AirAsia: The Worlds Lowest Cost Airline

Filiz McNamara and Vicki Troftgruben

AirAsia
An overview of AirAsias
Internal environment External environment Problem statement Possible solutions

AirAsias 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

AirAsias 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.

AirAsias Values
Key strategies:
Safety first High aircraft utilization Low fare, no frills Streamline operations Lean distribution system Point to point network

AirAsias Strategies
Vision: 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 Airlines

The low-cost concept became a moneymaker in the United States, where it was pioneered in the 1970s by Southwest Airlines; the model for budget carriers elsewhere like Ryanair and easyJet in Europe

Background and Founder

Established 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 Founder

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

Last updated: July 2011

AirAsia
Revenue: 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

AirAsia
Flight 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; thats 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

AirAsia
Flight 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 Achievements
Year 2012
ATW Value Airline of the Year

Year 2011
Best Asian Low-Cost Carrier By TTG Travel Awards 2011
Worlds 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 Today
Associate 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, longhaul flights (over 400 miles) Flights to: Australia, China, Europe, Japan, Korea, India, Middle East and New Zealand

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

AirAsia Internal Capabilities

Foster 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

AirAsia
Corporate Belief Now Everyone Can Fly http://www.skyscanner.com/airline/airline-airasia-ak.html

AirAsia
A firm can differentiate its offering along five dimensions:
Product

Services
Personnel Channel Image

AirAsia
Differentiation Strategies to Online Businesses
Environment/ atmospherics Making the intangible tangible Building trust Efficiency and timely order processing Pricing Customer Relationship Management (CRM) Enhancing the experience

AirAsia Online Business

AirAsias 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

AirAsia
Making the Intangible Tangible The AirAsia Website is providing lots of elements of Making the Intangible Tangible such as: On-time performance On-time guarantee Go-In-sure hospital income plan Attractive pictures of places to visit Sitemaps

AirAsia
Building 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

AirAsia
Efficient and Timely Order Processing Payment by credit card or debit card Immediate purchasing services Making the purchasing process available at anytime and anywhere

AirAsia
Pricing 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 AirAsias reputation in making the promises become reality

AirAsia
Customer 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 offers News updates Phone circulars Flight change information

AirAsia
Enhancing the Experience The development has created outstanding improvement Satisfaction of selling process, customer buying process and customer usage experience

AirAsia Shareholders
Top 5 Shareholders:
Tune Air Sdn Bhd

Employees Provident Fund Board

Genesis Smaller Companies Wellington Management Company The Nomad Investment Partnership Lp Cayman

AirAsia
Value chain Primary activities such as: Inbound logistics Operations Outbound logistics Marketing and Sales Service

AirAsia
Value chain Support activities such as: Human Resource Management Technology Development Procurement

Potential Strategic Implementation

External Environment Clients

Suppliers and Alliances

The Strategy of Value Proposition

Internal Environment

The Strategic Forces of Value Proposition

Assessment of Internal Environment

Strenghs
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 Environment

Weaknesses Service resource is limited by lower costs Limited human resources Government interference and regulation on airport deals and passenger compensation Non-central location of secondary airports Brand is vital for market position and developing it is always a challenge Heavy reliance on outsourcing New entrants provide the price-sensitive services

AirAsias External Environment

Industry - Air Transportation Services General external environment Global Demographics Socio-cultural Political-regulatory Economic Technological Physical environment

AirAsias External Environment

General external environment Global - AirAsia is a domestic, regional and international airline serving Southeast Asia, Europe, India, Indonesia, and Australia Suppliers selected on a competitive basis Demographics - 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 AirAsias culture is relaxed, anyone can advance within the company and do anyones job regardless of education

AirAsias External Environment

General 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

AirAsias External Environment

General 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 center AirAsia uses Navitairs Open Skies computer reservation system (CRS) The CRS is a web-based sales and inventory system which links to AirAsias call center and allows customers to print boarding passes

AirAsias Site Map

AirAsia External Environment

Partnerships - 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 Xs 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 Environment

Looks 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 Analysis

Five Forces - an industry-level analysis to determine attractiveness of an industry Threat of New Entrants AirAsias 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 AirAsias niche markets

AirAsia Five Forces Analysis

Bargaining 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 Analysis

Rivalry 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 Advantage

Usage 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

Productive and skillful employees; simple aggressive and focused management structure

Courteous, but limited passenger service (e.g. no free meals)

Short haul, point to point routes, often to secondary airports

Competitive advantage with the LOW cost

High aircraft utilization

Frequent, reliable schedules

Standardized fleet of aircraft

Assessment of External Environment

Opportunities
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 Environment

Threats
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 valueadded 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 & LCCs

EasyJet plc Malaysian Airline System Berhad Ryanair Holdings Singapore Airlines Limited Southwest Airlines Thai Airways International

AirAsia
Before 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

AirAsia
Does 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 type High aircraft utilization and efficient operations (25 minute turn around per plane)

AirAsia
Does AirAsia have a sustainable competitive advantage? YES Flat organizational structure (AirAsias 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)

AirAsia
Does AirAsia earn above average returns? Definition of sustainable competitive advantage: is it valuable, rare, difficult to imitate and nonsubstitutable
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
(Million USD)

Revenue 2010

(Million USD)

Revenue 2009

% Change

Operating Profit 2010

(Million USD)

Operating Profit 2009

(Million USD)

% Change

(Million USD)

Net Profit 2010

(Million USD)

Net Profit 2009

% Change

AirAsia

$1230.9

$976.9

26

$332.6

284.4

16.9

$330.9

$157.8

209.6

Malaysian Airline Ryanair Holdings Southwest Airlines

4,022.6

4,603.8

14.5

(106.4)

(272.5)

39

72.7

105.4

54.9

4,223.4

4,156.9

1.6

568.3

130.9

434.1

431.5

(239.1)

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

Cost/Available Seat Kilometer
$0.10

$0.08 $0.06
$0.04
Ryanair

easyJet

Southwest

JetBlue Air Arabia

Air Asia

$0.02 $0.00 0 500 1000 1500 2000 2500

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

AirAsia
Problem 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?

AirAsia
Potential 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

References
AirAsia. (2012) AirAsia website. Retrieved from http://www.airasia.com/my/en/corporate/awards.page AirAsia. (2012) AirAsia website. Retrieved from www.airasia.com ASEAN. (2012) ASEAN website. Retrieved from http://www.aseansec.org/74.htm BBC.com. (2012) BBC News website. Retrieved from http://www.bbc.co.uk/news/business11647205 Docs.google.com. (2012) Google Docs website. Differentiation Strategies of Internet Retailing. Retrieved from https://docs.google.com/viewer?a=v&q=cache:m8YaGNeBKAEJ:journal.ccsenet.org/index.php/i br/article/download/1115/1118+airasia+retail+format&hl=en&gl=us&pid=bl&srcid=ADGEEShyeilvY4 J0XpjUmYicj6BMz4CshUtKHodMrtG0AyIQoVXsSSxdQam5mvOP2CeGIG_XG1p-BPUzBqb5T3Mk7L90vRVBf14fnXwMwNPNzZfuWC7s7kEE9cIZVV1MLW0aVuD8Zzh&sig=AHIEtbSILaGhmo4BoQjDjQKNLIvQICjBA

References continued
Ebscohost.com: Business Source Premier. (2012) Datamonitor Report: Malaysian Airline System Berhad. Retrieved from http://ezproxy.minotstateu.edu:2057/ehost/pdfviewer/pdfviewer?sid=748d40cb-c955-4d02-977f7f8aeebc9d23%40sessionmgr11&vid=19&hid=12 Ebscohost.com: Business Source Premier. (2012) Datamonitor Report: AirAsia Berhad. Retrieved from http://ezproxy.minotstateu.edu:2057/ehost/pdfviewer/pdfviewer?sid=1968b36e-1726-4554aa2c-cb61f20597c5%40sessionmgr12&vid=4&hid=19 Ebscohost.com: Business Source Premier. (2012) Datamonitor Report: Ryanair Holdings plc. Retrieved from http://ezproxy.minotstateu.edu:2057/ehost/pdfviewer/pdfviewer?sid=f0dd9f719e14-46fd-9dde-40b527cbcca3%40sessionmgr13&vid=4&hid=12 Ebscohost.com: Business Source Premier. (2012) Datamonitor Report: easyJet plc. Retrieved from http://ezproxy.minotstateu.edu:2057/ehost/pdfviewer/pdfviewer?sid=748d40cb-c955-4d02977f-7f8aeebc9d23%40sessionmgr11&vid=16&hid=12

References continued
Ebscohost.com: Business Source Premier. (2012) Datamonitor Report: Singapore Airlines Limited. Retrieved from http://ezproxy.minotstateu.edu:2057/ehost/pdfviewer/pdfviewer?sid=f0dd9f719e14-46fd-9dde-40b527cbcca3%40sessionmgr13&vid=13&hid=12 Ebscohost.com: Business Source Premier. (2012) Datamonitor Report: Southwest Airlines Company. Retrieved from http://ezproxy.minotstateu.edu:2057/ehost/pdfviewer/pdfviewer?sid=f0dd9f71-9e14-46fd-9dde40b527cbcca3%40sessionmgr13&vid=18&hid=12 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-9dde40b527cbcca3%40sessionmgr13&vid=21&hid=12 Grant, R.M. (2010). AirAsia: The Worlds Lowest Cost Airline, 2010. In R.M. Grant, Contemporary Strategy Analysis (7th ed.), (pp. 625-635). Chichester, UK: John Wiley & Sons Ltd.

References continued
Knoji.com. (2012) Knoji website. Retrieved from http://business-strategycompetition.knoji.com/strengths-and-weaknesses-of-airasia/ Scribd.com. (2012) Scribd website. Retrieved from http://www.scribd.com/doc/78281309/AirAsia-Cost-Leadership-Strategy Wikipedia.com. (2012) Wikipedia website. Retrieved from http://en.wikipedia.org/wiki/AirAsia_Group_destinations