Skift Take

Azul faces the obstacle of a volatile Brazilian economy. The real has fallen 13 percent over the last three months while Azul prices its aircraft and fuel in dollars. But Neeleman thinks it's time to reward investors, including himself, the airline's largest stakeholder.

David Neeleman, the airline entrepreneur who founded JetBlue Airways Corp., is betting that his initial public offering for Brazil’s Azul SA will succeed where other Latin American carriers haven’t.

After pulling the plug twice in the last 16 months, Neeleman filed again last week to sell shares in the U.S. and Brazil. It’s another chance for Neeleman and his backers who’ve been waiting for a return on their investment since 2008.

Azul is the sixth Latin American airline to announce an IPO in the past three years and the sales haven’t gone smoothly. Two Mexican airline IPOs were scrapped and three others are trading more than 20 percent below their offering price. Neeleman tried to sell shares in August 2013, then canceled the offering after the Ibovespa slumped. The process was repeated earlier this year.

“It’s not an easy time for that space,” said Eric Conrads, a money manager at ING Groep NV in New York who oversees about $500 million of Latin American stocks. “You have weak GDP growth and depreciating currencies, which affect demand.”

While Neeleman and Azul’s press office declined to discuss the IPO this week, he has said the airline is focused on rewarding its investors and isn’t being driven by a need to raise cash.

Market Conditions

“Our shareholders have been in it for over six years now and they want to be able to realize some of their investments, which I think is a fair thing,” Neeleman, 55, said in an interview at Bloomberg’s New York headquarters Sept. 11. “The reason we’re not public today is more of a market condition issue than a company condition.”

Azul said in a prospectus last week it’s raising money to expand its fleet of 128 planes currently in service, add more routes and let existing shareholders reduce their stakes in Brazil’s third-biggest airline.

Azul faces headwinds including a volatile local stock market, a stagnant economy and a tumbling local currency. The benchmark Ibovespa index has plunged 15 percent in the past three months as economists forecast 2014 growth of 0.18 percent. The real’s 13 percent slide in the period is the worst among major dollar counterparts worldwide.

Fuel Prices

That’s bad news for Barueri, Brazil-based Azul. While most of its revenue is in reais, fuel and most jets are priced in dollars.

Fuel prices at a three-year low and an aggressive expansion plan play into Neeleman’s favor.

Azul is benefiting the most from government aviation policies. It increased its share of slots at Sao Paulo’s domestic airport more than rivals and it also stands to gain from a proposed aviation subsidy because it already serves many of the eligible towns and has the right-sized planes to profitably fly there.

Neeleman is the company’s biggest shareholder, followed by the Chieppe and Caprioli families, which owned Trip Participacoes SA when it was sold to Azul in 2012. Among other shareholders are private-equity funds operated by TPG Capital and JPMorgan Chase & Co.’s Gavea Investimentos Ltda, according to the prospectus.

A press official representing TPG declined to comment on the IPO, while Gavea didn’t immediately respond to an e-mail seeking comment.

Market Share

Azul, which began by flying to small, underserved cities in Brazil, has maintained its market share at about 17 percent since buying Trip. It serves more than 100 cities in Brazil, the most of any carrier, and it added U.S. routes last week after agreeing to buy or lease $8.5 billion in small and large Airbus Group NV jets. Azul also signed a letter of intent in July to buy 30 Embraer second-generation planes.

Aggressive capacity expansion in international flights has created a supply and demand imbalance in Latin American markets, a team of Banco Itau BBA analysts led by Renato Salomone wrote in a Nov. 7 note.

“We continue to recommend that investors avoid airline stocks with high exposure to the troubled Latin American international air market until we see clearer skies,” the analysts wrote.

Mexican billionaire Miguel Aleman’s ABC Aerolineas and Grupo Viva Aerobus SAB, backed by the founders of Ryanair Holdings Plc, scrapped their stock sales on the night that shares were to be priced. Viva Aerobus withdrew its IPO in February, citing market volatility. Aleman blamed unfavorable conditions for the delay, since 2011, of a $300 million share sale in ABC Aerolineas, also known as Interjet.

Role Models

Mexican carriers Controladora Vuela Compania de Aviacion SAB and Grupo Aeromexico SAB, have both fallen more than 24 percent since debuting in 2013 and 2011, respectively. Panama City-based Avianca Holding SA, whose American depositary receipts started trading in November 2013, has since dropped 23 percent.

Neeleman may be hoping that Azul takes after some U.S. based airlines that have sold shares. Billionaire Richard Branson’s Burlingame, California-based Virgin America Inc. rose 56 percent since beginning trading last month in New York. Miramar, Florida-based Spirit Airlines Inc. has soared more than fivefold since its 2011 IPO.

“Obviously, it’s story by story,” ING’s Conrads said in a telephone interview. Azul “is a well-managed company. But the question is: ’Is it the right transaction for the moment?’”

To contact the reporters on this story: Jonathan Levin in Sao Paulo at [email protected]; Christiana Sciaudone in Sao Paulo at [email protected] To contact the editors responsible for this story: Jessica Brice at [email protected] Molly Schuetz

November 16, 2022
Dallas-Fort Worth, TX and Online
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Tags: azul, brazil, jetblue airways

Photo credit: David Neeleman (right), the founder of the Brazilian airline Azul, at the Fortune Brainstorm Green 2012 event in Laguna Niguel, California on April 17, 2012. Stuart Isett / Fortune Brainstorm Green