CAPA Live December 2021_Outlook for 2022 - Latin Americas

Transcript

Peter:

Good morning. Good afternoon. Good evening to everyone that is looking on to our latest [kapa 00:00:26] event. Thank you very much for kapa for the opportunity to showcase Latin America and the Caribbean once again. Today we have two of our regional leaders that will be part of our discussion. We have Abhi Shah, who's the Chief Revenue Officer at Azul and Marty St. George Chief Commercial Officer for LATAM Airlines Group. So gentlemen, good morning to you. Thanks very much for being on. We're going to start it off. Let's start. We have about 40 minutes and I think there's going to be a lot of interest from our viewership in terms of what's happening in our region. Both of your airlines are some of the largest most important players in our region, particularly in Brazil. But, let's just start off with pandemic. Reopening on borders.

Peter:

Things are beginning to somewhat look better in our region, but like it happened in most parts of the world. We get thrown a curve ball, and now we have a new variant in play. We're seeing new restrictions coming out. So Abhi, I'm going to start with you and simply Marty, we're beginning by alphabetical order. So, Azul with the A, so we're going in a fair way. Abhi, from your side, what you've seen in the market, tough 18 months globally, regionally, locally. We're opening, but we're now seeing a lot more restrictions because of the new variants, particularly in Brazil. How are you adapting as an airline? What are you seeing? And how confident are you with the next couple of months in your part of the woods?

Abhi:

Hey Peter, and Hey Marty, and everybody. Thanks for joining in. So yes, as you said, very, very difficult 18 months. Luckily for us in Brazil, we have a large domestic market. And that really has been the foundation for us. I think everybody in Brazil has relied on that heavily, especially this year, post second wave. So, in Brazil we had our second wave in April and we've seen a pretty good recovery domestically since then, June, July onwards. And I think we all going to have a pretty good three Q and a pretty strong fourth quarter as well. So, we're definitely happy with the somewhat robust domestic recovery in Brazil. It is a large domestic market. And most importantly, Brazil, even though we started late in the vaccinations, we've actually caught up very nicely in terms of vaccination rates.

Abhi:

We are now 75% of the population with at least one dose, and 65% of the population with at least two doses. Places like Sao Paulo, almost a 100% of the adult population is completely vaccinated. And these rates are very good. They are higher than the US, and they are higher than Europe. So that's allowed for the domestic reopening and that's freed up all of the domestic travel. Also luckily, unlike some other countries, for example, India, we do not have any different rules domestically by state. For example, which would be very challenging. So, we have one rule for the entire country, which is just coming in and out. It's definitely motivated and incentivized domestic travel, which has been our focus for the last 18 months and continues to be our focus through to next year as well.

Abhi:

The international borders, for Brazil, what's really important is Portugal, which opened up a few months ago and the US which obviously opened up in November. It's better in terms of, whether it's just an antigen test one day before, proof of vaccination. I think that's okay. People are nervous about going there and being stuck if they get COVID there, visas have expired, especially for the US. And that's going to take a long time to recover, a year or two, at least. And you have the currency. The Brazilian currency has devalued significantly in the pandemic. Most Brazilian international markets are Brazilian point of sale. It's Brazilians, either ethnic travel, friends and family travel or shopping to the US especially and purchasing power has come down. So, internationalist is going to continue to be challenging. We think for next year, you know our network is small internationally. Out of 900 flights a day, we have 3 or 4 that go internationally. To sum it up, a good recovery domestically, obviously news about variants affects the mood a little bit, but vaccination rates are good in Brazil.

Abhi:

Booster shots are also coming in nicely. So, I think domestically is going to be resilient. International is going to be challenging and our focus would be domestic.

Peter:

And Abhi, we'll talk a little bit more about Brazil in a few minutes since it is our largest market with huge opportunity in the future but also with some hurdles that as an industry we will have to overcome. Marty, from your side. You're relatively new I think. Unfortunately, you never had a honeymoon period when you left JetBlue to LATAM. As soon as you came in basically, we were swamped with the pandemic. Your transition, I imagine must have been very tough. From your perspective, an airline like LATAM, where the bulk of your traffic is international. You're based throughout the region from Brazil to Chile, to Peru, Columbia and so on.

Peter:

How difficult has it been from a commercial perspective, having to adapt to opening borders, closing borders, adapting to restrictions? We finally opened just about all the markets in our region. We are open now. Like I like to say throughout the market with these caveats of restrictions, but what are you seeing from your side? From the commercial side, are you seeing an uptake? People, are they wanting to travel? Are you seeing the numbers improve? And, these new variants, how difficult can it be for you moving forward let's say over the next six months?

Marty:

Well, first of all, Peter, thank you for the opportunity. I'll be good to talk as well. Let's start by saying, the majority of our traffic still is international... Excuse me, still is domestic, in our five home markets. And, much like Brazil, we're seeing domestic recovery to be relatively strong. Certainly, Columbia is now above where it was in 2019. Chile is relatively close. Peru unfortunately is not, but that's mostly due to sanitary restrictions and airports [inaudible 00:07:37] restrictions and it kept capacity down. A great deal in Peru. And in Ecuador, is almost back to 100%. So, domestic travel is actually pretty strong across Spanish south America, as well as in Brazil, as Abhi said earlier. The big challenge in the region for us has been regional. It's a pretty good chunk of our capacity is between the countries of south America.

Marty:

And unfortunately, that is lagging behind all the other recoveries that we've seen. And I think a big chunk of it is the combination of unclear restrictions, people who are worried about getting stuck if they get COVID or if of course there the rules change and just the overall friction in the process of travelling. If I'm just going from Peru to Ecuador, a relatively short trip, but between COVID tests and, security and double and triple checking. It could be very challenging to do shorter trips. So, that's the area that we really see the most upside. Now, I will say that, in the fourth quarter this year, we really did start seeing an uptake. We're starting to possibly cease an impact of Omicron. It's a little bit too high to say, and I think we'll know more in a couple of weeks, but I do think that it's a good reminder that the industry is still fragile really all around the world because, every week customers are looking at the climate as it is right now, respect to travel, respect to vaccines, et cetera. And, not withstanding the fact that, Chile is almost completely vaccinated.

Marty:

Like they've done an extremely good job in Chile, not withstanding the fact that people feel comfortable with the vaccination. People do still have some trepidations about taking some of those trips. Again, north America, Europe extremely strong for us right now. So, those are markets where there's a big bowel of pent-up demand. I fully expect that that bowel will end. Obviously, for anyone in this region, visiting friends and relatives market, it's a very important market for us. And, we are clearly seeing the VFR travel explode for people who have been kept from seeing their friends and relatives for a year plus. So, we're all experiencing that now, but I certainly recognise that we can't count on that continuing for too long.

Peter:

With regards as an industry, we've been calling out government system in terms of kind of putting pressure on them, on the importance of having a seamless process, transparency, global standards and in terms of how they go about implementing mandates and testing and restrictions and so on. With the new variants that are popping up, do you either, both of you have any concerns that we may be regressing again? That we will have governments that will try to impose partial requirements and Marty, from your standpoint in Chile country, we went through two cycles where the country opened up and then it regressed into harsher restrictions and to the point that we basically closed the borders.

Peter:

Would that be probably as an industry, our number one calling to governments at this point on saying, "Look, governments, we have enough science enough data. We need to learn how to live with this COVID and the variants. Aviation has been responsible, but regressing and implementing more restrictions would just be devastating to our industry. Particularly in Latin America, as we go into the summer season." Is that something that both of you would agree to in terms of our calling?

Abhi:

Absolutely. Wasn't it Japan that immediately as omicron came out, they closed the borders and they asked Yao to stop taking incoming bookings? And I think they reversed that or it didn't go through. But, obviously those kinds of sentiments are tough for an industry that's already suffered like we have, not to mention hotels, not to mention the entire ecosystem around the aviation industry. So, yeah, I'm not a scientist or a doctor or anything, but, I think that there are plenty of people who know more about this than I do, who... There has to be a more consistent way to and if you believe in vaccinations and, we do, that should be the answers consistently. So, yeah. It definitely would be very bad if we went backwards.

Peter:

One more item related to COVID and then we'll move on looking towards more positive aspects of our conversation. Cargo. Cargo during this pandemic really shifted gears and particularly converting some of our passenger aircraft into cargo aircraft. And it became a lifeline during the times that we were barely transporting any passengers. Is cargo now a permanent fixture in your airlines? Are you looking at expanding it in the future? So let's talk a little bit about the cargo and how important it's been as a lifeline. Marty, I'll start with you.

Marty:

Sure. Well, cargo was already a very important part of LATAM structure. In fact, if you look at the DNA of the company, the [Quato 00:13:04] family who was running the company before bankruptcy, their original entry into the airline business was in cargo. And obviously given the economic underpinnings of south America, when you look at the high value items and the perishables, it's an important part of the ecosystem of the economy for the entire region. Certainly, during COVID, I think it was the perfect storm, except on the good side, as far as what could happen in cargo. Demand sky-rocketing, a lot of goods that weren't seen before, like medical devices, vaccines, et cetera. And then, all the challenges of supply chain. We were very, very happy to be an important tool for getting vaccines to south America. By the way, free of charge, because I think it's part of the responsibility that we have to the region.

Marty:

But more importantly, we're also being very aggressive as far as penetrating pitched patches of supply chain that we've just never seen before, because, shipping is so clogged up and there's so many goods that need to be going back and forth northbound and southbound, just south America. As far as expansion, during the pandemic we announced that we're almost doubling the size of our full freighter fleet. We're extremely lucky to have a fleet of passenger 767, that are going to be partially replaced by 78s. And, what we found is, if you look at the combination of payload range and cost freight [inaudible 00:14:41], we find the 76 to be an absolutely outstanding cargo aeroplane. So from that perspective, I'm very, very happy that we're in a position to extend our Cargo business going forward. And frankly, one of the major strengths of LATAM across the entire continent is our diversification.

Marty:

We have five home markets. And in general, if one of had hiccups, there are other markets out there to sort of take the slack. And frankly, if you look at the perishable business we carry from Peru or Chile, compared to flower business that we carry in Columbia. And a lot of the hard goods we carry in Brazil, it's a really strong diversification. So, it was so important to us during the pandemic. And, we're very optimistic about our ability to further penetrate that market going forward. And more importantly, we're doing this with a relatively low capital cost aircraft in the 76, and also an aircraft that has extremely high residual value if it turns out that we overstretch and want to drop one of scrap planes. So, I don't see that happening, but we're very optimistic about the possibility of cargo being an important part of underpinning our sort of diversification and diversity of our revenue base right now.

Peter:

Abhi, from your side?

Abhi:

Yeah, absolutely. I mean, a Azul is much newer to the cargo business than LATAM. Certainly, our history is not as rich in cargo as LATAM's is. But we focused a little bit differently in terms of cargo and logistics is what we like to call it now because we do a lot less of freighters and it's more really the domestic logistics in Brazil, end to end via our partners around the country. So, today we can deliver to a 1,000 cities around Brazil in 48 hours, door to door. So from buyer to seller or seller to buyer actually, if you think about a Mercado Livre marketplace or an Amazon marketplace or something like that. So, we focus a lot more on building out that logistics capability and, yeah, obviously we got a little bit lucky.

Abhi:

In terms of the pandemic changing people's behaviour in purchasing e-commerce, shopping online and in Brazil, large cities like Sao Paulo, Rio, they always had good logistics. You could buy tennis shoes and they would show up the next day or two days. But Brazil, anywhere else was mostly by truck. And so, you buy tennis shoes in Northeast of Brazil, it takes you 10, 12, 14 days to show up. And, we know from Amazon in the US, it's all about delivery times. And so, our logistics business is really... The backbone is our schedule network. And because we fly to so many cities in Brazil, we really use our belly space to be the anchor, the backbone of that logistics network. So, that's worked very, very well for us. We do have a couple of freighters in 737s, and we do fly our 330s as well for cargo services, but we are 80%, 85% plus of our logistics is in the belly.

Abhi:

And that gives us efficient and it gives us scale and it gives us reach. So, yeah, our logistics business is doubled in revenue from 2019 to 2021. And it's going to grow again. So, our focus is a lot more domestic. We are not really that relevant internationally, say for our national flights. But really for us, it's about the logistics end to end capabilities that we're focused on in Brazil and expanding that. So, we know that all of the e-commerce players, all of the platforms, all the marketplaces, they're going to compete on delivery times and thanks to our scheduled network, we can deliver that very, very efficiently.

Peter:

Do you see e-commerce becoming... and both questions to both of you. Do you see e-commerce becoming a regional opportunity for us as it's become in Europe and north America, particularly with big players like Amazon. Is this something that we see it as a region, as an opportunity to further expand cargo penetration and bringing, let's say both economic and social wellbeing to our citizens? [crosstalk 00:19:13].

Abhi:

E-commerce in Brazil is definitely very under penetrated, compared to the rest of the world, compared to US, compared to China, it's not even close. And one of the main... obviously they have purchasing power, all that kind of stuff. But, one of the main reasons is logistics. Brazil has no train network. Everything is road. The roads are not that good apart from Sao Paulo and a few cities in the south of Brazil. So, yeah, I don't know much about logistics in between the countries. I'm sure mine is not a lot more about that, but within Brazil, the challenge is logistic. Is just getting stuff quickly, efficiently without complicated taxes and road infrastructure, all those kinds of things. So, definitely within Brazil, we see as opportunity. Sorry, Marty, go ahead.

Marty:

No, Abhi. And in Spanish speaking, I agree with you in Brazil and we're certainly seeing a lot of the traffic right now. We also have a daughter there service, and we're seeing a lot of e-commerce business coming into our Brazilian domestic network. With respect to the Spanish speaking side of south America, obviously Mercado Livre is a much bigger force there than Amazon, but I think we fully expect Amazon to be penetrating this market as well. But Abhi made an extremely important point that I don't want to understate is, from a cross-border perspective, it is still a little bit complicated with respect to taxation.

Marty:

I know Mercado Livre has had a wonderful advantage over Amazon, just because of the taxation advantage of being south American company with logistics here and things like that. But, I think the best way to look at e-commerce is to start with a customer look outward. It creates incredibly utility for customers. And I think as long as that's the case, we should expect that the demand for e-commerce will only grow. And again, we're very excited about the 76, an aeroplane, because, it's an aeroplane that has got a very good combination of weight capability and cube capability. So, for the density of typical e-commerce packages, it actually is a very, very nice aeroplane for us.

Peter:

Marty talked a little bit about taxation here, and I want to shift gears a little bit to our government in the region. And we're seeing a landscape that's quickly changing both from a political standpoint, we've had numerous elections throughout the region over the last year. We have several more in the next year, one of the biggest one probably in Brazil. The challenge we've always had it within industry, it's how many of our governments value transportation. You know what it is. Unfortunately, we're still perceived as an industry that caters to the very rich, where in fact, our fares all around the regions have really gone down 70% percent of most cases all around the region.

Peter:

Today we're very competitive with the bus, which many countries has been the main competitor. What do we have to do as a region? Particularly now that we have many governments are shifting. We have a huge social movement in our region. What does industry have to do to get a seat at the table where when we do have these elections and new governments come into play, aviation is a main agenda item for these governments, because it will bring social and economic prosperity for their countries. But what do we have to do better and more moving forward? I'll start with you Marty, on this one.

Marty:

Yeah. Thanks Peter. I'll start by saying that, I think that every airline in the region actually hold the responsibility in trying to improve the economic and social situations within south America. That what obvious said about the roads in Brazil applies that much more so in places like Chile and Peru. So it is extremely important that governments recognise the utility that aviation brings. Second thing is, I've certainly heard a lot from my governmental partners about pricing. I will say they should all be very thankful they're not in the US because prices may not be as much in Brazil, but certainly in Spanish speaking south America, prices are significantly lower than you see for similar lengths of [inaudible 00:23:35] US. And from that perspective, we're already providing a very, very attractive pricing compared to what you see for similar businesses elsewhere in the world.

Marty:

I think the most important thing is that, the governments recognise us as partners and not as adversaries. And frankly, I think the forces that create that pressure, that internal tension in the relationship are much more governmental than they are within the airlines. But again, we live in ecosystem where these governments are partners. So, that's why it's most important for us to be continually communicating. Frankly, I think IADA is extremely helpful in this front in a very challenging region, but this is one area where every airline shares the same objectives, which is, we want to be a position to rise as much service at as low cost as possible. And with governments being an assist and not an impediment.

Peter:

Abhi, you guys have been one of the pioneers in our region to make air travel affordable for everyone, particularly in Brazil, in a country of 200 plus million population. I think this year you're close to 95 million, half... Oh no, sorry,. Pre-pandemic 95, 100 million. So half the population. But unfortunately when you look at a ticket, when you put your ticket out there and it's very competitive, you're cheaper than some bus company. 60% to 70% of the ticket continues to be on taxation. So it's imposed by government fees, airport fees, and it gets really covered up. We're not as competitive as we should be. So from your side, taxation is major issue. What's your call out to government in this respect?

Abhi:

Yeah. So, the cost of doing business in Brazil is very high, especially for an airline. And unfortunately, airlines are still seeing a little bit of just, targets for further taxation. There's a new tax over leasing in Brazil. [inaudible 00:25:42] Which if it comes into play, is astronomical the cost. And that's something that obviously, we and our partners in the region are talking to the government here about. Legal processes. How many lawsuits does United have in Brazil versus elsewhere in the world? Factors. Multiples and factors above. The FAR, is that the regulations in terms of duty time, they're different here than they're in the US.

Abhi:

Fuel. Fuel is 50% more expensive in Brazil than it is in the US. And, one thing that Peter, IADA and I think the airlines have to keep reminding is that, airlines in Brazil, Azul, GOL and LATAM provide an exceptional level of service. Just look at on-time performance. Compare on-time performance in Brazil to on-time performance in the US. LATAM is the most on-time airline in the world. We know that. But even if you look Azul and GOL, it's miles better. It's not even close. The number of cities served in Brazil. Azul serves over 120, 130.

Abhi:

I guarantee you, the NPS of any airline serving in Brazil is higher than any airline that domestically. TSA. Jet lines you can't even compare. And now airports are getting modern with the privatisation. So, airlines in Brazil provide a really exceptional level of service in terms of just all aspects of the customer. And as you mentioned, at average fares that have come down while our costs have only gone up. We try obviously to keep reminding everybody of that. Of course, we get complaints about average fares, but you know what, Brazil is expensive. It's expensive in terms of labour and fuel. Obviously you have currency, you have all the different taxation, you have legal claims, you have all that kind of stuff.

Abhi:

I'm a huge advocate of what the airlines have provided here in Brazil. And I think we got to keep reminding people of that US, Europe. Flying in Brazil domestically is way better, way better than anywhere else. The experience, the people are nicer. It's not even close. So yeah, I think we just have to keep reminding people of that and, is it going to change anytime soon that we're seen as a target for additional costs? Maybe not. But I do think... Like look at the va... What LATAM did in terms of vaccines was amazing. Azul transported vaccines for free. [Got 00:28:45] sorted GOL and that changed lives here in Brazil. So, I think we've got to just keep reminding people of that, that what we provide really is something and for a continent, like size country, like Brazil, it's life or death, literally. So-

Peter:

So, yeah.

Abhi:

... Yeah, I mean...

Peter:

Sorry, go ahead.

Abhi:

Now, that's it. Our focus is reminding people of that, that Brazilians and the market here is exceptionally well served.

Peter:

So let's keep on Brazil because both for Azul and for LATAM, Brazil, it's a critical market. And directly indirectly, what happens in Brazil has a strong impact on the neighbouring countries in the region because of its economic and size of population. So we have an election coming up over the next year. It's going to be highly debated. We talked about tax issue. It's a very costly place to operate, to do business in. We have a population of 200 million people. Half the population may have never been on an aeroplane. We had roughly 95 million people travelling a couple of years ago. What do we have to do? Or what does this... Is taxation the... Or cost the name of the game in Brazil over the next 5, 6 years with this new government coming in place to get more people to fly, to expand our reach, to make it more competitive and to put a product that will be good for the travelling public. And it will be financially sound for the airlines that operate there. Is that cost the main issue that we would be talking to governments on it in Brazil?

Marty:

I think it will be. And I will say the second issue, which I think is going to be less in our control, but equally leveraged is, the strength of local currencies. Fundamentally, unlike many companies in Brazil, we work in a business where two of our biggest expenses are dollars are nominated between fuel and aircraft ownership. So, we don't have the natural hedge that some of the other businesses have as far as the ability to consume domestically and hopefully get foreign currency income and at local currency expense. So from that perspective, anything that keeps our costs low is going to be something that will be very high in the agenda that I think every airline is going to have in Brazil with whoever the new government ends up being.

Marty:

But, I do think the second piece, and I couldn't agree more with what Abhi said earlier. He's absolutely spot on with respect to the customer experience in Brazil and the cost of operating in Brazil. The most important thing that I think we are all to do is continue to educate our governmental partners as to the value that aviation brings in the sector. This is a logistically challenged region, not just Brazil, but really all south America, very logistically challenged. And, we bring a vital, vital part of the economic ecosystem. And unfortunately, I don't think we're always treated like that. And from that perspective, that's an area where it's really our problem to fix.

Marty:

It's not going to be an easy problem to fix, but it's certainly very important. And frankly, we're very optimistic about sort of what the new [inaudible 00:32:16] is going to look like past reorganisation. We have been able to get a cost structure done significantly. We jumped in rationalisation of our fleet in our network. And, from that perspective, I think we are better equipped than ever to be able to offer that type of service more than we have been historically. [crosstalk 00:32:34]

Abhi:

Yeah. I agree with Peter that, it's going to be cost. Obviously currency is huge, just the inflation. Inflation in Brazil is running over 10% right now. So, our navigation fees are all increasing 10% next year. Not to mention the union salary increases, which we settled actually at 8.3%, almost 8.5%. That's just straight cost, not to mention fuel, not to mention dollar, not to mention inflation with all our ground handling service providers and, yeah. So, a couple of things. Brazil had 95 million in [clainments 00:33:19] in 2019. If you think about that in terms of individual people, it's a lot less. It's probably closer to 20 million. So, it's probably closer to 20 million individual Brazilians actually travelled in 2019, which is 10% of the 200 million population. So, it's even more under penetrated than you think. If we look at those rates compared to Columbia, compared to Chile or Mexico is way up, you need like 5 or 6 Azuls just to handle that demand.

Abhi:

So, obviously we want to be able to provide that but the costs are very high. And, it has to be sustainable for everybody. So, absolutely I agree the cost in Brazil is going to be the key, currency and inflation play a very, very big role. But, one thing I think for everyone to remember is that, 96 million in clainments is 20 million individuals, because, the people that do travel, many of them travel a lot. Whether it's corporate and that kind of stuff. So, a lot of growth still ahead. So, that's why we're all still here. The opportunity is... A big and, there is growth ahead for the market. We truly believe that. Nobody can can say that 2019 the growth was down. We think the market's going to keep growing. And so there is huge opportunity, but yeah, the cost of doing business is definitely high on the agenda for sure.

Peter:

And [inaudible 00:35:00] to your point, the data that I'm reading here, based on the presentation we created not too long ago. In Chile, the trips per capital is 1.23 a year in Chile, Columbia, 0.78, Brazil, 0.48. Even Peru is higher at 0.68. So as you say, while 95 million trips took place, it's very small minority and certainly an opportunity. And I think that's where the industry is looking at. How do we get more Brazilians to travel and increase that passenger per capita? Because a country the size of Brazil, who's so dependent on air travel and the opportunity. There's no reason why Brazil should not be, I would assume that you would agree almost at the levels of US, Europe but certainly higher than some of our countries in Latin America. Abhi, just remind us, because I think it's a really neat story. How many new destinations did you put on the map this year in Brazil? During the pandemic.

Abhi:

So yeah, we have a sub regional operation with ATRs and with caravans. So we're going to finish the year close to 140 destinations. And we started the year probably at 80 [inaudible 00:36:24]. So we added 50, 60 destinations this year alone and, yes. And most of these places have never had air service before. So, I agree with what Marty said, it's our responsibility to kind of bring opportunity to everybody. And the way we know how is obviously bring air service and we know that, whether it's a daily ATR or even a daily caravan that connects to a network that changes the lives of the people in those cities. Populations of a 100,000, 200,000, 300,000. It changes the economic lives of those people. So, obviously we do it to make money. That's our job, but that's also how we bring demand into our network. But yeah, I know it's also how we try and help Brazil.

Peter:

And let's look at the future and technology. Azul was quite aggressive this year. You made a commitment or announced a $1000,0000,000 deal with [Brillium 00:37:34] for the almost 220 electric power vertical take off on landing aircraft. That's pretty innovative, pretty out there. And you're looking at bringing the first aeroplanes around 2025. Can you share a little bit about why the decision at this time during a pandemic? And what are you looking to do? Is it to serve those remote places in the future?

Abhi:

Yeah, there are obviously many companies around the world that are looking at urban mobility. You have [jobie 00:38:11], you have [lilium 00:38:12], you have [Embrer 00:38:14], you have [Archer 00:38:14], you have Vertical in Europe and they all have sort of similar but different type of technologies. Certainly, one thing that everybody agrees on is that the future of urban mobility is going to be different. Whether it's autonomous cars or these kinds of electric vehicles. The addressable market in the future 2030 and beyond is going to be very, very large. In Brazil, where again, infrastructure is challenged and you have large Metro areas like Sao Paulo, like Rio. So, for example, Brazil has three of the top 10 cities in the world of helicopter fleets. Sao Paulo has the most helipads of any city in the world.

Abhi:

And Brazil has three of the worst cities in terms of traffic as well. So, this market already exists in Brazil in terms of helicopters. Electric aeroplanes or these kind of electric vehicles, urban mobility vehicles are way quieter. And, they're electric a lot simpler to maintain, a lot simpler to operate, a lot simpler to sort of fly. So, many many at advantages of vertical takeoff and landing. So you can use existing helipad infrastructure. And for us, a sub-regional is a part of it, but initially it's connecting different parts of a big Metro area. So, you have suburbs in Sao Paulo, suburbs in Rio that will take you two hours to drive, but it's a 20-minute flight.

Abhi:

And so you can do those 30, 40 times a day, basically. It's a new business actually. It's not really an Uber, which is like a 5, 10 mile trip. Our average stage length for these kinds of flights is like a 100 kilometres, 80 kilometres. So it's a lot further away, but a lot of connecting the different parts of a large Metro area is the idea. And basically, I think replacing helicopters basically for commuter traffic. Helicopters have a role in rescue and medevac, all that kind of stuff offshore, but certainly within a large Metro area, I think these types of electric aircraft can do wonders.

Peter:

Marty, from your perspective, again, having several of the LATAM scattered throughout the region and looking towards the future and trying to have more people fly and get on aeroplanes from one point to another with connectivity, how do you see this from a regional perspective, from a LATAM side, when you look at countries as long as diverse as Chile or Peru where these communications are challenges?

Marty:

Well, we're certainly looking at multiple options in the electric aircraft area, not just on the 80 to a 100 kilometre option, but sometimes more than 500, 600 kilometre options. Certainly is fitter for hubs like Santiago or Lima in addition to our Brazilian hubs. I also think it's worth mentioning in the shorter term. We're also very, very focused on sustainability as is Azul. And I know we're both very interested in this and frankly, I think any organisation on the continent should be focused on trying to make sure that we can operate in a sustainable way. We just couple of months ago I think, announced a very, very large carbon offset project in Columbia, 200,000 hectares of land that we're using for offsets.

Marty:

We think that's going to be part of the future for us. And we're actually looking at each of our home markets for the opportunity to move ourselves towards being a carbon neutral airline. And frankly, electric air planes are an important part of that, but also there will obvious be missions for which we still don't have the technology from a battery perspective that electric can be available option. So, it can't be the only solution for us, which is why, in addition to electric, we're also very, very focused on being a sustainable airline as well.

Peter:

And, Marty, certainly LATAM has been one of the biggest leaders, not only regionally, but globally coming out with some very strong and ambitious targets from your CEO [inaudible 00:42:45] all the way down. Very passionate about it. [SAPH 00:42:48], will obviously be a key component here and both for you, I'll be in also a very active airline and that front. Is SAPH having accessibility to it the biggest challenge at this point in terms of moving some of the ambitious goals that we have, particularly as we get closer to some of these target dates?

Marty:

So, obviously we know the technology of SAPH works. The real issue right now... And by the way, it is available. What's not is available at a reasonable cost. And from that perspective, I think scale and public private partnership are going to be the path to get there. I know Azul's been very aggressive on the south front. I know that when we get through corner scale that's going to be part of the solution for us going forward.

Abhi:

Yeah. [crosstalk 00:43:37] I think getting to sort of net zero targets by 2040, 2045, 2050. It's going to be a whole range of solutions. SAPH is one of them, electric is one of them. Six passengers, a couple 100 kilometres is still small to what we need, but it's a start. And, I hope that there's somebody right now, either a kid being born or someone graduating high school, who's going to win a Nobel prize in physics and figure this out because we're going to need some serious brain power to do this. I would say that, I don't think all the tools exist yet. I think there's still going to have to be significant improvements in technology science over the next decade to get us there. So, I would say it's still... We're making baby steps.

Peter:

Sure. We're coming to the end and I don't want to leave on outside in terms of what our future looks like as an industry. If we were to get together for coffee around this time, next year, end of 2022, what would you tell me, would be a success or successful year compared to what we've had to endure over the last couple of years? So, [inaudible 00:45:00] Marty, you and I are having a pisco sour somewhere in Santiago. And you're telling me your 2022 would be a successful year if you had what?

Marty:

Well, first of all, I need to... From a political perspective, acknowledge that the Pisco sour could either be in Chile or Peru because both countries don't believe they own it and both have different recipes. And I need to be broad minded and recognise that they're both quite interested. So going to hold vacation there. Not to put [inaudible 00:45:30] in towards Peru, but towards Chile or Peru this situation. But notwithstanding, you know, most important thing for me is that, I think we all share the goal of getting back to some of the economic results that we've seen historically while also keeping our service levels where they are so we can service many customers as possible and increase the connectivity within and to and from the continent. And, I think if we can find a way to make that [inaudible 00:45:57] diagram work, but at the centre of it, it's got to be the sustainability of profits.

Marty:

And, frankly, we went through the unfortunate step of reorganising, other airlines that had to lever up significantly during COVID. So, there's a pretty significant hurdle for all of us from french perspective. And, the long term solution for any airline in the entire world is getting back to profitability. And, again getting to profitability, I should actually probably say back to positive return on capital above the cost. That to me is the most important thing. I really hope that as an industry, we get there by the end of 2022. I'm not going to make any forecasts for us, the Azul or anybody else, but, finding that sweet spot of continuing to grow service while also being profitable. Like to me, that's what success did look like.

Peter:

Abhi.

Abhi:

Yeah, thanks, Peter. Yeah, absolutely. We all have, of our guidance is out there. The market watches us, the market punishes, the market gives, the market takes. Lately it's been taking, but I hope it starts to give a little bit as well. Yeah. I think our objectives next year is to, fly the fleet. We haven't flown our entire fleet for two years. We definitely want to fly that the whole year, next year. Have a little bit of stability, which is tough in election year, but bring some confidence back to Brazil. I do think and obviously people have their own opinions on this stuff, but I read Brazilian news. I live in Brazil, my kids go to school in Brazil and I read CNN every day as well.

Abhi:

And, I just wish some of the good things that are happening would get out there as well. Not just the bad stuff. Not just the headline grabbing stuff, but the fact that we do have some of the highest vaccination rates in the world. There is a very high intent to vaccinate here. That the market is recovering here. And I do think that that gets lost, in the headline grabbing stuff. But, I want some of that confidence to come back to Brazil because I think some of it.

Abhi:

Is deserved. So, I would definitely would like some of that positive energy to come back to Brazil. I would love to see the market grow again in a sustainable way. That's definitely our target. Continue to transform our fleet into next gen. Aircraft. That's one of our big targets as well. And just keep the opportunities coming. And not just get sort of get bogged down in the negativity that somehow seems to afflict Latin America so much. I think sometimes deserved, sometimes undeserved. And so, if some of that confidence comes back to the region, some of that good news gets out there. I think that would be a positive.

Peter:

Abhi, absolutely. If you look at our region, I think the region has done a tremendous job, both from industry and government standpoint, considering how long the lockdown was in our region. Back in March of 2020, we locked down almost at the same time as Europe, north America. And we extended way beyond the periods in which some of those regions began to open.

But I think once we did open, we opened for good. That's why the region is now open. We've seen tremendous recovery in places like Columbia, Chile, Brazil. We're seeing international carriers coming back. Certainly, the airline community has done its social committed to social responsibility in bringing the vaccines, medical equipment, which was so critical on the early stages. And now you look at the vaccine rates, Chile, almost, one of the leading countries in the world, you talk about Sao Paulo and major metropolitan city, almost a 100% of double dosage.

Peter:

We're looking at Columbia and so on. So I think we have something to celebrate. We certainly should not let our guard down, but I think looking to 2022, unless something goes really wrong, which I hope it won't, we're looking at... As Marty says, getting back on a positive trend, getting more people to travel. Air connectivity in our region is so critical for social and economic wellbeing. Now we don't have the infrastructure as in other parts of the world. In our economies and social wellbeing, just to move from one place to another depends on getting on an aeroplane and, you guys do it in a very safe, efficient, and today very cost competitive manner. So, Marty, Abhi, thank you very much for your time. I appreciate the insight you... Both of you, one of our key leaders in the region, wishing you a safe and good holiday season. Hopefully, we'll be able to recharge during this period of time. We'll come back strong in 2022. So thank you very much for your time for both of you. Thank you very much.

Abhi:

Thanks so much, Peter. Happy holidays.

Marty:

Thanks Adam.

Peter:

All right.

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