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"Indonesia, as AirAsia's third international development, is in line with the company's plan to turn AirAsia into an ASEAN (Association of Southeast Asian Nations) brand. We are targeting customers who never fly and would like to see cheaper airline tickets,"
-- CEO AirAsia, Tony Fernandes, Jakarta Post, 2004
In Indonesia, the development of air transportation was related to the history of Dutch’s airline that occupied the country at the time. After World War I, the Dutch made the first flight to connect their country with Indonesia on October 1, 1924, while the first commercial was launched by KLM from Indonesia to the Netherlands on July 23, 1927.
After the independence, the Indonesian civil flight directorate sent its first fleet “Seulawah” to Calcutta, India in 1947 to get some gasoline so that it might flew further. But, the war hampered the fleet to return to Indonesia, then it was operated commercially in Birma. The airline returned to home country after the colonizer admitted the independence of Indonesia.
Nowadays, many commercial flight companies operate in the country. In 2000, there were 11 scheduled commercial flight companies that operated 117 fleets. The number of companies added up rapidly after six years to 31 flight companies with 226 fleets or up 93%.[1] Some of them were half-owned by foreign investors. This condition made the competition tighter. Nevertheless, the competition became even fiercer when many airlines offered lower airfare to win customers. Especially, after the financial crisis hit the country’s economy and caused many airlines customers became price-sensitive. In 2000, Lion Air was founded to offer lower airfare to customers. However, at that time, the strategy occupied by the airline was not considered as the application of low cost strategy. Even though, many new airlines was born after to duplicate the airline pricing strategy. The LCC concept became famous when the Malaysian airline “AirAsia” decided to expand its presence to the country in 2004. At the time, many parties considered the airline as the first no frills airline in Asia to implement the LCC concept. The airline’s Chief Executive Officer (CEO) Tony Fernandes said to target wider customers with cheaper airline tickets. [2] Muhammad Bachrul Ilmi prepared this case from published sources for fulfilling the strategic management course final task at Gadjah Mada University Business School (MM UGM). This case is not intended to serve as an endorsement source of primary data, or illustration of effective or ineffective management. From customers’ view, the expansion of AirAsia to Indonesia brought about price advantage so that more people may travel faster and cheaper to all parts of the country. Previously, many people considered that air transportation service was only for those wealthy men. Now, the application of LCC strategy has made possible for almost everybody to fly all over Indonesia. The Airline Industry in Indonesia The airline industry in Indonesia has been developing rapidly since the demand for faster transportation has increased. In 2000, the industry served 7.6 million domestic flight customers or up 21% from previous year. In the same year, it also transported 8.5 million international flight customers to various destinations or up 8% from previous year.
Until 2006, the number of customers choosing airline service as their transportation mode has grown quite significant to 46.8 million passengers, increasing 30.7 million people or up almost 200%. From the number, 34 million customers used domestic flights, while the rest used international flights.
From above figure, the number of served customers was far beyond the Indonesian people population that was estimated around 222 million people.[3] Then, the portion of those served by airlines was only 15%. It represents the fact that the opportunity for any airlines to get customers is enormous.
Until now, the huge opportunity becomes a significant catalyst for any new entrants in the airline industry in Indonesia. Moreover, Indonesia is the biggest islands country in the world with 17.508 islands from Indian to pacific oceans. Its wide is 3,977 mil or 6,363.2 km. The five biggest island in the country is Kalimantan or Borneo (the third world biggest, 539,460 km), Sumatera (473,606 km), Papua (421,981 km), Sulawesi (189,216 km), and Java (132,107 km).[4]
In addition, the distribution of Indonesian people is concentrated at those five islands with Java as the densest island, composing 58.8% of total population in 2005. Sumatera and Sulawesi are the second and the third densest islands with 21% and 7.2% portions. Then, in term of population number, it has 10 densest provinces that are West Java (17.8%), East Java (16.6%), Central Java (3.0%), North Sumatera (5.7%), Banten (4.1%), Jakarta (4.0%), South Sulawesi (3.4%), Lampung (3.3%), South Sumatera (3.1%), and Riau (2.1%). In 2005, the total population of Indonesia is 218,868,791 people.
From this point of view, Indonesia certainly has a huge potential for any airlines to grow their flight service businesses. Therefore, it is normal that many global airline players are keen to expand their businesses in the country. It also boosted the addition of new airlines players in Indonesia.
Fierce Competition
Many flight industry players had huge interest to invest in Indonesian flight industry after the government deregulated it in 2000. The airline industry in the country became more-opened to private companies, not monopolized by stated-owned companies such as Garuda and Merpati Nusantara airlines. Then, the industry began to embrace free completion among airline players.
On December 27, 2007, President Susilo Bambang Yudhoyono signed a government regulation to replace previous regulation regarding some businesses that were open and closed for foreign investment. By that regulation, the government of Indonesia gave its approval to foreign investors to acquire any Indonesian airlines up to 49% shares. This new policy is valid to any Indonesian airlines with domestic and international route services.[5]
The government’s new policy is believed to be the next stage of more-competitive atmosphere in the country’s airline industry. The reason is that the policy gave a positive signal for global industry player to put Indonesia as their new expansion target market.
Similar to other markets, the airline consumers in Indonesia have several preferences to choose one airline as their transportation mode. In general, quality and price factors play significant role in their decision-making.
Service flights such as Garuda Airlines are committed to total quality improvement in the area of service, safety, and on-time departures, while LCC flights such as Air Asia and Lion Air is committed to offer best price to customers with standard services. While, in December 18, 2008, Chairman of Indonesia consumer foundation (YLKI), Huzna Zahir stated that the competition in Indonesian airline industry was still on ticket pricing. It was fueled by the characteristics of most airline consumers in the country who were low-tariff oriented.[6]
The air tariff war occurred since deregulation has shaped the airline industry into a bloody battle. Some of airlines were forced to ground several fleets or even surrender due to their incapability to cope with the fiercer competition among airlines offering low tariffs. In 2002, AWAIR together with Kartika Airlines, which was owned Yayasan Kartika Eka Paksi (TNI AD), surrendered from the airline battle. One year after, Indonesia Airlines grounded several fleets to adapt with the market condition.[7] “We need to consolidate our business first because the air tariff ticket is not normal. We cannot face it. But, we still operate some flight service to Abu Dhabi twice a week for the Indonesian workers”
-- Indonesia Airline spokesman, Mohammad Irvan
Although the competition has become fiercer than before, the airline industry in Indonesia has still grown rapidly. It is because in business, those who have more competitive power may sustain and win the competition, while those not having the power become the minor players or even forced to raise their white flag.
Competitive Strategies
“Competitive strategy is about being different. It means deliberately choosing to perform activities differently or to perform different activities than rivals to deliver a unique mix of value.”
-- Michael E Porter
Even in the airline industry, the concept of competitive strategies by Michael E Porter may describe airlines’ choice to grow their businesses. The concept consists of five different strategies that are low-cost provider strategy, broad differentiation strategy, best-cost provider strategy, focused low-cost strategy, and focused differentiation strategy.[8]
The core concept of low-cost provider strategy is that a competitive leader put its overall strategies to implement low overall costs, not just low manufacturing or production costs. The key success factors (KSF) for the airline would be to make achievement of meaningful lower costs than rivals, include features and services in product offering that buyers consider essential, and find approaches to achieve a cost advantage in ways difficult for rivals to copy or match.
In applying broad differentiation strategy, an airline needs to understand that the strategy objective is to incorporate differentiating features that cause buyers to prefer firm’s product or service over brands of rivals. Therefore, the KSF for implementing the strategy is that a flight company needs not to spend more to more to achieve differentiation than the price premium that can be charged.
The best provider strategy is applied by an airplane through combining a strategic emphasis on low-cost with a strategic emphasis on differentiation. The company therefore may make an upscale product at a lower cost, while give customers more value for the money. Then, the focused strategy involves concentrated attention on a narrow piece of the total market.
Low Cost Carrier Revolution
The LCC concept was first developed in the USA in the early 1990s. At the time, one of the pioneers was Southwest Airline that was founded in 1971. Its concept refers to airline practices to achieve a lower operating cost structure than their competitors. Generally, this practice is often considered as the application if any flight companies willing to offer low ticket prices.
In Indonesia, LCC airline concept was not actually a new idea since the establishment of Lion Air in 2000. The financial crisis in 1997 hitting Indonesia made most airlines customers more price-sensitive. Lion Air embraced the situation and then launched its flight service with lower prices than other airlines.
At the time, Lion Air hit the industry with low fare prices because the country has just suffered from the financial crisis in 1997. Moreover, the government has deregulated the industry one year earlier.
As mentioned before, the LCC concept became famous when AirAsia decided to expand its presence to the country during September 2004. At the time, Air Asia International Limited got an approval from the Indonesia Investment Coordinating Board (BKPM) to acquire 49% shares of a local airline and made it as the first Indonesian LCC.
Generally, airlines applying the LCC concept may have following characteristics; - a single passenger class.
- a single type of airplane (commonly the Airbus A320 or Boeing 737), reducing training and servicing costs.
- a minimum set of optional equipment on the airplane, often excluding modern conveniences such as ACARS, further reducing costs of acquisition and maintenance.
- a simple fare scheme, such as charging one-way tickets half that of round-trips (typically fares increase as the plane fills up, which rewards early reservations)
- unreserved seating (encouraging passengers to board early and quickly)
- flying to cheaper, less congested secondary airport and flying early in the morning or late in the evening to avoid air traffic delays and take advantage of lower landing fees.
- fast turnaround times (allowing maximum utilization of aircraft)
- simplified routes, emphasizing point-to-point transit instead of transfers at hubs (again enhancing aircraft utilization and eliminating disruption due to delayed passengers or luggage missing connecting flights)
- encourage the use of direct flights. Luggage is not automatically transferred from one flight to another, even if both flights are with the same company.
- generation of ancillary revenue from non-ticket sources from a variety of activities, such as a la carte features and commission-based products.
- emphasis on direct sales of tickets, especially over the internet (avoiding fees and commissions paid to travel agents and computer reservations system)
- employees working in multiple roles, for instance flight attendants also cleaning the aircraft or working as gate agents (limiting personnel costs)
- a disinclination to handle Special Service passengers, for instance by placing a higher age limit on unaccompanied minors than full service carriers.
- Aggressive fuel hedging
Indonesia AirAsia
PT Indonesia AirAsia was a subsidiary flight company of the well-known Asian LCC company, Air Asia. Before that, the company’s name was PT AWAIR Internasional that was founded in September 1999 as a private local company in Indonesia. Then, in March 2000, a group of private investors headed by Unn Harris and Pin Harris took over the airline. After that, the airline launched its initial flight from Jakarta to Surabaya and Medan in June the same year using two fleets A310-300.
In August 2004, Air Asia International Limited showed its interest to acquire 49% AWAIR’s shares. It was due to the fierce competition among airlines in Indonesia. The Indonesia Investment Coordinating Board (BKPM) approved the acquisition in September.
Three month later, the new management of AWAIR reconstrcuted teh business model of the airline. The airline therefore applied LCC concept so that it was possible to offer lower tariff and no frill services. On December 1, 2005, the management changed the airline’s name into PT Indonesia AirAsia.
At the moment, Indonesia AirAsia operates 11 Boeing 737-300 that serve 8 domestic routes (From Jakarta to Medan, Padang, Pekanbaru, Denpasar, Balikpapan, Surabaya, Batam and Solo) and 15 international routes (From Jakarta, Bandung, Bali, Medan, Padang, Pekanbaru, Surabaya to Kuala Lumpur, Johor Baru, Bangkok, Kota Kinabalu, Kuching and Penang). Until the end of last year, the airline has served 4.3 passengers. Operation
To be the leader of LCC airlines in Indonesia, Indonesia AirAsia implemented some following operations,[9]
a. Lower price, no frills
The airline is commited to ensure its ticket price always lower than other airlines. It is implemented by using earlier order, cheaper price system. The company mentioned that this service is designed for those only willing to travel without any additional services such as food, airport loung, and loyalty frequent flyer miles.
b. High flying frequency
The airline’s high flying frequency aims to satisfy many customers. It implement 25 minute time for take-off and claimed to be the fastest in Asia so that may result high fleet utilization, lower cost, and increasing staf and fleet productivity.
c. Same fleet type
To boost operating efficientcy, the airline make all of its fleets into one type. It is also to make the pilot training and maintenance cost become efficient. Until 2006, all of AirASia’s fleets were B737-300.
d. For passenger satisfaction
Air Asia also tries to give satisfactory services and make trip even easier. In order to achieve those goals, the airline applied the ticket buying system as follow; - Call Center (Pusat Layanan Telepon), established in February 2004, having 60 different lines.
- Flying without physical ticket, established in April 2002, utilizing the Internet booking AirAsia.
- Direct reservation, available at airports and some cities.
- Travel agents, able to perform payments virtually via credit cards.
Lion Air
Lion Air started its initial flight in 2000 with only one aircraft, while today the company operates
37 planes flying to not only all of Indonesia’s major cities and wondrous tourist destinations, but to Singapore, Penang and Kuala Lumpur as well. Then, in 2005, Lion Air had the biggest market share in Indonesia.[10]
First, Lion Air operated the 42D Yak aircraft and B737-200. In 2001, it operated A310-300. Then, it chose MD-80 series aircraft, which is considered efficient and also convenience with 165 passenger capacity. Currently, Lion Air has a fleet of 46 aircrafts, consisting of 16 units MD 80-series, 5 units MD 90-series, 10 units B737-400, 2 units B737-300, 3 feeder aircrafts of Dash 8 and 10 units of B737-900ER.
From year 2007 until 2012, 144 aircrafts of B737-900ER will be delivered from the total 178 aircraft ordered to strengthen Lion Air fleets. B737-900ER is the newest member of Next Generation B737 family with the most advanced single aisle commercial airplane in the world. B737-900ER will enable Lion Air to offer more nonstop flight at low fares to more destinations throughout Indonesia and beyond.
Lion Air plan to be a market leader in LCC industry has spread news around Indonesia. Jakarta post stated that the airplane has really ordered 56 Boeing 737-900ER planes valued at more than US$4.4 billion at current list prices. The new purchase brings Jakarta-based Lion Air's combined orders for the plane - which can seat up to 220 passengers - to 178. It also acquired purchase rights for an additional 50 units of the plane.[11] Operation
As one of LCC airlines, generally, Lion Air also applied operation sytem that enables the flight to offer lower price ticket.
a. Lower price, no frills
The airline is commited to ensure its ticket price always lower than other airlines. It is implemented by using earlier order, cheaper price system. The company mentioned that this service is designed for those only willing to travel without any additional services such as food, airport loung, and loyalty frequent flyer miles.
b. Same fleet type
To boost operating efficientcy, this airline make all of its fleets into few types. It is also to make the pilot training and maintenance cost become efficient. In 2006, most of the airline’s fleets were MD or Boeing.
c. For passenger satisfaction
Lion also tries to give satisfactory services and make trip even easier. In order to achieve those goals, the airline applied the ticket buying system as follow; - Flying without physical ticket, utilizing the Internet booking Lion Air.
- City Check In, the airline offers passengers the service that allows them the option of checking-in at any off our Lion Air Sales Offices throughout Indonesia without baggage.
- Drive Thru Check In, the airline launched the first Drive Thru Check-in facility for passengers at Hasanuddin Airport in Makassar, South Sulawesi in August 2005. Due to high volumes of passenger travel, this option allows passengers without baggage the option of checking-in, drive-thru style.
- Mobile Check In, in 2004, Lion Air launched its innovative Mobile Check-in.
- 24 Hours Call Center, for booking flight
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