The Competitive Advantage of AirAsia Strategic Operations Management - Case Study Example

The Competitive Advantage of AirAsia Strategic Operations Management Within the case study of AirAsia a longer term historical analysis is not really forthcoming, based upon the fact that the airline prior to 2002 was in fact a government owned airline. At the time of Fernandes’ acquisition of the airline, and according to the then Prime Minister of Malyasia, Mr Mahathir Mohammad, the company was struggling, allowing for a value added acquisition of the company albeit with a relatively high amount of debt that was assumed along with the acquisition. This ‘privatisation’ of the airline within the Asian market follows what O’Connor (2001) provides as being somewhat of a trend during the preceding period of the AirAsia acquisition, for reasons which the author provides as being amongst others the reduction of deficits, raising of revenues (for the relevant governments), freeing airlines from political interference as well as adding to the viability and ultimately profitability of the airline in question (p.62). The aforementioned provides the historical perspective on the AirAsia ‘brand’ and provides the platform for which Fernandes re-launched and rebranded the company commencing in 2002, although Tamásy & Taylor (2008) provide that operations under Fernandes did in fact commence from 2001 (p.227). Assuming either 2001 or 2002 as the ‘commencement’ year of AirAsia, the analysis of the strategic development and initiatives of the company over the preceding eight years follows. The issue of privatisation of AirAsia is worth mentioning, although it may not have followed the standard processes of privatisation as compared to other airlines, the fact that the airline was a state owned entity provides the basis of specific opportunities that may have become available to Fernandes and the group of investors who acquired the company. This is supported by what Findlay, Chia & Singh (1997) provide as there being evidence in support of claims “that privatisation directly or indirectly leads to improved performance” (p. 51). Fernandes and the investors can be seen as taking the opportunity of a similar privatisation process, which is under the consent of the government with existing flight routes and an established client base. As compared to beginning a new venture within an already perceived difficult and highly regulated market, the approach of acquiring the existing business certainly bears testimony to a strategic approach to the airline industry within Malaysia. This fact can seen as what Porter (1987) provides as the basis of corporate strategy being built upon premises and may well support the concept of ‘the cost-of-entry test’ (pp. 46-47) and in turn specifically relevant to the perceived government’s support and already existing licences and operations held by AirAisa, at the time of acquisition. The fact that the investors acquired AirAsia for RM 1 million (approximately $275,000) demonstrates the value in the deal itself, which in turn supports specific strategic decision making of such acquisition and furthermore points to the fact that the Malaysian government was not preparing for a privatisation of the airline, but perhaps rather wanted a ‘quick sale’ of this struggling company. Opportunism and strategy within the acquisition is therefore displayed here based upon the pricing of the acquisition itself. Innovation and Strategy Having already displayed the strategic thinking behind the acquisition of AirAsia by the investors concerned, a number of ‘events’ and initiatives followed this acquisition within the re-launching and rebranding of the AirAsia airline company. These initiatives included what Grant (2010) illustrates as the procurement of relevant and experienced industry executives to lead the company forward, as well as the use of well known industry strategies and the combination of these into the specific and unique AirAsia strategy and operations planning. One of the main strategies and specific to costs and operations was the use of, and adaptation of the already proven low cost carrier (LCC) strategy as created by Southwest Airlines in the United States. However the company leaders and management did not merely adopt a single strategy but rather incorporated additional strategies, that have also been proven to work within the airline industry. Grant (2010) provides how McCarthy described the new business model of AirAsia as being that of “a Ryanair operational strategy, a Southwest people strategy and an EasyJet branding strategy” (p. 139) – this serves to illustrate the holistic approach to the company as a whole, and more importantly highlights three very specific areas of focus for the company, being that of operations, people (both internal and external stakeholders) and branding for and of AirAsia. These three focus areas are discussed below. Operational Strategy The operational strategy of any company is diverse to say the least and is largely dependent upon the core values and functioning of the business at hand. For the purpose of this analysis Lowson’s (2002) definition of corporate strategy is mostly utilised in the following formulation of an operational strategy definition: “The decision making and strategic management of competencies, processes, capabilities, technologies, resources, environment and activities by and within the company in the creation and delivery of products and services, or a combination thereof to the customer. Additionally the expected value of such products and services as demanded by the customer must be incorporated within such strategic initiatives and planning.” (Adapted from Lowson’s definition “A working definition of operations strategy (2002 pp. 57-58).) Working within the aforementioned definition the following focus areas are highlighted “competencies, processes, capabilities, technologies, resources, environment and activities”, and relevant activities of the investors, management and leadership have certainly provided the basis and platform for boosting the company, its image and the overall value of the brand in question. These “operational building blocks” (Lowson) have been strategically nurtured and developed since the acquisition of the airline and include a variety of initiatives, such as the hybridized business model of incorporating the operational, branding and people management models as previously mentioned. This process emanated from the re-launch of the airline and specifically targeting the 500 million population within the region that the airline was operating. However in order to stimulate market share, and resulting company growth the participation of the market was required, something which was not entirely occurring based upon the excessive cost associated to air travel. This issue was addressed by the rebranding of the airline, as well as the additional cost cutting measures that were implemented, allowing for a large saving to be passed onto the mentioned “underserved market segment” (Grant). This cost cutting initiative is described by Grant (p. 140) within AirAsia own description of their overall strategy, at the time of re-launching: Safety First; High Aircraft utilisation; Low Fare, no frills; Streamline Operations; Lean distribution system; and Point to point network. These points serve to illustrate the specific operational issues that the company has taken into account in determining not only affordable pricing to increase their market share, but the actual costs of operations being reduced as much as possible to contribute to this cost saving, and profit generation. The issue of streamlining operations may well incorporate the issues of human resource management, staffing and staff morale, an area of focus specifically identified by Fernandes in his leadership of the organization. Here a number of strategies pertaining to the human resource management and corporate structure have been revised, including the flattening of the typical “Asian Hierarchical” corporate structure, allowing for great interaction between all levels of employees and internal stakeholders of the organization. The rotation of staff amongst the various operational areas have allowed for a greater understanding of each of the functional areas by the staff members themselves, and although this may have contributed to training costs of the organization, it arguably allows for suitable replacement staff when needed. The issue of staff morale is addressed by the consistent meetings between departments, and regional areas to ensure open communications and functioning across these departments. To ‘crown’ these specific strategies, the involvement by Fernandes within the various key function areas not only leads by example, but rather puts the entrepreneur in a position to witness current operations and occurrences from the very grass roots level of the organization, allowing for valuable insight into the day to day operational issues that may be occurring. Current Strategic Situation The current strategic position has culminated from the initiatives set forward from the ‘formative’ period of 2001 to 2004. This period can be seen as the ‘rebirth’ of the airline via implementation of specifically laid out strategies and initiatives within the airline. Additionally innovative marketing campaigns, and expenditure have allowed the company to not only increase their market share, but also to grow the market too. Some may deem to consider the actions by the leadership of the company as somewhat ‘maverick’, with specific reference to the increase in marketing during the SARS outbreak in 2004, however the resultant increase in revenue and sales negates any such negative connotations thereto associated. The innovative approach to marketing, has included a number of co-branding opportunities, that have not only allowed the company to save money in terms of market entry as in the case of co-development of Thailand and AirAsia’s longer distance routes and former the “Thai AirAsia” product and brand in 2004 (Tamásy & Taylor), as well as the marketing campaign undertaken with Time magazine (Grant). The extension of the flight routes of AirAsia is central to their current strategic situation and direction. Hence after the mentioned strategic activities and initiatives mentioned within the launch and initial branding efforts of the company, the present – or at least over the preceding 5 to 6 years efforts have been focussed on building a more solid brand and generating name awareness within the Malaysian region. This appears to have subsequently progressed to include an expansion of operations, as is evident within the mentioned co launch of Thai AirAsia, as well as the expansion of the company’s flight routes and additional destinations that the company now offers. Throughout the 2004-2005 period the company aimed to develop more options for their market, as well as increasing teh distance of their flights, away from the traditional shorter and local flight options. These included the establishment of hubs in Thailand and Indonesia, for their respective new ‘partnerships’ of Thai AirAsia and Indonesia AirAsia. This expansion into longer flight routes and options, according to Grant was the initial strategy of Fernandes, however based upon the support of the Malaysian government and the resultant competition with Malaysian Airlines, the entrepreneur had to expand into a separate entity, specifically targeting the long haul flights, namely that of AirAisa X. However taking a step back, and focussing on the development strategies of AirAsia, the company required specific funding for such expansion, together with the mentioned Thailand and Indonesia options. This funding could have come about via various sources, however the most logical with respect to the growth and expansion of the company, was via the public offering which raised the necessary capital (RM 717 Million) for the respective joint ventures previously mentioned. One of the most important events, within 2006 and truly reflective of the company’s strategy of remaining within the budget and low cost band of air travel, was the agreement with Malaysian airlines regarding domestic flight services in Malaysia. The Star Online (thestar.com.my) provided details in which Malaysian Airlines would offer premium domestic flights, whereas AirAsia would offer the budget variation thereof, as provided in “MAS to share local flights with AirAsia” (2006). A number of advantages exist here for both companies, however the mention of this event or decision reiterates the chosen budget and low cost strategy of the AirAsia company, within their willingness to agree to such an arrangement. Additionally added financial support from the government was represented in the government’s willingness to pay AirAsia to “operate social routes like the rural air services in Sabah and Sarawak”, hence adding to the flight destinations and opportunities of the airline. Internet Technology has also formed an integral part of the company’s strategy within the operational context, with O’Connell & Williams (2005) providing that AirAsia was one of the first Asian airline companies to launch an integrated online ecommerce facility for direct sales of airline tickets to their prospective customers, as well as being a pioneer within ticketless travel within Aisa (p. 10). This strategy, already introduced within “the fifth month of operation” (O’ Connell & Williams) had contributed towards a total of 45% of the company’s sales being internet driven in 2003 already. In pushing the so called envelope, the company displayed further innovation within the ticket purchasing options on a mobile basis and more specifically via SMS, being the “first airline worldwide”. This strategy is well worth mentioning in that it elevates the company out of the Asian context and places it as a pioneer within the marketing context and specifically more so via the mobile or cellular option, something of which companies are only taking advantage of in present day marketing opportunities and activities. Additional distribution channels have been explored by the airline, such as via Post Office outlets within Malaysia. These efforts have allowed a more direct sales of tickets, cutting out the travel agent element, and thereby saving the company (and the end user) the cost associated to paying commissions to the intermediary, thereby allowing the costs of the air travel tickets to remain as low as possible. Leadership of the AirAsia Company has certainly displayed an innovative approach to information technology and more so embracing a number of solutions on a pioneering basis, such as the aforementioned as well as the implementation and marketing of the AirAsia Vista Gadget. This technology allows for users (and customers), with the Windows Vista operating system “to instantly manage and access live travel information and web-based services directly from their Windows Vista desktop computers”. And once again displaying their groundbreaking approach towards customer services and marketing within the use of such technology by being “the first organisation in any industry in the region to take advantage of the new Vista technology to strengthen its competitive advantage in its sector and reinforce its commitment to customer service excellence”. (Microsoft 2007.) Although not directly related to the airline industry the AirAsia ownership further displayed their tendencies of targeting and offering value within an industry, via their launch of “Tune Money”, an online based low cost investment portal geared at serving “ordinary people who have no money for big investments” (Joshi 2007). This fact serves to highlight the central drive, undertaken by the leadership of the company, of cost differentiation within the industries within which they choose to operate. Strategic Direction for the Future Within the news and with reference to the latest strategy for AirAsia, the likelihood of a merger with AirAsia X seems to be part of the strategic direction of the company under the leadership of Fernandes. However some may believe this to be purely speculative with some of the industry claiming such merger is based upon the financial woes of the long haul flight operations of AirAsia X, with some of the latest media reports indicating that AirAsia X may rather opt for an Initial Public Offering to support their respective growth objectives. Although the possibility of a merger may continue to exist based upon the core focus of the respective businesses, with the talks of such an IPO it is doubtful that such a merger will take place within the near future. One may argue that the actions, or inactions taken during times of a perceived or actual crisis may well be associated with the strategy of a company. In order to deal with current external forces in an effective and ultimately beneficial way may well determine the profitability and functioning of the company. Management of such crises, by AirAsia has been highlighted over the years of operation of the company, under the leadership of Fernandes, and range from the outbreak of SARS in 2004 and the political upheaval in Thailand in 2008. The way in which the company went about handling these events speaks of the innovative approach of the company in not only effectively dealing with the respective crises, but also stimulating market activity to their benefit. Within the SARS context, the company stepped up marketing, and achieved excellent results, whilst the Thailand airport siege provided the company a platform to provide 100,000 free airline tickets, in order to “lure tourists back to Thailand” (Associated Press). Once again these approaches provide proof of the innovative approach of the company, and more so within the parameters of their marketing strategy within the Asian region. Further evidence of this was once again repeated with the company giving away an additional 500,000 air travel tickets, at the time of the abolishment of fuel surcharges (Daily Telegraph 2008), representing another example of innovative marketing strategy and taking advantage of market developments within the air travel industry. As mentioned throughout this discussion of the strategies of AirAsia, and specifically that of joint ventures, alliances and co branding opportunities taken throughout their existence as a private / public company, it appears that this specific strategy related platform will continue to be utilised into the future. One of the latest developments, and specifically within the alliance / joint venture utilisation for expansion, news of the alliance if JetStar and AirAsia was announced at the beginning of 2010 (Creedy, 2010). This confirms the use of these partnerships by AirAsia, amongst other airlines in striving to remain competitive, whilst reducing the cost of air travel as much as possible within the airline industry. Marketing campaigns have additionally been central to the success of the company, however these have been well thought out and strategy aligned campaigns together with the company’s growth and expansion. These campaigns continue to innovate and grow accordingly, and are certainly not isolated or once off efforts or initiatives, as was displayed with the SARS time period in 2004, and the political issues in Thailand in 2008. AirAsia has successfully launched a number of marketing, and branding exercises, including the “Tell a story” and more recently the “Mind Blowing Fare” promotion (The Star Online). In defining the future strategy of a company, one has to make certain presumptions, based upon defined vision, mission and published strategies, as provided by the company concerned. Naturally not all strategies will be openly published or advertised by corporate leadership as one may link strategy closely to that of competitive advantage within a given market place or sector. Grimm, Lee & Smith (2006) confirm such a notion, however they additionally provide that the action corporate action, with respect to such strategy within the application of resources is arguably what defines the success of such planning and initiatives to be undertaken (pp. 69-70). Having discussed the identified strategy of AirAsia, and as depicted by their representation below, on a historical perspective from the time of acquisition it appears that the company has remained true with regards to their defined strategy as per Figure 1. Figure 1: AirAsia Strategy, as per www.airasia.com The foundation defined by the leadership of the company has continued to fuel initiatives as well as the resource allocation according to their goals of High Margins, and sustainable growth. Specific attention is drawn to the stimulation of new markets, as has been discussed, and with this in mind would in all likelihood be the driving force and underlying strategy of the future. The efficiency and low cost aspects of the foundation have further supported the success of the organization within their market share growth, and specifically within the new market stimulation in making air travel more affordable for everyone, within the Malaysian region, as well as within areas that they have expanded into. AirAsia’s specific “timeline” strategy further reveals a number of key elements and target positions within their growth, as provided within their provision of their strategic direction. According to their reporting they have achieved their 3rd stage within their strategic direction, in having achieved stages one and two as described in Table 1 below. The table reflects how the activities of the leadership of the company have in fact achieved their defined strategic goals and objectives, as laid out in stages one, two and three and are evidenced by the discussion of these initiatives within this discussion. Naturally Stages four and five provide the foundation for the company with respect to the future and in terms of their desired strategic direction. With the mention of a possible merger with AirAsia X, and the subsequent announcement of the Initial public offering scheduled for the long distance division of AirAsia, it is doubtful of whether any such merger will be forthcoming based upon this IPO. However the business model, in terms of offering long haul flights, of AirAsia X assumes a different core strategy and therefore would not necessarily be in line with that of the short haul carrier. This is evidenced by their mentioned strategic focus for the remaining stages, as depicted below. Strategic Direction Stage Descriptions / Initiatives / Strategies Evidenced / Notes Stage 1 Entry to market. Aggressive brand building & recognition: Market Introduction, Market Penetration, Open new markets Acquisition of failing state owned airline, strong branding and marketing, introduction of “Now Everyone can fly” campaign and pricing. Stage 2 IPO / Publicly Traded company: Strengthen financials, company credibility and ratings, improved supplier negotiation IPO and listing October 2004 Stage 3 (Current) Regional expansion & Business expansion: Expand to new countries, strategic partnerships, strong branding Numerous Joint ventures / partnerships – Jetstar, Thai Airlines etc. Continued innovative branding (Tell a story, Mind blowing Fare) Stage 4 Market Domination, route optimization and secondary hubs: route network, new destinations, ancillary enhancement Already exploring new destinations, applying for additional destinations, rural servicing Stage 5 Multi Specialist: maximisation of matured routes, ancillary composition Maximisation of markets and destinations within which they operate, additional business operations (ancillary) Table 1: Adapted from AirAsia Strategic Direction (Source: www.airasia.com) As per the mentioned and identified stages of strategy, as provide by AirAisa, the latest press release provided by the company serves to illustrate that they are within the transition phase from Stage 3 to Stage 4. With specific reference to the use and development of secondary hubs, the company has taken an active expansion into the Indian market, as provided by Fernandes in “we are continuing to grow our market in India especially from our other hubs in Thailand, making the subcontinent a key player in our growth strategy” (2010). In addition to this route network and ancillary enhancement the opportunity of airport management has become a target of the company, as reported by Latif (2010). Latif provides that the Indonesian Ministry of State owned enterprises has confirmed that AirAsia has expressed interest within managing the Indonesian Halim Perdanakusumah Airport, whilst also expressing interest in Terminal 3 of the Soekarno-Hatta Airport, also located in Indonesia. This supports the strategic direction as laid out by the company within both stages four and five and will in all likelihood enable the company to reduce costs further with respect to airport fees and duties often times imposed upon airlines. The management of such airports or terminals will allow the company to reduce such fees as is often times the case when management contracts are concluded with airlines and airline operators. Conclusion AirAsia, and her leadership have displayed a targeted and definitive strategy since their acquisition of the struggling AirAsia company in the early 2000s. The company has progressed beyond what many may perceive as difficult times, including the likes of the SARS virus, political instability within their focus areas of operation, the H1N1 virus and the recent global recession. However the company almost seems impervious to these external forces, and continues to reduce costs where possible, whilst displaying a continued growth year on year. This cannot be attributed to mere luck or opportunism on the part of the leadership, but rather a sound approach to innovative marketing and branding as displayed over the years, which in turn has allowed the company to open up new markets, and explore new destinations, based upon this continued growth. This innovation will surely aid the company in driving their expansion from a destination perspective, as well as their strategy for ancillary growth and development within their chosen and targeted areas of operations, such as that of their secondary and additional hubs of operation. This continued innovation, branding and carefully planned expansion will surely allow the company to continue to develop and grow, in line with posted results and growth already achieved. References AIR ASIA (Online). AirAsia Corporate Website. Accessed entire website via http://www.airasia.com/ AIR ASIA (Press Release: AA_2Q10). Air Aisa Press Release: Second Quarter 2010 Results. 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