PART B

AIRASIA Berhad

TABLE OF CONTENT

1. Executive summary

2. Introduction

3. Environmental analysis

4. Environment analysis

5. Company analysis

6. Competitive strategy

7. Financial analysis

8. Critical Success Factors

9. Problems & Issues

10. Recommendations

11. Conclusion

12. References

13. Appendices

AIR ASIA

1. EXECUTIVE SUMMARY

Strategic management has played a key role in the success of many business

organizations in the world including airlines and AirAsia is no exception.

Commencing in 1996, within fifteen years, AirAsia managed to expand its operations

into another ten countries. In addition, through its associate company AsiaX, it

launched long-haul low-cost air services from Malaysia to Australia and the United

Kingdom.

This paper will look at the award winning Malaysian low cost carrier- AirAsia’s by

analyzing its strengths and weaknesses using strategic tools such as PEST analysis,

Michael Porters Generic strategies, SWOT matrix analysis, Porter’s Force Model

Competitive Forces Model, BCG Matrix , Internal and External Factor evaluation

Matrix and Competitive Profile Matrix and Financial Analysis and recommend the

relevant strategies for adoption to pursue its continue its competitive differentiation

and profitability. The paper also throw some insights into the Blue Ocean Strategy

concept which is used by AirAsia as one of its strategic moves.

2. INTRODUCTION

Competition in the airline industry is very intense and growing rapidly. The airlines

are using several strategies to compete with one another in the industry. Airline

companies need to identify their strategic management to achieve their vision and

mission and AirAsia is no exception.

2.1 Background

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

November 1996. It was originally owned by the government-link company ,DRB-

Hicom, a heavily –indebted airline company purchased by Tune Air Sdn Bhd , a

company belonged to former Time Warner executive Tony Fernandes's company . By

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the year 2002 Tony Fernandes made AirAsia a profitable company and launching

new routes from its hub in Kuala Lumpur International Airport at breakneck speed,

undercutting former monopoly operator Malaysia Airlines (MAS) with promotional

fares as low as RM1 (US$0.27).

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

second hub at Senai International Airport in Johor Bahru . AirAsia later started a Thai

subsidiary, added Singapore itself to the destination list, and commenced flights to

Indonesia. Flights to Macau started in June 2004, while flights to Mainland China

(Xiamen) and the Philippines (Manila) started in April 2005. Flights to Vietnam and

Cambodia followed later in 2005 and to Brunei and Myanmar in 2006, the latter by

Thai AirAsia. On August 2006, AirAsia took over Malaysia Airlines's Rural Air

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

routes were subsequently returned back to MASwings a year later citing commercial

reasons. Air Asia has further enhanced its presence in Asia by strengthening and

enhancing its route network by connecting all the existing cities in the region and

expanding further into Indochina, Indonesia, China and India. With the increased

frequency and addition of new routes, AirAsia expects passenger volume to grow

further.

2.2 Vision, mission , values ,goals, objectives and strategies

AirAsia’s vision is to be the largest low cost airline in Asia serving the 3 billion

people who are currently underserved due to poor connectivity and high fares and it

aspires to be a the leading low-cost carrier in the Asian region that offers five-star

service with 95% of on-time performance. At the same time, it wants to promote

Malaysian hospitality and the local food. In addition to charging lowest fares and

focusing on customers, it also would like to develop various products and services.

AirAsia’s mission is to be the best employer, create a globally recognized ASEAN

brand, to be the lowest cost budget airline and to maintain the highest quality service

by embracing technology.

Air Asia’s value system( vision, business model and core values) is central to its

success as a leading budget airline in Malaysia. The core values of Air Asia are

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adopting safe practices, valuing its employees, focusing on customer, maintaining

highest standard of corporate integrity and commitment for performance excellence.

The goals and objectives of Air Asia are guided by its corporate vision and mission

which include emphasis on safety, customer focus,, operational excellence and human

capital development .In maximizing shareholders’ value, AirAsia also intends to

create more profit by expanding its business to other Asian countries. Besides, it also

has started to add routes and network in a prudent calculated way. Whilst going

through a calculated expansion routes and networks , the company also ensures to

reduce the risk of business loss.

The companies goals now is to carry 70 million passengers a year, within six years

starting from 2014, develop the low-cost carrier terminal at the KL International

Airport into the regional hub for budget travel , introduce more routes, add

frequencies and develop the existing routes.

Aligned with its mission statement, AirAsia’s business strategy is centred on cost

leadership. However, its business strategy targets specific markets; price sensitive

customers (including first-time fliers) needing short-haul flights. Therefore , Porter’s

generic strategies (table 1) ,AirAsia’s business strategy can be categorized into focused

cost leadership.

Table 1- Michael Porter’s Generic strategies

AirAsia builds and sustains its competitive advantage by providing services at a price

that is simply lower than competitors’ price. Operation effectiveness and outstanding

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efficiency are two main characteristics of low cost businesses including AirAsia. The

sources of cost advantages contributable to the low cost business model for each

activity in AirAsia’s value chain. These cost advantages constitute AirAsia’s order

winner in competing with its rivals as they enable AirAsia to provide the lowest cost

service.

3. ENVIRONMENTAL ANALYSIS

An environmental analysis is done using PEST model. The threats and opportunities

have been identified and discussed below.

1. Political

There was an on going consolidation in the airline industry as a result of increased

privatization and government -deregulation throughout the world. Most governments

were instrumental in the success of the most airlines success in Asia . Most airline

companies in Asia had full or substantial state ownership , management and control .

An example of state owned or assisted airlines in Malaysia is Malaysian airlines system

(MAS) These companies were often well subsidized and protected from competition.

These companies were focused on achieving national objectives rather profit oriented.

Opportunities

Privatization and de-regulation have opened the way for new routes and air port deals

through open skies agreements between countries, or the permission of the entry of

private airlines , reducing the constraints for international airlines ie. Malaysia signed

an “open –skies” agreement with the United States in 1997. Such agreement enables

new airlines like AirAsia to access to domestic routes of other countries. As a result,

AirAsia could to go for long haul flight services, to penetrate into the untapped market

share .Thus, the airlines could use their new aircrafts in the new routes.

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Threats

In the era of globalization, the airline industry was also affected global uncertainties

such as accidents, terrorists attacks, and disaster which affected the customer

confidence to a certain extent. If customer confidence is affected, AirAsia may face the

threat of losing its profitability, or even lead to bankruptcy. Being a low- cost carrier,

Air Asia is subjected to aviation regulations and government restraint, geography and

infrastructure of Asia and the travelling preferences of customers.

Overall under political heading there are more opportunities than threats. In Malaysia

as Air Asia is subjected to undergo several government regulations, the airline only

could minimize or contain the negative impacts by selecting the most favourable routes.

2. Economic

Opportunities

The global economic downturn has resulted in decline in airlines business. This affected

the budget airlines as well. However, as for AirAsia this situation created an opportunity

.The leasing costs of airplanes were drastically reduced by about 40%. This enabled

AirAsia to lease planes at a cheaper rate on pass on the cost savings to customers in the

form of cheaper fares..

Threats

During this period of recession, the air transport industry also faced fluctuations in fuel

prices . Whenever the price of fuel rose it had an impact on the airlines’ operating costs.

This would result in decrease in yield and profitability .

The economic trends faced by Air Asia is therefore unavoidable. However, the

opportunities posed by the downturn outweighed the threats and gave AirAsia an

opportunity for expansion.

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3. Social /cultural

Opportunities

Economic growth in recent years has led to rapid increase in middle class population in

Asia resulting the demand for air travel to increase. The surge in trade and tourism in

Asia also caused the demand for air travel to increase. More and more people are now

willing to travel at low fares and they are prepared to compromise on food and other

services during travel. The people are attracted by budget air lines because of their low

fares as low as 10-20 %of those charged by full service airlines.

The current situation gives AirAsia an opportunity to adopt differentiation strategy to

alienate itself from competitors by offering good customer service as full service

airlines with low fare. This has given AirAsia a competitive advantage. In addition Air

Asia now offers services such as in flight food and drinks ,online sales of hotel, car and

holiday reservations and travel insurance, branded credit card .

Threats

If Air Asia is not careful in implementing differentiation strategy, it could increase in

operation cost in producing value added services.

Overall, opportunities outweigh threats in this cultural /social aspect.

4. Technological

Opportunities

Air Asia fully utilize information technology . In fact, Air Asia is the first airline in

South east Asia to use e-ticketing and bypass the traditional travel agents. As a result

the air line was able to save the cost of issuing physical ticket .This has eliminated the

need for large and expensive booking and reservations systems and agent’s

commission.

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Threats

Heavy reliance on online sales may pose a risk of system disruption .This threat can be

minimized if the airline have appropriate back-up system , preventive maintenance and

a contingency plan.

4. INDUSTRY ANALYSIS

4.1 Porter’s Five Competitive Forces

An analysis is done using Porter’s five forces` frame-work ( figure 1) to assess the

competitive intensity and attractiveness of budget airline industry.

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Figure 1 – Michael Porter’s Five Competitive Strategies

1.Bargaining power of suppliers

The bargaining power of suppliers is also described as the market of inputs ( raw

materials, components and labour). In airline industry the bargaining power of suppliers is

low as there is stiff competition between air plane suppliers ,namely Boeing, ATR and

others.

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2. Bargaining power of customers

There is almost no switching cost for customer who intend to switch from one airline to

another. There are more choices for the customers and they are able to compare the prices

between airlines via internet. Air travel, especially leisure travel is therefore very price

elastic .

3. Threat from substitutes

Airlines industry has several substitutes including road, rail and maritime carriers.

However, in Asia the customers are unable to use them due to geographical reasons.

Therefore, the threat of substitute is very moderate .

4. Threat from new entrants

The barriers to entry in airline industry is high. The capital requirement and government

restrictions such as air service agreements are real barriers to industry. However, factors

such as de-regulation by Asian governments, and growing demand for affordable low

fares amongst budget conscious customers have increased competition. Now with

AirAsia’s overwhelming success has prompted many full service airlines like Malaysian

airlines Systems (MAS ) launch their own budget airlines i.e. Firefly . These new entrants

have the advantage of brand marketing, loyalty and other benefits overflow from their

parent companies. Therefore, threat from substitutes is in the budget air line industry is

sizeable.

6. Rivalry intensity

Rivalry among budget airline companies is very high due to increased competition by

more and more air lines and high exit cost .In addition, AirAsia is also facing intense

completion from a broad range of other air lines , ground transportation and maritime

services.

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4.1 Industrial analysis using external factor evaluation (EFE) matrix

Key External Factors weight Rating Weighted score

Opportunities

National & international Markets 0.03 3 0.09Growth of older generations 0.05 3 0.15Industrial R&D 0.02 3 0.06Growth of population 0.05 3 0.15New technology opens the door for new products & services

0.04 3 0.12

Increased internet advertising 0.06 3 0.18Familiarity of generation X with air travel and technology

0.07 3 0.21

Growth of business travel 0.06 3 0.18 1.00

Threats Decline of leisure travel due to economy and terrorism

0.10 3 0.30

Competing online ticketing reservation system

0.11 3 0.33

New government regulations makes operations costlier

0.03 3 0.09

Demand for air travel sharply after September 11

0.10 2 0.20

Gas and fuel price fluctuation 0.06 3 0.18Terrorist attacks 0.15 3 0.45Increase restrictions to limit noise (including restriction on types aircraft used and limits on a number of operations

0.03 2 0.06

Increase in annual airline security costs

0.04 2 0.08

1.0 2.83

Table 2 - External Factor Evaluation (EFE) Matrix

Based on table 2 above, , Air Asia lines can take advantage of opportunities available such

as older generation, growth of population, new technology , internet , growing demand

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travel (leisure and business) and Familiarity of generation X with air travel and

technology.

5 .COMPANY ANALYSIS

5,1 SWOT ANALYSIS

A SWOT analysis is done to evaluate the Strengths, Weaknesses, Opportunities, and

Threats involved in a AirAsia’s business. It involves specifying the objective of the

business venture or project and identifying the internal and external factors that

are favorable and unfavorable to achieve that objectives.

Internal factors as well as external factors are used to analyse company and the External

environment ,

EXTERNAL FACTORS :

Opportunities

a) Increased fuel price

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

so. Being a low cost leader, AirAsia has a upper hand in this matter because its cost

will be still the lowest among all the regional airlines. Thus, Air Asia has a great

opportunity to capture some of the existing customers of full service and other low

cost airline’s customers. However, there will be also some reduction in overall travel

especially by casual or budget travellers.

b) ASEAN open skies

The “ASEAN Open Skies” allows unlimited flights among ASEAN’s regional air

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

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

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AirAsia with its “first mover” advantage as well as its strengths in management,

strategy formulation, strategy execution, strong brand and “low-cost” culture among

its workforce viewing this agreement as more of opportunity than threat.

c) Partnership with other low cost airlines

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

airlines enhance their existing strengths or competitive advantages such as brand

name, landing rights and landing slots (time to land).

d) Population increase

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

This creates a larger market and a huge opportunity for all low cost airlines in this

region including AirAsia.

Threats

a) Air port charges

Air port charges imposed by air port authorities includes airport departure, security

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

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

cost as low as possible. For instance, Changi airport in Singapore charges SGD21 for

every person who departs from Singapore.

b) Competition from other airlines

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

attracted many competitors. Most of the full service airlines already have or

planning to create a low cost subsidiary to compete directly with AirAsia. For

example, Singapore Airlines has created a low cost carrier Tiger Airways.

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c) Fluctuating fuel price

There is always fluctuations in the fuel price due to economic and political factors

ie. Shortage, war .This is a major threat to the company as its operations heavily

dependent on jet fuel.

INTERNAL FACTORS

Strengths

a) Management team

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

links with government s and air line industry leaders. The executive management

come from diverse background which consists of industry experts and ex-top

government officials .

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

They adopted the proven strategies of South west Airline and Ryanair (no frills,

landing in secondary airport), Southwest’s people strategy (employee comes first)

and Easyjet’s branding strategy (linking with other service providers like hotels,

car rental).

b) Branding

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,

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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) have 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

c) Low cost leadership

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

Academy, AirAsia has successfully created a “low-cost airline mentality” among

their workforce. The workforce is very flexible and high committed and very

critical in making AirAsia the lowest cost airline in Asia.

d) Utilization of Information Technology (IT)

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

extent. This includes the contribution made by IT in promotional activities (email

alerts and desk top widgets ), brand building exercise ( with 3 million hits per

month and is a most widely used search engines of the world today).IT also resulted

in direct purchase of tickets by customers and savings in air line agent’s fee.

e) The Malaysian government support

The government of Malaysia offers whatever assistance it can without jeopardizing

the national interest and its flag carrier ,Malaysian Airlines (MAS). For instance, as

per report in Starbizweek, on 5th March 2011 , the Sarawak government has offered

to AirAsia to build a dedicated low cost carrier terminal (LCCT).

f) Financial position

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

The revenue of the company is impressive and is increasing. This is attributed to

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low operation and distribution costs which enable the airline to offer an attractive

ticket price which no other airline can match. The profitability of AirAsia is further

enhanced through its diversification strategies( such tune hotel , tune talk etc) and

joint ventures ( ie. With Thai Airways and Indonesian Airways)

Weaknesses

a) Maintenance,, repair and overhaul (MRO ) facility

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

repair and overhaul (MRO) facility. It may be a good strategy when they first started

with only Malaysia as the hub and few planes to maintain. But now, with few hubs

(Malaysia, Thailand and Indonesia) and over 100 planes currently owned and about

another 100 planes to be received in the next few years, Air Asia have to ensure proper

and continuous maintenance of the planes which will also help to keep the overall

costs low. It is a competitive disadvantage not to have its own MRO facility.

b) Good customer service is critical

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

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

change flight or get a refund if customers could not make it. Good customer service

and management is critical especially when competition is getting intense.

c) Air craft Financing

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

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

Asia now getting the planes on lease instead of buying.

5.2 SWOT matrix analysis

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Using external and internal factors a SWOT matrix is done ( table 3) to formulate the

appropriate strategies..There are 4 types of strategies :

1. SO strategies

2. ST strategies

3. WT strategies

4. WO strategies

1. SO strategies

This means using AirAsia’s strengths to seize opportunities.(O1,O2,04,07 ) This

strategy focused on expansion of untapped markets, Diversification (related and

unrelated) , new services or products such long distance budget travel .This is because

of the opportunities presented by globalisation ( 01) and AirAsia’s strong financial

strength.(S3)

2. ST strategies

This strategies are use strengths to overcome or contain threats. AirAsia has to fight

off competition and new entrants into market, Government regulations which are

threats( T1,T3 and T4) by using its strength such as strong financial position and

branding ( S 3,S6 )

3. WO strategies

The weaknesses are high operating costs ( W1,W2 ,W3 ) are can be overcome by its

strengths such as (S1,S2 and S3) can be contained or reduced by its strengths ( S1, S2 ,

S3 and S5)

4. WT strategies

Now AirAsia needs to focus on issues such as the high cost of operations, critical

customer service and thinning profit margin (W1,W2 and W3) in the wake of threats

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such as strong competition, substitutes new budget airlines, and further increase in

fuel and take appropriate ( T1,T2,T3,and T 6). AirAsia must try to minimise the

impact by prudent management.

STRENGHTS 1. Largest budget air line in

country2. Good management team3. Financial position 4. Marketing & advertisement5. Training & development 6. Branding

WEAKNESSES1. High cost of operation

expenses(W1)2. Low profit margin 3. Customer service is critical 4. Outsourced MRO facility

OPPORTUNITIES1. Globalisation2. Increased jet fuel prices 3. Penetration4. De regulation of air ways5. Upstream and down stream6. integration 7. Population growth 8. Rise in the middle class

population

SO – STRATEGIES 1. Expansion to untapped

market((01, 01)2. Diversification (related

and unrelated) 3. New services& products

( S1,S2,S3)4. Ie. Low budget long

distance travel ( S3)

WO – STRATIGIES 1. Use more IT2. Efficiency in business processes

& supply chain 3. (W1, O4)

THREATS1. Strong competition2. Substitutes3. Entry of new budget airlines4. Government and IATA regulations

policies 5. Congested facility at KLIA 6. Further rice in the price of fuel.

ST- STRATEGIES1. Penetration into new

markets2. Introduce new services

WT – STRATEGIS1. Bench marking against

strong players

Table 3 - SWOT Matrix Analysis for AirAsia Berhad

5.3 Internal factor evaluation model (IFEM

The internal Factor Evaluation Matrix appended above (table 4 below ) is self explanatory and

gives a comprehensive view of the company . Overall the company’s score is impressive.

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Internal Factors weight Rating Weighted score

Strengths 1.High capacity usage 0.08 5 0.402. Named the best low cost airline leader for the last 3 consecutive years

0.03 3 0.09

3. Diversity in upper management 0.08 5 0.404. Revenue increased by 10 % to 3.13RM billion in fiscal year 2009

0.08 5 0.40

5. Net income increased from RM 496.6 million (loss) in 2008 to RM 506.2 million in the fiscal year 2009

0.07 5 0.35

5. Dominates the short haul segment of the air industry

0.10 4 0.40

6. 2nd largest domestic airline 0.09 4 0.367.Air Asia posted profit for the last 2 consecutive years

0.08 4 0.32

Sub total 0.61 2.72WeaknessesFewer international flights 0.08 3 0.24No segment seat 0.08 4 0.32Dependent on single producer 0.06 3 0.18Carry small amount of freight 0.08 3 0.24Increasing operating costs 0.09 5 0.40Sub total 0.39 1.38Grand total 4.1

Table 4 - Internal Factor Evaluation (IFE) Matrix for AirAsia Berhad

5.3 BCG Matrix

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Figure 2 – The BCG Matrix

Reference to the BCG Matrix figure 2 above, the flight service provided by AirAsia is

definitely falls under ‘Star’ sector as the company has achieved high growth rate as

well as acquired comparatively larger market share.

However, although generally ‘Stars’ are leaders in high growth markets and tend to

generate large amounts of cash, AirAsia must be mindful that they also use a lot of cash

because of growth market conditions. In addition, AirAsia also needs to be aware that

market growth is not the only factor or necessarily the most important factor when

assessing the attractiveness of a market as growth markets attract new entrants. For

instance, if capacity exceeds demand, then a particular market may become a low

margin one and therefore becomes unattractive.

6. COMPETITIVE STRATEGY

Now Air Asia is facing strong competitive pressures from Tiger Airways , JetStar airways and Firefly.

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Table 5 - Competitive Profile Matrix

JetStar Airline is owned by Quantas Airways and Temasik holding .It is a new airline for

Australia and Asia Pacific. It has connecting services to various destinations which

includes USA, Australia, Singapore, Thailand ,Myanmar, Philippines, Vietnam, Cambodia

,Japan ,Indonesia ,Hongkong and Taiwan. Firefly , a subsidiary of Malaysian

Airways(MAS) has two 50 seater Fokker aero planes and covers a few destinations in

Malaysia and Thailand. Tiger Airways, a subsidiary of Singapore Airways(SIA) has

connectivity to 34 destinations in China, India, Australia, Indonesia, Thailand , Taiwan,

Vietnam and Philippines. A comparison between the four budget is shown above.

Based on Competitive Profile matrix at table 5 , Among all the three industrial players,

AiraAsia seems to provides excellent service in terms of Customer service besides its low

priced tickets because they provide many communication channels like face book, twitter

and emails and even PREMIUM lines .They listen to customers’ feedback and try their

best to answer customer’s enquiries on face book which other 3 airlines do not have .It

normally take 45 minutes to get through a JetStar Customer Relations Officer but it

usually takes less than 20 minutes to get through AirAsia Customer Relations Officer. In

the case of Tiger Air customers always never get through and always get cut off even

before connected.

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7. FINANCIAL PERFORMCE

Figure 3 : A Bar chart showing Revenue of AirAsia Bhd. For 2007,2008 and 2009

As indicated in figure 3 –Bar chart the sales of AirAsia increased by 41% %

from 2007 to 2008 , by 10% from 2008 to 2009 and by 8% from 2009 to

2010. The revenue of AirAsia has been increasing steady and the

return on equity indicates adequate return to the shareholders( refer

Appendix 1 &4). The quick ratio of 1.29 in 2009 indicates that it can

easily meet its short term obligations. Overall company’s performance

in 2009 (refer appendix4 ) after undergoing recessionary trend in 2008

is satisfactory. The debt ratio of 0.15 in 2009 shows that the company is

strong as its assets are primarily through equity.

Based on the 4th quarterly report for 2010 presented on presented on 24/2/2011, Air

Asia’s profit surpassed the One million mark as it posted a net profit of RM.1.06

Million( excluding its other subsidiaries) in 2010. This was partly attributed to the

increase of number of passenger from 14.2 million in 2009 to 16.1 million in 2010. When

combined with Thai Air and Indonesian Air Asia , there were 25.7 million people carried

by AirAsia. Breaking billion ringgit net profit barrier is the biggest milestone for Air asia

despite its spending per passenger has is now at RM 43.

8. CRITICAL SUCCESS FACTORS

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Several factors have attributed to AirAsia becoming the leading budget airline in the Asian

region which includes factors such as declining air craft costs, geography of Asia,

demographical factors and AirAsia’s strategy.

1. Declining aircraft cost in global context

There was a decline in the purchase price and leasing rate of planes in the

aftermath of the September 11 events. AirAsia took advantage of the situation.

2. Attractive market

The geography of Asia has assisted AirAsia. The pacific and Asian regions are

made up of several islands and all these areas are with poor road network.

3. Demography

There are more than 558 million people in AEAN countries and over 3 billions

people in China and India. The growth in population , urbanization coupled with

growth of middle class population had created a demand low budget air travel.

Most of Asian cities have more than 1 million people and this favoured travel.

4. Strategy

1. Corporate strategy

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 that has permeated into the entire firm. This is evidenced by high

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efficiency, intolerance of waste, rewards linked to costs containment , low

overheads , limited perks and intensive screening of budget requests,

2. Business Strategy

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.

3. Functional strategy

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

4. Culture

AirAsia lines has developed a brand that is accessible to everyone. The driving

force behind the AirAsia brand is single most important asset – over 4,000 staff

whose dedication, determination and patience have made the low budget airlines

a success story today.

AirAsia has created a positive workplace culture by promoting open

communication and strong team coordination. In particular they have managed to

achieve a high level of coordination between employee groups resulting in greater

aircraft and employee productivity, fewer flight delays, and fewer customer

complaints. This was achieved with the support of top-level management in

conjunction with a set of employee practices.

5. Organisation and Structure

Structure of an organization is a foundation of any organization and AirAsia has all

the three types of organization structure: Functional , projected and matrix.

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AirAsia has a functional structure headed by a CEO. The CEO is assisted by a

deputy CEO. There is a board comprising 6 directors who elect a chairman. Under

the CEO there are 15 departments ( line and functional /staff) : AirAsia Thai,

AirAsia Indonesia, Finance and strategic planning , Quality control and safety,

Engineering, Information technology, Commercial , operations , flying safety, All

airport & public safety, cargo , flight operations and go-holidays. AirAsia Thai and

AirAsia Indonesia are departments based on geography and enjoy certain level of

autonomy. Air Asia uses project and matrix structure.

6. Control

There exists three types of organisational control in AirAsia : strategic control,

management control and operational control. Strategic control is concerned with

tracking the strategy as it is being implemented, detecting any problem areas or

potential problem areas, and making necessary adjustments. Operational control

systems are designed to ensure that day-to-day actions are consistent with

established plans and objectives. Corrective action is taken where performance does

not meet standards. This action may involve training, motivation, leadership,

discipline, or termination. The key elements of AirAsia’s internal control system are

appended below:

• Clearly defined delegation of responsibilities of board and principal office bearers

• Documentation of standard operating procedures with regular updates

• Detailed budgeting process

• A half yearly review of the annual budget

7. Leadership

Leadership of AirAsia CEO , Tony Fernandez is one of the critical success factors

of the low budget airline. Under the able leadership of Tony Fernandez , the

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fledging airline with a RM40 million debt became a blooming, thriving business.

Today AirAsia is a leading low fare, no frills airline in Southeast Asia, which has

flourished into a household name in Malaysia, Thailand and Indonesia .

Tony Fernandez is a mixture of situational leadership style with transformational ,

democratic and servant leadership styles .Tony through the various transformation

efforts has implemented various strategies to achieve the success. To name a few his

contributions : online ticket booking system , online check-in, paperless ticket etc.

He hears and involves his staff’s participation in decision making. Tony motivates

his team regularly to be effective and efficient. This leader is highly visible and

uses chain of command to get the job done. Tony like any other CEOs focus on the

big picture, needing to be surrounded by people who take care of the details. Tony is

always looking for ideas that move the organization to reach the company's vision.

8. Blue Ocean strategy

By adopting Blue ocean Strategy, AirAsia has managed to avoid the red ocean

(compete with Malaysia Airline and regional airline) by looking into the factors that

industry take for granted and also factors that important to customers. With the Four

Actions Framework of Blue Ocean Strategy ( eliminate, reduce, raise and create) ,

AirAsia has implemented many strategic moves to ensure they are making Malaysia

Airline and other regional airline companies irrelevant. Strategic moves under the

Blue ocean strategy , AirAsia has e liminated “over the counter” booking system, free

food /beverage on board and seating class booking system .The company also reduced

“luxury facilities “ provided at the Airport lounge, seat quality and number of

attendants served on board. It also raised focus on several key destinations and

increased frequency of flights and created Online Booking system and Point to point

travel system.

9. PROBLEMS & ISSUES

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The Malaysian leading budget airline is facing many problems and issues which includes

competition among regional airlines, impact of recession, fluctuating fuel prices, rising

operating cost and inadequate infrastructure .

1. Competition

The airline industry today operates in a competitive environment whereby firms set

prices and domestic routes given derived from market conditions, but where access to

some key inputs, such as airport boarding gates, are determined by non-market

mechanisms. Increasing competition because of increasing number of low cost airline

competitors, aggressive competition against the large and traditional airline companies.

2. Economic downturn

Air line customers decrease because of poor economy. However, despite recession,

AIRaSIA has grown rapidly in recent years and while some airlines faring well, the

sector faces a bumpy ride as economic turbulence hits both domestic and international

travel.Asia's low-cost airlines, which took off in good economic times, are facing the

stiff headwinds of the global economic downturn.

3. Fuel price

Fuel amounts to 60 % of AirAsia’s operating costs and spikes in jet fuel may lead to

losses. As the cost of fuel always fluctuate and variable, it rather difficult to do costing.

Other airlines however have resorted to fuel surcharge which is charged above the normal

fare. Tony Fernandez knowing the price elasticity of budget airline market well has said

that AirAsia will not raise its ticket price.

4. Operating cost s

26

The labour costs have been rising over the last decade . Additionally, security costs and

stringent air transport department regulations put additional strain on airline operating

costs without signs of relief. These issues hurt the entire airline industry, even low cost

carriers have been impacted by this .

5.Infrastructure

The problem of inadequate infrastructure and facilities have impaired the smooth

operation of AirAsia. As a result AirAsia has to share the facilities at the newly built

KLIA resulting in delayed schedules and inconveniencing customers. Crowded in the

mornings and congestion on the runway have increased its operating cost.

10. RECCOMENDATION

AirAsia is strategically strong with an organized management team, established ‘low-

cost’ mindset with employees, and a sound strategic vision. Moreover, AirAsia is also the

front runner in the low cost industry with its early conception and aggressive product

branding and marketing techniques in the Asian region. It 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.

When there exists many strengths for AirAsia there are also some weaknesses. These

weaknesses, however, do not seem to be overly dangerous. Higher fuel costs around the

world, and fluctuating, unstable markets have made operational costs higher, especially for

the airline industry. However, this also means that companies with less profit margins than

AirAsia may become redundant in the future; thus, opening up customer bases previously

unavailable to AirAsia. In addition, 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.

27

Opportunity is the golden word where AirAsia is concerned. 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. Furthermore, increased access for Asian people to the internet,

coupled with new and developing IT solutions allow AirAsia to bolster its reputation as an

innovative and leading organization in terms of IT.

Potential threats to AirAsia come in the form of potential new entrants into the market

from established full carriers like Singapore Airlines and AirAsia are positioned well to

withstand any competition in this area. There are always threats from areas outside of

AirAsia’s control such as terrorism and global conditions. Finally, AirAsia needs to be

aware that system failures with the internet would seriously damage operations for such a

technologically reliant company. The company must have adequate back up facilities in

case there is a system failure.

11. CONCLUSION

To be a leader in the low cost carrier industry , AirAsia needs to use strategic management

continuously because the airline industry is a unique and complex in nature. The budget air

line needs not just reduce cost and make the operational activities running effectively but

also needs to come out with the strategy that can make competition irrelevant or

uncontested market space through differentiation which AirAsia already doing but it has to

enhance it further.

In a teleconference recently CEO Datuk Tony Fernandes said that AirAsia is in the best

financial position now and it would continue its focus on lowering cost ,improving returns

and expanding its network. Despite the share increase in prices of oil and aviation fuel

resulting from the Middle East crisis, Datuk Tony Fernandes has assured to the customers

that it will impose fuel surcharges.

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12. REFERENCES

1) Sen Ze and Jayne Ng , Air asia story, How a young airline made it possible for

everyone to fly and become a runway success practically overnight

2) http;www.scribed .com/doc/18152552/Ryanair-Case ( retieved on 20/3/2011)

3) Gerry Johnson ,Kevan Scholes & Richard Whitington , Ryanair –Competitive

Challenges and strategic choice in the budget airline industry ,(page 694-707) –

Low fares airline , Exploring Corporate strategy,8th edition

4) AirAsia Berhad, Annual Report 2007.2008 and 2009

5) Danny Yap and Elaine Ang, Blure Ocean Strategy for Corporate Malaysia (Article

published in the Star,Daily on 16/7/2007

29

6) http://www.airasia.com/iwov-resources/my/common/pdf/AirAsia/IR/AA_4Q10_A

nalyst_Presentation.pdf ( retrieved on 2/4/2011)

7) David, F R . Strategic Management –Concept and cases Thirteenth

Edition ,Prentice Hall,One Lake Street,Upper Saddle river ,New jersey

14. APPENDICES

APPENDIX 1 - Income Statement For The Financial Year Ended 31 December 2009

2009 2008 2007

RM'000 RM'000 RM'000

Revenue 3,132,901 2854970 2,018,779,603

Operating Expenses/Cost of sales (1,909,664,970)

- Staff Cost (306,002)

(236,793)

- Depreciation of property, plant and equipment (447,644)

(346,954)

- Air craft fuel expenses (927,795)

(1,389,841)

- Maintenance, overhaul, user charges

- and other related expenses (410,583)

(307,205)

- Aircraft operating lease expenses (107,251)

(92,649)

- Travel and taou operating expenses (53,524)

(37,945)

- Gain/(loss) on unwinding of derivatives 22,457 (678,503)

- Provision for loss on unwinding of derivatives - (151,713)

- Other operating expenses (92,188)

(46,570) (4,981,954)

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Other Income 102,393 81,545 12,160,465

Selling and distribution costs - - (27,449,065)

Administrative expenses - - (26,411,027)

Operating profit/(loss) 912,764 (351,658) 62,433,052

Finance income 84,505 35,245 -

Finance costs (374,971)

(552,785) (17,619,018)

Profit/(loss) before taxation 622,298 (869,198) 44,814,034

Taxation

- Current Taxation (11,186) (3,769) (8,300,276)

- Deferred Taxation (104,835) 376,404 (116,021) 372,635 (8,300,276)

Net profit/(loss) for the financial year 506,277 (496,563) 36,513,758

Earnings/(loss) per share (sen) 20.6 (21.1) 60.86

APPENDIX 2 - Balance Sheet as at 31 December 2009

  2009 2008 2007

Non-current Assets RM RM RM

Property, plant and euipment 7,942,188 6,594,299 186,109,652

Intangible asstes     30,255,070

Investment in subsidiaries - - -

Investment in associates 29 29 -

Other Investments 26,704 26,715 -

Goodwill 8,738 8,738 -

Loan to a subsodiary     -

Prepaid lease payments 23,593 24,258 4,982,718

Deferred tax assets 751,274 856,109 9,399,846

Amout due from a jointyl controlled entity 171,885    

Amout due from an associate 253,037    

  9,177,448 7,510,148 230,747,286

       

Current Assets      

Inventories 20,864 20,684 237,416,719

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Receiavble, deposits and prepayments 721,082 689,381 256,295,011

Deposit on aircraft purchase 330,978 334,628  

Amount due from subsidiaries     -

Amout due from a jointyl controlled entity 194,503 309,683  

Amout due from an associate 203,930 387,647  

Amout due from a related company 3,303    

Tax recoverable     5,106,946

Marketable securities     1,562,087

Deposit, bank and cash balances 746,312 153,762 92,795,473

  2,220,972 1,895,785 593,176,236

       

Current Liabilities      

Trade and other payables 872,990 774,250 -

Sales in advance 283,224 255,517 -

Provision for loss on unwinding of derivatives   151,713 -

Port employment benefit obligations     558,272

Provision of warranties     7,698,858

Borrowings (interest bearing)      

bank overdraft     3,978,171

- other     191,818,562

- Payables     193,179,079

Amount due to subsidiary - - -

Amount due to an associate 3,382 4,359  

Amount due to a related company - 3,634  

Hire purchase payables 56 77  

Borrowings 540,212 538,934  

Current tax liabilities 9,824 4,216 5,240,238

  1,709,688 1,732,700 402,473,180

       

Net Current Assets 511,284 163,085 190,703,056

       

Less : Non-current liabilities      

Hire purchase payables 16 72 -

Borrowings 7,067,696 6,067,625 -

Port employment benefit obligations - - 23,105,680

Borrowings (interest bearing) - - 169,377,260

Deferred tax liabilities - - 27,000

Deferred income - - 3,126,000

  7,067,712 6,067,697 195,635,940

  2,621,020 1,605,536 225,814,402

Capital and Reserves attributable to equity holders of the company

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Share Capital 275,774 237,421 60,000,000

Share Premium 1,206,216 735,352 17,386

Currency Translation reserve 592 592 338,060

Retaines earnings 1,138,438 632,171 165,458,956

Total Equity 2,621,020 1,605,536 225,814,402

APPENDIX 3 - Cash Flow Statement for the financial year ended 31

December 2009

2009 2008 2007

Operating Activities RM RM RM

Profit/(loss) before taxation 622,288 (869,198) -

Adjustment :Property, plant and euqipment-depreciation 447,644 346,954 - -write off 388 29 - -Gain on disposal (30,696) (15,554) - Loss on disposal of other investments - 4,217 - Amortisation of long term prepayments 9,645 10,261 - Amortisation of other investments 11 13 - Write-off receivables - 737 - Provision for loss on unminding of derivatives - 151,713 - Net unrealised foreign exchange (gain)/loss (39,742) 227,994 - Interest expense 371,153 297,533 - Interest income (6,300) (20,990) -

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1,374,391 133,709

Changes in working capital :Inventories (180) (3,117) - Receivables and prepayments (28,438) (148,520) - Trade and other payables 77,701 390,480 - intercompany balances (166,457) (565,117) - Cash generated from/(used in) Operations 1,257,017 (192,565)

Interest paid (322,407) (239,755) - Utilisation of provision for loss on unwinding of derivatives (151,713) - - Interest received 6300 20990 -

Cash receipts from customers 2122743959cash paid to supplies and employess -1915738549Cash from/(used in) operations 207005410Tax refunded (5,578) (4,731) 0Tax paid -15621176Interest expenses paid     -18286322Net cash flow from operating activities 783,619 (416,061) 173097912

Investing activitiesProperty, plant and equipment

- Additions (1,947,763) (2,623,001) - - Proceeds from disposals 182,538 50,043 -

Deposit on lease of aircraft (12,243) (7,448) - Long term prepayments - (48,197) - Proceeds from disposals of other investments - 26,675 - Acquisition of subsidiaries - - (12,190)Additional investment in subsidiary - - - Proceed from disposal of investment in subsidiary - - 1,883,208 Repayment of loan by subsidiary - - - Purchase of property, plant and equipment - - (93,899,177)Proceeds from disposal of property, plant and equipment - - 1,265,872 Investing activities securities - - (1,562,087)Dividend received - - 22,032 Interest income received - - 2,935,824 Net cash flow from/(used in) investing activities (1,777,468) (2,601,928) (89,366,518)

Financing activitiesPoceeds from allotment of shares 509,217 2,882 - Hire-Purchase instalments paid (77) (77) - Proceeds from borrowings 1,670,390 3,044,531 - Repayment of borrowings (593,131) (300,780) - Deposit pledged as securities 5,112 2,019 -

- - - (Repayment)/proceeds from short term - - - bank borrowings (net) - - (88,238,936)Proceeds from long term bank borrowings - - 32,910,300 Repayments of long term bank borrowings - - -

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Cash grant received - - - Dividends paid to shareholders - - (7,200,000)Net cash flow from financing activities 1,591,511 2,748,575 (62,528,636)

Increase/(decrease) in cash and cash equivalents 597,662 269,414 21,202,758 Currency translation differences 1,207,603 Cash and cash equivalents-at start of year 120803 390217 25,906,941 -at end of year 718465 120803 48,317,302

APPENDIX 4 - FINANCIAL RATIOS FOR AIR ASIA BHD.

2007 2008 2009Profitability

Gross Margin 0.31 (0.12) 0.29

Net profit Margin 0.25 (0.17) 0.20

Return on total asset (ROA) 0.44 0.053 0.0 44

Return on common equity (ROCE)

0.16 0.31 0.19

Liquidity

Current ratio 1.47 1.09 1.30

Quick ratio 1.46 1.08 1.29

Activity

Inventory turnover 80.44 155.03 106.40

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Average collection period 46.34 days 88.14 days 84.01 days

Total asset turn over 0.25 0.30 0.28

Debt

Debt ratio

0.49 0.18 0.15

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