AirAsia.com. Professional Diploma Program in Logistics and Supply Chain Management Project Studies Enabling Technology in Airline Industry

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1 AirAsia.com Professional Diploma Program in Logistics and Supply Chain Management Project Studies Enabling Technology in Airline Industry By WONG Pui Man, Cary March 2009

2 2 CONTENTS CONTENTS...2 ABSTRACT...3 COMPANY BACKGROUND...4 BUSINESS PROCESS AND OPERATION...5 LOW COST CARRIER (LCC) BUSINESS MODEL...7 BUSINESS MODEL...7 COMPETITIVE ADVANTAGES...8 SWOT ANALYSIS...8 MAJOR CHALLENGES...9 VALUE CHAIN ANALYSIS...9 IT IMPLEMENTATIONS AND STRATEGIC ALIGNMENT...10 CURRENT STRATEGIC IT IMPLMENTATION...10 POTENTIAL STRATEGIC IT IMPLEMENTATION...11 REFERENCES...14

3 3 ABSTRACT The use of information technology plays an important role in the strategic and operation management of airlines, and facilitates the successful airlines in the future. This paper will look at the awarding-winning low cost carriers (LCC) in Asia Pacific region AirAsia, analyzes the current business environment, competitive advantages, value chain, current implementation of information technology, and the recommended future implementation of technology in customer relationship management (CRM) implementation to pursue competitive differentiation and profitability effectively in the future.

4 4 COMPANY BACKGROUND AirAsia is one of the award winning and largest low fare airlines in the Asia expanding rapidly since With a fleet of 72 aircrafts, AirAsia flies to over 61 domestic and international destinations with 108 routes, and operates over 400 flights daily from hubs located in Malaysia, Thailand, and Indonesia. Today, AirAsia has flown over 55 million guests across the region and continues to create more extensive route network through its associate companies. AirAsia believes in the no-frills, hassle-free, low fare business concept and feels that keeping costs low requires high efficiency in every part of the business. Through the corporate philosophy of Now Everyone Can Fly, AirAsia has sparked a revolution in air travel with more and more people around the region choosing AirAsia as their preferred choice of transport. AirAsia creates values through the following vision and mission: AirAsia Values Vision To be the largest low cost airline in Asia and serving the 3 billion people who are currently underserved with poor connectivity and high fares. Mission To be the best company to work for whereby employees are treated as part of a big family Create a globally recognized ASEAN brand To attain the lowest cost so that everyone can fly with AirAsia Maintain the highest quality product, embracing technology to reduce cost and enhance service levels AirAsia makes the low fare model possible and create values through the implementation of the following key strategies: AirAsia Key Strategies Safety First Partnering with the world s most renowned maintenance providers and complying with the world airline operations. High Aircraft Utilization Implementing the regions fastest turnaround time at only 25 minutes, assuring lower costs and higher productivity. Low Fare, No Frills Providing guests with the choice of customizing services without compromising on quality and services. Streamline Operations Making sure that processes are as simple as possible. Lean Distribution System Offering a wide and innovative range of distribution channels to make booking and traveling easier. Point to Point Network Applying the point-to-point network keeps operation simple and lower costs.

5 5 BUSINESS PROCESS AND OPERATION AirAsia has fostered a dependency on Internet technology for its operational and strategic management, and provides an online ticket booking services to traveler online. The following shows the home page of AirAsia.com as the company key channel of marketing and sales. Exhibit 1 AirAsia.com Home Page To book a flight with AirAsia, customers can either choose the following channels or simply visit the AirAsia.com home page and follow the below 5 steps. 1. Call centre 2. Sales office and airport sales counter 3. Authorized travel agents 4. Mobile booking via mobile.airasia.com or 5. Online ( in 5 easy steps as shown below. Step 1 - Search Step 2 - Select Step 3 - Guest & Contact Step 4 - Payment Step 5 - Itinerary

6 6 The following diagram shows the online electronic ticket ordering process. Exhibit 2 AirAsia Electronic Ticket Ordering Process

7 7 LOW COST CARRIER (LCC) BUSINESS MODEL The low cost airlines like AirAsia have changed the definition of airlines that air travel is a luxury and it is only for the upper segment of the population. The key objective of low cost carriers is to increase their reach and provide the services to a large segment. However, the low cost carriers are now facing some challenges in the market. BUSINESS MODEL AirAsia follows the Low-Cost-Carrier (LCC) business model in the airline industry, which can be characterized as below: Low Cost Carrier (LCC) Business Model Simple Product Catering on demand for extra payment Planes with narrow seating and only a single class No seat assignment No frequent flyer programmes Positioning Non-business passengers, especially leisure traffic and price-conscious business passengers Short-haul point to point traffic with high frequencies Aggressive marketing Secondary airports Competition with all transport carriers Low Operating Costs Low wages Low airport fees Low costs for maintenance, cockpit training and standby crews due to homogeneous fleet High resource productivity Short ground waits due to simple boarding processes No air freight, no hub services, short cleaning times, and high percentage of online sales Exhibit 3 Low Cost Carrier Business Model

8 8 COMPETITIVE ADVANTAGES With the Low Cost Carrier business model, AirAsia has the following competitive advantages over the competitors in the airline industry, which can be summarized in the following diagram. Exhibit 4 AirAsia Competitive Advantages SWOT ANALYSIS To figure out the internal factors such as strengths and weaknesses, and external opportunities and threats to business objectives, a SWOT Analysis of AirAsia can be conducted and shown below. AirAsia SWOT Analysis Strengths Low cost operations Fewer management level, effective, focused and aggressive management Simple proven business model that consistently delivers that lowest fares Penetrate and stimulate to potential markets Multi-skilled staffs means efficient and incentive workforce Single type fleet minimize maintenance fee and easy for pilot dispatch Weaknesses Service resource is limited by lower costs Limited human resources could not handle irregular situation Government interference and regulation on airport deals and passenger compensation Non-central location of secondary airports Brand is vital for market position and developing it is always a challenge Heavy reliance on outsourcing New entrants to provide the price-sensitive services Opportunities Long haul flight is an trial to get undeveloped market share Differentiation from traditional LCC model by adding customer services or operation as full service airline with low fare Ongoing industry consolidation has opened up prospects for new routes and airport deals High fuel prices will squeeze out unprofitable competitors Threats Full service airlines start cut costs to compete Entrance of other LCCs High fuel price decreases yield Accident, terrorist attack, and disaster and affect customer confidence Aviation regulation and government policy Increase in operation cost in producing value-added services System disruption due to heavily reliance on online sales

9 9 MAJOR CHALLENGES Increasing competition because of increasing number of low cost airline competitors, and aggressive competition against the large or traditional airline companies Customer decrease because of poor economy Rising of the fuel prices Higher labor cost Inadequate infrastructure Route and flight utilization Safety and security issues of aircraft crash or being attacked VALUE CHAIN ANALYSIS To better understand and analyze the specific activities through which AirAsia can create a competitive advantage, a value chain analysis for airline industry has been conducted as below to model AirAsia as a chain of valuecreating activities. The goal of these activities (Inbound logistics, Operations, Outbound logistics, Marketing and Sales, and Service) is to create value that exceeds the cost of providing the product or services, thus generating a profit margin. Exhibit 5 Value Chain Analysis of Airline Industry

10 10 IT IMPLEMENTATIONS AND STRATEGIC ALIGNMENT In todays globalize economy, information technology has driven fundamental changes in the nature and application of technology in business. The implementation of information technology in its value chain provides powerful strategic and tactical tools for AirAsia, which if properly applied and used, could bring great advantages in promoting and strengthening the competitive advantages. CURRENT STRATEGIC IT IMPLMENTATION AirAsia has currently adopted information technologies strategically to integrate the operations and coordinate all the business and management functions. The followings are few system implementations that AirAsia has done in its marketing and sales activities as well as operation activity in the value chain. Yield Management System (YMS) Anticipates and reacts to the behavior of customers to maximize the revenue - taking into account the operating cost and aids AirAsia to optimize prices and allocate capacity to maximize the expected revenues by 2 levels: a) Seat Seats are available at various prices in different points of time. A reservation done at a later date will be charged more than the one done earlier for the same seat b) Route By adjusting prices for routes / destinations that have a higher demand when compared to others. Results increased revenue (3-4%) by taking advantage of the forecast of the high / low demand patterns, lower prices as YMS has aided AirAsia to increase the revenue by offering higher discounts, more frequently during off-peak times while raising prices only marginally for peak times. Computer Reservation System (CRS) An integrated web-enabled reservation and inventory system suite powered by Navitaire s Open Skies technology that includes Internet, call center, and airport departure control functionality. Satisfy the unique needs of AirAsia implementing a low-cost business model to transform the business process to efficiently streamline operations. Helps AirAsia to grow at a dramatic pace in the past few years as stated below: "Navitaire's Open Skies technology has truly enabled AirAsia's growth from 2 million passengers to 7.7 million passengers in less than two years. Open Skies scaled easily to accommodate our growth." - Tony Fernandes, CEO, AirAsia Enterprise Resource Planning System (ERP) An integrated ERP solution powered by Microsoft Business Solutions (MBS) on Microsoft technology platform which is implemented by Avanade consultants in Ma With the robust ERP technology platform, AirAsia is able to successfully maintain process integrity, reduce financial month-end closing processing time, speeds up reporting and data retrieval process.

11 11 POTENTIAL STRATEGIC IT IMPLEMENTATION In order to gain market share and sustain its competitive advantages to be the low cost carrier in the high demanding environment, AirAsia must develop new ways to manage both customer relationships and suppliers or partners to optimize customer loyalty, supplier relationships, and revenue. The following diagram shows the strategic forces of value proposition of the airline industry, showing that the focus on Supplier and Alliances and Customers will drive positive values to AirAsia can achieve. Customer Relationship Management (CRM) application will be one of the area of strategic IT implementation that AirAsia can focus to achieve high values to both shareholders and customers. Exhibit 6 The Strategic Forces of Value Proposition Customer Relationship Management (CRM) In long term, customer relationships should be fostered for AirAsia to maintain competitive advantage and profitability. When planning and implementing CRM application, management is recommended the following approaches: 1. Customer segmentation mileage-based segmentation is inadequate, rather should focused on value-based and needs-based approaches can guide investment decisions and drive greater insight into the needs of highvalue customers. 2. CRM initiative development to differentiate from other competitors, AirAsia should not adopt the fast follower approach to CRM initiative development, i.e. learning from other competitors approach (e.g. installing kiosks for fast check-in). AirAsia should implement CRM program in favor of investing in initiatives with a high return, which respond to the needs and desires of their own customers 3. Organizational design and management AirAsia needs to train the employees, empowering them with a complete view of the customer and clearly articulating the employee s role in the CRM strategy.

12 12 Advanced and sophisticated CRM information system should include the following key functions: Customer Relationship Program (CRM) Key Functions Traveling planning Site personalization for on-line customer to create travel plan, bundled services information, flight notification systems, and gate information displays etc. Reservations and ticketing Frequently flyer program Campaign management Customer care Business intelligence ITA search engines, roving agent check-in, kiosks, internet check-in, and phone check-in etc. membership-based or point-based rewarding scheme offering to the applicable customers. campaigns and promotion. Web-based self service such as e-ticket booking and reservation, online baggage tracing, RFID baggage tags, internet in lounge, and in air Internet services. Dynamic, updated, multi-dimensional reports that helps management to do analytics in various areas such as customer profiles. To justify the investment and implementation scope of the CRM program, AirAsia is recommended to look into the ROI and financial impact to shareholder value driven by each of the CRM initiatives. The followings show some examples of ROI and the financial assessment of selected CRM initiatives. Exhibit 7 Example of Return On Investment from Selected CRM Initiatives

13 13 Exhibit 8 Financial Assessment of Selected CRM Initiatives By taking the steps to implement a truly consumer-centric approach to relationship management, AirAsia will be better positioned to acquire, develop, and retain high-value customers.

14 14 REFERENCES 1. eairlines: Strategic and Tactial Use of ICTs in the Airline Industry. Dimitrious Buhalis. University of Surrey The future of CRM in the airline industry: A new paradigm for customer management. IBM Institute for Business Value AirAsia Corporate Website AirAsia How to book online tutorial Navitaire Open Skies by Navitaire Reservation and Distribution System.

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