Bus 162 Team 6: Building a Successful Budget Airline in Asia: The Ascendance of AirAsia 1.

What is the macro and industry environment in the Southeast Asian region for the entrance of new budget airlines? What opportunities and challenges are associated with this environment? Answer: Competition for the Southeast Asian budget traveler has increased significantly in recent years as more carriers have entered the market. These new entrants are attracted by the large number of potential travelers, and the fact that government regulations in the region have decreased making it easier for companies to operate. However, fuel prices are a concern as are other costs involved in running airlines such as providing ground operations and passenger services. Some airlines including AirAsia are forming alliances to share these additional costs. 2. How might demand for low-fare service differ in the Asia-Pacific region from North America and Europe? Answer: Substantial opportunities have been created for low-fare airlines in Asia by the relatively low income levels in most Asian countries, the availability of alternative modes of transportation, and the low percentage of the population that utilizes more expensive airlines, as well as the increased awareness of the U.S. and European trends favoring lowfare providers. . It is important to note that the Asian markets are substantially more sensitive to fare differentials than the North American market due to the competition from high speed rail. Moreover, although currently changing, Asian markets are still relatively limited in their utilization of the full potential of Internet resources, and still depend on travel agents and other middlemen. In addition, Asian low-fare airlines have a smaller market share, compared to their dominance in Western markets. Finally, in Asia, low-fare airlines are less likely to compete with more expensive providers for the same customers, and are more likely to target individuals who would otherwise not travel by air. This is also in line with the socially stratified nature of these cultures, which is not the case, for example, in the U.S. 3. Compare AirAsias generic strategy (cost leadership, differentiation, focus) with the strategies of other incumbent carriers and with Southwest and Ryanair. How is it similar to and different from the strategies of those carriers? Answer: AirAsia is trying to imitate Southwests successful people-oriented strategies and Ryanairs efficient operational strategies. However, Southwest and Ryanair emphasize those strategies in order to differentiate themselves from a large number of low-cost providers in their highly competitive and relatively saturated American and European markets, respectively. On the other hand, AirAsia is an imitator in a market with limited competition and growing demand from a previously nonexistent market segment. This gives AirAsia the opportunity to be a leader in its own market, while at the same time imitating and integrating business models that showed to be successful elsewhere. The success of such an approach depends on the similarities between the Asian market and those other markets, as well as the ability of AirAsia to capitalize upon the potential

synergies between these strategies. Today, AirAsia is recognized as Asias and perhaps the worlds most successful budget airline. 4. Did Fernandes weigh the range of political, economic, and operational uncertainties and risks when he took over AirAsia? What risks might he have overlooked? Answer: The case indicates that Fernandes was well-aware of most of these risks, especially having worked in a decision making capacity in the same geographic region. He seems to have also taken appropriate steps in seeking professional advice in the low-fare airline industry from Conor McCarthy of Ryanair and others. One area that he might have overlooked is macro political risks - major political decisions likely to affect all enterprises in a country. For example, Several Asian countries continue to face political instability, religious turmoil, currency fluctuations, corruption problems, discrimination issues, and other problems that may have spillover effects on the airline industry. 5. How would you describe Fernandes entrepreneurial strategy? Answer: Fernandes possesses a strong entrepreneurial spirit and the determination necessary to make his dreams come true. He is also flexible, insightful, and responsive to change. However, he seems to also take calculated risks, supported by the appropriate level of research and consultation. 6. How should AirAsia respond to the challenges posed by (a) new low-fare carriers entering the Asian marketplace and (b) low-fare strategies pursued by incumbent carriers? How would you characterize the competitive dynamics in this market? Answer: AirAsia has the advantage of being first-to-market, which gives it an edge over competition in terms of brand image, customer loyalty, and government support. Moreover, AirAsia has an advantage over potential multinational competitors due to its established knowledge of the Asian culture. AirAsia also seems to have the resources, credibility and planning capacity necessary for expansion into international markets and/or going public before many of its competitors. Finally, AirAsia does not face the obstacles of bureaucracy, stagnant organizational culture, and lack of a cost-conscious, efficiency-oriented mentality, prevalent in the incumbent, government-controlled, expensive carriers. The most effective approach for AirAsia is likely to be capitalizing on the above advantages to the maximum, rather than attempting to create hostile competition, especially with incumbent carriers. In order to neutralize the threats of government interference to save the survival of its primary carriers, AirAsia should initiate and maintain positive relations to rally the support of the government. This can be accomplished through finding mutually motivating goals so that AirAsia can be perceived as a contributor to the national economy, rather than a destroyer of the established carriers. 7. How do you think the Asian passenger air transport marketplace will shake out? What lessons can be drawn from the North American and European experience? Answer: It is likely that the Asian market will eventually be very similar to the North

American and European markets. As more low-fare airlines enter this promising market, it will become more competitive, with price dominating all other criteria in consumer decisions and choices. Other promotional tools will be necessary to create and maintain customer loyalty, including mileage accumulation, frequent and timely schedules, convenience, and availability of routes to a wide range of locations. However, these tools will not replace the domination of a price-orientation, but rather supplement it in creating competitive advantage. AirAsia is well advised to start implementing such initiatives sooner rather than later, at least on a pilot marketing basis, in order to find out for sure which ones can help it becomes more competitive as the Asian market becomes more crowded. 8. What is your assessment of Air Asia moving beyond its historic strength in Southeast Asia to Australia, China, India, and Europe? Answer: Air Asia has a proven ability to successfully operate a budget airline, and should capitalize on that ability by expanding into similar markets such as China and India. Expanding into the new markets will not only create a new stream of revenue, it will also help diminish the companys reliance on its existing markets. It could also be noted that the business environment in these other countries may be quite different from that in AirAsias existing markets. Based on this perspective, AirAsia can concentrate in being the market leader in the Southeast Asian region, and avoid possibly draining its resources by diversifying into too many new markets.