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Working Capital: How Betting On A Maverick Made AirAsia Soar

P D Olson
June 19, 2017
Anthony “Tony” Fernandes is a risk taker. One of the best-known airline chiefs in the world, he’s revered for taking Asia’s first low-cost airline up from near-bankruptcy to a company with more than 7,000 employees and a $2 billion valuation. For eight years in a row, AirAsia has won awards for being the world’s best no-frills airline.
Last fall, Fernandes added five new leased Airbus 320s from GE to his fleet of 180 planes. It made sense since GE Capital Aviation Services (GECAS), GE's financing arm for the airline industry, looked over AirAsia’s sale and financing in Fernandes’ early days. It has been its leasing partner ever since. (On Monday, GECAS ordered 100 new Airbus A320neo planes at the Paris Air Show. They will be powered by CFM International's LEAP engines valued at $2.9 billion. CFM is a 50-50 joint venture between GE Aviation and Safran Aircraft Engines.)

This story starts in 2001, when Fernandes was a music industry magnate for Warner Music with no airline experience. One evening he was sitting in a bar and happened to notice a television interview with Stelios Haji-Ioannou, the billionaire founder of the wildly successful, no-frills carrier EasyJet. He was riveted. “I [just] loved airports,” Fernandes says. “I thought they were happy places, and I thought, ‘Wouldn’t it be cool to own an airline?’ ”

Fernandes decided he, too, could build a low-budget airline.

 width= Top: After a successful career in the music industry, Anthony “Tony” Fernandes took the next logical step: He bought himself an airline. Above: When Fernandes started shopping around, AirAsia had just two planes. Today it has an 180-plane fleet, 7,000 employees and a $2 billion valuation. Images credit: Charles Pertwee/Bloomberg.

Advisors told Fernandes to buy an existing airline rather than develop one from scratch, and soon a little-known airline called AirAsia caught his eye. Owned by the Malaysian government, it had just two aircraft, a staff of 250 and debts of more than $11 million. Along with that debt burden was a guarantee that the airline’s parent company, DRB-Hicom, had made to GE Capital Aviation Services (GECAS), potentially blocking a deal.

In order to close the deal, Fernandes needed GECAS to drop the guarantee. He decided to cold call Mike Jones, a director at GECAS in Singapore, and the two met at the airport to chat over a cup of coffee.  “Take a risk on me,” the entrepreneur told him.

The risks were obvious. Fernandes was not only an unknown quantity, but conventional wisdom at the time also suggested no-frills airlines wouldn’t work in Asia like they did in Europe and the United States. Flying at the time was considered something only for the affluent, and it was unclear whether average consumers would purchase low-cost tickets.

Yet to Jones, Fernandes displayed the boldness necessary for a business that deals with breathtakingly high numbers. (A decade later, Fernandes would make one of the largest-ever single orders for commercial aircraft in history, buying 200 aircraft from Airbus with a list value of $18 billion.) “He had a very strong vision for what he wanted the airline to be,” Jones says. “He had a huge amount of energy.”

After more meetings with GECAS managers in the U.S., GECAS agreed to drop its guarantee, allowing the former music executive to buy AirAsia on the cheap. Fernandes mortgaged his home and used all his savings to help start to pay off the company’s debt. He then went to GECAS again to help him lease a handful of secondhand aircraft to grow AirAsia’s fleet. “That was the making of AirAsia,” Fernandes says.

Few people know that airlines don’t own many of the airplanes they fly. In fact, they lease around 40 percent of their fleets on average today. The number of leased planes was less than 1 percent some 50 years ago. The trend has taken off because it leaves airlines with extra capital to operate the business, and it spreads more risk to the lessor. The model is a bit like leasing a car — especially as technologies change, an airline might want the option to upgrade some of its aircraft sooner than a plane’s typical 25-year-lifespan.

It certainly worked for Fernandes. Within a year of buying AirAsia and subsequently growing his fleet, he’d cleared all the company’s debts thanks partially to a growing traveling class in Asia. In 2016, an estimated 100 million Asians took their first plane ride. And while Fernandes now has the capital to buy jets directly from Airbus, he chose to sit down with Jones and the GECAS team in late 2016 to discuss leasing some airplanes again.

Fernandes’ deals with GECAS are part of a wider trend of rapid growth in aviation that has managed to power through the dotcom bubble and even the 2007 financial crisis. The global middle class is projected to double over the next 15 years, and the number of planes in the sky is forecast to double by 2036, with airlines expected to invest an incredible $5.6 trillion to pick up 38,000 new aircraft.

That initial meeting over coffee was not only a catalyst to building one of the world’s most successful airlines, it provided an important lesson for Fernandes too. “In my whole life, any email that comes to me or from a client, I always take it very seriously,” he says. “I learned a little bit of that from Mike [Jones] because he didn’t fob me off. You never know what can come from it.”