Harvard Case - AirAsia Malaysia 2001
"AirAsia Malaysia 2001" Harvard business case study is written by M. R. Dixit, Sanjay Kumar Jena. It deals with the challenges in the field of Strategy. The case study is 18 page(s) long and it was first published on : Jul 5, 2019
At Fern Fort University, we recommend AirAsia adopt a disruptive innovation strategy focused on low-cost, high-frequency air travel in Southeast Asia. This strategy leverages technology and analytics to optimize operations, digital transformation for marketing and customer engagement, and strategic alliances to expand its network. By prioritizing value creation for the price-sensitive mass market, AirAsia can achieve sustainable competitive advantage in the region.
2. Background
The case study focuses on AirAsia, a Malaysian airline founded in 1993, facing financial difficulties in 2001. Tony Fernandes, a former music executive, acquired the struggling airline with the vision of transforming it into a low-cost carrier (LCC) model. He recognized the untapped potential of the burgeoning Southeast Asian market and the growing demand for affordable air travel.
3. Analysis of the Case Study
Porter's Five Forces analysis reveals a highly competitive airline industry in Southeast Asia, characterized by:
- High threat of new entrants: Low barriers to entry due to readily available aircraft and skilled labor.
- Moderate bargaining power of buyers: Price-sensitive customers have numerous options, but LCCs offer a unique value proposition.
- Moderate bargaining power of suppliers: Aircraft manufacturers and fuel suppliers have some leverage, but competition exists.
- High threat of substitutes: Train, bus, and ferry services offer alternative modes of transportation, especially for shorter distances.
- High rivalry among existing competitors: Numerous established airlines and emerging LCCs compete for market share.
SWOT Analysis:
Strengths:
- Entrepreneurial leadership: Tony Fernandes's vision and commitment to innovation.
- Cost-efficient business model: Focus on operational efficiency and lean staffing.
- Technology adoption: Early adoption of online booking and self-service technologies.
- Strong brand image: Positioned as a fun and affordable travel option.
Weaknesses:
- Limited financial resources: Start-up capital constraints and potential for financial instability.
- Operational challenges: Maintaining high service standards with a low-cost model.
- Regulatory hurdles: Navigating complex aviation regulations in multiple countries.
- Competition from established players: Facing pressure from traditional airlines with established networks.
Opportunities:
- Growing Southeast Asian market: Rapid economic growth and increasing disposable income.
- Demand for affordable travel: Rising middle class seeking low-cost travel options.
- Technological advancements: Emerging technologies for route optimization and customer experience.
- Strategic partnerships: Collaborating with other airlines and travel providers.
Threats:
- Economic downturn: Recessions can impact travel demand.
- Fuel price volatility: Fluctuating fuel costs can erode profitability.
- Competition from established LCCs: Aggressive expansion by competitors in the region.
- Safety concerns: Maintaining a safe and reliable service is crucial for customer trust.
Value Chain Analysis:
AirAsia's value chain focuses on minimizing costs throughout the process:
- Inbound Logistics: Negotiating competitive aircraft leases and fuel contracts.
- Operations: Efficient aircraft turnaround times and streamlined operations.
- Outbound Logistics: Direct flights and limited baggage allowance.
- Marketing and Sales: Online booking platform and aggressive marketing campaigns.
- Service: Basic in-flight service and limited amenities.
- Customer Service: Online support and self-service options.
Business Model Innovation:
AirAsia's business model innovation revolves around:
- Low-cost structure: Lean staffing, point-to-point routes, and minimal frills.
- Technology-driven operations: Online booking, self-service check-in, and automated systems.
- Value pricing: Offering competitive fares with additional fees for ancillary services.
- Strategic partnerships: Collaborating with travel agents, hotels, and other airlines.
4. Recommendations
- Expand Regional Network: Leverage strategic alliances with other LCCs and regional airlines to expand into new markets within Southeast Asia. This allows for market development and access to new customer segments.
- Enhance Technology and Analytics: Invest in information systems and AI and machine learning to optimize flight schedules, route planning, and customer service. This improves operational efficiency and enhances the customer experience.
- Strengthen Brand Management: Continue building a strong brand image through digital transformation and social media marketing. This reinforces the perception of AirAsia as a fun, affordable, and reliable travel option.
- Diversify Revenue Streams: Explore product development opportunities by offering ancillary services like travel insurance, airport lounges, and in-flight entertainment. This increases revenue per passenger and reduces reliance on ticket sales alone.
- Focus on Environmental Sustainability: Implement initiatives to reduce fuel consumption, minimize waste, and offset carbon emissions. This strengthens the brand image and attracts environmentally conscious customers.
5. Basis of Recommendations
These recommendations are based on:
- Core competencies and consistency with mission: AirAsia's core competency lies in its low-cost business model and technology-driven approach. Expanding the regional network, enhancing technology, and diversifying revenue streams align with this core competency.
- External customers and internal clients: The recommendations cater to the needs of price-sensitive customers seeking affordable travel options while also improving the experience for internal clients, such as pilots and cabin crew.
- Competitors: The recommendations address the competitive landscape by expanding the network, leveraging technology, and differentiating the brand.
- Attractiveness: The recommendations are expected to increase revenue, improve profitability, and enhance market share.
6. Conclusion
AirAsia's success in 2001 was a testament to Tony Fernandes's visionary leadership and the company's ability to leverage disruptive innovation to capture the growing demand for affordable air travel in Southeast Asia. By focusing on value creation for the price-sensitive mass market, AirAsia established itself as a dominant player in the region.
7. Discussion
Alternative strategies include:
- Vertical integration: Acquiring or partnering with ground handling, catering, or maintenance services. This could potentially reduce costs but carries significant financial risks.
- Mergers and acquisitions: Consolidating with other LCCs to gain market share and economies of scale. This requires careful consideration of regulatory approvals and potential integration challenges.
Key assumptions include:
- Continued economic growth in Southeast Asia: A decline in economic growth could negatively impact travel demand.
- Stable fuel prices: Fluctuating fuel prices can significantly impact profitability.
- Effective implementation of recommendations: Success depends on the company's ability to execute the recommended strategies effectively.
8. Next Steps
- Develop a detailed strategic plan: Outline specific objectives, timelines, and resource allocation for each recommendation.
- Implement technology upgrades: Invest in new information systems and analytics tools to optimize operations.
- Negotiate strategic alliances: Secure partnerships with other airlines and travel providers to expand the network.
- Develop new revenue streams: Introduce ancillary services and explore potential product diversification.
- Monitor progress and make adjustments: Regularly assess performance against key metrics and adapt the strategy as needed.
By implementing these recommendations, AirAsia can continue its journey of growth and success in the highly competitive Southeast Asian airline market.
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Case Description
This case presents the situation facing Tony Fernandes, the former Vice President of Warner Brothers, ASEAN region, in 2001, who had to decide whether to venture into the aviation business by acquiring an existing airline or drop the idea altogether. Fernandes was interested in starting a budget airline in Malaysia similar to low-cost airlines in the USA and Europe. He and his two close associates presented a proposal to Mahathir bin Mohammad, Malaysia's Prime Minister (PM), to start a low-cost airline. Mohammad rejected the proposal and suggested Fernandes to consider buying an existing airline. Conceptually it helps the participant to build the concept of entry through acquisition mode as opposed to entry through own creation. In the larger context, it involves the participants in evaluating a strategic opportunity for a new entrant.
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