Air Asia has been named the “World’s Best Low Cost Airline” in the annual World Airline Survey by Sky-trax for five consecutive years from 2009 to 2013. They have offered Southwest’s successful people-oriented people-oriented strategies and Ryanair’s efficient operational strategies. However, Southwest and Ryanair emphasize those strategies in order to differentiate themselves from a large number of low-cost providers in their highly competitive and relatively saturated American and European markets, respectively. On the other hand, AirAsia is an imitator in a market with limited competition and growing demand from a previously nonexistent market segment. This gives AirAsia the opportunity to be a leader in its own market, while at the same time imitating and integrating business models that showed to be successful elsewhere. What are these success strategies? Here is the list
1) Backward Integration: For an airline, one of the key resources is trained staff aligned with the company’s vision which are difficult to find due to the high rate of competition among airlines in the Asian markets, so AirAsia has setup Asian Aviation Academy with CAE to train personnel required in abundance for its ever expansionary vision. Second cause of price constraint on an airline is fuel which cuts into 33-50% of revenues, Air Asia has bulk discounts on airplane lease, fuel costs as it operates the biggest fleet in Asia, supplier side bargaining is a strategic advantage for this MAA aims at starting leasing house,
2) Forward Integration: 85 per cent of Air Asia tickets are sold through its website, limiting agent’s commission. Air Asia has partnered with Expedia for providing ticketing and hotel combination deals, hotel margins add further revenues and AAE has current valuation of 500 million USD. Apart from this Air Asia runs its own loyalty program convertible to paradigm mall and KLIA shopping rewards for getting consumers to fly more to earn loyalty points and also earn auxiliary income from sales. AirAsia has its own payment card called EZPay or Tune card which is a closed loop payment network and hence lowers payment bank charges on conversion to country currencies where the Airline operates in. Cargo handling services of airports have now been brought under AirAsia service as Redbox, cargo delivery with door to door delivery. Duty free shops to be launched which will provide customers international shopping experience from the convenience of their flights with delivery options added within.
3) Horizontal Integration: AirAsia bought 40% stake in Batavia airlines(fourth largest ) in Indonesia to gain additional routes and also bought zest airlines to create AirAsia Zest, AirAsia acquired an 85% economic interest and 49% voting rights in ZestAir, as well as a 100% interest in Yao's Asiawide Airways Inc.
4) Diversification
Diversification strategy is distinct as an organization essentially moves out of its current products and markets into new areas. AirAsia’s related diversificati on strategy was mainly in the form of backward, forward, and horizontal integration. The airline’s backward integration strategy was executed as the company extended its operations towards its growth of its ancillary products and services.
5) Market Penetration: Market penetration occurs when a company penetrates a market with its existing product range and strategic capabilities and obtains increased market share. For example, AirAsia, with its relatively low market share, succeeded at attacking Malaysia Airline System ’s market share in the domestic airline industry. This strategy begins with the existing customers of the organization and is used by companies to increase sales without drifting from the original product-market strategy. AirAsia penetrated the aviation industry by gaining the competitors’ customers, improving the product quality and its level of service, attracting non-users of the products or convincing current customers to use more of the company's products through its promotions and obtaining substantial media coverage due to its fairytale success. This strategy was important for AirAsia because retaining existing customers is cheaper than attracting new ones and engaging in relationship marketing activities is pertinent to retain its high lifetime value customers
6) Retrenchment: AirAsia focusses on excessive cost cutting on low resource utilization, it has an industry defining low average personnel per airplane at 80, and it believes in turnaround times from airports at 20 minutes to save on usage costs and has an average operating mean of 12.5 hours a day and goes as high as 16 hours in some countries. All auxiliary services are paid and no refunds are provided for ticket cancellations to ensure no seats are vacant. Point to point travel maps are drawn to get the maximum route utilization and lowest tariff airlines or those who offer maximum discounts or sops are selected for AirAsia operations. FINANCIAL IMPACT OF STRATEGIES ON PERFORMANCE: Revenue growth
The Asian airline market continues to grow, gaining market share after surpassing the West last year to become the largest market in the world. According to Oliver Wyman’s annual Airline Economic Analysis, the ranking of world regions in terms of airline capacity has flipped during the past few years. Asia now ranks first, Europe second, and the U.S. third. Just four years ago the positions were reversed.
When compared with 2009, the rankings have reversed in 2013
Now, when we look at the Asian market only, LCCs now account for only 15% of Asia’s fleet and slightly over 20% of seat capacity but approximately 50% of orders. Ten years ago LCCs accounted for only about 2% of total capacity in Asia-Pacific. When compared to developed markets this sector is nascent and has a huge scope for growth. Primary share in this sector is of Asia-Pacific low-cost carriers ranked by fleet size: as of 31-Dec-2013
Rank Carrier
Country LCC Group
Aircraft as of 31-Dec-2013
1
JT
Lion Air
Indonesia Lion
94^^
2
AK AirAsia
Malaysia AirAsia
74
3
JQ Jetstar Airways Australia Jetstar
4
6E IndiGo
India
(independent) 73
5
SG SpiceJet
India
(independent) 56
74
But according to new plane orders the future looks bright for AirAsia as the Lion and AirAsia/AirAsia X group’s accounts for 964 or over 60% of the 1,591 aircraft on order by the Asia-Pacific LCC sector. Asia-Pacific aircraft orders by LCC group: as of 31-Dec-2013
Group Lion AirAsia/AirAsia X Jetstar VietJet Tigerair
Current fleet 133 172 116 10 51
On order* 576 388 125 70 18
Source: CAPA Fleet Database
AIRASIA
For AirAsia the revenue growth has been positive for first quarter 2014, while recuperating from the political unrest in Thailand and high margin pressure in Malaysia and Indonesia.
This has been achieved as AirAsia has significant breathing margins over its competitors, even though the margins have been compromised in countries like Malaysia and India, but on an average it enjoys the highest margins due to the growth of ancillary services.
AIRASIA STRATEGIC GAME DISCUSSION The LCC business model works best when passengers can be stimulated to travel by offering very low fares in the market. Passengers who wouldn’t previously have flown because of high fares are now stimulated to fly, thereby creating a new passenger market. The full stimulation effect of low fares in an existing market occurs when the fare differential is greatest; normally when the first LCC comes onto the route. If the existing average fare is, for example 4000 rupees and the new average fare offered is 900
rupees, then the potential to stimulate a significant additional market is apparent. However, once the average base fare has been established at 900, then further discounting to 800 by a second new entrant LCC cannot stimulate the market with anything like the initial impact of the Rs 3100 reduction. The floor in the average fare is the level below which services become uneconomical, where revenues don’t cover the costs even if the aircraft is full. In competitive situations, airlines might operate at belo w cost levels in the short-term to try and chase off the competition, but ultimately a route will only survive if it can be operated at a profit. In the example above, the second LCC in the market would have very little room for maneuver, as the margin between the average fare of 900 and the airlines breakeven could be very small indeed. Once low-fare stimulation has been fully played out, the competition becomes a battle for market share, a reversion to normal competitive conditions, albeit at lower fares. The driver for traffic growth passes from the airlines to the passengers: the state of the economy and the disposable wealth of the population become the engines for further growth; just as they were before the low-cost carriers arrived on the scene.
