AirAsia switches to digital mode as it lightens load with leasing sale

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Tony Fernandes, the co-founder of AirAsia Bhd, is seeking to transform Asia’s biggest budget airline into an asset-light, digitally focused firm after the $1 billion sale of its leasing business, in an effort to foster sustainable growth.

AirAsia, which pioneered budget air travel in Asia along the lines of Ryanair Holdings in Europe, is now building a sprawling empire that includes a payments company, logistics firm, food and beverages brands and a loyalty programme.

Leveraging the profusion of customer data from its 65 million-plus passengers, the focal point of the strategy is a digital push that exceeds in scale that of regional budget airlines like Indonesia’s Lion Group and Cebu Pacific of the Philippines.

AirAsia will also be going head-to-head against flag carriers such as Singapore Airlines which is ramping up investments in digital technology. The goal is to offset the volatile earnings from the cyclical airline business.

“The biggest asset is our data,” Mr. Fernandes told Reuters in an interview. “And we’re going to monetise that data over a series of joint ventures in three kinds of pools.” That includes turning its loyalty programme points into a more formal currency through an initial coin offering, building a bigger logistics business and growing its content offering.

Loss of leasing

In the near term however, analysts said the move by one of Airbus’s biggest global customers to part-lease its current and ordered fleet of 500-plus planes could hurt its profits and leave it exposed to the risk of higher lease rates. “The leasing arm was a stable low risk business,” said Ngoi Se Chai, a partner at Hong Kong-based Oaklands Path Capital Management. “Now that that’s sold, earnings will come down and become more volatile. I think they sold something they shouldn’t have sold.”

While the sale proceeds from the leasing business will be used to reduce debt, the bulk will be paid out as special dividends, potentially limiting the upside in a stock that has more than quadrupled since hitting a seven-year low in late 2015.

“The amount of money generated from this exercise could almost wipe out AirAsia’s entire debts, so it would appear a positive move,” said Shukor Yusof, founder of consultancy Endau Analytics, but he noted it faces risks associated with higher leasing rates.

Leasing had accounted for around 20% of AirAsia’s revenue, with a similar share earned from non-ticket items like baggage fees and food sales.

The aim is to lift revenue from so-called ancillaries by 12% this year.

AirAsia plans to launch remittance and lending products in Southeast Asia, through its BigPay debit card and mobile app in Singapore after the recent launch in Malaysia, BigPay’s group CEO Chris Davison said.

But for now, the company’s non-flying revenue lags global low-cost leaders like Spirit Airlines in the U.S. and Ryanair and Wizz Air Holdings in Europe that receive 40% of revenue from ancillaries, said Jay Sorensen, president of consultancy IdeaWorksCompany.

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