The Low Cost Airline: AirAsia
A study of opportunities, challenges and critical success factors
LGT 3007 Air Transport Logistics
Introduction
History of low cost airlines
The low-cost concept became a moneymaker in the United States, where it was pioneered
in the 1970s by Southwest Airlines, the model for budget carriers elsewhere like Ryanair
and easyJet in Europe.
Definition of low cost airlines
A low cost airline generally has many features that differentiate it from the traditional
carriers. These features include ticketless travel, online ticket sales, no international
offices, no frequent flyer points, no free food and beverages, no inflight magazines, no
club lounges, use of secondary city airports.
Not all low cost airlines have these features, and not all airlines that have some of these
features are low cost airlines. For example, Virgin Express is a low cost airline, but it still
offers complimentary coffee and inflight magazine, and they are based at Brussels primary
airport.
Case Study—AirAsia
Story of AirAsia
Air Asia, as the second Malaysian National Airline, provides a totally different type of
service in line with the nation’s aspirations to benefit all citizens and worldwide travellers.
Such service takes the form of a no frills – low airfares flight offering, 40%-60% lower
than what is currently offered in this part of Asia. Their vision is “Now Everyone Can Fly”
and their mission is to provide ‘Affordable Airfares’ without any compromise to Flight
Safety Standards.
The story of emergence of AirAsia is similar to Ryanair, since both carriers underwent a
remarkable transformation from a money-losing regional operator to a profitable, low cost
airline.
AirAsia was initially launched in 1996 as a full-service regional airline offering slightly
cheaper fares than its main competitor, Malaysia Airlines. Before 2001, AirAsia fail to
either sufficiently stimulate the market or attract enough passengers from Malaysia
Airlines to establish its own niche market. The turnaround point of AisAsia is in 2001,
while it was up to sale and bought by Tony Fernandes. Tony Fernandes then enrolled
some of the lending low-cost airline experts to restructure AirAsia’s business model. He
invited Connor McCarthy, the former director of group operation of Ryanair, to join the
executive team. In late 2001, AirAsia was re-launched in Malaysia as a trendy, no-frills
operation with three B737 aircraft as a low-fare, low-cost domestic airline.
Opportunities faced by AirAsia in light of external development
1. Low fare of Indonesia-Malaysia trip
The fare for a Jakarta-Johor Baru trip costs Rp 100,000 (RM 88.88 one way). 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 route, charged Rp
1.05 million. The low fare provided by AirAsia helps it open the Indonesia market.
1. Low fare of Singapore-Bangkok service
AirAsia will increase its services between Singapore & Bangkok by introducing a 2nd
daily flight to its existing schedule. This recent development came barely a month after
Thai AirAsia operations started its first international flight to Singapore in early February
this year. AirAsia is offering its guests promotional fares to/from Singapore- Bangkok
from SGD$23.99 (THB 499) one way from the 28th March to 30th Oct, 2004. It is much
lower than the lowest fare SGD$56 offered by full-service carrier. This helps it open the
Singapore market.
1. Political connections
AirAsia hold 49% of Thai AirAsia with 1% being held by a Thai individual. The
remaining 50% is held by Shin Corp. which is owned by the family of Thailand’s prime
minister, Thaksin Shinawatra. Shin Corp. has financial strength, synergy in ingormation
technology and telecommunications, which support AirAsia Internet and mobile phone
bookings. Shin Corp. allows subscribers 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 backer may well grow up to bite. This helps it
open the Thailand market.
1. Malaysian government support
The Malaysian government supported the establishment of AirAsia in 2001 to help boost
the under-used Kuala LumpurInternationalAirport. AirAsia’s flights from Senai are meant
to develop Johor into a transport hub to rival Singapore. AirAsia, therefore, can provide an
alternative route to travel to Bangkok, by using SenaiAirport in Johor Bahru, in southern
Malaysia.
Opportunities faced by AirAsia in light of internal development
1. Issue of IPO
Kamarudin Meranun, AirAsia’s Executive Director announced the appointment of Credit
Suisse First Boston (CSFB) and RHB Sakura Merchant Bankers (RHB) as the bookrunners
for the company’s upcoming Initial Public Offering (IPO).
The IPO strengthens AirAsia balance sheet, further cuts its existing low costs at 2.5 US
cents per ASK and accelerates our growth plans throughout Asia. The IPO also allows
AirAsia to expand its fleet of 18 Boeing 737-300s.
1. Political connections
Thai AirAsia is a join venture established by AirAsia with Shin Corp. Shin Corp. is owned
by the family of Thailand’s prime minister, Thaksin Shinawatra, and about 900 million
baht will be invested in Thai AirAsia over a five-year period. Shin Corp. oversees the
finance and administration of Thai AirAsia while AirAsia shoulders the responsibility for
marketing and operations. Shin Corp. has financial strength and supports AirAsia to grow.
AirAsia with its politically powerful backer may well grow up to bite.
Challenges faced by AirAsia in light of external development
1. Indonesian habit
Preferences of Indonesian passengers are quite different from the concept of cheap air
travel without extra service for the passengers (free snacks and drinks), and also their
