AIRASIA - "Now Everyone Can Fly"

          AirAsia Berhad is an airline company in the aviation industry established in 1993. On 18 November 1996, AirAsia started its operations. The heavily indebted-airline was bought by Mr Tony Fernandes's (now Tan Sri Dr. Tony Fernandes) company Tune Air Sdn Bhd on 2 December 2001 for RM1 and USD11 million in debt (The Economic Times, 2013). Today, AirAsia has become Asia’s largest low fare, no frills airline with domestic and international flights (AirAsia, 2013).

AirAsia started with two ageing fleets and 200 employees in 2001 with its main hub located at LCC Terminal, Kuala Lumpur. In 2013, the airline has grown to 121 fleets including 66 fleets under its Malaysian operations and more than 6000 employees servicing 85 destinations across 21 countries (The Star Online, 2013).

In the short-run production, at least one variable is fixed (Sloman et al, 2012). AirAsia’s short-run production started when it began operating. The airline can only increase frequency of flights but only up to a certain point and location as it takes time to respond to the change in price and supply. AirAsia’s long-run production started when it purchased more fleets and eventually opened new hubs domestically. AirAsia expanded the main hub in LCC Terminal to a second hub in Senai International Airport, Johor Bahru (M2 Communications Ltd, 2003). In 2007, AirAsia took the long-run production to the next level by establishing AirAsia X that focuses on long-haul flights which are of four hours or more in distance such as China and Korea (AirAsia, 2013). Therefore, AirAsia is able to respond to the change of price and demand in the long-run production as there are no variables fixed. In the short-run production, supply is somewhat elastic as some input can still be increased and supply can increase somewhat. In the long-run production, the supply is highly elastic as there is sufficient time to increase all inputs (Sloman et al, 2012).

Figure 1: Effect of Long Run Production to Price and Quantity

Figure 1 shows that in the short-run supply, the supply curve is more inelastic. When demand for flights increase (D1 to D2), the price of airfare will increase (P2), However, in the long run, the supply curve is more elastic. When demand increases, equilibrium is achieved at c. At point c, price is slightly higher than P1 but lower than P2 and quantity is higher at Q3.

Figure 2: Average Fare Increases in the Long Run Production

As shown in Figure 1, long-run supply shows a slight increase in price (P3). It can be connected to Figure 2; every year the average fare increases except for 2009 and 2011. This is because in November 2008, AirAsia demolished fuel surcharge to customers, making airfares cheaper. A slight decrease in 2011 is due to AirAsia celebrating its 10-year anniversary selling of tickets at low price of RM0.10 (MY Everyday on Sales, 2011). Although it seems that airfare has increased over the years, the price is still lower compared to other airlines. 

Generally, air flights are considered as normal goods. Normal goods are goods that have positive income elasticity of demand. When a consumer’s income increases, demand for the good also increases (Sloman et al, 2012). For low and middle income individuals, a rise in income will allow them to buy lower cost airfares.

The law of demand states that when the price of the good falls, the quantity demanded will rise (Sloman et al, 2012). Being the world’s lowest cost airline, the quantity of demand for AirAsia flights have increased in a large percentage since its establishment. Referring to Figure 3 and Figure 4, the cheaper airfare price for AirAsia compared to Malaysia Airlines has caused an increase in the quantity of AirAsia passengers every year.  

Figure 5: Change in Quantity Demanded when Price Falls

Air travel can be considered a necessity for those required to travel long distances. For example, individuals who have offices and meetings abroad. Most business employees fly with Malaysia Airlines as it has seating classification- Business Class and Economy Class. Whereas seats are self-selected or auto-selected online without any class classification in AirAsia. Assuming that Malaysia Airlines seats are fully booked, AirAsia will become a substitute for businessmen or other individuals as another alternative of transportation. AirAsia has an average of 400 flights daily as compared to Malaysia Airlines which has an average of 292 flights daily (Malaysia Airlines, 2013). AirAsia’s belief that, "Now Everyone Can Fly", the lower income society will be able to afford air travel as AirAsia has become a substitute to other airline companies which are more expensive.

Demand for AirAsia is also determined by peak seasons. Analysed from Figure 6, AirAsia obtains the highest load factor in the fourth quarter every year. This means that the capacities of AirAsia’s fleets are around 80% occupied in the four quarter due to school holidays or seasonal celebrations. AirAsia also increased fleets to between December to January to meet the demand of travellers during the peak holiday season (The Star Online, 2011).

Figure 6: Flight Occupancy Measured Quarterly

Figure 7: Demand Shifts to Right when Demand Increases

In 2008, the airline demolished fuel surcharge in the airfare. Consequently, lower prices increased demand. AirAsia increased the number of fleets and daily flights to cope with the demand. One of the determinants that affect the supply or flight for AirAsia it is the cost of production. The higher the cost of production, the less profit will be made. Firms will cut back on production as costs rise (Sloman et al, 2012). For AirAsia, a rise in the cost of fuel will cause a drag in supply of flights. As fuel prices kept increasing, AirAsia reintroduced fuel charges beginning 3 May 2011 to counterbalance the fuel cost which has exceeded USD$140 per barrel (The Times of India, 2011). This in turns enables them to supply more flights instead of cutting down supplies for consumers.

Figure 8: Effect of Determinants to the Supply Curve
 (Increase-Shift Right, Decrease, Shift Left)

           Nature and other unpredictable events affect the supply of AirAsia. The flight services for AirAsia highly depend on the weather. If the weather condition is estimated to be bad, supply of flights will decrease by cancellations or delays for the safety of passengers. On the 22 September 2013, 32 flights to Hong Kong, Macau, Shenzhen and Guangzhou had to be cancelled due to Typhoon Usagi (Bangkok Post, 2013). Unpredictable technical problems will cause the supply of flight to decrease because technical problems will delay flights as daily turnaround time will be affected.

  AirAsia comes up with new strategies to increase the price elasticity of demand of consumers.  Demand for airfares has become more elastic through promotion and advertising. Subsequently, quantity demanded and consumer expenditure will increase. Thus, AirAsia’s total revenue will rise. Recently, AirAsia has been having low fares promotion starting with RM26 and RM49 from Kuala Lumpur to both domestic and international destinations. Advertisement is used as a method to get the information out to the public by using mediums such as social media and billboards.

Figure 9: AirAsia Advertisement on Youtube

      Figure 10: AirAsia;s Billboard Advertisement

             When there is less competition in the market, the demand for AirAsia is more inelastic because there are fewer substitutes for low cost airlines. Even if AirAsia increases the price for airfare, the change in quantity demanded is less than the change in price because the airfare will still be cheaper than full service airlines. New competitors emerging in the market will cause the demand for AirAsia had become more elastic. Low cost carriers - Malindo Air, Jetstar and Lion Air are now emerging which may be a threat to AirAsia. Consumers now have more substitutes to AirAsia.  Hence, AirAsia must consider the reaction towards other airlines when formulating its price. AirAsia is in the oligopoly market structure as each airline will be affected by their competitors’ actions which mean that they are interdependent on each other.  

           Government intervention affects the supply and demand of AirAsia flights. All procedures carried out by AirAsia must follow government rules and regulation. In 2010, the government rejected AirAsia’s new route to Sydney, Australia (ETB News, 2010). This affected AirAsia in terms of being unable supply new routes to consumers. Tata Group, pioneer of commercial air travel in India plans to partner with AirAsia to venture in AirAsia India in 2013. Nevertheless, AirAsia still requires the approval from the government to launch the airline with Tata Group (NDTV Profit, 2013). Government intervention affects demand by controlling the safety and quality of airline standards which provides consumers with better services and comfort. Consumers will choose to fly more with security and comfort.

Cost is lowered when the firm experiences economies of scale in the long-run production (Sloman et al, 2013). AirAsia experiences economies of scale if costs per unit of output fall as the scale of production increases.

Figure 11: Economies of Scale and Diseconomies of Scale

The key components for AirAsia to achieve economies of scale:

Bil	Reasons that bring towards economies of scale	Empirical evidence
1	Specialisation and division of labour	i) Pilots, flight attendants, mechanics and operations personnel are specialised in a single type of aircraft which saves cost on training and maintaining spare part stocks.
2	Organisational and administrative economies	i)        Standard Operating Procedures ensures streamline operations are homogeneous and as simple as possible to avoid extra cost      ii)      Operating at a faster turnaround time (25 minutes & 60 minutes)     iii)     Operating secondary airports is cheaper than from the bigger major airports and they are also a lot less congested and "turnaround times" for aircraft are a lot shorter    iv)    Online ticketing system which saves cost - no paper, printing and distributing.

                                                                                                        (Air Asia, 2013)

In my evaluation, AirAsia will continue to grow bigger in the future. However, diseconomies of scale can happen in the long run due to decreasing returns such as law suits from customers. In 2011, Up to 54 claims were made against the airline company due to flight delays in the tribunal (New Straits Times, 2012). Nevertheless, AirAsia is still able manage to these costs well for now which is one of the reason it is not experiencing diseconomies of scale.

(1597 Words)
Marjorie Tann Mei Yuen
0316272

REFERENCING

AirAsia (2013) Corporate Profile. Available from: http://www.airasia.com/my/en/about-us/corporate-profile.page [Accessed 17 October 2013]

AirAsia (2013) Investor Relations. Available from: http://www.airasia.com/my/en/about-us/ir-bursa-announcements.page [Accessed 19 October 2013]

AirAsia (2013) World’s Best Low-Cost Airline 5 Years Running. Available from: http://www.airasia.com/ask/template.do?id=429 [Accessed 17 October 2013]

eTravel Business News (2010) AirAsia “Paralysed” by Government Rules on Air Rights: CEO. Available from: http://asia.etbnews.com/29303/airasia-paralysed-by-government-rules-on-air-rights-ceo/  [Accessed 19 October 2013]

Malaysia Airlines (2013) Investor Relations. Available from: http://ir.chartnexus.com/mas/report.php [Accessed 19 October 2013]

MY Everyday On Sales (2011) AirAsia 10^th Anniversary Celebration Sale at RM0.10. Available from: http://www.everydayonsales.com/27841/airasia-awesome-is-coming-10th-anniversary-celebration-rm0-10-promotions [Accessed 17 October 2013]

M2 Communications Ltd (2003) AirAsia to Launch Operations at Senai Airport. Available from: http://www.thefreelibrary.com/AirAsia+to+launch+operations+at+Senai+Airport.-a0109677444 [Accessed 18 October 2013]

NDTV Profit (2013) AirAsia Seeks Government Nod to Launch Airline with Tata Group. Available from: http://profit.ndtv.com/news/industries/article-airasia-seeks-government-nod-to-launch-airline-with-tata-group-318236 [Accessed 20 October 2013]

New Straits Times (2012) AirAsia to Give Refund for Delay. Available from: http://www.nst.com.my/nation/general/airasia-to-give-refund-for-delay-1.94302
[Accessed 22 October 2013]

Sloman, J., Wride, A., and Garratt, D. (2012) Economics.  8th ed.  London: Pearson

The Bangkok Post (2013) THAI, Air Asia Cancel Flights to Hong Kong, Macau. Available from: http://www.bangkokpost.com/news/transport/370935/thai-air-asia-cancel-flights-to-hong-kong-macau [Accessed 19 October 2013]

The Economic Times (2013) The Story of Tony Fernandes and AirAsia. Available from: http://economictimes.indiatimes.com/slideshows/people/the-story-of-tony-fernandes-and-airasia/tony-fernandess-appetite-for-taking-risks-had-him-move-into-airline-industry/slideshow/18608896.cms [Accessed 18 October 2013]

The Star (2 August 2011) AirAsia X to Increase Flights during Peak Season. Available from:
http://www.relax.com.sg/article/news/airasia-x-to-increase-flights-during-peak-season
[Accessed 20 October 2013]

The Star Online (6 August 2013) AirAsia Q2 load factor hits 80%. Available from: http://www.thestar.com.my/Business/Business-News/2013/08/06/AirAsia-Q2-load-factor-hits-80.aspx [Accessed 19 October 2013]

The Times of India (29 April 2011) AirAsia Reintroduces Fuel Surcharge. Available from: http://articles.timesofindia.indiatimes.com/2011-04-29/international-business/29486633_1_fuel-surcharge-jet-fuel-fuel-price  [Accessed 19 October 2013]

Tune Group (2013) Tune Air: Our Portfolio. Available from: http://www.tunegroup.com/tuneair.html [Accessed 19 October 2013]