AirAsia.com CEO Interview: In a changing world, non-airline revenues become the key growth driver

Transcript

Peter Harbison:

Hello. And I'm talking to Karen Chan, who's the CEO of AirAsia.com. Karen, welcome to CAPA Live. Great to have you with us.

Karen Chan:

Good morning, good afternoon to all the audience and thank you, Peter, for having me.

Peter Harbison:

It's a great pleasure indeed. If I could set the broad picture before we start, Karen. I think for airlines historically, the main revenue stream, of course, was selling tickets. Then it evolved into a second stream, which was around loyalty frequent flyer programs, where you basically have third parties contributing money to you, the credit cards, the retailers, you name it. And that's become, particularly for someone like Qantas, a very big source of income, those third parties.

Peter Harbison:

Now we're talking, in some ways I suppose it's a crude way of describing it, but an extension of the ancillaries, the non-ticket price, but actually attracting revenue from your customers, both flying and non-flying. And this is where the really interesting part comes. I guess it's really about leveraging your brand, and I guess the circular virtual circuit in that case too.

Peter Harbison:

Why don't you tell us a bit about how you've structured this and how you've gone for the first year, since you became CEO in December, 2019?

Karen Chan:

Sure. Thank you. And that's a great question, Peter. I think whether with the COVID or without the COVID being able to become a lot more than just an airline has always been AirAsia's vision and also Tony's vision. How do we, as we start building on the 19 years of history and the 75 million customer members that we have amassed over those 19 years, how do we actually start growing? Not just to become the airline of the future, but to become the platform was a future? And I think you've also seen since last year, we have been talking about AirAsia.com to become the fastest growing ASEAN super app. Not just providing offers for travel, but further into daily lifestyle. And I think what COVID has actually done last year for us is that we have actually accelerated the digital transformation to be a lot more than just an airline.

Karen Chan:

Right now, we are focusing on three strategic verticals. Travel is always in our blood, but apart from just selling AirAsia flight tickets, we are now selling any airline flight tickets, and we are actually in very serious discussion with quite a few full service carrier. We just announced our strategic partnership with Turkish Airlines, so that now we can actually go and pull the content and the infantry onto AirAsia.com platform.

Karen Chan:

We want to go and put a stake for ASEAN that we will become the challenger OTA. Not only are we able to go and sell flight tickets, we can also go and sell what you mentioned, the adjacencies, hotels, activities, airport transfer. And later on, I can also share a lot about some of the more innovative products that as a result of having a platform, an OTA platform, we are able to go and expand into when other airlines are just not able to do so.

Peter Harbison:

Yeah, well that sounds very ambitious, and I guess for a brand like AirAsia, which is ubiquitous across ASEAN and beyond, even into India and so forth, it should be an achievable goal to really expand that way. Can we just talk first about the OTA side of it, which is very interesting. It's a challenging, competitive market. What advantages does AirAsia.com have over, without naming any of the names, some of the other OTAs in the region?

Karen Chan:

Yeah, so I would love to say, and when both Tony and myself get asked, "Karen, you guys are such late comers. There are so many other big guys out there, incumbents who have been in this play for 10 years. What makes you think that you can win?" And the first thing we say is that when AirAsia started as a budget carrier with just two planes, buying the airline for $1, people will also laughing at us, and look where we are now. I think sometimes it's not about being the time of entering the market, but it's also about learning from all the mistakes and all the successes of all of the incumbents.

Karen Chan:

The biggest difference between us and any of the other OTA is that we are proud to say we are the only OTA that's backed by an airline. What does that mean? If you look at how OTA actually pulling infantry, they are pulling infantry either from direct API or from aggregators. Because we actually own an airline, and as you also know, there are many, many different tiers of of fares, we are able to go and leverage on the cheapest tiers of fares, the promo fares, as well as also unsold infantry.

Karen Chan:

A very simple example that we just recently launched since last year, a particular product called SNAP. SNAP is really just the bundling of flight and hotel. Everybody can do it, but why do we feel that we can actually do it much better and really go into the market and claim best price guarantee? That's because we are the only OTA that actually controls the pricing of every single segment and every single route, 365 days out. We actually know the [youka 00:05:31]. And what that means is that, for instance, flying from Singapore to KL, we have 14 flights daily. Not all the flights are always full and the low factor will not be 100% percent. Morning flight, 6:30 in the morning. Peter, me and you, we don't like to get out of bed at 3:00 AM in the morning to catch a flight.

Karen Chan:

So the unsold infantry, and because they are so perishable, even at an 85% load factor for an A320, I still have about 20 to 25 seats unsold. I will now be able to go and bundle those unsold inventory for one ringgit, or twenty-five cents US, with basically the direct inventory from a hotel and I will be able to go into the market best price guarantee. Nobody would be able, none of the other OTAs would be able to go and tap into unsold infantry or some of the distress fare prices that an airline would be able to offer, which now we will be able to go and offer to our passengers and customers.

Peter Harbison:

Right. Really interesting point. Karen, just before we go on, your cables are banging against each other, which is distorting the sound a bit. Could you just separate the cables as they come down? That's it.

Karen Chan:

Is it better now?

Peter Harbison:

Oh, I think as long as they don't bang against it. That's good. Just that's fine now, I think. Yeah. Excellent.

Karen Chan:

Excellent. I'll try not to move my head.

Peter Harbison:

You're allowed to move your lips though. So let's take, for example, you've got ... You mentioned the new Interline arrangement with Turkish, are you able to leverage that from an OTA point of view as well?

Karen Chan:

Absolutely. So we are actually signing a strategic partnership and Turkish Airlines is basically one of our first partners. We are also talking to other full-service carriers, whereby they actually see the network and the coverage of AirAsia as a fast hinterland to go and draw traffic, whether it is flying into the Middle East, whether it is flying into Europe or even into China. We have also announced our partnership with Ctrip.

Karen Chan:

As you can imagine, once international borders open outbound from China, basically Chinese are the number one travelers within ASEAN. And we would like to go and start leveraging into the fifth, into the sixth tier cities, which right now we do not cover. But via the strategic partnership with Ctrip, we would then be able to go and bring Chinese into the rest of our ASEAN and really ASEAN into the rest of the world. That's basically the whole point. And as you can imagine, when we talk about the recovery of travel for this year, I keep telling my staff right now January feels like the 13th month of 2020.

Karen Chan:

Right now January feels like the 13th month of 2020, but we actually see silver lining. One of the other impact apart from leisure and business travel is actually religious travel. Religious travel has actually taken a huge delay and already we are actually getting a lot of requests from customers for basically pilgrimages, whether it is going to the Middle East or whether it's going to other parts, this is going to be the third strategic pillar for travel. And the reason why we are working very closely with Middle Eastern airlines is we will then basically be the traffic to go and drive them into the final destination, be it Saudi or some other places.

Peter Harbison:

Okay. Let's just talk about... Okay, so we are in this situation at the moment where very little is flying either aircraft or people. Let's look say two years down the track, we've got back in the air in the meantime, everything's flying again. We have another grounding basically of airline fleets, how well-established will your non-flying revenue streams be by that stage?

Karen Chan:

Maybe I can share some top line numbers. I think if we actually look at everything being a blessing in disguise, I think what COVID has really done is that it has really galvanized the entire organization to be laser-focused on what does it take to be more than just an airline? And what I can share with you is that for us to actually be ready so that the revenue contribution, what we actually anticipate in five years time, basically by the end of 2024, is the 50% of the revenue will actually be coming from non-flight-related, non-AirAsia-related revenue, that is already in progress. We actually have very strategic and very aggressive targets for this year, but allow me to go and share.

Karen Chan:

So basically travel, apart from just selling AirAsia flights, as I mentioned, we are now also looking into hotels because the network coverage of AirAsia, 25% of them have always been monopolistic, which means that we are the only carrier that goes into specific hubs, especially in domestic Malaysia and also domestic Indonesia. Being able to go and sell hotels is a no-brainer because once they actually purchase that particular flight they need to also go and find accommodation, and also for on-ground transfer. These are non-AirAsia flights-related revenue that we already have started building up.

Karen Chan:

The other strategic vertical which I mentioned is really about e-commerce. I think with COVID, home delivery is now a new way of life. It's basically a new way of shopping, it's also a new channel for revenue. And if we talk about online e-commerce, the linchpin for successful e-commerce is about last-mile fulfillment. And as you can imagine, AirAsia as a budget carrier we are also not immune to basically the impact of the pandemic.

Karen Chan:

What we have been able to do, however, is that we have repurposed a lot of our crew, our ground staff, even pilots to actually go and support the delivery and the last mile fulfillment logistics piece. Whether it is actually start optimizing the warehouse fulfillment, whether it is about becoming drivers so that we can now go and guarantee one-hour delivery for our restaurant food, we are now actually repurposing some of our staff.

Karen Chan:

So on one hand, whilst we are actually rationalizing for the airline, at the same time we are also upskilling and reskilling our staff to go and prepare for the e-commerce vertical that we are now building very, very fast. Tony also made on a very, very good comment. AirAsia has always been about carrying people across Asia, now we are also carrying parcels. Logistics and cargo will become increasingly important as e-commerce continue to go and grow within the Asian region.

Peter Harbison:

Talk to us a bit about these non-airline activities. You've got OURSHOP, OURFARM, OURFOOD. How did they fit into their respective market sectors? What sort of competition is there in that? And again, going back to this sort of continuing point, how powerful is the AirAsia brand in terms of leveraging an advantage in that?

Karen Chan:

I can actually say that going into e-commerce is actually very new for us, but we do have quite a few things that's actually in our advantage, and I can actually say it's actually unfair advantage. The fact that we were able last year, basically before the end of Christmas, to be able to go and launch Last-Mile fulfillment in 70 cities, we call it basically the city launcher across the entire Asia, is based on the fact that AirAsia already have hubs in most of the metro, as well as second and third tier cities across the entire Asia. Whether you're talking about Wunderbar in Thailand, whether you're actually talking about Lombok, Surabaya, Medan in Indonesia, or whether you're talking about Iloilo and Palawan in Philippines, we are already there.

Karen Chan:

Now, that basically give us our speed for market penetration, that's the first point. Leveraging on the existing network coverage and the manpower and resources that's actually on ground in market allows us to go a lot faster for e-commerce than some of the other pure online players whereby they do not have actually the hands and legs within each market and they need to build, that's the first point. The second point about e-commerce, and obviously once international borders open again, is that we are the only e-commerce player who can guarantee 24-hour cross-border delivery of goods.

Karen Chan:

If you go to any other e-commerce marketplaces, majority of the delivery is between three to seven days, you can go and offer express. That's because they need to then go and consolidate a lot of the parcels on to basically another middleman, onto another middle before they can actually go onto the plane. We actually go and control the fleet size and we actually control all the belly space across the seven AOCs that we have within Asian. So in terms of cross border, Tony has given us a challenge. Why can't we go and deliver the beautiful snow crab in Hokkaido within same day, within 24 hours to Malaysia, to Thailand and to Indonesia? There's no reason why. Because we have basically five to six dailies going from Japan to the rest of Asia. So that's the other piece, the cross-border piece.

Karen Chan:

The third piece is that the reason why we feel e-commerce for us is also an unfair advantage is because we already have a 75 million customer database sitting with AirAsia. If you look at other players, majority of their marketing spend and hence they go quite a lot into cash burn and not profitable, is basically the high cost of customer acquisition. Whether you're talking about a super app or whether you're talking about a shopping marketplace, one customer acquisition can cost up to 75 U.S. for one new customer acquisition. We are not in the business of acquiring new customers, we already have 75 million customer that we now need to go and upsell and cross sell using the analytics and the AI and the real time reward that we can offer.

Karen Chan:

Not sure whether I've also shared, in the past when you actually go and earn loyalty points on AirAsia, you can only earn it when you purchase flights and you can only redeem it and burn it by buying flights. Now we are democratizing all the points, points will be the new currency on airasia.com. If you don't have enough points going from KL to go to maybe Japan, now you can actually go and use them to buy your next meal, to go and buy the fresh grocery. We have basically allowed all the points to be used across travel, across e-commerce and even for paying bills now for the utility and payment side of the vertical. So these are the three things that we actually feel very strongly that we can also be successful.

PART 2 OF 4 ENDS [00:16:04]

Karen Chan:

Three things that we actually feel very strongly that we can also be successful within e-commerce.

Peter Harbison:

Yeah. Some very interesting points in there and I can see particularly the speed of delivery issue is actually a real value creator. You can charge obviously a significant premium if you can deliver same day, particularly fresh, obviously, fresh crabs. And you touched there at the end on this crossover between loyalty and the marketing, the e-commerce side of things. Big loyalty is just rebranded as big rewards and sort of evolved from originally just the AirAsia frequent flyer program effectively. How does that crossover work? And what is the implication of having big rewards as a separately branded separate activity to some extent? How does that work? Is it effective?

Karen Chan:

Actually, as part of the strategic initiative for 2021, we are basically now bringing big rewards into the full ecosystem. I think one of the power and the strength of AirAsia is really in the whole ecosystem play. Not only do we own an airline but we also have separate entities where [inaudible 00:17:14] is actually in big rewards. And as you've also heard from Spencer, Spencer's the CEO for big rewards. The reason why they want to rebrand is that we don't really want to be seen as a frequent flyer program anymore. We actually want to go and be seen as basically a lifestyle partner, whatever the consumer wants to do on airasia.com, we need to stay relevant. And point is going to be the new currency, whether you are actually online or whether you are actually in flight, you can now go and utilize points as cash. That's basically the end game for the loyalty and the rewards piece, so that's one part of it. If you ask the importance of loyalty or points, it is very, very important because this is one way to go and drive stickiness.

Karen Chan:

And we are not just looking at points, points is one piece of the puzzle but more important, it's about the data exchange. As I mentioned, we already have over 70 million customer database, every single customer we have more than 10 touchpoints. If you look at some of the other e-commerce players, they may only have your full name, your credit card details, your home address. That's basically it. But if we also look at the other entity, which is in big pay, which is basically our FinTech, the third pillar, we actually have very high-quality primary data. Not only do we actually have, we have done a lot of the KYC, know your client. So these are high-quality data coupled with basically the understanding of the PNL. We already know your passport number, how many people you are actually traveling with on a particular trip. Data is basically the new black gold for us and that's how we can go and make sure that whatever offer that we can serve, whether it's to you Peter, or whether it's to myself, will be personalized.

Karen Chan:

Will be at the right time with the right promotional offer for upsell. That's a power of data combined with the loyalty program that we have.

Peter Harbison:

You keep stealing the questions out of my mouth before I ask them, unfortunately.

Karen Chan:

I'm sorry, Peter.

Peter Harbison:

But, no, no. I mean it's obviously a good place to be. I mean the data issue obviously is the big picture for the future. As you say, data is gold, or data is gold. We took partnerships before. Are you fully in control of that data, aggregation, and mining? Or are you using a partnership to get the sort of really high-value mining that's possible with some of the more sophisticated players?

Karen Chan:

It's both, it's both. Obviously for airasia.com for any transaction that happens on airasia.com whereby we are the merchant of record. Not only do we have data ownership, we also have data usage rights. Now, as we start talking about partnering with maybe some of the other strategic full-service carriers or working with other hoteliers, it's more about the data usage. The data ownership would still reside with the final merchant of record, which might be with the hotel. And actually, when we start looking at data, there are many, many different parts for data. Analytics is really just a throughput on how we actually go and utilize it. But as we start looking at ingesting, all these different data, they are no longer just talking about transactional data upon the completion of a particular order or an invoice. We now talk about interactive data. When a customer who have actually come to airasia.com, they really wanted to go and purchase a hotel but they didn't find the right date and hence they leave us.

Karen Chan:

These are basically behavioral data that we are now also looking in so that we can actually do a lot more targeted personalization and a lot of more targeted re-engagement. So data is not really just about the completion of a particular transaction but also interaction. What have they actually clicked through? Maybe they've actually clicked on food and they actually have a consideration for this particular dessert but they never completed that. My next engagement whether it's EDM or push notification will be, hey, how about we actually give you 20% off? Or a particular throw in with a brownie? And then we actually go and drive the conversion through that way. So there are many different facets of data that we are looking at as well.

Peter Harbison:

Right. Do you have a common platform for this data? I mean one of the problems quite often is that it's sort of aggregated in different little piles. So are you starting essentially from scratch and working from the bottom up?

Karen Chan:

I think the fragmentation and the silos of data exist across all industry, we are not exempt from it. And as a result last year, a lot of the work that we have actually been doing, it's really about integrating, harmonizing, and consolidating the data lake. Make sure we're doing property duplication and ensuring that as we actually start building consumer intent and profile, we are able to go and start grouping them in different relevant cohorts. So that a customer who may have purchased our Nasi Lemak, our favorite Santan meal on board, we would then be able to go and upsell them with a home delivery of Santan, which we are already doing. So a lot of the different cohorts, we now are stitching them together to make sure that we are really doing the right personalization with the right offer. So those are a lot of the work that we have been doing in the backend for data ingestion, as well as doing all the different data modeling.

Peter Harbison:

Right. Yeah. I mean that is a challenge and it's expensive, isn't it? To do it yourself. It obviously slows you down in terms of achieving your goals as well as if you can't get it together. Let's talk a little bit more about the partnerships. I mean we've talked about Turkish but partnerships with other airlines. It's been mentioned, either you've mentioned and or Tony has mentioned, in discussion with many others. Can you go a little bit further than that and give us some details, regions, airlines, whatever?

Karen Chan:

Sure. Maybe I can talk about partnerships in three verticals. Not only are we doing partnership within travel to become a challenger OTA, we are also doing a lot of partnership within the e-commerce and also without the FinTech space as well. So maybe I can start with the OTA piece. Apart from working directly with airlines, whether it's the Middle Eastern airlines, we are also in talks with some other European airlines. It is really about once international border open, all of us are banking on basically the pent-up demand. People were asking me, Karen, what is the one word you want to use for 2021? It's about traveling. I'm sure all of us during Christmas we are reminiscing on all the different trips, right? Whether it's to the beach or to the snow, we are all reminiscing on that. So we are already gearing up for travel, not just within [inaudible 00:23:59] but also across the world, bringing [inaudible 00:24:02] to the world. So that's on the-

Karen Chan:

... But also across the world, bringing ASEAN onto the world. That's on the airline piece.

Karen Chan:

We are also looking at specific GDS partners so that we would be able to also go and pull inventory across multiple full-service carriers. That's the first part. We are also working very closely with aggregators. In the past, we always talk about sleeping with frenemies, now we are actually working very closely with them. As I mentioned, we have some strategic partnership with Ctrip. Ctrip and trip.com, the mother company, they are doing a lot of amazing work. Whether it's about loyalty, they are now also launching something that is actually currency-based, digital currency-based in the loyalty program, which we would also like to tap into. We definitely want to tap into the fast hinterland of China, which AirAsia may currently not cover. The third to the seven-tier cities that Ctrip already covers, because they will be the inbound traffic once international travel opens.

Karen Chan:

We are also working very closely with the Agoda. Agoda have a very strong position within ASEAN, especially for hotels. As we start looking at how do we go and provide better value, making it easy for customers to order everything from AirAsia.com, not only are we directly sourcing from hotels, we are also working with partners like Agoda to go and basically provide the depth and the selection of hotels across whichever city you are looking at within ASEAN.

Karen Chan:

We also are working with Kiwi. Kiwi.com, an aggregator in Europe. We love working with them because they have some of the best state-of-the-art virtual interlining technology, which we are also leveraging and building upon. That's on the travel piece.

Karen Chan:

One other piece that I would like to go and share a little bit more about is that, when people ask, "Karen, how do you actually expect the rebound or the recovery of travel?" Business travel is going to take a bit of time now with Zoom and all the other online conferences. Leisure travel will basically at the mercy of the wide availability of vaccines and the harmonization of SOP.

Karen Chan:

I keep reminding them, health travel, medical travel will be the third pillar. That even with COVID in this new reality, would be actually a new focus. Health and wellbeing. Whereby consumers actually travel overseas to go and seek treatments. Take, for instance, I'll give you some numbers. Last year, even during the lockdown, we were actually doing medical charters from China, from Indonesia into Malaysia, for cancer treatments, some of them being terminal. This will continue to grow. What we have actually launched last year is basically the full online integrated medical travel platform. There's a lot of discussion about telemedicine, teleconsult, but they only end with a passenger or a medical seeker talking to a practitioner. If you need to go and book a particular appointment, you still need to go and call the hospital or the clinic.

Karen Chan:

AirAsia Health is the only platform that has integrated, first of all, with 18 private hospitals in Malaysia, whereby you do not even need to go and call the hospital. The online booking system for specific treatments are already available. Once you actually book that, we would then be able to go, and you can also book your flights, your accommodation, and also online transfer plus translator, if you're talking about overseas patients coming into Malaysia. This is one platform. These partnerships are very, very different. We are now talking to hospitals, not only have we signed up for hospitals in Malaysia, we've already signed up for another big hospital chain within Thailand. Also one of the more sophisticated private hospital in India. We believe that there's a lot of traffic and a lot of movement within the medical travel industry as well.

Karen Chan:

On the other piece for e-commerce ... Sorry, Peter.

Peter Harbison:

I was just going to say, this is massively ambitious, isn't it? The different verticals you're getting into. And obviously requires a lot of resources to be able to finesse the relationships. It sounds very, very encouraging.

Peter Harbison:

Karen, sorry, I'll let you get back to your point, but we've got a couple of minutes left. I did want to ask you specifically, when you talk about the medical, is AirAsia going to be in the business of helping to distribute the vaccines when they come become available?

Karen Chan:

Absolutely. We are in very close talks with basically the MOH and also the DG. We would love to go and support the country in whichever way we can. Actually, last year over the 1000 charter flights, close to 20% of them are basically for humanitarian reason and also for medical supplies. We have been doing a lot of special charters for sending medical supplies to East Malaysia, to Bangladesh, to different countries whereby they have needs. This is something that both Tony and Datuk [inaudible 00:29:01] are very, very passionate about. It's not just about, we used to talk about AirAsia is about creating jobs and supporting community. We are now talking about saving jobs and supporting communities.

Peter Harbison:

On a more controversial point, will AirAsia be looking at the requirement to have a vaccine before you can get on an airplane?

Karen Chan:

Right now, we will be guided by the different government regulations. But even with the vaccine, I think it would still continue to co-exist with basically COVID testing. Just because you have a vaccine doesn't mean that you may, depending on the duration of the vaccine and when you actually take the vaccine. We believe that they will co-exist. Continuous testing on COVID, in whatever form, whether it is COVID, the PCR swab, whether it is rapid or whether it's antigen, we will continue to go and work very closely with the government to ensure that proper SOP are in place so that AirAsia can really go and give consumers the peace of mind for digitized and sanitized travel.

Peter Harbison:

Yeah, it certainly does seem that's going to be the way governments are going to be looking. You've got to be testing, testing, testing, because with several billion people, it's going to take a long time to vaccinate everybody with lots of different vaccines.

Peter Harbison:

Let's end on that reasonably positive note. Hopefully those vaccines are going to be coming through, they're going to be effective, and certainly do wish you a lot of luck in this massively ambitious program.

Peter Harbison:

The last question with one word, do you think others can imitate what you're doing? Yes. No.

Karen Chan:

Maybe. We love to have more competition and we love to have more collaboration. That's how it will work.

Peter Harbison:

Great, thanks Karen. Lovely talking to you. Hope to do it again soon.

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