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Airasia Vs. Tigerair

Essay by   •  March 4, 2015  •  Essay  •  3,604 Words (15 Pages)  •  919 Views

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1. Introduction

The entry of low cost carriers (LCCs) in Southeast Asia has dramatically changed the regional aviation market in recent years, as shown in Figure 1 in the Appendix. After the quick success of the pioneer in the regional low-cost air travel (AirAsia), a number of new LCCs emerged in an attempt to carve out a piece of a booming, but increasingly competitive market, which now has almost 600 aircraft operating in the region (Figure 2). The degree of success of these companies varied widely, and in this paper I will discuss the strategy adopted by the market leader - AirAsia, and of one of its regional competitors - Tigerair.

2. Background - AirAsia

AirAsia was established in 1994 and began operations at the end of 1996. It was originally founded by a government-owned conglomerate, DRB-Hicom. On 2 December 2001, the airline, which was on the verge of bankruptcy, was acquired by former Time Warner executive Tony Fernandes, for the token sum of one ringgit (about US$0.26 at the time) along with US$11 million worth of debts .

Fernandes quickly turned the company around, producing the profit in 2002 and launching new routes from its hub in Kuala Lumpur. The company successfully managed to undercut the dominating local airline (Malaysia Airlines) with low cost fares. In 2003, AirAsia opened a second hub at Senai International Airport in Johor Bahru near Singapore and launched its first international service to Bangkok, Thailand.

Following rapid success from its two regional hubs, AirAsia embarked on an ambitious expansion plan that saw the company establish several cross-border joint ventures in Asia, notably in Thailand and Indonesia. The airline has more recently also partnered with other airlines and investors to create ventures in the Philippines, India and Japan. It has also started (or planned to start) longer-range operations between Australia, Japan and Southeast Asia.

At the end of FY2013 the company posted revenues of over US$1.5 billion, although it also reported a net loss of over US$100 million due to increasing expenses for fuel and aircraft maintenance. AirAsia's operations were marred at the end of 2014 by the crash of a plane operated by its Indonesian subsidiary. The accident highlighted the potential safety issues and challenges brought by the breakneck speed at which Southeast Asia's air travel has expanded in recent years. Despite this setback, AirAsia can be described as a hugely successful operation so far.

3. Background - Tigerair

Tiger Airways Holdings is a Singapore-based holding company for a group of low-cost airlines operating primarily in Southeast Asia, consisting of its flagship airline and wholly owned subsidiary, Tigerair (Tiger Airways Singapore), and a 10% stake in Tigerair Taiwan, an associate company. Tigerair was established in December 2003 and began services in September 2004 to Bangkok. It operates scheduled international services from Singapore Changi Airport. Originally 40% of its shares were owned by Singapore Airlines, which recently increased its stake to 55% in the face of Tigerair's financial troubles .

The company has grown from revenues of US$75 million in 2006 to US$734 million in 2014, but it has reported heavy net losses for three consecutive years (2012-2014). It has started and then abandoned a number of overseas ventures, including:

* Tigerair Australia, whose operations were sold in 2014 to Virgin Australia (and retained the name "Tigerair Australia");

* Tigerair Mandala, the company's foray into the Indonesian market, which ceased operations in 2014;

* Tigerair Philippines, which was sold to rival Cebu Pacific in 2014

* Thai Tiger and Incheon Tiger, two aborted proposed airlines in Thailand and South Korea, respectively.

Tigerair was repeatedly subject of allegations over its poor safety record, and the training level of its pilots, as highlighted by a temporary ban from Australian airspace in 2011. The recent AirAsia crash is likely to bring Tigerair's safety standards under intense scrutiny once again.

4. AirAsia: the innovation path of a regional pioneer

I will now analyse AirAsia's innovation approach by using the Blue Ocean Strategy concept, developed by Kim and Mauborgne . According to this model, the distinction between successful and less successful companies is their strategic positioning from the very beginning of their operations. Kim and Mauborgne use the image of "red and blue oceans" to describe, in general, all types of possible markets in which a company can operate. A red ocean refers to a market that is currently very competitive. A blue ocean, in contrast, refers to the unknown or unexplored market space, which has the potential for rapid growth. The cornerstone of the Blue Ocean Strategy is 'value innovation', which occurs when a company successfully combines product/service innovation with competitive cost positioning.

Similarly to what was accomplished by Southwest Airlines in the United States, and Ryanair in Europe, AirAsia in Malaysia managed to change Southeast Asia's travellers 'perception of air travel. Figure 3 in the appendix shows the strategy canvas of people transportation businesses in Malaysia for three types of businesses - one representing AirAsia itself, one representing traditional airlines, and one representing land transport - and I highlight the way AirAsia pursued the Blue Ocean approach.

AirAsia in this canvas is not compared with a direct competitor such as Tigerair, but rather with the pre-existing competitors at the beginning of AirAsia's business in order to highlight the company's role as a pioneer in the region's air transport.

Using Kim and Mauborgne's "Six Paths Framework" , which categorises the six main strategies used to redefine market boundaries, I also looked at specific strategies that were adopted by the company to carve out a market space for its business. The six paths are listed below:

1. Look Across Alternative Industries

2. Look Across Strategic Groups Within Industries

3. Look Across the Chain of Buyers

4. Look Across Complementary Product and Service Offerings

5. Look Across Functional or Emotional Appeal to Buyers

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