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As filed with the Securities and Exchange Commission on May 24, 2013

No. 333-            

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

Azul S.A.

(Exact name of Registrant as specified in its charter)

Federative Republic of Brazil   4512   Not applicable
(State or other jurisdiction of incorporation
or organization)
  (Primary Standard Industrial Classification
Code Number)
 

(I.R.S. Employer

Identification No.)

Edifício Jatobá, 8 th floor, Castelo Branco Office Park

Avenida Marcos Penteado de Ulhôa Rodrigues, 939

Tamboré, Barueri, São Paulo, SP 06460-040, Brazil.

+55 (11) 4831 2880

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

National Corporate Research, Ltd.

10 East 40th Street, 10th Floor

New York, NY 10016

(212) 947-7200

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

Copies of all communications, including communications sent to agent for service, should be sent to:

Stuart K. Fleischmann, Esq.

Shearman & Sterling LLP

599 Lexington Avenue

New York, NY 10022

 

Robert M. Ellison, Esq.

Shearman & Sterling LLP

Av. Brigadeiro Faria Lima, 3400, 17 th  floor

São Paulo, SP, 04538-132, Brazil

 

Richard S. Aldrich Jr., Esq.

Skadden, Arps, Slate, Meagher & Flom LLP

Av. Brigadeiro Faria Lima, 3311, 7 th  Floor

São Paulo, SP, 04538-133, Brazil

Approximate date of commencement of proposed sale of the securities to the public: As soon as practicable after this registration statement becomes effective.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box:    ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

CALCULATION OF REGISTRATION FEE

 
Title of each class of securities to be registered  

Proposed

Maximum

Aggregate

Offering Price(1)

  Amount of
registration fee

Preferred shares, including in the form of ADSs (2)(3)

  U.S.$100,000,000   U.S.$13,640
         
(1)   Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act.
(2)   Includes preferred shares, including in the form of ADSs, which the underwriters may purchase from the Selling Shareholders solely to cover over-allotments, if any, and preferred shares which are to be offered in an offering outside the United States but which may be resold from time to time in the United States in transactions requiring registration under the Securities Act.
(3)   A separate Registration Statement on Form F-6 will be filed for the registration of ADSs issuable upon deposit of the preferred shares registered hereby. Each ADS represents one preferred share.

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the U.S. Securities and Exchange Commission is effective. This prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

PRELIMINARY PROSPECTUS (Subject to completion, dated May 24, 2013)

 

Preferred shares including preferred shares in the form of American depositary shares

 

LOGO

 

(incorporated in the Federative Republic of Brazil)

 

 

 

This is our initial public offering of              non-voting preferred shares. We are selling              preferred shares. The preferred shares may be offered directly or in the form of American depositary shares, or ADSs, each of which represents one preferred share and is evidenced by an American depositary receipt, or ADR. This prospectus relates to the offering by the international underwriters of preferred shares, including in the form of ADSs, in the United States and elsewhere outside of Brazil. Concurrently, we are selling preferred shares in Brazil through the Brazilian underwriters by way of a Brazilian prospectus in Portuguese. We refer to the international offering in the United States and elsewhere outside Brazil and the concurrent offering in Brazil as the “global offering.” The closings of the international and Brazilian offerings are conditioned upon each other.

 

No public market currently exists for our preferred shares or ADSs. We anticipate that the initial public offering price will be between R$         and R$         per preferred share and between U.S.$         and U.S.$         per ADS, calculated at the exchange rate of R$         per U.S.$1.00 at                     , 2013. We have applied to list the ADSs on the New York Stock Exchange, or NYSE, under the symbol “            .” We have applied to list our preferred shares on the Level 2 (Nível 2) segment of the São Paulo Stock Exchange (BM&FBOVESPA S.A.—Bolsa de Valores Mercadorias e Futuros), or BM&FBOVESPA, under the symbol “            .”

 

 

 

Investing in our preferred shares, including in the form of ADSs, involves risks. See “ Risk Factors ” beginning on page 22 of this prospectus.

 

 

 

    

Per

Preferred

Share

    

Per

ADS

    

Total

 

Public offering price

   R$                    U.S.$                    U.S.$                

Underwriting discounts and commissions

   R$         U.S.$         U.S.$     

Proceeds, before expenses, to us

   R$         U.S.$         U.S.$     

 

 

 

The selling shareholders referred to in this prospectus, or the Selling Shareholders, have granted the international underwriters and Brazilian underwriters an option to purchase for a period of 30 days beginning on the date hereof up to              additional preferred shares, including in the form of ADSs, at the initial public offering price less the underwriting discount to cover over-allotments. We will not receive any proceeds from the sale of preferred shares, including in the form of ADSs, by the Selling Shareholders. See “Underwriters—Option.”

 

Neither the Securities and Exchange Commission, or the SEC, the Brazilian Securities Commission (Comissão de Valores Mobiliários), or the CVM, nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

Delivery of the ADSs will be made through the facilities of The Depository Trust Company, or DTC, on or about                     , 2013. Delivery of our preferred shares not sold in the form of ADSs will be made in Brazil through the book-entry facilities of BM&FBOVESPA on or about                     , 2013.

 

 

 

Morgan Stanley   Itaú BBA   

Goldman, Sachs

& Co.

  Santander   Banco do Brasil Securities LLC

 

Raymond James   Pine

 

The date of this prospectus is                     , 2013


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LOGO


Table of Contents

TABLE OF CONTENTS

 

     Page  

GLOSSARY OF AIRLINE AND OTHER TERMS

     ii   

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

     vi   

PROSPECTUS SUMMARY

     1   

SUMMARY FINANCIAL AND OPERATING DATA

     10   

THE OFFERING

     17   

RISK FACTORS

     22   

THE TRIP ACQUISITION

     41   

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     44   

USE OF PROCEEDS

     46   

EXCHANGE RATES

     47   

CAPITALIZATION

     48   

DILUTION

     50   

SELECTED CONSOLIDATED FINANCIAL INFORMATION

     52   

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

     56   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     62   

REGULATION

     98   
     Page  

INDUSTRY

     107   

BUSINESS

     111   

MANAGEMENT

     130   

PRINCIPAL AND SELLING SHAREHOLDERS

     137   

RELATED PARTY TRANSACTIONS

     143   

DESCRIPTION OF CAPITAL STOCK

     144   

DESCRIPTION OF AMERICAN DEPOSITARY SHARES

     153   

MARKET INFORMATION

     164   

DIVIDEND POLICY

     168   

TAXATION

     171   

ERISA CONSIDERATIONS

     181   

UNDERWRITERS

     182   

EXPENSES OF THE GLOBAL OFFERING

     197   

VALIDITY OF SECURITIES

     198   

EXPERTS

     198   

WHERE YOU CAN FIND MORE INFORMATION

     198   

ENFORCEABILITY OF CIVIL LIABILITIES

     200   

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1   
 

 

 

 

This prospectus has been prepared by us solely for use in connection with the proposed offering of preferred shares, including in the form of ADSs, in the United States and elsewhere outside Brazil. Morgan Stanley & Co. LLC, Itaú BBA USA Securities, Inc., Goldman, Sachs & Co., Santander Investment Securities Inc. and Banco do Brasil Securities LLC, Raymond James & Associates, Inc. and Banco Pine S.A. (acting through Pine Securities USA LLC for sales in the United States), will collectively act as international underwriters with respect to the offering of the ADSs and as agents, on behalf of the Brazilian underwriters, with respect to the offering of preferred shares sold outside of Brazil not in the form of ADSs.

 

Neither we, the Selling Shareholders, the international underwriters or the Brazilian underwriters, nor any of their respective agents, have authorized anyone to provide any information other than that contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we may have referred you. We, the Selling Shareholders, the international underwriters, the Brazilian underwriters and their respective agents take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. Neither we, the Selling Shareholders, the international underwriters or the Brazilian underwriters, nor their respective agents, are making an offer to sell the preferred shares, including in the form of ADSs, in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus, regardless of the time of delivery of this prospectus or any sale of the preferred shares, including in the form of ADSs. Our business, financial condition, results of operations, cash flows and prospects may have changed since the date on the front cover of this prospectus.

 

We are also offering preferred shares in Brazil by way of a Brazilian prospectus in Portuguese. The Brazilian prospectus, which will be filed with the CVM for approval, has the same date as this prospectus but a

 

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different format and is not considered part of this prospectus. The international offering is made in the United States and elsewhere outside Brazil solely on the basis of the information contained in this prospectus. Investors should take this into account when making investment decisions.

 

 

 

In this prospectus, references to “Azul,” the “Company,” “we,” “us” and “our” refer to Azul S.A., a sociedade por ações incorporated under the laws of Brazil, and its subsidiaries on a consolidated basis, unless the context requires otherwise. The term “Selling Shareholders” refers to David Neeleman (directly and through Saleb II Founder 1 LLC), Gerald Blake Lee (through Saleb II Founder 2 LLC), Thomas Eugene Kelly (through Saleb II Founder 3 LLC), Tom Anderson (through Saleb II Founder 4 LLC), Carol Elizabeth Archer (through Saleb II Founder 5 LLC), Cindy England (through Saleb II Founder 6 LLC), Robert Land (through Saleb II Founder 7 LLC), Robert Milton (through Saleb II Founder 8 LLC), Mark Neeleman (through Saleb II Founder 9 LLC), Marlon Yair Ramirez (through Saleb II Founder 10 LLC), John Rodgerson (through Saleb II Founder 11 LLC), Maximiliam Urban (through Saleb II Founder 12 LLC), Joel Peterson (through Saleb II Founder 13 LLC), Amir Nasruddin (through Saleb II Founder 14 LLC), Jason Truman Ward (through Saleb II Founder 15 LLC), John Joseph Daly (through Saleb II Founder 16 LLC), Gianfranco Beting, Regis da Silva Brito, TPG Growth (through Star Sabia LLC), Weston Presidio (through WP-New Air LLC), Azul HolCo, LLC, Maracatu LLC, Gávea Investimentos Ltda. (through GIF II Fundos de Investimento e Participações and GIF Mercury LLC), ZDBR LLC, Kadon Empreendimentos S.A., Bozano Holdings Ltd., JJL Brazil LLC, Morris Azul, LLC, Miguel Dau, João Carlos Fernandes and Trip Participações S.A. The term “Brazilian underwriters” refers to Banco Morgan Stanley S.A., Banco Itaú BBA S.A., Goldman Sachs do Brasil Banco Múltiplo S.A., Banco Santander (Brasil) S.A. and BB-Banco de Investimento S.A., and Pine Investimentos Distribuidora de Títulos e Valores Mobiliários Ltda., who will act collectively as Brazilian underwriters with respect to the sale of preferred shares in the public offering in Brazil. The term “international underwriters” refers to Morgan Stanley & Co. LLC, Itaú BBA USA Securities, Inc., Goldman, Sachs & Co., Santander Investment Securities Inc. and Banco do Brasil Securities LLC, Raymond James & Associates, Inc. and Banco Pine S.A. (acting through Pine Securities USA LLC for sales in the United States), who will collectively act as underwriters with respect to the offering of the ADSs and as agents, on behalf of the Brazilian underwriters, with respect to the offering of preferred shares outside of Brazil not in the form of ADSs. Certain international underwriters will also act as placement agents for the Brazilian underwriters with respect to the placement of preferred shares outside Brazil, including in the United States.

 

The term “Brazil” refers to the Federative Republic of Brazil and the phrase “Brazilian government” refers to the federal government of Brazil. “Central Bank” refers to Banco Central do Brasil. References in the prospectus to “ real ,” “ reais ” or “R$” refer to the Brazilian real , the official currency of Brazil and references to “U.S. dollar,” “U.S. dollars” or “U.S.$” refer to U.S. dollars, the official currency of the United States.

 

 

 

GLOSSARY OF AIRLINE AND OTHER TERMS

 

The following is a glossary of industry and other defined terms used in this prospectus:

 

The “Águia Branca Group”, or “Grupo Águia Branca”, is a Brazilian transportation and logistics conglomerate controlled by the Chieppe family.

 

“Airbus” means Airbus S.A.S.

 

“aircraft utilization” represents the average number of block hours operated per day per aircraft for our operating fleet, excluding spare aircraft and aircraft in maintenance.

 

“ANAC” refers to the Brazilian National Civil Aviation Agency ( Agência Nacional de Aviação Civil ).

 

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“ATR” refers to Avions de Transport Régional, G.I.E., a European aircraft manufacturer that is an affiliate of EADS.

 

“available seat kilometers,” or “ASKs,” represents aircraft seating capacity multiplied by the number of kilometers the aircraft is flown.

 

“average ticket revenue per booked passenger” means total passenger revenue divided by booked passengers.

 

“average stage length” means the average number of kilometers flown per flight segment.

 

“average fare” means total passenger revenue divided by passenger flight segments.

 

“block hours” means the number of hours during which the aircraft is in revenue service, measured from the time it leaves the gate until the time it arrives to the gate at destination.

 

“Boeing” means The Boeing Company.

 

“booked passengers” means the total number of passengers booked on all passenger flight segments.

 

“Bozano” means Cia Bozano.

 

“CAPA” means the Centre for Aviation, a provider of independent aviation market intelligence, analysis and data services.

 

“Caprioli Group” is a privately-held company controlled by the Caprioli family.

 

“CASK” represents total operating cost divided by available seat kilometers.

 

“completion rate” means the percentage of our scheduled flights that were operated by us, whether or not delayed (i.e., not cancelled).

 

“crewmembers” is a term we use to refer to all our employees, including aircraft crew and all ground personnel.

 

“departure” means a revenue flight segment.

 

“EADS” means European Aeronautic Defense and Space Company.

 

“DECEA” means the Brazilian Department of Airspace Control (Departmento de Controle do Espaco Aéreo) .

 

“economic interest” means a participation in the total equity value of our company, calculated as if all 464,482,529 common shares outstanding had been converted into 6,193,100 preferred shares at the conversion ratio of 75 common shares to 1.0 preferred share, giving a total of 89,588,180 preferred shares outstanding on a theoretical fully-converted basis prior to this global offering and prior to any issuance to TRIP’s Former Shareholders under the TRIP Investment Agreement.

 

“Embraer” means Embraer S.A.

 

“FAA” means the United States Federal Aviation Administration.

 

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“FAPESP” means the State of São Paulo Research Foundation ( Fundação de Amparo à Pesquisa do Estado de São Paulo ), an independent public foundation established to foster research and the scientific and technological development of the state of São Paulo.

 

“FGV” refers to the Getulio Vargas Foundation ( Fundação Getulio Vargas ), a Brazilian higher education institution that was founded in December 1944.

 

“flight hours” means the number of hours during which the aircraft is in revenue service, measured from the time it takes off until the time it lands at the destination.

 

“FlightStats” refers to FlightStats, Inc., a provider of worldwide flight on-time performance information to the global travel and transportation industries.

 

“FTEs” means full-time equivalent employees.

 

“FTEs per operating aircraft” means the number of FTEs divided by the number of operating aircraft.

 

“GIE TRIP Atrone” is a French aircraft finance company that is party to some financing agreements with TRIP.

 

“Gol” means Gol Linhas Aéreas Inteligentes S.A.

 

“IATA” means the International Air Transport Association.

 

“ICAO” means the International Civil Aviation Organization.

 

“INFRAERO” means Empresa Brasileira de Infraestrutura Aeroportuária—INFRAERO, a Brazilian state-controlled corporation reporting to the SAC that is in charge of managing, operating and controlling federal airports, including control towers and airport safety operations.

 

“Innovata” means Innovata LLC, a provider of travel content management that maintains a flight schedule database in partnership with IATA.

 

“LATAM” means LATAM Airlines Group S.A. including all of its subsidiaries.

 

“load factor” means the percentage of aircraft seats actually occupied on a flight (RPKs divided by ASKs).

 

“on-time performance” refers to the percentage of an airline’s scheduled flights that were operated and that arrived within 30 minutes of the scheduled time.

 

“operating fleet” means aircraft in service, spare aircraft and aircraft undergoing maintenance.

 

“passenger flight segments” means the total number of revenue passengers flown on all passenger flight segments.

 

“pitch” means the distance between a point on one seat and the same point on the seat in front of it.

 

“PRASK” means passenger revenue divided by ASKs.

 

“RASK” or “unit revenue” means operating revenue divided by ASKs.

 

“revenue passenger kilometers” or “RPKs” means the numbers of kilometers flown by revenue passengers.

 

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“route” means a segment between a pair of cities.

 

“SAC” means the Brazilian Civil Aviation Secretariat ( Secretaria de Aviação Civil ).

 

“TAM” means TAM S.A. and/or TAM Linhas Aéreas S.A.

 

“TRIP” means TRIP Linhas Aéreas S.A.

 

“TRIP Acquisition” means our 2012 acquisition of TRIP.

 

“TRIP’s Former Shareholders” means, collectively, the Caprioli family and the Águia Branca Group.

 

“TRIP Investment Agreement” means the agreement entered into between Azul and TRIP’s Former Shareholders on May 25, 2012 and amended on August 15, 2012.

 

“trip cost” represents operating expenses divided by departures.

 

“yield per passenger kilometer” represents the average amount one passenger pays to fly one kilometer.

 

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PRESENTATION OF FINANCIAL AND OTHER INFORMATION

 

Financial Statements

 

We maintain our books and records in reais . Our audited consolidated financial statements at and for each of the years ended December 31, 2012, 2011 and 2010 are included in this prospectus. Our audited consolidated financial statements were prepared in accordance with the International Financial Reporting Standards, or IFRS, issued by the International Accounting Standards Board, or IASB, beginning with the financial statements for the year ended December 31, 2010, and have been audited by Ernst & Young Terco Auditores Independentes S.S. Our audited consolidated financial statements at and for the year ended December 31, 2012 include the results of operations of TRIP commencing November 30, 2012. See “The TRIP Acquisition.”

 

Our unaudited interim condensed consolidated financial statements at and for the three months ended March 31, 2013 and 2012 are included in this prospectus and have been prepared in accordance with the IFRS issued by the IASB.

 

This prospectus also includes individual financial statements for TRIP at November 30, 2012, at December 31, 2011, at December 31, 2010, and at January 1, 2010, and for the period from January 1, 2012 through November 30, 2012 and for each of the years ended December 31, 2011 and 2010, which have also been audited by Ernst & Young Terco Auditores Independentes S.S.

 

The financial information presented in this prospectus should be read in conjunction with our audited consolidated financial statements, our unaudited interim condensed consolidated financial statements, TRIP’s audited individual financial statements, our unaudited pro forma consolidated financial information, the notes relating to each of the above and the section of this prospectus entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

In this prospectus, we present earnings before interest, taxes, depreciation and amortization (EBITDA), adjusted earnings before interest, taxes, depreciation and amortization (Adjusted EBITDA) and adjusted earnings before interest, taxes, depreciation, amortization and rent (Adjusted EBITDAR), which are not financial performance measures determined in accordance with IFRS and must not be considered as an alternative to operating income, or an indication of operating performance, or as an alternative to operating cash flows, or as an indicator of liquidity. A non-financial performance measure is generally defined as one that purports to measure financial performance, financial position or cash flows, but excludes or includes amounts that would not so be adjusted for in the most comparable IFRS measure. EBITDA, Adjusted EBITDA and Adjusted EBITDAR are recognized performance measurements in the airline industry that are frequently used by investors, securities analysts and other interested parties in comparing the operating performance of companies in our industry. However, these measures are susceptible to varying calculations and not all companies calculate them in the same manner. As a result, EBITDA, Adjusted EBITDA and Adjusted EBITDAR as presented may not be directly comparable to similarly titled measures presented by other companies. In addition, EBITDA, Adjusted EBITDA and Adjusted EBITDAR present limitations that impair their use as a measurement of performance, since they do not consider certain costs arising from our business that might significantly impact our results of operations and liquidity, such as financial expenses and depreciation. For a calculation of EBITDA, Adjusted EBITDA and Adjusted EBITDAR and a reconciliation of each to net income, see “Summary Financial and Operating Data.”

 

Unaudited Pro Forma Consolidated Financial Information

 

We include in this prospectus unaudited pro forma consolidated financial information for the year ended December 31, 2012 and for the three months ended March 31, 2012 that gives effect to our acquisition of TRIP as if it had occurred on January 1, 2012. See the section of this prospectus entitled “The TRIP Acquisition.” The assumptions and adjustments used to prepare this unaudited pro forma consolidated financial information are

 

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described in the notes accompanying such information in the section of this prospectus entitled “Unaudited Pro Forma Consolidated Financial Information.” The unaudited pro forma consolidated financial information is provided for informational and comparative purposes only.

 

Effect of Rounding

 

Certain amounts and percentages included in this prospectus, in our and TRIP’s audited financial statements, in our unaudited interim condensed consolidated financial statements and in the unaudited pro forma consolidated financial information have been rounded for ease of presentation. Percentage figures included in this prospectus have not been calculated in all cases on the basis of the rounded figures but on the basis of the original amounts prior to rounding. For this reason, certain percentage amounts in this prospectus may vary from those obtained by performing the same calculations using the figures in our and TRIP’s audited financial statements and in our unaudited interim condensed consolidated financial statements. Certain other amounts that appear in this prospectus may not sum due to rounding.

 

Market and Industry Data

 

This prospectus contains data related to economic conditions in the market in which we operate. The information contained in this prospectus concerning economic conditions is based on publicly available information from third-party sources that we believe to be reasonable. Data and statistics regarding the Brazilian civil aviation market are based on publicly available data published by ANAC, INFRAERO and SAC, among others. Data and statistics regarding international civil aviation markets are based on publicly available data published by ICAO or IATA. We also make statements in this prospectus about our competitive position and market share in, and the market size of, the Brazilian airline industry. We have made these statements on the basis of statistics and other information from third-party sources that we believe to be reasonable, such as ANAC and Dados Comparativos Avançados (Advanced Comparative Data, a monthly report issued by ANAC that contains preliminary information on the number of ASKs and RPKs recorded in the Brazilian civil aviation market). In addition, we include additional operating and financial information about TAM, Gol and LATAM, which is derived from the information released publicly by them, including disclosure filed with or furnished to the SEC and other information made available on their respective websites. Although we have no reason to believe any of this information or these reports are inaccurate in any material respect and believe and act as if they are reliable, neither we, the Selling Shareholders, the international underwriters, the Brazilian underwriters, nor their respective agents have independently verified it. Governmental publications and other market sources, including those referred to above, generally state that their information was obtained from recognized and reliable sources, but the accuracy and completeness of that information is not guaranteed. Neither we, the Selling Shareholders, the international underwriters, the Brazilian underwriters, nor their respective agents can guarantee the accuracy of such information. In addition, the data that we compile internally and our estimates have not been verified by an independent source.

 

Fleet Data

 

As of March 31, 2013, our total fleet consisted of 130 aircraft, of which we owned or held 58 under finance leases or other financing and 72 under operating leases. The operating leases are not recorded as debt on our balance sheet. Unless otherwise indicated, any reference to the number of aircraft that we own or operate includes aircraft leased under operating leases. Our fleet in service as of March 31, 2013 consisted of 68 Embraer E-Jets and 50 ATR aircraft, totaling 118 aircraft. The 12 aircraft not included in our fleet in service consisted of new aircraft delivered that had not yet been certified to enter service and aircraft being prepared for sale.

 

Financial Information in U.S. Dollars

 

We have translated some of the real amounts included in this prospectus into U.S. dollars. You should not construe these translations as representations by us that the amounts actually represent these U.S. dollar amounts

 

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or could be converted into U.S. dollars at the rates indicated. Unless otherwise indicated, we have translated the real amounts for the year ended December 31, 2012 and for the three months ended March 31, 2013 using a rate of R$2.0138 to U.S.$1.00, the U.S. dollar selling rate as of March 31, 2013, published by the Central Bank on its electronic information system ( Sistema de Informações do Banco Central —SISBACEN), using transaction code PTAX 800, option 5. See “Exchange Rates.”

 

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PROSPECTUS SUMMARY

 

This summary highlights selected information about us and this global offering. It does not contain all of the information that may be important to you. Before investing in our preferred shares, including in the form of ADSs, you should read this entire prospectus carefully for a more complete understanding of our business and this global offering, including our financial statements and the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

Overview

 

We have been the fastest growing airline in Brazil in terms of ASKs since we commenced operations in December 2008 and currently have the largest airline network in the country in terms of cities served, with service to 103 destinations, 232 routes and 799 departures per day. Our model is to stimulate demand by providing frequent and affordable air service to underserved markets throughout Brazil, with the result that we are the sole airline on 70.7% of our routes. By March 2013, we had a 29.3% share of the Brazilian aviation market in terms of departures. We acquired TRIP in 2012 and have consolidated its results of operations into our financial statements since November 30, 2012.

 

We were founded by entrepreneur David Neeleman in 2008 and are the latest of his four airline ventures with sustained operational viability from inception to date in three different countries, including JetBlue Airways. Backed by Mr. Neeleman and other key shareholders such as Weston Presidio, TPG Growth, Gávea Investimentos, Grupo Bozano, and Grupo Águia Branca, we are highly capitalized and have invested in a robust and scalable business model. We have a management team that combines local knowledge with experience in best practices from the United States, the world’s largest and most competitive aviation market.

 

In 2012 we acquired TRIP, which at the time was the largest regional carrier in South America by number of destinations. As a result of the TRIP Acquisition, we began service in 46 additional cities. The fleet similarity between Azul and TRIP has allowed us to integrate all our operations rapidly and start yielding synergy gains (as measured by the sum of estimated revenue synergies plus estimated net cost synergies) of R$200 million to R$300 million in 2013 and R$300 million to R$400 million in 2014. The acquisition substantially increased our network connectivity, enabling us to become the leading carrier by departures in 70 cities as of December 31, 2012 and consolidate our position as a leader in Brazil’s fast-growing regional aviation market. Through the acquisition, we became the leading carrier in Belo Horizonte, Brazil’s third largest metropolitan area, and gained strategic landing rights at Guarulhos airport in São Paulo and Santos Dumont airport in Rio de Janeiro, complementing our hub at Campinas in the state of São Paulo.

 

We believe we have created a robust network of profitable routes by stimulating demand through frequent and affordable air service. We select routes that we believe possess high demand and growth potential and are either not served or underserved by other airlines. We believe this model has enabled us to stimulate significant new demand to become the market leader in the majority of the markets we serve.

 

Our fleet of 118 aircraft in service, composed of 68 modern Embraer E-Jets, which seat up to 118 customers, and 50 fuel-efficient ATR aircraft, which seat up to 70 customers, allows us to effectively match capacity to demand and offer more convenient and frequent non-stop service than our main competitors, who fly larger aircraft. We believe this structure not only stimulates demand from business travelers, who tend to travel more as a result of increased flight frequencies, but also attracts cost-conscious leisure travelers, many of whom are first time flyers, by offering low fares for advance purchases. In addition, our aircraft enable us to serve smaller markets profitably and connect them to our extensive network. With an average age of four years at December 31, 2012, our fleet is younger than those of our main competitors, Gol and TAM.

 

 

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We believe we have built a strong brand by offering a high-quality travel experience, based on a culture of customer service provided by a team of crewmembers who we train to be highly motivated and cultivated through the past ventures of our founder David Neeleman. Among other awards, we were named “Best Low Cost Carrier In The World” in 2012 by CAPA, an independent aviation market intelligence provider, and “Best Low Cost Carrier In Latin America” in both 2012 and 2011 by Skytrax, an aviation research organization. Our service offering features individual entertainment screens incorporating free LiveTV at every seat on virtually all of our jets, extensive legroom with a pitch of 30 inches or more, two-by-two seating with no middle seats, complimentary beverage and snack services, and free bus service to key airports (including between the city of São Paulo and Campinas airport).

 

As of March 31, 2013, we were the market leader by frequency on 80.8% of our routes, as the only airline operating on 70.7% of our routes and the most frequent carrier on an additional 10.1% of our routes, according to IATA. This extensive network coverage allows us to offer more itineraries and connections than our competitors, which serve a significantly lower number of destinations. We believe that this leading network position has enabled us to achieve significantly higher PRASK than other domestic carriers in the four-year period ended March 31, 2013. In 2012, we achieved an average load factor of 79% and generated a 55% PRASK premium relative to Gol, according to its year-end 2012 public disclosure. In addition, for the three months ended March 31, 2013, we maintained an average load factor of 79% and generated a 62% PRASK premium relative to Gol, according to its quarterly results of operations filed with the SEC for the first quarter of 2013.

 

Utilizing smaller aircraft with lower fuel consumption, gives us trip costs lower than those of our main competitors. For example, our end-of-period FTEs per operating aircraft was the lowest in Brazil, at 77 compared to 173 for LATAM and 126 for Gol as of March 31, 2013, according to their end of first quarter 2013 public disclosures. Our leading revenue performance driven by superior load factors, combined with our efficient operations and competitive cost structure, enabled us to achieve an Adjusted EBITDAR margin for the three months ended March 31, 2013 of 25.1% compared to 17.6% for Gol, our main competitor, according to its quarterly results of operations filed with the SEC for the first quarter of 2013. For a description of how we calculate Adjusted EBITDAR, see “—Summary Financial and Operating Data” below.

 

Unlike other airlines’ loyalty programs, our loyalty program, Tudo Azul , rewards customers for the amount of money paid for flights as opposed to the number of miles flown. The program had more than 750,000 enrolled members at December 31, 2009, and more than 2,400,000 members at March 31, 2013. We have plans to expand the scope of Tudo Azul through commercial partnerships with companies from other industries where we believe our brand provides a competitive advantage, such as Azul-branded credit cards. Our current Tudo Azul partners include Banco Itaú, Banco Santander, American Express and Walmart, among numerous others. As Tudo Azul expands, we may consider managing it as a separate business unit.

 

Our hub-and-spoke network is an integral part of our model of stimulating demand since it allows us to consolidate traffic by serving larger and medium-sized markets (including every state capital in Brazil) as well as smaller cities that do not generate sufficient demand for point-to-point service. We believe our main competitors, with their larger aircraft, are unable to generate sufficient demand to serve most of our markets profitably.

 

Our main hubs are located in Campinas and Belo Horizonte, two of the largest metropolitan areas in the country. Campinas is located approximately 90 kilometers (56 miles) from the city of São Paulo and has a catchment area of approximately seven million people in a 100km radius, according to IBGE. We are the leading airline at Campinas, with a 95.7% share of the airport’s 166 daily departures as of March 31, 2013. As a result of heightened demand driven by our entry into Campinas, as of March 31, 2013, the Campinas airport served 48 destinations, the most non-stop domestic flights of any Brazilian airport. Other key strategic destinations in our network include the cities of São Paulo (Guarulhos airport), Rio de Janeiro (Santos Dumont and Galeão airports), Salvador and Manaus.

 

 

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Brazil, which is geographically similar in size to the continental United States, had the second fastest-growing domestic aviation market in the world in 2012 and is expected to be the third largest market for domestic passengers in 2016 according to IATA. We believe Brazil continues to show significant growth potential as air travel is still significantly underpenetrated, with 0.5 average flight segments flown per person per year, compared to 2.1 in a mature market such as the United States in 2012.

 

The core of our strategy is to drive greater profitability by growing our network, adding new destinations, further interconnecting our current destinations, and increasing frequency in existing markets. We believe this continued roll-out will stimulate further demand, reducing CASK and increasing margins through the economies of scale created by optimizing our resources and staff. We also intend to continue growing our ancillary revenue streams, such as cargo operations and travel packages, by leveraging our existing products and expanding our offerings.

 

Our Strengths

 

We believe we compete successfully by employing the following competitive business strengths:

 

Largest network in Brazil

 

We have the largest airline network in the country in terms of cities served, with service to 103 destinations, 232 routes and 799 departures per day. Our hub-and-spoke network allows us to consolidate traffic, serving larger and medium-sized markets as well as smaller cities that do not generate sufficient demand for point-to-point service. We believe that our extensive network coverage allows us to connect more passengers than our competitors, who serve significantly fewer destinations. As a result of this differentiated business strategy, we were the sole airline in 42 of the destinations we serve and the leading player in 70 cities as of March 31, 2013. We were the sole carrier on 70.7% of our routes and most frequent carrier on an additional 10.1% as of March 31, 2013, giving us market leadership by frequency on 80.8% of our routes, according to IATA. We intend to continue identifying, entering and rapidly achieving leading market presence in new markets or underserved markets with high growth potential, where we believe we are well positioned to capture the expected increasing demand led by the economic growth in Brazil’s middle class.

 

We believe the Brazilian government’s incentive package for the regional aviation industry, announced in December 2012, will support the expansion of our network. The package includes investments of up to R$7.3 billion in regional aviation infrastructure, with the goal of expanding the number of commercial airports in Brazil from 129 as of December 31, 2012 to 270 in ten years. As part of the incentive package, the Brazilian government announced that it intends to provide subsidies and airport fee exemptions for regional flights.

 

We are confident that the airport infrastructure at our hubs will be sufficient to support our growth. Currently, Campinas airport has one runway, which allows up to 30 operations per hour. Following the privatization of the airport in February 2012, a series of new investments for Campinas have been announced, including a new runway by 2017, according to Aeroportos Brasil , the private consortium that won the bid to operate Campinas airport. In the shorter term, a R$1.4 billion investment program has been announced to provide, in time for the World Cup in 2014, a new passenger terminal for up to 14 million passengers per year, a new apron for 35 aircraft and 4,500 additional car parking spaces. Total investments at Campinas over the next 30 years are expected to amount to more than R$8.9 billion and, according to INFRAERO, Campinas airport is expected to reach 60 million passengers per year by 2030 as a result of these investments. Our second largest hub, Confins airport in Belo Horizonte, where we are already the leading carrier with a 45.5% share of total departures serving 28 destinations as of March 31, 2013, is also expected to be privatized in 2013. More generally, the Brazilian government has announced that it plans to use part of the funds raised through airport privatizations to invest in airport infrastructure across the country.

 

 

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Operating the right-sized aircraft for our target market

 

By operating a fleet of smaller aircraft that offer lower trip costs, we are able to match capacity to demand, achieve higher load factors, provide greater convenience and frequency, and serve low and medium density routes and markets that our main competitors, who fly larger aircraft, cannot serve profitably. According to ANAC, 85% of the flights in Brazil carry fewer than 120 customers. Our modern Embraer E-Jets seat up to 118 customers, and our fuel-efficient ATR aircraft seat up to 70 customers, while the narrowbody aircraft used by our two principal competitors in Brazil have, on average, 81% more seats than our aircraft – some with as many as 187 seats. As a result, we achieved an average load factor of 79% in the three month ended March 31, 2013, compared to an average of 73% for our main competitors, according to ANAC. In addition, the average trip cost for our fleet is R$16,512, compared with R$25,328 for the larger Boeing 737-800 jets flown by Gol, our main competitor, according to its quarterly results of operations filed with the SEC for the first quarter of 2013. We can therefore offer non-stop, frequent service ranging from four to seven departures per day from Campinas to destinations such as Porto Alegre, Navegantes, Salvador, Goiânia, Ribeirão Preto and São José do Rio Preto, routes that are not served by our two main competitors.

 

The table below shows our frequencies on certain non-stop routes as compared to our main competitors at March 31, 2013:

 

     At March 31, 2013  
     Departures per Day  
     Azul      Gol      TAM  

Campinas—Rio de Janeiro

     21         2         2   

Belo Horizonte—Campinas

     15                   

Campinas—Curitiba

     10                   

Porto Alegre—Campinas

     10                   

Belém—Altamira

     6                   

Belo Horizonte—Vitória

     6         4           

Guarulhos—Belo Horizonte

     6         6         4   

Campinas—Navegantes

     5                   

São José do Rio Preto—Campinas

     5                   

Salvador—Campinas

     5                   

Campinas—Brasília

     5         1         2   

Goiânia—Campinas

     5                   

Campinas—Cuiaba

     5                   

Campinas—Ribeirão Preto

     5                   

Belo Horizonte—Ipatinga

     5                   

 

Industry-leading demand stimulation through frequent, affordable service in Brazil

 

Our proprietary yield management system is key to our strategy of optimizing yield through dynamic fare segmentation and stimulating demand, targeting not only business travelers but also cost-conscious leisure travelers, for whom we offer low fares to stimulate air travel and encourage advance purchases. This segmentation model enabled us to achieve a market-leading PRASK of 25.05 cents of a real in the first quarter of 2013, compared to 15.46 cents of a real for our main competitor Gol, according to its quarterly results of operations filed with the SEC for the first quarter of 2013, representing a 62% premium.

 

 

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As an illustration of our ability to stimulate demand, the following table shows the increase in average customers per day on certain routes from November 2008, before we started operations, to December 2012:

 

     Total Direct Flights      Azul      Average Daily
Enplanements
(One Way)
 

Campinas—Rio de Janeiro

        

November 2008

     6                 564   

December 2012

     27         21         2,559   

Campinas—Salvador

        

November 2008

                     155 (1)  

December 2012

     5         5         595   

Campinas—Belo Horizonte

        

November 2008

     5                 503   

December 2012

     18         15         1,426   

Belo Horizonte—Goiânia

        

November 2008

     1                 82   

December 2012

     5         3         445   

Campinas—Porto Alegre

        

November 2008

                     241 (1)  

December 2012

     7         7         851   

 

Source:    ANAC and internal data.

  (1)   Itinerary available through connecting flight only.

 

We believe that the increase in flights from Campinas, our main hub, illustrates the success of our demand-stimulation model. As a result of our focus on an undeserved market, we were able to establish a successful platform that has significantly increased demand at Campinas airport over the last five years. In November 2008, before we started operations, the incumbent airlines serving Campinas airport offered just nine daily departures to eight destinations. As of March 31, 2013, Campinas airport offered 166 daily departures to 48 destinations, and we held a 96% share of these daily departures. We believe we have been able to leverage our position as the largest airline in Campinas airport to establish a strong and loyal customer base and intend to serve up to 55 cities from Campinas by the end of 2013. Across Brazil we offer superior connectivity for connecting passengers, with the most non-stop services in the country.

 

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 which we believe is unique among Brazilian airlines.

 

We provide extensive training for our crewmembers that emphasizes the importance of both customer service and safety. In compliance with Brazilian and international standards, we provide training to our pilots, flight attendants, maintenance technicians and airport and call center agents. We have implemented employee accountability initiatives both at the time of hiring and on an ongoing basis to maintain the quality of our crew and customer service. We currently operate three flight simulators and are completing an integrated training center in Campinas, to be known as Universidade Azul (Azul University), which is expected to open in June 2013. We were recognized as one of the best companies to work for in Brazil in 2012 by Exame/Você S/A , a Brazilian business magazine, and the first airline to receive this award.

 

Our service offering features assigned seating, individual entertainment screens with free LiveTV at every seat in virtually all our jets, extensive legroom with a pitch of 30 inches or more, two-by-two seating with no

 

 

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middle seats, complimentary beverage and snack service, free bus service to key airports we serve (including between the city of São Paulo and Campinas airport) and a fleet younger than those of our main competitors, Gol and TAM.

 

We focus on meeting our customer needs and have posted one of the best on-time performance records among Brazil’s largest carriers for the last 4 years, at 91.1% for 2012, 90.2% for 2011, 93.2% for 2010 and 91.9% for 2009, according to INFRAERO. We were recognized as the airline with best on-time performance in Latin America by FlightStats in 2012. In addition, our completion rate has been consistently high, totaling 99.2% in 2012 and 99.3% in 2011.

 

Most efficient cost structure in the Brazilian airline market

 

Before launching our operations, we constructed a robust and scalable operating platform that features advanced technology such as ticketless reservations, an Oracle financial system, and electronic check-in kiosks at our main destination airports. At the same time, we have made substantial progress on the integration of TRIP into our operations and existing processes. We have fully integrated all administration and back-office personnel, and expect approval from ANAC to achieve a single operating certificate by July 2013. We believe our scalable platform provides superior reliability and safety and will generate economies of scale as we roll out our growth strategy. We have also leveraged our management’s experience by implementing a disciplined, low-cost operating model. As a result, when compared to Gol, our main competitor, at March 31, 2013, our average trip cost of R$16,512 was 34.8% lower than theirs of R$25,329 and our end-of-period FTEs per operating aircraft of 77 was significantly lower than theirs of 126. We achieved an Adjusted EBITDAR margin for the three months ended March 31, 2013 of 25.1% compared to 17.6% for Gol, our main competitor, according to its quarterly results of operations filed with the SEC for the first quarter of 2013. For a description of how we calculate Adjusted EBITDAR, see “—Summary Financial and Operating Data” below.

 

We achieved these low operating costs primarily through:

 

   

Single class aircraft configuration

 

   

Low sales, distribution and marketing costs through direct-to-consumer marketing, high utilization of web-based sales and social networking tools

 

   

Operating a modern fleet with only two aircraft types, with better fuel efficiency and lower maintenance costs than larger aircraft

 

   

Innovative and beneficial financial arrangements for our aircraft, as a result of being one of the largest customers for Embraer and ATR aircraft

 

   

Creating a company-wide business culture focused on driving down costs.

 

Well-recognized brand

 

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 for our high quality service. As a result of our strong focus on customer service, our customer surveys indicate 77% of our customers would strongly recommend or recommend Azul to a friend or relative. The strength of our brand has been recognized in a number of recent awards:

 

   

Named “Best Low Cost Carrier In The World” in 2012 by CAPA, an independent aviation market intelligence provider

 

   

Named “Best Low Cost Carrier In Latin America” in both 2012 and 2011 by Skytrax, an aviation research organization

 

 

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Elected “Best Brazilian Airline” in both 2012 and 2011 by the readers of Viagem e Turismo, a Brazilian travel magazine

 

   

Named one of the “50 Hottest Brands In The World” in 2010 by Ad Age, a leading marketing news source

 

   

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.

 

Experienced management team

 

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

 

   

Our Chairman and Chief Executive Officer David Neeleman, who has founded four airlines in three different countries, including JetBlue Airways

 

   

Our Chief Operating Officer, José Mario Caprioli dos Santos, who was the founder of TRIP and is now a shareholder and board member of Azul

 

   

Our Chief Financial Officer, John Rodgerson, who served as Director of Planning and Financial Analysis at JetBlue Airways for five years

 

   

Our Chief Revenue Officer, Maximilian Urbahn, who has more than 12 years of experience in the airline industry as Chief Revenue Officer at JetBlue Airways, Senior Revenue Director at US Airways, Director of Revenue Management at Northwest Airlines and several management positions at United Airlines. He was also a founding partner of priceline.com.

 

Most of our senior management team has worked together for some time and has been with Azul since our launch, and all non-Brazilian individuals on the team are residents of São Paulo with permanent work visas. The executives who joined Azul’s management from TRIP have extensive experience in the Brazilian transportation industry and will bring further local knowledge to the team. In addition to Mr. Neeleman, a number of our other senior officers are also shareholders in Azul, and all are incentivized by participation in our stock option plan, which we believe aligns shareholders’ and management’s interests. Our management has concentrated on establishing a successful working environment and employee culture. The experience and commitment of our senior management team has been a critical component in our growth, as well as in the continuing enhancement of our operating and financial performance.

 

Our Strategy

 

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

 

Continue to grow our network by adding new connections and destinations and increasing frequency in existing markets

 

We intend to leverage our existing strong financial position to continue our sustainable and profitable growth by adding new destinations, further connecting the cities that we already serve, and increasing frequency in existing markets:

 

   

We intend to “connect the dots” by adding new non-stop routes between existing destinations where we believe there is further sustainable growth potential. For example, in November 2012 we added a Campo Grande—Rio de Janeiro route, in response to demand for connections between our

 

 

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Campinas—Campo Grande and Campinas—Rio de Janeiro routes. We believe that by applying this strategy to major focus cities we can increase revenues and generate economies of scale by leveraging the infrastructure and staff at our existing destinations.

 

   

We intend to apply our disciplined approach in selecting routes and rapidly achieve superiority in new and underserved markets, with a continued focus on Brazilian cities where we believe is the greatest opportunity for profitable growth. We are resuming flights to destinations that were abandoned by Brazil’s incumbent airlines when they began operating larger aircraft, and we also continue to reduce average trip time for our customers. As a result, the number of domestic routes served in Brazil increased by 36% from November 2008, before we started operations, to December 2012. In addition, we believe the incentive package for the regional aviation industry announced by the Brazilian government in December 2012 should favor our entry into new markets that otherwise would not be profitable over the next ten years.

 

   

On existing routes that we already serve but that we believe present additional demand, we intend to increase the number of daily frequencies so as to achieve or further increase schedule superiority over our competitors, without decreasing our load factors. For example, we increased daily departures on the Campinas—Rio de Janeiro route from six to 21 between March 2009 and December 2012, and daily departures on the Campinas—Belo Horizonte route from eight to 15 between September 2012 and December 2012. By providing this additional convenience for our customers, we aim to continue stimulating demand for our products and services.

 

Leverage our strong brand and continue to deliver a high-quality travel experience

 

We intend to maintain a disciplined focus on our business model in our existing markets, further strengthening our financial position and reinforcing our brand strength. We have already demonstrated our ability to stimulate growth in new and existing markets, and achieved better Adjusted EBITDAR margins than our main competitor, Gol, in 2012 and for the three months ended March 31, 2013, according to Gol’s results of operations for those periods filed with the SEC. We aim to remain the airline of choice in our existing markets through rigorous focus on our model of offering convenient frequent service, high-quality customer service offering and efficient operations. We believe the strength of our brand allows us to grow revenues by increasing our ability to segment our customer base and provide client tailored services, leading to higher satisfaction and loyalty.

 

Increase our ancillary revenue streams

 

We intend to continue to grow our ancillary revenue business, by both leveraging our existing products and introducing new products. We will focus on deriving further value from our existing ancillary revenue streams such as cargo services, passenger-related fees, upgrades to seats with extra legroom ( Espaço Azul ), sales of advertising space in our various customer-facing formats, commissions on travel insurance sales and revenues from airport parking at Campinas. We plan to expand our cargo business, building on our extensive route network and taking advantage of the fact that Campinas is the second largest cargo airport in Brazil by freight volume. In addition, we intend to leverage our customer base to increase non-ticket revenues by broadening our product and service offerings. In addition to expanding the scope of our Tudo Azul loyalty program through commercial partnerships with companies from other industries, we also plan to increase revenues from Azul Viagens , our travel packages initiative, through which we generate commissions from hotel reservations and car rentals bundled with flight sales.

 

Improve operating efficiency

 

Azul’s R$400 million (U.S.$235 million, considering the historical exchange rate) start-up capital enabled us to invest up-front in our scalable operating platform and efficient young fleet and rapidly achieve market-leading Adjusted EBITDAR. Our decision to purchase Brazilian-made Embraer aircraft enabled us to access

 

 

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competitive local aircraft financing from BNDES, Brazil’s national development bank (at current rates below Brazil’s Interbank Deposit Certificate, or CDI, overnight deposit rate). We have financed 71.1% of our finance-leased and debt-financed jets in reais as of March 31, 2013, whereas our two main competitors, who, according to their quarterly results of operations filed with the SEC for the first quarter of 2013, operate aircraft purchased from non-Brazilian manufacturers, have 100% currency exposure for their aircraft ownership costs. We believe we will be able to further reduce our unit operating costs and improve efficiency by, among other things, spreading our low fixed-cost infrastructure over a larger-scale operation, using technology to create further operating efficiencies, leveraging our labor productivity, and continuing our cost-effective fuel hedging strategy. In this regard, we have developed a customized hedging product with Petrobras Distribuidora, which enables us to lock in the cost of the jet fuel we will consume in the future, thereby offering a hedge that is tailored more specifically to our needs rather than West Texas Intermediate, or WTI, or heating oil futures, which are not perfectly correlated to jet fuel. This hedging contract also allows us to lock in the jet fuel price in reais , thereby hedging our exposure not only to fuel prices, but also to real /U.S. dollar exchange rates.

 

Corporate Information

 

We are incorporated as a Brazilian sociedade por ações . Our headquarters are at Edifício Jatobá, 8 th floor, Castelo Branco Office Park, Avenida Marcos Penteado de Ulhôa Rodrigues, 939, Tamboré, Barueri, São Paulo, SP 06460-040, Brazil. The telephone number of our investor relations office is +55 (11) 4831-2880 and our website address is www.voeazul.com.br . Information provided on our website is not part of this prospectus and is not incorporated by reference herein.

 

 

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SUMMARY FINANCIAL AND OPERATING DATA

 

The following tables summarize our financial and operating data for each of the periods indicated. You should read this information in conjunction with our financial statements and related notes, and the information included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Unaudited Pro Forma Consolidated Financial Information” elsewhere in this prospectus.

 

This summary financial data at and for the years ended December 31, 2012, 2011 and 2010 has been derived from our audited consolidated financial statements included elsewhere in this prospectus, which have been prepared in accordance with IFRS.

 

The summary financial data at and for the three months ended March 31, 2013 and 2012 has been derived from our unaudited interim condensed consolidated financial statements included elsewhere in this prospectus, which have been prepared in accordance with IFRS.

 

We have also included in this section summary unaudited pro forma consolidated financial data for the year ended December 31, 2012 and for the three months ended March 31, 2012. This summary data has been derived from the unaudited pro forma consolidated financial information included elsewhere in this prospectus, which gives effect to our acquisition of TRIP as if it had occurred as of January 1, 2012. See “Unaudited Pro Forma Consolidated Financial Information.”

 

Statements of Operations Data

 

    For the Years Ended December 31,  
    Pro Forma Unaudited              
    2012     2012     2012     2012     2011     2010  
    (U.S.$)     (R$)     (U.S.$)     (R$)     (R$)     (R$)  
   

(in thousands, except amounts per share and %)

 

Operating revenue

           

Passenger revenue

    1,839,478        3,704,341        1,218,915        2,454,651        1,558,256        786,721   

Other revenue

    210,072        423,043        130,452        262,704        162,971        84,409   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    2,049,550        4,127,384        1,349,367        2,717,355        1,721,227        871,130   

Operating expenses

           

Aircraft fuel

    (771,808     (1,554,267     (532,953     (1,073,261     (684,442     (341,006

Salaries, wages and benefits

    (394,253     (793,946     (253,469     (510,435     (345,511     (189,997

Aircraft and other rent

    (180,634     (363,760     (113,911     (229,393     (109,069     (68,733

Landing fees

    (117,691     (237,006     (77,698     (156,468     (78,016     (38,651

Traffic and customer servicing

    (91,643     (184,551     (64,592     (130,076     (96,054     (54,289

Sales and marketing

    (98,480     (198,320     (65,403     (131,708     (93,498     (54,004

Maintenance, materials and repairs

    (121,045     (243,760     (62,974     (126,817     (60,915     (33,228

Depreciation and amortization

    (87,783     (176,778     (52,643     (106,013     (87,541     (51,258

Other operating expenses

    (225,689     (454,492     (121,434     (244,543     (141,085     (90,807
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    (2,089,026     (4,206,880     (1,345,077     (2,708,714     (1,696,131     (921,973

Operating income (loss)

    (39,476     (79,496     4,290        8,641        25,096        (50,843

Financial result

           

Financial income

    6,932        13,959        4,824        9,715        13,360        6,475   

Financial expenses

    (127,855     (257,474     (80,780     (162,675     (114,373     (55,691

Derivative financial instruments

    4,927        9,922        4,970        10,009        3,402        (2,867

Foreign currency exchange, net

    (35,686     (71,865     (18,700     (37,659     (32,936     5,359   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax and social contribution

    (191,158     (384,954     (85,396     (171,969     (105,451     (97,567

Income tax and social contribution

    560        1,127        560        1,127                 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss for the year

    (190,598     (383,827     (84,836     (170,842     (105,451     (97,567
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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Table of Contents
    For the Years Ended December 31,  
    Pro Forma Unaudited              
    2012     2012     2012     2012     2011     2010  
    (U.S.$)     (R$)     (U.S.$)     (R$)     (R$)     (R$)  
   

(in thousands, except amounts per share and %)

 

Basic and diluted loss for the year per common share R$ (1)

    (0.03     (0.06     (0.01     (0.03     (0.02     (0.02

Basic and diluted loss for the year per preferred share R$

    (2.13     (4.28     (1.26     (2.53     (1.61     (1.49

Other financial data (unaudited):

           

EBITDA ( 2 )

    17,548        35,339        43,203        87,004        83,103        2,907   

Adjusted EBITDA ( 2 )

    51,051        102,806        65,318        131,538        124,886        (4,936

Adjusted EBITDAR ( 2 )

    231,685        466,566        179,229        360,931        233,955        63,797   

Adjusted EBITDAR Margin (%) ( 2 ) (3)

    11.3     11.3     13.3     13.3     13.6     7.3

 

  (1)   Reflects the conversion ratio of 75.0 common shares to 1.0 preferred share.
  (2)   EBITDA, Adjusted EBITDA, Adjusted EBITDAR and Adjusted EBITDAR Margin (whether expressed on a historical or pro forma basis) are included as supplemental information because we believe they are useful indicators of our operating performance. However, EBITDA, Adjusted EBITDA, Adjusted EBITDAR and Adjusted EBITDAR Margin are not financial performance measures determined in accordance with IFRS and must not be considered as an alternative to operating income, or as an indication of operating performance, or as an alternative to operating cash flows or as an indicator of liquidity. We believe that these measures are recognized performance measurements in the airline industry that are frequently used by investors, securities analysts and other interested parties in comparing the operating performance of companies in our industry. However, they are susceptible to varying calculations and not all companies calculate them in the same manner. As a result, EBITDA, Adjusted EBITDA, Adjusted EBITDAR and Adjusted EBITDAR Margin as presented may not be directly comparable to similarly titled measures presented by other companies. In addition, these measures present limitations that impair their use as a measurement of performance, since they do not consider certain costs arising from our business that might significantly impact our results of operations and liquidity, such as financial expenses and depreciation.
  (3)   Represents Adjusted EBITDAR divided by total operating revenue.

 

 

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Table of Contents
     For the Three Months Ended March 31,  
     Pro Forma Unaudited     Unaudited  
     2012     2012     2013     2013     2012  
     (U.S.$)     (R$)     (U.S.$)     (R$)     (R$)  
     (in thousands, except amounts per share and %)  

Operating revenue

          

Passenger revenue

     431,269        868,489        556,967        1,121,620        552,466   

Other revenue

     41,949        84,476        61,074        122,991        53,423   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     473,218        952,965        618,041        1,244,611        605,889   

Operating expenses

          

Aircraft fuel

     (176,615     (355,667     (213,514     (429,974     (237,867

Salaries, wages and benefits

     (93,909     (189,113     (85,853     (172,891     (111,949

Aircraft and other rent

     (36,803     (74,114     (56,867     (114,519     (43,360

Landing fees

     (25,313     (50,975     (32,641     (65,733     (33,499

Traffic and customer servicing

     (24,470     (49,278     (23,806     (47,940     (28,575

Sales and marketing

     (19,984     (40,243     (25,428     (51,206     (26,781

Maintenance, materials and repairs

     (19,983     (40,244     (39,225     (78,991     (17,343

Depreciation and amortization

     (22,793     (45,900     (23,083     (46,484     (27,031

Other operating expenses

     (39,898     (80,347     (53,693     (108,127     (43,430
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     (459,768     (925,881     (554,110     (1,115,865     (569,835

Operating income

     13,450        27,084        63,931        128,746        36,054   

Financial result

          

Financial income

     2,085        4,199        1,637        3,296        2,879   

Financial expenses

     (30,728     (61,880     (44,649     (89,915     (35,940

Derivative financial instruments

     (3,110     (6,263     (361     (726     (11,159

Foreign currency exchange, net

     4,524        9,111        6,014        12,111        5,602   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income/(loss) before income tax and social contribution

     (13,779     (27,749     26,572        53,512        (2,564

Income tax and social contribution

                   (12,120     (24,408       

Deferred income tax and social contribution

                   743        1,496          
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income/(loss) for the period

     (13,779     (27,749     15,195        30,600        (2,564
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic income (loss) per common share

                                   

Diluted income (loss) per common share

                                   

Basic income (loss) per preferred share (1)

     (0.15     (0.31     0.17        0.34        (0.04

Diluted income (loss) per preferred share (1)

     (0.15     (0.31     0.16        0.33        (0.04

Other financial data (unaudited):

          

EBITDA (2)

     37,657        75,832        92,667        186,615        57,528   

Adjusted EBITDA (2)

     49,129        98,935        98,035        197,424        77,319   

Adjusted EBITDAR (2)

     85,932        173,049        154,902        311,943        120,679   

Adjusted EBITDAR Margin (%) (2)(3)

     18.2     18.2     25.1     25.1     19.9

 

  (1)   Reflects the conversion ratio of 75.0 common shares to 1.0 preferred share.
  (2)  

EBITDA, Adjusted EBITDA, Adjusted EBITDAR, Adjusted EBITDAR margin and pro forma Adjusted EBITDAR margin are included as supplemental information because we believe they are useful indicators of our operating performance. However, EBITDA, Adjusted EBITDA, Adjusted EBITDAR, Adjusted EBITDAR margin and pro forma Adjusted EBITDAR margin are not financial performance measures determined in accordance with IFRS and must not be considered as an alternative to operating income, or as an indication of operating performance, or as an alternative to operating cash flows or as an indicator of liquidity. We believe that these measures

 

 

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Table of Contents
  are recognized performance measurements in the airline industry that are frequently used by investors, securities analysts and other interested parties in comparing the operating performance of companies in our industry. However, they are susceptible to varying calculations and not all companies calculate them in the same manner. As a result, EBITDA, Adjusted EBITDA, Adjusted EBITDAR, Adjusted EBITDAR margin and pro forma Adjusted EBITDAR margin as presented may not be directly comparable to similarly titled measures presented by other companies. In addition, EBITDA, Adjusted EBITDA, Adjusted EBITDAR, Adjusted EBITDAR margin and pro forma Adjusted EBITDAR margin present limitations that impair their use as a measurement of performance, since they do not consider certain costs arising from our business that might significantly impact our results of operations and liquidity, such as financial expenses and depreciation.
  (3)   Represents Adjusted EBITDAR divided by total operating revenue.

 

The following tables present the reconciliation of EBITDA, Adjusted EBITDA and Adjusted EBITDAR to net income (loss) for the periods indicated below:

 

     For the Years Ended December 31,
     Pro Forma
Unaudited
   
     2012   2012   2012   2012   2011   2010
     (U.S.$)   (R$)   (U.S.$)   (R$)   (R$)   (R$)
     (in thousands, except Adjusted EBITDAR margin)

Reconciliation:

                        

Loss for the year

       (190,598 )       (383,827 )       (84,836 )       (170,842 )       (105,451 )       (97,567 )

Plus (minus):

                        

Financial expenses

       127,855         257,474         80,780         162,675         114,373         55,691  

Financial income

       (6,932 )       (13,959 )       (4,824 )       (9,715 )       (13,360 )       (6,475 )

Deferred income tax and social contribution

       (560 )       (1,127 )       (560 )       (1,127 )                

Depreciation and amortization

       87,783         176,778         52,643         106,013         87,541         51,258  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

EBITDA

       17,548         35,339         43,203         87,004         83,103         2,907  

Foreign currency exchange on debt (1)

       36,782         74,071         27,085         54,543         45,185         (10,710 )

Derivative financial instruments (2)

       (4,927 )       (9,922 )       (4,970 )       (10,009 )       (3,402 )       2,867  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Non-recurring costs (3)

       1,648         3,318                                  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Adjusted EBITDA (4)

       51,051         102,806         65,318         131,538         124,886         (4,936 )

Aircraft and other rent

       180,634         363,760         113,911         229,393         109,069         68,733  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Adjusted EBITDAR (4)

       231,685         466,566         179,229         360,931         233,955         63,797  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Adjusted EBITDAR Margin (4) (%)

       11.3 %       11.3 %       13.3 %       13.3 %       13.6 %       7.3 %

 

  (1)   Represents the foreign exchange remeasurement on U.S. dollar denominated debt.
  (2)   Represents currency forward contracts used to protect our U.S. dollar exposure.
  (3)   Direct expenses related to the closure of Campinas airport in October 2012 due to an incident with an aircraft from a cargo airline that blocked the runway for 45 hours.
  (4)   Adjustments exclude the effects of the following items: (i) the foreign currency exchange variation relating to our debt denominated in U.S. dollars, as this variation is directly related to our total debt cost and should be considered as part of our finance expense; and (ii) gains or losses in connection with our derivative instruments used to protect us against variations of the U.S. dollar compared to the real . We believe that this adjustment should be made as it mitigates the adjustment related to foreign currency exchange fluctuations, which do not reflect our actual operating results. Adjustments also exclude the non-recurring costs related to the temporary airport closure referred to in footnote (3) above.

 

 

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     For the Three Months Ended March 31,  
     Pro Forma
Unaudited
   

 

 
     2012     2012     2013     2013     2012  
     (U.S.$)     (R$)     (U.S.$)     (R$)     (R$)  
     (in thousands, except Adjusted EBITDAR margin)  

Reconciliation:

  

Loss for the year

     (13,779     (27,749     15,195        30,600        (2,564

Plus ( minus ):

          

Financial expenses

     30,728        61,880        44,649        89,915        35,940   

Financial income

     (2,085     (4,199     (1,637     (3,296     (2,879

Deferred and current income tax and social contribution

     —          —          11,377        22,912        —     

Depreciation and amortization

     22,793        45,900        23,083        46,484        27,031   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

     37,657        75,832        92,667        186,615        57,528   

Foreign currency exchange on debt (1)

     8,362        16,840        5,007        10,083        8,632   

Derivative financial instruments (2)

     3,110        6,263        361        726        11,159   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA (3)

     49,129        98,935        98,035        197,424        77,319   

Aircraft rentals

     36,803        74,114        56,867        114,519        43,360   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDAR (3)

     85,932        173,049        154,902        311,943        120,679   

Adjusted EBITDAR Margin (3) (%)

     18.2     18.2     25.1     25.1     19.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (1)   Represents the foreign exchange remeasurement on U.S. dollar denominated debt.
  (2)   Represents currency forward contracts used to protect our U.S. dollar exposure.
  (3)   Adjustments exclude the effects of the following items: (i) the foreign currency exchange variation relating to our debt denominated in U.S. dollars, as this variation is directly related to our total debt cost and should be considered as part of our finance expense; and (ii) gains or losses in connection with our derivative instruments used to protect us against variations of the U.S. dollar compared to the real . We believe that this adjustment should be made as it mitigates the adjustment related to foreign currency exchange fluctuations, which do not reflect our actual operating results.

 

Balance Sheet Data

 

The following table presents key line items from our historical balance sheet data:

 

     At December 31,  
     2012      2012      2011      2010  
     (U.S.$)      (R$)      (R$)      (R$)  
     (in thousands)  

Cash and cash equivalents

     134,629         271,116         131,664         96,909   

Total assets

     2,359,611         4,751,785         1,964,003         1,223,955   

Loans and debentures

     1,484,346         2,989,175         1,439,581         780,181   

Total liabilities and shareholders’ equity

     2,359,611         4,751,785         1,964,003         1,223,955   

 

     At and For the Three Months Ended
March 31,
     Unaudited
     2013      2013      2012
     (U.S.$)      (R$)      (R$)
     (in thousands)

Cash and cash equivalents

     143,530         289,041       137,485

Total assets

     2,387,038         4,807,018       2,079,580

Loans and debentures

     1,488,023         2,996,582       1,549,660

Total liabilities and shareholders’ equity

     2,387,038         4,807,018       2,079,580

 

 

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Table of Contents

Operating Data

 

     At and For the Years Ended December 31,  
     Pro Forma Unaudited     Unaudited  
     2012     2012     2012     2012     2011     2010  
     (U.S.$)     (R$)     (U.S.$)     (R$)     (R$)     (R$)  

Operating Statistics (unaudited):

            

Operating aircraft at end of period

     118        118        118        118        49        26   

Total aircraft at end of period

     127        127        127        127        49        28   

Airports served at end of period

     100        100        100        100        42        28   

Average daily aircraft utilization (hours)

     10.3        10.3        11.5        11.5        12.9        13.6   

Stage length

     693        693        778        778        859        968   

Number of departures

     269,639        269,639        143,363        143,363        92,343        47,873   

Block hours

     376,693        376,693        220,184        220,184        150,543        82,793   

Passenger flight segments (thousands)

     17,885,884        17,885,884        11,718,784        11,718,784        8,161,458        4,414,731   

Revenue passenger kilometers (RPKs) (thousands)

     12,604,879        12,604,879        9,061,814        9,061,814        6,973,014        4,239,476   

Available seat kilometers (ASKs) (millions)

     16,719,596        16,719,596        11,495,008        11,495,008        8,598,424        5,065,737   

Load Factor (%)

     75     75     79     79     81     84

Passenger revenues (in millions)

     1,839,478        3,704,341        1,218,915        2,454,651        1,558,256        786,721   

Passenger revenue per ASK (cents) (PRASK)

     11.00        22.16        10.60        21.35        18.12        15.53   

Operating revenue per ASK (cents) (RASK)

     12.26        24.69        11.74        23.64        20.02        17.20   

Yield per ASK (cents)

     14.59        29.39        13.45        27.09        22.35        18.56   

Trip cost

     7,747        15,602        9,382        18,894        18,368        19,259   

End-of-period FTEs per operating aircraft

     76        76        76        76        88        105   

CASK (cents)

     12.49        25.16        11.70        23.56        19.73        18.20   

CASK (ex-fuel) (cents) (1)

     7.88        15.87        7.07        14.23        11.77        11.47   

Fuel liters consumed (thousands)

     682,805        682,871        469,458        469,458        337,437        205,541   

Average fuel cost per liter

     1.13        2.28        1.14        2.29        2.03        1.66   

 

  (1)   CASK (ex-fuel) means CASK excluding all fuel costs.

 

 

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Table of Contents
     At and For the Three Months Ended March 31,  
     Pro Forma
Unaudited
    Unaudited  
     2012     2012     2013     2013     2012  
     (US$)     (R$)     (US$)     (R$)     (R$)  

Operating Statistics (unaudited):

          

Operating aircaft at end of period

     107        107        118        118        51   

Total aircraft at end of period

     112        112        130        130        55   

Airports served at end of period

     95        95        103        103        47   

Average Daily Aircraft utilization (hours)

     10.5        10.5        9.6        9.6        12.0   

Stage length (kilometers)

     711        711        717        717        819   

Number of departures

     64,328        64,328        67,581        67,581        31,030   

Block hours

     90,182        90,182        96,379        96,379        49,015   

Passenger flight segments (thousands)

     4,189,038        4,189,038        4,751,685        4,751,685        2,631,863   

Revenue passeneger kilometers (RPKs)(thousands)

     3,036,442        3,036,442        3,537,284        3,537,284        2,136,290   

Available seat kilometers (ASKs)(millions)

     4,048,884        4,048,884        4,478,202        4,478,202        2,688,144   

Load Factor (%)

     75.0     75.0     79.0     79.0     79.5

Passenger revenues (in millions)

     431,269        868,489        556,967        1,121,620        552,466   

Passenger revenue per ASK (cents) (PRASK)

     10.65        21.45        12.44        25.05        20.55   

Operating revenue per ASK (cents) (RASK)

     11.69        23.54        13.80        27.79        22.54   

Yield per ASK (cents)

     14.20        28.60        15.75        31.71        25.86   

Trip cost

     7,147        14,393        8,199        16,512        18,364   

End of period FTEs per operating aircraft

     78        78        77        77        94   

CASK (cents)

     11.36        22.87        12.37        24.92        21.20   

CASK (ex-fuel) (cents)

     6.99        14.08        7.61        15.32        12.35   

Fuel liters consumed (thousands)

     165,822        165,822        178,064        178,064        110,024   

Average fuel cost per liter

     1.06        2.14        1.20        2.41        2.16   

 

 

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Table of Contents

THE OFFERING

 

Issuer

Azul S.A.

 

The global offering

[ · ] preferred shares, to be offered in an international offering and a Brazilian offering. The number of preferred shares offered in the international offering and the Brazilian offering is subject to reallocation between the offerings. The closings of the international offering and the Brazilian offering are conditioned upon each other.

 

International offering

We are offering [ · ] preferred shares, in the form of ADSs, through the international underwriters in the United States and elsewhere outside Brazil.

 

  The international underwriters also will act as placement agents on behalf of the Brazilian underwriters with respect to the sale of preferred shares to investors located outside Brazil who are authorized to invest in Brazilian securities according to the rules of the Brazilian National Monetary Council ( Conselho Monetário Nacional ), or the CMN, and the CVM.

 

Brazilian offering

Concurrently with the international offering, we are offering [ · ] preferred shares through the Brazilian underwriters to investors in Brazil in a public offering authorized by the CVM. The Brazilian offering will be made by means of a separate prospectus in Portuguese.

 

Selling shareholders

David Neeleman (directly and through Saleb II Founder 1 LLC), Gerald Blake Lee (through Saleb II Founder 2 LLC), Thomas Eugene Kelly (through Saleb II Founder 3 LLC), Tom Anderson (through Saleb II Founder 4 LLC), Carol Elizabeth Archer (through Saleb II Founder 5 LLC), Cindy England (through Saleb II Founder 6 LLC), Robert Land (through Saleb II Founder 7 LLC), Robert Milton (through Saleb II Founder 8 LLC), Mark Neeleman (through Saleb II Founder 9 LLC), Marlon Yair Ramirez (through Saleb II Founder 10 LLC), John Rodgerson (through Saleb II Founder 11 LLC), Maximiliam Urban (through Saleb II Founder 12 LLC), Joel Peterson (through Saleb II Founder 13 LLC), Amir Nasruddin (through Saleb II Founder 14 LLC), Jason Truman Ward (through Saleb II Founder 15 LLC), John Joseph Daly (through Saleb II Founder 16 LLC), Gianfranco Beting, Regis da Silva Brito, TPG Growth (through Star Sabia LLC), Weston Presidio (through WP-New Air LLC), Azul HolCo, LLC, Maracatu LLC, Gávea Investimentos Ltda. (through GIF II Fundos de Investimento e Participações and GIF Mercury LLC), ZDBR LLC, Kadon Empreendimentos S.A., Bozano Holdings Ltd., JJL Brazil LLC, Morris Azul, LLC, Miguel Dau, João Carlos Fernandes and Trip Participações S.A. are granting options to the international and Brazilian underwriters to purchase at the initial public offering price less the underwriting discount a total of up to [ · ]

 

 

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additional preferred shares including in the form of ADSs to cover over-allotments, if any.

 

International underwriters

Morgan Stanley & Co. LLC, Itaú BBA USA Securities, Inc., Goldman, Sachs & Co., Santander Investment Securities Inc., Banco do Brasil Securities LLC, Raymond James & Associates, Inc. and Banco Pine S.A. (acting through Pine Securities USA LLC for sales in the United States), as co-managers.

 

Brazilian underwriters

Banco Morgan Stanley S.A., Banco Itaú BBA S.A., Goldman Sachs do Brasil Banco Múltiplo S.A., Banco Santander (Brasil) S.A., BB-Banco de Investimento S.A and Pine Investimentos Distribuidora de Títulos e Valores Mobiliários Ltda.,

 

Shares outstanding before this global offering

464,482,529 common shares and 83,395,080 preferred shares. Each common share is convertible into preferred shares at the ratio of 75.0 common shares for 1.0 preferred share. After applying this conversion ratio, solely for the purposes of calculating each shareholder’s economic interest in our capital, we would have 89,588,180 preferred shares outstanding prior to this global offering on a theoretical fully-converted basis.

 

Shares to be issued to TRIP’s Former Shareholders prior to this global offering

Under the TRIP Investment Agreement, we expect to issue between [ · ] and [ · ] additional preferred shares calculated at the upper and lower points of the offering price range, to former shareholders of TRIP immediately prior to the closing of this global offering. For more information, see “The TRIP Acquisition.”

 

Shares outstanding after this global offering

[ · ] common shares and [ · ] preferred shares. After applying the 75:1 conversion ratio, solely for the purposes of calculating each shareholder’s economic interest in our capital, we would have [ · ] preferred shares outstanding after this global offering on a theoretical fully-converted basis. This calculation assumes that we issue [ · ] new preferred shares to TRIP’s Former Shareholders immediately prior to this global offering under the TRIP Investment Agreement, based on the midpoint of the price range in this global offering.

 

Preferred shares being offered

Preferred shares without voting rights, except for the voting rights mentioned in “Description of Capital Stock—Voting rights” for as long as our company is listed on the Level 2 segment of BM&FBOVESPA. Holders of our preferred shares benefit from certain tag-along rights, the right to receive 75 times the dividends paid on our common shares and liquidation preferences, all as described in “Description of Capital Stock.”

 

ADSs

Each ADS represents one preferred share and may be represented by American depositary receipts, or ADRs. The ADSs will be issued

 

 

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under a deposit agreement entered into among us, Deutsche Bank Trust Company Americas, as depositary, and the registered holders and beneficial owners from time to time of ADSs issued under the deposit agreement.

 

Options to purchase additional ADS and preferred shares

The Selling Shareholders will grant the international underwriters an option, exercisable by the Representatives (as defined herein), on behalf of the international underwriters, upon prior written notice to the other international underwriters, us and the Selling Shareholders, for 30 days from and including the first day of trading of our preferred shares on BM&FBOVESPA, to purchase up to [ · ] additional preferred shares, in the form of ADSs (less any preferred shares sold to the Brazilian underwriters under their option referred to below), at the initial public offering price less the underwriting discount, solely to cover over-allotments, if any, provided that the decision to allocate the additional preferred shares (including in the form of ADSs) is made jointly by the Brazilian and international underwriters at the time the price per preferred share and ADS is determined. See “Underwriting—Option.” If any additional ADSs are purchased using this option, the international underwriters will offer them on the same terms as the ADSs being offered in the international offering.

 

  The Selling Shareholders will grant the Brazilian underwriters an option, exercisable by Banco Itaú BBA S.A., on behalf of the Brazilian underwriters upon prior written notice to the other Brazilian underwriters, us and the Selling Shareholders, for 30 days from and including the first day of trading of our preferred shares on BM&FBOVESPA, to purchase up to [ · ] additional preferred shares (less any preferred shares in the form of ADSs sold to the international underwriters under their option referred to above), at the international offering price less the underwriting discount, solely to cover over-allotments, if any, provided that the decision to allocate the additional preferred shares (including in the form of ADSs) is made jointly by the Brazilian and international underwriters at the time the price per preferred share and ADS is determined. See “Underwriting—Option.”

 

Offering price

We expect the offering price will be between R$[ · ] and R$ [ · ] per preferred share and between U.S.$ [ · ] and U.S.$ [ · ] per ADS, calculated at the exchange rate of R$[ · ] per U.S.$ at [ · ], 2013.

 

Use of proceeds

We estimate that the net proceeds that we will receive from this global offering will be R$[ · ] million. We intend to use these net proceeds to (i) invest in aircraft to grow our fleet, (ii) fund the capital expenditures needed to increase the number of destinations in our network, (iii) pay down debt of approximately R$140 million and (iv) for general corporate purposes. For further information, see “Use of Proceeds.”

 

 

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  We will not receive any proceeds from the sale of preferred shares, including in the form of ADSs by the Selling Shareholders.

 

Listing

We have applied to list the ADSs on the New York Stock Exchange, or NYSE, under the symbol “[ · ]” and to list our preferred shares on the Level 2 segment of BM&FBOVESPA under the symbol “[ · ].” We cannot assure you that a trading market for our preferred shares or ADSs will develop or will continue if developed.

 

Transfer restrictions

Our preferred shares, including in the form of ADSs, will be subject to certain transfer restrictions as described under “Underwriting—Selling Restrictions.”

 

Dividends and dividend policy

Holders of our preferred shares are entitled to receive 75 times the value of dividends (and other distributions) distributed to holders of our common shares. Holders of both our common and preferred shares are entitled to receive annual mandatory distributions of 0.1% of our net income; however, our preferred shares do not carry priority rights to receive fixed or minimum dividends, and therefore will not be entitled to voting rights even if no dividends are paid. Holders of our preferred shares are entitled to the general voting rights provided in the Corporate Governance Rules of the Level 2 segment of BM&FBOVESPA. For further details, see the sections of this prospectus entitled “Description of Capital Stock—Voting Rights” and “Dividend Policy.”

 

Lock-up agreement

We, the Selling Shareholders and our directors and officers have agreed not, for a period of 180 days after the date of this prospectus, subject to certain exceptions, to issue, offer, sell, contract to sell, pledge or otherwise transfer or dispose of, directly or indirectly, or file with the SEC or the CVM a registration statement relating to, any preferred shares, ADSs or securities convertible into or exchangeable or exercisable for preferred shares (including our common shares) or ADSs, or publicly disclose any intention to make any such offer, sale, pledge, disposition or filing, without the prior written consent of the Representatives.

 

  Additionally, pursuant to the regulations of the Level 2 segment of BM&FBOVESPA, we, the Selling Shareholders and our directors and executive officers may not sell and/or offer to sell any common and/or preferred shares (or derivatives relating to common and/or preferred shares) owned immediately after this global offering, or any securities or other derivatives linked to securities issued by us, for six months after the publication in Brazil of the announcement of commencement of this global offering. After the expiration of this six-month period, we, the Selling Shareholders and our directors and executive officers may not, for an additional six-month period, sell and/or offer to sell more than 40% of the securities that each of we or they hold. See “Underwriting—No sale of similar securities.”

 

 

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Controlling shareholder

Prior to this global offering, David Neeleman owns, directly or indirectly, 67% of our common shares’ giving him 67% of the voting rights in our company. Following this global offering, Mr. Neeleman will continue to control all shareholders’ decisions, including the ability to appoint a majority of our board of directors.

 

Tag-along rights

Holders of our preferred shares have the right to participate in a public tender offer for control of Azul, on the same terms and conditions (taking into account the 75:1 conversion ratio) as are offered to our controlling shareholder in any sale of control transaction. See “Description of Capital Stock—Rights of our Common and Preferred Shares.”

 

  Our principal shareholders also have certain tag-along rights applicable to sales of common shares by them. See “Description of Capital Stock—Shareholders’ Agreement.”

 

ADS depositary

Deutsche Bank Trust Company Americas.

 

Taxation

Dividends paid to holders of preferred shares who are not domiciled in Brazil will not be subject to any Brazilian withholding tax.

 

  For a discussion of the material U.S. tax consequences relating to an investment in our preferred shares, including in the form of ADSs, see “Taxation.”

 

Risk factors

Investing in our preferred shares, including in the form of ADSs, involves risks. See “Risk Factors” beginning on page 22 and the other information included in this prospectus for a discussion of the factors you should consider before deciding to invest in our preferred shares, including in the form of ADSs.

 

 

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RISK FACTORS

 

This initial public offering and an investment in our preferred shares, including in the form of ADSs, involves a high degree of risk. You should carefully consider the risks described below before making an investment decision. Our business, financial condition, results of operations, cash flows and prospects could be materially and adversely affected by any of these risks. The trading price of the our preferred shares, including in the form of ADSs, could decline due to any of these risks or other factors, and you may lose all or part of your investment.

 

The risks described below are those that we currently believe may adversely affect us or the preferred shares, including in the form of ADSs. In general, investing in the securities of issuers in emerging market countries such as Brazil, involves risks that are different from the risks associated with investing in the securities of U.S. companies and companies located in other countries with more developed capital markets. To the extent that information relates to, or is obtained from sources related to, the Brazilian government or Brazilian macroeconomic data, the following information has been extracted from official publications of the Brazilian government or other reliable sources and has not been independently verified by us.

 

Risks relating to Brazil

 

The Brazilian government has exercised, and continues to exercise, significant influence over the Brazilian economy. This involvement, together with Brazil’s political and economic conditions could adversely affect our business, financial condition, results of operations, cash flows and prospects as well as the trading price of our preferred shares, including in the form of ADSs.

 

The Brazilian government frequently exercises significant influence over the Brazilian economy and occasionally makes significant changes in policy and regulations. The Brazilian government’s actions to control inflation and other policies and regulations have often involved, among other measures, increases in interest rates, changes in tax policies, price controls, foreign exchange rate controls, capital controls and limits on imports. We have no control over and cannot predict what measures or policies the Brazilian government may take in the future. We and the market price of our securities may be adversely affected by changes in Brazilian government policies, as well as general economic factors, including, without limitation:

 

   

growth or downturn of the Brazilian economy;

 

   

interest rates;

 

   

currency fluctuations;

 

   

inflation;

 

   

liquidity of the domestic capital and lending markets;

 

   

import and export controls;

 

   

exchange rates and exchange controls and restrictions on remittances abroad;

 

   

modifications to laws and regulations according to political, social and economic interests;

 

   

fiscal policy and changes in tax laws;

 

   

economic and social instability;

 

   

the Brazilian government’s control of or influence on the control of certain oil producing and refining companies; and

 

   

other political, social and economic developments in or affecting Brazil.

 

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Uncertainty over whether the Brazilian government will implement changes in policies or regulations affecting these and other factors may create instability in the Brazilian economy, increasing the volatility of the Brazilian securities markets. In addition, possible political crises may affect the confidence of investors and the public in general, which may result in economic deceleration and affect the trading prices of securities issued by Brazilian companies. Any of these factors may adversely affect our business, financial condition, results of operations, cash flows and prospects, as well as the trading price of our preferred shares, including in the form of ADSs.

 

Exchange rate instability may have adverse effects on the Brazilian economy, our business, financial condition and results of operations.

 

The Brazilian currency has been devalued frequently over the past three decades. Throughout this period, the Brazilian government has implemented various economic plans and used various exchange rate policies, including sudden devaluations, periodic mini-devaluations (during which the frequency of adjustments has ranged from daily to monthly), exchange controls, dual exchange rate markets and since 1999 a floating exchange rate system. Although long-term depreciation of the real is generally linked to the rate of inflation in Brazil, depreciation of the real occurring over shorter periods of time has resulted in significant variations in the exchange rate between the real , the U.S. dollar and other currencies. In 2012, the real depreciated by an average of 16.7% and in 2011 it appreciated by an average of 4.85%, against the U.S. dollar. The real /U.S. dollar exchange rate reported by the Central Bank was R$2.0435 per U.S. dollar on December 31, 2012 and R$2.0138 per U.S. dollar on March 31, 2013.

 

Depreciation of the real against the U.S. dollar could create inflationary pressures in Brazil and cause increases in interest rates, which could negatively affect the growth of the Brazilian economy as a whole and harm our financial condition and results of operations, curtail access to financial markets and prompt government intervention, including recessionary governmental policies. Depreciation of the real against the U.S. dollar can also, as in the context of the current global economic recovery, lead to decreased consumer spending, deflationary pressures and reduced growth of the economy as a whole. Consequently, when the real appreciates, we incur in losses on our monetary assets denominated in, or indexed to, a foreign currency, such as the U.S. dollar, and our liabilities denominated in, or indexed to, foreign currency, decreases as the liabilities and assets are translated into reais .

 

Our revenues are denominated in reais and a significant part of our operating expenses, such as fuel, certain aircraft operating lease agreements, certain flight hour maintenance contracts and aircraft insurance, are denominated in, or linked to, foreign currency. As of March 31, 2013, 54.5% of our operating expenses were denominated in, or linked to, foreign currency. While in the past we have generally adjusted our fares in response to, and to alleviate the effect of, fluctuations of the real and have entered into hedging arrangements to protect us against the effects of fluctuations of the real , there can be no assurance we will be able to or will continue to do so. Any depreciation of the real against the U.S. dollar may have an adverse effect on us, including leading to a decrease in our profit margins or to operating losses caused by increases in U.S. dollar-denominated costs (including fuel costs), increases in interest expense or exchange losses on unhedged fixed obligations and indebtedness denominated in foreign currency. We may incur substantial amounts of U.S. dollar-denominated operating lease or financial obligations, fuel costs linked to the U.S. dollar and U.S. dollar-denominated indebtedness in the future or similar exposures to other foreign currencies.

 

Inflation and certain measures by the Brazilian government to curb inflation have historically adversely affected the Brazilian economy and Brazilian securities market, and high levels of inflation in the future would adversely affect our business, financial condition, results of operations and cash flows.

 

In the past, Brazil has experienced extremely high rates of inflation. Inflation and some of the measures taken by the Brazilian government in an attempt to curb inflation have had significant negative effects on the

 

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Brazilian economy generally. Inflation, policies adopted to curb inflationary pressures and uncertainties regarding possible future governmental intervention have contributed to economic uncertainty and heightened volatility in the Brazilian securities market.

 

Since the introduction of the real in 1994, Brazil’s inflation rate has been substantially lower than in previous periods. According to the National Consumer Price Index ( Índice Nacional de Preços ao Consumidor Amplo) , or IPCA, Brazilian inflation rates were 5.8%, 6.5%, 5.9%, 4.3% and 5.9% in 2012, 2011, 2010, 2009 and 2008, respectively. The annualized inflation rate during the three months ended March 31, 2013 was 6.6%. Brazil may experience high levels of inflation in the future. Inflationary pressures may lead to the Brazilian government intervening in the economy and introducing policies that could adversely affect our business, financial condition, results of operations, cash flows and prospects and the trading price of our preferred shares, including in the form of ADSs.

 

In the event that Brazil experiences high inflation in the future, we may not be able to adjust the prices we charge our passengers to offset the potential impacts of inflation on our expenses, including salaries. This would lead to decreased net income. Inflationary pressures may also adversely affect our ability to access foreign financial markets, causing adverse effects on our capital expenditure plans.

 

Developments and the perceptions of risks in other countries, including other emerging markets, the United States and Europe, may adversely affect the Brazilian economy and the market price of Brazilian securities, including the trading price of our preferred shares, including in the form of ADSs.

 

The market for securities issued by Brazilian companies is influenced by economic and market conditions in Brazil and, to varying degrees, market conditions in other Latin American and emerging markets, as well as the United States, Europe and other countries. Even though the world economy and the financial and capital markets had been recovering from the 2008 global financial crisis throughout 2010 and early 2011, the conditions of the global markets again deteriorated in 2011 and 2012. European countries encountered serious fiscal problems, including high debt levels that impair growth and increase the risk of sovereign default. At the same time, the United States faced fiscal difficulties, which culminated in the downgrade of the U.S. long-term sovereign credit rating by S&P in 2011. Developments or economic conditions in other emerging market countries have at times significantly affected the availability of credit to the Brazilian economy and result in considerable outflows of funds from Brazilian decreased the amount of foreign investments in Brazil.

 

Crises in other emerging market countries, the United States, Europe or other countries could decrease investor demand for Brazilian securities, such us our preferred shares, including in the form of ADSs. This may adversely affect the trading value of our preferred shares, including in the form of ADSs, and any decline in trading value would impede our access to capital markets and financing for future operations.

 

Variations in interest rates may have adverse effects on our results of operations.

 

We are exposed to the risk of interest rate variations, principally in relation to the Long Term Interest Rate ( Taxa de Juros de Longo Prazo ), or TJLP, with respect to loans denominated in reais , the Interbank Deposit Rate, or DI Rate, and with respect to operating and finance leases and debt-financed aircraft denominated in U.S. dollars, the London Interbank Offer Rate, or LIBOR.

 

The TJLP was 5.0% on March 31, 2013, 5.5% on December 31, 2012, 6.0% on December 31, 2011, 6.0% on December 31, 2010, 6.0% on December 31, 2009 and 6.25% on December 31, 2008. The DI Rate was 7.0% on March 31, 2013, 6.9% on December 31, 2012, 10.9% on December 31, 2011, 10.6% on December 31, 2010, 8.5% on December 31, 2009 and 13.6% on December 31, 2008. The three-month LIBOR was 0.5% on March 31, 2013, 0.3% on December 31, 2012, 0.6% on December 31, 2011, 0.3% on December 31, 2010, 0.3% on December 31, 2009 and 1.4% on December 31, 2008. Significant increases in consumption, inflation or other macroeconomic pressures may lead to an increase in these rates.

 

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If the TJLP, the DI Rate or LIBOR was to increase, our repayments under loans, operating and finance leases would increase, and we might not be able to adjust the prices we charge to offset increased payments. For example, in addition, our repayments under many of our operating and finance leases and debt-financed aircraft are linked to LIBOR, and we are exposed to the risk of variations in LIBOR. The outstanding loan balance due on our operating and finance lease and debt-financed aircraft contracts linked to LIBOR amounted to U.S. $649.5 million as of March 31, 2013.

 

Risks Relating to our Business and the Brazilian Civil Aviation Industry

 

Substantial fluctuations in fuel costs or the unavailability of fuel, which is mostly provided by one supplier, would harm our business.

 

Historically, international and local fuel prices have been subject to wide price fluctuations based on geopolitical issues and supply and demand. Fuel costs, which at times in 2007 and 2008 were at historically high levels, constitute a significant portion of our total operating expenses, accounting for 38.5% of our operating expenses for the three months ended March 31, 2013 and 39.6% of our operating expenses for the year ended December 31, 2012. Fuel availability is also subject to periods of market surplus and shortage and is affected by demand for both home heating oil and gasoline. Events resulting from prolonged instability in the Middle East or other oil-producing regions, or the suspension of production by any significant producer, may result in substantial price increases and/or make it difficult to obtain adequate supplies, which may adversely affect our profitability. Natural disasters or other large unexpected disrupting events in regions that normally consume significant amounts of other energy sources could have a similar effect. The price and future availability of fuel cannot be predicted with any degree of certainty, and significant increases in fuel prices may harm our business. Our hedging activities may not be sufficient to protect us from fuel price increases, and we may not be able to adjust our fares adequately to protect us from this cost.

 

Substantially all of our fuel is provided by one supplier, Petrobras Distribuidora. Petrobras is entitled to terminate its fuel supply contracts with us for a number of reasons. In addition, Petrobras may be unable to guarantee its fuel supply to us, for example due to difficulties in its production, import, refining or distribution activities. If we were unable to obtain fuel on similar terms from alternative suppliers, our business would be adversely affected. In addition, this agreement enable us to lock in the cost of the jet fuel we will consume in the future. Accordingly, in case this agreement is terminated, we will be required to enter into alternative hedging

 

We and the airline industry in general are particularly sensitive to changes in economic conditions and continued negative economic conditions that would likely continue to negatively impact our results of operations and our ability to obtain financing on acceptable terms.

 

Our operations, and the airline industry in general, are particularly sensitive to changes in economic conditions. Unfavorable economic conditions, such as high unemployment rates, a constrained credit market and increased business operating expenses, can reduce spending for both leisure and business travel. Unfavorable economic conditions can also impact our ability to raise fares to counteract increased fuel, labor, and other expenses. An increasingly unfavorable economic environment would likely negatively impact our results of operations. In addition, a significant instability of the credit, capital and financial markets, could result in increasing our borrowing costs, negatively affecting our operating results, financial condition, growth strategy and investment plans. These factors could also negatively impact our ability to obtain financing on acceptable terms and our liquidity in general.

 

Changes to the Brazilian civil aviation regulatory framework may adversely affect our business and results of operations, including our competitiveness and compliance costs.

 

Brazilian aviation authorities monitor and influence the developments in Brazil’s airline market. For example, ANAC addressed overcapacity by establishing strict criteria that must be met before new routes or additional flight frequencies were awarded. The policies of the ANAC and other aviation supervisory authorities may negatively affect our operations.

 

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In December 2012, the Brazilian government announced an incentive package for the regional aviation industry, by which it plans to provide subsidies and airport fee exemptions for all carriers offering regional flights. This incentive package provides for investments of up to R$7.3 billion in regional aviation infrastructure. Such subsidies and exemptions may cause the reallocation of landing rights and increased competitiveness at the airports where we operate, which may also negatively affect our business and results of operations.

 

We cannot assure you that these or other changes in Brazilian civil aviation regulations will not have an adverse effect on our business or results of operations. Any change that requires us to dedicate a significant level of resources on compliance with new aviation regulations, for example, would result in additional expenditure on compliance and consequently adversely affect our business and results of operations.

 

We have committed significant resources to the acquisition of TRIP and expect to incur further expense in finalizing the integration of the business operations of Azul and TRIP. If we cannot successfully integrate TRIP’s operations and business, then we may not recover this investment.

 

We have incurred and expect to continue to incur expenses in connection with the integration of Azul and TRIP. We incurred R$44.0 million and R$1.8 million in non-recurring expenses in connection with the TRIP Acquisition and integration in 2012 and the three months ended March 31, 2013, respectively principally for financial advisory, legal and accounting fees and expenses, reorganization and restructuring costs, severance and employee benefit-related expenses, and the integration of numerous processes, policies, procedures, operations, technologies and systems. As of March 31, 2013, we expect to incur up to R$15.6 million of expenses in 2013. The remaining anticipated expenses mainly relate to obtaining a joint operations certificate, transferring TRIP’s slots to Azul and finalizing the integration of the two companies.

 

There may, however, be significant unanticipated additional costs and expenses in connection with the combination that we may not recoup, such as: (i) unforeseen expenses or delays leading to one-time cash costs to integrate the two airlines that may exceed the one-time cash costs that we currently anticipate, (ii) material liabilities not identified during legal and accounting due diligence or lawsuits relating to labor, tax, civil or other claims, or to TRIP’s Former Shareholders pursuant to the TRIP Investment Agreement and (iii) losses resulting from actions relating to the integration of TRIP’s business.

 

We may encounter difficulties in fully integrating the acquired TRIP business into our business and may not fully achieve, or achieve within a reasonable time frame, the estimated strategic objectives and other expected benefits of the acquisition.

 

The process of integrating Azul and TRIP is expected to continue through July 2013. We may still face unanticipated difficulties in the integration, such as distracting management from day-to-day operations and the inability to successfully combine the businesses of Azul and TRIP in a manner that permits the combined companies to achieve the full revenue and cost synergies we anticipate.

 

The integration of two large companies presents significant management challenges. Achieving the anticipated synergies and the potential benefits of the acquisition will depend on successful integration of the businesses. Factors that may impact our achievement of the estimated synergies and benefits of the acquisition include, but are not limited to, our ability to maintain and enhance our relationships with existing TRIP customers, our ability to provide additional opportunities for the acquired business through our existing customer relationships and service channels, changes in the spending patterns and preferences of such customers, and fluctuating economic and competitive conditions. We may be unable to achieve the same growth, sales levels and profitability that the TRIP business has achieved in the past. Our ability to address these issues will determine the extent to which we are able to successfully integrate, develop and grow the acquired business and to achieve the expected synergies and other benefits of the acquisition. There can be no assurance that the TRIP Acquisition will result in the realization of the full benefits of synergies, innovation and operational efficiencies that we currently expect, that these benefits will be achieved within the anticipated timeframe or that we will be able to

 

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measure the effectively achieved synergies fully and accurately. The failure to achieve the estimated synergies and benefits could have a material adverse effect on our revenues, operating results and financial condition.

 

Because we have a limited operating history, it is difficult to evaluate an investment in our preferred shares, including in the form of ADSs.

 

Because we have a limited operating history, having commenced operations in December of 2008, it may be difficult to evaluate our future prospects and an investment in our preferred shares, including in the form of ADSs. Our prospects are uncertain and must be considered in light of the risks, uncertainties and difficulties frequently encountered by companies with a limited operating history. Our future performance will depend upon a number of factors, including our ability to:

 

   

implement our growth strategy;

 

   

provide high quality, reliable customer service at low fares;

 

   

enter new markets successfully;

 

   

hedge against fuel price, foreign exchange and interest rate fluctuations;

 

   

obtain aircraft that best suit our growth strategy;

 

   

maintain adequate control of our expenses;

 

   

attract, train, retain and motivate qualified personnel;

 

   

react to customer and market demands; and

 

   

maintain the safety of our operations.

 

We cannot assure you that we will successfully address any of these factors, and our failure to do so could adversely affect our financial condition and results of operations and the price of our preferred shares, including in the form of ADSs. In addition, given our limited operating history, our financial statements and other financial information included in this prospectus may not be adequate for evaluating our current financial condition and are not indicative of our future results and performance.

 

We operate in a highly competitive industry.

 

Airlines increase or decrease capacity in markets based on perceived profitability. Decisions by our competitors that increase overall industry capacity, or capacity dedicated to a particular region, market or route, as well as any other management decisions that increase a potential competitor’s market share, could have a material adverse impact on our business. Our growth and the success of our business model could stimulate competition in our markets through the development of similar strategies by our competitors. If these competitors adopt and successfully execute similar business models, our business and financial conditions could be materially adversely affected.

 

Each year we may face increased competition from existing and new participants in the Brazilian market. The air transportation sector is highly sensitive to price discounting and the use of very aggressive pricing policies by some airlines. Other factors, such as flight frequency, schedule availability, brand recognition, and quality of offered services (such as loyalty programs, VIP airport lounges, in-flight entertainment and other amenities) also have a significant impact on market competitiveness. In addition, the barriers to entering the domestic market are relatively low. We cannot assure you that existing or new competitors in our markets will not offer lower prices, more attractive services or increase their route capacity in an effort to obtain greater market share. In addition, a competitor may have greater financial resources and access to cheaper sources of capital than we do, which could enable them to operate their business with a lower cost structure than we can.

 

As a Brazilian airline focused in the domestic market, we also face competition from air travel substitutes. On our routes, we currently face competition from some other transportation alternatives, such as bus or

 

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automobile. In addition, technology advancements may limit the desire for air travel. For example, video teleconferencing and other methods of electronic communication may reduce the need for in-person communication and add a new dimension of competition to the industry as travelers seek lower cost substitutes for air travel. If we are unable to adjust rapidly to the changing nature of competition in our markets, it could have a material adverse effect on our business, results of operations and financial condition.

 

Further consolidation in the Brazilian and global airline industry framework may adversely affect us.

 

As a result of the competitive environment there may be further consolidation in the Brazilian and global airline industry, whether by means of acquisitions, joint ventures, partnerships or strategic alliances. We cannot predict the effects of further consolidation on the industry. Our competitors may increase their scale, diversity and financial strength and may have a competitive advantage over us, which would negatively affect our business and results of operations. Consolidation in the airline industry and changes in international alliances will continue to affect the competitive landscape in the industry and may result in the formation of airlines and alliances with increased financial resources, more extensive global networks and reduced cost structures.

 

In the event we do not act as a consolidator, our competitors may increase their scale, diversity and financial strength and may have a competitive advantage over us, which would negatively affect our business and results of operations. Consolidation in the airline industry is likely to affect the competitive landscape in the industry and may result in the formation of airlines and alliances with increased financial resources, more extensive global networks and reduced cost structures.

 

Our results of operations tend to be volatile and fluctuate due to seasonality.

 

Our operating revenue is substantially dependent on the passenger traffic volume carried, which is subject to seasonal and other changes in traffic patterns. The Brazilian passenger air transportation market is subject to seasonality, as there is always higher demand for air transportation services in the first and fourth quarters of the year, as a result of year-end and summer holidays. Accordingly, our results tend to be volatile.

 

We have significant fixed expenses that may harm our ability to attain our strategic goals.

 

We have high fixed expenses, such as aircraft ownership, headquarters facility and personnel, IT system license costs, training and insurance expenses. We expect to incur additional fixed expenses and contractual debt as we lease or acquire new aircraft and other equipment to implement our growth strategy or other purposes. As of March 31, 2013, we had firm commitments to purchase 23 Embraer E-Jets, and firm commitments to purchase 20 ATR 72 aircraft to be delivered between 2013 and 2016, totaling R$2.4 billion.

 

As a function of our fixed expenses, we may (i) have limited ability to obtain additional financing, (ii) be required to dedicate a significant part of our cash flow to fixed expenses resulting from operating leases and debt for aircraft, (iii) incur higher interest or leasing expenses in the event that interest rates increase or (iv) have a limited ability to plan for, or react to, changes in our businesses, the civil aviation sector generally and overall macroeconomic conditions. In addition, volatility in global financial markets may make it difficult for us to obtain financing for our fixed expenses on favorable terms or at all.

 

We depend significantly on automated systems and any breakdown in these systems may harm our business, financial condition, results of operations, cash flows and prospects.

 

We depend on automated systems to operate our businesses, including our sales system, automated seat reservation system, fleet and network management system, telecommunications system and website. Significant or repeated breakdowns of our automated systems may impede our passengers and travel agencies’ access to our products and services, which may cause them to purchase tickets from other airlines, adversely affecting our net revenues.

 

These interruptions may include but are not limited to computer hackings, computer viruses, worms or other disruptive software, or other malicious activities. In particular, both unsuccessful and successful cyber attacks on

 

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companies have increased in frequency, scope and potential harm in recent years. The costs associated with a major cyber attack could include expensive incentives offered to existing customers to retain their business, increased expenditures on cyber security measures, lost revenues from business interruption, litigation and damage to our reputation. In addition, if we fail to prevent the theft of valuable information, protect the privacy of customer and employee confidential data against breaches of network or IT security, it could result in damage to our reputation, which could adversely impact customer and investor confidence. Any of these occurrences could result in a material adverse effect on our business, financial condition, results of operations, cash flows and prospects.

 

A failure to implement our growth strategy may harm our results of operations.

 

Our growth strategy, and the consolidation of our leadership in terms of markets served in Brazil, includes, among other objectives, increasing the number of markets we serve and increasing the frequency of the flights we provide. These objectives are dependent on obtaining approvals for operating new routes from local regulators and obtaining adequate access to the necessary airports. Certain airports that we serve or that we may want to serve in the future are subject to capacity constraints and impose landing rights and slot restrictions during certain periods of the day such as the Santos Dumont airport in Rio de Janeiro and the Juscelino Kubitschek airport in Brasília. We cannot assure you that we will be able to maintain our current landing rights and slots and obtain a sufficient number of landing rights and slots, gates, and other facilities at airports to expand our services as we propose. It is also possible that airports not currently subject to capacity constraints may become so in the future. In addition, an airline must use its slots on a regular and timely basis or risks having those slots reallocated to other airlines. Where landing rights and slots or other airport resources are not available or their availability is restricted in some way, we may have to modify our schedules, change routes or reduce aircraft utilization. Any factor preventing or delaying our access to airports or routes which are relevant to our growth strategy (including our ability to maintain our current landing rights and slots and obtain additional landing rights and slots at certain airports) may restrict the expansion or our operations and, consequently, adversely affect our growth strategy.

 

Some of the airports to which we fly impose various restrictions, including limits on aircraft noise levels, limits on the number of average daily departures and curfews on runway use. In addition, we cannot assure you that airports at which there are no such restrictions may not implement restrictions in the future or that, where such restrictions exist, they may not become more onerous. Such restrictions may limit our ability to continue to provide or to increase services at such airports, which may adversely affect us. Any factor preventing or delaying our access to airports or routes which are vital to our growth strategy (including our ability to maintain our current slots and obtain additional landing rights and slots at certain airports) may restrict the expansion of our operations and, consequently, adversely affect our growth strategy.

 

Our reputation, financial results and the market price of our preferred shares, including in the form of ADSs, could be harmed by events out of our control.

 

Accidents or incidents involving our aircraft could involve significant claims by injured passengers and others, as well as significant costs related to the repair or replacement of a damaged aircraft and its temporary or permanent loss from service. We are required by ANAC and lessors of our aircraft under our operating lease agreements to carry liability insurance. The amount of liability insurance we maintain may not be adequate and we may be forced to bear substantial losses in the event of an accident. Substantial claims resulting from an accident in excess of our related insurance coverage would harm our business and financial results. Moreover, any aircraft accident or incident involving our aircraft, even if fully insured, or the aircraft of any major airline could cause negative public perceptions about us or the air transport system, which would harm our reputation, financial results and the market price of our preferred shares, including in the form of ADSs.

 

We may also be affected by other events that affect travel behavior, such as the potential of epidemics or acts of terrorism. These events are out of our control and may affect us even if occurring in markets where we do not operate and/or in connection with other airlines. In addition, in the past there have been concerns about

 

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outbreaks or potential outbreaks of other diseases, such as avian flu and Severe Acute Respiratory Syndrome, or SARS, which had an adverse impact on global air travel. Any outbreak of a disease that affects travel behavior could have a material adverse impact on us and the trading price of shares of companies in the worldwide airline industry, including our preferred shares, including in the form of ADSs. Outbreaks of disease could also result in quarantines of our personnel or an inability to access facilities or our aircraft, which would harm our reputation, financial results and the market price of our preferred shares, including in the form of ADSs.

 

Natural disasters and other events out of our control may affect and disrupt our operations. For example, in 2011, a volcanic eruption in Chile had a prolonged adverse effect on air travel, halting flights in, Argentina, Chile, Uruguay and the southern part of Brazil for several days. As a result, our operations to and from these regions were temporarily disrupted, including certain aircraft being grounded in the affected regions. In 2012, an incident with an aircraft from a cargo airline caused the closing of a runway at Campinas airport for three days, which negatively impacted our operations and forced us re-accommodate our passengers to new flights. Any natural disaster that affects air travel in the regions in which we operate could have a material adverse impact on our business and results of operations.

 

Our insurance expenses may increase significantly as a result of a terrorist attack, harming our financial condition and results of operations.

 

Insurance companies may significantly increase insurance premiums for airlines and reduce the amount of insurance coverage available to airlines for civil liability in respect of damage resulting from acts of terrorism, war, or similar events, as was the case following the terrorist attacks of September 11, 2001 in the United States.

 

In response to substantial increases in insurance premiums to cover risks related to terrorist attacks following the events of September 11, 2001 in the United States, the Brazilian government enacted legislation, authorizing the Brazilian government to assume civil liability to third parties for any injury to goods or persons, whether or not passengers, caused by terrorist attacks or acts of war against Brazilian aircraft operated by Brazilian airlines in Brazil or abroad. In addition, according to the abovementioned legislation, the Brazilian government may, at its sole discretion, suspend this assumption of liability at any time, provided that it gives seven days’ notice of the suspension. If the Brazilian government suspends its assumption of liability, Brazilian airlines will be required to assume the liability once more and obtain insurance in the market.

 

Airline insurers may reduce their coverage or increase their premiums in case of new terrorist attacks, seizures, aircraft accident and the Brazilian government’s termination of its assumption of liability or other events affecting civil aviation in Brazil or abroad. If there are significant reductions in insurance coverage, our potential liability would increase substantially. If there are significant increases in insurance premiums, our operating expenses would increase, adversely affecting our results of operations.

 

In line with global industry practice, we leave some business risks uninsured, including business interruption, loss of profit or revenue and consequential business losses arising from mechanical breakdown. To the extent that uninsured risks materialize, we could be materially and adversely affected. In addition, there is no assurance that our coverage will cover all potential risks associated with our operations and activities. To the extent that actual losses incurred by us exceed the amount insured, we may have to bear substantial losses which will have an adverse impact on our operations and financial condition.

 

Technical and operational problems in the Brazilian civil aviation infrastructure, including air traffic control systems, airspace and airport infrastructure, may have a material adverse effect on our strategy and, consequently, our business and results of operations.

 

We are dependent on improvements in the coordination and development of Brazilian airspace control and airport infrastructure, which, mainly due to the large growth in civil aviation in Brazil in recent years, require substantial improvements and government investments. This is further emphasized by the need for additional infrastructure investments in the context of the Soccer Confederations Cup (2013), World Cup (2014) and the Summer Olympics (2016) in Brazil. Technical and operational problems in the Brazilian air traffic control

 

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systems have led to extensive flight delays, higher than usual flight cancellations and increased airport congestion. The Brazilian government and air traffic control authorities have taken measures to improve the Brazilian air traffic control systems, but if the changes undertaken by the Brazilian government and regulatory authorities do not prove successful, these air traffic control related difficulties might recur or worsen, which may have a material adverse effect on our business, our results of operations and our growth strategy.

 

The Santos-Dumont airport in Rio de Janeiro, which is important for our operations, has certain landing rights restrictions. Several other Brazilian airports, for example Brasília, Campinas, Salvador, Belo Horizonte (Confins), São Paulo (Guarulhos) and Rio de Janeiro (Galeão), have limited the number of landing rights per day due to infrastructural limitations at these airports. Any condition that would prevent or delay our access to airports or routes that are vital to our strategy, or our inability to maintain our existing landing rights and slots, and obtain additional landing rights and slots, could materially adversely affect our operations. New operational and technical restrictions imposed by Brazilian authorities in the airports we operate or in those we expect to operate may also adversely affect our operations. In addition, we cannot assure that any investments will be made by the Brazilian government in the Brazilian aviation infrastructure to permit a capacity increase at busy airports and consequently additional concessions for new slots to airlines.

 

Increases in labor benefits, union disputes, strikes, and other worker-related disturbances may adversely affect our operations and financial condition, or affect our ability to carry out our normal business operations.

 

Our business is labor intensive. Our expenses related to our workforce represented 15.5%, 18.8% and 20.4% of our total operating expenses related to our workforce in the three months ended March 31, 2013, and the years ended December 31, 2012 and 2011, respectively. All Brazilian airline employees, including ours, are represented by two labor unions: the National Pilots’ Union ( Sindicato Nacional dos Aeronautas ) and the National Aviation Union ( Sindicato Nacional dos Aeroviários ). Negotiations regarding cost of living increases and salary payments are conducted annually between the two unions and an association that represents all Brazilian airline companies, the National Union of Airline Companies ( Sindicato Nacional das Empresas Aeroviárias ), or SNEA. Work conditions and maximum work hours are regulated by government legislation and are not subject to labor negotiations. Future terms and conditions of collective agreements could become more costly for us as a result of an increase in threats of strikes and negotiations between the unions and SNEA. Additionally, our labor costs could increase if the size of our business increases. Any labor proceeding or other workers’ dispute involving unionized employees could adversely affect our operations and financial condition, or interfere with our ability to carry out our normal business operations.

 

The successful execution of our strategy is partly dependent on the maintenance of a high daily aircraft utilization rate, making us especially vulnerable to delays.

 

In order to successfully execute our strategy, we need to maintain a high daily aircraft utilization rate. Achieving high aircraft utilization allows us to maximize the amount of revenue that we generate from each aircraft and dilute expenses and is achieved, in part, by reducing turnaround times at airports and developing schedules that enable us to fly more hours on average per day. Our aircraft utilization rate could be adversely affected by a number of factors that we cannot control, including air traffic and airport congestion, interruptions in the service provided by air traffic controllers, adverse weather conditions and delays by third-party service providers in respect of matters such as fueling and ground handling. Such delays could result in a disruption in our operating performance, leading to customer dissatisfaction due to any resulting delays or missed connections.

 

We are highly dependent on Campinas airport for a large portion of our business and as such, a material disruption at this airport could adversely affect us.

 

Our business is heavily dependent on our operations at the Campinas airport, in the state of São Paulo. Many of our routes operate through Campinas, which accounted for approximately 34% of our arrivals and departures in 2012. Like other airlines, we are subject to delays caused by factors beyond our control and that could affect only Campinas airport or other airports in the region. Due to this capacity concentration, we may not

 

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be able to react as quickly or efficiently as our competitors to any delays, interruption or disruption in service or fuel at Campinas airport, which could have a material adverse impact on us. In 2012, an incident with an aircraft from a cargo airline caused the closing of a runway at Campinas airport for three days, which negatively impacted our operations and forced us re-accommodate our passengers to new flights.

 

We may be unable to maintain our culture and to retain and/or hire skilled personnel as our business grows, such as pilots, which could have a material adverse impact on us.

 

We believe that our growth potential and the maintenance of our results and customer oriented company culture are directly linked to our capacity to attract and maintain the best professionals available in the Brazilian airline industry. We place great emphasis on the selection and training of crewmembers with potential to add value to our business and who we believe fit in with and contribute to our company culture. As we grow, we may be unable to identify, hire or retain enough people who meet the above criteria, or we may have trouble maintaining this company culture as we become a larger business. From time to time, the airline industry has experienced a shortage of skilled personnel, especially pilots. We compete against all other airlines, both inside and outside Brazil, for these highly-skilled personnel. We may have to increase wages and benefits to attract and retain qualified personnel or risk considerable employee turnover. Our culture is crucial to our business plan, and failure to maintain that culture could have a material adverse impact on us.

 

Our maintenance costs will increase as our fleet ages and any material increase in maintenance costs could materially adversely affect us.

 

As of December 31, 2012, the average age of our aircraft fleet was approximately four years. Our relatively new aircraft require less maintenance now than they will in the future. Our fleet will require more maintenance as it ages and our maintenance and repair expenses for each of our aircraft will be incurred at approximately the same intervals. We expect scheduled and unscheduled aircraft maintenance expenses to increase as a percentage of our revenue over the next several years. Any significant increase in maintenance and repair expenses would have a material adverse effect on us.

 

We rely on agreements with third parties to provide our customers and us with facilities and services that are integral to our business and the termination or non-performance of these agreements could harm our business and results of operations.

 

We have entered into agreements with third-party contractors to provide certain facilities and services required for our operations, such as aircraft maintenance, ground handling and baggage handling. All of these agreements are subject to termination on short notice. The loss or expiration of these agreements or our inability to renew these agreements or to negotiate new agreements with other providers at comparable term and conditions or at all could harm our business and results of operations. We also have a long-term agreement with LiveTV, LLC for the equipment, content and service of our in-seat entertainment. Further, our reliance on third parties to provide essential services on our behalf gives us less control over the costs, efficiency, timeliness and quality of those services.

 

We depend on our senior management team and the loss of any member of this team, including our Chairman and key executives, could negatively affect our business.

 

Our business depends upon the efforts and skill of our senior management, including our Chairman, who has played an important role in shaping our company culture, as well as other key executives. Our future success depends on a significant extent on the continued service of our senior management team, who are critical to the development and the execution of our business strategies. Any member of our senior management team may leave us to establish or work in businesses that compete with ours. There is no guarantee that the compensation arrangements and non-competition agreements we have entered into with our senior management team are sufficiently broad or effective to prevent them from resigning in order to join or establish a competitor or that the non-competition agreements would be upheld in a court of law. In the event that our Chairman or a number of

 

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our senior management team leave our company, we may have difficulty finding suitable replacements, which could have a material adverse effect on our business and results of operations.

 

We may not succeed in obtaining all aircraft and parts on time, which may result in a suspension of the operations of certain of our aircraft because of unscheduled or unplanned maintenance.

 

One of the key elements of our current business strategy is to save costs by operating a simplified aircraft fleet. We operate Embraer E-Jets and ATR aircraft and intend to continue to rely on the E-Jets and ATR aircraft. If either Embraer or ATR is unable to perform its contractual obligations or if we are unable to acquire or lease new aircraft from aircraft manufacturers or lessors on acceptable terms, we would have to find other suppliers for similar types of aircraft. If we had to lease or purchase aircraft from another supplier, we could lose the benefits we derive from our current fleet composition, including a simplified maintenance structure designed to serve our E-Jets and ATRs. We cannot assure you that any replacement aircraft would have the same operating advantages as the E-Jets and ATR aircraft have or that we could lease or purchase aircraft that would be as reliable and efficient as them. We may also incur substantial transition costs, including costs associated with retraining our crewmembers, replacing our manuals and adapting our facilities, to the extent that such costs would not be covered by the alternate supplier.

 

Our business would be significantly harmed if a design defect or mechanical problem with E-Jets or ATR aircraft were to be discovered causing our aircraft to be grounded while any such defect or problem is being corrected, assuming it could be corrected at all. The use of our aircraft could be suspended or restricted by ANAC in the event of any actual or perceived mechanical or design problems while ANAC conducts its own investigation. Our business would also be significantly harmed if the public avoided flying our aircraft due to an adverse perception of Embraer or ATR aircraft generally, due to safety concerns or other problems, whether real or perceived, or in the event of an accident involving any Embraer or ATR aircraft, in particular any E-Jets or ATR aircraft. We may not succeed in obtaining all aircraft and parts on time, which may result in a suspension of the operations of certain of our aircraft because of unscheduled or unplanned maintenance.

 

As of March 31, 2013, we had 43 firm commitments in a total amount of R$2.4 billion to purchase 23 Embraer E-Jets and 20 ATR 72 aircraft to be delivered between 2013 and 2016. Any disruption or change in the manufacturers’ delivery schedules for these new aircraft may affect our operations and might negatively affect our financial condition and results of operations because we may not be able to accommodate increased passenger demand or develop our growth strategies. Our ability to obtain these new aircraft from Embraer and ATR may be affected by several factors, including (i) Embraer or ATR may refuse to, or be financially limited in its ability to, fulfill the obligations it assumed under the aircraft delivery contracts, (ii) the occurrence of a fire, strike or other event affecting Embraer’s or ATR’s ability to fulfill its contractual obligations in a complete and timely fashion and (iii) any inability on our part to obtain aircraft financing or any refusal by Embraer or ATR to provide financial support. Our operations may also be affected by any failure or inability of Embraer or ATR (or other suppliers) to supply sufficient replacement parts in a timely fashion, which may cause the suspension of operations of certain aircraft because of unscheduled or unplanned maintenance. Any such suspension of operations would decrease passenger revenue and adversely affect us.

 

General Electric is the sole manufacturer and supplier of the CF34 engines on our Embraer E-Jets. Pratt & Whitney is the sole manufacturer and supplier of the PW 127M engines on our ATR 72 aircraft. We have also outsourced all engine maintenance for our Embraer E-Jet fleet to General Electric. If General Electric or Pratt & Whitney are unable to perform their contractual obligations or if we are unable to acquire engines from alternative suppliers on acceptable terms, we could lose the benefits we derive from our current agreements with General Electric and Pratt & Whitney and also incur substantial transition costs.

 

Inability to obtain lease or debt financing for additional aircraft would impair our growth strategy.

 

We typically finance our aircraft through operating and finance leases and debt-finance. We may not be able to continue to obtain operating or lease financing on terms attractive to us, or at all. To the extent we cannot

 

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obtain such financing on acceptable terms or at all, we may be required to modify our aircraft acquisition plans or to incur higher than anticipated financing costs, which would have an adverse impact on the execution of our growth strategy and financial condition.

 

The airline industry is subject to increasingly stringent environmental regulations and non-compliance therewith may adversely affect us.

 

The airline industry is subject to increasingly stringent federal, state, local and foreign laws, regulations and ordinances relating to the protection of the environment, including those relating to emissions to the air, levels of noise, discharges to surface and subsurface waters, safe drinking water, and the management of hazardous substances, oils and waste materials. As far as civil liabilities are concerned, Brazilian environmental laws adopt the strict and joint liability regime. In this regard we may be liable for violations by third parties hired to dispose of our waste. Moreover, pursuant to Brazilian environmental laws and regulations, the piercing of the corporate veil of a company may occur in order to ensure enough financial resources to the recovery of damages caused against the environment. Compliance with all environmental laws and regulations can be very costly. In addition, future regulatory developments in Brazil could adversely affect operations and increase operating costs in the Brazilian airline industry. Concerns about climate change and greenhouse gases may result in additional regulation or taxation of aircraft emissions in Brazil. Future operations and financial results may vary as a result of the adoption of such regulations in Brazil. Compliance with regulations that may be applicable to us in the future could increase our cost base and could have a material adverse effect on us.

 

We benefit from tax incentives on our purchases of jet fuel in Brazil. These tax incentives may be revoked at any time.

 

The price of the jet fuel that we purchase in the Brazilian states of Bahia, Rondônia, Amazonas, Goiás, Mato Grosso, Mato Grosso do Sul, Minas Gerais, Paraná and Santa Catarina is subsidized through tax incentives provided to us by those states. Governmental authorities may revoke, suspend or fail to renew these tax incentives at any time, including if we fail to comply with our obligations in the tax incentive agreements that we have executed with those states. In addition, in order to be valid, these tax incentives require approval from CONFAZ, the Brazilian National Council of Fiscal Policy, and may be canceled by the Brazilian Supreme Court if they have not been approved. The state tax incentives from which we benefit have not been approved by CONFAZ and could therefore be canceled at any time. If any of these tax incentives are canceled, revoked, suspended or not renewed, the prices that we pay for jet fuel would increase, which may lead to a significant increase in our costs and adversely affect our business and results of operations.

 

The agreements governing our debt contain covenants and restrictions that could limit our ability to engage in change of control transactions, terminate our relationship with certain suppliers and incur certain levels of indebtedness.

 

Our financing agreements contain covenants and restrictions that restrict our and our subsidiaries’ ability to engage in change of control transactions and terminate concession agreements associated with such financing leases, whether through failure to renew or otherwise. In addition, certain of our financing instruments require us and our subsidiaries to meet financial covenants that, among other restrictions, limit our permissible ratios of debt to EBIDTAR and debt to cash freely convertible into U.S. dollars. Our ability to comply with the covenants and restrictions contained in our financing agreements may be affected by economic, financial and industry conditions beyond our control. The breach of any of these covenants and restrictions could result in declaration of an event of default and acceleration of the maturity of indebtedness, which would require us to pay all amounts outstanding.

 

As of March 31, 2013, we were in compliance with all covenants in our material financing instruments, except for noncompliance related to financial covenants requiring TRIP, our subsidiary, to maintain certain ratios, which, in some cases, required the posting of additional guarantees and, in other cases, would have caused the acceleration of the underlying debt had waivers not been received.

 

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Risks Relating to the Global Offering and Our Preferred Shares, Including in the Form of ADSs

 

Our controlling shareholder has the ability to direct our business and affairs, and its interests may conflict with yours.

 

Our controlling shareholder has significant power with respect to our company, including the right to elect the majority of the members of our board of directors and to determine the result of substantially any decision that requires shareholders’ approval. This power includes decisions with respect to related parties transactions, corporate restructurings, dispositions, partnerships and the time for payment of any future dividends in accordance with Brazilian corporate law and our bylaws. Our controlling shareholder may choose to enter into acquisitions, dispositions, partnerships or enter into loans and financing or other similar transactions for us that could conflict with the interests of investors. Upon completion of this global offering, assuming full exercise of the underwriters’ over-allotment option, our controlling shareholder will own [ · ]% of our voting capital and [ · ]% of our total capital.

 

New investors in our preferred shares, including in the form of ADSs, will experience immediate book value dilution after this offering and may experience further dilution in the future.

 

The initial public offering price of our preferred shares (including in the form of ADSs) is higher than the book value of such shares immediately after this global offering. In addition, this difference will increase further as a result of the exercise of stock options granted to our management.

 

The issuance of new preferred shares to TRIP’s Former Shareholders immediately prior to this global offering, in the global offering, and any exercises of stock options that have vested immediately upon completion of this global offering would together result in an immediate dilution in our book value to purchasers in this offering of R$[ · ] per preferred share, compared to our pro forma book value per preferred share, on a theoretical fully-converted basis, as of March 31, 2013. As a result of this dilution, investors in this global offering may receive significantly less than the full purchase price that they paid for our preferred shares purchased in this offering in the event of liquidation. See “Dilution.” In addition, this dilution effect does not reflect any exercise of stock options that will vest in the future.

 

In the event that we need to obtain capital for our operations by issuing new shares in the future, any such issuance may be made at a value below the book value of our preferred shares on the relevant date. In that event, the holders of our ADSs and preferred shares at such time would suffer an immediate and significant dilution of their investment.

 

We expect to issue additional preferred shares to TRIP’s Former Shareholders immediately prior to the closing of this global offering which may cause you to experience significant dilution.

 

Pursuant to the TRIP Investment Agreement, TRIP’s Former Shareholders were granted warrants exercisable for preferred shares immediately prior to the closing of this global offering. The amount of additional preferred shares we issue to these former shareholders of TRIP will be based on the price per share at the beginning of this initial public offering and the number of shares issued prior to the date of completion of this public offering (i.e., the pre-money equity valuation of our company). To the extent we issue preferred shares pursuant to the TRIP Investment Agreement, you will experience dilution in your investment. See “Dilution” and “TRIP Investment Agreement and Adjustment Mechanism.”

 

Our preferred shares, including in the form of ADSs, have not previously been traded on any stock exchange and, therefore, an active and liquid trading market for such securities may not develop, thereby potentially adversely affecting the price our preferred shares, including in the form of ADSs, after this global offering.

 

Before this global offering, none of our preferred shares, including in the form of ADSs, have ever been traded on any stock exchange. In connection with the global offering, we will apply to list ADSs representing our preferred shares on the NYSE and our preferred shares on BM&FBOVESPA. An active and liquid public trading

 

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market for our preferred shares, including in the form of ADSs, may not develop or, if developed, may not be sufficiently liquid. Active, liquid trading markets generally result in lower price volatility and more efficient purchases and sales of shares.

 

The investment in marketable securities traded in emerging countries, such as Brazil, usually represents higher levels of risk as compared to investments in securities issued in countries whose political and economic situations are more stable, and in general, such investments are considered speculative in nature. The Brazilian securities market is substantially smaller, less liquid, more volatile, and more concentrated than major international securities markets. BM&FBOVESPA had a market capitalization of R$2.45 trillion and a daily average trading volume of R$7.4 billion, as of March 31, 2013. The top 10 stocks in terms of trading volume accounted for 42.7% and 42.9% of all shares traded on BM&FBOVESPA during the three months ended March 31, 2013 and in 2012, respectively. These market characteristics may substantially limit the capacity of holders of our preferred shares to sell them at the price and time of their preference and this may have an adverse effect on the market price of our preferred shares.

 

The initial public offering price for our preferred shares, including in the form of ADSs, will be determined by negotiation between us, the international underwriters and the Brazilian underwriters based upon several factors, and the trading price of our preferred shares, including in the form of ADSs, after this global offering may decline below the initial public offering price. The market price of our preferred shares could vary significantly as a result of a number of factors, some of which are beyond our control. As a result, investors may experience a significant decrease in the market price of our preferred shares, including in the form of ADSs. If an active trading market does not develop or is not maintained, the liquidity and trading price of our preferred shares, including in the form of ADSs, could be seriously harmed.

 

Our preferred shares do not carry general voting rights.

 

Except under certain situations, our preferred shares, including in the form of ADSs, do not carry general voting rights. See “Description of Capital Stock—Voting Rights”. Our principal shareholders, who hold the majority of common shares with voting rights and control us, are therefore able to approve corporate measures without the approval of holders of our preferred shares, including in the form of ADSs. Accordingly, you will generally not have control over any matters, including the approval of corporate measures such as appointment of directors, approval of significant transactions or changes in our capital structure.

 

Our preferred shares will have limited voting rights even if dividends are not paid.

 

According to Brazilian corporate law and the regulations of the Level 2 segment of BM&FBOVESPA, preferred shares with limited voting rights and with rights to fixed or minimum priority dividends, gain voting rights if the company ceases to pay the fixed or minimum dividends to which such shares are entitled for three consecutive fiscal years. However, pursuant to our bylaws, the dividends attributed to our preferred shares are not fixed or minimum priority dividends. Accordingly, our preferred shares will not have the right to vote even if dividends are not paid. See “Description of Capital Stock—Voting Rights.”

 

Holders of our preferred shares, including in the form of ADSs, may not receive any dividends or interest attributable to shareholders’ equity.

 

According to our bylaws, we must pay our preferred shareholders at least 0.1% of our annual adjusted net income as dividends or interest attributable to shareholders’ equity, as calculated and adjusted pursuant to Brazilian corporate law. Interim dividends and interest on our shareholders’ equity declared for each fiscal year may be attributed to our minimum obligatory dividend for the year in which it was distributed. For more information, see “Dividend Policy”. This adjusted net income may be capitalized, used to absorb losses or otherwise retained as allowed under Brazilian corporate law, and may not be made available for payment as dividends or interest attributable to shareholders’ equity.

 

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Additionally, Brazilian corporate law allows a company like ours to suspend the mandatory distribution of dividends in any particular fiscal year if our board of directors informs our shareholders that such distribution would be inadvisable in view of our financial condition. If these events were to occur, the holders of our preferred shares, including in the form of ADSs may not receive dividends or interest attributable to shareholders’ equity.

 

The sale of a significant number of our preferred shares, including in the form of ADSs, after the offering may negatively affect the trading price of our preferred shares, including in the form of ADSs.

 

We, the Selling Shareholders and our directors and officers have agreed not, within 180 days following the pricing of this global offering, subject to certain exceptions, to issue, offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, or file with the SEC or the CVM a registration statement relating to, any common and/or preferred shares, ADSs or securities convertible into or exchangeable or exercisable for preferred shares (including our common shares) or ADSs, or publicly disclose any intention to make any such offer, sale, pledge, disposition or filing, without the prior written consent of Morgan Stanley & Co. LLC.

 

In addition, pursuant to the regulations of the Level 2 segment of BM&FBOVESPA, our controlling shareholders, directors and executive officers may not sell and/or offer for sale any common and/or preferred shares of our company or derivatives linked to our common and/or preferred shares, which we or they hold immediately after the offering, for a period of six months after the publication in Brazil of the announcement of the commencement of this global offering. Following this initial six-month period, our controlling shareholders, directors and executive officers may not sell and/or offer for sale, for an additional six-month period, more than 40% of our common and/or preferred shares of our company (or derivatives linked to such shares) immediately after this global offering.

 

We or our principal shareholders may sell additional preferred shares at any time following the termination of these lock-up restrictions. In addition, under a registration rights agreement, as amended and restated, or the Registration Rights Agreement, that we entered into on August 28, 2009 with our then principal shareholders, they have the right to require us to register additional preferred shares held by them with the SEC for future sale at any time commencing six months following this global offering. For further details of the registration rights agreement, see “Principal and Selling Shareholders—Registration Rights Agreement.”

 

A sale of a significant number of our preferred shares, including in the form of ADSs, or market perception of an intention to sell a significant number of our preferred shares, including in the form of ADSs, may negatively affect the trading price of our preferred shares, including in the form of ADSs.

 

The participation of our controlling shareholder, members of our board of directors, our officers, the Brazilian underwriters, the international underwriters and any other person related to the offering and their respective relatives, in this global offering may adversely affect the liquidity of our preferred shares, including in the form of ADSs, and the determination of the offering price.

 

The offering price will be determined after a bookbuilding process. Pursuant to CVM Instruction No. 400 dated December 29, 2003, in the event that demand for the preferred shares, including in the form of ADSs, offered in the global offering is less than the number of securities offered plus one-third of this amount, the bookbuilding process may include purchase commitments by institutional investors that are our controlling shareholder, members of our board of directors, our board of executive officers, the Brazilian underwriters, the international underwriters and any other person related to the offering and their respective relatives who may purchase up to 20% of the total offering. The participation of these persons in the offering may have an adverse effect on the liquidity of our preferred shares, including in the form of ADSs, and determination of the offering price per ADS/preferred share. Affiliates of the Brazilian underwriters may purchase preferred shares, including in the form of ADSs, for hedging purposes using derivate instruments for the account of and on behalf of their clients. These transactions may influence the demand for our preferred shares, including in the form of ADSs, and the offering price.

 

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Changes in Brazilian tax laws may have an adverse impact on the taxes applicable to a disposition of our preferred shares, including in the form of ADSs.

 

Law No. 10,833 of December 29, 2003 provides that the disposition of assets located in Brazil by a non resident to either a resident or a non resident of Brazil is subject to taxation in Brazil, regardless of whether the disposition occurs outside or within Brazil. This provision results in the imposition of income tax on the gains arising from a disposition of our preferred shares by a non resident of Brazil to either a resident or a non resident of Brazil. However, since currently there is no judicial guidance determining whether ADSs should be considered assets located in Brazil, we are unable to predict whether Brazilian courts may decide that income tax under Law No. 10,833 applies to gains assessed on dispositions of our ADSs. In the event that the disposition of assets is interpreted to include the disposition of our ADSs, this tax law would result in the imposition of withholding taxes on the sale of our ADSs by a non resident of Brazil to either a resident or a non resident of Brazil. Because any gain or loss recognized by a U.S. Holder (as defined in “Taxation—Material U.S. Federal Income Tax Consequences”) on the disposition of preferred shares or ADSs generally will be treated as U.S. source gain or loss for U.S. foreign tax credit purposes, the U.S. Holder may not be able to benefit from a foreign tax credit for Brazilian income tax imposed on the disposition of preferred shares or ADSs unless the U.S. Holder can apply the credit against U.S. federal income tax payable on other income from foreign sources. See “Taxation—Material U.S. Federal Income Tax Consequences—Sale or Other Taxable Disposition of Preferred Shares, Including in the Form of ADSs.”

 

The Brazilian government may impose exchange controls and significant restrictions on remittances of reais abroad, which would adversely affect your ability to convert and remit dividends or other distributions or the proceeds from the sale of our preferred shares, and our capacity to make dividend payments or other distributions to non-Brazilian investors and would reduce the market price of our preferred shares, including in the form of ADSs.

 

In case of serious imbalances, the Brazilian government may restrict the remittance abroad of proceeds of investments in Brazil and the conversion of the real into foreign currencies. The Brazilian government last imposed such remittance restrictions for a brief period in 1989 and early 1990. We cannot assure you that the Brazilian government will not take similar measures in the future. The return of any such restrictions would hinder or prevent your ability to convert dividends or other distributions or the proceeds from any sale of our preferred shares into U.S. dollars and to remit U.S. dollars abroad, and our capacity to make dividend payments or other distributions to non-Brazilian investors. The imposition of any such restrictions would have a material adverse effect on the stock market price of our preferred shares, including in the form of ADSs.

 

If you surrender your ADSs and withdraw preferred shares, you risk losing the ability to remit foreign currency abroad and certain Brazilian tax advantages.

 

As an ADS holder, you benefit from the electronic certificate of foreign capital registration obtained by the custodian for our preferred shares underlying the ADSs in Brazil, permitting the custodian to convert dividends and other distributions with respect to the preferred shares into non-Brazilian currency and remit the proceeds abroad. If you surrender your ADSs and withdraw preferred shares, you will be entitled to continue to rely on the custodian’s electronic certificate of foreign capital registration for only five business days from the date of withdrawal. Thereafter, upon the disposition of distributions relating to the preferred shares, unless you obtain your own electronic certificate of foreign capital registration, or you qualify under Brazilian foreign investment regulations that entitle some foreign investors to buy and sell shares on Brazilian stock exchanges without obtaining separate electronic certificates of foreign capital registration, you would not be able to remit abroad non-Brazilian currency. In addition, if you do not qualify under the foreign investment regulations, you will generally be subject to less favorable tax treatment of dividends and distributions on, and the proceeds from any sale of, our preferred shares.

 

If you attempt to obtain your own electronic certificate of foreign capital registration, you may incur expenses or suffer delays in the application process, which could delay your ability to receive dividends or

 

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distributions relating to our preferred shares or the return of your capital in a timely manner. The depositary’s electronic certificate of foreign capital registration may also be adversely affected by future legislative changes.

 

If we do not maintain a registration statement and no exemption from the Securities Act of 1933, as amended, or the Securities Act, is available, U.S. Holders of ADSs will be unable to exercise preemptive rights with respect to our preferred shares.

 

We will not be able to offer preemptive rights on preferred shares granted to holders of our preferred shares to holders of ADSs unless a registration statement under the Securities Act is effective with respect to such preferred shares and preemptive rights, or an exemption from the registration requirements of the Securities Act is available. We are not obligated to file such registration statement, and we cannot assure you that we will file a registration statement. If a registration statement is not filed and an exemption from registration does not exist, Deutsche Bank Trust Company Americas, as depositary, will attempt to sell such preemptive rights or preferred shares, as the case may be, and you will be entitled to receive the proceeds of the sale. However, if the depositary is unable to sell these preemptive rights or preferred shares, U.S. holders of ADSs will not receive any value in connection with such distribution.

 

We will be required to assess our internal control over financial reporting on an annual basis and any future adverse findings from such assessment could result in a loss of investor confidence in our financial reports, significant expenses to remediate any internal control deficiencies and ultimately have an adverse effect on the market price of our preferred shares, including in the form of ADSs.

 

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, beginning with our Annual Report on Form 20-F for the year ending December 31, 2014, our management will be required to report on, and our independent registered public accounting firm to attest to, the effectiveness of our internal control over financial reporting. The rules governing the standards that must be met for management to assess our internal control over financial reporting are complex and require significant documentation, testing and possible remediation. We are currently in the process of reviewing, documenting and testing our internal control over financial reporting. We may encounter problems or delays in completing the implementation of any changes necessary to make a favorable assessment of our internal control over financial reporting. In connection with the attestation process by our independent registered public accounting firm, we may encounter problems or delays in completing the implementation of any requested improvements and receiving a favorable attestation. In addition, if we fail to maintain the adequacy of our internal control over financial reporting we will not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404.

 

The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members.

 

As a public company, we will incur significant legal, accounting and other expenses that we have not incurred as a private company, including costs associated with public company reporting requirements. We also have incurred and will incur costs associated with the Sarbanes-Oxley Act of 2002 and related rules implemented by the SEC. The expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time consuming and costly, although we are currently unable to estimate these costs with any degree of certainty. These laws and regulations could also make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as our executive officers and may divert management’s attention. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our preferred shares, fines, sanctions and other regulatory action and potentially civil litigation.

 

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Our status as a foreign private issuer allows us to follow alternate standards to the corporate governance standards of the NYSE, which may limit the protections afforded to investors.

 

We are a “foreign private issuer” within the meaning of the NYSE corporate governance standards. Under NYSE rules, a foreign private issuer may elect to comply with the practices of its home country and not comply with certain corporate governance requirements applicable to U.S. companies with securities listed on the exchange. We currently follow certain Brazilian practices concerning corporate governance and intend to continue to do so.

 

We intend to rely on certain exemptions as a foreign private issuer listed on the NYSE. For example, a majority of our board of directors will not be independent, and we do not plan to hold at least one executive session of solely independent members of our board of directors each year. Also, pursuant to Brazilian corporate law and Instruction No. 308, dated May 14, 1999, as amended, issued by CVM, our audit committee, unlike the audit committee of a U.S. issuer, will only have an “advisory” role and may only make recommendations for adoption by our board of directors, which will be responsible for the ultimate vote and final decision.

 

In addition, we do not intend to have a nominating or corporate governance committee as required for U.S. issuers under the NYSE rules and although we have a compensation committee, we are not required to comply with the NYSE standards applicable to compensation committees of listed companies.

 

Accordingly, holders of our ADSs will not have the same protections afforded to shareholders of companies that are subject to all of the NYSE corporate governance requirements.

 

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THE TRIP ACQUISITION

 

Acquisition

 

In 2012 we acquired TRIP, which at the time was the largest regional carrier in South America by number of destinations. We announced the acquisition in May 2012 and have consolidated TRIP’s results of operations into our financial statements since November 30, 2012, after receiving approval for the acquisition from ANAC, the Brazilian civil aviation authority. CADE, the Brazilian antitrust authority, approved the acquisition in March 2013. No other approvals are required for the acquisition of TRIP.

 

The fleet similarity between the two airlines has allowed us to rapidly integrate our activities and start yielding synergy gains (as measured by the sum of estimated revenue synergies plus estimated net cost synergies) of R$200 million to R$300 million in 2013 and R$300 million to R$400 million in 2014. Through this acquisition, we gained strategic landing rights at Guarulhos airport in São Paulo and Santos Dumont airport in Rio de Janeiro, complementing our hub at Campinas.

 

TRIP’s Business

 

TRIP was founded in 1998 by the Caprioli Group, and in 2006 the Águia Branca Group, controlled by the Chieppe family, acquired 50% of TRIP’s share capital. In 2007 TRIP acquired the assets of TOTAL Linhas Aéreas S.A., which allowed TRIP to expand its network and enter several markets in the central region of Brazil, where TOTAL’s operations were concentrated. Skywest Inc. acquired a 20% stake in TRIP in 2008 but sold these shares in May 2012, shortly before we announced the acquisition. TRIP focused on point-to-point routes with a strong concentration in the northern and central regions of Brazil. At the time we acquired TRIP, it was the largest regional airline in South America and was the sole airline on 57% of its routes.

 

Integration and Synergies

 

We have made substantial progress on the integration of TRIP into our operations and existing processes. As a result of the similarity of our networks, we were able to achieve what we believe to be more efficient flight schedules and start flying on a codeshare basis in October 2012. As of December 2012, we started selling our flights using the same platform, automatically redirecting all customers from TRIP’s website to Azul’s website. We have fully integrated all administration and back-office personnel, unified check-in spaces and signage at airports and standardized our on-board services. Although Azul and TRIP aircraft still fly under different operating certificates, we are currently transferring all of the TRIP aircraft on to Azul’s operating certificate and expect these transfers to be concluded by July 2013.

 

We have incurred and expect to continue to incur expenses in connection with the integration of Azul and TRIP. We incurred R$44.0 million and R$1.8 million in non-recurring expenses in connection with the TRIP Acquisition and integration in 2012 and during the three months ended March 31, 2013, respectively, principally for financial advisory, legal and accounting fees and expenses, reorganization and restructuring costs, severance and employee benefit-related expenses, and the integration of numerous processes, policies, procedures, operations, technologies and systems. As of March 31, 2013, we expect to incur up to R$15.6 million of expenses in 2013. The remaining anticipated expenses mainly relate to obtaining the joint operating certificate, transferring TRIP’s slots to Azul and finalizing the integration of the two companies.

 

We believe the acquisition of TRIP has the potential to yield estimated synergies (as measured by estimated revenue synergies plus estimated net cost synergies) of R$200 million to R$300 million in 2013 and R$300 million to R$400 million in 2014.

 

Our revenue synergy estimates are mainly based on the following: (i) route network rationalization, including (a) the reorganization of routes and flight schedules to achieve higher load factors, and (b) the reallocation of certain acquired aircraft to new routes as a result of post-merger network reorganization and

 

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overlap between Azul’s and TRIP’s routes, and (ii) improved network connectivity due to network complementarity and an increase in the number of destinations served.

 

Our net cost synergy estimates are mainly based on the following: (i) leverage to negotiate more favorable contractual terms with suppliers based on scale, particularly with respect to fuel costs, ground handling and baggage handling services, cargo and courier services, and aircraft leases, and (ii) the adoption of customized process improvement practices that we believe increase efficiency, such as the integration of Azul’s and TRIP’s operational systems and improvements regarding taxiing practices.

 

Although we believe that these estimates are based upon reasonable assumptions, they are subject to many significant risks, uncertainties and assumptions and are made in light of information currently available to us. See “Special Note Regarding Forward—Looking Statements” and “Risk Factors—Risks Relating to our Business and the Brazilian Civil Aviation Industry—We may encounter difficulties in fully integrating the acquired TRIP business into our business and may not fully achieve, or achieve within a reasonable time frame, expected strategic objectives and other expected benefits of the acquisition.”

 

The antitrust approval for the acquisition from CADE was conditioned on our terminating a codeshare agreement between TRIP and TAM by 2014 and our maintaining operational performance of at least 85% of Azul/TRIP scheduled takeoffs and landings at Santos Dumont airport in Rio de Janeiro. On March 28, 2013, we terminated the TAM codeshare agreement and do not anticipate any difficulty in maintaining CADE’s operational performance requirement.

 

Unaudited Pro Forma Consolidated Financial Information

 

We include in this prospectus unaudited pro forma consolidated financial information for the year ended December 31, 2012 and for the three months ended March 31, 2012 that gives effect to our acquisition of TRIP as if it had occurred on January 1, 2012. The assumptions and adjustments used to prepare this unaudited pro forma consolidated financial information are described in the notes accompanying such information in the section of this prospectus entitled “Unaudited Pro Forma Consolidated Financial Information.” The unaudited pro forma consolidated financial information is provided for informational and comparative purposes only.

 

TRIP Investment Agreement and Adjustment Mechanism

 

In the acquisition we purchased 100% of the shares of TRIP from TRIP’s Former Shareholders in the TRIP Investment Agreement. In return, we issued new shares in our company to TRIP’s Former Shareholders, giving them 33.0% of our voting shares and 26.6% of our preferred shares. These shares represented 32.0% of our total share capital and 27.0% of the economic interest in our company after giving effect to the stock split completed on March 22, 2013.

 

The TRIP Investment Agreement provides for a mechanism by which TRIP’s Former Shareholders may exercise warrants to receive, immediately before the capital increase resulting from this global offering, a number of additional preferred shares in our company depending on the pre-money equity valuation of our company, in U.S. dollars, which results from the pricing of this global offering. The pre-money equity valuation consists of the price per share specified in the announcement of this global offering, multiplied by the total number of common and preferred shares issued by Azul immediately prior to this global offering (taking into account the difference in economic interest between our common and preferred shares, as each common share is convertible into preferred shares at the ratio of 75.0 common shares for 1.0 preferred share). For purposes of this calculation under the TRIP Investment Agreement, the price per share will be converted into U.S. dollars at the average purchase and sale rate for reais and U.S. dollars, published by the Central Bank, through the SISBACEN system, PTAX 800 transaction, Option 5, Currency Code 220, on the Business Day immediately prior to payment. This exchange rate may not be same as the rate used for calculating the offering price per ADS or for other purposes in this prospectus.

 

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The TRIP Investment Agreement contains customary representations, warranties and indemnification provisions. It also includes a mechanism under which TRIP’s Former Shareholders may receive additional preferred shares in our company, immediately before the capital increase resulting from this global offering, in lieu of any cash payments in respect of any amount that they may be entitled to receive from us as indemnification under the TRIP Investment Agreement as of the pricing of this global offering. Conversely, any indemnification that we may be entitled to receive from them as of the same time will also be paid in equity form, by way of offset, reducing the number of preferred shares they receive from us under the pre-money equity valuation mechanism described above. Any indemnification that becomes due under the TRIP Investment Agreement after the pricing of this global offering shall be paid exclusively in cash.

 

The table below shows the number of our preferred shares to be issued to TRIP’s Former Shareholders and the resulting economic interest in our company that they will hold immediately prior to this global offering as a result of the pre-money equity valuation mechanism, calculated at the low end, midpoint and high end of the price range per preferred share in this global offering, and after taking account of any adjustment to be made in respect of indemnification as of the date of this prospectus:

 

     Current ownership
by TRIP’s Former
Shareholders
    Ownership at the following offering
prices (1)
 
     U.S.$ [ · ] (2)     U.S.$ [ · ] (3)     U.S.$ [ · ] (4)  

New preferred shares to be issued

     N/A        [ · ]        [ · ]        [ · ]   

Economic interest of TRIP’s Former Shareholders immediately prior to this global offering (5)

     [ · ]     [ · ]     [ · ]     [ · ]

 

  (1)   The assumed offering price per preferred share in reais set forth on the cover page of this prospectus, translated into U.S. dollars at the exchange rate of R$[ · ] per U.S.$1.00 at [ · ], 2013. For purposes of the pre-money equity valuation mechanism, the offering price per preferred share in reais will be converted into U.S. dollars at the exchange rate specified in the TRIP Investment Agreement as described above, which may not be the same as the rate used for calculating the offering price per ADS or for other purposes in this prospectus.
  (2)   The low point of the price per preferred share in this global offering.
  (3)   The midpoint of the price per preferred share in this global offering.
  (4)   The high point of the price per preferred share in this global offering.
  (5)   Capped at 33.0% of the economic interest in our company immediately prior to this global offering under the TRIP Investment Agreement.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus includes estimates and forward-looking statements principally under the captions “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.”

 

These estimates and forward-looking statements are based mainly on our current expectations and estimates of future events and trends that affect or may affect our business, financial condition, results of operations, cash flow, liquidity, prospects and the trading price of our preferred shares, including in the form of ADSs. Although we believe that these estimates and forward-looking statements are based upon reasonable assumptions, they are subject to many significant risks, uncertainties and assumptions and are made in light of information currently available to us.

 

These statements appear throughout this prospectus and include statements regarding our intent, belief or current expectations in connection with:

 

   

synergies gains and losses resulting from the acquisition of TRIP, including expected cost savings from any operating efficiencies and expected gains resulting from increased network connectivity, as well as expected liabilities in connection with the business combination;

 

   

changes in market prices, customer demand and preferences and competitive conditions;

 

   

our ability to keep costs low;

 

   

general economic, political and business conditions in Brazil and particularly in the geographic markets we serve;

 

   

existing and future governmental regulations;

 

   

increases in maintenance costs, fuel costs and insurance premiums;

 

   

our limited operating history;

 

   

our ability to maintain landing rights in the airports that we operate;

 

   

air travel substitutes;

 

   

labor disputes, employee strikes and other labor-related disruptions, including in connection with negotiations with unions;

 

   

our ability to attract and retain qualified personnel;

 

   

our aircraft utilization rate;

 

   

defects or mechanical problems with our aircraft;

 

   

our ability to successfully implement our growth strategy, including our capital expenditure plans and our ability to enter new airports that match our operating criteria;

 

   

management’s expectations and estimates concerning our future financial performance and financing plans and programs;

 

   

our level of debt and other fixed obligations;

 

   

our reliance on third parties, including changes in the availability or increased cost of air transport infrastructure and airport facilities;

 

   

inflation, appreciation, depreciation and devaluation of the real ;

 

   

our aircraft and engine suppliers; and

 

   

other risk factors as set forth under “Risk Factors.”

 

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The words “believe,” “understand,” “may,” “will,” “aim,” “estimate,” “continue,” “anticipate,” “seek,” “intend,” “expect,” “should,” “could,” “forecast” and similar words are intended to identify forward-looking statements. You should not place undue reliance on such statements, which speak only as of the date they were made. Neither we nor the Selling Shareholders undertake any obligation to update publicly or to revise any forward-looking statements after we distribute this prospectus because of new information, future events or other factors. Our independent public auditors have neither examined nor compiled the forward-looking statements and, accordingly, do not provide any assurance with respect to such statements. In light of the risks and uncertainties described above, the future events and circumstances discussed in this prospectus might not occur and are not guarantees of future performance. Because of these uncertainties, you should not make any investment decision based upon these estimates and forward-looking statements.

 

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USE OF PROCEEDS

 

We estimate that the net proceeds to us from the sale of preferred shares, including in the form of ADSs, in this global offering will be approximately R$[ · ] million, after deducting commissions and estimated expenses payable by us, and assuming an initial public offering of R$[ · ] per preferred share (and U.S.$ [ · ] per ADS, based on an exchange rate of R$[ · ] to U.S.$1.00 as of [ · ], 2013), which is the midpoint of the range set forth on the cover of this prospectus.

 

We are undertaking this global offering in order to access the public capital markets with the main objective of financing our future expansion plans. We intend to use the net proceeds from this global offering for the following purposes:

 

   

[ · ] million to invest in aircraft to grow our fleet;

 

   

[ · ] million to fund the capital expenditures needed to increase the number of destinations in our network;

 

   

[ · ] million to repay the debt of R$120 million that we owe to Bozano under the loan agreements described under “Related Party Transactions—Loan Agreements with Bozano”. This indebtedness carries interest at a rate of 10.1% per year and is due to be repaid in full on June 29, 2014, but will become immediately payable upon the initial public offering of our preferred shares. The proceeds of this indebtedness were used for working capital needs;

 

   

[ · ] million to repay a total of U.S.$12.2 million (approximately R$24.5 million, calculated at the exchange rate of R$2.0138 per U.S.$1.00 at March 31, 2013) which is the aggregate amount outstanding on five junior loans we guarantee that will become immediately due and payable, following our initial public offering, (referred to in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Loans and Financings”); and

 

   

[ · ] million for general corporate purposes.

 

For additional information regarding our indebtedness, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Loans and Financings” and “—Off Balance Sheet Arrangements.”

 

We will not receive any proceeds from the offering of preferred shares, including in the form of ADSs, by the Selling Shareholders, assuming the over-allotment option is exercised, who we estimate will receive net proceeds of R$[ · ] million in this global offering assuming the full exercise of the options to purchase additional preferred shares, including in the form of ADSs.

 

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EXCHANGE RATES

 

The Brazilian foreign exchange system allows the purchase and sale of foreign currency and the international transfer of reais by any person or legal entity, regardless of the amount, subject to certain regulatory procedures.

 

Since 1999, the Central Bank has allowed the U.S. dollar- real exchange rate to float freely. Since then, the U.S. dollar- real exchange rate has fluctuated considerably.

 

In the past, the Central Bank has intervened occasionally to control unstable movements in foreign exchange rates. We cannot predict whether the Central Bank or the Brazilian government will continue to permit the real to float freely or will intervene in the exchange rate market through the return of a currency band system or otherwise. See “Risk Factors—Risks Relating to Brazil—The Brazilian government has exercised, and continues to exercise, significant influence over the Brazilian economy. This involvement, together with Brazil’s political and economic conditions, could adversely affect our business, financial condition, results of operations, cash flows and prospects as well as the trading price of our preferred shares, including in the form of ADSs.”

 

The real may depreciate or appreciate against the U.S. dollar substantially. See “Risk Factors—Risks Relating to Brazil—Exchange rate instability may have adverse effects on the Brazilian economy, our business, financial condition and results of operations.”

 

Furthermore, Brazilian law provides that, whenever there is a serious imbalance in Brazil’s balance of payments or there are serious reasons to foresee a serious imbalance, temporary restrictions may be imposed on remittances of foreign capital abroad. We cannot assure you that such measures will not be taken by the Brazilian government in the future. See “Risk Factors—Risks Relating to our preferred shares, including in the form of ADSs—The Brazilian government may impose exchange controls and significant restrictions on remittances of reais abroad, which would adversely affect your ability to convert and remit dividends or other distributions or the proceeds from the sale of our preferred shares and our capacity to make dividend payments or other distributions to non-Brazilian investors and would reduce the market price of our preferred shares, including in the form of ADSs.”

 

The following table shows the period end, average, high and low Foreign Exchange Market selling rates published by the Central Bank on its electronic information system ( Sistema de Informações do Banco Central—SISBACEN ), under transaction code PTAX 800 ( Consultas de Câmbio ), or Exchange Rate Enquiry, Option 5, Venda ( Cotações para Contabilidade ), or Rates for Accounting Purposes, expressed in reais per U.S. dollar for the periods and dates indicated.

 

Year Ended December 31,

   Closing Selling Rates of R$ per U.S.$1.00  
   Low      High      Average (1)      Period End  

2008

     1.56         2.50         1.84         2.34   

2009

     1.70         2.42         1.99         1.74   

2010

     1.66         1.88         1.76         1.67   

2011

     1.53         1.90         1.67         1.88   

2012

     1.70         2.11         1.95         2.04   

 

Month Ended

   Low      High      Average (2)      Period End  

November 2012

     2.03         2.11         2.07         2.11   

December 2012

     2.04         2.11         2.08         2.04   

January 2013

     1.99         2.05         2.03         1.99   

February 2013

     1.96         1.99         1.97         1.98   

March 2013

     1.95         2.02         1.98         2.01   

April 2013

     1.97         2.02         2.00         2.00   

May 2013 (through May 22), 2013

     2.00         2.04         2.02         2.04   

 

  (1)   Represents the average of exchange rates on each day of each month during the periods indicated.
  (2)   Represents the average of the daily exchange rates during each day of the respective month indicated.

 

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CAPITALIZATION

 

The table below presents our consolidated capitalization as of March 31, 2013 on a historical basis and as adjusted to reflect the following:

 

   

(i) the issuance by us of [ · ] new preferred shares to TRIP’s Former Shareholders immediately prior to this global offering in respect of their pre-money valuation adjustment mechanism under the TRIP Investment Agreement (calculated at an offering price of R$[ · ] per preferred share, the midpoint of the price range in this global offering), and after taking account of any adjustment to be made in respect of indemnification, each as described in “The TRIP Acquisition—TRIP Investment Agreement and Adjustment Mechanism” and (ii) the extinguishment of the liability recorded on our balance sheet associated with the potential obligation to issue such shares under the TRIP Investment Agreement; and

 

   

the items described above plus (i) the receipt by us of approximately R$[ · ] million in net proceeds from this global offering, after deducting commissions and estimated expenses payable by us (calculated at an offering price of R$[ · ] per preferred share, the midpoint of the price range in this global offering), and (ii) the repayment by us of total debt of R$[ · ] million as described in “Use of Proceeds.”

 

The information presented below in the column marked “Actual” is derived from our unaudited interim condensed consolidated financial statements as of March 31, 2013, prepared in accordance with IFRS. This table should be read in conjunction with, and is qualified in its entirety by reference to, “Selected Consolidated Financial Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations––Loans and Financings”, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations––Off Balance Sheet Arrangements,” and our unaudited interim consolidated financial statements and the related notes included elsewhere in this prospectus.

 

     As of March 31, 2013 (Unaudited)
     Actual (R$)     Actual (U.S.$) ( 1 )     Adjusted (R$) (2)    Adjusted  (U.S.$) (1)(2)
     (in thousands)

Loans and debentures:

         

Current loans and debentures

     675,689        335,529      [ · ]    [ · ]

Noncurrent loans and debentures

     2,320,893        1,152,494      [ · ]    [ · ]

Shareholders’ equity:

         

Issued capital

     473,968        235,360      [ · ]    [ · ]

Capital reserve

     415,416        206,285      [ · ]    [ · ]

Accumulated other comprehensive loss

     (37,898     (18,819   [ · ]    [ · ]

Accumulated losses

     (467,647     (232,221   [ · ]    [ · ]
  

 

 

   

 

 

   

 

  

 

Total shareholders’ equity

     383,839        190,605      [ · ]    [ · ]

Total capitalization (3)

     3,380,421        1,678,628      [ · ]    [ · ]
  

 

 

   

 

 

   

 

  

 

 

  (1)   For convenience purposes only, the amounts in reais at March 31, 2013 were translated into U.S. dollars using the exchange rate of R$2.0138 per U.S.$1.00 as of March 31, 2013, which was the commercial selling rate for U.S. dollars as of March 31, 2013, as reported by Brazil’s Central Bank.
  (2)  

Adjusted to reflect (i) the issuance by us of [ · ] new preferred shares to TRIP’s Former Shareholders immediately prior to this global offering in respect of their pre-money valuation adjustment mechanism under the TRIP Investment Agreement (calculated at an offering price of R$[ · ] per preferred share, the midpoint of the price range in this global offering), calculated after taking account of any adjustment to be made in respect of indemnification, each as described in “The TRIP Acquisition—TRIP Investment Agreement and Adjustment Mechanism” and (ii) the extinguishment of the accounting liability associated with the potential obligation to issue such

 

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  shares under the TRIP Investment Agreement; and (iii) the receipt by us of approximately R$[ · ] million in net proceeds from this global offering, after deducting commissions and estimated expenses payable by us (calculated at an offering price of R$[ · ] per preferred share, the midpoint of the price range in this global offering), and (ii) the repayment by us of total debt of R$[ · ] million as described in “Use of Proceeds.”
  (3)   Total capitalization corresponds to the sum of current and noncurrent loans and debentures and total shareholders’ equity.

 

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DILUTION

 

As of March 31, 2013, our shareholders’ equity was R$383.8 million. Our book value per common share at that date was R$[ · ] and our pro forma book value per preferred share was R$[ · ], based on [464,482,529] common shares and [83,395,080] preferred shares outstanding at the date of this prospectus, with a conversion ratio of 75.0 common shares to 1.0 preferred share, reflecting two stock splits that we carried out on March 22, 2013. Shareholders’ equity represents our total assets net of our total liabilities, and book value per preferred share and common share represents shareholders’ equity divided by the total number of shares of such class issued and outstanding.

 

For purposes of comparison in order to eliminate the differences in economic interest between our two classes of shares, the dilution calculations below assume that all our current common shares had theoretically been converted into preferred shares at a ratio of 75.0 common shares to 1.0 preferred share, resulting in [89,588,180] preferred shares outstanding and a pro forma book value per preferred share as of March 31, 2013 of R$[ · ]. However, under Brazilian corporate law the total amount of preferred shares outstanding may never exceed 50% of our total shares, as discussed under “Description of Capital Stock.”

 

Accordingly, assuming that we issue:

 

  (i)   [ · ] new preferred shares to TRIP’s Former Shareholders immediately prior to this global offering in respect of their pre-money equity valuation adjustment mechanism under the TRIP Investment Agreement (calculated at an offering price of R$[ · ] per preferred share, the midpoint of the price range in this global offering), after taking account of any adjustment in the number of preferred shares to reflect our or TRIP’s Former Shareholders’ respective indemnity obligations, each as described in “The TRIP Acquisition—TRIP Investment Agreement and Adjustment Mechanism;”

 

  (ii)   [ · ] new preferred shares in this global offering at a price of R$[ · ] per preferred share (the midpoint of the price range in this global offering), assuming the underwriters’ over-allotment option is not exercised, and after deducting commissions and estimated expenses of the offering payable by us; and

 

  (iii)   [ · ] new preferred shares to our management as a result of the exercise of all stock options that will be vested and exercisable immediately following this global offering

 

then our pro forma shareholders’ equity as of March 31, 2013 would have been R$[ · ] million. If all our current common shares had theoretically been converted into preferred shares as described above, there would be [ · ] preferred shares outstanding following these issuances, resulting in a pro forma book value per preferred share of R$[ · ].

 

The issuance of new shares as described above would therefore result in an immediate dilution in our book value of R$[ · ] per share to purchasers in this global offering, compared to our pro forma book value per preferred share, on a theoretical fully-converted basis, as of March 31, 2013.

 

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The following table illustrates this dilution, based in each case on the theoretical conversion of all common shares into preferred shares and calculated at the midpoint of the price range in this global offering:

 

     R$
(except for  %)
 

Offering price per preferred share

     [ · ]   

Historical pro forma book value per preferred share as of March 31, 2013 (1)

     [ · ]   

Pro forma book value per preferred share as of March 31, 2013 after issuance of [ · ] new preferred shares to TRIP’s Former Shareholders and [ · ] new preferred shares in this global offering

     [ · ]   

Pro forma book value per preferred share as of March 31, 2013 after issuance of [ · ] new preferred shares to TRIP’s Former Shareholders, [ · ] new preferred shares in this global offering and [ · ] new preferred shares in respect of options

     [ · ]   

Increase in pro forma book value per preferred share attributable to the above matters

     [ · ]   

Dilution in pro forma book value per preferred share to new investors in this global offering attributable to the above matters

     [ · ]   

Percentage of dilution per share to new investors ( 2 )

     [ · ]

 

  (1)   Reflects the conversion of [ · ] common shares into [ · ] preferred shares at a conversion ratio of 75.0 common shares to 1.0 preferred share.
  (2)   The percentage of dilution in pro forma book value per share to new investors is calculated by dividing the dilution in pro forma book value per share to the new investors by the price per share.

 

The actual offering price per preferred share is not related to our book value, but was established on the basis of the bookbuilding process.

 

An increase or decrease of R$1.00 in the offering price per share of R$[ · ] (which is the midpoint of the indicative initial offering price range per share included on the cover page of this prospectus) would, upon completion of this global offering, increase or decrease the following:

 

  (i)   our shareholders’ equity by R$[ · ] million;

 

  (ii)   our pro forma shareholders’ equity per preferred share by R$[ · ]; and

 

  (iii)   the dilution in pro forma book value per preferred share to new investors in this global offering by R$[ · ], in each case after giving effect to the issuances and related assumptions described above.

 

Upon completion of this global offering, our shareholders’ equity will be subject to the actual adjustments resulting from the offering price and other terms to be defined after the marketing process.

 

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SELECTED CONSOLIDATED FINANCIAL INFORMATION

 

The following tables summarize our financial data for each of the periods indicated. You should read this information in conjunction with:

 

   

our audited consolidated financial statements at and for each of the years ended December 31, 2012, 2011 and 2010 and the related notes;

 

   

our unaudited interim condensed consolidated financial statements at and for the three months ended March 31, 2013 and 2012 and the related notes;

 

   

TRIP’s financial statements at November 30, 2012, at December 31, 2011, December 31, 2010 and January 1, 2010, and for the period from January 1, 2012 through November 30, 2012 and for each of the years ended December 31, 2011 and 2010, and the related notes;

 

   

the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations;” and

 

   

the information under “Unaudited Pro Forma Consolidated Financial Information;”

 

all included elsewhere in this prospectus.

 

The financial data for Azul included below at and for the years ended December 31, 2012, 2011 and 2010 has been derived from Azul’s audited consolidated financial statements, which were prepared in accordance with IFRS and are included elsewhere in this prospectus. The financial data for Azul at and for the year ended December 31, 2009 has been derived from the consolidated financial statements audited under Brazilian Generally Accepted Audit Standards for Azul for 2009, which were also prepared in accordance with IFRS but are not required to be included in this prospectus. TRIP’s results from operations have been consolidated into our financial statements since November 30, 2012.

 

The financial data for Azul included below at and for the three months ended March 31, 2013 and 2012 has been derived from our unaudited interim condensed consolidated financial statements, which were prepared in accordance with IFRS and are included elsewhere in this prospectus. The results of operations for Azul for the three months ended March 31, 2013 are not necessarily indicative of the operating results to be expected for the full year.

 

The financial data for TRIP included below has been derived from TRIP’s audited financial statements included elsewhere in this prospectus, which were prepared in accordance with IFRS. TRIP’s historical financial data has been restated and its assets and liabilities remeasured in connection with its acquisition by Azul. See “The TRIP Acquisition,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations—TRIP Acquisition,” “Unaudited Pro Forma Consolidated Financial Information” and Note 1 to Azul’s audited consolidated financial statements.

 

This section also includes unaudited pro forma consolidated financial information for the year ended December 31, 2012 and for the three months ended March 31, 2012, giving effect to the acquisition of TRIP as if it had taken place on January 1, 2012. This summary pro forma financial data has been derived from the unaudited pro forma consolidated financial information included elsewhere in this prospectus. See “Unaudited Pro Forma Consolidated Financial Information.”

 

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Azul Financial Information

 

Statements of Operations Data

 

    Pro Forma Unaudited     For the Years Ended December 31,  
    2012     2012     2012     2012     2011     2010     2009  
    (U.S.$)     (R$)     (U.S.$)     (R$)     (R$)     (R$)     (R$)  
    (in thousands, except amounts per share and %)  

Operating revenue

             

Passenger revenue

    1,839,478        3,704,341        1,218,915        2,454,651        1,558,256        786,721        352,208   

Other revenue

    210,072        423,043        130,452        262,704        162,971        84,409        24,646   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    2,049,550        4,127,384        1,349,367        2,717,355        1,721,227        871,130        376,854   

Operating expenses

             

Aircraft fuel

    (771,808     (1,554,267     (532,953     (1,073,261     (684,442     (341,006     (165,647

Salaries, wages and benefits

    (394,253     (793,946     (253,469     (510,435     (345,511     (189,997     (118,897

Aircraft and other rent

    (180,634     (363,760     (113,911     (229,393     (109,069     (68,733     (26,736

Landing fees

    (117,691     (237,006     (77,698     (156,468     (78,016     (38,651     (19,715

Traffic and customer servicing

    (91,643     (184,551     (64,592     (130,076     (96,054     (54,289     (45,821

Sales and marketing

    (98,480     (198,320     (65,403     (131,708     (93,498     (54,004     (39,901

Maintenance, materials and repairs

    (121,045     (243,760     (62,974     (126,817     (60,915     (33,228     (15,991

Depreciation and amortization

    (87,783     (176,778     (52,643     (106,013     (87,541     (51,258     (32,255

Other operating expenses

    225,689        (454,492     (121,434     (244,543     (141,085     (90,807     (54,733
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    (2,089,026     (4,206,880     (1,345,077     (2,708,714     (1,696,131     (921,973     (519,696
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    (39,476     (79,496     4,290        8,641        25,096        (50,843     (142,842

Financial result

             

Financial income

    6,932        13,959        4,824        9,715        13,360        6,475        15,066   

Financial expenses

    (127,855     (257,474     (80,780     (162,675     (114,373     (55,691     (30,005

Derivative financial instruments

    4,927        9,922        4,970        10,009        3,402        (2,867       

Foreign currency exchange

    (35,686     (71,865     (18,700     (37,659     (32,936     5,359        57,390   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax and social contribution

    (191,158     (384,954     (85,396     (171,969     (105,451     (97,567     (100,391

Income tax and social contribution

    560        1,127        560        1,127                        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss for the year

    (190,598     (383,827     (84,836     (170,842     (105,451     (97,567     (100,391
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted loss for the year per common share (1)

    (0.03     (0.06     (0.01     (0.03     (0.02     (0.02     (0.02

Basic and diluted loss for the year per preferred share (1)

    (2.13     (4.28     (1.26     (2.53     (1.61     (1.49     (1.54

 

  (1)   Reflects the conversion ratio of 75.0 common shares to 1.0 preferred share.

 

Balance Sheet Data

 

    At December 31,  
    2012     2012     2011     2010     2009  
    (U.S.$)     (R$)     (R$)     (R$)     (R$)  
    <