Firstly, cost pressures on airlines
continue to be high. The industry is facing many challenges on the cost side.
For instance, jet fuel costs, which are directly correlated with oil prices,
continue to rise. Airlines are generally unable to pass these costs onto the
consumer, especially in the face of growing competition and price-sensitive
markets. Nevertheless, these high fuel prices have motivated manufacturers to
create more fuel-efficient aircrafts. Secondly, airlines are becoming more
environmentally conscious, partly (or mainly)due to stricter emission and noise
regulations. Globally, governments are more concerned with the implications of
air travel to issues such as global warming and climate change. This is seen by
Australia being one of the first countries to implement a carbon emissions tax,
and the EU’s plans to implement a similar initiative. Thirdly, customers have
greater choice and bargaining power. This is due to deregulation and emergence
of new carriers especially the low-cost carriers. More innovative pricing
models and services are now available to compete for the consumers’ dollar.
With growing affluence of regions such as Asia-Pacific, manufacturers such as
Airbus have predicted passengers to double over the next 20years.Finally, the
use of technology (such as mobile applications and social media) to advertise,
engage consumers, build customer databases, and sell travel deals/ faresis
becoming increasingly prevalent. Beyond just providing air travel, airlines
will everage more on mobile technology and social networks to foster deeper and
more responsive interaction with customers and build brand loyalty
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 in-flight 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.
How has Air Asia achieved cost leadership or
differentiation?
The business level strategy adopted by Air
Asia is a cost leadership strategy that targets markets such as domestic
flights, short-haul / regional flights and long-haul regional services and
selling their services below the average industry price to gain market share.
Beyond competing on prices, Air Asia also introduced value-added services such
a ticket less travel and a free seating policy. Under the guise of offering
more choice to customers, they also monetized services that were previously
taken for granted under full-service premium airlines. For instance, they
offered an internet check-in service that allowing the passengers to print
their own boarding passes; charging additional fees for early boarding and seat
selection; pre-book their checked baggage and meals, and sale of F&B on
board the flight
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).
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