AirAsia: The Sky's the Limit

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DOI: 10.1177/097282010500300104

2006 3: 25Asian Journal of Management CasesRizal Ahmad and Mark Neal

AirAsia : The Sky's the Limit

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This case details the rise and expansion of AirAsia in South-east Asia. The companyemployed a business model for low-cost airlines that was originally developed bySouthwest Airlines in the United States and subsequently employed with great successby European companies such as Ryanair and EasyJet. The case thus documents thesuccessful application of a western business model in a previously unexploited Asianenvironment, and raises issues about knowledge transfer, and the sustainability ofsuch a model in the face of increasing competition and market turbulence. In thisway, this case raises issues of innovation, adaptation, strategy and sustainability withinthe Asian context.Keywords: Low-cost airlines, Budget airlines, Business model, Knowledge transfer,Innovation, Asian entrepreneurship

‘Now everyone can fly’—AirAsia had been drumming South-east Asians to take to theskies by making air travel affordable to the masses. In October 2004, AirAsia successfullyattracted over USD 200 million in fresh capital through an Initial Public Offer (IPO) ofits shares.1 In December 2004, it announced its decision to purchase up to eighty AirbusA320s (Defence-aerospace 2005). Arguably, AirAsia not only enabled many ordinarypeople to travel by air, but also stirred up competition and encouraged the formation ofseveral low-cost airlines in South-east Asia (SEA). The financial market recognized itsimpressive financial performance, and Morgan Stanley Capital International Inc. (MSCI)included AirAsia Bhd’s2 shares, which were listed on the Kuala Lumpur Exchange, in itsglobal index, the MSCI Standard Index Series (The Star Online 2005). By February 2005,

1 Based on the price of RM 1.25 per share for institutional investors (560,407,500 shares) and RM 1.16 pershare for retail investors (140,101,900 shares)—as reported in Airline Industry Information Online(M2 Communications Ltd). 1USD at RM 3.8.

2 Bhd is an abbreviation of the Malay word ‘Berhad’, which means ‘limited’. Bhd is thus used to indicatelimited companies.



26 RIZAL AHMAD AND MARK NEAL

its shares were traded at a 50 per cent premium (RM 1.78) to its offer price (The StarOnline 2005). How did AirAsia achieve such spectacular success?

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AirAsia was incorporated in 1993, with Hicom Berhad and Mofaz Air as shareholders.In 1996, it became Malaysia’s second national carrier and commenced full-service do-mestic operations with two Boeing 737–300s. It initially flew from Kuala Lumpur (thecapital of Malaysia) to four destinations—three in East Malaysia (Kota Kinabalu, the capitalof Sabah; Labuan, the Federal Territory and an offshore financial centre; and Kuching,the capital of Sarawak) and one in West Malaysia (Langkawi, a duty-free island and holidaydestination). In December 2001, Tune Air acquired AirAsia from DRB-HICOM Bhd.3 forRM1 (USD 0.26) and assumed its debt of RM 40 million (USD 10.5 million). The manage-ment team, headed by its CEO, Tony Fernandes, transformed AirAsia into a successfullow-cost carrier and within two years expanded its fleet nearly eightfold to fifteen air-crafts. Exhibit 1 shows the milestones of AirAsia’s progress. By 30 June 2003, despite itslimited operational and financial resources, AirAsia achieved a net profit of RM35 million(USD 9.2 million) on the back of RM 400 million in revenues—a major turnaround froma profit of RM 232,000 (USD 61,000) in 2002 and a loss of RM 19.1 million (USD 5.0 mil-lion) a year earlier. Within three years, AirAsia had built a brand and become a householdname, not only in Malaysia, but also in Thailand, and increasingly in Singapore andIndonesia.

AirAsia’s main operations remained in Malaysia, but it had shareholding interestsin Thailand through Thai AirAsia (a low-cost carrier based in Bangkok, Thailand) and inPT AWAir (a low-cost carrier based in Jakarta, Indonesia). AirAsia operated from fourhubs: Kuala Lumpur International Airport (KLIA) in Sepang near Kuala Lumpur; Senai,near Johor Bahru in the southern part of West Malaysia, close to Singapore; Don MuangAirport (DMA), near Bangkok, Thailand; and Soekarno–Hatta International Airport, nearJakarta, Indonesia. Exhibit 2 shows the air routes of the AirAsia group. Exhibit 3 providesa profile of the AirAsia group; and Exhibit 4 details income, cost of sales and expenses.

3 DRB-HICOM was the result of a merger between two companies, DRB and HICOM.



AIRASIA: THE SKY’S THE LIMIT 27

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Low-cost air travel was not a new phenomenon. Approximately 25 per cent of the domesticdeparting passengers in the United States of America (USA) and Australia travelled bylow-cost carriers. In South-east Asia, there was thus room for low-cost carriers to increasetheir market share. A low-cost carrier, as the name suggests, was run on the principle ofminimizing the costs of operations and maximizing sales revenues. Cost minimizationwas the core business principle that drove the business. This business principle did notimply that the products of a low-cost airline were always the cheapest in the market orthat its products were of low quality. ‘Low-cost’ as a business principle simply emphasizedthe need to keep operating costs low. A low-cost business may have used high technologyand costly equipment. The product proposition that low-cost carriers offered to customerswas ‘value’, by delivering basic product functionality, that is, a cost effective means oftransport. Carriers or airlines that adopted this principle included the ‘original’ low-costcarrier, Southwest Airlines (USA), as well as Ryanair (based in Ireland) and EasyJet (basedin the United Kingdom).

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AirAsia was the first low-cost carrier in South-east Asia. In Malaysia, MAS (MalaysianAirline System, the national airline of Malaysia) was AirAsia’s main competitor. MASwas a full-service carrier that provided multi-class scheduled services to a network ofmore than 100 domestic and international destinations. It provided complimentary in-flight meals, a frequent-flyer programme, and airport lounges for business and first classcustomers. In the past, MAS had offered ‘Supersaver Fares’ on almost all its routes withinMalaysia. Supersavers enabled passengers to save up to 50 per cent of the usual economyclass fares. On shorter routes, namely Kuala Lumpur to Senai and from Kuala Lumpur toPenang or Alor Star (two cities in the north of West Malaysia), AirAsia was in competitionwith ground transportation such as trains, express buses and self-driven cars. Drivingtime from Kuala Lumpur to these cities took less than five hours. In addition to MAS, theAirAsia group also faced competition from carriers based in neighbouring countries.Thai AirAsia faced competition from Thai Airways International (THAI), Nok Air(a budget airline associated with THAI) and One-Two-Go (a budget airline associatedwith Orient Thai). On certain routes like, for example, Bangkok to Singapore, AirAsiafaced fierce competition from scheduled airlines that chose to exercise their ‘Fifth Freedom




Right’4 to fly and pick up passengers. Along this route, AirAsia was in direct competitionagainst two budget and twelve full-service airlines. Exhibit 5 shows the major players inthe aviation market, including low-cost carriers in South-east Asia. Exhibit 6 comparesAirAsia’s operational data with two of its main competitors, the scheduled airlines; ThaiAir and MAS. Although the cost and revenue per ASK5 for both of these scheduled airlineswas relatively higher than that of AirAsia, the net revenue per ASK of AirAsia was almostthe same as that achieved by Thai Air. Arguably, this shows that a low-cost model canproduce a reasonable, if not better, net revenue than the traditional full service model.

According to the S–A–P Group LLC (an independent aviation consulting company en-gaged by the AirAsia Group), intra-regional passenger volumes in South-east Asia wereexpected to grow at an annual rate of 8.6 per cent per year between 2003 and 2008.6 Fivefactors that were expected to drive the aviation activities in South-east Asia were cited:

(i) A large demographic area: South-east Asia was a large demographic area with arelatively ‘good’ per capita income growth. S-A-P, in its study, found that the numberof air travels (passenger round trips) was positively related to per capita GDP(Gross Domestic Product). Exhibit 7 shows the relationship between per capitaGDP and air travel in selected countries of Asia-Pacific. In South-east Asia, morethan half of the population lived within a five and six hours flying radius fromBangkok and Kuala Lumpur respectively.

(ii) Liberalized aviation industry: Countries in South-east Asia had liberalized theiraviation markets. Thailand and China, for example, agreed to open their skies toeach other’s airlines. Nearly unrestricted airline operations were allowed betweenthe two countries through the ‘open skies agreement’. Additionally, China relaxedits travel restrictions and became more willing to issue exit visas for independentand group travel. Thailand also entered into an ‘open-skies’ agreement with India.

(iii) The geography of South-east Asia: Many parts of South-east Asia were separated bywater and Indonesia had many islands. Surface (land and sea) transportation wasnot extensively developed and low-cost air transport services were an attractivesubstitute for land surface transport services.

4 ‘Fifth Freedom of The Air—the right or privilege, in respect of scheduled international air services,granted by one State to another State to put down and to take on, in the territory of the first State, trafficcoming from or destined to a third State (also known as the Fifth Freedom Right)’—International Civil AviationOrganizations (ICAO).

5 Available Seat Kilometers (ASK) is the total number of seats available on scheduled flights multipliedby the number of kilometers those seats are flown.

6 This was reported in AirAsia’s IPO prospectus.




(iv) Growing numbers of business travellers: Further expansion in the economies ofSouth-east Asian countries and China increased the business activities within theregion. On certain air routes, such as between capital and commercial cities—most notably along the Bangkok–Kuala Lumpur/Bangkok–Singapore corridor—low-cost air travel, when combined with increased frequency and reliable airschedules, was an attractive proposition to business travellers.

(v) Increase in urbanization: There was a strong trend towards urbanization in South-east Asia. Growth in cities and the general population generated higher demand.

What was the potential market size and growth rate for air travel in South-east Asia?This could be anyone’s guess, but the statistics seemed to point towards growth. Themarkets of AirAsia could be seen from many different angles: nationality of travellers,purposes of travel, types of needs (which required different products, for example, excessbaggage and air freight facilities) and destinations that involved intra and inter-countrytravel by people from within the country and abroad. In this case, we highlight AirAsia’smarkets in terms of the countries where potential air travellers are based.

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Malaysia comprised West and East Malaysia, which were separated by the South China Sea.By 12 October 2004, AirAsia operated 322 flights from Kuala Lumpur International Airport(KLIA) to fourteen domestic and eight international destinations (three in Thailand andfive in Indonesia) and another sixty-three flights from Senai to four domestic and twointernational destinations. Malaysia had a total population of approximately 24.3 millionwith a per capita Gross Domestic Product (GDP) of USD 3,905.7 Malaysia’s per capita GDPin 2005, in terms of PPP (Purchase Power Parity) was equivalent to USD 10,449 (Inter-national Monetary Fund 2005). With a relatively high per capita GDP, Malaysians couldafford to travel more frequently. AirAsia had so far managed to get a fair share of domesticpassenger movement within Malaysia. From January 2002 to June 2004, AirAsia’s shareon all routes was 23.1 per cent (1.35 million persons) but this translated into a higher shareof 24.1 per cent on the routes that AirAsia flew. By 2015, the proportion of urban populationin Malaysia was expected to increase to 66 per cent, from a current share of 59 per centof the whole population. Knowing that AirAsia was based in Malaysia, foreign touristsmight consider using Malaysia as their base to travel within South-east Asia. Malaysiawas among the world’s top fifteen tourist destinations, which in 2002 attracted 13.3 millionvisitors (World Tourism Organization 2005).

7 In 2002, based on S-A-P’s report and quoted in the AirAsia IPO prospectus.




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Thailand had a population of 61.6 million and a per capita GDP of USD 2,060. Thailand’sper capita GDP in 2005, in terms of PPP, was equivalent to USD 7,851 (InternationalMonetary Fund 2005). It covered a land area of 513,115 sq km and it offered manytourist attractions (Tourism Thailand 2005). From its hub in Don Muang Airport (DMA),Bangkok, Thai AirAsia commenced operations in February 2004. In the first five monthsof operations, Thai AirAsia carried 380,400 passengers to or from DMA, the majority ofwhich (86.7 per cent) were travelling on Thailand’s domestic routes. Within five monthsof operations, Thai AirAsia managed to build a market share of 11.9 per cent of domesticpassenger movement. Domestic passenger movements at Thailand’s major airports(Bangkok, Phuket, Chiang Mai, Chiang Rai, and Hat Yai) grew at a compounded averageannual growth rate of 10.6 per cent between 1985 and 2003. This growth rate gave ThaiAirAsia a tremendous opportunity to carry more passengers. In the international market,Thai AirAsia was in a competitive position to serve destinations in India, Burma,Bangladesh, Cambodia, Vietnam and Southern China. In 2002, 10.9 million foreign touristsentered Thailand (World Tourism Organization 2005). Moreover, Thailand’s open skypolicy was likely to facilitate airlines in bringing in more foreign tourists.

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Indonesia was a populous country. It had a population of 211.7 million (three and a halftimes that of Thailand) and per capita GDP of USD 817. Indonesia’s per capita GDP in2005, in terms of PPP, was equivalent to USD 3,661 (International Monetary Fund 2005).It had a land area of over 1 million sq km (twice that of Thailand) and was the largestarchipelago in the world, with over 17,500 islands spread in an area between the Asiancontinent and Australia, and between the Pacific and the Indian oceans (Tourism Indonesia2005). Indonesia’s urban population, which was AirAsia’s potential market, accountedfor 43 per cent of its total population (World Bank 2005).

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Even though Singapore had a comparatively small population of 4.16 million, it was amongthose countries with the world’s highest per capita GDP. Singapore’s per capita GDP in2005, in terms of PPP, was equivalent to USD 25,385 (International Monetary Fund 2005).It was a city-state and a well known international destination. More than forty airlinesflew in and out of Singapore (World Airport Guide 2005).

Although AirAsia did not fly into Singapore, travellers could, for about USD 1 (RM 4),take a shuttle bus from Senai Airport to City Lounge in Johor Bahru and then change




to another bus that would take them to Kranji (mass rapid transit (MRT)—a rail service)station in Singapore (Senai Airport 2005).

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Several other untapped markets could also be served by AirAsia. These includedCambodia, Vietnam, Laos, Southern China, Burma, Sri Lanka, Bangladesh, Southern India,the Philippines and even Western Australia. Hubs in East Malaysia, Thailand and Indonesiacould serve destinations in these countries. News clips in Exhibit 8 show that AirAsia ar-ranged to fly to China and the Philippines in April 2005. Thai AirAsia was also planningto fly to seven other southern China destinations, that is, Guangzhou, Naning, Kun-ming,Wuhan, Chengdu, Chongqing and Hankou by the end of 2005 (The Star Online 2005). In2003, China was among the world’s top air passenger markets, registering 21.9 millionpassengers, and that was expected to grow at an annual rate of 12.5 per cent until 2008,according to the International Air Transport Association’s (IATA) forecast (IATA 2005).

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AirAsia targeted markets (destinations) within a three-and-a-half hour flight-time fromits hubs. These destinations covered virtually the whole of South-east Asia. It was estimatedthat approximately 500 million people would be able to travel through these destinations.Short flight-time air routes would enable AirAsia to optimize the utilization of its aircraftsand other ground support assets. AirAsia optimized both the frequency and turnaroundtime (time between arrival and departure). It was one of the airlines that had the world’slowest cost per ASK (Available Seat Kilometers, which is the total number of seats availableon scheduled flights multiplied by the number of kilometers those seats are flown) atUS 2.5 cents.

AirAsia believed that it had six business strengths:

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There was only one class in all AirAsia flights, and the service did not provide free in-flight meals, in-flight entertainment, airport lounges or other amenities. Neither did ithave a loyalty programme for its customers. However, customers could purchase a widerange of items aboard AirAsia flights, such as snacks and merchandise. AirAsia priced itsone-way travel seats based on expected demand and time of booking. On every route, itsfare structure comprised twelve tiers of fares, and offered customers savings depending




on how far in advance a particular booking was made and the level of demand for theseats. Purchased seats were non-refundable and changes, when allowed, involved anadministration fee.

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AirAsia maximized the utilization of the Boeing 737–300, which it operated in a numberof ways. It fitted an additional sixteen seats to the typical 132 seats on a two-class config-uration. It operated on a longer working day, which commenced at 0700 hrs, and it main-tained a low turnaround time of approximately 25 minutes compared to the 45–120 minutesthat was typical of full-service airlines. AirAsia planned its routes and operations so thaton average its aircrafts were used for a 12–13 hour block, compared to the 8 hour blocktypical of full-service airlines. This higher aircraft utilization rate enabled AirAsia tomount five additional round trips per aircraft per week or more than 200 per aircraft peryear. AirAsia also multi-tasked by hiring employees who were capable of carrying outvaried jobs.

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AirAsia negotiated and obtained lower lease charges for its aircrafts, lower rates for long-term maintenance contracts, lower airport fees and lower rates on its insurance fees, be-cause of its high safety and maintenance standards. Employees were not unionized anda large portion of their remuneration was tied to their productivity. Pilots were providedwith incentives to keep flight and operation times to a minimum and to cover as manyflight sectors as possible on a given day. Cabin crews were rewarded for punctuality,availability for duty and standby, and fewer leaves. Ground crew remuneration was basedon both basic salary and productivity-related compensation, which was measured byperformance and commission from the sale of seats, as well as linked to factors such asservice skills, product knowledge, attendance, punctuality and the ability to performmultiple tasks. In addition to basic salary, type-rating allowances were awarded to theengineers in recognition of the individual’s technical qualifications. In the area of infor-mation technology, AirAsia invested in the necessary technology that would not onlyimprove efficiency but also cost less to use. Instead of purchasing software, AirAsia sub-scribed for it on an annual basis, using OpenSkies for inventory and sales management,Microsoft’s Axapta for financial management, the Geneva Optimum Airline Performancefor flight scheduling and crew rostering, and ASPrecise’s Engineering Software Solutionfor managing aircraft maintenance engineering and logistics.




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AirAsia did not issue tickets, and that helped save administrative costs and related ex-penses. It sold its seats through the Internet, its agents, sales offices, mobile phone SMSand a Nationwide Call Centre (NCC). Customers, however, had to pay a nominal surchargeon bookings made through the mobile phone SMS and call centre. Seats sold through theInternet were priced at a discount to seats sold through other channels. By August 2004,the Internet channel accounted for 50 per cent of all bookings/sales. Customers couldalso pay for their seats through credit cards, or through cash at banks, post offices andother third party outlets in various countries, such as mobile telecommunication oper-ators. In addition to this, AirAsia also maintained a network of ‘preferred’ travel agents,‘sky agents’, sales stations and sales offices located at airports and throughout Malaysia,as well as in the countries it operated in. ‘Preferred’ travel agents were those that hadregistered with AirAsia. They maintained a pre-paid account with AirAsia, from whichpurchases were made while customer payments were secured. ‘Sky agents’ did not haveaccounts with AirAsia but they could book and pay for purchased seats with their owncredit cards or the credit cards of their customers. ‘Preferred’ and ‘sky’ agents did notearn any commission from AirAsia, but they were allowed to charge customers for theirservices.

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AirAsia operated a fleet of similar aircrafts, that is, Boeing 737–300s. Simplified mainten-ance (that resulted from using one type of aircraft and engine) and reduced spare partsinventory requirements helped AirAsia to increase cost savings.

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AirAsia’s success in South-east Asia attracted publicity and the group used these oppor-tunities to promote and increase its brand awareness without additional promotionalcosts. It was awarded ‘Superbrand’ status in Malaysia by Superbrands International.

AirAsia continued to find ways to reduce its cost of operations without compromisingsafety and customer service. Like other airlines, fuel was a major component of its costof operations, and AirAsia implemented a number of strategies to keep its fuel costs to aminimum. For example, it hedged its fuel purchases (approximately 83 per cent of itspurchases in the year 2003–04). Whenever permissible, its aircrafts carried minimumfuel, and purchased fuel from suppliers at destinations where it was less expensive.AirAsia paid for its fuel upfront, which gave it bargaining power to obtain better prices. It




also had clear policies and guidelines covering all areas of flight operations that, amongothers, aimed at minimizing fuel consumption. For instance, its pilots took their aircraftsto their optimum height within the shortest period of time and they took straight-linepaths. AirAsia also decreased the overall weight of its aircrafts by eliminating unnecessaryload, such as ovens in aircraft galleys and built-in steps. Its efforts in reducing costs re-sulted in a 50 per cent overall reduction in cost per ASK (from USD 0.050 or ½ cent, toUSD 0.025 or ¼ cent within the four years and three months from March 2000 to June2004). However, during the same period, lower average fares resulted in a 30.7 per centreduction in revenue per RPK, from RM 0.205 (USD 0.0539) to RM 0.142 (USD 0.0374).

In addition to the above, AirAsia prided itself on building a strong, team-focused cor-porate culture. AirAsia’s core strategy involved maintaining low costs while achievinghigh productivity. It also had a proven management team that had been together sincethe company commenced operations in 2002. The Centre of Asia Pacific Aviation awardedAirAsia the title of ‘Asia Pacific Airline of the Year’ in 2003. Since June 2002, AirAsiaemployed over 1,800 people in Malaysia and 322 in Thailand.

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AirAsia’s goal was to establish itself as a leading low-cost carrier in Asia. It had sevenstrategies:

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It believed that its success in attracting air travellers and building customer loyalty de-pended on the ability to continue to offer low fares—fares that were, on average, sub-stantially lower than the published fares of full-service competitor airlines in the countriesin which it operated.

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AirAsia planned to do this by focusing on routes that were under-served by other airlineswithin Malaysia, Thailand, Indonesia and other countries in South-east Asia and China.

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AirAsia considered this as a key strategy because it expected that air travellers would notonly want low fares, but would wish to benefit from convenience in terms of the availability




of flights. It planned to increase the frequency of flights in its established markets, andthose with high growth potential.

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Cost minimization could be achieved by several measures. The first was to encourageair travellers to book their flights online. Second, it would continue to contract out air-craft maintenance services, ground handling and ground support services at airports inIndonesia, Macau and Singapore. Contracts would be awarded through a competitivebidding process or negotiation. Third, it would continue to adhere strictly to its ‘low-costcarrier model’ and leverage its economies of scale to further reduce the per unit cost ofinput by negotiating better terms with suppliers and airports.

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AirAsia regarded its brand as an important asset. It planned to refine its branding strategyand increase brand awareness, particularly in Malaysia, Thailand, Indonesia andSingapore. AirAsia wanted to be ‘the people’s airline’ and its tag line ‘Now everyone canfly’ underscored that objective. It was very selective in choosing its media of commu-nication—it normally used print, supported by radio and outdoor advertising. It also par-ticipated in community and charity projects, and helped to promote local and internationalartists. AirAsia allocated up to 3 per cent of its revenue for marketing campaigns andactivities.

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Despite its low fares, AirAsia emphasized high-quality service that was friendly and per-sonal. This was achieved through effective recruitment and staff training. AirAsiaembarked on initiatives that sped-up bookings and check-ins, improved handling services,and provided rapid and effective responses to customer feedback. It monitored its punc-tuality performance and published it on its website.

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AirAsia used a revenue management system that was geared to optimize revenue frompassenger seat sales. It also worked towards increasing revenues from other sources,such as freight and charter services, holiday packages and hotel rooms. It sold food andbeverages under its own brand, ‘SnackAttack’, and worked towards acquiring exclusive




or more advantageous concessions at airports, particularly those airports where AirAsiacontributed more than 50 per cent of the total traffic. In addition, AirAsia also worked inalliance with other organizations. It teamed up with RHB Bank in Malaysia to launchAirAsia Credit Cards; and with Singapore’s DBS to issue debit cards, credit cards andcharge cards bearing the AirAsia logo. In its efforts to attract corporate customers, AirAsialaunched ‘GoCorporate’—a product, which offered services to companies that purchasedmore than 500 point-to-point sectors a year. Corporate customers not only enjoyed costsavings on fares, but also flexibility and convenience when they chose to purchaseAirAsia’s fully flexible fares. In addition, AirAsia’s system allowed companies to trackand manage their employees’ travel details. Advertising was another source of income.‘TIME dotcom Berhad’, for instance, paid RM 800,000 (USD 210,000) to use AirAsia aircraftsas its ‘flying billboard’ for three years. Other revenues came from excess baggage fees,administration fees, and cancellation charges.

There were a number of risks faced by AirAsia, particularly increased competition.Aircraft maintenance costs could also increase and there was a risk that its ground supportservice contractors might not be able to deliver services that were integral to its inter-national business operations. For the year ending June 2004, fuel costs accounted for ap-proximately 31 per cent of AirAsia’s cost of sales. Its ability to contain this cost wascrucial to its future success. AirAsia relied on the Internet to minimize its distributioncosts, but the group’s primary markets, particularly new markets in Thailand andIndonesia, had low Internet penetration and credit card usage. Historically, South-eastAsia’s economy had experienced economic upturns and downturns, as well as currencydepreciations and appreciations. A recurrence of economic upheavals in the South-eastAsia regions was potentially devastating. Finally, yet importantly, demand for air travelwas sensitive to adverse news such as terrorism, or the recurrence of illnesses like SARS(Severe Acute Respiratory Syndrome) and the bird flu.

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AirAsia had decided to acquire eighty Airbus 320s through forty purchase obligationsand forty purchase options (Defence-aerospace 2005). Delivery of the new aircrafts wasto commence in 2006. In the light of growing competition from other low-cost carriers,semi-low-cost carriers and full-service airlines (see Exhibit 5), the air travel market had,in general, become more competitive. There were mixed comments from travellers whohad used AirAsia (see Exhibit 8). The airline now faced a number of issues that couldenhance or inhibit future growth. First, it had to identify further opportunities to reducecosts, so that it could continue to offer lower prices. Second, it had to identify new markets,




so that it could increase the number of customers and revenues. Third, it had to find newsources of revenue other than from fares.

The Sky’s the Limit! What further specific actions could AirAsia take?

Please address all correspondence to Dr Rizal Ahmad and Dr Mark Neal at Depart-ment of Marketing, Sultan Qaboos University, Oman. E-mail address: [email protected],[email protected]

Exhibit 1The Milestones of AirAsia’s Progress

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• Lease agreements for two aircrafts are renegotiated resulting in a significant reduction of averagemonthly aircraft leasing costs.

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• AirAsia’s Nationwide Call Center (NCC) at Kelana Square commences operations, enabling guests topay for their reservations by phone.

• Ticketless services are launched.• Internet booking and on-line payment services commence operations.• Fleet expands to four Boeing 737–300 aircrafts by leasing two additional aircrafts.• Operations at Kuala Lumpur International Airport (KLIA) commence.

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• Fleet expands to eleven aircrafts, nine of which are leased and two of which are purchased.• IDBIF Malaysian Investments Ltd, Crescent AirAsia Investments II, Ltd (CAAL) and Deucalion Capital

II Ltd (DCL) acquire a 26 per cent shareholding for RM 98.8 million.• The world’s first airline booking by SMS from a guest’s mobile phone is introduced.• AA International Ltd (AAIL) forms a joint venture with Shin Corporation8 to invest in Thai AirAsia.• Operations from Senai commence.• International flights between Kuala Lumpur and Thailand begin.

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• Fleet expands to twenty-four aircrafts (of which sixteen aircrafts are operated by AirAsia, four leasedto and operated by Thai AirAsia and four are expected to be in operation, two in Malaysia and two inThailand, by the beginning of November 2004) of which eighteen are leased and six are purchased.

• Thai AirAsia, managed by AirAsia, commences operations with flights to Chiang Mai, Phuket, Hat Yai,Khon Kaen and Singapore.

8 Shin Corporation: a Public Limited Company based in Thailand.




• AirAsia commences international flights to Indonesia.• AirAsia acquires a 99.8 per cent interest in AA International Ltd.

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The Group and its CEO, Tony Fernandes, have received the following awards and accolades:

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� Asia Pacific Airline of the Year 2003 by the Centre for Asia Pacific Aviation, an independent privateaviation consultancy company.

� Air Finance Journal’s Development Airline of the Year 2003.� Top 100 Company, CIO 100 2004, by CIO Asia, a subsidiary of International Data Group.� www.airasia.com voted as the most popular website for online shopping in the 11th Malaysia Internet

User Survey conducted by AC Nielsen Consult.� Awarded Malaysian SuperBrand status by SuperBrands International based on an evaluation by profes-

sionals from the branding and media industry and, more importantly, results from a consumer evalu-ation from a regional study conducted by SuperBrands International.

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� Emerging Entrepreneur of the Year 2003, Ernst & Young Entrepreneur of The Year Malaysia 2003.� CEO of the Year 2003, American Express Corporate Services & Business Times.� International Herald Tribune award for the Visionaries & Leadership Series in 2003.

Source: AirAsia’s IPO prospectus, 2004.




Exhibit 2The Air Routes of AirAsia Group as of 12 June 2004

Source: AirAsia’s IPO prospectus, 2004.




Exhibit 3Corporate Structure of AirAsia Berhad

Notes: (1) Operating company for ‘Go Holiday’ and ‘Get A Room’(2) Effective July 1 2004, the Company will equity account for Thai AirAsia’s results (Please

refer to Section 13.2.7 ‘Management’s discussion and analysis of financial condition andresults of operations—Results of Significant Associate’).

(3) Thai Crunch Time is effectively 49.4% owned by the Company(4) Leasing entity

No. of aircrafts AirAsia operates as of 30 June 2004: 13.

No. of employees as of 30 June 2004: 1,382. This includes AirAsia’s cabin crew and pilots seconded(loaned) to Thai AirAsia and crunch time employees.

[Thai AirAsia has 436 employees including Thai AirAsia’s cabin crew and pilots seconded to AirAsia.Additionally, AirAsia and Thai AirAsia have arrangements for sharing and/or loaning their pilots andcabin crews to each other, as when that becomes necessary].

No. of destinations: 28 (18 domestic and 10 International). In addition, Thai AirAsia serves 10destinations (7 domestic and 3 international destinations).

No. of hubs: 2 in Malaysia. (Thai AirAsia has a hub in Bangkok).

Source: AirAsia Berhad IPO prospectus, October 2004, p. 66.




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Exhibit 5Major Players in the South-east Asia Aviation Market Including Low-cost Carriers

Current Low-cost Carriers and Low-fare Carrier Market Shares (Estimated)Departing Seats

as at June 1, 2004

Domestic Activity International Activity (a)Country Share Carriers Included Share Carriers IncludedIndia 1% Air Deccan – –Indonesia 21% Lion Air 8% AirAsia, Lion Air, ValuairMalaysia 25% AirAsia 5% AirAsia, Lion AirPhilippines 33% Cebu Pacific Air – –Singapore n.a. – 2% Thai AirAsia, Lion Air, ValuairThailand 20% Orient Thai(b), 2% AirAsia, Thai AirAsia, Valuair

Thai AirAsia

Source: AirAsia’s IPO prospectus, 2004.Notes: (a) within Southeast Asia region, (b) operating as One-Two-Go. n.a. = not applicable

Low-cost airlines in Asia

Thailand: Bangkok Airways, NOK Air, and One-Two-Go.Singapore: JetStar Asia, Value Air, and Tiger Airways.Indonesia: Adam Air, Lion Air, and Citi Link.Philippines: Air Philippines and Cebu Pacific Air.Pakistan: Aero Asia and Air Blue.India: Air Deccan, Air India Express, Kingfisher, and Spicejet.Japan: Air Do, Air Next, Ibex Airlines, JAL Express, Skymark Airlines, and Skynet Asia Airways.

Source: http://www.attitudetravel.com/lowcostairlines/asia/




Exhibit 6Comparative Operational Data on AirAsia, MAS and THAI*

Malaysia Airline System Thai Airways InternationalAirAsia1 (MAS)2 (THAI)3

2004 (as of 2003 (as of 2004 (as of 2003 (as of 2004 (as of 2003 (as ofJune 30) June 30) 31 March) 31 March) Sept 30) Sept 30)

No. of aircraft 13 7 109 99 83 81No. of types of aircraft 1 1 8 9 9 9No. of passengers

carried (‘000) 2,839 1,481 15,375 16,325 19,540 17,048ASK (mil) 3,592 2,086 55,692 54,266 69,830 63,826RPK (mil) 2,771 1,539 37,659 37,653 50,633 44,396Cost per RM 0.094 RM 0.109 RM 0.154 RM 0.163 THB 1.837 THB 1.893ASK USD 0.025 USD 0.029 USD 0.041 USD 0.041 USD 0.037 USD 0.038Revenue RM 0.142 RM 0.151 RM 0.233 RM 0.235 THB 3.014 THB 3.030per RPK USD 0.037 USD 0.040 USD 0.061 USD 0.062 USD 0.061 USD 0.061Revenue RM 0.109 RM 0.111 RM 0.158 RM 0.164 THB 2.108 THB 2.185per ASK USD 0.029 USD 0.029 USD 0.042 USD 0.043 USD 0.042 USD 0.044Difference between USD 0.004 USD 0.000 USD 0.001 USD 0.002 USD 0.005 USD 0.006

Revenue and Costper ASK

Notes: *Exchange rate used = 1 USD = RM 3.8 = THB 49.594.1. Figures were obtained and, when relevant, calculations were based on data published in AirAsia

IPO prospectus, 2004, p. 73. The stated figures were based on AirAsia’s operating information forits scheduled flights to and from KLIA and Senai—its hubs in Malaysia.

2. Figures were obtained and, when relevant, calculations were based on data obtained from MalaysiaAirline Annual Report 2004. (Also available on http://hq.malaysiaairlines.com/mys/eng/about_us/investor_relations/annual_reports/annual_reports.asp, accessed 2 July 2005.) In calculatingCost and Revenue per ASK and per RPK, revenues refers to total revenue; and operating expensesrefers to total expenditure stated under the performance highlights.

3. Figures were obtained and, when relevant, calculations were based on data obtained from ThaiAirways International Annual Report 2004. (Also available on http://www.thaiair.com/About_Thai/Investor_Relations/annual_reports.htm, accessed 2 July 2005). In calculating Cost andRevenue per ASK and per RPK, revenues refers to total operating revenue; and operating expensesrefers to operating costs stated in the account.




Exhibit 7The Relationship between Per Capita GDP

and Air Travel in Selected Countries of the Asia-Pacific

The figure below highlights this relationship for 13 countries in the Asia-Pacific region.

RELATIONSHIP BETWEEN PER CAPITA GROSS DOMESTIC PRODUCT (GDP) AND AIR TRAVELSelect Countries in Asia-Pacific

Per Capita

GDP Total(in Current passenger

Country US$) roundtrips

Australia $ 20,822 1.11Brunei $ 18,151 1.29China $ 989 0.04India $ 487 0.01Indonesia $ 817 0.05Japan $ 31,407 0.55Malaysia $ 3,905 0.42New Zealand $ 14,872 1.53Pakistan $ 408 0.02Philippines $ 975 0.08Singapore $ 20,886 3.30South Korea $ 10,006 0.42Thailand $ 2,060 0.26

Source: S-A-P Group LLC, reported in AirAsia’s IPO prospectus, 2004.Notes: Amounts include domestic and international air travel to/from reporting airports in the countries

shown and may include some transfer passengers. Roundtrips represent double one-way passangermovements.

Exhibit 8Selected News Clips on AirAsia

AirAsia spreading wings to Philippines

PETALING JAYA: AirAsia will commence flights to Diosdado Macapagal International Airport (formerlythe Clark Angeles Airport) in Manila beginning April 5. According to a statement, daily flights for this newservice would begin simultaneously out of KL International Airport and Kota Kinabalu International Airport.‘By connecting Clark to Malaysia, and linking it to our network of flights serving Thailand, Indonesia, andMacau, AirAsia is indirectly bringing the people of Asean closer and thus one step nearer to achieving aborderless Asean policy,’ said the airline group CEO Tony Fernandes. The one-way fare for the Kuala Lumpur–Clark route starts from RM129.99 while the Kota Kinabalu–Clark service will start from RM119.99. Seats forthe respective flights would be available for sale from March 19.

Source: The Star Online (2005), AirAsia spreading wings to Philippines, http://www.thestar.com.my/news/story.asp?file=/2005/3/22/nation/10479833&sec=nation. Accessed 22 March 2005.

2002




AirAsia to fly to Xiamen from Bangkok

XIAMEN: Malaysia’s budget carrier AirAsia will begin daily flights to this Chinese city next month throughits Thai sister company, making it the first no-frills airline in Asia to enter China. The Bangkok–Xiamenroute, starting April 25, is the first in a string of new destinations. Flights to seven cities in southern China—Guangzhou, Naning, Kunming, Wuhan, Chengdu, Chongqing and Hankou—and four Asean countries—thePhilippines, Laos, Cambodia and Vietnam—are due to take off by September. ‘These flights may take offfrom Kota Kinabalu and Penang as well, not just from Kuala Lumpur and Bangkok,’ said AirAsia group CEOTony Fernandes. ‘Coming to China is a huge step. Another major step will be to enter India—but not rightnow,’ he said, adding that Thai AirAsia was offering 8,888 seats at a special launch fare of 388 yuan (RM178)or 1,899 baht for one way. These fares, which exclude airport tax and fees, are valid from April 25 to Oct 29,he told a press conference, after a ceremony to announce the airline’s entry into China, here yesterday.Fernandes said the company had secured most of the aircrafts required for its new routes. On the company’sinroads into China, he said: ‘The market is right, the airport (Xiamen) is right, Thai AirAsia is strong.’

Source: The Star Online (2005), AirAsia to fly to Xiamen from Bangkok, http://archives.thestar.com.my/last30days/default.asp?Query=airasia&NewSearch=True. Accessed 21 March 2005.

AirAsia considers flying to Darwin from Kota Kinabalu

AirAsia and Australia’s Northern Territory officials are willing to hold talks on flights between Sabah andDarwin. ‘We never turn down any offer. We are keeping an open mind,’ AirAsia executive director KamarudinMeranun told Agence France-Presse. Kamarudin said the route between Sabah capital Kota Kinabalu andDarwin in the Northern Territory is within the three-hour time horizon of the carrier. Meanwhile, NorthernTerritory International Trade Director Quentin Kilian told AFP such a link would promote tourism andtrade and help make state capital Darwin a departure point for Australian tourists. ‘We’re certainly interestedin discussing it ...everything hinges on it being a commercial reality,’ Kilian said. ‘The opportunity is verymuch there,’ he added. Northern Territory officials were in talks with a number of airlines about expandingDarwin’s currently limited international reach of direct flights to Singapore, Denpasar in Bali and Bruneionly, he added. ‘What we want to do is open up both trade and tourism links within the near region,’ he said,adding that this could include Malaysia and Brunei. Kamarudin said AirAsia’s Indonesian unit, PTAWAIRInternational (AWAIR), was also keen to launch flights from Bali to Darwin. ‘We can also do the Bali–Darwinroute,’ he said, adding that AirAsia would have to conduct a feasibility study before making a decision.AirAsia operates in Malaysia, Thailand, Indonesia, the Philippines and Macau and will become the first no-frills foreign airline to fly to China next month with daily services between Bangkok and Xiamen in South-eastern China. – AFX-Asia

Source: The Star Online (2005), AirAsia and Australia ready to discuss Kota Kinabalu–Darwin flights,Wednesday 30 March 2005. http://biz.thestar.com.my/news/story.asp?file=/2005/3/30/business/10543154&sec=business. Accessed 30 March 2005.

Passenger opinions

AirAsia—by Wouter Gijs

5 August 2004We used AirAsia on 3 internal flights. Booking was done through the internet which was swift and correct.At the airport, you just show the booking printout and the passports. You get a flimsy boarding pass lookinglike a supermarket bill. They are serious about overweight luggage because you are allowed just 15 kg—but




the extra charge is just 50 baht /kg. Airplanes are modern Boeing 737’s. One class configuration, all leatherseats. Seat pitch is narrow. Families with children board first. The seats are not allocated. Drinks andsnacks (and even AirAsia souvenirs) are sold at economical rates. Toilets are clean, the airplane is cleanenough. Staff is friendly and correct. Prices were 300 baht to Udorn and 500 baht on the Phuket stretch.These prices seem to have increased a bit recently. Be aware about the fact that AirAsia doesn’t guaranteeconnections on their own flights. You have to get out of the airplane and check-in again for the next flight.This forced us to take a Nokair ticket on the Phuket–Bangkok–Udorn Thani stretch—otherwise we wouldhave had to wait 5 hours! AirAsia advertises itself as ‘now everyone can fly’. It is very economical and thequality is there. Good alternative from Nokair and Orient Thai (and Valuair on the Singapore stretch forvisa runs). Each flight the plane was full. Each flight had a small departure delay of about 10–20 minutes.But arrival times were almost correct. You can book by phone, internet and also at regional small offices.Domestic terminals of Bangkok, Phuket and Udorn Thani are small and convenient.

AirAsia—by K. Kwan

18 September 2004I’ve flown with AirAsia a few times. Their airfares are the talk of the town and I must agree these are rockbottom prices; hence, this is the main reason I chose to fly with them. Services rendered, on board andground, are comparable to more established airlines. Their call centres for ticket bookings are efficient andhelpful. However, I’ve noticed that AirAsia has one blatant flaw that’s given the airline immenselybad publicity. This airline will simply postpone or cancel a scheduled flight at the very 11th hour. Most ofthis occurs either during when its patrons are on their way to the airport or during check-in. I’ve experiencedthis ‘stunt’ twice myself and it messed up one of my family vacations. No apology was given, they willsimply put you in the next flight out. And when I questioned them about the incident, the check-in staffsimply replied that they’ve sent a text message to my mobile to inform me about the delay. I was given nooption but to accept this unacceptable explanation and then tortured myself by waiting for a few morehours for the next flight. I really hope that AirAsia can seriously look into this matter, as people hate itwhen their trip itinerary is ruined, be it a vacationer or a business traveller.

AirAsia—by Stephen Blakey

5 January 2005Despite sending frequent emails to AirAsia since December 1st, requesting information on a specificscheduled routing for April 2005, I have still not received the courtesy of a reply or an acknowledgementfrom them. This draws into question how customer focused they may be in other areas as well and I wouldtherefore be very wary of booking with them.

AirAsia—by Al Patok

28 January 2005I’ve flown AirAsia around 10 times, international, domestic Malaysian, and domestic Thai, including justlast weekend (BKK–UTH–BKK for less than US$30 return). I have usually been quite happy: the value formoney is amazing by any standard. Usually flights depart on time and everything goes like clockwork, butlike all low-cost carriers, the tight scheduling can cause problems: a single mechanical problem (even on adifferent plane) can cause multi-hour delays to cascade through the schedule for the rest of the day. Don’ttake AK/FD if you have a tight connection to catch, but for leisure travel it’s more than OK in my book.




AirAsia—by Paul Hotchan

2 February 2005I flew AirAsia from MFM (Macau)–KLIA–MFM on the 27th of Jan. The reason why I chose this flight isbecause it’s timings allowed me to have two full days in KL for meetings whilst only staying one night.Make sure you get an early check-in from your hotel! Outbound from Macau, the flight left bang on time.Very competent and personable cabin and flight crew. Full of smiles and laughs which was surprising asthey were turning around after a 4 hour flight from KUL. Hot meals (Nasi Lemak) were available forpurchase, in addition to the usual drinks & snacks. Noticed that the majority of passengers were mainlandChinese who probably expected a full service airline—many of them asked for blankets, and were surprisedto see a menu with prices. Return flight was a different story however. Flight delayed over 45 minutes dueto technical problems. Boarding was very confused and chaotic as there was a flight to Kuching departingafter us from the same gate. However, the Kuching passengers were in the boarding area together with us.The boarding screens showed that the Macau flight was on final call whilst the Kuching flight was not yetboarding according to the monitors—but infact it was the other way round. Many of the Macau passengersboarded the Kuching flight. Once the ground crew realized what was happening, they had to check everyoneon the Kuching flight and this led to a further delay. The crew onboard this flight wasn’t as professional asthe previous flight.

AirAsia - by Karin Ho

23 February 2005I have flown with AirAsia 6 times and suffered no delays yet. Booking through their online website wasconvenient and time saving. I would like to add that since this IS a BUDGET Airline, do NOT expect firstclass bells and whistles service. Paying peanuts and expecting a SIA/MAS full service is not fair to AirAsia.I like the crew’s crisp red uniforms and the Thai AirAsia’s leather seats. Just wish we could meet the pilots.I just returned from Bangkok on Feb 18, 2005 and will be flying to Trengganu on Feb 28. April 25, 2005 willbe my maiden flight to Macao. Thank you AirAsia for providing us with an affordable way to fly.

AirAsia—by Roger Mathastein

7 March 2005Would like to agree wholeheartedly with Karen Ho. Recently flew with my wife from Bangkok to ChiangMai and return. On time both journeys. No faults at all as far as I am concerned. It is a budget airline. Someof the budget airlines closer to home could learn a lot from AirAsia. Very pleasant experience. Would bookagain with absolutely no hesitation.

AirAsia—by Dominik Choy

15 March 2005HKT-KUL and KUL-BKK.9 Both flights departed and arrived on time. Check-in staff was efficient, friendlyand helpful, for a moment you thought it was a non–budget airline. The staff was very efficient in turningthe aircraft around—20 mins back to back. The seats were comfortable enough, no complaint because wepaid only £5 to KUL and £60 to BKK—my fault booked it last minute.

Source: Airlinequality.com (2005), Airline forum on AirAsia, http://www.airlinequality.com/Forum/air_asia.htm. Accessed 24 March 2005.

9 HKT = Hong Kong. KUL = Kuala Lumpur. BKK = Bangkok.




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news/story.asp? File1/2005/2/16/business/10174525 & sec=business, accessed 18 February2005.

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21 March 2005.http://www.icao.int/cgi/goto.pl? icao/en/trivia/freedoms-air.htm



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AirAsia: The Sky's the Limit

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