AZUL (AZUL) Q2 2026 Earnings Report, Transcript and Summary

Hello, everyone, and welcome to Azul's Second Quarter Earnings Conference Call. My name is Zach and I will be your operator for today. This event is being recorded. [Operator Instructions] I would like to turn the presentation over to Thais Haberli, Head of Investor Relations. Please proceed, Thais.

Thank you, Zach, and welcome all to Azul's second quarter earnings call. The results that we announced last night, the audio of this call and the slides that we reference are available on our IR website. I'd like to caution you regarding our forward-looking statements. Any matters discussed today that are not historical facts, particularly comments regarding the company's future plans, objectives and expected performance constitute forward-looking statements. These statements are based on a range of assumptions that the company believes are reasonable, but are subject to uncertainties and risks that are discussed in detail in our CPM and SEC filings. Also, during the course of the call, we will discuss non-IFRS performance measures, which should not be considered in isolation. Presenters today will be John Rodgerson, our CEO; and Antonio Garcia, our CFO. Abhi Shah, the President of Azul Group, is also here for the Q&A session. With that, I will turn the call over to John. John?

Thank you, Thais. Welcome, everyone, and thank you for joining us today. We are pleased to present Azul's second quarter 2026 results. The quarter reflects the continued execution of our plan and the decisive actions we have taken to navigate higher fuel prices, protect liquidity and build a stronger, more resilient company positioned for long-term success. As we go through the presentation, we'll focus on operational reliability and customer experience, disciplined capacity and revenue management, liquidity and deleveraging and the initiatives positioning Azul for sustainable value creation. In response to higher fuel prices, we proactively reduced capacity to protect cash and profitability. This is disciplined. It reflects our commitment to align capacity with profitable demand in creating long-term value. This shows a clear change in mindset and acting in a responsible way to the macro changes. At the same time, we continued with our fleet transition as we removed several widebody aircraft from our operation and we will restore our international capacity throughout this year. By year-end, we expect to have only one ACMI remaining and a significant step towards a more reliable international operation operated with Azul aircraft and our own crew members. Our operational performance is the best in the region. As you will see on the next slide, Azul was the most on-time airline in Brazil in April, June and July and the most on-time airline in Latin America in July. We maintain the #1 position month-to-date. This matters because reliability is a key driver of customer satisfaction, loyalty and customer selection. The improvement is also reflected in our NPS, which increased 26 points in 2026. A better travel experience strengthens customer loyalty, supports premium demand and reduces the cost of operational disruptions. Together, these improvements reinforce our ability to capture premium revenue through our focus on high yield customers, enhanced customer experience and differentiated products. This is how Azul grows revenue while maintaining disciplined capacity. It all starts with the customers. Reliable operations enhance customer experience translating to stronger yields and disciplined capacity converts demand into profitability and cash generation. Together, they position Azul to navigate volatility and create sustainable long-term value. Moving to Slide 4. Our on-time performance reached 87.7% in July, making Azul the most on-time airline in Latin America. This follows leading performance in Brazil in April, June and July demonstrating the consistency of a great operation. This directly translates to our NPS, which increased 26 points since December 2025. This reflects the direct impact of restoring fleet reliability, reducing operational disruptions and enhancing the overall customer experience. Improving reliability is not only the right thing to do for our customers, but also a key driver of loyalty, premium demand and higher yields. One example of this is our co-branded credit card, which just hit a record of over 1 million holders this quarter. Behind these improvements are our crew members. Azul's service culture remains one of our most important competitive advantages. By focusing on operational reliability and customer experience, our teams are reinforcing the foundation of Azul and leading us to greater profitability. On Slide 5, you can see our crew members in action. I want to pause here and especially thank them for their dedication, passion and commitment. These qualities make Azul unique and bolster our customer-centric culture, operational excellence and differentiated travel experience. This is a competitive advantage that cannot be replicated simply by investing in aircraft. It is built by our people every day. Our product also reinforces this differentiation. Azul operates the most modern and efficient fleet. Our Embraer aircraft are equipped with seat back entertainment, live television and WiFi providing customers with a differentiated experience even on domestic flights. Combined with our service culture, this product advantage strengthens loyalty and supports our premium positioning. We have the best operational performance, the best hard product and the best people in the business, all of that while maintaining the lowest unit cost in the region. With that, I'll turn it over to Antonio, who will walk you through our second quarter results. Antonio?

Well, thank you, John. Good morning, everyone. Before discussing the results, I would also like to recognize our crew members for their dedication, passion and commitment to our customers. Their focus on safety, service and the operational excellence is driving improvements in reliability and customer experience that differentiate Azul. Our people are the foundation of our culture and give us the confidence in our ability to execute our long-term plan. Turning to our second quarter results on Slide 6. The metrics shown here underscore both the resilience of our business model and the effectiveness of our strategy. We reported operating revenue of BRL 5 billion in the second -- a second quarter record supported by healthy demand, disciplined capacity management, strong high yield revenue and continuous growth in our business units. RASK increased 12.7% year-over-year to a record for second quarter of BRL 0.4341. Adjusted EBITDA reached BRL 510 million representing a 10.2% margin. We delivered the results in the weakest quarter season-wise while also managing the significant 61% increase in fuel prices. We ended the quarter with immediate liquidity of BRL 3.7 billion equivalent to 16.6% of the last 12 months revenue. These results delivered during a challenging quarter are exactly what we committed to our investors during the restructuring, a disciplined airline with a stronger balance sheet and a clear path to cash generation and the ability to create value long term. On Slide 7, highlights the resilience of our business model. Revenue increased 0.7% year-over-year, while capacity declined 10.6% reflecting the disciplined capacity allocation and price actions designed to align with profitable demand and partially mitigate higher fuel prices. Higher fares, strong yields and solid contribution from our business units supported both recorded revenue and recorded unit revenue with RASK increasing 12.7% year-over-year. On Slide 8, you can see how Azul responded actively to higher fuel prices. We proactively implemented additional capacity reductions through our plan to protect liquidity and remain focused on long-term value creation. This was not reactive, just to repeat, this is discipline. Capacity declined 10.6% in the quarter. This figure represents a combination of our restructuring plan capacity and further actions taken as fuel price increased. This proactive action enabled Azul to align capacity with profitable demand, preserve liquidity and strength long-term financial performance. While total capacity declined; at the same time, premium revenue increased 12% versus last year. This reflects our ability to capture higher quality demand through 4 key actions: prioritizing high yield customer, enhancing customer experience, introducing differentiated premium products and concentrating capacity on routes with a stronger premium demand. Our strategy is clear, prioritize revenue quality over volume. This ongoing mix shift supports strong yields and enable Azul to sustain RASK growth while maintaining disciplined capacity. Now on to Slide 9, let me address another important part of our strategy, our business units. These businesses diversify our revenue base, support premium revenues and enhance the resilience of Azul's broader ecosystem. Second quarter '26, average fares increased 9.5% year-over-year while our business units continued to contribute more than 20% of RASK reinforcing their growing importance to Azul business model and long-term value creation. Fidelidade, Viagens, Logistics, Conecta, TechOps and Media are much more than just ancillary revenues. They are strategic units with differentiated business model, diversified revenue streams and attractive cash flow cycles. Together, this business creates more diversified and balanced revenue profile, strengthening Azul ability to navigate volatile periods and generate value beyond the network. As shown on Slide 10, fuel prices have remained high volatile reinforcing the importance of our flexible fleet, disciplined capacity management, dynamic pricing and diversified business units and strong cash management practice. Fuel remains primarily external variable affecting our profitability. Given the continued uncertainty around fuel prices and the broader macro environment, Azul is not providing full year guidance for 2026 at this time. We are focused on our long-term strategy. Turning to cost. Slide 11 shows CASK at BRL 0.4480 in the quarter, 26% higher year-over-year primarily reflecting the 61.8% increase in fuel cost per liter. However, Azul continues to maintain the lowest CASK in the region demonstrating our structural cost advantage and the benefit of the restructuring. CASK ex fuel increased 12% mainly reflecting the temporary actions, reduction in capacity, pilot retention plan and training, higher sales incentives to match market dynamics. I'd like to highlight that a meaningful portion of the increase reflects the temporary fixed cost deleverage as fixed costs were allocated over a smaller ASK base. Rather than a structural deterioration of our cost base, it's in the opposite. We are confident that as fleet availability stabilize and capacity progressively resumes, this temporary deleverage should be reduced or diminished. The results of the resulting dilution and fixed costs combined with our structure cost initiatives and more modern fleet should strengthen operating leverage and support the normalization of CASK over time. Moving to Slide 12. As you can see the impact of fuel prices on EBITDA in second quarter '26 in a year-over-year comparison. Fuel represented an approximate BRL 749 million headwind compared with second quarter '25. Through disciplined capacity management and price action, Azul recaptured 60% of its impact contributing approximately BRL 448 million to EBITDA. This performance was achieved even in a challenging operating environment with higher fuel prices and the historically weakest seasonal period in Brazil affecting demand and profitability. As a result, Azul delivered BRL 510 million in EBITDA in the quarter demonstrating the resilience of our business model and our ability to respond to the changes in market conditions. Looking ahead, we expect much higher EBITDA levels in the second half of the year. Turning to Slide 13. Let me walk you through the recurring free cash flow here was nearly breakeven in the quarter. This is a meaningful achievement considering the seasonally weaker period and substantially higher fuel price and lower capacity. Please keep in mind that we continue to clean up the remaining commitments from the restructuring process. During the quarter, Azul paid BRL 794 million in nonrecurring items related to restructuring and normalization of deferred obligations. This payment will decline materially over time reducing our cash outflows and supporting stronger free cash flow generation. Our strengthened liquidity position also enabled us to reduce advances of credit card receivables during the quarter, supporting lower financial costs and greater financial flexibility. As Azul restores its fleet and resumes capacity in line with restructuring plan, air traffic liability should increase as books continues to grow. This growth represents a source of working capital and should provide additional support to operating cash flow as capacity and revenue recovers. Delivering near breakeven recurring free cash flow during the one of the most challenging period in Brazil for a Brazilian carrier while absorbing significant transition related to cash outflows demonstrated the effectiveness of our restructuring. As nonrecurrent payment decline in capacity normalized, Azul expects cash flow cash generation strength further. On Slide 14, you can see that Azul ended the quarter with BRL 3.7 billion immediate liquidity as expected. Total debt declined by approximately BRL 13 billion year-over-year reaching BRL 21.4 billion reflecting successful completion of our restructuring. Leverage measured using immediate liquidity improved to 2.8x, 2.3x lower than second quarter last year. This substantial improvement in our balance sheet demonstrates the effectiveness of our restructuring and provides Azul the financial flexibility to navigate near-term volatility while continuing its delevering journey. Now let me detail our debt maturity schedule. On Slide 15 shows the amortization profile of our loans and financial obligations. Azul has no material debt maturity before 2031 with the exit financial representing the only significant remaining obligation and its repayment concentrated in that year. This provides approximately 5 years of visibility, materially reducing the refinance risk and give us the flexibility to pursue strategic opportunities while generating the cash required to address this obligation. In addition, our restructuring permanently reduced interest payments by more than 50%, further strengthening our ability to generate consistent free cash flow and deleverage over time. Just to finalize. In addition, we recently achieved an important milestone by obtaining approval of both FGE and FNAC facility as shown in the Slide 16. These programs together provide up to BRL 4.6 billion of long-term financial at attractive rates. Combined with our existing liquidity, this facility provides additional financial flexibility throughout this transitional year and supports continued execution of our strategic plan. It is important to highlight we only had BRL 1.1 billion in government backed finance in our restructuring business. The approval of BRL 4.6 billion reflects the confidence in Azul underlying business fundamentals. We expect to access these lines in third quarter or fourth quarter 2026. With that, I will turn the call back to John. Thank you very much.

Thank you, Antonio. Moving to Slide 17. As we look ahead, Azul is entering a new phase. Our operation is the best in Latin America, our balance sheet is reset and our strategy remains firmly focused on long-term value creation. Operationally, we will continue improving efficiency through higher utilization and greater reliability and lower operational disruptions. Today, 100% of our E2 aircraft are flying as is our 320 aircraft. And we are restoring our international operations while reducing our ACMI exposure, positioning Azul for more reliable international operation, increasingly supported by Azul's aircraft and its own crew members. Our international recovery will be completed by stronger partnerships with leading global carriers. The recent expansion of our codeshare partnership with JetBlue increases connectivity beyond our U.S. gateways, allowing us to offer customers access to additional destinations while improving the profitability and capital efficiency of our international network. Financially, our priorities remain clear: preserve liquidity, enhance cash generation and continue deleveraging. As our restructuring-related obligations decline, our nonrecurring cash outflow should progressively normalize further supporting free cash flow generation. We will pursue profitable growth through disciplined capacity allocation, deploying aircraft where they generate the highest returns and leveraging strategic partnerships where they create greater network value. By improving service quality, restoring international connectivity and attracting more premium customers; Azul will continue strengthening the competitive advantages that differentiate us. On Slide 18, you can see that our objectives align with our Board's strategic priorities. We are targeting leverage below 1.5x and 150% increase in market cap by 2029. Achieving these objectives requires a sustained, rational and profitable growth, consistent free cash flow generation and disciplined investment and continued deleveraging. We have the right strategy, a stronger operational foundation and the financial flexibility to execute. As we move forward, we are confident in our ability to deliver stronger results, generate sustained cash flow and create long-term value for our shareholders. I want to once again thank our crew members, partners, investors and customers for their support and trust in Azul. With that, Antonio, Abhi and I are available to take your questions as I turn the call over to the operator.

[Operator Instructions] The first question will come from Andre Ferreira, sell-side analyst from Bradesco BBI.

Congrats on the work you've been doing in the past few years. I want to touch base on 2 topics here. So first on the CASK ex-fuel, which increased this quarter. It was mainly personnel, marketing and maintenance. Just wanted to get some more color on the incentives given in terms of personnel and marketing and also some more color on maintenance. And what should the year-on-year delta look like for the rest of the year? And the second question on the levered free cash flow, around BRL 80 million negative, but it was then affected by the nonrecurring.

Just quickly to address the salary related. I think obviously those pilots are key and strategic to us. We put in place some guarantees to ensure our pilots were fairly compensated as we took our flying down. [Technical Difficulty]

Just following the market in terms of corporate customers, in terms of attracting the high-yield customers. These customers book indirectly. So we have to go through travel agencies, corporate travel agencies and making sure that we're partnering in a really positive way with these corporate travel agencies to make sure that we get not just our fair share, but what we should be getting in terms of corporate and high yield revenue. So it was very, very much aligned with our revenue targets and our ability to increase RASK this quarter and most importantly, our ability to keep increasing RASK as the fuel curve evolves.

Andre, Antonio speaking here. In regards to your question about those temporary measures, I would say something around BRL 100 million that should not repeat in the next year for example because we are talking about temporary measures, especially on the salary side. And when you asked about the levered free cash flow, the line was broken. Could you repeat your question?

Yes. On the levered free cash flow, it was affected by the nonrecurring -- close to BRL 800 million in nonrecurring payments related to Chapter 11. Just wanted to know if there are any other like tail payments left for the 3Q and 4Q?

Yes. Andre, thanks for the question. And we already performed 2/3 of the payments in Q1 and Q2. If the remaining 1/3 is going to outflow between Q3 and Q4, then we should be very clean from 2027 onwards.

Okay. Perfect. And just very quick, the first part, which was John commenting on the personnel, it got cut off. I'm not sure if only for our team here.

Let me just repeat. So pilots are strategic to our business and when we cut capacity like we do, that significantly impacts their pay. And so we put in place kind of retention and bonuses in place for them while they weren't getting the full amount of their typical flying and that helps us maintain our pilot population as we now look to grow in the back half of the year because as we replace our widebody fleet and move away from ACMI, we have a significant amount of training. And so it's around short-term pilot retention and we feel good about where we are right now. And what we did really was effective for us and that will normalize as we go into the third and the fourth quarter.

The next question will come from Guilherme Mendes, sell-side analyst at JPMorgan.

On the fee recapture strategy, first congrats, the 60% in the second quarter seems pretty impressive. But can you walk us through the strategy for the second half of the year? How have you been seeing demand evolving and the price elasticity on corporate and leisure segments? And the second one is more of a follow-up on the guidance or not providing the guidance. Just want to understand the rationale of not providing this short-term third quarter guidance and for the year.

Yes. So overall, we are in a really good place right now as an industry I would say. As you know, second quarter is the weakest quarter and of course the biggest aggravating effect was the World Cup, right? It was a massive distraction in Brazil and impacted June flown revenue and impacted June bookings as well. Now we are coming out of that World Cup winter break. We've seen really good momentum first couple of weeks of August both on the revenue side, on the volume side and the average fare side. I think the industry has done a really positive job of preparing the table for the next 9 months, which is our best seasonality. So I think we've put ourselves in a really good place overall. I see resilient demand on the agency side. On the corporate side, probably the highest ever corporate fares in the history of Brazil probably is what customers are paying right now. And the volumes are good and the revenue is good. If you remember on the previous call, I mentioned that leisure demand, which is our direct channels which is the site and the app, initially was waning when fares jumped in the March and April time frame, the first reaction to the war. Now we are seeing that demand recovering as well. So we're probably having our best B2C week this year in the last 6 months easily. So I think momentum is good. Good seasonality going forward is very helpful. The industry has been very disciplined overall, I think doing all of the right things. And again our capacity posture is very helpful in allowing us to be aggressive and make sure that we're able to recapture the fuel. As we showed you, there's a new spike in the fuel curve going forward, right? So what we did is not enough and this work has to keep going to make sure that we're now able to recover this fuel spike going forward as well.

Yes. If I could just add, it's a premium game. And I just want to reiterate Azul's hubs, we have 80% of the markets. We're the only ones that fly that helps Abhi get the revenue where it needs to be. We think we're being the real rational competitors in the market and the most around disciplined capacity and when we see, we see that's not the case as an industry as a whole. We're seeing a lot of additional capacity coming in from our competitors, but we are going to stay the course and do the right thing for our business. As it relates to the guidance this year, the fuel curve keeps moving 10% one week to the next and it's about building credibility and pointing investors to the long-term strategy of Azul, right? So we are on plan for where we need to be as we go into 2027 and '28 and '29 and that's why we want to point investors there. We feel very good about our third quarter, how it's coming in right now. But we just don't think there's value in providing guidance as the fuel curve continues to bounce around as much as it has.

Guilherme, this is Antonio speaking here. We'd love to give guidance. But if we would do this, we would fail today. It means we want to keep consistency our message here. With this parabolic behavior in the fuel price, you never know what's going to happen tomorrow means let's have a little bit patience, but the picture for second quarter is much, much better as I said in my speech, much, much better.

The next question will come from Lucas Barbosa, sell-side analyst at Santander. The next question will be from Gabriel Rezende, sell-side analyst at Itau BBA.

I just wanted to follow up a little bit on your comment regarding fuel prices, specifically on how the company is managing the tariffs increase looking into the second half of the year. Just trying to understand. I understand it's a big challenge. Everyone is being surprised by how much volatility we are seeing from one day to the other. But just trying to understand what the company and perhaps what the sector is trying to do when managing tariffs increases looking into the second half of the year considering that the sector does seem rational, companies are trying to pass through this higher fuel inflation. Just what perhaps can we expect into profitability looking into the second half of the year due to this high volatility environment? And also if you comment a little bit more on the company's premium strategy targeting these more premium customers. Just trying to understand what are the main advantages that the company sees in targeting these customers, whether it's perhaps competition, whether it's less sensitivity to price increases, whether it's higher margins, the overall factors that incentive the company to seek those customers.

Yes. Gabriel, I can start and John can jump in. I mean the industry is trying to maximize revenue, right? So that's obviously the #1 priority and that has extreme urgency given the way the fuel curve is behaving. So as I mentioned, we're seeing really good discipline on the fare side and I think that given the seasonality now over the next 6 to 9 months, I think the customer behavior will be very positive. Now of course our capacity discipline helps us because we just have less -- we can be more selective in the type of demand that we take. We don't have to be more aggressive in terms of volumes like some of the other competitors here because that are growing more and that's publicly out there, right? So it allows us to be a lot more selective. Our network advantage. We have over 200 nonstop routes, nothing has changed in terms of the competitive dynamics. Only 18 of them I consider super competitive where all 3 airlines are flying and another 18 of them I have some competition, but we have a large majority of the share on those routes. So really, our network position continues to be very, very privileged. The market is maintaining the overall discipline. And we of course have the added benefit of having our capacity plan, which allows us to be even more resilient. I think the corporate customer is very favorable right now. We're seeing strong dynamics in that sector and we're starting to see, I would say, for the first time since the war began a really positive behavior from the B2C, from the direct customer as well, which kind of points towards the strong seasonality for the second half of the year. This also goes very much in line with our initiatives on premium customer. So our credit card is we think by far the largest mix of premium credit cards with Infinity, Skyline and Platinum. That brings us a large proportion of customers that are into our universe. We launched this year 2 new tiers in our loyalty program, which again delivers benefits like 24-hour concierge service, airport service, other benefits like same-day change that our customers are really enjoying and are providing more stickiness to our network and to our universe. In addition of course to our vacations business, which provides a really strong cross-sell opportunity. Remember, I mean not every customer is a corporate customer, but pretty much 100% of customers are leisure customers at some point, right? And so that allows us to have really strong cross-sell within the Azul universe. So having access, growing this premium population allows us to increase revenue across the entire business.

Yes. And a couple of things I'll just kind of highlight on that. Going back to capacity, I think some of our competitors planned capacity assuming the war would end. I think everybody would kind of rethink the amount of capacity they put in the system as it goes to the third quarter. So we feel very good about the disciplined approach we made. We reacted quickly, obviously working very closely with our Board and the guidance that they've provided and so we feel good about that. But when you talk about premium customers, it comes down to having a great operation and we have the best operation in Latin America right now. Abhi talked about the corporate customer. And I think over the last 4 or 5 years, Azul lost a little bit of its glow because we were fighting for survival. Azul is now back. We're investing in the product. We're investing in our customers. You're seeing a significant improvement in our NPS scores. You're seeing the glow come back on the faces of our crew members as they deliver unbelievable great service on a daily basis. The operational reliability that we talked about is really, really important. And so the premium customer, there are customers in Brazil that fly us over 100 times a year, right? And so being the most on-time airline really matters to them. Having the best product with WiFi and television onboard the aircraft really, really matters. Having the best network that Abhi has built over an 18-year period, the most destinations, the most connectivity and really, really concentrating on our super hubs in Campinas, Confins and Recife are really important to driving that premium revenue.

The next question coming from Mike Linenberg, sell-side analyst at Deutsche Bank.

Let me just apologize I was on different systems. I guess 2 questions here. When we go back to liquidity as a percent of 12 months revenue -- last 12 months revenue, Antonio, can you just remind us what is the right range for you, number one, you were at just over 16% or just under 17%? And as we think about the back half of the year, I know that you're not giving us guidance, but you did say that EBITDA should be a lot better in the back half, the second half of 2026. If we incorporate that and the over BRL 400 million of debt payments as well as, call it, that nonrecurring cash flow charges, where should liquidity be by the end of the year? And again what's the right long-term range that you guys are aiming for?

Thanks, Mike, for the question. So a normal percent should be around 20% and basically means today we are confident to end of this year. We have the access of this government financial lines giving back even more that we need that's why I'd say we should be above 20% to end of this year on the last 12 months' revenue.

I also want to remind everybody that American Airlines is not yet funded, right? I mean we're still going through the antitrust process of that. The technical team has approved it and our expectation is that should get approved in the third quarter as well. So that's an also enhancement to liquidity as we move.

And by the way, Mike, that was already for us the level of liquidity we have today that has been expected. Forget about the fuel price and the reduction on it. We were expecting higher payments for the pre and post Chapter 11. That happens. And we were also planning to access those lines in Q2, didn't happen and also American, that's moving to the right to Q3 and Q4, but I would say we are confident to be above 20% to end of this year from the revenue side.

Okay. Great. And then just my second question. Abhi, you made the comment you were feeling very good about how September quarter is coming in now. Can you just give us a sense like how much of September is booked now? And maybe even an early read, how much of December would be booked? It's probably pretty low. It's probably like 10%, 15%. And your booked yields that you're currently seeing at least with the September quarter, just kind of getting a better sense of how that revenue is trending.

Yes. So the booking curve has come in especially as fares have gone up and the agencies are overachieving in that sense. So about more than 50% of our revenue is inside 21 days right? So it's very, very close in, which is good in terms of filling in available seats at higher yields, but it also creates a lot of sweaty nervous afternoons and evenings because you just look very, very closely about what's going to happen, right? So that's one. Second of all, we also have to -- when we look at year-over-year now for 3Q and 4Q, we have to remember that last year July onwards, we implemented the new network, which already had significant capacity cuts. So last year, our third quarter was 16% above 2Q. Fourth quarter was 21% above 2Q. So we're already now at this much higher base and we're now having to push through in addition to that higher base. So we're absolutely seeing higher yields kind of going forward September, October. And like you said, fourth quarter is very low booked, I mean I would -- 15%, 20%, not even that much. But we're just managing kind of close in now on a much higher base. So yes, it's close in demand. It's kind of white knuckling it a little bit, but we feel very good about kind of how the industry is positioned and given our capacity posture, how we are positioned.

And Mike, I just want to highlight another thing on the international side, right? Our second quarter was down 25% year-over-year as expected as we transitioned the fleet and more than 50% of our customers flew on non-Azul metal when they flew international. As we reaped in and we relaunch our international product over the next 2 quarters, that has a significant improvement and will also improve the booking curve as well as international traffic is booked much farther out than the close-in that Abhi is talking about. But also when we come out and tell our customers that now they're confident they're going to fly on our aircraft with a great product and on a much cheaper aircraft, we're excited for that as we move forward.

John and Abhi, is it close in just because the fares are so high and people are just sort of taking that wait-and-see approach, maybe hoping for a little bit of fare relief if fuel prices come down? Like what's the main driver for that?

Yes. Definitely on the B2C side on the direct channels, the site and the app, we saw a wait-and-see approach and now really we're starting to see that customer come back in a very strong way. And the corporate channel -- and remember, so much of our network will by ourselves. So that corporate customer really doesn't have that many choices, right? So that demand stays a lot more steady. If I just look at pricing, right, if I look at competitive markets pricing versus where we are alone pricing, the competitive markets since March have had 6 oscillations up and down 6 times and now we are back on an upward trend again. But our margin is pretty much a straight line, kind of up and straight. So you have that kind of dynamic where you just have that audience, if you will, in our markets and then the more leisure customer, the more sensitive customer takes a more of a wait-and-see approach. Now for the first time really since the war, those customers start to come back.

The next question will come from Savi Syth, sell-side analyst at Raymond James.

I was just wondering if you could remind me again what you're expecting in terms of fleet over the kind of next 12 to 18 months. And just preliminary, I know international should start growing again next year, but just curious how you're thinking about kind of capacity between domestic and international as you kind of go through the next 12 to 18 months.

So on the fleet side, remember in the restructuring, we really simplified the forward fleet. So we have 3 more E2s this year is all and next year 5 E2s on the domestic side. On the international side, we're in the process of reoptimizing our fleet. So we have received 1 neo so far this year. The next one is delayed, f course, but it's going to come in the October, November time frame. Thanks, Airbus. And we also are getting replacement A330ceo aircraft. One is flying. The other one is on its way and there should be 3 more plus 2 more. So replacing the widebody fleet, getting to 12 widebody aircraft by the end of this year. That's our baseline fleet. And really just 5 E2s a year is all until 2029.

But Savi, I want to just highlight a couple of things to kind of help Abhi with this. Q2 was the bottom, right, and so we'll have the operating leverage as we move forward. We may be down slightly year-over-year. But remember, second quarter was down 10% year-over-year so it was substantially down. And for the first time in over 4 years, all of our E2s are flying because the GTF problem has been resolved and also all of our A320s will be flying. So with the existing fleet that we have today, we have the ability to produce more ASKs, which is great from an operating leverage standpoint because we're not adding a bunch of leverage out of the balance sheet, but we will be able to produce more ASKs, but we're going to be cautious about it. Obviously, we are going to be the most disciplined airline in terms of capacity deployment as we move forward.

And just following up on that, I know you mentioned less reliance on ACMI. So how should we think about kind of utilization of the fleet as we go forward? Where has it been and where could we see it?

Yes. We're flying the 320 fleet pretty much max as much as we can. There is a natural -- there are a couple of conflicting forces here, right? So obviously fuel prices and utilization. Utilization has increased nights, weekends and stretching out the day, right? Those times of days typically also have lower unit revenues. So we have to make sure that we balance out stretching out the day and nights and weekends with the fuel prices as they are. So that's why you saw a dip in utilization in 2Q, start to come up now as we improve seasonality towards the end of the year. So the 320s are flying pretty much as much as we can. The E2s as well. We have less E1s in the fleet now per design. So the E2s are picking up a little bit of the shorter-haul network that brings down the utilization a touch. But our sort of metrics are E2s, 12-hour plus -- 11.5, 12 hours; 320s pushing 14 hours; 321s pushing 15 hours.

The next question comes from Jens Spiess, sell-side analyst at Morgan Stanley.

Yes, 2 questions. So basically one is a follow-up on the crew incentive program and I just want to understand if that will be remaining in place as capacity stays relatively close to existing levels or if it's just a onetime item in that sense? And secondly, on the booking curve, you mentioned that a lot of bookings are happening closer to the date of travel, which I understand obviously gives you a bit of anxiety, but doesn't it also help you in the like fuel recapturing process? And if you could give any indication of how much like fuel recapture completion you expect in the next few quarters, it would be very much appreciated.

Yes . I'll take the second one first. Yes, you're right. It leaves more seats to be filled at the better fares, right? So that is absolutely a positive in that regard. I think the fuel recapture, I hate to say it, but depends on the fuel curve, I hate to sound obvious here. But the fuel curve that we had like 3 weeks ago, we were probably at 90% recapture by the end of the year. The fuel curve that we have now that's got another peak in it, we're probably where we are now which is 60% in that range.

As for the pilot salary retention, we expect that to normalize over the next couple of quarters. And again, it was to ensure that they weren't hurt by the reduction in capacity and to make sure we retain our great pilots that we have.

The next question comes from Hamed Khorsand, sell-side analyst at BWS Financial.

I just want to ask you about how you're scaling your capacity back? Is it going to come back all at Q4 or is there a time line as to how you expect your capacity to come back?

Yes. It's going to be over the next several quarters especially as the international fleet comes in over the next 6 months. So you will see 3Q still negative year-over-year, but less negative than 2Q was. You will start to see 0 around fourth quarter and then you'll start to see positive low single digits, low to mid-single digits for 2027. So it's going to take some time especially as it takes time for these aircraft to get into service. As John mentioned, we're extremely happy that the entire E2 fleet is flying again and we should be at 0 A320 AOGs in the next 15 to 30 days. And that's for the first time in the last many, many years. So the combination of that with 3 to 5 E2s a year, you'll see that inflection over the next couple of quarters.

The next question from Lucas Barbosa, sell-side analyst at Santander. Lucas, are you able to ask the question? Lucas has sent the question by writing. We're going to read it. Can you walk us through your expectations of supply increase for the whole domestic market in the second half of 2026 and 2027? Is competition adding significant capacity. How much can that impact pricing?

So I mean this data is public, right, so anybody can pull the schedules. We just know what we see, which is we see goal around 12%, 13%, 14%, 15% in domestic capacity and then we see LatAm kind of in the high single digits right now, right? We did see them cut a little bit for second quarter when fuel first spiked, but I have not seen that yet for the second half of the year with this recent spike in fuel. So obviously it's a lot higher than where we are and we're just very comfortable with our network and with our posture. Could it have an effect? Yes, it could, right? And that's why we think that we're just being very disciplined and very responsible for the market overall.

Thank you. We will now go to the closing remarks. I'll ask John to please make the closing remarks.

I just want to thank everybody and especially the Azul team for all the work. And we look forward to meeting with you. I know we have several calls set up over the next couple of days and Antonio will be in New York in early September. So we'll have the opportunity to speak with many of you. And so we appreciate your support and look forward to having a great third quarter.

Thank you. This concludes Azul's conference call for today. Thank you very much for all your participation and have a good day.