How AirAsia boss Tony Fernandes shrugged off the global recession

IF Tony Fernandes, the chief executive of pioneering low-cost carrier AirAsia, ever suffered from shyness as child, he is certainly cured of it now.

The UK-educated Malaysian entrepreneur, who founded the short haul airline in 2001 and its longhaul sister AirAsia X six years later, dominates the meeting room of his West End PR agency with his loud voice and breezy manner.

But then you need to be able to hold your own in the sort of company he travels in. The morning City A.M. spoke to him he had just had breakfast with Sir Martin Sorrell, the boss of WPP and the world’s most influential advertising executive; and he regularly hobnobs with the rich and powerful. Fernandes, 46, bought the Lotus Formula One team last September, and has since made a bet with Virgin boss Sir Richard Branson, who runs his own Virgin Racing outfit. Whoever finishes behind the other at the end of the season must serve as a cabin crew member on the rival airline.

Fernandes, who actually began his career on one of Branson’s cable TV stations in the late 1980s, says: “I have already told him to start shaving his legs. We don’t like cabin crew with hairy legs on AirAsia.”

One gamble Fernandes, who has a £230m fortune, lost out on earlier this year was his bid to buy West Ham United football club, which was sold to British businessmen David Gold and David Sullivan.

Fernandes has moved on from that and is currently making headlines because last month he confirmed his intention to float longhaul outfit AirAsia X in the second half of next year. Parent company AirAsia has a 16 per cent stake in that business.

Currently AirAsia has 86 planes and average fares of £25 to more than 100 routes including Malaysia, Thailand, China, the Philippines and Macau. AirAsia X has 11 planes and average return fares of around £300 on routes such as Hong Kong and London. Both airlines share 7,000 staff and are based in Kuala Lumpur, Malaysia. Fernandes is chief executive of AirAsia, which itself floated in 2004, and a board director of its longhaul sister.

AirAsia posted a 2009 net profit of RM 549m (£112m) on sales up 11.5 per cent at RM3,179m (£648m). The airline bucked the 3.5 per cent fall the industry suffered globally last year, as it launched 12 new routes and saw passenger numbers grow 24 per cent to 22.7m. Smaller but no less successful AirAsia X posted a net profit of RM87m on sales of RM720m. The longhaul carrier is currently completing a RM100m rights issue to be able to finance the running of its own operations in advance of the separation.

Fernandes says the reason for the flotation is because he is seeing “a bit of contamination” between the way the two airlines are run, and this needs to be prised apart.

He says: “The patterns of the pilots and cabin crew are different on shorthaul and long haul airlines. Both airlines need differing amounts of ground crew, because there is less luggage in the hold on shorthaul. Also the approach to marketing is different on both carriers.”

Fernandes says AirAsia X will float in Malaysia and is considering a secondary listing in London or New York. He will not say how much of the business will be sold to outside investors, but he does say AirAsia’s 16 per cent stake in the longhaul outfit will be “treated as an investment” and will be sold down over time.

Intriguingly, Branson’s Virgin Atlantic also holds a 20 per cent stake in AirAsia X. Fernandes will begin to look for banks to handle the sale towards the end of the year.

However, he does not want or predict a full separation of the two airlines. He says they will still share the same website, but more importantly he says that he sees a “star chamber” of four executives, including himself, who will sit on a board that will span both carriers.

Fernandes says that what is happening at his carriers reflects a polarisation in the airline business brought about by the 2008 financial crisis.

He says airlines are often “destroyers of capital”. And if you take into account the scores of airlines around the world that have failed in the last two years – from Oasis in Hong Kong to Flyglobespan in Scotland – it is hard to disagree with him.

He adds: “Airlines have to choose what they want to be, either shorthaul or longhaul. You have to focus on what you are offering. Two of the world’s most successful airlines, Singapore Airlines and Cathay Pacific, are basically longhaul airlines.”

The airline boss continues: “By contrast British Airways runs four businesses. They have first class, business class, premium economy and economy. And that takes different levels of service and marketing for each.”

Fernandes adds: “BA should sell off its shorthaul operations. The industry is separating out into simply premium and low cost airlines, and it takes a lot of focus to do one of those well and make money from it.”

He also thinks that banks should take the bulk of the blame for the financial crisis, backs a Glass-Steagall style reform of finance and says that government response to bank regulation around the world is patchy.

Fernandes says: “Banks should be there to build businesses, and that means sensible lending. Too much cash was put into instruments like derivatives. Governments should split up banks into commercial and investment arms.”

He adds: “Asian banks have learned their lessons from their own banking crisis in 1997, when there was a lot of free and easy money flying around. But this time around they did a superb job.”

Fernandes thinks that the EU is introducing prudent banking reforms, but adds that he thinks the US “has still not got to grips with their big banks”.

The airline chief also argues that the industry is beginning to look up. He says: “We are in a very sweet spot. In terms of budget travel people are trading down towards us. But across the industry as a whole the Icelandic volcano shows that people can’t live without aviation. People want to travel. TV has made the world smaller. There is a lot of talk about CO2 emissions but cars emit out a lot more carbon. The urge to travel is strong.”

There are not many in the airline industry who would see the Iceland’s Eyjafjallajökull volcano, which grounded planes across Europe and the Atlantic at a cost of hundreds of millions of pounds, as good news for air travel.

However, for Fernandes the glass is never less than half full. His beginnings in the business demonstrate that.

He worked in the finance department of Virgin’s Music Box and Super Channel in the late 1980s. Fernandes then moved on to become the south east Asian regional vice-president for Warner Music for nine years, until 2001, but then he struck out on his own after becoming disillusioned with the Time Warner’s and AOL merger.

He saw Sir Stelios Haji-Ioannou, a fellow London School of Economics alumni, talking about his easyJet airline on TV and thought he could replicate the idea in Asia.

He brought together two partners, remortgaged his house for £250,000 and bought AirAsia from the Malaysian government for RM1, taking on RM40m of debt. The airline then comprised of just two ageing Boeing 737-300 jets, with the deal being signed just three days before 9/11, terrible timing for any airline.

“I was philosophical about it,” smiles Fernandes. “The business could only go up from there.”

The airline quickly followed the classic budget aircraft model of lean staff, one-hour airport turnarounds, and high plane usage (12 hours in the air per day instead of the more usual seven). Remarkably, it made a profit at the end of its first year.

“We had to make money, because we did not have any other cash to fall back on,” he says. The airline carried on adding routes and passengers and grew to become a dominant player in the region.

As the airline industry continues to polarise and change, and Asian firms continue their global ascent, we are bound to see far more of the loud, brash and confident Tony Fernandes. Europe’s remaining legacy carriers had better watch out.

CV | TONY FERNANDES
Age: 46; born in Kuala Lumpur

Work: Virgin’s Music Box and Super Channel where he worked as an auditor and later financial controller: 1987-1989; Warner Music: 1992-2001, leaving as south east Asian regional vice-president; chief executive of AirAsia: 2001 to present.

Education: Epsom College: 1977-1983 (“It was like a borstal”); London School of Economics: 1984-1987, read accounting.

Family: Married, with two children.

Hobbies: Music, has about 8,000 iTunes tracks: “Most of it is R&B, but I like most stuff except country and western.” A West Ham fan since 1975.