How Azran Osman-Rani reinvented low-cost airline business

AirAsia X's CEO finds challenging the accepted commercial wisdom risky but fun.

This article is from the November 2013 issue of INTHEBLACK.

Azran Osman-Rani FCPA is reinventing the business model of low‑cost airlines.

As founding chief executive of Malaysia’s AirAsia X, Osman-Rani has challenged the practices of industry icons easyJet, Ryanair and Southwest Airlines and six years on, has proved things can indeed be done differently.

The Malaysian-born, Stanford-educated Osman-Rani will be forever associated with questioning the status quo.

He is outsmarting the competition, taking risks and astounding the analysts. He says taking on the turbulent high-cost, low-margin airline industry is “fun”.
But has the airline’s initial public offering process in June inhibited the innovative thinking that has become his calling card?

Osman-Rani told former CPA Australia chief executive Alex Malley that right now, he’s still concentrating on doing what’s right for the company rather than making the quarterly results sing.

Bumpy ride: We had problems being seen as a legitimate.
Malley: Azran, you’ve always said you are a restless soul. What does that mean?

Osman-Rani: I’m never happy even when things are going OK. I’m always looking for what’s different, what’s next. It’s just how I’m wired. It’s a curse sometimes.

Malley: From a leadership point of view, it’s not a bad attitude. Coming back to you growing up, your parents were quite encouraging of you having an independent view from an early age.

Osman-Rani: Exactly. Both my parents were university professors and I grew up in an environment where they would bring their colleagues home for dinner and, even as a four‑year-old, I had the opportunity to interact with adults.

I was asked to speak and express myself. That set the foundation for my self‑confidence: that you don’t have limits imposed on you, whether by family or the school system you grew up with.

Malley: Did you find when you were at school in those early years it was difficult to be stimulated by the kids your own age?

Osman-Rani: Definitely. I ended up sometimes creating my own games and forming my own teams
Most kids my age want to go onto the football field and for me it was like, “well, that’s what everybody is doing, why can’t we do it differently with four goals and three teams?”.

Malley: You’ve got that adventurous spirit and you’ve brought that into aviation. What brought about your introduction to this role?

Osman-Rani: Air Asia group executive chairman Tony Fernandes had this idea that there was a big, untapped opportunity to take the low-cost model beyond the four-hour [flight] limitation.

That’s what all the big established players do from Ryanair to easyJet to Southwest Airlines, and everyone who had tried to do long-haul before that had failed.

Everybody thinks this is about the limit of what a low-cost carrier should do. Tony said, “no, I think we can do more” and naturally his board and shareholders thought it was pretty dumb and too risky. He said “if that’s the case, let’s create a separate company”.

He needed to find someone who was gullible enough, who didn’t know that you’re not supposed to be able to do this.

A mutual friend connected us. Tony was attracted to what I was doing before, which was in the satellite television broadcasting industry, in business development.

I was going into frontier places like Indonesia, India, China and having to negotiate deals with local partners, invest, set up teams from day one in a small office with two rickety desks.

In Indonesia, for example, in 10 months we went from a small office to two floors of a building with 400 people with a satellite broadcasting centre which was functionally transmitting in a nationwide distribution channel.

It was about moving very fast, taking on whatever stood in your way, solving problems and building up the business.

Malley: Looking back now as having started a business from scratch, what would you do differently if you had the same opportunity again?

Osman-Rani and Alex Malley meet at CPA Congress in Kuala Lumpur | Photo: Aaron Chin

Osman-Rani: The market was clearly there, it was latent, untapped and the overall formula was the right formula.

We had a lot of challenges, from being seen as a legitimate airline in the eyes of governments who are also shareholders of competing airlines to not being able to get rights to fly where we wanted.

We had the huge oil spike, the global financial crisis, H1N1 [bird flu], volcanoes erupting, earthquakes in Christchurch, earthquakes in Japan.

But if you can get through all of that, you become resilient for the next set of pressures. You’ve got to try to go in there knowing you are going to make several mistakes and it’s OK to make mistakes.

That’s the only way you learn because if you keep trying to plan and analyse you never get things done. You don’t see the real consequences.

You can’t anticipate customer reaction or government reaction or what kinds of issues will arise.

I think I would have spent a lot more time with the team up-front. This is always a challenge in a start-up. To be frank, my batting average in terms of hiring and appointing people was 50 per cent at best.

So could I have spent a bit more time and got that to 70 per cent or 75 per cent and made a huge difference? Probably. One of those wrong decisions it can take you more than 12 months to recover from.

Malley: To a person who has led organisations and who is trained as an accountant, the airline industry is such a counter-intuitive business.

The world is moving to reduce fixed costs, be online, be nimble – yet this business is about high-priced assets and high fixed costs. Do you get so used to it you forget how counter-intuitive it appears?

Osman-Rani: The revenue side of the equation is fast-moving, customers are sensitive, but your investments are long cycle and getting that match right is very, very tough.

It’s a really crappy industry, certainly, for investors. But people still need to get from point A to point B. You can’t imagine a world today where you don’t have planes.

And because it’s so particularly difficult, it creates more room for differentiation if you out-execute the others. It’s kind of fun.

It’s not smooth, it’s not sexy in a way that IT is, but it’s fun taking on this status quo. You’ve got to have a certain evil mindset to enjoy being in that situation.

Malley: Your chairman, Tony Fernandes, from what I’ve heard, gives good-quality advice
and, given what he’s achieved, he will have a confident view.

But you’re running the business, you know what it is about and you’re confident about your view: give me a sense of those moments together.

Osman-Rani: Boy, it can be ground zero nuclear, or it can be great when we build on each other. One of the things I’ve learnt with our two dynamics is it works best when we are in person.

There is something about having a face-to-face discussion – you pick up a lot of non‑verbal cues, you can suss it out.

I think where I’ve had real disasters has been on emails and text messages. We’ve created this monster, this email thing.

Malley: When you go to talk to your board these days, is it a bouncing board? Is it a report-to board? Or is it something in the middle?

Osman-Rani: Interestingly for us, we are going through a real transition because we just completed our IPO. So the board composition has changed.

We now have a third independent directors and they clearly act in a very different manner than principals who have their investments.

We also have two international investors who invested in us up front and are happy that they
have completed the IPO and are probably considering their exit strategy.

So it is a balance, because Tony and some of his Air Asia colleagues are looking at this like their life, and they have a very different view than the investors.

Then you’ve got independent directors who are saying, let’s not take any risk. Our agenda post-IPO is basically a couple of very big decisions.

Do we want to invest in a lot more planes to make sure we are more than double the size of our competitors? And we are going to invest in opening up AirAsia X companies in other countries. That’s a different ball game. But if we could do it, it really changes the game.

Malley: How has that changed your personal chemistry?

Osman-Rani: I don’t think there is anything intrinsic that changes about me. For the moment I’ve not succumbed to “OK, you know what, let’s just meet quarterly results”.

I’m still a big believer in doing what’s right. It is a tough challenge because of the speed bumps, the due process, because of the spotlight on you, especially within the investor community.

You can’t help but look at the share price and look at what research analysts write about you.

Malley: You know and I know when you are sitting in a boardroom the tone of the conversations tell you exactly where things are and you’re now facing some very different tones?

Osman-Rani: In Asian contexts, what’s more telling are the conversations outside the boardroom. You almost have to anticipate everything, since the actual board meeting itself is almost like a show.

Malley: If you take the proverbial crystal ball out 20 years, what does the airline industry look like?

Osman-Rani: Brand centricity is going to really come to the fore. You’ve got to have a clear proposition for the people you serve, just like in the hotel industry.

You don’t see a Four Seasons trying to serve the mass market. You don’t see a Mercedes‑Benz or BMW doing the same. Likewise, you’re not going to see Zara or H&M trying to come up with a premium product.

The problem with the airline industry historically is that it has been all things to everyone, the same plane carries the first class and economy class passengers.

I think that clearer polarisation will ultimately happen, so the guys who are stuck in between, who either don’t have the lowest cost base or don’t have the premium quality of Singapore Airlines, you can’t survive.

These guys are being propped up by national governments. At some point, no government has an unlimited budget.

Second, I think the way airlines try to achieve global scale indirectly through alliances, it’s a patchwork solution, and that’s because no one wants to give up brand sovereignty.

The problem is, customers don’t think of their alliances as their primary brand. So your experience becomes fractured in terms of your overall brand journey.

The whole concept of alliance may take longer, but it has to give way. Take Qantas and Emirates – in 10 years one of them will go, there will be one brand.

One of the problems with the low-cost carrier model is they’re region-specific because they use small planes. But we finally cracked the code to make big planes work, you can create a truly global network with a multi‑hub model.

If you think about leading brands such as Emirates and Singapore, their network model, mathematically speaking, is crude, based on one place – going out and coming back.

Now, think about if we had four different hubs serving multiple destinations from multiple points.

That means thinking beyond “I am a Hong Kong-based airline, I’m a Singapore airline – but really, I’m a brand and can be anywhere”. That is an unstoppable force. It will come.

Low-cost comfort: AirAsia X’s angled flatbed seats.

The innovator

When we started, the convention for low-cost carriers was free seating. I thought, when you extend that to a big plane with more than 300 seats, you’re going to have a bit of a circus every time.

Plus, on a long-haul flight people are much more particular about where they sit. So we created a model based on assigned seating.

You could pay a small fee to choose where you sat, but even if you didn’t pay you would still get an assigned seat and we found a way of operationally doing it so it didn’t affect the turnaround process.

Interestingly, 18 months after we launched, Air Asia also adopted the model and last year, easyJet finally adopted it – easyJet is the big global low‑cost carrier (LCC) icon.

It cascades through the industry down to simple things like pre-booking meals – again, long-haul you can’t get your meals wrong.

If you don’t have enough, people are going to be horribly upset and if you have too much you’re going to kill the margins.

Then, low-cost carriers around the world say they are only a point‑to‑point carrier. So we came up with a way of making it easier to buy two seamless tickets and have your bags transferred.

Angled flatbed seats – everybody thought this would add tremendous cost and complexity to the business and it defies all the LCC conventions of having as many seats as possible.

But long‑haul travel is holiday-oriented, very seasonal, and because of that the last 10 per cent of your real estate only gets filled up four to five months of the year.

With a different customer segment you get more with that real estate than you would if it were all economy.

My favourite example comes back to observing passengers. In economy you might have one of three empty seats and hope no one sits next to you.

We came up with a product called “empty seat option” where we pre-sell the option – not a guarantee, but a chance – to get all three seats.

But if all are sold, we’ll refund you your A$30.

AirAsia X factbox

Founded: 2007. Azran Osman-Rani appointed CEO July 2007

Notable initial investor: Sir Richard Branson, of Virgin fame

Destinations: 15 across China, Australia, Taiwan, South Korea, Japan, Nepal and the Middle East. The airline’s inaugural flight from Adelaide was in October and by 2014 it will fly twice daily from Sydney, Melbourne and Perth

Staff: 1550

Airline group: Air Asia, Malaysia’s domestic low‑cost carrier

Debut flight: Kuala Lumpur to the Gold Coast, Queensland, November 2007

Fleet size: 13 Airbus A330-300s

Loyalty program: partners with AirAsia’s program, BIG

IPO: June 2013, Malaysia’s largest. Earned the company US$310 million

Milestones: AirAsia X operates with the world’s lowest airline unit cost and its highest aircraft utilisation. It achieved positive operating cash flow within six months of launch and made a net profit by the end of 2008. In 2009 it broke the million-passenger barrier and since launch it has carried more than nine million passengers
This article is from the November 2013 issue of INTHEBLACK.

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