September 24, 2002

Air Asia - no-frills seeker

Cheap fares are coming to Asia, writes Eric Ellis

WITH its red and white livery, it looks like Virgin. With its supermarket specials and marketing style it feels like Virgin. And with $18 one-way fares for the hour's flight from Kuala Lumpur to Penang, Asia's newest airline Air Asia wants to do a Richard Branson and "release the travelling public from the airline tyranny."

With that type of philosophy, it's no surprise that Tony Fernandes, Air Asia's 37-year-old chief executive, used to work as an accountant for Branson in London. And is a big fan of what he's doing in Australia.

But it's not Branson's Virgin Atlantic or even Virgin Blue that Fernandes wants to emulate; it's the godfather of discount flying, Ireland's Ryanair, one of the world's best share market and profit performers in recent years.

To that end, Fernandes, a former music industry high-flyer whose only contact with the airline industry before last year was a regular acquaintance with international first-class cabins, has on board one of the industry's sharper players - Ryanair's former chief operating officer Connor McCarthy who has signed on for 5 per cent of Air Asia and a consultancy to the fledgling carrier.

But the two have the job ahead of them. In an Asia market where discounted air travel is as rare as the one-sky policy that has seen discount flyers proliferate in Europe and North America, Air Asia is pioneering no-frills air travel from the seat of its principals' pants.

Fernandes and four partners, including McCarthy, bought the airline from a struggling state company three days before September 11 last year, paying one Malaysian ringgit (55 cents Australian), $80 million in outstanding debt and with zero goodwill and a massive competitor, Malaysia's state-owned Goliath, Malaysian Airlines System (MAS).

But Fernandes is one of the few businessmen for whom the terrorist attacks in the US was good news.

"The airline industry was devastated and so everything we needed to start up the airline was suddenly half-price," he says.

Almost a year later, Fernandes claims to be going from strength to strength. With its Malaysia-only service to six domestic centres, Air Asia is running around 80 per cent average occupancy. Fernandes says all debts are cleared and Air Asia is in a "net asset position".

Moreover, the parvenu flyer has spooked MAS, which in July slashed it own domestic fares by 50 per cent - this despite MAS racking up losses last year of $405 million.

Air Asia is the latest of a lengthening line of Ryanair imitators in Asia, where travellers have long endured some of the world's highest fares on some of the world's most dangerous airlines.

Japan has seen a spate of cheapie carriers - Skymark, Skynet and the now-defunct Air Do - while in The Philippines, John Gokongwei's Cebu Pacific is taking on Philippine Airlines.

"The traditional full-service airline model requires significant modification, if not open-heart surgery," says respected regional analyst Timothy Ross of UBS Warburg.

But talk like that is an anathema to Asian nations, who protect their national carriers with fierce patriotic pride. Indeed, MAS has been a case in point. MAS has accumulated too many planes - 98 at last count - and too many losses by being a political football for much of the prime ministership of Malaysia's mercurial Prime Minister Mahathir Mohamed.

As "Dr M" spread his unique brand of economic nationalism around the world, his diplomatic bag would frequently include bilateral air links with MAS, in part to help fill Kuala Lumpur's massive but under-used new airport at Sepang.

The net result for the embattled MAS were obligations to fly from KL to profit-less destinations such as Tunis, Zagreb or Buenos Aires, hardly regional aviation hubs.

"There's never been a lot of passenger demand for KL to Buenos Aires," notes Mark Webb, aviation analyst with HSBC Securities in Singapore.

The big money for the start-up airline might be yet to come. Plans are afoot to set up a hub in Johor Baru in southern Malaysia in what seems a cheeky attempt to take on Singapore Airlines.

SIA is a formidable competitor. One of Corporate Asia's great success stories, it has been nurtured by a Singapore Inc system that deters competition and has been fortunate to have two relatively poor neighbours, MAS to the north, and Indonesia's Garuda, (which wags like to say stands for Good And Reliable Under Dutch Administration).

Air Asia can't match SIA on service but it seems ready to test the mighty carrier on price, setting up a hub in neighbouring Johor Baru and running Air Asia plans to run cut-price flights to SIA's staple routes to Jakarta, Bangkok, Surabaya and Bali.
Even cheekier is an Air Asia plan to bus prospective passengers from downtown Singapore to Johor's under-trafficked Senai airport, a 30-45 minute journey on vacant freeways as against the 20 to 25 minute ride to Singapore's busy Changi. The extra 20 minutes might be compensated by fares 50 per cent under, say, the $700 it costs for the two-hour Singapore to Bali return fare.

If SIA are flustered by Air Asia's leaking plans, they aren't showing it.

"Air Asia aiming at the low-cost market - a different approach to ours," says SIA's corporate affairs manager Innex Willox.
"We always welcome competition and believe that makes all involved try harder which is the way it should be."

But an industry source says the Singaporeans, still smarting after big losses on Air New Zealand and being outmanoeuvred by Virgin Blue in Australia, are "a little bit spooked", even offering to help set up a new terminal in Singapore for the new Malaysian airline. The Singapore Civil Aviation Authority admits to being in discussion with Air Asia but denies offering to build it a Singapore terminal.

Ultimately, Air Asia's expansion may be stymied by politics. Unlike Europe - where Ryanair, KLM's Buzz, and Stelios Haji-Ioannou's UK-based EasyJet have prospered on the 2-hour to 3-hour sectors - Asia remains a region where bilateral deals matter.

JP Morgan's airline analyst Peter Negline says there is scope for domestic discount carriers in places such as Indonesia or China and, as Air Asia, Malaysia, but "major structural impediments" remain internationally. Still, Negline says, Air Asia's noisy arrival makes it one to watch.