AirAsia was initially launched in 1996 as a full-service regional airline offering slightly cheaper fares than its main competitors. Unable to stimulate the market or attract enough passengers, the company was beset with major financial troubles. In 2001, Tony Fernandes reinvented the airline to model Southwestern’s no-frills/low cost design and with only three B737 aircrafts was able to quickly create one of the most profitable airlines in the world.
Economies of Scale – Economies of scale exist wherever proportionate increased in the amounts of inputs employed in a production process result in lower unit costs. Grant, p 232) * Technical Input-Output relationships – “AirAsia operates a single type of aircraft, the Boing 737. A single aircraft type offers economies in purchasing, maintenance, pilot training and aircraft utilization. ” (Grant, p 630) * Specialization – Because of their smaller size and repetitiveness of activities the employees are able to specialize on their specific roles, but due to the limited number of roles, they can cross train employees to seamlessly cover other roles. In a sense they have specialized their employees to be cross-trained reducing down time and training costs.
By exploiting the flexibility advantages of smaller size; second, by avoiding the difficulties of motivation and coordination that accompanies large scale. (Grant, p 233-234) Economies of Learning – Learning occurs both at the individual level through improvements in dexterity and problem solving, at the group level through the development and refinement of organizational routines. As noted above, in Specialization, the AirAsia employees have a more robust learning advantage over their competitors. Their increased individual skills and process inputs help create a culture of improved organizational routines.
Process Technology and Process Design – A process is technically superior to another when, for each unit of output, it uses less of one input without using more of any other input. Where a production method uses more of some inputs but less of others, then cost efficiency depends on the relative prices of the inputs. (Grant, p 234) AirAsia’s strategy to streamline operations to make sure that processes are as simple as possible; their lean distribution system, offering a wide and innovative range of distribution channels to make booking and traveling easier; and their point-to-point network are examples of process designs.
Outsourcing their booking system and maintenance utilizes a technology process. Location Differences in Input Costs – The Indonesian government were looking for a solution to their low cost air transport problems and the low entry barrier and start up costs were very low for Fernades to recreate AirAsia. Also, their no-frills and light baggage requirements fit with the nation’s current preference. Most Indonesians, unlike westerners and Europeans like to travel light and are accustomed to overcrowded transportation.
They were able to eliminate the overhead costs and offer lower prices and increased profitability Capacity Utilization – AirAsia’s hedging on fuel stocks, single airplane design and outsourcing of labor allowed them to further reduce their overhead costs. Residual Efficiency – Residual efficiencies related to the extent to which the firm approaches its efficiency frontier of optimal operations. (Grant, p 239) AirAsia’s limited radius of short-haul flights of no more than 4 hours allows them to turn their plans quicker and allow for better utilization of their resources.
Fernandes realized that longer flights would require new equipment and less utilization. In an attempt to realize his dream of creating a long-haul low cost airline Fernandes created AsiaAir X. Having to upgrade the equipment to the Airbus A320, a larger and more expensive plane, would allow the local market access to short and long haul options and by maintaining a similar model of operations would allow AirAsia X to utilize on the existing expertise of the management structure.
While fundamentally sound, this strategy steers way from some of the principles that helped AirAsia reach their success. Utilizing benchmarking, if there was a market for low-fare no frills international travel, then Southwestern would have capitalized on the opportunity already. I would avoid merging the two companies and scale back the scope of AirAsia X’s flights to an 8 hour radius, or look to market some direct flights to locations that they have effectively branded with, like Europe and Manchester United.