Introduction: Use of value chain analysis for cost-saving
The firm separates fare costs from other cost. It uses fuel efficient aircrafts which are fewer in number (inbound logistics). It builds its own terminals to reduce gate collection fees or simply, passengers alight next to the main road (outbound logistics) (Grant & Jordan, 2012 Lecture5 slide 12).
There is a connection between AirAsia terminals and AirAsia X such that passengers can use both airlines to reach specific destinations. Marketing of the brand accounts for 30% of the communication expenditure The airline is loyal to its suppliers since it utilizes particularly the Airbus models. This makes cooperation between the two companies more integrated as it can be realized from AirAsia X purchasing the first Airbus A350 model (Jeffs, 2008 p. 62).
PEST analysis
Grant & Jordan (2012) describe a business environment as an array of external factors that influences the decisions and performance of a business entity. A PEST analysis for AirAsia X include a favorable political influence in Malaysia and Singapore. It is noted that the Kuala Lumpur International Airport had most modern terminals but their gate fees were so high that it made AirAsia to build its own low cost terminal. This was possible from a strong local political support (Forrey, B et al. 2012 p.7).
AirAsia X’s strategy was to have most of tickets sold online. Its application of information technology was challenged by the vast number of customers trying to buy tickets through the internet that sometimes its operations were slowed to several hours. AirAsia X first used AirAsia.com for sales, and later adopted KoolRed to ease internet traffic for its clientele (Forrey, B et al. 2012 p. 8). AirAsia X utilizes social networking to the fullest.
Porter’s Five Forces
Grant & Jordan (2012, Lecture2 slide 14) consider the use of Porter’s Five Forces to analyze the competitiveness of an industry. AirAsia X strategy to pursue a different market segment reduces industry rivalry effects. This is because the other service providers target high income middle class onwards while it targeted the marginalized low income groups.
AirAsia X minimizes threats of entry by its low cost model. AirAsia X was offering fares at a cost that was about 25% compared to competitors. A comparison rate of $0.02 a mile per seat while low cost competitors were offering $0.09 a mile per seat (Forrey, B et al. 2012 p. 4). There is an absolute cost advantage of its differentiated services.
Entry is hindered by the number of years that a company has to go through different governments to be given permission to get landing rights. AirAsia X succeeded by selling a portion of AirAsia to Malaysian Airlines and using the freed up certifications to launch the long haul.
Competitors offered business class, and first class tickets. AirAsia X recognizes the value customers laid on being able to sleep on a flat position from its survey on the premium class’ flat seat. There are considerations to increase the premium class. AirAsia X least differentiated its products compared to competitors. For example, in its Airbus A340s, 18 seats were premium and 309 economy (Forrey, B et al. 2012 p. 5). The company laid more emphasis on economy class space utilization.
Despite 60% of its customers being Malaysian, the bargaining power of buyers is reduced because they have little option when they consider the cost. AirAsia X is the lowest in the industry.
The strategy of the firm to publicize its prices’ generation further gives the customer a clear picture of how ticket prices are determined (Forrey, B et al. 2012 p. 4). It gives the airline justification, and the customers obtain value for money. Customers are aware what they are charged for flight, and for refreshments.
Porter’s complementer 6th force
The purchaser’s choice between competitors is limited by the low cost AirAsia X products (Grant & Jordan, 2012 Lecture3 slide3). Return on sunk costs is obtained from the high number of customers who buy tickets long before the day of the flight. Most of the planes seem to be fully packed on flight. There is an advantage of shared terminals by AirAsia such that passengers can connect to their destinations using the two airlines.
AirAsia X’s current strategy
AirAsia X’s strategic decision to leave out those who travel business class was a trade-off with utilization of space (Grant & Jordan, 2012 Lecture1 slide8). The economy class they invented carried extra seats that enabled the firm to lower costs without much profitability constraints. The substantial change was shifting from the normal seat arrangement of 2-4-2 to a 3-3-3 arrangement. From this, an extra seat is added in each row (Forrey, B et al. 2012 p. 5). The company was able to provide a low cost product without comfort features.
A good strategy is judged by ability to examine the nature of challenges and what is critical for success (Rumelt as quoted by Grant & Jordan 2012, Lecture1 Slide4). AirAsia X realized that what customers valued most was to reach their destination safely and on schedule. Other costs such as food and beverages were separated to be incurred on preference. Customers preferred free space for the feet rather than for the seats. The two factors reduced cost and eased movement-to-seats that was put under consideration.
The challenge AirAsia X faced was following the culture of including other cost in the overall ticket price. The company is successful because of positioning. It targeted the low income groups whose main concern are not similar to those targeted by other airlines. The business class, and the first class are concerned about comfort features offered. The economy class is concerned with reaching destination safely.
The company’s strategy includes a trade-off between the high-load factor and the high-yield factor (Forrey, B et al. 2012 p. 9). Higher-load factor is when the profitability comes from an increase in utilization of space. That is a high number of customers per flight. High-yield factor is the strategy used by competitors. Profitability comes with luxurious flights where the cost per seat is very high. This high-yield factor has been the culture of the industry. AirAsia X high-load factor is more successful than the previous belief.
Describing AirAsia X strategy (Grant & Jordan 2012, Lecture1 slide 11), it involves its competitive advantage coming from low cost flights. Its vision is to make flight possible to all income groups from the slogan “Everyone can fly”. Its priority includes measures that reduce costs such as sharing fixed assets with AirAsia apart from planes. Its lean strategy to reduce fuel cost by using Airbus instead of Boeing.
AirAsia X reduces the cost of servicing debts by the hours its planes are used in a day. Its planes are up in the sky for 16 hours while competitors’ planes average was 11 hours a day (2010). This required that flight schedule were dynamic to suit the change in daily utilization of planes. Spreading the cost of debts over many flights has given it a further ability to lower ticket prices (Forrey, B et al. 2012 p. 6).
The firm meets the “benchmarks of an effective strategy” (Grant & Jordan, 2012). Its low cost product is distinct in that it is about 25% the price offered by low cost competitors. Its low cost strategy also meets sustainability standards because it does not rely on external factors. The seating arrangement by itself is able to reduce costs by about 20% while the getting the similar revenues to competitors.
AirAsia X recognizes safety as the most important part of the airline business. The fact that it was launched after the commonly known 9/11 terrorist attacks calls for integrated use of technology to curb similar incidences. This is the company’s corporate social responsibility. “CSR neither hurts nor helps profitability on average” (Haberberg et al. as quoted by Grant & Jordan, 2012 lecture 1 slide 15). In this case, assurance of security increases customers’ confidence in using the airline.
AirAsia X’s strategy is simple, consistent, and considers long-term goals. It also shows a clear “understanding of the competitive environment” (Grant & Jordan 2012, Lecture1 slide3). The company is aware of the market segment sought by competitors, and market needs that have not been satisfied. For example, people who never travelled out of their country because of high long haul ticket prices.
Strategy appraisal
Resource appraisal
The launch of AirAsia X mainly relied on resources generated by AirAsia. These included the brand, finances, personnel and fixed assets (Grant & Jordan, 2012 Lecture4 slide9). AirAsia X has the advantage of sharing fixed assets such as terminals, and ticket sales outlets. The cost of maintaining such assets is shared. However, AirAsia X realized the importance of separating itself from using planes owned by AirAsia. This is because of the difference in between long haul and the short distance flight (Jeffs, 2008 p. 56).
The firm used the human resources of AirAsia after its launch but has maintained to train its own personnel to suit its long-term goals (Sadler, 2003 p. 32). New recruits found the operations already being carried out. AirAsia X benefits from the training program set by AirAsia. The training academy recruits pilots, engineers, and cabin crew (Forrey, B et al. 2012 p. 8). The high esteem of workers such that they refer to each other as “All Stars” is commendable.
AirAsia X initially used AirAsia.com website to launch its sales. It bought its own, KoolRed website, to deal with the delay in sales, and crash of the website that used to follow after launches in new geographical areas. Customers have two alternatives AirAsia.com or KoolRed. This also worked out to deal with different languages that come from differences in geographical location.
AirAsia X is recognized as a low cost brand which has been built for over 4 years considering its first flight was in November 2, 2007. This is a resource that it uses to launch into new routes. The high turnover after every launch is due to customer confidence in the brand. Initially, it used AirAsia’s good reputation in Malaysia to reach to a global market.
Additional competitive advantage
Its competitive advantage is also experienced in economies of learning (Grant & Jordan, 2012 Lecture5 slide11). By setting its own academy, the cost of individual workers upgrading their skills is reduced. By conducting surveys on consumer preferences, the firm utilizes its human resources to modify its products to suit the market segment.
Ownership of low-cost inputs such as the fuel-efficient Airbus A350 model (Forrey, B et al. 2012 p. 5). AirAsia X is characterized by the use of low-cost human resources. The workers in Malaysia are paid lower income rates compared with international rates. The firm has fully utilized the drivers of cost advantage (Grant & Jordan 2012, Lecture5 slide 11).
VIRUS Conclusion
The strategic resources such as its brand, and motivated personnel are valuable to the environment. Its relations asset with AirAsia is inimitable. However, its fixed assets resources can be imitated (Grant & Jordan 2012, Lecture4 slide14).
References
Forrey, B et al. 2012, AirAsia X: Can the low Cost Model Go Long Haul? Richard Ivey School of Business Foundation, Ontario.
Grant, R & Jordan, J 2012, Strategic Management. Lecture notes.
Jeffs, C 2008, Strategic Management, SAGE Publications, London.
Sadler, P 2003, Strategic Management, Kogan Page Limited, London.