16-Mar-2022 2:09 PM

Azul's air cargo ambitions run high after a record year

Analysis

Cargo was a major focus of Brazil's Azul Airlines before the COVID-19 pandemic, and after a record performance in its cargo business during 2021 the company is not resting on its laurels as Azul's logistics arm remains a key pillar of its strategy.

Although Azul has been involved in the transport of cargo since 2009 (one year after it launched passenger operations), the company has pushed up its investment in its cargo and logistics business during the past few years. Through its logistics arm Azul makes deliveries to 4,500 cities and has 48-hour delivery windows to 2,000 of those destinations.

Azul's chief revenue officer Abhi Shah said that he would be disappointed if Azul's fleet of Embraer freighters did not grow. He explained that the aircraft has advantages in terms of trip costs and the secondary cities it can access.

Azul believes there are opportunities to add more converted Embraer freighters to its fleet, and more broadly, to grow its cargo profile in the country significantly. The company has aspirations to model itself after a particular US cargo giant.

Summary

Azul exceeded its stated revenue targets for its cargo business in 2021.
The airline uses its whole fleet in its cargo business but aims to add more converted Embraer jets to its cargo operations.
Azul aims to keep evolving its cargo business.

Azul posts record-breaking results in cargo during 2021

In 2018 two all-cargo Boeing 737-400s joined Azul's fleet for a lease term of five years.

Similarly to the case at other airlines worldwide, cargo served as a buffer for Azul during the COVID-19 pandemic, given the investments it had made in that business before the coronavirus pandemic. Revenues in the company's logistics business beat its own targets in 2021, reaching BRL1.1 billion and exceeding Azul's stated goal of doubling its 2019 logistics revenue of BRL480.7 million.

The performance reflects overall cargo demand during the pandemic and Azul's more nuanced strategy for its cargo business in the Brazilian market.

Through its logistics arm Azul makes deliveries to 4,500 cities and has 48-hour delivery windows to 2,000 of those destinations.

Azul's cargo operations are a fleet-wide affair

Most of Azul's cargo is flown in the bellies of its passenger aircraft, but along with the two 737 freighters the airline is now operating three of its Embraer 195-E1s converted from passenger to an all-cargo configuration, Azul executives recently said.

In late 2021 Azul's chief revenue officer Abhi Shah explained that the airline uses its entire fleet to transport cargo. "We use our [Cessna] Caravans in the most remote part of Brazil." The airline also has some dedicated quick-change ATR 72-600 turboprops that it can use for cargo.

Azul Brazilian Airlines: fleet summary, as of early Mar-2022

During a recent earnings discussion Mr Shah explained that Azul's goal was to keep adding converted Embraer's to its cargo operations "as much as we can."

Mr Shah said Azul that was showcasing the new aircraft to potential customers, and "we have one large customer already flying".

In some cases, those converted jets are being deployed to new markets. "In fact, we're flying to cities that we don't even fly with our passenger networks...in the northwest of Brazil", Mr Shah said.

He said that he would be disappointed if Azul's fleet of Embraer freighters did not grow. He explained that the aircraft has advantages in terms of trip costs and the secondary cities it can access.

The airline believes there is plenty of room for growth in cargo

Back in Dec-2021 Azul calculated that approximately 40% of its customer base in the company's cargo business were new customers that had previously used ground as their primary way to do logistics, according to Mr Shah.

Another 40% was from its organic long term customers that had expanded their business with the airline, and the remaining 20% were those that had previously used a different provider in Brazil.

Some of Azul's continued growth in cargo will stem from customers shifting from road logistics, Mr Shah explained, noting that the addressable road logistics market in Brazil was BRL45 billion.

"So we just have to fish a little bit in that market every year, and that's going to drive a lot of growth going forward", he said.

Azul aims to keep evolving its cargo capabilities

During an investors' call in Feb-2022 Mr Shah was asked about the next steps for Azul in its cargo operations.

He explained that Azul wanted to keep evolving its capabilities in the sector, including "first mile, middle mile and last mile".

Mr Shah stated that Azul had no intention of buying its own ground vehicles. However, he explained: "We definitely want to have deeper relationships with our ground transport providers on all sides of the logistics chain, and so, we are looking at all opportunities", he said. But he also added, "There's nothing to announce."

Mr Shah did say: "We want to be the FedEx of Brazil", which means having closer ties with different partners.

Azul already has a network of 300 representatives around the country, said Mr Shah, "and we want to make those ties [are] even stronger so that we can have access to the capacity we need for pickups and deliveries in all geographies around the country".

Essentially, Azul wants to keep building out its logistics capability "so we can deliver to more cities even faster, and so, that's something we're going to keep looking at, and we'll do what makes sense", Mr Shah said.

Previously Azul has said that it has the capability of delivering items within 48 hours to more than 2,000 cities.

Azul's decision to bolster its cargo business is paying off

Azul determined that there were opportunities to grow its cargo business in Brazil long before the COVID-19 pandemic swept the world in 2020.

And now, as cargo demand remains robust, the groundwork the airline laid years ago is paying off and its ambitions to continue growing its cargo operations show no signs of slowing down.