THE RISE OF TONY FERNANDES AND AIRASIA IN MALAYSIA1

SHAHRIL EASHAK ISMAIL Monash Asia Institute, Monash University, Caulfield East Vic 3145, Australia Email: seism1@student.monash.edu

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This paper was presented to the 18 Biennial Conference of the Asian Studies Association

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of Australia in Adelaide, 5-8 July 2010. It has been peer reviewed via a double referee process and appears on the Conference Proceedings Website by the permission of the author who retains copyright. This paper may be downloaded for fair use under the Copyright Act (1954), its later amendments and other relevant legislation.

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The Rise of Tony Fernandes and AirAsia in Malaysia This article discusses the emergence of Tony Fernandes and AirAsia. At first, when AirAsia was relaunched as a Low-Cost Carrier (LCC) under the leadership of Fernandes, no one thought the airliner would survive, let alone become a symbol of the liberalisation of the aviation industry in Southeast Asia. Second, Fernandes, a Malaysian Indian of Portuguese Malaccan descent – obviously not a Bumiputra2 - was able to thrive as an entrepreneur in an environment where the government gave top priority to Bumiputra entrepreneurs. These issues are discussed in this paper.

Malaysia’s New Economic Policy (NEP) The Malaysian Government has played a significant role in Malaysia’s rapid economic growth. After the independence in August 1957, the economy shifted from agriculture to industrialisation; an import-substitution strategy was adopted to reduce dependency on primary sector and simultaneously diversify the economy. By the late 1960s, with the exhaustion of import substitution, the Malaysian government made the transition to exportoriented industrialisation.

The May 1969 election and ensuing race riots resulted in the increased state intervention, with the government introducing policies to address the uneven distribution of wealth between the three main ethnic groups in the country, namely the Bumiputra, Chinese and Indians. The government believed that disparities in income levels could be reduced by providing an environment that support entrepreneurial growth, especially for Bumiputra. Hence, in 1970 New Economic Policy (NEP) began.

Despite the NEP, it is a general belief in Malaysia that when it comes to entrepreneurial endeavours, the Chinese are the experts, and, to a certain extent, the Indian community (Othman, Sulaiman, Zainudin, & Hasan, 2008, p. 2). In contrast, Bumiputras are alleged not to have a tradition of entrepreneurship. Ever since the British occupation, Bumiputras were

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Bumiputras, directly translated to “Sons of the soil” refers to ethnic Malays and other

indigenous groups.

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usually employed in government service. The NEP sought to change all these by the following policies: 1. Awarding large government contracts to Bumiputra companies. 2. Requiring new listings on the Malaysia stock exchange to have an initial 30 per cent Bumiputra equity ownership. 3. The allocation of at least 30 per cent of government contracts for public and private works to Bumiputra contractors. 4. Requiring all private companies to offer employment opportunities to Bumiputras. 5. Ensuring that a minimum of 60 per cent of government procurements, contract work and other related projects be awarded to Bumiputra entrepreneurs. 6. Making government finance available for the exclusive use of Bumiputra business people.

The Malaysian government claimed that the NEP fulfilled its goals since the nation was acknowledged as one of the ten fastest-growing economies in the world from 1970 to 1990, a period that coincided with the NEP’s implementation. This conclusion was in agreement with the research on Malaysian economic development3 conducted by the Harvard Institute for International Development (HIID) and Institute of Strategic and International Studies in Kuala Lumpur (ISIS Malaysia) (Snodgrass, 1996, p. 1). Despite this and the new policies that superseded the NEP since 1990, the affirmative action programme remains controversial. Indeed, many people believe that the NEP continues to define current government development policies in Malaysia. Critics of the NEP believe that the policy was only partially successful in, for example, reducing socio-economic disparity and encouraging the arrogance of Bumiputras (Anshar, 2008). Research by the Australian Government’s Department of Foreign Affair4 (2005, p. xiii) was also critical about the alleged business restrictions that the NEP encouraged – it criticised that these were counterproductive and may even have thwarted the development of a vibrant and resilient business community. 3 4

The research looks into the Malaysian economic development from 1970 to 1990. Malaysia: An Economy Transformed (2005). This report on the Malaysian business

environment prepared by The Economic Analytical Unit (formerly the East Asia Analytical Unit) is part of the Department of Foreign Affairs and Trade and is responsible for publishing reports analysing major trade and economic issues of relevance to Australia.

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The Entrepreneurial Tony Fernandes If the NEP was restrictive of non-Malay entrepreneurship, how was it possible that Fernandes, a non Bumiputra could emerge as the most celebrated entrepreneur in Malaysia? My research suggests that the NEP did not stifle entrepreneurship and that Fernandes is not the only successful non Bumiputra business person in Malaysia. This is a complex debate, and my doctoral thesis seeks to address it in greater detail. But in this paper I will outline some of the considerations that need to be taken into account in explaining how and why Fernandes rose to become one of Malaysia’s millionaires. Fernandes was born on 30th April 1964 into a family that had no prior knowledge or experience of business; his father was a physician from Goa (India) and his mother was a music teacher of Malaccan-Portuguese descent. In other words, Fernandes came from an Indian-Malaysian family of professionals; the new middle class that emerged in Malaysia from the 1960s. Like many other middle class families, the Fernandes had sufficient wealth to send Fernandes to study in England.

Fernandes, at the age of 12, went to London in 1976 to study at Epsom College and attended the London School of Economics in which he graduated in 1987 with a degree in accounting (BusinessWeek, 2009). In total, he spent some 11 years in London, a painful separation from his parents who could not afford to pay for his flights back to Malaysia. It was this experience, according to Brown5 (2010) that gave him an insight into the benefits of perhaps developing cheap international carriers. However, at this stage his career path did not take him into the airline business.

Upon graduation from the London School of Economics Fernandes took the normal route of working in accounting jobs. Fernandes worked briefly at Virgin Communications, a television division of the Virgin Group of companies. What did Fernandes learn from Virgin? 5

Kevin Brown is a journalist for the Financial Times. He was appointed Asia regional

correspondent for the Financial Times in September 2009, based in Singapore. Prior to this role, he was Asia news editor. Previously, he was the personal finance editor of the Financial Times.

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The main benefit was the experience of working in a global company, acquiring insights into the running of an international business, and developing an impressive resume which worked in his favour in being appointed to the position of Senior Financial Analyst at Warner Music International6 in London. At Warner, Fernandes showed strong business acumen. He started in 1989 as Senior Financial Analyst, and by 2001, when he resigned from Warner, he was the Vice President, ASEAN region. Within 12 years at Warner he was promoted four times; that is on average he was promoted every three years.

Fernandes’ time at Warner Music was significant because it was during this period that Fernandes matured and transformed himself from being a mere accountant into a strategist with an analytical mind. Commentators such as Ionides7 (2004) believed that Fernandes’ ability to think strategically, and understand his environment from a macro perspective, was the reason why Fernandes felt compelled not to be part of Warner’s ill-fated merger with America Online Inc in 2001. This incident was said to be the catalyst for Fernandes’ decision to switch careers after 12 years with Warner. A word of caution is needed: the early history of Fernandes’ emergence as an entrepreneur is based on the business press and journals. As part of my doctoral work I will be examining these issues in greater detail, and therefore reserve the right to correct the narrative as it currently stands.

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Warner Music International is part of the Warner Music Group which is the third-largest

business group and family of record labels in the recording industry. Warner Music Group also has a music publishing arm called Warner/Chappell Music, which is currently one of the world's largest music-publishing companies.
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Aviation analyst Nicholas Ionides is Singapore Airlines Vice President of Public Affairs.

His appointment came into effect on 4 May 2009. In 2010, Mr Ionides, 37 is the Singaporebased Managing Editor (Asia) at Reed Business Information, publishers of Flight International and Airline Business Magazines and the Air Transport Intelligence and Flightglobal news websites. He was the aviation editor for Hong Kong’s South China Morning Post newspaper before coming to Singapore.

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State Own Enterprise, Privatisation and Picking Winners Initially, Malaysia’s industrialisation involved the state taking on the role of entrepreneur. Many state owned enterprises (SOEs) were established, including during the NEP period. But evidence emerged during the 1980s of the poor development of these and their disappointing performance. However, these problems were obscured by high profits from some SOEs such as Petronas8. According to the work of Adam and Cavendish (1995) cited by Jomo and Tan (2010, p. 9), during the period 1980-1988, about 40 per cent of Malaysia SOEs were either ‘sick’, or ‘weak’, indicating the existence of unprofitable companies. The Malaysian government under the leadership of Tun Mahathir Mohamad9 was aware of the poor performance of the Malaysian SOEs required action. One of the ways that was used to make SOEs more competitive was to encourage privatisation from 1983 onwards.

Despite privatisation, Malaysia’s industrialisation through the implementation of exportoriented strategy remained inspired by the economic and technology development of Japan and Korea (Abdullah & Muhammad, 2008, p. 2). The Japanese and Korean models brought together the state and private sectors in a special relationship to encourage rapid industrialisation in the national interest. By privatising SOEs, Mahathir hoped to model Malaysia’s industrialisation and economic growth on the Japanese experience. Chalmers Johnson (1982), attributed Japan’s post-war industrial growth to the Ministry of International Trade and Industry’s (MITI) interventionist role in influencing corporate decision making. The industries identified as ‘industrial winners’ by MITI, were to receive support from the Japanese government. In Japan’s case, government leadership was the driving factor of the economy with the private sector as a willing follower.

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Petronas, short for Petroliam Nasional Berhad, is a Malaysian-owned oil and gas company.

Wholly owned by the Government, the corporation is vested with the entire oil and gas resources in Malaysia. The discovery petroleum reserves in 1973 and the creation of government oil company Petronas the following year (August 17, 1974), increased the Malaysian government’s ability to spend, and hence, SOE expansion.
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Tun Mahathir Mohamad was Prime Minister of Malaysia throughout 1981 to 2003.

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This interpretation of Japan’s rapid industrialisation has been discussed by scholars. For example, Chalmers Johnson10 emphasised in his work the special role that the Japanese state, via MITI, played in post-war Japan. The government took on developmental functions by targeting industries for privileged government support. Johnson (1982, pp. 305 - 306) believed that credit for the post-war Japanese miracle should go primarily to conscious and consistent government policies. In Japan, MITI was one of the most powerful agencies in the Japanese government. Its duty was to use state intervention in a manner that conformed to the needs of the market. Mahathir wanted Malaysia to emulate the Japan’s achievement in picking winners, and one example of this was the establishment of Malaysian Airlines.

Malaysia Airlines Malaysian Airlines was established in 1937 under the name of Malayan Airways Limited. After Malaysia gained its independence from Britain in 1957, the airline changed its name to Malaysian Airways. It changed its name again in 1966 to Malaysia-Singapore Airlines as a result of a joint ownership by the governments of Malaysia and Singapore. In 1972 when both countries decided to create their separate airliners, Malaysia-Singapore Airlines became Malaysia Airlines System. Fifteen years later the airline management decided to rename the airline again, and from 1987 on it is known as Malaysia Airlines (MAS) (MalaysiaAirlines, 2010).

In setting up the national airliner the government acted as the entrepreneur. But Mahathir believed that the government would benefit more if part of MAS could be privatised. By picking the aviation industry as a winner, the Malaysian government would support MAS, which in essence became a mixed state-private sector company. In 1985 MAS was privatised with the government holding a 42% stake. According to Zainal Abidin (2005, p. 3), even

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Johnson’s book MITI and the Japanese Miracle, on the Japanese Ministry of International

Trade and Industry was the preeminent study of the country's development and created the subfield of what could be called the political economy of development. He coined the term "developmental state." As a public intellectual, he first led the "Japan revisionists" who criticised American neoliberal economics with Japan as a model; their arguments faded from view as the Japanese economy stagnated in the mid-90s and beyond.

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though the government did not own the controlling stake in MAS, it held the so-called “golden shares”, which gave it veto rights on major decisions.

Malaysian Airlines, however, has not always been a ‘winner’. With the Asian Financial Crisis in 1997, the airliner suffered losses as high as MYR 260 million. By 2002, MAS recorded five years of consecutive losses and was burdened with approximately USD $2.4 billion worth of debt. In mid 2002, a rescue plan was drawn up and the government became the entrepreneur again by establishing a new holding company, Penerbangan Malaysia (PMB), which took control of MAS’ fleet and assumed all its liabilities. By this process, MAS was remoulded into an SOE (ZainalAbidin, et al., 2005, p. 12).

The history of MAS shows that despite strong government support, the airliner was not immune from financial trouble. It is also well known, that the global aviation industry is a volatile business. Entering this industry is not, therefore, an obviously rational decision. Moreover, the Malaysian government already had a commitment to MAS – the national carrier. However, this knowledge was not a hindrance to Fernandes who was determined to enter into the aviation industry. An interview by Done (2007) indicated that at a stopover in London, Fernandes saw Stelios Haji-Ioannou11, the founder of easyJet Airline12, on television explaining a Low-Cost Carrier model, and Fernandes felt it could work in Southeast Asia. In the following section, I explain how and why Fernandes entered the aviation sector.

11

Sir Stelios Haji-Ioannou, born 14 February 1967, is a Greek Cypriot serial entrepreneur

best known for setting up EasyJet, a low-cost carrier airline. Haji-Ioannou started EasyJet when he was 28.
12

easyJet Airline Company Limited is a British Low-Cost Carrier headquartered at London

Luton Airport. The airliner was established in 1995.

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AirAsia AirAsia was originally established by the Malaysian government as a sister airliner to the major national carrier MAS. It was founded in 1993 by a government-owned conglomerate DRB-HICOM13 and began operations in late 1996. Prior to 2002 MAS was virtually a monopoly operator in the Malaysian domestic aviation market. Being a SOE, it had tremendous government support; this also meant that in most cases the national objectives over-rode commercial considerations. However, the government was more committed toward MAS operations. Perhaps this was why AirAsia failed year after year to bring in profits, even though AirAsia was set up as a sister airliner to cater domestic routes normally not serviced by MAS.

By the time Fernandes came into the picture with the idea of developing a Low-Cost Carrier in 2001, AirAsia was a shell of a company with a massive debt of USD $37 million. Why would Fernandes enter this market and insist on meeting Mahathir in order to persuade Mahathir to give him a license?

Initially, Fernandes intention during the meeting with Mahathir in June 2001 was to get the prime minister’s official endorsement to be a new operator in the Malaysian aviation industry. Journalists such as Pesek (2003) and Ranawana (2001) believed that the Prime Minister saw this meeting as an opportunity for the government to offload the failing AirAsia, which the government was trying to do so for two years .

At the time of the meeting, Fernandes had already registered a company in Kuala Lumpur called TuneAir (in May 2001). It is interesting to note that his three partners, Kamarudin Meranun, Dato’ Pahamin A Rajab, and Abdul Aziz Abu Bakar, were Bumiputras. Did

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DRB-HICOM was the result of a merger between two companies, DRB and HICOM in

1996. The Heavy Industries Corporation of Malaysia Berhad (HICOM) was incorporated in 1980. The Malaysian company plays an integral role in the Manufacturing, Assembly and Distribution within the automotive industry. Diversified Resources Berhad (DRB) incorporated in 1990, has diversified business in the automotive industry, property development and infrastructure, and services.

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Fernandes perhaps try to make himself popular with the government by having Bumiputra partners?

It was reported in the Economist (2009) that at this meeting Mahathir agreed to allow Fernandes and partners to start a new Low-Cost Carrier. But instead of issuing a new license, Mahathir suggested that TuneAir could acquire an airline license by taking over AirAsia. The exact role of Mahathir in this arrangement remains to be analysed in my doctoral thesis, but clearly the needs of the government and the ambition of Fernandes were a good match at this time. An agreement was drafted in September 2001. For a token sum of MYR 1 (about USD $0.26 at the time) TuneAir purchased AirAsia which comprised of two ageing Boeing 737300 jets, and took over of 50% of net liabilities, or around MYR 40 million (USD $11 million) worth of debts (Prystay, 2001). On the 8th December 2001, TuneAir officially acquired 99.25 per cent equity of 51.68 million shares from DRB-HICOM, and took over AirAsia (Li, 2003).

AirAsia’s resurgence Different from the conventional Asian carriers at the time that focused on affluent business travellers, the remodelled AirAsia targeted millions of Asians, many of whom had never flown and wanted inexpensive basic transportation. This fits well with its slogan ‘Now everyone can fly’.

As a Low-Cost Carrier, AirAsia was actually imitating the highly successful Ryanair. Cost cutting measures included the use of a single type of aircraft, online ticketing to eliminate travel agents commission, charging for in-flight meals, reducing turnaround time on the ground, and ensuring frequent flights. It came to no surprise that Connor McCarthy Ryanair’s former Director of Operations served as an adviser to Fernandes (AirAsia, 2006, p. 31). Setting fares as low as USD $0.99, AirAsia commenced its first flight as a Low-Cost Carrier on January 2002 (AirAsia, 2006, p. 10). The following table summarises the key developments in AirAsia from the time of Fernandes’ takeover in 2001 to 2006.

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Table

Summary of key developments in AirAsia from 2001 to 2006

Time September 2001 8 December 2001 th Event TuneAir purchase AirAsia for a token sum of MYR 1. TuneAir officially acquired 99.25 per cent equity of MYR 51.68 million shares from DRB-HICOM.

January 2002

AirAsia took its first flight as a Low-Cost Carrier on 15 January 2002, and it served six destinations.

Year ended 30 June 2002 Year ended 30 June 2004

AirAsia had carried 611,000 passengers. AirAsia served 26 destinations and had carried 2.8 million passengers.

Year ended 30 June 2006

AirAsia served 65 cities and had carried 9.3 million passengers.

Source: Data collated from AirAsia website (www.airasia.com).

Despite the well known contours of AirAsia re-emergence as set out in Table 1, much yet needs to be explained. The financial details of how AirAsia dealt with the debt that it inherited from the Malaysian government is one area that I am currently researching. Another question is the degree to which AirAsia is successfully competing with other regional LowCost Carriers in Southeast Asia. I have started to analyse the balance sheets of AirAsia and also plan to speak with financial experts to test the wide spread assumption that Fernandes is now running a profitable enterprise, a remarkable revival of the loss making SOE that he took over from the Malaysian government. These subjects are the focus of forthcoming research papers by me.

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Conclusion The word ‘entrepreneur’ is derived from the French entreprendre which literally means ‘to undertake’, as in accepting a challenging task. This gives us the picture of the entrepreneur as a risk-taker and innovator who, when successful, contributes to creating economic value (Peredo & McLean, 2006, p. 58). In what sense is Fernandes an entrepreneur? Does he fit the character of an entrepreneur? Can the theories of Schumpeter and others help us to better understand him as a business person?

From the above review of the rise of AirAsia in the context of Malaysia’s long history of state control of industry, it seems that Fernandes was very much a risk taking entrepreneur. But exactly how Fernandes’ entrepreneurial talents compare with the earlier history of state ownership of AirAsia is something that only further research for my doctoral thesis will reveal. This case study is not only about private versus state sector development in Malaysia but it is also a narrative about the openings that have been available to non Bumiputra business people in Malaysia during the last three decades.

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