Airasia’s Strategic Management

Case assume AIRASIA air travelAsia was launched in 2002 by Tony Fernandes, at the time a pioneer of low-cost flights in Asia. At first, the confederation operated three Boeing 737s. In 2004, after a in truth successful public offering, AirAsia was called on the Malaysian demarcation Exchange and from there grew rapidly. As of 2011, the AirAsia Group has 93 aircraft spread across 12 hubs (see appendix 1) and is straightaway to more than 60 destinations in 16 countries with 130 municipal and international routes.AirAsia operates 3,500 flights every week on domestic and international routes from nine regional hubs in Malaysia, Thailand (Thai AirAsia) and Indonesia (Indonesia AirAsia). AirAsias head office and its main al-Qaida is the Low damage Carrier Terminal at Kuala Lumpur International Airport. This terminal handles 48. 4% of AirAsias merchandise (see appendix 2). AirAsia is the leading low-cost carrier in the world and won the Skytrax award for Worlds Best low-priced Ai rline in 2009 and 2010.In addition, the company is Asias largest low-f argon, no-frills airline business and has a long-haul arm, AirAsia X, which currently flies to chinaware, India, Iran, Taiwan, the UK and Australia with plans to launch function to Japan and South Korea. This report ordain use the PESTEL framework to evaluate the opportunities and threats presented by AirAsias away environment. It go away then apply a SWOT framework to analyse the Strengths, Weaknesses, Opportunities, and Threats of the AirAsia group.Finally, this report leave list three recommendations, to be evaluated by the AirAsia board of directors before implementation. To begin, a PESTEL framework lead en fitting us to understand all the macro-environmental divisors affecting AirAsia. 1. Political Opportunities Deregulation and privatization present Air Asia with opportunities for new routes. For example, the ASEAN governments signed the ASEAN triangular Agreement on the Full Liberalisation of Pa ssenger Air Services (an open skies policy) in 2010.From 2015, designated airlines from ASEAN countries testament be able to fly to any city with an international airport in a genus Phallus nation. AirAsia will therefore rent the opportunity to penetrate undeveloped grocerys in the ASEAN region by scuttle new routes. However, it should be noted that foreign competitors will have the same opportunity and new routes will require the utilization of more aircraft. The Malaysian government activity has constantly supported the Malaysian airline industry. unity example of this is the opening of the Low Cost Carrier Terminal at Kuala Lumpur International Airport.Further, the Malaysian Government has helped all low-cost carriers (LCCs), and in particular AirAsia, to develop a competitive edge by trim their in operation(p) costs and improving their logistics. Secondly, the Malaysian Government has given AirAsia, along with all Malaysian airlines, hearty tax incentives (see appendi x 3). These tax-incentives in fact helped AirAsia to cover a substantial part of its loan kindle when purchasing aircraft. It is besides important to naughtylight that other southeastern United States Asian countries argon often wellhead state owned.This allows the government to control the airline and protect it from competition. As an example, AirAsia accomplished a joint move with Shin Corp when it began operating in Thailand with Thai AirAsia. AirAsia had a holding of 49% of Thai AirAsia magic spell the dwellder was held by Shin Corp. , owned by the former Thailand Prime Minister Thaksin Shinawatra (2001 -2006). Threats AirAsia and its competitors goat also be negatively affected by government decisions. For example, unless the Malaysian government makes an effort to minimise crime, travellers whitethorn choose to visit other destinations.Low-cost carriers are also suffering from recent delays in the construction of a new permanent low-cost carrier terminal (Expecte d to open in October 2012), work macrocosm undertaken by the Malaysian government. These delays reduce the ability for low-cost carriers to expand their power by catering for new passengers. Barriers to slew between countries may also inhibit low-cost carriers in Malaysia from get ining more protected trades bid 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 Southern Thailand and terrorism attacks have occurred in the lay of Thailand and Indonesia. Additionally, Malaysias recent decision to explore oil-rich waters off the coast of Borneo has led to additiond tensions with Indonesia. These tensions could harm customer confidence and affect all businesses operating in sou-east Asia. 2. Economic OpportunitiesThe frugal situation in Malaysia is stable. As an illustration, from 2004 to 2010, Malaysias fair in terest 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 surplus that enables them to continuously encourage domestic demand, resulting in an average annual GDP Growth of 4. 5% between 2000 and 2011. The global aim for all Asian countries for 2011 anticipates an average GDP maturation of at least 3% for 2011.Countries like China, India and Indonesia are expected to experience GDP crop exceeding 6% (see accompaniment 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 reduced by about 40% at such times. Thus, companies with deep pockets are able to invest and expand their fleet at a very competitive price. Threats Fluctuating oil prices are a major challenge for airlines.For example, in 2009 and 2010 the pric e of jet kerosene price represented between 40 to 55% of AirAsia C use up (cost per purchasable seat kilometre). From the latest information, the fuel price in 1Q11 was US$117 per pose, relatively high when compared with 1Q10 when the price was only 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 comprise 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 last decade was very prosperous for some(prenominal) Southeast Asian airlines and the Asia peaceful domestic LCC penetration by capacity has expanded rapidly, and has reached a saturation level in some(prenominal) countries. For instance, in countries like the Philippines (61. 8%) or Malaysia (56. 5%), more than half of the regions airline seats are supplied by low-cost carriers compared with the world average of 24% (se e cecal appendage 9). 3. Social/Cultural / Demographic Opportunities Firstly, Southeast Asia offers an important advantage to airlines because the egion is comprised of multiple ethnic groups that are able to speak several languages. For example, Malaysia is composed 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 useful as they rapidly expand their business outside Malaysia. Secondly, the rapid urbanization of Southeast Asia clearly helps airlines because it forces governments to develop important infrastructures and open new airports in dictate to facilitate the blend of people between countries.According to the UN, seven out of the 15 some populated cities in the world (10 million) are predicted to be in Asia by 2025 (see Appendix 6). Thirdly, rapid economic yield also drives a rapid growth in the middle trend within Asias large population. According to the latest OECD forecast, the amount of money spent by the Asian middle class is expected to represent 59% of the total amount spent by the middle class in the world by 2030 (see Appendix 7).By analysing average household consumption within Asia, we can also confirm that the communication and transport pass category will increase from less than 10% in 1995 to 15% in 2015 and this will by all odds increase the demand for air travel between Asian countries (see Appendix 7). Threats The emergent middle class is growing 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 well as a large economy of collection plate than Malaysian airlines like AirAsia. 4.Technological Opportunities By utilizing information technology, airlines have been able to reduce their operating costs. LCCs were clearly the most effective players in the airline industry at implementing breakthr ough 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, progressive 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 last CASK (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 transcription (Novitiate Open Skies), a global Enterprise Resource Planning System (powered by Microsoft Business Solutions) and a Customer Relationship Management system provided by Siebel.Threats By being highly dependent on technology, LCCs incur costs in ensuring that their systems operate smooth ly and safely (i. e. from assuagement systems and maintenance). In addition, by relying heavily on online sales, LCCs expose themselves to large financial losses when system fracture 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 take 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, labour unions in Asia are relatively weak when compared with EU or USA 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 exposed to Hurricanes, snow, fog, H1N1 influenza pandemic, volcanic eruptions and earthquakes. SWOT Opp ortunities Threats O1) The population of Asian middle class is booming and will reach almost 700 million by 2012O2) Lots of potential to expand and exploit growing markets in China, India, Japan and Korea as well as the long haul approach in Europe (AirAsia X)O3) high fuel costs may force some competitors out of the industry T1) ASEAN Open Skies will increase competition, for example Singapore Airline and Thai Airways will start LCCs in 2012T2) Saturation of he LCC market in the Philippines and MalaysiaT3) Aviation regulation and Government interference 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 affecting customers Strengths Weaknesses S1) Cost leadership The worlds lowest CASK (Cost per available seat kilometre) with $US3. 52 in 2010. S2) Economies of scale The biggest and youngest fleet among the LCCs in the region, with an average age of 2. 5 familys.S3) Single aircraft fleet (which reduces maintenance and training costs)S4) bifurcate digit growth of all AirAsia subsidiaries AirAsia achieved record profit in Q42010S5) Quick turnaround of 25 minutes, which is the express in the regionS6) AirAsiaX has the world best fleet-utilisation, in wasted of 17 hours, achieved by focusing on price-sensitive, time-insensitive customers S7) wage margin 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 operations (ticketless travel, online booking, online check-in)S11) Strong management squad consist of industry experts wit h fast decision making processes (entrepreneurial)S12) Not sensitive to seasonal factors due to the high diversification of routesS13) Partnership ANA S14) virgin Group has 20% share in AirAsia XS15) Weak labour unions W1) AirAsia lode factor fluctuates a lot and is not optimal. W2) Limited human resources due to low costsW3) Non-central location of collateral airportsW4) Heavy reliance on outsourcing (maintenance, repair). W5) Not financially strong enough to compete with deep pocket international airlines, e. g.Singapore Airlines new LCC * Main Recommendations * 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 pay future growth) Recommendations 1) Load factor As can been seen from the SWOT analysis, AirAsia is outperforming its c ompetitors 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 easternmost Asia.However by analysing the cost structure of Air Asia, it is clear that revenue can be improved by increasing the passenger agitate factor from 75% to more than 85%, something Easyjet has been able to do (see Appendix 10 for more information). The CI team must be deployed to investigate in detail the strategy that Easyjet has apply. 2) LCC penetration in Southeast Asia is reaching maturity 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 are 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 Nipponese 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 friendship in order to define several scenarios for future collaboration within China. 3) IPO to finance growth The construction of the new, world-class low-cost carrier terminal in Kuala Lumpur is expected to be co mpleted in October 2012. Once 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 limited 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 in 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 wh o will start their own LCCs in 2011. In order to perfect 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 composition Q1-2011 reservoir http//www. airasia. com/iwov-resources/my/common/pdf/AirAsia/IR/AA_1Q11_Analyst_Presentation. pdf Appendix 2 AirAsias extensive domestic and regional network Source http//www. airasia. com Source http//www. centreforaviation. com/profiles/airlines/airasia-ak Appendix 3 Malaysian government Tax inducing Source http//www. centreforaviation. com/profiles/airlines/airasia-ak Appendix 4 Asian countries GDP Forecasts Appendix 5 Jet Kerosene prices Source spunk for Asia Pacific Aviation & US Energy Information AdministrationAppendix 6 Top 15 most populated cities in the world (10 million) are predicted to be in Asia by 2025 Appendix 7 acclivitous middle class in Asia Sour ce 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 Southern 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 US 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 local area network 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 contract for Asia Pacific Aviation and company reports Appendix 9Asia Pacific domestic LCC penetration by capacity 2011 Source Centre 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 lo ad 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