Cover Story: Metamorphosis: From airline to tech company that happens to fly planes

Thursday 25 Apr 2024

This article first appeared in Digital Edge, The Edge Malaysia Weekly on April 12, 2021 - April 18, 2021

For Tony Fernandes, CEO of AirAsia Group Bhd, the pandemic was like the bird strike incident that the low-cost airlines group encountered in 2001, which he calls a defining moment.

An AirAsia plane — one of the two it had at the time — had run into a flock of birds en route to Kuching and suffered damage. When Fernandes received the news, he had just spent eight hours asking a government official to give him a route to Langkawi, he recalls.

“In the end, she gave it to me. When I was driving back, my chief pilot calls me and told me we had a bird strike. I said, ‘What can a bird do to our mighty 737 plane?’” Fernandes tells Digital Edge in an interview.

Quite a lot, it turned out. The plane had to be grounded for 12 days. But having just won the right to a coveted route and committed to turning around the airline, he had to make a decision.

“We only had one plane left. We’re not going to cancel any flights, and so that one plane flew 24 hours non-stop for around 10 days. We never cancelled any flights. But we obviously had delays,” says Fernandes.

The Covid-19 pandemic has resulted in even more grounded planes and painful losses. At this time, it only makes sense for the group to double down on its digital initiatives, says Fernandes. “We couldn’t fly, so I told the team that now is the perfect time to pivot. We have to move quickly. We really put our foot on the pedal during Covid-19 because we had no choice.”

Out of need, some old plans, like the Redbeat Academy, were sped up and launched in less than half a year by October. The academy is a digital skills training centre done in partnership with Google.

The AirAsia superapp — a rebranding of airasia.com — was launched in the same month, offering e-commerce services beyond flights and hotels. This is underpinned by Teleport, AirAsia’s logistics venture, which also had to transform to become a last-mile delivery provider as border closures impacted cargo capacity. AirAsia’s food delivery service began operations last April.

Meanwhile, new plans such as an air taxi service were developed in three months. Fernandes expects trials for the air taxi service to begin later this year. Drone deliveries, ride hailing and micro-credit services under AirAsia Digital are expected to be launched this year as well.

“We had daily meetings, and keeping everyone motivated was my job. We are lucky that we came up with this digital strategy. If not, it’d be depressing,” says Fernandes.

It was not an easy time, as the group had to retrench 10% of its staff last year. That’s why he rushed the launch of Redbeat Academy, says Fernandes. The academy offers courses in data analytics, software engineering and other areas to reskill its staff. It is now open to the public.

“We had the idea to launch the Academy before Covid-19 because I thought that a lot of people were going to lose their jobs from digitalisation. I had prepared for this because I didn’t want to lose good, loyal staff due to Industrial Revolution 4.0,” says Fernandes. He estimates that the academy has reskilled around 600 internal staff and trained over 3,000 individuals.

“We have many staff members now who have moved from their operational jobs, whether it’s cabin crew, pilots or ground staff, into data science or data engineering jobs.”

Focusing on its strengths

AirAsia Digital’s strategy spans three areas: the superapp platform, which is branded as an all-in-one lifestyle and travel app; fintech, which is done through BigPay; and Teleport, its logistics arms that covers cargo logistics, last-mile delivery services and e-commerce marketplaces for AirAsia Food, Fresh and Shop.

These initiatives cover a wide area, but a few things tie them together. One is the reliance on AirAsia’s huge bank of customer data, given that those who fly with the airline would already have the app. According to the company, the app had over 75 million users and 40 million downloads as at October 2020.

BigPay, which is integrated with the app and has over a million users, allows its users to pay for online purchases and send money abroad at a lower rate. Last November, BigPay received a community credit licence to offer online loans or microcredit.

“I looked at our infrastructure and figured out what we can do. How can we convert our customers’ loyalty with AirAsia and give them more value through our app?” says Fernandes.

Adding e-commerce and fintech functions to the app made sense, as this allows AirAsia customers to purchase services and products beyond those related to travel. The group can also rely on the data bank to understand its customers’ preferences.

Secondly, due to the company’s wide network of flights locally and regionally, it has a powerful logistics infrastructure. Teleport was able to leverage this to offer a cargo logistics service.

During the pandemic, Teleport transformed to also provide end-to-end delivery infrastructure, including first and last- mile deliveries and digital customs clearance. It converted some passenger aircrafts to cargo-only freight planes to meet the demand for e-commerce.

In April, it launched Freightchain, which the group says is the world’s first digital air cargo network run on blockchain. This feature allows shippers or freight forwarders to instantly book planes to carry cargo.

“We are great movers of people. So, I thought, can we build a business to move boxes like we move people? No one has 15 flights a day to Kuching. We can deliver products the fastest by plane. And when you need someone to pick you up from the airport, we can offer you a car ride [through the ride-hailing service],” says Fernandes.

How to innovate in a short time?

It is interesting to note how quickly AirAsia transformed its existing initiatives and plans to launch its new drone delivery, ride hailing and air taxi services, which are all expected to come online or conduct trials this year.

This required the company to develop the ideas in a short amount of time, find the right talent and obtain regulatory approvals. On the last item, Fernandes laughs, saying “… don’t forget that we’re the regulatory kings. Opening AirAsia Food in Singapore was a lot easier than applying for the route to fly to Singapore.”

The company also deployed its grounded staff to manage the new initiatives. The drone delivery, for instance, is steered by AirAsia pilots. Fernandes is hoping to launch the service in December.

“It costs three times more than a normal delivery. But for someone who wants something really quickly, they’ll pay for it. It can cover up to 25km but it depends on the weight. The cost will eventually come down,” he says.

The air taxi service, meanwhile, is run by AirAsia’s chief pilot of safety. It is working with two companies that are furthest ahead in getting regulatory approvals for this service.

“Imagine that you can take a helicopter from the airport after your flight lands to wherever you live. Eventually, this will be autonomous. I hope to conduct our first trial in December,” says Fernandes.

This highlights another element of his strategy: partnerships with companies that are already in the space.

“You’re going to see a lot of mergers and acquisitions happen under AirAsia. A lot of small companies will join up with us, whether they are food or delivery companies,” he adds.

Fernandes hopes to launch the ride hailing service by end-April, and conduct a soft launch of the microcredit service under BigPay in two months’ time. Meanwhile, a new e-commerce experience for AirAsia’s food and grocery delivery services is expected to go live this month.

A digital company from the start

AirAsia’s digital journey actually started 19 years ago when it began selling tickets online. CEO Tony Fernandes recalls that when he took over the company, it was still using a paper-based system.

“Along the way, we’ve always tried to use digital platforms, whether it’s for payment or by embracing social media. We were also the first airline to have a paperless cockpit. We persuaded the Department of Civil Aviation to let us use tablets and computers in the cockpit. They used to store massive amounts of books in the cockpit, and for a long time, they wanted us to have both,” he recalls.

“We were also the first to embrace cloud from an enterprise standpoint and messaging systems. I’m against email and I prefer direct messaging.”

Eventually, he realised the importance of data and looked for ways to monetise it. He explored partnerships with companies like Expedia to launch products that leverage big data.

Two and a half years ago, the company began to seriously invest in its digital arm. “We started with a platform and then a loyalty strategy; then we began building a logistics and fintech strategy. That’s how the revolution started.”

Can AirAsia compete?

Deliveries and ride-hailing are competitive spaces where the current players are aggressively trying to make a profit while grabbing market share. Why is AirAsia Group CEO Tony Fernandes confident that AirAsia can make a profit through these ventures?

His confidence stems from AirAsia’s strong logistics advantage, data bank, as well as its ability to offer efficient services, he says. Just like AirAsia’s flight services, the digital initiatives will not aim to become everything for everyone.

“We don’t have first or business classes in AirAsia. We only did short-haul flights and focused on a low-cost model. We’ll have the same principles with our digital initiatives. This means we are not going to have as many restaurants on delivery as Grab or Foodpanda. We’ll pick our restaurants and focus on certain areas,” explains Fernandes.

“We won’t deliver more than a certain distance, and we’re going to charge restaurants less (10% commission) because we have less cost. But consumers may not have a map to track their driver, for instance.”

The company will rely on its strengths to deliver these services. For instance, its ride-hailing services can target those travelling to and from the airport.

“Can we compete with Grab? I don’t think so. But we can be an alternative and we can be No 1 in airport rides because I can see the passenger’s arrival time before any other companies can. Anyone who lands in Klia2 and needs a ride can use the service,” says Fernandes.

For Teleport, the company can leverage on its technology to optimise the delivery of items. Its advantage is perhaps most obvious in cross-border deliveries. “We can make it as easy as possible to deliver goods across borders. We have the necessary tools, and now we have to see whether we can implement and execute,” he says.

Something that Fernandes keeps bringing up in the conversation is the parallel between AirAsia’s digital initiatives and its origins. Back then, AirAsia had to go up against big industry players that had an effective monopoly in the market, says Fernandes.

“No one made money on domestic routes before us. We had two miserable planes and yet, we managed to make money in around a year. The similarities are uncanny in this space. I do believe that we can make money from these initiatives. Will we be the biggest player? Probably not. Can we be the most profitable one? Yes, I think so.”

He does not want to disclose how much AirAsia has invested in its digital initiatives, but says it is “very little” given that the group is not flush with cash. In the past year, the group has been raising funds through private placements and loans.

“We debunked [the myth] that you need billions of ringgit to transform. Similar to AirAsia’s flight business, we’ve shown that we can build a business with very little cash,” he says.

Wouldn’t he need more funds to scale these digital initiatives? “I disagree. We have our own database, platforms, social media and many ways of promoting our products.

“I’m all about margins and profitability. And providing jobs is my main aim. We’ve always been about serving the underserved. I know some restaurants can’t make money from their delivery because the [delivery] company takes a 30% to 35% cut. That’s not sustainable in the long run,” says Fernandes.

According to the group’s fourth quarter results in 2020, Teleport recorded a positive Ebitda (earnings before interest, taxes, depreciation and amortisation) of RM17 million, making it one of only two AirAsia digital initiatives with positive earnings in that quarter (the other being BigLoyalty, which had a one-off deferred revenue breakage).

Entering this digital space pits AirAsia against some heavily funded unicorn-level companies, where the focus is not necessarily to achieve profits from the get-go but to attain market share aggressively. How can it navigate these dynamics?

“A lot of these tech companies are given rewards for increasing their top line sales. No one puts them under pressure to make money. But eventually, the gravy train will stop. We can’t afford to do that. We have to make money, otherwise we will close down. It’s as simple as that,” says Fernandes.

At the same time, delivery, ride hailing and microcredit are low-hanging fruit targeted by many competitors. Superapps are hungry for market share. Again, how can AirAsia compete?

“Is this a zero-sum game? I don’t think this market can accommodate just one player. We’re okay with not being the biggest player. It’s not about size, it’s about whether you can make money and justify your existence,” says Fernandes, who hopes that the superapp can become profitable in 1½ years’ time.

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