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CASE STUDY
THE ASCENDANCE OF AIRASIA: BUILDING A SUCCESSFUL
BUDGET AIRLINE IN ASIA

Group:8
Mr.

Pradeep Kumar Agrawal

13010121336

Ms.

Aloka Reddy

13010121115

Mr.

Ankit Govil

13010121273

Mr.

Sarath P.

13010121199

Mr.

Saurabh Biswal

13010121089

Submitted to:

Dr. Samik Shome

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I. PROBLEM STATEMENT:
Air Asia needs to be examined if their strategies can be repeated across the world, and how it
will compete with the influx of new entrants especially in the low budget and no frills
category and also if it can become the world leader competing with the other full service
airlines. It explains how combining an entrepreneur leader with a purposeful strategic process
and an efficient business model can create a winning formula for wealth creation.

II. ISSUE ANALYSIS:

In September 2001, Tony Fernandes left his job as the vice president and head of Warner
Musics Southeast Asian operations, cashed in stock options, took out a mortgage on his
house and took control of a struggling Malaysian Airline with two jets and US$ 37 million in
debt.
Tony Fernandes was inherited with a risk taking ability and an entrepreneurial attitude. But
apart from the unique strategies, the external environmental factors also helped him with his
cause.
FACTS AND OPINIONS OF THE CASE:

Facts:

Japan was the pioneer in the budget airlines sector and started with Air Do in 1998,
followed by Skymark in 2000. Thailand started with PB Air and Air Andaman and
Cambodia started with Siem Reap Air. In late 2001, Air Asia was launched and

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Philippines started with Cebu Pacific Airways. India started with Air Deccan (now
Kingfisher Red) in 2003 and finally China entered into the scene in 2005 with Spring
Airlines.
The liberalization of the economy in the 1990s and agreements such as the Open
Skies Agreement with the United States led to the emergence of many carriers, all of
whom by the turn of the century have become major players in their countrys air
service sectors both domestic and international.
First outside investment in China was George Soross US$25 million acquisition of a
25% stake in Hainan Airlines in 1995.
ASEAN (Association of Southeast Nation) leaders announced plans to fully liberalize
air travel by the end of 2008, however, the countries were allowed to opt out and
delay liberalization until 2015.
The strategies followed by Skymark Airlines operating from1998 are as follows:
- Low Fare Price Leadership Model
- Satellite TV Entertainment System
- 12 Business Class Seats out of its total 309 seats Hybrid Budget Airline
Model
In Malaysia, only 6% of the adult population travelled by air in 2001.
Due to policy of highly regulated domestic fares of Malaysian Govt. Malaysian
Airlines had been losing US$79 million annually on its domestic routes.
Air Asia transformed from a money losing airline when a new group of investors,
Tune Air SdnBhd, bought the shares and half of the shares and half the share of
liabilities in the original airline in September, 2001.
According to 2006 data Asian Airlines had fleets comprising of 71% wide-body
aircraft and only 29% narrow-body ones whereas in North America and Europe, 23
% were wide-body and 77% were narrow-body ones. This affected in terms of load
factor and the fuel efficiency.
Air Asia initially launched in 1996 as a full service regional airline offering slightly
cheaper fares as compared to its competitors. But this strategy failed as they were
unable to attract customers.
The investors announced an agreement on September 8, 2001 to buy Air Asia for a
symbolic one ringgit (26 cents) and to assume 50% of the liabilities or around 40
million ringgit.
In January 2002, Air Asia was relaunched as a budget airline with three Boeing 737
aircraft
Government helped in the infrastructure development and provided huge freedom
associated with subsidies and tax expenditure which led to the development of routes
from the urban cities to outlying areas thereby improving the economy.
Air Asia achieved a cost per available-seat-kilometer (ASK) early in its development
of 2.5 cents, half of that MAS and Ryanair and a third of Easyjet. According to UBS,
it was the lowest cost airline in the world by 2007. Its revenue model was driven by
VFR and small business travellers.

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By 2007, Air Asia was handling 51,000 passengers a day with a fleet of 54 planes
offering a fare of 50 ringgit which was 40-60% lower than fares of full service airlines
and in some cases the fares were even less than that of bus or rail fares at that time.
Air Asia expanded from 2 aircrafts in 2001 to 54 by 2007, 70 by 2010 and finally 180
by 2014.
Air Asia handled 1.5 million passengers in 2003, 6.3 million in 2005 and almost 14
million passengers by 2007. In early 2010, in spite of fall in global passenger demand,
Air Asias passenger numbers grew by 24% to 22.7 million. Its profit margin was 35%
and it announced a profit of RM 549 million (US$ 162 million) for the year 2009.
Air Asia took over 96 of MASs 118 domestic routes in 2006, only four of which were
profitable.
Air Asia entered into a number of joint ventures including Thai Air Asia, Indonesia
Air Asia and Air Asia X.
Malaysian Govt. built a low cost terminal at Kuala Lumpur International Airport in
2006.
Air Asia X was a legally separate company in which Air Asia had only 16% stake but
a consortium that included Tony Fernandes owned 48%. Virgin Group also had a
stake of 16% in it.
To compete with Air Asia, Singapore Airlines launched Valuair in 2003, Thai Airways
International launched NokAr in 2004, the Sri Lankan government launched Mihin
Lanka in 2007 and Quantas started Jetstar in 2004.
Air Asia prompted increased passenger travel with its 2007- 2008 To Malaysia with
Love campaign. It celebrated 50 years of nationhood of Malaysia and offered cheap
fares owing to the low-cost carrier terminal in the Kuala Lumpur airport with a
throughput of about 10 million passengers.
By 2010, Air Asia X was connecting to three cities in China and Air Asia was
connecting six shorter haul cities from Malaysia and Thailand.
Air Asia improved their brand recognition by sponsoring Manchester United Football
club in England and Oakland Raiders Football team in USA. Oakland was chosen
because of its strategic advantages.
In 2007, Air Asia expanded to cargo transportation and entered into an agreement with
the cargo management company Leisure Cargo. The agreement served 18 destinations
made possible by the Airbus A320s carrying both passengers and cargo.
Air Asiawent public on November 22, 2004. Its IPO was worth US$226 million. It
was one of the largest public offerings in Malaysia and brought RM 717.4 million
(US$ 188.8 million) for its future expansion. Its revenue grew 52 % from 2006-2007
reaching 1603 million ringgits in 2007. Its pre-tax profit grew 223 % from 86 to 278
million ringgits and net profit grew 147 % from 202 to 498 million ringgit. Despite
some challenges and profit drops in 2007 and 2008, it continued its growth when the
core operating profit rose by 591 % and the net profit by 26% in the 2008 and 2009
period.

Opinions:

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The prevailing sentiment among some of the Asian majors, expressed by the Asia
Pacific Airlines Association in the early 2003, was that no frill fliers are not a threat
to Asian Airlines.
According to Peter Harbison of the Centre for Asia Pacific Aviation, consultancy in
Sydney, Australia, the key ingredient is liberalization.
Tony Fernandes wanted to start operations on a long haul basis but as per Conor
McCarthys opinion he started on short haul routes.
According to Conor McCarthy, timing and luck had striking importance in the success
of Air Asia, right from cheap aircraft prices owing to 9/11 attacks, establishment of
forward contracts and also to get a foothold in the market and thus become the market
leader
As Air Asia planned to enter Thailand and other neighbouring countries, the
Malaysian Govt. was sceptical about its success in those region and also because they
would need to accommodate the growth of a new budget airline at the cost of
reducing the market value of government-owned Malaysian Airlines.
At the introduction of the Quantass budget airline Jetstar, in which Temasek Holdings
had a stake of 19% and also a 57% stake in Singapore Airlines, were accused of
conflict of interest but they retaliated saying that the introduction of this airline would
increase the pie and their interest were strictly for financial returns and they view both
of them as potentially attractive investments.
Eric Kohn of Deutsche BA argued that established carriers are not set up to succeed in
the low-cost space. He said, People at big airlines dont have accountability or a
focus on costs. It is a lot easier to start an airline from scratch than to take a legacy
airline and make a profit.
As per the interview with Tony Fernandes he expressed that they feel pretty
vindicated as a lot people doubted them and laughed at them and warned him not to
go international but he thought there is no difference between the domestic and
international operations and finally proved them wrong.
Relating to Air Asias expansion to cargo transportation, one of the regional directors
commented that, Cargo plays an integral part of our ancillary income and we foresee
cargo to be one of the key drivers with significant contribution towards the companys
bottom line.

STRATEGIES IMPLEMENTED BY AIR ASIA FOR ITS SUCCESS:

Low Fare and No Frills Strategy - Price Leadership Model

Employment of low cost airline experts to restructure Air Asias business model and
also persuaded McCarthy to join the executive team and become one of the investors.
Hey bought used planes initially to reduce cost. The 9/11 attacks further helped them
in lowering their costs
Followed Ryan airs operational strategy, Southwests people strategy and Easyjets
branding strategy.

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Initially focussed on short haul flights to establish themselves and become the market
leader before expanding to long haul international borders.
Entered into maintenance contracts and fuel hedging to further reduce costs.
In distribution, the majority of the bookings were made via the web and in some
places where payment type was an issue, it opened up billing and settlement plan
(BSP) and computer reservation system (CRS) channels.
Achieve ASK early
Its revenue model was driven by VFR and small business travellers.
Rapid expansion in neighbouring countries like Thailand, Indonesia, India and China
both in terms of fleet and number of flights.
Joint Venture with cross border markets. Harmonization of regulations in pilot hours
and maintenance oversight.
Separate low-cost terminal in airports.
Operate through secondary airports as they are able to provide fast Turnaround Time
(TAT) and Taxi Times.
Communication strategy though campaigns like To Malaysia with Love to promote
itself and increase reach.
International route expansion through Thai Air Asia, Indonesia Air Asia and Air Asia
X.
Sponsorship of Manchester United and Oaklands Raiders to improve brand
recognition in those countries
Oakland was further strategically chosen as it was a base for Southwest Airlines
thereby connecting thousands of passengers in their domestic routes at low price.
Air Asia used A320s for short haul routes and A330s to support the projected long
haul operator Air Asia X. Apart from relying on A340s for one stop service to USA
and non-stop service to Europe, it was rapidly increasing its fleet with A350s.
It entered into Cargo Transportation through an agreement with Leisure Cargo.
It went public in 2004 and brought in a lot of capital for expansion.

SWOT Analysis:

STRENGTHS
Strong management Team
Strong Strategy and Execution
plan on fuel hedging, buying low
cost airbuses.
Low cost Model
Single type fleet
Efficient Operations
First to market with ICT
collaboration
Strong Brand Name

WEAKNESSES
Outsourcing
Limited human resources
Heavy reliance on IT
Non-central location of secondary
airports

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Multi-skilled Staff seamless

transition within workforce
OPPORTUNITIES
Expansion to new routes based on
low cost philosophy (exploit
growing markets like China, India)
Higher fuel costs means less
profitable competitors may be forced
out of business
Partnerships with Virgin airline to
use existing strengths (brand
recognition, landing rights)
Differentiate from old LCC model
(include customer service and
operation as full service airline)
Long haul flight to approach
undeveloped market (Air Asia X to
Europe)

THREATS
Accident and disaster affect
customer confidence
Aviation regulation and government
policy (barriers in new routes
expansion)
Full service airlines start cut costs to
compete
Entrance of other low cost couriers
(Jetstar, Tiger Airways)

QUESTIONS & ANSWERS:

1. What is the macro and industry environment in the Southeast Asian region for the entrance
of new budget airlines? What opportunities and challenges are associated with this
environment?
In recent years as more carriers have entered the market Competition for the
Southeast Asian budget traveller has increased significantly. These new entrants are
attracted by the large number of potential travellers, and the fact that government
deregulations in this region made easier for companies to operate. However, fuel
prices are a concern as are other costs involved in running airlines such as providing
ground operations and passenger services. Some airlines including Air Asia are
forming alliances to share these additional costs.

2. How might demand for low-fare service differ in the Asia-Pacific region from North
America and Europe?
The relatively low income levels in most Asian countries created Substantial
opportunities for low-fare airlines in Asia by, the availability of alternative modes of
transportation, and the less percentage of the population that utilizes more expensive

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airlines, as well as the increased awareness of the U.S. and European trends favouring
low-fare providers. It is to be note that the Asian markets are substantially more
sensitive to fare differentiation than the North American market due to the high
competition from high speed rail. Asian markets are still relatively limited in their
utilization of the full potential of Internet resources, and still depend on travel agents
and other middlemen. In addition Asia low-fare airlines are less likely to compete
with more expensive providers for the same customers, and are more likely to target
individuals who would otherwise not travel by air. Finally, Asian low-fare airlines
have a smaller market share, compared to their dominance in Western markets.

3. Compare AirAsias generic strategy (cost leadership, differentiation, focus) with the
strategies of other incumbent carriers and with Southwest and Ryanair. How is it similar to
and different from the strategies of those carriers?
Air Asia is trying to imitate Southwests successful people-oriented strategies and
Ryanairs efficient operational strategies. However, Southwest and Ryanair
implement those strategies in order to differentiate themselves from a large number of
low-cost providers in highly competitive and relatively saturated American and
European markets. Air Asia is an imitator in the market with limited competition and
growing demand from a previously nonexistent market segment. This gives AirAsia
opportunity to be a leader in its own market, while at the same time imitating and
integrating business models that showed to be successful elsewhere. The success of
such an approaches depend on the similarities between the Asian market and other
markets, as well as the ability of AirAsia to capitalize upon the potential synergies
between these strategies. Today, AirAsia is seen as the worlds most successful
budget airline.

4. Did Fernandes weigh the range of political, economic, and operational uncertainties and
risks when he took over AirAsia? What risks might he have overlooked?
The case indicates that Fernandes was well-aware of most of these risks, especially
having worked in a decision making capacity in the same geographic region. He
seems to have also taken appropriate steps in seeking professional advice in the lowfare airline industry from Conor McCarthy of Ryanair and others. One area that he
might have overlooked is macro political risks - major political decisions likely to
affect all enterprises in a country. For example, Several Asian countries continue to
face political instability, religious turmoil, currency fluctuations, corruption
problems, discrimination issues, and other problems that may have spillover effects
on the airline industry.

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5. How would you describe Fernandes entrepreneurial strategy?

Fernandes possesses a strong entrepreneurial spirit. He is also flexible, insightful, and
responsive to change. However, he seems to also take calculated risks, supported by
the appropriate level of research and consultation.

6. How should AirAsia respond to the challenges posed by (a) new low-fare carriers entering
the Asian marketplace and (b) low-fare strategies pursued by incumbent carriers? How would
you characterize the competitive dynamics in this market?
AirAsia has first-mover advantage, which gives it an edge over competition in terms
of brand image, customer loyalty, and government support. Moreover, AirAsia has an
advantage over potential multinational competitors due to its established knowledge
of the Asian culture. AirAsia also seems to have the resources, credibility and
planning capacity necessary for expansion into international markets and/or going
public before many of its competitors. AirAsia does not face the obstacles and
hurdles of bureaucracy, stagnant organizational culture, and lack of a cost-conscious,
efficiency-oriented mentality, prevalent in the incumbent, government-controlled,
expensive carriers. The most effective approach for AirAsia is likely to be
capitalizing on the above mentioned advantages to the maximum, rather than
attempting to create hostile competition, especially with incumbent carriers. In order
to neutralize the threats of government interference to save the survival of its primary
carriers, AirAsia should initiate and maintain positive relations to rally the support of
the government. This can be accomplished through finding mutually motivating goals
so that AirAsia can be perceived as a contributor to the national economy, rather than
a destroyer of the established carriers.

7. How do you think the Asian passenger air transport marketplace will shake out? What
lessons can be drawn from the North American and European experience?
It is likely that the Asian market will eventually be very similar to the North
American and European markets. As low-fare airlines enter this promising market, it
will become more competitive, with price dominating all other criteria in consumer
decisions and choices. Other promotional tools will be necessary to create and
maintain customer loyalty, including mileage accumulation, frequent and timely
schedules, convenience, and availability of routes to a wide range of locations.
However, these tools will not replace the domination of a price-orientation, but rather
supplement it in creating competitive advantage.

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8.What is your assessment of Air Asia moving beyond its historic strength in Southeast Asia
to Australia, China, India, and Europe?
Air Asia is successful in executing the appropriate budget airline, and should
capitalize on the ability by expanding into similar markets such as China and India.
Expanding into the new markets will not only create a new stream of revenue, it will
also help diminish the companys reliance on its existing markets. It is noted that the
business environment in these other countries may be quite different from that in Air
Asias existing markets. Based on this perspective, Air Asia should avoid diversifying
into too many new markets.