HOW AIR ASIA MANAGEMENT MANAGING DOWNTURN 2008 TO 2009 - REVISIT

INTRODUCTION

In the year 2008 to 2009, Malaysia had been hit by global financial crisis or downturn. United States of America (US) with its Mortgage subprime issues has had its links on fire all over the world. Inevitably, Malaysia also got affected due to high dependency to US market. This paper will analyse and evaluate those downturn issues on its management challenges upon Malaysian low cost airlines namely AirAsia.

(The Institute of Strategic and International Studies (ISIS) and University Malaya (UM), 2009) reported that US economic contracting sharply. Hence this will cast doubt on the Government’s 2020 plan. The report further explained that Malaysian GDP declined over the first two quarters of 2009 and was forecasted a shortfall of 26% of targeted 2020’s GDP. Malaysian Government had put stimulus packages to counter the falling aggregated demand on Malaysian economy.

As for airlines industry, oil is the main cost generated to fuel the business. Rembrandt, (2012) stated that “oil price appears to have played a role in the subprime crisis”, and this was the same tone expressed by Giuseppe Marconi (2009) as he mentioned a quote from Dr Nouriel that oil prices caused the 2009 financial crisis. AirAsia on the other hand did not get affected by these turbulent scenarios, neither it needed any intervention by local government during the downturn. As a matter of fact the motto ‘Now everyone can fly’has had much more to explored during the period of time. As an example the owner of AirAsia Tony Fernandez had expanding into the downturn as he reportedly to speak “At a time when most carriers capacity and cutting routes, AirAsia has been adding destination” (AirAsia Blog, 2009 para 1.) In 2008, he unwind his fuel hedges resulted a profit of 697.6 million ringgit in 2007 and to post a loss of 471.7 million ringgit in 2008. While other airlines were still locked in to higher prices, AirAsia get the full benefit of oil at $40 a barrel.

1. BACKGROUND

The year was 1993 as Hicom Bhd and Mofaz Air became AirAsia shareholders. Tony Fernandez took over the helm by acquiring AirAsia through Tune Air in December 2001. He was partnered by Dato’Pahamin Ab. Rajab as Chairman of AirAsia, Dato’Kamarudin bin Meranun as Deputy Group Chief Excitive Officer, AirAsia and Abdul Aziz bin Abu Bakar as Director of AirAsia. Although the price paid is at only RM1 but Tune Air assumed AirAsia debts of RM40 million. Their strategy is to become a low cost carrier, and AirAsia was the first in Asia in 2002.

AirAsia expanding since 2001 with fleet of 72 aircrafts to flies to 108 routes, which 61 of them are domestic. With 55 million guest flown with over 400 flights daily, whether from Thailand’s hubs, Malaysia, and Indonesia.

Financially, the new AirAsia CEO had made RM35 million net profit in 2003. As a leader in low cost carrier Airlines in South East Asian Fernanez transformed AirAsia into a big brand in three years later. In 2007 it was valued at RM4.5 billion (AirAsia Annual Report Corporate, 2007).AirAsia Berhad Annual Report, 2009 shown that AirAsia net profit keep increase since 2006 (RM202 million), 2007 (RM924 million), and drop to a loss of RM496 million in 2008, and 2009 (RM506 million). Despite economic downturn in 2009, AirAsia managed to recover to a net profit RM506 million. In 2009 AirAsia has a market capitalization of RM 2 billion.

In 2009, AirAsia Organizational Structure reflected in AirAsia Berhad Group of which comprises many business entities worldwide including business partners were as follows: :

• AA Capital Ltd - 100%

• AirAsia (Hong Kong) Ltd - 100%

• AirAsia Go Holiday Co. Ltd - 49%

• AirAsia Pte Ltd - 49%

•  PT Indonesia AirAsia - 49%

• Thai AirAsia Co. Ltd - 49%

• Airspace Communications Sdn Bhd - 100%

• AirAsia (Mauritius) Ltd - 100%

• AirAsia Go Holiday Sdn Bhd - 100%

• AirAsia Corporate Services Limited - 100%

• Aras Sejagat Sdn Bhd - 100%

• Crunchtime Culinary Services Sdn Bhd - 100%

• AirAsia (B) Sdn Bhd - 100%

• Asian Contact Centres Sdn Bhd - 100%

• Asia Air Limited - 100%

• AirAsia Philippines Inc – 39.9%

• AA International Ltd – 100%

            (As at 31 December 2009)

           Source: (AirAsia Berhad, 2009, p.15 – p.17)

As for organizational management structure, apart from those five founders of AirAsia mentioned earlier, there are others AirAsia’s Directors, they are :

Dato’ leong Khee Seong, Malaysian, aged 71, was appointed Independent Non-Executive Director of the Company on 8 October 2004. He is Chairman of the Audit Committee and a member of the Remuneration Committee of the Board.

Datuk Alias Bin Ali, Malaysian, aged 62, was appointed Independent Non-Executive Director of the Company on 23 September 2005. He is also the Chairman of the Remuneration Committee and a member of the Audit and Nomination Committees of the Board.

Dato’ Mohamed Khadar Bin Merican, Malaysian, aged 54, was appointed Independent Non-Executive Director of the Company on 10 September 2007. He is also a member of the Safety Review Board and Audit Committee of the Board.

Source: (AirAsia Berhad, 2009, p.15 – p.17)

The year 2008 to 2009 was really turbulence for everybody, but yet AirAsia Bhd triplet its advertising spending. AirAsia saw opportunities to expand beyond economic slowdown. “I always believe nothing is impossible and for me, at this time of uncertainty, a lot of opportunities are there for us to grab,” CEO Boss, Fernandes further explained in airasiafansclub.blogspot.com (2009). Later he stressed “... This is the best time for you to build your brand as others are taking a step backward,” he said.

In order to revise targets and goals during economic downturn, hence SWOT Analysis for AirAsia needed to be defined such as below :

Strengths, Weaknesses, Opportunities and Threats Analysis for AirAsia

             1. Strengths

Air Asia has a very strong management team with strong links with governments and airline industry leaders. This is partly contributed by the diverse background of the executive management teams which consists of industry experts and ex-top government officials. For example, Shin Corp (formerly owned by the family of former Thai Prime Minister - Thaksin Shinawatra) holds a 50% stake in Thai AirAsia. This has helped AirAsia to open up and capture a sizeable market in Thailand. With their strong working relationship with Airbus, they managed to get big discount for aircraft purchase which is also more fuel efficient compared to Boeing 737 planes which is being used by many other airlines.

The management team is also very good in strategy formulation and execution. The strategy that they have formulated at the beginnings was a clever blend of proven strategies by other low cost airlines is US and Europe. They are Ryanair’s operational strategy (no frills, landing in secondary airport), Southwest’s people strategy (employee comes first) and Easyjet’s branding strategy (linking with other service providers like hotels, car rental).

AirAsia’s brand name is well established in Asia Pacific. Besides the normal print media advertising & promotions, AirAsia’s top management also capitalised on promotions through news by being very “media friendly” and freely sharing the latest information on Air Asia as well as the airline industry. Their partnership with other service providers such as hotels and hostels, car rental firms, hospitals (medical tourism), Citibank (AirAsia Citibank card) has created a very unique image among travellers. Alliance with Galileo GDS (Global Distribution System) that enables travel agents from around the world to check flight details and make bookings have also contributed to their string brand name. Air Asia’s local presence in few countries such as Indonesia (Indonesia AirAsia) and Thailand (Thai AirAsia) have successfully “elevated” the brand to become a regional brand beyond just Malaysia. The links with Manchaster United (one of the world’s most famous football teams) and AT&T Williams Formula One team have further boosted their image to a greater extend beyond just the this region.

AirAsia is the low cost leader in Asia. With the help of AirAsia Academy, AirAsia has successfully created a “low-cost airline mentality” among their workforce. The workforce is very flexible and high committed and very critical in making AirAsia the lowest cost airline in Asia.

The excellent utilization of IT have directly contributed to their promotional activities (email alerts and desktop widget which was jointly developed with Microsoft for new promotions), brand building exercise (with over 3 million hits per month and on the most widely surfed booking engines in the world) as well keep the cost low by enabling direct purchase of tickets by consumer thus saving on airline agent fees.

              

             2. Weaknesses

Air Asia does not have its own maintenance, repair and overhaul (MRO) facility. It may be a good strategy when they first started with only Malaysia as the hub and few planes to maintain. But now, with few hubs (Malaysia, Thailand and Indonesia) and over 100 planes currently owned and about another 100 planes to be received in the next few years, AirAsia have to ensure proper and continuous maintenance of the planes which will also help to keep the overall costs low. It is a competitive disadvantage not to have its own MRO facility.

AirAsia receives a lot complaints from customers on their service. Examples of complaints are around flight delays, being charged for a lot of things and not able to change flight or get a refund if customers could not make it. Good customer service and management is critical especially when competition is getting intense.

             3. Opportunities

There are 2 major events that are taking place now or going to take place in less than 6 months from now. First, is the ever increasing oil price. Second, is the “ASEAN Open Skies” agreement that has been reached.

The increasing oil price at the first glance may appear like a threat for AirAsia. But being a low cost leader, AirAsia an upper hand because its cost will be still the lowest among all the regional airlines. Thus, AirAsia has a great opportunity to capture some of the existing customers of full service and other low cost airline’s customers. However, there will be also some reduction in overall travel especially by casual or budget travellers.

The “ASEAN Open Skies” allows unlimited flights among ASEAN’s regional air carriers beginning December 2008. This will definitely increase the competition among the regional airlines. However, with the “first mover” advantage as well as its strengths in management, strategy formulation, strategy execution, strong brand and “low-cost” culture among its workforce, this agreement can be seen as more of an opportunity.

There is also some opportunity to partner with other low cost airlines as Virgin to tap into their existing strengths or competitive advantages such as brand name, landing rights and landing slots (time to land).

The population of Asian middle class will be reaching almost 700 million by 2010. This creates a larger market and a huge opportunity for all low cost airlines in this region including AirAsia.  

                4. Threats

Certain rates like airport departure, security charges and landing charges are beyond the control of airline operators and this is a threat to all airlines especially low cost airlines which tries to keep their cost as low as possible. For example, Changi airport in Singapore charges SGD21 for every person who departs from Singapore.

AirAsia’s profit margin is about 30% and this has already attracted many competitors. Most of the full service airlines have or planning to create a low cost subsidiary to compete directly with AirAsia. For example, Singapore Airlines has created a low cost carrier Tiger Airways.

Users’ perception that budget airlines may compromise safety to keep costs low.

2.      PLANNING

In most cases, everybody agreed that AirAsia has its own Finance Guru, and that has to be the CEO himself. Since 2009 AirAsia has been named the ‘’The World’s Best Low Cost Airlines’’ in the world. The best strategies seem applied during the economic downturn by AirAsia in 2008 to 2009. During global downturn, Wong (2014) stated “AirAsia increased efforts during the global downturn as Air Asia’s fellow competitors shrank back and cut down on flight routes. This strategy is called “Seize the opportunity to lead the sheep away”. AirAsia even gave millions of free seats and increased advertising. What AirAsia did is to fill up the vacuum left in the industry and use to poach customers from other airlines.

AirAsia’s success as referred to (AirAsia Berhad, 2009, p.6) had something to do with its guest confidence who prefer low fare with no-frills, convenient while at the same time hassle free in air travel. The key is to consistently maintaining lower cost. AirAsia made it possible by following these key strategies:

( I ) Operational Strategies

As Bateman & Snell (2013) has expressed that Öperational planning identifies the specific procedures and processes required at lower levels of the organization”.

Safety First – Never compromise on Safety is the single most important criterion in every aspect of the operations, an area that AirAsia will. AirAsia complies with the conditions set by regulators in all the countries where the airline operates. In addition, AirAsia partners with the world’s most renowned maintenance providers to ensure that its fleet is always in the best condition.

High Aircraft Utilisation – AirAsia’s high frequency flights have made it more convenient for guests to travel as the airline implements a quick turnaround of 25 minutes, which is the fastest in the region. This has resulted in high aircraft utilisation, lower costs and greater airline and staff productivity.

Low Fare, No Frills – AirAsia targets guests who are prepared to do away with frills such as meals, frequent flyer miles or airport lounges in exchange for fares lower than those currently offered without comprising on quality and service. Guests have the choice of buying exclusively prepared meals, snacks and drinks from our in-flight service at an affordable price.

Streamlined Operations – Making the process as simple as possible is the key to AirAsia’s success. We are working towards a single aircraft fleet; this greatly reduces duplicating manpower requirements as well as stocking of maintenance parts.

Lean Distribution System – AirAsia offers a wide and innovative range of distribution channels to make booking and travelling easier for its guests. AirAsia’s ticketless service provides a low cost alternative to issuing printed tickets.

Point to Point Network – The LCC model adopts the simple point-to-point network. All AirAsia flights are short haul (four-hour flight radius or less) while our sister airline AirAsia X focuses more on the medium to long haul flights (more than four-hour flight radius). The underlying business is to fly a person from point A to B.

(II)  Tactical Strategies

As Bateman & Snell (2013) elaborated, “Tactical planning translates broad strategic goals and plans into specific goals and plans….often are functional area like marketing or human resources…”. This was how the biggest budget airlines was built. Lee (2013) wrote that Tony Fernandes had mentioned 12 success strategies applied by AirAsia during 2009 until 2013, they are :

A good grasp of finance - Similar to Megaworld’s Andrew Tan, Fernandes is an accountant by training and good at numbers. Educated at the London School of Economics, from 1987 to 1989 he worked as the financial controller of British tycoon Richard Branson’s Virgin Records in London. He is from Malaysia’s ethnic Indian minority, with ancestral roots in India’s former Portuguese colony of Goa, which explains his Portuguese-sounding surname.  Fernandes was formerly Southeast Asian regional vice president for Warner Music Group from 1992-2001. No need to become accountants, but we all need a good understanding of accounting and finance.

Determination - During a speech at the Sabah International Business Luncheon Talk 2012, Fernandes was quoted by the Borneo Post as saying nothing is impossible to achieve as long as there is determination. He turned around an unprofitable and small airline company with only two airplanes to one that now has a 160-strong fleet of aircraft in only 12 years!

Do not fear failure - ”I don’t care about failing because I do not want to sit down in my older years and say, ‘How come I didn’t try?’ So we did and Malaysia is the country which allowed four Malaysians to go out and make their dreams come true,” Fernandes said.

Take care of key assets, your people — One of Fernandes’ strengths is his caring for and nurturing good employees. He sees people as the “key asset” of any business and hopes to help develop their full potential, passions and dreams. His business offices have no walls and he seeks ideas from his staff. On Dec. 12, Fernandes gave 263 Chopard watches totaling five million ringgit as gifts to 263 staff members who’ve been with the company 10 years. Chopard is a 153-year-old Swiss luxury watch brand. Also, after typhoon Yolanda destroyed Tacloban City, Fernandes reportedly sought out one of his employees whose home was wiped out and I heard the tycoon will help rebuild the house. 

Branding - JG Summit Holdings founder John Gokongwei Jr. years ago told me that earning profits is not enough in business, that it is important to create a brand or brands. One believer in the power of brands is Tony Fernandes. He said it took him seven years to consciously and consistently build up the AirAsia brand name and logo as distinct and internationally known.

Marketing - Tony Fernandes invests in and excels in marketing. He said: “If you have a great product but no one knows about it, it’s history.” Fernandes reminds me of his former boss, Virgin Group’s colorful Richard Branson and America’s high-profile realty developer Donald Trump. Like Trump, Fernandes this year hosted the Asian version of the TV series The Apprentice Asia, with the winner being Filipino UP Diliman economics graduate Jonathan Allen S. Yabut, who is now also chief marketing officer of AirAsia Zest.

Support from Government - As in most societies, entrepreneurs cannot go against the government but need their support. Fernandes got his break in 2001 when then Malaysian Prime Minister Dr. Mahathir Mohamad heard of his dream to start an airline and advised him to just buy the heavily in-debt, government-linked AirAsia. Fernandes mortgaged his house and got personal savings to buy this firm with two old jets and US$11 million worth of debt. He bought the company for one ringgit (about 26 US cents). After he turned around AirAsia, in 2003 Fernandes lobbied Dr. Mahathir to raise the “Open Skies” idea with leaders of Thailand, Indonesia, and Singapore, leading to these nations giving AirAsia and other budget airlines landing rights.

Use digital technologies - Fernandes believes in using digital technology for his businesses. Much of his business comes from AirAsia.com. In fact, one unique thing about AirAsia flights is its inflight magazine Travel 3Sixty, which has this reminder: “Touch me, feel me and flip me over, but you can’t take me home. Read me online.” I think Fernandes isn’t scrimping on publishing costs, it is part of his clever marketing strategy to make passengers discover and enjoy his website.

Generosities -Fernandes is legendary for his personal and corporate generosity. He gives people big gifts, not only to generate loyalty to the business, but he is also generous in philanthropy, for example, his relief assistance to typhoon Yolanda victims here in the Philippines. His AirAsia Foundation also recently supported the social enterprise Rags2Riches led by Reese Fernandez-Ruiz of the Philippines. Rags2Riches is a genuine NGO helping underprivileged Filipino artisans transform their lives and turn scrap into high-fashion bags and other items.

Passion Passion seems to be a common denominator among achievers in business, the arts, sports and other fields. Tony Fernandes hires people with passion. He is exceptionally passionate, not only about his firms, charities and employees, but also about sports. He owns a football team in England, an F1 car racing team and is a major supporter of Asia’s biggest mixed martial arts sport, the OneFC.

Bold VisionTony Fernandes has a bold, global and long-range vision for his various companies. As a child, he dreamt of three things: running an airline, owning an English football club and owning a Formula One racing team.

Dynamic Corporate value - Fernandes said: “In AirAsia we consider ourselves basically a dream factory. We deliberately decided that we wanted a company where people can pursue their passion and we wanted to make use of all the talent that we have in-house.  The culture that we have stems from the fact that we want openness and we want people to be creative and passionate about what they do. In order to do that, we’ve got to inspire them.”

3.      HUMAN RESOURCE

Apart from traditional Human Resources, it is learned that Airasia has one of the most flexible and dynamic workforce structure, even recruitment process, training, reward systems, and labor system. According to airasiafanclub, (2009) the success stems from AirAsia's work culture, which stresses innovation, openness and a never-say-die attitude. Its offices have few physical barriers between desks, there are no titles on name cards and everyone is encouraged to use first names. Cabin crew are pushed to develop their own personality, instead of conforming to preconceived notions about their role, resulting in a relaxed onboard environment. There are no reduction process during downturn of 2008 to 2009. This is due to expansion made to create more routes instead of hold on to cost as others airlines did.

Recruitment is vital due to AirAsia principal to get the best and the right person. There are no limit on staff career’s opportunity as proven Miss Thailand is AirAsia’s Thailand Staff. Training is held at the AirAsia Academy and every staff is encouraged to be involved.

4.      LEADING

Nextup Asia (2014), found the leader behaviors in Tony Fernandez as he adopts a walk around management style. “Ïf you sit up in your ivory tower and just look at financial reports, you are doing to make some big mistakes.” For him, few days in a month he will works on the ground or in the cabin and getting feedback from the crew before making important decision. This type of management is called Transformational Leadership. “Leaders who motivate people to transcend their personal interests for the good of the group.” Bateman, 2013, p.425.  Further examined by (Kamisan & King, 2013) they found that Tony Fernandes has more freedom in decision making and traits of entrepreneuship skills. This proven b expanding his businesses to various portfolios such as Tune Talk,Tune Insurance, Tune Hotel, etc. Due to this it is understood that Tony Fernandes can be very effective in manoeuvring the organization in the downturn scenario. Moreover his kind of interpersonal communication has no barriers when it comes to mix with subordinates. It always been said that there are no walls in AirAsia office, so everybody can directly meet Mr Tony Fernandes.

5.      MOTIVATING

The CEO sets the tone. Anyone can walk up to "Tony", exchange a high-five, and offer a suggestion or just grumble about football. Talk to almost any of the 6,000-strong AirAsia staff, and a strong sense of ownership is evident (airasiafanclub, 2009). He even gave a woman pilot’s job as asked. The way Tony Fernandez motivates his staff is through his own iconic personalities, ambitious, and always strike for the best.

6.      CONTROLLING

AirAsia is the leader in airline business. According to airasiafanclub, (2009) "Commerce, rather than governments, drives Asean. Countries will always want more want tourists and traffic. Asean governments realised they had to open up or always play second fiddle to China and India,". That was on the bureaucratic control system. As the first mover into low cost carriers businesses, AirAsia definitely has the competitive advantage over rival. Business expansion is inevitably, in airasiafanclub, (2009) Fernandes quote to said AirAsia is now the region's largest low-cost operator, with a network of 122 routes covering more than 65 destinations. It has carried over 65 million passengers since its inception and grown its fleet to 80 aircraft. It has gone public, ordered 175 Airbus A320s, started associates in Indonesia and Thailand, and finally secured access to Singapore after overcoming various obstacles. Fernandes and AirAsia have also helped to start AirAsia X, a long-haul, low-cost airline that has 25 Airbus A330s on order and will imminently sign a deal for around 25 Airbus A350s.

CONCLUSION

Economic downturn 2008 to 2009 has given many opportunities to AirAsia. With Tony Fernandes leadership’s style, AirAsia has become the biggest airlines players in South East Asia.

REFERENCES

1. ISIS, UM (2012). The Global Financial Crisis and the Malaysian Economy:Impact and Responses. (A Joint Report by the Institute of Strategic and International Studies (ISIS) Malaysia and the Faculty of Economics and Administration, Universiti Malaya (UM ) Commissioned by the United Nations Development Programme (UNDP). Washington, DC: Author. Retrieved from http://www.isis.org.my/attachments/e-books/The_Global_Financial_Crisis_and_the_Malaysian_Economy.pdf

2. Rembrandt, T. (2012). Oil's Role in the Global Economic Crisis, retrieved from oilprice.com/Finance/the-Economy/Oils-Role-in-the-Global-Economic-Crisis.html

3. GIUSEPPE, M. (2009) Did High Oil Prices cause the Financial Crash? By for OIL-PRICE.NET, retrieved from http://oil-price.net/en/articles/did-high-oil-prices-cause-financial-crash.php

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5. AirAsia annual report (2013). Retrieved from  http://klse.i3investor.com/servlets/staticfile/239160.jsp, pg.60

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7. Flores, W.,L. (2013, Dec 16). 12 success strategies of AirAsia boss Tony FernandesRetrieved from http://www.philstar.com/business-life/2013/12/16/1268045/12-success-strategies-airasia-boss-tony-fernandes 8. Beh, W. (2014).  3 AirAsia Success Factors 2014Retrieved from http://www.nextupasia.com/3-airasia-success-factors/

9. Kamisan, A. (2013). International Journal of Business and Management; Vol. 8, No. 24; (2013). Transactional and Transformational Leadership: A Comparative Study of the Difference between Tony Fernandes (Airasia) and Idris Jala (Malaysia Airlines) Leadership Styles from 2005-2009, ISSN 1833-3850 E-ISSN 1833-8119, Published by Canadian Center of Science and Education.

10. SWOT Analysis for AirAsia, (2008). Strengths, Weaknesses, Opportunities and Threats Analysis for AirAsia. Retrieved from http://strategy.agileworks.asia/2008/07/swot-analysis-for-airasia.html

11. Interview with Tony Fernandes, (2009). Retrieved from http://airasiafansclub.blogspot.com/2009/05/interview-with-tony-fernandes.html

12. Bateman & Snell, (2013). Management: Leading & Collaborating in Competitive World, 11^th edition, Mcgraw Hill International Edition

(RAM'S 2014)