Air Asia, which began daily flights to the island from its Kuala Lumpur hub in August, had sold 30,000 tickets before its first flight landed by offering seats at a third of the price charged by full service airlines.
Its chief executive Tony Fernandes says Air Asia’s cost per passenger kilometer is the lowest in the industry despite the airline growing to 82 aircraft carrying 22 million people every year.
LBR’s Shamindra Kulamannage interviewed Tony Fernandes recently. Excerpts:
Q: What’s Air Asia’s Sri Lanka strategy? Do you want to carry tourists between the two destinations or do you think your Colombo flight will help feed in to your network including the long range?
A: I think it would be both. Coming out of the plane today gave me a flavor of what’s to come. Maybe three aspects of the market.
One is that Air Asia brings to any city really the world now. On our flight we had Serbians, Australians, Japanese, and Americans, who have come from Air Asia X from London, Australia etc and from the Air Asia networks. So I think we will bring a lot of tourists from Malaysia and South East Asia and the world to Sri Lanka.
We also provide a network for Sri Lankans who have left Sri Lanka and are living in other countries such as my own country. It was wonderful to meet one man who hadn’t been to Sri Lanka for 27 years and Sri Lankans from Australia coming home after 20 years.
The third aspect is Sri Lankans going to South East Asia and Australia. So those are the three markets. And I also saw lots of businessmen. Air Asia facilitates lots of small and medium enterprises and businesses to start growing. I think we’ll see a growth in trade between Sri Lanka and Malaysia just through the connectivity we provide.
Q: How do full service carriers usually respond to, for instance, a daily frequency by a budget carrier?
A: There is generally an emotional reaction, and I’ve seen it time and time again where they dump their fares or whatever. But ultimately they have a very different cost structure.
It’s hard to compete with us in that way because we have the lowest cost in the world at 2.6 cents (per passenger kilometer). But full service carriers will begin to see that it’s a big enough market for everybody. If every hotel in Sri Lanka was a five star hotel, you are limiting the market and you don’t see the Hilton here competing with a budget hotel. Eventually you form your own market and you realize where your niches are.
Q: What sort of a load factor do you need on a point-to-point route like this?
A: Anything above 60 percent we’ll make money at present fuel prices. We are doing exceptionally well. I think we sold about 30,000 seats, and we are experiencing very high loads of over 85 percent.
Q: You seem to be doing well in pretty much every market that you enter. That’s contrary to the only other budget carrier based here. Is it scale that works for you?
A: I started with two planes, seven years ago against a national carrier, with very little capital and four destinations. So it’s not about size. It’s about the management, the ability, the discipline and the marketing ability.
I think Air Asia is the same as when we started seven years ago. We are still focused on low cost, and high quality. Obviously scale helps because when you roll in to a market where people know you, when you can bring people from all over the world, it helps. But seven years ago we only had two planes. You’ve got to start somewhere; you can’t start on day one with 82 planes.
Q: Colombo’s main airport at Katunayake doesn’t have a budget carrier terminal. Is this something we should look in to in the long term?
A: I think it’s a big opportunity for Sri Lanka. Airport charges are high here in my view and there are only one or two service providers. It’s one of the most expensive places I’ve come to.
Actually the country loses out. If you reduce fees and increase volume you get money anyway. The tourism spend in the country is really where the benefits are. You know, in Malaysia an average tourist spends about 500 US dollars. You multiply that by the 10 million tourists that we bring in and you’re are talking about billions of dollars and the multiplier effect is 12 times. So we are talking about hundreds of billions.
Sri Lanka is a beautiful country, there’s so much to see, people are great, but it’s expensive getting here. I think that’s an area the government should look at.
Q: You’ve managed to grow passenger numbers by 20 percent so far this year. Looking at the broader South East Asian economy, does it look like consumer confidence has recovered after the hit it took last year?
A: I don’t think consumer confidence was ever hit that badly. You can’t run away from the fact that Asia was affected, but less affected because our banking systems were more solid and we weren’t leveraged as America and Europe.
We (Air Asia) are in a unique market, where when business is bad people will trade down to us. If economies are booming there are more people flying. People want to fly provided the costs are low. If anything, people want to fly more to get away from depression and have a holiday and it’s a matter of price. We’ve able to grow principally, not because confidence has come back but because we are offering great value and low prices and there is a market for that.
Q: One thing that’s been picking up for you are the little extras you sell. You charge premiums for better seats and meals aren’t free. Is this revenue significant?
A: What we are trying to do is to peel away the various airline costs, which you think you’re getting for free. You buy a ticket; you get food. But everything has a cost associated with it. We are giving people a complete choice and a menu of services but you pay. So if you want food you pay for it. You want a nice seat, you pay for it. If you want a basic product, it’s there. We give you the choice all the way up to a full service carrier, but still much cheaper.
Ancillaries come in two ways. One is the aviation ancillaries, two is selling to the database we have, whether it’s insurance, whether it's duty free products, credit cards etc. Nothing related to the airline per se but related to the brand that we’ve built. I think it's very significant - about 15 percent or 30 Ringgit per passenger I think it can go up to 60 Ringgit. It’s a different airline model that we’re building but it’s a robust one that can stand the volatility.
Q: Exactly my next question. What are the big risk factors? Are they oil, Swine Flue, possible economic down turn?
A: I knew you were coming to that.
We’ve been through everything known to mankind. We’ve been through SAARS, Bird Flu, governments’ protection of national airlines, tsunami, earthquakes, terrorism, you name it, we’ve had it. We’ve always been resilient.
When I started this business oil was 30 dollars and went up to 200 dollars. Ancillaries have come as a good defense to oil prices.
We have become smarter, in some ways like a virus; you know when you pound it with antibiotic it morphs in to something more virulent. We have found ways to deal with everything. There’s nothing out there that can scare me. I’ve never heard of H1N1 or SAARS till they hit and all I will say to our investors and shareholders is that we will manage it better than most.
Q: Any other plans for the South Asian region?
A: It’s our last frontier so to speak. We started from Malaysia and grew out to ASEAN. We did China. We finally reached the Indian shores and now Colombo. Really over the next 18 months India, Colombo and Maldives will be important. We see tremendous opportunities. I’m very bullish on Sri Lanka.
I hope the government sees low cost airlines are a different business from full service airlines. I’m not cannibalizing anyone but we are really growing the pie and the country will benefit. My country has benefited immensely from low cost travel. But it would not be low cost unless we have low cost facilities. Our low cost terminal in Malaysia does not have aero-bridges. It cost 50 million dollars to build and charges passengers five dollars. The volumes are massive.
I hope Sri Lank will look at building a low cost terminal. The benefits to tourism are immense.