The Low Cost Airline: AirAsia

A study of opportunities, challenges and critical

success factors
LGT 3007 Air Transport Logistics

1
Introduction
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 irlines, the model for bud!et carriers elsewhere
like "yanair and easy#et in $urope%
&efinition of low cost airlines
low cost airline !enerally has many features that differentiate it from the traditional
carriers% These features include ticketless tra'el, online ticket sales, no international
offices, no fre(uent flyer points, no free food and be'era!es, no infli!ht ma!a)ines,
no club loun!es, use of secondary city airports%
*ot all low cost airlines ha'e these features, and not all airlines that ha'e some of
these features are low cost airlines% +or e,ample, -ir!in $,press is a low cost airline,
but it still offers complimentary coffee and infli!ht ma!a)ine, and they are based at
.russels primary airport%
Case StudyAirAsia
Story of irsia
ir sia, as the second /alaysian *ational irline, pro'ides a totally different type of
ser'ice in line with the nation0s aspirations to benefit all citi)ens and worldwide
tra'ellers% Such ser'ice takes the form of a no frills - low airfares fli!ht offerin!,
102-302 lower than what is currently offered in this part of sia% Their 'ision is
4*ow $'eryone 5an +ly4 and their mission is to pro'ide 0ffordable irfares0 without
any compromise to +li!ht Safety Standards%
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The story of emer!ence of irsia is similar to "yanair, since both carriers underwent
a remarkable transformation from a money-losin! re!ional operator to a profitable,
low cost airline%
irsia was initially launched in 1993 as a full-ser'ice re!ional airline offerin!
sli!htly cheaper fares than its main competitor, /alaysia irlines% .efore 6001,
irsia fail to either sufficiently stimulate the market or attract enou!h passen!ers
from /alaysia irlines to establish its own niche market% The turnaround point of
issia is in 6001, while it was up to sale and bou!ht by Tony +ernandes% Tony
+ernandes then enrolled some of the lendin! low-cost airline e,perts to restructure
irsia7s business model% He in'ited 5onnor /c5arthy, the former director of !roup
operation of "yanair, to 8oin the e,ecuti'e team% 9n late 6001, irsia was re-
launched in /alaysia as a trendy, no-frills operation with three .7:7 aircraft as a low-
fare, low-cost domestic airline%
;pportunities faced by irsia in li!ht of e,ternal de'elopment
1% <ow fare of 9ndonesia-/alaysia trip
The fare for a #akarta-#ohor .aru trip costs "p 100,000 ="/ >>%>> one way?% nd
char!e "p 1@0,000 for a .andun!-Auala <umpur fli!ht, and "p :00,000 for a
Surabaya-Auala <umpur trip, whereas a #akarta-Auala <umpur air ticket from
/alaysia irlines a'ailable at tra'el a!ents cost "p 1%1 million% /eanwhile, <ion ir
on the same route, char!ed "p 1%0@ million% The low fare pro'ided by irsia helps
it open the 9ndonesia market%
6% <ow fare of Sin!apore-.an!kok ser'ice
irsia will increase its ser'ices between Sin!apore B .an!kok by introducin! a 6nd
daily fli!ht to its e,istin! schedule% This recent de'elopment came barely a month
after Thai irsia operations started its first international fli!ht to Sin!apore in early
+ebruary this year% irsia is offerin! its !uests promotional fares toCfrom
Sin!apore- .an!kok from SD&E6:%99 =TH. 199? one way from the 6>th /arch to
:0th ;ct, 6001% 9t is much lower than the lowest fare SD&E@3 offered by full-ser'ice
carrier% This helps it open the Sin!apore market%
:% Folitical connections
:
irsia hold 192 of Thai irsia with 12 bein! held by a Thai indi'idual% The
remainin! @02 is held by Shin 5orp% which is owned by the family of Thailand7s
prime minister, Thaksin Shinawatra% Shin 5orp% has financial stren!th, syner!y in
in!ormation technolo!y and telecommunications, which support irsia 9nternet and
mobile phone bookin!s% Shin 5orp% allows subscribers of the Shin mobile phone
fla!ship, d'anced 9nformation Ser'ice, bein! able to reser'e tickets throu!h its
short-messa!in! ser'ice =S/S?% irsia with its politically powerful backer may
well !row up to bite% This helps it open the Thailand market%
1% /alaysian !o'ernment support
The /alaysian !o'ernment supported the establishment of irsia in 6001 to help
boost the under-used Auala <umpur 9nternational irport% irsia7s fli!hts from
Senai are meant to de'elop #ohor into a transport hub to ri'al Sin!apore% irsia,
therefore, can pro'ide an alternati'e route to tra'el to .an!kok, by usin! Senai
irport in #ohor .ahru, in southern /alaysia%
;pportunities faced by irsia in li!ht of internal de'elopment
1% 9ssue of 9F;
Aamarudin /eranun, irsia0s $,ecuti'e &irector announced the appointment of
5redit Suisse +irst .oston =5S+.? and "H. Sakura /erchant .ankers ="H.? as the
bookrunners for the company0s upcomin! 9nitial Fublic ;fferin! =9F;?%
The 9F; stren!thens irsia balance sheet, further cuts its e,istin! low costs at 6%@
US cents per SA and accelerates our !rowth plans throu!hout sia% The 9F; also
allows irsia to e,pand its fleet of 1> .oein! 7:7-:00s%
6% Folitical connections
Thai irsia is a 8oin 'enture established by irsia with Shin 5orp% Shin 5orp% is
owned by the family of Thailand7s prime minister, Thaksin Shinawatra, and about 900
million baht will be in'ested in Thai irsia o'er a fi'e-year period% Shin 5orp%
o'ersees the finance and administration of Thai irsia while irsia shoulders the
responsibility for marketin! and operations% Shin 5orp% has financial stren!th and
supports irsia to !row% irsia with its politically powerful backer may well !row
up to bite%
5hallen!es faced by irsia in li!ht of e,ternal de'elopment
1% 9ndonesian habit
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Freferences of 9ndonesian passen!ers are (uite different from the concept of cheap air
tra'el without e,tra ser'ice for the passen!ers =free snacks and drinks?, and also their
reluctance to brin! li!ht ba!!a!e%
irsia prefers passen!ers with 'ery li!ht and minimum ba!!a!e% 9f this is the case,
it may not last lon!%
.ut 9ndonesian domestic airline companies are able to pro'ide 'alue-added e,tras like
food and be'era!es as part of their ser'ice to the passen!ers, althou!h at a relati'ely
hi!her cost%
The comparati'e ed!e of 9ndonesian domestic airline companies compared to irsia
concerns habit =culture?%
+urthermore, 9ndonesian domestic airlines were already trained with the low-cost air
tra'el concept, known as tariff war% They ha'e pro'ed themsel'es as immune, and
mana!ed to sur'i'e%
<ast but not least, the 9ndonesian !o'ernment or domestic airline companies had
ne'er announced the a'ailability of a low-cost airline company of the country% ll
these affect irsia !rowth in 9ndonesia%
6% Sin!apore !o'ernment re8ection
9nitially, irsia wanted to start fli!hts from the southern state of #ohor, near
Sin!apore, it hoped to attract passen!ers by runnin! a con'enient bus ser'ice to the
city-state% Howe'er, Sin!apore (uickly (uashed that idea% The Sin!apore
!o'ernment said it would not appro'e a bus link for irsia because it was not Gin her
national interest7, reflectin! fears that Sin!apore7s 5han!i airport would lose business
to #ohor7s new Senai airport% This makes irsia cannot abandon the use of 5han!i
airport, and therefore suffer from a hi!her cost%
This is because irsia flyin! to Sin!apore needs to suffer from fli!ht con!estion of
5han!i% 5han!i has drawbacks of fli!ht con!estion that could pre'ent the (uick
turnarounds essential to keepin! down costs% irsia finds it stuck between bi!
planes and circlin! to wait for a slot to open up, which means e,tra fuel costs%
/oreo'er, the SD&E61 departure and security ta, of 5han!i is too hi!h for irsia
low-cost operation% irsia had asked the Sin!apore !o'ernment to wai'e the fees,
@
howe'er, a re(uest that was not only re8ected but also critici)ed%
.esides Sin!apore H .an!kok, irsia now pro'ides an alternati'e route to tra'el to
.an!kok, by usin! Senai irport in #ohor .ahru, in southern /alaysia% Seekin! to
cater to the different markets, fares for #ohor .ahru- .an!kok are !enerally 60 2
lower in comparison to Sin!apore - .an!kok% irsia currently operate daily fli!hts
to .an!kok from #ohor .ahru% Howe'er, the choice pro'ed unpopular, as the route
failed to attract Sin!aporeans because of the additional cost and incon'enience of
ha'in! to tra'el in and out of /alaysia by road% ll these affect irsia e,ternal
!rowth%
:% /inimum air-fare rates
irsia faces challen!es findin! open takeoff and landin! slots at opportune times,
and Thailand7s re!ulation that sets minimum air-fare rates% lthou!h Transport
/inister Suriya #un!run!rean!kit said the current minimum air-fare re!ulations will
be scrapped to open up the market, he couldn7t name a date when this will be done%
This seems to be fa'oritism toward Thai irways 9nternational7s domestic operations,
and affects Thai irsia to compete in the Thailand market%
$,ternal 5han!es which ha'e impact on irsia
1% sia7s middle class !rowth
<ow cost airlines are anticipated to ha'e !reater potential in sia as there are many
sian cities with a population abo'e one million people each as well as a risin!
middle class population% This !rowth of middle class in sia pro'ides a hu!e market
potential for irsia to !row%
Howe'er, as the market is becomin! lar!er, more airlines or new comers would like to
!et a piece of the action% +or e,ample, .ud!et airlines, it is estimated, will capture at
least 6@2 of sia7s air tra'el market within ne,t 10 years and a lot of that will be new,
not di'erted, traffic% Therefore, irsia will face more competitions at the same time%
.esides the low cost airlines, irsia still needs to compete with the con'entional
carriers% lthou!h e,tra passen!ers of the low cost airlines will be comin! from the
new demand to be created by the low fares, the !rowth may not be entirely Gstolen7
from bi! fla! carriers%
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6% ctions of 5han!i and nearby airports
The !rowth of low cost airlines in south-east sia has a si!nificant effect on which
airports will dominate the re!ional a'iation market% <ow cost airlines are seen as
helpin! funnel more passen!ers to airport hubs% Therefore, there is a reali)ation
amon! re!ional !o'ernments that they need smashin! airports and feisty carriers or
they are !oin! to miss out bi! time% Therefore, these !o'ernments are more willin! to
support low cost airlines% +or e,ample, the /alaysian !o'ernment supported the
establishment of irsian in 6001 to help boost the under-used Auala <umpur
9nternational irport, and Thai premier7s Shin 5orp% forms a 8oin 'enture with
irsia that would benefit .an!kok7s new airport and create a new hub at 5hian!
/ai% Therefore, under this situation, it helps irsia !row in sia%
/oreo'er, as there is a !rowth of se'eral south-east sian airports, this poses a
challen!e to the status of Sin!apore7s 5han!i airport as a re!ional a'iation hub%
These airports include #ohor7s new Senai airport in southern /alaysia, .an!kok7s
new Su'arnabhumi airport which will be able to handle 1@ million passen!ers when it
opens in 600@, .an!kok &on /uan! which recently o'ertook 5han!i in passen!er
numbers, etc% To maintain 5han!i7s position as the air hub in the re!ion, Sin!apore is
proposin! a bud!et airline terminal at 5han!i by 600@ and lower passen!er ta,es to
attract low cost airlines% This helps irsia !row and lower the cost%
:% ctions of e,istin! airlines
The e,istin! airlines in south-east sia ha'e se'eral actions to compete with irsia,
for e,ample, some ha'e launched a low cost airline to fi!ht with irsia%
Sin!apore irlines launched a low cost airline subsidiary, Ti!er irways, in the
second half of 600:, only months after the scheduled launch of -aluir set up by one
of its former e,ecuti'es%
;rient Thai irlines launched a new low cost airline subsidiary, ;ne-To-Do% ;ne-To-
Do operates with a fleet of si, .oein! 7@7-600s and match any fares that Thai
irsia offers%
Thai irways ha'e fre(uency and capacity to offer to their 1: domestic destinations%
They also ha'e, durin! the past two years, worked to impro'e operational efficiency,
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slashin! unprofitable domestic routes, increasin! fli!hts on busy routes, stren!thenin!
yield mana!ement and controllin! costs%
ll these make irsia face a hu!e competition%
5ritical success factors in the <ow cost airlines in sia
"eduction in operational cost
<ow cost airlines stri'e to achie'e the lowest possible price for their products and
ser'ices% <ow prices cannot sustain unless the company ma,imi)es its operational
efficiency%
The success factors of sian low cost airlines in reducin! their operational cost
includeI
1% Ser'ice sa'in!s =no frills cabin ser'ice and e,tensi'e use of outsourcin!?
*;-frills includeI
*; drinks, *; food, *; headphones, *; newspapers, *; mo'ies, *; -9F loun!es,
*; e,pensi'e offices, *; milea!e pro!rams, *; seat allocation, *; children7s fares,
*; paper tickets =$lectronic tickets only?, *; connectin! fli!hts =ll fli!ht-le!s must
be booked independently?
6% ;perational sa'in!s =point-to-point ser'ices and uniform fleet?
:% ;'erhead sa'in!s =internet sales and streamlined bureaucracy?
Je can compare the operational cost in terms of costs per a'ailable seat kilometer
=SA?, a measure of the runnin! cost of the airline% +or instance, "yanair in $urope is
almost half of the SA price comparin! with the full ser'ices airline% The a'era!e fare
offered by ir sia in /alaysia is 10-30 2 lower than its full-ser'ice competitor%
5ompetiti'e Ticket price a!ainst traditional full-ser'ice airline
<ow cost airlines be!ins with two initial cost ad'anta!es arisin! from the 'ery nature
of their operationI hi!her seatin! density and hi!her daily aircraft utili)ation% .y
remo'in! business class and reconfi!urin! their aircraft, low cost airlines can increase
the number of seats on their aircraft% Seat pitch of a low cost airline is usually 6>
>
inches, compared to a traditional con'entional economy class pitch with :6 inches%
&o!anis =6001? calculates that should be able to operate at seat cost that are only 10-
@0 2 those of mainline ri'al% 5ombinin! the load factor benefit and beneficial
distribution cost, low cost airline7s cost per passen!er can reduce price by one-third of
con'entional airline%
+lyin! out of secondary airports
/any low-cost airlines keep e,penses down by flyin! out of secondary airports,
a'oidin! ma8or hubs where takeoff and landin! fees are much hi!her while still
!ettin! passen!ers close enou!h to their destinations%
The tra'el distance is short
s the routes offered by low cost airlines are mainly short, domestic routes which
may only take one to two hours, tra'ellers mi!ht be fine with no amenities on fli!hts
Success factors in irsia
bsolute 5ost d'anta!e
1% <ow cost per a'era!e seat kilometer
irsia focused on ensurin! a competiti'e cost structure as its main business strate!y%
9t has been able to achie'e a cost per a'era!e seat kilometer =SA? of 6%@ cents, half
that of /alaysia irlines and "yanair and a third that of $asy#et% irsia can lease
the .7:7-:00s aircraft at a 'ery competiti'e market rates due to the harsh !lobal
market conditions for the second-hand aircrafts because of the September 11
th
e'ent in
6001% ;n the other hand, the operatin! cost of the company is also dropped
drastically%
6% <ow distribution cost
irsia focus on 9nternet bookin!s and ticketless tra'el allowed it to lower the
distribution cost%
:% ttracti'e ticket price
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Jith the a'era!e fare bein! 10-30 2 lower than its full-ser'ice competitor, irsia
has been able to achie'e stron! market stimulation in the domestic /alaysian air
market =Thomas 600:?% +or instance, the fare for the trip from Auala <umpur to
Fenan! on irsia starts from :9 rin!!it% 5omparin! to trip by bus char!e 10 rin!!it
and >0 rin!!it by car% The effect of attracti'e low fare is more tra'elers switchin!
from bus to air, similar case as "yanair in $urope%
Dood /ana!ement Team
irsia 'alue proposition is more sophisticated than "yanair placin! e(ual emphasis
on brand reputation and customer ser'iceCpeople mana!ement, by a senior ad'isor to
issia7s top mana!ement team% irsia pursue a "yanair operational strate!y,
Southwest people strate!y and an $asy8et brandin! strate!y%
Jeakness
+air a'ailability
The a'ailability of irsia is not !ood as traditional airline as it only pro'ide uni(ue
aircraft% Howe'er, it cannot be the cost leader if it offers customi)ed features or
comprehensi'e support which will result in increasin! operational cost%
Howe'er, focus on a specific customer may a'oid straddlin!%
5ase of straddlin!
#apanese low cost airline, Skymark, tryin! to be e'erythin! to e'eryone tar!etin!
the broader customer and offerin! limited special features =satellite T-, .usiness class
and charter operations?% The result is failin! to both cost efficient and price
competiti'e renderin! it 'ulnerable to market forces and customer demand
=porter1993K <awton 1999?%
/a8or strate!ic directions recommended
1% ;pen more sian market
<ow cost airlines are anticipated to ha'e !reater potential in sia as there are many
sian cities with a population abo'e one million people each as well as a risin!
middle class population% 9t is time for irsia to e,ploit the potentials of affordable
air tra'el by sia7s !rowin! middle class% .esides startin! ser'ices to the Fearl "i'er
&elta in south 5hina in 6001, irsia can e,pend its ser'ices to the coastal cities in
5hina%
.esides the !rowth of sian middle class, the liberali)ation of a'iation sector of 9ndia
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is another reason for irsia to open more sian market% The 9ndian !o'ernment has
liberali)ed the a'iation sector lon! dominated by the national carriers% *ow, only a
few low cost airlines, e%!% ir &eccan, irone +eeder irline F't <td, 5rescent ir,
ha'e launched their ser'ices there% /oreo'er, the national carriers, 9ndian irlines or
ir 9ndia, despite their domination of the 9ndian skies, do not seem to be much
interested in operatin! low-cost ser'ices% Therefore, it is a !ood chance for irsia to
open the 9ndian market%
6% #oin 'enture with -ir!in Droup
irsia should put more effort to set up a pan-sian low cost airline with -ir!in
.lue, which is a low cost carrier of -ir!in Droup ser'in! ustralia and *ew Lealand
mainly% -ir!in .lue has su!!ested it may e,tend ser'ices to south-east sia%
Therefore, settin! up a 8oin 'enture with -ir!in .lue can help irsia to !row in sia
e'en further, and help -ir!in .lue to e,tend ser'ices to south-east sia%
"ecommendations to ma,imi)e competiti'e ad'anda!es of irsia
1% $nforce Folitical ad'anta!es
irsia established a 8oin 'enture, Thai irsia with Shin 5orp% Shin 5orp% is owned
by the family of Thailand7s prime minister, Thaksin Shinawatra, and about 900
million baht will be in'ested in Thai irsia o'er a fi'e-year period% Shin 5orp% has
financial stren!th, syner!y in in!ormation technolo!y and telecommunications, which
support irsia to !row in Thailand% irsia with its politically powerful backer can
well !row up to bite, and therefore it should enforce such political ad'anta!es in order
to e,tend the !rowth in Thailand%
+urthermore, irsia should use its Thai subsidiary, Thai irsia, to claim the use of
Thailand7s Gopen skies7 a!reements to fly to Sin!apore, .runei and 5ambodia,
o'ercomin! the barrier of bilateral a'iation pacts that threatened to limit its !rowth%
6% 9nduction of smart cards
irsia can issue a smart card which is compatible with the e,istin! ticketless
bookin!%
9t can offer 6 kinds of smart cards% The first kind of smart card, aimed at ordinary
tra'ellers, will offer instant rewards when topped up, offerin! !reater 'alue than its
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purchase price% +or e,ample a .t@,000 card may be worth .t@,@00% The card can also
be used by other people with the same family name as the cardholder%
The second kind of smart card will offer unlimited tra'el for fre(uent flyers% Friced
pro'isionally at .t60,000, cardholders will be allowed make as many trips as they
want within a specified period%
Conclusion
study by the 5entre for sia Facific 'iation =6006? confirms that sia continues to
offer attracti'e conditions for the air transportation industry% Jith thirteen out of
world7s top twenty-fi'e ma8or urban centres located in the sia Facific re!ion and a
rapidly increasin! urbani)ation trends, the sian air tra'el market is bound to
continue to !row% Urbani)ation is hi!hli!hted as one of the key dri'ers for the !rowth
in air tra'el% 9t is estimated that sia would account for :02 of the world market by
6019, or one third of !rowth between now and then% Jhile the impact of S"S is
!oin! to slow down the !rowth of sian re!ional demand, the lon!-run forecast
continues to be 'ery positi'e% These enable low cost airlines to !row e'en further%
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