VIEW: Air Asia's Tony Fernandes to 'fire up' investors

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Kuala Lumpur (The Star/ANN) - He has fired many people on the Apprentice Asia reality show, which came on air this week, and appears to be enjoying it too. Some of those who have watched the show might feel that that must be the style at AirAsia and AirAsia X (AAX), the two airlines he founded with long-time friend Kamarudin Meranun.

But some time early next month, Fernandes is not likely to fire anyone, as he goes on a roadshow to meet retail investors. Instead, he would be at his charming best to woo them to subscribe to the AAX initial public offering (IPO) shares.

AAX, incidentally, is the once long-haul airline that turned medium-haul, moving out of the London and New Delhi airports, much to the chagrin of travellers, because it could not sustain its operations there.

The airline is going for a listing on the main board of Bursa Malaysia on July 10. And being the founding member with interest in the company, Fernandes is the best man to go to the ground to tell AAX's growth story.

As a matter of fact, the retail roadshow is his idea, as is the idea of offering a larger portion of its shares to retail investors.

AAX is offering 10.6 per cent or 252 million shares to retail investors, which is far higher than the 2 per cent to 5 per cent norm allocated to retail investors by other companies.

His rationale is simple: the retail investors are the people who fly with AAX, and therefore, should get a chance to own the airline.

And the sweetener for investing in the IPO shares is a free air ticket to any of the 14 destinations that the airline flies to.

This is provided investors keep the shares for a year, with the limit set at three years for one ticket each year. This is only for the airfare. Other charges like taxes will have to be borne by the investors. Still, it would help because a return ticket to Australia can easily cost between 1,500 ringgit and 2,000 ringgit (US$494 to $659).

The minimum shares they must hold for the free ticket is 10,000, and if they buy 100,000 shares, they would get three tickets.

All this is part of the shareholder benefit programme for retail investors. This is an interesting proposition, as it does help save some travelling cost and can also be seen as a dividend of sorts until such time that the airline decides on a dividend policy.

AAX now flies to 14 destinations across Asia on to Australia and Nepal. It has plans to expand into new markets across North Asia and Australia, and might also re-enter India. However, the chances are rather slim at this juncture, as it needs to secure landing rights first.

AAX is also looking to set up a hub in Thailand as part of its expansion strategy. It is trying to get an air operator's certificate to operate regular flights from Bangkok's Don Muang International Airport to South Korea and Japan. It plans to use two A330-300s for this, but all that is subject to approvals from the Thai authorities.

Unlike most recent IPOs, where the focus was on cornerstone investors, this IPO will have none of that category of investors. Cornerstone investors normally have a lock-in period of between three and six months, helping to cushion any plunge in the share price.

Any stickiness being associated with AAX at present can be traced back to the offer of the free air tickets. However, the offer could turn the tide in Fernandes' favour, just as any criticism towards his Tune Insurance listing had proven to be unfounded. Tune Ins Holdings Bhd has breached the 2 ringgit mark from its IPO price of 1.35 ringgit a few months ago.

AAX is offering 790 million shares to raise US$300mil (930 million ringgit) at an indicative price of 1.45 ringgit a share. Some analysts, however, think that the price is a bit steep, saying it should be in the region of between 1.20 ringgit and 1.30 ringgit a share instead. This is despite the company's bullish profit projections for the next three years, where net profits are expected to reach up to 400 million ringgit.

And while all looks fine and good, one has to be mindful that the airline business is very cyclical in nature. It is particularly susceptible to external economic factors because it affects and depends on a substantial number of industries. The supply and demand price elasticity of carriers may vary, depending on the nature of the industry. Fuel is a major cost component, and even though Fernandes has often said that demand for budget travel is good in both gloom and boom times, the first thing people would do in a downturn is cut travel cost.

The challenges are there. But being in Asia where demand for air travel is still high, AAX should get its fair share of the market. However, airlines need to be mindful that the customer is always king, even if they were travelling on a budget airline.

And if any situations did arise, it has to be handled delicately with compassion and tact, as no amount of public relations would work if an airline is not seen as being caring towards its passengers.

Deputy news editor B K Sidhu says it was amazing how MAS seized the day and came out smelling like roses in the recent "baby fever" incident.

*US$1=3.0 ringgit

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