Azul

The elderly woman fidgeting in her seat became increasingly nervous as the jet began its ascent into the skies over Brazil. Gianfranco Beting, director of branding for the country’s new budget airline, Azul, happened to be sitting nearby. Because of the airline’s high number of first-time flyers, he’d seen this kind of behavior before, and he sought to reassure her.

“Is this your first time on an airplane?” he asked gently.

The woman nodded her head.

“You have nothing to worry about. It’s very safe.”

The woman shot him an impatient look. “I’m not worried about safety!” she said. “I’m worried about not being able to go to the bathroom. It’s a long flight.”

It took Beting a moment to realize what she meant. “You do know,” he responded, “that we have a bathroom on the airplane?”

“Really?”

“Yes. Look. It’s just back there! You can use it now, because the “Fasten seatbelts” sign has been turned off.”

The woman used the restroom and looked remarkably relaxed for the rest of the trip.

This story shows two things about Azul. First, the company is succeeding in its efforts to attract a new set of lower-income customers in Brazil, many of whom have never before seen the inside of an airplane. Second, Azul is accomplishing its task with a passion fueled by its informal management style — a style that encourages high-level executives to reach out in a personal way to customers.

Multinationals based in emerging markets have attracted attention lately for their savvy in selling goods to low-income, bottom-of-the-pyramid consumers. Yet in some industries, the West still has the edge in discount pricing know-how; the airline sector is one of those. In the case of Azul, CEO David Neeleman is applying the skills he learned as founder and former CEO of JetBlue to a brand-new market.

Neeleman’s democratic managerial approach sets Azul apart from other Brazilian corporations, which are generally more hierarchical. It’s a style that comes naturally to Neeleman. Employees view him as a slightly scattered boss, prone to forgetting appointments and often running behind schedule. He announced a few years ago that he suffers from attention deficit disorder.

Yet he is also, by many accounts, an inspirational and unpretentious leader. Neeleman spends half of his working time at simple, serviceable offices in Darien, Conn. Every other week he travels to the company’s headquarters in Campinas, a city just north of São Paulo, where he has instituted a similarly low-brow philosophy. Parking spaces at Azul’s main office were distributed by lottery, and furnishings are colorful, but basic. “David is just not a fancy person,” says Carol Archer, who left JetBlue to act as the United States executive manager to her former boss.

Not everyone is happy with the horizontal organization. “This is a country where your status at the company is measured by the thickness of the carpet and the size of the desk in your office,” says Beting. “Some people have a hard time adjusting to a management style that treats everyone the same.”

Neeleman was ousted by JetBlue’s board in 2007 after hundreds of the airline’s passengers were left sitting on the tarmac for hours without adequate food and water. The loss of his job left Neeleman casting around for a new project. He was asked, as a favor, to check out a new Brazilian airline, BRA, for potential investors. Neeleman wasn’t impressed; the airline was later reorganized into a charter-only service. But the experience left him wondering if he could replicate the JetBlue business plan in Brazil.

The idea was rendered more doable because Neeleman was born in Brazil. The son of a UPI journalist, he lived there until he was five; as a result he has dual citizenship. He speaks fluent Portuguese, thanks to a brief stint in the country as a Mormon missionary. After raising $250 million from investors, he launched Azul, which means blue in Portuguese — a not-so-subtle reference to Neeleman’s former baby, JetBlue.

When he started spending time once more in the country of his birth, Neeleman was struck by the duality of the Brazilian economy. Emerging market corporations in China, India and other countries have become emblematic for marketing to the masses. (Think of the low-priced Tata car for the Indian market, for instance.) Yet in Brazil, Neeleman observed a rigid economic division between the haves and have-nots.

“Basically, corporations in Brazil sell to the ‘A’ class customers [upper-middle class] who can afford to buy their products,” he says. “They ignore the ‘B’ and especially the ‘C’ classes. So they take a market of 200 million people and turn it into a market of 50 million.” The C class in Brazil is generally defined as families making the equivalent of between US$8,000 and US$30,000 per year.

Azul’s democratic management style suits a company that is reaching out to the masses. The company has gained a reputation as a friendly place to work, and for every opening at Azul, the company receives 10 applications. Neeleman is grateful for the company’s appeal, because low educational levels in Brazil can otherwise make hiring a challenge. The most difficult human resources problem, Neeleman says, is getting enough trained pilots. The job of pilot in Brazil is less desirable than it is in other countries. Pilots are permitted to work a maximum of 10.5 hours a day, as opposed to 14 in the United States. This means that the average pilot works 21 days of the month, a schedule that can have a negative impact on the quality of life.

For Neeleman, keeping lines of communication open with workers and customers is key to success. Flight attendant Patricia Leal Bassi says her bosses at the now-defunct Varig, where she worked for many years, rarely asked her opinion on anything. But at Azul, flight attendants are periodically called in for meetings with senior management to air any complaints. While these meetings include predictable requests for better salary and more days off, Leal Bassi believes the most productive discussions have been about issues that senior management hadn’t previously realized were a problem. Like many flight attendants, for instance, Leal Bassi prefers to work in slacks, rather than skirts and dresses. She was surprised at the company’s quick response to some of the flight attendants’ concerns.

“We got to wear more pants,” she said. “And the food issue improved. They didn’t realize it, but we were eating the same meal almost every day over a period of months — tuna fish for dinner every night. We got them to vary it a little.” Leal Bassi says the open line of communication makes flight attendants feel that they have some control over their working conditions.

Azul Aerolinhas (Azul Airlines) has enjoyed remarkable success since its inauspicious start at the height of a worldwide recession in 2008. The trade publication Advertising Age named Azul one of the hottest brands in the world in 2009. In September of 2010, just 20 months after it started flying, Azul welcomed its five-millionth customer on board. It is the first airline ever to reach that number of flyers so quickly. The airline’s outreach to additional classes shows in Azul’s packed flights. The company operates its planes with 85 percent capacity, the highest level in Brazil. If it weren’t for the purchase of 45 new jets in July 2010 — a purchase that will more than double the size of the company’s fleet — the company would already be in the black, it says. In 2011, the group predicts, it will turn a profit.

In many ways, Brazil is a budget airline’s dream market. It is geographically expansive, about the size of the continental United States. But it lacks a national rail system. Some of the country’s largest cities, such as Manaus in the Amazon, are difficult or impossible to access by road. Buses are the population’s mainstay for long-distance travel, but that comes with some obvious disadvantages. Travel times by bus are often measured in days, as opposed to hours with air. There are no unions in the airline industry in Brazil. The market has also been opened up in recent years by the bankruptcies of Vasp, Varig and Transbrasil.

That’s not to say Azul doesn’t face hurdles. The cost of fuel in Brazil is exorbitant, and the government levies a high tax on airline transactions. Two airlines — the well-established Tam, and Gol, which started in 2001 — present serious competition. They have been pushing back lately, with more flight options and lower prices.

Neeleman feels that reaching a fatter part of the class pyramid is key to Azul’s success. When Azul launched, the cheapest round-trip flight from Sao Paulo to Manaus was 800 reals – about US$469. Azul sells tickets on that route for a fraction of that price. Azul flights from São José dos Campos (a small city that hosts the headquarters of the airplane maker Embraer) to Belo Horizonte, a larger city in the middle of the country, were recently going for as little as US$20 one way, less than the bus fare.

The economic constraints on the C class have forced Azul to take a different approach with its marketing. Taxi fares are prohibitively expensive for most Brazilians, and there aren’t many other options for getting back and forth from the country’s airports. In most cases, the local government does not provide public transportation links to the country’s airports. Neeleman thinks it would be naïve to expect that to change any time soon. “Working with the government here, it would take years to get anything accomplished,” he explains.

So the company has taken ground transportation issues into its own hands. Azul has created its own shuttle bus service in some of the cities it services, collecting passengers at various pickup points and ferrying them to and from the airport. And the company plans to expand this service in coming months.

The group has also taken a novel approach to helping customers finance trips. Brazil, with its previous history of high inflation and challenging household cash flow, has long had a romance with the system of monthly payments for consumer purchases. The monthly payment is often more important, in the consumer’s eyes, than the total cost of an item, a preference reflected in television commercials and print advertising.

Azul offers a maximum payout schedule, with interest, of 60 months — five years — generous even by Brazilian financing standards. Moreover, to buy a seat on Azul, passengers don’t need to have a credit card. (A large portion of the population does not have one.) A bank account is all that’s necessary to purchase a ticket on credit from the company. Default rates are high — up to 10 per cent — but the company thinks it’s worth it. “The alternative is flying with empty seats,” says Neeleman. “That’s definitely not going to make us any money.”

Azul is not only after C class passengers. The group markets itself to the wealthy as well. Its seats are upholstered with leather, and the airline plans to install television sets. On many jets, there are no middle seats and better-than-average legroom. And the airline offers another luxury as well — it has the most frequent flights between a number of Brazilian cities and the fewest delays of any other airline in the country. The airline stands out, in particular, for service from secondary cities. Azul runs flights between its base in Campinas and Rio de Janeiro, for instance, 10 times each day.

Serving upper-class passengers in Brazil has its own challenges. People accustomed to large numbers of servants on the home front — including cooks, maids, gardeners and chauffeurs — expect an exceptional level of service. When Varig was still in business five years ago, for instance, flyers would be offered a hot meal even on a 40-minute flight. And it would be served on real china, with linen napkins.

Despite the high standards of the wealthy, Azul decided not to splurge on food service. This is partly because the group has no choice. Many of its jets, for instance, do not have an oven, so hot food isn’t an option. Regardless, the airline prefers to reduce costs by offering simple snacks, such as a granola bar or a sandwich, on most of its flights.

Beting says he sometimes hears complaints from people used to flying in what they refer to as the “good old days.” “They talk about how they would always drink a scotch on the rocks on the 6 o’clock shuttle service.” He counters by asking how much they paid for a flight back then. (The shuttle service between Rio de Janeiro and São Paulo ran about $400.) Younger consumers, Beting finds, are usually a lot more open to the lower-frills approach.

“Our philosophy is that no one buys an air ticket because they want a fantastic meal,” says Neeleman. So far, the approach appears to be working. Azul’s broad customer base is clear as its passengers line up to enter the aircraft. A businessman in a suit may be just behind an elderly lady flying for the first time in her life.

Azul’s future success is far from assured. Bringing in new customers by offering bargain basement prices is the easy part. The hard part is making money in the bottom-of the-pyramid demographic segment. To do that, Azul will need to achieve economies of scale. On paper, the company looks like it is on a solid path to profits. Yet plenty of airlines on the same trajectory have ended up failing, points out Vaughn Cordle, managing partner of the research group Airline Forecasts, based in Washington, D.C.

“At $35 a flight there’s no question that you can find buyers,” Cordle says. “But at some point, you need to start making money on those customers.” One hurdle that often trips up young airlines is the end of what Cordle calls the “maintenance holiday.” New jets generally don’t need to be serviced for the first three years of their life; maintenance costs are close to zero. But that advantage doesn’t last long. Airplanes often start to need new parts and regular servicing after just a few years. Cordle believes that to become a profitable enterprise, Azul will need to win greater market share from other carriers, particularly in that A class that is targeted by other Brazilian companies.

Then there is the question of running a company in the economically dynamic, yet volatile Brazil. Right now, Brazil’s economy is booming, but Neeleman acknowledges that conditions could sour quickly. He spent time in the country, after all, when it was in the throes of its 1980s’ hyperinflation saga. The country seems unlikely to return to those days, but an unforeseen economic challenge could very well be in the cards. Neeleman maintains cash levels of 100 million dollars to guard against an unexpected downturn.

While Neeleman loves the warmth and spirit of the Brazilians, he admits frustration over the country’s bureaucracy. He often encounters resistance to his plans — say, to build an airport where none had existed before — and is forced to move more slowly than he otherwise would. “Sometimes the response is just a simple ‘well, we’ve never done that before,’ ” Neeleman says. “But it’s mostly from inexperience with the aviation world. We’ve been there, so we know how to do things quickly.”

International expansion also remains a question mark. Neeleman says he’s not interested in turning Azul into a global carrier. Certain destinations, such as the ski resorts of Bariloche, Argentina, or the beaches of Punta del Este, Uruguay, may be considered. “But even if we go there, we’ll be targeting Brazilians, not the global market,” Neeleman says. “There just aren’t enough Brazilians who go abroad on a regular basis for us to think of expanding much beyond that.” Yet Cordle believes Neeleman may need to take international routes into consideration at some point, even if Azul is just feeding into other global airlines. “That’s the model for the industry right now,” he says. “You have to at least link up to global flights.”

There’s also the issue of Neeleman’s management style. As one of the best-known entrepreneurs in the world, he has racked up both startling successes and stunning failures. His uneven management style was on show when he led JetBlue. In 2007, a storm that left passengers stranded for hours on the tarmac in New York without adequate food or water placed the company in crisis mode. Neeleman was praised for his swift response. He immediately apologized for the incident and offered compensation to passengers. He also issued a passenger’s Bill of Rights, which outlined JetBlue’s responsibilities to its customers.

The fact that Neeleman was pushed out anyway may have reflected the fact that the board was already unhappy with him. The company was having a hard time transitioning from entrepreneurial upstart to established company with a focus on return on capital. “Neeleman just wasn’t seen as a numbers man,” says Cordle. “Hopefully, he’s learned from his mistakes and is now doing things differently, but that remains to be seen.”

Whatever happens to Azul, Neeleman will leave this job voluntarily. He has set up his contract to avoid a repeat of the JetBlue ouster; while he owns about 15 percent of the company’s shares, he controls the majority of voting shares. Because of Neeleman’s high international profile, the company’s progress will be closely watched. If Azul succeeds in drawing a profit from the fat part of the pyramid, managers around the world will be looking to take some pointers from its marketing strategy.

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A long-time correspondent for The Financial Times, Victoria Griffith covers business from Boston.