MALAYSIA AIRPORTS

CORPORATE DIPLOMA IN AIRPORT MANAGEMENT

STRATEGIC BUSINESS DEVELOPMENT

INDIVIDUAL ASSIGNMENT

Submitted to : Prof. Dr. Zaini Abdullah

NAME: ZAINUDDIN ABU NASIRI/C NO: 630617-02-5109

Strategic Business Development

Zainuddin Abu Nasir

Question

Choose a business story from the current business press that involves a firm or an industry in strategic change. Give an Executive Summary of the story, in 500-600 words, bringing out the significance dimension from a resource-based view or a Porter 5-forces view. The body of the assignment is to be given to an original analysis, not mere summary of events. Attach the article to the assignment.

Answer

The article “ Air Asia aims high” and “Stiffer Competition with Malindo Flying” both was selected from Starbiz – STAR newspaper dated 17 Dec 2012 and 7 January 2013 are related to the paper.

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This paper shall analyze the issues according to the Porter’s Five analysis which is derived into

several categories such as threat of new entrance, threat of new substitutes, power of suppliers, power

of buyers and rivalry amongst other carriers. [Please refer to Appendix - Porter’s Five Forces of

Competitive Position]. Presenter wish to look into Air Asia airlines case for the paper discussion and

shared how they survived in the low cost carrier mainstream beginning from their day as a new entrant

in 1996 and successfully carved their brand name internationally.

Introduction

There is not much competition in the airlines industry in Malaysia as the most dominant is Malaysia

Airlines which is the legacy carrier and Air Asia which is the low cost carrier. Both airlines operates

in a different model of business but in the same aviation sector.

Air Asia Berhad is a Malaysian-based low-cost airline. Air Asia is Asia's largest low-fare, no-frills

airline and a pioneer of low-cost travel in Asia. Air Asia group operates scheduled domestic and

international flights to over 400 destinations spanning 25 countries. Its main hub is the Low-Cost

Carrier Terminal (LCCT) at Kuala Lumpur International Airport (KLIA). Air Asia was established in

1993 and began operations on 18 November 1996. Air Asia operates with the world's lowest unit cost

of USD 0.023/ASK and a passenger break-even load factor of 52%. It has hedged 100% of its fuel

requirements for the next three years, achieves an aircraft turnaround time of 25 minutes, has a crew

productivity level that is triple that of Malaysia Airlines, and achieves an average aircraft utilization

rate of 13 hours a day. Air Asia currently operates more than 142 routes to 78 destinations, with over

400 daily flights covering Indonesia, Malaysia and Thailand and with domestic and international

routes, primarily from Kuala Lumpur, to Australia, Brunei, Cambodia, People's Republic of China,

India, Japan, Laos, Myanmar, Nepal, Philippines, South Korea, Singapore, Sri Lanka, Taiwan and

Vietnam.

Malaysia Airlines (MAS) uses KLIA as the hub where all flights transit Kuala Lumpur and the MAS

network is now better described as mainly point-to-hub. The long-haul strategy now is built around

Frankfurt, Zurich, Rome, Paris, Los Angeles, New York, Stockholm and London. MAS have

increased frequencies on key routes such as Paris, which is now daily, and extra services were added

to Yangon, Dhaka, Hanoi and Cebu. The airline also expanded its core network in Asia/Pacific, while

strengthening the airline's hub-and-spoke connectivity in Europe, Australia, New Zealand and Africa

via its new partnership agreements with KLM, Gulf Air, Virgin Blue and South African Airways.

Middle East routes will be restructured and flight frequencies to non-trunk markets such as North

America, South America and South Africa may be dropped.

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Currently, MAS operated 93 jet aircraft. The airline flies Boeing 747-400, Boeing 777-200ER and

Airbus A330 aircraft mainly for medium to long haul international routes, while the Boeing 737-400

is often used for shorter international and domestic flights departed from KUL, Kota Kinabalu

International Airport (BKI), Penang International Airport (PEN) and Kuching International Airport

(KCH). MAS also has issued a proposal to procure Boeing and Airbus for up to 55 narrow body

aircraft to replace the 737-400s and 55 twin-aisle aircraft, such as B787. The current order of six

A380 is also in the plan.

FORCE NO 1:- THREAT OF NEW ENTRANCE

The Airline dominance is affected by the ability of people to enter your market. If the costs is little and

shorter time to enter the market and little protection for key technologies, the new competitors can

quickly enter airlines market and weaken the carrier position. If airlines have strong and durable

barriers to entry, then airlines can preserve a favourable position and take fair advantage of it.

New entrants could change major determinants of market environment like market share, prices,

customer loyalty. Like the case of the two airlines in Malaysia, MAS and Air Asia, there is always

possibility that another airline will be formed to service the existing market. The likeliness of another

airlines being formed, will depend so much on the barrier to entry and the lucrativeness of the

business. The new airline entrant for Malaysia is Malindo Air, which is a joint venture between

Malaysia's National Aerospace and Defense Industries (NADI) (51%) and Lion Air of Indonesia

(49%). Malindo Air plans to start operation on 1st May 2013 from the new KLIA2 terminal initially.

Malindo is also backed up by Indonesian tycoon Rusdi Kirana who controls the Lion Air Group.

Malindo Air will begin with domestic flights i.e. Kuala Lumpur to Kota Kinabalu and Kuching and

from 2015 to other long hauled flight to ASEAN countries, India, China (Shenzhen and Guang Zhou

& Hong Kong) and Australia through own flights and code-sharing with other airlines, including Lion

Air’s subsidiaries Batik Air and Wings Air. Malindo Air intends to start operations with 12 B 737

aircraft. The company will start operation with a fleet of 12 aircraft and is planning to reach 100

planes over a ten-year period of operation

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The business model of any carriers is predominantly driven by:-

1. Providing safe, reliable and certain limited service.

2. Operating licences - duration air service

3. Lowest possible fare where applicable.

4. Cost of passenger services (example no seat assignment unless paid)

5. Fleet performance

6. Employee turn around

7. High aircraft utilization – the minimum fast turn around

8. Availability point to point for short haul or long haul longer hour’s operation.

9. Dedicated areas for operational facilities in terminal and apron

FORCE NO 2: THREAT OF NEW SUBSTITUTES

Threat from substitution is affected by the ability of your customers to find a different way of

improvement technologically, manually or by outsourcing it. If substitution is easy and substitution is

viable, then this weakens your power. Air travel is a market segment based on travel purposes and the

purpose of travelling is for business dealing, like meeting or discussion or social. With the advance in

internet, some of the discussion can be done online, either through video conferencing or the simple

chatting. Airlines that can offer alternate products with lower prices and better performance

parameters will attract significant proportion of the market volume & hence reduce the potential sales

volumes of existing players. Buyer inclination towards substitute will increase and with less number

of strategic partners increases the bargaining power

The North-South Expressway or PLUS is the longest expressway in Malaysia with the total length of

966km running from Bukit Kayu Hitam in Kedah to Johor Bahru at the southern portion of Peninsular

Malaysia and to Singapore. The expressway links many major cities and towns in western Peninsular

Malaysia, becoming the backbone of the west coast of the Peninsula Malaysia. The network of roads

in Peninsular Malaysia is of high quality, whilst the road system in East Malaysia is not as well

developed. The efficient connection between cities have shortens the time travel.

The intercity railway network in Peninsular Malaysia consists of two main lines: The West Coast Line

between Singapore and Padang Besar, Perlis, and the East Coast Line between Gemas in Negeri

Sembilan and Tumpat in Kelantan. The entire 1,699 km network makes the connecting between

major cities in Peninsular Malaysia good. Adding the current network, a total of 332 km of the

railway network is double track and electrified connecting to Ipoh and later to Perlis. This includes

portions of the West Coast Line between Seremban and Ipoh and in future, the whole stretch of West

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Cost Line would be electrified. The rail network in Peninsular Malaysia has become practical,

convenient to passengers to travel around Peninsular Malaysia.

However, in some part of Malaysia, ferry services are an alternative transportation option for traveller

between the mainland Peninsular Malaysia to island like Pulau Pinang, Pangkor and Langkawi, while

for Sabah is from Kota Kinabalu to Labuan and Brunei Darussalam and Sarawak from cities to cities.

FORCE NO 3: POWER OF SUPPLIERS

The Airline dominance is influence with the facilities provided by the surrounding Airport where

particular airlines hub. The airlines shall look for various services and facilities available at the

airports. These include aircraft time slot, parking bay, ground handling, catering facilities, ground

service equipment facilities, airline staging areas, baggage handling, boarding facilities, check in

counter, exclusive lounges with private space, refuelling facilities and other facilities in need for

aircraft operation i.e. ramp operations.

Air Asia continued to increase its fleet, open new operating bases, and in March 2006, it began

operating from the LCCT. The LCCT was specifically built and custom-made to meet the LCC

business model and was planned to handle 10 million passengers a year. As of 2010, the Air Asia

Group passenger has exceeded LCCT capacity to 15 million passengers.

KLIA, Kuala Lumpur is now building it low cost new terminal and the operation is expected to

commence by 28 Jun 2013. The new low cost terminal shall have the capacity to expand to 45 million

with a dedicated runway, passenger terminal, aircraft facilities and air traffic control tower which will

give an advantage to Air Asia. The terminal will have a totally different concept of low cost

terminal which will cater to current and future passenger, airlines and stakeholder need compared to

the existing which have basis terminal infrastructures.

Singapore is a primary competitor to KUL and other large Southeast Asian hubs for international

connecting traffic. Since there are no domestic markets to be served in Singapore, SIN has

exclusively international service to a wide variety of regional as well as intercontinental flights.

Flights are scheduled to serve both the Singapore O&D market, which is driven by commercial

demand generated by the financial and trade centre in Singapore. Both full service network airlines

and low cost airlines have significant operations at Singapore. In view, of the new terminal for LCCT

at KLIA, Changi has demolished one of its terminal and follow suit KLIA to built new terminal for its

low cost carrier. Changie has a competitive advantage in long-haul markets with more capacity to

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destinations in Africa, Europe, North America, and Australia & Oceania; many Malaysian destinations

are served from SIN for both long-haul intercontinental traffic as well as international traffic traveling

via SIN to cities throughout Malaysia.

Bangkok is served by two airports, the new Suvarnabhumi International Airport (BKK) as the main

international gateway and the older Don Mueang Airport. Flights are scheduled to serve the

Bangkok’s market, which is driven by commercial and tourist demand. Bangkok, as an international

gateway to Thailand connects international and domestic flights, and act as an international hub

connecting passengers from diverse world regions.

Soekarno Hatta - Jakarta is a competitor to Kuala Lumpur and other large Southeast Asian hubs for

international connecting traffic. Flights are scheduled to serve the Jakarta’s market, which is driven by

commercial and tourist demand generated by the City of Jakarta, and as an international gateway to

Indonesia connecting international and domestic flights. Both full service network airlines and low

cost airlines have significant operations at Jakarta.

The latest traffic result for November 2012, released by International Air Transport Association

(IATA) showed an improvement in both passenger and freight demand. The air travel in November

was 4.6% higher compared to last year. Air freight volumes rose 1.6% over the same period, while

passenger capacity rose 3.2% and load factor improve by 77.3% compared to the year-ago period. It

indicates positive sign for air transport demand. This year, we aspect that cargo volumes will grow

1.4%, and passenger traffic will increased by 4.5% worldwide, “IATA director –general and chief

executive officer Tony Tyler said. International passengers demand grew 5.6% compared with the

same month a year ago. Emerging markets continue to perform well and capacity increased 3.1%

compared with a year ago. Load factor rose 1.8% to 76.3%

FORCE NO 4: BARGANING POWER OF BUYERS

The importance of bargaining power for each individual buyer to your business, the cost to them of

switching from your products and services to those of someone else, and so on. Strong customers can

force a decrease in costs or increase in quality. Some airline operates using a single type of aircraft,

for example Boeing. Then the seller will have greater power over the airline. For that reasons, most

airlines will opt for multiple suppliers. It was an added advantage of getting a better deal, because the

like of Boeing knows that if the deal is not attractive, the airline will go to Airbus. However having

multiple types of aircraft fleet will incur more overhead cost from maintenance, operation (crews) and

administration thus reducing the airlines revenue.

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The replacement of Air Asia aging Boeing B737 aircraft with the Airbus A320 aircraft - opportunity

to stamp its dominance as the ASEAN airline. [Refer Attachment A and B], with its unmatched

network connectivity, fuel saving, frequency and full-fledged Airbus operation along with its low cost

operations and low-fare model, Air Asia will enjoy a substantial edge over its competitors.

The new sharklet wing tip for A320 can increased the load capacity by 450kg and Air Asia is the first

recipient of the wings. The installation of this wing tip does not require any reconfiguration to the

aircraft cabin.

RIVALRY AMONGST OTHER CARRIERS

Competitive rivalry within the industry

Competition exists whenever 2 or more company’s organizations offer similar products or services for

the same group of individuals or customers. The number and capability of your competitors, equally

attractive products and with services offering, the carrier will control the situation, because suppliers

and buyers will go elsewhere if they don't get a good deal from carrier.

Air Asia has introduced AirAsia X Sdn. Bhd as the international operation of the brand to operate

long-haul destination. The airline has commenced its operations on 2 November 2007. Its first service

flew from Kuala Lumpur International Airport, to Gold Coast Airport in Australia. AirAsia X operates

a fleet of 11 aircraft and has placed orders for more. The franchise is able to keep costs down by using

a common ticketing system, aircraft livery, employee uniforms, and management style. AirAsia X is

also affiliated with Virgin Group and Air Canada.

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There was an effort to harmonize the aviation sector which both Malaysia Airlines and Air Asia has

earlier agreed to have shares equity enabling a strategic partnership thus reduce rivalry between the

two major carrier. The pact had seen Tune Air, the parent company of AirAsia, exchange 10% of

AirAsia shares for 20.5% of MAS stocks with state-owned Khazanah Nasional. The deal also was

expected to reduce competition and help MAS, the national carrier, return to profitability However,

Air Asia and Malaysian Airline System (MAS) have scrapped their proposed share swap deal amid

pressure from the workers' union at MAS. However, it had proven unpopular with the union amid

concerns that the tie-up may lead to restructuring and job cuts. Tony Fernandes, chief executive of

AirAsia, and his deputy Kamarudin Meranun have both quit the MAS board. The cross-holding of

shares has become a distraction to management's efforts to turnaround MAS and win stakeholders'

support for collaboration

Competition depends on aviation industry concentration & their relative market share. More the

number of companies, greater are the competition for resources & market share. When an airlines

company reduces its fares, other companies are forced to follow the suit. Air Asia promotes product

differentiation, improving features, and making innovative changes of value added facilities from the

airlines refreshments and music at the airport, audio and video on-demand, with extra-wide

personalized screens in the aircraft, sleeperette seats with extendable footrests, pre order-course

gourmet cuisine, global exposition, internet booking, check in, e flight boarding passes and ticketless

services will attract traveller to choose between which airlines the wish to travel. Since customer

loyalty is difficult to retain in this industry, airlines look at new innovative ways to attract new

customers and retain existing ones.

Conclusion

A holistic planning, considering regional planning is an important factor in determining the success of

Air Asia progress. The economic sector corridor such as Wilayah Iskandar, North Region , SCORE

will see growth of economic in the peninsular region while BIMP-EAGA economic sector region

shall be able to embrace the low cost aviation activities in the region while the low cost in Asia and

Europe are bracing for more players and hence competition according to RHB Research Institute on

23 Nov 2012. The development shall be complementing each other and not head-to-head competition,

thus can exploit the market at their full potential, [Please refer Attachment C].

Malaysia Airlines and Air Asia future strategy must be are in line with the program to lower costs,

keeping fares competitive, increasing revenue, and delivering five-star products and services will

determine their existence in future aviation industry. Figure 1, below illustrative a canvas strategy a

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practical tool from the Blue Ocean Strategy that Air Asia may adopt for their strategic business

direction.

Figure-1

REFERENCES

1. http://en.wikipedia.org

2. www.air asia.com

3. Starbiz articles

4. Blue Ocean Strategy :- Author, W.Chan Kim and Renee Mauborgne

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Attachment A

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Attachment B

Attachment C

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