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Cover Story: ‘It’s my next Captain Kirk journey’

The Edge logo The Edge 11/10/2018 Khairie Hisyam Aliman
Tony Fernandes in a red shirt © Provided by The Edge Communications Sdn Mhd

AS AirAsia turns 17 this year, the flight path is clear for its airline business, which is now Asia’s largest low-cost carrier group.

It is gaining market share in nearly all its domestic sectors with double-digit passenger growth for three years running. Fleet expansion is on the fast track, and has a 13% target for this year.

But co-founder and group CEO Tan Sri Tony Fernandes is already looking beyond the airline business and towards what is, essentially, a new entrepreneurial adventure.

His eyes light up as he sits down to talk about his new mission: transforming AirAsia into a digital business.

“It’s my next Captain Kirk journey. After 17 years of building AirAsia, you get a bit tired but this (digital venture) is giving me a new sense of purpose,” Fernandes tells The Edge.

(Captain Kirk is the lead character in the science-fiction series Star Trek, who leads his crew on board the starship Enterprise on a journey to explore new worlds.)

The key lies in its data. AirAsia, which flew 65.5 million passengers last year, has over 33 million unique passenger profiles based on flown data.

It also has another 30 million potential profiles based on unidentified website visitors who will come into the database when they someday make purchases.

Last year, AirAsia.com recorded 125 million page views monthly from 27 million unique visitors each month, hailing from 237 countries.

Putting that into perspective, Southeast Asia’s leading ride-sharing firm Grab boasted 45 million app downloads as at June this year.

AirAsia officials have said that its passenger data is richer than that collected by other service providers like ride-sharing companies due to tighter aviation security needs.

On one level, that means AirAsia wants to further monetise its data to drive ancillary revenue growth, which accounted for about 20% of its RM9.71 billion revenue in 2017.

In a nutshell, it wants to step up sales of products other than airline seats.

“We are a very good seller of seats, but we’ve never really pushed on our digital platform the ability to sell other things better. It’s been tokenism, if you ask me,” Fernandes says.

To date, AirAsia has revamped its online duty-free store and rolled out a digital wallet called BigPay and loyalty programme Big Loyalty.

Another project is a content platform called Travel 3Sixty, envisioned to be the “SnapChat of TripAdvisor” in Southeast Asia by using traveller-generated photos to showcase Asean destinations.

But ancillary is only part of the story, Fernandes says, indicating that AirAsia is still exploring the possibilities offered by its data.

“I don’t have a full answer yet. I’m now beginning to see the potential, and I’m adding people, I’m meeting people, merging models together,” he adds.

As guidance, he looks to the growth of Amazon from an online bookstore to the world’s largest internet retailer by revenue and market capitalisation — selling everything from software and content streaming to cloud infrastructure services.

The difference with Amazon is that Fernandes sees AirAsia going into the niche value-add spaces in the orbit of its core air travel service.

Duty-free aside, that would include accommodation services and tour packages. AirAsia had already started offering some of these services some time ago but is not selling them very well, the group CEO says.

“This is the new frontier [for AirAsia], to be the Amazon of travel.”

 

‘Digital may surpass airline’

In that vein, Fernandes believes the digital ventures hold more promise than many give AirAsia credit for. He thinks the digital side could “potentially” surpass the airline business someday.

Unlike the earlier wave of AirAsia spin-off businesses, which it sold off in recent years to unlock value, Fernandes says he may not dispose of the digital businesses.

“Look at PayPal — it’s bigger than eBay now,” he says, referring to the fact that PayPal has outgrown its former parent in terms of revenue, income and market capitalisation.

The possibility of outgrowing the airline business was signalled by the group’s organisational split last December into two cores: the airline business and the digital side.

Deputy CEO Bo Lingam heads the airline business while Aireen Omar, former AirAsia Malaysia CEO, is now deputy group CEO of the digital business.

Growing the digital business to overtake the airline side will not be an easy task. In financial year ended Dec 31, 2017, AirAsia recorded RM1.57 billion net profit from RM9.71 billion revenue. About 20% of its revenue came from ancillary offerings.

From the market perspective, clear scepticism is reflected in AirAsia’s valuation.

Last week, it was traded at about 4.3 times price-earnings ratio (PER), the lowest among its regional peers, according to Bloomberg. In comparison, many airline peers are valued in the high teens, with one airline valued as high as 20.95 times PER.

To be fair, however, most analysts are bullish on AirAsia Group Bhd, the main holding company. From 20 analysts tracked by Bloomberg, 14 has ‘buy’ calls with price targets ranging between RM4.10 and RM5.30 per share.

Last Friday, AirAsia Group closed at RM3.16 per share, with a market capitalisation of RM10.56 billion.

To Fernandes, the relative lack of valuation ascribed to AirAsia’s non-airline businesses shows a gross underappreciation of its digital ambitions and its comparative advantage to high-value digital start-ups in the region.

Fernandes believes AirAsia is now in the same playground as the likes of Grab and GoJek, both of which recently ventured into adjacent services such as food delivery to further monetise their customer base.

“I have all the pieces to do it and make myself bigger, stronger, faster. It’s whether I can do it ... that is the question,” he says.

The difference, though, is that the loss-making firms had burnt billions to acquire their customers whereas AirAsia is already profitable, says Fernandes.

“They’re not making any money, yet they are valued much more than we are. I have a ready-made customer machine called an airline, odd which I happen to be making some money.

“Where I have a disadvantage is they have already built a platform, whereas I have a platform but I’ve got to deliver further transformation of my platform to sell more things,” he adds.

For perspective, AirAsia’s market capitalisation was about RM10.56 billion as at last Friday. Closing a US$2.5 billion fund-raising in January, Grab is now valued at roughly four times higher at US$10 billion (RM40 billion).

GoJek, Grab’s Indonesian rival, is now worth US$5 billion (RM20 billion) following a US$1.5 billion funding round in February. It could be worth higher if a US$2 billion funding round, reported on Sept 18, materialises.

“But the market determines that and if the market doesn’t see value, what can I do? I’m here to develop a vision and some people will buy into it, some won’t, but the proof is in the pudding,” says Fernandes.

 

A cultural hurdle

While AirAsia’s data and passengers give it a head start on other digital firms, that has also, in a way, created a “cultural” hurdle.

Fernandes concedes that the group, which turns 17 by year-end, is now a “teenager with a lot of processes” and fixing that is a priority.

“We’re not that young, nimble start-up that can adapt instantaneously anymore ... we’re losing a little bit of that whereas they (the newer digital players) innovate and implement much quicker than us,” he says.

But he takes it as a challenge and intends to be less involved on the airline side, preferring to put more of his efforts into the digital side.

That is not to say that the digitalisation push is detached from the airline business. AirAsia has publicly embarked on a drive to digitalise its airline operations, alongside further integration of operational functions across the region.

While that may sound contradictory for an airline that derives 70.4% of its 2017 revenue from the internet, the point is also to find cost savings and efficiencies.

For example, its chief data officer Nikunj Shanti previously told The Edge that eventually, AirAsia’s planes should be equipped with over 1,000 sensors each to capture various operational and other data.

Such data allows monitoring and predictive maintenance, such as pre-emptive cleaning of engines before they become too dirty and start consuming too much fuel.

The airline has also started enhancing its route-planning with machine-learning and artificial intelligence as well as reducing average stage-lengths by adjusting capacity with data, Fernandes says.

Overall, AirAsia is investing about US$7 million to US$8 million in digital initiatives on an annual basis, Fernandes adds.

Asked about the next frontier for the airline business itself, he reiterates his long-held ambition of creating a single Asean carrier, which, he feels, “could take out a lot of costs”.

One major barrier to that ambition has been regulation. Asean countries generally do not allow foreign entities to have a majority stake in local airlines.

That said, there are tell-tale signs that the barrier may slowly be chipped away. Last year, Thailand proposed a legislative revamp that, among others, would remove the 49% cap on foreign shareholding in local airlines.

“A lot can be done before we hit that barrier and I’m hoping that barrier can change eventually. So, the big drives on the airline side are cost reduction and integration — that’s the next frontier,” says Fernandes.

 

Removing friction

On the digital businesses side, there is steady progress. For one, tailoring its website and app to individual visitor data for better sales has boosted conversion rates from below 5% to nearly 9% now, Fernandes says.

Its e-wallet BigPay is alive and kicking with 400,000 members and he indicates that both a moneylending licence and a remittance licence are coming.

“If you start something like BigPay — which we think can be a bank — tomorrow, you’ll have to spend billions of dollars, you know, whereas we have a ready-made market on our planes,” Fernandes muses.

The direction moving forward is to make experiences more seamless for its passengers.

“My vision is to remove friction and to add more value-added services for our customers, which should increase our revenue to deal with oil price or whatever headwinds are there,” says Fernandes.

One upcoming change is the replacement of physical in-flight magazines with digital magazines, which will allow passengers to immediately order and buy a product they like.

That may open up more monetisation avenues for AirAsia as it can theoretically employ data to prioritise showing different products based on individual passengers.

On the payments side, AirAsia is working on removing one-time passwords, which may be implemented by end-2018.

AirAsia is also studying an additional charge for counter check-ins to encourage passengers to do so online or via its mobile app once the ecosystem is ready.

“You can check in for free on the app, but if you’re going to the counter, then I’m going to charge for it because that person at the counter cost me. I have to pay the airport for the desk and so on,” Fernandes says.

So, when will investors get to see a truly digital AirAsia? Fernandes declines to set a “chiselled” deadline.

“It’s an evolutionary process but I think we’ll be beginning to see the start of it in 2018, then the delivery of some great projects in 2019 and then, I hope, functioning business units in 2020,” he adds.

  

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