The Low Cost Airline: The Money Maker

The low-priced construct became a moneymaker in the United States, where it was pioneered in the 1970s by Southwest Airlines, the theoretical account for budget bearers elsewhere like Ryanair and easyJet in Europe.

Definition of low cost air hoses

A low cost air hose by and large has many characteristics that differentiate it from the traditional bearers. These characteristics include ticketless travel, on-line ticket gross revenues, no international offices, no frequent circular points, no free nutrient and drinks, no inflight magazines, no nine lounges, usage of secondary metropolis airdromes.

Not all low cost air hoses have these characteristics, and non all air hoses that have some of these characteristics are low cost air hoses. For illustration, Virgin Express is a low cost air hose, but it still offers complimentary java and inflight magazine, and they are based at Brussels primary airdrome.

Case Study-AirAsia

Narrative of AirAsia

Air Asia, as the 2nd Malayan National Airline, provides a wholly different type of service in line with the state ‘s aspirations to profit all citizens and world-wide travelers. Such service takes the signifier of a no frills – low airfares flight offering, 40 % -60 % lower than what is presently offered in this portion of Asia. Their vision is “ Now Everyone Can Fly ” and their mission is to supply ‘Affordable Airfares ‘ without any via media to Flight Safety Standards.

The narrative of outgrowth of AirAsia is similar to Ryanair, since both bearers underwent a singular transmutation from a money-losing regional operator to a profitable, low cost air hose.

AirAsia was ab initio launched in 1996 as a full-service regional air hose offering somewhat cheaper menus than its chief rival, Malaysia Airlines. Before 2001, AirAsia fail to either sufficiently stimulate the market or pull adequate riders from Malaysia Airlines to set up its ain niche market. The turnaround point of AisAsia is in 2001, while it was up to sale and bought by Tony Fernandes. Tony Fernandes so enrolled some of the loaning low-priced air hose experts to reconstitute AirAsia ‘s concern theoretical account. He invited Connor McCarthy, the former manager of group operation of Ryanair, to fall in the executive squad. In late 2001, AirAsia was re-launched in Malaysia as a trendy, no-frills operation with three B737 aircraft as a low-fare, low-priced domestic air hose.

Opportunities faced by AirAsia in visible radiation of external development

Low menu of Indonesia-Malaysia trip

The menu for a Jakarta-Johor Baru trip costs Rp 100,000 ( RM 88.88 one manner ) . And charge Rp 150,000 for a Bandung-Kuala Lumpur flight, and Rp 300,000 for a Surabaya-Kuala Lumpur trip, whereas a Jakarta-Kuala Lumpur air ticket from Malaysia Airlines available at travel agents cost Rp 1.4 million. Meanwhile, Lion Air on the same path, charged Rp 1.05 million. The low menu provided by AirAsia helps it open the Indonesia market.

Low menu of Singapore-Bangkok service

AirAsia will increase its services between Singapore & A ; Bangkok by presenting a 2nd day-to-day flight to its bing agenda. This recent development came hardly a month after Thai AirAsia operations started its first international flight to Singapore in early February this twelvemonth. AirAsia is offering its invitees promotional menus to/from Singapore- Bangkok from SGD $ 23.99 ( THB 499 ) one manner from the 28th March to 30th Oct, 2004. It is much lower than the lowest menu SGD $ 56 offered by full-service bearer. This helps it open the Singapore market.

Political connexions

AirAsia hold 49 % of Thai AirAsia with 1 % being held by a Thai person. The staying 50 % is held by Shin Corp. which is owned by the household of Thailand ‘s premier curate, Thaksin Shinawatra. Shin Corp. has fiscal strength, synergism in ingormation engineering and telecommunications, which support AirAsia Internet and nomadic phone engagements. Shin Corp. allows endorsers of the Shin mobile phone flagship, Advanced Information Service, being able to reserve tickets through its short-messaging service ( SMS ) . AirAsia with its politically powerful angel may good turn up to seize with teeth. This helps it open the Thailand market.

Malayan authorities support

The Malayan authorities supported the constitution of AirAsia in 2001 to assist hike the under-used Kuala Lumpur International Airport. AirAsia ‘s flights from Senai are meant to develop Johor into a conveyance hub to equal Singapore. AirAsia, hence, can supply an alternate path to go to Bangkok, by utilizing Senai Airport in Johor Bahru, in southern Malaysia.

Opportunities faced by AirAsia in visible radiation of internal development

Issue of IPO

Kamarudin Meranun, AirAsia ‘s Executive Director announced the assignment of Credit Suisse First Boston ( CSFB ) and RHB Sakura Merchant Bankers ( RHB ) as the bookrunners for the company ‘s approaching Initial Public Offering ( IPO ) .

The IPO strengthens AirAsia balance sheet, farther cuts its existing low costs at 2.5 US cents per ASK and accelerates our growing programs throughout Asia. The IPO besides allows AirAsia to spread out its fleet of 18 Boeing 737-300s.

Political connexions

Thai AirAsia is a join venture established by AirAsia with Shin Corp. Shin Corp. is owned by the household of Thailand ‘s premier curate, Thaksin Shinawatra, and about 900 million tical will be invested in Thai AirAsia over a five-year period. Shin Corp. oversees the finance and disposal of Thai AirAsia while AirAsia shoulders the duty for selling and operations. Shin Corp. has fiscal strength and supports AirAsia to turn. AirAsia with its politically powerful angel may good turn up to seize with teeth.

Challenges faced by AirAsia in visible radiation of external development

Indonesian wont

Preferences of Indonesian riders are rather different from the construct of inexpensive air travel without excess service for the riders ( free bites and drinks ) , and besides their reluctance to convey light luggage.

AirAsia prefers riders with really light and minimal luggage. If this is the instance, it may non last long.

But Indonesian domestic air hose companies are able to supply value-added supernumeraries like nutrient and drinks as portion of their service to the riders, although at a comparatively higher cost.

The comparative border of Indonesian domestic air hose companies compared to AirAsia concerns wont ( civilization ) .

Furthermore, Indonesian domestic air hoses were already trained with the low-priced air travel construct, known as duty war. They have proved themselves as immune, and managed to last.

Last but non least, the Indonesian authorities or domestic air hose companies had ne’er announced the handiness of a low-priced air hose company of the state. All these affect AirAsia growing in Indonesia.

Singapore authorities rejection

Initially, AirAsia wanted to get down flights from the southern province of Johor, near Singapore, it hoped to pull riders by running a convenient coach service to the city state. However, Singapore rapidly quashed that thought. The Singapore authorities said it would non O.K. a coach nexus for AirAsia because it was non ‘in her national involvement ‘ , reflecting frights that Singapore ‘s Changi airdrome would lose concern to Johor ‘s new Senai airdrome. This makes AirAsia can non abandon the usage of Changi airdrome, and hence suffer from a higher cost.

This is because AirAsia winging to Singapore demands to endure from flight congestion of Changi. Changi has drawbacks of flight congestion that could forestall the speedy turnarounds indispensable to maintaining down costs. AirAsia finds it stuck between large planes and circling to wait for a slot to open up, which means excess fuel costs. Furthermore, the SGD $ 21 going and security revenue enhancement of Changi is excessively high for AirAsia low-priced operation. AirAsia had asked the Singapore authorities to relinquish the fees, nevertheless, a petition that was non merely rejected but besides criticized.

Besides Singapore – Bangkok, AirAsia now provides an alternate path to go to Bangkok, by utilizing Senai Airport in Johor Bahru, in southern Malaysia. Seeking to provide to the different markets, menus for Johor Bahru- Bangkok are by and large 20 % lower in comparing to Singapore – Bangkok. AirAsia presently operate day-to-day flights to Bangkok from Johor Bahru. However, the pick proved unpopular, as the path failed to pull Singaporeans because of the extra cost and incommodiousness of holding to go in and out of Malaysia by route. All these affect AirAsia external growing.

Minimal air-fare rates

AirAsia faces challenges happening unfastened takeoff and set downing slots at opportune times, and Thailand ‘s ordinance that sets minimal air-fare rates. Although Transport Minister Suriya Jungrungreangkit said the current minimal air-fare ordinances will be scrapped to open up the market, he could n’t call a day of the month when this will be done. This seems to be favouritism toward Thai Airways International ‘s domestic operations, and affects Thai AirAsia to vie in the Thailand market.

External Changes which have impact on AirAsia

Asia ‘s in-between category growing

Low cost air hoses are anticipated to hold greater potency in Asia as there are many Asiatic metropoliss with a population above one million people each every bit good as a lifting in-between category population. This growing of in-between category in Asia provides a immense market potency for AirAsia to turn.

However, as the market is going larger, more air hoses or new comers would wish to acquire a piece of the action. For illustration, Budget air hoses, it is estimated, will capture at least 25 % of Asia ‘s air travel market within following 10 old ages and a batch of that will be new, non diverted, traffic. Therefore, AirAsia will confront more competitions at the same clip.

Besides the low cost air hoses, AirAsia still needs to vie with the conventional bearers. Although excess riders of the low cost air hoses will be coming from the new demand to be created by the low menus, the growing may non be wholly ‘stolen ‘ from large flag bearers.

Actions of Changi and nearby airdromes

The growing of low cost air hoses in south-east Asia has a important consequence on which airdromes will rule the regional air power market. Low cost air hoses are seen as assisting funnel more riders to airport hubs. Therefore, there is a realisation among regional authoritiess that they need nailing airdromes and plucky bearers or they are traveling to lose out large clip. Therefore, these authoritiess are more willing to back up low cost air hoses. For illustration, the Malayan authorities supported the constitution of AirAsian in 2001 to assist hike the under-used Kuala Lumpur International Airport, and Thai Prime Minister ‘s Shin Corp. forms a join venture with AirAsia that would profit Bangkok ‘s new airdrome and make a new hub at Chiang Mai. Therefore, under this state of affairs, it helps AirAsia grow in Asia.

Furthermore, as there is a growing of several south-east Asiatic airdromes, this poses a challenge to the position of Singapore ‘s Changi airdrome as a regional air power hub. These airdromes include Johor ‘s new Senai airdrome in southern Malaysia, Bangkok ‘s new Suvarnabhumi airdrome which will be able to manage 45 million riders when it opens in 2005, Bangkok Don Muang which late overtook Changi in rider Numberss, etc. To keep Changi ‘s place as the air hub in the part, Singapore is suggesting a budget air hose terminus at Changi by 2005 and lower rider revenue enhancements to pull low cost air hoses. This helps AirAsia grow and lower the cost.

Actions of bing air hoses

The bing air hoses in south-east Asia have several actions to vie with AirAsia, for illustration, some have launched a low cost air hose to contend with AirAsia.

Singapore Airlines launched a low cost air hose subordinate, Tiger Airways, in the 2nd half of 2003, merely months after the scheduled launch of ValuAir set up by one of its former executives.

Orient Thai Airlines launched a new low cost air hose subordinate, One-To-Go. One-To-Go operates with a fleet of six Boeing 757-200s and fit any menus that Thai AirAsia offers.

Thai Airways have frequence and capacity to offer to their 13 domestic finishs. They besides have, during the past two old ages, worked to better operational efficiency, cut downing unprofitable domestic paths, increasing flights on busy paths, beef uping output direction and commanding costs.

All these make AirAsia face a immense competition.

Critical success factors in the Low cost air hoses in Asia

Decrease in operational cost

Low cost air hoses strive to accomplish the lowest possible monetary value for their merchandises and services. Low monetary values can non prolong unless the company maximizes its operational efficiency.

The success factors of Asiatic low cost air hoses in cut downing their operational cost include:

Service nest eggs ( no frills cabin service and extended usage of outsourcing )

No-frills include:

NO drinks, NO nutrient, NO earphones, NO newspapers, NO films, NO VIP lounges, NO expensive offices, NO milage plans, NO place allotment, NO kids ‘s menus, NO paper tickets ( Electronic tickets merely ) , NO linking flights ( All flight-legs must be booked independently )

Operational nest eggs ( point-to-point services and unvarying fleet )

Overhead nest eggs ( internet gross revenues and streamlined bureaucratism )

We can compare the operational cost in footings of costs per available place kilometre ( ASK ) , a step of the running cost of the air hose. For case, Ryanair in Europe is about half of the ASK monetary value comparing with the full services air hose. The mean menu offered by Air Asia in Malaysia is 40-60 % lower than its full-service rival.

Competitive Ticket monetary value against traditional full-service air hose

Low cost air hoses begins with two initial cost advantages originating from the very nature of their operation: higher siting denseness and higher daily aircraft use. By taking concern category and reconfiguring their aircraft, low cost air hoses can increase the figure of seats on their aircraft. Seat pitch of a low cost air hose is normally 28 inches, compared to a traditional conventional economic system category pitch with 32 inches. Doganis ( 2001 ) calculates that should be able to run at place cost that are merely 40-50 % those of mainline challenger. Uniting the burden factor benefit and good distribution cost, low cost air hose ‘s cost per rider can cut down monetary value by tierce of conventional air hose.

Flying out of secondary airdromes

Many low-priced air hoses maintain disbursals down by winging out of secondary airdromes, avoiding major hubs where takeoff and landing fees are much higher while still acquiring riders near plenty to their finishs.

The travel distance is short

As the paths offered by low cost air hoses are chiefly short, domestic paths which may merely take one to two hours, travelers might be all right with no comfortss on flights

Success factors in AirAsia

Absolute Cost Advantage

Low cost per mean place kilometre

AirAsia focused on guaranting a competitory cost construction as its chief concern scheme. It has been able to accomplish a cost per mean place kilometre ( ASK ) of 2.5 cents, half that of Malaysia Airlines and Ryanair and a 3rd that of EasyJet. AirAsia can rent the B737-300s aircraft at a really competitory market rates due to the rough planetary market conditions for the second-hand aircrafts because of the September 11th event in 2001. On the other manus, the operating cost of the company is besides dropped drastically.

Low distribution cost

AirAsia focal point on Internet engagements and ticketless travel allowed it to take down the distribution cost.

Attractive ticket monetary value

With the mean menu being 40-60 % lower than its full-service rival, AirAsia has been able to accomplish strong market stimulation in the domestic Malaysian air market ( Thomas 2003 ) . For case, the menu for the trip from Kuala Lumpur to Penang on AirAsia starts from 39 ringgit. Comparing to trip by bus charge 40 ringgit and 80 ringgit by auto. The consequence of attractive low menu is more travellers exchanging from coach to air, similar instance as Ryanair in Europe.

Good Management Team

AirAsia value proposition is more sophisticated than Ryanair puting equal accent on trade name repute and client service/people direction, by a senior adviser to AisAsia ‘s top direction squad. AirAsia pursue a Ryanair operational scheme, Southwest people scheme and an Easyjet stigmatization scheme.

Failing

Fair handiness

The handiness of AirAsia is non good as traditional air hose as it merely supply unique aircraft. However, it can non be the cost leader if it offers customized characteristics or comprehensive support which will ensue in increasing operational cost.

However, concentrate on a specific client may avoid straddling.

Case of straddling

A Nipponese low cost air hose, Skymark, seeking to be everything to everyone aiming the broader client and offering limited particular characteristics ( satellite Television, Business category and charter operations ) . The consequence is neglecting to both cost efficient and monetary value competitory rendering it vulnerable to market forces and client demand ( porter1996 ; Lawton 1999 ) .

Major strategic waies recommended

Open more Asiatic market

Low cost air hoses are anticipated to hold greater potency in Asia as there are many Asiatic metropoliss with a population above one million people each every bit good as a lifting in-between category population. It is clip for AirAsia to work the potencies of low-cost air travel by Asia ‘s turning in-between category. Besides get downing services to the Pearl River Delta in south China in 2004, AirAsia can use its services to the coastal metropoliss in China.

Besides the growing of Asiatic in-between category, the liberalisation of air power sector of India is another ground for AirAsia to open more Asiatic market. The Indian authorities has liberalized the air power sector long dominated by the national bearers. Now, merely a few low cost air hoses, e.g. Air Deccan, Airone Feeder Airline Pvt Ltd, Crescent Air, have launched their services at that place. Furthermore, the national bearers, Indian Airlines or Air India, despite their domination of the Indian skies, do non look to be much interested in runing low-cost services. Therefore, it is a good opportunity for AirAsia to open the Indian market.

Join venture with Virgin Group

AirAsia should set more attempt to put up a pan-Asian low cost air hose with Virgin Blue, which is a low cost bearer of Virgin Group functioning Australia and New Zealand chiefly. Virgin Blue has suggested it may widen services to south-east Asia. Therefore, puting up a articulation venture with Virgin Blue can assist AirAsia to turn in Asia even further, and assist Virgin Blue to widen services to south-east Asia.

Recommendations to maximise competitory advandages of AirAsia

1. Enforce Political advantages

AirAsia established a articulation venture, Thai AirAsia with Shin Corp. Shin Corp. is owned by the household of Thailand ‘s premier curate, Thaksin Shinawatra, and about 900 million tical will be invested in Thai AirAsia over a five-year period. Shin Corp. has fiscal strength, synergism in ingormation engineering and telecommunications, which support AirAsia to turn in Thailand. AirAsia with its politically powerful angel can good turn up to seize with teeth, and therefore it should implement such political advantages in order to widen the growing in Thailand.

Furthermore, AirAsia should utilize its Thai subordinate, Thai AirAsia, to claim the usage of Thailand ‘s ‘open skies ‘ understandings to wing to Singapore, Brunei and Cambodia, get the better ofing the barrier of bilateral air power treaties that threatened to restrict its growing.

Initiation of smart cards

AirAsia can publish a smart card which is compatible with the bing ticketless engagement.

It can offer 2 sorts of smart cards. The first sort of smart card, aimed at ordinary travelers, will offer instant wagess when topped up, offering greater value than its purchase monetary value. For illustration a Bt5,000 card may be deserving Bt5,500. The card can besides be used by other people with the same household name as the cardholder.

The 2nd sort of smart card will offer limitless travel for frequent circulars. Priced provisionally at Bt20,000, cardholders will be allowed do as many trips as they want within a specified period.

Decision

A survey by the Centre for Asia Pacific Aviation ( 2002 ) confirms that Asia continues to offer attractive conditions for the air transit industry. With 13 out of universe ‘s top 25 major urban Centres located in the Asia Pacific part and a quickly increasing urbanisation tendencies, the Asian air travel market is bound to go on to turn. Urbanization is highlighted as one of the cardinal drivers for the growing in air travel. It is estimated that Asia would account for 30 % of the universe market by 2019, or one tierce of growing between now and so. While the impact of SARS is traveling to decelerate down the growing of Asiatic regional demand, the long-term prognosis continues to be really positive. These enable low cost air hoses to turn even further.