Air Asia Case Study

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1. Comment on the business-level strategy adopted by Fernandes. How has AirAsia achieved cost leadership and differentiation?

1. Tony Fernandes’ Business Strategy

Tony Fernandes took over debt ridden Air Asia in December 2001 with an aim to turn it into a profitable airline. His idea was to bring a low cost carrier (LCC) to Malaysia, a model similar to that of Ryan Air in Europe. This model works on a ‘Low cost, No frills’ framework, where the goal is to offer the lowest airfares by curtailing all unnecessary costs and providing only required facilities to its customers; without compromising on safety or on customer service.

2. Cost Leadership

Air Asia’s cost per available seat kilometre was 46% lower than its competitors in 2008, and it has maintained that so far by adopting the no frills concept, wherein the airline has a standard class cabin and does not provide any free meals or inflight entertainment on board. To further cut costs, Air Asia focuses on secondary airports to save on large slotting fees levied by the major airports. The airline has also bought 200 of the Airbus A320 fuel efficient airplanes to minimise the risk arising from volatile fuel prices, these have since contributed significantly to reducing the airline’s fuel costs. The aircrafts have a high turnaround time and it is ensured that the time they spend on the ground is minimal, maximising the number of flights taken per day. Almost all Air Asia flights are short haul therefore flights return on the same day saving the airline on any crew accommodations or allowances as well.

In terms of expansion, Air Asia has made strategic decisions that kept its costs as low as possible. Its joint venture subsidiary Thai Air Asia enabled it to get cheaper and easier access to other SEA countries. Its sister airline Air Asia X has been exploring partnerships with LCCs in the Asia Pacific region for it to commence flights to more cities around the world.

3. Differentiation

Air Asia offers the lowest fares to its customers without compromising on service quality. In addition, to increase convenience for their customers, the airline employs a hassle free ticketless travel system and allows its customers to book tickets through its multilingual website and through SMS. Air Asia has also diversified into financial services such as travel insurance and other travel products, such as hotel bookings, car rentals etc that can be bought while buying the ticket itself.

Despite being an LCC, Air Asia provides its customers with “Real 5 Star” facilities such as cushioned leather seats, hot meals, including Malaysian and other Asian delicacies, which are available on board for purchase. It’s first of a kind “on-time guarantee” offers Air Asia e-vouchers worth 61$ if there flight is delayed by over 3 hours, giving its passengers confidence that Air Asia is receptive to complaints.

2. Did Fernandes weigh the range of political, economic, and operational uncertainties and risks when he took over AirAsia? What risks might he have overlooked?

1. Threats Facing Air Asia

There were a number of threats facing the already debt ridden Air Asia when Fernandes took over in 2001 that could have potentially led to the airline’s failure. The air travel downturn caused by the September 11 attacks was one of them but Fernandes decided to relaunch the airline anyway, predicting that it could benefit from the dropping aircraft leasing costs and the availability of experienced staff due to layoffs. The other two major threats to Air Asia at the time were —

1.1 Rising Competition with MAS - Air Asia was facing tough competition from its number one competitor Malaysia Airlines. After Fernandes relaunched Air Asia as an LCC in 2002, it proved to be a major threat to MAS’s bottom line due to being a much cheaper alternative for the growing middle class population in South East Asia. In 2006, Air Asia negotiated an agreement with MAS, taking over two thirds of their loss making domestic routes, eliminating losses for MAS and reducing competition for Air Asia i.e. a win win situation for the two airlines. Although strong competition still exists between the two, Fernandes has led Air Asia to be a strong player in the fight.