Flying Above The Rest AirAsia

Before I dwell deeper into AirAsia's financial performance, why not take a snip at its strategy. AirAsia is quite well known to be a "blue ocean" company as their concept is similar to Southwest Airline's model. The below strategic profile illustrates how both these low budget airline company's effective strategy in reinventing the airline industry via value innovation.

Key lesson that every great strategy must have a focus and the above value curve clearly shows it. AirAsia has untapped uncontested market space and making competition irrelevant as the average airline can't compete as they invest in all airline industry competitive factors. AirAsia like Southwest Airline focuses on three core factors: service, speed and flight frequency.

I would think CEO Dato' Tony Fernandez actually copied the model (though he established the company before the book was published) but took a step further by modifying it to stand apart. Four actions of eliminating, reducing, raising and creating, he managed to differentiate AirAsia's profile from the industry's usual profile.

Eliminate

Over the counter booking system, Free F&B on the flight

Reduce

Seat quality & less on flight attendant

Raise

Flight frequency to popular destinations & speed of air travel

Create

Online booking system
Point-to-point travel between cities instead of hubs

But like all blue ocean businesses it will become a bloody red one after more players copy the model (e.g. SIA's Tiger Airways & FireFly) and thus change is imperative. Right now AirAsia is looking good as recently it far exceeded market expectations when its core net profit increased 10-fold to RM270 million in 3Q'10 beating all analysts estimates by RM146 million to RM200 million. It is also the cheapest low-cost carrier (LCC) stock based solely on its PER of 7x while Tiger's PER is 17x and Ryanair (Europe's LCC) at over 15x. More about its financial next round.

How will AirAsia evolve to fend off competition? It comes in the form of free. Ryanair is already starting to draft creative ideas by actually making air travel absolutely free! Instead they derive their earnings from ancillary income (Money earned by an organisation through an activity that lies outside its normal core activity and purpose). Such as baggage check in, food & beverage on flight, advertising and have even mooted out the idea of having in-flight gambling. Free is become a trend nowadays and in 2009, "Freemium" was the word of the year and also hold the record of being the second most notorious word after "Fuck". See how big companies make money from free? Facebook, Google, Skype & Pandora (Internet based but we should see other industries follow suit one day).


Is MAS doing any better? Oh please, this is another retarded GLC. MAS is taking delivery of three Boeing 737-800 (US$80mil/each) end of this year with another 32 more in the next four years. This is in addition to another 15 more Airbus A330-300s (US$200mil/each) plus 6 units of A380-800 Super Jumbos (US$330mil/each) within the 2011-2015 timeframe. Spending model does not translate into revenue earning capabilities especially when there is no clear marketing strategy (btw MAS is an average airline on the strategy canvas). Perhaps like Syabas, MAS will be coming around to the government with a bowl in hand to ask for bailout. This is according to Sakmongkol AK47 in which I believe is credible source. 

Let me put some numbers into perspective. The cost of buying these new aircrafts will be approximately RM23bil spread over 5 years (RM4.5 bil/year), MAS has RM2bil in borrowings but only RM2.2bil of cash. For the last 5 years, MAS's profit minus loss after tax is -RM500mil. Now you tell me how to save MAS? Just die la, like Proton and most GLCs you are a national liability not an asset.