In-Depth Integrative Case 2
Can the Budget Airline Model Succeed in Asia?
The Story of AirAsia
Synopsis
In September 2001, Anthony Fernandes left his job as vice president and head of Warner Music’s Southeast Asian operations, one of the most visible and prominent positions in Asia’s music industry. He reportedly cashed in his stock options, took out a mortgage on his house, and lined up investors to take control of a struggling Malaysian airline with two jets and US$37 million in debt. Three days later, terrorists destroyed the World Trade Center.1 Within two years, AirAsia demonstrated that the lowfare model epitomized by Southwest and JetBlue in the United States, and by Ryanair and easyJet in Europe, has great potential in the Asian marketplace. In fact, AirAsia’s success spawned numerous imitators and competitors. Yet questions remain as to whether the low-fare model can succeed and expand in Asia. Even if healthy market demand continues, it is unclear whether the influx of many new entrants will result in a shake-out such as has occurred in North America and Europe, compromising AirAsia’s future in this increasingly competitive market.2
The Rise of Low-Fare Airlines in Asia
Following late on the global trend, low-fare airlines (LFAs) are rapidly emerging across Asia. In 2000, Skymark emerged in Japan, followed quickly by Air Do. Carriers modeled on leading American and European budget airlines also emerged in Thailand (PBAir and Air Andaman) and in Cambodia (Siem Reap Air). In late 2001, AirAsia was relaunched in Malaysia as a no-frills operation. In the Philippines, Cebu Pacific Airways, also expressly modeled on Southwest, has focused on restraining costs by selling online and operating out of secondary airports. India’s first budget airline, Air Deccan, was launched in late August 2003. LFAs have begun to make inroads into a number of Asian markets, but the long-term survival of these carriers depends on their ability to compete with Asia’s traditional, full-service airlines. The prevailing sentiment among some of the Asian majors, expressed by the Asia Pacific Airlines Association in early 2003, is that “no-frill fliers are not a threat to Asian airlines.”
Ryanair and easyJet. Recently, however, the environment changed dramatically. According to Peter Harbison of the Centre for Asia Pacific Aviation, a Sydney, Australia, consultancy, “The key ingredient is liberalization.”3 Air transport liberalization in Asia began in the 1990s when Australia deregulated its domestic market. Virgin Blue was one of the few carriers that survived this initial battle with incumbents, and it has succeeded in establishing its position in the market. New Zealand was one of the first countries to privatize its national flag carrier and embrace airline liberalization. More recently, India and Japan have pursued deregulation of air transport in order to stimulate competition. Elsewhere in Asia, several countries have publicly embraced liberalization in the form of reciprocal access agreements: Singapore, Malaysia, Taiwan, South Korea, Brunei, and Pakistan all have open-skies air service agreements with the United States. In Taiwan and South Korea, liberalization measures in the late 1980s and early 1990s spawned the birth of carriers that are now major players in their countries’ air service sectors, both domestic and international. In Thailand, the domestic market has undergone deregulation, and new private players are looking to expand. Indonesia has witnessed the emergence of a large number of new entrants, following government moves to allow more competition. In India, Pakistan, Bangladesh, Nepal, the Philippines, and Malaysia, domestic markets underwent varying forms of deregulation in the early-to-mid-1990s, and today, despite some glitches, passengers generally experience much greater choice in domestic travel. The People’s Republic of China has also been opening up its air transport market and system. Foreign investors are now permitted to enter joint ventures with, or buy stock of, domestic Chinese airlines. The first outside investment in China was George Soros’s US$25 million acquisition of a 25 percent stake in Hainan Airlines in 1995. China Eastern and China Southern Airlines have also issued shares on international capital markets.4 In Hong Kong, restrictions barring more than one locally based airline from operating on a particular route have been eased. These moves were long overdue in a region that has been resistant to change in the airline sector.
Market Liberalization in the Asia-Pacific Region
Just a few years ago, most observers questioned whether Asia would ever emerge as a viable market for no-frills budget carriers similar to the United States’ Southwest and Europe’s
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Low-Fare Airlines in Japan
Japan was the first Asian country to experience a real boom in both domestic and international travel in the 1960s.
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Since then, Japan has retained the status of the largest air travel market among all Asia-Pacific countries as a result of the combination of its population size and a steadily growing disposable income. Japanese air travel growth rates increased rapidly until the late 1980s, when the market became more mature and reached a plateau in its growth pattern. The total Japanese travel market (both international and domestic) grew by only 6 percent from 1990 to 2000, which indicates that it was saturated with the product offered by the traditional full-service carriers.5 Japan undertook comprehensive deregulation and liberalization in a range of sectors throughout the 1990s, partly as a strategy to jump-start its stagnant economy. One sector that was partly liberalized was air transport. Future growth in air transport could come from the introduction of the new business model represented by low-cost/low-fare carriers. Although the total supply of seats provided by the LFAs in the Japanese domestic market is still very small when compared to Japan Airlines (JAL) and All Nippon Airways (ANA), the two large traditional carriers, the potential for growth is significant as long as new entrants can successfully compete both with the full-service majors and with intermodal competition from high-speed rail. Skymark, Japan’s first real LFA, has pursued a business model similar to JetBlue or easyJet’s differentiated LFA approach rather than the traditional Southwest or Ryanair no-frills, price leadership model. Skymark currently flies to four domestic points in Japan with B767 aircraft. It maintains high-frequency schedules on two of these (seven and three flights a day to Fukuoka and Kagoshima, respectively) and low-frequency schedules to the other two (twice a day to Aomori and Tokushima). The service is basic although all aircraft are equipped with a satellite TV entertainment system. Skymark’s onboard product is further differentiated through offering business-class seats on flights to Fukuoka and Kagoshima. A special “Lady’s Seat” with bigger seats and a selection of women’s magazines is also offered on all domestic routes (10 seats are allocated for every flight). All of these additional features put Skymark closer to a hybrid LFA model. An advanced entertainment system draws parallels with the JetBlue onboard TV model, while the availability of business class and other special seats places Skymark in the same category as AirTran and Spirit in the United States.6 Another distinction from the classic LFA model is Skymark’s charter operations from Tokyo to Seoul every weekend. The charter business is only secondary to Skymark, so it uses aircraft downtime to operate Korea charters at night or early in the morning, thereby maximizing total aircraft utilization. The distribution network includes all channels, such as direct reservation lines, Internet, and travel agents. The tickets for Korea charters can be purchased only through travel agents. Table 1 provides a comparison of the Skymark and AirAsia budget-air models.
Table 1
Comparison of Price and Features of AirAsia and Skymark AirAsia Skymark Price leader: discounting up to 50% off the flat carrier fares Basic: only economy cabin, pay for food and drinks, ticketless, no preassigned seating, no frequent flyer program Acceptable: travel with a smile Selective: Web site, call center, preferred travel agents (60% of sales via Internet) Price competitive: fares are 10–20% below the majors Original/customized: business-class cabin, special “Lady Seats, ” satellite TV, limited frequent flyer program through partnership with VISA and MasterCard Average: positioning as a high-end LFA Selective: Web site, call center, H.I.S. group “parent” travel agencies (Internet sales limited)
Price
Features
Quality Availability
Source: Authors’ calculations.
Low-Fare Airlines in Malaysia
The emergence of the LFA model in Malaysia has been a result of deregulation and of the Malaysian government’s desire to release Malaysian Airlines (MAS) from having to serve its perpetually money-losing domestic routes. Malaysia’s geographical position provides natural conditions that encourage air travel, but only 6 percent of the adult population traveled by air in 2001.7 This low figure indicates an underdeveloped aviation market that could be grown significantly through the introduction of low fares on domestic routes. The policy of highly regulated domestic fares has been long maintained by the Malaysian government.8 Such a policy created many headaches for the management of MAS, which “has reportedly been losing up to US$79 million annually” on its domestic routes.9 The initial success of AirAsia may partly validate the Malaysian government’s role in encouraging a LFA into its domestic market. However, the government-controlled MAS is starting to show concern about that same success. In the fall of 2002, MAS introduced discounted fares on limited seats on domestic routes. After its initial failure, AirAsia was transformed from a money-losing full-service airline into a low-cost, low-fare airline when a new group of investors, Tune Air Sdn Bhd, bought the shares and half the share of liabilities in the original airline in September 2001.10 How did Malaysians react to the introduction of this new business model in their country? The anecdotal evidence points out that they were as eager to embrace it as residents of the United States, U.K., and Ireland were when
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Table 2
Fleet Comparisons Among Asia, North America, and Europe in 2001 Aircraft/ North Region Asia America Europe Wide-body fleet Narrow-body fleet 71% 29% 15% 79% 23% 77%
Source: AAPA, ATA, and AEA.
they were first given an opportunity to travel for a fraction of historical fares.11 Conor McCarthy, AirAsia’s operations director and a former director of operations for Ryanair, has specifically noted that the management of AirAsia has been encouraged by the similarities between the consumer market in Malaysia and in Ireland, Britain, and Germany when Ryanair first entered those markets.12 Internet resources with consumer feedback about travel on Asian LFAs are fairly limited in comparison with similar North American or Western European travel-related Web sites. One traveler offered the following comment on an online discussion site after traveling on AirAsia in March 2003 from Kuala Lumpur to Penang: “It is good to see the nofrills model finally making headway in the Asia-Pacific region. No food, total scrum for the plane at the boarding announcement, crammed seats . . . but for the equivalent of around US$15, you can’t complain. . . . Let’s hope that the governments around the region put consumer interests ahead of protecting state-owned airlines.”13 Table 2 provides a comparison of the types of aircraft in use in major world regions.
The Rise of Air Asia
2001, however, he had tired of the politics at what had become AOL Time Warner and decided to start his own airline. This came as no surprise to those who knew him. Unlike many kids who aspired to becoming airline pilots, from an early age Fernandes had wanted to own his own airline.15 On a trip to Britain, he met Conor McCarthy, Ryanair’s former director of group operations.16 Fernandes had envisioned a low-cost airline competing on long-haul routes. McCarthy encouraged him to focus closer to home. In late 2001, AirAsia was up for sale. Founded in 1996 as Malaysia’s second airline, AirAsia had been beset by problems from the beginning and failed to turn a profit. Fernandes enlisted leading low-cost-airline experts to restructure AirAsia’s business model, and he persuaded McCarthy to join the executive team and become one of the investors.17 The investors announced an agreement on September 8, 2001, to buy AirAsia for a symbolic one ringgit (26 cents) and to assume 50 percent of net liabilities, or around 40 million ringgit.18 The September 11 attacks resulted in lower costs for purchasing and leasing used airplanes. The new AirAsia was relaunched in January 2002 with three B737 aircraft as a low-fare, low-cost domestic airline. Its value proposition was described as “a Ryanair operational strategy, a Southwest people strategy, and an easyJet branding strategy.”19 Fulfilling his boyhood dream, Tony Fernandes was running an airline company in which he had a personal stake of around 35 percent.
AirAsia’s Strategy and Operations
AirAsia focuses on ensuring a very low cost structure as a cornerstone of its business strategy. It has been able to achieve a cost per average-seat-kilometer (ASK) of 2.5 cents, half that of Malaysia Airlines and Ryanair and a third that of easyJet.20 The common fleet of B737-300s is leased at very competitive market rates due to the soft global market conditions for second-hand airplanes. One important distinction of AirAsia’s revenue model from the traditional LFAs comes from its active involvement in selling holiday packages marketed through its Web site and various tour operator partners. While enabling the carrier to reach more market segments with its product portfolio, this strategy must also add other costs usually associated with selling blocks of seats to the charter operators.21 Fernandes acknowledged that the timing of the AirAsia start-up in the aftermath of the tragic events of September 11, 2001, helped to ensure the lowest possible cost structure, with both leasing and operating aircraft costs sharply declining year over year. AirAsia today handles 11,000 passengers a day with a fleet of 18 planes, offering fares as low as $2.60 (Ryanair has fares between European cities for under one euro, about $1.25).22 The revenue formula of
The emergence of Malaysian-based AirAsia resembles the story of Ryanair, the Irish low-cost carrier that has dramatically altered the passenger air transport landscape in Europe since the mid-1990s. Both carriers underwent a remarkable transformation from money-losing regional operators into profitable low-cost, low-fare airlines. AirAsia was initially launched in 1996 as a full-service regional airline offering slightly cheaper fares than its main competitor, Malaysian Airlines.14 This business model failed because AirAsia could neither sufficiently stimulate the market nor attract enough passengers away from Malaysian Airlines to establish its own market niche.
Fernandes’s Entrepreneurial Venture
Anthony Fernandes had a history of going his own way. Shipped off to boarding school in Britain to become a doctor like his father, Fernandes rebelled, earning an accounting degree and landing a job with the Virgin Group instead. Eventually he left Virgin for Warner Music, which sent him back to Malaysia in 1992. In 1997, he became vice president for the company’s Southeast Asian operations. By
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AirAsia mostly follows the traditional low-fare approach; only three different fare types are offered.23 AirAsia’s focus on Internet bookings and ticketless travel allows it to emphasize simplicity for the customer while securing low distribution costs. With the average fare being 40 to 60 percent lower than the fares of its full-service competitor, AirAsia has been able to achieve strong market stimulation in the domestic Malaysian air market.24 For example, the lowest fare for the trip from Kuala Lumpur to Penang on AirAsia starts from 39 ringgit. The same trip by bus would cost 40 ringgit and increase to 80 ringgit if traveling by car. The introduction of such super-competitive fares is starting to produce the same market growth effect that was achieved by the entry of Ryanair (in its low-fare form) into the U.K.–Ireland air travel market—travelers’ switching from sea to air transportation. In the case of Malaysia, consumers are increasingly switching from bus to air travel. It is yet to be seen whether AirAsia successfully makes it through its initial start-up phase and reaches sustainable profitability. Starting with two planes bought from a Malaysian conglomerate in late 2001, the airline expected to have 30 aircraft by the end of 2004. This would be impressive growth but also raise concern because other LFAs faced their most serious challenges when they attempted to expand too fast.25 AirAsia expected to handle 3.2 million passengers in 2004, up from 2.1 million in 2003 and 1.1 million in 2002. The company quickly repaid its inherited debt and was profitable from the outset. Its profit margins (before interest, depreciation, amortization, and aircraft leasing costs) are around 35 percent, among the highest in the world, according to Michael McGhee, CSFB’s airline analyst. For the half year ending June 30, 2004, AirAsia expected to make a profit of 42 million ringgit ($11 million), more than twice what it made in the entire previous year.26
by taking a simple car trip across the border. This possibility elicited a response from some of AirAsia’s corporate neighbors, most notably Singapore Airlines (SIA), Asia’s largest carrier by market capitalization. Singapore announced a low-fare subsidiary, and a former SIA deputy chairman, Lim Chin Beng, registered a company in June 2003, intending to operate as Singapore’s third airline. Registered as “ValuAir,” the airline seems likely to be a low-fare carrier—if it receives regulatory approval. Thai Airways International also announced its LFA as a joint venture with another company.27 The indications are that AirAsia is causing competitive ripples that are likely to grow in scale and scope. See Table 3 on page 362.
The Future
Going International and Incumbent Competition
In January 2004, AirAsia started its first international service, from Kuala Lumpur to the Thai holiday island of Phuket. In February, it began flying from Johor Bahru across the border from Singapore. In 2005, it will start flying to Indonesia, a country with 235 million potential passengers. Expansion to India and China is reportedly also under discussion, two markets with a combined population of 2.3 billion. At the same time, incumbents are striking back. In late 2003/early 2004, the number of budget airlines either flying or about to launch more than doubled from 7 to 15, most of them coming from spin-offs of traditional airlines. For example, Thai Airways announced an international carrier, Nok, and Singapore Airlines established its own budget airline with the founders of Ryanair. That airline, Tiger Airways, was scheduled to begin flying by the end of 2004. In April 2004, Australia’s Qantas said that it was starting a new airline in Singapore. Qantas invested about 50 million Singapore dollars ($30 million) for a 49.9 percent stake in the new airline; Temasek Holdings, the powerful investment arm of the Singapore government, will own 19 percent; two local businessmen will hold the remainder. Although Temasek owns roughly 57 percent of Singapore Airlines, Temasek officials deny that its ownership in the two carriers represents a conflict of interest. “We think this new player will increase the pie,” said Rachel Lin, a spokeswoman for Temasek. “Our interest is strictly for financial returns; we see both of them as potentially attractive investments.” Moreover, as the government moves to defend its role as a hub for air travel by building an airport terminal designed to accommodate budget airlines, Singapore’s founding prime minister and elder statesman, Lee Kuan Yew, recently warned Singapore Airlines that the government intended to protect Changi Airport’s competitiveness, even at the flag carrier’s expense.28 Some believe the incumbents in Asia—like those in the United States—face inherent disadvantages in their ability
Reaction to AirAsia’s Success
The Malaysian government was supportive of AirAsia as long as it was taking over previously money-losing domestic routes and was serving as a benchmark for the restructuring of Malaysian Airlines. AirAsia’s plans to enter into the traditionally profitable intra-regional markets to Thailand and other neighboring countries have met with less enthusiasm from the Malaysian government. The Malaysian regulatory authorities face the knotty problem of accommodating the growth plans of a new LFA at the cost of reducing the market value of government-owned Malaysian Airlines. Given the uncertainty about its ability to fly outside of Malaysia, AirAsia is proactively seeking creative ways to expand its market coverage by targeting cross-border markets in Singapore and Thailand. The Malaysian towns serviced by AirAsia might attract residents of neighboring countries to try AirAsia when they travel to Kuala Lumpur if they can save half of the airfare
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Table 3
AirAsia Fact Sheet Holding company Operating company Business description
Head office
Established
Chairman/director Chief executive officer/director Director Director Employees Customer base Cities served
Fleet Available seats Weekly departures
Tune Air Sdn Bhd AirAsia Sdn Bhd Asia’s first low-fare no-frills airline to introduce “ticketless” traveling, AirAsia will be unveiling more incentives in the future to encourage more air travel among Malaysians. AirAsia Sdn Bhd Lot No N1 Level 4 Main Terminal Building Kuala Lumpur International Airport 64000 Sepang Selangor Darul Ehsan Malaysia December 12, 2001, Tune Air Sdn Bhd officially acquired 99.25 percent equity (51.68 million shares) of AirAsia from DRB-Hicom, making it the official holding company. YBhg Dato’ Pahamin A. Rajab Tony Fernandes Encik Kamarudin Meranun Encik Aziz Bakar 948 2,200,000 Alor Star, Kedah Bangkok, Thailand Johor Bahru, Johor Kota Kinabalu, Sabah Kota Bharu, Kelantan Kuala Terengganu, Terengganu Kuching, Sarawak Langkawi, Kedah Miri, Sarawak Penang Phuket, Thailand Sandakan, Sabah Sibu, Sarawak Tawau, Sabah Wilayah Persekutuan Kuala Lumpur Wilayah Persekutuan Labuan 10 Boeing 737-300 aircraft, with an average age of 6 years 148 seats From/to KLIA, Kuala Lumpur: 84 flights a week to Kuching 70 flights a week to Kota Kinabalu 56 flights a week to Penang 42 flights a week to Kota Bharu 28 flights a week to Miri, Langkawi, Kuala Terengganu, Johor Bahru and Alor Star 14 flights a week to Tawau, Labuan, Sandakan, Sibu and Phuket From/to Senai Airport, Johor Bahru: 28 flights a week to Kuching and Penang * 14 flights a week to Kota Kinabalu, Miri and Langkawi * 14 flights a week to Bangkok ** * starting from December 3, 2003 ** starting from February 2, 2004 (Daily flights are available to all destinations.)
Source: Company Web site.
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to compete on cost and price because they do not have the cost discipline or the culture of budget start-ups. Thai Airways hired an advertising executive to run Nok, apparently with the intention of mimicking Tony Fernandes, but their choice appears to lack Fernandes’s marketing and operational ability. Eric Kohn, who was number two at Deutsche BA, initially organized as a German-based low-price offshoot of British Airways, argues that established carriers are not set up to succeed in the low-cost space: “People at big airlines don’t have accountability or a focus on costs. It is a lot easier to start an airline from scratch than to take a legacy airline and make a profit.”29 “We feel pretty vindicated,” Fernandes said in a telephone interview from his office at Kuala Lumpur International Airport. “A lot of people laughed at us at first.”30 Fernandes disputes analysts’ warning that AirAsia is likely to run into more difficulties as it goes international. “I don’t see why it makes any difference,” he said. As for Asia’s relative lack of bilateral agreements to allow new carriers to ferry passengers from country to country, Fernandes says competition for tourist revenue is pushing more countries to open up. Fernandes says that relatively low landing fees in Asia make up for a scarcity of the cheaper satellite airports that low-cost carriers rely on in Europe and the United States. In September 2003, he set up a joint venture in Thailand, Thai AirAsia Aviation, which will fly not only to points in Thailand, but also to Cambodia and Vietnam. Despite liberalization, Fernandes decided to form a joint venture with Shin Corp., partly owned by the family of Thai prime minister Thaksin Shinawatra, in order to jump-start the process. The airline started flying in January 2004 with promotional fares as low as $2.50 from Bangkok to Phuket.31
The Low-Fare Future in Asia
Views on whether low-cost airlines will flourish in Asia vary. Three factors—regulation, population, and demographics— drive this calculus. Although the target consumer base for AirAsia is enormous—500 million people live within three hours of AirAsia’s hubs in Kuala Lumpur and Bangkok, more than Western Europe’s entire population— the failure of Asia’s regulatory environment to keep pace and the uncertain demand for low-cost services create uncertainty. Those who sell airplanes, airports, or advice tend to be of the opinion that low-cost carriers will redraw Asia’s socioeconomic map, offering affordable international travel to millions and thereby fostering the integration of a region divided by water, politics, and poor infrastructure. However, some analysts who follow established carriers insist that the success of low-cost airlines depends on that map being redrawn. There are too few bilateral agreements that allow new, low-cost carriers to fly between countries, they say, and too few of the satellite airports that the airlines
need to keep costs low. Moreover, in a region where most people still earn less than $7 a day, not enough people are well enough off to support a budget airline industry, they contend. “The demographics don’t support the low-cost carrier model in Asia,” said Chin Y. Lim, an analyst at Morgan Stanley in Singapore.32 Others, however, see a large and growing market. They predict that low-cost carriers will tap pent-up demand among less affluent Asians who typically travel by bus and hardly expect attentive service. According to a survey by Axess Asia, a Bangkok-based aviation-and-hospitality consultancy, low fares are the deciding factor in decisions to go or stay home for budget-conscious travelers in Southeast Asia. “We’re talking about a transformational shift in the way people travel in Asia,” says James Reinnoldt, managing director of Axess Asia.33 And although incomes are lower in Asia than in Europe, Timothy Ross, an analyst for UBS, says that the region’s lower average incomes should boost rather than constrain demand for cheap fares. Moreover, the pattern in other regions suggests that once rules start to relax, growth follows. In the United States, budget carriers saw passenger numbers rise nearly 50 percent in the five years following deregulation, compared with 4 percent for traditional airlines. Low-cost carriers now have roughly a third of the market. In Australia, Virgin Blue took only three years to win a 30 percent market share.34 AirAsia already has assumed a populist flavor; its slogan is “Now everyone can fly.” “We’re bringing cheap travel to the masses,” Fernandes says. With so many destinations being added to his route map, Fernandes said he had no doubt that AirAsia would find enough customers in the region’s growing middle class. But just in case, AirAsia and its Thai affiliate are planning to fly to India and eventually to China. The growth of low-fare carriers has great potential to spill over into the broader tourist and business travel economy: More air passengers generate higher demand for more hotel rooms. This connection is being seen in Australia, where Virgin Blue has taken nearly one-third of the domestic market from Qantas Airways. This has resulted in a sharp upturn in demand for economy hotels such as Accor. “In many cases, it’s entirely new business that wouldn’t have happened if it weren’t for cheap air tickets,” says Peter Hook, general manager for communications at Accor Asia Pacific.35 In addition, low-fare carriers may offer options for Asian travelers to mix business with pleasure, as many North American and European business travelers do, by extending trips or bringing family members to accompany them. Ultimately, Fernandes pointed out, low-cost airlines in Asia have an advantage in that Asia has almost no interregional highways and no high-speed international rail. “There’s a lot of sea in between,” he said. “Air travel is the only way to develop interconnectivity in Asia.” But competition is growing. In addition to the many upstart carriers and joint ventures with majors, some
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significant players from outside the region are also making rumbles. After his success with Virgin Blue, Richard Branson expressed interest in investing in a low-fare operation specifically in Asia. David Bonderman, an airline financier who helped found Ireland’s Ryanair, took a stake in Tiger Airways, Singapore Airlines’ budget venture. So far, Hong Kong–based Cathay Pacific Airways is one of the few regional heavyweights to say it isn’t likely to enter the fray.36
3.
4.
5. 6.
Maintaining the Entrepreneurial Spirit and Going Public
Tony Fernandes had entrepreneurial flair from the start, an approach that he maintains even as AirAsia grows and becomes more established. When he recently announced a joint venture, he made sure that he was photographed in front of the headquarters of Singapore Airlines, just to goad his rival. Like Richard Branson of Virgin, Fernandes has turned himself into his company’s most effective marketing tool, sporting his trademark red baseball cap and boasting that he “loves a good party.”37 And like Virgin, AirAsia pushes the envelope in its advertising and marketing: “There’s a new girl in town. She’s twice the fun and half the price,” reads AirAsia’s latest advertising campaign. However, it is unclear whether this spirit could be maintained if AirAsia went public or was bought by a larger carrier.38 In February 2004, AirAsia announced that it had decided to defer its decision on a public listing until September to focus on domestic and regional expansion. AirAsia chief executive Tony Fernandes had told the Financial Daily that the company hoped to raise 760 million ringgit (US$200 million) from its initial public offering (IPO) but would make a final decision about whether to proceed later in the year. Although the IPO is important in order to help the carrier to cut costs and scale up services, Fernandes said that the main priority was to add new routes from AirAsia’s two international hubs at Bangkok and Senai in Malaysia’s southern Johor state. “We felt it is too fast for us to grow ourselves. For now, we want to focus on expansion plans in our Bangkok and Senai hubs,” he said.39 7.
Compare AirAsia’s strategy with the strategies of Southwest and Ryanair. How is it similar to and different from the strategies of those carriers? Did Tony Fernandes weigh the range of political, economic, and operational risks when he took over AirAsia? What risks might he have overlooked? How would you describe Tony Fernandes’s entrepreneurial strategy? How should AirAsia respond to the challenges posed by (a) new low-fare carriers entering the Asian marketplace and (b) low-fare strategies pursued by incumbent carriers? How do you think the Asian passenger air transport marketplace will shake out? What lessons can be drawn from the North American and European experience?
Exercise
Anthony Fernandes and his team are preparing for an IPO and are presenting the case to underwriters and investors. Break into three groups representing these stakeholders (AirAsia, underwriters, and investors). The AirAsia group should make the case for an IPO to support expansion, describe the impact of this expansion on future earnings growth, and support this pitch with specific information about opportunities in the Asian market. The groups representing underwriters and investors should ask questions and seek clarification about the validity of the expansion plans, the potential impact of an IPO on the positions of existing investors and debt holders, and the overall market’s receptivity to the IPO issue.
Source: This case was prepared by Professor Thomas Lawton of Imperial College London and Professor Jonathan Doh of Villanova University as the basis of class discussion. It is not intended to illustrate either effective or ineffective managerial capability or administrative responsibility. Reprinted with permission.
Questions for Review
1. What opportunities exist in the Asia-Pacific region for the entrance of new low-fare airlines? How might demand for low-fare service differ in the Asia-Pacific region and in North America and Europe? Do governments pose a significant obstacle to the expansion of low-fare airlines in Asia?
2.