Brazil’s Azul Files For Chapter 11 Bankruptcy Protection, With A Twist

At the start of the pandemic, we saw several airlines file for bankruptcy protection, given the unprecedented challenges the industry faced. This was especially true in Latin America, where we’ve seen the four biggest airlines — Aeromexico, Avianca, GOL, and LATAM — all file for bankruptcy protection.

You can now add another airline to the list, as Brazil’s Azul has just filed for Chapter 11 bankruptcy protection in the United States.

Azul files for Chapter 11, continuing to operate as usual

Azul has voluntarily filed for Chapter 11 bankruptcy in the United States, a legal process that will allow the airline to financially restructure under the supervision of a federal court, all while continuing to operate as normal. In the past several months, the airline has tried to restructure its (mostly pandemic-era) debt, with no luck.

Azul’s restructuring deal includes a commitment of $1.6 billion in financing, while eliminating $2 billion in debt. It also includes a further commitment of up to $950 million in equity financing upon emergence from Chapter 11.

Azul states that it has entered into agreements with its biggest financing stakeholders, including existing bondholders, and aircraft lessor AerCap. On top of that, strategic partners United Airlines and American Airlines are also supporting the restructuring (more on that in a bit).

With this process, we’ll see Azul reduce lease obligations and optimize its fleet, to emerge with greater flexibility and a more sustainable business and capital structure. Exact details of that remain to be seen. Keep in mind that Azul was founded by David Neeleman, the serial airline entrepreneur who is also behind JetBlue, Breeze, WestJet, etc.

Here’s how Azul CEO John Rodgerson describes this development:

“Azul continues to fly – today, tomorrow, and into the future. These Agreements mark a significant step forward in the transformation of our business – one that enables us to emerge as an industry leader in the main aspects of our business. With a collaborative approach and the support of our stakeholders, we have made a strategic decision to pursue a voluntary financial restructuring as a proactive move to optimize our capital structure – which was burdened by the COVID-19 pandemic, macroeconomic headwinds, and aviation supply chain issues. Our strategy is not just about financial reorganization. By using this process, we believe that we are creating a robust, resilient, industry-leading airline – one that Customers will continue to love flying, at which Crewmembers will continue to love working, and that will create value for our stakeholders.”

The American & United angle here is interesting

It’s worth understanding that while Azul hasn’t exactly been ultra profitable historically, one of the carrier’s biggest challenges has been settling its pandemic-era debt. As much as US airlines like to accuse some foreign airlines of being unfairly subsidized, the reality is that the US airline industry received the most financial support of anywhere in the world.

There’s a reason so many Latin American airlines have had to restructure, and it’s because they haven’t had as good of a setup for dealing with their debt. The industry isn’t exactly very profitable under the best of circumstances, let alone when there are sustained losses.

I think what’s so interesting about this Chapter 11 announcement is that both American and United are supporting the restructuring. For what it’s worth, United has historically partnered with Azul (rather loosely, given the lack of overlap in their networks), while American hasn’t. Instead, American has partnered with GOL, and even owns a stake in the airline.

So, what’s going on here? Keep in mind that in recent months, there was talk of Azul and GOL merging, to form a Brazilian mega-airline. American Vice Chair and Chief Strategy Officer has released the following statement regarding this announcement, which hints at closer cooperation:

“We are confident that Azul’s plan to strengthen its future will be extremely positive for the Brazilian aviation market and travelers to, from and across Brazil. American has served Latin America since 1942 and is proud to fly to 14 destinations in South America. Our service, including that of our partners GOL and JetSMART, combined with the strength and breadth of Azul’s network, will provide our customers another unique option for traveling between the Americas and even more connectivity in Brazil and throughout South America. We are excited to support this process and to be part of Azul’s future.”

“GOL remains a key partner to American. We are proud to have created the largest joint frequent flyer program in the Americas with the combination of American’s AAdvantage and GOL’s SMILES loyalty programs. Together, American and GOL offer customers access to 230 destinations in the United States served by American and more than 75 destinations in South America served by GOL. Through the strength of our partnership, our most loyal members enjoy a seamless experience with increased reciprocal benefits when traveling on the broadest and most rewarding network in the Americas. We are excited about the future of our partnership.”

It’s going to be very interesting to see how this all plays out. It sounds like American wants to partner more closely with Azul in the long run, but so does United. So we’ll put this in the “watch this space” category for now…

Bottom line

Brazilian airline Azul has filed for bankruptcy protection, as the airline hopes to eliminate around $2 billion in debt, all while getting fresh funding and renegotiating some lease obligations.

For passengers, it should be business as usual. When it comes to the long term strategy, there are more questions than answers as of now, especially when it comes to talk of the fleet being optimized, plus partnerships with both American and United.

What do you make of Azul filing for Chapter 11 bankruptcy protection?