Airasia X: Can the Low Cost Model Go Long Haul?

Case 2 study: AirAsia X: Can the low cost model go long haul?

Chastity Cabreja, Catherine White, Chukwuemeka Efidi and Yang Wang

Mercy College

MBAA 602 Managerial Economics

AirAsia was the first successful low cost airline in the Southeast Asian region. This airline was launched in 2001; with negativity from analysts, who thought it was a bad time for the global aviation industry. The Asian airline industry was said to be different from the industries of the United States and Europe as airline passengers in Asia looked on air travel as a luxury, and expected to be pampered by the airlines. For this reason, analysts thought that no-frills travel would not appeal to them. In addition, Asian countries had a great amount of red tape, which made it difficult to start any new venture, least of all, an airline industry. Major national airlines in most of the countries also enjoyed government backing and were too powerful to allow competition to flourish. Therefore, AirAsia was greeted by a large amount of skepticism.

Despite this, AirAsia managed to develop a successful business model. It became the first successful low cost airline in the Southeast Asian region. According to analysts, AirAsia's main appeal was its low fares. By offering fares that were a fraction of what major airlines charged, people who could not afford air travel began to fly AirAsia; which significantly changed the dynamics of the Southeast Asian aviation industry. Within the next six years of operation, AirAsia’s airline industry grew comprehensively; spinning off several regional subsidiaries. Thus, in 2007 AirAsia X was created as a franchise of AirAsia, with a legal separate corporate entity.

The general environment in the global airline industry

Over the past decades the industry has been characterized by intense competition, partial privatization of state-owned enterprises, consistent financial losses, and consolidation of legacy carriers into three global alliances (One World, Star Alliance and SkyTeam). There were low cost, low-fare carriers, first in North America, then Europe and most recently Asia.

After 9/11, the Unites States experienced many years of losses, and low-fare providers started to take market share. Europe followed a similar pattern with US market and many of the larger, full-service carriers could no longer compete.  Since inception, AirAsia has been developed on a low cost model, therefore they were able to survived and expanded when other competitors like Hong Kong base Oasis and Zoom ceased operations.

The success of AirAsia’s grow and expand  

AirAsia entered the Asian market when there was little completion, because larger carriers did not see any opportunity for the masses to fly. With this knowledge, AirAsia acquired airplane assets at a low cost, as it had limited to no cost from on the ground charges. Also, with cheap labor costs and the absence of unionization in Malaysia, this helps keep human resource costs low.

AirAsia also developed an aggressive marketing campaign with low cost distribution of tickets; a direct model; which excluded all frills and include taxes and fees. Their business model also included aircraft selection, higher utilization of space by maximizing seating capacity, aircraft utilization, customer focus operational simplicity and other unique intangibles.

The change from short to long haul

The broad elements of AirAsia's original business model of low cost strategy, disruptive innovation, growth strategies and strategic renewal had to be revisited as it introduced AirAsia X; and moved beyond short to medium haul service to longer haul service with the purchased the Airbus A330. The industry as well as the competitive environment changed during this expansion because of the adoption of a low cost model, which excluded all extra costs. This new model called for a reduction in the seat size, an expansion of the leg room and lead to premium services without the frills. Also by sharing resources with AirAsia such as mechanics, marketing, and training, made the industry very competitive.  

AirAsia X best leverage and extensive network

X can best leverage the extensive network of their regional sister company AirAsia by establishing a network of regional airports with landing rights; which  help  in the selection of  new and profitable destinations for X. The leveraged of its government relationships as well as the use for its brand awareness was the best for X; who relied on the experience of AirAsia to help identify underserved markets 

Success does come from a low fare concept in a geographical area. There may be more complexities in Europe; however core competencies are developing a low cost travel experience, with limited competition.

Specific offering of AirAsia X long haul service

Various specific offerings were important in developing Air Asia X’s long haul service. Some offerings were adjusted and also newly adopted. X maintained laser-like focus on offering flights at low costs to attract new customers, and developing customer branding and engagement. X’s fares included the seat and all departure and landing taxes and fees which made the calculation of out of pocket costs easy to understand. X’s long haul service also included seat assignments, checked baggage, onboard food and beverages, in-flight entertainment, flight transfers and changes, pillows and blankets, which were all available for purchase separately at a fixed price. This process brought clarity and discouraged the hustle of hidden fees in traditional carriers.