Cranky: Now what about Vegas? People have long thought of Southwest as the low fare airline, and you’re coming into Vegas-West markets where Southwest has long ruled the roost. But you think that Southwest’s fares have risen to the point where there’s room for a lower fare operator?

Barry: Well, we added LA last month. You’ve still got Delta, US Airways, American, and United. There are plenty of high cost guys. But we do have lower costs than Southwest. We also offer a different product. Southwest would actually go out and tell you that everything is free. They tell you bags are free, but what they really ought to say is that you’re subsidizing people who want to check bags. It’s like when you go out to dinner with friends and someone orders a really expensive bottle of wine. When you split the bill, you’re paying for it whether you drank the wine or not.

In 2006 our total revenue per passenger was $109. We actually had less than $5 in non-ticket revenue. In 2010, our average total prce including options was $112. It was only up $3 but our non-ticket revenue was $35. We don’t nickel and dime. What we’ve done is allowed people options. Most people are figuring out that we’re a much more consumer-friendly model. But we also cater to a different clientele. If you’re the guy who always orders that wine, you like the Southwest model.

Cranky: Let’s talk about one of the more controversial moves. You’ve started charging for people to bring carry-on bags.

Barry: We were averaging 17 gate-checked bags per departure at LaGuardia. The reason is because airlines lie to you, not Spirit, well, they don’t really lie but they’re allowing you two bags when there isn’t enough space above all the seats for everybody to jam a bag up there. If it’s a full flight, there’s a backup, nowhere to put the bag so its gets checked. It delays the flight and the customer gets mad. Will it be checked to my connection? Wait, I’ve got to get my medicine out. We don’t have those issues anymore. We’ve ended up with a better customer experience. Our total turn is down by 7 minutes because I’m not gate checking bags. Are we evil or are we actually the best option for consumers?

Cranky: Some people think that you’re being sneaky and trying to hide fees from them.

Barry: I want you to know what’s optional and what’s not and what’s included and what’s not. Part of the challenge is that there are so many requirements for disclosing this or that (not just in the airlines) and so people don’t pay attention. I don’t want to deceive anybody. I want people to feel good about the purchase that they bought. We just think the airline industry operated forever in a manner that didn’t give options. If you go way back, we assumed everyone wanted a meal.

At the end of the day, if you take a Haitian who lives in South Florida and they immigrated here 10 years ago and they’re living the American Dream and they want to go see their mother back in Haiti, who am I to say they need bags or they need a TV or they need food? We believe it’s our job to get them the cheapest possible way to go see their mother because otherwise they might not be able to afford it.

Cranky: But disclosure is a lot tougher for sales that aren’t through Spirit directly. And you do sell through third parties.

Barry: I think there’s frustration with the third parties. If they sell the ticket they should be obligated to tell our policies. How many times have you gone to Expedia and then you get to the hotel and there’s a $15 a day resort fee and it’s mandatory. Wait, so this is required of me and you didn’t tell me this? But they should have just said it.

There is an issue with people who haven’t flown us and bought us through a third party. The third party causes the most challenge. We like that distribution partner, but we’re not in all of them. We’re comfortable with the partners we have and we see value in it. We’re just trying to isolate the specific issue you mention. We’re not going to go to them with a big mandate, but at some point we’re going to have to figure out a way for them to disclose better and better present the options to the customer.

But the third party is a separate issue. When we changed our model in 2007 in a big way, there were people who had flown Spirit before who were not familiar with the new model. I’m not aware of a complaint we’ve ever got from Haiti, but routes that we had flown before, there was a higher propensity. There definitely was a conditioning of previous customers on previous routes. Last year was a good example. When we announced carry-on fees, we had these huge banners, maybe we went overboard. If I’m going to carry 700,000 people a month, if I get 99 percent, if 1 percent of people don’t know, that’s still a large number of people. I don’t know how we get every last person conditioned, but I’m committed to trying to get there.

Cranky: You talk about places like Haiti, but those are markets where people usually do bring a lot of bags when they go back to their families. There hasn’t been any backlash?

Barry: What we normally do to illustrate it to people is explain that your fares are going to drop so much that you can afford to go back and forth. Before you were paying $700 and you wanted to make that trip count, so you would take a gazillion things back with you. But now they don’t need to bring as much stuff. We see checked bags drop the longer we’ve been in a market.

And that was the end of the interview. I tend to agree with just about everything Spirit says, but there are a couple practices that I don’t like. First, Spirit charges an $8 passenger usage fee each way. This applies to everyone unless you buy at the ticket counter, so that’s how they get around it being considered optional. I’m fine with that, but I want a disclaimer that shows me that I can save $8 each way if I go to the airport. It’s not very clear.

The second issue is with opt-in versus opt-out. As Barry mentions, people do get overwhelmed with disclosures and end up missing things. So when, for example, travel insurance is already pre-checked for me and I have to opt out, that’s a little tricky in my mind. How many people fail to uncheck it even if they don’t want it? Of course, this will be going away with the recent DOT regulation change, so it won’t be an issue for much longer.

Other than, I like what Spirit does. I have no clue if they can make big city markets work, but hey, they think they can and the results have been promising in those cities with the trial balloons they’ve sent up so far.

This past week, the airline announced some big moves. It will begin flying from Chicago/O’Hare to Boston, Dallas/Ft Worth, Detroit, New York/LaGuardia, and Orlando. You’ll also see flights from Vegas to Portland (OR), Oakland, and San Diego. These are big moves in big airports, and I was able to get Spirit’s Chief Marking Officer Barry Biffle on the phone to learn more about it. We ended up having a wide-ranging discussion, so it’s going to be broken into two parts. Today we’ll talk about the new markets. Tomorrow, look for talk about fees and why Spirit loves them so much.

Cranky: Where is all this capacity coming from for these new routes?

Barry: There are two more aircraft coming in at the end of this year and three more at the beginning of next year. There’s not a lot of frequency on these routes, so they don’t actually use a lot of aircraft. You can take San Diego to Las Vegas for example. It’s only an hour flight. We operate our airplanes 13 hours a day, so that’s a small amount of time for a roundtrip.

Cranky: Tell me more about this move. You’ve really focused on Caribbean and Latin America for awhile. Recently you’ve gone into small cities like Plattsburgh (NY) and Latrobe (PA). Now you’re doing big city routes.

Barry: The geography may be a little different, but it’s 100 percent consistent with the business model. What we look to do is provide something different in the marketplace; we are the price leader. We look for markets that have really high cost competitors, we look for really high fares, and we look for cities where we can we have an efficient operation. Then the question is: Will the market stimulate if we come in?

Cranky: But O’Hare is crowded and not the cheapest airport around, so can you have an efficient, low cost operation?

Barry: Specifically in Chicago, we’ve been there for a long time and we’ve been growing Chicago in just the last year and a half. We see the dynamics of the customer base in Chicago wanting more and more of what we offer. The fare environment has gotten really high. American and United have a great product and they’re serving the business customer needs very well but the reality is that $400 for a two-hour flight to Dallas is out of reach for leisure consumers and people visiting friends and relatives. So we saw a great opportunity there.

Las Vegas also meets those same criteria, and when you talk about the stimulation potential, Las Vegas is one of the greatest destinations on the planet. At the end of the day, it comes down to price. You have a lot of markets out there that are one- to two-hour flights that are over $100 on average. The only reason people go there is vacation or leisure, setting aside convention business. The price is gonna draw a lot of people in. Vegas is also important because the seasonal balancing opportunities are very good and it complements Ft Lauderdale. In Sept/Oct, which are decent convention months in Vegas, it’s hurricane season [in Florida]. Conversely, not a lot of people go to Vegas for Christmas.

Cranky: I understand the rationale for targeting these markets in general, but why O’Hare? If you are all about lowest costs and lowest fares, why not something like Gary or Rockford which is cheaper?

Barry: We’ve looked at Gary. We’ve looked at it a lot. It’s cheap. And we looked at Rockford. The best way to think about our airport selection is we will go where we believe we will have a cost advantage. We will not fly somewhere if we believe that the airport location is going to impede our cost structure. We fly to LaGuardia and we believe we’re the lowest cost operator there. We run 12 flights a day on one gate. We wouldn’t be in LaGuardia if I couldn’t find a way to be the lowest cost operator at the airport.

We’re already in O’Hare and by throwing out two gates of flying, we’re actually lowering our costs there. Our first choice is always going to be a secondary airport because of congestion and at the end of the day, the facility’s cheaper. But the reality is that there may not be a good secondary option. In Europe, it’s actually great, because there’s so much ground transportation. In the States, unfortunately, so many people have cars, but they don’t want to necessarily drive them that far.

Cranky: So you’re saying people don’t want to drive to Gary or Rockford for low fares?

Barry: Specifically with Chicago, my opinion is that if you’re going there for business, Midway is just as convenient to downtown or easier than O’Hare. In our case, we’re not targeting business traffic, so I don’t look at it that way. If you think about the geography where the population lives, specifically the suburban population, it’s north and west of downtown. So O’Hare is much more convenient than Midway. If you look at Gary, there’s just not that much population, and definitely not the affluent population on the south side, south and east of Chicago.

I actually think we’re still intrigued with Gary and I would actually argue that Gary serves a different geographic base. Rockford is a little bit different. You do kind of appeal to some of that west and northern suburbs and of course, I guess Allegiant has chosen that. Our view is that I’m already at O’Hare so we want to grow O’Hare to its potential before I consider another airport.

Tomorrow, we’ll talk fees. I can already hear you guys typing your comments, so I look forward to a “Spirit-ed” discussion. (Sorry for the pun, but I had to do it.)

Cranky: Looking at Horizon now compared to a couple years ago, you look a lot more like any other regional carrier other than the fact that you’re owned by Alaska Air Group. Is this foreshadowing a possibility of doing flying for other airlines?

Glenn: Yeah, I wouldn’t rule that out. Right now our focus is on getting our transition to the all-Q400 fleet and getting our profitability to the level of Alaska’s. You know, Alaska has just achieved its 10 percent goal for return on invested capital, and that’s the goal for Horizon as well. We’re halfway there. When we get to that level, I think we would be competitive in terms of being able to go out and look for other business if that was in the interest of [Alaska] Air Group to have us do that.

Cranky: And you don’t have many competitors flying Q400s.

Glenn: And I think the Q400 is a great airplane in the right markets. Obviously it doesn’t compete on real long haul markets. With the number of seats it has and the incredible fuel efficiency, it’s a fabulous competitive tool for us.

Cranky: Looking at the Alaska network, there’s really limited growth opportunity for that airplane. You’ve talked about going into the State of Alaska, but other than that, do you see real growth opportunity with Alaska’s network?

Glenn: We’ve actually just recently introduced service from San Jose to Los Angeles. It’s an interesting one for us to watch because it’s an intra-California marketplace … obviously a competitive marketplace but also pretty well-suited from my perspective for the Q400 so I think there’s lots of opportunities once we get the cost structure right at the company.

Cranky: That market is interesting as well because you’re going up against one of your codeshare partners too. I was waiting to see if we’d see some American regional jets disappear in favor of the Q400 at some point.

[silence]

Cranky: Probably not gonna comment on that, I guess. [laughs]

Glenn: [laughs] Nope. I’ll leave that one alone.

Cranky: What about the Alaska flying? Are you talking about that at all yet?

Glenn: We haven’t announced anything other than what we’ve said on the [earnings] call which is that we are actively looking to see if the Q400 has a place doing State of Alaska flying from a technical standpoint and from a community standpoint as well. If you think about the State of Alaska flying, and my last job was as the CFO for [Alaska] Air Group so I have some insight into this, we need to figure out the right mix of flying where we can still handle the right mix of cargo and passengers. At the end of the day, the Q400 on the right stage length has better economics than a 737. That can allow us to provide service more efficiently and produce lower fares. That’s what customers want these days.

Cranky: Are there are any tech issues with the Q400 up there?

Glenn: It kind of depends on which cities and that’s why we’re looking across the whole range. Alaska pioneered the [Head-up Guidance] system and we have that, so as far as low visibility flying we’re fine. And Alaska pioneered [Required Navigation Performance] RNP flying, particularly for the Juneau Airport which is quite tricky. Horizon has work to do to get to the same level of RNP certification at each airport. That’s what I mean when I talk about technical issues.

Cranky: Switching gears, as a Long Beach resident I was wondering how you would continue to serve Long Beach when the CRJ-700s are retired. I see there’s an agreement with SkyWest to take some of your CRJ-700s. I imagine that’s making some people nervous at Horizon.

Glenn: We haven’t talked about specific city pairs but all along as we’ve talked about simplifying down to a single fleet type with Q400 flying, there are some markets that we are serving on behalf of Alaska on the CRJ that are not great candidates for a Q400. You could probably technically do Pacific Northwest to Southern California routes with a Q400 but it adds 20 to 25 minutes time and so that’s probably not ideal. Alaska is still working on specifics on which markets. It’s just 5 airplanes.

And you’re right, the Horizon employees are concerned about the impact of that and my reminder to the employee group is that we’re very competitive with the Q400. We’ll become even more competitive when we get through the rest of the business transformation process – getting to a single fleet type, getting the rest of the reliability and cost issues with the Q400 taken care of. At the end of the day I think the Q400 becomes a competitive advantage for us in the right size market against anybody else.

Cranky: I assume there is some anxiety around which routes will be taken over, but I’m sure they’re nervous saying, “can this grow any further? Will it take routes away from us?”

Glenn: The best way to not have that happen is for us to have really competitive costs so we can produce seats for Alaska at the best costs possible within the family.

Cranky: Is there any discussion about Alaska Air Group spinning off Horizon into a separate company? Sell it to a larger regional?

Glenn: We’ve said that no, we acquired Horizon (I say “we” because I was at [Alaska] Air Group) with the intent of having that feed owned within the Air Group. Horizon has an important place within [Alaska] Air Group. The challenge for Horizon until recently has been they were producing all that feed but not generating adequate return on the $750m of capital on the Horizon side of the business – about 25% of total capital of [Alaska] Air Group. The board was rightly concerned; we certainly couldn’t invest more capital in the Horizon side of the business with no return on it, and even with the existing capital, we had to get it to generate an adequate return.

For the year 2009, we generated 5% return on invested capital at Horizon and 11.2% for Alaska so Horizon is moving along. We were in the 1 to 2% prior to that in terms of return on invested capital on the Horizon side. We’re moving pretty swiftly ahead. We just have to keep focus on that and we can get to 10% return and then we can look at additional investments for Horizon. But absolutely the stated intent is to keep Horizon within the Air Group and have it be an important feed provider for Alaska.

Cranky: A lot of changes at Horizon this week, several of which have been in the works for quite some time. To start, why retire the brand now?

Glenn: Sure, you know Horizon’s just about to celebrate its 30th anniversary, so the name and the brand has been built over all those years but we made the decision to go to 100 percent capacity purchase agreement (CPA) flying [Ed note: that's where Alaska buys capacity from Horizon and handles pricing and marketing] effective January 1. While that doesn’t necessarily mean you have to change the external branding, we thought that was a good opportunity to look at it. Certainly the Alaska brand … I don’t know if you know my background; I’ve been at [Alaska] Air Group for 28 years back and forth between Alaska and Horizon so I think I recognize the value of both brands … but certainly Alaska is a much better-known brand.

I think what we came up is kind of unique in the industry. We didn’t go with Alaska Express or Alaska Connection but the Alaska name and the Eskimo on the airplane with the Horizon name still there. I think that captures the value of both of the brands. And as we think about taking Horizon up to the State of Alaska, certainly there’s no better brand to have on the side of the airplane than the name of the state. It all seemed to come together.

Cranky: What were you doing with the brand before this? Obviously it was on the side of the airplane but was there a lot of brand promotion over the last couple years?

Glenn: I would say that we’ve been ratcheting it down over the last few years. When we first acquired Horizon at [Alaska] Air Group back in 1986, we kept the two brands completely separate and over the years we’ve found more and more opportunities to co-brand things. In 2010 about 50 percent of our flying was done on behalf of Alaska as CPA flying and the other half was done on what we’d call brand flying where we did our own advertising and promotion in some of the small communities. So there was some level of effort and cost put into the Horizon-specific brand but I think there’s a more cost effective solution here to go with the Alaska brand and get the benefit of all the advertising that goes into the Alaska brand for both companies.

Cranky: Externally, the only thing that seems to be changing is the paint job, right?

Glenn: Right. There will be some airport signage so where we have a Horizon backwall we’ll change those out to Alaska backwalls. The airports will transition to be just Alaska. We have to still say the flights are operated by Horizon Air like any other CPA carrier.

Cranky: Is anything changing internally? I know there’s already been a huge behind-the-scenes effort to consolidate.

Glenn: It really doesn’t and that’s one of the things we’re talking about with employees this week. They’re anxious about this. Losing their identity, so to speak. But we remain a separate company with a separate operating certificate. We still have all the same employees. Still have our folks in Horizon uniforms in terms of pilots and flight attendants. We’re maintaining the service elements that we think are important to our customers. The free beer and wine onboard, the a la carte service … so all of those elements stay the same. It’s really just getting that visual brand recognition and the brand halo from the customer perspective.

Cranky: I find myself wondering how many people even know the Horizon brand outside of the Pacific Northwest.

Glenn: I would say where we have a fair amount of name recognition is in Idaho, Montana, Eastern Washington, and Oregon. Those are traditional Horizon locations, the small cities, where Alaska hasn’t had a presence. That was what we were trying to capture by keeping Horizon on the side of the airplane. Places like Missoula, Montana see Horizon as their hometown carrier and we still want them to have that same sense of pride and ownership in the airline even though we’ve got a new name on the side of the airplane. By contrast, when we are down in California flying from LA to Loreto or La Paz on behalf of Alaska or go up to the State of Alaska, it makes no sense to me to try to propagate it and promote two brands.

Cranky: So the assumption on your part is that there’s enough brand benefit by consolidating with Alaska to pay for the cost of painting the planes?

Glenn: Yep, and to that extent we’ve said it’ll take 12 months or longer to get everything painted. We have 8 new airplanes coming over the next 6 months so those will all be painted in the new colors, of course, and then we’ll take a period of time to paint the existing airplanes. We’ve held off on painting so there’s a bit of a backlog because we knew this decision was pending. And we have 8 airplanes with special liveries – the university airplanes and the green airplane – that will just be a simple change by painting Alaska with the script instead of Horizon. There’s not a huge amount of incremental cost because it’ll be done largely in the course of business.

Come back tomorrow for more on the recent deal Alaska made to outsource some flying to SkyWest as well as future growth opportunities for Horizon.

Cranky: It seems like you’re dipping your toes in a lot of different places right now, so is there an overall strategy, is it more of a transition, or is the goal just be in a bunch of different places?

David: We’ve always had a diversified revenue stream for our company but this is the logical next step for us. . . . As I mentioned in another article, it’s hard being in Las Vegas to ignore what Allegiant’s done. We like their business model. There’s really no barrier of entry to us. In fact, we feel like we have a great product, and we feel like we can deliver tremendous value to the consumer. So moving into scheduled service into underserved markets, particularly in leisure destinations, is a logical next step for Vision Airlines.

Cranky: I guess I’m a little confused about how Louisville fits into that.

David: Well Louisville – Atlanta is something we looked at as long as 6 or 7 years ago in terms of setting up a corporate shuttle for UPS. There’s been a need for a very long time. We’re probably personally familiar with it as a company because we have offices in Atlanta and a maintenance facility and offices in Louisville, Kentucky. So we as a company have experienced the high fares and limited service on that route. We’ve heard from other companies that there’s a need for low cost travel between those two city pairs so for us to start initially into Louisville and Atlanta made a lot of sense. There’s only one carrier on that route nonstop, Delta Air Lines, and if you look at Delta’s fares, they’re high. That was a very easy decision for us to make but in the long range most likely we’ll focus primarily on leisure destinations.

Cranky: So this is sort of a one-off opportunistic look?

David: Initially it’s a one-off but I could see us looking at other markets that are underserved that might connect to business centers. That’s not out of the question.

Cranky: Is there any sort of subsidy on this route?
David: Well, not unlike numerous airports around the US, they have incentives for new routes, new carriers, but in terms of any revenue subsidy or anything like that, there is no revenue subsidy.

Cranky: You had mentioned in Today in the Sky that you were hoping or expecting that UPS or Home Depot, large companies like that would come. The way that the legacy airlines structure their corporate agreements, I imagine it’s going to be very hard for them to shift business your way in a place like Louisville. Is this something you think you can get around?

David: I don’t want to comment on specific negotiations with specific companies, but with that said I think it’s safe to say, being a Louisville native, I know there is a large number of folks that will fly on Southwest from Louisville to Birmingham, rent a car and drive to Atlanta simply because of the high fares. I don’t expect us to cut into Delta’s market share. Delta isn’t our target. We’ll probably encourage folks to fly versus drive or fly to Atlanta instead of flying to Birmingham and then driving. I think Delta is probably not concerned with Vision Airlines with 32 seats per departure 2 times a day. Our threshold for success is very very low, so we’re pretty confident that we’re gonna be in this market for a long time.

Cranky: I would tend to agree that Delta’s not paying close attention but if they start seeing their big customers going other places, then they’ll notice. But if it is pulling people off the roads that’s a different story.

David: You’re right. We have 64 seats a day. Delta has 10 or 12 departures. We’re barely putting the number of seats that Delta has in the market on a regional jet. They’re the 800 lb gorilla and I’d be surprised if they respond to a 32 passenger Dornier. I’m not sure if it would be wise.

Cranky: Yeah, but rational behavior is not always the way things work in this industry.

David: I understand, and we’re not naive enough to think there may not be a response, but we’re not betting our company or betting the farm on this particular route. We have the Dorniers, we have pilots. This is not a very big risk for Vision Airlines.

Cranky: Let’s talk about Florida. When do you expect to be putting that out?

David: I imagine you’ll see an announcement in the next 45 days. We’re finalizing negotiations right now with various airports.

Cranky: This will be more along the lines of an Allegiant-style model?

David: Exactly. You’ll see us focus on point-to-point routes going from underserved cities to leisure destinations and also letting consumers buy additional services like a hotel room and a package or a car or various activities, golf, show tickets.

Cranky: Do you have a lot of those relationships set up today?

David: We’ll initially start with air seats to the destinations but we’re in the process of finalizing negotiations with a number of resorts and providing via the global distribution systems, provide the gateway for that product that we can distribute with air seats to the consumer and provide a great value. We’ve looked at the economics and the value we can deliver and we’re confident we’ll be extremely competitive.

Cranky: When we’re talking about the Allegiant model, what is it specifically that interests you most? Are you looking at a couple days a week, more frequency?
David: I think you’ll see us 3 or 4 days per week in the cities we’re gonna be announcing. It’ll be less than daily service initially. The schedules will be around the typical consumer travel patterns. A Sunday-Wednesday-Friday, Tuesday-Thursday-Saturday type of travel pattern fits with the destinations. The playbook is fairly easy to read. It’s easy to see what the travel patterns are, it’s easy to see what the other providers are doing. To emulate success is a fairly easy thing to do. Particularly when we feel like our cost structure and biz model puts us in a place to be more competitive.

Cranky: Are you looking to expand the fleet or just use the airplanes you have today?

David: Both. We’re going to start with the aircraft we have today. We have three 737-400s under contract. One’s in maintenance as we speak with the others in the next 30 days. We’re looking to add more airplanes in the spring.

Cranky: More 737s?

David: Right.

Cranky: Are you focusing more on the classic 737 because it’s lower cost or are you looking at the newer ones as well?

Cranky: For the moment, we’re looking at adding more classics. As we look into higher utilization routes, it’s not out of the question for us to add additional [next generation 737s]. You get some fuel savings, and a little more speed and more seats, but if you’re not using the airplane more than 180 hours a month, it doesn’t make sense to use the airplane.

Cranky: Are you looking at using the 767s in schedule operations?

David: Primarily we’re focused on charter with the 767s but it’s not out of the question. We’ve had some discussions already with other carriers to provide ACMI agreements. I think you’ll see the 767, we expect to have worldwide operating authority in the next 60 days and the next step would be to finish up ETOPS.

Cranky: Would you be looking at long haul low cost operations in the future?

David: Absolutely.

Cranky: A lot of airlines have tried that, not in the US as much, and it’s been a tough nut to crack.

David: I think if you look at what Allegiant mentioned with respect to Hawai’i, the only barrier to us is ETOPS. That’s a very important thing to consider.

Cranky: You guys aren’t raising money for this, this is all being funded from existing operations?

David: Right. Unlike other airlines, we’ve been around since 1994. So we’re not solely dependent on the earnings from these commercial routes. We have ICE contracts, ACMI work, casino contracts. So there’s other revenue sources for the company besides limited scheduled service. That’s what I mean when I say I think we have the business model that gives us an opportunity to be out with a low cost fare because we’re not having to support our entire company from earnings from the commercial operations.

Cranky: In terms of the product, you say you have a good product. What is it like on the airplane?

David: One of the great things, unlike the regional jets, the Dornier 328 has a 31 inch seat pitch and it’s similar to sitting in a 737 seat. I’m a pretty big guy and I’m 6’2″ and I can tell you that I can’t hardly sit in a window seat on a CRJ whereas in a Dornier 328 I can sit in a window and it’s very comfortable. The good news for travelers is that the creature comforts onboard are much better than what you get on a CRJ. We are going to offer complimentary snacks and soft drinks. Until we go long haul we probably won’t get into the meal service business. We do have a couple of ideas that we’re entertaining that would be unique. We’re just in the preliminary discussions so it would be premature to talk about it.

And that was that. So, if anyone gets a chance to fly on these guys to Louisville, please let me know. Otherwise, I’ll be back to talk more about them when the Florida announcement comes out.

Cranky: Some would say that the rapid growth of JetBlue is what caused you problems there. Is that an issue here? Or do you not think that was issue there?
David Neeleman, CEO Azul Airlines: I’m not gonna tell you it wasn’t an issue. JetBlue was kind of built for lower fuel costs than what we had. So it took an adjustment period. That was part of it, certainly infrastructure. I was more focused with growing the business from a marketing perspective and I think our operation didn’t keep up maybe as well as it should have.

I had a COO [current President and CEO Dave Barger] that was in charge of that. I think the Valentine’s Day storm showed a weakness in operational recovery areas so that’s an issue. I looked at that experience in Brazil and we have a great team of people down there. We built all of our systems in the beginning, where JetBlue should have been. There was some people who were supposed to be focusing on that, obviously they weren’t. So I’m not leaving anything to chance.

Cranky: It seems, the article I was reading, it seems that there’s still sort of an almost bitterness about what happened there. Maybe it’s just a dissatisfaction. Does it still bother you? Obviously, Azul means blue. Is this still something that bugs you?
David: Yeah, it bugs me. You had a board that was rash and hasty and made a decision that didn’t need to be made at the time. The crewmembers didn’t really deserve that kind of treatment either. They had a certain vision for the company, an expectation. All of a sudden overnight that was changed. Things are different at JetBlue today. They’re not the same as they were.

Maybe some areas they needed a change, but you know, the camaraderie we had, a lot of things we did in the customer service area, I just don’t think it’s the same company and there are a lot of people lamenting that. Every time I fly, people say such things. “Wish you were back.” I wish they would say, “We’re doing great, it’s awesome. Thanks for starting it.” I would much rather have that.

I built JetBlue for one reason. I didn’t need the money. I wanted it to be a great place to work, a great place for people to fly differently than the other guys. Same thing at Azul. It’s your legacy, you know. And you want to make sure. I still think JetBlue is better than anyone else but it’s not the same. When you get bigger, it’s hard to keep it the same. But Southwest Airlines has been around for 40 years and they’ve been able to maintain a lot of happy people working there.

Cranky: You’re still a fairly large shareholder. As a shareholder, what would you want to see JetBlue do differently?
David: I would like to see it focus on customer service. I tell people that at Azul. I only have two goals for the company. I want this to be the best place you ever worked and I want every customer to say, “wow, that was a great flight.” If you can do those two things, you’re gonna grow and be successful. That’s really it. It’s just a focus. I’ve been on some delayed flights on JetBlue lately and didn’t hear anything about the customer bill of rights. In those days, we did things that were special.

JetBlue still wins the JD Power award every year but if you look at the scores, it’s all the TVs and more legroom. If you look at the customer contact scores, Southwest wins all those awards, those categories. And they never did. I think you can make a difference in a commodity business.

Cranky: Back to Azul for a second then I’ll let you go. Can we expect to see Azul outside the Brazilian borders?
David: The market size just isn’t that big. Don’t know if you saw the news on TAM and LAN, still trying to figure out what the heck that is, but the cross border stuff in South American countries is just a tiny fraction. Maybe it’s just a play for TAM to get some management over there, but the market’s just not that big and the market in Brazil is huge. So we’re going to focus on Brazil. Never say never, but we’ve got plenty to do.

Cranky: Not likely to see any widebodies coming in, right?
David: No, not now. We’re small guys now. We like smaller – much bigger opportunity there.

Cranky: I appreciate it. Good luck continuing to grow Azul. Maybe one of these days I’ll be down there and take it for a ride.
David: That’d be great, we’d love to have you.

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 market 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.

Everything you’ve heard about David is true. He never stops working. In fact, our first call was supposed to be on Friday before his daughter’s wedding. Something else came up and we tried to connect on the Sunday after. Ultimately, he called me after walking off a redeye in New York on Monday morning. He thinks nothing of commuting down to Brazil. He is always thinking about a million things a minute. It’s impressive and, yes, tiring.

We had a wide-ranging discussion on everything from fleet decisions in Brazil to his departure from JetBlue. He’s still not happy about that and has a list of things that he thinks JetBlue needs to do. David doesn’t hold any punches, and that’s refreshing. But you’ll have to wait for part three for the JetBlue discussion. Today, we start with talk about Brazil’s fabled air traffic control system and the rapid growth and opportunity in the country. Tomorrow in part two, we’ll look at Azul’s fleet decisions.

Cranky: With Azul, you’re sort of following a similar path of rapid growth, low cost carrier [like JetBlue] – kind of filling a niche that hasn’t been filled before. I was reading an article recently saying some of the lessons you’ve learned. Every time you start with a new airline, you change things around a little bit. I’m curious with Azul, what are the things you’re doing differently, above and beyond what you’ve done in the past?
David Neeleman, CEO Azul Airlines: It’s much different in Brazil than in the US in a lot of ways. If you were to go down and fly Azul, you would not think there was any difference [compared to JetBlue]. But behind the scenes, there’s a lot of market stimulation, and a lot of different things that we do because the market is 1/3 the size of what it needs to be. When we started flying it was about 50 million; then it was 56. I think this year will be 65 but the number should be closer to 150 million.

Cranky: There’s clearly a lot of opportunity, but one of the issues in the past has been Brazil’s disorganized air trafic control system. Is that something that’s improving or are you just able to work with it the way it is?
David: It’s certainly improving. We’re used to seeing things move a lot quicker in the United States. Here it’s a learning process. They’ll get there. They’ve had, you know, the Gol crash . . . traumautized the country. But they’re very careful and they’re very proud of what they do have. We’ll work with it.

We’re not just concerned about the in-the-air stuff as we are the infrastructure on the ground. There’s plenty of infrastructure today in most cities, but as the market starts to grow, there’s going to need to be a lot of new construction of terminals, new tarmacs, parking, to handle the growth.

Cranky: Is the airport funding system similar to the US where they build and then the airlines end up paying or is government-funded with no reimbursement?
David: It’s an enplanement fee rate – they charge the equivalent of about $10 to $12 per domestic passenger depending on the airport. That goes to Infraero, and Infraero is the agency that governs most all the airports, so for one thing you have one group that does it all which is good. If you have a problem, you go to one source with local management. But they don’t have a lot of experience with temporary terminals and temporary facilities. . . .

We haven’t really had to do that before, because flying in Brazil was mainly for the elite, for the A and the B class. There’s A, B, C, D, and E in Brazil. And now that the C class is growing – there’s a hundred million people in the C class – and C class people are starting to get credit cards, half of them have credit cards. So we’re seeing a lot of new travel and a lot of people are traveling who have never traveled before. It’s easy to see it when you have flights between cities that have never had nonstop service before. Travel has been expensive and inconvenient.

Cranky: So the Azul target is the C class?
David: No, no. Our target is the A, B . . . [and more]. When I got down there, I was giving a speech, and one of the other airline guys came up to me and goes “look dude, you don’t really know what you’re talking about. We’re seeing more people travel but the people who always travel are just traveling more. We’re not seeing new travelers.”

But that’s what we’re seeing. We’re seeing both. We have one market, Viracopos to Salvador, which is kind of like São Paulo to Ft Lauderdale kind of thing. That used to have about 34 people a day. Today there’s over 500 a day. So, we’re seeing that growth in a lot of markets that just didn’t have air service before. It’s great to see.

Next up, we’ll dig in to Azul’s fleet choices and then we’ll touch on David bitterness with JetBlue.

Cranky: Middle Eastern carriers tend to avoid traditional alliances, what is your stand on alliances? Codesharing?
Tony: Two things really. Codeshare: whatever makes business sense to us, we will work with. We have a strong relationship with United in the USA. We codeshare on New York and Washington. We codeshare with US Airways out of Houston but those are one-to-one business relationships. The alliance strategy, I can’t really comment on, because that’s our CEO’s prerogative.

Cranky: Are you pretty happy with the feed you’re getting in the US from United and US Airways? Are you looking for more?
Tony: The day we go out with full flights every day of the year, we’ll be happy with the feed. One of the issues we have in the US is the Fly America Act [where US government travelers have to buy tickets on US-based airlines]. In Washington in particular, we carry a lot of government and military business. So the United codeshare does mean those passengers can travel on us with a United ticket. So that’s good. And the passengers are pretty pleased they can do that.

Cranky: Washington is obviously a lot of government. New York is a lot of everything.
Tony: Yeah, it’s New York. We get a lot of business. We also carry a lot of ethnic traffic. About 80% of all our business connects beyond to somewhere else.

Cranky: Really?
Tony: Yeah, the big premise of Doha is as a hub and spoke, so that’s what we do. We have this very famous premium terminal for Business and First. It’s like being in a five star hotel. That’s what we’re geared up to do.

Cranky: Another thing that may surprise people is the Houston connection. Qatar has a lot of natural gas, right?
Tony: Yes, second largest supply in the world.

Cranky: Is that primarily what the Houston flight is doing?
Tony: That was the key premise. Very much so. We carry a lot of business for the main oil companies and affiliated industries. But again, we carry traffic from the West Coast, even from Canada, and again we have some ethnic business. We have a lot of medical tourism becase of the big medical center in Houston.

Cranky: Let me go back to Emirates and Etihad for a second. Emirates is in Houston, New York. Eighty percent of your traffic is connecting so you’re not necessarily selling on the nonstop flight. If you could explain how you compete with them – what’s your selling point?
Tony: Like any business, there’s no blue ocean space around anymore. For us, our biggest competitors are not just Etihad and Emirates. We compete with Lufthansa, British Airways, Air France, KLM , who have pretty extensive networks. The value proposition we have is that for one, we offer excellent serice. All our flights from the States are ultra long haul. Our shortest flight to the States is 12 1/2 hours. So obviously we are very good at that.

We have to offer the customer more space. If you take the 777s, all airlines in economy have 3-4-3 configuration and we have 3-3-3, so we have a whole row of seats not there so that makes a difference. Our business class space is huge. So all the ingredients for long haul flying have to be there. That’s a big hook. The other thing is depending on where you’re going, you can do a one stop service with us that might require 2 stops on another carrier.

Thirdly, the terminal proposition. I’m a Brit with good ole’ Heathrow and everything. But Frankfurt and Heathrow in particular can be tough for transfers. Doha is quick. It’ll be better with the new airport which will open in about 18 months.

Cranky: Wait, in Doha there’s a new airport?
Tony: Yeah, there will be. It’ll be the most modern airport in the world.

Cranky: Is it just a new terminal or a greenfield site? I suppose it wouldn’t be greenfield but maybe brownfield.
Tony: No, it’s a brand new airport built on reclaimed land about 4km from the current airport.
Cranky: I’ll have to get more info on that.

And that I will, once I have time. The new airport looks to be absolutely massive and only a couple miles from the current one. Thanks to Tony for taking the time to chat.

I started with most basic question – how do you pronounce the name of the airline (and country)? Then we dove into a wide-ranging discussion on performance of US markets, codesharing, and competition with other airlines. I’ve split it up into two parts. Today we talk about Qatar itself along with the airlines from states in the Emirates. Unless something earth-shattering happens tomorrow, I’ll run part two then.

Cranky: Let me ask the one question that everyone wants to know. How do you pronounce the name of the company and the country?
Tony Hughes, Senior VP Americas: Well you know you’re absolutely right. When we started in the States, we ran a series of adverts saying how do you pronounce Q-a-t-a-r? Now, I’m English so we would say ka-TAR. In the States, they say, KA-ter. In other words, I don’t really have a good answer.

Cranky: So really, call it whatever we want as long as we buy a ticket?
Tony: Exactly! One of the interesting things for us is obviously Qatar as a country is not particularly well-known by the general public whereas Dubai is a destination. So we have that side – not only do we have to get the name over, we also have to get the country over.

Cranky: I think for a lot of people, when they think of Qatar, it’s instantly tied in with some negative thoughts, even if there isn’t as much of that in the country, it’s the region in general.
Tony: Yeah, there is an element of that. Once people actually know that the US Central Command is based in Qatar and we have six American university campuses in Doha . . . but of course, how do you get that message over? The reality is, not belittling the issues, if you actually go to Qatar walking around the streets you’re safer than in Washington. But I understand what you’re saying.

Cranky: Yeah, general perception.

Tony: I think, as you know, we are one of 5 or 6 airlines that are rated five star by Skytrax. We’re an international world class airline, not just an Arab carrier.

Cranky: Yeah, although, you may not just be another air carrier, but you are competing with other airlines that have that same reputation, Emirates and Etihad.
Tony: They’re 4 star.

Cranky: Oh yeah? Well, they still have that reputation for Americans.
Tony: And I would not sit here and say they’re not good.

Cranky: And that’s where all the growth is coming, in that region.
Tony: I think two reasons. One is the geographical location. The age of long haul jets has literally made that part of the world the crossroads between East, West, North, South. And secondly, the capital investment that’s been available there is quite spectacular.

Cranky: In Qatar, it’s obviously not growing as the same extent as Dubai has been, right?
Tony: No. I mean, in world terms it’s exceptional. It is growing, has an area full of splendid modern office buildings going up. It has its own floating island, the Pearl. There is a lot of investment but far more conservative than Dubai.

Cranky: Let’s talk more about the US market since that’s your domain. You have what, Houston, New York, and Washington?
Tony: Yeah, daily 777s from each destination.

Cranky: When you look at the US market, are you still looking to expand? Or are you looking to solidify your position?
Tony: Yes and yes. The company has quite clearly stated expansion plans and aircraft orders. Some orders are to replace existing aircraft because it’s the company’s objective to have one of the most modern fleets in the world, and the rest are to expand. We don’t have any immediate plans to bring another service to the States. I’m sure at some stage we will, but we’re reviewing all the time.

Tomorrow, I’ll have part two of the interview. We’ll talk about codesharing and competition.