This study examines the extensive strategic analysis of AirAsia Berhad that has enabled it to sustain its competitive advantage as Asia’s leading low cost carrier (LCC). The study demonstrates the diverse business-level, corporate level and competitive strategies of AirAsia Berhad, played crucial roles in the LCC to successfully penetrate the under-served market segment of the airline industry within the ASEAN region. An in-depth analysis using a wide array of academic resources, relevant financial, legal and management resources and authorized websites, including face-to-face interviews were used to provide a more consequential comprehension on the varied business and international strategies that were implemented by AirAsia Berhad.
This research exhibits critical analysis pertaining to the current macro environment of the aviation industry which includes the PEST framework and Porter’s Industry Analysis. The competitive environment analysis for AirAsia Berhad is thoroughly scrutinized to examine the driving determinants that attributed to the organization’s competitive advantage in the industry. Further analysis using the BCG Matrix, lends evidence to the successful growth of the organization. Additionally, the international strategies that were implemented exhibit the foresight of the airline. The study concludes by adopting the balance scorecard framework to evaluate the organization from four pertinent perspectives of an organization which includes financial performance, customer knowledge, internal business process and learning and growth.
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Introduction of AirAsia
AirAsia Berhad (AirAsia) is a leading Low-Cost Carrier (LCC) in the Association of Southeast Asian Nations (ASEAN) region. The Group focuses on providing high-frequency services on short-haul, point-to-point domestic and international routes. The Group implemented the low-cost carrier business model in the ASEAN region when it acquired the then loss making AirAsia from its Malaysian owner DRB-HICOM Berhad for a token of RM1 (USD0.25 cents), and agreed to assume the debts of the company. AirAsia was resurrected, re-branded and re-launched as a low-cost carrier following the acquisition of the Company by Tune Air Sdn Bhd in December 2001. With the drive and determination by Dato’ Sri Dr Tony Fernandes and with the support of his partners, the AirAsia Group (including its Thailand and Indonesian affiliates) operates a fleet of 90 aircraft and flies to more than 60 destinations from hubs in Malaysia, Thailand, Indonesia and in the upcoming future, Vietnam. AirAsia operates more than 3,500 flights a week and in its short history, has ferried more than 90 million guests. AirAsia offers a simple service at fares lower than those offered by other full-service airlines. Read also introduction for online reservation system
It was modelled on U.S.-based Southwest Airlines and Dublin-based Ryanair. AirAsia was established to create a new aviation product in Malaysia, revolutionize air travel, and grow the local aviation market by providing low fares so more people can fly. AirAsia now flies to over 60 destinations in Malaysia, Thailand, Indonesia, Singapore, China, Philippines, Brunei, Cambodia, Laos, Vietnam and Myanmar. It also formed 2 successful joint ventures in Thailand through Thai AirAsia, and Indonesia through Indonesia AirAsia, expanded its fleet from the two to twenty eight. To date the AirAsia group, has carried over 35 million guests. By serving the underserved market segment has propelled AirAsia’s popularity with the masses. With over 130 routes linking three continents, Asia’s largest low-cost carrier is proud to be a truly ASEAN carrier, linking communities, cultures and cities across this diverse region by enabling affordable and convenient travel, stimulating regional and local economies and realising the ASEAN dream of integration. The Company and Group CEO Dato’ Sri Tony Fernandes have won numerous local, regional and international awards (including the CBE Award by Queen Elizabeth II) and have earned plaudits from varied organizations globally, due to its culture of innovation and its dedication to exemplary service in the aviation industry.
AirAsia’s vision is ‘To be the largest low cost airline in Asia and serving the 3 billion people who are currently underserved with poor connectivity and high fares.’ As we can see, the new vision statement that formed is still within its scope, AirAsia remain emphasizing that it wanted to be the largest low-cost airline company in the Asia. When the company grows larger, it will direct more people to recognize AirAsia easily, in other words it brings strong brand identity to the customers. Besides that, in the new
vision statement AirAsia interpreted as becoming the leader in flight industry in Asia, and obviously the original vision statement of AirAsia does not including this. Furthermore, in the new vision statement states that AirAsia wants to delivers the best flying experience to the customers, in fact this is another new direction that AirAsia can look into as customers today are concern about the services more than the features that the company can provider.
To be the best company to work for whereby employees are treated as part of a big family Create a globally recognized ASEAN brand. To attain the lowest cost so that everyone can fly with Air Asia Maintain the highest quality product, embracing technology to reduce cost and enhance service levels The new mission statement has come out to have a productive and motivated workforce in AirAsia. This simply means that AirAsia needed to keep providing trainings and empower among the employees to make sure the work flow is carrying efficiently and productivity. While building well relationships between employees and top management can be done by organizing team building and applying good working policy to the AirAsia workforce. This mission statement helps guiding AirAsia for shaping its whole organization structure well and flat.
As the others airline, the main objectives of AirAsia is to carry as much passenger as they can. Since 2004, AirAsia proposed to have an average of 70 million passengers a year and also wishes to turn their budget terminal to the region hub for the entire low cost carrier in Southeast Asia. Other than that, AirAsia also wished to develop in its service such as opening more routes and as a result it could be able to add more frequencies. (AirAsia Annual Report,2010).
Flying outside Malaysia is difficult. Bilateral agreement is one of the main obstacles in the way of low cost carriers. Landing charges is also another big influencing factor on costing of low fare airlines. The low- cost airline industry in south-east Asia has been underdeveloped because the aviation market is tightly regulated by bilateral air rights agreements. Privatization and deregulation of governments presented opportunities for new routes and airport deals through open-skies agreements between countries, or the permission of the entry of private airlines, reducing the constraints for international airlines. For instance, in 1997, Malaysia singend an “open-skies” agreement with the United States such deregulation present new airlines with the opportunity to access domestic routes. Having domestic routes could lead Air Asia to the trial of long haul flight to attain the penetrate an undeveloped market share. Globalization can also result in global uncertainty, something that Air Asia come avoid and preventing. For example like accidents, terrorist attacks and disaster this may happen suddenly.
These kinds of matters will strongly affect the customer confidence and they may able to choose others airlines as their consumer target. It will intense affecting the threat of losing its profitability or even bankrupt. As Air Asia is subjected to government interference and regulation on airport deals and passenger compensation, Air Asia can only minimize its negative impacts by selecting routes that are favorable. Noise pollution is being created by Air Asia airports, for those people who are living near the airport might constantly hear the airplanes departing and arriving sound. Other than that the airplane emission of AirAsia is composed of about 70% carbon footprint. This carbon footprint will lead to greenhouse effect therefore the cause of global warming. Beside that if people absorb too much of carbon feet print if might linked to heart disease, breathing difficulties and cancer along with other health issues. So as a country government, supposed to control the situation through political or regulation to minimal the usage of carbon feet print.
It becomes the treat for Air Asia to control their carbon feet print. The adjustment in government monetary policy and fiscal policy also maybe affect the operation of the airlines, it bring opportunity and threat at the same times for the Air Asia, depend on how the government decision. Monetary policy influence shifts in aggregate demand of goods and services by increasing money supply to reduce the equilibrium interest rate and stimulating investment spending or decreasing money supply to increase the equilibrium interest rate and lowering investment spending. Fiscal policy is by controlling the taxes and the government spending, depend on the economic situation. This 2 policy had significantly impact on airlines industry. Policy on excise and fees levied on air carriers directly affected Air Asia airline industry. Through fiscal policy, the taxes that accumulate from the public, sometimes the government will used for improving airports and providing security and purchasing oil for airline company as subsidiaries. These fees represent around 26% of a ticket, as a result of the introduction of this fees, air ticket price went up. In present economic scenario when airline industry is struggling, such fiscal policy impacted airline industry negatively.
Threat occur and it may result thousands of job cut in the social, therefore many of the carriers can go bankrupt as consumers will react heavily to the increase in ticket price and demand will come down significantly. In other side monetary policy reflect positive effect on airline industry. Government increase money supply to the market therefore interest rates will going down some near to zero and tax burden is being decreased as well. Monetary policy help airlines to stabilize itself, however this policy gave not shown any significant change in the spending habits of the consumer to travel via air, but the economic situation will turn good. More people will think to travel as vacation to relax themselves. Thus the demand for airlines will increase at the same time.
Although, global financial crisis appear that might bring result in a downturn in the industry, but in this situation it can prove to be an opportunity for Air Asia. For example, during global economic downturn, aircraft leasing costs were reduce by about 40%, this situation creating an opportunity for Air Asia to lease their aircraft at a cheaper ticket price with lesser competition. During economics crisis, firms and individual are experiencing large losses and with this situation where spending has to be cut down , therefore the higher demand for low budget airline (Air Asia) will be increasing at that period if compare with its largest competitor Malaysia Airline. Other than that, in spite of strong competition from Malaysia Airline(MAS), Air Asia low-cost carriers offering a cheaper prices ticket and few in-flight ticket services are gaining more attraction in region when economic downturn, more people will think to enjoy its cheap tickets. The unsterilized changes in oil prices would bring an impact on operating cost when the oil prices are getting higher. The yield and profitability will obviously decline for Air Asia if oil prices become too high. Recession, forcing airlines to reduce their cost by cutting down the salaries of the airlines staff or job cuts, this situation may cause them go on strike. This may cause some of the department absence of services. Air Asia airlines can be brought down with economics crisis, if they didn’t manage it well. By the way, recession mean the economy of the country turning bad, so in the sight of foreigner investor will think that there is not worth to be invested since all trading even spending of people significantly decreasing. Foreigner investor may withdraw their money from our country as a short period to prevent losing.
So this might handicap some project that had been planned earlier by Air Asia airline. The changes in economics interest rate have brought impact to the airlines industry operations. The expenses for a airlines is quiet high, normally the companies had no so much cash to cover therefore, they have to make loan from the central bank. If interest rates keep rising, there will be a trouble for the Air Asia airline about the payment of loan. For instance, Air Asia have a loan amount of 40million at actual interest rate of 5%, there they only have to pay 2million per years. If interest rates grow to 10%, Air Asia has to double pass up the loan interest payment to 4million. Therefore this will becomes the threat that might affect the total revenue return of the Air Asia companies.
Air Asia recently have rapid economic growth resulted in a burgeoning middle class within Asia’s larger population. Other than that the increasing in trade and tourism within and into Asia, demand for Air Asia increased as well, more people willing to compromise on food and other services in exchange for lower prices. Air Asia is a budget airline and become the attractiveness to pursued clients to purchase their flight tickers with low prices, which can be as low as 10-20% of those charged by full-services airlines. This given opportunity for Air Asia to differentiate themselves with others competitors by adding customer services or operating as full service airline with low fare, giving it a competitive advantage. Air Asia provided sufficient services that satisfy their customers need for example like provision of in-flight food and beverages, online sales, check in, hotel, car and holiday reservation, as well as travel insurance and corporate travel services with its own branded credit card, further increasing brand awareness and value for customers. Air Asia is a low fares airlines, so their targeting customers main are poor or middle standard family.
For those who got the higher living standard family properly will not choose Air Asia as their choices. So they will lose a part of profit from the high consumption clients. Outbreak of the Severe Acute Respiratory Syndrome (SARS) has scare people to fly. AirAsia commit to "Safety First"; comply with all regulatory agencies, set and maintain consistently high standards; ensure the security of staff and guests. Other than that, it is hard for a company to prevent rumors, some Perpetrators would like to spreads fake news to the public to spoil their image and reputation. This may affect the customer’s confidence. The nature of its workforce also the main threat causing the demand of their flight ticket. If some of the staff of the Air Asia showing the bad attitude and services to their clients, it will disrupt the impression of the Air Asia airline and change their idea next time to choose other airlines.
Technology factors in one of the major reason of the growth of AirAsia. Well managed ticketing system and e-ticketing has lowered distribution costs thus, eliminating travel agent fees. AirAsia has used the full potential of the technology by connecting to the customers via internet. The major sale made by AirAsia is via internet. This can be seen from the AirAsia's 2009 financial statement 76% of sales are made via internet well use of networking has been a successful factor on managing the sales, more over advertising their airline has made a difference in the Asian Airlines. Due to major growth in technology recently airline industry has develop ways on how to reduce the cost of travelling by introducing Airbus. AirAsia has the youngest fleet in Asia with the new Airbus A320 and A330, improved fuel efficiency, extra capacity, and innovations means better performance and reliability. Economical fuel burn and simpler maintenance result in lower costs, effecting cost optimization to enable AirAsia to enjoy considerable cost savings thus providing low fares all-year round, besides of course a much better quality service in air. These airlines will replace the pervious Boeing 737 which has served AirAsia well. Information and communication technology (ICT) has allowed AirAsia to reduce operating costs and provide fast, effective service in areas including; checking fight schedules, book seats, electronic check in and pre order meals. Furthermore information regarding AirAsia, they have no.1 Travel Website in Asia and the biggest e-commerce website in Asia; Monthly average of 20 million unique visitors and 210 million page views in 2009.
This shows the effectiveness of AirAsia connecting with technology. Regarding on connecting with technology, AirAsia also ranked as no.1 Facebook corporate account in the transportation field in the region. Connecting through social media such as Facebook; AirAsia has a huge advantage over the other competitors due to the growth of Facebook to 500 million active users. By utilizing information technology able to help Air Asia to increase their sales, AirAsia is the 1st airline in Southeast Asia utilize e-ticketing and bypass traditional travel agents. This high technology advantages bring opportunity for Air Asia to save on the cost of issuing physical ticket. Other than that AirAsia can save some maintenance cost for the booking and reservation system and also agent’s commission. All go through internet is the most efficiency ways to save cost. We know that internet is very useful for us and it is relatively important in our life now because internet provides us a convenient and comfortable life as we can easily get information through internet and we can use it as our communication channel as well. In business, not only easy to get information, but internet can also helps to maximize the earnings of a firm by the faster process of operation, give a greater flexibility by accumulate and control up to 36million of tariff records (Carlton, 2009).
In this day and age, most of companies which are already been listed have their own websites and provide more information and details to customers about their products or services. As example, in our case, which is airline industry, all of the companies in airline industry have their own websites. The purpose of creating website is that customers are able to know the information about the flight which they desire. With the advance of technology, people can save their times and cost in order to purchase the product by using internet. In the airline industry, people are able to obtain ticket from anywhere because they are able to purchase flight ticket through internet and also cost-saving for not buying tickets from travel agents. If we see the perspective from the company, the company can cut off indirect cost such as travel agents, labor cost, operational cost and generate revenue margin of the company at the same time. This factor gives a positive impact to the airline industry itself and to the public as well, even though it required cost in order to create the website. Thus, internet brings an opportunity to airline industry. From the graph and table above, we can see that the number of internet users in Malaysia increased rapidly from year 2000 to 2008. In 2009, there was a low decline in term of internet users, but in year 2010, it climbed back to 15,705,762.401 (which is not shown in the graph and table). This figure represent that internet has become popular and common for people in Malaysia.
Nowadays smart phone become commercial for businesses to launch their product as advertising through apps. Air Asia also providing this kind of technology for smart phone user to search, purchase and check in their flight ticket. This technology provided the most convenient ways, for clients to make a deal rapidly. Other than that high technology enable Air Asia to make advertising through internet for example like Facebook, Twitter and Instragram. Save cost, save time and it’s a 24hours operation services. Customers can get information anytime from the Internet. Air Asia by using the advanced technology to set up few system implementations that Air Asia have done in its marketing and sales activities as well as operation activity. They are Yield Management System (YMS), Computer Reservation System (CRS) and Enterprise Resources planning System (ERP) through IT. Yield Management System (YMS):
This system understands, anticipates and reacts to the behavior of customer to maximize revenue for the organization. This system giving opportunity for Air Asia airlines optimize price and allocate capacity to maximize expected revenue. The optimization is done on two levels in Air Asia there were “Seat” and “Route”. Seat is considered as an opportunity to maximize revenue. It is because the price of every seat is flexible it can change anytime due to the different points of time. if people booking earlier than the prices of seat will be lower, if the reservation done at a later date will be charged more than the people book earlier. Next is about route, Air Asia airline got the opportunity to adjusting prices for routes or destinations that have a higher demand when compared to others routes. Thus, is system is mainly to help me airlines to maximize their revenue through IT. Anticipates and reacts to the behavior of customers to maximize the revenue - taking into account the operating cost and aids AirAsia to optimize prices and allocate capacity to maximize the expected revenues by 2 levels: i. Seat – Seats are available at various prices in different points of time. A reservation done at a later date will be charged more than the one done earlier for the same seat ii. Route – By adjusting prices for routes / destinations that have a higher demand when compared to others. Results increased revenue (3-4%) by taking advantage of the forecast of the high / low demand patterns, lower prices as YMS has aided AirAsia to increase the revenue by offering higher discounts, more frequently during off-peak times while raising prices only marginally for peak times.
Computer Reservation System (CRS)
An integrated web-enabled reservation and inventory system suite powered by Navitaire’s Open Skies technology that includes Internet, call center, and airport departure control functionality. Satisfy the unique needs of AirAsia implementing a low-cost business model to transform the business process to efficiently streamline operations. Helps AirAsia to grow at a dramatic pace in the past few years as stated below: ?"Navitaire's Open Skies technology has truly enabled AirAsia's growth from 2 million passengers to 7.7 million passengers in less than two years. Open Skies scaled easily to accommodate our growth." - Tony Fernandes, CEO, AirAsia CRS is an integrated wen-based reservation and inventory system. This system include internet, call center, airport departure control and more through the advanced technology, it actually given opportunity for Air Asia to simplify their job. CRS is a direct sales engine that effectively eliminates the middleman or agents and the sales commissions that need to pay to them. CRS also help to centralized customer data by Open Skies and this help Air Asia to track booking and schedule flight activities with real-time, on demand reporting future. The vast booking information provided online to the customer, therefore internet provided a more convenient channel for customers to use the website thus reducing the customer support costs. This CRS enable Air Asia to introduce the first ticket less travel option and also provides features such as advanced boarding passes in addition to online booking that enable the growth of Air Asia. This bring opportunity for Air Asia to attract more customers, it is because of this system provide less time consuming features to purchase a ticket by queuing. Nowadays Air Asia had did some improvement on it by implement a Wireless Delivery System too to expand it reach via smart phone. This strategic move for growth as the Asia-Pacific region has a larger population of mobile phone users rather than Internet user.
Enterprise Resource Planning System (ERP)
Air Asia had recently implement ERP on May 2005, this system help Air Asia to be successful maintain process integrity, reduce financial month-end closing processing times, and speed up reporting and data retrieval processes. This show that the IT strategy are aligned to for Air Asia to operate on a low-cost model consider as a great opportunity. There are four models to Strategic Alignment Perspective, there were, Strategic Execution, Technology Transformation, Competitive Potential and Service Level. These four models enable Air Asia to reduce the cost of operation and maximize revenue. The business strategy acts as the driver in this perspective. ?An integrated ERP solution powered by Microsoft Business Solutions (MBS) on Microsoft technology platform which is implemented by Avanade consultants in Ma 2005. With the robust ERP technology platform, AirAsia is able to successfully maintain process integrity, reduce financial month-end closing processing time, speeds up reporting and data retrieval process. If the department didn’t handled properly for their backup systems and maintenance, there would be risk of system disruption due to heavily reliance on online sales. System disruption would pose to be a threat if Air Asia didn’t manage well their technology system. Other than that, some important information will be stole by the hackers, therefore prefect securities system is needed to prevent this kind of matters happened.
The barrier to entry the airlines market is depending on the customers little brand loyalty. If the customers of Air Asia without brand loyalty, then the strength of the threat of new entrants is high. If the number of airlines competitors increasing might affect the customer loyalty. New competitors which want to entry airlines industry have to spend little to compete with Air Asia, because most of the people prefer low cost travel. The another barrier for others competitors to entry airlines industry is high capital is required to set up everything, for instance like the cost of setting up offices, buying or leasing aircraft, hiring different department of staff and pilot. It purposely need a high start-up cost most of the people will not considering to join the airlines industry if they don’t have enough capital to cover. Thus, the threat is low for Air Asia offering a different product to their customers if compare to other airlines in Asia. Other than the passenger sales ticket, Air Asia also include holidays packages which is affordable, they has good connection with hotels and tourism companies around Asia.
So for new entrance competitors they have to spend a lot of time build set up or build up this relationship with other industry and packages, therefore low threat for Air Asia among frequent travelers it is because they are the first airlines offering enable customers to purchase air tickets from internet online in Malaysia. Air Asia has a well management on moderate access to distribution channel. Air Asia can be so famous. Although new competitors can create a new form of website for their airlines, but it is still difficult for them to compete with Air Asia’s website. It is because the Air Asia is known of its simplicity and friendly user. Thus, new competitors are difficult to make known their websites to travelers. Lastly, the government regulation is one of the barriers for entering airlines industry. For instance Malaysia Airline has been protected by the government on the route to Sydney and Seoul Incheon. So for Air Asia airlines, they are difficult to get new route from the government, therefore this might affect the timeline set by the Air Asia but also influence their profit. In obtaining a new license and permit to operate a new airline company is quiet difficult and restricted. This is because the Malaysia government want to protect the interest of its national airlines, MAS which is operating on loses a few years back. Nevertheless,
the government is limited the new entrance of airlines therefore the threat of entry is low for Air Asia.
Rivalry Among Existing Firms
In every industry, there is positive or negative trend to industry growth rate. If there is positive trend, then the firms have not to steal the market share among them. However, in airline industry, the growth rate is really low due to limited customers. Thus, in order to expand, AirAsia has to steal the market share from its competitors. (Roy L. Simerly) Secondly, AirAsia leads the main battlefield in price among competitors due to low operating costs. However, there are more competitors enter to airline industry who have majorcarriers as their backers or owners which may lead to unreasonable price war in the future. Moreover, Air Asia is not the only one who provides airline service. There are few low cost carriers such as Firefly, Tiger Airway and etc. which makes their services provided weak differentiation. High numbers of competitors will definitely influence profitability of Air Asia. There are almost 59 low fares and no frills airlines compete with Air Asia among the Asia. For example like Jet Star Airways, Tiger Airways and etc. some airlines compete indirectly through route that Air Asia does not fly, therefore, the more competitors, the fiercer the competition.
High fixed cost is needed for airline industry in which consists of finance cost, hire purchase, and staff cost that required a huge number of capital. Air Asia being force to gain more market share to cover the fixed costs, therefore if competitors keep increasing they have to control their fare prices as well to compete with others. Thus the rivalry is strong. Customers have no much loyalty mean that all of them are actually look at the prices and flight schedule that suits them the best when buying their air ticket. So that customers will easily switch to other airline if Air Asia didn’t provided a services that they need. The change in customers makes the airline industry become so competitive. For airlines industry, generally their product and services are similar. And the purpose for people to using airline is to reach the destination they want. So if Air Asia has to be more attractive to convince customers to choose their airline. They have to add some extra services to satisfy the travelers needed for example like hotel booking and tour packages; it is the subject of customer’s choices. An industry with similar product offered is highly competitive. An airline companies is hard for them to exit when they losing at a long period. It is because the cost is high in paying loans, staff retrenchment and flight cancellation refunds. Even making losses, the airline companies have to keep going operate to cope with fixed cost. Airline enable to solve this problem through market share either looking for new foreigner investor to help on recovering the situation of the airline. Therefore this makes the industry very competitive.
Bargaining Power of Buyers
Buyers are one of the factors which will bring impact to the airline industry whether making profit or losses. Nowadays most of the people are much knowledgeable and with higher educated. They know what is more worth to purchase, especially the price gap of any product and services. Even buyers know that Air Asia is a low budgeting airline but sometimes they still will compare the price ticket with others airline. If the price is higher than others airline than will switch their mind to choose other airline in Malaysia for example, MAS, Firefly and Tiger Airway. If Air Asia flight always delay or under maintenance it will influence buyer trust to the airline. Therefore they will choose another airline to instead Air Asia. The power of buyer is quiet high to Air Asia. Next is about the portion of expenditure on airline is moderate. This factor depend on portion of low income individual earns. Low income buyer wills generally looking for low price ticket, thus the stronger the bargaining power of buyers to Air Asia. Since 20th century, the IT industry become more and more advanced, successful airlines indeed to use IT and e-commerce to operate their companies more efficiency and effectiveness. Without IT, a business had boundaries and international business will be prohibited as well.
Through internet, buyer can find the information they needed on one click only, it is simple and quick. Internet provided 24 hour services, even during midnight the current airline market information is easy and available all the time. Thus, this show that customer had strong bargaining power. Air Asia has created a system called Yield Management System also known as Revenue Management system In order to understand anticipates and reacts to the behavior of customers to maximize the revenue of their companies. Air Asia has done two level of optimization that is through seat and routes. Every seat is considered an opportunity for airlines to earn maximizes profit, it is because every seat are selling at various price, it is depend on the time period. A reservation done at a later date will be charged higher price than the one done earlier. How about routes? Route is the adjustment of price though a demand when the demand is higher compared to others. This is the most effective method even though is to combine these two levels for all flights, all routes so that both the seat and the route are effectively priced for all the flights. So this system generally help Air Asia more understand about the customers behavior, thus they able to offering the most effectives and efficiency strategy for their customers and satisfy their need. Other than that Air Asia can allocate capacity to maximize the expected return. The bargaining power of buyer is strong.
Bargaining Power of Suppliers
Suppliers also play an important role that might affect the airline industry; there are only 2 major suppliers in Malaysia airline industry which are Airbus and Boeing. Due to the economic crisis has limited the new entrance of supplier and also limited the upgrade of airplanes in the immediate future. Other than aircraft supplier, there is fuel supplier, foods suppliers and merchandise supplier is purposely needed by Air Asia airlines, in terms of the supply must be based on the marketing condition. The supplier cannot increase too much of its price or risk losing long term business with the aircraft business. Air Asia had ordered out of 200 aircraft from Airbus and so far only 54 aircraft had been delivered. This shows that, Air Asia is not the most important buyer from the Asia. Airbus is a UK based Aviation Company; therefore the total ordered aircraft from whole Asia is uncountable. Thus, the bargaining power of suppliers is strong over Air Asia. High switching cost is required if Air Asia want to switch Airbus models to Boeing Models. It is because training cost for employees to suit the aircraft features must be provided. Other than that, the technology used by Airbus is the most advanced, thus Air Asia must rely to the Airbus engineers to do maintenance of the aircrafts and seek advices. Thus, bargaining power of suppliers is actually at medium level. Next is about the oil supplier, the oil price in the market is too flexible, changing over time.
Threat of Substitute Product
Substitute means that those product and services can be replace by other brand with identical product and service that can give the same level of satisfaction for the customers. In airline services it can be divided into 2 types of substitute, they are direct and indirect substitute. Indirect substitute include bus, train and taxi. How come an airline will be affected by that indirect public transportation? It is because for local travel for example to Johor, Penang either Singapore, people will think which more worth is and prefer low cost travel. For those people who living at Johor Baru planning to go Singapore, Normally they will think to go by bus either by car, the cost is more cheaper if compare to travel by airplane, even though they have to spend 1 hours or more than that to reach there. Other than that if they go by plane, they have to depart from Air Asia airport (LCCT) somewhere around Negeri Sembilan. It is quiet far away and it spends more time to drive from their home to airport. This might stronger affect the revenue of the Air Asia airline company.
By the way the geographical structure of Asia has made air travel an efficient, viable and convenient mode of transportation, thus the threat of indirect substitute is consider as low. Direct substitute of is about the substitution between the airline competitors, for instance, MAS, Firefly and Jet star. Nowadays everything goes through internet, so customer can easily compare the price among the few local airlines through accessing internet. So when others airline launching any attractive promotion or big sales, therefore Air Asia will immediately being replaced. Thus, to prevent it Air Asia Strategy department have to come out some idea to pull back their customers even making the same strategy. The performance of an airline is important to avoid being substituted. Performance of airline normally consists of the accuracy of take off time, aircraft performance and staff services. So far, Air Asia had constantly reviewed its performance and improves its services. Therefore the threat of substitute is moderately low. Next is about the prices, price always decide everything this is the reality of the social and the customer mentality. Generally the prices of substitutes are about the same with Air Asia. The prices of air ticket offered depend on the time gap between the booking date and flight ticket. The longer the date, the cheaper the price, if the ticket is purchase in last minutes, the prices of ticket will generally same with the premium airlines. So in this situation customers will switch to premium airline since the price is almost the same, and the facilities of aircraft and services is much more better if compare with Air Asia. In this situation the threat of substitute still remain low, because most of the people will book their ticket earlier, and this situation just will happen only for urgent businessman.
Nowadays, everyone can buy their flight ticket more easily and convenience due to the various number of the operating airlines around. The market is becoming more and more competitive to the particular airline especially the low cost carrier (LCC) AirAsia to cope with the challenges from the industry. So as to build a strong brand and carry more passengers, marketing and sale strategies will play a vital role in the order to add more profit to the firm. By doing so, AirAsia should have a proper and well manage marketing strategy and therefore they could be able to compete with their rivals. As an effective marketing strategy, it always focuses on the different elements according to the concept of four Ps in basic theory of marketing.
Definition of price refers to the value of a product that attracts the buys to exchange their money or something which is value for it. AirAsia provides the low fare, no frills service which indicates that the price which is offered by AirAsia significantly lower than other airline operators. There is no a meal or even drinks for the journey offered. Despite of providing no frills, AirAsia recently launch the "Snack Attack" tactic which brings to the passengers a number of delicious snacks and drinks on board at a affordable price and therefore the passengers have the choice of purchasing food and drinks on board. In the Malaysia market, the price war is currently an issue between Malaysian Airline (MAS) and AirAsia with the form of giving the free seat within the travel period. According to Wong (2007), the customers were about to receive the most profit from the war pricing between MAS and AirAsia in 2007. MAS offered RM9 fare for the route from Kuala Lumpur - Kuantuan and Penang - Langkawa while AirAsia's 99sen offer is for most of the routes between Kuala Lumpur and state capitals.
MAS offered 250,000 tickers for its 23 destinations whereas AirAsia had offered 500,000 seats at discounted fares of up to 99% for all destinations which is departed from its fours Malaysian hubs that is located at Low Cost Carrier Terminal KLIA, Johor Baru, Kota Kinabalu and Kuching. Over the travel period, when the price is set at regular price, we can observe that taking a flight from MAS is almost two times more expensive than taking flight from AirAsia at the same booking date (Appendix 1) where MAS offered the two ways fare from Kuala Lumpur International Airport (KLIA) to Kota Kinabalu at the total sum of RM1038.00 meanwhile AirAsia charged each of its passenger RM538.00 for the same route. Although Ahmetoglu, Fried, Dawes and Furnham (2010 pp 8 -35) mention about the compulsory drips in pricing which can be understood as the Taxes &Fees charged in MAS ticket and the fuel charge plus airport tax in AirAsia ticket. These kind of extra charge will immediately be re-acted according to the customer's behaviour where most of them will look for the service that offer the same kind of services at lower price. Through the comparison of air ticket price between AirAsia and Firefly which could bring us a clearer view of the denomination of AirAsia in the domestic flight. For instance the two-way flight tickets from Kuala Lumpur to Langkawi which are offered by Firefly and AirAsia at price of RM552.90 and RM331.00 respectively (Appendix 2). The price which is offered from AirAsia is considered almost two times cheaper than its rival. Therefore we conclude that the successful pricing strategy is one of the best tools for AirAsia to generate higher sales and profits.
Placing products in the hand of the ultimate customers is the marketing function known as "distribution" or "place". Distribution requires a chain or network of organisation and individuals. The chain exists between the producers and consumers are defined as the distribution channel. According to AirAsia (n.d), AirAsia differs itself from the full service carrier (FSC) by simplifying its distribution channel in the order to minimize the cost of operation due the commission that will directly reflect in the fares. Internet booking has seen as the most effective channel where it is approved that the tickets will be delivered from the operators to the customers directly as the diagram below.
By using the internet booking, it is recorded that the bulk of sales (±65%) are done via the airline's website whereby the fares are paid by using a credit card (AirAsia, n.d). AirAsia does not limit itself at providing the internet booking but also providing other channel of distribution which are sale office, call centres, and the minority of the travel agents. The sale office is located at every terminal hub of AirAsia and also at the center of town in the various countries such as Malaysia, Thailand, Indonesia, Vietnam, India, Cambodia, Singapore and etc. All of those sale offices are fully under controlled of AirAsia BHD. Moreover, AirAsia provides the call centre as one the distribution which is to be the alternative aid for some of the customers who could not buy the air tickets through internet and also is to help someone who has some disability. In this text, we conclude that AirAsia is really succeeded with an effective channel of distribution which minimise the operating cost and also to generate higher profit to the firm.
AirAsia's core products were passengers’ seats but it also offered a number of complementary products thus AirAsia's customers could be able to add on their purchased fares. The final fares that have been attached with the option will be the actual products that customers deemed to receive. The actual products can be categorised into different groups. For instance, leisure and budget travellers will be attracted by package named goholiday or gocar. If a customer purchases the goholiday package, the fare price will be charge including the passenger's seat, airport taxes, airport transers, hotel rooms and activities at destination such as the group tours. All the extras packages of AirAsiais merely not from AirAsia because these services is provided by a third parties which is currently doing partnership with AirAsia. Hertz and Avis are the most popular companies which is providing car rental service, meanwhile the Health Scan Malaysia, Life Care Dianogstic Medical Centre, Sunway Medical Centre are the partner of AirAsia in the gomedic package which is able for the passengers who seek for the medical service in Malaysia. In addition, partnership the local banks is not only bringing the convenience to the customers and also giving AirAsia additional revenue such as sale commissions (Ahmad 2010), for example ThaiAsia had promoted its own credit card to as the advancement. The enhancement in-flight optional service such as express boarding, snack attack and redmegastore are meant to strike the customer's desire. With the express boarding, the customers are given the priority to get in the aeroplane earlier compare with the customers did not purchased the service. Customers can enjoy the meals and other the snacks if they purchase the package or else they will have to pay higher price if they just purchase during the flight, furthermore customers can also buy the souvenirs like the airasia t-shirt and baseball caps.
As the expansion of the firm, AirAsia also needs to face a challenge of filling up the seat capacity as consumer spending slows and competition increases from other competitors. For instance, Malaysia airlines offered zero fares on the number of surplus seats therefore it forced AirAsia to come up with the suitable strategy in the order to cope with such situation. Since the takeover of AirAsia from Tony Fernandes, the company was successful in creating the new market where it tended to serve the group customers who had never ever boarded a plane or dreamt of flying to fly over. Due to the high competitive in the low cost industry, it will directly push the customer segmentation. In the short routes segment, there are three types of customers which are non-business passengers (the budget travellers), price-conscious business passengers (low cost carriers) and quality-conscious business passengers (full service airlines).
This promotion strategy can be split into advertising and also sale promotion to the market. For the advertising strategy, AirAsia decided to be the sponsor of Manchester United in 2005 and 2009 respectively (Stone 2009). From the deal with one of the most reputable football all over the world, the company is able to advertise its brand worldwide because the name of the company will be pasted on the jersey of the club and also the AirAsia's aircraft are painted with the picture of the football players of Manchester
United, for instance they are Wayne Rooney, Ryan Giggs and also Rio Ferdinand. Not only being the sponsor of a football club, Dato' Tony Fernandes also said that "We want to be a global brand, this partnership with William can take AirAsia to another level" (Guan 2007). From the deal with the formula one team AT&T Williams, AirAsia once again successfully advertise its brand name to the world and it is showed that AirAsia have a strong marketing strategy in order to built the company's reputation. According to Hergaty (2011), in the financial year 2011 the CEO of AirAsia had brought up 66 percent of the football club which is playing in English Premier League (EPL), the most popular football league all over the world. By holding the most portions of stakes in the club, Tony Fernandes agreed to share the advertisement to Malaysia Airline (MAS) as well as take it as the company advantages to do advertisement. Talking about the promotion of the company, AirAsia made it become an traditional of its own by offering the ZERO FARE campaign for these several years.
In 2009, AirAsia was giving AirAsia Zero Fare promotion to all of its routes. Through the continuous promotion and great sale in the fares activities, AirAsia is always successful to catch the attention of the customers. Normally, the promotion period will be expected in mid-May or mid -November and the valid of travel period will be estimated around 6 to 8 months after the bookings. AirAsia was having a greatest boost in profit via this effective promotion because usually the promotion comes with restrictions of no change of name, date and destination and therefore the customers cannot claim back the fund that they already purchased. In conclusion, with the simple and effective marketing strategies, AirAsia has magnificently ranked at the top as the airline gain the most profit through its marketing campaign.
Human Resource Management
Human resources refer to employees that working for the company. AirAsia’s are still capable to keep its employees motivated because AirAsia is extremely supportive and responsive in encouraging and listening to its employee all the time. This made the employees more productive and creative in performing their responsibility. Instead of offering high and attractive salary to its competitors, AirAsia recommend its own policy which are more motivated. For example, AirAsia offered a broad range of incentives that includes productivity and performance-based bonuses, shares and stocks option. In addition, AirAsia implement a sector pay policy rather than hourly pay scale for its pilots. This policy adopted to encourage pilot to enhance flight efficiencies by keeping flight and operating times to a minimum and to cover as much flight sectors as possible daily. All those hard work that AirAsia take not only helped in increase productivity buy also to further strengthen employees’ relationships day by day. Moreover, highly skilled employees are also the source of capabilities that AirAsia has that is hardly to intimate by others competitors. Hence, human resources are one of AirAsia strength to match the key success factors.
Airasia operation is in airline services field, it has fostered a dependency on Internet technology for its operational and strategic management, and provides an online ticket booking services to traveler online. The following shows the home page of AirAsia.com as the company key channel of marketing and sales
To book a flight with Airasia, customers can either choose the following channels or simply visit the AirAsia.com home page and follow the below 5 steps.
- 1. Call centre
- Sales office and airport sales counter
- Authorized travel agents
- Mobile booking via mobile.airasia.com
- Online (http://www.airasia.com) in 5 easy steps as shown below.
- Step 1 - Search
Step 2 - Select
Step 3 - Guest ; Contact
Step 4 - Payment
Step 5 – Itinerary
The following diagram shows the online electronic ticket ordering process. Passengers have to check-in in order to be allocated seats. During the check-in, passengers need to show the flight ticket or booking code to the crew. The crew will verify passengers’ information. Thereafter, crew will issue boarding pass to passengers. In early year 2010, Airasia encouraged passengers to use visual online application to check-in via smart phone, computer or Kiosk rather than over the counter check-in. currently, in some of the airport who check-in via over the counter will be charge extra RM 10. Viewpoint of Airasia in Online check-in, it means that Airasia could cut the labor costs who serve on over the counter. Airasia only paid for Developing initial costs Online check-in function and lesser running costs which Airasia only hires lesser crews in Office. Relatively, over the counter check-in, Airasia has to pay the salaries that are in serving over the counters. Those crews served in over the counter are many.
Airasia crew will stand at boarding gate to serve passengers who attempt to go into waiting hall. This crew will verify passengers boarding pass. While passengers are setting at the boarding hall, those crew also will standby provision of inquiry. During the boarding to the flight, that crew will guide these passengers to flight on the right way. 4.3.3 Departure, on board, arrival . According to the law and regulation for airline service companies, before flight departure, all of the airline service companies must provide instruction of escape and use escape equipments flow. Those crews on board also have to check and ensure passengers tie the safe belt and window cover are opening. On boarding, it is main operation and services which Airasia provided. Pilots will drive safely and ensure all of the functions are work. Those crews will provide services on board which including beverage and foods and other ceded services by passengers. For those who do not order early the beverage and foods, they can purchase on board. Before arrival, those crews also have to repeat checking the same manner as departure.
Airasia crew will transport the luggage form aircraft to airport in order to let passengers get back their luggage without any damages. However, some of the passengers did not have consigned any luggage to the Airasia, so that,
they no need go through this step. Those international passengers can straight go to immigration checkpoint for stamping passport while domestic passengers automatically get the exception of this process.
Airasia follows the Low-Cost-Carrier (LCC) business model in the airline industry, which can be characterized as below:
Airasia is able to outstanding from the airline market players, because it has utilized d perfectly the low cost carrier model. Those market competitors are hard to achieve this model, it need a substantial customers based and various route to operation. However, Airasia has achieved this competitive advantage. Airasia offer simple product, operate in low cost and innovate business position. However, other competitors also try to copy this strategy for their business, but they failed doing so since Airasia has built the goodwill over years. Getting new destination in Malaysia could be considered policy barrier, so that, Airasia could still sustain in airline industry with low cost carrier model. In Airline service industry, the manpower is vital importance. Because it is main factor to assist airline service companies in operation. Even other factors also important such as tangible equipments (aircraft), but these factors can be purchases from the sellers. Airasia train their staffs to become specialists and professional in order to provide quality low cost carrier service. If Airasia staffs is representing Airasia to serve their customers. Unlike selling tangible product companies, the companies will more concern about the product quality. If markets do not accept the product, it implies that the revenue would fail. It is same meaning back to airline service companies, if those staffs do not serve their customers well, and its revenue would fail too.
Before we analyse the internal firm, there is one important thing that we need to mention: For the income statement, the figures for the year 2006 and 2007 are calculated based on our own assumption, due to the annual report of these two years ended on 30 June while year 2008 to 2010 ended on 31 December. We calculated figures in 2007 by added up the 6 months financial period ended in the 31 December 2007 with the 6 months financial period ended 30 June 2007 (1 year financial period ended 30 June 2007 divided by 2). For the year 2006, we calculated by added up the 1 year financial period ended 30 June 2006 with the 1 year financial period ended 30 June 2007 and then divided by two to get the average. For the balance sheet, we only calculated the figures in year 2006 as it ended on 30 June whereas the year 2007 ended on 31 December provided in the annual report of the year 2008. Therefore, we calculated the figures of balance sheet using the same method as stated above in the income statement.
The horizontal analysis compares the specific items (revenue, gross profit and etc.) of the current period with the past period to analyse the financial performance of the company over a certain period of time. This analysis carried out by dividing each of the specific items of a given period by the same item in the base year and the evaluation of differences in the relative importance of specific items and notified the reasons in changing of the specific items. The analyst will use his or her discretion when choosing a particular timeline; however, the decision is often based on the investing time horizon under consideration.
From the horizontal analysis for income statement, we used the year 2006 as the base year. As we can see that, the Air Asia has faced loss in the year 2008 thereafter continue to increase its profit in the year 2009 and 2010. In the year 2008, the company faced big losses compared to the base year due to the economic crisis occurred. However, after that, the company able to recover and increased its profit in the year 2009 and 2010. For the year 2010, the company has achieved 2 times of the net profit compared to the base year which mean that the company perform well in that year. At the same time, there was also an increased in the revenue for these four years as compared to the base year. Another factor that affects the net profit is the operating expenses. From the table, we observed that the Air Asia had higher operating expenses in the year 2008 as compare to the base year. Therefore, the company faced the operating loss and net loss. This is because there was an increase in the aircraft fuel expenses in the year 2008 and economic was downturn. Moreover, the figure for the taxation in the year 2006 until year 2008 is negative mean that the Air Asia has experienced tax saving. This is because the company has been granted a great amount of tax incentive from government for its CAPEX in purchasing aircrafts.
The graph above shows that the relationships between the total assets, PPE, cash ; cash equivalents and inventories of the Air Asia. From the graph, we can see that the PPE and total assets were increasing every year by compare to the year 2006. In addition, the PPE and total assets are moving on the same way and this shows that the PPE is the most impact factor for the total assets. Hence, the changes of PPE directly influence the changes of total assets. The inventories for the Air Asia for the year 2007 to the year 2010 as compared to base year were not so obvious. There were no much changes for the amount of the inventories hold by the company. The inventories only decreased in the year 2010 as compared to base year due to the high revenue and net profit gained by the company in that year. However, the changes of the inventories do not give much influence to the total assets. On the other hand, the cash ; cash equivalents decreased in the year 2007 and year 2008 as compared to the base year. The company had the lower percentage (-69.88%) compared to the base year due to the economic depression in the year 2008. After that, the cash ; cash equivalents increased in the year 2009 and 2010.
This graph shows the relationships between the total liabilities, retained earnings, share capital and shareholders’ equity. The retained earnings of the Air Asia has increased in the year 2007 and then decreased in the year 2008 as compared to year 2006. Thereafter, the retained earnings continued increased and achieved the highest ratio (363.15%) in the year 2010. The total liabilities of the Air Asia have increased all the time when compared to the base year. Generally, if a company has the higher retained earnings, its borrowings will reduce. From the Air Asia, we can see that in the year 2008, the company has reduced in its retained earnings and increased its borrowings. Share capital and retained earnings are the components of the shareholders’ equity. Therefore, the change of the shareholders’ equity is influence by these components. From the graph, we observed that the share capital just had a bit changes in the year 2009 compared to base year. Therefore, the change of shareholders’ equity is mainly influence by the retained earnings. ii. Vertical Analysis
The vertical analysis is another way to investigate or to compute the income statement and balance sheet items into percentage terms. It calculates the items based on another items in the financial statements during the same period of time. This is also an indicator to let the management making the decision.
The table shows that the income statement components are expressed as percentage of the revenue. These percentages of components are calculated from the year 2006 to year 2010 by the revenue as the base item. The operating expenses decreased from the year 2006 to 2007 but it increased in 2008. When the operating expenses have the higher percentage over the revenue, it means that the company has less profit. In the year 2008, the Air Asia had the operating expenses of 112.32% over the revenue, which means that the operating expenses were higher than the revenue gained by the company. Thus, the company faced losses in the year 2008 by having the negative percentage due to the higher aircraft fuel expenses and economic recession. For the year 2009 and 2010, the operating expenses had decreased as compared to the previous year. The operating profit or loss was the revenue minus the operating expenses. Therefore, when operating expenses increased, the operating profit will decreased and vice versa. For the taxation, the Air Asia had the negative percentage of taxation from the year 2006 to 2008 over the revenue represented that the company had the tax incentives from the government. Therefore, the company can get the tax savings. In the net profit, the Air Asia had the negative percentage over revenue in the year 2008. The company had the higher operating expenses in the year 2010 compare to 2009, but the net profit in 2010 was higher than 2009 due to the lower taxation in the 2010. Hence, then lower the operating expenses, higher profits the company can earn and improve company earnings.
Through the vertical analysis, we found that the fixed assets of the Air Asia increased from the year 2006 to the year 2009 and slightly decreased in the year 2010. The fixed assets increased due to the purchases of plant, property and equipments increased. In addition, the fixed assets occupy the major of the total assets as compared to the current assets. Thus, the fixed assets are important to the company. From the table, we also observed the percentage of the total liabilities and equity the company hold. The Air Asia had the higher level of the liabilities as compare to the equity. Therefore, it put the company at a more risky situation. However, the company was able to meet their obligations and earn profits.
The cash ; cash equivalents include the deposits, cash and bank balances are the important component of the total current assets, so that the company can has enough cash to face the difficulties. On the other hand, if a company holds too much cash, it will be bad for them as it does not generate any income. From the graph above, it has shown that the Air Asia had downward sloping manner of the cash ; cash equivalents from the year 2006 to 2008, then the cash ; cash equivalents upward sloping until year 2010. The highest percentage was in the year 2010, which was 52.35% of the total current assets. This meant that the cash ; cash equivalents played important role in the total current assets as any changes in cash ; cash equivalents will influence the changes in total current assets.
Trade payable defines as the liabilities that a company owed to the suppliers for the purchases or services rendered. Trade and other payables is another important component in the balance sheet to the total current liabilities. This is because the changes in the trade and other payables will influence the changes of the total current liabilities. From the graph, it has shown that the changes of the trade and other payables were not stable. The amount of the trade and other payables were influences by the trade payables, aircraft maintenance accruals, accrual for fuel, other payables and accruals.
From the graph above, it illustrated the borrowings of the Air Asia to the total liabilities. The long-term borrowings were higher than the short-term borrowings. In the year 2006 to 2007, the change was obvious than the other years that the company increased its long-term borrowings and reduced its short-term borrowings. After that, there was only a little change in the borrowings. According to the annual report, the borrowings were mainly for the purpose of purchases of aircraft, spare engines, and simulators.
Financial Ratio Analysis (Air Asia)
Besides the horizontal and vertical analysis, the financial ratio analysis is another important analysis that needed to analyse the success, failure and progress of the business. Through this analysis, the managers of the company will be able to make a comparison of the company performance with the competitors. On top of that, the financial ratio analysis may provide the all-important early warning indications that allow company to solve their difficulties before their business is destroyed by them.
Liquidity ratio measures the company’s ability to pay back its short-term debt obligations. Normally, the higher the liquidity ratio, the company will be more able to cover its short-term debts. The current ratio and cash ratio discuss below are the common liquidity ratios.
The current ratio is the liquidity ratio that examines the company’s financial strength. It also shows how the company’s short-term assets to pay off its short-term liabilities. Generally, current ratio greater than one indicates a measure of the company has enough short-term assets to cover its short-term financial obligations. On top of that, the currency ratio also determines how efficient the company. If the company has a current ratio of 3 or 4, it means that the company holds too much money on hand and it is inefficiency.
The graph shown that the cash ratio decreased from the year 2006 to year 2008, and then it improved till year 2010. In the year 2008, the Air Asia had the lower cash ratio due to the cash ; cash equivalents reduced 64%, which was from RM425 million (2007) to RM153 million (2008). After that, the cash ; cash equivalents increased by 385% in the year 2009 (from RM153 million to RM749 million), and 102% in the year 2010 (from RM749 million to RM 1,504 million) thereby improved the cash ratio. As mentioned above, the current ratio increased as there is an increase in the cash ; cash equivalents. Therefore, the cash ratio also improves year by year due to this reason. The cash and cash equivalent has risen extensively and lead to the improvement of cash ratio. However, the company should maintain a sufficient level of cash assets to cover the current liabilities. This is because the excessive money can be used to generate higher returns in elsewhere or returned to shareholders.
Debt Management Analysis
Debt management analysis is another financial ratio analysis that illustrates how a company uses debt financing and its ability to meet debt repayment obligations.
Debts Ratio indicates the proportion of total debt a company has relative to its total assets. The measure gives an idea to the leverage of the company along with the potential risks the company faces in terms of its debt-load. The lower the debt ratio means that the company has less leverage and strong equity position. However, when the debt ratio is high, the company has put itself at a risky position.
The Air Asia has achieved the highest debt ratio in the year 2008 as there was an increase of 80% in total debts and only 46% in total assets. After year 2008, the increase in total assets exceed the increase in total debt caused debt ratio reduced. The lower the debt ratio, the company less depends on leverage. The debt ratio for the Air Asia is higher and this put the company at more risky situation. However, the high percentage of debt ratio does not put the Air Asia into the trouble as it is large and well-established company. The debt ratio of the company has also been reduced from year 2008 to 2010. This is due to the increase in the total assets is greater than the increase in the total debt.
Time interest earned is used to determine how easily a company can pay its interest expenses out of its profit. The lower the time interest earned ratio, the more burdens the company has toward the interest expenses. The better ratio that a company should attain is above 1.5 times.
When time interest earned is smaller than 1.5, the company will not be able to meet its total interest expense on its debt. From the graph, the Air Asia only had a negative time interest earned (-0.572 times) in the year 2008 due to the high level of borrowings and negative EBIT. The company had the negative EBIT as the operating expenses were more than the revenue in the year 2008. Therefore, the company was not able to meet its interest expenses. After that, the company has able to attain the time interest earned larger than 1 as the EBIT has increased. Asset Management Analysis
Other term for asset management is asset exploitation. Asset Management ratios analyze how effective and efficient a company to manage their assets in order to create sales. As everyone knows that the finest asset is cash, but cash could not create income or profits. In here, we may know that other assets such as inventory, fixed assets and account receivable which could generate income (Peavler, 2011) This asset management analysis consist of several types of ratios which being used to measure company’s’ asset such as Days Sales Outstanding, Inventory Turnover, Days Sales in Inventory, Total Assets Turnover and Fixed Assets Turnover. In here, we only did Day Sales Outstanding, Total Asset Turnover and Fixed Assets Turnover.
Days Sales Outstanding is also called Average Collection Period which measures how many days or common number of days that the firm acquire to accumulate their income after sales has taken place; or to accumulate its credit accounts from their customers (Burnett, 2009).
From the graph, we can see that the Days Sales Outstanding of AirAsia from 2006 to 2007 was increasing. This is due to the increase in amount of Account Receivables as well as its Net Revenue. The climb of Net Revenue is come from number of passenger that increasing during period of time. On the other hand, it decreasing in 2008 which caused by the rapid climb on AirAsia’s Net Sales or Revenue which being offset by slight increase in Account Receivables and it happens throughout 2009 and 2010 as well, that’s why the graph of DSO was declining. The lower the DSO of a company, the better it is because the company can get its’ money faster. (b) Total Assets Turnover
This ratio is to compute the capability of a firm to create sales by make use of its’ assets such as fixed assets, inventory and account receivables. It is better for a company to have higher total assets turnover since it means that the company fully utilized their assets to generate sales, if the total assets turnover ratio is low, it means that the company is not fully utilized their assets (Peavler, 2011). From the annual report of AirAsia, the total assets in 2006 is RM 3.677 billion and keep increased steadily to RM 13.24 billion in 2010. The chart shows that it decreasing from 2006 to 2007 which is 0.364 times to 0.295 times. This was not because of the Net Revenue of AirAsia was declined, but because of the increase in 2007 was not enough to offset the rapid increase of their assets. It means that AirAsia could not efficiently make use of their assets to generate sales. After that, the graph shows that the Total Assets Turnover ratio is having a stable movement from 2007 to 2010.
The last ratio to determine the company’s asset management is Fixed Assets Turnover ratio. This ratio computes the usefulness of company in produce sales by using its fixed assets such as plants, properties and equipments. If the result of this ratio is low, it means that company spent too much amount in plant and equipment or it also can mean that income of a company is low. So, it is better if company can obtain high fixed assets turnover ratio (Peavler, 2011).
It is a very obvious drop in Fixed Assets Turnover ratio in year 2006 to 2007 which is not good for AirAsia because it means that the investment in fixed assets is too much and it did not offset by balanced income. As 2006 to 2007 amount of Net Revenue was RM 1.337 billion and RM 1.896 billion, on the other hand, AirAsia fixed assets in 2006 and 2007 was RM 2.111 billion and RM 4.353 billion. In this, we can see the big difference from AirAsiarevenue’s and its fixed assets. From year 2007 until 2010, although it was lower than ratio in year 2006, at least AirAsia could maintain a relative stable movement. As in year 2010, the ratio slightly higher than previous year which was good for AirAsia because it means that they could adjust their fixed assets along with their revenue well.
Overall, we can conclude that AirAsia was not fully utilize their assets to generate sales because it is better for a company to have higher total assets turnover and fixed asset turnover since it means that the company fully utilized their assets to generate sales. Profitability analysis is used by the management to measure the company’s ability or overall effectiveness in generating returns comparatively towards the sales, assets and equity, (Sander ; Haley). It helps the company to assess how effective they able to generate the earnings, profits and cash flows relative to some metric such as the amount of money invested. Profitability ratios are somewhat a crucial core set of bottom-line ratios to all investment analysis as compared to other ratios since it highlight how the company could well manage its profits or revenues. Those ratios include in profitability analysis are gross profit margin, operating profit margin, net profit margin, return on equity (ROE), return on assets (ROA), return on capital employed (ROCE), and cash flows margin ratio.
Though these ratios are used for the same purpose, each of the ratios provides different useful insights into the financial health and performance of a company and need to be remained that different ratios are used by the different type of businesses. For instance, gross profit margin, operating margin and net profit margin tell how well the company is managing its expenditures while, return on capital employed (ROCE) tells how well the company is using its capital employed to generate returns. Return on investment tells whether the company is generating enough profits in order to satisfy its shareholders. Another example, AirAsia is a company which operated in service scope and thus it cannot use the gross profit margin because the cost of goods sold data is not available.
Therefore, aimed to analyzeAirAsia financial performance there are only some particular ratios being used such as operating profit margin, net profit margin, return on assets (ROA), return on equity (ROE), and cash flow margin ratio. Under the profitability analysis, the outcome of those ratios are expected to be higher than the previous performance since the higher the value, the better the company manage its company in generating profits, revenues and cash flows and vice versa. Thus, the company needs to be more concerned on its financial health and overall company performance. The following below will be the profitability analysis of AirAsia and its detail explanations:
According to FinanceScholar.com (2011), the operating margin is used to illustrate how efficient the managers of a firm in generating the profits; the higher the operating margin, the better it is since it shows that the company able to control its spending (successful cost accounting). As aforementioned, AirAsia’s annual report does not provide the cost of goods sold because it is a service company; only a few products produce such as merchandises, foods and drinks, and others and thus it is not included in the financial statement.
From the graph above, we know that the operating margin in year 2008 declined to -12% as compared to last year. This was due to the loss of Air Asia’s operating income which about RM351,658,000 and the main causes of this loss were huge losses on unwinding of derivatives (RM678,503,000) and increased in aircraft fuel expenses (RM1,389,841,000). Therefore, although the net sale was increasing around 960 million, it was still unable to cover the losses on the overall operating income. After crisis in 2008, AirAsia was still able to survive and it proven through AirAsia’s financial performance in year 2009, it was the greatest performance among others with operating margin was 29%. The group had shown that it could improve the financial performance by well-managing its expenses and additionally, the subsidiaries performance enhanced the financial performance of the group as Thai AirAsia’s number of passengers and revenue rose up to 19% and 5% and new route between Bali and Australia also had received an excellent response from both side so that led to the increasing in the group financial performance. Therefore, the net sales and the operating income resulted in the positive ratio or high margin as can be seen above. Likewise for year 2010, the operating margin declined by 2% because of the expenses went up to RM 2,894,661,000 (about 23.44%) due to the increased in depreciation of property, plant and equipment by 16.20% with the highest depreciation percentage in buildings (178%) and training equipment (32.26%), rose in the aircraft fuel expenses (30.43%) as the oil price crisis happened and the other operating expenses (rental of land and building, audit fees, rental of equipment, advertising cost, etc) went up circa 109%.
Moreover, the other losses – net increased by 100% whereby some of the contracts brought a negative return and led to held on trading the contract. The ineffectiveness on cash flow hedges contributed around 27% of the losses as well. Similar with year 2008 case, there was no gain from unwinding of derivatives as well and smaller other income contribution which only RM 35,943,000. On top of that, the group developments were conducted within this year so that the expenditure costs increased and led to lower profit contrasted to last year.
Those developments were in terms of jointed-venture with Philippine, added several new routes connecting ASEAN region and built new hubs so that it could help to widen the business scope. Hereafter we can safely conclude that the operating performance of AirAsia in year 2010 was still acceptable since it gave a positive operating margin to the company meanwhile, year 2008 can be categorized as the worst performance of AirAsia. As mentioned above, the higher the ratio in profitability analysis the more effective the company generates its earnings, profits and cash flows relative to some metric such as the amount of money invested but still, we cannot conclude that the poor financial performance in year 2008 was the result of poor management of expenditures because in that particular period can be categorized as the crisis of the world. In year 2008, there were several cases occurred and those were September 11 attacks in Washington – US (911 attacks), outbreak of swine-flu, Bali bombings and sharp increases in fuel prices. These matters caused AirAsia’s number of passengers declined as compared to what it had been expected by the group and resulted in high expenditure costs.
In order to back up the outcome and conclusion of the operating margin, we then performed a net margin analysis. Even though the function of the net margin itself is similar with the operating margin, it considers finance income/costs and taxation within the accumulation process. Net margin is measured as the net income divided by the total assets (non-current assets and current assets).
Aforementioned shows operating margin has a small decline in 2010 meanwhile, the net margin shows a different outcome in which the net margin is far higher as contrasted to the net margin in year 2009. From the income statement we know that the 2010 net income was double than 2009, it due to the taxation imposed and finance income/costs. In 2010, the net finance income was RM 31,895,000 meanwhile 2009 ended up with net finance cost about RM 290,466,000. Besides that, the income not subject to tax increased by 241% (RM 55,977,000) with the tax incentives increased by 890% (RM 149,092,000) and this then cause the taxation to be lower compared to 2009.
ROA measures how efficient the managers in utilizing its assets to generate the earnings so that is could give an idea to the investors on how effective the company is converting the money it has to invest into net income, (Investopedia ULC, 2011). Similar with other profitability ratios, the higher the ROA, the better it is for the company because it determines that the company can earn more profit by only investing in small amount of investments. This then prove that the manager has wisely invested the funds.
Though the group having losses in 2008, the total assets of the group was still increasing about RM2,975,471,000 since the non-current assets and current asset were increasing about RM2,655,856,000 and RM434,693,000. There was, only decreased in other investments ? recreational golf club membership decreased about 29%. As the turbulent situation had passed, ROA in 2009 was getting better (9%) because of the raising on net income; gain on the unrealized foreign exchange’s borrowing RM 75,910,000) and increasing in total assets about 21%. Its performance then kept improving as shown in 2010. Total asset in 2010 increased due to the increasing of property, plant and equipment net book value in which owned aircraft sub-leased out to RM3,445,485,000 (40.13%) and aircraft pledged as security for borrowings to RM9,030,028,000 (18.14%). Stated on AirAsia’s annual report 2010, since the aircrafts, spare engines and simulators purchased by finance lease liabilities (Ijarah) and Commodity Murabaha finance, the beneficial ownership and operational control of aircraft and others pledged as security for borrowings rests with the company when the aircraft was delivered to the company and the legal title to the aircraft being held by them during delivery, the legal title would be transferred to the company only upon settlement of the respective facilities. These seemed to be more appropriate classified as borrowing of the group (specified for company) because its beneficial ownership and operational control being control by the financiers nevertheless, the property, plant and equipment itself are still assets for them and therefore, it being imported under non-current assets. Moreover, the highest contribution of the increasing on total assets also came from the heightening of deposits, cash and bank balances which approximately 102% as due to rose in cash and bank balances (168%), deposits with licensed banks (84%) and short-term deposits with fund management companies (3%).
In year 2006 onwards, Airasia decided to change their financial year to December end of the year. Therefore, we applied the average each month’s method to calculate the whole year earning from January to December. Earnings per share (EPS) is one type of financial ratio. It use to stakeholders to have clear picture in each outstanding share with how much earnings. In Airasia, graph above show a V curve of EPS from year 2006 to year 2010 in the overall over past 5 years. For the Airasia, it was doing well since it started up; Airasia became larger and larger over the year. The reason for Airasia did well was the internal factor, Airasia is using low cost strategy and well planned marketing to promote Airasia airline services. Year 2006 to year 2007, the EPS increased 92.8% from RM14.9 Sen to RM28.7 Sen; even in year 2007 Malaysia experienced high inflation of production cost. In year 2008, the whole world experienced effect of subprime crisis, Airasia business highly relate the macroeconomic factors. Airasia also is the main player in Malaysia airline services; it covered above 50% of the low cost carrier business in Malaysia. The business of Airasia will be influenced while the economy fluctuating. EPS in year 2008 shrink 173.6% to net losses RM21.1 Sen per share. This means that no dividend allocation for the year. Malaysia government observed this financial crisis. Malaysia government started injuring money or planning the economy program in order to recover the economy if Malaysia. In year 2009, the Airasia has recovered their business, this year show recovery of business by 202% to earning RM20.6 Sen per share. The Airasia strong performances continue to year 2010, the EPS stand at RM38.4Sen.
The price to earnings ratio (P/E ratio) of Airasia in year 2006 was the highest within five years. The reason is that the investors demand was high, and the systematic risk was lower, the macrocosmic was doing well in year 2006. Most of the investors expected Airasia would perform extraordinary. As the result, year 2006 the P/E ratio was in 10.13. In year 2007, the market share price increased 5.9% from RM1.51 to RM 1.6 over a year, but the earnings per share showed in the good result which is RM0.287 per share compare year 2006 RM 0.149 per share. However, the P/E ratio showed only in 5.57. Most of the companies were underperforming in year 2008. Airasia also was unable to avoid this situation too. As we known, operating airline service it involves very high fixed cost. Consumers thought that economic was not well; they would wait the economy turn well. Therefore, travelling by aircraft passengers will be influence. There are many cost, the Airasia still has to absorb. As the result, Airasia shows the negative RM0.211 earnings per share. Investors demand Airasia stock in around 4 times against the earnings. Which means investors expected Airasia will perform better while the economic turn well. In year 2009 and 2010, Airasia did not let the investors disappointed, and investors still strongly demand Airasia stock, it shows around 6 times of their earnings per share. 4.4.2 Financing Analysis
There is much that can be learned by noticing at the sources and uses of funds reports. If this statement is not presented, it can be created by evaluate the Balance Sheet at the end of a period to the Balance Sheet at the end of the earlier period. By discovery out what the company spent and how the company gets their funds will help understanding in the company’s operations. Assessment of the origin and applications of funds allows the analyst to see where funds were used up and where it came from. It also can be a symbol of the firm’s financial strategy by re-from the financial statements in percentage terms which can emphasize movements and problems and also compares performance of company to other companies, so that able to confirm whether the outcome and/or processes are or are not going well (Financial Analysis and Interpretation, 2011). Most of the firms are prefer to use internal financing to finance their business by hold some internal funds such as cash and short-term investments even when they are raising outside funds.
From the pecking order theory which was come from Myers (1984), argued that adverse selection means that retained earnings are better than debt, and debt is better than equity. This theory only can be apply to public-listed company because this theory based on the “signaling” in order to get or have sufficient information to analyze the situation of company. Same as “signaling” theory, adverse selection which was developed by Myers and Majluf (1984) and Myers (1984) also important in this theory because it determine why the firm issued equity financing (Eckbo, 2008). In “signaling” theory, by raising capital or funds through equity might send the negative signal which means that the firm has no confident about its’ future prospects and thus would like to have more shareholders to share the potential loss in the future. Furthermore, by issuing equity could also signal that the firm’s current share price is over-valued, because normally the firms which have under-valued share price are not willing to issue equity. The over-valued firms are willing to issue equity because it will give a benefit for the existing shareholders as firms can raise extra money by selling new shares at higher price. Moreover, the other economic expert will question why a firm uses equity financing. By that, they could find out that the firm has too much debt level, so that the firm could not using debt financing as it will worsen the firm’s situation. They will also find out that the firm’s internal funds or retained earnings are too low to use internal financing. The next way to raise funds is by debt financing. Debt financing normally has lower negative signal compare to equity. This is due to the fear of over-valued (mispricing) for debt is not as great as equity and the fluctuation of market share for bond is lesser than equity. Thus, the bondholders receive fixed coupon as different to dividends which are not fixed. In spite of choosing debt financing is way better than equity financing, firms still have to choose the least risky type of debt compared to the allocation of high risk debt, such as convertible bond, warrant bond and other types of bonds with option. This is due to bonds with option are more complex to value and hence mispricing are tend to be more serious compared to straight bonds or bank loans. Read another article "SWOT Airasia"
In the case of AirAsia, it given out ordinary shares capital in order to get financing from the shareholders which is equity financing. Ordinary shares do not give out any fixed dividend payments towards shareholders unlike preferred shares. But, sometimes ordinary shareholders are allowed to accept dividends if there are any obtainable after dividends on preferred shares are paid. Ordinary shares correspond to equity ownership in a firm and enables owner of firm to take part in election in matter put before shareholders in percentage to their ownership in the company. However, ordinary shareholders are unsecured creditors due to the last in the line for getting business earnings after bondholders and preferred shareholders (Investopedia, 2011). In equity financing, it is true that the company is easy to find their funds to finance their activities without any repayment burden like bank loans and debt financing. But this advantage is only applicable for small businesses, not the large businesses like AirAsia. Other than that, from AirAsia case, the equity financing could dilute the shareholders’ control and affect power of shareholder to make management decisions. From the newest news, it mentioned that AirAsia and Malaysian Airline System (MAS) swapped shares in partnership which was expected to get rid of overlaps and enhance the business of both companies because Tony Fernandes optimistically thought that he might make a lot of money from this swap. It was a swapped which MAS shareholders accept one AirAsia warrant for every 30 MAS shares and every 10 AirAsia shares could get one MAS’s warrant which caused AirAsia hold 20.5% equity interest and MAS hold 10% equity interest in AirAsia. This action permitted AirAsia and MAS to relocate on increasing airline 100 percent and they will have routes to grow (Fong and Ahmad, 2011). Debts
Debts can be a symbol of loan, bonds, mortgage or other term stating repayment and interest requirements. All these different forms mean to pay back an amount allocated by a precise date. Other than equity financing, AirAsia finance its business by using debts financing as well. First, AirAsia take finance leasing which are capitalized at the predictable present value of the fundamental lease payments at the beginning. Each lease payment is billed between the liability and finance charges so as to complete a periodic stable rate of interest on the balance outstanding. The consequent rental contract, net of finance charges is incorporated in payables hence the interest component of the finance charge is imposed to the income statement over the lease period. Property, plant and equipment are fall under finance lease agreement and depreciated over the functional life of asset (Annual Report, 2010). Other than finance lease, borrowing also is a popular way to obtain funds in term of debt financing. Borrowings are originally known based on the earnings received, net of transaction costs sustained. The borrowings which the companies get at a stable rate on the carrying amount are charged to the income statement. By using debt financing a company easier to take decisions as AirAsia has control on their own business and own all the profit they made. Not only that, the interest payment regarding the loan is tax-deductible which means that it protected AirAsia’s income from taxes and lowers the tax liability every year which has been mentioned in the annual report of AirAsia. To the contrary, if a company uses too much debt financing, it can cause bankruptcy because not able to repay back the debt. From AirAsia’s debt ratio analysis, we can conclude that AirAsia’s use a lot of debt financing as the figure was high. In 2006, AirAsia’s debt ratio was 61.78% and kept increase until 82.93% in 2008, then went down to 75.50% in year 2010. This figure already shows us that ArAsia’s debt level is high. From our analysis, AirAsia did too much borrowing as the borrowing amount of AirAsia exceeds their profits, even AirAsia faced some losses in 2008.
As we all know, retained earnings are the amount of funds which not paid out as dividends, but kept by a company to being reinvest in the new investment or give out to pay company’s debt. Retained earnings a bit reflect a company’s dividend policy because it reflects company’s decision whether reinvest the profit or pay out to the shareholders. Most of these analyses engage contrasting the retained earnings per share to profit per share over a particular time, or they might compare the quantity of capital retained to the change in share price through that time. These methods try to measure the management’s return which produces on profits it invested back into the business equally (Investing Answers, 2011). In most cases, firms use their earnings for spend into parts where the firm can create growth prospect, such as purchase new machinery, spend more in research and development (Investopedia, 2011). Advantages from retained earning financing is easier for the firm to raise funds because many firms’ management thinks that by using retained earnings, it does not cost anything, although this is not all true, but at least it does not direct to payment of cash. It is also smart source of finance since it can undertake projects without the needs of engaging from either shareholders or any outsider. There is no dilution of control which is result of issuing new shares (FAO, 2011). For the risk is that retained earning subject to higher taxes as retained earnings is not tax-deductible. From annual report of AirAsia, we could see that Air Asia had the negative percentage of taxation from the year 2006 to 2008 over the revenue represented that the company had the tax incentives from the government due to the increase in use of debt financing from year 2006 to 2008. As from year 2009 and 2010 AirAsia subjected to higher taxes due to the decline in debt ratio which also due to the increase in retained earnings used by AirAsia in 2009 and 2010.
This disposal of assets is including in internal financing. The account of trade receivables in AirAsia financial statement are classified as current assets on balance sheet of AirAsia. In AirAsia case, trade receivables take into account of quantity due from customers for merchandise or products sold or services completed in the ordinary course of business. The collection of these trade receivables of AirAsia if expected to be receiving from customers within one year time because classified as current assets in the balance sheet, or else, it will be presented as non-current assets if the collection is expected to be more than one year. Account receivable of AirAsia keep increasing from year 2006 to 2010 which was from RM292.894 million to RM841.122 million. Tax benefits is one of the advantages by applying account receivables financing, because lease expenses are describe as expenses which means that un-taxed money can be used. By using asset as financing allocates firm’s borrowing options open because operating lease is group as expenses rather than debt, so it will not affect firm’s credit rating. Other advantage include the lease specific bonuses, which is lease comprise some particular benefits such as service in equipment. Meanwhile, disadvantages of asset financing include fixed interest of the asset, which mean if the interest rates fall piercingly, it might lead to lost for the firm, which is why a company has to control the interest rate moves so this can be a profit in certain situation.
Dato' Adbel Aziz @ Abdul Aziz bin Abu Bakar, Malaysian aged 58 Dato' Adbel Aziz was not originally from an airline industry, from 1980s until mid 1990s, he was involved in the music industry where he had hold some of the key position in the firm such as the Executive Director of Showmasters (M) SdnBhd and after that he was Managing Director of BMG Music which is one of the most well-known music company worldwide. From 2005 until now, he was appointed as the Non-Executive Chairman of AirAsia, surprisingly Dato' Abdel Aziz received his Diploma in Agriculture from University Pertanian Malaysia in 1975, after that Mr Adbel Aziz continue in adding value to himself by taking a certificate from Louisiana State University in Agriculture in 1978, in addition he achieved an MBA from Dallas University two years later. Currently , he is assigned as Non- Executive Chairman of VDSL Network Sdn.Bhd and also the Chairman of PAIMM (Academy of Malaysian Music Industry Association) and PRISM (Performance and Artists Rights Malaysia SdnBhd). From the working background of Mr Abdel Aziz, we can conclude that the great success which AirAsia is having might come from a good participation and huge contribution from the top managers of the corporation. It could bring some different when the top manager observe the airline industry by another point of view which is not necessarily for him to start from airline industry (AirAsia Annual Report 2010). Dato' Sri Dr. Anthony Francis Fernandes, Malaysian aged 47
Together with Dato' Abdel Aziz, Mr. Tony Fernandes was originally from music industry where he was appointed as Financial Controller at Virgin Communications London from (1987-1989), for the period of (1989-1992) Mr. Tony Fernandes was a financial analyst at Warner Music International London and he gone further in his career by becoming the managing director of Warner Music Malaysia from (1992-1996). Later on, he reached the top management position in Warner Music for the South East Asia region for the period of (1999-2001) before he becomes the CEO of AirAsia(AirAsia Annual Report 2010). Dr. Tony Fernandes was the one who made the decision of taking over AirAsia from DRB - HICOM Bhd at RM 1.00 but have to clear off all the debt in return. After the takeover, Dr. Tony Fernandes had turned AirAsia from a heavily in debt company into one the most success one. Same to Dato' Adbel Aziz, he did not observe the airline business in the view point of an airliner operator meanwhile he used his experiences which he got from music industry to run AirAsia well. Dato' Kamarudin Bin Meranun Group Deputy Chief Executive Officer, Malaysian aged 49 Dato' Kamarudin was assigned as the Executive Director of AirAsia since 2001, within three years of his contribution, he ranked at the top manager of the firm and then being assigned as the Group Deputy Chief Executive Officer. Originally, Dato' Kamanrudin was from banking industry where he was a portfolio manager at Arab-Malaysian Merchant Bank for the period of (1988-1993). In 1994, he was selected as Executive Director of Innosabah Capital Management Sdn. Bhd, but after that Dato' Kamarudin made a big change in his career by acquiring the shares of the joint venture of his company's partner and formed a new company which is Intrinsic Capital Management Sdn Bhd. With the experienced that he gained from Finance and Banking industry, it fully qualified DatoKamarudin to sit as one of the Chief Executive Officer at AirAsia(AirAsia Annual Report 2010).
He was involved in the airline industry before he got to join AirAsia on 21 June 2004. Mr. Connor experienced the airline industry for 18 years long with Aer Lingus in every department. He had gone through the engineering, operations, maintenance, strategic management, fleet planning, from the deeply understanding of the natural of the business he successfully become the part of Aer Lingus. Unlike other directors, Mr.Connor had only one certificate which is deemed the first class honour degree in engineering at Trinity College Dublin. Currently, he is the Chairman of Dublin Aerospace and also serves as Director on the board of Pegasus Airline in Turkey (AirAsia Annual Report 2010). With an expert in airline industry to be one of the top manager in the board, it is understandable that AirAsia could achieve the leader position in low cost carrier. As it stated above, there are four main person who played the very important role that heavily impact to the successful of AirAsia. Talking about the aging, all of them are middle-age man (49- 58 years old) where they have minimum of 20 years of working experience. By starting the early career as an auditor and later as the financial controller, Mr. Tony accumulated a lot of experiences from the finance and accounting field before he decided to buy AirAsia. Wisely, Mr. Tony invited Connor McCarthy to join the AirAsia's management team because Mr. Connor is very famous in the low cost airline industry when he was former CEO Aer Lingus and also the Director of group operation at Ryanair, the most well known low cost airline which carried the passengers from Ireland to some of the countries within Europe. From the aid of Connor McCarthy, AirAsia was successfully achieved its goal by the mix in strategies which is adopted from all of the low cost carriers such as Ryanair, EasyJet and Aer Lingus.
The value chain is the famous tool which is developed by Dr.Michael Porter that commonly used to determine value added to the firm by utilise the raw materials. From the value chain model the company can be able to find out the competitive advantages on its own compate to its rivals. (Porter 1985).
Basically, the value chain contains two main parts which are supporting activities and primary activities. Supporting activities:
Firm infrastructure: it can be define as those activities which are relevant to general management, finance and accounting matters of the firm. In the AirAsia's case, we have seen that the company have a strong management team due to the sustainable strategy that based on the strengths of its company. In the order to make the employees become more productivity, the managers of the firm should be responsible in emphasising the benefits that could be obtained from their subordinates on the other hand, to gain the efficient from the employees the managers have to ensure that the company could provide better quality of life to every single worker. Having a good relationship with the government will indirectly contribute to the margin in the value chain in term of the government protection to the firm. For example, AirAsia owned 49 percent proportion of Thai AirAsia meanwhile 1 percent being held by a Thai individual and the rest is held by Shin Corp which is owned by the family of former Thailand's prime minister, ThaksinShinawatra(Malespine and Jinks 2006). Moreover, AirAsia also being supported from the Malaysian government in 2001 where the company was allowed to use the Kuala Lumpur International Airport (KLIA) as its hub since it was not fully utilised. Human resources: from the human resources strategy of this company, we could easily observe that AirAsia used to move backward for its operation. For example, the company supply the employees for its own demand. Because as the large corporation, AirAsia will require a huge number of employees therefore AirAsia opened the AirAsia's academy which is to make the students here become part of the corporation and willing to work there after graduate. AirAsia provided flight analyst training, yield analyst training, pilot training, safety training and also the flight training etc. By doing so, the company does not have to seek for the employees and from there AirAsia can always guarantee that their employees is always highly skilled and efficient.
The academy is one the component that make the company to gain the margin profit due to the profit that every students have to paid for tuition fees and also to reduce the cost and time in seeking for the workers. Technology: As we know that, AirAsia is one the most airline operator that efficiently adapted the advancement in technology especially in IT. Currently, AirAsia uses yield management system (YMS) as the method to manage the operating cost and to help the firm to optimise the prices by allocate the seats according to the routes and seats level.. As a result, AirAsia has seen an increase of 3 to 4 percent by taking advantage of the predict of the fluctuate in demand patterns, keeping the low price which indicate that the yield management system effectively help AirAsia to gain more revenue through offering higher discounts in off-peaks times and vice versa. Moreover, the CRS which stands for computer reservation system that is an integrated of the web enable reservation and inventory system in the order to fulfil the demand that AirAsia implementing in the low cost carrier industry. This system consistently helps the company to grow at a impressive tempo (Wong 2009). Other than that, AirAsia also integrated the database marketing (DBS), internet sale (IS) and call centre (CC) into the web solution. These advancement in technology lifted AirAsia to the top of the low cost carrier in the world and they are also reduce the operating and gain the revenues in return.
Procurement: AirAsia purchased into fuel hedging in order to protect its business from the unforeseen market volatility when the experts and pundits forecasted that the oil price would soon hit US$200 per barrel. From the global crisis in the second half of 2008, AirAsia learnt that, it is very important for them to slow down the hedges. Moreover, AirAsia made a deal with Malaysia Airline which to boost the profit for these both airline operators. The low cost carrier decided to swap 10 percent of its share in exchange for 20.5 percent of Malaysia Airline's shares (Thong 2011). This shares swap will significantly reduce the competition between AirAsia and Malaysia Airline, on the other hand AirAsia would benefit from this swap due to the increasing in the relationship with the government where Airasia can acquire more beneficial flight routes. Shifting back to one year ago since AirAsia successfully created the joint venture with Qantas-owned low cost carrier Jetstar. This partnership was expected in generating the cost savings worth tons of million dollars and also resulted in the lower fares that offered by these two airlines (Yeo 2010). Based on these supporting activities above, we conclude that AirAsia has its own strengths and also the competitive advantages compare with its other rivals which is currently involved in the industry. These activities partly added value for AirAsia in term of generating higher profit margin. 5.0 BCG matrix
We put AirAsia Cargo as its question Mark, because it has a high growth rate these years. Although it is not the leader now, but it has a trend to be the cash cows. AirAsia identifies cargo as a major revenue-generating channel and a huge contributor to its ancillary income. The airline is optimizing the potential of its aircraft belly space to bring in revenue, by offering cargo services at rates considerably lower than its competitors. By tapping into AirAsia’s extensive network and flight frequencies, the airline manages to reach more destinations and achieve faster delivery time. AirAsia’s cargo services ps across the entire ASEAN region and extends to East Asia, South Asia, Oceania, and Europe. AirAsia is also strengthening cargo operations in part to protect its bottom line against fluctuations in fuel prices; actively engaging with more cargo agents and sizable export-import firms in the markets that AirAsia flies to. It is also reaching markets beyond its current route network through other airlines in which AirAsia has special pro-rate agreements. These major airlines extend AirAsia’s reach to more cities in East Asia, the Middle East and Africa. Last year, AirAsia Cargo was rewarded the ‘ Rising Star Carrier of the Year’. So, we look forward that AirAsia Cargo will get more profit for AirAsia in the future. Air cargo commonly known as air freight, is one of the services provided by the airline industry to transport the goods to other countries by the aircrafts. From the table below, we can see that the world air cargo traffic achieved 1.9% growth per year from the year 1999 to the year 2004. It means that the world air cargo is still in the growth stage. On top of that, graph belowshows that over the next 20 years (from the year 2009 to 2029), world air cargo traffic will grow 5.9% per year.For the Asia’s air cargo markets, it will continue to lead the air cargo industry in average annual growth rates, with the domestic China and intra-Asia markets expanding 9.2% and 7.9% per year respectively as shown in the table below. For the more mature North America and European markets have reflects slower and thus lower-than-average traffic growth rates.
Passenger carrier is the one type of service in the airline industry which was already well-known by public. This service provide by the airline industry to transport passengers to other countries or destinations by the aircrafts. From the graph below, we can see number of passengers in the airline industry from year to year until 2009. From the graph below, we can see that the number of passengers carried by airline industry in Malaysia drop from approximately 20 million to 18 million passengers in 2006. This was due to the oil prices which affect the macro-economy and assesses quantitatively sustained of higher oil prices. In 2004 the price of crude oil increased and that made market condition more labile than usual and it affected the airline industry as well. Operation cost of airline been affected by the climbed of fuel price and in turn airline industry jacked up tickets price, thus it distress the airline industry and made the demand for air travel weaken than before (Algoe, 2011).
After the negative period in 2004 to 2006, we can see that there was an improvement in Malaysia and other countries’ economic, which recovered the demand of people to travel and give an opportunity for airline industry to boost the business again which was shown in the graph above, the demand increase in 2010. During recession in 2009, many travelers were forced to change their accommodation type to low cost carrier. Even in 2010, when the economy has recovered, customers kept on supporting AirAsia for the reason that most of tourists prefer low cost travel and tourism because they had already familiarized with the level of services that AirAsia provide. Not only that, the rise of trade value sales and market share of travel and tourism in Malaysia in 2010 was also because of promotion and price cuts which are still the mainly smart methods to raise the demand. The economic upturn gives a chance to consumers to begin use up their funds on travel. Association of Tour and Travel Agents (MATTA) and the Malaysia Domestic Tourism Travel Fair (MDTF) are the most importance travel fair in endorsing their products. Internet users helps to enhance the demand of air flight as the internet users keep on growing as time passes which can be seen from graph above, the amount of passengers keep increase. Many consumers purchase their tickets via online in 2010, especially in Malaysia because Internet booking endow the ease and direct verification that many travelers fancy.
Tune Hotel is categorized as service industries. Tune Hotel aims to take advantage of the growing budget hotels segment to push its expansion plans in the future. The expansion plan offers the company an exciting opportunity to fill in the large gap of quality branded no-frills accommodation in South East Asia region. The company sees a huge upside in Asian tourism market over the next 4-5 years. For now the company will focus on the Malaysian market to build up its image position and experience. For now Tune Hotel can be considered as the market leader in the no-frills budget hotel in Malaysia and also in South East Asia nations. This is because Tune Hotel is the first to come out with this kind of creative and innovative concept in Malaysia and there is still no company or hotel that claims to be in the same market segment. As the first and leader of the no-frills segment, Tune Hotel can make use of the opportunities while there are still no direct competitors in this market segment in strengthening its business roots and establish a strong position. In this case Tune Hotel surely will follow the same strategy of its co-founder Datuk Tony Fernandes in what he did to Air Asia when he first introduced the low cost carrier in Malaysia. Now Air Asia established a very strong position in the no-frills airline market in Malaysia and Asian region despite some company had copied its business strategy. As the first and leader of the market, Tune Hotel has the privilege to set up the service standard.
Today, Skytrax names AirAsia as the World’s Best Low Cost Airline for 4 consecutive years 2009- 2012. AirAsia has become a household brand in Malaysia and beyond in less than a decade. In the third quarter ended Sept 30, 2012, AirAsia Bhd had RM2.2bil in cash and bank balances with net
gearing reduced to 1.03 times this quarter (net gearing was reported at 1.10 times in quarter two). It has been the market leader, and also bring a increasing growth rate for group.
The overall market in Asia is also growing much faster than other regions. The total Asian passenger market is expected to grow at a rate of about 10% per annum, reaching about 900 million passengers (excluding China) by 2020. As LCCs continue to increase their share of this market, by about two percentage points per annum, they are poised to grow at rate of about 20% per annum. The 20% figure is feasible based on current order books and fleet plans. The LCC growth rate in Asia could even accelerate in the latter portion of this decade and early portion of next decade based on orders recently placed for new narrowbody aircraft. Asian LCCs account for a remarkable 65% (488 of 753) of the A320neos acquired by airline customers worldwide since Airbus launched the A320neo programme late last year (this figure includes MOUs and orders and is of the end of Jun-2011). Leasing companies have also so far committed to 276 A320neos, a large portion of which are expected to be placed with fast growing Asian LCCs. Not a single Asian full service carrier has yet ordered the A320neo (Garuda’s A320neo order is for its low-cost carrier unit Citilink). As Airbus has already sold all delivery slots for the A320neo until late 2018, the growth gap between Asia’s low-cost and full-service carriers on short/ medium-haul routes is likely to accelerate. The A320neo is scheduled to enter service in 4Q2015, giving its operators a 15% improvement in fuel burn compared with the current-generation A320. As a result, Asia’s low-cost carriers which have acquired the A320neo will be able to further reduce their already world-leading unit costs. This will widen the competitive advantage LCCs already enjoy and push down fares within Asia further, allowing LCCs to potentially capture all the growth in short-haul markets.
Recently listed Tune Ins Holdings Berhad (TIH) has announced record profits in its full 2012 financial year results. Based on revenues of RM226.38 million, TIH’s year-on-year pre-tax profits increased by 51% to RM48.6 million compared to 2011 while net profits increased by 22% to RM28.6 million. But compare to the year before and other business of AirAsia, Tune Ins. has a low growth rate and less market share in the industry. This including a lot of reasons, especially the purchasing power has been decreased and the global economic recession. Tune Group should take some measures for the company to increase the market share.
Focusing on providing air travel without frills at substantially lower prices, AirAsia has managed to achieve lower prices to attain high passenger loads, market share, and profitability by eliminating provision of costly in-flight services, flying a standard fleet, selling tickets to passengers directly, and minimizing labor, facilities and overhead costs (i.e. passengers are not allocated seats, and do not receive meals, entertainment, amenities, or access to airport lounges). Its successful negotiations for its low aircraft lease rates, low long-term maintenance contracts rates, and low airport fees, enabled AirAsia to provide the lowest fares. As a result, AirAsia was able to reduce its overheads and investments in equipment substantially in the absence of fringe services. Exhibit 4 shows that AirAsia has the lowest operating cost (29), compared with 29 other competitors (with Air France being the highest at 184). Moreover, AirAsia’s aircraft maintenance contract costs were reported to be substantially lower than other airlines (i.e. contractual lease charge per aircraft decreased by more than 60% from 2001 to 2004), adding to AirAsia’s competitive advantage, which was further compounded by its young fleet. AirAsia’s high safety and maintenance standards allowed AirAsia to procure favorable rates on its insurance policies, increasing customer confidence. Therefore, this is a valuable, rare, non-substitutable capability and difficult to imitate (by competitors), which creates sustainable (cost) competitive advantage for AirAsia.
Single type fleet minimizes maintenance fee and easy for pilot dispatch. There are two main types of flight consist of AirAsia fleet team which are airbus-330 and airbus-320. Using single type fleet can minimize the repair
cost and train fee. Operating a single aircraft type enabled AirAsia to have substantial cost savings: maintenance was simplified (i.e. made cheaper), spare parts inventory was minimized, infrastructure and equipment needs were reduced, staff and training needs were lowered (i.e. easy for pilot dispatch), and better purchase terms could be negotiated. Therefore, this resource is a core competency (resource) as it is rare, difficult to imitate and without substitutes. Exhibit 8 shows that AirAsia has the largest fleet size of 30 has compared with its nearest competitor in the low-cost airline industry (Bangkok Airways) with a fleet size of 15.
High aircraft utilization and efficient operations. AirAsia aircrafts (i.e. point-to-point services kept flights to no more than 4 hours, minimizing turnaround time) and employees (i.e. perform multiple roles) were more effectively and intensively used as compared with other airlines. In 2004, as a result of its point-to-point services, AirAsia managed to operate its aircraft or an average of approximately 13 hours/day. This was 2.5 hours more than efficient full-services airlines, which only managed to use their aircraft for an average 10.5 hours/day. Also, the average turnaround time for AirAsia’s aircraft was lesser (e.g. 25 minutes), as compared to that of a full-service airline (e.g.45-120 minutes). Thus, this capability provides AirAsia with a sustainable (differentiation and cost) competitive advantage as it is rare, difficult to imitate (e.g. not many competitors were as successful as AirAsia), and without substitutes.
AirAsia has strong branded recognition and well band marketing Air Asia has given a positive image toward public. This is because; they have signed on to become the official airline sponsor of the world famous Manchester United football club and the AT ; T Williams Formula One team. Air Asia has received few awards and recognition throughout its appearance. Some of the awards received Airline strategy Award in the finance Category, airline Market Penetration Leadership of the Year and etc. AirAsia’s brand name is well established in Asia Pacific region now. Besides the normal print media advertising ; promotions, AirAsia’s top management also capitalised on promotions through news by being very ‘media friendly’ and freely sharing the latest information on Air Asia as well as the airline industry.
Their partnership with other service providers such as hotels and hostels, car rental firms, hospitals (medical tourism), Citibank (AirAsia Citibank card) has created a very unique image among travellers. Air Asia’s local presence in few countries such as Indonesia (Indonesia AirAsia) and Thailand (Thai AirAsia) has successfully ‘elevated’ the brand to become a regional brand beyond just Malaysia. The links with Manchester United (one of the world’s most famous football teams) and AT;T Williams Formula One team have further boosted AirAsia’s image to a greater extend beyond just the this region Due to aggressive expansion, AirAsia was able to penetrate potential markets (i.e. Exhibit 7 - an extensive Southeast Asian regional network of 60 routes at the end of 2005). From 3 routes in Malaysia (in early 2002), AirAsia quickly expanded its route network in Malaysia, covering all major destinations in Malaysia (by end of 2002). As a result, AirAsia had a regional presence (though joint-ventures) in Southeast Asian with countries such as Indonesia (Indonesia AirAsia), Thailand (Thai AirAsia).
Subsequently, AirAsia become a leader among low-cost carriers in Southeast Asia, receiving regular coverage from regional media outlets. Hence, the airline was able to penetrate and stimulate potential markets by maximizing media coverage: brand awareness promotion without incurring high sales and marketing expenses. Additionally, AirAsia’s aggressive marketing stimulated potential markets: its introductory promotional fares in 2002 of US$2.50, attracted huge publicity and interest from travelers who were used to high prices; emphasizing the airline’s slogan, “Now Everyone Can Fly”. This resulted in AirAsia’s profitability within few months of its operations commencements. Strong passenger growth and high passenger loads can be seen from Exhibit 1 where AirAsia enjoyed compound average growth of 45% for sales during the period between 2001 and 2004. Moreover, AirAsia’s major sponsorship for Manchester United, which involved global sponsorship and advertising, further promoted the brand beyond the region. AirAsia also managed to enhance its current offerings (and profitability) with substantial ancillary revenues derived from additional services (i.e. provision of in-flight food and drinks, and online sales of hotel, car, and holiday reservations, as well as travel insurance), and corporate travel services, and even had its own branded credit card, further increasing brand awareness and value for customers.
Being the first airline in Southeast Asia to utilize e-ticketing and bypass traditional travel agents, AirAsia saved on the cost of issuing physical ticket (i.e. estimated at US$10 per ticket), eliminating the need for large and expensive booking/reservation systems, and agents’ commissions. In 2004, AirAsia’s website was voted the most popular site for online shopping in Malaysia: internet bookings increased from 5% of all bookings in 2002, to approximately 50% in 2004. AirAsia subsequently made its tickets available via post offices and designated bank teller (ATM) machines, increasing accessibility to consumers while having lower distribution costs, gaining more market share in the process. AirAsia has capitalized on IT wisely. Selling tickets online minimizes distribution cost, it also keep the costs low by enabling direct purchase thus saving up on airline agent fees. It has also contributed directly to As Asia's marketing effort and allowed them to create brand awareness.
Flat organizational structure and effective staff policies .A high portion of AirAsia costs was the salaries and benefits for its employees. Hence, the airline implemented flexible work rules, streamlining administrative functions which allowed employees to perform multiple roles within a simple and flat organizational structure. In AirAsia’s case, a flatter hierarchy improved (sped-up) communication, resulting in an effective and focused workforce. AirAsia’s rumination policy focused on maximizing efficiency and productivity, whilst keeping staff costs at levels consistent with low-cost carrier industry standards. Although salaries offered to employees were below that of rivals, all employees were offered a wide range of incentives such as productivity and performance-based bonuses, share offers, and stock options. This motivated employees, giving them a sense of ‘ownership’.
Air Asia has a very strong management team with strong links with governments and airline industry leaders. The real strength of Air Asia is based on its strong management team with strong links with government s and airline industry leaders. The executive management comes 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 Ryan air (no frills, landing in secondary airport), Southwest’s people strategy (employee comes first) and Easy jet’s branding strategy (linking with other service providers like hotels, car rental). This is partly contributed by the diverse background of the executive management teams that consists of industry experts and ex-top government officials. According to Johnston (1996), without the protection of national airlines brought about by deregulation, building alliances as strategy became necessary for many airlines to stay competitive and gain access to a global market too huge for any existing airline to dominate. The strong links with the government and airline industry leaders is one of the strength of AirAsia Company. For example, Shin Corp (formerly owned by the family of former Thai Prime Minister – Thaksin Shinawatra) holds a 50% stake in Thai AirAsia. This has helped AirAsia to open up and capture a sizeable market in Thailand. And also, with their strong working relationship with Airbus, they managed to get big discount for aircraft purchase which is also more fuel efficient compared to Boeing 737 planes which is being used by many other airlines
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, AirAsia have to ensure proper and continuous maintenance of the planes which will also help to keep the overall costs low. It is a competitive disadvantage not to have its own MRO facility.
AirAsia receives a lot complaint from customers on their service. AirAsia receives lot complaints from customers on their 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. Besides, this is also due to not on too many routes as compared to market leader. Which mean Air Asia can’t provide many fly schedule compared to the MAS for example. And Air Asia has a very stiff competition in its sector.
Some of the fly operates at the odd hours. The route which from KUL to Kun Ming it only arranges three flight per week and only one flight at the odd hours per available day. Nowadays, Malaysia launch MM2H program to attract foreigners to stay and invest in Malaysia. It also attracts a great number of Chinese people to come to Malaysia. If the flight only operates at the odd hours, many customers will choose the flight which has more time option, especially for business people. That will lose many valuable consumers.
Limited target cost limits their service resource. Because of this human resource limit, they cannot handle irregular situations. According to some reviews, customers had complaints about bad service and rude personnel. Someone even complained that he was not allowed to fly even if he clearly had his ticket on hand. There are also complaints about flight delays. Air Asia flies from and land in secondary airports to reduce costs. This may be an inconvenience to passengers. (Secondary airports are usually under-utilized.) They also tend to use stairs rather than the air-bridge because it is much cheaper. This may cause inconvenience to passengers, especially those with physical disabilities.
In a country of billion people, the Indonesian aviation industry is puny. Indonesia have 12 million people who travel by air every year against 3 million passengers who fly everyday in the US, even though its population is one-fourth that of Indonesia. Even if we assumed that only one-fourth of that large middle-class could afford and would be willing to travel by air, it would call for at least a 5-6 fold increase in capacity. This points to a huge opportunity for AirAsia and the aviation industry in general. However, this large market is recognized by all and is the reason why new players are waiting to enter the Industry to exploit this potential. It is pertinent to note that the number of air trawlers in Indonesia has grown during the last there of 2005-10 as compared to the same period last year, as per estimates of Amadeus Worldwide.
There is also some opportunity to partner with other low cost airlines. As Virgin to tap into they exist strengths or competitive advantages such as brand name, landing rights and landing slots (time to land). The population of Asian middle class is increasing quickly. This creates a larger market and a huge opportunity for all low cost airlines in this region including AirAsia. Low cost airlines are anticipated to have greater potential in Asia, as there are many Asian cities with a population above one million people each as well as a rising middle class population. This growth of middle class in Asia provides a huge market potential for AirAsia to grow. However, as the market is becoming larger, more airlines or new comers would like to get a piece of the action. For example, Budget airlines, it is estimated, will capture at least 25% of Asia’s air travel market within next 10 years and a lot of that will be new, not diverted, traffic. Therefore, AirAsia will face more competitions at the same time. Besides the low cost airlines, AirAsia still needs to compete with the conventional carriers. Although extra passengers of the low cost airlines will be coming from the new demand to be created by the low fares, the growth may not be entirely ‘stolen’ from big flag carriers.The ‘ASEAN open skies’ allows unlimited flights among ASEAN’s regional air carriers beginning December 2008. This will definitely increase the competition among the regionalairlines. However, with the ³first mover´ advantage as well as its strengths in management,strategy formulation, strategy execution, strong brand and ³low-cost´ culture among itsworkforce, this agreement can be seen as more of an opportunity.
Certain rates like airport departure, security charges and landing charges are beyond the control of airline operators This is a threat to all airlines especially low cost airlines that tries to keep their cost as low as possible. For example, Changi airport in Singapore charges SGD21 for every person who departs from Singapore.
AirAsia’s profit margin is about 30% and this has already attracted many competitors. Most of the full service airlines 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. The Asia Region skies are witnessing a bloody battle for market shares. A much anticipated fare war has broken out across Asia Region skies. AirAsia is still a growing Airline Company, but a medium-big player in the Asia Region skies. They are vulnerable to price cuts by large-existing players with deep pockets. Aviation experts are betting could start a debilitating price war to push the fledgling no frills airlines off the tarmac-permanently.
Oil price spare no airline. Aviation turbine fuel(ATF) cost and other operational costs (all government controlled) are the same for all airlines, whether it is a low cost airline or not. This adds significantly to costs of carriers like AirAsia, especially since fuel costs as a percentage of total costs are higher at 26% for low cost airlines, compared to 20% for full service airlines. Fuel is the most crucial factor for airline companies since the largest cost of the airline expenses come from fuel. Thus, the fluctuation of the fuel price is indeed critical for AirAsia as well as other airline companies. Similar with other commodities’ prices, the price of fuel will also experiencing a wide price swing during shortage or oversupply period. Recently, the oil price is very volatile and a possible oversupply of the oil within Asia-Pacific will likely to limit the local airlines’ earnings growth. The volatile movement could cause huge losses for the airline companies since it basically priced the ticket one to three months before and the profits will then be easily wiped out.
The graph above shows the fluctuation of crude oil price across the nation over the period until year 2009. Analysts find out that the fluctuation in the crude oil price is significant and recently, the price goes up extremely high than previous years. The oil price rose by 40% within a year and then declined again. The unstable movement of the oil price lead to a recapitulation from the analysts that the local airlines such as AirAsia and MAS will downgraded their stocks or cut their earnings forecast for year 2011 sue to higher fuel bills, (Arulampalam, 2011). Furthermore, financial crisis in this few years that cause the increasing of the oil price make the airline companies to push up the prices of its transportation fee. This is a threat for airline industry since they have to increase their transportation fee as the cost of the main expenses increase. As the amount of the operating expenses increase, the profit of the company will in turn to decrease.
Expansion of untapped market. With the dramatic increase in middle-income earners in China and India especially, there is much potential for AirAsia to expand its routes and frequency of flights. Relaxation of the ‘ASEAN Open Skies’ laws means that, with AirAsia’s established number one position, low cost, strong brand and strategy execution, it is firmly established to overcome potential new entrants and increase market share in the future.
Air Asia has done horizontal diversification while entering Indonesian market by joining with Awair, which is an Indonesian airline company. The joining helps Air Asia to know the condition of Indonesian airline market, so the company will have guidance on how to enter and survive in the market by the help of an experienced partner. If Air Asia does vertical diversification, for example by selling all the flight tickets without the help of agents and
open many Air Asia ticket spot, Air Asia will be able to control all the prices and can sell the tickets for lower price. It will also prevent the customers from having bad service that the agents might give, because Air Asia can maintain and train the staff to be friendly and helpful at all time and it might help Air Asia to maintain customers’ satisfaction. But, it means Air Asia will have to spend some amount of money for building rent and to pay more employees.
Continue using low-cost operation with more IT technology The important key of the AirAsia’s success is to make processes are simple as possible. AirAsia is able to save on operational expenses by using secondary airports and uniform fleets. AirAsia selects airports and routes to avoid congestion that introduces delays. Air Asia’s limit on the type and length of routes make standardized aircraft possible. Therefore, AirAsia currently only uses Airbus 340-300 fleets. AirAsia not only uses a limited variety of fleets, but also used less fleets than MAS. It also has used IT to its advantage with the use of the Internet and newer airplanes. Finally, it is beginning to establish its name and brand on the world stage with innovative and intelligent sponsorship deals. Air Asia’s strategy for strong profitable growth combines low fares, with high load factor and low cost. If AirAsia could combine the IT and low cost operation, it will increase more market share.
Improve the efficiency in business process and supply chain AirAsia has a relatively poor reputation with customers, particularly due to their flight times and cancellations. Improvements are needed to be made in this area without increasing operating costs. 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 need to improve its efficiency in business process and supply chain. Then it will reduce the cost and improve the revenue.
Penetration into new markets. Market penetration is a strategy to grow the same product of the company in the same market. The only way to gain more market share with the same product in the same market is to attract competitors’ customers and get more loyal customers by marketing strategies. By doing market penetration, the cost will not be as much as doing diversification because the company can finance the strategy by using marketing budget and using the existing marketing department of the company.
The other ways to gain growth by of limited growth strategy are product development and to sell the product in new geographical market. Air Asia might open up new routes to other places than the existing routes: Bali, Balikpapan, Batam, Kuala Lumpur, Medan, Padang, Surabaya, Palembang, and Pekanbaru (AirAsia.com, 2007, Internet). Until June 2007 Air Asia airplanes from Indonesia still cannot land directly to Singapore because the Civil Aviation Authority of Singapore rejected the landing rights application. Air Asia airplane from Indonesia landing directly in Singapore is going to bring advantages to both parties, as 20% or 1.92 million of international tourists in Singapore in 2006 are Indonesian tourists (media-indonesia.com, 2007, Internet). Other than Singapore, Hongkong is also a potential destination because there are a lot of Indonesian shoppers who go to Hongkong to shop monthly, or even twice in a month.
Retrenchment is when the company tries to cut costs or spending in doing the activities (Oxford American Dictionaries, 2005). Air Asia has been very cost effective and efficient since the first time, so a new possible retrenchment strategy might be difficult to find because every aspect of the company are already operating with the lowest cost possible, except on the safety aspect. Retrenchment strategy can be done by withdrawal from offering some products, in this case might be a flight destination that is not really profitable. But, Air Asia Indonesia only has 9 destinations to important cities of Indonesia, so even though closing of destination will decrease the expenses of the company, it might bring the customers to Air Asia competitors.
7.0 SFA analysis
7.1 Option 1—Diversification
By doing unrelated diversification such as conglomeration, Air Asia might spread risk if suddenly airline industry is stuck and have high profit opportunity from the new business. But, to open up a new company, high quality of management and financial ability is needed in order to make it successful, but if the new business is not successful, it might create unstable condition for Air Asia because of loss of money and resources. Overall, diversification strategy needs a lot of money for building rent or to build new office buildings, to pay more employees, and the company also needs knowledge about the new field that it is going to enter.
AirAsia’s corporate strategy is aligned to its mission statement. In Michael Porter’s generic terms, AirAsia adopts focused cost leadership. This is because of the huge size of the market. In LCC industry cost is the competitive priority and determines its success and market position. AirAsia has successfully adopted a cost leadership strategy because of the huge size of the market. The cost-leadership strategy has permeated into the entire firm. This is evidenced by high-efficiency, intolerance of waste, rewards linked to costs containment, low overheads, limited perks and intensive screening of budget requests. To experience cost reduction effects, AirAsia has to continue its policy of outsourcing major parts of the products and getting more suppliers to provide them with key components in order to be independent of a particular supplier. The outsourcing efforts should include more value chain activities and as suppliers with their superior efficiency in producing components at lower costs can pass on these savings to the company, AirAsia can benefit greatly through outsourcing and likewise concentrate on its core competencies design and innovation. The last choice would be the horizontal integration, expected to yield cost savings through M&A, but reality shows us that often these actions fail to realize these anticipated gains.
The business strategy however targets specific markets: price sensitive customers needing short haul flights. In Porter’s generic strategies, AirAsia’s strategy is described as focused cost leadership. The airline company offers attractive ticket price, even compared to bus and road fare. Competitive strategy has equally to match the generic business level strategy as we target a lower cost structure. The savings occurred from the
implementation of functional strategies, hopefully leaves us with more powerful tools to survive in the competitive structure of the industry. In addition to the previously available non-price tools to create barriers to entry and to reduce rivalry inside the industry, AirAsia now can use limit pricing to deter potential entry as it now, with a lower cost structure, can survive lasting price battles and effectively signaling the environment that it won’t let any firm take market share away, especially if it would target the same customer needs and groups. If AirAsia manages to implement the necessary measure to shift from a pure differentiator to a cost leadership oriented differentiator it can combine low cost structure by meanwhile still offering unique and superior products, which would further decrease the threat of rivalry.
AirAsia’s attention to functional strategies, and has thrived through competition, despite facing stiff competitions from the national flag carrier, Malaysian Airlines and other budget airlines. The budget airline’s functional focus includes: quality control, technological development, safety and staff training. We believe that the brand name “AirAsia” is already strong enough developed to remain alive as hip brand even with decreased marketing expenses. Also expensive prime time advertising campaigns should be only utilised if necessary, because we believe that AirAsia’s products are themselves means and channels of marketing. The stylish forms, paired with superior engineering quality are a delight for the eye and therefore successfully create a positive corporate image of the company. Another area where costs are high above industry average is operations and logistics. AirAsia has continuously experienced bottlenecks in its supply chain management, which consequently led to increased costs due to time lags in the production process. To ride down the experience curve and enjoy economies of scale, AirAsia has to continue to outsource production processes and find a broader group of key suppliers in order to be in a better bargaining position, which would lower the cost of inputs therefore lowering overall production costs, widening the spread between costs and value for the customer. As a result AirAsia could price its products also more competitively on the market and subsequently, facing the threat of immense rivalry, win market share from its rivals
Air Asia may increase its brand image by promoting cheap, on time and safe traveling experience campaign. There are many cheap Indonesian airline companies who are weak on these spots, so the campaign might attract business people, who want to save cost, arrive at the meeting place on time and safely, to try Air Asia. To make the promotion more attractive, if a flight is delayed, Air Asia can give 30% discount voucher that will be posted to all passengers who went on the delayed flight, and they can use the voucher on their next trip with Air Asia. ii. Price: Yield management: different price’s categories are defined. Cheap tickets available during the middle of the week Expensive tickets to be distributed when the demand is high (week-end) Prices increasing according to the demand
Air Asia can get the profit. Air Asia should to determine the amount of cash in the hands should hold, within a specific time accounts receivable payment discounts given. The process of operations strategy refers to the procedures which are used to formulate operations strategies. Air Asia can increase the new routes. It gives more choice to customers. Now each airline is very competitive, some airlines digging talents, resulting in lack of talent in Air Asia. It is important to recruit talent at present. Not every highly educated people can obtain higher positions also need to provide training. Training is not only the growth of knowledge, but also the moral quality of the training. Outstanding achievements in training reward. Motivate employees.
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