Strategic Analysis on AirAsia

BUS 488 STRATEGY Assignment 3 – Individual Assignment 2 Jul 2010 Semester 2010 ________________________________________________________________ Completed By

Woo Gim Chuan Marcus (J0704245)

Name of Tutor (T01)

XXX

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, AirAsia “jumped out” from an intra-Malaysia and Thailand market to a “real AirAsia” 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, AirAsia’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 AirAsia’s solvency had strengthened and thus is able to fulfill its debt obligations. In fact, the t he debt-to-asset ratio1 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

AirAsia’s net profit ending Jun 2005 was reported US$29.2 million, a 126% increase year-on-year. The end of June 2005 financial summary showed that AirAsia, the leading low cost airline in Asia, had a huge reserve (bank and cash balances) of US$86.6 million. This is the company’s strength as very few low cost airlines of similar size have 1

Debt-to-Asset = Total debt / Total asset


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, AirAsia “jumped out” from an intra-Malaysia and Thailand market to a “real AirAsia” 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, AirAsia’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 AirAsia’s solvency had strengthened and thus is able to fulfill its debt obligations. In fact, the t he debt-to-asset ratio1 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

AirAsia’s net profit ending Jun 2005 was reported US$29.2 million, a 126% increase year-on-year. The end of June 2005 financial summary showed that AirAsia, the leading low cost airline in Asia, had a huge reserve (bank and cash balances) of US$86.6 million. This is the company’s strength as very few low cost airlines of similar size have 1

Debt-to-Asset = Total debt / Total asset


such large reserves. With such huge reserves and low debt-to-asset ratio, AirAsia is thus capable of generating generating internal funds to finance finance any expansion. It is certainly AirAsi AirAsia’ a’ss strength.

c)

Orga Or gani nisa sati tion on De Design sign and and Org Organ anis isat atio iona nall Reso Resour urce cess

AirAsia’s organisational structure is rather simple and flat as it involves a group of staff in the company reporting to one manager. This serves AirAsia 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 AirAsia 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.

d)

Physical Re Resources

Despite having a large fleet of Boeing 737 aircraft for operation, AirAsia still continues to invest heavily. This includes the acquisition of more fuel-efficient aircraft (A320) so that the company company can have sufficient sufficient capacity capacity to meet the growing needs and demands of their customers customers as well as to continue to keep its cost low. 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.

e)

Technological Resources

AirAsi AirAsiaa was the first first airli airline ne in Southea Southeast st Asia to utilis utilisee e-tick e-ticketi eting ng so that 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 system systems. s. To furthe furtherr exploit exploit technol technologi ogies, es, AirAsia AirAsia made made it possib possible le for custom customers ers to purchase tickets either from post offices or designated bank teller (ATM) machines. In short, AirAsia’s strength is also about the ability to leverage on technologies well and ahead of its competitors to increase sales and lower costs.


f)

Human Resources Management

Although the employees were not unionised 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 AirAsia's strength.

g)

Innovation Resources and Product Development

So far, AirAsia has managed to design its aircraft cabins that can minimise 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 company 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

AirAsia’s success has been widely recognised. For instance, in 2003, it was named the “Developing Airline of the Year” (by Airfinance 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 Fernandes has also won several recognitions. Most notably, the International Herald


Tribune listed Mr Tony Fernandes in its Visionaries and Leadership series in 2003. He was consequently named the “Asia Pacific Aviation Executive of the Year” in 2004 and 2005 (by CAPA) and is one of the 25 stars of Asia (by Businessweek). 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 Euromoney after its IPO. Given the positive perceptions of AirAsia’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, AirAsia’s holistic approach to risk management effectively is viewed favourably by its stakeholders most of the time, especially the shareholders.

For a synopsis of all the points that have been discussed, refer to Appendix I.

Value Chain Analysis of AirAsia


The value chain analysis is used to evaluate the value of each particular functional activity that is added to the organisation’s products or services as seen in Diagram 1.

Diagram 1: Value Chain For Airline Industry

a)

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 has 1382 employees and they received proper on-the-job training workshops so that they can perform multiple roles effectively within a simple and flat organisation structure.

b)

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 AirAsia’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 are 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 AirAsia’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 Fernandes always wears a red AirAsia baseball cap in any of his interviews. His well thought out statements often reinforce AirAsia’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 25 minutes 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 emphasises a lot on maintaining a high quality service to all its passengers such as punctuality rate and excellent baggage-handling performance.

The summary of strengths and weaknesses of AirAsia is appended in Table 1 below:

Strengths • •

•

• •

•

Low cost operations. Fewer management levels, effective, focused and aggressive management. Simple proven business model that consistently delivers that lowest fares. Penetrate and stimulate to potential markets Multi-skilled staffs means efficient and incentivised workforce. Single type fleet minimise maintenance fees and easy pilot dispatch.

Weaknesses • •

•

Service resource is limited by lower costs. Limited human resources could not irregular situation. Heavy reliance on outsourcing.

handle

Table 1: Summary of AirAsia’s Strengths and Weakness

Core Competencies of AirAsia

The analysis on AirAsia’s resources as well as primary and support activities are evaluated using the Resources-Competency Model as shown in Table 2 below.


Functional Activities

Capabilities

Bundle of Resources involved

Inbound Logistics

Possess the ability to leverage on technologies and economies of scales to keep costs low.

Technology + Human + Financial + Innovation + Infrastructure

Operations

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).


Possess the capability to train employees to perform multiple and execute the procedures that enhance operations protocols. Excellence in promoting brand awareness effectively without incurring high sales and marketing expenses. Able to integrate the various resources and functional activities to meet the needs (safety and low airfare) of cost-conscious customers. Possess a large and standardised fleet of aircraft to keep maintenance costs low as well as a large reserve with access to external financing readily that can be leveraged to invest in infrastructure to further lower costs. Able to leverage on financial resources to provide attractive numeration packages that help to motivate and incentivise. Implement flexible work rules and streamline administrative functions so that employees are allowed to perform multiple roles. All these help to keep costs low.


Technology

The possession of tacit knowledge to build a business by leveraging on new technologies (internet).

Procurement

Possess procurement know-how that leads to lower costs and expenses.

Technology + Human + Financial + Innovation + physical Technology + Human + Financial + Innovation

Outbound Logistics Marketing & Sales Services

Infrastructure & Finance

Human Resources

Human + Financial + Innovation Technology + Human + Financial + Innovation + Infrastructure Human + Financial + Innovation + Infrastructure

Human + Financial

Table 2: Resources-Competency Model Used On AirAsia’s Resources, Primary and Support Activities

To 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)


(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 co st).

The evaluation conducted on AirAsia’s capabilities is appended in Table 3 below: Capability

Possess the ability to leverage on technologies and economies of scales to keep costs low. Able to integrate and execute all aspects of airline operations very effectively.

Valuable

Rare

Difficult to imitate

Nonsubstitutable

Y

Y

N

N

Y

Y

N

N

Competitive consequences

Performance implications

Temporary Competitive Advantage Temporary Competitive

Average returns to Aboveaverage returns Average returns to Above-


Possess the capability to train employees to perform multiple and execute the procedures that enhance operating standards. Excellence in promoting brand awareness effectively without incurring high sales and marketing expenses. Able to integrate the various resources and functional activities to meet the needs (safety and low airfare) of cost-conscious customers.

Advantage

average r eturns

Y

N

N

N

Competitive Parity

Average returns

Y

N

N

N

Competitive Parity

Average returns

Y

N

N

N

Competitive Parity

Average returns

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).

Y

Y

Y

Y

Sustainable Competitive Advantage

Above-average returns

Able to leverage on financial resources to provide attractive numeration packages that help to motivate and incentivise.

Y

N

N

N

Competitive Parity

Average returns


Y

Y

Y

Y

Sustainable Competitive Advantage

Above-average returns

Possess procurement know-how that leads to lower costs and expenses.

Y

N

N

N

Competitive Parity

Average returns

Table 3: Evaluation of AirAsia’s Capabilities

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 realise 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, AirAsia’s success is based on the following key factors:

a)

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 minimise 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


turnaround 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 who are properly trained to perform multiple roles as well as aircraft cabins that reduce cleaning time, 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 position is a valuable defence 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, travellers 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 utilisation 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 AirAsia’s success. In some instances, such high frequency of services can also attract business travellers 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 AirAsia’s success. However, it should also be noted that AirAsia’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 in 2001. 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 emphasises 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

AirAsia’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 utilise its aircraft for an average of 13 hours per day as opposed to 10.5 hours by other airlines. Again, improved productivity means more revenue for AirAsia.


c)

Low Fixed Costs

AirAsia’s ability to acquire low rates for long-term maintenance contracts and aircraft leases led to substantial cost savings. It was reported that AirAsia’s average contractual lease charge per aircraft decreased by more than 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 favourable 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.

e)

Minimise 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 110 employees 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 taxy on the ground. As many secondary airports were older, they were often close to urban areas and were thus more attractive to some travellers. 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 defence 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 late 1990s, there was increase privatisation 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 SingaporeThailand 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, ecommence 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 1.8 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 AirAsia’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 cognisant 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 realise that price war is destructive for them and thus they tend to avoid direct price competition to make themselves ‘friendly’ competitors.

Stakeholder Management

AirAsia’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 organisational stakeholders (employers and managers). AirAsia’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 AirAsia’s aggressive expansion and resounding success in the regional markets – which include Thailand and Indonesian over a short span of time. For instance, AirAsia’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 AirAsia’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.


Boston Consulting Group (BCG) Matrix

The market growth axis correlates with the product life cycle paradigm and predicates the cash requirement a product needs relative to the growth of that market. Reference to the BCG Matrix appended in Diagram 1, the ferry flight service provided by AirAsia is definitely in the ‘Star’ sector since the company’s business has achieved high growth rate as well as acquired comparatively larger market share.

Diagram 1: BCG Matrix

However, although generally ‘Stars’ are leaders in high growth markets and tend to generate large amounts of cash, AirAsia must be mindful that they also use a lot of cash because of growth market conditions. In addition, AirAsia also needs to be aware that market growth is not the only factor or necessarily the most important factor when assessing the attractiveness of a market as growth markets attract new entrants. For instance, if capacity exceeds demand, then a particular market may become a low margin one and therefore becomes unattractive.


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.

Diagram 2: Customer Segmentation

Competitors Analysis

Based on a report about major Asian budget airlines that Airline Business produced, only two 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.


Diagram 3: A Framework of Competitor Analysis

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 modelled in ‘quadrant I’ are direct competitors of AirAsia. In contrast, the other airlines such as ValueAir and Tiger Airways modelled 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, AirAsia’s main airline competitor is Malaysia Airlines (MAS) which offers a full range of services. Although MAS had an ambivalent reaction to AirAsia’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 costcontrolling 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 is moderately 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. Opportunities •

•

•

•

•

•

•

•

High growth in the airline traffic presents the opportunity to increase business regionally. Privatisation and deregulation suggests more opportunities to expand market and increase market share. Surveys showed a change in people’s preferences, i,e, more people are willing to compromise on food and other services in exchange for lower prices. The existence of a large pool of low income passengers who were no longer able to afford or justify air travel on full-service carriers. Increasingly cost conscious business passengers also looking to make their travel budgets go further. Larger working age population; more disposable income. New services such as Internet Telephony provide all LCC with the opportunity to leverage on new technologies to increase sales. Technology advancements provide opportunities to reduce operation costs.

Threats •

Full service airlines start cut costs to compete.

•

Entrance of other LCCs.

•

High fuel price decreases yield.

•

Accident, terrorist attack and disaster that affect customers’ confidence.

•

Aviation regulation and government policy.

•

System disruption due to heavily reliance on online sales.


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 AirAsia’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 amortisation) 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$0.05, AirAsia does not provide them. In addition, it also emphasises 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 utilisation. At 29 U.S. cents operating cost per available seat-kilometre, AirAsia's operating cost is the lowest in the industry. With such as an obsession with costs, 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 amortisation) 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


implementing cost reduction measures along its value chain more effectively) allows AirAsia to achieve continual success.

e)

Effective Marketing

AirAsia has been such a big phenomenon in airline industry especially in Asia. By using a simple but strong slogan “Now Everyone Can Fly”, AirAsia has successfully positioned itself in customers’ minds. This is a huge victory in any marketing strategies. However, its greatest marketing asset is probably the company’s founder and CEO, Mr Fernandes, as he is particularly effective in generating media attention about his airline. In his media appearances, he had never failed to wear a red AirAsia baseball cap. He always takes the opportunities to reinforce AirAsia’s positioning as a small entrant firm battling against giant industry incumbents that offers low airline prices. This helps the company to gain new customers as well as retaining some of its existing clients. AirAsia is also well known for promoting brand awareness without incurring high sale and marketing expenses. However, it would invest aggressively where required. For instance, in order to widen the company’s media exposure, AirAsia successfully bided and became the major sponsor of football giant Manchester United. This deal, which involved global sponsorship and advertising, was seen as a coup since Manchester United was the biggest and most popular football club in the world.

As the lowest cost operator in Southeast Asia, AirAsia is certainly well poised to sustain its success. Moving forward, in order to continue to gain market share and sustain its competitive advantages as a LCC in the high demanding environment, AirAsia must develop new ways to manage both customer relationships and suppliers or partners to optimise customer loyalty, supplier relationships, and revenue.


Appendix I Summary of Evaluation Outcome of AirAsia’s Resource

Financial Resources

Organisational Resources

Physical Resources

Technological Resources

Human Resources

Innovation Resources

Reputational Resources

Tangible Resources - AirAsia’s net profit ending Jun 2005 was reported US$ 29.2 million, a 126% increase yearon-year. - Possess huge reserve of US$86.6 million in mid 2005 and debt-to-asset was merely 0.14. - With a huge reserve and low debt-to-asset ratio, AirAsia is thus capable to generate internal funds as well as afford high demand of debt and equity to finance any expansion. - Organisational was simple and flat; allows AirAsia to focus more intensely on areas like marketing, services and customers. - A larger span of control; many people in the company reporting to one manager which translates to fewer levels of management. This helps enhance consistency and reduce costs which augur well with the cost leadership strategy that the company has adopted. - Operated a large fleet of Boeing 737 aircraft - Continued to invest heavily in acquiring more fuel-efficient aircraft so that the company has sufficient capacity to meet the growing needs and demands of their customers while continue to keep costs low. For example, the company placed an order for 100 A320 aircraft. - New aircraft would lower fuel usage by about 12%. - Operating a single aircraft type also could lead to substantial cost savings. - AirAsia was the first airline in Southeast Asia to utilise e-ticketing and bypass traditional travel agents. These two measures saved the cost of issuing physical tickets, which were estimated at US$10 per ticket, and agents’ commissions, and eliminated the need for large and expensive booking and reservation systems. - In May 2002, internet bookings increased from 5% to approximately 50% in August 2004. - AirAsia tickets could be purchased from post offices and selected ATM machines. Intangible Resources - Although the employees were not unionised and the salaries offered by the company were below those of its rivals, AirAsia was still able to keep its work force motivated and incentivised by providing a remuneration policy that is competitive and attractive. - All employees were offered a wide range of incentives that include productivity and performance-based bonuses, share offers and stock options. All these not only helped to incentivise and improve productivity, it further strengthened relationships. - AirAsia adopted a modified version of the low-cost airline model in order to keep costs low (or lower) than its rivals. For instance, the company’s aircraft cabins were designed to minimise wear and tear, cleaning time and cost. - AirAsia reconfigured the seating configurations of their 148-seat Boeing 737-300 aircraft to maximise capacity. A standard configuration has only 132 seats. - AirAsia’s success was widely recognised with a series of awards accorded to the company. - AirAsia’s CEO also received numerous many awards in recognition of his ability to make the company successful in a short period of time. - With just 3 years of operations, the AirAsia was listed publicly in November 2004. The company’s IPO raised US$210 million for the airline and US$42 million for its owners. - Venture Capitalists and financial institutions provided finances support.


Appendix II Porter’s Five Forces Threat of Substitute Product: MODERATELY LOW Threat of Substitute Products is HIGH when: The differentiation of the substitute product is high Rate of improvement in price-performance relationship of substitute product is high

High

Low

High

Low

High

Low

High

Low

Power of Buyers: HIGH Power of Buyers is HIGH when: Concentration of buyers relative to suppliers is high Switching costs are low Product differentiation of suppliers is low Threat of backward integration by buyers is high Extent of buyer’s profits is low Importance of supplier’s input to quality of buyer’s final product is low Threat of Suppliers: HIGH Power of Suppliers is HIGH when: Concentration of suppliers relative to buyers industry is high Availability of substitute products is low Importance of customer to suppliers is low Differentiation of the supplier’s products and services is high Switching costs of the buyers is high Threat of forward integration by the supplier is high

Threat of New Entrants: MODERATELY LOW Threat of New Entrants is HIGH when: Economies of scale are low Product differentiation is low Capital requirements are low Switching costs are low Ease of access to distribution channels is low Cost disadvantages are low Government policies creating barriers are low


Intensity of Rivalry: MODERATELY HIGH Intensity of Rivalry is HIGH when: Number of competitors is high Industry growth rate is low Fixed costs are high Storage costs are high Product differentiation is low Switching costs are low Exit barriers are high Strategic stakes are high

High

Low

Strategic Analysis on AirAsia

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