Asia
Content
1. Briefly describe the trends in the global airline industry. a) Increasing travel demand Two of the top six U.S. airlines saw their best traffic results in 18 months this past November. While Southwest recorded a 12 percent increase, Continental registered a 2.8 percent increase, respectively, in miles flown per passenger. These figures represent absolute increases in ‘warm bodies’ flown – a more reliable metric than passenger load factor. Clearly, the slump in air travel is ending. IATA has now revised its passenger traffic estimates for 2010 upwards by 4.5 percent (as against the previous forecast of 3.2 percent in September 2009). An estimated 2.28 billion people are expected to fly in 2010, bringing the total passenger numbers back in line with the peak recorded in 2007. b) Airline-supplier consolidation As airlines improve services while implementing aggressive pricing strategies, many plan to forge new links with distributors, including travel management agencies that don’t rely on the traditional GDS connections. A trend that first started two years ago, airlines are expected to continue to implement direct-connect models to manage products and inventories, and establish closer ties with their customers. For example, last October, American Airlines indicated its plans to move all indirect volume to direct connections. This will change the nature of Airline-GDS relationships. One notable potential byproduct of this trend could be GDS / TMC consolidation. With Amadeus and Travel port considering IPOs, the cash raised could be used to purchase a major global TMC. The GDS would like to have a more direct impact on their revenue potential from the carriers and, if this were to occur, a whole new dynamic will impact the already convoluted distribution model. c) Environmentally-responsible aviation By March 2010, EU-based airlines must provide carbon dioxide emission reports. That’s why, over the last six months, several EU airlines have begun using bio-fuel either wholly or in part on certain routes. This trend is now spreading to North America where several airlines have indicated their interest in buying eco-friendly jet fuel. In addition, several EU airlines have begun developing carbon offset programs as well as implementing shorter routes and efficient landing operations as well as best practices in fuel management to reduce emissions. Two years ago, Richard Branson spoke of coconuts as an alternative to fly his
planes around the globe. His pioneering measure at Virgin Atlantic has raised the awareness about eco-friendly air travel. d) More incentive trips After a year of bad press, travel incentives for top company performers are slowly coming back. This is good news not just for airlines and hotels but for businesses further downstream such as TMCs, car rental companies and restaurants, to name a few. According to the U.S. Travel Association, incentive trips make for sound businesses and jobs. Such trips, meetings and events account for 15 percent of all travel spending, which creates an estimated 2.4 million jobs, USD 240 billion in spending and USD 39 billion in tax revenue in the U.S. alone. e) Union challenges The U.S. government is working on changing voting rules for unions which will effectively give them more bargaining power. The U.S. Federal Mediation Board is considering no longer requiring a majority vote amongst all potential members for unionization. For aviation, this would have negative implications such as higher operational costs and potentially increased disruption like delays and cancellations. In 2009, some U.S. and global carriers experienced multiple slowdowns or ‘sickouts.’ Airline employees believe they have taken more than their fair share of the pain in the downturn and are now fighting to regain what they gave up. Even if strikes are not called, such smaller, targeted actions by the unions wreak havoc throughout the network at a time when we are starting to see the first good news in traffic growth in years. Even with signs of growth, the industry will not be out of the proverbial woods in 2010. IATA estimates that airlines will record losses of USD 5.6 billion this year – the good news is that this number is just over half 2009′s estimated losses. 2. What is the business level strategy adopted by Air Asia? a) Single Class, No Frills Service As with most low-cost airlines, Air Asia operated a single class-service, without frills and at substantially lower prices: passengers were not allocated seats, did not receive meals, entertainment, amenities (i.e. pillows or blanks), loyalty program
points, or access to airport lounges. Air Asia’s aircraft were designed to minimize wear and tear, cleaning time and cost. This reduced cleaning and maintenance expenses, loading and unloading times and costs, and allowed quicker turnarounds between flights, improving process efficiencies (differentiation) and having lower costs (cost advantage). b) High Aircraft Utilization and Efficient Operations Compared with other airlines, Air Asia’s usage of its aircraft and staff was more efficient. Such (high) efficiency and utilization meant that the overhead and fixed costs associated with an aircraft were lower on a per flight basis. For example, seating configurations to Air Asia’s Boeing 737-300 aircraft were maximized, having 16 more seats than the standard configuration adopted by full-service competitors. In addition, Air Asia’s aircraft (i.e. point-to-point services kept flights to no more than 4 hours, minimizing turnaround time), and employees (i.e. encouraged to perform multiple roles), were used more effectively and intensively than competitors. For example, its point-to-point services (in 2004) enabled Air Asia to operate its aircraft an average of approximately 13 hours/day. It was 2.5 hours more efficient then full-services airlines, which only managed to use their aircraft for an average 10.5 hours/day. Furthermore, the average turnaround time for Air Asia’s aircraft was lesser (e.g. 25 minutes), as compared to full-service airlines (e.g. 45-120 minutes). c) Single Aircraft Type Operating a single aircraft type enabled Air Asia to have substantial cost savings: maintenance was simplified (i.e. made cheaper), spare parts inventory was minimized, infrastructure and equipment needs were reduced, staff and training needs were lowered (i.e. easy for pilot dispatch), and better purchase terms could be negotiated. For instance, its large purchase of A-320s would make Air Asia on of the relatively few low cost airlines operating this aircraft. With fuel accounting for almost 50% of the total operating costs for the airline, the A-320s would provide an important cost saving of lower fuel usage by about 12%; increasing the airline’s profitability. d) Low Fixed Costs Air Asia achieved low fixed costs through successful negotiations for low lease rates for its aircraft, low rates for its long-term maintenance contracts, and low airport fees. This enabled Air Asia to reduce its overheads and investments in equipment’s
substantially in the absence of fringe services. As a result of its successful negotiations, Air Asia’s contractual lease charges per aircraft decreased by more than 60% from 2001 to 2004. Aircraft maintenance contract costs were also reported to be substantially lower than other airlines, giving Air Asia a competitive advantage, which was further compounded by its young fleet. Furthermore, the airline’s high safety and maintenance standards allowed Air Asia to procure rates that were favorable on its insurance policies. e) Low Distribution Costs By utilizing information technology (i.e. being the first airline in Southeast Asia to utilize e-ticketing, bypassing traditional travel agents), Air Asia achieved low distribution costs by eliminating the need for large and expensive booking/reservation systems, and agents’ commissions. This saved the airline the cost of issuing physical ticket (i.e. estimated at US$10 per ticket). f) Minimizing Personnel Expenses As a high portion of costs was the salaries and benefits for its employees, Air Asia implemented flexible work rules, streamlining administrative functions, which allowed employees to perform multiple roles within a simple and flat organizational structure. Having employees perform multiple roles enabled Air Asia to deploy fewer employees per aircraft (i.e. ratio of 106 per aircraft versus 110 employees or more for competitors), saving on overhead costs and maximizing employees’ productivity, as process efficiencies are improved. Air Asia’s employees were not unionized, hence its rumination policy focused on maximizing efficiency and productivity, whilst keeping staff costs at levels consistent with low-cost carrier industry standards. Although salaries offered to employees were below that of rivals, all employees were offered a wide range of incentives (i.e. productivity and performance-based bonuses, share offers, and stock options). In addition, rather than an hourly pay scale for its pilots, Air Asia adopted a sector pay policy: pilots were provided incentives to enhance flight operation efficacies by keeping flight and operating times to a minimum, and to cover as many flight sectors as possible within a day. The absence of in-flight services made it possible for the airline to reduce the number of cabin crew per light, saving on employee cost.
g) Maximizing Media Coverage
Being a leader among budget airlines in Southeast Asia, Air Asia received regular coverage from media outlets. Air Asia managed to promote brand awareness without incurring high sales and marketing expenses: in all of his media appearances, Frenandes always appeared wearing a red Air Asia baseball cap and his statements reinforcing Air Asia’s positioning to offer low prices; generating media attention for the airline. However, Air Asia also invested heavily where required: Air Asia’s major sponsorship for Manchester United, involved global sponsorship and advertising, and promoted the brand beyond the region. h) Use of Secondary Airports Air Asia, as with most low-cost airlines, usually operated out of secondary airports which allowed Air Asia to charge lower fares, as operation costs were lower: landing, parking, and ground handling fees were lower, with more slots for landings and takeoffs. i) Low-Cost Philosophy To reinforce its low-cost structure, Air Asia instilled a low-cost culture, emphasizing on cost avoidance. For example, emphasis was placed on the elimination of avoidable expanses such as tag costing (despite reach tag costing less than US$0.05), turning off cabin lights at appropriate times, and not overheating inflight ovens. Such cost saving measures enabled Air Asia to achieve costs per average seat kilometer of US$0.0213 (the lowest for any airline in the world), with its margins of 38% (before taxes, interests, depreciation, and amortization) being the highest in the world in 2004. Therefore, in conclusion, by eliminating the provision of costly in-flight services, flying a standard fleet, selling tickets to passengers, and minimizing labor, facilities and overhead costs, Air Asia has managed to achieve a successful low-cost structure, which enables it to charge lower prices to achieve high passenger loads, market share, and profitability.
3. How does Air Asia achieve cost leadership through differentiation? a) Low Cost Model: Low cost operations and fixed costs Focusing on providing air travel without frills at substantially lower prices, Air Asia has managed to achieve lower prices to attain high passenger loads, market share, and profitability by eliminating provision of costly in-flight services, flying a standard fleet, selling tickets to passengers directly, and minimizing labor, facilities
and overhead costs (i.e. passengers are not allocated seats, and do not receive meals, entertainment, amenities, or access to airport lounges). Its successful negotiations for its low aircraft lease rates, low long-term maintenance contracts rates, and low airport fees, enabled Air Asia to provide the lowest fares. As a result, Air Asia was able to reduce its overheads and investments in equipment’s substantially in the absence of fringe services. Moreover, Air Asia’s aircraft maintenance contract costs were reported to be substantially lower than other airlines (i.e. contractual lease charge per aircraft decreased by more than 60% from 2001 to 2004), adding to Air Asia’s competitive advantage, which was further compounded by its young fleet. Air Asia’s high safety and maintenance standards allowed Air Asia to procure favorable rates on its insurance policies, increasing customer confidence. Therefore, this is a valuable, rare, non-substitutable capability and difficult to imitate (by competitors), which creates sustainable (cost) competitive advantage for Air Asia. b) Low Distribution Costs: Utilization of Information Technology (IT) Being the first airline in Southeast Asia to utilize e-ticketing and bypass traditional travel agents, Air Asia saved on the cost of issuing physical ticket (i.e. estimated at US$10 per ticket), eliminating the need for large and expensive booking/reservation systems, and agents’ commissions. In 2004, Air Asia’s website was voted the most popular site for online shopping in Malaysia: internet bookings increased from 5% of all bookings in 2002, to approximately 50% in 2004. Air Asia subsequently made its tickets available via post offices and designated bank teller (ATM) machines, increasing accessibility to consumers while having lower distribution costs, gaining more market share in the process. c) Single aircraft type Operating a single aircraft type enabled Air Asia to have substantial cost savings: maintenance was simplified (i.e. made cheaper), spare parts inventory was minimized, infrastructure and equipment needs were reduced, staff and training needs were lowered (i.e. easy for pilot dispatch), and better purchase terms could be negotiated. Therefore, this resource is a core competency (resource) as it is rare, difficult to imitate and without substitutes. Air Asia has the largest fleet size of 30 has
compared with its nearest competitor in the low-cost airline industry (Bangkok Airways) with a fleet size of 15. d) High aircraft utilization and efficient operations Air Asia aircrafts (i.e. point-to-point services kept flights to no more than 4 hours, minimizing turnaround time) and employees (i.e. perform multiple roles) were more effectively and intensively used as compared with other airlines. In 2004, as a result of its point-to-point services, Air Asia managed to operate its aircraft or an average of approximately 13 hours/day. This was 2.5 hours more than efficient full-services airlines, which only managed to use their aircraft for an average 10.5 hours/day. Also, the average turnaround time for Air Asia’s aircraft was lesser (e.g. 25 minutes), as compared to that of a full-service airline (e.g.45120 minutes). Thus, this capability provides Air Asia with a sustainable (differentiation and cost) competitive advantage as it is rare, difficult to imitate (e.g. not many competitors were as successful as Air Asia), and without substitutes. e) Flat organizational structure and effective staff policies A high portion of Air Asia costs was the salaries and benefits for its employees. Hence, the airline implemented flexible work rules, streamlining administrative functions which allowed employees to perform multiple roles within a simple and flat organizational structure. In Air Asia’s case, a flatter hierarchy improved (spedup) communication, resulting in an effective and focused workforce. Air Asia’s rumination policy focused on maximizing efficiency and productivity, whilst keeping staff costs at levels consistent with low-cost carrier industry standards. Although salaries offered to employees were below that of rivals, all employees were offered a wide range of incentives such as productivity and performance-based bonuses, share offers, and stock options. This motivated employees, giving them a sense of ‘ownership’. f) Low-Cost Philosophy Although other Budget airlines attempted to do the same, Air Asia managed to be more effective at implementing these measures (difficult to imitate). Exhibit 10 provides an overview of Air Asia’s efficiency: Air Asia managed to achieve cost per average seat per kilometer of 3.16 U.S. cents, the lowest for any airline in the
world; giving it a competitive (cost) advantage as it is able to maintain its low fares for passengers. Hence, this is a sustainable (cost) competitive advantage for Air Asia as it is rare (e.g. lowest cost per average seat per kilometer in the world), difficult to imitate (e.g. no many competitors were as successful as Air Asia), and without substitutes. g) Strong branding and marketing Due to aggressive expansion, Air Asia was able to penetrate potential markets. From 3 routes in Malaysia (in early 2002), Air Asia quickly expanded its route network in Malaysia, covering all major destinations in Malaysia (by end of 2002). As a result, Air Asia had a regional presence (though joint-ventures) in Southeast Asian with countries such as Indonesia (Indonesia Air Asia), Thailand (Thai Air Asia). Subsequently, Air Asia become a leader among low-cost carriers in Southeast Asia, receiving regular coverage from regional media outlets. Hence, the airline was able to penetrate and stimulate potential markets by maximizing media coverage: brand awareness promotion without incurring high sales and marketing expenses. Additionally, Air Asia’s aggressive marketing stimulated potential markets: its introductory promotional fares in 2002 of US$2.50, attracted huge publicity and interest from travelers who were used to high prices; emphasizing the airline’s slogan, “Now Everyone Can Fly”. This resulted in Air Asia’s profitability within few months of its operations commencements. Strong passenger growth and high passenger loads where Air Asia enjoyed compound average growth of 45% for sales during the period between 2001 and 2004. Moreover, Air Asia’s major sponsorship for Manchester United, which involved global sponsorship and advertising, further promoted the brand beyond the region. Air Asia also managed to enhance its current offerings (and profitability) with substantial ancillary revenues derived from additional services (i.e. provision of inflight food and drinks, and online sales of hotel, car, and holiday reservations, as well as travel insurance), and corporate travel services, and even had its own branded credit card, further increasing brand awareness and value for customers. Therefore, as this capability is rare, difficult to imitate and without substitutes, it is a sustainable (differentiation) competitive advantage for Air Asia. Based on the above internal analysis, Air Asia’s simple proven business model, which consistently delivers the lowest fares, has been identified as Air Asia’s core
competency. It consists of resources and capabilities that are both valuable and difficult to imitate (e.g. low costs, low fares, strong branding and marketing, and reliable service), giving Air Asia a competitive (cost and differentiation) advantage. A value chain analysis has been conducted to give determine how Air Asia’s value chain creates cost advantages (competitive advantage) through a chain of value creating activities, with the goal to generate a profit margin with value that exceeds the cost of providing the product/services.
4. Identify the ways Air Asia can sustain its competitiveness through the business level strategy that is adopted? 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 Air Asia, it has to 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, Air Asia has to leverage on its core competency create cost advantages across multiple value chains.
For example, Air Asia could exploit the potentials of affordable (cheap) air travel by Asia’s burgeoning middle class by leveraging on its operational efficiency (i.e. expanding into China and India, which have large populations), propelled by Asian governments liberalization of the aviation 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 3½ hours flying time model, Air Asia could start with routes (from Bangkok to India); leveraging on Air Asia’s 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 Air Asia has established quite a number of Southeast Asian routes (e.g. China, Indonesia, Singapore, Malays Thailand, Hong Kong and Macau), it could look at joint ventures with pan-Asian budget airlines (e.g. Virgin Blue) to extend it services beyond (Southeast) Asia.
Moreover, Air Asia’s low cost model emphasizes on the importance of maintaining cost discipline (cost competitive advantage), it has no intention of moving up the
airline value chain. This may prove to be a competitive advantage for Air Asia as it continues to provide customers with 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 travelers who are 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, Air Asia could use its Thai subsidiary (Thai Air Asia) to claim use of Thailand’s ‘open skies’ agreements to overcome the barrier of bilateral aviation pacts that threaten to limit its growth (i.e. fly to Singapore, Brunei and Cambodia).
In addition, Air Asia would have to continuously identify new sources of cost advantage to enable it to provide the lowest price possible to budget-conscious customers, further improving its market position with a range of innovation and personalized services. Air Asia managed to enhance its current offerings (and profitability) with substantial ancillary revenues 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 travel services, and even had its own branded credit card, further increasing brand awareness and value for customers (differentiation competitive advantage).
Air Asia could further enhance its offerings by issuing smart cards, which are compatible with its existing ticketless booking system: one card for ordinary travelers (i.e. offering instant rewards when topped up and offers greater value than its purchase price), while the other offers unlimited travel for frequent travels (i.e. provisionally priced and allows customers to make as many trips as they want within a specified period); leveraging on its use of technology (differentiation competitive advantage).
planes around the globe. His pioneering measure at Virgin Atlantic has raised the awareness about eco-friendly air travel. d) More incentive trips After a year of bad press, travel incentives for top company performers are slowly coming back. This is good news not just for airlines and hotels but for businesses further downstream such as TMCs, car rental companies and restaurants, to name a few. According to the U.S. Travel Association, incentive trips make for sound businesses and jobs. Such trips, meetings and events account for 15 percent of all travel spending, which creates an estimated 2.4 million jobs, USD 240 billion in spending and USD 39 billion in tax revenue in the U.S. alone. e) Union challenges The U.S. government is working on changing voting rules for unions which will effectively give them more bargaining power. The U.S. Federal Mediation Board is considering no longer requiring a majority vote amongst all potential members for unionization. For aviation, this would have negative implications such as higher operational costs and potentially increased disruption like delays and cancellations. In 2009, some U.S. and global carriers experienced multiple slowdowns or ‘sickouts.’ Airline employees believe they have taken more than their fair share of the pain in the downturn and are now fighting to regain what they gave up. Even if strikes are not called, such smaller, targeted actions by the unions wreak havoc throughout the network at a time when we are starting to see the first good news in traffic growth in years. Even with signs of growth, the industry will not be out of the proverbial woods in 2010. IATA estimates that airlines will record losses of USD 5.6 billion this year – the good news is that this number is just over half 2009′s estimated losses. 2. What is the business level strategy adopted by Air Asia? a) Single Class, No Frills Service As with most low-cost airlines, Air Asia operated a single class-service, without frills and at substantially lower prices: passengers were not allocated seats, did not receive meals, entertainment, amenities (i.e. pillows or blanks), loyalty program
points, or access to airport lounges. Air Asia’s aircraft were designed to minimize wear and tear, cleaning time and cost. This reduced cleaning and maintenance expenses, loading and unloading times and costs, and allowed quicker turnarounds between flights, improving process efficiencies (differentiation) and having lower costs (cost advantage). b) High Aircraft Utilization and Efficient Operations Compared with other airlines, Air Asia’s usage of its aircraft and staff was more efficient. Such (high) efficiency and utilization meant that the overhead and fixed costs associated with an aircraft were lower on a per flight basis. For example, seating configurations to Air Asia’s Boeing 737-300 aircraft were maximized, having 16 more seats than the standard configuration adopted by full-service competitors. In addition, Air Asia’s aircraft (i.e. point-to-point services kept flights to no more than 4 hours, minimizing turnaround time), and employees (i.e. encouraged to perform multiple roles), were used more effectively and intensively than competitors. For example, its point-to-point services (in 2004) enabled Air Asia to operate its aircraft an average of approximately 13 hours/day. It was 2.5 hours more efficient then full-services airlines, which only managed to use their aircraft for an average 10.5 hours/day. Furthermore, the average turnaround time for Air Asia’s aircraft was lesser (e.g. 25 minutes), as compared to full-service airlines (e.g. 45-120 minutes). c) Single Aircraft Type Operating a single aircraft type enabled Air Asia to have substantial cost savings: maintenance was simplified (i.e. made cheaper), spare parts inventory was minimized, infrastructure and equipment needs were reduced, staff and training needs were lowered (i.e. easy for pilot dispatch), and better purchase terms could be negotiated. For instance, its large purchase of A-320s would make Air Asia on of the relatively few low cost airlines operating this aircraft. With fuel accounting for almost 50% of the total operating costs for the airline, the A-320s would provide an important cost saving of lower fuel usage by about 12%; increasing the airline’s profitability. d) Low Fixed Costs Air Asia achieved low fixed costs through successful negotiations for low lease rates for its aircraft, low rates for its long-term maintenance contracts, and low airport fees. This enabled Air Asia to reduce its overheads and investments in equipment’s
substantially in the absence of fringe services. As a result of its successful negotiations, Air Asia’s contractual lease charges per aircraft decreased by more than 60% from 2001 to 2004. Aircraft maintenance contract costs were also reported to be substantially lower than other airlines, giving Air Asia a competitive advantage, which was further compounded by its young fleet. Furthermore, the airline’s high safety and maintenance standards allowed Air Asia to procure rates that were favorable on its insurance policies. e) Low Distribution Costs By utilizing information technology (i.e. being the first airline in Southeast Asia to utilize e-ticketing, bypassing traditional travel agents), Air Asia achieved low distribution costs by eliminating the need for large and expensive booking/reservation systems, and agents’ commissions. This saved the airline the cost of issuing physical ticket (i.e. estimated at US$10 per ticket). f) Minimizing Personnel Expenses As a high portion of costs was the salaries and benefits for its employees, Air Asia implemented flexible work rules, streamlining administrative functions, which allowed employees to perform multiple roles within a simple and flat organizational structure. Having employees perform multiple roles enabled Air Asia to deploy fewer employees per aircraft (i.e. ratio of 106 per aircraft versus 110 employees or more for competitors), saving on overhead costs and maximizing employees’ productivity, as process efficiencies are improved. Air Asia’s employees were not unionized, hence its rumination policy focused on maximizing efficiency and productivity, whilst keeping staff costs at levels consistent with low-cost carrier industry standards. Although salaries offered to employees were below that of rivals, all employees were offered a wide range of incentives (i.e. productivity and performance-based bonuses, share offers, and stock options). In addition, rather than an hourly pay scale for its pilots, Air Asia adopted a sector pay policy: pilots were provided incentives to enhance flight operation efficacies by keeping flight and operating times to a minimum, and to cover as many flight sectors as possible within a day. The absence of in-flight services made it possible for the airline to reduce the number of cabin crew per light, saving on employee cost.
g) Maximizing Media Coverage
Being a leader among budget airlines in Southeast Asia, Air Asia received regular coverage from media outlets. Air Asia managed to promote brand awareness without incurring high sales and marketing expenses: in all of his media appearances, Frenandes always appeared wearing a red Air Asia baseball cap and his statements reinforcing Air Asia’s positioning to offer low prices; generating media attention for the airline. However, Air Asia also invested heavily where required: Air Asia’s major sponsorship for Manchester United, involved global sponsorship and advertising, and promoted the brand beyond the region. h) Use of Secondary Airports Air Asia, as with most low-cost airlines, usually operated out of secondary airports which allowed Air Asia to charge lower fares, as operation costs were lower: landing, parking, and ground handling fees were lower, with more slots for landings and takeoffs. i) Low-Cost Philosophy To reinforce its low-cost structure, Air Asia instilled a low-cost culture, emphasizing on cost avoidance. For example, emphasis was placed on the elimination of avoidable expanses such as tag costing (despite reach tag costing less than US$0.05), turning off cabin lights at appropriate times, and not overheating inflight ovens. Such cost saving measures enabled Air Asia to achieve costs per average seat kilometer of US$0.0213 (the lowest for any airline in the world), with its margins of 38% (before taxes, interests, depreciation, and amortization) being the highest in the world in 2004. Therefore, in conclusion, by eliminating the provision of costly in-flight services, flying a standard fleet, selling tickets to passengers, and minimizing labor, facilities and overhead costs, Air Asia has managed to achieve a successful low-cost structure, which enables it to charge lower prices to achieve high passenger loads, market share, and profitability.
3. How does Air Asia achieve cost leadership through differentiation? a) Low Cost Model: Low cost operations and fixed costs Focusing on providing air travel without frills at substantially lower prices, Air Asia has managed to achieve lower prices to attain high passenger loads, market share, and profitability by eliminating provision of costly in-flight services, flying a standard fleet, selling tickets to passengers directly, and minimizing labor, facilities
and overhead costs (i.e. passengers are not allocated seats, and do not receive meals, entertainment, amenities, or access to airport lounges). Its successful negotiations for its low aircraft lease rates, low long-term maintenance contracts rates, and low airport fees, enabled Air Asia to provide the lowest fares. As a result, Air Asia was able to reduce its overheads and investments in equipment’s substantially in the absence of fringe services. Moreover, Air Asia’s aircraft maintenance contract costs were reported to be substantially lower than other airlines (i.e. contractual lease charge per aircraft decreased by more than 60% from 2001 to 2004), adding to Air Asia’s competitive advantage, which was further compounded by its young fleet. Air Asia’s high safety and maintenance standards allowed Air Asia to procure favorable rates on its insurance policies, increasing customer confidence. Therefore, this is a valuable, rare, non-substitutable capability and difficult to imitate (by competitors), which creates sustainable (cost) competitive advantage for Air Asia. b) Low Distribution Costs: Utilization of Information Technology (IT) Being the first airline in Southeast Asia to utilize e-ticketing and bypass traditional travel agents, Air Asia saved on the cost of issuing physical ticket (i.e. estimated at US$10 per ticket), eliminating the need for large and expensive booking/reservation systems, and agents’ commissions. In 2004, Air Asia’s website was voted the most popular site for online shopping in Malaysia: internet bookings increased from 5% of all bookings in 2002, to approximately 50% in 2004. Air Asia subsequently made its tickets available via post offices and designated bank teller (ATM) machines, increasing accessibility to consumers while having lower distribution costs, gaining more market share in the process. c) Single aircraft type Operating a single aircraft type enabled Air Asia to have substantial cost savings: maintenance was simplified (i.e. made cheaper), spare parts inventory was minimized, infrastructure and equipment needs were reduced, staff and training needs were lowered (i.e. easy for pilot dispatch), and better purchase terms could be negotiated. Therefore, this resource is a core competency (resource) as it is rare, difficult to imitate and without substitutes. Air Asia has the largest fleet size of 30 has
compared with its nearest competitor in the low-cost airline industry (Bangkok Airways) with a fleet size of 15. d) High aircraft utilization and efficient operations Air Asia aircrafts (i.e. point-to-point services kept flights to no more than 4 hours, minimizing turnaround time) and employees (i.e. perform multiple roles) were more effectively and intensively used as compared with other airlines. In 2004, as a result of its point-to-point services, Air Asia managed to operate its aircraft or an average of approximately 13 hours/day. This was 2.5 hours more than efficient full-services airlines, which only managed to use their aircraft for an average 10.5 hours/day. Also, the average turnaround time for Air Asia’s aircraft was lesser (e.g. 25 minutes), as compared to that of a full-service airline (e.g.45120 minutes). Thus, this capability provides Air Asia with a sustainable (differentiation and cost) competitive advantage as it is rare, difficult to imitate (e.g. not many competitors were as successful as Air Asia), and without substitutes. e) Flat organizational structure and effective staff policies A high portion of Air Asia costs was the salaries and benefits for its employees. Hence, the airline implemented flexible work rules, streamlining administrative functions which allowed employees to perform multiple roles within a simple and flat organizational structure. In Air Asia’s case, a flatter hierarchy improved (spedup) communication, resulting in an effective and focused workforce. Air Asia’s rumination policy focused on maximizing efficiency and productivity, whilst keeping staff costs at levels consistent with low-cost carrier industry standards. Although salaries offered to employees were below that of rivals, all employees were offered a wide range of incentives such as productivity and performance-based bonuses, share offers, and stock options. This motivated employees, giving them a sense of ‘ownership’. f) Low-Cost Philosophy Although other Budget airlines attempted to do the same, Air Asia managed to be more effective at implementing these measures (difficult to imitate). Exhibit 10 provides an overview of Air Asia’s efficiency: Air Asia managed to achieve cost per average seat per kilometer of 3.16 U.S. cents, the lowest for any airline in the
world; giving it a competitive (cost) advantage as it is able to maintain its low fares for passengers. Hence, this is a sustainable (cost) competitive advantage for Air Asia as it is rare (e.g. lowest cost per average seat per kilometer in the world), difficult to imitate (e.g. no many competitors were as successful as Air Asia), and without substitutes. g) Strong branding and marketing Due to aggressive expansion, Air Asia was able to penetrate potential markets. From 3 routes in Malaysia (in early 2002), Air Asia quickly expanded its route network in Malaysia, covering all major destinations in Malaysia (by end of 2002). As a result, Air Asia had a regional presence (though joint-ventures) in Southeast Asian with countries such as Indonesia (Indonesia Air Asia), Thailand (Thai Air Asia). Subsequently, Air Asia become a leader among low-cost carriers in Southeast Asia, receiving regular coverage from regional media outlets. Hence, the airline was able to penetrate and stimulate potential markets by maximizing media coverage: brand awareness promotion without incurring high sales and marketing expenses. Additionally, Air Asia’s aggressive marketing stimulated potential markets: its introductory promotional fares in 2002 of US$2.50, attracted huge publicity and interest from travelers who were used to high prices; emphasizing the airline’s slogan, “Now Everyone Can Fly”. This resulted in Air Asia’s profitability within few months of its operations commencements. Strong passenger growth and high passenger loads where Air Asia enjoyed compound average growth of 45% for sales during the period between 2001 and 2004. Moreover, Air Asia’s major sponsorship for Manchester United, which involved global sponsorship and advertising, further promoted the brand beyond the region. Air Asia also managed to enhance its current offerings (and profitability) with substantial ancillary revenues derived from additional services (i.e. provision of inflight food and drinks, and online sales of hotel, car, and holiday reservations, as well as travel insurance), and corporate travel services, and even had its own branded credit card, further increasing brand awareness and value for customers. Therefore, as this capability is rare, difficult to imitate and without substitutes, it is a sustainable (differentiation) competitive advantage for Air Asia. Based on the above internal analysis, Air Asia’s simple proven business model, which consistently delivers the lowest fares, has been identified as Air Asia’s core
competency. It consists of resources and capabilities that are both valuable and difficult to imitate (e.g. low costs, low fares, strong branding and marketing, and reliable service), giving Air Asia a competitive (cost and differentiation) advantage. A value chain analysis has been conducted to give determine how Air Asia’s value chain creates cost advantages (competitive advantage) through a chain of value creating activities, with the goal to generate a profit margin with value that exceeds the cost of providing the product/services.
4. Identify the ways Air Asia can sustain its competitiveness through the business level strategy that is adopted? 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 Air Asia, it has to 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, Air Asia has to leverage on its core competency create cost advantages across multiple value chains.
For example, Air Asia could exploit the potentials of affordable (cheap) air travel by Asia’s burgeoning middle class by leveraging on its operational efficiency (i.e. expanding into China and India, which have large populations), propelled by Asian governments liberalization of the aviation 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 3½ hours flying time model, Air Asia could start with routes (from Bangkok to India); leveraging on Air Asia’s 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 Air Asia has established quite a number of Southeast Asian routes (e.g. China, Indonesia, Singapore, Malays Thailand, Hong Kong and Macau), it could look at joint ventures with pan-Asian budget airlines (e.g. Virgin Blue) to extend it services beyond (Southeast) Asia.
Moreover, Air Asia’s low cost model emphasizes on the importance of maintaining cost discipline (cost competitive advantage), it has no intention of moving up the
airline value chain. This may prove to be a competitive advantage for Air Asia as it continues to provide customers with 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 travelers who are 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, Air Asia could use its Thai subsidiary (Thai Air Asia) to claim use of Thailand’s ‘open skies’ agreements to overcome the barrier of bilateral aviation pacts that threaten to limit its growth (i.e. fly to Singapore, Brunei and Cambodia).
In addition, Air Asia would have to continuously identify new sources of cost advantage to enable it to provide the lowest price possible to budget-conscious customers, further improving its market position with a range of innovation and personalized services. Air Asia managed to enhance its current offerings (and profitability) with substantial ancillary revenues 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 travel services, and even had its own branded credit card, further increasing brand awareness and value for customers (differentiation competitive advantage).
Air Asia could further enhance its offerings by issuing smart cards, which are compatible with its existing ticketless booking system: one card for ordinary travelers (i.e. offering instant rewards when topped up and offers greater value than its purchase price), while the other offers unlimited travel for frequent travels (i.e. provisionally priced and allows customers to make as many trips as they want within a specified period); leveraging on its use of technology (differentiation competitive advantage).
