AIR ASIA ( End Book Case Study 5: Page 528)

The case is about a 7 year old airline, which boasts to be the cheapest airlines in the Asian
continent. The founder of the airlines is Mr. Tony Fernandez, a graduate from the London
School of Economics who had bought the sinking Air Asia on 8 December, 2001 from DRB-
HICOM for only 25cents (I ringitt- Malaysian currency) and a whopping debt of USD 11
million. With the aspiration to set up a no frills low cost carrier he paid no heed to the advices
against the takeover. The business broke even within a short span of one year and there has
been no looking back since.
Tony Fernandez’s strategies to make the commoner fly in the air helped him to succeed in his
business. The company has now diversified in other areas too like Tune Hotels and Tune
Money as the brand extensions to cash in on the success of the Air Asia. The run-away
success of the airline is a package of various strategies which has helped the airline to
generate returns of 17%, far ahead of its other competitors.

Some facts about the case:

1. The airlines had become a nightmare for the Malaysian government when the Asian
meltdown in the 1997-98 hit the Air Asia Airlines also, thus it became a takeover
target.
2. Tony Fernandez agreed to the proposition when the airlines industry was in a down
turn due to the terrorist attack in US and the since the aircraft leasing were down by
40% the purchase was feasible.
3. Tony Fernandez was successful in targeting the common man’s desire to fly. This
provided him with and untapped market to explore.
4. The Airline broke even in the first year of its acquisition clearing all its debt and
turned into the fastest growing airlines in the world.

Questions and Probable answers:

Q 1) What were the main reasons for the early success of Air Asia?

Ans:Air Asia was primarily successful due to the various strategies that the
Tony Fernandez implemented in the initial years of the acquisition.
1. He bought the airlines when the air lines industry was leasing at low costs.
2. He targeted at the untapped markets in that region and thought of a low fare and no frills
air lines for commoners.
3. He has extensively used technology to keep the Airline’s costs low and make it highly
productive
¾ The unit cost is as low as USD0.023/ASK and break even point is at a passenger
load factor of 52%.
¾ It has a turn around time of 25 minutes, the fastest in Asia with an aircraft
utilization rate of 13 hours a day.
¾ Highly productive and efficient crew.
¾ Air Asia sells through internet whereas other airlines have counter booths, offices,
more staff, and more paper work and high set up costs.
¾ Services to customers like web-check-ins, X-press boarding, option to buy extra
baggage, smart phones and others.
4. He has also included Airbuses with the Boeing 737s in his fleet, that has helped him to
cut down costs further.

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Q 2) Do you agree with the growth plans of Tony Fernandez.??
Ans: The exuberant success of the Airlines had made Tony Fernandez confident and has
given him an eye for expansions into the other businesses as well. In order to take his airlines
industry a step further he has ordered 150 units of Airbus A320, that is destined to make this
infant airline the biggest sir fleet in the Asian region. The other businesses in which Tony
Fernandez has laid his eyes upon are hospitality and financial services like Tune hotels and
Tune money.
The diversification move would help the company to achieve good results in the near future
and also help to provide as well as maintain the working capital requirements of the parent
business. As the targeted businesses are also in the genre of the no frills business there is very
less probability that the Airlines business could be hampered. Moreover it can be argued that
the new businesses will compliment the airlines business. Its time for Air Asia to cash on the
reputation it has built in the last six years.

Q 3) What are the kinds of problems you foresee with the ambitious growth trajectory
Fernandez has set for tune?
Ans: The associate businesses are expected to do well and support the main airlines
Business. Thought there can be associated business risks such as.
• No frills hotels are targeted to be set up in 2008 and later, looking at the high
operating cost and maintenance cost it would be difficult for the main business to
break even.
• Cost of funds for set up and for operations will be a significant factor in these cash
hungry businesses.
• 16 Tune hotels are being started at one time. This becomes a huge step in a new
industry. A downturn in the hospitality industry or any changes in the regulations or
policies will lead to severe problems for Tune Hotels.
• Tune money business has tried to bring down the cost to at least 30% cheaper than the
rest in the market with no hidden cost. There are chances that this proposition may be
too costly and in way to eat away the profits of the main airlines business.
• Air Asia prices have been stagnating for a while. Such a situation may become a
problem for new business, especially in the light of volatile markets.

Q 4) Budget Airlines like Air Asia and De ccan are revolutionizing air Travel. Now air
travel is affordable for many people who could not dream of flying in an airplane. Can you
call this Air Asia’s contribution to the society? Don’t you think that the social
responsibility of a business should be restricted to smoothly running a business?

Ans: Targeting the ‘Bottom of the Pyramid’ is not an act of social responsibility. The airline
industry had been targeting a narrow section of the society and that had led to the problems
for the industry. By targeting the middle class, the no frills airlines have done a social good
but that was not the primary aim.
The case of Air Asia illustrates that a well run business can contribute to society by just doing
its job well.