MALAYSIA AIRPORTS CORPORATE DIPLOMA IN AIRPORT MANAGEMENT

STRATEGIC BUSINESS DEVELOPMENT

INDIVIDUAL ASSIGNMENT

Submitted to : Prof. Dr. Zaini Abdullah

NAME: I/C NO:

ZAINUDDIN ABU NASIR 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 Porters 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 - Porters 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. Now Everyone Can Fly
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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 Airs 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 hours 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 Now Everyone Can Fly
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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 Now Everyone Can Fly
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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 Bangkoks 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 Jakartas 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. Now Everyone Can Fly
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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 companys 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 Now Everyone Can Fly
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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. 2. 3. 4.

http://en.wikipedia.org www.air asia.com Starbiz articles Blue Ocean Strategy :- Author, W.Chan Kim and Renee Mauborgne

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Attachment A

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Attachment B

Attachment C Now Everyone Can Fly

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