Air Asia

The Pioneer Low Cost Airlines of Asia

By: William Widjaja

/2009

MBA-MIB 555/855 International Marketing

Table of Contents
1. Introduction.............................................................................................................................4
2. Company background.............................................................................................................5
3. Analysis...................................................................................................................................7
3.1. SWOT Analysis................................................................................................................7
Strength................................................................................................................................7
Weaknesses..........................................................................................................................8
Opportunities.......................................................................................................................9
Threats.................................................................................................................................9
3.2. PEST Analysis................................................................................................................10
Political Factors.................................................................................................................10
Economics Factors.............................................................................................................10
Social-cultural Factors.......................................................................................................11
Technology Factors...........................................................................................................11
3.3. Porter’s 5 Forces Analysis..............................................................................................12
Competitive Rivalry within the Industry...........................................................................12
Bargaining Power of Customers........................................................................................12
Bargaining Power of Suppliers..........................................................................................13
Threat of New Entrants......................................................................................................13
Threat of Substitutes..........................................................................................................13
3.4. BCG Matrix Perspective................................................................................................14
3.5. Ansoff Matrix Perspective.............................................................................................15
3.6. Mix-Marketing...............................................................................................................15
Product or Commodity......................................................................................................15
Price or Cost......................................................................................................................16
Place or Distribution Channel............................................................................................16
Promotion or Communication...........................................................................................17
People................................................................................................................................17
4. Recommendations.................................................................................................................17
5. Conclusions...........................................................................................................................19
Reference..................................................................................................................................19
Books.....................................................................................................................................19
Websites................................................................................................................................19

3
1. Introduction
Since its conception almost 100 years ago, the airline industry has long been known as a hard

to profit industry due to few reasons. One of them was (and in several countries still is) many

main players are actually government controlled companies who have other agendas beside

purely profit-making. The other reason is the enormous numbers of regulations the airlines

operators must comply domestically and internationally. Even after deregulations in several

countries, it is still relatively so compare to the other kinds of transportation.

This article attempts to provide an analysis on how a company which was heavily in debt of

RM 40 million (approximately USD 11 million in Oct 2001) when changed ownership can

excel as the star of the airline industry in the region in just a few years, out of debt in just one

year after taking-over, went public in November 2004, and keep making new movements as

the leader that reshape the whole airline industry, even the related tourism industry in South

East Asia.

South East Asia main airports which have long been known as very strategic locations

between two oceans and two continents, have been the transit hubs for many big aircrafts

which flying from and to places in those continents and oceans. The topology of South East

Asia which consists of more sea than land, also contributes to the needs of air travelling

relatively more than other regions. These are just a few facts that contribute to the market

attractiveness of the airline industry in the region. But before the birth of budget airline

industry in the region less than a decade ago, despite the facts mentioned above, very few

percentages of people in the region ever took planes or even considered of taking ones mainly

due to price reasons.

 Although still very young in the region, the budget airline industry has created a new history

in transporting people. Started by one company named Air Asia in 2001, the concept is

proliferating fast throughout the whole region, just after Air Asia has proven it worked.

2. Company background
Air Asia (with IATA1 flight code: AK) was established in 1993 by a Malaysian government-

owned company and started operations in 1996. On 2 December 2001, the heavily-indebted

airline was purchased by Tune Air Sdn Bhd of Tony Fernandes for one Malaysian ringgit.

Fernandes made a remarkable turnaround, turning a profit in 2002 and launching new routes

from its hub in Kuala Lumpur International Airport fast, undercutting former monopoly

operator Malaysia Airlines with extremely low or even free promotional fares.

Dramatic changes to the legacy airlines were introduced by Air Asia to make sure the low

cost such as booking and payment directly through internet which means no commission paid

to any travel agencies, no air-ticket booklets (only printed codes on normal papers), no

boarding pass (without seat numbers), limited or paid baggage allowance, no meal on board,

reduced ground staff and air crews per aircrafts, usage of low cost airport terminals wherever

possible.

After the quick success in Malaysia, Air Asia branched out and worked together with partners

from neighboring countries and established local airlines in Thailand and Indonesia since

2003 and 2004 respectively to serve domestic flights and also international flights from and to

cities in the two countries, resulting in Thai Air Asia (FD) and Indonesia Air Asia (QZ).

1
IATA is International Association of Travel Agencies

5
Following Thai Air Asia and Indonesia Air Asia, another co-operation by the founder with his

international business partners including Sir Richard Branson of Virgin Atlantic has formed

Air Asia X which has a different IATA flight code (D7) dedicated to serve long haul flights

like Kuala Lumpur – Gold Coast (KUL-OOL), Kuala Lumpur – Melbourne(KUL-MEL),

Kuala Lumpur – Tianjin(KUL-TSN), Kuala Lumpur – Hangzhou(KUL-HGH), even Kuala

Lumpur – London(KUL-STN, Stansted airport), and the latest one Kuala Lumpur – Abu

Dhabi(KUL-AUH), and some other secondary cities/airports within Asia, Australia, and

Europe that considered as long haul flight destinations from South East Asia, particularly

Kuala Lumpur. This strategy of flying to secondary cities/airports that are quite near to the

primary big cities/airports is to avoid the premium airport handling charges by primary main

airports in their respective regions. Air Asia X was formerly FlyAsianXpress (FAX) which

only served remote areas in East Malaysia.

The low cost carrier terminal (LCCT) in Sepang, Malaysia was built specifically by the

airport authority to cater for low cost airlines like Air Asia. KLIA was the first airport to have

separation between normal carrier and low cost carrier, which soon followed by other main

airports in the region. It is clear that Air Asia is a phenomenon that has changed the air

transportation in Malaysia and the regions.

Air Asia also has their own aviation school which they call Air Asia Academy in Malaysia to

train more pilots, aircrews, and ground staff to support and sustain their business growth.

Beside their main airline industry, the Tune group of companies (Air Asia’s sister companies)

are also in businesses that support or related to their airline business, such as hotel business,

with the similar brand with Tune Air, i.e. Tune Hotel. Tune Hotel is a chain of hotels on the
same low budget/cost concepts. Hotel guests can book the rooms online just like Air Asia air

tickets. The basic room night price is kept very low, but the service provided is only the

rooms without any additional amenities like in other hotels. The guests have the choice to opt

to for air-conditioner, in-room wi-fi, toiletries, and other amenities for their rooms with

additional charge. No space for meeting room, swimming pool, gym, big admin office to

utilize space maximally for room occupancy. Currently Tune Hotels are located in LCCT

Sepang, downtown Kuala Lumpur, downtown Penang, Kota Kinabalu, Kuching, and Kuta-

Bali.

Another business of the group is Tune Money which provides unique financial service to

customers who like to use credit cards but also want to control the usage, and to avoid late

charges, interest, and any other kind of financial charges that apply to the conventional credit

cards. In other words, Tune Money is a kind of prepaid credit-card similar to prepaid phone.

Recently Tune group also has launched their own mobile phone provider, TuneTalk which

somehow also adopted the low cost concept of “everyone can fly” to “everyone can talk”.

3. Analysis
3.1. SWOT Analysis

Strength

-Air Asia has a strong management team with links to governments and airline industry

leaders. The founder Tony Fernandes embraced many of his reliable connections to be part of

his management team.

-The strategies applied by the management team which is a mixture of other famous and

successful low cost airlines in the US and Europe like Southwest, Virgin Atlantic, Ryanair is

7
now being adopted by other newer low cost airlines in Asia. This makes Air Asia as leader in

low cost airlines.

-Have good partnerships with other service providers in the hospitality and tourism industry,

also financial institutions. Air Asia even has sister companies in hotel and financial industry

(Tune Hotel and Tune Money).

-Having regional sister companies in the same industry, Indonesia AirAsia and Thai AirAsia

helped to promote their brand awareness and flight coverage in South East Asia, although Air

Asia doesn’t practice connecting flight. In the same way, Air Asia X contributes similarly in

the further regions.

- Having their own AirAsia Academy, AirAsia has shaped workforce who are flexible,

committed and very critical in making AirAsia the lowest cost airline in Asia.

- The focus on internet booking has saved Air Asia from agency fees, and on the same time

can utilize their web presence for web marketing.

Weaknesses

-So far Air Asia still depend on others on maintenance, repair and overhaul (MRO) facility,

although they already announced the plan to have their own MRO at their home in Malaysia

since 2006.

- Being low cost and putting charges on a lot of things that Air Asia consider not in the basic

tariff, passenger who used to the common services by the other airlines will complain, and

might choose back the other airlines for more convenient and comfortable flying experience.
Opportunities

- With so many air accidents happened to local airlines in Indonesia for the past few years,

Indonesian customers have been losing trust on taking their own national flights. Airlines

from overseas are considered as having newer planes and better maintenance.

-The recent economic crisis has pushed people who are used to legacy airlines to choose

budget airlines for their travels for business and leisure, and being a low cost one Air Asia can

benefit from it.

- Many states or countries in the region are trying to propel their economy by inviting more

regular flight airlines to fly into their airports. Air Asia being a low cost one is a good choice

for first flyers. For example, on targeting health tourism Lapangan Terbang Batu Berendam in

Melaka is expecting Air Asia to operate to their airport from main cities in Sumatra and

Jakarta.

Threats

-Certain rates in airports like security charges and landing charges are beyond the control of

airline operators and this is a threat to all airlines especially low cost airlines which tries to

keep their cost as low as possible.

- Most of the full service airlines have or planning to create a low cost subsidiary to compete

directly with AirAsia.

- Users’ perception that budget airlines may compromise safety to keep costs low.

9
3.2. PEST Analysis

Political Factors

-From its conception, the new Air Asia (after bought over by Tony Fernandes) has been

closed to political leaders in several countries in South East Asia where it operated. Despite

that, harsh unfair competition from government owned airlines and regulations that block

their plan to expand their market have been faced by Air Asia, particularly in Malaysia and

Singapore.

-The recent open sky policy among ASEAN countries has brought new opportunities as well

to all airlines in the region including Air Asia.

These all have been the political advantage and disadvantage for Air Asia.

Economics Factors

-in July 2005 when China and Malaysian government release the pegs of their currencies to

US dollar and allow their currencies to float and rise against US dollar, many companies who

have international debt in US dollar have been benefited overnight.

-the improvement of economics in Asian countries despite some economics crisis has been

steady for the past decade. This contributes to the increasing market of people who wants to

take flight for their travel. Tourism Boards in many Asian countries have been actively

targeting market from big population countries in Asia like China, India, and Indonesia.
Social-cultural Factors

-Many Asians are still very keen of visiting their family members who stay in other cities/

states/ countries to maintain their extended family relationships during big occasions like New

Year, Christmas, Hari Raya, etc. This will need transports, and with the low cost Air Asia can

capture this market.

-Targeting on first time flyers, many of these passengers are actually not very aware of the

services that a full service provided, so there will be less complain on the lack of service. In

the contrary, those who are first flyers, need more assistance in the process of check-in,

boarding, and even behaving while in the plane. This can make some of those experienced

flyers to avoid taking the same plane with the first group of people.

Technology Factors

-No doubt, the usage of internet for booking and purchasing tickets relying on high

technology. This will need 24 x7 ready maintenance for their website, as website down time

will mean no business time.

-People who are internet-savvy respond happily to the direct booking and purchasing, but to

extend the market to the group who don’t use internet, Air Asia need to develop some other

marketing ways like co-operating with outlets of mobile phone providers, banks, etc. In

Indonesia, Air Asia work together with XL(a Telecom Malaysia owned mobile phone

provider) to use their outlets as places to sell Air-Asia tickets, as well as Multiplus (a

franchise of stationeries and other daily office needs) outlets.

11
3.3. Porter’s 5 Forces Analysis

Competitive Rivalry within the Industry

As the leader of low cost airlines in Asia particularly South East Asia, Air Asia didn’t really

have rivals within the industry during the start, except when Malaysian Airlines tried to do

promotional act to beat its prices. But that was resolved by Tony Fernandes throwing a

cocktail party where the then Malaysian Transportation Minister also attended and Tony

highlighted bravely on the unfair practice from MAS, a government link company.

When Air Asia entered Indonesia market after invested in and renamed AWAIR to Indonesia

Air Asia, it straight away faced competition from City Link, a low cost carrier arm of Garuda

Indonesia. But the convenience of booking and purchasing provided by Air Asia had beaten

City Link successfully.

As time goes by, with other low cost carriers appearing in the region, now the competition is

becoming quite intensive. Price is one of the weapon in this competition, but also innovation

in expanding market share and finding new market with the current resources.

Bargaining Power of Customers

Unlike the full-serviced Airlines who are very dependent on travel agents to promote and sell

their seats, as a company who practice direct selling business in an industry that have lots of

choices, surely end customers opinion is the one that is more important for the growth of

marketing of Air Asia. Air Asia is actively sponsoring events that can attract the hearts of

people, for example being the sponsor of Manchester United soccer club, and sponsoring

some educational event like having junior pilot /aircrew game outlet in Kidzania Jakarta.
Kidzania is an indoor theme park where children can learn how to earn and spend artificial

game money (Kidzania dollar) while playing with certain roles of jobs.

Bargaining Power of Suppliers

To operate Air Asia definitely need fuel, maintenance and spare parts. During the high oil

price in the beginning of this year, they tried to hedge the oil price for few months to protect

themselves from the volatile oil price. As the price has gone down recently, the hedge is also

released. Currently Air Asia together with Indonesia Air Asia, Thai Air Asia, and Air Asia X

have hundreds of aircrafts, therefore they have a quite strong bargaining power against the

supplier when come to fuel purchasing, maintenance contract and also spare parts ordering.

Beside that Air Asia also need airport landing services and time slots for landing and take-off

from respective airports. In this area, government link relationships, market size (number of

passengers using the airport), and the destinations that it serves to and from that airport will

play an important role, therefore the bargaining position is various from airport to airport.

Threat of New Entrants

It is quite common for such a lucrative industry to have new players coming in to grab the

market share. Tiger Air, Value Air, Cebu Pacific are just a few examples of competitors in

this region. As the leader, Air Asia needs to keep innovative and become the trendsetter in the

region.

Threat of Substitutes

Low cost airlines like Air Asia actually substitute many inter-city bus or vessel routes in the

countries or regions where they operate domestically. But it is also possible they will be

13
replaced by other kind of vehicles at price, speed, and service that is as competitive or even

more competitive. For example, the bullet train connecting Taipei and Kaohsiung in Taiwan

has attracted many previous domestic flight passengers in Taiwan. This has happened in

Japan and Europe for short-haul flights. The plan of building Singapore-KL bullet train

possesses a potential threat to kill many airlines serving the short-haul route.

3.4. BCG Matrix Perspective

From BCG Matrix perspective, before Air Asia was purchased by Tony Fernandes, it was

more towards “Dog” state because it has low market share and a low growth rate and thus

neither generates nor consumes a large amount of cash. However, it is cash trap because of

the cash and even debt tied up in a business that has little potential, and waiting for

divestment.

After the purchase, it had entered the “Question Mark” state as Tony differentiated and leaded

Air Asia into a new market (the low cost airlines market) that had huge potential.

After one year of the purchase, when Air Asia started to be on the black, it quickly turned to

become a “Star”, and with that Air Asia started to form Thai Air Asia, Indonesia Air Asia,

and later Air Asia X as new arms of their business. Not only that, Tune group where Air Asia

is part of, have reached out to other businesses too, like Tune Hotel (budget hotel which adopt

the low cost concept of Air Asia), Tune Money (prepaid financial card that can be used in

outlets that accept Visa credit card, this is to target on people who dislike the charges, debt

collection method, and other weaknesses of conventional credit cards, or even those can’t get

credit card approval for certain reasons), and now Tune Talk (mobile phone provider).
3.5. Ansoff Matrix Perspective
When first taken over by Tony Fernandes, Air Asia neither had many existing customers, nor

was the low cost airline concept familiar to the customers in Malaysia and the region. With

such situation according to Ansoff Matrix perspective, it had to do a daring move by

diversification of introducing new product to new market. After it was on the black, Air Asia

did market development to enlarge its geographical coverage by cooperating or acquiring to

form Thai Air Asia, Indonesia Air Asia, and Air Asia X. These airlines of Air Asia group also

diligently add their domestics and international destinations from their respective current

based airports and countries regardless of economics crisis.

Beside the airlines business, Tune group (where Air Asia is part of) is now having new

businesses like Tune Hotel, Tune Money, and Tune Talk. They all have the same logo color

and similar logo to Air Asia. The first batch of customers for these new businesses is expected

to be the existing Air Asia customers. In this way Tune group is doing product development.

What Tony Fernandes and his Tune Group is doing in Malaysia and South East Asia is similar

to what Richard Branson and his Virgin group was doing in the UK and Europe more than a

decade ago.

3.6. Mix-Marketing
Here are some analyses according to the Mix-Marketing components (Ps or Cs).

Product or Commodity

Brand name for Air Asia is a good name to symbolize its home and main coverage area. The

service it offers is clear, transporting passengers from origin to destination at low cost without

extra amenities. And so far, Air Asia has very less record of accidents.

15
On packaging Air Asia offer convenience on booking through internet as well as booking

through Global Distribution System like Amadeus.

Price or Cost

Air Asia’s main competitive edge is price. Its management tries every way possible to push

down the price but still able to provide safe flights. Utilize the web to minimize dependency

on travel agents thus very low or no agency commission need to be paid. Unnecessary

amenities on board and for check-in process in the airports are scrapped; Number of staff on

board and in airport is reduced to the minimum.

Place or Distribution Channel

Utilizing the web has created a ubiquitous 24 x 7 distribution channel for Air Asia group of

airlines. The website www.airasia.com covers all airports/cities they fly to, and can book and

purchase directly from any places on the earth that have internet connection. The website also

offers various choices of local languages of the origin country and charge in the origin

country local currencies.

In Indonesia, for those who don’t have credit cards or are not internet savvy, Air Asia co-

operate with companies that have many outlets in many cities to sell their tickets.

Air Asia has also worked with Global Distribution System like Amadeus and Abacus like the

conventional airlines for travel agencies to book faster, as the speed of such dedicated service

is faster than their normal website.

Promotion or Communication

It seems like relatively cheaper price for all the routes than conventional airlines is still not

enough for Air Asia to attract customers. They frequently have very low or even zero fair for

their new routes or certain routes that they want to boost. As and when they have this kind of

promotions, they will communicate it through websites (not only their own websites) and

other forms of media, resulted in mass booking and purchasing within very short period.

In Indonesia, Air Asia co-operate with HSBC to issue Visa credit card that allows the

cardholder to have the privilege to book and purchase these lucrative offers 12 hours sooner

than other online users/customers who don’t have the cards.

People

The main “locomotive” Tony Fernandes so far is the right person to lead and grow Air Asia.

Beside he himself, his board of directors and executive are filled by people who have long

time experiences in several businesses, and good relationships with government and airline

industry leaders.

To make sure Air Asia can function well with all the “low cost” philosophy, Air Asia

Academy is the place to train all the pilots, aircrews, and other staffs in making sure they also

understand and practice the philosophy actively on the field. But this way, the Academy

generates human resources that is suitable for Air Asia needs.

17
4. Recommendations
Air Asia has been creating innovations in the traditionally hard-to-profit airline industry. But

Air Asia also created some controversial that they need to address carefully to maintain their

popularity.

Being a low cost airline, it is very sensitive and important for Air Asia to keep making sure

their flights although cheap but not on the expense of safety. Common public opinion on

cheaper price means lower quality is the main concern for this case.

There could be critics saying that Air Asia is just shifting the cost from the air fare to others

by allowing only very low baggage weight so passengers will be easily forced to pay extra

charges for excess baggage, delaying the check-in process so they can sell express boarding

cards, no free food so they can sell food on board, lure people to buy certain routes much

earlier and when those who buy can’t fly at the booked time later, they will simply get the

money without have to provide the service, and many more.

To address the abovementioned issues, Air Asia needs to keep educating customers through

online and offline forums and media to explain how actually they are doing their business and

why they are doing their business such ways.

The lucrative promotions Air Asia is throwing frequently can back fire on them financially if

not managed properly because of miscalculation on the prospects of certain routes.

Due to many air accidents recently happened to other airlines, staff on ground need to be

educated more when they accept luggage so there won’t be any total overweight for the

planes.
After having their own training and education center like Air Asia Academy, it is for their

best interest if Air Asia can also have their own MRO (maintenance) facilities sooner to

provide the maintenance of their growing numbers of aircrafts themselves.

Besides that, Air Asia needs to prepare carefully for the time when their current routes has

turned into “Cash Cow” according to BCG Matrix, so when that time comes they already

have enough alternatives to keep their growing rate.

5. Conclusions
So far Air Asia generally has been doing the right things for their marketing and business

development. They just need to carefully managed public opinions so it will be generally in

favor to them. This can be achieved through good public relations.

They also need to take care of the other sides of business like various back office functions

like technical, ground operation management, manifest reporting (report on data of flown

passengers), and the very crucial financial management, also legal aspects well, so they won’t

get into serious problems because of overlooking them.

Reference
Books
Kotler, Philip, and Keller, Kelvin, Twelfth edition (2006) “Marketing Management”, Pearson
International Edition.

Doole, Isobel, and Lowe, Robin, Fourth edition (2004), “International Marketing Strategy”,
Thomson

Kotler, Philip and Armstrong, Gary, First edition (2005), “Principles of Marketing, An Asian
Perspective”, Pearson Education South Asia.

19
Websites
http://www.airasia.com

http://ww.tunehotel.com

http://ww.tunetalk.com

http://www.tunemoney.com

http://www.abacus.com

http://www.amadeus.com

http://ww.sky.com/skynews (search for: Speedy Trains to Replace Short Flights, Aug 05,
2009)

http://www.republika.co.id (searh for: beli tiket Air Asia di gerai XL, Apr 28, 2006)

http://bisniskeuangan.kompas.com/ekonomi (search for: Air Asia incar calong penumpang

tidak memiliki kartu kredit, Sep 10, 2009)

http://www.dailyexpress.com (search for: Ringgit unpeg good for importers, Jul 25, 2005)

http://biz.thestar.com.my/ (search for: AirAsia plans 50% fuel hedge, Dec 6, 2007)

http://ww.wikipedia.com/air_asia

http://ww.wikipedia.com/indonesia_airasia

http://www.wikipedia.com/thai_airasia

http://www.wikipedia.com/airasia_x