65249961 Strategic Management Assignment Part B Air Asia edited PDF

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PART B

AIRASIA Berhad

TABLE OF CONTENT 1. Executive summary 2. Introduction 3. Environmental analysis 4. Environment analysis 5. Company analysis 6. Competitive strategy 7. Financial analysis 8. Critical Success Factors 9. Problems & Issues 10. Recommendations 11. Conclusion 12. References 13. Appendices

AIR ASIA 1. EXECUTIVE SUMMARY

Strategic management has played a key role in the success of many business organizations in the world including airlines and AirAsia is no exception. Commencing in 1996, within fifteen years, AirAsia managed to expand its operations into another ten countries. In addition, through its associate company AsiaX, it launched long-haul low-cost air services from Malaysia to Australia and the United Kingdom.

This paper will look at the award winning Malaysian low cost carrier- AirAsia’s by analyzing its strengths and weaknesses using strategic tools such as PEST analysis, Michael Porters Generic strategies, SWOT matrix analysis, Porter’s Force Model Competitive Forces Model, BCG Matrix , Internal and External Factor evaluation Matrix and Competitive Profile Matrix and Financial Analysis and recommend the relevant strategies for adoption to pursue its continue its competitive differentiation and profitability. The paper also throw some insights into the Blue Ocean Strategy concept which is used by AirAsia as one of its strategic moves. 2.

INTRODUCTION

Competition in the airline industry is very intense and growing rapidly. The airlines are using several strategies to compete with one another in the industry. Airline companies need to identify their strategic management to achieve their vision and mission and AirAsia is no exception. 2.1

Background

AirAsia was established in 1993 . The company commenced its operations on 18 November 1996. It was originally owned by the government-link company ,DRBHicom, a heavily –indebted airline company purchased by Tune Air Sdn Bhd , a

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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. 2.2 Vision, mission , values ,goals, objectives and strategies AirAsia’s vision is to be the largest low cost airline in Asia serving the 3 billion people who are currently underserved due to poor connectivity and high fares and it aspires to be a the leading low-cost carrier in the Asian region that offers five-star service with 95% of on-time performance. At the same time, it wants to promote Malaysian hospitality and the local food. In addition to charging lowest fares and focusing on customers, it also would like to develop various products and services. AirAsia’s mission is to be the best employer, create a globally recognized ASEAN brand, to be the lowest cost budget airline and to maintain the highest quality service by embracing technology.

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Air Asia’s value system( vision, business model and core values) is central to its success as a leading budget airline in Malaysia. The core values of Air Asia are adopting safe practices, valuing its employees, focusing on customer, maintaining highest standard of corporate integrity and commitment for performance excellence. The goals and objectives of Air Asia are guided by its corporate vision and mission which include emphasis on safety, customer focus,, operational excellence and human capital development .In maximizing shareholders’ value, AirAsia also intends to create more profit by expanding its business to other Asian countries. Besides, it also has started to add routes and network in a prudent calculated way. Whilst going through a calculated expansion routes and networks , the company also ensures to reduce the risk of business loss. The companies goals now is to carry 70 million passengers a year, within six years starting from 2014, develop the low-cost carrier terminal at the KL International Airport into

the regional hub for budget travel , introduce more routes, add

frequencies and develop the existing routes. Aligned with its mission statement, AirAsia’s business strategy is centred on cost leadership. However, its business strategy targets specific markets; price sensitive customers (including first-time fliers) needing short-haul flights. Therefore , Porter’s generic strategies (table 1) ,AirAsia’s business strategy can be categorized into focused cost leadership.

Table 1- Michael Porter’s Generic strategies

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AirAsia builds and sustains its competitive advantage by providing services at a price that is simply lower than competitors’ price. Operation effectiveness and outstanding efficiency are two main characteristics of low cost businesses including AirAsia. The sources of cost advantages contributable to the low cost business model for each activity in AirAsia’s value chain. These cost advantages constitute AirAsia’s order winner in competing with its rivals as they enable AirAsia to provide the lowest cost service. 3. ENVIRONMENTAL ANALYSIS

An environmental analysis is done using PEST model. The threats and opportunities have been identified and discussed below.

1.

Political

There was an on going consolidation in the airline industry as a result of increased privatization and government -deregulation throughout the world. Most governments were instrumental in the success of the most airlines success in Asia . Most airline companies in Asia had full or substantial state ownership , management and control . An example of state owned or assisted airlines in Malaysia is Malaysian airlines system (MAS) These companies were often well subsidized and protected from competition. These companies were focused on achieving national objectives rather profit oriented. Opportunities Privatization and de-regulation have opened the way for new routes and air port deals through open skies agreements between countries, or the permission of the entry of private airlines , reducing the constraints for international airlines ie. Malaysia signed an “open –skies” agreement with the United States in 1997. Such agreement enables new airlines like AirAsia to access to domestic routes of other countries. As a result, AirAsia could to go for long haul flight services, to penetrate into the untapped market share .Thus, the airlines could use their new aircrafts in the new routes.

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Threats In the era of globalization, the airline industry was also affected global uncertainties such as accidents, terrorists attacks, and disaster which affected the customer confidence to a certain extent. If customer confidence is affected, AirAsia may face the threat of losing its profitability, or even lead to bankruptcy. Being a low- cost carrier, Air Asia is subjected to aviation regulations and government restraint, geography and infrastructure of Asia and the travelling preferences of customers. Overall under political heading there are more opportunities than threats. In Malaysia as Air Asia is subjected to undergo several government regulations, the airline only could minimize or contain the negative impacts by selecting the most favourable routes.

2. Economic

Opportunities The global economic downturn has resulted in decline in airlines business. This affected the budget airlines as well. However, as for AirAsia this situation created an opportunity .The leasing costs of airplanes were drastically reduced by about 40%. This enabled AirAsia to lease planes at a cheaper rate on pass on the cost savings to customers in the form of cheaper fares..

Threats During this period of recession, the air transport industry also faced fluctuations in fuel prices . Whenever the price of fuel rose it had an impact on the airlines’ operating costs. This would result in decrease in yield and profitability .

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The economic trends faced by Air Asia is therefore unavoidable. However, the opportunities posed by the downturn outweighed the threats and gave AirAsia an opportunity for expansion.

3.

Social /cultural

Opportunities Economic growth in recent years has led to rapid increase in middle class population in Asia resulting the demand for air travel to increase. The surge in trade and tourism in Asia also caused the demand for air travel to increase. More and more people are now willing to travel at low fares and they are prepared to compromise on food and other services during travel. The people are attracted by budget air lines because of their low fares as low as 10-20 %of those charged by full service airlines. The current situation gives AirAsia an opportunity to adopt differentiation strategy to alienate itself from competitors by offering good customer service as full service airlines with low fare. This has given AirAsia a competitive advantage. In addition Air Asia now offers services such as in flight food and drinks ,online sales of hotel, car and holiday reservations and travel insurance, branded credit card .

Threats If Air Asia is not careful in implementing differentiation strategy, it could increase in operation cost in producing value added services. Overall, opportunities outweigh threats in this cultural /social aspect.

4.

Technological

Opportunities

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Air Asia fully utilize information technology . In fact, Air Asia is the first airline in South east Asia to use e-ticketing and bypass the traditional travel agents. As a result the air line was able to save the cost of issuing physical ticket .This has eliminated the need for large and expensive booking and reservations systems and agent’s commission.

Threats Heavy reliance on online sales may pose a risk of system disruption .This threat can be minimized if the airline have appropriate back-up system , preventive maintenance and a contingency plan.

4. INDUSTRY ANALYSIS

4.1 Porter’s Five Competitive Forces An analysis is done using Porter’s five forces` frame-work ( figure 1) to assess the competitive intensity and attractiveness of budget airline industry.

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Figure 1 – Michael Porter’s Five Competitive Strategies

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1.Bargaining power of suppliers The bargaining power of suppliers is also described as the market of inputs ( raw materials, components and labour). In airline industry the bargaining power of suppliers is low as there is stiff competition between air plane suppliers ,namely Boeing, ATR and others. 2. Bargaining power of customers There is almost no switching cost for customer who intend to switch from one airline to another. There are more choices for the customers and they are able to compare the prices between airlines via internet. Air travel, especially leisure travel is therefore very price elastic . 3. Threat from substitutes Airlines industry has several substitutes including road, rail and maritime carriers. However, in Asia the customers are unable to use them due to geographical reasons. Therefore, the threat of substitute is very moderate .

4. Threat from new entrants The barriers to entry in airline industry is high. The capital requirement and government restrictions such as air service agreements are real barriers to industry. However, factors such as de-regulation by Asian governments, and growing demand for affordable low fares amongst budget conscious customers have increased competition. Now with AirAsia’s overwhelming success has prompted many full service airlines like Malaysian airlines Systems (MAS ) launch their own budget airlines i.e. Firefly . These new entrants have the advantage of brand marketing, loyalty and other benefits overflow from their parent companies. Therefore, threat from substitutes is in the budget air line industry is sizeable. 6. Rivalry intensity

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Rivalry among budget airline companies is very high due to increased competition by more and more air lines and high exit cost .In addition, AirAsia is also facing intense completion from a broad range of other air lines , ground transportation and maritime services.

4.1 Industrial analysis using external factor evaluation (EFE) matrix

Key External Factors

weight

Rating

Weighted score

Opportunities National & international Markets Growth of older generations Industrial R&D Growth of population New technology opens the door for new products & services Increased internet advertising Familiarity of generation X with air travel and technology Growth of business travel Threats Decline of leisure travel due to economy and terrorism Competing online ticketing reservation system New government regulations makes operations costlier Demand for air travel sharply after September 11 Gas and fuel price fluctuation Terrorist attacks Increase restrictions to limit noise (including restriction on types aircraft used and limits on a number of operations Increase in annual airline security costs

0.03 0.05 0.02 0.05 0.04

3 3 3 3 3

0.09 0.15 0.06 0.15 0.12

0.06 0.07

3 3

0.18 0.21

0.06 1.00

3

0.18

0.10

3

0.30

0.11

3

0.33

0.03

3

0.09

0.10

2

0.20

0.06 0.15 0.03

3 3 2

0.18 0.45 0.06

0.04

2

0.08

10

1.0

2.83

Table 2 - External Factor Evaluation (EFE) Matrix

Based on table 2 above, , Air Asia lines can take advantage of opportunities available such as older generation, growth of population, new technology , internet , growing demand travel (leisure and business) and Familiarity of generation X with air travel and technology.

5 .COMPANY ANALYSIS 5,1 SWOT ANALYSIS A SWOT analysis is done to evaluate the Strengths, Weaknesses, Opportunities, and Threats involved in a AirAsia’s business. It involves specifying the objective of the business venture or project and identifying the internal and external factors that are favorable and unfavorable to achieve that objectives. Internal factors as well as external factors are used to analyse company and the External environment , EXTERNAL FACTORS : Opportunities

a) 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 a 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 airline’s customers. However, there will be also some reduction in overall travel especially by casual or budget travellers.

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b) ASEAN open skies

The “ASEAN Open Skies” allows unlimited flights among ASEAN’s 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. c) 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). d) 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 a) Air port charges Air port charges imposed by air port 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 tries to keep their cost as low as possible. For instance, Changi airport in Singapore charges SGD21 for every person who departs from Singapore. b) Competition from other airlines

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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.

c) 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.

INTERNAL FACTORS Strengths a)

Management team

The real strength of Air Asia is based on its strong management team with strong links with government s and air line 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), Southwest’s people strategy (employee comes first) and Easyjet’s branding strategy (linking with other service providers like hotels, car rental). b) Branding 13

AirAsia’s brand name is well established in Asia Pacific region now. Besides the normal print media advertising & promotions, AirAsia’s top management also capitalised 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 Asia’s 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 world’s most famous football teams) and AT&T Williams Formula One team have further boosted AirAsia’s image to a greater extend beyond just the this region c) 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-co...