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BPMN 6023
STRATEGIC MANAGEMENT
PM Dr. Cheng Wei Hin
SUSTAINING COMPETITIVE EDGE FOR MAS AND
AIR ASIA
MUHAMMAD IZWAN BIN YUSOF
814118
2
INTRODUCTION
The first aviation records date from 1903, when Orville and Wilbur Wright (later known as the
Wright brothers) took the first powered flight in a heavier-than-air machine. This was a 120-foot
12-second flight in North Carolina. Eleven years later, the first scheduled air service began in
Florida. This was a plane, designed by Glenn Curtiss, which took one passenger at a time across
Tampa Bay. The trip was 18 miles long and took about 23 minutes, for a price of $5.
Since then, the aviation industry has tremendously developed through World War I, World War
II and various economic turning points. Invention of various types of aircrafts has also
significantly changed the purpose of an aircraft being built from eliminating enemies to be one of
the important means in transporting people.
The industry itself has grown from a hundred thousand dollars to multi billion dollars with each
airlines rigorously competing with each other. With this competition, price per ticket is getting
cheaper and cheaper which has resulted good purchasing power at the hand of the consumer.
In the early stage of the industry, we can only see flights within United States as well as Europe.
However, as the industry evolves, the market has now started to shift to Asia. Emergence of
various national airlines such as Singapore Airlines, Malaysia Airlines, Garuda and not to forget
Vietnam Air has initiated the shifting process. To further add into the stiff competition, Low
Cost Carriers(LCC) lead by Lion Air, Air Asia and Cebu Pacific has further strengthen the
aviation industry in South East Asia.
Major Players in the Industry
As cited in the World Aviation Yearbook 2013, it is clear that Asia is rising in the aviation
industry with China is expected to dominate the skies in 5 years time. Nevertheless, the United
States is still leading the industry with the support and intelligence of the Federal Aviation
Authority(FAA) through Delta Airlines, United Airlines as well as the Southwest Airlines out of
240 Airlines registered with the International Air Transport Association (IATA). A clear picture
of the leaders in the industry is illustrated in Table 1: The World Top 20 Airlines by Seats
Offered .
3
Rank Airlines Total Seats
1 Delta Airlines 3,802,004
2 United Airlines 3,416,483
3 Southwest Airlines 3,170,990
4 American Airlines 2,789,021
5 US Airways 2,199,479
6 China Southern Airlines 1,773,387
7 Lufthansa 1,745,538
8 China Eastern Airlines 1,639,682
9 Ryanair 1,610,091
10 All Nippon Airways 1,498,216
11 Air France 1,344,527
12 Air China 1,307,969
13 easy Jet 1,307,969
14 British Airways 1,104,228
15 Emirates 1,093,811
16 Gol 1,089,278
17 Turkish Airlines 983,611
18 TAM Airlines 965,854
19 Japan Airlines 962,136
20 Air Canada 916,517
Table 1: The World Top 20 Airlines by Seats Offered (World Aviation Yearbook 2013,
2013)
Focusing on the South East Asia Airlines, Malaysia is currently represented by 2 major airlines
which are Air Asia and MAS. Both can already be considered as the big boys in the industry
with MAS having a market presence for more than 40-years while Air Asia made its first flight
in year 1994. These 2 major airlines of Malaysia which has their own strengths and weaknesses
are now challenged with the new emergence of small yet flexible airlines, Malindo Airlines.
Air Asia were ranked 37th
while MAS was 43rd
in terms of total seats ranking. Nevertheless,
MAS has outranked Air Asia in terms of service ranking as outlined in the Skytrax review for
year 2013. MAS has received a 5-stars status while Air Asia only managed to be classified as a
3-stars airlines.
Looking at the financial performance, Air Asia is currently leading MAS with a total profit of
RM1.03billion compared to MAS which has made a total loss of RM430.74 million in year
2012. Based on this figure itself, it is obvious that the sustainability of MAS is truly questionable
4
with Air Asia roaring the skies embarking its journey to become the worlds best low-cost
airlines.
To further add, the players are supported by the growing market in each of their segment. Europe
and America remains the biggest market for the aviation industry with Asia as the emerging
market trying to make a big impact, giving some additional bonus to the airlines. This happened
as most of the developing countries which require the supports of modern countries in term of
materials as well as the services are located at Asia. The emergence of this market has shifted the
market from the west to the east. Total seats offered by region is illustrated in Figure 1: Total
Worlds Regions by Capacity
Figure 1: Total Worlds Regions by Capacity (World Aviation Yearbook 2013, 2013)
In total, Asia leads with a total of 36,968,632 seat offerings followed by 30,825,562 (America)
and 30,523,899(Europe) respectively. The remaining came from the rest of the continents of the
world with 4,358,730 seat offerings.
South East Asia Industry Overview
Southeast Asia continues to post some of the highest growth rates in the global aviation industry,
driven primarily by expansion in the regions booming low-cost sector(CAPA, 2013).
For an example, the Low Cost Carrier (LCC) currently holds more than 50% capacity in
Southeast Asia mainly contributed by Indonesia, Malaysia, Philippines and Thailand. Taking it
into a new level, the LCCs have also claimed nearly 50% share from the intra-Southeast Asia
24
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5
international market. Also, taking advantage of the growth within Southeast Asia is the regions
flag carrier which focuses on the regional routes as full-service operators.
According to the data provided by CAPA and Innovata, the Southeast Asias international
market has increased by 20% within the last 18 months from 4.7 million weekly seats in Apr-
2012 to 5.6 million weekly seats in Oct-2013. This growth has seen a double digit capacity
except for Brunei. The most rapid growth seen was on Myanmar, after it opened the aviation
market to the world. While Thailand and Malaysia has posted the biggest growth in terms of total
international seats added with over 230,000 and 200,000 weekly seats added respectively.
This growth can be seen clearly in Figure 2: Seat Offerings Increase .
Figure 2: Seat Offerings Increase (CAPA, 2013)
Specifically looking into AirAsia, it can be considered as slightly smaller than the Lion Air
Group within the Southeast Asia region, with a 32% share of LCC capacity. Nevertheless,
AirAsia is larger than Lion in terms of the international market and it has also sizeable operations
connecting Southeast Asia with North Asia and Australia. Meanwhile, Lion has yet start serving
either of these markets. All of these facts are illustrated in Figure 3 Weekly Seats of LCC
capacity.
Singapore, 11%
Thailand , 21%
Malaysia, 25%
Indonesia, 29%
Philippines, 12%
Vietnam, 17%
Cambodia, 28%
Myanmar, 77%
Brunei, 3% Laos, 28%
6
Figure 3 Weekly Seats of LCC capacity
The full fledge carrier of each country is also seen to have an important role in the growth of the
aviation industry in Southeast Asian market, both on regional and long-haul routes. Subsidiaries
of the flag carriers such as SilkAir (Singapore Airlines) and Thai Smile (Thai Airways) have
been among the fast growing carriers in the region in 2013.
The Malaysian Airlines(MAS) has also been identified as one of the fastest growing full-service
carriers in the Southeast Asia together with Garuda. MAS itself has indicated an increase of
growth capacity by 6% over the period of May 2013 Oct 2013. While Garuda itself has
recorded a higher growth rate of 7% compared to MAS.
Southeast Asias 10 flag carriers currently operate 646 aircraft (including their full-service
regional subsidiaries but not their low-cost subsidiaries). This equates to about 44% of the total
fleet in the region. With LCCs currently accounting for about 31% of the regions fleet, that
leaves about 25% of the fleet at smaller full-service carriers including independent regional
operators.
36.81%
31.79%
10.06%
5.38%
4.62% 4.06%
3.92% 2.67% 0.26% 0.23% 0.20% Lion Air
Air Asia
Cebu Pacific
Tigerair
Thai Airways
Garuda
Jetstar
Vietjet
7
Figure 4 Southeast Asian Flag carriers seat offerings
In a nut shell, a total of 3 million weekly seats were provided by the regions flag carriers, which
contributes to 35% share of the total market. With the rising and expansion of LCCs, the market
share has been going down over the last decade. But most of Southeast Asias flag carriers have
been able to retain significant shares of their home market and remain profitable. On average
they have also continued to grow faster than their counterparts in other regions.
Southeast Asia remains a dynamic and fast-growing market. Competition is as fierce as it has
ever been and will only intensify as several new carriers, primarily LCCs, plan to enter the
market over the next year. But overall the outlook for the Southeast Asian market is bright.
Industry Performance Main Variables
The aviation industry runs on few dependent variables which are explained below.
Fuel
The main variable which is important for the industry will be the fuel which has a tag price of
circa USD100 per barrel (Brent crude). Though the OECS consumption has declined by 1.2% in
2012, the overall global consumption has grew by 0.7%, marginally. This happened to be
because of the instability of Middle Eastern countries ie Syria which has resulted in more
19.74%
18.94%
18.44%
17.07%
12.20%
10.24%
1.17% 1.03% 0.83%
0.33%
Singapore Airlines
Malaysia Airlines
Thai Airways International
Garuda Indonesia
Vietnam Airlines
Philippine Airlines
Royal Brunei Airlines
Lao Airlines
Cambodia Angkor Air
Myanmar Airways International
8
potential flash points than usual. It is expected for the price of fuel to relatively maintain in year
2014 as fuel surcharges have provided partial shelter to airlines supported by a relatively healthy
economic background.
Should there any fuel price hike or another economical crisis, it will certainly create a great
discomfort for airlines, which in the end will squeeze them to reduce capacity on marginally
profitable routes or even worse, to withdraw completely. Whereas in the past full-service airlines
may well have persisted with poorly routes, todays sensitive levels of competition are prompting
a better focus on the short term bottom line. The long term has become a extravagance few
airlines can afford.
Economy
It is eminent that most of the economical experts said firmly that Europe is the past, the US the
present and Asia the future. This has been clearly seen based on Europes economy which is
steadfastly rooted in debt for several years while the US which maintains as the massive aviation
market, appears to be forging a shaky recovery, albeit heavily founded on debt and with a
political mixture more appropriate to a fairground. Asia meanwhile is robust and gearing up for
a better future, even faced with a floppy global economy.
Europes economic uncertainty however still contains unknowns that threaten to re-emerge.
Severity is not something that the powerful and varied underlying social forces in Europe are
prepared to tolerate for extended periods. And, to continue, hoping that things will eventually get
better is a journey into the unknown. Waiting for time to heal the wounds may even aggravate
the initial hurt.
Based on the IATA AGM in year 2012, it was noted that fuel prices and the economy was and
are the 2 main factors which can lead in creation of the key success factors underlying the
industry itself. With cost reduction is seen as the best action to be taken in order to sustain the
industry, emergence of the successful Low Cost Carrier including Air Asia has certainly proven
that that is the correct direction where the industry should be heading to. Other key success
factors includes hoarding cash, tight capacity control, increasing load factor & yields,
strengthening partnership between airlines as well as exploiting ancillary sales.
9
Unpredictable events
There are a lot of unpredictable events which affect the aviation industry. These events were not
even predicted and commonly are natural disasters. For an example is when the volcano in
Iceland erupted which had greatly affected the airlines in Australia. Flight schedules were
cancelled as it was extremely dangerous to fly any aircraft during the eruption. As a result there
were a lot of passengers stranded without being able to travel by air.
Another event which has affected the whole world was when any pandemic diseases spread. A
clear example is when the H1N1 virus hits. Major international airports took a lot of initiatives to
ensure that there is minimal virus spreading around its area. Many of the passengers were afraid
of travelling and most of them had postponed their vacations of even business trips just to avoid
being affected by the virus. This again has affected on the revenues and profits of the airlines.
Others might also include events such as terrorist threat in the US, snowstorms in London, the
iconic butterfly in Brazil which can disrupt a complex assortment of personal and commercial
interactions.
These unpredictable events cannot be forecasted but it is critical for the airlines to be ready by
having good and strong foundation of economy, financial and team.
Industry Growth and its Key Success Factors
The aviation industry itself has the main objective of transporting a passenger from the starting
point to its destination. No materials were involved as it is service oriented product.
As such, we can consider that the industry is capital intensive as well as labor intensive. The
costs of setting up an airline are extremely huge and normally were covered by the government.
Some of the privately owned airlines were even financed through loans in order for them to start
operating.
Revenues and profits margins were the main target with the profits were normally seasonal and
thin. During the summer for example, sees that people taking vacations and during this peak
time, airlines will then be able to make higher profits as demand increases. However, during
winter or snowy season, airlines were forced to make a lot of promotions in order to increase
their sales.
10
75% of the airlines revenue was obtained from the passengers while 15% came from the cargo
services. And from the 75%, around 80% were normally contributed from the domestic
travelling. These tickets were normally issued by the travel agencies as well as the online
ticketing system. These travel agencies itself which are considered as an element outside the
airline gives a big impact towards the economics of the system. Hence, it has to be taken into
consideration when the boundary of the aviation industry is being drawn.
One of the main management tools which were used in the industry is the basic break-even load
factor which refers to the percentage of seats in a particular route that the airlines need to sell in
order to cover its costs. This is usually around 66%. Thus, an airline that operates near this
margin and 1 or 2 seats in a flight can make the difference between profit and loss.
The seat configurations in an aircraft also plays an important role as the more seats in an airplane
entail more revenue at the same cost, but also less comfort for passengers. Thus, the best strategy
is to analyze the market for each flight and check what passengers prefer. For passengers who
prefer lower price tickets, the airlines should configure the seats to be more. If they belong to a
business community, use a plane with fewer seats with a higher pricing, but that gives them more
comfort and workspace.
Finally, pricing and scheduling are also two major, very complex, tasks that an airline must
perform. Pricing is purely competitive since deregulation of the industry. Each ticket is sold
according to the value that the passenger gives to having a seat in a particular flight. The goal of
the airline is to maximize its revenue in each flight because the cost associated with a particular
flight is pretty much fixed, offering the correct mix of tickets either full-fare, discounted, or
upgraded. This is a complex optimization process, accomplished today by specific computer
software. Scheduling is also free since the late 1970s. It is also obtained using powerful
computer software that takes into account demand, crew availability, maintenance, airport
restrictions and aircrafts.
MALAYSIAN AIRLINES(MAS)
The Malaysian Airlines is the Malaysias national airlines which provide the best in its class in
terms of services. It has won numerous of awards in the past which includes the Best Airline to
Asia and Worlds Best Cabin Crew. It is also one of the only six airlines around the globe
which has been accredited as a five-star airline. This shows that MAS is highly recognized by
the world-wide with a good branding image. As a result, customers who choose MAS can be
identified as the ones who have preferences on MAS services.
11
MAS Business Strategies and Model
MAS, is a company which has been operating in a red mark every year, financially. In order to
stay afloat, MAS has determined to continue the Business Transformation Plan(BTP) which has
been initiated by Idris Jala. These BTP has now reached the 3rd
wave which has resulted of the
implementation of the Business Transformation Plan (BTP) 3 under the stewardship of Ahmad
Jauhari.
For the first quarter ended March 31, 2013, MAS registered a loss after taxation of RM279
million and if these losses are annualised MAS losses for this year will exceed the RM1 billion
mark. (Ranjit Singh, 2013)
In order to sustain the company, the Business Turnaround 3.0 has been executed. This
emphasizes on the recovery plan as well as turning the company into a profit making
organization (MAS,2012).
Based on the recovery plan, MAS has focused on building a profitable network, winning back
the customers, cost reduction as well as bridging the fund gap. Taking note on the importance of
having a good network, MAS has relentlessly established partnership with various airlines in
order to cater for their customers needs. These include partnership with Etihad Airways,
American Airlines, Gulf Air, Silk Air, Korean Air and other major airlines. As a result, more
routes have been established with lesser costs incurred. These new network also has managed to
increased the seat offerings capacity simultaneously increasing the profit generated by the
company. Any loss-making routes have also been suspended in order to avoid further loss. These
however will then be taken into consideration once the company is stabilized.
Various promotion activities have also been conducted by MAS. Via its subsidiary, Firefly has
also supported these promotion activities focusing on the domestic market. While for the
international market, MAS consistently provides discounts on tickets as well as accommodation
in order to provide a one-stop solution for its customers. A new fleet of aircrafts were also
purchased so that customers will have more confidence on the safety aspect of the services which
MAS is providing. Reinvigorating its sales and marketing activities were also the focus of the
company by optimizing yield through better revenue management and tactical sales program.
Supported by its sales network, MAS is expected to make profits by year-end 2014 as this
turnaround program has managed to gain its momentum (The Star, Aug 22, 2013).
12
Cost reduction maintains to be in one of the business strategy plan. MAS realized that cost
reduction is not just about reducing quality. However, it is also about increasing efficiency of its
operation. For example, MAS has invested a sum of money in order to enhance its IT solution to
provide a better and efficient operation cost while at the same time tightening the procurement
process (The Edge Malaysia, March 04, 2014). While on the material aspects, MAS is trying to
lock on the fuel bills and maintenance expenses while keeping the overhead and discretionary
expenditure to a minimum.
As it needs to grow, MAS also realized that funding all of these programs requires a strong
support from the shareholders. These are to support its difficult and unpopular decisions to
assure a positive cash flow performance. The management of MAS is committed to do anything
within their power to redeem the faith and support of the major shareholders.
Competitive Advantage and Distinctive Competencies
MASs has its own pricing mechanism which focuses on its seating capacities. Most of its
aircrafts were designed to be economical while having the capabilities to provide more seats to
the customers. As such, MAS has the luxury of offering a substantially less expensive air tickets
to its customers compared to any major international airlines in the world.
Having a world class cabin crews certainly shows to the world that MAS provides a courteous
and comfortable services to its customers without considering whether it is for the economy class
or the business/1st class. And this excellent services were not just been provided while the
passengers were on the air, but were also extended while the passengers at the airport via
excellent airport facilities and services. These special cultures of warmth and friendliness has
attracted numerous and countless of passengers who are willing to exchange their money for this.
Coupled with the 1st class services, MAS has also a modern fleet of aircrafts which supports its
service. This has increased the confidence of the passengers on MAS knowing also that MAS has
their own capabilities in maintaining these aircrafts. With highly trained engineers, technicians
and even the ground staffs, it is assured that passengers boarding any of MAS aircrafts are
secured on their safety.
A long-haul flight will certainly bore the passengers. Taking this into consideration, MAS has
ensured that all of its wide body aircrafts were fully equipped with the state of the art
entertainment system. And even in some of the aircrafts, MAS has equipped it with Wifi
capabilities just to ensure that the passengers are able to surf the internet while on the air.
13
The designer of the aircrafts has succeeded in providing a spacious and wide leg room. Some of
the passengers chose MAS just because of the leg room, especially the Westerners which has a
huge and big body. These tiny little things have indeed provided MAS the competitive advantage
towards its competitors.
Not to forget is that the improved website and ticket booking process which can be made without
any hassle. The customers experience via these online services is extremely important as it
provides the first time impression of the airlines itself, and MAS has indeed proved that it is
capable of doing so. Tied with various attractive promotions, any passengers would not miss the
opportunity to fly in a 5-star airline with style.
SWOT Analysis
Strength
Strengths reflect Malaysia Airlines (MAS) competencies and capabilities of their core business
which differentiate the company itself with other service company based on value, price and
services. There are some gists which that can show the sequences of the strengths it has.
Personnel
MAS has an established brand image which has existed since 70 years ago. With these
experience, MAS has initiated a full force efforts on terms of branding and publicity which has
revolved around flight crew compared to other airlines that focuses on aircrafts and extensive
networks. The strategy is merely to promote the airline via the flight attendants and to portray
cabin crews of MAS as the representative of Malaysian hospitality and friendliness. With the
Going Beyond Expectations slogan, MAS has branded itself internationally by heavily
promoting its service excellence. Further to transform their business plan, MAS have manifested
with the innovative branding line of attack slogan which is MH is Malaysian Hospitality. It is
to highlight the hospitality of its cabin crew instead of the airlines extensive network and its
premium cabin and economy class cabin products.
In order to fulfill the customers needs to have the best service experience, MAS has initiated a
training program dedicated for cabin and flight crew. By having this program, it has resulted for
the airline to achieve a lengthy record of service and best practices excellence, with more than
100 awards in the last 10 years. The most distinguished ones comprise being the first airline with
the "World's Best Cabin Crew" by Skytrax UK consecutively from 2001 until 2013, "5-star
14
Airline" in 2005 and 2006, as well as No.1 for "Economy Class Onboard Excellence 2006"
also by Skytrax UK.
Management
A strong and well designed organizational structure is what MAS currently has. To further
strengthen the organization, MAS also has a pool of talented management team which plays an
extremely important role in steering the company to perform the best brand experience. Even
though MAS management had face difficulties and losses in several times, the management team
always have their own strategies to make sure that they are able to take this challenge as their
opportunity to enhance their reputation and quality of the service.
Idris Jala was appointed to become the new CEO on the 1st December 2005 in order to execute
the changes in the company itself. Under his stewardship, he has established a Business
Turnaround Plan(BTP), focusing on highlighted low yield, an efficient network and low
productivity. Taking part into the business is the cargo and maintenance services which has
operations in six continents and covers over 100 different locations. It certainly shows that MAS
is a service company that has strong platform in the business industry.
These business transformation efforts have been continued aggressively by its successor, Ahmad
Jauhari Yahya who has then managed to further reduce the losses incurred in previous financial
years.
Weaknesses
A companys weaknesses are the things it does not do well or that other companies are doing
better. Although MAS had its humble beginning in the golden age of travel but this company is
still having some weaknesses as what every business have.
Offerings
In a world full of competition, MAS has to fight against 2 major airlines in Malaysia, which are
the Air Asia and Malindo. These both companies which focuses on low cost operation provides
different types of service, addressing different customers requirements.
15
Though MAS operates both domestic and international routes, MAS customers are mainly
recognized as international flight customers. Compared with other airline s, the cost offered by
MAS is more expensive than others, though that the pricing is still lower should it be compared
to other 5-star airlines.
Being a 5-star airline, MAS has a lot to pay in terms of the maintenance costs. This will then be
translated into the real costs which will be borne by the customers. Indirectly, MAS is targeting
the high income market as their main customers. Nevertheless, the cost of living in Malaysia is
not really high compared to other country like Japan. There are just a few groups of people in
Malaysia who can effort to pay for the cost to fly because of the high rate of airlines tickets.
Personnel
The risk which MAS is facing is really huge as it requires a big capital in order to run the
business efficiently. With this, the management team managed to set the objectives clearly and
also has the best strategies in order to achieve their objectives. However, they were lacking in
knowing how to implement and execute the strategies effectively. This is the main reason why
MAS has met many difficulties and losses in their business and need to turnaround the business
to recover the problems and sometimes it needs high turnover rate among employees.
The RM1.3billion loss were contributed by several causes which includes escalating fuel prices,
increased maintenance and repair costs, staff costs, low yield per available seat kilometer
("ASK") via poor yield management and an inefficient route network. Another factor for the
losses was high operating costs. MAS substantially lagged its peers on yield. Some of this gap is
due to differences in traffic mix, (less business traffic to and from Malaysia than to and from
Singapore), but much of it was due to weaknesses in pricing and revenue management, sales and
distribution, brand presence in foreign markets, and alliance base.
In addition, these weaknesses which has occurred has been caused by immature channels and
distribution system as MAS needs to expand their business widely throughout the region within
the stipulated of time. Starting in year 2008, MAs has started new routes, with Macau and
Yogyakarta being the latest additions to its list of destinations. Besides, these service airline
company growths post recovery because of the trimming of the airline since year 2000.
16
Opportunities
Opportunities are the openings in the industry which could be utilized by the company in order to
make it much more favorable in the market. The areas of opportunities are higher customer
satisfaction and the changes in customer preference.
Changes in customer preference
There are a lot of factors in determining the purchasing power of a customer. This can be
demographic, psychographic, and geographic factor. In a way to obtain a certain objective,
Malaysian Airlines should be able to introduce a new concept of flying with MAS. It is because
customers are human beings that can easily having a change in their life. They can be influenced
by many aspect of their life including the way of their lifestyle. Due to that, MAS is continuously
innovating all aspects of their services and products in their transformation journey to be a 5-Star
Value Carrier.
As a start, MAS has introduced hot meal boxes which offer favorites such as nasi lemak and nasi
goreng kampung as well as the introduction of new varieties in a move to respond to customer
preferences while continuing to optimize aircraft utilization in line with its Business
Transformation Plan. In addition, MAS has more menu options available and customers can now
choose between an Asian or western meal. A total of 37 menus are on offer over an 8 week cycle
rotation to ensure that frequent travelers will be able to enjoy a variety of meals. New offerings
include nasi impit with lontong, black pepper chicken balls with spaghetti, and waffles with fruit
fillings. A permanent feature of this new menu is the option of western meals. Passengers will
continue to enjoy unlimited in-flight beverages such as coffee, tea and fruit juices. New kiddy
and special meals including vegetarian are also progressively being developed and will be
introduced by the end of this quarter.
Threats
Threats are the elements from outside of the organization which could have negative effect on
the company. There are some threats that will affect MAS such as economy, competitors,
terrorism, and technology.
17
Economy
Changes in economy will directly affect every business positively and negatively in many
aspects. If the economy are having crisis, it will affect the whole business globally. As one of the
company airlines, MAS has many connections throughout the world and it will give a big impact
to the company if there are any changes in economy level. Thus, it is important for the
organization to prepare some alternatives to overcome this problem because these unpredictable
problems may occur anytime.
Terrorism
Terrorism is leading to decrease tourism and confidence in the airlines. It might happen in many
ways of terrorism either in certain countries or it might happen in the plane itself. As example,
we know that MAS flies to 88 destinations. In cooperation with code-share partner airlines, the
airline serves more than one hundred destinations worldwide. If there is terrorism happen in the
area of Southeast Asia, MAS need to stop their flight destination to the Southeast Asia for a
certain time. It is because it will be too dangerous to the people and the whole crew as well as the
plane. At the same time it will decrease the confidence in the airlines.
18
AIR ASIA
AirAsia was established in 1993 . The company commenced its operations on 18 November
1996. It was originally owned by the government-link company ,DRB Hicom, a heavily
indebted airline company purchased by Tune Air Sdn Bhd , a company belonged to former Time
Warner executive Tony Fernandes's company . By the year 2002 Tony Fernandes made AirAsia
a profitable company and launching new routes from its hub in Kuala Lumpur International
Airport at breakneck speed, undercutting former monopoly operator Malaysia Airlines (MAS)
with promotional fares as low as RM1 (US$0.27).
AirAsia launched its first international flight to Bangkok In 2003 when it opened a second hub at
Senai International Airport in Johor Bahru . AirAsia later started a Thai subsidiary, added
Singapore itself to the destination list, and commenced flights to Indonesia. Flights to Macau
started in June 2004, while flights to Mainland China (Xiamen) and the Philippines (Manila)
started in April 2005. Flights to Vietnam and Cambodia followed later in 2005 and to Brunei and
Myanmar in 2006, the latter by Thai AirAsia. On August 2006, AirAsia took over Malaysia
Airlines's Rural Air
Service routes in Sabah and Sarawak, operating under the Fly Asian Xpress brand, the routes
were subsequently returned back to MASwings a year later citing commercial reasons. Air Asia
has further enhanced its presence in Asia by strengthening and enhancing its route network by
connecting all the existing cities in the region and expanding further into Indochina, Indonesia,
China and India. With the increased frequency and addition of new routes, AirAsia expects
passenger volume to grow further.
Business Strategies & Model
AirAsias business model is based on 3 business strategies, which are having simple product,
positioning and low operating costs. These 3 strategies are the main criteria for AirAsias
operation since it has been established.
Simple product is the main offerings which AirAsia provides to its customers. It is back to the
basics needs of the customers itself where the main requirements for AirAsia are to fly using air
transportation. Thus, AirAsia has set up a policy that should any of their customer would like to
have additional services, then the customers will need to pay extra for that particular services
he/she would like to have. Some passengers might not need that whereas other might see it as a
necessity when travelling. This has attracted many passengers in becoming a regular customers
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to AirAsia. In addition to that, AirAsia also has configured the seating positions in its aircraft to
be as narrow as possible in order to be able to provide more seating capacities. This has resulted
in more revenue can be generated from a single journey of the aircraft. Flexibility in choosing
seats was also emphasized. Passengers are able to choose his/her own seat where they would like
to be. Also, unlike other airlines, AirAsia does not have any frequent flyer program as it believes
that they have offered the best to the customers by providing a low cost air travelling.
In terms of business positioning, AirAsia has focused on non-business passengers especially
leisure traffic and price-conscious business passengers. These are the main target market for
AirAsia. Besides, AirAsia has also emphasized on short-haul point to point traffic routes with
high frequencies. Coupled with its aggressive marketing, AirAsia has decided that there is no
need to travel to those major airports as secondary airports is enough for the passengers to reach
their own destination. These itself has lower down the costs which has been passed to the
customers.
Being an airline focusing on low operating costs, AirAsia has ensured that wages, airport fees,
maintenance costs are kept at a minimum level. Purchasing the same fleet of aircraft alone ie
Airbus A320 has managed to reduce the maintenance costs for AirAsia. All of this supported
with a team of high resource and productive staffs as well as short ground waiting period assured
that passengers can fly at a lower cost.
Into the bargain to the above, AirAsia has also decided not to venture into air freight services
neither hub services. The business of carrying passengers alone has filled up the plates of
AirAsia supported by efficient online sales system.
Competitive Advantage and Distinctive Competencies
The advantages which AirAsia has commonly surround the operation of the company itself.
Using secondary airports as the end point and short-haul journey provide ease to the customers to
plan their journey. Further strengthening their advantages are AirAsias frequent and reliable
schedules which assure that customers will be arriving at their destination on time. Having this
has also indirectly assured that all of the aircrafts owned by AirAsia will be fully utilized to be
the tool of creating revenue for the company.
Standardization of fleet again prove to be the competitive advantage of the company as it clearly
reduce the operation costs for AirAsia. This, coupled with pool of efficient and aggressive staffs
as well as focused management structure further strengthen the companys position.
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With all of this low operation costs, Air Asia has created its own distinctive competency to
become the affordable air travelling paraphernalia for the passengers.
SWOT Analysis
Strength
Management team
The real strength of Air Asia is based on its strong management team with strong links with
government and airline industry leaders. The executive management come from diverse
background which consists of industry experts and ex-top government officials .
The Air Asia management team is good at strategy formulation and execution. They adopted the
proven strategies of South west Airline and Ryanair (no frills, landing in secondary airport),
Southwests people strategy (employee comes first) and easyjets branding strategy (linking with
other service providers like hotels,car rental).
Branding
AirAsias brand name is well established in Asia Pacific region now. Besides the normal print
media advertising & promotions, AirAsias top management also capitalized on promotions
through news by being very media friendly and freely sharing the latest information on Air
Asia as well as the airline industry. Their partnership with other service providers such as hotels
and hostels, car rental firms, hospitals (medical tourism), Citibank (AirAsia Citibank card) has
created a very unique image among travellers. Air Asias local presence in few countries such as
Indonesia (Indonesia AirAsia) and Thailand (Thai AirAsia) have successfully elevated the
brand to become a regional brand beyond just Malaysia. The links with Manchester United (one
of the worlds most famous football teams) and AT&T Williams Formula One team have further
boosted AirAsias image to a greater extend beyond just the this region.
Low cost leadership
AirAsia is the low cost leader among air lines in Asia. With the help of AirAsia Academy,
AirAsia has successfully created a low-cost airline mentality among their workforce. The
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workforce is very flexible and high committed and very critical in making AirAsia the lowest
cost airline in Asia.
Utilization of Information Technology (IT)
Information Technology has contributed to the progress of Air Asia to a greatest extent. This
includes the contribution made by IT in promotional activities (email alerts and desk top
widgets), brand building exercise (with 3 million hits per month and is a most widely used search
engines of the world today).IT also resulted in direct purchase of tickets by customers and
savings in air line agents fee.
The Malaysian government support
The government of Malaysia offers whatever assistance it can without jeopardizing the national
interest and its flag carrier ,Malaysian Airlines (MAS). For instance, as per report in
Starbizweek, on 5th March 2011 , the Sarawak government has offered to AirAsia to build a
dedicated low cost carrier terminal (LCCT).
Financial position
From the very beginning the financial performance of AirAsia has been very good. The revenue
of the company is impressive and is increasing. This is attributed to low operation and
distribution costs which enable the airline to offer an attractive ticket price which no other airline
can match. The profitability of AirAsia is further enhanced through its diversification strategies(
such tune hotel , tune talk etc) and joint ventures ( ie. With Thai Airways and Indonesian
Airways)
Weaknesses
Maintenance, repair and overhaul (MRO ) facility
The air craft maintenance cost is surging. Air Asia does not have its own maintenance, repair and
overhaul (MRO) facility. It may be a good strategy when they first started with only Malaysia as
the hub and few planes to maintain. But now, with few hubs (Malaysia, Thailand and Indonesia)
and over 100 planes currently owned and about another 100 planes to be received in the next few
years, Air Asia have to ensure proper and continuous maintenance of the planes which will also
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help to keep the overall costs low. It is a competitive disadvantage not to have its own MRO
facility.
Good customer service is critical
AirAsia receives a lot of complaints from customers about its service. Examples of complaints
are around flight delays, being charged for a lot of things and not able to change flight or get a
refund if customers could not make it. Good customer service and management is critical
especially when competition is getting intense.
Air craft Financing
AirAsia as part of its expansion plan , AirAsia is purchasing more aircrafts to cater for the
increased demand. However, this cost is surging. To overcome this problem, Air Asia now
getting the planes on lease instead of buying.
Opportunities
Increased fuel price
The increasing oil price at the first glance may pose threat for Air Asia. This is not so. Being a
low cost leader, AirAsia has an upper hand in this matter because its cost will be still the lowest
among all the regional airlines. Thus, Air Asia has a great opportunity to capture some of the
existing customers of full service and other low cost airlines customers. However, there will be
also some reduction in overall travel especially by casual or budget travelers.
ASEAN open skies
The ASEAN Open Skies allows unlimited flights among ASEANs regional air carriers since
December 2008.This led to the liberalization of ASEAN capital routes.
This has resulted in increased competition among the regional airlines. However, AirAsia with
its first mover advantage as well as its strengths in management, strategy formulation, strategy
execution, strong brand and low-cost culture among its workforce viewing this agreement as
more of opportunity than threat.
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Partnership with other low cost airlines
There is also some opportunity to partner with other low cost airlines such as Virgin airlines
enhance their existing strengths or competitive advantages such as brand name, landing rights
and landing slots (time to land).
Population increase
The population of Asian middle class will be reaching almost 700 million by 2010. This creates a
larger market and a huge opportunity for all low cost airlines in this region including AirAsia.
Threats
Airport charges
Airport charges imposed by airport authorities includes airport departure, security charges and
landing charges and these are beyond the control of airline operators.
This poses a threat to all airlines especially low cost airlines which try to keep their cost as low
as possible. For instance, Changi airport in Singapore charges SGD21 for every person who
departs from Singapore.
Competition from other airlines
Now AirAsia is reaping profit margin of more than 30% and this has already attracted many
competitors. Most of the full service airlines already have or planning to create a low cost
subsidiary to compete directly with AirAsia. For example, Singapore Airlines has created a low
cost carrier Tiger Airways.
Fluctuating fuel price
There is always fluctuations in the fuel price due to economic and political factors ie. Shortage,
war .This is a major threat to the company as its operations heavily dependent on jet fuel.
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THE FUTURE OF THE INDUSTRY
IATA (2013) in its Airline Industry Forecast 2013-2017 expected for the airlines to see at least
31% increase in total volume of passengers from 2012 to 2017. It is estimated that there will be
3.91 billion passengers using the airlines services compared to only 2.98 billion in year 2012.
An average of 5.4% compound annual growth rate(CAGR) of demand is expected between 2013
and 2017. For the global passenger growth, it will expand by 4.3% CAGR between 2008 and
2012, which will reflect the negative impact of the 2008 global financial crisis. Of the new
passengers, approximately 292 million will be carried on international routes and 638 million on
domestic routes.
Middle East and Asia Pacific which is considered as the emerging market will see will see the
strongest international passenger growth with CAGR of 6.3% and 5.7%, followed by Africa and
Latin America with CAGR of 5.3% and 4.5%.
While China, still dominant on the single largest driver of growth, accounting for 24% of new
passengers during the forecast period. Of the anticipated 227.4 million additional passengers,
195 million will be domestic and 32.4 million will be international.
The Asia-Pacific region (including China) is expected to add around 300 million additional
passengers by the end of the current forecast horizon. Of these, around 225 million or 75% are
expected to be domestic passengers.
With 677.8 million domestic passengers in 2017, the United States will continue to be the largest
single market for domestic passengers, although it will add only 70 million passengers over the
forecast period (2.2% CAGR). This reflects the markets maturity. China is firmly established in
second place (487.9 million passengers in 2017, 10.2% CAGR.). The US also will reclaim the
top spot from Germany for international passengers by the end of the forecast period. Germany
will add 27.2 million passengers to the 149.4 million in 2012 (3.4% CAGR.), while the US will
add 28.2 million international passengers, rising from 149.3 million in 2012 to 177.5 million
(3.5% CAGR) in 2017.
The Asia-Pacific region which is led by China and the Middle East will deliver the strongest
growth over the forecast period is not surprising. Governments in both areas recognize the value
of the connectivity provided by aviation to drive global trade and development. Similar
opportunities exist for developing regions in Africa and Latin America. To reap the benefit,
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governments in those regions will need to change their view of aviation from a luxury cash cow
to a utilitarian powerful draft horse to pull the economy forward.
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