Air Asia has been named the “World’s Best Low Cost Airline” in the annual World Airline

Survey
by Sky-trax for five consecutive years from 2009 to 2013. They have offered Southwest’s
successful people-oriented strategies and Ryanair’s efficient operational strategies. However,
Southwest and Ryanair emphasize those strategies in order to differentiate themselves from a large
number of low-cost providers in their highly competitive and relatively saturated American and
European markets, respectively. On the other hand, AirAsia is an imitator in a market with limited
competition and growing demand from a previously nonexistent market segment. This gives
AirAsia the opportunity to be a leader in its own market, while at the same time imitating and
integrating business models that showed to be successful elsewhere. What are these success
strategies? Here is the list
1) Backward Integration: For an airline, one of the key resources is trained staff aligned with the
company’s vision which are difficult to find due to the high rate of competition among airlines in
the Asian markets, so AirAsia has setup Asian Aviation Academy with CAE to train personnel
required in abundance for its ever expansionary vision. Second cause of price constraint on an
airline is fuel which cuts into 33-50% of revenues, Air Asia has bulk discounts on airplane lease,
fuel costs as it operates the biggest fleet in Asia, supplier side bargaining is a strategic advantage
for this MAA aims at starting leasing house,
2) Forward Integration: 85 per cent of Air Asia tickets are sold through its website, limiting agent’s
commission. Air Asia has partnered with Expedia for providing ticketing and hotel combination
deals, hotel margins add further revenues and AAE has current valuation of 500 million USD. Apart
from this Air Asia runs its own loyalty program convertible to paradigm mall and KLIA shopping
rewards for getting consumers to fly more to earn loyalty points and also earn auxiliary income
from sales. AirAsia has its own payment card called EZPay or Tune card which is a closed loop
payment network and hence lowers payment bank charges on conversion to country currencies
where the Airline operates in. Cargo handling services of airports have now been brought under
AirAsia service as Redbox, cargo delivery with door to door delivery. Duty free shops to be
launched which will provide customers international shopping experience from the convenience of
their flights with delivery options added within.
3) Horizontal Integration: AirAsia bought 40% stake in Batavia airlines(fourth largest ) in Indonesia
to gain additional routes and also bought zest airlines to create AirAsia Zest, AirAsia acquired an
85% economic interest and 49% voting rights in ZestAir, as well as a 100% interest in Yao's
Asiawide Airways Inc.
4) Diversification
 Diversification strategy is distinct as an organization essentially moves out of its current products
and markets into new areas. AirAsia’s related diversification strategy was mainly in the form of
backward, forward, and horizontal integration. The airline’s backward integration strategy was
executed as the company extended its operations towards its growth of its ancillary products and
services.
5) Market Penetration: Market penetration occurs when a company penetrates a market with its
existing product range and strategic capabilities and obtains increased market share. For example,
AirAsia, with its relatively low market share, succeeded at attacking Malaysia Airline System’s
market share in the domestic airline industry. This strategy begins with the existing customers of
the organization and is used by companies to increase sales without drifting from the original
product-market strategy. AirAsia penetrated the aviation industry by gaining the competitors’
customers, improving the product quality and its level of service, attracting non-users of the
products or convincing current customers to use more of the company's products through its
promotions and obtaining substantial media coverage due to its fairytale success. This strategy was
important for AirAsia because retaining existing customers is cheaper than attracting new ones and
engaging in relationship marketing activities is pertinent to retain its high lifetime value customers
6) Retrenchment: AirAsia focusses on excessive cost cutting on low resource utilization, it has an
industry defining low average personnel per airplane at 80, and it believes in turnaround times from
airports at 20 minutes to save on usage costs and has an average operating mean of 12.5 hours a
day and goes as high as 16 hours in some countries. All auxiliary services are paid and no refunds
are provided for ticket cancellations to ensure no seats are vacant. Point to point travel maps are
drawn to get the maximum route utilization and lowest tariff airlines or those who offer maximum
discounts or sops are selected for AirAsia operations.

FINANCIAL IMPACT OF STRATEGIES ON PERFORMANCE: Revenue growth

The Asian airline market continues to grow, gaining market share after surpassing the West last year to
become the largest market in the world. According to Oliver Wyman’s annual Airline Economic Analysis,
the ranking of world regions in terms of airline capacity has flipped during the past few years. Asia now
ranks first, Europe second, and the U.S. third. Just four years ago the positions were reversed.
When compared with 2009, the rankings have reversed in 2013

Now, when we look at the Asian market only, LCCs now account for only 15% of Asia’s fleet and slightly
over 20% of seat capacity but approximately 50% of orders. Ten years ago LCCs accounted for only about
2% of total capacity in Asia-Pacific. When compared to developed markets this sector is nascent and has a
huge scope for growth. Primary share in this sector is of

Asia-Pacific low-cost carriers ranked by fleet size: as of 31-Dec-2013

Aircraft as of
Rank Carrier Country LCC Group
31-Dec-2013
1 JT Lion Air Indonesia Lion 94^^
2 AK AirAsia Malaysia AirAsia 74
3 JQ Jetstar Airways Australia Jetstar 74
4 6E IndiGo India (independent) 73
5 SG SpiceJet India (independent) 56

But according to new plane orders the future looks bright for AirAsia as the Lion and AirAsia/AirAsia X
group’s accounts for 964 or over 60% of the 1,591 aircraft on order by the Asia-Pacific LCC sector.

Asia-Pacific aircraft orders by LCC group: as of 31-Dec-2013

Group Current fleet On order*
Lion 133 576
AirAsia/AirAsia X 172 388
Jetstar 116 125
VietJet 10 70
Tigerair 51 18
Source: CAPA Fleet Database

AIRASIA

For AirAsia the revenue growth has been positive for first quarter 2014, while recuperating from the
political unrest in Thailand and high margin pressure in Malaysia and Indonesia.
This has been achieved as AirAsia has significant breathing margins over its competitors, even though the
margins have been compromised in countries like Malaysia and India, but on an average it enjoys the
highest margins due to the growth of ancillary services.

AIRASIA STRATEGIC GAME DISCUSSION

The LCC business model works best when passengers can be stimulated to travel by offering very low fares
in the market. Passengers who wouldn’t previously have flown because of high fares are now stimulated to
fly, thereby creating a new passenger market. The full stimulation effect of low fares in an existing market
occurs when the fare differential is greatest; normally when the first LCC comes onto the route. If the
existing average fare is, for example 4000 rupees and the new average fare offered is 900 rupees, then the
potential to stimulate a significant additional market is apparent. However, once the average base fare has
been established at 900, then further discounting to 800 by a second new entrant LCC cannot stimulate the
market with anything like the initial impact of the Rs 3100 reduction.

The floor in the average fare is the level below which services become uneconomical, where revenues don’t
cover the costs even if the aircraft is full. In competitive situations, airlines might operate at below cost
levels in the short-term to try and chase off the competition, but ultimately a route will only survive if it
can be operated at a profit. In the example above, the second LCC in the market would have very little room
for maneuver, as the margin between the average fare of 900 and the airlines breakeven could be very small
indeed. Once low-fare stimulation has been fully played out, the competition becomes a battle for market
share, a reversion to normal competitive conditions, albeit at lower fares. The driver for traffic growth
passes from the airlines to the passengers: the state of the economy and the disposable wealth of the
population become the engines for further growth; just as they were before the low-cost carriers arrived on
the scene.