Air Asia as the Worlds Lowest Cost Airline - Case Study Example

Case Study: Air Asia of the This paper explores the aviation market of Asia, and how it has expanded. It specifically analyzes Air Asia and its journey to becoming Asia's lowest cost airline. It also gives an insight into the general aviation market and its potential in Asia. Q1: In general, the demand for low-fare service is high throughout the world. North America and Europe have seen high demand from 1990s, since most of the countries in those regions have air travel liberalization. When we look at the two markets, we find some differences in the two markets. According to my understanding of the case, low-fare service demand is higher in the Asian market relative to the European and the North American market because of difference in per capita income. Europe and North America enjoy a much higher per capita income, and therefore, travel more than Asians. However, they tend to value quality service, and are willing to pay for excellent service. On the other hand, Asians are less likely to concentrate on quality of service, and are willing to compromise quality service for a low price. Furthermore, people in the U.S. and Europe can use other forms of transport for short trips such as speed rail, bus etc. However, there are hardly any world class rails in Asia, and air travel remains the only option for many travelers. Some people in Asia might use bus, but the advent of budget airlines has made it cheaper for travelers to fly instead. Given today's economic climate, low-fare service would be a hit in any part of the world and the Gulf region is no exception. Although, the Gulf region has a good per capita income, lower and middle class travelers would nevertheless welcome low-fare service and it would definitely affect the large carriers in the Gulf Region. Q2: Air Asia is a budget airline which was on the verge of bankruptcy, but sprang up in 2001 to become the world's cheapest airline. Air Asia is a budget airline and succeeded in getting the lowest cost per kilometer of any airline. It was largely in part because of the declining demand for air travel and fleet purchases in the aftermath of 9/11. Thus, time was a key player in ensuring that Air Asia got the lowest cost structure possible. Furthermore, Air Asia also differentiated itself from other carriers by initiating ticketless travel. Under this new method, travelers had to book tickets online and there was no hassle to for travelers to go through agents. This made travel easy for the passengers and helped further in the reduction of distribution costs. However, Air Asia was similar to other carriers because all carriers of its type focused on low cost travel and targeted small business travelers. Moreover, Air Asia just like other carriers also offered only three types of fares. This was to stimulate demand for these carriers and attract travelers from major airlines like Malaysian Airlines. Q3: By reading the case study, I feel that Air Asia was wrong in its decision of Internet booking. Although this has been a viable option for many travelers, it has also meant that the airline is losing potential passengers who do not have access to the Internet. Air Asia is targeting relatives and small travelers and many might not have access to Internet. Furthermore, I also feel that expanding too much in a short period of time might have its disadvantages. Purchasing a lot of fleet might be a cause of concern given today's shifting business climate. It would be difficult to make monthly payments if uncertain conditions force demand to plunge. First, Air Asia came into the market at the right time. Just after the terrorist attacks of September 11, the aviation industry took an uncertain turn and there was a drop in demand. This caused the market for fleets to go down and leasing costs were reasonable, causing Air Asia to penetrate the market. Also, Air Asia expanded beyond national borders and grabbed the opportunity to serve neighboring countries. Moreover, Air Asia came into an agreement with a cargo company to transport cargo. This helped Air Asia to maintain its cost structure, and keep offering low fare travel to passengers. Q4: According to me, Fernandes's entrepreneurial strategy was fascinating. I feel that he took over at Air Asia with a vision to develop a low cost airline that would serve long haul routes. From childhood, Fernandes looked thought of owning an airline. His most important contribution was to analyze the external environment for his new low cost airline. He used his entrepreneurial skills to combine the strategies of competitors' and incorporate all the good things about it in Air Asia. The strategy included being a low cost airline and maintaining it, and using this low price to build a brand image amongst small business travelers. Furthermore, he did not misread the external environment because Air Asia was the first of low cost airlines in Asia. Fernandes had already noticed other European and American competitors like Ryan air and South West airlines, and had seen the impact they made in the already established aviation markets. Furthermore, starting a low cost airline in Asia had low risk attached to it, given the fact that there was no such airline in Malaysia. This encouraged Fernandes to take the big step and cater to a specific niche of low class citizens of Malaysia and neighboring countries. Q5: The toughest challenge that Air Asia faces is the price of oil in the international market. Oil shocks in the global market can really dampen Air Asia's image as being a low-cost airline. Continued rise in the price of oil would hurt Air Asia, and one way to offset the negative effect of oil price increases is to order the Boeing 787 Dreamliner aircraft, that according to estimates is the most fuel efficient aircraft in the aviation market. Furthermore, Air Asia is relying on the ASEAN members to negotiate a liberalization agreement that would open skies among member countries. Air Asia is relying on these members to continue its growth and profitability. Also, the financial turmoil in the world has not attracted a lot of tourists, unlike previous years. This trend might continue in the near future because of the longest global recession since the Great Depression. Air Asia should continue to strive to expand into specific niches and areas where air travel is not common, and where poor infrastructure makes it impossible for residents to travel. All in all, several low-cost or budget airlines have sprung up in Asia to compete with Air Asia. The industry is really competitive and external factors such as oil prices, government laws, and international relations etc make the industry dynamic. Any established airline can be troubled by the external factors, and so the airline always has to be ready for the change in its external environment. Air Asia needs to maintain its low cost structure to ensure the cheapest fare available in the market. This can be done through short term contracts and establishing offices across major routes to attract potential customers. For instance, Air Asia should use agents to book tickets. Although, this would mean commission to the agent and a reduced profit margin, but it would keep the airline established in the market. Q6: The North American and the European market proved that low cost travel is successful. Similarly, it is successful in Asia. However, we should keep in mind that achieving low cost travel is manageable, but how to maintain that competitive advantage in terms of cost is difficult. In an industry like this, we have to take lessons from other markets, and bound into short term contracts, since the industry changes quite rapidly. Furthermore, liberalization in North America and Europe increased demand for domestic travel, and with more Asian countries opening up their skies, the potential for growth is still to be utilized. Read More