As AirAsia Bhd.
(AIRA) prepares to more than triple its fleet, Chief Executive Officer Tony Fernandes says
he wants to match the growth of his budget airline with discount hotels, mobile
phones and financial services.
Tune Group, the
closely held parent company of Fernandes and business partner Kamarudin
Meranun, may sell stock in some of the units by the end of next year, Fernandes
said. Initial public offerings are also planned for AirAsia’s Indonesian budget
arm and long-haul unit AirAsia X Sdn., he said. AirAsia is the world’s
fastest-growing traded airline by sales in the past five years, according to
data compiled by Bloomberg.
“Tune
Money and Tune Hotels have the most potential,” the Malaysian entrepreneur said
in a June 14 interview. “The financial services industry is complicated, just
like airlines, and we are reaching a market that they generally missed and we
are utilizing AirAsia’s customer base, which is huge.”
The
48-year-old is targeting emerging wealth in Southeast Asia where an
increasing number of its 598 million inhabitants can afford to travel and buy consumer goods such
as mobile phones for the first time.
Fernandes
will relocate to Jakarta this month to focus on regional growth. He will also
step down as CEO of his Kuala Lumpur-listed airline from June 30 to be replaced
by Aireen Omar, currently regional head of corporate finance and treasury,
according to an exchange filing in Malaysia today.
“When
you’re based in Malaysia you’ll inevitably get drawn into the Malaysian operations,”
he said. “I’ll take on the regional role.”
Resilient
Demand
Demand
for budget services has so far withstood the global economic slowdown amid a
protracted crisis in Europe.
AirAsia’s first-quarter profit rose while full-service carriers Singapore
Airlines Ltd. (SIA) and Malaysian
Airline System Bhd. (MAS) posted losses in the period, citing fuel
costs. AirAsia’s passenger numbers gained 12 percent in the quarter as the
region’s slowing economic growth prompted more people to opt for budget travel.
Tune
Group is the holding company created in 2007 when the initial aviation business
was extended to include hotels. It will eventually hold assets from movie
production to Formula One racing and online financial services.
Southeast
Asia is weathering a slump in IPOs better than markets including Hong Kong, as optimism about
the region’s economic outlook draws investors to offerings by companies
including Felda Global Ventures Holdings Bhd., Malaysia’s biggest plantation
owner, and IHH Healthcare Bhd., Asia’s largest Hospital operator.
Repeating
Model
Asia Aviation
Pcl (AAV), the parent of AirAsia’s Thai airline, has fallen 8 percent in
Bangkok after becoming the first subsidiary to begin trading last month.
“The
best use of capital is a repeating model,” said Fernandes, who has spent some
of his wealth on buying a Formula One racing team and the English soccer club Queens Park Rangers.
Most of
Tune’s companies are designed to contribute to one another. Passengers booking
flights online are offered travel insurance, budget bedrooms and prepaid mobile
phone cards. All are available and interlinked via the Internet.
“With
AirAsia, he found a section of the population underserved by current flag
carriers,” said Narayan Pant, a Singapore-based professor of management
practice at Insead. “It’s not clear if there’s such an underserved segment in
the new businesses that he’s going into.”
Tune Hotels Regional
Services Sdn. operates 24 budget hotels in Southeast Asia and the
U.K., with deals signed with developer partners to add another 60 properties in
countries including Australia, India and the Middle East,
Chief Executive Officer Mark Lankester said in an interview.
‘Disastrous
Start’
While
international hotel operators including France’s Accor SA have set up economy
brands such as Ibis and All Seasons to target budget-conscious travelers, they
don’t compete in the same bargain-bucket segment as Tune.
Tune Money Sdn., an
online distributor of insurance and mutual funds, got off to a “disastrous
start,” said Fernandes, a trained accountant. It changed management and
strategy, making about 30 million ringgit ($9.5 million) last year. “Many
people who fly with us don’t have insurance, don’t have credit cards, don’t
have unit trusts.”
Tune Talk Sdn. is
a so-called mobile virtual network operator that uses other carriers’ infrastructure
for its wireless phone services. It has just broken even, he said.
Of
three Tune units targeted for listing, fund manager Choo Swee Kee said he’s
most skeptical about Tune Talk.
“Its
fate could be very similar to XOX Bhd. (XOX),
another MVNO player that wasn’t very profitable at the time of listing and then
the share price tanked,” said Choo, who manages about 700 million ringgit as
chief investment officer of TA Investment Management Bhd. in Kuala Lumpur.
Music
Roots
XOX has
reported three straight quarterly losses and
slid 80 percent in Kuala Lumpur since its trading debut a year ago.
Some
Tune ventures have little connection to the core tourism business. Tune Studios
allows aspiring singers to record albums inexpensively. Plans are under way to
start Tune Live, which would organize concerts.
“All
these businesses are run by different people,” said Fernandes, who like his
former bossRichard
Branson started out in the music industry before
branching into aviation and other industries. “We are no different from a
private-equity fund.”
Fernandes,
who previously worked as financial controller for Branson’s Virgin Records inLondon, has more time to expand
these businesses after stepping down from Malaysian Air’s board in April and
reversing a share swap following union dissent over management’s turnaround
plans.
Young
Population
Southeast
Asia offers one of the fastest-growing markets for Tune’s products. Indonesia, the region’s
most-populous country, has a median age of 28, compared with 36 in China, according to the Central
Intelligence Agency’s World Fact Book.
Tune
joins furniture retailer Ikea Group and Uniqlo store- operator Fast Retailing
Co. in targeting a region where gross domestic product growth exceeds 7 percent
and its population is among the youngest in the world. The total GDP of
Southeast Asia’s 10 nations is $1.86 trillion, more than India, and 37 percent
of its residents are under 19, according to the Association of Southeast Asian Nations.
Fernandes
and Kamarudin bought AirAsia from DRB-Hicom Bhd., with two aging Boeing Co. 737
jets and 40 million ringgit of debt, for a token 1 ringgit, or 32 cents --
three days before the Sept. 11 terror attacks in the U.S. With a current market
capitalization of 10.2 billion ringgit, it has overtaken Malaysian
Air as the country’s biggest airline by value.
Airline
Partnerships
The
budget carrier may order 100 more Airbus SAS A320 jets, including options,
within the next two months to facilitate growth, Fernandes said on June 13. The
AirAsia group already has 300 planes booked to add to its 110-strong fleet.
AirAsia is Airbus’ biggest customer for single-aisle A320s.
AirAsia
aims to form five budget airline partnerships in the next two years in
countries including South Korea, Vietnam and China, Fernandes said.
This
may include the Middle East. A budget tie-up with All Nippon
Airways Co. (9202) is scheduled to start flights from Tokyo’s Narita Airport in August.
Sales
growth has averaged 35 percent over the past five years, according to data
compiled by Bloomberg. Of 20 analysts who have updated their coverage of
AirAsia’s stock in the past six months, 15 rate it the equivalent of buy and
three recommend selling it, according to data compiled by Bloomberg.
Chong
Pooi Koon
Business & Investment Opportunities
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