Air Asia Has so Far

Air Asia has so far been able to carve out a successful niche for itself by offering the lowest fares to a number of destinations that are very popular for the business traveler. These travelers are willing to accept a certain level of very basic service in exchange for efficiency and low fares. They do not expect gourmet food or free pillows and blankets. They do expect on-time departures and arrivals and guaranteed low fares. While the company is eager to meet these expectations, there are a number of factors beyond the control of the company that affect its ability to maintain these two conditions. This paper explores some of those.

The primary condition that the company does not have control over is fuel prices. The recent political and social unrest in North Africa and the Middle East have substantially destabilized fuel costs, a sector that already has a relatively high level of ongoing instability. For example the effect of recent political and social unrest in North Africa and the Middle East has greatly increased fuel costs, prompting a number of carriers, including American Airlines, United Continental, and Delta to consider various new fees along with fare hikes. (Davies, 2011)

However, while all airline companies are being affected by the current rise in fuel costs (as well as other recent spikes in fuel costs), low cost airlines have much less latitude to make up for rising fuel costs than do more mainstream companies. Non-low-cost airlines are not raising their fares per se, but are asking passengers to pay for a number of services that were previously provided free. Given that low cost airlines like AirAsia are already charging for all such services, the company has no wiggle room in this area and will have to compensate for rises in fuel costs in other ways (Gross & Schroeder, 2007, p. 37).

The primary ways in which the company can compensate for rising fuel costs are to increase fares, to accept a lower profitability rate, or to reduce other costs such as marketing or labor costs. Given that the profitability rate is already very low and that other costs have already been cut, the only practical response to rising fuel costs (assuming that they do not fall drastically very quickly) is to raise fares.

This will be problematic for the company, of course, since it has established as its major selling point the fact that it offers the lowest fares possible. However, having to raise fares is something that will no doubt happen at other companies as well since all companies will be affected. Thus it is entirely possible that the company will be able to raise fares and yet remain the lowest priced company in its market (Creaton, 2007, p. 48).