Full Video: Azul Brazilian Airlines CEO at Skift Aviation Forum 2022
Azul Brazilian Airlines doesn’t expect any ultra-low cost carriers to enter Brazil any time soon. The low cost carrier has 165 aircraft that fly to 170 destinations in Brazil and will flies just under 1000 flights a day next month.
Azul Brazilian Airlines CEO John Rodgerson said the unique attributes of Brazil will deter the entry of ultra low-cost carriers, discussed why only domestic airline consolidations make sense in Latin America, and detailed the returns on the carrier’s aircraft choices and post-pandemic recovery efforts, and more.
Watch this on-stage conversation between Rodgerson and WestJet Aviation Advisor and board member Alex Cruz about what it takes for a low-cost carrier to survive in Brazil’s aviation market. The full transcript is below.
Alex Cruz: All right. Well, good morning, everyone. We got a problem. Problem is lunch is next, so we really need to keep everyone super entertained.
As I was preparing to speak with you today, I thought that about nine years ago in a conference very similar to this one with a number of CEOs and industry experts, we went through a process of about one hour where the question was what is the best airline that we could build today together? And through a series of questions and surveys, we built one. And the answer was a low-cost carrier in South America that would have co-chairs and interlines and relationships with others. Here we are.
John Rodgerson: That’s it. We built it.
Cruz: Amazing thing. Right. So as we go along, perhaps a couple of things about Azul. Azul started as a really a true, I don’t know if I should use the word true, but as a low-cost carrier, very pure, simple to start with. But then it grew. It began to grow, it began to take on other aircraft types, began to relate to other airlines.
Tell me more about that evolution of the model. Because most people that start in that sort of truest of models, they try, or at least they tend to, want to stay there, or many of them do anyways.
Rodgerson: We found in Brazil, and I think this is for most part of the world, is that the market is big and diverse, right? And so when we went to Brazil, we saw nobody was flying Embraer aircraft, so aircraft that are manufactured inside the country. There was only about 40 cities served in a country that should have more than 200 cities served.
And so we started kind of flying these Embraer aircraft, opened up a lot more cities than our competitors did. And then we said, “Geez, there’s cities of 20 million people in Sao Paulo, 13 million in Rio, but there’s also cities of 200,000 people that don’t have air service and these are really wealthy cities.”
And so we diversified again and went down to turboprop aircraft where people just didn’t have access, the road system is very expensive in Brazil, fuel prices are 40% more expensive in Brazil than they are in the US and in Europe. And so the model adapts.
I mean, I think of In-N-Out Burger. I love In-N-Out Burger but it’s the same thing every time and I think that works really well for certain individuals. But when we saw the opportunity in Brazil as if we were an In-N-Out Burger, we’d probably be capped out at about 50 aircraft.
And today we have 165 aircraft flying to 170 destinations all over Brazil and have become the most profitable airline in South America doing just that. And I think that we diversified ourselves to create more opportunity for our people and for the country where we’re trying to develop aviation.
Cruz: That’s interesting, because in a way, when you look at super ultra low-cost people, Indigo Partners, et cetera, they haven’t really focused on Brazil. From a distance, Brazil looks like a populous country with dense population centers but also some remote secondary airports, et cetera. But there isn’t one of those in Brazil. Why? Why isn’t there a Volaris or a Wizz Air or something like that in Brazil?
Rodgerson: Because fuel’s 40% more expensive, right? And the unions have a minimum salary there. And so yeah, you can come in with a more densified product than maybe the local competitors, but there are many attributes to Brazil make it very difficult for ULCC to succeed.
And the primary one, Alex, you know this well, is that the product is already unbundled in Brazil, right? So everybody’s charging for seat assignment, change fees, all of those things, it’s already unbundled. But the primary reason is that Brazil, the burden is on the airlines.
So I’ll give you an idea. Santos Dumont Airport in downtown Rio, many of you have flown into that airport. It closes on a pretty regular basis. I’d say once a week it closes. But when it closes because God decided to shut the airport because of rain, fog, whatever it is, we’re responsible to feed the passenger, access to internet, transportation and a hotel night. Has absolutely nothing to do with us, right? And so you think about a ULCC that comes in and charges a very cheap fare, one event in the Santos Dumont Airport and it’s almost game over for that business model.
The other interesting about Brazil is it’s a very litigious society. So we have about 3% of the world’s flights, but we have 85% of the world’s lawsuits. Azul was ranked as the most on-time airline four times this year, and we get 4,000 civil lawsuits a month. Right?
So, and you think about that for a second. And so, you think about kind of more of a brash ULCC model that comes into Brazil and now this is what it is, the market’s not mature enough for that yet, right? And so we just had the ability to charge for bags, and then Congress went and took it away. And then the president vetoed it. And it’s kind of that back and forth.
And so I think that until, I’ll tell another funny story, so during the pandemic, the president of the country was at the airport, decides to board one of our aircraft just to say hi to people, right? And he’s not wearing a mask, and the pilot comes out of the cockpit, takes his mask off, takes a selfie with the president of the country, okay? We get a multi-million Brazilian real fine because of that, right?
And so these are things that, Brazil’s a difficult place, but there’s a tremendous amount of opportunity still if you do it right. And I told my wife we were moving to Brazil and it would be a three-year journey and I’m now on year 15, right? And so it takes time to kind of develop the market and to do what we’re doing.
And so I think that pure ULCC model that you’re starting to see in Chile and in Peru and in Colombia, Brazil’s just not there yet. The legislation is not ready for it yet because of that. I mean, imagine you ran a very large ULCC. Can you imagine having an army of lawyers that have to go?
And it’s interesting, and where the lawsuits are is they’re all spread out all over the country, right? So you can have some random judge in the middle of nowhere in Brazil that’s taking a decision. And I joke that every bag we lose has a wedding dress in it because that’s the type of kind of-
Cruz: And an iPad.
Rodgerson: IPad, everything. But it’s a different country. It doesn’t mean that there’s not opportunities, because there’s tremendous opportunities to grow the Brazilian market, but it’s uniquely different than the rest of Latin America for those reasons.
Cruz: That’s interesting. In volume, we ended up having two and a half resources for legal and then outsourced the rest. And we thought it was quite intensive, to be quite honest. But okay, I’ll take that number of so many thousand a month. That’s really incredible. I guess the question that comes out of that is, can you charge a revenue premium to account for all of this?
Rodgerson: You have to, right? And that’s kind of what I tell lawmakers in Brazil today. The individuals that are suing the airline today, who pays for that are all of the other customers. Right? And so it becomes more of an elitist kind of system in Latin America because only that top tier can afford to travel because all of that is in the cost structure. Right?
And so every time we put a flight in, you have to have a cost structure in there for when the airport’s closed, for the certain number of people that actually sue you. And so you’ll see that. I mean, Azul today has the highest fares in Brazil by far, right? And a lot of it’s because we’re monopolies or we’re the only carrier in about 80% of the routes that we fly because we fly to so many different cities.
Our two main competitors, they fly to what I call the triangle of Brazil. They fly Rio, Sao Paulo, Brazilia, and 92% of their seats always hit one of those three cities. For us it’s only 38%, right? And so we’re kind of spread out more all throughout Brazil. But you do need to have a revenue premium to do that.
But where it hurts you, Alex, is that Brazilians travel less than Colombians. They travel less than Chileans. They travel less than Mexicans. Certainly travel a lot less than the people in the United States and in Europe. And so I think until you kind of attack some of those other issues that you have, it’s going to be hard to truly stimulate that market.
Cruz: That makes sense. I’m still stuck on the revenue premium. And of course, you wouldn’t be able to have a super low fare in which you waive your rights in any way, shape or form, right? I’m sure you’ve looked at this to try to not have to pay for that.
Well, let’s move on a little bit. A few years ago, now quite a few years ago, we had the first big South American merger between land and town. And that’s been going on for some time and they just come out of bankruptcy, et cetera, et cetera. But we now have another group of airlines that say that they’re going to come together, and they even referred to themselves as the IAG of South America. I have a few comments about that. Not for this meeting.
Rodgerson: I’d love to hear them.
Cruz: Not today. But the reality is that an investor base has decided that it was worth it to come together, to pull forces together commercially and otherwise. And of course, they’ve had a setback. Felix was going to join us today, he’s unable to join us. They had a setback in Colombia.
Now, you yourselves, you have been forging relationships with other airlines from very simple, very early on interlines and then code shares to JVs to now equity. Well, that was a while ago, United, et cetera. Does this go farther? Is there a place in which Azul at some point comes together with others? Does it need to?
Rodgerson: I don’t think we need to, but I think let’s look at the US market first and then maybe Europe and then go back to Latin America. I mean, the US carriers only became free cash flow positive when they went through M&A activity, right? And so that’s what drove it. And it was domestic consolidation that drove airlines to be an investible asset. Okay?
And so when you talk about kind of cross-border, and you’re referring to kind of land and TAM kind of merging, and they just went through bankruptcy a couple years ago. So I’m not sure that cross-border consolidation is simple, and I’m not sure that it has the level of synergies that you get in pure domestic consolidation.
So I’m an advocate for domestic consolidation. I think that’s very healthy. I think you kind of connect two networks that have seven, 800 flights a day and have your revenue management teams together coordinating schedules.
When you start talking about cross-border, especially in Latin America, Brazilians love South Florida. Brazilians don’t love Bogota, they don’t love Santiago, they don’t love Buenos Aires, they love South Florida, right? And so when you think about it, there’s not that many flights intra Latin America that touch Brazil.
And so the level of synergies, and you think of a network, is when you can coordinate pricing and schedules through some sort of a JV or consolidation opportunity, and that’s where the value is for investors. And I think that in the US they learned that. And I think the US has done a really good job.
And so when you ask me, “Hey, what’s of interest to us?” Partnerships are always of interest. Anytime you can get feed, and United Airlines has been a great partner of ours, JetBlue’s a fantastic partner of ours when we fly into Florida, but how many passengers are you truly connecting, right?
Azul next month will have just under 1,000 flights a day, okay? And so our partner, United Airline, they have five, six flights a day into Brazil. And how many of them are connecting beyond Sao Paulo? Right? There’s not that many, right?
And when you’re comparing an airline of our size that’s going to carry 26 million passengers this year, it’s just not that significant. But when you look at opportunities to connect domestically through co-chairs, JVs, wow, now that gets really interesting and ability to add a lot of value for all stakeholders.
You think about it, it’s really interesting as you go back and you look at the United States and you kind of say, “Hey, what’s going to happen when United and Continental get together? Are US Airways an American? All these people are going to lose their jobs.”
These guys can’t staff their airlines today. They simply cannot staff their airlines today, with all due respect to those of them that are here, right? Because they’re getting new metal. They strengthen their balance sheets, and that strength in the balance sheet makes somebody want to grow, right?
And I think that that’s what’s best for Latin America overall, is that type of consolidation drives an investible asset. You get your aircraft cheaper and it provides surety of a job for the long term. We’ve seen so many airlines start and go bust, start and go bust in Latin America. And for a pilot career in Latin America, that’s a pretty devastating thing to always have to start out at the bottom of the seniority list, right? And so I’m very much in favor of things that could be done. Now, cross borders, it’s hard for me to see the synergy value that you get from that.
Cruz: And I’m asking the questions today, but there are some formulas when you look at some overall items like fleet procurement or some big agreements in which being able to come together with others absolutely delivers immediate great value if the process is well-managed. And I’ve been part of that. So there’s some, but I see commercially how that can be slightly more difficult.
Now, let’s pick on a couple of things that you said. You mentioned aircraft on a couple of different times. There was a day in which you were a single island airline and all of a sudden you weren’t. And is this related to South Florida? How did you make that step and how has it been to now have wide buddies?
Rodgerson: It’s really interesting, a lot of people say, “What the hell are you doing? You’re flying a number of aircraft, all of a sudden you have a…” We actually got 330s before we got 320s, believe it or not, right? And people say, “Why are you doing that?” Because that’s where our customers want to go, right?
So every woman in Sao Paulo that gets pregnant wants to go to Florida. It’s just that simple. Right? Every iPhone that’s purchased that if you walk around Sao Paulo today and ask somebody, “Where’d you get your iPhone?” Miami. “Where’d you get your iPhone?” Miami. “Where’d you get your S7?” I got in Miami. “Where’d you get your baby carriage?” Oh, Miami. Miami. Right?
And so we see Miami, Fort Lauderdale, Orlando, they’re just two other Brazilian cities. They just happen to be a little bit farther north. Right? And so Brazilians know South Florida better than they know a lot of their own country, right?
And so I’ll give you an idea, Foz do Iguacu, it’s the most majestic falls that you can possibly imagine. And most Brazilians have been to Paris, but they’ve never been to Foz do Iguacu, right? And so it’s just when you connect, like we do, 170 cities, we’re aggregating demand from 170 different cities and taking them to South Florida, right? And we also fly into Lisbon. And I think it’s just another part of our network, right?
And I think the big fear you have as a small carrier, now we’re kind of getting to a little bit bigger, is that you let the international drive your whole business. And that hasn’t happened with us, right? It’s so sexy to think about wide-body aircraft flying internationally. What’s going to be your onboard product? What kind of meals you have? Right? But I’ve got 900 flights a day and only 15 of them are doing that type of stuff. Right?
And I think that’s the big fear you have, is that everybody wants to focus on this sexy part of the business, but it’s the blocking and tackling and the nuts and bolts of the business which is delivering 885 domestic flights a day that that’s why we have those, right? So I have to fly a prop plane into the middle of the Midwest of Brazil in order to fill my wide-body aircraft that’s going to go to Europe tonight. And I think you just can’t lose focus on that, and I think that’s really important.
Cruz: And to that point, for example, do you allow many pictures of the premium product of the long haul show up in internal comms? Probably not, right? Because you don’t want people to be focused on that.
Rodgerson: Yeah, it’s just amazing how much people want to focus on that, right? And so, we’ve got 13,000 people that work for us, and how many of those people actually touch a wide-body aircraft? Very few. Right? But yet it’s when you’re meeting with your people, they want to talk about that, but you just cannot lose focus on running a great business.
And on that point, Alex, I think one thing I wanted to kind of address is I joke with all of my US counterparts that they’re all subsidized airlines, right? Because the US government came in and gave billions of… And what drives me absolutely crazy is that I’m American citizen and I pay taxes here, and so they all got part of my tax money, and Brazil, we’ve got zero. We’ve got no money at all, right?
And so that was a very difficult thing during COVID, if you can imagine, really nine months, no revenue. And we had to survive. And so of those 13,000 people that work for Azul today, 11,716 of them took an unpaid leave of absence.
Cruz: For how long?
Rodgerson: Anywhere from three to six months. And that saved the airline. And so when you sit down and you talk with a guy like Steve Hazy, and Steve is a legend in the business, said, “You’re flying around into global and we have these guys that took an unpaid leave of absence. You have to help, right?” And so I think it gave enormous credibility.
And so when we got back online after stopping for as long as we did, our people are our true asset. And that’s why with many different fleet types flying to 170 cities, we became the most on-time airline in the world, not Latin America, in the world, because it’s a people business. And I think that that’s kind of crucial.
And our people saw what it was like to go without pay for several months and the fear, right? And we were like, “Is the government going to help us? Is the government going to help us?” And finally said, “They’re not there.” Right? Latin American countries do not have the resources that other countries have, and so we had to do things differently.
Cruz: I know the feeling of not getting government help and 20 million pounds a day burn rate. But I was going to ask about that. Having run an airline that only had one aircraft type with three variants, 19, 20 and 21 Airbuses, moving then to an airline that had many different kinds of aircraft types, immediately came into contact with the complexity. But yet you’re delivering fantastic on-time performance. What’s the magic potion here? Is it really the people? Is it the convention that that plane has to leave on time regardless? How do you make that happen?
Rodgerson: I think every pilot wants to fly the wide-body, right? Every pilot wants to become a captain, everybody wants to grow. And I think we instill in our people, the only way that we grow is if everything works, right? We only have a large aircraft because we have these small aircraft.
And the biggest complexity we have today at the airline is pilot training. It is a royal pain in the ass. It’s very, very difficult. Every time a wide-body shows up, there’s five different training events that are triggered by that, right? And we allow for the people to kind of grow, and that’s a huge, huge challenge for us. But everybody knows that it all has to work together, right? We are a connect airline. More than 65% of our customers connect on us on a daily basis, 65%.
Cruz: 65.
Rodgerson: Right? So if we don’t run an on-time airline, imagine how many lawsuits we’d have. And so it’s kind of essential to who we are and everybody has to be aware of that.
And we tell our pilots it’s, “Look, if we can trim five minutes here, five minutes here, that creates another aircraft for us to grow.” And everybody kind of has to be on the same page because it is extremely complex to have multiple fleet types.
But Alex, you know this well, it’s also extremely expensive to fly the wrong aircraft in a market. And people forget that. People think the largest cost an airline has is fuel. The largest cost an airline has is an empty seat, because you’ll never capture that again. And so many times, airlines fly the wrong equipment type into certain markets. And so we try to ensure that we always have the right equipment type into every market that we fly.
Cruz: Okay, A couple quick questions before we wrap it up. COVID, you mentioned it very quickly, I guess my main question is, after talking about that leave of absence between three and six months, incredible, 11,000 people, are you better off post-COVID? Did you have an opportunity to look back, see what else you could do better? Was there any process improvement? Do you feel that you’re better off afterwards or still suffering the after-effects?
Rodgerson: It’s interesting, Alex, I moved to Brazil 15 years ago. I hired my neighbor across the street, right? And he was a good guy and he served well at the company, but for a couple years I was like, “He’s not really delivering like he should.” But when you’re growing an airline always, growth hides fat. It’s just a fact.
But when you take an airline all the way down to its knees and you stop operating, you start to say, “What is essential? What do I absolutely need to do?” And so we built the airline back up and our call center today is 25% more efficient. Our airports are 20% more efficient. So that’s being a more on-time airline today with less people across the board. So it’s the true technology that kind of came in and said, “Hey, how are we going to do things better? How do we communicate better as an airline?”
And I think that that leave of absence that took place, everybody’s like, “Shit, I went without a salary. If he’s not pulling his weight, that’s a problem, because I don’t want to suffer again.” And so you got the best of the best and people that are really committed to what you’re doing.
And I think for Latin America, Azul is a great employer, right? And so I think in the United States and Europe, people have a lot of different options, but today, Azul is I think the 45th largest company in all of Brazil, right? And it’s only 15 years old. But yeah, absolutely. We had to re-look at everything that we did and make sure that we built it back much better.
Now, we obviously have more debt. We obviously have to kind of pay back our operating less sores that gave us kind of some time while we weren’t operating. And so that’s a burden. But I think every airline in the world is more levered today than they were when they exited or when they started COVID, right? And so we’ve increased our leverage. But you know what? Today we’re producing the same amount of EBITDA that we had in 2019, and our airline today is 44% larger in terms of revenue in the third quarter with less people.
So think about that for a second. We’re 44% larger in terms of absolute revenue compared to 2019 with less people on board. Now, obviously fuel has gone up and other costs have gone up, we’ve had a little bit of devaluation of the currency, but I think that shows that we built it back a lot stronger.
Cruz: Great. And it’s an unfair question to ask in 30 seconds or less, but as you look at growth, and we’ve spoken markets, partnerships, aircraft, et cetera, role of technology, are you investing a lot in technology? Do you recognize that technology can be one of those levers that can help you, growth? Is that present?
Rodgerson: Absolutely. Alex, I had the experience of JetBlue, you had this at IAG as well. It’s so easy to invest 40, $50 million in a new aircraft, but we forget about technology, right? And so your CapEx every year is new aircraft, new metal, new metal, new metal, new metal, until all of a sudden you have a shitty operation and you say, “What did I do?” Right?
And so I think that the technology is the solution. And a lot of times, again, buying aircraft and talking to a less or an OEM, it’s sexy, but the technology is really the backbone of your business and to make you more efficient. I know there’s a lot of great technology providers that are here at this conference, but it’s absolutely essential, right? Because you can’t continue to grow an airline with just throwing more bodies at it. The technology.
And it’s the right thing to do for all of your stakeholders. It’s the right thing to do for your customers, your crew members, for your investors, right? You cannot grow an airline and be inefficient going forward.
Cruz: No, it’s exciting. And I know that you’re investing and working on a lot of innovation projects, et cetera. Well, I’m super reinforced that this decision we made 10 years ago that the best airline we could create should be a South American low-cost carrier that evolves in this model is the right thing, so thank you very much. Congratulations.
Rodgerson: Thank you, Alex.
Cruz: All right. Thank you.
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