Flying High, My Story

by Tony Fernandes

  The culture of integration and a diverse, multicultural staff goes right back to my childhood reading and my travel in the USA and Australia. When we set up AirAsia Thailand I found that the pilots wouldn’t travel to the plane with the cabin crew despite repeated requests from management. So I took twelve Malaysian pilots and twelve Malaysian cabin crew off to Thailand and forced them to get the bus together to show the Thais how AirAsia works. Within two years there were two Malay–Thai marriages within AirAsia Thailand.

  We always kept in mind that AirAsia versus MAS was the ultimate David and Goliath situation. MAS were owned by a combination of the government and the stock market so they were unimaginably rich in our eyes; they had 120 planes where we had just two and they had a virtual monopoly on most of the domestic routes – our target market. So the only thing we could do was to be better, which meant be more innovative, provide fantastic value for money and customer service, and react much faster to changing market conditions.

  We were the new boys, and being new we had no influence. Our only option was to disrupt. This has become a bit of a cliché now but in 2001 it was still quite a novel idea. We didn’t try to match the competition, we tried to do things differently and, by doing that, changed the shape of the market. It’s a common misconception that disruption is destructive; it isn’t, it’s creative. In this approach I was influenced by a book called Blue Ocean Strategy. We came into the Malaysian airline market and we didn’t set about stealing routes from the existing players; instead we looked for new routes, we created new areas of the market where we were the first stallholders. The others would have to play catch-up. Disruption isn’t about destroying the competition, it’s about changing the market to your advantage.

  We’d made it to February 2002, and were improving the airline, surviving on the cash we generated and even starting to chip away at some of the debt. Then one of the planes (9M-AAB) got hit by a bird strike and was grounded while the engine was fixed. The plane was on a night flight to Kuching when it happened, captained by one of my most experienced pilots, Adrian Jenkins (now group director of Flight Operations). He called me as soon as the engineer had given his report. When I heard, I couldn’t believe it. I’d never even heard that this was potentially a problem – how stupid must birds be to fly into an aircraft engine? Then the consequences became apparent: the aircraft would be out of action for eleven days while the engine was repaired. Effectively that meant that our fleet was halved for the entire period. Imagine if that happened to British Airways or Ryanair. Our scale was tiny but the relative economic effect was the same.

  My reaction, I’ve been told, made a big difference to the morale of the company. For a start, I didn’t freak out. The first thing I did was check that all the passengers and the crew were OK. The staff really responded to that because I didn’t scream or shout or panic and didn’t blame anyone, but demonstrated that safety was the number-one priority. And then I gathered everyone. ‘We were aiming to do twenty-five-minute turnarounds, now we’re going to make them twenty minutes,’ I told them. 9M-AAA flew twenty-four hours for eleven days – we never cancelled a flight. There were delays but we worked foot-to-the-floor to honour our passengers’ tickets. By the time the engine was repaired, we had shown how committed we were to giving everyone the opportunity to fly.

  Anyone who worked at AirAsia then knew the intensity of the experience and I genuinely believe the episode was the making of the company – not only in the eyes of our customers but of the staff as well. If you go through a test like that and come out the other side the experience forges an unbelievably strong culture and sense of belief. It also injects a huge amount of confidence into a young company. People began to believe the unbelievable: that maybe there was something about this ridiculous idea, that maybe we could really make things happen. On a purely practical level, it also demonstrated to the pilots and engineers that a twenty-five-minute turnaround was possible, even beatable.

  No sooner had we lurched out of that crisis than we hit a different kind of problem, one that was potentially fatal to the business. After we’d fixed 9M-AAB, Chinese New Year holiday season at the end of February was on the horizon. A year before in Stansted, Conor and I had discussed selling tickets over the web, cutting out the travel agents who were making 7 per cent on every sale. At that point, though, we were using the sales system inherited from the old AirAsia and had not switched to our planned web-based direct-to-customer booking engine. (Ryanair used a system called ‘Open Skies’, which Conor had mentioned, but I wasn’t ready to look at that yet; there were too many other headaches – like bird strikes – to deal with.) As we approached the holiday season, I was getting reports of huge sales – 65,000 seats for the end of February and we had only been going for a couple of months. We were looking at an 85 per cent load factor. I hoped the cash would enable us to invest and develop further.

  I had been a bit concerned about the role of the travel agents, and not just for the commission they took. There was a sense that MAS had a firm grip on the whole agent network; they had more routes, more planes, more capacity and more clout. Although there was no evidence of this happening, I was genuinely worried that, if an agent started selling non-MAS tickets, MAS would stop dealing with that travel agent.

  This was the background to the day before the holiday started, when my daily load report appeared showing we suddenly had an extra 25,000 seats. When I checked what had happened, I was as angry as I had been for a long, long time. It seemed the travel agents had put place-holders on the seats they’d ‘bought’, so that if someone walked in off the streets, they would have a seat to sell them straight away. They’d effectively taken all my ‘inventory’ and prevented me from selling it in case someone wanted it; once the opportunity to sell had passed, they returned the seats. I was stuck with 25,000 seats I had no way of selling and we were back in crisis mode.

  I rang Conor straight away and said, ‘Put me in touch with the guy who runs Navitaire [the company that owns the ‘Open Skies’ web booking system]. I’m going to Minneapolis tomorrow.’ We signed a deal within a couple of days of me arriving and had the system installed within a month.

  The travel agent experience also brought home to Din and me just how hard we had to focus on cost to make our model work. Our mantra ‘Cost is king’ came from this period because we looked at every single line of every contract, looked at every cost line and every revenue line to see if we could squeeze more money out of operations. So, for example, a company offered to install a TV panel on the headrest of each seat. The company who proposed the deal said they’d pay for the screens and installation and we’d split the advertising revenues. It looked like it would be all upside, but Din and I thought it through and rejected it for three reasons: the first was that the screens added more weight to the plane, which would increase our fuel costs; the second was that it added more complexity to the plane’s wiring and added another possible cause of malfunction; lastly, we wanted the crew to sell products directly to the customers (if the passengers are watching a screen, they’ll buy less). We were ruthless in cutting costs and ruthless in sticking to our model.

  And that model itself was starting to make bigger waves. When we ran our first ad for a fare of MYR 9.99 to Kota Kinabalu, the country went bananas. The phone system physically melted – the demand caused the main switchboard to over-heat – so there was a stampede at the airport. Our staff were overwhelmed and our customers were shoving each other to get to the ticket counters. After that experience we invested in a numbered-ticket dispenser to organize the crowds.

  Things were starting to move in our direction. We bought a third plane – an old Air Afrique 737 – which we had painted in our red livery before it was delivered. The other two AirAsia planes were still in the old AirAsia colours because we couldn’t have them on the ground long enough to get them painted. So when 9M-AAC came in to land at Subang dressed up in our rebranded AirAsia red, it was a big moment. We all stood on the observation deck as
the plane approached and it stirred memories of waiting for my mum to come back from her Tupperware trips. My heart skipped a beat as the plane landed. One cabin crew, Andrea Pinto, started crying. She turned to me and said, ‘Five years we’ve waited for a third plane and in just three months since you took over, we have it!’

  I’d underestimated just how much the staff wanted AirAsia to move on and how frustrated they were by the lack of progress under the previous management. Her pride and ambition stirred me.

  Back in September, when we first signed the deal with DRB-HICOM, I had approached the government to ask if AirAsia could keep flying out of Subang Airport – it would have meant so much to me to be able to have my airline based at the airport where my love of flying had started. KLIA had recently been built and we were under huge pressure to relocate our operations there. We fought long and hard but the government wouldn’t give way and after a few months we were forced to move to KLIA, about thirty-five miles away. Our offices there were right down by the apron, beyond security and a dirty twenty-minute walk from the terminal. Kathleen Tan, who I’d lured from Warner Singapore, was shocked that her designer shoes had to battle through oil spills, mud and mounds of rubbish on her way to work. This wasn’t the first-class jet-set lifestyle of Warner Music and Kathleen, whose previous job had been in high-end fashion, was surprised at how basic all the facilities were.

  With the new plane, we expanded our operations. We put on four flights to Penang – one of Malaysia’s most important business and cultural hubs – and were looking at lots of new destinations. At first the passenger loads to Penang were low but we adjusted and began to make progress through trial and error.

  When AirAsia started, the average member of the public just did not fly. There was a small percentage – say 10 per cent or 15 per cent of the population – who used MAS or Singapore Airlines a lot, but for the rest it would never have crossed their minds to get on a plane. We were creating a new market of fliers – but these people were often quite literally first-time fliers who had no idea what to do.

  Bo Lingam, my operations director, who I’d also dragged over from Warner, tells a great story. One evening at about 5.00 p.m. he was walking through the landside seating area of the Subang terminal when he saw an old couple sitting with their suitcases in what was called the Waiting Area. He thought nothing of it and carried on with his end-of-day rounds, checking on staff and ground crew. He walked back through a couple of hours later and they were still sitting there with their cases. At that stage, AirAsia was about the only operator left at the airport, everyone else had moved to KLIA, so Bo walked over and said, ‘Are you OK? Are you waiting for somebody?’

  ‘No, we’re waiting for our flight.’

  ‘When’s your flight?’

  ‘We’re not sure, we’re just waiting here …’

  It turns out that the flight had left at 7.00 a.m. They had bought tickets, made their way to the airport and sat down in the Waiting Area, almost as if at a bus stop, thinking that a plane would just appear and pick them up.

  Bo of course arranged for them to fly on the next available flight and showed them what to do. These kinds of stories appeared almost daily so we commissioned a cartoonist to produce a comic to explain how to navigate the processes from the terminal doors to the seat on the aircraft. We weren’t just opening up a new market and providing a new way to travel, we were educating a great part of the population on how to fly.

  The slogan ‘Now Everyone Can Fly’ had come to me early on. As with many good ideas, it came in the shower one morning as I was thinking about what made our ‘offer’ to this new market special; what marked us out from the established airlines. The simplicity and boldness of the statement appealed to me – and, after all, with the fares we were offering, no one could really dispute it. When these stories started to come in, I felt we really were making good on our claim.

  The energy from getting through the bird strike crisis propelled us through 2002, and we added three more planes over the course of the year. Within seven months we had wiped out our portion of the MYR 40 million debt. Again we felt we were making progress. We added new routes and continued to expand.

  By November 2002 I thought we were on a pretty solid footing. I should have known that as soon as I had that feeling, it was time to worry. We had six planes, increasing passenger loads and were negotiating new routes. Our staff were loyal and constantly humbling in their dedication. It was at this point that I decided to call them ‘Allstars’ and every day they earn the title. I wanted to start flying internationally – Thailand, Singapore, Indonesia – and to open up South East Asia to our airline. But the World Health Organization – my dad’s old employer – had other ideas. Or rather their announcement that a new disease called SARS was spreading through the region threw the airline industry into chaos.

  SARS (severe acute respiratory syndrome) was first spotted in China at the end of 2002 and the WHO told the world about it in February 2003. The disease spread by human contact – usually when someone infected coughed or sneezed and saliva or mucus landed on someone else. Confining people in aircraft cabins was one of the worst things that could be done. The best prevention was to make sure that no one with the disease got on the plane. Globally, the media went mad. SARS was on every front page and led news programmes. In South East Asia a lot of airlines retreated from the crisis, cutting back on their operations and advertising.

  I felt we should do the opposite. The WHO and governments in the region were putting measures in place to prevent transmission and it really wasn’t our responsibility to manage that. My feeling was that in a crisis you should move aggressively because there are opportunities and gaps to fill. I went to my marketing and finance departments and told them to triple our advertising. Most financial controllers will cut brand advertising during a crisis, but it’s actually the worst thing to do.

  The reaction was as I expected: ‘Are you mad? No one’s flying!’

  ‘Trust me,’ I said, ‘I know Malaysians. If you offer a low enough fare, they’ll fly regardless of the risks. No one will fly to Kota Kinabalu for MYR 400 if they think they could die, but if you offer it at MYR 40, they won’t care!’

  We churned out the ads and the take-up was amazing. When the crisis abated, we were bigger and stronger and our reputation as an airline that operated in all circumstances was enhanced. People always need to fly and we wanted to make sure that they knew AirAsia would be there to help them. After all, our slogan promised exactly that.

  We’d weathered 9/11, the bird strike and then SARS. Our first eighteen months had tested our resilience, our business model and our culture. I felt that we had passed with flying colours. The fleet stood at thirteen planes by the end of 2003.

  Proof that our reputation was spreading came in the form of a phone call from an aide to the Thai Prime Minister, Thaksin Shinawatra. The aide told me that Thaksin was impressed with what we were doing and wanted to start a low-cost airline in Thailand. I leapt at the opportunity to build our brand and our network. We partnered with the Shin Corporation to establish AirAsia Thailand and I dragged in my old Warner colleague Tassapon Bijleveld to head up the new airline. I packed Bo Lingam off to help Tassapon set it up. It felt like a further vindication.

  In January 2004, just after the region was picking itself up after SARS, reports started emerging of a new strain of bird flu in Vietnam and Thailand, and within weeks ten more countries had reported infection. It was, again, a global crisis over which we had no control. Panic set in amongst many airlines but, once more, I took the view that if others were retreating we should expand.

  We announced an IPO in 2004 and couldn’t seem to get anyone interested. I went knocking on every bank’s door but was brushed off. Our fortunes changed when Credit Suisse saw the potential of our operation – particularly the possibility of taking over MAS’s domestic routes, which I’d hinted might be in the offing – and were joined by a German bank (DVB). At the end of the process AirAsia w
as valued at $100 million – a staggering number given our starting point – and we sold 30 per cent of the available shares to a portfolio of investors to take us to the next level. The injection of cash made a massive difference – we’d been living cash-in-hand ever since our first flight.

  Our use of technology was so important in the early days. As a way of maximizing what we got from each ticket sale, we were one of the first to move ticket sales online so that we didn’t have to sell through travel agents and pay their commission. We sold tickets as far in advance as possible; got passengers to pay up front to ensure that our cash flow was as high as possible and made the tickets non-refundable. Even so, it was a hand-to-mouth existence before the IPO.

  The injection of cash also woke our competitors up. MAS suddenly announced in 2004 that they were slashing their domestic fares to compete with or undercut ours. It was a devastating blow. Remember, they were subsidized by the government so the risk to them was minimal; whereas for us, every ringgit was life and death. So I went bananas. I still knew no one in the financial or aviation press but I had contacts on the music side and some of them had moved up to become overall editors. One of them, Datuk Ahirudin bin Attan, also known as Rocky Bru, had become editor of the Malay Mail and he wrote a front-page editorial saying that MAS were killing competition. It got our message out there and helped mobilize our support.

  I also took the direct route. I gatecrashed a party where the transport minister was trying to enjoy himself. I think he stopped having such a good time when he saw me. I managed to persuade him that their campaign was unfair and he agreed to put a temporary halt to it. Hostilities were out in the open now, though.

  The campaign put me in the role of a kind of Robin Hood. The message from the beginning of AirAsia had been that we were on the passengers’ side – that we would do everything we could to get them where they wanted to go. With that increasing reputation, the government found it hard to allow MAS to try to kill us because it would have been so unpopular with the voters.