MIAMI — United Airlines is making an aggressive play for the Brazilian market. The Chicago-based carrier will be purchasing a 5% stake in Azul Brazilian Airlines, the Sao Paulo based low cost carrier that is Brazil’s third largest airline after oneworld alliance member LATAM Airlines Group (South America’s largest airline) and low cost carrier Gol. United will spend $100 million for its minority ownership stake, valuing Azul at $2 billion. The two airlines will also deepen ties through code sharing in both the US/Caribbean and Brazil, optimization of schedules in Brazil, and reciprocal frequent flyer program earnings and benefits.

Initial Network Synergies might be Sub-Optimal Due to Mismatch

United is by far the most Sao Paulo-centric of the three US legacy carriers in its Brazilian long haul network, with daily service from Houston, Chicago O’Hare, Newark, and Washington Dulles. It also serves Houston – Rio de Janeiro nonstop to feed into Houston based oil traffic. By comparison, Delta has double daily service from Atlanta to Sao Paulo (daily to Detroit/New York JFK), as well as daily Atlanta service to Rio and Brasilia. Delta will also be adding nonstop service from Orlando to Sao Paulo and Brasilia.  And American Airlines is of course in a different hemisphere, with service to 10 different Brazilian destinations thanks to its hub at Miami.

Azul for its part, primarily offers nonstop service from its hub at Viracopos International Airport in Campinas, about an hour north of Sao Paulo, where it operates nearly 170 peak-day departures to 48 domestic destinations. It will also operate 12 flights per week to Fort Lauderdale and 14 to Orlando this winter, leveraging its recently delivered fleet of Airbus A330-200 aircraft. In addition, Azul will offer daily nonstop service from Belo Horizonte (its second largest hub with ~80 daily departures) and Sao Paulo Guarulhos (GRU – Sao Paulo and Brazil’s primary international gateway) to Orlando. And while it has not yet announced schedules or frequencies, Azul also plans to add nonstop service from Viracopos (VCP) to New York JFK later this year.

This represents a fundamental network mismatch. United’s Brazil operations are concentrated on GRU, and while Azul does have roughly 50 daily departures to 16 domestic destinations at GRU (it’s fourth largest base by capacity), connectivity for United’s four arriving flights (between 10:40 and 11:40 am) isn’t quite as expansive. In terms of feasible connections (i.e. more than 1.5 hours connecting time [which is cutting it close] and fewer than 4-5 hours), United customers at present will have convenient connections to Belo Horizonte, Brasilia, Cascavel, Curitiba, Goiania, Porto Alegre, Rio de Janeiro (Santos Dumont), Salvador, and Vitoria. Feed for United’s northbound flights from GRU (Which all depart after 11:00 pm) is more expansive, adding Campo Grande (barely), Maringa, Navegantes, and Recife to the aforementioned destinations. But there are still enormous gaps, with suboptimal or nonexistent connectivity to Recife (unidirectional), Fortaleza, Belem, Florianopolis, Natal, and Foz de Iguacu amongst major Brazilian origin centers for US demand.

Theoretically Azul could re-time some of its GRU flights or add destinations, but given the scarcity of slots at GRU, an en-masse re-timing and/or the addition of new destinations could be difficult. When compared to Gol (who Delta code shares with and owns 3% of) with 109 daily departures to 31 domestic destinations (and 13 daily departures to 8 South American ones) or TAM (closely tied with American) with 90 daily departures to 25 domestic destinations (and 26 to 10 South American ones), Azul is clearly suboptimal for feed at GRU. Theoretically, United could add service to VCP. Campinas is an important and growing economic center in its own right, and the Sao Paulo metropolitan area increasingly resembles Tokyo, New York, or the Pearl River Delta in that is getting so spread out that multiple airports are more than justified by demand dispersal. Still, VCP is far less preferred by premium travelers than GRU or Congonhas in Central Sao Paulo, and that will work against United. Nonstops from VCP to Chicago O’Hare and Washington Dulles are absolutely out of the question. Houston and Newark would have a better shot at success, but so far the only US airport that has proven its ability to sustain a US airline flight to VCP is Miami for American Airlines.

At Rio de Janeiro’s Galaeo airport, Azul is a nonentity, with just 10 daily departures, mostly to VCP. Once again Gol (69 daily departures/23 domestic destinations) and TAM (46 departures/16 destinations) provide far better connectivity. United can of course layer Azul’s connectivity with that of its Star Alliance partner Avianca Brasil (a subsidiary of Colombia-based Avianca) in Rio (16 departures/9 destinations) and Sao Paulo (36 departures/14 destinations), but even so, United will be at a severe disadvantage when it comes to feed.

On the US side, United isn’t doing much for Azul either. Azul’s US operations are currently concentrated in South Florida, and both Fort Lauderdale and Orlando are spokes for United, with little connectivity beyond United’s hubs. And of course United is exiting the New York JFK market entirely, so they’re not much help there. One immediate fix would be for Azul to alter its New York plans to focus on United’s hub at Newark Liberty International Airport, where United offers a massive amount of connectivity (roughly 430 daily departures and close to 150 destinations). Newark might not be as preferred for New York travelers as JFK, but the feed should more than offset that.

JV Seems Imminent, Star Alliance Less So

The US-Brazil market will be liberalized through an Open Skies agreement beginning in October of this year, which would enable US and Brazilian carriers to secure antitrust immunity (ATI) for joint venture (JV) partnerships. Assuming alignment along current partnerships, United and Azul would be prime JV candidates, as would Delta/Gol and American/TAM, which would solve the network misalignment problems by allowing better coordination, planning, and marketing through a profit-sharing agreement. Service from United’s hubs to VCP would also be a lot more viable under a JV.

Whether Azul would join United in Star Alliance is less immediately clear. Azul founder David Neelman’s recent acquisition of Portuguese Star Alliance carrier TAP (who operates a massive long haul operation from Lisbon to Brazil and will open 10 new US routes as per Neelman’s announced plans) would point towards deepening ties for Azul and Star Alliance. The counter is that Star Alliance already has a major Brazilian presence in Avianca Brasil (admittedly a distant fourth in market share), and the history of two airlines from the same country co-existing in an alliance is mixed. It remains to be seen whether Azul will formally tie itself to Star Alliance, but United’s investment is unquestionably a step forward for the global alliance in the all-important Brazilian market.