BUSINESS STRATEGY ANALYSIS OF SUCCESSFUL LOW-COST AIRLINES IN THE WORLD AND LESSONS FOR VIETJET AIR TO COMPETE IN THE INTERNATIONAL MARKET
Student’s name: Pham Linh
Class: 13th English, Business Administration
Supervisor: Duong Thi Hoai Nhung, MBA
TABLE OF CONTENTS
Acronym ; abbreviation
Charts, tables, and other exhibitions
Research Motivation ; objectives
Contribution of the Research
Definition of business strategy
Importance of business strategy to a company’s success
Types of business strategies
Building an organization capable of good strategy execution
Managing internal operations
Develop corporate culture
Key success factors
Definition and role of key success factor
Key success factor identification model
Case study selection
Global aviation industry overview
South West Airlines
Business strategy analysis
Strategy implementation analysis
Air Asia Analysis
Business strategy analysis
Strategy implementation analysis
Key success factors
Vietjet Air Overview
Recommendation to Vietjet Air
For more than a century, Airline industry has drastically changed the way humankind lives and works. It not only has increased global trade by allowing faster and easier movement of goods and passengers, but also has also provided work to millions of people. According to the CEO of IATA’s (the International Air Transport Association), in 2014, aviation provides 58 million jobs and contributes ~$2.4 trillion in GDP. This is expected to increase to 105 million jobs and $6 trillion in GDP in 2034 (Marketrealist.com, 2018). Furthermore, it brings people to wherever they want to go on this earth. Whether it is the long-awaited vacation trip to paradise island, a flight to sign the historical deal, or just a flight to visit someone matter, aviation industry makes people’s lives better by providing faster and easier transportation.
However, before the 1970s, airlines were not widely accessible. Flights are very expensive for the majority and thus were catered to affluent and business travelers. Airline travelers were a pampered lot, plied with food and wine by nubile stewardesses on flights that were seldom full, which frequently allowed one to stretch out on the adjacent empty seat and enjoy forty winks in the hushed passenger cabin.
Fortunately, in the 1970s, low-cost airlines model are introduced in the USA and they changed the whole industry again. By relentlessly focusing on cost-cutting strategies such as the point-to-point model, discount pricing, technology adoption, fleet uniformity, low-cost airlines have been able to introduce much cheaper ticket prices that are accessible to the majority of people.
The liberalization of the airline industry has yielded spectacular results. As a Bloomberg article notes, by 2010, the number of U.S air travelers had more than tripled to 721 million, from 207.5 million in 1974. Over the same period, fares have decreased drastically, with airline revenue per passenger mile down 61% from 0.33 dollar (inflation-adjusted) in 1974 to 0.13 dollar in 2010. Fill rate, or load factors — the percentage of filled airline seats, have increased from about 50% in the early 1970s to 74% in the first decade of this millennium (Marketrealist.com, 2018).
The LCC revolution has spread worldwide over the past three decades, to Europe in the 1990s and Asia in the 2000s. Vietnam is not an exception to this trend. For the last decades, many low-cost airlines have launched flights into Vietnam market. However, the only one low-cost carrier that company has truly succeed the market is Vietjet Air.
VietJet Aviation Joint Stock Company, trading as VietJet Air, is an international low-cost airline from Vietnam. Launched in December 2011, the company has continuously grown and achieve astounding successes. On the third quarter of 2017, Vietjet Air became one of the most profitable private corporations in Vietnam, just after 6 years of its launch, according to VNR500. The airline also makes sky transportation accessible more than 19 millions of Vietnamese for its cheap price (Dautuchungkhoan, 2016). Before Vietjet Air, flying is a choice known only for the upper class. Now, almost any Vietnamese can fly to anywhere they want in Vietnam within their budget. On a global perspective, the company becomes the pride of Vietnamese people because its’ financial success makes the company’s CEO and Founder Nguyen Phuong Thao a multi-billionaire and become #55 most powerful women on earth, a higher position than Hillary Clinton of USA (Forbes.com, 2017).
As an incoming business graduate, the author is highly impressed the company’s achievement so far and is intrigued by its future moves. Vietjet Air has established the strong market position in the domestic market. The next big growth may lie in diversification or international market expansion. Since the corporation already has implemented diversification strategy by opening its cargo business (Cafebiz.vn, 2017), the author focuses on international market expansion opportunities in this research.
There are a lot opportunity as well as challenges for Vietjet if it wants to expand internationally. APAC market is expected to the fastest growing region for global aviation industry. This growth can be explained by increasing disposable incomes of Asian people (Deloitte Insights, 2017), which mean more people can fly. Furthermore, digital technology has enabled airlines to remove intermediaries and get closer to customers, which allow companies to reach out, understand, and serve customers at different countries and regions more easily.
Nonetheless, there are also challenges related to competition, market understanding, and regulatory issues. Vietjet Air’s competitors in APAC regions are Air Asia, Indigo, and Jet stars, whose revenue are among top 10 highest low-cost revenue airlines in the world (Statista, 2016). Air Asia has been named best low-cost airline for 9 consecutive years. Besides major players named above, there are strong domestic low-cost brands in each country such as Singapore Airline or Thai Airways, who have effectively beaten Air Asia in their homeland to hold market leader position. Furthermore, due to religion variety in the region and Vietnam being a communist country, Vietjet Air will face a lot of challenges in its effort to expand internationally and needs to carefully prepare for the challenges.
Understanding that there are tremendous opportunities as well as challenges in growing internationally, the author, in this research, aims to help Vietjet Air compete successfully in international markets, by analyzing business strategies of leading low-cost airlines in the world and draw relevant lessons for the company.
The author set out two specific objectives. The first is to understand what makes leading low-cost airlines successful. The second objective is to identify relevant lessons for Vietjet Air to compete successfully in the international market.
1.2. Research questions
In order to achieve the two objectives, the author set out five questions to answer in this research.
1. What strategy are leading airlines using?
2. How do they implement their strategy?
3. What are the key success factors of the leading airlines?
4. What is Vietjet Air’s current competitive ability in the international market?
5. What are lessons for Vietjet Air in building and implementing its strategy to compete effectively in the international market?
1.3. Research scope
The research’s key objects are two low-cost airlines which are Air Asia and SouthWest Airlines in low-cost aviation industry of Asia market and North America market respectively. The secondary of an object is the current business context and business strategy of Vietjet Air in Asia market. The analysis focuses on analyzing the airlines’ business activities that related to a firm’s business strategy formulation and implementation. Nonetheless, some additional details are also discussed in the study as background for the researched objects.
Since firms’ strategies transform over time to adapt to the fast-paced changing competitive environments, the author did not research the objects in a fixed time frame. Instead, he analyzes objects at multiple time points with a key focus on the airlines’ strategy over the recent three to five years.
1.4. Research structure
The author divides this research into five main chapters as follow:
Chapter 1: Introduction
This chapter presents the general background and the author’s motivation to choose this topic. It also states the research objectives and questions, research scope, and the general view of the research’s structure.
Chapter 2: Theoretical Background
This chapter introduces and evaluates the theoretical foundation for the whole research. Readers can expect to see concepts, models, and frameworks to be used for analyzing the research objects in this section.
Chapter 3: Methodology
This chapter discusses methods will be used to approach, analyze the research objects and draw the conclusions. Readers can expect to understand research design, approach, case study selection criteria, as well as data source used for case analysis.
Chapter 4: Empirical finding
In this chapter, the author firstly provides an overview of the global aviation industry as well as introducing the two leading low-cost airlines (Air Asia and South West Airlines) selected for analysis.
Afterward, the author analyzes business strategies and implementation of the two airlines, using the models and frame worked discussed in theoretical background chapter.
To finish the chapter, the author will synthesize key success factors from the two airlines to build a list of potential learning points for Vietjet Air.
Chapter 5: Recommendations and conclusion
In this chapter, the author introduces and briefly analyze Vietjet Air current situation, and then select applicable lessons from the synthesis of the previous chapter, and give recommendations to Vietjet Air companies based on these lessons. The conclusion of the research also belongs to this chapter, summarising the research process and result.
For Vietnamese practitioners in the role of strategic planning and commercial in of airline industry, this research will provide them with background knowledge on strategy development and strategy implementation, a perspective on what level of calibers required to be able to compete internationally, as well as valuable lessons to be learned from two real model companies. This knowledge will help Vietnamese low-cost airlines which helps them better prepare for the competition in the quest for international growth.
For academic researchers, this work will provide a structural and scientific approach to analyzing a strategic case study of leading firms in the world and synthesize relevant strategic lessons for a local firm. Other scholars can refer to this material for their research work on other firms of any other industries.
2. THEORETICAL BACKGROUND
2.1. Business strategy
Strategy has been studied for years by business leaders and by business theorists. Yet, there is no definitive answer about what strategy really is. Gerry Johnson and Kevan Scholes, authors of “Exploring Corporate Strategy,” say that strategy determines the direction and scope of an organization over the long term, and they say that it should determine how resources should be configured to meet the needs of markets and stakeholders.
Michael Porter, a strategy expert, and professor at Harvard Business School emphasizes the need for strategy to create and maintain unique and valuable position and says that it should determine how organizational resources, skills, and competencies should be combined to create competitive advantage.
From different perspectives mentioned above, we can identify similarities for the definition of strategies. First, strategy is a set of various actions within the whole organization rather than individual action from any specific functions or teams. Second, the final impact of strategy is corporate performance. Taking Porter’s definition into consideration, the “unique and valuable position” in the market allows a firm to take customers away from competitors, which helps it capture market share and profitability. “Meeting market needs and stakeholders” of Johnson’s definition also means performance.
For the two reasons, the writer chooses strategy definition of Frank Rothaermel, who authored the strategy textbook Strategic Management (2016) and who state that strategy is a set of goal-directed actions a firm takes to gain and sustain superior performance relative to competitors”.
There are two main types of strategy: business strategy and corporate strategy. The former type aims at delivering superior performance at the single-business level, or a particular line of business. The latter type is about choosing what kind of business a firm should be in and how to manage a portfolio of multiple businesses for maximum for profitability and growth. For the scope of this research, we only address business strategy.
Business strategy is the goal-directed actions managers take to gain and sustain competitive advantages when competing in a single product market (Rothaermel, 2016).? A company achieves a competitive advantage whenever it has some type of edge over rivals in attracting buyers and coping with competitive forces. According to Micheal Porter, a company achieves a competitive advantage when it provides buyers with superior value compared to rival sellers or offers the same value at a lower cost to the firm.
To gain a competitive advantage, a firm needs to provide either goods or services consumers value more highly than those of its competitors, or goods or services similar to the competitors’ at a lower price. A competitive advantage is sustainable when firms are able to maintain for the prolonged period of time.
The rewards of superior value creation and capture are profitability and market share. Sam Walton, found Walmart as a discounted retail company who was driven by offering lower prices than other retailers. Walmart has successfully kept its low-cost advantage for decades and it is the highest revenue company in the world with nearly 500 billion USD in sales annually. Steve Jobs build Apple to “put a ding in the universe” by making a difference by delivering products and services people love. Apple is the most profitable company in the world with 52.6$ billions USD.
2.1.2. Importance of business strategy to a company’s success
Business Strategy is fundamental to the superior performance and sustainability of any organization for three main reasons. An effective business strategy gets customers to choose you over competitors. As explained later in the research, strategy puts firms to make hard choices between differentiating its products or lowering its prices if it is offering the same value as competitors. Those hard choices put the firm into a position that creates more incremental economic value to customers than its competitors, which spurs customers to choose them over competitors.
An effective strategy help firm exploits market opportunities and minimizes threats. Discussed later in the research, strategic planning requires firms to analyze its macro environments such as the economy, legal, technology and competitive factors such as direct rival, the threat of new entry or suppliers bargaining power. The analysis help firms understand what are opportunities and potential threats and what to do about it.
Furthermore, firms with a strategy utilize its strengths and optimize its weakness. Highly strategic firms analyze and evaluate carefully its resources, capabilities, and core competencies to determine not only what it does well, what it doesn’t do well but also what it needs to do well and what to outsource. Strategy help firms become competitive while efficiently invest in the right of resources and business activities, which make firms highly profitable as a result.
Strategy is management’s prescription for doing business, its roadmap to competitive advantage, its game plan for pleasing customers, and its formula for improving performance.
2.2. Strategy formulation
2.2.1. External analysis
In this part, a set of models will be presented to analyze the external environment in which the firms and competitive forces operate. The author will begin with PESTEL framework, which allows companies to scan, monitor, and evaluate changes and trends in the firm’s macro-environment. Next, the author explores Porter’s five forces model of competition to help readers to understand competitive environment at a micro level and determine an industry’s profit potential.
Figure 2.1. Firm’s external environment
Source: Rothaermel (2016)
18.104.22.168. Macro environment analysis using PESTLE framework
The PESTEL model analyzes the macro environment of an industry under six factors: Political, Economic, Sociocultural, Technological, Ecological, and Legal
a. Political factors
Political factors are actions and processes of the government entity that can affect the decisions of companies. Political factors can range from tax policy, environmental laws to bureaucracy, bribery, and corruption. While firms traditionally have little influence over political factors, companies have increasingly been trying to influence this realm. They do so by applying nonmarket strategies—that is, through lobbying, public relations, contributions, litigation, and so on, in ways that are favorable to the firm.
b. Economic factors
Economic factors in a firm’s external environment are largely macroeconomic. Three key factors should be taken into consideration are growth rates, employment level, Interest rates.
The overall economic growth rate is a measure of the change in the number of goods and services produced by a nation’s economy. When the economy grows or expands, people have more money and consume more, which makes demands increases, and competition among firms frequently decreases, which makes business more profitable.
Growth rates also directly impact the level of employment. When the economy is growing, unemployment rate tends to be low, and skilled human resources become a scarce and more expensive resource. In economic downturns, unemployment rises. As more people look for jobs, skilled human capital is more abundant and wages usually fall.
Interest rates are the amount that debtors have to pay creditors for borrowing money from them. Low real interest rates create more demand because when interest rates are low, consumers borrow more to buy homes, automobiles, computers, and vacations on credit, which makes business more profitable. The reverse is true when the interest rate is high.
c. Sociocultural factors
Sociocultural factors cover a society’s norms, cultures, and values. Customer’s demand and preference don’t not only always change but also differ across groups, managers need to closely monitor such trends and consider the implications for firm strategy. In recent years, for example, an increasing number of American consumers have become more health-conscious about what they eat. This trend led to a boom for businesses such as Chipotle, Subway, and Whole Foods.
Demographic trends are also important sociocultural factors. These trends capture population characteristics related to age, gender, family size, ethnicity, sexual orientation, religion, and socioeconomic class. Like other sociocultural factors, demographic trends present opportunities but can also pose threats.
d. Technological factors
Technological factors are the application of knowledge to create new processes and products. For the last 50 years, world’s major innovations in process technology include lean manufacturing, Six Sigma quality, and biotechnology. Recent product innovations include the smartphone, electric cars, virtual reality and augment reality devices, artificial intelligence. Technological factors are major factors that disrupt industry and business for the last decade. The introduction of smartphones, which start with iPhone, has drive Nokia and basic phone companies out of business. The introduction of Uber has killed traditional taxi industry.
e. Ecological factors
Ecological factors capture broad environmental issues such as the global warming, pollution, and sustainable economic growth. There is an interdependent relationship between companies and the natural environment it operates in. If companies manage ecological environment well, people’s living condition increases, society’s and government’s support for the company increase, which helps the company grow sustainable.
g. Legal factors
Legal factors include the official outcomes of political processes as manifested in laws, mandates, regulations, and court decisions—all of which can have a direct bearing on a firm’s profit potential. Failure to understand and comply with law and regulations may greatly impact firm’s performance.
22.214.171.124. Microenvironment analysis: five forces
In the 1980s, Dr. Micheal Porter of Harvard University built a model called “Porter’s Five Forces Model” to analyze competitive environment. So far in business scholar community, the model is considered the most comprehensive and insightful model to help firms analyze its competitive environment. Porter’s model identifies five key competitive forces that managers need to consider when analyzing the industry environment and formulating competitive strategy: Threat of entry, Power of suppliers, Power of buyers, Threat of substitutes, Rivalry among existing competitors.
Figure 2.2: Five competitive forces
Source: Porter (1985)
a. Threat of entry
The threat of entry is the risk that potential new competitors will enter the industry. With the threat of new value proposition coming into the industry, incumbent companies may lower prices to make the entry appear less attractive to the potential new competitors, which would, in turn, reduce the overall industry’s profit potential
Incumbent firms may spend more to satisfy their existing customers. This spending reduces an industry’s profit potential, especially if firms can’t raise prices.
There are a number of barriers to keep potential competitors from entering the industry. Entry barriers are obstacles that determine how easily a firm can enter an industry. Those are economies of scale, network effects, customer switching costs, capital requirements, advantages independent of size, government policy, credible threat of retaliation.
b. Bargaining power of suppliers
The bargaining power of suppliers is the price pressure that suppliers can impose on industry’s players. Suppliers reduce the profitability of firms by increasing prices of firm’s supplied inputs or by reducing the quality of inputs materials. Supplier’s relative bargaining power is high when the suppliers’ industry is more concentrated than the industry it sells to; suppliers do not depend heavily on the industry for a large portion of their revenues; incumbent firms face significant switching costs when changing suppliers.
c. Bargaining power of buyers
The power of buyers captures the pressure an industry’s customers can place on the producer’s margins in the industry by demanding a lower price or higher product quality. When buyers successfully obtain price discounts, it reduces a firm’s top line (revenue). The power of buyers is high when there are a few buyers and each buyer purchases large quantities relative to the size of a single seller; the industry’s products are standardized or undifferentiated commodities; buyers face low or no switching costs; buyers can credibly threaten to backwardly integrate into the industry.
d. Threats of substitutes
Substitutes are products or services options that can meet same basic customer need as the industry’s product but in a different way. The threat of substitutes is the threat that an industry’s customers can use other products or services available from outside to meeting their needs instead of using the industry’s product. For example, in order to relax, people can play video games instead of going to bar, pubs, or vacation.
e. Rivalry among existing competitors
Rivalry among existing competitors describes the intensity with which companies in the same industry compete for market share and profit margin.
By performing PESTLE and five forces model analysis, a firm has a good understanding of opportunities and threats present in the external environment Nonetheless, to make the best strategic decision, firms need to look at its internal situation as well.
2.2.2. Internal analysis
Resources, capabilities, and core competencies are the foundation of competitive advantage. Resources are bundled to create organizational capabilities. In turn, capabilities are the source of a firm’s core competencies, which are the basis of establishing competitive advantages. According to business scholars, these are critical components business leaders need to look at when performing the internal analysis.
Figure 2.3. Firm’s internal factors
Resources are the productive assets owned by the firm; capabilities are what the firm can do. Individual resources do not confer competitive advantage; they must work together to create organizational capability. It is capability that is the essence of superior performance.?
Resources can be either tangible or intangible. Tangible resources are assets that can be observed and quantified. Production equipment, manufacturing facilities, distribution centers, and formal reporting structures are examples of tangible resources
Intangible resources are assets that are rooted deeply in the firm’s history, accumulate over time, and are relatively difficult for competitors to analyze and imitate. Because they are embedded in unique patterns of routines, intangible resources are difficult for competitors to analyze and imitate. Knowledge, trust between managers and employees, managerial capabilities, organizational routines (the unique ways people work together), scientific capabilities, the capacity for innovation, brand name, the firm’s reputation for its goods or services and how it interacts with people (such as employees, customers, and suppliers), and organizational culture are intangible resources.
For each analysis, tangible and intangible are grouped into categories. The four primary categories of tangible resources are financial, organizational, physical, and technological. The three primary categories of intangible resources are human, innovation, and reputational.
The firm combines individual tangible and intangible resources to create capabilities. In turn, capabilities are used to complete the organizational tasks required to produce, distribute, and service the goods or services the firm provides to customers for the purpose of creating value for them.?
126.96.36.199. Core competency
Core competencies are capabilities that serve as a source of competitive advantage for a firm over its rivals. Core competencies distinguish a company competitively and reflect its personality. Core competencies emerge over time through an organizational process of accumulating and learning how to deploy different resources and capabilities. As the capacity to take action, core competencies are the “crown jewels of a company,” the activities the company performs especially well compared to competitors and through which the firm adds unique value to the goods or services it sells to customers. Excellent customer service in its retail stores is another of Apple’s core competencies. In this instance, unique and contemporary store designs (a tangible resource) are combined with knowledgeable and skilled employees (an intangible resource) to provide superior service to customers.
Two tools help firms identify their core competencies. The first consists of four specific criteria of sustainable competitive advantage that can be used to determine which capabilities are core competencies. The second tool is the value chain analysis. Firms use this tool to select the value-creating competencies that should be maintained, upgraded, or developed and those that should be outsourced.?
188.8.131.52. The Four Criteria of Sustainable Competitive Advantage
Scholars have developed the VRIO model for evaluating a firm’s resource endowments in order to answer the question of what capabilities attributes underpin competitive advantage. For capabilities to be the basis of a competitive advantage, it must be valuable, rare, costly to imitate. And finally, the firm itself must be organized to capture the value of the resource.
A resource is valuable if it enables a firm to create more value to the market. Revenues rise if a firm is able to increase the perceived value of its product or service in the eyes of consumers by offering superior design and adding attractive features.
A resource is rare if the number of firms that possess it is less than the number of firms it would require reaching a state of perfect competition. A resource that is valuable but not rare can lead to competitive parity at best.
A resource is costly to imitate if firms that do not possess the resource are unable to develop or buy the resource at a reasonable price.
Being organized to capture means the characteristic of having in place an effective organizational structure, processes, and systems to fully exploit the competitive potential of the firm’s resources, capabilities, and competencies.
Figure 2.4. VRIO analysis model
Source: Rothaermel (2016)
Using VRIO framework, a firm can determine if it has a competitive advantage or not; and also that what the firm needs to do to turn its resources and core competency into competitive advantages. However, what should an outsider who aspire to perform an internal analysis of the firm do to determine its key resources and capabilities? He will need to look at the firm’s value chain.
184.108.40.206. Core competency identification: value chain analysis
The value chain describes the internal activities a firm engages in when transforming inputs into outputs. Each activity the firm performs along the horizontal chain adds incremental value—raw materials and other inputs are transformed into components that are assembled into finished products or services for the end consumer. Each activity the firm performs along the value chain also adds incremental costs.?
A careful analysis of the value chain allows firm leaders to deeply understand how the firm’s economic value creation breaks down into a distinct set of activities that help determine perceived value and the costs to create it, and moreover, understand which activities should be focused to deliver values.
Figure 2.5. Firm’s value chain analysis
Source: Porter (1985)
As shown in Exhibit, the value chain is divided into primary and support activities. The primary activities add value directly as the firm transforms inputs into outputs—from raw materials through production phases to sales and marketing and finally customer service.
Other activities, called support activities, add value indirectly. These activities include: research and development (R&D), information systems, human resources, accounting and finance. Firm infrastructure including processes, policies, and procedures.
The value chain perspective enables managers to see how competitive advantage flows from the firm’s distinct set of activities. This is because a firm’s core competency is generally found in a network linking different but distinct activities, each contributing to the firm’s strategic position as either low-cost leader or differentiator.
2.2.3. Types of business strategies
Most scholars in strategic management field derive their approach to business strategy categorization from Michael Porter and his book Competitive Strategy (1980). Porter categorize business strategy under two factors.
Figure 2.7: types of business strategy
First, Porter described an industry as having multiple segments that can be targeted by a firm. The breadth of its targeting refers to the competitive scope of the business. Second, since business strategy is about creating and sustaining competitive advantages, Porter defined two types of competitive advantage: lower cost or differentiation relative to its rivals. Achieving competitive advantage results from a firm’s ability to cope with the five forces better than its rivals.
The two basic types of competitive advantage combined with the scope of activities for which a firm seeks to achieve them lead to three generic strategies for achieving above average performance in an industry: cost leadership, differentiation and focus. The focus strategy has two variants, cost focus and differentiation focus?
If a firm is targeting customers in most or all segments of an industry based on offering the lowest price, it is following a cost leadership strategy. If it targets customers in most or all segments based on attributes other than price (e.g., via higher product quality or service) to command a higher price, it is pursuing a differentiation strategy.
If it is focusing on one or a few segments, it is following a focus strategy. A firm may be attempting to offer a lower cost in that scope (cost focus) or differentiate itself in that scope (differentiation focus).
Since all the three objects in this research target broad markets, the writer will focus on cost leadership strategy and differentiation strategy.
220.127.116.11. Cost leadership strategy
a. Definition and role
Cost leadership is a business strategy wherein a business firm tries to become the market leader by operating at the lowest cost amongst all the firms in business. The goal of a cost-leadership strategy is to reduce the firm’s cost below that of its competitors while offering adequate value (Rothaermel, 2016). The cost leader, as the name implies, focuses its attention and resources on reducing the cost to manufacture a product or deliver a service in order to offer lower prices to its customers. The cost leader attempts to optimize all of its value chain activities to achieve a low-cost position.
Cost leadership strategy enables firms to offer products of equivalent value at a lower cost from competitors, which drives customers to choose the firm over others. While this usually lower the firm’s profit margin per products sold but increase its market share and overall profitability.
b. When should firm pursue cost leadership strategy?
A low-cost provider strategy becomes increasingly appealing and competitively powerful when:
Price competition among rival sellers is vigorous. Low-cost providers are in the best position to compete offensively on the basis of price.
The products of rival sellers are essentially identical. Then, buyers have no reason to choose a seller from others other than price.
Buyers incur low-costs in switching their purchases from one seller to another. Low switching costs give buyers the flexibility to shift purchases to products perceived to be better value for money.
c. Advantages and disadvantages
A cost-leadership strategy is defined by obtaining the lowest-cost position in the industry while offering acceptable value. The cost leader, therefore, is protected from other competitors because of having the lowest cost. If a price war ensues, the low-cost leader will be the last firm standing; all other firms will be driven out as margins evaporate. Since reaping economies of scale is critical to reaching a low-cost position, the cost leader is likely to have a large market share, which in turn reduces the threat of entry. A cost leader is also fairly well isolated from threats of powerful suppliers to increase input prices, because it is more able to absorb price increases through accepting lower profit margins. Likewise, a cost leader can absorb price reductions more easily when demanded by powerful buyers.
Although a cost-leadership strategy provides some protection against the five forces, it also carries some risks. If a new entrant with new and relevant expertise enters the market, the low-cost leader’s margins may erode due to loss in market share while it attempts to learn new capabilities. Furthermore, Powerful suppliers and buyers may be able to reduce margins so much that the low-cost leader could have difficulty covering the cost of capital and lose the potential for a competitive advantage. The low-cost leader also needs to stay vigilant to keep its cost the lowest in the industry. Over time, competitors can beat the cost leader by implementing the same business strategy, but more effectively.
d, Source of cost advantage
For a company to do a more cost-efficient job of managing its value chain than rivals, managers must diligently search out cost-saving opportunities in every part of the value chain. Particular attention must be paid to a set of factors known as cost drivers that have a strong effect on a company’s costs and can be used as levers to lower costs. Cost-cutting approaches that demonstrate an effective use of the cost drivers include:
Capturing all available economies of scale. Economies of scale stem from an ability to lower unit costs by increasing the scale of operation. Often a large plant or distribution center is more economical to operate than a small one.
Taking full advantage of experience and learning-curve effects. The cost of performing an activity can decline over time as the learning and experience of company personnel build.
Operating facilities at full capacity. Higher rates of capacity utilization allow depreciation and other fixed costs to be spread over a larger unit volume, thereby lowering fixed costs per unit.
Substituting lower-cost inputs wherever there is little or no sacrifice in product quality or performance. If the costs of certain raw materials and parts are “too high,” a company can switch to using lower-cost items or maybe even design the high-cost components out of the product altogether.
Using online systems and sophisticated software to achieve operating efficiencies. For example, sharing data and production schedules with suppliers, coupled with the use of enterprise resource planning (ERP).
Companies that effectively manages its cost drivers along the value chain will drastically reduce its cost and achieve the cost advantage. Companies that are well known for their cost-reducing incentive systems and culture are Southwest Airlines, and Walmart. Their cost saving initiatives keeps them at top position of their industry. However, when everyone in the industry tries to lower cost and customers’ preference are open for product feature innovation, firms may want to consider differentiation strategy.
18.104.22.168. Differentiation strategy
a. Definition and role
The second generic strategy is one of differentiating the product or service offering of the firm, creating something that is perceived industrywide as being unique? (Porter, 1998). The goal of a differentiation strategy is to add unique features to product and services that will increase the perceived value of goods and services in the minds of consumers so they are willing to pay a higher price.
Firms will achieve higher profit margin than industry averages. While highly differentiated firms will tend to have less market share than firms with lower cost approach, it has viable profitability. Take Apple as an example. Apple’s flagship iPhone is the iPhone X, which is sold at 1000$, which is 3 times higher than average smartphone price (Recode, 2018). Apple Rakes In 87% Of Smartphone Profits, But 18% Of Unit Sales (SEITZ, 2018).
b, When should a firm pursue differentiation
Differentiation strategies tend to work best in market circumstances where:
Buyer needs and uses of the product are diverse. Diverse buyer preferences allow industry rivals to set themselves apart with product attributes that appeal to particular buyers.
There are many ways to differentiate the product or service that have value to buyers. For example, hotel chains can differentiate on such features as location, size of room, range of guest services, in-hotel dining, and the quality and luxuriousness of bedding and furnishings.
Technological change is fast-paced and competition revolves around rapidly evolving product features. Rapid product innovation and frequent introductions of next-version products heighten buyer interest and provide space for companies to pursue distinct differentiating paths.
c. Advantages and disadvantages
A well-executed differentiation strategy reduces rivalry among competitors.A successful differentiation strategy is likely to be based on unique or specialized features of the product, on an effective marketing campaign, or on intangible resources such as a reputation for innovation, quality, and customer service. A rival would need to improve the product features as well as build a similar or more effective reputation in order to gain market share.
The threat of entry is reduced: Competitors will find such intangible advantages time-consuming and costly, and maybe impossible, to imitate. Since a successful differentiator creates perceived value in the minds of consumers and builds customer loyalty, powerful buyers demanding price decreases are unlikely to emerge.The viability of a differentiation strategy is severely undermined when differentiated products become commoditized and an acceptable standard of quality has emerged across rival firms. Although the iPhone was a highly differentiated product when first introduced in 2007, touch-based screens and other once-innovative features are now standard in smartphones. And cheaper manufacturer like Samsung or Xiaomi cut more shares and profit from Apple.
d. Source of differentiation
Differentiation opportunities can exist in activities all along an industry’s value chain. The most systematic approach that managers can take, however, involves focusing on the value drivers, a set of factors—analogous to cost drivers—that are particularly effective in creating differentiation. Ways that managers can enhance differentiation based on value drivers include the following:
Create product features and performance attributes that appeal to a wide range of buyers. This applies to the physical as well as functional, emotional, social benefits attributes of a product.
Improve customer service. Better customer services, in areas such as delivery, returns, and repair, can be as important in creating differentiation as superior product features.
Invest in production-related R;D activities, which leads to more product innovation.
Increase marketing and brand-building activities. Marketing and advertising can have a tremendous effect on the value perceived by buyers and therefore their willingness to pay more for the company’s offerings. They can create differentiation even when little tangible differentiation exists otherwise.
Crafting the right strategy is only half the way to superior performance. Without proper implement, a great strategy is worthless. The next part, the author will discuss how a firm can successfully implement the strategy by properly design its organization.
2.3. Strategy implementation
Strategy implementation is the sum total of the activities and choices required for the execution of a strategic plan. Implementation critical to strategic success but it is not easy. In fact, many companies fail because of poor implementation rather than poor strategy. Strategy implementation process follow the following steps
1, Build a capable organization
Staff the right people
Develop internal capabilities
Build supportive organizational structure
2, Managing internal operations
Allocate budget, and develop policy and procedures
Develop incentives & control system
3, Develop corporate culture
Figure 2.8: Strategy implementation process
Source: Thompson (2016)
2.3.1. Building an organization capable of good strategy execution
22.214.171.124. Staff the right people
No company can hope to perform the activities required for successful strategy execution without attracting and retaining talented managers and employees with suitable skills and intellectual capital.? Assembling a capable management team is a cornerstone of the organization-building task. In order to staff the right people, firms need to understand what skill sets and personality it needs, design package of benefits that fits the kind of people it wants, design the effective recruitment process to best find the quality they need in candidate.
126.96.36.199. Develop internal capabilities
After formulating strategy, business leaders need to ask themselves do their companies actually have enough capabilities to deliver superior and unique value to customers. While a firm’s strategy is based on its core competency, in reality, the capabilities may need to be at strengthened or to be improved. There are three ways to build or strengthen a firm’s capabilities: develop internally, acquire other firms or collaborative partnership
188.8.131.52. Develop the right structure
The design of the firm’s organizational structure is a critical aspect of the strategy execution process. The organizational structure comprises the formal and informal arrangement of tasks, responsibilities, and lines of authority and communication by which the firm is administered. It specifies the linkages among parts of the organization, the reporting relationships, the direction of information flows, and the decision-making processes.
If we categorize organization structure through hierarchy, which determines the formal, position-based reporting lines and thus stipulates who reports to whom, there are two tpye of structure: flat and tall.
A tall structure results in one long chain of command similar to the military. Managers form many ranks and each has a small area of control. Flat structures have fewer management levels, with each level controlling a broad area or group.
The pros of tall structures lie in clarity and managerial control. The narrow span of control allows for close supervision of employees. Tall structures provide a clear, distinct layers with obvious lines of responsibility and control and a clear promotion structure. Challenges begin when a structure gets too tall. Communication begins to take too long to travel through all the levels. These communication problems hamper decision-making and hinder progress.
Flat organizations offer more opportunities for employees to excel while promoting the larger business vision. That is, there are more people at the “top” of each level. For flat structures to work, leaders must share research and information instead of hoarding it. If they can manage to be open, tolerant and even vulnerable, leaders excel in this environment. Flatter structures are flexible and better able to adapt to changes. Faster communication makes for quicker decisions, but managers may end up with a heavier workload. Instead of the military style of tall structures, flat organizations lean toward a more democratic style.
2.3.2. Organize internal operations
184.108.40.206. Policy and procedures
Policies and procedures are a set of well-honed routines and regulation for running the company and executing the strategy. A company’s policies and procedures can either support or hinder good strategy execution. Anytime a company moves to put new strategy elements in place or improve its strategy execution capabilities, some changes in work practices are usually needed. Managers are thus well advised to carefully review existing policies and procedures and to revise or discard those that are out of sync.?
220.127.116.11. Incentives and rewards
Incentives and rewards are benefits employee receive if they perform in a desirable manner or deliverable desirable results. Incentives and rewards are powerful control to employees behaviors and motivation. Financial incentives generally head the list of motivating tools for gaining wholehearted employee commitment to good strategy execution and focusing attention on strategic priorities. However, incentives must be based on accomplishing the right results, not on dutifully performing assigned tasks. 2.3.3. Cultures
Organizational culture describes the collectively shared values and norms of an organization’s members. Values define what is considered important. Norms define appropriate employee attitudes and behaviors.
A culture that is grounded in actions, behaviors, and work practices that are conducive to good strategy implementation supports the strategy execution. A culture that is well matched to the chosen strategy and the requirements of the strategy execution effort focuses the attention of employees on what is most important to this effort. A company culture that is consistent with the requirements for good strategy execution can energize employees, deepen their commitment to execute the strategy flawlessly, and enhance worker productivity in the process.
2.4. Key success factors
Behind a successful organization there lies some key success factors. It can be anything from strategy, systems, staff, or even culture. Business scholars have developed a model called key success factors to analyze and understand success factors of high performing firms.
2.4.1. Definition of role key success factors
An industry’s key success factors (KSFs) are those competitive factors that most affect industry members’ ability to survive and prosper in the marketplace: the particular strategy elements, product attributes, operational approaches, resources, and competitive capabilities that spell the difference between being a strong competitor and a weak competitor—and between profit and loss.
KSFs by their very nature are so important to competitive success. How well the elements of a company’s strategy measure up against an industry’s KSFs determines whether the company can meet the basic criteria for surviving and thriving in the industry. Any companies competing in an industry without understanding key success factors are likely to fail.
2.4.3. Key success factor identification model
An industry’s key success factors can always be deduced by asking two key questions: Figure 2.9. Key success factor identification model
Source: Grant (2010)
1. What customer want? In other words, what is valuable to them when they consider buying a product a service?
2. Given the nature of competitive rivalry prevailing in the marketplace, what resources and competitive capabilities must a company have to be competitively successful?Answering the two questions may bear a list of success factors. However, manager needs to prioritize and there rarely are there more than five key factors for competitive success. And even among these, two or three usually outrank the others in importance.
3.1. Research Design
The author designed the research using Input-Process-Output (IPO) model, which is developed by Ludwig von Bertalanffy in his book based on the General Systems theory (1968). The model proposes that the whole work is a system, with each part interacting with others in a consequential flow. The research flow is demonstrated as follow:
Figure 3.1. Research design flowInput
Objectives & questions
Literatures with analysis models
AirAsia & Southwest
Objectives & questions
Literatures with analysis models
AirAsia & Southwest
First, the author defines research objectives and question, which in this case seeks to understand business strategy of the world’s leading low-cost airlines and draw relevant lessons for Vietjet Air in competing in the international market. Afterward, the author will discuss relevant literature on the realm of business strategy and key success factors. This knowledge will define the main content of research and serve as the foundation for later empirical analysis.
Subsequently, the writer went on to empirical findings chapter where he analyzes the three companies using the theoretical framework discussed earlier. The primary objects of this case are Southwest Airlines and AirAsia. The secondary object is Vietjet Air. Analysis of the two leading airlines will provide in-depth insight into their competitive environment, business strategy, internal capabilities, implementation, and success factors. By analyzing Vietjet Air’s current competitive capabilities, weakness and improvement points will be revealed. Finally, recommendations for the Vietjet Air will be given to conclude the research.
3.2. Research approach
There are two research approaches qualitative and quantitative. Qualitative Research is primarily exploratory research. It is used to gain an understanding of underlying reasons, opinions, and motivations. It provides insights into the problem or helps to develop ideas or hypotheses for potential quantitative research. Quantitative Research is used to quantify the problem by way of generating numerical data or data that can be transformed into usable statistics. It is used to quantify attitudes, opinions, behaviors, and other defined variables and generalize results from a larger sample population.The writer will use qualitative scientific approach for this research because for the main goal is to explore and seek indepth understanding of a few research objects, which means there is a need for examine and interact with the research subject from multiple aspects which qualitative approach can accomplish better.3.3. Research method
There are five general methods to conduct a qualitative research, which are experiment, survey, archival analysis, history, case study. The writer decided to use case study method.
A case study is a description of a management situation over time that provides a rich description of the situation. Case study is defined as a ‘research strategy that focuses on understanding the dynamics present within single settings’ (Eisenhardt, 1989,p.534)
In order to come up with decision of choosing case study, the author evaluate all five choices using criteria proposed by Robert K. Yin, author of Case study research: design and methods. Yin (1994) proposes that the criteria are: the type of research question posed; if the research requires the researcher to have direct control of the participants’ behaviour; and the degree of the research focus. These conditions are summarized in the table below:
Table 3.2: Choosing the suitable methods based on conditions
Research Method Form of research question Requires control behavioral events Focuses on contemporary events
Experiment How,why Yes No
Survey Who, what, where, how many/much No Yes
Archival analysis Who, what, where, how many/much No Yes/No
History How, why No No
Case study How, why No Yes
Source: adapted from Yin(1994)
As primary objectives is to understand why leading airlines are successful and from which generate success lessons for Vietjet, case study method is suitable because it best answer “Why” question. This research focused on the contemporary business strategy issue of the research objects, it will be also compatible to case study method. With both criteria of research question and contemporary event focus in the table above being satisfied, choosing the case study method in this study is justified.3.4. Case Study selection
The research’s purpose is to help Vietjet Air compete successfully in the international market by learning the business strategy of world’s most successful airlines. The author set two main criteria for case selection: one is financial performance, which is indicated by annual profit and profit margin; the other is relevance to Vietjet Air’s business context, which is indicated by similarity of geographic, economic, social, and legal factors. With these criteria, the writer selects AirAsia and Southwest Airline.
Table 3.3. Leading lowcost airlines worldwide 2016, based on net profit
Airlines Revenue ($M) Net Profit ($M) Profit Margin (%) Origin
1. Southwest 20425 2224 10.9% North America
2. Ryan Air 7350 1450 19.7% Europe
3. JetBlue Airway 6632 759 11.4% North America
4. Easy Jet 6574 601.3 9.1% Europe
5. Air Asia 1721 514.6 29.9% Asia
6.Jet Star 2874 357 12.4% Australia
7. Gol 2866 320.1 11.2% South America
8. Spirit Airlines 2322 264.9 11.4% North America
9. IndiGo 2891 247.7 8.6% Asia
10. Wizz Air 1743 235.27 13.5% Europe
Source: 2016 annual report of the airlines
AirAsia satisfies both conditions. In terms of performance, the firm is the fifth most profitable low-cost airline in the world and the most profitable low-cost airline in Asia. Furthermore, the airline has the highest profit margin in the world, which is 29.9 percent, more than 1.5 times higher than that of the following airline, which is Ryan Air with 19.7% percent margin. Beside from financial performance, AirAsia has been awarded best low-cost airlines in the world for recent nine consecutive years by Skytrax World Airlines Award, which is known as the “Oscars of the aviation industry”.
AirAsia is also a great role model to Vietjet Air for similarities of business context between the two airlines. AirAsia was founded and based in Malaysia, a South East Asian country who has the similar hot and humid climate to Vietnam. While Malaysia economy is a bigger than Vietnam and the infrastructure is better developed, the two are emerging countries, which share many economic similarities.
The two airlines also share social factors. AirAsia’s primary market is South East Asia, its services and marketing strategy are best tailored toward with Asian customers, and its organizational design and leadership are suitable for Asian employees. Therefore AirAsia is the most suitable case study for the research purpose.
Southwest is selected primarily for its superior performance and partly for its pioneering role in the low-cost aviation industry. Southwest is the most profitable low-cost airlines in the world with 2.2 billion USD in profit, which is 50 percent higher than second most profitability airline Ryan Air. It does not only hold the world’s most profitable airline position for decades but it also has been profitable in 45 out of 46 years of operation.
While Southwest Airlines doesn’t share many similarities with Vietjet Air like AirAsia do, the US-based airline is the father, world leader, and pioneer in low-cost carrier industry. It is likely that Southwest will dictate the world standard of low-cost airlines and drives the trend of the whole industry. If Vietjet Air wants to truly win the international markets, it needs to understand the success formula of the best of the best, which is Southwest Airlines.
3.5. Data sources
In this thesis, the source of data used is secondary data, which are annual reports of those firms, past researches and studies by business scholars and authors, interviews videos of the firm’s leaders or employees, and related articles. However, it is important to recognize the limitation of secondary data. First-hand information about critical internal business activities and resources within the companies may be not comprehensive because those pieces of information are only available to internal stakeholders of the company. Therefore, in this research the writer focus on finding and analyzing relevant and reliable information available on the internet.
4. EMPERICAL FINDINGS
4.1. Global airline industry overview
An airline is a company that provides air transport services for traveling passengers and freight through aircraft. Airlines vary in size, from small domestic airlines to full-service international airlines. Airline services can be categorized as being intercontinental, domestic, regional, or international, and may be operated as scheduled services or charters.
The low-cost carrier is one of three business models most airlines use, the two other of which are full-service carrier and chartered flights. Low-cost carriers, discount airlines or low-cost airlines are airlines that offer lower fares in exchange for fewer passenger comforts. The concept started in the 70s by the American domestic carrier Southwest as a way to offer cheap airfares to consumers, since then more low-cost airlines started to proliferate gobbling market share of major carriers.
Chart 4.1. Evolution of low-cost segment vs traditional scheduled segment
Source: STATFOR (2016)
According to STATFOR, percentage of low-cost airlines’ flights over all flights is 19% in 2007. The percentage increased to 30% in 2016, which accounts for nearly one-third of all flights. Meanwhile, the percentage of traditional airlines’ flights over all flights decreased from 59% in 2007 to 53% in 2016.
The common theme among all low-cost carriers is the reduction of cost and reduced overall fares compared to legacy carriers. Traditional airlines have also reduced their cost using several of these practices.
Single type of aircraft with a single passenger class: so cabin and ground crew will only have to be trained to work on one type of aircraft.
Bases developed at focused cities rather than tradition hubs: Like the major carriers, many low-cost carriers develop one or more bases to maximize destination coverage and defend their market.
Low-cost carriers generate ancillary revenue from a variety of activities, such as convenient features, cargo, or commission-based products. Some airlines may charge a fee for a pillow or blanket or for carry-on baggage.
Low-cost carriers intend to be low-cost, so in many cases, employees work multiple roles. At some airlines, flight attendants also work as gate agents or assume other roles (limiting personnel costs).
Low-cost airlines have lower profit margin but gain profitability through high load factor and aircraft optimization.
4.2. AirAsia analysis
Established in 1993 as an government-owned airline, AirAsia was purchased by a Malaysian businessman Tony Fernandes in 2001. Under Tony’s leadership, AirAsia is transformed from a low-performing and heavily-indebted airline into one of low-cost best airlines in the world. The company pursues in low-cost carrier business model, relentless cuts cost in its operational activities, and offer customers low-fare, no-frills flights with the brand tagline “Now everyone can fly.”
Based in Malaysia, AirAsia possesses a fleet of 92 aircraft flies to over 74 domestic and international destinations ranging from South East Asian countries to East Asia Countries, to United States, United Kingdom, and the United Arab Emirates. AirAsia has flown over 55 million invitees across the world.
While AirAsia faces intense competition from other Asia low-cost carrier such as Jetstar, Tiger Air, Spice Jet, the airline remains the most profitable low-cost airline in the world.
4.2.1. Business strategy analysis
18.104.22.168. External analysis
AirAsia operates in an extremely regulated and political environment of the ASEAN region. The political establishment of the Aviation Industry across the Asian continent is governed by strict rules and regulations which favor the passenger safety at the priority level. The government support attracted for the national aviation passenger carriers is pertinent for sustained growth of the low-cost Airlines of the Asian region.
Fast-paced economic growth in ASEAN countries drives the growth of aviation Industry across the region. Furthermore, urbanization trend experienced in the Asian continent is resulting in the creation of new urban centers across the region, which triggers an increase in regional travel destinations, attracting more business for the Aviation players. However, the rising fuel cost and fluctuations in the oil prices are the factors that are negatively impacting the growth prospects of the Aviation Industry.
In social aspects, the rising disposable income of Asian consumers is a positive reflection for the growth of the Aviation business in the Asian continent. Nevertheless, consumers also have become increasingly demanding, which means that airlines need to be ready to offer better, more customized service.
Technology is changing fast and can lead to the success or failure of an airline operator. Critical emerging technology in the world are artificial intelligence, virtual reality, augmented reality, facial recognition tech, and many things else. AirAsia needs to constantly assess new technology application to improve firm’s safety standard, cost efficiency, and customer service quality or it may lose its advantage to competitors.
Regarding environmental factor, global warming is a critical issue around the world. Getting more conscious on environmental issues, the public demand corporations to take greater care of the environment. Governments are also getting stricter in implementing policies, rules and regulation for the corporations. While this trend in Southeast Asia is not as strong as in developed region in the world like Europe or North America, it will soon be. Therefore, AirAsia needs to be environmentally conscious to win in long term.
Last but not least, the Legal Environment for the Aviation Industry is getting tougher and challenging in the recent years. The number of lawsuits from the stakeholders against the Airlines functional in Asia has increased. The regulations regarding the safety issues of the passengers and the related legal scrutiny have become stricter.
b. Five forces analysis
In order to understand AirAsia’s competitive environment, Porter’s five forces model is employed as the following table
Table 4.2. AirAsia’s competitive forces
Competitive forces Rationale
High There are a lot of low-cost carrier in Asia such as Scoot, Jetstar, Indigo, and many of which are among world’s top performing low-cost airlines.
Threats of substitutes: Moderate Most Asian nations are developing countries. The domestic Air travel still becomes a secondary option for many travelers.
Threats of new entrant: Low Lengthy and sophisticated legal process for obtaining the operating license for the aircraft is one barrier to entry. The second is high upfront investment capital.
Bargaining power of suppliers: High Only two major aircrafts suppliers, which are Boeing and Airbus, that covers more than 90% global market.
Bargaining power of customers: High There are a lot of other low-cost airlines. Switch cost of customers is minimal, they can just search online for other tickets.
22.214.171.124. Strategic choicea. Cost leadership strategySince Tony Fernandes acquired the firm in 2002, AirAsia has adopted low-cost carrier business models and has been pursuing cost leadership strategies ever since. The firm envisions 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. It set the mission to attain the lowest cost so that everyone can fly. AirAsia’s cost per seat kilometer (CASK) and revenue per seat kilometer (RASK) reflects its strategic choice, as illustrated in the following table.
Table 4.3. Comparison of AirAsia’s CASK & RASK and other airlines’
In order to achieve this superior low-cost position, AirAsia performs relentless cost optimizing activities along its value chain. The airline has high aircraft utilization in relative to other competitors. In order to maximize the number of daily flights, the company start its first flights early morning and let the latest flight end in late night. It also shorter turnaround time to 25 minutes, compared with 1 hour for Full-Service Carrier (FSC). On average, AirAsia aircraft utilization is 13 block hours per day, compared to the FCS 8 hours per day. High utilization allows the firm to minimize fixed cost and optimize revenue (source: web AirAsia).
The airline offers no frills, which means there is no free food and beverage onboard, no requested seats. If customers prefer something, they can pay a small sum for it. No frills also mean ticketless. This creates less hassle for the customer, as guests need not worry about collecting tickets before traveling. This also allows AirAsia to keep our costs down with less paper, printing and distribution costs. Furthermore, there is no refund because Airlines waste a lot of money, time and resources due to refunds and rescheduling when guests do not show up for a flight.
The airline simplifies all operations. AirAsia uses a single type of aircraft so that flight crew recruitment and training cost as well as plane maintenance cost are minimized. At the airport, AirAsia was an early adopter of self-service kiosks that allow guests to check in, print their boarding pass and bag tags, and also introduced home bag tags and self-bag drop functions. Recently, AirAsia debuted its Fast Airport Clearance Experience System (FACES) facial recognition at boarding gates, making it the first airline in Asia to be fully automated from check-in to boarding (Source).
AirAsia chooses to use secondary airport because they are cheaper than the bigger major airport in terms of parking, landing and ground handling fees. Secondary airports are also less busy than main airports with most of them having shorter runways, this, in turn, reduces fuel consumption during takeoff or landing. Fuel consumption is one of the main expenses that AirAsia has hence this is a bene?cial cost saving. Secondary airports are often closer to urban districts which makes it more appealing to some travelers and hence increases the number of potential customers for the airline. The use of secondary airports helps in boosting sales and keeping operating costs low. (AirAsia 2012).
AirAsia avoids the hub-and-spoke system and includes simple point to point. Almost all of the AirAsia flights are short-haul flight (less than 4 hours). This approach lower route length and save fuel cost.
One of biggest cost-saving tactics of AirAsia is its lean distribution system.
While most of full-service carriers depend on travel agents or the sales office to sell the ticket, AirAsia focuses on the internet, SMS and credit card sales. About 85% of ticket sales are generated from the AirAsia website. Ticket booking and sales can be made by telephone; it is simple and cost-effective. AirAsia has a few sales office in places where technology is not developed enough such as Myanmar. This is the most cost saving distribution systems where the airline does not pay any commission for the travel agent.
By leveraging homogeneous fleet, using secondary airports, point-to-point route models, simplifying operation process, optimize the number of flights, leveraging digital technology for sales and marketing, AirAsia has gained and sustained a superior low-cost position and achieve superior profitability. However, the airline’s winning factor does not only lies in low-cost. The firm has also differentiated itself to gain a unique standpoint in the international market.
b. Differentiation The firm invested heavily to build a brand image of a safe, young, vibrant, low-cost airline that delivers enjoyable flying experiences. It perform distinctive branding strategies, as illustrated in the following table
Brand strategy AirAsia Other leading LCC in Asia
Positioning Safe, reliable, low-cost, vibrant, young, fun. Low-cost
Promotion – Traditional marketing: TVC, Print Ads
– Digital marketing: social media
– Sponsorship: Manchester United, Formula One, Ultimate Fighting Championship, and many other world-recognized brands – Traditional marketing: TVC, Print ads
– Digital marketing: social media
As a result, AirAsia became the top 5 most valuable low cost airlines brands in world (Brandfinance, 2018), and the most valuable low cost airline brand in Asia. the brand drives superior website visits and social media followers compared to other competitors, as illustrated in Chart 4.4.
Chart 4.4. Monthly website visits and Facebook followers of AirAsia and peers
126.96.36.199. Internal analysis a. Resouces and capabilitiesThe author first identifies the firm’s resources and capabilities by analyzing its four key activities along the value chain. Then he evaluates the resources/capabilities under four criteria of competitive advantages to determine the firm’s core competency.
Figure 4.5. Airline value chain
Source: Micheal Porter (1985)
(1) Inbound logistic activities
Route selection. AirAsia has effective route selection capabilities. It only participates in point-to-point routes that have high traffic and are within four-hour flight range from its hubs, which helps it optimize the number of flights and lower cost. Currently, the firm operates in more than 165 routes over 25 countries.
Yield management. AirAsia also masters the yield management. With two decades of experience and advanced demand forecast and analytics tools, the company well understands the market and ready to anticipate the changes in the external environment. AirAsia is able to influence customer behavior in order to maximize profits through the affordable ticket price (which has the lowest cost so that can offer the lowest price) and add-on service (meal on-board, travel insurance, seat selection, hotel and car booking, etc.
Aircraft Acquisition and Fuel Management. AirAsia uses Airbus A320neos which are among the most fuel-efficient aircraft in the market. Furthermore, AirAsia aircraft mostly fly on cruise phase (pilot will decrease the engine’s thrust to the optimal setting of fuel burn and thrust produced in order to conserve fuel). Furthermore, by having a strong relationship with Airbus for being the biggest customers of A320 line, AirAsia can acquire the airplanes at discounted prices.
Flight scheduling. The airline also has effective flight scheduling capability. As discussed earlier, turnover for every flight is only about 25 minutes compared industry’s average of one hour and aircrafts utilization is 13 block hours per day compared to industry average of 8 hours. This capabilities roots from efficient turnaround management process and employees’ skills.
Ticket counter operation. AirAsia has state-of-the-arts technology that facilitates highly efficient ticket counter operation. The airline employs a facial recognition system with self-boarding gate. The new technology identifies enrolled guests as they approach the automated boarding gate, allowing them to board their flight without having to present any travel documents. This makes AirAsia the first airline in Asia to have a seamless travel experience from check-in to boarding with the latest biometric facial recognition technology.
For flight connection in outbound logistics activity of the value chain, AirAsia’s key focus is non-stop short-haul (4 hours or less radius) flights. AirAsia X, a sub-brand of AirAsia which offers medium or long-haul flights, are also non-stop flights. These strategic choices help the firm saves human recourses cost, facilities cost, airport cost, etc.
(3) Marketing and sales
AirAsia has highly effective and efficient marketing skills and a superior brand. The firm leverage internet marketing platform to reach many people at low-cost. It drives millions of customers to its website and achieves 85% of its tickets sales on the web.
AirAsia brand is built and spread to the world through its sponsorship with other world-class brands such as Formula 1 and MotoGP circuits, on Barclays Premier Leagues, football pitches and jerseys, basketball courts, cricket games and tennis competition. Its sponsorship and creative marketing campaigns enable AirAsia top on main recall and build an AirAsia brand image that fun, young and vibrant company.
In terms of services, the firm has a frequent-flyer program called AirAsiaBIG to develop relationships with frequent flyers. Behind BIG lies digital system the companies use to manage award points and AirAsia’s understanding of customers and service skills. For daily customer support, AirAsia has offices, phone-line, and online representatives.
(4) Technological development
AirAsia’s resources and capabilities can be found in its supporting activities, especially its technological development. Years ago, it introduces self-scanning kiosk to reduce human resources cost. Recently, unveiled its Fast Airport Clearance Experience System (FACES), Malaysia’s first airport facial recognition system with self-boarding gate, at Senai International Airport, Johor Bahru, making it the first airline in Asia to have a seamless travel experience from check-in to boarding with the latest biometric facial recognition technology.
b. Core compentency and competitive advantageAirAsia has a wide range of resources and capabilities to successfully perform activities along the value chain every day. Nonetheless, there are only two key resources and capabilities that create a sustainable competitive advantage for the firm, which are the AirAsia brand and its innovativeness.
After years of sponsoring worldwide brand and events like The Premier League, Formula One, and nine years of being named the best low-cost airline in the world, AirAsia brand has hugely imprint on hundreds of millions of people all over the world. It is a sustainable competitive advantage as it meets VRIO criterias
Valuable: To hundreds of millions of people all over the world, AirAsia brand represents safety, reliability, fun, youthful, vibrancy, accessibility. Whenever anyone in Asia thinks about flying affordably and enjoyably, they think about AirAsia first, which makes the brand a valuable assets of the firm
Rare: having a strong global brand from Asia is rare. As mentioned earlier, Asia is the only Asian brand among top five most valuable brand in the world.
Costly to Immitate: building brand takes a lot of time and investment in promotion and customer experience management.
AirAsia has always been a pioneer in adopting new technologies with SMS booking in 2003, the award winning Airasia website and mobile application, the self-service kiosk, the recent boarding gates facial recognition systems. VRIO analysis clearly illustrates AirAsia’s innovativeness as its great sustainable source of competitive advantages
Valuable: The firm’s innovation is valuable to increase operational efficiency and improve customer flying experience.
Rare: While most other low-cost airlines from Asia wait and copy technology from leading Western airlines, only AirAsia pioneers in introducing new products and technology.
Costly to Immitate: While the actual digital technology is not costly to imitate, it is the firm’s ability to capture new technology and being the first mover not easily imitatable.
AirAsia has over 17000 employees globally spanning all over its branches office in SouthEast Asia, China, Japan, Korea, Australia, and some Middle East countries.
Since the company’s service quality and operational efficiency greatly depends on its employee, AirAsia put a high emphasis on hiring and training people. The firm offers outstanding benefits to attract the best people.
Benefits AirAsia Other LLC in Asia
For career Career progression opportunity ? ?
A 5-day work week ? Performance bonus ? ?
Long service award ? Examination leave ? Health Hospitalisation and surgical expenses ? Personal accident and term life insurance coverage ? ?
Food and drink subsidies ? ?
Travelling Yearly free flight coupons ? ?
Discounts on Concession Travel ? ?
For family Paternity leave ? Compassionate leave ? Hospitalisation and surgical expenses for employee’s spouse and children ? As a results, the AirAsia’s employees rating score is the highest among leading low cost airlines in Asia, according to Indeed.
However, this approach can create heavy human resources cost to the firm, which may undermine its cost leadership position in the future. The author hypothesize that since AirAsia already establish cost leadership brand and a strong operational system to maintain lean cost structure, it wants to improve its service to differentiate itself among low cost airlines in Asia and meet service standard of developed countries it aims to compete in the future such as Japan and South Korea. A increase in human resources cost doesn’t drastically affect its low cost position.
The corporate structure of AirAsia is relatively simple and flat as it comprises of few levels of management so as to reduce cost and increase efficiency (AirAsia 2011). The levels of management are streamlined and together with the use of IT, employees are empowered with decision-making skills with only one or two people to report to in the organization structure.
Tony Fernandes would like to create a flat structure, where everyone has access to the big boss and that allows him to get the best people and discover their potential and talent. Employees are regarded as equals, and inputs are often encouraged regardless of hierarchical positions. Good ideas, proposed by anyone, can be implemented quickly because there is little bureaucracy. At the same time, bad ideas can be scrapped just as fast.
This structure is highly supportive for the company’s cost leadership strategy. Cost saving initiative usually comes from frontline employees – the people who observe everyday operation in high details. Flat structure allows their ideas to be heard and implemented quickly, which help firm save cost.
188.8.131.52. Policy and procedure
In AirAsia there is a policy of open and direct communication. All staff can approach any member of the management team to voice out an opinion or share an idea. Good ideas, proposed by anyone, can be implemented quickly because there is little bureaucracy. At the same time, bad ideas can be scrapped just as fast. The AirAsia staff members understand that generating ideas is not limited to the directors and executives of the company and that everyone can contribute ideas regardless of their rank in the company.??
This open communication is even taken more serious when it comes to safety. At AirAsia, safety always comes first. AirAsia has committed itself to a programme of reducing risks and hazards normally associated with the aviation industry through a Safety Management System. This commitment is extended to ensure the full integration of a safety culture, safety policy and safety objectives in a proactive approach to aviation safety.
A Safety Management System relies on the development of a reporting policy by all employees and is a vehicle for ensuring that hazards and safety deficiencies are brought to the attention of those who have the authority to make changes. CEO Tony Fernandes has pledged that he would not take disciplinary action against any employee who dared to make a stand and report a safety hazard to the company’s management, and no staff member will be asked to compromise AirAsia’s safety standards just to get the job done.
The open communication policy support AirAsia cost leadership strategy by allowing cost saving initiatives to be heard and implemented quickly. After most major cost-cutting strategies like point-point models, using standard fleets, using secondary airports are well-known and implemented by all LCC across the industry, cost leadership edge lies on hundreds of small cost saving techniques which usually discovered by frontline employees – the people who observe everyday operation in high details. Only with this open communication policy can employees’ voices and ideas are heard and implemented, which help firm strengthen its cost advantages.
184.108.40.206. CultureAirAsia’s culture lies in five core value safety, passion, integrity, caring, and fun. These values provide a frame of reference for every AirAsia members’ daily code of conduct.
Safety is reflected in every employee policy and safety management program. Passion, caring, and fun is reflected internally through the way AirAsia treats its employees. Tony Fernandes’ casual style of dressing at work also reflects the culture at AirAsia. He goes to work wearing his trademark red AirAsia cap, short sleeved t-shirts and a pair of jeans which are sometimes older than his employees. By doing so, he is able to break the psychological barrier of communication between himself and his employees and get everybody to talk and give invaluable ideas.
4.3. Southwest Airlines analysisFounded in 1971, Southwest Airlines Co. is US-based low-cost airlines that focus on short-haul flights. As the pioneer of low-cost carrier business model, Southwest disrupts airline industry in the 1970 and 1980s with low-cost fares and fun flying experiences.
With a fleet of 718 aircraft, Southwest flies to over 100 domestics and international destinations with a key focus on North America market and serves over 100 million customers annually on average. While competing in the hyper-competitive airline industry with big players such as JetBlue, Allegiant Air, Virgin America, the company is extremely profitable. It enjoys the 45th straight consecutive years of profitability and is the most profitable low-cost airlines in the world.
4.3.2. Business strategy analysis
220.127.116.11. External analysis
Both being an international player in the global aviation industry, Southwest Airlines, and AirAsia shares many similarities of external environmental factors as environment, technology (PESTLE), competitive forces from suppliers and buyers bargaining power. Since the author already analyzes those factor in-depth earlier in AirAsia’s section, he focuses on mainly distinctive factors of Southwest Airlines in this section.
Regarding political factors, Southwest Airlines domestic operations are significantly influenced by government bodies; primarily Federal Aviation Administration (FAA) (see www.faa.gov). For instance, the 1979 ‘Wright Amendment’ prohibited the airline to fly non-stop or provide through-plane service from Dallas Love Field to any other than 7 permitted cities. Recently, a law has been passed to repeal the Wright Amendment to be in effect in 2014 (Thompson and Gamble, 2012).
Regarding social factors, American people have been more conscious on their spending after world financial crisis. They seek a better value-for-money option in the market, which will favor the most cost-efficient airlines. Customers also expect better customer service even it is low-cost airlines. While they are cost-conscious, they are willing to pay a bit more to be treated well. Lastly, customers now value healthy lifestyles, which may affect food and beverage offering in the flights
Regarding economic factors, fluctuations in the oil prices pose difficulty for low-cost carriers in controlling cost. Furthermore, decreasing disposable income of American people will affect demands of flying.
b. Five forces model
Southwest Airlines 5 five forces follow the general five forces of the airline industry. Therefore, we have the similar conclusion like AirAsia. The threat of new entrants is generally low due to high up-front investments and establishing cost. However, this threats for Southwest Airlines is higher than it is for AirAsia because there are a lot of capital concentration in the North America market and licensing process is much more simple.
The threat of substitution is high in because when it comes to transportation, people have a lot of options to choose from. Threats of bargaining power of customers are high for Southwest because the switching cost is very low. Bargaining power of suppliers is high because there are a few major suppliers for the whole industry. Southwest Airline has a huge competition in the market from its competitors such as Delta, American airline, and United, JetBlue, Allegiant Air.
18.104.22.168. Strategic choice
a. Cost leadership
Introducing the low-cost carrier business model to in 1971, South company has been loyal to this model and pursuing cost leadership strategy for the last 47 years of operation. The company’s purpose is to connect people to what’s important in their lives through friendly, reliable, and low-cost air travel. It set low costs as one of the company’s core values.
The business model of Southwest Airline is to deliver flights lowest fares possible. In order to achieve this cost position, the firm relentlessly cut cost in its operation in a similar manner to AirAsia’s method discussed above. The airlines stay away from congested airports, leverage point-to-point system, use single lines of aircraft, offers no frills, short turnaround times, and lean distribution system.
Southwest’s relatively cheap fares and low-cost operating advantage have allowed it to become the largest and most consistently profitable domestic U.S. airline.
While still dominant in terms of domestic market share, Southwest no longer possesses the low-cost operating advantage which once made it the envy of the airline industry, as illustrated in the chart. Younger airlines such as Spirit Air or Allegiant copied cost saving business models of Southwest Airlines and has managed to achieve a better cost structure than the firm for a decade now.
So why is the firm still the most profitable airline in the world? The answer is that Southwest Airlines doesn’t only sell low cost flights, it only offer a superior service.
Besides low fares, Southwest Airline is a company famous for its excellent customer services. In its own word, the company’s mission is dedication to the highest quality of Customer Service delivered with a sense of warmth, friendliness, individual pride, and Company Spirit.
1651001389380Southwest maintains excellent customer satisfaction ratings. According to the Department of Transportation (DOT), Southwest ranks number one (lowest number of complaints) of all U.S. airlines in 2017, which is the 23rd time it holds the position since DOT began tracking customer satisfaction statistics in 2017.
Source: USA Department of Transportation (2017)
In order to deliver superior services, Southwest Airline performs a set of distinctive activities, among which strategic human resources management is the key driver. Southwest leaders believe that happy employees create great customer services. Therefore, its strategic human resources strategy aims at creating competent, happy, and energetic employees. In order to achieve this, the firm hire the right people, build the proper culture, develop the proper policy and reward system.
(1) Hire the right people
Southwest Airlines is highly selective in who it recruits. The airline only employs that can be absorbed into the company culture with the motto “hire for attitude, train for skills”. The firm looks for three attributes a warrior spirit which means a desire to excel, act with courage, persevere and innovate; a servant’s heart which means the ability to put others first, treat everyone with respect and proactively serve customers; and a fun-loving attitude which means passion, joy and an aversion to taking oneself too seriously. How the firm recruits these people will be discussed in details later.
(2) Develop suitable policies & incentives
Southwest has internal policies of treating employees as internal customers. Southwest believes that it should satisfy its employees first and then they would satisfy its customers. Southwest Airlines don’t sacrifice happy employees in order to satisfy customers. It believes that the company should trust and stand on its employees’ side because sometimes customers might be wrong.
The airline allow employees to wear whatever they want. Every employee of Southwest is creative and has his or her own personality. Their original clothing and dress, humorous conversations, and interesting broadcasting lead to a relaxing and delighted atmosphere. It can relieve the stress and pressure for passengers that take Southwest Airlines as well as create additional entertainment for everyone onboard without spending additional money. Another example of the Southwest attitude towards its employees is a quote by Herb Kelleher (CEO): “Fun is a stimulant to people. You don’t have to surrender your individuality to work for Southwest Airlines, work is important don’t spoil it with seriousness”.
The firm also have excellent incentives and rewards system. Southwest was the first in the airline industry to offer a profit sharing plan with employees. On 2017, the firm share $543 million with its employees through its profit sharing plan. It was the top three profit sharing companies in airline industry and the highest among low-cost airlines. data
Southwest have a family culture. Family culture means people always treat people properly with their heart and respect. They care about each other. Lowest level employees can arrange meeting with senior leaders to discuss their concern. Even the president can know somebody is sick and needs encouragement. They do it not because the company requires them to, but because they want to. This is part of the Southwest spirit.
Family culture means volunteered shared responsibility. Everyone in the crew shares the responsibility of cleaning up the air craft and enabling their planes to have the take-off again after a spending very short period of time after the ground duty. Southwest Airlines have, in fact, pioneered a rapid turnaround service on keeping its aircraft on the ground for less than twenty minutes.
Family culture means fun and openness. There are gadgets, games, and other creative outlets readily available on planes and in the corporate offices to make it easy for employees to engage in breaks. Having a humorous time cuts down on the time spent on feeling stressed and creates a work environment that is interesting and fun.
Employees’ satisfaction rating of Southwest and peers
Source: Glassdoor (2018)
Every employee of Southwest is emotionally-connected with their company, and as such is willing to do anything for the beneficial growth of Southwest. Every employee infects each other with an extreme sense of joy and satisfaction; therefore as a result, customers are also influenced by the employees’ delight and are, consequently, may also feel happiness. This is how Southwest became one of the most efficient airlines.
22.214.171.124. Internal analysis
a. Resources and capabilities
Similiar to AirAsia, Southwest has a set of capabilities to help it achieve low-cost position such as turnaround time management, effective route selection yield management, using a single family of aircraft, using fuel optimization, efficient flight scheduling, efficient ticket counter operation, lean distribution system.
What set Southwest Airlines apart is its human resources management capabilities. This includes effective hiring and training, policy, procedures, policy management skills, and especially culture management skills. Having human resources enable Southwest Airlines to deliver truly great services.
-622301882775Southwest also possess a great brand. It is the only low cost airline on top five most valuable airline brands in the world. Thinking out Southwest, American people think about delightful flying experience with affordable fares. The firm’s brand reputation doesn’t come from massive sponsorship programs or advertisement, it comes from people’s amazing flying experience and words of mouth instead. Southwest’s flying experience is so good that people share it with each other and build brands for Southwest.
Source: Brandfinance (2017)
b. Competitive advantages
Through VRIO analysis, it is clearly that culture is the Southwest biggest source of competitive advantage.
Valuable: Southwest culture play a vital role in its human resources management strategy, which create highly competent, fulfilled, and happy employees, who delivers superior customer services. It is the customer services that get customers to choose Southwest over other airlines who has lower fares.
Rare: Southwest culture is very rare rare because there are no low-cost airlines whose culture can be comparable to Southwest.
Costly to Immitate: it is very hard to copy Southwest cultures because the culture is shaped by the founders’ unique personality and philosophy. Furthermore, a culture needs a lot of time and nurture to be well developed.
After 47 years of delivering a delightful flying experience at an affordable cost for hundreds of millions of people, the Southwest brand has a huge imprint on American culture. Under VRIO analysis, the brand is the second competitive advantage of the airline.
Valuable: To hundreds of millions of people all over the world, Southwest brand represents affordable and fun flying. Whenever anyone thinks about flying affordably and enjoyably, they think about Southwest first, which makes the brand a valuable assets of the firm
Rare: having a brand that both represents affordability and superior customer service is rare in airline industry where most airlines either known for cheap price or great service at high price.
Costly to Immitate: building brand takes a lot of time and investment in promotion and customer experience management.
Southwest Airlines has over 57112 employees globally spanning all over its branches office in the United States, Mexico, Canada, South America, Europe, and Asia.
Since the company’s service quality and operational efficiency greatly depends on its employee, Southwest put a high emphasis on hiring and training people.
Being highly selective in who it recruits. The airline only employs that can be absorbed into the company culture with the motto “hire for attitude, train for skills”. The firm looks for three attributes a warrior spirit which means a desire to excel, act with courage, persevere and innovate; a servant’s heart which means the ability to put others first, treat everyone with respect and proactively serve customers; and a fun-loving attitude which means passion, joy and an aversion to taking oneself too seriously.
The airline clearly defines and public these expectations by listing them on every job description and building interviewing methodology around them. The mentality isn’t “We’ll know it when we see it.” It’s “Does this person already live the way we do?” The airline uses behavioral interview questions to determine whether candidates have those key attributes. For example, to determine someone’s ability to be a passionate team player, Southwest recruiters will ask him or her to describe a time when he or she went above and beyond to help a co-worker succeed. Recruiters also conduct what we call a career motivation interview to determine if the candidate really understands the job he or she is applying for and if it is aligned with his or her career goals.?
b. Policy & procedures
Southwest realized that the real ownership of an organization doesn’t come from how much stock one owns. Southwest claims, “Ownership is the result of believing that you can make a difference, then acting on that belief in everything you do.” Southwest empowers its employees to solve service problems in a timely manner without asking supervisors for permission. They are encouraged to offer extraordinary service and their judgments are trusted, whether they are flight attendants or engineers.
Southwest believes the more employees know, the more they care. The most updated information about Southwest is easily available for every employee. It lets employees know the profit of Southwest is not only the president’s concern but also related to your employment security. If every employee understands how the company makes money and how a single customer would influence the performance of profitability, they would know their service to each customer mean a lot. In this case, they are more eager to suggest solutions for reducing cost and the front-line service providers can be in a better position to provide better services.
Southwest has a lean structure and informal code of conduct. The leanness leads to the cross-functional communication. Employees can connect with managers or even the president immediately whenever they want to deliver opinions and suggestions. Its hierarchy is quite simple so that department supervisors can manage employees very well and both sides can maintain good and direct communication.
The leaders of Southwest are not in a prominent or unreachable position. Any employee can enter their offices to discuss anything at any time. If there are suggestions to be made, the leaders are there to hear them. The leaders also, surprisingly, help with groundwork such as baggage handling. This type of organization allows Southwest employees to feel free to do their job and continuously improve whatever needs to be improved without any restrictions or pressure.
4.4. Key success factor analysis
As discussed earlier, key success factors satisfy two criteria: the first is it helps firm provide something valuable to customers, and also it helps the firms compete effectively with competitors. From the case study of AirAsia and Southwest Airlines, the author identify three similars success factors from the two firms: brand, culture, and being customer-centric.
Factors Customers’ want Helps survive competition Air Asia Southwest
Low cost Basic LCC business model ? ? ?
Operational efficiency ? ? ?
Suppliers relationship ? ? ?
Lean distribution system ? ? ?
Superior service Standard service process ? ? ?
Cultures & employee satisfaction management ? ? ? ?
Customer-centricity ? ? ? ?
Digital technology integration ? ? ? ?
Brand ? ? ? ?
Both AirAsia and Southwest put great efforts in building and preserving its brand name. AirAsia spends millions of dollar on sponsoring world-class events such as Formula 1 and MotoGP circuits, on Barclays Premier Leagues, football pitches and jerseys, basketball courts, cricket games and tennis competition to promote its brand around the world. Southwest build its brands through superior customer experiences and witty, humorous advertisement. The firm also sponsors as official airlines four Major League Baseball teams and five NBA teams, in addition to being the official airline for the Super Bowl in order to strengthen its brand in the United States.
A strong brand satisfies the two criteria of key success factors. First, it is valuable to customers because whenever Customers want quickly find a cheap, safe airline that gives decent flying experiences, they automatically think about AirAsia or Southwest. Second, a good brand differentiates firms from the competitors in the mind of customers and it is very difficult and costly for competitors to imitate. Therefore, the most important success factors of the two airlines lie in their brand and brand building ability.
The second success factor is the culture. Both Airlines build a flat culture where employees are put first, trust and open communication is established, there is little distance between management and employees. The two companies put an emphasis on hiring cultural fit people and develop their capabilities. The two airlines hold the same principles that if management makes employees happy, they will smile and serve the customer well. Great culture is key success factor because it empowers superior customer services. Furthermore, culture is not easily built within days or months, it takes years of operation and requires management role model to be effective, which make it a great source of competitive advantage.
The two airlines also share another success factor: being customer-centric, although their approaches are different. AirAsia focus on digital innovation to make flight experiences more quickly and seamless. Southwest focuses on delivering delightful experiences through great customer services. Both of the approach not only bring great value to customers but also create immutable advantages. While the actual digital technology is not rare nor costly to imitate, AirAsia’s ability to capture new technology and being the first mover is rare and not easily imitatable. Southwest customer service stems from its unique cultures, which are also very hard to copy.
5. RECOMMENDATION & CONCLUSION
5.1. Vietjet Air’s overview
VietJet Air is a low-cost carrier based in Hanoi Noi Bai International Airport, Vietnam. The carrier began operating on 25-Dec-2011, after several delayed attempts, initially with 3 A320 aircraft to Ho Chi Minh City and Da Nang. VietJet had planned to utilize the AirAsia brand after receiving an investment from the Malaysian LCC but went ahead with the VietJet brand after AirAsia was denied regulatory approvals. The carrier operates services across Asia.
VietJet captured a 42% share of the Vietnamese domestic market in 2016 and a 27% share of the total market. The airline has also been consistently profitable since 2013. VietJet Air serves 32 destinations, with a near equal spit between domestic and international in the coun. ts current week schedules include 17 points in Vietnam and 15 abroad with a network that includes eight countries including South Korea to the northeast, Taiwan, and Hong Kong to the east, Myanmar to the west as south into Malaysia and Singapore. Having fleet size of 55.
5.1.2. Current competitive ability in international market
VietJet has one of the lowest unit costs in Asia – and the world. In 1H2017 its cost per available seat kilometer (CASK) was less than USD4 cents.
Table 5.1. VietJet Air CASK and fuel-excluded CASK (USD cents): 2013 to 1H2017
Year 2013 2014 2015 1H2016 1H2017
CASK 5.3 5.04 4.14 3.81 3.89
Fuel-exlcuded CASK 2.57 2.48 2.42 2.43 2.25
Among publicly listed short-haul low-cost airlines, only Cebu Pacific, AirAsia, Wizz Air, Ryanair have at, or under, USD 4 cents. This can be a great source of advantage when the firm expands and compete in the international market.
The second strength of Vietjet Air is ancillary revenues, which have helped the airline achieve profitability at an early stage. Ancillaries now account for over 23% of VietJet’s revenues. A small number of LCCs rely on ancillaries for more than 30% of total revenues, but 23% is a very respectable showing for a relatively new airline, particularly in Asia, where ancillaries are typically lower.
Table 5.2 VietJet ancillary revenues as portion of total revenues: 2013 to 1H2017
2013 2014 2015 1H2016 1H2017
16.40% 17.30% 22.30% 22.60% 23.30%
Source: CAPA – Centre for Aviation and company reports.
Ancillaries can be a decent source of revenue to support cost structure or price competition when the firm compete in international market.
While VietJet has a strong local brand and distribution network, outside Vietnam the situation is the opposite, and the airline is a relatively unknown commodity. As VietJet starts to expand more in Vietnam’s international market it will have to overcome this weakness. There are huge opportunities in the international market, but Vietnam is a bigger inbound, rather than outbound, market. In 2016 there were 10 million inbound visitors and 5.6 million outbound travelers (includes visitors and travelers which did not arrive or depart by air).
The second weakness is poor yield management system. VietJet has a simple reservation system that further limits its ability to maximize ticket revenues. The system is so basic that when a new destination is added it is sent to the bottom of the list on its web booking engine, rather than appearing in alphabetical order.
5.2. Recommendation for Vietjet Air
5.2.1. Improve digital technology for better customer experience and operational efficiency
Digital technology has been proven to helps airlines optimize operational efficiency and improve customer experiences. With digital solutions makes customers’ interaction with the airlines easy, fast, and convenient. Furthermore, digital investment is usually cheaper than others.
Vietjet should make improvements to current technology that involves a lot of customer interaction to meet international or at least regional standard. The airline’s current has limited functions and obsolete web interface design compared to region low-cost airlines like AirAsia or Cebu Pacific. AirAsia’s application gets two stars (over five scales) with very poor reviews.
For technology the firm doesn’t have yet. The Airlines should research successly-applied current digital technology in the market from leading firms like AirAsia or Southwest Airlines and strategically choose to right technology to apply to Vietjet Air. For example, AirAsia has self-check-in system of AirAsia, or digital boarding pass, or FACES digital boarding pass.
To prepare for the adoption of new technology, training is generally required. To speed up the process, training should be given first to people that are more familiar with technology (generally young generation) and the managers of the department using that upcoming technology.
During the implementation of these technologies, internal assessment should be frequently made to give the top managers a closer view on the performance and efficiency of new methods. If they are not utilized to the desirable level, fixes should be done immediately in order not to increase depreciation.
5.2.2. Improve yield management systems
Yield Management System (YMS) which also known as Revenue Management System (RMS) is the process of understanding, anticipating as well as influencing consumer behavior to maximize revenues or profits from a fixed perishable resource. YMS is critical to good profit margin. When VJ air wants to scale to another, it would lose a lot of money without proper yield management systems.
It should first gain relevant organizational skillset for this system. It can assign its key personnel for short specialized course on the topic or hire specialist into the team. Afterward, the firm should upgrade its current YMS to a more modern system.
5.2.3. Build strong brands across South East Asia
A brand is a superior source of competitive advantages. And Vietjet Air is lacking a strong brand image in the region. The author recommends developing a stronger brand presence in South East Asia through strategic sponsoring and mesmerizing advertising campaign. Since sponsoring big events like QPR and stuff is expensive. We will focus on a few key events in SouthEast Asia that allows people to immerse into the brand experience. The brand is fun, sexy, enjoyable, youthful. It can sponsor football cups like AFC Cups, Asia Cup, or sponsors electronic-dance music events.
For advertising, Vietjet Air commercial now is highly domestics with Vietnamese titles and content and images. It should focus on more international experiences to makes it appeal to international travelers. Furthermore, Vietjet Air needs to consider its bikini images advertisement as many countries in Southeast Asia are Muslim and have strict regulation with sensitive dressing.
5.2.4. Build effective cultures
Great cultures create happy employees who deliver delightful services. The firm should build a culture where communication is open, employees are valued and trusted, and are free to contribute their ideas to management. In order to achieve this, the firm should make the structure more simple and flat, issues policy which procedures that allow direct communication from ground employees to management, and incentives for people to contribute great ideas.
Vietjet Air builds a better culture by hiring the right personality and attitude. The firm can prioritize people with fun, sociable, driven, servant attitude. It is easier to teach a person some skills rather than change their personality, which is critical to how they treat customers and get along with other employees.
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