Troubled Brazil Airlines hit with losses on currency, climate woes

Brazilian airlines, already struggling with high interest rates and volatile fuel costs, are being hit with more losses as currency woes and climate challenges test the sector’s operational resilience. 

Azul SA and Gol Linhas Aereas Inteligentes SA, two of the nation’s largest carriers, reported setbacks in the second quarter as a weakening Brazilian real and the closing of a key airport following torrential rains in country’s south dragged their earnings, quarterly reports showed this week. 

The real’s slide in particular — around 11% this year — has weighed on the carriers, which have grappled with rising fuel costs and high interest payments on their heavy debt loads. The weaker currency further raised fuel costs tied to the greenback and dollar-denominated lease payments last quarter. Catastrophic floods in May compounded the difficulties, paralyzing the state of Rio Grande do Sul’s main airport in Porto Alegre, which remains closed. 

“The exchange rate and operational disruptions in Porto Alegre affected the costs and flight supply of both Gol and Azul, leading to a negative impact on their operational performance in the quarter,” said Carolina Chimenti, an analyst at Moody’s Ratings.

Gol shares fell as much as 7.8% in Sao Paulo Thursday, the most since May, after the company reported a net loss of 3.91 billion reais ($713 million), reversing a profit seen in the same period of last year. The airline said the exchange rate variation made its gross debt swell by 2.7 billion reais, and cited the impact of a decline in passenger demand and capacity amid the closure of Porto Alegre’s Salgado Filho airport.

In its earnings report, Gol estimated that the closing of Salgado Filho was responsible for revenue losses amounting to approximately 120 million reais. The Sao Paulo based-company, which struggled during the Covid pandemic, filed for Chapter 11 bankruptcy protection in January after a dozen attempts to restructure its debt.

The closing of Porto Alegre’s airport also severely hit Azul’s earnings, which estimated that the reduction in capacity impacted second quarter results by at least 200 million reais.

“Rio Grande do Sul is the fourth largest state in Brazil in terms of economic activity and represented over 10% of our total capacity,” the airline’s chief executive officer John Rodgerson, told analysts on a conference call on Monday. “The relevance to us is equivalent to the relevance of Los Angeles for a major US airline.”

Azul’s shares plunged 12% on Monday after it reported net losses of 3.87 billion reais ($706 million) for the second quarter and boosted its net debt forecast. Shares recovered some of the slump as Brazil stocks gained, though they’re still down for the week. The carrier’s bonds are the worst performing among emerging-market corporates this quarter, according to a Bloomberg gauge. 

Rodgerson cited the real’s weakness as well as higher fuel prices seen in the quarter. On Porto Alegre, he said the airport is expected to partially reopen on Oct. 21, and Azul has already opened sales at almost 80% of its capacity pre-floods. 

“Operationally, this was probably bottom, because there was the impact from Porto Alegre. But they also need to manage their liquidity,” Moody’s Chimenti said of Azul. While the company mentioned some cost-cutting initiatives, it still has “some homework to do,” she added. 

Azul was the only one among Brazil’s trio of dominating airlines — which also includes Gol and Latam Airlines Group SA — that didn’t file for bankruptcy protection after the Covid-19 pandemic upended the travel industry. Instead, the company was able to push out maturities through a bond swap offer in June 2023.