QUESTIONS:
1. Briefly describe the trends in the global airline industry.
1. Briefly describe the trends in the global airline industry.
Answer :
- 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.
2. What is the business level strategy adopted by Air Asia?
Answer :
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?
Answer :
- Lowest prices without compromising on customer service.
- Shunned hub and spoke for 'point to point' system
- Reliance on ITES
- VAS to flyers
- Ticketless check in - saved time and hassle free
- Single class seating - no bias amongst flyers
- Standard operating procedures ensured uniform level of competence amongst the staff.
4. Identify the ways Air Asia can sustain its competitiveness through the business level strategy that is adopted?
Aligned with its mission statement, AirAsia’s business strategy is centred on cost leadership. However, its business strategy targets specific markets; price sensitive customers (including first-time fliers) needing short-haul flights. In Porter’s generic strategies, AirAsia’s business strategy can be categorised into focused cost leadership; quadrant 3A in figure 1.
AirAsia builds and sustains its competitive advantage by 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. Appendix 2 summarises the sources of cost advantages contributable to the low cost business model for each activity in AirAsia’s value chain. These cost advantages constitute AirAsia’s order winner in competing with its rivals as they enable AirAsia to provide the lowest possible price to the price sensitive customers. In LCC industry, cost is the competitive priority and it determines market position.
Answer :
Aligned with its mission statement, AirAsia’s business strategy is centred on cost leadership. However, its business strategy targets specific markets; price sensitive customers (including first-time fliers) needing short-haul flights. In Porter’s generic strategies, AirAsia’s business strategy can be categorised into focused cost leadership; quadrant 3A in figure 1.
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| Figure 1 |
AirAsia builds and sustains its competitive advantage by 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. Appendix 2 summarises the sources of cost advantages contributable to the low cost business model for each activity in AirAsia’s value chain. These cost advantages constitute AirAsia’s order winner in competing with its rivals as they enable AirAsia to provide the lowest possible price to the price sensitive customers. In LCC industry, cost is the competitive priority and it determines market position.