Submitted: March 8, 2011
Tony Fernandes, as the Chief Executive Officer of AirAsia, decided to pursue his dream to start an airline with the following vision: “To be an airline that flies long-hauls with low fares with a corporate culture that is flexible and functional”. In January of 2002, Tony re-launched AirAsia (previously a struggling government-owned airline) with only 3 planes and started serving the South-East Asian Market. In 2004, it began its first international service and in 2007, expanded into long-haul flights run by a different brand: AirAsia X. That year, the company achieved its title as “The World Lowest Cost Airline,” and was also one of the world’s most profitable airlines. AirAsia was still able to earn 4% ROA during the recession in 2008. Between 2002 and 2009, AirAsia had expanded from 2 aircrafts and 200,000 passenger journeys to 79 aircrafts and 11.8 million passengers.
The focus of our research is to determine if AirAsia should expand its long haul business and to what extent AirAsia and AirAsia X should be integrated operationally. Currently, AirAsia is the brand of its short-haul flights, with AirAsia X encompassing flights over 4 hours in length.
There are several advantages to expanding into long-hauls, with the most prominent being the ability to expand into new markets, gain increased market share and take advantage of growth opportunities. These expansions would also aid in establishing trunk routes to increase traffic on AirAsia’s local flights. Some of the notable disadvantages are that AirAsia could be moving away from their successful low-cost carrier (LCC) strategy. Other disadvantages include the need to expand acquire different planes and potential brand confusion between AirAsia X and AirAsia, whether in Asia and for new markets internationally. If it is decided to pursue long-haul flights, then it is then important to decide whether AirAsia X should remain a separate brand or whether the 2 brands should be consolidated into one.
To determine what would be best for AirAsia to remain competitive, we conducted a company analysis that looks into AirAsia’s operating cost structure, as well as some cost drivers that AirAsia must pay attention to in order to keep their cost advantage.
Operating Cost Structure
Low cost airlines like AirAsia have changed the airline industry by making flying more accessible by lowering their costs. These can only be maintained by maximizing operational efficiency, which can be achieved by minimizing services and reducing overhead. Airline operating costs can be divided into direct and indirect costs. Direct operating costs refer to the expenses incurred in the operation of an aircraft, including flying expenses, maintenance and overhaul expense and aircraft depreciation. Indirect operating costs encompass all items of expenditure not directly related to the operation of aircrafts, which includes stations and grounds costs, passenger services, ticketing, sales and promotion, and general administration. AirAsia has been able to establish an EBIT of 18% while the industry average is at 12% and its ROE has been 17 against the average of 13, proving its success as a LCC.
Cost Drivers affecting AirAsia
There are 7 cost drivers that we analyzed in order to determine AirAsia’s cost advantage, these include: capacity utilization, product design, economies of scale, economies of learning, input goods, production technologies, and residual efficiency.
AirAsia has excellent capacity utilization demonstrated by their turnaround time of 25 minutes compared to the hour a full-serviced carrier takes. The airline also takes advantage of a single class seating system with no assigned seating unless passengers pay for Xpress boarding. Unlike...