The $3 Flight
Tony Fernandes had no aviation experience when he founded his no-frills carrier, AirAsia. It's now among the fastest-growing airlines in the world.
Tony Fernandes had no aviation experience when he founded his no-frills carrier, AirAsia. It's now among the fastest-growing airlines in the worl
If you want to find the new jet set, head to Sepang, Malaysia, before sunrise, to a building that looks like a beige Ikea. The Low Cost Carrier Terminal at Kuala Lumpur International Airport has no frequent-flier lounge, no sit-down restaurant, no moving walkways. It's basically a hangar for people, thousands of them, who throng the place every morning to catch a flight on the terminal's dominant carrier, AirAsia.
At 7:30 a.m., a fat, rumpled figure in black slacks and a white shirt saunters through the glass doors, escorted by a blast of humid air. Eyes fixed on his phone, he doesn't look up except to glance at a departures board that lists one tongue-tripping destination after another: Langkawi, Jakarta, Kuala Terengganu. But at the sight of his round face and red cap-it reads "AirAsia: Now Everyone Can Fly!"-travelers nudge each other. One woman whispers to another, "He is the big boss."
The big boss is Tony Fernandes, a former music executive who, just seven years ago, had no airline experience. Today, he runs AirAsia, which he bought out of near bankruptcy for 25 cents and a pile of debt in 2001 and turned into one of the world's fastest-growing airlines. Under Fernandes' watch, AirAsia has never posted a quarter in the red. For the 2007 fiscal year, it reported a pretax profit of $79 million-more than triple that of 2006-on revenue of $458 million, a 17 percent margin that is third best in the industry, behind Brazil's Gol and Ireland's Ryanair. About 18 million passengers are projected to fly AirAsia next year. Ryanair, the world's biggest low-cost carrier, from which AirAsia has borrowed much of its business model, took three times as long to hit the 18-million-passenger mark.
AirAsia is also the most prominent example of the broader revolution taking place in air travel. As full-service carriers in North America and Europe invest in pricey frills like flatbed seats to squeeze more money out of premium passengers, dozens of low-cost carriers in the developing world are taking a more radical-and profitable-�approach.
These airlines are democratizing air travel by offering extremely cheap fares. Gol has sold tickets from Rio de Janeiro to S�o Paulo for $20; Air Arabia advertises fares of $44 between its hub in Sharjah, United Arab Emirates, and Bahrain; AirAsia prices some seats on flights within Malaysia at $3.
Fernandes now plans to go further. This fall, AirAsia will start service from Kuala Lumpur to the Gold Coast, a region in Queensland, Australia. It hopes to add London next year, eventually expanding to U.S. destinations. Virgin Group founder Richard Branson is a believer; in August, his company bought a 20 percent stake in Fernandes' long-haul operation, AirAsia X (which is set up under a separate corporate structure), for about $7 million. Still, the move is a big gamble, and history is not on Fernandes' side. Many upstart airlines-from People Express to ValuJet-have run into problems during ambitious expansions. But Fernandes remains undaunted. "We're going to be the largest carrier in Asia," he says, "maybe even the world."
When Anthony Francis Fernandes was a boy in Kuala Lumpur, he told his dad, a doctor, that he wanted to own an airline when he grew up. "He said, 'If you get past Hilton doorman, I'll be pleased,' " Fernandes recalls. After graduating from the London School of Economics, Fernandes sprinted up the ladder at Warner Music Group in London, eventually returning to his homeland to head the company's Malaysian division. But he grew disgruntled with the unrelenting emphasis on short-term earnings, cashed out his stock options, and quit.
One evening, as he moped in London, pondering his next move, Fernandes saw a TV documentary about European budget carrier EasyJet. It triggered memories of his childhood fantasy, and the next day, he headed to the carrier's base at London Luton Airport, where he realized that Asia had nothing like EasyJet. "I thought, Everyone's been stealing my music," he says. "I can steal an airline concept."
Neither he nor the music-industry buddies he recruited to work with him knew anything about the business. "We were scanning the internet to find out how many seats a 737 had," Fernandes says. Expertise arrived in the form of Conor McCarthy, an ex-Ryanair executive Fernandes persuaded to sign on as a founding director. He brought with him knowledge of the Irish carrier's model.
Fernandes also managed to earn former Malaysian prime minister Mahathir Mohamad's blessing-which means everything in a nation governed almost as a fiefdom-but Mahathir instructed Fernandes to buy an existing carrier. He agreed to purchase a two-plane, three-destination, money-bleeding airline called AirAsia. The price: 1 ringgit (then about 25 cents) and the assumption of $11 million in debt. The deal was struck on September 8, 2001.
That may seem like a horrible time to have started an airline, particularly in Asia, which was subsequently pummeled by epidemics of SARS and avian flu, the 2002 bombings in Bali, and the 2004 tsunami. But AirAsia launched as the industry "was hitting the bottom of the cycle," says Timothy Ross, who researches the Asian transport industry for the investment bank U.B.S. and formerly sat on AirAsia's board. Aircraft, one of the biggest startup costs for an airline, were cheaper than ever. AirAsia leased more than a dozen Boeing 737s, many of which had been mothballed by U.S. Airways, each for as little as $75,000 a month-40 percent less than what they would go for now. Prices were still low when the airline was ready to order new planes in 2005. Ross estimates that AirAsia bought Airbus A320s for about half their nearly $60 million list price. (Today, AirAsia is one of Airbus' biggest customers, with orders booked for 125 A320s and 15 A330s.)
The airline's inaugural fares were as cheap as a bus ride-$3 for a one-way ticket from Kuala Lumpur to the resort island of Langkawi. AirAsia's average fare has since grown to $48, and its red-and-white planes now fly-typically about 80 percent full-to 48 cities in 10 countries. "It has been the first mover in the region," says Peter Harbison, executive chairman of the Centre for Asia Pacific Aviation, a consultancy based in Sydney. "And it has been the first mover into what you would call essentially virgin markets."
AirAsia has made fliers out of people like Supriyadi Amin, a palm-tree farmer from Malaysian Borneo. When I met him in the L.C.C.T., he had just taken the first flight of his life, from Bintulu to Kuala Lumpur, and he was waiting for a connection to Solo, Indonesia, where he would visit family. "It's very fast," he said of the experience. The trip to Solo by bus and ferry used to take him four days.
Flying mostly inexperienced passengers has presented challenges Fernandes never foresaw. AirAsia is constantly writing and rewriting rules, many with a distinctly local flavor. Every confirmation email comes with a reminder that "fresh or frozen seafood or other meats are unacceptable as checked baggage." Durian-a spiky-skinned Asian fruit so pungent that English novelist Anthony Burgess described it as "vanilla custard in a latrine"-is forbidden. There's a limit to the number of bags a passenger can carry on, but it's rarely enforced. (Grandmothers can often be seen boarding with several overstuffed plastic bags in each hand.)
One rule that hasn't changed, says Bo Lingam, AirAsia's director of operations, is "Cost is the enemy." The statistic that the airline's management obsesses over is its cost per available seat mile, an industry metric of how much an airline spends-including everything from maintenance to marketing-to fly one passenger one mile. AirAsia's C.A.S.M. is just 5 cents, lower than that of any other airline in the world, including Ryanair, which spends 7.6 cents, and Southwest Airlines, the leanest major U.S. carrier, which spends 9 cents.
McCarthy says AirAsia's operating secrets aren't so secret: a lot of small cuts on the cost side and a lot of incremental increases on the revenue side. A no-frills airline requires fewer staffers-Singapore Airlines flies nearly the same number of passengers but has four times as many employees-and Southeast Asia's labor costs are low. Regulations are more lax too; a Ryanair pilot can only fly 900 hours a year under European Union law, but AirAsia's crew can log 1,000. (So far, AirAsia's safety record is unblemished.)
At the same time, Fernandes has looked for new ways to generate income. In fiscal 2007, nonticket sources contributed about 7 percent of revenue. Fernandes wants that number closer to Ryanair's 19 percent. (One Ryanair advantage is that it can sell alcohol and lottery tickets, both culturally unacceptable in mostly Muslim Malaysia and Indonesia.) In May, AirAsia, which, like Southwest, doesn't assign seats, began selling the right to preboard for about $6, bringing in more than $150,000 during the first four weeks.
Fernandes markets the airline in both traditional venues (a sponsorship of Manchester United, which is popular in soccer-mad Asia) and unconventional ways (an AirAsia logo is plastered across the exterior of his Ford Escape). And from the start he's shown a flair for expansion. Because most national aviation markets are tightly regulated, the company couldn't set up hubs in Bangkok and Jakarta. So Fernandes concocted a franchise-style structure that is unique among airlines. He launched carriers in Thailand and Indonesia that are technically separate companies in which AirAsia Berhad, as the company is formally known, owns a minority stake-49 percent, the maximum allowed in the two countries. (AirAsia Berhad trades on the Malaysian stock exchange.)
His biggest challenge yet will be applying his low-cost model to long-haul flights. His newest carrier, AirAsia X, will operate flights of more than four hours, the first of which was scheduled to go from Kuala Lumpur to Australia's Gold Coast in October. Roundtrip fares will average about $550-30 percent less than the typical Malaysia-Australia ticket-with promotional prices as low as $25. During the next year, AirAsia X plans to add Melbourne and two destinations in China, followed by London and, eventually, eight U.S. cities.
Such routes will make it harder to wring out the savings that short-distance flights allow by, say, keeping planes in the air. (AirAsia schedules just 25 minutes at the gate.) "We can still turn planes around faster," �McCarthy insists. "Not enough to help us daily, but we'll get more flights in on a weekly and monthly basis." The company will also squeeze 396 passengers onto an A330 that typically seats 335 by eliminating first- and business-class cabins, narrowing aisles, and shrinking galleys. Onboard sales are expected to be much higher as well. Not everyone wants to eat or watch a movie during a two-hour flight, but extend that to eight hours and even the hardiest traveler might think about paying up.
Branson's August purchase of a 20 percent stake in AirAsia X gave the project a publicity and credibility boost, but even AirAsia's fans wonder if Fernandes can succeed where so many upstart airlines have failed. According to analyst Harbison, the company can turn a profit on long flights, but, he says, "you just can't get the same reductions in costs."
Fernandes rejects suggestions that he's aiming too high, too soon. He believes that full-service, long-haul carriers are ripe targets, because they have the model all wrong and penalize customers for it with higher fares. "Airlines have always tried to do it all themselves-first class, business class, and economy," he says, saddling them with steep costs.
Still, the low-cost model has always worked best for carriers that know their limits and markets. Southwest has never tried to go international, and Ryanair flies mostly within the friendly regulatory framework of the increasingly borderless E.U. "Fernandes is very hands-on," Harbison says, "but the bigger AirAsia gets, the more it does seem to be a miraculous operation."Visit Portfolio.com for the latest business news and opinion, executive profiles and careers. Portfolio.com© 2007 Condé Nast Inc. All rights reserved.