CASE 9
AirAsia: The World’s Lowest Cost Airline
TEACHING NOTE
■ SYNOPSIS ■
The Malaysian airline AirAsia was an entrepreneurial venture started by Tony Fernandes, a Malaysian
music executive who was inspired by the example of easyJet’s Stelios Haji-Ioannou. From just three
planes flying out of Kuala Lumpur, by 2009 AirAsia had six hubs Kuala Lumpur (Malaysia), Johor Bahru
(Malaysia), Bangkok (Thailand), Jakarta (Indonesia), Kuching (East Malaysia) and Kota Kinabalu (East
Malaysia). In 2007, AirAsia achieved the distinction of being recognized the world’s lowest cost airline
in terms of operating cost per available seat-kilometer (ASK): the industry’s main benchmark for cost
efficiency). AirAsia’s costs were between 25% and 45% below those of Ryanair, Southwest, JetBlue and
Virgin Blue.
■ TEACHING OBJECTIVES ■
The case allows a fairly straightforward application of the tools of cost analysis (Chapter 9 of
Contemporary Strategy Analysis) to an industry where inter-firm cost and efficiency comparisons are
comparatively easy. The case offers an alternative to other cases whose primary focus is the strategies of
the low-cost carriers (e.g. cases on Southwest airlines, Ryanair, and easyJet).
■ POSITION IN THE COURSE ■
This is a case in competitive advantage with specific reference to cost advantage it fits with the part
of the course dealing with business strategies to create competitive advantage.
■ ASSIGNMENT QUESTIONS ■
What are the sources of AirAsia’s cost advantage?
■ READING ■
■ CASE DISCUSSION AND ANALYSIS ■
What are the sources of AirAsia’s cost advantage?
In analyzing AirAsia’s cost advantage, a preliminary issue is to decide which other companies to compare
Having decided to benchmark costs against MAS, the next question I pose is: “What is the key indicator
of an airline’s cost efficiency?” Students should be able to identify cost per available seat kilometer as the
main cost indicator, i.e. the cost of flying one passenger, one kilometer. As Table 1 shows, the difference
is considerable:
When asked about the sources of this cost difference, students typically focus upon the LCC operating
model. I press the class to identify the key elements of this and explain why each element results in a cost
advantage. Among the key points here are:
Point-to–point travel: avoids complexities of through ticketing and baggage transfer. Also
consistent with single aircraft type.
So, is AirAsia pursuing a generic, LCC strategy? It is interesting to note that co-founder Conor McCarthy
described Air Asia’s business model as: “a Ryanair operational strategy, a Southwest people strategy, and
an easyJet branding strategy.” If this does not come up in the discussion, I specifically ask one of the
class, “What did McCarthy mean by this statement?”
The answer can tell us a good deal about what it takes to make the LCC strategy work—especially in a
new market:
The Ryanair operational strategy is basically what has been described above. The whole emphasis
easyJet invests more in brand building than Ryanair—one consequence of which is that it is
higher cost than Ryanair (see Figure 9.1). Certainly AirAsia has been a big spender on
advertising, sponsorship, and other forms of promotion. So, what is the rationale for this and how
does it fit with AirAsia objective of cost leadership? We need to recognize that for a start-up
Having looked at the reasons why AirAsia’s strategy, operations management and HR management
reduces its costs. It is useful to see just how far the evidence points to AirAsia’s cost leadership.
Comparing AirAsia with MAS (see Table 1) reveals the following:
Productivity indicators
AirAsia
MAS
Comments
ASKs/employee
4,942
2,796
Employee productivity substantially higher at AirAsia
ASKs/plane
0.24m
0.49
Mainly the result of MAS’s bigger planes. Also fleet size is
measured at year end; AirAsia was adding planes during the year
Load factor
67.8%
11.8
11.1
AirAsia gets higher utilization despite shorter routes
AirAsia
MAS
Comments
8.0%
14.3%
Lower cost seems to be due primarily to lower pay: staff cost per
employee RM 62,332 for AirAsia, RM114,167 for MAS
11.7%
2.2%
46.9
43.0%
Maintenance
11.6%
7.5%
Probably few economies here for LLCs
Note that AirAsia has no sales commissions, has lower landing
fees, and has no administrative buildings
Despite AirAsia’s lower operating costs compared to MAS, a striking feature of Table 1 is the fact that
MAS made a net profit in 2008 while AirAsia turned in a net loss. The reasons are not difficult to detect.
First, while AirAsia’s cost per ASK was 49% below that of MAS, its revenue per ASK was 32% less.
Second, AirAsia incurred a RM830m (US$ 237m) charge in 2008 arising from unwinding its fuel
Expansion into Long Haul Flights
AirAsia’s expansion into long–haul through AirAsiaX, its associate company appears to be part of
Fernandes’ vision, but is the result of admiration for budget-airline pioneer Freddy Laker rather than any
well-conceived business model. The case notes that very few LCCs have attempted to combine short and
medium-haul routes with long haul. To understand why, it useful to review the points that were made
concerning the cost-reducing elements of the LCC operating model.
Once an LCC adds long haul flights several elements of the model are compromised, including:
Single aircraft type (long haul requires bigger planes)
In addition, for international flights there is typically not the large untapped market as for
domestic/regional flights—hence an LCC is probably going to have to take market share from existing
international carriers.
The overall result is that the operating model for an LCC flying international routes is less distinctive
from that of the established carriers. The cost advantages are smaller and it is more difficult for them to
differentiate on the basis of punctuality and reliability.
So should AirAsia expand its AirAsiaX business and, if so, should it seek to integrate within AirAsia?
Given the differences between the two business and operating models, it might be less risky to operate the
two as separate airlines (a model here might be Virgin Atlantic which has no business or operational
linkages with Virgin Blue or Virgin America).
■ KEY TAKE-AWAYS FROM THE CASE DISCUSSION ■
1. Cost drivers: identifying the sources of cost differences between firms. The list of cost drivers
(see Figure 9.1 in Contemporary Strategy Analysis, p. 231) offers a systematic approach to
identifying the reasons for differences in competing firm’s unit cost. In the case of the AirAsia,
the principal factors appear to be:
“Input Costs”—lower wage rates
2. Role of “Residual Efficiency” In most cost leaders cultural, managerial, and motivational factors
play a critical role in achieving and sustaining cost efficiency. Culture can play a particularly
important role—if employees can internalize the values of thrift and parsimony they become key
3. Cost efficiency in service businesses. In manufacturing industries scale economies (especially in
4. Cost leader does not necessarily mean providing a commodity product. Cost minimization is
consistent with differentiation. Southwest and AirAsia make great efforts to make a flying a
5. Differentiation may be complementary to cost efficiency. Low cost typically requires scale
efficiency and capacity utilization—differentiation in terms of appealing design, brand awareness,
4. The sustainability of cost advantage in service industries. Cost advantage may be more
sustainable in service industries than in manufacturing industries. Manufactured goods are
tradable—hence cost advantage can be overturned by exchange rate movement or by a new
NOTE
1
1 sen = 1/100 of Malaysian Ringgit. In 2008, US$ 1 = RM 3.5.