By Kathy Chu, Gaurav Raghuvanshi and Megumi Fujikawa
When Malaysian entrepreneur Tony Fernandes bought the struggling
AirSHYAsia Bhd. in 2001, his goal was to build a budget airline
group that could take advantage of the explosive travel growth he
saw coming in the region.
To do that, Mr. Fernandes made AirAsia into the McDonald's of
the aviation industry, bridging Asia's checkerboard of sovereign
states and aviation rules by rolling out franchise-like joint
ventures under the AirAsia brand, in countries from Thailand and
the Philippines to India.
In roughly a decade, that model turned AirAsia into a group
encompassing nine carriers, of which the three listed companies had
$2.3 billion in revenue in 2013. While the number of annual airline
seats in the Asia-Pacific region has doubled to 1.7 billion during
the past decade, the number of seats available on budget airlines
increased tenfold to 400 million, according to the CAPA-Centre for
Aviation.
But as the AirAsia group grapples with its biggest crisis
yet--the aftermath of the December crash of a plane operated by its
Indonesian affiliate--that franchise model and the growth on which
it was premised could be under strain.
AirAsia's once heady traffic growth is slowing as competition
increases, causing profit to shrink at AirAsia's Malaysian flagship
company. AirAsia Thailand has become unprofitable and AirAsia
carriers in Indonesia and the Philippines are restructuring,
creating challenges for the Malaysian group.
In 2014 the AirAsia group carried 50 million passengers, CAPA
estimates, 9.3% more than the previous year but the slowest growth
since the airline began operations under Mr. Fernandes in 2002.
Analysts expect AirAsia Bhd.'s earnings to be hurt by the
AirAsia Flight 8501 crash, which killed all 162 people on board,
when the company posts results at the end of February.
Meanwhile, cultural and regulatory tussles have hampered
AirAsia's efforts to expand its franchises further in markets such
as Japan and Vietnam.
There "is a limit to bringing all AirAsia's business ways into
the Japanese market," said Shinzo Shimizu, a senior vice president
at former joint-venture partner ANA Holdings Inc., after the
partnership fell apart in 2013.
AirAsia said last year that it was setting up a second Japanese
joint venture with different partners.
A spokeswoman for the AirAsia group declined to comment for this
article.
Mr. Fernandes, known for his no-nonsense attitude and his
trademark uniform of jeans and a red cap, overhauled AirAsia after
he bought it in 2001 from the Malaysian government for one ringgit
(28 U.S. cents) and the assumption of 40 million ringgit ($11
million) in debt.
He established the first joint venture in Thailand in 2003,
taking a minority stake to comply with Thailand's rules barring
foreigners from owning more than 49% of an airline.
It now has similar stakes in franchises in Indonesia, Thailand,
the Philippines and India, as well as AirAsia X, its long-haul
carrier.
Despite the minority stakes, AirAsia exercises a high degree of
control over its joint ventures, dictating matters from branding to
in-flight retail. The control has rankled some partners, but it
also has been responsible for the airline's success in training
pilots and flight attendants, and negotiating contracts for
aircraft, former employees say.
"Even from the inside, you would not see much of a difference
between AirSHYAsia Malaysia and AirAsia Philippines," said Dany
Bolduc, who worked for the Kuala Lumpur-based flagship for two
years until 2013, managing in-flight sales of items such as caps
and T-shirts across the group. "The model has to be consistent
across the markets [in which] they operate."
Analysts say one of AirAsia's greatest achievements has been
persuading regulators in the countries where it operates to let it
keep the AirAsia name despite its minority-partner status.
"AirAsia has successfully branded itself," said Yeah Kim Leng,
dean of the business school at Malaysia University of Science and
Technology. "It has really standardized the service quality,
corporate culture and expectations that customers have."
But the franchise model has some drawbacks for AirAsia's
affiliates, which grapple with higher costs than the Malaysian
flagship. Affiliates may pay the flagship fees for things including
maintenance and leasing planes. Cost per available seat kilometer,
a common measure of aviation costs, was $3.99 in the quarter ended
in September for AirAsia's Malaysia operations, compared with $5.14
for Indonesia and $5.24 for Thailand, according to AirAsia
filings.
"No matter what, the cost is going to be higher than the main
company," said Brian Thomas Hogan, managing director of XSQ
Aviation Consultancy and a former chief executive adviser of Zest
Air before its partnership in the Philippines with AirAsia.
Other would-be partners have balked at AirAsia's attempts to
control them.
For ANA of Japan, one source of friction was that AirAsia relied
heavily on website bookings, which account for about 85% of the
AirAsia brands' ticket sales, though in Japan reservations through
travel agents were more common, a spokesman for ANA said.
AirAsia also wasn't willing to alter a system that required
passengers to check in at least 45 minutes before departure, even
though other major Japanese airlines had a 15-minute cutoff, the
spokesman said.
The Malaysian group said when the partnership dissolved that the
companies had "a fundamental difference of opinion between its
shareholders about how the business should be managed, from cost
management to where the domestic business operations should be
based."
AirAsia scrapped plans for a highly publicized partnership in
Vietnam in 2011, saying it was unable to get Vietnamese regulatory
approval to use the AirAsia brand, which it said was "fundamental
to the successful conduct of the business model."
A person familiar with the proposed joint venture with VietJet
Aviation JSC said cultural clashes were also responsible for the
dissolution of the partnership.
"Vietnamese people have their own way of thinking about how to
manage the company, and AirAsia thought it could do it the AirAsia
way," this person said.
Anh Thu Nguyen, In-Soo Nam and Shibani Mahtani contributed to
this article.
Access Investor Kit for ANA Holdings, Inc.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=JP3429800000
Access Investor Kit for AirAsia Bhd.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=MYL5099OO006
Access Investor Kit for ANA Holdings, Inc.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US0323501009
Access Investor Kit for McDonald's Corp.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US5801351017
Subscribe to WSJ: http://online.wsj.com?mod=djnwires