Airasia X: Can the Low Cost Model Go Long Haul?

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There was a great response for the offerings X long haul service had to offer. As it appealed not only to the vast business travelers and affluent individual travelers but also to people that would not ordinarily consider flying to intercontinental destinations and with growing disposable income.

AirAsia X’s market differed from competitors markets such as MaxJet and EOS Airlines from the United States and Oasis from Hong Kong who competed by targeting budget travelers from the middle and upper middle class whose primary option for long distance travel was by air. X deliberately targeted the lower class with lower incomes. Those customers in the market chose other means of transportation including busses and trains or did not just travel. X based in Malaysia market was different, benefiting from the connectivity and passenger feed to fill its aircraft. Unlike its Hong Kong based competitor Oasis, who only accompanied Hong Kong to London and Hong Kong to Vancouver routes, X had hundreds of flight to and from 78 points.

Mentality of AirAisa X team and IPO issue

Darren Wright, can shift its marketing team mentality to a global IPO mindset by improving in two areas namely advertising and media purchases, and secondly, revenue management. Wright should change the process of staff coordinating advertising activities for 12 countries and 15 cities, and also having remote teams monitoring advertising in Australia and the UK to having one consolidated report summarizing the global market expenditures. Integrating advertising activities on a global scale would be more cost-effective and limit risks of misalignments.

Wright should also match advertising activities to revenue management activities; Spending money on advertising, and in return getting a high profitability reaction to ticket sales which was not always the case. In November 2010, X had 85 percent of seats sold and was 50 million Malaysian ringgit ($15M) short of its projected revenue for the year which wouldn’t convince investors to buy into the IPO, therefore Darren Wright met with His revenue management team and devised a strategy to meet the 2010 budget revenue target, which they did with the help of X CEO, Osman-Rani.

The future of AirAsia X

After eight years’ development, AirAsia X becomes the largest budget airline in Asia and its low cost model has also become the successful example to competitors. However, AirAsia X will still have a lot of uncertainties and challenges in the future.

First, AirAisa X has continuing losses in recent years. Even though the total revenue of AirAsia X has increased from around 2 billion ringgit (1 dollar = 3.9 ringgit) in 2012 to more than 3 billion ringgits in 2015, the net profit has dropped approximately to 300 million ringgit in 2015 (Murray Hunter, 2016). Operation cost increased dramatically in recent years because of increase in the labor and fuel cost. The low cost model of AirAisa X starts to be called into question.

Secondly, how to keep a good relationship with governments to obtain more routes is another important issue for AirAisa X. In Feb 2015, Australia and Indonesia government rejected AirAisa X’s application for new route from Melbourne to Bali which caused a huge loss. In addition, AirAisa X is also under huge pressure from its competitor Malaysian Airlines (MAS), a national airline who has monopolistic power in Malaysia.

Thirdly, there is the issue of safety. In Dec 2014, AirAisa X’s sister company AirAisa has an airplane crashed into the Java Sea during bad weather which killed 162 people. In addition, MAS also have two serious accidents MH370 and MH17 during 2014 which led to the death of more than 600 people. These safety issues have significant negative effects on people’s trust in Malaysia’s airlines and both AirAisa and AirAisa X.

Resources

Ramakrushna Panigrahi (2014). Maruti Suzuki India Limited: Sustaining Profitability. Harvard Business Review. Boston, USA.

Murray Hunter (2016). Is it time for Air Asia to reinvent itself. Asia Correspondent. Bristol, UK.