Analysing the AirAisa organisation of Malaysia

AirAsia Berhad is perhaps one of Malaysia’s most instantly recognizable companies. Launched in 2001 by its founder and CEO Datuk Sri Tony Fernandes, it has the distinction of being Malaysia’s first low cost carrier. With its famous tagline, “Now Everybody Can Fly”, it democratized air travel and made it accessible for the masses. The company has moved from strength to strength despite some setbacks and it is currently one of Malaysia’s most famous brand names. At the moment, AirAsia has a fleet of 72 aircrafts and flies to over 61 domestic and international destinations with 108 routes. The company operates over 400 flights per day from hubs located in Malaysia, Indonesia and Thailand.

AirAsia’s very existence was an audacious move. It was launched at a time when the global airline industry was reeling from the devastation caused by the September 11 terrorist attacks in America. In addition, its founder had no prior experience in the airline industry, being a music executive at Warner Music (Malaysia). The company had all the makings of a failure and yet, it surprised everybody by turning out as a success story.

AirAsia introduced a concept that was novel at the time, but is now copied by rivals. Previously, the term “no frills” airline was an alien concept in Asia. Air travel was only available to the rich who were accustomed to travel in relative luxury. The idea of having free seating arrangements, no in-flight meals or movies ran contrary to most people’s impression of what air travel should be. Yet, Tony Fernandes believed that air travel should be for everybody and to do so, it must be made affordable. As a result, he created an airline that was ahead of its time.

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AirAsia’s success can be attributed to many factors, but in this writer’s opinion, it is largely the product of a successful business strategy. This report examines the current strategic focus of AirAsia which has contributed to organizational success with the use of selected strategic model. It also provides recommendations of strategic moves for the immediate future.

1.2 Industry Background

In order to understand better the strategy used by AirAsia and why it succeeds, it is worth briefly discussing the global airline industry from the time AirAsia was founded until the present.

In general, the airline industry is in what is dubbed Stage 4 maturity. This is particularly the case for non-low cost carriers in which the market is saturated with many players, profit margins are squeezed to the limit and there is virtually no room for growth. Indeed the trend for the last decade has show a decline in Revenue Passenger Kilometer growth, which is used as a measure of the airline industry. In this industry, the bargaining power of customers is very high since they have so many options to choose from. Therefore, airlines are forced to drastically reduce prices and absorb costs just to stay in business.

Another major problem faced by the industry is an ever increasing fuel cost. The global aviation industry was rattled in 2008 when fuel prices threatened to rise to US$200 per barrel and we are witnessing a similar scenario at present. Fuel is a major expense for all airlines and rising costs threaten a company’s bottom line.

Owing to these trends, it can be surmised that it is unprofitable to run a traditional airline. Indeed, the number of bankruptcies in the airline industry is proof of how competitive and difficult it is to succeed in the industry. Even national carriers like Malaysian Airlines (MAS) suffer from periods of flagging revenues, in spite of strong government backing.

Therefore, the only way to succeed in the industry is to either pursue a niche or a low cost strategy. Low cost carriers are the most successful players in the industry because they keep costs low. Also, at the time of AirAsia’s founding, research showed that just 6% of Malaysians traveled by plane, owing to prohibitively high air fares. Therefore, if an airline could provide low fares, it could be profitable if there is high sales volume. This represented a tremendous opportunity for AirAsia.

Similarly, AirAsia took advantage of market deregulations. After MAS incurred losses of up to RM300 million per annum from serving unprofitable Malaysian routes, the Malaysian government decided to free it from this social obligation and allow others to fly these routes. Therefore, AirAsia would be filling a void.

When we examine these factors, we can see why the establishment of AirAsia was not based on a whim but a calculated business move. Tony Fernandes realized that there was a need for low cost air travel among price sensitive customers and that there were many flight routes that were now for the taking. This led to the formulation of the company’s business strategy.

2.0 CURRENT STRATEGY

2.1 General Overview

AirAsia’s business strategy flows from its corporate vision which is stated as continuing to be the lowest cost short haul airline in every market it serves, delivering strong organic growth by offering the lowest airfares at a profit.

Consequently, the company formulated four pillars of its corporate strategy. They are safety, low fares, service and simplicity. The company places a premium on safety by following International Aviation Safety Standards and practices, maintaining simplicity and transparency in its operations and making sure that its employees and passengers are safe. When passengers feel safe, they can overcome their aversion to flying, especially in smaller airplanes like Boeing 737s.

AirAsia’s next pillar is low fares. The company can provide low fares because it applies the leanest cost structure. More of this will be explained in a later section. The company’s third pillar is its services. Customers are referred to as guests, as a sign of AirAsia’s customer oriented approach. Guest satisfaction is of the paramount importance. Employees are advised to show friendliness and expose guests to AirAsia style hospitality as guest satisfaction is critical to the long term success of the company.

The final pillar in AirAsia’s strategy is simplicity. This means the company not only simplifies operations to the bare essentials, but makes things simpler for guests. When successful, guests find air travel to be an enjoyable, hassle free experience

2.2 SWOT Analysis

2.2.1 Strengths

Very Strong Management Team

AirAsia is renowned for the strength of its management team. Executives are drawn from diverse backgrounds and consist of retired senior government officials and captains of industry. This strong team, under Tony Fernandes’ visionary leadership, is the main driving force for the company’s strategy. In addition, the company cultivates strong links with international governments. This approach has enabled it to penetrate new markets such as in Thailand and Indonesia. Also, AirAsia cultivates good relationships with other companies in the airline industry to form strategic alliances and other mutually beneficial associations. For example, its close relationship with Airbus has enabled the company to get a sizeable discount for purchasing aircrafts.

Excellent Strategic Formula and Execution

From the outset, Tony Fernandes made a careful study of successful low cost carriers like Ryanair and Southwest and sought to emulate their best features. However, instead of being a mere clone, AirAsia is an amalgamation of the strengths of these companies and also formulates its own approach. Once the corporate strategy is formulated, executives tirelessly execute it throughout the organization.

Strong Brand

AirAsia is currently one of Malaysia’s most recognizable brand names. From the start, Tony Fernandes emphasized the importance of good branding. Initially when the company was new and had limited funds, the company used simple but effective approaches like caps to highlight its brand. Later, it embarked on sponsorship of sporting events such as Formula One and Manchester United. These endeavors have increased the brand profile on an international level. Similarly, the company has advertising in traditional and non-traditional media as well as using promotions, offers and discounts to attract more customers to the brand.

Excellent Workforce

Like all successful companies, part of AirAsia’s success is attributable to its employees. The company currently employs over 6, 000 employees in 9 countries. Interestingly, AirAsia does not pay its employees top notch salaries compared to its peers. Yet, the company prides itself on providing a stimulating and flexible work environment. To this extent, the company has adopted a slogan “One people, One culture, One AirAsia, One family”. The company stresses the importance of work life balance and strives to create a happy workplace. Employees respond by showing great commitment and passion to their job.

Low Cost Leader

Tony Fernandes is an accountant by training and he has drawn on his knowledge and experience in accountancy to establish a low cost structure at AirAsia. This low cost “mentality” is a driving force behind the company as everybody is committed to cutting costs and eliminating waste and inefficiencies throughout the entire value chain.

Successful Utilization of Information Technology

AirAsia uses IT extensively in its marketing activities. Customers can purchase tickets online through the company’s website and it has a strong presence in social media networks such as Facebook and Twitter. Also, the company uses IT in its cost management structure as part of its low cost leader strategy.

2.2.2 Weaknesses

Lack of Maintenance Facilities

When AirAsia began, it was a small airline with few planes to maintain. However, now that it has over 70 plans and plans to order another 100 within the next five years, the company will face serious difficulties in maintenance if it continues as it began. While the current system may work with few planes, it is unfeasible in the long term as if maintenance work is outsourced, costs may increase instead of decrease and this goes against the grain of having a low cost structure.

Problems in Customer Service

Despite its success, AirAsia still receives a lot of complaints from customers. These range from complaints about flight delays to lack of refunds, lost baggage and being charged for services not requested. The company needs to seriously address these grievances especially in the face of increasing competition from rival low cost carriers.

Over-reliance on Tony Fernandes

Like Virgin Airways and Richard Branson, AirAsia will inextricably be linked to Tony Fernandes. It is no exaggeration to say that Tony Fernandes is AirAsia and vice versa. This poses the problem called “founder’s trap” in which an organization is only successful because of its founder. Once the founder retires or dies, the company goes under. Fernandes has indicated that he is grooming successors but who they are is unknown, as he is still effectively running the business. It is uncertain whether the company will be as successful post- Tony Fernandes.

2.2.3 Opportunities

ASEAN Open Skies

ASEAN countries have signed and agreement that have abolished the Visa requirements for travel within ASEAN countries, beginning in December 2008. This open skies approach has the potential of greatly facilitating air travel within the region.

A booming middle class in Asia

In 2010, Asia’s middle class population reached 700 million. This is a tremendous untapped market for air travel as the middle class are more adventurous and fond of traveling. Low cost carriers can take advantage of the new found wealth of this middle class to promote flights across the region.

2.2.4 Threats

High operating costs

Oil prices in particular are subject to wide fluctuations. The current crisis in the Middle East has cause oil prices to rise once again and the company is sometimes powerless to overcome this problem as hedging may be ineffective. The rising costs of raw materials for planes and even food prices all threaten to escalate the company’s operating expenses.

Terrorist attacks

Each time there is a major terrorist attack, people get frightened and stay at home. While it occurred a decade ago, many are still wary of air travel after terrorists used airplanes to launch the September 11 attacks in America.

Disease

Similarly, global pandemics like bird flu force people to stay at home and cut back on discretionary travel. Indeed, airlines are powerless to prevent people from traveling during such outbreaks.

Natural disasters

Natural disasters can cause flight disruptions. For instance, the volcano eruption in Iceland in 2010 cause many flights to be cancelled and cost the airline industry an estimated 100 billion euros. The recent earthquake and nuclear reactor disaster in Japan has caused flights to be cancelled to the affected areas in Japan and such instances can seriously affect a firm’s bottom line.

2.3 EFE Analysis

UST – Key External Factors

Weight

Rating

Weighted Score

Opportunities

ASEAN Open Skies

0.25

4

1.00

Booming Asia middle class

0.25

3

0.75

Threats

High operating costs

0.20

4

0.80

Terrorist attacks

0.10

2

0.20

Disease

0.10

2

0.20

Natural disaster

0.10

1

0.10

Total

1

3.05

IFE Analysis

Key Internal Factors

Weight

Rating

Weighted Score

Strengths

Very strong management team

0.10

3

0.30

Excellent strategic formula and execution

0.15

4

0.60

Strong brand

0.15

4

0.60

Excellent workforce

0.15

3

0.45

Low cost leader

0.15

4

0.60

Successful utilization of information technology

0.05

3

0.15

Weaknesses

Lack of maintenance facilities

0.10

3

0.30

Problems in customer service

0.05

4

0.20

Over-reliance on Tony Fernandes

0.10

2

0.20

1

3.4

2.5 Strategic Model

Porter (1990) identified four generic strategies that organizations commonly use. They are differentiation, cost leadership, cost focus and differential focus. AirAsia uses the first approach, which is cost leadership. This is a firm’s generic strategy that is based on appeal to the industry wide market using a competitive advantage based on low cost.

A business that wants to achieve low cost advantage must obtain a complete cost advantage relative to its competitors. AirAsia does this by providing no-frills flights to a broad target market using standardization of service to obtain the most benefits from economies of scale and experience. Other tactics that are use are an aggressive construction of efficient scale facilities. The company also vigorously pursues cost reduction that it learnt from experience. Overhead is controlled and flexed based on volume. This means that when customer volume increase, overhead costs per customer reduces and the company is able to offer lower fares. At the same time, the company avoids “marginal costs” customers, whose costs increase as volume increases. AirAsia also minimizes costs in all activities throughout its value chain.

2.6 Low Cost Strategy

2.6.1 Yield Management System (YMS)

AirAsia uses IT in a number of major ways including yield management system, computer reservation system and enterprise resource planning system. Yield management system (YMS) is a revenue management system that understands and analyzes the behaviour of customers and responds in a manner that maximizes revenue. This is useful because the company can use the information to evaluate operating costs, allocate capacity and optimize prices. For example, if a customer books a seat early, he or she will enjoy discounts not provided when booked later. Secondly, the company can adjust prices for routes or destinations that are more in demand compared with other destinations.

2.6.2 Customer Reservation System (CRS)

AirAsia also implements IT in the form of customer reservation system (CRS). This is an integrated web-based reservation and inventory system. The system encompasses the internet, call centers and airport departure control. This is a direct sales system that can remove unnecessary intermediaries like the travel agent and the sales commissions that are normally paid to them. This system is also customer friendly since customers can order online from the comforts of their own home instead of having to wait in line for hours to buy a ticket. This enhances customer satisfaction.

2.6.3 Enterprise Resource Planning System (ERP)

This is a comprehensive software approach to support decisions that are in tandem with the planning and control functions of the business. The system integrates comprehensive software to make the entire system more efficient and effective. Consequently, processing time for financial statements generation is dramatically reduced, data access and retrieval is sped up and there is greater process integrity. Transactions can be obtained and monitored on a daily basis and this helps strategic decision making, apart from lowering process costs.

2.6.4 Sales Volume

To succeed at a low cost strategy and achieve economies of scale, a company needs to have a large sales volume. AirAsia is very successful in this area. Firstly, its tickets are generally cheap and affordable so this enables it to achieve a high sales volume. Secondly, it employs a series of tactics to create volume during off peak seasons or low flight days. For instance, the company is famous for its free or extremely low ticket price promotions. This is done to draw more passengers to the company. However, from an accounting perspective, the company is not actually providing free tickets. By utilizing its YMS, CRS and ERP, the company knows precisely what percentage of a flight will be unutilized so it provides “free” tickets to fill up these vacant seats. Even when tickets are sold at a nominal rate, it still has the effect of lowering fixed costs per unit. However, the public is unaware of this and buzz is created for the company which pushes sales up further.

3.0 STRATEGIC MOVES FOR THE IMMEDIATE FUTURE

Overall, AirAsia has good strategic management. However, what is good can always be made better. The following are some recommended strategic moves for the immediate future that will help the company achieve greater success.

3.1 Maximize the Impact of Information Technology.

AirAsia already uses IT extensive in its operations. The internet has created new opportunities for it to achieve low cost leadership by allowing it to manage costs and achieve better efficiencies. Transaction costs are greatly lowered through IT. For instance, in AirAsia, online ticket sales eliminate the sales for sales calls and minimize the expenses associated with sales force. At the same time, paperless transactions reduce procurement and other paper costs. Transaction costs can also be lowered by removing intermediaries that add costs. Collaborative design efforts that employer internet technology can link designers, suppliers and customers, thus reducing costs and speeding the process of new ideas generation.

AirAsia can go one step further by introducing more applications and e-business. One way this can be done is through the extended value chain by using IT to link the company’s own value chain with the value chains of suppliers and customers. As a result, value is added not just through AirAsia’s own value creating activities, but those for its suppliers and customers as well. This is also part of the virtuous business cycle that will be described in a later section.

However, AirAsia should be aware of the pitfalls of using this strategy. The main treat is imitation by competitors, especially when business is done online. This is because many of the advantages related to connecting directly on a real time basis to the customers, such as software can be easily duplicated by others without any real threat of copyright infringement. Another pitfall is that companies become so enchanted with using the internet to cut costs that they lose sight of the big picture. When one business activity, such as cutting costs is given a priority over the others, then the whole organization will suffer from lopsided and myopic strategic planning.

Reconfiguring the Value Chain

The value chain is defined as a sequence of activities that should contribute more to the ultimate value of the product than to its cost (Atkinson et al, 2007). When value is added in the form of the value chain, it can be utilized to develop AirAsia’s sustainable competitive advantage. All organizations consist of activities that are linked together to develop the value of the business, and together these activities form the organization’s value chain. Value chain analysis is a useful tool for companies to identify the key activities within the organization which form the value chain and have the potential of achieving a significant and lasting competitive advantage for AirAsia.

Short term cost advantages can be obtained by reconfiguring the value chain. This can be done at AirAsia by making structural changes in the value chain such making improvements in its capacity utilization, reducing processing time, and enhancing vertical integration. As a result, costs are lowered and value is added. All these result in lower costs, lower ticket prices and greater customer satisfaction.

3.3 Diversification

There are two approaches here – related and unrelated diversification. In related diversification, AirAsia can enter into agreements whereby main resources and or capabilities are shared or leveraged. Synergies exist when relationships are formed between business units. There are two major sources of cost savings and improved revenue. The first is economies of scope that can be derived when core competencies are leveraged and when activities are shared. The second is market power, which is obtained when there is a larger pool of resources, vertical integration or the power of negotiation.

Alternatively, AirAsia can undergo unrelated diversification. It can enter product markets that are dissimilar to its present business. For example, it could run hotels or start a chain of retail outlets. Nevertheless, there is not much opportunity for a firm to leverage core competencies or share business units between business units. Hence, synergies are achieved as a result of vertical relationships between the parent office and business units. Otherwise, AirAsia can opt for unrelated diversification through corporate restructuring or it can use portfolio analysis techniques.

AirAsia could diversify its product markets through mergers and acquisitions, joint ventures or strategic alliances. It could merge or acquire rivals like Tiger Airways but there could be expensive premiums to pay or there may be problems integrating the acquisition. Otherwise, it could form strategic alliances with other low cost carriers or even traditional carriers if it proves to be advantageous. This can be used as a risk reduction technique since the effort entails the combining and sharing of resources. Still, they may also give AirAsia less control since corporate governance has to be shared between two separate companies.

3.4 Rethinking the Business Model

This might be viewed as a long term business strategy, which is partly true. However, rethinking the business model also involves making strategic moves for the immediate future which is why it is recommended.

When strategic moves are contemplated by a company, they normally involve some variation of Porter’s generic strategies or other approaches. One approach that is increasingly popular now is rethinking the business model. According to a recent survey, nearly 70% of American companies are trying to create innovative business models whereas 98% are in the midst of modifying existing models.

Still a majority of these companies view the creation and evaluation of business models as an isolated activity, devoid from how they will impact the business and how they will connect with the business models of rivals. Consequently, companies fail to achieve their strategic goals. In addition, many companies are oblivious that virtuous business cycles can be created through business models, in the manner of high technology companies like Microsoft, Google and Facebook. Competitive advantage is reinforced when these cycles are aligned with company goals.

When the right choices are made, a company can strengthen the virtuous cycle of its business, transform rivals into complementary enterprises or even weaken rivals. This strategy is using business models to gain competitive advantage.

A good business model has three characteristics. One, it is aligned with company goals. When designing a business model, the choices made should reflect the outcomes that help a company achieve its targets. Two, it must be self reinforcing. Each of the choices made through a business model must reflect each other. There must be internal consistency. If AirAsia were to decide to provide a level of comfort comparable to that offered by a full fare carrier such as Malaysian Airlines, the change would require reducing the number of seats on each plane and offering food and drinks. These choices would undermine the company’s low cost structure and wreck its profits. If there is weak reinforcement, the business model should be tweaked by discarding certain choices and adopting new ones.

Three, a good business model is robust. It must be able to maintain its effectiveness over a long period by shaking off four main threats. They are imitation (whether competitors can replicate the company’s business model), holdup (the ability of customers, suppliers or other players to capture the value that is created by taking advantage of their bargaining power), slack (complacency within the company) and substitution (whether alternative products or services can lower the perceived value customers have about the company’s products or services). Even though the period of effectiveness is shorter nowadays than it once was, robustness is still a critical parameter.

To evaluate how redesigning its business model can help AirAsia, let us consider another famous low-cost carrier which served as inspiration for AirAsia – Ryanair. In the early 1990s, Ryanair switched from a traditional business model to that of a low cost carrier. This was accomplished by eliminating all frills, ruthlessly cutting costs and lowering prices to unprecedented levels. The company provides low fares, its planes fly out of secondary airports only, caters to one class of economy passenger, charges for all extra services, does not serve food or drinks, makes only short haul flights and uses a standardized fleet of small sized Boeing 737s. Its workforce is non-unionized and employees get many types of incentives. As a result of these choices, the company enjoys high volume, low fixed and variable costs, an aggressive management team and a reputation for reasonable fares. Consequently, the business model permits Ryanair to provide good service at low cost without compromising on customers’ willingness to pay for the company’s services.

Ryanair’s business model has created three virtuous cycles that maximize the company’s profits through increasingly low costs and prices. These cycles are shown in Figure 1 below:

RYANAIR’S KEY VIRTUOUS CYCLES

CYCLE 1

Low fares High Volumes Greater Bargaining power with suppliers Lower Fixed Cost Even Lower Fares

CYCLE 2

Low fares High Volumes High Aircraft Utilization Lower Fixed Cost per Passenger Even Lower Fares

CYCLE 3

Low fares Expectations of low quality service No meals offered Low Variable Costs Even Lower Fares

AirAsia is currently in the first cycle so it has potential to move on to the second and third cycles.

The common outcome of these cycles is reduced costs and this permits the company to lower prices which in turn increase sales volume and finally contribute to greater profitability. The company’s competitive advantage grows as the virtuous cycles created by the business model. All of these cycles result in reduced costs. These in turn allow lower prices that propel revenue and ultimately lead to increased profits. Its competitive advantage keeps growing as long as the virtuous cycles generated by its business model are in momentum.

However, things do not go on forever. There is always a limit for virtuous cycles in which they trigger counterbalancing cycles that slow them down or whenever the clash with other business models. If these cycles are interrupted, the synergies move in the opposite direction and then reduce competitive advantage. For instance, if Ryanair’s workers decided to unionize and ask for more wages, then the company’s operating cost could increase and it can no longer provide lower fares. As a result, sales volume would be lost and the utilization of airplanes would decline. Consequently, this would have a negative multiplier effect on profitability.

3.5 Reinventing the Business

All businesses, even the most successful ones, will inevitably stop growing. There are many reasons why this could happen. A company could stray from its core business activity or stay with it for too long. It may have difficulty in realizing its strategy, or customer tastes could change, or the company could obsessively cut costs just for the sake of cutting costs. As a result, they need to reinvent themselves from time to time. The ability to move from a maturity stage of one type of business to the growth stage of another type of business is what separates the long term success stories and the ‘one hit’ failures.

All businesses undergo what can be described as a financial S curve, which is similar to the product life cycle curve. This occurs when a company grows slowly at first, then experiences a period of rapid growth before facing a period of decline. Most companies focus far too much on one S curve without realizing that they should actually create multiple S curves in order to stay competitive. This means that a company should move from one financial S curve which is its maturity or decline stage to another which is in the growth stage. Such an approach is most prevalent in the mobile phone industry in which companies periodically reinvent their product offering. On the other hand, successful companies like Google seemed struck in a trap in which it cannot move from its existing business model and strategy, though it is not for want of trying.

To move from one S curve to another, AirAsia needs to be aware of some ‘hidden’ curves. The first is the hidden competition curve. T