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Way Smarter: Valuair in the budget
airline industry
Terence P.C. Fan
Sim Kay Wee, CEO of Valuair, was feeling confident. It was a rainy afternoon in early 2005,
and his Way Smarter marketing campaign was coming to a close. The campaign sought to
brand Valuair as a savvy, high-quality product that appealed to cost-conscious holiday
travelers and business executives alike. Sim was not concerned about competition from
full-service airlines (FSAs). Valuair was a budget airline a completely different segment.
Besides, he could beat FSAs on cost alone.But other budget airlines were more of a threat. Two budget airlines had entered into the
Asia-Pacific market since Valuair opened for business in 2003. It was starting to feel a bit
crowded in Singapore, yet Sim believed Valuair had differentiated itself enough to set it apart
from other domestic low-cost carriers. He said:
Even competition from Jetstar Asia, the third Singapore budget carrier launched in 2004, has not
materially affected our load factors in the strong Singapore-Hong Kong market[1]. I believe we
have a good product that is priced right (Sim, 2004).
Sim felt Valuair also had an early mover advantage. Nonetheless, he knew that it was critical
for Valuair to keep expanding in order to stay ahead of the competition. This was a challenge.
Airlines were expensive undertakings. The upfront capital investments necessary for growth
were enormous, and given high-fuel costs, the operating margins were low. There was even
the occasional price war to worry about, and these could be expensive. Sim himselfunderstood that Valuairs business model was sound, but he still needed to convince
investors to provide financial backing.
Sim considered the historical context of the airline industry, analyzed the competitive
landscape, and weighed it all against Valuairs market position. On all accounts, he believed
Valuair was well poised and would continue to succeed. Sim (2004) worried:
What really keeps me awake at night is how the air transport authority intends to allocate new
routes among the current five Singapore-based airlines. Deregulation is still a new trend in Asia
and not every country is as liberal as Singapore when it comes to exchanging air rights.
The real concern for the future of Valuair was not so much competition, but policy.
Government and quasi-governmental organizations ultimately controlled how air rights were
distributed, and without such air rights, Valuair could not even enter into a market or compete
on a route. With no domestic market to fall back on, having access to foreign markets was amatter of survival for Singapore-based airlines.
The origin of budget airlines
Since the deregulation of the US airline industry in 1978, budget airlines, also known as
low-cost or low-fare carriers, had changed the face of air travel, first in North America, and
later in Europe and parts of Asia-Pacific. Successful budget airlines, such as Southwest in
the USA and Ryanair in Europe, had taken away large chunks of formerly unassailable
DOI 10.1108/EEMC-07-2013-0145 VOL. 3 NO. 4 2013, pp. 1-24, Q Emerald Group Publishing Limited, ISSN 2045-0621 jEMERALD EMERGING MARKETS CASE STUDIES j PAGE 1
Terence P.C. Fan is based
at Lee Kong Chian School
of Business, Singapore
Management University,
Singapore.
John Butler at University ofHawaii and Phillip Phan at
University of Baltimore gaveinvaluable advice to the earlyversion of this case.
Disclaimer. This case is writtensolely for educational purposesand is not intended to representsuccessful or unsuccessfulmanagerial decision making.The author/s may havedisguised names; financial andother recognizable informationto protect confidentiality.
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markets dominated by the traditional FSAs. Budget carriers emphasized a low-cost and
limited service product that appealed to the rapidly growing price sensitive segment of the
market. This was in contrast to FSAs, which offered a full-service and often more expensive
product.
1945 to the late 1970s
Air travel products offered by FSAs were partly a legacy of extensive regulation in the airlines
industry prior to 1978. After the Second World War, economic regulation in air transportation
took the form of price coordination and capacity restriction. At the time, the focus of
regulation was on safety and industry stability. For example, the International Air Transport
Association (c), a trade association formed by major airlines, provided a platform for carriers
to coordinate airfare and service standards on international routes. Airlines used service
quality to differentiate themselves because they were not able to charge different prices for
the same product. A choice of hot meals soon became standard, even on short-haul flights,
which were defined as flights under 500 miles or less than an hours flight time. Shortly
thereafter, dedicated first-class and business-class cabins began to appear this heralded
the golden age of air travel.
Prior to deregulation in the USA, the worlds largest domestic air transportation market, the
Civil Aeronautics Board (CAB), set domestic airfares based on actual costs incurred by the
industry, and imposed stringent standards before approving new services and market
proposals. These were not the only competitive barriers; governments would often
collaborate to limit traffic rights to carriers on international routes as a means to restrictcapacity. Known as air traffic service agreements, these inter-governmental treaties
specified the maximum number of designated foreign carriers in a market, restricted the
numberof destinations served, and limited the numberof seats perweek allowed to be flown.
Renegotiating an increase in thenumber of allotted traffic rights, although possible, wasquite
difficult. This was because many traditional flag carriers were government-owned, and
therefore had their own interests in protecting their market shares from new competition[2].
The USA in the 1980s
Based on the Theory of Contestability, in 1978 the US Congress approved economic
deregulation of the domestic air transportation industry by allowing carriers to freely set
prices, capacity, and schedules, as well as to enter into and withdrawal from specific
markets at their own discretion (Tutor2u, 2002). As a result, US carriers withdrew fromparticipating in IATA price-setting mechanisms because collusion between carriers was
deemed anti-competitive. The subsequent decline in airfares increased the demand for air
travel. However, airport capacity was relatively inelastic. Increased demand was therefore
met with the introduction of wide-body aircraft types in the late 1970s that could hold more
passengers. The result of all this was a boom in worldwide air travel in the 1980s (refer to
Exhibit 1 for historic growth in air travel).
US FSAs responded to demand growth in the 1980s by reorganizing their flight networks into
spokes emanating from a few hub airports (refer to Exhibit 2 for examples of hub-and-spoke
and point-to-point routes). Arrival and departure times at these hubs were scheduled to
maximize flight connections for passengers. At the same time, several new entrant
carriers began to attract customers that ordinarily traveled by car, long-distance bus, or train
through the creation of point-to-point networks that catered to passengers travelling within aspecific region.
One of these carriers, Southwest Airlines, gained prominence over its full-service
counterparts by offering significantly lower airfares through frequent point-to-point,
peanuts-only, short-haul flights. This marked a paradigm shift in the business of air travel
with Southwest Airlines becoming the only consistently profitable carrier in the USA. This
success was attributed to its ability to translate productivity improvements into tangible cost
savings. For example, the use of only one type of airplane, the Boeing 737, allowed for
flexible resource allocation. Utilizing smaller secondary airports also meant Southwest
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Airlines could avoid large congested airports, which further helped to lower operating costs
and maintain schedule reliability (Jody, 2004).
Europe in the 1990s
IATAs authority on price regulation began to weaken in Europe in the 1980s with the
emergence of regional charter carriers[3]. These carriers put downward pressure on prices
through increased competition. The European air transportation industry underwent further
transformation when a process of deregulation began in 1987. By 1997, carriers within the
European Union had no restrictions on internal destinations, nor did they face anyrestrictions on pricing, flight frequency, or scheduling. Airport capacity had become the only
constraint. In conjunction with relaxed border controls, the European Union had effectively
become a single air transport market rivaling the USA.
Deregulation in the European air transportation industry created new opportunities for
competition; as a result, budget carriers entered the market. These new entrants introduced
many cost-saving innovations. For example, budget carriers like Ryanair and EasyJet had
developed scalable destination routes, consisting of short flights less than two hour within a
large interconnected network. This simplified logistics and minimized aircraft turnaround
time, which was the time spent by an aircraft on the ground between flights. These
innovations increased the operational efficiency of an aircraft. Furthermore, passengers
were responsible for booking their own tickets directly through the carrier over the internet or
by telephone. This was cost saving because it required less service staffing for the carrier
and removed the need for third-party booking agents. A pay-for-service model was also
used, whereby customers had to pay extra for additional services that were standard on
FSAs, like on-board snacks and beverages. These measures pushed airfare costs so low,
that by the late 1990s, Ryanair was regularly offering free tickets to many destinations that
were financed by incentives funded by local municipalities (BBC News, 2003, 2004).
The 2000s
By 2004, limited airport capacity continued to constrain air transportation despite industry
deregulation in the USA and the European Union. Airport capacity was not allocated by
market-based mechanisms. Instead, nearly all of the major international airports in the world,
including Singapores Changi International Airport, distributed slots of scarce runway time
on a per aircraft basis between carriers. IATA continued to coordinate airport capacity
management and maintained a policy that grandfathered such slot times to carriers.
Nonetheless, flexible resource allocation was still possible since carriers could exchange
their slot time with other carriers. However, new slots had to be created for existing carriers to
expand service or for new carriers to initiate service. This required additional airport
capacity, which was problematic because airport expansions and the construction of new
airports were subject to government approval and were often met with community concerns
over the negative effects of air transportation, such as environmental degradation and
noise pollution.
Prominence of secondary airports
Many of the 50 or so intra-European budget carriers had been operating out of secondary
airports away from major city centres or in smaller cities and towns, primarily because ofairport capacity issues (The Economist, 2012). At one point, Ryanair, the longest-running
and largest budget carrier in Europe, advertised Copenhagen as one of its destinations,
even though its airplanes flew only into uncongested Malmoairport in Sweden, about a 45-
minute bus ride away (Paul, 2004). In August 2004, Europes second largest budget carrier,
EasyJet, announced that it would halt services from Londons Stansted to Milans centrally
located Linate Airport due to a lack of attractive slots (EasyJet to Drop Milan-Stansted,
2004). By early 2004, in spite of the capacity problem at primary airports, budget carriers
managed to carry one in five intra-European air passengers (ELFAA, 2004).
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A new paradigm in the west
FSAs reexamine their business model
An incumbent FSA had several options when faced with competition from budget carriers.
When budget carriers first began to appear, incumbent FSAs would initially ignore the
budget carriers or offer a limited number of low-fare seats on flights that competed directly
with budget carrier flights. FSAs used price discrimination tactics to offer low competitive
airfares. These tactics included advanced purchasing and minimum-stay restrictions, which
were often non-refundable. Normal, refundable airfares were usually eight to ten times the
price of the lowest discounted airfare, but could be purchased shortly before the departuretime without minimum-stay requirements and itinerary change restrictions. These were
normally targeted towards business travelers who were willing to pay more for the extra
options and flexibility.
Subsidiary airlines
During the recession of the early 1990s, competition from budget carriers intensified in North
America. In response, FSAs developed low-cost subsidiaries as de factobudget carriers of
their own. For instance, such airlines included Shuttle by United Airlines on the West Coast,
Continental Lite by Continental Airlines out of Denver, and Delta Express along the East
Coast. These were followed some time later by US Airways Metrojet and Tango by Air
Canada. However, by 2003, these low-cost subsidiaries had all folded. In Europe, British
Airways and KLM out of The Netherlands launched their own budget airlines, but were later
sold to EasyJet and Ryanair in 2003.
Low-cost subsidiary airlines, sometimes called airlines within an airline, were able to
contain the impact of pricing pressures from budget carriers within specific regions. This
was accomplished by using standard 130-seat aircraft similar to Southwests
single-aircraft-type strategy, and also by sacrificing the quality of in-flight services. By
2000, complimentary in-flight meals had gradually disappeared on most domestic flights
within the USA, including FSA flights[4]. In spite of the decline in service quality, most US
carriers were able to maintain their relatively high airfares through the use of sophisticated
yield management systems that could price-discriminate passengers based on their
willingness to pay. They were also able to efficiently allocate resources through a
comprehensive network of flights, and mitigate risk by locking in customers through loyalty
schemes like frequent flyer programs.
Characteristics begin to convergence
Meanwhile, some budget carriers were fast approaching their full-service counterparts in
terms of service offerings. In 1998, the new entrant JetBlue Airways was the first airline to
offer free live satellite television. Budget carrier AirTran Airways configured a separate
business-class cabin on its jets and Southwest Airlines improved its variety of snacks on
some of its longer transcontinental routes. In Europe, Ryanair announced it would let
passengers rent a handheld entertainment device that would show movies and videos
(Kevin, 2004b).
Rebranding
The slump in air travel following the September 11, 2001, terrorist attacks in the USA which
used hijacked aircraft as suicide weapons, killing thousands forced many carriers to thebrink of financial distress. American West Airlines, an FSA-based in Arizona, re-branded
itself as a budget carrier. Atlantic Coast Airlines, a regional feeder airline to Delta and United
Airlines, retagged itself into Independence Air, a low-fare, point-to-point carrier with aircraft
seating as few as 50 passengers. Other FSAs, including American Airlines and US Airways,
offered deli-style food items for sale on board a service concept borrowed from the
European budget carriers.
Some European airlines had also changed their business models in face of rising
competition from budget carriers. FlyBE began as a regional feeder to Air France, but was
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later re-branded as a budget carrier flying out of small cities in the UK (Kevin, 2004a). Charter
carriers, such as Hapag-Lloyd of Germany, also entered into the budget carrier segment.
In response to the rise of budget carriers operating out of the London area, British Airways
had to cut its capacity at London Gatwick Airport by 52 percent in the summer of 2001. It was
then forced to reduce airfares by up to 30 percent on its remaining European flights out of
Gatwick (The Financial Times, 2004). A comparison of the operating revenues and costs of
several budget carriers vs their full-service counterparts showed that FSAs were operating at
higher costs (refer to Exhibit 3 for operating costs of select carriers worldwide).
Market saturation
Ironically, the explosive growth of budget carriers had not only threatened the survival of
FSAs, but some budget carriers as well. In 2004, United Airlines, US Airways and American
Trans Air (ATA), a re-branded national budget carrier, all declared bankruptcy. Independence
Airfaceda cash shortage crisisin late 2004, andDeltaAirlinesalso reported to be on thebrink
of a similar crisis (Kevin, 2004c). Meanwhile, Delta andUnited Airlines hadpinned their hopes
on their newlow-costsubsidiaries, Song andTed, respectively[5]. In sum, about half of theUS
airlines were operating under bankruptcy protection or were close to bankruptcy by late 2004
(Caroline, 2004a, b). At this time, budget carriers in the USA carried nearly a third of all
domestic passengers (Dan, 2005).
In January 2005, Delta Airlines, the third largest US carrier, announced a major fare
simplification program that offered up to 50 percent reduction on last-minute ticket
purchases. This policy was designed to attract business travelers and brought its farestructure much closer to that of competing budget carriers. American Airlines, the worlds
largest FSA by seat capacity, immediately implemented a similar pricing policy. As a result,
airfares priced in the budget carrier category comprised around 60 percent of all ticket sales
for US domestic flights.
The story in Europe was similar not every budget carrier was succeeding. The low-cost
subsidiary of British Airways, Go, never even experienced profitable operations (Ng, 2004).
By late 2004, some reports estimated that a third of all budget carriers in Europe had ceased
operations (Alfred, 2004). Notable cessations of operation in 2004 included Duo of Britain,
Volare of Italy, JetGreen and JetMagic of Ireland, V-Bird operating out of Germany, and Air
Polonia of Poland(The Business Traveller, 2004). By the end of 2004, senior managers at both
EasyJet and Ryanair expected budget carriers in Europe to undergo a wave of consolidation
reminiscent of the mergers in the US airline industry in the late-1980s (Toby, 2004).
Budget carriers in Asia-Pacific
A new generation of air carriers emerged to compete with incumbent flag-carriers in
Southeast Asia during the mid-1990s (refer to Exhibit 4 for a map of Southeast Asia). These
were not originally intended to be budget carriers, as their airfares could be higher or lower
than the FSAs depending on relative service quality. On the highly competitive
Bangkok-Hong Kong route, Orient Thai and Angel Air of Thailand often offered lower
airfares than the incumbents, Thai Airways and Cathay Pacific. However, Bangkok Airways
charged premium fares for full service on routes that avoided direct competition with
incumbents. It had even gone so far as to build and operate its own small airport.
Budget carriers throughout the Asia-Pacific region came somewhat later than in Europe.
In 2000, a number of new budget carriers out of the region began operations. They includedVirgin Blue of Australia, Lion Air of Indonesia and Air Asia of Malaysia along with its sister
carrier Thai Air Asia operating out of Thailand. These budget carriers were domestic in
scope and faced ever-increasing competition from new domestic start-ups. By late 2004
there were six new carriers operating within Thailand and about 50 in Indonesia (Today,
2004a). Some of these budget carriers were subsidiaries of larger FSAs, similar to their
counterparts in North America and Europe. For instance, Qantas Airways launched low-cost
Jetstar Airways to compete with Virgin Blue of Australia; Thai Airways International launched
Nok Air; and Orient Thai launched One-Two-Go to compete with Thai Air Asia.
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Although success was not guaranteed, early winners attracted investors, which helped raise
additional capital for expansion and price competition (refer to Exhibit 5 for market
capitalization and price-earning ratios of select budget carriers).
Air Asia: Asias benchmark budget carrier
Air Asia initially began as a start-up operating in Malaysia in late 2001. The carrier first began
flying from Kuala Lumpur to other medium-sized cities within Peninsular Malaysia, and then
to Sabah and Sarawak on the island of Borneo. Boasting now everyone can fly, Air Asia
attracted passengers who would have otherwise used another mode of transportation or
simply not traveled. Air Asia greatly expanded the size of the air travel market in Malaysiaand its surrounding countries by offering airfares as low as S$8 from Kuala Lumpur to
Penang or Johor Bahru[6]. The carrier managed yields by closely monitoring the demand for
seats. By doing so, it was able to allocate a limited number of seats to be deeply discounted
and vary the availability of different fare categories. For example, airfares would increase as
the date of departure approached. By doing so, Air Asia was able to maximize revenue from
late-booking passengers. The purpose of such revenue management tactics was to fill up
capacity early in order to aid operational planning and alleviate waste. The company also
utilized online reservations combined with data mining and electronic ticketing to enable an
analytical approach to revenue management an important tool for maximizing profits in the
highly competitive budget air travel industry.
Following the service strategies of their European and US budget counterparts, Air Asia
offered beverage and light snacks for in-flight sale. Moreover, there were no pre-assignedseats for passengers. For airplanes that served airports other than Kuala Lumpur
International, passengers were often required to walk on the tarmac to and from the terminal.
This saved time and costs that normally were spent towing the aircraft away from the
terminal. In general, Air Asia operated on a 25-minute turnaround time on flights of less than
two and a half-hours, which was well below the typical FSA turnaround times.
Air Asia flies beyond Malaysia. Air Asias initial success out of Kuala Lumpur quickly led to
another base in Johor Bahru, not far from downtown Singapore[7]. However, expansion into
other countries within the region was problematic because many of these countries
restricted air traffic rights to foreign carriers. Air Asia set up local operating subsidiaries in
other countries in the region to circumvent this barrier. For example, it created the 51
percent Thai-owned subsidiary, Thai Air Asia, to secure air traffic rights in Thailand. In early
2004, Air Asia began non-stop service between Bangkok and Singapore. Daily services
between Phuket and Singapore were offered by November 2004 and shortly thereafter, by
early 2005, flights between Bangkok and Macau were added[8]. The Macau route
specifically targeted travelers going to Hong Kong that were willing to add an additional
hours trip by boat from Kowloon to arrive at their final destination in exchange for a
lower airfare.
In late 2004, Air Asia bought AWAir, a dormant Indonesian domestic carrier, and
commenced operations from Jakarta to Medan and Balikpapan. AWAir planned on offering
scheduled daily non-stop services between Singapore and Jakarta beginning January
2005, which would be marketed by Air Asia (refer to Exhibit 6 for an example of an Air Asia
print advertisement). However, this service was quickly canceled and passenger bookings
were transferred to other carriers on short notice. Despite this setback, Air Asia boasted the
largest operating fleet among budget carriers in Southeast Asia by the end of 2004.
Air travel regulation in Southeast Asia
While the emergence of new FSAs and budget carriers often coincided with liberalization of
a countrys domestic air transport industry, the carriers were still subject to more stringent
rules on how international air traffic rights were negotiated and allocated between most
countries. According to Lee Ark Boon, Director of air transport at Singapores Ministry of
Transport, the world was slowly moving toward open-skies agreements, but the global
market was still partitioned into free trade zones and bilateral rights agreements.
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By the end of 2004, Singapore had liberal air traffic agreements with Australia, Brunei, Chile,
New Zealand, Peru, Samoa, Sri Lanka, Thailand, Tonga, the UAE and the USA. This meant
Singapore-based carriers could fly between Singapore and these countries at the
frequencies, capacities and prices of their own choosing. However, flights beyond these
countries may still have been subject to specific approval of the governments concerned.
In other countries where Singapore-based carriers flew, including Malaysia, Hong Kong and
Indonesia, flight frequency and seat capacity were still subject to inter-governmental
negotiated limits. In December 2004, Brunei, Singapore and Thailand agreed to allow their
respective carriers to operate an unlimited number of passenger flights on any international
route within these three countries on a multilateral basis. Other Association of South EastAsian Nations (ASEAN) members, including Indonesia, Malaysia and Vietnam, were also
planning to grant each others carriers unlimited access to each of their respective capital
cities by 2008 (Karamjit, 2004b).
Valuair
Target customers
Lim Chin Beng, a long-time executive of Singapore Airlines (SIA), founded Valuair of
Singapore. The airline commenced operations in May 2004 with two brand new Airbus A320
jets. Valuair, touted as the regions only quality budget airline, aimed to serve a mixture of
leisure travelers, students and business travelers (The Edge Singapore, 2004b). Cost-
sensitive small and medium enterprises (SMEs) were also interested in budget services, as
air travel had previously been too costly to justify as a business expense (The EdgeSingapore, 2004b). Lim compared this to automobile segmentation:
There is a market for the Mercedes of the world and there is a market for the Toyotas (Sim, 2004).
Business travelers tended to book travel arrangements close to the actual date of travel and
placed a high value on flexibility in their itineraries this would require a carrier with frequent
departures. They were also more willing to pay for premium services such as lounge access
and frequent flyer programs offered by FSAs. In contrast, leisure travelers and executives of
SMEs were generally more willing to accept travel restrictions in order to obtain lower
airfares. These restrictions included advanced purchases, minimum stay requirements and
penalties for changing itineraries. However, Lim recognized there was a risk in appealing to
these market segments:
Very often, [your business partners] will ask about your flight [. . .] If they hear that you took a
[rock-bottom] airline on the way over, they may think your business may not be doing well; if they
hear that you took a full-service carrier, they may think you are wasteful; but if they hear that you
took a flight with Valuair, they will think that you are smart (Sim, 2004).
There was a thin line between being cheap and budget savvy it was all about branding the
right image.
Way smart branding
Valuair sought to project a hip image with its Way Smarter marketing campaign (refer to
Exhibit 7 for examples of Valuair print advertisements)[9]. The campaign was multi-
dimensional in scope. The company partnered with Maybelline, a multinational cosmetics
company, to make available its products for use by the cabin crew in exchange for advertising
on aircraft upholstery. Next, Valuair operated a women-only flight to Hong Kong in May 2004 to
enhance the carriers fun and innovative image. The carrier also hosted a public outdoorbarbeque in a prominent location in Singapore to promote its Perth service. Valuair ultimately
attributed Way Smarter to helping fill 70 percent of its seats on its twice-daily flights to
Bangkok (Tay, 2004b). It was a success. The campaign had generated positive feedback from
many customers: passengers had described the service as cheerful, friendly and stylish.
Operational service area
Valuair inaugurated its operations with a twice-daily service from Singapore to Bangkok, and
a daily service to Hong Kong and Jakarta. A third Airbus A320 joined the fleet at the end of
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2004, which flew a daily non-stop flight to Perth and a second daily flight to Hong Kong.
In addition to a simple meal service, the Perth flight offered in-flight movies and extra
legroom, an innovation in the budget carrier segment.
Valuairs strategy of serving major cities in direct competition with FSAs was unusual among
budget carriers elsewhere in the world. Ryanair, the most successful budget carrier in
Europe, focused on providing services to provincial towns that had no scheduled jet
services. In this manner, Ryanair relied on price-sensitive passengers to make their own way
by ground transport to the major cities (refer to Exhibit 8 for comparisons of flight time radii).
Sim (2004) explained:
Wealth distribution in Asia is concentrated in a few large cities [. . .] and unlike Europe and North
America there is very little trafficoriginatingfrom thesmall towns.[As such] we want to be flyingto
capital or major cities.
Sim (2004) continued:
Average distances between major cities of wealth concentration in Asia-Pacific are greater than in
Europe, which translates into longer flight times for budget carriers and hence higher fuel,
maintenance, and service related costs.
Turnaround time and added value
Valuair offered each passenger a simple complimentary meal and beverage to contend with
the longer flight times. Alcoholic beverages were also available for purchase. Passengers
enjoyed a seat pitch the distance between two rows of seats of 32 inches and 34 incheson some aircraft. This was about 10 percent more legroom than other budget carriers
provided. Sim (2004) noted:
Unlike Europe and North America where flying has become a mode of commute for the masses,
here in Asia it is still quite an event for many and we make sure our customers feel this way.
The scheduled turnaround time for Valuair aircraft was at least 45min, which was
significantly longer than the 25 min or less typical of other budget airlines. This difference in
turnaround time was due to Valuairs longer flight times. However, Valuair made good use of
an aircrafts time on the ground given a longer turnaround. For example, cabins could be
more thoroughly cleaned before receiving new passengers. More importantly was that this
time could be used to transfer cargo. Valuairs longer distance flights relative to other budget
carriers allowed it to offer lucrative air cargo services on top of its passenger services for a
single aircraft.
Simplicity
In contrast to the many different fare levels available at other FSA and budget carriers,
Valuairs ticket structure was comparatively simple and customer-friendly. There were only
two regular fare levels, both of which were available up to the flight departure time if seats
were still available. A third, lower-cost, early bird category that had restrictions on advanced
purchases, itinerary and length of stay changes was also available. Occasional promotional
airfares were also used. For example, a low-cost student airfare accompanied the newly
launched Singapore-Perth service.
The competition
Maintaining profitability in the airline industry was difficult. Mounting a schedule of flightsrequired significant resources in terms of aircraft and trained personnel, yet the products
offered for sale were extremely perishable a seat had value only up to the time of
departure. Customer loyalty was also volatile. With other things being equal, travelers had
relatively low switching costs and preferred airlines that could offer frequent services. This
made scheduling challenging.
To the carriers, being able to offer frequent, high-capacity flights on the same route meant
lower average costs if they could fill all the seats. Otherwise, the fixed costs of maintaining
such a schedule could result in massive losses. Therefore, on existing routes, incumbent
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promotional fare to Thailand. Air Asia responded by offering S$0.49 and S$0.29 airfares.
Tiger had three Airbus A320s by the end of 2004. At this time it operated four daily round-trip
flights from Singapore to Bangkok, which included daily round-trip flights to Phuket and Hat
Yai in Southern Thailand. This competed directly with SIAs Silk Air subsidiary. Tiger planned
to expand its services by offering travel to ten destinations by the end of its first year of
operations, and up to 15 destinations by its second year.
Tiger Airways passengers were seated in a high-density configuration, with food and
beverages offered on a for-sale basis, which was similar to Ryanairs cabin service model.
This strategy was working well. In December 2004, the carrier consistently filled 70 percentof their available seats, and was filling 80 percent of its seats to Bangkok on average (Today,
2005c). Tony Davis, CEO of Tiger Airways, announced plans for expansion. In an interview in
January 2005, he stated that the next move for Tiger Airways would be to inaugurate
services to Singapores neighboring countries. He had revealed that the carrier had already
been granted landing rights in Jakarta, Medan and Padang in Indonesia (Liza, 2005).
Jetstar. Jetstar Asia was a Singapore-based sister carrier of Jetstar Australia. It was
49.9 percent owned by Qantas Airways and began operations in December 2004. The
airline was positioned well with a capital endowment of S$100 million. Jetstar Asia
inaugurated services with once daily round-trips to three locations: Hong Kong, Taipei and
Pattaya, Thailand. Jetstar Asia offered airfares as low as S$20 on select flights to Taipei and
Pattaya, and planned to have a fleet of more than 20 aircraft by 2008 (The Edge Singapore,
2004a). Chief Operating Officer, Con Korfiatis, said that the carrier was consideringexpanding service to Shanghai, Mumbai, Vietnam, Taiwan, Perth, Darwin, and anywhere
else in between (Today, 2004b) (Refer to Exhibit 13 for Valuair, Tiger Airways and Jetstar Asia
travel routes at the end of 2004.).
Competition from foreign budget carriers
Air Asia. Many budget carriers based outside of Singapore competed directly with Valuair.
Through its subsidiaries in Thailand andIndonesia, Air Asia competed directly with Valuair on
two routes. In response to Valuairs debut in May 2004, Air Asia significantly lowered airfares
on the Singapore-Bangkok route, which Valuair also serviced. More critically for Valuair, Air
Asias flights from Singapore to Bangkok connected budget-conscious passengers to its
network of low-cost flights within Thailand and to Macau. Air Asia also planned to offer flightsto Jakarta that would connect to low-cost domestic flights throughout Indonesia. In late 2004,
Air Asia announced plans to upgrade its fleet of aging Boeing 737 aircraft by purchasing 40
new Airbus A320 jets with an option to purchase an additional 40 (Today, 2005a).
Indonesian carriers. In 2004, several Indonesia-based carriers were in competition with
Valuair. Lion Air (Lion Mentari Airlines) offered multiple daily flights to Jakarta, which
competed directly with Valuairs only daily flight to the capital city. In addition, one of Lions
flights to Singapore continued on to Ho Chi Minh City four times a week. Lion serviced other
destinations, like Kuala Lumpur and Batam, which was near Singapore. Jatayu Airlines
operated Boeing 727-200 aircraft on the Singapore-Medan route, and Star Air operated daily
service between Jakarta and Kuala Lumpur.
Indian carriers. Emerging carriers in other liberalized domestic markets in the regionpresented the potential for strong competition when they began offering Singapore routes.
For instance, in 2004 Jet Airways, a privately owned FSA was Indias largest domestic carrier
and was planning daily flights to Singapore from several Indian cities. At the same time, Air
Sahara, a quality oriented Indian carrier, was planning to enter the Southeast Asia market
and provide services to Singapore (Today, 2005b). When asked about future plans to
counter the growing threat from emerging Indian carriers to the Singapore market, Sim
(2004) noted:
SIA and Silk Air have used up all the [existing] landing rights to the big cities [in India already].
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Regional regulatory constraints
Singaporean budget carriers competitive position was constrained by the limited availability
for traffic rights. Most bilateral air traffic rights agreements granted equal access to carriers
of treaty nations. SIA had a conspicuous presence in Singapores Changi International
Airport. It had become the largest international hub in the region and could offer more flights
to neighboring countries than any other national carrier. This crowded out traffic rights for
new carriers based outside of Singapore, and few if any traffic rights remained for emerging
domestic budget carriers.
A short-term constraint concerning the growth of Singaporean budget carriers was airportcapacity. Air Asias CEO, Tony Fernandes, commented that:
[Singapore] made a mistake by building a low-cost terminal because [Changi] is limited by size
and runway capacity (Sim, 2004).
He believed that the runway capacity problem at Singapores Changi Airport would make it
increasingly difficult for budget airlines to achieve turnaround times under 40 min, which
would undermine the business model on which they depended to support low airfares
(Today, 2004c).
The Civil Aviation Authority of Singapore (CAAS) allowed a maximum of three flights per
5-min interval on departures or arrivals. This was a fairly conservative standard when
compared to airports in other countries (refer to Exhibit 14 for Flight Movements at Changi
Airport in 2004, Singapore). This was because Changi was located in a highly populated
area. Slot capacity was therefore restricted for safety reasons. In this respect, Valuair wasconstrained by Changis capacity.
The big picture
In view of the large number of existing and potential competitors, some observers such as
Tony Concil, Communications Director at IATA, thought that the Asian budget carriers would
experience consolidation in the near future, similar to what had happened in Europe and
North America. Contrary to this point, Robert Khoo, CEO of Singapores National Association
of Travel Agents, believed:
It is not in Asian business culture to contemplate mergers [and therefore the industry may
continue to remain fragmented] (Today, 2004b).
Executive Director of the online travel portal, Zuji.com, Martin Symes, offered a differentopinion:
The players [will] establish their own specific position in the market place (Tay, 2004b).
Regardless of these differing views, top management at Valuair was upbeat about the future
of the carrier. Still, they realized continued success could not be taken for granted.
Valuairs original business plan ostensibly lacked a contingency concerning the growth
witnessed in other Singaporean budget carriers[10]. Although the original plan forecasted
moderate growth, it had not anticipated the actual growth that had taken place between
2003 and late 2004. Further, it did not take into consideration the dramatic rise in jet fuel
prices in 2004. In early 2005, the company faced two direct competitors that each had
significant capital and expansion plans that would increase their combined fleet by more
than 32 aircraft over the next three years. For the future, what appeared to matter most tosenior management was the need for more capital, both as a cash hedge against
competitive pricing and an investment in a new capacity.
To this end, prospective investors wondered if the market for budget air travel would be able
to support Valuair and its competitors. Sim was optimistic, pointing out that the entire
Asia-Pacific region was still projected to exhibit significant economic growth in the years
ahead. He believed good economic times usually translated into higher demand for air
transport services (refer to Exhibit 15 for comparison of growth in air transportation capacity
in select Asian countries relative to economic growth, since 1996).
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The future of Valuair
Sim needed to persuade investors to help finance Valuairs expansion over the next several
years. He examined the historical context of the market that Valuair competed in and
conducted a comprehensive competitor analysis. On all points it appeared that Valuair had
the position and strategy to win. The most significant threat, he believed, came from the
potential for detrimental regulatory change. In this respect, he felt Valuair was a low-risk
investment that would attract the much-needed capital [. . .] was Sim right?
Notes1. The load factor was the ratio of passenger revenue to the number of seats offered. Across multiple
routes the aggregate load factor was calculated by weighting (multiplying) each route with its
distance.
2. Immediately after the Second World War, privately owned American carriers lobbied for a
multilateral, liberal regulatory regime wherecarrierscouldfreely decideon which routesto fly, and at
what frequency to operate. Governments were concerned these carriers might dominate global air
transportation. Therefore, at the Chicago Convention of 1944, governments around the world settled
on a more restricted, bilateral traffic rights regime. By the 1990s, limited traffic freedoms were
negotiated between many countries. These agreements usually specified upper limits on capacity,
but also allowed for carriers from these countries to select which routes to fly.
3. Chartered flights did not operate on a regular basis. Hence, they were not as restricted by the
bilateral air traffic service agreements.4. On many short-haul flights operated by full-service airlines, such as American Airlines, passengers
were informed that flight attendants were primarily for passenger safety.
5. The head of Song announced plans to resign in October 2004. Many senior executives of Songs
parent company, Delta Airlines (2004).
6. Not all seats on specified flights were sold at these prices.
7. Air Asia provided a connecting bus service that linked Singapore to the Johor Bahru airport.
8. The service was temporarily suspended following the tsunami in December 2004.
9. Based on passenger comments retrieved from Valuair web site: www.Valuair.com (refer to tab or
give full we blink and give access date).
10. TemasekHoldings, an investment arm of theGovernmentof Singapore, owned 19 percent of Jetstar
Asia and 11 percent of Tiger Airways.
Keywords:
Marketing,
Strategic management,
Airline Industry
in Southeast Asia,
Budget Airlines,
Investment Decisions
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VOL. 3 NO. 4 2013 jEMERALD EMERGING MARKETS CASE STUDIESjPAGE 13
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Exhibit 1. Historic growth in number of worldwide air travellers
Exhibit 2. Examples of hub-and-spoke and point-to-point routes
Map of Eastern USA showing hub-and-spoke travel routes.
Figure E1
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
1975 1980 1985
MillionsPassengers
PerYear
1990
Year
1995 2000
Source:World Bank development indicators
Figure E2
Source:United Airlines
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Map of continental USA with insular Caribbean showing point-to-point travel routes.
Exhibit 3. Operating costs of select carriers worldwide
Figure E3
Source:JetBlue Airlines
Table EI
AirlineRyanair Easyjet VirginBlue Southwest JetBlue Silk Air a
Headquarter region Europe Europe Australia USA USA SingaporeYear ending March 4 November 4 March 4 December 3 December 3 March 4
Operating revenue 978 1,604 1,026 5,937 998 135
Fuel cost 213 208 133 830 147 No info
Operating cost (incl. fuel) 978 1,520 862 5,454 830 125
ASKb (millions) 13,476 21,024 14,024 115,532 21,949 No info
Operating cost/ASK 7.26 7.23 6.14 4.72 3.78 No info
Headquarter region Lufthansa British Qantas American Delta SIAa
Year ending December 3 March 4 June 4 December 3 December 3 March 4
Operating revenue 11,041 13,012 8,552 17,440 13,303 5,796
Fuel cost 1,237 1,587 1,021 2,562 1,938 841
Operating cost (incl. fuel) 11,125 12,315 7,725 18,284 14,089 5,392
ASKb (millions) 124,026 141,273 104,200 173,806 134,383 88,253
Operating cost per ASK 0.0897 0.0872 0.0741 0.1052 0.1048 0.0611
Notes: aSilk Air is a subsidiary of SIA; bavailable seat-kilometers (ASK); currency units in USD (millions) equivalent based on
exchange-rates for period covered; ASK for Ryanair were estimated from flight schedules from the Official Airline Guide. All others from
annual company reports
Source: Annual Reports of the Respective CompaniesandThe Official Airline Guide
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Exhibit 4. Map of Southeast Asia, 2004
Figure E4
Source:CIA World Factbook
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Exhibit 5. Market capitalization and price-earning ratios of budget Carriers, June 2004
Exhibit 6. Example of an Air Asia print advertisement, January 2005
Table EII
Carrier Country Market capitalization (USD millions) Price-earning ratio (June 2004)
AirAsia Malaysia 768 59.5
AirTran USA 1,090 18.3
EasyJet UK 1,119 0.2
JetBlue USA 1,286 10.6Ryanair Ireland, Europe 3,601 18.0
Southwest USA 12,600 46.3
Virgin Blue Australia 1,286 10.6
WestJet Canada 1,106 34.4
Carrier average (excluding AirAsia) 23.7
Source: Nirgunan (2004)
Figure E5
Source:Today in Singapore, January 26, 2005
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Exhibit 7. Examples of Valuair print advertisements, January 2005
Figure E6
Source:The Edgeand Today, 2005
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Exhibit 8. Comparisons of flight time radii
Number of Cities With Scheduled Flights Within five hour flight radius.
Table EIII
Population Ex-Singapore Ex-London
More than 5 million 19 5
1-5 million 59 47
500,000-1 million 17 51100,000-500,000 93 199
50,000-100,000 42 81
10,000-50,000 77 88
Under 10,000 or not known 141 124
Total 448 595
Source: Official Airline Guide(2004) and Collins New World Atlas (2002); UK
Figure E7
Five Hour Flight Radius from London
Source:The Edgeand Today, 2005
Five Hour Flight Radius from Singapore
Singapore
1,500 km at Equator
London
1,500 km at Equator
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Exhibit 9. Comparison of budget carrier airfares operating in Asia-Pacific, 2005
Discounted Economy Class Airfares for the Singapore-Bangkok Route, January 2005(one-month advanced booking).
Lowest economy class return trip airfares from Singapore, January 2005 (one-monthadvanced booking).
Table EIV
Carrier No. of daily flights Airfare for individual travelers (SGD) a
Tiger Airways 3 94-185
Air Asia 3 167-278Jetstar Asia 1 197-387b
Valuair 2 254-285
Swiss #1 278-493
Scandinavian #1 341
Indian Airlines 1 346
SIA 5 371-521
Thai Airways 5 391-781
Cathay Pacific 1 432-778c
Turkish Airlines ,1 421
Notes: aTaxes and airline surcharges were included; travel agency service fees, full-economy airfares
with complete flexibility and refundable ticketswere excluded; bService to Pattaya (Utapao); crates
according to Misa Travel
Table EV
Destination Carrier Lowest fare (SGD) a Distance (km)
Bander Seri Begawan SIA 531 1,279
Bangkok Air Asia 167 1,438
Denpasar Garuda 303 1,669
Ho Chi Minh City Vietnam 481 1,087
Hong Kong Valuair 415 2,555
Jakarta Lufthansa 170 879
Medan SilkAir 361 639
Perth Valuair 415 3,896
Phnom Penh SilkAir 681 1,131
Notes: aTaxes and airline surcharges were included; travel agency service fees, full-economy airfares
with complete flexibility and refundable tickets were excluded; Jatayu Airlines was excluded because
airfare prices were unavailable; Bander Seri Begawan was the capital of Brunei
Source: zuji.com.sg and the respective airline web sites
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Exhibit 10. Examples of print advertisements for Tiger Airways and Jetstar Asia,January 2005
Figure E8
Source:Today, January 2005
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Exhibit 11. Cash operating cost of a 150-seat airbus A320, 2004
Exhibit 12. Service amenities offered by select budget carriers, 2004
Table EVII
Service (economy) Valuair SIA JetstarAsia AirAsia Tiger
Seat pitch (inches)a 32-34 ,32 ,29 ,29 ,29
Assigned seating Yes Yes Yes No No
Baggage allowance (kg) 20 20 20 15 15
In-flight food and beverage Free Free For sale For sale For sale
In-flight entertainment For rent Free No No No
Flight connectionb Yes Yes No No No
Low-cost terminal planc No No Not sure Yes Yes
Frequent flyer program Yes Yes No No No
Seats in an Airbus 320d 150 142 180 148 180
Notes: aDistance from one row of seats to the next; bflight connections: yes, if baggage recheck
wasnot required,and no, if separatejourneyswere considered; cIf carrier planned to operate out of
a new, dedicated airport terminal for low-cost carriers in Singapore (Tay, 2004a); dSilk Air under SIA
andAirAsia used Boeing737-300;standard all-economy configuration was132 seatsin a 737-300;all
other carriers used the Airbus 320
Source: Respective airline web sites and Todayand TheEdge (2004/2005)
Table EVI
Item Cost (USD)/block hour a
Fuel (assuming US$0.85/US gallon) 670
Airframe maintenance 310
Engine maintenance 210
Line maintenance 85
Flight crew 451Landing/navigation fees 615
Total per block hour 2,341
Notes: aBlock time referred to the elapsed time between the departure from an airport terminal gate
and the arrival at the destination terminal gate; the per-block-hour measure was based on a flight
route of 925 km with a block time of 1.36 h and utilization of 2,006 such trips per year; acquisition cost
or monthly lease of an A320 not included in estimate; a typical A320 aircraft could fly with a full load of
passengers and baggage without refueling for just under 6 h
Source: Airline Fleet & Network Management(2004 November/December, pp. 16-19)
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Exhibit 13. Routes served by Valuair, Tiger Airways and Jetstar Asia, 2004
Exhibit 14. Flight movements at Changi Airport in Singapore, 2004
Figure E9
Perth
Phuket
Bangkok
Hong Kong
Taipei
Singapore
Jakarta
Pattaya
Hat Yai
Medan
Padang Balikpapan
Shanghai
Macau
Denpasar (Bali)Darwin
Brunei
Manila
Chennai
(Madras)
Tokyo
Phnom Penh
Ho Chi Minh City
Legend:
Tiger Airways
Jetstar Asia
Served by full-service incumbents from Singapore
Not served by full-service incumbents from Singapore
Source:Respective airline websites, 2004
Valuair
Figure E10
0
5
10
15
20
25
30
35
40
0 2 4 6 8 10 12
Time of Day on 24-Hour Clock
Source:The Official Airline Guide, 2005
14
NumberofScheduledFlights
16 18 20 22
Total Departure
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Exhibit 15. Comparison of growth in air transportation capacity in select Asiancountries relative to economic growth
Corresponding author
Terence P.C. Fan can be contacted at: terencefan@smu.edu.sg
Figure E11
Hong Kong 96-00
Mean Annual Growth in GDP/Capita, 1996-2000, 2000-2004
(Horizontal axis)
MeanAnnualGrowthinAirTransportation
Capacity,
1996-2000,
2000-2004(VerticalAxis)
Indonesia 00-04
Thailand 00-04
Malaysia 00-04
Philippines 00-04Singapore 00-04
Hong Kong 00-04
Singapore 96-00Philippines 96-00 Malaysia 96-00Thailand 96-00
Indonesia 96-00
40%
20%
0%
20%
40%
60%
80%
10% 5% 0% 5% 10% 15% 20% 25% 30%
Note:Air transportation capacity measured in available seat kilometres (or ASKs)
Source:The Official Airline Guide, 2005, and Economist Intelligence Unit, 2004
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