By Nicholas Ionides in Kuala Lumpur
AirAsia chief executive Tony Fernandes is fashioning one of the fastest growing and recognisable low-fare brands in South-East Asia
Tony Fernandes is clearly having fun. Driving his Ford Escape sport utility vehicle airside at Kuala Lumpur International Airport, music blasting and mobile phone ringing non-stop, the 39-year-old group chief executive and key shareholder of AirAsia has no regrets about leaving the music business for the airline industry.
"I love it," he says in between text messages, travelling to a far end of the airport to show off AirAsia's new maintenance hangar. "You've got to get up in the morning saying it's fun going to work, and that's what it's like."
For now at least, Fernandes is the man of the moment in Asia, making headlines just about everywhere he goes. A highly personable guy who boasts with an almost juvenile snicker that he "loves a good party", Fernandes has taken on the establishment and proven wrong those who said low-fare airlines could not succeed in the region.
Although not the first to have tried, AirAsia is the most successful low-cost/no-frills operator in Asia - excluding Australia where Virgin Blue is going strong. Some of the major incumbent carriers in South-East Asia, notably Singapore Airlines (SIA) and Thai Airways International, are setting up no-frills operations as a result of the phenomenon that Fernandes calls a "fad" similar to the dotcom frenzy of the 1990s. "They probably see it as a guy in a t-shirt from the music business, so it can't be that difficult," he says.
Criticism of competitors aside, the no-frills phenomenon has made Fernandes a rich man, at least on paper, and it promises to make him far more wealthy after the airline goes public through a planned initial public offering (IPO) later this year. But he insists he did not get into the airline business for the money, noting that many fortunes have been lost by those who failed.
"Rich is just a byproduct," he says, turning serious. "It's a nice byproduct - let's not lie about it - but money hasn't driven me to do this. I got into this because I need a challenge in my life. I thought this was an enormous challenge and no one gave us a hope in hell.
"I love to prove the impossible. I don't want to have to do it every time because I've got a lot of grey hair out of it. But you're remembered for something like that and I would love to make all the staff relatively wealthy and leave something that in the years to come is a respected company."
AirAsia was not always a respected airline, however. Although a new name to many, it began operating late in 1996 as Malaysia's second national carrier with grand plans for expansion. The plans were never realised as the carrier went nowhere after the death in March 1997 of Yahaya Ahmad, head of then-parent company DRB-Hicom, in a helicopter crash. This was followed by the two-year Asian economic downturn that started in mid- 1997, and from which the old AirAsia never recovered. Just as DRB-Hicom was hoping a buyer would come along, Fernandes, at the time Warner Music's vice-president for South-East Asia, decided it was time for a change in his life.
"I was flying back from New York and decided to stop in London for a bit of a party," he recalls. "And I saw Stelios [easyJet founder Stelios Haji-Ioannou] on TV and thought this low-fare thing sounds interesting. I thought it was a great concept."
Fernandes took a train to easyJet's base at Luton airport and spent the day talking to passengers and staff. The next day he returned with a video camera, after which he called his wife and said he wanted to start an airline. "After she stopped laughing I said I was serious."
Fernandes started drawing up a business plan but it proved a challenge, he admits: "I knew nothing, absolutely nothing, about airlines." He trawled the internet for information and met a friend who was a leasing lawyer at White & Case. Fernandes was then introduced to an executive at GE Capital Aviation Services who briefed him on how the airline industry works. This contact helped put Fernandes in touch with Conor McCarthy, former director of group operations at Ryanair.
The two met at London Stansted airport early in 2001 and Fernandes showed McCarthy his business plan: for a long-haul, low-cost, no-frills carrier that would "hook up with all the low-cost carriers" in Europe. "We hit it off right away," says Fernandes, "and then he tore my business plan apart."
A new plan was drawn up for an airline with operations in Malaysia, modelled after low-fare carriers in other parts of the world. McCarthy signed on as an investor, as did a handful of others, and in May 2001 a meeting was arranged with Malaysia's then-prime minister, Mahathir Mohamad, aimed at securing his approval. Mahathir gave his blessing but said no new airline licence would be issued, meaning an existing operator would have to be purchased.
The group left dejected, as the plan was to start anew. But they regrouped to consider their options. One was to buy regional operator Pelangi, but it was a basket case and has since shut. The other option was loss-making AirAsia, which had a fleet of just two Boeing 737-300s and a tiny route network.
Takeover talks began soon after and a deal was quickly reached. The investor group, through their company Tune Air, would purchase AirAsia for 1 ringgit (26¢) and the assumption of 50% of net liabilities, or around 40 million ringgit. The deal was inked in September 2001 and completed in December. In January 2002, AirAsia was relaunched as a low-fares operator, with additional aircraft and new domestic routes. Profitable just about from day one, the debt was paid off within a few months and the carrier's operating margin is now said to be approaching 30%. For the year to June, a 30 million ringgit net profit was recorded on revenue of 310 million ringgit.
"Everyone thought we were crazy but I knew it would work," says Fernandes, who mortgaged his home to help capitalise the airline, in which he has a stake of around 35%. "One of the key facts was that only 6% of Malaysians flew. I thought this could only grow."
The market indeed has grown substantially since AirAsia's relaunch. The airline has carried more than 3.6 million passengers since January 2002 and expects to carry more than 3 million this year alone. It now has a domestic market share of around 30% - from market growth, as Malaysia Airlines (MAS) has not seen any drop in domestic passenger numbers.
"The market has grown from 9 million passengers to 12 or 13 million," says Fernandes. "We've gone up against the biggest, and we're definitely the David of the David and Goliath. There's a national empathy." Proof comes as Fernandes stands at the boarding bridge of one of AirAsia's 737s at Kuala Lumpur airport. As passengers board, several congratulate him on the carrier's success and thank him for bringing down fares to enable them to fly. Some ask to have their picture taken with him.
"There's a lot of laughs," he says, admitting that the celebrity factor is a fun byproduct. "We also get nice letters from people saying they never thought they would fly before they died and were able to take their son for a holiday. It's a nice feeling."
But behind the laughter, trademark jeans, t-shirt and bright red baseball cap, Fernandes is a serious businessman who is building a valuable corporate empire.
Last year a $26 million capital injection was secured from foreign investors in return for a 26% stake, valuing the carrier at $100 million. Around September more cash is expected to be raised through an IPO that Fernandes hopes will fill the airline's coffers with another $200 million. He claims bankers are valuing the airline at between $750 million and $1.2 billion, and whether these are realistic sums or not there is no doubt AirAsia is a very valuable brand. Not bad for a relatively unknown airline that was acquired for less than the price of a cup of coffee just over two years ago.
AirAsia is now expanding into other markets, having recently launched international services from Malaysia and having set up a 49%-owned associate carrier of the same name in Thailand with Shin Corp, a company founded by Thailand's prime minister, Thaksin Shinawatra.
AirAsia is also looking at establishing a similar operation in Singapore with local partners and has submitted an air operator's certificate application. Fernandes sees the extension of the brand to other markets as similar to what Ryanair has done by setting up new bases around the European single aviation market. In Asia there is no equivalent common market, but AirAsia has found a way to expand its reach in the regulated environment by franchising, of sorts.
AirAsia's model is identical to that of traditional no-frills carriers in other parts of the world. It operates just one aircraft type, has turnarounds of 25min or less to keep utilisation high, sells most of its tickets over the internet at different prices depending on the time of travel and how early one books, and does everything possible to keep costs low. Fernandes says AirAsia has the lowest operating costs of any airline, anywhere on the planet, of around 2.5¢ per available seat kilometre (4¢ per mile). He believes this can be reduced further after the IPO as funds raised will enable it to purchase more aircraft rather than rely so much on leasing.
Starting with just two aircraft, by February this year the fleet had grown to 14 737s - including two with the Thai operation - and by the end of 2004 the group fleet should be nearing 30 aircraft. Fernandes does not like to predict how large the company may become in the coming years: "If you told me two years ago that I'd have 30 planes I wouldn't have believed it".
"But I suppose there's no reason why each operation couldn't have 30 aircraft themselves," he says, referring to the operations in Malaysia and Thailand. The proposed Singapore operation would be smaller.
The Thai operation started early in February with domestic services, quickly going international with flights between Bangkok and Singapore. The Malaysian operation, meanwhile, has built up an extensive domestic network, with hubs at Kuala Lumpur International Airport and Senai Airport near Johor Bahru, just across the border from Singapore. It also now serves Thailand and has its sights on other international destinations, such as points in Indonesia.
Apart from a possible Singapore-based operation, AirAsia is not looking aggressively at setting up shop elsewhere for now, says Fernandes, as "we have enough on our plate at the moment". Growth plans were in fact slowed last year because the airline felt it was not able to keep up with pilot training requirements.
"As much as we have grown aggressively we are a very conservative company," he says. "We are not going to grow stupidly. I've seen some airlines grow too quickly and they fall over themselves. We must make sure that we grow sensibly."
And what of the "fad" that he is credited with starting in the region? Fernandes finds it flattering that some of the majors are now setting up low-fare units, but questions their motives. "You either want to do it or you don't. That's where we have an advantage over Thai or SIA - they can put in all the theory and think capital is going to buy them success. But it's not just about capital," he says.
"We started the business for the right reason - to grow the market. We didn't go out there to kill anyone. We thought there was a business opportunity. SIA is not starting it for the right reason, otherwise why didn't they start it a long time ago? It's not like Tony Fernandes introduced the model. The model has been here for a long, long time. They're starting it as a defensive move. Businesses that start as a defensive move are always on a minus platform. You don't start with the right motivation and the right environment."
Fernandes says he tries to create an environment of serious fun at AirAsia, where everyone is valued. In cluttered and crowded head offices at Kuala Lumpur airport, accountants, web designers, marketing staff, promotions and public relations employees, operations personnel, flight attendants, schedulers, pilots and mechanics all work under the same roof.
"I'm very close to our staff. It's not staged, it's what we are. I find airlines are so compartmentalised. You have engineers who think they're one thing, pilots who think they're demigods, and nobody talks to each other," says Fernandes. "Airlines are full of prima donnas. There are massive egos in this business. We don't have that. We know that you are only as good as tomorrow."
One way he keeps egos in check is by making pilots cook breakfast for engineers each quarter to thank them for looking after their aircraft. He says he also tries to provide opportunities to move within the company, pointing to a cadet pilot training programme which started late last year with 19 internal recruits. Currently undergoing training to be pilots are former check-in assistants, a former accountant and a former baggage handler, for example.
"That kind of thing really motivates people, especially in an Asian company," says Fernandes. "The Asian way is management decides everything and the rest do as they say. We take a different approach here because it is a lot better having a thousand brains working for you than just 10.
"Anyone can start a low-cost carrier. The model is out there and it is not a secret - it's not Colonel Saunders' secret recipe. But it's harder to do in reality because you have got to get a lot of people to buy into your culture. It's almost like a religion. You've got to keep that motivation pumped up all the time."
Fernandes says one way he is able to keep his own motivation level high is by making things light-hearted wherever possible. A case in point is the new 'A' check maintenance hangar that he was so keen to show off. As he steps out of his car he boasts that the tiny structure cost 2.5 million ringgit, making it the cheapest hangar ever built. But the real reason he wants to show it off is to provoke a laugh from the billboard on its side.
Directly facing a much larger hangar belonging to MAS, the billboard brags that AirAsia employs the best people and is clearly meant as a slap in the face to the national carrier's staff. Why do such a thing? Fernandes replies as if it should be obvious: "Going against the establishment has been fun."
Taking to the airwaves
Many kids say they want to become airline pilots but Tony Fernandes had a different goal. "When I was young I said I was going to own an airline." Today, at age 39, he owns around 35% of AirAsia, having left a life of corporate perks and rubbing shoulders with celebrities in the music business to run a low-fares airline.
Fernandes was born in Malaysia but moved to the UK to attend boarding school in 1977 and stayed in the country for 13 years. An avid sports fan who enjoys football and squash, he wanted to become a professional cricket player but did not make the cut. Instead he studied accounting and his first job was as an auditor in the UK.
"I couldn't stand it," he says, and left the job after six months. He then focused on the music business, having long enjoyed playing keyboard and drums. Fernandes sent his CV to record companies and Virgin employed him in the finance section of its television department.
After two years at Virgin he left to join Warner Music and at age 26 was moved from the UK to his home country as general manager of the Malaysian operation. Six months later he became managing director.
By 2001 Fernandes felt it was time to move on and left Warner. He mortgaged his home and with a handful of other investors acquired then struggling AirAsia. "I don't regret it for a minute," he says.