BPMN 6023

STRATEGIC MANAGEMENT

PM Dr. Cheng Wei Hin

SUSTAINING COMPETITIVE EDGE FOR MAS AND

AIR ASIA

MUHAMMAD IZWAN BIN YUSOF

814118

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INTRODUCTION

The first aviation records date from 1903, when Orville and Wilbur Wright (later known as the

Wright brothers) took the first powered flight in a heavier-than-air machine. This was a 120-foot

12-second flight in North Carolina. Eleven years later, the first scheduled air service began in

Florida. This was a plane, designed by Glenn Curtiss, which took one passenger at a time across

Tampa Bay. The trip was 18 miles long and took about 23 minutes, for a price of $5.

Since then, the aviation industry has tremendously developed through World War I, World War

II and various economic turning points. Invention of various types of aircrafts has also

significantly changed the purpose of an aircraft being built from eliminating enemies to be one of

the important means in transporting people.

The industry itself has grown from a hundred thousand dollars to multi billion dollars with each

airlines rigorously competing with each other. With this competition, price per ticket is getting

cheaper and cheaper which has resulted good purchasing power at the hand of the consumer.

In the early stage of the industry, we can only see flights within United States as well as Europe.

However, as the industry evolves, the market has now started to shift to Asia. Emergence of

various national airlines such as Singapore Airlines, Malaysia Airlines, Garuda and not to forget

Vietnam Air has initiated the shifting process. To further add into the stiff competition, Low

Cost Carriers(LCC) lead by Lion Air, Air Asia and Cebu Pacific has further strengthen the

aviation industry in South East Asia.

Major Players in the Industry

As cited in the World Aviation Yearbook 2013, it is clear that Asia is rising in the aviation

industry with China is expected to dominate the skies in 5 years time. Nevertheless, the United

States is still leading the industry with the support and intelligence of the Federal Aviation

Authority(FAA) through Delta Airlines, United Airlines as well as the Southwest Airlines out of

240 Airlines registered with the International Air Transport Association (IATA). A clear picture

of the leaders in the industry is illustrated in Table 1: The World Top 20 Airlines by Seats

Offered .

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Rank Airlines Total Seats

1 Delta Airlines 3,802,004

2 United Airlines 3,416,483

3 Southwest Airlines 3,170,990

4 American Airlines 2,789,021

5 US Airways 2,199,479

6 China Southern Airlines 1,773,387

7 Lufthansa 1,745,538

8 China Eastern Airlines 1,639,682

9 Ryanair 1,610,091

10 All Nippon Airways 1,498,216

11 Air France 1,344,527

12 Air China 1,307,969

13 easy Jet 1,307,969

14 British Airways 1,104,228

15 Emirates 1,093,811

16 Gol 1,089,278

17 Turkish Airlines 983,611

18 TAM Airlines 965,854

19 Japan Airlines 962,136

20 Air Canada 916,517

Table 1: The World Top 20 Airlines by Seats Offered (World Aviation Yearbook 2013,

2013)

Focusing on the South East Asia Airlines, Malaysia is currently represented by 2 major airlines

which are Air Asia and MAS. Both can already be considered as the big boys in the industry

with MAS having a market presence for more than 40-years while Air Asia made its first flight

in year 1994. These 2 major airlines of Malaysia which has their own strengths and weaknesses

are now challenged with the new emergence of small yet flexible airlines, Malindo Airlines.

Air Asia were ranked 37th

while MAS was 43rd

in terms of total seats ranking. Nevertheless,

MAS has outranked Air Asia in terms of service ranking as outlined in the Skytrax review for

year 2013. MAS has received a 5-stars status while Air Asia only managed to be classified as a

3-stars airlines.

Looking at the financial performance, Air Asia is currently leading MAS with a total profit of

RM1.03billion compared to MAS which has made a total loss of RM430.74 million in year

2012. Based on this figure itself, it is obvious that the sustainability of MAS is truly questionable

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with Air Asia roaring the skies embarking its journey to become the worlds best low-cost

airlines.

To further add, the players are supported by the growing market in each of their segment. Europe

and America remains the biggest market for the aviation industry with Asia as the emerging

market trying to make a big impact, giving some additional bonus to the airlines. This happened

as most of the developing countries which require the supports of modern countries in term of

materials as well as the services are located at Asia. The emergence of this market has shifted the

market from the west to the east. Total seats offered by region is illustrated in Figure 1: Total

Worlds Regions by Capacity

Figure 1: Total Worlds Regions by Capacity (World Aviation Yearbook 2013, 2013)

In total, Asia leads with a total of 36,968,632 seat offerings followed by 30,825,562 (America)

and 30,523,899(Europe) respectively. The remaining came from the rest of the continents of the

world with 4,358,730 seat offerings.

South East Asia Industry Overview

Southeast Asia continues to post some of the highest growth rates in the global aviation industry,

driven primarily by expansion in the regions booming low-cost sector(CAPA, 2013).

For an example, the Low Cost Carrier (LCC) currently holds more than 50% capacity in

Southeast Asia mainly contributed by Indonesia, Malaysia, Philippines and Thailand. Taking it

into a new level, the LCCs have also claimed nearly 50% share from the intra-Southeast Asia

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international market. Also, taking advantage of the growth within Southeast Asia is the regions

flag carrier which focuses on the regional routes as full-service operators.

According to the data provided by CAPA and Innovata, the Southeast Asias international

market has increased by 20% within the last 18 months from 4.7 million weekly seats in Apr-

2012 to 5.6 million weekly seats in Oct-2013. This growth has seen a double digit capacity

except for Brunei. The most rapid growth seen was on Myanmar, after it opened the aviation

market to the world. While Thailand and Malaysia has posted the biggest growth in terms of total

international seats added with over 230,000 and 200,000 weekly seats added respectively.

This growth can be seen clearly in Figure 2: Seat Offerings Increase .

Figure 2: Seat Offerings Increase (CAPA, 2013)

Specifically looking into AirAsia, it can be considered as slightly smaller than the Lion Air

Group within the Southeast Asia region, with a 32% share of LCC capacity. Nevertheless,

AirAsia is larger than Lion in terms of the international market and it has also sizeable operations

connecting Southeast Asia with North Asia and Australia. Meanwhile, Lion has yet start serving

either of these markets. All of these facts are illustrated in Figure 3 Weekly Seats of LCC

capacity.

Singapore, 11%

Thailand , 21%

Malaysia, 25%

Indonesia, 29%

Philippines, 12%

Vietnam, 17%

Cambodia, 28%

Myanmar, 77%

Brunei, 3% Laos, 28%

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Figure 3 Weekly Seats of LCC capacity

The full fledge carrier of each country is also seen to have an important role in the growth of the

aviation industry in Southeast Asian market, both on regional and long-haul routes. Subsidiaries

of the flag carriers such as SilkAir (Singapore Airlines) and Thai Smile (Thai Airways) have

been among the fast growing carriers in the region in 2013.

The Malaysian Airlines(MAS) has also been identified as one of the fastest growing full-service

carriers in the Southeast Asia together with Garuda. MAS itself has indicated an increase of

growth capacity by 6% over the period of May 2013 Oct 2013. While Garuda itself has

recorded a higher growth rate of 7% compared to MAS.

Southeast Asias 10 flag carriers currently operate 646 aircraft (including their full-service

regional subsidiaries but not their low-cost subsidiaries). This equates to about 44% of the total

fleet in the region. With LCCs currently accounting for about 31% of the regions fleet, that

leaves about 25% of the fleet at smaller full-service carriers including independent regional

operators.

36.81%

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4.62% 4.06%

3.92% 2.67% 0.26% 0.23% 0.20% Lion Air

Air Asia

Cebu Pacific

Tigerair

Thai Airways

Garuda

Jetstar

Vietjet

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Figure 4 Southeast Asian Flag carriers seat offerings

In a nut shell, a total of 3 million weekly seats were provided by the regions flag carriers, which

contributes to 35% share of the total market. With the rising and expansion of LCCs, the market

share has been going down over the last decade. But most of Southeast Asias flag carriers have

been able to retain significant shares of their home market and remain profitable. On average

they have also continued to grow faster than their counterparts in other regions.

Southeast Asia remains a dynamic and fast-growing market. Competition is as fierce as it has

ever been and will only intensify as several new carriers, primarily LCCs, plan to enter the

market over the next year. But overall the outlook for the Southeast Asian market is bright.

Industry Performance Main Variables

The aviation industry runs on few dependent variables which are explained below.

Fuel

The main variable which is important for the industry will be the fuel which has a tag price of

circa USD100 per barrel (Brent crude). Though the OECS consumption has declined by 1.2% in

2012, the overall global consumption has grew by 0.7%, marginally. This happened to be

because of the instability of Middle Eastern countries ie Syria which has resulted in more

19.74%

18.94%

18.44%

17.07%

12.20%

10.24%

1.17% 1.03% 0.83%

0.33%

Singapore Airlines

Malaysia Airlines

Thai Airways International

Garuda Indonesia

Vietnam Airlines

Philippine Airlines

Royal Brunei Airlines

Lao Airlines

Cambodia Angkor Air

Myanmar Airways International

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potential flash points than usual. It is expected for the price of fuel to relatively maintain in year

2014 as fuel surcharges have provided partial shelter to airlines supported by a relatively healthy

economic background.

Should there any fuel price hike or another economical crisis, it will certainly create a great

discomfort for airlines, which in the end will squeeze them to reduce capacity on marginally

profitable routes or even worse, to withdraw completely. Whereas in the past full-service airlines

may well have persisted with poorly routes, todays sensitive levels of competition are prompting

a better focus on the short term bottom line. The long term has become a extravagance few

airlines can afford.

Economy

It is eminent that most of the economical experts said firmly that Europe is the past, the US the

present and Asia the future. This has been clearly seen based on Europes economy which is

steadfastly rooted in debt for several years while the US which maintains as the massive aviation

market, appears to be forging a shaky recovery, albeit heavily founded on debt and with a

political mixture more appropriate to a fairground. Asia meanwhile is robust and gearing up for

a better future, even faced with a floppy global economy.

Europes economic uncertainty however still contains unknowns that threaten to re-emerge.

Severity is not something that the powerful and varied underlying social forces in Europe are

prepared to tolerate for extended periods. And, to continue, hoping that things will eventually get

better is a journey into the unknown. Waiting for time to heal the wounds may even aggravate

the initial hurt.

Based on the IATA AGM in year 2012, it was noted that fuel prices and the economy was and

are the 2 main factors which can lead in creation of the key success factors underlying the

industry itself. With cost reduction is seen as the best action to be taken in order to sustain the

industry, emergence of the successful Low Cost Carrier including Air Asia has certainly proven

that that is the correct direction where the industry should be heading to. Other key success

factors includes hoarding cash, tight capacity control, increasing load factor & yields,

strengthening partnership between airlines as well as exploiting ancillary sales.

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Unpredictable events

There are a lot of unpredictable events which affect the aviation industry. These events were not

even predicted and commonly are natural disasters. For an example is when the volcano in

Iceland erupted which had greatly affected the airlines in Australia. Flight schedules were

cancelled as it was extremely dangerous to fly any aircraft during the eruption. As a result there

were a lot of passengers stranded without being able to travel by air.

Another event which has affected the whole world was when any pandemic diseases spread. A

clear example is when the H1N1 virus hits. Major international airports took a lot of initiatives to

ensure that there is minimal virus spreading around its area. Many of the passengers were afraid

of travelling and most of them had postponed their vacations of even business trips just to avoid

being affected by the virus. This again has affected on the revenues and profits of the airlines.

Others might also include events such as terrorist threat in the US, snowstorms in London, the

iconic butterfly in Brazil which can disrupt a complex assortment of personal and commercial

interactions.

These unpredictable events cannot be forecasted but it is critical for the airlines to be ready by

having good and strong foundation of economy, financial and team.

Industry Growth and its Key Success Factors

The aviation industry itself has the main objective of transporting a passenger from the starting

point to its destination. No materials were involved as it is service oriented product.

As such, we can consider that the industry is capital intensive as well as labor intensive. The

costs of setting up an airline are extremely huge and normally were covered by the government.

Some of the privately owned airlines were even financed through loans in order for them to start

operating.

Revenues and profits margins were the main target with the profits were normally seasonal and

thin. During the summer for example, sees that people taking vacations and during this peak

time, airlines will then be able to make higher profits as demand increases. However, during

winter or snowy season, airlines were forced to make a lot of promotions in order to increase

their sales.

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75% of the airlines revenue was obtained from the passengers while 15% came from the cargo

services. And from the 75%, around 80% were normally contributed from the domestic

travelling. These tickets were normally issued by the travel agencies as well as the online

ticketing system. These travel agencies itself which are considered as an element outside the

airline gives a big impact towards the economics of the system. Hence, it has to be taken into

consideration when the boundary of the aviation industry is being drawn.

One of the main management tools which were used in the industry is the basic break-even load

factor which refers to the percentage of seats in a particular route that the airlines need to sell in

order to cover its costs. This is usually around 66%. Thus, an airline that operates near this

margin and 1 or 2 seats in a flight can make the difference between profit and loss.

The seat configurations in an aircraft also plays an important role as the more seats in an airplane

entail more revenue at the same cost, but also less comfort for passengers. Thus, the best strategy

is to analyze the market for each flight and check what passengers prefer. For passengers who

prefer lower price tickets, the airlines should configure the seats to be more. If they belong to a

business community, use a plane with fewer seats with a higher pricing, but that gives them more

comfort and workspace.

Finally, pricing and scheduling are also two major, very complex, tasks that an airline must

perform. Pricing is purely competitive since deregulation of the industry. Each ticket is sold

according to the value that the passenger gives to having a seat in a particular flight. The goal of

the airline is to maximize its revenue in each flight because the cost associated with a particular

flight is pretty much fixed, offering the correct mix of tickets either full-fare, discounted, or

upgraded. This is a complex optimization process, accomplished today by specific computer

software. Scheduling is also free since the late 1970s. It is also obtained using powerful

computer software that takes into account demand, crew availability, maintenance, airport

restrictions and aircrafts.

MALAYSIAN AIRLINES(MAS)

The Malaysian Airlines is the Malaysias national airlines which provide the best in its class in

terms of services. It has won numerous of awards in the past which includes the Best Airline to

Asia and Worlds Best Cabin Crew. It is also one of the only six airlines around the globe

which has been accredited as a five-star airline. This shows that MAS is highly recognized by

the world-wide with a good branding image. As a result, customers who choose MAS can be

identified as the ones who have preferences on MAS services.

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MAS Business Strategies and Model

MAS, is a company which has been operating in a red mark every year, financially. In order to

stay afloat, MAS has determined to continue the Business Transformation Plan(BTP) which has

been initiated by Idris Jala. These BTP has now reached the 3rd

wave which has resulted of the

implementation of the Business Transformation Plan (BTP) 3 under the stewardship of Ahmad

Jauhari.

For the first quarter ended March 31, 2013, MAS registered a loss after taxation of RM279

million and if these losses are annualised MAS losses for this year will exceed the RM1 billion

mark. (Ranjit Singh, 2013)

In order to sustain the company, the Business Turnaround 3.0 has been executed. This

emphasizes on the recovery plan as well as turning the company into a profit making

organization (MAS,2012).

Based on the recovery plan, MAS has focused on building a profitable network, winning back

the customers, cost reduction as well as bridging the fund gap. Taking note on the importance of

having a good network, MAS has relentlessly established partnership with various airlines in

order to cater for their customers needs. These include partnership with Etihad Airways,

American Airlines, Gulf Air, Silk Air, Korean Air and other major airlines. As a result, more

routes have been established with lesser costs incurred. These new network also has managed to

increased the seat offerings capacity simultaneously increasing the profit generated by the

company. Any loss-making routes have also been suspended in order to avoid further loss. These

however will then be taken into consideration once the company is stabilized.

Various promotion activities have also been conducted by MAS. Via its subsidiary, Firefly has

also supported these promotion activities focusing on the domestic market. While for the

international market, MAS consistently provides discounts on tickets as well as accommodation

in order to provide a one-stop solution for its customers. A new fleet of aircrafts were also

purchased so that customers will have more confidence on the safety aspect of the services which

MAS is providing. Reinvigorating its sales and marketing activities were also the focus of the

company by optimizing yield through better revenue management and tactical sales program.

Supported by its sales network, MAS is expected to make profits by year-end 2014 as this

turnaround program has managed to gain its momentum (The Star, Aug 22, 2013).

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Cost reduction maintains to be in one of the business strategy plan. MAS realized that cost

reduction is not just about reducing quality. However, it is also about increasing efficiency of its

operation. For example, MAS has invested a sum of money in order to enhance its IT solution to

provide a better and efficient operation cost while at the same time tightening the procurement

process (The Edge Malaysia, March 04, 2014). While on the material aspects, MAS is trying to

lock on the fuel bills and maintenance expenses while keeping the overhead and discretionary

expenditure to a minimum.

As it needs to grow, MAS also realized that funding all of these programs requires a strong

support from the shareholders. These are to support its difficult and unpopular decisions to

assure a positive cash flow performance. The management of MAS is committed to do anything

within their power to redeem the faith and support of the major shareholders.

Competitive Advantage and Distinctive Competencies

MASs has its own pricing mechanism which focuses on its seating capacities. Most of its

aircrafts were designed to be economical while having the capabilities to provide more seats to

the customers. As such, MAS has the luxury of offering a substantially less expensive air tickets

to its customers compared to any major international airlines in the world.

Having a world class cabin crews certainly shows to the world that MAS provides a courteous

and comfortable services to its customers without considering whether it is for the economy class

or the business/1st class. And this excellent services were not just been provided while the

passengers were on the air, but were also extended while the passengers at the airport via

excellent airport facilities and services. These special cultures of warmth and friendliness has

attracted numerous and countless of passengers who are willing to exchange their money for this.

Coupled with the 1st class services, MAS has also a modern fleet of aircrafts which supports its

service. This has increased the confidence of the passengers on MAS knowing also that MAS has

their own capabilities in maintaining these aircrafts. With highly trained engineers, technicians

and even the ground staffs, it is assured that passengers boarding any of MAS aircrafts are

secured on their safety.

A long-haul flight will certainly bore the passengers. Taking this into consideration, MAS has

ensured that all of its wide body aircrafts were fully equipped with the state of the art

entertainment system. And even in some of the aircrafts, MAS has equipped it with Wifi

capabilities just to ensure that the passengers are able to surf the internet while on the air.

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The designer of the aircrafts has succeeded in providing a spacious and wide leg room. Some of

the passengers chose MAS just because of the leg room, especially the Westerners which has a

huge and big body. These tiny little things have indeed provided MAS the competitive advantage

towards its competitors.

Not to forget is that the improved website and ticket booking process which can be made without

any hassle. The customers experience via these online services is extremely important as it

provides the first time impression of the airlines itself, and MAS has indeed proved that it is

capable of doing so. Tied with various attractive promotions, any passengers would not miss the

opportunity to fly in a 5-star airline with style.

SWOT Analysis

Strength

Strengths reflect Malaysia Airlines (MAS) competencies and capabilities of their core business

which differentiate the company itself with other service company based on value, price and

services. There are some gists which that can show the sequences of the strengths it has.

Personnel

MAS has an established brand image which has existed since 70 years ago. With these

experience, MAS has initiated a full force efforts on terms of branding and publicity which has

revolved around flight crew compared to other airlines that focuses on aircrafts and extensive

networks. The strategy is merely to promote the airline via the flight attendants and to portray

cabin crews of MAS as the representative of Malaysian hospitality and friendliness. With the

Going Beyond Expectations slogan, MAS has branded itself internationally by heavily

promoting its service excellence. Further to transform their business plan, MAS have manifested

with the innovative branding line of attack slogan which is MH is Malaysian Hospitality. It is

to highlight the hospitality of its cabin crew instead of the airlines extensive network and its

premium cabin and economy class cabin products.

In order to fulfill the customers needs to have the best service experience, MAS has initiated a

training program dedicated for cabin and flight crew. By having this program, it has resulted for

the airline to achieve a lengthy record of service and best practices excellence, with more than

100 awards in the last 10 years. The most distinguished ones comprise being the first airline with

the "World's Best Cabin Crew" by Skytrax UK consecutively from 2001 until 2013, "5-star

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Airline" in 2005 and 2006, as well as No.1 for "Economy Class Onboard Excellence 2006"

also by Skytrax UK.

Management

A strong and well designed organizational structure is what MAS currently has. To further

strengthen the organization, MAS also has a pool of talented management team which plays an

extremely important role in steering the company to perform the best brand experience. Even

though MAS management had face difficulties and losses in several times, the management team

always have their own strategies to make sure that they are able to take this challenge as their

opportunity to enhance their reputation and quality of the service.

Idris Jala was appointed to become the new CEO on the 1st December 2005 in order to execute

the changes in the company itself. Under his stewardship, he has established a Business

Turnaround Plan(BTP), focusing on highlighted low yield, an efficient network and low

productivity. Taking part into the business is the cargo and maintenance services which has

operations in six continents and covers over 100 different locations. It certainly shows that MAS

is a service company that has strong platform in the business industry.

These business transformation efforts have been continued aggressively by its successor, Ahmad

Jauhari Yahya who has then managed to further reduce the losses incurred in previous financial

years.

Weaknesses

A companys weaknesses are the things it does not do well or that other companies are doing

better. Although MAS had its humble beginning in the golden age of travel but this company is

still having some weaknesses as what every business have.

Offerings

In a world full of competition, MAS has to fight against 2 major airlines in Malaysia, which are

the Air Asia and Malindo. These both companies which focuses on low cost operation provides

different types of service, addressing different customers requirements.

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Though MAS operates both domestic and international routes, MAS customers are mainly

recognized as international flight customers. Compared with other airline s, the cost offered by

MAS is more expensive than others, though that the pricing is still lower should it be compared

to other 5-star airlines.

Being a 5-star airline, MAS has a lot to pay in terms of the maintenance costs. This will then be

translated into the real costs which will be borne by the customers. Indirectly, MAS is targeting

the high income market as their main customers. Nevertheless, the cost of living in Malaysia is

not really high compared to other country like Japan. There are just a few groups of people in

Malaysia who can effort to pay for the cost to fly because of the high rate of airlines tickets.

Personnel

The risk which MAS is facing is really huge as it requires a big capital in order to run the

business efficiently. With this, the management team managed to set the objectives clearly and

also has the best strategies in order to achieve their objectives. However, they were lacking in

knowing how to implement and execute the strategies effectively. This is the main reason why

MAS has met many difficulties and losses in their business and need to turnaround the business

to recover the problems and sometimes it needs high turnover rate among employees.

The RM1.3billion loss were contributed by several causes which includes escalating fuel prices,

increased maintenance and repair costs, staff costs, low yield per available seat kilometer

("ASK") via poor yield management and an inefficient route network. Another factor for the

losses was high operating costs. MAS substantially lagged its peers on yield. Some of this gap is

due to differences in traffic mix, (less business traffic to and from Malaysia than to and from

Singapore), but much of it was due to weaknesses in pricing and revenue management, sales and

distribution, brand presence in foreign markets, and alliance base.

In addition, these weaknesses which has occurred has been caused by immature channels and

distribution system as MAS needs to expand their business widely throughout the region within

the stipulated of time. Starting in year 2008, MAs has started new routes, with Macau and

Yogyakarta being the latest additions to its list of destinations. Besides, these service airline

company growths post recovery because of the trimming of the airline since year 2000.

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Opportunities

Opportunities are the openings in the industry which could be utilized by the company in order to

make it much more favorable in the market. The areas of opportunities are higher customer

satisfaction and the changes in customer preference.

Changes in customer preference

There are a lot of factors in determining the purchasing power of a customer. This can be

demographic, psychographic, and geographic factor. In a way to obtain a certain objective,

Malaysian Airlines should be able to introduce a new concept of flying with MAS. It is because

customers are human beings that can easily having a change in their life. They can be influenced

by many aspect of their life including the way of their lifestyle. Due to that, MAS is continuously

innovating all aspects of their services and products in their transformation journey to be a 5-Star

Value Carrier.

As a start, MAS has introduced hot meal boxes which offer favorites such as nasi lemak and nasi

goreng kampung as well as the introduction of new varieties in a move to respond to customer

preferences while continuing to optimize aircraft utilization in line with its Business

Transformation Plan. In addition, MAS has more menu options available and customers can now

choose between an Asian or western meal. A total of 37 menus are on offer over an 8 week cycle

rotation to ensure that frequent travelers will be able to enjoy a variety of meals. New offerings

include nasi impit with lontong, black pepper chicken balls with spaghetti, and waffles with fruit

fillings. A permanent feature of this new menu is the option of western meals. Passengers will

continue to enjoy unlimited in-flight beverages such as coffee, tea and fruit juices. New kiddy

and special meals including vegetarian are also progressively being developed and will be

introduced by the end of this quarter.

Threats

Threats are the elements from outside of the organization which could have negative effect on

the company. There are some threats that will affect MAS such as economy, competitors,

terrorism, and technology.

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Economy

Changes in economy will directly affect every business positively and negatively in many

aspects. If the economy are having crisis, it will affect the whole business globally. As one of the

company airlines, MAS has many connections throughout the world and it will give a big impact

to the company if there are any changes in economy level. Thus, it is important for the

organization to prepare some alternatives to overcome this problem because these unpredictable

problems may occur anytime.

Terrorism

Terrorism is leading to decrease tourism and confidence in the airlines. It might happen in many

ways of terrorism either in certain countries or it might happen in the plane itself. As example,

we know that MAS flies to 88 destinations. In cooperation with code-share partner airlines, the

airline serves more than one hundred destinations worldwide. If there is terrorism happen in the

area of Southeast Asia, MAS need to stop their flight destination to the Southeast Asia for a

certain time. It is because it will be too dangerous to the people and the whole crew as well as the

plane. At the same time it will decrease the confidence in the airlines.

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AIR ASIA

AirAsia was established in 1993 . The company commenced its operations on 18 November

1996. It was originally owned by the government-link company ,DRB Hicom, a heavily

indebted airline company purchased by Tune Air Sdn Bhd , a company belonged to former Time

Warner executive Tony Fernandes's company . By the year 2002 Tony Fernandes made AirAsia

a profitable company and launching new routes from its hub in Kuala Lumpur International

Airport at breakneck speed, undercutting former monopoly operator Malaysia Airlines (MAS)

with promotional fares as low as RM1 (US$0.27).

AirAsia launched its first international flight to Bangkok In 2003 when it opened a second hub at

Senai International Airport in Johor Bahru . AirAsia later started a Thai subsidiary, added

Singapore itself to the destination list, and commenced flights to Indonesia. Flights to Macau

started in June 2004, while flights to Mainland China (Xiamen) and the Philippines (Manila)

started in April 2005. Flights to Vietnam and Cambodia followed later in 2005 and to Brunei and

Myanmar in 2006, the latter by Thai AirAsia. On August 2006, AirAsia took over Malaysia

Airlines's Rural Air

Service routes in Sabah and Sarawak, operating under the Fly Asian Xpress brand, the routes

were subsequently returned back to MASwings a year later citing commercial reasons. Air Asia

has further enhanced its presence in Asia by strengthening and enhancing its route network by

connecting all the existing cities in the region and expanding further into Indochina, Indonesia,

China and India. With the increased frequency and addition of new routes, AirAsia expects

passenger volume to grow further.

Business Strategies & Model

AirAsias business model is based on 3 business strategies, which are having simple product,

positioning and low operating costs. These 3 strategies are the main criteria for AirAsias

operation since it has been established.

Simple product is the main offerings which AirAsia provides to its customers. It is back to the

basics needs of the customers itself where the main requirements for AirAsia are to fly using air

transportation. Thus, AirAsia has set up a policy that should any of their customer would like to

have additional services, then the customers will need to pay extra for that particular services

he/she would like to have. Some passengers might not need that whereas other might see it as a

necessity when travelling. This has attracted many passengers in becoming a regular customers

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to AirAsia. In addition to that, AirAsia also has configured the seating positions in its aircraft to

be as narrow as possible in order to be able to provide more seating capacities. This has resulted

in more revenue can be generated from a single journey of the aircraft. Flexibility in choosing

seats was also emphasized. Passengers are able to choose his/her own seat where they would like

to be. Also, unlike other airlines, AirAsia does not have any frequent flyer program as it believes

that they have offered the best to the customers by providing a low cost air travelling.

In terms of business positioning, AirAsia has focused on non-business passengers especially

leisure traffic and price-conscious business passengers. These are the main target market for

AirAsia. Besides, AirAsia has also emphasized on short-haul point to point traffic routes with

high frequencies. Coupled with its aggressive marketing, AirAsia has decided that there is no

need to travel to those major airports as secondary airports is enough for the passengers to reach

their own destination. These itself has lower down the costs which has been passed to the

customers.

Being an airline focusing on low operating costs, AirAsia has ensured that wages, airport fees,

maintenance costs are kept at a minimum level. Purchasing the same fleet of aircraft alone ie

Airbus A320 has managed to reduce the maintenance costs for AirAsia. All of this supported

with a team of high resource and productive staffs as well as short ground waiting period assured

that passengers can fly at a lower cost.

Into the bargain to the above, AirAsia has also decided not to venture into air freight services

neither hub services. The business of carrying passengers alone has filled up the plates of

AirAsia supported by efficient online sales system.

Competitive Advantage and Distinctive Competencies

The advantages which AirAsia has commonly surround the operation of the company itself.

Using secondary airports as the end point and short-haul journey provide ease to the customers to

plan their journey. Further strengthening their advantages are AirAsias frequent and reliable

schedules which assure that customers will be arriving at their destination on time. Having this

has also indirectly assured that all of the aircrafts owned by AirAsia will be fully utilized to be

the tool of creating revenue for the company.

Standardization of fleet again prove to be the competitive advantage of the company as it clearly

reduce the operation costs for AirAsia. This, coupled with pool of efficient and aggressive staffs

as well as focused management structure further strengthen the companys position.

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With all of this low operation costs, Air Asia has created its own distinctive competency to

become the affordable air travelling paraphernalia for the passengers.

SWOT Analysis

Strength

Management team

The real strength of Air Asia is based on its strong management team with strong links with

government and airline industry leaders. The executive management come from diverse

background which consists of industry experts and ex-top government officials .

The Air Asia management team is good at strategy formulation and execution. They adopted the

proven strategies of South west Airline and Ryanair (no frills, landing in secondary airport),

Southwests people strategy (employee comes first) and easyjets branding strategy (linking with

other service providers like hotels,car rental).

Branding

AirAsias brand name is well established in Asia Pacific region now. Besides the normal print

media advertising & promotions, AirAsias top management also capitalized on promotions

through news by being very media friendly and freely sharing the latest information on Air

Asia as well as the airline industry. Their partnership with other service providers such as hotels

and hostels, car rental firms, hospitals (medical tourism), Citibank (AirAsia Citibank card) has

created a very unique image among travellers. Air Asias local presence in few countries such as

Indonesia (Indonesia AirAsia) and Thailand (Thai AirAsia) have successfully elevated the

brand to become a regional brand beyond just Malaysia. The links with Manchester United (one

of the worlds most famous football teams) and AT&T Williams Formula One team have further

boosted AirAsias image to a greater extend beyond just the this region.

Low cost leadership

AirAsia is the low cost leader among air lines in Asia. With the help of AirAsia Academy,

AirAsia has successfully created a low-cost airline mentality among their workforce. The

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workforce is very flexible and high committed and very critical in making AirAsia the lowest

cost airline in Asia.

Utilization of Information Technology (IT)

Information Technology has contributed to the progress of Air Asia to a greatest extent. This

includes the contribution made by IT in promotional activities (email alerts and desk top

widgets), brand building exercise (with 3 million hits per month and is a most widely used search

engines of the world today).IT also resulted in direct purchase of tickets by customers and

savings in air line agents fee.

The Malaysian government support

The government of Malaysia offers whatever assistance it can without jeopardizing the national

interest and its flag carrier ,Malaysian Airlines (MAS). For instance, as per report in

Starbizweek, on 5th March 2011 , the Sarawak government has offered to AirAsia to build a

dedicated low cost carrier terminal (LCCT).

Financial position

From the very beginning the financial performance of AirAsia has been very good. The revenue

of the company is impressive and is increasing. This is attributed to low operation and

distribution costs which enable the airline to offer an attractive ticket price which no other airline

can match. The profitability of AirAsia is further enhanced through its diversification strategies(

such tune hotel , tune talk etc) and joint ventures ( ie. With Thai Airways and Indonesian

Airways)

Weaknesses

Maintenance, repair and overhaul (MRO ) facility

The air craft maintenance cost is surging. Air Asia does not have its own maintenance, repair and

overhaul (MRO) facility. It may be a good strategy when they first started with only Malaysia as

the hub and few planes to maintain. But now, with few hubs (Malaysia, Thailand and Indonesia)

and over 100 planes currently owned and about another 100 planes to be received in the next few

years, Air Asia have to ensure proper and continuous maintenance of the planes which will also

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help to keep the overall costs low. It is a competitive disadvantage not to have its own MRO

facility.

Good customer service is critical

AirAsia receives a lot of complaints from customers about its service. Examples of complaints

are around flight delays, being charged for a lot of things and not able to change flight or get a

refund if customers could not make it. Good customer service and management is critical

especially when competition is getting intense.

Air craft Financing

AirAsia as part of its expansion plan , AirAsia is purchasing more aircrafts to cater for the

increased demand. However, this cost is surging. To overcome this problem, Air Asia now

getting the planes on lease instead of buying.

Opportunities

Increased fuel price

The increasing oil price at the first glance may pose threat for Air Asia. This is not so. Being a

low cost leader, AirAsia has an upper hand in this matter because its cost will be still the lowest

among all the regional airlines. Thus, Air Asia has a great opportunity to capture some of the

existing customers of full service and other low cost airlines customers. However, there will be

also some reduction in overall travel especially by casual or budget travelers.

ASEAN open skies

The ASEAN Open Skies allows unlimited flights among ASEANs regional air carriers since

December 2008.This led to the liberalization of ASEAN capital routes.

This has resulted in increased competition among the regional airlines. However, AirAsia with

its first mover advantage as well as its strengths in management, strategy formulation, strategy

execution, strong brand and low-cost culture among its workforce viewing this agreement as

more of opportunity than threat.

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Partnership with other low cost airlines

There is also some opportunity to partner with other low cost airlines such as Virgin airlines

enhance their existing strengths or competitive advantages such as brand name, landing rights

and landing slots (time to land).

Population increase

The population of Asian middle class will be reaching almost 700 million by 2010. This creates a

larger market and a huge opportunity for all low cost airlines in this region including AirAsia.

Threats

Airport charges

Airport charges imposed by airport authorities includes airport departure, security charges and

landing charges and these are beyond the control of airline operators.

This poses a threat to all airlines especially low cost airlines which try to keep their cost as low

as possible. For instance, Changi airport in Singapore charges SGD21 for every person who

departs from Singapore.

Competition from other airlines

Now AirAsia is reaping profit margin of more than 30% and this has already attracted many

competitors. Most of the full service airlines already have or planning to create a low cost

subsidiary to compete directly with AirAsia. For example, Singapore Airlines has created a low

cost carrier Tiger Airways.

Fluctuating fuel price

There is always fluctuations in the fuel price due to economic and political factors ie. Shortage,

war .This is a major threat to the company as its operations heavily dependent on jet fuel.

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THE FUTURE OF THE INDUSTRY

IATA (2013) in its Airline Industry Forecast 2013-2017 expected for the airlines to see at least

31% increase in total volume of passengers from 2012 to 2017. It is estimated that there will be

3.91 billion passengers using the airlines services compared to only 2.98 billion in year 2012.

An average of 5.4% compound annual growth rate(CAGR) of demand is expected between 2013

and 2017. For the global passenger growth, it will expand by 4.3% CAGR between 2008 and

2012, which will reflect the negative impact of the 2008 global financial crisis. Of the new

passengers, approximately 292 million will be carried on international routes and 638 million on

domestic routes.

Middle East and Asia Pacific which is considered as the emerging market will see will see the

strongest international passenger growth with CAGR of 6.3% and 5.7%, followed by Africa and

Latin America with CAGR of 5.3% and 4.5%.

While China, still dominant on the single largest driver of growth, accounting for 24% of new

passengers during the forecast period. Of the anticipated 227.4 million additional passengers,

195 million will be domestic and 32.4 million will be international.

The Asia-Pacific region (including China) is expected to add around 300 million additional

passengers by the end of the current forecast horizon. Of these, around 225 million or 75% are

expected to be domestic passengers.

With 677.8 million domestic passengers in 2017, the United States will continue to be the largest

single market for domestic passengers, although it will add only 70 million passengers over the

forecast period (2.2% CAGR). This reflects the markets maturity. China is firmly established in

second place (487.9 million passengers in 2017, 10.2% CAGR.). The US also will reclaim the

top spot from Germany for international passengers by the end of the forecast period. Germany

will add 27.2 million passengers to the 149.4 million in 2012 (3.4% CAGR.), while the US will

add 28.2 million international passengers, rising from 149.3 million in 2012 to 177.5 million

(3.5% CAGR) in 2017.

The Asia-Pacific region which is led by China and the Middle East will deliver the strongest

growth over the forecast period is not surprising. Governments in both areas recognize the value

of the connectivity provided by aviation to drive global trade and development. Similar

opportunities exist for developing regions in Africa and Latin America. To reap the benefit,

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governments in those regions will need to change their view of aviation from a luxury cash cow

to a utilitarian powerful draft horse to pull the economy forward.

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