AirAsia's Fernandes: "Cargo could be as powerful as passenger services"

TF: I am ever the optimist, that there is an ending, in that the vaccines are coming in and we can see from our brothers in Europe and America that life is becoming to go back

"This thing started in February, so February, March, April, May, June, July - well, we're kind of 18 months into this thing, and we're still in lockdown, cases are record high, but I am ever the optimist, that there is an ending, in that the vaccines are coming in and we can see from our brothers in Europe and America that life is becoming to go back. Now, due to the inequality, I don't know, however you want to look at it, of vaccines, we're about five months behind everybody, but we'll get there in the end."

PH: How's that comparing with the cases? Are your cases (in Malaysia) stabilising a bit now, because you did have this surge a couple of months ago?

TF: "No they've surged a bit. I mean, we kept factories and all open, and so around the country where there isn't industry, it's gone down to 50s and 100s. But in KL, it's about 1000.

"In now, Selangor, which is the main industrial state, it's about 4000. But, I mean, and cases will go down, we'd been on the third week of a lockdown, but it wasn't a very strict lockdown, but now they've made it pretty strict. But as I said on the other side, vaccinations are going, so I hope within a month or so, things will be a little bit more Europe."

PH: And your vaccine rollout is being pretty efficiently done?

TF: We are vaccinating around 350,000 a day, which is impressive for a country our size. It's moving in the right direction

"Very efficient, in Malaysia, very efficient. We had another record day - 350,000.

"If you think, China's doing a million a day, that's impressive for a country our size, about one percent of our population. And Thailand, Indonesia, Philippines are all moving, I mean, Indonesia being the biggest problem, because that's a massive country. But it's moving in the right direction."

PH: Let's start domestically in Malaysia. What's the level of operations there now? Are you able to fly?

TF: We have maybe 10% of our fleet flying right now. We've probably got another six weeks of this and then things are going to start opening up permanently. Internationally, everyone wants to open up tourism, that's a big thing.

"Oh, very small. Very small at the moment. I'd say, overall on the fleet, would be maybe 10% of our fleet flying right now. So we've probably got another six weeks of this and then I think things are going to start beginning to open up permanently."

PH: That's domestically, what about internationally?

TF: "International, we've seen Thailand kind of talking about opening in October. Indonesia wanted to make a go of Bali a few weeks ago, but that may have slowed down, but I was with the Filipino government the other day, everyone wants to open up tourism. It's kind of a big thing.

"So I think those with two vaccinations will start to be allowed to fly, but I think probably towards the end of the year, October, November, we'll start seeing it."

PH: What are the provisions that Malaysia is using now for the people who do come and go? Do you have quarantine? What about testing? Is that something that's done on arrival?

TF: We have two weeks quarantine at the moment. I'm arguing that for those with double vaccines, that that should go. Testing is required three days before you leave and again when you arrive

"We have two weeks quarantine at the moment for those countries, in the sub-continent three weeks. I'm arguing that for those with double vaccines, that that should go, but I'm in no rush. Let the numbers go down a bit, and then we'll start advocating for that.

"They ask you to do a test three days before you leave, then when you arrive, you do a test."

PH: Because some of the experts we deal with are starting to say, now, that while vaccination is very important, it's going to be so long before sufficient numbers of people are vaccinated that it's really going to rely on testing to get markets opened up effectively on a wide scale.

TF: I'm a big advocate of testing and newer technology. Singapore has two great testing pieces of apparatus, both based on breath - one takes 15 seconds, the other 20 seconds

"Yeah, I'm not sure if I said it on the last time we met, but while vaccine is the main thing, I've been a big advocate of testing and newer technology.

"And Malaysia has just... In fact, I go on a call tomorrow on production of it, but Singapore's come out with two great testing pieces of apparatus. Both are based on breath, and one's 15 seconds, the other's 10 seconds. And I saw some videos in Abu Dhabi or Dubai where they're just using a hand phone, so I think testing is equally as important as vaccine."

PH: Well, it seems that it's going to be that way. Just going back to the movements, I mean, you're now talking about, and going ahead with, I think, a 73[7]-800 freighter. I can still see pictures in my mind of you lugging boxes into the belly hold of an aircraft going back to the old days. So you've always done a bit with freight, but is this accelerated plans to diversify like that? Let's talk about Teleport.

TF: Prior to COVID I began to see the e-commerce revolution, and I started building a separate company and I wanted to keep more of the share, more of the upside. We got rid of all of the GSAs, and we started dealing more with freight forwarders. And now we're beginning to deal more with direct customers.

"Yeah, very much. I think two things.

"One is, we're a passenger airline. My first argument with (AirAsia co-founder) Conor McCarthy was: should we do cargo? And I pushed to do cargo, but we were kind of prostituting, we were just selling our belly space to the highest bidder, right?

"Prior to COVID, I began to see the e-commerce revolution, and I started building a separate company for Teleport, and I wanted to keep more of the share, more of the upside. I wanted to understand the whole pie, so to speak. "And we started that process, said, 'Why can't we do to cargo what we did to passengers? I.e. eliminate the middleman, etc.'

"So we started that process. First thing is we got rid of all of the GSAs, and we started dealing more with freight forwarders. And now we're beginning to deal more with direct customers.

"And we consolidated all our space across all the airlines. We built a blockchain to deal with that. So it was one airline as opposed to five different airlines, and five or six other airlines have joined us now in selling space together. So it was quite innovative of us. We also actually won an award for that blockchain."

When COVID hit we accelerated these plans as e-commerce was driven to another level, air cargo has become much more expensive or much more valuable. I never thought we'd have freighters. I never thought we'd be taking seats off the plane to do cargo. There is a false market out there, so you shouldn't all get carried away

"And then COVID hit. So we accelerated the plans, and obviously, COVID has driven e-commerce to another level, and hence, air cargo has become much more expensive or much more valuable.

"So what was kind of a nice to have, has become something that could be as powerful as our passenger services, and is a bit of a diamond in the rough. But the work was done beforehand; what is accelerated is, I never thought we'd have freighters. I never thought we'd be taking seats off the plane to do cargo.

"There is a false market out there, so you shouldn't all get carried away, because airlines are fantastic at screwing it up and charging in and buying hundreds of freighters, and then suddenly, you've got the global airline fleet coming in with their belly space, and that's going to change the economics again.

"So we're cautious, but we do think it's no more a stepchild, it's now... I mean, but it's still, it's interesting to change the perception of the staff. So when a budget plan is put in front of me, I'm like, 'Well, where's the cargo routes? Where are the cargo only routes? Where is the capacity...'

"Because everything is based on passenger numbers, right? And cargo's stuck in it. And so, models have to be redone, changing the ship. Now it's easier in AirAsia, because we're very nimble, even though we're big, numbers wise, but I've always been a change agent, so the staff are used to that, but it's still a change. But, yeah, it's going to be a big part of our business."

PH: So you're also dealing in sort of the last mile stage of that freight delivery? That's more complex, isn't it?

TF: I'm going full on. No half-hearted, no dipping my toes in it. I want to be part of the whole logistics chain. So we handle everything from first mile to last mile, including warehouse

"Yeah. I'm going full on. No half-hearted, no dipping my toes in it. If you're going to do it, throw your whole body into it. So it's just like you Aussies, you don't have one beer, I mean, you have 20. If you're going to go to the pub, make sure you maximise your time there.

"So anyway, I want to be part of the whole logistics chain. So what is that? That's the first mile, last mile, that's mid mile. Airlines are mid mile, but trains are mid mile. Big trucks are mid mile.

"And I also want to be in the warehouse game, so we're going to cover everything. So we're throwing ourselves in, and what are the products we're going to come out with? We're going to come out with, what we've been doing all the time, air cargo, but be more of a direct source to the freight forwarders, be a freight forwarder ourselves for some companies.

"So we handle everything from first mile to last mile, including warehouse. Be a courier, get all our planes up in the air, there's no one that can really match us in terms of speed in Southeast Asia, and be an e-commerce provider.

"So it's a fascinating business. It's the rebirth of me. I mean, they're three of my lives. First life was selling music. Well, first life, I actually was being an accountant, which has always been there, because you can't run away from numbers. Life was rock and roll. Third was airline, but really passenger airline, and so this is a fourth incarnation of me, which is logistics. And then, I suppose the fifth is this whole digital kind of journey we're going on."

PH: Well, I mean, the latter part of it is a fairly natural evolution, isn't it? As technologies change, and also as sort of this combination, as you say, with having such a massive network of operations across Asia that really come together.

TF: Even for legacy airlines who have had freighters for a long time it was still the stepchild in the business plan. You never hear CEOs talking about buying freighters. We are taking it to a different level. I'm working with shipping companies and trains, so we can provide an integrated solution

"I dare say that most airlines, even the legacy airlines, who have had freighters for a long time, it was still the stepchild in business plans. Even when I come to a CAPA conference, or in the very rare time that I'm invited to an IATA conference, they're only talking about passengers, right?

"They talk about their freighters. You never hear the CEO saying, 'I've just bought 20 freighters'. They're all talking about their passenger, and their first class seat, and the best business class seat, and we've got the best food in the world, etc.

"So I think this COVID will change a little bit on that. And it's not seen as a glamorous side of the business, but it's going to be a very important part of the business, and we're going to take it to another level."

PH: It's very big business in its own right, isn't it? And nobody's ever really put the two together.

TF: "Yeah. I mean, I'm working with shipping companies. I'm working with trains. So as I said, if we're going to do it, we're going to do it properly. We don't just want to be a piece of it, we're going to be all of it, so that we can provide an integrated solution. So someone could send a million cars into a port in Malaysia, we're not going to move those million cars, but they might want to move spare parts around, and that's great for us, especially for fast moving goods. They might want to move somewhere on the train. So they want to move a bit of it on the road.

"So we want to be totally integrated. And apart from DHL and FedEx, who really made their money from courier stuff, as opposed to a lot of stuff, there's no one really in it."

PH: Well, it sounds fascinating. And you'll need another few months before that starts getting reconstituted, if you've got 90% of your fleet on the ground, of course. How's it looking with the other (cross-border) joint ventures?

TF: We have closed Japan and we are virtually out of India so I'm going to be focusing on Southeast Asia. The Filipino operation is looking better than it was and the Thai operation has got clarity of purpose. Indonesia was doing well, but capacities have come down for all the airlines. I have a shot now, all bets off

"Well, we kind of closed Japan. I mean that just wasn't going to work with two planes, which is a shame, because I think we could have done a really good job in Japan.

"We're virtually out of India, and I'm just going to be focusing on Southeast Asia. We've got a Filipino operation, that's probably looking better than it was. The Thai operation's got clarity of purpose now. And the Indonesian operation was doing well, and is taking a back seat now because of the huge number of COVID cases. But capacity's come down there dramatically for all the airlines.

"So the leanness and the nimbleness... Where I could never see myself being number one, I have a shot now. It's like, all bets off. It's like, we're back in the ring, right? So it gives us an opportunity."

PH: Let's talk about the financial end of things. I mean, a lot of governments have come to the party with their flag carriers and with sort of more general support for the industry. How have you been positioned in that? Have you missed out?

TF: We were unfortunate that we didn't have any debt, so there was no plug to pull. But the lessors have been fantastic; not every lessor. I think one of the great lessons is that you could be paying someone for 19 years, and they've made so much money from us, but they forget that in one week when you miss a payment. I will not forget the guys who have treated us badly

"Well, we haven't got it yet. It's 15 months on... I mean, the problem is the government guarantees there in Malaysia. That's the only country where there is, where I operate. And there have been various little sources of support elsewhere, but really Malaysia is probably the best. But it's getting banks comfortable with guarantees there. The bank's got to give the loan, right?

"So it's been tough, because every time you're just about to do something, another virus or an outbreak or vaccine supply, but I think all the news is out. There's another strain coming out, sounded like a dance music, Lambada. I suppose there'll be a Macarena one next. Lambda. I've forgotten my Greek. Yeah. I've forgotten my Greek from Peru.

"It's a matter of just being patient and grinding out. We've waited so long, it's not going to take forever. It's got to sort itself out. There were much worse situations with the Spanish flu and all these other things, right?

"So we've lived through AIDS, we've lived through many of these things, and this is the toughest for sure, but we'll come back stronger. So in a nutshell, Malaysia and Thailand look the strongest, Philippines next, and Indonesia is the weakest. But there's a silver lining there that we may be able to grow quicker afterwards."

PH: Going back to the banks, though, Tony, I mean, effectively, we're all in this together, as they say. I mean the lessors, the lenders, the airlines, nobody can pull the plug at this stage, can they? They can't afford to sort of pull out that apple from the bottom of the pile.

TF: "No, I mean, we were fortunate that we didn't have much bank. We didn't have any debt, so there was no plug to pull. But the lessors have also been fantastic; not every lessor.

"I think one of the great lessons, and I'm sure my fellow brother CEOs feel the same way, what's my most important lesson from this is, you could be paying someone 19 years, you could have grown their business from 200,000 to 19 million, and they've made so much money from us, but they forget that in one week when you miss a payment.

"And that is something, I don't know what anyone else is going to say, but I'm very outwardly spoken about it. I will not forget the guys who have treated us badly, after we've treated them so well, and I'm so motivated."

And on the other side I will not forget the guys who have treated us great. We remember our friends, and we will certainly go deep on this. The aviation community has been pretty damn good.

"Because AirAsia is a fantastic airline, pre-COVID, nothing I can do when you can't fly. And it's amazing we're still alive after 16 months. So it is painful to see how we're treated sometimes, and that won't be forgotten. I'll turn that negative energy into a positive. To motivate me to come back stronger and make them want me.

"I think the lessors and people like Airbus have been great. GE have been great. Those that are really in the aviation community have been great. Maybe the reservations systems have not been as great, but I got to say, the aviation community has been pretty damn good."

PH: That's good. And from the government side, though, are you getting, basically in crude terms, a fair deal? Are you getting the same sort of treatment as the flag carriers that operate in the countries you operate to?

TF: It's hard to say we're getting a fair treatment, because their shareholders are the government and their shareholders have bigger pockets than my shareholders. When I retire, I'm going to do a PhD on flag carriers and politics, it's phenomenal. In most industries, most of these airlines should not exist. America doesn't have a flag carrier, yet the government still bails out its airlines regularly

"No. It's hard to kind of say we're getting a fair treatment, because their shareholders are the government, so if their shareholders are prepared to put one more money in and lose, then what can I say? Is it fair? Is it unfair?

"Their shareholders have bigger pockets than my shareholders, so they're willing to do it, but this is an old tune that's gone on for a long time. Is the Australian government treating Virgin the same as Qantas? I don't think so.

"But, yeah, when I retire, I'm going to do a PhD on flag carriers and politics, it's phenomenal. In most industries, most of these airlines should not exist. I mean, you've seen big companies, and America doesn't have a flag carrier. Yet, it still bails out its airlines regularly.

"They're big employers. There's a myth that they add so much to the economy, sometimes, but I can't really complain. I went into it with my eyes wide open and the government is a big shareholder, and the government will support the flag carriers more than us."

PH: Part of where I was heading there, Tony, was, I mean, this is a bigger jolt than usual, and governments coming out of this, they're going to have a lot of other things to support. On the one hand, are they really going to prop up failing carriers? And you've got two or three of them around you in, in Southeast Asia, are they going to be able to afford it?

TF: I can't answer you about how governments will treat this, but definitely it will tighten. I don't think there's that unlimited supply of finance that happened before

"I think there's a hard answer. Yeah. I mean, Thailand seems to be quite firm in really sorting out Thai International, and Indonesia put Garuda into bankruptcy. Malaysia Airlines are restructuring.

"I can't really answer that question, but pockets are needed, because it's not just the aviation industry, there's a lot of people that need help after this. So I can't answer you how governments will treat this, but definitely it will tighten. I don't think there's that unlimited supply of finance that happened before."

PH: I guess once you get out of the domestic markets, you as an airline, are very different from the full service carriers in the region who were predominantly, other than being point-to-point, very much in the long haul hub roles, which are going to be very difficult in the future. In a couple of ways, does that mean that the LCC model will come out of this looking better?

TF: Prior to COVID I think business travel was already going down. I think intercontinental travel is going to take a hit for a while, it will come back. But I think long haul hub carriers will not recover as quickly as low cost carriers, not because we're better, but just the market is going to change

"Yeah, I think so. I mean, I think business travel... I was on a panel with James Riley at Mandarin Oriental, and he said prior to COVID, business travel was already going down. But it's going to take a while before conventions happen, and then people have gotten used to Zoom, right? Which is scary.

"And then, travelling intercontinental. Let's take Europeans and Americans coming to Asia, it's going to be painful. Less painful for Asians going to Europe and America, to be honest. But after 9/11, it was hard to get visas and stuff. And yeah, I think intercontinental travel is going to take a hit for a while, it will come back. But I think long haul hub carriers will not recover as quickly as low cost carriers, not because we're better, but just the market is going to change. And I think people would rather jump on a plane to Phuket, or even domestically, than schlep all the way to Australia."

I think lockdown is a prescriptive medicine. It's very easy to lock down, and it's very hard to unlock

"I mean, I can't imagine... I mean, Australia is going to be a hermit kingdom. I mean, it's like, it's going to be the latest Lord of the Rings movie, Middle Kingdom, right?

"Because I think it's going to be really hard to get into Australia. I mean, look, you can say Australia has managed itself very well, from a health perspective, but no one wants to take a vaccine in Australia, because there's no cases. There's no incentive to take one, and there's now an overreaction.

"You have two people with COVID and Perth goes into a lockdown for four days. There's a fantastic article in The Economist, actually, that those countries that are locking down longer are going to be really hit hard economically."

PH: Well, I think the problem, though, is that they haven't looked at phase two, which is actually getting the vaccinations done, obviously you have to open up eventually.

"Yeah. And I think lockdown is a prescriptive medicine. It's very easy to lock down, and it's very hard to unlock down."

PH: I've been fascinated by the way Southwest has lifted its promotion of business travel, well, as a low priced carrier, not really a low cost carrier anymore. And it's doing that on the premise that full service carriers are, probably, not going to have a differentiator, there's not going to be as much business travel. It's going to be more cost sensitive. Do you see that as a line of business, above the freight, for you? You don't want to be in that market?

TF: In some ways the full service carriers in America have been bringing down their model to be more low cost. In my case, I don't want to change my model, because we know what we do and we know customers. But if you try to get too many different types of customers, we'll end up screwing ourselves. So stick to what we know best

"No. I think business market comes with... I mean, Southwest for a while, has been changing its original model. It's almost reminiscent of Virgin Blue, right?

"And in some ways, the full service carriers in America have been bringing down their model to be more low cost. So I think America is a very unique market, but, in my case, I don't want to change my model, because we know what we do and we know customers. But if you try to get too many different types of customers, we'll end up screwing ourselves, basically. So stick to what we know best.

"There's always someone who says you can do it, and yeah, you'll get this yield, and you'll do this. And you don't settle, but I think for 19 years, I follow the Ryanair model."

PH: Ryanair has compromised a bit in that respect too. But yes, I hear what you're saying, and I think, to some extent that's reinforced by the fact that there isn't going to be as much business travel for quite a while, as you say, within this region.

TF: I think local business travel will flourish because of the e-commerce, because of trading

"I think local business travel will flourish because of the e-commerce, because of trading, I think it will. And I think the SME, I think, America business travel will be as robust as possible.

"So maybe Southwest and JetBlue made a little bit of money flying to San Juan and Mexico, etc., and maybe they're looking at that. Maybe they've just hit a cost structure and they need to get their yield up. They can't get their cost structure down. So I can't answer that. But at the moment, no, never say never, but at the moment, no."

PH: Well, we've got a minute left, give me some really good news Tony. Give me some really nice outlooks.

TF: The good news is that I'm alive. Most airlines are still alive. Every person I see say they can't wait to get on a plane. Everyone wants to travel. That's good news as far as I'm concerned, because travel could have been eradicated from all the pain of being tested. But nope - people are ready to do it

"Hey, good news is I'm alive. If I had told you or if you had thought when we first met on this in February of last year that in July of this year I've still got 10% on my fleet, you'd say, 'you're not going to be around, Tone. Come and join CAPA'.

"The good news is most airlines are still alive. That's impressive. I mean, a few have gone into bankruptcy protection and stuff, but most airlines are still alive. All LCCs in Southeast Asia are still alive. From Nok Air to Lion Air and stuff. So that's good news.

"Second good news is - I don't know about you, but every single person I see, and they're not just saying it for me, is, I can't wait to get on a plane. I never had that before, right?

"I mean, everyone says, 'I can't wait to travel. I want to go for a holiday'. Everyone's like, 'I can't wait to get on a plane to see my parents, to see my kids, to go on holiday, to get drunk', whatever, so those are good news.

"After this horrific thing, which we're social distancing, don't travel, borders closed, the good news is that people are robust. They want to travel. That's good news, as far as I'm concerned, because travel could have been eradicated from all the pain of being tested, but nope, people are ready to do it.

"It's just like 9/11. I've been very consistent and I've been right that, it was a pain in the ass going to America after 9/11, but we went, and we went through being interrogated, etc., etc. And some of my friends being detained for hours as suspected terrorists. And we got used to it. We got used to the fact that we should travel semi-naked, because they take all your clothes off anyway, when you're going through a security line, right? And we didn't stop travelling.

"And so we'll get used to this people sticking things up our nose or breathing or whatever. But that's the good news. I'm happy - competitor or no competitor, the airline industry is still more or less, in the state.

"It's good news, United's buying planes again. It's good news that Airbus is talking about an uplift in orders. So number one, we're alive, and number two, people who want to travel. We're not the stagecoach industry, we're still very much alive."

PH: That's a nice line to finish with Tony Fernandes. Great to see you. Thanks for coming on.

TF: "Good to see you mate. And I hope to see you in the flesh in Australia without being detained, in Middle Kingdom."