Introduction As we can see, this assignment requires us to have an understanding on the oligopoly market, which is one of the most sought after market condition which is being applied in many sectors, including banking, airline and car industry. Many large organizations are involved in merger and acquisition to strengthen its position besides expanding their market share. As example, Hong Leong Bank completed a takeover on EON Bank to consolidate its position as one of the major bank in Malaysia (Bloomberg, 2011).
Oligopoly market is defined as a market that consists of a small number of large players (Begg & Ward, 2009). In Malaysia, airline and banking industry are two industries that have small numbers of large players. As we can see, there are certain characteristics that we could observe from oligopolistic market. The first characteristic is that the entry barriers to the market are high, thus controlling the number of players joining the market (Begg & Ward, 2009). Entry barriers exist that allow a handful of firms to achieve economies of scales, but no more beyond that.
Any new firms would have too small a market share and would have to produce at too high a price Additional sources of barriers to entry often result from government regulation favouring existing firms making it difficult for new firms to enter the market. The second characteristic of oligopoly is that it produced homogenous or differentiated products (Begg & Ward, 2009). For homogenous products, industries in these markets produce intermediate goods which are use by other different industries later on for manufacturing the products.
Examples are raw materials such as petrol. As for differentiated products, goods manufactured in these kinds of markets are for personal consumption as they have different needs and wants. Another characteristic that we could derive from oligopoly market is that the firms are interdependent of one another. In oligopoly market, each firm is so large that its actions affect market conditions. Their competition is based on belief about possible reaction of rival’s price and non-price competition, such as advertising and promotion.
For this assignment, we will look at the airline in Malaysia, which were once monopolistic, but moved into oligopoly condition with emergence of low cost carrier, AirAsia. AirAsia is one of the best low cost carriers in the world and it is worth to look at to understand how they manage to capitalize on the market share of airline industry. Background of AirAsia AirAsia was established in 1993 and commenced operations on 18 November 1996. It was originally founded by government-owned organization, DRB-Hicom.
Due to heavy debt, it was bought by former Time Warner executive Tony Fernandes’s company, Tune Air Sdn Bhd in 2001for the token sum of RM 1. 00. He renegotiated lease agreements on its two aircraft and reinvented AirAsia as a low cost carrier. AirAsia endures a turbulent time in its early days of establishment due to the disasters that had shaken toe whole world, including airline industry. The September 11 terrorist bombing create havoc all over the world and airline industry was affected as a result.
Besides that, an accidental collision with a bird which grounded one of AirAsia’s two planes, the terrorist bombing in Bali and the regional SARS epidemic spelt challenging times for the low cost carriers. AirAsia was also forced to relocate its operational hub to the more expensive KLIA following the closure of Subang Airport. Tony Fernandes proceeded to manage a remarkable turnaround, turning a profit in 2002 and launching new routes from its hub, undercutting former monopoly operator Malaysia Airlines with promotional fares as low as RM1.
They also manage to double its fleet to four planes, and continued to grow its operations in terms of flying destinations and frequencies. Today, AirAsia is one of the award winning and largest low fare airlines in the Asia expanding rapidly since 2001. AirAsia group operates scheduled domestic and international flights to over 400 destinations spanning 25 countries. Today, AirAsia has flown over 55 million guests across the region and continues to create more extensive route network through its associate companies.
Its affiliate airlines Thai AirAsia and Indonesia AirAsia have hubs in Suvarnabhumi Airport and Soekarno-Hatta International Airport respectively (AirAsia, 2011). AirAsia believes in the no-frills, hassle-free, low fare business concept and feels that keeping costs low requires high efficiency in every part of the business. Through the corporate philosophy of “Now Everyone Can Fly”, AirAsia has sparked a revolution in air travel with more and more people around the region choosing AirAsia as their preferred choice. AirAsia won the Skytrax World’s best low-cost airline award in 2009, 2010 and 2011 (Skytrax, 2011).
It has the world’s lowest operating costs at $0. 035/seat-kilometre in 2010. It is also the first airline in the region to implement fully ticketless air travel system. Is Airline Industry in Malaysia considered as Oligopoly Market? As we go through further in this assignment, a question will remain in our mind, whether airline industry is an oligopoly market. It is important for us to understand the characteristic of airline industry to have more understanding on the market. Based on the characteristic of oligopoly market, it stated they produced homogenous or differentiated products.
We could see that AirAsia is differentiating themselves through low cost, even though they provide the same services, which is to fly passengers from one point to another. Besides that, AirAsia also differentiated themselves by providing hotel booking services. Besides that, airline industry also have high barrier of entrance, which is one of the characteristic of oligopoly market. We could see that government are regulating the market to ensure there are only few major players, to ensure that each will make substantial profit from it. Government charge high landing fees to deter new players from entering into the market.
In domestic flight, AirAsia will need to compete with Firefly and MAS Swings over the market share, while in international flight, AirAsia will need to compete with MAS over the market share of international market. Hence, AirAsia are competing with few airlines to become the market leader in Malaysia. Another main characteristic of oligopoly market is that the firms are interdependent of one another, which does occur in airline industry as well. As we can see, their competition is based on belief about possible reaction of rival’s price and non-price competition, such as advertising and promotion.
This occurs when AirAsia promote its zero ringgit ticket to attract new customers. Firefly also come out with same strategy to avoid losing its market share, whereas MAS had been promoting better flights at the lower price. By looking at the characteristics of oligopoly market and airline industry, we could see that they share many similarities and hence, it does prove that airline industry in Malaysia is based on oligopoly market, which had few major players fighting over to control the market share in Malaysia. Factors Pushing Competition for AirAsia
The airline industry is a highly competitive industry, given the demand from the customers. People are travelling around the world, pushing the competition to be more intense between airlines. As we can see, the competition in airline industry is intensifying with the mergers and formation of new airlines in order to expand its market share. Besides that, the growing demand in tourism sector also push the competition and this certainly do no good for AirAsia as they have to compete with other airlines to capitalize on the market share, thus growing its operation across the regions.
To have a deeper outlook on the airline industry, we would be using the Porter’s Five Forces so that we could have a better understanding on the industry as a whole. Porter’s Five Forces model identifies the five key drivers of competition in an industry. As the intensity of each driver increases, the more competitive the industry becomes and the lower the profits are for firms (Begg & Ward, 2009). Rivalry among Competitors Rivalry exists among competitors because they offer similar service. Customers’ main purpose of using the airline service is to get to their intended destination.
Though Air Asia offers additional services such as hotel booking and tour packages, it is subject to its customers’ choice. An industry with similar products and services offered is highly competitive. Besides that, high operating costs caused rivalry among the airlines. In order to cover the costs, the airline companies would have to gain more market share. Hence, rivalry is strong with its competitors as they would need to compete with one another in order to expand their market share. AirAsia is slowly expanding its operation to Japan in order to capitalize on the market share of low cost carriers.
Another factor that caused rivalry includes low switching cost for customers. Customers’ priority is to look at price and flight schedule that suits them best when purchasing air tickets. As mentioned earlier, customers’ main purpose of using the airline service is to get to their intended destination. Hence, customers would prefer airlines that could provide them with convenience and satisfaction, and hence loyalty is very low and this will cause rivalry among the airline carriers. Threat of New Entrants The threat of new entrants is low because airline industry requires high capital.
The cost of setting up an office, purchasing or leasing aircrafts, hiring pilots and staffs incurs a high start-up cost. Hence, the threat of new entrants is low for Air Asia. As we can see, most of the players of airline industry are old timer and they are merging with one another to strengthen its position in airline industry. Another factor that deters the entrance of new players is strict government regulations. Every potential entrant is required to obtain license and permit before it is allowed to be operated.
This is to allow the government to protect the interest of its national airline, Malaysia Airlines, where they have been operating on losses a few years back. High landing fees and airport tax deter the emergence of new airlines as they could not cope with the high operating expenses. Threat of Substitute Products As we can see, threat of substitute products is high because there are different mode of transports which is available. Compared to other modes of transportation, the geographical structure of Asia made air transportation the most viable, convenient and efficient mode of transportation.
However, most of the low-cost airlines only fly domestic routes within the country of origin, while only a few operate international routes connecting nearby countries. Hence, customers will always look for alternatives. Apart from that, substitute products includes same mode of transportation which is offered by full service carriers. The threat is high when the prices of substitutes are about the same with Air Asia. As we know, some of the airlines offers cheaper price to achieve profitable passenger loads. The price offered depends on the time gap between the booking date and flight date.
If the air transportation tickets are purchased last minute, the price will be about the same with premium airlines such as MAS and Singapore Airlines (SIA). In this situation, customers may opt for premium airlines for the fare which is equivalent to the one being offered by low cost airlines. Bargaining Power of Buyers The bargaining power of buyers is high with the emergence of Internet. The internet has allowed customers to have access in aviation market information, and they will be able to compare the ticket prices between different airlines.
Hence, customers will be able to choose the airline which provides them with greatest satisfaction. Low switching cost is also one of the factors that increase the bargaining power of buyers. Customers’ priority is to look at price and flight schedule that suits them best when purchasing air transportation tickets. As mentioned earlier, customers’ main purpose of using the airline service is to get to their intended destination. Therefore, customers can switch to other airline which greatly enhances their satisfaction. Bargaining Power of Suppliers
Bargaining power of suppliers is high because they are limited number of aircrafts supplier. There are only two aircrafts supplier companies in the world, which are Airbus and Boeing. Compared to Boeing aircrafts, Airbus aircrafts is the most advanced in technology, hence, Air Asia must rely on the Airbus engineers to do maintenance on the aircrafts and seek advices. Besides that, they must also ensure that the suppliers would send the fleet on time in order for AirAsia to maximize its fleet usage, thus maximizing its profit.
Apart from the Porter’s Five Forces, another factor that pushes competition includes the rise in middle class population across Asia. Low cost airlines are anticipated to have greater potential in Asia as there are many Asian cities with a population above one million people each as well as a rising middle class population (AirAsia, 2011). This growth of middle class in Asia provides a huge market potential for AirAsia to grow. However, as the market is growing, more airlines would like to get a piece of the action.
Analyst predicts that budget carriers will capture at least 25% of Asia’s air travel market within next 10 years (AirAsia, 2011). Therefore, AirAsia will face more competitions at the same time. Besides the low cost airlines, AirAsia still needs to compete with the conventional carriers. Although extra passengers of the low cost airlines will be coming from the new demand to be created by the low fares, the growth may not be entirely from big flag carriers. Competitive Strategy Adopted by AirAsia As we can see, there are a few strategies that is being adopted by AirAsia to allow them to gain competitive advantage over its competitors.
Harvard Business School define competitive strategy as how a company competes in a particular business. Competitive strategy is concerned with how a company can gain a competitive advantage through a distinctive way of competing. Competitive advantage is defined as how a company distinct themselves from its competitors. The first competitive strategy that is being is to provide low cost air fares to its passengers. AirAsia is adopting cost leadership, which is under Porters Generic Strategies to gain competitive advantage over its competitors.
With this strategy, the objective is to become the lowest-cost producer in the industry. Most market segments in the industry are supplied with the emphasis placed minimising costs (Kotler & Keller, 2009). If the achieved selling price can at least equal the average for the market, then the lowest-cost producer enjoy the best profits. This strategy is usually associated with large-scale businesses offering “standard” products with relatively little differentiation that are perfectly acceptable to the majority of customers.
Occasionally, a low-cost leader will also discount its product to maximise sales, particularly if it has a significant cost advantage over the competition and, in doing so, it can further increase its market share. [pic] In the case of AirAsia, they operate a single type aircraft which is Boeing 737-300. This leads to cost savings through simplifying maintenance and reducing spare parts inventory requirements. Further, the single-class service enables AirAsia to have 148 seats in each aircraft versus the typical 132-passenger seat capacity for a typical Boeing 737-300 aircraft in a 2-class seating configuration.
The 737-300 has also proven to be efficient and cost effective in short-haul, high-frequency operations. Another way of keeping its operating cost low is via the airline’s 25 minute turnaround time upon landing at the airports, which enables AirAsia to make an average of five additional round trips per aircraft per week using the same crew resources having on an usual turnaround time of 60 minutes, resulting in higher aircraft and staff utilisation rates. Also, AirAsia has negotiated for lower lease charges for its aircraft, lower rates for long term maintenance contracts.
Besides that, many low-cost airlines keep expenses down by flying out of secondary airports, avoiding major hubs where takeoff and landing fees are much higher while still getting passengers close enough to their destinations. As example, AirAsia flies to lower cost airports such as Macau instead of Hong Kong and Miri instead of Bandar Seri Begawan to keep its costs to a minimum. A table comparing the cost features between AirAsia and a typical full-service airline is depicted below: |AirAsia |Typical full service airline | |Aircraft |Single type |Multiple type | |Aircraft utilisation |12-13 block hours/day |8 block hours per day | |Turnaround times |25 minutes |45-120 minutes | |Aircraft layout |Single-class |Multiple class | |Assigned seating |No |Yes | |Refreshments & meals |Chargeable as required |Complimentary | |Pricing |Tiered |Fixed | Source: AirAsia. com. my
Apart from that, another competitive strategy that is being adopted by AirAsia includes encirclement strategy. Each product will liberate some market share from the target competitor’s product, leaving it weakened, demoralized, and in a state of siege (Kotler & Keller, 2009). Alternatively, the encirclement can be based on market niches rather than products. The attacker expands the market niches that surround and encroach on the target competitor’s market. This encroachment liberates market share from the target. As we can see, AirAsia had encircled the market share of Malaysia Airlines by firstly providing low cost airfares for domestic market, which had caused MAS to lose out on the domestic routes.
Secondly, AirAsia attack MAS by introducing low cost airfares to international routes through their long distance carrier, AirAsia X. This had certainly affected the market share of MAS as AirAsia manage to fly to countries where MAS could not afford to. As an example, AirAsia offer low cost air tickets to Manchester and it had certainly garnered tremendous response from passengers. In contrast, MAS suffer losses on its routes to Manchester and they finally cut out on the routes as they fail to break even, even though the flight had full capacity of passengers. The third competitive strategy that is being deployed by AirAsia is to decentralize its organization to allow quick decision making in response to the rapidly changing business environment (Samson & Daft, 2009).
In line with their vision to become the number one carrier in ASEAN, they have set up base in ASEAN countries to allow local management to make quick decision, besides providing them opportunities to expand its businesses as different entity. AirAsia had set up base in Thailand and Indonesia as they see the potential and demand for low fare flights. Apart from that, AirAsia is also in negotiation to set up base in Vietnam and Phillipines to expand its market share in Southeast Asia region, and they are on course to achieve their objectives. Aside from that, AirAsia also plans to expand its budget carrier in other part of Asian, and one of them is Japan. AirAsia had set up AirAsia Japan with All Nippon Airways Co. To be based in Narita Airport in a bid to capitalize on the growing travel boom in Asia.
The Japanese carrier will hold 67% stake in terms of voting rights and it is advantageous for AirAsia as they will have the expertise of Nippon Airways in order to expand its market share across Asia (Wall Street Journal, 2011). [pic] Source: Airasia. com. my Another key strategy that is being adopted by AirAsia is technological innovation. AirAsia is the first airline in Asia to go ticketless by allowing its passengers to pay for their flights with credit cards over the phone. Over the years, AirAsia had invested in technology to provide greater customer convenience and satisfaction to its passengers in order to increase their loyalty towards the airline. In year 2010, AirAsia introduced its latest booking innovation in the form of New Skies, which allows customers to better manage their online bookings (AirAsia, 2011). The emergence of Web 2. such as Twitter and Facebook allows AirAsia to better promote itself. Internet is a form of advertisement and promotion that allows AirAsia to reach a huge customer base within short period of time (Turban & Volonino, 2010). AirAsia is, in fact, recognised as the most popular airline in the region on Facebook in terms of fan base (AirAsia, 2010). Besides that, with Internet booking, customers could also purchase tickets at lower price as Internet reduces the hassle of having physical centres to accommodate the booking. As we can see, the above mentioned competitive strategies certainly assist AirAsia in expanding its market share in short period of time, given its limited resources.
Apart from that, good management certainly helps in operational decision making and this is one of the important factor AirAsia could maintain its position as one of the best low cost carrier in the world. Competitive strategy is important as it helps AirAsia to strengthen its position and further expand its market share in airline industry AirAsia’s Economic Objectives Every organization that is operating would have objectives to be achieved, in terms of satisfaction or profitability. It is the same for AirAsia as they are also a business entity operating in airline industry. As all of us knows, AirAsia’s tagline “Everyone Can Fly” had been a great hit and it had certainly portray its image as one of the best low cost airlines available in the world. One of AirAsia’s main objectives is to provide affordable air fares to its customers.
As we know, air fares used to be expensive before the emergence of low cost carriers. It was deemed as luxurious in the past as not many could afford to fly around, thus opting for other mode of transportation. With inflation rising, it reduces the purchasing power of consumers, and thus the demand for flights will drop as a result (Begg & Ward, 2009). With the introduction of low cost carriers, more people could afford to fly around as it is beyond their means of purchasing power. When the price of air fares drop, the demand will increase as more people will be able to afford it. As a result, AirAsia would have a surge in demand due to its low fare and it helps to portray its image as the people’s airline.
As we can see, when the ticket price drops, the demand will increase, as indicated from the chart below. [pic] From the chart above, we could see that when the prices drop, the demand will increase as more consumers will be able to afford to purchase the tickets. Hence, it is in line with the mission of AirAsia, which is to serve billions of people which is underserved due to poor connectivity and high fares. This certainly provides an opportunity for AirAsia to serve consumers who are price conscious and have limited purchasing power. Apart from that, another AirAsia’s objective is to be the best company to work for whereby employees are treated as part of a big family.
As we can see, AirAsia is expanding its businesses throughout Asia and they will plan to increase its workforce in order to provide maximum satisfaction to its passengers. By hiring more employees, it will help to reduce the unemployment rate in Malaysia, as people will have the opportunities to apply for the job. Reduction in unemployment will increase the GDP of our countries, as people will have higher purchasing power. When consumers have purchasing power, they will be able to purchase the products that they wanted, and it subsequently increases the GDP of our country, which is a good sign for the country as it indicates the economic outlook of the country and it could also regain the confidence of foreign investment in our country.
Apart from that, it will also help to build up the image of AirAsia as one of the best place to work at, hence may help the airline to strengthen its brand in the eyes of Malaysian. With strong branding, it may subsequently increase its consumers’ brand loyalty towards the airline, and AirAsia could capitalize on it to expand its market share in the region. Another important objective of AirAsia is to strive for the lowest cost so that all of the 3 billion people can fly with AirAsia. As we can see, rising operating expenses and fluctuation in oil prices caused airlines to submerge in losses as they could not cope with the rising operating expenses.
The chart below shows the operating expenses of a typical airline while the second chart depicts costs incurred by AirAsia Malaysia, Indonesia and Thailand. [pic] [pic] For AirAsia, it is important for them to reduce its costs for two purposes. The first purposes is to minimize the costs so that air fares will be more affordable to the people from different income level, and also to achieve its target, which is to serve more than 3 billion of peoples who are underserved. This will allow AirAsia to expand its market share in order to increase the passenger load. When more people embarked on AirAsia’s flight, it subsequently will help the airline to increase its operating revenues, to allow the airline to gain operating profit and due recognition as one of the best low cost airline in the world.
Besides that, another purpose that AirAsia is working hard to reduce its operating expenses is to increase its net profit in order to increase shareholders’ wealth (Atkinson, Kaplan, Matsumara & Young, 2012). As we can see, investors invest in AirAsia due to its performance for the past few years, which saw them from being debt ridden and being transformed into one of the best low cost carrier in the world. Hence, in order to retain the investors, it is important for AirAsia to build up on its profits so that investors and shareholders could increase its wealth through better financial performance. Besides that, AirAsia is also giving out dividend for the first time this year, indicating its financial strength that they build over the years, and this certainly increase shareholders’ confidence in AirAsia.
With the bleak outlook surrounding airline industry, it will further strengthen AirAsia’s position if they could maintain their performance and subsequently expand its market share despite the economic crisis. Financial Performance of AirAsia Besides having in-depth analysis on the competitive strategies being adopted by AirAsia, it is important for us to look at its financial performance to have a better understanding on how its competitive strategies work. As we can see, AirAsia registered increasing net profit every year, except for year 2008. In year 2008, global economic meltdown had caused AirAsia to drop into losses. Based on report by International Air Transport Association (IATA), passenger numbers in the Asia Pacific region shrunk by 1. 5% in 2008 and is expected to contract by a further 0. 6% in 2009.
Another report found out that Asia Pacific region suffer losses amounting to U$500 million, with the amount expected to balloon to U$1. 5 billion in year 2009. Apart from that, record high in oil price also contributes to the operating losses suffered by AirAsia, as they fail to cope with the sudden increase in oil prices, which also affects other airlines. In year 2009, AirAsia slowly regain its momentum through route expansion and improved passengers load, allowing them to be back on profitable route after the economic downturn which affects the global market. In year 2010, AirAsia experienced rapid expansion and surge into strong growth as they manage to expand its base into Indonesia and Thailand.
Besides that, fleet conversion from Boeing 737s to Airbus 320s contributes to the increase in operating profits (AirAsia, 2010). Besides that, AirAsia’s revenue also increases through ancillary services. As time passed, AirAsia managed to increase its average spend per guest and also manage to expand its product offerings, which help to increase the choices available on board. Financial Performance of AirAsia |Year Ended |Revenue |Expenditure |Profit/(Loss) |Shareholders |Earnings per | | |(RM million) |(RM million) |After Tax |Fund |Share (cents) | | | |(RM million) |(RM million) | | |31 June 2006 |1,071 |997 |201. 7 |1,206 |3. 8 | |31 June 2007 |1,603 |1,322 |498 |1,662 |21. 2 | |31 Dec 2007 |1,094 |858 |425. 7 |2,099 |18. 1 | |31 Dec 2008 |2,635 |2,966 |-497 |1,606 |(21. ) | |31 Dec 2009 |3,133 |2,220 |506 |2,621 |20. 6 | |31 Dec 2010 |3,948 |2,881 |1,061 |3,641 |38. 4 | Source: airasia. com. my Apart from that, we also look at the financial performance of Malaysia Airlines for the past few years. We could see that the notable difference between MAS and AirAsia is the amount of operating expenses. We could see that full fledge carriers incur more expenses as a result of higher fuel surcharges and higher landing fees.
Besides that, we could see that AirAsia’s financial performance is much better in terms of profit margin, as they manage to minimize the operating expenses and maximize revenue through better passenger load. According to former MAS CEO, Datuk Seri Idris Jala, they still incur losses even they have full capacity in their flight to Manchester due to high operating expenses, causing them to cut out the unprofitable routes. For MAS, unprofitable routes had been one of the main reason they incur high expenses, and phasing it out helps bring their revenue increase. Financial Performance of Malaysia Airlines |Year Ended |Revenue |Expenditure |Profit/(Loss) |Shareholders |Earnings per | | |(RM million) |(RM million) |After Tax Fund |Share (cents) | | | | |(RM million) |(RM million) | | |31 Dec 2006 |13,490 |13,842 |(134) |1,873. 5 |(10. 90) | |31 Dec 2007 |15,289 |14,460 |852. 7 |3,934. 8 |58. 05 | |31 Dec 2008 |15,504 |15,259 |245. 7 |4,186 |14. 62 | |31 Dec 2009 |12,782 |12,289 |493. 1 |747. 6 |28. 64 | |31 Dec 2010 |13,588 |13,462 |237. 4 |3,524. 2 |7. 2 | Source: malaysiaairlines. com. my
Apart from financial performance, we could also compare MAS and AirAsia’s performance in terms of market capitalization. Market capitalization is an indicator of a company’s net worth and is a determining factor in stock valuation. As of 2nd August 2011, AirAsia’s share price rallied further, giving them a market capitalization of RM 11. 5 billion, more than double of MAS’ market capitalization which stood at RM 5. 1 billion, considering that AirAsia only overtook MAS in terms of market capitalization only ten months ago (Business Times, 2011). AirAsia shares have risen by 24% since the start of the year, almost in line with Tiger Airways’ 26. 5% rise and outperforming the Malaysian benchmark’s KLSE 8. % increase (Centre for Pacific Aviation, 2010). AirAsia share price growth: Jan-2010 to Aug-2010 [pic] Source: Centre for Asia Pacific Aviation Recommendation Apart from addressing the problems faced by AirAsia, it is important for us also to come up with recommendations on how to improve the performance of the airline. This is important in order for AirAsia to achieve its objectives. The first recommendation that I would make is for AirAsia to expand its base to other part of Asia instead of ASEAN countries. As we can see, there are booming middle class populations in countries such as Korea, India and China, and hence it will be an opportunity for AirAsia to capitalize on.
These countries would provide opportunity for AirAsia to expand its market share, as middle class populations are more price conscious and it would certainly be a potential market for AirAsia to capitalize on. Besides that, analyst also predicts that low cost carriers to outpace the full fledge carriers by 50%. Analyst also predicts that passenger growth forecast for AirAsia will improve by 8. 5% (AirAsia, 2011). As we can see from the graph below, India will be the place for AirAsia to expand its market as they have 1. 1 billion populations, USD 3. 1 trillion economies and 20 over airports to operate. [pic] Besides that, another recommendation that AirAsia could take is to involve in merger and acquisition with other airlines in order to strengthen its status as one of the best low cost carrier in the world.
Based on a report by Wall Street Journal, we could see that many airlines are establishing low cost carrier to capitalize on the increasing price conscious market segment. Singapore Airlines Ltd. , Thai Airways International PCL and have all unveiled intentions to back new budget carriers recently. Apart from that, other budget carriers such as Jetstar Airways and Cebu Pacific are strengthening their operation by purchasing more fleets (Wall Street Journal, 2011). As analyst had predicted, the demand for airline will increase in future, as shown in the chart below, and hence it will be better solution if AirAsia could merge with other low cost carriers to avoid overlapping of routes, and they will also be able to lower down its operating costs.
By merging or acquiring other airlines, AirAsia could further expand its market share, and will be able to strengthen its position in airline industry despite the emergence of other competitors, and they will be able to achieve its target to serve people worldwide. [pic] Source: International Air Transport Association (IATA) Another recommendation that AirAsia could consider is to reduce its cost through several methods. One of the methods is to improve on its technogical innovation to allow further cost reduction. As we can see, booking online had reduced the cost of establishing a physical store, besides allowing customers to book their tickets anytime, anywhere.
Another method that could be implemented is to slowly phase out its old fleet and purchase new fleets which are more fuel efficient. As we can see, Airbus 320s helped to reduce fuel consumption and in long run, it will be beneficial to AirAsia as they will be able to reduce its operating expenses, hence posting stronger profit for the airline company. Conclusion As all of us had known, AirAsia is one of the most successful organization in Malaysia, considering that they were heavily in debts ten years ago. Their transformation from debt ridden airline to one of the most successful airline in the world certainly amazed everyone of us, with due credits given to the management of AirAsia.
AirAsia had been performing well, overtaking MAS in terms of market capitalization ten months ago, and now they had almost doubled the market capitalization of MAS. Besides that, they had posted strong revenues despite being faced by high oil prices due to political unrest in Middle East countries, and also natural disasters which had been affecting popular tourist countries such as Japan. They also took opportunity to expand their operations by setting up base in Thailand and Indonesia. Besides that, they are also in talk with Phillipines and Vietnam counterparts to set up base in the particular countries. AirAsia is certainly on the verge of achieving their dream as the Truly ASEAN Airline.
Besides that, they are also in agreement with All Nippon Airways to operate AirAsia Japan in that country, paving new opportunities for AirAsia to venture into other part of Asia. We could also see that AirAsia had a few economic objectives which they had try to fulfill. Among them is to serve the 3billion people which is underserved due to the high fares or poor route network. AirAsia’s believe in providing low cost fare certainly provide them with a new opportunities targeted at price conscious consumers. Apart from that, AirAsia’s objectives are to treat its employees as a big family and provide the best working environment for its employees. This is certainly true for AirAsia as they believe humility is the key to success.
As we have looked at the objectives they want to achieve, we do look at the recommendation on how to improve its operation. As we know, Asia will be booming with middle class population in years to come, and AirAsia could capitalize on it by working on those routes before its competitors do. By venturing early, AirAsia could gain competitive advantage over its competitors and hence will be able to expand its market share. In conclusion, AirAsia is certainly one of the organizations which had performed well despite the bleak economic outlook. It is worthwhile for us to analyze the operation of AirAsia as it will help us to understand how they performed well with limited resources. References 1) AirAsia. (2011).
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