This article first appeared in The Edge Malaysia Weekly on September 28, 2020 - October 4, 2020

AS the coronavirus pandemic takes the shine off the commercial aviation industry, carriers such as AirAsia Group Bhd are repositioning themselves as digital or technology companies, rather than being pure-play airlines.

The low-cost carrier (LCC), in recent weeks, has been accelerating its move towards digitalisation amid the downturn in air travel, which is likely to get back to 2019 levels only at end-2023, according to Moody’s Investors Service.

Last Thursday, AirAsia said it was consolidating all of its digital businesses — AirAsia.com, BigPay, Teleport, AirAsia BIG Rewards and Santan — under its rebranded digital venture called AirAsia Digital, formerly known as RedBeat Ventures.

According to some aviation analysts, this pivot may help AirAsia convince investors to back the carrier as it races to raise between RM2 billion and RM2.5 billion in additional capital via equity and debt before the year end.

But this is not the start of AirAsia’s digital journey. Its co-founder and group CEO Tan Sri Tony Fernandes had been talking about digitalisation and transforming the carrier into a leading travel technology company in Asia even before the pandemic upended the global airline industry.

As far back as 2018, Fernandes had tweeted that its financial technology (fintech) business BigPay would one day be worth more than AirAsia. At the time, he mocked unenthusiastic market analysts for not understanding its digital strategy and the value of its data. Last year, he was quoted as saying that its digital businesses could eventually contribute up to 70% of the airline’s earnings.

Shukor Yusof, head of aviation consultancy Endau Analytics, says that among the country’s carriers, AirAsia has been the most aggressive in embracing technology. “It partnered US software giant Oracle Corp [to streamline its finance operations]. It was also the first airline in Asia to implement the biometric facial recognition technology for flight boarding,” he tells The Edge.

“So to be fair, [Fernandes] embraced technology well before any other Malaysian airline did because he sees opportunities in AirAsia as a digital airline — as an airline that maximises the use of technology to help cut costs and support seamless passenger travel. I give him credit for that.”

AirAsia is also among the airlines that have adopted chatbots to communicate with passengers. In 2019, it developed and launched an artificial intelligence-powered chat platform, AirAsia Virtual Allstar. AVA currently handles more than 80% of customer cases while the rest are transferred to a live agent who assists directly.

Shukor believes that positioning itself as a high-tech digital airline would be more bankable than being a “pure conventional airline, transferring passengers from point A to B, in the current times”. “It is a sexy strategy that Fernandes has embarked on and it looks good when talking to investors or shareholders. There is some truth to it as well because that is the way forward, putting this technology together with the airline so that when the travel industry recovers, AirAsia will probably be one of the leading contenders in the region to have an all-in-one super app,” he says.

Still, Shukor concedes that whether shareholders and potential investors will buy into AirAsia’s digital story will depend on what they think airlines will look like post-Covid-19. “I don’t think it will be so easy for AirAsia to raise money regardless [of the story it sells], especially in these tough times. But one thing is certain: people are comfortable with having Fernandes around whether you like him or not. There is a lot of comfort with him there, with expectations that he will turn AirAsia around,” he says.

“If you look at AirAsia in the long term, I do think it is in a much better position to ride out this crisis than legacy carriers, for example. LCCs, by virtue of them being low cost, are more nimble. They can react better. They don’t depend on the hub and spoke operations and are more leisure-focused. More people will have less money to spend post-Covid-19, which will benefit LCCs.”

Shukor notes that AirAsia also entered the pandemic in a better position than Malaysia Airlines Bhd and Malindo Airways Sdn Bhd. “If I were an investor, I would think this is the one that I would put my money in. There is a clear strategy, idea and concept of what [Fernandes] wants to do with AirAsia post-Covid-19.

“His personality aside, look at what the carrier is doing and where and how he wants it to go. In that sense, AirAsia has been able to encapsulate its ideas into what it thinks it will be in the future.”

An analyst with a foreign research firm says the digital story is “probably the only positive thing that Fernandes has now as it doesn’t appear that the airline industry will improve anytime soon. It seems like this is the only bullet he has to convince investors to stay invested in the carrier in these times.

“Honestly, [whether or not investors will be convinced] by AirAsia’s digital story will depend on how familiar they are with digital ventures. It is worth noting that the carrier has the customer database in terms of reach and infrastructure. In that sense, it already has a leg up on its competitors. But Fernandes still has to convince investors that he can make those digital businesses profitable to make up for the loss of income from the airline business,” says the analyst.

Last month, AirAsia announced that AirAsia.com’s revenue was up 137% year on year for the second quarter ended June 30 (2QFY2020). It said BigPay revenue improved 11% y-o-y while its logistics division Teleport contributed 42% to group revenue, its highest share ever. In contrast, airline revenue declined 98% y-o-y as capacity was significantly reduced due to the fleet hibernation at end-March. It was also negatively impacted by RM60 million in refunds.

Analysts are not scrambling to rerate AirAsia’s stock just yet as they point out that most of its digital ventures are still loss-making and small relative to the overall group. Of the 20 analysts covering the stock, 18 rate it a “sell” and two a “hold”, according to Bloomberg data. The average analyst target price is 53 sen. Last Thursday, AirAsia shares had fallen 62% year to date to close at 65 sen, giving the company a market capitalisation of RM2.17 billion.

Says one analyst, “We have been hearing the same digital story over the past few years. I think investors will be mindful that it is still an airline with huge losses. So, it may be tough to see a mind shift happening unless it gets  strategic investors like SoftBank Group to come on board. That is probably why it is taking so long for the fundraising exercise to take place.”

Another aviation analyst concurs. “The challenge that Fernandes faces is that everybody is going on a shift to digital,” he points out, citing recent data from DataReportal that shows flight booking or travel apps were not listed among the 10 most popular mobile apps in Malaysia in 2019. The analyst also points to British Airways’ recent rights issue to raise £2.74 billion, which was fully underwritten and offered at a 36% discount.

Nevertheless, it makes a lot of sense for companies to move towards becoming technology companies given that they command far higher valuations. For example, leading tech start-ups in Asia-Pacific such as Grab, Gojek and MoMo have proved their ability to raise funds from established investors, even though they are still losing money.

For the first six months of 2020 (1HFY2020), AirAsia posted a net loss of RM1.8 billion versus a net profit of RM111.78 million in the previous corresponding period, as revenue more than halved to RM2.43 billion from RM5.65 billion in 1HFY2019.

In an Aug 26 report, KAF Equities analyst Max Koh says that together with cost adjustments, he is forecasting losses of RM2.1 billion for the financial year ending Dec 31 (FY2020). “While cost-cutting measures and potential capital-raising measures will help AirAsia remain afloat, we remain cautious as we expect air travel demand to remain muted. A second Covid-19 outbreak is a key risk to impact travel activities,” he writes.

MIDF Research views AirAsia’s digital move “favourably as it demonstrates management’s continued entrepreneurial drive, innovative spirit and prudence amid the pandemic”. However, the research firm is maintaining its “trading sell” call on the stock, with a target price of 40 sen, as it remains wary of the bleak outlook for the airline.

“We believe that the odds are stacked against AirAsia and we are not convinced yet of the recovery narrative. A rerating catalyst would be a faster-than-expected recovery from the Covid-19 pandemic,” says MIDF Research in a report last Friday.

All eyes will be on whether Fernandes can pull off his digital game plan, which could be the ultimate game changer for the carrier to soar again.

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