When Brazil's No. 3 airline, Azul, unveiled plans to begin flying to the U.S., it ignited speculation about whether it would partner with JetBlue Airways (NASDAQ:JBLU). After all, the two airlines were both founded by Brazilian-American businessman David Neeleman. (They are also both named after the color blue!)
Initially, the speculation didn't lead to any action. Last year, Azul Brazilian Airlines seemed to lean in a different direction, partnering with United Continental (NYSE:UAL). At that time, United also bought a 5% stake in Azul for $100 million.
More recently, the long-expected JetBlue-Azul alliance has started to become a reality. Let's take a look at why the two upstart carriers are deepening their ties.
Azul and United partner up
United Continental had a very good reason for investing in Azul. Brazil is a key international market for global airlines, and United's two main rivals have already partnered with the two largest airlines in Brazil: TAM and GOL.
Additionally, United's hubs aren't particularly well located for flying to Brazil. As a result, to be successful there, it needs a local partner that can provide connecting traffic at major airports in Brazil. With TAM and GOL both taken, Azul was the only viable option.
However, that's not to say the United-Azul partnership was a match made in heaven. United only flies to Sao Paulo and Rio de Janeiro in Brazil, whereas Azul has its main hub at Viracopos Airport -- more than 50 miles from the center of Sao Paulo.
On the flip side, United doesn't have a very big presence in Fort Lauderdale and Orlando, the first two cities on Azul's U.S. route map. As a result, the United-Azul partnership hasn't opened up many convenient connecting opportunities yet.
JetBlue and Azul team up, too
Fortunately, Azul's agreement with United Continental doesn't seem to restrict it from partnering with other U.S. airlines. Last fall, just a few months after announcing the United partnership and investment, Azul and JetBlue signed an interline agreement, allowing customers to buy a single ticket for itineraries connecting between the two carriers.
There's more to the JetBlue-Azul partnership than management ties. JetBlue has growing focus city operations in Fort Lauderdale and Orlando, allowing for seamless connections from Azul's hub to various other cities in the U.S.
Accordingly, Azul and JetBlue tightened their relationship this week. Azul plans to place its own airline code on a variety of JetBlue-operated flights from Fort Lauderdale and Orlando in a "one-way codeshare" arrangement. This will make it even easier to buy tickets combining Azul- and JetBlue-operated flights.
More room to grow this relationship
Weak economic conditions in Brazil have taken a big bite out of air travel demand there. This has forced Azul to slow its growth, including on international routes.
However, it is likely to add a route from its base at Viracopos Airport to New York's JFK Airport sooner or later. United Airlines pulled out of the JFK market entirely in late 2015. By contrast, JetBlue is the largest domestic carrier there and could supply lots of connecting traffic for Azul flights to Brazil.
So far, the Azul-United partnership seems very one-sided. Azul has shown no particular desire to add flights to United Airlines hubs. As a result, if United wants to leverage the value of Azul's broad route network, it probably needs to start flying to Viracopos Airport itself.
On the other hand, some of JetBlue's top focus cities happen to be in big markets for travel to and from Brazil. Azul naturally wants to serve these markets -- which could drive it to deepen its ties with JetBlue in the coming years.
Adam Levine-Weinberg owns shares of JetBlue Airways and United Continental Holdings, and is long January 2017 $17 calls on 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.