Introduction
Budget airline model is profitably used by low-cost carrier, also known as no-frills/discount carrier, that generally offers low fares but with the exemption of offering the traditional passenger services such as free meals and complementary drinks. The concept of budget airline was coined in 1971 by and who introduces the concept of ticketless airlines. However, the credit is said to have been incorrectly given to Southwest Airlines since it was in 1949, emerges the first ever successful low-cost carrier, the Pacific Southwest Airlines. Further, with the deregulation of aviation, the budget airline model spread to Europe in which, the most notable was that of the Ireland’s Ryanair that started its operations back in 1991 and the EasyJet four years after.
The budget airline model is entirely different compare with that of the traditional airline model. To account one difference, for instance, is the difference in the pricing model they employ. Airlines like the British Airways profited those early bird booking through reduction on the prices as the date of travel approaches, whereas in the budget airline model, profited those who booked early by raising the prices as the date of travel approaches. Moreover, other diffrentiating characteristics of a budget airline model are that they have a single, one class passenger class, a single type of airplane used (the Air A320 or Boeing 737 models are commonly used), the non-issuance of tickets that denotes the concept of “ticketless” airlines, a simple fare scheme, unreserved seating that describes the short check-in time, utilizes less congested secondary airports, offers simplified routes with emphasis on point-to-point transit instead of the hubs, the employing of direct selling via the internet, ergo, avoiding add-on fees and payment of commissions to travel agents or the computer reservations systems, employees and crews doing multitasking and lastly, budget airlines do not have the benefits of having free meals or entertainment on board, although, the budget airline offers an optional paid-for-in-flight food and beverages.
This paper, seeks to answer six questions in relevance to the implementation of a budget airline model and its applicability to the Asia-Pacific region following to the success of this model in the Europe and American market. Specifically, it would answer questions that pertains to the implementation of the budget airline model in AirAsia. Prior to answering the questions in this paper, it would be appropriate to give a snap-shot overview of AirAsia.
The AirAsia
The emergence of AirAsia started as a full-service regional airline and has been considered as Malaysia’s second national airline, was re-launched in 2001, after the Tune Air Sdn Bhd, the holding company of AirAsia, officially accrued majority of the shares in AirAsia from DRB-Hicom and became the first Asia’s low-fare ticketless airline. AirAsia operations are reflected in its key strategies such that it embodies the endearing philosophy of “now everyone can fly”. There are five key strategies being employed by AirAsia. First, is the low fare, no frills concept in which it targets the customers who can live without the frills of free meals, frequent flyer miles or the luxury of an airport lounge but with an attractive low 80 percent price reduction offerings in the ticket price. Second, is the flight guest convenience where guest are provided a variety of convenient means to book their flights either via the nationwide call centre, ticketless service, easy payment channels launched last 2002, the internet booking, reservations and sales offices, authorized travel agents and through customer service. Third, is the frequent flights to assure that guest convenience are met, in which, AirAsia practices a turnaround of only 25 minutes. Fourth is the safety first wherein AirAsia does not sacrifice the integrity of their airlines safety as part of cost optimization philosophy. Fifth is the efficient cost optimization operations where they strives to maximize profit, just like any business, but with the provision of offering low fares at high quality service.
In 2003, not only AirAsia became the first airline in Asia to introduce the use of SMS booking, but the first airline in the world. The success of AirAsia is indicative of the recognitions and awards it had gained in the business world. Among the awards that are given to AirAsia is the 2005 Market Leadership Award in Airline Achievement, Asia Pacific Low Cost Airline of the year, Best Managed Company in the Airlines and Aviation Sector, and so on. Currently, AirAsia operates over 100 point-to-point both domestic and international flights from its hubs in Malaysia, Thailand and Indonesia.
Main Part
Q1. What opportunities exist in the Asia-Pacific region for the entrance of new low-fare airlines? How might demand for low-fare service differ in the Asia-Pacific region and in North America and Europe?
Some of the analyst had undermined the potential of low-carrier airlines in Asia saying that demographics do not support the low-carrier airlines because of the low levels of purchasing power, the existence of only few bilateral agreements that allows low-carrier airlines to operate between countries and too few satellite airports. However, despite of the negativities of some analyst, others believe that the offering of affordable international travel fosters the integration of Asia-Pacific region in general. Contrary to the non-support of the opportunities of demographics, Axess Asia revealed that low fares are often the deciding factors for budget-conscious travelers in Southeast Asia. Moreover, Mr. Ross form UBS says, that the region’s low average incomes should boost rather than constrain cheap fares demands. With the emergence of low-cost carrier, it provides the less affluent Asians, an alternative means of traveling inexpensively. The market of Pacific Asia region, specifically in terms of population, is vast such that the penetration of low-carrier airlines alone in China may generate promising great amount of profitability for any low-cost carrier airlines.
From the survey of 1999 with 19,000 British leisure passengers, it is evidently recommendable to choose the low-cost no frills airline compare with the other traditional European airlines. The results for low-cost carriers yielded that when it comes to individual factors, such as the comfort, catering, cleanliness, and the like, they are surveyed the worst. However, when in terms of the value for money, they are ranked the best. Simply stated, the British passengers, no matter how unsatisfied they are in the individual factors, the low-cost that is being offered to them compromises to those unsatisfactory individual factors. Similarly, the 'no-frills' scheduled carriers were also much more highly recommended than European charter airlines which like those, offer low fares but with frills ( 1999). The difference in the demand for low-fare service between Asia-Pacific and Europe or that of the North America may not be too different. In terms of the population, it would be evident to presume that population of the Asia-Pacific combined with the resurgence of Asian market can suffice the bright prospect for low-carrier airlines. If however, there is a difference that can be accounted in the low-fare demand, it would be the regulation of the government and the slow dissemination of information regarding the low-cost airlines being recently offered to the Asians, especially to the Asian developing countries that perceived the air travel as expensive. In fact, in support of Mr. claims that low-cost airlines in Asia is highly advantageous since the only few interregional highways exists and no-high speed rail makes the low-cost airlines a promising and enticing business.
Q2. Do governments pose a significant obstacle to the expansion of low-fare airlines in Asia?
Yes. The regulation of airline in some parts of Asia inhibits competition to take place which results to the government being manipulative and restrictive to its growth leading to limited alternatives for Asian people to only have few choices in air travel. Considering the success of AirAsia in the Malaysian borders, the urge for expansion to venture into intra-regional market is less welcomed by the Malaysian government as Malaysia’s regulatory authorities is confronted by the predicament of accommodating the growth prospect of the low-fare airlines at the expense of reducing the market value of the Malaysian Airlines as it is government owned. The government in this instance may hamper the expansion of AirAsia, therefore, government on this regard; obviously act as a big obstacle for AirAsia.
Q3. Compare AirAsia's strategy with the strategies of Southwest and Ryanair. How is it similar to and different from the strategies of those carries?
Southwest Airlines as being one of the pioneer in adopting the budget airline model, named in 1993 as the dominant airline in ninety-three of its top 100 markets ( 1999). The Southwest incorporates to the core of their strategy, the operations in short sectors where they offer low and unrestricted fairs, high point-to-point frequencies and excellent on-time departures, thereby engulfing a brand image of ‘flying is fun’. The summation of these strategies taken from the excerpts of Southwest CEO’s Mr. statement states that, 'We are not competing with other airlines; we're competing with ground transportation' ( 1996). In fact, in recent years, Southwest has tended to top the Department of Transportation surveys of on-time performance, baggage handling and customer satisfaction (1998).
Table1: The Southwest airlines' low-cost, no-frills model
PRODUCT FEATURES
OPERATING FEATURES
Fares
Low Simple, unrestricted Point-to-point No interlining
Distribution
Travel agents and direct sales, Ticketless
In-flight
Single-class, high-density, no seat assignment, optional meals, snacks and light beverages only
Frequency
High
Punctuality
Very good
Aircraft
Single type (Boeing 737), four variants, high utilization (over 11 hours/day)
Sectors
Short to average below 800 km (500 miles)
Airports
Secondary 15-20 minute turnarounds
Growth
Target 10 percent per annum with 15 percent as maximum
Staff
Competitive wages, profit-sharing since 1973, high productivity
Source: Table 6.2 of Doganis, R. (2001) The Airline Business in the Twenty-First Century.
The Ryanair strategy is not different from that of the Southwest since their strategy encompasses with that of the Southwest. As what the CEO of Ryanair explicitly stated after a primacy of setback in the adoption of the budget airline model, 'We went to look at Southwest. It was like the road to Damascus. This was the way to make Ryanair work' (1998). Just like any other low-carrier strategy, their key strategy does not differ much. AirAsia, shares the similarities being offered by the Southwest and Ryanair, specifically in the in-flight, frequency, punctuality, aircraft, airports with a very slight difference in terms of the fare since they are relatively a bit lower, the distribution wherein the AirAsia adds the SMS booking feature that is aimed to cater to the Asian people such that they are fond of using the SMS and is being rated as mobile phones savvy. Overall, AirAsia values the proposition describes as “a Ryanair operational strategy, a Southwest people strategy, and an EasyJet branding strategy.”
Q4. Did Tony Fernandes weigh the range of political, economic, and operational risks when he took over AirAsia? What risks might he have overlooked?
Any top caliber entrepreneur would not venture into something too risky, even though entrepreneurs are highly characterized as risk takers, provided that he or she has not explored fully the consequences of venturing into a new risky business. With Tony Fernandes being able to have the nerve guts to gave up his prominent position in Asia’s leading music industry being the vice president and head of Warner Music’s Southeast Asia operations in exchange of moving into a struggling AirAsia in which he became the vice-president of Southeast Asian operations, is indeed indicative of the heavy weigh he considered prior to his bold move wherein uncertainty may have placed his career in doom. However, Tony Fernandes’s move cannot be considered a no-brainer at all. Perhaps, it was envisioned by Tony Fernandes that something more bright was coming up for him in which, he has to act on to make that envision of his a reality. It is hard to pinpoint if the decision of Tony Fernandes has some flaws or he has overlooked something from an audience perspective because with the tremendous success of AirAsia, it really is hard to tell. From being a top executive of Warner Music from running an airline company in which he owns 35 percent of AirAsia’s stake, the harder it is to tell.
Q5. How would you describe Tony Fernandes's entrepreneurial strategy?
First and foremost, Tony Fernandes’s, a British man, is described as having a superb entrepreneurial attitude and skills that unquestionably falls into the context of being an entrepreneur, a risk-taker, innovator, initiative-taker and the like. Equipped with marketing and entrepreneurial ability, it is no wonder that Tony Fernandes excels into envisioning and be driven by childhood dream of owning his own airline someday, he was able to make it a reality, just like that of a Bill Gates when he envisioned that household PC’s in the future would have Microsoft in their PC’s system.
Q6. How should AirAsia respond to the challenges:
(a) new low-fare carriers entering the Asian marketplace
The low-fare airlines (LFA) entering in the Asian marketplace combined with the deregulation of government in the airline business permits competition to occur. AirAsia as one of the first LFA in Asia having have had established itself in the Pacific-Asia region can respond by protecting its competitive positioning in the market and focusing more on the intangibles that is resistant to competitor’s imitation. With the advantage of being the first in Asian market, the competitors would surely try to find ways to imitate and emulate the strategies of AirAsia and it is imperative that the management would seek to protect that aspect. Moreover, AirAsia can stress on the capabilities approach which serves as a locator of the sources of defensible competitive position in the distinctive, hard-to-duplicate resources that encompasses the integrations of assets and capabilities the firm has gradually developed (1987; 1991).
(b) low-fare strategies pursued by incumbent carriers?
It is inevitable that the LFA’s would offer the lowest possible fare to the consumers at the very bottom price they can. Incumbent carriers would always find ways to strike back, offering customers lower prices, lower than that of AirAsia. However, given the low fare already given by AirAsia, the battle would be on the aspect of giving add-on services at no extra cost in which incumbent carriers might fail to level on. For example, in adherence to AirAsia’s cost-optimization philosophy, the assurance of safety first is primary to them.
Q7. 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?
Asian passenger air transport marketplace will shake out when Asian governments would impose stiff and strict regulations in the airline industry inhibiting competition to flourish. Further, it will experience a shake out when Asian economy would have another financial crisis as people would not have relatively high purchasing power even though the prices being offered is already low, Asians may not be able to afford it since not all the Pacific-Asia region are financially well to do. But with the Asians being able to hold up, like the booming economy of China and the consistency of Japan’s economy, seemingly the shake out mayhap is just temporary. The lesson that can be drawn from Europe and North America experiences is that venturing into an alternative route can still be enjoying and inexpensive and the linkage of one country to another fosters unity and promotes interconnectivity between regions.
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