AirAsia’s promising digital ventures provide little lift in crisis

An empty AirAsia flight's economy class. Photo by JC Gellidon on Unsplash.

Before AirAsia Group could fully capitalise on the Asian middle-class boom, and morph into what founder Tony Fernandes characterised as the “Amazon of the skies,” the coronavirus pandemic scuppered its plans.

Asia’s largest low-cost carrier was counting on its 100-million-passengers-a-year base and the massive mounds of data it had acquired to grow from an airline into a Southeast Asia-wide travel and financial platform.

But now, as air travel ground to a halt and industry players forecast a bleak future for low-cost carriers, in particular, the once high-flying AirAsia is fighting for survival. Attention and resources are being dedicated to keeping its core airline business as a going concern as its ‘super app’ ambitions take a back seat.

Some industry analysts have expressed doubt that in the face of dramatically reduced travel demand, the existing business models of budget carriers and leisure hospitality plays can be sustained in a post-COVID-19 world.

Nevertheless, the charismatic Fernandes has been characteristically upbeat about AirAsia’s future. “I know I’m ambitious, but I am confident that in 2021, we can be profitable,” he told Nikkei Asian Review earlier in July. But is sentiment enough? If the core business does not make it, how will its spin-off ventures fare?

Turbulence compounded

Even before the coronavirus pandemic decimated global economic activity, AirAsia was visibly suffering.

In 2019, AirAsia’s revenue grew 11.47 per cent to 11.86 billion ringgit, from 10.64 billion ringgit in 2018. But it slipped into the red with a net loss of 283.22 million ringgit, partly due to recognition of one-off costs and the share of losses in AirAsia India. This compared to a net profit of 1.7 billion ringgit recorded in 2018.

Then as borders closed in bids to contain the virus spread, AirAsia reported a net loss of 803.85 million ringgit for the first three months of 2020. A year ago, the group had recorded a net profit of 96.09 million ringgit for the same period. The weaker performance this year came on the back of a fall in Q1 revenue to 2.31 billion ringgit, down 15.4 per cent from 2.73 billion ringgit a year ago.

Analysts warn the worst is yet to come for the company as the March quarterly results only partly reflected the impact of the travel ban imposed on its home turf and other markets. AirAsia operates joint ventures or affiliates in Thailand, Indonesia, the Philippines, India and Japan. It also has a long-haul arm, separately listed in Malaysia under AirAsia X Bhd.

CGS-CIMB analyst Raymond Yap noted in a July 7 report that the lockdowns and border closures across the region resulted in a more than 85 per cent year-on-year fall in AirAsia’s capacity, measured in available seat kilometres (ASKs). Yap expects losses to widen in the next two quarters and estimates that AirAsia would need to raise close to 3 billion ringgit ($708 million) to keep afloat.

In its research note, DBS Research said it expects AirAsia’s losses to hit 1.3 billion ringgit in 2020. 

“The situation is still very fluid, and there are a lot of uncertainties. I expect AirAsia to be loss-making next year,” Hong Leong Investment Bank aviation analyst Daniel Wong told DealStreetAsia. 

Earnings visibility will also depend on how the COVID-19 pandemic pans out. A prolonged crisis will affect airlines’ pricing strategies and could require further cost-cutting.

“Unless [AirAsia] can cut its expenses sharply and everyone starts flying before year-end, it is still difficult for them to turnaround next year,” Wong said. He pointed out that airlines are bracing for cutthroat competition as air routes gradually reopen and carriers seek to maximise fleet utilisation in the face of lower travel demand. 

On July 7, external auditors Ernst & Young expressed doubt on AirAsia’s ability to continue as a going concern given the COVID-19 pandemic and the current economic conditions. The auditor noted that in 2019, AirAsia’s liabilities exceeded current assets by 1.84 billion ringgit ($431.7 million). 

“The travel and border restrictions implemented by countries around the world has led to a significant fall in demand for air travel which impacted the Group’s financial performance and cash flows,” EY said in a report attached to a regulatory filing. 

Against this crippling backdrop, how much of a difference can AirAsia’s ventures – business outside of the core air passenger services – make?

Venturing beyond

The story of AirAsia has been one of going against the odds to come out on top.

Fernandes famously started the business by taking over a crippled Malaysian carrier for 1 ringgit and shouldering $11 million in debt. He managed to turn it into a successful carrier that outshone the national airline as well as its regional peers.

In 2018, Fernandes pushed a so-called digital strategy that saw the group transfer its non-airline businesses – these range from its logistics unit to a travel and lifestyle platform – to RedBeat Ventures.

RedBeat Ventures now holds the logistics, fintech, and loyalty programme units. These include BigPay, a digital challenger bank targeted at Southeast Asian millennials and travellers. 

RedBeat Ventures has also partnered with Universal Music Group to form a new label, RedRecords, in December last year, as it aimed to build a lifestyle brand.

In March 2019, RedBeat announced a global venture capital (VC) fund, RedBeat Capital, alongside a strategic partnership with Silicon Valley VC firm 500 Startups. The venture was to support post-seed stage startups seeking to enter or expand their presence in Southeast Asia, with a particular focus on travel and lifestyle, logistics and fintech. 

Meanwhile, AirAsia.com was revamped to an online marketplace that cross-sells merchandise, hotel and travel packages, and even seats on rival airlines’ planes. 

AirAsia also ventured into the restaurant business, opening Santan restaurant to sell in-flight meals. Santan was said to be working on blueprints for a franchise business model, a digital farm-to-business platform, and a cloud kitchen.  

That’s not all. The airline also opened up its belly space and logistics infrastructure to direct businesses and consumers through its logistics arm Teleport. In April, during Malaysia’s Movement Control Order (MCO) period, it was reported that Teleport mobilised its passenger aircraft as cargo-only fleet following the grounding of most of AirAsia’s fleet in the past months.

“We expanded Teleport, our cross-border air cargo logistics business to cover last-mile ground delivery, offering same-day delivery service within Klang Valley in Kuala Lumpur,” AirAsia.com CEO Karen Chan told DealStreetAsia in an email interview.

On the face of it, AirAsia’s efforts should stand it in good stead in a crisis. 

“The diversification is, if anything, more important because they need other revenues to help get them through this crisis,” said aviation industry analyst Brendan Sobie.

Indeed, other airlines have embarked on similar routes. Hong Kong’s Cathay Pacific has started food delivery services in selected areas, Hong Kong media Ming Pao reported.

Some of AirAsia’s non-airline businesses continue to see growth, its first-quarter financials showed.

During the quarter, logistics arm Teleport recorded a 49 per cent increase in revenue to 150.4 million ringgit as it completed its cargo consolidation across the group’s ASEAN airline operating companies.

BigPay reported a 161 per cent growth in revenue as it gains traction with the expansion of remittance corridors to include India, Bangladesh and Nepal. Website AirAsia.com’s revenue was up 118 per cent on the back of new offers and flight and hotel bundle packages.

But most of the non-airline units continue to be loss-making, except for Teleport which reported an EBITDA of 63.18 million ringgit. These businesses collectively accounted for less than 8 per cent of AirAsia’s total revenue during the quarter ended March 31, 2020. AirAsia.com reported a loss of 5.27 million ringgit in the same quarter.

RedBeat Ventures’ Portfolio

Expand Table

BusinessSectorDescription/Activities
AirAsia.comTravel & Financial platform, Online Travel Agencyflight booking, e-commerce platform, travel packages, hotels
- OURFOODe-commerce & logisticson-demand, pre-order, payment & food delivery service
- OURSHOPe-commercee-commerce marketplace, online shopping mall
- OURFARMe-commercee-commerce platform for farmers, supported by Malaysia agriculture ministry
- OURDAILYmass media/lifestylecontent provider, creative agency, record label
TELEPORT Logisticsair cargo, door-to-door service, social commerce merchants, Freightchain (digital air cargo network run on blockchain), customs clearance services
BIGLIFELoyalty programmeloyalty programme with 22m members, more than 200 merchants
BIGPAYFinteche-wallet, remittance services, potential applicant for digital banking license
SANTANHospitality/Food restaurant, fast food franchise, food catering, food delivery
RedBeat AcademyEducationone-stop tech, leadership and innovation academy, a collaboration with Google

In 2019, AirAsia completed reorganising its corporate structure into two main areas – airline & RedBeat Ventures.

Still, there are big plans for AirAsia.com, as Chan told DealStreetAsia. Among upcoming initiatives is a B2B2C travel retail e-commerce portal that will bring bulk purchases of duty-free items by travel agents to customers’ homes. 

“AirAsia.com will be launching AirAsia Health – our online medical travel platform, where healthcare meets travel,” Chan added. This will be a regional platform in partnership with healthcare providers, offering end-to-end medical services from online consultations, medical treatments and on-ground logistics to post-recovery check-up.

And, in anticipation of borders reopening, she said AirAsia.com is also in discussions with key international airlines to connect their European and MEA (Middle East Airlines) networks directly with AirAsia’s ASEAN network.

“Our founder Tony Fernandes continues to remind us to ‘never waste a crisis.’ Some positive consequences of COVID-19 have been the coming together of the travel industry. Strategic collaborations were forged in solidarity to get through this pandemic,” Chan said, pointing to joint efforts by hotels and other tourism operators to stimulate travel demand.

Raising cash

It remains to be seen how AirAsia and RedBeat are going to fund their endeavours, or at the least, satisfy the market that the group remains a going concern.

RedBeat has yet to respond to DealStreetAsia’s queries on its plans. In an interview with Nikkei Asian Review last year, RedBeat CEO Aireen Omar said it is opening  to outside investors ahead of a possible IPO, which she said was still several years away. 

“We will do a few rounds of financing, then would decide on an IPO or any other way of monetising the digital asset,” she was quoted as saying.

In any case, AirAsia has signalled it plans to tap the debt and equity markets to ease cashflow. It plans to raise 2.4 billion ringgit, including up to 1 billion ringgit from banks.

Of the debt funding, Fernandes said in a July 9 statement that “a certain portion” would be eligible for the government guarantee loan under the Danajamin PRIHATIN Guarantee scheme in Malaysia.

“Other than Malaysia, our Philippine and Indonesia entities are currently in various stages of bank loan applications. In the Philippines, we have applied for the government-guaranteed loan under the Philippine Economic Stimulus Act (PESA), with an expected positive outcome,” he said.

In June, Malaysian newspaper The Star reported that AirAsia was in talks to sell 10 per cent of its shares to South Korea’s third-largest conglomerate SK Corp, through a private placement at 1 ringgit per share. If true, the deal could raise about 334.2 million ringgit.

In response to a query, AirAsia said it has applied for bank loans to shore up its liquidity and has also been presented with proposals to raise capital to strengthen its equity base from investment bankers and lenders. Additionally, it has ongoing deliberations with several parties for joint-ventures and collaborations that may result in additional third-party investments in specific segments of the group’s business, it said. 

And while it looks as if AirAsia’s non-airline businesses are improving, their contributions to the group business are still minimal. “The large chunk of revenue still comes from its airline business. It’s more than 90 per cent,” said Hong Leong’s Wong.

But he believes it makes sense for AirAsia to leverage its infrastructure to offer more products for its existing customer base. “If these digital businesses can disrupt the market, it could be a game-changer for the whole group,” he said.

Still, AirAsia’s core business model is under extreme pressure and, with no end to the pandemic in sight, the cash raised now could dry up in a matter of months. The group’s monthly cash burn rate is estimated at 527 million ringgit, a CGS CIMB research note in April showed. In a report dated July 10, Nomura said AirAsia’s cash burn run rate (excluding leases and fuel related costs and some portion of aircraft maintenance) during the second quarter  averaged at about RM150 million. Lease payments has been deferred by three months so far, and ongoing negotiations are currently in the works for other possibilities, in the form of discounts, waivers in exchange for longer lease tenure, the research house noted. 

Another analyst pointed out that while diversifying and expanding into non-airline digital businesses are always a good idea, the priority now is to raise sufficient funds to keep the company afloat.

Separately, one investor told DealStreetAsia that he was eyeing potential distressed debt that the airline could be forced to issue. 

“Amazon of travel? They’ll need to survive this current crisis first,” the analyst said.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.