Uncover Air Asia Strategic Analysis Tourism Essay

The constant changing of external environment has encouraged many companies to ensure that its own internal resources and capabilities are more than sufficient to meet the needs of external environment and competitive environment (Henry, 2008). Therefore, strategy analysis allows organization to evaluate how well it is positioned to exploit the opportunities in its external environment.

Value chain analysis exposed how Air Air’s resource which is cost advantage adds value to its current strategy. The findings found out that the success of Air Asia low cost strategy is aligned with its cost advantage along its value chain.

PEST analysis illustrated the effect of external factors (macro environment) that influence Air Asia in several ways in terms opportunities and threats. Whilst, Porter’s five forces framework demonstrated the attractiveness of the airline industry and the intensity of competition within the airline industry.

it is found that PEST analysis have influence on the industry attractiveness identified through Porter’s five forces.

In addition to carry out the evaluation, information will be gathered from different sources including Air Asia official website, Air Asia annual report, books, online sources and journal articles. To sum it up, recommendation will serve strategic choice to be adopted for sustainable competitive advantage in the future.

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Introduction

This report uncovers Air Asia strategic analysis by scanning the impact of micro and macro environment. Macro environment will be analyzed through P.E.S.T analysis and Porter’s five forces, while for micro environment will be analyzed through Value Chain Analysis to perform S.W.O.T analysis. Value chain analyses will emphasis on the operation of cost effectiveness driver as source of competitive advantage. Therefore, the objective of this report is to evaluate Air Asia strategic position or its success strategy by comparing the current strategy with the proposed TOWS matrix strategy.

Strategy is direction and scope of organization over the long term which achieves advantage for organization over its configuration of its resources within a changing environment (Johnson and Scholes, 2002). Therefore, in the case of budget carrier- Air Asia, strategy that it needs to consider is the strategy than can bring competitive positioning in different activities from rivals to achieve its success.

2.0 History of Air Asia

Air Asia is Asia’s largest low-cost carrier which operates scheduled domestic and international flights. It was established on 12 December 2001 and started operation in 2002. Its main base is at the LCC Terminal-Kuala Lumpur International Airport, Malaysia. Since 2003 till present, Air Asia received several local and international awards for its service excellence and success in brand building (see appendix 1).

With its simple slogan “Now Everyone Can fly”, Air Asia has successfully adopted cost leadership through operational effectiveness and cost efficiency. Air Asia’s missions are to attain the lowest cost for everyone to fly with regardless of any compromise to flight safety standards, to create the best company work environment for whereby employees are treated as part of big family, and to improve technology in order to reduce cost and enhance services (Air Asia Corporate Profile, 2010).

As at year end of 2009, Air Asia has flown to over 60 destinations across 3 continents in 16 countries with 126 domestic and international routes from and within Malaysia, Thailand and Indonesia (Air Asia Annual Report, 2009). It has become the region’s largest low-cost carrier with 7,500 employees,

In 2010, a total of 6.48 million passengers have been carried by Air Asia (The star online, 2010).

3.0 Strategic Environment Analysis

3.1 Macro environment analysis (PEST factors)

Kotler (1998) claimed that PEST analysis is a useful strategic tool for understanding market growth, business position, and directions for operations comprise of political, economic, social/cultural, and technology. All the variables in these environments will give raise to opportunities and exert threats (Johnson and Scholes, 2002). Good analysis of the following factors is believed to enable Air Asia to detect trends in the external environment that will ultimately find its way into competitive environment (David, 2007).

Political and legal

In the case of airline industry, political factors deal with issues such as restriction to airline travel/ routes, policy from ministry of transport, and airport regulations (Bowen, 2000). In terms of airport regulation, in Malaysia air travelers are to be required to pay airport service charge or security charge depends on which airport they leave from (see appendix 2).

Since air travel allows people to fly across national borders, political situation in a country will also impact on air travel. For instance, the aftermath terrorist attacks on the USA (11 September 2001) had seriously affect on the business of international airline industry to provide more safety air travel. Besides that, Indonesia-Bali Bombings in 2005 has created threat for international tourist to visit South East Asia thus airlines that provide routes to Bali will also be affected automatically (http://www.trademinister.gov.au/speeches/2002/021023_mvt_apec_loscabos.html )

Economic

According to Ireland, Hoskisson, Hitt (2008), economic factors that can have influence on firms should consider in understanding current future economic trends are inflation rates, gross nation product, income growth, and currency exchange rates in country across the globe.

ASEAN economies in 2009 which resulting an average of USD 1.5 trillion, for example, has grabbed airline attention especially Air asia to focus on ASEAN market (Annual report 2009).

The worldwide economic downturn has caused people become more aware in spending power is low. This situation has encourage whole airline industry to slashing airline ticket to lure people to travel.

Since oil price were denominated in US dollars,

Since aviation was a cyclical business whatever happens globally would have impact on the airlines,

Social

It is important to know that social environment such as demographic changes in terms of population, ages and income level can have important attitude demand for travel. In addition, population health also impacts on airline industry. For example, in 2009, the world desperately sought to cope with the A (H1N1) influenza pandemic in which keep passengers away from flying. International Air Transport Association (IATA) which represents 230 carriers also reported traffic decline more than 5% in Europe, North America and the Asia-Pacific region (Air Asia Annual Report, 2009).

Technology

Technological breakthroughs can create new industries which might prove a threat to existing organizations whose products or services might be rendered redundant (Hitt et al, 2005). As travelers these days have become more tech savvy, it is essential for airline to embrace advance in technology that provide convenience and ease to its passengers.

The emergence of internet as computer advancement technology has brought advantages for airline industry. Many airlines have exploited online system for customers to purchase air tickets (http://ezinearticles.com/?Technology-Drives-the-Airline-Industry&id=4764781 ). In addition, social networking site such as Facebook also has been used as channel of communication and marketing tactics e.g. promotions, new route launches, contests, flight schedule updates and guest support service in airline industry (see appendix)

Furthermore, technology for in-flight connectivity service has come of age thus it is a must-have for airline looking to remain competitive. Singapore Airlines (SIA), for example, has built partnership with OnAir- world’s leading provider of global IT and telecommunication solutions for air transport industry for its passengers to be able to access Wi-fi internet and mobile services on board (http://www.airlinenewsresource.com/article49284Phone_Calls__Texts_and_Wi_Fi_Internet_on_Long_Haul_Flights_.html ).

3.2 Micro environment (industry analysis)

Industry environment analyzed using Porter’s five force (1979) place more direct effect on firm’s strategic competitiveness (John & Harrison, 1999). Porter’s five forces framework is used within Air Asia in order to identify the sources of competition or challenges that impacting upon airline industry (Johnson and Scholes, 2002). Wheelen and Hunger (2006) claimed that “The stronger each of the Porter’s five forces, the more limited companies are in their ability to raise price and earn greater profits” High force can be regarded as a threat because it is likely to reduce profits. Low force, in contrast can be viewed as opportunity because it may allow greater profit earnings. Thus, challenges that Air Asia faced in the airline industry are listed as follow:

Threat of New Entrants

Threat of new entrants refers to an extent where new competitors enter into an industry and become a threat to the existing companies. According to Lynch (2006), new entrants usually come into market place when profit margins which can be achieved from that particular market are attractive and the barrier of entry is low.

Besides that, government intervention in limiting entry with such control as airport license requirement, aircraft certification, safety regulation, and so on is also help to reduce the threat of new entrant (Johnson, Scholes, Whittington, 2008).

In airline industry, threat of new entrants is low, as the barrier of entry in terms of capital requirement (fuel expenditure, maintenance cost and cost of purchase aircraft) to set up an airline business is relatively huge as well.

Moreover, Air Asia’s brand name as the main player of low-cost carrier in the Southeast Asia has served as a threat for new entry to come in.

Bargaining Power of Buyers

As the information of air-ticket price is fully available to be compared through internet, buyers exercise power through their ability to force down prices, bargains for higher quality or service, and play competitors against incumbents’ airline. As a result, price sensitivity serves as key tool in low cost airline because slight change in price whole market can sway into lower pricing situation directly (Hitt et al, 2005).

Moreover, there is very low switching cost in airline industry since majority buyers’ wants are just to seat on a plane to certain destination thus they can easily change their favourites from one airline to another after (http://ezinearticles.com/?Technology-Drives-the-Airline-Industry&id=4764781). Thus, in airline industry, bargaining power of buyer is considered as medium to high.

Commonly leisure travelers are more price sensitive and would switch to alternative mode of transport if air fares seemed to high.

Bargaining Power of Suppliers

For low cost carrier, bargaining power of suppliers is high due to limited number of suppliers for low cost carrier which is only American Boeing and European Airbus. Since Air Asia has a fleet of 90 Airbus aircraft, supplier (airbus manufacturer) has a high bargaining power over Air Asia (Air Asia Annual Report, 2009).

However, other suppliers such as providers of on board snack have low bargaining power over Air Asia as they are larger industry which allow Air Asia to have choice to over which food suppliers Air Asia is purchasing from.

Threat of substitute

Generally, threat of substitute for air travel will be sea and land travel. In air travel context, substitutes usually pose a threat as a result of technological or low cost breakthrough (Lynch, 2006).

In Malaysia itself, for example to reach East Malaysia, one can travel by sea e.g. Penang, Port Klang, Kuching and Kota Kinabalu are some of the ports that offer entry into Malaysia. Thus, for domestic flight served by Air Asia, threat of new substitute is considered to be medium to high.

Moreover, the advancement of technology nowadays has controlled many business travelers to travel less than before. Take for example, rather than fly over other places to conduct meeting, most business firms have use video conferencing.

Yet, if to see the geographical structure of Asia continent, air travel is much more efficient and convenient as mode of transportation, which result in threat from substitute is moderately low.

Rivalry among existing competitors

The fact that airline industry is in maturity stage of industry life circle, many airlines fight vigorously for increase in market share (Hill et al, 2007). Moreover, the air travel is weakly differentiated has caused price is therefore the main battlefield of competition as all these competitors compete on offering lower price to customers. Provided any slowing in passenger traffic airline tends to set off price war as the only path to growth is to take sales away from competitors (Wheelen and Hunger, 2006). For example, Air Asia and MAS has competed strongly in their advertising (see appendix 3).

Furthermore, many full service airlines have moved to low cost. For example, Malaysia Airlines (MAS) has launched Firefly (http://www.fireflyz.com.my/media-coverage/firefly-can-operate-from-subang-airport/), Singapore airlines (SIA) also has come out with Tiger Airways to compete with Air Asia (www.tigerairways.com). Competitive rivalry in airline industry is extremely high due to the intense competition among incumbent airlines.

The macro environment will have impact towards the micro environment

In the case of economic downturn, people’s spending power has been eroded which cause people to seek alternative to reduce their cost of travelling. Thus, Air Asia as low cost carrier with no frills policy has been in a good position. Using Bowman strategy clock, Air Asia strategic position is located in no. 2 which adopts low price strategy (see appendix 4).

4.0 SWOT analysis

In addition to the aforementioned five forces analysis, SWOT (strength, weakness, opportunity and threat) analysis is also complemented for industry analysis. SWOT analysis provides overview about Air Asia’s strengths and weaknesses in light of changing environment in terms of opportunities and threats (Lynch, 2006). Air Asia’s SWOT analysis in detail is provided in appendix.

In terms of strength, AirAsia’s strengths can be categorized in terms of its brand recognition and market share. Air Asia has been successfully recognized as low fare and no frills carrier that make flying affordable and convenient for everyone. This can be seen from when it launched “1 million free seats” campaign in November 2009, the power of its brand has proved that just in 48 hours time all the seats had been fully snapped up (Air Asia Annual report, 2009).

Its market share also has been reported

In terms of weakness, On the other hand, unlike its competitors MAS that provide superior service quality with higher fare, Air asia focuses on providing low fare ticket thus it operates with single cabin and there is limited in-flight service.

4.3 Opportunities

In December 2008,”ASEAN Open Skies” agreement -a the liberalization of air space that allows unlimited flights among ASEAN’s regional air carriers has been introduced (http://www.thejakartapost.com/news/2010/01/15/five-airports-ready-open-sky-policy.html). This agreement will definitely increase the competition among the regional airlines, however, Air Asia with its strong brand and “low-cost” culture seen it as more of an opportunity as it can expand more routes on the member of ASEAN countries.

Besides that, another opportunity is ASEAN Multilateral Agreement on full liberalization of passenger air services in which airlines from ASEAN countries are allowed to fly to any city in a member nation with an international airport (http://www.airasia.com/iwov-resources/my/common/pdf/AirAsia/IR/AA_3Q10_Press_Release.pdf )

Threats

Competitors

Aligned with SWOT analysis aforementioned, TOWS matrix identified by Weihrich (1982) is derived to generate strategic options/ situation on turning potential threats into opportunities and weaknesses into strengths

SO, ST, WO, and WT.

SO strategies indicates the way in which Air Asia use its strengths to take advantage of opportunities. ST strategies reflect on Air Asia’s abilities to use its strengths to overcome the threats. WO suggests areas Air Asia’s chance to take advantage of opportunities in addressing weaknesses. Lastly, WT strategies indicate Air Asia’s defense in minimizing weakness and avoid threats (Johnson, Scholes, Whittington, 2008). Strategic options for Air Asia are identified into four internal quadrants (refer to Appendix 7).

However, due to the intense competition in the industry though Air Asia has been proven to be successful in implementing its strategy, the sustainability of its competitive advantage is still unable to be guaranteed. According to Johnson et al (2008), sustaining competitive advantage can be achieved in three different ways which is through priced based strategy, differentiation and lock-in (see appendix)

Air Asia strategy

The framework of Porter’s Generic strategy is applied to manage Air Asia performance

Porter’s Generic Strategy

Aligned with its mission “to attain low cost so that everyone can fly with Air Asia”, Air Asia’s business strategy is centered on cost leadership. However, its business strategy specific markets which is price sensitive customers who needed short-haul flights (Air Asia Annual Report, 2009). Referring to Porter’s generic strategy, Air Asia’s business strategy can be categorized into focused cost leadership.

Since Air Asia offers only single cabin without any business or economy seat, it appeals to the average customer. The most important concept in low cost strategy is the lower price attracts customers (Hill et al, 2007)

Value Chain Analysis

Value chain considers the role played by different functions of company e.g. production, marketing, research and development, service and human resource in the value creation process towards customers.

The key challenge for Asia Asia in the low price stage is on how costs to be reduced in ways which other cannot match such that low cost strategy might give sustainable advantage (Johnson and Scholes, 2002).

According to Thompson Jr et al (2005), value chain analysis explains how competent a firm manages its activities relative to rivals which will be a key driver to build valuable competencies and sustainable competitive capabilities along its primary activities and supporting activities (see appendix.

Air Asia as biggest low cost carrier creates its competitive advantage by providing unique service at a price that is simply lower than its competitor’s price (Hill et al, 2007). The areas of cost reduction to achieve bigger cost advantage are provided through its value chain analysis.

From Air asia’s value chain analysis, the essential elements of its cost advantage driver are operation, marketing and technology development. Firstly, in terms of operation it uses a fuel efficiency aircraft and implements no-frills service. Secondly, the presence of online marketing strategy has assist cutting cost of alliance with travel agents. Thirdly, technology development in online-check in system also has driven cost cutting in hiring ground staffs. It is reported that Air Asia website has been saying to drive average of over 20 million unique visitors and online sales account for 76% of revenue in 2009 with ancillary income of 18% (Air Asia Annual Report, 2009). In detail, sources of cost advantage that contributable to low cost business model for each activity in Air Asia’s value chain are summarized in Appendix 6.

Growth Strategy

For growth strategy, forward integration strategies are also implemented by Air asia in further expanding its business in achieving sustainable competitiveness. For example, Air asia launched Go Holiday website an expansion of online reservation system which offer flight ticket + accommodation packages (hotels), and activity+ tours (www.airasiago.com).

7.0 Recommendation

Refer to the TOWS matrix, strategic alternatives recommended for sustain competitive advantage is market penetration strategy especially ASEAN market due to the Open skies Agreement. Besides, it is better if Air asia not to merely focus on low cost strategy yet to move forward for differentiation strategy as customers’ nowadays are more demanding about the quality of service rather than price (product development strategy).

Alliance strategy – http://www.scribd.com/doc/28023798/airline-industry-in-malaysia

8.0 Conclusion

From the Porter’s five forces industry analysis, airline industry in Malaysia is considered unattractive. However, Air Asia- effective cost leaders is capable of overcoming all the above mentioned threats by offering low prices and remain profitable as in June 2010, Air Asia group announced a net income of RM 198.93 million, while MAS suffered a net loss of RM 532.73 million (http://www.btimes.com.my/Current_News/BTIMES/articles/flyxx/Article/index_html ).

The fact that most customers have switched from full service airline to Air Asia, has caused Air Asia revenue to increase radically. However, this advantage only benefit Air Asia in short-term as it might become a threat to Air Asia as well because some full cost carrier also have switched to offer low fare and comes out with own low cost carrier. Its proven that Air Asia success today is due to its cost advantage strategy in cutting cost as low as possible in achieving its objective to provide customers low fare airlines while enjoy favorable return from its as well.

Air asia cost leadership strategic choices would be fairly safe as long as cost advantage is maintained and as long as price is the key for significant for number of buyers (Hill et al, 2007). Conversely, the drawback would be easily imitated by competitors and with its mere focus to reduce cost, changes in customers’ taste is seemed to be ignored.

Appendices

APPENDIX 1

Air Asia’s Achievements

Year 2010

•

Masterclass Global CEO of the Year

awarded to YBhg. Dato’ Tony Fernandes

•

World’s Best Low Cost Airline

by Skytrax

•

AirAsia voted the Air Cargo Industry Newcomer Award at the ACW World Air Cargo Awards 2010.

by Air Cargo Week

Year 2009

•

Airline Of The Year

By Centre for Asia Pacific Aviation (CAPA)

•

Tony received the 2009 Frost & Sullivan Excellence in Leadership Award

by Frost & Sullivan

•

Best Asian Low-Cost Carrier

By TTG Travel Awards 2009

•

World’s Best Low Cost Airline

by Skytrax

Year 2008

•

The Laureate Award for Best Commercial Airport Transport

from Aviation Week

•

Tony awarded the Malaysia Brand Icon Award

from Deputy Prime Minister YAB Dato’ Seri Najib Tun Razak at the Global Brand Forum Malaysia

•

AirAsia – Malaysia’s 30 Most Valuable Brands 2008

By Malaysia’s Most Valuable Brands (MMVB)

•

PIKOM ICT Organisation Excellence Award 2008

By Association of the computer and multimedia industry (PIKOM)

•

AirAsia X – Best New Airline Of The Year

By Centre for Asia Pacific Aviation (CAPA)

•

Best Asian Low-Cost Carrier

By TTG Travel Awards 2008

•

Top CEO brand & 3rd Best Corporate Brand in Malaysia

By Pulse Group Survey

•

World’s Best New Airline (AirAsia X)

By Budgie World Low Cost Airline Awards 2008

•

Friends Of Thailand Award 2008

By Tourism Authority of Thailand

•

Asia Pacific’s Top 1000 Brands 2008 Survey (AirAsia- Top 5 Airline)

by Taylor Nelson Sofres

•

Asia’s Best Budget Airline under Best In Travel Poll 2008

by SmartTravelAsia.com

•

AirAsia wins Airline Strategy Award in the Finance Category

by Airline Business

•

AirAsia recognized as one of the 50 Most Innovative Companies In The World

by FastCompany.com

•

Airline Market Penetration Leadership of the Year

by Frost & Sullivan

•

Rising Leaders – The Next 10 Years

by Singapore Institute of International Affairs (SIIA) in collaboration with AXN Asia

•

Commendations of Prestige Award for outstanding contribution in Macau

by Macau Special Administrative Region

Year 2007

•

Airline Of The Year 2007

by Centre for Asia Pacific Aviation (CAPA)

Click here for Press Release

•

Asia’s Best Budget Airline under Best In Travel Poll 2007

by SmartTravelAsia.com

•

Airline Human Capital Development Strategy Award

by Frost & Sullivan

•

Asia’s Best Emerging Companies with regards to Corporate Governance

by The Asset

•

Best Low Cost Airline in Asia

by Skytrax

•

The Brand Laureate 2006-07

for brand excellence in the Airlines-Low Cost Carrier Category

Year 2006

•

Malaysia’s Ernst & Young Entrepreneur of the Year 2006

awarded to YBhg. Dato’ Tony Fernandes

•

Low Cost Airline of the Year in KLIA Awards 2006

by Malaysia Airports Holdings Berhad

•

Merit Award for CAPA Airline of the Year 2006

by Centre for Asia Pacific Aviation (CAPA)

•

Asia’s Best Budget Airline under Best In Travel 2006

by SmartTravelAsia.com

•

Best Managed Company, Best Corporate Governance, Best Investor Relations, and Most Committed to Strong Dividend Policy under The Annual Investor Poll

by FinanceAsia.com

Year 2005

•

The CAPA Aviation Executive of the Year 2005

awarded to YBhg. Dato’ Tony Fernandes

•

Regional/ Low Cost Leadership Award in Airline Business Startegy Awards 2005

by Airline Business – awarded to YBhg. Dato’ Tony Fernandes

•

Airline Market Leadership Award

by Air Transport World (ATW)

•

Transport Company of Excellence Award

by Ports World Sdn. Bhd

•

Asia’s Top 200 “Best Under A Billion” Companies

by Forbes Asia

•

RHB AirAsia Credit Card by Superbrands

•

Best Chip Program for MasterCard Marketing Leadership Award 2005 by MasterCard

Year 2004

•

Asia Pacific Low Cost Airline of the Year 2004

by Centre for Asia Pacific Aviation (CAPA)

•

Asia Pacific Aviation Executive of the Year 2004

awarded to Tony Fernandes, Group CEO

by Centre for Asia Pacific Aviation (CAPA)

•

Asia Pacific Low Cost Advertising Award for Best Asia Pacific / Middle East Low Cost Airline Print Advertisement 2004 by Centre for Asia Pacific Aviation (CAPA)

•

Asia’s Best Managed Company in the Airlines and Aviation Sector by Euromoney

•

Best Newly Listed Company (3rd place)

by Euromoney

•

Triple A Regional Award for Best Airline IPO for 2004

by The Asset Magazine

•

Best IPO of the Year by The Edge Singapore

•

25 Stars of Asia honoree listing (Tony Fernandes)

by Business Week

•

‘Best Uniform’ for Miss Airlines International Contest 2004

5th China Air Show, Zhuhai

•

Market Leadership Award, 2005 Airline Achievement Awards

by Air Transport World Magazine

Year 2003

•

Developing Airline of the Year 2003

by Airfinance Journal

•

CEO of the Year (Tony Fernandes)

by Business Times and American Express

•

CIO Top 100 Honoree for excellence in strategic IT deployment

•

Obtained Malaysian Superbrands status

by Superbrands International

•

www.airasia.com voted as the most popular website for online shopping in the 11th Malaysia Internet User Survey conducted by AC Nielsen Consult

Source: http://www.airasia.com/my/en/corporate/awards.html

Appendix 2

KLIA / other airports

LCCT, KLIA and LCCT, Kota Kinabalu

PSC (RM)

SC (RM)

Total

PSC (RM)

DOMESTIC

6

3

9

6

INTERNATIONAL

45

6

51

25

PSC- passenger service charge; SC- security charge

Source: http://www.mot.gov.my/index.php?option=com_content&task=view&id=83&Itemid=118

Appendix 3

Intense competition between Air Asia and MAS

Appendix 4

High

Differentiation

4. Focused

Hybrid 3. 5. Differentiation

Perceived

Value Low price 2. 6.

No frill 1. 7. Strategies designed for

8. ultimate failure

Low

Low PRICE High

Appendix 5

Porter’s five force framework-LCC Industry in Asia

Potential new LCCs and LCCs

Set up by the full service airlines

Threat of new Entrants

Aircraft manufactures Price sensitive

Rivalry amongst existing competitors Boeing andAirbus customers

Power of Customers

Power of Suppliers

Threats of Substitute

Other mode of transportation &

Advancement in communication

Technology

Adapted from Porter, M.E (1979) “how competence forces shape strategy” Harvard business review; Source: Henry (2008) p.71

Appendix 6

Sources of Air Asia’s cost advantage along its value chain

Classification

Activity

Sources of cost advantage

Inbound Logistics

Utilize one type of aircraft (airbus) which result in reduction of maintenance cost and spare parts inventory, simplify task of scheduling planes for particular flights.

Use secondary airport as its base