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.html
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

External
Clients
Environment

Suppliers
Internal
and
Environment
Alliances The
Strategy of
Value
Proposition

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 Courteous, but limited
passenger service (e.g.
no free meals)

Productive and skillful

Short haul, point to point
employees; simple
routes, often to
aggressive and focused
secondary airports
management structure

Competitive advantage
with the LOW cost

Frequent, reliable
High aircraft utilization
schedules

Standardized fleet of
aircraft
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 2009 Profit 2010 Profit 2009 2010 2009
(Million USD) (Million USD) (Million USD) (Million USD) (Million USD) (Million 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%5EIXIC
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?a=v&q=cache:m8YaGNeBKAEJ:journal.ccsenet.org/index.php/i
br/article/download/1115/1118+airasia+retail+format&hl=en&gl=us&pid=bl&srcid=ADGEEShyeilvY4
J0XpjUmYicj6BMz4CshUtKHodMrtG0AyIQoVXsSSxdQam5mvOP2CeGIG_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%40sessionmgr11&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