Management report: Air Asia - Essay Example

? MANAGEMENT REPORT Air Asia: The World’s Lowest Cost Airline BY YOU YOUR SCHOOL INFO HERE HERE EXECUTIVE SUMMARY Air Asia operates in a market structure that is dominated by considerable competitive rivalry as it relates to pricing specifically. Larger and emerging low-cost carriers continue to pose competitive threats to this growing airline, prompting changes in marketing, service positioning on the consumer market, and improvements in cost consolidation to improve quality and convenience. It is a market that is slow to achieve growth, however it is in a maturity stage for low cost carriers that provide opportunities for service delivery innovations and relaunch to improve growth rather than ultimately decline through complacency. Air Asia also maintains limited negotiation and price bargaining power in the supply market, due to its standardisation strategies for fleet procurement and maintenance, which poses a cost and efficiency risk to the business model. Because of it limited availability of large capital expenditures, the airline relies on technology and innovation as key contributions to gain market attention rather than upgrading services or using costly advertising. In fact, the company uses low cost banner ad and Facebook digital media sources for its advertising function (Grant 2010). Cost recognition, in many operational factors, contributes to the firm’s ability to keep overhead low and offer competitive ticket pricing. Air Asia has also elected to become more interactive with cooperative partnerships and alliances to improve its brand reach and improve service quality, alongside with cost reduction efforts related to consolidation of service and labour. All of these factors, and more, contribute to this airline being able to boast being the world’s lowest cost carrier. Outside of its strengths in operations, quality, marketing and strategic-minded values, Air Asia does maintain some weaknesses in terms of promotion and also as it relates to over-reliance on technology to justify its competitive position and meet with changing consumer demand and preferences. This report highlights several recommendations for the organisation to improve its competitive position and still achieve effective strategic outcomes related to its proven business model based on the case study in Grant (2010) with supplementary support for all business functions. TABLE OF CONTENTS Executive Summary 1. Introduction............................................................................................................ ... 5 2. Market and corporate analyses................................................................................... 7 2.1 Challenges in the oligopolistic markets........................................................ 7 2.2 Management of externalities and innovation management.......................... 9 2.3 Setting standards and standards management............................................... 11 3. Recommendations....................................................................................................... 13 4. Conclusion................................................................................................................... 15 References TABLE OF CHARTS AND FIGURES Figure 1: Porter’s Five Forces Model................................................................... 7 Figure 2: Current Positioning Map of Air Asia among Competition.................... 10 1. Introduction Air Asia in an oligopolistic market structure, one in which few firms dominate a market, thus each competitor is reliant on the performance of competitor analysis as a means to outperform service delivery, marketing or expansion strategy through predictive and quantitative or statistical analysis. In the oligopoly, Air Asia must be concerned with the advertising and promotion occurring with competition in order to identify its own market positioning strategy, the tangible value chain activities which drive competitive strategy and also the ability of the competition to secure brand-related awareness and loyalty with target market consumers. The oligopolistic market structure maintains key characteristics that create both advantages and disadvantages in terms of supplier bargaining power and the potential entry or exit barriers for Air Asia and competition. Air Asia has experienced significant changes to its revenue and capital development plans from 2001 to 2005. In 2001, the fledgling business endured a net income loss of RM 19.1 billion, whilst its revenue exceeded RM167.7 billion (Air Asia 2005). During the introductory and growth periods of its business model, this airline maintained significantly high operating costs and overhead which depleted its competitive position in terms of cash flow availability. However, through transformative strategic planning and implementation, the business began to experience profit in 2003, which ultimately led to a net income of RN 49.1 billion in 2005 (Air Asia). By 2011, Air Asia had secured its brand position in its key operating markets and boasted significant competitive and comparative advantage in relation to information technology development, research and development, and service delivery. Air Asia developed its business model based on many of the fundamental pricing and service models associated with the operations of RyanAir, a low cost, no frills airline able to use dynamic pricing to undercut larger competition in the European service market (Grant 2010). Air Asia has eliminated meals, complimentary beverages, frequent flyer programmes, and the development of airport lounges as a means to provide lean services to promote discounted ticket pricing (Air Asia 2011). Further, by housing a limited fleet of jets, it reduces the operational costs of hub development, maintenance costs (which are largely outsourced) and also to create more predictable and reliable arrival and departure schedules as an added convenience to customers. This ability to create more efficient and reliable flight schedules positions the business in terms of quality as compared to high cost and low cost carriers in its Malaysian and Indonesian markets. The lean service provision model, however, creates significant challenges in the oligopolistic market. No frills philosophy somewhat limits the ability of the firm to broaden its target market as the majority of customers are lower-income travellers looking with considerable price sensitivity (Air Asia 2010; Wong 2009). As operational costs increase, such as fuel, the business maintains less opportunity to offset these expenses by adding surcharges or increasing ticket prices. Thus, no frills methodology limits service delivery resources (Wong) and limits human resource capabilities for adaptive response for irregular situations occurring during service delivery as human capital is limited through reduced payroll cost strategy. However, Air Asia maintains significant opportunities for improving its marketing positioning against competition due to its low cost business model. Cash flow and revenue growth allows the business to devote more capital toward advertising and promotion, when this strategy would be relevant in the future, thus enhancing its brand recognition and loyalty. In the oligopoly, brand reputation is vital for competitive advantage (Wong, 2009; Boone & Kurtz, 2008). Air Asia also maintains a streamlined and standardised aircraft procurement policy. This provides the firm the ability to save considerable costs on training development (Aruan 2005), thus reducing reliance on specialised technical support teams to repair multiple aircraft models and provide human resource guidance for such development. To further enhance opportunities for Air Asia, the report highlights issues of cooperative partnerships and networking strategies for growth, the process of setting operational and strategic standards for quality control, understanding the external market environment and branding, and exemplifying how innovation management assists in competitive and comparative advantage for this organisation. Air Asia maintains a high volume of competitive strengths, however there are specific externally-driven factors that continue to conflict a benchmarking-worthy operations and strategic model. The report highlights these deficiencies and proposes recommendations for improvement to assist the airline in competitive sustainability and forward brand improvement. 2. Market and corporate analyses Analysis of potential opportunities for Air Asia consisted of consultation with published theorists in strategic management, cultural development, finance and marketing via secondary resource compilation and analyses. Case study reports, including yearly Air Asia annual report analyses, were identified to gain a practical viewpoint of actual business function and development occurring in the airline. Theory of marketing and strategy are transposed and applied to existing Air Asia business and competitive models. 2.1 Challenges in the oligopolistic markets Michael Porter (2012) identified five forces that contribute to success or failure of business strategy as it pertains to a market that requires emphasis on marketing and branding and maintaining competitive advantage through innovation. Figure 1 illustrates this position. Figure 1: Porter’s Five Forces Model Source: Porter, M. (2012), www.managementhelp.org Under Porter’s model, there are two distinct and legitimate risks to Air Asia maintaining its competitive position, these are rivalries among competition and bargaining power of suppliers. This is a market that maintains very high fixed costs and sustains slow market growth opportunity, which increases competitive rivalry (Porter 2011). Air Asia, therefore, maintains a significant reliance on promotion and other marketing/advertising functions in order to maintain customer relationship management with key target markets and strategy to effectively position the organisation with desired markets. Bargaining power of suppliers is illustrated by the streamlined procurement strategy for Boeing to sustain the firm’s fleet. By standardising capital assets, Air Asia is able to reduce costs, however it provides Boeing with considerable power. Switching costs are quite low and thus Boeing can easily sell these same standards to other firms who desire market entry or already dominate competitive Asian markets (Feng Chia University 2010). How is Air Asia ultimately affected by these low switching costs? Boeing maintains the specialised technical expertise and thus there are no substitute suppliers to offer support and maintenance of these airline assets. Air Asia is therefore unable to bargain pricing in the supply chain or integrate cooperative partnership methodology throughout the entire supply system. This places significant risk on Air Asia in terms of fluctuating supply costs that can ultimately erode profitability. However, Air Asia has been proactive in developing cooperative partnerships, modelled after the Air France and KLM merger which found significant economic synergies through consolidation. Air France/KLM managed 135 million Euro annual savings in maintenance and procurement costs by reducing the bargaining power of suppliers through consolidation and market presence (Mukim 2007). Air Asia recently created a partnership agreement with Malaysia Airlines, a major higher-priced carrier, to expand its service availability and consolidate expertise in key areas such as maintenance, procurement and information technology. This agreement allows sharing of staff and airline availability, thus offering Air Asia new supply options and maintenance expertise (outside of Boeing’s dominance) to bring more value to the supply chain and operational aspects of the firm’s value chain systems. This agreement was also highly publicised through marketing function and thus provided new opportunities for B2B networking as a means of expanding its service markets and brand presence internationally. 2.2 Management of externalities and innovation management Larger carriers operating in Air Asia’s market segment adapt to changing market conditions and consumer attitudes by devoting more capital expenditures for hub creation and expansion of service through procurement of new airline fleet assets. Air Asia does not have this luxury due to its limited cash resources (despite significant growth in the last decade related to revenue production). Thus, the business must rely on innovation as a means of establishing advantage and building a more recognised and respected brand name. Air Asia, as previously identified, has established a powerful brand, primarily through information technology development. Air Asia, in its effort to position on quality, developed an online booking and payment system that has no comparison competitively or even in the Asian marketplace. Only Singapore Airlines and Cathay Pacific, two major competitors operating a high-price business model, have fully functional, enterprise-wide e-commerce websites to sustain business enhancement (O’Connell and Williams 2009). Air Asia was also the first company to offer SMS booking and ticket-less travel options (O’Connell and Williams). Air Asia recognised that none of the competitors in its key target markets maintained convenience digital systems and thus devoted significant capital to data systems development. While other companies were reliant on hub support personnel to perform these functions, Air Asia understood the risks associated with competitive rivalry and thus took the opportunity to establish innovative booking systems and therefore built proactive brand recognition and quality values in the minds of its target consumers. Air Asia conducts considerable market research into consumer attitudes and changing demands for its target audience (the lower-income traveller and businessperson) and is therefore highly adaptable to reduce competitive rivalry risks (Kotler and Armstrong 2001). The business utilises psychographic tactics associated with lifestyle to develop effective promotional advertising to create relationships with its target consumer groups. In 2009, as one relevant example, Air Asia signed a one-year contract with Manchester United, one of the most renowned football clubs and organisation in Europe, boasting an exclusive carrier agreement for all associates of the English Premier League (Air Asia 2005). Because there is such a heavy reliance on branding and marketing in the oligopoly, it was necessary for the business to create the perception of lifestyle relevance with important target consumers and thus utilised effective promotion to describe its values as they related to market research data about lifestyle preferences and recreational habits of consumers. In many aspects, as it pertains to competitive rivalry and strategic focus, Air Asia is highly proactive in understanding how to respond to changing consumer market conditions and develop new relationship management marketing to improve its brand reputation and position internationally and domestically. Figure 2: Current Positioning Map of Air Asia among Competition 2.3 Setting standards and standards management Standardisation comes in strategic planning and implementation for Air Asia. For instance, the business maintains a thorough cost optimisation system that recognises every function through the value chain and seeks lean philosophy as a matter of cost reduction (Grant, 2010; Air Asia 2005). Where standardisation is most noticeable is in the strategic development processes occurring as it relates to launch of innovations in service delivery, establishment of cooperative networking and partnerships, and in procurement philosophy. Unlike competition, Air Asia selects logical incrementalism as its preferred method of developing new business practices rather than relying on substantially-long strategic planning and development to achieve high-dollar capital expenditure projects that are commonly found with larger competition with higher cash resources and credit availability. “Incrementalism is the antithesis of intrusive central planning, which can create rigid work systems unable to deal with the actual problems faced at the grassroots level” (Brews and Hunt 2008, p.905). By making incremental changes to the existing (and successful) no frills model, Air Asia is able to adapt using limited staff capability and thus does not proverbially place all of its eggs in one basket as it relates to capital investment projects and service enhancements. Logical incrementalism is a significant competitive strength as it provides Air Asia with the ability to review competitive actions on broad-scale strategy and dismiss those actions from its innovations and service development model that are proven competitive failures. These lessons can then be distributed throughout the organisation for effective knowledge exchange and effective strategic planning. The business also maintains the ability to establish better knowledge management systems due to its limited staff and thus can also develop a unified and motivated organisational culture related to the provision of a learning organisation. Cultural advantages are attractive to investors as they consider human capital development as a key resource for total competitive advantage (Very, Lubatkin, Calori and Veiga 1997). Because minimal resources are required to sustain learning and training for minimised staff, cultural efficiency provides a more attractive investment platform that can improve networking capabilities and also the establishment of cooperative partnerships and alliances over time. In terms of quality control standards and strategic implementation success measurement, Air Asia relies largely on revenue increases and ticket volume occurring in conjunction with advertising and other marketing-based promotions. Unlike larger competition, this airline does not maintain the capital resources for staffing to develop rigid quality control systems related to operational and strategic efficiency. Air Asia must develop effective quality control systems as it relates to service delivery. To facilitate more effective strategic management auditing systems, the business can be more proactive in risk identification and create alternative risk mitigation strategies to provide more value to the business model. Relying largely on cultural development and the use of financial data and comparative price analyses with competition are not always effective methods to ensure that the business maintains its competitive advantage and also is operationally efficient. This is a mature market that will rely on repositioning of service philosophy or innovation development in order to extend the service life cycle in this mature competitive environment. Financial figures analyses do not always provide the more complex dynamics influenced by stakeholders that impact service provision and organisational structuring to provide better quality. 3. Recommendations Despite the many competitive advantages boasted by Air Asia, the organisation requires a shift in its service delivery systems and innovations in order to maintain its position with the target customers. Air Asia operates in a very mature market and the company’s apparent complacency about the growth potential of its service model could cause potential threats to its profit and branding strategies. O’Connell and Williams (2005) sternly identify that in mature markets such as this, no frills airline carriers are beginning to surface intensively as barriers to market entry continue to break down. Traditionally, market entry was impeded for new competitors due to regulatory compliance demands, financing problems, and the high costs of establishing digital technology to support innovation and business function. Today, growth in international information technology support improves the ability to establish online booking systems and consolidated knowledge management systems at much lower cost than a decade ago. Air Asia places too much reliance on its information technology expertise and e-commerce website to continue to position the business as a quality and price leader. During the introductory and growth periods of the service life cycle, Air Asia was able to establish a recognised brand that offered convenience above other high cost and low cost carriers in key markets. Today, however, many companies are adopting this model and thus rivalry increases. Air Asia requires a new service differentiation strategy that is not dependent on e-commerce as its fundamental distinction among competitors. Komninos (2002) supports this notion by suggesting that it is often very difficult to recognise decline signals of a service until market sales begin to decline. It is during the transition period between maturity and decline, such as in the case of Air Asia, where the business needs to begin withdrawing certain service variations that maintain the potential for weakness in a firm’s market position (Komninos). Air Asia requires development of a culturally-based repositioning strategy that steers the brand away from value in terms of pricing and adds further quality through promotion of its relationship focus internally. Logical incrementalism also describes the notion of the development of coalitions and assigning champions of change to ensure quality control. Air Asia should take modelling from companies such as BP and Exxon Mobil that regularly promote their corporate values and culture to indicate its focus toward corporate social responsibility. Today’s consumers in multiple segmented markets are recognising the virtual of CSR and the impact of airline companies toward reducing its carbon footprint. Air Asia maintains a very unique opportunity to express its dedication to culture through service and promote the many changes occurring that lead toward more sustainable environmentally-based policy. Research did not uncover any such programmes in place other than basic regulatory compliance identified in the firm’s annual reports from 2005, 2010 and 2011. Currently, its main competitors are not promoting similar values, thus giving a competitive edge for launching a new strategy related to sustainable business practices and cultural development. Air Asia should also seek out more international partnerships and alliances with larger carriers to improve its service capabilities and brand identity. The Malaysian Airlines cooperation will provide Air Asia with significant financial synergies by consolidating expertise and improving the viability of expanded service provision using resources at this major carrier. Air Asia has functioned independent of networking and alliance philosophy that has, recently, led the business far into its maturity phase based on the current standardised practice of service concept and delivery. By improving its cash position through shared resource allocation, the organisation can become a convenience leader rather than simply through quality and price, thus giving more emphasis to an evolving organisation that adapts regularly to changing customer needs. Such alliances or even acquisitions would give the business more international brand presence and also allow for cost reduction in information technology, maintenance, research and development, and also service concept development. Such activities would also improve its liquidity position in terms of asset accumulation, making it more attractive to future shareholders. The case study of Air Asia indicates an inclination of a future merger between Air Asia and Air Asia X (Case Study). However, the business might wish to examine the feasibility of this merger due to the difficulties of Air Asia X to seize market share from larger competing airlines with long-range flight capacity. Air Asia is clearly attempting to diversify its service capacity and its brand presence internationally, but it should not rush into merger philosophies with underperforming organisations as it will require more capital investment in advertising and operational improvements to sustain competitive advantage in its new merger-induced business divisions. Air Asia should be more proactive in performing research about the potential for alliances by scrutinising the financial, brand reputation, flight scheduling and capacity, and various competitive or comparative advantages that certain airlines maintain before arguing in favour of the long-run benefits of such a merger. There simply is not enough resource or financially-based evidence to suggest that Air Asia X will provide cash flow and revenue producing results if the business pursues this strategy immediately. What is recommended is a more in-depth and proactive risk management strategy that identifies stakeholder influence versus operational constraints imposed by the merger before selecting a long-term merger investment. 4. Conclusion Air Asia, in the next several years, will likely not be the only low-cost carrier in its operating market that is capable of serving its target market. Clearly, the business has significant strengths in its business model that are worthy of benchmarking, including lean product and service philosophy and logical incrementalism that reduces risk and high capital expenditures that will not necessarily achieve market penetration and satisfaction for new service development. Being a slow mover in adjusting current best practice, Air Asia excels as a competitive advantage leader. However, growth in competition in this market could alter the oligopolistic market structure to move toward a perfect competition market, thus changing the dimensions of competitive rivalry and adding buyer power in the consumer market with threat of defection from the currently trusted Air Asia brand name. Air Asia, as based on the research in the report, requires a more proactive approach to altering existing service concept and providing innovations that give the firm a more competitive position that will endure as the service moves toward a decline. Declines are likely caused by growth in competitive forces and rigid and unchanging service concepts. If the organisation invests more emphasis on corporate social responsibility and effective promotion of this method, and further invests resources into research and development, the firm will be well-equipped to withstand situations in the external market that complicate operations and strategy formation. With careful preliminary planning, the life cycle of its current service provision and philosophy can be extended and give more value with target customers by adding uniqueness to its largely proven business model. The airline seems to be in a position that recognises the power of competitive entities in its markets that do not provide for effective competitive strategy simply through low cost methodology as the barriers of market entry are breaking down and more imitators are adopting this same model. Air Asia must be cautious about making risky decisions for improving strategic position as there are literally no more comparative advantages that the business can boast due to low cost technology development and digital media advertising for other large-scale and low-cost carriers. With careful and risk-averse strategies, Air Asia will be in a better position to expand its reputation and service capacity. References Air Asia (2005), Air Asia Annual Report 2005 [online] http://www.airasia.com/iwov-resources/my/common/pdf/AirAsia/IR/AirAsia%202005%20corp%20section.pdf (accessed July 29, 2012) Air Asia (2010), Air Asia Annual Report [online] http://www.airasia.com/iwov-resources/my/common/pdf/AirAsia/IR/AirAsia_AR10.pdf (accessed July 29, 2012) Air Asia (2011), Air Asia Annual Report [online] http://www.airasia.com/iwov-resources/my/common/pdf/AirAsia/IR/AA-Financials-2011.pdf (accessed July 29, 2012). Aruan, S.H. (2005), Might of Air Asia: Internal analysis perspective, University of Melbourne. [online] http://sandygarink.tripod.com/papers/AA_IA.pdf (accessed August 1, 2012). Boone, L. and Kurtz, D. (2008), Contemporary Marketing, 13th ed. United Kingdom: Thompson South Western. Brews, P.J. and Hunt, M.R. (2008), Learning to plan and planning to learn: resolving the planning school/learning school debate, Strategic Management Journal, 20(1), pp.889-913. Feng Chia University. (2010), Analyzing Air Asia in business competition era, p.11. [online] http://www.scribd.com/doc/32169487/air-asia (accessed July 30, 2012). Grant, R.M. (2010), Contemporary Strategy Analysis, 7th ed. John Wiley & Sons. Komninos, I. (2002), Product life cycle management, Urban and Regional Innovation Research Unit, p.8 [online] http://www.urenio.org/tools/en/Product_Life_Cycle_Management.pdf (accessed August 1, 2012). Kotler, P. and Armstrong, G. (2001), Principles of Marketing, 9th ed. Upper Saddle River: Prentice Hall. Mukim, S. (2007), An analysis of stockholder returns and synergistic gains in Air France and KLM Royal Dutch Airlines Merger [online] http://schwert.ssb.rochester.edu/f423/Paper_mukim0803.pdf (accessed July 29, 2012). O’Connell, John F., & Williams, George. (2005). Passengers’ perceptions of low cost airlines and full service carriers: A case study involving Ryanair, Aer Lingus, AirAsia and Malaysia Airlines, Journal of Air Transport Management, 11(4), pp.259-272 Porter, M. (2012). Porter’s Five Forces Model [online] http://www.managementhelp.org (accessed August 1, 2012). Porter, M. (2011), Porter’s Five Forces: A model for industry analysis [online] http://www.quickmba.com/strategy/porter.shtml (accessed July 31, 2012). Very, P., Lubatkin, M., Calori, R., and Veiga, J. (1997), Relative standing and the performance of recently acquired European firms, Strategic Management Journal, 18(8). Wong, C. (2009), AirAsia.com: Enabling technology in the airline industry [online] http://www.skcs.hk/AirAsia.pdf (accessed August 1, 2012) Appendices A: AirAsia passenger numbers and average fares: 1Q07 to 1Q09 Source: Centre for Asia Pacific Aviation & Airasia (2009). http://centreforaviation.com/profiles/airlines/airasia-ak This revenue and passenger volume chart illustrates the growth experienced by Air Asia over a two year period, showing congruency with pricing and volume (demand) occurring over time which illustrates a viable pricing model in the minds of consumers Appendices 2: SWOT Analysis for Air Asia Strengths A well-established brand name in Asia Currently the low cost leader in Asia Quality usage of information technology Effective use of promotion and advertising Weaknesses Lack of maintenance facilities self-owned and managed No form of loyalty system for customer incentive Not currently seeking strategic partnerships or alliances Opportunities Growing Asian population offering new target consumer potential New partnership opportunities with low cost and high cost carriers New service innovation research and development Threats Major airlines attempting to create similar low cost subsidiaries to compete with Air Asia Too much reliance on e-commerce website to differentiate Rising fuel costs Labour complaints on outsourcing of maintenance staff Other strengths and weaknesses of the firm have been identified in the body of the report with more in-depth analysis. The elements identified in the SWOT include additional risks or potentials for further business development at Air Asia. Appendices 3: Projected Demand Percentages for Low Cost Carriers in Asia – 2012 through 2015 Figures are based on research identified in the annual reports, business reports highlighting current market share at Air Asia and the market share of major high cost competition. Increase patterns from 2001 to 2010 assisted in developing demand projections. Read More