Strategic Analysis on AirAsia

8/8/2019 Strategic Analysis on AirAsia

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BUS 488

STRATEGY

Assignment 3 Individual Assignment 2

Jul 2010 Semester 2010

________________________________________________________________

Completed By

Woo Gim Chuan Marcus (J0704245)

Name of Tutor (T01)

XXX


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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, Macauand 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, AirAsias 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 AirAsias solvency had strengthened and thus is able to

fulfill its debt obligations. In fact, the 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 ResourcesAirAsias 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 companys strength as very few low cost airlines of similar size have

1 Debt-to-Asset = Total debt / Total asset

Individual Assignment 2 Page 2 of 31


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such large reserves. With such huge reserves and low debt-to-asset ratio, AirAsia is thus

capable of generating internal funds to finance any expansion. It is certainly AirAsias

strength.

c) Organisation Design and Organisational Resources

AirAsias 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 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 can have sufficient capacity to meet the growing needs and

demands of their customers as well as to continue to keep its cost low. The new aircraftcan 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

AirAsia was the first airline in Southeast Asia to utilise e-ticketing so that

traditional travel agents can be bypassed. This implementation saves the cost of issuing

physical tickets and eliminates the need for large and expensive booking and reservation

systems. To further exploit technologies, AirAsia made it possible for customers to

purchase tickets either from post offices or designated bank teller (ATM) machines. In

short, AirAsias strength is also about the ability to leverage on technologies well and

ahead of its competitors to increase sales and lower costs.



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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. Forinstance, 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

AirAsias 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 companys CEO, Tony

Fernandes has also won several recognitions. Most notably, the International Herald



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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 Asias Best

Managed Company in the Airlines and Aviation Sector by Euromoney after its IPO.

Given the positive perceptions of AirAsias 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 of2005, 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,

AirAsias 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



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The value chain analysis is used to evaluate the value of each particular functional

activity that is added to the organisations 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



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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 companys 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 AirAsias 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 over60 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 AirAsias 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 AirAsias positioning as a



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Functional

ActivitiesCapabilities Bundle of Resources involved

Inbound LogisticsPossess the ability to leverage on technologies and economies ofscales 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).

Technology + Human + Financial +

Innovation + Infrastructure

Outbound LogisticsPossess the capability to train employees to perform multiple andexecute the procedures that enhance operations protocols.


Marketing & SalesExcellence in promoting brand awareness effectively withoutincurring high sales and marketing expenses.

Human + Financial + Innovation

ServicesAble to integrate the various resources and functional activities tomeet the needs (safety and low airfare) of cost-conscious customers.


Infrastructure & Finance

Possess a large and standardised fleet of aircraft to keepmaintenance costs low as well as a large reserve with access toexternal financing readily that can be leveraged to invest ininfrastructure to further lower costs.

Human + Financial + Innovation +Infrastructure

Human Resources

Able to leverage on financial resources to provide attractivenumeration packages that help to motivate and incentivise.Implement flexible work rules and streamline administrativefunctions so that employees are allowed to perform multiple roles.All these help to keep costs low.

Human + Financial

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

Technology + Human + Financial +Innovation + physical

Procurement Possess procurement know-how that leads to lower costs andexpenses.

Technology + Human + Financial +Innovation

Table 2: Resources-Competency Model Used On AirAsias Resources, Primary and

Support Activities

To determine whether AirAsia has any core competencies (sustainable competitive

advantages), the companys capabilities are assessed based on the four criteria - valuable, rare,

difficult to imitate and non-substitutable. The evaluation results so far revealed that two core

competencies below:

(1) The possession of tacit knowledge to build a business by leveraging on new

technologies (internet).

(2) The religious zeal to cost-avoidance coupled with tacit knowledge to build

extremely efficient processes to enable it to execute its business model (low cost).

Theevaluation conducted on AirAsias capabilities is appended in Table 3 below:

Capability Valuable RareDifficult to

imitate

Non-

substitutable

Competitive

consequences

Performance

implications

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

Y Y N NTemporaryCompetitiveAdvantage

Average returnsto Above-

average returns

Able to integrate and execute all aspects of airlineoperations very effectively.

Y Y N N TemporaryCompetitive

Average returnsto Above-



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Advantage average returns

Possess the capability to train employees to performmultiple and execute the procedures that enhanceoperating standards.

Y N N NCompetitive

ParityAverage returns

Excellence in promoting brand awareness effectivelywithout incurring high sales and marketing expenses.

Y N N NCompetitive


Able to integrate the various resources and functionalactivities to meet the needs (safety and low airfare) ofcost-conscious customers.

Y N N NCompetitive


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 provideattractive numeration packages that help to motivateand incentivise.

Y N N NCompetitive


The possession of tacit knowledge to build a business

by leveraging on new technologies (internet).Y Y Y Y

Sustainable

Competitive

Advantage

Above-average

returns

Possess procurement know-how that leads to lowercosts and expenses.

Y N N NCompetitive


Table 3: Evaluation of AirAsias 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, AirAsias 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



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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

AirAsias 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.



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All the success factors mentioned above explain AirAsias success. However, it should

also be noted that AirAsias 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.



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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 togain 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

AirAsias 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.



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c) Low Fixed Costs

AirAsias ability to acquire low rates for long-term maintenance contracts and

aircraft leases led to substantial cost savings. It was reported that AirAsias 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 airlines 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 policyfacilitated 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.



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The ability to lower cost and at the same time widen profit margin (through increase

productivity) augurs well with AirAsias 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.



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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

Asias rapid economic growth and sprouting middle class continues to fuel thegrowth 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



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Thailand in 2004 successfully, the company still could not expand beyond the Singapore-

Thailand routes because it could not acquire landing rights elsewhere.

c) Social-Cultural

Surveys revealed that more people were willing to compromise on food and other

services in exchange for lower prices. In fact, it was stated that price of tickets was the

single most important consideration that influenced passengers decisions and of course

this included without having to compromise on safety and punctuality. In addition,

increasingly over the years cost conscious leisure and business passengers were also

looking to make their budgets decrease further. This presents an opportunity for all LCCs

to increase their revenues by offering travelling at a much lower fare.

d) Demographic

In 2005, the total population in Asia stands at more than 3.5 billion. The United

Nations statistics also show that Asia has an astonishing demographic dividend - where

more than 35% of its population is below the age of 25 and more than 55% hovers below

the age of 35. This indirectly means that the increasing large population of the middle age

group equates to a larger working age population with more disposable income and thusthe likelihood of more business and leisure travels is almost confirmed. This thus presents

another golden opportunity for AirAsia.

e) Technological

New services such as Internet Telephony and the increase in the use of

telecommunications services (such as buying air tickets online) provide AirAsia with the

opportunity to leverage on new technologies to increase their sales. In addition, e-

commence and internet-based activities (such as online holiday and hotel reservations)

are other areas where AirAsia can derived ancillary revenues from. Better still, in some

instances, technology advancements also means having opportunities to reduce operation

costs such as savings on commissions for travel agents AirAsia was the first to do so.



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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 AirAsias strong presence in the region, this presents vast

opportunities to enlarge the companys 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 - Porters 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.



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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 forthem and thus they tend to avoid direct price competition to make themselves friendly

competitors.

Stakeholder Management

AirAsias 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).

AirAsias stellar performance since its establishment in 2001 has brought value to its

shareholders since they were receiving positive returns from the day of the companys inception



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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 companys key staffs travel regularly to mingle with

the host communities so that they understand them better. This has facilitated AirAsias

aggressive expansion and resounding success in the regional markets which include Thailand

and Indonesian over a short span of time. For instance, AirAsias 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 AirAsias 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, thepower 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.



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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 companys 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.



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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.



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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, AirAsias main airline competitor is Malaysia Airlines (MAS) which offers a

full range of services. Although MAS had an ambivalent reaction to AirAsias 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.



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Moving forward, it is expected that acquisition and merger will happen in the market

until equilibrium is reached. When this takes place, only a few strong players with sound cost-

controlling and profitable business model will exist and succeed. In other words, AirAsia can

expect to face stiff competition in time to come even though market participants understand that

price war is destructive and thus will try to avoid any direct price competition.

A short summary on the possible opportunities and threats are appended in the table

below. From the analysis of AirAsia, it can be deduced that the operating environment 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 Threats High growth in the airline traffic presents the

opportunity to increase business regionally.

Privatisation and deregulation suggests moreopportunities to expand market and increasemarket share.

Surveys showed a change in peoples preferences,i,e, more people are willing to compromise onfood and other services in exchange for lowerprices.

The existence of a large pool of low incomepassengers who were no longer able to afford orjustify air travel on full-service carriers.

Increasingly cost conscious business passengersalso looking to make their travel budgets gofurther.

Larger working age population; more disposableincome.

New services such as Internet Telephony provide

all LCC with the opportunity to leverage on newtechnologies to increase sales.

Technology advancements provide opportunities toreduce operation costs.

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.



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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 thesame year, the aggressive expansion also resulted in an extensive Southeast Asian regional

network of 60 routes. For sure, the large, untapped market and AirAsias 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 byCSS (2005), it was deduced that



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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 companys rivals (by continuously



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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 companys 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 AirAsias 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 companys 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 Unitedwas 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.



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Appendix I

Summary of Evaluation Outcome of AirAsias Resource

Tangible Resources

Financial

Resources

- AirAsias net profit ending Jun 2005 was reported US$ 29.2 million, a 126% increase year-on-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 internalfunds as well as afford high demand of debt and equity to finance any expansion.

Organisational

Resources

- Organisational was simple and flat; allows AirAsia to focus more intensely on areas likemarketing, services and customers.- A larger span of control; many people in the company reporting to one manager whichtranslates to fewer levels of management. This helps enhance consistency and reduce costswhich augur well with the cost leadership strategy that the company has adopted.

Physical

Resources

- 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 continueto 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.

Technological

Resources

- AirAsia was the first airline in Southeast Asia to utilise e-ticketing and bypass traditionaltravel agents. These two measures saved the cost of issuing physical tickets, which wereestimated at US$10 per ticket, and agents commissions, and eliminated the need for largeand 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

Human

Resources

- Although the employees were not unionised and the salaries offered by the company werebelow 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 andperformance-based bonuses, share offers and stock options. All these not only helped toincentivise and improve productivity, it further strengthened relationships.

Innovation

Resources

- 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 companys aircraft cabins were designed tominimise wear and tear, cleaning time and cost.- AirAsia reconfigured the seating configurations of their 148-seat Boeing 737-300 aircraft tomaximise capacity. A standard configuration has only 132 seats.

Reputational

Resources

- AirAsias success was widely recognised with a series of awards accorded to the company.- AirAsias CEO also received numerous many awards in recognition of his ability to makethe company successful in a short period of time.- With just 3 years of operations, the AirAsia was listed publicly in November 2004. The

companys IPO raised US$210 million for the airline and US$42 million for its owners.- Venture Capitalists and financial institutions provided finances support.



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Appendix II

Porters Five Forces

Threat of Substitute Product: MODERATELY LOW

Threat of Substitute Products is HIGH when: High Low

The differentiation of the substitute product is high

Rate of improvement in price-performance relationship of substituteproduct is high

Power of Buyers: HIGH

Power of Buyers is HIGH when: High Low

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 buyers profits is low

Importance of suppliers input to quality of buyers final product islow

Threat of Suppliers: HIGH

Power of Suppliers is HIGH when: High LowConcentration of suppliers relative to buyers industry is high

Availability of substitute products is low

Importance of customer to suppliers is low

Differentiation of the suppliers 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: High LowEconomies of scale are low

Product differentiation is low

Capital requirements are low


Ease of access to distribution channels is low

Cost disadvantages are low

Government policies creating barriers are low



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Intensity of Rivalry: MODERATELY HIGH

Intensity of Rivalry is HIGH when: High Low

Number of competitors is high

Industry growth rate is low

Fixed costs are high

Storage costs are high

Product differentiation is low


Exit barriers are high

Strategic stakes are high



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References:

1) R. Duane Ireland, Robert E. Hoskisson, and Michael A. Hitt The Management ofStrategy (Concepts) 8th Edition

2) Kulwant Sing, Nitin Pangarkar, Loizos Heracleous Business Strategy in Asia: ACasebook, 3rd Edition

Strategic Analysis on AirAsia

Documents