And now, it’s time to talk JetBlue. When I read a recent article where David Neeleman talked about JetBlue, I thought he sounded bitter, so I had to ask. It’s clear that he’s still bugged by what happened at JetBlue, and as a shareholder, he wants to see things change. You can catch up with part one and part two, if you missed them.

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.

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 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.

I had the pleasure of speaking with David Neeleman last week on a variety of subjects. David is best known for founding JetBlue, an airline which effectively fired him after the operational melt down on that cold wintry Valentine’s Day weekend back in 2007. After that, he went down to Brazil to found Azul, which, not coincidentally, means blue in Portuguese.

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.

Yesterday in part one of my discussion with Qatar Airways Senior VP of the America Tony Hughes, we were just getting warmed up. Today in part two, we get right into the meaty issues of codesharing and competition.

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 had the chance to speak with Qatar Airways’ Tony Hughes recently and had a fascinating conversation. Tony is the Senior VP for the Americas, so he runs the show here in the western hemisphere.

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.