airline industry in malaysia

Industry Overview The airline industry is a large and growing industry. In the past years, air travel has been growing by 6% a year and scheduled airlines carried more than 1 billion passengers in 2008. The airline industry involves large capital requirements. For example, the requirements for aircraft, close monitor by the government regulations, competition from other tourist transport and the requirement to have high level of expertise to operate and manage. In the airline industry, aircraft manufacturer is conquered by two companies. They are The Boeing Company and the Airbus SAS. In Malaysia, airlines are separated into two; 1) Passenger airlines and 2) Cargo airlines. The passenger airlines in Malaysia are Air Asia, Malaysia Airline System Berhad (MAS), Firefly which is owned by MAS, Layang-Layang Aerospace which is based in Sabah to provide air services to Layang-Layang Island, Berjaya Air which is owned by Berjaya Group, Sabah Air and last but not least Hornbill Skyways which is a helicopter service that operates in the rural area of Sarawak. Other than passenger airlines, there are also three cargo airlines that operate in Malaysia. They are the Athena Air services, MAS cargo and Transmile Air Services. Despite the various kinds of air operators, the airline industry in Malaysia is being monopolized by two main operators. The first one is the Malaysia Airline System Berhad (MAS), which is Malaysia’s full service national carrier that first took the skies in 1947 under the name of Malayan Airways Limited. It was formed through a joint initiative of the Ocean Steamship Company of Liverpool, Straits Steamship of Singapore and also Imperial Airways. With a team of young and dynamic people, the domestic carrier turned into an international airline in less than a decade and the name MAS was only fully incorporated in 1973 after going through numerous mergers and separations. As of today, MAS flew nearly 50 000 passengers daily to 100 destinations worldwide. The carrier is a national identity to Malaysia and also a proud one as it had been awarded as the World’s Best Cabin Crew’ in 2001 until 2004 and 2009, and the ‘5 STAR Airline’ award from 2005 till 2009 by Skytrax UK. MAS currently have 90 aircrafts for domestic and international flight. There are currently 20 Airbus and 70 Boeing. MAS main base is at Kuala Lumpur International Airport (KLIA). The other airline operator in Malaysia is Air Asia which takes on the low-cost budget airline business model and is the leading budget airline in Asia. Air Asia has been expanding rapidly since 2001 and flies to 61 destinations operating 400 flights daily using its 75 aircrafts that it has.

To date, it has flown over 55 million passengers across the region and continues to create more extensive route network through its associate companies. In the second quarter of 2009, Air Asia has a capacity growth of 22% (YoY) due to increased number of routes flight frequencies and passenger growth of 24% (YoY) or 9 005 828 seats in total as at 11 August 2009 (Graph 1). This is due to its low fare structure making Air Asia the number one choice as opposed to MAS. With its vision to be the largest low cost budget airline in Asia and serving the 3 billion people who are currently underserved with poor connectivity and high fares, Air Asia had also made the nation proud. It was recently awarded the “Best Low Cost Airline” award by the Skytrax UK and has started to serve long haul flights to the United Kingdom under its associate company Air Asia X. Air Asia believes in serving the best to its customers with no frills, hassle-free and low fare business concept and under its philosophy ‘Now Everyone Can Fly’. Air Asia has sparked a revolution in the airline industry with more and more people around the world choosing Air Asia as their preferred choice of transport giving greater competition to MAS in terms of monetary value. Air Asia has more than 50 aircrafts for their flights. There are currently 45 Airbus and 9 Boeing. Air Asia main base is at Low Cost Carrier Terminal (LCCT) and Kuala Lumpur International Airport (KLIA). Graph 1

Despite the tough competition that the two airline operators of Malaysia persists, both MAS and Air Asia managed to overcome the global economic downturn that the world economy is

currently experiencing and recorded RM180 million and RM203 million in net income for the first half of 2009 which is better than the industry’s market average (Graph 2). Graph 2

Marketing Strategies As the airline industry is a very complex industry which involves high set-up costs and faces high competition between various competitors, the airline company has to come up marketing strategies to ensure its success in luring airline passengers to choose them as their mode of transportation. The strategies that they adopt will need to be the most cost-effective especially during times of an economic downturn as passengers will often opt for the cheapest air-fare and the best value of money that they can obtain. The marketing strategies include advertising, sales promotions, publicity and even word of mouth that incorporates the promotion mix and communications mix. In terms of advertising, we can often see various advertising campaigns done by the MAS and Air Asia. Advertising campaigns can be seen on major television channels, magazines and also a fair amount of billboards in major places around the world. Also, as the world is becoming more tech-savvy, the two companies also extend their advertising campaigns online. As advertising is the number one priority for marketing strategies, corporations will often be willing to spend to

ensure that their brand name and individual corporate philosophies is well known among consumers. As for instance, MAS markets will market its brand name along with its ‘Going Beyond Expectations’ philosophy while Air Asia will ensure that their ‘Now Everyone Can Fly’ ‘punch-line’ is made to be known. The importance of advertising can be proved against the amount that the two airline operators had spent on advertising as found in their second quarter of 2009 financial report, in which MAS had spent RM 36 million while Air Asia had forked out RM 24 million. Other than that, the Malaysian airline industry is also boosted through the publicity made by Air Asia in the sporting arena. This is as; the Air Asia brand name receives worldwide media coverage everytime a football match is being played on television as the brand name can be seen on billboards during the Barclays Premier League football matches in the United Kingdom. Other than that, Air Asia also sponsors the world’s most famous football club Manchester United enhancing their brand name. In addition to that, Air Asia also ventures into the motorsports arena sponsoring F1 teams like the AT&T Williams team. All these publicity is a form of advertising and marketing strategy that Air Asia adopts in promoting international growth for their brand. As for sales promotions, the two carriers will have various sales promotions throughout the year. One of them is the participation of MAS and Air Asia during the MATTA Travel Fair that is being conducted by the Malaysian Association of Tour and Travel Agents (MATTA) twice a year. The travel fair often gives the best discounted promotional prices to consumers to boost the demand for travelling amongst consumers as well as enhancing the tourism industry. Other than that, MAS also has its own travel fair called the MAS Travel Fair to promote the sales of their airline tickets to consumer through heavily discounted prices which are highly competitive. On the other hand, Air Asia also promotes its sales through numerous sales promotions through various discount windows where tickets could go as low as RM0.00 in line with its low cost business model that Air Asia adopts. In graph 3 we can see the various kinds of promotional sales campaigns that are being conducted by Air Asia and the number of successful ticket sales generated as opposed to MAS through the campaign.

Graph 3

Other than that, MAS also promotes its growth through its loyalty programs called Enrich and Grads which allow frequent flyers to receive rewards through the point collection system. Members are able to convert their travel points to get discounts on flight tickets and receive upgrades from economy to business class on-board. Other than that, the loyalty programs also reward their members various benefits, promotions and discounts at selected participating merchant outlets. Industry Changes Every industry has its challenges as the global environment changes. One of the main challenges that the airline industry faces is the global economic downturn. With depreciating income amongst households and the increasing economic uncertainties, the consumers thus have to scale back their expenses in order to sustain their living. Thus, the new low cost budget airline business model tends to dominate this kind of environment as it is more economical then flying on a full service carrier. As we can see in graph 4, during the height of the recent and current global financial crisis which is the final quarter of 2008, MAS saw a contraction in the number of passengers by 15.6% while Air Asia saw a growth of 21%. This proves that the low cost budget airline business model dominates the full service carrier business model which therefore provides greater challenge to MAS in terms of profitability and market share. This can also be seen in graph 5 where Air

Asia’s operating profit margin was 23.1% while MAS recorded only 1.3% also during the fourth quarter of 2008. The change in the industry’s business environment is healthy for the industry as the increase in competition will thus lead to higher economic efficiency in the airline industry with better pricing for the benefit of consumers. As an example, since March 2009, MAS announced their ‘MH Stimulus Package’ which has 9 great deals covering all classes (first, business and economy classes) to boost demand for their ticket sales in times of economic downturn. This stimulus package of theirs was a success for MAS as the program generated RM 95 million in sales revenue (Graph 6). Graph 4

Graph 5

Graph 6

In addition to that, environment challenges are also one of the challenges that the airline industry faces. According to the September 2009 quarterly newsletter of the International Air Transport Association (IATA), the airline industry had agreed to three tough targets to achieve environmental sustainability. The targets are 1.5% improvement in fuel efficiency until 2020; carbon-neutral growth from 2020 and a 50% absolute reduction in emissions by 2050 compared to 2005 levels. Other than that, it is also expected that in December, the world leaders will meet in Copenhagen to plan the global response to climate change. Any decisions that will be made

during the summit will impact the business of the aviation industry which includes the business of MAS and also Air Asia. In order for the airline industry to achieve the new goals that have been laid out by the IATA, all players in the airline industry have to be united in their proactive approach to the environment. According to Giovanni Bisignani, the IATA’S DG and CEO, the airlines’ commitment is needed to be match by the governments. This is as; the success of the industry in achieving its commitments will be contingent on governments acting effectively. One of them is that government must establish a legal and fiscal framework to support the availability of sustainable biofuels in order for the carbon neutral growth by 2020 to be a success. Another key area of change that needs to be highlighted is the deregulation of the airline industry. Before deregulation took place, countries adopt policies to protect their national air carriers from competition with foreign carriers making air services between nations to be very restricted. This is especially noticeable in most developing countries i.e. Asia as governmental economic policies are often protectionism. However, since December 2008, the air services in the Association of Southeast Asian Nations (ASEAN) region had became fully deregulated, allowing the airlines from member states to fly across each other’s territory, make fuelling stops, and pick up passengers at one location before completing the journey to their final destination. This is as this ASEAN countries has came to a multilateral agreement called the ASEAN Multilateral Agreement on Air Services. This agreement has had a significant impact on the Asia Pacific region, as it creates harmonization of its operations and development. The liberalization of the industry has led to an increase in flights and airlines operating on certain routes. The Kuala Lumpur - Singapore route, for example, now has Malaysia Airlines, Air Asia, Silk Air, Tiger Airways, Singapore Airlines and Jet Star adding services, which will enhance customer choice to the benefit of consumer with the increase in competition. Industry strengths and weaknesses Airlines are part of service businesses. It is important to know the strengths and weaknesses of an airplane industry because it will lead to a better knowledge of understanding its potential and the way to improve the services, technology advance and its product. Every airline must be able to do many things well and have to deliver the most efficient behavior in order to give satisfaction to the customers. By not doing well in any one area may result in failure of its service. Therefore, it is recommended that the strengths and weaknesses of this service to be thoroughly studied.

Determining the four main strengths enable to determine the success of the business like are Ability to attract the customers, Ability to equip the fleet with good facilities, Productive and high-skilled employees and Well-planned finances. The reason is the ability to attract the customers is basically airline usually uses two factors of measurement with regard to its customers: Firstly, the attractiveness of the airline's service and secondly, the effectiveness of the airline's promotional expenditures. In the original research we used a rather complex model of an airline's "attractiveness" relative to that of its competitors, for example including infrastructure convenience and scope of service. The base was the attractiveness of the price of tickets. In this analysis only the relative price of tickets has been used because ticket price was by far the most significant factor in attractiveness. A lower relative price would generally be more attractive to most travelers. Air Asia, for example, always competes with others by offering low price tickets, especially during the holidays. The price could be as low as a bus fare with a great service and a short journey. Service plays a prominent role in ensuring a long-lasting business. A good service will definitely attract the customers to use the airline effectively. As saying goes, "First impression lasts long". This is the reason why good service is the main attraction as it gives a long-lasting or even eternal impression to the business. The second reason is the ability to equip the fleet with excellent facilities. In the area of fleet management, the same factors are used for this analysis. Airplane utilization in hours per day deals with how well the companies' major assets (airplanes) are used as a group. The load factor relative to the industry average indicates how well the average individual airplane is used. Simply stated, the load factor is that proportion of an airplane's seats that are sold and actually filled at departure. The strength also includes the ability of the airline to provide its customer with the high technology equipment to use during the flight. This ensures comfort and convenience for the customers regardless of wherever they are, either at the airport or flying high in the sky. They should be able to enjoy the facilities provided that helps to ease their boredom in the airplanes. The third reason is the productive and high-skilled employees. Good airline is determined by how well the airline manages its people. In airline, productivity capacity per employee is a measure on how effectively the employees working together in providing the physical service of to get the passenger to travel from another places to another destination. They definitely have to be morally good as well as high-skilled in dealing with their job and their customers. Poor

treatment from the employees will be a setback why certain airlines do not achieve success compared to others. Morale base of how the employees provide the best and good service to the airline's customers. Productivity is measured the seat available miles per employee. Morale is measured using proxies with the complex and requires information not currently available for the airlines being examined. In this case, indicators committed airline employees to serving their customers on how they manage the customer by lost bags per 1000 passengers and complaints per 100,000 enplanements derived from the Air Travel Consumer Report. The action result in the lost bags or poor enough treatment of passengers that file complaints will directly prove as the morale employees in the airline. Labor-management relations (including strikes and threatened strikes) are one example of a driver of these effects. And lastly the fourth reason is the Well-Planned Finances; financial management consists of four areas, which relates to six factors. Unit revenue and unit cost are important by themselves, including the relationship is also important. Therefore, they have compared the unit revenue and the unit margins among the airlines. A measure of capacity to normalize these factors is used since the airlines fly all their available seats, not just those that are occupied. It may not be advantage for an airline whose unit costs are out of line with the unit revenue. In addition to unit revenues and unit costs, funding for growth is important for an organization's long-term success. Many successful companies choose to grow over time. In the case of the airlines, growth is measured of capacity growth. Furthermore, in order to grow, an airline needs adequate funds. To be attractive for most equity investors, an airline must grow its equity over time. To be more attractive to most debt investors, a reasonable debt-to-assets ratio is desirable. In this realm of funding, this study is less precise. However, in light of this study's prior research, the measures in this case appear to indicate the likelihood of enduring success for the airlines. The Weaknesses of Airline Service Despite the four strength of airline, it also reveals a few weaknesses that should be pointed out. Airlines have a high "spoilage" rate compared to most other industries. Once a flight leaves the gate, an empty seat is lost and non-revenue is produced. This leads to less passengers and the loss of profit due to the empty seat. The second weakness is the high cost of aircraft that requires huge capital outlays. This causes the return of investment to be different than planned. Besides that, the frequent maintenance of aircrafts demands skilled workers which is also costly and needs luxurious amount of capital. The third reason is the big number of workforces spread over large geographic areas, including international points. This therefore requires continual

communication and monitoring. This can be exacerbated during operational irregularities, such as bad weather and the lastly are while the business climate are changing quickly, airline have difficulty making quick schedule and aircraft changes due to leases, staffing commitment and etc.

Strategic alliances and potential M&A In order to have a greater market share and to increase profitability, strategic alliances are important. Strategic alliances are an agreement to cooperate to achieve one or more common strategic objectives. In the airline industry, there are three main airline alliances namely the Oneworld, Star and also Skyteam alliances. According to Strategic Marketing textbook written by Cravens and Piercy (2009), the three alliances account for some 60% of the total world airline capacity with eighteen of the world’s twenty biggest airlines signed up. Unaligned legacy carriers account for 30% of the world capacity and the remaining 10% is the low cost carriers. Take for an example the Oneworld global alliance, the alliance brings together ten of the world’s biggest and best airlines, all committed to providing world-class service and value. It enhances the market share amongst them as putting all together they serve more than 675 destinations worldwide and more than 500 airport departure lounges. The alliance also brings about exclusive frequent flyer benefits and innovative fare products that would increase attractiveness of the airline companies involves amongst potential customers and also increase profitability. For example in Malaysia, Air Asia also has its own strategic alliances. In order for Air Asia to further expand its network in the Asian region, Air Asia has incorporated Thai Air Asia and Indonesia Air Asia into its brand name. Thai Air Asia is a joint venture between Air Asia and Thailand’s Asia Avitaion that adopts the Air Asia low cost business model while Indonesia Air Asia is a business alliance between Air Asia and Air Wagon International. Other than expanding itself in Asia, Air Asia also expands its brand name through Air Asia X (an affiliation between Air Asia, Air Canada and Virgin Group) that flies out too Australia and also United Kingdom with many more routes to come in the foreseeable future. Furthermore, in 2001 Air Asia entered into an ATM contract with the government of Malaysia to provide Angkatan Tentera Malaysia (ATM) with a specified number of seats to specified routes and also meals on-board. This kind of contracts saw an increase in revenue for Air Asia in

which, for the year ended June 30 2004, the contract had accounted for 5.1% of the total revenue of Air Asia. Thus proving that strategic alliances and affiliations plays an important role in the sustainability of an organization and the industry as a whole. MAS also have strategic alliances. They are currently has code-sharing partnership with 25 airlines. As of 2008, MAS has signed two code-sharing partnerships with Jet Airways from India and Turkey Airlines from Turkey. MAS also is a member of SkyTeam and Star Alliance.

Challenges of understanding product-markets and future trends Although there is no theory of tourist travel, a range of tourist motivators does exist. The competitive threat posed by substitute products is strong when the prices of substitutes are attractive; buyer’s switching costs are low. Thus, many buyers tend to believe that the substitutes have better features. A competitive strategy that differentiates the industry’s product formed substitute products usually via the combination of lower cost, better service, better quality and more desirable performance features. For example, firm in one industry nowadays are in close competition with firms from another industry because their respective products are good substitute. For the airline industry, the rapid growth of ship cruise industry and the quickly recognized world class ship cruise that would put South-east Asia squarely on the world map as an important international cruise destination. Cruise successfully marketed their cruise holidays as one for both the young and old, thus changing the misconceptions that cruise holiday were for only retirees and older generation. Cruising has become a new holiday option and is in competition with the airline industry. Plus, the new trends of B2C shopping, for example E-Bay, through internet has also reduced the need to overseas travelling. One of the other things that should take into consideration for the airline companies is the innovations to reduce airline delays. Delaying the take off time because of weather problem can be accepted, but delaying the take off time because of technical problems and other irrelevant stuff is not good for the airline. How can an airline cope with these problems? By giving the passengers better information would be a good start. One of the proposals to reduce airline

delays is through the holiday season fixes. Maybe by opening other airport railway for example opening military airspace especially during holiday’s season would be a good idea. Ground services should be upgraded for example for the passengers to have a comfortable time. For example the lounge at the airport can be used by everyone including to those who does not purchase business class and first class tickets. The aircraft cabin can also be more comfortable. There are usually 3 cabins in big commercial aircraft. They are First Class, Golden Club Class (usually is known as Business Class) and Economy Class. Most people would usually purchase Economy Class because it is more affordable. Maybe the airline can improve the Economy Class to be more comfortable and a little bit more spacious.

The Evolution of Airline Aircrafts in Malaysia 1. Airspeed Consul Model VR-SCD

This is the first aircraft type that operated in Malaysia. Under Malayan Airways it is an 8-seater aircraft that operates between Singapore, Kuala Lumpur and Penang. This aircraft is called Airspeed Consul. It is first operated in 1947. 2. Douglas DC-3

As the airline industry in Malaysia expanded, in the 1940s and 1950s, the Malayan Airways add large numbers of DC-3 as in went public in the 1950s. It is a 50-seater aircraft that operate to new routes such as from Singapore to Hong Kong. Flights are also operated using DC-3 to other parts of Malaya that time such as to Kota Kinabalu and Kuching in Sabah and Sarawak. It has operated for at least the next 20 years.

3. Boeing 707, 737, 747 and 777

In the 1970s, as Malayan Airways change to Malaysia Airline (MAS), it saw rapid expansion in the airlines industry in Malaysia such as growth in airline’s fleet and routes. So this is MAS first purchased of Boeing aircraft which is the Boeing 707 and 737. It started with seven 707s and five 737s which would allow more services in short and long haul destination. This is followed by the purchase of 747 as the industry expanded. In 1972, MAS completed it first long haul flight from Kuala Lumpur to London. Soon after, in 1976, MAS received its DC-10-30 aircraft

where MAS scheduled a flight to Europe from Kuala Lumpur to Amsterdam, Paris and Frankfurt. As MAS grow rapidly, MAS became the first airline in South East Asia to reached America via flights to Buenos Aires, Argentina. MAS use Boeing 747 to reach Argentina. The Boeing 777 was purchased as wide body replacement is considered to be an integral part of the airline’s competitiveness as it is used to replace the aging Airbus 330. 4. Air Asia’s Aircraft

Airbus A320

Boeing 737

Air Asia started their airline operation in 1996 and operates around Malaysia. And make it first international flight to Bangkok in 2003. 5. Firefly Airline

ATR-72-500

Fokker F-50

Firefly started operates in 2007 with it first flight from Penang to Kota Bharu using the Fokker F-50 aircraft. It operates from two hubs. They are Subang Airport and Penang International

Airport. Firefly is 100% owned by MAS. Firefly started their operation with 2 Fokker F-50 and as they expanded with 10 ATR-72-500 aircrafts in 2008. By the end of 2008, Firefly has replaced all Fokker F-50 with ATR-72-500 aircrafts. Their flights are including Penang, Langkawi, Alor Setar, Johore Bahru and Kuala Terengganu. It international flights including Thailand and Indonesia.

Bibliography

1. http://www.airasia.com.my 2. http://www.flightglobal.com/blogs/airline-business/2007/04/airasia-thinks-globally-with-

f-1.html 3. http://www.iata.org 4. http://www.matta.org.my 5. http://www.malaysiaairlines.com 6. http://www.oneworld.com/ 7. http://www.worldairlineawards.com/Awards_2009/Result_Summary.htm 8. http://en.wikipedia.org/wiki/Air_asia 9. http://en.wikipedia.org/wiki/Malaysia_Airline_System

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