Co-founder of Malaysia's biggest airline reveals post-pandemic game plan in exclusive interview

KUALA LUMPUR -- "If I was Jesus Christ," said AirAsia co-founder Tony Fernandes, not a trace of a smile on his face, "it would be the second coming."

Even for a man known for his showmanship and what might politely be termed a strong sense of self-worth, it is a fairly astonishing remark.

Still, there's no denying that budget carrier AirAsia, which Fernandes mortgaged his house to start in 2001, had a close brush with mortality when air travel collapsed during the COVID-19 lockdowns. Now the flamboyant, 58-year-old Malaysian tycoon says business is booming as tourism throughout the region roars back.

Airlines in the Asia-Pacific region ferried 34.1 million international passengers in January and February alone, compared to 5.2 million in the same two months of 2022. That period included China's unexpected early reopening in time for Lunar New Year -- peak season for Chinese and Southeast Asian tourists.

AirAsia's founder Tony Fernandes learned his business skills in the music industry before founding the airline in 2001.    © Reuters

In late March, Fernandes signed agreements in London to lease 15 new Airbus A321neos to cope with the soaring demand -- he said the airline is selling almost 90% of all available seats. Fernandes signed options for another 15 planes at the same time, he said. Meanwhile, Capital A, AirAsia's parent company, logged its first quarter in the black since the beginning of the pandemic, reporting a net profit of 172 million ringgit ($39 million) for the last quarter of 2022.

The decision to lease new planes came despite AirAsia having only about 70% of its 200 planes in service. The remaining jetliners, having been mothballed during COVID, are at various stages in the process of being returned to airworthiness. In an interview with Nikkei Asia, Fernandes said the full complement is expected to be in service by July or August, six months ahead of earlier projections.

Although there are strong tail winds aiding the airline's recovery from the near-death experience of COVID, substantial obstacles stand between AirAsia and clear skies. Principal among them is the fact that the carrier's two listed holding companies, Capital A and AirAsia X, have both been classified by the Malaysian stock exchange as being in financial difficulties, a designation known as "Practice Note 17." Under the exchange regulations, the companies must present a restructuring plan demonstrating a viable path back to solvency or face being delisted.

AirAsia is now readying its remaining mothballed jetliners for their return to the sky -- and to handle the surge in post-pandemic tourism.   © Getty Images

AirAsia X has until April 28 to submit its restructuring plan to stock market regulators. While Capital A's deadline is not until July, Fernandes said the plan to be submitted in late April will address the restructuring of both concerns. He argues that the PN17 status is mainly about disagreements over accounting standards and does not reflect fundamental solvency issues.

Not surprisingly, Fernandes also expressed complete confidence that the restructuring will allow both companies to emerge from the PN17 designation. But even his own description of the plan, which is necessarily limited because of regulatory constraints, underlines the complexity of the exercise. It will likely involve the breaking up of the two companies into four separately listed entities, he said, one of which will oversee all of AirAsia's airline operations.

That would be a difficult trick to pull off in the best of times: Doing so while carrying billions of ringitt of negative shareholders' equity, as AirAsia's parent Capital A does, will be what even Fernandes himself calls an "incredibly complicated process." Capital A's negative equity amounts to 5.8 billion ringgit, according to Samuel Yin Shao Yang of Maybank Investment Banking Group in Kuala Lumpur.

"I would never write Tony Fernandes off," said one Kuala Lumpur-based equities analyst who was not authorized to speak on the record. But the restructuring "is a huge hurdle. There are multiple moving parts and all of them have to come together at the same time."

Others are more sanguine. Tony Fernandes is "a pirate," quipped Shukor Yusof, owner of Johor Bahru-based aviation research company Endau Analytics. "Your typically aggressive entrepreneur, because that's what you need to excel in the low-cost carrier business.

"But Tony has learned his lessons over the years and knows how to handle the policymakers in government."

Shukor added that although AirAsia never got a cent in government money during the pandemic -- unlike its heavily subsidized rival flag carrier Malaysia Airlines -- regulators still have considerable incentive to keep AirAsia from being delisted. It is by far "Malaysia's biggest airline, after all," Shukor said, and as such a major contributor to the country's economy through tourism arrivals.

AirAsia staff welcome passengers disembarking from a flight at Kuala Lumpur International Airport 2 in Sepang, Selangor, Malaysia, on April 1, 2022.   © Getty Images

Despite the PN17 worries, there's no question that booming operating conditions are an enormous asset for AirAsia and indeed airlines throughout Asia. Air passenger travel has soared in the first months of 2023, with iconic destinations such as Thailand and Indonesia seeing triple-digit rises that should put them on a path to approach 2019 arrivals, the last full year before COVID hit.

Much of that business comes from the all-important Chinese market. After being completely closed to the world and then abruptly reopening in early January, Chinese tourists were slow at first to return to Southeast Asia. The Association of Asia Pacific Airlines (AAPA) maintained a subdued outlook for the year given the moderate recovery of flights on China routes and weaker demand for air cargo. "Asian airlines are proactively taking steps to reduce the strain on operations where possible," said Subhas Menon, director general of the Kuala Lumpur-based AAPA.

"The demand outlook for international travel is positive," Menon added, "but expected to moderate in the coming months compared with the larger traffic volumes in the later months of last year as more borders reopened over the course of 2022."

Fernandes says arrivals are now rising rapidly and estimates they will soon reach pre-COVID levels.

The sudden turnaround in AirAsia's fortunes came as a surprise even to the preternaturally self-confident Fernandes.

"My job was making sure we survived, making sure we hired everyone back," he said. "But I didn't think we'd be looking at growth again so fast. Demand is very strong."

Walking the walk and eating the food

Fernandes grew up in Kuala Lumpur and trained as an accountant at the London School of Economics. He worked briefly for Richard Branson's Virgin Atlantic airlines in London before moving on to the music business. But his experience with Virgin Atlantic clearly left its mark, and in 2001 he quit his job at Warner Music, mortgaged his home and used his own savings to take over a small, failing government-owned airline, then the owner of two leased Boeing 737s. Plastering his slogan -- Now Everyone Can Fly -- on its aircraft, Fernandes grew the carrier into a regional giant.

In 2013, Virgin Atlantic's Sir Richard Branson dressed up as a stewardess on an AirAsia flight after losing a bet to friend Tony Fernandes about the outcome of the 2010 Abu Dhabi Grand Prix.   © Getty Images

He also made friends with Branson, who famously lost a bet to Fernandes over which of their 2010 Formula One teams would beat the other at the Abu Dhabi Grand Prix. Branson paid it off in 2013 by dressing up as an AirAsia stewardess and serving drinks to Fernandes on a flight from Perth to Kuala Lumpur.

In 2019, AirAsia Group (now Capital A) flew 83 million passengers to 160 destinations and had around 20,000 employees. It has been named the world's best budget airline 13 times in a row, including in 2022, by London-based airline and airport reviewing company Skytrax.

Fernandes became wealthy, too, acquiring a fortune estimated at around $600 million before COVID. He also acquired some of the usual tycoon's toys such as a small British sports car manufacturer and a football team, the Queens Park Rangers.

Tony Fernandes, right, sits with one of his AirAsia cofounders, Datuk Pahamin, in Kuala Lumpur, Malaysia, ahead of the airline's first ever regional flight to Phuket in 2003. (Photo courtesy of Capital A) 

In the process of nurturing AirAsia into a regional giant, Fernandes' outsize, showman's personality made a number of enemies, particularly in government. But not even his harshest critics can say Fernandes does not throw himself heart and soul -- and sometimes stomach -- into his projects.

To some people, eating airline food on the ground would itself be above and beyond the call of duty. But Fernandes not only walks the talk when it comes to his companies, he eats the food. A reporter arriving early for an interview recently discovered Fernandes seated at a plastic table eating a curry lunch served on a paper plate. The meal came from a branch of Santan Cafe, a Malaysian chain that serves a menu comprising dishes served onboard AirAsia flights. The chain plans to expand to Thailand and the Philippines.

AirAsia's new food delivery service, a competitor for Singapore's Grab, was among tycoon Tony Fernandes' attempts to keep his company afloat through the pandemic. (Photo courtesy of Capital A) 

The cafe is an apt symbol of the lengths to which Fernandes was willing to go during the dark years of COVID lockdowns to branch out into businesses other than air travel. He said he was already considering diversification and that the COVID crisis merely forced him to speed up those plans.

Among the new ventures was a ride-hailing service, AirAsia Ride, to challenge the near monopoly held in the region by Grab, the Singaporean tech platform. A matching food delivery service is also a direct competitor for Grab, as is a travel booking site, all gathered together on AirAsia's so-called Super App, launched in 2020. A separate app called BigPay is the group's foray into fintech.

Elsewhere, an existing cargo hauling company was rebranded Teleport. Fernandes said it is now being positioned to take on FedEx and DHL in Southeast Asia, a market he says is ripe for newcomers.

Repackaging these and other existing AirAsia operations would comprise the core of the restructuring package due to be presented to Malaysian regulators at the end of April. Fernandes said the broad plan is to have airline operations currently under the Capital A banner, chiefly short haul, absorbed into AirAsia X, which is responsible for medium-haul operations.

With all airline-related businesses under the AirAsia X banner, the group's other businesses would be grouped under three or possibly four other listed companies. One would comprise all aviation services such as repair and maintenance, as well as financial and other consulting services for other airlines. Another company would be responsible for the digital services under the Super App and BigPay. Teleport, meanwhile, would handle cargo and logistics including the planned ramping up of express delivery in the region.

"It will turn PN17 from a negative into a positive," Fernandes sums up triumphantly, and in the process will "create tremendous shareholder value."

Stock market analysts say the key to the restructuring will be how Capital A's assets are valued when they are taken over by AirAsia X. Much will depend on how intangibles such as the company's goodwill generated by its brand and existing market position are calculated.

Analysts note, however, that the plan must address the fact that Capital A's shareholder equity is deep in negative territory, the main reason the company entered into PN17 in the first place.

Fernandes said the restructuring plan will address the issue of the debt but that he is constrained by stock market rules from divulging details. And, he added, "I don't think we should ever have gone into PN17" in the first place. "We went into the PN17 based on accounting, not on the fundamentals of the business." Requests for comment to Bursa Malaysia, the stock market regulator responsible for issuing the PN17 notice, did not receive a response.

Furthermore, "the stock exchange should have given the aviation industry another year" in which to recover, Fernandes said. Even though lockdowns ended, the COVID-sparked crisis has by no means ended for airlines.

AirAsia's parent company Capital A is currently classified as PN17 by the Malaysian stock exchange, meaning it is facing financial difficulties.    © Reuters

Whatever the case, until that issue is resolved, raising money remains a huge challenge, said a Kuala Lumpur equities analyst who tracks AirAsia, especially from all important institutional investors. "In terms of the share price, you might have an upside of 30% or even 40%. But when the downside is total delisting, a lot of people are choosing to wait and see."

To make the decision to withdraw the PN17 designation as easy as possible for regulators, Fernandes must focus on keeping his existing businesses as profitable and debt free as possible. That could be tricky, given that many of those businesses and all of the newer ventures launched during the pandemic are still startups.

Fortunately, most of the new business ventures are relatively small compared to the company's airline operations.

"They are a sideshow," said Shukor of Endau Analytics, "designed to show investors their ability to be nimble during the lockdown. The company's most recent results illustrate the point: For the whole of 2022, digital businesses BigPay and the Super App generated about 412 million ringgit. The pure aviation business meanwhile (excluding engineering, logistics and other directly related services) pulled in nearly 6 billion ringgit.

Fernandes acknowledges that these ventures are mostly small, but says their potential is huge. He believes the collection of digital services gathered under the AirAsia Super App has the potential to transform travel in the region.

AirAsia's Super App, launched in 2020, is home to a range of founder Fernandes' business ventures, from ride-hailing to holiday-booking services.   © Reuters

"My whole life has been about making it affordable for people to fly, democratizing travel," he said. "But flying is only one part of the equation. You still need to get to the airport, and you still need hotels. You still need money for shopping."

Snakes and ladders

For passengers on a budget airline, ticket price is the principal issue that drives their decisions. And that area is currently looking good for AirAsia, notes Yin of Maybank.

"Yes, there have been some cost pressures, but they have been more than made up for" by earlier ticket price rises and other factors like the decline of aircraft leasing costs.

Yin points out that leasing rates for short-haul aircraft like the A320, the mainstay of AirAsia's fleet, are down around 25% from pre-COVID levels. For long-haul Airbus A330s operated by AirAsia X, it is "easily 50% cheaper."

Another major cost concern for airlines is jet fuel, which usually makes up from 20% to 30% of operating costs. There too, things are looking up. After peaking at above $4 a gallon in 2022, due to the Ukraine war, prices have dropped by nearly a third, currently hovering around $2.75 a gallon.

All of which leaves AirAsia in prime position to continue to reap the benefits of the resurgence of tourism in Asia and beyond, Yin said.

Tourists came flooding back to Asia's hotspots, such as Bangkok's Grand Palace in Thailand, in the second half of 2022 after countries started lifting COVID-19 border restrictions.    © Getty Images

Asia's population is Fernandes' main business case: "India and China. There's a couple of billion people in those areas," he said. "And then we have the rest of ASEAN, which is 700 million people. That doesn't count in Japan, Korea, Australia. And [gross domestic product] is growing, so the propensity to travel is huge. The timing for us is massive."

Past experience, however, has taught Fernandes that his focus is best kept on international travel, not domestic. AirAsia was forced by intense local competition to shutter subsidiary ventures aimed at domestic markets in India and Japan during the COVID shutdowns. And he has not been able to make a mark in Indonesia's domestic market, where the local AirAsia holds only about 5% of a booming market.

This lesson has been fortuitous, Fernandes said, as it has nudged the airline to focus on what it does best: international travel within Asia.

"That's where we are making most of our money," he said.

As to the business of the PN17 status and the possibility of being delisted and losing everything he has built up, a typically ebullient Fernandes said all will be well once the restructuring plan is revealed to the public at the end of April.

"It's kind of like snakes and ladders," he said. "You got to square 97 and you're just about to retire and then you come all the way down to square three. To pick yourself up again from square three is tough. But we have done that, and now we're going to come back stronger and bigger again."

https://asia.nikkei.com/Spotlight/The-Big-Story/AirAsia-s-Tony-Fernandes-Tourism-is-back-but-fight-to-survive-goes-on