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


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De: http://crankyflier.com/2014/12/04/across-the-aisle-from-david-neeleman-on-why-azuls-new-service-to-the-us-is-going-to-work-part-1/

 

Across the Aisle From David Neeleman on Why Azul’s New Service to the US is Going to Work (Part 1)
By CF on Dec 4, 2014 |

Way back in 2010, I spoke with JetBlue and Azul founder David Neeleman (Part 1, Part 2, Part 3). As he 2014_12_04-azulacrosstheaisle-256x300.jpdoes 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.

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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.

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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.

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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?”

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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.

 

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Across the Aisle from David Neeleman on Azul’s Skycouches, US Partner Opportunities, and More (Part 2)

By CF on Dec 8, 2014 | 12 Comments

In part 1 of my discussion with Azul’s David Neeleman, I had him focus on why this was going to work when the odds seemed stacked against the airline. In this part, we dive into the airline’s product, partnering, and aircraft decisions.

The A330s that are flying today do not look like the airline wants. Starting next year, they’ll go in for a complete redo on the inside. What comes out will include flat beds and Skycouches in coach(from Air New Zealand but better because it has 4 seats instead of 3). Let’s dive back in.

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Cranky: Can you talk about the multi-cabin product decision? How did you arrive at that?

David: It was a tough fight. It’s all around geometry; it’s real estate. A business class lay flat seat takes up 2.5 times a coach seat. Do the math. What’s my average coach [fare] versus my average business class? We had one faction in the company that was pushing lower density with more lay flat seats. But in order to do that you have to be confident you can sell that for $5,000 roundtrip. Another faction said, we get $1,000 [coach] fares, we can sell as many as we need to. So we kind of compromised. It may not seem the like best from a commonality point of view. We have 7 A330s and some will have 274 seats with 24 lay flat business class seats. Then the two planes that are going to New York will have 35 lay flat business class seats and a total of 246 seats. We’re just trying to cater to the market.

Cranky: Sounds like an expensive way to do it.

David: Not really. The planes are really reliable. The other thing we have on the high density airplane, we have 17 Skycouches so you pick 4 seats together and it folds up and makes a bed. So if ever we got into a challenge where we were full in business to New York and we had to go with a high density airplane, we’d have 40 extra seats that we could give to everyone.

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Cranky: Where does this go? How big is this opportunity in the US?

David: I think there’s a lot of West Coast demand. We have the range to do that, be it LA or Las Vegas or in that area. There’s also big demand for Europe. I think the thing I really like the best is we got these A330s for a great price. Even with the reconfiguration that we start in March and have them brand new on the inside, the cost is about the same as [an Embraer 190] costs us. So they’re very inexpensive. So when the A350s come on in 2017, those are higher capital costs, lower operating costs, and have 60 more seats. Those babies will fly like crazy. They’ll go back and forth to Florida and New York. Then the others, we’ll be able to explore… Caribbean, Cancun, West Coast, Europe. We don’t have to do daily service. We’ll just play with them. Even if we sat them on the ground and did nothing, it wouldn’t really affect us from a total cost point of view in a company that’s doing $4 billion in sales.

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Cranky: How much of your plan relies on feed from the US side?

David: Well… feed on the US side, we don’t really need it right now. We’re full and it’s doing great. It’s always nice to have feed. United is talking to us. A lot of airlines need feed in Brazil, especially the Star [Alliance] guys. Obviously a logical one would be JetBlue. We’ll have those conversations as time goes on. We have a lot to get done. We did all this in 9 months, so we put it together quickly. It wasn’t timed to go get feed arrangements because we didn’t really need it. We’ll get some on [the US] side, but it’ll just be frosting on our cake.

Cranky: Are you open to codesharing and alliances?

David: Yeah, sure. As long as it makes sense for us. It’s not going to be a big expense. We’re not going to change reservation systems to do it or anything like that.

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Cranky: Tell me a little bit about the A320s you’ve got coming in here. Your niche has been a lot of connecting cities that didn’t have service, as you’ve talked about. Taking people off buses. The A320 has a lot more seats, and it’s a lot more expensive airplane. I assume this is for connecting bigger cities to bigger cities, so how does that fit with the overall plan?

David: We took our route system today and we have 140 airplanes flying. Based on the economics of the neo — this is important because we talked about the fuel prices in Brazil — we just said, based on our operating costs today, if we just stuck a 320 on the route, which routes would do better with the bigger airplane? We did the math, particularly on the neo side, because the neo burns the same amount of fuel as the [Embraer] 195 does. So the trip cost on a 2.5 to 3 hour flight is about the same on a neo as it is on an [Embraer] 195.

Cranky: So this is more about upgauging the existing network as opposed to entering new bigger markets.

David: Yeah. So we have about 30 planes. The first 30 we get are just going to replace those and take the Embraers and put them in other cities. Take out the ATRs and put jets on those. Then take the ATRs and open up new cities. There are about 50 cities we could open up if we had the airplanes. It’s kind of like a trickle down. We’ll put the neos on the thickest routes and we need the seats for our frequent flier program. We need it for cargo, for our package division. We need it to be able to offer lower-priced seats. An Embraer is great for an hour, hour and a half, two hours. But when you start getting to 3 hours, it gets tougher to compete, especially to vacation destinations where people are price-sensitive. You gotta get such a high fare that it doesn’t make sense.

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Cranky: It’s not inconceivable that you’ll be the largest airline in Brazil in the not-too-distant future.

David: No, I think so. I think we have foundations built. Our competitors are talking about trying to get into the regional market, but the TRIP acquisition gave us like a 4-year head start. We had 3 years, and then it would take for someone to duplicate what we’re doing… it’s like having a Wal-Mart in a city. It just doesn’t make any sense to have another carrier in there. So we dominate all these cities. It’s really hard to shoot your way in especially when we have the connectivity already. From a revenue standpoint, we’re about 26 percent of the market today compared to 31 and 33 for Gol and TAM so we’re not that far away from that now even without adding the neos and the international stuff.

Cranky: I know you’re busy with all the festivities today, so I’ll let you go. Congrats on the launch of service here.

David: Super. Thanks Brett. Keep up the good work.

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[Read Part 1 – Across the Aisle From David Neeleman on Why Azul’s New Service to the US is Going to Work]

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Incrível reportagem e mostra a agilidade,ousadia e rapidez com que ele projeta a Azul e certamente crescerá muito,com grandes chances de ser a maior num período muito breve,caso tb siga crescendo no internacional, é claro

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O cara é um vendedor de primeira, muito diferente das entrevistas dos ceos da tam e da gol. O cara tem ânimo. Isso é um fato, gostem ou n dele.

 

 

Enviado do meu iPad usando o Tapatalk

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Tambem nao entendi... O cara so falou da visao dele para a empresa, em nenhum momento, so se o aucesso da azul decretar, para vc, o fim da profissao.

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Não sei se estou certo, mas o que provavelmente o "Secfacelac" quis dizer com o fim para os aeronautas é devido aos péssimos salários que o poderoso David Neelman paga aos seus funcionários, por isso o fim para os aeronautas, quem ficará na aviação serão os poucos que se sujeitarem à esses salarios

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Engraçado, toda vez que leio uma entrevista dele, tenho a sensação que ele entende mais desse negócio do que qualquer outra pessoa..

 

Além disso, parece que a Azul está anos luz a frente das outras em planejamento e estratégia, parece que sabem oq estão fazendo...

 

 

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Velha história, o olho do dono que engorda o gado.... Diferentemente das outras, nota-se claramente que existe alguém no comando... Assim como foi na TAM um dia. Acho inevitável mas gostaria que a Azul não se perdesse nesse mundo de conselhos administrativos, presidentes vindo de fora, etc....

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