Strengthening domestic market AirAsia's priority

STRENGTHENING its base in the domestic market remains AirAsia's priority for 2003 although just six months ago the airline was keen on going regional this year. 

“It makes more sense for us to remain in the country. There is a lot more to be done here, and we want to perfect our model before flying out. 

“We have plans for (additional frequencies and even new destinations) this year, say, five times weekly to Kota Kinabalu, and we may even try to get into Ipoh (or even Johor Baru),'' AirAsia chief executive officer Tony Fernandes said. Other destinations AirAsia intends to fly to this year include Kuantan, Alor Star, Bintulu and Sandakan. 

Fernandes said that one year's good results did not guarantee future success, and venturing into unchartered territories might not be the best at the present time. 

One thing for sure, Singapore Airlines is not taking AirAsia's innuendoes lightly. It is gearing SilkAir for competition. Fernandes is aware of regional competition, not only from Silk Air or other smaller carriers but also from the bigger regional boys such as Malaysia Airlines, Singapore Airlines, Cathay Pacific and even Qantas Airways. 

And that is why AirAsia has decided not to rush into the region, but rather to first “be a champion at home''. 

Then again, AirAsia does not thrive on travel agents to sell its seats, it is done online. Setting up a platform for product distribution and, at the same time, maintaining very low costs would be AirAsia's challenge going regional. 

“We are a different product and the issue is how we differentiate ourself,'' he said, adding that talks on landing rights in Indonesia and Thailand were still ongoing. 

AirAsia also intends to increase its fleet size to 14 from six by year's end, and to 20 by end-2004. 

“Right now, if you ask me, I would lease the aircraft; but in a few weeks' time with better pricing, we may look again. If we buy new ones, our cost will be up; if we lease, the cost will be lower by 20%–30%; with second-hand aircraft, our cost will be up slightly. We have to take a conservative approach.'' 

Tune Air, controlled by Fernandes and four of his friends (Datuk Pahamin Rajab, Aziz Bakar, Kamarudin Meranun and Connor McCarthy), took over AirAsia in December 2001. They bought the airline for RM1 and assumed its debts of RM40mil. 

Many sceptics did not envisage AirAsia, which sold seats for as low as RM10, raking in RM19.4mil in profit for its first year (first seven months) of its operations under the new management when previously the airline was running at a huge loss. What was the secret of its success? 

Leaning back in his chair, Fernandes said the first year had been very challenging. Initially, no one wanted to deal with them. Fernandes flew with his own money to see the suppliers, most of them based in the US and Europe, to get them to supply equipment at a low cost so that the airline could begin operations. 

“I remember knocking on the doors of many banks but only Bumiputra-Commerce Bank came forward. We sold our story. And yes, we have netted profits in our first year of operations, but we also know that the journey has just begun,'' he said. 

He also acknowledges that AirAsia would not have been successful if not for the help from the government, the dedication and commitment of its own employees, which have grown from 250 to 450, and attention to detail. 

“I don't think many airline management goes so deeply as we do into cost and supplies. We know the price of every item for we ourselves negotiate everything. The cost culture reverberates from our senior management team right to the engineers, pilots and stewardesses,'' he said. 

Today, AirAsia prides itself on having the lowest cost in the world. Its cost per available seat kilometer (the airline measure of unit cost) is 10.9 sen or 2.5 US cents.  

This compares with 4.7 US cents for European budget airline RyanAir and 7.5 US cents for leading US low-cost carrier, Southwest. 

Cost, says Fernandes, is AirAsia's biggest competitor or enemy. While he reckons that AirAsia will still make money by selling seats at RM34 each, the cost has to be kept low, and the load factor averaging 80%. The load factor is now about 70%. 

“To help keep costs low, we have to keep the systems and processes simple, we break down barriers in decision making and use technology to save money and to grow the business.  

“The airline industry is a glamour industry, and there are layers and layers of decision makers. You just have to cut them, and managers have to be at the shop floor level to manage better,'' Fernandes said. 

Having an office at the KL International Airport allows all its employees – pilots, stewardess and even engineers – to meet. To Fernandes, nothing beats face-to-face contact for creating a sense of togetherness and responsibility. Only with such values can employees make AirAsia a success. 

Did the new management have any inkling that AirAsia would do so well when they started off? 

Said Fernandes: “At our first press conference someone asked if we would survive the first three months. We did. But we also initially thought we were going to lose about RM26mil. We are satisfied with the performance thus far. It is a good start, but we are also mindful that we have a long way to go.'' 

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