Asian Journal of Management Cases http://ajc.sagepub.com
Now Everyone Can Fly: Air Asia
Joan Enric Ricart and Daxue Wang Asian Journal of Management Cases 2005; 2; 231 DOI: 10.1177/097282010500200206 The online version of this article can be found at: http://ajc.sagepub.com/cgi/con http://ajc.sagep ub.com/cgi/content/abstract/2 tent/abstract/2/2/231 /2/231
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The case details how AirAsia, a Malaysian airline, was transformed into a successful low-cost airline through its well-defined business model. The emergence of low-cost airlines in Asia led to increasingly intense competition in the industry. By forming joint ventures ventures across Asia, Asia, AirAsia is trying trying to gain advantages advantages with its its Pan-Asia Pan-Asia plan. With such a plan, the low-cost carrier would obviously face the risk of over-expansion. over-expansion. This case study explores AirAsia’s business model, competitive advantages, and expansion strategy. Keywords: AirAsia, Strategy, Low-cost airlines, Business model, Competitive advantages
Barrelling through longstanding barriers to competition, Tony Fernandes, a former music executive for Time Warner Warner Inc., has turned tur ned Asia’s stodgy state-dominated state-domin ated airline industry upside down. Over the last three years, he has built the no-frills AirAsia into the region’s premier budget carrier, prevailing over government bureaucrats determined to protect their flag carriers. The Wall Street Journal, Journal, 20 July 2004
recognized as Asia’s first ‘low-cost, no-frills carrier’, AirAsia was planning to break through with its Pan-Asia plan, a mission impossible asserted by many aviation experts. Fernandes was trying to figure out the feasibility of this Pan-Asia plan whilst simultaneously maintaining AirAsia’s competitive edge.
Beginning in 1996 with fares slightly cheaper than Malaysia Airlines (MAS), AirAsia reported losses during its early years of operation. At the end of 2001, three days before the attack on the Twin Towers in the United States on September 11, AirAsia was officially acquired by Tune Air, a holding company founded by Tony Fernandes, Connor McCarthy, and three Malaysian investors. By paying a nominal RM 1 (US $0.26) and assuming RM 40 million (US $10.5 million) in debt, Tune Air took over 99.25 per cent of the ownership of AirAsia. McCarthy, Ryanair’s former Director of Operations, served as adviser to Fernandes.
In 2001, in addition to providing charter services, AirAsia was also operating a pair of leased 737-300s that flew between Kuala Lumpur and four other destinations. In January 2002, a third Boeing 737-300 was added to the fleet. Different from other Asian carriers that had long catered to the well-to-do business traveller, the refreshed AirAsia targeted millions of Asians, many of whom had never flown and wanted basic transportation at cheap price 1 (see Exhibit 1 for the income level and air travel in some Asia-Pacific countries). Setting fares on some routes as low as US $10, AirAsia commenced its flights with the tag line ‘Now everyone can fly’. Emulating the highly successful Ryanair, AirAsia structured itself as a low fare and low cost airline. Cost cutting included sticking to a single type of aircraft, using online
2003 was fraught with calamities of war, terrorism, and epidemic disease; yet AirAsia did not stop expanding its fleet and increasing routes. It maintained a strong load factor at about 75 per cent. On 3 December 2003, AirAsia began flights from its second hub at Senai International Airport. 2 Five days later, its first regional flight commenced from Kuala Lumpur to Phuket, Thailand. Fernandes worked aggressively to move into the Thai market. He sought an alliance with Shin Corporation, a Bangkok-based company founded by the family of Thai Prime Minister Thaksin, which controlled Thailand’s sole satellite operator. Thaksin had initially asked Singapore International Airlines (SIA) to work with Thai Airways International (THAI) to set up a budget carrier. When Singapore Airlines declined, AirAsia entered and in November 2003 they formed a new budget airline called Thai AirAsia. This deal gave AirAsia a 49 per cent stake in Thai AirAsia along with management control. 3 Again, the popularity of Thai AirAsia’s low fares was evident; the airline carried more than 380,000 passengers in just five months since February 2004 (see Exhibit 3 for AirAsia’s operating statistics and Exhibit 4 for the domestic passenger movement at Don Muang International Airport in Bangkok [DMA] between January and June 2004). The region targeted by AirAsia in South-east Asia was within a 3.5-hour flight time from its hubs, thereby giving it access to approximately 500 million people. In July 2004, a new route from Bangkok to Macau marked the airline’s first step outside the South-east Asian market. It offered a springboard into the lucrative southern part of mainland China. Eventually, AirAsia served twenty-eight destinations around the region, through over 400 domestic and international weekly flights (see Exhibit 5 for AirAsia’s route map). With nearly 25 per cent of the domestic market, AirAsia flew fourteen airplanes from Kuala Lumpur International Airport and Senai International Airport, and four from Don Muang International Airport in Bangkok. Four of these airplanes were bought in the financial year 2004 while the others were leased. The average age of the fleet was about
AirAsia used Navitaire’s OpenSkies, a revenue management system to optimize passenger seat sales. OpenSkies was used by many of the leading low-cost carriers, including Ryanair, Virgin Blue, and JetBlue. Using a multiple fare structure comprising twelve tiers of fares per route, AirAsia offered passengers savings depending on how far in advance a particular booking was made and the level of demand of the seats. The highest fare seats were sold close to the day of travel when time sensitivity outweighed price sensitivity. Such seats were sold at approximately 80 per cent of the published fares offered by full-service airlines. Revenues from these ‘last minute’ fares helped maintain the company’s revenue from passenger seat sales. While AirAsia sought to maximize its revenue, the low-cost structure allowed it to offer fares that were on average lower than its competitors on the same routes. Airlines were usually burdened with high fixed costs associated with the aircraft and airport services. AirAsia negotiated lower lease charges for its aircraft, lower rates of long-term maintenance contracts, and lower airport fees. For example, the average monthly contractual lease charge per aircraft decreased by more than 60 per cent from the year 2001 to 2004. At domestic airports, the airline provided its own ground handling and ground services. At international airports, these services were outsourced to third parties. AirAsia flew fuel-efficient Boeing 737-300s and practised a quick turnaround of twentyfive minutes, the fastest in the region and about half that of other major airlines. Standard business class seats were replaced with economy class, enabling the airplane to hold 148 passengers instead of the usual 132. Fernandes often supervised operations from AirAsia’s headquarters at the Kuala Lumpur International Airport. He once suggested that pilots avoid using their brakes as long as possible upon landing, in order to save fuel. According to Jim Belz, Boeing Sales Director for South-east Asia, the best measures for an efficient fleet operation were high daily utilization coupled with high dispatch reliability. AirAsia ranked on top of Boeing’s
subsequent four months, some 4,000 tickets were sold through this channel. Passengers could book through AirAsia’s nationwide call centre in Petaling Jaya, which was fully equipped with 180 telephone lines, or via the Internet, SMS, and other alternatives. 5 In total, about 85 per cent of the sales were made directly, thereby saving the commission fees paid to the travel agents.6 AirAsia also used a unique VIR (Interactive Voice Recognition) system which offered real-time information on its flight schedules and fares. Innovative strategies like these positioned AirAsia as the airline with the lowest operating cost in the world: US $0.025 per ASK (Available Seat Kilometres), 7 compared to Ryanair’s US $0.046 and Southwest’s US $0.081.8 In May 2004, AirAsia was listed in the CIO Top 100 Honouree, recognizing its value improvement through strategic and creative use of technology. 9 The staff, including the executives and sometimes Fernandes himself, did everything from checking-in passengers at the gate to cleaning up planes. On several occasions, Fernandes attributed the cost performance of the airline to the staff’s productivity and work ethic, ‘Our pilots have cut fuel consumption by nearly 20 per cent and doubled the number of landings that we get from the tires. All our staff discusses ways of cutting costs.’ The company’s engineering team obtained JAR OPS1 approval in just nine months, instead of the two years usually required by other airlines. While there was an aggressive focus on cost savings, there was an equally strong focus on safety and solving defects in AirAsia by committing to ‘Safety First’. To support the growing fleet, AirAsia signed a number of contracts, including a US $20 million engine MRO agreement with GE Engine Services in July 2002, and a US $3 million aircraft engine and aircraft frame parts leasing agreement with VolvoAero later in the same month. In March 2004, it awarded a nine-year agreement to GE Engine Services, a contract valued at more than US $50 million. This was followed by a ten-year deal of US $63.5 million with ST Aero for components management in July 2004. High safety and maintenance standards allowed the company to procure favourable insurance rates, thereby further lowering its expenses.
The company values were: At AirAsia, there is much CARING and FUN amidst people of PASSION and INTEGRITY who keep a keen eye on SAFETY at all times. It was not surprising to walk into Fernandes’s office and find him deep at work with rock music blasting away. The ability to have fun was set up as one of AirAsia’s recruiting criteria, even for the pilots. The staff freely mingled with one another, irrespective of designation and seniority. The dress code was smart casuals. ‘It is a casual environment that we have here. I think we are the only airline where everyone shares the same office —pilots, cabin crew, engineers, personnel from marketing, finance and others’, said Fernandes. The company instilled a unique corporate culture that not only encouraged its employees to have fun but also gave them the freedom to express their concerns by showing them that they were valued. AirAsia emphasized customer service, striving to make travelling easy, convenient, and fun for its ‘guests’, a special term used by AirAsia to describe its passengers. Sometimes, several guests were called up front to make safety announcements, and the winner received a little gift, usually a cap or a T-shirt. Humour was used to put passengers at ease. AirAsia pilots and flight attendants were known for their self-deprecating humour. For example, during one of the flights to East Malaysia, there was a rip-roaring session when passengers were asked to first guess the age of the aircraft and later that of the pilot. Fernandes operated out of a modest, unglamorous office space at Kuala Lumpur International Airport. He had no intention of relocating AirAsia’s headquarters to the office towers in Kuala Lumpur. ‘If you run an airline, you have to be at the airport and this is one of the main reasons for our success. You’ve got to be close to your business. You’ve got to be able to talk to your guests, see why there are flight delays and what’s happening…. I think too many senior executives lose track of their staff and business by being too distant from where the real action is,’ Fernandes reasoned. 10 Fernandes constantly interacted with customers and employees, ‘I am very close to
The Women’s Aid Organization applauded AirAsia for its progressive policy, implemented in 2003, to extend and equalize the age of retirement for its cabin crew to fiftyfive years. Through this policy, AirAsia aimed to eliminate gender discrimination that existed in other national companies such as Malaysia Airlines. 12 Jane Chen, a forty-fiveyear-old mother whose former job was First Officer at AirAsia, became the first Malaysian woman to fly a commercial aircraft in September 2003.
Identified by Business Week as one of the ‘25 Leaders at the Forefront of Change in Asia’, 13 Fernandes’s path into the airline business was a most unlikely one. Graduating in accountancy from the UK in 1987, he pursued a career in the entertainment industry, serving as Vice-President Asia for Time Warner’s music business, when he caught the airline bug. In early 2001, after consulting with McCarthy, who had just left Ryanair, Fernandes cashed in his stock options, mortgaged his house, and set up Tune Air. He explained that he quit the music business over his frustration with copyright piracy, a perennial problem in Asia. In a revealing comment he added, ‘I was also tired of turning unknowns into stars and then having to put up with obnoxious behaviour. Planes do what you want!’ 14
After taking over AirAsia, Fernandes improvised actively for the fledgling airline. He got contracts to fly Muslim pilgrims to Mecca and to ferry Malaysian soldiers between military postings. He successfully lobbied government officials, including Ling Liong Sik who was then the transportation minister, for new domestic routes. The public embraced the new budget carrier immediately, raising alarm at the staterun Malaysia Airlines. Malaysia Airlines first accused AirAsia of robbing its best domestic routes and then the Malaysian government banlked at granting these routes. The country’s
a daring move in a country where criticism of the government was muted, and cordial relations with politicians were considered vital to business success. Fernandes even crashed an exclusive cocktail party in Kuala Lumpur and confronted the party’s guest of honour—Ling Liong Sik. He accused the government-supported carrier of trying to drive AirAsia out of business. ‘How can we compete with an airline that doesn’t have to worry about its finances,’ Fernandes asked. Soon afterwards, the government ordered Malaysia Airlines to end the steep fare cuts. ‘We didn’t want to give any reason for the people to become angry with us,’ Ling later conceded.
When trying to expand beyond Malaysia and into regional markets, AirAsia faced fresh obstacles. A key target was Singapore Changi Airport, Asia’s sixth busiest hub after Tokyo Haneda, Bangkok, Hong Kong, Tokyo Narita, and Beijing. For Fernandes, Singapore was not only a hub which allowed him to carry passengers, but also a symbol that could put AirAsia in league with no-frills giants like Ryanair. The bilateral agreement between Malaysia and Singapore stated that all carriers must be granted dual government approval, before flying between the two countries, with the result that reciprocal landing rights were given only to Malaysia Airlines and Singapore International Airlines. Failing to get the sanction, in December 2003 AirAsia set up its own hub at Senai at a privately owned airport about an hour’s drive from Singapore. Although it took fifteen more minutes from downtown Singapore to Senai than to Changi Airport, the 50 per cent price reduction was a strong pull for travellers. Close to the end of 2003, AirAsia began flying between Senai International Airport and Kuala Lumpur International Airport, skimming Singapore traffic for the first time. Taking a dig at Singapore International Airlines’ kebaya-clad Singapore Girl, AirAsia’s ads went: ‘There’s a new girl in town. She’s twice the fun and half the price’. The Singaporean government took other steps to block AirAsia. When AirAsia asked
up their kids,’ said Fernandes proudly, ‘The Land and Transport Authority of Singapore cannot stop Singaporeans from coming.’15
When AirAsia applied to fly from Kuala Lumpur to Bangkok and Phuket in August 2003, officials of the Malaysian Ministry of Transport did not respond for three months. They then approved just one flight per day to each destination, despite the fact that AirAsia had already been given second national airline status. ‘I do sense that the government is not used to having two national airlines. It’s still very protective…. If we don’t get it from the Malaysian side, we could now just get it from the Thai side. But I don’t believe that’s the right way. We are a Malaysian airline and we should get it in our home territory.’ 16 Fortunately, by then Malaysia had a new transportation minister, Chan Kong Choy, who was part of a growing cadre of politicians who admired the entrepreneurial aplomb. When bureaucrats delayed processing AirAsia’s applications for a second flight to Bangkok and one to Jakarta, Chan intervened. Before Fernandes arrived on the scene, countries in the region seldom had any kind of open-skies agreement. In mid-2003, Fernandes’s lobbying pushed Mahathir to raise the idea of such an agreement with the leaders of neighbouring Thailand, Indonesia, and Singapore. As a result of this, these nations granted landing rights to AirAsia and other budget carriers. ‘Fernandes has had remarkable influence in shaping government and airline thinking in South-east Asia and beyond,’ said Peter Harbison, Managing Director of the Centre for Asia Pacific Aviation, the region’s foremost aviation research institution. In recognition of his achievements, Fernandes won the ‘ International Herald Tribune Visionaries and Leaders 2003’ award and ‘Malaysia’s CEO of the Year 2003’ from American Express Corporation Services and Business Times. AirAsia was honoured as the ‘Asia Pacific Airline of the year 2003’ by the Centre for Asia Pacific Aviation, and ‘Developing Airline of the Year 2003’ by Airfinance Journal.
of 7.5 per cent, compared with the world average of 4.4 per cent. 17 According to S-A-P, intra-regional passenger volumes grew at 8.6 per cent per year from 2003 onwards. This trend was expected to continue through to 2008, while the growth rate for Malaysia was estimated at 9.2 per cent for its international routes and 6.6 per cent for its domestic routes18 (see Exhibit 6). Some of the optimism for rapid growth in Asian aviation was a result of China and India’s continued economic expansion and liberalization of travel policies for their citizens. Chinese government officials indicated an interest in building a more liberal air service framework between China and ASEAN (Association of South East Asian Nations) countries. On different occasions, India also expressed a commitment to grant reciprocal air rights to designated airlines from nine countries. Other countries wishing to increase connectivity with India would receive similar rights. 19 Post deregulation, Europe became a single aviation market with few barriers to adding destinations and flight frequencies. The United States was its own vast domestic market. As opposed to the US aviation industry, the regulations of international routes in Asia were governed by a series of bilateral agreements and remained restrictive. As part of a move towards an ‘open skies’ framework by 2015, ASEAN countries reached an informal agreement, according to which restrictions that capped the number of inter-capital flights would be lifted by 2008.
Since 1996, liberalization of the air industry in Thailand had accelerated after early deregulation efforts in 1988. Private Thai airlines were permitted to operate on all domestic routes by September 2000 and certain international routes by September 2001. Thailand entered an ‘open skies’ agreement with India in October 2003 and with China in January 2004. This agreement lifted restrictions on airlines, flight and passenger numbers, and allowed airlines to exercise their Fifth Freedom Rights between Thailand
The Kuala Lumpur–Singapore route was considered to be Asia’s fourth-busiest and most protected. According to the Association of Asia Pacific Airlines, 1.9 million passengers travelled this route between April 2002 and March 2003. A bilateral agreement gave Malaysia Airlines and Singapore Airlines, virtual monopoly over flights between Kuala Lumpur and Singapore. They operated 154 out of the 184 flights per week, with a price of about US $184 for a round-trip ticket. Limited competition resulted in a decline in the number of flights on this route as opposed to other routes. For example, there were 188 flights between Singapore and Hong Kong, and 380 between Singapore and Bangkok, per week. There were signs that this situation might be on the point of changing, since both the Malaysian prime minister and his Singaporean counterpart expressed an interest in opening up the routes to facilitate more traffic rights between the two countries. However, they also added that the ‘open sky’ agreement could only gradually materialize by 2008.
From ValuAir in Singapore to Nok Air in Thailand, a flock of imitators scrambled to copy AirAsia’s formula. In July 2004, there were thirteen budget carriers operating or due to launch later in the year.21 Malaysia Airlines said that it was staying focused on its core business and felt no need to set up a budget airline, but it would review that policy if market conditions made it necessary. 22
A former Singapore Airlines executive set up ValuAir in June 2003. It began operations in May 2004 with two 180-seat Airbus A320s to serve Hong Kong, Bangkok, and Jakarta.
year, bringing Thailand, Hong Kong, and Madras within reach. The company received two Airbus A320s and expected to get another two by the end of 2004. Four more were planned for 2005 and 2006. Four other airlines, including Australian carrier Qantas, expressed an interest in setting up budget carrier operations in Singapore.
Emerging in July 2004, Nok Air became the third no-frills carrier in Thailand, following Thai AirAsia and One-Two-Go. Founded by THAI, Nok Air started with two 737-400s (149 seats), flying to Chiang Mai, Udon Thani, and Hat Yai. Phuket and Kon Kean were added to the list in the fourth quarter of 2004. One-Two-Go was established by Orient Thai in December 2003 after AirAsia ‘invaded’ the Thai market. By 2004, it had a fleet of eight Boeing 747s and four Boeing 757s offering services from Bangkok to Chiang Mai, Chiang Rai, Hat Yai, Phuket, and Udon Thani. Flights from Bangkok to Surat Thani and other destinations were also planned. Overseas, it was providing services from Bangkok to Singapore and Kuala Lumpur. As for the route from Bangkok to Macau, although only Thai AirAsia had been granted scheduled daily flight rights under the agreement of ‘one carrier per country’, One-Two-Go received permission to open a twice per week charter service. If Thailand and Macau authorities approved a proposed open sky agreement, OneTwo-Go would increase operations to four flights per week. Additionally, One-Two-Go was also flying between Macau and Phuket on a charter basis. In contrast to AirAsia’s strategy, which promoted differential pricing, One-Two-Go offered ‘One price on every seat and every flight’.
Lion Air, with its headquarters in Jakarta, had fifty domestic routes and certain destin-
captured 30 per cent of Australia’s domestic market. With over 10 million passengers, the airline generated US $920 million revenue in the financial year ending 31 March 2004. Its parent airline Qantas planned to bring out a budget airline called Jetstar by the end of 2004. The number of budget airlines was increasing rapidly. Air Deccan in India and Cebu Pacific Air in the Philippines were good examples. Anthony Ryan, founder of Ryanair, predicted that within ten years, 10 per cent of the Asian air traffic would comprise budget carriers.24 Robert Martin, Managing Director of Singapore Aircraft Leasing Enterprise, foresaw that this niche would claim 25 per cent of the market within five years. 25 The push for China and India to set up budget airlines was fuelled by market demand and profitability. Even as Singapore, fretted over the potential threat that discount carriers posed to state-controlled Singapore Airlines, it planned to complete Asia’s first dedicated terminal for budget carriers by 2006.
Four full-service carriers in South-east Asia—Malaysia Airlines, THAI, Garuda, and Singapore International Airlines—accounted for approximately half of the total seats for regional destinations (see Exhibits 7, 8 and 9 for the operating statistics, financial performance, and route map of these airlines). The competition within the intra-regional routes was primarily between these flagship airlines and other local airlines, while non local carriers such as European airlines only competed on a small number of routes.
AirAsia’s largest competitor for its domestic flights at Kuala Lumpur International Airport was Malaysia Airlines. Internationally, AirAsia had to compete mainly with Malaysia Airlines and THAI for its Thailand destinations, and with Garuda and Lion Air for its
Don Muang International Airport was the busiest airport in Thailand. Annually some eighty airlines operated 160,000 flights that hauled 30 million passengers and 700,000 tons of cargo. Thai AirAsia’s largest competitor was THAI, which had shown profits for thirty-nine successive years. In addition to this, Thai AirAsia also faced competition for its domestic routes from budget carriers Nok Air (associated with THAI) and One-TwoGo (associated with Orient Thai Airways). International competition pitted Thai AirAsia against Orient Thai Airways and Singapore Airlines. The Bangkok-Singapore route locked twelve full-service airlines and two low-cost carriers in fierce competition. Yet Thai AirAsia maintained a load factor of 70 per cent on this route. By June 2004, Thai AirAsia and Nok Air retained 20 per cent of the domestic air service in Thailand. AirAsia, Thai AirAsia and ValuAir claimed 2 per cent of the international passenger travel at Don Muang International Airport. Based on the latest ‘open-skies’ agreements, Thai AirAsia applied for landing rights to Phnom Penh, Hanoi and Yangoon, as well as in South China—Hainan and Kunming.
In Europe, the growing low-cost airline sector triggered survival battles amongst its top fifty carriers. The first sign was Ryanair’s winter promotion of one million seats for 99p in July 2004. In Asia, budget carrier rivalry was also turning lethal. From day one, One-Two-Go had been poised to match any fare that was offered by AirAsia.26 For example, a day after Thai AirAsia announced its ‘less than Baht 1,000 (US $25.40)’ deal for a Bangkok to Chang Mai flight, One-Two-Go sold a Baht 999 (US $25.37) ticket for the same route (THAI’s full service charge was Baht 2,000). These fare wars forced Udom, Managing Director of One-Two-Go, to slash the fare on this service to 30 per cent less than planned, thus resulting in revenue losses. 27 But Udom
six months of operation. With a US $1.52 million breakpoint, Udom said, ‘Once that line is crossed, the company would have to decide whether to continue or throw in the towel altogether.’29 Tiger Airways announced a 59-cent (US $0.34) promotional fare for over 3,000 one-way tickets to three Thai destinations: Bangkok, Phuket, and Hatyai. Responding in kind, Thai AirAsia offered 5,000 29-cent (US $0.34) seats on these routes during a September promotion. This promotion became effective the same day that Tiger Airways launched its services. Meanwhile, SilkAir, the regional wing of Singapore Airlines, also joined the price war on Thai routes by offering more than 900 return tickets to the popular island resort of Phuket for US $52. Touting amenities, SilkAir’s chief executive Mike Barclay announced, ‘In addition to low fares, we offer excellent in-flight service, hot meals, a full bar service, in-flight entertainment, seat assignment and many extras at no additional cost.’
Soon after its emergence, the Thai government awarded Thai AirAsia two daily flights to Singapore and landing rights for flights to Macau. ‘What makes setting up a Thai venture all the more ingenious is the fact that AirAsia is able to overcome possible obstacles to securing air freedom rights back home,’ said Philip Wickham, an airline expert at ING Financial. Envisioning a Pan-Asian network stretching from China to India, Fernandes wanted to replicate his Thai joint-venture model across Asia (see Exhibit 10 for the map of Southeast Asia and Asia). His goals included 6 million guests annually by 2005 and fleet expansion to eighty new planes by 2012. 30 There were more than 235 cities in Asia with populations of over half a million. One hundred and thirty cities had more than 1 million. Amongst the latter, forty-three cities were in China and thirty-seven in India. Analysts expected an annual growth of regional
towns and cities. ‘There is no question here that the geography is different. There are no fast railways or superhighway networks as in Europe or the USA,’ said Eckes. 32 By June 2005, AirAsia expected to expand its fleet size with three purchased and thirty-three leased carriers. A capital expenditure of US $26 million was needed to support this expansion. AirAsia’s long-range acquisition plans included eighty new aircraft over a seven-year span. Forty would be purchase obligations and forty purchase options from Airbus or Boeing. A purchase agreement was reached as early as December 2004 and delivery would commence in January 2006. The immediate next step for the Pan-Asian network saw AirAsia implementing its joint venture business model in Indonesia. A preliminary agreement to acquire a 49 per cent share in AWAir, an Indonesian company that suspended services in March 2002, would allow AirAsia to operate its low-cost carrier model from a hub at Soekarno-Hatta International Airport in Jakarta. The 49 per cent interest would cost US $2 plus liabilities. Located at the crossroads of international shipping and air routes, Singapore was a centre for transportation in South-east Asia. Changi Airport was a regional aviation hub served by sixty-eight international airlines. A third terminal and a dedicated low-cost terminal for budget airlines were constructed to expand the airport. Both terminals would be ready for use by 2006. Although Fernandes believed that only two budget airlines could survive on the Singaporean soil, he did not by any means give up his ambition to ‘invade’. 33 Soon, AirAsia had set up a company in Singapore and applied for a licence to operate from there. Fernandes was also involved in similar talks with the state-owned Chinese National Aviation Corporation, which owned China’s two largest carriers. A code-sharing agreement with Air Macau allowed the two airlines to book tickets on each other’s flights, giving AirAsia access to China’s market. 34 In addition to this, Fernandes was planning to commence flights between Malaysia and India in 2005, with 70 per cent cheaper fares than the normal ticket prices on this route. 35 He did not plan to fly to all points across India, but only wanted to cater to the south Indian population in Malaysia. Southwest Airlines acquired just six aircraft in its first five years of operation, and it
How to turn the Pan-Asia plan into a reality and how to maintain AirAsia’s established advantages were the foremost thoughts on Fernandes’s mind. Forcing himself to concentrate he got back to work. Another sleepless night ahead of him! Exhibit 1 Per Capita GDP and Air Travel in Asia-Pacific Countries (2002)
Country
Per Capita GDP (in US$)
Australia Brunei China India Indonesia Japan Malaysia New Zealand Pakistan Philippines Singapore South Korea Thailand
Passenger Round trips (Per Capita)
20,822 18,151 989 487 817 31,407 3,905 14,872 408 975 20,886 10,006 2,060
1.11 1.29 0.04 0.01 0.05 0.55 0.42 1.53 0.02 0.08 3.30 0.42 0.26
Source: S-A-P report. Exhibit 2 AirAsia’s Financial Statement 1 (1) Balance Sheet (US $’000)
As on 31 March Non-current assets Property, plant and equipment
2000
2001
382 382
385 385
As on 30 June 2002
2003
2004
3,458 1,764
10,921 5,276
42,900 41,699
( Exhibit 2 contd ) As on 31 March 2000
2001
Current liabilities Trade and other payables Hire purchase payables Current tax liabilities Amount owing to related parties Borrowings
12,749 11,106 22 16 1,026 579
Non-current liabilities Deferred tax liabilities Hire purchase payables Loan from related parties Borrowings Shareholder’s Equity Share capital Share application monies Share premium Accumulated losses Minority interest
As on 30 June 2002
2003
2004
16,182 14,365 22 19 1,197 579
12,858 12,643 3 22 191 0
19,709 19,654 22 33 0 0
39,643 26,881 34 116 53 12,560
16,881 0 29 16,852 0
24,408 0 7 24,402 0
0 0 0 0 0
92 0 92 0 0
12,900 293 63 0 (2) 12,560
(22,589) 13,703 0 0 (36,292) 0
(27,626) 13,703 0 0 (41,328) 0
678 42,444 0 0 (41,766) 0
12,915 42,444 7,268 0 (36,809) 12
39,547 46,086 0 17,357 (23,896) 0
2000
2001
2002 (15 months)
Revenue Passenger seat sales Chartered flight revenue Other revenue
39,286 10,837 27,854 595
44,144 11,590 31,160 1,394
57,216 23,120 32,416 1,681
86,853 51,543 32,384 2,925
103,339 91,571 6,451 5,317
Cost of Sales Fuel expenses
45,262 9,073
46,438 10,899
54,776 16,837
75,918 24,627
73,452 27,028
(2) Income Statements (US $’000)
2003
2004
( Exhibit 2 contd ) 2000
2001
2002 (15 months)
677) 149)
539) 36)
380) 81)
989) 309)
3,435 1,201
Operating profits (EBIT) Finance costs Loss of associated companies
(7,426) 809)
(3,831) 1,200)
(342) 81)
3,038) 22)
16,136 824 31
Profit before taxation Taxation
(8,235) 9)
(5,031) 6)
(423) 15)
3,016) (1,941)
15,282 2,382
Profit after taxation
(8,244)
(5,036)
(438)
4,957)
12,900
2000 ))
2001 )
2002 ) (15 months)
2003
2004
(4,931)
(699)
(3,153)
4,001)
7,610)))
(7)
(167)
(1,725)
(5,862)
(37,855)(3)
6,622)
6,388)
(585)
6,802)
37,099 (4))
1,685)
5,523)
–5,462)
4,940)
6,854)))
1,878)
3,563)
9,086)
3,623)
8,564)))
3,563)
9,086)
3,623)
8,564)
15,418)))
Other operating expenses Other operating income
2003
2004
(3) Cash Flow Statements (US $’000)
Net cash generated from (used in) operating activities Net cash generated from investing activities Net cash flow generated from financing activities Net increase in cash and cash equivalents Beginning balance of cash and cash equivalents Ending balance of cash and cash equivalents
Source: Company report. Notes: 1. The financial statements of the company are for the years ending 31 March 2000 and 31 March 2001, 15-month period ending 30 June 2002, years ending 30 June 2003 and 30 June 2004. Translate
Exhibit 3 Operating Statistics of AirAsia
Flights to and from KLIA and Senai 2000 Passengers carried 271,118 (1) RPK (million) 339 ASK (million)(2) 547 (3) Passenger load factor (%) 62 Average fares (US$) 54 Number of aircraft year end 2 Frequency of scheduled flights (per week) N/A Number of destinations 4 Aircraft utilization (block hours per day) 9.2 (4) Revenue per RPK (US$) 0.054 Revenue per ASK (5) (US$) 0.033 (6) Cost per ASK (US$) 0.050 (7) Average stage length (km) 1,238 (8) Domestic market share N/A Employee number 236
2003
2004
Flights to and from DMA (5 months ending June 2004)
2001
2002
290,687 363 586 62 53 2
610,738 672 1,018 66 48 3
1,481,097 1,539 2,086 74 39 7
N/A 4
77 6
161 10
301 22
119 10
10.1 0.054 0.033 0.042 1,327 N/A 241
11.2 0.048 0.032 0.034 1,128 10.1% 322
12.5 0.040 0.029 0.029 975 17.1% 648
12.8 0.037 0.029 0.025 967 23.1% 1,382
12.5 0.033 0.025 0.034 798 8.0% 463
2,838,822(9) 380,387 2,771 300 3,592 395 77 77 34 25 13 4
Source: Company report. Notes: 1. Revenue Passenger Kilometres = number of paying passengers * number of kilometres the passengers were flown. 2. Available Seat Kilometres = total number of seats available * number of kilometres the seats were flown. 3. The number of passengers as a proportion to the number of seats available. 4. Non-scheduled, chartered flight revenue was subtracted from the total revenue for the purpose of this calculation.
Exhibit 4 Domestic Passenger Movements (1) At Airports of Malaysia (2002 to June 2004)
AirAsia Others Total AirAsia share
2002
2003
2004 (January–June)
1,010,582 9,038,363 10,048,945 10.1%
1,780,128 8,655,829 10,435,957 17.1%
1,351,741 4,506,179 5,857,920 23.1%
Source: Malaysia Airport, Senai Airport, and Company report of AirAsia. (2) At Don Muang International Airport (2004)
Thai AirAsia Others Total Thai AirAsia share
January
February
March
April
May
June
– 885,348 885,348 0.0%
42,195 759,885 802,080 5.3%
48,822 757,414 806,236 6.1%
60,201 770,109 830,310 7.3%
80,007 666,296 746,303 10.7%
79,991 593,433 673,424 11.9%
Source: DMA and Company report of AirAsia. Exhibit 5 AirAsia’s Route Map (as of August 2004)
Exhibit 6 Average Annual Passenger Growth Rate in South-east Asia
1985–2002 South-east Asia Malaysia Thailand Indonesia
2003–08 (forecasted)
Domestic (1)
International (2)
7.5% 11.2% 10.6% 9.6%
9.3% 8.0% 7.9% 7.6%
Domestic
International
8.6% 6.6% 10.1% 13.2%
9.9% 9.2% 7.8% 10.5%
Source: Boeing Company reports and S-A-P forecast. Notes: 1. For South-east Asia: ‘Domestic’ means the region. 2. To and from China, India and other South-east Asian countries only. Exhibit 7 Operating Statistics of Major Airlines in South-east Asia (Financial Year 2003–04) 1
MAS Passengers carried 15,370,000 (domestic) (8,299,800) ASK (million) 55,692 RPK (million) 37,659 Passenger load factor 67.60% Staff number 18,712 Average on-time performance 91.78% Fleet 109 Aircraft utilization (block hours per day) 9.6 (2) Average age of fleet 13.8 Destinations: Domestic 32 International 82
THAI (Jan–June 2004)
SIA
Garuda (2003)
8,892,000 13,278,000 7,229,072 (3) (N/A) (1,356,000 ) (5,516,586) 34,930 88,253 N/A 24,803 64,685.2 N/A 70% 73.3% 69.6% 25,447 14,010 9,000
AirAsia
Thai AirAsia (Feb–June 2004)
2,838,822 (2,710,022) 3,592 2,771 77% 1,382
380,387 (329,796) 395 300 77% 436
N/A 83
N/A 95
84.75% 67
86% 13
N/A 4
N/A N/A 14 63
10.6 5.6 1 60
N/A N/A 30 24
12.8 16 14 8
12.5 N/A 7 3
Exhibit 8 Income Statement of Major Airlines in South-east Asia (US $’000, Financial Year 2003–04)
MAS Total revenue 1,967,381) (Asian routes) (356,895) Total cost 1,932,940) Fuel and oil 535,622) Staff costs 395,939) Aircraft operating costs 347,702) Depreciation 42,264) Maintenance and overhaul costs 204,649) Landing, parking costs and other airport charges 412,227) Sales commission and other marketing costs 194,329) In-flight meals and other passenger costs N/A) Operating profits 34,441) Profit before taxation 154,555) Profit after taxation 152,422)
THAI 1,872,096) (1,076,937) 1,619,329) 482,091(1) 86,622) 148,882) 239,421) 273,737) 152,845) 219,086) 252,766) 156,974) 113,838)
SIA 4,191,020) (1,424,140) 4,103,440) 825,481) 715,160) 547,289) 541,224) 443,265) 238,426) 275,860) 264,140) 87,580) 191,487) 250,321(2)
Garuda 928,057 (N/A) 921,659
6,398 26,493 299
Source: Company report of each airline. Notes: 1. MAS and SIA’s fiscal year ended on 31 March 2004; Garuda’s fiscal year ended on 31 December 2003; THAI’s data is for half a year from 1 January 2004. Translate exchange rate at US $1 = RM 3.8 = SGD 1.715 = Thai Baht 39.37 = IDR (Indonesian Rupiah) 9,430 as on 30 June 2004. 1. Sum of fuel costs and staff costs. 2. After adjustment for reduction in Singapore statutory tax rate.
Exhibit 9 Route Map of Major Airlines in South-east Asia (1) Malaysia Airlines (MAS)
(2) Thai Airways International (THAI)
Domestic Routes (3) Singapore Airlines (SIA)
International Routes
(4) Garuda
Domestic Routes
International Routes Exhibit 10 Map of South-east Asia and Asia
Abstract: The emergence of low-cost airlines in Asia led to increasingly intense com-
petition in the aviation industry. By forming joint ventures across Asia, AirAsia, a Malaysian airline, is trying to gain advantages with its Pan-Asia plan. Such a plan would no doubt expose the low-cost carrier to the risk of over-expansion. This case study explores AirAsia’s business model, competitive advantages, and expansion strategy. It details how AirAsia transformed itself into a successful low-cost airline through its well-defined business model. Keywords: AirAsia, Strategy, Low-cost airlines, Business model, Competitive advantages Discussion Questions • State your views about the airlines industry. What is the character of this industry in Asia? How does it affect the attractiveness of the industry? • What are the differences between the business model of AirAsia and that of traditional airlines? • What are the core competencies and competitive advantages of AirAsia? • How do you evaluate AirAsia’s expansion plan? What will be the effect of this expansion on its core competencies?
SUMMARIES AND D ISCUSSION Q UESTIONS 135 Downloaded from http://ajc.sagepub.com by lukas sapto aji on September 25, 2008
