AirAsia: The World’s Lowest Cost Airline

Filiz McNamara and Vicki Troftgruben

AirAsia

 An overview of AirAsia’s

 Internal environment
 External environment
 Problem statement
 Possible solutions
AirAsia’s Vision
 “To be the largest low cost airline in Asia and serving 3
billion people who are currently underserved with poor
connectivity and high fares.”

“Now Everyone Can Fly”

AirAsia’s Mission
 “To be the best company to work for whereby employees
are treated as part of a big family,
 Create a globally recognized ASEAN brand,

 To attain the lowest cost so that everyone can fly with

AirAsia,
 Maintain the highest quality product, embracing
technology to reduce cost and enhance service levels.”
AirAsia’s Values
 Key strategies:

 Safety first
 High aircraft utilization
 Low fare, no frills
 Streamline operations
 Lean distribution system
 Point to point network
AirAsia’s Strategies
 Vision: Continue to be the LOWEST cost airline in every
market AirAsia serves
 Goal: High margin – sustainable growth

 Strategy: Safety, low fare, service and simplicity

 Foundation: Low cost, efficiency, stimulate new markets,

and strong cash flow
History of Low Cost Airlines
 The low-cost concept became a moneymaker in the United
States, where it was pioneered in the 1970’s by Southwest
Airlines; the model for budget carriers elsewhere like
Ryanair and easyJet in Europe
Background and Founder
 Established in 1993 and commenced operation on
November 18, 1996
 December 2, 2001, it was purchased by former Time
Warner executive Tony Fernandes’ company Tune Air
SdnBhd from the ownership of HICOM Holdings Bhd for
the token sum of only RM1, and with only 2 Boeing 737-
300 aircraft plus another RM40 million (about $11 million)
in debt
 AirAsia operates scheduled domestic, regional and
international flights to over 400 destinations spanning 25
countries
Background and Founder
 AirAsia has flown over 100 million guests upon the core
believe that ‘Now Everyone Can Fly’
 Main terminal hub is the Low-Cost Carrier Terminal
(LCCT) at Kuala Lumpur International Airport (KLIA),
Malaysia
 AirAsia operates scheduled domestic, regional and
international flights to over 400 destinations spanning 25
countries
Organizational Structure
The following chart shows the corporate structure and principal operating
companies for AirAsia

Last updated: July 2011

AirAsia
 Revenue: 1Q-11 RM 1.05 Billion (1 Malaysian ringgit = 0.3257 US
dollars)

 Number of employees: 8,000

 HQ location: Kuala Lumpur, Malaysia
 Ownership: Listed on the Malaysian stock exchange
 Year founded: 2001
 The company grew from two planes in 2002 to a fleet of 86
aircraft flying 30 million people
AirAsia
 Flight Profile

 Every 3 minutes, an AirAsia aircraft is either taking off

or landing somewhere in Asia
 Aircraft fly an average of 2.8 million kilometers each
year; that’s a distance equal to the moon and back, four
times over
 Pilots and cabin crew travel 500,000 kilometers each
year; the equivalent of circling the Earth 13 times
AirAsia
 Flight Profile

 The aircraft consume approximately 14 million liters

(3.64 million gallons) of fuel each year
 The aircraft make contact on the tarmac approximately
every 13,000 kilometers (8,077 miles) each year, about
half the distance a normal passenger car puts in every
year. BUT, the aircraft will require 16 tire changes each
year
AirAsia Achievements
 Year 2012
 ATW Value Airline of the Year

 Year 2011
 Best Asian Low-Cost Carrier By TTG Travel Awards 2011
 World’s Best Low Cost Airline
 Best Low Cost Airline – Asia by Skytrax
 Best Company for Investor Relations – Mid Cap
 Best Investor Relations Website – Mid Cap by Malaysian
Investor Relations Association (MIRA)
AirAsia Today
 Associate Companies

 AirAsia (AK)
 AirAsia X (D7)
 Thai AirAsia (FD)
 Indonesia AirAsia (QZ)
 AirAsia Philippines (PQ)
 AirAsia Japan (Begins August 2012)
AirAsia
 AirAsia X (D7)

 Established in 2007 to provide low-cost, long-haul

flights (over 400 miles)

Flights to:
 Australia, China, Europe, Japan, Korea, India, Middle
East and New Zealand
AirAsia X
 Previously known as FlyAsianXpress

 Focusing on the low-cost, long-haul segment

 Established in 2007 to provide high-frequency and point-

to-point networks to the long haul-business
 AirAsia X is spreading its wing to exciting destinations
such as Australia, China, India, the Middle East and Europe
AirAsia Internal Capabilities
 Foster a dependency on Internet technology; such as direct
ticketing
 Online booking, online checking (flight status,
promotions), boarding passes on mobile phones
 Investment in the AirAsia Academy

 Dynamic environment between employees and

management, quarterly meetings
 No communication barriers between employers and
employees
AirAsia Internal Capabilities
 “Employees before customers”
 Aggressive marketing tactics, massive advertising,
promotional packages
 Employee motivation - rewards free flights for their staff
 Offer customers the ticketless concept
 Low operating costs - wages, airport fees, short ground
waits due to simple boarding processes
 Keeping costs low - uses one type of aircraft, Airbus A320
AirAsia
 Corporate Belief

 Now Everyone Can Fly

 http://www.skyscanner.com/airline/airline-air-asia-ak.ht
ml
AirAsia
 A firm can differentiate its offering along five
dimensions:

 Product
 Services
 Personnel
 Channel
 Image
AirAsia
Differentiation Strategies to Online Businesses

 Environment/ atmospherics
 Making the intangible tangible
 Building trust
 Efficiency and timely order processing
 Pricing
 Customer Relationship Management (CRM)
 Enhancing the experience
AirAsia Online Business
 AirAsia’s Site Environment / Atmospherics

 Fascinating, multitasking and user friendly

 Interactive buttons, accurate information
 Flight booking, pricing, packages and vacation offers
 Promotions are always becoming the main factor to be
advertised on the website
AirAsia
 Making the Intangible Tangible

 The AirAsia Website is providing lots of elements of

“Making the Intangible Tangible” such as:
 On-time performance
 On-time guarantee
 Go-In-sure hospital income plan
 Attractive pictures of places to visit
 Sitemaps
AirAsia
 Building Trust

 AirAsia has made trust a major element in making the

customers and potential customers feel confident in
dealing with the company website
 Safe and encrypted payment process for transactions
 One of the best secured sites for internet transactions
AirAsia
 Efficient and Timely Order Processing

 Payment by credit card or debit card

 Immediate purchasing services
 Making the purchasing process available at anytime and
anywhere
AirAsia
 Pricing

 Fares are significantly lower than those of other airline

service providers
 Website fares are much cheaper compared to the
frontline counter price
 Promotion pricing strategy has enhanced AirAsia’s
reputation in making the promises become reality
AirAsia
 Customer Relationship Management (CRM)

 Always determine the customers as their first priority in

every consideration
 Customer or potential customers can always be
connected to the AirAsia programs
 Promotional booking offers
 News updates
 Phone circulars
 Flight change information
AirAsia
 Enhancing the Experience

 The development has created outstanding improvement

 Satisfaction of selling process, customer buying process
and customer usage experience
AirAsia Shareholders
 Top 5 Shareholders:

 Tune Air Sdn Bhd

 Employees Provident Fund Board
 Genesis Smaller Companies
 Wellington Management Company
 The Nomad Investment Partnership Lp Cayman
AirAsia
 Value chain
 Primary activities such as:
 Inbound logistics
 Operations
 Outbound logistics
 Marketing and Sales
 Service
AirAsia
 Value chain
 Support activities such as:
 Human Resource Management
 Technology Development
 Procurement
Potential Strategic
Implementation

The Strategic Forces of Value Proposition

Assessment of Internal
Environment
 Strenghs
 Low cost operations
 Fewer management levels, effective, focused and aggressive
management
 Simple proven business model that consistently delivers the
lowest fares
 Penetrate and stimulate potential markets
 Multi-skilled staffs means efficient and incentive workforce
 Single type fleet minimizes maintenance fee and pilot
training costs
Assessment of Internal
Environment
 Weaknesses
 Service resource is limited by lower costs
 Limited human resources
 Government interference and regulation on airport
deals and passenger compensation
 Non-central location of secondary airports
 Brand is vital for market position and developing it is
always a challenge
 Heavy reliance on outsourcing
 New entrants provide the price-sensitive services
AirAsia’s External Environment
 Industry - Air Transportation Services

 General external environment

 Global
 Demographics
 Socio-cultural
 Political-regulatory
 Economic
 Technological
 Physical environment
AirAsia’s External Environment
 General external environment

 Global - AirAsia is a domestic, regional and

international airline serving Southeast Asia, Europe,
India, Indonesia, and Australia
 Suppliers – selected on a competitive basis
 Demographics - serving those that cannot afford the
main stream airlines; about 500 million people within
3.5 hours flying time from their hub in Kuala Lumpur,
Malaysia
 Socio-cultural – AirAsia’s culture is relaxed, anyone can
advance within the company and do anyone’s job
regardless of education
AirAsia’s External Environment
 General external environment

 Political-regulatory – AirAsia abides by all of the

regulations within each country it serves, as well as
maintaining strict maintenance standards on its planes
 Economic –
 AirAsia is able to keep costs low via their direct sales
and marketing through their website and call center;
they avoid paying commissions to travel agents
 Aircraft maintenance is outsourced to 3rd parties; labor
is usually the #1 cost for airlines
AirAsia’s External Environment
 General external environment

 Technological – AirAsia outsources most of their IT

needs based upon competitive bids; they are able to keep
costs low by having consumers purchase directly from
the website or from their call center
 AirAsia uses Navitair’s Open Skies computer
reservation system (CRS)
 The CRS is a web-based sales and inventory system
which links to AirAsia’s call center and allows
customers to print boarding passes
AirAsia’s Site Map
AirAsia External Environment
 Partnerships - with Vietnam-Malaysia cooperation formed
VietJet AirAsia
 Strong branding strategy: AT&T Williams F1 team,
Manchester United, ASEAN Basketball League (ABL),
EPL Referees, Oakland Raiders, NFL, The Amazing Race
Asia, Monsoon Cup 2006, etc.
 AirAsia X’s first flight from Kuala Lumpur, Malaysia to
Stansted, London, England was greeted by Prince Andrew
 Linking with Virgin Airlines provided financial backing
and valuable industry experience
AirAsia External Environment
 Looks for suppliers with good quality on certain price
points; builds long-term relationships
 Airports have low cost terminal hubs
 Computer Reservation System (CRS), recently involved in
providing flight services for evacuation of Malaysian
students in Egypt
AirAsia Five Forces Analysis
 Five Forces - an industry-level analysis to determine
attractiveness of an industry
 Threat of New Entrants – AirAsia’s low cost carrier
strategy is to maintain efficiencies to sustain the lowest
fares, thus being a barrier to new entrants
 Threat of Substitute – As one of the most profitable low
cost carriers, it is difficult for competitors to find enough
efficiencies to become a substitute for AirAsia’s niche
markets
AirAsia Five Forces Analysis
 Bargaining Power of Buyers – The more informed
internet customers become, the more power they may have
over AirAsia, especially if AirAsia is unable to maintain its
low cost leadership position
 Bargaining Power of Suppliers – Since AirAsia is the low
cost leader, they may be able to force their suppliers to
maintain or lower prices; they are in a better position to
continue earning above average returns even if suppliers
costs are increased
AirAsia Five Forces Analysis
 Rivalry Among Competitors – AirAsia is in a guarded
position against their current competitors; since they are
the low cost leader they are able to weather price cuts/wars
and maintain their profits after their competitors have
competed away their profits
AirAsia Competitive Advantage
 Usage of one type of aircraft, Airbus A320

 Economies of scale

 Costs can be cut by 50%

 Small inventories (power of purchasing)

 Reduces employee training time and learning curve

AirAsia Competitive Advantage

Competitive advantage
with the LOW cost
Assessment of External
Environment
 Opportunities
 Long haul flights are a trial to get undeveloped market share
 Differentiation from the traditional LCC model by adding
customer services or operation as full service airline with
low fares
 Ongoing industry consolidation has opened up prospects for
new routes and airport deals
 High fuel prices will squeeze out unprofitable competitors
Assessment of External
Environment
 Threats
 Full service airlines may cut costs to compete
 Entrance of other LCCs
 High fuel prices decrease profits
 Accident, terrorist attack, and disaster may affect customer
confidence
 Aviation regulations and government policy
 Increase in operation costs in producing value-added services
 System disruption due to heavily reliance on online sales
Major Challenges
 Increasing competition due to an increasing number of low
cost and aggressive airline competitors
 Competition against the large or traditional airline
companies
 Customer decrease due to economic recessions
 Rising fuel prices
 Higher labor costs
Major Challanges
 Inadequate infrastructure
 Route and flight utilization
 Safety and security issues of aircraft crash or being
attacked
Major Competitors & LCCs
 EasyJet plc

 Malaysian Airline System Berhad

 Ryanair Holdings

 Singapore Airlines Limited

 Southwest Airlines

 Thai Airways International

AirAsia
 Before 2001, AirAsia failed to sufficiently stimulate the
market and attract enough passengers from Malaysia
Airlines to establish its own niche market
 In 2002, AirAsia was purchased by Tony Fernandes’ group
with only two aircraft and 200,000 passengers
 By 2009, AirAsia grew to 79 aircraft and 11.8 million
passengers
AirAsia
 Does AirAsia have a sustainable competitive
advantage? YES

 Low cost operations and fixed costs (single aircraft type)

 Low distribution costs (utilization of information
technology)
 Single aircraft type
 High aircraft utilization and efficient operations (25
minute turn around per plane)
AirAsia
 Does AirAsia have a sustainable competitive
advantage? YES

 Flat organizational structure (AirAsia’s flatter structure

allows better communication from bottom to top,
management solicits employee cost savings ideas)
 Low cost philosophy (the lowest cost per available seat
kilometer)
 Strong branding and marketing (high advertising budget
and sponsorship with sports teams for an LCC)
AirAsia
 Does AirAsia earn above average returns?

 Definition of sustainable competitive advantage: is it

valuable, rare, difficult to imitate and non-substitutable

 Yes, Air Asia does earn above average returns in two primary
areas:
 Technology – specifically the internet
 Low cost model – to be more efficient than full service
carriers and other LCC competitors; have the lowest prices
 Competitor Comparisons
Company Revenue Revenue % Change Operating Operating % Change Net Profit Net Profit % Change
2010 (Million 2009 (Million Profit 2010 Profit 2009 2010 (Million 2009 (Million
USD) USD) (Million USD) (Million USD) USD) USD)

AirAsia $1230.9 $976.9 26 $332.6 284.4 16.9 $330.9 $157.8 209.6

Malaysian 4,022.6 4,603.8 14.5 (106.4) (272.5) 39 72.7 105.4 54.9

Airline

Ryanair 4,223.4 4,156.9 1.6 568.3 130.9 434.1 431.5 (239.1)

Holdings

Southwest 12,104 10,354.4 16.9 988 262 377 459 99 463.6

Airlines

Thai 5,652.4 5060.4 11.7 301.8 263.3 14.6 480.4 229.8 209
Airways Intl
Costs per Available Seat Kilometer
Cost/Available Seat Kilometer
$0.10

$0.08 easyJet

$0.06 Southwest
JetBlue
Ryanair
$0.04 Air Arabia
Air Asia

$0.02

$0.00
0 500 1000 1500 2000 2500
5099.KL (AirAsia), MAS (Malaysian
Airline) and Indices GSPC (S&P 500),
IXIC (Nasdaq), DJI (Dow Jones)

 http://uk.finance.yahoo.com/q/bc?s=5099.KL&t=5y&l=on
&z=l&q=l&c=MAS%2C%5EFTSE%2C%5EDJI%2C%5E
IXIC
AirAsia
 Problem Statement: How can AirAsia maintain its
profitable low cost carrier leadership position in the airline
industry, especially now that they have added long-haul
flights?
AirAsia
Potential Solutions:

 Continue its successful low cost carrier strategy

 Continue to place employees and customers first
 Continue to maintain strict cost controls; lower than their
competitors
 Continue to offer customers the lowest fares, thus
making it difficult for competitors to compete and
unlikely for new entrants to emerge on the scene
Questions?

 We thank you for your attention this evening

References
 AirAsia. (2012) AirAsia website. Retrieved from http://www.airasia.com/my/en/corporate/awards.page

 AirAsia. (2012) AirAsia website. Retrieved from www.airasia.com

 ASEAN. (2012) ASEAN website. Retrieved from http://www.aseansec.org/74.htm

 BBC.com. (2012) BBC News website. Retrieved from http://www.bbc.co.uk/news/business-11647205

 Docs.google.com. (2012) Google Docs website. Differentiation Strategies of Internet Retailing. Retrieved from
https://docs.google.com/viewer?
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&hl=en&gl=us&pid=bl&srcid=ADGEEShyeilvY4J0XpjUmYicj6BMz4CshUtKHodMrtG0AyIQoVXsSSxdQam5mvO
P2CeGIG_XG1p-BPUzBqb5T3Mk7L90v-
RVBf14fnXwMwNPNzZfuWC7s7kEE9cIZVV1MLW0aVuD8Zzh&sig=AHIEtbSILaGhmo4-
BoQjDjQKNLIvQICjBA
References continued
 Ebscohost.com: Business Source Premier. (2012) Datamonitor Report: Malaysian Airline System Berhad.
Retrieved from
http://ezproxy.minotstateu.edu:2057/ehost/pdfviewer/pdfviewer?sid=748d40cb-c955-4d02-977f-7f8aeebc9d23%40se
ssionmgr11&vid=19&hid=12

 Ebscohost.com: Business Source Premier. (2012) Datamonitor Report: AirAsia Berhad. Retrieved from
http://ezproxy.minotstateu.edu:2057/ehost/pdfviewer/pdfviewer?sid=1968b36e-1726-4554-aa2c-
cb61f20597c5%40sessionmgr12&vid=4&hid=19

 Ebscohost.com: Business Source Premier. (2012) Datamonitor Report: Ryanair Holdings plc. Retrieved from
http://ezproxy.minotstateu.edu:2057/ehost/pdfviewer/pdfviewer?sid=f0dd9f71-9e14-46fd-9dde-
40b527cbcca3%40sessionmgr13&vid=4&hid=12

 Ebscohost.com: Business Source Premier. (2012) Datamonitor Report: easyJet plc. Retrieved from
http://ezproxy.minotstateu.edu:2057/ehost/pdfviewer/pdfviewer?sid=748d40cb-c955-4d02-977f-
7f8aeebc9d23%40sessionmgr11&vid=16&hid=12
References continued
 Ebscohost.com: Business Source Premier. (2012) Datamonitor Report: Singapore Airlines Limited. Retrieved from
http://ezproxy.minotstateu.edu:2057/ehost/pdfviewer/pdfviewer?sid=f0dd9f71-9e14-46fd-9dde-
40b527cbcca3%40sessionmgr13&vid=13&hid=12

 Ebscohost.com: Business Source Premier. (2012) Datamonitor Report: Southwest Airlines Company. Retrieved
from http://ezproxy.minotstateu.edu:2057/ehost/pdfviewer/pdfviewer?sid=f0dd9f71-9e14-46fd-9dde-
40b527cbcca3%40sessionmgr13&vid=18&hid=12

 Ebscohost.com: Business Source Premier. (2012) Datamonitor Report: Thai Airways Intl Public Company Limited.
Retrieved from http://ezproxy.minotstateu.edu:2057/ehost/pdfviewer/pdfviewer?sid=f0dd9f71-9e14-46fd-9dde-
40b527cbcca3%40sessionmgr13&vid=21&hid=12

 Grant, R.M. (2010). AirAsia: The World’s Lowest Cost Airline, 2010. In R.M. Grant, Contemporary Strategy
Analysis (7th ed.), (pp. 625-635). Chichester, UK: John Wiley & Sons Ltd.
References continued
 Knoji.com. (2012) Knoji website. Retrieved from http://business-strategy-competition.knoji.com/strengths-and-
weaknesses-of-airasia/

 Scribd.com. (2012) Scribd website. Retrieved from http://www.scribd.com/doc/78281309/Air-Asia-Cost-

Leadership-Strategy

 Wikipedia.com. (2012) Wikipedia website. Retrieved from http://en.wikipedia.org/wiki/AirAsia_Group_destinations