Company background Tony Fernandes, as the Chief Executive Officer of AirAsia, decided to pursue his dream to start an airline with the following vision: “To be an airline that flies long-hauls with low fares with a corporate culture that is flexible and functional”. In January of 2002, Tony re-launched AirAsia (previously a struggling government-owned airline) with only 3 planes and started serving the South-East Asian Market. In 2004, it began its first international service and in 2007, expanded into long-haul flights run by a different brand: AirAsia X.
That year, the company achieved its title as “The World Lowest Cost Airline,” and was also one of the world’s most profitable airlines. AirAsia was still able to earn 4% ROA during the recession in 2008. Between 2002 and 2009, AirAsia had expanded from 2 aircrafts and 200,000 passenger journeys to 79 aircrafts and 11. 8 million passengers. Problem The focus of our research is to determine if AirAsia should expand its long haul business and to what extent AirAsia and AirAsia X should be integrated operationally. Currently, AirAsia is the brand of its short-haul flights, with AirAsia X encompassing flights over 4 hours in length.
There are several advantages to expanding into long-hauls, with the most prominent being the ability to expand into new markets, gain increased market share and take advantage of growth opportunities. These expansions would also aid in establishing trunk routes to increase traffic on AirAsia’s local flights. Some of the notable disadvantages are that AirAsia could be moving away from their successful low-cost carrier (LCC) strategy. Other disadvantages include the need to expand acquire different planes and potential brand confusion between AirAsia X and AirAsia, whether in Asia and for new markets internationally.
If it is decided to pursue long-haul flights, then it is then important to decide whether AirAsia X should remain a separate brand or whether the 2 brands should be consolidated into one. To determine what would be best for AirAsia to remain competitive, we conducted a company analysis that looks into AirAsia’s operating cost structure, as well as some cost drivers that AirAsia must pay attention to in order to keep their cost advantage. Operating Cost Structure Low cost airlines like AirAsia have changed the airline industry by making flying more accessible by lowering their costs.
These can only be maintained by maximizing operational efficiency, which can be achieved by minimizing services and reducing overhead. Airline operating costs can be divided into direct and indirect costs. Direct operating costs refer to the expenses incurred in the operation of an aircraft, including flying expenses, maintenance and overhaul expense and aircraft depreciation. Indirect operating costs encompass all items of expenditure not directly related to the operation of aircrafts, which includes stations and grounds costs, passenger services, ticketing, sales and promotion, and general administration.
AirAsia has been able to establish an EBIT of 18% while the industry average is at 12% and its ROE has been 17 against the average of 13, proving its success as a LCC. Cost Drivers affecting AirAsia There are 7 cost drivers that we analyzed in order to determine AirAsia’s cost advantage, these include: capacity utilization, product design, economies of scale, economies of learning, input goods, production technologies, and residual efficiency. AirAsia has excellent capacity utilization demonstrated by their turnaround time of 25 minutes compared to the hour a full-serviced carrier takes.
The airline also takes advantage of a single class seating system with no assigned seating unless passengers pay for Xpress boarding. Unlike full cost carriers, LCC’s base ticket fares on the time value of the seats. There are a total of 12 fare tiers and ticket fares increase the closer it gets to the day of the flight. The first few tiers are targeted toward value conscious passengers who will book their tickets ahead of time. This technique allows AirAsia to cover all operational costs of the flight from these ticket sales before making a profit from tickets sold from the top of the fare tiers.
Through product design features, AirAsia is able to increase its cost advantage by cutting expenses in many areas. The airline does not offer free food or beverages, but makes them available for purchase. AirAsia is a ticketless airline and has a no refund policy. As a LCC, it is important for AirAsia to keep processes as simple as possible to reduce costs and maintain their cost advantages over full service carriers. One way they do this is by employing a single type of aircraft for their fleet, the Airbus A320.
This offers economies of scales in maintenance, training, and purchasing. The airline sells directly to customers through call centers and their website to avoid paying third parties. Employee specialization helps organizations gain economies of learning. Specialization promotes development of individual skills and increases efficiency by conducting a process in the best possible way. To lower input costs, the company outsources activities that can be done efficiently by third parties, such as most of its information technology and ircraft maintenance. Operating through secondary airports also minimizes aircraft landing and parking fees, but also allows for less congestion and thus lessens turnaround. Another way AirAsia cuts input costs is by retaining non-union labour, whose average salary and benefit cost is significantly lower than union employees. AirAsia also establishes cost advantage through its production techniques by being effective with their distribution methods. AirAsia flights use a point to point network instead of a hub and spoke system.
The point to point network leaves out connecting flights, flight transfers and having to label luggage and move luggage from one flight to another. Residual efficiency is another important component of cost advantage. AirAsia creates a team-oriented environment. Employees are selected based on their aptitudes, are multi-skilled, and have is a high level of job-flexibility, which fits nicely with AirAsia’s open management style. Employees are aware of the company’s core strategy and are also rewarded with bonuses based on individual performance. Recommendation and Conclusion
Based on this analysis, our recommendation focuses on three main areas: 1) A Blending of Brands: AirAsia has established a great name and reputation, and should continue to add to its success by integrating the AirAsia X brand. This can be achieved by the “X” representing premium choices on long-haul flights. This will this ease brand confusion by having only one Air Asia brand with extra (X) options, and will present a strong united front. 2) Implement Long-Haul Flights Strategically: AirAsia has the ability to provide long-haul flight at lower costs than other airlines, and therefore Air Asia should expand its long-haul flights.
However, they need to expand in this direction very strategically as to not disrupt their low cost strategy. This can be achieved by providing flights to places with similar culture and way of life, and to places of similar geographic conditions. 3) Remain one of the “Cost Leaders”: Because one of Air Asia’s main competitive advantages is being able to provide flights at low costs, there should be a high priority placed on keeping unit costs low while expanding. This can be achieved by maintaining their already existing “cost conscious” policies and ecision making. Conclusion AirAsia should stick to its vision to run long-hauls because the company has the capacity to offer these flights at lower costs than competitors. An amalgamation of the AirAsia and AirAsia X brands will reduce brand confusion. However, it is important to expand strategically to keep their LCC strategy strong. We suggest that AirAsia limits its long-hauls to countries with favourable weather conditions and also to countries with a similar culture and economy.
