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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].

PAGE 10 jEMERALD EMERGING MARKETS CASE STUDIES j VOL. 3 NO. 4 2013


11/24

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).



12/24

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

References

Alfred, L. (2004), More Europe budget carriers may go bust, The Straits Times Interactive, May 4.

BBC News (2003), Ryanair Loses Strasbourg Appeal, BBC News, December 18, available at: http://

news.bbc.co.uk/2/hi/business/3330861.stm (accessed September 23, 2013).

BBC News (2004), Ryanair Faces NewPayment Probe, BBC News, February 5, available at: http://news.

bbc.co.uk/2/hi/business/3458423.stm (accessed September 23, 2013).

(The) Business Traveller(2004), Light goes out on duos bright idea, The Business Traveller, June,

pp. 7-8.

Caroline, D. (2004a), Holes appear in low-cost strategy, The Financial Times, October 27.

Caroline, D. (2004b), Independence air warned, The Financial Times, November 18.

Dan, R. (2005), Tippingpoint in passenger loads sparks changes in fares, The USAToday, January 7.

Delta Airlines (2004), Northwests head completes airline exodus, The Financial Times, October 2,

available at: www.ft.com/intl/cms/s/0/7915c0ac-1410-11d9-aa94-00000e2511c8.html#axzz2fdo9Juya

(accessed September 23, 2013).

EasyJet to Drop Milan-Stansted (2004), Copenhagen over slots, fees, August 31, available at: www.

atwonline.com/indexfull.cfm?newsid4497 (accessed September 2004).



13/24

(The)Economist(2012), Turbulent skies special report on low-cost airlines, The Economist, July 8,

available at: www.economist.com/node/2897525 (accessed September 2012).

(The) Edge Singapore(2004a), Snapshots of LCCs in Singapore, The Edge Singapore, November 22.

(The) Edge Singapore (2004b), Travellers will learn to compare services, The Edge Singapore,

November 22.

ELFAA (2004),Members Statistics, European Low Fares Airline Association, available at: www.easyJet.

com

(The) Financial Times(2004), BA cuts Gatwick fares by up to 30 percent, The Financial Times, May 14,

available at: www.FT.com (accessed May 14, 2004).

Jody, H.G. (2004), Southwest Airlines Way: Using the Power of Relationships to Achieve High

Performance, McGraw-Hill, New York, NY.

Karamjit, K. (2004a), Hong Kong air ticket price war?, The Straits Times Interactive, May 5.

Karamjit, K. (2004b), New air pact sets pace for ASEAN travel, The Straits Times, December 24.

Karamjit, K. (2004c), Valuair chief lashes out at big airlines price cuts, The Straits Times Interactive,

May 6.

Kevin, D. (2004a), FlyBE sets a course for clearer skies, The Financial Times, November 22, available

at: www.ft.com/intl/cms/s/0/8f6be956-3c2b-11d9-8b17-00000e2511c8.html#axzz2fdo9Juya (accessed

September 23, 2013).

Kevin, D. (2004b), Ryanair plans e7-A-flight entertainment, The Financial Times, September 22,

available at: www.atwonline.com/indexfull.cfm?newsid4497 (accessed September 3, 2004).

Kevin, D. (2004c), Top US airlines suffer heavy 3Q losses, The Financial Times, October 20.

Liza, L. (2005), Tiger airways CEO sees competition crumbling, The Business Times, January 18.

Ng, M.Y. (2004), Why GO was a No-Go,The Edge Singapore, Week of October 11, page OP5 (print

issue).

Nirgunan, T. (2004), AirAsias slippery take-off, The Edge: Singapore, November 22, p. 16.

Paul, P. (2004), Ryanair misled public over flight destinations,The Independent, March 13, available

at: http://infoweb.newsbank.com.l ibproxy.smu.edu.sg/iw-search/we/InfoWeb?p_actiondoc&p_

topdoc1&p_docnum1&p_sortYMD_date:D&p_product AWNB&p_text_direct-0document_

id (%20132A8F99E8D49360%20)&p_docid132A8F99E8D49360&p_themeaggdocs&p_

queryname132A8F99E8D49360&f_openurlyes&p_nbidE66O58OOMTM3OTkzNTI1NS43NTk1

NTk6MToxMjoyMDIuMTYxLjMzLjE&&p_multiTND1 (accessed September 23, 2013).

Sim, K.W. (2004), Guest lecture at Singapore Management University (unless you know the title of his

speech?), Singapore, December 14.

Tay, T.-W. (2004a), CAAS to build low-cost carrier terminal, Today, July 21.

Tay, T.-W. (2004b), Up to 40% lower fares on Tiger Airways, Today, August 24.

Toby, S. (2004), Easyjet sees challenging times ahead, The Financial Times, November 23.

Today(2004a), AirAsia buys Indonesian Airlines, Today, October 18.

Today(2004b), Jetstar aims to fly above the fray, Today, November 16.

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January 20.

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content/topics/transport/transport_contestability.htm (accessed September 2012).



14/24

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



15/24

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



16/24

Exhibit 4. Map of Southeast Asia, 2004

Figure E4

Source:CIA World Factbook



17/24

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



18/24

Exhibit 7. Examples of Valuair print advertisements, January 2005

Figure E6

Source:The Edgeand Today, 2005



19/24

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



20/24

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



21/24

Exhibit 10. Examples of print advertisements for Tiger Airways and Jetstar Asia,January 2005

Figure E8

Source:Today, January 2005



22/24

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)



23/24

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



24/24

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: [email protected]

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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