05/06/2012

An Analysis: Air Asia's Business Strategies

IntroductionIntroduction

Budget airlines are with their cutprice flights, served by fantastically low-price flights,

and it would directly here to stay. The premise ideas is that once you know where to

fly, you’ll be able to find out how much luggage you can take with, how to get the

cheapest of cheap seats, make sure that you are don’t pay a dollar more than. In

1986 in London,Ryan-air launched its first ‘cheap’ flight, at that time the costing £90

from Dublin to Luton, they have been going there from strength to strength ever

starting (Recognizing the airline industry, 2007). Their prices have dropped further

and further in order to attract the public. Not only have they succeeded in desirable

many to the skies who would like never previously have been able to afford it, and

they have also created a new kind of traveller ever since the European ‘open skies’

agreement of 1987 paved the way for easyJet (Recognizing the airline industry,

2007). People who will long onto the net to find a cheap flight and end up holidaying

somewhere they have never hear of.

In Asia and in accordance to low landing charges, Air Asia to cover its lowly, the idea

is use ticket online booking, fly to small airports with low landing charges, cut cost by

doing away with all the perks of flying like newspaper, magazine, food and drinks,

and, carry as many people as possible for the achievable fares. In Malaysia, Air Asia

carries over a million passengers a month, while the Malaysian government adopted

airline“Malaysian Airline”, one of a close and much younger rival budget airline, is

fast catching up (Air Asia Website, 2010). Furthermore, budget airlines in response

to the greater demand for cheaper flights, some of the larger tour operators are

beginning to muscle in on the market, leading to hopes that budget flights would

soon be available worldwide.

Discussions

ØAir Asia's Background

In year 2001, Mr. Fernandes, a 40-year-old Malaysian that has been previously

working in Virgin Group bought Air Asia. During that time, Air Asia was considered

as a money-losing Airline in which only two aging 737s fleet are available. But due to

the expressive management capabilities and strategies of Mr. Fernandes, Air Asia

currently has 17 Boeing 737-300 aircrafts (Air Asia Website, 2010). As Mr.

Fernandes adopted Air Asia, Air Asia became the first low-fare Airline in Asia

headquartered in Kuala Lumpur and serving major cities in Malaysia, Indonesia,

Thailand, Brunei, Singapore and Macau (Air Asia Website, 2010). As the strategy of

Mr. Fernandes becomes effective in Singapore, the company was planning to extend

their Airline services stretching from China to India.

ØSWOT Analysis

Strengths

1 Strong language, culture and kinship

2 Strong reputation

3 Customer oriented

4 Strong community involvement

5 Strong in brand name

6 Unlimited innovation

7 High sales amount

8 Full skilled labor

9 Larger in local market share with long-haul

10 Online Advertisements can Generate Revenue

11 Rapidly Growth of E-commerce Market

Air Asia is indeed on its way on becoming the dominant player in the industry (Air

Asia Website, 2010). However, the road it has to travel is paved with obstacles and

hurdles that will essentially test the company’s resolve. This is highlighted in the

given case study. The company, regardless of its potential to be great, has some

weaknesses that may cause their demise if not dealt with accordingly. This is

compounded by the imminent threats to its operations as seen in the

microenvironment of Air Asia. However, the opportunities and strengths that the

company have may well even out these perceived negativities as they outnumber

them.

Seeing that the company’s strength is built on their reputation, it seems that Air Asia

does implement a strategy that complements their environment. In the same

manner, the previous presentation has given the impression that the internal

environment of the organization is able to contribute to this success. Thus, a balance

in managing both internal and external environment may have been the redeeming

feature of Air Asia in the low-cost air transport industry.

Weaknesses

1 Relatively high price and high operation cost

2 Investment cost in high technology

3 Extensive competition against state-owned carrier

4 Financial stability

5 Strong competition in current market

6 Government impose tax

7 Time consuming And costly infringement claims

Fares change all the time, with promotional offers for the opening of new routes,

seasonal specials and so forth. In the Airline Industry, one of the major weakness is

the relatively high price and high operation cost considering that gasoline costs and

other resources used in operation are continuously increasing. In addition, the

government also imposes high taxes rate to airline businesses which is adding to

business difficulty in Malaysia. In the given case, it also shows that the state-owned

carrier of Malaysia are also battling Air Asia in cutting prices which causes so much

damages in the business operation of the company (Air Asia Website, 2010).

Opportunities

1 Expansion to becoming a major carrier

2 Improving quantity of core customers

3 Possible partnership with other low cost air transport organizations

4 Marketing and business development through e-commerce, internet

Due to the expressive result of the venture of Air Asia to the local carrier business in

Singapore, the idea of tying up to local business operators in China and India was a

good opportunity for business expansion. On the other hand, online booking are so

popular recently, Air Asia is easy to make their brand name become more and more

famous (Air Asia Website, 2010). In Singapore, Air Asia has promoted the low cost

fares for the ticket to the school graduation/rest, and providing them with the various

kinds of support they need to become self assured on coming years. However,

Electronic commerce emphasizes the generation and exploitation of new business

opportunities.

Technological Advancement, Rapidly Growth of E-commerce Market, Online

Advertisement and online booking can Generate Revenue are the other three

opportunities that we should pay attention. E-commerce is often thought to doing

business and using simply, fast and low costs refer to buying or selling using on the

Internet. People would immediately think of consumer purchase. For the Online

booking, Air Asia can via their own celebrity to attract different types of commercial

companies to advertise on their website. Moreover, rapidly growth of E-commerce

Market is the suitable time to attract more new clients, especially the youngest to use

their services.

Threats

1Potential strengths of the new entrants in the low cost air transport

industry

2 Increasing competition in e-commerce

3 Escalating prices of fuels used in business operation

4 Attack by the low-cost government airlines

In opposites, we need to focus on the threats and try to make some improvements.

Firstly, the most we worry about is there is strong competition in the current market.

There are so many competitors as like Dragon Air, Cathay Pacific Airways, and

budget airline including Jetstar, United Airlines and so on, although each airline has

their potential customer (Recognizing the airline industry, 2007). They need to face

the strong competition and try to via the improvements to attract more clients.

Besides, elements include substitutes, and the competitor, and so on. Payment in

the Internet, it caused the problem on the tax, the revenue of internet sales may

decrease, and especially it will affect the buyer. Attack by substitutes in a threat,

Time consuming & costly infringement, and Internet fraud complaint are the other

threats that we should pay more efforts to deal with. Many of the budget airlines work

on a first come, they sell all the low fares first and don’t release any more closer to

the date of departure. Therefore, the cheap fares advertised by budget airlines. At

the same time, customers always complain which they can never get the fares

online. For the attack by substitutes, Air Asia should strength it’s characterized to

keep their clients. They need to make an investigation on the complaint and give the

feedbacks to their clients. Furthermore, in the whole process of trading, buyer

usually don’t have any kind of receipts.

Originally, almost all of airlines are having a market share, has than one more fares

supplier in Malaysia; therefore we cannot fulfil all the demand. People can select to

buy budget fares or not, i.e. more airline company with promotional offers seasonal

specials.

ØPorter’s Five Forces Model

5-Forces Analysis - Airline industry conducts more research and development

(R&D) than any other industry because air transportation is dependent to

considerable degree on the quality and performance of equipment produced for the

airlines and airways operators, therefore R&D is a major long-term determine of

national economic growth. With this, Porter’s 5-Forces Model is useful for

understanding the context of the industry, in which the firm operates (‘Porter’s Five

Forces’ 2006).

In investigating rivals' operational processes, Air Asia may learn of new and

improved methods and processes that allow it to remain competitive. Thus, securing

information across several environmental sectors may enable a firm to gain

competitive advantage or maintain its market position. According to Davies & Lam

(2001), although the five forces approach provides sound theoretical basis and

allows systematic analysis, it has the disadvantage of not providing how to measure

and weight the many different components which determine each of the forces. Also,

it is only possible to make an unambiguous judgment on the strength of a force if all

the indicators ‘point’ in the same direction. If indicators contradict each other, there is

the problem of how to balance them.

The intensity of competitive rivalry is keen -Basically, the intensity of competitive

rivalry is keen and it affects the business operation of the company. As justified, the

company still dominates the low-cost Airline in Malaysia business but due to the

escalating prices of fuels, Air Asia may possibly fall down. This means that even

though Air Asia is still on top of the competition among other low-cost Airline

company, the company is not exempted to the impact of global inflation. The

company enjoys its competitive position in the region and still trying to sustain its

competitive advantage among its rivals. With this regard, the company still needs to

manage and sustain the quality of their services in order to gain trust to their

customers.

The threat of new entrants is not strong - According to Davies & Lam (2001),

barriers to entry are related to economies of scale, the existence of learning and

experience curve effects, brand preferences and customer loyalty, capital

requirements, cost disadvantages independent of size, access to distribution

channels and government actions and policies. The economies of scale, for

instance, implies that the more scale economies, the less threat of entry in that if

entrant cannot quickly get large market share, it will have a major cost disadvantage.

In the case of Air Asia, the threat of new entrants is not strong since Air Asia already

established the position in the market. The new entrants in the market may possibly

have difficulties to maintain their business because of the inflation rate which lessen

the treat of new entrants.

The bargaining power of customers is strong - Airline businesses have a long

history--a history rich in diversity, international scope, and, above all, continuous

change and adaptation. These competitive changes have forced adaptations, and in

general have improved the level and efficiency of the services offered by Air Asia to

clients, thereby increasing service quality. Coupled with these and extensive

advertising of airline companies, the customers have become informed and

becoming more demanding. They have required that airline companies meet their

very specific individual needs, therefore showing that clients to this industry have

shaped what it is right now. This means, on an overall note, that customers have a

high influence on the workings of the airline industry, as they have the ability to affect

it.

The bargaining power of suppliers is weak -Similar to the results of previous

variable, the bargaining power of suppliers in Air Asia is also high. Basically, the fuel

supplies and airplane maintenance materials use in business operation is crucial for

the company. And currently, due to global inflation and the increase of prices of

these supplies, this becomes a treat in business operation of Air Asia.

The threat of substitute is weak - With respect to the efforts of the company in

maintaining the quality of their services, the treat of substitute is weak. Actually,

substitutes give high influence to the company since substitutes they can make a

company lose the clients it has. But in the case of Air Asia, they make sure that the

substitutes won’t give them too much problem. They do this by proving that the

services they offer are of best quality and are better than substitutes. They also

prove that their services are better against others by comparing and contrasting it

with substitutes so that clients can know the difference. The company also offer

services superior than substitutes so that they can attract more clients.

ØBCG Matrix

There are 6 important business areas for the Air Asia, which are grouped according

to the country that their fleets are operating: Malaysia, Indonesia, Thailand, Brunei,

Singapore and Macau.

Figure SEQ Figure \* ARABIC 1 BCG Matrix

Figure 1 shows the BCG matrix analysis of the 6 business areas of the Air Asia.

Cash Cow –a business unit that has a large market share in a mature and slow

growing industry. Thus, it requires a little investment and generates cash that can be

used in other business units (QuickMBA 2007). Malaysia is the only business unit

that was included in the said category. This is because Air Asia was started and

headquartered in this country. Above all, one of the most important aspects to be

considered is the number of competitors in the city.

Star –a business unit that has a large market share in a fast growing industry. This

business unit generates cash, however, due to the rapid growth of the market, they

require investment in order maintain the lead of a specific company (QuickMBA

2007). Singapore is business area which included in the said category. The Air Asia

is considered as first low-priced airline in Asia, particularly in Singapore. Because of

that, the Air Asia had been able to gain competitive advantage, in terms of image

towards the Singaporean travelers. However, because of the growing economy of

the said country, it had resulted to the growing number of players in the industry,

thus pushed Air Asia to focus on different strategic plan and implementation that will

maintain their competitive advantage.

Question Mark –a business unit that has a small market share in a high growth

market. A problem child requires resources in order to grow market share, however,

the fact if they will be successful and become stars is not sure (QuickMBA 2007).

Macau and Thailand are the two business units that were included in the said

category. In Macau, the Air Asia has a small share in the market because of the

extensive competition, primarily from the local players in the city. The said situation

is the same in Thailand.

Dog -a business unit that has a small market share in a mature industry. Indonesia

and Brunei are three of business units that belong to the said category. The reason

behind the said analysis is because of the fact that Indonesia and Brunei are

considered as one of the most prominent cities in the world. Thus, there are different

huge companies that have already started their operations in there. Although it is

important to consider that a dog may not required substantial cast, it is connected to

the capital that could be better be deployed elsewhere, however in the case of the

Air Asia, it is considered as strategic purpose of the group in order to introduce the

carrier in China or even in India.

ØAnsoff Matrix

Ansoff’s Product/Market Growth Matrix suggest that an attempt of a given business

to grown is dependent on whether a market is new or existing products in a new or

existing markets.

Figure 2 Ansoff's Product/Market Growth Matrix

Source: (Tutor2u 2010)

The entire growth strategies of the Air Asia focus on the three strategies suggested

by Ansoff: market penetration, market development and product development.

Market Penetration– is the growth strategy which enables the business to focus on

the process of selling existing products into the existing market. It focuses on the

objective to maintain and even increase the market share of the company (Tutor2u

2010). This can be seen on the effort of the Air Asia on its pricing strategies,

advertising and service promotion. This can be seen on the effort of the company in

applying online booking, technologies or Information Systems in their entire process,

in order to ensure that they are giving fast and efficient services towards the

customers.

Market Development – this strategy focuses on the different actions of the business

that seeks to sell its existing products/services into a new market. This strategy

focuses on extending their services on different parts of the globe. In 2001, Air Asia

debut in Malaysia as low-priced Airline. But the founder Mr. Fernandes never ceased

in developing as they continuously expand in the market of Singapore, Thailand,

Brunei, Macau and Indonesia. Currently, Air Asia also plans to fly in China up to

India.

Product/Service Development –pertains on the different growth strategies which

aim to introduce new products/services in an existing market. Air Asia focuses on the

different strategies which improve its existing assets, by introducing new concepts or

improving their services. Thus, in order for Air Asia to maintain their competitiveness

as low-priced Airline, they offered low prices of tickets but to save money, Air Asia

doesn’t offer free in-flight food, but sells sandwiches and a few of other basic items.

It uses leased Boeing 737-300s that are typically around within 25 minutes of

landing.

ØExtended Marketing Mix

Furthermore, since Air Asia as a brand concept be similar to or is associated with

service stipulation, the 8Ps method adopted for service marketing may be

competently espoused for its advertising. The 8Ps are:

Product –This refers to the stuff or services to be offered by the company. In the

case of Air Asia, their services is about low-priced airline services, thus the need for

constant review should be bear in mind in order to meet the changing customer

expectations.

Place –Air Asia are considering the issue regarding availability of services needed by

the target market, i.e., current and prospective clients. As seen, Air Asia are now

doing the online booking and online ticketing in which clients can avail the services

of Air Asia. Aside from this, the company was also committed in extending their

services all over Asia.

Price –In terms of price, Air Asia fees were priced competitively and guaranteed at

low price.

Promotion –Air Asia's most effective ways to communicate to the various target

groups to stimulate greater awareness, interest and patronage are somewhat good

but not exceptional. Air Asia are also using TV advertisement, Internet marketing,

and billboard advertising.

Physical Evidence –In terms of presentation, Air Asia's services are exceptional. As

seen in their offices and aircraft board, Air Asia are known with their well-dressed

staff, logos on office doors/ business centers, letter heads, brochures, complimentary

cards, consultancy reports, etc.

Process –With regards to the process, the business of Air Asia are well management

in which makes their business system flawless and customer complaints are easily

handled.

People –When it comes to people, Air Asia chooses the best suitable person needed

by the company. This means that Air Asia expertly identify the capabilities of a

person that will reflect the value of Air Asia services.

Promise –Air Asia with their consultants are delivering their promises. In terms of

quality of products and services, Air Asia are giving it to their customers at utmost

quality despite of its low-priced services.

Public Relations –Air Asia stakeholders carefully identify the various publics that can

impact on Air Asia to which PR communications can be directed. Such publics

include individual consultants, clients, big practices, small practices, other related

professional associations, relevant agencies of the United Nations, financial

institutions, etc.

ConclusionConclusion

The strategies of Air Asia focus more on the management and access of information

rather the creation of irrelevant airline services. For this reason, Air Asia has

developed a unique set of guiding principles - simplicity, cost-efficiency and

effectiveness. Total commitment to these principles makes the airline services of Air

Asia very user-friendly to its customers. Air Asia was able to achieve a broad market

leadership through various acquisition deals over the years even there is a stiff

competition in the market. The strategies of Air Asia are focused mainly on driving

the growth of its airline services and improving the company’s financial performance.

These innovations have also helped secure significant acquisitions and partnerships.

And more importantly, these innovations have led to the release of the potentials of

the company’s employees, thus building a quality performance- based culture.

On the other hand, Air Asia’ strategies in the airline industry changed for the better at

the start of the new millennium and began pursuing airline service differentiation.

True enough; the differentiated airline services of Air Asia were able to satisfy the

needs of customers through a sustainable competitive advantage. This also justified

that the bargaining power of their customer is high while the treat of their substitute

and new entrant is low because of their extensive efforts in maintaining the quality of

their services. Moreover, this allowed Air Asia to desensitize the prices of their airline

services and instead focused on the values that generated not only a comparatively

higher price but also a better margin since these things could help to avoid business

downfall. As the airline is currently operating in Malaysia, Indonesia, Thailand,

Brunei, Macau and expressive results in Singapore, they have plans of expanding to

other routes this year and the years to follow from China stretching to India.

Bibliography

Air Asia Website (2010), About Us. Accessed 10 June 2010, from

<http://www.airasia.com/my>.

Davies, H & Lam, P (2001), Managerial Economics: An Analysis of Business Issues,

Financial Times Prentice Hall, Harlow, England.

Porter’s Five Forces (2006), Quick MBA, viewed 10 June 2010, From

<http://www.quickmba.com/strategy/porter.shtml>.

QuickMBA (2007), BCG Growth-Share Matrix, viewed 10 June 2010,

<http://www.quickmba.com/strategy/matrix/bcg/>

Recognizing the airline industry (2007), The World Low Cost Airline Award,

accessed 10 June 2010, from

<http://www.terrapinn.com/2007/budgies/index.stm>

Tutor2u (2010), Ansoff’s Product/Market Mix, viewed 10 June 2010, <

http://www.tutor2u.net/business/strategy/ansoff_matrix.htm>