Air asia case

7/28/2019 Air asia case

1/4

Case Study: AirAsia

History and Growth

Asia's first low-fare, ticketless airline was established in December 2001 when Tune

Air Sdn Bhd officially acquired AirAsia, Malaysia's second national carrier, from

DRB-Hicom, a Malaysian conglomerate. It was the brainchild of Tony Fernandes, afinance graduate from the London School of Economics and former vice-president of

South-East Asia for Warner Music Group, who envisioned a no-frills, discount airline

that would boost air travel in the region at a time when the worldwide airlines

industry was still reeling from the 11 September terrorist attacks. Together with three

other partners, Tony founded Tune Air Sdn Bhd and purchased a 99.25% equity stake

in AirAsia which had two Boeing 737-300 jets and RM40million in debt. Modelled

on other successful low-cost airlines such as Southwest Airlines in the United States

and Dublin-based Ryanair, AirAsia, with the tagline 'now everyone can fly', was

quick to establish its presence based on its philosophy of making air travel affordable,

easy, fun and convenient for everyone.

Within the first year, it extended its fleet of aircraft to six, opened several sales

offices around Malaysia and generated media awareness through a series of public

relations events. It also increased convenience by accepting credit card payments for

telephone bookings (March 2002) and introducing online bookings through its

website (May 2002). In a series of firsts, it was Asia's first airline to go ticketless

(April 2002) and introduce a multilingual website (July 2003) as well as the first

airline in the world to introduce SMS booking (August 2003). In 2003, the airline

introduced Go Holiday, its online holiday program, where guests can book holiday

packages through its website.

Johor Bahru was launched as its second operating hub outside of Kuala Lumpur and

the number of destinations was increased, including new ones outside Malaysia such

as Bangkok and Phuket. In November of the same year, AirAsia established AirAsia

Aviation Co. Ltd, a joint venture with Shin Corporate of Thailand, to launch Thai

AirAsia, a low-fare carrier in Thailand operating from Bangkok. In 2004, AirAsia

expanded its flights to several destinations in Indonesia such as Jakarta, Bandung,

Surabaya, Denpasar (Bali) and Medan and launched its Indonesian associate budget

airlines, AWAIR, in which it has a 49% equity holding. AirAsia currently has over

2,000 employees, a fleet of modern Airbus jets and operates over 100 domestic and

international daily flights from hubs in Kuala Lumpur, Johor Bahru, Bangkok and

Jakarta. Its routes are concentrated within three countries-Malaysia, Thailand andIndonesia-but it has started flights to Manila, Xiamen and Macau with plans to

increase the number of destinations in China, Indo-China and the Philippines. It also

developed Air Asia X to fly long haul to destinations such as the Gold Coast,

Melbourne, London, Paris and Christchurch (though London, Paris and Christchurch

have recently been discontinued).

AirAsia's objective is to be the leading low-cost carrier in Asia. One of the

components in its management strategy is to maximise shareholder value. AirAsia is

a publicly listed company on the Malaysia Stock Exchange, having launched its

initial public offering in November 2004 and raised over RM700 million. Its strategy

for profit creation is through prudent expansion of routes and networks within Asia,reinvestment of profits to develop the business further (no dividends are paid out) and


2/4

focus on brand enhancement. The cornerstone of AirAsia's business model is to build

the brand gradually by targeting the price-sensitive (rather than time-sensitive) travel

segments on popular routes with a basic, no-frills, but reliable, product at a very

competitive price. This requires cost efficiency and low complexity to be profitable.

Tony Fernandes explains:

My philosophy is very clear: before a business can grow, it needs to have its costs

under control. It must be cost-efficient and profitable, and it must create value. Costs

that do not add value must be contained, reduced and even eliminated. I have been

asked by various people, 'How much lower can you cost reduce? You're already the

lowest in the world!' My direct answer is if we do not strive to be more efficient and

choose to be complacent-our days are numbered. This is a continuous task we have to

face head on year on year, it is the critical ingredient to operate a successful business.

In order to achieve profit goals and provide low fares with a reliable and quality

service, AirAsia continuously seeks to improve aircraft utilisation and crew

efficiency. Cost-cutting strategies include 'no frills' service such as no free food onboard, no frequent-flyer program, using one type of aircraft to minimise training costs,

faster turnarounds to save on airport parking fees, use of reservations via Internet or

mobile phones to eliminate booking offices, and multitasking of staff such as flight

crews who also clean the planes and work at the check-in desk. Despite its cost-

optimisation strategy, AirAsia is stringent in ensuring the safety of its aircraft, which

are fully compliant with the standards of the International Aviation Safety Association.

Flying with AirAsia

AirAsia's popularity may be largely attributed to its strategy of stimulating demand by

offering low-priced and even free tickets. It caters to price-sensitive travellers who are

fairly flexible in their travel schedules, for instance students and budget tourists, and

who prefer the convenience of online ticketing and payment. The customer experience

with AirAsia is very much based on the self-service (co-production) concept. This

begins from the point of booking one's own ticket right up till the actual flight itself.

Using the single-class and free-seating policy, there are no seat allocations based on

specific seat numbers. However, priority for boarding is given to the elderly or

disabled passengers as well as those with children. Once on board, there is minimal

inflight service other than crews going around selling food and drinks. The low prices

do, however, come with certain restrictions. The airline operates on a point-to-point

basis and bears no liability for customers' failure to meet connecting flights due to

delays. Once confirmed, bookings are not able to be cancelled and payments made arenot refundable but can be credited to future flights.

Culture and Branding

Just like its informal in-flight service, AirAsia's corporate culture is similarly low in

bureaucracy, hierarchy and formalisation, in line with the personality and management

style of its CEO. The core values of AirAsia are fun, integrity, caring and passion.

Employees are encouraged to be themselves, display a sense of humour, be passionate

and enthusiastic about their job and willing to take risks. An open office concept and

casual dress code is adopted to reduce the power distance between staff and

management.

Tony Fernandes has a cubbyhole in the same office as the rest of his staff and


3/4

employees regularly drop by to talk to him about operational matters. He also spends

time on the ground to get a feel of the various departments such as cabin crew,

engineering, sales and boarding, and has even helped to load and unload baggage

from planes. Fernandes advocates internal branding which he believes many

companies have neglected. 'Employees are a company's most valuable assets and

every effort should be made to make them identify with the company', he declares.He believes that staff must first understand the company's direction before others can

be convinced. To that end, large numbers of staff were involved in midnight briefings.

Furthermore, to create a motivated workforce based on the 'Anything is possible'

motto and will to win, staff ideas and suggestions are encouraged, for instance cabin

crew were allowed to design their own uniform. The company also set up a flight

academy with interested and qualified staff being admitted for training as pilots. The

company places similar emphasis on its external brand-building efforts. Right from its

launch, AirAsia has rarely been out of the media limelight, thanks to frequent press

releases and promotions. Both the airline and Fernandes himself have become

celebrities of sorts, having won numerous awards. Fernandes has also become a much

sought after speaker at various business functions. The company has demonstrated asavvy use of public relations, having orchestrated a variety of events generating large

amounts of media publicity, including smart partnerships with other companies.

One of its most outstanding publicity coups was the sponsorship deal with the

Manchester United football team for one year beginning in August 2005, thus

becoming the first low-cost carrier in the world to link itself to one of the most popular

football clubs in the English Premier League. The strategic rationale is that being the

official low-fare airline for Manchester United will allow the company to generate

tremendous 'share of mind' for its brand among football fans in Europe and Asia.

Another event that generated a large amount of media publicity was the arrival of the

company's first Airbus A320. It is part of AirAsia's continuing strategy to keep one step

ahead of the competition through cost optimization at the same time as providing a

more comfortable yet affordable flying experience for its customers.

Future Outlook

Fernandes has declared that there is no intention for AirAsia to move upmarket to a

full-service, long-haul airline. Future plans are to focus on regional expansion,

especially China. An on-going issue is the competition on domestic routes between

AirAsia and the national carrier Malaysia Airlines (MAS). MAS has consistently

reported losses in recent years, largely blamed on high operating costs including fuel

prices. A new managing director, Idris Jala, has taken office with the goal of achieving

a significant turnaround in the airline's financial performance. MAS is seeking to cut

its fuel costs by 10%, or RM110 million, save up to a third of procurement costs and

enhance revenue by another RM200 million over 12-18 months. The Malaysian

government has agreed in principle to rationalise air travel within the country to avert a

head-on price war between MAS and AirAsia as well as to improve the financial

position of MAS, and AirAsia has expressed willingness to operate almost all of the

domestic routes currently served by MAS. Internationally, AirAsia is facing

competition from a multitude of LCCs in the South-East Asian region. The main

competitors are Thailand's Nok Air (owned by Thai Airways), Indonesia's Lion Air,

Tiger Airways (49% owned by Singapore Airlines) and Singapore-based Jetstar Asia

and ValuAir.


4/4

AirAsia is currently ahead of its budget competitors in terms of number of destinations

served. ValueAir currently flies only to Jakarta, Bali and Surabaya whereas Nok Air

concentrates on six destinations within Thailand. Tiger Airways and Jetstar Asia serve

12 and 10 destinations outside Singapore respectively. In comparison, AirAsia flies to

31 domestic and regional destinations. The region is considered to have a huge unmet

demand for low-cost air travel, with demand being considered highly price elastic. Incomparison to the United States and Europe, where LCC penetration is estimated at

25.5% and 16.0% respectively, penetration in Asia is only around 5.5%. Nevertheless,

many LCCs are realising that, with competition rising rapidly, competing on price

alone is unlikely to win huge market share. Differentiation through brand building is

widely considered to be a prudent strategy to avoid being perceived as a commodity

product and also to widen non-airline sources of revenues, for instance sales of airline

merchandise and partner products and services. AirAsia certainly has the first-mover

advantage for now. It remains to be seen whether it can successfully maintain its

stunning four-year performance in the face of a challenging and dynamic environment

both domestically and internationally.

Documents

Air asia case