Does AirAsia has any economic moat?
AirAsia branded itself as a low cost airline. It makes money by offering no frill air travel, and has been tremendously successful in capturing the Malaysian air travellers market. Before AirAsia, air travelers are served mainly by the Malaysian Airlines (MAS). While MAS' service is award winning, its steep ticket price deters many from flying. The company was asked to lower its fare many times, especially for East Malaysian who depended on its service, but there is no economic motivation for it to do so. That is until AirAsia comes along. It seized the opportunity to offer what MAS does not bother to entertain, the hugely under served Malaysian public who are eager to fly but cannot afford MAS' airfares.
The rest as they say is history.
And recently there was an article about AirAsia being a good business to invest in. The storyline goes like this.
If RM 200,000 is invested into AirAsia in January 2007, the investor should have roughly 130000 units of AirAsia shares. With that amount of shares, if the investor managed to stay vested in the same company until 2013, he will be rewarded with a whopping RM 23,400 dividends in the last financial year 2012. No doubt, business wise, it has been doing really well.
From the look of it, anyone who managed to earn the dividend must have a lot of faith in the company. It was not smooth sailing for the investors, and if they could stay with the company that long, they deserve to be rewarded.
But, is the dividend sustainable?
In other words, does it has an economic moat, which according to Warren Bufftet is the competitive advantage that one company has over other companies in the same industry. Perhaps we could obtain the answer by observing some of AirAsia's business practices, on how it treats its customers.
No doubt, AirAsia offers lower ticket price compared to MAS in many routes it operates in. And it also flies to more routes than MAS. For example, MAS no longer offer direct flight between Kuching and Johor Bharu. Nor does MAS offers the Penang-Kuching flight. Both cities have a big number of catchment customers because there are many migrant Sarawakian labor in Singapore and Penang.
Due to these cost and route advantages in Malaysia, it is an airline with no call center. The only mean to ask for support is by using the "new age" media such as online chat or twitter. If the customer are not familiar with these communication methods, then there is virtually no support for him.
Not only that, it limits the online chat support to 10 minutes, and if the issue is not resolved, the caller will be asked to try the chat again, which means another 30 minutes wait. So it does not matter if the issue is resolved for AirAsia The way the service is measured is the number of request "serviced". Whether the issue is resolved or not is not AirAsia's concern.
For AirAsia's X customers who have any problem with their ticket reservations, there is a call center available. But, there is a catch. They are told upfront that there will RM 1.95/minute "charges". I wonder how many company can charge its customers for trying to resolve their problem in the first place.
AirAsia also practiced route "experiment" aggressively. It could presell the tickets of the routes by offering steep discounts. However, if there is no sufficient demand for the route, the service could be cancelled and the passenger will be left stranded. This is widely reported recently in Philippines.
So yes, it has all the upper hands now, but I could not help comparing the company with MAS of yesteryears. MAS did not lower the ticket price because it chose to ignore its potential customer. Will AirAsia suffers the same fate 10 years from now by treating its customer like pariah? It will be an interesting story to follow.
In the end, a business thrives because its customers value its service. With AirAsia people has no other choice, but that "could" change anytime with the arrival of Malindo and the resurgent MAS.
In the mean time, any investors who value it's cash generating capability could invest in the company as any of its competition does not seem to be encroaching any time soon.
AirAsia branded itself as a low cost airline. It makes money by offering no frill air travel, and has been tremendously successful in capturing the Malaysian air travellers market. Before AirAsia, air travelers are served mainly by the Malaysian Airlines (MAS). While MAS' service is award winning, its steep ticket price deters many from flying. The company was asked to lower its fare many times, especially for East Malaysian who depended on its service, but there is no economic motivation for it to do so. That is until AirAsia comes along. It seized the opportunity to offer what MAS does not bother to entertain, the hugely under served Malaysian public who are eager to fly but cannot afford MAS' airfares.
The rest as they say is history.
And recently there was an article about AirAsia being a good business to invest in. The storyline goes like this.
If RM 200,000 is invested into AirAsia in January 2007, the investor should have roughly 130000 units of AirAsia shares. With that amount of shares, if the investor managed to stay vested in the same company until 2013, he will be rewarded with a whopping RM 23,400 dividends in the last financial year 2012. No doubt, business wise, it has been doing really well.
From the look of it, anyone who managed to earn the dividend must have a lot of faith in the company. It was not smooth sailing for the investors, and if they could stay with the company that long, they deserve to be rewarded.
But, is the dividend sustainable?
In other words, does it has an economic moat, which according to Warren Bufftet is the competitive advantage that one company has over other companies in the same industry. Perhaps we could obtain the answer by observing some of AirAsia's business practices, on how it treats its customers.
No doubt, AirAsia offers lower ticket price compared to MAS in many routes it operates in. And it also flies to more routes than MAS. For example, MAS no longer offer direct flight between Kuching and Johor Bharu. Nor does MAS offers the Penang-Kuching flight. Both cities have a big number of catchment customers because there are many migrant Sarawakian labor in Singapore and Penang.
Due to these cost and route advantages in Malaysia, it is an airline with no call center. The only mean to ask for support is by using the "new age" media such as online chat or twitter. If the customer are not familiar with these communication methods, then there is virtually no support for him.
Not only that, it limits the online chat support to 10 minutes, and if the issue is not resolved, the caller will be asked to try the chat again, which means another 30 minutes wait. So it does not matter if the issue is resolved for AirAsia The way the service is measured is the number of request "serviced". Whether the issue is resolved or not is not AirAsia's concern.
For AirAsia's X customers who have any problem with their ticket reservations, there is a call center available. But, there is a catch. They are told upfront that there will RM 1.95/minute "charges". I wonder how many company can charge its customers for trying to resolve their problem in the first place.
AirAsia also practiced route "experiment" aggressively. It could presell the tickets of the routes by offering steep discounts. However, if there is no sufficient demand for the route, the service could be cancelled and the passenger will be left stranded. This is widely reported recently in Philippines.
So yes, it has all the upper hands now, but I could not help comparing the company with MAS of yesteryears. MAS did not lower the ticket price because it chose to ignore its potential customer. Will AirAsia suffers the same fate 10 years from now by treating its customer like pariah? It will be an interesting story to follow.
In the end, a business thrives because its customers value its service. With AirAsia people has no other choice, but that "could" change anytime with the arrival of Malindo and the resurgent MAS.
In the mean time, any investors who value it's cash generating capability could invest in the company as any of its competition does not seem to be encroaching any time soon.
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