Low Cost Airlines influence on ASEAN Aviation Industry

ABSTRACT

Airline Industry is a glamorous industry, may be less than Hollywood but it has its shine; new airlines are coming and leaving the market. The Airline industry is growing everyday even though some flag carriers are filing for bankruptcy, some are lowering their fares and some are merging with each other, creating a biggest airline company. Currently, the airline industry is not in a good state as many say but one region where it has really changed the face of the industry, Asia. it is an important region for the business including Aviation industry since its population growth. Asia’s low-cost carrier (aviation) sector is very exciting for the world right now due to the power and extent of growth opportunities available in its promising markets. A big prospect is seen in China and India who are leading the way, with more positive aspect seen for Low Cost Carriers in Indonesia, Malaysia and Vietnam. This is quite a revolution for the Asian Aviation industry with the introduction of the low-cost Airlines. The rapid growth of these airlines has been extraordinary, and the markets they have captured are beyond expectations. With the increase of low-cost Airlines in ASEAN, this has and will allow more passengers to travel within the Asia-Pacific and even further. In addition, they have been economically sustainable in Asia unlike in Europe and North America where some of the Low Cost Carriers had to leave its ground and discontinue.

INTRODUCTION

1. ASEAN, which stands for Association of South East Asian Nations, which consists of Malaysia, Indonesia, Thailand, Vietnam, Singapore, Philippines, Brunei, Laos and Cambodia. ASEAN was established on August 8th, 1967 in Bangkok by the five original member countries: Malaysia, Indonesia, Thailand, Singapore, and Philippines. In 1984, Brunei Darussalam joined ASEAN followed by Vietnam in 1995, Lao PDR and Myanmar in 1997 and Cambodia in 1999.

ASEAN’s main objective is the stepping up of economic growth, social progress and cultural advancement of its members along with the encouragement of regional peace. Originally, ASEAN was meant to be an association of countries engaged in nation building. The end of World War II saw the emerging of Indonesia, Malaysia, Philippines and Singapore as sovereign independent nations.

The fundamental principle of ASEAN involves mutual respect for the independence and autonomy of its members. Secondly, it holds the right of every member state to lead its national existence from external interference (L. Jones, 2012). It calls for the non-interference in the internal affairs of one another and the resolution of differences in diplomatic approach and it condemns the use of force or threat. Ever since its inauguration three decades ago, no tension has spiraled into armed conflict among the ASEAN member countries due to the political discourse and common understanding they share (J. Haacle, 2009). The members of ASEAN undertake to always option to peaceful processes in the agreement of intra regional disputes and to look on their security as effectively linked to one another and held together by geographic location, common vision and objectives (L. Jones, 2012). Recently, the entrance of Burma into ASEAN and the lack of enthusiasm of ASEAN to resolve Burma’s enduring political chaos (especially the most recent, 2010 elections) have sparked off much debate and controversy among the member states as well as the international community. This is because ASEAN upheavals the non-interference principle in managing its inter-relations, indicating lack of credibility, importance and unity. Therefore, this policy memo will suggest some short and long-term strategies that will re-orientate political and economic change in Burma in accordance to ASEAN’s interest (J. Haacle, 2009). The Framework Agreement on Enhancing Economic Cooperation was assented at the Fourth ASEAN Summit in Singapore on 1992, which incorporated the creation of a method towards an ASEAN Free Trade Area (AFTA). The strategic goal of AFTA is to amplify the ASEAN region’s competitive gain as a single construction unit (Y. Lee, 2011). The removal of tariff and non-tariff barriers among the member countries created to encourage greater economic efficiency, production, and competitiveness. ASEAN cooperation has resulted in greater regional integration (L. Jones, 2012). Within three years from the launching of AFTA, exports among ASEAN countries grew from US$ 43.26 billion in 1993 to almost US$ 80 billion in 1996, an average yearly growth rate of 28.3 per cent. In the procedure, the allocation of “intra-regional” trade from ASEAN’s total trade rose from 20 per cent to roughly about 25 per cent (L. Jones, 2012). Tourists from ASEAN countries themselves have been a big contribution to an increasingly important share of tourism in the region. In 1996, the arrival of 28.6 million tourists generated in ASEAN economic cooperation; it covered the following areas: Trade, Investment, Service Industry, Finance, Agriculture, Forestry, Energy, Transportation, Communication, Intellectual property, Small Businesses, and Tourism (Y. Lee, 2011).

ASEAN’s Total Merchandise Exports By Destination
Region	Percentage of ASEAN’s Total Exports
	2000	2011	2020 Forecast
Intra- ASEAN	22.8	25.3	30.0
China	3.9	11.5	15.0
India	1.6	3.7	6.0
Japan	13.6	10.2	8.0
EU	14.9	10.7	8.2
United States	20.9	9.8	8.5
Middle East	1.9	2.6	3.5

Source: UOB Report: “The Rise of Intra- Regional Trade in Asia

In addition to trade and investment liberalization, regional economic incorporation been pursued through the development of Trans-ASEAN transportation network consisting of major inter-state highway and railway networks, principal ports and sea-lanes for maritime traffic, inland waterway transport, and major civil aviation links. ASEAN wants to promote the inter-operations and inter-connections of the national telecommunications equipment and services. The building of Trans-ASEAN energy networks such as the ASEAN Power Grid and the Trans-ASEAN Gas Pipeline Projects have been developed and will be completed by 2015 (B. Bhasin, 2011). Throughout the paper, it will discuss some of the questions that will lead to the answers of this research:

1) Some in depth report of some of the big players in ASEAN like Malaysia and Singapore, how their growth has helped the region?

2) What are the factors (analysis on marketing strategy), which has made some of these low-cost airlines powerful and strong in this region?

3) Will low-cost airlines in U.S. be able to follow their model?

4) Can these airlines be economically sustainable in future?

BACKGROUND OF ASEAN PLAYERS

An in depth report of some of the big players in ASEAN like Malaysia and Singapore, how their growth has helped the region?

Malaysia is the second fastest growing economy in the South East Asian region with an average Gross National Product (GNP) growth of eight-plus percent per year in the last seven years (A.Tajuddin, 2012). According to Economist on 2011, these are Malaysia’s economic facts:

GDP growth: 4.4%
GDP: $292 billion (PPP: $473 billion)
Inflation: 2.6%
Population: 29.0m
GDP per head: $10,050 (PPP: $16,320)

Since Malaysia’s independence on August 31, 1957, Malaysia has moved from a primary (agricultural) based economy to a more diversified and export oriented one (Secondary and almost tertiary). The Malaysian market is openly oriented with tariffs only with an average of fifteen percent and almost non-existent, non-tariff barriers and foreign exchange controls. The open trade based economy is supported by the fact that the total two-way trade almost amounts to 120 percent of the GNP in 1994. Collectively with a stable political environment, increasing per capita income and the possibility for regional integration throughout the Association of South East Asian Nations (ASEAN) region, Malaysia is an attractive prospect for FDI (Foreign Direct Investment) (A.Tajuddin, 2012).

Until 1993, foreign investment contributed 60% of all investment in Malaysia and the FDI grew strongly in the late 1980s to reach at its highest point of RM17.7 billion in 1992. Then it was followed by a sharp drop to RM 6 billion (US$ 2 Billion) in 1993 due to the world recession, but rose again to RM15.2 Billion (US$5 Billion) in 1994. Malaysia is among the top five recipients of foreign direct investment in the world and while in recent years it has come mainly from other Asian countries, 1993 saw the US as the biggest inward investor. The former Prime Minister of Malaysia, Dr. Mahathir Mohammad’s claim “Malaysia would be an industrialized nation by 2020.

In 2001, the force of the hold back in economic activity was felt by the labor market, particularly in terms of unemployed workers in the manufacturing sector. Nevertheless, given the flexibility given by the labor market, then pay cuts and temporary layoffs were taken as alternative measures by employers; this helped contain the number of workers unemployed. The Malaysian exchange rate remained pegged to the US dollar at the rate of RM3.15 per US dollar in 2001 (A.Tajuddin, 2012). The Malaysian Ringgit appreciated against all major currencies, including the regional currencies along with the strong U.S dollar. The joint exchange rate rule continued to be supported by the strong ground rules of the economy as reflected by the strong current account surplus and the low rate of inflation. Given that the viewpoint for the global economy has improved, supported particularly by positive developments in United States and the expected pick-up in world trade along with a steady upturn in the electronics sector, the Malaysian economy is well placed to strengthen further in the near future (B. Bhasin, 2011). However, some negative aspect risks needed to be addressed as the strength of global recovery was still doubtful and outer demand may not be as strong as it was during the 1999-2000 period. The current economic expansion is taking place in the middle of global excess capacity, particularly in the information and communication technology sector. Malaysia consequently needs to make sure that the economic recovery gathers the momentum and the downside risks are minimized (A. Gangopadhay, 2013).

The Republic of Singapore celebrated its 47 years of independence on August 7, 2012. Situated at the southern tip of Malaysia, Singapore currently holds a population of 5.31 million as of June 2012; this is an increase of 2.5% compared to the year 2011 according to Singapore Department of Statistics.

Population	1970	1980	1990	2000	2010	2011	2012
Total Population (000)	2,074	2413	3047	4027	5076	5183	5312
Resident Population (000)	2,013	2281	2735	3273	3771	3789	3818
Singapore citizens (000)	1,874	2194	2623	2395	3230	3257	3285
Singapore Permanent citizens (000)	138.8	87.8	112	287.5	541	532	533.1
Pop. Density (Total population per sq.mile)	3,5358	3907	4814	5900	7126	7257	n.a
Sex Ratio (males per 1,000 females)	1,049	1032	1027	998.1	974	972	970
Median Age (Years)	19.5	24.4	29.8	34.0	37.4	38.0	38.4

At 704 km² (274 sq miles), it is ranked 189th in the area size and fourth in the world for its population density. During the past four decades, the economy as calculated by real Gross Domestic Product (GDP), multiplied by over 20 times (B. Bhasin, 2011). As a small and very open economy, Singapore long-term continued existence is very much reliant on the capacity to maintain its possible position and remain floating in the sea of global competition (A. Gangopadhay, 2013). Singapore has a strategic advantage for international industry, shipping and trading. The expansion of the Singapore economy depends heavily on foreign capital, foreign technology and foreign workers and foreign companies are very much attracted by an interesting tax system (B. Bhasin, 2011). The foreign investors profit from the fact that they pay lower tax rates than local residents. The Singaporean government has a big influence on the social and economic development and the authorities have organized; for example, training for Singaporean workers in order to obtain training highly motivated residents. This resulted in the fact that insignificant wages raised and unemployment declined (B. Bhasin, 2011). The Singaporean government always supported the “free enterprise” system in order to obtain industrial stability. The starting point of Singapore economy was from a base of abilities in entrepôt trade, petroleum refining and seaport service. Afterwards, it progressed into exporting industrial products based on enormously FDI expansion (A. Gangopadhay, 2013).

Singapore industrial activities were meager for a decade due to a little consumerist expertise and fresh technology spilled over from China and a weak composition of domestic private enterprise. Ultimately, the government performed tightly to develop the business structure and the specific skills needed by intervening enormously of Singapore government (L. Jones, 2012). Strong policy making and its industrial structure encouraged and carried on industrial growth rapidly. Singapore has several port competitors such as their neighbor Malaysian port, Busan port of Korea, and in particular Hong Kong (China) port which is the key Singapore’s competitor. Singapore is very interesting country because they know how to obtain maximum benefits from limited physical resources they have. The small country has only a few labors but value has been add to its populations by education and training as high-skilled workforce and high quality human resources (B. Bhasin, 2011). The limited physical resources cannot limit their economic growing because they can import products from other realms, transform and re-export as entrepôt trade. Entrepôt activity has played a significant role to generate trade balance surplus to that country. Singapore also knows how to exploit from the geographical competitive advantage by using differentiate strategic port of transshipment (A. Gangopadhay, 2013). Furthermore, Singapore realized that FDI is the key factor to increase economic growth so Singapore government offers several effective policies and regulations to attract more foreign companies such as low tax rate and minimum tariff and non-tariff barriers. The high quality government also provides many infrastructures, for example: road, airport and sea- cargo, telecommunication as well as financial infrastructures. Nonetheless, Singapore should keep improving to compete in globalized and sustain its economic growth     (L. Jones, 2012).

What are the factors, which has made these low-cost airlines powerful and strong in this region?

Now, the rising markets are becoming more attractive for multinational companies. Asian consumers are motivated by a composite range of cultural factors and are becoming more interested in pursuing brands to experience their status, to stand out from the crowd or to create new trends of a modern high-class lifestyle in purchasing power of established and  mostly western brands (G. Raghuvanshi, 2013). Particularly the rebellion group of young urban professionals, the so-called “Yuppies” is eager to spend big amounts of their relatively high salary on designer brands. Consequently, many multinational companies, particularly those selling finest fashion, luxurious accessories or sought-after consumer electronics on the Asian market recognize a steady double-digit percentile increase in sales. In fact, the annual income levels in the peer group of “Asian Yuppies” living in tier one metropolises reached from $12.000 in Thailand to $ 18.000 in Taiwan. The income level has raised up to $ 35.000, in Singapore and Malaysia. In short, the higher upper class and a rising middle class group of people, why this is possible for the airline companies. For a few low fare (less than $15 one way), a person can be from Kuala Lumpur to Singapore or even Bangkok and the travel time is only an hour (G. Raghuvanshi, 2013).

Asian carriers comparatively have often offered lower fares compared to their European or American rivals have. In South-East Asia, the “ASEAN-wide open skies” agreement is in the process, but in the rest of the continent, flights are still restricted by mutual agreements. Asian carriers are generally much cheaper than their American is or European rivals are, and there are some great bargains to be had. The low-cost airline industry in Asia is sure to boom the economy in the coming years; it has shown some promising development. There are almost 20 low-cost airlines in ASEAN (A. Daga, 2013).

                                   

MAJOR ASEAN AVIATION MARKETS

COUNTRY	Seats/week	Fleet	LCC Fleet	Population (millions)	GDP	GDP per Capita
Indonesia	1.8 m	298	87	238	$707 bil	$3000
Thailand	1.4m	162	82	67	$319 bil	$5000
Malaysia	1.3 m	192	61	28	$248 bil	$8600
Singapore	1.2 m	158	48	5	$232 bil	$44,000
Philippines	900 K	92	38	94	$189 bil	$3700
Vietnam	600 K	79	7	91	$109 bil	$1200

Source: CAPA (Centre For Aviation and Innovata)

Here are the lists of airlines in ASEAN

• Indonesia: 1) Air Asia Indonesia 2) Lion Air 3) Mandala Airlines 4) Citilink
• Singapore: 1) Jetstar Asia Airways 2) Scoot Airlines 3) Tiger Airways
• Thailand: 1) Nok Air 2) Bangkok Airways 3) Thai AirAsia 4) Solar Air
• Vietnam: 1) Jetstar Pacific 2) Viet Jet Air 3) Air Mekong
• Malaysia: 1) AirAsia 2) AirAsia X 3) FireFly 4) Maswings

On the other hand, AirAsia has other subsidiaries, which are AirAsia Australia, AirAsia Japan and AirAsia India. Jetstar and Tiger Airways has its subsidiaries in other parts of Asia and Australia including; Tiger Airways Australia, Tiger Airways 

Tiger Airways

Tiger Airways covers the whole South East Asia and parts of India that is a very good deal for most passengers. Tiger Airways operates with a fleet of 19 Airbus A320-family aircraft and is committed to increasing its fleet size to 68 by December 2015. Currently, the airline operates flights to 33 destinations across 11 countries and territories in Asia and Australia (refer the map) from its aircraft bases in three locations, Singapore’s Changi Airport “Budget Terminal”, Adelaide Airport in South Australia and Tullamarine Airport in Melbourne (All of them from the budget or domestic terminals). Moreover, it has detail duties, responsibilities and specifications for every position include Flight Dispatchers, Operations Controllers, Flight Safety Manager, Pilots and Cabin Crew (Tiger Airways, 2013).

Tiger Airways and Thai Airways are both infusive airlines in Asia. Recently, Tiger Airways jointly launched a low-cost airline with Thai Airways, which can benefit both two companies to achieve a win-win situation. Tiger Airways which is based in Singapore, choose to co-operate with Thai Airways based in Bangkok, Thailand could further develop the international market in Asia (Tiger Airways, 2013).

Thailand is one of the most famous tourist resorts in the world and tourism is a major economic factor in Thailand. It contributes an estimated 6.7% to Thailand’s GDP. No doubt, more people will choose Tiger Airways to Thailand for its price advantages. This strategic decision started to attract more passengers to Tiger Airways. Compared to Jet star, Air Asia and other low-cost airlines, Tiger Airways is still smaller than its rivals are. This move could increase the overall strength of the market competitiveness in Asia. Just not in Asia but also in Australia, the price of its fares makes it a decent option for most Australians. Tiger Airways is all along with its low-cost airline business model from the day when it established. This is a super excellent chance to advertise its business model and corporate image. Tiger Airways of Singapore has agreed to open their operations in various countries. It is also stepping forward to associate with a Global Distribution System company to strengthen its ticketing system to enable travelers to access to more passengers. The Company recorded an operating profit of $28.0 million and a profit for the year attributable to shareholders of the Company of $28.2 million for the financial year ended 31 March 2010. Revenues grew 28.6% to $486.2 million while operating costs grew only 8.7%, despite the 55.8% increase in passengers compared to the preceding 12 months. Growth in revenues was supported by the combination of passenger seat revenue increasing 19.6% and ancillary revenue growth of 87.4%. Ancillary revenues currently comprise 19.4% of our revenue base, an increase from 13.3% in FY2011. Management continues to be focused on optimizing ancillary revenues, with initiatives such as the carriage of cargo being introduced in FY2011. During the last 12 months from 2011 to 2012, the number of passengers reached at 5,872,000 (A. Daga, 2013).

 

JETSTAR

The Australian domestic airline industry has experienced major changes in the past decade. These changes include, the collapse of Ansett airlines, the amalgamation of Impulse airlines into Qantas and the entry and rapid growth of Virgin Blue, to name a few. These events have subsequently altered the makeup of Australia’s aviation line-up from a four-player airline structure– Qantas Airways, Ansett Australia, Virgin Blue and Impulse Airlines, to just two (Qantas Airways & Virgin Blue). Jetstar’s original purpose was to provide Qantas (Same Ownership) a cost-effective alternative for the provision of domestic flights around Australia while also giving customers a cheaper and somewhat “no frills” option when flying locally. Jetstar’s expansive venture is then obviously significant, relevant to the study of international business’s (any business transaction, which involves a cross-border commercial transaction), and the goals and barriers achieved and endured (Jetstar, 2013).

The external environment of the Jetstar is divided into seven parts and the economic environment of Jetstar plans to slash costs and ticket prices, taking the first step in an alliance that could transform the Asian budget market. The demographic environment, the Jetstar focuses on Asia-Pacific market, because they realize that the Asia-Pacific region is one of the biggest growth markets in aviation. The technological environment, Jetstar investigated jointly procuring new aircraft; cooperate on buying engineering and maintenance supplies. In addition, they operating 60 aircraft are the world’s largest long- haul budget carrier. The competition environment, Jetstar having the partnership so they can go forward and also offer unmatched reach in the Asia-Pacific region, with more routes and lower fares than their main competitors, so those new alliances will enable them to maximize that scale. The government influence the Jetstar when cooperate with other airlines, each country has different legal when to be the partnerships and the taxation laws (J. Ng & J. Chui, 2013).

Jetstar in general grew with a capacity by 19 per cent in 2011 and this includes growth in domestic capacity of 23 per cent, international capacity of 9 per cent and Jetstar Asia of 46 per cent. Overall, the passenger numbers grew 14 per cent against the prior year 2010. In 2012, Jetstar Asia has celebrates its 5th birthday in Japan, and as plans are accelerating to launch Jetstar Japan son and bring low fares to domestic routes in Japan as Japanese has a strong Aviation market and during the Japanese holidays even for domestic flights they have to use Boeing 747s  (subject to government and regulatory approval). Jetstar Hong Kong will be another approach to capture the Asian market and this will become the first low cost carrier in Hong Kong. This new airline would prompt new travel demands as it grows and as the market in Asia Pacific is growing (B. Bahari, 2013).

AIR ASIA

Air Asia, one of the earliest and the most successful low cost carriers (LCC) in Asia, It was launched as a LCC since 2001. Air Asia has so far expanded its network from its base in Malaysia (LCCT) to Thailand, Singapore, and Macau and entered the Mainland China in 2006. Air Asia has climbed the ladders of Asian market from an intra-Malaysia and Thailand market to a “Real Air Asia” in the continent. The reason to start Air Asia was allow more Malaysians to fly. Malaysian Airlines, the official carrier of Malaysia was too expensive and it was hard for regular middle class and working class people to fly. Tony Fernandez, the founder of Air Asia who had nothing to do with aviation; who was in the music industry decided to do something for those passengers. Here, it is Air Asia one of the top Low Cost Airline Company. Air Asia cannot survive without its customer support and monitoring customers’ changing demands and needs and it is significant to its business success (J. Ng & J. Chui, 2013). There are two fundamental strategies for monitoring customer: reactive and proactive. “Reactive” customer monitoring is responding to problems, trends, and any events after they occur. Air Asia identifies customer concerns by listening very thoroughly to customer complaints. Proactive customer monitoring is about anticipating problems, trends, and events before they occur.
Air Asia goal is to establish itself as a leading low-cost carrier in Asia by offering guests a safe, reliable and enjoyable flying experience at an affordable price. Air Asia considers that the success in attracting guests and building customer loyalty will be determined largely by its ability to repeatedly offer low fares. Air Asia website has a great marketing program, its twitter and Facebook which reminds the customers for great deals for the current and coming months.  Fares from Kuala Lumpur to Singapore are only US$8 (one way) and travel time is only 35 minutes. With these kinds of fares, it is hardly to resist for anyone regardless of business or flying for leisure. Air Asia believes that growing the flight frequencies is essential to passengers who choose airlines based on low fares and scheduling convenience.  Air Asia emphasizes high quality and friendly service, in spite of its low fares and low cost carrier model. The group has been able to maintain low insurance premium and maintenance costs. Strives to be honest and transparent in its interaction with third parties including guests, vendors and creditors, and believes that it has developed a reputation for integrity that enhances its ability to obtain low lease rates for its aircraft, engines and other equipment and services. According to Air Asia Income Statement on 2004, Air Asia’s earnings margin before interest and taxes (16.8), return on capital employed (14.6) and return on equity (37.7) accounting ratios were above the industry average – 14.5 is the industry average for earnings margin, 11.6 for return on capital employed and 21.2 for return on equity. The result indicates the company has been able to perform and produce good returns. The increase in current ratio from 1.24 (US$49. 206 million / US$39.643 million) to 5.60 (US$230.024 million / US$41.099 million) also serves as a confident booster to investors and shareholders in that Air Asia’s solvency had strengthened and thus is able to fulfill its debt obligations. In fact, the debt-to-asset ratio in the last 5 years was low and decreasing too. In fact, in 2005, it was merely 0.14, which was comparatively lower than many low cost carriers were. (Business Week, March 15, 2013)

Air Asia’s organizational structure is rather simple and flat as it involves a group of staff in the company reporting to one manager. This serves Air Asia well as the business requires a structure with fewer levels of management to achieve more consistency and cost reduction. In addition, the cost leadership strategy that the company adopted also allows Air Asia to focus more intensely on areas such as in/out-bound logistics, operations, marketing, services and customers. This in turn helps to create synergy and capability to deliver the full spectrum of low cost carrier business.

Air Asia was the first airline in Southeast Asia to utilize e ticketing so that traditional travel agents can be bypassed. With further technologies, Air Asia either made it possible for customers to purchase tickets from post offices or designated bank teller (ATM) machines. In short, Air Asia’s strength is also about the ability to leverage on technologies well and ahead of its competitors to increase sales and lower costs.

Simple and one-liner differentiation strategy of Air Asia is to offer lowest fares without compromising on quality and services. Air Asia has been awarded world 3 star low cost airline according to SKYTRAX. They are not only using their website for their core reason selling tickets but they have integrated it with social networking sites this helps to retain not only the customer’s loyalty but also works as cost effective promotion. Air Asia has its own blogging site and in addition to that has opened a YouTube channel. All these measurement simply locks in the customers because more and more people are spending their time on these social networking sites.

Will low cost airlines in U.S. be able to follow their model?

The big pundits of aviation know the fact it is hard for any airline to follow a complete model of another airline. They might take a portion or some of the theories and ideas of that airline but not completely. Just like South East Asia (ASEAN) there are many Low Cost Carriers in United States like Jetblue, Spirit, Allegiant and Southwest Airlines. Among all of the lost cost carriers in United States; Southwest Airlines is one of the strongest airlines and in ASEAN it is Air Asia. A comparison of both the giants would be a justice and understand the SWOT analysis of these companies will give a better understanding.

Look at the company profile of Southwest Airlines; Southwest is committed to the utmost excellence of Customer Service delivered with a sense of friendliness, individual pride and company spirit. Providing service for last 42 years, Southwest Airlines is the USA’s leading low-fare carrier; it has continued to distinguish it from other airlines and offering a consistent product with excellent Customer Service. It maintains its low fare by flying from/to smaller city airports in the USA with a low landing and departure fees. It uses one aircraft type and so gains effectiveness and efficiency as variety promotes inefficiency; Southwest Airlines is the most productive airline in the sky and offers customers a comfortable travelling experience. SouthWest Airlines offers a very comfortable ride for its passengers with all premium leather seats and plenty of legroom in all of its young Boeing 737 fleet.

Let us do a SWOT analysis on this airline

STRENGTHS

• Best low-fare carrier by standardization of fleet
• Flexible even though unionized – Employees can still negotiate flexible work hours
• Maximizes use of Internet for booking
• Great staff relationships – looks after its staff
• Top class service in its flight for all of its domestic flights compared to the flag carriers’ similar services.
• All similar Boeing 737 fleet which makes it easier for them to operate. All similar aircrafts means only one kind of tools and crew members and pilots. This reduces the cost of operation.

WEAKNESSES

• Conservative growth tactics – also strength!
• Being copied by other airlines
• Limited to 60 plus cities
• Operates mainly its own booking service
• No option of International service like JetBlue

OPPORTUNITIES

• Expansion to other cities
• International flights
• Further improve customer satisfaction and value

THREATS

• Recession: Can cause a huge decrease in air travel
• Fuel price: Higher fuel prices will make them increase fares which will lower the amount of passengers.
• Terrorist attacks: A big threat in the aviation industry. A terrorist attack will automatically lower their load factor in their flights.
• Competitors: JetBlue, Airtran, Spirit and etc. Southwest Airlines are being copied by these airlines
• Operates mainly its own booking service, Can’t be found in any other booking sites and services, which reduces the chance for people to find them. In addition, many foreigners visiting U.S. will be unaware of this airline company.

AIR ASIA SWOT ANALYSIS

• Strengths

Air Asia has a very strong management team, association with governments and some airline industry leaders. This is partly contributed by the diverse background of the decision-making management teams, which consists of industry experts and ex-top government officials. For example, Shin Corp (the family of former Thai Prime Minister – Thaksin Shinawatra’s family formerly owned it) holds a 50% stake in Thai Air Asia. This has helped Air Asia to open up and capture a sizable market in Thailand. Air Asia’s strong relationship with Airbus has managed them to get big discounts for aircraft purchases which is also more fuel efficient compared to Boeing 737 airplanes, many airline companies opt to use it.

The management team is also expert in strategy formulation and implementation and the approach that they have formulated at the early stages was a clever blend of proven strategies by other low cost airlines in US and Europe. They are Ryanair’s functioning strategy (no frills and landing in secondary airport), Southwest’s people tactic (employee comes first) and Easy jet’s branding strategy (linking with other service providers like hotels, car rental).

Air Asia’s brand name is well established in Asia Pacific and besides the normal print media advertising & promotions, Air Asia’s top management also capitalized on promotions through news by being very “ social media friendly” and without restraint sharing the latest information on Air Asia and some of their fare information. They have a strong partnership with other service providers such as brand name hotels and hostels, car rental, hospitals (medical tourism) and Citibank. Air Asia Citibank card has created a unique image among travelers and an alliance with Galileo GDS (Global Distribution System) that enables travel agents from around the world to check flight details and make bookings have also contributed to their string brand name. Air Asia’s local existence in few countries such as Indonesia (Indonesia Air Asia) and Thailand (Thai Air Asia) have effectively elevated the brand to become a regional brand beyond just Malaysia. The links with Manchester United (famous English soccer team) and AT&T Williams Formula One team have further boosted their image to a greater extend beyond just this region.

AirAsia is the leading low cost leader in Asia. With the help of Air Asia Academy, it has successfully created a “low-cost airline mentality” among their workforce. The staffs are very flexible, highly committed, and very decisive in making Air Asia the lowest cost airline in Asia.

The utilization of IT has contributed a lot to their promotional activities (email alerts and desktop widget that was jointly developed with Microsoft for new promotions). Brand building exercise (Over 3 million hits per month and one of the most widely surfed booking engines in the world) as well as keeping the cost low by enabling direct purchase of tickets by consumer thus saving on airline agent fees.

• Weaknesses

Air Asia does not have its own maintenance, repair and overhaul (MRO) facility and it was a good strategy when they first started with only Malaysia as their hub and just few airplanes to maintain. Currently, with few hubs in Malaysia, Thailand and Indonesia, there are 100 airplanes currently owned by the company and another 100 aircrafts being ordered Air Asia have to ensure proper and continuous maintenance of their planes, which will also helps to keep the overall costs low. It is a competitive disadvantage for an airline company not to have its own MRO facility.

Air Asia receives lot of complaints from customers on their service. In Malaysia, a survey of 30 people were done who flies regularly domestic or within the ASEAN region. Obviously, these are Air Asia regular passengers, according to them the biggest concern for Air Asia was delays and secondly about maintenance.  A favorable (good) customer service and management is critical especially when competition is getting forceful.

• Opportunities

The increasing fuel price at the first glance may appear like a threat for Air Asia. But being a low cost leader, Air Asia an upper hand because its cost will be still the lowest among all the regional airlines. Thus, Air Asia has a great opportunity to capture some of the existing customers of full service and other low cost airline’s customers. However, there will be also some decline in overall travel especially by casual or budget travelers depending on their budget and economic situations.

The “ASEAN Open Skies” allowed infinite flights among ASEAN’s regional air carriers from December 2008. This increased the competition among the regional airlines; however, with the “first mover” lead as well as its strengths in management, strategy formulation, execution, strong brand name and “low-cost” culture among its staff, this agreement can be seen as an opportunity. There is also an opportunity to collaborate with other low cost airlines such as Virgin, as they would tap into their existing strengths or economical advantages such as brand name, landing rights and landing slots (time to land).

The population of Asian middle class will be reaching almost 900 million by 2014 (L. Jones, 2012). This will create a larger market and a huge opportunity for all low cost airlines in this region including Air Asia.

• Threats

      Certain charges like airport departure tax, security charges and landing fees are beyond the control of an airline operators and this is a threat to all airlines particularly low cost airlines that tries to keep their cost as low as possible. For example, Singapore’s Changi Airport charges SGD21 ($US16) for every person who departs from Singapore. Air Asia’s profit margin is about 30% and this has already attracted many competitors. Most of the flag carriers in Asia have or been planning to create a low cost subsidiary to compete directly with Air Asia. For E.g., There is firefly airlines created by Singapore Airlines and Garuda Indonesia has created Silk Air.

    From this SWOT analysis, it can be found there are similarities between these airlines but an exact model would not be possible as both of them are in different locations. There are rules, government regulations and customer preference which play an important role in the quality of the airline.

Can these airlines be economically sustainable in future?

In the past Low Cost Carriers have discontinued due to bankruptcy; for example in U.S. there are a lot of airlines which ceased their operations in past like ATA Airlines, Metrojet Airlines, Southeast Airlines and etc. Similarly, in Indonesia it was Adam Air and Batavia Air; in Singapore it was Valuair, even though Valueair is now Jetstar.

The first thing in an airline is safety and security. How well, the airline company takes care of it. Even some of the flag carriers around the world compromises with their safety and security issues like Air China Southern Airlines. Therefore, it is obvious for the low cost carriers to cut down their costs by ignoring some of their safety issues. Union issues, management, corruption and many other issues; like old aircrafts can cause the airline to shut down. So far, with a growing market like Asia with an upcoming middle class there are much potential for the low cost carriers.

CONCLUSIONS

The Asia-Pacific region offers many opportunities for the entrance of new low-fare airlines. Analyst revealed that low fares are often the deciding factors for budget-conscious travelers in Southeast Asia. The Pacific Asia region represents a huge population, which offers low-fare airlines a vast market with promising profits. Demand may differ for low-fare services between the Asia-Pacific region and in North America and Europe. In the Asia Pacific region low airfare is the main driving force for choosing an airline carrier. In European and American customers look for a more traditional airline which   offers factors such as comfort, food, cleanliness, etc… Government airline regulations in Asia prohibit competition to take place amongst airline carriers, allowing the government opportunities to be manipulated and bribed. The manipulation of the government by competing airlines can limit the growth for alternative airlines to offer service to Asia-Pacific regions, leading Asia to have few choices amongst air carriers. The actual main strength of LCC was based in its innovative ways to keep the cost low that was hard to imitate. Air Asia has indicated that synergies between the internal and external factors could develop a competitive advantage. This has allowed Air Asia to place itself to be the market leader in the LCC. In future, there will be more Low Cost Carriers and it will keep on serving the passengers in the Middle Class ASEANs and around the world.

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