Category: AirAsia

Introduction: Use of value chain analysis for cost-saving

The firm separates fare costs from other cost. It uses fuel efficient aircrafts which are fewer in number (inbound logistics). It builds its own terminals to reduce gate collection fees or simply, passengers alight next to the main road (outbound logistics) (Grant & Jordan, 2012 Lecture5 slide 12).

There is a connection between AirAsia terminals and AirAsia X such that passengers can use both airlines to reach specific destinations. Marketing of the brand accounts for 30% of the communication expenditure The airline is loyal to its suppliers since it utilizes particularly the Airbus models. This makes cooperation between the two companies more integrated as it can be realized from AirAsia X purchasing the first Airbus A350 model (Jeffs, 2008 p. 62).

PEST analysis

Grant & Jordan (2012) describe a business environment as an array of external factors that influences the decisions and performance of a business entity. A PEST analysis for AirAsia X include a favorable political influence in Malaysia and Singapore. It is noted that the Kuala Lumpur International Airport had most modern terminals but their gate fees were so high that it made AirAsia to build its own low cost terminal. This was possible from a strong local political support (Forrey, B et al. 2012 p.7).

AirAsia X’s strategy was to have most of tickets sold online. Its application of information technology was challenged by the vast number of customers trying to buy tickets through the internet that sometimes its operations were slowed to several hours. AirAsia X first used AirAsia.com for sales, and later adopted KoolRed to ease internet traffic for its clientele (Forrey, B et al. 2012 p. 8). AirAsia X utilizes social networking to the fullest.

Porter’s Five Forces

Grant & Jordan (2012, Lecture2 slide 14) consider the use of Porter’s Five Forces to analyze the competitiveness of an industry. AirAsia X strategy to pursue a different market segment reduces industry rivalry effects. This is because the other service providers target high income middle class onwards while it targeted the marginalized low income groups.

AirAsia X minimizes threats of entry by its low cost model. AirAsia X was offering fares at a cost that was about 25% compared to competitors. A comparison rate of $0.02 a mile per seat while low cost competitors were offering $0.09 a mile per seat (Forrey, B et al. 2012 p. 4). There is an absolute cost advantage of its differentiated services.

Entry is hindered by the number of years that a company has to go through different governments to be given permission to get landing rights. AirAsia X succeeded by selling a portion of AirAsia to Malaysian Airlines and using the freed up certifications to launch the long haul.

Competitors offered business class, and first class tickets. AirAsia X recognizes the value customers laid on being able to sleep on a flat position from its survey on the premium class’ flat seat. There are considerations to increase the premium class. AirAsia X least differentiated its products compared to competitors. For example, in its Airbus A340s, 18 seats were premium and 309 economy (Forrey, B et al. 2012 p. 5). The company laid more emphasis on economy class space utilization.

Despite 60% of its customers being Malaysian, the bargaining power of buyers is reduced because they have little option when they consider the cost. AirAsia X is the lowest in the industry.

The strategy of the firm to publicize its prices’ generation further gives the customer a clear picture of how ticket prices are determined (Forrey, B et al. 2012 p. 4). It gives the airline justification, and the customers obtain value for money. Customers are aware what they are charged for flight, and for refreshments.

Porter’s complementer 6^th force

The purchaser’s choice between competitors is limited by the low cost AirAsia X products (Grant & Jordan, 2012 Lecture3 slide3). Return on sunk costs is obtained from the high number of customers who buy tickets long before the day of the flight. Most of the planes seem to be fully packed on flight. There is an advantage of shared terminals by AirAsia such that passengers can connect to their destinations using the two airlines.

AirAsia X’s current strategy

AirAsia X’s strategic decision to leave out those who travel business class was a trade-off with utilization of space (Grant & Jordan, 2012 Lecture1 slide8). The economy class they invented carried extra seats that enabled the firm to lower costs without much profitability constraints. The substantial change was shifting from the normal seat arrangement of 2-4-2 to a 3-3-3 arrangement. From this, an extra seat is added in each row (Forrey, B et al. 2012 p. 5). The company was able to provide a low cost product without comfort features.

A good strategy is judged by ability to examine the nature of challenges and what is critical for success (Rumelt as quoted by Grant & Jordan 2012, Lecture1 Slide4). AirAsia X realized that what customers valued most was to reach their destination safely and on schedule. Other costs such as food and beverages were separated to be incurred on preference. Customers preferred free space for the feet rather than for the seats. The two factors reduced cost and eased movement-to-seats that was put under consideration.

The challenge AirAsia X faced was following the culture of including other cost in the overall ticket price. The company is successful because of positioning. It targeted the low income groups whose main concern are not similar to those targeted by other airlines. The business class, and the first class are concerned about comfort features offered. The economy class is concerned with reaching destination safely.

The company’s strategy includes a trade-off between the high-load factor and the high-yield factor (Forrey, B et al. 2012 p. 9). Higher-load factor is when the profitability comes from an increase in utilization of space. That is a high number of customers per flight. High-yield factor is the strategy used by competitors. Profitability comes with luxurious flights where the cost per seat is very high. This high-yield factor has been the culture of the industry. AirAsia X high-load factor is more successful than the previous belief.

Describing AirAsia X strategy (Grant & Jordan 2012, Lecture1 slide 11), it involves its competitive advantage coming from low cost flights. Its vision is to make flight possible to all income groups from the slogan “Everyone can fly”. Its priority includes measures that reduce costs such as sharing fixed assets with AirAsia apart from planes. Its lean strategy to reduce fuel cost by using Airbus instead of Boeing.

AirAsia X reduces the cost of servicing debts by the hours its planes are used in a day. Its planes are up in the sky for 16 hours while competitors’ planes average was 11 hours a day (2010). This required that flight schedule were dynamic to suit the change in daily utilization of planes. Spreading the cost of debts over many flights has given it a further ability to lower ticket prices (Forrey, B et al. 2012 p. 6).

The firm meets the “benchmarks of an effective strategy” (Grant & Jordan, 2012). Its low cost product is distinct in that it is about 25% the price offered by low cost competitors. Its low cost strategy also meets sustainability standards because it does not rely on external factors. The seating arrangement by itself is able to reduce costs by about 20% while the getting the similar revenues to competitors.

AirAsia X recognizes safety as the most important part of the airline business. The fact that it was launched after the commonly known 9/11 terrorist attacks calls for integrated use of technology to curb similar incidences. This is the company’s corporate social responsibility. “CSR neither hurts nor helps profitability on average” (Haberberg et al. as quoted by Grant & Jordan, 2012 lecture 1 slide 15). In this case, assurance of security increases customers’ confidence in using the airline.

AirAsia X’s strategy is simple, consistent, and considers long-term goals. It also shows a clear “understanding of the competitive environment” (Grant & Jordan 2012, Lecture1 slide3). The company is aware of the market segment sought by competitors, and market needs that have not been satisfied. For example, people who never travelled out of their country because of high long haul ticket prices.

Strategy appraisal

Resource appraisal

The launch of AirAsia X mainly relied on resources generated by AirAsia. These included the brand, finances, personnel and fixed assets (Grant & Jordan, 2012 Lecture4 slide9). AirAsia X has the advantage of sharing fixed assets such as terminals, and ticket sales outlets. The cost of maintaining such assets is shared. However, AirAsia X realized the importance of separating itself from using planes owned by AirAsia. This is because of the difference in between long haul and the short distance flight (Jeffs, 2008 p. 56).

The firm used the human resources of AirAsia after its launch but has maintained to train its own personnel to suit its long-term goals (Sadler, 2003 p. 32). New recruits found the operations already being carried out. AirAsia X benefits from the training program set by AirAsia. The training academy recruits pilots, engineers, and cabin crew (Forrey, B et al. 2012 p. 8). The high esteem of workers such that they refer to each other as “All Stars” is commendable.

AirAsia X initially used AirAsia.com website to launch its sales. It bought its own, KoolRed website, to deal with the delay in sales, and crash of the website that used to follow after launches in new geographical areas. Customers have two alternatives AirAsia.com or KoolRed. This also worked out to deal with different languages that come from differences in geographical location.

AirAsia X is recognized as a low cost brand which has been built for over 4 years considering its first flight was in November 2, 2007. This is a resource that it uses to launch into new routes. The high turnover after every launch is due to customer confidence in the brand. Initially, it used AirAsia’s good reputation in Malaysia to reach to a global market.

Additional competitive advantage

Its competitive advantage is also experienced in economies of learning (Grant & Jordan, 2012 Lecture5 slide11). By setting its own academy, the cost of individual workers upgrading their skills is reduced. By conducting surveys on consumer preferences, the firm utilizes its human resources to modify its products to suit the market segment.

Ownership of low-cost inputs such as the fuel-efficient Airbus A350 model (Forrey, B et al. 2012 p. 5). AirAsia X is characterized by the use of low-cost human resources. The workers in Malaysia are paid lower income rates compared with international rates. The firm has fully utilized the drivers of cost advantage (Grant & Jordan 2012, Lecture5 slide 11).

VIRUS Conclusion

The strategic resources such as its brand, and motivated personnel are valuable to the environment. Its relations asset with AirAsia is inimitable. However, its fixed assets resources can be imitated (Grant & Jordan 2012, Lecture4 slide14).

References

Forrey, B et al. 2012, AirAsia X: Can the low Cost Model Go Long Haul? Richard Ivey School of Business Foundation, Ontario.

Grant, R & Jordan, J 2012, Strategic Management. Lecture notes.

Jeffs, C 2008, Strategic Management, SAGE Publications, London.

Sadler, P 2003, Strategic Management, Kogan Page Limited, London.

Abstract

This paper explores the transition of the AirAsia X low-cost model from short haul to long haul operations by providing an insight into the strategies that underpin its success. At the outset, the essay explains the factors behind the victory the airline by providing an insight into the various elements that made its strategies applicable. The paper also provides a framework for utilizing the infrastructure of the AirAsia. Lastly, it seeks to explain how Darren Wright can use alternative market plans to promote the business within a year.

Introduction

AirAsia X is a flight company that was launched in 2007. Tony Fernandes finally implemented his dream of operating a low-cost long haul airline. The new business was an expansion of short and medium haul flights of the sister air carrier, AirAsia. Low-cost insiders who held that the plan was not viable challenged the idea in the end. However, Fernandes did not give up his expansion dream. Various key strategies were executed to realize the growth of the low-cost model. This paper critically examines the transition of the AirAsia X’s low-cost model from short haul to long haul operations by providing an insight into the strategies that underpin the success of the airline.

Factors behind the Success and Expansion of AirAsia X from Malaysia to other Destinations

Description of the Airline Industry Environment discussed in the Case Study

The case study reveals a business environment that was undoubtedly unfavorable for the global airline industry. It was a hard time following the effects of the September 11 World Trade Center terrorist attack in the United States. Air safety had become a global concern. As a result, many aviation companies dreaded aircraft hijackings. The prevalence of the severe acute respiratory syndrome (SARS) was also becoming global disaster. This situation scared pessimists from venturing into international airline businesses. Furthermore, the prevailing economic depression had tremendous effects on the industry. These conditions lowered the prices of the air tickets significantly. As a result, many airlines opted to charge relatively low prices to entice passengers (Chan, 2014).

Elements of AirAsia’s Business Model Revisited by X for its Success

The AirAsia X airline adopted the low-cost model of its sister company. It also embarked on various strategies that facilitated its transition to long haul operations. Firstly, the company targeted customers with growing disposable income rather than the wealthy class customers. The affordable tickets were inclusive of seats and airline taxes. However, they excluded onboard services. As a result, they attracted a considerable number of passengers in this class.

Secondly, the choice of aircraft and seat design were critical factors that propelled the expansion of the company. It had operated airbuses A330 and A340 before it introduced the most fuel-efficient A350 model. The company had about 20-percent more seating capacity as compared to other carriers that operate similar A330. According to Chan (2014), it adopted a 3-3-3 instead of the 2-4-2 pattern that was used by the other carriers. In 2010, the AirAsia X airline introduced a limited number of premium seats in a small section of the plane that stretched out flatly to ensure comfort (Chan, 2014).

Another unique strategy was the La Carte in-flight experience that brought about additional revenue for the airline. The management excluded onboard food and beverages services from the booking ticket. A reduced pre-booking option was adopted to boost the ticket sales. This option allowed passengers to buy the volume of food and beverages of their choice. This feature was uncommon with other carriers whose ticket included onboard services. AirAsia X also provided in-flight entertainment for a fee. This service was not offered in budget flights (Chan, 2014). Finally yet importantly, the company had a unique company culture that created a friendly working atmosphere regardless of position, gender, and/or age among others. The staff members were regarded as stars in the business.

How AirAsia X best leverage the Extensive Network of the Regional Sister Company AirAsia to select New and Profitable Destinations for AirAsia X?

The AirAsia X airline relied on its sister’s existing routes and resources for its success. In the 2008 global financial crisis, most its competitors such as Oasis suspended their operations because the airline business had become uneconomical for them. Due to its cheap model, the AirAsia X Company stayed in business. It received feeder flights from more than 78 destinations (Chan, 2014).

Due to its favorable local political relationships, the company was not opposed when it proposed to construct a low-cost carrier terminal. Although the terminal was usable by the competitors, it became the turning point of the air company because it avoided the expensive gate fees at the Kuala Lumpur International Airport (Daft & Albers, 2012). Moreover, the airline established a training academy for its staff including cabin crews, pilots, and engineers. The aim of the academy was to instill knowledge about strategic operations in its staff with a view of distinguishing itself from AirAsia.

In addition, the company used the existing sister company’s website for its online sales. Although the AirAsia airline adopted both traditional and non-traditional marketing strategies, AirAsia X took online marketing. It also used the print media to sensitize its business activities to the public. The plan was to reach scholars, internet users, and shoppers. This situation resulted in network expansion to other destinations around the world (Daft & Albers, 2012).

How can Darren Wright help shift his marketing team’s mentality away from a start-up mindset and simultaneously prepare for a global initial public offering within the next twelve months?

Daren Wright established a training academy to train the AirAsia X staff. The objective of this academy was to equip the staff with proper marketing strategies such as onboard sales techniques (Daft & Albers, 2012). It also sold a variety of products to its passengers during flights. The sales included services such as in-flight entertainment, which was only offered by the business class airlines. This strategy expanded the airline’s customer base. The passengers were allowed to purchase onboard services. This provision was not available in the business class airlines. However, the services provided to them were limited. Darren Wright focused on excluding such services from the ticket costs. The advantage of this strategy was that it attracted more passengers since the booking ticket fee was considerably low. Secondly, customers bought unlimited in-flight services of their choice (Daft & Albers, 2012)

Conclusion

The AirAsia X low-cost model propelled the airline to unimaginable success. This model surpassed the expectations of many other global airlines. The company survived the tough financial crisis when other operators opted to suspend operations. However, sound leadership and management have also played a crucial role in the success of the low-cost business model. While advisors at the AirAsia airline expressed their pessimism, Fernandes remained focused on his dream heights. Therefore, the low-cost model can go a long haul. However, the developing airline depended on the AirAsia’s infrastructure to realize its success.

Reference List

Chan, J. (2014). Understanding the meaning of low airfare and satisfaction among leisure air travelers using Malaysian low-cost airlines. Journal of Vacation Marketing, 20(3), 211-23.

Daft, J., & Albers, S. (2012). A profitability analysis of low-cost long-haul flight operations. Journal of Air Transport Management, 19(1), 49-54.

Ingrid

AirAsia has become one of the most successful companies in the airline industry. The analysis of the main specifics of its strategy, its methods for achieving cost leadership and differentiation, and techniques used to sustain its compatibility reveals the secrets of the success of AirAsia.

Basic Information about AirAsia

Introduction

AirAsia is the biggest low-cost airline in Asia. The main hub of the airline is the international airport Kuala-Lumpur. The company is considered one of the best low-cost airlines in the world, with the world’s lowest unit cost. The company includes such affiliate airlines as AirAsia India, AirAsia Japan, AirAsia X, AirAsia Zest, Indonesia AirAsia, Indonesia AirAsia X, Philippines AirAsia, Thai AirAsia, Thai AirAsia X.

Such developed structure lets the company be able to operate international flights for lower prices, as the airline has its hubs in numerous countries. The company operates Airbus A320-200 fleets. The company has a no-refund policy on most of its routes. Flights to South Korea are the only ones offering a refund policy.

History Background

AirAsia was founded as a government-controlled airline in Malaysia in 1994. At this stage, the airline offered full services for relatively low prices, if compared with Malaysia Airlines. In 2001, AirAsia was heavily in debt and was bought by Tony Fernandes for less than one dollar.

Despite the decline in demand for air traveling after the tragedy of 11 September 2001, Fernandes managed to reorganize the company in such way that it started bringing revenues from the first years of being governed by him. He was the first in Asia to use no-frills, a low-cost concept in the airline industry, and his innovation turned out to be a great success

General Strategy of AirAsia

No-frills, low-fare

The general strategy of AirAsia is based on the no-frills, low-fare concept. The company can be considered as an innovator in the sphere of air traveling in Asia. The company implemented no-frills, low-fare concept by offering prices that were nearly 50% lower than the prices of the competitors.

The company offers low-fare flights without providing free entertainment or meals. Besides being the first no-frills, low-fare airline in Asia, it was also the first airline in the region that introduced free seating policy and got rid of the need for printed tickets during the travel long before the competitors introduced the same innovations.

The company has always strived for implementing innovations that enable the customers to buy tickets and book seats in the most opportune way. Easy-to-use website and other options for buying the tickets made the process more convenient and contributed to customers’ satisfaction. Therefore, striving for introducing innovations in different areas of the airline’s functioning can be regarded as the first component of the strategy of AirAsia.

Gradual expansion

The second component of the strategy can be identified as a gradual expansion. In the beginning, the company focused on improving the system of providing local low-fare flights and achieved great success. It expanded the number of hubs to serve the domestic market better.

Then it employed a systematic strategy to expand its services outside Malaysia. The airline started providing regional short-haul flights to neighboring countries. It achieved low costs by organizing subsidiary companies in these countries. Only after ensuring the success of the discussed operation, AirAsia launched long-haul flights.

The company strived for exploring partnerships with companies operating in different regions of the world to have the opportunity to provide low prices. For example, while entering the Asia-Pacific region the company explored partnerships with such low-cost airlines as Australia’s Virgin Blue, Singapore’s Tiger Airways, and Indonesia’s Lion Air.

Cooperation with low-cost partners let the company enter different markets without investing immense sums of money. Besides, the company adjusted the services to the needs of the patients of long-haul flights by offering new services regarding the opportunity to choose between the classes of the cabin and hot meals.

How Has AirAsia Achieved Cost Leadership and Differentiation

Cost-leadership Strategy

The airline employed no-frills, low-fare concept to achieve cost leadership in domestic air traveling. The company managed to economize its expenses and offer the prices that differed significantly from the prices of the competitors. The airline used joint ventures to ensure the cost leadership in international short-haul flights.

Further expansion to different regions was accompanied by focusing on secondary airports to avoid paying large fees at major airports. Besides, the company organized the flights in such way that the planes returned to the original departing cities on the same day, which enabled the airline to avoid spending on crew accommodation and other allowances at the arriving cities.

The airline launched its sister company AirAsia X and attracted new investors to ensure the cost leadership in long-haul international flights. By exploring partnerships with low-cost airlines in Asia-Pacific region and Europe, the company managed to keep the prices for long flights relatively low if compared with most airlines.

The company opted for a dynamic, layered-hedge strategy to pay for fuel in advance. Such approach allowed the company to cut the expenses for fuel and remain competitive. Besides, it replaced its old fleet with fuel-efficient Airbus A320-200 aircraft, which also gave an opportunity to sustain cost leadership.

Differentiation Strategy

The primary method for achieving differentiation employed by AirAsia is providing the lowest possible prices. The company stands out from the rest of Asian airlines by offering the most attractive fares. Besides, the airline achieves differentiation by being the pioneer in many services in the Asian region.

It was the first in the region to introduce ticketless flights, mobile applications for booking the seats, and online check-in. Such innovations made the airline unique and distinguished it from the rest of local companies. The company is also regarded as having more relaxed and refreshing image than those of other airlines as the flight attendants are not obliged to stick to the uniform appearance.

The chief executive of the airline, Fernandes, has also contributed a lot to the differentiation of the company by being open to journalists and providing instant access to all news of the company for mass media.

Five Forces Analysis and Risks and Benefits of the Strategy of AirAsia

The analysis of Porter’s five forces can help to reveal the potential success of AirAsia in the airline industry. The threat of new entrants can be considered a low threat, as airline industry require big investments to keep new companies sustainable and long-term authority of the airline to attract the customers.

New entrants have small chances to put a threat to such well-recognized companies as AirAsia as existing companies have big opportunities for addressing new threats by investing their capital in the means able to retaliate against new companies. Besides, customers tend to choose well-named airlines, as experience and trust matter a lot in the airline industry. The threat of substitute products or services can be determined as relatively low for international flights of AirAsia.

Domestic flights are more susceptible to this risk, as customers are more likely to choose other means of transportation while traveling around the country. Bargaining power of customers has a low threat to AirAsia, as the airline provides unique cost opportunities at the market. Bargaining power of suppliers can be regarded as a high threat to AirAsia, as there is a limited number of suppliers. There are only two aircraft manufacturers – Boeing and Airbus.

The intensity of competitive rivalry can be considered the main threat to AirAsia as the competitiveness of the airline industry is high. Malaysian Airlines is considered the main competitor of AirAsia at the domestic market, as the company tries to attract the customers of AirAsia by launching loyalty programs.

Short-haul flights of AirAsia are also vulnerable to the impact of rivalry with Malaysian Airlines. However, AirAsia appears to be rather successful in dealing with the competitors, as it is recognized as one of the best companies offering low-cost flights, and its success is rather difficult to be repeated.

The strategy of AirAsia appears to have more benefits than risks, as it gained huge revenues and worldwide recognition during the short period. The primary benefits include huge popularity of the airline due to its exceptional low fares. The strategy of gradual expansion of services let the airline achieve great sustainability in the market of international flights. Successful strategy of reducing fuel costs enabled the company to sustain low fares.

Striving for employing the best innovations also contributes to the success of the company and attracts more customers. The main risk of the company’s strategy is related to its commitment to one aircraft manufacturer. Such situation enables Airbus to put pressure on the airline. If the manufacturer is free to increase the prices for its products at any time, as the airline has no choice but to agree to the new price policy, as it heavily depends on the cooperation with the manufacturer.

Besides, any strikes of employees or other problems inside the manufacturing company can also directly affect AirAsia and cause serious complications. Other risks are related to the evolvement of many low-cost airlines all over the world during the last decade. Such situation puts a threat to the company’s compatibility and can affect its leading position in the world of cost-effective air traveling.

How AirAsia Sustains Its Competitiveness

To maintain its competitiveness, AirAsia focuses on promoting its reputation of the company that offers the lowest fares. Such reputation helps to sustain a large number of customers, as the price of the tickets is one of the main factors influencing the choice of travelers. The company launches campaigns able to address the loyalty programs of other airlines. For example, when Malaysian Airlines launched “Everyday Low Fare” campaign, AirAsia fought back with its “Sub-Zero Fare Campaign”.

The company quickly reacts to any changes on the market and takes appropriate actions that help the company to remove the threats put to its compatibility by the competitors successfully. Besides, the company strives for gaining the reputation of the provider of high-quality services. While being a low-fare airline, AirAsia offers the range of services typical for integrated service providers. It provides financial services (e.g. travel insurance) and holiday products.

The airline has established effective cooperation with numerous companies and offers numerous online booking services for hotels, hostels, car rentals, cruises and medical care. The company has also launched Citibank–AirAsia credit card, which lets the customers earn the points and enjoy discounts. Therefore, while focusing on providing the lowest fares, AirAsia puts much effort in sustaining its compatibility with other airlines in terms of the quality of services.

The effective strategy aimed at achieving cost leadership and differentiation has contributed to the success of AirAsia. The analysis of the methods used by the airline helps to understand the main strengths of its strategy.