Getting back to normal

we will rebuild

HE called it the biggest fight of his career. Saving AirAsia Group Bhd is Tan Sri Tony Fernandes’ biggest challenge after he and his business partner Datuk Kamarudin Meranun bought a fledgling airline for one ringgit 18 years ago to turn it into one of the world’s most famous low-cost airlines.

With its fleet grounded until recently, Fernandes had to endure the anguish of wondering if the airline they painstakingly built will be able to survive the business chasm brought about by the Covid-19 pandemic.

Just as flights resumed, AirAsia’s auditors Ernst & Young dropped a bombshell after it raised concerns about the company’s financial statements for the financial year ended Dec 31,2019.

It issued an unqualified audit opinion due to material uncertainty relating to going concern as its current liabilities exceeded its current assets by RM1.843bil. That number has nearly doubled at the end of its first quarter ended March 31,2020 with the change in accounting rules on its leases affecting its balance sheet.

The airline is confident its business will continue to survive, given the efforts already undertaken to raise cash and to cut costs, more importantly to see its cash expenses drop by 50% this year.

“The good thing is... about three months ago, there was a vision but we did not really know whether that vision would happen. The good thing is we’re flying, ” Fernandes tells StarBizWeek in an interview.

“We see people at the airports, our load factors are not bad, everyday our sales are improving, that is a lot better than (March and April).”

Next up will be when international flights resume and the airline, which used the downtime effectively to grow its digital business, is looking at those businesses being more than supplementary ancillaries to its overall operations.

Below is the interview Fernandes gave to StarBizWeek’s Royce Tan and Jagdev Singh Sidhu.

You said this was your biggest challenge, why is it so and what have you learnt from the many crises you have been through? The biggest challenge is because in every other crisis, there was an ability to create demand. You can’t create demand between Malaysia and Thailand right now because it’s not open.

We could do something to stimulate the market and to get it going. Now it’s a waiting game.

I have no doubt at all, as soon as the borders are unlocked, travel will be like this (gesturing a steep upward curve). I’ve absolutely no doubt.

The beauty is also that, tourism is a very large part of the Asean economy, a massive part of Thailand’s economy, and a big part of the Malaysian economy.

Positive outlook: AirAsia aircraft sit idle on the tarmac of KLIA2. The airline is confident its business will continue to survive, given the efforts already undertaken to raise cash and to cut costs, more importantly to see its cash expenses drop by 50% this year.Positive outlook: AirAsia aircraft sit idle on the tarmac of KLIA2. The airline is confident its business will continue to survive, given the efforts already undertaken to raise cash and to cut costs, more importantly to see its cash expenses drop by 50% this year.

It’s all just a waiting game?Yeah, but at least it’s imminent. When Covid-19 started, if you told me there’s going to be 95% of the planes on the ground in the world, I would’ve laughed at you. No one expected that Malaysia will be locked down for six weeks and millions of people around the world are infected.

But I think now when there’s a cluster, we know how to react. Melbourne’s got some, it’s been isolated, they’re dealing with it. We’re prepared, the health system is prepared. So far, big countries like Indonesia, Thailand, Indonesia, the Philippines and India, our markets are much more prepared.

What about the subsidiary companies that you have. How are they coping?I think Thailand is similar to Malaysia, domestic is operating. The Thai government has pumped in a lot of money into the tourism industry. They’re giving like 40% for your hotel that kind of stuff. India is an interesting comparison. The Philippines is next, they’re flying, it’s getting better.

Indonesia is the toughest but then again you can’t compare Indonesia like you compare Brazil. Indonesia has got a lot more (cases) than us but less than Brazil. And Indonesia is a massive archipelago.

And India is a market which is operating in Covid-19, it’s interesting. In India, China and Indonesia, you will see green zones opening up.

How are you prepared for that, what’s your roll out strategy when things start to move?Domestically, we’re just having capacity as and when we need. In terms of international, we got it into two bits, countries that we think need no testing and no quarantine and countries that we think will need testing. Countries that will need quarantine, we’re not even bothered.

So for the first bunch, no big deal. For the second bunch, we’re working with clinics and hospitals, trying to reduce the cost so that you can get tested. We already built a tag, so your medical records will be in our app.

The second thing is consumer behaviour. With Malaysia Airports Holdings Bhd, we’re now almost contactless and the last thing is the bag drop.

You can now use your mobile phone to check in at the counter and your luggage tag will come out. You still need to hold the handle to bag drop, but that will also be contactless soon.

You don’t have to touch anything on the plane, you’ll soon be able to order your food from the seats. Our crews have all got gloves on and the necessary PPE, depending on the risk of the flights. We’re prepared. The last piece of the puzzle is just the opening of those borders.

And then I think we are back to a pre-Covid world in a new normal, so to speak.

What’s the new normal going to look like?You don’t see the face of the cabin crew anymore with masks and glasses for a while. You’re going to be be more contactless and apart from that, you will get just like security, you will get people saying I’m not going to travel. I think that’s the older generation because that’s the more susceptible generation to be really affected by Covid-19.

How is this going to affect travel? Is it going to do so in a short period of time or is this how it’s going to be like for the foreseeable future?It’s hard to say but if domestic is anything to go by, it is not long. I’m already at 50% of where I was two months ago.

Hotels are booked, people are travelling, and Kota Kinabalu was quite alive, Kuching was quite quiet, Penang was quiet at night but Eastern & Oriental Hotel was full. So, not bad.

While the recovery may be slower, it’s longer lasting. Malaysia is a bit more better prepared and a bit more disciplined.

Now I’m told everyone is adapting to this new normal where you wait, there weren’t anyone standing in the queue, waiting in the corridor, waiting to deplane.

I think it’s going to last because there will be second waves. I think that’s inevitable. But it will be contained and it won’t be like in America. Italy and Spain seem to be doing a better job.

We’ve done surveys and 85% of our market want to travel in the next four months.

What about the profile of people who are travelling? Have you had the chance to analyse that? Our audience has generally been younger anyway. I don’t have any information at hand but on the flights we went, it’s mostly younger people. Families for sure.

You’re in discussions with bankers and the creditors will be the people you are going to talk quite frequently with. Has there been any discussion with the Malaysian government on what they can do to help?They put in the Prihatin scheme, that’s good. Most countries don’t have it, at least we have.

We recommended to the government to remove the exit tax. Now’s not the time to have a travel tax and we told the government on improving logistics. That’s a big upside for AirAsia.

In other countries, governments have stepped in to help their airlines. Is there a tinge of disappointment?No... it’s good enough to have that, at least we have that. In the 18 years that we’ve been around, we’re never received anything from the government nor have we asked.

We just asked to be treated fairly and given equal access. The Malaysian government has been great.

We are asking for a loan, and it’s a loan. We have to pay it back is because for four months, we had no revenue and we’re also working on many forms of equity as well.

Analysts have been talking about the RM1.4bil in terms of equity issuance. So the amount of money that people have been saying, how long will that last?In our minds, we’re looking at RM2bil. To be honest, RM1bil is more than comfortable. Right now, RM2bil is more than enough. We have to work out with our creditors as well.

They’ve been pretty supportive because they’ve been in the airline business. They know what we’re all going through.

Right now, we’re trading cash flow positive if you take out the leasing and some fuel hedging that we thought we did a good hedge.

You take those two things out, we’re trading cash flow positive, which is impressive because we have 200-odd planes sitting on the ground doing nothing.

The business model is robust. The two things that people aren’t looking at is we could end up making more money if borders were open and we can actually be profitable because there is going to be less capacity and fares are going to go back to where they should be as opposed to crazy competition or subsidised competition.

We see a fairer environment now and it’s a good environment. For us, we don’t want to put up fares to kill demand.

There has been a surge in fares because capacity has been constrained. You were expecting that by next year, you will be back to where you were before. When do you foresee that breakeven point and what are the conditions that need to happen for that to take place?There’s a lot of bad press initially, because realistically, you got to be fair to the airlines.

We couldn’t sell the middle seat and second thing is Malaysia Airlines has probably been subsidising its fares, potentially through money it received from the government.

Malaysia Airlines is a premium airline, so they’ve got a different cost structure compared to AirAsia.

You get different services, food, et cetera. So for many years, they were pricing the same as us and we know that their cost structure isn’t right.

So that’s a new normal. For the first time, airlines are pricing at the right price. All these years, the fares were not realistic.

How has the demand been in terms of load factors and capacity?Capacity is half, fares are higher and the load factor is about 60%. We would have been at about 80% and that’s pretty impressive because we went from like 4% capacity. We’ve only had a few weeks to sell it.

Number of planes flying?About 60 planes.

That increase will be contingent on how other countries have jurisdiction over travel?Yeah, that’s one. And two as domestic travel picks up, we can put more capacity.

Are you seeing a rise in domestic demand?People I see on Instagram, people who used to go skiing here, they were in Langkawi and Redang.

If you were to take out your lease payments, then you will have a positive cash flow. Airbus has not gotten any orders for the past few months. Is that helping your case, given that there’s no demand for new planes?For sure. If we’re the only company deferring planes, then you know. Who’s going to buy a plane now when you’ve got so many on the ground?

The reason you buy a plane is if it is old and you can get better fuel efficiency. Then there’s maintenance. Even that hypothesis is out of the window because oil is much lower and leasing prices are going to come down. Asset prices are going to come down.

So that will only help in your cause?For sure. It’s a fact. It was good that we sold our airplanes. Because at least we have some flexibility with leasing and to restructure, to return.

Is there any takeaways from Covid-19 in terms of how you would do things differently when you are growing the airline? No, of course it is to keep costs as low as possible and maximise demand. Will I ever hedge oil again? Maybe not, but the pressure is on you to hedge anyway from the financial markets.

Can you have more cash? I could have had all my cash but it’s still a problem. How much cash would you have needed to deal with this situation?

The asset light model, when you start to look at the current liabilities like what the auditors pointed out, that really surged in the end of the first quarter. Will you still maintain that it was the right thing to do?Well, I don’t run my companies based on accounting policies. The accounting policy changed but from a cash flow perspective, it made no difference. It was better.

It’s just they changed it from you don’t have to put it on the balance sheet to suddenly made it you have to put it for the whole 12 years of the lease.

Again, contingent liabilities don’t help in a Covid-19 scenario. But no, wouldn’t change it. Still much rather be asset light.

How will the airline landscape change from this pandemic?Warren Buffett made a lot of money after 9/11, a lot of money. Because he foresaw an airline consolidation. It’s going to happen here. M&A is going to happen, consolidation is going to happen. Weaker players are going to go out of business. So it’s good for an industry like the airline.

But when you start to see your capacity in South-East Asia, do you feel that even though the growth dynamics and demand is quite strong, some of your competitors here in Malaysia and South-East Asia will fold? It already has been. You got to question some of their models.

Why do you think your model will be able to survive?I think we have a very strong brand. We have good operations. There is nothing physically wrong with our model. Why have we made less money in prior years is because of competition. It is not really fair competition.

Our model is good and so is AirAsia X’s model. We have to rationalise some of our cost structure. A short-haul budget carrier in Asean is a nicer place to be than a long-haul full-service first-class business airline going to London and America.

When do you expect to return to the black?I boldly said we can be profitable in 2021. There is no reason we can’t, looking at the current fare environment. I don’t think we will be cash flow positive because we have to sort out our creditors. AirAsia and AirAsia X are in the right markets.The fare environment is better and the cost environment will improve and we could make money in 2021.

You said the cost structure will need further rationalising. What have you not done that you will need to do?We have to look at lease rates and renegotiate all our costs. Pre-Covid, airports were increasing charges every year. I fought against that. That has to change. It is not just Malaysian airports, it is Thai airports and Cambodian too.

Realistically, we were all in competition for pilots. That dynamic has changed. Pilot wage inflation was way above anyone else and some of this will need to be addressed.

How many employees do you have and how important is their welfare in the survivability of the group?A total of 22,000 and it is the only thing that keeps me in this business. Not to sound facetious, I am at the moment the best person to handle this. I would rather not be in the crisis we are in which has many nasty elements from redundancies et cetera. It is my number one priority.

In 18 years, we have never made anyone redundant. It is the saddest day of my life. Our AirAsia all stars are a remarkable group. I got thank-you letters for having a wonderful career. There was no bitterness. It is testament to our culture that they will write a note to the CEO and thank them.

My job is to try and get everyone back. I don’t think we will realistically do it in my time but hopefully we will build a structure for the next management team to recruit everyone back. We continue to spend a lot of time retaining and training people. We built RedBeat academy very fast. We have 2,000 people there.

A lot of our staff are being re-skilled into the digital businesses. We have cabin crew selling vegetables now, merchandise. We offer other companies the opportunity to hire some of our staff members. We have people counselling to help where we can.

You said this is the job for the next person. Is that a hint there is a finite time for your tenure?I have always said leadership is knowing when to go. I was planning to leave pretty soon but that has been stalled for a while. I think leadership has to be refreshed. Too many leaders stay too long.

You are going to put everything right and then take a step back?Yeah. That has always been my intention from the promotion of Aireen Omar, Bo Lingam and Riad Asmat. If the personality is too big and when the personality goes, the company will go as well. A risk on AirAsia is the Tony Fernandes myth. But now is not the time to talk about retirement.

You said you were not too sure AirAsia could survive. Why is that?No. It’s like the E&Y report that said we will survive but there is no guarantee. I have said it is a fair report and you really don’t know. If the whole world gets the virus, then who is going to survive? If we get a vaccine tomorrow, we are in boom town.

I am being pragmatic and a realist. I am going to fight like hell and we are going to survive, and I think we are going to come out stronger but I will be a foolish man to say we will because we don’t know how this virus is going to evolve. It looks promising now.

One of my partners said to me the world has been great at locking down but not so great at unlocking.

When you speak to large investors, what are they telling you?It is fantastic we are talking to large investors. That in itself says there is believe out there. That means investors see value and light. And we are spoilt for choice at the moment for equity investors. When you have built a company up so much and you see the prices that are being offered, you have to be realistic. We have gone past that and are realistic. We will rebuild it again.

Investors are excited on the prospects for all the things I have mentioned, like being in the right region, model, management and brand. They like our digital story. We are proving the thesis of that story by proving our customers are now moving onto our other products. On Thursday, we had a record number of orders on our e-commerce platform, 17,000 orders on a platform we only started three months ago. Our food orders hit a thousand. We did not have a food ordering service three weeks ago.

BigPay has a million cards now. Ourfarm, an idea that today has got Uncle Don as a customer. We are selling chickens to restaurants. We are getting more customers and have done a million ringgit worth of business from an idea that happened six weeks ago.

The investors are not going to invest in people they do not have faith in. I can’t step back because one of the conditions from equity investors is I have to remain with AirAsia.

What are the ways AirAsia is going to raise cash?There are also convertibles. There are four ways (The other three are a rights issue, a placement and the Danajamin loan). We are working on four.

Is the belief in the AirAsia story as strong as ever? Yeah. It always predicates on demand. Demand from people who want to fly and demand from people who want to give us cash. The initial thesis so far is demand is on paper looking good.

How is the demand for BigPay and how is the journey towards becoming a digital bank?That is the ultimate aim. We have registered our interest with Bank Negara and there are others too.

We have a million customers. The remittance model is doing very well. The debit card payment model amazingly has held up very well. You think we are travel-based and its not at its peak and gone down but held up very well.

The lending model is imminent. Opened in Singapore and the next will be the Philippines. We are living the Asean model in everything we do.

Our logistics model through Teleport is doing really good. We have permission now to use our passenger planes to carry cargo, which means we are almost 60% of a freighter. That is a growing business and we are now trying to look at land logistics to supplement our air logistics and no one can match our network. Teleport is very valuable.

We have built a nice e-commerce and food platform business. The thesis of our digital business is that you convert your big database into other products. It is predicated by Big Points, which is now the largest Asean points provider.

Our digital is split into travel and we are now doing a massive deal with a massive airline and that is going to prove the thesis. It is a global brand and they want to be on AirAsia’s platform to sell their products. Because of Covid, we will catch up with Expedia and the other brands in terms of hotel supply.

Tune Hotel, which was never interested in working with AirAsia, is very interested. We have certainly increased their coverage. We are delivering some value to them now and we are doing some great deals on Unlimited.

The power of the platform is certainly working in our favour.

What we built in three months we could never do in normal time. We had three months of doing nothing and that enabled us to rethink our whole digital strategy and build it up and really focus on it. What would have been done in 18 months was done in three months. We didn’t waste the time.

What about AirAsia X and its survivability compared with AirAsia?In some ways, it is in a better position, which may surprise a few people. It is smaller, less complex (Thailand and Malaysia) and Thailand is quite self sufficient.

It flies, except Jeddah and Delhi, to all the green zone countries. Logistics is going to be huge. It is probably going to give AirAsia X the ability to resize and review its cost structure. It had a high cost structure relative to planes because we did expensive sale and leasebacks.

In the SARS outbreak, you tripled your advertising. This time around, what will your strategy be?It won’t be that different. I came out with Unlimited, which everyone thought was mad but we sold 200,000 of those. I copied Amazon Prime and soon you will see other things added to it.

Tune Hotels did an Unlimited. We are going to brand Unlimited but it really does not mean unlimited. Unlimited in my eyes is great value. I noticed some Chinese and Vietnamese airlines are copying us.

It is aggressive marketing and will not be much different from SARS. We need to be opened up first.

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