INTERNATIONAL MARKETING.

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Case Study 7 AirAsia: Flying High With No-Frills Pricing A no-frills, low cost strategy has been the central stage of a Malaysian-based airline company - AirAsia. Its origin began with serving several short-haul domestic sectors and this unique business model has proven successful ever since. In 2007, AirAsia formed its subsidiary company named AirAsia X as a long-haul carrier and hence, spreading its wings to some foreign countries such as Australia, China and UK. The so-called 'low-cost long-haul', as the business model for AirAsia X, is an extension of AirAsia Bhd's success with its 'low-cost short-haul' model. AirAsia X's cost efficiencies are derived from maintaining a simple aircraft fleet and a route network based on low-cost airports, without complex code-sharing and other legacy overheads that weigh down traditional airlines. Both airlines share the same brand, uniform and logo, they are maintained as separate business entities focusing on different customer segments. By the end of 2009, AirAsia had established a network of flights to over 60 cities in 16 countries with 126 domestic and international routes from and within Malaysia, Thailand and Indonesia. There are over 3,000 flights a week; 15 domestic and 46 international destinations from the Malaysian hubs; 11 domestic and 15 international destinations from the Thai hubs and seven domestic and ten international destinations from the Indonesian hubs. AirAsia not only has an extensive network across all ASEAN countries but also connects to China, Taiwan, India, Sri Lanka, Bangladesh, Australia and United Kingdom. As opposed to the conventional full-service global airlines, AirAsia X is able to prove that even the long-haul market is price-elastic, with a big underserved potential customer base that responds well to fare 40% to 50% lower than those offered by conventional airlines. AirAsia X manages to operate at 60% lower operating costs than the established carries by selecting the A330-300 aircraft with a high-density configuration that provides 30% more seats and operating at a 35% higher aircraft utilization rate enabled by rapid turnaround times. Other low-cost carriers notably Firefly, Jetstar, Tiger Airways and Silverfly are operating on some similar routings as AirAsia. In this instance, AirAsia X has a major competitive advantage over other low-cost carrier where passengers could use the Kuala Lumpur hub to connect to a wide range of routes. With this competitive mindset, AirAsia launched a provocative US$1 air fare for domestic and international flights in August 2010. In the first day, the promotion recorded the highest number of seat sales in an hour having sold 36,871 seats, a 47.5% increase from the previous record of 25,000. Other value-adding factors which contribute to the success of AirAsia include the shared brand identity between AirAsia (which operates short-haul) and AirAsia X (which operates longhaul) thereby capitalizing on existing brand awareness. Under a shared service agreement, both AirAsia and AirAsia X also share pilots, cabin crew, service staff, website, IT platform, marketing and distribution to optimize efficiency on operating costs. The company also invests heavily in raising brand recognition through association with globally recognized organizations such as AT&T, William F1, British MotoGP and Professional Game Match Officials CPGMOL. The management at AirAsia believes that most customers do not have loyalty to any particular brand because their choices are driven by prices. Prices, in the context of an airline are largely determined by operating costs. Following a hike in fuel prices globally, several low-cost carriers have since ceased operation because of their inability to cope with the increase in fuel.

prices. This list includes Hong Kong's Oasis, Indonesia's Adam Air and Thailand's One-TwoGo. The closure of these airlines is a boost to AirAsia's market share and enhances its position as the ultimate leader in the region's low-cost airline sector. Market analysts predicted that the AirAsia group would have the marketing know-how and X-factor to capitalize on such opportunities that arise from its competitors falling out of the game. On a positive note, the continual surge in fuel prices seemed to have been offset by newer fuel-efficient planes and its simple business model that helps keep its non-fuel costs at minimum levels. In addition, AirAsia X could also reap the seeds sown by the group such as positive corporate culture, leadership and entrepreneurial skills and the right management philosophy. The recent launch of the New Skies - a state-of-the-art booking system - has also contributed to the expansion of the booking capacity, allowing up to almost 1 million flights booking a day.

Questions:

1. What is "no-frills" strategy?

2. How AirAsia X manages to operate at 60% lower operating costs than the established carriers?

3. Why AirAsia and AirAsia X are having a shared brand identity and shared service agreement?

4. What is the rationality in maintaining AirAsia and AirAsia X as separate business entities?

5. Why it is important to launch a new booking system?