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Strengths and Weaknesses of AirAsia

Identifying the strengths and weaknesses of AirAsia.

The following are strengths and weaknesses of AirAsia:

1. Low Cost Model: Low cost operations and fixed costs

Strengths

Focusing on providing air travel without frills at substantially lower prices, AirAsia has managed to achieve lower prices to attain high passenger loads, market share, and profitability by eliminating provision of costly in-flight services, flying a standard fleet, selling tickets to passengers directly, and minimizing labor, facilities and overhead costs (i.e. passengers are not allocated seats, and do not receive meals, entertainment, amenities, or access to airport lounges).

Its successful negotiations for its low aircraft lease rates, low long-term maintenance contracts rates, and low airport fees, enabled AirAsia to provide the lowest fares. As a result, AirAsia was able to reduce its overheads and investments in equipments substantially in the absence of fringe services. Exhibit 4 shows that AirAsia has the lowest operating cost (29), compared with 29 other competitors (with Air France being the highest at 184).

Moreover, AirAsia’s aircraft maintenance contract costs were reported to be substantially lower than other airlines (i.e. contractual lease charge per aircraft decreased by more than 60% from 2001 to 2004), adding to AirAsia’s competitive advantage, which was further compounded by its young fleet.

AirAsia’s high safety and maintenance standards allowed AirAsia to procure favorable rates on its insurance policies, increasing customer confidence. Therefore, this is a valuable, rare, non-substitutable capability and difficult to imitate (by competitors), which creates sustainable (cost) competitive advantage for AirAsia.

2. Low Distribution Costs: Utilization of Information Technology (IT)

Strengths

Being the first airline in Southeast Asia to utilize e-ticketing and bypass traditional travel agents, AirAsia saved on the cost of issuing physical ticket (i.e. estimated at US$10 per ticket), eliminating the need for large and expensive booking/reservation systems, and agents’ commissions. In 2004, AirAsia’s website was voted the most popular site for online shopping in Malaysia: internet bookings increased from 5% of all bookings in 2002, to approximately 50% in 2004. AirAsia subsequently made its tickets available via post offices and designated bank teller (ATM) machines, increasing accessibility to consumers while having lower distribution costs, gaining more market share in the process.

Weaknesses

With its reliance on IT, there is a risk of system disruption due to AirAsia’s heavily reliance on online sales: any flight delays or calling their customer line to confirm bookings would indicate that AirAsia’s system is not robust enough to handle booking efficiently. This would result in the loss of customers, as confidence and satisfaction levels drop, affecting profitability. Hence, AirAsia would have to (constantly) invest in technological equipments, and connections to sustain and serve its huge network of company subsidiaries and affiliates (where appropriate); incurring (high) costs.

The capability to utilize information technology, and other distribution channels (e.g. post offices) to lower distribution costs can be imitated (by competitors), is with substitutes (e.g. other websites or distribution channels used by competitors), and is not rare (e.g. although AirAsia was the first airline to utilize e-ticketing, competitors will follow suit, seeing how successful it was).

Thus, this is just a capability that provides short-term competitive advantage: AirAsia would have to continually keep up with the (fast) pace of technology advancements (i.e. invest in technology, upgrade servers) and find other innovative distribution channels to stay ahead of competition.

3. Single aircraft type

Strengths

Operating a single aircraft type enabled AirAsia to have substantial cost savings: maintenance was simplified (i.e. made cheaper), spare parts inventory was minimized, infrastructure and equipment needs were reduced, staff and training needs were lowered (i.e. easy for pilot dispatch), and better purchase terms could be negotiated.

Therefore, this resource is a core competency (resource) as it is rare, difficult to imitate and without substitutes. Exhibit 8 shows that AirAsia has the largest fleet size of 30 has compared with its nearest competitor in the low-cost airline industry (Bangkok Airways) with a fleet size of 15.

4. High aircraft utilization and efficient operations

Strengths

AirAsia aircrafts (i.e. point-to-point services kept flights to no more than 4 hours, minimizing turnaround time) and employees (i.e. perform multiple roles) were more effectively and intensively used as compared with other airlines.

In 2004, as a result of its point-to-point services, AirAsia managed to operate its aircraft or an average of approximately 13 hours/day. This was 2.5 hours more than efficient full-services airlines, which only managed to use their aircraft for an average 10.5 hours/day. Also, the average turnaround time for AirAsia’s aircraft was lesser (e.g. 25 minutes), as compared to that of a full-service airline (e.g.45-120 minutes).

Thus, this capability provides AirAsia with a sustainable (differentiation and cost) competitive advantage as it is rare, difficult to imitate (e.g. not many competitors were as successful as AirAsia), and without substitutes.

5. Flat organizational structure and effective staff policies

Strengths

A high portion of AirAsia costs was the salaries and benefits for its employees. Hence, the airline implemented flexible work rules, streamlining administrative functions which allowed employees to perform multiple roles within a simple and flat organizational structure. In AirAsia’s case, a flatter hierarchy improved (sped-up) communication, resulting in an effective and focused workforce.

AirAsia’s rumination policy focused on maximizing efficiency and productivity, whilst keeping staff costs at levels consistent with low-cost carrier industry standards. Although salaries offered to employees were below that of rivals, all employees were offered a wide range of incentives such as productivity and performance-based bonuses, share offers, and stock options. This motivated employees, giving them a sense of ‘ownership’.

Weaknesses

However, although AirAsia streamlined administrative functions allowed employees to perform multiple roles within a simple and flat organizational structure, it may compromise AirAsia’s productivity in the future (as it expands). For example, in order to upkeep (the constant implementation of) Internet bookings and distributors, AirAsia would require a substantial number of (specialized) technical professionals. Performing multiple roles may lower the efficiency and effectiveness of such employees (i.e. too abstract job scope and not focused enough). Also, as AirAsia expands, its simple and flat organizational structure could result shallow decision-making; affecting the airline’s productivity.

Therefore, this capability is a short-term sustainable competitive advantage: as AirAsia expands, with overdependence on key staff and possible shallow decision-making. To maintain this competitive advantage, AirAsia would have to constantly improves and restructure itself to stay competitive and relevant.

6. Low-Cost Philosophy

Strengths

Although other Budget airlines attempted to do the same, AirAsia managed to be more effective at implementing these measures (difficult to imitate). Exhibit 5 provides an overview of AirAsia’s efficiency: AirAsia managed to achieve cost per average seat per kilometer of 2.13 U.S. cents, the lowest for any airline in the world; giving it a competitive (cost) advantage as it is able to maintain its low fares for passengers. This efficiency enabled AirAsia to utilize its capacity by increasing its load factor (passenger carrying capacity) from 0.62 in 2000, to 0.75 in 2005).

Hence, this is a sustainable (cost) competitive advantage for AirAsia as it is rare (e.g. lowest cost per average seat per kilometer in the world), difficult to imitate (e.g. no many competitors were as successful as AirAsia), and without substitutes.

7. Strong branding and marketing

Strengths

Due to aggressive expansion, AirAsia was able to penetrate potential markets (i.e. Exhibit 7 - an extensive Southeast Asian regional network of 60 routes at the end of 2005). From 3 routes in Malaysia (in early 2002), AirAsia quickly expanded its route network in Malaysia, covering all major destinations in Malaysia (by end of 2002). As a result, AirAsia had a regional presence (though joint-ventures) in Southeast Asian with countries such as Indonesia (Indonesia AirAsia), Thailand (Thai AirAsia).

Subsequently, AirAsia become a leader among low-cost carriers in Southeast Asia, receiving regular coverage from regional media outlets. Hence, the airline was able to penetrate and stimulate potential markets by maximizing media coverage: brand awareness promotion without incurring high sales and marketing expenses.

Additionally, AirAsia’s aggressive marketing stimulated potential markets: its introductory promotional fares in 2002 of US$2.50, attracted huge publicity and interest from travelers who were used to high prices; emphasizing the airline’s slogan, “Now Everyone Can Fly”. This resulted in AirAsia’s profitability within few months of its operations commencements. Strong passenger growth and high passenger loads can be seen from Exhibit 1 where AirAsia enjoyed compound average growth of 45% for sales during the period between 2001 and 2004.

Moreover, AirAsia’s major sponsorship for Manchester United, which involved global sponsorship and advertising, further promoted the brand beyond the region. AirAsia also managed to enhance its current offerings (and profitability) with substantial ancillary revenues derived from additional services (i.e. provision of in-flight food and drinks, and online sales of hotel, car, and holiday reservations, as well as travel insurance), and corporate travel services, and even had its own branded credit card, further increasing brand awareness and value for customers.

Therefore, as this capability is rare, difficult to imitate and without substitutes, it is a sustainable (differentiation) competitive advantage for AirAsia.

Based on the above internal analysis, AirAsia’s simple proven business model, which consistently delivers the lowest fares, has been identified as AirAsia’s core competency. It consists of resources and capabilities that are both valuable and difficult to imitate (e.g. low costs, low fares, strong branding and marketing, and reliable service), giving AirAsia a competitive (cost and differentiation) advantage.

A value chain analysis has been conducted to give determine how AirAsia’s value chain creates cost advantages (competitive advantage) through a chain of value creating activities, with the goal to generate a profit margin with value that exceeds the cost of providing the product/services.

Hence in conclusion, the mentioned AirAsia strengths mentioned (and consolidated in the value chain analysis) contributed to its success, giving the airline a competitive edge. For instance, its achievement of good operating benchmarks in terms of flights on time (88%) and baggage-handling efficiency (99.9%) further added (customer perceived) value and confidence to its brand, and contributed to its success; giving it a competitive (cost and differentiation) edge.

References:

• Ireland, R D, Hoskission, R E & Hitt, MA 2009, The management of strategy concepts, 8th edn, South-Western Cengage Learning, USA

• Singh, K, Pangarkar, N & Heracleous, L 2010, Business strategy in Asia a case book, 3rd edn, Cengage Learning Asia, Singapore

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