Azul Sees Opportunity in Delivery as Amazon Moves on Brazil

(Bloomberg) -- Azul SA’s betting its next big opportunity arrives by mail.

The Brazilian airline signed an agreement with the country’s postal service last month to create a company to deliver packages by air. It may prove prescient, considering the region’s poor infrastructure, the growth in e-commerce and Amazon Inc.’s expanding presence in Latin America’s largest economy.

"The logistics don’t exist," said Chief Executive Officer John Rodgerson in an interview at the company’s Sao Paulo headquarters on Jan. 10. "We’re the only airline that serves 100 cities in the country. We have the most reliable airline in the country. We have the best on time performance. If we can deliver things all throughout the country, it’s a huge opportunity."

Azul will hold a 50.01 percent stake in the new venture, with the postal service -- Empresa Brasileira de Correios e Telegrafos -- holding the rest. Brazil’s antitrust regulator, Cade, must still approve the new company.

The post office currently spends about 550 million reais ($171 million) each year transporting goods by air, using a number of different airlines, but does so only at night and to just 21 cities. Azul, by comparison, has a fleet of 122 planes and flies to more than 100 destinations, about 60 more than local rivals.

Guilherme Campos, president of Correios, sees the possibility of Azul expanding to 140 destinations “if on paper it’s viable,” he said in a telephone interview. He noted Azul’s already large network made it an obvious choice. However, Azul executives were more measured, projecting growth of about five to 10 cities a year.

Record Shipments

The alliance comes as e-commerce, and the resulting shipments, pick up steam in Brazil. The post office carried a record number of packages in December, hitting 26.1 million versus the previous year’s 23.1 million. Campos said the trend is for that number to keep going up.

The new company will save Correios at least 200 million reais a year in air-transport costs, Campos said. That doesn’t take into account all the deliveries that will shift to the skies, from land and boat transport.

For Azul, the move is a way to make use of excess capacity in the belly of its aircraft, Rodgerson said. Just handling cargo on their own isn’t a viable solution, but the shipping volume provided by Correios would make it worthwhile. If the business takes off, Azul may even look into buying dedicated cargo planes.

“This is a very intelligent move by Azul," said Alvaro Salgado Frasson, an analyst at Eleven Financial. "Azul should become more competitive with this partnership. Of course, we have to wait to see concrete results to have any financial measure, but I see the move as positive."

The deal, however, is not without its obstacles. The postal service has been involved in corruption scandals and they are well-known for going on strike.

Beer, Happy Hour

After two years of stagnation during which it removed some aircraft and cut costs, Rodgerson says Azul is growing again, and that expansion can continue since Brazilians still don’t travel as much as their regional peers. Any addition to the bottom line from the delivery deal will be an added benefit. 

For now, things are going well enough that it’s introducing beer and a "happy hour" on flights as the focus turns to customer service from cutthroat pricing competition.

"We kind of have our mojo back," Rodgerson said.

Concerns that revival could be disrupted by United Continental’s impending accord with Avianca Holdings, which is poised to merge with Avianca Brasil, were downplayed by Azul. 

The two Aviancas are controlled by Synergy but are currently separate entities. There’s minimal overlap between the two airlines domestically, with Azul focusing on smaller cities and Avianca Brasil focusing on bigger ones.

To contact the reporter on this story: Christiana Sciaudone in Sao Paulo at csciaudone@bloomberg.net.

To contact the editors responsible for this story: Arie Shapira at ashapira3@bloomberg.net, Larry DiTore, Morwenna Coniam

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