Ir-Depth Integrative Case 3.2 The Ascendance of AirAsia: Building a Successful B

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Ir-Depth Integrative Case 3.2 The Ascendance of AirAsia: Building a Successful Budget Airline in Asia Thomas Lauton and Jonathan Doh wrote this case solely to provide material for class discussion. The authors do not inke e situation. The suthors may have disgsised certis names and oher ideuaifying Sounce: Professors cither effective or ineffective handling of a manageria Publishing. to protect confidentiality Ont dime permission to reprocduce snanted by Richard Ivey Schonl of Busines Fosundation on 00 e hr lvey School of Business Foundation prohibits any forms of reproduction, siorage, or transmission without is wrines of this material is not covered under authorization by any reproduction rights organization. To onder copies or daction eproduce materials, contact Ivey Pblishing. Richard Ivey School of Business Foundation. The University of Westers Ostarie, London Onario, Canada, NGA 3K7; phone (519) 661-3208, fax (519) 661-3882, email cases@iney woca Introduction Budget airlines were making inroads into most Asian In September 2001, Tony Fernandes left his job as vice markets, but the long-term survival of these cariers president and head of Warner Music's Southeast Asian depended on their ability to compete with Asia's tradi most visible and prominent posi- tional fullservice airlines. The prevailing sentiment tions in Asia's music industry. He reportedly cashed in his among some of the Asian majors, expressed by the Asia stock options, took out a mortgage on his house, and lined Pacific Airlines Association in early 2003, was that no up investors to take control of a struggling Malaysian air frill fliers are not a threat to Asian airlines." This view line with two jets and USS37 million in debt. Three days was based in part on the perception that many establishesd Asian airlines were highly cost competitive relative to Within two years, AirAsia had demonstrated that the their global peers. It also illustrates a perception that Asian low-fare model epitomized by Southwest and JetBlue in air passengers valued high service more than low price. the late 1990% most observers questioned whether Asia would ever emerge as a viable market for no- the Unitod States' Soutrwest later, terrorists destroyed the World Trade Center. the United States, and by Ryanair and casyJet in Europe. As early as had great potential in the Asian marketplace. AirAsia's success rapidly spawned numerous imitators and com- frills budget carriers similar to could AirAsia maintain momentum and continue to since changed dramatically, According to Peter Hartison of expand across Asia and globally? Would the influx of new the Centre for Asia Pacific Aviation, a consultancy in Syd- entrants result in a shakeout such as had occurred in North ney, Australia, "the key ingredient is liberaliration America and Europe, compromising AirAsia's future in Air transport liberalization in the Asia-Pacific region began in the 1990s when Australia deregulated its domes- tic market. Virgin Blue was one of the few carriers that with incumbents, and it suc- ceeded in establishing its position in the market. New Zealand was one of the first countries to privatize its this increasingly competitive market ket Liberalization and the Rise of Low-FareSsurvivedthis inlbate wil Airlines in the Asia-Pacific Region late on the global trend, low-fare, budget air national flag carrier a gan operating in Japan in 1998, followed by Skymark ulation in order to stimalate and embrace airline liberalization. (LFAs) were rapidly established across Asia. Air Do Japan and India subsequently pursued air tran in lines (LFAs) were rapid competition. Elsewhere it Carriers modeled on leading American and Asia, several countries publicly embraced liberalization in and Air Andaman) and in Cambodia (Siem Reap Malaysia, Taiwan, South Korea, Brunei, and Pakistam al Un late 2001, AirAsia was relaunched in Malaysia negotiated open-skies air service agreements with the pean budget airlines also emerged in Thailand the form of reciprocal access agreements: Si line and operating out birth of carriers that, by the turn of the century, had all countries' air service sec- in late tors, both domestic and intermational. In Thailand, the with the domestic market underwent deregulation, and new private players were looking to expand. Indonesia witnessed the test, focused measures in the late 1980s and carly 1990s spawned the 0n costo expressly modeled on Southwest, on cost containment by se of secondary a no-frills operation.In the Philippines, Cebu Pacific United States. In Taiwan and South Korea, liberalization y airports. India's first budget airline, Air become Deccan (now August 2003 creation of Spring Airlines. na entered the game in 2005 based in Shanghai

Explanation / Answer

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Asia - Pacfic region holds immense potential for budget air travel owing to a huge population of "upwadly mobile" citizens banking on the opened up economies, access to new age jobs through higher education, high economic growth rates, global connectivity and opportunities created by fluorishing IT, services and manufacturing sectors in these areas. This new generation of knowledge workers, entrepreneurs, tech enabled professionals and business persons have higher disposable incomes than their previous generations. As a result, more and more people out of this enormous population of aspirants can look forward to spend few dollars extra for air travel that can save them precious time and effort in comparison to bus or train journey. Majority of them will not mind the absence of extra legroom or on board entertainment.

Another factor in Asia is the lack of efficient, fast and cost effective intraregional transportation owing to geographical and political constraints, that can boost up demand of low cost air travel, that may help them to visit the friends, conduct a business or a well being trip locally and abroad.

A vital factor tat may boost up the air travel in Asia is a synergy created with the hospitality, tourism, well being and leisure industries which depend upon better and cost effective connectivity. Growth of these industries will create demand for more flyers who look forward to a budget vacation.

Europe and America on other hand comprise of well developed economies and much higher per capita income levels than Asia. In these economies, a traveller has more options to choose from, at not much different costs, thanks to equally efficient road transport system, motorways and high speed railroad services, that are sometimes more convenient, time saving and cost effective than even the budget airlines for short travel spanning 2-3 hours. In this scenario, the demand for budget airlines will keep rising for medium to long haul flights, particularly in Americas and long distances across the Europe, but not like Asia, where millions of aspirants line up to earn that extra money to graduate to air travel.

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