Some airline-industry insiders have been scratching their heads at David Neeleman's decision to launch a new airline into a Brazilian market that the former JetBlue CEO himself admits contracted 3% in 2008. The question mark is particularly pertinent at a time when the global economy is looking increasingly uncertain.
But Neeleman is nothing if not successful as an airline entrepreneur. The names of the carriers that he has founded or helped found since 1980 – Morris Air (which Southwest feared so much that it bought the airline), WestJet and JetBlue Airways – are all recognised as highly successful start-ups.
Even so, there's every chance that history could judge Azul Linhas Aéreas Brasileiras as Neeleman's greatest triumph. Not only did he succeed in attracting $200 million in start-up investment to finance the business, but he also designed Azul to break into what he sees as a vast, untapped market that is ready for exploitation. If he is right, Azul's growth could indeed be spectacular.
"Fares in Brazil have been really, really high," explains Neeleman. "They've been 60% to 70% higher than in the United States and that was even before the run-up in fuel prices. They're so high because there is a duopoly and a lack of competition."
But that's only part of the market opportunity that he sees. "The other thing is that there is just a lack of service in a lot of sectors, because the aircraft operated by Azul's competitors, TAM and GOL Linhas Aéreas Inteligentes, are too big to make sense on many undeveloped routes between Brazilian cities.”
Compared with TAM's A319s and A320s and GOL’s Boeing 737-800s, the Embraer 190s and 195s that Azul flies have 35%–40% fewer seats – "and that's a very big difference," he says. " A case in point is that three of our first four routes had no non-stop competition," adds Neeleman.
Azul's start-up base, – the city of Campinas only 100km from São Paulo – has a catchment area of five million with just 15 flights a day out of the city, explains Neeleman. This paucity of flights has meant that until now, people choosing to fly from Campinas to other Brazilian cities connected at Sao Paulo. However, the flight time from Campinas to São Paulo's Guarulhos airport was only 20 minutes and there was only one flight per day, so virtually everybody drove to São Paulo to catch flights.
Azul chose the 1,500km sector between Campinas and the big coastal city of Salvador as its first route. Until Azul began service, an average of only 12 people per day flew from Campinas to São Paulo to connect to Salvador, says Neeleman.
"We have five flights a day now directly linking the two cities,” he adds. "Will that increase traffic, if you can go from your local airport and fly to Salvador? Absolutely. So we're not talking about a 3% or 4% contraction, we're talking about building markets – maybe 1,000% more traffic out of certain markets. The same goes for Porto Alegre and Vitoria, which Azul has also started serving from Campinas,” enthuses the Azul founder.
While Azul is facing competition on Campinas–Curitiba (its fourth route), Neeleman thinks there is plenty of room for his airline. "We're pretty excited about the prospects, because we think on a macro basis that the Brazilian market should be maybe three or four times bigger than it is today," he says. "There are about five times as many people that go by long-haul intra-state bus than go by air."
Along with Brazil's high domestic fares, another problem that has stunted market growth is the lack of traditional fare segmentation. "The highest fare and the lowest fare are probably a little too close – there's not enough distance between them to stimulate the kind of traffic you need. They're not down at the bus-fare level on the lowest fares," believes Neeleman.
The bus fare from Campinas to Salvador is, "in dollars and cents, maybe $80," he says, pointing out that this is about the same as the lowest airfares on flights covering the similar distance between New York and Orlando. But on Campinas–Salvador and other two–hour Brazilian routes "traditionally the fare was maybe $130 or $140."
However, on Azul's non-stop Campinas–Salvador flights, the $80 bus fare level is "about what our lowest fare is," says Neeleman. Couple that with non-stop rather than connecting service – "because that's a big deal to people" – and new made-in-Brazil aircraft that offer comfortable seats in two-by-two seat rows with no middle seats, live TV and large cabin windows, and Azul believes the public will respond to its product. "People will spread the word if they have a great experience," he says.
If this prediction is right, the pay-off could be eye opening. "There are 190 million people in the country, and over the past 18–24 months, 20 million people have moved into the class of people that can afford to fly, especially with our lower fares. They've moved from what they call the 'D' class to 'C' class – they have credit cards for the first time."
Azul wants to own its aircraft rather than lease them to avoid the high costs of operating leases and maintenance reserves and to obtain the volume-discount advantage of buying a sizeable number of aircraft. But the airline seems likely to modify its initial plan to primarily operate Embraer 195s, to include sizeable numbers of the slightly smaller Embraer 190s in the fleet.
Azul leased two 190 aircraft from JetBlue Airways to operate its start-up schedule along with the first of the 36 Embraer 195s it ordered. More importantly, Azul wants to establish a substantial operation at Rio de Janeiro's downtown Santos Dumont Airport, should the Brazilian government stick to its promise to open the tightly restricted airport to more competition.
"We'd like to put a lot of flights in there," says Neeleman. To do so, however, Azul would need Embraer 190s rather than 195s. "The 195 is a good airplane from a unit cost perspective, but it is not performance-wise. It's not the best airplane to fly into Santos Dumont,” he says, referring to the 4,300-foot runway.
With these ambitious plans, would Azul look to enter an alliance? "We're absolutely not opposed to it. The problem is, we have to not only have the size, but we've also got to be where other airlines are flying. We have a plan for that, and by the time we get down the road, I'm sure we'll have plenty of interest from other airlines."
In the meantime, Azul plans to add 14 to 16 new Embraer jets this year and 12 in each of the following two years. By early 2012, it expects to be operating at least 42 aircraft. With analysts forecasting at least another year of rough economic conditions, we will have to wait and see whether the Brazilian market leaves Neeleman riding the wave of success or feeling a bit blue.
This article is featured in Routes News 2009 Issue 1