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Air Asia Economic Analysis -Mba

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    Table of Contents {text:bookmark-start} {text:bookmark-start} Background {text:bookmark-end} {text:bookmark-end} A successful example of a Malaysian no frills airline is Air Asia. Revolutionized and Reinvented by Tony Fernandez in 2001. It is based on the low-cost, no-frills model of the US carrier Southwest. The concept of Air Asia is based on the belief that demands for short-haul air transport is price flexible. That means, if prices for flights are being reduced, more people will fly.

    Traditionally, airline concepts are based on the assumption that airline traffic grows in line with the economy and that cutting prices will only lead to a decrease in revenues. With the introduction of the ‘no-frills’ concept to the Malaysian market, Air Asia has proven this theory wrong and goes from strength to strength by actually increasing the size of the market and more recently by taking away passengers from the major airline competitors. With its expanding strategy as objectives to reach excellent standard around the world, marketing in Asia has been the key player to achieve success.

    Air Asia is one of the businesses that have successfully adopted cost leadership through operational effectiveness and efficiency. The cost advantages have enabled Air Asia to become the Asia’s leading low fare airline. Air Asia has successfully positioned itself in customers’ mind. Its net profit for the second quarter ending 31 December 2004 was reported RM 44. 4 million, a 323% increase over the previous quarter. AirAsia until today has flown more than 55 million passengers in and around Asia (Air Asia, 2005). AirAsia has also ventured into other market that complements with the airlines business.

    It has started franchises like the tunes hotels and red box couriers to gain maximum efficiency in and around the airline business. {text:bookmark-start} {text:bookmark-start} The Business Environment Needed for the Firm to Adapt {text:bookmark-end} {text:bookmark-end} AirAsia is an Oligopoly market as there are only a few major players in the airline industry with substantial barriers to entry . they are non-cooperative and pursue profit-maximizing strategies based on the assumptions on competitor action.

    The major players in the airline industry in Malaysia are Malaysian airline, firefly, who a combined own 40% of the market share. In order to maintain its competitiveness in this dynamic oligopoly market, AirAsia has positioned itself as one of the low cost no frills airline that focus on providing traveler a cheap and efficient way to travel from once place to another. To survive in a long run AirAsia has ventured into newer services that complements their airline, also they have ventured with airlines in other countries to expand their market share around the ASEAN region.

    According to IATA (International Air Transport Association), the estimated business for airline in Asia is about 847Million per annum, whereby AirAsia owns about 40% of the market share for low cost airline in Asian region. With Air Asia’s plan to expand, more in the Asian sector there is certainly a lot of opportunity for AirAsia to gain high income. The main goal of AirAsia is to focus on improving the customer and to expand in and out of Asia. The major customer base of AirAsia is the middle and low-income group whose main preference is to get from one place to another in a efficient and cost efficient manner.

    AirAsia has adapted to the economic situation in such a way that 50% of their customer can help them break even and the remain percentage are all profit. The fuel crisis that happened was one of the major effects that affected many airlines, which lead them to shutdown. Oasis airline of Hong Kong, Zoom airlines were some of airlines that were forced to shut down due to the overwhelming fuel cost. AirAsia on the other hand has an adapted to this situation via its operational model, and by using a series of fuel-efficient fleet that helped them to survive during the fuel crisis.

    As stated by Azran Osman Rani(AirasiaX), unlike AirAsia, the carriers like zoom and oasis used old planes, some as old as 20 years old. “With today’s high fuel costs, it does not work anymore. ” The recession is also one factors had most of the airline rethink its existence. During recession, people hesitate to travel; this generally does not favor the transportation industry, especially airlines. Most of the airlines noted high losses during the recession situation. However, AirAsia was able to survive the situation with incurring much loss.

    The main reason being that it was able to adapt to all situation with the help of its low cost model, which suited the recession situation appropriately. With AirAsia providing ticket fares as low as 0. 99 sen it certainly motivated people to travel more. Technological is a dynamic entity that has been changing in and around the globalized situation. With most businesses changing into internet based, the situation has become more complicated for the airline industry. Most of the airline oday use internet to see their tickets directly to customers to provide a next generation airline experience. With technology becoming the core competence of the businesses around the world, AirAsia has adapted to the situation via its online booking facility. Using this facility AirAsia was able to cut cost and provide customer with a cheaper fares i. e. when tickets are sold online, it reduces the intermediaries and connects directly to the customers, which in turn reduces the commission cost, agency cost etc. thus providing a efficient business environment.

    Also adapting to technological environment, they were able to gain revenue way ahead of time (Example: a person flying in June would book the tickets in March, and by using the internet the payment is made immediately. Thought this AirAsia is able to receive the revenue even before the customer has performed his/her journey) As the world is being globalized most of the organization are expanding rapidly throughout the world and being the in the aviation industry, AirAsia also need to adapt to the globalization to survive in the long run.

    To adapt to and environment and to expand at the same time AirAsia has to structure itself in a according manner. The solution for this was to acquire smaller firms, In light of economic downturn, there is always a possibility of smaller firm might have financial difficulty due to poor business performance and it is forced to wind up their business. The big company like AirAsia can acquire this kind of company, as they perceive it as a good synergy to increase their market power with minimum cost and expand their business.

    This was what that lead to the evolvement of Thai AirAsia, which was begun by AirAsia buying over Thailand’s Asia aviation. The main reason was that Asia aviation was sustaining a loss due to their business model and was about to close down. AirAsia saw this as a opportunity and bought over the firm to expand its fleet to Thailand. In addition, the same situation happened in Indonesia, whereby AirAsia bought the firm that was facing losses that converted it to indo-AirAsia. Thus AirAsia has to adapt to the business environment to help them sustain in the business for a long run.

    Changes keep happening in the business situation and the firm has to be dynamic to adapt to the changes and sustain in it for the future. {text:bookmark-start} {text:bookmark-start} Pricing strategies, costing and the consumers’ behavior {text:bookmark-end} {text:bookmark-end} “Price is a very important element to decide a business success. When a firm decides the price of their products, they must be very careful. If the price is setting to high, customer will not buy their product. They will switch to the competitors. If the product is setting to low, the company cannot maximize their profit. (Gordon Tullock, 1998) {text:bookmark-start} {text:bookmark-start} Price Changes and Consumption Choice {text:bookmark-end} {text:bookmark-end} The relationship between price changes and consumption choice are interdependent. It is possible to hold fixed income and allow prices to vary. In the first case in Figure below indicates a ordinary case where a lower price for good 1 leads to greater demand for the good so that the Law of Demand is satisfied; in the second case we have a situation where a decrease in the price of good 1 brings about a decreased demand for good 1. Such a good is called a Giffen good. draw:frame} In the figure whereby in panel A the demand for good one increases as the price decreases so it is an ordinary good. In panel B the demand for good one decrease as its price decreases, so it is a Giffen good. {text:bookmark-start} {text:bookmark-start} AirAsia pricing strategy {text:bookmark-end} {text:bookmark-end} There are many types of price strategies for firm with their market power to increase the market demand and maximize theirprofit. In the reality, there are many success examples that company using pricing strategies to successful achieve their goal and maximize profit in the intense competition market.

    The price strategies divided intothree types according to their purpose. They include pricing strategies for extracting consumer surplus from consumers, pricing strategies for special cost or demand, and pricing strategies in markets with intense competition. AirAsia chooses *randomized pricing *strategy and successfuluse this strategy to increase the market demand and profit maximize. Randomized pricing is a pricing strategy in which a firm intentionally varies its price in an attempt to “hide” price information from consumers and rivals (Baye, 2006).

    With a randomized pricing strategy, a firm varies its price from hour to hour or day to day basic, consequently. When a firm randomly changes the prices of their goods, consumer cannot learn from experience which firm charges the lowest price in the market. Sometimes firm A might be lowest and sometimes firm B might be lowest. Since consumers do not have an understanding of where a company stands on pricing, they have less incentive to shop for the best price. The other advantage a firm gets with this strategy is it discourages other firms from trying to undercut their prices.

    Other firms cannot accurately predict the price set by a randomly priced good, so they are forced to ignore it when they are setting their prices. {text:bookmark-start} {text:bookmark-start} Costing {text:bookmark-end} {text:bookmark-end} AirAsia is using lower price strategy. That means the total cost of product is lower. The cost of product is a very significant element, which will affect the price of a product. Generally, the higher their price, the higher will be the costs of production. In order to keep high demand in the market, AirAsia lower their cost by many ways.

    There are many factors that cause the product cost is lower. Air Asia’s fares are significantly lower than those of other competitors are. This service targets the guests who will do without the frills of meals, frequent flyer miles or airport lounges in exchange for fares up to 75% lower than those currently offered will with equivalent convenience will will. No complimentary drinks or meals are offered. Furthermore, AirAsia key to success is its online e-ticketing system, with the tickets sold in the internet reducing cost for agents and service sectors for purchase.

    AirAsia ticket sold in the internet offer a lower price range and discounts for passengers booking tickets online from AirAsia. {draw:g} AirAsia focused on ensuring a competitive cost structure as its main business strategy. It has been able to achieve a cost per average seat kilometer (ASK) of 2. 5 cents, half that of Malaysia Airlines and Ryanair and a third that of EasyJet. AirAsia can lease the B737-300s aircraft at a very competitive market rates due to the harsh global market conditions for the second-hand aircrafts because of the September 11th event in 2001.

    On the other hand, the operating cost of the company is also dropped drastically. Therefore, the lower cost led to the lower price. When the price is low, the demand in the market will increase. With the average fare being 40-60 % lower than its full-service competitor, AirAsia has been able to achieve strong market stimulation in the domestic and international market. {text:bookmark-start} {text:bookmark-start} Consumer Behavior {text:bookmark-end} {text:bookmark-end} “Consumer behavior referred to as the study of when, why, how, where and what people do or do not buy products.

    Consumer behavior is influenced by demographics, psychographics (lifestyle), personality, motivation, knowledge, attitudes, beliefs, and feelings. Consumer behavior concern with consumer needs consumer actions in the direction of satisfying needs. Every individuals behavior depend on thinking process” ( Sandhusen, Richard L). AirAsia uses low cost as one of the key factors to influence their consumer behavior. Using cost that is a key entity in the market balancing will certainly work in the favor of AirAsia to make more customers come to AirAsia.

    The target audience of the AirAsia plays a vital role in the consumer behavior of the company. The Air Asia being a low cost airline, whose target audience is the all people whose salary falls in the middle or lower income of Malaysia. That is the reason why the AirAsia always uses the low pricing strategy to position itself as being cheaper than their competitors are. Secondly, it also targets the age groups, who are young adult and above because this kind of age group have the ability to spending and may be always need a flight to other far destination in shorter time.

    Third, behaviorist of Air Asia’s target audience also is the people who are benefit sought, sensitive to price and none loyalty status. Therefore, they will easily attract and influence by the promotion doing by the AirAsia which only RM0. 99 for a flight. This kind of target market will easily shift to other competitor who also offers the lowest price or doing a sales promotion. This is because these kinds of target market are likely purchase the service that is economy, valuable and affordable. In other words, AirAsia covers all the audience in the middle and low-income sector in Malaysia. draw:frame} To improve the consumer behavior, AirAsia has also used various pricing factors to gain better response from the consumers. I. e. by cutting cost in the pricing and the surcharges they are able to gain more customers and provide a better service. “Our recent quarter 1 result recorded a surge of more than 21 percent in our passenger growth compared to last year, which goes to prove people appreciate true value – particularly in these difficult times,” said AirAsia Group CEO Tony Fernandez. “The economies of scale are accomplished through their ever-increasing route network, fleet and ncillary income and it is further supported by our operational efficiencies,” said Air Asia’s regional head of commercial Kathleen Tan. {text:bookmark-start} {text:bookmark-start} Competitors {text:bookmark-end} {text:bookmark-end} AirAsia being in an oligopoly structure has fewer player in the industry. The main competitor of AirAsia in Malaysia is MAS (Malaysian Airline Service) and firefly. Full-service airlines generally have the advantage of being larger, with significantly greater financial and other resources than the Air Asia.

    As a result, they may be in a better position to withstand losses on some of their routes for a longer period of time than the Air Asia began operations, MAS has reduced its fares on certain routes to compete with fare charged by Air Asia. In the event that MAS or any other full-service carriers were to reduce their fares to levels at which Air Asia could not match while sustaining profitable operations, and were to maintain such reduced fares for an extended period, there can be no assurance that Air Asia would be able to maintain such reduced fares for an equivalent period of time.

    Malaysia does not have any antitrust laws which prohibit monopoly or predatory pricing. Flagship carriers frequently benefit from other types of government support and have other privileges which enhance their competitive position. For example, MAS and THAI are responsible for the allocation of slots at KLIA and DMA, respectively. Unfavorable allocations of slots to the Group may reduce the attractiveness of its flight which would materially and adversely affect its revenues. Air Asia also faces competition from regional low-cost carriers.

    These low-cost carriers may also have significantly greater financial and other resources than the Air Asia. Subject to airport capacity, low-cost carrier competitors could rapidly enter markets served by Air Asia and quickly discount their fares, which could materially and adversely affect the Air Asia. The airline industry is particularly susceptible to price discounting because airlines incur only nominal variable costs to provide service to passengers occupying otherwise unsold seats.

    In addition to fare competition, an increase in the number of airlines operating at the Air Asia’s hubs may result in an increase in congestion and delays at those airports which could have a material adverse effect on the company’s operations. The firm also faces competition from ground and sea transportation alternatives, which are the traditional means of transportation used by substantially all of the population in the Air Ailsa’s market. text:bookmark-start} {text:bookmark-start} MAS (Malaysian Airline Services) {text:bookmark-end} {text:bookmark-end} Malaysia Airlines has operated since 1987 once it changed name to Malaysia Airlines System (MAS). The predecessor of MAS was Malaysian Airways founded in 1947. The first flight was a charter flight from Singapore to Kuala Lumpur on 2 April 1947. In 1966, airline’s name was changed to Malaysia-Singapore Airlines. There was a rapid expansion in the following year.

    However, the different needs of two shareholders led to break-up of the airline in 1972. MAS was born in this situation and led by government. Since then, MAS operated 118 domestic routes within Malaysia and 114 international routes across six continents. From the hub in Kuala Lumpur, MAS has a worldwide network to 87 destinations across six continents. It has a particular strong presence in Southeast Asia region, together with MASWings and Firefly. text:bookmark-start} {text:bookmark-start} Firefly {text:bookmark-end} {text:bookmark-end} {text:bookmark-start} {text:bookmark-start} Competitors Analysis {text:bookmark-end} {text:bookmark-end} Air Asia’s goal is to establish itself as a leading low cost carrier in Asia. A low cost airline generally has many features that differentiate it from the traditional carriers. These features include ticketless travel, online ticket sales, no international offices, no frequent flyer points, no free food and beverages, no in-flight magazines, no club lounges, use of secondary city airports.

    Not all low cost airlines have these features, and not all airlines that have some of these features are low cost airlines. For example, Virgin Express is a low cost airline, but it still offers complimentary coffee and in-flight magazine, and they are based at Brussels primary airport. {text:bookmark-start} {text:bookmark-start} Malaysian government with AirAsia {text:bookmark-end} {text:bookmark-end} The Malaysian government supported the establishment of Air Asia in 2001 to help boost the under-used Kuala Lumpur International Airport.

    Air Asia’s flights from Senai are meant to develop Johor into a transport hub to rival Singapore. Air Asia therefore, can provide an alternative route to travel to Bangkok, by using Senai Airport in Johor Bahru, in southern Malaysia. Government creates rules, regulations and frameworks in which businesses are able to survive and compete against each other. From time to time the government will change these rules and frameworks forcing businesses to change the way they operate. Among such businesses is Air Asia in Malaysia whose business is thus keenly affected by government policies in delivering its services.

    Some of the Key areas where government’s effect can be seen on Air Asia include: {text:bookmark-start} {text:bookmark-start} Government economic Policies, which brings Competition: {text:bookmark-end} {text:bookmark-end} A key area of government economic policy is the role that the government gives to the aviation industry. Malaysia tends to rely more on a free marketing economy where by private individuals are encouraged to invest and allow the market forces to take its course.

    Air Asia being a private company indicates that the government is willing to allow private airline companies to enter the market and compete with the local players. This is drastic in Air Asia’s perspective as allowing a free entry will make the market look less attractive because there is always a tendency of price war. {text:bookmark-start} {text:bookmark-start} Taxation Policy, which brings about increase in Costs: {text:bookmark-end} {text:bookmark-end} {draw:frame} {draw:frame} Taxation policy affects business costs.

    For example, a rise in corporation tax (on Air Asia’s profits) has the same effect as an increase in costs. Air Asia can pass some of this tax on to consumers in higher prices, but it will also affect the bottom line. Other business taxes are environmental taxes (e. g. landfill tax), and VAT (value added tax). VAT is actually passed down the line to the final consumer but the administration of the VAT system is a cost for business. Since Air Asia was established based on the low cost carrier concept, prices of air tickets fluctuates from day to day mainly because of Tax. draw:g} When government tax is at the level t0 the ticket price charged is p0 at the same time quantity demanded will be at q0. But when government raises the tax to a point t1 the price of ticket will also increase to p1 considering that the burden will be shifted to the consumers and this will lead to a reduction in quantity demanded of tickets from q0 to q1 because the tickets will become more expensive as extra costs are incurred by the company paying the government tax; which were later added to the ticket price. text:bookmark-start} {text:bookmark-start} Government Spending Policy will increase Air Asia’s demand: {text:bookmark-end} {text:bookmark-end} Malaysia ‘WAWASAN 2010’; which is on the lawn of becoming a developed nation required a substantial amount of its foreign revenue to come from its service sector which made the government to start spending more on its educational and tourism systems so as to attract potential visitors to visit all parts of the country.

    Therefore, the government spending policy will affect Air Asia’s business in such a way that visitors that purchase tourism packages to visit the country will need a fast and ease mode of transportation for instance from the capital KL to Johor Bahru to visit Danga Bay might be using Air Asia for his/her journey. Since it is the only low cost carrier in Malaysia, such government spending attracting foreigners will have a direct impact by raising demand for flight tickets of Air Asia at large. text:bookmark-start} {text:bookmark-start} Airline Regulations in Malaysia {text:bookmark-end} {text:bookmark-end} The government (landing rights, services to certain routes, equity ownership) makes some decisions at are considered critical; taking the case of Subang for example, AirAsia applied to use Subang as their hub, was turned down by the govt. Now the government has allowed Firefly to operate from Subang. Otherwise, AirAsia’s financial performance is significantly affected by government regulation of the Malaysian domestic and international airline industry.

    Substantially all aspects of AirAsia’s domestic airline operations in Malaysia, including slots allocation, granting of rights under Malaysia’s air services agreements (ASAs) are subject to regulation by Defense Communication Agency (DCA). Besides that Air Asia increasing the frequency of flights to markets that it currently serves and expanding the number of markets that it serves, ultimately the success of this growth depends upon obtaining additional traffic rights suitable airports located in AirAsia’s targeted geographic markets. Actually, the government has granted most of the air traffic rights to Air Asia. text:bookmark-start} {text:bookmark-start} Government Policy on Services Sector {text:bookmark-end} {text:bookmark-end} The government’s intervention in consolidating the financial sector has clearly increased market concentration in this sector. Other non-tradable sectors such as telecommunications have also witnessed M&As that have increased market concentration. While alternative modes of transport were introduced in Kuala Lumpur, extensive consolidation has resulted in monopoly or duopoly markets in some urban bus routes. These have had impact on competition but are not well documented.

    One of the more interesting cases of competition in the services sector has been the competition between Malaysian Airlines (MAS) and AirAsia. Prior to 2002, MAS was virtually a monopoly operator in the domestic airline market. With the entry of AirAsia the domestic airline market became more competitive. AirAsia offers no-frills domestic flights at low fares. MAS responded by introducing a new pricing scheme (‘Super Saver Scheme’) which offers 50 percent discounts for ten seats in every flight in response to competition from AirAsia.

    This is surprising since, Only a year earlier, in July 2001, the government had granted a request by MAS for an increase in the fares for domestic services within Peninsular Malaysia by about 52 percent. AirAsia also responded to MAS’s pricing strategy by offering lower fares in September 2002. Despite MAS’s plea for government (Ministry of Transport) intervention to resolve the perceived ‘price war’, the government has maintained that the competition between the two firms as healthy competition. The MAS vs. AirAsia case clearly highlights the impact of market entry on competition in the services sector. text:bookmark-start} {text:bookmark-start} Individual effects {text:bookmark-end} {text:bookmark-end} {text:bookmark-start} {text:bookmark-start} China {text:bookmark-end} {text:bookmark-end} China is one of the countries AirAsia has begun its operations and Chinese government aviation officials have recently indicated an interest in building a more liberal air service framework between China and the ASEAN countries. China also recently signed an “open skies” agreements allow for increased competition on routes, which lowers airfares, thereby stimulating increased activity levels.

    Air Asia passenger activity in China has raised from 2. 3 million in 1978 to 87. 6 million in 2003. China’s total domestic activity is now the world’s second largest, following that of the United States. To accommodate the expected, rapid increases in aviation activity, the government plans to make available 237 airports by 2010. {text:bookmark-start} {text:bookmark-start} Malaysia {text:bookmark-end} {text:bookmark-end} From 1985 to 2003, domestic passenger movements at Malaysian airports strongly at a compounded average annual growth rate of 11. %, as shown in the figure below. Malaysia’s domestic and international markets are expected to enjoy strong growth rates, with international activity growing more rapidly than domestic activity. The country has an excellent tourist infrastructure and good average per capita income levels (77% higher than those in Thailand and 399% higher than those in Indonesia. {text:bookmark-start} {text:bookmark-start} Thailand {text:bookmark-end} {text:bookmark-end} Thai Air Asia launched operations in 2004 and serves domestic and international routes from Thailand.

    By June 2004, Thai Air Asia and another Thailand- based low-fare carrier, Orient Thai Airlines accounted for approximately 20% of all domestic passenger movements in Thailand. According to relative fingers, the domestic passenger have been grew 10%, the international passenger have been grew 7. 8% from 2003 to 2008. {text:bookmark-start} {text:bookmark-start} Indonesia {text:bookmark-end} {text:bookmark-end} Indonesia is the most populous country in Southeast Asia, the population has been forecasted to increase nearly 50% over the next 50 years.

    Although the country’s per capita income levels are low, but the country’s total gross national income is the highest in Southeast Asia, otherwise, nearly all of Indonesia’s international travel is by air, with limited land and sea substitutes. Within the country, long distances and large bodies of water separate major population centers. Air Asia’sstrategy is to target markets within a three and a half hour flight time from its hubs. This strategy gives it access to Southeast Asia’s population of approximately 500 million people.

    So the growing population provides an attractive market for the Air Asia to stimulate air travel among a population that previously could not afford to travel by air or lives in areas not serviced by other airlines. {text:bookmark-start} {text:bookmark-start} Firm effects {text:bookmark-end} {text:bookmark-end} {text:bookmark-start} {text:bookmark-start} Online Service {text:bookmark-end} {text:bookmark-end} These services, which were launched by the Company in September 2003, are expected to be assumed by the Company’s wholly owned subsidiary, AirAsia Go Holiday, by the end of 2004.

    Subsequent to the launch of Air Asia’s online services, the Company was advised by the Ministry of Tourism Malaysia that the services would need to be licensed under the Tourism Industry Act, 1992. The Company’s application for a license was unsuccessful, as the Ministry requires the services to be offered thtough an entity distinct from the Company. On September 10,2004, a license was approved for Air Asia Go Holiday to undertake tour operating and travel agency business. text:bookmark-start} {text:bookmark-start} Macroeconomic factors of airline {text:bookmark-end} {text:bookmark-end} In these modern economic conditions leaves its mark on all the levels of world economy including the system of relations existing in air transportation sphere. This dynamic branch of world economy is subjected to the influence, in the first place, of institutional subjects. States, blocks of states and international organizations are meant.

    In the main predestination, macroeconomic regulation is aimed of anti cyclic influence on the economy of the country under the condition of activation of risky- forming factors in the world economy. The support of stable economic growth in the country is a super task. Real economic growth, guarantee stable money circulation in the country, rational and effective employment and, at last, effective interaction with world community are macroeconomic regulators’ main problems. Air transportation market refers to most important markets in the world economy.

    As its element the air transportation market: Uses common world air space; Depends on the tendencies of development of the world economy; Becomes more active under the condition of world economy internationalization and consolidation of international cooperation; Depends on market condition an main world market; • it is greatly regulated by mega economic regulators. In this connection, the problem of institutional air transportation market regulation is actual factor and demands special consideration.

    Investigations show that air transportation rate of development outstrips the level of business activity in the world. Thus within the period from 1985 to 2005 GDP (Gross Domestic Product) growth in The world was 3,7 %, but the volume of transportation growth in pass. /km was 5,2 % . Macroeconomic regulators should take into consideration main characteristics of modern air transportation market: High level of competition; High level of capital concentration and centralization of market participants; High level demands for securing safety in activity; Uninterrupted implementation of capital investments;

    High level demands for personnel training and retraining process Air Asia aims for a long run with the low fares, because they have high customer base and they can with stand any economic situation. According to Bank Negara Malaysia (BNM), Malaysian economy shrank 6. 2 % in the first three months of 2009, its first quarterly drop since 2001. However, it is likely that the negative GDP growth forecast for Malaysia this year is likely to change in 2010. This will be in line with global economic growth, which is estimated to reach between four and five percent in the next two to three years. text:bookmark-start} {text:bookmark-start} GDP with AirAsia {text:bookmark-end} {text:bookmark-end} From this table, we can see that the GDP in the first quarter of 2009 was negative 6. 25%, this means that in this economic situation, people don’t want to spend their money. This is also impact the most airline industries, so one of low fare carriers airline company, Air Asia lower fare ticket and large volume passenger that delivery large demand to Air Asia while bring the huge profit to Air Asia which has strong power to facing the economic downward.

    Furthermore, Air Asia’s growth strategy involves increasing the frequency of flights to markets that it currently serves and expanding its route network. For instance, the Air Asia in order to provide more affordable and transparent air fares for business and leisure travelers, Air Asia offering 500,000 free seats, with no fare or fuel surcharge, in a five-day campaign for flights in the third quarter of 2009. Otherwise, Air Asia strive to the low cost business model, the LOW fixed costs ,LOW distribution costs, SINGLE aircraft type these competitive advantage give the Air Asia ability to facing this economic downward situation. text:bookmark-start} {text:bookmark-start} Portfolio of Air Asia’s products {text:bookmark-end} {text:bookmark-end} The main product of AirAsia is its service of travel from point to point, AirAsia is no frills airline making it direct seller of the product. This service of AirAsia basically under the form of air travel, and the critical success factor for its product are as follows Low cost airlines strive to achieve the lowest possible price for their products and services. Low prices cannot sustain nless the company maximizes its operational efficiency The critical success factors of Asian low cost airlines in reducing their operational cost include: Service savings (no frills cabin service and extensive use of outsourcing) NO-frills include: NO drinks, NO food, NO headphones, NO newspapers, NO movies, NO VIP lounges, NO expensive offices, NO mileage programs, NO seat allocation, NO children’s fares, NO paper tickets (Electronic tickets only), NO connecting flights (All flight-legs must be booked independently) Operational savings (point-to-point services and uniform fleet) Overhead savings (internet sales and streamlined bureaucracy) We can compare the operational cost in terms of costs per available seat kilometer (ASK), a measure of the running cost of the airline. For instance, Ryan air in Europe is almost half of the ASK price comparing with the full services airline. The average fare offered by Air Asia in Malaysia is 40-60 % lower than its full-service competitor. Even though air Asia has reached a critical stage and gained success, with its strategy and economic manipulation. Its critical that the business continues to take modest fiscal approach to sustain the image gained in the market.

    In addition, expanding in a reasonable rate, not for the sake of expansion in and of itself, but because it makes prudent economic sense. {text:bookmark-start} {text:bookmark-start} PEST Analysis {text:bookmark-end} {text:bookmark-end} {text:bookmark-start} {text:bookmark-start} {text:bookmark-start} Political {text:bookmark-end} {text:bookmark-end} {text:bookmark-end} The government (landing rights, services to certain routes, equity ownership) makes some decisions at are considered critical; taking the case of Subang for example, AirAsia applied to use Subang as their hub, was turned down by the govt. Now the government has allowed Firefly to operate from Subang.

    Political influence could also affect the HR policies of AirAsia recruitment and selection of staff does not necessarily be based on merits but also on the privileges of government composition. The taxes for the operation and the license to be paid by AirAsia also plays an important role since, AirAsia has to revenue its operational license in certain period unlike other airlines. In addition, the airport tax payable for Air Asia LCCT (low cost carrier terminal) is considerably high. {text:bookmark-start} {text:bookmark-start} {text:bookmark-start} Economic {text:bookmark-end} {text:bookmark-end} {text:bookmark-end} The rising cost of oil – affects operating costs.

    Competition – more new low-cost airlines like firefly Availability of funds – are financial institutions willing to provide financing for AirAsia investments. As the recession is likely to last for some more time, business travelers will keep an eye on their travel expenses. {text:bookmark-start} {text:bookmark-start} {text:bookmark-start} Social {text:bookmark-end} {text:bookmark-end} {text:bookmark-end} The standards of living of people in destinations served by AirAsia – they have the ability to pay for air travel. The Tastes and lifestyles of people play a key role in determining, if the people are willing to fly on low-cost airlines. The nature of its workforce – will the staffs in AirAsia be able to cope with the changes implemented in AirAsia.

    Some of the staff is former employees of other full-service airlines; some of the old habits/norms are still with them. {text:bookmark-start} {text:bookmark-start} {text:bookmark-start} Technology {text:bookmark-end} {text:bookmark-end} {text:bookmark-end} Most of the bookings for AirAsia is made through the internet. The technology depends on the effectiveness of overall IT infrastructure. Some potential customers could have been lost due to technological problems. But, on the other hand, this internet technology could also be used to AirAsia advantage because they are able to reach potential customers from all parts of the world.

    Technological issues in the payment system. Banks, through their web-based, online banking systems, do influence AirAsia businesses. Technological capacities of the aircraft manufacturers on the time period taken to deliver the necessary aircraft i. e. from Boeing or airbus. {text:bookmark-start} {text:bookmark-start} Business Environment {text:bookmark-end} {text:bookmark-end} {text:bookmark-start} {text:bookmark-start} {text:bookmark-start} Macro environment {text:bookmark-end} {text:bookmark-end} {text:bookmark-end} The major macro-environmental factors suggest a very conductive environment for the growth of LCCs in Asia.

    According to Sachs (1997), “demographic fundamentals of large populations, rising middle classes with increasing leisure time and disposable incomes, combined with the lack of competitive forms of transportation, paint an extremely encouraging demand picture in the long run”. Furthermore, air travel market is bound to continue to grow due to a rapidly increasing urbanization trends (Centre for Asia Pacific Aviation, 2002). Archipelago geographical structure of Asia continent is also contributable to the importance of air transportation. For example, there is no other viable and efficient mode of transportation between East and West Malaysia other than by air (Lawton and Solomon, 2003).

    While the impact of terrorism and SARS can be negative for the growth of LCCs, the long run forecast continues to be very positive. {text:bookmark-start} {text:bookmark-start} {text:bookmark-start} Micro environment {text:bookmark-end} {text:bookmark-end} {text:bookmark-end} Porter’s five forces are utilized to perform the micro-environmental analysis for AirAsia in terms of low cost carriers (LCC) in Asia. The overall power of supplier is high due to limited number of suppliers (only Boeing and Airbus). The power of buyer is moderately high due to almost no switching cost for customers to switch from one LCC to another. In addition, the access to the internet allows customers to have close to full information on prices charged by the LCCs.

    Threat of substitutes is moderately low; there are several substitutes such as cruises, rail, bus, and car. However, the archipelago geographical structure of Asia has made air travel the viable, efficient, and convenient mode of transportation. Threat of new entry is moderate; high capital requirement and government barrier such as air service agreement can act as barriers to entry. However, the deregulation of aviation industry in Asia Pacific region has resulted in more competitors entering the market. Furthermore, many full service airlines enter the LCC industry by launching their LCC version. I. e. Malaysian airline introduced firefly as its LCC For example, Nok Air set up by Thai Airways is a part of low cost carrier industry in Thailand.

    Finally, industry rivalry is moderately high due to price as the basis of competition and high exit cost. However, market participants tend to realize that price war is destructive for them thus they avoid direct price competition and they turn into ‘friendly’ competitors. Based on the environmental scanning performed, the demand for LCC is expanding, thus LCC industry will keep growing rapidly. The LCC industry attractiveness and profitability will attract many full service airlines to launch its LCC version adding the degree of rivalry in this industry. As the implication, AirAsia, current market leader of LCC in Malaysia, Thailand, and Indonesia, will face competition from both existing and new players.

    In order to sustain its competitive advantage, AirAsia needs to leverage its competency in creating cost advantages across multiple value chains. {text:bookmark-start} {text:bookmark-start} References {text:bookmark-end} {text:bookmark-end} {text:list-item} {text:list-item} {text:list-item} {text:list-item} {text:list-item} {text:list-item} {text:list-item} {text:list-item} {text:list-item} {text:list-item} {text:list-item} {text:list-item} {text:list-item} {text:list-item} {text:list-item} {text:list-item} {text:list-item} {text:list-item} {text:list-item} {text:list-item} {text:list-item} {text:list-item} {text:list-item} {text:list-item} {text:list-item} {text:list-item} {text:list-item}

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