September 2, 2002
With no previous airline industry experience, Tony Fernandes didn't mind
breaking the rules at Air Asia
Eric Ellis, Kuala Lumpur
Tony Fernandes isn't your typical airline executive. His taste in music runs to German hip-hop. He's not above pushing a cabin trolley or unloading baggage to gauge customers' moods. And he had never worked in the industry before buying Malaysia's discount carrier Air Asia last September. "The closest I came to the airline industry was kicking back in first en route to another artist signing," says the 37-year-old former music industry executive.
But Fernandes has learned enough in the past year to create turbulence for government-backed giants like Malaysian Airline System (MAS) and Singapore Airlines. Since buying Air Asia from struggling Malaysian automaker Hicom for one ringgit (about $0.26) and $36 million of debt three days before Sept. 11, Fernandes has transformed domestic air travel in Malaysia.
Offering cheeky ads, funky staff attitude, easy online booking, and low fares--as little as $9 from Kuala Lumpur to Penang (compared with $44 on MAS)--Air Asia has had no trouble keeping its planes full. Fernandes says he has already cleared Air Asia's debts and is operating at a profit, with margins of 15% on the $36 million in revenues the carrier generated in the first five months of 2002.
That's a claim MAS can't make. The Malaysian flag carrier lost $219 million in the fiscal year that ended March 31 and is going through a radical restructuring, its third in a decade. MAS isn't happy that the government has allowed Air Asia to become a symbol of economic reform and is clearly rattled by the upstart. In August it announced it would cut domestic fares by half, only a year after raising prices to boost profits. MAS denies it is responding to Air Asia--"Customers have the basic right to choose," says MAS chairman Azizan Zainal Abidin--but it's hard to see the situation any other way.
Fernandes still has some distance to travel. MAS has 97 planes, a global network, and decades of experience and influence. Air Asia has only five leased 737s, five domestic destinations, and a savvy advisor, Connor McCarthy, a former right-hand man to Michael O'Leary, the brains behind Ireland's Ryanair. (McCarthy owns 5% of Air Asia's holding company; the rest is owned by Fernandes and three Malaysian associates.)
Ryanair is the model for a number of discount airlines in Asia. In the Philippines, John Gokongwei's Cebu Pacific is taking market share from struggling Philippines Airlines. Richard Branson's Virgin Blue is eyeing a public offering just two years after its first flight in Australia. And in Japan, SkynetAsia Air has started cheap fares from Tokyo's Haneda airport and plans to go regional.
But it won't be easy for these carriers to replicate the success of Ryanair, Britain-based EasyJet, or American flier Southwest Airlines. Asian aviation is a "bilateral story--countries do route deals with each other," says Mark Webb, aviation analyst with HSBC Securities in Singapore. "There's not the same one-sky market as in Europe and North America." And the established carriers are not all sitting ducks. A Japanese discounter, Air Do, filed for bankruptcy in June after being out-discounted by the majors.
Fernandes may be flying high in Malaysia, but he has to find a way through Asia's bilateral barriers to cash in on his big bet. Air Asia is planning to set up a hub at Malaysia's Johor Baru, not far from Singapore. The idea is to bus cost-conscious Singaporeans 30 minutes across the border--only ten minutes longer than it takes to get to Singapore's Changi airport from downtown--and fly them more cheaply than Singapore Airlines can to such destinations as Bali, Jakarta, Bangkok, and southern China. Fernandes is currently in talks for landing rights in those places.
"There's definitely scope if they operate away
from the major trunk routes into some of the lesser trafficked routes,"
says J.P. Morgan analyst Peter Negline. Fernandes insists Air Asia is an idea
whose time has come. "I think the tyranny of traditional airlines is about
to end," he says. And for the region's long-suffering travelers, who endure
some of the world's most expensive airlines, that's a welcome prospect.