Assignment On

Low Cost Leadership Analysis On AirAsia

Submitted To
MIR ASHIQUR RAHMAN (PMP & MCIPS)
Lecturer
Southeast Business School
Southeast University

Submitted By
MD. SAROWAR JANNATUL MD ABDUL
FAKRUL HASSAN MEHER AFROJ
HOSSAIN FERDOWS MUNIM
ID # ID # ID # ID # ID #
2018010005080 2018110005068 2017210005066 2018010005029 2018010005052
 Submission Date : 19 April 2019
Letter of Transmittal

19 April, 2019

Mir Ashiqur Rahman (PMP & MCIPS)

Lecturer

Southeast Business School

Southeast University

A.R. Tower
24, Kamal Ataturk Avenue
Banani, Dhaka-1213

Subject: Submission of Assignment

Dear Sir,

With due respect and humble submission, we would like to state that it is an

immense joy for me to submit our assignment on “Low Cost Leadership Analysis On

AirAsia”. We are glad to work under your active and cooperative support and we

think it has been a great achievement for us that we could study under you

throughout the last three months for which it has been possible to complete the

assignment successfully.

We will be really grateful to you if you are kind enough to receive our assignment
report and give your valuable feedback so that we can utilize your judgment for
further prospects.
Sincerely Yours,

_______________
FAKRUL HASSAN
MD. SAROWAR HOSSAIN
JANNATUL FERDOWS
MD ABDUL MUNIM

Abstract

Compare with the earlier ages, the airline industry has evolved much; the operations
become simpler and more efficient. Airline industry contributes to the economic growth of a
country. The International Air Transport Association surveyed that the growth rate of the
airline industry is about 6.6% every year and it has been grown more than 5% from the year
2000 – 2010.

The author chooses AirAsia as the study object for learning low-cost leadership that
developed by Michael E. Porter. The main idea of the paper is about the industry analysis
applied to generic strategies thus generate competitive advantages. AirAsia Berhad (MYX:
5099) is a Malaysian-based low-cost airline. AirAsia is Asia's largest low-fare, no-frills airline
and a pioneer of low-cost travel in Asia. AirAsia group operates scheduled domestic and
international flights to over 65 destinations spanning 18 countries. Together with the
associate companies; AirAsia X, Thai AirAsia, Indonesia AirAsia, Philippines' AirAsia Inc and
AirAsia Japan; AirAsia is ready to serve valuable and memorable flight with its believable,
“Now Everyone Can Fly.”

AirAsia applies low-cost leadership on its whole operations which characterized as; high
aircraft utilization, no frills (no free foods, no seat assigned, ticketless, no refundable ticket,
no loyalty program), modernize operations (simple process, single class seating,
standardized operations), basic amenities, point to point network, lean distribution system,
positioning, and low operating cost. This thesis explained in detail the AirAsia‟ strategy and
whole operations that keep the cost low through the value chain analysis. In particular, the
author applies Porter‟s generic strategy especially Low-Cost Leadership strategy to
competitive strategy, to argue that AirAsia‟s success that strict with low-cost.

Author thinks that AirAsia is the best company to learn the low-cost leadership strategy. The
company strictly on low cost, breaks the travel norm, innovate the operation process, and
become a strong leader in Asia (supported by the performance data).

Introduction

Nowadays, the airline industry has become simpler when compared to olden ages; they
want to improve themselves in the broad global market. Airline industry boosts all the
countries in growth of the economy, tourism, and international business investment. It has
made a lot of changes of people lifestyle to travel and the way of doing business by reducing
travel time consuming and allow people to visit different places or countries. The
International Air Transport Association surveyed that the growth rate of the airline industry
is about 6.6% every year and it has been grown more than 5% from the year 2000 – 2010.

The airline industry has evolved extremely since the last decades into a multifaceted a nd
fast growing industry drifted by the economic growth, travel and tourism divisions, in
accompany with the significance increasing passengers from numerous places
(www.adg.stanford.edu, 2000). In the few decades ago, low cost carriers or no frills carriers
such as EasyJet and South Western Airlines have appeared with the great competitive
marketing strategy to battle with the existing giant market leader such as British Airways
and United Airlines (Buhalis, 2003). Seeing in the current business of the Malaysian aviation
industry, Malaysia Airlines (MA) – flag or scheduled carrier, that was the first established
and monopolizing the air travel business in this region; is now opposition rising challenges
from no frills or low cost carrier – AirAsia (AA), that has appeared as the successful airline
regionally (O‟Connell & Williams, 2005). The rapid change was because of the lower fare,
new routes and various locations with different time frequencies and the online booking
process that provided to the customer‟s needs (O‟Connell & Williams, 2005). This was
further confirmed by Driver (1999), that in the challenging situation of the airline industry
that was expanding very rapidly; 2 fare structures, provision of routes, simplified ticketing
system, improved pre- and post-flight aspects of travel, distribution channels and
promotional activities of an airline were among its thriving factor to success.

Michael Porter has explained about the three general types of strategies that are mostly
applied by the businesses to gain and retain competitive advantages. These three generic
strategies are defined in two dimensions; strategic scope and strategic strength. Strategic
scope is a demand-side and appeared at the size and composition of the market that
company aim to the target. Strategic strength is a supply-side dimension and refers to the
strength or core competency of the company. In particular Porter identified two
competencies that he felt were most important: product differentiation and product cost
(efficiency).

In his 1980 classic Competitive Strategy: Techniques for Analyzing Industries and
Competitors, Porter simplifies the scheme by reducing it down to the three best strategies.
They are cost leadership, differentiation, and market segmentation (or focus). Market
segmentation is narrow in scale while both cost leadership and differentiation are relatively
broad in market scope.

Problem Statement

Recently, the airline industry has been a great and developed industry. Numbers of
passengers increase these 10 years dramatically. These numbers are very significant in Asia.
It makes the author want to develop and gain more information related to it. The author
chooses AirAsia as the company that will be observed. It is a leading airline company in Asia.
Some points that will be questioned about this company such as; how AirAsia implement a
cost leadership strategy on its operations, and how the strategies meet success. Some
points that will be concerned are how the relationship among five forces model,
competitive strategies, value chain analysis, and competitive advantages in the case of
AirAsia; and analyze the future development of the industry and what strategies that might
be good for AirAsia for the next 5 years.

Purpose and Significance of the Study

Based on the research question above, the author develops the research objectives. There
are some research objectives regarding research question. The author wants to learn the
success of AirAsia related to the Michael Porter competitive strategy. Beside, knowing the
reasons why the company applied the strategy and what the cause effect of them. Author
hopes will gain as much as information that useful in the MBA learning process; and the last
it is a requirement of MBA graduation.

AirAsia Low Cost Leadership Analysis

The AirAsia LCC had changed the norms of airlines that air transportation is a luxury and
expensive, it also only for high segmented people. The main objective of LCC is to gain huge
market and provide the flight service to a broader market. However, LCC is developing now
but it has some challenges in the market. AirAsia applies the Low Cost Carrier (LCC) business
model in the airline industry, which could be characterized as bellow:

(1) High Aircraft Utilization AirAsia‟s aircraft flying as much as possible, the first flight begin
in the early morning and the latest flight end in late night. The fast turnover is very
important, AirAsia ensure the time on the ground are very limited – an aircraft make money
when flies. The AirAsia turnaround time is 25 minutes, compared with 1 hour for Full Service
Carrier MBA Dissertation of Jinan University 37 (FSC). On average, AirAsia aircraft utili zation
is 12 block hours per day, compared to the FCS 8 hours per day.
(2) No Frills The basic of LCC business is about how to fly people from A to B. The other
service or everything else is regarded as a luxury or frills, of which cost money. AirAsia
removes some frills such as:

1. No free food and beverage on-board. Passengers can buy food and beverage on-board at
affordable price from the flight attendant, or buy online on the ticket booking process.
2. There is no assigned-seating, all seating are free. Except passenger willing to pay more for
seat selection. If no, passengers will receive the general boarding pass and have to take any
available seats.
3. Ticketless. Less complicated for the operational and customers. Passengers do not need
to worry about collecting ticket before the flight and it is cost-efficient for AirAsia (printing,
paper, distributing).
4. No refund. Airline cost much money when passengers no show for flight due to refund
and reschedule. Whether the aircraft full or empty, the passenger show or not, the cost of
the airline is the same. AirAsia does not give any compensation for no show guest and do
not refund for the missing flight passengers.
5. No loyalty program. AirAsia believes customers are loyal with the low fare, so it does not
apply frequent flier miles program.

(3) Modernize Operations

1. AirAsia makes the process as simple as possible and it is the key of LCC business. AirAsia
uses a single type of aircraft that enable the staffs (pilot, mechanic, flight attendant, etc) are
specialized in a single type of aircraft; which is maintaining cost in many aspects; learning
cost, training cost, spare parts stock.

2. AirAsia only offers single class seating. Passengers are seated on available seat. If
passengers want to have special privileges to choose a seat, they have to buy Xpress
Boarding.
3. AirAsia has Standard Operational Procedures SOP that ensures all of the staff have the
same level of competencies. On this way, AirAsia can ensure the homogeneous service
offered to the customers.

4) Basic Amenities

1. Secondary Airport. Most of the LCC use secondary airport (not the busiest and
highfacility), AirAsia also does it. AirAsia in many countries uses secondary airport, for
example; in Malaysia use LCCT instead of KLIA, in Singapore, The Philippines, and Indonesia.
Secondary airport is cheaper than bigger major airport and also less dense airport that allow
faster turnover for the aircraft.
2. AirAsia does not offer business lounge for its passenger even for very important people.

(5) Point to Point Network Point to point network. LCC avoids the hub-and-spoke system
and include simple point to point. Almost all of the AirAsia flights are short haul flight (less
than 4 hours). There is no partnership with another airline for connecting flights, if the flight
transfer happens, every baggage are labeled and passed through the other flight.

(6) Lean Distribution System Distribution costs are something that full service carrier like to
ignore. Most of FSC depend on travel agents or the sales office to sell the ticket. AirAsia
keeps the distribution channel as simple as possible and will cover up the entire scale of the
customer‟s profile. For example, AirAsia accommodates the most difficult European traveler
via internet and credit card sales. At the same time, AirAsia has an established system to sell
tickets to the most distant and technology deprived locations, such as in Myanmar.

1. About 80% of ticket sales are generated from the AirAsia website. This is the most cos t
saving distribution systems. The airline does not pay any commission for the travel agent,
which will affect the price. AirAsia also does not participate in the worldwide reservation
system; thus save costs.
2. AirAsia has very few sales office, it does not believe that the high sales generated by the
sales office; AirAsia establishes more call center.
3. Ticket booking and sales can be made by telephoning; it is simple and cost effective.
(7) Positioning The customers mostly are non-business passengers, particularly leisure
travelers and price-conscious business passengers. The characteristic of the flight is short-
haul point to point traffic with high frequency. AirAsia has to do very aggressive marketing
compare with ordinary or high end airline operator. It will be very helpful and profitable if
the main hub is in secondary airport (Low Cost Carrier Terminal and Secondary Changi
Airport). Because of the low cost it competes with all transportation carriers, both land and
water.

(8) Low Operating Cost The key of LCC Business Model is lower cost than ordinary flight
operator. AirAsia applies cost leadership strategy on its operations. It employs staff with low
wages (most of the secondary important staffs are from Indonesia, Bangladesh, Nepal, and
China which has low wages). The main hub is in Low Cost Carrier Terminal in Malaysia and in
any other secondary airport across countries which allowed AirAsia has low airport fees.
AirAsia uses homogeneous fleet that enable low cost for maintenance, cockpit training,
standby crews and learning cost. High resource productivity also the key of success while
applying the low cost leadership strategy. All the resource utilized maximally and avoid
overpaying. The boarding process is very efficient because of short ground waits due to
simple boarding processes. The operational is simpler than FSC industry, in AirAsia there is
no hub services, short cleaning fleet times, and higher sales from websites than travel
agents.

Research Findings

After doing some analyses above, such as Porter‟s Five Forces, SWOT analysis, AirAsia Low-
Cost Leadership Analysis, Value Chain Analysis, and Competitive Advantage,; author meets
the objectives of doing research. All analysis results are deep, reliable and useful for the
research study and the MBA learning process. AirAsia is one of the best examples for
learning low-cost leadership practice.
AirAsia Porter‟s five forces; author analyzes the whole airline industry forces and industry
attractiveness related to the AirAsia. The threat of new entrants analysis is medium;
customers have slight brand loyalty to LCC, require high capital, low switching cost for
customers, distribution channel, and government regulation. The rivalry among existing
firm's analysis is relatively high; there are numerous rivals in the industry, high fixed cost
make industry has fierce competition, customer easy to switch, high exit cost, and product
differentiation. The threat of substitute analysis is relatively low; there are some
alternatives like land and sea transportation for short haul and FCS‟s price sometime low.
Bargaining power of customer analysis is high; the customer has strong bargaining power
than the company, there are many providers and no switching cost for the customers.
Bargaining power of supplier analysis is relatively medium; the company does not have
power to the primary supplier (aircraft, fuel, and airport) and have a strong power to the
secondary supplier (food, merchandise, etc). These are the Porter‟s five forces analysis
through the industry attractiveness, and the industry is attractive considering these
analyses.

AirAsia applies low-cost leadership on its whole operations which characterized as; high
aircraft utilization, no frills (no free foods, no seat assigned, ticketless, no refundable ticket,
no loyalty program), modernize operations (simple process, single class seating,
standardized operations), basic amenities, point to point network, lean distribution system,
positioning, and low operating cost.

Through the value chain analysis readers can understand the whole operation of AirAsia
through specific activities to gain competitive advantage. Through the primary and
secondary activities AirAsia success to create competitive advantage and get profit margin.

After applying the low-cost leadership and detailing on the value chain, AirAsia success gains
competitive advantage between its industries. These are the following competitive
advantage; both cost advantage and differentiation advantage: great human resources,
associate organization, and widespread network, organized cost structure, leading LCC in
Asia, bran management, digital airline, subsidiary income, strong balance sheet, and fleet
growth.
The author also did a SWOT analysis to know the internal and external factors of the
company. Hopefully company can maintain the strengths, develop the weaknesses and turn
them into strengths, and catch every opportunity, seized every threat.

Conclusion

Nowadays, the airline industry has become simpler when compared to olden ages; it want
to improve itself in the broad global market. Airline industry boosts all the countries in
growth of the economy, tourism, and international business investment. It has made a lot of
changes of people lifestyle to travel and the way of doing business by reducing travel time
consuming and allow people to visit different places or countries. The International Air
Transport Association surveyed that the growth rate of the airline industry is about 6.6%
every year and it has been a growth more than 5% from the year 2000 – 2010.

Low cost carriers (LCC) focus on cost reduction with the purpose of implementing a cost
leadership strategy on the markets that they serve. The utilization of a young and
homogenous fleet of medium-size of aircraft (usually Boeing 737-700/800 or Airbus
319/320) normally accelerates a lessening of fuel, upkeep, staff, maintenance, overheads
and – if hefty requests at discounted prices are placed – capital expenses. High occupancy
seating accelerates lower unit cost of all classes, as fix costs (incl. ATC expenses) might be
credited to more sears and passengers. Only variable in-flight seating expenses (and some
fuel expenses) increase when increasingly passengers are on-board. Ground times and
delayed are decreased by serving smaller, uncongested airports and by focusing on point-
to-point flights, without any connecting flight, empowering a LCC to expand the amount of
daily block hours and in this way aircraft utilization.

AirAsia is well known in Asia especially in ASEAN. It is the leading low-cost carrier,
connecting people and place around countries with 132 routes, and 40 of the routes are
only provided by AirAsia.
AirAsia is one of the best examples for learning low-cost leadership practice. Some analyses
above, such as Porter‟s Five Forces, AirAsia Low-Cost Leadership Analysis, Value Chain
Analysis, Competitive Advantage, and SWOT Analysis; are done and author meets the
objectives of doing research. All analysis results are deep, reliable and useful for the
research study and the MBA learning process.

AirAsia Porter‟s five forces; author analyzes the whole airline industry forces and industry
attractiveness related to the AirAsia. These are the Porter‟s five forces analysis through the
industry attractiveness, and the industry is attractive considering these analyses. AirAsia
applies low-cost leadership on its whole operations. Through the primary and secondary
activities, AirAsia success to create competitive advantage (both cost advantage and
differentiation advantage) and get profit margin.