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AirAsia Business Case Study: Strategy and Environment

AirAsia is the airline industry started based on the low cost carrier (LCC) concept in Malaysia.
The low cost concept is introduced in the year of 2001 with the belief that “Now Everyone Can
Fly” by Tony Fernandes. AirAsia was first established in 1993 and began its operation on 18
November 1996. In the year 2001, Anthony Fernandes (or known as Tony Fernandes) bought
the airline which is suffering a loss. It was re-established as the low cost carrier after the bought
over. AirAsia’s vision is to be the largest low cost airline in Asia and serve the 3 billion people
who are currently underserved with poor connectivity and high fares. The airline has also
partnered with other airlines and investors to create ventures in the Philippines, India and
Japan. AirAsia's extensive domestic and regional network includes services within Malaysia and
to China, Southeast Asia and the Subcontinent.

AirAsia has become one of the leading airlines corporation of Malaysia that performed
exceedingly well in terms of its past investments and the profits that it made out of it after it’s
relaunch. The sudden changes in the profit graph came to the surface soon when it announced
its first profit right in seven months of its re-launch. The innovations in strategy and
investments brought immense amount of profit to the company in the following years. It
invested amounts on new and effective services and cut shorted various not essentially
required expenditure to reduce the overall cost. With the implementation of its successful Low
Cost Carrier (LCC) model, the whole business model of AirAsia was changed and it became first
Airline Corporation to have no-cost, no-frill concept to lower the prices by 40-60% than its
rivals. The results were quite beneficial as it announced its first profit as US$6 million in
December, 2002.

The corporation kept on expanding its business with the opening of three other hubs within
Malaysia to have more share of market size on domestic air flights in Malaysia. It also invested
in to have regional flights to its neighboring countries like Thailand and Indonesia with its
collaboration with Thailand Shin Corporation and Awair. This made AirAsia to have cheaper
airlines to the neighboring countries. AirAsia soon emerged as the largest domestic airlines in
Malaysia with the expectancies of over 18 million passengers in the year 2007. With its
partnerships with various LCCs, the corporation performed well enough for its long-haul
regional services. Its joint ventures with the LCCs like Australia’s virgin blue, the corporation got
a big share in the expanding market of Australia. Its market kept on expanding over the years
with the commencement of its flights to even the far cities like London and also for close
countries like India and China with the net income reaching over US$44 millions in the year
2008.
Organisational Structure

The organizational structure of AirAsia is a semi-flat structure that starts with the CEO Tony
Fernandes, following by Chairman of the board and other six directors. There are two main
management layers in the organizational structure and the people in these positions are
considered as main leaders of the company. The top managers of AirAsia contain the CEO,
deputy CEO and three vice-presidents that are responsible for operation, marketing and human
resource departments. Meanwhile, the second layer includes managers for different functions.
The most information of the network operations is done by the senior manager who needs to
report to the executive vice president of operations.

AirAsia is a centralized organization where every department has to follow the decisions made by
the top management which consists of the Chief Executive Officer (CEO) and the deputy. The CEO
has the power to control and make decisions over his position. AirAsia’s Heads of Department
play a critical role in leading day-to-day operations and operational approaches for organization
success. With this management structure, the activities of the company are under control
because they are supervised by the second management layer; meanwhile, the top managers’
business strategy/plan is ensured to be practiced with frequent updates. However, the
organization is practicing in low power distance culture. To be more specific, it is stated that the
company’s organizational structure is not published because the CEO believes that a rigid
structure tends to segregate people into different categories. Hence, the leaders treat their
employee equally without bureaucracy, which increases employees’ trust and respect as well as
their willingness to work harder for the organization.

AirAsia has established the geographical structure. Organizational structure of geography


distributes the workers by geographical areas according to different parts of its branch
operations. It was established at the request of customers who are far away from or outside
the organization's operations center. The geographical organizational structure in operation
between different employees is responsible for carrying out business activities at designated
locations. In geographic structure, units and divisions are based on the places and the
geographical area. When a company or office operates in many different geographic areas, this
structure applies to countries, religions, and countries. In addition, geographic structure is the
coordination of work and workers in the unit or where different parts are responsible for each
of the organization or activity within an exact topographical area.

STRATEGIC POSTURE

The mission of the corporation is to provide high-quality but low cost flying services to all type
of passengers. The corporation being a part of airline industry, it missions to become the leader
of the market by implementing its smart strategies and sharp business skills. As quoted by its
owner Fernandes, he overtook the corporation during its declining stage as he advocated the
correctness of time to enter the market because of charter aircraft price and abundance of
skilled aircraft staff. The company has been consistent in following its goals and objectives
throughout in its performance in the past decade. The corporate objectives were innovative
and highly efficient with its symbolic acquisition of its own by Tony Fernandes, joint venture
with Thailand Shin Corporation, Awair, Singapore’s Tiger Airways, etc to provide a broad
destination options for its customers at the right times when it was needed. The business
model was reconstructed with no-frills, low cost carriers (“LCC”) which brought immense
amount of profits to them. The business objectives were to get not only the quality customers
but the quantity customers with its seats available in different schemes and at different prices
for all type of class of customers. They were constantly consistent with each other to provide
exactly what the customers wants and what actually can be managed. The functionality
objectives were always to cut down the fare of air travel by either performing to get reduced
charge from the passengers or providing effective routes for them reducing their net
expenditure on travel. It also added various value-added services like online booking, SMS
booking, and bookings through call centers, etc. AirAsia soon became the integrated service
provider from being a classic LCC product in its functionality to provide maximum attraction to
its customers. The objectives were also consistent with the environment of the corporation.
Even during the hikes in the prices of oil in mid-2008, the corporation didn’t let the fare go that
high which was quite helpful for the corporation in beating off its competitors.

The AirAsia opted for various cost-effective, customer-oriented and highly innovative strategies
to shape its business model to reach its ultimate missions and objectives. With its innovative
low-fare, no-frills concept it highly reduced the cost of air ticket such as by having just a single
standard cabin, paid meals instead of pre-paid free meals, etc. The corporation found efficient
ways of reducing the expenditure on travel by the customers while expanding its domestic and
international business. Like for example, the short-haul flights took less than four hours for
travel which provided it opportunity of having the return of the flights on the same day
conserving many of the expenses of the corporation. The company also launched its long-
hauled air services at the time when many of the LCCs were reluctant for that. All the strategies
or mix of strategies were consistently aiming at gradually achieving the goals and the objectives
of the corporation and dynamic with the changing internal and external environment.

The corporation adopted bold and dynamic policies to achieve its objectives. The corporation
first concentrated only on the domestic market and modified its business model to LCC. Then,
gradually and steadily corporation expanded itself to first neighboring countries and then
internationally across the continents.

The company has very well performed on the basis of its current market position and the
position from which it had started during its relaunch. The company has enough promotion and
publicity in media through its publicity strategies. The fares of ticket have always been kept as
low as possible despite of all sorts of problems coming up like price hikes of oil, etc. The
company is even the sponsor of the famous Manchester United Football Club and AT&T
Williams Formula one team to have its world-wide promotion. The market size of the company
is expanding with the launch of its several multinational collaboration and establishment of the
joint ventures in Indonesia, Thailand, Australia, etc. Besides, its primary product of airline
tickets its several other products include internet check-in services, Xpress boarding services,
mileage programs, Citibank-Air Asia Credit Card, etc. The company is able to earn for the same
product easily from the developed region in comparison to that in developing region. This
shows a trend that the basically the marketing strategy of a company should cover every
section of the society in order to have maximum profit. This trend had been a fare impact on
the success rate of a company and surely will be in the future too. The marketing of its products
gives the company massive advantage over its competitors.

The marketing strategies of the corporation have beaten all its major competitors both in terms
of profits and customer’s satisfaction. The marketing managers have accepted these tools and
techniques to evaluate the performance of a product. Marketing is highly dependent upon the
political and socio-economic conditions prevailing in a country and hence same marketing
strategy cannot be applied for adjustments in all the countries. The marketing takes an overall
account in every dimension and hence the environmental sustainability has to be a guiding
factor in marketing policies.

AirAsia current practices and design

 AirAsia is an award winning Low Cost Carrier (LCC) in Asia Pacific area. The way to conveying
low charges is to reliably keep cost low. Achieving minimal effort requires high efficiency in
all aspects of the business and looking after straightforwardness. In this manner each
framework procedure must fuse best industry rehearses. The utilization of information
system assumes an essential part in the strategic and operation administration of airlines,
and encourages the effective airlines for the future. Air Asia makes the low fare business
model and creates values through the usage of the following key methodologies:

 Safety first: safety is the absolute most imperative criteria in each part of the operations, a
range that AirAsia will never compromise on. AirAsia consents to the conditions set by
controllers in every one of the countries where the airline operate. Joining forces with the
world's most famous maintenance provider and conforming to world aircraft directions.

 High aircraft utilization: AirAsia's high recurrence flights have made it more helpful for
visitors to go as the carrier executes a brisk turnaround of 25 minutes, which is the
speediest in the region. This is the cause of high aircraft usage, bring down expenses and
more prominent aircraft and staff efficiency.

 Low charge, no frills: giving visitors the decision of tweaking administrations without
bargaining on quality and administrations. AirAsia targets visitors who are set up to get rid
of ornamentations, for example, dinners, preferred customer credits or airplane terminal
parlors in return for admissions lower than those right now without including on quality and
administration. Visitors have the decision of purchasing solely arranged suppers, snacks and
beverages from in-flight benefit at an affordable cost.
 Streamline operations: ensuring that procedures are as basic as could reasonably be
expected. Making the procedure as basic as conceivable is the way to AirAsia's prosperity.
Making the procedure as basic as conceivable is the way to AirAsia's prosperity.

 Lean distribution system: AirAsia offers a wide and inventive scope of appropriation
channels to make booking and voyaging less demanding for its visitors. AirAsia's ticketless
administration gives a minimal effort contrasting option to issuing printed tickets.
Straightforward Distribution System Simple is great, basic is the thing that we need and
basic is the thing that we as a whole need.

 Point to point network: applying the indicate point organize keeps operations basic and
expenses low.

CURRENT STRATEGIC IT IMPLEMENTATION

AirAsia has currently adopted information technologies strategically to integrate the operations
and coordinate all the business and management functions. The followings are a few system
implementations that AirAsia has done in its marketing and sales activities as well as operation
activity in the value chain.

Yield Management System (YMS)


 Anticipates and reacts to the behavior of customers to maximize the revenue - taking
into account the operating cost and aids Air Asia to optimize prices and allocate capacity
to maximize the expected revenues by 2 levels:

 Seat – Seats are available at various prices in different points of time. A


reservation done at a later date
 will be charged more than the one done earlier for the same seat
 Route – By adjusting prices for routes / destinations that have a higher demand
when compared to others.

 Results increased revenue (3-4%) by taking advantage of the forecast of the high / low
demand patterns, lower prices as YMS has aided Air Asia to increase the revenue by
offering higher discounts, more frequently during off-peak times while raising prices
only marginally for peak times.

Computer Reservation System (CRS)


 An integrated web-enabled reservation and inventory system suite powered by
Navitaire’s Open Skies technology that includes Internet, call center, and airport
departure control functionality.
 Satisfy the unique needs of Air Asia implementing a low-cost business model to
transform the business process to efficiently streamline operations.

 Helps AirAsia to grow at a dramatic pace in the past few years as stated below:

"Navitaire's Open Skies technology has truly enabled AirAsia's growth from 2 million
passengers to 7.7 million passengers in less than two years. Open Skies scaled easily to
accommodate our growth." - Tony Fernandes, CEO, AirAsia

Enterprise Resource Planning System (ERP)


 An integrated ERP solution powered by Microsoft Business Solutions (MBS) on Microsoft
technology platform which is implemented by Avanade consultants in May 2005.
 With the robust ERP technology platform, Air Asia is able to successfully maintain
process integrity, reduce financial month-end closing processing time, speeds up
reporting and data retrieval process.

In order to gain market share and sustain its competitive advantages to be the low cost carrier
in the high demanding environment, Air Asia must develop new ways to manage both customer
relationships and suppliers or partners to optimize customer loyalty, supplier relationships, and
revenue. Customer Relationship Management (CRM) application will be one of the areas of
strategic IT implementation that Air Asia can focus to achieve high values to both shareholders
and customers.

Customer Relationship Management (CRM)


In long term, customer relationships should be fostered for Air Asia to maintain competitive
advantage and profitability. When planning and implementing CRM application, management
has recommended the following approaches:

1. Customer segmentation – mileage-based segmentation is inadequate, rather should


focused on value-based and needs-based approaches can guide investment decisions and
drive greater insight into the needs of high value customers.

2. CRM initiative development – to differentiate from other competitors, Air Asia should not
adopt the “fast follower” approach to CRM initiative development, i.e. learning from
other competitors’ approach (e.g. installing kiosks for fast check-in). Air Asia should
implement CRM program in favor of investing in initiatives with a high return, which
respond to the needs and desires of their own customers.

3. Organizational design and management – AirAsia needs to train the employees,


empowering them with a complete view of the customer and clearly articulating the
employee’s role in the CRM strategy.
Advanced and sophisticated CRM information system should include the functions as shown in
Table 1.

Table 1. Customer Relationship Program (CRM)

Features Functions
Traveling planning Site personalization for on-line customer to create travel plan,
bundled services information,
flight notification systems, and gate information displays etc.

Reservations and ITA search engines, roving agent check-in, kiosks, internet
ticketing check-in, and phone check-in etc.

Frequently flyer Membership-based or point-based rewarding scheme offering


program to the applicable customers.
Campaign Email campaigns and promotion.
management
Email campaigns Web-based self-service such as e-ticket booking and
and promotion. reservation, online baggage tracing, RFID baggage tags,
internet in lounge, and in air Internet services.

Business Dynamic, updated, multi-dimensional reports that helps


intelligence management to do analytics in various areas such as
customer profiles.

 Critical success factors in the Low cost airlines in Asia

- Reduction in operational cost


- Low cost airlines strive to achieve the lowest possible price for their products and services.
Low prices cannot sustain unless the company maximizes its operational efficiency.
The success factors of Asian low cost airlines in reducing their operational cost include:

1. Low cost per average seat kilometer


AirAsia focused on ensuring a competitive cost structure as its main business strategy. It
has been able to achieve a cost per average seat kilometer (ASK) of 2.5 cents, half that of
Malaysia Airlines and Ryanair and a third that of EasyJet. AirAsia can lease the B737-300s
aircraft at a very competitive market rates due to the harsh global market conditions for
the second-hand aircrafts because of the September 11th event in 2001. On the other
hand, the operating cost of the company is also dropped drastically.

2. Low distribution cost


AirAsia focus on Internet bookings and ticketless travel allowed it to lower the distribution
cost.

3. Attractive ticket price


With the average fare being 40-60 % lower than its full-service competitor, AirAsia has
been able to achieve strong market stimulation in the domestic Malaysian air market
(Thomas 2003). For instance, the fare for the trip from Kuala Lumpur to Penang on AirAsia
starts from 39 ringgit. Comparing to trip by bus charge 40 ringgit and 80 ringgit by car. The
effect of attractive low fare is more travelers switching from bus to air, similar case as
Ryanair in Europe.

4. Good Management Team

Air Asia value proposition is more sophisticated than Ryan Air placing equal emphasis on brand
reputation and customer service/people management, by a senior advisor to Air Asia's top
management team. AirAsia pursue a Ryanair operational strategy, Southwest– people strategy
and an Easyjet branding strategy.

What is the secret to Air Asia’s success? Tony Fernandes said,

“Air Asia’s people”. “Your biggest asset is your people.”

Calling AirAsia “a place of innovation”, Fernandes said he company is “all about people,
believing in people, and believing in ideas and allowing ideas to just take and not worrying too
much about risk”.

“We’re such a flat structure that anyone can believe that they can ask anything, or innovate, or
dream to progress themselves or progress the company,” he said.
There were a number of risks faced by Air Asia, particularly increased competition. Aircraft
maintenance costs could also increase and there was a risk that its ground support service
contractors might not be able to deliver services that were integral to its international business
operations. For the year ending June 2004, fuel costs accounted for approximately 31 per cent
of AirAsia’s cost of sales. Its ability to contain this cost was crucial to its future success. AirAsia
relied on the Internet to minimize its distribution costs, but the group’s primary markets,
particularly new markets in Thailand and Indonesia, had low Internet penetration and credit
card usage. Historically, South-east Asia’s economy had experienced economic upturns and
downturns, as well as currency depreciations and appreciations. A recurrence of economic
upheavals in the South-east Asia regions was potentially devastating. Finally, yet importantly,
demand for air travel was sensitive to adverse news such as terrorism, or the recurrence of
illnesses like SARS (Severe Acute Respiratory Syndrome) and the bird flu.

THE FUTURE

AirAsia had decided to acquire eighty Airbus 320s through forty purchase obligations and forty
purchase options (Defence-aerospace 2005). Delivery of the new aircrafts was to commence in
2006. In the light of growing competition from other low-cost carriers, semi-low-cost carriers
and full-service airlines (see Exhibit 5), the air travel market had, in general, become more
competitive. The airline now faced a number of issues that could enhance or inhibit future
growth. First, it had to identify further opportunities to reduce costs, so that it could continue
to offer lower prices. Second, it had to identify new markets so that it could increase the
number of customers and revenues. Third, it had to find new sources of revenue other than
from fares. The Sky’s the Limit!
Reference:

Essays, UK. (November 2018). AirAsia Business Case Study: Strategy and Environment.
Retrieved from https://www.ukessays.com/essays/business/case-study-of-strategy-and-
environment-of-airasia-business-essay.php?vref=1

https://www.businessinsider.sg/tony-fernandes-shares-airasias-secret-to-success-and-it-
involves-a-surprising-office-dress-code