About Azul

Strategy

Our competitive strengths

We believe the following business strengths allow us to compete successfully:

Largest network in Brazil

We have the largest network in Brazil in terms of departures and cities served, with 784 daily departures serving 102 destinations, creating an unparalleled network of 203 non-stop routes as of December 31, 2016. Our connectivity at large hubs allows us to consolidate traffic, serving larger and medium-sized markets as well as smaller cities that do not generate suficiente demand for point-to-point service. We have grown our network organically and through the acquisition of TRIP in 2012, at that time the largest regional carrier in Latin America in terms of destinations served. We believe that our extensive network coverage allows us to connect more passengers than our competitors, who serve significantly fewer destinations. As of December 31, 2016, we served 96 destinations in Brazil, compared to 52 for Gol and 44 for LATAM. In addition, we were the sole airline on 70% of ourroutes and 34 of the destinations we served, and the leading player in 66 cities as of December 31, 2016. By comparison, Gol and LATAM were leading carriers in only 13 and 4 cities, respectively, as of December 31, 2016. Furthermore, as of December 31, 2016, 22% and 16% of our domestic network overlapped with that of Gol’s and LATAM’s, respectively, while Gol’s and LATAM’s networks had an overlap of more than 80% between them.

Our optimized fleet enables us to efficiently serve our target markets

Our fleet strategy is based on optimizing the type of aircraft for the different markets we serve. Our diversified fleet of ATR, E-Jets and Airbus aircraft enables us to serve markets that we believe our main competitors, who only fly larger narrow-body aircraft, cannot serve profitably. We believe our current fleet of aircraft allows us to match capacity to demand, achieve high load factors, provide greater convenience and frequency, and serve low and medium density routes and markets in Brazil that are not served by our main competitors. According to ANAC, 67% of the flights in Brazil carried fewer than 120 passengers in 2015. Our domestic fleet consists of modern Embraer E-Jets which seat up to 118 passengers, fuel-efficient ATR aircraft which seat up to 70 passengers, and next-generation Airbus A320neos which seat up to 174 passengers, while all the narrow-body aircraft used by Gol and LATAM in Brazil have between 144 and 220 seats. As a result, the average trip cost for our fleet of R$24,179 as ofDecember 31, 2016 was 31% lower than that of larger Boeing 737-800 jets flown by Gol. We also operate Airbus A330s to serve international markets.

Our fleet plan focuses on maintaining a trip cost advantage relative to our main competitors while also providing us with flexibility for growth into new markets both domestically and internationally. We expect to add up to 58 new next-generation Airbus A320neos between 2017 and 2023, and 33 next-generation E-195-E2 aircraft starting in 2019 to replace older generation aircraft and serve high-density markets. These new generation aircraft are more fuel-efficient than older generation aircraft. We expect that our fleet plan will allow us to maintain market-leading trip costs and to reduce our CASK, both in absolute terms and relative to our main competitors.

Industry-leading PRASK

We utilize a proprietary yield management system that is key to our strategy of optimizing yield through dynamic fare segmentation and demand stimulation. We target both business travelers, to whom we offer convenient flight options, and costconscious leisure travelers, to whom we offer low fares to stimulate air travel and to encourage advanced purchases. This segmentation model has enabled us to achieve a market-leading PRASK of 25.3 real cents in 2016. In addition, in 2016, our PRASK represented a 35% premium compared to Gol. We believe our superior network and product offering allows us to attracthigh-yield and frequent business travelers. According to ABRACORP, we held a 29% share in terms of Brazilian business-focused travel agency revenue, compared to a 17% market share in terms of RPKs as of December 31, 2016. In 2016, our average businessfocused travel agency ticket price was 27% higher than our main competitor and our total average fare was 6% higher than our main competitor.

As an illustration of our ability to stimulate demand, the following table highlights the increase in average customers per day on certain routes from November 2008, shortly before we started operations, to December 2016:

Total Direct Flights Azul Average Daily Enplanements (One Way)
Campinas — Rio de Janeiro
November 2008 6 - 564
Dezembro de 2016 21 19 1,773
Campinas — Salvador
November 2008 - - 155¹
December 2016 4 4 480
Campinas — Belo Horizonte
November 2008 5 - 503
December 2016 13 13 1,160
Belo Horizonte — Goiânia
November 2008 1 - 82
December 2016 3 3 292
Campinas — Porto Alegre
November 2008 - - 241¹
December 2016 9 9 875

Source:
ANAC and internal data.

(1) Itinerary available through connecting flight only.

The increase in flights from Campinas, our main hub, illustrates the success of our demand-stimulation model. Across Brazil, our Campinas hub offers superior connectivity for connecting passengers, with the most non-stop services in the country as of December 31, 2016. As a result of our focus on underserved markets, we have been able to establish a successful platform that hassignificantly increased demand at Viracopos airport over the last eight years. In November 2008, before we began operations, airlines serving Viracopos airport offered just twelve daily departures to eight destinations. As of December 31, 2016, Viracopos airport offered 154 daily departures to 55 destinations, and we held a 97% share of those daily departures.

Most efficient cost structure in the Brazilian market

We have leveraged our management team’s experience by implementing a disciplined, low cost operating model to achieve our operational efficiencies. We believe we have achieved these operational efficiencies primarily through:

  • Optimized aircraft for markets and routes served;
  • Low sales, distribution and marketing costs through direct-to-consumer marketing (approximately 86% of our total advertising expenses in 2016), low distribution costs (approximately 87% of all sales were generated by online channels in 2016) and associated use of social networking tools;
  • Lower costs due to single class cabin configuration for our domestic flights;
  • Operation of a modern fleet with better fuel-efficiency and lower maintenance costs than previous generation aircraft;
  • Innovative and beneficial financial arrangements for our aircraft, as a result of being one of the largest customers for Embraer and ATR aircraft;
  • Investment in check-in technology to increase operating efficiencies; and
  • Creation of a company-wide business culture focused on driving down costs.

As a result, we have achieved lower trip costs than our main competitor. In 2016, our average trip cost was R$24,179, which was 31% lower than that of Gol. In addition, our FTEs per aircraft were the lowest in Brazil at 84 compared to 117 for Gol as of December 31, 2016.

We have a robust and scalable operating platform that features advanced technology such as ticketless reservations, an Oraclefinancial system and electronic check-in kiosks at our main destination airports. We believe that our scalable platform providessuperior reliability and safety and will generate economies of scale as we continue to expand.

Strategic global partnerships

Over the last two years, we have established long-term strategic partnerships with United, Hainan and TAP. In 2015, United, acting through a subsidiary, acquired shares representing approximately a 5% economic interest in our company for US$100million. Our alliance with United has enhanced the reach of our mutual networks and created additional connecting traffic, as both we and United began selling each other’s flights on our websites through a code-share agreement. This code-share agreement also provides customers flying on both airlines with a seamless reservations and ticketing process, including boarding pass and baggage check-in to their final destination, and we are evaluating possible additional cooperation with United.

In August 2016, Hainan became our single largest equity shareholder following a strategic investment of US$450 million in exchange for shares representing approximately a 24% economic interest in our company. In 2016, we transferred two aircraft orders for future deliveries of Airbus A350s to certain Hainan affiliates and we expect to transfer three additional aircraft orders for future deliveries of Airbus A350s to certain Hainan affiliates by mid-2017. Furthermore, with Hainan, we are exploring globalnetworking opportunities, code-sharing and new routes as well as evaluating additional ways in which we can cooperate with Hainan to capitalize on the substantial passenger traffic between China and Brazil.

As part of the privatization process of TAP, a consortium of private investors (including our principal shareholder) acquired a stake in TAP, and we invested €90 million in exchange for TAP bonds convertible into up to a 41.25% economic interest in TAP. Such economic interest is equivalent to up to 6% of TAP’s voting rights and, if converted, would make us TAP’s largest shareholder in terms of economic interest. For information on the conversion mechanism of TAP bonds, see "Business—Strategic, Partnerships, Alliances and Commercial Agreements—TAP." As of December 31, 2016, TAP served more than 75 destinations,including 10 destinations in Brazil, and was the leading European carrier serving Brazil in terms of number of seats and flights. In addition, in June 2016, we successfully launched a non-stop flight between our and TAP’s main hubs, Campinas and Lisbon. We are constantly evaluating the various ways in which we can cooperate with TAP and in 2016 subleased 15 aircraft to TAP as part of our fleet optimization plan, see "Business—Fleet" and "Business—Strategic Partnerships, Alliances and Commercial Agreements—TAP."

As a result of our existing code-share agreements with United and TAP, our customers have access to more than 133 additional destinations worldwide. In October 2016, Hainan announced flights between China and Lisbon and in 2017, we expect to conclude a code-share agreement with Hainan, expanding our connectivity between Brazil and China. In addition, we believe that our strategic partnerships with these airlines provide our TudoAzul members with a broad range of attractive redemption options.

High-quality customer experience through product and service-focused culture

We believe we provide a high-quality, differentiated travel experience and have a strong culture focused on customer service. Our crewmembers are trained to be service-oriented, focusing on providing the customer with a travel experience that we believe is unique among Brazilian airlines. We provide extensive training for our crewmembers that emphasizes the importance of both safety and customer service. We strive to hold our employees accountable to maintain the quality of our crew and customer service.

Our service features include passenger seat selection, leather seats, individual entertainment screens with free live television at every seat in all our jets, extensive legroom with a pitch of 30 inches or more, complimentary beverage and snack service, free bus service to key airports we serve (including between the city of São Paulo and Viracopos airport) and a fleet younger than Gol and LATAM.

We focus on meeting our customers’ needs and had one of the best on-time performance records among Brazil’s largest carriers for the last three years, at 89% for 2016, 91% for 2015 and 90% for 2014, according to OAG. OAG has also recognized us as the low cost airline with best on-time performance in the world in 2015. In addition, our completion rate has been consistently high, totaling 99% in 2016, 2015 and 2014.

Well-recognized brand

We believe we have been successful in building a strong brand by using innovative marketing and advertising techniques with low expenditures that focus on social networking tools to generate word-of-mouth recognition of our high quality service. As a result of our strong focus on customer service, surveys that we have conducted indicate that, as of December 31, 2016, 90% of our customers would recommend or strongly recommend Azul to a friend or relative. The strength of our brand has been recognized in a number of awards:

  • Named "Best Airline in Brazil" in 2016 by Melhores Destinos, the largest web portal of airline fare promotions and loyalty programs in Brazil;
  • Named "Best Low Cost Carrier in South America" in 2016 for the sixth consecutive year by Skytrax, an aviation research organization;
  • Named "Best Staff in South America" in 2016 by Skytrax;
  • Named "Best Regional Leadership" in 2016 based on our success in the Brazilian market by Flight Airline Business, an air transport industry news and analysis provider, as part of their Airline Strategy Awards;
  • Recognized as the "Third Most On-Time Airline in the World" by OAG in 2015;
  • Recognized as the "Most On-Time Low Cost Carrier in the World" by OAG in 2015;
  • Named "Best Low Cost Carrier in The World" in 2012 by CAPA, an independent aviation research organization;
  • Named one of the "50 Most Innovative Companies in The World" and "Most Innovative Company in Brazil" in 2011 by Fast Company, a business magazine;
  • Named "Fastest Check-in in Brazil" in 2016 by the Civil Aviation Secretariat (Secretaria de Aviação Civil); and
  • Named one of the "50 Hottest Brands In The World" in 2010 by Ad Age, a leading marketing news source.

In addition, as a result of our strong brand awareness and focus on customer service, our TudoAzul loyalty program had approximately 7.0 million members as of December 31, 2016 and has been recognized with the following awards:

  • Named "Best Loyalty Program in Brazil in 2016" by Melhores Destinos;
  • Named "The Loyalty Program with the Best Rates in Brazil in 2016" by Melhores Destinos; and
  • Recognized as having "The Most Innovative Co-Branded Credit Card" at the 2015 Loyalty Awards Event presented by Flight Global, a renowned website recognized by the global aviation community as a reliable source of news, data and expertise relating to the aviation and aerospace industries.

Experienced management team

We believe we benefit from our highly knowledgeable and experienced management team. Our senior management, which has senior airline experience both in Brazil and in the United States, includes:

  • Our Chairman and Chief Executive Officer David Neeleman, a dual Brazilian and U.S. citizen, who has founded four airlines in three different countries, including JetBlue Airways;
  • The President of our only operating subsidiary - Azul Linhas Aéreas Brasileiras S.A., or Azul Linhas, Antonoaldo Neves, who was appointed on January 27, 2014. He previously served as a Partner at McKinsey & Company where he worked for over ten years, during which time he led our integration process with TRIP, and was appointed by BNDES and the Civil Aviation Authority Secretary as a board member of INFRAERO from 2011 to 2012;
  • Azul Linhas’ Chief Operating Officer, Flávio Costa, who has been part of the Azul founding team since inception and has more than 40 years of experience in the airline industry, having served as Technical and Operations Director at Pluna S.A., and OceanAir and as Technical Director at Varig;
  • Our Chief Financial Officer and Investor Relations Officer, John Peter Rodgerson, who previously served as Director of Planning and Financial Analysis at JetBlue Airways for five years. He was responsible for implementing our financial strategy and cost structure since our inception;
  • Our Chief Revenue Officer, Abhi Shah, who has more than 14 years of experience in the aviation industry and has previously held executive positions at JetBlue Airways and Boeing. He was responsible for developing our yield management, network planning and revenue structure;
  • The Head of our TudoAzul loyalty program, Alexandre Wagner Malfitani, who previously served as our Director of Finance and Treasurer. Before joining Azul, Mr. Malfitani held the position of Managing Director of Treasury at United, having also worked in the finance industry, including as a fund manager at Deutsche Bank and as a trader at Credit Agricole Indosuez; and
  • Our Vice President of Clients, Sami Foguel, is responsible for customer service, Azul Cargo and Quality assurance. Prior to joining Azul in 2014, Mr. Foguel held several executive positions at HSBC, including Head of Products, Segments, Customer Relationship Management and Customer Experience. Before joining HSBC, Mr. Foguel worked at McKinsey & Company for ten years.

Most of our senior management team has worked together for over eight years and has been with us since our launch. All non-Brazilian individuals on the team are residents of São Paulo with permanent work visas. In addition to Mr. Neeleman, all of our principal officers are also shareholders in our company, and all are motivated by participation in our stock option and restricted stock plans, which we believe aligns shareholders’ and management’s interests. Our management team has focused on establishing a successful working environment and employee culture. We believe the experience and commitment of our senior management team have been a critical component in our growth, as well as in the continuing enhancement of our operating and financial performance.

Our Growth Strategies

Our goal is to grow profitably and increase shareholder value by offering frequent and affordable services to our customers. We intend to implement the following strategic initiatives to achieve this objective:

Adding new destinations, larger aircraft and increasing flight frequencies

We intend to continue identifying, entering into and rapidly achieving leading market presence in new markets or underserved markets with high growth potential. We also intend to continue to grow by adding new destinations to our network, further connecting the cities that we already serve with new non-stop service, increasing frequency in existing markets, and using larger aircraft in markets that we have developed over the years. Finally, we intend to apply our disciplined approach of selecting new destinations that can be served by our ATR or Embraer aircraft, with a continued focus on Brazilian cities where we believe there is the greatest opportunity for profitable growth, and on select destinations in South America with perceived high growth potential. Our ATR aircraft give us a significant strategic advantage in the ability to enter new cities and access previously untapped demand, since these aircraft only have 70 seats and, therefore, require fewer passengers for the flight to become profitable.

We believe there are significant opportunities to connect the cities we currently serve with non-stop service where none existed before. We believe that our Embraer fleet is the ideal fleet type to connect such cities due to the combination of seat count and low trip costs. For example, Azul is the only airline flying non-stop between Porto Alegre and Cuiabá, two of our focus-cities where only we have the optimized aircraft for this service.

On existing routes that we believe present additional demand, we intend to increase the number of daily flights with our E-Jets to achieve or further increase schedule superiority over our competitors. For example, we increased our daily departures on the Campinas—Rio de Janeiro route from three to 19 between March 2009 and December 2016, and our daily departures on the Campinas—Belo Horizonte route from four to 13 between August 2009 and December 2016. By providing this additional convenience to our customers, we aim to continue stimulating demand for our products and services.

We have also begun to introduce next-generation Airbus A320neos, which have 56 more seats than our current E-Jets, for longer-haul leisure and peak hour focus-city to focus-city service. For the longer distance leisure domestic markets, we believe the next-generation Airbus A320neo gives us industry leading low seat costs to compete in these markets. For example, in December 2016, we started flying between our main hub in Campinas and our regional hub in Recife with our next-generation Airbus A320neos. This approximately three hour flight provides us with significantly lower seat costs than our current E-Jets and provides sufficient seat capacity to connect customers between both hubs. We believe that by applying this strategy we can increase revenues and generate economies of scale by leveraging the infrastructure and staff at our existing destinations.

We plan to focus our international growth on connecting our strong presence in Brazil via Campinas, Belo Horizonte and Recife and our current international destinations Fort Lauderdale, Orlando and Lisbon. We believe we are especially suited to stimulate additional demand for travel to key long-haul international destinations, which can be served by our Airbus A330s, by taking advantage of our focused domestic route structure, both in terms of passengers and overall connectivity throughout Brazil. We currently offer direct flights to 55 destinations out of our main hub in Campinas, and we continue to leverage our position as the largest airline in Viracopos airport by offering international flights as well as connecting passengers throughout Brazil. Additionally, our new code-share flight with TAP between Campinas and Lisbon enables us to connect our main hub with TAP’s main hub in Lisbon, thus enhancing our passenger connectivity between Brazil and Europe.

Continue to unlock value from our TudoAzul loyalty program

As a result of the growth of our network, we believe there is an opportunity to further unlock value from our TudoAzul, loyalty program. With approximately 7.0 million members as of December 31, 2016, TudoAzul has been the fastest growing loyalty program among the three largest programs in Brazil for the past three years. TudoAzul sells loyalty points to business partners as well as directly to program members. Our current business partners include financial institutions (including American Express, Itaú, Santander, Livelo (Banco do Brasil’s and Bradesco’s loyalty joint venture), Caixa, and HSBC), retailers (including Apple, Walmart and Fast Shop) and travel partners (including Hertz, Avis and Booking.com).

In September 2014, we also launched an Azul-branded credit card in partnership with Banco Itaucard S.A. In addition, in December 2015, we launched Clube TudoAzul, an innovative, subscription-based product through which members pay a fixed recurring amount per month in exchange for TudoAzul points, access to promotions and other benefits. We also offer members the ability to buy points to complete the amount required for a reward, or pay a fee to renew expired points or transfer points to a different member’s account. We believe that our international flights and strategic partnerships with international carriers, including United and TAP, provide our TudoAzul members with a broad range of attractive redemption options.

We offer last-seat availability to TudoAzul members and have significant flexibility to price redemptions in a way that is competitive with other loyalty programs, thus helping to maximize TudoAzul’s attractiveness. We actively manage the price of our redemptions, offering very competitive fares in points when seat availability is high and optimizing margin in peak, high-demand flights. We have also developed an exclusive, proprietary pricing system, which provides ample flexibility to price redemptions within a given flight. This allows us to sell seats using several combinations of points and money. It also allows us to customize pricing using a number of different factors, such as a member’s elite tier, membership in Clube TudoAzul, and age (allowing us to offer lower prices to infants and children). We are confident that this proprietary system offers more flexibility than those of our main competitors, therefore allowing us to create promotions, stimulate cross-sell of other TudoAzul products, and more accurately price redemptions so as to maximize profitability.

Direct sales of points to TudoAzul members via monthly subscriptions to Clube TudoAzul members, internet direct point sales and other means have been the fastest-growing revenue segment for TudoAzul, with a monthly growth rate from direct sales of 23% since December 31, 2015. This source of revenue is extremely attractive as it diversifies our customer base, with direct sales representing a significant volume of over 10% of TudoAzul’s external gross billings (excluding points sold to the airline), as of December 31, 2016. These direct sales generate recurring revenues and we expect to grow this segment by enhancing our customer offerings and introducing new products to our members.

In an effort to maximize the value creation potential of TudoAzul, we have been managing the program through a dedicated team since mid-2015. On a standalone basis, TudoAzul’s gross billings totaled R$708.7 million in 2016. Given the number of exclusive destinations we operate, our network strength, and the expected growth of passenger air travel, credit card penetration and usage and member loyalty in Brazil, we believe that TudoAzul is a strategic business for us. We plan to continue investing in TudoAzul’s expansion and evaluating opportunities to unlock value for this strategic asset.

Continue to establish and extend strategic partnerships

As of December 31, 2016, we had a code-share agreement with United and TAP, as well as 18 interline and code-share agreements with a number of other international airlines, allowing us to handle passengers traveling on itineraries that require multiple flights on multiple airlines. As part of our plans to expand globally, over the last two years, we have established strategic partnerships with United, Hainan and through our investment in certain convertible bonds, also in TAP. We view these and possible future relationships with other airlines as strategic ways of allowing us to expand our network with connectivity throughout the United States, Europe and Asia without having to commit the full resources on our own. We believe that our existing and future customer base are increasingly taking advantage of the ability to fly internationally, and we aim to be able to offer our Brazilian customers a seamless ability to do so, whether by purchasing tickets on partner airlines on our website or through connected and complimentary schedules facilitating onward travel outside of Brazil. In addition to facilitating a more global network for us through these partnerships, we are exploring a variety of cooperative arrangements, including additional interline agreements, codesharing, access to partner airlines’ frequent flyer programs and possible cobranding. We also see opportunities to leverage these relationships to facilitate greater operating efficiencies by utilizing partner expertise in maintenance, cargo transport and even possible pilot and crew training and redeployment, as well as redeployment of redundant or unneeded aircraft. We have started to observe such opportunities not just in relation to Azul and TAP code-share flights from Brazil to Lisbon, but also with the connectivity with Hainan between TAP’s hub in Lisbon and China announced in October 2016, the transfer of two aircraft orders for future deliveries of Airbus A350s to certain Hainan affiliates in 2016, the expected transfer of three additional aircraft orders for future deliveries of Airbus A350s to certain Hainan affiliates by mid-2017, the sublease of 15 aircraft in our fleet to TAP, and other measures. We are exploring joint ventures and other arrangements with our partners to determine the most effective and beneficial ways to leverage these relationships for all parties.

We view our partnerships as critical to our global connectivity but also as a way to addressing macroeconomic pressures in Brazil. By working with our partners we believe we have and can continue to adapt to any local economic conditions and do so swiftly in areas involving our fleet, crews and operating expenses. We expect to continue evaluating strategic partnership opportunities, including investments and acquisitions, that allow us to improve our network, offer more attractive benefits to our TudoAzul members, enhance our brand and build loyalty and revenue.

Continue to increase ancillary and other revenue

We intend to continue growing our ancillary and other revenue, by both leveraging our existing products and introducing new ones. We intend to focus on deriving further value from our existing ancillary and other revenue streams, which represented R$42.8 per passenger as of December 31, 2016 and included revenue from cargo services, passenger-related fees, upgrades, sales of advertising space in our various customer-facing formats, commissions on travel insurance sales, and revenues from airport parking at Viracopos airport. Since the launch of our international routes and aircraft with multi-class cabins in December 2014, we have been able to increase our ancillary revenue per passenger from R$31.3 as of December 31, 2015 to R$42.8 as of December 31, 2016, mostly due to the sale of upgrades to our "Espaço Azul", "Economy Xtra", "SkySofa" and business class sections. As a result of the introduction of the next-generation Airbus A320neos to our fleet, we expect to have more seat availability for our TudoAzul loyalty program and our Azul Viagens travel package business as well as additional cargo capacity.