The cheaper, the better?

From the perspective of AirAsia

Low cost carriers (LCC) have been regarded as a new business model in airline industry recently. Southwest Airlines, which is deemed as one of the largest LCC in the world, exhibits a successful story to all the airlines across the globe since 70s. Having launched its first flight from Dallas to Houston, Southwest Airlines has become one of the largest US airlines in number of national passenger flights. It was the sole profitable US airline in 2001 after 911 terror attack. Its successful business model stimulated the start-up of LCC in Europe. Ryanair, for example, has demonstrated itself as a profitable LCC in intra-Europe market since 1985. The business model of LCC, which is not a secret to the practitioners, comprises some basic principles including:
1) 2)

Cost controlling in sales& marketing, operations and maintenance; Low fare which targets non-business travelers who have the option to choose road transportation to the destination; and

3) High efficiency which means short turnaround time and high utilization of the fleet AirAsia, which is one of the earliest LCC in Asia, has become a LCC since 2001. It has expanded its network from Malaysia, Thailand to Singapore, Macau and even the Mainland China recently. A scheduled Bangkok to Xiamen was launched on 1st April this year. It seems that AirAsia has greatly jumped out from an intra-Malaysia and Thailand market to a real AirAsia in the continent among its competitors. How does the environment in Asia nurture those LCC? Why does AirAsia succeed in managing its value chain? Is the cheaper, the better?

Environmental analysis of LCC in Asia

Societal After the financial crisis in 1997, most Asian countries have been recovering and bouncing back from the valley in recent years. Therefore, the quality standard of leisure and business travel requested by Asians has declined. People are seeking for

traveling at a low price with satisfactory service. As an alternative to road transportation in a journey within 3 hours, LCC shortens the travel time by providing a low fare service with no frills. Technological In sales and marketing point of view, customers are more getting used to buying air tickets online. This convenient and cost-saving ticket-selling method allows most LCC to sell their tickets online which help save commission for traveling agents and simplify the administration process. Economical For the airports in Asia, especially secondary airports far away from the downtown, recession in airline business gives them a punch. Their fixed cost can not be eliminated even if the number of flights decreases. According to Francis et. al (2003), though the landing fee and handling charges on LCC are relatively low, airports have responded in various ways to these opportunities presented by low cost operations as traffic grows commercial revenue from expansion of retail, catering and car-parking facilities builds up forming an increasing share of total revenues. LCC seem to be a cure-pill for such small and secondary airports in Asia. Political and Government In the past, moves to liberalization were largely concentrated on long-haul routes rather than within the region. Asian flag carriers tended to see neighboring airlines as major competitors, and so their government owners were reluctant to relax local access provisions. Ionides (2000) points out that some Asian countries have publicly embraced liberalization: Japan, India, Singapore, Malaysia, Taiwan, South Korea, Brunei and Pakistan all have open-skies air service agreements with the U.S. In Taiwan and South Korea, liberalization measures in the late 1980s and early 1990s spawned the birth of carriers that are now major players in their countries air service sectors, both domestically and internationally. During the 1990s, yet regulatory protection and state ownership no longer provide the comfort that once they did for the major carriers. Many governments are becoming attracted to the idea of wider entry and a more liberal marketplace. Some are actively

looking to sell down their holdings or to increase access opportunities for new private national operators. And the former concentration on major long-haul hubs is starting to give way to a new competitive landscape.

Critical success factors in the LCC in Asia

Cost effectiveness LCC put emphasis on lowering all avoidable costs to sustain low fares and remain profitable, even on low yields. What LCC do is cut the cost of operating the flights on their chosen routes by flying to and from airports that offer cheaper take-off and landing fees. Besides, LCC end free meals and drinks during flights as travelers do not expect excellent service from LCC. Also, LCC do not allocate specific seats to passengers and there is only one class economy in LCC. Efficiency Using a ticket-less online booking system and telephone booking systems, LCC can save the travel agents commissions. Flying in and out of low-cost and not congested secondary airports has become the trademark of most LCC. Selected airports are generally close to large or international airports. Besides, the LCC strive to offer a very simple product, for example by just offering one-way tickets, without any frequent flyer points or rebates. Reliability LCC choose secondary and regional airport destinations instead of a congested main airport. Generally, less busy airports can be expected to provide higher rates of ontime departures, shorter turnaround times. Besides, without the need to load and unload cargo, the turnaround time of an aircraft was reduced from 30 to 25 minutes. Business travelers are attached by frequency and punctuality of the LCC. Higher frequency of service In general, LCC offer point-to-point flights on short-haul routes. Higher plane utilization is resulted from short turnaround time and point-to-point routes. LCC normally fly more often than other full service carriers. Frequent services are needed in order to justify the smaller capacity of the LCC. Such high frequency of service can

also attract business travelers since they can catch the connecting flights on time without waste their time.

Value Chain Analysis of AirAsia

The value chain analysis describes the activities the organization performs and links them to the organizations competitive position. It evaluates the value in each particular activity added to the organizations products or services. The performance of AirAsia could be evaluated by valued chain model.

Inbound

Logistics It involves all the activities required to receive, store, and inputs for producing outputs. AirAsia operates a single type of aircraft, the Boeing 737-300. The 737 is the best selling commercial jet of all time. It is because of its efficiency and cost effectiveness. AirAsia has 948 employees and they receive some proper on-the-job training workshops. AirAsia will recruit those people who understand the nature of their business to ensure the service quality. Operations It processes inputs to create valuable products/services. AirAsia is stringent about standards and procedures, but maintains a generous degree of humour. AirAsia realize that keeping the passenger safe is of paramoung importance. Thus, AirAsia joined ventures with GE Engine Services on a business alliance. In the next five years, GE Engine Services is going to maintain all AirAsia aircraft engines. Besides, Airline Rotables Limited has teamed up with AirAsia as the rotable component management

and support services for AirAsia fleets. Also, 98 per cent of all Airasia flights arrived on time and baggage-handling performance was 99.98 per cent reported in year 2003. Besides, AirAsia conducts line checks at transits, night-stops, and "A" checks, low level maintenance checks that are conducted once a month. Department of Civil Aviation (DCA) Malaysia also appreciate the high maintenance standards of AirAsia. Outbound Logistics It involves delivering the product/service into the distribution channel or to the final consumer. AirAsia currently operates 13 aircraft on a 12 aircraft schedule. AirAsia's aircraft interior is outfitted with signature red carpeting and plush leather seats to enable its guests to travel comfortably. Superior quality comes with the aesthetics, and every cabin crew demonstrates skill and talent in carrying out his/her tasks efficiently. AirAsia pilots practice standard applications, technical and behavioral tests, ground school training, safety and emergency procedural training etc. Marketing and Sales It involves all activities informing customers about products and services, inducing customersto purchase them, and facilitate their purchase. AirAsia is the first airline to introduce "ticketless" traveling. The introduction of AirAsia online sales facility has recorded an amazing growth in the airline internet sales with over 40 per cent of its total sales generated through the internet alone compared to only 25 per cent it was first introduced a year ago. AirAsia has already tied up to sell its tickets through Singapore Post offices, DBS Bank's automated teller machines and McDonald's fast food outlets. Recently, AirAsia has launched the world's first SMS ticket reservation service with hopes of expanding its reach to 10 million mobile phone users. Service AirAsia is one of the few airlines that has the shortest turnaround time. It operates with a 25 minutes turnaround time, hence allowing the airline to benefit from more flights a day. AirAsia also provides shuttle bus service for customer between main airport and secondary airport. AirAsia learnt a lot from their passengers feedback. AirAsia believe that being transparent can encourage itself to maintain a high quality service for all passengers.

AirAsia has once again emerged as market leader in the airline industry and possess all the critical success factors that we have identified. The low fares airline came up tops on the Boeing's list for having the best utilization and dispatch reliability amongst players in the airline industry. What this means is that AirAsia is successful in operating more flights out of its aircraft schedule and is on time for all its departures.

Looking further to LCC in the future

Keen competition In the near future, AirAsia will have to compete with other LCC (both existing and new) in Asia e.g. Silk Air, ValuAir, SkyAsia and Tiger Airways which has entered the market since 2000. As they adopt low-cost strategy, the way customers differentiate them from their competitors will be on fare. The lower the price, the higher the load factor. However, as a vicious circle, the profit margin of the remaining players will be compressed and weak LCC will be drove away from the market. It is expected that acquisition and merger will happen frequently in the market until equilibrium is reached at the time few strong players with sound cost-controlling and profitable business model exist. The way LCC should do seems to be attracting more nonbusiness travelers to choose LCC by changing their habit and mindset. Only the one can achieve these succeeds. Further liberalization of regional airport There is no doubt that pressure from municipal, airport and tourism authorities will result in national governments allowing enhanced foreign access to secondary airports like Chiang Mai in Thailand. For example, there will be a new terminal located at the main Changi airport, instead of the secondary Seletar airport, for LCC. The terminal could be ready for use by 2005 and its passenger service charges would be lower. (Ionides, 2004). However, the flag carriers will continue to enjoy political protection at the main gateways.

Conclusion
Aviation deregulation lowers the entry barrier for passenger airline. LCC was founded to acquire the market share for basic service and low price segment. The growth of LCC in Asia seems to be promising but the competition is really keen due to low entry barrier. Anyone can start a LCC even without an aircraft by chartering an aircraft. Some passengers are still reluctant to try LCC as they think of on board an aircraft is part of the journey they should enjoy traveling in a thousand of kilometers high instead of having no service and being crowded in the flight. Apart from managing its value chain well, mindset changing is also of paramount importance for the development of LCC , especially in Asia. The author of this article is John Yu who is working with an all-cargo airline. He can be reached at ysc8204@yahoo.com.hk.

References
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Francis, G., Humphreys, I. and Ison, S. (2003) Airports perspectives

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Ionides, N. (2000). Spoiling for choice. Airline Business. October Ionides, N. (2004). "Changi plans low-cost terminal. Feb <http://www.airasia.com/news> [Accessed 25th March, 2005] <http://www.travelglobe.biz/airlines/business_process/airlines_bpo.ht

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