Air Raiders

It’s only moments before takeoff when Tony Fernandes, CEO of high-flying budget airline AirAsia, rushes onto a plane destined for the Malaysian resort town of Kota Kinabalu. But there’s no plum seat waiting for him. Even top managers at no-frills airlines don’t get any frills. Fernandes treks through the crowded plane searching for an empty chair, ending up in one of the last rows. When flight attendants appear with a cart of sodas and instant noodles for sale, he plunks down 80¢ for a can of Milo chocolate drink. Fernandes then spends much of the two-hour journey chatting and shaking hands with each of the 140 passengers. After the plane touches down, he stands on the tarmac in his trademark red baseball cap, waves goodbye to the departing passengers and helps a team of baggage handlers unload suitcases from the cargo hold.

Fernandes wouldn’t have it any other way. “I love it when I struggle to find a seat,” he says, beaming. With ticket prices as low as 29¢–yes, you read that right–seats have often been hard to find. Fernandes expects to fly 4 million passengers this year, twice as many as in 2003. His success heralds a revolution in the airline industry in Asia. Although Americans and Europeans have benefited from low-cost air travel for years, tight regulation, powerful national-flag carriers and a dearth of airports have kept budget airlines at bay in Asia. But finally the region’s long-suffering travelers are able to join in. Five years ago, Asia had only one low-cost airline; today there are 13 either already in the air or due to launch later this year. The boom is lowering airfares across the region, increasing competition for major airlines and making air travel accessible to tens of millions who otherwise could never have afforded to fly.

Fernandes, 40, a fast-talking Malaysian, has become the poster child for the new movement. A 12-year veteran of Warner Music in Asia, Fernandes sold his pricey AOL Time Warner stock options and in 2001 bought into a sleepy two-plane airline in Kuala Lumpur. He now has 22 planes and is seeking to buy 80 more over the next eight years. AirAsia has gone from 12 flights a day to 100, including runs from Kuala Lumpur to Jakarta, from Bangkok to the gambling mecca of Macau and even flights to Bali. He’s also eyeing China and India. Boasts Fernandes: “We have transformed the way people think about flying.”

He’s not exaggerating. The cheap fares are luring Asians away from rickety buses, inefficient trains and traffic-choked highways. Laykha Boonlerd, 26, a bank employee in Kuala Lumpur, could never before afford to fly to Bangkok to see her family and instead made an excruciating 24-hour pilgrimage by bus and train. But with a one-way ticket on AirAsia costing only $26, she took wing in July for the first time. “I will travel much more with AirAsia,” she says. Indeed, about half the travelers on Asia’s budget airlines are first-time flyers like Boonlerd.

The no-frills carriers have also been helped by the changing attitudes of Asian governments. Instead of defending national-flag carriers, officials are clued in to the possibility that budget airlines can invigorate underused airports and attract much needed tourist dollars. Singapore is building a new terminal as a hub for budget carriers, and other countries have been wooing no-frills airlines by reducing airport fees. In Kota Kinabalu, AirAsia took over a mothballed terminal, which now buzzes with eight flights a day. Fernandes wants to turn the building into a regional hub. “The loyalty to national carriers is getting more and more compromised,” he says. “There’s no more cozy cartel where they can do what they want.”

Asia’s major airlines will soon start feeling the pinch. Airline analysts and executives expect budget carriers to drag down fares throughout Asia. Both Singapore Airlines and Hong Kong’s Cathay Pacific, Asia’s premier airlines, deny they are cutting prices in response to this new threat. But they have been offering what they call routine special promotions. In May Cathay Pacific sold round trips between Hong Kong and Singapore for $128even less than the $160 fare offered by Singapore-based low-cost carrier Valuair, which started flying that same month. Major airlines “have been advertising prices even lower than ours,” says Lim Chin Beng, Valuair’s chairman. If they “want to lose money by undercutting us, good luck to them.”

What makes the budget carriers such ornery opponents is their relentless cost cutting. Fernandes, who has dreamed up all kinds of ways to save money, claims AirAsia is the world’s lowest-cost airline. He pays his flight attendants to clean planes instead of hiring special crews, which not only lowers costs but also chops the time spent boarding at terminals to 25 minutes–about half that of the major airlines. His pilots are trained to land at a farther point on the runway and at a slower speed to conserve fuel and reduce wear and tear on tires. Half of AirAsia’s tickets are sold over the Internet, eliminating travel-agent fees. Passengers pay for their food and drinks. When a professional aviation-construction outfit demanded $20 million to build a hangar at Kuala Lumpur’s airport, Fernandes instead asked the small contractor who had built his home to do it for $500,000. “There is a lot of excess in the airline industry,” he says. “The challenge is to change the mind-set of staff so they eat, sleep and breathe costs.”

Still, even Fernandes doesn’t expect budget airlines to create the same upheaval for big carriers in Asia that they have in the U.S. and Europe. A tighter web of regulation provides established airlines more protection by preventing low-cost carriers from hopping from city to city around Asia the way Ryanair does in Europe. With only 2% of airline capacity in the region, the budget carriers have a long way to go to challenge the big boys. Most of all, major Asian airlines have much lower costs than their U.S. and European counterparts, allowing them to compete more easily. In Europe, for example, no-frills airlines have costs that are 60% lower than those of the major airlines. HSBC Securities estimates that in Asia the gap can be held to 30%.

With so many budget carriers starting up, they might be a bigger threat to one another than to the major carriers. Thailand has no fewer than seven low-cost operators. In September, Singapore’s A-Sonic Aerospace said it plans to start a budget carrier in China with a Chinese state company. Tiny Singapore will be home to three low-cost airlines: Valuair, Jetstar Asia (which boasts Australia’s Qantas Airways as a large shareholder) and Tiger Airways (backed by Singapore Airlines). “We’ll grow as quickly as we can and fly wherever we can,” vows Stephen Johnson of Indigo Partners, an investment company based in Phoenix, Ariz., that owns 24% of Tiger. But for all those grandiose dreams, executives believe that not all the budget carriers can survive. “There is going to have to be a consolidation or shake-out,” warns Tiger’s chairman, William Franke, a former CEO of America West.

The rivalry among no-frills flyers is already getting brutal. When Tiger offered a 59¢ one-way ticket to Bangkok from Singapore on September flights, AirAsia countered with a 29¢ fare. Fernandes advertised the promotion with his usual flair. Ads showing two beautiful flight attendants draped over a subdued tiger boasted, “AirAsia tames even the wildest tiger.” Udom Tantiprasongchai, chief executive of Orient Thai Airlines, says fierce competition from AirAsia and flag carrier Thai Airways forced him to slash the fare on his One-Two-Go budget service from Bangkok to Chiang Mai to less than $25, about 30% lower than he had planned. At that price, he admitted, he lost money. But Udom has wreaked revenge. He says he routinely employs a team in his office to go on the Internet and buy as many of the cheapest tickets on AirAsia flights as it can get, often spending more than $3,500 a day. That’s a small price to pay, he argues, to keep the low-price tickets out of the hands of potential AirAsia customers and to foster ill will toward his competitor. (Fernandes contends that this has not damaged his business in Thailand.) “I buy them and throw them away,” Udom says, adding, “I didn’t expect this dogfight to be so serious.”