Flying high

On January 8, Tony Fernandes spent three hours in the morning, sweating buckets, loading and unloading baggage with Air Asia baggage handlers at the airline’s low-cost terminal in Kuala Lumpur. A few weeks before that, he was in the cargo area discussing logistics with his cargo crew. Quite often, he mans a counter and checks passengers in.

In India, this will come off as bizarre behaviour for the CEO of a company, but it is exactly this kind of working-man philosophy and attention to detail—gleaned from low-cost airline icon and longtime Southwest Airlines CEO Herb Kelleher—that has propelled Fernandes and Air Asia towards being one of the dominant airlines in Asia today, with 75 planes and over 110 routes that even reach China and Australia.

Now, Fernandes—whose father is Goan and mother, Malay-Indian—has trained his sights on India, launching a dirt-cheap ($54 one-way) fare from Kuala Lumpur (KL) to Tiruchirappalli, that is currently thriving thanks to a 92 per cent load factor. Other routes, from Delhi and Mumbai to Bangkok and KL, are in the works. “Our fares will be 50 per cent lower than our competitors”, says Fernandes. These flights will be under his new ‘Air Asia X’ banner, of which airline mogul Richard Branson has grabbed a 20 per cent chunk. “I’m appealing to a market that never had the opportunity to travel. Yes, there are some sacrifices— we have more seats per square inch. But again, if you give the opportunity to someone from Delhi who’s been dreaming of coming to Bali, six hours is not that long for that kind of cost saving,” adds Fernandes.

What most people in the industry are now trying to figure out is whether Fernandes will spin-off an Indian JV version of Air Asia and change the domestic industry forever. Not anytime this year— foreign airlines are banned from investing in the Indian aviation sector. However, most industry watchers think that the winds of change for aviation policy are blowing strong and foreign airlines will soon be able to grab stakes in Indian ones, first up to 25 per cent in 2009 and then up to 49 per cent in 2010.

A stifling investment policy is not the only hurdle that Air Asia will face in India. LCCs generally require cheaper, secondary airports to fly out of in order to manage costs, but there are too few of them here, and many are glorified huts, says aerospace expert Harmoz Mama in a report titled Civil Aviation in India: Challenges and Prospects. The main ones are choked with passengers. Planes are forced to circle endlessly before landing and also waste precious fuel while waiting in long queues for take-off— all killer blows for LCCs that operate on thin margins. Also, jet fuel is exorbitant, because of a tax that can reach 39 per cent at the state level making fuel 60 per cent higher than what international counterparts are paying. Other problems: acute shortage of air traffic controllers, lousy equipment, pricy pilots and circuitous air-routes devised by the government.

Running a low-cost airline is a special skill. “Managing an LCC is like driving a Formula One race car, 24X7. You need unbelievable execution skills on the backend,” says Kapil Kaul, CEO of the Indian arm of CAPA. Plus, world class, nofrills airlines such as Fernandes’s— Southwest in the US, Ryanair and easyJet in Europe are the others— make money because they get the basics right: namely, one-class-fits-all service, no free, in-flight food or entertainment, selling tickets directly via the Internet or phone, quick twenty-five minute turnaround of aircraft—LCCs rely on a volume business to make money—and one aircraft type to minimise servicing and maintenance headaches. Air Asia is also able to boost profit margins from extraneous sources of income like excess baggage, insurance and in-flight food, amongst other things. Air Asia raked in $32 million in 2007 from these fripperies.

A former accountant and Warner Music hand, Fernandes saw a news segment on Ryanair while waiting for a flight in a bar in London a decade ago, and was electrified. A few years and hustles later, he managed to convince the then Malaysian Premier Mahathir to give him permission to buy a two-plane, money-bleeding outfit. He paid exactly one Ringgit—less than $.25—for it and took on around $11 million of the airline’s debt. The date that the deal was finalised on: September 8, 2001.

It’s not as if Air Asia doesn’t have problems. Its Thai and Indonesian operations are chronic money-losers. Analysts think that its long haul operations are risky due to decreased frequency of aircraft turnaround. The airline also lost $63 million on wrong bets against oil prices in 2008. Moreover, competing against Jet and Kingfisher—or even low-cost Indigo—in India could prove far more challenging than facing off against lumbering and inefficient Malaysian Airlines at home.

Still, Fernandes thinks that these are trivial issues when you consider the climate in which his airline has thrived. 9/11 was just the beginning of possibly the worst decade for Asian airlines. There was the SARS epidemic followed by the avian flu scare, the 2002 Bali bombings and then the devastation of the 2004 tsunami. Last year witnessed the crushing effects of the slowdown along with a credit squeeze. Yet, Air Asia has soared, growing rapidly despite crippling oil prices over the past several years. “We think we’re probably a beneficiary of these events. We probably fit into a category like Wal-Mart or McDonald’s, where people are trading down,” says Fernandes. Moreover, Air Asia has done so with a Cost Per Average Square Kilometre (CASM) of a tiny 4 cents—lower than that of any other airline in the world, including Ryanair, and Southwest.

Fernandes says he is always interested in India. “Who wouldn’t be? It has a billion people,” he adds. The only obstacles, he says, are the current set of aviation industry rules. If those change over the next few years, Indian runways might just end up cloaked in a sea of red.