AirAsia Berhad (AirAsia) | Analysis

Introduction

AirAsia Berhad (AirAsia) is one of the leading low cost airlines in South East Asia which has expanded rapidly since 2001. The company is based in Kuala Lumpur, Malaysia and has successfully positioned itself in customer’s mind through the simple slogan “Now Everyone Can Fly” (AirAsia, 2009). The company is currently valued at approximately RM2.7 billion and has a total of 60 aircrafts that fly to over 50 domestic and international destinations with over 400 domestic and international flights daily (Euromonitor International, 2009). The operation for the short and long haul are handled by AirAsia and its sister company, AirAsia X Sdn Bhd (AirAsia X).

AirAsia aims to establish itself as a leading low cost carrier in market by valuing its customers through cost advantages created by operational effectiveness and efficiency. More customers are able to fly taking into consideration the low fare charges as AirAsia capture segments of customers that previously could not afford the airlines’ fare.

Whether the strategy exploits the company’s key resources

Each organisation is unique in terms of it resources and capabilities and the key to success merely depend on its ability to find or create a competence that is distinctive (Teece et.al.,1997). The Resource Based View (RBV) combines two perspectives, the internal analysis of phenomena within an organisation and an external analysis of the industry and its competitive environment (Collis and Montgomery, 1995). It goes beyond the Strengths, Weaknesses, Opportunities and Threats (SWOT) analysis by integrating internal and external perspectives. The ability of an organisations resources to present competitive advantages could not be determine without taking into considerations the boarder competitive concept. Barney (1995) indicated that organisation’s resources and capabilities must be evaluated in terms of value, rarity, imitability or non-substitutability (VRINE model).

The value of the resources and capabilities interacts with the market sources and will differ based on time and industry. The three fundamental market forces; scarcity, demand and appropriability determines the value of a resources and capabilities (Collis and Montgomery, 1995). In order to answer the question of value, organisation could identify whether the resources and capabilities are able to meet market demand. As for AirAsia, the organisation relies on its human resources and management capabilities wherein these two components have satisfied the value requirement as it has been able to meet the demand for the Low Cost Carrier (LCC) market. The resources and capabilities own by AirAsia are homogenous in the market however aspect such as work culture and innovative routes differs it from the competitors. In applying the RBV concept, AirAsia has a competitive parity based on its valuable and not rare resources and capabilities. Immitability is something generic in the airline industry as aircraft, fast turnarounds time and others are easily duplicate. One of AirAsia’s imitable characteristics is path dependency wherein a characteristics of resources is developed and/or accumulated through a unique series of time. AirAsia’s work culture of openness between employees as well as the leadership from its Chief Executive Officer is something have been built up over a period of time which is difficult to duplicate. Moreover, the high capital requirement for market entry is another factor that leads to difficulty to imitate the resources and capabilities. It is undeniable that the said resources and capability be imitated as competitors will identify the same however it will take time and meanwhile, AirAsia gain the competitive advantages.

Having a control and exploiting the resources and capabilities provides competitive advantages to the organizations (Carpenter and Sanders, 2009). AirAsia has exploited it resources and capabilities which is shown in the financial performance. AirAsia has gradually increased its performance throughout the years. AirAsia’s s net profit for the 3rd quarter of 2009 totalled RM130 million ($38.4 million) which is sustained by rising passenger numbers and income from add-on services. The profit achieved was a turnaround from a RM466 million ($137 million) net loss in the same period last year (www.airasia.com).

The fit of the strategy to current industry conditions

The competitive environment consists of many factors that are particularly relevant to an organisation’s strategy. Analysing the external environment particularly the industry is a starting point for firms to develop a strategy. Porter’s five forces include the overall structure rather than focusing to any one element. However the forces are not stagnant which tendency to change may occur.

AirAsia operates within the airline industry and forces that are driven in the industry would identify the strength and weaknesses of the organisation.

There is potential market in the Asia for LCC due to the rapid economic and disposable incomes growth. Infrastructure such as high speed trains and highways has yet to meet the high standard level and therefore customers tend to choose the air as mode of transportation. Hence, threats of substitutes are low as the geographical structure of Asia has made air travel the viable, efficient and convenient mode of transportation. Looking into this scenario, AirAsia entered the airline industry concentrating on the LCC and noted that at the initial stage there were less rivalry but as the industry grows, the rivalry among established firms become higher partly due to price issues. AirAsia’s main competitors are Firefly, Tiger Airways and Jetstar Asia. Knowing the said changes, AirAsia applied the adaptation process (Hanan & Freeman, 1984) by expanding its operation to long haul services to various destinations. Moreover, AirAsia realise the price is destructive and try to avoid direct price competition and try to create a friendly competition environment.

As there is positive growth in the airline industry, full service airline carriers have refocused its operation related to costs and yields as it is seen as a requirement to maintain profitability (Graham and Vowles, 2006). There is possibility of new entrance by other LCC which creates further competition in the industry. For example, Firefly set up by Malaysia Airline System Berhad is a part of LCC industry in Malaysia that has adapted AirAsia’s low cost concept. However, it would not be a threat to AirAsia as Hanan & Freeman (1984) highlighted it is difficult to imitate as tacit amount of knowledge is required on the targeted firm. The high capital requirement and government barriers air service agreement can act as barriers to entry.

Due to significant growth within the industry, demand for additional aircraft has increased and suppliers will be in a powerful position. It was reported that Asia accounts for 40% of new aircraft orders for Boeing and Airbus and seat capacity on LCC worldwide has more than doubled in the past four years (Shameem, 2006). Due to few players, Boeing and Airbus and lack of competition in the market, the bargaining power of suppliers are low. Consequently there is not much competition in terms of pricing occurring between the two companies so an airline carrier will have to accept an offer from one of the suppliers. The bargaining power for buyers is low as there is no room to bargain for cheaper tickets as AirAsia provides the lowest price compared to other carriers.

The biggest threats for AirAsia are the rivalry and risk of entry with the existing and potential competitors. LCC business is viable and there is healthy profitability provided AirAsia continuously improves itself and is flexible in the challenging market.

The sustainability of the differentiators

Porter (1996) indicated that to outperform rivals, an organisation need to deliver greater value to customers or/and build comparative value at a lower cost. The airline industry is at the growing stage and therefore stiff competition from existing and new LCC is expected in the future. In order to sustain its competitive advantage, AirAsia needs to leverage its competency in creating cost advantages. At present, AirAsia differentiates by providing substantially low fares with no frills concept by offering innovative routes.

Murray (1988) indicated that there is uncertainty for sustainable differentiation to be achieved through product innovation and suggested that the area that could be concentrated for the said differentiation is quality and service. While, Porter (1996) highlighted that positioning are successful based on activity system and simple consistency between each activity aligning with the organisation strategy. AirAsia builds it brand name by providing a good quality service at a low price. During inception, AirAsia focused on internal destinations and have further entered the international destinations. AirAsia X is differentiated by its long haul LCC as customers would not need to look at different carriers to reach different destinations at a lowest price. It is based on the same no frills service model wherein the price is 80% lower than its competitor together with additional services that requires customer to pay additional payment such as food, entertainment and others. AirAsia also seek to create excitement amongst their customers with the range of innovative and personalized service such as self check-in.

Due to AirAsia’s success in the industry, competition might one to adapt the company’s business model. However, AirAsia had some advantages over its competitors by the advantage of experience and its brand enjoyed good recognition. AirAsia gain from the first mover advantage which allows it to establish itself before competition perceive further in this low cost segment, apart from competition that already exists across segments (low cost vs full service carriers). AirAsia has the strength to lay down the rules and framework in the industry for business and operational suitability.

Through AirAsia philosophy of ‘Now Everyone Can Fly’, AirAsia has embarked a revolution in air travel with more and more people around the region choosing AirAsia as their preferred choice of transport. As Air Asia continuously strives to promote air travel, AirAsia also seek to create excitement amongst their guests with they range of innovative and personalized service. Moreover customer loyalty is build by the differentiation which could act as a defense against rivalry (Eng, 1994).

Whether the elements of the strategy are consistent and aligned with the strategic position

Strategy works as a driver in a firm in achieving goals and objectives (Carpenter and Sanders, 2009). AirAsia’s five strategy elements are as follows:

Porter (1996) presented three generic strategies that an organisation could use to overcome the five forces and achieve competitive advantage. However, there were studies resulting that adapting one or more forms of competitive advantage will outperform better (Murray, 1988). In the LCC segment, cost is the competitive priority and it determines market position. In lieu of this, Airasia has applied the focused cost leadership strategy wherein it targets on specific markets; price sensitive customers as well as lowering its overall costs (Flouris and Walker, 2005).

With the positive growth in the LCC, it will create opportunity to others to enter the market. Competition between carriers using the same business model will inevitably be intense. One of the major pitfall against attempting to differentiate is by trying to combine low cost and differentiation strategy by starting to add frills in its business model. However, by applying the said strategy, carriers have lost their source of competitive advantage by narrowing the strategic cost gap. Every frill or service adds to cost and reduced the strategic cost gap, thus curbing the flexibility to offer innovative price deals.

Murray (1988) disagrees that cost structure is vital in relation to the output performance compared to the price sensitivity. Factors such as economy of scale and quality of management teams within the organization could be the benchmark for cost leadership. Under the cost leadership strategy, level of operation efficiency is vital as it assist in achieving cost advantages than the rivals by searching continuous areas for cost reduction along its value chain that leads to economies of scale (Eng, 1993). AirAsia increases its efficiency through increased route network and its operating activities by adapting cost optimising techniques such as quick turnaround times and maximizing of flight utilisation for its aircrafts (Shari, 2003). As the result from efficient operation, it minimizes the cost that is then passed on to customers so that affordable air travel can become a reality. In 2005, the cost per available seat mile (ASK) for Airasia was only 0.3 compared to the next lowest value from 0.6 being Firefly (www.airasia.com).

AirAsia took advantage from the existence of e-commerce which is cheaper and easier technique in providing information about products and services. Furthermore, it gives a better and more convenient way of promoting the company’s product and services. The cost related to web is very low compared to other methods like advertisement on television. AirAsia has taken advantage from this method to reduce the cost of operations that leads to operating on a low rate. Malaysia government has supported AirAsia through the opening of the LCC terminal in Kuala Lumpur International Airport which enhanced its competitive edge by reducing costs and better logistic planning (Euromonitor International, 2009).

Competitors tend to know how big the market is and how good the opportunity is in Asia. Therefore, there is threat by competitors which could imitate AirAsia’s low cost base. Most of the competitors have the same concept of no frills and low price strategy and will continuously try to reduce its costs than AirAsia in order to gain sustainability in the market. The challenge for AirAsia is to reduce cost effectively which it is difficult for the competitors to copy.

Possible issues associated with implementation

Strategy formulation and implementation are interdependent with the objectives being a coherent set of strategy elements and implement levers (Carpenter and Sanders, 2009). In order to succeed in the LCC segment, AirAsia will need to maintain its low cost elements in their business design as it is critical to the long term success. The main reason is because the more gap between arises between the competiting airlines, the more flexibility will be available to offer lower price and gain market share. An extended route system will most certainly be a key differentiator and to sustain its competitive advantages, resources and capabilities need to be analysed further. Around the world, it has been observed that low cost airlines pursuing a generic business design have emerged as the most successful.

Conclusion

AA actual main strength was based in its innovative ways to keep the cost low which was hard to imitate. AirAsia has indicated that synergies between the internal and external factors could develop a competitive advantage. This has allowed AirAsia to positioned and be the market leader in the LCC.

The brand name brand equity is a major strength that AirAsia must successfully capitalize.

Bibliography

• Barney J.B. Looking Inside for Competitive Advantage (1995) Academy of Management Executive. 9(4) pp. 49-61
• Carpenter, M.A., Sanders W.G. Strategic Management: A Dynamic Perspective Concepts and Cases (2009) Pearson International Edition.
• Collis, D. J.,Montgomery, C. A. Competing on Resources (1995) Harvard Business Review. pp. 118-128
• Graham B., Vowles T.M. Carriers within Carriers: A Strategic Response to Low-Cost Airline Competition(2006) Transport Reviews, pp. 105-126
• Porter M.E., What is Strategy (1996) Harvard Business School, pp. 61-78
• Shameen A. AirAsia Takes Flights on Low Cost Carriers (September 26, 2006), Business Week
• Teece, D.J., Pisano G., Shuen, Amy. Dyanmic Capabilities and Strategic Management (1997) Strategic Management Journal. 18(7), pp. 509-533