1.1. Budget Airlines
The original concept of budget airlines is basically outsourced business. It puts together other businesses into and integrates those separate businesses into a form of operation and put effort to create a brand. Basically, it will try to minimize capital investments and cover it with operational expenses. And by nature of its business model, the cost structures are all variable costs, or very minimum fixed costs.
With this business model, the company is not only rent the aircraft, but also outsourced its pilots, flight attendants, and other employees. It will sell tickets through agents and use service from company doing aircraft maintenance and services. And to ensure the profitability, it is critical that the operational costs, which is the main source of expenses, to be as low as possible. Therefore, it is typical that companies using this business model to use old airplanes which are close to end of the service-life. This will cost them much lesser than new airplanes.
1.2. Low Cost Airlines
BusinessDictionary.com defined low cost airlines as “charter and/or scheduled flights to offer bargain-basement fares. Budget airlines usually land at and take-off from secondary airports, do not provide inflight meals or refreshments, and may not even offer numbered seat allocation. Their ticket prices are fixed, and non-refundable in case of a cancellation or no-show. Also called no-frills airline”. Wikipedia defines it as “an airline which tries to keep its prices and fares lower than competitors. It usually does this by not offering services like free food and drink on a flight and keeping fines from airports low by keeping on time. They also usually only use one type of aircraft”
In this business model, airline companies are trying to squeeze cost structure and create an affordable ticket price. It minimizes services, uses budget terminal, reduces allowable luggage, less leg room, no in-flight entertainment and meals. Secondary airport will be the first choice, and the each airplane will only have approximately 25 minutes between flights for refueling, cleaning, onboarding passengers, etc.
SECTION 2 –Low Cost Airlines in Asia
A Malaysian-based low-cost airline owned by Tony Fernandez.AirAsia is Asia’s largest low-fare, no-frills airline and a pioneer of low-cost travel in Asia. AirAsia group operates scheduled domestic and international flights to over 400 destinations spanning 25 countries. Its main hub is the Low-Cost Carrier Terminal (LCCT) at Kuala Lumpur International Airport (KLIA) in Malaysia. AirAsia’s registered office is in Petaling Jaya, Selangor while its head office is at Kuala Lumpur International Airport.
Tiger Airways is headquartered in Singapore. It operates scheduled flights to regional destinations in Southeast Asia, Australia, China and India from its main base at Singapore Changi Airport. Its head office is in the Honeywell Building in Changi Business Park Central. Tiger Airways won the CAPA Low Cost Airline of the Year Award for 2006 and 2010
Indonesia’s largest privately run airline, capturing the largest share of the domestic market share. Headquartered in Jakarta, Lion Air flies to cities within Indonesia and to Singapore, Vietnam, Malaysia and Saudi Arabia. Its main base is Soekarno-Hatta International Airport. As of July 2010, it operates scheduled passenger services on an extensive network from Jakarta to 56 destinations. Along with most other Indonesian carriers, Lion Air (including its Wings Air subsidiary) is on the list of air carriers banned in the European Union due to safety concerns as of February 2012
Jetstar is an Australian budget airline established originally as a local subsidiary of Qantas. It first served domestic routes and New Zealand destinations. In subsequent years it expanded its network to South East Asia, China and Japan. The sister company Jetstar Asia Airways operates routes out of Singapore. Combined they serve almost all major destinations in Asia. Valuair was acquired in 2005 and fully integrated into the network.
SECTION 3 – Airline Trends
It is obvious that the airline industry is a rapidly growing, and it is now much more affordable to fly. Years ago, fly was a luxurious thing and airline industry was one of most wanted industry to work. The existence of low cost carrier model has helped the industry to grow and affordable flights are become realistic. It elevates the market growth and snapshots of LCC capacity share below will give better perspective in explaining that.
When fly was expensive and only for certain people, it was a challenge to keep the existence of airline companies. Most of countries are supporting its airline companies to keep it operates and available in many different ways including financial supports. Along with this privilege come sets of regulations that airline companies need to comply, and some of these conditions were barriers to the industry to grow. Currently, as airline industry grows with its huge and growing market, companies are becoming much more independent and profitable. With this situation, the industry is now less regulated. Overall industry is more controlled by competition among airlines and market demands. However, deregulation does not mean that there is no regulation. The industry still regulated such as in the area of safety, some environmental aspects, taxes and permits, etc.
3.2.Asia Open Sky Policy 2015
Globalization is something that should be anticipated, and different countries implement different strategy to implement it. Some of countries are well-prepared, and some neglect it and sitting in the lowest level of the food chain. Indonesia has signed the agreement for open market and in airline industry, there is Asia Open Sky Policy where all airlines can fly their airplanes to any destination in Asia by 2015. This means that the passengers from Makassar do not need to transit in Jakarta or Bali if they want to go to Phuket, they can take direct flight instead. This means that there will be more airports in each Asian countries serves international flights and there will be custom check at each airport.
Given the fact that the business is profitable, the market is growing, travel with airplane is now for everyone, and the open sky policy, it considered by most stakeholder in this industry as potential opportunity. To boost the growth, many countries are trying to upgrade their infrastructure such as airport, terminal and commuter to connect terminal and the city. Jakarta has also part of this effort where government is thinking to connect Gambir train station to Soekarno-Hatta International Airport. Apart from upgrading the infrastructure, there are also number of airport will be built. Indonesia is planning to have at least 24 additional airports in the next five years. This is also supported by the fact that current International airport in Jakarta has served double of its daily capacity. Besides the business aspects, there is a more important aspect that needs to be taken care, safety.
Computer and internet technologies have given better flexibility, efficiency and effectiveness of most of human work and interaction. This helps the globalization to grow to what it is today. The existence of these technologies helps companies to connect with their customers easier and cheaper compare to have a physical representation. Low cost carrier has captured this concept and built its online booking system, and some are also provide online check in system. AirAsia is one of pioneer in this online booking system.
SECTION 4 –Strategy and Positioning
Using Porter’s Generic Strategies model, we can analyze further airline industry and segment it based on its general strategy. There four sections where airline companies can be classified based on strategy they use, as describe in below figure.
It can be seen that airlines such as Garuda Indonesia, Singapore Airlines and Malaysian Airlines are in the same box. They are working on the uniqueness and differentiation, make the experience of flying with their airplanes are memorable moment and service are mainly excellent. In the Focus-Cost, Airfast and Riau Airlines as example are low cost carrier with focus market. Airfast exist because of Freeport mining, and only serves air transportation for Freeport. And Riau Airlines are only exist in Riau province, connecting regions within the province and still supported by provincial government. Premi Air, Indika and Trigana Air are chartered airlines for.
Indika is specifically doing cargo services, while the other two airlines will carry passengers. These airlines are customers are companies and government, and in some occasions are political parties during campaign. As described above, AirAsia, TigerAir, Jet Star and Lion Air are working on cost leadership servicing broader type of customers. In this concept of strategy, there might be companies that are trapped in the middle, and in this case, Merpati is taken as an example. Merpati trying to be low cost as well as provides memorable flights through its certain level of service. It makes a lot of complication and might lead to financial consequences.
4.2.Five Forces to Generic Strategies
This is the model that is used to see the relationship between Five Forces to the Generic Strategies model.
In cost leadership strategy, companies will be able to handle almost all of five forces elements through their strength in cost and price, as long as they can avoid power suppliers. And in the focus strategy, companies are more effective in handling five forces. When cost leadership style companies will avoid power supplier, the focus style companies will better able to pass on the pressure from suppliers to their customers. While in the differentiation strategy, companies are relatively most effective in managing five forces and mostly will be able to waive potential challenges from five forces by using their strength.
SECTION 5 – Defining Strategy
5.1.Low Cost Airlines Strategy Definition
In defining strategy, there are three factors should be considered. They are steering factor that is overseeing things that a company wants to achieve : sustainable business or maintain in maturity stage and large market share. The second is resource factor, which is things that a company has, this includes people, assets, knowledge, technology, etc. The third is environment, a condition where company does the business. This includes market condition, regulations, etc. In environment elements, LCC has to meet cut throat market; it is a situation where competitors use predatory pricing and heavy promotion to eliminate or undermine their rivals. In term of regulation, LCC meets open sky policy where the airlines can fly more routes. Lack of human resources availability is one of the threat for LCC.
5.2.Low Cost Airlines Strategy to Cope with Operational Cost LCC implements low fare business concept, to cope with operational cost, LCC implements several strategies.
* Fuel hedging
Airlines can sign contract locking in current price for months or even years to anticipate the fuel price is going to rise in the future
* Smaller airport to get cheaper airport fees
* Short haul
Direct flight to destination, this increases the number of scheduled flights, boost profits and cuts down on waiting time on the ground. The crew comes from local area, fly in the same route everyday, no layover, this will cut the operational cost. * Simplified
* Use 1 kind of aircraft only, this will save money on maintenance and repair, on pilot and mechanic training since they don’t need to separate training programs for each different type of aircraft. * 1 class only, single class, first come first served basis, simplifies interior design of the plane, reduces the number of crew members required per flight and reduces the overhead necessary to run complicated booking systems. It also speeds up turnaround times, allowing the airlines to schedule more flights and therefore make more money.
It is fundamental to assess company’s SWOT (Strength, Weakness, Opportunity and Threat) and put it as a foundation to build further analysis and decision around strategies. LCC may implements some strategies to run their business, and have the strategies as their strengths but sometimes they have to face the threat that comes from the environment, then turns their strengths into weaknesses. For example, overcapacity of the airport can be a threat in safety and on time performance because there will be flights queue during take off and landing.
SECTION 6 –AirAsia, the Strategic Management
6.1.Key Success Factor
A key success factor is a performance area of critical importance in achieving consistently high productivity.
* Safety is quality
* On time performance
* Qualified crew
* Point to point route system (No Transit)
* Pricing strategy
* Simple and Easy booking website
* Secondary terminal
LCC usually use the secondary terminal not the primary terminal, example like Low Cost Carrier Terminal at Kuala Lumpur International Airport (LCCT-KLIA) welcomed Tiger Airways. Benefit of using secondary airports
* The airport fees for secondary airports are usually a fraction lower than major hub airports as they are otherwise left idle. * Smaller airports have simple check-in and baggage systems, which will allow LLCs to operate a simple and efficient baggage system with the minimal man power required. * Due to the low traffic at secondary airports, LLCs can achieve a very efficient turnaround time of their aircraft allowing more scheduled services. * Decentralised flight crew for efficiency the crew comes from local area, fly in the same route everyday, no layover, cut crew accomodation cost.
* Blue Ocean Strategy
Blue ocean strategy that air asia create in the south east asia market was uncontested one by 2003-2004. they have no match, and this was even overlooked by indonesia’s Lion air at that time as well. Obviously airlines such as Garuda finally saw the opportunity, and in order to compete they create a subsidiary Low cost airlines called Citilink * Competitive advantages (must have if want to growth )
* Lower check in time
* Lower turn around time
* Pioneer in IT implementation
6.4.Challenges in Growth
* Tighter government security
Despite its just a secondary airport, it still need the x-ray for security reason.
* Training requirement for flight crew
This flight crew is not create in one night. It Take many times to train flight crew. It need times to stick this on their brain that aviation is a big industry and a very dangerous industry. * Restriction on infrastructure (airport, access, and Traffic controller) Like Medan they have a new airport already built but guess what, there is no road that connects they city to that airport. Land acquisition for the new airport is done but not yet for the road.
SECTION 7 – Expansion and Strategic Alliance
* Air Asia Malaysia – Indonesia, Thailand, Japan
Air asia is started in malaysia, now they have air asia indonesia, air asia thailand, air philipines, air asia japan. Its very good growth and Strategicly are contested nevetheless.
* Jetstar Australia – Singapore, Japan
Now jetstar australia see opportunities in asia, they also expand to singapore and japan. Working with local investor, jestar now operate hubs out of asia’s major cities
* Tiger Air acquired Mandala
Tiger airways which is singapore base aquired Mandala airlines recently. Mandala Airlines will focus on LCC market in Indonesia, while expanding their fleet to meet the demand of the market
* Lion Air, Malindo Air, Pacific Air
Lion air extend to vietnam with pacific air.
Anyone that lives in Medan, Balik Papan, Pekanbaru or even Surabaya has to go to Jakarta now to go abroad, and that would cost them more in air fares and take more time. the purpose is to make either Singapore or Malaysia a gateway to carry Indonesian passengers onward. Now lion group have Malindo, which is going to be their gateway to fly to Kuala Lumpur and beyond.
Strategic alliances can be done a few ways. Joint venture is a strategic alliance in which two or more firms create a legally independent company to share some of their resources and capabilities to develop a competitive advantage. Example such as Air Asia and Air Nippon Airways to create Air Asia Japan inorder to expand in Japan Low Cost market.
Equity strategic alliance is an alliance in which two or more firms own different percentages of the company they have formed by combining some of their resources and capabilities to create a competitive advantage. This can be seen in Air Asia Flight Academy where Air Asia allied with Canadian based CAE, a training solution provider to train Air Asia Pilot, using human resources from CAE and the building of Air Asia. This strategic alliance was a way to avoid using Air Asia pilot in ground training, so the pilots can stay flying and maintain the crew strength of Air Asia. Meanwhile a way of exapanding the brand for CAE is the advantage that CAE received.
Non-equity strategic alliance is an alliance in which two or more firms develop a contractual-relationship to share some of their unique resources and capabilities to create a competitive advantage. This can be seen through brand strategy awareness of Air Asia by endorsing Manchester United paint in one of the plane. Or Emirates building an emirates stadium in Arsenal City.
Global Strategic Alliances working partnerships between companies (often more than two) across national boundaries and increasingly across industries, sometimes formed between company and a foreign government, or among companies and governments. At the moment there are three big Global Airlines Alliances. The biggest one that consist of 5 star airlines is One world. Airlines such as British airways, Japan airlines, and Qantas are joint together to share airline code. In such a way that Qantas passenger may board British airways using Qantas ticket if they wish to travel within Europe.
Second global Alliance is the Star alliances, consist of four and five star airlines. Its members are Singapore airlines, Thai Airways and United Airlines. Serving the world as a competitor for One world. Third global alliance consists of mostly Four star airlines such as Garuda Indonesia, KLM and Korean Airlines.
Recent development in the global airlines alliances is the notion to create a global alliance of low cost carier. Pitch by Richard Branson to Tony Fernandez, Virgin airlines proposed to Air Asia to create a big LCC alliance to cter the demand of low cost air travel through out the world, where people my travel anywhere in the world by buying only one ticket from their home country. An idea that is progressing but very well indeed.
New Development of airlines in the world According to Centre of Asia pacific Aviation is the Hybrid Airlines, where Airlines must adopt its way of doing business and cater customer for its own preferences to fly with the airlines. In other words personalisation is the new buzz in the aviation business.