Brazilian airline Azul has filed for Chapter 11 bankruptcy protection in the US as it seeks to restructure billions of dollars in mostly pandemic-era debt, making it the latest Latin American carrier to pursue court protection following COVID-19's severe industry impact.

According to Reuters, the São Paulo-based airline said it had reached agreements with key stakeholders including American Airlines, United Airlines and aircraft lessor AerCap to support a "proactive reorganisation process" that includes reducing lease obligations and optimising its fleet.

The restructuring deal, made public on May 28, provides $1.6bn in financing throughout the process, eliminates more than $2bn of debt, and commits up to $950m in equity financing upon emergence from bankruptcy. Azul said it would maintain normal operations during Chapter 11 proceedings.

"We had too much debt on the balance sheet that principally came from COVID. We now have an opportunity to clean it all up," Azul's CEO John Rodgerson told Reuters. "We believe we could be in and out prior to the end of the year."

Fleet reduction and financial targets

Azul expects a 35% reduction in the company's future fleet through the Chapter 11 process, which should lead to lower capital expenditure due to reduced costs, maintenance requirements and supply growth, Estadao reported. The company said fleet optimisation and deleveraging should contribute to reducing foreign exchange exposure.

The airline projects significant deleveraging through the judicial recovery process, with leverage expected to fall from 5.1 times to 3 times. For 2026, Azul estimates the indicator will decline to 2.2 times, whilst it should reach 1.7 times in 2027.

Interest expense reductions are also expected, with Azul projecting cash interest expenses of $113mn for 2025, compared to a previous estimate of $216mn. For 2026, the company estimates expenses will fall from $255mn to $85mn, whilst 2027 projections were reduced from $253mn to $105mn.

Strategic partnerships and market reaction

Azul shares fell as much as 12% after the filing before paring losses to trade down around 3%. The stock is now down 70% year to date, with JPMorgan analysts downgrading their recommendation to "Underweight" – meaning Sell – citing significant equity dilution expectations.

The airline's net debt soared 50% year on year to BRL31.35bn by the first quarter, with its leverage ratio hitting 5.2 times its earnings. Rising interest payments particularly pressured the carrier, with Rodgerson noting costs increased 10-fold since 2019 whilst Brazil's real weakened 50%.

US carrier United Airlines, which maintains a strategic partnership with Azul, including codeshare agreements and earned a board seat through a $100m 2014 investment, is supporting the restructuring alongside American Airlines.

"Azul is more than just a commercial partner for United – their customer-first approach and unique route network connecting small and large communities have improved the passenger experience in Brazil," said Andrew Nocella, United's chief commercial officer, as quoted by Airlinegeeks.

American Airlines' involvement marks a notable shift, as it previously held partnerships with Azul rival GOL, purchasing a 5% stake in 2022. American Vice Chairman Stephen Johnson said the Azul deal would complement existing alliances and increase South American connections.

United and American have agreed to invest up to $300mn to backstop an equity rights offering to repay debtor-in-possession financing when Azul emerges from bankruptcy.

Regional airline restructuring trend

Azul joins numerous Latin American carriers that filed for bankruptcy during the pandemic, including GOL, Aeromexico, Colombia's Avianca, and LATAM Airlines. Aeromexico, Avianca and LATAM have since emerged from proceedings, whilst GOL expects to complete restructuring in June.

The Chapter 11 filing likely derails potential merger discussions with rival GOL, which would have created a dominant carrier in Latin America's largest economy. "We believe that consolidation discussions with Gol should be put on hold until Azul emerges from Chapter 11," JPMorgan analysts said, as quoted by Reuters.

New business strategy

According to Estadao, to return to profitability Azul has drawn up a new business plan focused on "significant fleet optimisation with moderate ASK growth, in order to improve resilience and reduce overall risk, foreign exchange exposure and leverage," according to the company.

The airline currently maintains 200 aircraft and flies to 900 destinations. Legal experts pointed out that US Chapter 11 proceedings offer advantages over Brazilian judicial recovery, including faster processing times, lower costs, and access to debtor-in-possession financing mechanisms not available under Brazilian bankruptcy law.