Host Country Political and Legal Environment Affect of Airasia
COMPANY AIRASIA Content a. Introduction b. Company bibliography c. Entry mode to international market (through exporting, joint venture, franchising, licensing, etc) d. How do the international market / culture, management styles and business system affect the company performance? Do they have to adjust / alter their product or services to fit with the host country market needs? How does the company face the competition? e. How does a host country political and international legal environment or trade barrier affect the Malaysian companies in their international marketing activities?
Bagaimana sebuah negara tuan rumah persekitaran politik dan antarabangsa undang-undang atau perdagangan halangan menjejaskan syarikat-syarikat Malaysia dalam aktiviti pemasaran antarabangsa mereka? Bagaimana sebuah negara persekitaran politik dan undang2 antarabangsa memberi kesan kepada syarikat Malaysia dalam aktiviti pemasaran antarabangsa mereka? f. SWOT analysis of the company in term of their 4 Ps (product, price, promotion and place) g. Any others additional information h. Conclusion i. References a,b,h – part 1 c – part 2 d – part 3 e – part 4(fathi) – part 5 each person choose one to do it n leave a comment which part u all do yea… tq BUS 488 Strategy – T01 Question 1 AirAsia, which is one of the earliest low cost carriers (LCC) in Asia, has become a LCC since 2001. So far, it has expanded its network from Malaysia to Thailand to Singapore, Macau and even the Mainland China in 2006. In short, Air Asia “jumped out” from an intra-Malaysia and Thailand market to a “real Air Asia” in the continent. Thus, what are the possible core competencies to ensure that there is quantum leap to success?
The internal analysis on the company below will answer the question. Resources, Capabilities & Core Competencies Analysis a)Accounting Ratio Analysis In 2004, Air Asia’s earnings margin before interest and taxes (16. 8), return on capital employed (14. 6) and return on equity (37. 7) accounting ratios were above the industry average – 14. 5 is the industry average for earnings margin, 11. 6 for return on capital employed and 21. 2 for return on equity. This above average results indicates that the company has been managed well and thus is able to achieve high above-average returns.
The increase in current ratio from 1. 24 (US$49. 206 million / US$39. 643 million)to 5. 60 (US$230. 024 million / US$41. 099 million) also serves as a confident booster to investors and shareholders in that Air Asia’s solvency had strengthened and thus is able to fulfill its debt obligations. In fact, the debt-to-asset ratio in the last 5 years was low and decreasing too. As a matter of fact, in 2005, it was merely 0. 14, which was comparatively lower than many low cost carriers. b) Finance Resources Air Asia’s net profit ending Jun 2005 was reported US$29. million, a 126%increase year-on-year. The end of June 2005 financial summary showed that Air Asia, the leading low cost airline in Asia, had a huge reserve (bank and cash balances) of US$86. 6million. This is the company’s strength as very few low cost airlines of similar size have such large reserves. With such huge reserves and low debt-to-asset ratio, Air Asia is thus capable of generating internal funds to finance any expansion. It is certainly Air Asia’s strength. c)Organization Design and Organizational Resources
Air Asia’s organizational structure is rather simple and flat as it involves a group of staff in the company reporting to one manager. This serves Air Asia well as the business requires a structure with fewer levels of management so as to achieve more consistency and cost reduction. In addition, the cost leadership strategy that the company adopted also allows Air Asia to focus more intensely on areas such as in/out-bound logistics, operations, marketing, services and customers. This in turn helps to create synergy and capability to deliver the full spectrum of low cost carrier business. ) Physical Resources Despite having a large fleet of Boeing 737 aircraft for operation, Air Asia still continues to invest heavily. This includes the acquisition of more fuel-efficient aircraft (A320) so that the company can have sufficient capacity to meet the growing needs and demands of their customers as well as to continue to keep its cost low. The new aircraft can lower fuel usage by about 12%, an important cost saving, as fuel accounted for almost 50% of the total operating costs for the company over a period of time. ) Technological Resources Air Asia was the first airline in Southeast Asia to utilize e-ticketing so that traditional travel agents can be bypassed. This implementation saves the cost of issuing physical tickets and eliminates the need for large and expensive booking and reservation systems. To further exploit technologies, AirAsia made it possible for customers to purchase tickets either from post offices or designated bank teller (ATM) machines.
In short, Air Asia’s strength is also about the ability to leverage on technologies well and ahead of its competitors to increase sales and lower costs. Human Resources Management Although the employees were not unionized and the salaries offered by the company were below those of its rivals, AirAsia is still able to keep its work force motivated by providing a remuneration policy that is competitive and attractive. For instance, all employees are offered a wide range of incentives that includes productivity and performance-based bonuses, offer of shares or stock options.
To provide further aircrew and cabin incentives, AirAsia also adopted a sector pay policy that gives extra incentives and thus this resulted in the company needing fewer crews per flight (106 per aircraft) as compared to other low-cost airlines (110 per aircraft). All these efforts not only helped to improve productivity, it also further strengthened employer-employee relationships. In summary, human resource management, particularly the ability to motivate and improve productivity of the staff is surely Air Asia’s strength. g) Innovation Resources and Product Development
So far, AirAsia has managed to design its aircraft cabins that can minimize wear and tear, cleaning time and cost. This innovative work allows for quicker turnarounds between flights and helps increase revenues. In addition, AirAsia is also able to leverage on innovative ideas to derive substantial ancillary revenues from additional services. For instance, the companies also have their own branded credit card and offers corporate travel services. Consequently, it also develops aircraft advertising by converting its planes into “flying billboards”.
The ability to innovate and come up with unique innovations to lower costs and increase revenues shows that AirAsia possesses substantial quality innovation resources that are valuable. h) Reputational Resources Air Asia’s success has been widely recognized. For instance, in 2003, it was named the “Developing Airline of the Year” (by Air finance Journal) and the “Asia Pacific Airline of the Year” (by Centre for Asia Pacific Aviation, CAPA). In 2004 and 2005, the company also won several prestigious awards. Similarly, the company’s CEO, Tony Fernandez has also won several recognitions.
Most notably, the International Herald Tribune listed Mr. Tony Fernandez in its Visionaries and Leadership series in 2003. Hewas consequently named the “Asia Pacific Aviation Executive of the Year” in 2004 and2005 (by CAPA) and is one of the 25 stars of Asia (by Business week). With just 3 years into operations, AirAsia managed to be listed publicly in November 2004 with support from bankers and venture capitalists. AirAsia was subsequently named as one of the “Best Newly Listed Companies” and Asia’s “Best Managed Company in the Airlines and Aviation Sector by Euro money after its IPO.
Given the positive perceptions of Air Asia’s reputation, the brand name is certainly the company’s strengths. i)Risk Management In general, the types of risks AirAsia faces include: (1) pure risk; (2) price risk; and (3) credit risk. AirAsia purchased insurance policies to mitigate pure risk although it is done and operated a bit differently as it adopts an integrated approach risk management that goes beyond the traditional parameters of what is insurable. For instance, when AirAsia purchases insurance any policies to insure against pure risk, it also makes a conscious effort to acquire them at a much lower rate lower than other LCCs.
In addition, to mitigate price risk, AirAsia hedged fuel prices at US$42 a barrel for the first half of 2005, which was substantially lower than the price per barrel of US$70 in the late 2005. AirAsia has little exposure to credit risk as it does not lend money to any external parties. Better still, customers who wish to purchase their air tickets need to make payment almost immediately upon booking. Hence, this eliminates credit risk totally. So far, Air Asia’s holistic approach to risk management effectively is viewed favorably by its stakeholders most of the time, especially the shareholders. ) Logistics This involves all areas of receiving, storing of inputs when producing outputs. So far, AirAsia only operates on a single type of aircraft, the Boeing 737-300. Based on a Report published by Aero Connections in 2004, that particular model was the best selling commercial jet of all times due to its efficiency and cost effectiveness. AirAsia also has1382 employees and they received proper on-the-job training workshops so that they can perform multiple roles effectively within a simple and flat organization structure. ) Operations It processes inputs to provide valuable products/services. AirAsia has always been stringent about standards and procedures. AirAsia is aware that maintaining its passenger safety is of paramount importance – as indicated in the surveys in the United States and Japan. Based on the company’s 2003 annual report, AirAsia had joined ventures with GE Engine Services for a business alliance that allows the latter to be in charge of maintaining all Air Asia’s aircraft engines in the next five years.
AirAsia had also managed to achieve good operating benchmarks in terms of flights on time and baggage handling where in 2004, the company registered 88% and 99. 9% respectively. c) Outbound Logistics This involves delivering products/services into a distribution channel or to the final destination. As of late 2005, AirAsia operated 32 Boeing 737 aircraft that run over 60 routes across Southeast Asian regional network. Not only that, its aircraft interiors is also outfitted with signature red carpeting and plush leather seats to enable its guests to travel comfortably.
In addition, it was also reported in prominent journals and magazines such as ABJ and AWM that many customers felt that Air Asia’s cabin crew demonstrated professionalism when carrying out their duties on air. d)Marketing and Sales It involves all activities that inform customers about their products/services; including those that induce and facilitate customers in making purchases. So far, AirAsia has promoted its company without incurring high sales and marketing expenses. For instance, its CEO Tony Fernandez always wears a red AirAsia baseball cap in any of his interviews.
His well thought out statements often reinforce Air Asia’s positioning as a small entrant firm battling against giant industry incumbents that also offer low prices. As such, when required, it also invested heavily and so far, its major sponsorships included being the “Official Low Fare Airline” for football giant Manchester United. This deal involved global sponsorship and advertising. e)Service AirAsia is one of the few airlines that had the shortest turnaround time, around 25minutes as opposed to 45 to 120 minutes recorded by other airlines. Hence, this allows AirAsia to benefit from conducting more flights a day.
Besides that, AirAsia emphasizes lot on maintaining a high quality service to all its passengers such as punctuality rate and excellent baggage-handling performance t o determine whether AirAsia has any core competencies (sustainable competitive advantages), the company’s capabilities are assessed based on the four criteria – valuable, rare, difficult to imitate and non-substitutable. The evaluation results so far revealed that two core competencies below:(1) The possession of tacit knowledge to build a business by leveraging on new technologies (internet). 2) The religious zeal to cost-avoidance coupled with tacit knowledge to build extremely efficient processes to enable it to execute its business model (low cost). Success Factors of AirAsia As AirAsia continues to compete with other LCC (both existing and new) in Asia which also may adopt low-cost strategy, what have to remember and realize that the way customers differentiate them from their competitors will be strictly on “fare” and reputation. As the saying goes, “the lower the price, the higher the load factor”. As such, Air Asia’s success is based on the following key factors: )Cost Effectiveness AirAsia puts very strong emphasis on lowering all avoidable costs so that it can continue to provide low fares and yet remain profitable. This means the company has to cut the cost of flight operation by flying to and from airports that offer cheaper take-off and landing fees. Besides that, passengers also were not provided with meals and entertainment as well as amenities such as pillows and blankets. AirAsia has also designed its aircraft cabins that minimize wear and tear as well as cleaning time so that cost associated to these areas can be lowered.
The better designed cabins also resulted in lower loading and unloading costs as things got done faster which in turn leads to better turn around time. Last but not least, to ensure cost effectiveness, AirAsia reconfigured the seating configurations of its Boeing 737 aircraft to increase seats from 132 to 148 and has thus far operated with only a single-class service. b) Efficiency and Productivity By using a ticket-less online booking system, staff that are properly trained to perform multiple roles as well as aircraft cabins that reduce cleaning ime, AirAsia greatly enhances it operations efficiency and productivity, which is a very important of the cost leadership strategy. However, it should be noted that the cost leadership strategy works on the lowest costs, not necessarily the lowest price in the market. As the lowest cost operator, AirAsia is able to continue to survive in a price war as its low-cost positions a valuable defense against any rivals. c) Reliability AirAsia also chose more consistently secondary and regional airport destinations instead of busy and congested main airports.
Generally, less busy airports can be expected to provide higher rates of on-time departures. Besides, without the need to load and unload any cargoes, the turnaround time of an aircraft can be reduced greatly – AirAsia clocked the regions fastest turnaround time at only 25 minutes. As a result, travelers can expert and look forward to more frequent and puncture flights. D) Higher Frequency of Service Predominantly, AirAsia offers point-to-point flights on short-haul routes – less than 4 hours flight time. The company is also able to achieve higher plane utilization due to short turnaround time and as mentioned point-to-point routes.
The ability to provide higher frequency service to justify the smaller capacity of a LCC is another key to Air Asia’s success. In some instances, such high frequency of services can also attract business travelers since most of the time they are able to save time and catch their connecting flights on time All the success factors mentioned above explain Air Asia’s success. However, it should also be noted that Air Asia’s zealous approach in preaching cost avoidance in every aspect of administration and operations is the key in sustaining a low-cost culture since its operation in2001.
AirAsia also has been particularly effective at implementing the various measures and thus it continues to survive and prosper till today. Question 2 The construct of cost leadership strategy emphasizes on lowest costs, though not necessarily the lowest price, in the market. A firm pursuing a cost-leadership strategy needs to gain a competitive advantage primarily by reducing its economic costs below its competitors. To achieve this, the strategic actions must thus reduce costs and improve productivity. With this in mind, let us discuss how the following strategic actions adopted by AirAsia support its cost leadership strategy.
A) Low Fare, No Frills Air Asia’s intense focus on providing air travel with no frills leads to substantial costs saving. The absence of in-flight services reduced pre-flight preparations such as the loading of food and drinks, cleaning time and the cost of meals and administration. Investment in kitchens and equipment for storing, heating and serving of meals can be avoided all together. B) Investment in Latest Technologies ; Efficient Operations AirAsia has heavily invested in purchasing the most modern aircraft A-320s.
The new aircraft allow AirAsia to enjoy substantial lower fuel cost as these modern airplanes had lower fuel usage by as much as 12%. Fuel accounted for almost 50% of the total operating costs and thus it is an important component of cost saving for AirAsia. By operating a single aircraft type allows AirAsia to achieve efficiency in executing its primary and secondary activities. Consequently, this leads to higher productivity which in turn allows the company the option to expand their operations with the same number of employees and right size its manpower requirement. Improved productivity means more revenue for AirAsia.
The extreme drive to achieve high efficiency in operations allows AirAsia to clock the fastest turnaround time of 25 minutes. This invariably leads to comparatively better productivity as the company was able to utilize its aircraft for an average of 13hours per day as opposed to 10. 5 hours by other airlines. Again, improved productivity means more revenue for AirAsia. c)Low Fixed Costs Air Asia’s ability to acquire low rates for long-term maintenance contracts and aircraft leases led to substantial cost savings. It was reported that Air Asia’s average contractual lease charge per aircraft decreased by more han 60% from 2001 to 2004. Similarly, its aircraft maintenance contract costs were also reported to be substantially lower than any other airlines. In view of the airline’s high safety and maintenance standards, AirAsia was also able to procure favorable rates on its insurance policies. All these help lower fixed costs. d)Lean Distribution System The use of e-ticketing helps to save the cost of issuing hardcopy tickets, which were estimated at US$10 per ticket. The company also saved on agents’ commissions’ and avoided the need for large and expensive booking and reservation systems. This too helps lower the overall costs. ) Minimize Personnel Expenses AirAsia implemented flexible work rules and streamlined administrative functions which allowed employees to perform multiple roles. This human resource policy facilitated AirAsia in lowering its personnel costs. In 2004, it was reported that AirAsia had the lowest staff-to-per aircraft ratio (106 staff per aircraft as compared to 110employees per aircraft registered by other low cost carriers) and this helps lower staff cost. f)Use of Secondary Airports Typically, AirAsia operates out of secondary airports, which involve lower landing, parking and ground handling fees.
These airports were also less busy and had shorter runways, thus helped reduce fuel consumption while aircraft queue for takeoff or taxi on the ground. As many secondary airports were older, they were often close to urban areas and were thus more attractive to some travelers. In short, the use of secondary airports can increase sales and help to keep operating costs low The ability to lower cost and at the same time widen profit margin (through increase productivity) augurs well with AirAsia’s cost leadership strategy.
This provides AirAsia the options to either lower its prices and gain market share and sales from rivals or keep its prices at present market level and make more profit for every unit sold. This inevitably helps AirAsia in its defense against aggressive competitions especially when it comes to price war from strong rivals Question 3 The PESTL Analysis and the Porter Model provide an overall analysis of the operating environment that AirAsia competes in. Also, the analysis of low cost carriers (LCC) industry reveals that it is so concentrated that intense competition is inevitable.
However, amidst the challenges faced, there are still plenty of opportunities for AirAsia to explore and exploit. PESTL Analysis – Macro Environment a)Economics Asia’s rapid economic growth and sprouting middle class continues to fuel the growth of air travel in Asia. This growth in air travel was also due to the region having geographically dispersed countries with large population, a rapid increase in trade and tourism as well as the respective government investments in their airports, airlines and travel infrastructure.
Although rapid growth and increased trade and businesses may intensify competition (entrance of other LCCs) and even lead to full-service airlines start cut costs to complete, it can present opportunities for airlines to enlarge their markets. Of late, projections by economists had placed Asia at the top of global economy growth charts in the coming years. b)Political/ Legal Government policies are important drives for the success of Asia. In the late1990s, there was increase privatization and deregulation of the airline industry in Asia.
It was noticeable that some Asian countries established open-skies agreements while others allowed the entry of private airlines. For instance, in 1997, a few LLC spouted quickly after Malaysia signed an “open-skies” agreement with the United States. Hence, it appears that although the travel market will be expanded, in reality AirAsia would also have to operate in a more challenging environment with intense competitions. As of 2006, governments’ intervention and regulation remained substantial.
For instance, although Thai AirAsia managed to launch its services between Singapore and Thailand in 2004 successfully, the company still could not expand beyond the Singapore-Thailand routes because it could not acquire landing rights elsewhere. c)Social-Cultural Surveys revealed that more people were willing to compromise on food and other services in exchange for lower prices. In fact, it was stated that price of tickets was the single most important consideration that influenced passengers’ decisions and of course this included without having to compromise on safety and punctuality.
In addition, increasingly over the years cost conscious leisure and business passengers were also looking to make their budgets decrease further. This presents an opportunity for all LCCs to increase their revenues by offering travelling at a much lower fare. d) Demographic In 2005, the total population in Asia stands at more than 3. 5 billion. The United Nations’ statistics also show that Asia has an astonishing demographic dividend – where more than 35% of its population is below the age of 25 and more than 55% hovers below the age of 35.
This indirectly means that the increasing large population of the middle age group equates to a larger working age population with more disposable income and thus the likelihood of more business and leisure travels is almost confirmed. This thus presents another golden opportunity for AirAsia. e)Technological New services such as Internet Telephony and the increase in the use of telecommunications services (such as buying air tickets online) provide AirAsia with the opportunity to leverage on new technologies to increase their sales.
In addition, e-commence and internet-based activities (such as online holiday and hotel reservations)are other areas where AirAsia can derived ancillary revenues from. Better still, in some instances, technology advancements also means having opportunities to reduce operation costs such as savings on commissions for travel agents – AirAsia was the first to do so However, amidst these benefits and cost saving, AirAsia must be mindful that system disruption due to heavily reliance on online sales can pose serious threat to the company. Analysis of the Industry In 2004, the airline industry flew 1. billion passengers, of which about 30% were in Asia. Airline traffic in Asia is projected to grow at 7. 1% annually for the next 5 years and more than triple in the next 20 years. Given Air Asia’s strong presence in the region, this presents vast opportunities to enlarge the company’s market shares. The Airline businesses are closely linked to economic activities in Asia and the world. As such, AirAsia needs to be cognizant with the business cycle so that it can to take full advantage of such effects especially when there are changes in discretionary income and consumer spending patterns.
AirAsia also needs to be mindful that increase in demand of fuel and limited supply can lead to higher fuel price that decrease yield. Last but not least, the impact of crisis such as 9/11 (2001) and SARS outbreak (2003) was able to hit the airline industry badly and as such they continue to pose serious threat to airlines. Analysis of Competitive Forces – Porter’s Five Forces Analysis a)Threat of Substitute Products The possibility threat of substitutes is moderately low; since there are several other substitutes such as cruises, rails, buses and cars.
However, the archipelago geographical structure of Asia made air travel the most viable, efficient and convenient mode of transportation which is a surplus for AirAsia b) Power of Buyers The power of buyer is high due to almost no switching cost for customers to switch from one LCC to another. In addition, the access to the internet also allows customers to have all the information on prices charged by the different LCCs. c)Power of Suppliers The supplier has an upper hand (high power) due to limited number of suppliers(only Boeing and Airbus). d)Threat of New Entrants
Threat of new entrants is moderately low as the entry into the industry requires high capital. Moreover, the industry is also highly regulated since every potential entrant is required to obtain approval from the civil aviation authority of the particular country before the company is allowed to be operated. e)Intensity of Rivalry Industry rivalry is moderately high due to competition and high exit cost. Nonetheless, market participants understand and realize that price war is destructive for them and thus they tend to avoid direct price competition to make themselves ‘friendly ‘competitors.
Stakeholder Management Air Asia’s stakeholders can be divided into capital market stakeholders (shareholders and major suppliers of capital e. g. banks and venture capitalists), product market stakeholders(primary customers, suppliers and host communities) and organizational stakeholders (employers and managers). Air Asia’s stellar performance since its establishment in 2001 has brought value to its shareholders since they were receiving positive returns from the day of the company’s inception to recent time 2005.
Between 2001 and 2004, AirAsia enjoyed a compound average growth of 45% for sales and 407% for net income as well as cash flow positive from the time it began its operations. All these inevitably increase the value of investments significantly. This probably explains why AirAsia has always enjoyed strong support from banks and venture capitalists when the CEO took the company public in November 2004. AirAsia satisfies its customers by offering low fares without having to compromise to quality and service. This helps to attract new customers as well as retain existing ones.
In order to ensure that all specific needs are met, the company’s key staffs travel regularly to mingle with the host communities so that they understand them better. This has facilitated Air Asia’s aggressive expansion and resounding success in the regional markets – which include Thailand and Indonesian over a short p of time. For instance, Air Asia’s joint venture with Shin Corporation to launch its new LLC achieved immediate success. In just 3 days of operations, it sold more than 20,000 seats on domestic routes.
This speaks well of Air Asia’s ability to meet (or even exceed) the expectations of its customers. Besides that, AirAsia also strives to build strong relationship with its suppliers. For instance, although the company operates 737 aircraft that were built by Boeing, it also acquired the new A320 aircraft from Airbus. In this way the company establishes good relationship with the two and only civil airliner suppliers and hopefully through these good mutual dealings, the power of these suppliers can be further reduced.
The company also strives to maintain good relationship with other suppliers that provide aircraft maintenance and airport services. This probably also explain why AirAsia is able to get lower rates from them. As a staff of the AirAsia team, he/she gets to enjoy highly competitive and attractive remuneration packages. These include productivity and performance-based bonuses, shares and stock options. In summary, with the capability and flexibility provided by above-average returns, AirAsia is able to satisfy multiple stakeholders more easily Marketing ; Customer Segmentation
Although AirAsia invests aggressively in marketing where required, it generally adopts creativity and yet low-cost advertising so as to keep cost low. For instance, to keep cost low, AirAsia commonly advertises and promotes through the host country newspapers as well as internet website as they are generally cheap. Like all other LCCs, AirAsia also positions itself as an airline that provides short-route ferry for non-business and price-conscious business passengers as shown in Diagram 2 . This means that competition is intense and increasing as new players join in Competitors Analysis
Based on a report about major Asian budget airlines that Airline Business produced, onlytwo LCCs, Bangkok Airways and Lion Air, share almost similar markets as AirAsia in terms of market commonality. Their tangible and intangible resources are also comparable to that of AirAsia. With that, based on the competitor analysis framework appended in Diagram 3 , Bangkok Airways and Lion Air fall in ‘quadrant I’ and thus are considered as close competitors of AirAsia. Technically, any firm or competitors in ‘quadrant I’ will use their similar resource portfolios to compete against each other.
This lead to the conclusion that Bangkok Airways and Lion Air modeled in ‘quadrant I’ are direct competitors of AirAsia. In contrast, the other airlines such as Value Air and Tiger Airways modeled in ‘quadrant IV’ share few markets although they all possess comparable resources. As such, these airlines do not directly pose as strong rivalry to AirAsia at this point in time. As of now, AirAsia will have to compete with Bangkok Airways and Lion Air which have entered the market since 2000/2001.
As they also adopt the low-cost strategy, the only way customers can differentiate them from their competitors would be on the airfare charges. In order to maintain or increase the load factor, any of these companies may consider lowering fare prices to achieve their objectives. However, if this happens, the profit margin of the remaining players will be compressed and the weak one may be drove out of the market (also known as the vicious cycle). In Malaysia, Air Asia’s main airline competitor is Malaysia Airlines (MAS) which offers a full range of services.
Although MAS had an ambivalent reaction to Air Asia’s entry into the airline industry, it also reacted to the competition by offering fares at 50% discounts on some its domestic routes. Although the ‘attack’ was not successful (MAS eventually lost about 30% of its market share), it proves that any airlines that provide full services can be a threat to AirAsia. Moving forward, it is expected that acquisition and merger will happen in the market until equilibrium is reached. When this takes place, only a few strong players with sound cost-controlling and profitable business model will exist and succeed.
In other words, AirAsia can expect to face stiff competition in time to come even though market participants understand that price war is destructive and thus will try to avoid any direct price competition. A short summary on the possible opportunities and threats are appended in the table below. From the analysis of AirAsia, it can be deduced that the operating environment immoderately competitive and filled with minimum uncertainties – which means that the company has to prepare themselves well during good times.
However, amidst the challenges, there are still many opportunities for AirAsia to explore and exploit so that it continues to lead and be the most profitable LCC in Asia. Amik kt dekstop-airasia Question 4 AirAsia has been soaring success. Starting with two planes bought from a Malaysian conglomerate in late 2001, the company had expanded it to 32 by the end of 2005. During the same year, the aggressive expansion also resulted in an extensive Southeast Asian regional network of 60 routes. For sure, the large, untapped market and Air Asia’s model would ensure its future success. a)Conducive Environment for Growth
The major macro environment factors suggest a very conducive environment for the growth of low cost carriers (LCC) in Asia. According to TWA (Dec 2003), it mentioned that in Asia “the demographic fundamentals of large populations that include rising middle classes with increasing leisure time and disposable incomes as well as the lack of competitive forms of transportation, paint an extremely encouraging demand picture in the long run” . Furthermore, a study by the Centre for AP (2002) confirmed that Asia would continue to offer attractive conditions for the air transportation industry.
It estimated that Asia would account for 30% of the world market by 2020 or one third of growth between now and then. The archipelago geographical structure of Asia continent is also an important contributing factor to the growth of air transportation. For example, between East and West Malaysia, there is no other viable and efficient mode of transportation other than to commute by air. As a matter of fact, in mid-2005, eight budget airlines were operating in Southeast Asia and there were predictions that there would be as many as 20 such airlines by 2012.
Although terrorism and SARS do impact on air travel, the long run forecast is very positive. b)Strong Finance Resource The company has been profitable from the start. It has a huge bank and cash balances of US$86. 7 million, with no loans and borrowings as of 30 June 2005. Its profit margins of 38% (before interests, taxes, depreciation and amortization) were among the highest in the world for LCC. According to a report by CSS (2005), it was deduced that AirAsia would continue to be profitable in 2006.
This probably explained why in 2004, bankers and venture capitalists had provided funds to help the company got listed despite the airline industry was being badly affected by SARS. In short, a strong finance resource is vital for growth and to wrestle any economic crisis. This in turn sustains success. c)Obsession with Low Cost Culture In some respects, the most important requirement to sustain success in the LCC industry is to possess a genuine low-cost culture. Unlike other LCC, AirAsia preached cost avoidance with religious zeal. For example, even though a luggage tag costs less than US$0. 5, AirAsia does not provide them. In addition, it also emphasizes cost deduction so intensely that in-flight ovens must not be overheated and that cabin lights switched off at appropriate times. To further lower cost, the company was the first to implement taking reservations via the internet rather than through travel agents. It operates only one type of aircraft to save on overheads and operating cost. AirAsia crews are also required to help clean the aircraft so as to shorten turnaround times to achieve higher aircraft utilization.
At 29 U. S. cents operating cost per available seat-kilometer, Air Asia’s operating cost is the lowest in the industry. With such as an obsession withcosts, AirAsia is certainly poised to sustain its success. d)Effective in Implementing Cost Reduction Measures Even though most low cost carrier had implemented the various cost reduction measures, it was AirAsia that had implemented them most effectively. As a result, AirAsia achieved cost per average seat kilometre of 2. 13 U. S. cents, the lowest for any airline in the world.
This in turn allowed the company to achieve profit margins of 38%(before interests, taxes, depreciation and amortization) which were among the highest in the world for LLC. In addition, the company was also able to achieve good operating benchmarks in terms of flights on time (88%) and baggage handling efficiency (99. 9%). This in turn resulted in further cost reduction as the company paid much lower charges and compensations as compared to other airlines. The ability to ensure that the central objective of achieving bigger cost advantages than the company’s rivals (by continuously