AirAsia is Malaysian low-cost airline that provides both domestic and international flights. AirAsia started operating on 18 November 1996, it pioneered low cost travelling in Asia. In 2001, the airline which was heavily indebted was purchased by Tony Fernandes’s company Tune Air Sdn Bhd. Under his charge, AirAsia has become one of the biggest low cost airlines operating in Asia today. Its main hub is based in the Low Cost Carrier Terminal (LCCT) at Kuala Lumpur International Airport (KLIA). As such, AirAsia consumers tend to be from the lower to middle income population. Thai AirAsia and Indonesia AirAsia are subsidiaries of AirAsia and are based in Suvarnabhumi Airport, Thailand and Soekarno-Hatta International Airport, Indonesia, respectively. Company Analysis
AirAsia target market segment consist of three different but overlapping segments that were segmented according to Geographic Segmentation, Demographic Segmentation and Psychographic Segmentation. AirAsia is targets mainly the Asian market, hence the name AirAsia. As such, they do geographic segmentation by focusing their services primarily in Asia. Being a low cost airline, they are targeting the low to middle income group (demographic) and the cost-conscious travellers (psychographic).
In order to find the current marketing challenges faced by AirAsia and to determine what are the possible solutions that they can implement, taking into consideration their opportunities and take advantage of their strengths, the TOWS analysis model (Threats, opportunities, weaknesses and strengths) will be used. Threats | Opportunities |
* Intense competition (i.e. Tiger Airlines, Singapore Airlines) | * Asia’s middle class growth * ASEAN Open Skies * Increasing oil price| Weaknesses | Strengths |
* Fair availability | * Well established brand name * Low cost leader in Asia |
What was once a relatively small market of low-cost airlines when AirAsia was first established, AirAsia not only has to face indirect competitors such as non-budget airlines (i.e. Singapore Airlines), ferries (i.e. Kuala Perlis Langkawi Ferry Service Sdn Bhd) and buses (i.e. Aeroline, now they are also threaten with intense direct competitors such as Tiger Airways and Jetstar Asia Airways.
Countries in Asia, such as China and India, are up-and-coming huge potential markets in the future. In China, there were already 130, 000, 000 consumers just in the middle class range in 2006. It is estimated to increase to 340, 000, 000 in 2016, a 162% growth from 2006 as shown in the graph below. This
is beneficial for AirAsia as it means that their targeted consumers (low to middle income) will grow exponentially in the near future.
ASEAN Open Skies is an agreement, targeted for 2015, to allow unlimited flights between all the ASEAN’s regional air carriers, both full services and low-cost airlines. The rationale for the Open Sky agreement is to promote competition in the airline industry. Due to its strong brand name and “low-cost” culture among its workforce, AirAsia is more likely to gain from this agreement. The increasing oil prices may seem like a threat to AirAsia, however being the low cost leader in Asia, this can actually be seen as an opportunity for them instead. This is because high oil prices would affect all the airlines and not just AirAsia. Thus, AirAsia will still be the lowest costing among all the different airlines. This could result in an increase in market share for AirAsia as customers from the different airlines would relocate to AirAsia. Weaknesses
The availability of AirAsia flights is not good as full services airline. While fair availability may seem like a huge weakness that would need to be tackled and solved, it would be difficult for AirAsia to remain cost leader if it offered comprehensive support as it would result in increased operational cost. Strengths
AirAsia’s brand name is well established in the Asian region. This was not only due to the fact that AirAsia the pioneered low cost travelling in Asia, but also because of the extensive advertising & promotions they have done. Indonesia AirAsia and Thai AirAsia have successfully helped AirAsia to spread the brand throughout the regional beyond just Malaysia. Due to AirAsia Academy, which AirAsia’s regional training academy located in Malaysia, it has helped to create a low-cost airline mentality among their workforce. It is because of this workforce that AirAsia has become the low-cost airline leader in Asia in terms of overall cost. In the table on the following page, it details the difference in terms of cost per available seat kilometres (ASK, which is the total number of seats available on scheduled flights multiplied by the number of kilometres these seats were flown), between AirAsia and the other competitors. Its shows that AirAsia has a large advantage over the competitors in this area.
Looking through the company analysis, the biggest marketing challenge currently faced by AirAsia is to remain competitive and protect their market share in the increasingly competitive market of low-cost airline. Recommendations
I. Tap into the growing Asian Market
For AirAsia to remain competitive and not only protect their market share but expand it as well, it is vital that AirAsia taps into and take advantage of the growing Asian Market. They can do this by adopting the following strategies.
Market Challenger Strategies
The market challenger strategies are a set of strategies that a company can employ to gain market share and becoming the leader eventually (Kotler and Armstrong, Principles of Marketing, latest 2010, 13th edition). AirAsia can use these strategies, specifically, frontal, flank, bypass and guerrilla attack, to make itself standout from the rest of the competitors and hopefully gain a larger market share of the growing Asia middle income population. Attacker
(3) Encirclement attack
(4) Bypass attack
(2) Flank attack
(5) Guerrilla attack
Frontal attack refers to when you attack the weakness of another company’s product. In the case of AirAsia, they should attack their competitors through their prices. Due to the reasons listed above, AirAsia has become the low cost leader in Asia. It is unlikely for their rivals to be able to complete in terms of price alone in the long run. Thus, AirAsia should use their comparative low prices to challenge their competitors directly. The limitation to this form of attack is that AirAsia has to maintain that low cost advantage that they have.
This means that they have to invest a large portion of their capital into their research and development section to ensure that they are flying at the lowest cost possible. One way AirAsia can further reduce their operational cost is by standardizing their aircraft. As shown in the table in the following page, AirAsia has currently 5 different types of aircraft, ranging from the Airbus A320-200 to the Airbus A350-900. However, if AirAsia was to reduce this to just two to three different types of aircraft it would lead to a drastic drop in cost, as economies of scale comes into effect when they buy and maintain the same type of aircraft Staff cost also reduce, as they only need to know how to handle a few types of aircraft, this leads to training time being reduced and eventually reducing operational cost.
Flank attack refers to attacking competitors at their weak points or blind spots. One of the things lacking in the low-cost airlines in Asia today is the ability to travel long distance at the same low price offered for the short duration trips. AirAsia already has AirAsia X, which provides this long haul flight services, however, their destinations are limited as they only go to the more popular countries such as London or Sydney. For that reason, one of the strategies AirAsia could implement is to form an alliance with low-cost airlines outside of Asia like Virgin Blue. This strategy will be further explained later in the report. Bypass Attack:
This form of attack refers to diversifying into unrelated products or markets neglected by the other competitors. One of the ways AirAsia could diversify is by offering affordable accommodations at their destinations. These accommodations can be provided by Tune Hotels which is an associated company own by Tony Fernandes, who is also the CEO of AirAsia. Travellers will see this as a value added service as not only would they be able to get a cheap form of transportation but a place to stay as well. The limitation of providing accommodations is that it is financially infeasible to set up a hotel at all of their current flight destinations. As such, it would be better to start off by offering this service only at location where it would be difficult to get cheap lodging, for examples in the city areas of Japan. And as the company grow further, it can start to expand on the location where these hotels will be provided.
AirAsia can apply guerrilla attacks by launching small, intermittent hit-and-run attacks to harass and destabilize the leader. AirAsia can use
promotions for short periods of time to try and steal customers from their competitors. One such example is when AirAsia had a 48 hours promotion between 28 Sept – 29 Sept 2009, where they offered a 20% discount on all seats, flights and destinations. This is a very useful type of attack for AirAsia because of their low cost advantage, as they are able to maintain promotions, especially discounted price promotion, longer than their competitors with a lower lost in profit. The limitation of offering promotions is the reduction in the profit margin when they give discounted prices. However, this negative impact can be minimized by placing the promotions at strategically moments, such as only when competitors are offering promotions. Alliance with Virgin Blue and America
As mentioned under the flank attack section, one of the ways AirAsia can attack their competitors is by offering a more extensive flight network outside of Asia. While AirAsia X is currently filling in this market of long haul flights for AirAsia, it is still not comprehensive enough and should be developed further. Virgin Blue and Virgin America are low cost airlines operating in Australia and America respectively. By partnering with them, AirAsia would be able to extend their destinations into Australia and America. For example, if a Malaysian traveller wanted to visit Los Angeles, he would first take an AirAsia route to travel from Kuala Lumpur to Washington, DC, and then take a Virgin America flight to Los Angeles. The rationale for choosing Virgin America is because America is one of the top destinations in terms of international tourist arrivals as seen in the table below, which will only increase with the growing Asian economy. By joining together with Virgin America, AirAsia can capitalize on this existing high human traffic flow going to America.
While Australia does not fall under the top 10 international tourist arrivals countries, AirAsia should still focus on the Asia to Australia route. This is because as China and India develop there will be a huge increase in the number of international travellers, a majority of which would be made up of people who have never travelled outside the Asia region or even their countries. Thus, these people, wanting to taste a culture different from Asia but do not want to travel to a far off location such as America or Europe on their first trip, would choose to go to Australia. The advantage of this strategy is that it will not only target the Asian market segment who wants to travel to locales outside of Asia but also cater to the market segment outside of Asia that wants to travel to Asia. The limitation of this strategy is that AirAsia would have to first form an alliance with low cost airliners in those regions, which could be a difficult process as proven by the already long list of failed airline alliance such as Air Canada/ Continental Airlines and Saberna/Air France (Nigel Evans, David Campbell, George Stonehouse, Strategic management for travel and tourism, 2003)
Take advantage of the ASEAN Open Skies agreement
As mentioned above, one of the things AirAsia can do to remain competitive in the future is to prepare for the ASEAN Open Skies agreement. With open skies in the ASEAN region, it would be mean that more routes are available for the airlines. For AirAsia, this means that they would be able to fly to more destinations while taking shorter routes as they would no longer be faced with restriction from the countries in the ASEAN region from flying over them. The shorter routes means that flights will take a shorter time to complete, frills such as providing meals may no longer be needed and the frequency of AirAsia flights could be increase as the turnover rate is higher.
Thus, they would be able to reduce operational cost, which translates to lower prices, hence making AirAsia more attractive to the consumers. The limitation to this strategy is that the Open Skies agreement applies to all airlines in the ASEAN region, meaning that AirAsia would face even tougher competitions when the agreement starts in 2015. However, because of the strong brand image and low cost leader advantage AirAsia has, if they were one of the “early movers”, they could grab a huge portion of this market. II. Capitalize on the corporate business
AirAsia have seen a recent increase in the numbers of companies (almost double the last 3 years, as seen in the following page table) trading down to low cost airlines, this could be due to the global economic downturn. As such, AirAsia should also be focusing on increasing their share in this corporate business market as this market tends have a more consistent source of demand unlike tourism which is seasonal and easily affected by external factors, such as in the case of the swine flu.
AirAsia’s seats sold to corporate clients: 2006 to 1Q09
To capture this market AirAsia could start offering a rewards program. AirAsia could offer perks that are earned according to the amount of business a company does with them. For example discounted pricing or with the more frequently fliers, a point system whereby the companies could earn free flights if they accumulated enough mileage. The limitation of this strategy is that AirAsia would have to incur a lower profit margin as they would now be selling at lower discounted prices. However, the pros far overweight the cons in the case of AirAsia. Once again due to being the low cost leader in Asia, the rewards program offered by AirAsia would likely be the most attractive compared to the other competitors as they can offer better perks, hence they could easily become the market leader in the corporate flying market, making up for the lower profit margin per seat by pure volume.
To recap, the main marketing challenge facing AirAsia at the moment is the intense competition that exist in the low cost airline industry. The strategies that AirAsia can implement to remain competitive are two pronged, to tap into the Asian middle income class and focus on the corporate businesses. They can capitalize on the Asian market by using market challenge strategies, standing out from the rest by attacking their competitors. Finally, they can take advantage of the corporate businesses by offering a form of loyalty programme that would make it more attractive for companies to use AirAsia. Ultimately, the reason why the above strategies would work is because of the low cost leader advantage that AirAsia has. In order to survive in this market, AirAsia has to ensure that they maintain their low cost altitude.