were just -- the Brazil was pretty challenged. And no one is in a better position to help that in Azul.
Unidentified Analyst
Thanks. And my second question.
David Neeleman
Yes. Go ahead.
John Rodgerson
I think she said, we didn't hear. What was your second question?
Unidentified Analyst
Okay. My last question is, we have many comments about [indiscernible] ?
John Rodgerson
Yes. Norwegian, it looks like, it's just going to fly from London to Brazil.
It's not surprising they go to Buenos Aires, in flight Singapore. They fly to New York.
So not really surprised and it didn't really affect us that much in anyways, international is out for them and that's it.
Unidentified Analyst
Okay, great. Thank you.
That's my question.
David Neeleman
Yes. So, we have a question on webcast, I will just reiterate here, so, the question is regarding the joint venture, and progress on that, of course, yesterday [indiscernible] announced they are in talks with United and Avianca on a Latin American, U.S.
joint venture. I can’t comment on their joint venture but regarding with Azul and United, as we said, the four -- now, that open skies 8x, we are absolutely talking towards a U.S.-Brazil, joint venture.
These things takes time to negotiate. We are in the process and they take even longer to get approved actually.
And it looks like the DOP right now has a pretty full docket, but nevertheless, there are opportunities for the consumer for our joint business. So we're actively talking to them regarding a U.S.
for joint venture with Azul and United.
John Rodgerson
And this was always in the plan. When United made their investment in the fuel before open skies has approved.
We knew that this was a possibility. And so we kind of -- we go up that in the contract that we have with them.
And United's been a fantastic partner of ours. We love the fact that they bought a portion of the H&A shares a few months ago which was their confidence in our business as we move forward and shows the upside that they believe in Azul.
Operator
[Operator Instructions] Ladies and gentlemen, this concludes today's question-and-answer session. I'd like to inform David Neeleman provide a closing statement.
Please go ahead sir.
David Neeleman
We would like to thank everybody for joining us today. And as always, do you have any follow-up questions, we're available.
We'll be doing calls all afternoon and certainly call with Andrea and we are glad to... [Call Finishes Abruptly]