Company case
Air asia: always a low fare, aways
Humbel origins
Until december 2000, air asia was in insolvent
subsidiary of a deeply indebted malaysian conglomerate. The airline had two
planes and flew to five destinations from
kuala lumpur. Enter 30 year-old tony fernandes, former managing director
of warner music’s malaysian operations. Seeing its potential, fernandes
assembled a small group of investors to buy air asia for 26 cents, and assume
its S$11 million debt (approximately S$1.70 =US$1). Air asia was launched as
asia’s first low fare, no frills airline in 2002, with the mission to make
travel so affordable that, according to its tagline “ now everyone can fly”.
Skeptics scoffed and said the air line would not survive more than six months.
There ware, after all, many barriers in the highly regulated and competitive
airline iindustry. Moreover, a budget airline was a new concept in the market.
A greater way to fly ?
Few are launching now. After only seven months in operation,
the budget carrier repaid all its debts. In 2002, the airline had profits of
S$8 million on sales of S$66 million. Air asia now flies to over 20 cities with
one-way fares as low as S$16 for flights from kuala lumpur to penang-cheaper
than going by bus. In 2003, it car reid 3.1 million passengers, many of whom
had never flown before. (only six percent of malaysians have traveled by air).
Aside from increasing its domestic network, air asia has expanded to singapore,
bali in indonesia, and chiang mai, hadyai, phuket, khon kaen, and bangkok in
thailand.
Air asia’s price have led to e shakeup in the
regional aviation industry. For example, the cost of a singapore-bali round
trip ticket on air asia S$123 (including bus fare to and from singapore to
senai in johor, where air asia flies out of). In contrast garuda charges S$305,
siingapore airllines S$406, and malaysian airline system (MAS) S$654. Indeed,
MAS malaysian’s, national carrier, has slashed demestic fares in half and is
throwing in cut rate hotel rooms to retaiin its domestic market leadership.
Moreover, air asia periodically runs price promotions. In february 2004, for
example, charging one way fares ranging from S$2.60 to S$23.70 on selected
routes.
Keeping prices low
Air asia manages to offer such discount prices by
keeping costs down. It employs cost optimization tecniques such as quicker
turnaround tiimes and flight utilizatin of aircraft. For example, air asia uses
more shallow landing approach to increase the life of its tires, which cost
S$6,000 per set, from 70 to 180 landings. Indeed air asia tooped boeing’s list
for best utilization and dispatch reliability iin 2003. Some 98 percent of its
flights arrived on time. The air line operates with a 25 minute turnaround
time, hence enabling it to launch more flights per day.
It also flies only one tipe of aircraft, operating
13 boeing 737s on a 12 aircraft schedule. This reduces staff training, as well
as operations and maintenence cost. Its fleet its also younger than any of the
big airlines. Air asia offers only economy class, with free seating and
boarding that reduce boarding time. It does not offer complimentary meals or
drink. Instead, passengers can choose to buy such affordable offering as conge,
hot noodels, nasi lemak, and sandwiches for about S$1.80, and beveerages for
S$0.80. chaildren’s meals packs are sold for S$3.15 each. To date, air asia
offers no frequent flayer programs, arguing that these are expensive and target
only a select few. It preferst to use secondary airports like subang, rather
than major ones like the kuala lumpur international airport, as their
procedures are cheaper and less complicated. Intangibles handling systems also
contribute to lower cost and more efficient operations.
Air asia also provides ticketless travel, thus
saving the cost of printing and delivering tickets. Instead, issues bobking
nuber and a flight itinerary with travel details that are e-mailed to customers
after they have made their bookings. Passengers need only bring their booking
number or mention their name and verify their identity during check-in. In
malaysia, tickets may be booked the via internet, using SMS, through airasia’s
call center, or at its walk-in airport sales station, sales offices, or
prefered travel agents. Malaysian passengers can pay with their credit card,
using the online banking service of two lokal banks, or at post offices around
the country. Customer in singapore, brunei, thailand, and other countries may
book via internet or by phone. Singapore passengers may pay by credit card or
at selected post offices, while those of other countries can pay by credit
card.
Less friendly skies
Airasia’s success has compelled full service
carriers to rethink their marketing
strategi and edcoureged other discount carriers to take to the sky. Thuse,
singapore airlines (SIA) ones considered converting itsregional carriers
silkair to a budget carrier. However, it eventually decided to lounch a
“fighter brand” in tiget airlinesto minnimize cannibalizing its premium
offering. Tiger commenced operations in the second half of 2004, flying to
destinations within a four hour reach of singapore. This puts popular tourist
destinations such as bali, and all of thailand, hong kong, and madras, within
reach. It may duplicate some of silkair’s routes, although the latter will
continue to serve as a feeder airline to SIA and will not offer budget fares.
Airasia’s fares are based on supply and demend, with
prices generally increasing seats are sold. Its system tries to predict how
popular each flight is likely to be, and the airline claims not to stipulate
any restrictions to qualify for the cheapest fare. For example, the lowest one
way fare from bangkok to singapore was S$12.65 for the booking period march 8
to 23, 2004 for travel between march 28 and october 30, 2004. However, such
discount seats are limited. Fares are non refundable, and exclude taxes and
fees. Also, no changes in names, dates, or flights are permitted. Such fares
are most often found on midweek travel dates, while those on weekends and
holidays may be higher. Thus, customer on this route may pay fares at three
different levels for flights at different times and days: L fares are pried at
S$48, Q fares at S$63, and M fares at S$71. The fares include an online
discount but exclude
taxes and fees. No conditions are attached.
The way ahead
Airasia has led way in discount in southeast asia.
According to UBS, the region’s beaches and secondary airports make it fertile
for low cost carriers like airasia. “what drives low cost carriers is typically
the leisure market, that is the most price sensitive. Southeast asia has a lot
of beach destination”, says UBS. It is (also) somewhere which has typically
more secondary airports.
Questions:
1.
Describe
and assess the internal and exeternal factors which affected airasia’s pricing
strategi.
2.
What
type new product pricing strategy did air asia employ ? explain
3.
Discribe and evaluate the price
adjustment strategies that airasia appears to use.
4.
Characterize
the response to airasia’s pricing strategy by its regional competitors.
5.
How
should airasia respond to its competitors in the discount airlines market?
Evaluate its package dael corporate market initiatives and recommend other
marketing strategies for the airline.
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