Airasia’s Strategic Management

Case Study AIRASIA auraAsia was launched in 2002 by Tony Fernandes, at the time a pioneer of inexpensive flights in Asia. At first, the comp some(prenominal) ope localised three Boeing 737s. In 2004, after a rattling successful public offering, ancestryAsia was listed on the Malayan Stock Exchange and from in that location grew rapidly. As of 2011, the AirAsia Group has 93 aircraft spread across 12 hubs (see appendix 1) and is flying to much than 60 destinations in 16 countries with 130 interior(prenominal) and international r come to the forees.AirAsia ope dictates 3,500 flights every week on home(prenominal) and international routes from nightclub domainal hubs in Malaysia, Tailand (Thai AirAsia) and Indonesia (Indonesia AirAsia). AirAsias head office and its main root word is the Low Cost Carrier final at Kuala Lumpur International Airport. This destination handles 48. 4% of AirAsias traffic (see appendix 2). AirAsia is the leading low- cost common crew cut in th e world and won the Skytrax award for Worlds Best Low-Cost air duct in 2009 and 2010.In addition, the community is Asias largest low-fargon, no-frills airline and has a long-haul arm, AirAsia X, which genuinely fly to China, India, Iran, Taiwan, the UK and Australia with plans to launch go to Japan and South Korea. This report entrust purpose the PESTEL framework to evaluate the opportunities and threats presented by AirAsias external environment. It give then apply a tog out framework to analyse the Strengths, Weaknesses, Opportunities, and Threats of the AirAsia group.Fin in ally, this report provide list three recommendations, to be evaluated by the AirAsia board of directors before implementation. To begin, a PESTEL framework will en sufficient us to understand all the macro-environmental circumstanceors concern AirAsia. 1. Political Opportunities Deregulation and privatization present Air Asia with opportunities for current routes. For spokesperson, the ASEAN pre sidencys signed the ASEAN seven-sided Agreement on the Full Liberalisation of Passenger Air serve (an open skies policy) in 2010.From 2015, designated airlines from ASEAN countries will be able to fly to any city with an international airport in a member nation. AirAsia will therefore puddle the opportunity to penet order un surfaceed markets in the ASEAN region by opening late routes. However, it should be noted that foreign competitors will pass water the same opportunity and new routes will require the exercising of more aircraft. The Malaysian Government has always supported the Malaysian airline pains. One example of this is the opening of the Low Cost Carrier Terminal at Kuala Lumpur International Airport.Further, the Malaysian Government has helped all inexpensive toters (LCCs), and in particular AirAsia, to develop a competitive edge by step-down their operating costs and improving their logistics. Secondly, the Malaysian Government has given AirAsia, on with all M alaysian airlines, significant tax incentives (see appendix 3). These tax-incentives in fact helped AirAsia to cover a substantial part of its loan interest when acquire aircraft. It is also important to toweringlight that other Southeast Asiatic countries ar often substantially state owned.This allows the government to control the airline and cheer it from competition. As an example, AirAsia established a joint venture with Shin potbelly when it began operating in Thailand with Thai AirAsia. AirAsia had a holding of 49% of Thai AirAsia while the remainder was held by Shin Corp. , owned by the fountain Thailand Prime Minister Thaksin Shinawatra (2001 -2006). Threats AirAsia and its competitors can also be negatively abnormal by government decisions. For example, unless the Malaysian government makes an effort to minimise crime, dielers whitethorn choose to visit other destinations.Low-cost pallbearers argon also suffering from new-fangled delays in the device of a new per manent low-cost carrier terminal (Expected to open in October 2012), work being undertaken by the Malaysian government. These delays melt off the ability for low-cost carriers to expand their message by provide for new passengers. Barriers to trade between countries may also inhibit low-cost carriers in Malaysia from entering more protected markets wish s comfortably(p) China where the government tightly controls the airline industry.Civil conflicts and conflicts between regional governments can also affect AirAsias operations. For instance, there has been a resurgence of violence in gray Thailand and terrorism attacks energise occurred in the rest of Thailand and Indonesia. Additionally, Malaysias late(a) decision to search oil-rich waters off the coast of Borneo has led to increased tensions with Indonesia. These tensions could harm node confidence and affect all linees operating in Southeast Asia. 2. frugal OpportunitiesThe economic situation in Malaysia is stable. As an illustration, from 2004 to 2010, Malaysias medium interest rate was 2. 91%, its average inflation rate was 2. 77% and its average unemployment rate was 3. 43%. In addition, the Government of Malaysia has a current account extra that enables them to continuously boost domestic demand, resulting in an average annual gross domestic product Growth of 4. 5% between 2000 and 2011. The global forecast for all Asiatic countries for 2011 anticipates an average GDP result of at least 3% for 2011.Countries akin China, India and Indonesia ar expected to experience GDP proceeds exceeding 6% (see addition 4). Although, economic downturns are always complicated for any business to negotiate, they can also present certain opportunities for companies like AirAsia because, for example, aircraft leasing costs are often garnishd by about 40% at such(prenominal) times. Thus, companies with deep pockets are able to invest and expand their fleet at a very competitive harm. Threats Fluctuating oil prices are a major challenge for airlines.For example, in 2009 and 2010 the price of jet kerosene price translateed between 40 to 55% of AirAsia barrelful (cost per open butt kilometre). From the latest information, the fire price in 1Q11 was US$117 per drumfish, relatively mellow when compared with 1Q10 when the price was tho US$99. 6 per barrel. Fluctuating oil prices have a major impact on operational costs. This is why all airlines use fuel-hedging contracts to stabilise the price they pay for the purchase of jet kerosene. By hedging fuel, Air Asia paid an average price of US$107 per barrel in Q1 2011 from (see Appendix 5).The experience decade was very prosperous for some(prenominal) Southeast Asiatic airlines and the Asia pacific domestic LCC acumen by capacity has expanded rapidly, and has reached a saturation level in several countries. For instance, in countries like the Philippines (61. 8%) or Malaysia (56. 5%), more than half of the regions airline beds are supplied by low-cost carriers compared with the world average of 24% (see Appendix 9). 3. Social/Cultural / Demographic Opportunities Firstly, Southeast Asia offers an important returns to airlines because the egion is comprised of multiple ethnic groups that are able to speak several languages. For example, Malaysia is peaceful of several ethnic groups Malay, Chinese, Indian and Thai and this provides a company like AirAsia with the ability to find staff that can speak several languages, something which is reclaimable as they rapidly expand their business outside Malaysia. Secondly, the rapid urbanisation of Southeast Asia clearly helps airlines because it military forces governments to develop important infrastructures and open new airports in order to facilitate the flux of people between countries.According to the UN, seven out of the 15 almost populated cities in the world (10 meg) are predicted to be in Asia by 2025 (see Appendix 6). Thirdly, rapid economic growth also drives a rapid growth in the middle manakin at bottom Asias large population. According to the latest OECD forecast, the amount of notes spent by the Asian middle consort is expected to represent 59% of the total amount spent by the middle degree in the world by 2030 (see Appendix 7).By analysing average household intake within Asia, we can also confirm that the communication and transport disbursal category will increase from less than 10% in 1995 to 15% in 2015 and this will definitely increase the demand for air travel between Asian countries (see Appendix 7). Threats The emergent middle class is evolution more rapidly in countries like India and China. It is likely that these countries will develop foreign LCC competitors that will have a higher growth rate as considerably as a larger economy of denture than Malaysian airlines like AirAsia. 4.Technological Opportunities By utilizing information technology, airlines have been able to reduce their operating costs. L CCs were clearly the most kernelive players in the airline industry at implementing breakthrough information technologies. By implementing e-ticketing systems and using e-commerce to bypass traditional travel agents, LCCs have been able to lean their processes by removing unnecessary costs. Furthermore, new, state of the art aircrafts are more fuel-efficient than older models, and this has helped airlines to reduce their fuel consumption.AirAsia has implemented these technologies and they have contributed to their operational efficiency. Today, AirAsia has the worlds lowest caskful (cost per available seat kilometre), at just US$3. 52 in 2010 (see Appendix 8). It has achieved this by implementing the following best practices a powerful Yield Management as well as Computer Reservation System (Novitiate Open Skies), a global Enterprise Resource Planning System (powered by Microsoft barter Solutions) and a Customer Relationship Management system provided by Siebel.Threats By being h ighly dependent on technology, LCCs incur costs in ensuring that their systems operate smoothly and safely (i. e. from backup systems and maintenance). In addition, by relying firmly on online sales, LCCs expose themselves to large financial losses when system shift occurs. 5. Environmental/Legal Opportunities Firstly, AirAsia has the youngest fleet in Asia, with the new Airbus A320 and A330 providing improved fuel efficiency.This is fortunate because the EU has adopted a new policy (coming into effect January 1, 2012) that requires all airlines to pay for greenhouse gas emissions released on journeys to and from EU airports. Secondly, undertaking unions in Asia are relatively weak when compared with EU or the States and this helps airlines in Asia to remain competitive by reducing their overhead cost to a minimum. Threats Natural disasters force airlines as well as airports to reduce or shut down their operations for hours or even days.In the last decade, airlines have been expo sed to Hurricanes, snow, fog, H1N1 influenza pandemic, volcanic eruptions and earthquakes. SWOT Opportunities Threats O1) The population of Asian middle class is booming and will reach almost 700 billion by 2012O2) Lots of potential to expand and exploit growing markets in China, India, Japan and Korea as well as the long haul go about in Europe (AirAsia X)O3) Higher fuel costs may force some competitors out of the industry T1) ASEAN Open Skies will increase competition, for example capital of Singapore Airline and Thai Airways will outgrowth LCCs in 2012T2) fertilisation of he LCC market in the Philippines and MalaysiaT3) Aviation regulation and Government fray will impact AirAsias passenger capacity (recent delays in the construction of the new, permanent low-cost carrier terminal (Expected opening date October 2012)T4) Accidents and disasters touch customers Strengths Weaknesses S1) Cost leadership The worlds lowest CASK (Cost per available seat kilometre) with $US3. 52 i n 2010. S2) Economies of scale The biggest and youngest fleet among the LCCs in the region, with an average age of 2. 5 years.S3) Single aircraft fleet (which reduces maintenance and training costs)S4) twofold digit growth of all AirAsia subsidiaries AirAsia achieved record receipts in Q42010S5) alert turnaround of 25 minutes, which is the immediateest in the regionS6) AirAsiaX has the world best fleet-utilisation, in excess of 17 hours, achieved by focusing on price-sensitive, time-insensitive customers S7) Profit delimitation is the highest margin in the LCC industry with 23% by way of comparison, Ryanairs profit margin is 20%S8) The highest ancillary revenue in the LCC industry (through services like pick a seat, cancellation, baggage supersizing, excess baggage, cargo, as well as travel and tours through AirAsiaGo. com, e-coupon with AirAsia Megastore or Hotels with TuneHotels. om)S9) Brand name is well established in Asia PacificS10) Good at using IT to deliver low-cost op erations (ticketless travel, online booking, online check-in)S11) Strong management team up consist of industry experts with fast decision making processes (entrepreneurial)S12) Not sensitive to seasonal factors collect to the high diversification of routesS13) Partnership ANA S14) Virgin Group has 20% share in AirAsia XS15) Weak labour unions W1) AirAsia freight factor fluctuates a lot and is not optimal. W2) Limited human resources due to low costsW3) Non-central location of secondary airportsW4) sarcoid reliance on outsourcing (maintenance, repair). W5) Not financially strong enough to bring off with deep pocket international airlines, e. g.Singapore Airlines new LCC * Main passs * O3 with W1 = Recommendation 1 (CI to benchmark European LCC Load factors)O2, S13,S14 with T2 = Recommendation 2 (Partnership to enter new countries due to high LCC penetration level in Southeast Asia)S4 with T1 and W5 = Recommendation 3 (IPO of Thai and Indonesian AirAsia as well as AirAsia X to finance future growth) Recommendations 1) Load factor As can been seen from the SWOT analysis, AirAsia is outperforming its competitors in terms of operation in several fields. It has the worlds lowest CASK, the worlds highest ancillary revenues per passenger and is the largest discount carrier in South East Asia.However by analysing the cost structure of Air Asia, it is clear that revenue can be improved by change magnitude the passenger elongate factor from 75% to more than 85%, something Easyjet has been able to do (see Appendix 10 for more information). The CI team essential be deployed to investigate in detail the strategy that Easyjet has utilise. 2) LCC penetration in Southeast Asia is reaching maturity date level need for diversification Appendix 9 and the SWOT together highlight the fact that domestic LCC penetration by capacity (seats) within Southeast Asia is starting to reach its maturity by exceeding LCC penetration worldwide (30% of Southeast Asian flights ar e supplied by LCCs compared with 24% in the world).Countries like the Philippines and Malaysia are clearly the most mature, with more than 50% of airline seats supplied by low-cost carriers. By analysing LCC penetration per country, we can see that AirAsia can leverage its AirAsia subsidiaries(Thai AirAsia and Indonesia AirAsia) to enter new countries with very low LCC penetration rate, such as Taiwan, Indonesia, China and Japan. The recent partnership of AirAsia with the Japanese airline ANA underlines the possibilities of this strategy. LCC penetration within Japan is only 9. 1%, far more than China with 6%, Indonesia with 5. 2% or the empty market in Taiwan with 0%. Meanwhile, Air Asia X (in which Virgin Group has an ownership position along with Air Canada) could be used to enter the difficult market in China more deeply.CI teams (AirAsia, Virgin Group, Air Canada) should be able to share information and knowledge in order to define several scenarios for future collaboration wi thin China. 3) IPO to finance growth The construction of the new, world-class low-cost carrier terminal in Kuala Lumpur is expected to be completed in October 2012. one time built, it will be able to serve over 30 million passengers a year and, with expansions, will have the capacity to serve up to 45 million passengers a year. By analyzing the forecasted growth of AirAsia as well as it cost structure (see Appendix 11) we can see than the current economic downturn has increased the cost of aircraft by 212%, mainly due to the credit crunch.In addition, AirAsias ability to finance the expected growth forecasted is throttle because its current structure includes only one publicly listed company that is used to finance all the capital expenditures for Thai AirAsia, Indonesia AirAsia and AirAsia X. One solution to cope with this situation of high growth and important capital requirements is to launch IPOs in 2011, especially because AirAsia X and Thai AirAsia are performing very well i n 2011. The proceeds of IPOs could enable AirAsia to buy new planes and fund growth in order to compete with Singapore Airlines and Thai Airways who will start their own LCCs in 2011. In order to optimize the IPO the CI team will evaluate the best time for implementing this strategy.In, addition, the CI team will also evaluate the possible risks that IPO will have on the autonomy of AirAsia. Appendixes Appendix 1 AirAsia Group fleet formation Q1-2011 solution http//www. airasia. com/iwov-resources/my/common/pdf/AirAsia/IR/AA_1Q11_Analyst_Presentation. pdf Appendix 2 AirAsias extensive domestic and regional network consultation http//www. airasia. com Source http//www. centreforaviation. com/profiles/airlines/airasia-ak Appendix 3 Malaysian government Tax Incentive Source http//www. centreforaviation. com/profiles/airlines/airasia-ak Appendix 4 Asian countries GDP Forecasts Appendix 5 Jet Kerosene prices Source eye for Asia Pacific Aviation & US Energy Information AdministrationA ppendix 6 discharge 15 most populated cities in the world (10 million) are predicted to be in Asia by 2025 Appendix 7 Emerging middle class in Asia Source http//www. oecd. org Source http//www. adb. org Appendix 8 AirAsia has the worlds lowest CASK (Cost per available seat kilometre) with 3. 52 USD in 2010. Selected airlines RASK and CASK Three months ended 30-Jun-2010 (RASK = Revenue per available seat kilometre and CASK = Cost per available seat kilometre) Airline RASK CASK AirAsia USD 4. 87 USD 3. 52 Air Arabia** USD 4. 88 USD 4. 43 Tiger Airways USD 4. 61 USD 4. 58 JetBlue USD 6. 72 USD 6. 04 COPA USD 7. 37 USD 6. 58Norwegian Air Shuttle USD 7. 34 USD 6. 82 Southwest USD 7. 73 USD 6. 84 Vueling USD 7. 68 USD 6. 91 China grey Airlines** USD 7. 32 USD 6. 98 Thai Airways USD 6. 76 USD 7. 15 WestJet USD 7. 95 USD 7. 43 Continental Airlines USD 8. 25 USD 7. 52 Virgin Blue** USD 7. 43 USD 7. 52 GOL USD 7. 99 USD 7. 71 Air New Zealand** USD 9. 22 USD 7. 71 Delta USD 8. 65 USD 7. 74 U S Airways USD 8. 93 USD 7. 88 United Airlines USD 8. 82 USD 8. 08 Air Berlin USD 7. 76 USD 8. 12 Jet Airways USD 8. 09 USD 8. 20 American Airlines USD 8. 51 USD 8. 22 Cathay Pacific USD 9. 55 USD 8. 41 TAM USD 8. 54 USD 8. 44China Airlines** USD 10. 60 USD 8. 49 Air China** USD 9. 75 USD 8. 60 China Eastern Airlines** USD 9. 25 USD 8. 63 Malaysia Airlines USD 7. 90 USD 8. 75 Singapore Airlines USD 9. 61 USD 8. 92 LAN USD 10. 31 USD 9. 18 British Airways USD 8. 88 USD 9. 21 EVA Air** USD 10. 47 USD 9. 38 Qantas** USD 9. 84 USD 9. 68 Iberia USD 9. 78 USD 9. 75 Korean Airlines USD 12. 65 USD 9. 82 Finnair USD 10. 20 USD 10. 68 Asiana USD 12. 48 USD 10. 69 Air France USD 12. 05 USD 12. 51 SAS USD 15. 03 USD 14. 18 Lufthansa** USD 16. 41 USD 16. 49 easyJet USD 6. 99 n/a Source optic for Asia Pacific Aviation and company reports Appendix 9Asia Pacific domestic LCC penetration by capacity 2011 Source vegetable marrow for Asia Pacific Aviation & OAG Facts Appendix 10 Passenger load factor Easyjet, Ryanair vs AirAsia Selected European airlines intra-Europe passenger load factor and passenger load factor growth Mar-2011 AirAsia load factor development 2Q2008 to 2Q2010 Source Centre for Asia Pacific Aviation and AirAsia AirAsia cost structure Source Centre for Asia Pacific Aviation & AirAsia Appendix 11 AirAsia A320 and A320neo aircraft delivery schedule 2011 to 2026 Source Centre for Asia Pacific Aviation and Ascend AirAsia cost breakdown / ASK 1Q08 vs 1Q09 Source Centre for Asia Pacific Aviation & Airasia