AIR ASIA CASE STUDY CS#2

Executive Summary
AirAsia was initially launched in 1996 as a full-service regional airline offering slightly cheaper fares than its main
competitor, Malaysia Airlines. Before 2001, AirAsia had failed to attract enough passengers from Malaysia Airlines to
establish its own niche market. The turnaround point of AisAsia began in 2001, when it was put up for sale and bought
by Tony Fernandes. Tony Fernandes then enrolled some of the leading low-cost airline experts to restructure AirAsias
business model. AirAsia, as the second Malaysian National Airline, provides a totally different type of service in line
with the nation's aspirations to benefit all citizens and worldwide travelers. Such service takes the form of a no frills low airfares flight offering, 40%-60% lower than what is currently offered in this part of Asia. Their vision is "Now
Everyone Can Fly" and their mission is to provide 'Affordable Airfares' without any compromise to Flight Safety
Standards. The story of the emergence of AirAsia is similar to Ryanair, since both carriers underwent a remarkable
transformation from a money-losing regional operator to a profitable, low cost airline. It may be foreseeable that some
budget airlines faces extreme challenge when they attempt to expand the market fast. Also, regulations and legal
issues of institutions imposed by governments may be the constraints for AirAsia to expand further into new markets,
even though there have been some form of open sky agreements in the world. In addition, demands and values of
consumers in different markets may not be identical to that AirAsia faced before this.
Introduction
Fernandes had a dream to own an airline since he was young. He earned an accounting degree, worked at Virgin Group,
and left the group after coming back to Malaysia in 1992. He decided to own his airline, and ultimately purchased
AirAsia, which was financially struggling in 2001, with a symbolic one ringgit. He persuaded McCarthy, Ryanairs former
director of group, to invest and be part of the executive team of AirAsia in where their value proposition was described
as Ryanair operational strategy, even Malaysian government was favorable to its strategy with the possibility of
offerring tremendous opportunity, with the slogan Now everyone can fly.
Fernandes vision has turned AirAsia to become one of the well-known airline brands in the world. AirAsia focused on
very lost cost structure, and finally achieved the lowest cost amongst the airline industry in the world, that ultimately
brought an enormous expansion of business. However, there are rising concerns that, other airlines which attempted
fast expansion faced serious challenges. Even though he succeed to expand AirAsia to service 42 international cities as
of 2009, rigorous scanning of political and demands of regions were required. He treats the employees as family
members in non-hierarchical atmosphere, promoting good teamwork and conducive working environments (King,
2013). Fernandes believed in the openness, creativeness, and passion of his employees, thereby inspiring his people,
and also led himself to be described as a transformational leader with the entrepreneurship qualities, charisma, and
innovation (King, 2013).
2. Analysis
2.1.Environmental scanning: Macro and Industry
To evaluate the macro environment in the Southeast Asia region for budget airline, PESTLE analysis were conducted to
gain a greater insight. PESTLE framework assesses the 1) Political, 2) Economical, 3) Social, 4) Technological, 5) Legal
and 6) Environmental issues among the region.
2.1.1. Political
Budget airlines grew rapidly in the Southeast Asia region after the the liberalisation of the industry. Countries including
Thailand, Malaysia, Cambodia, Philippines and Singapore underwent deregulation of the budget airline industry.
Moreover, reciprocal access agreement were implemented among Southeast Asia countries with the United States to
embrace the liberalisation of the industry. This implies the open skies services agreement encourage more air traffic to

enter and exit the region domestically and internationally. Finally, governments in these countries allowed more new
private budget airlines to be introduced to the industry to encourage fair competition.
2.1.2. Economical

Table 1 shows the GDP per capita for several countries in Southeast Asia from 2004 to 2013. There is an obvious
increase of GDP per capita among these countries, which indicated that the purchasing power of the region had gone
up, in general. Due to the strong economic growth in this region, budget airlines ticket are now more affordable
among middle income population.
2.1.3. Social
The large population based in Southeast Asia region created a large market for aviation travel. Among those, Indonesia
with 235 million potential passengers fuels the growth of budget airline industry. However, there is a perception that
Asian passengers value quality more than price. Hence, despite the low price strategy, certain inflight quality standards
will have to meet the expectations of Asian passengers.
2.1.4. Technological
Infrastructures provided by these international and domestic airports and public transport to the terminals are quite
sophisticated in the region. Malaysia for example, at least a domestic airport in every state, while bigger cities might
have a combination of international and domestic terminals. Internet coverage are usually adequate for the purpose of
purchasing online ticket, which lowers the operating cost in budget airline.
2.1.5. Legal
Competition regulation implemented in several countries such as Malaysia, major merger or acquisitions were mostly
prohibited by the local government to ensure the industrys competition. Foreign direct investment were also limited to
joint ventures or alliances by several countries in the region. Moreover, regulatory systems in some of these countries
are quite weak, which might affect the business planning in this region.
2.1.6. Environmental
Environment is really a big advantage for the airline industry, particularly to budget airlines. This is due the lack of high
speed cross countries railways or highways, which make land travelling among countries difficult. Most of the countries
are separated by sea, which pave ways to the budget airlines in the region, as either travelling because of business or
pleasure, dictates that they have to take a flight to another country. Additionally, tourism industry is a major industry in
the Southeast Asia countries. The spill over from the growth tourism industry also increases the demand for budget

airline, as more passengers demand for more low cost and fast travel options while travelling in the region. Finally, the
countries were located near to each other where they can reach from Malaysia to Singapore, Indonesia, Philippines,
Brunei and Thailand, within 3 hours flight.
2.2. Differing Demand Compared To North America and Europe
Firstly, although having huge pool of potential passengers, as mention above, the Asian regulatory systems are deemed
to unable to keep pace on the uncertain demand for low fare service (Lawton & Solombo, 2005). This creates a more
volatile and uncertain business environment in Southeast Asia market compared to the western markets. Nature of
demand for low fare services might be different in Asia Pacific than the western countries due to the existence of high
speed rail across these countries. As mention in the analysis above, passengers from European countries can choose to
travel by land which make them less sensitive to price offered by the budget airlines. Conversely, in Asia pacific region,
the only efficient way to travel across countries is limited mainly to air travel. Hence, price level of the fares plays a
major influences to the demand for the budget airline industry. To conclude, in North American and European markets,
demand differs from the type of transport offered.
2.3. AirAsias generic strategy
Aligned with the mission statement, AirAsia business strategy centered on cost leadership from Porters generic
strategies (2011), since they are mainly targeting the customers who are sensitive in pricing. AirAsia pursue its
competitive advantage by providing services at a lower price compared to its competitors. Operation effectiveness and
outstanding efficiency are the two main characteristics of low cost business including AirAsia, thereby they are able to
achieve bigger cost advantages (AirAsia, 2014).

Figure 1. Competitive advantage of nations: creating and sustaining superior performance, Porter, M. E., 2011.
2.3.1. Strategic similarities and differences between AirAsia and Incumbent Low Cost Carrier (LCC).
As it is written from the case, AirAsia, Southwest and Ryanair are all known as low cost airlines which are all currently
acting as strong cost leaders in their region, respectively. As they are all in low cost carrier (LCC) industry and known as
using cost leadership as their business strategy, there are some similarities and differences to note. Firstly, in terms of
similarity is the way of pursuing cost leadership strategy. AirAsia resembles Southwests successful people-oriented
strategies in the way of treating their employees and Ryanairs efficient operational strategies such as no frills, landing
in secondary airport (Kling & Smith, 1995; OConnell & Williams, 2005; AirAsia, 2014). Secondly, differences would be
the reason of pursuing those strategies such as people oriented strategy and efficient oriented strategies. Southwest
and Ryanair emphasize those strategies in order to differentiate themselves from other low-cost competitors in their
fierce competitive and relatively saturated American and European markets. Thus, for Southwest and Ryanair work
hard to position themselves as pursuing cost leadership and they using differentiation to distance themselves from
other low cost carriers (Kling & Smith, 1995; Baroto & Abdullah, 2011). It implies that the Porter model does not

appropriately account for firms like Southwest and Ryaniair that achieve both low costs and positive differentiation
(Kling & Smith, 1995). However, AirAsia is operating its business in a Southeast Asian market with limited competition
and growing demand as a new market segment compared to saturated America and European market.
2.4. Overlooked risks
The case indicates that Fernandes was most concerned of risks, especially having worked in a decision making capacity
in the same geographic region. Fernandes also invited Connor McCarthy, the former director of group operation of
Ryanair to seek advice expert advice about low cost carrier industry. These effort to avoid risk could be noticed from
the strategies which resembles other successful low cost airlines such as Southwest, Ryanair. However, one area was
overlooked was macro political risks. Nations differ in political risk, which affects the stability of their markets (Simon,
1984). Perception of foreign businesses entering their country also differ by governments; whilst some countries
welcome inflow of foreign capital, some shows negative respond as they fiercely protect their market share (Peng,
Wang & Jiang, 2008). These diverse aspect implies that the organization must understand the political environment as
domestic and foreign governments attitude is a crucial part of building international business strategies. The strategic
planning of doing business internationally could be seen as dealing with both domestic and different types of
governments, relationships, and levels of risk which country possess (Boddewyn, & Brewer, 1994; Holburn & Zelner,
2010). Political risk refers to governments activities that negatively affects the organizations such as forcing unjust law
with changing policy or regulation (Simon, 1984). It would link to political instability that refers to probability of sudden
change to a state of war, revolution, democratic changes in government or other political turmoil (Peng, Wang & Jiang,
2008).
2.4.1. Singapore governments rejection
Initially, AirAsia wanted to locate their flights from the southern state of Johor, near Singapore, in order to operate the
business at a lower cost than operating within Singapore. Furthermore, to attract customers, AirAsia attempted to
operate a convenient bus service which links cities to the state.
However, Singapore government rejected the idea mentioned as bus link for AirAsia would never be approved (Kaur,
2012). It reflects the fears that Singapores Changi airport would lose business to Johors new Senai airport. Therefore,
AirAsia had to use Changi airport, which led to burden of high cost in operation by SGD$21 departure and security tax
of Changi.
2.5. Fernandess entrepreneurial strategy
According to Boyett (1996), entrepreneur is an individual who have the resources to own a private firm and at the same
time expecting to be benefited directly from the labors. By looking at the case, Fernandes does possess entrepreneurial
traits such as flexibility, insightfulness, perceptiveness, and the ability to accept change as he has succeeded in making
his dream come true which is having his own airline.
To become an entrepreneur, risk is always present and Fernandes who is a risk taker, has tackled it head on by
purchasing AirAsia for one Ringgit even though previously AirAsia was failing and had a very large debt. Fernandes is an
independent minded person who trust his guts, who though is a first timer had the confidence to purchase AirAsia
without prior knowledge on airplane industry. Fernandes had the power to obtain something new and huge when
nobody else believed or dared to do it.
The other strategy that Fernandes took is opportunity when he met Conor McCarthy (Ryanair) during a trip to Europe,
this encounter helped Fernandes to make a better decision. One of Conor McCarthy advice was to focus closer to home
as is believed the reason offering domestic flights initially was to try gauge if AirAsia can compete within the country
where he understands the culture. By having the opportunity to meet and talk with Conor McCarthy, Fernandes
succeeded to persuade Conor McCarthy to become part of AirAsias team as soon as Fernandes bought AirAsia.
Fernandes strategy in inviting Conor McCarthy to join the team is a great idea, as Conor McCarthy was once a director

of Ryanair and this indirectly will help AirAsia. Thus, Ryanair operational strategy was used by AirAsia to compete as
well as survive in budget airline competition.
2.6. AirAsia Strategy against potential and existing competitors
AirAsia was launched in 2002 which is more than a decade ago. AirAsia have a lot of advantages compared to a new
competitor or new opponent. AirAsia has the advantages in terms of brand image, customer loyalty as well as
government support as AirAsia is the first low fare airlines in Asia. AirAsia also has the advantage to compete with
multinational competitors because it possess a deep knowledge of Asian culture, technology know-how, and
experience in the field of airlines. Hence, to reduce the risk as well as secure the position, AirAsia continuously identify
its weaknesses and to overcome it as most of the new competitor will imitate AirAsia strategy as well as improve on it.
AirAsia als seems to have the resources and capability to expand to more international markets.
2.7. Outlook of Asian passenger air transport marketplace and lessons drawn from the North American and European.
The Asian passenger air transport marketplace could shakeout if Asian governments fail to deregulate or, for those that
have already deregulated, impose strict competitive regulations in the airline industry. Moreover, if another economic
recession is to hit, business trips will decline due to weakened purchasing power. However, since there is lack of
alternative transportation such as high-speed railways, highways which connects internationally, and target consumers
in most of South-East Asian countries are though relatively less affluent have increasing disposable income, thereby
demand for low-cost air transport will continue to grow.
From the deregulation in the 1970s till the early 2000s the transformation of the low cost concept in the United States
can only be described as a series of innovations, proliferations and consolidations where many other low cost airlines
such as Pacific Southwest, New York Air, Jet America entered the market of which, some survived the competition and
others did not. This also caused some of the major carriers to start their own subsidiaries under the low cost banner in
order to regain their lost market share (Francis, Humphreys, Ison & Aicken, 2006).
In Europe the low cost concept was originated in the UK and Ireland based on the Southwest model with the
introduction of EasyJet and Ryanair in 1995. Their success was attributed to the favourable economic framework that
encouraged the low cost airline industry. For example, the deregulation allowed airlines of member states to operate
domestically within the European Union. Another example is low charges at underused airports which increased the
passenger numbers going into those airports and finally, their direct sales approach using the internet and call centers
(Francis et al, 2006).
Lesson that can be drawn from the North American and European experience and be applicable in the Asian setting is
the Low Cost model. The success of low cost airlines can be derived from what is called a low-cost leadership position
strategy. According to (Flouris & Oswald, 2006), the goal of a low-cost leader is to keep the costs to the lowest, relative
to industry rivals and, to create a sustainable cost advantage over the competition. The most important concept to this
strategy is that cost is not equal to price. The original low cost model is designed based on this concept and as outlined
in Alamdari & Fagan (2005), the original Southwest Low Cost Model which consists of key factors below:

Figure 2. Southwest Airlines original low-cost business model, Alamdari & Fagan, 2005. 2.8. Assessment of AirAsia
moving beyond its historic strength.
It may be a challenging idea that AirAsia moves beyond its historic strength. Firstly, to deliver on nonstop service to
Europe and a one-stop service to the United States, AirAsia X would need to rely on its small A340 fleet, and replacing
these and growing fleets with new aircrafts. As it was currently not scheduled to receive its first new aircraft until 2016,
it may take time. Secondly, Asias regulatory environment and uncertain demand for low-fair services created
uncertainty. Some analysts predicted that budget airlines will continuously cater the demand for less affluent
consumers and the other said lower average income should boost demand rather than constraints for the budget
airline. This implies the doubts that the concept of AirAsia can also be successful beyond its historical strength into
Europe and other regions because of difference in level of average income. Other analysts added that there is lack of
bilateral agreements that allows new low-fare carriers to fly between countries, and lack of satellite airports conducive
for cutting costs.
However, it is prospect that there are a lot of factors that indicate the future success of AirAsia. Due to regulatory
restrictions from country to country, competition for tourist revenue is pushing more countries to open up their sky,
according to Fernandes, with an example of open skies agreements of ASEAN in 2008 although it is expected to be fully
implemented in 2015. Also, 2007 AirAsia made an agreement with the cargo management company as cargo plays a
key part of AirAsias additional income, capital raised by IPO enabled it to create opportunity for future expansion.
Overall, it is known from the case that AirAsia should focus not only on cost saving, but also on profits. They should
capitalize on their accomplishments by expanding into comparable markets. With their expansion into these new
markets, they will create additional revenue helping the company reduce their dependence on existing markets.
However, the decision-making should be made rigorous and thorough due to raising factors that may take AirAsia into
danger waters.

Q: What can Air Asia do to maintain its revenue and profitability