Strategic Management Assignment Part B AirAsia.edited

PART B AIRASIA Berhad TABLE OF CONTENT 1. Executive summary 2. Introduction 3. Environmental analysis 4. Environment analysis 5. Company analysis 6. Competitive strategy 7. Financial analysis 8. Critical Success Factors 9. Problems & Issues 10. Recommendations 11. Conclusion 12. References 13. Appendices

AIR ASIA 1. EXECUTIVE SUMMARY

Strategic management has played a key role in the success of many business organizations in the world including airlines and AirAsia is no exception. Commencing in 1996, within fifteen years, AirAsia managed to expand its operations into another ten countries. In addition, through its associate company AsiaX, it launched long-haul low-cost air services from Malaysia to Australia and the United Kingdom. This paper will look at the award winning Malaysian low cost carrier- AirAsia’s by analyzing its strengths and weaknesses using strategic tools such as PEST analysis, Michael Porters Generic strategies, SWOT matrix analysis, Porter’s Force Model Competitive Forces Model, BCG Matrix , Internal and External Factor evaluation Matrix and Competitive Profile Matrix and Financial Analysis and recommend the relevant strategies for adoption to pursue its continue its competitive differentiation and profitability. The paper also throw some insights into the Blue Ocean Strategy concept which is used by AirAsia as one of its strategic moves. 2.

INTRODUCTION

Competition in the airline industry is very intense and growing rapidly. The airlines are using several strategies to compete with one another in the industry. Airline companies need to identify their strategic management to achieve their vision and mission and AirAsia is no exception. 2.1

Background

AirAsia was established in 1993 . The company commenced its operations on 18 November 1996. It was originally owned by the government-link company ,DRBHicom, a heavily –indebted airline company purchased by Tune Air Sdn Bhd , a

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company belonged to former Time Warner executive Tony Fernandes's company . By the year 2002 Tony Fernandes made AirAsia a profitable company and launching new routes from its hub in Kuala Lumpur International Airport at breakneck speed, undercutting former monopoly operator Malaysia Airlines (MAS) with promotional fares as low as RM1 (US$0.27). AirAsia launched its first international flight to Bangkok In 2003 when it opened a second hub at Senai International Airport in Johor Bahru . AirAsia later started a Thai subsidiary, added Singapore itself to the destination list, and commenced flights to Indonesia. Flights to Macau started in June 2004, while flights to Mainland China (Xiamen) and the Philippines (Manila) started 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's Rural Air Service routes in Sabah and Sarawak, operating under the Fly Asian Xpress brand, the routes were subsequently returned back to MASwings a year later citing commercial reasons. Air Asia has further enhanced its presence in Asia by strengthening and enhancing its route network by connecting all the existing cities in the region and expanding further into Indochina, Indonesia, China and India. With the increased frequency and addition of new routes, AirAsia expects passenger volume to grow further. 2.2 Vision, mission , values ,goals, objectives and strategies AirAsia’s vision is to be the largest low cost airline in Asia serving the 3 billion people who are currently underserved due to poor connectivity and high fares and it aspires to be a the leading low-cost carrier in the Asian region that offers five-star service with 95% of on-time performance. At the same time, it wants to promote Malaysian hospitality and the local food. In addition to charging lowest fares and focusing on customers, it also would like to develop various products and services. AirAsia’s mission is to be the best employer, create a globally recognized ASEAN brand, to be the lowest cost budget airline and to maintain the highest quality service by embracing technology.

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Air Asia’s value system( vision, business model and core values) is central to its success as a leading budget airline in Malaysia. The core values of Air Asia are adopting safe practices, valuing its employees, focusing on customer, maintaining highest standard of corporate integrity and commitment for performance excellence. The goals and objectives of Air Asia are guided by its corporate vision and mission which include emphasis on safety, customer focus,, operational excellence and human capital development .In maximizing shareholders’ value, AirAsia also intends to create more profit by expanding its business to other Asian countries. Besides, it also has started to add routes and network in a prudent calculated way. Whilst going through a calculated expansion routes and networks , the company also ensures to reduce the risk of business loss. The companies goals now is to carry 70 million passengers a year, within six years starting from 2014, develop the low-cost carrier terminal at the KL International Airport into

the regional hub for budget travel , introduce more routes, add

frequencies and develop the existing routes. Aligned with its mission statement, AirAsia’s business strategy is centred on cost leadership. However, its business strategy targets specific markets; price sensitive customers (including first-time fliers) needing short-haul flights. Therefore , Porter’s generic strategies (table 1) ,AirAsia’s business strategy can be categorized into focused cost leadership.

Table 1- Michael Porter’s Generic strategies

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AirAsia builds and sustains its competitive advantage by providing services at a price that is simply lower than competitors’ price. Operation effectiveness and outstanding efficiency are two main characteristics of low cost businesses including AirAsia. The sources of cost advantages contributable to the low cost business model for each activity in AirAsia’s value chain. These cost advantages constitute AirAsia’s order winner in competing with its rivals as they enable AirAsia to provide the lowest cost service. 3. ENVIRONMENTAL ANALYSIS

An environmental analysis is done using PEST model. The threats and opportunities have been identified and discussed below. 1.

Political

There was an on going consolidation in the airline industry as a result of increased privatization and government -deregulation throughout the world. Most governments were instrumental in the success of the most airlines success in Asia . Most airline companies in Asia had full or substantial state ownership , management and control . An example of state owned or assisted airlines in Malaysia is Malaysian airlines system (MAS) These companies were often well subsidized and protected from competition. These companies were focused on achieving national objectives rather profit oriented. Opportunities Privatization and de-regulation have opened the way for new routes and air port deals through open skies agreements between countries, or the permission of the entry of private airlines , reducing the constraints for international airlines ie. Malaysia signed an “open –skies” agreement with the United States in 1997. Such agreement enables new airlines like AirAsia to access to domestic routes of other countries. As a result, AirAsia could to go for long haul flight services, to penetrate into the untapped market share .Thus, the airlines could use their new aircrafts in the new routes.

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Threats In the era of globalization, the airline industry was also affected global uncertainties such as accidents, terrorists attacks, and disaster which affected the customer confidence to a certain extent. If customer confidence is affected, AirAsia may face the threat of losing its profitability, or even lead to bankruptcy. Being a low- cost carrier, Air Asia is subjected to aviation regulations and government restraint, geography and infrastructure of Asia and the travelling preferences of customers. Overall under political heading there are more opportunities than threats. In Malaysia as Air Asia is subjected to undergo several government regulations, the airline only could minimize or contain the negative impacts by selecting the most favourable routes.

2. Economic

Opportunities The global economic downturn has resulted in decline in airlines business. This affected the budget airlines as well. However, as for AirAsia this situation created an opportunity .The leasing costs of airplanes were drastically reduced by about 40%. This enabled AirAsia to lease planes at a cheaper rate on pass on the cost savings to customers in the form of cheaper fares.. Threats During this period of recession, the air transport industry also faced fluctuations in fuel prices . Whenever the price of fuel rose it had an impact on the airlines’ operating costs. This would result in decrease in yield and profitability .

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The economic trends faced by Air Asia is therefore unavoidable. However, the opportunities posed by the downturn outweighed the threats and gave AirAsia an opportunity for expansion.

3.

Social /cultural

Opportunities Economic growth in recent years has led to rapid increase in middle class population in Asia resulting the demand for air travel to increase. The surge in trade and tourism in Asia also caused the demand for air travel to increase. More and more people are now willing to travel at low fares and they are prepared to compromise on food and other services during travel. The people are attracted by budget air lines because of their low fares as low as 10-20 %of those charged by full service airlines. The current situation gives AirAsia an opportunity to adopt differentiation strategy to alienate itself from competitors by offering good customer service as full service airlines with low fare. This has given AirAsia a competitive advantage. In addition Air Asia now offers services such as in flight food and drinks ,online sales of hotel, car and holiday reservations and travel insurance, branded credit card .

Threats If Air Asia is not careful in implementing differentiation strategy, it could increase in operation cost in producing value added services. Overall, opportunities outweigh threats in this cultural /social aspect.

4.

Technological

Opportunities

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Air Asia fully utilize information technology . In fact, Air Asia is the first airline in South east Asia to use e-ticketing and bypass the traditional travel agents. As a result the air line was able to save the cost of issuing physical ticket .This has eliminated the need for large and expensive booking and reservations systems and agent’s commission.

Threats Heavy reliance on online sales may pose a risk of system disruption .This threat can be minimized if the airline have appropriate back-up system , preventive maintenance and a contingency plan.

4. INDUSTRY ANALYSIS

4.1 Porter’s Five Competitive Forces An analysis is done using Porter’s five forces` frame-work ( figure 1) to assess the competitive intensity and attractiveness of budget airline industry.

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Figure 1 – Michael Porter’s Five Competitive Strategies

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1.Bargaining power of suppliers The bargaining power of suppliers is also described as the market of inputs ( raw materials, components and labour). In airline industry the bargaining power of suppliers is low as there is stiff competition between air plane suppliers ,namely Boeing, ATR and others. 2. Bargaining power of customers There is almost no switching cost for customer who intend to switch from one airline to another. There are more choices for the customers and they are able to compare the prices between airlines via internet. Air travel, especially leisure travel is therefore very price elastic . 3. Threat from substitutes Airlines industry has several substitutes including road, rail and maritime carriers. However, in Asia the customers are unable to use them due to geographical reasons. Therefore, the threat of substitute is very moderate .

4. Threat from new entrants The barriers to entry in airline industry is high. The capital requirement and government restrictions such as air service agreements are real barriers to industry. However, factors such as de-regulation by Asian governments, and growing demand for affordable low fares amongst budget conscious customers have increased competition. Now with AirAsia’s overwhelming success has prompted many full service airlines like Malaysian airlines Systems (MAS ) launch their own budget airlines i.e. Firefly . These new entrants have the advantage of brand marketing, loyalty and other benefits overflow from their parent companies. Therefore, threat from substitutes is in the budget air line industry is sizeable. 6. Rivalry intensity

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Rivalry among budget airline companies is very high due to increased competition by more and more air lines and high exit cost .In addition, AirAsia is also facing intense completion from a broad range of other air lines , ground transportation and maritime services.

4.1 Industrial analysis using external factor evaluation (EFE) matrix

Key External Factors

weight

Rating

Weighted score

Opportunities National & international Markets Growth of older generations Industrial R&D Growth of population New technology opens the door for new products & services Increased internet advertising Familiarity of generation X with air travel and technology Growth of business travel Threats Decline of leisure travel due to economy and terrorism Competing online ticketing reservation system New government regulations makes operations costlier Demand for air travel sharply after September 11 Gas and fuel price fluctuation Terrorist attacks Increase restrictions to limit noise (including restriction on types aircraft used and limits on a number of operations Increase in annual airline security costs

0.03 0.05 0.02 0.05 0.04

3 3 3 3 3

0.09 0.15 0.06 0.15 0.12

0.06 0.07

3 3

0.18 0.21

0.06 1.00

3

0.18

0.10

3

0.30

0.11

3

0.33

0.03

3

0.09

0.10

2

0.20

0.06 0.15 0.03

3 3 2

0.18 0.45 0.06

0.04

2

0.08

10

1.0

2.83

Table 2 - External Factor Evaluation (EFE) Matrix Based on table 2 above, , Air Asia lines can take advantage of opportunities available such as older generation, growth of population, new technology , internet , growing demand travel (leisure and business) and Familiarity of generation X with air travel and technology.

5 .COMPANY ANALYSIS 5,1 SWOT ANALYSIS A SWOT analysis is done to evaluate the Strengths, Weaknesses, Opportunities, and Threats involved in a AirAsia’s business. It involves specifying the objective of the business venture or project and identifying the internal and external factors that are favorable and unfavorable to achieve that objectives. Internal factors as well as external factors are used to analyse company and the External environment , EXTERNAL FACTORS : Opportunities a) Increased fuel price The increasing oil price at the first glance may pose threat for Air Asia. This is not so. Being a low cost leader, AirAsia has a upper hand in this matter because its cost will be still the lowest among all the regional airlines. Thus, Air Asia 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 travellers.

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b) ASEAN open skies

The “ASEAN Open Skies” allows unlimited flights among ASEAN’s regional air carriers since December 2008.This led to the liberalization of ASEAN capital routes. This has resulted in increased competition among the regional airlines. However , AirAsia with its “first mover” advantage as well as its strengths in management, strategy formulation, strategy execution, strong brand and “low-cost” culture among its workforce viewing this agreement as more of opportunity than threat. c) Partnership with other low cost airlines There is also some opportunity to partner with other low cost airlines such as Virgin airlines enhance their existing strengths or competitive advantages such as brand name, landing rights and landing slots (time to land). d) Population increase 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 a) Air port charges Air port charges imposed by air port authorities includes airport departure, security charges and landing charges and these are beyond the control of airline operators . This poses a threat to all airlines especially low cost airlines which tries to keep their cost as low as possible. For instance, Changi airport in Singapore charges SGD21 for every person who departs from Singapore. b) Competition from other airlines

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Now AirAsia is reaping profit margin of more than 30% and this has already attracted many competitors. Most of the full service airlines already have or planning to create a low cost subsidiary to compete directly with AirAsia. For example, Singapore Airlines has created a low cost carrier Tiger Airways.

c) Fluctuating fuel price There is always fluctuations in the fuel price due to economic and political factors ie. Shortage, war .This is a major threat to the company as its operations heavily dependent on jet fuel.

INTERNAL FACTORS Strengths a)

Management team

The real strength of Air Asia is based on its strong management team with strong links with government s and air line industry leaders. The executive management come from diverse background which consists of industry experts and ex-top government officials . The Air Asia management team is good at strategy formulation and execution. They adopted the proven strategies of South west Airline and Ryanair (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). b) Branding 13

AirAsia’s brand name is well established in Asia Pacific region now. Besides the normal print media advertising & promotions, AirAsia’s top management also capitalised on promotions through news by being very “media friendly” and freely sharing the latest information on Air Asia as well as the airline industry. Their partnership with other service providers such as hotels and hostels, car rental firms, hospitals (medical tourism), Citibank (AirAsia Citibank card) has created a very unique image among travellers. Air Asia’s local presence in few countries such as Indonesia (Indonesia AirAsia) and Thailand (Thai AirAsia) have successfully “elevated” the brand to become a regional brand beyond just Malaysia. The links with Manchester United (one of the world’s most famous football teams) and AT&T Williams Formula One team have further boosted AirAsia’s image to a greater extend beyond just the this region c) Low cost leadership AirAsia is the low cost leader among air lines in Asia. With the help of AirAsia Academy, AirAsia has successfully created a “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. d) Utilization of Information Technology (IT) Information Technology has contributed to the progress of Air Asia to a greatest extent. This includes the contribution made by IT in promotional activities (email alerts and desk top widgets ), brand building exercise ( with 3 million hits per month and is a most widely used search engines of the world today).IT also resulted in direct purchase of tickets by customers and savings in air line agent’s fee. e) The Malaysian government support The government of Malaysia offers whatever assistance it can without jeopardizing the national interest and its flag carrier ,Malaysian Airlines (MAS). For instance, as

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per report in Starbizweek, on 5th March 2011 , the Sarawak government has offered to AirAsia to build a dedicated low cost carrier terminal (LCCT). f) Financial position From the very beginning the financial performance of AirAsia has been very good. The revenue of the company is impressive and is increasing. This is attributed to low operation and distribution costs which enable the airline to offer an attractive ticket price which no other airline can match. The profitability of AirAsia is further enhanced through its diversification strategies( such tune hotel , tune talk etc) and joint ventures ( ie. With Thai Airways and Indonesian Airways) Weaknesses a) Maintenance,, repair and overhaul (MRO ) facility

The air craft maintenance cost is surging. 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, Air Asia 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. b) Good customer service is critical AirAsia receives a lot of complaints from customers about its 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. c) Air craft Financing

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AirAsia as part of its expansion plan , AirAsia is purchasing more aircrafts to cater for the increased demand. However, this cost is surging. To overcome this problem, Air Asia now getting the planes on lease instead of buying.

5.2 SWOT matrix analysis Using external and internal factors a SWOT matrix is done ( table 3) to formulate the appropriate strategies..There are 4 types of strategies : 1. SO strategies 2. ST strategies 3. WT strategies 4. WO strategies 1.

SO strategies This means using AirAsia’s strengths to seize opportunities.(O1,O2,04,07 ) This strategy focused on expansion of untapped markets, Diversification (related and unrelated) , new services or products such long distance budget travel .This is because of the opportunities presented by globalisation ( 01) and AirAsia’s strong financial strength.(S3) 2.

ST strategies

This strategies are use strengths to overcome or contain threats. AirAsia has to fight off competition and new entrants into market, Government regulations which are threats( T1,T3 and T4) by using its strength such as strong financial position and branding ( S 3,S6 ) 3. WO strategies

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The weaknesses are high operating costs ( W1,W2 ,W3 ) are can be overcome by its strengths such as (S1,S2 and S3) can be contained or reduced by its strengths ( S1, S2 , S3 and S5) 4. WT strategies Now AirAsia needs to focus on issues such as the high cost of operations, critical customer service and thinning profit margin (W1,W2 and W3) in the wake of threats such as strong competition, substitutes new budget airlines, and further increase in fuel and take appropriate ( T1,T2,T3,and T 6). AirAsia must try to minimise the impact by prudent management.

STRENGHTS 1. Largest budget air line in country 2. Good management team 3. Financial position 4. Marketing & advertisement 5. Training & development 6. Branding

WEAKNESSES 1. High cost of operation expenses(W1) 2. Low profit margin 3. Customer service is critical 4. Outsourced MRO facility

OPPORTUNITIES 1. Globalisation 2. Increased jet fuel prices 3. Penetration 4. De regulation of air ways 5. Upstream and down stream 6. integration 7. Population growth 8. Rise in the middle class population

SO – STRATEGIES 1. Expansion to untapped market((01, 01) 2. Diversification (related and unrelated) 3. New services& products ( S1,S2,S3) 4. Ie. Low budget long distance travel ( S3)

WO – STRATIGIES 1. Use more IT 2. Efficiency in business processes & supply chain 3. (W1, O4)

THREATS 1. Strong competition 2. Substitutes 3. Entry of new budget airlines 4. Government and IATA regulations policies 5. Congested facility at KLIA 6. Further rice in the price of fuel.

ST- STRATEGIES 1. Penetration into new markets 2. Introduce new services

WT – STRATEGIS 1. Bench marking against strong players

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Table 3 - SWOT Matrix Analysis for AirAsia Berhad

5.3 Internal factor evaluation model (IFEM The internal Factor Evaluation Matrix appended above (table 4 below ) is self explanatory and gives a comprehensive view of the company . Overall the company’s score is impressive.

Internal Factors Strengths 1.High capacity usage 2. Named the best low cost airline leader for the last 3 consecutive years 3. Diversity in upper management 4. Revenue increased by 10 % to 3.13RM billion in fiscal year 2009 5. Net income increased from RM 496.6 million (loss) in 2008 to RM 506.2 million in the fiscal year 2009 5. Dominates the short haul segment of the air industry 6. 2nd largest domestic airline 7.Air Asia posted profit for the last 2 consecutive years Sub total Weaknesses Fewer international flights No segment seat

weight

Rating

Weighted score

0.08 0.03

5 3

0.40 0.09

0.08 0.08

5 5

0.40 0.40

0.07

5

0.35

0.10

4

0.40

0.09 0.08

4 4

0.36 0.32

0.61

2.72

0.08 0.08

3 4

18

0.24 0.32

Dependent on single producer Carry small amount of freight Increasing operating costs Sub total Grand total

0.06 0.08 0.09 0.39

3 3 5

0.18 0.24 0.40 1.38 4.1

Table 4 - Internal Factor Evaluation (IFE) Matrix for AirAsia Berhad 5.3 BCG Matrix

Figure 2 – The BCG Matrix Reference to the BCG Matrix figure 2 above, the flight service provided by AirAsia is definitely falls under ‘Star’ sector as the company has achieved high growth rate as well as acquired comparatively larger market share. However, although generally ‘Stars’ are leaders in high growth markets and tend to generate large amounts of cash, AirAsia must be mindful that they also use a lot of cash because of growth market conditions. In addition, AirAsia also needs to be aware that market growth is not the only factor or necessarily the most important factor when assessing the attractiveness of a market as growth markets attract new entrants. For instance, if capacity exceeds demand, then a particular market may become a low margin one and therefore becomes unattractive.

6. COMPETITIVE STRATEGY

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Now Air Asia is facing strong competitive pressures from Tiger Airways , JetStar airways and Firefly.

C ritic a l fac to rs

A ir A s ia J e ts tar T ig e r A ir w a y s F ire fly W e ig h t R a tin g W e ig h te d s cRo re a tin g W e ig h te d s cRo aretin g W e ig h te d s cRo aretin g W e ig h te d s c o re A d v er tis in g /p r o m o tio0 .1n s5 3 0 .4 5 3 0 .4 5 3 0 .4 5 3 0 .4 5 Q u a lity o f s e rv ic e 0 .1 1 3 0 .3 3 3 0 .3 3 3 0 .3 3 3 0 .3 3 P ric e c o m p e titiv e n e s0 s.1 4 4 0 .5 6 3 0 .4 2 4 0 .5 6 3 0 .4 2 C u s to m e r o n lin e 0 .0 9 5 0 .4 5 4 0 .3 6 3 0 .2 7 2 0 .1 8 O n s c h e d u le in air s 0e.1rv4ic e 4 0 .5 6 3 .5 0 .4 9 3 0 .4 2 3 0 .4 2 C u s to m e r lo y a lty 0 .0 8 3 0 .2 4 3 0 .2 4 3 0 .2 4 3 0 .2 4 T o tal n u m b e r o f d e s tin a tio n s 0 .0 6 5 0 .3 4 0 .2 4 3 0 .1 8 3 0 .1 8 S ea t c o m fo rt 0 .0 5 4 0 .2 3 0 .1 5 3 .5 0 .2 0 3 0 .1 5 R e s p o n s e T o C u s to m 0 .0e r5 q u e rie 5s 0 .2 5 4 0 .2 0 3 0 .1 5 2 0 .1 S ec u rity 0 .1 3 4 0 .5 2 4 0 .5 2 4 0 .5 2 3 0 .3 9 T o tal S c o re 1 3 .8 6 3 .4 0 3 .3 2 2 .8 4

Table 5 - Competitive Profile Matrix JetStar Airline is owned by Quantas Airways and Temasik holding .It is a new airline for Australia and Asia Pacific. It has connecting services to various destinations which includes USA, Australia, Singapore, Thailand ,Myanmar, Philippines, Vietnam, Cambodia ,Japan ,Indonesia ,Hongkong and Taiwan. Firefly , a subsidiary of Malaysian Airways(MAS) has two 50 seater Fokker aero planes and covers a few destinations in Malaysia and Thailand. Tiger Airways, a subsidiary of Singapore Airways(SIA) has connectivity to 34 destinations in China, India, Australia, Indonesia, Thailand , Taiwan, Vietnam and Philippines. A comparison between the four budget is shown above. Based on Competitive Profile matrix at table 5 , Among all the three industrial players, AiraAsia seems to provides excellent service in terms of Customer service besides its low priced tickets because they provide many communication channels like face book, twitter and emails and even PREMIUM lines .They listen to customers’ feedback and try their best to answer customer’s enquiries on face book which other 3 airlines do not have .It normally take 45 minutes to get through a JetStar Customer Relations Officer but it

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usually takes less than 20 minutes to get through AirAsia Customer Relations Officer. In the case of Tiger Air customers always never get through and always get cut off even before connected. 7.

FINANCIAL PERFORMCE

Figure 3 : A Bar chart showing Revenue of AirAsia Bhd. For 2007,2008 and 2009 As indicated in figure 3 –Bar chart the sales of AirAsia increased by 41% % from 2007 to 2008 , by 10% from 2008 to 2009 and by 8% from 2009 to 2010. The revenue of AirAsia has been increasing steady

and

the

return on equity indicates adequate return to the shareholders( refer Appendix 1 &4). The quick ratio of 1.29 in 2009 indicates that it can easily meet its short term obligations. Overall company’s performance in 2009 (refer appendix4 ) after undergoing recessionary trend in 2008 is satisfactory. The debt ratio of 0.15 in 2009 shows that the company is strong as its assets are primarily through equity. Based on the 4th quarterly report for 2010 presented on presented on 24/2/2011, Air Asia’s profit surpassed the One million mark as it posted a net profit of RM.1.06 Million( excluding its other subsidiaries) in 2010. This was partly attributed to the increase of number of passenger from 14.2 million in 2009 to 16.1 million in 2010. When combined with Thai Air and Indonesian Air Asia , there were 25.7 million people carried

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by AirAsia. Breaking billion ringgit net profit barrier is the biggest milestone for Air asia despite its spending per passenger has is now at RM 43. 8.

CRITICAL SUCCESS FACTORS

Several factors have attributed to AirAsia becoming the leading budget airline in the Asian region which includes factors such as declining air craft costs, geography of Asia, demographical factors and AirAsia’s strategy. 1. Declining aircraft cost in global context There was a decline in the purchase price and leasing rate of planes in the aftermath of the September 11 events. AirAsia took advantage of the situation. 2. Attractive market The geography of Asia has assisted AirAsia. The pacific and Asian regions are made up of several islands and all these areas are with poor road network.

3. Demography There are more than 558 million people in AEAN countries and over 3 billions people in China and India. The growth in population , urbanization coupled with growth of middle class population had created a demand low budget air travel. Most of Asian cities have more than 1 million people and this favoured travel. 4. Strategy 1. Corporate strategy AirAsia’s corporate strategy is aligned to its mission statement. In Michael Porter’s generic terms, AirAsia adopts focused cost leadership. This is because of the huge size of the market. In LCC industry cost is the competitive priority and

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determines its success and market position. AirAsia has successfully adopted a cost leadership strategy because of the huge size of the market. The cost leadership strategy that has permeated into the entire firm. This is evidenced by high efficiency, intolerance of waste, rewards linked to costs containment , low overheads , limited perks and intensive screening of budget requests, 2. Business Strategy The business strategy however targets specific markets : price sensitive customers needing short haul flights. In Porter’s generic strategies, AirAsia’s strategy is described as focused cost leadership. The airline company offers attractive ticket price , even compared to bus and road fare. 3. Functional strategy AirAsia’s attention to functional strategies , and has thrived through competition, despite facing stiff competitions from the national flag carrier , Malaysian Airlines and other budget airlines .The budget airline’s functional focus includes :quality control, technological development, safety and staff training 4. Culture AirAsia lines has developed a brand that is accessible to everyone. The driving force behind the AirAsia brand is single most important asset – over 4,000 staff whose dedication, determination and patience have made the low budget airlines a success story today. AirAsia has created a positive workplace culture by promoting open communication and strong team coordination. In particular they have managed to achieve a high level of coordination between employee groups resulting in greater aircraft and employee productivity, fewer flight delays, and fewer customer complaints. This was achieved with the support of top-level management in conjunction with a set of employee practices.

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5.

Organisation and Structure Structure of an organization is a foundation of any organization and AirAsia has all the

three types of organization structure: Functional , projected and matrix.

AirAsia has a functional structure headed by a CEO. The CEO is assisted by a deputy CEO. There is a board comprising 6 directors who elect a chairman. Under the CEO there are 15 departments ( line and functional /staff) : AirAsia Thai, AirAsia Indonesia, Finance and strategic planning , Quality control and safety, Engineering, Information technology, Commercial , operations , flying safety, All airport & public safety, cargo , flight operations and go-holidays. AirAsia Thai and AirAsia Indonesia are departments based on geography and enjoy certain level of autonomy. Air Asia uses project and matrix structure. 6. Control There exists three types of organisational control in AirAsia : strategic control, management control and operational control. Strategic control is concerned with tracking the strategy as it is being implemented, detecting any problem areas or potential problem areas, and making necessary adjustments. Operational control systems are designed to ensure that day-to-day actions are consistent with established plans and objectives. Corrective action is taken where performance does not meet standards. This action may involve training, motivation, leadership, discipline, or termination. The key elements of AirAsia’s internal control system are appended below: • Clearly defined delegation of responsibilities of board and principal office bearers • Documentation of standard operating procedures with regular updates • Detailed budgeting process • A half yearly review of the annual budget

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7. Leadership Leadership of AirAsia CEO , Tony Fernandez is one of the critical success factors of the low budget airline. Under the able leadership of Tony Fernandez , the fledging airline with a RM40 million debt became a blooming, thriving business. Today AirAsia is a leading low fare, no frills airline in Southeast Asia, which has flourished into a household name in Malaysia, Thailand and Indonesia . Tony Fernandez is a mixture of situational leadership style with

transformational ,

democratic and servant leadership styles .Tony through the various transformation efforts has implemented various strategies to achieve the success. To name a few his contributions : online ticket booking system , online check-in, paperless ticket etc. He hears and involves his staff’s participation in decision making. Tony motivates his team regularly to be effective and efficient. This leader is highly visible and uses chain of command to get the job done. Tony like any other CEOs focus on the big picture, needing to be surrounded by people who take care of the details. Tony is always looking for ideas that move the organization to reach the company's vision. 8. Blue Ocean strategy By adopting Blue ocean Strategy, AirAsia has managed to avoid the red ocean (compete with Malaysia Airline and regional airline) by looking into the factors that industry take for granted and also factors that important to customers. With the Four Actions Framework of Blue Ocean Strategy ( eliminate, reduce, raise and create) , AirAsia has implemented many strategic moves to ensure they are making Malaysia Airline and other regional airline companies irrelevant. Strategic moves under the Blue ocean strategy , AirAsia has eliminated “over the counter” booking system, free food /beverage on board and seating class booking system .The company also reduced “luxury facilities “ provided at the Airport lounge, seat quality and number of attendants served on board. It also raised focus on several key destinations and

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increased frequency of flights and created Online Booking system and Point to point travel system.

9. PROBLEMS & ISSUES The Malaysian leading budget airline is facing many problems and issues which includes competition among regional airlines, impact of recession, fluctuating fuel prices, rising operating cost and inadequate infrastructure . 1. Competition The airline industry today operates in a competitive environment whereby firms set prices and domestic routes given derived from market conditions, but where access to some key inputs, such as airport boarding gates, are determined by non-market mechanisms. Increasing competition because of increasing number of low cost airline competitors, aggressive competition against the large and traditional airline companies.

2. Economic downturn Air line customers

decrease because of poor economy. However, despite recession,

AIRaSIA has grown rapidly in recent years and while some airlines faring well, the sector faces a bumpy ride as economic turbulence hits both domestic and international travel.Asia's low-cost airlines, which took off in good economic times, are facing the stiff headwinds of the global economic downturn. 3. Fuel price Fuel amounts to 60 % of AirAsia’s operating costs and spikes in jet fuel may lead to losses. As the cost of fuel always fluctuate and variable, it rather difficult to do costing.

26

Other airlines however have resorted to fuel surcharge which is charged above the normal fare. Tony Fernandez knowing the price elasticity of budget airline market well has said that AirAsia will not raise its ticket price. 4. Operating cost s The labour costs have been rising over the last decade . Additionally, security costs and stringent air transport department regulations put additional strain on airline operating costs without signs of relief. These issues hurt the entire airline industry, even low cost carriers have been impacted by this . 5.Infrastructure The problem of inadequate infrastructure and facilities have impaired the smooth operation of AirAsia. As a result AirAsia has to share the facilities at the newly built KLIA resulting in delayed schedules and inconveniencing customers. Crowded in the mornings and congestion on the runway have increased its operating cost.

10. RECCOMENDATION AirAsia is strategically strong with an organized management team, established ‘lowcost’ mindset with employees, and a sound strategic vision. Moreover, AirAsia is also the front runner in the low cost industry with its early conception and aggressive product branding and marketing techniques in the Asian region. It has used IT to its advantage with the use of the internet and newer airplanes. Finally, it is beginning to establish its name and brand on the world stage with innovative and intelligent sponsorship deals. When there exists many strengths for AirAsia there are also some weaknesses. These weaknesses, however, do not seem to be overly dangerous. Higher fuel costs around the world, and fluctuating, unstable markets have made operational costs higher, especially

27

for the airline industry. However, this also means that companies with less profit margins than AirAsia may become redundant in the future; thus, opening up customer bases previously unavailable to AirAsia. In addition, AirAsia has a relatively poor reputation with customers, particularly due to their flight times and cancellations. Improvements are needed to be made in this area without increasing operating costs. Opportunity is the golden word where AirAsia is concerned. With the dramatic increase in middle income earners in China and India especially, there is much potential for AirAsia to expand its routes and frequency of flights. Relaxation of the ‘ASEAN Open Skies’ laws means that, with AirAsia’s established number one position, low cost, strong brand and strategy execution, it is firmly established to overcome potential new entrants and increase market share in the future. Furthermore, increased access for Asian people to the internet, coupled with new and developing IT solutions allow AirAsia to bolster its reputation as an innovative and leading organization in terms of IT. Potential threats to AirAsia come in the form of potential new entrants into the market from established full carriers like Singapore Airlines and AirAsia are positioned well to withstand any competition in this area. There are always threats from areas outside of AirAsia’s control such as terrorism and global conditions. Finally, AirAsia needs to be aware that system failures with the internet would seriously damage operations for such a technologically reliant company. The company must have adequate back up facilities in case there is a system failure.

11. CONCLUSION To be a leader in the low cost carrier industry , AirAsia needs to use strategic management continuously because the airline industry is a unique and complex in nature. The budget air line needs not just reduce cost and make the operational activities running effectively but also

needs to come out with the strategy that can make competition irrelevant

or

uncontested market space through differentiation which AirAsia already doing but it has to enhance it further.

28

In a teleconference recently CEO Datuk Tony Fernandes said that AirAsia is in the best financial position now and it would continue its focus on lowering cost ,improving returns and expanding its network. Despite the share increase in prices of oil and aviation fuel resulting from the Middle East crisis, Datuk Tony Fernandes has assured to the customers that it will impose fuel surcharges.

12. REFERENCES

1)

Sen Ze and Jayne Ng , Air asia story, How a young airline made it possible for everyone to fly and become a runway success practically overnight

2)

http;www.scribed .com/doc/18152552/Ryanair-Case ( retieved on 20/3/2011)

3)

Gerry Johnson ,Kevan Scholes & Richard Whitington , Ryanair –Competitive Challenges and strategic choice in the budget airline industry ,(page 694-707) – Low fares airline , Exploring Corporate strategy,8th edition

29

4)

AirAsia Berhad, Annual Report 2007.2008 and 2009

5)

Danny Yap and Elaine Ang, Blure Ocean Strategy for Corporate Malaysia (Article published in the Star,Daily on 16/7/2007

6)

http://www.airasia.com/iwovresources/my/common/pdf/AirAsia/IR/AA_4Q10_Analyst_Presentation.pdf ( retrieved on 2/4/2011)

7)

David, F R . Strategic Management –Concept and cases Thirteenth Edition ,Prentice Hall,One Lake Street,Upper Saddle river ,New jersey

14. APPENDICES APPENDIX 1 - Income Statement For The Financial Year Ended 31 December 2009

2009 RM'000 3,132,901

Revenue Operating Expenses/Cost of sales

2008 RM'000 2854970

(306,002 -

Staff Cost

)

-

Depreciation of property, plant and equipment

)

-

Air craft fuel expenses Maintenance, overhaul, user charges

)

(447,644 (927,795

30

(236,793 ) (346,954 ) (1,389,841 )

2007 RM'000 2,018,779,603 (1,909,664,970)

(410,583

(307,205

-

and other related expenses

)

)

-

Aircraft operating lease expenses

)

-

Travel and taou operating expenses

)

-

Gain/(loss) on unwinding of derivatives

22,457

)

-

Provision for loss on unwinding of derivatives

(92,188

)

-

Other operating expenses Other Income Selling and distribution costs Administrative expenses

(107,251

(92,649 )

(53,524

(37,945 ) (678,503 (151,713

)

(46,570 )

102,393 -

Operating profit/(loss) Finance income

912,764 84,505 (374,971

Finance costs

)

81,545 (351,658 ) 35,245 (552,785 )

(4,981,954) 12,160,465 (27,449,065) (26,411,027) 62,433,052 (17,619,018)

(869,198 Profit/(loss) before taxation Taxation

622,298

)

44,814,034

(11,186 -

Current Taxation

)

(3,769)

(8,300,276)

(104,835 -

Deferred Taxation

)

376,404 (116,021

) Net profit/(loss) for the financial year

506,277

372,635 (496,5 63)

20.6

(21.1)

Earnings/(loss) per share (sen)

APPENDIX 2 -

(8,300,276) 36,513,758 60.86

Balance Sheet as at 31 December 2009

Non-current Assets Property, plant and euipment Intangible asstes Investment in subsidiaries Investment in associates Other Investments Goodwill

31

2009 RM 7,942,188

2008 RM 6,594,299

29 26,704 8,738

29 26,715 8,738

2007 RM 186,109,652 30,255,070 -

Loan to a subsodiary Prepaid lease payments Deferred tax assets Amout due from a jointyl controlled entity Amout due from an associate

Current Assets Inventories Receiavble, deposits and prepayments Deposit on aircraft purchase Amount due from subsidiaries Amout due from a jointyl controlled entity Amout due from an associate

24,258 856,109

4,982,718 9,399,846

7,510,148

230,747,286

20,864 721,082 330,978

20,684 689,381 334,628

237,416,719 256,295,011 -

194,503 203,930

Amout due from a related company Tax recoverable Marketable securities Deposit, bank and cash balances

-

23,593 751,274 171,885 253,037 9,177,448

309,683 387,647

3,303

Current Liabilities Trade and other payables Sales in advance Provision for loss on unwinding of derivatives Port employment benefit obligations Provision of warranties Borrowings (interest bearing) bank overdraft other Payables Amount due to subsidiary Amount due to an associate Amount due to a related company Hire purchase payables Borrowings Current tax liabilities

Net Current Assets Less : Non-current liabilities Hire purchase payables Borrowings

32

746,312 2,220,972

153,762 1,895,785

872,990 283,224

774,250 255,517 151,713

3,382 56 540,212 9,824 1,709,688

4,359 3,634 77 538,934 4,216 1,732,700

511,284

163,085

16 7,067,696

72 6,067,625

5,106,946 1,562,087 92,795,473 593,176,236

558,272 7,698,858 3,978,171 191,818,562 193,179,079 -

5,240,238 402,473,180 190,703,056

-

Port employment benefit obligations Borrowings (interest bearing) Deferred tax liabilities Deferred income

7,067,712

6,067,697

23,105,680 169,377,260 27,000 3,126,000 195,635,940

2,621,020

1,605,536

225,814,402

Capital and Reserves attributable to equity holders of the company Share Capital Share Premium Currency Translation reserve Retaines earnings

275,774 1,206,216 592 1,138,438

237,421 735,352 592 632,171

60,000,000 17,386 338,060 165,458,956

Total Equity

2,621,020

1,605,536

225,814,402

APPENDIX 3 - Cash Flow Statement for the financial year ended 31 December 2009

2009 RM

Operating Activities

2008 RM

2007 RM

Profit/(loss) before taxation

622,288

(869,198)

-

Adjustment : Property, plant and euqipment -depreciation

447,644

346,954

-

33

-write off -Gain on disposal Loss on disposal of other investments Amortisation of long term prepayments Amortisation of other investments Write-off receivables Provision for loss on unminding of derivatives Net unrealised foreign exchange (gain)/loss Interest expense Interest income

Changes in working capital : Inventories Receivables and prepayments Trade and other payables intercompany balances Cash generated from/(used in) Operations Interest paid Utilisation of provision for loss on unwinding of derivatives Interest received Cash receipts from customers cash paid to supplies and employess Cash from/(used in) operations Tax refunded Tax paid Interest expenses paid Net cash flow from operating activities Investing activities Property, plant and equipment - Additions - Proceeds from disposals Deposit on lease of aircraft Long term prepayments Proceeds from disposals of other investments Acquisition of subsidiaries Additional investment in subsidiary Proceed from disposal of investment in subsidiary Repayment of loan by subsidiary Purchase of property, plant and equipment Proceeds from disposal of property, plant and equipment Investing activities securities Dividend received Interest income received Net cash flow from/(used in) investing activities Financing activities

34

388 (30,696) 9,645 11 (39,742) 371,153 (6,300) 1,374,391

29 (15,554) 4,217 10,261 13 737 151,713 227,994 297,533 (20,990) 133,709

-

(180) (28,438) 77,701 (166,457) 1,257,017

(3,117) (148,520) 390,480 (565,117) (192,565)

-

(322,407) (151,713) 6300

(239,755) 20990

-

(5,578)

(4,731)

783,619

(416,061)

2122743959 -1915738549 207005410 0 -15621176 -18286322 173097912

(2,623,001) 50,043 (7,448) (48,197) 26,675 (2,601,928)

(12,190) 1,883,208 (93,899,177) 1,265,872 (1,562,087) 22,032 2,935,824 (89,366,518)

(1,947,763) 182,538 (12,243) (1,777,468)

Poceeds from allotment of shares Hire-Purchase instalments paid Proceeds from borrowings Repayment of borrowings Deposit pledged as securities (Repayment)/proceeds from short term bank borrowings (net) Proceeds from long term bank borrowings Repayments of long term bank borrowings Cash grant received Dividends paid to shareholders Net cash flow from financing activities Increase/(decrease) in cash and cash equivalents Currency translation differences Cash and cash equivalents -at start of year -at end of year

509,217 (77) 1,670,390 (593,131) 5,112 1,591,511

2,882 (77) 3,044,531 (300,780) 2,019 2,748,575

(88,238,936) 32,910,300 (7,200,000) (62,528,636)

597,662

269,414

21,202,758 1,207,603

120803 718465

APPENDIX 4 - FINANCIAL RATIOS FOR AIR ASIA BHD.

2007

2008

2009

Profitability

Gross Margin

Net profit Margin

0.31

(0.12)

0.29

0.25

(0.17)

0.20

0.44

0.053

0.0 44

Return on total asset (ROA)

35

390217 120803

25,906,941 48,317,302

Return on common equity (ROCE)

0.16

0.31

0.19

Current ratio

1.47

1.09

1.30

Quick ratio

1.46

1.08

1.29

80.44

155.03

Liquidity

Activity

Inventory turnover

Average collection period

Total asset turn over

46.34 days

88.14 days

0.25

106.40 84.01 days

0.30

0.28

0.18

0.15

Debt Debt ratio

0.49

36