The First No Frills, Low Cost Airline in Asia
In the mid-1990s, Fernandes saw a great potential for a no-frills LCC in Asia after witnessing the success of LCCs progress in the West. This inspired him to invite Connor McCarthy, the former director of successful European LCC Ryanair, to join AirAsia's executive team. They together restructured AirAsia's business model and made it the first airline operator in Asia to adopt the low-fare, no frills concept. Some accomplishments and strategies of AirAsia as the first no frills LCC in Asia can be described as follows:
- AirAsia became the region's first airline to introduce fully ticket-less travel and implement free seating policy.
- AirAsia offered only one standard-class cabin without entertainment or free meals but can be bought from the planes.
- Lucky draws will be conducted on board to surprise passengers.
- Introduced tagline "Now Everyone Can Fly" due to the cheap and affordable tickets.
- The airfares were 40% to 60% lower than those of its rivals.
- Seats were sold through telephone booking centre, sales offices, travel agents and partnerships with local banks and post offices.
- AirAsia became the world's first airline to enable booking by mobile phone through Short Messaging Service (SMS) in Agust 2003.
Figure 3: Ticket can be bought using mobile phone Figure 4: Seats provided in the AirAsia planes Figure 5: Tagline "Now Everyone Can Fly" on AirAsia plane
In December 2002, just seven months into its operation, AirAsia announced its first profit which is approximately US$6 million. AirAsia's website was the most popular online shopping site for Malaysia's internet users in 2003 revealed by a research from AC Nielsen. These impressive achievements inspired many LCC followers in the region. The key element for AirAsia in these years is due to its innovative approaches in pioneering several new services for its operation and threatened the well-being of full-service operators. These services will be discussed further.
Domestic and Short-Haul Regional Services
In order to serve better in domestic market, AirAsia had introduced three more hubs other than primary hub at KLIA, within Malaysia. AirAsia also started to provide regional flights to neighbouring countries in 2004 in order to expand its domestic business which result in joint-venture subsidiary companies. The joint ventures of AirAsia with other neighbouring companies can be explained as below:
- Thai AirAsia was formed in affiliation with Thailand's Shin Corporation,the telecommunications company initially belonging to former Thai prime minister Thaksin's family.
- This enabled AirAsia to gain easier and cheaper access to South-East Asian countries and the lucrative Chinese market.
- AirAsia's electronic booking system was supported by Shin Corporation which held 51% stake in Thai AirAsia.
- Indonesia AirAsia also was established in 2005 through affiliation with the Indonesian airline formerly known as Awair.
- More hubs were established in Jakarta and Bali.
Long-Haul Regional Service: AirAsia X
As for the long haul regional service, AirAsia launched its first long haul flight to Australia's Gold Coast in late 2007 through its sister airline, AirAsia X. Sir Richard Branson was the key individual investor with a 20% stake of AirAsia X. He is a British tycoon and founder as well as chairman of the Virgin Group. The characteristics of AirAsia X are slightly different from AirAsia. The comparison between these two can be described as follows:
- AirAsia X shared a common ticketing website, uniforms and management style as AirAsia.
- Offered two-class cabins unlike AirAsia
- Allowed passengers to reserve seats when booking in advance.
- AirAsia X sold fullmeals with more food options than AirAsia, which sold only light meals.
Table 1: Comparison between AirAsia and AirAsiaX
Some of the strategies taken by AirAsia in order to grab a bigger opportunity of the flourishing world market are:
- By exploring partnerships with LCCs in Asia-Pacific region such as Australia's Virgin Blue, Singapore's Tiger Airways and Indonesia's Lion Air to enter the Australian market.
- By creating ties with other airlines in the west such as EasyJet and Virgin Atlantic Airways to venture European market.
- Announced that it would commence flights to Stansted Airport on the outskirts of London on 11 March 2009.
- Planned on flying to more cities in northern China and skies of India and the Middle East.
Table 2: Share Prices Comparison of Listed LCC, 07/08
Value-Added Services
In early 2007, AirAsia became the first airline in Malaysia to offer an internet check in service. This allows domestic travelers to enjoy online check-in and to print out their own boarding passes. Next, AirAsia allowed a limited number of passengers who paid extra for its Xpress Boarding service to board first despite of its unassigned-seat policy.
AirAsia also introduced checked-baggage handling fees in April 2008 in order to encourage customers to travel with less weight so that less fuel was burnt and pollution decreases. The "Real 5 Star" offerings also becoming one of the prominent things of AirAsia since it offers cosy leather seats and in flight hot meals, which included a wide selection of popular Malaysian and Asian delicacies.
Next, in order to deal with passengers' complaints about AirAsia's punctuality, US$61 worth of AirAsia e-gift vouchers will be awarded to those passengers whose flight was delayed by more than three hours. The company also planned to introduce this guarantee for flights delayed more than one hour.
Moving Down the Value Chain
Since the first new business model introduced in AirAsia by Tony Fernandes, the company had faced many evolution and development in terms of their services and management. These are the development achieved by AirAsia throughout these years:
- AirAsia had evolved from LCC into an integrated service provider.
- AirAsia offered online booking services for hotels, hostels, car rentals, cruises and medical care by partnering with various companies.
- AirAsia launched the co-branded Citibank-AirAsia credit card which allowed cardholders to earn free flights by collecting reward points.
- This card also allowed cardholders to enjoy discounts on holiday package and privileges at over 40000 hotels, restaurants and retail outlets worldwide.
- Due to the high volatility of oil prices by mid-2008, AirAsia opted for a strategy to pay for fuel in advance and to qualify for low prices.
- Positive work ethic by the staff had contributed much to lowering the airline's fuel cost and operational cost.
- More fuel-efficent Airbus A320-200 aircraft also had been ordered by AirAsia to replace its fleet of Boeing 737-300s.
Figure 6: AirAsia Boeing 737-300 Plane
Figure 7: AirAsia Airbus A320-200 Plane
AirAsia as World Renowned Airline
The secret for AirAsia's achievements is all due to its distinctive image and leadership. Some of the strategies taken by AirAsia in order to boost its image in the eyes of the world are:
- Cheeky advertising strategy. For example, in 2004, AirAsia's flight attendants could style their hair and apply makeup however they liked resulting in more relaxed and refreshing image compare to other airlines which required cabin crew to assume a more uniform appearance.
- Focused on being a low cost but high quality airline. AirAsia became official airline sponsor for Manchester United football club and AT&T Williams Formula One team. It also further tied up with Tourism Malaysia enhancing AirAsia's relationship with the tourism board.
- By addressing global concern about carbon emissions, AirAsia highlighted and illustrated in its website on how its operations conserved the environment.
- Fernandes himself became a walking advertisement for the company. He wore AirAsia's official red cap and T-shirt in every official function and even gave his mobile phone number to media for his company news.
Figure 8: Deal done between AirAsia and Manchester United Board Figure 9: Tony Fernandes wore red AirAsia cap and T-shirt for official event
Competition Between AirAsia and Malaysia Airlines
There is no doubt that competition between AirAsia and Malaysia Airline (MAS) do existed even though they seemed to compete in different markets. But this only held true at the beginning of AirAsia's participation in industry. AirAsia became a real threat with the emergence of more value-conscious consumers who were more acceptable with low cost, no frills concept. In order to fight back with the low cost services offered by AirAsia, MAS had at times lowered its ticket price but it seemed to not produced a significant profit turnaround. However in 2007, after the route rationalisation process in 2006, MAS began to turn a profit. It also founded Firefly that provides low cost flight services domestically to a few cities in Thailand and Indonesia.
In May 2008, MAS launched "Everyday Low Fare" campaign that offered 1 million free seats for its domestic flights and other short haul routes within SEA. This campaign received an overwhelming response from the public. However, this campaign was strongly opposed by Fernandes in which he regarded the competition as unhealthy and unfair. This is because, he claimed that MAS was turning from premium airline into LCC and concentrating its low fare promotion on AirAsia routes. He also accused MAS campaign was subsidised by the government even though MAS managing director, Jala denied the allegation. He defended that the campaign was not directed against AirAsia and was not funded by the government so MAS was fully accountable for its profitability.
However, AirAsia fought back with a campaign called "Sub-Zero Fare" which offering ticket prices below the prices offered by MAS. On 29 May 2008, AirAsia recorded its 25th consecutive quarter of profitability since 2002.
Figure 10: The advertisement war between AirAsia and MAS