STRATEGIC MANAGEMENT

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Content The Industry EnvironmentThe Competitive EnvironmentThe Macro EnvironmentKey Strategic IssueAlternativesDecisionImplementation and Contingency

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Brief Introduction

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How did it start? They started in 2001 with 2 old aircraft, having bought the then loss making

AirAsia from its Malaysian owner DRB-Hicom, for a token of MYR1 (USD0.25 cents) and MYR40 million (USD11 million) in debt.

Born in the aftermath of 9/11 and coming through the global financial crisis, AirAsia has faced some of the most turbulent times in the airline industry. With their successes today, AirAsia stand as testimony to the power of great innovation, passion, teamwork and well-executed ideas.

How did AirAsia do it?a) Low fares- AirAsia commitment to low fares lies in AirAsia promise of “Now Everyone Can Fly”. AirAsia service targets guests who can do without the frills of full-service airlines in exchange for low fares.b) Low cost carrier model- Self automation- No frills- Cost-saving innovationsc) Great value, amazing quality- Safety first

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What AirAsia have won?

AirAsia always strive to give the best to their guests. AirAsia biggest pride is winning Skytrax’s ‘World’s Best Low-Cost Airline’ for 7 years running.

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In June 2011 AirAsia ordered 200 Airbus A320 at the Paris Air Show. On 13 December 2012, AirAsia placed an order for an additional

100 Airbus A320 jet. With this, the total number of orders that AirAsia had placed for

the Airbus A320 had gone up to 475.

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The Industry Environment

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The Industry History & Introduction

Hokkaido International Airlines

(formerly Air Do)Japan

Skymark AirlinesJapan

1996

AirAsia Malaysia

2000 2001

Lion Air Indonesia

Cebu Pacific Philippines

Low Cost Carriers (LCC)

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Emerging high demand of low fare flight for

business traveler and it was sparked due to the financial crisis in

1997.

Governments had a financial constraint and declined the permit of national airline provider to

operate on international route.

Asian government removed the air travel boundaries and started to promote open skies

policy.

Development of low cost terminal across

this region.

Factor that leads to the exponential growth in this industry

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Industry Analysis – Porter’s Five Forces

HighCompetit

ive rivalry

Low Threat of

new entrants

High Bargaining power of buyers

ModerateThreat of substitute

products or services

HighBargaining power of suppliers

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Low • High capital requirement

Low• Strict government

regulations

High• Low customer’s switching

cost

High• Low customer’s brand

loyalty

Low • Efficient distribution channel

Low• Diversified in product

offered

Threat of new entrants – Low

High • High product similarity

High• Low switching cost

High • Middle class buyer segment

High• High access to market

information

Bargaining power of buyers – High

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Threat of substitutes – Moderate

Bargaining power of supplier – High

High• High switching cost

High• Limited vital supplier

High• Weak supplier relationship

High• High numbers of

competitor

High• High fixed cost

High• High exit cost

Moderate

• Alternative transportation

High• Relative price

High• Performance of substitute

Rivalry among existing firms – High

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The Competitive Environment

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The Competitive Environment Major Strategic Groups

• There are few dimensions to identify and profile the strategic groups in the airline industry in Malaysia

Market ShareVariable: Pricing Strategies (budget vs.

premium)Variable: Geographical Coverage Area

(long haul vs. short haul)

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Market Share - Airlines Industry in Malaysia

Market Share (%)AirAsia – 32.8%Malaysia Airline – 30.2%AirAsia X – 6.7%Malindo – 5.3%Firefly – 3.5%

Source: CAPA – Centre for Aviation

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Variables: Pricing Strategies & Coverage Area

2 Main Strategic GroupsLow cost and short haul carrierEg: AirAsia, Malinda Air, Lion Air, Tiger Air, JetstarMedium to long haul air flight service with higher price.Eg: Mab, SilkAir, Emirates Airline

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Key Industry Trend

Strategic group which provide

affordable price with short haul destination are more likely to perform better and sustain in

long run

Monthly household income- 55% (< RM5,000)

Ext. Environmentdepreciation in Ringgit, decline

in oil prices, increase cost of living and the weak market

sentiment

Cost optimization and operational efficiency

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24%

31%

45%

Monthly Households Income Malaysia - 2014

RM2,999 and below RM3,000 - RM4,999 RM5,000 and above

Source: Department of Statistics Malaysia

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Key Succe

ss Facto

rs

Stringent cost control• Enhancing the

organization structure, work practices and processes and the business operating model Outstanding

branding and promotional strategy• Conventional &

non-conventional strategies

Diversify and venture into related business• such as hotel

and insurance service

Capable workforce• Involve technical

experts and customer service personnel

Technological innovation• Streamline the

entire operational process, enhance the customer interface, gather and analyse customer profile

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Key Strategies

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Air Asia Strategy

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AirAsia have six major elements to follow to maintain as the lowest airlines and also to sustain its competitive advantage………

Leanest Cost Structure• Efficient and simple point to point operations• Attracting and retaining hardworking and smart people• Passion for continuous cost reduction

 Maximize Shareholders' Value

• Resilient profit growth through our lower cost base• Expansion of the AirAsia network in a prudent and disciplined

manner• Invest and enhance the AirAsia brand to increase investors' returns

Safety

• Comply with the highest International Aviation Safety Standards and practices

• Keep operations simple and transparent• Ensure the security of our People and Guests

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AirAsia have six major elements to follow to maintain as the lowest airlines and also to sustain its competitive advantage………

Passion for Guests' Satisfaction• Maintain simplicity in every application• Practice the unique and friendly AirAsia experience at every

opportunity• Recognize the linkage between guests' satisfaction and long-

term success  

Transparency• Transparency in decision-making and information

sharing• Optimum disclosure - higher than industry norms• Timeliness in disclosing information

Human Capital Development Invest in both hard and soft skills Recognize all our People as contributors to

our success Reward excellence and individual

contributions Maintaining one brand across the Group

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Porter’s Value Chain Model

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Air Asia Value chain

Activity Sources of cost advantagesInbound Logistics

Utilizing one type of aircraft (Boeing 737-300 which will be fully replaced with Airbus A320) results in reduction of maintenance cost (one of the major expenses in airline industry), scheduling cost, administrative cost, and inventory of parts.

Operation and Outbound Logistics

No frills, no assigned seat, one class, and ticket-less policies significantly reduce cost. Understanding of processes results in technical efficiency. Effective flying procedure. High utilization of aircraft and quicker turnaround time are two major operational cost advantages that AirAsia possessed.

Marketing and Sales

Creative and low-cost advertising significantly reduces marketing cost. On the other hand, AirAsia direct sales through internet, call centers, walk-in airport sales, and sales offices significantly reduce the commission fee to travel agents as AirAsia only assigned its sales to limited travel agents.

Customer support

Effective and efficient handling of customer enquiries and complaints.

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Activities Sources of cost advantage

Firm Infrastructure Maintaining simplicity, higher disclosure than

industry norms, and transparency in decision making.Human Resources AirAsia assigned multi-skilled cabin crews (2-3 crews/flight), cost- effective training, and performance based reward and incentives systems.

Technology Development

Business requirements related technologies and cost effective technology supporting AirAsia's core competency.

Procurement Effective and efficient technology acquisition (It and Communication

Air Asia Value chain

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The Macro Environment

“Strategic Issues Air Asia is Facing”

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Government

Policies

• Air Asia Thailand, Indonesia and India not fully owned by AA• Government Policies disable them from having major controlling

shares in the aviation industry• Not being able to have full control, hence outcome effects AA

Economical

Factors

• Depreciation of ringgit against dollars, increases operating cost• Increase in purchase price of planes• Slump in economy could see a fall in passengers travelling

Environmental

Factors

• Natural disasters and environmental factors could result in flight cancelation and suspension of service

• i.e. Chennai due to flooding, Bali due to volcanic eruption and Langkawi due to haze

• Could result in drop in revenue

Safety (Technological

Factors)

• recent air crashes caused a panic among air travelers• importance and priority for safety are at all time high• AA experienced its first air plane disaster, AirAsia flight 8501• Bad for business

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Key Strategic Issue

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Major Opportunity • Drop in profits in

AirAsia Malaysia due to stiff competition from MAS and Malindo

• 2 new LCC soon to open in Thailand will make market conditions worse

• Competition in Indonesia is intense, the least profitable group

• Failed venture in Japan

Solution• to form a strategic

alliance • similar to the one

between AirAsia Philippines and Zest Air

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AirAsia Philippines and Zest Air• The Philippine LCC market is dominated by Cebu

Pacific• AirAsia Philippine incurred a net loss of $7m in

2Q12 and $8m in 2Q13• March 2013 partnership with Zest was formed• Zest an independent LCC which was struggling

financially• Zest fly's out from Manila unlike AirAsia which

operates from Clark• Both carriers able to fully integrate their operations• AirAsia started selling Zest operated flights on its

website• both carriers remained separate and are 2 different

products• Carrier's network is expanded and utilization in

increased• at the same time can operate with a lower cost

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Who can

benefit?

AirAsia Indone

sia

AirAsia India

AirAsia Thailan

d

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Benefits of Strategic Alliance

decreasing ticket price when linking

cities to each other, hence increasing load factor and

reducing trip cost for both aircraft and

carrier

provide passengers with varied flight

schedules and wider choice of take-off

and landing times, which lead to

reduced travel time

Alliances seek to improve quality standards and

passenger services, and apply minimum

standards at all stages, including

ticket sales, choice of destinations,

baggage procedures, lounges,

passenger travel, passenger

complaints, and provision of

necessary services

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Alternatives

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ALTERNATIVES PROBLEM SOLVING

COMPETITIVE ADVANTAGE

FINANCIAL ANALYSIS

Added perks into serviceEg;

- Free water and light snacks- Excess baggage allowance- Inflight Entertainment  

Improves market penetration

Improve customer preference towards Air AsiaAdded customer valueImproves perception

Incurs added cost Middle class to

higher middle class

One of the reason why Malindo is rapidly gaining market share

Evidenced by aggressive advertising by Malindo on this aspect

Even though Malindo flights are slightly more expensive compare to AA

 

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ALTERNATIVES PROBLEM SOLVING

COMPETITIVE ADVANTAGE

FINANCIAL ANALYSIS

Cut on low yielding routes Re fleetUse only single type of Air craft

Gain market share

Able to concentrate on profit yielding routes by increasing the number of fleets and frequency and this attracts more customers because of the flexibility of timing of flights. It also allows the airline to explore other niche market such as Maldives by MAA and China by PAA. Reduction of fleet also means reduction of cost and hence reduction in ticket price pr0viding a competitive advantage.

PAA already reduced its fleet from 20 to 17 aircraft in 1H2015, enabling it to improve average aircraft utilisation rates as passenger traffic remained flat at 1.8 million in 2015  

IAA is also following PAA in boosting aircraft utilisation rates and implementing self-handling at its bases. IAA’s average aircraft utilisation rate is expected to improve from about 10hrs in 2Q2015 to 11.3hrs in 4Q2015 as the size of the fleet is reduced.

   PAA still has 15 aircraft on its books

but is in the process of selling older aircraft and aircraft powered with V2500s that were inherited from Zest. PAA will be left with 12 newer model CFM56-powered A320s, giving it one type of aircraft that is consistent with the rest of the AirAsia Group and generating operational efficiencies.

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Philippines AirAsia scheduled international seat capacity by hub/base/station: 21-Sep-2015 to 27-Sep-2015

https://vimeo.com/140259799

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ALTERNATIVES PROBLEM SOLVING

COMPETITIVE ADVANTAGE

FINANCIAL ANALYSIS

Frequent Flyer ProgramLoyalty program

• Expand revenue opportunities

• Enhance Market share

• Customer satisfaction and customer profitability

• Attract and retain more customers

• Brand loyalty – which is lacking now in v/o fierce competition

• One of the most important factor that promotes brand loyalty and repeat customers

• Most important contributor to increased ROI in CRM activities

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Decision

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Decision MatrixTable below represent the alternatives that AirAsia should pursue and the weightage of each item.

AlternativeAdded perks into service

Cut on low yielding routes

Frequent Flyer Program

criteriaWeighta

geRatin

gScor

e RatingScor

e RatingScor

eOnboard Catering 0.07 2 0.14 1 0.07 3 0.21Comfort and Cleanness of seat 0.15 3 0.45 4 0.6 4 0.6Onboard Entertainment 0.01 1 0.01 1 0.01 3 0.03Cabin Safety Procedure 0.15 4 0.6 3 0.45 3 0.45Accident Rate 0.23 4 0.92 4 0.92 4 0.92Responsiveness of Crew 0.1 2 0.2 1 0.1 3 0.3Efficiency of Crew 0.07 2 0.14 1 0.07 2 0.14Event Risk Sensitivity 0.14 1 0.14 4 0.56 3 0.42Customer Concentration 0.08 1 0.08 4 0.32 2 0.16Total Weight Score 1 20 2.68 23 3.1 27 3.23

Weightage:1.Major Weakness;2. Minor Weakness;3. Minor Strength;4. Major Strength

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DecisionAlternative 3 is selected as best decision on bring

AirAsia to next stage.

Frequent Flyer Program is already existing in

Airline industry

“BIG” by AirAsiaImprove with more choice with

payment method

Creating awareness on “BIG” . Add On

services are Premium Seats, Baggage, Meal,

AirAsia Insure Travel Protection, and

Comfort Kit

Suggestion by group to focus on building loyal base customer

AirAsia market being taken by other competitors (Malindo)

Introduction of more services would retain & attract more consumer

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“BIG” Customer Loyalty

Virtual currency

Value of A Points Mileage Run Elite Status

Convenience

Integrated with

Business Activities

Creating Loyal Base Customer

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Implementation and

Contingency

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AirAsia gain Knowledge and

prediction on most attractive packages

and routes

Consumer gain advantage and

benefit in using single method payment that

AirAsia ezpay Virtual Card

This also bring new fliers that attracted to price reduction value

Additional services can be offered

through this new loyalty program

The organizational structure must be

designed to support the priorities required

by the strategy.Management is often

distracted from its strategy by

opportunities that continually pop up

Organization efforts to bring change over

traditional and change over fast

reliable online ticketing

AirAsia commitment to bring loyalty

program to appreciate frequent

fliers

A clear understanding

of priorities

An organizational structure that supports the

strategy

Ability and willingness to

change

Commitment

How to implement alternatives successfully

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Thank You