Business Monday

Azul Airlines’ David Neeleman on the economy, Zika and the Olympics

David Neeleman, founder, chairman and CEO of Azul Brazilian Airlines, says economic and other challenges in Brazil have caused the airline to lower fares, defer expansion and reduce its fleet. But he predicts the storm may be subsiding soon.
David Neeleman, founder, chairman and CEO of Azul Brazilian Airlines, says economic and other challenges in Brazil have caused the airline to lower fares, defer expansion and reduce its fleet. But he predicts the storm may be subsiding soon. Azul Brazilian Airlines

Low-cost air travel has been a hallmark of David Neeleman’s career since he founded Utah-based Morris Air, Canadian airline Westjet, JetBlue, and now Azul Brazilian Airlines, his latest venture.

It is that affordable travel philosophy that is helping the São Paulo native lead his company through a Brazilian storm caused by a hemorrhaging economy, political unrest and Zika-induced health crisis. Throw in the Summer Olympics in Rio de Janeiro, and Neeleman has a full plate to contend with.

Before the economic downturn in early 2015, Azul was one of the most profitable airlines in the world, Neeleman said. Founded in 2008, the airline offers affordable service to underserved markets in Brazil. It expanded internationally in late 2014 with flights to Fort Lauderdale and Orlando. Now it flies to more than 100 destinations in Brazil, the United States, Portugal, Uruguay and French Guiana.

Recent challenges in its chief market have put off some growth opportunities for the fledgling company and forced the low-cost carrier to keep ticket prices even lower.

According to statistics released last month by the Brazilian Association of Airlines, which includes Azul, the numbers of passengers who traveled domestically fell by 9.9 percent in May over the same month last year. International trips dropped by 4.9 percent in May year-over-year.

750,000 Number of Brazilian visitors to Miami in 2015, the most of any country

But Neeleman predicts the storm may be subsiding soon.

If travel to Miami is any indication, Brazil is staying afloat. The South American country remains the top international market for travel to South Florida, with nearly 750,000 Brazilian visitors in 2015, according to data compiled by the Greater Miami Convention & Visitors Bureau.

We spoke to Neeleman while he was in Lisbon with Azul’s partner, TAP Air Portugal, on the challenges for a Brazilian airline in a time of turmoil, how the Olympics may or may not be offsetting the difficulties and the strength of travel between Brazil and South Florida.

Q. Travel in and to Brazil has faced serious challenges in recent months. Where are those challenges most felt from the point of view of an airline?

A. Brazil’s airlines, including Azul, have faced two significant challenges. First, after a decade of strong economic growth, which resulted in an emerging middle class with real disposable income, the country has suffered two years of negative GDP growth. The result has been a reduced demand for airline seats. The more significant impact has been the widely fluctuating value of the Brazilian real [Brazilian currency], which lost over half its value in a very short period of time. The problem for Brazilian airlines is that we earn our revenue in Brazilian reals, while nearly 50 percent of our costs, notably fuel and aircraft-related costs, are denominated in dollars.

Pre-downturn, Azul was one of the most profitable airlines in the world. The economic crisis made us react and adapt. We tightened our belts, raised new capital, deferred new U.S. route launches and reduced capacity by moving 17 aircrafts to our sister company, TAP. The result was that both companies benefited. Azul adjusted to the new economic reality. TAP obtained sistership aircrafts at favorable prices to replace its aging regional fleet and launched new daily service from Boston on June 11 and from New York/JFK on July 1 — with fares to 45 European cities as low as $799 round-trip with the option of a Lisbon and/or Porto stopover, for up to three days, at no cost. TAP also flies daily nonstop from Miami International Airport to Lisbon.

I would rather fly full planes at half the price than half empty planes at double the price. Why? Because we know once people fly our product, they will come back and fly us again.

David Neeleman, founder, chairman & CEO of Azul Brazilian Airlines

The good news is that economists are now forecasting positive GDP for the Brazilian economy in the fourth quarter of 2016. More importantly, the value of the real/dollar exchange rate has recovered from more than 4 reals per dollar to 3.25 reals per dollar. I’ll let you do the math. For every 1 cent improvement in the exchange rate, Azul’s annual EBIT [earnings before interest and tax] improves by approximately $10 million. Needless to say, in the past few months we are starting to see real improvements both in terms of Azul’s revenue as well as improvements in our cost base.

Q. Political unrest, economic instability and Zika invade the headlines about Brazil. Which of these is the greatest deterrent to travel? What concerns are you hearing from your customers?

A. For the reasons I have already discussed, the first two factors have had a significant impact. For Azul, Zika has had no noticeable impact on our demand. We have noticed no impact on our domestic demand, and since most of our international travelers are Brazilians traveling abroad, the impact on our international routes has been negligible. On the other hand, the Zika scare has had a noticeable impact on Azul’s partner, TAP Air Portugal. TAP serves 10 destinations in Brazil and is the largest carrier flying between Brazil and Europe. Fear of Zika substantially impacted European-originating demand to Brazil, particularly to cities in the Northeast.

There is good news here as well. It appears that this fear is now subsiding. TAP’s summer bookings to and from Brazil are very strong from the European point of sale as well as from Brazil.

Q. What is Azul doing to address those concerns and ease reservations about traveling to Brazil?

A. The two destinations we serve in the U.S., Fort Lauderdale and Orlando, are primarily destinations. Over 85 percent of our passengers are Brazilian.

For U.S. travelers, flying to Brazil can be a hassle because Brazil requires U.S. citizens to obtain a visa. It does so because the U.S. requires [a visa] of Brazilians traveling to the U.S. We have lobbied hard and have been successful in getting the Brazilian government to waive this during the Olympic Games. We are pushing for them to extend this visa waiver to encourage U.S. travel to Brazil.

Q. How do the Olympics play in? Have the upcoming Games helped grow interest or have bookings been below projections?

A. The Olympics are a short-term phenomenon. Overall, they’re probably a net negative from an airline’s perspective because business travel slows substantially and many people avoid travel because they perceive it will be a hassle.

[The Olympics] a net negative from an airline’s perspective because business travel slows substantially and many people avoid travel because they perceive it will be a hassle.

David Neeleman, founder, chairman & CEO of Azul Brazilian Airlines

On the other hand, we like to see the world spotlight on Brazil so that people can see how wonderful the country is and will want to visit. The Olympics will go on and they will be a success.

Q. How would you compare interest in traveling to and around Brazil this year for the Olympics against interest during the FIFA World Cup in 2014?

A. Similar: from an airline’s perspective, a net negative during the Games themselves. Many expected the World Cup to be a disaster, and it ended up being hugely successful despite the disappointing performance of the Brazilian team. Brazilians have an uncanny ability to rally and get things done. Brazil in general and Rio de Janeiro specifically will rise to the occasion and host a successful Olympics. Those that come to visit will see Brazil for what it really is: a country with incomparable beauty and amazingly hospitable people that love to compete and know how to throw a party.

Q. Brazil remains a top market for South Florida despite the difficulties. Why do you think the region has remained insulated? Can it last?

A. Because we have adjusted to weaker demand by lowering fares. Brazilians love South Florida, and we want them to continue traveling despite the reduced purchasing power of their currency. Brazilians are very price-sensitive. When the real price of traveling to Florida doubled, the natural demand declined. We responded by substantially reducing our prices so that people would continue to travel. The result is our load factors to South Florida have remained strong. Azul has a great cost structure so we have always been a price leader. I would rather fly full planes at half the price than half empty planes at double the price. Why? Because we know once people fly our product, they will come back and fly us again. Keeping our planes full is an investment.

Q. What has Azul done to continue growing despite the hardships?

A. In response to the crisis, we moved quickly and decisively to reduce capacity. Our long-term perspective was always to grow. We have a substantial order of A320/A321 Neos on order — the first of which will enter service in the fourth quarter of this year. These aircrafts are so much more efficient than the current generation aircraft, that we know it will allow us to grow the market by lowering prices. More importantly, we believe in Brazil and are confident that real economic growth will return and, with it, resurgent demand for our product. When it does, we will be ready.

We believe in Brazil and are confident that real economic growth will return and, with it, resurgent demand for our product. When it does, we will be ready.

David Neeleman, founder, chairman & CEO of Azul Brazilian Airlines

Q. Does the airline foresee more routes between the U.S. and Brazil? Is a Miami route a possibility?

A. Yes. We had planned on flying to New York before the downturn began and we’ll look at that again when market conditions allow. We have new generation A350s on order and we see lots of opportunities to deploy them as well as our A330 fleet in the U.S. market.

As for Miami, I have learned never to say never. On the other hand, Fort Lauderdale has worked very well for us. The enplanement cost [cost airlines pay to the airport per enplaned passenger] per passenger is substantially lower than Miami’s and there is a large Brazilian population in the Broward County area. With a new international terminal under construction, we see lots of opportunity to add capacity at Fort Lauderdale-Hollywood International Airport before we need to begin serving other South Florida markets.

David Neeleman

Job title: Founder, chairman & CEO of Azul Brazilian Airlines

Age: 56

Experience: Founded several airlines, including Morris Air, Westjet, JetBlue, and Azul Brazilian Airlines. Neeleman is an investor in TAP Portugal airlines, developed the first e-tickets and founded transatlantic airline Open Skies.

Personal: Born in São Paulo to a family of Dutch and North American descent, living in Brazil until he was 5. He now lives in New Canaan, Connecticut. Father of 10.

About Azul: Azul serves more than 100 destinations with an operating fleet of more than 140 aircrafts, including Brazilian-built Embraer E-190 and E-195 jets, and ATR-72s. Just as JetBlue in the U.S. before it, Azul is the first airline in Latin America to offer LiveTV inflight TV programming via satellite. It has been named the Best Low Cost Airline in South America for the past five years at the Skytrax World Airline Awards.

Website: voeazul.br/en/home

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