Airasia: the World’s Lowest Cost Airline

INTRODUCTION AND HISTORY AirAsia is a very successful low cost carrier. In a very short time, it became a market leader in the Asia region. The company successfully adopted cost leadership through operational efficiency and effectiveness. Using the slogan “Now Everyone Can Fly,” AirAsia positioned itself successfully in the niche LCC market. AirAsia was the creation of former music publisher Tony Fernandes. After watching a television show in a pub about easyJet successfully competing against British Airways, Fernandes decided to start his own low cost airline.

He then met with former Ryanair operations director, Conor McCarthy and the two developed a plan on starting up a LCC to serve South-East Asia. The plan started with a meeting with the prime minister of Malaysia. Prime Minister Mahathir Mohammad suggested that Fernandes and McCarthy acquire AirAsia, a struggling government owned airline. With their own money, and support of investors, they purchased AirAsia for 1 Malaysian ringgit and assume debts of 40 million ringgits; approximately 11 million US dollars. ORIGINAL STRATEGY

Tony Fernandes always had his sights on cheap long haul flights, but he knew AirAsia had to become successful on short hauls before his dream would be possible. He targeted a historically underserved segment to target with his low fares. His low fares would cover a geographical area less than three and a half hours flying time between hubs in an area populated by more than 500 million people. A large emphasis was placed on marketing and brand development. AirAsia had to remove the images of a rundown government owed airline and replace them with images of a safe, reliable airline that cares for its customers.

They had to show everyone that AirAsia is a low cost airline that places importance on customer service while providing an enjoyable flight experience. AirAsia invested in a large advertising campaign. They paid for television, print, and internet advertisements. Press coverage was maximized. AirAsia made image improvements through co-branding and sponsorship relationships. They sponsored the AT&T Williams Formula 1 race team by painting a plane to resemble the race car. Other planes were painted with portraits of soccer players and the Time magazine logo.

AirAsia has the following self described strategy: Safety first – AirAsia partners with renowned maintenance crews and complies with world airline regulations. The company does not own a maintenance shop. Everything with maintenance and repair is contracted out to keep costs down. High aircraft utilization – having the fastest turnaround time in the region, they assure lower costs and higher productivity. AirAsia has the newest and most efficient fleet flying in the Asia region. The planes have a single seating class and hold more passengers than competitors.

This allows for more revenue per flight. Low fare, no frills – keeps ticket prices cheap. Customers have the ability to customize for an extra fee. AirAsia focuses on price sensitive customers. Keeping lower prices is better for both the passenger and the airline. Streamline operations – simple is good. Using all the same planes saves on training pilots, contracting mechanics, and replacing parts. Lean distribution system – book flights online or on the phone. No travel agents. Passengers do not even use tickets. They simply show photo identification and are allowed to board the plane.

This saves booking/ticketing costs. Point to point network – A to B, or A to C service. No B to C service. Standardized short routes ensure quick turnaround times and high load volume. Using secondary airports saves on runway costs. Using this philosophy, AirAsia outperformed the government owned Malaysian Airline System. They had a higher seat factor, lower cost per seat, lower operating expense, lower staff cost, but still a higher debt due to taking on debt in the beginning. Porter 5 Forces Analysis Bargaining Power of Customers – Moderately High.

Customers have a high sensitivity to price. There is no switching cost to use a different LCC. The internet gives the customer full information on prices of each LCC. Bargaining Power of Suppliers – High – Only two sources exist for purchasing or leasing large airplanes, Boeing and Airbus; and AirAsia only uses one source. The monopoly gives the supplier high bargaining power. Leasing planes in bulk helps AirAsia keep costs down. There are also limited suppliers of fuel. AirAsia signs fuel future contracts to help keep lower prices on fuel.

Threat of New Entrants – Moderate – Start ups must have a lot of capital and political pull. There is high cost of branding and advertisement. The main threat is full service airlines developing LLCs. They can easily divert resources to the cheaper flights and they will already have established brands. ValuAir stared a LLC in 2003 followed immediately by Tiger Airways. Orient Thai Airlines started a LLC that matches any price AirAsia charges. The liberalization of ASEAN and India air travel opens up huge opportunities for all LLCs.

Threat of Substitutes – Low – With numerous islands, wide spread cities, and poor road network; substitutes are not viable for long distance travel. Trains are an option, but the ticket price is higher and the trip takes longer. The most efficient and convenient mode of traveling long distance is on a plane. Industry Rivalry – High – Tough competition exists in the LLC business. As mentioned above, Orient Thai Airlines will match any AirAsia price. Thai Airways has high capacity and has been lowering costs to compete with the LLCs.

The airlines realize a large price war would devastate everyone in the industry, so a peaceful competition is in place. CHANGE IN STRATEGY After successfully competing in the short haul LLC arena, Fernandes decided the time had arrived to try out long hauls. He wanted to take advantage of the rising middle class in China and India. He also wanted to offer service to the existing middle classes in Europe, Australia, and the Middle East. Careful measures were taken to spread the risk of starting a long haul operation and prevent political issues. Investors in AirAsia X came in having knowledge and expertise in the long haul business.

Having foreign investors also kept AirAsia from directly competing against the Malaysian government owned long haul provider. AirAsia X was setup to use the cost advantages of AirAsia and have a high transferability of the advantages plus already having the established and respected AirAsia name. AirAsia X was going to have the low cost, no frills philosophy. They would use larger planes with higher passenger capacity. To please business travelers, the planes would have both economy seats and premium seats. Meals would be provided for the longer flights.

The cost of starting up and running AirAsia X was one of the causes why AirAsia suffered its first year of losses in 2008. Fernandes believes that canceling current fuel futures contracts also contributed to the loss. Dealing with the higher fuel costs temporarily on the longer flights would allow them to make lower priced fuel contracts in the future which would allow them to save more money. AirAsia is currently one of the top LLC leaders in the Asia area. AirAsia X is gaining ground on the competition. After the first quarter of 2009, AirAsia X had a positive cash flow and a net profit of 18 million RM.

The CEO of AirAsia X believes merging the two companies and running short haul and long haul as AirAsia would have benefit AirAsia X. This would allow for further operational and financial efficiencies. RECOMMENDATIONS •Further pursue Chinese and Indian markets. Both markets have large populations of potential LCC customers. •Invest in building more secondary airports. This would grant AirAsia access to untapped customers. •Create a frequent flyer program. This would help retain price sensitive customers. •Continue to lease newer and better equipment. More seats with better fuel efficiencies will raise revenues. Expand routes and frequency of flights. Exploit the growing middle class in Asia. •Research the highest grossing long haul flights, focus on those routes and eliminate the losers. •Or hold an IPO for AirAsia X to raise funds for more equipment to make a larger presence in the long haul market. •Read customer comments on Trip Advisor to see what customers want. It seems there is a huge problem with stolen/missing luggage on this airline. Spend money to increase security with luggage and training for better baggage handlers. Customers will appreciate it.

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