AirAsia Factors

August 2, 2006 at 10:15 pm · Filed under AirAsia

I talked about AirAsia’s ingenious, Pajamas-style marketing strategy that made them Asia’s most successful low-cost airline so far by simply turning lemons found in their business into lemonade. See my last post on this –> AirAsia.

However, there are many other factors that contributed to their success. Just in case you’re wondering, AirAsia was profitable in its first year of operations.

This is quite a feat especially when you consider the huge capital outlay required in getting planes, paying its pilots and other staff plus a zillion other expenses that seem to crop up when you’re starting off, especially when it’s an airline.

Here are some of those factors:

1. Travel is a HUGE industry
Billions of people around the world move from one location to another for various reasons every single day. This will continue to happen until the end of time. If you were to start a business, Internet or otherwise - one way to increase your chances of success is to start within an industry with lots of Prospects, find places they’re not being served properly, and then offer your products/services to them.

2. People will travel again and again
You get repeat business from the same Customers. There is no better business than repeat business. This is why it’s a good idea to target business models where the customers naturally become repeat customers either through choice or even better, through a lack of choice.

3. Asia is a HUGE market
Asia is the world’s largest continent. It has BILLIONS of people living in it. It covers about 30% of Earth’s land area. A small percentage of this market is enough to make AirAsia very happy for a long time to come.

4. AirAsia followed an established business model
The low-cost airline model was copied from Europe, which was in turn copied from the US. The experiments have already been conducted by those who blazed the trail earlier. Starting a low-cost carrier in a huge virgin market correctly just about guarantees success provided its cost can be controlled well.

5. The low-cost carrier model keeps costs down to the bare minimum
This is one of the keys to its success. Keeping costs down can take many forms and I simply can’t tell you all of them.

However, here are a few:

Most flights are about 3 - 3.5 hours max. This enables AirAsia to use the same set of crew to make a return flight from the arriving destination back to the departing destination, carrying another load of passengers in the process - all without any further increase in the cost of the crew.

There is also no cost for accommodating the crew at the arriving destination since they’re back home on the same day, within an 8 - 10 hour period (which is about the same amount of time some of us work in our jobs). And because of this, there is no additional cost for paying the crew “subsistence allowances”.

With the tremendous cost savings, AirAsia plans its destinations very carefully, flying only to places that can be reached in 3-3.5 hours. However, if necessary, flights of 4 hours’ durations or longer can be considered if it makes business sense to have them.

Also customers are encouraged to purchase tickets on the Internet so there’s no need to employ numerous staff to manage ticket counters although it’s not fully Internet-based yet. No tickets are issued, only a ticket code and the fight details that the customer prints out himself.

There are many other ingenious Pajamas-style cost-minimization activities, but the above alone save AirAsia millions of dollars in salaries and costs every single month.

6. A profitable business model
AirAsia operates a fleet of Airbuses (model A320) with a passenger capacity of 180 (with plush leather seats).

If each ticket costs $200, then with a full load, one plane will earn $200 x 180 = $36,000 per trip. With each crew going on 2 trips a day (to and fro) with 2 full loads, each plane earns $36,000 x 2 = $72,000 per day - without any or little increase in staff expenses!

If each ticket costs $300, then 2 trips with a full load of 180 passengers will earn the airline $300 x 180 = $54,000 x 2 = $108,000. Now multiply that by 10 planes a day each doing $108,000 (as a quick example) and AirAsia earns a cool $1 million a day!

Of course, planes are not full every day, and AirAsia may not be flying 10 planes with round trips a day, plus AirAsia does a lot of promotions with low-cost seats - but the above is a very conservative calculation since some journeys can cost $400 or $500 per seat (and still be cheaper by 50 - 80% compared to the regular airlines), depending on the destination.

With it targeting 60 planes to be in operation by 2011 - you can easily imagine the amount of profit it can generate!

The key to more profits for AirAsia is more routes and more planes. With this in mind, it is already hoping to be operating 100 Airbuses eventually!

7. With such low prices - everybody CAN fly
Low-cost carriers can easily tap into a new source of Prospects where they didn’t exist before - those who couldn’t afford to fly the usual airlines. Now if you have a few bucks (if you wait for the Special Deals) or a hundred or two (instead of a thousand or two), you can fly to regions around you regularly without having to lose your shirt .

This is in addition to the millions of flyers who are now switching to low-cost carriers because of the cost savings (especially the frequent flyers), and corporations who are now sending their executives to meet up with their business partners the new low-cost way (who cares how their company sent them over?).

In my next post I’ll talk about another crucial factor in AirAsia’s phenomenal success, which brings you back to something quite familiar that involved the Internet and billions of dollars down the drain.

Stay tuned.