Wednesday, June 12, 2013

Economics again: The example of AirAsia

In our last instalment, we discussed the vast gulf in terms of bus ticket prices across a stretch of land. While bus tickets from Singapore to Kuala Lumpur cost $30, it may be surprising to know that for that same journey, one can an air ticket on Malaysia-based budget carrier AirAsia for the same price.

So how do the economics work out here then?

Initially, we have to understand that the airline industry is a cutthroat and extremely price-competitive business. Ultimately, this competition benefits the ordinary consumer by driving prices down and raising service standards. The presence of national airlines receiving government support and the fact that the aviation business is ultimately a regulated one also help to ensure that no one player is able to completely dominate the market by strategically undercutting its competitors.

The fact that AirAsia has expanded aggressively from its initial 2 planes and 6 domestic routes in 2002 to become a leading regional carrier, has led to massive consolidation and economies of scale for the airline. With overhead costs spread over a larger fleet and passenger haul, the airline is in a position to offer very compelling fares. Which sometimes, as raised earlier, can be even cheaper than the price of a bus journey.

Still, this is not yet a satisfactory answer. There are many large airlines in the world with deep reserves and an impressive fleet – what then, is the secret ingredient that places AirAsia firmly in the black, while its more illustrious peers such as Malaysian Airlines and even Singapore Airlines struggle to balance their budgets?

The magic element is: operational efficiencies. AirAsia has managed to streamline its costs to such an extent that you would hear of top management inspecting and complaining about adding extra padding to the seats, which they calculate would subsequently weigh down the plane and cut fuel efficiency. Building an airline around a single kind of aircraft (the Airbus A320), focusing on a quick plane turnaround and a no-wastage policy, make AirAsia's economic model a very lean and mean machine – one that is difficult to emulate by others, giving it a sustainable competitive advantage which it has capitalised on to expand aggressively.

The fact that AirAsia is gradually shifting its company base to Indonesia is also another shrewd move to keep operating costs down, while at the same time tapping into a booming consumer market.

With a combination of sound management and of being in the right place at the right time at the heart of ASEAN's economic boom, one expects AirAsia to not just give its fellow airlines a run for their money, but even the long-distance bus companies. And that is how surprising – and pleasant – economics can turn out to be for the ordinary man on the street, who, compared to 20 years ago, does not have to be a big businessman to be able to take a weekend off in Bali.