Theoretical And Conceptual Framework Of Airlines

In the past of few decades ago, airline industry is being control very tightly with lots of regulations. For example, United State (US) air transportation industry is being control tightly by the Civil Aeronautics Board (CAB) on price, route and schedule of flight. After that in 1978, domestic air transportation market of US is having a free competition among airlines which allowed by the Airline Deregulation Acts of 1978. Through this act, every airline is allowed to set their own price, how frequent they are flying and the destination they want to fly to (Thomas, O.G., 2004).

After the deregulation of American airline market, European air transport also experienced deregulation in the middle of 1980. The result of regulation is an increase competition of airlines and to open new entry to new airlines. The airline structure has changed due to deregulations. The airline industry becomes more competitive with numbers of competition. Changes of pricing strategy, marketing strategy and airlines networks such as hubs and spokes had made.

There are lots of changes from deregulation such as service patterns, pricing, computerized of the management systems and industry structure. Deregulation and air transport liberalization make a turning point of airlines structure and marketing strategies. Travelers are rational and not willing to pay for a level of service which is not necessary (Pourat, H., 1994). Technological development had improved the management system of airline where they are now having seats inventory system and reservation system had been improved.

During that time, lots of existing regulated airlines meet failure and left the airline industry. There are numbers of new entry airlines joined the airline industry as well. (Kaplan, D.P., 1995 cited in Thomas, O.G., 2004) report that, 19 jet operator formerly regulated by the Civil Aeronautics Board (CAB), only 7 survived until 1995. The most famous survivor, Southwest Airlines (created in 1971) remains a prosperous carrier today. Deregulation of airline market also brings in another form of new business model which is the low cost business model into the airlines industry as well. This will be further discussing in the next section.

1.2 Problem Statement

The new idea of low cost business model was first brought up by Southwest Airlines in the 1970. It took 15 years for the US airline industry and 20 years for the EU airline industry to take up the challenges of the emergence of low cost airline business model.

After the deregulation, in 1978, there are huge numbers of new entry of low cost airlines into the airline industry. Initially these new entry airlines was doing quite success but due to by having only low fare would not be able to sustain their business. They are lack of financial support to compete in the competitive airline industry during that time. There are new entries of airlines and airlines which faced failure and left the industry (Natthida Taweelertkunthon, 2006).

There is another new generation of low cost business model emerged in the airline industry in 1990. They startup their business with a strong financial support and with a better and younger aircraft used. This new generation of low cost airline has rewritten the business model to compete in the US competitive airline business environment and also with the commercial airlines market. They had also shifted from their business strategy from product differentiation into low cost. They become more cost advantages through efficiency where their operational efficient help to bring down the cost.

The emergence of low cost airline manage to “steal” customer from the commercial airlines especially price sensitive customer and served with wide range of services. Even those high end customers are not longer willing to pay such a high fare on air transport where this bring benefit toward the low cost airlines. Air transport is not a luxurious thing anymore. At this point of time, traditional airlines faced challenges from low cost airlines where they find difficulty on sustaining their business.

In Asia, low cost airline business model is still a new idea and just started in year 2000. Nevertheless, this new business model do faced problem of restrictive of two countries involved. Problem had been solved through the agreement among Southeast Asia (SEA) countries. Air Asia the successful pioneer established in the year 2001 and took the sky in November 2002. The success of Air Asia with low cost business model is the reason of the growth of low cost airlines rapidly in Southeast Asia. There are numbers of new entries of low cost airlines such as Tiger Airways, Nok Air and etc.

“The fact that Southeast Asia has a massive population is crucial, more than 50 million people with a rising middle class and a growing propensity for travel. The geographical location of surrounding islands without viable and competitive alternatives modes of transportation in Southeast Asia will enhances LCCs an enormous competitive advantage over surface and ground modes.”

(Natthida Taweelertkunthon, 2006)

Low cost business model of low cost airlines is different in between of SEA and US and EU. The application of low cost principle is different. For example, in US and EU, they could have a lower fare on landing at secondary airports. But in SEA, they couldn’t be able to avoid air traffic congestion at the core airport easily. Therefore, SEA low cost airlines cannot be able to save and lower fare on landing fees and etc.

Besides that, the competition faced by SEA low cost airlines is much competitive as compare to US and EU low cost airlines. This is because of there are lots of competitor in SEA country with low cost airlines. Therefore, the marketing strategy that being implement by the low cost airlines to stay and being competitive is important. This research proposal is focusing on the marketing strategy that implement by low cost airlines to gain competitive advantages in the competitive environment.

1.3 Research Question

From the problem statement above, it brings to several research questions where the researcher need to collect information for the purpose of this proposal.

What are the marketing strategies implementing by Air Asia?

How does marketing strategies influence the sales of Air Asia?

What are the objectives, benefits and cost of the marketing strategies implementing?

Are there any differences in between of traditional and low cost airlines’ marketing strategies?

How Air Asia’s marketing strategies make Air Asia to be competitive among other low cost airlines?

1.4 Research Objective

Research objectives have been listed down at below to guide the researcher in getting and answering the research questions which had stated above.

Identify the marketing strategies that being use by Air Asia.

Analyze on the marketing strategies that had being used.

Analyze the sales trend of Air Asia.

Compare the sales trend and marketing strategies that had implemented.

Evaluate the objectives, benefits and cost of the marketing strategies implemented.

Compare the marketing strategies of traditional and low cost airline.

Evaluate the competitive advantages of Air Asia.

1.5 Theoretical and Conceptual Framework

1.5.1 Conceptual Framework

1.5.2 Theoretical Framework

The process of this research proposal is shown in the diagram above. First of all, the problem statement would be discussing that the emergence of low cost airlines in the airline industry.

1.6 Scope and Limitation

1.6.1 Scope

In the business world, there are plenty of strategies that are implementing by different company to stay competitive in the business environment. The strategies implemented by company are such as marketing strategy, financial strategy, research and development (R&D), management information system (MIS) and etc. in this research proposal, the strategy that is being focus on is marketing strategy of an airline. It is to research on the ways of an airline manage their marketing strategy well to gain competitive advantage.

Airlines industry is a huge industry which consist of full service airlines and no frills airlines. This research proposal has limited the research topic into a small scope which is focusing on analyzing the marketing strategy of no frills airlines. Besides that, there are numbers of no frills airlines in the world as well. Therefore, the researcher has further scope the topic down to low cost no frills airline of Malaysia which is Air Asia.

1.6.2 Limitation

In every research proposal, there would have some limitations which limit the researcher to collect better information or result for the presentation of proposal. There is limitation which face by the researcher when doing research for this research proposal. AirAsia.com (2010), Air Asia is the only low cost airline available based in Malaysia (which not consist of low cost airline (FireFly) with subsidiaries of Malaysia Airline System Berhad). There do not have choice to researcher where Air Asia is the only available choice to be included as the scope of the topic.

Besides that, there are limited journals available about the marketing strategy of a low cost airline. Therefore, it is a limitation for the researcher to collect journals for review the literature. In addition, the marketing strategy of low cost airlines differs from airline to airline. It is difficult to finalize the main marketing strategy that is implementing by low cost airlines.

1.7 Significance of the Study

This research proposal is important to YBhg. Dato’ Tony Fernandes, the CEO of Air Asia and the marketing manager of Air Asia. This is because the research proposal has a summary of the effectiveness of the marketing strategies that being implementing by Air Asia where it makes them to be competitive advantage and a head above other low cost airlines. They would have the opportunity to have an outlook on a different angel of view in order to further improve on their current marketing strategy by advancing the current strategic planning model.

Besides that, another targeted reader of this research proposal is the marketing managers of other airlines (such as low cost or full service airlines). This is because they could have the idea of how Air Asia is having such an excellent marketing strategy which brings it to where it is right now as the World’s Best Low Cost Airline. They could use the strategic that Air Asia is implementing as the role model to market their airlines to be more competitive as well.

In addition, this research proposal is useful to students who are majoring in marketing strategic management. This is because it would be a good and appropriate case study to read and learn from on the ways of a company could be able to manage their strategic planning model so well and gain competitive advantages over other competitors. Student would have the opportunity to have an in-depth understanding on the ways of a low cost airline planning the marketing strategy model to suit the business model which to keep cost low and being successful.

1.8 Definition of Term

ASK = Available seat kilometer

ASK is to measure the carrying capacity of airlines’ passenger.

The formula is seat available x distance flown = carrying capacity per plane

Chapter 2: Literature Review

According to Natthida Taweelertkunthon (2006), there are two types of low cost carrier which are low cost no frills carrier and low cost low frills carrier. Low cost no frills carrier is those low cost airlines which do not provide any other extra services like on board meals. Tiger Airways and Air Asia are the example of low cost no frills carrier. On another hand, low cost low frills carrier refers to low cost airline which provide some extra service like on-board drinks or snacks. The fare of air ticket is slightly higher than low cost no frills carrier. The example of low cost low frills carrier are Nok Air, One-Two-Go and Jetstar Asia.

2.1 Key Features of Low Cost Airline Business Model

Figure 2.1: LCCs Business Model

Source: (Jiang, H., 2007)

The figure above shows the low cost airline business model which is build up three main key features which are simple product, low operating cost and positioning.

2.1.1 Simple Product / No Frills

A low cost airline would keep service and product simple to maintain cost advantages to offer product which is value for money to the customers. A simple product which also means no frills or no extra service such as meals on board provided on board to cut down cost. Besides that, meal on board could also be provided with a mean of good quality with extra charges. The seats are narrow to have a large capacity on plane and maximize seat density. This is to have a large volume of sales to cover the cost on the single journey to the destination. There is an only one class seat on aboard available with no seats arrangement allows (Jiang, H., 2007).

2.1.2 Low Operating Cost

In addition, a low operating cost is one of the low cost airlines’ features. Low cost airlines will only land on secondary airports where the landing fee is much lower as compare to core airports. Secondary airports also have the advantage of less traffic congestion where the flight and stop by and take off again in a shorter time. They would have a shorter turnaround time to avoid paying higher tax charges on parking. Besides that, low cost airline practice direct sales of air ticket or through online reservation and buying. A cost cutting strategy would be implementing by low cost airlines to keep their cost low and to have cost advantages (Dietlin, P., 2004).

2.1.3 Positioning

Lastly, low cost airline will market themselves mainly to non-business passengers. For examples, leisure passengers and price sensitive passengers are non-business passengers. In recent years, low cost airline starts to target business travelers as well. This is to grow their market to a more large perspective. A good and effective marketing strategy of low cost airline plays an important role to position their product to the public and to gain competitive advantage as well. Low cost airline will have a short haul which fly from point to point with high frequency. Moreover, low cost airline would likely to become the number one or two on most routes operated (Jiang, H., 2007).

2.2 Challenges of Low Cost Airlines

In the competitive environment of airline industry, there are several challenges which will be faced by low cost airlines. Explanations on the challengers that face by low cost airlines are explained as below.

2.2.1 Overcapacity

First of all, the airline industry of low cost airline is growing rapidly where there is more new entry of low cost airlines. According to Jiang, H. (2007), the author said that there are over thirty low cost airlines launched in the year of 2002. A sudden increase of a large amount of new entry brings threat to the existing low cost airline. The market is overcrowded and overcapacity where all of the low cost airlines need to compete among airlines to generate revenue for their own.

2.2.2 Pressure on Yield or Average Fares

With a large amount of new entry it creates a competitive competition environment among airlines. According to Dietlin, P. (2004), worldwide airline yield will decrease by 1.1% per year until 2010 and intra-Asia yield will decrease much faster than that. New pricing strategy had been introduced by traditional airline to compete with low cost airline. For example, for some routes, traditional airline introduce a low aggressive fare especially those routes that being fly by low cost airlines. Besides that, there is a price competition among airlines. The new entry airlines are having lower fares to compete with existing low cost airlines. This pulls down the average fares per customer where it does not benefit any side on a long run.

2.2.3 Difficulty on Keeping Cost Advantages

According to Dietlin, P. (2004), Asian airlines are having a significant lower input costs as compare to American airlines and European airlines. This problem of lower input cost is mainly due to labor cost. Dietlin, P. (unpublished, 2004) stated that Airlines in Singapore unit labor costs are USD 0.77 per ASK and airlines in American is having US 2.92 per ASK which is 279% more. Asian airlines are trying to solve the problem by hiring labor from low-income countries where they could have low wages for their labor to increase unit costs.

2.2.4 Product Differentiation

With numbers of low cost airlines in the market push every single low cost airline to differentiate their product to gain as much market share as possible. This simple mean more cost will incur. Airlines are coming up with more aggressive and low fares which it would pull down the average revenue of airlines. Low fare of air ticket is no longer enough to be differentiating from other competitor. They are trying to brand themselves to differentiate from others to gain competitive advantages.

2.3 Marketing Strategy that Implemented by Low Cost Airlines

There are several marketing strategies that being implement by low cost airlines to market or position their product to their customer. There are some marketing strategies that being practicing by low cost airline are stated as below.

2.3.1 Frequent Flyer Program

Frequent flyer program is one of the marketing strategies of Southwest Airline but it is not adopting by most of the low cost airlines. This program gives out frequent flyer point when customers purchase air ticket each time. By using the accumulate points, it could be redeem for free ticket or upgrade class seat which depend on the company policy (Lederman, M., 2003). As a marketing tool FFPs have proved highly successful (Bennett, M.M., 1996).

2.3.2 Point-to-Point

Gutstafsson, L. (2005) says that point-to-point could be included as a cost leadership strategy as well as a marketing strategy as well. Point-to-point refers to the air traffic movement system where the flights fly directly to the final destination without going through the hub. This would be able to help airline to save up cost. At the same time, it could be able to attract customer where they do not need to waste time on transiting at the hub. Customer could be able to have a flight directly to the final destination that they wish to be just with a low fare air ticket.

2.3.3 Branding / Image

It is difficult for airlines to differentiate their product from other competitor as the basic product of airlines are the same. Therefore, branding and build up good image or reputation is another option to market their product to the public. Branding is do marketing on a product externally to the public. There is another way round of branding being practicing. As an example, Air Asia do brand their product internally to their staff first before to brand it externally to the public (Marketing-interactive.com, 2008). This is to let the staff of Air Asia knows well on the function and attractive of the product where they could sell it more better externally to the public.

2.3.4 Pricing (Low Fares)

Low cost airlines are marketing their products with low fare to compete with traditional full service airlines. Low fare is the main attractiveness of low cost airline as compare to full service airline. Low cost airlines keep on introduce low fare ticket to customer and having promotion sales on air ticket. Fare of air ticket is getting cheap as time goes. Fare of air ticket is the main strategy that plays around by low cost airlines.

Chapter 3: Research Design and Methodology

3.1 General Nature of Research

The general nature of the research proposal is qualitative methodology. Saunders, M. et. al (1998) defines qualitative research as an array of interpretive techniques which seek to describe, decode, translate and otherwise come to terms with the meaning, not the frequency of certain more or less naturally occurring phenomena in the social world.

A deeper insight of the ways of Air Asia managing their marketing strategy would be able to gain from doing qualitative research. A research which is base on the meaning which express through words is qualitative research (Saunders, M. et. al, 1998).

3.2 Research Philosophy

Interpretive or phenomenology is the research philosophy that selected by researcher on this research proposal. This philosophy is suitable for research which is on qualitative methodology. Interpretive would help to gain new insight about the reality and deeper understanding on the question of how and why. Researcher is more flexible to adapt with changes during the research process. It is more appropriate to study on a small sample for interpretive philosophy. There are threats by using this philosophy. First of all, it will be time consuming when collecting qualitative data. In addition, analyzing of qualitative data would be difficult especially for inexperience researcher to analyze and generate new theory.

3.2 Research Method and Research Design

3.2.1 Research Method

The research method that is being use by the researcher in this research proposal is interview research method. According to Saunders, M. et. al (1998), there are several types of interview such as structured interview, semi-structured interview and unstructured interview.

The choice of interview selected is semi-structured interview which would have a list of topics to be cover during the section of interview. Semi-structured interview would be able to cover in depth and exploratory study. It would benefit to gain new insight on the particular topic as well (Saunders, M. et. al, 1998).

3.2.2 Research Design

3.2.2.1 General Research Design

General research design is known as research strategy. The three main research strategies are experiment, case study and survey. The research strategy that would be use in the research proposal is case study strategy. Case study would have a detail and intensive knowledge on the single case study that is being studied. Case study is very useful in conducting exploratory of the theory and challenging with come up with a new theory. Besides that, case study would provide a very rich understanding on the case that is being studied (Saunders, M. et. al, 1998).

3.2.2.2 Research Approach

Besides that, the research approach that being used is inductive approaches. Inductive approach is building theory which is more for case study research strategy. This approach would get the research to involve in the case study as well. The general idea of the problem would be understand well when inductive approach is being use. This approaches would more likely to use up interview data. It would be able to formulate theory by using the result of data analysis but at the same time it would also end up with the same theory as the existing theory (Saunders, M. et. al, 1998).

3.3 Sources of Data

3.3.1 Primary Research

There are several primary researches available such as observation, interview and questionnaire. The primary research which is being use in this research proposal is through interview. A semi-structured and in-depth interview would be conduct in order to have an exploratory study on Air Asia’s marketing strategy to gain new insight. An open-ended interview questionnaire would be design and use to interview the potential interviewee to collect qualitative data. A face-to-face interview would be held where it allow researcher to have more control and strengthen open-ended question (Mona, C., et. al, 2001).

3.3.2 Secondary Research

In this research proposal, the secondary research used is through online database to collect useful journals which are relating to the topic. The main online database is being use is [email protected] which is an online database of the Massachusetts Institute of Technology. The information that found through this online database is highly reliable where there is lots of PhD or master’s unpublished thesis available on the database.

Besides online database as secondary research, websites are being used as well. Official website of Air Asia is being used as the secondary research tool to get information regarding on Air Asia. Newsletters of Air Asia’s would frequently update the researcher on current news about Air Asia. Besides that, Air Asia’s blog is one of the secondary research tools where it provides new updates of Air Asia from time to time when latest news of Air Asia could be known from there as well.

3.5 Data Analysis Procedures

There is several methods data analysis on qualitative research. The method of data analysis selected for this research proposal is the grounded theory data analysis. This data analysis method uses the inductive research where it collects data from the source of interview. Through interview, data would be able to collect and at the point of time, the data is being grouped accordingly into respective main concept (Gutstafsson, L., 2005).

After the grouping of data into different concepts is done, the data could further categories into different supporting theory structure. By doing so, it enable researcher to have a better outlook of the data displayed in the structure. Therefore, researcher could interpret and analyze the data easily. A new theory would be able to generate by using the result of data analysis (Gutstafsson, L., 2005).