Two of Brazil’s three largest airlines, after having been hit hard by the pandemic, have now seen their debts more than double since 2019. They have also experienced negative equity growth, according to Valor Data, the data analytics arm of finance newspaper Valor. This is largely due to a change in the way these metrics appear on earnings reports.
Accounting rules for equity changed in January 2019. Leases are now shown on the balance sheet as right-of-use assets (assets) and obligations related to rights of use (liabilities). Previously, leased planes were simply considered an expense.
Generally speaking, negative equity is a deficit in shareholders’ equity that occurs when the value of an asset used to secure a loan is less than the outstanding balance of the loan. With a stronger U.S. dollar, the debts related to the airlines’ lease contracts are more expensive, while the value of the asset (the leased aircraft) is stable.
In 2019, the combined negative equity of the two companies amounted to BRL 10.6 billion. At the same time, the net financial debt of the two organizations increased from BRL 19.7 billion to BRL 45.4 billion.
Experts say this has no practical effect on either company’s cash flow. But the debt has become more expensive, and at some point both airlines will have to pay off these contracts, casting doubt on the actual operating situation of airlines. Especially at a time when both have been renegotiating debts with their creditors.
In March, Gol reported an unexpected net profit in Q4 2022, reversing a multi-billion-real loss of the previous year. On the other hand, Azul posted an adjusted net loss of BRL 610.5 million, a deeper loss than the BRL 436 million seen a year earlier.
The short-term scenario is unfavorable for the sector, with a strong dollar and volatile oil prices. The positive side, however, is demand, which continues to react despite high airfares.
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