Brazil’s Azul maintains a steep growth trajectory

 - December 28, 2010, 10:03 AM
Azul Linhas Aereos, Brazil’s newest discount airline, registered a 79.71-percent load factor and carried 2.2 million passengers last year, its first full year of operation, and the fledgling carrier expects to turn a profit this year.

The airline’s founder and chairman, David Neeleman, has been involved in the start-up of four airlines, most notably New York-based JetBlue. And while he has been fired on one occasion and forced out on another, Neeleman claims to have learned from the experience.

With $200 million in start-up capital, and that wealth of experience in the school of hard knocks, the 50-year-old aviation entrepreneur launched Azul in December 2008. According to Neeleman, Azul is the first airline in the world to carry more than two million passengers in its first year.

From its main base in the town of Campinas, about 60 miles north of Brazil’s major business center of São Paulo, Azul launched operations with three Embraer E195s and two E190s. The carrier now operates a fleet of 26 airplanes and expects to have more than 40 by the end of this year.

Institutional relations director Adelberto Febeliano declined to disclose a break-even load factor estimate, but noted that the load factor last year averaged better than 80 percent, the best of any national airline, according to the Brazilian civil aviation authority (Agência Nacional de Aviação Civil, or ANAC). The load factor for the first nine months averaged 85.6 percent, well above that of competitors Gol (66.8 percent) and Tam (66.2 percent).

Azul has, by choice, avoided the major airline hubs and connection centers in São Paulo and Rio de Janeiro, choosing to focus on cities less well served by established airlines. The airline currently serves 28 destinations in Brazil and expects to add to that total throughout 2011.

“We have a nice arrangement at Viracopos-Campinas International Airport [in Campinas], where there is still growth capacity and where Infraero continues to invest,” said Febeliano. [Infraero is a government corporation charged with operation of the country’s major airports.–Ed.]

Tapping Into A Non-flying Market
While Campinas is a little more than an hour’s drive from São Paulo, Azul softens the ride by providing free bus transportation for some 3,000 of its passengers daily from Brazil’s business capital and other cities it serves.

Febeliano said he believes the Brazilian air transportation market should be four times larger than it is today. “Many Brazilians are not yet accustomed to flying, and that will change as they learn the value of air travel, and that it is safe,” he explained.

To tap into a large percentage of the population that has never flown, Azul has created a pricing structure designed to make air travel more attractive to a larger segment of the population.

The great majority of Brazilians travel by long-distance bus, prompting Azul to offer competitive pricing for non-connecting flights. The airline also allows customers to purchase tickets in advance through a monthly payment plan.

For a limited time last year, the airline even trotted out the old JetBlue “all-you-can-travel” promotion, ­offering passes that allowed purchasers to travel on as many Azul flights as they wanted for a one-month period for $283. Azul sold 6,000 passes, even with restrictions barring travel on Fridays and Sundays. Neeleman said 80 percent of the purchasers on those passes had never flown on the airline before.

The promotion generated nearly $17 million in revenue, and, more important, said Febeliano, it generated a lot of new customers for Azul. “Our fares are lower, but we make this up in volume.”

Azul continues to use this promotion in select markets. During the first month of operations in Brasilia, the capital of Brazil and a major hub for other Brazilian airlines, Azul offered the “all-you-can-travel” promotion for flights departing the city.

As a further enticement, Azul has signed a contract with entertainment provider LiveTV and will equip its Embraer fleet with live television via satellite. Febeliano said the airline expects to have the equipment in seat backs of the entire fleet by March 2011.
Febeliano believes the initial choice of aircraft from Brazilian manufacturer Embraer was the right one. “[The E-Jets] are the most efficient in their class, and demand for air travel between our city pairs matches the seating capacity of our airplanes–106 and 118 passengers.” And they are reliable. According to ANAC figures, Azul was the “most punctual” airline in the country in 2009 and 2010.
Other airlines, he explains, rely too much on larger aircraft. The average airliner in Brazil carries 150 seats, while the average in the U.S. and other countries is closer to 100 seats.

Febeliano credits much of the on-time success to the fact that the entire fleet is made up of Embraer jets, for which Portuguese carrier TAP maintains a maintenance and service center on behalf of Embraer at Porto Alegre Salgado Filho International Airport near São Paulo. “And if we need anything special, there is the Embraer factory maintenance and service center at Gavião Peixoto, also not far from São Paulo.”

Looking to Smaller Airports
Nevertheless, looking to expand further into still smaller airports with shorter runways, Azul made a deal earlier this year with Franco-Italian aircraft manufacturer ATR for 40 ATR 72-600s, of which 20 are on firm order and 20 on option.

The acquisition, said Neeleman, “will enable Azul to serve even more cities in the vast Brazilian territory, linking smaller communities with major cities with seamless connectivity between our jets and the new ATRs.”

The turboprop twins will be configured for Azul to carry 70 passengers at 31-inch seat pitch. Thirty-seven ATRs now fly in service with competing airlines in Brazil. Deliveries of ATR 72s to Azul begin this year.

Febeliano notes that the Brazilian economy is thriving and the per-capita income is growing, as is the middle class. “We don’t see a lot of obstacles to growth in coming years.”

Nevertheless, Azul faces stiff competition. Established carriers Gol Linhas Aéreas Intelligentes and Tam together hold 87 percent of the domestic market and likely won’t give up that position without a fight.

Perhaps offering tougher competition in the near term is Trip Linhas Aéreas, which began scheduled passenger service in 2008 after a merger with Total Taxi Aéreas. The Belo Horizonte-based carrier flies six Embraer E175s configured for 86 passengers and it ordered two E190s at the Farnborough airshow this summer.

Meanwhile, Azul’s more immediate goal centers on overtaking its nearest competitor, WebJet Linhas Aereas. According to Febeliano, WebJet holds a slight market advantage with a 6.21-percent share, compared with Azul’s 5.57 percent. “But WebJet did not put any new aircraft into service this year, while we expect 26 airplanes as of January 1 and expect to have 40 by the end of this year,” said Febeliano. “We think we will overtake them before 2011. We have the right airplanes, the right routes and the right pricing structure,” he concluded.