David Neeleman on Azul’s Decision to Use Embraers and ATR Turboprops (Across the Aisle, Part 2)

Welcome back for part two of my talk with David Neeleman, founder of JetBlue and now current founder and CEO of Azul in Brazil. Yesterday in part one, we talked about starting up an airline in fast-growing Brazil, and some of the challenges involved. Today the focus is on the airline’s fleet choices. It opted to start with the smaller Embraer 190/195 aircraft and has now just announced an order for ATR turboprops. This is different from what JetBlue did, and the rationale behind it makes a lot of sense. (You can see part 3 on his thoughts on JetBlue here.) Let’s continue.


Cranky: I’m curious about the fleet choice. You started with the Embraers. I assume it was a conscious decision to go with a smaller gauge than you started with at JetBlue?
David Neeleman, CEO Azul Airlines: Yeah, we have our competitors down there, Gol and TAM. Between the two of them they have over 200, which doesn’t seem like a lot, but they have a lot of narrowbodies. Gol flies mainly 737s, mostly 800s with 185 seats in them. TAM has Airbus 319s, 320s, and 321s, so that kind of Across the Aisle from David Neelemanmarket was being served in a lot of big markets. And we couldn’t get in to the big, the filet mignon, they call it, Conghonas in São Paulo, so we thought well, what’s the best strategy? It was to go between cities with no nonstop service.

Of the 22 markets we fly, in 16 we’re the only nonstop. And the others, with one exception, we’re the market leader. The interesting thing about the Embraer 195 is that our trip cost is about 35 to 40% less than those guys are. So that means you can actually be making 15% to 20% on a market and they could be losing 20%. We have higher RASM [measure of unit revenue] than they do. Even though our average fares are less. For example, we had in May an average fare that was 30 Reais [about US$17] less than they had, but our RASM was 20% higher because we had an 85% load factor and they had a 58% load factor.

Cranky: Was part of the decision with the Embraers also a political aspect? Choosing a Brazilian-made plane?
David: That was just the frosting on the cake. We would never have done it just for political reasons, but having that advantage, we’ve certainly made the most out of it. Now with the ATRs come along. . . .


Cranky: Yeah, I was going to ask about that.
David: There are a lot of cities that just don’t have service, period. So we’re going into a bunch of cities in interior São Paulo that either have 1 or 2 flights a day or none. We give them good service, we’re kind of doing to ourselves what we did to the other guys. Because the ATR has about a 40% lower trip cost and about the same seat cost, which is astounding. The reason for that is that turboprops burn a lot less fuel and the cost of fuel in Brazil is about $1 more than in the US.

Cranky: With the ATRs, I looked at that and said, ok, you’re clearly not going to look at Embraer. You could have gone to an Embraer 170 if you were just concerned about the seats, but from a cost perspective that’s not a cheap plane.
David: Yeah, people like jets but jets just burn a lot more gas. An Embraer 145 with 50 passengers burns twice as much gasoline as a 70 seat ATR.

Cranky: Yeah, that’s why nobody wants the 50 seaters anymore.
David: Yeah

Cranky: I’m assuming you also looked at the Q400 so what was it about the ATR?
David: It was a couple things. The Q400 offers two advantages – it’s faster, flies about 50 knots faster [Cranky note: ATR says the ATR 72-600 max cruise speed is 276 kts while the Q400 is 360 kts] and it carries 6 more seats at the same seat pitch. The first hour doesn’t really save you that much with the speed. Most of our flights are 1 hour or 1.5 hours so it was not a big deal to us.

And the Q400 weighs 10,000 lbs more than the ATR [Cranky note: Operating empty weight for the ATR 72-600 is 28,682 lbs and for the Q400 HGW is 37,888 lbs] and burns about 30% more fuel. We didn’t need the speed, we didn’t need the seats, so why would we spend 30% on gas? For us, it was really a no-brainer to go with the ATR.

Cranky: With the ATR, are you treating it as the same type of experience onboard or is more of a traditional express type of service?
David: Well, it’s a very short flight. The average stage length is under an hour. I’m not going to put LiveTV on those planes. We’ll have that by the end of the year on the Embraer 195s. There’s 2/2 seating, leather seats, good seat pitch. Comfort issues will be the same as what we have on our 195 fleet. We just won’t have in-seat TV sets.


Cranky: Back to the Embraers. I know there were teething probelms with JetBlue in terms of dispatch reliability. Have those been worked out?
David: Every single plane has kind of a break-in period. We’re finding that the dispatch reliability on the 195, and that’s our bread and butter, every plane has its little idiosyncrasies, but we’re really happy. We’re flying them 14 hours a day and our dispatch reliability is over 99%, so we hardly ever canceled a flight due to maintenance.

Cranky: 14 hours a day?
David: Yeah, 13 or 14 depending upon the month.

Cranky: Wow. So you’re continuing this rapid growth path here, right?
David: Yeah, I mean whenever you have an opportunity and a market, to make sure you get established and have economies of scale. . . . There’s a wide open market in Brazil and we’re taking advantage of it.


And that’s it for part two. As I mentioned, come back tomorrow when we talk about what David thinks is wrong with JetBlue and what the airline needs to do to fix it.

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