Bullish Air Traffic Cushions AZUL Against Cost Concerns

The uptick in air-travel demand (particularly on the leisure front) bodes well for the Brazilian carrier Azul AZUL, currently carrying a Zacks Rank #3 (Hold). However, escalated fuel costs, a primary headwind, are limiting bottom-line growth.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Factors Favoring AZUL

The gradual improvement in air-travel demand is a huge boon for AZUL. Owing to this tailwind, Azul reported healthy traffic data for October. In the same month, Azul’s consolidated traffic increased 11% year over year. To match the increased demand situation, AZUL is expanding its capacity. In the same period, capacity grew 18.1% year over year. Since traffic growth was less than capacity expansion, the load factor (percentage of seats filled by passengers) fell 4.9 percentage points (p.p) to 77.2% last month.

The surge in international traffic (up 315.9% year over year) led to a rosy scenario with respect to consolidated traffic. On a year-to-date basis, consolidated traffic has increased 33.9% year over year. In the same period, capacity grew 31.2% year over year. Since traffic growth was more than capacity expansion, the load factor (percentage of seats filled by passengers) improved 1.6 percentage points (p.p) to 80% last month.

Per Azul’s CEO John Rodgerson, “We continued our focus on combining strong average fares and yield, with disciplined capacity deployment, leading to a sequential record RASK in October. We expect these trends to continue thanks to the demand in our network and the strong overall revenue environment.”

Recovery in air-traffic apart, Azul’s efforts to modernize its fleet bode well. The rise in airfares is also likely to bolster AZUL’s top line.

Key Risks

Escalating fuel costs pose a threat to AZUL’s bottom line. Oil price is moving north, primarily because of supply concerns stemming from Russia's invasion of Ukraine. In the September quarter of 2022, the average fuel cost per liter surged 85.3% from the third-quarter 2021 actuals. Fuel price is likely to be high in the December quarter as well.

A low current ratio (a measure of liquidity) also does not bode well as far as Azul’s liquidity is concerned. In the September quarter, AZUL’s current ratio of 0.35 was lower than the June reading of 0.42. A current ratio of less than 1 implies that a company doesn't have enough liquid assets to cover its short-term liabilities.

Stocks to Consider

In the broader Zacks Transportation sector, investors may consider better-ranked stocks like Covenant Logistics CVLG and Ryder System R.

Covenant Logistics offers a portfolio of transportation and logistics services, including asset-based expedited, dedicated and irregular route truckload capacity besides asset-light warehousing, transportation management and freight brokerage capability.

The gradually improving freight market scenario is a tailwind to Covenant. CVLG’s cost-control efforts are appreciated as well. CVLG currently sports a Zacks Rank #1. The stock has witnessed the Zacks Consensus Estimate for 2022 earnings being revised 10.1% upward over the past 60 days.

Miami, FL-based Ryder provides integrated logistics and transportation solutions. With improved economic and freight market conditions, R is benefiting from higher rental revenues owing to strong demand and favorable pricing. R’s acquisitions of Whiplash and Midwest Warehouse & Distribution System expand its e-commerce fulfillment network and boost multi-client warehousing capabilities. The transactions are expected to drive growth in the supply-chain solutions segment.

Ryder currently carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for R’s 2022 earnings has been revised 7% upward in the past 60 days.

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