Strategic Development Study On Corporate History Management Essay

Air Asia Berhad is Asia’s first low cost carrier has made its name synonymous with low fare air travel in the region. Now a household name throughout Asia, by offering lower fares by eliminating most traditional passenger services in order to make air travel affordable and accessible to everyone. In its dynamic and competitive environment, Air Asia is successful and reaped great benefit by adopting the Low Cost Carrier business model. The combination of technology advancement in its selling and marketing strategy and strong recognition of multi languages used by its customers, its business is well know as best performance company in Southeast Asia airlines industry.

What is the successful strategic development used by Air Asia to achieve Asia most successful and profitable Low Cost Carriers (LCCs).

TABLE OF CONTENTS

Introduction

In today’s competitive era, business has become more complicated and harder to maintain. It is facing higher pressure from increasing number of competitors, environment, and economic change. There is increasing numbered of new carriers with new business model, which has changed the competitive pattern in the airlines industry.

As quoted by O’Connell and William (2005) said that direct competition between full service airlines and no-frills carriers is intensifying across the world. The new business model adopt on using digital technology to operate the business to become more and more effective and efficient, and thus leading to cost advantages.

The new concept of flying is the key features of aviation industry in the beginning of this century introduced to the consumers. Low Cost Carriers (LCCs) open new product such as no frills, no food, no drinks, no spacious seat, no travel agencies booking but a very low price (Barbot, 2004). However not all LCCs carriers are profitable, only market-leading operations are able to maintain its consistent level returns above their investments.

In this assignment understanding Air Asia’s strategic corporate development history over the past 5 years, current strategic situation 2009 and future strategic direction using strategy framework and key management model such as PEST, Porter five forces, SWOT analysis and others.

History and Overview of Air Asia Strategic Development

Overview

Air Asia Berhad is also known as Air Asia, is an airline company, which provides air transportation service. Air Asia established in 1993 and started operations on 18 November 1996. A government-owned conglomerate, DRB-Hicom, founded Air Asia. Later on, Air Asia was purchased by Dato’ Sri Tony Fernandes, former Time Warner executive on 2 December 2001. Its main base is the Low Cost Carrier Terminal (LCCT) at Kuala Lumpur International Airport. Its operations carried out in Malaysia with 4593 employees (based on Air Asia annual report 2009).

Air Asia is the leading low fare airline in the Asia and Air Asia is the pioneer of low cost flying in Asia. Since 2001, Air Asia has tremendously expanding as the largest low cost carrier in Asia. Just over 8 years later, the AirAsia Group (including its Thai and Indonesian affiliates) operates a fleet of 90 aircraft and flies to more than 60 destinations from hubs in Malaysia, Thailand, and Indonesia.

AirAsia operates more than 3,500 flights a week, coloring the blue skies over Asia a bright red with their striking livery.

Air Asia are Asia’s largest low-cost carrier is now proud to be a truly ASEAN (Association of South East Asian Nations) carrier, linking communities, cultures and cities across this diverse region with its “sky bridges” that enable affordable and convenient travel, stimulate regional and local economies and help realise the ASEAN dream of integration.

History

Since January 2002, Air Asia’s operation has expand dramatically with the help from Conor McCarthy (Director, Air Asia; Director, Tune Air Sdn Bhd and former Director of group Operations, Ryanair). The strategy approached in 2002 has remodelled Air Asia into a low cost carrier and by 2 January 2002, their vision to make air travel more affordable to Malaysian took flight.

Air Asia initially operates with two Boeing 737-300s and transformed the airline full service carriers into a profitable low-cost carrier when the airline remark as “low fares, no frill” concept. During this period, this concept has overall improvement the financial results since its operations; which primarily due to high passenger traffic, increase in revenue and effective cost management.

The increase in passenger volume arising from the expansion of routes from five to seven and the increase in frequencies for higher demand sectors such as Kota Kinabalu, Langkawi, Kuching and Penang. As for passenger’s growth, it continued to show strong growth. The six months covering period from July 2002 to December 2002, period recorded 665,440 compared to only 621,899 in previous 15 months.

By using LCCs independent airlines model; Ryanair operational strategy, easyJet-branding strategy and a Southwest people strategy, Air Asia has relaunch its loss making takeover into a profitable airline within a short-term period.

The key features of LCCs business model concept is general accepted a low- cost air lines, also known as no-frills or discount airline which offers generally low fares but eliminate most traditional passenger services. The three key main element of “low-cost carrier” business design at this stage define as;

Simple product : catering on demand with extra payment, narrow seating (but bigger capacity), no refund, no loyalty programme and single class with no seat assignment or reservation.

Positioning : leisure traffic and price conscious business passenger, short-haul point-to-point traffic with high frequencies, aggressive marketing, secondary airports and competition with all transport carriers.

Operating cost : low wages, low airport fees, low maintenance cost, high human resource productivity, standard operating procedures, short ground wait due to simple boarding process and short cleaning time.

Air Asia adopt LCCs business model for its operation because LCCs adopts a simplistic fare structure based on time value relationship for seats. This strategy is not based on complicated restriction and it allows customers the flexibility to choose where and when they like. Air Asia use this LCCs business model to allow the heavily debt company into a profitable company in the short time.

Source : Air Asia website

Past Strategy Analysis

PEST analysis

Political

Looking in the political scenario there are factors to consider. Air Asia originally a government-owned airline, because of it facing huge debt and unable to sustain, the government has decide to sell the airline in order to safe Air Asia. Hope that it will be able to recover in the hand of current Air Asia operations by Dato’s Sri Tony Fernandes.

Malaysia rising prosperity and large potential market for leisure the government has encourage providing a better and cost efficient service to travellers. This decision had a great impact for Malaysia Airline that is the major full service airline in Malaysia.

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The government has encouraged more people to travel as Air Asia is tailor within their budget and there is potential market for tourism growth in Malaysia. As the deregulation across South-East Asia given an opportunity for Air Asia to exploit into international expansion to widen its market share globally.

Economic

Airlines are profitable when there is growth and economic trade. However in early 2002, Malaysia economic slow down does not hinder Air Asia airline to expand and grow rapidly because of the demand for low cost airlines by Malaysia’s consumer. This encourage Air Asia to continue to expand it market to more domestic destinations to meet the demand and expectation of it consumers.

Fuel price may be one of the major costs that Air Asia would need to consider as fuel price changes rapidly according to the demand and supply of the crude oil in the global market. This would not deter Air Asia to offer low-cost fare to travellers as this is one of the Tony Fernandez mission to keep the fare low. The fuel may be partially subsidy by the government so that Air Asia would be able to maintain its operations cost at the minimal.

Social

Consumer’s expectation is an important social factor. There has been increasingly complexity and speed in customer needs as customer become more demanding and selective.

With the low cost fare offer by Air Asia has encourage more people to travel especially low income consumer, elderly people, student going for group expedition, group travelling and price conscious travellers.

This will increase the potential tourism market in Malaysia to encourage more travellers to travel to local destination.

Technological

Technological are important in Air Asia’s operations as its operations are mainly depend on online booking. Air Asia has introduced easy to book, easy to pay and easy to fly by introducing the online booking. This eliminates the booking cost incurred by travel agents. It was the first Air Asia airline offer this easy and friendly user online booking to overcome the hassle the consumer need to go through when make booking with travel agents.

Porter’s five forces

Substitutes Product and Technology Development, eg:

alternatives price/quality

market distribution changes

legislative effects

Buyer Power, eg:

buyer choice

buyers size/number

change cost/frequency

product/service importance

Supplier Power, eg:

brand reputation

geographical coverage

product/service level quality

relationships with customers

Competitive Rivalry, eg:

number and size of firms

industry size and trends

fixed v variable cost bases

product/service ranges

differentiation, strategy

New Market Entrants, eg:

entry ease/barriers

geographical factors

new entrant strategy

routes to market

Porter’s five forces diagram

Competitive rivalry

Air Asia airline operations need to consider its operation which can be dividing into two kinds of style: cost leadership and differentiation. For the past five years Air Asia has been the dominant low cost airline and the only competitor are Malaysia Airline (known as MAS airline). So local industry rivalry is low due to the price competition is the major concern in the airline industry.

New entrants

Threat from new entrants is moderate as it requires high capital to maintain and high barrier are set by the government such are air service agreement are in place to those new entrants.

Supplier power

Air Asia’s airplane manufacturers are Boeing and Airbus, therefore the supplier power is high. The cost of switching is pretty low as it sells the same standards to other airline. So it would be rarely for Air Asia to change it manufacturer.

Buyer power

As the customers compare each airline by using the internet so the price and service are clearly stated in the website. Therefore the power of buyer is moderately high as no switching cost for customers.

Substitutes products or service

Due to the geographical structure of Asia customers mush have to transport by airplane or cruise, the substitute threat is moderately low. Therefore Air Asia will be the best selection by consumer for it low cow fare and excellent services.

Air Asia’s Current Strategic Situation

Air Asia has been rapidly expansion since 2001 as the largest low cost carrier in Asia. Since then Air Asia has flies to cover 60 cities in 16 countries with 126 domestic and international routes by 2009. It now operate on 70 Airbus A320 air craft and 14 Boeing 737 aircraft and operating over 3500 flight a week from nine region hubs from the LCC Terminal, KLIA Sepang; Penang International Airport, Penang; and Kota Kinabalu International Airport, Sabah. Thai AirAsia operates from Suvarnabhumi International Airport, Bangkok and Phuket International Airport. Indonesia AirAsia operates from Soekarno Hatta International Airport, Jakarta; Ngurah Rai International Airport, Denpasar; Bandung Husein Sastranegara Airport and Juanda International Airport, Surabaya.

Air Asia vision, “Now Everyone Can Fly”, as they want to be the leading low cost carrier in Asia and serving 3 billion people who with poor connectivity and high fares. Air Asia’s goal it to be the best company to work for by treating employees as part of a big family.

Current Strategy Analysis

PEST analysis

Political

Malaysia government are proud of the successful of Air Asia as the leading low cost carrier. The government will continue support Air Asia with it future plan expansion into global market. As today the more and more migrant entry into Malaysia and the rules and regulation will be tighten to control the population of the migrant.

Economical

Economic for year 2009 has been a profitable year for Air Asia with it new launches of long-haul flight with the creation of Air Asia X to spread the risk of this venture among several investors.

Current fuel price has increase dramatically over the past few years which mean that Air Asia would need to absorbed more fuel cost. This would a burden for Air Asia in the long run.

Social

Air Asia has connected people globally through the technology of social media such as Facebook, Twitter, Google and Yahoo searh engine.

Air Asia believe with social media provide a channel of communication for more than just low far promotions, new routes launches, contest, flight schedule update and customer support.

Technological

Air Asia has it own bespoke reservation system (Customer Reservation System-CRS) which linked Web-based sales and inventory system and as well as linking with Air Asia call centre. With the advance technology investment would easily assist Air Asia to compete globally with it competitors.

Value Chain Analysis

Value chain analysis describes the categories of activities within and around an organisation, together creates a product and service. The value chain analysis was conducted in order to better understand and analyze the Air Asia activities to create competitive advantage. The primary activities are directly concerned with the creation or delivery of Air Asia booking. Air Asia’s primary activities are:

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Inbound logistic – Market assessment, yield management and pricing, routes planning, fuel management, aircraft scheduling, in-flight catering, facilities planning and passenger service.

Operations – confirmation of stations and hubs, ticketing and reservation, check-in and gate operations, cargo management, aircraft operations, on-board service, baggage handling, and ticket office.

Outbound logistic – communication with airport authorities, flight connection, commission payments, business management and reporting, and safety and security procedures.

Marketing and sales – segmentation, promotion, special offers and targeted company, online sales, advertising, frequent flyer and travel agent programs.

Services – customer relations management, complaint follow up, loss baggage service, coordinating with partners and alliance members, rental car and hotel reservation.

Each of these groups of primary activities is linked to support activities to improve the effectiveness or efficiency of primary activities:

Procurement:

Inbound logistic – procurement ordering and assessing.

Operations – specification and delivery instruction.

Outbound logistic – incorporating in operations.

Marketing and sales – branding and online services.

Services – monitoring suppliers and establishing partnerships.

Technology development:

Inbound logistic, Operations, Outbound logistic – procurement computer reservation system, In-flight system, flight scheduling system and Yield management system

Marketing and sales – product development, market research

Services – CRM and data-mining, baggage tracking system

Human resources management:

Inbound logistic – flight, route and yield analyst training

Operations – pilot training and safety training

Outbound logistic – Cooperation training, procedure and operational training.

Marketing and sales – sales force planning, agent training, incentive management.

Services – career planning, service training, in-flight training.

Firm infrastructure:

Inbound logistic – business strategy, financial models, CDU management

Operations – Operations procedure

Outbound logistic – relationship building and regulatory compliance.

Marketing and sales – partnership and competition management.

Services – stakeholder management.

SWOT analysis

SWOT analysis is use to analyze the internal factors [strength and weaknesses] and external factors [opportunities and threats] of Air Asia Company.

The SWOT analysis is:

Strength

Strong and leading low cost carrier

First low cost airline in Asia

More narrow seat per aircraft

Minimize maintenance fees with single fleet

Minimum staff required

Strong brand name

Weakness

Limited human resources

Government interference

Regulation on airport and air traffic

Complaints form customers (flight and baggage delays)

Resources on service is limited by lower costs ( cash flow budget)

Opportunity

Large potential market to expand globally

Production differentiation

Regional international flight

Enter into new routes.

Threats

Other airline implementing low cost fare to compete

Terrorist attack, accident and bad weather

High fuel price (burden to Air Asia)

Government tight policy

Security charges, landing charges, and airport departure

Capabilities Analysis

As define from Applegate, Austin and Soule (2009), “capabilities enable a company to execute current strategy while also providing a platform for future growth. They define the resources needed to execute strategy and define the cost model of an organisation. Capabilities also define the assets of a firm and the efficiency with those assets is used.”

If capabilities can merge with strategy, it can bring into effect of synergy. In Air Asia’s business model capability audit frames analyses in the four areas are:

Analysis of processes and infrastructure

In order to provide low cost fare and forgone other unnecessary services, Air Asia are building its competitive advantage. For example, setup of kiosks to speed up check-in. The innovation is making aviation become more convenient and user friendly. Using IT to connect and integrate that end to end support process within Asia region.

People and partners evaluation

Air Asia has a series of training course for their in-house flight attendant to meet the customer excellent service. Working as team members in Air Asia are highly competitive and attractive remuneration or salary package, and incentives or rewards on performance basis.

Training and development courses include awareness on health and safety standards, aviation technology, in flight service procedures, product knowledge and customer service skills.

Partner are categorise as direct and indirect partners. Direct partners have strong relationship with the airline for example, hotels, travel agencies, catering service and others. While indirect partners include Facebook, Twitters, Youtube, Google and others.

Air Asia mainly rely on internet with those communities therefore Air Asia will be able to build strong connection with their customers locally and as well globally.

Organization and culture assessment

“To be the largest low cost carrier” in Asia is the vision of Air Asia, so it focuses on trimming and streamlining its organisation and trying to use Information Technology to simplified its structure. This could reduce the operation and governance cost.

Leadership and governance evaluation

“To be the best company to work for whereby employees are treated as part of a big family” is one of Air Asia’s missions. All Air Asia employees is appreciated as contributors, therefore no ranking is practice. The organisation structure is far from hierarchy. This creates more open communication, ideas and creativity between employees and management. Employee’s remuneration are based on performance, therefore the leadership tends to support the employees and incentives are given to them.

Air Asia’s Future Strategic Direction

At Air Asia, hard work, creativity, passion and commitment to excellence to be the best low cost carries not only in Malaysia but as the best low cost airline in Asean countries was achieved in 2009. This is the reason why Air Asia was chosen as the World’s Best Low-Cost Airline for 2009 for its innovation on products and services.

Air Asia’s goals is simple, the mission challenging and the vision clear which is exceeded expectations of their guests, suppliers, shareholders and other stakeholders.

With continue to growth in 2009, the challenge of the global economic slowdown and threat of A (H1N1) pandemic does not deter Air Asia from expanding. This has proven by the milestone achieved in 2009 where Air Asia take this opportunity to improve and implement the safeguards to keep the customer safe from any danger and expand it operation to more region.

Therefore, Air Asia has become the most popular option to fly by its customers. Air Asia has expanded it network to over 130 routes with additional hubs in Penang, Bandung, Phuket and Surabaya.

As the airline market has become more competitive, Air Asia has plan going forward to be the most profitable, attractive and best low-cost airline. As going forward, Air Asia will remain using its original strategy to capture the strong capital position from which they will continue to grow from the past years.

Air Asia main focus for the future are to achieve cost savings and profitable with maintaining it commitment to be the highest safety standards for their customers.

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Let look at the choices of strategy direction Air Asia could do to capture the future going forward market share and again as the world best low cost airline.

There are some strategic direction model can be used to expand Air Asia products and services.

Ansoff Matrix

Ansoff Matrix

Market Penetration

Air Asia takes increased share of its existing marketing with its existing product range.

As Air Asia is not the only in the region that operates out of Malaysia. Thailand and Indonesia, therefore Air Asia should look to operates at other region to expand their route network and frequency flight to for example India, China, Arab and Europe destinations. This would open more opportunities for Air Asia to be not only the best low cost but long haul airline.

There would be some problem of getting approval to stop at those region mentions above as it would require agreement from both countries. Those countries would have their own low cost airline which they may need to consider will it affect its local market.

Product Development

In order to produce more attractive products and services, Air Asia could either modify it existing products or services or produce new products or services to it existing market.

As Air Asia booking system are mainly through internet and does not every cover of the world would allow its customer to enjoy this services, therefore Air Asia could invent another way to promote it product to it customer. Beside call centre to take the booking, Air Asia could make a joint venture or partner with some radio station or television station to promote it products. This will advertise Air Asia products or services globally. New products and services could be inventing to suite the advertisement so that it will attract the customers.

This could be a very expensive overhead to bear but it can be overcome it they could come out with a barter agreement with the media station as they would be able to use Air Asia as transportation in exchange for the advertisement base on contract terms.

Market Development

If the above choice is too expensive and risky, alternative strategy is market development. Using market development involves offering existing products or services to new market.

Air Asia would need to look at products or services in the terms of packaging or service. It might take three forms:

New segment – Air Asia could offer it products and services into hospitality service or training centre for people who want to have been grasp on airline business.

New Users – Air Asia’s customer target majority are price conscious customer and customer who are looking for low cost fare. Air Asia could target higher end customer such as corporate company executive with an attractive fare package. Such as company excursion or company trip either to short haul or long haul holidays.

New geographies – Air Asia’s has since target London one of its geographies destination in 2009. There are more geographies destination that Air Asia would be able to spread its products and services such as other region in Europe, United States of America, Middle East region, India and China.

Product development could be a may not be easy to implement as it need big investment to do research it market. This would involve lots of research to input data on the acceptability from it customer, other country policy and government rules and cost incurred to create or tailored the products or services.

Diversification

This is strictly a strategy that takes the organisation away from its existing markets and existing products.

Air Asia is not at the stage of diversification as its products and services at this current stage are still in the growing life cycle. Low cost fares are still in demand either short haul or long haul. At the current economic stages, which are at the slowdown stage and recession, Air Asia’s customers still want to enjoy the benefit from low cost fare.

Some other higher end customers may change their mind and choose Air Asia as their option to travel as to keep within their budget.

Recommendation

As Air Asia has presented Air Asia X venture as a whole set of new challenges and Air Asia has to keep the operations continue to venture into other region with the Air Asia X creation.

Air Asia X could have alliance with other international airline. As Air Asia X would not be able to cover all regions in airline market share therefore this would help Air Asia X to cover some of the region without having to put in high investment to create the new route to new region.

By creating more promotions and encourage travelling, Air Asia could come out with an attractive free seat campaign with add on with one night accommodation at it Tune Hotel.com which are one of hospitality setup by Dato’ Sri Tony Fernandes using the same business model as Air Asia.

As Air Asia and Tune Hotel.com both uses the same business model setup by Dato’ Sri Tony Fernandes, and this given an opportunity for Air Asia to joint collaboration to make the low cost airline and hospitality more attractive to customers locally and globally.

As the world has become more information technology, it would be a good recommendation for Air Asia to venture into communication technology. With 9 out of 10 people would have a PDA mobile with internet or wireless connection, so therefore it would be an excellent choice for Air Asia to collaboration with telecommunication to bring their products and services to easily accessible anywhere, anyplace and anytime without any doubt and hassle free.

It would be good for Air Asia to create a charity organisation to help needed people. This would increase the trust and believe by the people that Air Asia does care for the people. Yearly contribution to the needed person or travelling package awarded for qualified family to travel to feel the unique experience with Air Asia.

This would conclude the recommendation for Air Asia’s future strategic direction. Air Asia would become the world most recognised and best airline in the world with excellent products and services within the people budget. Why not have a try on Air Asia to experience the uniqueness of its services and feel the airline’s cool innovation, high quality service and get involve with it new campaign and social media website.

Air Asia principal is to be the passenger services in order to make air travel affordable and accessible for everyone. Tag line “Now Everyone Can Fly”.

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