Despite MAS share swap, Fernandes’ heart is with AirAsia, says FT

Malaysian Insider, 10 August 2011

 

Brown heaped praise on “serial entrepreneur” Fernandes’ business acumen. — File pic

 

KUALA LUMPUR, Aug 10 — The Financial Times has praised AirAsia boss Tan Sri Tony Fernandes’ move to swap stakes and help ailing flag carrier Malaysia Airlines (MAS), but said today the “serial entrepreneur” remains focused on plans to make the low-cost carrier the region’s most successful airline. Fernandes and his partners’ private vehicle, Tune Air Sdn Bhd, yesterday exchanged 10 per cent of their AirAsia stock for 20.5 per cent of the loss-making MAS, which has undergone several financial restructuring but keeps bleeding red ink.

The influential global business daily pointed out that Fernandes has had an uphill battle in the aviation industry, buying a two-plane operation in 2001 for RM1 and taking over its then RM40 million debt despite being sneered by the Malaysian elite as a “comic upstart”.

“If he can help MAS recover, he will. But not at AirAsia’s expense. Recognition is sweet. But victory is sweeter,” wrote Financial Times regional correspondent Kevin Brown in a column published today.
The column pointed out that “So far, Mr Fernandes has hardly put a step wrong. As a serial entrepreneur, he has founded no fewer than four airlines — AirAsia, its long-haul affiliate AirAsia X and joint ventures in Indonesia and Thailand. He is also part-owner, with his business partner, of the privately held Tune Group, which runs hotel, financial services and mobile phone businesses”.

It added that AirAsia has grown from two planes to more than 100 planes now, and has just signed an US$18 billion (RM54 billion) deal with Airbus for 200 A320s over 15 years — the third-biggest order in the aircraft maker’s history.

“Investors are in no doubt about Mr Fernandes’ Midas touch. The shares have outperformed the global aviation index by more than 100 per cent since AirAsia was floated in 2004. No carrier has bettered its average 57 per cent annual increase in net income. The stock, up almost a third this year before the latest turmoil, was worth US$3.6 billion before the shares were suspended on Monday. That is more than double the market value of the Malaysian flag-carrier,” Brown wrote.

He noted AirAsia has benefitted from being in the right place at the right time.
“Its pace of growth is underpinned by the rapid expansion of emerging Asian economies. Average economic growth of about seven per cent a year is lifting millions more people every year to an economic level at which they can afford a budget airline flight.

“But Mr Fernandes is not just grabbing chunks of a growing market. AirAsia has grown consistently, as well as fast, thanks to a rigorous focus on expenses. Costs per passenger kilometre are lower than both Southwest Airlines of the US, which invented the low-cost model, and Ryanair, the Irish group often regarded as the world’s most competitive carrier,” Brown said in the article.

However, the state-owned MAS has “failed either to adapt to the low-cost era, or to trade effectively as a premium carrier, the strategy pursued (albeit with faltering success) by neighbouring Singapore Airlines”, Brown wrote, noting that MAS has had to be restructured twice in the past nine years following financial crises.

“Angered by the airline’s resistance to change and worried by the looming cost of fleet renewal, the government has given up, forcing MAS to accept a deal, confirmed on Tuesday,” he added.

“For Mr Fernandes, this is a moment to savour. Never shy of self-promotion, he has been hurt and offended over the years by the Malaysian elite, which has largely regarded him as a comic upstart. They laughed when he started in business with two old aircraft and US$250,000; they laughed again when he spoke of building AirAsia into the region’s most successful airline, when he launched a Formula One racing team and when he tried to buy an English Premiership football club.

“Their laughter has now ceased. But it would be ironic if Mr Fernandes’ moment of recognition turned out to be a millstone round his neck. This is not an inconsiderable risk. The deal was officially characterised as a partnership, but would be better seen as a last-chance rescue. Both earlier restructurings of MAS failed to resolve its underlying problems, and (Tan Sri) Azman Mokhtar, the head of Khazanah, has spent years putting it through a reform programme, to little effect,” wrote Brown.
But Brown said while the government hopes “the freewheeling Mr Fernandes will provide the missing ingredient”, the aviation tycoon’s new task would divert inordinate amounts of time from running AirAsia and its offshoots, which are soon to be joined by a Tokyo-based joint venture with ANA of Japan.
“With Singapore-based rival Tiger Airways in trouble – suspended from flying in Australia on safety grounds, and bleeding S$2 million (RM4.8 millio) a week – this is not the moment for Mr Fernandes to take his eye off the ball.

“All the signals are that he will not. Indeed, all the obvious gains will accrue to AirAsia: Route rationalisation is likely to favour the lower cost operator, and the deal should reboot government thinking on awarding new routes, on which it has tended to favour MAS. Mr Fernandes will aim to push MAS upmarket, and try to close Firefly, the flag-carrier’s largely domestic budget offshoot, leaving AirAsia with a local monopoly,” Brown said.