Azul goes regional – nation-wide!

Azul’s order for 20+20 ATR-72-600’s at Farnborough caught a lot of people by surprise – in a way, even yours truly! Aside from entering a market which is somewhat ‘abandoned’ in Brazil – regional aviation has been ‘dormant’ for a while and it wasn’t until recently that airlines woke up to realize the full potential this segment has –, Azul is on the right path to build the most comprehensive and extensive domestic network of any carrier in Brazil.

The ATR’s will offer Azul a distinctive advantage over its competitors, most notably Gol and TAM – though Trip ought to be scarred too, because our “blue friends” only plays for keeps: not only will Azul stamp its foot in the regional market, which so far has been pretty much up for grabs. Ok, that’s not entirely true: the regional market is pretty much Trip’s territory (if you look at the national coverage; there are other local regional carriers, but their market share is very small) and they have been doing whatever they feel like as they are/were the sole player. But, back to the point at hand: Azul will have the perfect aircraft with which to serve smaller markets and feed them directly into their hubs. Note that I’ve written hubs, not single hub. That’s because Azul will have the opportunity to create regional mini-hubs, a concept still more or less unexplored in Brazil. And there are plenty of mini-hub options for Azul to choose from: imagine if you can, creating small, regional hubs in Porto Alegre (Rio Grande do Sul state catchment area); Curitiba (Paraná state catchment area); Salvador (Bahia state catchment area); Brasília or Goiânia (the latter holds more potential as the airport is not quite as clogged); and especially the state of São Paulo which has plenty of potential and has a scattered, virtually ‘unconnected network’ (meaning its basically cut of from the main hubs in CGH, GRU and even VCP – there are exceptions, obviously). And there are many, many more potential regional hubs, I just listed a couple.

If (or should I say when?) Azul manages to create this proposed regional mini-hub system, the airline will be stimulating local traffic and thereby creating even more business opportunities. There is plenty of potential and one has to wonder why neither Gol nor TAM ever saw this potential? Regional code-shares are good and all – they are also the “safe” way of serving regional markets without generating additional costs – , but what Azul is doing seems to be a much more sound strategy.

So far so good, but it doesn’t stop there. If the creation of regional mini-hubs is indeed Azul’s strategy, they might have found the key to securing their long-term future. Here’s why:

1) Azul will push local traffic and create regional mini-hubs (meaning new business!);
2) Azul can stimulate new local traffic through its regional mini-hubs using their now widely accepted “Brazil's new middle class strategy": the combo “ease-of-acquisition” + segmented marketing + sporadic, specific pricing actions”.;
3) Use the “new regional business” to feed its mainline network.

Aside from the “commercial side of it”, the ATR’s Azul will use also offer an advantage other carriers simply don’t have: this particular airplane, designed to carry 70 passengers, can operate in and out of small airports, with short runways and reduced infrastructure (airports which Gol and TAM can’t serve because they simply don’t have the right airplane to do so – neither commercially, nor operation-wise). More than that, as it’s a designated “regional” turbo-prop, the ATR-72-600 is ideal for short and medium routes as its CASK simply can’t be matched by that of any jet of its size.

Everything fits like a glove. With everything we just covered above, Azul definitely looks set to take on the “big guys” Gol and TAM and give them a good run for their money, especially because one needs to remember that aside from expanding its network, Azul is set to introduce a hot new entertainment system by year’s end – something only Avianca Brazil could in theory match with their new A319’s; and so far they only have three – which will certainly ‘up the game’ by a notch. Furthermore, don’t forget that Trip, the carrier with the most number of destinations in Brazil, and so far the only regional carrier with national coverage, is reigning supreme only because it is alone and has no ‘real competition’. This is about to change.

Last but not least I do have one thing which has been bugging me. One needs to remember that Brazil has a huge airport infra-structure problem – all main airports are fully clogged – and the logical outcome of Azul’s discussed ‘regional hub’ strategy is that some traffic will flow into its mainline network. Or that’s the way it should be. But if there are no more slots available and your biggest jet serving the mainline network is the Embraer 195 with seating capacity for 118 passengers (and your average SLF is around 85%), you definitely risk loosing your ‘regional passengers’ to the competition. The only logical solution to this equation would, in my personal view, be the acquisition of new, larger airplanes (Airbus A320 family or Boeing 737NG family) which would take over the main trunk routes from the Embraer E-Jets (and thus also freeing them up to explore and open new markets). Knowing Azul you can only wonder: they’re certainly perfectly aware of what we just covered here and the big question becomes: do they have an ace up their sleeve (which nobody knows about)?

Finally, I almost forgot this: in my analysis I was only looking at Azul’s prospects in Brazil, but, as the airline itself already publicly stated, it intends to serve South America in a couple of years – the first charter flights to Buenos Aires and Bariloche in Argentina already took place this month (July 2010). It won’t be long before Azul’s reach goes beyond Brazil. Imagine what they could do in South America if they continue to pursue the same strategy they have in Brazil in the rest of South America…

Farnborough 2010: More E-Jets for Azul and Trip

Farnborough has just started. And it didn’t take long before orders were announced. Among the airlines announcing new orders were two Brazilian carriers: Azul and Trip.

Neeleman’s Azul confirmed a deal for an additional five Embraer 195 jets to be delivered later this year. According to Embraer, the order had already been placed in the second quarter and is, at list prices, valued at USD 211 million. Mind you this is an entirely new order which has nothing to do with the original one placed back in 2008. With this new order, Azul’s total backlog with Embraer now stands at forty one firm orders, twenty options and twenty purchase rights (total 81).

Meanwhile regional carrier Trip has converted two options (out of ten) of its original order dating back to June 2008 and ordered two Embraer 190. At list price converted order is valued at USD 80 million. The airline currently operates five Embraer 175 and still has eight outstanding options with purchase right for another fifteen E-Jets.

This was just day 1 at Farnborough… Tomorrow will certainly prove to be interesting – bear in mind that we it’s very likely we’ll be seeing more from news Azul.

Where there's smoke...

...there must be fire. Last friday "official" rumors emerged claiming that Brazil's hot new kid on the block Azul Linhas Aéreas (David Neeleman's Brazilian version of JetBlue) was to announce the acquisition of ATR turboprops.

The reports (after all it was printed in respected local newspapers like "Estado de São Paulo" and "Valor Econômico") stated that it was the carriers intention to add ATR "70-seaters" to its fleet. Mind you there isn't any official PR from either Azul nor ATR, but with Farnborough kicking in this week, you can certainly expect some news...

If (or should I say "when"...) these "official rumors" are confirmed, you can bet that Azul will give Trip, who so far has been all alone reining supreme in the regional market in Brazil, a good run for their money.

The Secret Key to Success - A look into Brazil Airlines' growth strategy

This is my first piece... I actually wrote this back in May for the magazine of the Brazilian SWISS Chamber of Commerce. There's actually much more to this subject and I could go on for quite a while, but for starters, I think this will have to do.

The Secret Key to Success - A look into Brazilian airlines' growth strategy

According to the International Air Transport Association (IATA), Latin America was the only region worldwide with a profitable outcome in the air transport sector in 2009 and the region is supposed to grow even stronger in 2010. Brazil in particular deserves a special attention. In a year where most airlines were announcing capacity cuts and incurring losses, Brazilian airlines were in fact growing: according to the Agência Nacional de Aviação Civil (ANAC), year-over-year capacity grew by 11% and the actual passenger number grew by 12%.

It is a known fact that Brazil has been more resilient to the global economic downturn than most, however one needs to have a closer look at the work being performed by Brazilian airlines in order to fully grasp why airlines such as TAM Linhas Aéreas and Gol Linhas Aéreas have succeeded, opposed to many legacy carriers (and even some low-cost carriers) worldwide, to close the “Annus Horribilis” on a positive note, with more passengers on a year-over-year comparison and a profit.

In a year where yields slumped, airlines all over the world, including in Brazil, were forced to take drastic measures in order to secure revenue and prevent further losses. Such measures included, among others, a stricter cost control; capacity trimming; fleet harmonization; seamless network planning; fuel hedging; more specific, target-oriented marketing actions and more volume-oriented sales actions. Nevertheless, such measures would have had little effect if the overall revenue kept on falling. Furthermore, airlines such as Gol, TAM and newcomers Azul Linhas Aéreas faced a very distinct and tough challenge in trimming capacity. These airlines have a considerable backlog of airplane orders at Airbus, Boeing and Embraer, respectively, and several deliveries planned for the coming years. Postponing deliveries was therefore not an option given the quantity of airplane orders and the severe cancellation/postponement penalties imposed by airframe constructors and leasing companies. Airplanes would have kept on coming regardless of the market situation.

In the face of rising (idle) capacity airlines were forced to think of alternative ways of securing additional revenue. The answer came in the form of Brazil’s “new middle class” which emerged in the wake of the country’s recent economical development. Brazilian Airlines had suddenly found a way of “creating demand” where there was none.

Gol forecasts that “Brazil has a potential market of more than 100 million people with sufficient disposable income to travel by air”. According to a study prepared by the Instituto Brasileiro de Geografia e Estatística (IBGE) and Fundação Getúlio Vargas (FGV), Brazil’s middle-class increased from around 70 million people in 2003 to more than 100 million people in 2008. Additionally, there has been major shift from the “E” to the “D” and “C” middle classes, in effect creating Brazil’s “new middle class”. The latest figures indicate that nowadays only around 16 million people actually fly, making Brazil one of the highest potential growth markets in the world for the airline industry.

Stimulating demand in Brazil’s new middle class has become a priority for all Brazilian carriers and the work being carried out is based on the following principles: offering competitive fares, comparable to those offered by interstate bus companies (as long as booked in advance); payment in long-term monthly installments (Azul, Gol and TAM go as far as offering 60 monthly installments); and, a specific, directed marketing strategy based on specific channels with segmented ads in publications and media outlets in regions and neighborhoods with high density of middle class. Webjet Linhas Aéreas for instance, has pursued a marketing strategy to advertise promotional fares on intercity buses, while TAM has partnered up with the countries largest Bank, Banco do Brasil, to sell tickets at governmental lottery houses. Gol on the other hand has taken a more “hands-on” approach and inaugurated a “VoeFácil” store, specifically created to tend this “new public”, strategically located in the Largo 13 de Maio region, one of São Paulo’s main middle-class commercial centers.

In the form of Brazil’s “new middle class”, domestic airlines might have found the key to their success. More importantly, they found the key to unlock its full potential: offer ease of acquisition, not only pricing (low fares). Airlines have discovered that through initiatives such as combining ease of payment, targeted marketing and guidance for first-time flyers, they can win more passengers, generate more revenue and, more importantly, more quality, high-yield revenue. The strategy seems to be working because TAM, Gol and Azul are predicting a healthy growth for the current year while at the same time reporting yield increases.

Hello & Welcome!!!

Well, it's about time... This is something I've been wanting to do for quite a while now and today I finally took the time to create my very own blog. From now on I will try to use this place to share news, rumors, my comments and views on what's happening in the civil aviation world, especially in Brazil.

Who am I? I work for a respected global network carrier in São Paulo's city office as a business/sales analyst. On my free time I am either at the airport spotting airplanes or else I'm lost in Twitter looking at the latest news, gossips, tech trends, etc.

I do hope you enjoy this blog and I invite you to interact with me and share your views and opinions!

Happy Landings,

Marcelo

PS: I almost forgot, I also keep a small website running where I share some photos from my spotting sessions. You can find it here under www.saospotting.com.