AirAsia: Have Net will travel

Posted on January 1, 2003 
Filed Under Anita, CNET

By Anita Devasahayam

The region’s first budget, no-frills airlines AirAsia is flying high, raking in an estimate RM500,000 a month (US$132,000), thanks to the Internet. Chief executive officer Tony Fernandes tells C|Level why his e-ticketing strategy works.

AirAsia's Tony FernandesAIRASIA’s chief executive officer Tony Fernandes believes that anything is possible where there is a good enough deal. So when he sold 2,600 air tickets within six hours over the Internet at RM10 (US$2.60) a piece in December 2000 for his newly launched airline, he was verified.

“If the offer is good, people will find their way. The beauty of it - and I will tell this story till I the day I die - we had a family of 19 from a rubber estate, who got their brother-in-law with a credit card, find their way to the Internet and bought tickets,” he reveals.

The success of his venture in a short space of time has not only proven his business model could work but importantly, shattered the stranglehold that travel agents have on the industry.

“Selling seats are intangible. It is not like buying perfume or pen where you want to touch it and feel it. I always believed that it will work. And you have to force change or there won’t be any progress. I think we have broken the dominance of travel agents because of the Internet,” he declares.

He adds that governments the world over have to realize that the market eventually wins unless they want taxpayers to continue subsiding hemorrhaging airlines that don’t cost structure according to market wants.

For an accountant who readily confesses a healthy dislike for algebra, Fernandes’ online foray began when he and his partners bought over an eight-year-old ailing airline from a Malaysian conglomerate, DRB-Hicom, for RM1 (US$0.26) and assumed liabilities over RM100 million (US$26 million).

He repaid the 11-digit debt within seven months by combining common sense and slick tactics synonymous of that from the entertainment industry where he began his career 12 years ago. Fernandes quit as Warner Music regional boss to fulfil a childhood ambition of owning an airline.

“I am not totally brilliant but I think like an non-aviation man - guided largely by instinct and common sense. I’ve had good advice from Connor McCarthy, the COO at Ryanair. We don’t have any preconceptions. We have no ego and we just look at what makes sense and do it.”

Advertising cheap tickets and collecting payment six months ahead grossed RM18 million (US$4.7 million) in monthly cash flow that promptly plugged AirAsia’s debts. The fledging airlines is still giving the national carrier Malaysian Airlines (MAS) a run for its money (despite recent attempts by the latter to match prices) as it increased domestic routes from two to 10 and added three more Boeing 737s to bring the fleet to five. The sixth aircraft is to arrive in January.

Pure math

Tickets on AirAsia are sold at cut-rate prices - often 50 percent less than that offered by MAS and early birds sometime can save up in 70 percent in fares if they book months ahead. The ticket-less passengers have the option of using a number provided on payment or passport/identity card for boarding.

“Our target are places not easily accessible by road - like Kota Bharu, Kuala Terengganu, Kota Kinabalu, Tawau, Miri, Kuching and islands like Langkawi, Penang and Labuan.”

Logical destinations as domestic travel shot up with the ordinary and less affluent Malaysians making the bulk of the passengers. Grateful travelers thank Fernandes (whenever he is at ramp helping load the luggage) for bringing budget airlines to their lives.

The average passenger traffic is 70 percent and aircraft turnaround time is 25 minutes. November was a bumper month with a 95 percent load and 98 percent dispatch reliability. During the recent Hari Raya season, tickets sold out within a month.

“Our rates are incredibly attractive. About 20 to 30 percent of the fares are sold at absolute rock bottom prices. For Chinese New Year, we don’t need to sell low fares because our fares are still such good value even at the highest price that we are sold out already,” he maintains.

The cocktail of sleek marketing and high sales would be incomplete without having the right technology infrastructure in place. The company pumped RM3 million (US$789,000) to put in a yield management system to manage online bookings. AirAsia started at zero in December 2000 and by October the following year, 30 percent of sales were from the Net. Today 85 percent of the bookings are done online.

“Yesterday I met five guys from Texas and two from UK who used the Internet to buy their tickets to Kota Kinabalu and they found us online. I believe, within a year, we can have 50 to 60 percent of our business from the Internet.”

Recently Fernandes invested in an off-the-shelf revenue management system called Open Skies to automate the process of predicting demand and setting pricing fare. “Up to last month, me and RMS just sit down with pen and paper to predict what is going to sell. This is going to go up because computers are going to predict far more accurately,” he says, adding that the back-end operation is well set-up to cater to 50 aircraft.

There are no immediate plans to add hardware though new products are in the offing. Headcount of pilots and cabin crew will rise but not in accounting and administration departments. “From our back room - computer & IT - we are very nicely set up. The beauty of our business is, while I don’t come from the aviation industry, is that they love to complicate issues in the (aviation) business. We’ve generally kept it very, very simple. So I don’t see an incremental overhead.”

Further cost savings were gained as there was no need to adopt the global distribution system used by nearly every airline worldwide where travel agents are responsible for the bringing in the money.

AirAsia manages its own bookings through a call centre set up in the suburb of Kelana Jaya an hour away from KLIA. The call centre has 60 people manning 180 phone lines.

However Fernandes does realize that there are people who can’t get to the Internet yet, or to the telephone or they don’t have a credit card or bank account and that generally some people like to deal with a travel agent. “Generally travel agents don’t like to work with us but there are few that do. We offer them our Internet based product packaged up for travel agents,” he says, adding that 15 percent of the business come from travel agents.

An alternative online payment scheme to credit cards involving bank to bank transaction is being worked out to give travelers yet another avenue for payment.

Prepaid cards are also another option under consideration.

Hidden costs

Does the guarantee of low fares mean that no other cost are hidden elsewhere? Fernandes insists that there is no hidden cost for the consumer. “I think all the costs are at your choice - we have insurance packed in and every other cost is up to you. Coffee is sold at RM3 (US$0.80).”

He confesses that in the early days the airline did have a fair share of problems in areas they did little control such as engineering that was undertaken by a third party. “Now we have control, it is done by SIA and that had a fantastic increase on our reliability.”

The biggest gripe among passengers is free seating concept that Fernandes will continue to practice. “Free seating works beautifully in Malaysia. Why? Because Malaysians being Malaysians, once they know it is free seating, they are at the boarding gate on time and get onto the first available seat. It works well for us as we can squeeze two to three extra flights this way given our speedy turnaround time. “

So quash any thoughts of paying premium for an aisle seat on the 148-seater aircraft as Fernandes has no intention of introducing it. However there are plans in the pipeline include a holiday company on the Internet allowing passengers to create their own holiday package.

“You choose your flight, type of hotel, length of stay, options to pick insurance or car rental. It is an all-encompassing package holiday available on the Internet. No one in Asia has that,” he claims.

The bottomline

Despite numerous reports of plans to go regional, Fernandes has shelved it for another year. “We are doing well domestically — we are making money and there are a lot of markets we have not covered and it is less complicated. We probably go regional at the end of 2003.”

Indeed flying into Asian destinations can prove messy with currency and language issues to resolve. The plan to strengthen domestic presence includes adding five more “not-very-accessible” destinations — Alor Star, Johor Baru, Sibu, Bintulu and Sandakan — and increasing the number of aircraft to 15.

“The choices are calculated. I mean why would anyone want to fly to Ipoh or even Penang? We picked places that are islands or very hard to get to. Our Penang sector had the lowest sales (at RM69.99 or US$18) until we sold tickets for RM38.88 (US$10), which is less than a tank of petrol. Now it is one of our strongest routes.”

The airlines will continue to its branding exercise throughout the following year and to “coast the domestic sector aggressively” having recently passed the millionth passenger mark on an average of 3.9 planes.

He credits his staff, supportive board and flexible management structure for being able to adapt to the market changes very quickly. Naturally having dealt with musicians helped. “Music is one of toughest business in the world. You are dealing with sensitive people and there is really no brand as we are marketing a new product every day. Today Madonna, tomorrow Phil Collins. We brought less formality and the ability to manage differently, without hierarchy and compartmentalization to AirAsia. It is better to have 450 brains than five.”

While high points in music career included turning an unknown into a star, life was indeed less glamorous at the boarding gate. “On a recent flight to KK, 10 people thanked me saying that before AirAsia, they have never dreamt of having a holiday. Students tell me they can now go back twice a year to see their parents. There is a genuine appreciation. Even if we have a delay and I go up and apologize, they say don’t worry we understand and we support you. Such strong loyalty is hard to find and that pushes us further.”

Fernandes intend to keep his feet firmly on the ground and head up in the clouds as he goes on to expand his e-ticketing strategy. “We are barely at walking stage and still crawling. We will grow sensibly and safely. What we have done is show that the Internet can work.”

Published in C | Level, CNET Asia publication, Jan/Feb, 2003 issue

by Anita Devasahayam

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