The Low Cost Airline: AirAsia A study of opportunities, challenges and critical success factors

LGT 3007 Air Transport Logistics

Introduction
History of low cost airlines
The low-cost concept became a moneymaker in the United States, where it was pioneered in the 1970s by Southwest irlines, the model for bud!et carriers elsewhere like "yanair and easy#et in $urope%

&efinition of low cost airlines

low cost airline !enerally has many features that differentiate it from the traditional carriers% These features include ticketless tra'el, online ticket sales, no international offices, no fre(uent flyer points, no free food and be'era!es, no infli!ht ma!a)ines, no club loun!es, use of secondary city airports% *ot all low cost airlines ha'e these features, and not all airlines that ha'e some of these features are low cost airlines% +or e,ample, -ir!in $,press is a low cost airline, but it still offers complimentary coffee and infli!ht ma!a)ine, and they are based at .russels primary airport%

Case StudyAirAsia
Story of ir sia
ir sia, as the second /alaysian *ational irline, pro'ides a totally different type of ser'ice in line with the nation0s aspirations to benefit all citi)ens and worldwide tra'ellers% Such ser'ice takes the form of a no frills - low airfares fli!ht offerin!, 102-302 lower than what is currently offered in this part of sia% Their 'ision is 4*ow $'eryone 5an +ly4 and their mission is to pro'ide 0 ffordable irfares0 without any compromise to +li!ht Safety Standards%

The story of emer!ence of ir sia is similar to "yanair, since both carriers underwent a remarkable transformation from a money-losin! re!ional operator to a profitable, low cost airline% ir sia was initially launched in 1993 as a full-ser'ice re!ional airline offerin! sli!htly cheaper fares than its main competitor, /alaysia irlines% .efore 6001, ir sia fail to either sufficiently stimulate the market or attract enou!h passen!ers from /alaysia irlines to establish its own niche market% The turnaround point of is sia is in 6001, while it was up to sale and bou!ht by Tony +ernandes% Tony +ernandes then enrolled some of the lendin! low-cost airline e,perts to restructure ir sia7s business model% He in'ited 5onnor /c5arthy, the former director of !roup operation of "yanair, to 8oin the e,ecuti'e team% 9n late 6001, ir sia was relaunched in /alaysia as a trendy, no-frills operation with three .7:7 aircraft as a lowfare, low-cost domestic airline%

;pportunities faced by ir sia in li!ht of e,ternal de'elopment

1% <ow fare of 9ndonesia-/alaysia trip The fare for a #akarta-#ohor .aru trip costs "p 100,000 ="/ >>%>> one way?% nd char!e "p 1@0,000 for a .andun!-Auala <umpur fli!ht, and "p :00,000 for a Surabaya-Auala <umpur trip, whereas a #akarta-Auala <umpur air ticket from /alaysia irlines a'ailable at tra'el a!ents cost "p 1%1 million% /eanwhile, <ion ir on the same route, char!ed "p 1%0@ million% The low fare pro'ided by ir sia helps it open the 9ndonesia market%

6% <ow fare of Sin!apore-.an!kok ser'ice ir sia will increase its ser'ices between Sin!apore B .an!kok by introducin! a 6nd daily fli!ht to its e,istin! schedule% This recent de'elopment came barely a month after Thai ir sia operations started its first international fli!ht to Sin!apore in early +ebruary this year% ir sia is offerin! its !uests promotional fares toCfrom Sin!apore- .an!kok from SD&E6:%99 =TH. 199? one way from the 6>th /arch to :0th ;ct, 6001% 9t is much lower than the lowest fare SD&E@3 offered by full-ser'ice carrier% This helps it open the Sin!apore market%

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Folitical connections
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ir sia hold 192 of Thai ir sia with 12 bein! held by a Thai indi'idual% The remainin! @02 is held by Shin 5orp% which is owned by the family of Thailand7s prime minister, Thaksin Shinawatra% Shin 5orp% has financial stren!th, syner!y in in!ormation technolo!y and telecommunications, which support ir sia 9nternet and mobile phone bookin!s% Shin 5orp% allows subscribers of the Shin mobile phone fla!ship, d'anced 9nformation Ser'ice, bein! able to reser'e tickets throu!h its short-messa!in! ser'ice =S/S?% ir sia with its politically powerful backer may well !row up to bite% This helps it open the Thailand market%

1% /alaysian !o'ernment support The /alaysian !o'ernment supported the establishment of ir sia in 6001 to help boost the under-used Auala <umpur 9nternational irport% ir sia7s fli!hts from Senai are meant to de'elop #ohor into a transport hub to ri'al Sin!apore% ir sia, therefore, can pro'ide an alternati'e route to tra'el to .an!kok, by usin! Senai irport in #ohor .ahru, in southern /alaysia%

;pportunities faced by ir sia in li!ht of internal de'elopment

1% 9ssue of 9F; Aamarudin /eranun, ir sia0s $,ecuti'e &irector announced the appointment of 5redit Suisse +irst .oston =5S+.? and "H. Sakura /erchant .ankers ="H.? as the bookrunners for the company0s upcomin! 9nitial Fublic ;fferin! =9F;?% The 9F; stren!thens ir sia balance sheet, further cuts its e,istin! low costs at 6%@ US cents per SA and accelerates our !rowth plans throu!hout sia% The 9F; also allows ir sia to e,pand its fleet of 1> .oein! 7:7-:00s% 6% Folitical connections Thai ir sia is a 8oin 'enture established by ir sia with Shin 5orp% Shin 5orp% is owned by the family of Thailand7s prime minister, Thaksin Shinawatra, and about 900 million baht will be in'ested in Thai ir sia o'er a fi'e-year period% Shin 5orp% o'ersees the finance and administration of Thai ir sia while ir sia shoulders the responsibility for marketin! and operations% Shin 5orp% has financial stren!th and supports ir sia to !row% ir sia with its politically powerful backer may well !row up to bite%

5hallen!es faced by ir sia in li!ht of e,ternal de'elopment

1% 9ndonesian habit
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Freferences of 9ndonesian passen!ers are (uite different from the concept of cheap air tra'el without e,tra ser'ice for the passen!ers =free snacks and drinks?, and also their reluctance to brin! li!ht ba!!a!e% ir sia prefers passen!ers with 'ery li!ht and minimum ba!!a!e% 9f this is the case, it may not last lon!% .ut 9ndonesian domestic airline companies are able to pro'ide 'alue-added e,tras like food and be'era!es as part of their ser'ice to the passen!ers, althou!h at a relati'ely hi!her cost% The comparati'e ed!e of 9ndonesian domestic airline companies compared to ir sia concerns habit =culture?% +urthermore, 9ndonesian domestic airlines were already trained with the low-cost air tra'el concept, known as tariff war% They ha'e pro'ed themsel'es as immune, and mana!ed to sur'i'e% <ast but not least, the 9ndonesian !o'ernment or domestic airline companies had ne'er announced the a'ailability of a low-cost airline company of the country% ll these affect ir sia !rowth in 9ndonesia%

6% Sin!apore !o'ernment re8ection 9nitially, ir sia wanted to start fli!hts from the southern state of #ohor, near Sin!apore, it hoped to attract passen!ers by runnin! a con'enient bus ser'ice to the city-state% Howe'er, Sin!apore (uickly (uashed that idea% The Sin!apore !o'ernment said it would not appro'e a bus link for ir sia because it was not Gin her national interest7, reflectin! fears that Sin!apore7s 5han!i airport would lose business to #ohor7s new Senai airport% This makes ir sia cannot abandon the use of 5han!i airport, and therefore suffer from a hi!her cost% This is because ir sia flyin! to Sin!apore needs to suffer from fli!ht con!estion of 5han!i% 5han!i has drawbacks of fli!ht con!estion that could pre'ent the (uick turnarounds essential to keepin! down costs% ir sia finds it stuck between bi! planes and circlin! to wait for a slot to open up, which means e,tra fuel costs% /oreo'er, the SD&E61 departure and security ta, of 5han!i is too hi!h for ir sia low-cost operation% ir sia had asked the Sin!apore !o'ernment to wai'e the fees,
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howe'er, a re(uest that was not only re8ected but also critici)ed% .esides Sin!apore H .an!kok, ir sia now pro'ides an alternati'e route to tra'el to .an!kok, by usin! Senai irport in #ohor .ahru, in southern /alaysia% Seekin! to cater to the different markets, fares for #ohor .ahru- .an!kok are !enerally 60 2 lower in comparison to Sin!apore - .an!kok% ir sia currently operate daily fli!hts to .an!kok from #ohor .ahru% Howe'er, the choice pro'ed unpopular, as the route failed to attract Sin!aporeans because of the additional cost and incon'enience of ha'in! to tra'el in and out of /alaysia by road% ll these affect ir sia e,ternal !rowth%

:% /inimum air-fare rates ir sia faces challen!es findin! open takeoff and landin! slots at opportune times, and Thailand7s re!ulation that sets minimum air-fare rates% lthou!h Transport /inister Suriya #un!run!rean!kit said the current minimum air-fare re!ulations will be scrapped to open up the market, he couldn7t name a date when this will be done% This seems to be fa'oritism toward Thai irways 9nternational7s domestic operations, and affects Thai ir sia to compete in the Thailand market%

$,ternal 5han!es which ha'e impact on ir sia

1% sia7s middle class !rowth <ow cost airlines are anticipated to ha'e !reater potential in sia as there are many sian cities with a population abo'e one million people each as well as a risin! middle class population% This !rowth of middle class in sia pro'ides a hu!e market potential for ir sia to !row% Howe'er, as the market is becomin! lar!er, more airlines or new comers would like to !et a piece of the action% +or e,ample, .ud!et airlines, it is estimated, will capture at least 6@2 of sia7s air tra'el market within ne,t 10 years and a lot of that will be new, not di'erted, traffic% Therefore, ir sia will face more competitions at the same time% .esides the low cost airlines, ir sia still needs to compete with the con'entional carriers% lthou!h e,tra passen!ers of the low cost airlines will be comin! from the new demand to be created by the low fares, the !rowth may not be entirely Gstolen7 from bi! fla! carriers%

6% ctions of 5han!i and nearby airports The !rowth of low cost airlines in south-east sia has a si!nificant effect on which airports will dominate the re!ional a'iation market% <ow cost airlines are seen as helpin! funnel more passen!ers to airport hubs% Therefore, there is a reali)ation amon! re!ional !o'ernments that they need smashin! airports and feisty carriers or they are !oin! to miss out bi! time% Therefore, these !o'ernments are more willin! to support low cost airlines% +or e,ample, the /alaysian !o'ernment supported the establishment of ir sian in 6001 to help boost the under-used Auala <umpur 9nternational irport, and Thai premier7s Shin 5orp% forms a 8oin 'enture with ir sia that would benefit .an!kok7s new airport and create a new hub at 5hian! /ai% Therefore, under this situation, it helps ir sia !row in sia% /oreo'er, as there is a !rowth of se'eral south-east sian airports, this poses a challen!e to the status of Sin!apore7s 5han!i airport as a re!ional a'iation hub% These airports include #ohor7s new Senai airport in southern /alaysia, .an!kok7s new Su'arnabhumi airport which will be able to handle 1@ million passen!ers when it opens in 600@, .an!kok &on /uan! which recently o'ertook 5han!i in passen!er numbers, etc% To maintain 5han!i7s position as the air hub in the re!ion, Sin!apore is proposin! a bud!et airline terminal at 5han!i by 600@ and lower passen!er ta,es to attract low cost airlines% This helps ir sia !row and lower the cost%

:% ctions of e,istin! airlines The e,istin! airlines in south-east sia ha'e se'eral actions to compete with ir sia, for e,ample, some ha'e launched a low cost airline to fi!ht with ir sia% Sin!apore irlines launched a low cost airline subsidiary, Ti!er irways, in the second half of 600:, only months after the scheduled launch of -alu ir set up by one of its former e,ecuti'es% ;rient Thai irlines launched a new low cost airline subsidiary, ;ne-To-Do% ;ne-ToDo operates with a fleet of si, .oein! 7@7-600s and match any fares that Thai ir sia offers% Thai irways ha'e fre(uency and capacity to offer to their 1: domestic destinations% They also ha'e, durin! the past two years, worked to impro'e operational efficiency,

slashin! unprofitable domestic routes, increasin! fli!hts on busy routes, stren!thenin! yield mana!ement and controllin! costs% ll these make ir sia face a hu!e competition%

5ritical success factors in the <ow cost airlines in sia

"eduction in operational cost
<ow cost airlines stri'e to achie'e the lowest possible price for their products and ser'ices% <ow prices cannot sustain unless the company ma,imi)es its operational efficiency% The success factors of sian low cost airlines in reducin! their operational cost includeI 1% Ser'ice sa'in!s =no frills cabin ser'ice and e,tensi'e use of outsourcin!? *;-frills includeI *; drinks, *; food, *; headphones, *; newspapers, *; mo'ies, *; -9F loun!es, *; e,pensi'e offices, *; milea!e pro!rams, *; seat allocation, *; children7s fares, *; paper tickets =$lectronic tickets only?, *; connectin! fli!hts = ll fli!ht-le!s must be booked independently? 6% ;perational sa'in!s =point-to-point ser'ices and uniform fleet? :% ;'erhead sa'in!s =internet sales and streamlined bureaucracy? Je can compare the operational cost in terms of costs per a'ailable seat kilometer = SA?, a measure of the runnin! cost of the airline% +or instance, "yanair in $urope is almost half of the SA price comparin! with the full ser'ices airline% The a'era!e fare offered by ir sia in /alaysia is 10-30 2 lower than its full-ser'ice competitor%

5ompetiti'e Ticket price a!ainst traditional full-ser'ice airline

<ow cost airlines be!ins with two initial cost ad'anta!es arisin! from the 'ery nature of their operationI hi!her seatin! density and hi!her daily aircraft utili)ation% .y remo'in! business class and reconfi!urin! their aircraft, low cost airlines can increase the number of seats on their aircraft% Seat pitch of a low cost airline is usually 6>

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inches, compared to a traditional con'entional economy class pitch with :6 inches% &o!anis =6001? calculates that should be able to operate at seat cost that are only 10@0 2 those of mainline ri'al% 5ombinin! the load factor benefit and beneficial distribution cost, low cost airline7s cost per passen!er can reduce price by one-third of con'entional airline%

+lyin! out of secondary airports

/any low-cost airlines keep e,penses down by flyin! out of secondary airports, a'oidin! ma8or hubs where takeoff and landin! fees are much hi!her while still !ettin! passen!ers close enou!h to their destinations%

The tra'el distance is short

s the routes offered by low cost airlines are mainly short, domestic routes which may only take one to two hours, tra'ellers mi!ht be fine with no amenities on fli!hts

Success factors in ir sia

bsolute 5ost d'anta!e
1% <ow cost per a'era!e seat kilometer ir sia focused on ensurin! a competiti'e cost structure as its main business strate!y% 9t has been able to achie'e a cost per a'era!e seat kilometer = SA? of 6%@ cents, half that of /alaysia irlines and "yanair and a third that of $asy#et% ir sia can lease the .7:7-:00s aircraft at a 'ery competiti'e market rates due to the harsh !lobal market conditions for the second-hand aircrafts because of the September 11th e'ent in 6001% ;n the other hand, the operatin! cost of the company is also dropped drastically%

6% <ow distribution cost ir sia focus on 9nternet bookin!s and ticketless tra'el allowed it to lower the distribution cost%

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ttracti'e ticket price

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Jith the a'era!e fare bein! 10-30 2 lower than its full-ser'ice competitor, ir sia has been able to achie'e stron! market stimulation in the domestic /alaysian air market =Thomas 600:?% +or instance, the fare for the trip from Auala <umpur to Fenan! on ir sia starts from :9 rin!!it% 5omparin! to trip by bus char!e 10 rin!!it and >0 rin!!it by car% The effect of attracti'e low fare is more tra'elers switchin! from bus to air, similar case as "yanair in $urope%

Dood /ana!ement Team ir sia 'alue proposition is more sophisticated than "yanair placin! e(ual emphasis on brand reputation and customer ser'iceCpeople mana!ement, by a senior ad'isor to is sia7s top mana!ement team% ir sia pursue a "yanair operational strate!y, Southwest people strate!y and an $asy8et brandin! strate!y%

Jeakness +air a'ailability The a'ailability of ir sia is not !ood as traditional airline as it only pro'ide uni(ue aircraft% Howe'er, it cannot be the cost leader if it offers customi)ed features or comprehensi'e support which will result in increasin! operational cost% Howe'er, focus on a specific customer may a'oid straddlin!% 5ase of straddlin! #apanese low cost airline, Skymark, tryin! to be e'erythin! to e'eryone tar!etin! the broader customer and offerin! limited special features =satellite T-, .usiness class and charter operations?% The result is failin! to both cost efficient and price competiti'e renderin! it 'ulnerable to market forces and customer demand =porter1993K <awton 1999?%

/a8or strate!ic directions recommended

1% ;pen more sian market <ow cost airlines are anticipated to ha'e !reater potential in sia as there are many sian cities with a population abo'e one million people each as well as a risin! middle class population% 9t is time for ir sia to e,ploit the potentials of affordable air tra'el by sia7s !rowin! middle class% .esides startin! ser'ices to the Fearl "i'er &elta in south 5hina in 6001, ir sia can e,pend its ser'ices to the coastal cities in 5hina% .esides the !rowth of sian middle class, the liberali)ation of a'iation sector of 9ndia
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is another reason for ir sia to open more sian market% The 9ndian !o'ernment has liberali)ed the a'iation sector lon! dominated by the national carriers% *ow, only a few low cost airlines, e%!% ir &eccan, irone +eeder irline F't <td, 5rescent ir, ha'e launched their ser'ices there% /oreo'er, the national carriers, 9ndian irlines or ir 9ndia, despite their domination of the 9ndian skies, do not seem to be much interested in operatin! low-cost ser'ices% Therefore, it is a !ood chance for ir sia to open the 9ndian market%

6% #oin 'enture with -ir!in Droup ir sia should put more effort to set up a pan- sian low cost airline with -ir!in .lue, which is a low cost carrier of -ir!in Droup ser'in! ustralia and *ew Lealand mainly% -ir!in .lue has su!!ested it may e,tend ser'ices to south-east sia% Therefore, settin! up a 8oin 'enture with -ir!in .lue can help ir sia to !row in sia e'en further, and help -ir!in .lue to e,tend ser'ices to south-east sia%

"ecommendations to ma,imi)e competiti'e ad'anda!es of ir sia

1% $nforce Folitical ad'anta!es ir sia established a 8oin 'enture, Thai ir sia with Shin 5orp% Shin 5orp% is owned by the family of Thailand7s prime minister, Thaksin Shinawatra, and about 900 million baht will be in'ested in Thai ir sia o'er a fi'e-year period% Shin 5orp% has financial stren!th, syner!y in in!ormation technolo!y and telecommunications, which support ir sia to !row in Thailand% ir sia with its politically powerful backer can well !row up to bite, and therefore it should enforce such political ad'anta!es in order to e,tend the !rowth in Thailand% +urthermore, ir sia should use its Thai subsidiary, Thai ir sia, to claim the use of Thailand7s Gopen skies7 a!reements to fly to Sin!apore, .runei and 5ambodia, o'ercomin! the barrier of bilateral a'iation pacts that threatened to limit its !rowth%

6% 9nduction of smart cards ir sia can issue a smart card which is compatible with the e,istin! ticketless bookin!% 9t can offer 6 kinds of smart cards% The first kind of smart card, aimed at ordinary tra'ellers, will offer instant rewards when topped up, offerin! !reater 'alue than its
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purchase price% +or e,ample a .t@,000 card may be worth .t@,@00% The card can also be used by other people with the same family name as the cardholder% The second kind of smart card will offer unlimited tra'el for fre(uent flyers% Friced pro'isionally at .t60,000, cardholders will be allowed make as many trips as they want within a specified period%

Conclusion
study by the 5entre for sia Facific 'iation =6006? confirms that sia continues to offer attracti'e conditions for the air transportation industry% Jith thirteen out of world7s top twenty-fi'e ma8or urban centres located in the sia Facific re!ion and a rapidly increasin! urbani)ation trends, the sian air tra'el market is bound to continue to !row% Urbani)ation is hi!hli!hted as one of the key dri'ers for the !rowth in air tra'el% 9t is estimated that sia would account for :02 of the world market by 6019, or one third of !rowth between now and then% Jhile the impact of S "S is !oin! to slow down the !rowth of sian re!ional demand, the lon!-run forecast continues to be 'ery positi'e% These enable low cost airlines to !row e'en further%

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