Azul on course to be profitable next year: Neeleman

Washington DC
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Azul founder and chairman David Neeleman expects the Brazilian low-cost carrier will start turning profits next year as it starts achieving economies of scale with a larger fleet and network.

Neeleman says in July the carrier was "close to break, even only with 12 airplanes and no economies of scale". Explaining that Azul's unit costs will steadily decrease as the carrier expands its fleet and economies of scale are achieved, he says the airline stands to make "lots of money" next July assuming unit revenues are maintained.

Azul now operates seven 106-seat Embraer E-190s and five 118-seat Embraer E-195s with two more aircraft scheduled to be delivered by year-end. Neeleman says the carrier will add seven E-190/195s next year and 12 more in 2011. The last seven aircraft from Azul's 36-aircraft order are now scheduled to be delivered in 2012.

Neeleman says 10 of Azul's 12 current aircraft are from its order. The other two are leased E-190s that were previously operated by JetBlue Airways, which Neeleman founded and served as CEO prior to establishing Azul last year.

He says Azul will continue to take a mix of E-190s and E-195s but more E-195s than E-190s. The carrier initially placed an order in 2008 for 36 E-195s and converted six of these orders to E-190s before launching in December. Neeleman says its order gives Azul the flexibility to freely switch between the two types.

Azul now serves 13 destinations from its Campinas hub, an underserved alternative airport outside Sao Paulo. Neeleman says over the next year the carrier will focus on opening hub bypass routes that connect cities it already serves.

He says over half of its current routes have no competition and most of the routes it will launch over the next year currently have no non-stop service. "In Brazil there's a lot of market opportunities that aren't being served because there are not many smaller aircraft," Neeleman says.

While the carrier doesn't yet have the economies of scale to turn profits, Azul has been posting by far the highest load factors in the Brazilian domestic market.

According to traffic data from Brazil's ANAC through the first eight months of this year Azul averaged a load factor of 77%, beating the industry average by 10 percentage points. Gol, TAM and Webjet all had average load factors of about 64% through the first eight months.

In the last few months the load factor gap has been even more pronounced as Azul filled 85% of its seats in July and 79% in August. Neeleman says the carrier's load factor was again "over 80%" in September.

Azul's unusually high load factors have helped the carrier quickly capture 5% of the Brazilian domestic market, making it Brazil's third largest airline after TAM and Gol. It now has a larger share of the market than Oceanair, TRIP and Webjet although all three of these carriers currently have larger fleets.

"I think the load factors in Brazil are too low," Neeleman says when asked about Azul's higher load factors. "I don't think the Brazilian airlines have done a very good job in segmenting the market."

He says historically in Brazil there has been a relatively small price gap between the highest and lowest fares with relatively few restrictions even on the lowest fares. Azul has created new low and restricted fares for passengers booking 30 days in advance, aimed at passengers who had been travelling by bus.

"I believe the Brazilian market has been stimulated and is being stimulated," Neeleman said during an interview with ATI sister publication Airline Business Magazine. "I think we've created our own market."

He adds Azul has conducted research that shows 85% of its passengers represent new traffic rather than traffic that had been flying other carriers.

Brazilian-born Neeleman says he owns about 15% of Azul with the remainder owned by a mix of US and Brazilian investors. An initial public offering (IPO) is part of the long-term plan - just as it was at JetBlue - but Neeleman says there is no set timeframe.

"We'll probably do an IPO. We've got a good exit strategy for our investors," he says.