AirAsia: A Low Cost Carrier with Global Potential

Is AirAsia the world's best low-cost airline in 2023?

1.0 Introduction 1.1 Company Background Air Asia was established in 1993 and started as one of the government-owned company's subsidiaries, DRB Hicom. In late 2001, when the executive of Warner Music wanted to establish an airline in Malaysia, he went and met with Tun Dr. Mahathir Mohammed (the fourth prime minister of Malaysia). Tun Dr. Mahathir took the opportunity to load debt-laden Air Asia to Tony Fernandez. Tony Fernandes via Tune Airways Sdn. Bhd bought Air Asia with a token sum of RM1 and with a partial debt of 40 million. Then, AirAsia had only two Boeing carriers. Then, it was carrying around 200,000 passengers in a year. In 2011 alone, it was carrying almost 18 million passengers. AirAsia's slogan is “Everybody can fly”. It highlights the low-cost carrier strategy it employs. It seeks to keep costs low by offering no-frills experience.

Is AirAsia a low-cost carrier?

2.0 Macro-Environment Analysis

2.1 Demographic Factor.

AirAsia is situated in a geographic location with over 3 billion population. Most of the world's population has never flown before because of high travel costs. This is AirAsia's competitive advantage. Its strict adherence to its low-cost business model will enable it to tap into this market; apart from that, the low-cost model has worked in the US and Europe despite the cyclical nature of economic growth. The diagram above is from IATA, which shows the additional passenger between 2006 and 2011.

Asia Pacific, which is home to AirAsia, shows the highest increase with almost 250 million additional passengers.

What are the biggest low-cost airlines in the world?

(AirAsia Annual Report 2007) Source:

Boeing.com, The market outlook from Boeing shows that the Asia Pacific region seeks the highest increase in new aeroplane demand compared to other regions. The demand for new aeroplanes from Asia Pacific, which is almost 50% of total demand in the coming twenty years, underscores the increased level of growth in the Asia Pacific market. This is a true testament to AirAsia’s potential in the Asia Pacific market. This is reflected in AirAsia’s aggressive approach to expanding. One of their main strategies in expanding their market is through joint ventures in Thailand, Indonesia, Philippines, Japan and possibly India.

2.2 Economic Factor Economic factors in decision-making are undeniable. Kotler thinks the “economic environment affects consumer-buying power and spending patterns.” Total buying power depends on current income, prices, savings and credit. The consumer-buying power also will influence the changing of consumer spending patterns. Different areas will have different effects influenced by economic factors. The strong and sustained growth in the entire region consisting of South Asia, South East Asia and East Asia compared to the rest of the world, especially traditional markets such as North America and Europe, puts AirAsia as AirAsia on the need to allow people who otherwise could not fly with traditional carriers to be able to fly. Hence, it targeted the more significant lower, middle and upper-middle-class segments.

In its early stages, it created a promotional campaign that revolved around giving away 1 million free tickets and a promotional campaign involving rock-bottom sales. Malaysians were immediately attracted to it. Hundreds of thousands, if not millions, of Malaysians, who otherwise would not be able to travel overseas, have begun to travel overseas. The strict adherence to the low-cost model assisted AirAsia in acquiring more market share in the aviation industry during the Global Financial Crisis. The global financial crisis is AirAsia's most significant economic challenge thus far. It resulted in the first-ever net loss for AirAsia Bhd ever since it went public. (AsiaInc Forum,2009).

What is Asia's leading low-cost airline?

2.3 Natural Factor

2.3.1 Oil Increasing level of fuel price has presented one of the biggest challenges to Airlines. AirAsia is quick to adapt to this by introducing cost-cutting measures in other sections and purchasing newer aircraft that are more fuel-efficient. It is currently in the midst of replacing its Boeing 737-300 fleet with Airbus 320. In fact, AirAsia is currently Airbus's biggest client. The new Airbus uses 15% less oil than its Boeing predecessor at AirAsia. (AirAsia Financial Report 2011; 2012) Fuel price will likely remain to be a huge component of airline cost structure. Hence, AirAsia must employ cost savings in other areas and enhance revenue from ancillary sources to compete.

Source: (OPEC, 2013)

2.4 Technology Technology remains the most dominant force affecting strategy decision-making at AirAsia, especially regarding marketing. As a low-cost carrier, AirAsia has aggressively taken a huge risk in leveraging technology advancement in terms of marketing and building a brand. It announces sales, for instance, mainly through its internet platform. AirAsia was the first airline in the world to have a mobile version of its website. It went ticketless and introduced a web booking service the year after Tony Fernandez took it over. It was a bold move since they were a new fledgling airline.

2.4.1 Internet AirAsia effectively used the Internet platform in marketing, helping them reduce costs. For instance, in 2004, AirAsia recorded almost half of its sales using its Internet website. It was the first to introduce a mobile version of its website, allowing mobile phone access.

2.4.2 Social Media The brand is strengthened when it is underpinned by real-life individuals and not a ‘monolithic corporate presence’. As CEOs and business leaders, we must use social media ourselves and put ourselves on the front line of customer engagement. – Azran Osman Rani's Social Media is a recent phenomenon. It allowed more people to engage with the world and revolutionized communication. It is also an effective platform for engaging with consumers and creating awareness. AirAsia Group CEO and AirAsia X executive used social media to their full advantage. They engage with the general public and are responsive.

The above quote by AirAsia X CEO Azran Osman Rani embodies the importance of removing communication barriers between their staff and the broader consumer market. Apart from them, they try to connect and engage with consumers by talking about sports and other social issues. One of the channels AirAsia uses as part of its social media strategy is Facebook. It has been using Facebook since 20069 and has several corporate pages. It has localized pages for countries like Indonesia, Hong Kong and the UK, apart from the general AirAsia Facebook page. Apart from that, it also maintains a presence in Taiwan’s Plurk and China’s Sina. The diagram above shows how social media helps airlines attain customer-centric data.

How does AirAsia implement its low-cost leadership strategy?

Source: Simpliflying.com, 2013. Major sales campaigns are often announced on these pages. As mentioned above, AirAsia effectively used this platform to promote, create awareness, and engage effectively with their customer base. They use it as a tool for market research and to gauge responses. Apart from that, their CEOs have Facebook and Twitter presence and effectively use it to solve ground problems and to engage with consumers. For instance, Tony Fernandez, Group CEO, recently announced their five business strategy, which encompass at least another.

2.4.2 E-ticket System AirAsia's main avenue in ticket booking is through its website. It has a centralised booking website at www.airasia.com. These allow them to cross-promote routes and promote greater synergy between their subsidiaries. The website was launched in 2002. It is also the first airline to go ticketless. In 2004, online sales accounted for 43%, but in 2009, online sales were 76%. In 2006, the website had 1.1 million viewers from 180 different countries and recorded a ticket purchase every 4.5 seconds. It was also the first airline in the world to introduce a mobile website.

Which was mobile.airasia.com?

It was a pioneering concept that allowed people to book tickets on the go. A few years prior to that, in the early stages AirAsia introduced the world’s first SMS booking system. It also initiated collaboration with POS Malaysia in its earlier days to enable consumers to remit ticket money via Pos Malaysia. (AirAsia Annual Financial Report, 2006) The entire digitalization of sales, which led to the traditional need to go to the travel agent to book tickets, was removed.

What factors led to the success of AirAsia as it grew and expanded from Malaysia to other destinations in Southeast Asia and beyond?

2.5 Political /Legal forces. In South East Asia, political and legal forces play a bigger role. It started in the early stages of AirAsia whereby the anti-competitive legacy airline policy of the Malaysian.

2.5.1 Malaysia Malaysia’s political and legal forces played a huge role in shaping AirAsia. It started with Tony Fernandez being made to acquire AirAsia by Malaysia’s then Prime Minister Tun Dr Mahathir. Apart from that, AirAsia was at a disadvantage because it had to compete with Malaysian Airlines, which had preferential treatment by the Malaysian government. It took intense public lobbying from AirAsia to get the government to relax their anti-competitive legacy airline policy that was not commercially viable. The most recent is the Malaysian government’s decision to reverse the share swap between its state-owned Malaysian Airlines and AirAsia due to political pressure.

However, due to this, AirAsia learned to adapt and emphasize building relationships with the powers to be. Apart from that, it works closely and builds a strong rapport with Tourism Malaysia. They actively support the Tourism Malaysia campaign. AirAsia also participated in the recent lab session with the Prime Minister Office’s PEMANDU department in drafting the Economic Transformation Programme, which saw them advocating for even more route liberalization. It also actively sponsors Malaysian organizations on the basics of charity and Corporate Social Responsibility.

2.5.2 Thailand Its joint venture in Thailand was rather smooth sailing. This is in regard to having a rather influential joint venture partner at that time. The former influential Thailand Prime Minister owns the Shin Corporation corporation. Although, the Thaksin was later ousted through a military coup and remained in exile. During the civil unrest in Thailand, AirAsia gained a lot of positive coverage when it launched a rescue mission for passengers stranded at the Suvarnabhumi Airport.

It also actively launched a regional-level campaign to promote tourism in Thailand post–tsunami that adversely affected tourism in Thailand. Thailand’s image as a rather liberal country and a country that promises exotic locations and experiences to tourists presents an important growth factor for AirAsia. (AirAsia Financial Report 2008) From October 2012 onwards, AirAsia shifted from Suvarnabhumi Airport back to Don Mueang International Airport to save costs by avoiding high airport taxes. AirAsia Financial Report 2012).

2.5.3 Indonesia AirAsia Berhad has a 49% share in the airline, with Fersindo Nusaperkasa owning 51%. Indonesia’s laws disallow majority foreign ownership of domestic civil aviation operations. AirAsia first made its presence in Indonesia by acquiring 49% of Awair, with the remaining 51% by Fersindon Nesaperkasa. Indonesian laws disallow majority foreign ownership of domestic civil aviation operations. It is a rather common policy frame. On Dec 1 2005, Awair changed its name to Indonesia AirAsia as part of a regional-level rebranding exercise.

This is to enable greater brand exposure and synergy between the various airline subsidiaries of AirASia in the world. 2012 AirAsia Bhd announced that it would buy out Indonesia’s Batavia Air. Although Indonesia prevents foreign majority stake, it could circumvent the law through joint acquisition with Indonesia AirAsia. However, the deal fell apart. Currently, AirAsia is employing a less risky organic growth strategy through Indonesia AirAsia and the presence of the AirAsia Group nerve centre AirAsia Asean. (Spreading its wings,2012).

2.5.4 India The recent airport tax hike has let AirAsia suspend flights to certain locations, such as Delhi and Mumbai. Apart from that, the Indian government's recent approval in allowing foreign-based airlines to acquire up to 49% of an Indian airline has allowed AirAsia to consider expansion by setting up an Indian subsidiary. However, as the CEO puts it, they are opting for a wait-and-see approach and allow time to kill off airlines that are competing very fiercely in India before making a move. Economist recently reported that AirAsia is in talks with a new joint venture partner in India to set up India AirAsia. Like Indonesia, India does not allow majority ownership in domestic Airlines. India presents a market of 200-300 middle-class families. Nevertheless, AirAsia Bhd enjoys leverage through its scale and strong presence in ASEAN, which gives it an edge to compete with India’s domestic carriers. (spreading its wings, 2012).

2.5.5 ASEAN ASEAN is an economic and geopolitical organization. It consists of ten countries in the South East Asia region. It has a population of 600 million people and a combined GDP of USD 1.8 trillion. Currently, AirAsia flies to 85 destinations in the world, 55 of which are located in ASEAN. With a free visa among ASEAN countries, a huge intra-ASEAN travel occurred, and we are on the right track to establishing an ASEAN Community in the coming years. In 2010, 47 percent or 34 million from 73 million tourists were intra-ASEAN travel. With the open sky policy of ASEAN kicking in 2015, there will be fewer regional barriers for airlines within the ASEAN region.

The scope of the Open Sky policy will remove ownership controls, remove route capacity controls, relax restrictions on the gateway, allow wet lease aircraft within ASEAN and permit multiple designations. (AusAid,2004) Hence, AirAsia shifted its group headquarters to Jakarta as part of the marketing strategy. It will also serve as a nerve centre of ASEAN and further capitalise on Indonesia's growth potential. Apart from that, such presence will create greater credibility and underscore the importance of Indonesia to AirAsia and leverage its role as headquarters of ASEAN.

2.5.6 Europe The implementation of a carbon tax in Europe, for instance, was a “nail in the coffin” that caused AirAsia X to suspend flights to London and Paris indefinitely.

2.6 Cultural factors Sporting cultural Countries in the ASEAN region, including Malaysia, are deeply passionate about sports, especially football. Hence, in the early days of Air Asia, Air Asia made a pivotal decision to sponsor Manchester United. Manchester United is the largest club regarding followers and support in the ASEAN region, especially Malaysia. This helped AirAsia to penetrate the Chinese and Indo-China markets (AirAsia Financial Report 2005). Nationalism Countries in Asia have a strong sense of nationalism. Foreign companies that expand into these markets have appealed to nationalism sense by pursuing localization and promoting a localized image.

AirAsia has been actively promoting itself not just as an ASEAN brand but as a local brand. It has used every crisis in the region to build a sense of ownership among consumers in its host country. (AirAsia Financial Report 2005) Conclusion The macro-environment analysis indicates AirAsia’s business model and marketing strategy. They have so far managed to handle the macro-environment forces really well. These forces are evolving, and constant analysis is required. Reference List Kotler, Philip, Linden Brown, Stewart Adam, Suzan Burton, and Gary Armstrong (2009) Marketing, 8th edition, Pearson Prentice Hall, Frenchs Forest.

Reference

Pride, W. M., Elliot, P., Rundle-Thiele, S., Waller, D., Paladino, A. & Ferrell, O. C. (2006) Marketing: Core Concepts and Applications, John Wiley & Sons, Australia. Solomon, Hughes, Cihitty, Fripp, Marshall, and Stuart (2009) Marketing – Real People, Real Choices, Pearson Prentice Hall, Frenchs Forest. AirAsia Annual Report 2005. AirAsia.com.

(August 2008). Retrieved from http://www.airasia.com/my/en/about-us/ir-annual-reports.page AirAsia Annual Report 2006. AirAsia.com.

(August 2006). Retrieved from http://www.airasia.com/my/en/about-us/ir-annual-reports.page AirAsia Annual Report 2007. AirAsia.com.

(August 2007). Retrieved from http://www.airasia.com/my/en/about-us/ir-annual-reports.page AirAsia Annual Report 2008. AirAsia.com.

(August 2008). Retrieved from http://www.airasia.com/my/en/about-us/ir-annual-reports.page AirAsia Annual Report 2009. AirAsia.com.

(August 2009). Retrieved from http://www.airasia.com/my/en/about-us/ir-annual-reports.page AirAsia Annual Report 2010. AirAsia.com.

(August 2010). Retrieved from http://www.airasia.com/my/en/about-us/ir-annual-reports.page AirAsia Annual Report 2006. AirAsia.com.

(August 2006). Retrieved from http://www.airasia.com/my/en/about-us/ir-annual-reports.page Ismail S, E, (2010).

The Rise of Tony Fernandes and AirAsia in Malaysia. Presented at the 18th Biennial Conference of the Asian Studies Association of Australia in Adelaide.

Retrieved from http://asaa.asn.au/ASAA2010/reviewed_papers/Ismail-Shahril_E.pdf Bellman,E.

(2012,July 31). AirAsia Bid Draws Indonesia Scrutiny—the Wall Street Journal.

Retrieved from http://blogs.wsj.com/deals/2012/07/31/airasia-bid-draws-indonesia-scrutiny Practitioners speak Out on How to Soar in 2013,

(2013, Jan). Retrieved from Simpliflying.com Forsyth, P., King, J., Cherry Lyn Rodolfo, C, &Trace, 2004 Preparing ASEAN for Open Sky.

Retrieved from http://www.ausaid.gov.au/Publications/Pages/8651_8233_7710_6825_9380.aspx Spreading its wings (2012 Sept 29).

The Economist.Retrieved from http://www.economist.com/node/21563724

AsiaIncForum(Organizer). (2009 ,Oct 21-22).

ASEAN Integration in the Face of Global Crisis: Challenges and Opportunities

Retrieved from http://www.youtube.com/watch?v=ve4UpCJboIketing

Word Count: 2510 words (excluding bibliography and in-text citation)