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

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 (from Air New Zealand but better because it has 4 seats instead of 3). Let’s dive back in.


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.


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.


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

David: Well… 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 . United is talking to us. A lot of airlines need 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 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.


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.


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.


[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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