JetBlue founder David Neeleman is taking his dirt-cheap airline model to South America. Will it fly?
David Neeleman is in a good mood. Fresh off a flight from S?o Paulo and gearing up for a round of TV interviews, Neeleman, 50, agrees to meet over lunch at a Cos? sandwich outlet in Greenwich, Conn., near his home in New Canaan. The lunch tab for two: $26—fitting for a man building his fourth discount airline and his first in an emerging market. Neeleman has a happy story to tell: Investment firm TPG has just bought a $30 million stake in his Brazilian airline Azul Linhas Aéreas Brasileiras, and Azul has set an industry record, carrying 2.2 million customers in its first year.
Azul's early success is all the more sweet for Neeleman given the bitterness he felt after his ouster from JetBlue Airways (JBLU). The company had captured consumers' imaginations, and Neeleman, hailed as the model of a passionate leader, could often be spotted passing out snacks on planes or helping passengers check in bags. JetBlue became such a phenomenon that its stock jumped 67%, to 45, on its first day of trading in April 2002. Then a Valentine's Day 2007 ice storm left thousands of passengers stranded and led to Neeleman's ouster by the board. "My reaction was shock and disbelief," says Neeleman. "I got sucker-punched." JetBlue, which declined to comment on the firing, hasn't enjoyed much of a rebound; its stock has since fallen by more than half, to about 5.
After dabbling with the idea of starting an ethanol company in California, Neeleman went to check out a Brazilian airline called BRA Transportes Aéreos as a favor to some investor friends. "It was the furthest thing from an airline I've ever seen," says Neeleman. "I thought, 'If these guys will invest $150 million in this, it must be worth looking around.' " (BRA suspended operations in late 2007.) Neeleman quickly raised $150 million to launch his own startup airline. Then, just as he was finalizing route plans and securing government clearance to fly, the global economy crashed. With his financing and plane orders locked in, he pushed ahead with his launch in December 2008. Remarkably, Azul—"blue" in Portuguese—is on track to make a profit in 2010. Neeleman, the chairman, owns about 15% and controls the voting shares.
Azul's long-term success will depend in part on how well Neeleman has learned from his mistakes. One challenge, says Vaughn Cordle, managing partner of Washington-based research firm AirlineForecasts, will be curbing his ambition. "The greatest threat is if they let Azul grow above a sustainable rate," says Cordle. "That's what happened at JetBlue." Neeleman acknowledges the Brazilian market's many challenges, from taxes to infrastructure, and insists he's keeping his expectations in check. But in the same breath he talks about the opportunity. He wants to revolutionize the Brazilian market by bringing air travel to the masses. And he wants redemption.
Brazil was a logical place for Neeleman to go. He spent his first five years there, the son of a reporter for United Press International who had first visited the country as a Mormon missionary. At 19, Neeleman returned to the country of his birth to do his own two-year missionary stint. In 1984 the college dropout helped create Morris Air, a Salt Lake City airline modeled on Southwest Airlines (LUV), which purchased Morris Air a decade later. Neeleman then helped launch Canada's WestJet and developed an airline reservation system called OpenSkies, now used by Ryanair (RYAAY) and a dozen other carriers, before starting JetBlue in 2000. He wasn't just the CEO of JetBlue—he was the creative force, an energetic father of nine children (now aged 10 to 28), proudly characterizing his attention deficit disorder as an asset he wouldn't trade for the world.
His time in Brazil left him with two distinct advantages: fluency in Portuguese and dual citizenship, which allowed him to get around Brazil's 20% cap on foreign ownership of airlines. Neeleman's instincts told him Brazil was ripe for a new aviation venture. Only a fraction of its 192 million people currently fly; per capita, Americans fly about eight times more, according to Airports Council International. "We're not even close to the level of air travel in mature economies," says Libano Miranda Barroso, CEO of Tam, Brazil's largest airline, with a 46% market share. "Even our projection for 2027 is equivalent to what the U.S. used to have in the 1970s."
Neeleman is determined to change that by creating a new market of fliers. His target is the 52% of Brazilian households that earn between 1,064 and 4,591 reais a month (about $594 to $2,565), making up Brazil's middle class. They are a fast-growing group that traditionally travels by bus. Many carriers have tried to tap this population, only to be thwarted by strained airports and high costs. As Renato Pascowitch, executive director of domestic Brazilian carrier OceanAir, puts it, fliers "often can't afford to take a taxi to the airport. So how do you get these passengers to board your plane, even if you are offering dirt-cheap tickets?"
Neeleman's reply: "We give them a free ride to the airport." Complementary transportation is all the more crucial because Azul, like Southwest and Ryanair, flies nonstop between secondary airports. Its main hub is Viracopos/Campinas International Airport in Campinas, an attractive and well-run city about 50 miles north of São Paulo. Campinas has about 2.6 million people, and some 30 million live within a 120-mile radius. Azul offers bus service from pickup points in seven cities, with about 50 bus trips a day.
But the real draw is the low fares. Tickets, if purchased in advance, run about the same as a bus trip. Traveling from São Paulo to Salvador by bus, for example, costs about $150 each way and takes 23 hours; on Azul, the lowest one-way fare is just over $100. Cristina Maisonnette of Rio de Janeiro had been planning to drive to Natal, a coastal town, before opting to fly. "I hope they survive," she says of Azul. "I want to be able to fly more often."
Azul offers online booking, automatic check-in, sleek plane interiors, and chatty flight attendants who carry baskets of snacks, telling customers to take as much as they want. Neeleman says Azul's reservations staff often take longer on the phone than at JetBlue because "they're explaining that there's a bathroom on board and a light above the seat."
Like JetBlue in its early days, Azul now has the benefit of a brand-new fleet of planes and a young staff, which means low maintenance costs and cheap labor. Profit margins could come under pressure as costs rise over time and as competitors come in with lower fares to steal business. Even before the ice storm, JetBlue's profitability had been eroding for those very reasons.
But these are long-term concerns; for now Neeleman is excited to be back in growth mode. He spends much of his week in Brazil, meeting with his staff and government officials. He also visits local businesses to talk about customer service and tours college campuses to "preach the gospel of Azul." Much of the time, he's on Azul flights, talking to passengers, showing first-timers how to unbuckle their seatbelts, and taking straw polls over the loudspeaker of how many folks are in the air for the first time. Neeleman has vivid memories of driving 12 hours in the back of a station wagon as a child to see his grandparents. "I always thought it would be so great if we could fly," he says. "For millions of people here, that's now possible."