How founder's distaste for buying drove AirAsia's growth

PHOTO: Reuters

AirAsia, the region's biggest budget airline, said it prefers to pursue organic growth instead of expansion through acquisitions, partly explaining why it declined to buy Hong Kong's sole low-cost carrier Hong Kong Express Airways (HK Express).

Cathay Pacific Airways, Hong Kong's flagship premium carrier, this week offered HK$4.93 billion (S$850 million) to buy its budget competitor from the indebted HNA Group.

AirAsia looked at the proposal to buy HK Express and its full-service sibling Hong Kong Airlines, declining to acquire either, said founder Tony Fernandes.

"My philosophy has been organic growth," Fernandes said in an interview with South China Morning Post during Credit Suisse's Asia Investment Conference in Hong Kong. "I generally don't believe in acquisition because it comes with a lot of inherent issues. When you import through acquisition, it comes at a risk, so it's not my preference."

Fernandes' approach illustrates how he turned the Kuala Lumpur-based airline from a near-bankrupt company into Asia's largest budget carrier in less than two decades, with more than 140 destinations and flying on 320 routes at the lowest unit cost in the global aviation industry.

Fernandes, who worked for Warner Music Group before striking out on his own, bought AirAsia in December 2001 for a token 1 ringgit, taking on the carrier's 40 million ringgit (S$15 million at the time) of debt. Within a year, the carrier reported a profit, qualifying for a listing on the Kuala Lumpur Stock Exchange two years later.

AirAsia's 2018 revenue rose 9 per cent to 10.6 billion ringgit (US$2.5 billion), while pre-tax profit rose by the same quantum to a record 1.7 billion ringgit. Low-cost, long-haul AirAsia X notched revenue of 4.5 billion ringgit, flat year-on-year, but the 2017's profit performance turned into a loss of 312 million ringgit.

The airline and its affiliates flew 73 million passengers last year, a figure that beat even full-service flag carriers in Southeast Asia.

AirAsia had made a single acquisition in 18 years, when it bought 49 per cent of Zest Airways for an undisclosed sum to secure a landing slot in the Philippines in 2013. Elsewhere in the region, AirAsia expands its network through joint ventures in seven countries, including Japan, India and Thailand.

The airline, operating with 21,000 employees with no union representation, wants to steer clear of importing "inherent issues" and excess baggage from taking on another airline, Fernandes said.

Now AirAsia has a chance to help revive Malaysia Airlines, the very competitor that the low-cost carrier had beaten into the ground. Malaysia's Premier Mahathir Mohamad broached the idea of either selling or shutting the nation's flag carrier two weeks ago.

Malaysia Airlines, now under the ward of the country's sovereign wealth fund Khazanah Nasional after a 6 billion ringgit capital infusion, "can definitely be turned around," Fernandes said.

Still, AirAsia is in no hurry to revive its 2011 share swap plan with the flag carrier, which was vetoed by the government of then-premier Najib Razak.

"Many people will say that [AirAsia's] expertise could be used to hurt Malaysia Airlines and benefit AirAsia. There is a genuine interest to help but in this day and age, not everyone will see it that way, " Fernandes said. "It's best that we do our own thing, and we've got a lot on out plate."

Worldwide aviation is booming, where 8.2 billion passengers could take to the sky by 2037, according to a 20-year forecast made in October by the International Air Transport Association (IATA), with the Asia-Pacific region driving the biggest growth.

Still, not everything is hale and rosy in the region, as intense competition in a price-sensitive travelling weighed on airlines' bottom lines. Only six of the 20 publicly traded airlines or affiliates in Southeast Asia were in the black, with 19 of them reporting declines in third-quarter profitability compared with a year earlier, according to CAPA Centre for Aviation.

AirAsia had been approached for help. It has already evaluated and declined buying a stake in Bangkok-based NokAir. AirAsia's Indonesia unit was also linked to - and denied - the possible purchase of Citilink, the low-cost brand of Indonesia's flag carrier Garuda.

"I never say no to any M&A, but it has to be a sexy opportunity to go down that route," Fernandes said.

Turning to India, and the troubles associated with Jet Airways, which was saved from near-bankruptcy at the last minute, the Malaysian-owned budget carrier said it was positioning itself for the opportunity to grow if runways slots relinquished come up for sale.

"India is a prize, but just like with prizes, nothing comes easy. It's been a lot of hard work," Fernandes said.

Expecting runway slots to be freed up, the AirAsia chief added. "We want to [buy] it in the right way. We're not vultures. There will be a few airlines hoping Jet goes bust and we don't want anyone to lose their jobs, we want every airline to survive and grow, but if an opportunity arises to take those slots, then for sure."

This article was first published in South China Morning Post