INTERVIEW: Azul Airlines CEO David Neeleman

In a quiet office in a small Connecticut town, the plan to transform Brazil’s Azul into an international airline is taking shape. Seat maps of its newly acquired Airbus narrowbodies are laid out on a conference room table, and the carrier is days away from taking delivery of its second Airbus A330-200.

In a quiet office in a small Connecticut town, the plan to transform Brazil’s Azul into an international airline is taking shape. Seat maps of its newly acquired Airbus narrowbodies are laid out on a conference room table, and the carrier is days away from taking delivery of its second Airbus A330-200.

Chief executive David Neeleman pores over the papers with his chief revenue officer Trey Urbahn while munching from a bag of crisps. It is Friday afternoon, the day of the week when Neeleman usually works from Azul’s secondary office in Darien, a mostly residential town on Connecticut’s Gold Coast, close to his home in New Canaan.

Darien is so small that when Airline Business was planning its visit, the only accommodation it could find in the town was a guesthouse at a convent. Housed in a sparsely decorated space on the second floor of one of Darien’s few office buildings, this Azul office bears little sign of the airline’s massive growth thousands of miles away in sprawling São Paulo.

Not that the airline’s trajectory should be any surprise, given that the man at its helm is no novice to the airline industry. Azul, launched by Neeleman in 2008, is his fourth airline venture after Morris Air, WestJet and JetBlue Airways. 

In the six years since then, Azul has grown to become Brazil’s third-biggest carrier, with a market share of 25% behind TAM and Gol – the duopoly that had dominated Brazil’s domestic air service market before Azul’s entrance. Azul’s rise is testimony to its success in carving out a niche for itself – the airline serves predominantly secondary markets in Brazil with Embraer E-Jets and ATR turboprops that TAM and Gol’s narrowbody aircraft cannot operate to profitably.

“Seventy percent of our market is exclusive,” points out Neeleman. “We are growing a lot of markets that did not have air service before.”

Azul reinforced its position when it announced plans to acquire Trip in 2012. The two airlines achieved a single air operator’s certificate earlier this year and serve a combined 102 destinations with a fleet of more than 140 aircraft. The Trip acquisition gained Azul strategic landing rights at São Paulo Guarulhos and Rio de Janeiro Santos Dumont airports, and solidified its position in Belo Horizonte, one of Brazil’s largest cities.

With a strong network at home, Azul is on the verge of its next major step – expanding overseas. In December, the carrier will launch its inaugural US service with non-stop flights from Viracopos-Campinas International airport to Fort Lauderdale and Orlando with the A330s. In mid-2015 it will begin flights to New York John F Kennedy.

Azul has announced plans to lease six A330-200s and five Airbus A350-900s for its international operations. Neeleman tells Airline Business it recently agreed to purchase a seventh A330 from lessor BBAM.

Neeleman calls the move to go international a “natural evolution”. “The decision to fly internationally was a relatively simple one,” he says, pointing to the growing number of Brazilian tourists travelling to the USA and the substantial Brazilian immigration population in south Florida. “Over the past few years, the Brazilians single-handedly solved the Florida housing crisis,” says Neeleman.

US Department of Commerce data shows Brazilian tourists were the third-fastest growing group to visit the USA in 2013. In terms of tourist dollars Brazilians were in fourth place after China, South Africa and India, spending more than $5,400 each on average.

With Azul’s domestic feed at its hub at Viracopos-Campinas, it made sense to offer the airline’s passengers a convenient connection to the USA, says Neeleman. “We have 55 non-stop [domestic] destinations going into Campinas. More than half of those are cities where our main competitor TAM doesn’t fly to… It was natural with all the feed we have, combined with the Brazilians’ love for Florida and the US [to start the US flights].”

Previously, the airline’s customers travelling to the USA would have had to arrive at Viracopos-Campinas and then travel by ground to São Paulo Guarulhos to catch a flight to the USA on another carrier.

Azul’s international flights will offer a full-service product when the airline’s A330s are reconfigured. Neeleman explains that the aircraft the airline is leasing will be initially flown with the seats they came with, as the new seats Azul has ordered will not be ready in time for the peak travel season starting in December.

Azul will begin reconfiguring the A330s in March 2015, as travel demand slows down. “By the time we hit June [2015], we will have the fleet all done,” he says. The airline will offer lie-flat seats in business class, a premium economy product that features the Skycouches trademarked by Air New Zealand and a regular economy class.

The airline has no plans to charge for meals and other amenities, but Neeleman says its “significantly lower costs” compared to competitor TAM will allow Azul to price its fares competitively. Promotional economy round-trip fares for Azul’s Florida flights start from R1,500 ($618). “We are going to compete well, but obviously it’s all based on yield management, supply and demand,” Neeleman says.

Business travellers flying for both work and leisure are expected to form Azul’s clientele on its international flights. “We are a very heavily corporate airline today, 65% of our business is business traffic,” says Neeleman. The airline already has more than 2 million travellers enrolled in its frequent flyer programme, he points out.

Azul does not plan to stop at just three US cities for its international network. Neeleman expects to add a fourth city in 2015, although he is coy on where this might be. “We are going to fly to any cities where Brazilians want to go… [Brazilians] like Las Vegas, the [US] West Coast, Europe. We will start with these three cities and then make that decision at a later day.”

Flights to Europe will be a distinct possibility in 2017, when Azul receives the first of its A350-900s. Neeleman reckons that the airline could begin with some weekly charter flights to Europe.

He is less enthusiastic, however, about flying internationally within South America. “Other than Buenos Aires for a quick weekend trip, there isn’t a lot of interest [from Brazilians] in flying to other cities in South America,” says Neeleman. Fares are already relatively low on flights to the Argentinian capital, he notes. “There isn’t a screaming need for it.”

Regional Trailblazer

When Azul began operations in 2008, it quickly made a name for itself by operating to underserved markets in Brazil that TAM and Gol were not flying to. The carrier is now the only airline serving on 70% of its more than 200 routes, and is the most frequent airline on 10% of its routes. For example, Azul flies 94 times weekly between Viracopos-Campinas and Rio de Janeiro Santos Dumont – its most high frequency route. This is compared with Gol’s 37 weekly flights. 

Azul’s management believes its smaller aircraft, compared with its rivals’ narrowbody jets, have helped the airline achieve lower costs and better passenger revenue per available seat kilometre (PRASK).

“In 2012 we achieved an average load factor of 79% and generated a 55% PRASK premium relative to Gol,” the airline says in its filing with the US Securities and Exchange Commission (SEC) for an initial public offering in May 2013 that it eventually postponed.

Azul achieved an adjusted operating margin of 25.1% for the quarter ended 31 March 2013, compared with Gol’s 17.6%, it reported in the filing.

The airline is set to grow its regional network within Brazil even further, with plans by the government to boost regional aviation in the country. The nation has announced an investment of R1 billion to incentivise regional routes, which would involve subsidies given to carriers to launch regional flights. Congressional approval is still needed for the plan, but Neeleman is optimistic that the incentives will go ahead.

“[They will] primarily subsidise some of the fuel costs… In the lowest cost fuel cities in Brazil, it’s about 50% higher than in the US… This money helps to defray some of the extra fuel costs and will allow us to develop a lot more markets.”

“I’m a capitalist,” says Neeleman. “I don’t believe in subsidies, but it makes a lot of sense as the government passes this legislation. It gives us the opportunity to expand our regional network. We have a fabulous regional network, but it allows us to expand it even more. That’s what we are going to do.”

From serving more than 100 destinations currently, Neeleman believes the regional incentives offered by Brazil’s government could allow Azul to add another “30, 40 destinations”.

“We think the potential is huge,” he says.

With the regional incentives planned by the Brazilian government, it is hardly surprising that Azul’s competitors are trying to take a leaf out of Neeleman’s book. TAM, Gol and Avianca Brazil all say they are studying regional aircraft orders, with the re-engined Embraer E-Jet E2 emerging as the clear favourite among the airlines. None of the carriers have pulled the trigger yet, but that could well change in the coming months.

Neeleman, however, believes Azul still has the first mover advantage when it comes to leading in the regional market. “There’s plenty of money to go around if [Azul’s competitors] want to do that. It’s going to take them a while to get going. We are well positioned to seize and move quickly into those markets, it’s what we do everyday. For them to kind of start it up, it will take them at least a year to get going. We have a big head start.”

Azul’s fleet growth is in line with expanding its regional network. The airline’s 143 aircraft have an average age of just under five years, according to Flightglobal’s Ascend Fleets database. It has another 11 Embraer 195s and 16 ATR 72-600s on order.

No one batted an eyelid when Azul announced a letter of intent to acquire up to 50 E195-E2 jets at the Farnborough air show in July, making it the launch operator of the re-engined aircraft. The order consists of 30 firm orders and 20 options. Deliveries to Azul are expected to begin in 2019.

The airline plans to use the new aircraft for both replacement and growth, says Neeleman. “By the time we get them in late 2019, early 2020, we will have some E195s coming off lease.” Azul is seeking to replace the smaller E190s first, followed by the E195s, and it will have “some room to grow with the options we have”.

By the end of 2020, Azul could operate a fleet of as large as 200 aircraft, says Neeleman. He is not ruling out adding more widebodies. In particular, the airline is interested in the Airbus A330neo, which was launched at Farnborough. Neeleman says Azul does not “really need the range” that the A350 has.

The airline picked the A350 over the Boeing 787, he says, because the 787-8 was not big enough and the 787-9 was not available to the airline. “[ILFC] had [the A350s] available at an attractive price, the economics really worked for us.”

Starting Big

With its international expansion and strong network back home, Azul has attracted strong interest from foreign airlines eager to get a slice of the revenue pie in Brazil. It has signed interline agreements with United Airlines, Lufthansa, Copa Airlines and Air France, among others.

With the planned flights to Fort Lauderdale and Orlando – both focus cities in JetBlue’s network – it is natural to ask Neeleman if Azul plans to partner the New York-based carrier he founded. Such a deal will “make a lot of sense”, he acknowledges. “That’s not the primary focus for us. [But] once we get flying, we will be able to set something up with them.”

On a broader scale, Neeleman is not against joining an airline alliance one day. “It’s not something we will rule out,” he says. But regardless of whether it does so or not, Neeleman makes it clear that Azul plans to grow unimpeded.

Asked to compare his experiences starting JetBlue and Azul, he says: “The opportunity in Brazil is much bigger. The challenges are big in Brazil. JetBlue has 5% of the US market. Azul, in terms of revenue, has 25% of Brazil already. That number is going to increase with our international flights.”

If anything, his time at JetBlue has taught him one thing: begin small, but think big. Referring to JetBlue’s past operational challenges, Neeleman says: “We started as a much smaller airline and had to grow into the systems. It’s hard to replace them as you get big.” Neeleman stepped down from the chief executive position at JetBlue in May 2007, months after the carrier’s network collapsed during a severe storm. The crisis was a public relations disaster for JetBlue, and cost the carrier $30 million.

Neeleman has lived and learned. “We started systems at Azul knowing we would be an airline with 200, 300 airplanes. That was one of the big lessons we learnt at Azul, to start big.”

(Reproduced from Airline Business with kind permission from our data partner Flightglobal)

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