Across the Aisle From David Neeleman on Why Azul’s New Service to the US is Going to Work (Part 1)

Way back in 2010, I spoke with JetBlue and Azul founder David Neeleman (Part 1, Part 2, Part 3). As he does best, David was in hyper-growth mode at Brazilian airline Azul. It had a single fleet of Embraer jets but it had just placed an order for ATR turboprops. Naturally, I looked ahead to future plans and asked about widebodies. His response? “No, not now. We’re small guys now. We like smaller – much bigger opportunity there.” My how times have changed. This week I had the chance to follow up with him for another Across the Aisle interview.

This week, Azul launched its first widebody flights starting with Viracopos/Campinas (outside Sao Paulo) to Ft Lauderdale. It also placed an order for 35 A320neos. Not enough? It filed the paperwork to go public this week after failing to go through with it a couple times before. This is all on top of its acquistion of TRIP in 2012 which built an enormous airline. In fact, Azul is likely to be the largest airline in Brazil in the not-too-distant future.

I was certainly skeptical about Azul’s chances to succeed in the US when it was announced, but David has a way of changing your thinking, especially when the reason for success isn’t based on just a low fare. Let’s see if you feel the same way.

Cranky: Let’s start with your US service. We’ve seen a lot of airlines try low-cost long-haul service but never really succeed. Why is this going to work for you guys?

David Neeleman, Chairman and CEO of Azul Linhas Aéreas: The biggest reason is that we have this amazing network in Brazil. No airline in Brazil has the same connecting network we have. About half the customers going out on the [first flight from Ft Lauderdale] are connecting to other cities. So if we didn’t have that we’d only have half as many people on this almost-full flight. It makes all the difference in the world. I don’t know if you’ve seen our route system in Brazil but we serve 105 cities with over 900 flights a day. We serve twice as many cities as our nearest competitor. There are people who live in cities that are 4 hours from an airport that only we serve… otherwise it’s [a longer drive or] maybe a 5 day boat ride. We can bring them to the US while our competitors can’t do that.

Cranky: So is that the make-up you’re seeing coming from these connecting passengers? Primarily people coming from these cities that don’t have service from other airlines right now?

David: It’s both. Even in the cities like Porto Alegre or Curitiba where we all serve it, we have a preferred status with our customers. They love us. It’s a lot like flying JetBlue… live television, legroom, leather seats. People love flying Azul. It’s created this amazing brand. We’ve doubled the traffic in Brazil since we started flying. It’s gone from about 50 million to over 100 million this year. And 25 million are our new customers that are flying.

Cranky: Some of that benefit is coming from that TRIP merger where you have even smaller cities, right?

David: Yeah, yeah. The TRIP merger was really big for us. Not only did we get a bunch of cities but we were fighting with them over other cities. The cost synergies were like $50 million a year but the revenue synergies were like $200 million a year. It really made a huge difference for us.

Cranky: So serving with those smaller aircraft has worked well? In the US, nobody likes smaller aircraft anymore.

David: There are a couple things different about Brazil versus the US. For one, fuel is a lot more expensive. It’s about 50 percent more expensive than in the US. In some cities it’s 2 and 3 times more expensive because the logistics of moving fuel to the Amazon basin. The ATRs are really important because they burn so little fuel. And there’s 70 seats on those airplanes. It’s not like a 50-seat regional jet. It’s more akin to like an [Embraer] 175. It really works well in those cities where fuel is really expensive and there’s really no other service. If you live in a city that’s a 4 hour boat ride or 8 hour car ride [from another airport] and the only other way you can go is to fly and you have to fly on a turboprop, you’re gonna go get on the turboprop and fly. People accept it because it’s a good airplane and it works great but they really have to accept it.

The other thing is that there’s almost no train service in Brazil for passenger trains. It’s not like India. You don’t have that option. And then the roads are very expensive; if it’s a really nice road it’s very expensive because they toll it to death. And then fuel is expensive for your car. So there’s a lot of incentive to get people to fly over drive.

One of the reasons we were able to double the traffic in Brazil is that there was no real segmentation of fares when we got there. The difference between the highest fare and the lowest fare was maybe 50 percent and now the difference between our highest and lowest fare is 500 to 600 percent. We don’t have a single route of our 260+ routes where you can’t get a cheaper fare than the bus fare if you buy your ticket in advance.

Cranky: Bring that back to the US service. Before, I assume there was a mix of people somehow finding their way to a big airport. Maybe some flew you to a gateway and transferred to another airline. So now, is your demand coming from those people? Or do you think it’s really just a stimulation play? Getting people to fly who never did?

David: I think it’s both. You stimulate because of convenience or because of low fare. Where we’ve seen the traffic double on the domestic, we feel international can double as well if we give you a convenient flight, we give you segmented fares that are cheaper. One of the things I don’t think people really understand is that [Brazilian visa requirements are] very onerous. If you don’t live in one of the 5 cities where you can get visas, you have to go there in person. It’s a 2-day process. But even with all the difficulties, about 80 percent of all traffic between the US and Brazil is Brazilians. Obviously going out of New York in Business Class there are a lot of bankers up front, but in general it’s mainly Brazilians going back and forth. And so we have a natural advantage, because we have a home court advantage. And we’re very good at yield management. We almost broke even in our first month of operation selling tickets that were $800 roundtrip. We know where the market is. We know what excites people. We can segment it and offer lower fares and common rate cities where there’s not a lot of competition.

Cranky: Talking about all the visa issues and the roadblocks, why start with the US when you’re looking at your international push?

David: Because Brazilians love America. They don’t want to go anywhere else. I’ve never met a single Brazilian who said I just got back from a weekend in Bolivia or Peru. They don’t want to go there. Thy want to go to the United States for a lot of reasons. One reason is that things are so inexpensive. Things in Brazil are really expensive. Even with the weaker real, it’s still 2 to 3 times cheaper to come to the US and buy things. A lot of them own homes here. There are 200,000 Brazilians who live in the South Florida area, 80,000 alone in Broward County, who single-handedly probably saved the housing crisis here by buying up the cheap homes. Just a lot of affinity of interest. The number one question I always got on airplanes was, “when are you going to fly to the US?”

On Monday, I’ll post the second half of this interview where we talk about the onboard product, the fleet plan, and the likelihood of Azul becoming the biggest airline in Brazil.