2:58 PM
MAD
This is a Group Work. Read and understand the attached HBS on Air Asia. Discuss among your group members and answer the following questions. Post your answers in your Group's Blog.
QUESTIONS:-
1) Briefly describe the trends in the global airline industry?
2) What is the business level strategy adopted by Air Asia?
3) How does Air Asia achieve cost leadership through differentiation?
4) Identify the ways Air Asia can sustain its competitiveness through the business level strategy that is adopted?
ANSWERS:-
1) Briefly describe the trends in the global airline industry.
Increasing travel demand.
Airline-supplier consolidation.
Environmentally-responsible aviation.
More incentive trips.
Union challenges.
Business level strategy adopted by Air Asia are with cost leadership, a set of actions are integrated to produce goods/services with features that are acceptable to customers at the lowest cost, relative to that of competitors. Although AirAsia’s business strategy is centered on cost leadership, it targets specific markets (i.e. price sensitive customers needing short-haul fights), selling its product/services below the average industry prices to gain market share. Hence, it can be categorized into focused cost leadership. AirAsia modified the low-cost airline model and adopted the following strategic actions to lower their costs relatively to competitors, while maintaining competitive levels of differentiation:
1. Single Class, No Frills Service
As with most low-cost airlines, AirAsia operated a single class-service, without frills and at substantially lower prices: passengers were not allocated seats, did not receive meals, entertainment, amenities (i.e. pillows or blanks), loyalty program points, or access to airport lounges. AirAsia’s aircraft were designed to minimize wear and tear, cleaning time and cost. This reduced cleaning and maintenance expenses, loading and unloading times and costs, and allowed quicker turnarounds between flights, improving process efficiencies (differentiation) and having lower costs (cost advantage).
2. High Aircraft Utilization and Efficient Operations
Compared with other airlines, AirAsia’s usage of its aircraft and staff was more efficient. Such (high) efficiency and utilization meant that the overhead and fixed costs associated with an aircraft were lower on a per flight basis. For example, seating configurations to AirAsia’s Boeing 737-300 aircraft were maximized, having 16 more seats than the standard configuration adopted by full-service competitors.
In addition, AirAsia’s aircraft (i.e. point-to-point services kept flights to no more than 4 hours, minimizing turnaround time), and employees (i.e. encouraged to perform multiple roles), were used more effectively and intensively than competitors. For example, its point-to-point services (in 2004) enabled AirAsia to operate its aircraft an average of approximately 13 hours/day. It was 2.5 hours more efficient then full-services airlines, which only managed to use their aircraft for an average 10.5 hours/day. Furthermore, the average turnaround time for AirAsia’s aircraft was lesser (e.g. 25 minutes), as compared to full-service airlines (e.g. 45-120 minutes).
3. Single Aircraft Type
Operating a single aircraft type enabled AirAsia to have substantial cost savings: maintenance was simplified (i.e. made cheaper), spare parts inventory was minimized, infrastructure and equipment needs were reduced, staff and training needs were lowered (i.e. easy for pilot dispatch), and better purchase terms could be negotiated.
For instance, its large purchase of A-320s would make AirAsia on of the relatively few low cost airlines operating this aircraft. With fuel accounting for almost 50% of the total operating costs for the airline, the A-320s would provide an important cost saving of lower fuel usage by about 12%; increasing the airline’s profitability.
4. Low Fixed Costs
AirAsia achieved low fixed costs through successful negotiations for low lease rates for its aircraft, low rates for its long-term maintenance contracts, and low airport fees. This enabled AirAsia to reduce its overheads and investments in equipments substantially in the absence of fringe services.
As a result of its successful negotiations, AirAsia’s contractual lease charges per aircraft decreased by more than 60% from 2001 to 2004. Aircraft maintenance contract costs were also reported to be substantially lower than other airlines, giving AirAsia a competitive advantage, which was further compounded by its young fleet. Furthermore, the airline’s high safety and maintenance standards allowed AirAsia to procure rates that were favorable on its insurance policies.
5. Low Distribution Costs
By utilizing information technology (i.e. being the first airline in Southeast Asia to utilize e-ticketing, bypassing traditional travel agents), AirAsia achieved low distribution costs by eliminating the need for large and expensive booking/reservation systems, and agents’ commissions. This saved the airline the cost of issuing physical ticket (i.e. estimated at US$10 per ticket).
6. Minimizing Personnel Expenses
As a high portion of costs was the salaries and benefits for its employees, AirAsia implemented flexible work rules, streamlining administrative functions, which allowed employees to perform multiple roles within a simple and flat organizational structure. Having employees perform multiple roles enabled AirAsia to deploy fewer employees per aircraft (i.e. ratio of 106 per aircraft versus 110 employees or more for competitors), saving on overhead costs and maximizing employees’ productivity, as process efficiencies are improved.
AirAsia’s employees were not unionized, hence its rumination policy focused on maximizing efficiency and productivity, whilst keeping staff costs at levels consistent with low-cost carrier industry standards. Although salaries offered to employees were below that of rivals, all employees were offered a wide range of incentives (i.e. productivity and performance-based bonuses, share offers, and stock options).
In addition, rather than an hourly pay scale for its pilots, AirAsia adopted a sector pay policy: pilots were provided incentives to enhance flight operation efficacies by keeping flight and operating times to a minimum, and to cover as many flight sectors as possible within a day. The absence of in-flight services made it possible for the airline to reduce the number of cabin crew per light, saving on employee cost.
7. Maximizing Media Coverage
Being a leader among budget airlines in Southeast Asia, AirAsia received regular coverage from media outlets. AirAsia managed to promote brand awareness without incurring high sales and marketing expenses: in all of his media appearances, Frenandes always appeared wearing a red AirAsia baseball cap and his statements reinforcing AirAsia’s positioning to offer low prices; generating media attention for the airline.
However, AirAsia also invested heavily where required: AirAsia’s major sponsorship for Manchester United, involved global sponsorship and advertising, and promoted the brand beyond the region.
8. Use of Secondary Airports
AirAsia, as with most low-cast airlines, usually operated out of secondary airports which allowed AirAsia to charge lower fares, as operation costs were lower: landing, parking, and ground handling fees were lower, with more slots for landings and takeoffs.
9. Low-Cost Philosophy
To reinforce its low-cost structure, AirAsia instilled a low-cost culture, emphasizing on cost avoidance. For example, emphasis was placed on the elimination of avoidable expanses such as tag costing (despite reach tag costing less than US$0.05), turning off cabin lights at appropriate times, and not overheating in-flight ovens. Such cost saving measures enabled AirAsia to achieve costs per average seat kilometer of US$0.0213 (the lowest for any airline in the world), with its margins of 38% (before taxes, interests, depreciation, and amortization) being the highest in the world in 2004.
(Exhibit 5 and Exhibit 6)
Therefore, in conclusion, by eliminating the provision of costly in-flight services, flying a standard fleet, selling tickets to passengers, and minimizing labor, facilities and overhead costs, AirAsia has managed to achieve a successful low-cost structure, which enables it to charge lower prices to achieve high passenger loads, market share, and profitability.
3) How does Air Asia achieve cost leadership through differentiation?
Disediakan oleh Wan Nor Zaimah Wan Salleh
2) What is the business level strategy adopted by Air Asia?
Business level strategy adopted by Air Asia are with cost leadership, a set of actions are integrated to produce goods/services with features that are acceptable to customers at the lowest cost, relative to that of competitors. Although AirAsia’s business strategy is centered on cost leadership, it targets specific markets (i.e. price sensitive customers needing short-haul fights), selling its product/services below the average industry prices to gain market share. Hence, it can be categorized into focused cost leadership. AirAsia modified the low-cost airline model and adopted the following strategic actions to lower their costs relatively to competitors, while maintaining competitive levels of differentiation:
1. Single Class, No Frills Service
As with most low-cost airlines, AirAsia operated a single class-service, without frills and at substantially lower prices: passengers were not allocated seats, did not receive meals, entertainment, amenities (i.e. pillows or blanks), loyalty program points, or access to airport lounges. AirAsia’s aircraft were designed to minimize wear and tear, cleaning time and cost. This reduced cleaning and maintenance expenses, loading and unloading times and costs, and allowed quicker turnarounds between flights, improving process efficiencies (differentiation) and having lower costs (cost advantage).
2. High Aircraft Utilization and Efficient Operations
Compared with other airlines, AirAsia’s usage of its aircraft and staff was more efficient. Such (high) efficiency and utilization meant that the overhead and fixed costs associated with an aircraft were lower on a per flight basis. For example, seating configurations to AirAsia’s Boeing 737-300 aircraft were maximized, having 16 more seats than the standard configuration adopted by full-service competitors.
In addition, AirAsia’s aircraft (i.e. point-to-point services kept flights to no more than 4 hours, minimizing turnaround time), and employees (i.e. encouraged to perform multiple roles), were used more effectively and intensively than competitors. For example, its point-to-point services (in 2004) enabled AirAsia to operate its aircraft an average of approximately 13 hours/day. It was 2.5 hours more efficient then full-services airlines, which only managed to use their aircraft for an average 10.5 hours/day. Furthermore, the average turnaround time for AirAsia’s aircraft was lesser (e.g. 25 minutes), as compared to full-service airlines (e.g. 45-120 minutes).
3. Single Aircraft Type
Operating a single aircraft type enabled AirAsia to have substantial cost savings: maintenance was simplified (i.e. made cheaper), spare parts inventory was minimized, infrastructure and equipment needs were reduced, staff and training needs were lowered (i.e. easy for pilot dispatch), and better purchase terms could be negotiated.
For instance, its large purchase of A-320s would make AirAsia on of the relatively few low cost airlines operating this aircraft. With fuel accounting for almost 50% of the total operating costs for the airline, the A-320s would provide an important cost saving of lower fuel usage by about 12%; increasing the airline’s profitability.
4. Low Fixed Costs
AirAsia achieved low fixed costs through successful negotiations for low lease rates for its aircraft, low rates for its long-term maintenance contracts, and low airport fees. This enabled AirAsia to reduce its overheads and investments in equipments substantially in the absence of fringe services.
As a result of its successful negotiations, AirAsia’s contractual lease charges per aircraft decreased by more than 60% from 2001 to 2004. Aircraft maintenance contract costs were also reported to be substantially lower than other airlines, giving AirAsia a competitive advantage, which was further compounded by its young fleet. Furthermore, the airline’s high safety and maintenance standards allowed AirAsia to procure rates that were favorable on its insurance policies.
5. Low Distribution Costs
By utilizing information technology (i.e. being the first airline in Southeast Asia to utilize e-ticketing, bypassing traditional travel agents), AirAsia achieved low distribution costs by eliminating the need for large and expensive booking/reservation systems, and agents’ commissions. This saved the airline the cost of issuing physical ticket (i.e. estimated at US$10 per ticket).
6. Minimizing Personnel Expenses
As a high portion of costs was the salaries and benefits for its employees, AirAsia implemented flexible work rules, streamlining administrative functions, which allowed employees to perform multiple roles within a simple and flat organizational structure. Having employees perform multiple roles enabled AirAsia to deploy fewer employees per aircraft (i.e. ratio of 106 per aircraft versus 110 employees or more for competitors), saving on overhead costs and maximizing employees’ productivity, as process efficiencies are improved.
AirAsia’s employees were not unionized, hence its rumination policy focused on maximizing efficiency and productivity, whilst keeping staff costs at levels consistent with low-cost carrier industry standards. Although salaries offered to employees were below that of rivals, all employees were offered a wide range of incentives (i.e. productivity and performance-based bonuses, share offers, and stock options).
In addition, rather than an hourly pay scale for its pilots, AirAsia adopted a sector pay policy: pilots were provided incentives to enhance flight operation efficacies by keeping flight and operating times to a minimum, and to cover as many flight sectors as possible within a day. The absence of in-flight services made it possible for the airline to reduce the number of cabin crew per light, saving on employee cost.
7. Maximizing Media Coverage
Being a leader among budget airlines in Southeast Asia, AirAsia received regular coverage from media outlets. AirAsia managed to promote brand awareness without incurring high sales and marketing expenses: in all of his media appearances, Frenandes always appeared wearing a red AirAsia baseball cap and his statements reinforcing AirAsia’s positioning to offer low prices; generating media attention for the airline.
However, AirAsia also invested heavily where required: AirAsia’s major sponsorship for Manchester United, involved global sponsorship and advertising, and promoted the brand beyond the region.
8. Use of Secondary Airports
AirAsia, as with most low-cast airlines, usually operated out of secondary airports which allowed AirAsia to charge lower fares, as operation costs were lower: landing, parking, and ground handling fees were lower, with more slots for landings and takeoffs.
9. Low-Cost Philosophy
To reinforce its low-cost structure, AirAsia instilled a low-cost culture, emphasizing on cost avoidance. For example, emphasis was placed on the elimination of avoidable expanses such as tag costing (despite reach tag costing less than US$0.05), turning off cabin lights at appropriate times, and not overheating in-flight ovens. Such cost saving measures enabled AirAsia to achieve costs per average seat kilometer of US$0.0213 (the lowest for any airline in the world), with its margins of 38% (before taxes, interests, depreciation, and amortization) being the highest in the world in 2004.
(Exhibit 5 and Exhibit 6)
Therefore, in conclusion, by eliminating the provision of costly in-flight services, flying a standard fleet, selling tickets to passengers, and minimizing labor, facilities and overhead costs, AirAsia has managed to achieve a successful low-cost structure, which enables it to charge lower prices to achieve high passenger loads, market share, and profitability.
Disediakan oleh Azemuddin B Husman
3) How does Air Asia achieve cost leadership through differentiation?
Asia achieve their cost leadership through differentiation when they managed the company by using a good restructured business model and a good strategy in their operation.
By implementing good strategy air Asia become the best in the industry, they playing with this strategy (safety,low fare,services and simplicity) to be the top at this region.
Air Asia adopted the low-fare, no-frills concept to their customer. Under the tagline everyone can fly the airfares offered 40% to 60% lower than those of its rivals. By implementing this concept air Asia attract their customer to use their services.
Air asia also introduced innovative services as region’s first airline to introduce fully ticketless travel. Through this Air Asia able to cut their operation because they no need to open air outlet for their customer . Besides that their customer can purchase their ticket through telephone booking center, sales offices,travel agents, and partnerships with local banks and post office
AirAsia started to provide regional flights to neighbouring countries. To make this possible, a joint-venture subsidiary company, Thai Air Asia, was formed in affiliation with Thailand’s Shin Corporation. The joint venture enabled Air Asia to gain easier and cheaper access to other South-East Asian countries and the lucrative Chinese market.
Moreover, new and more fuel-efficient Airbus A320-200 aircraft had been ordered by AirAsia to replace its fleet of Boeing 737-300s. So by this they able to cut fuel consumption by nearly 20% and doubled the number of landings.
Air Asia have a good vision to be the lowest cost airline in every market they served. In the field they playing with the ambition of being a low-cost but high-quality and innovative airline
Disediakan oleh Ahmad Azzri Ahmad Zainen
4) Identify the ways Air Asia can sustain its competitiveness through the business level strategy that is adopted?
Aligned with its mission statement, AirAsia’s business strategy is centred on cost leadership. However, its business strategy targets specific markets; price sensitive customers (including first-time fliers) needing short-haul flights. In Porter’s generic strategies, AirAsia’s business strategy can be categorised into focused cost leadership; quadrant 3A in figure 1.
AirAsia builds and sustains its competitive advantage by providing services at a price that is simply lower than competitors’ price. Operation effectiveness and outstanding efficiency are two main characteristics of low cost businesses including AirAsia. The central objective is to achieve bigger cost advantages than the rivals by continuously searching areas for cost reduction along its value chain. By further analysing AirAsia’s value chain, one can actually determine how AirAsia creates cost advantages along its value chain. Appendix 2 summarises the sources of cost advantages contributable to the low cost business model for each activity in AirAsia’s value chain. These cost advantages constitute AirAsia’s order winner in competing with its rivals as they enable AirAsia to provide the lowest possible price to the price sensitive customers. In LCC industry, cost is the competitive priority and it determines market position.
Disediakan oleh Mahathir Abdul Razak
