Introduction
The low cost carriers (LCCs) have been enjoying very fast growth in the past several years. Airlines like Ryan Air, Southwest, Lion Air and Asia have become dominant forces in their respective regions. Opportunities for growth and expansion abound especially in the light of changing consumer preferences and habits stemming from the global financial crisis. To take advantage of emerging opportunities, Air Asia needs to go public and raise funds for expansion. While its business model has so far been very successful, certain aspects of it operations and business model need to be modified for it to be able to compete in the global market. The company needs to find ways to protect its existing position, sustain growth and adjust to the changing realities of a truly global airline.
General Environment
Air Asia (and Air Asia X) has been one of the fastest growing airlines in the past 10 years, overtaking the likes of Singapore Airlines and Cathay Pacific. It now ranks second in terms of orders by airline in Asia Pacific and in terms of the size of its fleet in 2013 among LCCs. In 2007, Air Asia had several subsidiary companies: Malaysia Air Asia, Thai Air Asia, Indonesia Air Asia, Vietnam Air Asia and Air Asia X. It declared as slogan—“Now Everyone Can Fly!” Indeed. Its fares practically allowed people to do that. The company routinely offered flights priced as low as $3.00. The airlines has won twice, in 2008 and in 2009, Skytrax’s “World’s Best Low Cost Airline”Award.
The entire aviation industry in Southeast Asia has actually been growing very fast in spite of the crisis that started in 2008. Annual air passenger traffic at airports has been growing rapidly, in particular in Malaysia, Thailand and Myanmar, even if some airlines may have been suffering from some setbacks. Much of the growth could be attributed to the growth of the LCCs.
The same may be said for the entire global airline industry. LCCs have become the dominant industry players led by RyanAir in Europe and Southwest Airlines in the US.
Factors for Success
Air Asia displayed many factors for success, but three seem to be most prominent: (1) serendipity and the economic crisis; (2) understanding of the Asian market and of low-income consumers in general; and, (3) thorough understanding of airline operations vis-à-vis consumer needs and costs.
Air Asia found a golden opportunity in the global financial crisis when it went full blast in operations and expansion in 2008. Businesses and consumers were looking for ways to cut costs—including air travel costs; Air Asia offered a great way to fulfill those customers’ needs. In addition, it provided a way for Air Asia to easily promote and position itself clearly in the market. Consumers were actually for such low cost opportunities.
In addition, Tony Fernandez has a profound understanding of consumer needs, habits and opportunities. Traditional airlines all over the world were modeled to operate in a developed environment and upscale market. The realities in Asia are far from that. World Bank data shows that most countries in Southeast Asia are still classified as lower-middle income economies with per capita income of $1,046 to $4,125. The cost of living in these countries is much lower than those in developed countries and so the middle class in these countries can afford a lifestyle similar to their counterparts in developed economies. However, airline fares are way beyond within their means. Even in Europe, the success of Ryan Air, indicate that a huge segment of the market has been vastly neglected by major airlines. Airlines business models worldwide are based on business operations in the developed world. If operations costs and fare rates could be brought down to a level that the Asia middle class could afford, a great opportunity could open up in Asia, a huge market that may have been taken for granted by most airlines for a long time.
Ryan Air provided a model for budget airlines. Most consumers would be willing to give up many amenities and services for a lower air fares. In eliminating all the frills that consumers will have to pay for, the cost of total operations correspondingly also goes down. With regard to operations—especially flight aircraft maintenance, all safety measures had to be addressed. Manpower costs need have to remain competitive to retain quality talent. However, frills in many aspects of business operations—like fancy offices, officer amenities and high-end headquarters will have to be eliminated. Expensive gate fees at airports were also skipped so passengers will have to disembark outside the terminal.
Air Asia did not eliminate all of the frills and amenities. Passengers can purchase them—like food, pillows, and souvenir items—on demand in flight or in pre-booking. Selling these amenities allowed Air Asia to provide good service and at the same time improve income.
Changes for Air Asia X
Air Asia X had to make adjustments to meet demands of the new market. The long haul market is different from the short haul. Higher end and more frequent flyer customers did not mind no frills flights in the short haul. However, they would prefer certain services in the long haul that would provide them a more restive commute. Certain business class amenities may need to be added like more flat-bed seats. The lack of these services has led to some losses in customers in the long haul market.
In terms of image and branding, customers did not distinguish between Air Asia and X. For customers, they are one and the same brands. Some added improvements and amenities in X can be overlooked as it is mistaken as one and the same. Again, this could lead to some loss of customers.
Air Asia also needs to raise more capital and expand quickly. Singapore Airlines finally entered the LCC market. Its entry finally signals that LCC are recognized as a major threat in the industry. The traditional airlines have vast resources and existing scale economies. Although they seem to be only testing waters now, they could emerge as very stiff competitors. Although Air Asia has some first mover advantages in the field, large airlines could easily learn.
Leveraging Air Asia’s Resources
Aside from tapping into Air Asia’s existing facilities, manpower and other physical resources, an important resource that X should tap into is Air Asia’s database of customers and other information resource. This database could be mine to determine which destinations these existing customers would have gone or plan to go to using other airlines. This could provide leads into which places that existing and similar customers go to and what amenities they expect from an airline in these flights. The passenger could also be used for various market research surveys.
While airlines are excellent in booking and ticketing online services, Air Asia may try to develop software for deeper market analysis of customer behavior. Amazon’s way of market segmentation—by customer usage patterns—may be applied into the business.
Changing Existing Mentality
Darren Wright may need to do a Jeff Bezos to give the company a shake down and rid itself of a start-up mentality. He may need to conduct more frequent meetings down the line at the staff’s work locations. Any indications of veering away from the Air Asia’s austere culture will need to be eliminated. Like Bezos, he may have to require to submit written reports and orally discuss this in meetings. He may need to eliminate the use of projectors and similar devices. The rationale is that such reports forces the people to study and understand what is going with the company more thoroughly.
Air Asia has been doing well for a long time and much too well for a start-up company. The bad habits of being a start-up has thus prevailed because the company continued to do well. One of the unacceptable things—especially for an organization planning an IPO—is to miss its income and growth targets. Unfortunately, the company is doing well in spite of missed targets. This needs to be pounded on the staff.
Some kind of early reporting or warning system should be developed and implemented quickly. The company should be able to arrest any downward deviation from the target as early as possible.
Conclusion
Air Asia X’s potential in the long haul business and in the long term is very positive. There will always be a market for LCCs, especially in Asia. Even if the Asian countries develop, income per capita may still not be able to match those in developed countries. China alone can offer a great market opportunity that could last for a very long time. Many still will opt to use LCCs over traditional airlines.
However, Air Asia X should be able to meet certain customer requirements in the long haul services. It should continually conduct market research studies to understand changing customer needs.
The airline should also prepare for the entry of big competitors. It should remain agile especially in responding competitor threats. One area it needs to strengthen is its market intelligence data base. Being one of the biggest budget airlines, it should have already built a huge data base on customers that choose budget airlines. It should develop this further and make it a stronger advantage.
Air Asia can truly help make everyone, not only those in Asia but also those in the rest of the world, fly.
Works Cited
Air Asia. (2016). Investor Relations. Retrieved Jun 12, 2016, from Air Asia: http://www.airasia.com/my/en/about-us/investor-relations.page
CAPA Centre for Aviation. (2014). Analyst Viewpoint: Asian Airline Industry Overview. CAPA Centre for Aviation. Singapore: CAPA Centre for Aviation. Retrieved Jun 12, 2016, from https://www.uatp.com/files/uploads/PDF/AD2014PPT_CAPA.pdf
Forey, B., Schotter, A., Doh, J., & Lawton, T. (2011). Air Asia: Can the Low-Cost Model Go Long Haul? University of Western Ontario, Robert Ivey School of Business. London, Ontario: Ivey.
MacLeod, L. (2006, May 16). Amazon Delivers Lesson on Powers of Market Segmentation. Portland Business Journal. Retrieved Jun 3, 2016, from http://www.bizjournals.com/portland/stories/2006/03/20/smallb4.html
Stone, B. (2013). The Everything Store: Jeff Bezos and the Age of Amazon. New York, NY, USA: Little, Brown and Company.
World Bank. (2016). Country and Lending Groups. (International Bank for Reconstruction and Development) Retrieved Jun 7, 2015, from The World Bank: http://data.worldbank.org/about/country-and-lending-groups
