A Study On Low Cost Leadership Strategy 1

Master Dissertation of Jinan University
A Study on Low-Cost Leadership Strategy: The Case of AirAsia
研究成本领先战略：亚航
Author's name: Michael S.ST
Name of supervisor: Huang Wei Li
Academic degree and Title, Ph.D., Professor
Name of discipline and major: Master of Business Administration (MBA)
Submission date:04-2013
Date of defense: 05-2013
Chairman of the defense committee:
Paper Reviewer:
Degree-conferment authority and date:

Originality statement
I declare that the academic paper submitted is the achievements of the research carried out
by me under the guidance of the supervisor.To the best of my knowledge, except for the special
annotations and acknowledgements, the paper does not contain the research outcomes published
or written by other people have, nor materials already used to obtain academic degree or
certificate of Jinan University or other educational institutions. Any and all contributions to this
research made by my coworkers have been described and recognized herein.
Signature of author: Michael Date of signature: April 20, 2013
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The author of the academic paper fully understand theprovisions promulgated by Jinan
University for reservations and use of the academic papers, and is entitled to retain and submit
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Signature of author: Michael Signature of Supervisor: Huang Wei Li
Signing Date: April 20, 2013 Signing Date: April 20, 2013
Graduation destination of the author:
Employer: Student Tel: +8618688408574
Mailing address:michael.guntur@ymail.com Zip Code: 510632

MBA Dissertation of Jinan University
i
Abstract
早些年相比较，航空业已经有了发展;操作变得更简单，更快捷。航空业已为一
个国家的经济增长作出贡献。国际航空运输协会的调查，当前航空业每年的增长速约
是 6.6％，从 2000 年 - 2010 年已经增长超了 5％，。
本文选择了亚洲航空 AirAsia 为研究对象，去研究克尔。波特所提出的成
本领导力的发展。本文主要分析深入细致的分析了亚航的策略已经整个通价值链保持
价策略从而产生竞争优势的运作分析。亚洲航空有限公司 MYX：5099 是一家马来
西亚的成本航空公司。亚航是亚洲最大的票价无增值服务的航空公司并且是亚洲
成本旅行业的先驱。亚航集团所运行的国内和国际航班包括联营公司亚航 X，泰国亚洲航
空，印尼亚洲航空，菲律宾亚航公司和日本亚航一共跨越 18 个国家，有 65 个目的地。，
亚航随时准备着提供值得信赖的优质的服务和难忘的飞行经验，为了实现现在人人都
能飞
亚航运用成本领导力的策略在他的整个运营模式上，其特点是：飞机利用率高
，没有多余的装饰没有免费的食物，没有安排，无纸质票据，提供换票服务
，没有忠诚计划，现代化操作简单的流程，单班，标准化操作，基础设施
，点对点网络，精化配系统，精确市场定，成本运作。本论文细解释了亚航的
战略和通价值链研究亚航如何保持成本运作。特别是，波特 (Porter's) 的基本战略，
特别将成本领先战略运用在竞争力战略上，去证明，亚航的成功在于严格的执行成本
。
本文作者认为，亚航是学习成本的领导策略最好的公司案例。公司严格的执
行成本，打破了旅游规范，创新操作程，并成为一个强大的亚洲领先的性能数据支
持。
关键词：亚航，竞争战略，成本领先战略，竞争优势，成本航空公司，亚洲航空业

ii
English Abstract
Compare with the earlier ages, the airline industry has evolved much; the operations
become simpler and more efficient. Airline industry contributes to the economic growth of a
country. The International Air Transport Association surveyed that the growth rate of the airline
industry is about 6.6% every year and it has been grown more than 5% from the year 2000 –
2010.
The author chooses AirAsia as the study object for learning low-cost leadership that
developed by Michael E. Porter. The main idea of the paper is about the industry analysis
applied to generic strategies thus generate competitive advantages. AirAsia Berhad (MYX:
5099) is a Malaysian-based low-cost airline. 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 65 destinations spanning 18 countries. Together with the associate
companies; AirAsia X, Thai AirAsia, Indonesia AirAsia, Philippines' AirAsia Inc and AirAsia
Japan; AirAsia is ready to serve valuable and memorable flight with its believable, “Now
Everyone Can Fly.”
AirAsia applies low-cost leadership on its whole operations which characterized as; high
aircraft utilization, no frills (no free foods, no seat assigned, ticketless, no refundable ticket, no
loyalty program), modernize operations (simple process, single class seating, standardized
operations), basic amenities, point to point network, lean distribution system, positioning, and
low operating cost. This thesis explained in detail the AirAsia‟ strategy and whole operations
that keep the cost low through the value chain analysis. In particular, the author applies Porter‟s
generic strategy especially Low-Cost Leadership strategy to competitive strategy, to argue that
AirAsia‟s success that strict with low-cost.
Author thinks that AirAsia is the best company to learn the low-cost leadership strategy.
The company strictly on low cost, breaks the travel norm, innovate the operation process, and
become a strong leader in Asia (supported by the performance data).
Keywords: AirAsia, competitive strategy, low-cost leadership strategy, competitive advantage,
low-cost carrier, Asia airline industry.

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Table of Contents
Abstract …………………………………………………………….………..I
English Abstract ……………………………………………………..…….. II
Table of Contents …………………………………………………….....….. III
List of Figures and Tables ……………………………………..…….…….. V
1 Introduction …………………………………………………………..….. 1
1.1Background of the study ………………………….…...…..…….. 1
1.2Problem statement …………………………………………..….... 2
1.3Purpose and significance of the study …………………...……....2
1.4Research strategy ………………………………………..………..3
1.4.1 Research methodology …………………………………….. 3
1.4.2 Data gathering ……………………………………………....3
1.4.3 Organization of the thesis …………………………………..4
2 Theoretical Frameworks ………………………………………………….5
2.1 Porter’s five forces model and industry’s attractiveness …..…5
2.2 SWOT Analysis ………………………………………………….. 7
2.3 Generic strategy and competitive advantage ……………..…… 8
2.3.1 Michael Porter generic strategies ……………………..….. 8
2.3.2 Cost leadership (type 1 and type 2) …..…………………… 10
2.3.3 Differentiation strategy (type 3) ……………….……..…… 12
2.3.4 Focus strategy (type 4 and type 5) …………………………13
2.3.5 Competitive advantage ……………………………………..14
2.4 Value chain analysis ……………………………………………...16
3 AirAsia Case Study …………………………………………………...….. 18
3.1 Description of the case company ……………………………….. 18
3.1.1 Development of LCC in Asia …………………………….. 18
3.1.2 AirAsia profile ……………………………………………....23
3.1.3 The development of AirAsia ………………………………. 27

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3.1.4 LCC cost cutting strategy ………….……………..……….. 28
3.1.5 LCC’s sources of advantage ……………..…………….….. 30
3.2 Application of theoretical framework ……………………...….. 30
3.2.1 Porter’s five forces analysis of AirAsia …………….….…..30
3.2.2 SWOT analysis of AirAsia ……………………………..….. 34
3.2.3 AirAsia low cost leadership analysis …………….…….….. 36
3.2.4 Value chain analysis of airline industry ……………...……39
3.2.5 AirAsia’s competitive advantage ……………………....…..44
3.2.6 Performance evaluation of AirAsia .……………..…….…..48
3.3 Research findings …………………………………………...…… 51
4 Conclusion and Suggestion ….………………………………………..…..53
4.1 Conclusion …………………………………………………...……53
4.2 Company suggestion ……………………………………......…… 55
Notes ……………………………………………….…………………..……. 56
References …….……………………………………….……………..….….. 57
Acknowledgements …………………………………..………………….…..59

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List of Tables and Figures
Figure 2-1: Porter‟s Five Forces Diagram ………………………………………………… 5
Figure 2-2: Generic Strategies …………………………………………………………….. 9
Figure 2-3: A Model of Competitive Advantage …………………………………………..15
Figure 3-1: AirAsia Organization Structure ………………………………………………. 26
Figure 3-2: Value Chain Analysis of Airline Industry ……………………………………..40
Figure 3-3: AirAsia Financial Highlight …………………………………………………...50
Figure 3-4: AirAsia Operating Highlight …………………………………………………..51
Figure 3-5: AirAsia Share Performance …………………………………………………... 52
Table 3-1: Early-Start Low-Cost Carriers in Asia ………………………………………… 18
Table 3-2: A chronology of development of the low-cost carriers in Asia ……………….. 19
Table 3-3: Average annual passenger growth rate in South East Asia …………………….23
Table 3-4: Cost Cutting Strategies by LCCs ……………………………………………….29
Table 3-5: LCC‟s Sources of Advantage ………………………………………………….. 30
Table 3-6: Five-Year Group Financial Highlights …………………………………………49

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1 Introduction
1.1 Background of the Study
Nowadays, the airline industry has become simpler when compared to olden ages;
they want to improve themselves in the broad global market. Airline industry boosts all the
countries in growth of the economy, tourism, and international business investment. It has
made a lot of changes of people lifestyle to travel and the way of doing business by reducing
travel time consuming and allow people to visit different places or countries. The
International Air Transport Association surveyed that the growth rate of the airline industry
is about 6.6% every year and it has been grown more than 5% from the year 2000 – 2010.
The airline industry has evolved extremely since the last decades into a multifaceted
and fast growing industry drifted by the economic growth, travel and tourism divisions, in
accompany with the significance increasing passengers from numerous places
(www.adg.stanford.edu, 2000). In the few decades ago, low cost carriers or no frills carriers
such as EasyJet and South Western Airlines have appeared with the great competitive
marketing strategy to battle with the existing giant market leader such as British Airways
and United Airlines (Buhalis, 2003). Seeing in the current business of the Malaysian
aviation industry, Malaysia Airlines (MA) – flag or scheduled carrier, that was the first
established and monopolizing the air travel business in this region; is now opposition rising
challenges from no frills or low cost carrier – AirAsia (AA), that has appeared as the
successful airline regionally (O‟Connell & Williams, 2005). The rapid change was because
of the lower fare, new routes and various locations with different time frequencies and the
online booking process that provided to the customer‟s needs (O‟Connell & Williams,
2005). This was further confirmed by Driver (1999), that in the challenging situation of the
airline industry that was expanding very rapidly; 2 fare structures, provision of routes,
simplified ticketing system, improved pre- and post-flight aspects of travel, distribution
channels and promotional activities of an airline were among its thriving factor to success.
Michael Porter has explained about the three general types of strategies that are
mostly applied by the businesses to gain and retain competitive advantages. These three
generic strategies are defined in two dimensions; strategic scope and strategic strength.
Strategic scope is a demand-side and appeared at the size and composition of the market that
company aim to the target. Strategic strength is a supply-side dimension and refers to the
strength or core competency of the company. In particular Porter identified two

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competencies that he felt were most important: product differentiation and product cost
(efficiency).
In his 1980 classic Competitive Strategy: Techniques for Analyzing Industries and
Competitors, Porter simplifies the scheme by reducing it down to the three best strategies.
They are cost leadership, differentiation, and market segmentation (or focus). Market
segmentation is narrow in scale while both cost leadership and differentiation are relatively
broad in market scope.
1.2 Problem Statement
Recently, the airline industry has been a great and developed industry. Numbers of
passengers increase these 10 years dramatically. These numbers are very significant in Asia.
It makes the author want to develop and gain more information related to it. The author
chooses AirAsia as the company that will be observed. It is a leading airline company in
Asia. Some points that will be questioned about this company such as; how AirAsia
implement a cost leadership strategy on its operations, and how the strategies meet success.
Some points that will be concerned are how the relationship among five forces model,
competitive strategies, value chain analysis, and competitive advantages in the case of
AirAsia; and analyze the future development of the industry and what strategies that might
be good for AirAsia for the next 5 years.
1.3 Purpose and Significance of the Study
Based on the research question above, the author develops the research objectives.
There are some research objectives regarding research question. The author wants to learn
the success of AirAsia related to the Michael Porter competitive strategy. Beside, knowing
the reasons why the company applied the strategy and what the cause effect of them. Author
hopes will gain as much as information that useful in the MBA learning process; and the last
it is a requirement of MBA graduation.

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1.4 Research Strategy
Before writing the thesis author does a pre-write analysis and develop strategies
related to the topic and field study that will be written as the requirement of MBA study.
These are some steps that are done by the author:
(1) Identify and develop the topic: Author interested with the AirAsia, then start questioning
some interesting related with the company such as: How AirAsia meets success? What
strategies that applied? How is the application of each strategy and why the reason for
doing that? And other questions.
(2) Find background information: Look up the “AirAsia” keywords on the search engine
and read articles, journal, news related to the company. Also from the lecture about
related topics and subjects.
(3) Narrow the topic: After gaining much information, the author tries to select most wanted
information and decide what aspect will be the topic of the research.
(4) Find the research material: Author finds the materials from many sources for gain more
detailed information and deep analysis related to the topic.
(5) Evaluate and select research materials: The materials are selected and sorted based on
the needs of the topic that will be analyzed and consider about the credibility,
perspective, and timeliness of the materials.
(6) Write the paper: Drafting the paper and start writing with the help and leaded by the
tutor.
1.4.1 Research Methodology
The research method would be described and based on the quantitative method, the
actual data would be found in observation like secondary data; finding the online journal,
article, and books. The topic that author raise is related to the strategic management. Some
economic theories will be applied and analyze for AirAsia and airline industry. To done
this research paper will need a lot of resources and support, but due to the limitation, I
would spend as minimal as possible budget for this research with considering the best
result.
1.4.2 Data Gathering
In addition to this research, the author would maximize all the resources that we
might have and find including: Actual observation, Access to the School Online Library
(Journal), Online Journals, Books, Internal Network, and any other sources.

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1.4.3 Organization of the Thesis
This thesis is divided into six chapters. This following chapter one presents the
background of the study, problem statement, purpose of the study, research strategy and
methodology. Chapter two describes the whole theoretical framework that related to the
study and will be applied in the case of AirAsia; they are Porter‟s five forces analysis,
generic strategy and competitive advantage and value chain analysis. Chapter three
describes the case study of AirAsia, they are the description of the company, the
application of a theoretical framework, the finding and analysis. Chapter four is
conclusion and discussion. Chapter five is the references of the author and chapter six is
appendix.

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2 Theoretical Framework
2.1. Porter‟s Five Forces Model and Industry‟s Attractiveness
An industry consists of a group of companies that offerings products or services,
which are similar and serve as competitors and substitutes for each other. Economist
analyzes competitive forces within an industry to identify opportunity and threats that firm
facing. A model of analyzing the external environment was developed by Michael. E.
Porter. This model called five forces model and it helps a company to recognize and analyze
the competitive forces in an industry environment. Porter describes the five forces as: threat
of new entrants, bargaining power of suppliers, bargaining power of buyers, threat of
substitutes, and rivalry among existing firms.
For a company to analyze the industry analysis, the Porter‟s five forces is the first
step. Porter said, “The collective strength of these forces determines the ultimate profit
potential in the industry, where profit potential is measured in terms of long term return on
invested capital.”[1]
The purpose of competitive strategy for every company is to know the
company‟s position in the industry and how the company can defend against the competitive
forces and has a power to influence them. By understanding the fundamental forces able to
determine the structure of an industry and understand the strengths and weaknesses of a
business, show where a great difference can happen by changing the strategies, and clarify
when the trend of the industry can be opportunities or threats.
Figure 2-1: Porter‟s Five Forces Diagram
Source: Porter, 1985, p. 6
Competitive
rivalry wihin
an industry
Threat of
potential
entrants
Bargaining
power of
customers
Threat of
substitutes
Bargaining
power fo
supplier

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(1) Threat of new entrants
It refers to how difficult for a company enters the industry and competes with the
existing competitors. Threat of new entrants‟ analysis is important; it determines
whether the company will face new competitors often or seldom. If the barrier is easy;
the source of competitive advantage tends to a quick end. On the other hand, if the
barrier is hard, the source of competitive advantage will last long and a leader only
compete with a set of old competitors.
Threat of new entrants depends on two factors: existing company reacts to the
new comers and the barrier to enter into the market that overcomes in the industry. In
general, existing company strongly against new comers to enter especially when there is
a history about when the competitors have invested money and resources in the industry,
and when the industry growth is slow. Some main barriers to enter are high investment
required, economies of scale, and customers‟ switching cost, limited access to the
distribution channels, government restriction policies, and high degree of product
differentiation.
(2) Bargaining power of supplier
Suppliers can gain bargaining power in the industry under some following
conditions. When the industry relies on a few suppliers; when there is no substitute of
suppliers‟ product; when the switching cost for changing suppliers is high; when the
company‟s purchases are only a small portion of suppliers‟ business; when the suppliers
have the power to move forward in a distribution channel and take action on the
company customers. The power of suppliers can influence the relationship between
small businesses and their customers by changing the quality and increasing the price of
the final product. A good company should have a power to use the relation with
suppliers to gain competitive advantage.
(3) Bargaining power of buyers
The situation will reverse when the buyer has their bargaining power. A strong
buyer can push the small business players for a lower price, higher quality of goods; even
they can play competitors off one another to get what they want. This bargaining power
of buyers tends to increase when a customer buys a product in a large quantities, when
substitutes can be obtained easily, and when the cost needed to switch the supplier tend to
be low.

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(4) Threat of substitutes
Product substitution will occur when a customer begins to believe that similar
products can perform the same function at a better price, for example: insurance agents
gradually moved into areas of investment that were previously controlled by the
financial planner or vinyl record albums that has been taken over by the compact disc
technology. The main defense to deal with the threat of substitutes is product
differentiation. A company must have a deep understanding of the customer needs, so
they able to create the uniqueness of their products.
(5) Rivalry among existing firms
Cock said, "The battle you wage against competitors is one of the strongest
industry forces with which you contend".[2]
Competitive battle can be a form of price
war, advertising campaign war, new product launch, scramble customers – all these
forms can reduce the company‟s profitability in an industry. The intensity of
competition tends to increase under these following conditions: number of well-balanced
competitors, the slow industry growth level, high fixed costs, and lack of product
differentiation. Another factor that increased the intensity of competition is high-exit
barriers; including specialized assets, government and social restriction, emotional ties,
labor treaty, relationship with other business unit, high switching cost, and another
reason that make company stay and fight even when they know that the business is not
profitable.
Cock explained that “Industry attractiveness is the presence or absence of threats
exhibited by each of the industry forces. The greater the threat posed by an industry force,
the less attractive the industry becomes.”[3]
For a small-size business; have to find a market
condition which has low threats and high attractiveness. With understanding the industry
forces enable the small business owner to develop strategies to deal with them. These
strategies can help the business owner to meet the customers need and own competitive
advantage over rivals on its industry.
2.2 SWOT Analysis
SWOT analysis is strategic planning method that utilized to evaluate a company or
organization‟s internal analysis (strength and weakness) and external analysis (opportunity
and threat) in a project or business speculation. Those four factors named SWOT. This
analysis process involve determining specific goals and business speculation or project

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management and help to identified internal and external factors that supportive or not
supportive in achieving goal. SWOT analysis can be applied in a way to analyze and sort
numerous things that affect these four factors, and then applied on SWOT matrix diagram.
When the application is how the strength gain advantage from the existing opportunities and
how to overcome weaknesses that prevents profits (advantages) of opportunities. Further
step, how the strengths able to deal with threats and how to overcome weaknesses that able
create new threats.
2.3 Generic Strategies and Competitive Advantage
2.3.1 Michael Porter Generic Strategies
In the 1980‟s, probably the most read books on competitive analysis in the world
were Michael Porter‟s Competitive Strategies (Free Press, 1980), Competitive Advantage
(Free Press, 1985), and Competitive Advantage of Nations (Free Press, 1989). Porter said,
competitive strategy makes an organization or a company gains competitive advantages
from three different points: cost leadership, differentiation, and focus leadership. Porter
mentions these as generic strategies. Cost leadership highlighted producing product at a
very low per-unit cost for price-sensitive customer (airline customer). Two types of
alternative of cost leadership strategies are defined. Type 1 is a low-cost strategy that sells
products or services to a various customers at the lowest price available on the market.
Type 2 is the best-value strategy that sells product or services to various customers at the
best price-value available on the market; the type 2 strategy purposes to provide market
several of products or service at the lowest price compare with the competitor products or
services price. These two strategies are targeted to a large market.
Porter‟s Type 3 generic strategy is differentiation strategy. Differentiation is a
strategy purposed at producing products and services considered unique industry wide and
directed at consumers who are relatively price-insensitive.
Focus leadership means producing products and services that accomplish the needs
of a small group of people. There are two alternative types of focus strategies. They are
type 4 and type 5. Type 4 is low-cost focus strategy, which is selling products or services
to a small group (niche market) of customers at the lowest price on the market compare
with the existing competitors. Type 5 is best-value focus strategy that sells products or
services to a small group of people at best price-value available on the market beyond
competition. Type 5 strategy also called “focus differentiation,” the best value focuses
strategy purposed to target niche market products and services that meet their needs and

9
requirement better than competitors do. Both type 4 and type 5 strategies target is a small
market. The difference between them is type 4 strategies sell products and services to a
niche market at the lowest price, on the other hand type 5 sell products and services to a
niche group at a higher price but equipped with features so the products and services are
perceived as the best value.
Porter‟s five strategies mean different company arrangements, incentive system
and control procedures. Larger companies with more access to resources typically
compete on a cost leadership and differentiation, but smaller companies often compete for
focus leadership.
Porter emphasized the need for strategist to perform cost-benefit analysis to
analyze “sharing opportunities” between companies existing and potential business units.
Sharing resources and activity enable competitive advantage by lowering costs and
increasing differentiation. As well as promoting sharing, Porter emphasized the need for
companies to effectively “transfer” skills and expertise among independent business units
in order to result competitive advantages. Considering some factors such as size of firm,
type of industry, and nature of competition, a variety of strategies could yield advantages
in cost leadership, differentiation and focus leadership.
Figure 2-2: Generic Strategies
Source: Adapted From Michael E. Porter, Competitive Strategy: Techniques for Analyzing Industries and
Competitors (New York: Free Press, 1980): 35-40

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2.3.2 Cost Leadership (type1 and type2)
The main reason to chase forward, backward, and horizontal integrated strategies
are to achieve low-cost or best-value cost leadership benefits. But cost leadership in
general must be pursued in combination with differentiation. A vast of cost elements
affect the relative attractiveness of generic strategies, including economies or
diseconomies of scale accomplished, experience and learning curve effects, the percentage
of capacity deployment accomplished, and linkages with distributors and suppliers.
Another cost element to think about in choosing between alternative strategies include the
potential for sharing knowledge and costs among organization, R&D cost related, with the
new product modification and development of existing products and services, labor cost,
shipping costs, tax rates, energy costs, and shipping costs.
Determined to be the low-cost business in an industry could be particularly
effective when the market is when the business is included of numerous buyers that
sensitive in price, when there are a few steps to attain product differentiation, when the
customers do not care about brands, or when there are numerous buyers with high
bargaining power. The fundamental idea is to have lower price than competitors and in
this way able to gain more market shares and sales, wholly dragging some competitors
kicked out from the market. Companies applying a low-cost (Type 1) or best-value (Type
2) cost leadership strategy have to accomplish their competitive advantages in ways that
are challenging for competitor to match or duplicate. The leader‟s competitive advantages
will be not long last to field an important edge in the market if competitors find that it is
quite easy and inexpensive to duplicate the leader‟s cost leadership strategy. It is needed to
be concerned that the resource to be precious, it must be rare, difficult to copy, and not
easy to be substituted. To apply a cost leadership strategy successfully, a company has to
make sure that the total cost overall the value chain are lower than competitor‟s total cost.
There are two ways to achieve this:
(1) Execute the value chain models more effectively and efficiently compare with the
competitors and control the factors that influence the value chain activities cost. Some
activities include changing the plan layout, mastering new high technologies, using
common components or parts in different products, make the product design simpler,
finding alternatives to the full capacity year-round operation, etc.

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(2) Reconstruction the company‟s whole value chain to remove or avoid some cost-
producing activities. Some activities include maintaining supplier and distributors,
online selling, relocating manufacturing activities, keeping away from the use of union
labor, etc.
While applying the cost leadership strategy, a company has to be careful not to use
so aggressive price discount that their profits are really low or missing. Always consider
of cost-saving technological breakthroughs or any other related to value chain
development that able to corrode or eliminate the company‟s competitive advantages. The
Type 1 or Type 2 cost leadership strategy can be very effective bellow these conditions:
(1) When price war among competitors is especially dynamic.
(2) When the competitor‟s products are fundamentally the same and supplies are available
from many of several suppliers or distributors.
(3) When there are only a few ways to attain product differentiation that valuable to
buyers.
(4) When most buyers use the product in the same ways.
(5) When buyers lay you open to lower costs in changing their buys from one seller to
another.
(6) When buyers are many and have a strong power to bargain discounted prices.
(7) When industry new entrants use starting low prices to attract buyers and build a
customer loyalty.
A successful cost leadership strategy usually happens to the whole company as
indicated by high-efficiency, low overhear, intolerant of waste, limited perks, concentrated
examination of the budget request, broader spans of control, rewards linked to cost control
and wide employee partaking in cost control efforts. Some dangers of applying cost
leadership are that rivals may copy the strategy, thus make many industry profits down;
that technological breakthroughs in the industry may make the ineffectiveness strategy; or
that customers interest may change to other features in order to price. Some example
companies that are well-known for their low-cost leadership strategies are McDonald‟s,
Black and Decker, Wal-Mart, BIC, Lincoln Electric and Briggs and Sratton.

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2.3.3 Differentiation Strategies (type3)
Every strategy offers different degrees of differentiation. Differentiation does not
assure competitive advantage, particularly if standard products adequately meet the
customer needs of if fast duplication possibility by competitors. The best products are
durable products that protected by barriers to fast duplicating by competitors. The success
of differentiation means bigger product flexibility, bigger compatibility, lower cost,
improved service, low maintenance, bigger convenience and any other features. Product
development is an example of a differentiation strategy that able to achieve competitive
advantages.
A differentiation strategy needs to be followed after a study about the buyers‟
preferences and needs to decide the viability of including one or more different features to
the uniqueness of products that feature the desired specification. A successful
differentiation strategy lets a company to charge a higher price for its product or service
and to get customer loyalty since consumers may become strongly close to the different
features. Special features that make one‟s product differentiation with another can include
superior service, spare parts availability, engineering design, product performance, useful
life, gas mileage, or ease of use.
A threat of applying a differentiation strategy is that the exclusiveness of products
is not highly valued by the customers to willing to pay high. When this situation occurs,
the cost leadership strategy will easily win the competition towards differentiation
strategy. Another risk of applying a differentiation strategy is that other company or
competitors can easily imitate our differentiation features. As a company should find
durable sources of uniqueness that nor easily, quickly and cheaply imitate by the
competitors.
General organization requirements for making a differentiation strategy success
include the effective coordination among the marketing and R&D function and important
amenities to attract scientist and creative people. A company can apply a differentiation
strategy (Type 3) based on many different competitive features. For example, Mountain
Dew and root beer have a unique taste; Lowe‟s, Home Depot, and Wal-Mart offer a wide
selection and one-stop shopping; Dell Computer and FedEx offer superior service; BMW
and Porsche offer engineering design and performance; IBM and Hewlett-Packard offers a
wide range of products; and E*Trade and Ameritrade offer Internet convenience. Different
opportunities exist or can be developed where ever along the company's value chain,
including supply chain activities, R&D activities, technological and production activities,

13
human resource management activities, manufacturing activities, marketing activities or
distribution activities.
The effective differentiation bases are those that are difficult or pricy for
competitors to imitate. Competitors are always trying to copy and outperform rivals for
any differentiation aspects that has acquiesced competitive advantage. For instance, when
U.S. Airways reduced its prices, Delta Airways also quickly followed suit. When
Caterpillar instituted its quick-delivery-of-spare-parts policy, John Deere soon followed
suit. At the level that differentiating features are hard for competitor to imitate, a
differentiation strategy will be very effective, but the source of exclusiveness or
uniqueness must be time-consuming, costly, and easy too troublesome for competitors to
compete. As a result, a company must be careful when applying a differentiation (Type 3)
strategy. Customers are unwilling to pay the higher differentiation price unless they
perceived value surpassed the price that they are paying. Based on those features, as
impressive packaging, extensive advertising, and high quality of website, high quality of
the sales presentation, list of customers or buyers, professionalism, size of the company,
company‟s profitability, and actual value will be less important than perceived value for
the customers.
The Type 3 differentiation strategy can be very effective in these following
conditions:
(1) When there are many ways to differentiate products or services and there are a lot of
customers feel these differences own values.
(2) When the customers need and use the feature differences.
(3) When few competitors are following a similar differentiation strategy.
(4) When technological evolve quickly and competition revolves around quickly evolving
different product features.
2.3.4 Focus Strategies (type4 and type5)
The focus strategies are very effective when customers have individual or special
preferences or requirements and when the competitors are not able to specialize in the
same targeted segment. Starbucks, the biggest U.S. coffeehouse chain store, is applying a
focus strategy as it recently obtained Seattle Coffee‟s U.S. and Canadian operations for
$72 million. Based in Seattle, Starbucks now has Seattle‟s 150 coffee shops and its
wholesale contracts with about 12,000 grocery stores and food service stores that
distribute Seattle coffee beans.

14
In the insurance industry, Safeco lately divested its life insurance and investment
management divisions to target entirely on property casualty insurance operations. The
Seattle-based company‟s strategy is just one of some cases of consolidation in the
insurance industry where companies struggle to focus on one type of insurance rather than
many types.
In applying a focus strategy include the opportunity that many of competitors will
learn the successful of focus strategy and imitate it, customers' preferences will change in
the product features wanted by the market as a whole. A company applying a focus
leadership strategy may focus on a particular customers or groups, demographic or
geographic markets, or on particular product-line segments to serve up a significance-
defined but small market better than competitors that serve up very board market.
A low-cost (Type 4) and best value (Type 5) focus strategy can be has perfect
situation when these following conditions:
(1) When the niche market is large, growing, and profitable.
(2) When the market leader abandons niche market to be important to their success.
(3) When the market leaders regard that is too difficult and costly to fulfill the special
needs or request of niche market while concern on their mainstream customers.
(4) When the industry has a variety of niches market and segments, so allowing the
focused to choose a competitively profitable niche base on their own resources.
(5) When the competitors are few and are attempting to specialize in the same segment
targeted.
2.3.5 Competitive Advantages
When a company gain sustainable profit exceeds its competitors in the industry,
this company has competitive advantages compared to the competitors. The goal of a
business is having sustainable competitive advantages. Michael Porter identified two
basics competitive advantages; they are cost advantage and differentiation advantage. A
competitive advantage gained when a company can sell the same product or services at
lower cost than competitors (cost advantage), on the other hand when a company can give
benefits or feature more than a competitor‟s product or service (differentiation advantage).
In conclusion, a competitive advantage can be generated while a company can give better
value to the customer and get higher profit for the company itself.

15
Porter states that both cost advantage and differentiation advantage are also called
positional advantage, because they enable a company to know its position in the market as
a leader in either cost advantage or differentiation advantage.
A resource-based perception state that a company‟s resources and capabilities
utilize to gain competitive advantage that finally results in greater value creation. This
following diagram is combining the resources-based and positioning view to get more
understanding the concept of competitive advantage.
Figure 2-3: A Model of Competitive Advantage
Source: Adapted From Porter, Michael E., Competitive Advantage: Creating and Sustaining Superior
Performance
According to resources-based view, to a company gain competitive advantage, a
company should own capabilities and resources that are greater than competitor in the
industry. Without the greater capabilities and resources the competitor can easily copy
what the company has done and the competitive advantages will not sustain. Resources
are the company specific assets that can help companies to gain competitive advantage
and hard to acquire by the competitors. These are some example of resources: brand
equity, reputation of the company, patents and trademarks, installed customer base,
proprietary know-how, etc. Capabilities are the company‟s ability to utilize resources
properly. For example the ability of a company brings the product into the market faster
than competitors. This capability is rooted in the company culture and hard to documented
even copied by competitors. The company‟s capabilities and resources create its
distinctive competencies. The distinctive competencies enable companies to do
innovation, efficiency, customer responsiveness, quality and all that can help companies to
gain competitive advantage either cost advantage or differentiation advantage.
Resources and
Capabilities
Distinctive
Competencies
Cost or
Differentiation
Advantage
Value Creation

16
2.4 Value Chain Analysis
Womack, Jones et al, 1990 defined Value Chain Analysis (VCA) is a technique that
applied in the fields of operations management, process engineering and supply chain
management, for the analysis and subsequent improvement of resource utilization and
product flow within manufacturing processes.
On the other hand, Shank and Govindarajan, 1992; Porter 2001, defined value chain
analysis as a tool to understand value chain that creates a product. This value chain comes
from activities that done, since the raw material until the customers use the products, include
the sales service.
Porter on 1985 explained value chain analysis is a strategic analytical tool that
applied to have a better understanding of competitive advantages and identified the
customer value that can be increased and lower cost, for understanding the relationship
between the company and suppliers or customers and other company in the industry. Value
chain identified and connected whole strategic activities in a company (Hansen, Mowen,
2000). The characters of value chain depend on the type of the industries, manufacture,
service, or non-profit organization.
The purpose of value chain analysis is to identify value chain steps that help
companies to create value for its customers or lowering costs. Low cost and value added
enable a company gain competitive advantages.
These are some explanation related to the main activities on the value chain analysis:
(1) Inbound logistics include the receiving, warehousing, inventory control of the input
materials.
(2) Operations include the value creating activities that convert the input into final product
or services.
(3) Outbound logistics include the activities required for the final products or services
delivered to the customers.
(4) Marketing and sales are the activities how to get buyers to buy a company‟s products or
services. They including channel section, advertising, market penetration, pricing, etc.
(5) Services are the activities that create value added to the products or services; including
customer care, repair services, etc.
All of these primary activities are vital in gaining competitive advantage. On the
other hand there are some supportive activities that facilitate the primary activities.
Supportive activities sometime regarded as overhead; but many companies use them and

17
success in gaining competitive advantage. For example, to gain cost advantage through
innovate management of information system. These are some explanation of supportive
activities:
(1) Procurement: the purpose of obtaining raw materials and other inputs used in the value-
creating process.
(2) Technology development: include research and development process, automation
process, and other development in technology and other aspect for supporting value
chain activities.
(3) Human resources management: the activities related to recruiting, allocating human
resources, compensation, etc.
(4) Firm infrastructure: the activities related to finance, legal, quality management, etc.

18
Chapter 3 AirAsia Case Study
3.1Description of Case Company
3.1.1 Development of LCCs in Asia
In Asia, low-cost carriers‟ development during the mid 1990s was in Japan and the
Philippines, these two nations were liberalized by huge domestic markets. Skymark
Airlines and Air Do (Hokkaido International Airlines now; after having partnership with
All Nippon Airways and restructured in 2006) established low-cost domestic flight in
Japan in 1996. In the 1996, Cebu Pacific Air pioneered the „low fare, great value‟ strategy
in the Philippines‟ regional airline industry. These early-start LCCs served mainly point-
to-point services targeting price-sensitive leisure travelers flying within country borders
(see Table 3-1).
With the early start of only a few operators in these regions, LCCs have been
developing quickly in South Asia, North Asia and South East Asia since 2000 as more
airlines, both no-frills ventures of legacy airlines and independent private low-cost
startups; have appeared flying within and across different countries in the region. Table 3-
2 sets out a chronology of the development of the low-cost carriers in Asia since year
2000.
Table 3-1: Early-Start Low-Cost Carriers in Asia
Name of LCC Based
in
Operate
d since
Brief description on the LCC
Skymark
Airlines
Japan 1996,
flying
since
1998
Is an independent private start-up low-cost airline
headquartered at Tokyo International Airport
(Haneda) in ta, Tokyo, Japan, operating
scheduled passenger services within Japan. Its
major shareholders are CEO Shinichi Nishikubo
(35.47%) and the travel agency H.I.S. (27.62%).
Hokkaido
International
Airlines
(formerly Air
Do)
Japan 1996,
flying
since
1998
Is an independent private start-up Japanese low-
cost airline operating scheduled service between
Tokyo and cities in Hokkaid . It is headquartered
in the Oak Sapporo Building in Chū -Ku,
Sapporo, and its main base of operations is Tokyo
International Airport in ta, Tokyo. Owned by
Mizuho Financial Group and individual private
investors.

19
Continue Table 3-1: Early-Start Low-Cost Carriers in Asia
Cebu Pacific The
Philippi
nes
1996 Is a Philippines‟ second largest carrier and biggest
LCC based on the grounds of the Ninoy Aquino
International Airport, Pasay City, Metro Manila,
the Philippines. It offers scheduled flights to both
domestic and international destinations. Its main
base is Ninoy Aquino International Airport,
Manila, with other hubs at Mactan-Cebu
International Airport, Clark International Airport,
Francisco Bangoy International Airport, and Iloilo
International Airport. It is wholly owned by JG
Summit Holdings
Source: Author combines from various websites
Table 3-2: A chronology of development of the low-cost carriers in Asia
Name of
LCC
Based in Operated
since
Brief description on the LCC
Lion Air Indonesia 2000 -
early
2013
Independent private start-up and the first LCC in
Indonesia. The airline is owned by Rusdi Kirana.
The airline just liquidated by early 2013.
AirAsia Malaysia 2001 Malaysian low-cost airline headquartered in Kuala
Lumpur. It is Asia's largest low-fare, no-frills airline.
The airline was previously owned by AirAsia
Berhad. It is now listed publicly on the Malaysia
Stocks Exchange.
Citilink
Garuda
Indonesia 2001 LCC belongs to Garuda Indonesia Airlines
Skynet
Asia
Airways
Japan 2002 Independent private start-up low cost airlines owned
by the Industrial Revitalization Corporation of
Japan, Mera Electric Industrial Corporation and All
Nippon Airways
Air
Deccan
India 2003 Low-cost brand run by Kingfisher Airlines,
headquartered in Mumbai, India. Independent
private start-up and the first LCC in India. The
airline is listed and owned by public investors.
Thai
AirAsia
Thailand 2003,
flying
since
2004
Is a joint venture of Malaysian low-fare airline
AirAsia and Thailand's Asia Aviation. It serves
AirAsia's regularly scheduled domestic and
international flights from Bangkok and other cities
in Thailand.
Indonesia
AirAsia
(formerly
Awair)
Indonesia 2004 Is a joint venture of AirAsia; another foreign joint
venture 51% of which is owned by Abdurrahman
Wahid, former President of Indonesia (1999–2001)
and 49% owned by AirAsia.

20
Continue Table 3-2: A chronology of development of the low-cost carriers in Asia
One-
Two-Go
Thailand 2004 Owned and managed by Orient Thai Airlines and
owned by CEO Udom Tantiprasongchai and his
wife, the One-Two-GO brand was retired in July
2010, and the aircraft re-branded as Orient Thai
Airlines (international charter operator).
Nok
Airlines
(formerly
Sky Asia)
Thailand 2004 LCC of Thai Airways. The airline is 39% owned by
Thai Airways, 10% by Krung Thai Bank, 10% by
Dhipaya Insurance, 10% by the Government Pension
Fund, 6% by CPB EquityCo., 5% by ING Funds, 5%
by King Power and other minor shareholders
Valuair Singapore 2004 Is an independent private start-up and the first LCC
to begin operations in Singapore. The airline merged
with Jetstar Asia in July 2005, giving the first sign of
consolidation of LCCs operating in SE Asia
Tiger
Airways
Singapore 2004 LCC of Singapore Airlines. The airline is 49% held
by Singapore Airlines, 24% by Indigo Partners, 16%
by Irelandia Investments Ltd (the private investment
arm of Tony Ryan and family) and 11% by Temasek
Jetstar
Asia
Singapore 2004 Founded by Qantas in financial cooperation with the
Singapore government and two local investors.
Qantas holds 49% share of the airline, with the rest
19% held by Tamasek, 22% by Tony Chew and 10%
by FF Wong. Its sister company is Jetstar which is
based out of Melbourne and is wholly owned by
Qantas
Viva
Macau
Macau
SAR,
China
2004,
flying
since
2006
Independent private start-up owned by MKW
Capital and local investors. It is the first Asian LCC
airline to fly long-haul
SpiceJet India 2005 The company was originally known as Royal
Airways. Royal Holdings Services is one of the
largest shareholders of the airline, also with
investment from the Dubai-based Isthithmar (private
equity arm of the Dubai government), Citigroup, and
Ewart Investments (a division of the Tata Group)
Hansung
Air
Korea 2005 Independent private start-up and the first LCC in
Korea. The airline is listed and owned by public
investors
Spring
Airlines
China 2005 The first LCC of China owned by Shanghai Spring
International Travel Service Ltd, one of the
country‟s largest domestic travel agency

21
Continue Table 3-2: A chronology of development of the low-cost carriers in Asia
IndiGo India 2006 Independent private start-up owned by
Interglobe Enterprises, an Indian travel and
hospitality group
Jeju Air Korea 2006 The airline is a joint venture between the Jeju
Province (holding 25% share) and conglomerate
Aekyung Group (holding 75% share).
Oasis HKSAR
China
2006 Independent private start-up owned by Rev.
Raymond Lee and other shareholders. The airline
was liquidated on April 2008, after only a 15-
month operation.
AirAsia X Malaysia 2007 A long-haul LCC operated by FlyAsianXpress
(FAX). The airline is 48% controlled by Aero
Ventures Sdn. Bhd. (a company owned by Tony
Fernandes and his associates), 16% by Richard
Branson of the Virgin Group, and 10% each by
Japanese leasing firm Orix Crop and Bahrain-
based Manara Consortium.
Pacific
Airlines
Vietnam 2007 Vietnam‟s first LCC which was transformed from
the country‟s second largest legacy carrier
founded in 1991. The airline is owned by the
Vietnamese government‟s State Capital
Investment Corporation (SCIC), Saigon Tourist
Corporation and, its strategic partner, Qantas
Airways.
Philippines
AirAsia
Philippines 2010 Operating as Philippines AirAsia is a low-cost
carrier based at the Clark International Airport in
Angeles City, Pampanga in the Philippines.
AirAsia
Japan
Japan 2012 Low-cost airline headquartered in Tokyo, Japan.
The airline is joint venture between Malaysia's
AirAsia and Japan's All Nippon Airways.
AirAsia
India
India 2013 Operated as a joint venture between Tata Sons and
AirAsia, with AirAsia holding 49% of the airline
Source: Author combines from various websites
There are some vital reasons accounting for the rapid development of LCCs in
Asia since the early 2000. First, the eruption of the financial crisis in Asia in 1997 enable a
high demand of low-cost air transportation for business travelers which financially
supported by cost-conscious finance departments of private companies (Condom 2005).
The dramatic decline in air transportation after the Asian Financial Crisis also made the
governments in some Asian countries under pressured, which were before unwilling to
grant the right or permission to operate on international routes to airline providers other

22
than national routes, to establish both domestic and international aviation markets for
independent low-cost startup. For instance, the Indonesian Government in 2000 issued 10
licenses to new airline provider to gain broader market expansion (Thomas 2002).
Second, boundaries and limitation on bilateral air transport contracts were recently
eliminated by some Asian national governments to encourage rapid growth of trade and
travel in the region. In 2004, China accomplished a complete open skies agreement with
Thailand. A similar agreement was followed between Hong Kong and Malaysia
(Centreline 2004). The Association of South-East Asian Nations (ASEAN) is running
towards emerging an „open skies policy‟ targeted to give national carriers of the
Association‟s member nations unrestricted intra-ASEAN access between main capital
cities by 2008 (Ionides 2005). Deregulation of aviation rules has facilitated many LCCs,
some of which currently enjoy access to the under-capacity hub airports in the Asian
region, to offer multi-country flying services (Baker, Field and Ionides 2005; Interavia
2004, p. 25). Many LCCs which began by offering short-haul, „single border services‟
have expanded to cover up multi-country services within the sub-regions of North, South
and Southeast Asia, and crosswise them (Interavia 2004, p. 23). Even long-haul
international services have recently been opened by some LCCs such as Viva Macau and
Oasis, though with mixed results.
Third, there are some low-cost terminal opened recently, such as in Malaysia‟s
Kuala Lumpur Low Cost Carrier Terminal in 2005 and Singapore‟s Changi Airport in
2006. It really helps foster further development of low cost carrier in the region. These
low-cost terminals do not have the trimmings of other terminals (such as airline lounges)
and plan for the mass rapid on boarding and disembarking of passengers. By reducing or
eliminating value-added services offered by classic airports, these low-cost terminals were
able to control costs and pass the savings onto the airlines using their services. Tiger
Airways, for example, signed a contract to utilize the low-cost terminal opened at
Singapore‟s Changi Airport in March 2006. Similarly, AirAsia has used the low-cost
terminal opened and operated at Malaysia‟s Kuala Lumpur International Airport since
March 2006 (Hong Kong Economic Times 2006).
LCCs took off originally in East and South East Asia, spread quickly to North Asia
and, more recently, China as well as the Indian subcontinent. The enormous population in
ASEAN, China and India supplied the needed demographic base to fuel further
development of LCCs in the region. Growth of LCCs in the region will also be motorized
by an increase in the number of Asian desire travelers who would like to fly to nearby

23
holiday destinations (Interavia 2004, pp. 25–26; Voorhaar 2004). Growing regional
affluence, coupled with the lack of transport substitutes for air travel due to geographical
motives, is expected to additional boost up the growth of LCCs in the region. Reflecting
these expectations is the projected average annual passenger growth rates in South East
Asia (see Table 3-3).
Table 3-3: Average annual passenger growth rate in South East Asia
Airlines 2003-2008 Forecast
Domestic % International %
South East Asia 8.6 9.9
Malaysia 6.6 9.2
Thailand 10.1 7.8
Indonesia 13.2 10.5
Source: Wang and Ricart (2005, p. 22).
Compared with 4% average yearly growth rate of airline passenger for the
worldwide, the rate of 8.6% growth for domestic travel and 9.9% growth in international
travel in South East Asia is extraordinary (Airports Council International 2007). While
further growth of LCCs in the Asian region is unpredictable, rising jet fuel prices and
intense rivalry has placed pressure on existing participants in the industry and kept
potential entrants at bay. It is expected that LCCs in the region will keep on enjoying high
growth, although with some scale of consolidation in the sector, as is evident in the merger
of ValueAir with Jetstar Asia in July 2005.
3.1.2 AirAsia Profile
AirAsia is well known in Asia especially in ASEAN. It is the leading low-cost
carrier, connecting people and place around countries with154 routes, and 80 of the routes
are only provided by AirAsia. In 2010 the AirAsia group includes AirAsia Thai and
AirAsia Indonesia break the record of its leadership position with two extraordinary
occasions; flew 100 million passenger and gain profit of RM 1 billion (about US$ 32.7
million) worth.
From an airline with two aircraft covering six routes in Malaysia in January 2002,
AirAsia has transformed these past nine years to fly 65 routes in 18 countries. Nowadays,
AirAsia employed more than 8000 employees with market capitalization over RM 7.06
billion (US$ 21.6 million) on 31st December 2010. This is the only ASEAN airline that
serves more than 600 million passengers from 14 hubs in 6 countries; Malaysia (Kuala

24
Lumpur, Kuching, Penang and Kota Kinabalu), Thailand (Bangkok and Phuket),
Indonesia (Jakarta, Bali, Bandung and Surabaya), The Philippines (Angeles City,
Pampanga in the Philippines), Japan (Narita International Airport - Tokyo), and India.
In 2001, AirAsia opened two more hubs; Chiang May in Thailand and Medan in
Indonesia. In Changi Airport Singapore which is as a virtual hub, AirAsia is the top 10 in
terms of contribution of passenger traffic. For building up a strong ASEAN network, in
December 2010 the Group signed an agreement to establish a Philippine-based low-cost
affiliate, which is forecasted will operate at the end of 2011.
The whole Group business model is applying a low-cost philosophy which
requires the operations be clean, straightforward, and efficient. AirAsia is applying some
key strategies for the operations, likewise:
(1) High aircraft utilization
AirAsia uses the aircraft in very high frequency and high turnover of flights; these add
value to customer convenience and enable low cost. AirAsia has the fastest turnover in
its region; is 25 minutes.
(2) Low fare no frills
AirAsia does not have frequent flyer miles program and private airport lounge. No free
foods and beverages even snack in flight, additional meal and service required
passenger to pay more.
(3) Point to point network
All AirAsia both short-haul (4 hours or less radius) and medium to long-haul are non-
stop flight, by doing that; save human recourses cost, facilities cost, airport cost, etc.
On December 2004, AirAsia changed all existing old aircraft Boeing B737 with
Airbus A320, which has more capacity, more efficient fuel-consume and cost-efficient. As
a result, nowadays, the Group has the largest and newest A320 fleet in the region. From 90
aircrafts, 86 are Airbus A320 and 4 are Boeing 737 in AirAsia Indonesia and it is no more
used since 2012. The Group also has ordered more additional AirBus A320s. By utilizing
homogeneous aircrafts, the company able to save human resources cost and reduce spare
part stocks. These strategies have brought AirAsia as the lowest-cost airline in the world,
with a cost/ASK (available seat kilometer) of US3.67. This great achievement achieved
without compromising safety. AirAsia highest priority is safety; all the operations are
bellow supervision of all countries' regulators. To keep the aircraft in best condition
AirAsia partner with the best maintenance provider.

25
AirAsia R&D not only works on the aircraft utilization but also on infrastructure
and technology. One of the AirAsia success stories begins with the online booking
process, followed by ticketless airlines (the first in Asia) in March 2002, allow customer
to pay for the booking by using a credit card via phone. By applying this system, it
generates more sales and creates value for the customers; it saves money for the company.
In 2010, AirAsia launched an IT booking process innovation; called New Skies, it allows
customers to manage the booking and payment. The development of the technologies also
grows at the same with the financial strategies. Within 18 months operations the company
sealed the stamp of financial wizardry and boost the airline growth and win nobilities such
as the 2010 Asiamoney‟s Best Managed Company.
Even known as no-frills airline, AirAsia in the same time also youthful, energetic,
and has a sense of fun on its campaign and branding strategies. AirAsia regularly
sponsored sport event and entertainment event, and in 2010 AirAsia launched
AirAsiaRedTix.com; online information of world class performances and events. AirAsia
also does CSR well, in January 2010; AirAsia joined UNICEF to raise US$ 128 million
for helping the earthquake victims at Haitians. The airline also helps people with heart
disease to get treatment at the National Heart Institute in Kuala Lumpur through Donate
Your Loose Change Campaign.
The Group's adherence the best practices and proven by several awards over the
years AirAsia has been nominated the World's Best Low Cost Airline for two years
continually, in 2009 and 2010 by Skytrax. The award reflects of 18 million people
opinions over the world surveyed by the London-based aviation consultant. AirAsia proud
of many awards and achievement gained; and commits to provide the best service and
efficiency, also spread wider across the skies and keep the low cost at the same time.

26
Figure 3-1: AirAsia Organization Structure
Source: http://www.airasia.com/sites/my/en/about-us/ir-strategy.page

27
3.1.3 The Development of AirAsia
AirAsia is advance aviation which builds based on value that wanted to make
everybody can fly. Since 2001, AirAsia has changed world travel norm and appear to be
the best aviation in Asia. With a very vary route across 20 countries, AirAsia keep making
people travel with affordable price with innovative ways, efficient process and new
business model in its industry. Together with the associate companies, such as AirAsia X,
Thai AirAsia, Indonesia AirAsia, Philippines' AirAsia Inc and AirAsia Japan, AirAsia is
ready to serve valuable and memorable flight with its believable, “Now Everyone Can
Fly.”
AirAsia Berhad (MYX: 5099) is a Malaysian-based low-cost airline. 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 65 destinations
spanning 18 countries. Its main hub is the Low-Cost Carrier Terminal (LCCT) at the
Kuala Lumpur International Airport (KLIA). AirAsia's registered office is in Petaling
Jaya, Selangor while its head office is at the Kuala Lumpur International Airport.
AirAsia was established in 1993 and began operations on 18 November
1996.Initially AirAsia is a Malaysia Government-owned conglomerate, DRB-HICOM.
But AirAsia suffer heavily-indebted and was bought by the former Time Warner executive
Tony Fernandes's company Tune Air Sdn Bhd for the sum of 1 Ringgit (about US$ 0.26 at
the time) with US$ 11 Million worth of debts on 2 December 2001. Tony Fernndes
successfully turn around the company, and generate profit in 2002 with varying new
routes and lower promotion cost and compete with Malaysia Airlines.
In 2003, AirAsia emerged a secondary hub at Senai International Airport in Johor
Bahru near Singapore and begun its first international flight to Bangkok, Thailand.
AirAsia has since ongoing a Thai subsidiary, added Singapore itself to the route list, and
started flights to Indonesia. Route to Macau began in June 2004, and route to mainland
China (Xiamen) and the Philippines (Manila) in April 2005. Route to Vietnam and
Cambodia followed later in 2005 and to Brunei and Myanmar in 2006, the latter by Thai
AirAsia.
On August 2006, AirAsia acquired Malaysia Airlines's Rural Air Service routes in
Sabah and Sarawak, working under the FlyAsianXpress brand. The routes were
consequently returned to MASwings a year later, citing commercial reasons. AirAsia's
CEO Tony Fernandes subsequently exposed a five-year plan to further enhance its
presence in Asia. Under the plan, AirAsia offers to strengthen and enhance its route

28
network by connecting all the existing cities in the region and expanding further into
Vietnam, Indonesia, Southern China (Kunming, Xiamen, Shenzhen) and India. The airline
will focus on developing its hubs in Bangkok and Jakarta through its associate companies,
Thai AirAsia and Indonesia AirAsia. With increase frequency and the addition of new
routes, AirAsia expects passenger volume to reach 18 million by the end of 2007.
On 27 September 2008, the company just added 106 new routes to its current 60
routes. Some of the old routes discontinued have not been revealed in public. On 2 April
2012, AirAsia had the first flight from Sydney to Kuala Lumpur. In August 2011, AirAsia
had an alliance agreement with Malaysian Airlines by means of a share swap. Malaysian
government struck down the alliances in order to void the agreement of both airlines. By
early 2013, AirAsia had seen a sharp rise on its profitability. The year-on-year assessment
had publicized a 168% increase in profits as compared to 2012. For the last quarter 31
December 2012, the airline's net profit stood at 350.65 million Ringgit (US$114. 08
million). Regardless of a 1% rise in the regular fuel price, the airline had confirmed profits
of 1.88 billion Ringgit for the full financial year 2012.
In February 2013, AirAsia proposed an application to the Indian Foreign
Investment Promotion Board, throughout its investment division, AirAsia Investment
Limited, to look for approval for inauguration its operations in India. AirAsia wanted to
take up a stake of 49% in the airline, which was the greatest amount allowed by the Indian
government at that time. AirAsia firstly invested an amount of 50 million United States
dollars in the fleet. The fleet wished to begin operations from Chennai and enlarge its
network in South India, to where AirAsia already operated flights from Malaysia and
Thailand.
3.1.4 LCC Cost Cutting Strategy
Low cost carriers (LCC) focus on cost reduction with the purpose of implementing
a cost leadership strategy on the markets that they serve. Table 3-4 shows which strategic
measures lead to the reduction of which unit cost categories.

29
Table 3-4: Cost Cutting Strategies by LCCs
Cost Category Fleet In-flight Service Network Marketing
+ PR
H.R.
Unit Cost Category (cost
per passenger
kilometer)
Homogenous
fleet
Young
Fleet
High-density
seating,
Fewer
Galleys
and
Toilets
No
free
food
and
beverages,
lounges
and
FFP‟s
No
Seat
Reservation
Use
of
smaller
airports
/
second
hub
No
interlining,
no
flight
connections
Focus
on
direct
sales
“Low
prices
sell
themselves”,
aggressive
PR
Variable
remunerations,
low
hierarchies
Maintenance X X X
Fuel X X X
Staff X X X X X
Airport Costs X X X X
ATC costs X
In-flight service X
Capital and leasing X X X X X
Marketing / Sales X X X X
Overheads X X X X X X
Soucrce : DLR - http://www.dlr.de/fw/
The utilization of a young and homogenous fleet of medium-size of aircraft
(usually Boeing 737-700/800 or Airbus 319/320) normally accelerates a lessening of fuel,
upkeep, staff, maintenance, overheads and – if hefty requests at discounted prices are
placed – capital expenses. High occupancy seating accelerates lower unit cost of all
classes, as fix costs (incl. ATC expenses) might be credited to more sears and passengers.
Only variable in-flight seating expenses (and some fuel expenses) increase when
increasingly passengers are on-board. Ground times and delayed are decreased by serving
smaller, uncongested airports and by focusing on point-to-point flights, without any
connecting flight, empowering a LCC to expand the amount of daily block hours and in
this way aircraft utilization.

30
3.1.5 LCC‟s Sources of Advantage
Table 3-5: LCC‟s Sources of Advantage
Cost
Reduction
Cost per seat
Traditional Carrier 100%
Low Cost Carrier
Operating advantages
Higher seating density -16 84
Higher aircraft utilization -2 82
Lower flight and cabin crew costs -3 79
Use cheaper secondary airport -4 75
Outsourcing maintenance / single aircraft type -2 73
Product / Service Features
Minimal station costs and outsourced handling -7 66
No free in-flight meal, few passenger services -5 61
Differences in distribution
No travel agents or GDS commissions -6 55
Reduces sales/reservation costs -3 52
Other advantages
Smaller administration and fewer staffs -3 49
Low cost airlines compared to traditional airlines 49%
Source: Macário, et al., 2007 Macário, R., MacKenzie-Williams, P., Meersman, H., Monteiro, F., Reis, V.,
Schmidt, H., Van de Voorde, E., Vanelslander, T. 2007. The consequences of the growing European low-cost
airline sector. European Parliament, Brussels
3.2 Application of Theoretical Framework
3.2.1 Porter‟s Five Forces Analysis of AirAsia
In 1980 Michael E. Porter develops a model of the Porter‟s Five Forces on his
book “Competitive Strategy: Techniques for Analyzing Industries and Competitors”. After
that time until now it had become a very famous and useful tool for industry analyzing in a
strategic process. Five forces model is focused on how a corporate strategy facing
opportunities and threats in the industry external environment. Particularly, a competitive
strategy has to base on industry structures and the industry changes. These forces analyses
give an understanding about how the intensity of competition, the industry profitability
and the attractiveness of an industry. By doing five forces analysis, the corporate strategy
can be adapted for improving the position of the company in the industry. Based on the
analysis derived from the Five Forces Analysis, a company can decide how to influence or
to exploit particular characteristics of their industry. These are the Porter‟s five forces
analysis of AirAsia.

31
(1) Threat of new entrants
1. The customer has slight brand loyalty. Most of the AirAsia customers do not have
brand loyalty with the brand or the company itself. Customer loyal because of the low
fare; if AirAsia fails to offer the lowest fare customers will chose another airline
which able to offer the lowest fare. This reason attracts new entrants to enter. New
entrants and competitors are decreasing the customers‟ loyalty and AirAsia‟s market.
2. High capital requirement. For running an airline business needs very high start-up
capital and investment. For the cost of purchasing airlines, hire pilots and staffs, legal
aspect, offices, etc. Thus makes the threats is low for AirAsia.
3. Low switching costs for customers. Customers do not need to pay any money for
switching airlines; customers can choose airlines as they like. The customer can
choose based on the time availability, price, service, etc.
4. Efficient Distribution channel. AirAsia has very effective and efficient sales channel;
people can easily buy tickets from its website. There is no commission for the travel
agent. Although new competitor can copy AirAsia system, but people are used to by
AirAsia website. The AirAsia website is the most visited travel websites in Asia
according to Google. Thus, new competitors are hard to compete with AirAsia in
sales and maintaining low cost.
5. Strict government regulations. The thing that really needs to be considered for
newcomers is it‟s hard to gain a license and permit to build up an airline. AirAsia
mostly owned by people who has the power in the countries that make the
establishment and operation easier.
(2) Rivalry among existing firms
1. High numbers of rivals. There are approximately 21 direct competitors of AirAsia;
LCC with low fares and no frills operated in Asia. There are also about another 40
LCC around the world; indirect competitor. The more competitors are the more fierce
competition.
2. High fixed cost. The airline industry fixes cost; finance, salary, purchase, etc; is not
influenced by the sales volume. Not only AirAsia but also competitors have to get
more market share to cover the fix cost. It makes more fierce competition in this
industry.
3. Customers easily switch. Customers of airline industry priority factors in buying a
flight ticket are price and schedule. The main purpose of flying is to get to the

32
destination intended. Customer can easily choose any airlines to book their tickets
that make this industry so competitive.
4. High exit cost. For an airline, it is almost impossible to well exit the industry. This
business need to consider very high investments, high loans, staff retrenchment and
flight cancelation refund. Even the business suffers loss, the company should have to
keep running in order to cope with the business. This makes the industry more fierce
in competitive.
5. Different products and services offered. Different with the common airlines; either
FSC or LCC; AirAsia not only offer a flight service but also other service such as
accommodations and tours or holiday package at an affordable price. AirAsia has a
good business partnership with third-party business to support AirAsia business and
boost its income. These are hard to do with competitors or new comers.
(3) Threat of substitute
1. Alternative transportation. By being low cost and short haul, alternative
transportation can be substituted, such as train, bus, car, and sea transportation; which
are cheaper and more efficient.
2. Performance and price of substitutes. Sometime Full Service Carrier (FSC) ticket
price is slightly different with LCC; for longer prior time booked and last minute
booking. FSC performance is better in terms of time, schedule, service, etc. This
makes customers choose FSC compare with LCC.
(4) Bargaining power of customer
1. No significant product differentiation. Most of the LCC product is the same; they
offer flight with limited service in low fare. AirAsia tries to offer some different
additional product like accommodation and tour. The price is competitive with travel
agent price. There are many customers that do not like the travel agent program buy
AirAsia tour package. But it is only a small portion of sales. This bargaining power of
buyers is strong, since customers mainly need flight service.
2. No switching costs. Customers can choose the flight that fit them the best.
Considering the service, price, and schedule, customers can choose any airlines as
they like. The bargaining power of buyers is strong.
3. Customer budget allocation. For the business travelers, it does not affect much on the
airline. For the leisure travelers, their travel tendency depends on their earning

33
allocation on travel. People with higher allocation tend to be more flexible with the
price, on the other side people with small allocation are more price sensitive. Thus,
can be concluded, that the bargaining power of buyers is high.
4. Technology development. As the development of IT, the world has changed.
Information is swiftly spread through the internet. Many companies use IT and e-
commerce for the operation and as the key of success. With the internet, information
can be got easily with just a click. The customer also can access every airline website
and any other flight finder website to get flight information from various airlines.
This makes the airline has the less negotiation power to the customers. Thus,
customers have strong bargaining power.
5. Individual decision. Most of the customers of LCC are individuals; groups of travel
are a small part. So the flight ticket sold are purchased individually, airlines cannot
rely on travel agencies or few groups. Thus, the buyer has strong bargaining power.
(5) Bargaining power of supplier
1. Various suppliers. In the airline industry, there are some main suppliers and
secondary suppliers. The vital suppliers like fuel and aircraft have strong bargaining
power. The number of suppliers is so limited; only Airbus and Boeing for the aircraft;
and company purchase is only a small part of supplier business. On the other side the
secondary suppliers like food suppliers, merchandise suppliers, and other suppliers
have very limited bargaining power to the company. A company can select the
supplier that fit for its business.
2. High switching costs. AirAsia uses homogeneous aircraft, it uses Airbus A320. It is
very expensive to change to other aircraft (Boeing). By using homogeneous aircraft
AirAsia relies on Airbus for every aspect related, such as the tires, maintenance spare
part, and engineers. Airbus is a UK based aviation company. Airbus‟s customers
come from the whole world. There are more than 9000 aircrafts ordered to Airbus,
and more than 5400 had been delivered. Even AirAsia is the biggest buyer of the
Airbus (ordered 200 aircraft), it's less than one percent of Airbus‟s sales. The
AirAsia‟s business is just a small part of Airbus‟s business. So AirAsia does not have
bargaining power towards its supplier.

34
3.2.2 SWOT Analysis of AirAsia
The internal factors such as strengths and weaknesses will be considered for the
application of low cost leadership strategy, and the external factors such as opportunities
and threats will be considered on the five forces analysis. A SWOT Analysis of AirAsia
can be conducted and shown below.
(1) Strengths
1. AirAsia owns a very strong management team with strong relations with governments
and airline industry market leaders. This is partially contributed by the varied
conditions of the administrative management teams which consist of industry
professionals and ex-top government bureaucrats. For instance, Shin Corp (formerly
owned by the family of former Thai Prime Minister - Thaksin Shinawatra) holds a
50% stake in Thai AirAsia. This is much helped AirAsia to launch and gain a sizeable
market in Thailand. With their strong effective relationship with Airbus, AirAsia deal
with to get a big discount for 200 Airbus A320 purchase that is also more 15% fuel
efficiency compared with old Airbus A320 and compare with Boeing 737 planes that
used by many other airlines.
2. The management team is excellent in business strategy formulation and execution.
The strategy that AirAsia has formulated at the early stages was a brilliant blend of
proven strategies by other low cost airlines is US and Europe. They are Ryanair‟s
operational strategy (no frills, landing in secondary airport), Southwest‟s people
strategy (employee comes first) and Easyjet‟s branding strategy (partnering with
other related service providers like hotels, car rental).
3. AirAsia‟s brand name is fine recognized in Asia Pacific. Besides the usual print
media advertising and promotions, AirAsia‟s top management also took advantage of
promotions through news by being very “media friendly” and generously sharing the
newest information on AirAsia and the airline industry. Its partnership with other
service providers such as hotels and hostels, car rental firms, hospitals (medical
tourism), Citibank (AirAsia Citibank card) has built a very unique brand image
among travelers. Alliance with Galileo GDS (Global Distribution System) that
facilitated travel agents from around the world to get information about flight details
and make flight booking have also contributed to their strong brand name. AirAsia‟s
local existence in a few countries such as Indonesia (Indonesia AirAsia) and Thailand
(Thai AirAsia) have successfully “elevated” the brand to turn out to be a local brand
beyond just Malaysia. The associations with Manchester United (one of the world‟s

35
most famous football teams) and AT&T Williams Formula One team has further
boosted their image to a greater extend beyond just the this region.
4. AirAsia is the low cost carrier leader in Asia. With the support of AirAsia Academy,
AirAsia has successfully created a “low-cost airline mentality” among their
employees. The employees are very flexible and highly committed and very critical in
building AirAsia the lowest cost airline in Asia.
5. The outstanding employment of IT have straight contributed to their promotional
activities (email alerts and desktop widget which was jointly developed with
Microsoft for new promotions, IOS and Android application), brand building exercise
(with over 3 million hits per month and on the most extensively surfed booking
engines in the world) in addition maintain the cost low by enabling direct purchase of
tickets by consumer thus saving on travel agent fees.
(2) Weaknesses
1. AirAsia does not have its personal maintenance, repair and overhaul (MRO) facility.
It perhaps a good strategy when they initially started with only Malaysia as the only
hub and few aircrafts to maintain. But now, with only some hubs (Malaysia, Thailand
and Indonesia) and over 100 aircrafts currently owned and about another 200 Airbus
A320 to be received in the next few years, AirAsia has to make sure proper and
permanent maintenance of the aircrafts which will also facilitate to keep the overall
costs low. It is a competitive disadvantage not to have its own MRO facility.
2. AirAsia receives lot complaints from customers on their service, because of limited
service offered and low price. For instance, complaints are about flight time delays,
being charged for a lot of additional services and not able to modify flight or get a
refund if customers unable to fly. Good customer service and management is critical
particularly when competition is getting forceful.
(3) Opportunities
1. The rising of oil price perhaps at the first glimpse is like a threat for AirAsia. But
being a low cost carrier market leader in Asia, it an upper hand because its cost will
be keeps the lowest among all the Asian airlines. Therefore, AirAsia has a great
opportunity to gain more customers of full service and other low cost airline‟s
customers. On the other hand, there will be some cost reduction in whole travel
especially by casual and price sensitive customers.

36
2. There are some opportunities to partner with other airlines to tap into their existing
strengths or competitive advantages like brand, landing rights and landing slots (time
to land).
3. The population of Asian middle class citizens‟ increase is about 700 million. This
generates a broader market and a huge opportunity for all low cost airlines in this
region including AirAsia.
(4) Threats
1. Certain charge like airport departure costs, security charges and landing charges are
under the control of airline operators and these are a threat to all airlines particularly
low cost airlines which struggling to maintain their cost as low as possible. For
example, Changi Airport in Singapore charges SGD21 for every person who departs
from Singapore.
2. AirAsia‟s profit margin is about 30% and this has attracted many newcomers or
competitors. Many of full service airlines have or planning to create a low cost
subsidiary to compete directly with AirAsia. For instance, Singapore Airlines
established a low cost carrier Tiger Airways, Garuda Indonesia establishes Citilink
low cost carrier.
3. Passengers‟ perception that low cost airlines may compromise safety to keep costs
low.
3.2.3 AirAsia Low Cost Leadership Analysis
The AirAsia LCC had changed the norms of airlines that air transportation is a
luxury and expensive, it also only for high segmented people. The main objective of LCC
is to gain huge market and provide the flight service to a broader market. However, LCC
is developing now but it has some challenges in the market. AirAsia applies the Low Cost
Carrier (LCC) business model in the airline industry, which could be characterized as
bellow:
(1) High Aircraft Utilization
AirAsia‟s aircraft flying as much as possible, the first flight begin in the early
morning and the latest flight end in late night. The fast turnover is very important, AirAsia
ensure the time on the ground are very limited – an aircraft make money when flies. The
AirAsia turnaround time is 25 minutes, compared with 1 hour for Full Service Carrier

37
(FSC). On average, AirAsia aircraft utilization is 12 block hours per day, compared to the
FCS 8 hours per day.
(2) No Frills
The basic of LCC business is about how to fly people from A to B. The other
service or everything else is regarded as a luxury or frills, of which cost money. AirAsia
removes some frills such as:
1. No free food and beverage on-board. Passengers can buy food and beverage on-board
at affordable price from the flight attendant, or buy online on the ticket booking
process.
2. There is no assigned-seating, all seating are free. Except passenger willing to pay
more for seat selection. If no, passengers will receive the general boarding pass and
have to take any available seats.
3. Ticketless. Less complicated for the operational and customers. Passengers do not
need to worry about collecting ticket before the flight and it is cost-efficient for
AirAsia (printing, paper, distributing).
4. No refund. Airline cost much money when passengers no show for flight due to
refund and reschedule. Whether the aircraft full or empty, the passenger show or not,
the cost of the airline is the same. AirAsia does not give any compensation for no
show guest and do not refund for the missing flight passengers.
5. No loyalty program. AirAsia believes customers are loyal with the low fare, so it does
not apply frequent flier miles program.
(3) Modernize Operations
1. AirAsia makes the process as simple as possible and it is the key of LCC business.
AirAsia uses a single type of aircraft that enable the staffs (pilot, mechanic, flight
attendant, etc) are specialized in a single type of aircraft; which is maintaining cost in
many aspects; learning cost, training cost, spare parts stock.
2. AirAsia only offers single class seating. Passengers are seated on available seat. If
passengers want to have special privileges to choose a seat, they have to buy Xpress
Boarding.
3. AirAsia has Standard Operational Procedures SOP that ensures all of the staff have
the same level of competencies. On this way, AirAsia can ensure the homogeneous
service offered to the customers.

38
(4) Basic Amenities
1. Secondary Airport. Most of the LCC use secondary airport (not the busiest and high-
facility), AirAsia also does it. AirAsia in many countries uses secondary airport, for
example; in Malaysia use LCCT instead of KLIA, in Singapore, The Philippines, and
Indonesia. Secondary airport is cheaper than bigger major airport and also less dense
airport that allow faster turnover for the aircraft.
2. AirAsia does not offer business lounge for its passenger even for very important
people.
(5) Point to Point Network
Point to point network. LCC avoids the hub-and-spoke system and include simple
point to point. Almost all of the AirAsia flights are short haul flight (less than 4 hours).
There is no partnership with another airline for connecting flights, if the flight transfer
happens, every baggage are labeled and passed through the other flight.
(6) Lean Distribution System
Distribution costs are something that full service carrier like to ignore. Most of
FSC depend on travel agents or the sales office to sell the ticket. AirAsia keeps the
distribution channel as simple as possible and will cover up the entire scale of the
customer‟s profile. For example, AirAsia accommodates the most difficult European
traveler via internet and credit card sales. At the same time, AirAsia has an established
system to sell tickets to the most distant and technology deprived locations, such as in
Myanmar.
1. About 80% of ticket sales are generated from the AirAsia website. This is the most
cost saving distribution systems. The airline does not pay any commission for the
travel agent, which will affect the price. AirAsia also does not participate in the
worldwide reservation system; thus save costs.
2. AirAsia has very few sales office, it does not believe that the high sales generated by
the sales office; AirAsia establishes more call center.
3. Ticket booking and sales can be made by telephoning; it is simple and cost effective.

39
(7) Positioning
The customers mostly are non-business passengers, particularly leisure travelers
and price-conscious business passengers. The characteristic of the flight is short-haul point
to point traffic with high frequency. AirAsia has to do very aggressive marketing compare
with ordinary or high end airline operator. It will be very helpful and profitable if the main
hub is in secondary airport (Low Cost Carrier Terminal and Secondary Changi Airport).
Because of the low cost it competes with all transportation carriers, both land and water.
(8) Low Operating Cost
The key of LCC Business Model is lower cost than ordinary flight operator.
AirAsia applies cost leadership strategy on its operations. It employs staff with low wages
(most of the secondary important staffs are from Indonesia, Bangladesh, Nepal, and China
which has low wages). The main hub is in Low Cost Carrier Terminal in Malaysia and in
any other secondary airport across countries which allowed AirAsia has low airport fees.
AirAsia uses homogeneous fleet that enable low cost for maintenance, cockpit training,
standby crews and learning cost. High resource productivity also the key of success while
applying the low cost leadership strategy. All the resource utilized maximally and avoid
overpaying. The boarding process is very efficient because of short ground waits due to
simple boarding processes. The operational is simpler than FSC industry, in AirAsia there
is no hub services, short cleaning fleet times, and higher sales from websites than travel
agents.
3.2.4 Value Chain Analysis of Airline Industry
To have a better understanding how AirAsia creates competitive advantage
through specific activities, author conducted a value chain analysis for airline industry in
the case of AirAsia as a chain of creating value activities. The objective of these actions
(Inbound logistics, Operations, Outbound logistics, Marketing and Sales, and Service) is
to create value that exceeds the cost of providing the product or services, as a result
generating a profit margin.

40
Figure 3-2: Value Chain Analysis of Airline Industry
Source: Developed by Author
Primary Activities:
(1) Inbound Logistics
1. Market assessment: AirAsia has a very good brand in Asia, through its promotion
programs, marketing campaigns, sponsoring many events, etc. Beside AirAsia have
many followers on Twitter and Facebook Fans. Google also granted AirAsia as the
most visited travel websites in Asia.
2. Yield management and pricing: AirAsia master the yield management; the company
understands well the market and ready to anticipating the changes of the external
environment. AirAsia able to influence customer behavior in order to maximize
profits through the affordable ticket price (which has the lowest cost so that can offer
lowest price) and add-on service (meal on-board, travel insurance, seat selection,
hotel and car booking, etc.
3. Routes Planning: AirAsia has the widest routes in ASEAN; which is 132 routes over
countries, and will keep growing together with the growth in the number of aircraft.
4. Fuel Management: AirAsia use Airbus A320 which has more fuel efficient than a
Boeing 737, and for the future AirAsia has ordered a new design of Airbus A320 Neo
that have 15% more fuel efficiency. AirAsia‟s aircraft mostly fly on cruise phase
(pilot will decrease the engine's thrust to the optimal setting of fuel burn and thrust
produced in order to conserve fuel).

41
5. Flight Scheduling: AirAsia is applying high aircraft utilization, the turnover for every
flight is only about 25 minutes. The dense flight schedule creates value for customers,
they have varied flight schedule selection.
(2) Operations
1. Coordination of station and hubs: AirAsia has 14 hubs spread in 4 countries; it helps
AirAsia have good coordination and communication, also help AirAsia maintain low
cost.
2. Ticketing and Reservation: AirAsia is the first Airline with ticketless program in
Asia. The ticket sales mostly around 80% generated from AirAsia website sales; that
very low cost and less commission for travel agent.
3. Check-in and Gate Operation: AirAsia uses secondary airport and have many hubs; in
most airport AirAsia has self-check-in machine; the machines allow passengers to get
a boarding pass without going to the check-in counter. It saves cost on human
resources cost.
4. Cargo Management: AirAsia has cargo service in order to fill the emptiness aircraft's
belly and gain more profit.
5. Aircraft Operations: AirAsia aircraft consumes approximately 14 million liters of fuel
each year and flies an average of 2.8 million kilometers each year; that's an equal
distance to the moon and earth, four times over.
6. On-Board Service: AirAsia offers limited on-board service; for additional services are
charged at cost.
7. Baggage Handling and Ticket Office: Just same as other airlines.
(3) Outbound Logistics
1. Communication with Airport Authorities: AirAsia has 14 hubs spread in 4 countries;
it helps AirAsia have good coordination and communication, also help AirAsia
maintains low cost.
2. Flight Connection: All AirAsia both short-haul (4 hours or less radius) and medium to
long-haul are non-stop flight, by doing that; save human recourses cost, facilities cost,
airport cost, etc.
3. Commission Payment: AirAsia pays less commission to the travel agent because most
of the sales are generated from its website.

42
4. Safety and Security Procedures: AirAsia highest priority is safety; all the operations
are bellow supervision of all countries' regulators. To keep the aircraft in best
condition AirAsia partner with the best maintenance provider.
(4) Marketing and Sales
1. Segmentation: AirAsia has huge market segmentation, AirAsia value that now
everyone can fly.
2. Promotion: AirAsia promotions and sponsorship on Formula 1 and MotoGP circuits,
on Barclays Premier Leagues, football pitches and jerseys, basketball courts, cricket
games and tennis competition.
3. Special Offers: AirAsia always has special offers that other companies are not able to
do. Most offers are related to very low fare (less than US$1) even the free ticket for
many.
4. Campaign: AirAsia has a creative marketing campaign that always differentiates to
any other company; it is humorous, mocking and memorable – enable AirAsia top on
main recall and build an AirAsia brand image that fun, young and vibrant company.
5. Online Sales: Generated more than 80%.
6. Frequent Flyer Program: AirAsia has no loyalty program, it believes that the
customers are loyal on AirAsia low fares.
(5) Services
1. Customer Relationship: Customer can contact AirAsia both online and come directly
to the representative office available. Phone-line also available for customer relation
service.
2. Complaint Follow-up: AirAsia offers very limited free services, for every passenger
are sent the AirAsia‟s flight policies. All policies are written in detail for preventing
mistakes and complains.
3. Baggage Service Problem: Passengers that have a problem with their baggage (delay,
lost, damage) can come to the guest service officer before leave the airport. The
management will follow up with the baggage and keep the passenger informed.
4. Partnership: AirAsia partnership with Expedia and HPE-Clothing
5. Hotel Reservation: AirAsia offers travel deals including city tour, hotel and city
transportation. Hotel reservation also available through www.airasiago.com.

A Study On Low Cost Leadership Strategy 1

A Study On Low Cost Leadership Strategy 1

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