4.

0 Discussion on whether Air Asia will be successful in truly differentiate its brand
strategically, with appropriate justification.

Nowadays, the competition among airplane industries is very tough. Air Asia Berhad (AirAsia) is
one of the leading low cost airlines in South East Asia which has expanded rapidly since 2001.
The company is based in Kuala Lumpur, Malaysia and has successfully positioned itself in
customer's mind through the simple slogan "Now Everyone Can Fly" (Air Asia, 2009).And then,
Air Asia is one of the companies with good differentiates its brand among the rest airline with
effective company strategic management and has a successful story in the airplane industry in the
world. Air Asia now becoming the leading low cost carrier airline in the world and the achievement
that Air Asia received to ascertain that Air Asia is one of the best airplane companies. The
achievement that Air Asia received in 2009 on the last awards and recognition is the best low cost
airline in the world. The followings are the various area or segment in which Air Asia successfully
differentiate its brand among the rest.

4.1 Low Cost Model: Low cost operations and fixed costs

Focusing on providing air travel without frills at substantially lower prices, AirAsia has managed
to achieve lower prices to attain high passenger loads, market share, and profitability by
eliminating provision of costly in-flight services, flying a standard fleet, selling tickets to
passengers directly, and minimizing labor, facilities and overhead costs (i.e. passengers are not
allocated seats, and do not receive meals, entertainment, amenities, or access to airport lounges).

Its successful negotiations for its low aircraft lease rates, low long-term maintenance contracts
rates, and low airport fees, enabled AirAsia to provide the lowest fares. As a result, AirAsia was
able to reduce its overheads and investments in equipments substantially in the absence of fringe
services. Exhibit 4 shows that AirAsia has the lowest operating cost (29), compared with 29 other
competitors (with Air France being the highest at 184).

Moreover, AirAsia’s aircraft maintenance contract costs were reported to be substantially lower
than other airlines (i.e. contractual lease charge per aircraft decreased by more than 60% from
2001 to 2004), adding to AirAsia’s competitive advantage, which was further compounded by its
young fleet. AirAsia’s high safety and maintenance standards allowed AirAsia to procure
favorable rates on its insurance policies, increasing customer confidence. Therefore, this is a
valuable, rare, non-substitutable capability and difficult to imitate (by competitors), which creates
sustainable (cost) competitive advantage for AirAsia.

4.2 Low Distribution Costs: Utilization of Information Technology (IT)

Being the first airline in Southeast Asia to utilize e-ticketing and bypass traditional travel agents,
AirAsia saved on the cost of issuing physical ticket (i.e. estimated at US$10 per ticket), eliminating
the need for large and expensive booking/reservation systems, and agents’ commissions. In 2004,
AirAsia’s website was voted the most popular site for online shopping in Malaysia: internet
bookings increased from 5% of all bookings in 2002, to approximately 50% in 2004. AirAsia
subsequently made its tickets available via post offices and designated bank teller (ATM)
machines, increasing accessibility to consumers while having lower distribution costs, gaining
more market share in the process.

4.3 Single aircraft type

Operating a single aircraft type enabled AirAsia 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.

Therefore, this resource is a core competency (resource) as it is rare, difficult to imitate and without
substitutes. Exhibit 8 shows that AirAsia has the largest fleet size of 30 has compared with its
nearest competitor in the low-cost airline industry (Bangkok Airways) with a fleet size of 15.

4.4 High aircraft utilization and efficient operations

AirAsia aircrafts (i.e. point-to-point services kept flights to no more than 4 hours, minimizing
turnaround time) and employees (i.e. perform multiple roles) were more effectively and intensively
used as compared with other airlines.
In 2004, as a result of its point-to-point services, AirAsia managed to operate its aircraft or an
average of approximately 13 hours/day. This was 2.5 hours more than efficient full-services
airlines, which only managed to use their aircraft for an average 10.5 hours/day. Also, the average
turnaround time for AirAsia’s aircraft was lesser (e.g. 25 minutes), as compared to that of a full-
service airline (e.g.45-120 minutes).

Thus, this capability provides AirAsia with a sustainable (differentiation and cost) competitive
advantage as it is rare, difficult to imitate (e.g. not many competitors were as successful as
AirAsia), and without substitutes.

4.5 Flat organizational structure and effective staff policies

A high portion of AirAsia costs was the salaries and benefits for its employees. Hence, the airline
implemented flexible work rules, streamlining administrative functions which allowed employees
to perform multiple roles within a simple and flat organizational structure. In AirAsia’s case, a
flatter hierarchy improved (sped-up) communication, resulting in an effective and focused
workforce.

AirAsia’s 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 such
as productivity and performance-based bonuses, share offers, and stock options. This motivated
employees, giving them a sense of ‘ownership’.

4.6 Low-Cost Philosophy

Although other Budget airlines attempted to do the same, AirAsia managed to be more effective
at implementing these measures (difficult to imitate). Exhibit 5 provides an overview of AirAsia’s
efficiency: AirAsia managed to achieve cost per average seat per kilometer of 2.13 U.S. cents, the
lowest for any airline in the world; giving it a competitive (cost) advantage as it is able to maintain
its low fares for passengers. This efficiency enabled AirAsia to utilize its capacity by increasing
its load factor (passenger carrying capacity) from 0.62 in 2000, to 0.75 in 2005).
Hence, this is a sustainable (cost) competitive advantage for AirAsia as it is rare (e.g. lowest cost
per average seat per kilometer in the world), difficult to imitate (e.g. no many competitors were as
successful as AirAsia), and without substitutes.

4.7 Strong branding and marketing

Due to aggressive expansion, AirAsia was able to penetrate potential markets (i.e. Exhibit 7 - an
extensive Southeast Asian regional network of 60 routes at the end of 2005). From 3 routes in
Malaysia (in early 2002), AirAsia quickly expanded its route network in Malaysia, covering all
major destinations in Malaysia (by end of 2002). As a result, AirAsia had a regional presence
(though joint-ventures) in Southeast Asian with countries such as Indonesia (Indonesia AirAsia),
Thailand (Thai AirAsia).

Subsequently, AirAsia become a leader among low-cost carriers in Southeast Asia, receiving
regular coverage from regional media outlets. Hence, the airline was able to penetrate and stimulate
potential markets by maximizing media coverage: brand awareness promotion without incurring
high sales and marketing expenses.

Additionally, AirAsia’s aggressive marketing stimulated potential markets: its introductory

promotional fares in 2002 of US$2.50, attracted huge publicity and interest from travelers who
were used to high prices; emphasizing the airline’s slogan, “Now Everyone Can Fly”. This resulted
in AirAsia’s profitability within few months of its operations commencements. Strong passenger
growth and high passenger loads can be seen from Exhibit 1 where AirAsia enjoyed compound
average growth of 45% for sales during the period between 2001 and 2004.

Moreover, AirAsia’s major sponsorship for Manchester United, which involved global
sponsorship and advertising, further promoted the brand beyond the region. AirAsia also 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.
Overall summary on Air Asia will be successful in truly differentiate its brand strategically,

Therefore, as this capability is rare, difficult to imitate and without substitutes, it is a sustainable
(differentiation) competitive advantage for AirAsia.Based on the above internal analysis,
AirAsia’s simple proven business model, which consistently delivers the lowest fares, has been
identified as AirAsia’s core competency. It consists of resources and capabilities that are both
valuable and difficult to imitate (e.g. low costs, low fares, strong branding and marketing, and
reliable service), giving AirAsia a competitive (cost and differentiation) advantage.

A value chain analysis has been conducted to give determine how AirAsia’s value chain creates
cost advantages (competitive advantage) through a chain of value creating activities, with the goal
to generate a profit margin with value that exceeds the cost of providing the product/services.

Hence in conclusion, the mentioned AirAsia strengths mentioned (and consolidated in the value
chain analysis) contributed to its success through its differentiation strategy by giving the airline a
competitive edge. For instance, its achievement of good operating benchmarks in terms of flights
on time (88%) and baggage-handling efficiency (99.9%) further added (customer perceived) value
and confidence to its brand, and contributed to its success; giving it a competitive (cost and
differentiation) edge.