AirAsia X, previously Fly Asian Xpress is a Malaysian airline was established in 2007. It has poised itself to focus on low cost, long distance flights outside Malaysia. Partly owned by Aero Ventures, Orix Group and Manara Consortium (20%); are primed to expand its destination resource. Virgin Group sold its 10% stake in July, 2012. They flew approximately 2.5 million people (AirAsia X, 2012) and made revenue in excess of RM1.9 billion ($620 million) in 2011 (Gupta, 2012).
1.2 Mission &Vision
This company’s mission is to provide customers with the lowest long haul rates, create a collective family initiative with its employees and providing affordable service with minimal cost returns. While its vision is to maintain its low tariff system even with increasing cost of operations and fuel prices. (Graduan.com.my, 2011)
1.3 Value chain Analysis. Fig 1.0
The value chain symbolizes the relationship between various intrinsic activities, procedures and services exclusive to the airline. It also exemplifies the specification to which operations both small and big occur at managerial or support levels.
1.4 Competitive Advantage
Its core competency lies in its ability to continually offer low tariffs. With the combination of low tariffs, low operational costs, varied distribution channels, integrated IT systems, recognizable brand name and viral marketing: The services offered will be a sustainable cost and operational advantage for some time to come, as it will be difficult for a competitor to create a system of operations similar to this. Notwithstanding, long term progress rely on their ability to evolve operationally.
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2.0 Industry Analysis using Porter’s 5 Forces
2.1 New Market Entry
This attribute is essential, despite how expensive it is to thrive in this market. Its low cost fares are sustainable to act as a barrier for entrance. The ability of a company to enter the market and build up as quickly is possible but minimal. In order to remain effective, they must record substantial amount of profits to stay operational.
Threats of substitute are usually minimal as this avenue remains relatively underexplored.
Due to their influence in the market, it’s potently difficult for competitors to provide substitutes due to efficiencies in the market, thus this business model is an alternative to major national carriers.
2.3 Buyers bargaining power
As customers recognize the company’s pricing practices, the greater their ability to make more informed decisions. However, as the company continues to sustain its costs on pricing, this then continues the circle of low bargaining power on the part of customers.
2.4 Suppliers bargaining power
Despite market influence, they lower pricing strategies with their suppliers are low. Especially with Airbus (aircraft manufacturer); who have supplied all their aircrafts. This places the bargaining power of suppliers as relatively high, and greatly diminishes the bargaining power of the airline; as the supplier can limit the company’s expansion in the market.
As a low cost airline, market positions when situations such as high aviation fuel prices, low customer turnout in low seasons can put them at a better advantage. Their structure allows them to maintain their key operations and make profits in the process, if operational costs are kept in check.
3.0 Macro-environmental Analysis using PESTLE
The Malaysian government policy restricts the employment of non-Malaysians to first officers (co pilots) positions. This in turn dictates HR recruitment policy in hiring locals in cabin crew positions (Pilot Career Centre, 2010). This can act negatively for the airline, as expatriates are known to be well rounded in their training and knowledgeable in operational conditions outside Asia. Also, with the increase in airport fees and government regulations in suspending visa-on-arrival service for Malaysians entering India; this airline has withdrawn from this route.
The rapid increase in aviation fuel prices has tested this company’s operational worthiness. Less this factor and this company can be deemed profitable. This factor led to the suspension of its New Zealand route (ONE News, 2012). Nonetheless, with its high borrowing, the focus has turned on its ability to stay operational. Exchange rates are also another factor of consideration, as it conducts its businesses in over 7 currencies.
Customer level of income is vital in determining revenue. Customer income determines how much they are willing to pay for travel; as countries with high economic growth provide a greater number of travelers. Convincing those used to certain travel amenities or lifestyle to use your airline is also another key feature; as level of income must be paired with demand and service. This feature also applies to employees. Low demand in its European routes forced the airline to withdraw from the market.
Bookings and ticketing are IT supported with this airline. It shares its IT network with AirAsia, in order to reduce its economies of scale. Its IT reliant customer services are: Premium line (customer care), empty seat option (ESO), upgrade travel option (UTO) etc. The successes of these features are highly dependent on the IT support systems. Low bandwidth, high online traffic, constrained web payment procedures will result in the loss of potential customers. However, highly effective IT systems will minimize cost, improve efficiency and give worldwide access to customers.
Global warming is an important issue when it comes to the airline industry. Air travel is estimated to cause 2% of worldwide CO2 emissions. This element has resulted in stricter international carbon emission regulations, for aircraft manufacturers and aircraft operators in order for them to reduce their carbon footprint. The ramification of this factor is that this airline will have to invest in low fuel consumption and alternative energy aircrafts in the near future (IPCC Working Groups I and III: Houghton, et al., 2000).
Pilots of this airline violated health and safety protocol in 2010 and 2012 by advancing lower than their assigned altitude thus intruding into other airways while on approach in Gold Coast, Australia. The Australian Transport Safety Bureau ruled these occurrences as lack of pilot training on the allocated flight conditions. AirAsia X pilots flying this route has been put under the Gold Coast simulator program (Heasley, 2012).
3.7 The Globalization Factor
The airline’s prerogative to pull out of its Indian, Middle Eastern and European routes signifies the effects of globalization. Negatively, the competitiveness of the airline outside the Austrasia region has been extinguished despite having a viable technological resource. The tourism to Malaysia by Europeans may have been slightly affected as a result of low prices for those who cannot afford to travel (the long term effects are unknown), and the possibility of potential foreign investment has taken a significant back step (Stanford University’s Department of Aeronautics and Astronautics, 2000). Positively, this airline can now focus their resources in dominating the Austrasia market and boost the effect of regional/local investments, low cost operations and tourism.
4.0 Internal Environment Analysis using SWOT ANALYSIS
Reduced costs as a result of online booking and ticketing procedures.
High incentive based appraisal system.
Low cost in operations and staffing leads to higher profitability.
Inefficiency will surface if online sales service is compromised.
Potential increase in staffing requirements as the company expands.
Limited IT infrastructure.
Limited number of operational aircrafts.
As cost of operations increase in a region, the airline will have no chance forced to pull out.
Market share growth is reliant on increase in destinations.
Expansion of in-flight services and extension of IT services will create better customer value.
Rapid expansion into various continents will dictate its long term profitability.
The airline industry will remain one of the most expensive industries to enter.
LCC model is yet to be exploited in Africa.
The price of aviation fuel has increased from
$75 per 4 litres in 2007 to over $130 in 2012.
Air crashes, hijacking or terrorism can deter customers from flying.
Increase in costs at the expense of creating
value for customers.
High costs in upgrading IT systems in the case of greater online traffic.
Without favorable IPO cash inflows, its business model might fail.
The SWOT analysis of fig 1.1 posses’ significance on the negatives (weaknesses and threats) rather than rather than on its positives (strengths and opportunities) as a result of the short term financial constraints faced the company (as explained in section 6.0).
5.0 Organizational Strategic Analysis
5.1 Strategic Objectives
It’s strategic objectives lies in the prospects of placing employees and management in a suitable work environment, eliminating uncertainties in communication by creating a platform for discussions through quarterly meetings, creating long term sustainable growth by expanding its destination resource, and increasing its revenue through the expansion of its customer base into promising markets.
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5.2 Corporate & Competitive Strategies
This airline must choose to further diversify its market if its profitability is to grow. Unlike its failed expansion to Europe, Middle East and India, its future expansion plans must be realistic and sort after in order to achieve the demands of the market. Due to unfamiliarity of customer perception in these markets, partnerships with local companies (airline and otherwise) in their theatres of operations can indeed help to explore the potential of the company and give them a higher long term profitability and survival margin.
This company operates under a simplistic business model and secure competiveness by offering its services at the lowest price. By concentrating on low to medium income individuals, this company can encompass a large amount of earnings. The focus on this function in earnest eliminates the possibility of trying to change your market criteria years into operations.
5.3 Fleet Planning Strategy
This airline’s 2012 fleet projections is primed to grow by 77% in 2013, 43% in 2014, 17% in 2015 and 12% in 2016. In comparison, a key regional competitor’s fleet (Scoot Singapore) is slated to grow by 50% in 2013, 33% in 2014, 37% in 2015, 27% in 2016 (CAPA: Centre For Aviation, 2012). Recognizing that Scoot Pte is the closest rapidly growing low cost airline in the region, I can determine that with this level of fleet introduction, this airline’s route possibilities will open up future expansion into other markets should be expected.
5.4 Route Strategy
As a result of the shot down of services to locations exceeding 10,000 kilometres; this airline can now intensify its reach on routes that produce greater demand and higher revenue. Australia, China, South Korea and Japan appear to be these targets. The rapid growth in these routes will phase out competitors such as Scott Pte, who are relatively young in the Australian market. Today this airline controls 60% of North East Asia, 36% of South West Pacific and 3% of South Asia markets (CAPA: Centre For Aviation, 2012), further market consolidation should be expected in 2013.
6.0 Organizational Critical Appraisal using VRIO
The Maybank Investment Bank, a coordinator for AirAsia X’s IPO release states that; the company has yet to record profits since the beginning of 2011 (Francis, 2012). This assessment is accurate as its financial statements have proven it so (Nair, 2012). The prime factor here hasn’t been the possibility of new entry into the market or the exclusivity of services but the consequences that arise from uncoordinated business operations. Expansion and costs are two factors that go hand in hand.
This company has recorded net losses since the end of 2011 to the end of the 2nd quarter of 2012; as a result of high taxes and airport fees. There is a greater possibility that financial year earnings of 2012 will also result in loss. Political factors and high costs of operations can dictate market exclusivity with or without an exclusive business model. However, risk assessment remains crucial in potential market opportunities.
Ability to Imitate
Over the past two years, revenue has promisingly increased as customer influx increase. From 2010 to 2011 this company’s revenue has increased by 44 %, so far in 2012 its revenue seem promising compared to its performance by this time last year, The rate of expenses also increased by 46% from 2010 to 2011 and expenses as of June 2012 still remain high. For a company that places low cost operations at the centre of its model, this factor can be considered a threat as competitor will utilize these misfortunes to revise their business model.
This company possess a negative working capital. When a company borrows more money in the short term, this drives up their percentage in debt, hence the need for rapid cash inflows becomes necessary (Nair, 2012). They have decided to curb this cash flow problem with the issuance of IPO shares in excess of 700 million, priced to be between 98 cents to RM1.40 per share and slated for purchase by 2013 (Yeap, 2012). These sales should result in cash inflows over 600 million on the low end and 2.9 billion at the high end (Felicity, 2012). Even with this level of cash inflow one can conclude that the organizational financial structure has been comprised as a result of uncalculated risks undertaken during expansion.
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