Monday, January 08, 2007

Tony Fernandes is Looking to Broaden his Horizons

If Datuk Tony Fernandes has his way, the world is going to get a lot smaller. This week, AirAsia Bhd's flamboyant chief executive ended heated speculation by unveiling plans for a long haul, low-cost carrier that is set to fly its inaugural Kuala Lumpur-UK route in July.
Somewhat unusually for AirAsia, so accustomed to playing the underdog, this latest venture is being conducted with the government's full blessing. A missive from Prime Minister Datuk Seri Abdullah Ahmad Badawi on Fernandes' desk hails the new carrier as “proof of Malaysia's entrepreneurial creativity” and “complementary of the government's policy for our companies to think and compete globally.”
In a nutshell, rural air services operator FlyAsiaXpress (FAX) will be newly christened AirAsia X (`X' for extra long), leasing the name from AirAsia for branding synergies. FAX is currently privately held by Fernandes, with a 50% share, along with AirAsia deputy chief executive Kamaruddin Meranum and Raja Azmi Raja Razali who own 30% and 20% respectively.
Raja Azmi, AirAsia's former chief financial officer, is FAX's chief executive.
Since the rumours first started flying, the hype has been tremendous. After all, the prices are worthy of headlines themselves – passengers would bite the hands off anyone offering KL to the UK at a floor of RM300. The new airline also promises to offer point-to-point frequencies to hot spots in China, India and Europe at enticing rates.
All the same, it's worth noting that taxes and fuel surcharges will hike those headline prices up a fair bit but it still beats the current fares in terms of affordability.
In fact, the fuel issue remains one of the weapons of choice in any naysayer's arsenal. Besides worries over volatility, environmental concerns could see the implementation of taxes that would adversely affect such a low-cost model.
“Oil is not unique to AirAsia. It affects everyone, so everyone's cost goes up,” is Fernandes typically ebullient response. “But our costs are still the lowest – the key is that our unit cost is 1.9 US cents.”
Prior to Friday's press conference, much discussion had centred on a possible role for Virgin group head Richard Branson. With characteristic candour, Fernandes dispels as many rumours as he starts with regards to a potential tie-up with AirAsia's European brethren such as easyJet, one that analysts say could help to reduce costs.
It was hard to miss the hint of rare caution that crept into Fernandes' voice during the one-on-one with BizWeek. He's as excited as ever and wouldn't do it if he didn't think he'd succeed, but he's realistically mindful that it's no easy feat : “It hasn't taken off yet (scheduled to do so by July this year). When I see an A330 taking off, and the plane is full, then ask me. It's a paper concept now. Talk is easy. Doing it is different, so I’m not counting my chickens.”
A prudent approach no doubt, if one recalls the embarrassing one-day delay that bedeviled the launch of long haul, budget airline Oasis Hong Kong Airlines late last year. Even more prudent, if viewed against the backdrop that previous attempts to run cheap long haul flights have failed. (Laker Airways, the first no-frills, long haul carrier which offered one-way flights from London to New York for £32.50, went bust in 1982 when British Airways and Trans World Airlines (TWA) slashed their economy fares to its levels. Another one, Newark, New Jersey-based People Express Airlines, was merged out of existence in 1987 after facing massive debt woes.)
Competing on price, and price alone, has been AirAsia's not-so-secret weapon. Still, the company will require some revolutionary insights to keep a lid on costs if it plans to stick to Fernandes' oft-repeated mantra – that passengers will flock to the lowest prices on offer.
Fernandes fends off what may seem like understandable scepticism : “No one has looked hard enough at the model. That's how new businesses are built. In time you shall see. They can succeed but we aren't going to tell all now. Time will tell.”
The key to succeeding in low cost, long haul flights, which Fernandes is obviously talking about, is actually no different than what is required for a low cost, short haul to succeed - aggressive, brutal cost cutting measures. The only difference is that in the case of long haul, the dynamics may differ.

There is a school of thought that the same factors that help keep costs low for short haul carriers are less relevant to long haul such as short turnarounds, cutting out catering costs, having a single type of aircraft, last minute online books and low numbers of empty seats. With that, they point out that the efforts to strip out all the complexities for short haul budget airlines cannot be readily transferred to long haul.
Even so, analysts who attended the grand launch late in the week, which was attended by Malaysia's corporate glitterati, seem spellbound. Raymond Yap, aviation analyst at CIMB says : “It's magical and well thought out. It's not just about independent flights to the UK but there is also a link with AirAsia for short-haul flights. It should bring passengers into the country and I believe it will be good for Malaysia as a whole.”
And then there's OSK Research senior manager Chris Eng's take on the news: “It's started with a bang. A very good marketing campaign, a great start. There is demand, I believe. Look at it this way, from September to December you have students from Malaysia to Europe to cater to, and then you have the backpackers travelling to Malaysia and Asean for another three months for a holiday.
“So six months will already be taken care of, it's only the remaining six that company will have to worry about. That too can be overcome with low fares etc.”
His chief concern, echoing that of many others, is of course profitability. However, he says based on AirAsia's track record, it should turn around in two to three years.
Another analyst from Kenanga Research shares a similar view : “AirAsia has always been a long-term growth story. This is no different. There will be a long gestation period for this business. But it will definitely create a new segment of travellers.”
With that, previous opinions on what impact Visit Malaysia Year 2007 would have on AirAsia have now switched to how AirAsia X will instead affect VMY07.

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