Air Asia India - Business Report

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AirAsia India


Team Airasia has its tagline which says “Everyone can fly”. They are working harder towards their tagline and Mr. Mittu Chandilya, the new CEO of AirAsia India is making sure that he and his team would go for that extra mile to fulfill the dream of starting the airlines in India.

Mr. Tony Fernandes who is the co-owner of AirAsia is reportedly excited as well as informed about the daily developments of the airlines to be started in India. But is the road really clear as he sees. The competition that Airasia faces from Indigo and Air India is huge. Though it has the tag of low cost airline, would the Indians really prefer Airasia over the other players? , is a big question in front of the big heads involved in the launch. The current economy of India though is not encouraging, but definitely the road for bright future is ahead. Airasia has a history of being successful in most of the Asian countries where the operations are ongoing. Will the Indian market welcomes it in a warm way?

Company History:

AirAsia is a low cost carrier headquartered in Kuala Lumpur, Malaysia. It was established in 1994, and started its operations in 1996. The firm was heavily indebted and was bought by Tony Fernandes in 2001, for a price of 1 ringgit. Fernandes turned around the company, and since 2002; the company has been making profit.

In 2004, AirAsia entered the Thai market. By the end of 2006, the company has unveiled a five-year plan of expanding in Asian market. The plan was to enhance and strengthen the route network, along with expanding further into Vietnam, Southern China, Indonesia and China.

External environments favoring the entry into South East Asia:

The South East Asian market had huge opportunities for the aviation sector. AirAsia banked on these opportunities, and it had a great impact on the success of the company

  1. Demography: South-East Asia has a large demography with a good GDP.
  2. Financial crisis: the outbreak of financial crisis in 1997 shaped the demand for a low cost carrier in the Asian markets.
  3. Liberalization: South Asian countries had liberalized their aviation markets.
  4. Geography: the land and sea transport was much developed in the South Asian countries. Hence, low cost airline had huge potential.
  5. Increase in number of business travelers: The economies of South Asian countries was growing at very fast pace. On certain routes which connected capital and commercial cities, the number of fliers was increasing. Further, there was a growth in urbanization, thus, an increase in demand.

The New Business Model since 2001 (Malaysian markets):

In 2001, apart from the regular charter services, the company was operating a pair of leased 737-300s, which were flying between Kuala Lumpur and four other destinations. AirAsia targeted people who had never flown and wanted less expensive and quicker transport. AirAsia commenced its line with the tag line “Now Everyone Can Fly”.[1] The basic strategy adopted by the company was to monitor it costs on a daily basis. The idea was based on the philosophy of former CEO of General Electric, Jack Welch. He said that in old economy price was determined by adding costs and desired profits; but in new economy the profits are determined by deducting costs from the price.

The airline believed to have following strengths in its strategy:

  1. No frills service and single class

The airline offered only a single class i.e. economy class, and there were no frills provided. Thus, the costs of inflight entertainment, airport lounges etc. we’re not charged. They had no loyalty program.

The pricing was done based on expected demand and time of booking. The fare structure was divided into twelve tiers, depending on the time of booking. In addition, the purchased seats were non-refundable, and charge was applied for rescheduling.

  1. High utilization and efficiency

AirAsia customized the Boeing 737-300. It added 16 additional seats to increase the seat number to 148. It started its operations early around 7 A.M. where normal airlines took around 45-120 minutes for turnaround; it took only 25 minutes to do so. It planned its routes and schedule in such a manner that each carrier was used for 12-13 hours (in comparison to 8 hours industry average). The staff at AirAsia was required to do multitasking, which again helped in reducing the costs.[2]

  1. Low fixed costs

Through negotiation, AirAsia obtained aircrafts at a lower lease rates. The maintenance contracts costs, airport fees, and insurance fees were also less in comparison to what competitors were paying.

A large part of the employees pay was based on his or her performance. Pilots were given incentives to keep flight times and operation times at minimum. Cabin Crew was rewarded for few leaves and punctuality. Engineers were given allowances as recognition of their technical qualifications. AirAsia also improved its efficiency by investing in necessary technology. It took the subscription on yearly basis, rather than going for the purchase of the complete software.

  1. Low distribution costs

The company did not issue tickets, the seats were sold via internet, mobile phones SMS, sales office etc., this helped in keeping administrative costs in check. Seats sold via internet were discounted in comparison to the seats sold via other mediums. The company did not get away completely with the travel agents. It established a network of its registered and preferred agents known as ‘Sky Agents’. This facility was a good option for those customers who did not have registered accounts with AirAsia. These agents maintained a pre-paid account, which the customers could use. AirAsia did not give any commission to these agents, however, the agents were free to charge the customers for the service provided.

  1. Single type of aircraft

AirAsia used only 737-300s for its operations. They even customized it by increasing number of seats by 16. Single type of aircraft reduced the maintenance costs, as spare parts inventory required was lesser.

  1. Leveraging on regional media coverage

The company’s success attracted a lot of media attention, and thus, media itself did additional branding for the company.

  1. Minimum fuel costs

It used the hedge the fuel purchases. The operating flights carried the minimum possible fuel, and purchases were made from the locations where the fuel was cheapest. The pilots were trained to use the fuel effectively, as they flew the carrier to optimum height in minimum time, and then follow straight line path to the destination. The weight of the aircraft was also kept to minimum by eliminating unnecessary loads.

  1. Low cost terminals

The Kuala Lumpur International airport developed in 2005 did not have trappings for any other terminals and were designed to cater to masses. This helped in faster movement of the passengers.

  1. Use of technology

IT was heavily used for decision making purpose. Analytics and trends were used in determining the prices for the tickets.

Entering Thai Market:

AirAsia entered the Thai market in 2003 by forming an alliance with Shin Corporation, which was sole controller of Thailand’s satellite operator. Tony Fernandes has 49% stake in the deal, along with managerial controls; (50% stake is with Asia Aviation and 1% with AirAsia CEO Tassapon Bijleveld)[3] . The strategy was labeled as “Branchizing”. In this system although the main ownership lies with the company with whom the alliance is formed, it pays management fees to AirAsia for using its brand name and systems. This mode of expansion helped AirAsia as it was easier to establish the carrier with local ownership. In addition, it enabled the company to secure air travel freedom from the government. This strategy of branchizing has proved very successful for the company. (See Exhibit 1)

The main strategy in Thai markets was to:

  1. Dominance on markets: The airline aimed at number one positions on both domestic routes and Indo China routes
  2. Optimum route network: the airline planned the most comprehensive routes and increased the frequencies on this route.
  3. Expansion in the Thai market: the company leveraged on the Thailand tourist industry. Further, Thailand had open skies arrangement, which helped in adding more destinations in the program.[4]

Since 2011, Thai AirAsia has funded its operations independently. The debt up till that time was funded by the revenues from Malaysia. The move has enabled each AirAsia to generate its own cash flow. [5]

Entering India:

AirAsia India is a joint venture between AirAsia BHD (with 49% stake), Tata Sons (with 30% stake) and Telstra trade place (with 21% stake). The company targets “first time travelers”, as told by Mr. S. Ramadorai, the chairperson of AirAsia India.[6]

The airline would operate point-to-point flights majorly from the Tier-II cities of India. The large focus is on southern markets and then later move up gradually.[7] The company has decided to make hubs only in smaller cities as operating costs are lower in these cities. This step would also enable lower fuel tax.

The low cost of the carrier would attract first time fliers and the entire families to fly.

The point-to-point flight would have relatively smaller haul as well, i.e. around 60-90 minutes.

In its statement of intent, it has mentioned that airline is planning to setup line stations in 10 cities across western and southern India[8]. This would imply that the airline is planning to build probable route network in these cities as well. Line stations are locations where pre departures, transit checks and weekly inspections are done.

The launch is expected in the month of March or April 2014. The launch would be introduced with dramatically low prices which would attract the customers.[9]

To check the rivals, Fernandes has ensured that the company is well capitalized to survive a price war. He has built his business model in such a way that he is able to offer the lowest prices in the market. Any competitor, who would challenge the prices of AirAsia, would hurt itself more.[10]

A standard measure of cost of flying a seat full or empty for JetLite is 7.5 cents, SpiceJet 6.4cents and for AirAsia it is 4.4 cents.[11] With high frequency and high turnaround of flights, the company has been able to be cost effective. In India, the company would be operating as a lean organization with 20 employees per aircraft.

Promotions:

AirAsia India has launched a “free seats” campaign, in which the passengers would be able to travel from 5 May’ 14 to 31 Jan’ 15 at a zero base rate fare. The price of the tickets would start at Rs. 500 including taxes.[12]

Hiring:

The airline is hiring pilots from smaller airlines as, delayed operations has led to lose its pilots to competitors. This was majorly due to lower salary offers. The airlines would now have to train the new pilots to fly their airbuses.[13]

General Strategy observed:

The company aimed at a growth rate of 25%-30% per annum.[14] In order to achieve this, a lot of diversification was brought in. few examples are:

  1. Setting up of in house catering department- snack attack
  2. Go Holidays- strategic business unit
  3. Buying of hotels

As a rule, company starts with minimum of four frequencies to any destination and then increases the frequencies with demand. Exhibit 2 shows the operating statistics of the company from 2001 to 2005.

EXHIBITS:

Exhibit 1:[15]

""

Exhibit 216

""

16

The International Journal of Human Resource Management, Vol. 21, No. 2, February 2010, 197–213


[1] http://ajc.sagepub.com/content/2/2/231

[2] http://ajc.sagepub.com/content/3/1/25

[3] The International Journal of Human Resource Management, Vol. 21, No. 2, February 2010, 197-213

[4] http://www.amchamvietnam.com/394/u-s-and-thailand-sign-open-skies-aviation-agreement-09-sep-05/

[5] Asian Aviation Magazine

[6] http://www.thehindubusinessline.com/industry-and-economy/logistics/airasia-india-set-to-begin-with-5-aircraft-in-first-quarter/article5508954.ece

[7] http://www.business-standard.com/article/companies/airasia-s-india-launch-may-see-further-delay-114011500013_1.html

[8] http://www.business-standard.com/article/companies/airasia-s-india-launch-may-see-further-delay-114011500013_1.html

[9] http://articles.economictimes.indiatimes.com/2014-01-23/news/46514380_1_telstra-tradeplace-airasia-india-airasia-chief

[10] http://forbesindia.com/article/big-bet/will-airasia-disrupt-indian-aviation/34859/1

[11] http://forbesindia.com/article/big-bet/will-airasia-disrupt-indian-aviation/34859/2

[12] http://businesstoday.intoday.in/story/airasia-announces-free-seats-campaign-in-india/1/200862.html

[13] http://articles.economictimes.indiatimes.com/2014-01-14/news/46185448_1_airasia-india-pilots-budget-carrier

[14] The International Journal of Human Resource Management, Vol. 21, No. 2, February 2010, 197–213

[15] The International Journal of Human Resource Management, Vol. 21, No. 2, February 2010, 197–213

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