EX-99.1 2 a18-15589_1ex99d1.htm EX-99.1

Exhibit 99.1

 

Azul S.A.

Unaudited Interim condensed consolidated financial statements

March 31, 2018

 

Contents

 

Interim consolidated balance sheets

F-2

Interim consolidated income statements

F-4

Interim consolidated statement of other comprehensive income

F-5

Interim consolidated statement of changes in equity

F-6

Interim consolidated statement of cash flows

F-7

Notes to the unaudited interim condensed consolidated financial statements

F-8

 

F-1



 

Azul S.A.

 

Interim Consolidated Balance Sheets

As of March 31, 2018(Unaudited) and December 31, 2017(Audited)

(In millions of Brazilian reais)

 

 

 

March 31,
2018

 

December 31,
2017

 

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents (Note 5)

 

738.9

 

762.3

 

Short-term investments (Note 6)

 

627.7

 

1,036.1

 

Restricted investments (Note 7)

 

3.9

 

8.8

 

Trade and other receivables

 

1,166.1

 

914.4

 

Inventories

 

175.1

 

150.4

 

Taxes recoverable

 

108.5

 

112.9

 

Derivative financial instruments (Note 15)

 

12.5

 

10.3

 

Prepaid expenses

 

104.7

 

109.8

 

Related parties (Note 8)

 

75.9

 

73.2

 

Other current assets

 

90.2

 

125.9

 

Total current assets

 

3,103.5

 

3,304.1

 

 

 

 

 

 

 

Non-current assets

 

 

 

 

 

Related parties (Note 8)

 

9.9

 

9.7

 

Long-term investments (Note 15)

 

906.4

 

836.0

 

Restricted investments (Note 7)

 

 

 

Security deposits and maintenance reserves (Note 9)

 

1,329.7

 

1,259.1

 

Derivative financial instruments (Note 15)

 

430.3

 

410.5

 

Prepaid expenses

 

9.3

 

4.5

 

Other non-current assets

 

216.7

 

206.0

 

Property and equipment (Note 10)

 

3,434.8

 

3,325.5

 

Intangible assets

 

960.7

 

961.0

 

Total non-current assets

 

7,297.8

 

7,012.3

 

 

 

 

 

 

 

Total assets

 

10,401.3

 

10,316.4

 

 

F-2



 

 

 

March 31,
2018

 

December 31,
2017

 

Liabilities and equity

 

 

 

 

 

Current liabilities

 

 

 

 

 

Loans and financing (Note 12)

 

581.6

 

568.2

 

Accounts payable

 

947.7

 

953.5

 

Air traffic liability

 

1,271.5

 

1,287.4

 

Salaries, wages and benefits

 

250.4

 

246.3

 

Insurance premiums payable

 

19.5

 

24.4

 

Taxes payable

 

29.9

 

44.4

 

Federal tax installment payment program

 

9.7

 

9.8

 

Financial instruments (Note 15)

 

46.1

 

48.5

 

Other current liabilities

 

160.2

 

151.7

 

Total current liabilities

 

3,316.6

 

3,334.2

 

 

 

 

 

 

 

Non-current liabilities

 

 

 

 

 

Loans and financing (Note 12)

 

2,806.0

 

2,921.7

 

Financial instruments (Note 15)

 

384.4

 

378.4

 

Deferred income taxes (Note 11)

 

364.3

 

326.9

 

Federal tax installment payment program (Note 11)

 

103.0

 

105.4

 

Provision for tax, civil and labor risk (Note 20)

 

77.3

 

73.2

 

Other non-current liabilities

 

331.0

 

343.0

 

Total non-current liabilities

 

4,066.0

 

4,148.6

 

 

 

 

 

 

 

Equity

 

 

 

 

 

Issued capital (Note 13)

 

2,182.5

 

2,163.4

 

Capital reserve

 

1,895.4

 

1,898.9

 

Treasury shares (Note 13)

 

(4.1

)

(2.7

)

Other comprehensive loss (Note 13)

 

(9.2

)

(11.2

)

Accumulated losses

 

(1,045.9

)

(1,214.8

)

 

 

3,018.7

 

2,833.6

 

 

 

 

 

 

 

Total liabilities and equity

 

10,401.3

 

10,316.4

 

 

The accompanying notes are an integral part of these financial statements.

 

F-3



 

Azul S.A.

 

Interim Consolidated Income Statements (Unaudited)

Three months ended March 31, 2018 and 2017

(In millions of Brazilian reais, except income (loss) per share)

 

 

 

For the three months ended
March 31,

 

 

 

2018

 

2017

 

 

 

 

 

 

 

Operating revenue

 

 

 

 

 

Passenger revenue

 

2,111.8

 

1,600.5

 

Other revenue

 

101.6

 

273.3

 

Total revenue

 

2,213.4

 

1,873.8

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

Aircraft fuel

 

(577.2

)

(465.7

)

Salaries, wages and benefits

 

(333.8

)

(290.0

)

Aircraft and other rent

 

(327.1

)

(280.4

)

Landing fees

 

(144.9

)

(115.0

)

Traffic and customer servicing

 

(98.1

)

(84.2

)

Sales and marketing

 

(84.4

)

(69.7

)

Maintenance materials and repairs

 

(123.3

)

(146.0

)

Depreciation and amortization

 

(81.2

)

(76.6

)

Other operating expenses, net (Note 16)

 

(167.5

)

(141.0

)

 

 

(1,937.5

)

(1,668.6

)

 

 

 

 

 

 

Operating income

 

275.9

 

205.2

 

 

 

 

 

 

 

Financial result (Note 17)

 

 

 

 

 

Financial income

 

12.4

 

8.1

 

Financial expense

 

(89.4

)

(139.3

)

Financial instruments, net

 

13.5

 

(52.2

)

Foreign currency exchange, net

 

(0.2

)

27.0

 

 

 

(63.7

)

(156.4

)

 

 

 

 

 

 

Result from related parties transactions, net (Note 8)

 

57.9

 

11.8

 

 

 

 

 

 

 

Net income before income tax and social contribution

 

270.1

 

60.6

 

 

 

 

 

 

 

Income tax and social contribution (Note 11)

 

(1.3

)

8.5

 

Deferred income tax and social contribution (Note 11)

 

(58.2

)

(13.7

)

 

 

 

 

 

 

Net income

 

210.6

 

55.4

 

 

 

 

 

 

 

Basic net income per common share - R$ (Note 14)

 

0.01

 

0.00

 

Diluted net income per common share - R$ (Note 14)

 

0.01

 

0.00

 

Basic net income per preferred share - R$ (Note 14)

 

0.63

 

0.21

 

Diluted net income per preferred share - R$ (Note 14)

 

0.62

 

0.21

 

 

The accompanying notes are an integral part of these financial statements.

 

F-4



 

Azul S.A.

 

Interim consolidated statements of other comprehensive income (Unaudited)

Three months ended March 31, 2018 and 2017

(In millions of Brazilian reais)

 

 

 

For the three months ended
March 31,

 

 

 

2018

 

2017

 

 

 

 

 

 

 

Net income

 

210.6

 

55.4

 

Other comprehensive loss to be reclassified to profit or loss in subsequent periods:

 

 

 

 

 

Changes in fair value of cash flow hedges, net of tax

 

2.0

 

0.6

 

Total comprehensive income

 

212.6

 

56.0

 

 

The accompanying notes are an integral part of these financial statements.

 

F-5



 

Azul S.A.

 

Interim consolidated statements of changes in equity

Three months ended March 31, 2018 and 2017 (Unaudited)

(In millions of Brazilian reais)

 

 

 

Issued
capital

 

Capital
Reserve

 

Treasury
shares

 

Cash flow
hedge reserve

 

Accumulated
losses

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

1,488.6

 

1,291.0

 

 

(33.8

)

(1,743.8

)

1,002.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

55.4

 

55.4

 

Other comprehensive income

 

 

 

 

0.6

 

 

0.6

 

Total comprehensive income

 

 

 

 

0.6

 

55.4

 

56.0

 

Share-based payment (Note 19)

 

 

1.2

 

 

 

 

1.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2017

 

1,488.6

 

1,292.2

 

 

(33.2

)

(1,688.4

)

1,059.2

 

 

 

 

Issued
capital

 

Capital
Reserve

 

Treasury
shares

 

Cash flow
hedge reserve

 

Accumulated
losses

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

2,163.4

 

1,898.9

 

(2.7

)

(11.2

)

(1,214.8

)

2,833.6

 

Impact of adoption of IFRS 9 (Note 3)

 

 

 

 

 

(0.4

)

(0.4

)

Impact of adoption of IFRS 15 (Note 3)

 

 

 

 

 

(41.3

)

(41.3

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 1, 2018

 

2,163.4

 

1,898.9

 

(2.7

)

(11.2

)

(1,256.5

)

2,791.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Profit for the period

 

 

 

 

 

210.6

 

210.6

 

Other comprehensive income

 

 

 

 

2.0

 

 

2.0

 

Total comprehensive income

 

 

 

 

2.0

 

210.6

 

212.6

 

Issuance of shares due exercise of stock options (Note 13)

 

19.1

 

(11.1

)

 

 

 

8.0

 

Treasury shares (Note 13)

 

 

 

(1.4

)

 

 

(1.4

)

Share-based payment expense (Note 19)

 

 

7.6

 

 

 

 

7.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

2,182.5

 

1,895.4

 

(4.1

)

(9.2

)

(1,045.9

)

3,018.7

 

 

The accompanying notes are an integral part of these financial statements.

 

F-6



 

Azul S.A.

 

Interim consolidated statement of cash flows (Unaudited)

Three months ended March 31, 2018 and 2017

(In millions of Brazilian reais)

 

 

 

For the three months ended March 31,

 

 

 

2018

 

2017

 

Cash flows from operating activities

 

 

 

 

 

Net income for the period

 

210.6

 

55.4

 

Adjustments to reconcile net income to cash flows provided by (used in) operating activities

 

 

 

 

 

Depreciation and amortization

 

81.2

 

76.6

 

Write-off of fixed assets and intangibles

 

3.4

 

20.7

 

Results unrealized from financial instruments

 

(14.8

)

23.5

 

Share-based payment expenses

 

7.6

 

1.2

 

Exchange (gain) and losses on assets and liabilities denominated in foreign currency

 

(9.8

)

(15.5

)

Interest (income) and expenses on assets and liabilities

 

(18.9

)

69.4

 

Deferred income tax and social contribution

 

58.2

 

20.7

 

Allowance for doubtful accounts

 

1.6

 

(0.6

)

Provision for tax, civil and labor risks (Note 20)

 

14.2

 

15.8

 

Provision for inventory

 

0.8

 

(0.0

)

Profit on sale of property and equipment (Note 10)

 

(0.7

)

(5.5

)

Changes in operating assets and liabilities

 

 

 

 

 

Trade and other receivables, net

 

(253.9

)

51.4

 

Inventories

 

(25.5

)

(7.7

)

Security deposits and maintenance reserves

 

(63.4

)

(42.4

)

Prepaid expenses

 

0.3

 

(13.0

)

Recoverable taxes

 

4.3

 

(10.2

)

Other assets

 

25.1

 

(6.4

)

Accounts payable

 

(5.8

)

0.8

 

Salaries, wages and employee benefits

 

4.1

 

15.0

 

Insurance premiums payable

 

(4.9

)

(7.5

)

Taxes payable

 

(14.5

)

(30.8

)

Federal installment payment program

 

(2.4

)

(1.6

)

Air traffic liability

 

(78.6

)

(37.7

)

Provision taxes, civil and labor risks (Note 20)

 

(10.1

)

(16.5

)

Other liabilities

 

(3.7

)

(6.6

)

Interest paid

 

(25.6

)

(122.2

)

Net cash (used) provided by operating activities

 

(121.2

)

26.3

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Short-term investment

 

 

 

 

 

Acquisition of short-term investments

 

(572.2

)

(189.2

)

Disposal of short-term investments

 

988.6

 

286.5

 

Long-term investment

 

 

 

 

 

Disposal of long-term investments

 

 

1.1

 

Restricted investments, net

 

5.1

 

70.0

 

Proceeds from sale of property and equipment

 

45.7

 

112.6

 

Acquisition of intangibles

 

(10.9

)

(9.1

)

Acquisition of property and equipment (Note 10)

 

(227.6

)

(146.0

)

Net cash provided by investing activities

 

228.7

 

125.9

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Debentures

 

 

 

 

 

Proceeds

 

 

 

Repayment

 

(40.1

)

 

Loans and financing

 

 

 

 

 

Proceeds

 

 

183.6

 

Repayment

 

(100.9

)

(401.2

)

Redemption of preferred shares

 

 

 

(44.7

)

Issuance of shares due exercise of stock options (Note 13)

 

8.0

 

 

Treasury shares (Note 13)

 

(1.4

)

 

Related parties (Note 8)

 

 

0.2

 

Net cash used by financing activities

 

(134.4

)

(262.1

)

 

 

 

 

 

 

Exchange gain and (losses) on cash and cash equivalents

 

3.5

 

(4.3

)

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(23.4

)

(114.2

)

 

 

 

 

 

 

Cash and cash equivalents at the beginning of the period

 

762.3

 

549.2

 

Cash and cash equivalents at the end of the period

 

738.9

 

435.0

 

 

The accompanying notes are an integral part of these financial statements.

 

F-7



 

Azul S.A.

 

Notes to the unaudited interim condensed consolidated financial statements

March 31, 2018

(In millions of Brazilian reais, except when otherwise indicated)

 

1.                  Operations

 

Azul S.A. (“Azul”) is a corporation headquartered at Av. Marcos Penteado de Ulhôa Rodrigues, 939, in the city of Barueri, in the state of São Paulo, Brazil. Azul was incorporated on January 3, 2008 and is a holding company for providers of airline passenger and cargo services. Azul and its subsidiaries are collectively referred to as the “Company”.

 

Azul Linhas Aéreas Brasileiras S.A. (“ALAB”), a 100% owned subsidiary incorporated on January 3, 2008, has operated passenger and cargo air transportation in Brazil since beginning operations on December 15, 2008. Canela Investments LLC (“Canela”), a 100% owned special purpose entity, headquartered in the state of Delaware, United States of America, was incorporated on February 28, 2008, to acquire aircraft outside of Brazil and lease them to ALAB.

 

The Company’s shares are traded on the BM&FBOVESPA and American Depositary Share (“ADS”) on the New York Stock Exchange (“NYSE”).

 

The consolidated financial statements are comprised of the individual financial statements ofthe entities as presented below:

 

 

 

 

 

 

 

% equity interest

 

Entities

 

Main activities

 

Country of 
incorporation

 

March 31, 2018

 

December 31,
 2017

 

Azul Linhas Aéreas Brasileiras S.A. (ALAB)

 

Airline operations

 

Brazil

 

100.0

%

100.0

%

Azul Finance LLC (a)

 

Aircraft financing

 

United States

 

100.0

%

100.0

%

Azul Finance 2 LLC (a)

 

Aircraft financing

 

United States

 

100.0

%

100.0

%

Blue Sabiá LLC (a)

 

Aircraft financing

 

United States

 

100.0

%

100.0

%

ATS Viagens e Turismo Ltda. (a)

 

Package holidays

 

Brazil

 

99.9

%

99.9

%

Azul SOL LLC (a)

 

Aircraft financing

 

United States

 

100.0

%

100.0

%

Azul Investment LLP (a)

 

Group financing

 

United States

 

100.0

%

100.0

%

Fundo Garoupa (b)

 

Exclusive investment fund

 

Brazil

 

100.0

%

100.0

%

Fundo Safira (a)

 

Exclusive investment fund

 

Brazil

 

100.0

%

100.0

%

Fundo Azzurra (a)

 

Exclusive investment fund

 

Brazil

 

100.0

%

100.0

%

Canela Investments LLC (Canela) (a)

 

Aircraft financing

 

United States

 

100.0

%

100.0

%

Canela 336 LLC (d)

 

Aircraft financing

 

United States

 

100.0

%

100.0

%

Canela 407 LLC (d)

 

Aircraft financing

 

United States

 

100.0

%

100.0

%

Canela 429 LLC (d)

 

Aircraft financing

 

United States

 

100.0

%

100.0

%

Canela Turbo Three LLC (d)

 

Aircraft financing

 

United States

 

100.0

%

100.0

%

Daraland S.A. (a)

 

Holding

 

Uruguay

 

100.0

%

100.0

%

Encenta S.A. (Azul Uruguai) (e)

 

Airline operations

 

Uruguay

 

100.0

%

100.0

%

TudoAzul S.A.

 

Loyalty programs

 

Brazil

 

100.0

%

100.0

%

 


(a)         Azul’s investment is held indirectly through ALAB.

(b)         Azul’s investment is held 1% directly and 99% through ALAB.

(c)          Transfer of ownership from Azul to ALAB on December 1, 2017.

(d)         ALAB’s investments are held indirectly through Canela.

(e)          Investments are held indirectly through Daraland.

 

F-8



 

Azul S.A.

 

Notes to the unaudited interim condensed consolidated financial statements

March 31, 2018

(In millions of Brazilian reais, except when otherwise indicated)

 

Senior notes

 

On October 19, 2017, Azul Investments LLP priced an offering of US$400.0 million aggregate principal amount of 5.875% senior unsecured notes due 2024. This transaction is part of Azul’s liability management strategy and net proceeds will be used for debt refinancing and general corporate purposes.

 

Strategic Partnerships

 

Empresa Brasileira de Correios e Telégrafos (Brazil’s Postal Service)

 

On December 20, 2017, ALAB and Correios (Brazil’s Postal Service) signed a memorandum of understanding for the creation of a private integrated logistics solutions company, Azul will own a 50.01% stake of the new company and Correios the remaining 49.9%.

 

With the existing demand already served by ALAB and Correios, the new company anticipates handling approximately 100 thousand tons of cargo per year. Both companies expect the new company to generate cost savings, operating efficiency and revenue gains while improving the service offer to the consumer.

 

The memorandum of understanding will be submitted to the Brazilian authorities and appropriate government bodies for approval. Only after regulatory approval, the new company will be established and its activities are expected to initiate by the end of 2018. Azul expects to consolidate this entity and its related operations.

 

2.                  Basis of preparation of financial statements

 

The interim condensed consolidated financial statements for the three months ended March 31, 2018 were approved and authorized for issuance during the executive board of directors meeting held on June 25, 2018.

 

The interim condensed consolidated financial statements were prepared in accordance with the IAS 34, Interim Financial Reporting, as issued by the International Accounting Standards Board (IASB).

 

The Company has adopted, when applicable, all standards and interpretations issued by the IASB, the International Financial Reporting Standards (IFRS) and Interpretations Committee that were in effect on March 31, 2018. The interim condensed consolidated financial statements were prepared using the historical cost basis, except for the valuation of certain financial instruments which are measured at fair value.

 

F-9



 

Azul S.A.

 

Notes to the unaudited interim condensed consolidated financial statements

March 31, 2018

(In millions of Brazilian reais, except when otherwise indicated)

 

3.                  Significant accounting policies

 

The accounting policies adopted in the preparation of the interim condensed consolidated financial statements are consistent with those used in the preparation of the Company’s annual consolidated financial statements for the year ended December 31, 2017 except for the new standards adopted on January 1, 2018, presented in notes 3.1, 3.2 and 3.3.

 

The interim condensed consolidated financial statements do not include all the information and disclosures required in the annual financial statements, and should be read in conjunction with the Company’s annual financial statements at December 31, 2017.

 

3.1 Financial instruments

 

3.1.1.Non-derivative financial assets—initial recognition and subsequent measurement

 

Initial recognition

 

Non-derivative financial assets, other than trade receivables, are measured at initial recognition at their fair value plus (in the case of a financial asset not at fair value through profit or loss) transaction costs that are directly attributable to the acquisition of the financial asset.

 

Trade receivables that do not contain a significant financing component are measured at initial recognition at the transaction price.

 

Classification of financial instruments

 

Under CPC 48 / IFRS 9 classification and measurement of financial instruments is based on the business model of the Company to manage financial assets and on the contractual cash flow characteristics of the financial assets.

 

Financial assets are classified in three categories:

 

(i)      measured at amortized cost,

(ii)     measured at fair value through other comprehensive income, and

(iii)    measured at fair value through profit or loss

 

Financial assets are classified in the categories above upon initial recognition when the Company is required to assess how the Company manages the asset or group of assets and to determine whether the contractual cash flows are solely payments of principal or interest on the principal amount outstanding.

 

F-10



 

Azul S.A.

 

Notes to the unaudited interim condensed consolidated financial statements

March 31, 2018

(In millions of Brazilian reais, except when otherwise indicated)

 

Business model assessment

 

The business model assessment requires classification of the asset in one of the business models defined by IFRS 9. The business models reflect how the Company manages the financial asset in order to generate cash flows on the basis of scenarios that the Company reasonably expects to occur. In order to perform the business model assessment the Company has grouped financial assets in portfolios of assets that are managed together.

 

Management Objective

 

Measurement

Collect contractual payments over the life of the instrument

 

Amortized cost

Collecting contractual cash flows and selling financial assets

 

Fair value through other comprehensive income

Held for trading or measured in a fair value basis

 

Fair value through profit or loss

 

Contractual cash flow characteristics assessment

 

The contractual cash flow characteristic assessment requires to determine whether the contractual cash flows of the assets consists solely of payment of principal or interest on the principal amount outstanding “SPPI”. When the asset cash flows consist solely of SPPI it will be subsequently measured following the result of the business model assessment. However when the asset cash flows do not consists solely of SPPI it will be measured at fair value through profit of loss irrespective of the result of the business model assessment.

 

Subsequent measurement of the financial assets of the Company

 

The criteria for subsequent measurement of the financial assets of the Company is presented below:

 

At amortized cost — Restricted investments, Trade and other receivables other than credit card receivables, receivables from related parties, security deposits and maintenance reserves;

 

At fair value through other comprehensive income- Credit card receivables; and

 

At fair value thorough profit of loss- Short-term investments and the TAP Convertible Bonds presented under long-term investments

 

Method of adoption

 

The Company has opted not to restate comparative information for periods before January 1, 2018. Financial assets for such comparative periods are recognized and measured following the criteria defined by IAS 39 and presented in Note 3.1 to the annual financial statements for the year ended December 31, 2017.

 

F-11



 

Azul S.A.

 

Notes to the unaudited interim condensed consolidated financial statements

March 31, 2018

(In millions of Brazilian reais, except when otherwise indicated)

 

3.1.2.Non-derivative financial liabilities—initial recognition and subsequent measurement

 

Initial recognition

 

Non-derivative financial liabilities are measured at initial recognition at its fair value less transaction costs that are directly attributable to the acquisition of the financial asset.

 

Subsequent measurement

 

Non-derivative financial liabilities are subsequently measured at amortized cost unless they are held for trading or when they qualify for and are designated upon initial recognition to be recognized at fair value through profit or loss “fair value option”.

 

Non-derivative interest-bearing financial liabilities are subsequently measured at amortized cost, using the effective interest rate method. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the effective interest rate. The effective interest rate amortization is included as finance expenses in the interim consolidated income statements.

 

All non-derivative financial liabilities of the Company at the reporting date are measured at amortized cost and consists of loans and financings and accounts payable, except for those designated as hedge item in a fair value hedge

 

Classification and measurement until December 31, 2017

 

The Company has opted not to restate comparative information for periods before January 1, 2018. Financial liabilities for such comparative periods are recognized and measured following the criteria defined by IAS 39 and presented in Note 3.1 to the annual financial statements for the year ended December 31, 2017.

 

3.1.3.Derivative financial instruments and hedge accounting— Initial recognition and subsequent measurement

 

Under IFRS 9, the Company opted to continue to apply IAS 39 requirements for hedge accounting, rather than adopting IFRS 9 requirements. The Company may opt to adopt IFRS 9 hedge accounting requirements at the beginning of any accounting period, including quarters.

 

F-12



 

Azul S.A.

 

Notes to the unaudited interim condensed consolidated financial statements

March 31, 2018

(In millions of Brazilian reais, except when otherwise indicated)

 

Initial recognition and subsequent measurement

 

The Company uses derivative financial instruments, such as currency forward contracts options, forward contracts, and interest rate swaps to hedge its foreign currency risks and interest rate risk as well as commodity price risk. Derivative financial instruments are recognized initially at fair value on the date when the derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are presented as financial assets when the instrument’s fair value is positive and as financial liabilities when fair value is negative.

 

Any gains or losses from changes in the fair value of derivatives during the year are recorded directly in the consolidated income statements for the period, except for the effective portion of cash flow hedges that are recognized directly in other comprehensive loss.

 

These gains or losses are then recorded in the consolidated income statements when the hedge item affects the consolidated income statements.

 

Hedge accounting

 

The following classifications are used for hedge accounting purposes:

 

·     Fair value hedge when hedging against exposure to changes in fair value of recognized assets or liabilities, or an unrecognized firm commitment.

 

·     Cash flow hedge when providing protection against changes in cash flows that is attributable to a particular risk associated with a recognized asset or liability or a highly probable forecast transaction which may affect the income or foreign currency risk in an unrecognized firm commitment.

 

On inception of a hedge relationship, the Company formally designates and documents the hedge relationship to which the Company wishes to apply hedge accounting, as well as the Company’s objective and risk management strategy for undertaking the hedge. The documentation includes identification of the hedge instrument, the item or transaction being hedged, the nature of the risk being hedged, the nature of the risks excluded by the hedge, a prospective statement of the effectiveness of the hedge relationship and how the Company will assess the effectiveness of the changes in the hedging instruments fair value in offsetting the exposure to changes in the fair value of the item being hedged or cash flows attributable to the risk being hedged. It is expected that these hedges are highly effective in offsetting any changes in fair value or cash flows, and they are continually assessed to determine whether they actually have been highly effective over all the reporting periods for which they were designated.

 

Hedges that meet the criteria for hedge accounting are accounted for as follows:

 

F-13



 

Azul S.A.

 

Notes to the unaudited interim condensed consolidated financial statements

March 31, 2018

(In millions of Brazilian reais, except when otherwise indicated)

 

Fair value hedge

 

The gain or loss resulting from changes in fair value of a hedge instrument (for derivative hedge instrument) or the foreign exchange component of its carrying amount measured in accordance with IAS 21 (for non-derivative hedge instrument) is recognized in the consolidated income statements. The gain or loss from the hedge item attributable to the hedged risk should adjust the carrying amount of the hedged item and is also recognized in the consolidated income statements.

 

If the hedged item is derecognized, the unamortized fair value is recognized immediately in the interim consolidated income statements.

 

When an unrecognized firm sales commitment is designated as a hedged item in a hedge relationship, the change in fair value of the firm sales commitment attributable to the hedge risk is recognized as a financial asset or as a financial liability, with the recognition of a corresponding gain or loss in the consolidated income statements. The accumulated balance in the interim consolidated balance sheets resulting from successive changes in fair value of the firm sales commitment attributable to the hedged risk will be transferred to the balance of the hedged item upon its recognition (recognition of balance of accounts payable or accounts receivable).

 

The Company holds interest rate swaps to hedge against its exposure to changes in fair value of some of its aircraft financing (Note 15).

 

Cash flow hedge

 

The effective portion of a gain or loss from the hedge instrument is recognized directly in other comprehensive loss while any ineffective portion of the hedge is recognized immediately in financial income (expenses).

 

The amounts recorded in other comprehensive loss are transferred to the interim consolidated income statements in tandem with the hedged transaction impact on profit or loss, for example when a forecasted sale occurs or when the income or expense being hedged is recognized. When the hedged item is the cost of a non-financial asset or non-financial liability, the amounts recorded as other comprehensive loss are transferred to initial carrying amount of the non-financial assets or liability.

 

If the occurrence of the forecast transaction or firm commitment is no longer likely, the amounts previously recognized in other comprehensive loss are transferred to the interim consolidated income statements. If the hedge instrument expires or is sold, terminated, exercised without replacement or rollover, or if its designation as a hedge is revoked, any cumulative gain or loss previously recognized in comprehensive loss remains deferred in other comprehensive loss until the forecast transaction or firm commitment affects profit or loss.

 

F-14



 

Azul S.A.

 

Notes to the unaudited interim condensed consolidated financial statements

March 31, 2018

(In millions of Brazilian reais, except when otherwise indicated)

 

The Company uses swap contracts to hedge against its exposure to the risk of changes in interest rates related to its finance lease transactions.

 

Current and non-current classification

 

Derivative instruments that are not classified as effective hedge instruments are classified as current, non-current or segregated into current or non-current portions based on the underlying contractual cash flows.

 

·   When the Company expects to maintain a derivative as an economic hedge (and do not apply hedge accounting) for a period exceeding 12 months after the interim consolidated balance sheets date, the derivative is classified as non-current (or segregated into current and non-current portions), consistent with the classification of the underlying item.

 

·   Embedded derivatives that are not closely related to the host contract are classified in a manner consistent with the cash flows of the host contract.

 

·     Derivative instruments that are designated as and are effective hedge instruments are classified consistently with the classification of the underlying hedged item. The derivative instrument is segregated into current and non-current portion only if a reliable allocation can be made.

 

3.1.4.Derecognition of financial assets and financial liabilities

 

Financial assets

 

Financial assets, or where appropriate, part of a financial asset or part of a group of similar financial assets, are derecognized when:

 

·    The rights to receive cash flows from the assets have expired; or

 

·             The Company has transferred their rights to receive cash flows of the assets and (a) the Company has substantially transferred all the risks and benefits of the assets, or (b) the Company has not transferred or retained substantially all the risks and benefits related to the assets, but has transferred control of the assets.

 

When the Company has transferred their rights to receive cash flows from assets and has not transferred or retained substantially all the risks and rewards relating to an asset, that asset is recognized to the extent of the continuing involvement of the Company. In this situation, the Company also recognizes an associated liability.

 

The transferred assets and associated liabilities are measured based on the rights and obligations that the Company has retained.

 

Continuing involvement that takes the form of a guarantee on the assets transferred is measured by the original book value of the assets or the maximum payment that may be required from the Company, whichever is lower

 

F-15



 

Azul S.A.

 

Notes to the unaudited interim condensed consolidated financial statements

March 31, 2018

(In millions of Brazilian reais, except when otherwise indicated)

 

Financial liabilities

 

A financial liability is derecognized when the obligation under the liability is discharged, cancelled, or expires.

 

When an existing financial liability is replaced by another from the same lender with substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability, with the difference in the corresponding book values recognized in the consolidated income statements.

 

3.1.5. Offsetting of financial instruments

 

Financial assets and financial liabilities are offset and the net amount reported in the interim consolidated balance sheets if there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, to realize the assets and settle the liability simultaneously.

 

3.1.6.    Impairment of financial assets

 

The Company recognizes an allowance for losses on financial assets for expected credit losses in line of IFRS 9 requirements.

 

Trade receivables and contract assets

 

The Company uses the simplified approach allowed by IFRS 9 to estimate the allowance for losses on trade receivables.

 

Under the simplified approach the Company estimates expected credit losses over the life of the receivables at the reporting date (which in all cases have a contractual life shorter than 12 months) since they result from transactions with customers and do not have a significant financing component.

 

In estimating expected credit losses the Company considers credit card receivables as receivables with a low risk of default. Considering that it has a relevant history of no credit risk losses on such receivables and that it does not expect losses during the lifetime of those receivables no allowance has been recognized for those assets.

 

F-16



 

Azul S.A.

 

Notes to the unaudited interim condensed consolidated financial statements

March 31, 2018

(In millions of Brazilian reais, except when otherwise indicated)

 

In order to estimate expected credit losses for other trade receivables and contract assets the Company aggregates such assets in portfolios of receivables which share credit risk characteristics. The Company currently use portfolios to estimate credit losses. For each portfolio the Company measures the historic rate of losses (net of recoveries) on defaulted receivables over a relevant historic period considering that, generally, a receivable has defaulted when is more than 90 days overdue. Such historical default rate for the portfolio is subsequently adjusted to incorporate an estimate of the impact of future economic conditions on past historic rates. The estimate of the impact of future economic conditions is based on the observed correlation of defaults with macroeconomic indicators. The Company periodically reviews the historic period over which defaults are measured and, the relevant macroeconomic indicator to use and how the correlate with the experience of defaults.

 

Other financial assets

 

For other financial assets the Company assesses individually for each counterparty whether there has been a significant increase in the credit risk of the asset since initial recognition or not. Such determination is based on information already available to the Company. If and when credit risk ratings of the counterparty are publicly available such information is also taken into consideration.

 

For financial assets with no significant increase in credit risk an estimate is made of expected credit losses that result from default events on a financial instrument that are possible within the 12 months after the reporting date while for those assets with a significant increase in credit risk the estimate is made of losses that result from default events that are possible over the lifetime of the asset.

 

An allowance for loss is recognized when the Company estimates that the risk of credit losses over the relevant period is more than de minimis. In measuring the allowance the Company considers at least three scenarios (standard, optimistic and pessimistic) and for each an estimate of cash inflows (including cash inflows from collateral) is made. The resulting estimated cash flows for each scenario is discounted to present value to the reporting date and are probability-weighted based on a judgmental determination of the probability of each scenario.

 

3.1.7.Fair value of financial instruments

 

The fair value of financial instruments actively traded in organized financial markets is determined based on prices quoted in the market at close of business at the interim consolidated balance sheets date, not including the deduction of transaction costs.

 

The fair value of financial instruments for which there is no active market is determined using valuation techniques. These techniques can include use of recent market transactions, references to the current fair value of other similar instruments, analysis of discounted cash flows, or other valuation models.

 

F-17



 

Azul S.A.

 

Notes to the unaudited interim condensed consolidated financial statements

March 31, 2018

(In millions of Brazilian reais, except when otherwise indicated)

 

An analysis of the fair value of financial instruments and more details about how they are calculated is described in Note 15.

 

3.2. Revenue from contracts with customers

 

Passenger tickets revenue is recognized upon effective rendering of the transport service. Travel related services revenue is recognized when the related transportation service is provided being classified as passenger revenue. Travel related services include baggage fees, administrative charges, upgrades and other travel related charges.

 

Tickets and related services sold and not used, corresponding to advanced ticket and related services sales (Air traffic liability) are recorded in current liabilities. Tickets expire in one year.

 

The Company recognizes revenue for tickets and travel related services sold upon the departure of the related scheduled flight and for tickets and travel related services sold that are expected to expire unused (brakeage). The Company estimates the value of future refunds and exchanges, net of forfeitures for all unused tickets, once the flight date has already passed. These estimates are based on historical data and experience from past events.

 

The estimated future refunds and exchanges included in the Air traffic liability are compared monthly to actual refunds and exchange activities in order to monitor if the estimated amount of future refunds and exchanges is reasonable.

 

Revenue is segregated as follows:

 

 

 

For the three months ended

 

 

 

March 31, 2018

 

March 31, 2017
(Pro forma)

 

Operating revenue

 

 

 

 

 

Tickets revenue

 

1,901.9

 

1,600.5

 

Travel related services

 

209.9

 

189.4

 

Total passenger revenue

 

2,111.8

 

1,789.9

 

 

 

 

 

 

 

Other revenue

 

101.6

 

88.5

 

 

 

 

 

 

 

Total revenue

 

2,213.4

 

1,878.4

 

 

3.2.1. “TudoAzul” Program

 

Under the “TudoAzul” program customers accrue points based on the amount spent on tickets flown. The amount of points earned depends on TudoAzul membership status, market, flight, day-of-week, advance purchase, booking class and other factors, including promotional campaigns. The Company recognizes revenue on points that are estimated to expire unused. Points in general expire in 2 years after the date earned regardless of activity in the account.

 

F-18



 

Azul S.A.

 

Notes to the unaudited interim condensed consolidated financial statements

March 31, 2018

(In millions of Brazilian reais, except when otherwise indicated)

 

Upon the sale of a ticket, the Company recognizes a portion of the ticket sales as revenue when the transportation service occurs and defers a portion corresponding to the points earned under the TudoAzul Program, in accordance with IFRIC 13, Customer Loyalty Programs in the account “Air Traffic Liabilities”.

 

The Company determines the estimated selling price of the air transportation and points as if each element is sold on a separate basis. The total consideration from each ticket sale is then allocated to each of these elements individually on a pro rata basis. The estimated selling price of points is determined using an equivalent ticket value (“ETV”) approach which is based on the prior 12 months’ weighted average equivalent ticket value of similar fares as those used to settle award redemptions.

 

We sell mileage credits to business partners including co-branded credit cards, financial institutions and other businesses. The related revenue is deferred and recognized as passenger revenue when points are redeemed and the related transportation service occurs, based on the weighted average price of the points sold. In instances where points are redeemed for products, revenue is recognized when products are delivered, net of the costs of the products.

 

Sales of mileage credits to co-branded credit cards are comprised of two components, transportation and marketing. Accordingly, we recognize the marketing component in “other revenue” based on contractual terms.

 

Points awarded or sold and not used are recorded in “Air traffic liability”. The Company recognizes revenue for points sold and awarded that will never be redeemed by program members. The Company estimates such amounts annually based upon the latest available information regarding redemption and expiration patterns.

 

3.3. New and amended standards and interpretations

 

The Company applied for the first time certain standards and amendments, which are effective for annual periods beginning on or after 1 January 2018. The Company has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective.

 

The nature and the effect of these changes are disclosed below.

 

IFRS 9 — Financial instruments

 

In July 2014, the IASB issued the final version of IFRS 9 - Financial Instruments, which superseded IAS 39 - Financial Instruments: Recognition and Measurement. IFRS 9 is applicable for annual periods beginning on or after January 1, 2018.

 

Except for hedge accounting, retrospective application is required, but comparative information is not required. The Company adopted the new standard on January 1, 2018.

 

F-19



 

Azul S.A.

 

Notes to the unaudited interim condensed consolidated financial statements

March 31, 2018

(In millions of Brazilian reais, except when otherwise indicated)

 

The Company has opted not to present comparative information showing retroactively the results from the adoption of IFRS 9.

 

Classification and measurement

 

The new standard sets out new requirements for the classification and measurement of financial assets and liabilities as detailed in Note 3.1.

 

The Company classified its financial assets and liabilities in accordance with the business models established in IFRS 9 and evaluated the contractual terms of those instruments not measured at fair value through profit or loss. As result of the new classification and measurement requirements credit card receivables previously measured at amortized cost are measured at fair value through comprehensive income.

 

The following table presents for financial assets and liabilities at January 1, 2018 the original measurement category under IAS 39 and the current measurement category under IFRS 9.

 

 

 

Original under IAS 39

 

Current under IFRS 9

 

 

Measurement category

Assets

 

 

 

 

Short-term investments

 

Held for trading

 

Fair value through profit of loss

Restricted investments

 

Fair value through profit of loss

 

Amortized cost

Trade and other receivables

 

Loans and receivables

 

Amortized cost except for credit card receivables which are measured at fair value through other comprehensive income

Derivative financial instruments

 

Held for trading except those under cash flow hedge accounting

 

Fair value through profit of loss except those under cash flow hedge accounting

Non-current related parties

 

Loans and receivables

 

Amortized cost

Long-term investments (TAP Convertible Bond)

 

Hybrid instrument recorded on its entity at fair value through profit or loss

 

Fair value through profit of loss

Non-current restricted investments

 

Fair value through profit of loss

 

Amortized cost

Security deposits and maintenance reserves

 

Loans and receivables

 

Amortized cost

Non-current derivative financial instruments

 

Held for trading except those under cash flow hedge accounting

 

Fair value through profit of loss except those under cash flow hedge accounting

 

 

 

 

 

Liabilities

 

 

 

 

Loans and financings

 

Amortized cost

 

Amortized cost

Accounts payable

 

Amortized cost

 

Amortized cost

Derivative financial instruments

 

Held for trading except those under cash flow hedge accounting

 

Fair value through profit of loss except those under cash flow hedge accounting

Non-current loans and financings

 

Amortized cost

 

Amortized cost

Non-current accounts payable

 

Amortized cost

 

Amortized cost

Non-current derivative financial instruments

 

Held for trading except those under cash flow hedge accounting

 

Fair value through profit of loss except those under cash flow hedge accounting

 

F-20



 

Azul S.A.

 

Notes to the unaudited interim condensed consolidated financial statements

March 31, 2018

(In millions of Brazilian reais, except when otherwise indicated)

 

All changes result exclusively from the change in measurement criteria on transition to IFRS 9.  No financial asset or liability was designated as measured at fair value through profit or loss under IAS 39 and the Company did not make any such designation upon adoption of IFRS 9.

 

Impairment

 

As further detailed in Note 3.1 the new impairment model requires the recognition of allowance for credit losses on assets not measured at fair value through profit or loss based on expected credit losses (ECL) rather than only incurred credit losses as was the case under IAS 39.

 

The estimate of the expected loss is based on the Company’s historical credit losses, adjusted for management’s expectations about future economic conditions for the relevant period.

 

The application of the requirements of impairment under IFRS 9 resulted in an increase in the allowance for doubtful accounts of R$0,6 at January 1, 2018 which corresponds on its entirety to trade receivables (other than credit card receivables) measured at amortized cost.

 

Hedge accounting

 

As allowed under IFRS 9, the Company opted to continue to apply IAS 39 requirements for hedge accounting, rather than adopting IFRS 9 requirements.

 

IFRS 15 - Revenue from Contracts with Customers

 

IFRS 15, issued in May 2014, establishes a new constant five-step model, which will be applied to revenues from customer contracts. Under IFRS 15, revenues are recognized in an amount that reflects the consideration to which an entity expects to be entitled in exchange for the transfer of goods or services to a customer. The new revenue standard replaced all previous revenue recognition requirements under IFRS.

 

The Company adopted the new standard on the effective date of its entry into force, January 1, 2018, using the modified adoption method.

 

The new standard requires the reclassification of ancillary revenues, such as baggage fees, administrative charges, upgrades and other travel related charges that were previously classified in other revenue, to passenger revenue. These ancillary fees are directly related to passenger travel and will no longer be considered distinct performance obligations separate from the passenger travel component. In this context, such ancillary revenues, which were previously recognized when sold, are now recognized when transportation is provided.

 

In addition, the adoption of IFRS 15 slightly increases the rate used to account TudoAzul Program credits. We previously analyzed the market prices of airfares offered to travel agencies with high volumes of transactions to establish the selling price of our mileage credits.

 

Considering the guidance in the new standard we adopted the Equivalent Ticket Price method as described on 3.2.1 above.

 

F-21



 

Azul S.A.

 

Notes to the unaudited interim condensed consolidated financial statements

March 31, 2018

(In millions of Brazilian reais, except when otherwise indicated)

 

In the tables below, we show the pro forma balances of prior periods to provide comparability of the balances, reflecting the adjustments of the impact of the adoption of IFRS 9 and IFRS 15, if the Company had previously adopted them.

 

 

 

Three months ended
March 31, 2017

 

 

 

As Previously
Reported

 

Adjustments

 

Under new
standards

 

Income Statement:

 

 

 

 

 

 

 

Passenger Revenue

 

1,600.5

 

189.4

 

1,789.9

 

Other Revenue

 

273.3

 

(184.8

)

88.5

 

Other Operating Expenses

 

(141.0

)

(0.5

)

(141.5

)

Deferred income tax and social contribution

 

(13.7

)

(1.0

)

(14.7

)

Net Income

 

55.4

 

3.1

 

58.5

 

 

 

 

December 31, 2017

 

 

 

As Previously
Reported

 

Adjustments

 

Under new
standards

 

Balance Sheet:

 

 

 

 

 

 

 

Trade and other receivables

 

914.4

 

0.6

 

915.0

 

Air traffic liability

 

1.287.4

 

62.6

 

1.350.0

 

Deferred income taxes

 

326.9

 

(21.5

)

305.4

 

Accumulated losses

 

(1,214.8

)

(41.7

)

(1,256.5

)

 

Amendments to IAS 7 Statement of Cash Flows: Disclosure Initiative

 

The amendments require entities to provide disclosure of changes in their liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes (such as foreign exchange gains or losses).

 

Amendments to IAS 12 Income Taxes: Recognition of Deferred Tax Assets for Unrealized Losses

 

The amendments clarify that an entity needs to consider whether tax law restricts the sources of taxable profits against which it may make deductions on the reversal of deductible temporary difference related to unrealized losses. Furthermore, the amendments provide guidance on how an entity should determine future taxable profits and explain the circumstances in which taxable profit may include the recovery of some assets for more than their carrying amount.

 

Annual Improvements Cycle - 2014-2016

 

Amendments to IFRS 12 Disclosure of Interests in Other Entities: Clarification of the scope of disclosure requirements in IFRS 12

 

The amendments clarify that the disclosure requirements in IFRS 12, other than those in paragraphs B10—B16, apply to an entity’s interest in a subsidiary, a joint venture or an associate (or a portion of its interest in a joint venture or an associate) that is classified (or included in a disposal group that is classified) as held for sale.

 

F-22



 

Azul S.A.

 

Notes to the unaudited interim condensed consolidated financial statements

March 31, 2018

(In millions of Brazilian reais, except when otherwise indicated)

 

4.                   Financial risk management objectives and policies

 

The main financial liabilities of the Company, other than derivatives, are loans, debentures and accounts payable. The main purpose of these financial liabilities is to finance operations as well as finance the acquisition of aircraft. The Company has trade accounts receivable and other accounts receivable that result directly from its operations.

 

The Company also has investments available for trading and contracts derivative transactions such as currency forwards and swaps in order to reduce the exposure to foreign exchange fluctuations.

 

The Company’s senior management supervises the management of market, credit and liquidity risks. All activities with derivatives for risk management purposes are carried out by experts with skills, experience and appropriate supervision. It is the Company’s policy not to enter in to derivatives transactions for speculative purposes.

 

a)                 Market risk

 

Market risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk consists of three types of risk: interest rate risk, currency risk and other price risk, such as equity price risk and commodity risk. Financial instruments exposed to market risk include loans payable, deposits, financial instruments measured at fair value through profit or loss and derivative financial instruments.

 

a.1)                 Interest rate risk

 

Interest rate risk is the risk that the fair value of future results of a financial instrument fluctuates due to changes in market interest rates. The exposure of the Company to the risk of changes in market interest rates refers primarily to long-term obligations subject to variable interest rates.

 

The Company manages interest rate risk by monitoring the future projections of interest rates on its loans, financing and debentures as well as on its operating leases. To mitigate this risk, the Company has used derivative instruments aimed at minimizing any negative impact of variations in interest rates.

 

Sensitivity to interest rates

 

The table below shows the sensitivity to possible changes in interest rates, keeping all other variables constant in the Company’s income before taxes that are impacted by loans payable subject to variable interest rates. For the sensitivity analysis, the Company utilized the following assumptions:

 

·     LIBOR based debt: weighted average interest rate of 4.68% p.a.

·     CDI based debt: weighted average interest rate of 9.44% p.a.

 

F-23



 

Azul S.A.

 

Notes to the unaudited interim condensed consolidated financial statements

March 31, 2018

(In millions of Brazilian reais, except when otherwise indicated)

 

We estimated the impact on profit and loss and equity for the three months ended March 31, 2018 resulting from variation of 25% and 50% on the weighted average rates, as shown below:

 

 

 

25%

 

-25%

 

50%

 

-50%

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

51.6

 

(51.6

)

103.1

 

(103.1

)

 

a.2)                 Currency risk

 

Currency risk is the risk that the fair value of future dollar denominated commitments vary according to the fluctuation of the foreign exchange rate. The exposure of the Company to changes in exchange rates relates primarily to the U.S dollar denominated loans and financing, net of investments in the U.S. dollar, and also to operating expenses originated in U.S. dollar.

 

The Company is also exposed to changes in the exchange rate of the Euro through its investment in the TAP Convertible Bonds (Note 15).

 

The Company manages its currency risk by using derivative financial instruments seeking to hedge up to twelve months of its projected non-operational activities.

 

The Company continuously monitors the net exposure in foreign currency and, when deemed appropriate, enters into arrangements to hedge the projected non-operating cash flow for up to 12 months to minimize its exposure.

 

The Company’s nominal foreign exchange exposure is shown below:

 

 

 

Exposure to U.S. dollar

 

Exposure to Euro

 

 

 

March 31,
2018
(Unaudited)

 

December
31, 2017

 

March 31,
2018
(Unaudited)

 

December
31, 2017

 

Assets

 

 

 

 

 

 

 

 

 

Cash and cash equivalents and short-term Investments

 

149.8

 

278.2

 

 

 

Security deposits and maintenance reserves

 

1,303.3

 

1,237.4

 

 

 

Long-term investments (Note 15)

 

 

 

906.4

 

836.0

 

Financial instruments

 

50.2

 

49.5

 

 

 

Other assets

 

382.1

 

314.6

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

1,885.4

 

1,879.7

 

906.4

 

836.0

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Accounts payable

 

(244.7

)

(255.6

)

 

 

Loans and financing (*)

 

(2,560.9

)

(2,609.7

)

 

 

Other liabilities

 

(159.7

)

(164.9

)

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

(2,965.3

)

(3,030.2

)

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives (NDF) — notional

 

1,892.1

 

1,224.0

 

 

 

 

 

 

 

 

 

 

 

 

 

Net exposure

 

812.2

 

73.5

 

906.4

 

836.0

 

 

F-24



 

Azul S.A.

 

Notes to the unaudited interim condensed consolidated financial statements

March 31, 2018

(In millions of Brazilian reais, except when otherwise indicated)

 


(*)    As of March 31, 2018, US dollar denominated working capital loans totaling R$1,387.6 were swapped to Brazilian Reais, resulting in an total debt in Reais of R$2,214.3.

 

Sensitivity to exchange rates

 

At March 31, 2018, the Company used the closing exchange rate of R$3.3238/US$1.00 and R$4.0850/EUR1.00. We present below a sensitivity analysis considering a variation of 25% and 50% over the existing rates:

 

 

 

25%

 

-25%

 

50%

 

-50%

 

Exposure in US$

 

R$4.1548/US$

 

R$2.4929/US$

 

R$4.9857/US$

 

R$1.6619/US$

 

Effect on exchange rate variation

 

203.0

 

(203.0

)

406.1

 

(406.1

)

 

 

 

25%

 

-25%

 

50%

 

-50%

 

Exposure in EUR

 

R$5.1063/EUR

 

R$3.0638/EUR

 

R$6.1275/EUR

 

R$2.0425/EUR

 

Effect on exchange rate variation

 

226.6

 

(226.6

)

453.2

 

(453.2

)

 

a.3)                 Risks related to variations in prices of aircraft fuel

 

The volatility of prices of aircraft fuel is one of the most significant financial risks for airlines. The company’s fuel price risk management aims to balance the airline exposure to its market peers, so that the airline is neither overly affected by a sudden increase in prices nor is unable to capitalize on a substantial fall in fuel prices. The Company manages the risk related to fuel price volatility either through forward looking fixed-price contracts directly with a supplier, or derivative contracts negotiated with banks. The company may use derivative contracts for oil or its sub products.

 

Fuel price sensitivity

 

The table below sets out the sensitivity of the Company’s fuel hedges to substantial changes in the oil markets, maintaining all other variables constant as of March 31, 2018.

 

The analysis considers a change in oil prices, in Reais, relative to the market average for the current period and projects the impact on the Company’s financial instruments, stemming from a variation of 25% and 50% in the oil prices, as follows:

 

Change in Oil prices in Reais

 

25%

 

-25%

 

50%

 

-50%

 

Impact on fuel hedges

 

31.8

 

(21.5

)

58.4

 

(48.1

)

 

a.4)                 Risk related to changes in the fair value of TAP Convertible Bonds

 

Since the TAP Convertible Bonds contain a conversion option into shares of TAP, the Company is exposed to changes in the fair value of TAP.

 

The acquisition of the TAP Convertible Bonds is part of the commercial strategy of the Company of creating synergies between the Company and TAP by having the option to become a direct shareholder of TAP in case the stock price of TAP increases and is economically advantageous to convert the debt into TAP shares.

 

F-25



 

Azul S.A.

 

Notes to the unaudited interim condensed consolidated financial statements

March 31, 2018

(In millions of Brazilian reais, except when otherwise indicated)

 

b)                  Credit risk

 

Credit risk is inherent in operating and financial activities of the Company, mainly represented under the headings of: trade receivables, cash and cash equivalents, including bank deposits.

 

The credit risk of “trade receivables” is comprised of amounts payable by major credit card companies, and also trade receivables from travel agencies, and sales payable in installments. The Company usually assesses the corresponding risks of financial instruments and diversifies the exposure.

 

Financial instruments are held with counterparties that are rated at least A in the assessment made by S&P and Fitch, or, mostly, are hired in futures and commodities stock exchange, which substantially mitigates the credit risk. TAP Convertible Bonds are secured by liens over certain intangible assets.

 

c)                  Liquidity risk

 

Liquidity risk takes on two distinct forms: market and cash flow liquidity risk. The first is related to current market prices and varies in accordance with the type of asset and the markets where they are traded. Cash flow liquidity risk, however, is related to difficulties in meeting the contracted operating obligations at the agreed dates.

 

As a way of managing the liquidity risk, the Company invests its funds in liquid assets (government bonds, CDBs, and investment funds with daily liquidity), and the Cash Management Policy establishes that the Company’s and its subsidiaries’ weighted average debt maturity should be higher than the weighted average maturity of the investment portfolio.

 

The schedule of financial liabilities held by the Company is as follows:

 

March 31, 2018
(Unaudited)

 

Immediate

 

Until 6
months

 

7 to 12
months

 

1 to 5 years

 

More than 5
years

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans and financing

 

173.3

 

166.6

 

241.7

 

1,239.0

 

1,567.0

 

3,387.6

 

Accounts payable

 

737.1

 

181.2

 

29.4

 

 

 

947.7

 

Liabilities from derivative transaction

 

21.1

 

 

24.9

 

195.0

 

189.5

 

430.5

 

Provisions

 

 

 

 

77.2

 

0.1

 

77.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

931.5

 

347.8

 

296.0

 

1,511.2

 

1,756.6

 

4,843.1

 

 

Capital management

 

The Company’s assets may be financed through equity or third-party financing. If the Company opts for equity capital it may use funds from contributions by shareholders or through selling its equity instruments.

 

F-26



 

Azul S.A.

 

Notes to the unaudited interim condensed consolidated financial statements

March 31, 2018

(In millions of Brazilian reais, except when otherwise indicated)

 

The use of third-party financing is an option to be considered mainly when the Company believes that the cost would be less than the return generated by an acquired asset. It is important to ensure that the Company maintains an optimized capital structure, provides financial solidity while providing for the viability of its business plan. As a capital-intensive industry with considerable investment in assets with a high aggregated value, it is natural for companies in the aviation sector to report a high degree of leverage.

 

The Company manages capital through leverage ratios, which is defined by the Company as net debt divided by the sum of net debt and total equity. Management seeks to maintain this ratio at levels equal to or lower than industry levels.

 

Management includes in the net debt the loans and financing (includes debentures) less cash and cash equivalents, restricted cash, short and long-term investments and current and noncurrent restricted investments.

 

The Company’s capital structure is comprised of its net indebtedness defined as total loans and financing (includes debentures) and operating leases net of cash and cash equivalents, restricted cash, short and long-term investments and current and noncurrent restricted investments. Capital is defined as equity and net indebtedness.

 

The Company is not subject to any externally imposed capital requirements.

 

The Company defines total capital as total net equity and net debt as detailed below:

 

 

 

March 31, 2018
(Unaudited)

 

December 31,
2017

 

 

 

 

 

 

 

Equity

 

3,018.7

 

2,833.6

 

 

 

 

 

 

 

Cash and cash equivalents (Note 5)

 

(738.9

)

(762.3

)

Short-term investments (Note 6)

 

(627.7

)

(1,036.1

)

Long-term investments (Note 15)

 

(906.4

)

(836.0

)

Restricted financial investments (Note 7) (*)

 

(3.9

)

(8.8

)

Loans and financing (Note 12) (*)

 

3,387.6

 

3,489.9

 

 

 

 

 

 

 

Net debt

 

1,110.7

 

846.7

 

 

 

 

 

 

 

Total capital

 

4,129.4

 

3,680.3

 

 


(*)    Includes current and non current.

 

F-27



 

Azul S.A.

 

Notes to the unaudited interim condensed consolidated financial statements

March 31, 2018

(In millions of Brazilian reais, except when otherwise indicated)

 

5. Cash and cash equivalents

 

Cash and cash equivalents are comprised of the following:

 

 

 

March 31,
2018
(Unaudited)

 

December 31,
2017

 

 

 

 

 

 

 

Cash and bank deposits

 

143.6

 

160.4

 

Cash equivalents

 

 

 

 

 

Bank Deposit Certificate — CDB

 

356.8

 

290.8

 

Investments funds

 

238.5

 

311.1

 

 

 

738.9

 

762.3

 

 

The balances of cash and bank deposits represent amounts deposited in checking accounts with Brazilian banks.

 

The CDB investments are indexed to the Brazilian Interbank Deposit Certificate (“CDI”) and are repayable on demand.

 

Investment funds is comprised of CDB’s investments and repurchase agreements, denominated in Reais, with financial institutions (deposit certificates).

 

Cash equivalents investments are classified as financial assets at fair value through profit or loss.

 

6. Short term investments

 

Investments are comprised of:

 

 

 

March 31,
2018
(Unaudited)

 

December 31,
2017

 

 

 

 

 

 

 

Other short-term investments

 

50.3

 

57.3

 

Investment funds

 

577.4

 

978.8

 

 

 

627.7

 

1.036.1

 

 

Investment funds is comprised of Brazilian government bonds and bank notes, denominated in Reais, with financial institutions (deposit certificates) and debentures issued by B and BB+ risk rated companies bearing an accumulated average interest rate of 102.8% of CDI - Interbank Deposit Certificate rate. Brazilian government bonds are comprised of National Treasury Bills (“LTN”), National Financial Bills (“LFT”) and National Treasury Notes (“NTN”).

 

Short-term investments are classified as financial assets at fair value through profit or loss.

 

F-28



 

Azul S.A.

 

Notes to the unaudited interim condensed consolidated financial statements

March 31, 2018

(In millions of Brazilian reais, except when otherwise indicated)

 

7. Restricted investments

 

Restricted financial investments are comprised of deposits to guarantee some of our stand-by letters of credit, required by certain financial institutions, which were invested in floating rate CDBs - Bank Certificate Deposits and DI — Investments linked to the Interbank Deposit interest rate. The return on these investments varies from 100% to 101% of the CDI rate.

 

8.                  Related parties

 

a)                 Compensation of key management personnel

 

Key management personnel include board of director members, officers and executive committee members. The compensation paid or payable to officers and directors services is as follows:

 

 

 

For the three months ended
March 31,

 

 

 

2018

 

2017

 

 

 

(Unaudited)

 

Salaries and wages

 

4.0

 

3.7

 

Share-based compensation and restricted share units plans

 

6.0

 

3.6

 

 

 

10.0

 

7.3

 

 

b)                 Guarantees granted

 

The Company granted guarantees for some property rental agreements entered into by three of its executive officers, the amounts involved are not material.

 

c)              Maintenance agreements

 

ALAB entered into Maintenance Agreements to aircraft with a TAP Manutenção e Engenharia Brasil S/A (“TAP ME”). TAP ME is part of the same economic group as TAP.

 

The total value of maintenance services acquired by the Company pursuant to such Maintenance Agreements during the three months ended March 31, 2018 was R$16.2 (March 31, 2017 - R$22.7).

 

d)                 Codeshare Agreement

 

On 2015, ALAB signed a codeshare agreement with TAP and United (a shareholder), which will provide transport of passengers whose tickets have been issued by one of the airlines and the service is performed by the other.

 

F-29



 

Azul S.A.

 

Notes to the unaudited interim condensed consolidated financial statements

March 31, 2018

(In millions of Brazilian reais, except when otherwise indicated)

 

e)              Loan agreements receivable

 

On September 2, 2016 the Company entered into a loan agreement with a shareholder in the amount of US$2.8 million (March 31, 2018 - R$9.9). This agreement bears interest at a rate of Libor plus 2.3% p.a. and will be paid in full in 2019.

 

On November 24, 2017 the Company entered into a loan agreement with HNA, the borrower, in the amount of US$22 million (March 31, 2018 - R$75.9). This agreement bears a one time upfront fee of 1% of the principal and interest at a rate of 1.0% per calendar month, and matures in 364 days from the signing date. The loan is guaranteed by a pledge of 25,472,852 preferred shares of Azul owned by HNA.

 

f)               Transactions with TAP

 

The Company entered into certain transactions with TAP as described below:

 

 

 

For the three months ended
March 31,

 

 

 

2018

 

2017

 

 

 

(Unaudited)

 

Aircraft sublease (i)

 

2.9

 

6.1

 

TAP Convertible Bonds (ii)

 

55.0

 

5.7

 

 

 

57.9

 

11.8

 

 


(i)        Aircraft sublease

 

In March 2016, the Company subleased fifteen aircraft to its related party TAP. Seven of the fifteen leases had been executed at a time when the market for regional aircraft was higher than when the related seven subleases were executed. As a result, although the Company believes that the rates in these seven subleases represented approximate market rates at the time of their execution, the Company will receive from TAP an amount lower than the amount that the Company has to pay under the related leases. This difference considering the total term of sublease contracts discounted to its net present value was R$64.4 in March 31, 2018 (December 31, 2017 — R$68.9) and recorded as a provision for the obligations under onerous leases, as required by IAS 37 “Provisions, Contingent Liabilities and Contingent Assets”, representing the remaining amount of the future unavoidable costs under the leases.

 

The loss recognized in the three months ended March 31, 2018 in the “result from related party transaction, net” line item in the interim consolidated income statements, due to assumptions at fair value.

 

In July 2017, the Company subleased two additional aircraft to TAP. These aircraft are owned by the Company and the rates in these leases represented market rates at the time of their execution. Additionally, two of the fifteen initially subleased aircraft was returned TAP, resulting in a total of fifteen aircraft subleased to TAP as of March 31, 2018.

 

F-30



 

Azul S.A.

 

Notes to the unaudited interim condensed consolidated financial statements

March 31, 2018

(In millions of Brazilian reais, except when otherwise indicated)

 

For the fifteen subleases, over the three months ended March 31, 2018, amounts received from TAP from the subleases amounted to R$25.0 (March 31, 2017 — R$29.5), and amounts paid to the lessors of the related aircrafts totaled R$28.9 (March 31, 2017 — R$36.8).

 

(ii)     TAP Convertible Bonds

 

On March 14, 2016, the Company acquired series a convertible bonds issued by TAP (the “TAP Convertible Bonds”) for an amount of €90 million. The TAP Convertible Bonds are convertible, in whole or in part at, the option of Azul into new shares representing the share capital of TAP benefiting from enhanced preferential economic rights (the “TAP Shares”). Upon full conversion, the TAP Shares will represent 6.0% of the total and voting capital of TAP, with the right to receive dividends or other distributions corresponding to 41.25% of distributable profits of TAP.

 

The option is exercisable starting in July 2016. The TAP Convertible Bonds mature 10 years from their issuance and bear interest at an annual rate of 3.75% until June 20, 2016 and at rate of 7.5% thereafter. Accrued interest remains unpaid until the earlier of the maturity date or early redemption of the bonds.

 

TAP has the right to early redeem the TAP Convertible Bonds if not yet converted and upon the earlier of (i) occurrence of an IPO, or (ii) 4 years from issuance of the TAP Convertible Bonds provided that TAP should be in compliance with certain financial covenants. The TAP Convertible Bonds will be redeemed at their principal amount together with the accrued unpaid interest.

 

The TAP Convertible Bonds, as well as the option to convert them into TAP Shares, were classified as a single financial asset recorded at changes in the fair value through profit or loss, under “Result from related parties’ transactions, net”, classified in “Long term investments”. Until December 2017, HNA had an option to obtain 30% of the economic interest in the TAP bonds. In December 2017, the option expired unexercised thus the associated liability was reversed in December 2017.

 

For the three months ended March 31, 2018, the net result from changes in the fair value of TAP Convertible Bonds was a net gain of R$60.7. The net change for the three-months March 31, 2017 was R$5.7.

 

g)              Related parties Guarantees

 

ALAB entered into a Deed of Guarantee and Indemnity as of September 15, 2017, in connection with the obligations and liabilities related to the operating lease agreements of three A350-900XW aircraft entered into by Hong Kong Airlines and Beijing Capital

 

F-31



 

Azul S.A.

 

Notes to the unaudited interim condensed consolidated financial statements

March 31, 2018

(In millions of Brazilian reais, except when otherwise indicated)

 

Airlines, companies of the HNA Group, shareholder of the Company, and Wilmington Trust SP Services (Dublin) Limited.

 

F-32



 

Azul S.A.

 

Notes to the unaudited interim condensed consolidated financial statements

March 31, 2018

(In millions of Brazilian reais, except when otherwise indicated)

 

h)             Operating lease agreements

 

As of September 12, 2017, ALAB entered into Operating Lease Agreements to five A330 neo aircraft with Avolon Aerospace Leasing Ltd (“Avolon”). Avolon is part of the same economic group as HNA.

 

The Company carried out an extensive pricing process with the main players in the international aircraft leasing market, including Avolon’s competitors. Upon completion of this process, the transaction with Avolon presented the best terms and conditions for the Company. This transaction has been completed on arms’ length terms that would be applicable in transactions with third parties.

 

9.                  Security deposits and maintenance reserves

 

 

 

March 31, 2018
(Unaudited)

 

December 31,
2017

 

 

 

 

 

 

 

Security deposits

 

190.7

 

181.0

 

Maintenance reserve deposits

 

1,139.0

 

1,078.1

 

 

 

1,329.7

 

1,259.1

 

 

Security deposits and maintenance reserve deposits are denominated in US dollars and adjusted for changes to foreign exchange rates. Security deposits are related to aircraft lease contracts and will be refunded to the Company when the aircraft is returned at the end of the lease agreement. Maintenance reserve deposits are paid under certain aircraft leases to be held as collateral in advance of the performance of major maintenance activities and are reimbursable upon completion of the related maintenance event, under certain conditions.

 

As of March 31, 2018 maintenance reserve deposits are likely to be recoverable as they are lower than the expected cost of the related next maintenance event that the reserves are intended to collateralize. During the three months ended March 31, 2018 the Company recognized a write-off of R$0.6 (December 31, 2017 - R$9.6) in the “Maintenance materials and repairs” in the interim consolidated income statements line item for maintenance reserve deposits that are not likely to be reimbursed in relation to aircraft that went through their last maintenance event prior to their return.

 

The Company replaced some of its security deposits and maintenance reserves deposits for bank guarantees, and was refunded an amount of R$5.7 and R$0, respectively as of March 31, 2018 (March 31, 2017 - R$1.6 and R$0 respectively).

 

F-33



 

Azul S.A.

 

Notes to the unaudited interim condensed consolidated financial statements

March 31, 2018

(In millions of Brazilian reais, except when otherwise indicated)

 

Presented below are the changes in the security deposits and maintenance reserve deposits balance:

 

 

 

Maintenance
reserves deposits

 

Security deposits

 

Total

 

 

 

 

 

 

 

 

 

Balance at December 31, 2016

 

858.2

 

219.8

 

1,078.0

 

 

 

 

 

 

 

 

 

Additions

 

291.4

 

25.8

 

317.2

 

Refunds from sublease (*)

 

 

3.3

 

3.3

 

Write-offs

 

(9.6

)

 

(9.6

)

Refunds/returns

 

(81.0

)

(69.5

)

(150.5

)

Foreign exchanges variations

 

19.1

 

1.6

 

20.7

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

 

1,078.1

 

181.0

 

1,259.1

 

 

 

 

 

 

 

 

 

Additions

 

75.0

 

15.2

 

90.2

 

Write-offs

 

(0.6

)

 

(0.6

)

Refunds/returns

 

(19.9

)

(6.4

)

(26.3

)

Foreign exchanges variations

 

6.4

 

0.9

 

7.3

 

 

 

 

 

 

 

 

 

Balance at March 31, 2018

 

1,139.0

 

190.7

 

1,329.7

 

 


(*) refers to the net amount received and refunds from TAP in relation to security deposits of subleased aircraft.

 

10.           Property and equipment

 

Property and equipment are mainly comprised of “aircraft and engines” and aircraft equipment.

 

“Aircraft and engines” refers to owned aircraft and capitalized heavy maintenance and structural checks related to owned aircraft.

 

During the three months ended March 31, 2018, the Company sold an owned aircraft. The gain associated with the sale transactions of R$0.7, was recognized in “Other operating expenses, net”.

 

During the three months ended March 31, 2017, the Company entered into sale and leaseback transactions on owned aircraft. All aircraft were subsequently leased back by the Company under operating lease agreements. The gain associated with the sale and leaseback transactions of R$5.5 was recognized in “Other operating expenses, net”.

 

F-34



 

Azul S.A.

 

Notes to the unaudited interim condensed consolidated financial statements

March 31, 2018

(In millions of Brazilian reais, except when otherwise indicated)

 

a)      Breakdown

 

 

 

March 31,2018
(Unaudited

 

December 31,
 2017

 

 

 

Cost

 

Accumulated 
depreciation

 

Net amount

 

Net amount

 

Leasehold improvements

 

119.6

 

(50.8

)

68.8

 

71.6

 

Equipment and facilities

 

117.2

 

(70.5

)

46.7

 

45.8

 

Vehicles

 

1.2

 

(0.8

)

0.4

 

0.4

 

Furniture and fixtures

 

17.7

 

(9.1

)

8.6

 

8.5

 

Aircraft equipment

 

974.7

 

(279.8

)

694.9

 

647.8

 

Aircraft and engines

 

2,705.3

 

(430.8

)

2,274.5

 

2,357.0

 

Advance payments for acquisition of aircrafts

 

148.9

 

 

148.9

 

148.9

 

Construction in progress

 

192.0

 

 

192.0

 

45.5

 

 

 

4,276.6

 

(841.8

)

3,.434.8

 

3,325.5

 

 

b)      Changes in property and equipment balances are as follows

 

 

 

Cost

 

 

 

December 31,
 2017

 

Acquisitions

 

Disposals/
Write-offs

 

Transfers

 

March 31, 2018

 

Leasehold improvements

 

117.9

 

1.4

 

 

0.3

 

119.6

 

Equipment and facilities

 

112.8

 

4.5

 

(0.1

)

 

117.2

 

Vehicles

 

1.2

 

 

 

 

1.2

 

Furniture and fixtures

 

17.2

 

0.5

 

 

 

17.7

 

Aircraft equipment

 

908.7

 

71.6

 

(5.6

)

 

974.7

 

Aircraft and engines

 

2,770.2

 

 

(67.6

)

2.7

 

2,705.3

 

Advance payments for acquisition of aircrafts

 

148.9

 

 

 

 

148.9

 

Construction in progress

 

45.5

 

149.5

 

 

(3.0

)

192.0

 

 

 

4,122.4

 

227.5

 

(73.3

)

 

4,276.6

 

 

 

 

Accumulated depreciation

 

 

 

December 31,
 2017

 

Depreciation 
for the year

 

Disposals/
Write-offs

 

Transfers

 

March 31, 2018

 

Leasehold improvements

 

(46.3

)

(4.5

)

 

 

(50.8

)

Equipment and facilities

 

(67.0

)

(3.5

)

 

 

(70.5

)

Vehicles

 

(0.8

)

 

 

 

(0.8

)

Furniture and fixtures

 

(8.7

)

(0.4

)

 

 

(9.1

)

Aircraft equipment

 

(260.9

)

(20.0

)

1.1

 

 

(279.8

)

Aircraft and engines

 

(413.2

)

(41.5

)

23.9

 

 

(430.8

)

 

 

(796.9

)

(69.9

)

25.0

 

 

(841.8

)

 

For owned aircraft, we employ the deferral method that results in the capitalization of heavy maintenance and structural checks cost. Under this method, the cost of major maintenance and structural checks are capitalized and amortized as a component of depreciation and amortization expense until the next major maintenance event. Heavy maintenance and structural checks on aircraft held under operating lease is expensed as incurred, and it is recorded in the “maintenance material and repair” line items.

 

The next major maintenance and structural check event is estimated based on the average maintenance costs and timing of the next scheduled maintenance event as suggested by the manufacturer and according to the fleet’s historical performance in the Company, and may change based on changes in aircraft utilization and changes in suggested manufacturer

 

F-35



 

Azul S.A.

 

Notes to the unaudited interim condensed consolidated financial statements

March 31, 2018

(In millions of Brazilian reais, except when otherwise indicated)

 

maintenance intervals. In addition, these assumptions can be affected by unplanned incidents that could damage a major component to the extent that would require a major maintenance event prior to a scheduled maintenance event.

 

Based on technical analysis and to reflect the Company’s current outlook for the use of its assets, the average useful life of certain engine major maintenance events was extended from five to six years effective in July 1, 2017. The change in useful life was calculated prospectively.

 

The amortization of deferred maintenance expenses over major maintenance expenditures and structural checks and the maintenance expenses are presented as follows:

 

 

 

For the three months ended
March 31,

 

 

 

2018

 

2017

 

 

 

(Unaudited)

 

Amortization of capitalized maintenance costs

 

(6.0

)

(14.5

)

Maintenance materials and repairs

 

(123.3

)

(146.0

)

 

 

(129.3

)

(160.5

)

 

As of March 31, 2018, the Company reviewed the impairment indicators and no impairment of property and equipment was recognized as a result of such impairment analysis.

 

11. Income tax and social contribution

 

a)                 Income tax and social contribution (Unaudited)

 

 

 

March 31,

 

 

 

2018

 

2017

 

Income before income tax and social contribution

 

270.1

 

60.6

 

Combined tax rate

 

34

%

34

%

Income tax and social contribution statutory rate

 

(91.8

)

(20.6

)

 

 

 

 

 

 

Adjustments to calculate the effective tax rate:

 

 

 

 

 

Taxable profit on foreign subsidiaries

 

 

(2.0

)

Exchange differences on foreign subsidiaries

 

(11.9

)

8.4

 

Unrecorded deferred tax on tax loss and on temporary differences

 

19.7

 

3.0

 

Permanent differences

 

16.6

 

(3.7

)

Reversal of provisions for uncertain tax provisions (*)

 

 

9.8

 

Other

 

7.9

 

(0.1

)

Total income tax and social contribution expenses

 

(59.5

)

(5.2

)

 

 

 

 

 

 

Current income tax and social contribution

 

(1.3

)

8.5

 

Deferred income tax and social contribution

 

(58.2

)

(13.7

)

 

 

(59.5

)

(5.2

)

 


(*)    Reversal of income tax provision prescribed considering the five-year statute of limitation

 

F-36



 

Azul S.A.

 

Notes to the unaudited interim condensed consolidated financial statements

March 31, 2018

(In millions of Brazilian reais, except when otherwise indicated)

 

b)             Breakdown of deferred income tax and social contribution

 

 

 

March 31, 2018
(Unaudited)

 

December 31,
2017

 

Deferred tax liabilities

 

 

 

 

 

On temporary differences

 

 

 

 

 

Provision for tax, civil and labor risks

 

26.3

 

17.7

 

Deferred revenue of TudoAzul program

 

(113.3

)

(109.7

)

Aircraft lease expense

 

(240.5

)

(233.1

)

Depreciation of aircraft and engines

 

(59.7

)

(55.3

)

Exchange rate

 

(15.2

)

(11.3

)

Deferred gain related to aircraft sold

 

47.1

 

49.3

 

Cash flow hedge (*)

 

4.1

 

5.0

 

Fair value of TAP convertible bonds

 

(165.1

)

(147.4

)

Provision for onerous contract

 

21.9

 

23.4

 

Financial instruments

 

(24.4

)

(0.7

)

Fair value of aircraft

 

(0.4

)

(0.4

)

Fair value of slots

 

(27.9

)

(27.9

)

Other on business combination fair value adjustment

 

(3.9

)

(4.3

)

Others

 

41.3

 

41.7

 

Net deferred tax (liabilities)

 

(509.7

)

(453.0

)

 

 

 

 

 

 

Deferred tax assets on net operating losses

 

145.4

 

126.1

 

 

 

 

 

 

 

Net deferred tax (liabilities)

 

(364.3

)

(326.9

)

 


(*) Deferred tax recorded in “Other comprehensive income (loss)”

 

The Company offsets tax assets and liabilities if and only if it has a legally enforceable right to set off current tax assets and current tax liabilities and the deferred tax assets and deferred tax liabilities relate to income taxes levied by the same tax authority.

 

The Company has income tax losses that are available indefinitely for offsetting against future taxable profits, as follows:

 

 

 

March 31, 2018
(Unaudited)

 

December 31,
2017

 

Net tax losses

 

1,841.0

 

1,940.1

 

 

 

 

 

 

 

Income tax loss carryforwards (25%)

 

460.2

 

485.0

 

Social contribution negative base tax carryforwards (9%)

 

165.7

 

174.6

 

 

Deferred income tax assets on tax losses have not been recognized as there is no evidence of recoverability in the near future, except for R$145.4 related to 30% of the deferred tax liability balance as of March 31, 2018 in accordance to the limit provided by the tax law.

 

F-37



 

Azul S.A.

 

Notes to the unaudited interim condensed consolidated financial statements

March 31, 2018

(In millions of Brazilian reais, except when otherwise indicated)

 

In 2017 the Company used tax loss carryforwards for an amount of R$244.5 after adhering to the “PERT” (Provisional Measure 783/17 converted into Law 13,496/17), which is an installment payment program for federal taxes and other debts administrated by Local Government Authorities (“PGFN” and “RFB”).

 

The balance of the debts included in all Federal Installment Payment Programs (REFIS and PERT) is as follows:

 

 

 

March 31,
2018
(Unaudited)

 

December 31, 
2017

 

Air navigation fees (REFIS)

 

73.9

 

75.6

 

Air navigation fees (PERT)

 

38.8

 

39.6

 

Total

 

112.7

 

115.2

 

 

 

 

 

 

 

Current

 

9.7

 

9.8