Case Study: AirAsia

History and Growth Asia's first low-fare, ticketless airline was established in December 2001 when Tune Air Sdn Bhd officially acquired AirAsia, Malaysia's second national carrier, from DRB-Hicom, a Malaysian conglomerate. It was the brainchild of Tony Fernandes, a finance graduate from the London School of Economics and former vice-president of South-East Asia for Warner Music Group, who envisioned a no-frills, discount airline that would boost air travel in the region at a time when the worldwide airlines industry was still reeling from the 11 September terrorist attacks. Together with three other partners, Tony founded Tune Air Sdn Bhd and purchased a 99.25% equity stake in AirAsia which had two Boeing 737-300 jets and RM40million in debt. Modelled on other successful low-cost airlines such as Southwest Airlines in the United States and Dublin-based Ryanair, AirAsia, with the tagline 'now everyone can fly', was quick to establish its presence based on its philosophy of making air travel affordable, easy, fun and convenient for everyone. Within the first year, it extended its fleet of aircraft to six, opened several sales offices around Malaysia and generated media awareness through a series of public relations events. It also increased convenience by accepting credit card payments for telephone bookings (March 2002) and introducing online bookings through its website (May 2002). In a series of firsts, it was Asia's first airline to go ticketless (April 2002) and introduce a multilingual website (July 2003) as well as the first airline in the world to introduce SMS booking (August 2003). In 2003, the airline introduced Go Holiday, its online holiday program, where guests can book holiday packages through its website. Johor Bahru was launched as its second operating hub outside of Kuala Lumpur and the number of destinations was increased, including new ones outside Malaysia such as Bangkok and Phuket. In November of the same year, AirAsia established AirAsia Aviation Co. Ltd, a joint venture with Shin Corporate of Thailand, to launch Thai AirAsia, a low-fare carrier in Thailand operating from Bangkok. In 2004, AirAsia expanded its flights to several destinations in Indonesia such as Jakarta, Bandung, Surabaya, Denpasar (Bali) and Medan and launched its Indonesian associate budget airlines, AWAIR, in which it has a 49% equity holding. AirAsia currently has over 2,000 employees, a fleet of modern Airbus jets and operates over 100 domestic and international daily flights from hubs in Kuala Lumpur, Johor Bahru, Bangkok and Jakarta. Its routes are concentrated within three countries-Malaysia, Thailand and Indonesia-but it has started flights to Manila, Xiamen and Macau with plans to increase the number of destinations in China, Indo-China and the Philippines. It also developed Air Asia X to fly long haul to destinations such as the Gold Coast, Melbourne, London, Paris and Christchurch (though London, Paris and Christchurch have recently been discontinued). AirAsia's objective is to be the leading low-cost carrier in Asia. One of the components in its management strategy is to maximise shareholder value. AirAsia is a publicly listed company on the Malaysia Stock Exchange, having launched its initial public offering in November 2004 and raised over RM700 million. Its strategy for profit creation is through prudent expansion of routes and networks within Asia, reinvestment of profits to develop the business further (no dividends are paid out) and

focus on brand enhancement. The cornerstone of AirAsia's business model is to build the brand gradually by targeting the price-sensitive (rather than time-sensitive) travel segments on popular routes with a basic, no-frills, but reliable, product at a very competitive price. This requires cost efficiency and low complexity to be profitable. Tony Fernandes explains: My philosophy is very clear: before a business can grow, it needs to have its costs under control. It must be cost-efficient and profitable, and it must create value. Costs that do not add value must be contained, reduced and even eliminated. I have been asked by various people, 'How much lower can you cost reduce? You're already the lowest in the world!' My direct answer is if we do not strive to be more efficient and choose to be complacent-our days are numbered. This is a continuous task we have to face head on year on year, it is the critical ingredient to operate a successful business. In order to achieve profit goals and provide low fares with a reliable and quality service, AirAsia continuously seeks to improve aircraft utilisation and crew efficiency. Cost-cutting strategies include 'no frills' service such as no free food on board, no frequent-flyer program, using one type of aircraft to minimise training costs, faster turnarounds to save on airport parking fees, use of reservations via Internet or mobile phones to eliminate booking offices, and multitasking of staff such as flight crews who also clean the planes and work at the check-in desk. Despite its costoptimisation strategy, AirAsia is stringent in ensuring the safety of its aircraft, which are fully compliant with the standards of the International Aviation Safety Association. Flying with AirAsia AirAsia's popularity may be largely attributed to its strategy of stimulating demand by offering low-priced and even free tickets. It caters to price-sensitive travellers who are fairly flexible in their travel schedules, for instance students and budget tourists, and who prefer the convenience of online ticketing and payment. The customer experience with AirAsia is very much based on the self-service (co-production) concept. This begins from the point of booking one's own ticket right up till the actual flight itself. Using the single-class and free-seating policy, there are no seat allocations based on specific seat numbers. However, priority for boarding is given to the elderly or disabled passengers as well as those with children. Once on board, there is minimal inflight service other than crews going around selling food and drinks. The low prices do, however, come with certain restrictions. The airline operates on a point-to-point basis and bears no liability for customers' failure to meet connecting flights due to delays. Once confirmed, bookings are not able to be cancelled and payments made are not refundable but can be credited to future flights. Culture and Branding Just like its informal in-flight service, AirAsia's corporate culture is similarly low in bureaucracy, hierarchy and formalisation, in line with the personality and management style of its CEO. The core values of AirAsia are fun, integrity, caring and passion. Employees are encouraged to be themselves, display a sense of humour, be passionate and enthusiastic about their job and willing to take risks. An open office concept and casual dress code is adopted to reduce the power distance between staff and management. Tony Fernandes has a cubbyhole in the same office as the rest of his staff and

employees regularly drop by to talk to him about operational matters. He also spends time on the ground to get a feel of the various departments such as cabin crew, engineering, sales and boarding, and has even helped to load and unload baggage from planes. Fernandes advocates internal branding which he believes many companies have neglected. 'Employees are a company's most valuable assets and every effort should be made to make them identify with the company', he declares. He believes that staff must first understand the company's direction before others can be convinced. To that end, large numbers of staff were involved in midnight briefings. Furthermore, to create a motivated workforce based on the 'Anything is possible' motto and will to win, staff ideas and suggestions are encouraged, for instance cabin crew were allowed to design their own uniform. The company also set up a flight academy with interested and qualified staff being admitted for training as pilots. The company places similar emphasis on its external brand-building efforts. Right from its launch, AirAsia has rarely been out of the media limelight, thanks to frequent press releases and promotions. Both the airline and Fernandes himself have become celebrities of sorts, having won numerous awards. Fernandes has also become a much sought after speaker at various business functions. The company has demonstrated a savvy use of public relations, having orchestrated a variety of events generating large amounts of media publicity, including smart partnerships with other companies. One of its most outstanding publicity coups was the sponsorship deal with the Manchester United football team for one year beginning in August 2005, thus becoming the first low-cost carrier in the world to link itself to one of the most popular football clubs in the English Premier League. The strategic rationale is that being the official low-fare airline for Manchester United will allow the company to generate tremendous 'share of mind' for its brand among football fans in Europe and Asia. Another event that generated a large amount of media publicity was the arrival of the company's first Airbus A320. It is part of AirAsia's continuing strategy to keep one step ahead of the competition through cost optimization at the same time as providing a more comfortable yet affordable flying experience for its customers. Future Outlook Fernandes has declared that there is no intention for AirAsia to move upmarket to a full-service, long-haul airline. Future plans are to focus on regional expansion, especially China. An on-going issue is the competition on domestic routes between AirAsia and the national carrier Malaysia Airlines (MAS). MAS has consistently reported losses in recent years, largely blamed on high operating costs including fuel prices. A new managing director, Idris Jala, has taken office with the goal of achieving a significant turnaround in the airline's financial performance. MAS is seeking to cut its fuel costs by 10%, or RM110 million, save up to a third of procurement costs and enhance revenue by another RM200 million over 12-18 months. The Malaysian government has agreed in principle to rationalise air travel within the country to avert a head-on price war between MAS and AirAsia as well as to improve the financial position of MAS, and AirAsia has expressed willingness to operate almost all of the domestic routes currently served by MAS. Internationally, AirAsia is facing competition from a multitude of LCCs in the South-East Asian region. The main competitors are Thailand's Nok Air (owned by Thai Airways), Indonesia's Lion Air, Tiger Airways (49% owned by Singapore Airlines) and Singapore-based Jetstar Asia and ValuAir.

AirAsia is currently ahead of its budget competitors in terms of number of destinations served. ValueAir currently flies only to Jakarta, Bali and Surabaya whereas Nok Air concentrates on six destinations within Thailand. Tiger Airways and Jetstar Asia serve 12 and 10 destinations outside Singapore respectively. In comparison, AirAsia flies to 31 domestic and regional destinations. The region is considered to have a huge unmet demand for low-cost air travel, with demand being considered highly price elastic. In comparison to the United States and Europe, where LCC penetration is estimated at 25.5% and 16.0% respectively, penetration in Asia is only around 5.5%. Nevertheless, many LCCs are realising that, with competition rising rapidly, competing on price alone is unlikely to win huge market share. Differentiation through brand building is widely considered to be a prudent strategy to avoid being perceived as a commodity product and also to widen non-airline sources of revenues, for instance sales of airline merchandise and partner products and services. AirAsia certainly has the first-mover advantage for now. It remains to be seen whether it can successfully maintain its stunning four-year performance in the face of a challenging and dynamic environment both domestically and internationally.