Ingrid
AirAsia has become one of the most successful companies in the airline industry. The analysis of the main specifics of its strategy, its methods for achieving cost leadership and differentiation, and techniques used to sustain its compatibility reveals the secrets of the success of AirAsia.
Basic Information about AirAsia
Introduction
AirAsia is the biggest low-cost airline in Asia. The main hub of the airline is the international airport Kuala-Lumpur. The company is considered one of the best low-cost airlines in the world, with the world’s lowest unit cost. The company includes such affiliate airlines as AirAsia India, AirAsia Japan, AirAsia X, AirAsia Zest, Indonesia AirAsia, Indonesia AirAsia X, Philippines AirAsia, Thai AirAsia, Thai AirAsia X.
Such developed structure lets the company be able to operate international flights for lower prices, as the airline has its hubs in numerous countries. The company operates Airbus A320-200 fleets. The company has a no-refund policy on most of its routes. Flights to South Korea are the only ones offering a refund policy.
History Background
AirAsia was founded as a government-controlled airline in Malaysia in 1994. At this stage, the airline offered full services for relatively low prices, if compared with Malaysia Airlines. In 2001, AirAsia was heavily in debt and was bought by Tony Fernandes for less than one dollar.
Despite the decline in demand for air traveling after the tragedy of 11 September 2001, Fernandes managed to reorganize the company in such way that it started bringing revenues from the first years of being governed by him. He was the first in Asia to use no-frills, a low-cost concept in the airline industry, and his innovation turned out to be a great success
General Strategy of AirAsia
No-frills, low-fare
The general strategy of AirAsia is based on the no-frills, low-fare concept. The company can be considered as an innovator in the sphere of air traveling in Asia. The company implemented no-frills, low-fare concept by offering prices that were nearly 50% lower than the prices of the competitors.
The company offers low-fare flights without providing free entertainment or meals. Besides being the first no-frills, low-fare airline in Asia, it was also the first airline in the region that introduced free seating policy and got rid of the need for printed tickets during the travel long before the competitors introduced the same innovations.
The company has always strived for implementing innovations that enable the customers to buy tickets and book seats in the most opportune way. Easy-to-use website and other options for buying the tickets made the process more convenient and contributed to customers’ satisfaction. Therefore, striving for introducing innovations in different areas of the airline’s functioning can be regarded as the first component of the strategy of AirAsia.
Gradual expansion
The second component of the strategy can be identified as a gradual expansion. In the beginning, the company focused on improving the system of providing local low-fare flights and achieved great success. It expanded the number of hubs to serve the domestic market better.
Then it employed a systematic strategy to expand its services outside Malaysia. The airline started providing regional short-haul flights to neighboring countries. It achieved low costs by organizing subsidiary companies in these countries. Only after ensuring the success of the discussed operation, AirAsia launched long-haul flights.
The company strived for exploring partnerships with companies operating in different regions of the world to have the opportunity to provide low prices. For example, while entering the Asia-Pacific region the company explored partnerships with such low-cost airlines as Australia’s Virgin Blue, Singapore’s Tiger Airways, and Indonesia’s Lion Air.
Cooperation with low-cost partners let the company enter different markets without investing immense sums of money. Besides, the company adjusted the services to the needs of the patients of long-haul flights by offering new services regarding the opportunity to choose between the classes of the cabin and hot meals.
How Has AirAsia Achieved Cost Leadership and Differentiation
Cost-leadership Strategy
The airline employed no-frills, low-fare concept to achieve cost leadership in domestic air traveling. The company managed to economize its expenses and offer the prices that differed significantly from the prices of the competitors. The airline used joint ventures to ensure the cost leadership in international short-haul flights.
Further expansion to different regions was accompanied by focusing on secondary airports to avoid paying large fees at major airports. Besides, the company organized the flights in such way that the planes returned to the original departing cities on the same day, which enabled the airline to avoid spending on crew accommodation and other allowances at the arriving cities.
The airline launched its sister company AirAsia X and attracted new investors to ensure the cost leadership in long-haul international flights. By exploring partnerships with low-cost airlines in Asia-Pacific region and Europe, the company managed to keep the prices for long flights relatively low if compared with most airlines.
The company opted for a dynamic, layered-hedge strategy to pay for fuel in advance. Such approach allowed the company to cut the expenses for fuel and remain competitive. Besides, it replaced its old fleet with fuel-efficient Airbus A320-200 aircraft, which also gave an opportunity to sustain cost leadership.
Differentiation Strategy
The primary method for achieving differentiation employed by AirAsia is providing the lowest possible prices. The company stands out from the rest of Asian airlines by offering the most attractive fares. Besides, the airline achieves differentiation by being the pioneer in many services in the Asian region.
It was the first in the region to introduce ticketless flights, mobile applications for booking the seats, and online check-in. Such innovations made the airline unique and distinguished it from the rest of local companies. The company is also regarded as having more relaxed and refreshing image than those of other airlines as the flight attendants are not obliged to stick to the uniform appearance.
The chief executive of the airline, Fernandes, has also contributed a lot to the differentiation of the company by being open to journalists and providing instant access to all news of the company for mass media.
Five Forces Analysis and Risks and Benefits of the Strategy of AirAsia
The analysis of Porter’s five forces can help to reveal the potential success of AirAsia in the airline industry. The threat of new entrants can be considered a low threat, as airline industry require big investments to keep new companies sustainable and long-term authority of the airline to attract the customers.
New entrants have small chances to put a threat to such well-recognized companies as AirAsia as existing companies have big opportunities for addressing new threats by investing their capital in the means able to retaliate against new companies. Besides, customers tend to choose well-named airlines, as experience and trust matter a lot in the airline industry. The threat of substitute products or services can be determined as relatively low for international flights of AirAsia.
Domestic flights are more susceptible to this risk, as customers are more likely to choose other means of transportation while traveling around the country. Bargaining power of customers has a low threat to AirAsia, as the airline provides unique cost opportunities at the market. Bargaining power of suppliers can be regarded as a high threat to AirAsia, as there is a limited number of suppliers. There are only two aircraft manufacturers – Boeing and Airbus.
The intensity of competitive rivalry can be considered the main threat to AirAsia as the competitiveness of the airline industry is high. Malaysian Airlines is considered the main competitor of AirAsia at the domestic market, as the company tries to attract the customers of AirAsia by launching loyalty programs.
Short-haul flights of AirAsia are also vulnerable to the impact of rivalry with Malaysian Airlines. However, AirAsia appears to be rather successful in dealing with the competitors, as it is recognized as one of the best companies offering low-cost flights, and its success is rather difficult to be repeated.
The strategy of AirAsia appears to have more benefits than risks, as it gained huge revenues and worldwide recognition during the short period. The primary benefits include huge popularity of the airline due to its exceptional low fares. The strategy of gradual expansion of services let the airline achieve great sustainability in the market of international flights. Successful strategy of reducing fuel costs enabled the company to sustain low fares.
Striving for employing the best innovations also contributes to the success of the company and attracts more customers. The main risk of the company’s strategy is related to its commitment to one aircraft manufacturer. Such situation enables Airbus to put pressure on the airline. If the manufacturer is free to increase the prices for its products at any time, as the airline has no choice but to agree to the new price policy, as it heavily depends on the cooperation with the manufacturer.
Besides, any strikes of employees or other problems inside the manufacturing company can also directly affect AirAsia and cause serious complications. Other risks are related to the evolvement of many low-cost airlines all over the world during the last decade. Such situation puts a threat to the company’s compatibility and can affect its leading position in the world of cost-effective air traveling.
How AirAsia Sustains Its Competitiveness
To maintain its competitiveness, AirAsia focuses on promoting its reputation of the company that offers the lowest fares. Such reputation helps to sustain a large number of customers, as the price of the tickets is one of the main factors influencing the choice of travelers. The company launches campaigns able to address the loyalty programs of other airlines. For example, when Malaysian Airlines launched “Everyday Low Fare” campaign, AirAsia fought back with its “Sub-Zero Fare Campaign”.
The company quickly reacts to any changes on the market and takes appropriate actions that help the company to remove the threats put to its compatibility by the competitors successfully. Besides, the company strives for gaining the reputation of the provider of high-quality services. While being a low-fare airline, AirAsia offers the range of services typical for integrated service providers. It provides financial services (e.g. travel insurance) and holiday products.
The airline has established effective cooperation with numerous companies and offers numerous online booking services for hotels, hostels, car rentals, cruises and medical care. The company has also launched Citibank–AirAsia credit card, which lets the customers earn the points and enjoy discounts. Therefore, while focusing on providing the lowest fares, AirAsia puts much effort in sustaining its compatibility with other airlines in terms of the quality of services.
The effective strategy aimed at achieving cost leadership and differentiation has contributed to the success of AirAsia. The analysis of the methods used by the airline helps to understand the main strengths of its strategy.