Interview: JetBlue Founder’s Future With Azul Airlines and TAP Portugal

David Neeleman did not leave JetBlue Airways under the best of circumstances.

It was 2007, not long after the airline’s Valentine’s Day crisis, when a New York-area ice storm crippled JetBlue’s operations for days. All airlines have meltdowns at some point but this was worse than most, with many passengers stuck on planes for hours, and others unable to get help from customer service agents. A few months later, after making an apology tour, Neeleman, the company’s founder, resigned as CEO.

But Neeleman is a lifelong airline guy — he co-founded a U.S. airline called Morris Air in 1984, when he was in his mid-20s and sold it to Southwest Airlines in 1993 — and again this time it did not take him long to reappear. By 2008, he had started a new airline, Brazil’s Azul Airlines. A low-cost carrier, Azul is similar to JetBlue in its strategy, paint job and onboard product (and color, too: “azul” is blue in Portugues and Spanish).

Neeleman is CEO, and Azul is Brazil’s third-largest airline, with more than 100 aircraft and a network stretching to Orlando, Fort Lauderdale and Lisbon, Portugal. With Brazil in recession, Azul has struggled recently, but Neeleman said the carrier’s finances are improving.

Increasingly, Neeleman is focusing on a new project, TAP Portugal. Last year, an investment consortium led by Neeleman and others bought a controlling interest in the ailing European carrier, which had been controlled by the national government. The investors were not permitted to buy as much of the company as they had wanted, and the government still owns part of it. But Neeleman said his group controls enough of it to make key decisions. “We have the lion’s share,” he said.

Neeleman now splits his time among three places — Connecticut, Brazil and Portugal.

We spoke with Neeleman recently to discuss Brazil’s economic situation, his investment in TAP and his opinions about JetBlue. This is the fifth in a series of airline CEO interviews we plan for the next several months.

Note: This interview has been edited for length and clarity.

Skift: Overall, has the economic climate improved a little bit in Brazil recently? How is demand for Azul? Are things getting better?

David Neeleman: Yeah. A lot better. A lot of things have happened in Brazil. For our financial situation, what’s improved the most is the exchange rate. Sixty-five percent of our costs are dollar denominated. Obviously, when the [Real to U.S. dollar] exchange rate went over 4 to 1 [in fall 2015], that was very challenging for us. We weren’t able to recover that in the revenues. It’s back down to 3.2 to 1.

Demand has never really been an issue. We’ve always flown a lot of people. It’s just that we had to do it at a fare where we could cover the increased costs. With fuel staying down and now the exchange rate coming down, I think there’s new optimism in Brazil. The Olympics went well. Our demand is good. Costs are down. We’re back in the black. We’re feeling really good about what’s going on in Brazil.

During the times when things were horrific in Brazil, we were selling $400 [round-trip long-haul] tickets. That’s what we had to do to fill the airplane up. Now, we’re, thankfully, we’re more than double that.

Skift: When you say. ‘back in the black,’ does means that Azul is making money?

Neeleman Yes. In the third quarter we’ll make money.

Skift: Brazil’s airline industry is still heavily regulated. How does that affect Azul?

Neeleman: You can’t charge for anything in Brazil. You can’t charge for bags. It’s really hard to segment and create lower fares. There’s just things that are against the law. We’re talking a lot with the civil aviation folks and saying, ‘Look, we can charge more, but we also can give lower fares if we can charge for bags.’ We can do things a little bit more like things are being done in Europe and the United States. That’s an important change.

Fuel is another issue. Every single state in Brazil charges its own tax rate on fuel. We’re trying to get a standard rate throughout the country. You pay up to 25 percent in Sao Paulo. In other states you’re paying 5 percent. We’re tying to get a standard rate that’s 10 percent or less. We just don’t think it’s good public policy to tax fuel. It’s kind of silly. It stops people from traveling and actually costs the economy more money than what you gain in the taxes. Fares are higher [and] people don’t travel as much. If they don’t do that, it doesn’t have the trickle down effect into the economy and the other sectors.

Skift: What about TAP? How are TAP’s finances?

Neeleman: TAP’s doing well. We expect, again, to make a profit in TAP this year. A lot of it’s related to fuel prices being down. You should be making money at these fuel levels. The challenge for TAP has been Brazil. A lot of the business is Brazil related. With Brazil doing better, we’re seeing that in TAP as well. Fares are better. Also, [flights to] Angola have been challenging because of the [dip in the] oil [economy]. That has been one of TAP’s most profitable markets. Even with Brazil being down, and Angola being tough …we had a great summer. I think because of all of the difficulties in Europe with terrorism and stuff, a lot of people ended up going to Portugal. They felt, I think, safer in Portugal.

Skift: Before you bought a controlling interest, TAP was a state-run airline that had difficulty competing with Europe’s largest carriers. Why did you see opportunity?

Neeleman: There’s a lot of things. No. 1 is its relationship to Brazil. Azul’s strength in Brazil was really important. TAP flies almost 30 percent of all the people that go from Brazil to all of Europe. They are far and away the market share leader. Even though Brazil has been up and down and had some difficulties, it’s still a very big country, and a very important country. It’s got the fourth largest domestic market in the world. [We wanted to] be able to connect Azul to TAP and to work together, to bring those synergies together from both airlines.

No. 2, [is related to where ]Lisbon is located, kind of on the entrance to Europe. Geographically, it’s well positioned if you want to have a hub where you want to take people from Africa, Brazil, South and Central America, and North America, and bring them into Lisbon. Then you can distribute them to all of Europe. You don’t have [to backtrack]. If …you want to go to Spain or you want to go to France or you want go to [any] southern European countries …[Lisbon] is a great place to [connect].

Skift: You’ve reduced TAP’s schedule to Brazil and added flights to the United States. Why?

Neeleman: Because the management team came from Brazil, and they were mainly Brazilian, they focused a lot more on Brazil than they did North America. We think there’s a big market in North America [with travelers] going to Lisbon and connecting over Lisbon.

Skift: What’s been the biggest challenge in taking over an airline that was government run? Has it been difficult to change the mentality?

Neeleman: It just takes a little time. There are really good people over there. There’s a lot of expertise. The company had been starved for capital for so many years. [Because TAP was] a government-owned company in the European Union, the government legally wasn’t allowed to invest because of state aid rules in Europe. [The airline] just made a profit, — it made do — but didn’t have the ability to do a fleet renewal or change the product or make it more up to standards of what was going on at Iberia and other places around Europe.

We’ve got our team over there running the operation and running the commercial side of the business. We’re starting to reconfigure the airplanes. We’ve got a couple of Azul airplanes flying [for TAP]. The re-configured Azul airplanes are really nice, flying to Boston and JFK.

We’re starting now to introduce a new product, domestically. Basically, we’re segmenting the fares and getting the back of the planes reconfigured. [We’re] getting Ryanair type fares and charging for bags — doing all those things things that those other guys are doing. It’s been really successful. On our planes, you can pay up to sit up front, get more leg room, get free bags. Or, you can sit in the back and pay Ryanair fares. We’re just launching that now.

Skift: In early September, International Airlines Group CEO Willie Walsh suggested more airline consolidation may occur in Europe. Do you agree? 

Neeleman: I’m more focused on what we’re doing. There are, obviously, a lot of airlines in Europe that are doing different things. If Willie thinks that’s the case, I’ll agree with him. He knows a lot more than I do. We’re just focused on our little corner of the world and making TAP profitable and making it a great product and getting people to fly.

Obviously, it wouldn’t make any sense for us, and for the country of Portugal, to consolidate. When you do consolidation, you get rid of flying and you get rid of routes. The Lisbon hub is important to Portugal, the country. That’s not going to go away. It needs to be there. The country depends on tourism. If someone were just to buy TAP to get rid of it, that’s not something, that is in our interest. As part of the privatization process [of the airline], we agreed not to let that happen.

Skift: At all of your recent airlines, you have focused on bringing humanity back to air travel. Why do you care so much about passenger comfort?

Neeleman: People don’t really look forward to flying that much. It’s like they want to get to the place, but they don’t look forward to the experience. We want to make it a neutral thing where you may actually even say, ‘Wow, I’m going on a flight today, I’m looking forward to spending four or five hours watching TV or on the internet, or whatever.’

Flying JetBlue transcon is not a bad experience when you’re watching TV and playing on the internet and being treated well and people are smiling you. I think it’s so important to have someone say, ‘I look forward to flying these guys because they treat me well. They treat me like I’m a human.’ It’s something that we’ve always really focused on.

Skift: Will travelers pay more for a slightly better experience?

Neeleman: Certainly. If it’s torture flying one airline and [yours] is a pleasant experience, it certainly helps your revenue.

Skift: No one has started a new U.S. airline since Virgin America in 2007 and now it is being acquired by Alaska Airlines. Is there room for another U.S. startup?

Neeleman: It’s not really something on my to-do list. [But] the airlines in this country are making a lot of money. The unions are getting a much larger share of that as you go forward, and airplane prices are pretty cheap right now. These newer technology airplanes are coming in that were built for much higher fuel prices, and now you’ve got a surplus of planes that are less expensive that maybe burn more fuel. But, it doesn’t really matter, because fuel prices are low. That it creates an opportunity.

One of the constraints on the U.S. business is the pilot shortage. There’s not an abundance of pilots. There may be an abundance of cheap fuel and airplanes. There probably isn’t an abundance of gates at popular airports, either. I think a lot of those have been taken by the other guys. So I don’t know. There may be a model in flying to cities that have been neglected. You have to know what you’re doing, because you can lose a lot of money doing that, too. A lot of people tried that. I think that as the market moves and costs get higher and fares get higher, it always creates opportunity. That’s been the cycle over the years.

Skift: The most successful U.S. startup in the past two decades has been JetBlue Airways, which you founded. What do you miss most about JetBlue?

Neeleman: I miss the people. They’re just so dedicated. I get the opportunity to fly on JetBlue a lot. I was flying from Salt Lake to New York on Saturday night and one of our great in-flight people saw me, came running over, and gave me a big kiss and a hug, and said, ‘We miss you so much.’ It’s great to see the company doing well. I think Robin Hayes is doing a good job. I think the direction of the company’s good. Since he’s taken over, I think people are generally happier there. They trust him. I’m pleased with what’s going on there. I feel the company’s in good hands.

Skift: In your era, JetBlue was an all-coach airline. Now it is rolling out its new business class style cabin on some Airbus A321s flying longer routes. Is that a good move?

Neeleman: The move into the 321s was smart — something that certainly I would’ve done. Once you have that extra real estate, it’s just a math equation. Say the Mint seat takes up 2.2 times what a coach seat takes and you can get 3 times the amount of revenue, on an average fare. Then it makes a lot of sense. Not to mention the branding and just being able to cater to your higher end customers. It’s been a huge success.

I think it’s a great product. People do a great job with the service and the space is nice. [Business class] is not something I was considering back in ’07 when I left. I can see how it has evolved. Seat technologies have changed too. They didn’t have a lie-flat seat for a 321 back in ’07 the same way that they do today.

Skift: Both Azul and TAP have business class flatbeds. Is that required now, no matter the airline’s model?

Neeleman: Yeah. You have to have them. Those wedgie seats, whatever they call them, those recliners, they’re just not competitive anymore. The difference between those and a coach seat isn’t that great to be able to warrant charging the amount. You need a little more space for a lie-flat, but not that much more.

In the TAP configuration, we’re getting the same number of lie-flat seats as we had recliner seats. People can lay flat, as opposed to laying at an angle. It makes no sense to go with the angled seats if you’re going to actually have a premium product.

It’s just all math, and it pays for itself. It works. The average fares are more than the real estate that it takes up. Then when you can sell [empty seats] at the gate for an upgrade for 500 bucks or 600 bucks … it makes all the sense in the world.