AirAsia: The World’s Lowest Cost Airline

Filiz McNamara and Vicki Troftgruben

AirAsia

An overview of AirAsia’s

Internal environment External environment Problem statement Possible solutions

AirAsia’s Vision“To be the largest low cost airline in Asia and

serving 3 billion people who are currently underserved with poor connectivity and high fares.”

“Now Everyone Can Fly”

AirAsia’s Mission“To be the best company to work for whereby

employees are treated as part of a big family,

Create a globally recognized ASEAN brand,

To attain the lowest cost so that everyone can fly with AirAsia,

Maintain the highest quality product, embracing technology to reduce cost and enhance service levels.”

AirAsia’s ValuesKey strategies:

Safety first High aircraft utilization Low fare, no frills Streamline operations Lean distribution system Point to point network

AirAsia’s StrategiesVision: Continue to be the LOWEST cost

airline in every market AirAsia serves

Goal: High margin – sustainable growth

Strategy: Safety, low fare, service and simplicity

Foundation: Low cost, efficiency, stimulate new markets, and strong cash flow

History of Low Cost AirlinesThe low-cost concept became a moneymaker

in the United States, where it was pioneered in the 1970’s by Southwest Airlines; the model for budget carriers elsewhere like Ryanair and easyJet in Europe

Background and FounderEstablished in 1993 and commenced operation

on November 18, 1996

December 2, 2001, it was purchased by former Time Warner executive Tony Fernandes’ company Tune Air SdnBhd from the ownership of HICOM Holdings Bhd for the token sum of only RM1, and with only 2 Boeing 737-300 aircraft plus another RM40 million (about $11 million) in debt

AirAsia operates scheduled domestic, regional and international flights to over 400 destinations spanning 25 countries

Background and FounderAirAsia has flown over 100 million guests upon

the core believe that ‘Now Everyone Can Fly’

Main terminal hub is the Low-Cost Carrier Terminal (LCCT) at Kuala Lumpur International Airport (KLIA), Malaysia

AirAsia operates scheduled domestic, regional and international flights to over 400 destinations spanning 25 countries

Organizational Structure

Last updated: July 2011

The following chart shows the corporate structure and principal operating companies for AirAsia

AirAsiaRevenue: 1Q-11 RM 1.05 Billion (1 Malaysian ringgit =

0.3257 US dollars)

Number of employees: 8,000

HQ location: Kuala Lumpur, Malaysia

Ownership: Listed on the Malaysian stock exchange

Year founded: 2001

The company grew from two planes in 2002 to a fleet of 86 aircraft flying 30 million people

AirAsiaFlight Profile

Every 3 minutes, an AirAsia aircraft is either taking off or landing somewhere in Asia

Aircraft fly an average of 2.8 million kilometers each year; that’s a distance equal to the moon and back, four times over

Pilots and cabin crew travel 500,000 kilometers each year; the equivalent of circling the Earth 13 times

AirAsiaFlight Profile

The aircraft consume approximately 14 million liters (3.64 million gallons) of fuel each year

The aircraft make contact on the tarmac approximately every 13,000 kilometers (8,077 miles) each year, about half the distance a normal passenger car puts in every year. BUT, the aircraft will require 16 tire changes each year

AirAsia AchievementsYear 2012

ATW Value Airline of the Year

Year 2011 Best Asian Low-Cost Carrier By TTG Travel Awards

2011 World’s Best Low Cost Airline Best Low Cost Airline – Asia by Skytrax Best Company for Investor Relations – Mid Cap Best Investor Relations Website – Mid Cap by

Malaysian Investor Relations Association (MIRA)

AirAsia TodayAssociate Companies

AirAsia (AK)AirAsia X (D7) Thai AirAsia (FD) Indonesia AirAsia (QZ)AirAsia Philippines (PQ)AirAsia Japan (Begins August 2012)

AirAsia AirAsia X (D7)

Established in 2007 to provide low-cost, long-haul flights (over 400 miles)

Flights to:

Australia, China, Europe, Japan, Korea, India, Middle East and New Zealand

AirAsia XPreviously known as FlyAsianXpress

Focusing on the low-cost, long-haul segment

Established in 2007 to provide high-frequency and point-to-point networks to the long haul-business

AirAsia X is spreading its wing to exciting destinations such as Australia, China, India, the Middle East and Europe

AirAsia Internal CapabilitiesFoster a dependency on Internet technology;

such as direct ticketing

Online booking, online checking (flight status, promotions), boarding passes on mobile phones

Investment in the AirAsia Academy

Dynamic environment between employees and management, quarterly meetings

No communication barriers between employers and employees

AirAsia Internal Capabilities“Employees before customers”

Aggressive marketing tactics, massive advertising, promotional packages

Employee motivation - rewards free flights for their staff

Offer customers the ticketless concept

Low operating costs - wages, airport fees, short ground waits due to simple boarding processes

Keeping costs low - uses one type of aircraft, Airbus A320

AirAsiaCorporate Belief

Now Everyone Can Fly

http://www.skyscanner.com/airline/airline-air-asia-ak.html

AirAsiaA firm can differentiate its offering along

five dimensions:

Product Services Personnel Channel Image

AirAsiaDifferentiation Strategies to

Online Businesses

Environment/ atmosphericsMaking the intangible tangibleBuilding trustEfficiency and timely order processingPricingCustomer Relationship Management (CRM)Enhancing the experience

AirAsia Online BusinessAirAsia’s Site Environment / Atmospherics

Fascinating, multitasking and user friendly Interactive buttons, accurate information

Flight booking, pricing, packages and vacation offers

Promotions are always becoming the main factor to be advertised on the website

AirAsiaMaking the Intangible Tangible

The AirAsia Website is providing lots of elements of “Making the Intangible Tangible” such as:On-time performanceOn-time guaranteeGo-In-sure hospital income planAttractive pictures of places to visitSitemaps

AirAsiaBuilding Trust

AirAsia has made trust a major element in making the customers and potential customers feel confident in dealing with the company website

Safe and encrypted payment process for transactions

One of the best secured sites for internet transactions

AirAsiaEfficient and Timely Order Processing

Payment by credit card or debit card Immediate purchasing servicesMaking the purchasing process available at

anytime and anywhere

AirAsiaPricing

Fares are significantly lower than those of other airline service providers

Website fares are much cheaper compared to the frontline counter price

Promotion pricing strategy has enhanced AirAsia’s reputation in making the promises become reality

AirAsiaCustomer Relationship Management

(CRM)

Always determine the customers as their first priority in every consideration

Customer or potential customers can always be connected to the AirAsia programs Promotional booking offersNews updatesPhone circularsFlight change information

AirAsiaEnhancing the Experience

The development has created outstanding improvement

Satisfaction of selling process, customer buying process and customer usage experience

AirAsia ShareholdersTop 5 Shareholders:

Tune Air Sdn Bhd Employees Provident Fund Board Genesis Smaller Companies Wellington Management Company The Nomad Investment Partnership Lp Cayman

AirAsiaValue chain

Primary activities such as: Inbound logisticsOperationsOutbound logisticsMarketing and SalesService

AirAsiaValue chain

Support activities such as:Human Resource ManagementTechnology DevelopmentProcurement

Potential Strategic Implementation

The Strategic Forces of Value Proposition

Assessment of Internal EnvironmentStrenghs

Low cost operations Fewer management levels, effective, focused

and aggressive management Simple proven business model that consistently

delivers the lowest fares Penetrate and stimulate potential markets Multi-skilled staffs means efficient and incentive

workforce Single type fleet minimizes maintenance fee and

pilot training costs

Assessment of Internal EnvironmentWeaknesses

Service resource is limited by lower costsLimited human resourcesGovernment interference and regulation on

airport deals and passenger compensationNon-central location of secondary airportsBrand is vital for market position and

developing it is always a challengeHeavy reliance on outsourcingNew entrants provide the price-sensitive

services

AirAsia’s External EnvironmentIndustry - Air Transportation Services

General external environmentGlobal DemographicsSocio-culturalPolitical-regulatoryEconomicTechnologicalPhysical environment

AirAsia’s External EnvironmentGeneral external environment

Global - AirAsia is a domestic, regional and international airline serving Southeast Asia, Europe, India, Indonesia, and AustraliaSuppliers – selected on a competitive

basisDemographics - serving those that cannot

afford the main stream airlines; about 500 million people within 3.5 hours flying time from their hub in Kuala Lumpur, Malaysia

Socio-cultural – AirAsia’s culture is relaxed, anyone can advance within the company and do anyone’s job regardless of education

AirAsia’s External EnvironmentGeneral external environment

Political-regulatory – AirAsia abides by all of the regulations within each country it serves, as well as maintaining strict maintenance standards on its planes

Economic – AirAsia is able to keep costs low via their

direct sales and marketing through their website and call center; they avoid paying commissions to travel agents

Aircraft maintenance is outsourced to 3rd parties; labor is usually the #1 cost for airlines

AirAsia’s External EnvironmentGeneral external environment

Technological – AirAsia outsources most of their IT needs based upon competitive bids; they are able to keep costs low by having consumers purchase directly from the website or from their call centerAirAsia uses Navitair’s Open Skies

computer reservation system (CRS)The CRS is a web-based sales and inventory

system which links to AirAsia’s call center and allows customers to print boarding passes

AirAsia’s Site Map

AirAsia External EnvironmentPartnerships - with Vietnam-Malaysia

cooperation formed VietJet AirAsia

Strong branding strategy: AT&T Williams F1 team, Manchester United, ASEAN Basketball League (ABL), EPL Referees, Oakland Raiders, NFL, The Amazing Race Asia, Monsoon Cup 2006, etc.

AirAsia X’s first flight from Kuala Lumpur, Malaysia to Stansted, London, England was greeted by Prince Andrew

Linking with Virgin Airlines provided financial backing and valuable industry experience

AirAsia External EnvironmentLooks for suppliers with good quality on certain

price points; builds long-term relationships

Airports have low cost terminal hubs

Computer Reservation System (CRS), recently involved in providing flight services for evacuation of Malaysian students in Egypt

AirAsia Five Forces AnalysisFive Forces - an industry-level analysis to

determine attractiveness of an industry

Threat of New Entrants – AirAsia’s low cost carrier strategy is to maintain efficiencies to sustain the lowest fares, thus being a barrier to new entrants

Threat of Substitute – As one of the most profitable low cost carriers, it is difficult for competitors to find enough efficiencies to become a substitute for AirAsia’s niche markets

AirAsia Five Forces AnalysisBargaining Power of Buyers – The more

informed internet customers become, the more power they may have over AirAsia, especially if AirAsia is unable to maintain its low cost leadership position

Bargaining Power of Suppliers – Since AirAsia is the low cost leader, they may be able to force their suppliers to maintain or lower prices; they are in a better position to continue earning above average returns even if suppliers costs are increased

AirAsia Five Forces AnalysisRivalry Among Competitors – AirAsia is in a

guarded position against their current competitors; since they are the low cost leader they are able to weather price cuts/wars and maintain their profits after their competitors have competed away their profits

AirAsia Competitive AdvantageUsage of one type of aircraft, Airbus A320

Economies of scale

Costs can be cut by 50%

Small inventories (power of purchasing)

Reduces employee training time and learning curve

AirAsia Competitive Advantage

Competitive advantage with the LOW cost

Assessment of External EnvironmentOpportunities

Long haul flights are a trial to get undeveloped market share

Differentiation from the traditional LCC model by adding customer services or operation as full service airline with low fares

Ongoing industry consolidation has opened up prospects for new routes and airport deals

High fuel prices will squeeze out unprofitable competitors

Assessment of External EnvironmentThreats

Full service airlines may cut costs to compete Entrance of other LCCs High fuel prices decrease profits Accident, terrorist attack, and disaster may

affect customer confidence Aviation regulations and government policy Increase in operation costs in producing value-

added services System disruption due to heavily reliance on

online sales

Major Challenges Increasing competition due to an increasing

number of low cost and aggressive airline competitors

Competition against the large or traditional airline companies

Customer decrease due to economic recessions

Rising fuel prices

Higher labor costs

Major Challanges Inadequate infrastructure

Route and flight utilization

Safety and security issues of aircraft crash or being attacked

Major Competitors & LCCsEasyJet plc

Malaysian Airline System Berhad

Ryanair Holdings

Singapore Airlines Limited

Southwest Airlines

Thai Airways International

AirAsiaBefore 2001, AirAsia failed to sufficiently

stimulate the market and attract enough passengers from Malaysia Airlines to establish its own niche market

In 2002, AirAsia was purchased by Tony Fernandes’ group with only two aircraft and 200,000 passengers

By 2009, AirAsia grew to 79 aircraft and 11.8 million passengers

AirAsiaDoes AirAsia have a sustainable

competitive advantage? YES

Low cost operations and fixed costs (single aircraft type)

Low distribution costs (utilization of information technology)

Single aircraft typeHigh aircraft utilization and efficient

operations (25 minute turn around per plane)

AirAsiaDoes AirAsia have a sustainable

competitive advantage? YES

Flat organizational structure (AirAsia’s flatter structure allows better communication from bottom to top, management solicits employee cost savings ideas)

Low cost philosophy (the lowest cost per available seat kilometer)

Strong branding and marketing (high advertising budget and sponsorship with sports teams for an LCC)

AirAsiaDoes AirAsia earn above average returns?

Definition of sustainable competitive advantage: is it valuable, rare, difficult to imitate and non-substitutable

Yes, Air Asia does earn above average returns in two primary areas: Technology – specifically the internet Low cost model – to be more efficient than full

service carriers and other LCC competitors; have the lowest prices

Competitor Comparisons

Company

Revenue 2010

(Million USD)

Revenue 2009

(Million USD)

% Change

Operating Profit

2010 (Million

USD)

Operating Profit 2009 (Million USD)

% Change

Net Profit 2010

(Million USD)

Net Profit 2009

(Million USD)

% Change

AirAsia $1230.9 $976.9 26 $332.6 284.4 16.9 $330.9 $157.8 209.6

Malaysian Airline

4,022.6 4,603.8 14.5 (106.4) (272.5) 39 72.7 105.4 54.9

Ryanair Holdings

4,223.4 4,156.9 1.6 568.3 130.9 434.1 431.5 (239.1)

Southwest Airlines

12,104 10,354.4 16.9 988 262 377 459 99 463.6

Thai Airways Intl

5,652.4 5060.4 11.7 301.8 263.3 14.6 480.4 229.8 209

Costs per Available Seat Kilometer

$0.00

$0.02

$0.04

$0.06

$0.08

$0.10

0 500 1000 1500 2000 2500

Cost/Available Seat Kilometer

Air Asia

Ryanair

easyJet

SouthwestJetBlue

Air Arabia

5099.KL (AirAsia), MAS (Malaysian Airline) and Indices GSPC (S&P 500), IXIC (Nasdaq), DJI (Dow Jones)

http://uk.finance.yahoo.com/q/bc?s=5099.KL&t=5y&l=on&z=l&q=l&c=MAS%2C%5EFTSE%2C%5EDJI%2C%5EIXIC

AirAsiaProblem Statement: How can AirAsia

maintain its profitable low cost carrier leadership position in the airline industry, especially now that they have added long-haul flights?

AirAsiaPotential Solutions:

Continue its successful low cost carrier strategy

Continue to place employees and customers first

Continue to maintain strict cost controls; lower than their competitors

Continue to offer customers the lowest fares, thus making it difficult for competitors to compete and unlikely for new entrants to emerge on the scene

Questions?

We thank you for your attention this evening

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AirAsia. (2012) AirAsia website. Retrieved from www.airasia.com

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Ebscohost.com: Business Source Premier. (2012) Datamonitor Report: Thai Airways Intl Public Company Limited. Retrieved from http://ezproxy.minotstateu.edu:2057/ehost/pdfviewer/pdfviewer?sid=f0dd9f71-9e14-46fd-9dde-40b527cbcca3%40sessionmgr13&vid=21&hid=12

Grant, R.M. (2010). AirAsia: The World’s Lowest Cost Airline, 2010. In R.M. Grant, Contemporary Strategy Analysis (7th ed.), (pp. 625-635). Chichester, UK: John Wiley & Sons Ltd.

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competition.knoji.com/strengths-and-weaknesses-of-airasia/

Scribd.com. (2012) Scribd website. Retrieved from http://www.scribd.com/doc/78281309/Air-Asia-Cost-Leadership-Strategy

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