Professional Documents
Culture Documents
Submission date:04-2013
Paper Reviewer:
Abstract
;
AirAsia
MYX5099
18 65
(Porter's)
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English Abstract
Compare with the earlier ages, the airline industry has evolved much; the operations
become simpler and more efficient. Airline industry contributes to the economic growth of a
country. The International Air Transport Association surveyed that the growth rate of the airline
industry is about 6.6% every year and it has been grown more than 5% from the year 2000
2010.
The author chooses AirAsia as the study object for learning low-cost leadership that
developed by Michael E. Porter. The main idea of the paper is about the industry analysis
applied to generic strategies thus generate competitive advantages. AirAsia Berhad (MYX:
5099) is a Malaysian-based low-cost airline. AirAsia is Asia's largest low-fare, no-frills airline
and a pioneer of low-cost travel in Asia. AirAsia group operates scheduled domestic and
international flights to over 65 destinations spanning 18 countries. Together with the associate
companies; AirAsia X, Thai AirAsia, Indonesia AirAsia, Philippines' AirAsia Inc and AirAsia
Japan; AirAsia is ready to serve valuable and memorable flight with its believable, Now
Everyone Can Fly.
AirAsia applies low-cost leadership on its whole operations which characterized as; high
aircraft utilization, no frills (no free foods, no seat assigned, ticketless, no refundable ticket, no
loyalty program), modernize operations (simple process, single class seating, standardized
operations), basic amenities, point to point network, lean distribution system, positioning, and
low operating cost. This thesis explained in detail the AirAsia strategy and whole operations
that keep the cost low through the value chain analysis. In particular, the author applies Porters
generic strategy especially Low-Cost Leadership strategy to competitive strategy, to argue that
AirAsias success that strict with low-cost.
Author thinks that AirAsia is the best company to learn the low-cost leadership strategy.
The company strictly on low cost, breaks the travel norm, innovate the operation process, and
become a strong leader in Asia (supported by the performance data).
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Table of Contents
Abstract ... I
English Abstract .... II
Table of Contents ....... III
List of Figures and Tables ..... V
1 Introduction .... 1
1.1Background of the study ........ 1
1.2Problem statement ...... 2
1.3Purpose and significance of the study ....... 2
1.4Research strategy .... 3
1.4.1 Research methodology .. 3
1.4.2 Data gathering .... 3
1.4.3 Organization of the thesis .. 4
2 Theoretical Frameworks .5
2.1 Porters five forces model and industrys attractiveness .. 5
2.2 SWOT Analysis .. 7
2.3 Generic strategy and competitive advantage .. 8
2.3.1 Michael Porter generic strategies .... 8
2.3.2 Cost leadership (type 1 and type 2) .. 10
2.3.3 Differentiation strategy (type 3) ... 12
2.3.4 Focus strategy (type 4 and type 5) 13
2.3.5 Competitive advantage .. 14
2.4 Value chain analysis ... 16
3 AirAsia Case Study ..... 18
3.1 Description of the case company .. 18
3.1.1 Development of LCC in Asia .. 18
3.1.2 AirAsia profile .... 23
3.1.3 The development of AirAsia . 27
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1 Introduction
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competencies that he felt were most important: product differentiation and product cost
(efficiency).
In his 1980 classic Competitive Strategy: Techniques for Analyzing Industries and
Competitors, Porter simplifies the scheme by reducing it down to the three best strategies.
They are cost leadership, differentiation, and market segmentation (or focus). Market
segmentation is narrow in scale while both cost leadership and differentiation are relatively
broad in market scope.
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2 Theoretical Framework
Threat of
potential
entrants
Threat of
substitutes
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management and help to identified internal and external factors that supportive or not
supportive in achieving goal. SWOT analysis can be applied in a way to analyze and sort
numerous things that affect these four factors, and then applied on SWOT matrix diagram.
When the application is how the strength gain advantage from the existing opportunities and
how to overcome weaknesses that prevents profits (advantages) of opportunities. Further
step, how the strengths able to deal with threats and how to overcome weaknesses that able
create new threats.
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requirement better than competitors do. Both type 4 and type 5 strategies target is a small
market. The difference between them is type 4 strategies sell products and services to a
niche market at the lowest price, on the other hand type 5 sell products and ser vices to a
niche group at a higher price but equipped with features so the products and services are
perceived as the best value.
Porters five strategies mean different company arrangements, incentive system
and control procedures. Larger companies with more access to resources typically
compete on a cost leadership and differentiation, but smaller companies often compete for
focus leadership.
Porter emphasized the need for strategist to perform cost-benefit analysis to
analyze sharing opportunities between companies existing and potential business units.
Sharing resources and activity enable competitive advantage by lowering costs and
increasing differentiation. As well as promoting sharing, Porter emphasized the need for
companies to effectively transfer skills and expertise among independent business units
in order to result competitive advantages. Considering some factors such as size of firm,
type of industry, and nature of competition, a variety of strategies could yield advantages
in cost leadership, differentiation and focus leadership.
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(2) Reconstruction the companys whole value chain to remove or avoid some cost-
producing activities. Some activities include maintaining supplier and distributors,
online selling, relocating manufacturing activities, keeping away from the use of union
labor, etc.
While applying the cost leadership strategy, a company has to be careful not to use
so aggressive price discount that their profits are really low or missing. Always consider
of cost-saving technological breakthroughs or any other related to value chain
development that able to corrode or eliminate the companys competitive advantages. The
Type 1 or Type 2 cost leadership strategy can be very effective bellow these conditions:
(1) When price war among competitors is especially dynamic.
(2) When the competitors products are fundamentally the same and supplies are available
from many of several suppliers or distributors.
(3) When there are only a few ways to attain product differentiation that valuable to
buyers.
(4) When most buyers use the product in the same ways.
(5) When buyers lay you open to lower costs in changing their buys from one seller to
another.
(6) When buyers are many and have a strong power to bargain discounted prices.
(7) When industry new entrants use starting low prices to attract buyers and build a
customer loyalty.
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In the insurance industry, Safeco lately divested its life insurance and investment
management divisions to target entirely on property casualty insurance operations. The
Seattle-based companys strategy is just one of some cases of consolidation in the
insurance industry where companies struggle to focus on one type of insurance rather than
many types.
In applying a focus strategy include the opportunity that many of competitors will
learn the successful of focus strategy and imitate it, customers' preferences will change in
the product features wanted by the market as a whole. A company applying a focus
leadership strategy may focus on a particular customers or groups, demographic or
geographic markets, or on particular product-line segments to serve up a significance-
defined but small market better than competitors that serve up very board market.
A low-cost (Type 4) and best value (Type 5) focus strategy can be has perfect
situation when these following conditions:
(1) When the niche market is large, growing, and profitable.
(2) When the market leader abandons niche market to be important to their success.
(3) When the market leaders regard that is too difficult and costly to fulfill the special
needs or request of niche market while concern on their mainstream customers.
(4) When the industry has a variety of niches market and segments, so allowing the
focused to choose a competitively profitable niche base on their own resources.
(5) When the competitors are few and are attempting to specialize in the same segment
targeted.
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Porter states that both cost advantage and differentiation advantage are also called
positional advantage, because they enable a company to know its position in the market as
a leader in either cost advantage or differentiation advantage.
A resource-based perception state that a companys resources and capabilities
utilize to gain competitive advantage that finally results in greater value creation. This
following diagram is combining the resources-based and positioning view to get more
understanding the concept of competitive advantage.
Cost or
Resources and Distinctive
Differentiation Value Creation
Capabilities Competencies
Advantage
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All of these primary activities are vital in gaining competitive advantage. On the
other hand there are some supportive activities that facilitate the primary activities.
Supportive activities sometime regarded as overhead; but many companies use them and
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success in gaining competitive advantage. For example, to gain cost advantage through
innovate management of information system. These are some explanation of supportive
activities:
(1) Procurement: the purpose of obtaining raw materials and other inputs used in the value-
creating process.
(2) Technology development: include research and development process, automation
process, and other development in technology and other aspect for supporting value
chain activities.
(3) Human resources management: the activities related to recruiting, allocating human
resources, compensation, etc.
(4) Firm infrastructure: the activities related to finance, legal, quality management, etc.
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One- Thailand 2004 Owned and managed by Orient Thai Airlines and
Two-Go owned by CEO Udom Tantiprasongchai and his
wife, the One-Two-GO brand was retired in July
2010, and the aircraft re-branded as Orient Thai
Airlines (international charter operator).
Nok Thailand 2004 LCC of Thai Airways. The airline is 39% owned by
Airlines Thai Airways, 10% by Krung Thai Bank, 10% by
(formerly Dhipaya Insurance, 10% by the Government Pension
Sky Asia) Fund, 6% by CPB EquityCo., 5% by ING Funds, 5%
by King Power and other minor shareholders
Valuair Singapore 2004 Is an independent private start-up and the first LCC
to begin operations in Singapore. The airline merged
with Jetstar Asia in July 2005, giving the first sign of
consolidation of LCCs operating in SE Asia
Tiger Singapore 2004 LCC of Singapore Airlines. The airline is 49% held
Airways by Singapore Airlines, 24% by Indigo Partners, 16%
by Irelandia Investments Ltd (the private investment
arm of Tony Ryan and family) and 11% by Temasek
Jetstar Singapore 2004 Founded by Qantas in financial cooperation with the
Asia Singapore government and two local investors.
Qantas holds 49% share of the airline, with the rest
19% held by Tamasek, 22% by Tony Chew and 10%
by FF Wong. Its sister company is Jetstar which is
based out of Melbourne and is wholly owned by
Qantas
Viva Macau 2004, Independent private start-up owned by MKW
Macau SAR, flying Capital and local investors. It is the first Asian LCC
China since airline to fly long-haul
2006
SpiceJet India 2005 The company was originally known as Royal
Airways. Royal Holdings Services is one of the
largest shareholders of the airline, also with
investment from the Dubai-based Isthithmar (private
equity arm of the Dubai government), Citigroup, and
Ewart Investments (a division of the Tata Group)
Hansung Korea 2005 Independent private start-up and the first LCC in
Air Korea. The airline is listed and owned by public
investors
Spring China 2005 The first LCC of China owned by Shanghai Spring
Airlines International Travel Service Ltd, one of the
countrys largest domestic travel agency
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AirAsia India 2013 Operated as a joint venture between Tata Sons and
India AirAsia, with AirAsia holding 49% of the airline
There are some vital reasons accounting for the rapid development of LCCs in
Asia since the early 2000. First, the eruption of the financial crisis in Asia in 1997 enable a
high demand of low-cost air transportation for business travelers which financially
supported by cost-conscious finance departments of private companies (Condom 2005).
The dramatic decline in air transportation after the Asian Financial Crisis also made the
governments in some Asian countries under pressured, which were before unwilling to
grant the right or permission to operate on international routes to airline providers other
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than national routes, to establish both domestic and international aviation markets for
independent low-cost startup. For instance, the Indonesian Government in 2000 issued 10
licenses to new airline provider to gain broader market expansion (Thomas 2002).
Second, boundaries and limitation on bilateral air transport contracts were recently
eliminated by some Asian national governments to encourage rapid growth of trade and
travel in the region. In 2004, China accomplished a complete open skies agreement with
Thailand. A similar agreement was followed between Hong Kong and Malaysia
(Centreline 2004). The Association of South-East Asian Nations (ASEAN) is running
towards emerging an open skies policy targeted to give national carriers of the
Associations member nations unrestricted intra-ASEAN access between main capital
cities by 2008 (Ionides 2005). Deregulation of aviation rules has facilitated many LCCs,
some of which currently enjoy access to the under-capacity hub airports in the Asian
region, to offer multi-country flying services (Baker, Field and Ionides 2005; Interavia
2004, p. 25). Many LCCs which began by offering short-haul, single border services
have expanded to cover up multi-country services within the sub-regions of North, South
and Southeast Asia, and crosswise them (Interavia 2004, p. 23). Even long-haul
international services have recently been opened by some LCCs such as Viva Macau and
Oasis, though with mixed results.
Third, there are some low-cost terminal opened recently, such as in Malaysias
Kuala Lumpur Low Cost Carrier Terminal in 2005 and Singapores Changi Airport in
2006. It really helps foster further development of low cost carrier in the region. These
low-cost terminals do not have the trimmings of other terminals (such as airline lounges)
and plan for the mass rapid on boarding and disembarking of passengers. By reducing or
eliminating value-added services offered by classic airports, these low-cost terminals were
able to control costs and pass the savings onto the airlines using their services. Tiger
Airways, for example, signed a contract to utilize the low-cost terminal opened at
Singapores Changi Airport in March 2006. Similarly, AirAsia has used the low-cost
terminal opened and operated at Malaysias Kuala Lumpur International Airport since
March 2006 (Hong Kong Economic Times 2006).
LCCs took off originally in East and South East Asia, spread quickly to North Asia
and, more recently, China as well as the Indian subcontinent. The enormous population in
ASEAN, China and India supplied the needed demographic base to fuel further
development of LCCs in the region. Growth of LCCs in the region will also be motorized
by an increase in the number of Asian desire travelers who would like to fly to nearby
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holiday destinations (Interavia 2004, pp. 2526; Voorhaar 2004). Growing regional
affluence, coupled with the lack of transport substitutes for air travel due to geographical
motives, is expected to additional boost up the growth of LCCs in the region. Reflecting
these expectations is the projected average annual passenger growth rates in South East
Asia (see Table 3-3).
Table 3-3: Average annual passenger growth rate in South East Asia
Airlines 2003-2008 Forecast
Domestic % International %
South East Asia 8.6 9.9
Malaysia 6.6 9.2
Thailand 10.1 7.8
Indonesia 13.2 10.5
Source: Wang and Ricart (2005, p. 22).
Compared with 4% average yearly growth rate of airline passenger for the
worldwide, the rate of 8.6% growth for domestic travel and 9.9% growth in international
travel in South East Asia is extraordinary (Airports Council International 2007). While
further growth of LCCs in the Asian region is unpredictable, rising jet fuel prices and
intense rivalry has placed pressure on existing participants in the industry and kept
potential entrants at bay. It is expected that LCCs in the region will keep on enjoying high
growth, although with some scale of consolidation in the sector, as is evident in the merger
of ValueAir with Jetstar Asia in July 2005.
Lumpur, Kuching, Penang and Kota Kinabalu), Thailand (Bangkok and Phuket),
Indonesia (Jakarta, Bali, Bandung and Surabaya), The Philippines (Angeles City,
Pampanga in the Philippines), Japan (Narita International Airport - Tokyo), and India.
In 2001, AirAsia opened two more hubs; Chiang May in Thailand and Medan in
Indonesia. In Changi Airport Singapore which is as a virtual hub, AirAsia is the top 10 in
terms of contribution of passenger traffic. For building up a strong ASEAN network, in
December 2010 the Group signed an agreement to establish a Philippine-based low-cost
affiliate, which is forecasted will operate at the end of 2011.
The whole Group business model is applying a low-cost philosophy which
requires the operations be clean, straightforward, and efficient. AirAsia is applying some
key strategies for the operations, likewise:
(1) High aircraft utilization
AirAsia uses the aircraft in very high frequency and high turnover of flights; these add
value to customer convenience and enable low cost. AirAsia has the fastest turnover in
its region; is 25 minutes.
(2) Low fare no frills
AirAsia does not have frequent flyer miles program and private airport lounge. No free
foods and beverages even snack in flight, additional meal and service required
passenger to pay more.
(3) Point to point network
All AirAsia both short-haul (4 hours or less radius) and medium to long-haul are non-
stop flight, by doing that; save human recourses cost, facilities cost, airport cost, etc.
On December 2004, AirAsia changed all existing old aircraft Boeing B737 with
Airbus A320, which has more capacity, more efficient fuel-consume and cost-efficient. As
a result, nowadays, the Group has the largest and newest A320 fleet in the region. From 90
aircrafts, 86 are Airbus A320 and 4 are Boeing 737 in AirAsia Indonesia and it is no more
used since 2012. The Group also has ordered more additional AirBus A320s. By utilizing
homogeneous aircrafts, the company able to save human resources cost and reduce spare
part stocks. These strategies have brought AirAsia as the lowest-cost airline in the world,
with a cost/ASK (available seat kilometer) of US3.67. This great achievement achieved
without compromising safety. AirAsia highest priority is safety; all the operations are
bellow supervision of all countries' regulators. To keep the aircraft in best condition
AirAsia partner with the best maintenance provider.
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AirAsia R&D not only works on the aircraft utilization but also on infrastructure
and technology. One of the AirAsia success stories begins with the online booking
process, followed by ticketless airlines (the first in Asia) in March 2002, allow customer
to pay for the booking by using a credit card via phone. By applying this system, it
generates more sales and creates value for the customers; it saves money for the company.
In 2010, AirAsia launched an IT booking process innovation; called New Skies, it allows
customers to manage the booking and payment. The development of the technologies also
grows at the same with the financial strategies. Within 18 months operations the company
sealed the stamp of financial wizardry and boost the airline growth and win nobilities such
as the 2010 Asiamoneys Best Managed Company.
Even known as no-frills airline, AirAsia in the same time also youthful, energetic,
and has a sense of fun on its campaign and branding strategies. AirAsia regularly
sponsored sport event and entertainment event, and in 2010 AirAsia launched
AirAsiaRedTix.com; online information of world class performances and events. AirAsia
also does CSR well, in January 2010; AirAsia joined UNICEF to raise US$ 128 million
for helping the earthquake victims at Haitians. The airline also helps people with heart
disease to get treatment at the National Heart Institute in Kuala Lumpur through Donate
Your Loose Change Campaign.
The Group's adherence the best practices and proven by several awards over the
years AirAsia has been nominated the World's Best Low Cost Airline for two years
continually, in 2009 and 2010 by Skytrax. The award reflects of 18 million people
opinions over the world surveyed by the London-based aviation consultant. AirAsia proud
of many awards and achievement gained; and commits to provide the best service and
efficiency, also spread wider across the skies and keep the low cost at the same time.
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network by connecting all the existing cities in the region and expanding further into
Vietnam, Indonesia, Southern China (Kunming, Xiamen, Shenzhen) and India. The airline
will focus on developing its hubs in Bangkok and Jakarta through its associate companies,
Thai AirAsia and Indonesia AirAsia. With increase frequency and the addition of new
routes, AirAsia expects passenger volume to reach 18 million by the end of 2007.
On 27 September 2008, the company just added 106 new routes to its current 60
routes. Some of the old routes discontinued have not been revealed in public. On 2 April
2012, AirAsia had the first flight from Sydney to Kuala Lumpur. In August 2011, AirAsia
had an alliance agreement with Malaysian Airlines by means of a share swap. Malaysian
government struck down the alliances in order to void the agreement of both airlines. By
early 2013, AirAsia had seen a sharp rise on its profitability. The year-on-year assessment
had publicized a 168% increase in profits as compared to 2012. For the last quarter 31
December 2012, the airline's net profit stood at 350.65 million Ringgit (US$114. 08
million). Regardless of a 1% rise in the regular fuel price, the airline had confirmed profits
of 1.88 billion Ringgit for the full financial year 2012.
In February 2013, AirAsia proposed an application to the Indian Foreign
Investment Promotion Board, throughout its investment division, AirAsia Investment
Limited, to look for approval for inauguration its operations in India. AirAsia wanted to
take up a stake of 49% in the airline, which was the greatest amount allowed by the Indian
government at that time. AirAsia firstly invested an amount of 50 million United States
dollars in the fleet. The fleet wished to begin operations from Chennai and enlarge its
network in South India, to where AirAsia already operated flights from Malaysia and
Thailand.
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No interlining, no flight
kilometer)
aggressive PR
Young Fleet
connections
second hub
hierarchies
Maintenance X X X
Fuel X X X
Staff X X X X X
Airport Costs X X X X
ATC costs X
In-flight service X
Capital and leasing X X X X X
Marketing / Sales X X X X
Overheads X X X X X X
Soucrce : DLR - http://www.dlr.de/fw/
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destination intended. Customer can easily choose any airlines to book their tickets
that make this industry so competitive.
4. High exit cost. For an airline, it is almost impossible to well exit the industry. This
business need to consider very high investments, high loans, staff retrenchment and
flight cancelation refund. Even the business suffers loss, the company shou ld have to
keep running in order to cope with the business. This makes the industry more fierce
in competitive.
5. Different products and services offered. Different with the common airlines; either
FSC or LCC; AirAsia not only offer a flight service but also other service such as
accommodations and tours or holiday package at an affordable price. AirAsia has a
good business partnership with third-party business to support AirAsia business and
boost its income. These are hard to do with competitors or new comers.
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allocation on travel. People with higher allocation tend to be more flexible with the
price, on the other side people with small allocation are more price sensitive. Thus,
can be concluded, that the bargaining power of buyers is high.
4. Technology development. As the development of IT, the world has changed.
Information is swiftly spread through the internet. Many companies use IT and e-
commerce for the operation and as the key of success. With the internet, information
can be got easily with just a click. The customer also can access every airline website
and any other flight finder website to get flight information from various airlines.
This makes the airline has the less negotiation power to the customers. Thus,
customers have strong bargaining power.
5. Individual decision. Most of the customers of LCC are individuals; groups of travel
are a small part. So the flight ticket sold are purchased individually, airlines cannot
rely on travel agencies or few groups. Thus, the buyer has strong bargaining power.
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most famous football teams) and AT&T Williams Formula One team has further
boosted their image to a greater extend beyond just the this region.
4. AirAsia is the low cost carrier leader in Asia. With the support of AirAsia Academy,
AirAsia has successfully created a low-cost airline mentality among their
employees. The employees are very flexible and highly committed and very critical in
building AirAsia the lowest cost airline in Asia.
5. The outstanding employment of IT have straight contributed to their promotional
activities (email alerts and desktop widget which was jointly developed with
Microsoft for new promotions, IOS and Android application), brand building exercise
(with over 3 million hits per month and on the most extensively surfed booking
engines in the world) in addition maintain the cost low by enabling direct purchase of
tickets by consumer thus saving on travel agent fees.
(2) Weaknesses
1. AirAsia does not have its personal maintenance, repair and overhaul (MRO) facility.
It perhaps a good strategy when they initially started with only Malaysia as the only
hub and few aircrafts to maintain. But now, with only some hubs (Malaysia, Thailand
and Indonesia) and over 100 aircrafts currently owned and about another 200 Airbus
A320 to be received in the next few years, AirAsia has to make sure proper and
permanent maintenance of the aircrafts which will also facilitate to keep the overall
costs low. It is a competitive disadvantage not to have its own MRO facility.
2. AirAsia receives lot complaints from customers on their service, because of limited
service offered and low price. For instance, complaints are about flight time delays,
being charged for a lot of additional services and not able to modify flight or get a
refund if customers unable to fly. Good customer service and management is critical
particularly when competition is getting forceful.
(3) Opportunities
1. The rising of oil price perhaps at the first glimpse is like a threat for AirAsia. But
being a low cost carrier market leader in Asia, it an upper hand because its cost will
be keeps the lowest among all the Asian airlines. Therefore, AirAsia has a great
opportunity to gain more customers of full service and other low cost airlines
customers. On the other hand, there will be some cost reduction in whole travel
especially by casual and price sensitive customers.
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2. There are some opportunities to partner with other airlines to tap into their existing
strengths or competitive advantages like brand, landing rights and landing slots (time
to land).
3. The population of Asian middle class citizens increase is about 700 million. This
generates a broader market and a huge opportunity for all low cost airlines in this
region including AirAsia.
(4) Threats
1. Certain charge like airport departure costs, security charges and landing charges are
under the control of airline operators and these are a threat to all airlines particularly
low cost airlines which struggling to maintain their cost as low as possible. For
example, Changi Airport in Singapore charges SGD21 for every person who departs
from Singapore.
2. AirAsias profit margin is about 30% and this has attracted many newcomers or
competitors. Many of full service airlines have or planning to create a low cost
subsidiary to compete directly with AirAsia. For instance, Singapore Airlines
established a low cost carrier Tiger Airways, Garuda Indonesia establishes Citilink
low cost carrier.
3. Passengers perception that low cost airlines may compromise safety to keep costs
low.
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(FSC). On average, AirAsia aircraft utilization is 12 block hours per day, compared to the
FCS 8 hours per day.
(2) No Frills
The basic of LCC business is about how to fly people from A to B. The other
service or everything else is regarded as a luxury or frills, of which cost money. AirAsia
removes some frills such as:
1. No free food and beverage on-board. Passengers can buy food and beverage on-board
at affordable price from the flight attendant, or buy online on the ticket booking
process.
2. There is no assigned-seating, all seating are free. Except passenger willing to pay
more for seat selection. If no, passengers will receive the general boarding pass and
have to take any available seats.
3. Ticketless. Less complicated for the operational and customers. Passengers do not
need to worry about collecting ticket before the flight and it is cost-efficient for
AirAsia (printing, paper, distributing).
4. No refund. Airline cost much money when passengers no show for flight due to
refund and reschedule. Whether the aircraft full or empty, the passenger show or not,
the cost of the airline is the same. AirAsia does not give any compensation for no
show guest and do not refund for the missing flight passengers.
5. No loyalty program. AirAsia believes customers are loyal with the low fare, so it does
not apply frequent flier miles program.
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(7) Positioning
The customers mostly are non-business passengers, particularly leisure travelers
and price-conscious business passengers. The characteristic of the flight is short-haul point
to point traffic with high frequency. AirAsia has to do very aggressive marketing compare
with ordinary or high end airline operator. It will be very helpful and profitable if the main
hub is in secondary airport (Low Cost Carrier Terminal and Secondary Changi Airport).
Because of the low cost it competes with all transportation carriers, both land and water.
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Primary Activities:
(1) Inbound Logistics
1. Market assessment: AirAsia has a very good brand in Asia, through its promotion
programs, marketing campaigns, sponsoring many events, etc. Beside AirAsia have
many followers on Twitter and Facebook Fans. Google also granted AirAsia as the
most visited travel websites in Asia.
2. Yield management and pricing: AirAsia master the yield management; the company
understands well the market and ready to anticipating the changes of the external
environment. AirAsia able to influence customer behavior in order to maximize
profits through the affordable ticket price (which has the lowest cost so that can offer
lowest price) and add-on service (meal on-board, travel insurance, seat selection,
hotel and car booking, etc.
3. Routes Planning: AirAsia has the widest routes in ASEAN; which is 132 routes over
countries, and will keep growing together with the growth in the number of aircraft.
4. Fuel Management: AirAsia use Airbus A320 which has more fuel efficient than a
Boeing 737, and for the future AirAsia has ordered a new design of Airbus A320 Neo
that have 15% more fuel efficiency. AirAsias aircraft mostly fly on cruise phase
(pilot will decrease the engine's thrust to the optimal setting of fuel burn and thrust
produced in order to conserve fuel).
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5. Flight Scheduling: AirAsia is applying high aircraft utilization, the turnover for every
flight is only about 25 minutes. The dense flight schedule creates value for customers,
they have varied flight schedule selection.
(2) Operations
1. Coordination of station and hubs: AirAsia has 14 hubs spread in 4 countries; it helps
AirAsia have good coordination and communication, also help AirAsia maintain low
cost.
2. Ticketing and Reservation: AirAsia is the first Airline with ticketless program in
Asia. The ticket sales mostly around 80% generated from AirAsia website sales; that
very low cost and less commission for travel agent.
3. Check-in and Gate Operation: AirAsia uses secondary airport and have many hubs; in
most airport AirAsia has self-check-in machine; the machines allow passengers to get
a boarding pass without going to the check-in counter. It saves cost on human
resources cost.
4. Cargo Management: AirAsia has cargo service in order to fill the emptiness aircraft's
belly and gain more profit.
5. Aircraft Operations: AirAsia aircraft consumes approximately 14 million liters of fuel
each year and flies an average of 2.8 million kilometers each year; that's an equal
distance to the moon and earth, four times over.
6. On-Board Service: AirAsia offers limited on-board service; for additional services are
charged at cost.
7. Baggage Handling and Ticket Office: Just same as other airlines.
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4. Safety and Security Procedures: AirAsia highest priority is safety; all the operations
are bellow supervision of all countries' regulators. To keep the aircraft in best
condition AirAsia partner with the best maintenance provider.
(5) Services
1. Customer Relationship: Customer can contact AirAsia both online and come directly
to the representative office available. Phone-line also available for customer relation
service.
2. Complaint Follow-up: AirAsia offers very limited free services, for every passenger
are sent the AirAsias flight policies. All policies are written in detail for preventing
mistakes and complains.
3. Baggage Service Problem: Passengers that have a problem with their baggage (delay,
lost, damage) can come to the guest service officer before leave the airport. The
management will follow up with the baggage and keep the passenger informed.
4. Partnership: AirAsia partnership with Expedia and HPE-Clothing
5. Hotel Reservation: AirAsia offers travel deals including city tour, hotel and city
transportation. Hotel reservation also available through www.airasiago.com.
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Support Activities:
(1) Firm Infrastructure
1. Business Strategy: Applying low-cost leadership strategy
2. Financial Models: Have a very strict financial management in order to maintain the
low-cost.
3. SBU Management: Development some SBU, such as AirAsia Cargo, AirAsia Go,
AirAsia Megastore, AirAsia RedTix, etc.
4. Operational Policies Procedure: Have standard SOP, so passenger gets the same
service experience in every flight.
5. Relationship Building: Maintain relationship with the passenger by giving the best
service in low fare.
6. Regulatory Compliance: Has a strong relationship with the government in countries
that help AirAsia has flight license and permit through the countries.
7. Stakeholder Management: Maintaining relationship with the customer, supplier,
shareholder, employee, and society.
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(4) Procurement
1. Procurement: AirAsia has E-Procurement Requisition (EPR) System. EPR is built on
the idea that procurement requisition can be more intuitive, efficient, and useful. This
system is related to ordering and receiving, delivery instruction, specification,
branding, etc.
2. Monitoring Suppliers: AirAsia ensures that suppliers consistently meet all their
quality, cost and delivery commitments.
3. Establishing Partnership: AirAsia has good partnerships related to the procurement.
For example, with the Airbus in aircraft procurement; with Airbus maintenance; with
food suppliers; with merchandising suppliers, etc.
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of dedication in their work to achieve companys goal. With more than 9000 staffs,
they are running together to exceed customer needs. They are very energetic and fun.
In AirAsia every staff has the same opportunity to grow in its career path and every
voice is well listened as an improvement for the company. Employee needs and
satisfactions are AirAsia concern, AirAsia knows the staffs talent and develop in
every area. AirAsia also built up AirAsia academy for the development of the human
resources and get qualified staffs.
(2) Associate organizationAirAsia built up the affiliates under a name of AirAsia such as
Indonesia AirAsia and Thai AirAsia in 2004. Continued with the expansion; built up
Philippines AirAsia and Japan AirAsia. These affiliates have a great power and great
synergy as we have seen the performance of Indonesia AirAsia and Thai AirAsia. All
the associates represent the business globalization of AirAsia that enable the company
applying low-cost business model in every place and routes since has many local
partners in most areas.
(3) Widespread network
Beside the associate organization and affiliates, AirAsia also built up 14 hubs in 4
countries in the regions; Malaysia, Indonesia, Thailand, and Philippines; and will
build other hubs in Japan after Japan AirAsia running. The plenty of hubs give the
model to AirAsia with flying in 4 hours radius; means the more hubs will generate the
wider network expansion of AirAsia. Recently AirAsia has flown 142 routes (154
including AirAsia X) in 70 destinations (80 including AirAsia X). AirAsia sky bridge
10 ASEAN nations and beyond, and no less than 50 routes are unique tours. With
AirAsia everyone not only can fly but also everyone can fly everywhere.
(4) Organized cost structure
These 10 years growth happens because of the company has a strict and discipline
cost structure. AirAsia maintains its focus on cost efficiency in every aspect; use
great and efficient aircrafts, developed infrastructure, etc. Besides focusing on cost
efficiency, AirAsia very concern on fight safety. Low-cost practices like standard
fleet, high aircraft utilization, no frills, no unions, etc allow AirAsia achieve
economies of scale and enable to have great bargaining power.
(5) Leading LCC in Asia
AirAsia is the largest low-cost carrier in Asia and the largest carrier in ASEAN. In
2011 AirAsia flew 29.9 million passengers, surpass the Singapore Airlines, Malaysia
Airlines, Thai Airways, and Garuda Indonesia; these are 4 dominant airlines in
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ASEAN. These 10 years growths exceed the growth of established LCCs such as
Ryanair and Southwest. This fast growth means AirAsia flew 100 million passengers
in 8.5 years operation.
(6) Brand management
In recent 10 years, AirAsia has made a huge number of flights; the company claimed
has turned the sky, sea, and land into red (because of the color of the AirAsias
Aircraft. AirAsia name found everywhere; AirAsia promotions and sponsorship on
Formula 1 and MotoGP circuits, on Barclays Premier Leagues, football pitches and
jerseys, basketball courts, cricket games and tennis competition. AirAsia support
heroes in ASEAN regions and have been developed the brand in the process.
AirAsia has a creative marketing campaign that always differentiates to any other
company; it is humorous, mocking and memorable enable AirAsia top on main
recall and build an AirAsia brand image that fun, young and vibrant company.
AirAsia also win Worlds Best Low Cost Airline by Skytrax for three years running;
it builds a great brand image of AirAsia on customers eyes.
(7) Digital Airline
AirAsia utilizes technology strategy to push the cost at lowest. In 2002, AirAsia is the
first airline that goes ticketless in Asia. The technology development keeps trying to
make AirAsia operation more convenient and cheap to fly with. Nowadays the around
80% sales are generated from website and Google awarded AirAsia as No 1 Travel
Website in Asia. AirAsia website accessed over 65 million page visits per month
from more than 25 million visitors around the world spread more than 200 countries.
This condition enables a company to monetize the business and achieve more growth
and greater profitability. AirAsia also has 600,000 Twitter followers and 2 million
Facebook fans.
(8) Subsidiary Income
AirAsia tries to get more income beside the flight service, AirAsia has many
subsidiary income sources to get more profit and as a defense strategy of facing the
increasing of the oil price as well as to keep a continuing offer affordable price for
every flight. AirAsia subsidiary activities benefit from existing IT and aircraft
infrastructure for cost efficiency. It includes add-on service such as excess baggage,
board me first, insurance, seat selection, meal on-board and cargo service (which
utilize the aircraft belly space). AirAsia knows how to maximize revenue with the
owned resources and capability.
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differentiation. The threat of substitute analysis is relatively low; there are some alternatives
like land and sea transportation for short haul and FCSs price sometime low. Bargaining
power of customer analysis is high; the customer has strong bargaining power than the
company, there are many providers and no switching cost for the customers. Bargaining
power of supplier analysis is relatively medium; the company does not have power to the
primary supplier (aircraft, fuel, and airport) and have a strong power to the secondary
supplier (food, merchandise, etc). These are the Porters five forces analysis through the
industry attractiveness, and the industry is attractive considering these analyses.
AirAsia applies low-cost leadership on its whole operations which characterized as;
high aircraft utilization, no frills (no free foods, no seat assigned, ticketless, no refundable
ticket, no loyalty program), modernize operations (simple process, single class seating,
standardized operations), basic amenities, point to point network, lean distribution system,
positioning, and low operating cost.
Through the value chain analysis readers can understand the whole operation of
AirAsia through specific activities to gain competitive advantage. Through the primary and
secondary activities AirAsia success to create competitive advantage and get profit margin.
After applying the low-cost leadership and detailing on the value chain, AirAsia
success gains competitive advantage between its industries. These are the following
competitive advantage; both cost advantage and differentiation advantage: great human
resources, associate organization, and widespread network, organized cost structure, leading
LCC in Asia, bran management, digital airline, subsidiary income, strong balance sheet, and
fleet growth.
The author also did a SWOT analysis to know the internal and external factors of the
company. Hopefully company can maintain the strengths, develop the weaknesses and turn
them into strengths, and catch every opportunity, seized every threat.
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4.1 Conclusion
Nowadays, the airline industry has become simpler when compared to olden ages; it want
to improve itself in the broad global market. Airline industry boosts all the countries in growth of
the economy, tourism, and international business investment. It has made a lot of changes of
people lifestyle to travel and the way of doing business by reducing travel time consuming and
allow people to visit different places or countries. The International Air Transport Association
surveyed that the growth rate of the airline industry is about 6.6% every year and it has been a
growth more than 5% from the year 2000 2010.
In the few decades ago, low cost carriers or no frills carriers such as EasyJet and South
Western Airlines have appeared with the great competitive marketing strategy to battle with the
existing giant market leader such as British Airways and United Airlines (Buhalis, 2003). In
Asia, low-cost carriers development during the mid 1990s in Japan and the Philippines, these
two nations were liberalized by domestic markets. Skymark Airlines and Air Do (now is
Hokkaido International Airlines after having partnership with All Nippon Airways and
restructured in 2006) established low-cost domestic flight in Japan in 1996. In the 1996 also,
Cebu Pacific Air pioneered the low fare, great value strategy in the Philippines regional airline
industry. These early-start LCCs served mainly point-to-point services targeting price-sensitive
leisure travelers flying within country borders. Seeing in the current business of the Malaysian
aviation industry, Malaysia Airlines flag or scheduled carrier, that was the first established and
monopolizing the air travel business in this region; is now opposition rising challenges from no
frills or low cost carrier AirAsia, that has appeared as the successful airline regionally
(OConnell & Williams, 2005). The rapid change was because of the lower fare, new routes and
various locations with different time frequencies and the online booking process that provided to
the customers needs (OConnell & Williams, 2005).
Low cost carriers (LCC) focus on cost reduction with the purpose of implementing a cost
leadership strategy on the markets that they serve. The utilization of a young and homogenous
fleet of medium-size of aircraft (usually Boeing 737-700/800 or Airbus 319/320) normally
accelerates a lessening of fuel, upkeep, staff, maintenance, overheads and if hefty requests at
discounted prices are placed capital expenses. High occupancy seating accelerates lower unit
cost of all classes, as fix costs (incl. ATC expenses) might be credited to more sears and
passengers. Only variable in-flight seating expenses (and some fuel expenses) increase when
increasingly passengers are on-board. Ground times and delayed are decreased by serving
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smaller, uncongested airports and by focusing on point-to-point flights, without any connecting
flight, empowering a LCC to expand the amount of daily block hours and in this way aircraft
utilization.
AirAsia is well known in Asia especially in ASEAN. It is the leading low-cost carrier,
connecting people and place around countries with132 routes, and 40 of the routes are only
provided by AirAsia. In 2010 the AirAsia group includes AirAsia Thai and AirAsia Indonesia
break the record of its leadership position with two extraordinary occasions; flew 100 million
passenger and gain profit of RM 1 billion (about US$ 32.7 million) worth.
From an airline with two aircraft covering six routes in Malaysia in January 2002,
AirAsia has transformed these past nine years to fly 65 routes in 18 countries. Nowadays,
AirAsia employed more than 8000 employees with market capitalization over RM 7.06 billion
(US$ 21.6 million) on 31st December 2010. This is the only ASEAN airline that serves more
than 600 million passengers from 10 hubs in 3 countries; Malaysia (Kuala Lumpur, Kuching,
Penang and Kota Kinabalu), Thailand (Bangkok and Phuket), and Indonesia (Jakarta, Bali,
Bandung and Surabaya).
AirAsia is one of the best examples for learning low-cost leadership practice. Some
analyses above, such as Porters Five Forces, AirAsia Low-Cost Leadership Analysis, Value
Chain Analysis, Competitive Advantage, and SWOT Analysis; are done and author meets the
objectives of doing research. All analysis results are deep, reliable and useful for the research
study and the MBA learning process.
AirAsia Porters five forces; author analyzes the whole airline industry forces and
industry attractiveness related to the AirAsia. These are the Porters five forces analysis through
the industry attractiveness, and the industry is attractive considering these analyses. AirAsia
applies low-cost leadership on its whole operations. The value chain analysis helps readers to
understand the whole operation of AirAsia through specific activities to gain competitive
advantage. Through the primary and secondary activities, AirAsia success to create competitive
advantage (both cost advantage and differentiation advantage) and get profit margin.
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AirAsia does not have its personal maintenance, repair and overhaul (MRO) facility. It
perhaps a good strategy when they initially started with only Malaysia as the only hub and few
aircrafts to maintain. But now, AirAsia has many hubs over six countries, many aircrafts and will
receive many other aircrafts; AirAsia has to make sure proper and permanent maintenance of the
aircrafts which will also facilitate to keep the overall costs low. It is a competitive disadvantage
not to have its own MRO facility.
These are some recommendations developed by author for the future development of
AirAsia. The author wishes that AirAsia keeps being leader in Asia and develop greater. The
vision Now everyone can fly everywhere realized soon.
Notes
[1] Porter, Michael E., Competitive Strategy: Techniques for Analyzing Industries and Competitors. New York: Free Press,
1980.
[2] Cook, Kenneth J. The AMA Complete Guide to Strategic Planning for Small Business. American Marketing Association,
1995.
[3] Cook, Kenneth J. The AMA Complete Guide to Strategic Planning for Small Business. American Marketing Association,
1995.
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5 References
[1] AirAsia 2007 Annual Report (2008), http://www.airasia.com, viewed on 16th June, 2008.
[2] AirAsia Annual Report 2008. AirAsia. 3 (5/137). Retrieved 6 October 2009
[3] AirAsia 2011 Annual Report, http://http://www.airasia.com/iwov-resources/my/common/pdf/AirAsia/IR/annual-report-
corporate-2011.pdf.
[4] AirAsia India to take to the skies in Q4. MCIL Multimedia Sdn Bhd. Retrieved 21 February 2013.
[5] AirAsia Investor Presentation (2007), CLSA Investor Forum Hong Kong, http://www.airasia.com, viewed on 16th June,
2008.
[6] AIRASIA is named as the World's Best Low-Cost Airline at the 2012 World Airline Awards held at Farnborough Air Show.
The World Airline Awards. 2012. Retrieved 12 April 2013.
[7] Airlines must merge or go bust: Fernandes Jun 16, 08, http://www.malaysiakini.com/news/84534
[8] AirAsia Q1 2008 Financial Report (2008), http://www.airasia.com, viewed on 16th June, 2008.
[9] AirAsia to offer wider range of products online,
http://www.tmsamericas.info/cms/content.jsp?id=com.tms.cms.article.Article_e09fb0ac-caba7cb6-11e6a370-c4747769
[10] AirAsia unleashes its X-factor. The Star (Kuala Lumpur). 27 September 2008. Archived from the original on 29 June 2011.
Retrieved 27 June 2011.
[11] Anker, David. Developing Business Strategies. Chicago: Wiley, 1998.
[12] Asias Low-cost Carriers Set to Boom, (2004), Interavia, 675, 2326.
[13] Asia Times Online, Jul 6, 2007, Prying open ASEAN's skies,
http://www.atimes.com/atimes/Southeast_Asia/IG06Ae01.html
[14] Asiamoney, COVER STORY: Turbulence sure to test ambitions of Asian airlines,
http://www.asiamoney.com/default.asp?page=7&ISS=24757&SID=706404
[15] Baker, C., Field, D., and Ionides, N. (2005), Global Reach, Airline Business, May 21, 5, 6065.BBC News (2007), Long-
haul Budget Airline Unveiled, January 5, retrieved on February 13, 2007 from:
http://news.bbc.co.uk/2/hi/business/6233295.stm.
[16] Bernama (13 July 2012). "AirAsia named Skytrax's World Best Low Cost Airline". New Straits Times. Retrieved 11 April
2013.
[17] Carr, Lawrence P, 1999: Value cahin Analysis and management for competitive advantage.
[18] Centreline (2004), Q&A on Low Cost Airline Developments in North Asia, Centre for Asia Pacific Aviation, March 18.
[19] Chan Tien Hin (1 December 2008). "AirAsia Has Record Drop on Loss, Analyst Downgrade". Bloomberg (New York).
Retrieved 27 September 2009.
[20] Condom, P. (2005), Low-profit Carriers, Interavia Business & Technology, 676.
[21] Cook, Kenneth J. The AMA Complete Guide to Strategic Planning for Small Business. Chicago: American Marketing
Association, 1995.
[22] David, F 2007, Strategic Management: Cases and Concepts, Pearson Education, New Jersey
[23] Discount airlines in Asia, http://wikitravel.org/en/Discount_airlines_in_Asia
[24] Driver, J. C. (1999). Developments in airline marketing practice. Journal of Marketing Practice, 5(5), 134 150. Retrieved
November 17th, 2010, from http://www.emeraldinsight.com/journals.htm?articleid=857947&show=html
[25] Forbes.com, September 17, 2007, Phuket Crash Raises Fears About Budget Flights,
http://www.forbes.com/markets/2007/09/17/phuket-air-crash-markets-equity-cx_vk_0917markets05.html
[26] Goodstein, Leonard. Applied Strategic Planning: How to Develop a Plan That Really Works. New York: McGraw-Hill,
1992.
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[27] Hansen, and Mowen, 2000: Management Biaya; Akuntansi dan Pengendalian, alih bahasa Tim Salemba Empat. Salemba
Empat jakrta.
[28] Hong Kong Economic Times (2006), March 27.
[29] Ionides, N. (2005), MAS and SIA Forge Surprise New Pact, Airline Business, April 21, 4, 25.
[30] Johannes Reichmuth, 2008 : Analyses of the European air transport market Airline Business Models
[31] Kurlantzick, Joshua (23 December 2007). "Does Low Cost Mean High Risk?". The New York Times. Retrieved 28 April
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[32] Leong Hung Yee (27 December 2006). "AirAsia embarks on 2nd chapter". The Star (Kuala Lumpur).
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397.234, European Parliament
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[37] Porter, Michael E., Competitive Advantage: Creating and Sustaining Superior Performance
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[39] Thomas, G. (2002), Asias Absent Revolution, ATW, September 42, 47.
[40] Voorhaar, R. (2004), Fear of Low-cost flying: Get Over It!, Traveltrade, February 25, 32.
[41] Wang, D., and Ricart, J. (2005), Now Everybody Can Fly: AirAsia, IESE Business School, University of Navarra.
[42] Womack, J. P., Jones, D. T., & Roos, D. (1990), The Machine that Changed the World, Harper Perennial, New York.
[43] WTEC Panel Report on Electronics Manufacturing in the Pacific Rim, http://www.wtec.org/loyola/em/
[44] www.airasia.com
[45] www.airasiago.com
[46] www.adg.stanford.edu , 2000
[47] www.wikipedia.com
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Acknowledgement
The success of this study required the help of various individuals. Without them, the
author might not meet their objectives in doing this study. The author wants to give gratitude to
the following people for their invaluable help and support:
To Jesus Christ, our Lord and Savior, for giving the wisdom, strength, support and
knowledge in exploring things; for the guidance is helping surpass all the trials that the author
encountered and for giving determination to pursue their studies and to make this study possible;
To Prof. Huang Wei Li, for the time and effort; leading the author and give valuable
guidance; kind, responsible and understanding adviser, who was always available during the
process of this thesis giving some advice and ideas to accomplish this thesis.
To my parent, for giving support and encouragement to pursue my study also giving
support and encouragement and guidance to pursue their study; for giving trust, love, and
patience.
To Christy Lizar, for giving me support and careness for evertyhing that I do. Pray and
love are highly appreciated regarding achieving great success.
To all MBA teachers, for teaching me many valuable skills and knowledge; guiding me
to finish the MBA learning process.
And lastly, to the people who helped and contribute great ideas and advices, especially
classmates and close friends; Hansdrata Hindryanto, Shan Wiyono, Rifan Hia, Sonny Thjaiyahdi,
Jassisca Klory, Jansen Setiawan, Momen Ghola, Judy, Carol, Jervis, Rosu, Celina, Paul, Ivan,
Emilly, Anna, Bern, Laurent, and others that cannot be mentioned one by one; for without them,
this study would not be possible.
The Author
Michael
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