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UNIVERSITY OF EAST LONDON

The Strategic Position

Executive Summary
of AirAsia X
AirAsia X: Can the low cost model go
long haul?
The purpose of this report is to investigate the possibility of AirAsia X sustaining their low cost
long haul business venture, in reference to a case study on AirAsia X. Research for this report
included the use of Porters five forces,
Word study of the1951
Count: macro-environment, and a Value Chain
analysis, to identify the key success factors of AirAsia X. The major findings show that AirAsia X
achievements is primarily due to its focus on cost reduction and product differentiation. While it is
clear that there is a market for running a long haul low cost airline, this report recommends that
AirAsia X continues to maintain their customer-orientated approach in planning and innovation, if
it wishes to survive the predicted competitive market, where challenges such as; staff grievances,
political interference, and an unstable economic condition will upset the market.

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Student ID: 1039387
Module code: SM3027
Seminar Tutor: Adrian Haberberg
Turnitin ID: 19535090

Table of Contents

INTRODUCTION...................................................................................................... 2

AIRASIA Xs BUSINESS ENVIRONMENT...................................................................2

PORTER FORCES ANALYSIS..................................................................................... 3

BARGAINING POWER OF SUPPLIERS...................................................................3

BARGAINING POWER OF THE BUYER..................................................................3

THREAT OF SUBSTITUTION FOR AIRLINES...........................................................4

THREAT OF ENTRY.............................................................................................. 5

RIVALRY AMONG EXISTING COMPETITORS..........................................................5

AIRASIA X MACRO-ENVIRONMENTAL FACTORS.......................................................6

LACK OF GOVERNMENT SUPPORT.......................................................................6

CREDIT CRUNCH AND RECESSION......................................................................6

EMPLOYEE AWARENESS...................................................................................... 6

THE VALUE CHAIN ANALYSIS..................................................................................6

USING THE VALUE CHAIN ANALYSIS TO EXPLORE AIRASIA Xs COST-SAVING......6

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Student ID: 1039387
Module code: SM3027
Seminar Tutor: Adrian Haberberg
Turnitin ID: 19535090

INTRODUCTION
This report will investigate the strategic position of AirAsia X, applying the porter forces to
analyse its business environment, and the impact of emerging trends from the macro-
environment, using the relevant PEST analysis. This report will also explore AirAsia Xs low
cost approach using the value chain to analyse the strategy being implemented by AirAsia X,
and how its low cost model and product/ service differentiation complements the business
growth and competitive advantage in the industry. To conclude, a critical appraisal of AirAsia
Xs low cost strategy will be provided, using results from the previous
industry/environmental analysis to assess the sustainability of the AirAsia Xs competitive
advantage in the future.

PORTER FORCES ANALYSIS

BARGAINING POWER OF SUPPLIERS


The industrys suppliers are primarily Aircraft Manufacturers, Local Transportation Service,
Aircraft Leasing Companies, Fuel Companies, Labor Unions, Airports, and Catering Service
Companies. Most of these suppliers are primarily vital to the airline industry as they add to its
core operations, and hence would have a HIGH bargaining power over the airline. Airlines
tend to build strong relationship with their supply chain, because of benefits like; favorable
financial terms, economy of scales, materials re-order services, stock and resource
management. Although there is a cost associated with switching, most airlines would always
seek a more suitable supplier that satisfy their needs. In cases where they are many suppliers
to one airline, the suppliers would have a low bargaining power.

BARGAINING POWER OF THE BUYER


The buyers in this industry includes; Travel Agents, Federal Government, Military, Pleasure
and Business travellers, Cargo and Mail services. The airline industry would always have a
huge demographic market of consumers with fast air transport needs, particularly low budget
airlines would have many ticket buyers due to its low cost model. Customers have lots of
airline travel choices, and there are no cost for switching airlines. However, from the
available range of quality airlines, customers tends to choose the airline that offers the most
value for money in tickets and services. Sufficient information about airline prices and

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Student ID: 1039387
Module code: SM3027
Seminar Tutor: Adrian Haberberg
Turnitin ID: 19535090

services are available to the customer. This can influence the buyers decision by promoting
the airlines quality in service or reputation.

Buyers in this industry have a HIGH power, but is often subjected to international or long
haul flights, because the market is already too saturated with competition. Airlines may also
submit to the customers buying power, to gain competitive advantage. I.e. In economic
situations or Ecological concerns. Most low budget airlines operate nationally. And unlike
international airline, the national airlines tends to be monopolised by one or two company; In
this case, buyer will have LOW power.

THREAT OF SUBSTITUTION FOR AIRLINES


In general, the airline industry is always assumed to have a HIGH threat of substitution,
because of the other modes of transportation available. These includes; Alternate Travel
Services such as; Fast Trains, Private Transportation, Boats and Videoconferencing. Treats of
substitution is HIGH, because it is not the only mode of transportation existing. However,
closer study on the airline transport service will show that it is not just a means of
transportation, but a whole new model on delivering the flying experience to the customers
(Emma, 2012). The airplane travel is known as the fastest means of transportation, and with
regards to that, the threat of substitution is LOW.

Alternatively, the threat of substitution would vary depending on if the flight is regional or
international. The threat of substitution for regional or short haul flights will be high, because
customers could opted to use other modes of transportation that is within that region, as it
may be more cost effective.

THREAT OF ENTRY
As long as there is a need to travel, there will be numerous airlines trying to offer the best
services to the customers. Therefore, threat of entry for this industry would be high, due to its
vast customer population. Although, the market is becoming too saturated, making it difficult
for emerging firms to survive in a market that already has a fierce competition in cost,
product positioning and differentiation. This will make it harder to contest with these airlines
who has strong relationships with their distributors and supply chain, making the threat of
entry LOW.

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Student ID: 1039387
Module code: SM3027
Seminar Tutor: Adrian Haberberg
Turnitin ID: 19535090

Likewise, in the low budget airline industry, the supply chain relationships are important,
because it aids the firms economy of scale by allowing them buy materials in large amount,
for a fixed cost (depending on how strong the relationship is). New entrants diversifying from
other markets, can utilize existing capabilities and cash flows to gain competitive advantage.
Porter, M. (2008). Barriers to entry is HIGH due to strong relationships to suppliers, and the
threat to entry is LOW, depending on how many firms are entering the market.

RIVALRY AMONG EXISTING COMPETITORS


Porter explains that high rivalry in an industry limits the profitability of that industry, because
the competitors are trying to attract customers by dropping prices. This also occurs in the
airline industry, especially the low budget airlines that seeks to reduce cost so as to provide a
cheaper service to the customer. Although a strategy to reduce cost will most likely increase
profitability, because of the perceived reduction in waste. Firms should also take into
consideration, the probability of the other firms using the same strategy to compete in the
market. As a result, the industry will lose its supplier power and buyers can now exert their
high power by causing firms to compete aggressively in low prices. Many airlines go
bankrupt regularly, due to high rivalry, and this could also have a negative effect on the
market share. However, not all business model fail in this instance, as there are some models
that thrive in this conditions.

AIRASIA X MACRO-ENVIRONMENTAL FACTORS

LACK OF GOVERNMENT SUPPORT

AirAsia Xs service flight to Sydney is yet to be approved by the Malaysian


government, and this has blocked routes to a potential market.
Increase in barriers to entry, as a result of government bias support of Malaysian
airlines.
The Malaysian government has not shown support to AirAsia X flight routes for the
past 60 years, and seem highly unlikely they would start now.

CREDIT CRUNCH AND RECESSION


Not every airline in the industry can continue to sustain the low cost model.

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Student ID: 1039387
Module code: SM3027
Seminar Tutor: Adrian Haberberg
Turnitin ID: 19535090

Decrease in fierce competitor rivalry, initiating a possible emergence of a monopoly


from surviving firms.
Airlines without strong relationship with their supply chain will fail.
Unemployment. The amount of employees needed for a low cost operation will
decrease, due to leaner operations.

EMPLOYEE AWARENESS
Most firms operate using the bare minimum number of staffs.
The low budget industry will see a rise in employee grievances, due to a perceived
notion of being overworked and under-paid
This will lead to unionization.
Labor cost may increase in Malaysia, and this will upset the low cost model.

THE VALUE CHAIN ANALYSIS


AirAsia Xs low cost approach had been successful in the industry, however emerging trends
from the macro-environmental factors, forecast an inevitable flop if AirAsia X continues to
use this model. This report has identified the reason behind AirAsia X competitive advantage,
has to do with both their cost model and service/product differentiation, and will use a value
chain analysis will help identify how AirAsia X operates and adds value, by being distinctive
in its low cost model and product/ service differentiation in a high demanding environment.

USING THE VALUE CHAIN ANALYSIS TO EXPLORE AIRASIA Xs


COST-SAVING
Porters Activities that fit Cost-saving opportunities Identified differentiation
category Porters categories and initiatives opportunities
Updated fleet of Airbus In-flight Catering service on
Aircraft, fuel, In-flight
Inbound planes, Pricing, Fuel demand for additional fee,
Catering, Passenger
logistics management, Decrease of Competitor monitoring, Market
service,
waste in food and drink. assessment.
Operations Ticket selling, flight A significant portion of Ticketing and Reservations,
safety, Baggage AirAsi Xs operating costs Aircraft Operations and On-board
Handling, repair & of the airline, was driven service, Check-in and Gate
maintenance by global forces out of operations.

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Student ID: 1039387
Module code: SM3027
Seminar Tutor: Adrian Haberberg
Turnitin ID: 19535090

individual carriers control.

Simple routes are used to


Flight connections, New flight connection option;
focus on a point to point
partnerships and passengers could book tickets to
Outbound network, instead of using
alliances with other destinations beyond their point-
logistics transfer hubs. Low cost
operators, safety and to-point network in Kuala
terminals for lower landing
security procedures Lumpur
charges.
AirAsia Xs has been named the
Promotion, advertising,
Worlds Best Low Cost Airline for
special offers and
All ticket were sold four consecutive year, starting
Marketing & targeted campaign, high
primarily through its 2009, and this has enhance the
sales percentage of online
website. companys brand image and
sales, Travel agents
Reputation. Customer
program.
segmentation
Customer relationship
Providing customers with
management, Customer Technical Support and
the option of customizing
Service Customer customer profiling for better
services without
communication and service delivery
compromising on quality
complaints follow-up
Fewer management Maintain its focus model
Business strategy, effective
Firm system, financial on low cost and making
partnership and competition
infrastructure models, policies and processes as simple as
management
procedures possible.
Recruitment, Incentive Low costs for aircraft AirAsia X cross-trained their staff
management, flight maintenance, standby to manage their aircrafts. It also
HRM routes Pilot and Cabin crews and cockpit training, had its own training academy to
crew training, safety due to standardised Airbus develop a specific AirAsia
training fleet mindset amongst staff members
Technology Procurement, In-flight Developing new methods of managing both customer
development System, CRM, relationships, suppliers and partners to improve customer
Baggage tracking loyalty, supplier relationships, and profits. Utilizing the
system and Yield aircraft seat configuration and the flat bed seat innovation

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Student ID: 1039387
Module code: SM3027
Seminar Tutor: Adrian Haberberg
Turnitin ID: 19535090

management system

Acquisition of Culture of hard


Branding and Online Sales, Raw
aircraft, Ordering and bargaining, Monitoring
Procurement material specifications and
Receiving suppliers and Establishing
Delivery Instructions
Partnerships

Source: Forrey et al. (2012)


Source: AirAsia. (2011)

From the above analysis, this report deduced that the key success factors which would give
AirAsia X a sustainable competitive advantage is its managerial system, organisational
culture, already established brand with a large customer base, strong business model focus,
and product / service differentiation. AirAsia X has a lean firm infrastructure that encourages
creativity, and a business strategy that centres on its culture. Such strategies brought about the
seating configurations and flat bed innovation that distinguishes AirAsia X from its
competitors. The brand image and reputation has supported AirAsia X operations, and
increased customer loyalty. All these factors, including AirAsia sharing resources, gives
AirAsia X a long sustaining advantage in the industry. At the moment, AirAsia X strategic
resources meets all the VIRUS criteria; Its low cost model is valuable to the industry success
factors; the managerial prowess solely available to AirAsia, and thus cant be imitated; it has
a distinctive seating configuration and innovation that is rare; AirAsia X utilises a low cost
model that caters for the needs of its customer, by providing affordable quality service that
cannot be substituted. Though, there is always a level of uncertainty that dictates AirAsia X
sustainable factor, in the sense that regardless of Xs sustaining advantage now, the future is
very unpredictable. Such concerns includes; natural disasters in the operating region, terrorist
attacks, recession etc.

With the emergence of other low cost operators and full service carriers in the low cost long
haul market, AirAsia X must continue to be the market innovators, without losing sight of
their culture, vision, and business strategy. As a result of AirAsia X low cost approach, they
are bound to be various challenges in the future, including staff grievances and political
interference. The key to AirAsia X survival in the uncertain market is to maintain their

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Student ID: 1039387
Module code: SM3027
Seminar Tutor: Adrian Haberberg
Turnitin ID: 19535090

customer-orientated approach in planning and innovation, in order to acquire and retain their
high-value customers.

REFERENCE

8|Page
Student ID: 1039387
Module code: SM3027
Seminar Tutor: Adrian Haberberg
Turnitin ID: 19535090

AirAsia. (2011). Tell me more about AirAsia. Available:


http://www.airasia.com/ask/template.do?id=43. Last accessed 24th Nov 2012.

Emma, K. (2012). Interiors optimise in-flight experience. Asian Aviation Magazine. 10 (2),
p23-26.

Forrey, B; Schotter, A; Doh, J and Lawton, T. (2012). AirAsia X: Can The Low Cost Model
Go Long Haul. Richard Ivey School of Business Foundation. 1 (1), p1-20.

Miller, T.O. (1992), ``A customer's definition of quality'', The Journal of Business
Strategy,pp. 4-7
Porter, M. (2008) The five competitive forces that shape strategy, Harvard Business
Review, 86 (1), pp. 78-93.

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