Air Asia takes millions to the sky

Tony Fernandez has been called the Richard Branson of Asia. The former music executive took over a bankrupt Malaysian carrier and quickly built it into one of the world's biggest, and most cost-efficient airlines. Competing with entrenched national carriers, he helped cut prices and add routes around the region, cheered by millions as he kept Air Asia focused on its mantra: "Now Everyone Can Fly!"

TONY FERNANDES SET OUT with the grand goal of revolutionizing the way Asia flies. In a quick snap of six years, he’s modernized boarding and booking procedures, bumped up efficiency and slashed costs. His low-cost Air Asia has turned an industry upside-down, taking millions of passengers on their first flights, while sending prices plummeting.

  Nobody expected much in 2001, when Fernandes took over a tiny, bankrupt Malaysian carrier, paying a token sum of US 0.27 cents for a pair of old Boeing planes and US$11 million in debt. Yet, within his first year, he cleared the books, and began ramping up at a pace that keeps accelerating.

  Last year, Air Asia flew 13 million passengers. This year, it’s on pace for 18 million. Within six years, Fernandes projects the number will reach 70 million, making Air Asia the region’s – and maybe the world’s - largest passenger carrier.

  With passenger volume growing at over 35 percent per year, the unsinkable Fernandes is now plotting what many consider his biggest gamble yet: taking low-cost flights long haul.

  He says he will launch a new airline in September flying from his Malaysian hub to Europe and Australia. Most industry observers scoff at the possibility of undercutting big carriers. Fernandes vows prices will be slashed in half.

  “All the skeptics were there when I started Air Asia,” he notes cheerfully. “I think it’s good to have all the skeptics. If they weren’t all saying this was impossible, then there would be no room for little Tony to prove them wrong.”

  Fernandes, 43, relishes the challenges and his underdog role. In India last week, he was mobbed like a Bollywood star, reporters begging for clues about his plans to open up Indian skies.

  “Air Asia has become very sexy,” he chuckles. He admits that India offers attractions, but also has his eyes on new routes to China and Japan.

  “Japan is very, very much on our radar,” he says of one of Asia’s highest-priced, and most closed aviation markets. “We’re getting approached all the time. It’s like this club with all these beautiful girls. There are just so many options out there.”

  If the cherubic Fernandes sounds a bit smug, he’s surely earned it. Likened to Richard Branson, and a onetime employee at Virgin, Fernandes was an executive at Warner Music in Asia when he cashed out his stock options, mortgaged his house, and with fellow Malaysian music executive Kamarudin Meranun, launched Air Asia on little more than a pair of wings and a prayer. And the motto: “Now everyone can fly.”

  Back then, he reckons, as few as six percent of the Malaysian population had been inside a plane. Across Asia, even fewer had flown. While low-cost carriers like Ryan Air, Easyjet and Southwest Airlines were soaring in Europe in the United States, Asia remained a jumbled network of highly-protected, highly-priced carriers.

  Using established low-cost models, Air Asia began flying routes nobody else bothered with, using a fleet of reconditioned Boeing jets. Service was bare-bones, staff kept to the minimum. Flight attendants, even pilots, pitched in to clean cabins or unload baggage.

  Nor was the boss, in trademark red Air Asia baseball cap, above pitching in, rushing to landed craft, surprising and inspiring staff as he wielded a mop or dishrag.

  Cutting costs is the model of all budget airlines, but Air Asia took frugality to new heights. Air Asia claims a cost per seat of under 2 cents per kilometer, about half that of leading US cut-rate carrier Southwest.

  Asia offers built-in advantages, like low-priced labor. With fuel costs and landing fees generally fixed, this is where low-cost carriers really compete.

  Labor in Asia typically constitutes 17 percent of overall airline operating expense, according to Andrew Herdman, director general of Asia Pacific Airlines, the region’s largest airline association. In comparison, even after drastic reorganization, the figure is 30-40 percent in the US and Europe, he says. “Air Asia focuses on cost,” he notes. “It’s the traditional model of successful, no-frills airlines.”

  Yet none have perfected the penny-pinching as much as Air Asia. Ticket sales were funneled through the internet, eliminating the need to operate pricey service centers, or pay travel agent commissions.

  Hardly innovative in the industrial West, this was a major gamble in a region with low internet rates and a preference for personal service. The airline introduced e-ticketing to many countries in Asia. Elimination of paper like boarding passes, means more savings.

  Air Asia’s impact has been nothing short of revolutionary on numerous routes. When it launched flights from Bangkok to Phnom Penh, Cambodia, through subsidiary Thai Air Asia, the route was served by only two carriers, Bangkok Air and Thai Air. Many felt the pair operated as a cartel, offering two or three flights daily, at almost identical times and prices of $250-300 for a 50-minute flight. Air Asia launched with tickets as low as $10 each way. Now, established airlines offer discounts of half or less.

  “Air Asia has really opened up our options,” says Tony Lawson, a father of four from Bangkok, on holiday in Malaysia last week. “Before, we couldn’t really afford more than one vacation a year, but now the entire family can fly for the price of one ticket.”

  Others praise the convenience and inter-connectivity offered by Air Asia. Kuala Lumpur-based photographer Palani Mohan flies constantly around the region, usually at last minute.

  “Before, it was a nightmare getting around. Since Air Asia came on the scene,” he says, “there are so many options. The great thing about Air Asia is that they fly routes people want to go, that just weren’t serviced before.”

  Air Asia has also gained praise with lavish giveaways of tickets, and promotional fares that can run under $1, before taxes and handling charges.

  As Air Asia grew, it replaced its old Boeings with more fuel-efficient Airbus. Running a fleet of the same craft offers savings in training and maintenance. The airline currently has orders or options for 100 new craft, reflecting enormous growth plans.

  Around the region, other low-cost carriers have emerged, about three dozen at present with more flying and failing every year. Most competitors fall into two categories: tiny, mainly-domestic budget airlines like Thailand’s Nok Air; or big regional players with deep-pocket parents like Singapore’s Tiger (Singapore Airlines) or JetStar (Qantas).

  None have managed to come close to the flight diversity or scale of Air Asia. And in the aviation game, the battle is largely about market-share and branding. Many believe Air Asia has a commanding lead that cannot be overtaken.

   Even with its razor-thin margins, Air Asia is likely to see net profits triple to $100 million on sales of $340 million for the fiscal year ending in this month.

  “AirAsia is one of the most profitable listed airlines in Asia,” notes Corrine Png, who covers aviation for Citigroup Investment Research. She predicts growth in passenger traffic across the region at 7.4 percent annually for the next five years.

  Peter  Drolet, Asia Aviation Sector Head of Research for Singapore’s UOB Kay Hian Bank, sees the runaway growth extending 10 years, and beyond. “We’ve very bullish.”

  The airline received a huge boost in March 2006, with the opening of a new, low-cost terminal in Kuala Lumpur. This was further vindication of the influence of Air Asia, which had previously been stymied in plans to expand on its home turf.

  Built largely to service Air Asia’s booming growth, the new dedicated hub is a testimony to frugality. Lacking expensive over-bridges, baggage moves from counter to curbside to nearby plane in minutes, without networks of cargo handlers and equipment.

  Designed to serve 10 million passengers, the terminal – locals call it “the shed” - was built in under a year for about US$30 million, says Dato Seri Bashir Ahmad, CEO of Malaysia Airports Holdings Berhad, which runs the terminal and 38 other Malaysian airports. Typically, the cost for full-service modern airport runs into the multi-billions.

  Aside from a handful of weekly flights from Cebu Pacific, a budget carrier in the Phillipines, the entire flight board and airport is dominated by Air Asia, which offers up to 50 flights daily. The custom airport allows for the quick on-ground turnaround crucial to low-cost carriers, which need to keep planes in the air to make a profit.

  Seri says low-cost hubs are clearly the model for Asia, pointing to a similar airport that opened in Singapore, and plans for another in Thailand to compete for the booming low-cost business. Malaysia itself opened a second low-cost terminal this year in Kota Kinabalu, and plans to build another, bigger hub in Kulua Lumpur by 2010.

  “When we built the low-cost terminal, it was designed to be a temporary facility,” he says. Constructed for capacity of 10 million, the terminal is likely to handle 6-7 million passengers this year. The new terminal planned will have capacity for 25 million.

  The new terminal plays into Fernandes plan to further revolutionize regional aviation with the launch of his new international airline. Likely to be called AirAsia X, it will be run independently from Air Asia, financed largely by Fernandes and deputy Meranun.

  But will the low-cost model fly on long-haul routes? Industry stalwarts like Herdman  are skeptical, noting that the need to use bigger aircraft with more baggage handling eliminates the quick turnaround times that make budget airlines so effective. And the lack of frills that customers happily endure to save costs on short flights become less attractive on long flights. Budget carriers already respond on longer flights by offering more food, entertainment and space – all at an additional price. Fernandes concedes that his new long-haul airline will do likewise.

  “The attraction to the long-haul market is simple,” Herdman says. “That’s where the money is.” In the USA, for instance, despite the proliferation of low-cost airlines, 90 percent of the revenue is claimed by full-service carriers, he says. 

  “Long-haul means higher revenue, it’s just a huge pie. I think Air Asia realizes that low-cost carriers are limited to a small part of the revenue pool. They are going to long-haul, because that is where there is a lot of money, but the question is, can you make a profit?

  “My view is that the low-cost carriers end up offering something that is virtually indistinguishable from what exists,” says Herdman. “The reality is, whether low-cost or established airline, all are aiming for that same sweet spot, they just come at it from a different direction. Normal airlines offer one price and lots of discounts. Low-cost airlines start with a low price, then move upwards. They charge extra for everything, food, on-board service, check-in. You wind up essentially paying about the same.”

  Fernandes is confident that he can make it work, and still turn a profit. Meanwhile, he’s turned his attention elsewhere, opening the first of what he expects will become a chain of low-cost hotels that bring to lodging the same formula used so effectively in flights. Rooms are booked on the internet, initially for prices in the pennies. As rooms fill up, demand increases along with the price. Customers get a comfortable room on the cheap, but pay extra for everything, from air-con to TV remotes.

  Already a winner with Air Asia, “There is personal satisfaction in proving you were right,” he concedes. “But I never really doubted that logic would prevail.”

  Flamboyant at times, Fernandes can come off as the folksy hero he’s become to many Malaysians, especially when he puts his last few high-flying years in perspective.

  “When you talk to people who say they always had a dream of seeing China to Thailand, and you have made that happen, that’s the greatest feeling.”

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