Air Asia

STRATEGIC MANAGEMENT (PMS 3393) ‘AIR ASIA’ Prepared by: Ahmad Izzuddin Bin Ahmad Zamri (4102005781) HaslindaBinti Ismail (4092008911) MohdAzuan Bin MohdAbdKadir (4102008091) Muhammad Khairil Anwar Bin Othman (4102004441) Nur An-NisaBintiRahmat (4071032881) SitiAisyahBintiMohdYusoff( 4102001031) SitiKhajirahBinti Abdul Aziz (4092008931) Prepared for: Dr. HafsahBinti Ahmad Submission Date: 22nd November 2012 Table of Content Acknowledgement1 Introduction2 History3 The Vision, Mission Statement and Objective5 Value Strategy6 Business Model8 Competitive Advantages10 AirAsia Assumption12SWOT Analysis13 The Air Asia 5 Forces Porter Model16 Air Asia Market Segments19 Five Years Financial Highlights22 Appendix24 References25 Acknowledgement Alhamdulillah. Thanks to Allah SWT, whom with His willingness has giving us the opportunity to successfully complete this Strategic Management assignment. First of all, we would like to express our special thank to Dr. HafsahBinti Ahmad, a le cturer of Strategic Management who had guided us and also provide a lot of information regarding our assignment from beginning to the end of the semester and also the valuable advices that he gave to us during our lectures.We are really appreciating it. Deepest thanks and appreciation to our parents, family and all fellow friends for their cooperation, encouragement, constructive suggestion and full of support for the assignment completion, from the beginning till the end. Without the help and guidance from all of you, it will be difficult for us to complete this assignment. Thank you. 1. 0 Introduction Air Asia is a Malaysian-based low-cost airline. Air Asia is Asia's largest low-fare, no-frills airline and a pioneer of low-cost travel in Asia.Air Asia group operates scheduled domestic and international flights to over 400 destinations spanning 25 countries. Its main hub is the Low-Cost Carrier Terminal (LCCT) at Kuala Lumpur International Airport (KLIA). Its affiliate airlines Tha i Air Asia, Indonesia Air Asia, Air Asia Philippines and Air Asia Japan have hubs in Suvarnabhumi Airport, Soekarno-Hatta International Airport, Clark International Airport and Narita International Airport respectively. Air Asia's registered office is in Petaling Jaya, Selangor while its head office is at Kuala Lumpur International Airport. 1. 1 HistoryAirAsia was established in 1993 and began operations on 18 November 1996. It was originally founded by a government-owned conglomerate, DRB-Hicom. On 2 December 2001 the heavily-indebted airline was bought by former Time Warner executive Tony Fernandes's company Tune Air Sdn Bhd for the token sum of one ringgit (about USD 0. 26 at the time) with USD 11 million (MYR 40 million) worth of debts. Fernandes turned the company around, producing a profit in 2002 and launching new routes from its hub in Kuala Lumpur, undercutting former monopoly operator Malaysia Airlines with promotional fares as low as MYR 1 (USD 0. 7). In 2003, AirAsia ope ned a second hub at Senai International Airport in Johor Bahru near Singapore and launched its first international flight to Bangkok. AirAsia has since started a Thai subsidiary, added Singapore itself to the destination list, and started flights to Indonesia. Flights to Macau began in June 2004, and flights to mainland China (Xiamen) and the Philippines (Manila) in April 2005. Flights to Vietnam and Cambodia followed later in 2005 and to Brunei and Myanmar in 2006, the latter by Thai AirAsia.On August 2006, AirAsia took over Malaysia Airlines’ Rural Air Service routes in Sabah and Sarawak, operating under the Fly Asian Xpress brand. The routes were subsequently returned to MAS wings a year later, citing commercial reasons. Air Asia's CEO Tony Fernandes subsequently unveiled a five-year plan to further enhance its presence in Asia. Under the plan, Air Asia proposes to strengthen and enhance its route network by connecting all the existing cities in the region and expanding fu rther into Vietnam, Indonesia, Southern China (Kunming, Xiamen, Shenzhen) and India.The airline will focus on developing its hubs in Bangkok and Jakarta through its sister companies, Thai AirAsia and Indonesia AirAsia. With increase frequency and the addition of new routes, AirAsia expects passenger volume to reach 18 million by the end of 2007 On 27 September 2008, the company had on its list 106 new routes to be added to its then-current list of 60. The number of old routes discontinued has not been publicly disclosed. On 2 April 2012 Air Asia had their first flight from Sydney to Kuala Lumpur.In August 2011, AirAsia agreed to forge an alliance with Malaysian Airlines by means of a share swap. The alliance was struck down by the Malaysian government, in effect voiding the agreement of both airlines. 2. 0 The Vision, Mission Statement and Objective The Vision To be the largest low cost airline in Asia and serving the 3 billion people who are currently underserved with poor connecti vity and high fares. The Mission Statement †¢ To be the best company to work for whereby employees are treated as part of a big family. †¢ Create a globally recognized ASEAN brand. To attain the lowest cost so that everyone can fly with Air Asia. †¢ Maintain the highest quality product, embracing technology to reduce cost and enhance service level. Future Objective for AirAsia Kuala Lumpur, Malaysia-based AirAsia has recently announced in a press conference that they intend to purchase an additional twenty-five aircraft. The purchase is the second this year for the airline and fourth since the 2005. The purchase agreement is for 25 Airbus A320 series aircraft. This will bring the total A320 series aircraft operated by AirAsia to well over 200 aircraft.Air Asia group CEO Tony Fernades says at the press conference that this purchase is an important step for Air Asia as it signifies their future aggressive route expansion plans in tandem to their expected traffic growth over the next decade. It also demonstrates their commitment to enhance AirAsia's position on the networks by incorporating the most modern and efficient aircraft in the market. The addition of aircraft will be used to add frequency across the route network and introduce new routes. AirAsia's introduction to the aviation industry as an innovator has grown to the extent it is now a leader that sets the benchmark to others. Also speaking at the press conference was Airbus CEO John Leahy. Leahy was very excited about this newest order and says that their company have been extremely proud to be part of AirAsia's outstanding success and delighted that the confidence in the A320 has resulted in the airline now becoming the largest airline customer for this aircraft in the world. With its unbeatable economics and enormous passenger appeal, he is confident that the large A320 fleet is destined to propel AirAsia to the forefront of industry in the years ahead. 2. 1 Value Strategy * SafetyAdop ting a zero tolerance to unsafe practices and strives for zero accidents through proper training, work practices, risk management and adherence to safety regulations at all times. * High Aircraft Utilization Air Asia implementing the regions fastest turnaround time at only 25 minutes and assuring the lower costs and higher productivity. * Low Fare, No Frills Providing guests with choice of customizing services without compromising on the quality and services. * Valuing their People Committing to their people’s development and well-being and treating them with respect, dignity and fairness. Customer Focused They care and treat everyone in the same manner that they want to be treated. * Lean Distribution System They also offer a wide and innovative range of distribution channels to make booking and traveling easier. * Integrity Practicing highest standards of ethical behavior and demonstrate honesty in all their lines of work in order to command trust and mutual respect. * Exce llence in Performance Setting goals beyond the best and reinforcing high quality performance standards and achieving excellence through implementing best practices. 2. AirAsia Business Model 1. Low Cost Carrier A low cost carrier (also known as a no-frills or discount carrier) is an airline that offer low fares but eliminates all â€Å"non-essential† services. The typical low-cost carrier business model is based on: * A single passenger class * A single type of airplane (reducing training and services costs) * A simple fares scheme (typically fares increase as the plane fills up, rewards early reservations) * Free seating ( which encourages passengers to board early) * Direct, point to point flight with no transfer Flying to cheaper, less congested secondary airport * Short flights and fast turnaround times (allowing maximum utilization of planes) * â€Å"Free† in-flight catering and other â€Å"complimentary† services are eliminated, and replaced by optimal pai d-for-in-flight food and drink. 2. Simple Products A typical low cost airlines product is extremely basic. It focuses on getting passenger from point A to B, cutting all the â€Å"extras†. This means there are no meals, drinks and snacks served free on the board. In certain airlines, these may be purchased on request.The aircraft have Narrow seating to permit greater capacity. Low cost airlines offer all-economy flights with no additional space requirement for wider business class seating. This means more passengers can be accommodate on each sector. There are no facilities for seat allocations as this free-seating makes passenger’s board the flights early to get themselves a decent seat. The pricing structures of low cost airlines allow for no additional schemes or sales promotion activities, including frequent-flyers programmed. 3. PositioningThe low cost airlines the world over are known to target non-business passengers, leisure traffic and the price-conscious busi ness passenger segment. The low cost model works best on short-haul point-to-point traffic with high frequencies. These airlines have aggressive marketing strategies and complete with all transportation carriers, including the road and railway networks. Most western low cost airlines fly to secondary airports which are cheaper to land into. However, this is not yet option in India. 4. Low Operation CostsLow cost airlines have a very lean organization structure and operating costs are kept to the bare minimum with low wages (as crew/staff requirement are low and generally fresher’s are preferred), low airport fees, low cost for maintenance and cockpit training (as these are typically outsourced). There is no requirement for standby crews due to a homogeneous aircraft fleet. Low cost carriers aim at achieving high resource productivity. This is generally achieved due to short ground waits (as turnaround times are kept minimal due to simple boarding processes, no air freight, no hub services and short cleaning times).Selling cost is also minimized as high percentage (if not 100%) of ticket sales is generate online, eliminating the margin that would otherwise need to be passed on as commissions to travel agents. 2. 3 Competitive Advantages 2. 4AirAsia Assumption Assumption 1: it is assumed that AirAsia’s customers can still be satisfied and chose AirAsia’s services even if the company does not improve their customer service, as the level and factors of satisfaction differ amongst different customers.Mathematical, these three assumptions can be stated as: A3 = A2 + A1 Where A3 = Customer loyalty through improved services in AirAsia is dependent on; A2 = Customer (repurchase) behavior and; A1 = Customer satisfaction level based on previous experience. Assumption 2:  it is improvement of AirAsia’s customer services will result in improved customers satisfaction and preference for their services, but does not guarantee future repurchase i ntention, thus reducing the chances of customer retention and loyalty.Assumption 3: from the figure (3) above, it is assumed that an improvement in AirAsia’s customers services will enhance customers patronage (which can be measured by the number of repeat purchase and/or intention to repurchase) by improving customer’s experience with their services and enhancing their preference for AirAsia’s services compared to that of AirAsia’s competitors. 3. 0 SWOT Analysis Strengths * Air Asia has a very strong management team with strong links with governments and airline industry leaders.This is partly contributed by the diverse background of the executive management teams which consists of industry experts and ex-top government officials. For example, Shin Corp (formerly owned by the family of former Thai Prime Minister – Thaksin Shinawatra) holds a 50% stake in Thai Air Asia. This has helped Air Asia to open up and capture a sizeable market in Thailand. With their strong working relationship with Airbus, they managed to get big discount for aircraft purchase which is also more fuel efficient compared to Boeing 737 planes which is being used by many other airlines. The management team is also very good in strategy formulation and execution. The strategy that they have formulated at the beginnings was a clever blend of proven strategies by other low cost airlines is US and Europe. They are Ryanair’s operational strategy (no frills, landing in secondary airport), Southwest’s people strategy (employee comes first) and Easyjet’s branding strategy (linking with other service providers like hotels, car rental). * AirAsia is the low cost leader in Asia. With the help of AirAsia Academy, AirAsia has successfully created a â€Å"low-cost airline mentality† among their workforce.The workforce is very flexible and high committed and very critical in making AirAsia the lowest cost airline in Asia. * The excellent ut ilization of IT have directly contributed to their promotional activities (email alerts and desktop widget which was jointly developed with Microsoft for new promotions), brand building exercise (with over 3 million hits per month and on the most widely surfed booking engines in the world) as well keep the cost low by enabling direct purchase of tickets by consumer thus saving on airline agent fees. Weaknesses Air Asia does not have its own maintenance, repair and overhaul (MRO) facility. It may be a good strategy when they first started with only Malaysia as the hub and few planes to maintain. But now, with few hubs (Malaysia, Thailand and Indonesia) and over 100 planes currently owned and about another 100 planes to be received in the next few years, AirAsia have to ensure proper and continuous maintenance of the planes which will also help to keep the overall costs low. It is a competitive disadvantage not to have its own MRO facility. * AirAsia receives lot complaints from ustom ers on their service. Examples of complaints are around flight delays, being charged for a lot of things and not able to change flight or get a refund if customers could not make it. Good customer service and management is critical especially when competition is getting intense. Opportunities * There are 2 major events that are taking place now or going to take place in less than 6 months from now. First is the ever increasing oil price. Second is the â€Å"ASEAN Open Skies† agreement that has been reached. * The increasing oil price at the first glance may appear like a threat for AirAsia.But being a low cost leader, AirAsia an upper hand because its cost will be still the lowest among all the regional airlines. Thus, AirAsia has a great opportunity to capture some of the existing customers of full service and other low cost airline’s customers. However, there will be also some reduction in overall travel especially by casual or budget travelers. * There is also some opportunity to partner with other low cost airlines as Virgin to tap into their existing strengths or competitive advantages such as brand name, landing rights and landing slots (time to land). The population of Asian middle class will be reaching almost 700 million by 2010. This creates a larger market and a huge opportunity for all low cost airlines in this region including AirAsia. Threats * Certain rates like airport departure, security charges and landing charges are beyond the control of airline operators and this is a threat to all airlines especially low cost airlines which tries to keep their cost as low as possible. For example, Changi airport in Singapore charges SGD21 for every person who departs from Singapore. AirAsia’s profit margin is about 30% and this has already attracted many competitors. Most of the full service airlines have or planning to create a low cost subsidiary to compete directly with AirAsia. For example, Singapore Airlines has created a low cos t carrier Tiger Airways. * Users’ perception that budget airlines may compromise safety to keep costs low. 3. 1 The AirAsia 5 Forces Porter Model Internal Rivalry According to the geographic and product market, Lion Air, Batavia Air, Mandala Air, SriwijayaIndonesia and even Garuda Indonesia are Air Asia’s competitors.They also provide cheap prices andnumerous flight routes in South Asia. All these flight companies compete in price except GarudaIndonesia which has a different strategy. As consumer of Garuda, they will get a value-added. Air Asiaclaims that they have no Admin fees but in reality, there are many additional fees which don’t exist inother flight companies. Which is free for some companies is not for other ones. For instance, customers canspeak about booking seats fees or luggage fees. This is definitely the price dimension which matters onthis specific market.Thus the firms struggle on their costs. For instance Air Asia is well-known for theconsidera ble development of its Information Technology. Thanks to the considerable use of the IT, theyget low costs and are then able to offer low prices. In Asian developing countries, the middle class isgrowing up. This creates huge opportunities for the airlines. The companies will have to fight to get somemarket shares because customers are not loyal and switch easily from one company to another. Barriers to Entry Brand awareness is quite important in this industry.To enter this industry not only is requiredhigh capital but also brand image. Most of the time consumers choose the product or service they reallytrust. New entrants have to create brand loyalty by making huge investments to establish their reputation. The government legislation is one of the barriers for entering airlines industry. Therefore it isvery difficult getting a new flight route from the government. If Air Asia doesn’t get any more flight-routes, it may affect their profit because they need to extend their net work. Hopefully Air Asia has always been close to the governments in South Asia.For instance in Thailand, Shin Corp formerly owned by thefamily of former Thai Prime Minister, Thaksin Shinawatra, holds a 50% stake in Thai Air Asia. Thishelped Air Asia to open up and capture a sizeable market in Thailand. Government policies have limitednew entrances, which is a good thing for Air Asia because they are already settled on the market. Key inputs as technological know-how, raw materials, distribution or locations may also limit theaccess to the market. But when a company already established creates its own low cost firm, the key inputs are not a problem anymore.Tiger Airways which has been created by Singapore Airlines is one of the most dangerous competitors of Air Asia Supplier’s Power In airline industry, the power of suppliers is quite high. First there are only two major planessuppliers which are Airbus and Boeing. However both suppliers provide almost the same standardaircra fts, so that the possibility of consumers to switch is low. Moreover Air Asia ordered large amountsfrom Airbus in order to expand its routes to international routes. They built a strong relationship and Air Asia managed to get big discounts.Then Air Asia uses the fuel supplier (AVTUR) from Pertamina which prices are very sensitive. Itmay affect the ticket price. Moreover Air Asia, as Lion Air or Mandala, doesn’t use catering suppliers. They only offer snacks on flight and this is not for free. Lastly, Air Asia doesn’t have its ownmaintenance, repair and overhaul (MRO) facility. If this was not a problem before when they only startedin Malaysia, now with three hubs and an important fleet of aircraft, it might be too expensive. Air Asiamust pay attention to this, not having its own MRO facility is a competitive disadvantage. Buyer’s PowerNowadays, buyers are much more informed and high-educated. That is why they are verysensitive to the price not matter the produc t or the service. Even if Air Asia always provides the lowest price to the costumer, they still will make a comparison between the different airlines. Besides it is veryeasy and costless for the customer to switch from one company to another one because many are offeringthe same service. Moreover Air Asia often gives a bad image to the costumers because of their chronicflight delays. People could choose for another company to be sure being on time. Substitutes and ComplimentsSometimes the consumer is not so much interested in the main product for some reasons. On thelow cost market, the main reason will be the price which he judges too expensive. Then he will look for substitutes. In the airline industry, we can meet two types of substitutes, the direct ones and the indirectones. If the customer is looking for transportation for a short distance, he can look for indirect substitutessuch as bus, train or ship. But travelling will take a longer time. He has to make a strategic choice between time and money. In Indonesia, the railroad industry is monopolized by PT. KAI so there is nocompetition.Regarding the bus and the ship, there are many companies so many choices. Some are the property of the government, some are private. If he is travelling on a longer distance, he will look for adirect substitute, that is to say other airlines. Teleconferencing and other type of business communicationsmay also be substitutes to air travel. Then they would affect the demand for airplanes. 3. 2 AirAsia Market Segments Market segmentation varies for each product but typically targets price oriented customers through their slogan â€Å"Now everyone can fly† Air Asia’s philosophy of low fares is aimed to make flying affordable for everyone.Air Asia also aims at making travel easy, convenient and fun for its guest. Full market coverage Products offered to customers cover all areas of a budget traveler. 3. 3 AirAsia 5 years Financial Highlights Appendix 4. 0 Reference s 1) History of AirAsia en. wikipedia. org/wiki/AirAsia 2) AirAsia’s vision, mission and objectives www. airasia. com/iwov†¦ /AirAsia/IR/AA%20Corporate%202007b. pdf 3) AirAsia value strategy announcements. bursamalaysia. com/†¦ /AIRASIA-†¦ 4) AirAsia business model en. wikipedia. org/wiki/No_frills 5) Competitive advantage www. academia. edu/†¦ AirAsia_The_Worlds_Lowest_Cost_Airline 6) Strategic directions http://www. scribd. com/doc/14214973/Air-Asia-Strategic-Analysis 7) Strategic assumptions http://www. iservices. ilokabenneth. com/research_proposal_AirAsia. html 8) SWOT analysis www. allfreepapers. com/Miscellaneous/Air-Asia/9363. html 9) 5 Forces model www. studymode. com/subjects/air-asia-porter's-five-forces-page1. html 10) AirAsia market segmentations www. scribd. com/doc/51874782/14/MARKET-SEGMENTS 11) AirAsia 5 years financial highlights www. airasia. com/my/en/about-us/ir-5-year-financial-highlights. page