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Mas Strategic Analysis

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Strategic Audit Report Strategic Management 313 Unit Index No. 3522 Semester 2, 2011 Malaysian Airlines PREPARED BY: Alfonso Di Tullio Andrew Dellaposta Philip Podgorski Sebastian Michael 14078282 13947899 13949206 14224933 SUBMITTED: 23/09/2011 1 1. 0 Executive Summary The aim of this report is to analyse Malaysia Airline System Berhad (MAS) in regards to its competitive position in the South East Asian (SEA) airline industry, and provide recommendations to help MAS counter the threat of Low Cost Carriers (LCCs). Analysis is limited to the major airlines operating within the SEA airline industry.

Firstly, the report begins with an external analysis of the SEA airline environment highlighting significant opportunities and threats. The most notable opportunity is an increased demand for low cost travel in SEA, while the growing market share of LCC AirAsia is an emerging and significant threat. Secondly, an analysis of MAS’s internal resources, capabilities and core competencies is carried out highlighting significant strengths and weaknesses.

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MAS? s most prominent strengths are its high brand recognition and reliable MRO facility. However, poor management of costs and high capital intensity prove to be the organisations main weaknesses.

Finally, these characteristics are cross matched in a TOWS matrix to develop a number of possible strategies from which an evidence based recommendations are formed. It is recommended that MAS form a corporate strategy to diversify and offer low cost budget air travel as well as existing premium services. This can be achieved by horizontal integration into the related LCC airline segment through the formation of an alliance with existing SEA LCC leader AirAsia via an equity swap arrangement. In support, MAS shall also divest its fledgling LCC subsidiary Firefly.

This strategy will counter the growing threat of LCC AirAsia while also providing the benefits of economies of scope/scale, transfer of core competencies and infrastructure sharing, and thus help MAS create and sustain a competitive advantage in the SEA airline environment. 1 Table of Contents 1. 0 2. 0 3. 0 4. 0 Executive Summary …………………………………………………………………………………………………. 1 Introduction ……………………………………………………………………………………………………………….. Malaysian Airlines – Main Strategic Issues …………………………………………………………. 5 Malaysian Airlines in the SEA Environment ……………………………………………………….. 7 4. 1 General Environment Analysis ………………………………………………………………………………………. 7 4. 1. 1 Political Environment ………………………………………………………………………………………………………………….. 7 4. 1. Economic Environment……………………………………………………………………………………………………………….. 8 4. 1. 3 Socio-cultural Environment ……………………………………………………………………………………………………….. 9 4. 1. 4 Technological Environment ……………………………………………………………………………………………………….. 9 4. 1. 5 Environmental Environment …………………………………………………………………………………………………… 10 4. 1. Legal Environment …………………………………………………………………………………………………………………….. 10 4. 1. 7 Summary ……………………………………………………………………………………………………………………………………… 11 4. 2 Industry Environment Analysis ……………………………………………………………………………………. 11 4. 2. 1 Threat of new entrants ……………………………………………………………………………………………………………… 12 4. . 2 Threat of Substitutes …………………………………………………………………………………………………………………. 13 4. 2. 3 Intensity of Rivalry…………………………………………………………………………………………………………………….. 13 4. 2. 4 Bargaining power of buyers …………………………………………………………………………………………………….. 13 4. 2. 5 Bargaining power of suppliers ………………………………………………………………………………………………… 4 4. 2. 6 Summary ……………………………………………………………………………………………………………………………………… 14 4. 3 Competitors Environment Analysis…………………………………………………………………………….. 15 4. 3. 1 Scope and Methods of Analysis……………………………………………………………………………………………. 16 4. 3. 2 Strategic Group Map ………………………………………………………………………………………………………………….. 17 4. 3. AirAsia : LCC Competitor analysis ………………………………………………………………………………………….. 20 5. 1 Capabilities……………………………………………………….. ………………………………………………………………. 23 5. 2 Tangible Resources ………………………………………………………………………………………………………….. 24 5. 2. 1 Financial Resources …………………………………………………………………………………………………………………… 24 5. 2. Organisational Resources…………………………………………………………………………………………………………. 25 5. 2. 3 Physical Resources …………………………………………………………………………………………………………………….. 25 5. 2. 4 Technological Resources ………………………………………………………………………………………………………….. 26 5. 3 Intangible Resources ……………………………………………………………………………………………………….. 26 5. . 1 Human Resources ………………………………………………………………………………………………………………………. 26 5. 3. 2 Innovation Resources ……………………………………………………………………………………………………………….. 26 5. 3. 3 Reputational Resources ……………………………………………………………………………………………………………. 27 5. 4 Core Competencies …………………………………………………………………………………………………………… 7 5. 4. 1 VRIO ……………………………………………………………………………………………………………………………………………… 28 5. 0 Malaysian Airlines Resources and Capabilities ………………………………………………. 23 6. 0 6. 1 6. 2 6. 3 6. 4 6. 5 Possible Strategies………………………………………………………………………………………………… 29 SO Strategies ……………………………………………………………………………………………………………………… 1 WO Strategies ……………………………………………………………………………………………………………………. 32 ST Strategies ……………………………………………………………………………………………………………………… 33 WT Strategies ……………………………………………………………………………………………………………………. 33 Recommendation ……………………………………………………………………………………………………………… 4 7. 0 8. 0 Conclusion ………………………………………………………………………………………………………………. 36 References ………………………………………………………………………………………………………………. 37 2 2. 0 Introduction In the highly competitive airline industry, airlines must constantly analyse and re-evaluate their competitive environments in order to devise strategies that create and sustain a competitive advantage (DataMonitor 2009).

This report analyses Malaysia Airline System Berhad (MAS) in regards to its competitive position in the South East Asian (SEA) airline industry, with emphasis on countering the threat of Low Cost Carriers (LCCs). An analysis of the external and micro external environment will be conducted followed by an analysis of MAS’s internal resources, capabilities and core competencies. By doing so, the report will uncover the current strengths, weaknesses, opportunities and threats of MAS, and offer evidence-based recommendations that aim to counter the threat of LCCs and ensure MAS’s profitability in the SEA airline industry.

A graphical overview of the report structure and the analytical tools used is depicted in Figure 1 on the next page. 3 Current MAS Strategic Issues External Environment PESEL Framework Micro-External Environment Porters Five Force Model Strategic Group Map Analysis Porters Framework for Competitive Analysis Internal Analysis VRIO Analysis Opportunities and Threats Strengths and Weaknesses Strategy Formulation TOWS Framework Recommendations Figure 1. Report Graphical Overveiw 4 3. 0 Malaysian Airlines – Main Strategic Issues Malaysia Airline System Berhad (MAS) is a Malaysian-government owned airline with an active fleet of over 100 aircraft.

Operating in a traditional hub-and-spoke configuration, MAS flies approximately 50,000 passengers daily to and from its two Malaysian home bases in Kuala Lumpur and Kota Kinabalu (Malaysia Airline System Berhad n. d. ). MAS’s roots date back to 1947 where it operated as a charter airline as Malayan Airways Limited. By the 1960’s, a reduction of operating costs through technology and global economies of scale allowed the airline to offer single tickets to the general public at an affordable price, bringing about rapid expansion (Thomas 2007).

By the 1980’s, it had expanded to providing longhaul flights with the aid of an economic boom in Malaysia. MAS experienced two periods of unprofitability in 1997 and 2005 but recovered primarily through aggressive route rationalisation (cutting unprofitable routes) (White 2006). By 2006, MAS only flew only 19 domestic flights compared to 118 in 2003 (Airline Business, 2006). This lack of domestic flights and market liberalisation opened the Malaysian domestic market to Low Cost Carrier (LCC) AirAsia, which took over many of MAS’s unprofitable routes with discount airfares, via its low cost operating model.

By 2007, AirAsia had rapidly expanded to include regional and international routes while maintaining an emphasis on low operating costs at every level, thus becoming a significant threat to MAS’s profitable routes (Poon et al. ). 5 Yearly Profit Before Tax (PBT) of Selected Airlines in SEA 1500 Currency in Millions of Malaysian Ringgits 1000 500 MAS Air Asia JetStar -500 0 -1000 MAS Air Asia JetStar End of 2007 526. 6 554. 4 End of 2008 262. 3 -880. 5 244. 744 End of 2009 491. 8 592 327. 084 End of 2010 282 1,104. 60 409. 836 Figure 2: (BusinessWeek 2011a; BusinessWeek 2011b; Qantas 2010; Qantas 2009)

Figure 2 depicts the yearly profit before tax (PBT) of LCCs AirAsia and Jetstar, and MAS since 2007. Following heavy investment in 2008, Air Asia was expected to grow rapidly at the expense of MAS as it continues to apply its low cost model to more routes that MAS already covers (Poon et al). By the end of 2010, this trend was already evident and will likely continue. MAS can no longer ignore the threat of LCCs. MAS must seek out new competitive advantages through a decisive set of strategies that capitalise on its internal strengths, minimise its weaknesses, capture industry opportunities and manage its macro-economic challenges. 4. 0 Malaysian Airlines in the SEA Environment External analysis of MAS will focus on the general, industry and competitor environment of the company. This analysis will lead to the identification of the main opportunities and threats facing the organisation. 4. 1 General Environment Analysis Through the use of PESTEL analysis, the general external environment is analysed in order to find factors that will most likely affect MAS. 4. 1. 1 Political Environment The political situation within Malaysia is fundamentally focused on the country? s economic growth.

The government has intervened within the Malaysian economy in order to stimulate economic growth so as to improve the living standards of the poor (Boyle 2011). However such noble standing has backfired as political suspicion has risen as to whom mainly benefitted (Boyle 2011). As a result Malaysia has become a dangerous place for tourists to visit as rallies and activist marches are common. Recently 50,000 people have protested in a rally with the police force quelling the march with tear gas and water cannons. Many were arrested and charged with „war against the king? (Boyle 2011).

This unrest within Malaysia could affect tourism and the airline industry. 7 4. 1. 2 Economic Environment The economy of Malaysia had grown since its independence in 1957, becoming a main exporter of certain resources such as tin, rubber and oil (Thomas White 2010). With Malaysia? s reliance on the exportation of goods overseas, the economy had thrived and expanded. Malaysia seeks to transform its production from agricultural to industrial through the establishment of information technology and research and development bases. This will encourage skilled workforces and stronger technology, a movement known as the „knowledge economy? Thomas White 2010). This venture into knowledge economy displays opportunities for great improvement in technology and skills within the labour force. However, the recent global financial crisis has affected the export trade which Malaysia had heavy reliance on to support the economy (Thomas White 2010). The decline in overseas demand was a major blow to the growing Malaysian economy and caused problems for industries within the country. Khazanah Nasional or „National Treasury? translated into English, is the main investment arm of the Malaysian government that has piece of almost every local corporation within the country.

This is significant because Khazanah Nasional holds equity in AirAsia as major shareholder and has 70 percent stake invested within MAS (Stock Market Reviews 2011). This means that the local Malaysian government has a „golden share? of MAS making it the largest shareholder to the business and exerting considerable power over MAS. This is similar to Malaysian government intervention in the economy. 8 4. 1. 3 Socio-cultural Environment Malaysia is a country with diverse ranges of ethic cultures from Chinese, Malaysians and Indians.

Through a history of unrest between the multi-cultured society, Malaysia has reached some means of harmony however, racial discrimination still seethes (Thomas White 2010). The various religions and culture diversity is a rare sight that attracts tourists. Despite the multi-cultured country, there is still cultural conflict in the country in respect to the Malaysia people. The unrest is caused due to the negligence of the Malaysian government in civil liberties and certain human rights issues which in turn has caused political instability (Anwar 2010).

There are numerous ethnic groups to manage in Malaysia and many feel discriminated or cheated by the Malaysian government. 4. 1. 4 Technological Environment In terms of technology, airlines within Malaysia are either enhancing customer experiences through new modes of communications or reducing operation costs from upgrading of aircraft. Constant innovation is always encouraged in this changing environment to ensure survivability. In order to keep up with the growing competition in the airline industry, MAS has upgraded technology and operating processes.

New check-in technologies such as automated kiosks and mobile, self-service terminals have been introduced to enhance consumer interactions and workforce productivity (Malaysia Airlines 2011). Modifications to aircraft are ongoing and encouraged. Following price increases in aircraft fuel, the airline industry has modified aircrafts to be more fuel-efficient in order to avoid increasing operating costs while supporting the green revolution. Reductions in the airline industries carbon 9 footprint are achieved through CO2 standard engines and an abundant supply of palm oil biofuels (Association of Asia Pacific Airlines 2010).

This new green technology suggests that airlines will successfully manage increasingly strict regulations surrounding carbon emissions. 4. 1. 5 Environmental Environment Environmental issues within the airline industry have grown even stricter with the notion of climate change and a green revolution. The tropics of South East Asia already experience severe outbreaks of fire due to warmer climate and the use of forest burning to clear land presents a problem (Wong-Anan 2009). The increase in fires results in smogs over major cities presenting visibility problems for aircraft and potential health hazards for citizens and tourists.

The aviation industry has begun a unified strategy in addressing climate change developed during the UNFCCC Conference in Copenhagen in December 2009 (Association of Asia Pacific Airline 2010). The strategy aims to reduce the carbon footprints of aircraft through fuel-efficient planes, CO2 standard engines and a cap on carbon emissions (Association of Asia Pacific Airline 2010). In regards to restrictions introduced to combat climate change, Malaysia has begun a shift in the reliance of fossil fuels to cleaner alternatives.

When the price of fossil fuels rose, countries within South East Asia began investment in bio-fuels, with Malaysia approving over 5 million tons (Shameen 2006). The many large plantations of palm oil trees in Malaysia is a valuable natural resource to assist in the shift to bio-fuels from fossil fuel. 4. 1. 6 Legal Environment A recent development that could affect the airline industry in Malaysia is a plan to increase aircraft landing charges by 30% and parking charges by 60% from September 15, 2011 (Nambiar 10 2011). The price hike would systemically increase the prices of airfares due o increased operating costs. For example, international passenger fares would increase by RM65 (Nambiar 2011). The significant rise in prices could discourage international and domestic air travel. Analysts suggested that the increase in airport taxes may not deter international customers as significantly as the low cost carrier travellers, a concern for domestic travellers (The star online 2011). Within the SEA airline industry, one of the main issues surrounds the ethics of an aesthetic, sexualised and emotional labour force.

The notion of a perfect flight attendant has been those of females of specific size, weight and beauty (Speiss and Waring 2005). This leads to ongoing problems surrounding sexual discrimination in the labour force and legal challenges. 4. 1. 7 Summary In summary, opportunities exist to reduce the carbon footprint of the airline industry in Malaysia by using alternative biofuels and more technologically advanced aircraft. Despite that, there are threats due political turmoil, increasing operating costs and labour relation issues. 4. 2 Industry Environment Analysis

One widely accepted method of analysing the micro external environment is Porter’s Five Forces Model. Developed in 1979, it provides a framework for analysing the level of competitive intensity and thus attractiveness of a market (Grant et al. 2011). 11 4. 2. 1 Threat of new entrants Siegfried and Evans (1994) argue that that there are two types of entry impediments. Structural barriers which exist due to natural characteristics of the industry and behavioural barriers which originate via intentional discretionary conduct by incumbent firms.

Perhaps the strongest structural barrier that exists in the airline industry are high capital requirements which provide incumbents a natural absolute cost advantage over entrants in the short run. This is empirically supported by Dunne and Roberts (1991), and Chappell, Kimenyi & Mayer (1992) which found that high capital intensity industries such as airlines have significantly lower entry rates. This barrier is however mediated by the prospective firms cost of capital and thus dependent on economic conditions such as interest and exchange rates.

This suggests that relative to other industries, the airline industry has a significantly lower capital barrier during a global boom due to its high capital intensity nature. One behavioural barrier that MAS itself perpetuates is brand recognition and customer loyalty via the generation of customer delight. Brand loyalty increases a customer’s psychic switching costs. Ong and Tang (2010) found that customer loyalty to MAS is higher in the international route markets as customers tend to place a higher priority on price on shorter routes at the expense of loyalty.

Among other reasons, Air Asia capitalised on this weakness in order to successfully enter the market in 2001. MAS also has an operational unit cost advantage over new entrants via the learning curve effect. Through over 60 years of experience, MAS holds knowledge, skill and stakeholder contacts that new entrants will need to acquire. 12 4. 2. 2 Threat of Substitutes For MAS, close substitutes only exist for domestic routes in the form of buses, boats and personal automobiles. However, such substitutes are perceived inferior in terms of convenience and only marginally superior in price (O’Connell and Williams 2005).

Furthermore, domestic routes only make up 15% of revenue. Consequently the threat of substitute products can be seen as low. 4. 2. 3 Intensity of Rivalry With the advent of nearby regional-route low cost carriers such as Air Asia and a significant amount of aggressive international carriers such as Singapore Airlines and Thai Airways, rivalry and price competition on all routes is high. Although airlines attempt to distinguish themselves through means other than price, most buyers still indicate that price is their primary factor in choice (Ong and Tang 2010). This leads to intense price wars.

For instance, in the mid 2008 low season, MAS attempted to match Air Asia by offering cost-price fares (Grant et al. 2011). As many costs are fixed, the profitability of individual airlines is determined by efficient operations and favourable unit costs. As airlines are a naturally high capital intensity industry, airlines need to constantly be using their capital (airplanes) to maximum capacity. During periods of poor economic performance, price competition increases even further in an effort to remain operationally efficient due to reduced demand since leisure air fares are price elastic. . 2. 4 Bargaining power of buyers In the airline industry, consumers have high buying power for several reasons. Firstly, as supported by Shaw (2007), leisure customers are likely to spend the majority of their travel budget on airfares and thus are sensitive to changes in price. Secondly, customers do not strongly differentiate between airlines. Thirdly, the widespread availability of air fare comparison search 13 engines strongly reduce information-search costs due to an abundance of relevant accessible information.

In addition to low switching costs, these factors induce the customer into dissonance-reducing buying behavior. Customers can change airline firms with little consideration. Recognising this, some airlines such as MAS have attempted to lower the bargaining power of buyers through the introduction of frequent flyer programs. 4. 2. 5 Bargaining power of suppliers The capital-intensive nature of the industry largely originates from the need to purchase relatively-expensive aircraft that are essential for any airline to exist.

Aircraft are purchased from a market that is a near-duopoly consisting of Airbus and Boeing. This low concentration of suppliers relative to buyers, coupled with its business-critical nature leads to an industry where suppliers have strong bargaining power. Indeed, this bargaining power is so strong that Boeing, MAS’s primary aircraft suppliers, have complained of constant excessive demand with backlogs for some of its aircraft orders stretching to 2019 (International Business Times 2011). Furthermore, it is near-impossible for an airline firm to vertically ntegrate its aircraft purchases due to extremely high entry costs in the form of very large capital requirements and a high learning curve. 4. 2. 6 Summary In summary, it can be concluded that the SEA airline market is moderately attractive. Strong supplier and buyer bargaining power along with strong rivalry within existing firms restrict MAS’s profit margins. However, high barriers of entry and a low threat of substitutes suggest that the number of competitors (or competitive goods) will likely not significantly increase. 14

Furthermore, these factors also suggest that in the long-term, demand for airline travel will increase due to a shortage of viable substitutes and population growth. Figure 3: Adapted from Porter (1980) 4. 3 Competitors Environment Analysis To understand how competitors within the SEA airline industry create a competitive advantage, a Strategic Group Map will be formulated in order to analyse how airlines form groups based on the strategies they have adopted. Following this, an analysis of the most significant competitor derived from the strategic group map will be undertaken using Porters Framework for competitor analysis. 5 4. 3. 1 Scope and Methods of Analysis Malaysian Airline Systems (MAS), the national airline carrier of Malaysia, is located in SouthEast Asia with a population of 600 million (ASEANstats 2011). Air travel within the ASEAN region alone accounted for 36% of MAS? s passengers in June 2011 and is predicted to grow significantly (Malaysian Airline System Berhad 2011). Based on this, competitive analysis will be limited to the major Low Cost Carriers (LCC? s) and Network Airlines based in this region, as listed in Table 1.

Airline Air Asia Indonesia Air Asia Thailand Air AsiaX AirAsia Firefly Garuda Indonesia Jetstar Lion Malaysian Airways Nok Air One to Go Singapore Airways Thai Airways Tiger Airways Country Indonesia Thailand Malaysia Malaysia Malaysia Indonesia Singapore Indonesia Malaysia Thailand Thailand Singapore Thailand Singapore Associated Carriers AirAsia, Air Asia Thailand, AirAsiaX AirAsia, Air Asia Indonesia, AirAsiaX AirAsia, Air Asia Indonesia, AirAsia Thailand AirAsiaX, Air Asia Indonesia, AirAsia Thailand Malasian Airlines Qantas Firefly Thai Airways Tiger Airways Nok Air Singapore Airways Type of Carrier

Low Cost Low Cost Low Cost Low Cost Full Service/Network Low Cost Low Cost Full Service/Network Low Cost Low Cost Full Service/Network Full Service/Network Low Cost Table 1: Major South East Asian Airlines (Zhang 2009) 16 4. 3. 2 Strategic Group Map As described by Porter (1980), a strategic group map aims to identify a cluster of companies within an industry that implement similar strategies. Two key strategic variables are selected for the airline industry and its competitors are plotted on a quadrant according to these variables to help identify the strategic groups (Grant et al. 2011).

One of the strategic issues to be addressed in this report is the threat of low cost carriers to full service carriers such as MAS. A key characteristic of LCC? s is the basic services offered on board flights versus the many included services offered by the full service network carriers (Damuri and Anas 2005). Based on this difference, one of the variables selected for the strategic group map will is the „level of service? offered by an airline shown on the (Y) axis. The geographical range in which relevant airlines operate has been selected as the second variable, used on the (X) axis of the strategic group map.

This ranges from domestic, regional (within SEA), through to international long haul for the identified airlines in Table 1. A strategic group map has been formed (see Figure 4 on next page) to display the position of each major SEA airline along the strategic variables of level of service and geographical range 17 Figure 4 18 Analysis of the strategic group map (Figure 4) identifies four distinct strategic groups within which airlines adopt similar strategies based on the variables chosen: 1. Domestic LCC 2. Regional LCC 3. International long haul LCC 4.

Network Full service carriers The following conclusions can be drawn from observations of the Strategic Group map. ? As shown in Table 1 some of the LCC airlines within these strategic groups are subsidiaries of the Network carrier airlines. They are engaged in the LCC and the full service segments. For example, in 2007 MAS created a fledgling wholly owned domestic LCC called Firefly (Firefly 2009). ? By definition MAS has similar strategies to those airlines within its strategic group and as such faces the most intense rivalry from them.

Each of the airlines within this group has similar capabilities such cargo, engineering and ground handling services. ? MAS also face direct competition from other strategic groups. Malaysian based airline AirAsia and its subsidiaries span all the strategic groups that employ a LCC strategy on domestic, regional and some long haul routes. ? Within the International „Long haul LCC? strategic group AirAsiaX is the only airline competing. This clearly gives them a competitive advantage and perhaps threatens some of the Network carriers long haul market.

Philip Lim (2011) from the Taipei times reports that since recent tough economic conditions there has been a substantial swing of business travellers to LCC? s in the long haul travel segments. New entrants, may also judge this strategic group as an attractive segment due the low rivalry. 19 Form a corporate level it is clear that MAS? s main competitors within the South East Asian airline industry are SIA, and Thai Airways. However the focus of this report is to analyse how MAS is to counter the threats of low ost competitors. AirAsia? s Malaysian base and breadth over all LCC strategic groups highlights that they may also be a more relevant, threatening and emerging competitor. This is supported by Thomas (2007) who notes that AirAsia has captured over 50% of Malaysia? s total air travel market. Based on these findings it is pertinent to undertake a brief competitor analysis of AirAsia in order to gain a deeper understanding of their activities. 4. 3. 3 AirAsia : LCC Competitor analysis

Based on the observations of the strategic group analysis, an analysis of Malaysian airlines main LCC competitor, AirAsia will be undertaken using „Porters Framework for competitive analysis? (Grant et al. 2011). The framework focuses on analysing an organisations Strategy, Objectives, Assumptions and Resource capabilities in order to understand and predict competitors behaviour. Focusing on AirAsia, each of these aspects is explored. AirAsia – Strategy AirAsia has subsidiaries in all the LCC strategic groups such as AirAsiaX, AirAsia Thailand, & AirAsia Indonesia.

AirAsia competes with smaller LCC? s and also Large International Network carriers. Air Asia? s annual report (2010) highlights that the Organisation implements the following 5 Strategies in order to gain a competitive advantage. 20 1. Low Fares – No Frills ? ? No frequent flyer programmes or airport lounges Choice to purchase in-flight services 2. High Aircraft utilisation ? ? High frequency flights High turnaround of flights 3. Point to point network ? All flights are non-stop. Does away with resources at transit locations. 4. Convert Fleet to more reliable and efficient aircraft. Complete fleet of A320? s. This homogeneous fleet reduces maintenance costs. 5. Safety First ? World standard maintenance of fleet by reputable provider (Luftansa). AirAsia – Objectives The organisations goals are as follows ? ? ? To continue to be the Lowest cost airline in every market it operates within High margins Sustainable growth It can be seen in the Table 2 (next page) that AirAsia has grown remarkably since 2007 across all significant measurables. It has also won the Skytrax „Worlds best low cost airline? award for the last 3 years (SYTRAX 2011). 21

For the year ended 30 June 2007 Revenue [Ringit Millions] Total Assets [Ringit Millions] Profit before Tax [Ringit Millions] No of Passengers Carried Group Fleet Size No of Employees No Routes Served R1,603. 00 R4,779. 00 R278. 00 8,737,939 54 2,924 75 For the Year ended 31 December 2010 R3,948. 00 R13,240. 00 R1,099. 00 16,054,738 90 4,702 132 Percentage increase since 2007 to 2010 146. 29% 177. 05% 295. 32% 83. 74% 66. 67% 60. 81% 76. 00% Table 2: Air Asia Group Recent Performance (AirAsia 2010) AirAsia – Assumptions In AirAsia? s 2010 Annual report the organisation made a number of assumptions about the airlines operating environment.

Firstly, global economic conditions are set to improve and secondly demand for air travel in the SEA region is predicted to rise substantially. However oil prices are expected to continue increasing, putting further pressure on operating costs and political uncertainty in the Middle East may continue to cause further disruptions to flight services. AirAsia – Resources and Capabilities One AirAsia? s main strengths and key to its success is quoted by Poon and Waring (2010, 203) as the , “…forensic management of costs…closely monitored on a daily basis”.

This focus has come from the strong leadership of the group CEO Tony Fernandes who monitors costs daily in order to find ways to deal with any issues. 22 Another strength of AirAsia lies in the creation of AirAsiaX to compete in a new strategic group of low cost long haul services. As described by Wensveen and Leick (2009), this is a new competitive environment that creates a bridge between various short-haul LCC? s across the globe. Perhaps opportunities exist for of LCC? s around the globe to form alliances to compete with the network carriers.

AirAsia has no aircraft maintenance repair or overhaul (MRO) facilities of its own. MRO is a key element of AirAsia success as it provides safe and reliable aircraft. As described by Rieple and Helm (2008) leaving this to a third party could be risky as AirAsia is not in direct control of these activities and is subject to market forces in relation to the cost of these services. With a growing fleet this could be interpreted as a weakness and competitive disadvantage compared to the major network carriers such as MAS, SIA and their low cost subsidiaries who all have their own MRO facilities. . 0 Malaysian Airlines Resources and Capabilities The internal analysis of MAS will focus on the organisations resources and capabilities that help it gain a competitive advantage. This analysis will lead to the identification of the main strengths and weaknesses of MAS. 5. 1 Capabilities Capabilities, put simply, are the integration and collaboration of individual resources to reach a desired outcome (Grant et al. 2011). Capabilities are a combination of both tangible and intangible resources. By analysing a company? capabilities, we can deduce both the core competencies and competitive advantages that the company may possess. A competitive 23 advantage may lie within a company? s capabilities if they are not easily replicated (Grant et al. 2011). The below table represents MAS capabilities based on the resources mentioned below: Functional Area Management Capability Forward Thinking Clear Objectives Resources Business Turnaround Plan 1+ 2. Transparent information sharing. Skilled Managers. Innovative programs. Awards, Customer Loyalty, Recognisable, Various advertising mediums.

Skilled Technicians, trusted supplier materials. Revered History, Government co-operation, strong supplier support, strong government links, open communication channels, innovation, employee knowledge Marketing Manufacturing Organisation Quality Customer Service Brand Recognition Differentiation High Quality Products Product Range Strong Network R Strong CSR Development Table 3 5. 2 Tangible Resources 5. 2. 1 Financial Resources MAS have several shareholders. „Penerbangan Malaysia Berhad? is the majority shareholder with a 52. 0% stake of MAS. The second-largest shareholder is „Khazanah National? which holds 17. 33% of the shares. Foreign shareholders make up 5. 13% (Grant et al. 2011). Up until December 2008, MAS had shrunk its operations for the tenth consecutive quarter (IntellAsia 2008). MAS? officials identified that increasing maintenance, repairs costs, an increasingly inefficient route network, higher staff costs and escalating fuel prices and increasingly inefficient route networks as reasons for the financial losses (Scribd 2011). The 24 introduction of the BTP has helped MAS deal with the financial issues, increased competition and government intervention (Grant et al. 011). 5. 2. 2 Organisational Resources The introduction of the BTP (Business Turnaround Plan) in 2006 and its successor the BTP2 in 2008 was implemented to regain profitability after 10 consecutive quarters of negative profit. MAS profit of RM 493 Million in 2009 (Grant et al. 2011) can be largely attributed to the success of the BTP. MAS has been able to successfully implement its private MRO (maintenance, repair overhaul) department which has reduced costs and increased both effectiveness and efficiency simultaneously (The Financial Express 2008).

In 2008 MAS expanded their partnerships with other airline organisations such as Singapore Airlines, Air Mauritius and Silk Air. Also in 2008, MAS and Etihad Airways, two opposing competitors, signed a „code share agreement? to enhance their networks respectively (Etihad Airways 2008). In 2009, MAS once again expanded its network by signing a code share agreement and frequent-flier partnership with low cost carrier Jet Airways. This agreement increased passenger traffic between Malaysia and India (The Economic Times 2009) 5. 2. 3 Physical Resources The headquarters of the airline is in Kuala Lumpur, Malaysia.

In total, MAS has approximately 19,000 employees (Airfleet 2010). MAS has the capability to use 100 routes globally. MAS has over 70 offices worldwide, which again displays its strength in its exceptional customer service (Airlines Information 2011). As of 2010, MAS has 12 A330 Airbus? s, and a fleet of 68 Boeing Aircraft, and 42 Boeing freighter aircraft. The MAS fleet comprises of 109 aircraft. (Airfleet 2010) 25 5. 2. 4 Technological Resources MAS source its aircraft from the two most reputable aeroplane manufacturing companies in the world, Boeing and Airbus (Ahmed , 2010).

By using these two companies as suppliers, MAS leads customers to believe that they use only the safest and highest quality parts when assembling their fleet. 5. 3 Intangible Resources 5. 3. 1 Human Resources MAS have been able to identify and employ highly skilled and capable workforce, which has been illustrated by the array of awards MAS has received. With pilots, engineers and technicians in particularly high demand globally (Pearson, 2008), MAS will have to offer a number of incentives and strategies to keep the most suitable workforce possible. MAS customer service has always been revered.

Continual awards and recognition are testament to this MAS has received the award of best cabin crew in the world 8 times since 2000 (Skytrax World Airline Awards, 2010). Customer service in the airline industry is a major factor to be considered when customers choose which airline to fly with. 5. 3. 2 Innovation Resources MAS have implemented a number of new strategies to suggest it is a creative and innovative company. The introduction of the „Everyday Low Fares? policy in 2008 meant that MAS matched the lowest prices of its competitors, mainly Air Asia.

Although this severely cut profit margins, it 26 was able to offer 1. 3 million „zero? fares, and most importantly, MAS were able to price match Air Asia (Grant et al. 2011). In what has been described as a „pioneering? move, MAS has introduced the ability for customers to be able to check into their flights via the social networking website of Facebook. Malaysia Airlines is currently the only airline in the worldwide to have such a feature available (Cnet Australia 2011). 5. 3. 3 Reputational Resources Throughout the organisation? s history, MAS has enjoyed strong brand recognition.

MAS places a heavy emphasis on customer service and can boast about being one of only six international airlines to be awarded a „5-Star? Rating (Grant et al. 2011). Other significant awards include the „Phoenix Award? for businesses undergoing a life changing transformation and magazine „Aviation Week ranking MAS as the 2nd best full service carrier globally (Skytrax World Airline Awards 2010) . With this reputation, customer loyalty is increased. These loyal customers are crucial to the success of any organisation, as they will often exclusively only use MAS. . 4 Core Competencies The core competencies of a company have been defined as “activities that an organisation performs better than its other internal activities and that are the most critical to competitiveness and profitability” (Business Dictionary 2011). By extracting and reviewing the core competencies of any organisation, competitive advantages and the strengths of MAS can then be identified. By using the „VRIO? model (Valuable, Rare, Costly to Imitate, Substitutable), we can then extract the strengths and weaknesses of MAS. 27 5. 4. VRIO RESOURCES AND CAPABILITES VALUABLE RARE COSTLY TO IMITATE NONSUBSTITUABLE Brand Recognition High R Spending Clear Objectives Quality Customer Service Forward Thinking High Quality Products Strong Network Product Range Strong CSR Development Yes Yes Yes Yes Yes No Yes Yes Yes Yes No No Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Table 4 No Yes Yes Yes No Yes Yes Yes No Yes 28 6. 0 Possible Strategies Following external and internal analysis of MAS, prominent strengths, weaknesses, opportunities and threats can be identified.

These elements have been plotted into a TOWS matrix as shown in Table 5 on the next page, in order to link these characteristics and facilitate the formation of strategies that may aid the organisation resolve the intended strategic issues outlined in this report. (Weihrich 1982). 29 Strengths 1. High Brand Recognition 2. Strong learning curve advantage 3. Superior Customer Service 4. 5. 6. Clear Positioning Strong Route Network Reliable MRO subsidiary with proven record Opportunities 1. Increasing demand for low cost travel in SEA 2. Low rivalry in the longhaul LCC strategic group 3.

Availability of new technology: biofuels to reduce fuel costs 4. Availability of newer more fuel-efficient aircraft SO 1. O1+O2+S1+S2+S4 Form alliance with a LCC to satisfy demand for market segments which prefer low cost over full service while maintaining the existing premium brand and positioning O1+O2+S2 – Expand and intensify Firefly operations in the SEA area O3+S6 – Leverage reliable in-house MRO to retrofit existing aircraft with biofuel Weaknesses 1. Government Golden Share: Socioenvironmental obligation to Malaysia 2. Poor Cost Management 3. High capital intensity WO 1.

O2 + W3 – Shift underutilized aircraft to the Low cost/long haul segments to improve returns on capital. O3 + O4 + W1 – Use modern fuel efficient aircraft and biofuels to reduce carbon footprint to satisfy government social responsibility obligations 2. 2. 3. Threats 1. LCC? s are increasingly providing long haul services that compete with MAS 2. Continuing global economic uncertainty is increasing the attractiveness of long haul LCC? s such as AirAsiaX 3. High rivalry is further increasing from network carriers and low cost subsidiaries 4. Buyers and suppliers have increasingly higher bargaining power 5.

Airports are continuing to increase landing and parking prices in a market with few alternatives 6. Malaysian labour legalisation may raise labour overhead costs. ST 1. S1+S3+S5+T2+T3 – Develop promotional campaign to emphasise safety, a proven track record and customer service awards are worth the premium S1+S3+T4 – Leverage customer service awards and brand recognition to further develop loyalty programs to decrease buyer bargaining power WT 1. W2+T1 – Shift focus from differentiation to cost leadership (similar to AirAsia) W1+T6 – Lobby Malaysian government to reduce social obligation and improve flexibility . 2. Table 5: MAS – TOWS Analysis 30 Described below are the strategies developed from TOWS matrix that will aid MAS in achieving a competitive advantage. 6. 1 SO Strategies Form alliance with a LCC to satisfy demand for market segments which prefer low cost over full service while maintaining the existing premium brand and positioning The airline industry can be can be behaviourally differentiated into two broad segments; those consumers which place a high importance on the price of air fares above all else, and those are who are willing to pay more for premium service (Kotler et al. 010). By forming an alliance with an established existing LCC, MAS will be able to maintain and capitalise on its existing premium brand and learning curve advantage in the full-service industry whilst satisfying increasing demand for low-cost air fares in SEA (O? Connell and Williams 2005). Furthermore, establishing an alliance will ensure that each firm will be able to focus on their core competencies and established customer base by maintaining their current positioning.

Expand and intensify Firefly operations in the SEA area Firefly, MAS’s wholly-owned subsidiary, currently operates a small amount of domestic and regional routes (Firefly, 2011). To capitalise on increasing demand for low-cost air fares, MAS could expand and intensify Firefly’s operations to cover more of the SEA region. Such a complete dual-brand strategy, as first introduced in the SEA region by Qantas/Jetstar, would essentially see Firefly compete with MAS, except that it will target the more price-conscious segment (Sandilands, 2009).

MAS would be able to maintain its high brand recognition for its premium services whilst building Firefly’s existing brand and experience in the LCC industry. 31 Leverage reliable in-house MRO to retrofit existing aircraft with biofuel MAS’s owns an award winning reliable maintenance-repair-operations division that could be utilised to lower fuel costs by retrofitting existing aircraft with bio-fuel technology (Grant et al. 2011). Bio-fuel as resource will likely be comparatively inexpensive for MAS as Malaysia has booming palm oil business from which it can produce bio-fuel from (Shameen 2006). . 2 WO Strategies Shift underutilised aircraft to the low cost/long haul segment. The airline business is capital intensive and MAS uses a large portion of its capital to purchase expensive machines compared to its labour costs. When these machines lay idle or are underutilised they can drastically increase costs for the airline (Wensveen 2009). Low rivalry identified by the strategic group map in the low cost/long haul segment could be an opportunity for MAS to diversify and shift underutilised aircraft into this new segment to increase aircraft utilisation.

Use modern fuel efficient aircraft and bio-fuels. The governments golden share of MAS allows the Malaysian government to put internal pressure on the MAS board to uphold social and environmental responsibility obligations to Malaysia. Malaysia has booming palm oil business that could be used to reduce reliance on high carbon emitting fossil fuels (Shameen 2006). Along with this, the use of new generation aircraft that are more fuel efficient can substantially reduce MAS carbon footprint and help satisfy some government social responsibility obligations. 32 6. 3 ST Strategies

Develop a promotional campaign to emphasise safety, track record and customer service awards. The attractiveness of low-cost carriers and higher rivalry from the low-cost subsidiaries presents as threats to MAS in maintaining survivability within the airline industry. Recently in 2010, Malaysia Airlines had won two awards as Asia? s Leading Airlines and Asia? s leading Business Class Airlines which can become the core focus of the promotional campaign (Malaysia Airline 2010). Through implementing a promotional campaign, MAS is able to rejuvenate its brand as the high quality airline that it is.

Leverage customer service awards and brand recognition to further develop loyalty programs to decrease buyer bargaining power. With the increase in buyer bargaining power, the strategy of developing loyalty programs ensures higher switching costs to keep loyal fliers of MAS with the company. MAS already have the Enrich loyalty program in which customers are able to benefit from. In 2007, Virgin Blue had joined in partnership with MAS Enrich loyalty program to further the benefit for consumers (Malaysia Airline 2007).

The partnership of Virgin Blue with MAS Enrich Loyalty program creates higher switching costs for buyers and reduces the bargaining power that has been on the rise. 6. 4 WT Strategies Shift focus from Differentiation to Cost Leadership Malaysian Airlines systems currently operates on a „differentiation? strategy. This strategy has allowed the organisation to distance itself from its competitors, and have a recognizable and strong brand recognition, which is paramount in gaining and retaining customer base. In recent 33 imes, some competitors, namely Air Asia (a Low Cost Carrier) has started to increase long haul services, which previously was only offered by Malaysian Airlines. The implications of LCC? s increasing long haul routes means that a number of customers will use LCC? s over MAS purely due to having a lower cost. A feasible strategy would be for MAS to offer same the same prices as these LCC? s over similar routes, essentially nullifying the LCC competitive advantage. Customers would be more likely to fly with MAS over LCC? s due to a) MAS reputation b) Customer service.

This would change MAS overall strategy from „differentiation? to a „cost leadership? strategy. Lobby government to reduce social obligations and improve operational flexibility Malaysian Airlines currently has to meet a number of social obligations demanded by the government. Malaysian Airlines is widely supported for meeting its Corporate Social Responsibilities, but faced with the threat of an increase in labour restrictions and legislation, it would be wise for MAS to propose to (lobby) the government that for a relaxation of these Corporate Social obligations.

This in turn, would improve operational and organizational flexibility, which would help MAS deal with the possible threat of increasingly stringent labour restrictions. The lobbying process would have to be done in a manner in which the final result (increased organizational flexibility) benefits both the government and organisation, as the government has veto powers over any decision made by the MAS board. 6. 5 Recommendation Based on the strategies developed following internal and external analysis of MAS, it is recommended that MAS adopt a corporate strategy to diversify and offer low cost budget air 34 ravel to satisfy the increasing demand for market segments which prefer low cost over full service, while maintaining the existing premium brand and positioning (Jegathesan 2011). This is to be achieved by horizontal integration into the related LCC airline segment through the formation of an alliance with existing SEA LCC leader AirAsia via an equity swap arrangement. In support of this agreement, MAS shall also divest its fledgling domestic LCC subsidiary Firefly. This strategy best resolves the main strategic issue of how an established carrier such as MAS can counter the threats posed by low cost competitors for the following reasons: 1.

Each airline can focus on their core competency to create synergy and economies of scope. This strategy brings benefits of the specialisation of the two companies together. MAS in the long-haul premium travel and AirAsia low cost air travel. 2. Exchange in human capital such as Air Asia? s Tony Fernandez who was able to make Air Asia successful. The exchange of human capital is more than just able-bodied men, but the transference of skills and experiences. Both companies stand to benefit in the exchange of knowledge and skills. 3. Sharing of prominent intangible resources that each business