AirAsia has adopted cost leadership as its business level strategy.

Mentions the strategic

actions adopted by AirAsia in implementing its business level strategy and explains how these
strategic actions support AirAsias cost leadership strategy.
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
AirAsias 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:
1. 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. AirAsias 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).
2. High Aircraft Utilization and Efficient Operations
Compared with other airlines, AirAsias 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 AirAsias
Boeing 737-300 aircraft were maximized, having 16 more seats than the standard
configuration adopted by full-service competitors.
In addition, AirAsias aircraft (i.e. point-to-point services kept flights to no more than 4 hours,
minimizing turnaround time), and employees (i.e. encouraged to perform multiple roles), were
used more effectively and intensively than competitors. For example, its point-to-point
services (in 2004) enabled AirAsia to operate its aircraft an average of approximately 13
hours/day. It was 2.5 hours more efficient then full-services airlines, which only managed to
use their aircraft for an average 10.5 hours/day. Furthermore, the average turnaround time for
AirAsias aircraft was lesser (e.g. 25 minutes), as compared to full-service airlines (e.g. 45-
120 minutes).
3. 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.
For instance, its large purchase of A-320s would make AirAsia on of the relatively few low
cost airlines operating this aircraft. With fuel accounting for almost 50% of the total operating
costs for the airline, the A-320s would provide an important cost saving of lower fuel usage
by about 12%; increasing the airlines profitability.
4. 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.
As a result of its successful negotiations, AirAsias contractual lease charges per aircraft
decreased by more than 60% from 2001 to 2004. Aircraft maintenance contract costs were
also reported to be substantially lower than other airlines, giving AirAsia a competitive
advantage, which was further compounded by its young fleet. Furthermore, the airlines high
safety and maintenance standards allowed AirAsia to procure rates that were favorable on its
insurance policies.
5. 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 (i.e. estimated at US$10
per ticket).
6. 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.
AirAsias employees were not unionized, hence its rumination policy focused on maximizing
efficiency and productivity, whilst keeping staff costs at levels consistent with low-cost
carrier industry standards. Although salaries offered to employees were below that of rivals,
all employees were offered a wide range of incentives (i.e. productivity and performance-
based bonuses, share offers, and stock options).
In addition, rather than an hourly pay scale for its pilots, AirAsia adopted a sector pay policy:
pilots were provided incentives to enhance flight operation efficacies by keeping flight and
operating times to a minimum, and to cover as many flight sectors as possible within a day.
The absence of in-flight services made it possible for the airline to reduce the number of cabin
crew per light, saving on employee cost.
7. 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 AirAsias positioning to
offer low prices; generating media attention for the airline.
However, AirAsia also invested heavily where required: AirAsias major sponsorship for
Manchester United, involved global sponsorship and advertising, and promoted the brand
beyond the region.
8. 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.
9. 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. (Exhibit 5 and Exhibit 6)
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.
References:
Ireland, R D, Hoskission, R E & Hitt, MA 2009, The management of strategy concepts, 8th
edn, South-Western Cengage Learning, USA
Singh, K, Pangarkar, N & Heracleous, L 2010, Business strategy in Asia a case book, 3rd
edn, Cengage Learning Asia, Singapore