Havard Business Case Study (HBS) Air Asia
AIRASIA: FLYING LOW-COST WITH HIGH HOPES
1.0 Introduction
“Without a strategy the organization is like a ship without rudder, going around in circles”. (Joel Ross and Michael Kami) Nowadays, the competition among airplane industries is very tough. According to Daniel Chan (2000), with just about two years to go to the turn millennium, air wars over Asia are hotting up, with some of the world’s biggest airlines engaged in intense over Asian skies[1]. Each Of Airplanes Company in the world trying to conduct some strategies to compete with another competitor in their industry. A lot of airplane companies come out with different strategies to make their company better than their competitors. To compete with their competitor in the business environment, a company needs to make a strategy to achieve their long terms objective and can be successful for doing their business.
Moreover, to be successful in their long terms objective and their business, company need to identify their strategic management, because with good strategic management company can be achieving their vision and mission to achieve the successfulness in their business. Regarding this issues, the strategic management becomes important due to the following reason such as globalization to survival their business, and than e-commerce become the critical success to the company nowadays.
The two following reason are need to take into consideration, and than to be successful in the company management, a company needs to consider the company ability and how to integrating it with the as well as main factor in the internal and external factor. The main factor in the internal and external factor can be identified with SWOT analysis. The internal factor can take a look into strength and weakness in a company, and for the external factor, a company can look at opportunities and threats in the external environment.
Furthermore, according to Daniel Chan (2000), the airline industry is a unique and fascinating industry. It captures the interest of a wide audience because of its glamour, reach, and impact on the large and growing numbers of consumers/travelers worldwide[2]. Based on this statement, airline industry become the greatest opportunity for AirAsia. The growing numbers/travelers worldwide can be the wonderful opportunity for AirAsia for running their business. In addition, to captures and attract a customer to choose AirAsia as an airline option, AirAsia need to develop and create a wonderful strategy and come out with special offering to their customer to successfully in their business.
On this paper, I would like to identify and analyze the AirAsia Company strategic management: “ How AirAsia can be a leader in the lowest cost carrier in the airplane industry”. I’m interested to more deeply identify and analyze the strategic management in AirAsia Company because AirAsia have a lot of achievement and awards since year 2001 until present and than they have the greatest strategy which is can make AirAsia to be a leader in the world’s low cost carrier in airline industry.
And than, AirAsia is one of the companies with good company strategic management and has a successful story in the airplane industry in the world. AirAsia now becoming the leading low cost carrier airline in the world and the achievement that AirAsia received to ascertain that AirAsia is one of the best airplane companies. The achievement that AirAsia received in 2009 on the last awards and recognition is the best low cost airline in the world.
In Addition, on this paper will be structured into four sections. Section 1.0 is introduction, Section 2.0 covers about AirAsia Current issues, in this section will be discusses about why AirAsia need to consider a strategy, and AirAsia current issues. Section 3.0 mainly discusses about AirAsia business strategy, this section also will be discusses about why AirAsia stressed to be low cost carrier in airline industry, AirAsia SWOT (strength, weakness, opportunity, and threat) analysis, and also AirAsia business strategy to solve the current issues. And than, section 4.0 would be the last section is conclusion for this paper.
2.0 AirAsia Current issues: how to be low cost carrier leader in airline industry
On this section, I will discuss about the AirAsia current issues: how to be low cost carrier in airline industry. This section involve, why AirAsia need to consider a strategic management, and than what is the current issues that happen in AirAsia Company. This section will discusses the importance of developed and consider strategic management in AirAsia Company, and identify of current issues in AirAsia Company.
2.1 Why AirAsia need to consider a strategic management
Why a company needs to consider a strategic management nowadays? According to Daniel Chan (2000), since the 1970s, the competition for the Asian air travel market has always been intense. This became more intense in the 1990s as traffic volumes were squeezed[3]. Based on that statement, the competition among airplane industry will become more grow, traffic volume also would be increase, and also the Asian air travel market has always been intense. When the competition in the airplane industry becoming though, complex, and rapidly change, AirAsia company as a company that joined in the airplane industry business need to thinking strategically and also must preparing a good strategic management. The AirAsia strategic management needs to effectively and efficiently prepare and implement in the AirAsia company management. Why AirAsia need to consider strategic management? The first reason is because the airline industry is a unique and complex industry[4]. Based on the statement, the complexity and unique of the airline industry, AirAsia need to come out with the greatest strategy to compete with their rival in the same industry. Without the right strategic management, its possible AirAsia could not be able be compete with the complex business environment in the airline industry.
Furthermore, the second reason why AirAsia need to consider a strategic management because in a company nowadays, general management which is the process of achieving organizational goals by engaging in the four major functions of planning, organizing, leading, and controlling may not sufficient and supportive for the organization succeed in the world of complex environments. It concerns about the process to manage the company internally but do not concentrate more on creating competitiveness regarding environments affecting the organization. Even companies adopt general management to sustain profitability by reducing the defects or costs, and improving operations process in order to increase productivity, they may not succeed in the competition because they perform only similar activities better than competitors but do not create distinctive competitiveness.
Additionally, they perform only operational effectiveness but not strategy. Operational effectiveness and strategy are both essential to superior performance but they work in very different ways. Strategy is about competitive position that the company performs different activities from rivals or performing similar activities in different ways. To learn how the companies create strategies and put them into action, the executives or strategists should examine carefully an aspect of strategic management.
Moreover, the organization or company nowadays is faced with constantly changing external environments and needs to ensure that its own internal resources and capabilities are more than sufficient to meet the needs of the external environment. Organizations or companies do not exist simply to survive in the market place but want to grow and prosper in a competitive environment. In order to make sense of what is going on around them, firms must undertake an analysis of their external and internal environment. To understand and how take an action about external and internal environment, a company needs to support themselves with a good strategic management.
Because of this reason, AirAsia need to consider a strategic management as the important things in their company. The strategy that AirAsia need is not just how to reduce cost and make the operational activities running effectively. But, AirAsia needs to come out with the strategy that can make competitive position that the company performs different activities from rivals or performing similar activities in different ways to achieve their business successfully.
In addition, the third reason, why AirAsia company needs to consider and stress to a strategic management? This is because, strategic management becomes important in AirAsia due to the following reasons. The first reason why strategic management becomes important is because the globalization. The globalization consideration impacts virtually all-strategic decisions in a company. The globalization also forced AirAsia Company to survival for business. To see and appreciate the world from the perspective of others has become a matter of survival business.
The underpinning of strategic management hinge upon managers gaining an understanding of competitors, markets, prices, suppliers, distributors, governments, creditors, shareholders, and customers worldwide. The price and quality of firm’s products and services must be competitive on a worldwide basis, not just a local basis[5]. The globalization makes a rapid change in the business environment. Every company has a same chance and opportunity for doing their business. For those company doesn’t aware and take this as important consideration, they will failed to compete with their rival or competitors in their business.
Moreover, the strategic management becoming important due to the following reason is because the rapid development in E-Commerce. Nowadays, E-commerce is becoming a business tool. E-commerce also has become a vital strategic management and allows a company to sell products, advertise, purchase supplies, bypass intermediaries, track inventory, eliminate paperwork, and share information. In total, electronic commerce is minimizing the expense and cumbersomeness, improved products, and higher profitability[6].
In conclusion, Air Asia is need to aware and consider with the strategic management. The reason of the airline industry is a unique and complex industry, not just how to reduce cost and make the operational activities running effectively. But, AirAsia needs to come out with the strategy that can make competitive position that the company performs different activities from rivals or performing similar activities in different ways to achieve their business successfully, and the last one is because the effect of globalization and E-commerce becoming an effective tool in a company nowadays.
Regarding to the importance of strategic management for AirAsia Company, the next part will discusses about the current issues that happened in AirAsia Company.
2.2 AirAsia current issues
The leading low fare airline in the Asia – AirAsia has been expanding rapidly since 2001, to become an award winning and the largest low cost carrier in Asia. With a fleet of 72 aircrafts, AirAsia flies to over 61 domestic and international destinations with 108 routes, and operates over 400 flights daily from hubs located in Malaysia, Thailand and Indonesia. To date, AirAsia has flown over 55 million guests across the region and continues to spread its wings to create more extensive route network through its associate companies, Thai AirAsia and Indonesia AirAsia.
Established on 12 December 2001, AirAsia has been such a big phenomenon in airline industry especially in Asia. AirAsia with the ordinary symbol but with strong brand, “now everyone can fly” nowadays has been phenomena in Airlines industry. AirAsia is one of the airline companies who more focused with the strategy how to reduce inefficiency and make it low possible fare in the world. With the cost-efficiency, low complexity and profitability are always the cornerstones of building a strong business.
Furthermore, according to Dawna and Blaise (2005), the most successful carriers came to dominate their hub markets allowing them to exert greater control over pricing and capacity[7]. Based on this statement, the current issues in AirAsia Company are how to achieve to be a lowest carrier in the world in Airplane industry. Regarding to this issues, Dawna and Blaise said, the most successful carrier in the airline industry allowing them to exert greater control over pricing and capacity.
In addition, according to Haddad (2003), the key to their current success has been to cut costs to the bone through lower salaries and reduced overhead[8]. In airline industry nowadays, customer not only looks at the service that airline company offered to them, but the price of the airline ticket also can influencing the customer to use an airline company. AirAsia Company can compete with the other competitor in the airline industry if they can cut costs through lower salaries and reduced overhead.
Moreover, according to Daniel Chan (2000), these moves but a very small price to pay for continued and greater access to the world’s most prospective air travel markets[9]. The very small price are offered to the customer also can give biggest affect in this business. As all airlines in low cost carrier (LCC) industry compete on costs, AirAsia needs to offer the lowest possible fare in order to win the competition in the current markets served as well as new markets[10].
In conclusion, the current issues in AirAsia Company are more focused in the competition of the cost among an airplane industry. AirAsia as an industry company which is more focusing in the low cost carrier airplane industry need to consider to make the lowest possible cost to compete with the other competitors in their airplane industry. To achieve the lowest possible cost, AirAsia Company has some strategy to achieve it. On the next section, I would like to discuss about AirAsia business strategy: how to implement and achieve it.
3.0 AirAsia Business Strategy: how to implement and achieve it.
On this section, I would like to discuss about AirAsia business strategy. On the previous section, it more focused about the importance of strategic management for AirAsia Company and what is the current issue in AirAsia Company that was happening. On this section, would be involved with the question, why AirAsia stressed to be low cost carrier in airline industry. And than what is AirAsia SWOT analysis and how AirAsia solves the current issues in their company.
3.1 Why AirAsia stressed to be low cost carrier in airline industry
Datuk Tony Fernandez as CEO of AirAsia Berhad said his philosophy is very clear: before a business can grow, it needs to have its costs under control. It must be cost-efficient and profitable, and it must create value. Costs that do not add value must be contained, reduced and even eliminated. I have been asked by various people, “How much lower can your cost reduce? You’re already the lowest in the world!” My direct answer is if we do not strive to be more efficient and choose to be complacent – our days are numbered. This is a continuous task we have to face head on year on year; it is the critical ingredient to operate a successful business[11].
Based on the Datuk Tony Fernandez said, AirAsia can be growing in the airline business if they can control their cost. The cost that they have to running there must be efficient and reliable. Everything that can make inefficiencies must be reduced and possibly to eliminate. What a Datuk Tony Fernandez said is very strong opinion about their company to running their business. AirAsia can be possibly competing with another airplane industries if they can make efficiencies to reduce cost and make the low possible fare than another airplane industries.
Furthermore, based on the environmental scanning performed, the demand for low cost carrier (LCC) industry will keep growing rapidly. The LCC industry attractiveness and profitability will attract many full services airlines to launch its version adding the degree of rivalry in this industry. As the implication, AirAsia, current market leader of LCC in Malaysia, Thailand, and Indonesia, will face competition from both existing and new players. In order to sustain its competitive advantage, AirAsia needs to leverage its competency in creating cost advantages across multiple value chains[12]. Based on that statement, AirAsia need to make a consideration and more stressed to be lowest cost carrier in the airline industry. The demand for lowest cost carrier is will be growing rapidly, it can be the great opportunity for AirAsia Company to run their business.
In addition, AirAsia business strategy also centered on cost leadership. According to Porter’s generic strategies (1985), one of the generic strategies is the cost leadership[13]. The cost leadership in AirAsia Company is already approving because AirAsia more focused and concentrated in the lowest cost carrier in airplane industries. AirAsia wanted to be a leader in the lowest cost for run their business. AirAsia builds and sustains its competitive advantage by providing services at a price that simply lower than competitors price. Operation effectiveness and outstanding efficiency are the two main characteristics of low cost business including in AirAsia.
Moreover, AirAsia believes in the no-frills, hassle-free, low fare business concept and feels that keeping costs low requires high efficiency in every part of the business. Efficiency creates savings that are then passed on to guests so that affordable air travel can become a reality. Through AirAsia philosophy of ‘Now Everyone Can Fly’, Air Asia has sparked a revolution in air travel with more and more people around the region choosing AirAsia as their preferred choice of transport. As Air Asia continuously strives to promote air travel, AirAsia also seek to create excitement amongst their guests with they range of innovative and personalized service.
In conclusion, with there believes to make a low possible fare for to the customer, AirAsia was becoming an Airline company that is chosen by so many customers. The best philosophy of AirAsia ‘now everyone can fly’ means to giving an opportunity to all the people to flight with the lowest possible fare and making them can flight even they only have the less money.
In conclusion, the reason why AirAsia more stressed to be low cost carrier in airline industry because:
1. AirAsia believes to compete in the airline industry, it must be cost-efficient and profitable, and it must create value. Costs that do not add value must be contained, reduced and even eliminated.
2. Demand for low cost carrier (LCC) industry will keep growing rapidly.
3. And than the best philosophy of AirAsia ‘now everyone can fly’ means to giving an opportunity to all the people to flight with the lowest possible fare.
The lowest possible fare that AirAsia was implementing is the best strategy that they are used to compete with their rivals in the airplane industries. AirAsia believes with the lowest fare that they are offering to the customer, they can attract customer more than their rival in the airplane industries.
In addition, to achieve the lowest possible fare in the low cost carrier airplane industry, AirAsia also need to make analysis about their SWOT (strength, weakness, opportunity, and threat). On the next part, I would like to discuss about the AirAsia SWOT analaysis
3.2 AirAsia SWOT analysis
Strengths, Weaknesses, Opportunities and Threats Analysis are one of the important things in a company. This SWOT analysis is for identifying the internal (strength and weakness) and external (opportunities and threats) factor for AirAsia Company to achieve their goals and objectives to be low cost carrier company in airline industry. To be successful in the company management, a company needs to consider the company ability and how to integrating it with the as well as main factor in the internal and external factor. The main factor in the internal and external factor can be identified with SWOT analysis. On this section, I will identify one by one the strength, weakness, opportunities and threats in AirAsia Company. The purpose of this analysis are for identify the internal and external factor that AirAsia need to consider to be low cost carrier in airplane industry. These are the strength, weakness, opportunities, and threat in AirAsia.
1. Strengths
This is partly contributed by the diverse background of the executive management teams that consists of industry experts and ex-top government officials. According to Johnston (1996), without the protection of national airlines brought about by deregulation, building alliances as strategy became necessary for many airlines to stay competitive and gain access to a global market too huge for any existing airline to dominate[14]. The strong links with the government and airline industry leaders is one of the strength of AirAsia Company.
For example, Shin Corp (formerly owned by the family of former Thai Prime Minister – Thaksin Shinawatra) holds a 50% stake in Thai AirAsia. This has helped AirAsia to open up and capture a sizeable market in Thailand. And also, with their strong working relationship with Airbus, they managed to get big discount for aircraft purchase which is also more fuel efficient compared to Boeing 737 planes which is being used by many other airlines
- Air Asia has a very strong management team with strong links with
This is partly contributed by the diverse background of the executive management teams that consists of industry experts and ex-top government officials. According to Johnston (1996), without the protection of national airlines brought about by deregulation, building alliances as strategy became necessary for many airlines to stay competitive and gain access to a global market too huge for any existing airline to dominate[14]. The strong links with the government and airline industry leaders is one of the strength of AirAsia Company.
For example, Shin Corp (formerly owned by the family of former Thai Prime Minister – Thaksin Shinawatra) holds a 50% stake in Thai AirAsia. This has helped AirAsia to open up and capture a sizeable market in Thailand. And also, with their strong working relationship with Airbus, they managed to get big discount for aircraft purchase which is also more fuel efficient compared to Boeing 737 planes which is being used by many other airlines
- The management team is also very good in strategy formulation and execution.
- AirAsia’s brand name is well established in Asia Pacific.
Besides the normal print media advertising & promotions, AirAsia’s top management also capitalized on promotions through news by being very “media friendly” and freely sharing the latest information on Air Asia as well as the airline industry. Their partnership with other service providers such as hotels and hostels, car rental firms, hospitals (medical tourism), Citibank (AirAsia Citibank card) has created a very unique image among travellers. Alliance with Galileo GDS (Global Distribution System) that enables travel agents from around the world to check flight details and makes bookings have also contributed to their string brand name.
Air Asia’s local presence in few countries such as Indonesia (Indonesia AirAsia) and Thailand (Thai AirAsia) has successfully “elevated” the brand to become a regional brand beyond just Malaysia. The links with Manchester United (one of the world’s most famous football teams) and AT&T Williams Formula One team have further boosted their image to a greater extend beyond just the this region
Air Asia’s local presence in few countries such as Indonesia (Indonesia AirAsia) and Thailand (Thai AirAsia) has successfully “elevated” the brand to become a regional brand beyond just Malaysia. The links with Manchester United (one of the world’s most famous football teams) and AT&T Williams Formula One team have further boosted their image to a greater extend beyond just the this region
- AirAsia is the low cost leader in Asia.
- The excellent utilization of IT
The excellent utilization of IT have directly contributed to their promotional activities (email alerts and desktop widget which was jointly developed with Microsoft for new promotions), brand building exercise (with over 3 million hits per month and on the most widely surfed booking engines in the world) as well keep the cost low by enabling direct purchase of tickets by consumer thus saving on airline agent fees.
2. Weaknesses
- Air Asia does not have its own maintenance, repair and overhaul (MRO) facility.
- AirAsia receives a lot complaint from customers on their service.
3. Opportunities
- There are 2 major events that are taking place now or going to take place in
First, is the ever-increasing oil price. Second, is the “ASEAN Open Skies” agreement that has been reached. The increasing oil price at the first glance may appear like a threat for AirAsia. But being a low cost leader, AirAsia an upper hand because its cost will be still the lowest among all the regional airlines. Thus, AirAsia has a great opportunity to capture some of the existing customers of full service and other low cost airline’s customers. However, there will be also some reduction in overall travel especially by casual or budget travelers.
Second, is the “ASEAN Open Skies” allows unlimited flights among ASEAN’s regional air carriers beginning December 2008. This will definitely increase the competition among the regional airlines. However, with the “first mover” advantage as well as its strengths in management, strategy formulation, strategy execution, strong brand and “low-cost” culture among its workforce, this agreement can be seen as more of an opportunity.
- There is also some opportunity to partner with other low cost airlines.
- The population of Asian middle class will be reaching almost 700 million by 2010.
4. Threats
- Certain rates like airport departure, security charges and landing charges are beyond the control of airline operators
- AirAsia’s profit margin is about 30% and this has already attracted many competitors.
- Users’ perception that budget airlines may compromise safety to keep costs low.
After I’m discussed about the SWOT analysis, I would like to discuss about the AirAsia strategy to solve the current issues: How AirAsia can be a leader in the lowest cost carrier in the airplane industry.
3.3 AirAsia business strategy to solve the current issues
Regarding to the airplane industries issues that is low cost carrier was becoming an important issue if AirAsia want to compete with other airplane industry that is involved with low cost carrier business.
The strategy that AirAsia was implementing to make they are being a successful in low cost carrier and can compete with other competitors in this field of business are:
Maximized IT and implementing E-commerce in AirAsia business
Nowadays, E-commerce is becoming a business tool. E-commerce also has become a vital strategic management and allows a company to sell products, advertise, purchase supplies, bypass intermediaries, track inventory, eliminate paperwork, and share information. In total, electronic commerce is minimizing the expense and cumbersomeness, improved products, and higher profitability[15]. According to this statement, E-commerce can change the way of doing business nowadays. E-commerce becomes a major success to Airplane Company to make effectively and efficiency in their business.
AirAsia is one of the airplane companies, which is implementing E-commerce and maximized their information technology usage to make the efficiency and effectively in their company and make possible low cost carrier in their business. According to Pultorak (2004), when the business strategy and IT are aligned, the IT infrastructure can continuously sense the changing business needs and respond by provisioning or redeploying resources to match the demands of the business[16].
Moreover, to maximize their IT, AirAsia implemented current IT such as yield management system (YMS), computer reservation system (CRS), and enterprise resource planning (ERP) system[17]. Lets we discuss the current IT that AirAsia implemented one by one.
Yield management system as revenue management system it understands, anticipates, and reacts to the behavior of customer to maximize revenues for the organization. In this system, AirAsia used it to takes into account the operating costs and aids AirAsia to optimizes price and allocate capacity to maximize expected revenues.
The optimization is done on two levels in AirAsia:
v Seat (Every seat is considered an opportunity to maximize revenue.
Seats are available at various prices in different points of time. A reservation done at a later date will be charged more than the one done earlier – for the same seat)
v Route (By adjusting prices for routes/destinations that have a higher demand when compared to others).
The effective method however is to combine these two levels for all flights, all routes so that both the seat and the route are effectively priced for all the flights.
As a result, by using this yield management system, AirAsia can understands the behavior of their customer and offering the effectives and efficiency strategy and also can allocate capacity to maximize the expected revenue. By this system, AirAsia can make efficiency to know their customer using IT technology with lowest cost.
Furthermore, the other system that AirAsia implemented is customer reservation system (CRS); it is an integrated web-based reservation and inventory system. It includes Internet; call center, airport departure control and more. It is a direct sales engine that effectively eliminates the middleman (travel agents) and the sales commissions that need to be paid to them.
By using this system, AirAsia can reduce the cost and eliminates the middleman (travel agents) and the sales commission to pay them. After that, this system are very customer friendly because the entire customer if want to buy or make a reservation a ticket directly via online, and no need to come to the ticket counter. In conclusion, by using this system effectively, efficiency, customer satisfaction, fast and secure in buying a ticket already met. It means the lowest cost can possibly achieve.
And than, the last system that AirAsia used in maximized IT to meet the lowest cost during their business activities is the implementation of enterprise resource system (ERP). From the view of managers in a company, the emphasis is on the word planning; ERP represents a comprehensive software approach to support decisions concurrent with planning and controlling the business[18].
Based on the definition, ERP is the system that integrated comprehensive software to make the IT system is more effectively and efficiently. By implementing this package AirAsia is looking to successfully maintain process integrity, reduce financial month-end closing processing times, and speed up reporting and data retrieval processes, (Microsoft Malaysia)[19]. In addition, it is a system focusing on capturing transactions in daily operations and helping AirAsia to save its operational costs as well as to increase the efficiency and integrity in its operation (Microsoft Press Pass, 2005)[20]
As a result, the system that AirAsia implemented by using strategy to maximized the IT system (yield management system (YMS), computer reservation system (CRS), and enterprise resource planning (ERP) system) can be a great strategy to make AirAsia more effective and efficiency and possibly able to reduce the cost and eliminated inefficiency in their business.
1. Operation effectiveness and outstanding efficiency
One of the AirAsia strategies to solve the current issues/problem in the lowest carries competition among the LCC airline industry is to make operation effectiveness and outstanding efficiency. How AirAsia implemented this strategy to make operation effectiveness and outstanding efficiency? To make this strategy successfully implemented:
- AirAsia move from the traditional business into modern business by implementing E-commerce and maximize the information technology (IT) in their business.
- The implementation of E-commerce can reduce the cost of travel agents, and less of ticketing paper cost.
- AirAsia also choose the route by adjusting prices for routes/destinations that have a higher demand when compared to others.
- And than AirAsia also trying to reduce by using better maintenance management.
In conclusion, those are the Air Asia strategy to make Operation effectiveness and outstanding efficiency in their business. With this strategy, AirAsia can achieve their goals and objective into the lowest carrier airplane in the world.
2. Implemented outsourcing in their business
To make the lowest carrier in airplane industry, AirAsia also face with challenged to make a decision in terms of efficiency in their business how it will acquire the system. AirAsia have two options in this strategy: in house building or outsourcing. In the strategy that AirAsia used and implemented, AirAsia more preferred to used or implemented outsource system in this strategy. The decision in outsourcing has several benefits such as cost, competency, control, and also competitive advantage.
By implemented outsourcing in their business strategy will provide:
- Cost benefits to AirAsia because it can be eliminated in more resource consumption (time financial).
- And than for the competency, AirAsia competency is not in IT. By implemented outsourcing in the IT field, AirAsia also can reduce cost in IT system activities which is can make possible more cost in their business.
- After that, by using outsourcing, AirAsia can easily to control all the system that is outsourced to another vendor or company. The control in this strategy also gives benefits because AirAsia function only to be a controlled a system that is AirAsia used.
- By using outsourcing, AirAsia also can reduce risk, and it can make AirAsia not spend their financial to cover the risk factor in this strategy.
- The implementation of outsourcing also can give competitive advantage in AirAsia because the strategy can be greater rather than created by AirAsia itself.
4.0 Conclusion
The competition among airplane industries is very tough. Each Of Airplanes Company in the world trying to conduct some strategies to compete with another competitor in their industry. To compete with their competitor in the business environment, a company needs to make a strategy to achieve their long terms objective and can be successful for doing their business. The strategic management becomes important due to the following reason such as globalization to survival their business, and than e-commerce become the critical success to the company nowadays. a company needs to consider the company ability and how to integrating it with the as well as main factor in the internal and external factor.
How AirAsia can be a leader in the lowest cost carrier in the airplane industry? To be a leader in the low cost carrier, firstly, AirAsia need to consider about their strategic management. The reason why need to consider strategic management because the first reason is because the airline industry is a unique and complex industry. The second reason, the strategy that AirAsia need is not just how to reduce cost and make the operational activities running effectively. But, AirAsia needs to come out with the strategy that can make competitive position that the company performs different activities from rivals or performing similar activities in different ways to achieve their business successfully, the third reason because a globalization and implementing E-commerce.
The current issues in AirAsia Company are more focused in the competition of the cost among an airplane industry. AirAsia as an industry company which is more focusing in the low cost carrier airplane industry need to consider to make the lowest possible cost to compete with the other competitors in their airplane industry.
How AirAsia can solve the current issues to be a low cost carrier leader in airplane industry? The first is to identify and analyze the SWOT analysis, and than to solve the current issues with some strategies such as Maximized IT and implementing E-commerce in AirAsia business, Operation effectiveness and outstanding efficiency, and the last one is implemented outsourcing in the AirAsia business.
--------------------------------------------------------------
Question 1 : Briefly describe the trends in the global airline industry.
The pattern of ownership has been privatized in the recent years, that is, the ownership has gradually changed from governments to private and individual sectors or organizations. This occurs as regulators permit greater freedom and non-government ownership, in steps that are usually decades apart. This pattern is not seen for all airlines in all regions
The overall trend of demand has been consistently increasing. In the 1950s and 1960s, annual growth rates of 15% or more were common. Annual growth of 5-6% persisted through the 1980s and 1990s. Growth rates are not consistent in all regions, but countries with a de-regulated airline industry have more competition and greater pricing freedom. This results in lower fares and sometimes dramatic spurts in traffic growth. The U.S., Australia, Canada, Japan,Brazil, Mexico, India and other markets exhibit this trend. The industry has been observed to be cyclical in its financial performance. Four or five years of poor earnings precede five or six years of improvement. But profitability even in the good years is generally low, in the range of 2-3% net profit after interest and tax. In times of profit, airlines lease new generations of airplanes and upgrade services in response to higher demand. Since 1980, the industry has not earned back the cost of capital during the best of times. Conversely, in bad times losses can be dramatically worse. Warren Buffett once said that despite all the money that has been invested in all airlines, the net profit is less than zero. He believes it is one of the hardest businesses to manage.
As in many mature industries, consolidation is a trend. Airline groupings may consist of limited bilateral partnerships, long-term, multi-faceted alliances between carriers, equity arrangements, mergers, or takeovers. Since governments often restrict ownership and merger between companies in different countries, most consolidation takes place within a country. In the U.S., over 200 airlines have merged, been taken over, or gone out of business since deregulation in 1978. Many international airline managers are lobbying their governments to permit greater consolidation to achieve higher economy and efficiency.
Question 2 : What is the business level strategy adopted by Air Asia?
With cost leadership, a set of actions are integrated to produce goods/services with features that are acceptable to customers at the lowest cost, relative to that of competitors. Although AirAsia’s business strategy is centered on cost leadership, it targets specific markets (i.e. price sensitive customers needing short-haul fights), selling its product/services below the average industry prices to gain market share. Hence, it can be categorized into focused cost leadership. AirAsia modified the low-cost airline model and adopted the following strategic actions to lower their costs relatively to competitors, while maintaining competitive levels of differentiation:
1. Single Class, No Frills Service
As with most low-cost airlines, AirAsia operated a single class-service, without frills and at substantially lower prices: passengers were not allocated seats, did not receive meals, entertainment, amenities (i.e. pillows or blanks), loyalty program points, or access to airport lounges. AirAsia’s aircraft were designed to minimize wear and tear, cleaning time and cost. This reduced cleaning and maintenance expenses, loading and unloading times and costs, and allowed quicker turnarounds between flights, improving process efficiencies (differentiation) and having lower costs (cost advantage).
2. High Aircraft Utilization and Efficient Operations
Compared with other airlines, AirAsia’s usage of its aircraft and staff was more efficient. Such (high) efficiency and utilization meant that the overhead and fixed costs associated with an aircraft were lower on a per flight basis. For example, seating configurations to AirAsia’s Boeing 737-300 aircraft were maximized, having 16 more seats than the standard configuration adopted by full-service competitors.
In addition, AirAsia’s aircraft (i.e. point-to-point services kept flights to no more than 4 hours, minimizing turnaround time), and employees (i.e. encouraged to perform multiple roles), were used more effectively and intensively than competitors. For example, its point-to-point services (in 2004) enabled AirAsia to operate its aircraft an average of approximately 13 hours/day. It was 2.5 hours more efficient then full-services airlines, which only managed to use their aircraft for an average 10.5 hours/day. Furthermore, the average turnaround time for AirAsia’s aircraft was lesser (e.g. 25 minutes), as compared to full-service airlines (e.g. 45-120 minutes).
3. Single Aircraft Type
Operating a single aircraft type enabled AirAsia to have substantial cost savings: maintenance was simplified (i.e. made cheaper), spare parts inventory was minimized, infrastructure and equipment needs were reduced, staff and training needs were lowered (i.e. easy for pilot dispatch), and better purchase terms could be negotiated.
For instance, its large purchase of A-320s would make AirAsia on of the relatively few low cost airlines operating this aircraft. With fuel accounting for almost 50% of the total operating costs for the airline, the A-320s would provide an important cost saving of lower fuel usage by about 12%; increasing the airline’s profitability.
4. Low Fixed Costs
AirAsia achieved low fixed costs through successful negotiations for low lease rates for its aircraft, low rates for its long-term maintenance contracts, and low airport fees. This enabled AirAsia to reduce its overheads and investments in equipments substantially in the absence of fringe services.
As a result of its successful negotiations, AirAsia’s contractual lease charges per aircraft decreased by more than 60% from 2001 to 2004. Aircraft maintenance contract costs were also reported to be substantially lower than other airlines, giving AirAsia a competitive advantage, which was further compounded by its young fleet. Furthermore, the airline’s high safety and maintenance standards allowed AirAsia to procure rates that were favorable on its insurance policies.
5. Low Distribution Costs
By utilizing information technology (i.e. being the first airline in Southeast Asia to utilize e-ticketing, bypassing traditional travel agents), AirAsia achieved low distribution costs by eliminating the need for large and expensive booking/reservation systems, and agents’ commissions. This saved the airline the cost of issuing physical ticket (i.e. estimated at US$10 per ticket).
6. Minimizing Personnel Expenses
As a high portion of costs was the salaries and benefits for its employees, AirAsia implemented flexible work rules, streamlining administrative functions, which allowed employees to perform multiple roles within a simple and flat organizational structure. Having employees perform multiple roles enabled AirAsia to deploy fewer employees per aircraft (i.e. ratio of 106 per aircraft versus 110 employees or more for competitors), saving on overhead costs and maximizing employees’ productivity, as process efficiencies are improved.
AirAsia’s employees were not unionized, hence its rumination policy focused on maximizing efficiency and productivity, whilst keeping staff costs at levels consistent with low-cost carrier industry standards. Although salaries offered to employees were below that of rivals, all employees were offered a wide range of incentives (i.e. productivity and performance-based bonuses, share offers, and stock options).
In addition, rather than an hourly pay scale for its pilots, AirAsia adopted a sector pay policy: pilots were provided incentives to enhance flight operation efficacies by keeping flight and operating times to a minimum, and to cover as many flight sectors as possible within a day. The absence of in-flight services made it possible for the airline to reduce the number of cabin crew per light, saving on employee cost.
7. Maximizing Media Coverage
Being a leader among budget airlines in Southeast Asia, AirAsia received regular coverage from media outlets. AirAsia managed to promote brand awareness without incurring high sales and marketing expenses: in all of his media appearances, Frenandes always appeared wearing a red AirAsia baseball cap and his statements reinforcing AirAsia’s positioning to offer low prices; generating media attention for the airline.
However, AirAsia also invested heavily where required: AirAsia’s major sponsorship for Manchester United, involved global sponsorship and advertising, and promoted the brand beyond the region.
8. Use of Secondary Airports
AirAsia, as with most low-cast airlines, usually operated out of secondary airports which allowed AirAsia to charge lower fares, as operation costs were lower: landing, parking, and ground handling fees were lower, with more slots for landings and takeoffs.
9. Low-Cost Philosophy
To reinforce its low-cost structure, AirAsia instilled a low-cost culture, emphasizing on cost avoidance. For example, emphasis was placed on the elimination of avoidable expanses such as tag costing (despite reach tag costing less than US$0.05), turning off cabin lights at appropriate times, and not overheating in-flight ovens. Such cost saving measures enabled AirAsia to achieve costs per average seat kilometer of US$0.0213 (the lowest for any airline in the world), with its margins of 38% (before taxes, interests, depreciation, and amortization) being the highest in the world in 2004. (Exhibit 5 and Exhibit 6)
Therefore, in conclusion, by eliminating the provision of costly in-flight services, flying a standard fleet, selling tickets to passengers, and minimizing labor, facilities and overhead costs, AirAsia has managed to achieve a successful low-cost structure, which enables it to charge lower prices to achieve high passenger loads, market share, and profitability.
References:
• Ireland, R D, Hoskission, R E & Hitt, MA 2009, The management of strategy concepts, 8th edn, South-Western Cengage Learning, USA
• Singh, K, Pangarkar, N & Heracleous, L 2010, Business strategy in Asia a case book, 3rd edn, Cengage Learning Asia, Singapore
Question 3 : How does Air Asia achieve cost leadership through differentiation?
Some low-cost carriers operate aircraft configured with a single passenger class, and most operate just a single type of aircraft. In the past, low-cost carriers tended to operate older aircraft, such as the McDonnell Douglas DC-9 and older models of the Boeing 737. Since 2000, fleets generally consist of smaller, newer, more fuel efficient aircraft, commonly the Airbus A320 or Boeing 737 families, reducing training and servicing costs.
Like the major carriers, many low-cost carriers develop one or more hubs to maximize destination coverage and defend their market[1] Many, like Southwest Airlines, do not operate a traditional hub in any market. Southwest operates point-to-point service, with focus cities serving as mini-hubs for passenger connections to other cities.
Aircraft often operate with a minimum set of optional equipment, further reducing costs of acquisition and maintenance, as well as keeping the weight of the aircraft lower and thus saving fuel. Pilot conveniences may be excluded such as ACARS and autothrottle. Often, no in-flight entertainment systems are made available, though many US low-cost carriers do offer satellite television or radio in-flight. Some do not offer reserved seating, hoping to encourage passengers to board early and quickly, thus decreasing turnaround times. Some airlines even use only non-reclining seats, or operate aircraft with no window shades.
Airlines often offer a simpler fare scheme, such as charging one-way tickets half that of round-trips. Typically fares increase as the plane fills up, which rewards early reservations. Often, the low cost carriers fly to smaller, less congested secondary airports and/or fly to airports in off-peak hours to avoid air traffic delays and taking advantage of lower landing fees. The airlines tend to offload, service and re-load the aircraft (turnaround) in shorter time periods, allowing maximum utilization of aircraft.
In Europe and early in Southwest's history, luggage is not automatically transferred from one flight to another, even if both flights are with the same company. This saved costs and is thought to encourage passengers to take direct flights. Modern US-based low-cost carriers generally transfer baggage for continuing flights, as well as transferring baggage to other airlines.
In many cases, low cost carriers generate ancillary revenue from a variety of activities, such as à la carte features and commission-based products. Some airlines may charge a fee for a pillow or blanket or for carry-on baggage. In Europe, it is common for each and every convenience and service to have an additional charge. In other regions this practice is more limited.
Low-cost carriers are intended to be low-cost, so in many cases employees work multiple roles. At some airlines flight attendants also clean the aircraft or work as gate agents (limiting personnel costs). Southwest Airlines is well known for using fuel hedging programs to reduce its overall fuel costs. Some airlines eschew the use of gates that include jetways, since these generally cost more to lease.
Where permissible, some airlines have a disinclination to handle Special Service passengers, for instance by placing a higher age limit on unaccompanied minors than full service carriers. Often these airlines offer no refunds or transfers to later flights in the event of missed flights; if the aircraft leaves on time without a passenger who arrived late, he will have to buy a wholly new ticket for the next flight.
Differentiation
Not every low-cost carrier implements all of the above points. For example, some try to differentiate themselves with allocated seating, while others operate more than one aircraft type, still others will have relatively high operating costs but lower fares. JetBlue for instance has in-flight entertainment (i.e. LiveTV) in every passenger seat. Other airlines are limited on what points they can implement based on local laws, such as Ryanair cannot remove window blinds from its aircraft as they are required to be fitted by the Irish Aviation Authority. As supply increases, this sort of differentiation by brand is one of the most important criteria for the future success of low-cost-carriers, since price-competition alone is not believed by many experts to be enough given the number of carriers.
As the number of low-cost carriers has grown, these airlines have begun to compete with one another in addition to the traditional carriers. In the US, airlines have responded by introducing variations to the model. Frontier Airlines and JetBlue advertise satellite television. Advertiser-supported Skybus Airlines launched from Columbus in 2007, but ceased operations in April, 2008. In Europe, the emphasis has remained on reducing costs and no-frills service. In 2004, Ryanair announced proposals to eliminate reclining seats, window blinds, seat headrest covers, and seat pockets from its aircraft.
Question 4 : Identify the ways Air Asia can sustain its competitiveness through the business level strategy that is adopted?
Aligned with its mission statement, AirAsia’s business strategy is centred on cost leadership. However, its business strategy targets specific markets; price sensitive customers (including first-time fliers) needing short-haul flights. In Porter’s generic strategies, AirAsia’s business strategy can be categorised into focused cost leadership; quadrant 3A in figure 1.
AirAsia builds and sustains its competitive advantage by providing services at a price that is simply lower than competitors’ price. Operation effectiveness and outstanding efficiency are two main characteristics of low cost businesses including AirAsia. The central objective is to achieve bigger cost advantages than the rivals by continuously searching areas for cost reduction along its value chain. By further analysing AirAsia’s value chain, one can actually determine how AirAsia creates cost advantages along its value chain. Appendix 2 summarises the sources of cost advantages contributable to the low cost business model for each activity in AirAsia’s value chain. These cost advantages constitute AirAsia’s order winner in competing with its rivals as they enable AirAsia to provide the lowest possible price to the price sensitive customers. In LCC industry, cost is the competitive priority and it determines market position.