Air asia: always a low fare, aways

Humbel origins

Until december 2000, air asia was in insolvent subsidiary of a deeply indebted malaysian conglomerate. The airline had two planes and flew to five destinations from kuala lumpur. Enter 30 year-old tony fernandes, former managing director of warner music’s malaysian operations. Seeing its potential, fernandes assembled a small group of investors to buy air asia for 26 cents, and assume its S$11 million debt (approximately S$1.70 =US$1). Air asia was launched as asia’s first low fare, no frills airline in 2002, with the mission to make travel so affordable that, according to its tagline “ now everyone can fly”. Skeptics scoffed and said the air line would not survive more than six months. There ware, after all, many barriers in the highly regulated and competitive airline iindustry. Moreover, a budget airline was a new concept in the market.

A greater way to fly ?

Few are launching now. After only seven months in operation, the budget carrier repaid all its debts. In 2002, the airline had profits of S$8 million on sales of S$66 million. Air asia now flies to over 20 cities with one-way fares as low as S$16 for flights from kuala lumpur to penang-cheaper than going by bus. In 2003, it car reid 3.1 million passengers, many of whom had never flown before. (only six percent of malaysians have traveled by air). Aside from increasing its domestic network, air asia has expanded to singapore, bali in indonesia, and chiang mai, hadyai, phuket, khon kaen, and bangkok in thailand.

Air asia’s price have led to e shakeup in the regional aviation industry. For example, the cost of a singapore-bali round trip ticket on air asia S$123 (including bus fare to and from singapore to senai in johor, where air asia flies out of). In contrast garuda charges S$305, siingapore airllines S$406, and malaysian airline system (MAS) S$654. Indeed, MAS malaysian’s, national carrier, has slashed demestic fares in half and is throwing in cut rate hotel rooms to retaiin its domestic market leadership. Moreover, air asia periodically runs price promotions. In february 2004, for example, charging one way fares ranging from S$2.60 to S$23.70 on selected routes.

Keeping prices low

Air asia manages to offer such discount prices by keeping costs down. It employs cost optimization tecniques such as quicker turnaround tiimes and flight utilizatin of aircraft. For example, air asia uses more shallow landing approach to increase the life of its tires, which cost S$6,000 per set, from 70 to 180 landings. Indeed air asia tooped boeing’s list for best utilization and dispatch reliability iin 2003. Some 98 percent of its flights arrived on time. The air line operates with a 25 minute turnaround time, hence enabling it to launch more flights per day.

It also flies only one tipe of aircraft, operating 13 boeing 737s on a 12 aircraft schedule. This reduces staff training, as well as operations and maintenence cost. Its fleet its also younger than any of the big airlines. Air asia offers only economy class, with free seating and boarding that reduce boarding time. It does not offer complimentary meals or drink. Instead, passengers can choose to buy such affordable

offering as conge, hot noodels, nasi lemak, and sandwiches for about S$1.80, and beveerages for S$0.80. chaildren’s meals packs are sold for S$3.15 each. To date, air asia offers no frequent flayer programs, arguing that these are expensive and target only a select few. It preferst to use secondary airports like subang, rather than major ones like the kuala lumpur international airport, as their procedures are cheaper and less complicated. Intangibles handling systems also contribute to lower cost and more efficient operations.

Air asia also provides ticketless travel, thus saving the cost of printing and delivering tickets. Instead, issues bobking nuber and a flight itinerary with travel details that are e-mailed to customers after they have made their bookings. Passengers need only bring their booking number or mention their name and verify their identity during check-in. In malaysia, tickets may be booked the via internet, using SMS, through airasia’s call center, or at its walk-in airport sales station, sales offices, or prefered travel agents. Malaysian passengers can pay with their credit card, using the online banking service of two lokal banks, or at post offices around the country. Customer in singapore, brunei, thailand, and other countries may book via internet or by phone. Singapore passengers may pay by credit card or at selected post offices, while those of other countries can pay by credit card.

Less friendly skies

Airasia’s success has compelled full service carriers to rethink their marketing strategi and edcoureged other discount carriers to take to the sky. Thuse, singapore airlines (SIA) ones considered converting itsregional carriers silkair to a budget carrier. However, it eventually decided to lounch a “fighter brand” in tiget airlinesto minnimize cannibalizing its premium offering. Tiger commenced operations in the second half of 2004, flying to destinations within a four hour reach of singapore. This puts popular tourist destinations such as bali, and all of thailand, hong kong, and madras, within reach. It may duplicate some of silkair’s routes, although the latter will continue to serve as a feeder airline to SIA and will not offer budget fares.

Airasia’s fares are based on supply and demend, with prices generally increasing seats are sold. Its system tries to predict how popular each flight is likely to be, and the airline claims not to stipulate any restrictions to qualify for the cheapest fare. For example, the lowest one way fare from bangkok to singapore was S$12.65 for the booking period march 8 to 23, 2004 for travel between march 28 and october 30, 2004. However, such discount seats are limited. Fares are non refundable, and exclude taxes and fees. Also, no changes in names, dates, or flights are permitted. Such fares are most often found on midweek travel dates, while those on weekends and holidays may be higher. Thus, customer on this route may pay fares at three different levels for flights at different times and days: L fares are pried at S$48, Q fares at S$63, and M fares at S$71. The fares include an online discount but exclude taxes and fees. No conditions are attached.

The way ahead

Airasia has led way in discount in southeast asia. According to UBS, the region’s beaches and secondary airports make it fertile for low cost carriers like airasia. “what drives low cost carriers is typically the

leisure market, that is the most price sensitive. Southeast asia has a lot of beach destination”, says UBS. It is (also) somewhere which has typically more secondary airports.

Base on the article, answer the following questions:

a) How does Airasia compete in the regional airline market? What are their competitive priorities? (10 Marks)

b) Describe and assess the internal and external factors which affected Airasia’s marketing strategy. (10 Marks)

1. Describe and assess the internal and exeternal factors which affected airasia’s pricing strategy.

2. What type new product pricing strategy did air asia employ ? explain

3. Discribe and evaluate the price adjustment strategies that airasia appears to use.

4. Characterize the response to airasia’s pricing strategy by its regional competitors.

5. How should airasia respond to its competitors in the discount airlines market? Evaluate its package dael corporate market initiatives and recommend other marketing strategies for the airline.