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Can AirAsia’s super-app ambitions take off?

Whether it’s ecommerce, digital payments, travel, or online media, you name it, AirAsia’s in it.

While the airline very much remains its core business, the AirAsia Group’s 17 business lines, ranging from fintech to e-commerce and food delivery, speak to its sprawling “super app” ambitions.

“We want to be the one-stop-shop portal to satisfy all consumer needs…You can fly, stay, shop, eat, chat – all from the convenience of one app,” Karen Chan, CEO of AirAsia.com, said at Tech in Asia’s Product Development Conference last week.

AirAsia’s pivot comes amid an unprecedented crisis that has brought the travel industry to its knees. While the company had the foresight to diversify from its core business well before the pandemic hit, it’s now running against the clock.

With travel demand just a fraction of what it was, the carrier has reported 803.3 million ringgit (US$187.9 million) in net losses from January to March, its biggest first-quarter loss since November 2004.

And despite the reopening of domestic routes, AirAsia’s external auditor Ernst & Young has said “material uncertainties” exist, which may cast doubt on the group’s ability to continue as a going concern.

Global passenger travel is not expected to recover to pre-pandemic levels until the end of 2023. As such, the success of AirAsia’s super-app ambitions will depend on the company’s ability to raise money to tide itself through this period. If it does work out, AirAsia could become a textbook example of how asset-heavy corporations can spin off new internet businesses.

While the notion of an airline-based super app might sound unusual, it’s actually not that far-fetched, as airlines are already more multifaceted than people might think: They’re transportation, logistics, F&B, media, and retail businesses rolled into one.

airasia group chart

Some of AirAsia Group’s main businesses / Table: Tech in Asia

What AirAsia hopes to do is to take these units and extend them beyond the airplane.

Imagine travelers booking a flight to Malaysia through AirAsia.com and getting recommendations for holiday packages and hotel bundles as well.

Upon landing, they can order nasi lemak made by AirAsia’s F&B brand Santan through GrabFood or buy fresh carrots from ecommerce site Ourshop, paying through AirAsia’s in-house e-wallet BigPay. In the process, they collect BIGLife loyalty points that they can then use to offset costs in future flights or purchases. Finally, they receive their orders at their doorsteps via logistics service Teleport.

Ride hailing from the air

AirAsia challenges one’s notions of what a super app is – which, in most of Asia, is often tied to ride hailing. “What’s really interesting is that if you look at the other super apps in ASEAN, they are anchored around ground mobility. AirAsia.com is grounded on air mobility,” Chan says.

Super apps Grab and Gojek have built a massive distribution network of users, drivers, and merchants through their core ride-hailing services: Grab has 187 million mobile downloads to date, while Gojek has 36.3 million monthly active users across the region.

On board an AirAsia flight / Photo credit: 123rf

AirAsia boasts a respectable user base as well: Before the pandemic, it was flying 100 million passengers annually, Chan says. Every month, over 40 million users visit AirAsia.com for flights and travel-related searches, she adds.

But with flight bookings down during the pandemic, the challenge now is to drive non-travel related lifestyle searches on the platform, whether for food or online shopping. It’s a limitation that’s specific to air mobility. “Our business model is high-average basket value, high affinity, but low velocity: not that much frequency, [just] maybe four to five times a year,” Chan notes.

However, the CEO is hopeful that recent pushes into expanding its non-airline offerings will change that.

Non-airline revenue for AirAsia grew 189% between FY 2018 and FY 2019 / Source: AirAsia Investor Deck, April 2020

Its non-airline businesses have been growing fast: Between 2018 and 2019, non-airline revenue grew by 189% to 697 million ringgit (US$161.7 million). They’re still relatively nascent, though, bringing in only around a fifth of the total group revenue.

Teleport-ing to profitability

Underscoring the difficulty of making ground in the highly competitive verticals of ecommerce, fintech, and food delivery are the losses incurred last year by almost all of AirAsia’s non-airline verticals, despite the significant growth they achieved. The only exception? Its logistics arm Teleport.

Teleport, a wholly-owned subsidiary of AirAsia’s corporate venture arm RedBeat Ventures, recorded positive earnings before interest, taxes, depreciation, and amortization (EBITDA) of 239 million ringgit (US$55.9 million) – an almost tenfold increase from 2018, its first year of operations.

It stands out against RedBeat Ventures’ portfolio of unprofitable ventures, which include AirAsia.com, BigPay, and quick-service restaurant brand Santan – all of which were in the red last year.

Cross-border air cargo services like Teleport are mainstays in many airlines, but AirAsia’s edge lies in its unique routes, Chan points out. “Over 25% of our routes are unique, which means AirAsia is the only carrier that can upload cargo and deliver parcels to customers in remote provinces, covering both first-mile and last-mile.” The airline runs 388 routes across the region.

However, cross-border air cargo hasn’t been spared by Covid-19 either. In May, SIA Cargo, the air cargo operations unit of Singapore’s national carrier, reported a 52.8% year-on-year decline in cargo traffic, measured in freight tonne kilometers, while Hong Kong-based Cathay Pacific saw its cargo and mail revenue fall by 29.1% year on year.

Amid movement restriction orders imposed in Malaysia since March, Teleport is expanding from middle-mile logistics, with AirAsia launching the last-mile ecommerce logistics solutions Ourshop and Ourfresh, as well as food delivery platform Ourfood, to take advantage of the rise in demand for grocery and food deliveries.

Nasi lemak, one of the food options offered by AirAsia’s inflight menu brand Santan / Photo credit: 123rf

Teleport has also launched same-day and next-day parcel delivery services, with the latter expected to eventually reach customers across 10 cities and 3 countries.

“Within two-months, we pivoted our ecommerce, travel, retail platform from selling perfume and cosmetics to [selling] potatoes and carrots,” Chan explains.

Since the start of the pandemic, AirAsia has onboarded 3,000 merchants, from peanut butter to durian suppliers. “For a lot of these entrepreneurs, it’s actually their first time [becoming] e-tailers,” Chan says, adding that the company helps them produce digital assets and even does photoshoots of their products.

Whether it’s intentional or not, it’s clear that merchants are becoming an increasing focus for AirAsia – and, by extension, Teleport.

Ourfarm is an agriculture platform that links up local farmers and fisheries directly to businesses across Southeast Asia through the ground mobility support of 7,000 drivers and excess “belly space” on AirAsia flights. As of June, it has 45 local farmers and poultry breeders on board, serving the Klang valley. While deliveries of fruits, vegetables, meat, and fish are currently limited to the Kuala Lumpur area, Ourfarm’s service is expected to expand to the cities of Sabah and Sarawak, as well as neighboring Singapore, in the next three to four months.

Teleport is riding the online shopping wave. Malaysia’s ecommerce industry, which exceeded US$3 billion in gross merchandise value in 2019, is expected to hit US$11 billion by 2025, according to a 2019 report by Google and Temasek. But rising ecommerce demands have created a need for more well-oiled logistics services, and Teleport will find stiff competition from the likes of J&T Express and Ninja Van.

It’s unclear what AirAsia’s ambitions for small merchants are, but Grab’s creation of a dedicated GrabMerchant platform could be a good blueprint. The ride-hailing company’s suite of services includes sourcing of wholesale supplies, creating advertisements, business analytics, and setting up cashless payments, and will soon include access to financial services. It claims to have onboarded 78,000 merchants to its platform between March and April this year.

The AirAsia.com advantage

While Teleport is the proven moneymaker among AirAsia’s non-airline businesses, AirAsia.com is the lightning rod. Someone who has shopped on Ourshop or has had food delivered through Ourfood has probably flown AirAsia previously, and AirAsia.com is likely the company’s single most important driver of traffic; according to Chan, 80% of traffic on the site is organic.

“You won’t have a guy who’s never flown on AirAsia, never heard of it, and [yet] decides to use one of its existing services,” says Mohshin Aziz, an aviation consultant.

AirAsia.com is now leaning more heavily into its traffic-generating role. Last year, it started offering flights by external airlines through a white-label partnership with online travel platform Kiwi.com. This opened up bookings to destinations not served by AirAsia, such as London, Dubai, Abu Dhabi, and Auckland.

Photo credit: 123rf

It’s also stepped up to offer bundled hotel and holiday packages and deals, putting it in direct competition with activity bookings site Klook, as well as Airbnb and regional OTA Traveloka, both of which have launched travel experience bookings.

But unlike its competitors, AirAsia concurrently operates an airline, giving it visibility over data on various flights and routes, Chan notes. This allows the airline to bundle unsold seats together with hotel packages at highly discounted rates in the market, thereby maximizing revenue on each flight.

“Even when we sell some of our seats at a loss, we can make it up in the total average basket value [expected over a customer’s lifetime],” she explains, giving AirAsia extra leeway in undercutting its competitors through lowered ticket pricing.

Though not yet profitable, AirAsia.com is growing. Revenue grew by more than threefold to 11.1 million ringgit (US$2.6 million) in the fourth quarter of last year, while gross booking value was 5.5 billion ringgit (US$1.3 billion) in the same period, up 15% year on year.

While air travel has been hit by the pandemic, AirAsia is expecting a recovery in air ticket sales as movement curbs ease. Spurred by pent-up travel fever, consumers from Malaysia and Thailand have snapped up over 200,000 of AirAsia’s unlimited travel passes, a new product that was launched in February.

The website’s new services will leverage both of the company’s airline and logistics businesses. By the end of August, AirAsia.com will launch an end-to-end online medical tourism platform that can handle everything from flight and hotel bookings and on-ground logistics to the booking of hospitals and medical treatments – including post-medical treatment and recovery – for prospective patients and their families.

Another new venture in the pipeline is Ikhlas, a Muslim travel and lifestyle portal that will feature Hajj travel options and Halal-certified consumer products on an ecommerce marketplace.

Keeping food delivery lean

Food delivery is another area that AirAsia is playing in.

It’s worth noting the two food delivery models at play here. The first is Santan, a model similar to Grain’s and Dahmakan’s cloud kitchens. Santan also operates two physical restaurants in Kuala Lumpur and Selangor. While the fulfillment of orders are partly handled by Teleport, Santan has also roped in GrabFood and same-day delivery platform MrSpeedy as delivery partners.

GrabFood driver on bike / Photo credit: Grab

cloud kitchen is a type of restaurant business that’s optimized for deliveries instead of dining in. Since cloud kitchens don’t need to be in a vicinity with high foot traffic, their rental costs are significantly reduced and gross margins are higher. In Singapore, that can save a business anywhere between “6x to 15x in terms of rent,” Grain co-founder Yi Sung Yong told Tech in Asia in May.

On top of that, Santan has a couple of additional advantages. First – and this is not always apparent – is that airlines are also F&B businesses, since they serve in-flight food.

AirAsia runs its own kitchens, and these economies of scale and expertise can help it grow its restaurant business; the company already made around US$20 million in revenue from in-flight sales of food and beverages in 2017.

Now, if AirAsia can succeed in getting these same diners to buy its food from the comfort of their homes, simple estimates by Tech in Asia show that this could create meaningful revenue that approaches Teleport’s figures.

Another advantage for Santan is that it has the B2B agriculture platform Ourfarm as its main source of fresh produce, which further lowers the cost of procurement – one of the biggest overheads of any F&B establishment. It’s likely that AirAsia wields its substantial bargaining power to obtain favorable wholesale rates that can boost margins in every order.

In addition to a cloud kitchen business, AirAsia also runs Ourfood, a restaurant aggregator or marketplace similar to Foodpanda, GrabFood, and Deliveroo. As of June, the platform has 36 F&B merchants.

Taken as a whole, AirAsia’s model avoids the pitfalls of the food delivery business, a thin-margin endeavor where profits are dependent on a multitude of factors such as city density, labor costs, and the efficiency of the driver fleet. Despite years in the business, Uber and GrubHub have yet to make a profit, and so does Grab in Thailand.

In comparison, Santan leans toward a full-stack business that could own every aspect of its operations, except for the farms where its ingredients come from.

Santan’s hybrid model could have better margins / Table: Tech in Asia

Of course, airline food has the reputation of being unappetizing, which means it might be tough to convince consumers to give Santan a try.

That said, given the upheaval that Covid-19 has brought to the restaurant industry, it may just find an opening.

“What we will see is a lot of F&B brands slowly thinking about innovating, moving away from traditional retail to focus more on delivery, whether by offering delivery through their retail spaces or moving into cloud kitchens where there’s a lot less overhead. They can be a little bit more experimental,” says Jessica Li, chief operating officer at Dahmakan.

Betting big on BigPay

No super app will be complete without its own e-wallet – or at least, that’s the prevailing wisdom. AirAsia’s BigPay, which reached over a million downloads as of Q4 2019, still has to battle the likes of Alibaba and Touch ‘n Go’s e-wallet, the telecommunications giant Axiata-owned Boost, and GrabPay.

As of January this year, only 5% of total daily payments in Malaysia were cashless, according to Malaysian Finance Minister Lim Guan Eng, with cash transaction still the preferred mode for paying for groceries, parking, and newspapers.

Against such resistance, fintech players need all the help they can get. Last December, the Ministry of Finance Malaysia distributed 30 ringgit (US$7) among Malaysians who were at least 18 years of age and earn less than 100,000 ringgit (US$23,400) annually as part of the e-Tunai Rakyat initiative, aimed at increasing digital adoption in the country.

Grab, GrabPay, Grab pay, payments

Photo credit: Grab

Three e-wallets were selected as part of the scheme: Touch ‘n Go, Boost and GrabPay; BigPay was shut out.

“Through this initiative, we saw over 70% of claimants spending on our ecosystem of services, and over 50% of users [remained] active on GrabPay even after the movement control order [was relaxed],” says Huey Tyng Ooi, managing director of GrabPay.

Boost, Touch ‘n Go, and GrabPay are expected to benefit from continued government support through schemes such as the short-term economic recovery plan (PENJAYA), where the three are participating merchants. Government co-funded programs enable digital players to offer discounts that entice customers to spend via digital means. Grab, for instance, is offering 50% off on orders on GrabMart and GrabFood via the “Shop Malaysia Online” campaign, and 2,000 ringgit (US$470) to brick-and-mortar merchants that sign up on the platforms.

As for BigPay, it will have to continue to fund steep subsidies – whether in the form of discounts or cashbacks – out-of-pocket in order to stay competitive. It is expected to “continue to incur expansion costs as it acquires market share,” according to company guidance as of December.

Indeed, despite claiming to be the largest e-money issuer in Malaysia in terms of transactional volume, BigPay was a loss-making business last year, recording a negative EBITDA of 78.8 million ringgit (US$18.5 million). Transaction volumes on BigPay were not made available to Tech in Asia.

According to a third-party industry estimate, BigPay had less than a quarter of the number of Boost’s monthly active users, and less than one-eighth of Touch ‘n Go’s.

It’s worth noting that while the Touch ‘n Go e-wallet, a joint venture between TNG Digital and Ant Financial, has the largest active user base, most of its transactions are payments done on toll expressways and highways rather than for lifestyle purchases. However, it has recently diversified into parking, theme parks, and selected retail outlets, and is also one of the accepted payment options on Lazada.

But the “quality” of an e-wallet’s user base might also matter more than just its sheer size. BigPay’s user base, which consists of travelers, is arguably more affluent than its competitors’, as they are willing to spend on plane tickets. Compared to “other mobility [players],” the average basket transaction size of an AirAsia customer is “five to eight times higher,” Chan claims.

But the total lifetime value of a customer is a function of both average transaction values and frequency. “A chatting app may be used 40 times a day, taxi and food apps four times a day, a travel app one time per quarter – but the average value of transaction will be different across all of them,” says Varun Mittal, emerging market fintech leader at consultancy Ernst & Young.

In reality, higher-cost purchases, like those spent on flight tickets, take place less frequently than cab rides. Therefore, the task for AirAsia is to get its customers to use BigPay more frequently.

Made with Flourish

BigPay has set its sights beyond just digital and local payments, though. It already offers a remittance service, allowing users to send money from their BigPay accounts to bank accounts in countries such as Singapore, Thailand, the Philippines, and Indonesia, at real exchange rates.

An accompanying BigPay Mastercard essentially allows customers to spend at over 40,000 Mastercard-accepting merchants worldwide, whereas Boost’s and Touch ‘n Go’s services are limited to Malaysia.

And similar to UK-based fintech company Revolut, BigPay also offers users visibility on their spending patterns.

The point of running an e-wallet isn’t necessarily to make a profit. Rather, it is to accumulate transactional data that offers insights into consumers, which can then be fed into advertising algorithms or used as credit scoring for loans. In fact, BigPay’s “next big launch” will be its credit and lending facilities, BigPay CEO Chris Davison revealed in January, though a date is yet to be set.

You get into this predicament: Are you an airline or a tech company?

AirAsia is reportedly in the running for a digital banking license in Malaysia, though the company has not confirmed this. Five digital banking licenses are expected to be awarded by Bank Negara, which is expected to finalize the guidelines later this year.

“They are entering into things where there’s still rapid growth and no profits, unfortunately, and everyone is scrambling to become number one. It’s a tough and challenging period to be doing it, and when you want to enter during this stage, you will incur a lot of startup loss,” says Aziz, the aviation analyst.

Can this all work?

ASEAN’s fragmented market, which has “no dominant player that spans across multiple verticals,” offers AirAsia an opportunity, Chan says. “We already have a unified platform; payments solutions and loyalty points are in place. What we then need to build and scale rapidly is the onboarding of merchants.”

While many of AirAsia’s digital initiatives have valid value propositions, successive launches of new services and its sprawling web of apps and sub-products have baffled some consumers and analysts. “You get into this predicament: Are you an airline or a tech company?” asks Aziz. Ourfarm, for instance, is “another fine example of a digital venture that will confuse the analyst community.”

But perhaps another question to ask is, can it be both?

Before finding the answer to that question, AirAsia has to deal with the magnitude of initial startup losses first, as unlike venture-backed startups, AirAsia’s war chest is reliant on the health of its primary airline business. Grab has over US$3 billion in reserves, a source told Reuters. In comparison, AirAsia’s overall losses (before taxes) from its airline and non-airline businesses combined in 2019 was 549.8 million ringgit (US$128.9 million).

AirAsia founder and group CEO Tony Fernandes speaking at the World Travel & Tourism Council (WTTC) World Summit 2017 / Photo credit: WTTC

To tide itself through a period of subdued travel demand, the firm has applied for bank loans and has had ongoing deliberations for joint ventures and collaborations that might result in additional third-party investments in specific segments of the group’s businesses, Group CEO Tony Fernandes has said.

Already, the company has been forced to make staff cuts and salary reductions, and a possible exit from its joint venture in India is on the cards.

There’s also the question of whether its new food delivery and ecommerce offerings will be able to keep users on the platform, in the absence of international air travel. Domestic travel, notably, is picking up, with all domestic routes expected to restart beginning in July.

Despite its efforts to diversify from solely being an “airline,” AirAsia’s success will ultimately hinge on the health of its main business. “Without [the] primary business doing well, and if people are not flying, [AirAsia] is not going to get all these ancillary subservices,” says Aziz.

Currency converted from Malaysian ringgit to USD: 1 ringgit = US$0.23.