Air Asia

ABSTRACT

In its dynamic and competitive environment, Air Asia has reaped great benefit byapplying low cost advantage in its business model.AirAsia, which is one of the earliest low cost carriers (LCC) in Asia, has become a LCCsince 2001. So far, it has expanded its network from Malaysia to Thailand to Singapore, Macauand even the Mainland China in 2006. In short, AirAsia jumped out from an intra-Malaysiaand Thailand market to a real AirAsia in the continent. Thus, what are the possible corecompetencies to ensure that there is quantum leap to success?Established on 12December 2001, AirAsia has been such a big phenomenon in airline industryespecially in Asia. By using a simple but strong slogan Now Everyone Can Fly,AirAsia has successfully positioned itself in customers mind. Its net profit for thesecond quarter ending 31 December 2004 was reported RM 44.4 million, a 323%increase over the previous quarter (AirAsia, 2005).

Phuntshok .R

Page 1

Air Asia
INTRODUCTION AirAsias mission statement is to be the Asia's leading low fare no frills airlineand first to introduce "ticketless" traveling, AirAsia will be unveiling moreincentives in the future to encourage more air travel among Malaysians.(AirAsia, N.D).

Now Everyone Can Fly clearly describes AirAsias value. Cost advantagescreated by AirAsia through operational effectiveness and efficiency go directly tothe customers. The customers now enjoy much more surplus than before as thefare falls dramatically and AirAsia captures some of the dead weight losses bycapturing segments of customers that previously cannot afford the airlines fare.

Business Strategy Aligned with its mission statement, AirAsias business strategy is centred on costleadership. However, its business strategy targets specific markets; pricesensitive customers (including first-time fliers) needing short-haul flights. InPorters generic strategies, AirAsias business strategy can be categorised intofocused cost leadership; quadrant 3A in figure 1.

In 2004, the airline industry flew 1.8 billion passengers, of which about 30% were inAsia. Airline traffic in Asia is projected to grow at 7.1% annually for the next 5 years and morethan triple in the next 20 years. Given AirAsias strong presence in the region, this presents vastopportunities to enlarge the companys market shares.

The Airline businesses are closely linked to economic activities in Asia and the world. Assuch, AirAsia needs to be cognisant with the business cycle so that it can to take full advantageof such effects especially when there are changes in discretionary income and consumerspending patterns. AirAsia also needs to be mindful that increase in demand of fuel and limitedsupply can lead to higher fuel price that decrease yield. Last but not least, the impact of crisissuch as 9/11 (2001) and SARS outbreak (2003) was able to hit the airline industry badly and assuch they continue to pose serious threat to airlines. Analysis of Competitive Forces - Porters Five Forces Analysis :

Phuntshok .R

Page 2

Air Asia

AirAsia builds and sustains its competitive advantage by providing services at aprice that is simply lower than competitors price. Operation effectiveness andoutstanding efficiency are two main characteristics of low cost businessesincluding AirAsia. The central objective is to achieve bigger cost advantages thanthe rivals by continuously searching areas for cost reduction along its valuechain. By further analysing AirAsias value chain, one can actually determine howAirAsia creates cost advantages along its value chain. Appendix 2 summarisesthe sources of cost advantages contributable to the low cost business model for each activity in AirAsias value chain. These cost advantages constitute AirAsiasorder winner in competing with its rivals as they enable AirAsia to provide thelowest possible price to the price sensitive customers. In LCC industry, cost isthe competitive priority and it determines market position.

Environmental Scanning Environmental scanning is performed to assess the attractiveness of LCCindustry specifically in Asia. Macro-environmental scanning will be conducted byanalysing significant macro factors affecting the LCC industry while Porters fiveforces will be utilised to assess the micro-environment surrounding LCC industry.

Macro-Environment The major macro-environmental factors suggest a very conductive environmentfor the growth of LCCs in Asia. According to Sachs (1997), demographicfundamentals of large
Phuntshok .R Page 3

Air Asia

populations, rising middle classes with increasing leisuretime and disposable incomes, combined with the lack of competitive forms oftransportation, paint an extremely encouraging demand picture in the long run. Furthermore, air travel market is bound to continue to grow due to a rapidlyincreasing urbanisation trends (Centre for Asia Pacific Aviation, 2002).Archipelago geographical structure of Asia continent is also contributable to theimportance of air transportation. For example, there is no other viable andefficient mode of transportation between East and West Malaysia other than byair (Lawton and Solomko, 2003). While the impact of terrorism and SARS can benegative for the growth of LCCs, the long run forecast continues to be verypositive.

Micro-Environment Porters five forces is utilised to perform the micro-environmental analysisspecific to LCC industry in Asia. The overall power of supplier is high due tolimited number of suppliers (only Boeing and Airbus). The power of buyer ismoderately high due to almost no switching cost for customers to switch fromone LCC to another. In addition, the access to the internet allows customers tohave close to full information on prices charged by the LCCs. Threat of substitutes is moderately low; there are several substitutes such as cruises, rail,bus, and car. However, the archipelago geographical structure of Asia has madeair travel the viable, efficient, and convenient mode of transportation. Threat ofnew entry is moderate; high capital requirement and government barrier such asair service agreement can act as barriers to entry. However, the deregulation ofaviation industry in Asia Pacific region has resulted in more competitors enteringthe market. Furthermore, many full service airlines enter the LCC industry bylaunching their LCC version. For example, Nok Air set up by Thai Airways is a part of LCC industry in Thailand. Finally, industry rivalry is moderately high dueto price as the basis of competition and high exit cost. However, marketparticipants tend to realize that price war is destructive for them thus they avoiddirect price competition and they turn into friendly competitors. Appendix 3summarises Porters five forces specific to LCC industry. Based on the environmental scanning performed, the demand for LCC isexpanding thus LCC industry will keep growing rapidly. The LCC industryattractiveness and profitability will attract many full service airlines to launch itsLCC version adding the degree of rivalry in this industry. As the implication,AirAsia, current market leader of LCC in Malaysia, Thailand,

Phuntshok .R

Page 4

Air Asia

and Indonesia, willface competition from both existing and new players. In order to sustain itscompetitive advantage, AirAsia needs to leverage its competency in creating costadvantages across multiple value chains.

Boston Consulting Group (BCG) Matrix The market growth axis correlates with the product life cycle paradigm and predicates the cash requirement a product needs relative to the growth of that market. Reference to the BCG Matrix appended in Diagram 1, the ferry flight service provided by AirAsia is definitely in theStar sector since the companys business has achieved high growth rate as well as acquiredcomparatively larger market share.

However, although generally Stars are leaders in high growth markets and tend togenerate large amounts of cash, AirAsia must be mindful that they also use a lot of cash becauseof growth market conditions. In addition, AirAsia also needs to be aware that market growth is not the only factor or necessarily the most important factor when assessing the attractiveness of amarket as growth markets attract new entrants. For instance, if capacity exceeds demand, then aparticular market may become a low margin one and therefore becomes unattractive.

Phuntshok .R

Page 5

Air Asia
CONCLUSION Based on the external analysis, demand for budget airlines is expected to grow rapidly, attracting more competition and increasing the degree of rivalry. The attractiveness and profitability will attract many full-service airlines to launch their own budget airlines. Due the Southeast Asian region having the lowest rate of air travel per capita among the other regions indicates a strong potential for growth. As low prices alone cannot sustain AirAsia, it hasto maximize its operational efficiency to maintain its competitive advantage (i.e. being the leader in budget airlines) in the advent of existing and new competitors. Therefore, AirAsia has to leverage on its core competency (identified in theinternal analysis ) to create cost advantagesacross multiple value chains.For example, AirAsia could exploit the potentials of affordable (cheap) air travel by Asiasburgeoning middle class by leveraging on its operational efficiency (i.e. expanding into Chinaand India, which have large populations), propelled by Asian governments liberalization of theaviation industry (i.e. promoting tourism within and around Asia). When looking for (new)Indian routes (in its expansion into India), in order to adhere to its strict adherence to 3 hoursflying time model, AirAsia could start with routes (from Bangkok to India); leveraging onAirAsias efficiency and resources.

Efficiency creates cost (competitive advantage) savings that can be passed on to customers,resulting in lower ticket prices and improves its brand image (perceived value) for customers (i.e.cheap tickets and shorter flight times). Also, as AirAsia has established quite a number of Southeast Asian routes (e.g. China, Indonesia, Singapore, Malays Thailand, Hong Kong andMacau), it could look at joint ventures with pan-Asian budget airlines (e.g. Virgin Blue) toextend it services beyond (Southeast) Asia.Moreover, AirAsias low cost model emphasizes on the importance of maintaining costdiscipline (cost competitive advantage), it has no intention of moving up the airline value chain.This may prove to be a competitive advantage for AirAsia as it continues to provide customerswith cheaper ticker (than competitors), with flights that are efficient and reliable (e.g. safety):increasing customer confidence and appealing to the increasing number of budget travellers whoare willing to compromise on services for a cheaper, but safe and efficient flights.For instance, in order to maximize its existing (cost and differentiation) competitive advantages,AirAsia could use its Thai subsidiary (Thai AirAsia) to claim use of Thailands open skiesagreements to

Phuntshok .R

Page 6

Air Asia
overcome the barrier of bilateral aviation pacts that threaten to limit its growth(i.e. fly to Singapore, Brunei and Cambodia)

In addition, AirAsia would have to continuously identify new sources of cost advantage toenable it to provide the lowest price possible to budget-conscious customers, further improvingits market position with a range of innovation and personalized services.AirAsia managed to enhance its current offerings (and profitability) with substantial ancillaryrevenues derived from additional services (i.e. provision of in-flight food and drinks, and online sales of hotel, car, and holiday reservations, as well as travel insurance), and corporate travelservices, and even had its own branded credit card, further increasing brand awareness and valuefor customers (differentiation competitive advantage).AirAsia could further enhance its offerings by issuing smart cards, which are compatible with itsexisting ticketless booking system: one card for ordinary travellers (i.e. offering instant rewardswhen topped up and offers greater value than its purchase price), while the other offers unlimitedtravel for frequent travels (i.e. provisionally priced and allows customers to make as many tripsas they want within a specified period);leveraging on its use of technology

(differentiationcompetitive advantage).Therefore, in conclusion, it is possible for AirAsia to sustain its success as the long-run forecast continues to be very positive.

References/ Electronic journals:

Phuntshok .R

Page 7

Air Asia

Ireland, R D, Hoskission, R E &Hitt, MA 2009, The management of strategy concepts, 8thedn, South-Western Cengage Learning, USA

Singh, K, Pangarkar, N &Heracleous, L 2010, Business strategy in Asia a case book,

3rd edn,Cengage Learning Asia, Singapore

Centre for Asia Pacific Aviation (2002). Low Cost Airlines in Asia Pacific Region:

An Exceptional Intra-Regional Traffic Growth Opportunity. Retrieved from www.centreforaviation.com on 10th September 2005

Budhiarta, Iwan. (2009). Strategic Analysis of AirAsia: The Best Low-Cost Carrier

Airlines in the world. Unpublished, faculty of Economics and Business, National University of Malaysia, Malaysia.

Kho, Charles., Aruan, Sandy Hofman., Tjitrahardja, Christian., Narayanaswamy,

Ramaratnam.(2005). Air Asia Strategic IT Initiative. Unpublished, Faculty of Economics and Commerce, University of Melbourne, Melbourne

Phuntshok .R

Page 8

Air Asia
Appendix 1 AirAsias Value Chain

Phuntshok .R

Page 9

Air Asia
Appendix 2 Sources of AirAsias Cost Advantages along Its Value Chain

Phuntshok .R

Page 10

Air Asia

Appendix 3 Porters Five Forces LCC Industry in Asia

Phuntshok .R

Page 11