Brazilian Airline Azul Criticized Bankruptcy But Failed to Avoid It

(Bloomberg) — Even as the Brazilian airline Azul SA struggled with exchange rate pressures and the lingering effects of the pandemic, top executives insisted they would do whatever they could to avoid filing for bankruptcy.

“The ones who benefit from a Chapter 11 process are not the partners — it’s the lawyers, the advisers,” the company’s chief executive officer, John Peter Rodgerson, told a local publication in August.

Last week, though, after multiple debt reworks and several cash injections, the company acknowledged the extent of its problems and took the step that it tried so hard to resist, filing for bankruptcy protection in a New York court. 

It was the latest plot twist for Azul, which became a major regional player after being founded in 2008 with just a few Embraer SA jets and the ambition to become a local low-cost version of JetBlue Airways Corp.

But it has become a familiar storyline in Latin America, where airlines have been overwhelmed by the pandemic, along with inflation and high interest rates. Brazilian carriers struggled particularly because the government did not step in to offer aid during the pandemic. Then there was the mismatch between their revenues in local currencies and their dollar-denominated costs, including fuel, plane leases and debt obligations to foreign creditors that have weighed on them.

Another large Brazilian airline, Gol Linhas Areas Inteligentes, carried out ten liability management exercises or capital raises before ultimately seeking protection from its creditors in US court in January 2024. That came a few years after the major regional carriers LATAM Airlines Group, Avianca Holdings SA and Grupo Aeromexico SAB, filed for bankruptcy in the US in 2020. 

The wave of court-led restructurings has cast a shadow over the industry, despite a press release from Azul last week in which Rodgerson promised that “Azul continues to fly – today, tomorrow, and into the future.”

“The lingering challenges in the Brazilian aviation sector could temper investor enthusiasm, raise more concerns, and make investors even more cautious about this industry,” said Alex Dray, director of emerging markets research at Gimme Credit. 

Azul’s filing is particularly notable because it came after Brazilian President Luiz Inacio Lula da Silva’s attempts to help airlines in the country. The leftist leader, who campaigned on affordable plane travel, pushed for a rescue plan for struggling airlines in 2024. But almost a year and a half later, the $4 billion reais in promised aid has not reached the companies. 

Government officials have said they still expect the money to come through in the next three months, but Azul is now ineligible for the support because of a policy that prohibits lending to bankrupt companies. 

On Friday, Azul’s institutional vice president, Fabio Campos, said that his company had been waiting for the funds, “but the money never made it.”

“The inability to access those funds was part of the equation in our decision-making process,” Campos said at a press conference. 

Even apart from the wait for federal funding, Azul, like many Brazilian companies, was hesitant to declare bankruptcy in the US, despite the widespread use of the tactic by airlines globally before and after the pandemic. 

“In Brazil, there is still a huge stigma surrounding the insolvency process, and in the rest of the world, it’s seen as a path to restructuring and recovery,” said Edgard Lemos Barbosa a lawyer at Barroso Advogados Associados. 

Azul’s efforts to beat back bankruptcy appeared to gain traction in 2023, when the company implemented a plan that included a debt for equity swap. The stock, though, continued to fall, and the company’s attempts to do another debt exchange and an equity offering ultimately failed to restore investor confidence. 

Some creditors were urging Azul’s management to file for bankruptcy as early as last November, according to people familiar with the discussions. The pressure came after the company was hit by rising interest rates and the closure of a major airport in the country’s south in May due to torrential rains and historical floods.

In April, when the company’s latest equity offering had failed to raise enough money — and government aid had still not come through — creditors put together a pre-packaged deal in a matter of weeks and presented it to the company, the people said.

Azul now plans to slash more than $2 billion in debt and repay some of its lenders with a $650 million equity offering. United Airlines Holdings Inc. and American Airlines Group Inc are planning to invest another $200 to $300 million in equity, the company said. 

Campos said Friday that Azul hopes it will be able exit bankruptcy as soon as early 2026. The company believes the filing in partnership with creditors will allow it to avoid fees and move faster than it could through an out-of-court restructuring, according to a person familiar with the company’s thinking.

But the filing casts doubt over a proposed merger with Gol, announced earlier this year, which would create Brazil’s largest airline. Azul is now entirely focused on its restructuring process, Campos said. 

Analysts say that Azul’s delay in entering bankruptcy — and kicking off negotiations with the companies that lease it planes — will now make it harder to compete with regional peers who have already gone through the process.

“Airlines that restructured earlier — Avianca, Aeromexico, and Latam — secured more favorable lease terms during a period of lower aircraft demand, giving them more flexibility post-restructuring,” Luiz Felipe Scalercio, the head of Brazil credit research at BCP Securities, wrote in a note to clients. 

Then there are all those fees that Rodgerson said were such a drain on companies that file for Chapter 11. The company estimated in filings that it will spend as much as $200 million for “professional fees” tied to the bankruptcy. 

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