Climbing Neelemanjaro: Brazil's Azul is looking to go abroad. Expect an uphill battle.

April 28 2014It certainly gets credit for boldness. Azul, an airline that today flies no plane larger than an E195 with 118 seats, plans to become an intercontinental airline practically overnight. Daring indeed, especially at a time when Brazil’s economy has slowed to a crawl—and when industry capacity between Brazil and the U.S. is growing by double digits.

It’s the U.S. market that Azul will initially target, with plans to fly A330s and later A350s to Florida and New York. It intends to set off on this adventure roughly one year from now. To be sure, it will have some competitive strengths, most importantly its dominance at the previously underutilized Viracopos airport in Campinas, a large and rather wealthy metro area in its own right, but more importantly one within commuting distance to Sao Paolo—Azul operates free buses for passengers, in fact, connecting Viracopos to points throughout the region. The airport is also planning to open a new terminal in time to handle incoming World Cup traffic in June.

Azul furthermore, has a deep domestic network from which to feed its new overseas flights. After merging with TRIP, it became the largest Brazilian airline by number of destinations served—nearly 60 cities from Campinas alone—in many cases flying to central airports too small for the full-sized Airbus and Boeing narrowbodies flown by TAM and Gol. What’s more, the local competition on intercontinental routes will be light, with Gol flying only narrowbodies and TAM recently reducing its overseas footprint, especially to Florida. It has exited a number of European routes too, which will help if Azul ever decides to target that market. Another compelling reason to go abroad: earning U.S. dollar revenues will help ease Azul’s foreign exchange exposure, no small matter given the sharp depreciation of the Brazilian real against the U.S. dollar that began in late 2011.

These are some reasons why Azul might do well flying longhaul. But there are at least as many reasons why this might prove a case of irrational exuberance. For starters, Brazil’s remote geography makes intercontinental flying a risky endeavor from the get-go. The Campinas-to-New York route is nearly 5,000 miles, not much shorter than flying to New York from Istanbul. Campinas-Lisbon, a route flown by TAP Portugal, is roughly equidistant. In the airline business, distance is a de-stimulant, meaning long flights generally attract fliers who absolutely need to travel, as opposed to discretionary travelers. Not many people…

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