OAG Travel News

A conversation with CEO Tony Fernandes by Roger Collis.

Will the successful no-frills, or budget airline, model work for long-haul, trans-continental flights? That is the question – especially in such dire economic times, when many airlines are cutting services and reducing capacity.  
 
One airline that is bucking the trend is AirAsia X, the low-cost, long-haul affiliate of AirAsia (www.airasia.com), which has announced plans to fly five-times weekly non-stop (a 12-hour flight) between London Stansted and Kuala Lumpur, starting March 11, 2009.  One-way fares start at £99 (RM49) for a 31-inch pitch seat, and from £549 (RM1,999) for a ‘premium’ seat, including airport taxes. 
 
(Currently AirAsia X flies 4 times weekly to Gold Coast, Australia, and 5 times weekly to Hangzhou, China. AirAsia X aims to cover destinations which are more than four hours away from Kuala Lumpur, complementing the existing AirAsia network and offering daily point-to-point frequencies to popular destinations in Australia, North Asia, India, the Middle East and Europe.)  
  
[No-frills carriers are modeled on Southwest Airlines in the United States. They are characterized by point-to-point services, high utilization of aircraft, low distribution costs, achieved with on-line booking, and variable one-way fares that reflect demand for flights at different dates and times of the day. Such has been the success of carriers such as EasyJet, Ryanair, Air Berlin, and German Wings, that ‘full-service’ airlines, like Air France, SAS, Swiss and British Airways, have adopted similar low-cost, one-way pricing in order to compete on short-haul routes in Europe.  It is often hard to tell the difference these days between no-frills and the full-service, or ‘legacy,’ carriers in Europe, as they both raise the stakes in competing with one another.
 
Analysts have long debated whether the ‘no-frills’ formula can work with long-haul services, if only because quick aircraft turnarounds can be frustrated by issues of safety and time-zone constraints, and crew schedules.   And of course, the discomfort span: will passengers tolerate being jammed for eight hours into a knee-crunching seat that they might just about put up with for a short flight? And one has to offer some creature comforts on a long flight.
 
Craig Jenks, president of Airline/Aircraft Projects Inc. in New York, says, ‘You are asking, can one become the other and vice versa?   The answer is that the high-cost full-service carriers are doing their best to reduce costs.  And the low-cost carriers over here are going progressively longer haul. JetBlue and Southwest both fly from Coast to Coast, one hour less than the North Atlantic.     You might say, if they can do that, why can’t they just cross the Atlantic? It so happens that that one hour time difference is the difference between operating a narrow body plane like the Boeing 757 and a wide body like the 767. Simplicity of equipment is absolutely paramount.   And when you go long haul, you have to have better food, service and entertainment. And probably a premium cabin of some kind.’
 
‘Pay-per-frill,’ such as charging for priority boarding, and disembarking, in-flight use of mobile phones, extra legroom and baggage allowance, and gourmet meals, might be the answer for both airlines and passengers. Look out for hybrid premium seats or cabins, not as fancy (or pricey) as the all-singing-all-dancing ergonomic lie-flat sleeper seats in first and business-class cabins  of the big name carriers, but at least as comfortable as those old  first class seats in the narrow body Boeing 707s and DC 8s back in the late 1960s, before business class was invented. Following perhaps in the tradition of the much lamented Canadian carrier, Ward Air (long since subsumed by Air Canada) that had a ‘Big Seat’ option on long-haul routes between Canada and Europe.   Everyone got the same service, but you could opt to pay extra for a larger, more comfortable, seat. ]
 
I spoke first with Azran Osman-Rani, CEO of Air Asia X:, and then Tony Fernandes, AirAsia group CEO.
 
R.C: There are various business models for ‘no-frills,’ ‘low-cost’  and ‘budget’ that are sometimes hard to define; then you get so-called ‘hybrid’ carries – a sort of segmentation within the low-cost category.   What sort of model is Air Asia on this particular route?
 
A.O-R: I joined AirAsia a year and a half ago to start AirAsia X – a separate company  that does long-haul services – operationally, we’re one and the same and we have one consumer brand which is Air Asia,  but Tony has kept us as a separate entity because he did not want to expose AirAsia’s public shareholders to the different risk profile of  long haul, which at that time was unproven compared to short haul – he wanted to use  public shareholder funds to underpin the financing of AirAsia short haul operations.
As we started AirAsia X as a separate company, we were able to raise our own funding,  buy our own planes, but we take advantage of the strength Air Asia has in terms of the brand and the network; we share the same pilots and crew, and ground handling… now, here’s Tony.
 
R.C: Successful no-frills carriers, such as Ryanair and EasyJet, have been based on the Southwest Airlines model, which is essentially point-to-point;  single equipment;   low overhead;  low distribution costs – they pioneered on-line booking, and one-way pricing, which legacy carriers have been following; high aircraft turnaround and high  utilization of capital; no interlining… Now  this works for short haul, but can it work for long haul? Can you give me a rationale for the long haul? and how you are going to make it work?
 
T.F: Right now I think we are the only airline that is using our present model  how does it work?   Since we started everyone has said the long haul model doesn’t work for the all the reasons you have said. Now where we buck the trend is we take AirAsia and we put it on steroids  and it becomes AirAsia X and it becomes high capacity,  high utilization;  we still do quick turnarounds, we’re not slaves to a timetable; so if you look at our London flight, we arrive at different times during the day so we maximize utilization. But the key is really the point-to-point; we’re not really point-to-point, though we operate as point-to-point. What does that mean?  It means that when I fly from London to Kula Lumpur, the point-to-point  traffic in KL may not be that large, but you now have a short haul network that’s second to none. You can go from KL to scores of destinations, like Bali, Phuket, Bangkok, Singapore and so on… So we marry the long haul with the short haul in what we think is a winning formula.
 
R.C: So you can interline?
 
T.F:  We don’t actually practice the interlining policy; we have all the advantages   without the costs…
 
R.C. Interlining is costly.
 
T.F:  Correct. We’re like EasyJet; if you want to fly on you, have to have a separate ticket. We make it easy. For example, in our new terminal were building in KL, we have for the first time put in a transfer desk; and people coming off Azan’s planes  can go to this desk and recheck in for their next flight. We will make it a form of interlining, but we’ll make it self-liquidating; i.e. if you say I don’t want to deal with my bags, can you put them on the next flight? then we will charge you for that service. So it’s still a menu of services, that are priced, so that you can virtually get a full service product. But you pay for it.
 
R.C: This a la carte  pricing is now happening with the full service airlines; it started with baggage. I see it working for the consumer  because if you just want a basic  fare  you get it; you think you’re getting free food or interline, but you’re not; it’s in the cost structure. I prefer to pay for my own champagne if I want it.
 
T.F: Correct. It’s inequitable;  because the guy in front of you may drink three bottles;   the guy behind you may be a teetotaler…
 
R.C: But tell me how it works.
 
T.F: You buy a  base fare, a seat; change your ticket? No, you want to change anything,  there are change fees and so on. We ask for discipline. Why? Because  a lot of people will book a seat and then they don’t turn up. It’s a perishable product; when you don’t turn up we have very little time to sell it again, so we say, to maintain our low fares,  our efficiency, we ask a little bit of discipline  from you. One base fare,   dynamically priced,  based on demand. Our yield management is exactly like Ryanair or EasyJet. The best passenger  in the crude sense, according to [Michael] O’Leary, is someone going to a funeral. Why? Because he has to get there. So you open a newspaper (you had no intention of going to KL), you see £99, you say, I’m going to go; that’s the discretionary market that we fill up using our low fares; then the middle market people, who had planned to take a trip; then the last minute travelers. We charge a bit more for them because we know they’re time sensitive.
 
So that’s how we work; maybe I’m a little bit biased. It’s been in my mind since I was a 13-year-old plane spotter at Heathrow.  I’ve looked at how could we get people cheaper across from Europe to Asia;  and I think that for £99 pounds,  people will say,  I was going to Spain, but now I’ll go to Bali. The same for people in Southeast Asia, who only dreamed of seeing Big Ben. There are three things people in Asia people are dying to see: the Queen, Big Ben, and a football match. It’s now a reality.
 
You buy your basic fare and get a 31-inch pitch; it’s a shell-back seat that slides down – we think it’s irritating when someone puts their seat back on you. We have a  wonderful in flight system that costs you about £5; you pay for that and order from a choice of food on a touch screen; the order goes straight to the galley and crew will bring it out  with drinks; it’s all there, comfort kits,  extra blankets, order what you want, just swipe your card. I reckon you’d spend another £20  more on a 12-hour flight; one meal and a snack in between. You’re talking about £10 for food; maybe £5 for luggage.
 
You can also pay extra for a better seat; this could be an aisle seat, one by the emergency exit  or  by the bulkhead – allows you to stretch a bit more. Or it could be a completely better seat, the XL seat we call it, leather, fully reclining with more leg-room. It’s not a class. You see, that’s where complexity comes in; if I put in a class, then I have to have a separate check-in;  people’s expectations are different,  and your costs start creeping up. We have 30 XL seats on the Airbus A340 we’re leasing initially from Air Canada. Our load factor on those seats is about 65 percent.
 
Eventually, our configuration will be about 50 flat beds.  Again, as a traveler  I don’t care too much about the food; it is space and getting a good night’s sleep with really flat beds. One thing airlines screw up on is the duvet; they cut costs and put polyester and tiny pillows. We give you a really decent pillow and a decent blanket; that’s all inclusive in the seat cost – about £1,000 return.         
 
So I keep the tradition;  I’m not changing my model – I have high utilization;  point-to-point, I don’t interline, don’t have a separate class; but we manage to tweak it without spoiling the operational efficiency, by giving customers a choice, so they can supplement it. 
 
R.C. Would you call AirAsia X a hybrid carrier?
 
T.F:  I’d like to say it isn’t actually, because I do think we’re in the traditions of Southwest Airlines; but I’d like to say we’ve been innovative, in being very religious to the model  but finding ways to preserve the model. I sit down with Herb Kelleher of Southwest and he thinks what I’m saying is complete sacrilege. O’Leary would crucify me on the stake of low cost for abandoning the model. But I think one of the dangers of those guys is they don’t look at different ways of doing it. Jet Blue took out rows of seats, and put in live TV and all that, and putting in lounges. Or Air Tran having a business class; I don’t agree with that. But I think if you’re just stuck in your way for 40 years, then you  do miss opportunities; one has to be evolving. But the core principles of the model are still there, although you can add value to that model.    
 
R.C: How can you get fast turnaround on long haul?
 
T.F: We’re doing it. We’ve got 18 hours utilization; we’re turning around a 340 in about an hour right now; our 330 with 383 passengers we’re doing it in 55 minutes. An hour versus 25 minutes isn’t going to get you an extra flight to London. But let me tell you how we get it, how we differ from a traditional long-haul airline. One is if you look at our timetable. Everyone is flying at the same time  every day; if I took a Malaysian Airlines flight, it would leave KL at 12 o’clock at night, arrive in London at six in the morning. Because of its integrity to its schedule, it would leave London  about 11 o’clock in the morning and arrive back at KL  at five; and then it wouldn’t leave again till 12. So in two days you lose 12 hours,  because it doesn’t want its business class passengers getting up at six in the morning.
 
We’ll start off with five flights a week. But  I’m going to look at London to KL as  being a shuttle route. It sounds bizarre, but I really think I can get five, even seven flights a day. But I don’t want to scare the hell out of anyone. I’d say to them five times, but I really think we could do seven times a day; every three hours. Now why do I think that? Because I’m not just serving the UK market in Stansted; all my low cost brethren are there: Ryanair, EasyJet, Air Berlin, and whoever else survives this mess. So someone from Paris or Prague can fly over to Stansted, and take us to KL; and equally, someone from Malaysia can get over to Stansted with us, and travel on to Paris or wherever.
 
R.C: Will you do deals with them, with other low-cost carriers? 
 
T.F: Well, I think eventually. Mind you, doing a deal with Michael O’Leary sounds a scary thought. Stelios though is a good friend; I started this airline based on Stelios, and yeah, Stelios is a much nicer person to deal with than O’Leary. I’ve got 600 million people in Asia I can promote to, so basically, I don’t think we need a formal tie up; because the Internet brings it all together anyway.   
 
R.C: But why on earth are you launching at this particular time? Oasis, Zoom and others all going out of business?
 
T.F: What they did wrong was, number one, they didn’t have size; number two, they only had two or three planes; they didn’t have a brand like AirAsia. But the most important thing is they veered away from the low-cost model. Oasis had a business class with the same seating configuration as Singapore Airlines, and lounges. But the most important factor was, they didn’t have Air Asia’s short-haul network. When you arrive on KL with us, you’ve got the connectivity with us throughout Asia. 
 
We have 100 destinations out of KL, and hubs in Bangkok and Jakarta, like Stelios in Europe. I think that’s the difference between us, plus we were religious to the model; we pack the seats in and made it as comfortable as possible.  
 
R.C. What sort of load factors do you need to break even?
 
T.F: Well, right now,  fuel’s come down so much, so our load factors come down dramatically. Right now, at today’s oil price, for break-even we’re looking at 52 percent; with oil at $100 dollars, we’d be looking at about 65 percent; $150 dollars, we’re looking at 85 percent – at these fares.
   
R.C: Still, doing this in the credit crunch; what makes you so optimistic?
 
T.F: I thrive on calamity; I thrive on the fact that everyone’s got their heads in a spin   and don’t know what to do. And in a world of chaos, it’s the best time to capitalize and to build market share when everyone’s too busy looking after their own back sides; they’re not worried about what you do, all they’re saying is, this guy’s a lunatic,  he will fail. So they leave us alone. 
What I say, if anyone listens, is the best time to build a brand is during a recession,   because everyone else has cut advertising. The worst time to cut your marketing budget is during a recession, because when you come out of the recession, your brand is very strong; those who survive will be very strong. So it’s the easiest thing to cut, that’s correct, but it’s the worst thing, and you sometimes can’t see the effects of the brand building, you know, to the bottom line. I have daily battles with my controller who says, why don’t you take a quarter page ad instead of a full page? But we thrive on this; we’re contrarian, we believe people want to travel, that we have good news and this will stimulate travel.  
 
R.C: What about other routes?
 
T.F: The big question is, whether I put all my eggs into Stansted, and use that as the base into Europe; or whether we split and say, okay, let’s have one in Stansted, one in central Europe, and one in eastern Europe. I would probably say the latter. So we’d look at somewhere in southern Europe or central Europe. And I’m a big believer in eastern Europe; I believe the Poles, and the Czechs, and the Slovaks would love to come to our part of the world;  and we would  love to go to their part of the world.
 
London, December, 2008   www.rogerandrandy.com