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  1. 1. Case Study: AIRASIAAirAsia was launched in 2002 by Tony Fernandes, at the time a pioneer of low-cost flights in Asia. At first, thecompany operated three Boeing 737s. In 2004, after a very successful public offering, AirAsia was listed on theMalaysian Stock Exchange and from there grew rapidly. As of 2011, the AirAsia Group has 93 aircraft spreadacross 12 hubs (see appendix 1) and is flying to more than 60 destinations in 16 countries with 130 domestic andinternational routes. AirAsia operates 3,500 flights every week on domestic and international routes from nineregional hubs in Malaysia, Thailand (Thai AirAsia) and Indonesia (Indonesia AirAsia). AirAsia’s head office and itsmain base is the Low Cost Carrier Terminal at Kuala Lumpur International Airport. This terminal handles 48.4% ofAirAsia’s traffic (see appendix 2). AirAsia is the leading low-cost carrier in the world and won the Skytrax awardfor Worlds Best Low-Cost Airline in 2009 and 2010. In addition, the company is Asias largest low-fare, no-frillsairline and has a long-haul arm, AirAsia X, which currently flies to China, India, Iran, Taiwan, the UK and Australiawith plans to launch services to Japan and South Korea. This report will use the PESTEL framework to evaluatethe opportunities and threats presented by AirAsia’s external environment. It will then apply a SWOT frameworkto analyse the Strengths, Weaknesses, Opportunities, and Threats of the AirAsia group. Finally, this report willlist three recommendations, to be evaluated by the AirAsia board of directors before implementation.REVUZ SYLVAIN a
  2. 2. To begin, a PESTEL framework will enable us to understand all the macro-environmental factors affectingAirAsia. 1. PoliticalOpportunitiesDeregulation and privatization present Air Asia with opportunities for new routes. For example, the ASEANgovernments signed the ASEAN Multilateral Agreement on the Full Liberalisation of Passenger Air Services (anopen skies policy) in 2010. From 2015, designated airlines from ASEAN countries will be able to fly to any citywith an international airport in a member nation. AirAsia will therefore have the opportunity to penetrateundeveloped markets in the ASEAN region by opening new routes. However, it should be noted that foreigncompetitors will have the same opportunity and new routes will require the utilization of more aircraft.The Malaysian Government has always supported the Malaysian airline industry. One example of this is theopening of the Low Cost Carrier Terminal at Kuala Lumpur International Airport. Further, the MalaysianGovernment has helped all low-cost carriers (LCCs), and in particular AirAsia, to develop a competitive edge byreducing their operating costs and improving their logistics. Secondly, the Malaysian Government has givenAirAsia, along with all Malaysian airlines, significant tax incentives (see appendix 3). These tax-incentives in facthelped AirAsia to cover a substantial part of its loan interest when purchasing aircraft.It is also important to highlight that other Southeast Asian countries are often substantially state owned. Thisallows the government to control the airline and protect it from competition. As an example, AirAsia establisheda joint venture with Shin Corp when it began operating in Thailand with Thai AirAsia. AirAsia had a holding of49% of Thai AirAsia while the remainder was held by Shin Corp., owned by the former Thailand Prime MinisterThaksin Shinawatra (2001 -2006).ThreatsAirAsia and its competitors can also be negatively affected by government decisions. For example, unless theMalaysian government makes an effort to minimise crime, travellers may choose to visit other destinations.Low-cost carriers are also suffering from recent delays in the construction of a new permanent low-cost carrierterminal (Expected to open in October 2012), work being undertaken by the Malaysian government. Thesedelays reduce the ability for low-cost carriers to expand their capacity by catering for new passengersi. Barriersto trade between countries may also inhibit low-cost carriers in Malaysia from entering more protected marketslike China where the government tightly controls the airline industry.Civil conflicts and conflicts between regional governments can also affect AirAsia’s operations. For instance,there has been a resurgence of violence in Southern Thailand and terrorism attacks have occurred in the rest ofThailand and Indonesia. Additionally, Malaysias recent decision to explore oil-rich waters off the coast of Borneohas led to increased tensions with Indonesia. These tensions could harm customer confidence and affect allbusinesses operating in Southeast Asia. 2. EconomicOpportunitiesThe economic situation in Malaysia is stable. As an illustration, from 2004 to 2010, Malaysias average interestrate was 2.91%, its average inflation rate was 2.77% and its average unemployment rate was 3.43%. In addition,the Government of Malaysia has a current account surplus that enables them to continuously boost domesticdemand, resulting in an average annual GDP Growth of 4.5% between 2000 and 2011ii. The global forecast for allAsian countries for 2011 anticipates an average GDP growth of at least 3% for 2011. Countries like China, Indiaand Indonesia are expected to experience GDP growth exceeding 6% (see Appendix 4). Although, economicdownturns are always complicated for any business to negotiate, they can also present certain opportunities forREVUZ SYLVAIN 1
  3. 3. companies like AirAsia because, for example, aircraft leasing costs are often reduced by about 40% at suchtimesiii. Thus, companies with ‘deep pockets’ are able to invest and expand their fleet at a very competitiveprice.ThreatsFluctuating oil prices are a major challenge for airlines. For example, in 2009 and 2010 the price of jet keroseneprice represented between 40 to 55% of AirAsia CASK (cost per available seat kilometre). From the latestinformation, the fuel price in 1Q11 was US$117 per barrel, relatively high when compared with 1Q10 when theprice was only US$99.6 per barrel. Fluctuating oil prices have a major impact on operational costs. This is why allairlines use fuel-hedging contracts to stabilise the price they pay for the purchase of jet kerosene. By hedgingfuel, Air Asia paid an average price of US$107 per barrel in Q1 2011 from (see Appendix 5).The last decade was very prosperous for several Southeast Asian airlines and the Asia Pacific domestic LCCpenetration by capacity has expanded rapidly, and has reached a saturation level in several countries. Forinstance, in countries like the Philippines (61.8%) or Malaysia (56.5%), more than half of the regions airline seatsare supplied by low-cost carriers compared with the world average of 24% (see Appendix 9). 3. Social/Cultural / DemographicOpportunitiesFirstly, Southeast Asia offers an important advantage to airlines because the region is comprised of multipleethnic groups that are able to speak several languages. For example, Malaysia is composed of several ethnicgroups – Malay, Chinese, Indian and Thaiiv – and this provides a company like AirAsia with the ability to find staffthat can speak several languages, something which is useful as they rapidly expand their business outsideMalaysia.Secondly, the rapid urbanization of Southeast Asia clearly helps airlines because it forces governments todevelop important infrastructures and open new airports in order to facilitate the flux of people betweencountries. According to the UN, seven out of the 15 most populated cities in the world (>10 million) arepredicted to be in Asia by 2025 (see Appendix 6). Thirdly, rapid economic growth also drives a rapid growth inthe middle class within Asia’s large population. According to the latest OECD forecast, the amount of moneyspent by the Asian middle class is expected to represent 59% of the total amount spent by the middle class inthe world by 2030 (see Appendix 7). By analysing average household consumption within Asia, we can alsoconfirm that the communication and transport spending category will increase from less than 10% in 1995 to15% in 2015 and this will definitely increase the demand for air travel between Asian countries (see Appendix 7).ThreatsThe emergent middle class is growing more rapidly in countries like India and China. It is likely that thesecountriesv will develop foreign LCC competitors that will have a higher growth rate as well as a larger economy ofscale than Malaysian airlines like AirAsia. 4. TechnologicalOpportunitiesBy utilizing information technology, airlines have been able to reduce their operating costs. LCCs were clearly themost effective players in the airline industry at implementing breakthrough information technologies. Byimplementing e-ticketing systems and using e-commerce to bypass traditional travel agents, LCCs have beenable to ‘lean’ their processes by removing unnecessary costs. Furthermore, new, state-of-the-art aircrafts aremore fuel-efficient than older models, and this has helped airlines to reduce their fuel consumption. AirAsia hasREVUZ SYLVAIN 2
  4. 4. implemented these technologies and they have contributed to their operational efficiency. Today, AirAsia hasthe world’s lowest CASK (cost per available seat kilometre), at just US$3.52 in 2010 (see Appendix 8). It hasachieved this by implementing the following best practices: a powerful Yield Management as well as ComputerReservation System (Novitiate Open Skies), a global Enterprise Resource Planning System (powered by MicrosoftBusiness Solutions) and a Customer Relationship Management system provided by Siebel.ThreatsBy being highly dependent on technology, LCCs incur costs in ensuring that their systems operate smoothly andsafely (i.e. from backup systems and maintenance). In addition, by relying heavily on online sales, LCCs exposethemselves to large financial losses when system disruption occurs. 5. Environmental/LegalOpportunitiesFirstly, AirAsia has the youngest fleet in Asia, with the new Airbus A320 and A330 providing improved fuelefficiency. This is fortunate because the EU has adopted a new policy (coming into effect January 1, 2012) thatrequires all airlines to pay for greenhouse gas emissions released on journeys to and from EU airports. Secondly,labour unions in Asia are relatively weak when compared with EU or USA and this helps airlines in Asia to remaincompetitive by reducing their overhead cost to a minimum.ThreatsNatural disasters force airlines as well as airports to reduce or shut down their operations for hours or evendays. In the last decade, airlines have been exposed to Hurricanes, snow, fog, H1N1 influenza pandemic, volcaniceruptions and earthquakes. SWOTOpportunities ThreatsO1) The population of Asian middle class is booming T1) ASEAN Open Skies will increase competition, forand will reach almost 700 million by 2012 example Singapore Airline and Thai Airways willO2) Lots of potential to expand and exploit growing start LCCs in 2012markets in China, India, Japan and Korea as well as T2) Saturation of the LCC market in the Philippinesthe long haul approach in Europe (AirAsia X) and MalaysiaO3) Higher fuel costs may force some competitors out T3) Aviation regulation and Governmentof the industry interference will impact AirAsia’s passenger capacity (recent delays in the construction of the new, permanent low-cost carrier terminal (Expected opening date October 2012) T4) Accidents and disasters affecting customersStrengths WeaknessesREVUZ SYLVAIN 3
  5. 5. S1) Cost leadership: The world’s lowest CASK (Cost W1) AirAsia load factor fluctuates a lot and is notper available seat kilometre) with $US3.52 in 2010. optimal.S2) Economies of scale: The biggest and youngest W2) Limited human resources due to low costsfleet among the LCCs in the region, with an average W3) Non-central location of secondary airportsage of 2.5 years. W4) Heavy reliance on outsourcing (maintenance,S3) Single aircraft fleet (which reduces maintenance repair).and training costs) W5) Not financially strong enough to compete withS4) Double digit growth of all AirAsia subsidiaries; “deep pocket” international airlines, e.g. SingaporeAirAsia achieved record profit in Q42010 Airlines new LCCS5) Quick turnaround of 25 minutes, which is thefastest in the regionS6) AirAsiaX has the world best fleet-utilisation, inexcess of 17 hours, achieved by focusing on price-sensitive, time-insensitive customersS7) Profit margin is the highest margin in the LCCindustry with 23%; by way of comparison, Ryanairsprofit margin is 20%S8) The highest ancillary revenue in the LCC industry(through services like pick a seat, cancellation, Main Recommendationsbaggage supersizing, excess baggage, cargo, as well astravel and tours through, e-coupon O3 with W1 = Recommendation 1 (CI to benchmarkwith AirAsia Megastore or Hotels with European LCC Load factors) Brand name is well established in Asia Pacific O2, S13,S14 with T2 = Recommendation 2S10) Good at using IT to deliver low-cost operations (Partnership to enter new countries due to high LCC(ticketless travel, online booking, online check-in) penetration level in Southeast Asia)S11) Strong management team consist of industryexperts with fast decision making processes S4 with T1 and W5 = Recommendation 3 (IPO of(entrepreneurial) Thai and Indonesian AirAsia as well as AirAsia X toS12) Not sensitive to seasonal factors due to the high finance future growth)diversification of routesS13) Partnership ANAS14) Virgin Group has 20% share in AirAsia XS15) Weak labour unionsRecommendations1) Load factorAs can been seen from the SWOT analysis, AirAsia is outperforming its competitors in terms of operation inseveral fields. It has the world’s lowest CASK, the world’s highest ancillary revenues per passenger and is thelargest discount carrier in South East Asia. However by analysing the cost structure of Air Asia, it is clear thatrevenue can be improved by increasing the passenger load factor from 75% to more than 85%, somethingEasyjet has been able to do (see Appendix 10 for more information). The CI team must be deployed toinvestigate in detail the strategy that Easyjet has used.2) LCC penetration in Southeast Asia is reaching maturity level need for diversificationAppendix 9 and the SWOT together highlight the fact that domestic LCC penetration by capacity (seats) withinSoutheast Asia is starting to reach its maturity by exceeding LCC penetration worldwide (30% of Southeast Asianflights are supplied by LCCs compared with 24% in the world). Countries like the Philippines and Malaysia areclearly the most mature, with more than 50% of airline seats supplied by low-cost carriers. By analysing LCCpenetration per country, we can see that AirAsia can leverage its AirAsia subsidiaries(Thai AirAsia and IndonesiaAirAsia) to enter new countries with very low LCC penetration rate, such as Taiwan, Indonesia, China and Japan.The recent partnership of AirAsia with the Japanese airline ANA underlines the possibilities of this strategy. LCCREVUZ SYLVAIN 4
  6. 6. penetration within Japan is only 9.1%, far more than China with 6%, Indonesia with 5.2% or the empty market inTaiwan with 0%. Meanwhile, Air Asia X (in which Virgin Group has an ownership position along with Air Canada)could be used to enter the difficult market in China more deeply. CI teams (AirAsia, Virgin Group, Air Canada)should be able to share information and knowledge in order to define several scenarios for future collaborationwithin China.3) IPO to finance growthThe construction of the new, world-class low-cost carrier terminal in Kuala Lumpur is expected to be completedin October 2012. Once built, it will be able to serve over 30 million passengers a year and, with expansions, willhave the capacity to serve up to 45 million passengers a year. By analyzing the forecasted growth of AirAsia aswell as it cost structure (see Appendix 11) we can see than the current economic downturn has increased thecost of aircraft by 212%, mainly due to the credit crunch. In addition, AirAsia’s ability to finance the expectedgrowth forecasted is limited because its current structure includes only one publicly listed company that is usedto finance all the capital expenditures for Thai AirAsia, Indonesia AirAsia and AirAsia X. One solution to cope withthis situation of high growth and important capital requirements is to launch IPOs in 2011, especially becauseAirAsia X and Thai AirAsia are performing very well in 2011. The proceeds of IPOs could enable AirAsia to buynew planes and fund growth in order to compete with Singapore Airlines and Thai Airways who will start theirown LCCs in 2011. In order to optimize the IPO the CI team will evaluate the best time for implementing thisstrategy. In, addition, the CI team will also evaluate the possible risks that IPO will have on the autonomy ofAirAsia.REVUZ SYLVAIN 5
  7. 7. AppendixesAppendix 1AirAsia Group fleet composition: Q1-2011 Source: 2AirAsias extensive domestic and regional networkSource: http://www.airasia.comREVUZ SYLVAIN 6
  8. 8. Source: 3Malaysian government Tax IncentiveSource: 4Asian countries GDP ForecastsREVUZ SYLVAIN 7
  9. 9. Appendix 5Jet Kerosene pricesREVUZ SYLVAIN 8
  10. 10. REVUZ SYLVAIN 9
  11. 11. Source: Centre for Asia Pacific Aviation & US Energy Information AdministrationREVUZ SYLVAIN 10
  12. 12. Appendix 6Top 15 most populated cities in the world (>10 million) are predicted to be in Asia by 2025REVUZ SYLVAIN 11
  13. 13. Appendix 7Emerging middle class in AsiaSource: http://www.oecd.orgSource: http://www.adb.orgAppendix 8AirAsia has the world’s lowest CASK (Cost per available seat kilometre) with 3.52 USD in 2010.REVUZ SYLVAIN 12
  14. 14. Selected airlines RASK and CASK: Three months ended 30-Jun-2010 (RASK = Revenue per availableseat kilometre and CASK = Cost per available seat kilometre) Airline RASK CASKAirAsia USD 4.87 USD 3.52Air Arabia** USD 4.88 USD 4.43Tiger Airways USD 4.61 USD 4.58JetBlue USD 6.72 USD 6.04COPA USD 7.37 USD 6.58Norwegian Air Shuttle USD 7.34 USD 6.82Southwest USD 7.73 USD 6.84Vueling USD 7.68 USD 6.91China Southern Airlines** USD 7.32 USD 6.98Thai Airways USD 6.76 USD 7.15WestJet USD 7.95 USD 7.43Continental Airlines USD 8.25 USD 7.52Virgin Blue** USD 7.43 USD 7.52GOL USD 7.99 USD 7.71Air New Zealand** USD 9.22 USD 7.71Delta USD 8.65 USD 7.74US Airways USD 8.93 USD 7.88United Airlines USD 8.82 USD 8.08Air Berlin USD 7.76 USD 8.12Jet Airways USD 8.09 USD 8.20American Airlines USD 8.51 USD 8.22Cathay Pacific USD 9.55 USD 8.41TAM USD 8.54 USD 8.44China Airlines** USD 10.60 USD 8.49REVUZ SYLVAIN 13
  15. 15. Air China** USD 9.75 USD 8.60China Eastern Airlines** USD 9.25 USD 8.63Malaysia Airlines USD 7.90 USD 8.75Singapore Airlines USD 9.61 USD 8.92LAN USD 10.31 USD 9.18British Airways USD 8.88 USD 9.21EVA Air** USD 10.47 USD 9.38Qantas** USD 9.84 USD 9.68Iberia USD 9.78 USD 9.75Korean Airlines USD 12.65 USD 9.82Finnair USD 10.20 USD 10.68Asiana USD 12.48 USD 10.69Air France USD 12.05 USD 12.51SAS USD 15.03 USD 14.18Lufthansa** USD 16.41 USD 16.49easyJet USD 6.99 n/aSource: Centre for Asia Pacific Aviation and company reportsAppendix 9Asia Pacific domestic LCC penetration by capacity 2011:Source: Centre for Asia Pacific Aviation & OAG FactsAppendix 10Passenger load factor Easyjet, Ryanair vs AirAsiaSelected European airlines intra-Europe passenger load factor and passengerload factor growth: Mar-2011REVUZ SYLVAIN 14
  16. 16. AirAsia load factor development: 2Q2008 to 2Q2010Source: Centre for Asia Pacific Aviation and AirAsiaAirAsia cost structureREVUZ SYLVAIN 15
  17. 17. Source: Centre for Asia Pacific Aviation & AirAsiaAppendix 11AirAsia A320 and A320neo aircraft delivery schedule: 2011 to 2026Source: Centre for Asia Pacific Aviation and AscendAirAsia cost breakdown / ASK: 1Q08 vs 1Q09REVUZ SYLVAIN 16
  18. 18. Source: Centre for Asia Pacific Aviation & Airasiai SYLVAIN 17

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