Posted at 11.20.2018
AirAsia Berhad could very well be 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 priced carrier. With its famous tagline, "Now Everybody Can Fly", it democratized flights and made it accessible for the people. The business has shifted from strength to durability despite some setbacks and it is presently one of Malaysia's most well-known brand names. At this time, AirAsia has a fleet of 72 aircrafts and flies to over 61 home and international spots with 108 routes. The company functions over 400 plane tickets each day from hubs positioned in Malaysia, Indonesia and Thailand.
AirAsia's very life was an audacious move. It had been launched at a time when the global air travel industry was reeling from the devastation triggered by the September 11 terrorist problems in America. In addition, its founder acquired no previous experience in the flight industry, being a music professional at Warner Music (Malaysia). The company possessed all the makings of failing and yet, it surprised everybody by turning out as successful story.
AirAsia introduced a concept that was book at the time, but is currently copied by competitors. Previously, the word "no frills" air travel was an alien theory in Asia. Air travel was only open to the rich who have been familiar with travel in relative luxury. The thought of having free seating preparations, no in-flight foods or videos ran unlike most people's impression of what air travel should be. Yet, Tony Fernandes presumed that flights should be for everyone and to do this, it must be made affordable. Because of this, he created an flight that was ahead of its time.
AirAsia's success can be attributed to many factors, however in this writer's opinion, it is basically the merchandise of an effective business strategy. This article examines the current strategic concentration of AirAsia which includes contributed to organizational success by using selected tactical model. In addition, it provides advice of strategic movements for the immediate future.
In order to comprehend better the strategy utilized by AirAsia and just why it succeeds, it is worth briefly talking about the global flight industry from enough time AirAsia was founded before present.
In general, the air travel industry is within what's dubbed Level 4 maturity. That is particularly the case for non-low cost service providers where the market is saturated numerous players, profit margins are squeezed to the limit and there is practically no room for expansion. Indeed the craze for the last decade has show a decline in Revenue Traveler Kilometer expansion, which is used as a measure of the flight industry. Within this industry, the bargaining electric power of customers is very high since they have so many choices to choose from. Therefore, airlines are pressured to dramatically reduce prices and absorb costs just to stay static in business.
Another major problem faced by the industry can be an ever increasing petrol cost. The global aviation industry was rattled in 2008 when fuel prices threatened to go up to US$200 per barrel and we are witnessing an identical scenario at the moment. Fuel is a major expense for those airlines and increasing costs threaten a company's bottom line.
Owing to these movements, it can be surmised that it's unprofitable to run a traditional airline. Indeed, the number of bankruptcies in the air travel industry is proof of how competitive and difficult it is to succeed in the industry. Even nationwide carriers like Malaysian Airlines (MAS) have problems with times of flagging revenues, regardless of strong government support.
Therefore, the only way to succeed in the industry is to either pursue a distinct segment or an inexpensive strategy. Low cost carriers will be the most successful players in the industry because they keep costs low. Also, at the time of AirAsia's founding, research confirmed that just 6% of Malaysians journeyed by plane, due to prohibitively high air fares. Therefore, if an air travel could provide low fares, maybe it's profitable when there is high sales size. This represented a significant opportunity for AirAsia.
Similarly, AirAsia needed good thing about market deregulations. After MAS incurred loss as high as RM300 million per annum from serving unprofitable Malaysian routes, the Malaysian administration decided to free it from this social obligation and allow others to journey these routes. Therefore, AirAsia would be filling a void.
When we consider these factors, we can see why the establishment of AirAsia was not predicated on a whim but a calculated business move. Tony Fernandes came to the realization that there is a need for low cost flights among price hypersensitive customers and this there were many airfare routes which were now for the taking. This resulted in the formulation of the business's business strategy.
AirAsia's business strategy moves from its commercial eye-sight which is mentioned as carrying on to be the cheapest cost short haul airline in every market it provides, delivering strong organic and natural progress by offering the lowest airfares at a earnings.
Consequently, the business produced four pillars of its commercial strategy. They are security, low fares, service and convenience. The business places reduced on security by pursuing International Aviation Safeness Standards and routines, maintaining straightforwardness and transparency in its procedures and making sure that its employees and travellers are safe. When individuals feel safe, they can overcome their aversion to traveling, especially in smaller airplanes like Boeing 737s.
AirAsia's next pillar is low fares. The company can provide low fares since it applies the leanest cost structure. More of this will be discussed in a later section. The business's third pillar is its services. Customers are known as guests, as a sign of AirAsia's customer oriented approach. Guest satisfaction is of the paramount importance. Employees should show friendliness and expose friends to AirAsia style hospitality as guest satisfaction is crucial to the permanent success of the business.
The last pillar in AirAsia's strategy is convenience. This means the business not only simplifies functions to the bare necessities, but makes things simpler for friends. When successful, friends find flights to be an enjoyable, straight forward experience
AirAsia is renowned for the strength of its management team. Professionals are drawn from diverse backgrounds and consist of retired senior federal representatives and captains of industry. This strong team, under Tony Fernandes' visionary management, is the key driving push for the company's strategy. In addition, the company cultivates strong links with international governments. This approach has allowed it to penetrate new market segments such as in Thailand and Indonesia. Also, AirAsia cultivates good connections with others in the airline industry to form tactical alliances and other mutually beneficial organizations. For instance, its close marriage with Airbus has empowered the company to obtain a sizeable discount for purchasing aircrafts.
From the outset, Tony Fernandes made a careful review of successful low cost carriers like Ryanair and Southwest and desired to emulate their best features. However, instead of being a mere clone, AirAsia can be an amalgamation of the advantages of the companies and also formulates its approach. Once the corporate strategy is designed, executives tirelessly implement it throughout the business.
AirAsia happens to be one of Malaysia's most recognizable brand names. From the start, Tony Fernandes emphasized the importance of good branding. Primarily when the business was new and got limited funds, the business used simple but effective techniques like caps to focus on its brand. Later, it embarked on sponsorship of sporting events such as Solution One and Manchester United. These endeavors have increased the brand account on an international level. Similarly, the company has advertising in traditional and non-traditional advertising as well as using campaigns, offers and discounts to draw in more customers to the brand.
Like all successful companies, part of AirAsia's success is due to its employees. The company currently uses over 6, 000 employees in 9 countries. Interestingly, AirAsia does not pay its employees first class salaries in comparison to its peers. Yet, the company prides itself on providing a stimulating and flexible work environment. To the extent, the company has implemented a slogan "One people, One culture, One AirAsia, One family". The business stresses the value of work life balance and strives to create a happy work place. Employees act in response by showing great commitment and passion with their job.
Tony Fernandes can be an accountant by training and he has attracted on his knowledge and experience in accountancy to establish an inexpensive structure at AirAsia. This low priced "mentality" is a driving force behind the company as every person is focused on lowering costs and eliminating waste materials and inefficiencies throughout the whole value string.
AirAsia uses IT extensively in its marketing activities. Customers can buy seat tickets online through the company's website and it has a strong existence in social multimedia systems such as Facebook and Twitter. Also, the company uses IT in its cost management structure within its low cost leader strategy.
When AirAsia begun, it was a little air travel with few planes to keep. However, now that they have over 70 ideas and ideas to order another 100 next five years, the company will face serious troubles in maintenance if it carries on as it began. As the current system may use few planes, it is unfeasible in the permanent as if maintenance work is outsourced, costs may increase rather than decrease which will go against the grain of experiencing an inexpensive structure.
Despite its success, AirAsia still gets a lot of complaints from customers. These range from complaints about journey delays to insufficient refunds, lost baggage and being priced for services not requested. The company needs to seriously solve these grievances especially in the face of increasing competition from rival low cost carriers.
Like Virgin Airways and Richard Branson, AirAsia will inextricably be associated with Tony Fernandes. It is no exaggeration to say that Tony Fernandes is AirAsia and vice versa. This poses the situation called "founder's trap" in which an organization is only successful due to its founder. Once the creator retires or dies, the company will go under. Fernandes has indicated that he is grooming successors but who they are is unknown, as he is still effectively working the business. It is uncertain whether the company will be as successful post- Tony Fernandes.
ASEAN countries have signed and agreement that contain abolished the Visa requirements for travel within ASEAN countries, from December 2008. This wide open skies approach has the probable of greatly facilitating flights within the region.
In 2010, Asia's middle income population come to 700 million. This is a significant untapped market for air travel as the center class are more adventurous and keen on traveling. Low cost carriers may take advantage of the new found riches of this middle class to market flights across the region.
Oil prices in particular are subject to wide fluctuations. The existing crisis in the Middle East has cause engine oil prices to go up once more and the company may also be powerless to beat this issue as hedging may be inadequate. The increasing costs of recycleables for planes and even food prices all threaten to escalate the company's operating bills.
Each time there's a major terrorist episode, people get frightened and stay at home. Although it occurred a decade ago, many are still wary of air travel after terrorists used airplanes to launch the Sept 11 attacks in America.
Similarly, global pandemics like parrot flu force people to stay at home and cut back on discretionary travel. Indeed, airlines are powerless to prevent people from journeying during such outbreaks.
Natural disasters can cause air travel disruptions. For example, the volcano eruption in Iceland in 2010 2010 cause many plane tickets to be cancelled and cost the airline industry an estimated 100 billion euros. The recent earthquake and nuclear reactor catastrophe in Japan has triggered flights to be cancelled to the affected areas in Japan and such cases can seriously affect a firm's important thing.
ASEAN Open Skies
Booming Asia midsection class
Very strong management team
Excellent strategic solution and execution
Low cost leader
Successful utilization of information technology
Lack of maintenance facilities
Problems in customer service
Porter (1990) identified four universal strategies that organizations commonly use. They are simply differentiation, cost command, cost target and differential emphasis. AirAsia uses the first strategy, which is cost authority. This is a firm's universal strategy that is based on appeal to the industry huge market using a competitive advantage predicated on low cost.
A business that wants to achieve low cost advantage must get yourself a complete cost edge in accordance with its competitors. AirAsia will this by giving no-frills plane tickets to a wide target market using standardization of service to get the most benefits from economies of scale and experience. Other techniques that are use are an hostile construction of useful scale facilities. The company also vigorously pursues cost decrease that it learned from experience. Overhead is controlled and flexed predicated on volume. This means that when customer volume level increase, overhead costs per customer reduces and the company can offer lower fares. At the same time, the business avoids "marginal costs" customers, whose costs increase as quantity raises. AirAsia also decreases costs in all activities throughout its value chain.
AirAsia uses IT in a number of major ways including produce management system, computer booking system and business reference planning system. Yield management system (YMS) is a revenue management system that understands and analyzes the behavior of customers and responds in a fashion that maximizes revenue. That is useful because the company can use the info to evaluate operating costs, allocate capacity and maximize prices. For example, if a person books a seating early, she or he will enjoy special discounts not provided when booked later. Secondly, the company can adjust charges for routes or vacation spots that are definitely more in demand weighed against other destinations.
AirAsia also implements IT by means of customer reservation system (CRS). This is a web-based booking and inventory system. The system encompasses the internet, call centers and air port departure control. That is a primary sales system that can remove unneeded intermediaries like the travel agent and the sales commissions that are usually paid to them. This technique is also customer friendly since customers can order online from the conveniences of their own house instead of needing to wait in lines all night to buy a solution. This enhances customer satisfaction.
This is a thorough software method of support decisions that are in tandem with the planning and control functions of the business enterprise. The system combines comprehensive software to make the whole system more efficient and effective. Consequently, handling time for financial assertions generation is significantly reduced, data gain access to and retrieval is sped up and there is greater process integrity. Orders can be acquired and monitored on a regular basis and this helps strategic decision making, apart from bringing down process costs.
To succeed at an inexpensive strategy and achieve economies of scale, a company needs to have a huge sales amount. AirAsia is very successful in this area. Firstly, its seat tickets are usually cheap and affordable so this enables it to achieve a high sales volume. Secondly, it employs a series of tactics to make level during off peak months or low trip days. For instance, the business is well-known for its free or extremely low ticket price promotions. That is done to attract more passengers to the company. However, from an accounting point of view, the business is not actually providing free tickets. Through the use of its YMS, CRS and ERP, the company knows just what percentage of the flight will be unutilized so that 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 reducing set costs per device. However, the general public is unacquainted with this and buzz is established for the business which pushes sales up further.
Overall, AirAsia has good proper management. However, what is good can continually be made better. The following are some recommended strategic steps for the immediate future that will help the company achieve better success.
AirAsia already uses IT intensive in its procedures. The internet has generated new opportunities for this to achieve low cost leadership by and can manage costs and achieve better efficiencies. Purchase costs are greatly decreased through IT. For example, in AirAsia, online ticket sales get rid of the sales for sales phone calls and lessen the expenditures associated with sales force. At the same time, paperless orders reduce procurement and other newspaper costs. Exchange costs can be lowered by removing intermediaries that add costs. Collaborative design efforts that employer internet technology can web page link designers, suppliers and customers, thus lowering costs and speeding the process of new ideas technology.
AirAsia can go one step further by bringing out more applications and e-business. A method this is done is through the prolonged value chain by using IT to link the business's own value chain with the value chains of suppliers and customers. As a result, value is added not merely through AirAsia's own value creating activities, but those for its suppliers and customers as well. That is also area of the virtuous business pattern that will be explained in a later section.
However, AirAsia should become aware of the pitfalls of using this plan. The main treat is imitation by rivals, particularly when business is performed online. This is because lots of the advantages related to linking directly on a genuine time basis to the clients, such as software can be easily duplicated by others without the real threat of copyright infringement. Another pitfall is that companies become so enchanted with utilising the web to spend less that they lose perception of the big picture. When one business activity, such as chopping costs is given important over others, then the entire organization will suffer from lopsided and myopic strategic planning.
The value chain is thought as a collection of activities that should add more to the ultimate value of the merchandise than to its cost (Atkinson et al, 2007). When value is added in the form of the value chain, it could be utilized to develop AirAsia's ecological competitive benefits. All organizations contain activities that are associated together to develop the value of the business enterprise, and jointly these activities form the organization's value string. Value chain examination is a useful tool for companies to recognize the key activities within the organization which form the value chain and have the potential of achieving a substantial and long lasting competitive gain for AirAsia.
Short term cost advantages can be acquired by reconfiguring the value chain. This can be done at AirAsia by making structural changes in the value chain such creating improvements in its capacity utilization, reducing processing time, and boosting vertical integration. As a result, costs are reduced and value is added. All these result in lower costs, lower solution prices and higher customer satisfaction.
There are two strategies here - related and unrelated diversification. In related diversification, AirAsia can enter contracts whereby main resources and or capacities are shared or leveraged. Synergies exist when relationships are shaped between sections. You will discover two major resources of cost savings and improved income. The foremost is economies of range that can be derived when key competencies are leveraged so when activities are distributed. The second is market ability, 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 marketplaces that are dissimilar to its present business. For example, it could run hotels or take up a chain of retail outlets. Nevertheless, there is not much chance of a company to leverage main competencies or show business units between sections. Hence, synergies are achieved because of this of vertical romantic relationships between the mother or father office and sections. In any other case, AirAsia can decide for unrelated diversification through corporate and business restructuring or it can use portfolio examination techniques.
AirAsia could diversify its product markets through mergers and acquisitions, joint projects or strategic alliances. It might merge or acquire rivals like Tiger Airways but there may be expensive prices to pay or there could be problems integrating the acquisition. Often, it could form strategic alliances with other low priced service providers or even traditional companies if it proves to be beneficial. This is used as a risk reduction technique since the effort requires the mingling and sharing of resources. Still, they may also give AirAsia less control since corporate and business governance has to be shared between two independent companies.
This might be looked at as a permanent business strategy, which is partly true. However, rethinking the business model also will involve making strategic techniques for the immediate future which is why it is strongly recommended.
When strategic movements are contemplated by a company, they normally involve some deviation of Porter's common strategies or other strategies. One procedure that is increasingly popular now is rethinking the business enterprise model. Matching to a recent survey, nearly 70% of American companies are trying to create ground breaking business models whereas 98% are in the midst of modifying existing models.
Still most these businesses view the creation and analysis of business models as an isolated activity, devoid from how they will impact the business and how they'll connect with the business models of rivals. Consequently, companies fail to achieve their tactical goals. Furthermore, many companies are oblivious that virtuous business cycles can be created through business models, in the manner of high technology companies like Microsoft, Yahoo and Facebook. Competitive advantages is reinforced when these cycles are aligned with company goals.
When the right options are made, a company can fortify the virtuous circuit of its business, change competitors into complementary companies or even weaken rivals. This strategy is using business models to get competitive benefits.
A good business model has three characteristics. One, it is aligned with company goals. When designing a business design, the options made should reveal the final results that help a company achieve its targets. Two, it must be self reinforcing. Each of the choices made by having a business design must reflect each other. There has to be internal steadiness. If AirAsia were to choose to provide a level of comfort comparable to that offered by a complete fare carrier such as Malaysian Airlines, the change would require minimizing the amount of chairs on each planes and offering food and beverages. These choices would undermine the business's low cost composition and wreck its revenue. If there is weak reinforcement, the business enterprise model should be tweaked by discarding certain choices and adopting new ones.
Three, a good business design is powerful. It must have the ability to maintain its effectiveness over a long period by shaking off four main threats. They are simply imitation (whether competitors can replicate the business's business model), holdup (the power of customers, suppliers or other players to fully capture the value that is created by taking good thing about their bargaining ability), slack (complacency within the business) and substitution (whether alternate products or services can lower the identified value customers have about the business's products). Despite the fact that the time of success is shorter nowadays than it once was, robustness continues to be a crucial parameter.
To assess how redesigning its business model can help AirAsia, why don't we consider another famous low-cost carrier which served as enthusiasm for AirAsia - Ryanair. In the first 1990s, Ryanair switched from a normal business model compared to that of an inexpensive carrier. This is accomplished by eradicating all frills, ruthlessly lowering costs and decreasing prices to unprecedented levels. The business provides low fares, its planes soar out of supplementary airports only, suits one class of economy traveler, charges for all extra services, does not serve food or refreshments, makes only brief haul plane tickets 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 business enjoys high volume level, low preset and changing costs, an extreme management team and a reputation for sensible fares. Consequently, the business model allows Ryanair to provide good service at low priced without reducing on customers' willingness to cover the business's services.
Ryanair's business model has generated three virtuous cycles that increase the company's gains through increasingly low costs and prices. These cycles are shown in Shape 1 below:
Low fares High Volumes Greater Bargaining ability with suppliers Lower Fixed Cost Even Lower Fares
Low fares High Amounts High Aircraft Usage Lower Fixed Cost per Passenger Even Lower Fares
Low fares Goals of poor service No dishes offered Low Variable Costs Even Lower Fares
AirAsia is currently in the first pattern so that it has potential to go to the second and third cycles.
The common final result of the cycles is reduced costs and this permits the business to lower prices which increase sales size and finally contribute to greater profitability. The business's competitive advantage develops as the virtuous cycles created by the business enterprise model. Many of these cycles result in reduced costs. These subsequently allow lower prices that propel revenue and finally lead to increased profits. Its competitive benefits keeps growing so long as the virtuous cycles generated by its business design are in momentum.
However, things do not continue forever. There is always a limit for virtuous cycles where they activate counterbalancing cycles that decrease them down or whenever the clash with other business models. If these cycles are interrupted, the synergies move around in the opposite way and then reduce competitive gain. For example, if Ryanair's personnel decided to unionize and ask for more wages, then your company's operating cost could increase and it can't provide lower fares. As a result, sales amount would be lost and the use of airplanes would drop. Consequently, this might have a negative multiplier effect on profitability.
All businesses, even the most successful ones, will inevitably stop growing. There are multiple reasons why this may happen. A corporation could stray from its center business activity or persist for too long. It may have difficulty in knowing its strategy, or customer preferences could change, or the business could obsessively cut costs just for the sake of cutting costs. Because of this, they have to reinvent themselves every once in awhile. The capability to move from a maturity level of one type of business to the expansion stage of another type of business is what separates the long-term success stories and the 'one strike' failures.
All businesses undertake what serves as a a financial S curve, which is similar to the product life routine curve. This occurs whenever a company grows slowly but surely at first, then experiences a period of rapid progress before facing a period of decline. Most companies target far too much on one S curve without realizing that they have to actually create multiple S curves in order to stay competitive. This means that an organization should move from one financial S curve which is its maturity or decrease stage to some other which is in the growth stage. This methodology is most widespread in the cellular phone industry in which companies routinely reinvent their product offering. Alternatively, successful companies like Yahoo felt struck in a capture where it cannot move from its existing business design and strategy, though it isn't for want of hoping.
To move in one S curve to another, AirAsia needs to be familiar with some 'invisible' curves. The foremost is the invisible competition curve. Which means that a company's competitors constantly differ from enough time it was founded to when it achieves peak profitability. Successful companies realize that there are shifts in customer needs and desires and therefore create the next program for new competition.
The second hidden curve is the capacities curve. Each successful company has its sets of functions that enable it to achieve success at business. These can range from production methods, work of computer and human reference. However, the competitive benefit accomplished from these functions is not permanent so companies need to formulate new functions to join to the next S curve.
The third hidden curve is the talent curve. Many companies make the fatal problem by not retaining critical talent at a time when it issues most. For instance, when companies are approaching their peak, they could opt for a leaner composition and eliminate many employees. Because of this, they could lose talented people who might be needed in helping the business move to its next S curve. That is a blunder AirAsia cannot find the money for to make.
To succeed at reinventing its business, AirAsia needs to balance its short-term and permanent thinking. It needs to realize that measures that may be successful in the short term may not always be the better to sustain permanent growth. It needs to arrange its strategies well to avoid overload. Tasks and obligations should be delegated to the magnitude possible and the company shouldn't overburden top executives as that will impair their tactical thinking talents.
Business reinvention also calls for taking advantage of surplus expertise. AirAsia has a solid workforce of talented and suitable people and it is a waste products to leave such ability unutilized. Frequently, talented individuals feel stifled when they are not allowed to harness their abilities and may move to another organization. These people could be the ones who are necessary to the business's ability to move to the next level. For this function, staff development programs are essential to draw out the best in everybody.
By any solution, AirAsia is successful tale. Its strategies just work at providing it with competitive edge. However, it is in an industry that is extremely prone, challenging and sophisticated. Which means that the company cannot be complacent with just one single business strategy, but must continually examine, enhance and even change strategies if they are irrelevant or no more work. Currently, its overall strategic model of low priced leadership is successful and it is anticipated that the business will continue to be successful so long as it retains this key feature. Yet, the company should be open to new prospects or financial S curves to ensure it consistently reinvents itself to stay relevant and profitable.