WRITTEN BY RACHNA KUMARI, ERN LI KOH, ONAISEE SYED, & EDITED BY SEOW KIAN TAN
In December 2001, 5 years after its founder DRB-Hicom failed to establish profitability as a full-service regional airline, AirAsia was acquired by an eager maverick Tony Fernandes who had just left his executive position in Warner Music. This proved to be the turning point for the Malaysian airline industry.
With the help of Conor McCarthy, the Irish low cost carrier Ryanair’s former director, a new business model for AirAsia was developed. The low cost carrier (“LCC”) model involves providing a no-frills flight offering, which involves cutting off value added services such as in-flight meals, allocated seating, and in-flight entertainment. This cost reduction is then passed on to customers, in tandem with AirAsia’s slogan, “Now everyone can fly.”
The Malaysian airline industry
Many critics, in and outside of the airline industry, were sceptical of the new comer’s chances of success. Here was a man with zero experience and knowledge of the aviation industry, who mortgaged his home to purchase and finance a debt-ridden firm which at that time only owned two planes. Its formidable competitor, an experienced world-class national carrier supported by the government, posed an immediate looming threat to its survival. The barrier to entry was indeed high. It was an against-all-odd, David versus Goliath scenario.
The situation was further compounded by the fact that AirAsia’s new business model was put into operation only mere months after the 11 September 2001 attacks on the World Trade Centre in the United States. Airlines worldwide were driven to enforce stricter aviation policy and protocols, which more often than not translated into added costs. Consumer confidence dwindled, causing a drop in up to 70 percent in global airline load and a 25 percent drop in air traffic (Travel Research Ltd, 2001).
This doom and gloom prospect did not stop AirAsia’s new CEO from continuing his business venture. In fact, within a short span of 11 months, not only did AirAsia wrote off its RM20 million debts and achieved profitability, it also expanded its fleet by leasing aircrafts from other airliners.
AirAsia versus Malaysia Airlines
Prior to AirAsia’s emergence, Malaysia Airlines (“MAS”) already had issues with profitability, due to low yield, high costs, low productivity, and suboptimal networks (Malaysia Airlines, 2006). In 2000, MAS was pressing the Malaysia Government for a domestic fare increase of up to 80 percent (Business Times Malaysia, 2000). Naturally, when AirAsia emerged, it did not welcome the added low-cost competition. MAS initially criticized AirAsia for ‘dumping’ activities via its low fare seats. According to MAS, these practices resulted in 31% drop in profits of each competing route.
“We now see low cost competitors hoping to stimulate demand by dumping large numbers of very low price seats in core markets. These airlines are attempting to generate new pools of discretionary traffic. Even though these airlines do not explicitly target the business passengers from which mainline carriers make their living, they create a devastating residual effect.” (Malaysia Airlines, 2006)
MAS thus see AirAsia as a definite threat to their business. In 2002, they were unsupportive in providing maintenance support, charging AirAsia maintenance rates well above market rates (Poon & Waring, 2010).
Fortunately for AirAsia, with the appointment of Dato Sri Idris Jala as MAS’ new CEO in 2005, the national carrier shifted focus towards regaining profitability via their Business Turnaround Plan. In August 2006, the Malaysia government ended its subsidies to MAS. In a bid to eliminate unprofitable routes, MAS relinquished 96 out of its 118 domestic routes to AirAsia. This was hailed as a major victory for AirAsia.
By 2007, through vigorous cost cutting and...