Watch out! Tony Fernandes is nothing like Indian aviation has ever seen

By Ankush Chibber

It was on a hot and muggy April afternoon in Goa that Savio Faleiro (name changed), a 24-year old cabin attendant by training, had his father drive him across to Panaji’s naval airport. Ghosting past security and empty check-in kiosks, Faleiro made it just in time for his flight, operated by an airline known for its efficiency.

Faleiro’s destination was Chennai. Never having got the job he was assured of by his training institute, Faleiro was now on his way to the cabin crew recruitment drive for AirAsia Berhad, the Malaysian low cost carrier (LCC) that is now entering India’s domestic air travel market.

Faleiro knew the competition would be tough-even a layman can tell you that it is not really an employee’s market. Heck, it is not just as if there are not enough jobs; there are not even enough airlines to serve India.

One carrier’s maverick boss is running from creditors while shooting bikini calendars. Another regional airline last flew in 2010. The state carrier is lumbering on with huge debts and disgruntled staff, fueled on only by the socialist mindset of India’s political class. And the once-golden bird of Indian aviation is also looking to a Middle East carrier desperately for a bailout.

Three dead ducks in what was once a flock of eight does not make for any confident reading of India’s aviation sector. So that begs the larger question about that other person of Goan origin-what is Tony Fernandes, the executive-turned-entrepreneur behind AirAsia, going to do differently?

Out of the blue

For the last two years, there was not a week when India’s pink sheets did not speculate about the possibility of the government opening up the skies to foreign direct investment (FDI).

Then, when the government did relax policy to permit foreign airlines to acquire an equity stake of up to 49 percent in Indian air carriers in September 2012, they jostled with each other for months to tell us how Kingfisher Airlines was in advanced talks with foreign investors and how Jet Airways is days away from inking a deal with Abu Dhabi’s Etihad Airways.

No one really saw Fernandes and AirAsia coming. In wintery February this year, AirAsia Berhad stunned the sector when it announced that it had submitted an application to the Foreign Investment Promotion Board (FIPB) for approval to invest into a proposed Indian joint venture airline together with Tata Sons Ltd and Arun Bhatia of Telestra Tradeplace Pvt Ltd.

The joint venture, where AirAsia would invest 49 percent, Tata Sons would invest 30 percent and Bhatia would invest the remaining 21 percent, would operate from Chennai, focusing on providing domestic Tier II and Tier III city connectivity to Indian travelers-much like its model elsewhere. In fact, Fernandes in an exclusive interview said that AirAsia India will replicate the exact same business model as per what is in place in Malaysia, Thailand, Indonesia, Philippines and Japan.

“We see the potential in the Indian market. Our business model and operating structure will set us apart. We are the world’s best LCC four years running and have the lowest operating costs in the whole world,” he said.

Amber Dubey, Partner and Head-Aviation at KPMG India, said it was not unexpected that an overseas airline like AirAsia would set up a fresh airline rather than buy into one of the incumbents. “Why take on huge debts and other challenges when you can start afresh, building from the ground up? And with the Tata Group behind him, Tony has the right partner for this foray.”

But like we could say about starting up in any other sector in the beehive (our new favorite word, hat tip to Rahul Gandhi) that is India, it really is less than half the game.

Not an easy play

Like Harish HV, Partner at tax and advisory firm Grant Thornton in India, said, there are various factors that have led to the poor financial performance of incumbent airlines. A combination of high Aviation Turbine Fuel (ATF) prices, increased rivalry amongst existing LCCs that dominate the market, taxation and infrastructure woes, rupee depreciation, and regulations that need an overhaul have blindsided all those ducks we mentioned earlier. Surely, nothing points to an easy haul.

Fernandes did not mince words when we brought this up. “Look, I am aware that there is no way I will be successful in the Indian market if I do not have enormous amounts of determination,” he said. “I want to change the market and I want to change the people’s perception of low-cost carriers that has been badly bruised by failed promises.”

Fernandes’ philosophy of doing business has never been conservative and even though he is an Asian of Indian origin, there is nothing traditional about how he does things. Even so, he said, he considers humility, the most Asian of characteristics, his and AirAsia’s strong point.

“Too many people in the airline business have an ego the size of an A380. I keep emphasizing that you are only as good as tomorrow. If we need to be successful in the Indian market, we need to be innovative. We have to do things that have not been done before,” he said emphatically.

Dubey gave us a fair idea of what we can expect from AirAsia’s domestic game. “They like to play aggressive. They innovate. They may operate from small airports bypassing the big ones that come at high user charges. They are likely to get into agreements with local airport authorities and state governments for deep discounts in return for air connectivity,” he says.

Dubey added that AirAsia may offer air travel at prices not seen before in India. “They may operate from no-frills airports, stripped of non-critical infrastructure and amenities. They are known for fast turnaround and high utilization rate of their aircraft. As they grow, they may push metro airports to create low cost terminals.”

Some may pooh-pooh Fernandes’ ability to crack such deals and lobby successfully for such concessions. But then, this is the guy who successfully convinced a Malaysian Prime Minister to first, sell a state-owned airline to him, and then get him to convince other South-East Asian heads of state to give landing rights to his airline and other LCCs.

For 1 Ringgit

In Malaysia, today, one Ringgit would buy any one of these things-Nasi Lemak (rice cooked in coconut milk), a small loaf of bread, instant noodles (if you buy them in a bunch), a stick of Gudang Garam, the local cigarette, and a bus ticket. In September 2001, that is how much Fernandes paid to buy AirAsia from the Malaysian government.

A former music industry executive in London, Fernandes had seen the Internet bite piece by piece off the music business. But he had also seen the growth of another industry in Europe-of low cost airlines like Ryanair and easyJet.

Fernandes believed that there was a market for LCCs in Asia and he went after this dream, displaying a zeal similar to his former boss and now occasional sparring partner, Virgin’s Richard Branson.

In hindsight, some would also call this zeal foolhardy bravado. When Fernandes bought the ailing airline, it came with two just-about-flying Boeing planes and a liability of $11 million. Fernandes also had the not-so-good luck of making the deal at a time when the aviation sector worldwide sank in the aftermath of 9/11. The sector’s experienced voices gave the young upstart no chance.

But Fernandes persisted doggedly. Mortgaging his own house and eating heavily into his own savings, Fernandes steadily started flipping the business. His calling card was always going to be low cost travel and unpredictably, the slowdown also worked in his favor here. Layoffs meant that Fernandes could get experienced staff for cheap, thus taking a chunk off his operating costs.

Over time, he introduced more short haul flights, and pushed for faster turnaround times. He tied up lucrative marketing deals with other brands and introduced an immediately profitable cargo service too.

By the end of its first year of operations, AirAsia was a profitable entity having wiped off its debts. By 2004, it was flying to 28 destinations around the region, including Jakarta and Bangkok. Today, it flies to 85 destinations, and is currently Asia’s largest LCC with 118 aircraft and 350 orders.

It’s all about culture

Samyukth Sridharan, President and Chief Operating Officer at Cleartrip, an online travel booking site, and also the former Chief Commercial Officer for SpiceJet, where he led business expansion for the Indian LCC, said that one of the core reasons why AirAsia has succeeded where others have failed is because of its culture that separates it from other LCCs. “It is a big reason why AirAsia is where its today. It defines how AirAsia operates.” He points to the use of red color, considered warm and welcoming, the in-flight behavior, the training of the staff, and even the quirky use of humor. “Much like Indigo has on-time behavior as its USP, AirAsia has its culture.”

Fernandes too points towards his emphasis on the airline’s culture. “AirAsia’s way of approaching the LCC business is very different. We keep it simple and humble. We have 10,000 people. They can think on their feet and have strong communication skills. And humility is our strong point,” he stresses again.

“When we hit India, I need people who are determined. I need people who can realize they have made some mistake and have the humility to say I screwed up and fix things,” he said.

By all accounts, this culture runs top down through the airline. Examples of this are sprinkled all over the Internet. One example that we came across was a disgruntled passenger who managed to write directly to Fernandes. Not only did he write back quickly, he also ensured that the matter was addressed.

One executive who has worked with the airline said on the condition of anonymity that it is very normal for the man in the red cap (which he is rarely seen without) eating in the employees’ cafeteria. “You will often see him talking directly to the staff about any issues they may have. He makes everyone feel equally important.”

Not that he is a softie. When asked how it is working with Fernandes, Kathleen Tan, CEO of AirAsiaExpedia, the joint venture between the airline and travel booking site Expedia, had this to say-“It is nuts.”

“You are constantly being challenged. You pull your hair out all the time. He does not take no for an answer. But when you complete a given task, you realize that he has made you break your boundaries,” Tan said, giving an example of how she was once a digital dinosaur, but Fernandes pushed her till she became somewhat of a whiz.

Tan, who is considered the brain behind the 1 million discounted tickets model, has been tasked with anchoring the AirAsia India initiative.

Mark Lankester, CEO of Tune Hotels, said that Fernandes gave him a platform to begin with. “But from there, it was left to us. He gave us the freedom to choose our team and show aggression. He gives you opportunities that way.”

Incidentally, both Tan and Lankester will accompany Fernandes on The Apprentice Asia, a local version of the hit reality TV franchise that will go on air on AXN this May.

One of the main things that Fernandes said he has always done right and recommends is choosing the right people to partner with, which is crucial in cracking any new market or problem-like the India market. And that he does in his own way of dealing one-on-one with the other side.

“I hate detail. I hate legal stuff. I hate dealing with bankers. I switch off when they talk and they always think that I have attention deficit. When I deal with lawyers, I switch off in a nano-second. But I have a great partner who loves dealing with exactly the same kind of stuff,” he said, referring to Kamarudin Menun.

Menun is the co-founder, with Fernandes, of Tune Group, a leisure and entertainment group operating in the ASEAN region and also the Deputy Group Chief Executive Director of AirAsia since December 2001.

Tune Group is the parent holding group of all the ventures Fernandes and Menun have ventured into including AirAsia, Tune Hotels, Tune Sport, Tune Money, Tune Tones, and Tune Talk Mobile Prepaid. Though different, all businesses ultimately owe allegiance to AirAsia’s low cost mantra.

“No one person can run a business on his own. One person gets the credit sometimes. But success in business is a collation of people and partnerships. I found five founding partners in AirAsia in the beginning,” he said.

Starting out, Fernandes, besides Menun, partnered with Conor McCarthy, who brought low cost carrier experience, Aziz Bakar, who brought the ability to leverage his government and media relations for AirAsia and Dr. Pahamin Rajab, the first Chairman who dealt with the bureaucracy.

His partnerships in India and the motivating factors behind them are less transparent. Tata is said to have come on board as a pure investor, while the role of Bhatia is less clear.

Tata Group did not comment for this story while Bhatia was unreachable. Local media has speculated that Ratan Tata had a big hand in inking this deal and tweets from him and Fernandes have at least partially betrayed that.

Bhatia is connected to Fernandes in less than six degrees of separation. His son, Amit Bhatia, is married to the only daughter of LN Mittal, owner of ArcelorMittal. Mittal owns 27 percent of English football club Queens Park Rangers, where Fernandes owns a 66 percent stake and Amit is a board member. One can almost guess, given Fernandes’ different way of approaching partnerships, that Bhatia and he inked the deal on the sidelines of a match at Loftus Road or off the racetrack, where the Caterham F1 team races against the world’s elite. Fernandes had acquired Caterham, the sports car maker, in 2011.

Up and away

The venture would be operational in the third quarter of 2013, when the first AirAsia India planes would fly domestically, said Fernandes. Though AirAsia India has got FIPB approval, it is still to apply for an operator’s permit. It has also finalized a CEO to head the venture. The fleet size and network have not been revealed.

India has 136 usable airports. Of these, six airports can be defined as Tier I airports, including Chennai. Of the rest, 35 are being upgraded by the Airports Authority of India.

According to anna.aero, an airline network news and analysis website, AirAsia India is likely to initially link smaller, Tier II cities to Chennai and it will then add some competition on the largest international markets later.

“Domestic routes to include-Bengaluru, Kolkata, double daily. Coimbatore, Kochi, Nagpur, and Bhubaneswar all operated at least daily. Possibly a low frequency service to Surat. Regulatory approval aside, international routes to include Colombo, Singapore, Dubai and Jeddah,” the site said. It predicted that SpiceJet would challenge AirAsia India the most as it flies to all eight Tier II airports currently operated from Chennai. “Jet Airways would be a formidable competitor on six, with low-cost airline IndiGo operating on five, and state entity Air India on four of the routes,” it said.

Peeyush Naidu, Senior Director at Deloitte Touche Tohmatsu, said that it would be wrong to think that AirAsia will have it all its way in India’s airspace.

“The incumbents have already made inroads into the Tier II market that AirAsia would like to target. I think they have an ability to respond to AirAsia and they will. You can expect more routes and lower pricing from them,” he says.

Naidu is very sure that when AirAsia does launch its operations in India, it would ignite a pricing war. This would be detrimental for the industry in the long term, but would benefit the consumer, he said. Already, he pointed out, AirAsia is offering huge discounts for Indians on international routes and when it happens domestically, Indian airlines would respond to AirAsia.

Fernandes, however, thinks that he can tackle the competition. “We are the best in the LCC business. We have the lowest costs in the world. And our margins are still as high as 17 percent. We are our only competition,” he said.

KPMG’s Dubey believes that the domestic incumbents would need to prepare their war plans well if they have to combat AirAsia. “These guys are tough. They have survived and expanded despite strong competition in South East Asia. Indian carriers will need to be really prepared. In the end, it’s all good for the end users-the passengers.”

Cleartrip’s Sridharan thinks that, at the very least, AirAsia would have to tweak its model to fit local conditions. “For example, AirAsia does not work with OTAs as a way to keep costs low. But in India, 30 percent of bookings come from OTAs. They will have to adapt.”

Unpredictable, persistent, and dangerous

According to Dubey, the thing that sets AirAsia apart from others is that while they are willing to experiment, they are also sticklers for the principles that have got them this far. He pointed to AirAsia’s international operations out of India, where Fernandes pulled out his airline from Delhi, Mumbai and Kolkata after the airports hiked charges.

“That is Tony for you. His concepts are clear. He said that once the airports raised their charges, there was no way for him to offer his USP-price,” he said.

Fernandes said he will not shy away from trying anything once. “Failure is good. It means you tried. Too many Asians sit on their backsides, and then whine about what they wished they had done when they are 55.”

“It took me seven years to get the Singapore and KL route. They did everything to not give it to me. First Singapore refused. Then Malaysia did. If I did not try, we would have lost out on a lucrative sector. We would have not been the airline we are,” he says sternly. “Failure does not daunt me.”

This story was first published Entrepreneur magazine