Introduction
Business-level strategies for targeting customers may be broad or focused depending on the nature of the market. AirAsia pursues a combination of broad cost leadership and differentiation strategies, which entail low-priced services and unique value for a broad market (Kennedy, 2020). Since January 2002, the airline has been using the ‘no frills, low-cost carrier (LCC)’ business model, offering services priced 40-60% lower than the industry average. The goal is to appeal to a large customer base by providing budget travel services. Differentiation is achieved through its emphasis on simplicity and convenience offerings such as mobile booking and online check-ins for local travelers.
AirAsia has achieved cost leadership by being the first airline in the region to pursue the LCC model. Cost leaders also maintain their advertising, marketing, and new product development budgets low (Kennedy, 2020). For example, AirAsia’s sales and marketing cost per kilometer is ¢0.11, which is lower than the industry average of ¢0.36. Further, through its trademark slogan, ‘Now everyone can fly’, the airline provides frequent fare promotions to entice local travelers but the package excludes on-board entertainment and free meals. Instead, passengers can purchase meals on board or pre-order refreshments at discounted prices.
In addition, travelers can conveniently book their flights via telephone, sales offices, or mobile devices and check in virtually. By adopting technology, AirAsia can deliver low-cost services to travelers and achieve efficiency. According to Siggelkow and Terwiesch (2019), cost leaders leverage economies of scale to cut costs and sell more products. AirAsia has partnered with other LCCs, such as Virgin Blue, to expand to new markets in Australia and Europe. The aim is to gain cost advantages by providing cheaper airfares for long-haul flights. In addition, the airline now provides cheaper travel insurance, car rentals, and branded hostels to benefit from diversification.
Porter’s Model
Porter’s five forces of competition can help evaluate the viability of AirAsia’s business-level strategy. They include the threat of new entrants, the threat of substitutes, buyer power, supplier power, and competitive rivalry (Goyal, 2020). Firms can leverage these forces to compete in their industry. As an LCC, the threat of new entrants is not high for AirAsia. The low entry barriers may be offset by high brand loyalty in Malaysia, government support, first-mover advantage, and vertical integration.
The threat of substitutes in the airline industry presents a medium risk to AirAsia. Domestic travelers can opt for car transport or high-speed rail but these modes may not be feasible for regional travel (Ellis, 2020). In addition, some of these options would be more costly and time-consuming than LCC services. For these reasons, the cost leadership strategy is an appropriate long-term business strategy for AirAsia. Buyer power refers to the influence of customers on the company (Goyal, 2020). For airlines, individual buyers and travel agencies are the main clients. They wield considerable power because competitors in AirAsia’s markets are many. However, the airline has increased switching costs by introducing reward points (AirAsia Ringgits) for loyal flyers. In addition, the carrier offers value-added financial services such as travel insurance, which may help increase loyalty and reduce buyer power. Overall, the LCC strategy is not affected by this force, and thus, it is suitable for AirAsia’s growth plan.
Powerful suppliers are a barrier to the pursuit of a business strategy. They can raise prices, reduce quality, or pass costs to the firm (Goyal, 2020). In the airline industry, aircraft suppliers are few and wield immense power. AirAsia operates fuel-efficient Airbus planes but without backward integration, the cost leadership strategy may not be suitable for the airline in the long term. On the other hand, the number of LCC players and full-service competitors in Malaysia, including Malaysia Airlines, is increasing, contributing to intense competitive rivalry. However, by differentiating itself as a low-cost carrier, AirAsia’s profit potential may not be affected significantly by this force.
Sustaining Competitiveness
Cost leadership is a core long-term business-level strategy for AirAsia. Its strategic actions include providing cheaper air tickets and convenience and reducing spending on sales and marketing and product development. However, this approach may not sustain its competitiveness in the long term. Without backward integration or in-house production of components, cost reduction may be a challenge owing to the high supplier power (Prasanna et al., 2021). In addition, venturing into financial services, such as travel insurance and hotels, to cut costs creates new risks for AirAsia. It may lack skilled in-house teams to drive its growth in these sectors.
Conclusion
Pursuing both cost leadership and differentiation may be problematic for AirAsia. Cheaper airfares may be attractive to budget travelers who will still demand quality services. AirAsia may not deliver high-quality in-flight services at low costs without affecting its profitability. To remain profitable, the company will need to reduce its service quality or raise airfares. Thus, the cost leadership strategy may not sustain its competitiveness, especially with the rising fuel prices, but the use of fuel-efficient Airbus fleets may mitigate this risk. In addition, budget cuts on sales and marketing to reduce overall operational costs will affect AirAisia’s ability to attract new clients.
References
Ellis, D. (2020). Developing a strategic framework of analysis for air transport management. Transportation Research Procedia, 51, 217-222. Web.
Goyal, A. (2020). A critical analysis of Porter’s 5 forces model of competitive advantage. Journal of Emerging Technologies and Innovative Research, 7(7), 149-152.
Kennedy, R. (2020). Strategic management. Virginia Tech Publishing.
Prasanna, R. P. Upulwehera, J. M., Senarath, B. D., Abeyrathne, G. A., Rajapakshe, P. S., Jayasundara, J. M., Ekanayake, E. M., & Gamage, S. K. (2021). Factors determining the competitive strategic positions of the SMEs in Asian developing nations: Case study of SMEs in the agricultural sector in Sri Lanka. Economies 9(193), 1-24. Web.
Siggelkow, N., & Terwiesch, C. (2019). Connected strategy: Building continuous customer relationships for competitive advantage. Harvard Business Review Press.