Azul Weighs Merger and Bankruptcy Options Amid Debt Crisis

Amid financial strains, Brazilian airline Azul SA is exploring strategic options to manage its impending debt obligations.

Options under consideration include issuing new shares or entering Chapter 11 bankruptcy.

This information was provided by sources who chose to remain anonymous due to the confidentiality of the discussions.

Azul is actively seeking a merger with Gol Linhas Areas Inteligentes SA, aiming to convince creditors that a unified entity could achieve lower debt levels and better growth prospects.

However, given Azul’s urgent cash needs and poor financial results, this merger is seen as less appealing. Bankruptcy protection remains a possibility, but Azul is keen to avoid it.

The airline is collaborating with Citigroup Inc. for a potential share offering and advisory services on the merger.

Azul is considering issuing debt through its cargo unit as another alternative to address financial issues.

Azul’s representatives and Citigroup declined to comment on the record.

In a landscape where several major Latin American airlines have succumbed to bankruptcy, Azul has distinguished itself.

Unlike its counterparts—Avianca, Latam Airlines, and Grupo Aeroméxico, which declared bankruptcy in 2020—Azul managed to stave off such measures post-COVID-19 through a bond swap in June 2023.

Nevertheless, it continues to struggle with lease obligations and high interest payments on its debt burden.

A weaker Brazilian real has exacerbated Azul’s financial woes, increasing expenses such as dollar-denominated lease payments and fuel costs.

The airline is facing R$382 million ($69.5 million) in local debt payments this year, alongside $550 million in promissory notes due over the next four years.

The company’s net debt has surged following a net loss of R$3.87 billion ($704 million) in the second quarter.

Its leverage ratio has climbed from three times to more than four times its earnings before interest, taxes, depreciation, and amortization, according to recent forecasts.

Azul attributes the rise in debt to the weaker currency and catastrophic floods that disrupted operations at Porto Alegre’s main airport in Rio Grande do Sul.

The Brazilian government, under President Luiz Inácio Lula da Silva, is seeking legislative approval for a bailout plan for the airline.

The plan includes state-backed loans through Brazil’s development bank, provided Azul avoids declaring bankruptcy.

This government intervention could potentially mitigate some of the financial pressures facing Azul.

As a result, Azul may be better positioned to navigate its current economic turbulence more effectively.

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