Brazilian airline Azul SA is weighing options from an equity offering to a Chapter 11 filing to address approaching debt obligations, according to people familiar with the matter.

The troubled carrier is also actively working get the merger over the line with Gol Linhas Aereas Inteligentes SA to convince creditors that a new combined entity would have lower debt levels and better growth prospects, one of the people said, asking not to be named because the information is private. But that approach is seen as less attractive given Azul’s imminent cash needs and weak financial results.

While filing for bankruptcy protection is on the table, Azul is keen to avoid it and is working with Citigroup Inc. for a potential follow-on offering, according to one of the people. The company has also tapped Citi as an adviser on the potential merger agreement with Gol, and is pursuing that potential deal as a strategic option separate from the current debt crunch. 

Another potential option under consideration is to issue debt through Azul’s cargo unit.

Representatives for Azul and the US bank declined to comment for this story.

Gol filed for Chapter 11 bankruptcy in January after grappling with $2.7 billion in near-term liabilities and carrying out a dozen debt exchanges. Three other of the region’s largest airlines — Avianca Holdings SA, Latam Airlines Group SA and Grupo Aeromexico SAB — filed for bankruptcy in 2020, with their respective processes dragging on for years. Since then, smaller carriers like Interjet in Mexico and Colombia’s Viva Air have also shuttered operations. 

Azul was the only one among Brazil’s trio of dominant airlines that didn’t file for bankruptcy protection after the Covid-19 pandemic ravaged the travel industry. Instead, the company was able to push out maturities through a bond swap in June 2023. But its still grappling with lease obligations and high interest payments on its debt load. 

A weaker Brazilian real has inflated Azul’s expenses, including dollar-denominated lease payments and fuel costs tied to the greenback. The carrier has 382 million reais ($68.6 million) in outstanding local debt payments this year, as well as $550 million in US dollar notes due in quarterly installments over the next four years.

Azul’s shares plunged after it reported net losses of 3.87 billion reais in the second quarter and boosted its net debt. The company’s leverage level has climbed to more than four times its earnings before interest, taxes, depreciation and amortization, from three times previously, according to its latest published guidance. The airline blamed its higher debt outlook on the weaker currency and catastrophic floods that paralyzed the state of Rio Grande do Sul’s main airport in Porto Alegre, which remains closed. 

President Luiz Inacio Lula da Silva’s government is seeking legislative approval for an airline rescue plan that includes state-backed loans through Brazil’s development bank. If it passes, it too could help ease the pressure on Azul, which would qualify as long as it avoids a bankruptcy filing.