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Malaysia’s New Economic Model:
Risks and Rewards
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AseanAffairs Magazine May - June 2010

Prime Minister Najib Razak vows to take Malaysia forward and transform it into a high income nation through economic and social reforms. Initial responses to this ambitious drive are mixed, details are scarce and investors play wait-and-see.Yet, Najib insists he’s got support to push ahead.

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Having piloted AirAsia through the worst economic turbulence in the aviation industry, CEO Tony Fernandes is naturally very positive on the budget carrier’s prospects for 2010 and beyond. Yet, the boom in low-cost travel and a growing web of open-skies agreements may make it tougher for AirAsia to maintain its growth and leadership as competition heats up.
A Malaysian entrepreneur who was educated in Britain and began his career at Virgin Records and then Warner Music, Tony Fernandes, 45, bought an ailing government-linked airline and turned it into the profitable, publicly listed budget airline AirAsia.
Report said he bought the airline for a token M$1 plus M$40m debt in 2001. AirAsia, the region’s pioneering no-frills carrier, has grown fast due mainly to a rigorous focus on keeping down costs, combined with rapid economic growth across Asia, the gradual liberalisation of the region’s air services and generally low levels of congestion at many Asian airports, which speeds up aircraft turnround times.
“It’s all about keeping costs down. We are the lowest-cost airline in the world and we will continue to be. That’s what I focus on, and if you had sat in our budget meeting last week you’d have seen that that’s all I talk about,” said Fernandes.
With the latest inroads into Vietnam, a joint venture with VietJet, AirAsia now operates in four of the five biggest members of the Association of South East Asian Nations (Asean), a 10-member grouping with an economy bigger than India’s and a population of about 600 million, which is the airline’s main target. The next destination for AirAsia will be the Philippines, which is on the agenda. The expansion drive continues. Airbus’ biggest customer for the A320-200, AirAsia will take delivery of 16 aircraft this year to replace its older Boeing 737 in Thailand and Indonesia. It will take delivery of another 89 new aircraft from 2011 to 2015.
Fernandes has built AirAsia into a formidable business with 92 planes which has thrived despite oil spikes and intense competition and which he says could be the region’s biggest carrier by passenger load by 2013-14.
From its cavernous terminal outside Kuala Lumpur, which despite recent extensions is again exceeding capacity, it now reaches some 60 destinations, and another eight long-haul routes with sister carrier AirAsia X.
Lately, Tony Fernandes seemed digressing from AirAsia, as he was apparently immersed in Formula 1 motor racing with his Lotus team. Was he testing his ability to multi-task or losing his focus?

Q: What do Lotus F1 and AirAsia airline have in common?Have you been distracted from AirAsia or just taking pleasure in multi-tasking?

There are many similarities between AirAsia and Lotus Racing. For one thing, both have had their doubters! But we proved them wrong with AirAsia, and I’m confident we’ll do the same with Lotus. The staff in both companies also share the sense of passion, creativity and the spirt of innovation in what they are doing. Have I been distracted from AirAsia with the launch of Lotus? Not at all. AirAsia is still my primary focus. This is where spend most of my time at. But let’s also not forget that there’s a very seasoned, stress-tested, hardworking aqnd creative senior management team in place at AirAsia. I’ve always said that the achievemernts at AirAsia are down to the staff. It’s never been, nor will it ever become, a one-man show.

Q: Please tell us briefly about the Lotus and your F1 journey?

I didn’t really expect it to happen. But when the idea was broached, I thought why not? Malaysia has never had a F1 team despite having a track and holding races. And there is the excitement and privilege to be allowed to resurrect an iconic racing brand. So my partners and I decided to do it. It’s also about inspiring dreams. Malaysians and people throughout Asean now have an opportunity to cheer on a “local” team rather than all those European teams. And they can now dream of becoming a F1 driver or working on a F1 car.


Q: How important is it to add Vietnam to your list of AirAsia hubs in Asean? What about AirAsia in the Philippines?

Vietnam with its tourist attractions and tremendous potential for growth is very important to AirAsia. Our bid for a stronger presence in Vietnam is in line with our commitment to create more “sky bridges” in the ASEAN region. Right now, AirAsia has six routes to Vietnam: from Kuala Lumpur and Bangkok to Hanoi, and from Kuala Lumpur, Bangkok, Phuket and Jakarta to Ho Chi Minh City. We have 126 weekly flights to and from Vietnam. We expect to fly more tourists to Vietnam once VietJet AirAsia takes off and is able to fly tourists to more destinations.


Q: AirAsia has kept up its promotions - giveaways and heavily discounted fares. How does that affect the airline’s margins?

Promotions are AirAsia’s way of attracting guests to fly on our new routes or try our new products and services, and they drive sales. And with promotions, we’re able to expand our consumer base - those who have never tried our services get an incentive to fly with us, and after they do so, they come back again and again. Also, promotions strengthen our ties with guests who are thankful for the low fares and give us their loyalty in return.


Q: What is your forecast for AirAsia’s load factor this year and what is the prospect for ancillary income? 

We’re looking at flying 11% to 14% more guests this year, a substantial increase from the around 25 million we flew last year. We’re aggressively expanding in India and we’ve just got rights to fly to Korea. We’re confident of achieving this target.


Q: Are there any concerns for overcapacity as you have many aircraft scheduled for delivery this year?

No overcapacity issue. On the contrary, we actually need more aircraft because we’re opening more routes. But we are constrained from acquiring enough aircraft to support the expansion rate that we prefer – and for which we’re prepared – because of concerns over the airport’s space capacity for our aircraft. There is not enough space to accommodate many more aircraft at the current Low-Cost Carrier Terminal near Kuala Lumpur. And we expect the new permanent LCCT that’s been planned to be delayed beyond the projected opening date of September, 2011.


Q: The dual listings of AirAsia in Thailand and Indonesia reflects your vision of AirAsia as a truly Asean airline. What prospects do you see for the aviation industry in Asean considering the launch of a single market in 2015 and industry liberalisation?

AirAsia is not yet publicly listed in Indonesia and Thailand. There are plans to do so but it may take a while given the process involved. We’re looking forward to open skies in the Asean region that would allow us to more easily open new routes and serve more communities.


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