One of Latin America's best-run airlines faces significant headwinds and is reportedly pondering moves to try to offset any weakness.
The uncertainty appears to have investors on edge, sending shares of Azul (NYSE: AZUL) down 12% for the week as of Thursday midday, according to data provided by S&P Global Market Intelligence.
Destination consolidation?
The entire global airline industry was hit hard by the pandemic, but few regions felt the impact more than Latin America. Azul was a rare standout in a sector that had experienced several high-profile bankruptcies, and the airline has been trying to go on the offensive in the years since.
Azul initially tried to buy rival LATAM Airlines Group out of bankruptcy. It now reportedly has turned its attention to domestic archrival Gol Linhas Aereas Inteligentes SA. According to a Bloomberg report, Azul has held talks with large Gol shareholder Abra Group about a deal that would see Abra take a stake in the combined airline, lessening the cash outlay Azul would need to complete a deal.
The airlines are looking at options in part due to uncertainty about the Brazilian market. Earlier in the week, Bank of America downgraded Azul shares to underperform from neutral and cut its price target to $9.50 from $18. The bank believes that further yield increases are unlikely due to growing macro uncertainty and competition, and itsaid Azul could operate at slightly below cash breakeven in the coming years.
Is Azul stock a buy on its recent weakness?
As we have seen in the United States, consolidation can help stabilize airlines because with less competition there is more pricing power. A deal between Azul and Gol that creates a single Brazilian powerhouse airline might be in the best interest of all parties, but it will not happen overnight and will require the approval of multiple regulators and labor groups.
In the meantime, the macroeconomic concerns are not going to go away. Investors interested in buying in now should get a company strong enough to fly above any challenges, but there could be a significant delay before Azul shares are flying high again.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bank of America. The Motley Fool has a disclosure policy.
