Nov 10, 2019
Operator
Hello everyone and welcome to Azul's Third Quarter 2019 Results Conference Call. My name is Beatriz 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 proceed.
Andrea Bottcher
Thank you Beatriz and welcome all to Azul's third quarter earnings call. The results that we announced this morning, the audio of this call, and the slides that we reference are available on our IR website.
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 would 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 that are subject to uncertainties and risks that are discussed in detail in our CVM and SEC filings.
Also during the course of the call, we will discuss non-IFRS performance measures which should not be considered in isolation. With that, I'll turn the call over to David.
David?
David Neeleman
Thanks Andrea and welcome everyone and thanks for joining us on our third quarter 2019 earnings call. As always, I'd like to start by congratulating our crew members and thanking them for another great quarter, we certainly couldn't do without them.
Based to their efforts, we continue to deliver on our IPO promise of expanding margins. What we didn't highlight enough at the time of the IPO is that in addition to expanding margins, we have also increased revenue by more than 70% since the time of the IPO.
This year alone, revenue should increase by more than 25% compared to last year. So, the combination of expanding margins -- and growing revenue base has led to an EBITDA to more than double since our IPO in 2016.
That's incredible. And like I always said we always thought we would expand margins.
I guess we forgot to say that in part we were going to grow as well. So, the bottom-line is really growing.
More importantly, we have demonstrated our ability to grow while maintaining our operational excellence and great customer service. This quarter for the third year in a row readers of Melhores Destinos, one of Brazil's largest travel site selected Azul as the best airline in the country and TudoAzul as the best loyalty program, a true testament to our commitment to customer satisfaction.
We're also proud to be ranked number one in all categories by Reclame AQUI, a customer satisfaction website including Best Airline, Best Loyalty, Program, and Best Travel Package program. What I'm most excited about this quarter was the delivery of our very first E2.
We've been talking about that for a while. The first one is finally here.
We have another 50-plus on order to be delivered over the next few years. The E2s have -- as we've been telling you have a lower trip cost that is 14% lower than the E1s, we're actually getting better fuel performance than even we've anticipated and it comes with 18 additional seats.
So, lower trip costs, 18 additional seats. So, that's nirvana for the airline business.
It also gives us flexibility to connect dots that have never been connected before in Brazil. These are long thin routes that like I said have never been plumbed before just tons of flexibility.
We can also add additional frequencies in our business markets, a very exciting airplane. By the end of 2020, we should have 76 next-generation aircraft in our fleet including 320neos and the E2s representing 61% of our ASKs.
As we have been telling the market, with the addition of the E2s and the 320neos, we will continue to reduce unit costs while producing more revenue per aircraft. As you can see on Slide 4, we still have a long way to go in our margin expansion story.
The best news is that we are less than halfway completed. As I just mentioned, we have just started switching E1s with E2s in October and we have roughly 500 flights a day to replace.
We're also thrilled with the growth of our business units Azul Cargo, TudoAzul both which grew more than 40% in the quarter. On Slide 5, you will see that -- our latest network.
We now have -- we have like 114 destinations, incredible and have more than 900 daily flights. I've asked Abhi when we're going to hit that 1,000 flight.
And he guarantees me it's coming up in the not-too-distant future. In Q3, we also started flying the air bridge between São Paulo and Rio with 14 daily frequencies.
This is the fourth largest market in the world and the largest in the Americas in terms of passengers. We are very pleased with the results we are seeing on this route.
In summary, we continue to deliver on our promise of expanding margins while growing our topline by double-digits. Our network is as strong as it has ever been and could be -- and I couldn't be more excited about the opportunities that lie ahead of us as we continue to benefit from our fleet transformation.
I'm certain that it will create great value for our shareholders crew members and customers. And with John -- with that I'll turn the time over to John to give you more details on the quarter.
John Rodgerson
Thanks David. I also want to thank our crew members for all their hard work during the past quarter.
Thanks to them we continue to deliver great results. As you could see on Slide 6, we grew our topline revenue by 25% to over BRL3 billion in the quarter and also expanding EBIT margin to 18.5%.
EBITDA reached a record $936 million up 24% year-over-year. RASK on a stage-length adjusted basis increased 1.7%, while CASK decreased 1.5%.
Excluding the impact of the end of the payroll tax relief program, CASK would have fallen 4%. We had net income of BRL441 million, up 57% year-over-year if you remove the non-cash impact of currency variation.
Moving on to Slide 7, our cargo business maintained a strong growth with revenue increasing 42% year-over-year, benefiting from the expansion of our network and fleet. In August, we signed a commercial agreement with Mercado Libre, Latin America's largest e-commerce player becoming their exclusive direct provider of air shipment for e-commerce in Brazil.
Through this partnership, Mercado Libre will have the fastest shipping times of any e-commerce player, reaching more than 3,700 municipalities nationwide with the support of our extensive network. E-commerce represented almost 20% of Azul Cargo revenue in 3Q 2019, up from 9% in the same period last year.
In addition to the growth in e-commerce, we're also growing our corporate customer base reaching a domestic cargo market share of 22% the second highest in Brazil. TudoAzul also had a great performance during the quarter with gross billings ex-Azul increasing 40% year-over-year.
This is Tudoazul's fourth consecutive year with over 30% growth. And as David highlighted, it is once again elected the Best Loyalty program in Brazil.
Congratulations to the entire TudoAzul team for their great work. Moving on to Slide 8, I'm proud to report that we ended the quarter with a strong liquidity position, representing 41% over last 12 months revenue and this is while growing revenue by 25% year-over-year.
Our balance sheet is further protected against currency fluctuations through our assets such as our security deposits and maintenance reserves, totaling BRL1.6 billion. These are not included in our cash balance.
On the right side of the slide, we show an evolution of our leverage which reached 3.3 in July. With the new accounting standard when a new aircraft arrives we immediately see an increase in debt reflecting the full term of the lease without the benefit of the EBITDA these aircraft will produce.
Adjusting for these five aircraft that we added during the quarter, our leverage would have been three. We expect this timing effect to level off as these aircraft become fully productive.
On Slide 9, you can see that in addition to the improvement of our operating results and solid balance sheet our operating cash flow was almost BRL1 billion and we generated free cash flow of BRL187 million in the quarter. Moving on to Slide 9, we wanted to highlight the significant investments we're making in our future, adding new aircraft, hiring pilots, and flight attendants.
We added 14 aircraft year-to-date including five planes in the third quarter. In Q4, we expect to add 12 next-generation aircrafts.
We also elected to convert some of our prior A320 orders to A321s allowing us to further up-gauge our fleet in a margin-accretive way. Next week, we will receive our first A321neo and we plan to receive a total of 12 by 2022.
As you know we've been actively marketing the E1s to accelerate our transition into an all next-generation fleet. We sold one E1 in the third quarter and also sold one in the fourth quarter.
We're happy to share with you that we've recently signed an MOU with an airline for the sublease of up to 32 E1s over the next few years. The 195 -- the E195 served their purpose at Azul, but once new technology came out, it's important we transition as quickly as possible.
Consistent with our aircraft sales the sublease will most likely result in a non-cash one-time book loss in the fourth quarter. We will finalize the exact amount over the coming weeks and we'll update you as soon as the number's final.
Also consistent with the aircraft sales, given the great economics of the next-generation aircraft, this transaction is cash positive and margin accretive. We also invested in the construction of a new hangar, one of the largest and most modern in Latin America.
The facility accommodates up to eight A320neos or two A330s and will help reduce our maintenance cost, as we'll be in-sourcing all of our narrow-body C checks. We're also excited with our investment in TAP, as it continues to make progress on its own fleet transformation plan.
The recent consolidation events in Europe further reinforce the value of our investment, given TAP's strategic location and leadership position in traffic between Brazil and Europe. In addition today, we've submitted for shareholders' approval a proposal for our commercial joint venture with TAP, which we believe will be revenue accretive for both carriers in the coming years.
Wrapping up on slide 12, we present our updated 2019 outlook. We expect our capacity to grow approximately 20% in 2019 and we remain confident on the expected operating margin for the year of around 18%.
In summary, we are building the best airline for our crew members, customers and shareholders. This is a multi-year margin expansion story.
I'm excited with what the company will look like one-year from now, three years from now and even five years from now, as we continue to build and invest in the best airline in the world. Just keep in mind; we still have 500 daily flights being flown by E1.
Finally, I would like to thank our shareholders for their continued support. We will work to keep your confidence and expect to continue making progress on growing our business profitably.
With that, David, myself and Abhi and Alex are here to answer any of your questions. Let me turn it over to the operator.
Operator
Ladies and Gentlemen, thank you. We will now begin the question-and-answer session.
[Operator Instructions] Our first question comes from Savi Syth, Raymond James.
Savi Syth
Hey, good afternoon. The capacity for 2019 coming at the kind of towards the lower end.
I was kind of curious if that's the function of aircraft timing? Or if you're kind of just reacting to the environment and with the -- it seems to kind of imply maybe a bit of a moderation in the fourth quarter.
So should 4Q kind of RASM be at a similar level to what you're seeing in 3Q? Thanks.
John Rodgerson
Hey, Savi. I'll answer the first part and then pass it over to Abhi.
Airbus, as well as Embraer, has experienced some delivery delays, from what they originally gave to us. And so that's primarily the difference in capacity as we look in the fourth quarter.
Airbus has not yet caught up. And even Embraer has been delayed a bit on some deliveries.
So that's really what the difference is from what we had previously forecasted.
Abhi Shah
Hey, Savi. Abhi here.
Yes. So it was -- we had the deliveries that John talked about.
We also have a couple of Embraers starting to exit the fleet for the exit process and that's happening in 4Q. And so, it's mostly fleet related some exits, two aircraft exiting the fleet to begin the exit process and the new airplanes coming in with the dates sliding around.
There also is a minor impact with the timing of the November holiday, the holiday's on a Wednesday and so we've kind of made adjustments around that, but it's mostly fleet stuff in terms of the -- why the ASK guidance has come down to the lower end. In terms of unit revenues for 4Q, yes, I mean, I expect them to be close to zero again.
Now keep in mind, we have two very, very strong effects when it comes to year-over-year RASK. The first one is, you're a very high base from last year.
Last year every month, August, September, October, November were all record months for Azul in terms of our RASK. And so we have a very high base that we're trying to get even higher this year.
And we have the impact of the aircraft mix that we talked about at Azul Day, just the fact that our A320s now represent so much more of our network than they did last year. They have give up about 100% in capacity year-over-year.
They're obviously -- they fly double the stage length and they're 50% bigger. And this effect is not really included in the stage length adjustments.
So the fact that they fly much longer, they're much bigger, on absolute terms they have a lower RASK. And the effect of -- the mathematical effect of the aircraft mix is a 7 to 8 point system-wide RASK impact.
And so, I think, in 4Q we'll be again RASK very close to zero as well. But in actuality, we're actually up seven to eight points, because we're making up for the effect of the aircraft mix.
So, hopefully, that answers the question.
Savi Syth
That make sense and helpful. So just given the neo E1 announcement, any color on how we should think about growth next year?
Is that still pretty consistent? Or should we think about kind of slower or faster growth next year?
Abhi Shah
Yes. I think you can expect growth for next year very consistent to what you have this year.
It's going to bias more towards the E2s. Obviously, this year was more towards the E1s.
And because the E1s are primarily in our network, in our hubs, in our corporate markets, the swapping out of the E1 to E2 is going to be focused in our networks in our largest corporate markets where we have 9, 10, 11 flights a day out of Campinas, out of Belo Horizonte, CNF and VCP. So the focus next year is going to be E2s.
The ASK number is going to be similar to what you have -- what we have this year and it's going to be just focused on swapping E1s for E2s.
Operator
Our next question comes from Mike Linenberg, Deutsche Bank.
Mike Linenberg
Hey. Just a few housekeeping questions and then a bigger picture question.
The 321neos, how many seats are they going to have?
Abhi Shah
Hey, Mike. Abhi here.
321s have 214, 2-1-4.
Mike Linenberg
Okay. 2-1-4.
Okay, great. And that's also going to include your sort of extra room upfront type product that you have on the...
Abhi Shah
Yes.
Mike Linenberg
Okay, great.
Abhi Shah
Yes. It's a domestic A321 with extra legroom upfront.
Mike Linenberg
Okay, great. And then just a quick second here.
I saw that you were reporting earnings per ADR. And I know in the past, I think it was per ADS.
Was there -- did you have any sort of like a legal change on the share structure? I realize this is kind of minor.
Alex Malfitani
No. we use those interchangeably ADRs and ADSs.
No difference.
Mike Linenberg
Okay, great. And then, Alex, actually since you answered that a quick question just on the accounting, the difference between your reported loss and then you had kind of net income as adjusted, you added back the foreign currency exchange hit.
Are there any tax implications though as a result of adding that back? Is that just a straight add back?
Or should we assume -- apply some sort of tax rate to getting to like a true after tax number? Maybe it's not even applicable, you wouldn't even apply taxes to that.
Alex Malfitani
Yes. No, it's pretty -- it's a pretty straight add-back of sort of the impact of FX to our DAR dominated debt, which isn't real debt, as you know that these days, Mike, it's mainly the capitalized leases right.
So unfortunately with IFRS 16 the volatility to earnings with FX are going to increase, because all of those lease cash flows get capitalized on a balance sheet and they get translated to reais every quarter down the quarter end FX. So it's bit -- but they don't -- when you calculate taxable income, that FX volatility does not apply, right.
So for taxable income, the revenue service already kind of disregards the FX volatility. And so, you don't need to worry about tax impact when you add it back to net income.
Mike Linenberg
Okay, great. That's helpful.
And then, just lastly, maybe this is more of a question to David. You referenced recent consolidation in Europe and we now have another marker out there for a carrier, which in this case, it is a carrier that had a decent presence between Latin America and Europe.
And yet, when I look at the numbers, I believe, TAP is actually a larger carrier, maybe a point or two of share larger than Air Europa. Just thoughts about that transaction?
And kind of how it -- sort of how you think about it vis-à-vis TAP?
David Neeleman
Absolutely. I think, Air Europa is maybe a bit stronger in the rest of Latin America and TAP's really strong in Brazil.
I think if you were to take what we have scheduled for next year between, say, JV between TAP and Azul, I think there's like 100 weekly departures going to Europe from Brazil, which is far and away the largest carrier. I think we have about 30% of all of the passengers that fly between Brazil and Europe which is quite amazing.
Nobody even comes close to that, including Air Europa if you even add them to IAG. So no it's -- I think, it's great.
I mean, I think, Air Europa has sales of BRL2.1 billion. That's what I read.
And I think TAP this year is going to be close to BRL3.5 billion. So we're significantly bigger.
The price that was paid -- that's not equivalent maybe the debt is a little bit different or something. But it's certainly -- it was encouraging for us.
So we thought it was a great transaction. And interesting the antitrust implications of that with both the carriers being in Madrid, but obviously we feel confident that that's going to be approved.
So it certainly opens up -- makes our investment more valuable, no doubt about it. We're pretty excited about it.
Mike Linenberg
Yes. No absolutely.
It's great to see another marker in the marketplace. Anyway, good job this quarter everyone.
Thank you.
John Rodgerson
Thanks, Mike.
David Neeleman
And just to remind everybody that, if you were to take the shares of Azul the convertible and all that it's about 48% TAP. So it's a significant amount by far away the largest shareholders.
So that's -- so when you talk about those numbers, you can take about half of that and that's what is Azul is value in TAP shares.
Operator
Our next question comes from Dan McKenzie, Buckingham Research.
Dan McKenzie
Thanks. A few questions here.
Abhi, I'm wondering if you can talk about the velocity demand that you've seen over the past couple of months. And what I'm getting is we've had some pretty big developments in Brazil including the passage of pension reform.
And it seems the privatization of the state-owned companies has picked up here. And I'm just wondering what does that all mean for Azul?
Are you seeing a more confident consumer or a less confident consumer? I'm just wondering how that all filters down to Azul?
Abhi Shah
Hey, Dan. Yes.
I mean we felt pretty good about demand. Obviously, we reported our October traffic yesterday, it was very strong, strong internationally and very, very strong domestically.
I think the industry is feeling pretty good about it overall, combining that with good capacity discipline -- discipline as well. You're not seeing too many strange things or aggressive things on the corporate discounts and the private fares and all those kinds of gains.
So yes, I think that the corporate demand has been good the second half of the year. We're expecting now to have -- October was pretty good.
October last year had elections. So we actually had a good comp as well for October.
In November, we have a very difficult comp, but November has started out well also. So certainly, I think on the domestic front, we're seeing strong numbers.
And I think the numbers you will see from our friends in the domestic market are going to be good as well. So certainly reasons to be optimistic here on the domestic side.
John Rodgerson
And Dan, just to highlight, this pension reforms a big deal for Brazil and the states will be included soon. And one thing that we saw as you saw Brazilians going to the street asking for pension reform that's unheard of in Latin America and people pushing for it.
I think there's a newfound optimism in the country. I think the economic team and the ministers that are in place right now are doing all the right things for Brazil.
And Brazil is headed very much in the right direction. The fact that we're seeing this demand in our flights being full and able to add this capacity before Brazil takes off, right.
I mean we believe that Brazil will start to grow again over the next couple of years and we're really poised to take advantage of that growth.
Abhi Shah
Yes. And just to reiterate Dan, I mean this was our second best ever third quarter RASK in the history of Azul.
And we just missed it by 0.5%. So on by far our largest ever ASKs.
And so that gives an idea of kind of the demand is there for this capacity.
Dan McKenzie
Yes, yes. And then just to follow-up here on the cost side.
Alex, I'm wondering if you can just clarify the pressure, the FX pressure that that put on CASK field. So if we could just look at cost or CASK excluding fuel on an FX-neutral basis what would that have looked like in the third quarter?
Alex Malfitani
So that's the -- it was a unique quarter Dan in which the average FX rate was fairly flat year-over-year. But the final FX rate, the end of quarter FX rate was pretty big year-over-year and also quarter-over-quarter, right?
For operating expense, the average FX rate is more of a good indicator as to how our expenses are affected by FX. And so year-over-year, I don't think FX is as big of either a headwind or a tailwind for operating expense.
There was some help from oil prices, right. So fuel prices in dollars were down and that helped.
But even if you adjust for FX, which was -- which didn't have a lot of effect fuel and the payroll tax, we did see a decrease in CASK. So what we call normalized CASK normalized for these kind of out of our control factors, our CASK would have gone down by about 1.5 point, right which is just the natural result that you would expect from our upgauging, right.
The fact that we're bringing in aircraft that has essentially the same trip cost or lower trip cost, but a lot more seats right which naturally reduce CASK, right. So I think this quarter we didn't talk too much about the normalized CASK because the normalized CASK which we always point to try to control for all these macro factors, it was pretty similar to the accounting CASK, right.
So 1%, 1.5% reduction I think that tells the story of what's happening with our operating expense.
Dan McKenzie
That's right. And if I could just squeeze in one last one here the 500 departures with the E1s, it would be helpful to know what percent of the revenue were the flying that is because I mean the way to think about that obviously is you got a chunk of revenue.
I don't know if that's 20%, 10% or 30% where you're going to see margins improve. But I think if you can help size the part of that margin improvement story that would be helpful.
Anything you can share there?
Abhi Shah
Yes, Dan. I'll get back to you on the exact number, but these departures are in our hubs.
So, in Viracopos, for example, we fly 11 times a day to Curitiba or 10 times to Porto Alegre and things like that. In Belo Horizonte, [indiscernible].
And so a lot of big corporate markets that have higher-than-average yields, higher-than-average RASKs. And so it would be a higher-than-average for sure revenue representation than just what the ASKs are.
So because these are our highest yielding corporate markets with the high frequencies. So I'll give you the exact number, but it will be a higher representation in terms of revenue than it is in terms of our ASKs.
So it's going to be very significant when it comes down to our bottom line.
Alex Malfitani
Yes. But again just the debt side, its not just the revenue side, obviously just talked about revenue, it's the CASK side.
So if you take 500 flights and you take 15% or so off of that cost on all those 500 flights that's really significant. And then you add the revenue on top of that because you have 18 more seats.
We've got some numbers internally that are pretty high popping and obviously most of the new are quite significantly on our margins and that's why we're expediting the E1s as quickly as possible and taking delivery of the E2s as quickly as possible as we've been talking about for a few quarters now, but now we're actually doing it.
Dan McKenzie
Understood. Thanks for the time.
Alex Malfitani
Thank you, Dan.
Operator
Our next question comes from Andressa Varotto, UBS.
Andressa Varotto
Hi. Thank you very much for taking my question.
I would like to understand better the depreciation decrease quarter-over-quarter. We saw that depreciation decreased at around 5% quarter-over-quarter.
But at the same time, we have seen increases in T&E and the rent payments. So if you could provide some color on that would be very helpful.
And I just have second question regarding the competition outlook within Europe especially after the start of operations of Passaredo and market. That is from my end.
Thank you.
Alex Malfitani
Great. I'll start with the depreciation and Abhi will take the regional routes.
Yes, so depreciation as you can see obviously went up year-over-year, some of it from the fleet transformation, but more of it from maintenance. The truth is it got to take a while for our new aircraft to really start impacting depreciation significantly.
The way IFRS 16 works, you're taking the present value of all the payments that you're going to have over the course of 12 years or 144 months. You're calculating the present value of that, using our discount rate which is fairly higher than the history rate.
So that gets you a smaller number and they divide that by 144. There you can do the math and you'll see that each aircraft gets added, it doesn't really impact depreciation all that much.
It impacts debt more significantly because the debt takes the full brunt of the present value. And also it affects leverage as we always talked about because you get the leverage, you get the debt impact on the leverage, but you don't get the EBITDA generation yet, right.
That would come overtime. Now so you shouldn't expect that huge growth quarter-over-quarter.
Certainly, not as we're seeing in the growth of ASKs for example. Because like I said, it takes a while for these new aircraft to start impacting depreciation.
Also this year what we did is because we had a change on IFRS about these new aircrafts coming in we were -- we made a small change to the timing of when we recognize -- when we start recognizing as depreciation of a new aircraft. That change was all within the year of 2019.
So that's why you're seeing Q2 higher than Q3 because we then changed the policy in Q3. So what it really means is Q1 was a little bit higher than with this new policy Q2 a little bit higher than with this new policy and then we reversed that in Q3.
And that's why you see the reduction in Q3 versus Q2. That is all -- when you look at the full year number it's all consistent.
Abhi Shah
And regarding the question about the regional routes. Yes we have operators just starting some regional routes out of Congonhas.
So in terms of our direct overlap with them we still have very little direct overlap with them. I believe maybe one or two routes total.
We're not seeing any impact from their flights in our numbers. It represents a very small percentage of our network.
And so it's not something that it's a big impact that we are seeing not something that we are noticing on a daily basis. We are watching it and but in terms of the impact we're not seeing anything significant to report or to notice.
John Rodgerson
I just want to put in perspective, I think TAP Azul has five to six ATRs and MAPI [ph] had two to three ATRs. You're talking about in total seven to nine ATRs and a lot of them they dedicated the Congonhas airport to fly the new schedule.
Exit a lot of route that MAPI was flying in Amazonas and when you fly in Congonhas it's important to keep the schedule there. And a lot of the market that they fly are local markets that we don't compete with them on like for example Congonhas [indiscernible] but I think they direct competition with LATAM on that route but we don't fly it.
And so very, very small airline overall even after combining the two airlines it's very small. So it's pretty insignificant in what we're seeing.
And I think keep in mind we're taking 12 aircraft in the fourth quarter that are 3x the size of their largest aircraft. And so it's pretty small relative to the business that we have.
Andressa Varotto
That’s very helpful. Thank you very much.
Operator
Our next question is from Stephen Trent Citi.
Brian Roberts
Yes, hi, it's actually Brian Roberts on for Steve Trent. If we could go back to your stake in TAP through the converts is it fair to say that Azul can monetize this holding if approached by strategic suitor or TAP or beside the IPO?
John Rodgerson
Of course, that’s what we known at. I mean, we own it, its an investment and we think it's certainly it completely increases in value.
As we mentioned, as John mentioned, TAP's undergoing the same kind of fleet transformation that we're doing here. They're replacing the 330 -- 230neos.
They have 15 that they've done this year though actually for the year 75% are their new generation airplanes on the widebody fleet. And then they're starting their narrowbody, they start to find the 321 LR, which is used to be called long, 321 stood for a long range but we changed it to medium range because it kind of works best when together from Europe until the XLR comes along.
So we start to fling that to Berlin and start flying it to Washington to the off season which seemed extension on margins with those airplanes, so things are looking great for TAP. And so we’re trying our investment there.
And we also set strategic value of having this joint venture that we announced today, there was a full widebody yesterday. So the ability to kind of there's going to be each centers used between buffers being able to coordinate schedules and coordinate fares and do all those things.
But also it's an investment. And if we -- some of the investment there or purchased that we certainly have upside for all of that because of our ownership stake.
David Neeleman
Yes. And I think it's important that having the commercial agreement and the joint venture in place means that we can monetize the asset and still have all the strategic value associated with it.
And so that's why the sequencing is happening at phase. And so it's very important for us to get the commercial joint venture in place before we talk about what will be the alternatives for liquidity that you addressed.
Brian Roberts
And then if we could just switch gears. Given your partnership with MELI is it possible that you might see other partnerships with other e-commerce companies like Amazon et cetera?
Thank you.
John Rodgerson
We're not naming Amazon or any of the other players right now. But we are significantly investing in our logistics network in Brazil, right.
And so we continue to invest a lot of our management time focused on it and I think you'll hear a lot about this over the coming year or so. So we're very excited.
It's a new phase in Brazil. And the fact that we can deliver packages in 3700 municipalities in the country it's very powerful.
Our network is our greatest strength and we're going to leverage that as much as we can in e-commerce.
Brian Roberts
Great. Thank you.
Operator
Our next question comes from Josh Milberg Morgan Stanley.
Josh Milberg
Good afternoon, everyone and thanks for the call. You guys have already covered a lot of ground today but I wanted to ask about the issue of hidden assets that Alex had touched on at your Investor Day and just the potential for prepaid maintenance expenses to go down longer term.
I think it's maybe not too surprising to see that line on your balance sheet. It was up this quarter but I was just hoping you could give a little more perspective on how it could evolve in the next two years or how we might project that upside?
Thanks.
John Rodgerson
I think the way to project that Dan -- Josh is I think our fleet plan is probably a good proxy because the payment of maintenance reserves is by and large a phenomenon from our old E1 leases, right. And that's why we're confident that they will go down over time because as E1 leave and they will leave just a matter of time we will see that line going down.
Now we are -- the reason why it might go up or down but until then it's more a question of the maintenance events that E1s will go through or not, right. In some quarters where we have a lot of maintenance then we kind of dip in to that balance to pay for the maintenance events.
And then if there's a quarter where there's not a lot of E1 events that we make the payments for the main reserves that go together with the lease payments but the drawdown. I think the way you – really, we haven't had a lot of E1s leaving but we're very excited about the recent progress that we made with E1s because we sold one in Q3, we sold one in Q4.
We have the MOU to start accelerating their exit and that's when you're going to see that balance start to come down. The other thing that drives that balance FX right.
We not only to hear the math in terms of prepaid cash that hasn't even left the company but that balance is all in dollars. And so as the currency fluctuates you will see that balance going up and down as well.
David Neeleman
It's like one of the benefits you get with the sub-leasing with these 32 E1 is that delivered conditions now transfer to the new lessee right. And so that's one of the benefits that you have is that they use the aircraft for the remaining term of the lease they're responsible for that portion of the return piece.
Josh Milberg
Okay. Very clear response.
Thank you very much.
Operator
Our next question is from Pablo Monsivais Barclays.
Pablo Monsivais
Hello. Hi, guys.
Congrats on the results. I have one follow up question.
Can you please share with us what is putting some pressure on unit revenues in the third quarter? And for the fourth quarter of 2019 you're discussing lower margin guidance despite better unit cost performance is there anything incremental here that we should be aware of?
Thanks.
Abhi Shah
Pablo, Abhi here. Yes as I kind of talked about during the call there were sort of two effects that are putting pressure on RASK on a year-over-year basis.
One is the higher base from last year. We had a record months almost every month last year second half of the year including September, October, November.
But the biggest effect that we're having is the effect of the aircraft mix. The A320s are flying double the average age and they're 50% bigger.
So in an absolute basis that aircraft had a lower absolute RASK than the other aircrafts. If you look at our RASK for each and every equipment type, they all actually went up year-over-year.
Our A320s went up in capacity to 100% and our RASK was up more than 5% on the A320s. But however, because they have a lower absolute number as they become a larger and larger percentage in terms of ASK weighting in the network that brings down the overall RASK of the airline.
And so, that's why we're looking at 3Q and 4Q RASK of close to zero. Close to zero actually mean that we are recovering seven to eight points of RASK.
That's a headwind due to the aircraft mix. So, as you think revenues doing very well, we're able to implement the capacity and the demand there.
As I said, this is our second best ever third quarter in the history of Azul with by far the most ASks in the history of Azul. So, the revenue environment is strong, which is having the effects in terms of year-over-year RASK due to the strong base last year and the effect of the aircraft mix.
John Rodgerson
And I also think we never promised to forever increase RASK. In fact, these new generation aircraft can allow us to reduce RASK over the coming years and expand margins.
I mean that's the whole key of bringing in an aircraft that has unit costs that are 25% and 29% lower than our actual aircraft. It's really going to strengthen the network as we move forward.
And so, the fact that the market was able to accept all the capacity that we put into it and to have RASK up 1.7% on a stage length adjusted basis I think, is a strength for the network that we have.
Pablo Monsivais
Of course. Perfect.
Thank you very much.
Operator
[Operator Instructions] Our next question comes from Lucas Barbosa, Morgan Stanley.
Lucas Barbosa
Good afternoon, everyone. Thanks for taking my question.
So my question is on the A321neos. Can you walk us through the strategy for these aircrafts?
I can imagine they will be allocating the highest density routes in the domestic market. But any color you can give from where they will be allocated will help a lot?
Also, if you could give any color on how their unit cost compared to the A320neos that would be great. Thanks very much.
Abhi Shah
Hey, Lucas. Yeah.
So in terms of the where to put these aircraft, I'm obviously very excited to have this airplane into our network. One of the unique benefit that we have in our network as we have hub in São Paulo in Campinas.
We have a hub in Belo Horizonte. We have a hub in Recife.
All of which are very meaningfully sized hubs; Recife approaching 80 departures a day. Belo Horizonte approaching 100 departures a day to 45 destinations, and of course Campinas with 160 departures a day.
So, just connecting the hubs to each other is going to be the first mission of the A321 and this not only helps the economics of those routes, but it helps the economics of all of the other routes that connect. So we're able to drive a lot more connectivity with each and one of those flights than we were before.
Similar to what we did with the E1 to the 320, we can now do with the 320 to the A321. So the first job is just to connect the hubs to each other.
And then of course we have our focus cities like Cuiabá, like Belem, like Curitiba, like Porto Alegre that they themselves have connectivity within them. So, that could -- so there's a lot of opportunity as well.
So given how broad our network is and how broad the platform is throughout the different country -- throughout the country, there's just a lot of opportunity for us with the A321. In terms of the cost economics, we're very excited.
We think that the trip cost of the A321, it's just going to be slightly higher than that of the A320 and that's with 40 additional seats. So, you're going to see additional unit cost leverage for us as we use this aircraft.
It's going to help us lower our unit costs further. And given the strength of the network and how broad the network is, I'm very confident that we can protect the revenue and actually improve revenue across the network with this airplane.
Lucas Barbosa
Okay. Thanks very much.
That makes a lot of sense.
Operator
Our next question comes from Savi Syth, Raymond James.
John Rodgerson
Savi?
Operator
Excuse me Syth, your line is open.
Savi Syth
All right. Sorry about that.
Hey. And I just had a follow-up on the MOU for the E1.
Just how quickly do you envision those aircraft leaving the fleet versus kind of the prior expectation now that you have this?
David Neeleman
Yes Savi, there is - as many as 10 next year alone in 2020. And then we have our natural lease returns as well.
And as Alex said, we've also sold one in the fourth quarter of this year. And so, it's going to be a significant transition out of the E1s.
And so as you look at 2021 to 2022, I think you're going to see almost all of our E1s exiting our fleet in that period of time.
Alex Malfitani
Yeah. And Savi, one thing that I think is good to clarify, thanks for the question is the fleet plan that we have on our institutional deck, that's our expected delivery time right?
That's not the contractual time. So the success that we've had, it may accelerate one year and -- but a lot of it is already incorporated.
So, I think like John said, there's such a big exit in 2020 that maybe we're going to kind of beat the fleet plan in 2020, but that’s already an objective of offers right? That's not the contractual delivery schedule.
It's actually what we believe we can accomplish with all the marketing effort that we're doing in order to sell our own E1s and to sublease the leased E1s.
John Rodgerson
And Embraer has the ability to pull forward our deliveries for the E2.
Alex Malfitani
For E2s.
Savi Syth
Make sense. And with the Airbus, do you expect some catch-up next year?
Or do you expect some of these delays kind of continuing into the following year?
John Rodgerson
Got to get better, right? And we've been hearing that for a while, but we expect them to get back.
I think the A321s have been a lot more delayed than the A320neos. But hopefully, we're down to a two, three month delay as opposed to six months delay is what we've seen so.
Alex Malfitani
I mean it's pretty flexible. I mean if we are able to give E1s quicker even in 2021, they can give us more E2 deliveries to speed that up even quicker.
So we're working really hard to do that not just with this MOU that with others as well.
Savi Syth
Got it. All very helpful.
Thank you.
Operator
[Operator Instructions] Ladies and gentlemen, this concludes today's question-and-answer session. I would like to invite John to proceed with his closing statements.
Please go ahead, sir.
John Rodgerson
Thanks for joining us today. We appreciate your support, and look forward to talking with you over the next couple of days, if you have further questions about our results.
Thanks everybody.
Operator
Ladies and gentlemen, that does concludes the Azul's audio conference for today. Thank you very much for your participation and have a good day.