Identify and Discuss the Sources of Airasia’s Competitive Advantage

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AirAsia has made a name for itself as the world’s lowest-cost airline and should keep excelling at just that. Yet, that does not mean it should not expand its business further, both short and long haul. AirAsia should keep expanding its long haul business, under the AirAsiaX brand. By focusing on centralization of common services between the two businesses the core of each can stay intact. Not integrating completely operationally will result in some missed operating synergies, but it will also result in the two businesses being able to focus on key success factors most relevant in their respective businesses, which is what has gotten AirAsia so far in the first place.

The following sections describe recommended strategies, along with reasoning and expected results, for AirAsia to move forward with.

Further expand AirAsiaX’s operations

Even though AirAsiaX faced already established competition when entering the long-haul market it successfully gained market share by utilizing the LCC model. The fact that it has managed to provide customers with a cheaper alternative and still make a profit shows that its business model is viable in the fiercely competitive industry of long-haul airlines. Cost comparisons between AirAsiaX and its competitors show a significant advantage in its favor (table 4) and in conjunction with a high load factor (table 5) one can understand why AirAsiaX have succeeded with its low pricing model. Since AirAsia’s expansion into long-haul business has yielded positive results it should continue down that path with further expansions. By remaining true to its low price policy it can offer consumers a service cheaper than many other airlines. Through the low price AirAsia should be able to attract further market shares in the long-haul industry as prices is often an important factor when differentiation between suppliers offerings is low, which is the case in the airline industry.

Centralize common services and activities

Many of the services used by AirAsia and AirAsiaX are shared already and is what allowed AirAsiaX to secure cost efficiencies from the get go. AirAsia should keep manage linkages which can benefit both firms and in turn their shareholders. Sharing of activities as a corporate strategy focuses on exploiting economies of scope where commonalities exist. At a basic level this involves the sharing of corporate management functions and certain business services. AirAsia does this do a certain degree already but should look further into where centralized solutions between the two firms would result in better efficiency.

One important factor to consider when talking about linkages between businesses is the understanding top management has of existing commonalities that can be exploited. AirAsiaX is more or less a sister company of AirAsia, established by Tony Fernandes, and the two airlines exercise a similar low cost management strategy. Finding common ground to stand on should therefore not be a problem as similarities between the two firms’ values and goals exist.

Partially integrate operations without merging

AirAsiaX was created as a separate entity in order to achieve operational independence and the two airlines should look to partially integrate operations while continuing to run business separately. When the overall strategical logic is similar between different businesses it makes sense to look for operational linkages. Actions that will help both airlines operate more efficiently without losing their independence from each other makes sense for both parties.

AirAsiaX does not compete on the same terms as many of their competitors in the long-haul airline industry, and it should not try to either. AirAsia does not have dense domestic and regional route networks to feed their long-haul flights, therefore operational synergies are not available to desired extent between the two, and fully integrated operations therefore not optimal. Omitting services like through-ticketing and baggage transfer is part of the low-cost strategy which established AirAsiaX on the market, a strategy it should stick to in order to continue gaining market shares. Both AirAsiaX and AirAsia should continue to focus on competing with their low costs with organizational strategies optimized for their individual needs, integrating operations where operational independence is not threatened.

Another aspect to consider is the will of the shareholders. When AirAsia decided to let their long-haul expansion grow outside of the company, it was done in order to avoid taking all the risk. With AirAsia and AirAsiaX operating under somewhat different circumstances the cash flows of the two businesses are imperfectly correlated. Thus fully integrated operations between the two would result in reduced variance of their combined cash flows (i.e. diversified risk). But shareholders are most of time better of diversifying themselves through holding different portfolios, especially since costs are incurred when trying to exploit synergies between firms. As a listed company operating in the interest of their shareholders AirAsia should avoid full operational integration through merger as operational synergies are not ensured and diversification of risk should be left to the shareholders.

Summing up

AirAsia should keep expanding, both in the short- and long-haul business areas. By sticking to the cost-focused strategy that have worked for both businesses so far they should be able to grow further with continued positive profitability. Integration of common activities and services between the two firms should be implemented where the result is efficient operations without jeopardizing independence between them. With AirAsia and AirAsiaX continuing to operate as separate units their responsiveness to external changes will remain intact, a capability which has proven crucial in the establishment of AirAsia’s competitive advantage.