Red Planet Cleared for Takeoff

Published on Hotel Analyst Emerging Markets (http://www.ha-em.com)

Red Planet cleared for takeoff

When Tim Hansing and Ken Kerr were combing Asia buying and selling assets for their employer, Saudi Prince Alwaleed’s Kingdom Hotel Investments (KPI), the pair was struck by the thought that the budget hotel sector had even greater potential than the luxury end of the market.

It was at a time when budget airlines, most notably AirAsia, were opening up new opportunities for first time travellers across the economically virile Asean region.

Hansing and Kerr, two of the four founders of Red Planet Hotels, decided that they could replicate what they were doing in the luxury sector by launching their own investment company focusing on the limited service sector.

“We came across Tune Hotels 18 months ago. We liked what they were doing and we approached them,

“There was no-one in that ultra budget, good quality - US$30 a night space - in Asia,” Hansing says.“An d because there are not a lot of Tune Hotels at the moment, the deal gave us the opportunity to deploy a lot of capital and achieve scale quickly.”

Lansing says another attraction of teaming up with Tune was the importance it gave them within the partnership. “If we went to Accor to invest in Ibis hotels we wouldn’t even be on the map with them. With Tune we get attention.”

Bangkok-based Red Planet, formed in 2010 as a privately owned company with 12 shareholders based, has moved quickly to grow Tune Hotels, which is part of the Tune Group, the private investment group of Tony Fernandes, founder and group CEO of low-cost airline AirAsia.

Red Planet develops and operates its own limited service hotels under a franchise agreement with Tune Hotels. Currently Red Planet has 3000 rooms under development for the brand, contained in a portfolio of 19 hotels spanning three countries - Thailand, the Philippines and Indonesia. Total value of the projects underway is US$120m with plans to raise a further US$100m in equity by the first quarter 2012.

To date the investors in Red Planet’s two fund-raising offers– one of US$50m and the other of US$25m - have been high-worth individuals but the focus for the new equity raising will be institutional investors. Hansing said once Red Planet’s Tune Hotels are launched - the first, in Hat Yai Thailand, is due to open its doors on December 16 - the institutional investors will be active.

“We’re not worried about the timing of the next fund-raising. We have attracted money at times worse hant this. When we raised our first US$50 million we were the first to do so after the Lehman Brothers crash.”

Lansing says there is always money available for good deals. “Tune Hotels is a really good concept, there is nothing quite like it at the moment.

“In good times, the budget airlines are catering to people who haven’t travelled before but don’t want to spend a lot on their accommodation. In bad times, regular travellers are trading down with their accommodation. We’re getting the best of both worlds.”

Red Planet will have six Tune Hotels open by March next year, and will have 15 properties operational by December 2012. Hansing said the company would use revenue from the soon-to-be operating hotels to invest and increase its room inventory by a minimum of 2,000 rooms per year over the next five years.

Investment in hotels in China will remain on the back burner for a short while, but probably no later than early 2012. “We feel there is great advantage to be gained from being first mover with this project. There

Tune Hotels currently operates 10 hotels in Malaysia, two in Bali, Indonesia and one in London. It will open eight new hotels from December 2011 up to the first quarter of 2012, including Tune Hotels Ipoh in Malaysia, following a deal signed with developer Liew Yin Yin Group.

HA Perspective: When Tony Fernandes launched low-cost carrier Air Asia in 1996, there were those who said he was wasting his money – even the one ringgit (US26 cents) he paid for the debt-ridden enterprise.

And when in 2007 he announced the launch of low-cost long-haul carrier AirAsia X there were even more pundits lining up to tell him that noone would want to fly 11 or 12 hours from Kuala Lumpur to London in budget carrier discomfort.

But Fernandes has made a habit of making his critics eat their words and AirAsia and AirAsia X are both gaining altitude at a time when economic uncertainty around the world is encouraging flyers to weigh up advantages of sacrificing a few comforts for a cheaper fare.

Something similar is happening with another of Fernandes’ pet projects – Tune Hotels. It is no longer a backpacker product as other independent travellers are increasingly drawn to its value for money.

And with acceptance comes growth in demand, both from travellers and investors. As Red Planet had identified, there is plenty of low hanging fruit to be picked and with the reduced cost of developing Tune hotels there is the opportunity to quickly build scale.

There are several hotels groups well advanced in developing new products in the budget sector, but just as AirAsia succeeded by first identifying the limited service opportunities in the airline space, so the brashly-painted Tune Hotels have sprinted ahead of the field with its hotel offering.