FTG Sdn Bhd

Zulfakar Asraf B Abd Manap- SX122558CSRF01

Havard Business Case Study(HBS)

1.       Briefly describe the trends in the global airline industry.

• Change in ownership pattern from Government owned or supported to private.
• Deregulation in airline industry leading to greater competition and pricing freedom.
• In order to increase efficiency, carriers are entering into new strategic alliances with each other.
• Fierce competition, rising fuel prices leading to streamlining of operations to enhance the value chain.
• Emergence of Low Cost Carrier (LCC) market due to rising economies increasing business travel and growing disposable incomes especially in Asia.
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2.       What is the business level strategy adopted by Air Asia?

Business level strategy adopted by Air Asia are 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 :

• 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).

• 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.

• 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.

• 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.

• 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.

• 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.

• 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.

• 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.

• 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.

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.

3.       How does Air Asia achieve cost leadership through differentiation?

AirAsia achieved cost leadership through differentiation through strategic action such as single class services with no frills and minimum lower fares without preferable seats, meals, entertainment and other utilities. Besides that, their priority is simplicity and safety for the passengers. AirAsia also always makes promotions to keep their customers coming back for their product such as regular fare promotions for specific travelling periods to encourage early booking. The tickets were through a telephone booking centre, sales offices, travel agent and partnerships with local bank and post offices. Passengers also can pre-book their checked baggage for a lower rate to encourage customer to travel lighter so less fuel was burned and less pollution was caused.

Its speedy expansion from domestic routes to regional flight was supported by its cheeky advertising strategy. For instance, in 2004, when it began the route from Singapore to Bangkok, its full-page newspaper ad read: “There’s a new girl in town: twice the fun, half the price”, poking fun at the iconic Singapore Airlines’s female flight attendants, who were widely known as “Singapore girls” and had an elegant image. AirAsia’s flight attendants, on the other hand, could style their hair and apply make up however they liked, projecting a muchmore relaxed and refreshing image than those of other airlines, which required cabin crew to assume a more uniform appearance. While all AirAsia advertisments focused on low fares, they also reflected the LCC’s intention to be seen as an airline of high quality. With the ambition of being a low-cost but high-quality and innovative airline, it signed on to become the official airline sponsor of the world-famous Manchester United football club and the AT&T Williams Formula One team, painting some of its aircraft with the club colours and sport stars. AirAsia further tied up with Tourism Malaysia to make AirAsia a sponsor of Manchester United’s training centre in Trafford, UK, enhancing AirAsia’s relationship with the tourism board. Philanthropic activities were also pursued, such as transporting aid to cyclone-hit Myanmar in 2008 and donating free seats to China’s Red Cross to raise funds for the Sichuan earthquake recovery. Addressing global concern about carbon emissions, AirAsia’s website illustrated how its operations conserved the environment, such as its ticketless system reducing paper waste. AirAsia gained free publicity on many occasions so they can reduce their cost in advertising their product.

4.       Identify the ways Air Asia can sustain its competitiveness through the business level strategy that is adopted?

AirAsia can sustain its competitiveness by opening more hubs in more countries around the world, not just limited to Asia. By expanding its business across the world, AirAsia could be the number one airline company in the world while 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.