Case Study Air Asia free essay sample

AirAsia’s attempts to expend its service offering into long-haul flights and gaining additional recognition and market share is consistent with owner Tony Fernades’ company goal; however, the strategy changes required to be a successful long-haul airline significantly differ from and conflict with its current resource base (i. e. aircraft types, hubs, employee skills) and core competencies and capabilities (i. e. cost and efficiency optimization/utilization) as a low-cost carrier (LCC) airline. Analysis The airline industry as a whole is quite competitive with multiple players and various elements effecting the industry environment. AirAsia has developed a specific set of resources and core competencies that it has exploited in order to become the leading short-haul LCC in South East Asia. AirAsia’s strategy employs cost and efficiency optimization by utilizing its key resources; thus, possessing capabilities necessary for success. AirAsia’s tangible resources, including its fleet and hubs, enhance the company’s low cost capabilities. Due to AirAsia’s selectivity in the type/model of aircrafts it purchases, both cost and efficiency can be capitalized. By limiting the variability in aircrafts, AirAsia is able to obtain economies in purchasing, its pool for spare parts is narrowed, thus reducing costs; mechanics and pilots’ specialized knowledge of the planes increases allowing for greater efficiency and reduced cost in maintenance, repairs, and flying. Although this strategy is ideal for AirAsia as a short-haul LLC, it is not transferrable to long-haul flights. By expanding into the long-haul market, AirAsia is required to increase its resource base adding newer, larger aircraft models in turn requiring expansion of spare parts, loss of purchasing economies (until sufficient growth has been achieved), additional training and loss of specific specialized knowledge possessed by pilots and mechanics resulting in increased costs and reduced efficiencies. AirAsia’s expansion and growth has resulted in adding hubs in densely populated South East Aisan cities. However, as a cost savings measure AirAsia utilizes secondary airports resulting in a competitive advantage. This strategy is transferrable to long-haul flights; however, it is reasonable to presume (based on AirAisa’s proposed expansion plan on page 628) AirAisa’s long-haul flights will be required to fly into larger international airports and lease terminals in order to accommodate customers’ needs, thus increasing costs. Additionally, further risk revolves around the fact that expansion into long-haul flights would result in a significant increase in competition with reputable and established global airlines. Furthermore, such expansion places AirAsia in direct competition with government backed Malaysian Airlines (pg. 627). Although the idea of expansion into long-haul international flights is appealing, the risks involved with intense industry competition as well as the unsustainable low cost strategies should be a deterrent to AirAsia’s long-haul expansion. Additional conflicts exist between LCC strategies and long-haul success factors. AirAisa has thrived as an LLC based on the reduction of extrenious costs, thus an elimination of â€Å"frills† or amenities. The â€Å"no frills† strategy is very sustainable for short-haul flights (under 3. 5 hours) because customers’ needs are minimal and therefore expectations are met, meanwhile adding superior customer service to the mix flyers leave very satisfied. However, on longer flights, lack of â€Å"frills†, amenities and comforts may result in flyers’ negative perception of the airline. Although a flyer may initially believe a low cost, long flight with no amenities is palatable, it is likely the flyer will end up dissatisfied with lack of options while in the air; again a low cost strategy that is unlikely to remain sustainable in the long-haul market. With AirAsia’s implementation of point-to-point flights, streamlined and simple operations, as well as its unprecedented turnaround time, in the regional market, aircraft utilization is at a high while costs remain low. However, AirAsia will not be able to utilize its point-to-point cost reduction and aircraft utilization strategy. Long-haul flights will require more time in the sky with flyer layovers and a less streamlined flight schedule. Short regional flights allow AirAsia to serve a greater number of flyers over a shorter period of time at a lesser cost (example: 2 or 3 short-haul flights in the time it takes a single long flight). Lastly, due to the highly competitive nature and over saturation of international airlines, AirAsia may not realize the same aircraft utilization in long-haul flights as it does with short flights. Regionally, South East Asia is densely populated with a large market segment consisting of budget leisure and business travelers that had been under served prior to AirAsia (pg. 628). By implementing low cost strategies, AirAsia was able to capture and capitalize on the underutilized segment. Unfortunately, due to industry saturation in international long haul flights, AirAsia would have to fight to obtain a strong customer base from established airlines by providing actual or perceived value while trying to maintain cost and utilization optimization. Another issue AirAsia may face should it overly focus on airline expansion is the fact that barriers to entry in South East Asia are relatively low. The main barrier to entry is the capital investment required to acquire aircrafts. South East Asia has experienced government deregulation of airlines which aided AirAsia’s growth and may attract new entrants. Additionally, the LCC airline model is easily replicable; several reputable regional LCC airlines exist (i. e. , the US’s Southwest and Europe’s Ryanair) in which AirAisa adopted and adapted strategies for its growth and success. Due to the ease of strategy replication, new entrants may emerge in the South East Asian short-haul market. Should new LCC airlines being to emerge in this region, AirAisa may experience a reduction in market share (reduced number of passengers) and fierce price competition where AirAisa cuts ticket prices resulting in reduced profit margin. Therefore, company growth based solely on expansion as a LLC airline may not be sustainable. Alternatives Due to AirAsia’s significant growth and excellent reputation as a result of branding strategies, several alternatives are available for AirAsia to consider. 1) With Tony Fernandes’ experience in purchasing and revamping struggling airlines and the established capabilities the company possesses, AirAsia could expand itself by acquiring struggling regional airlines and restructuring them to meet the AirAsia standard of customer service, low costs, and high utilization. 2) Because of its location and access to smaller planes as well as its ability to work well with other companies, AirAsia could joint venture with an international airline, such as Delta. This joint venture could be along the lines of providing flights into and out of smaller cities so flyers could reach Delta hubs for their long flights. This joint venture will give AirAsia additional branding opportunities through allignment with such a prominent airline. It could also provide AirAsia with an additional customer base that it did not previously have. 3) AirAsia’s low costs and high aircraft utilization capabilities make it a good option for air cargo shipping. With its growth, AirAsia could expand its resources and enter into the air shipping market where it would likely turn a profit by exploiting its strong capabilities. 4) AirAsia current provides inexpensive flights based on a â€Å"no frills† scheme. Should this scheme not interest flyers due to their need and expectation for amenities, AirAisa could consider partnering with large product companies such as Coke, Nestle, or Sony to provide food, beverage, or entertainment amenities to passengers. By partnering with large companies, AirAsia could use its planes as advertisements and the company could in turn provide some of its products to AirAsia at a reduced cost. Recommendation Based on the analysis of AirAsia’s resources and capabilities with respect to its environment, I recommend the following: 1) AirAisa should discontinue further expansion into long-haul flights due to nontransferable resources and unsustainable low cost and high utilization capabilities. 2) AirAsia should further exploit the dense population of budget travelers in South East Asia by expanding its low cost and high utilization capabilities into hotels, shuttles, rental cars, and excursion activities. Since the market AirAsia is catering to is mainly budget leisure travelers; it would be in AirAsia’s best interest to expand on its offering of services. Because customers perceive additional value in the â€Å"whole package†, hotels, shuttles rental cars and excursions are all compliments to flying. By expanding offerings while implementing its capabilities and incorporating resources such as its technology system for booking trips and utilizing its partnerships, AirAsia is able to attract more flyers, travelers, and gain additional brand recognition. Based on this, for the next 5 years AirAsia should invest 5% of its yearly profits in service expansion by investing in budget, â€Å"no frills† hotels, rental cars/shuttles, and working deals with partners to provide local activity offerings (in 2012 AirAsia’s net profit was $562 US million. Should net profit stay the same, 5% over the course of 5 years would total $140. 5 US million). 3) Also, as South East Asia becomes more developed and prosperous AirAsia should focus on providing additional value to business travelers and those budget travelers who desire a few extra accommodations. In order to grow and meet the demands of the customers, AirAsia should invest in some fleet upgrades to provide additional customer value. Over the next 10 years the company should invest 10% of its yearly profits (approx. $56 US million per year) in adding premium sections to the planes with seats at the front of the craft, providing USB ports in the arm rests, as well as providing internet services; seat size and leg room will remain the same in order to accommodate the same number of passengers per flight. The cost of a premium seat will be only slightly higher for those individuals who choose to purchase the upgrade. Unlike long-haul strategies, the goal is not to significantly increase price to subsidize economy class tickets. The key in providing upgraded seats is to ensure customers feel as though they are receiving an extra value and to help retain customer base and market share as regional economics improve.