Airasia: the World's Lowest Cost Airline

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AirAsia is a very successful low cost carrier. In a very short time, it became a market leader in the Asia region. The company successfully adopted cost leadership through operational efficiency and effectiveness. Using the slogan “Now Everyone Can Fly,” AirAsia positioned itself successfully in the niche LCC market. AirAsia was the creation of former music publisher Tony Fernandes. After watching a television show in a pub about easyJet successfully competing against British Airways, Fernandes decided to start his own low cost airline. He then met with former Ryanair operations director, Conor McCarthy and the two developed a plan on starting up a LCC to serve South-East Asia. The plan started with a meeting with the prime minister of Malaysia. Prime Minister Mahathir Mohammad suggested that Fernandes and McCarthy acquire AirAsia, a struggling government owned airline. With their own money, and support of investors, they purchased AirAsia for 1 Malaysian ringgit and assume debts of 40 million ringgits; approximately 11 million US dollars.

Tony Fernandes always had his sights on cheap long haul flights, but he knew AirAsia had to become successful on short hauls before his dream would be possible. He targeted a historically underserved segment to target with his low fares. His low fares would cover a geographical area less than three and a half hours flying time between hubs in an area populated by more than 500 million people. A large emphasis was placed on marketing and brand development. AirAsia had to remove the images of a rundown government owed airline and replace them with images of a safe, reliable airline that cares for its customers. They had to show everyone that AirAsia is a low cost airline that places importance on customer service while providing an enjoyable flight experience. AirAsia invested in a large advertising campaign. They paid for television, print, and internet advertisements. Press coverage was maximized. AirAsia made image improvements through co-branding and sponsorship relationships. They sponsored the AT&T Williams Formula 1 race team by painting a plane to resemble the race car. Other planes were painted with portraits of soccer players and the Time magazine logo.

AirAsia has the following self described strategy:

Safety first – AirAsia partners with renowned maintenance crews and complies with world airline regulations. The company does not own a maintenance shop. Everything with maintenance and repair is contracted out to keep costs down.

High aircraft utilization – having the fastest turnaround time in the region, they assure lower costs and higher productivity. AirAsia has the newest and most efficient fleet flying in the Asia region. The planes have a single seating class and hold more passengers than competitors. This allows for more revenue per flight.

Low fare, no frills – keeps ticket prices cheap. Customers have the ability to customize for an extra fee. AirAsia focuses on price sensitive customers. Keeping lower prices is better for both the passenger and the airline.

Streamline operations – simple is good. Using all the same planes saves on training pilots, contracting mechanics, and replacing parts.

Lean distribution system – book flights online or on the phone. No travel agents. Passengers do not even use tickets. They simply show photo identification and are allowed to board the plane. This saves booking/ticketing costs.

Point to point network – A to B, or A to C service. No B to C service. Standardized short routes ensure quick turnaround times and high load volume. Using secondary airports saves on runway costs.

Using this philosophy, AirAsia outperformed the government owned Malaysian Airline System. They had a higher seat factor, lower cost per seat, lower operating expense, lower staff cost, but still a higher debt due to taking on debt in the beginning.

Porter 5 Forces Analysis
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