COMPANY BACKGROUND AirAsia is one of the award winning and largest low fare airlines in the Asia expanding rapidly since 2001. With a fleet of 72 aircrafts, AirAsia flies to over 61 domestic and international destinations with 108 routes, and operates over 400 flights daily from hubs located in Malaysia, Thailand, and Indonesia. Today, AirAsia has flown over 55 million guests across the region and continues to create more extensive route network through its associate companies.
AirAsia believes in the no-frills, hassle-free, low fare business concept and feels that keeping costs low requires high efficiency in every part of the business. Through the corporate philosophy of “Now Everyone Can Fly”, AirAsia has sparked a revolution in air travel with more and more people around the region choosing AirAsia as their preferred choice of transport. AirAsia creates values through the following vision and mission: AirAsia Values| Vision| • To be the largest low cost airline in Asia and serving the 3 billion people who are currently underserved with poor connectivity and high fares. Mission| • To be the best company to work for whereby employees are treated as part of a big family • Create a globally recognized ASEAN brand • To attain the lowest cost so that everyone can fly with AirAsia • Maintain the highest quality product, embracing technology to reduce cost and enhance service levels| AirAsia makes the low fare model possible and create values through the implementation of the following key strategies: AirAsia Key Strategies| Safety First| Partnering with the world’s most renowned maintenance providers and complying with the world airline operations. High Aircraft Utilization| Implementing the regions fastest turnaround time at only 25 minutes, assuring lower costs and higher productivity. | Low Fare, No Frills| Providing guests with the choice of customizing services without compromising on quality and services. | Streamline Operations| Making sure that processes are as simple as possible. | Lean Distribution System| Offering a wide and innovative range of distribution channels to make booking and traveling easier. | Point to Point Network| Applying the point-to-point network keeps operation simple and lower costs. |
General Environment Analysis Before we can proceed further in deciding whether investing in Air Asia is a good choice or not, we have to do a market analysis on the market condition of the airline industry. Our market industry is based on five main elements which are: 1. Legal Like all industries in the market, the airline industry is also tied to certain legal policy of the government so as to ensure the safety and the consumer’s rights. For the airline industry worldwide, the rules and regulation are set by the International Civil Aviation Organization and is revised from time to time.
The rules and regulations are mostly about flight’s safety measurements and also the management of safety during flight such as making the providence of first-aid kit compulsory on every aircraft in case anything happen during flight. Not only that, the air stewardess and air steward must have basic knowledge of first aid. 2. Politics Politics play a major role in the performance of the airline company as well. Any political policy that is to the airline company’s disadvantage will affect the performance and annual profit of the airline.
For example, airline deregulation according to the Wikipedia encyclopedia is the process of removing entry and price restrictions on airlines affecting the carriers permitted to serve specific routes. Before deregulation happened, the airline company has to abide by the instructions of the government concerning the routes and the choice of which airports to land on and depart from. Whereas after deregulation, the airline company has the freedom to choose any routes that they want and whichever airports that they want to stopover at.
There are pros and cons to the deregulation of the airline company. The pro is the airline company has the freedom to decide on the operation of the airline whereas the con is that the entry barriers for new airline entrants are lower. Thus, creating a more competitive market for established airlines. This is when the low cost carrier airline starts to appear in the market. The appearance of these airways will lower the profit margin of the existing airways as Low Cost Carrier (LCC) airlines tend to price their airfare at the very minimum price as possible.
Another political aspect is the existence of bilateral agreements between two or more countries regarding the authority of stopovers at different airports. Bilateral agreement is normally based on the concept of ‘freedom of thee air’ where it gives the airline the freedom or rights to fly in the air space of another country and also be permitted to stop at the airports of their choice. And sometimes, some country may even allow foreign airline to operate on their domestic routes, but this is very rarely to be found.
This move by the government will remove many of the barriers to competition and allowing their own airlines to have foreign partners or code sharing partners. This will further increase the airline access to more international routes and also further exposed the airline to foreign countries. Both the airline deregulation policy and the bilateral agreements play a major role in determining the successfulness of an airline company. A policy set by the government may inhibit or aid in the success of an airline company. 3. Economics
When we look at the economic side of the market, we will first look at the overall Gross Domestic Product (GDP) in the world. All the countries have different GDP, some countries may have negative growth and some countries have positive growth. This is normal as during 2008 is when the financial crisis happened. But not all countries did not benefit from the global economy downturn as some countries have positive growth rate for their GDP. This may be due to the fact that the countries benefited from industries that bring losses to another country which results in a tradeoff between the benefits between countries.
Service industry plays an important role in the performance of a country and service industry includes airline industry. From the GDP of a country; we can look at the purchasing power parity (PPP) of the consumers. If the GDP of the country is low or is a negative value, this means that the PPP of the citizen is low and vice versa. The PPP of consumers can also be linked directly to the inflation rate of a country. As the inflation rate increase, the PPP of consumer will drop. Inflation rate will increase the price of goods in general as the demand exceeded the supply of the goods.
Thus, decreasing the amount of extra money allocated for luxurious goods which also include travelling and entertainments. So the changes in the GDP of a country will affect all the industries, including the airline industry. Another event that might affect the economic performance of an airline company is terrorism such as the event of the ill-fated day of September 11, 2001where American Airlines and United Airlines was hijacked. This had caused both airways to face huge losses due to the decline in value of the airway’s stocks.
This can reflect the confidence of the customers towards both the airlines had declined extremely as an aftermath of the hijacking event. 4. Environmental There are times when not only the GDP will affect the performance of an airline; it may be due to natural disasters which include earthquake, tsunami and flash flood which have been happening quite frequently nowadays. All of these can disrupt the operation of the airline companies as facilities and airports maybe destroyed in the process. Thus, causing an airline company to face loss in the event of natural disasters. 4. Social
As the years goes by, consumer demands are evolving gradually. The consumers nowadays want anything that is their convenience, cheap and can be done instantly without going through painstaking procedures. So as to accommodate the change in the demands of the customers, the airline company has to improvise themselves from time to time. Most of the airline companies nowadays have their own websites. This is to make it easier for the consumers to check the availability of tickets, the schedule of the airline and also enabling the consumers to purchase their ticket through e-ticketing.
All of these are to the customers’ convenience. So as to attract more customers, some airlines are now practicing online check-in of luggage where luggage can be checked-in within 24 hours of the scheduled flight. Social and economic factors are closely related to each other as any changes in the market economy will directly affect the consumer behavior. As stated above under the economic factors, the event of financial crisis will affect the PPP of the customers as prices of goods have been increased due to inflation.
In order to save more money, consumers will opt for cheaper goods. The same goes to the purchase of airfares. The lower the airfare is, the better it is and this even applies to business travelers travelling on premium class. 5. Technology With the advancement of the technological changes in the world, the technology used by the airline company also improvised with time. In the past, whenever the customers wanted to buy air tickets, they will have to go to either the airline’s office or any travel agency to purchase their tickets.
But now, customers can just purchase their ticket with a click of the mouse. They do not even need to step out of the house, as long there is internet available. Advanced check-in can also be done through the internet 24 hours prior to the flight departure. All of these technologies are to the consumers’ convenience. Advancement in the technology of the airline industry can also be seen on the safety and the comfort of the aircraft. Aircrafts nowadays are more comfortable, safer and in-flight entertainment is also provided for long haul flights.
This is very different from the olden aircraft where the main purpose of the aircraft is just to transport passengers from one point to another. The airline company is improvising their aircraft from time to time in so as to ensure that their aircraft is the best in terms of safety and also the comfort level. Airline companies in the market are also using the advancement in technology to implement risk management by providing good and reliable databases for risk analysis and targeting, providing faster and more effective business processes, more efficient recordkeeping and providing better services to the customers.
Task Environment Analysis In this report, Porter’s Five Forces Model is being used to analysis the aviation industry structure to provide an overall view of the industry. This is a well-established model, in which the industry can be simulated as a model influenced by five different factors called ‘forces’. A suitable dynamic interaction of these five forces shapes the basic structure to determine the profitability and attractiveness of the industry. 1. Industry Competitor The degree of rivalry is one of the most important factors that determining profitability of the industry.
The market growth and number of competitors are some of the causes that will affect the industry rivalry. For the airline industry where its fixed cost is usually very high and the variable cost is low, competition is fierce as airlines are trying to generate revenue to reach break-even level in order to survive. Competition in the airline industry can be divided into competition between low cost carriers (LCCs) and full service carriers (FSCs) in both regional and domestic markets. There are 6 budget airlines in Malaysia which are Air Asia, Firefly, Tiger Airways, Cebu Pacific, Jetstar, and Lion Air.
The competition among low cost carriers is usually fiercer as offering the cheaper airfare is utmost important for them. One of the main reasons that passengers choose to use a LCC is “cheaper airfares”. Since most of the low cost carriers do not have frequent flyer program to impose switching cost on customers, it is rather difficult for them to build up customer loyalty except constantly offering a cheaper airfare to retain their customers. On the other hand, there are a lots of full service airline (FSCs) in Malaysia such as MAS, Cathay Pacific Airway, China Airlines, Eva Airways Corporation, and so on.
Thus, the competition between full service carriers is more complicated. This is because FSCs are competing in many aspects of their services, such as network coverage, flight frequency, and service quality and ticket prices. While the competition between FSCs and LCCs are mainly focused on attracting each other’s market as they usually have different customer groups. Customer base of LCCs are largely made up of leisure traveler while FSCs appear to be more attractive for business traveler. 2. Suppliers
Suppliers are those who provide necessary raw material, equipment and labor for an airline to perform their daily operation. Supplier’s strength can greatly affect the industry’s profitability, if there is a high concentration in the supplier power, they can exert influence on airlines thus increasing their bargaining power. Major inputs for airline to provide their services to passengers are aircraft, labor, fuel and landing slots. The fleet is the most important assets for airlines to generate revenue.
However, there are only two major aircraft manufacturers in the West, Boeing and Airbus, which almost monopolizing the wide-body civil transport aircraft market worldwide. Hence, the bargain power of aircraft manufacturers against airlines remains very strong, as the concentration of aircraft supplier market is very high. 3. The Buyers Power The buyer’s power is defined as the influence that customers can have on the airlines revenue affecting ticket prices and service charges. If the buyer’s power is strong enough, customers can set the ticket price, and vice verse.
Strong buyer power can bargain away potential airline profit and extract other benefits from airlines such as quality-improved services. Some of the favorable factors to strong buyer’s power in the airline industry are relatively low customer switching cost, low product differentiation, and freely available information on Internet. Nevertheless, the buyer’s power may be weaken by low buyer concentration or small purchase volume. Although fierce pricing war dispute among the airlines, it is notably that buyers do not play proactive roles in the pricing war.
Besides, travel agents, who usually buy air tickets in large volume, yield greater power but they use this concept to strengthen their position in the market rather than transferring the cost benefit to costumers. 4. New Entrant “New entrant” refers to any new player in the aviation market which will compete with the incumbents. A key criterion to analyze the threat of new entrant in the industry is to analyze the level of entry barriers. Entry barriers are obstacles that may discourage others from entering the market hence affect the competition of the industry.
New entrants will also lower the potential profits of the industry as a whole. Most common entry barriers in airline industry are regulation restrictions, labor, access to distribution channels and high capital requirement. However, the entry barriers to the airline industry had generally been lowered recently, especially on the regulation restrictions and distribution channels. 5. Substitutes “Substitution” represents the threat that other industries or transportation may offer a product, which can replace air transport. The threat of substitution depends on the type of flight, namely long haul or short haul, nd travel purpose such as business or leisure. For short haul and leisure travel, the main substitution threat in the Asia Pacific comes from surface transport such as road and sea transport. Even though some of the airfares from LCCs are lower than bus fare, but after paying for the airport charges and insurances, customers will find that generally the total cost of air travel is still higher than that of road transport. Although surface transport is cheaper in term of money, it still costs the passenger more in terms of time and efficiency.
Furthermore, road transport generally will not compete with long haul travel, especially for cross nation traveling. On the other side, latest technology inventions such as video conference pose a bigger threat for business travel. In the aftermath of 911, many worries that the airline industry will be substituted by video conferencing companies as they assumed that people will be less willingly to travel since then. However, the speedy traffic recovery proved them wrong. Although the international passenger flow haven’t returned to the pre-crisis level, but it seems the recovery is on the right path. . Ratio Analysis | 2011| 2010| Profitability| | | Return on Equity| | | Net Income| 555,324| 1,061,411| Total Share Holder’s Equity| 4,036,397| 3,640,960| | | | Return on Total Assets| | | = Net Income| 555,324| 1,061,411| Total Asset| 10,111,761+3,793,948| 10,366,136+2,874,164| | | | . Gross Profit Margin| | | = Gross Profit| 1,162,520| 1,066,961| Net sales| 4,495,141 | 3,948,095| | | | Investment Ratio| | | P/E Ratio| | | Market Value per Share| | | Earnings per Share (EPS)| | | | | | Dividend Yield| | | Annual Dividend Per Share| | | Price per Share| | | | | Dividend payout| | | Dividend| 76,965| 0| Net income| 555,324| 1,061,411| | | | Liquidity Ratio| | | Current Ratio| | | = Current Asset| 3,793,948| 2,874,164| Current Liabilities| 2,194,072| 1,843,591| | | | Quick Ratio| | | = (Current assets- Inventories)| 3,793,948-19,730| 2,874,164-17,553| Current liabilities| 2,194,072| 1,843,591| | | | | | | Financial Leverage Ratio| | | Interest Coverage Ratio (times)| | | Total Debt Equity Ratio| | | Total Liabilities| | | Total Shareholder’s equity| | | | | | Debt Ratio| | | Total Debt| | |
Total Asset| | | | | | Performance Ratio| | | Gross EPS (Sen)| | | Dividend (Sen)| | | Strategy Direction Other relevant information There are some other values to convince the BOD of PPMP PLC decides to merge with AirAsia Airline Company. 1. Safety AirAsia Adopting a zero tolerance to unsafe practices and strives for zero accidents through proper training, work practices, risk management and adherence to safety regulations at all times. 2. Valuing People Committing to people’s development and well-being and treating them with respect, dignity and fairness.
This cause good customer services when company take care of employees welfare. 3. Customer Focused Air Asia care and treat everyone in the same manner that they want to be treated. 4. Integrity Practicing highest standards of ethical behavior and demonstrate honesty in all Air Asia lines of work in order to command trust and mutual respect. 5. Excellence in Performance Setting goals beyond the best and reinforcing high quality performance standards and achieving excellence through implementing best practices.