AirAsia to acquire 40% of Zest Air

Local budget carrier Zest Airways and Malaysia’s AirAsia group are forming a strategic partnership in the airline business in a bid to create a stronger player in the highly competitive Philippine aviation industry.

Inquirer sources said AirAsia, led by Malaysian businessman Tony Fernandes, and ZestAir, led by the group of Filipino-Chinese tycoon Alfredo Yao, were moving toward a deal that would allow the Malaysian group to acquire at least 40 percent of ZestAir.

Yao, founder of the Zest-O group and chairman emeritus of newly listed Philippine Business Bank (PBB), is expected to keep majority ownership of ZestAir but might cede management control of the airline in favor of the Malaysian carrier.

Under the Philippine Constitution, foreigners cannot own more than 40 percent of certain industries like transportation, real estate and utilities in order to protect public interest. But AirAsia has a local affiliate that is majority-owned by Filipinos.

The negotiations have reached an advance stage toward the prospective airline alliance, the sources said.

An alliance is seen allowing AirAsia, a regional player but a new entrant in the Philippine airline sector, to gain a foothold in the local market at a faster pace, especially with formidable rivals like the Gokongwei-led Cebu Air and flag carrier Philippine Airlines/AirPhil Express dominating local skies. Meanwhile, competition in the airline industry is heating up not just in the Philippines but across the region, including in AirAsia’s home market.

AirAsia earlier entered the Philippine market through local unit AirAsia Inc., a consortium that is 40-percent owned by Fernandes while local businessmen Antonio “Tonyboy” Cojuangco Jr., Michael Romero and Marianne Hontiveros each own 20 percent.

Malaysian-Indian founder Fernandes rose to fame after turning AirAsia, once a cash-strapped government-owned airline, into a profitable enterprise using the “no-frills” model with the tagline “Now everyone can fly.” It is a similar model eventually adopted by leading local low-cost carrier Cebu Pacific.

A study released by CIMB of Malaysia in September last year said mergers and acquisitions (M&As) would be the way to go for the Philippine airline industry as tough times would likely prevail in the next three to five years. The study noted that oversupply was building while yields were falling amid cutthroat competition and some structural constraints.

Over the long term, the report said the Philippine aviation industry has a substantial growth potential, with only 5 percent of its population flying. Despite a population close to 100 million and despite its archipelagic nature that makes it ideal for air travel, CIMB noted that the Philippines had one of the smallest aviation markets in Asia. CIMB estimated that the Philippine aviation market was only 40 percent of the size of Thailand’s and 20 percent the size of Malaysia’s although it was about 20 percent bigger than Indonesia’s.