Fernandes Says Tune Can Repeat AirAsia’s Budget Success

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.

Photographer: Chris Ratcliffe/Bloomberg

The Tune hotel, operated by Tune Hotels Regional Services Sdn. Bhd., in Westminster in London. Close

The Tune hotel, operated by Tune Hotels Regional Services Sdn. Bhd., in Westminster in London.

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Photographer: Chris Ratcliffe/Bloomberg

The Tune hotel, operated by Tune Hotels Regional Services Sdn. Bhd., in Westminster in London.

‘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 boss Richard 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 in London, 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.

To contact the reporter on this story: Chong Pooi Koon in Kuala Lumpur at pchong17@bloomberg.net

To contact the editors responsible for this story: Barry Porter in Kuala Lumpur at bporter10@bloomberg.net; Lars Klemming in Singapore at lklemming@bloomberg.net

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