Air Asia Business Strategy

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					Table of Contents

Introduction……………………………………………………………………. 2 Air Asia Current Business Strategies…………………………………………..3 Possible Alternative Strategies Evaluation……………………………………. 7 Air Asia Resources Evaluation………………………………………………. 11 Possible Future Strategies For Air Asia Indonesia…………………………… 12 Air Asia Indonesia vs. Adam Air…………………………………………….. 14 Targets For Achievements of The Strategies………………………………… 16 Appendix……………………………………………………………………... 17 Bibliography………………………………………………………………….. 18

Introduction

Air Asia Indonesia is an originally Malaysian airline company, which started to operate in Indonesia in year 2006. The report is about Air Asia Indonesia and strategies to make it a major player in the Indonesian airline market.

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Air Asia Current Business Strategies

Air Asia wants to be the lowest short-haul airline in every market it goes in. To achieve the goal, it has some strategies such as lean cost structure, different ways of promotion, keeping safety, satisfying guests, and developing human resources (AirAsia.com, 2007, Internet).

Air Asia always tries to keep the operations simple and efficient to keep the costs low, for example by simple and efficient online ticket booking. According to Fu Sen, an ex employee of Awair – the airline company bought by Air Asia, the tickets that have been booked online can printed by the customers or the customers can just remember the booking code and show their identity card for checking-in, so Air Asia can also save some amount of money that it should spend on thick ticket material, like what other airlines do, which cost approximately IDR 5000,00 each, and on ticket printing which may cost more money.

Another Air Asia’s way to save costs is not to provide food and drinks on the plane, as the goal of the airline is just to ‘move someone from one to another place’ cheaply. It sells food, snacks, and beverages, on the plane, so customers who want to eat or drink can just buy what they want. By implementing this strategy, Air Asia can gain profit from the sales of the food and beverages because it sells the products for higher prices than supermarket or wholesaler prices.

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A source said, Air Asia Indonesia may do retrenchment by cutting day-to-day cost, such as providing only drinking water in the office and not coffee or tea. Providing coffee or tea cost more because coffee or tea also needs sugar or creamer to drink with, so cutting cost on drinks may be possible. Employees who want to drink coffee or tea might bring it from their homes.

Fu Sen said, Air Asia also tries to keep the costs low by recruiting only numbers of workers needed and selecting only capable and hard workers, so each worker will have works to do and the company does not have to pay workers who do not work efficiently. The company also gives multiple task to some of the employees, for example, Air Asia does not hire cleaners to clean used planes that stop in airports. Instead, the stewardess or stewards of the planes have to clean the used plane. So, other than saving another amount of money, it also can make maximum use of the human resources available.

Air Asia does promotions by television, in tabloids, and in the newspaper, but other than that, Air Asia also promote the brand by sponsoring The Amazing Race Asia along the show and to have a sponsorship deal with Manchester United (MU). By having the sponsorship deal with Manchester United, Air Asia tries to attract loyal MU fans in Asia to travel with Air Asia (AsiaTravelTips.com, 2005, Internet). It also send newsletter by email to registered customers to inform free seats promotion for flights to some cities in Indonesia such as Surabaya, Bali, and Lombok.

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One of the characteristics of no frill airlines is to do fuel hedging program, where advance purchase of fuel at fixed price for future delivery is done to anticipate rises in prices (Wikipedia.com, 2007, Internet). Rises in prices will hit oil prices at the first time because it is the most important material in most industries.

Air Asia also maintains the safety of the airplanes by complying with the highest International Aviation Safety Standards and practices. To guarantee the safety of the airplanes, all Air Asia’s airplanes machines are taken care by GE Engine Service since July 2002 for 5 years. Air Asia also has a US$ 3 million partnership with Volvo Aero who will provide plane structure and machine spare parts for all Air Asia planes (AirAsia.com, 2007, Internet). So, for customers who want cheap but safe flight can choose Air Asia, because even though the ticket price is cheap, the safety is guaranteed.

graph 1 source: airasia.com

For airplanes that are parked in the airport, airline companies have to pay hourly rated fare. To save some money from paying airplane-parking fare, Air Asia tries to keep the flight schedule efficient and on time. The planes only stop for approximately 25 minutes

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for cleaning, so everytime the airplanes stop in the airport, the plane will be cleaned before the passengers come into the plane, and the airplanes will take off right away.

Air Asia realized that satisfying customers is the key for long-term success, and that is why it always tries to satisfy its customers by flying on time and to be friendly to every Air Asia customers. 90% of Air Asia Indonesia’s flights in May 2007 flied on time (AirAsia.com, 2007, Internet).

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Possible Alternative Strategies Evaluation

There are three types of strategies that Air Asia can pursue in order to be a major player in the Indonesian airline market. They are substantive growth strategy through diversification, limited growth strategy through market penetration or market development, and retrenchment.

Diversification Diversification is when the company is selling new product into new market. Diversification is a risky strategy and the company has to be sure and well prepared before doing diversification because diversification strategy mostly costs more money than doing limited growth strategy. There are types of diversification such as horizontal, vertical integration, and conglomeration.

Ansoff Matrix source: wikipedia.com

In horizontal diversification, the company will be developing activities that are directly complementary to a company’s present activities. Air Asia has done horizontal diversification while entering Indonesian market by joining with Awair, which is an

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Indonesian airline company. The joining helps Air Asia to know the condition of Indonesian airline market, so the company will have guidance on how to enter and survive in the market by the help of an experienced partner.

If Air Asia does vertical diversification, for example by selling all the flight tickets without the help of agents and open many Air Asia ticket spot, Air Asia will be able to control all the prices and can sell the tickets for lower price. It will also prevent the customers from having bad service that the agents might give, because Air Asia can maintain and train the staff to be friendly and helpful at all time and it might help Air Asia to maintain customers’ satisfaction. But, it means Air Asia will have to spend some amount of money for building rent and to pay more employees.

By doing unrelated diversification such as conglomeration, Air Asia might spread risk if suddenly airline industry is stuck and have high profit opportunity from the new business. But, to open up a new company, high quality of management and financial ability is needed in order to make it successful, but if the new business is not successful, it might create unstable condition for Air Asia because of loss of money and resources.

Overall, diversification strategy needs a lot of money for building rent or to build new office buildings, to pay more employees, and the company also needs knowledge about the new field that it is going to enter.

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Market Penetration Market penetration is a strategy to grow the same product of the company in the same market. The only way to gain more market share with the same product in the same market is to attract competitors’ customers and get more loyal customers by marketing strategies.

By doing market penetration, the cost will not be as much as doing diversification because the company can finance the strategy by using marketing budget and using the existing marketing department of the company.

Market Development The other ways to gain growth by of limited growth strategy are product development and to sell the product in new geographical market. Air Asia might open up new routes to other places than the existing routes: Bali, Balikpapan, Batam, Kuala Lumpur, Medan, Padang, Surabaya, Palembang, and Pekanbaru (AirAsia.com, 2007, Internet).

Until June 2007 Air Asia airplanes from Indonesia still cannot land directly to Singapore because the Civil Aviation Authority of Singapore rejected the landing rights application. Air Asia airplane from Indonesia landing directly in Singapore is going to bring advantages to both parties, as 20% or 1.92 million of international tourists in Singapore in 2006 are Indonesian tourists (media-indonesia.com, 2007, Internet). Other than Singapore, Hongkong is also a potential destination because there are a lot of Indonesian shoppers who go to Hongkong to shop monthly, or even twice in a month.

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Even though opening up more routes is going to be advantages, it costs more than doing market penetration because more avtur will be needed and may be more capable pilots.

Retrenchment Strategy Retrenchment is when the company tries to cut costs or spending in doing the activities (Oxford American Dictionaries, 2005). Air Asia has been very cost effective and efficient since the first time, so a new possible retrenchment strategy might be difficult to find because every aspect of the company are already operating with the lowest cost possible, except on the safety aspect.

Retrenchment strategy can be done by withdrawal from offering some products, in this case might be a flight destination that is not really profitable. But, Air Asia Indonesia only has 9 destinations to important cities of Indonesia, so even though closing of destination will decrease the expenses of the company, it might bring the customers to Air Asia competitors.

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Air Asia Indonesia Resources Evaluation

To implement a strategy, Air Asia has to review the resources because if the resources are not enough to do the strategy, the implementation will not be maximized and there will be the possibility that the strategy will fail. There are resources to be evaluated before choosing a strategy, such as budgets, human resources, and network analysis (HNC/HND Business Strategy, 2004: 254).

For diversification strategies, a lot of money will have to be allocated to run the strategy. New employees who understand about the new business also need to be recruited to run the new business, and it means there will be another cost for employee trainings and to pay the employees’ salaries. The company might have to build a factory or buy/rent new building for the new business activities. So, diversification strategy is a high cost strategy, which may bring long-term profitability.

For market penetration and market development strategies, less money will have to be allocated to run the strategy compared to diversification strategies. Market penetration and market development strategies only develop existing resources to get more profit or bigger market share, and the budget for these strategies are mostly taken from marketing budget.

Air Asia always wants continuous costs reduction from the activities to get more profit. So, lower cost strategy such as limited growth strategy will be preferred at the moment.

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Possible Future Strategies for Air Asia Indonesia

Limited growth strategies such as market penetration and market development will be the best strategy for Air Asia at the moment. Even though diversification might bring bigger profit to the company, the strategy is usually used when the company is having surplus money that can be invested in other business. Air Asia Indonesia started in 2006 and is still a new airline company that needs to survive in the industry, so at the moment it would be better if the company tries to increase its brand image and get more loyal customers than to open up a new business.

Air Asia may increase its brand image by promoting cheap, on time and safe traveling experience campaign. There are many cheap Indonesian airline companies who are weak on these spots, so the campaign might attract business people, who want to save cost, arrive at the meeting place on time and safely, to try Air Asia. To make the promotion more attractive, if a flight is delayed, Air Asia can give 30% discount voucher that will be posted to all passengers who went on the delayed flight, and they can use the voucher on their next trip with Air Asia.

Promoting on television is expensive but effective to increase the brand image, so Air Asia Indonesia may advertise on the television. Advertising on television is expensive, but efficient to reach everyone in the country. To reduce the cost, the advertisement time may be made shorter and the advertisement may not be aired very frequently. According to Hezal Weisman, a senior art director in DDB Advis, a 30-second prime-time

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advertisement spot in RCTI or SCTV television station costs IDR 30-35 million, while a 15-second spot costs 60% of it. Air Asia may use the 15-second spot and only advertise in holiday time when people are thinking to go traveling.

Air Asia Indonesia might also open up a new route to Indonesian’s favorite international holiday spots such as Hong Kong and Singapore, or educational spot such as Australia. By opening up new routes, even though more resources may be needed, it will enable Air Asia customers to compete with other airlines.

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Air Asia Indonesia and Adam Air – Roles and Responsibility

Air Asia Indonesia entered the market in 2006 while Adam Air has been operating since 2003. Both airlines are well-known low-cost carriers. Both companies have strategies to compete and get bigger market share.

One of the suggested strategies for Air Asia is to create image of safe and cheap airlines. Air Asia has to emphasize cheap price and safety in its marketing campaign, because nowadays what people find is mostly cheap but unsafe flights. So, by proving and maintaining the safety of Air Asia aircraft continuously, Air Asia Indonesia is maintaining its long-term success.

On implementing the strategy, Marketing Department will be responsible as promotion is a part of marketing. It might held press conference to talk about why Air Asia would be the best low cost carrier, or throw events that are managed by outsourced PR companies. Air Asia might also advertise its prices on Television and Newspaper and hire an advertising agency to do the project, to get the best professional result.

Adam Air had done press release to inform developments in the service of the company. Adam Air neglected its responsibility to take care of the safety of the aircrafts and did not maintain the aircraft based on the requirement (Wikipedia.com, 2007, Internet) because it saves a lot of money. As the result, there are some Adam Air accidents that caused death. Since the last deadly accident, Adam Air has been heavily criticized and a lot of

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customers left Adam Air because they are scared that someday the accident will happen to them.

After deadly accidents that happened, Adam Air did a press conference to try to get back customers’ trust by announcing that they are having a contract with an experienced company who takes care and check the airplanes regularly.

The third strategy is to open up new important destinations, such as Singapore, Hong Kong, and Australia. This project will be the responsibility of Product Department as new destinations are considered as product and market development. The department might have to conduct research on other popular destinations that are still unavailable. Hiring experienced research company such as AC Nielsen, to get the best result, can do the research.

To open up new destinations, Finance Department also have to be involved to calculate the costs needed, also Human Resources Department to calculate how many new workers need to be recruited.

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Targets for Achievements of The Strategies

The preparation for market penetration strategy will be started on July 2007 and finished in October 2007. There will be one month for strategy operation review and training the employees for the new programs, and then the market penetration strategy is targeted to start in November 2007. The strategy will be operating for one months, then there will be the first big review.

For opening new international routes, higher-level pilots and stewardess are needed, so Air Asia might have to do selections and trainings to provide the best on-board staff. The company will also have to send landing rights applications to the new international destinations. So, opening new international routes may be long-term strategies so the preparation will probably take at least 2 years.

All strategies should be well prepared before they start to operate.

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Appendix

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Bibliography

AirAsia.com, 2007, http://www.airasia.com/site/in/home.jsp (accessed 19/6/07), ‘InvestorRelation’http://www.airasia.com/site/en/investorRelations.jsp?name=Strateg y&id=ad371afe-ac1e00ae-645fd000-87b34c09&rootId=50ae1200-c0a8c85d1410a850-baad6a43&parentId=ad371afe-ac1e00ae-645fd000-87b34c09(accessed 19/6/07) AsiaTravelTips.com, 2005, ‘AirAsia Scores Sponsorship Deal With Manchester United’, http://www.asiatraveltips.com/news05/227-ManchesterUnited.shtml (accessed 22/6/07) HNC/HND Business Strategy Mandatory Unit 7, (2004), BPP Professional Education: London Media-Indonesia.com, 2007, ‘1,92 WNI Berwisata ke Singapura Selama 2006’, http://www.media-indonesia.com/berita.asp?id=133821 (accessed 23/6/07) Oxford American Dictionaries, (2005), ‘Retrenchment’, Apple Computer Inc. Wikipedia.com, 2007, ‘Adam Air’, http://en.wikipedia.org/wiki/Adam_Air (accessed 23/6/07) ‘Fuel Hedging’, http://en.wikipedia.org/wiki/Fuel_hedging (accessed 18/6/07) ‘Diversification (strategy)’, http://en.wikipedia.org/wiki/Diversification_(strategy) (accessed 22/6/07)

Other Source

Mr. Fu Sen Ex-employee of Awair (Air Wagon International Airlines)

Mr. Hezal Weisman Senior Art Director of DDB Advis

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