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Dr. Claudia H.L. Woo prepared this case under the supervision of Dr. Stephen Ko for class discussion. This case is not intended to show effective or ineffective handling of decision or business processes.

© 2009 by The Asia Case Research Centre, The University of Hong Kong. No part of this publication may be reproduced or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise (including the internet)—without the permission of The University of Hong Kong.

Ref. 09/435C

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STEPHEN KO

AIRASIA: FLYING LOW-COST WITH HIGH HOPES

AirAsia started out as a Malaysian government-controlled, full-service regional airline that offered slightly lower fares than its number-one competitor, Malaysia Airlines (“MAS”). In December 2001, private entrepreneur Tony Fernandes took over the debt-ridden airline for the symbolic sum of US$0.26. Despite the air-travel downturn following the 11 September 2001 terrorist attacks, Fernandes believed that the timing for entering the airline market was just right, as aircraft leasing costs had dropped sharply and experienced staff were readily available due to airline layoffs. Moreover, the acquisition was welcomed by the Malaysian government, which hoped to boost the under-used Kuala Lumpur International Airport (“KLIA”). Fernandes restructured AirAsia into the first no-frills, low-cost carrier (“LCC”) in Asia, and the new business model was a huge success. The company generated impressive profits after its relaunch in January 2002, and soon inspired many LCC followers in the region. Being innovative down to the corporate bone, AirAsia pioneered several new services for its operation and threatened the well-being of full-service operators. In mid-2008, amid surging oil prices and intense competition, how could AirAsia increase its competitiveness?

No Frills, Low Cost

In the mid-1990s, Fernandes saw great potential for a no-frills LCC in Asia after witnessing the success of LCCs in the West. Upon acquisition of AirAsia in 2001, he invited Connor McCarthy, the former director of successful European LCC Ryanair, to join AirAsia’s executive team. They restructured AirAsia’s business model [see Exhibit 1] and made it the first airline operator in Asia to adopt the low-fare, no-frills concept. AirAsia also became the region’s first airline to introduce fully ticketless travel and implement a free seating policy. With the LCC model, AirAsia offered only one standard-class cabin. It did not provide in- flight entertainment or free meals, but instead had food and beverages ready for sale on board. Occasionally, lucky draws were conducted on board to surprise passengers. Under the tagline “Now Everyone Can Fly”, the airfares were 40% to 60% lower than those of its rivals. Some even cost less than bus fare. Many domestic leisure travellers were attracted to purchase air tickets through its multilingual website, which offered regular fare promotions for specific

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travelling periods to encourage early booking. In line with its “Easy to Book, Easy to Pay & Easy to Fly” approach, seats were also sold through a telephone booking centre, sales offices, travel agents, and partnerships with local banks and post offices.

Just seven months into its operations, AirAsia announced its first profit of approximately US$6 million in December 2002. Research firm AC Nielsen revealed that AirAsia’s website was the most popular online shopping site for Malaysia’s internet users in 2003. Adding to the convenience of customers, AirAsia was the world’s first airline to enable booking by mobile phone through Short Messaging Service in August 2003.

Domestic and Short-Haul Regional Services In addition to its primary hub at the KLIA, AirAsia had set up three other hubs within Malaysia to better serve the domestic market. In 2004, while continuing to expand its domestic business, AirAsia started to provide regional flights to neighbouring countries. To make this possible, a joint-venture subsidiary company, Thai AirAsia, was formed in affiliation with Thailand’s Shin Corporation, the telecommunications company initially belonging to former Thai prime minister Thaksin’s family [see Appendix 1]. With the hub set up in Bangkok. The joint venture enabled AirAsia to gain easier and cheaper access to other South-East Asian countries and the lucrative Chinese market.1 Shin Corporation, which held a 51% stake in Thai AirAsia, also helped support AirAsia’s electronic booking system. Another subsidiary, Indonesia AirAsia, was established in 2005 through affiliation with the Indonesian airline formerly known as Awair, and hubs were established in Jakarta and Bali.

As a result of the joint ventures, which broadened the destination selection for domestic consumers in Malaysia, the number of AirAsia passengers grew significantly. In March 2006, the main hub of AirAsia in Malaysia was moved from KLIA to the nearby Low Cost Carrier Terminal, 2 specifically built by the government to meet the increasing number of LCC passengers.

In August 2006, AirAsia entered into a domestic-route rationalising arrangement with MAS [see Appendix 2]. Under this arrangement, AirAsia took over more than two-thirds of MAS’s loss-making domestic routes, making AirAsia the largest domestic national airline in Malaysia, with the number of passengers expected to increase to 18 million in 2007.

Because all of AirAsia’s domestic and short-haul flights took less than four hours, its planes could pick up a new load of passengers from its destinations and return to the original departing cities on the same day, reducing costs for crew accommodation and other allowances at the arriving cities. To save on the large slotting fees charged at major airports, AirAsia chose to focus on secondary airports. AirAsia’s high-flying success in terms of its rapid route expansion and growing sales and profit inspired many potential LCC followers in the Asia-Pacific region, especially those from neighbouring countries [see Exhibit 2]. To compete with these new entrants, the company introduced innovative services [see Exhibit 3].

Value-Added Services In early 2007, AirAsia became the first airline in Malaysia to offer an internet check-in service, allowing domestic travellers to enjoy online check-in and to print out their own boarding passes. It even planned to pioneer a check-in service using customers’ handheld devices in the near future. In spite of its unassigned-seat policy, AirAsia allowed a limited number of passengers who paid extra for its Xpress Boarding service to board first so as to 1 Thai AirAsia was the first budget carrier granted landing rights in mainland China. 2 The Low Cost Carrier Terminal was also built with a no-frills approach, with no aerobridges linking to the aircraft, requiring

passengers to walk to the aircraft.

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choose their seats with ease. Passengers could also pre-book their checked baggage for a lower rate, and AirAsia introduced checked-baggage handling fees in April 2008 to encourage customers to travel lighter so that less fuel was burnt and less pollution was caused.

The LCC was also proud of its “Real 5 Star” offerings, such as its cosy leather seats and in- flight hot meals, which included a wide selection of popular Malaysian and Asian delicacies. Passengers could either buy the food on board or opt to pre-order meals on the AirAsia website at a discounted rate. In addition to the Real 5 Star features was the first-of-its-kind “on-time guarantee”, introduced by AirAsia in June 2008. In face of passengers’ complaints about AirAsia’s punctuality, each passenger whose flight was delayed by more than three hours was awarded US$61 worth of AirAsia e-gift vouchers. The company also planned to introduce this guarantee for flights delayed more than one hour.

Long-Haul Regional Service: AirAsia X Despite most LCCs being hesitant to operate long-haul routes due to cost concerns, AirAsia launched its first long-haul flight to Australia’s Gold Coast in late 2007 through its sister airline, AirAsia X. The key individual investor, with a 20% stake of AirAsia X, was Sir Richard Branson, the British tycoon and founder and chairman of the Virgin Group.3 The long-haul arm of AirAsia shared a common ticketing website, uniforms and management style but, unlike AirAsia, it offered two-class cabins (ie, economy seats and premium XL seats) and allowed passengers to reserve seats when booking in advance.4 AirAsia X also sold full meals with more food options than AirAsia, which sold only light meals [see Exhibit 4]. One day after AirAsia X started operations, Jetstar, the low-cost subsidiary of Australia’s Qantas Airways, launched its long-haul service from Sydney to Kuala Lumpur. However, in June 2008, Jetstar, which was ranked as the world’s best LCC in 2007 by leading airlines research firm SkyTrax, axed this route due to escalating fuel prices, which had been hurting the bottom line of almost all leading LCCs [see Exhibit 5].

By exploring partnerships with LCCs in the Asia-Pacific region such as Australia’s Virgin Blue, Singapore’s Tiger Airways and Indonesia’s Lion Air, AirAsia intended to grab a bigger slice of the flourishing Australian market.5 It also explored ties with other airlines in the West, such as easyJet and Virgin Atlantic Airways, to venture into the European market and make cheaper fares possible for its long-haul flights to the region. In 2008, AirAsia announced that it would commence flights to Stansted Airport on the outskirts of London on 11 March 2009. For Asia, it was aiming high to fly to more cities in northern China and to the liberalising skies of India and the Middle East.

Moving Down the Value Chain AirAsia had evolved from a classic LCC into an integrated service provider, offering not only no-frills air tickets but also financial services such as travel insurance, as well as other holiday products. Having sought out various companies to partner with, the company offered online booking services for hotels, hostels, car rentals, cruises and medical care. Rather than the mileage programmes offered by full-service airlines, AirAsia launched the co-branded Citibank–AirAsia credit card, which allowed eligible cardholders to earn free flights by

3 The core business of the Virgin Group included travel, entertainment and lifestyle. It owned a stake in Virgin Atlantic Airways,

a long-haul cross-regional airline, and in Virgin Blue, a budget airline in Australia. 4 In February 2009, it introduced the Pick A Seat service, allowing all passengers of both AirAsia and AirAsia X to choose their

seats for a fee. The service, which was previously available for AirAsia X passengers only, had two categories: “hot seat” and “standard seat”. Hot seats, whose fee was US$6.85, were seats in the first five rows of the aircraft cabin and the two rows of seats at emergency exits. The standard seats were the remaining seats on board, at a fee of US$1.36. Passengers who did not opt for the service would be automatically allocated seats so that they would not need to rush onto the aircraft to get their seats.

5 eTurboNews (21 February 2008) “AirAsia Reveals Virgin Plan”, http://www.eturbonews.com/1392/airasia-reveals-virgin-plan (accessed 28 May 2008).

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accumulating reward points, named as AirAsia Ringgits, through purchases at specified stores. Cardholders could also enjoy discounts on holiday packages and privileges at over 40,000 hotels, restaurants and retail outlets worldwide.

Fuel costs had a significant impact on AirAsia’s bottom line [see Exhibit 6]. With oil prices showing high volatility and reaching record levels by mid-2008, AirAsia opted for a dynamic, layered-hedge strategy to pay for fuel in advance and to qualify for low prices. Fernandes believed that his staff’s positive work ethic had also contributed much to lowering the airline’s fuel cost and operational cost: “Our pilots have cut fuel consumption by nearly 20% and doubled the number of landings that we get from the tyre”.6 Moreover, new and more fuel-efficient Airbus A320-200 aircraft had been ordered by AirAsia to replace its fleet of Boeing 737-300s. The 175-aircraft commitment to Airbus—a purchase made possible by its listing on the Malaysia Stock Exchange in November 2004—would potentially turn it into the Asia-Pacific region’s single-largest Airbus A320 operator by 2012.

Distinctive Image and Leadership

Having started as a three-aircraft operation in 2002, AirAsia owned 72 aircraft by 2008 and served over 100 routes in the Asia-Pacific region, with more than 300 flights per day [see Exhibit 7]. Its speedy expansion from domestic routes to regional flights was supported by its cheeky advertising strategy. For instance, in 2004, when it began the route from Singapore to Bangkok, its full-page newspaper ad read: “There’s a new girl in town: twice the fun, half the price”, poking fun at the iconic Singapore Airlines’s female flight attendants, who were widely known as “Singapore girls” and had an elegant image. AirAsia’s flight attendants, on the other hand, could style their hair and apply makeup however they liked, projecting a much more relaxed and refreshing image than those of other airlines, which required cabin crew to assume a more uniform appearance. While all AirAsia ads focused on low fares, they also reflected the LCC’s intention to be seen as an airline of high quality [see Exhibit 8]. With the ambition of being a low-cost but high-quality and innovative airline, it signed on to become the official airline sponsor of the world-famous Manchester United football club and the AT&T Williams Formula One team, painting some of its aircraft with the club colours and sport stars. Fernandes further tied up with Tourism Malaysia to make AirAsia a sponsor of Manchester United’s training centre in Trafford, UK, enhancing AirAsia’s relationship with the tourism board. Philanthropic activities were also pursued, such as transporting aid to cyclone-hit Myanmar in 2008 and donating free seats to China’s Red Cross to raise funds for the Sichuan earthquake recovery. Addressing global concern about carbon emissions, AirAsia’s website illustrated how its operations conserved the environment, such as its ticketless system reducing paper waste.

As the chief executive officer of AirAsia, Fernandes himself was a walking advertisement for the company. He wore AirAsia’s official red cap and T-shirt to almost every official function. He even gave his mobile phone number to all the media representatives he talked to, making it easier for them to approach him for company news. AirAsia gained free publicity on many occasions. Between 2003 and 2008, AirAsia received several local and international accolades for its service excellence and success in brand-building, business management and leadership [see Exhibit 9]. For example, it was recognised as the best LCC in the Asia region in 2007 by SkyTrax, By 2008, AirAsia maintained the lowest cost structure among all listed airlines in the world [see Exhibits 10 and 11]. It could break even by filling only 56% passenger load per flight, compared with 70% for MAS.