AirAsia was launched in 2002 and has since grown rapidly to become a leading low-cost airline in Asia. It now operates over 130 routes across Asia with a fleet of 93 aircraft. AirAsia benefits from supportive government policies in Malaysia and other countries, but also faces challenges such as fluctuating fuel prices and increased competition from other low-cost carriers. The company leverages opportunities presented by trends like urbanization and rising incomes in Asia to continue its growth.

1. Case Study: AIRASIA
AirAsia was launched in 2002 by Tony Fernandes, at the time a pioneer of low-cost flights in Asia. At first, the
company operated three Boeing 737s. In 2004, after a very successful public offering, AirAsia was listed on the
Malaysian Stock Exchange and from there grew rapidly. As of 2011, the AirAsia Group has 93 aircraft spread
across 12 hubs (see appendix 1) and is flying to more than 60 destinations in 16 countries with 130 domestic and
international routes. AirAsia operates 3,500 flights every week on domestic and international routes from nine
regional hubs in Malaysia, Thailand (Thai AirAsia) and Indonesia (Indonesia AirAsia). AirAsia’s head office and its
main base is the Low Cost Carrier Terminal at Kuala Lumpur International Airport. This terminal handles 48.4% of
AirAsia’s traffic (see appendix 2). AirAsia is the leading low-cost carrier in the world and won the Skytrax award
for World's Best Low-Cost Airline in 2009 and 2010. In addition, the company is Asia's largest low-fare, no-frills
airline and has a long-haul arm, AirAsia X, which currently flies to China, India, Iran, Taiwan, the UK and Australia
with plans to launch services to Japan and South Korea. This report will use the PESTEL framework to evaluate
the opportunities and threats presented by AirAsia’s external environment. It will then apply a SWOT framework
to analyse the Strengths, Weaknesses, Opportunities, and Threats of the AirAsia group. Finally, this report will
list three recommendations, to be evaluated by the AirAsia board of directors before implementation.
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2. To begin, a PESTEL framework will enable us to understand all the macro-environmental factors affecting
AirAsia.
1. Political
Opportunities
Deregulation and privatization present Air Asia with opportunities for new routes. For example, the ASEAN
governments signed the ASEAN Multilateral Agreement on the Full Liberalisation of Passenger Air Services (an
open skies policy) in 2010. From 2015, designated airlines from ASEAN countries will be able to fly to any city
with an international airport in a member nation. AirAsia will therefore have the opportunity to penetrate
undeveloped markets in the ASEAN region by opening new routes. However, it should be noted that foreign
competitors will have the same opportunity and new routes will require the utilization of more aircraft.
The Malaysian Government has always supported the Malaysian airline industry. One example of this is the
opening of the Low Cost Carrier Terminal at Kuala Lumpur International Airport. Further, the Malaysian
Government has helped all low-cost carriers (LCCs), and in particular AirAsia, to develop a competitive edge by
reducing their operating costs and improving their logistics. Secondly, the Malaysian Government has given
AirAsia, along with all Malaysian airlines, significant tax incentives (see appendix 3). These tax-incentives in fact
helped AirAsia to cover a substantial part of its loan interest when purchasing aircraft.
It is also important to highlight that other Southeast Asian countries are often substantially state owned. This
allows the government to control the airline and protect it from competition. As an example, AirAsia established
a joint venture with Shin Corp when it began operating in Thailand with Thai AirAsia. AirAsia had a holding of
49% of Thai AirAsia while the remainder was held by Shin Corp., owned by the former Thailand Prime Minister
Thaksin Shinawatra (2001 -2006).
Threats
AirAsia and its competitors can also be negatively affected by government decisions. For example, unless the
Malaysian government makes an effort to minimise crime, travellers may choose to visit other destinations.
Low-cost carriers are also suffering from recent delays in the construction of a new permanent low-cost carrier
terminal (Expected to open in October 2012), work being undertaken by the Malaysian government. These
delays reduce the ability for low-cost carriers to expand their capacity by catering for new passengersi. Barriers
to trade between countries may also inhibit low-cost carriers in Malaysia from entering more protected markets
like China where the government tightly controls the airline industry.
Civil conflicts and conflicts between regional governments can also affect AirAsia’s operations. For instance,
there has been a resurgence of violence in Southern Thailand and terrorism attacks have occurred in the rest of
Thailand and Indonesia. Additionally, Malaysia's recent decision to explore oil-rich waters off the coast of Borneo
has led to increased tensions with Indonesia. These tensions could harm customer confidence and affect all
businesses operating in Southeast Asia.
2. Economic
Opportunities
The economic situation in Malaysia is stable. As an illustration, from 2004 to 2010, Malaysia's average interest
rate was 2.91%, its average inflation rate was 2.77% and its average unemployment rate was 3.43%. In addition,
the Government of Malaysia has a current account surplus that enables them to continuously boost domestic
demand, resulting in an average annual GDP Growth of 4.5% between 2000 and 2011ii. The global forecast for all
Asian countries for 2011 anticipates an average GDP growth of at least 3% for 2011. Countries like China, India
and Indonesia are expected to experience GDP growth exceeding 6% (see Appendix 4). Although, economic
downturns are always complicated for any business to negotiate, they can also present certain opportunities for
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3. companies like AirAsia because, for example, aircraft leasing costs are often reduced by about 40% at such
timesiii. Thus, companies with ‘deep pockets’ are able to invest and expand their fleet at a very competitive
price.
Threats
Fluctuating oil prices are a major challenge for airlines. For example, in 2009 and 2010 the price of jet kerosene
price represented between 40 to 55% of AirAsia CASK (cost per available seat kilometre). From the latest
information, the fuel price in 1Q11 was US$117 per barrel, relatively high when compared with 1Q10 when the
price was only US$99.6 per barrel. Fluctuating oil prices have a major impact on operational costs. This is why all
airlines use fuel-hedging contracts to stabilise the price they pay for the purchase of jet kerosene. By hedging
fuel, Air Asia paid an average price of US$107 per barrel in Q1 2011 from (see Appendix 5).
The last decade was very prosperous for several Southeast Asian airlines and the Asia Pacific domestic LCC
penetration by capacity has expanded rapidly, and has reached a saturation level in several countries. For
instance, in countries like the Philippines (61.8%) or Malaysia (56.5%), more than half of the region's airline seats
are supplied by low-cost carriers compared with the world average of 24% (see Appendix 9).
3. Social/Cultural / Demographic
Opportunities
Firstly, Southeast Asia offers an important advantage to airlines because the region is comprised of multiple
ethnic groups that are able to speak several languages. For example, Malaysia is composed of several ethnic
groups – Malay, Chinese, Indian and Thaiiv – and this provides a company like AirAsia with the ability to find staff
that can speak several languages, something which is useful as they rapidly expand their business outside
Malaysia.
Secondly, the rapid urbanization of Southeast Asia clearly helps airlines because it forces governments to
develop important infrastructures and open new airports in order to facilitate the flux of people between
countries. According to the UN, seven out of the 15 most populated cities in the world (>10 million) are
predicted to be in Asia by 2025 (see Appendix 6). Thirdly, rapid economic growth also drives a rapid growth in
the middle class within Asia’s large population. According to the latest OECD forecast, the amount of money
spent by the Asian middle class is expected to represent 59% of the total amount spent by the middle class in
the world by 2030 (see Appendix 7). By analysing average household consumption within Asia, we can also
confirm that the communication and transport spending category will increase from less than 10% in 1995 to
15% in 2015 and this will definitely increase the demand for air travel between Asian countries (see Appendix 7).
Threats
The emergent middle class is growing more rapidly in countries like India and China. It is likely that these
countriesv will develop foreign LCC competitors that will have a higher growth rate as well as a larger economy of
scale than Malaysian airlines like AirAsia.
4. Technological
Opportunities
By utilizing information technology, airlines have been able to reduce their operating costs. LCCs were clearly the
most effective players in the airline industry at implementing breakthrough information technologies. By
implementing e-ticketing systems and using e-commerce to bypass traditional travel agents, LCCs have been
able to ‘lean’ their processes by removing unnecessary costs. Furthermore, new, state-of-the-art aircrafts are
more fuel-efficient than older models, and this has helped airlines to reduce their fuel consumption. AirAsia has
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4. implemented these technologies and they have contributed to their operational efficiency. Today, AirAsia has
the world’s lowest CASK (cost per available seat kilometre), at just US$3.52 in 2010 (see Appendix 8). It has
achieved this by implementing the following best practices: a powerful Yield Management as well as Computer
Reservation System (Novitiate Open Skies), a global Enterprise Resource Planning System (powered by Microsoft
Business Solutions) and a Customer Relationship Management system provided by Siebel.
Threats
By being highly dependent on technology, LCCs incur costs in ensuring that their systems operate smoothly and
safely (i.e. from backup systems and maintenance). In addition, by relying heavily on online sales, LCCs expose
themselves to large financial losses when system disruption occurs.
5. Environmental/Legal
Opportunities
Firstly, AirAsia has the youngest fleet in Asia, with the new Airbus A320 and A330 providing improved fuel
efficiency. This is fortunate because the EU has adopted a new policy (coming into effect January 1, 2012) that
requires all airlines to pay for greenhouse gas emissions released on journeys to and from EU airports. Secondly,
labour unions in Asia are relatively weak when compared with EU or USA and this helps airlines in Asia to remain
competitive by reducing their overhead cost to a minimum.
Threats
Natural disasters force airlines as well as airports to reduce or shut down their operations for hours or even
days. In the last decade, airlines have been exposed to Hurricanes, snow, fog, H1N1 influenza pandemic, volcanic
eruptions and earthquakes.
SWOT
Opportunities Threats
O1) The population of Asian middle class is booming T1) ASEAN Open Skies will increase competition, for
and will reach almost 700 million by 2012 example Singapore Airline and Thai Airways will
O2) Lots of potential to expand and exploit growing start LCCs in 2012
markets in China, India, Japan and Korea as well as T2) Saturation of the LCC market in the Philippines
the long haul approach in Europe (AirAsia X) and Malaysia
O3) Higher fuel costs may force some competitors out T3) Aviation regulation and Government
of the industry interference will impact AirAsia’s passenger capacity
(recent delays in the construction of the new,
permanent low-cost carrier terminal (Expected
opening date October 2012)
T4) Accidents and disasters affecting customers
Strengths Weaknesses
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5. S1) Cost leadership: The world’s lowest CASK (Cost W1) AirAsia load factor fluctuates a lot and is not
per available seat kilometre) with $US3.52 in 2010. optimal.
S2) Economies of scale: The biggest and youngest W2) Limited human resources due to low costs
fleet among the LCCs in the region, with an average W3) Non-central location of secondary airports
age of 2.5 years. W4) Heavy reliance on outsourcing (maintenance,
S3) Single aircraft fleet (which reduces maintenance repair).
and training costs) W5) Not financially strong enough to compete with
S4) Double digit growth of all AirAsia subsidiaries; “deep pocket” international airlines, e.g. Singapore
AirAsia achieved record profit in Q42010 Airline's new LCC
S5) Quick turnaround of 25 minutes, which is the
fastest in the region
S6) AirAsiaX has the world best fleet-utilisation, in
excess of 17 hours, achieved by focusing on price-
sensitive, time-insensitive customers
S7) Profit margin is the highest margin in the LCC
industry with 23%; by way of comparison, Ryanair's
profit margin is 20%
S8) The highest ancillary revenue in the LCC industry
(through services like pick a seat, cancellation, Main Recommendations
baggage supersizing, excess baggage, cargo, as well as
travel and tours through AirAsiaGo.com, e-coupon O3 with W1 = Recommendation 1 (CI to benchmark
with AirAsia Megastore or Hotels with European LCC Load factors)
TuneHotels.com)
S9) Brand name is well established in Asia Pacific O2, S13,S14 with T2 = Recommendation 2
S10) Good at using IT to deliver low-cost operations (Partnership to enter new countries due to high LCC
(ticketless travel, online booking, online check-in) penetration level in Southeast Asia)
S11) Strong management team consist of industry
experts with fast decision making processes S4 with T1 and W5 = Recommendation 3 (IPO of
(entrepreneurial) Thai and Indonesian AirAsia as well as AirAsia X to
S12) Not sensitive to seasonal factors due to the high finance future growth)
diversification of routes
S13) Partnership ANA
S14) Virgin Group has 20% share in AirAsia X
S15) Weak labour unions
Recommendations
1) Load factor
As can been seen from the SWOT analysis, AirAsia is outperforming its competitors in terms of operation in
several fields. It has the world’s lowest CASK, the world’s highest ancillary revenues per passenger and is the
largest discount carrier in South East Asia. However by analysing the cost structure of Air Asia, it is clear that
revenue can be improved by increasing the passenger load factor from 75% to more than 85%, something
Easyjet has been able to do (see Appendix 10 for more information). The CI team must be deployed to
investigate in detail the strategy that Easyjet has used.
2) LCC penetration in Southeast Asia is reaching maturity level need for diversification
Appendix 9 and the SWOT together highlight the fact that domestic LCC penetration by capacity (seats) within
Southeast Asia is starting to reach its maturity by exceeding LCC penetration worldwide (30% of Southeast Asian
flights are supplied by LCCs compared with 24% in the world). Countries like the Philippines and Malaysia are
clearly the most mature, with more than 50% of airline seats supplied by low-cost carriers. By analysing LCC
penetration per country, we can see that AirAsia can leverage its AirAsia subsidiaries(Thai AirAsia and Indonesia
AirAsia) to enter new countries with very low LCC penetration rate, such as Taiwan, Indonesia, China and Japan.
The recent partnership of AirAsia with the Japanese airline ANA underlines the possibilities of this strategy. LCC
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6. penetration within Japan is only 9.1%, far more than China with 6%, Indonesia with 5.2% or the empty market in
Taiwan with 0%. Meanwhile, Air Asia X (in which Virgin Group has an ownership position along with Air Canada)
could be used to enter the difficult market in China more deeply. CI teams (AirAsia, Virgin Group, Air Canada)
should be able to share information and knowledge in order to define several scenarios for future collaboration
within China.
3) IPO to finance growth
The construction of the new, world-class low-cost carrier terminal in Kuala Lumpur is expected to be completed
in October 2012. Once built, it will be able to serve over 30 million passengers a year and, with expansions, will
have the capacity to serve up to 45 million passengers a year. By analyzing the forecasted growth of AirAsia as
well as it cost structure (see Appendix 11) we can see than the current economic downturn has increased the
cost of aircraft by 212%, mainly due to the credit crunch. In addition, AirAsia’s ability to finance the expected
growth forecasted is limited because its current structure includes only one publicly listed company that is used
to finance all the capital expenditures for Thai AirAsia, Indonesia AirAsia and AirAsia X. One solution to cope with
this situation of high growth and important capital requirements is to launch IPOs in 2011, especially because
AirAsia X and Thai AirAsia are performing very well in 2011. The proceeds of IPOs could enable AirAsia to buy
new planes and fund growth in order to compete with Singapore Airlines and Thai Airways who will start their
own LCCs in 2011. In order to optimize the IPO the CI team will evaluate the best time for implementing this
strategy. In, addition, the CI team will also evaluate the possible risks that IPO will have on the autonomy of
AirAsia.
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7. Appendixes
Appendix 1
AirAsia Group fleet composition: Q1-2011
Source: http://www.airasia.com/iwov-resources/my/common/pdf/AirAsia/IR/AA_1Q11_Analyst_Presentation.pdf
Appendix 2
AirAsia's extensive domestic and regional network
Source: http://www.airasia.com
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8. Source: http://www.centreforaviation.com/profiles/airlines/airasia-ak
Appendix 3
Malaysian government Tax Incentive
Source: http://www.centreforaviation.com/profiles/airlines/airasia-ak
Appendix 4
Asian countries GDP Forecasts
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9. Appendix 5
Jet Kerosene prices
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10. REVUZ SYLVAIN sylvain.revuz@free.fr 9

11. Source: Centre for Asia Pacific Aviation & US Energy Information Administration
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12. Appendix 6
Top 15 most populated cities in the world (>10 million) are predicted to be in Asia by 2025
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13. Appendix 7
Emerging middle class in Asia
Source: http://www.oecd.org
Source: http://www.adb.org
Appendix 8
AirAsia has the world’s lowest CASK (Cost per available seat kilometre) with 3.52 USD in 2010.
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14. Selected airlines RASK and CASK: Three months ended 30-Jun-2010 (RASK = Revenue per available
seat kilometre and CASK = Cost per available seat kilometre)
Airline RASK CASK
AirAsia USD 4.87 USD 3.52
Air Arabia** USD 4.88 USD 4.43
Tiger Airways USD 4.61 USD 4.58
JetBlue USD 6.72 USD 6.04
COPA USD 7.37 USD 6.58
Norwegian Air Shuttle USD 7.34 USD 6.82
Southwest USD 7.73 USD 6.84
Vueling USD 7.68 USD 6.91
China Southern Airlines** USD 7.32 USD 6.98
Thai Airways USD 6.76 USD 7.15
WestJet USD 7.95 USD 7.43
Continental Airlines USD 8.25 USD 7.52
Virgin Blue** USD 7.43 USD 7.52
GOL USD 7.99 USD 7.71
Air New Zealand** USD 9.22 USD 7.71
Delta USD 8.65 USD 7.74
US Airways USD 8.93 USD 7.88
United Airlines USD 8.82 USD 8.08
Air Berlin USD 7.76 USD 8.12
Jet Airways USD 8.09 USD 8.20
American Airlines USD 8.51 USD 8.22
Cathay Pacific USD 9.55 USD 8.41
TAM USD 8.54 USD 8.44
China Airlines** USD 10.60 USD 8.49
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15. Air China** USD 9.75 USD 8.60
China Eastern Airlines** USD 9.25 USD 8.63
Malaysia Airlines USD 7.90 USD 8.75
Singapore Airlines USD 9.61 USD 8.92
LAN USD 10.31 USD 9.18
British Airways USD 8.88 USD 9.21
EVA Air** USD 10.47 USD 9.38
Qantas** USD 9.84 USD 9.68
Iberia USD 9.78 USD 9.75
Korean Airlines USD 12.65 USD 9.82
Finnair USD 10.20 USD 10.68
Asiana USD 12.48 USD 10.69
Air France USD 12.05 USD 12.51
SAS USD 15.03 USD 14.18
Lufthansa** USD 16.41 USD 16.49
easyJet USD 6.99 n/a
Source: Centre for Asia Pacific Aviation and company reports
Appendix 9
Asia Pacific domestic LCC penetration by capacity 2011:
Source: Centre for Asia Pacific Aviation & OAG Facts
Appendix 10
Passenger load factor Easyjet, Ryanair vs AirAsia
Selected European airlines intra-Europe passenger load factor and passenger
load factor growth: Mar-2011
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16. AirAsia load factor development: 2Q2008 to 2Q2010
Source: Centre for Asia Pacific Aviation and AirAsia
AirAsia cost structure
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17. Source: Centre for Asia Pacific Aviation & AirAsia
Appendix 11
AirAsia A320 and A320neo aircraft delivery schedule: 2011 to 2026
Source: Centre for Asia Pacific Aviation and Ascend
AirAsia cost breakdown / ASK: 1Q08 vs 1Q09
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18. Source: Centre for Asia Pacific Aviation & Airasia
i
http://www.dailyexpress.com.my/news.cfm?NewsID=76792
ii
http://www.tradingeconomics.com/malaysia/gdp-growth-annual
iii
http://www.centreforaviation.com/
iv
https://www.cia.gov/library/publications/the-world-factbook/
v
http://atwonline.com/airline-financedata/news/chinas-lccs-seek-new-investors-fund-growth-0309
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