Work with us and Malaysia will win, AirAsia tells Malaysia Airports and Malaysian Aviation Commission

Not helping matters is AirAsia co-founder and group CEO Tony Fernandes’ penchant for speaking his mind, often taking to social media to express his dissatisfaction and frustrations with MAHB.

Hopes that the establishment of an independent aviation regulator such as Mavcom would help ease tensions between AirAsia and MAHB have also dissipated.

Fernandes, who admits to throwing his support behind Mavcom three years ago, believes the commission has failed in its role and does not understand the LCC business. AirAsia now seems to have an additional adversary in Mavcom.

The Edge Malaysia met Fernandes recently at his home in Kuala Lumpur, which doubles as his office. He was his usual feisty self during the interview, which covered topics ranging from the LCC’s struggles and achievements to what he thinks MAHB and Mavcom need to do or did not do.

The following are excerpts from The Edge’s interview with Fernandes:

Airlines around the world say they are facing a challenging operating environment amid the volatility in fuel prices, foreign exchange and overcapacity. What are the key challenges faced by AirAsia Group Bhd?

The adoption of MFRS 16 (which governs the accounting of leases in a company’s financial statements) has hit our profit and loss. We are still getting to grips with it. I think we have overprovided and it will take us a few quarters to catch up in terms of fares. But our load factors are still strong. The competitive environment is definitely getting better. You have bouts of extremes [in the competition] from Malindo Air and Malaysia Airlines, but our market share is still strong. Then you have the external pressures such as China. The departure levy will not help. But on the positive side, we had a major victory on the [reduction of] PSC (passenger service charge), which will compensate, at least to some extent, the introduction of the departure levy for the moment.

... Why I am optimistic is that we have opened up this Pandora’s box.

For the first time, people are seeing tourism as an important part of the economy, what drives tourism, and they are beginning to see that we are one of the highest tax countries in terms of tourism — hotel tax, exit tax, higher PSC for a low-cost airline — MAHB always says our PSC is low because it compares with full service airlines — and highest visa fees for Chinese and Indians. It can be as high as US$30. I think all these are going to be solved as people for the first time are debating low-cost carrier terminals (LCCTs).

For the first time in our 18 years (since AirAsia started operations), we had a Cabinet decision reducing the airport tax. And around us, Japan has got three LCCTs and Indonesia, one. So, you can dislike me and you can paint me as the bad guy but you cannot ignore what is happening around the world.

It is a phenomenon which I have been predicting for a long time — low-cost travel is growing very rapidly... more than 50%. So, MAHB and Mavcom cannot have their heads in the sand and just hope things will go away. It is not going to go away because it is not just about AirAsia, it is about low-cost carriers (LCCs) like Indigo, Cebu Pacific and SpiceJet coming. It is very clear that LCCs such as IndiGo, Cebu Pacific and Scoot are operating at klia2 because they want to have lowcost facilities. So, if MAHB builds LCCTs, more LCCs will come. People don’t make the right decisions because they are emotional as opposed to what is good for the country, what is good for their own company and what is good for your partner, which is AirAsia.

If I am saying as an owner of MAHB, I would be all over AirAsia and the other LCCs. [I would be asking them] how do I double your worth? Because while the average passenger fee is maybe lower, the passenger volume [they bring in] is huge, plus the income that I get from duty-free [sales]. Malaysia Airlines and British Airways are not growing like LCCs.

You have Mavcom, which has not once visited AirAsia. What kind of regulator is that? And you have a CEO at MAHB who, with (Finance Minister) Lim Guan Eng (in a meeting), told me he wants to work with AirAsia, he wants to build low-cost terminals. Three weeks later, he is suing us.

And the latest case (on Sept 10, MAHB served garnishee orders on AirAsia to execute a judgement on outstanding PSC), to me, is quite ridiculous. It shows the pettiness and the dislike of AirAsia, particularly me, I suppose, on these garnishee orders.

I mean, are we bankrupt? Do we have no cash? We just paid out RM3 billion in dividends. We are cash flow positive. If the court says we have to pay, we will issue a cheque and pay. Why do you have to waste money and time garnishing? This is shareholders’ money. Do you see any logic in this? It just shows the level of stupidity and emotionality that has been built into this.

Now, have I not tried to reach out? I have tried with the (newly appointed) MAHB chairman (former Federal Court judge Zainun Ali). I have said, ‘Please, let’s meet. Hear us out. Hear how we can both win together’. No response. I wrote to her. And (AirAsia X chairman) Tan Sri Rafidah Aziz has written to her. The first response we got back was, ‘We will see you after the court case’. I was like, ‘You are a judge. Most lawyers and judges would want to settle the case before you go to court.’ Even my own divorce case. So I find that strange and she may be ill-advised.

The world is now changing. Why did the Japanese airport company build a low-cost carrier terminal (Terminal 2 at Nagoya Chubu Centrair International Airport, which was launched on Sept 20) in 18 months, where the airport tax and charges are 60% lower than the main terminal? Are they stupid?

The Board of Airline Representatives Malaysia is headed by a Malaysia Airlines guy who has also been very personal about AirAsia. If you disagree with the charges, move to klia2. Who is stopping you? If you think the facilities are great and you can save money, move. I would be happy if tomorrow, Malaysia Airlines wants to swap [terminals] with us and we pay [the extra] RM25 [in PSC]. It is worth it and we won’t have people moaning about walking [far to the gates at klia2], a runway that is falling apart, and so on. I pay RM25 because I know I will get it back [operating out of KLIA].

There are two different types of business models and it [LCCT] is happening around the world. Indonesia now has an LCCT. President Jokowi (Indonesian president Joko Widodo) wants 10 low-cost provincial airports. The Philippines is building one in Clark. Thailand is building it third low-cost airport in Utapao.

Does that mean that every hotel has to charge the same? Imagine Shangri-La Hotel charging the same as Tune Hotel. Is that logical? So there should be a budget airport that serves what budget airlines want.

Firstly, it is a very challenging (operating) environment.

Yes, AirAsia is making money, MAHB is making about RM800 million [it posted a net profit of RM727.3 million for the financial year ended Dec 31, 2018]. So the most profitable part of the aviation business right now is MAHB. I don’t begrudge that. Why shouldn’t they? I disagree with the statements that they are profiteering. I have no issue with them making money, but give us what we want. That’s what we are asking for. We make up 60% of your customer base.

No other business, for example, Airbus, would tell me, ‘No, you just take my planes. No, you put full-service seats (in the planes)’. GE won’t say, ‘Tony, take this engine, or leave it’. They work with us to build us a product that makes our airline better. Our A320 is phenomenally different from British Airways’ (BA) A320 because Airbus works with us. We are partners.

“The only company that does not work with us is MAHB and they are aided by Mavcom. So I don’t understand the logic. I want you to make money. I could make you more money if you work through us. You have 10 airports sitting there and doing nothing. Have they talked to us about Melaka? How do we grow Melaka? Terengganu is one of the most beautiful states in Malaysia. How many international flights are flying to Terengganu? Has anyone at MAHB come to us and say, ‘How do we work together to build Terengganu as a tourist destination?’

Look at what we have done in Johor, with Senai International Airport. Compare Senai airport before AirAsia and now. Look at how many international flights, look at the technology that we have put in, look at the branding we have there. We can’t even brand our counters in klia2. They (MAHB) want to charge me to put AirAsia on our check-in counters as advertising.

Since there are so many issues that you are not happy with, why not relocate elsewhere?

I am Malaysian. I made my money here. I owe everything to this country. I owe it to my staff and shareholders to do my best. I am not a quitter. Should I give up because there are some people who are just too emotional and personal, and don’t put the country first?

We can’t be defeated by negative people who just don’t want to listen.

This is ironic because the company I had helped to grow the most is MAHB by building us the old LCCT. What people don’t know is that they initially wanted to charge us the same (PSC). Kamarudin (AirAsia co-founder and executive chairman Kamarudin Meranun) and I nearly dropped dead. We made it such a cheap terminal and suddenly they wanted to charge us the same [PSC]. The Cabinet at the time overruled [MAHB’s decision] but told us, ‘Improve the volume and we give you a lower rate’. And we did.

Look at our passenger volume growth at the old LCCT and that since we moved to klia2. The Japanese, the Filipinos and the Thai [authorities] see it [the value of building LCCTs]. We would have been long gone dead if I was a pussy cat.

All I want is an airport authority that believes in low-cost travel. Low-cost travel means low-cost and is compensated by high volume. Using technology to reduce cost. You don’t build aerobridges. If you want aerobridges, go and fly Malaysia Airlines or Malindo Air. Why am I forced to use aerobridges?

The problem is you have a board and a management in MAHB that hasn’t changed. The current CEO was attacking me, together with (former special officer at) the Prime Minister’s Office Wan Shihab (Wan Ismail), when he was CFO.

What about concerns of full-service airlines operating at KLIA that would also want lower PSC?

I am your biggest customer. Is it wrong to support me? I am not saying support me at the cost of other people. I am saying there are two businesses here — low-cost and full-service. By reducing airport tax by RM25, are Emirates, Qatar, BA going to withdraw from Malaysia? No. Should Malaysia Airlines be worried? Not if its product is good. It’s not my fault if its product is not good because not everyone wants to fly AirAsia. People want the service too.

Do you honestly think for RM25, Qatar, Emirates, BA are going to withdraw because they think, ‘It is unfair, Airasia is winning?’ For a start, we don’t even fly to their destinations.

Would you support an airside shuttle bus service between klia2 and the main terminal?

Go ahead and do it. The buses will be empty.

If I am such a bad person, how come every other airport in the world wants to work with us? Singapore hates me, but worked with us to build Terminal 4.

If I were in MAHB, I would be working on how to help AirAsia and other LCCs, which is the biggest growth of business. While other countries are happily taking away that market share, MAHB just sits here and talks about interlining (laughing hard).

Let me finish this first... (as The Edge tried to raise a question).

Mavcom is aiding here. These are the people in Mavcom deciding the fate of lowcost airlines. Who on Mavcom’s board has any experience in low-cost airlines? You can say that Tony Fernandes has no experience in the airline business. True, but did I sit there in my office and not speak to anyone? I went out and met Ryanair, EasyJet, Herb Kelleher of Southwest Airlines. I learned. I sucked everyone’s brain dry. Then I understood the low-cost business.

Have any of them (Mavcom) sat with us to understand our business? Have they visited RedQ? Have they met Riad (Asmat, CEO of AirAsia) and Aireen (Omar, deputy group CEO of digital, transformation and corporate services)? Riad just came to see me, saying he had tried so many times to invite Mavcom but they never come. Why? Look at the board’s background.

Mavcom (under the former chairman) made a police report against me after the blue plane incident. They said they never stopped AirAsia from giving those extra flights during the elections (in May last year). But Riad has saved all the WhatsApp (messages) where they had said, ‘Cancel the flights, you are pro-opposition’. The police never called me. Why? Because I put on extra flights to help people go home and vote?

Do you know who called me to put on extra flights? (Datin Paduka) Marina Mahathir.

In 2018, Mavcom pledged that it would introduce service level agreements (SLAs) between airport operators and airlines to ensure the continuous growth and sustainability of the aviation industry.

More than a year later, no SLA is in sight. Without the SLA, airports in Malaysia have been utilising their monopolistic position to earn excessive profits, while exercising power in the form of ever-increasing (airport) charges.

Without an SLA, airlines are left with no recourse to address the numerous operational issues such as those at klia2. These include frequent unplanned runway closures, uneven aprons and taxiways, and a poor airport design that requires long walks to gates and subsequent delays for passengers trying to get to their flights.

What have they [Mavcom] done? Remove [the] processing fee. The standard modus operandi of Mavcom and MAHB has been to make police reports.

I supported the whole reason for Mavcom because I thought they would be independent regulators like SPAD (Land Public Transport Commission). In the end, they put up a structure that would hurt us. If you want to see a model regulator, Bank Negara Malaysia is one.

Mavcom says it is going ahead to announce the new aeronautical charges and the Regulatory Asset Base (RAB) framework ‘in the next few weeks’ as planned, with a view to implementing the new rates in January.

Go and argue with the government. We will fight for sure [if there is a hike in PSC for klia2]. But there are certain things we agree with [under the RAB] such as adopting a single till [revenue-setting] mechanism.

Why is a lower PSC so important to you?

If I have no PSC, my fare would be lower. It has to be lower so more people would fly.

What kind of support are you saying you can get elsewhere, but you can’t here?

I have just written a whole article on Nagoya Airport Terminal 2 (in a Linkedin post on Sept 11). The Japanese, who have known me for three years, have gone and built us an LCCT in 18 months and it was launched in September last year. That is what I call support. They sat with us, asked what we needed, more aerobridges, we worked with them on security, we worked with them on technology, they allowed us to use our own machines, and so on.

I had Osaka [airport authorities] coming to see me on what can they do to get more [AirAsia] flights. They flew eight hours to Malaysia to learn about LCC and to learn how to build an LCCT. MAHB is like how far away... 15 minutes? That should answer your question. We just want someone who is willing to understand us and work with us and Malaysia will win. You can’t work with someone if they don’t see you or they don’t care to be interested in your model.

The biggest tenant at Nagoya? We will be [the biggest tenant]. Right now, it is small. We are waiting for approvals. LCCs like Jetstar, Vanilla Air, Peach Aviation will be using it.

Other airlines have mentioned that one of the challenges they face is the oversupply of aircraft coming into our market. Do you agree?

How many aircraft has AirAsia put in in Malaysia? The number of aircraft received by AirAsia Malaysia this year was four. When you see new aircraft being delivered, they go to our other markets such as Indonesia and the Philippines as well. They are not just coming to Malaysia because we don’t have an airport that supports us.

In this case, would it be right to say that you are facing capacity constraints?

It is not a capacity constraint, it is a lack of support. It is a fact, isn’t it? Compare us with Thailand and Singapore, we (Malaysia) are a huge market. But the airport is not supporting us, our technology is not supporting us. Our queues at immigration are ridiculous. Why build tunnels? What about fixing the immigration issue where my passengers are standing in line at the gates? What are the airport authorities doing about that? That was badly designed... go and look at (previous meeting) minutes where we said it is too small.

In a race to improve cost efficiency, I suppose low-cost carriers like AirAsia have done a very good job. Have full-service airlines in this race been catching up?

That is what I am saying... the danger is there. Yes, they have definitely got more efficient. You are in a very tricky position if you are trying to be like us, you are going to mess with your clientele. You can’t just cut, cut, cut.

Full-service airlines are still trying to follow the old strategy of [LCCs] being their competition. Wrong. If I were the CEO of Malaysia Airlines, obviously I would make sure that my customers don’t fly on AirAsia. I would make sure there is a group of people who always fly Malaysia Airlines, stay with Malaysia Airlines and don’t go to Singapore Airlines.

Also, how can you survive on one flight to Europe; there is no network. If I were them [Malaysia Airlines], [places] I would be going to would be Eastern Europe, where there is huge market potential. I would fly to destinations like Nice, where I could serve Italy, I could serve France or the French Alps, and so on. It is a great opportunity for Malaysia Airlines. One flight to London, how are you going to survive? Malaysia Airlines’ problem is not caused by us, but by their product and they are shrinking (their network) too much.

What would you say to your shareholders in terms of AirAsia group’s prospects in the next three years?

I think we are suffering from a lack of foreign interest in the Malaysian stock market. Our foreign ownership is now 38%, we were like 60% [previously]. So, obviously, that has an impact on the share price, when your only investors are local investors. To be honest, we have an analyst community that does not understand the problem.

Analysts don’t understand your problems?

Yes, they are very short term, very quarterly-based. We have never been a company that focuses on the short term. As I said, we can have much better margins by cutting capacity and destroying our whole nature of business. I want to be in a place one day where it is irrelevant what PSC charges are, or what our ROE is.

The difference in opinion is that Grab has spent a trillion dollars to get where there are. They are worth US$12 billion ($16.5 billion), we are worth US$2 billion. We have the same power as Grab, but we are making money from our customers, they have to subsidise to get their customers.

Not one analyst or reporter has picked it (digital strategy) up.

So the prospects, if you are patient, are fantastic, in my opinion.

Because BigPay will be a digital bank, Teleport is our logistics and cargo business, airasia.com will be our lifestyle app, so I think we have a great future. All the analysts who hammered us for our Philippines and Indonesia [operations] haven’t praised us once. We have turned around the Philippines and Indonesia. Malaysia is doing good. AirAsia India, not through our efforts, but the demise of Jet Airways has helped, and Japan is a matter of regulatory approvals. So our airline business is strong. The only weak link is Thailand, which is dependent on Chinese visitors.

For the third and fourth quarter, AirAsia looks good because we have reassessed our capacity in Asean. I think the airline business is strong and we have a fantastically positive digital business, which no one has written about.

I think it must be very painful being an AirAsia shareholder, apart from the fact that we have given a lot of dividends. Any company that is pioneering, which we are, keeps evolving and changing. When you are dealing with a bunch of analysts who is used to just analysing, here is an airline in our country. You have to deal with an airline which has many joint ventures — you have the leasing business, you have the digital business.

The group is currently focusing on reorganising its corporate structure into three businesses — Airlines, AirAsia.com and RedBeat Ventures (such as Teleport [logistics], BigPay, Santan/ T&Co, AirAsia Big Loyalty). When do you expect to see the results?

I think you will see 2021 as the point in which our digital businesses will really contribute to the group’s bottom line. You will see the digital businesses contributing to the airline through airasia.com in 2020. Ancillary revenue will pick up and so will duty free.

What is the contribution that you want eventually from these three businesses?

Let’s use profit.. my goals are very lofty, realistically 50: 50 in the next five years. So 50% will come from the airlines business and another 50% from AirAsia.com and RedBeat Ventures, which is impressive for a four-year digital strategy. While most digital companies are not making any money, we believe that we will get 50% of our profit from the digital business.

But PSC will always be a battle, on top of the oil price. The price of oil is not a major part of our cost structure.

One day, you will not put us in the airline category. That is my dream, that we will be a digital company like Grab or Uber. That is a lofty dream. But none of you believed us 18 years ago when we came out and said we would have a digital strategy with AirAsia.com, we would be selling on the internet, we are not going to use travel agents, you all said we are on drugs, we would go bust in six months.

Which is a fair point because we were new to this business, what experience did I have, etc. So, the great thing is, the underdog always has the advantage. In this case, I don’t think Grab takes us seriously; I think Booking.com takes us seriously. It’s good to be not taken seriously.

When do you expect AirAsia X and AirAsia India to turn around?

AirAsia X is a function of the fact that it is a very competitive market, especially with Malaysia Airlines and Malindo. It has inherited very highlease planes, it did a lot of very expensive sales and leaseback at the time, so it suffered from that. Now we are getting out of those leases and we are reviewing them, so I think it will take another year or so.

AirAsia India will make money in the fourth quarter. We could make money tomorrow if we stopped adding planes in India, but we are growing. I don’t think we are going to make tons of money, but to break even in the next few years. That is my target for the next few years. It depends on when we get our international routes (out of India). The domestic market is tough because we are small.

Do you think that the long-haul low-cost airline model still works?

Yeah, very much. I believe in the model very much, I believe in it because there is the demand. We are still not getting the fare versus cost of journey, but the demand is still at 82% to 83%. We are flying to places that never had connectivity, whether it is Jaipur or Lanzhou where the demand is strong.

Kathy Fong is executive editor and Kang Siew Li is senior editor of The Edge Malaysia