Air Asia and Its Long-Haul Outlook - Case Study Example

IN GENERAL IS A GOOD WORK BUT PLEASE PAY ATTENTION TO AND FIX ALL THE HIGHLIGHTED COMMENTS I HAVE MADE. Contents Contents 2 Table of Figures 3 Background 5 Purpose 5 Problem statement 5 Direction 6 Literature Analysis 7 Main discussion and argument 8 PESTLE Analysis 9 Internal Analysis 11 Porter’s five forces 11 Figure 1: Porters five forces 11 Competitors Analysis 12 Conclusions and Recommendations 14 15 Reference List 16 Table of Figures Figure 1.....................................................................................................................................1 Figure 2.....................................................................................................................................12 Figure 3.....................................................................................................................................13 Executive Summary This project has analysed the case of Air Asia and its long-haul outlook. In order to conduct the macro environmental issues of the business PESTLE analysis has been conducted. The industry analysis provides an important insight about the intensity of competition in an industry and it helps in identifying the competitive position of the firm in the industry. The key findings from the analysis indicates that the adaptation of the long haul travel pose considerable challenges for Air Asia X, a company that is jointly owned by four other giants. This is because the major international competitors are already established and they have certain competitive advantage. In order to solve the crisis it is recommended that Air Asia X must merge with Air Asia to tap the wide resources of the already established company. Aggressive advertising in the international flight segment is also equally important for the company to gain competitive advantage over its rivals. Concentration on low cost strategy instead of product differentiation is also suggested for the company. Background Air Asia is one of the most successful low-cost airlines which have expanded aggressively in the past few years. The major success of the company could be attributed to the adaption of the business model by the Southwest Airlines in the US. The low-cost carrier model adopted by the company is however not unique as a number of competitors across the world have replicated the basic business model. Air Asia does not operate the long haul flights under the brand name. Instead the owner of company Tony Fernandes, had created a new wing under Air Asia, called Air Asia X which is jointly owned 16% by Air Asia, 48% by Aero Ventures, 16% by Richard Bransons Virgin Group and the remaining 20% owned by Bahrain-based Manara Consortium and Japan-based Orix Corporation. Air Asia X is responsible for all the long haul flights operating under the brand name of Air Asia (Grant, 2008). As already discussed, the management of the company had changed their basic business model and they are focusing on the long-haul flights by expanding their routes to include Australia and China along with U.K. and India. However, the basic problem with this type of a change in the strategic plan is that the low cost carrier flights have seldom made it successful in the intercontinental flights as the basic success of the flights depends on the short and the medium distance journeys. One of the key ways for the success of the company is to transfer the low-cost advantage of its flights into the long-haul. Purpose In order to analyze the situation if such a strategy is undertaken the purpose of this paper is to examine the internal and the external business environment to determine the opportunities and the challenges that can emerge from such a strategy. This paper has analyzed the PESTLE analysis, five forces industrial analysis and competitive analysis to comprehend the business environment that can be faced by the company. Problem statement The key problem that is being faced by Air Asia X is to look for ways by which it can increase the market share in the aviation industry that focuses on long haul travel (Grant, 2008). The problem that is being faced by the Air Asia X presently is the successful operation in the international market. This is because one of the parent company Air Asia under which it operates is a specialist in low cost carrier only at a regional level. It does not have the expertise required to obtain competitive advantage in the intercontinental travel. A host of reasons are responsible for this cause. Air Asia X on the other hand operates through a model which concentrates on minimizing the operating costs for which it excludes free complementary services like free baggage handling which reduces the competitive advantage. Under such a situation capturing the market share from the already existing players may become a formidable task. The situation is completely different compared to the situation faced by Air Asia. This is because Air Asia emerged as the lowest cost aviation company in Malaysia whereas Air Asia X has to emerge as a dominant market player in the international market. So the key problem that is being faced by Air Asia X is to look for ways by which it can increase the market share in the aviation industry that focuses on long haul travel (Grant, 2008). Direction This paper has used the strategic management tools to analyze the external business environment and conduct the industry analysis to comprehend the current situation that is being faced by the company. Porter’s three generic forces can be helpful in identifying the competitive advantage that is faced by a firm in the industry. The three generic forces identified by Porter namely differentiation strategy, cost strategy and focus or segmentation strategy has been widely used in the strategic discussions to gain competitive advantage (Shuk and Waring, 2010). In case of Air Asia it has been observed that the company has used low cost strategy to gain competitive advantage over its competitors. The company has employed a number of measures to reduce its operational costs. For instance the company had a single type of aircraft which had provided the company to achieve economies in purchasing and staff training. The no frills flights of the company had been another measure by which cost was saved. The company had saved costs by not providing complementary food and beverages and aerobridges for loading the baggage. As only single type of class were present in the aircrafts this provided allocation of more seats. Finally efficient use of information technology and strategic outsourcing of secondary jobs of the company have also resulted in the reduction of the operating costs. Air Asia has successfully transferred its low cost model to Air Asia X which has greatly reduced the operational cost of the long-haul flights of Air Asia X. Most of the airlines which operate on a low cost basis do so either by focusing on few consumer segments mostly delivers basic products or provide unitary benefit better than the rivals. This implies that all the airlines which are operating on this model fail to provide differentiated service to the customers and they only focus on providing the basic services with no differentiation characteristics (Lynes and Dredge, 2006). Few other low-cost air carriers have focused on geographic segmentation for maintaining the low cost in their operations. For instance, Wizz Air only focuses on transporting Central and Eastern Europeans to Britain and Ireland where the prospects of finding new jobs are higher. Assumptions The main assumptions for recommendations that have been suggested at the end of the project are: The routes of travel in the international haul of the competitors and Air Asia in the international haul is unlikely to change in the forthcoming years. Air Asia will not include any type of up-market complimentary strategy that can raise its cost significantly. In order to maintain its low-cost it is assumed that the basic low-cost structure is followed. Literature Analysis The Low cost carriers mainly operate on a logic that is known as the “no frills” travel. Success in any type of business is practically measured by the rise in the market share or a rise in the sales revenue. In case of low cost carriers it has been observed that the attempt is to circumvent a particular marketing concept namely operating with a very low margin in the aviation industry (Gilbert, Child and Bennett, 2001). In order to solve this problem several types of business model has been proposed like hub-and-spoke operations, as well as a number of innovative practices, like business lounges, frequent flier programs and computer reservations systems. In case of Air Asia has been observed that the company has mainly followed computer reservations systems and hub and spoke operations to maximize the operational revenue (Gillan and Lall, 2002). However the concept of business lounges and frequent flier programs have not been adopted by the company. This in turn is consistent with the long-term social-welfare maximization other than the short term gratifications (Mason, 2001). Michael Porter in his famous book has pointed out towards the fact that in order to gain competitive advantage a firm must either use product differentiation strategy or low cost strategy. The low cost strategy has been particularly followed by Air Asia. The theory of product differentiation is not consistent with the business model of Air Asia. Main discussion and argument External analysis refers to the identification of the proper opportunities and threats which affects the organization in its performance (Kaplan and Norton, 2001). Conducting this analysis basically involve three aspects namely the analysis of the industry environment in which the company operates, the analysis of the country of the business expansion and the analysis of the broader macroeconomic environment of the country (David, 2009). Two types of environment influence the performance of an organization namely the industry or competitive environment. The industry level analysis is best described through Porter’s five forces and the PESTLE framework is used for analysing the macro environment of a firm (Kaplan and Norton, 2001). For the purpose of studying the macroeconomic environment of an organization there are six external factors namely political, economic, social, technological, legal and environmental (the acronym for which is PESTLE) which needs to be analyzed. The other tool which is employed to study the external factors affecting a business is the industry analysis. This tool has been popularized by Michael Porter in 1980 by what is commonly known as the five forces model. The five forces model does not directly assess the performance of a firm but it helps the firm in the identification of the opportunities and the threats for the firms in the industry (Porter, 2011). Internal analysis refers to the internal strength and weakness of a company which are under the voluntary control of the management of the company. Internal analysis is a part of the strategic management process that focuses on the resource, capabilities and competencies of a company (Williams, 2001). External Analysis PESTLE Analysis In case of the airline industry the analysis of the macro environment involves all the major six components that are described in PESTLE analysis. Political: Political factors are one of the most crucial aspects of the aviation industry as it helps in the overall development of the industry. Among the political factors the double-sided nature of the agreements of the aviation industry may pose a crucial challenge to Air Asia. The charges of landing in another country can also be considerably higher which will significantly affect the costing of the company. The bilateral air right contacts of the South East aviation market have also considerably affected the development of the aviation industry in South East. The support of the government for national carriers and reducing the restrictions on migration are major factors which determines the growth of the aviation industry (Ze and Ng, 2008). Economic: The economic development of the ASEAN countries is crucial for the development of Air Asia. Over the past few years the ASEAN countries have experienced robust growth for which the prospects for the aviation industry have improved (Shuk and Waring, 2010). The promotion of the tourism industry by the regional governments has also brought a large number of tourists in the country preferring air travel. Recently the economic slowdown due to the global financial crisis has increased the demand for the low-cost air travels. The price of the aviation fuels is also a very important determinant affecting the operating costs of the aviation industry (David, 2009). Social: The social factors in Malaysia prevent the people from booking very expensive flights and there is a general tendency to travel by low-cost flights. Particularly for the aviation industry the safety of the travellers becomes a very crucial factor and the people are particularly sceptical about the safety standards undertaken by the industry (Cooper and Taylor, 2007). Technological: Air Asia provides its customers with a host of services based on advanced technology which act as important factors that draw customers. This has helped the company develop a host of ancillary services like online ticket booking, hiring cars and travel insurance benefits. Apart from this the company has also invested in advanced technology like investing in research and development to create aircrafts which are fuel efficient. The company has also introduced an online package tour called “Go Holidays” where customers can book their flights on a real time basis (Yashodha, 2012). Introduction of Airbus 320 is an example of an aircraft which is fuel efficient and has more capacity. The company has used a computer operating system known as CRS which has been helpful in maintaining the inventory with the web-linked sales. Advanced Planning and Scheduling system, different software is used by the company, to optimize the supply chain and facilities management (Yashodha, 2012). Legal: Operating across the global markets imply that the company might face legal issues in the country in which it operates. For instance, recently the country had faced legal issues in Australia for not being able to disclose the fare structure of the flights from Australia to other international destinations. The company was charged on the grounds of hiding the costs from the consumers (Ze and Ng, 2008). Such legal problems malign the reputation of the company and account for financial losses. Air Asia has complied with the safety and the regulatory standards of the regulators of each country where it operates. The airline is also subject to review of compliance for the standards of safety. The airline also meets the regulatory standard of IATA which is an international organization conducting the operational safety audit for the airline companies (Shuk and Waring, 2010). Environmental: The increasing controls of the government to improve the environmental conditions and the focus to reduce the ecological footprint are prompting the nations to use higher environmental standards. The “No Frills” service that had been introduced by the company was done with the objective of reducing the waste production to meet higher environmental standards. However, the issue of the carbon footprint is large for the aviation industry and the carbon emission remains high for the company as well. The introduction of stringent government policies on carbon emission can reduce the profitability of the nation (Lynes and Dredge, 2006). Internal Analysis Porter’s five forces Porter’s five forces are used for conducting the industry analysis (Yashodha, 2012). Figure 1: Porters five forces (Source: Porter, M. E., 2011) Bargaining power of the customers: There are two types of buyer’s power which needs to be considered for analysing the case of Air Asia’s long haul operation. One is the price sensitivity of the customers and the other is the negotiating power of the buyers. Air Asia has used the system of YMS to predict the behaviour of the customers and maximize the revenue. The practice of charging higher price based on the peak demand concept has helped the company to charge higher price. However, the bargaining power of the buyers is high as there are other service providers in the industry offering similar products. Bargaining Power of the suppliers: The suppliers of the airline industry include the staff fuel supplier, food supplier and parts supplier. The industry monopoly of Airbus and Boeing makes the power concentrated in the hands of a small number of suppliers. The volatility of the fuel prices also increases the challenge that is being faced by the airline business. The companies are trying to use fuel efficient carriers to maximize the returns (Proussaloglou and Koppleman, 1995). Barriers to entry: This aspect is particularly very high for the aviation industry as the amount of capital required to start the airline business is quite high. There are also patented technology and brand image which are particularly crucial for the aviation industry. This means the cost of entry of the new entrants is considerably higher which deters them from entering. Threat of substitutes: The substitute products for the LCC services are FSC services as customers may avail the better facilities associated with the later. The other substitutes include cars, trains, buses and ships which allows customer to travel at much lower fares but at higher costs. However, for long distance hauls, ships are the only substitutes and the journeys take long time compared to air travel (Barney, 1991). Rivalry among the existing firms: The rivalry among the existing firms is also very high as most of the aviation industry is coming up with ways to reduce the cost of the fares. Also the carriers involved in the international travel have multiple classes of travel on board which allows them to charge different prices for different products and yet maintain profit. The deregulation of the airline industry has also increased the competition (Wang and Hong, 2011). Competitors Analysis Air Asia faces stiff competition from Malaysian Airlines in the domestic market. In case of the international market Air Asia X. There are six international competitors which provide tough competition to the operation of Air Asia X. This is because these businesses are already established and Air Asia X has to take the market from the existing competitors. All these international competitors have a number of advantages which are missing particularly for Air Asia X like frequent flyer schemes, baggage transfer facilities and through-ticketing. As most of these companies operates separate first class, business class and economic class so the profits earned from the first two is used to subsidise the price of the economy class tickets (Grant, 2008). The competitive air fares and the cost of operations of the firms are shown in the following tables. Figure 2: Fare Comparison (Source: Grant, 2008) Figure 3: Operational cost comparison (Source: Grant, 2008) In terms of the fare comparison it can be clearly observed that Air Asia has the cheapest fare in a round trip from Kuala Lumpur to London compared to the other airline companies. There are other major competitors like Gulf Air, Qatar Air and Emirates which also have cheaper fares but Air Asia X has the cheapest fare which provides it with competitive advantage. Table 3 shows that the maximum passenger capacity of Air Asia is smaller than its competitors but in terms of flight fuel cost it is the smallest. In terms of both departure handling and arrival handling it has cost advantages over its other competitors. Finally, in terms of total cost per flight and the average cost per flight Air Asia has the smallest figures compared to the other major competitors. Conclusions and Recommendations From the above analysis of the case study it has been found that all the players in the industry are competing aggressively in the industry for which the competition in the industry has become very stiff. The only way for the company to survive in the long run is to constantly find ways in which it can maintain the lower costs of the business. In case of the newer aspect of the business which focuses on the long haul flights under Air Asia X the key to survival is through the maintenance of the low cost of operation. As the company Air Asia X has four joint owners so it has the potential to use the expertise of all of them and channelize it into their business operation. The brand name of Air Asia has helped air Asia X to obtain an identity in the global market and helped the brand to gather more customers. One of the major recommendations for Air Asia X is to carry forward with the merger with Air Asia as the merger can provide Air Asia X with greater resources. As Air Asia has built its image around the low cost image so it is extremely important that Air Asia X maintains its cost advantage policy. This is because if Air Asia X focuses on product differentiation then the operating costs are likely to increase. The analysis of the competitors has revealed they can offer different prices primarily because they have different classes on board. The final recommendation that has been suggested for Air Asia is to promote its long-haul flights as aggressively as it had promoted its regional flights. This will be particularly important because the low cost international air travel can be particularly lucrative during the times when most of the economies of the Western countries are emerging from the global financial crisis. 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