Cheap, but not nasty
Mar 19th 2009 | from the print edition
IN 1976 Tony Fernandes, aged 12, found himself being put on a plane to London from Kuala Lumpur by his father, who wanted his son to become a doctor and had enrolled him at a fancy boarding school associated with the medical profession. Mr Fernandes did not become a doctor. Instead, his father’s decision to send him to school in London ended up shaping his career in a rather different and unexpected way. When his pleas to be allowed home at half-term were rejected because of the cost of the flight, the young Mr Fernandes opted for what seemed like the next best thing: hanging out at Heathrow airport at weekends, planespotting. Unlike most boys of his age, Tony was not very interested in becoming a pilot. Inspired by Freddie Laker’s heroic efforts to launch his SkyTrain service to America, Mr Fernandes decided that what he really wanted was his own low-cost airline.
This month AirAsia X, the long-haul sister of AirAsia, the airline acquired by Mr Fernandes in 2001, began a five-day-a-week service from Kuala Lumpur to London, with an average ticket price of £179 ($250). AirAsia X’s first plane, an Airbus A330, was christened “Semangat Sir Freddie” (Spirit of Sir Freddie)—both a tribute to a fellow aviation entrepreneur and a reminder that few budget long-haul airlines have survived for very long.
Mr Fernandes has finally achieved his boyhood dream, albeit by an unusual route. After graduating from the London School of Economics with a degree in accounting, he spent 14 years in the music business, working first for Richard Branson’s Virgin Records and then running Warner Music in his native Malaysia. Deeply apprehensive about the merger between Time Warner and AOL in 2001, Mr Fernandes left Warner Music soon after the disastrous deal was finalised, cashing in his shares just in time. Returning to London, he happened to see a television interview with Stelios Haji-Ioannou, the founder of easyJet. The next morning he took himself off to easyJet’s base at Luton airport to see, at first hand, how the no-frills airline operated. The next day he returned with a video camera. If easyJet could make money flying people from Luton to Barcelona for £8, he asked himself, could he transplant the same model to Malaysia?
Already Mr Fernandes was thinking about applying the low-cost approach to long-haul—he even went to see GE Capital, to ask if he could lease a Boeing 747. But on the advice of Conor McCarthy, a hard-nosed former head of operations at Ryanair, he agreed to start with a short-haul business. To that end, he approached Malaysia’s then prime minister, Mahathir Mohamad, in June 2001 to see whether he would get official backing for his plan to challenge Malaysia Airlines’s local monopoly. The canny Mr Mahathir said that he would grant his blessing, but on condition that Mr Fernandes took over an existing airline: AirAsia, a struggling subsidiary of a government-owned conglomerate.
AirAsia had a couple of elderly Boeing 737s, 40m ringgit ($11m) of debt and not much else. Mr Mahathir told Mr Fernandes he could have it for one ringgit. The deal was signed just three days before the world’s airline industry was convulsed by the events of September 11th. By putting in the money from his Time Warner shares, remortgaging his home and bringing in a handful of outside investors, including Mr McCarthy, Mr Fernandes scraped together just enough working capital to run the business, but only if it could be made profitable from the first day.
There was no shortage of sceptics. Not only did it seem to be a terrible time to be starting out, but it was also widely assumed that the low-cost model would not work in Asia, where customers expect high levels of service. Mr Fernandes, however, reckoned that Asia would be spared the worst of the downturn and that he could take advantage of good deals on aircraft that other airlines no longer wanted. He was also convinced that the offer of ticket prices 50% below those of his rivals would speak for itself.
So it proved. In its first full year of operation, AirAsia carried just over a million passengers. This year, with its associate airlines in Thailand and Indonesia, it expects to fly 22m passengers (or “guests”, as Mr Fernandes calls them). The number of destinations it serves has risen from six to 110. With a nearly all-Airbus fleet of 80 aircraft and 175 more A320s on order, AirAsia has become one of the European planemaker’s best customers. AirAsia X, in which Mr Fernandes’s old boss, Mr Branson, has a 20% stake, wants 25 of the new A350s to add to the handful of A330s and the (London-bound) A340 it already operates. As well as the new London route, it flies to Australia, China and India. Unlike other long-haul budget operators that have crashed and burned, AirAsia X has the advantage of economies of scale with its short-haul sister airline, which also acts as a regional feeder network.
Doing it differently
AirAsia has been profitable for all but the second half of 2008, when Mr Fernandes decided to unwind fuel hedges before most other airlines took the plunge. After taking an initial hit, AirAsia is now getting the full benefit of oil at $40 a barrel while some rivals are still paying $100. That decision is typical of Mr Fernandes’s willingness to break ranks. When other airlines slashed advertising during the SARS scare in 2003, AirAsia tripled its spending.
Mr Fernandes says that he came to the industry with no preconceptions, but found it rigidly compartmentalised and dysfunctional. He wanted AirAsia to reflect his own unstuffy, open and cheerful personality. He is rarely seen without his baseball cap, open-neck shirt and jeans, and he is proud that the firm’s lack of hierarchy (very unusual in Asia) means anyone can rise to do anyone else’s job. AirAsia employs pilots who started out as baggage handlers and stewards; for his part, Mr Fernandes also practises what he preaches. Every month he spends a day as a baggage-handler; every two months, a day as cabin crew; every three months, a day as a check-in clerk. He has even established a “culture department” to “pass the message and hold parties”.