CAPA Live: AirAsia - huge data opportunities - and....


AirAsia will be back stronger in 2021, with international operations starting to open up within the next six months. AirAsia X is needed within Asia as a medium haul airline.

The airline is talking to the Malaysian government about receiving a USD250 million soft loan over five years, with capital raising taking place over next two to three months.

The airline will take all the planes on order, but it needs time to regrow. The new logistics company will need freighters.

Talking at the CAPALive on 9-Dec-2020, AirAsia's Group CEO Tony Fernandes spoke with CAPA's chairman emeritus Peter Harbison. Some key highlights can be found below.

  • AirAsia X is expected to come back stronger in 2021, focusing on medium-haul flights within Asia.
  • AirAsia is in talks with the Malaysian government for a USD250 million soft loan over five years to support its operations.
  • The airline plans to take all the planes on order but needs time to regrow its operations.
  • AirAsia sees testing as a game-changer for the tourism and airline industry, along with the development of therapeutics.
  • Public health measures will play a key role in the recovery of the aviation industry, and governments may require vaccination or testing for travel.
  • AirAsia has diversified its business beyond the airline industry, including logistics, fintech, e-commerce, and even a restaurant and record label.

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Verbatim from AirAsia Group CEO Tony Fernandes

"AirAsia X is a medium haul airline with a sweet spot of five to eight hours. It will come back stronger in 2021"

"Yesterday was our 19th birthday, we're entering our 19th year. It's been a ride, but I said to my staff, it's a never ending story, and COVID is just another chapter in an incredible ride. COVID is giving me the chance... I don't look at it negatively, a lot of the things that we couldn't do, we've stepped back, restructured relooked at where we may have gone wrong, where we may have lost some of the original AirAsia business plan, and we put it back in place."

"And so we feel we're going to come back stronger in 2021."

"AirAsia X is a medium haul airline, it's needed in Asia. It was never meant to be a long haul airline. It would be great to fly to London, it's great flying to Sydney. But really the bulk of the model is five to eight hours. That's the sweet spot. It works. It's right. But AirAsia X was constrained with irrational competition, state subsidized competition, airlines who didn't have the same cost structure, but had cheaper fares."

"So the model is right. Airlines of all sorts, government owned, private, they've all had to behave sensibly. And that gives AirAsia X the ability to restructure some of the costs, because the costs were high, because we were always raising cash, and we had very high sale-leaseback. So I think given the approval of a restructuring, this airline will come back very strongly and contribute."

"I saw recently people writing that long haul airlines will never work. I would agree, 13-hour, 14-hour long haul is always going to struggle because you need a mix in the cabin. But a medium haul airline, and now with the kit that Boeing and an Airbus are doing, like the 321, the long range DLRs, that changes the economics even more. And so I'm even more convinced that we're on the right track."

"We are still flying, but we are talking to the Malaysian government about giving us a USD250 million soft loan over five years"

"We've never needed the support of the government, and we continue to do that. The Malaysian government has been pretty good in looking at giving a soft loan, and that's what we're working through right now, we're in the last bits of it."

"But in relation to the rest of the world, it's very small. We're looking at about a $250 million soft loan over five years. But it also shows the robustness of AirAsia. That for the last eight, nine months where we've done very little flying, we're still in business. And we still believe that we'll come back strongly."

"So in this period, we haven't actually raised any money, the capital raising is going to be coming now over the next two or three months. We've been tremendously supported by lessors and our creditors and our own passengers. But it does show that being a very low cost airline and being tight on how we manage cash, has meant that we haven't required so much government support. But there is a bit for us that's for sure."

"Some of the testing we are working on will be a game changer for tourism and business"

"Firstly domestic is 50% of our business. And that's doing very, very well. The other 50% is international. And I think over the next six months you're going to start seeing opening up at various levels. Obviously there are three things that I've been focused on. One is vaccine, which is well-publicised. Two is testing.

"I think testing is going to be really important for airlines. Some of the tests we're working on with researchers in terms of you breathing into an apparatus and within 30 seconds, you know you have COVID or not. That's going to be a game-changer for the tourism and airline industry. So I think there's not a lot of talk enough about testing and there's a lot of innovation on testing."

"And the third one is therapeutics. If Donald Trump can survive, that gives us all hope that we can survive. So I think... You had this call in March of this year, we'll all be scratching our heads saying, 'When is it going to open?' Now, countries are desperate to open, and people are going to find ways of opening up. So I think March maybe a good time where you begin to see some borders opening up, where you begin to see some borders opening up."

"Obviously, Singapore will be in the lead in my opinion. And then I think July, August, we could see a return to normalcy. Now, AirAsia is in a much better spot in that we're domestic and we're regional. More likely, someone's going to go to Phuket then fly to London. We're not in the business class segment so leisure segment is going to bounce back first. At the moment, Malaysia opened up two days ago, we had record sales in Malaysia. That's the most important fact, Peter, is that demand is there, people want to fly. No-one's afraid of flying. That they know that flying is safe and they know how to protect themselves, and there's an element of frustration that a lot of people are just saying, "We got to get on with our lives, right? There're tons of other viruses out there, there're tons of diseases out there, but we know how to manage it now."

"So this is not the end of flying, it's going to come back strongly. I think the Chinese user revenge flying or revenge shopping will happen and I think we're in a nicer spot. So in March to June."

"It's going to take a long time to vaccinate everyone, so public health will play a key role. It's for governments to decide if people need to be vaccinated to fly"

"Let's be real, to vaccinate 276 million Indonesians is going to take a while. The vaccine gives us confidence, right? It gives a little bit of a boost to the human nature. But, I mean, Singapore can do it. They can vaccinate themselves and they can open up the country because there's eight million of them. But then Indonesia, Thailand will take longer. Malaysia'll be quicker, but it's going to say the better part of a year to get everyone vaccinated. So I see it as a cocktail of all solutions on top of the fourth one, which I think is the most important one and driven by human nature, is public health. Those who wear mask, those who wash hands, those who don't go into massive raves, etc."

"AirAsia won't say, 'You need to be vaccinated', but it'll be the country that will decide whether they'll allow people to come in if they're not vaccinated. You're touching on really strong liberties here and you have a danger of those who have and those who haven't. But we are old enough to know that we lived in a world where if you wanted to go to certain parts of the world, you needed malaria pills, or you needed to show you had yellow fever inoculations. That yellow medical certificate. So this is not something new. And so I foresee, in Asia anyway, that I think they won't let anyone in without a vaccination. Although, I think testing is just as good that if you have vaccinated, you don't need to be tested. But if you don't want to be vaccinated and you're happy to be quarantined or do a PCR test, then that should also be considered."

"But these are big human liberty things and that's another topic for another day. But I do foresee governments saying you have to be vaccinated because, I mean, I think that's happened in all the other times and other parts of the world over the course of the century."

"We are a data company and I saw a huge opportunity with data, and we are now building an engineering company and we've built airasia.com to sell tickets"

"I foresaw a recession in 2020/2021. I also have been in this industry long enough to know that airlines are going to go through up and downs. We've been through so many. SARS, bird flu, tsunami, earthquakes, military coups. You name it, we've been through it. And so when I saw this data revolution, it was music to my ears. Number one, we were a data company, we always were. I mean, you'll know from the very early days, we were the first people to use the internet in Southeast Asia to sell."

"And I jealously guarded that for 19 years because I wanted a direct relationship with a customer, good or bad, whether they liked us or didn't like us, they could deal with us directly. And 19 years on, 80% of our business is still done on our own channels, despite OTAs, despite all of this."

"So I saw that we had this huge opportunity with data and I saw the kind of businesses that were being built on data. At the same time, we were always an airline that used our assets to build businesses. We built a training academy, which we sold off, we built a leasing business, which we sold off, and we're now building an engineering business, which I think will be one of the best in the world because we have taken our engineering company and merged it with data science. The algorithms that we are coming out with are being used by the biggest manufacturers.

"We're now building an engineering business, which I think will be one of the best in the world"

"And so what was a cost centre, ADE - which is the name of our engineering company - will become a huge profit centre. And we've been really innovative because we're very late. It's just like AirAsia 19 years ago when we came in. I was from the rock and roll business, what did I know about planes? But that was probably a blessing in disguise and the same way we're approaching the MRO business in a very different way."

"Plus, we don't have the legacy of many of these MROs that have invested in frankly obsolete practices and obsolete machinery. So ADE is one and then we'd have a very exciting joint venture with, with Singapore, with SATS, our ground handling company, which now takes a new life in terms of warehousing because of this e-commerce revolution. So that's taking our airline assets.

"I said a while ago, 'Why don't we sell other airlines?'"

"So then [we] have a fantastic platform called airasia.com, which 60 million people come in every day buying AirAsia tickets. So I said a while ago, 'Why don't we sell other airlines?' And everyone looked at me in horror.

"And I said, 'Look, let's not be silly. People are going to other websites before they come to us. They're using KAYAK, they're using Google for price comparison. So in the same way, we let pilots train in our academy, let airlines sell with us.'"

"And now we're building a logistics business. None of the logistics companies can match us in terms of speed and efficiency to deliver packages around Asia..."

"And so that started the revolution of building an OTA. And then we said, "Well, we've got a fantastic logistics business. Really, no one, DHL, FedEx can match us in terms of speed and efficiency to deliver packages around Asia and especially the secondary and tertiary cities. We have such an incredible network."

"So we started building a logistics business and we saw the huge opportunities in building a tech stack to enable airlines and freight forwarders and companies to have a much easier stance. And then we saw Blockchain and we built a huge blockchain to allow other airlines, other companies called Freightchain. And we have airlines such as Air New Zealand, South African to Lufthansa that joined our blockchain to sell space. So we built this amazing logistics company. And for the first time I'm looking at freighters."

"But the logistics business is going to be a much bigger part of AirAsia's business. So that's the beginning of the crossover from AirAsia taking the assets and building that into this digital business. And then we said, 'Well, we've got a huge database. We have a huge mileage program. Let's do some e-commerce'. So we've done food, food delivery and travel retail. Obviously then the last bit is we can go build a bank and help our clientele.

"So we've built this incredible ecosystem, which is based on the airline on hard assets, moving goods around because it can be all you've won, but you still have to move goods around and people around. So we have that wonderful business in AirAsia and we built a fantastic platform made up of what I've just said, a very digitally-based logistics company and a fintech business around lending remittances and our loyalty programme."

"…and we've created a restaurant..."

"And on the side, we've taken our airline food and made a restaurant. And I now see many airlines emulating us, but we're going to give McDonald's a run for their money. And many people will laugh, but they laughed at me 19 years ago when I started AirAsia with two planes. I laugh about it now. We started with two, we went up to 245 and we're back to two. It's just like that snakes and ladders game. You go up to square 97 and you come all the way down. But we've got 25 restaurants in the mix, five already up record sales, even through COVID.

"And yes, we've developed some nice lines of business around food. So we've really extracted the power of the airline that no one has ever seen. And that power is customers and a brand. And you know that brand very well, right? And so we've used that brand to the maximum."

"…and a record label"

It's really important to have content and we're developing a lot of content around it. And we have a small little record label. What's an airline doing with a record label? But think about the number of people that fly on us and are listening to music before you take off and when you arrive. Think of the amounts of money Qantas will spend sponsoring various artists."

"We've helped so many artists along the way, but the relationship that we built with Universal Music is enabling... It's all about not spending money on Google and Facebook. It's about delivering our own... That's the next enemy for airlines, because you're going to spend a lot of money promoting yourselves and we're all going to kill each other outbidding each other. So I've been looking at alternative channels to promote ourselves and content is one of them."

"We have a joint venture with Tata Corporation in India and we came out of Japan...we're in discussions with Tata right now"

"India is a competitive market, tough for outsiders to come in. We've had fantastic partners. I couldn't have asked for better partners in the Tata corporation. It's like what I said right at the beginning, it's now, let's know where we're strong. Let's know what we're good at. And let's not have an ego. And if things don't feel right, then we look at other options. And we're in discussions with Tata right now. Obviously we've exited Japan because we were too small and COVID put final nails in that coffin."

"So what are we strong at? We're strong in Southeast Asia. That's our sweet spot. India has been fantastic because we built a lot of connectivity to India, which our brand wouldn't have been well known without AirAsia India. But whether we should put money to continue in India or to expand in Asean, that's a discussion I'm having with my partners in India and imminently, I'm sure there'll be some announcements one way or the other."

"Yes, we have a lot of planes on order, but I'm not a short term guy and flying is going to come back. There are billions of people in Asia with secondary routes, plus logistics will grow"

"The reality is, we've got 100 odd planes on the ground. Why would you take new planes right now? And these are the discussions the manufacturers are understanding and AirAsia is probably one of the last ones in the negotiation with Airbus right now. But could we, would we take our entire order book? Yes, I believe so.

"The A321 is a great plane and we've already got 245 of those planes. And if you replace every single one of them, then you've only got a little bit more for growth. So fundamentally, do you believe flying is going to come back? And I'm not a short term guy. Yes, it's not going to come back in the next year for sure. You're not going to fill 245 plans. But will you be able to grow in 2022 and 2023? Absolutely. I really do think so."

"So Asia's got billions of people, loads of secondary route, logistics is going to grow. Too many airlines make too many short term decisions and are driven by shareholders and bankers and all this kind of stuff. But the bottom line is, I'm a top line man. I've always seen where demand is. I've always gone up to demand. I've always innovated to create new demand, whether it's going to cities that no one ever went to. Demand is fundamentally there and that gives me the confidence that we will take planes again. Airbus and Boeing, and all these guys have to realise that airlines will need time to restructure, rebuild and regrow, but I definitely think we will regrow.

"And could we take all those planes? Absolutely. But in the short term, we will have to not take planes and we may have to return the planes in the short term as we rebuild our cash balances and rebuild our balance sheet. But manufacturers should be looking at the long term as well, and not look at the short term."

"COVID is a blip in the history of the world"

"In centuries to come, kids will learn about COVID 2020. But it's a blip. How big a blip? Pretty massive in terms of the short term. In terms of the long term, it's a blip. But what will change?

"In the short term, I think business travel is going to be affected because there'll be two reasons. Business leaders will be telling their junior subordinates, 'why do you need to travel? We coped with Zoom.' But the reality is we can do all these zoom calls you want, but there's nothing like talking in a bar, right?

"A business meeting is one, but the social interaction is really important. And I think that will come back in a big way. In the same way 9/11 caused a lot of problems for Asians flying to America, for Muslims with the wrong name in America, we all got used to it. We learnt how to deal with it. There was a time where you didn't go through any security. Then nowadays you virtually have to strip naked to go through. You dress for flying.

"So human nature adapts. Yes, there'll be more health protocols, but human nature will get used to it. So fundamentally I see some short-term changes, but long term, I don't see any real changes. Things will come back to the way they were. I really do think so."

"Looking forward, people are going to appreciate things more, but the biggest thing is the move to digital, and airlines have to adapt to that....And I think we have to see ourselves as more than an airline."

"People are going to appreciate life like they never have. We've taken a lot of things for granted, and people are going to appreciate airlines more than they ever did because they've been cooped up at home. Maybe it's a nice break than being on a plane every two seconds, but I think human spirit's going to be very strong. The will to come back will be strong. I feared that we were going to get more nationalism, but I think with the recent elections, the world will get closer again in America."

"And so the biggest thing is, what has changed is it's like for me, cassettes flipped to CD. That was a big moment for the music industry, and then CD to digital. What has changed - and won't change - is the digital world, and airlines will have to adapt to that, or they'll just be a commoditised product. And I think we have to see ourselves as more than an airline. And I think that progress is changing. That's happening. I think 2021 will be the start of a massive change in people accepting digital products, and all of us will have to adapt or die. But for me, it's incredibly exciting."

"I've gone from dealing with airlines that have big sugar daddies called governments to young guys who have massive backing from the SoftBanks of the world"

"Challenging, because you're dealing with some really sharp kids with a lot of money. So I've gone from dealing with airlines that have big sugar daddies called the governments to young guys who have massive backing from the SoftBanks of the world, who have insatiable amounts of cash.

"But I think the great thing about life is life is a challenge, and I'm looking forward to it. It'd be a lot of fun. I think 2021 is going to be a challenging year, but one that we can be all optimistic about, and I think the big thing I'm going to hear in 2021 is people being optimistic. Asians spend all their time mourning, I think the big change is you have a lot of optimism."

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