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Cablegate: Azul Airlines "Takes-Off"

VZCZCXRO5127
PP RUEHRG
DE RUEHSO #0664/01 3471729
ZNR UUUUU ZZH
P 121729Z DEC 08
FM AMCONSUL SAO PAULO
TO RUEHC/SECSTATE WASHDC PRIORITY 8776
INFO RUEHBR/AMEMBASSY BRASILIA 9927
RUEHAC/AMEMBASSY ASUNCION 3588
RUEHBU/AMEMBASSY BUENOS AIRES 3341
RUEHCV/AMEMBASSY CARACAS 0785
RUEHME/AMEMBASSY MEXICO 0859
RUEHMN/AMEMBASSY MONTEVIDEO 2817
RUEHLP/AMEMBASSY LA PAZ 3997
RUEHSG/AMEMBASSY SANTIAGO 2588
RUEHRI/AMCONSUL RIO DE JANEIRO 8946
RUEHRG/AMCONSUL RECIFE 4254
RHEHNSC/NSC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC 3228
RHMFISS/CDR USSOUTHCOM MIAMI FL
RUEAIIA/CIA WASHDC
RHMCSUU/FAA NATIONAL HQ WASHINGTON DC
RUEAYVF/FAA MIAMI ARTCC MIAMI FL
RULSDMK/DEPT OF TRANSPORTATION WASHDC
RUEHC/DEPT OF LABOR WASHDC

UNCLAS SECTION 01 OF 02 SAO PAULO 000664

SENSITIVE
SIPDIS

STATE FOR WHA/EPSC AND EEB/TRA - TROBL, YVLIMAYE-DAVIS
STATE PASS USTR FOR KATE DUCKWORTH
FAA FOR BAHUMADA, CTFRANCESCHI, KBERQUIST
DEPT OF TRANSPORTATION FOR BHEDBERG
BUENOS AIRES FOR TSA ATTACHE
MEXICO CITY FOR TSA ATTACHE MGALVAN
NSC FOR GTOMASULO
TREASURY FOR JHOEK
SOUTHCOM FOR POLAD
USAID FOR LAC/AA

E.O. 12958: N/A
TAGS: EAIR ECON EINV BEXP BR
SUBJECT: AZUL AIRLINES "TAKES-OFF"

SENSITIVE BUT UNCLASSIFIED--PLEASE PROTECT ACCORDINGLY

REF: A. SAO PAULO 0471; B. SAO PAULO 0619

1. (SBU) SUMMARY: Consulate officers attended the inaugural
demonstration flight of new low-cost Brazilian airline, Azul
Airlines, on December 2. While Azul had originally wanted its hub
to be from the local Santos Dumont airport in Rio de Janeiro, they
will be operating from the Campinas airport approximately 60 miles
from Sao Paulo. With only two functioning major airlines in the
country, Azul's anticipated entry has already lead to a precipitous
decline in domestic airfares with Gol Airlines immediately slashing
its prices online, before the start-up company had even officially
launched its website. Even with the current complication over
locating Azul's hub, hopes are that the entry of this airline may
finally signal the beginning of low-cost domestic travel within
Brazil. END SUMMARY.

2. (SBU) On December 2, two Consulate officers participated in the
inaugural demonstration flight of Azul Airlines. The flight
originated from and terminated at Viracopos International Airport
(VCP) in Campinas. ConOffs reported that the airplane, a domestic
Embraer regional jet (currently all planes envisioned for this fleet
are Brazilian made Embraer jets), was comfortable and the service
was above average. The flight around the city lasted approximately
45 minutes and provided company executives with an opportunity to
explain to local press the business strategy and goals of Azul.

3. (SBU) The day after the Azul Airlines inaugural launch,
competitor Gol Airlines responded with a series of price cuts along
the planned routes of Azul Airlines. Azul CEO David Neeleman has
stated publically that it his goal to provide one-way air travel
between Sao Paulo and Salvador for less than US$90, the price of "a
bus ticket and a roasted chicken." In response, Gol's website now
markets plane tickets as costing less than a bus ticket, including a
ticket to Salvador for US$85. This has touched off media
speculation of an airline price war in Brazil.

4. (SBU) Janio Quadros Neto, the Government and Strategy Advisor to
Azul Airlines (strictly protect), told EconOff that he does not
think Gol Airlines could win a price war against Azul Airlines. He
said that Gol is completely dependent on Brazilian sources of
financing, whereas Azul has better access to international financing
and thus better liquidity. Quadros pointed to what he called Gol's
"mistake" in acquiring struggling airline Varig in 2007 and media
reports of a potential delisting of Gol from the New York Stock
Exchange. In a protracted price war, he believes that Gol's credit
would run out before Azul's would. Despite the financial crisis,
Azul does not have problems accessing credit and is on schedule to
launch regular commercial flights on December 15.

5. (SBU) Airport congestion and other barriers have prevented Azul
from developing its preferred hub structure. Azul will use
Viracopos Airport (VCP) in Campinas (some 60 miles from central Sao
Paulo) as its hub, rather than either Santos Dumont in Rio or
Congonhas in Sao Paulo. Initially Azul had petitioned to use Santos
Dumont Airport (SDU) in Rio de Janeiro as its hub; however, the
Governor of Rio de Janeiro has moved to block this. According to
Quadros, the recent decision by the National Civilian Aviation
Agency (ANAC) to privatize Rio's international airport, Galeao

SAO PAULO 00000664 002 OF 002


(GIG), has stoked fears in the Rio State Government that there will
be a loss in traffic at GIG. Azul's other desired location,
Congonhas (CGH-domestic airport in Sao Paulo), is also unavailable
due to restrictions ANAC placed on increasing frequencies to the
airport or redistributing frequencies from the other two airlines,
TAM and GOL. Quadros characterized the GOB's involvement in Azul's
launch as "a disaster." TAM and GOL on the other hand recently
filed a complaint with ANAC over what the two companies see as
"preferential treatment" given to Azul as it begins operations,
specifically the alleged exemption ANAC has given Azul in meeting
certain mandatory filing deadlines requesting domestic flight
frequencies.

6. (SBU) COMMENT: Neeleman has already launched two successful
low-cost airlines: U.S. carrier JetBlue and Canada's WestJet. If
Azul Airlines gains the airport access it seeks, the company could
pose a formidable challenge to TAM and Gol Airlines especially along
routes between second tier cities in Brazil. However, Gol's recent
slashing of its prices indicates that it intends to compete directly
with Azul for budget travelers. Gol did report a profit last
quarter and, according to its CEO, Constantino de Oliveira, Jr.,
expects to turn a profit in 2009. Despite Quadros' confidence that
there will not be a price war, airfare prices in Brazil have fallen
significantly just before the holiday season, suggesting that the
airlines here do intend to compete for customers. The addition of a
third major domestic airline with prices lower than those of a bus
ticket could finally bring affordable travel to millions in the
growing Brazilian middle class. END COMMENT.

7. (U) This cable was coordinated/cleared by Embassy Brasilia.

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