A brief history of AirAsia
AirAsia was established by a Malaysian, government owned corporation in 1993 and began its operations in 1996 (AirAsia, no date). 5 years later, in December 2001, the airline was in RM40million debt. AirAsia and its debt were purchased by Tony Fernandes for the price of RM1 (approximately £0.20). Under the new leadership, AirAsia quickly recovered and launched new routes, both domestic and international, and between 2002 and 2009 expanded by 77 new aircrafts and the number of passenger journeys tremendously increased from 200,000 to 11.8 million. By 2009, AirAsia was known as Asia’s the most successful low-cost airline (Grant, 2016).
AirAsia’s motto “Now Everyone Can Fly” shows their vision of being the largest low-cost airline which serves everyone, including people who were previously unable to travel due to poor connectivity and fares which were unaffordable for many people. Although low-cost factor was very important to the airline, the company did not want to compromise on quality and services. AirAsia has had their focus on passenger’s safety, fast turnaround time streamline operations and lean distribution system (AirAsia, no date).
Those strategies lead AirAsia to winning awards such as Airline of the Year by Centre Asia Pacific Aviation (CAPA), Best Asia Low-Cost Carrier by TTG Travel Awards 2009, and World’s Best Low-cost Airline by Skytrax (Grant, 2016).
Airline industry
The first part of this assessment consisted of the group research and presentation about Porter’s Five Forces in the airline industry (Appendix 1.). Research conducted showed that in 2004 approximately 30% of passengers in the world were in Asia. Given a constantly growing airline traffic in Asia and strong position of AirAsia on the market, the opportunities to grow the market share are very significant. Additionally, by introducing long haul flights (AirAsia X), AirAsia’s traffic substantially increased (Grant, 2016).
This report is going to analyse AirAsia and the industry further and answer two questions:
1. Air Asia’s strategy is that of low cost but what are the sources of the airline’s cost advantage that makes it the ‘World’s Best Low-Cost Airline’?
2. What are the strategic capabilities that give the airline its competitive advantage? Using the VRIO framework identify if AirAsia has a sustainable advantage?
Case study Q.2: ‘World’s Best Low-Cost Airline’
Porter (cited in: Dess and Davis, 1984) has identified three generic strategies which are differentiation, overall low cost and focus. In cost leadership strategy, an organisation aims to become the low-cost service provider in its industry.
The sources of cost advantage might include the pursuit of economies of scale, low input costs, experience and product/ process design (Joseph, 2018).
According to Grant’s case study (2016) in order to become “world’s best low-cost airline”, Air Asia has followed the cost leadership strategy which is shown by targeting specific markets, such as price sensitive customers, and providing the service at very low price compared to the competitors. That allowed airline to gain the market share. AirAsia lowered its costs, however maintained competitive level of differentiation by the following sources of cost advantage:
- Single aircraft typeOperating a single type of aircraft, Airbus A320, allowed AirAsia to substantially lower the operating costs such as maintenance, pilot and crew training, purchasing and aircraft utilisation. Additionally, as cost of the fuel accounts for almost 50% of the total operating cost, this particular aircraft type, provided AirAsia with a lower fuel usage, therefore a significant cost saving.
- “No-Frills flights”AirAsia operates a single class service which allowed more seats per plane. Additionally, no extra services were provided; passengers neither were allocated seats nor received complimentary meals and drinks. The airline however, provided beverages and snacks at additional cost during the flight. Simplicity of the service allowed AirAsia to minimalize the turnaround time to utilise aircrafts and the cabin crew.
- High aircraft utilizationHigh efficiency and aircraft utilization meant that the overhead and fixed costs were significantly lower on a per flight basis. Earlier mentioned seating configuration (single class service) gave air Asia 16 more seats than the standard configuration used by competitors. In addition, the average turnaround time for AirAsia’s aircraft was 25 minutes, as compared to other airlines with an average turnaround of 45-120 minutes, assuring lower cost and higher productivity. That allowed AirAsia to operate aircrafts longer hours in comparison to the competitors.
- Low fixed costsAirAsia managed to successfully negotiate low lease rates for the aircrafts, maintenance contracts and airport fees which helped them to achieve low fixed costs. In result, cost of lease per aircraft decreased by over 60% from 2001 to 2004. Similarly, the cost of aircraft maintenance contract was substantially lower compared to other airlines, which gave AirAsia a competitive advantage. Contracting the maintenance helped AirAsia to achieve simplicity and cost economies as outsourcing those undertakings was more effective and efficient. Moreover, as AirAsia was focused on high safety standards, rates of insurance policies for the airline were considerably lower.
- Low distribution costsAirAsia also described lean distribution system as its strategy. It was the first airline in Southeast Asia which utilised information technology to make booking and travelling easier. That included online booking and e-ticketing. AirAsia achieved low distribution costs by eliminating expensive booking systems and agents’ fees.
- Use of secondary airportsAirAsia typically operated out of secondary airports to reduce operation costs such as landing, parking, and ground handling fees. That allowed AirAsia to maintain low fares and be profitable at the same time.
In conclusion, AirAsia lowered all avoidable costs and achieved a successful low-cost structure, which enabled it to charge low prices and consequently achieve high passenger loads, market share, and profitability. All those sources of AirAsia’s cost advantage make it the ‘World’s Best Low-Cost Airline’.
Case study Q.3: Competitive strategies
Strategies are necessary to ensure that all resources in the business are allocated effectively. The importance of strategies in managing businesses has been a topic of many researchers, including Porter, Drucker and Barney. According to Zekiri and Nedelea (2011) “business strategy is all about competitive advantage”. It determines whether the company performs better than competitors in terms of revenue, profitability or productivity which in a long run will define the market share in comparison to the competitors (Gerry et al., 2017). There are many different tools, such as PEST analysis, Growth-share Matrix, Porter’s 5 Forces, Value Chain analysis and VRIO Framework, which are used by companies to examine the internal and external environment.
According to Joseph (2018) there are four crucial criteria which help in assessing capabilities in terms of providing a basis for achieving sustainable competitive advantage. These are value, rarity, inimitability and organisational support, known as VRIO Framework (Appendix 2.). Long-term survival and competitive advantage depend on organisation’s resources and capabilities (Joseph, 2018). Resources are the assets (physical, financial, human) that organisations have, and capabilities are the ways that the resources are used or deployed.
Table 1. (Appendix 3.) shows the analysis of AirAsia’s resources using Resources-Competency Model used to identify core capabilities of the airline. To determine whether AirAsia has sustainable competitive advantages, the company’s capabilities are assessed using VRIO Framework, below (Table2.).
Many other Asian low-cost airlines competing with AirAsia might also follow the low-cost business strategy. For that reason, the airline must ensure that it is differentiated from its competitors. Success of AirAsia is based on the following aspects:
- ReliabilityAirAsia operated from secondary and regional airports rather than main airports which tend to be busy, congested and more expensive. Using secondary airports helped AirAsia to achieve high rates of on-time departures (Grant, 2016). Additionally, AirAsia’s turnaround time of 25 minutes helps the airline to provide its customers with frequent and punctual flights.
- Cost EffectivenessAirAsia’s main focus is to lower the avoidable costs in order to provide low fares but be profitable. That is achieved by no additional complimentary services for passengers, operating from secondary airports and single-class service (Grant, 2016).
- Efficiency and ProductivityAirAsia as a first airline in South-eastern Asia introduced online booking system, the airline also ensured that staff was trained and capable to perform various roles (Grant, 2016). AirAsia developed and maintained its operations efficiency and productivity, which is a major factor in achieving the cost-leadership strategy. AirAsia as ‘World’s Best Low-Cost Airline’ continues to survive in a high competition of low-cost carriers and its extremely low-cost position protects AirAsia from the rivals.
- Frequent ServiceAirAsia offers point-to-point flights on short-haul routes (Grant, 2016). Due to the short turnaround and point-to-point flights, AirAsia achieves high aircraft utilisation. Frequent flight service is another crucial factor to AirAsia’s success. Very often, high frequency service attracts business travellers who aim to save time and get to places without the delays.
In conclusion, analysis of AirAsia’s VRIO framework and success factors clearly shows that airline’s cost avoidance in all aspects of the business is the key to sustainable low-cost culture since 2001. Moreover, AirAsia has the second sustainable advantage which is an ability to build a business by leveraging on new technologies. Due to those two sustainable advantages, AirAsia continues to survive and flourish till today.
Summary
To sum up, AirAsia under the management of Fernandes developed significantly. He possessed an entrepreneurial spirit and determination. His responsiveness to change, taking calculating risks and good level of consultation helped him to achieve success with AirAsia. AirAsia has adopted cost leadership as its business strategy, however the management made sure that the airline maintains competitive levels of differentiation. Several sources of the airline’s cost advantage, such as using single aircraft type, “No-Frills flights”, High aircraft utilization and others made AirAsia` it the “World’s Best Low-Cost Airline”. Moreover, low-cost business strategy has successfully given AirAsia high profits. Lastly, the analysis of the VRIO framework shows that AirAsia has sustainable advantages, however it must continue differentiate itself from competitors who very likely also follow low-cost business strategy. Moreover, although entering the new markets could potentially increase AirAsia’s earnings, it would be risky to enter markets with well-established low-cost carriers, eg. Europe. For that reason, AirAsia should focus on its current market and concentrate on being the sustainable market leader until AirAsia X becomes better known and established in international markets.