A New Airline Expands in the U.S. -- What Does It Mean for Other Carriers?

By Markets Fool.com

Azul Brazilian Airlines recently became the latest foreign carrier to inaugurate service to the U.S. Last Tuesday, Azul began daily service using Airbus A330 jets between Fort Lauderdale and Viracopos/Campinas International Airport, which is on the outskirts of Sao Paulo. Next week, it will add daily service from Campinas to Orlando.

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Azul Brazilian Airlines started its first flights to the U.S. this month. Photo source: Wikimedia Commons.

The new service follows a trend of international carriers expanding rapidly in the U.S., where air-travel demand has been relatively strong. Tight capacity discipline in the U.S. has also created openings for foreign airlines to gain market share. The U.S. network carriers will need to continue focusing on cost containment to fend off the threat from these new rivals.

Azul targets the U.S.
Azul, the brainchild of JetBlue founder David Neeleman, began service just six years ago. Since then, it has quickly expanded through organic growth and a major acquisition. Today, it is one of the largest airlines in Brazil and it could overtake its two main rivals (TAM and GOL) within the next few years.

Since its founding, Azul has focused on flying to smaller cities that its rivals did not have appropriate planes to serve. This has allowed it to grow its network so that it now flies to more than 100 cities in Brazil: twice as many as any other carrier.

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Campinas is Azul's main hub. As a result, its new flights to the U.S. will benefit from numerous connecting opportunities there -- including some destinations that have never before had one-stop flights to the U.S. About half of the passengers on the first flight from Fort Lauderdale connected to a different final destination, according to CEO Neeleman.

A partnership opportunity for JetBlue
Azul's entry into the U.S. market represents another partnership opportunity for JetBlue. Rather than enter into one of the three global airline alliances, JetBlue has forged codeshare and interline partnerships with dozens of (mainly foreign) airlines. These carriers have been eager to get connecting traffic that JetBlue can provide at several strategically important airports.

JetBlue has formed partnerships with dozens of foreign airlines. Photo source: JetBlue Airways.

There are good reasons to expect Azul and JetBlue to partner up sooner or later. JetBlue is the top carrier in Fort Lauderdale, the second-largest carrier in Orlando (the largest, Southwest Airlines, rarely partners with other airlines), and the largest domestic carrier at JFK Airport in New York, which Azul plans to begin serving next year.

Neeleman's history as the founder and CEO of JetBlue prior to Azul's launch, as well as other links between the two companies, should ease the formation of a partnership. Indeed, the companies reportedly had some preliminary talks earlier this year.

Neeleman has indicated that Azul doesn't really "need" connecting feed in its current U.S. markets because of its broad network in Brazil. Nevertheless, that connecting traffic would be nice to have as an additional way to fill seats.

Legacy carriers, beware
The growth of foreign airlines like Azul is a long-term risk for the U.S. legacy carriers, which have a significant proportion of their capacity deployed in long-haul international markets. For the most part, foreign carriers have not adhered to the same kind of capacity restraints that have boosted the U.S. airline sector's profitability.

For the moment, the threat from Azul in particular is limited. It currently plans to operate just one daily flight to Fort Lauderdale, Orlando, and (eventually) New York. Moreover, it has no way to get connecting passengers from other U.S. cities, whereas the legacy carriers have broad domestic networks.

If an Azul-JetBlue partnership emerges, it would create a more dangerous situation. JetBlue can provide connecting traffic from many of the largest U.S. markets -- though still not nearly as many as the legacy carriers serve. As Azul grows in the U.S., the legacy carriers could have more trouble filling the "back of the plane" without cutting prices on flights to Brazil.

The article A New Airline Expands in the U.S. -- What Does It Mean for Other Carriers? originally appeared on Fool.com.

Adam Levine-Weinberg owns shares of JetBlue Airways. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.