Nothing is worse in cross-border alliances or acquisitions than to have partners in the same bed with different dreams Japanese

Proverb

1.0

INTRODUCTION

In the spirit of the UEFA European Cup, which begins in June, we can use the analogy of a successful football team to relate to the successful rational of Malaysias airline industry to become a developed nation and high income resilient economy. For a football team to succeed, all players in the team, irrespective of their position, need to work together and play as a team. If they dont, they are unlikely to win, worse, they may lose badly. Each player, whether it is the goalkeeper, defender, midfielder or striker, is equally important. However great the footballers are as individual players, victory can only be achieved as a team. Each individual team member is a valuable asset and everyones potential must be optimized to achieve success. Even if the team has the best strikers in the world, such as Rooney, Messi or Ronaldo, the team would still lose if it had weak defenders or goalkeeper, as the number of goals scored would be more than offset by the number of goals conceded. Going forward, we have the potential to achieve greater heights, if we are able to collectively work in an effective manner, leveraging on our respective strengths. In this regional Asia-Pacific analysis industry of MAS-Air Asia share swap dilemma, MAS could be a classified as a striker of versatility, seasoned, jaded and matured player (possibly declining) due to continuous participation in the competition. Air Asia on the hand is probably the opportunist striker who seems to have engineered their moment of glory by scoring goals and most crucially winning. Sadly MAS-Air Asia is not in the same team. Even worse they try to compete furiously in different division or standards of the game league. Practically and tremendously overlooked in this context of share-swap success or failure is however equally important is to find balance of wining synergy victory in the team. That is of course in the critical defense of the team, whether the fort or port the standards Malaysia airports have the capacity, competence, resources and potential to grow in line and meet up to the expansion expectations of MAS-Air Asia should it share swap structure should it materialize and come in par of the requirements of the Asean open skies agreement in 2015. That is however is will not be reviewed in this analysis. Therefore, to succeed, the quest to form a 1Malaysia airline team, that is united and aligned in purpose and vision, to achieve the best for Malaysia, through their collective best efforts.

1.1 ASEAN OPEN SKY POLICY AND THE IMPACT ON MALAYSIAN AIRLINE INDUSTRY
Open Skies is not a single, well-defined concept. Rather, it refers to packages of a number of distinct policy aspects, such as capacity deregulation and removal of price controls, which lead to less regulated airline services. It is a strategy of opening up aviation markets, which can be pursued on a bilateral, regional or multilateral basis. In particular, Open Skies gives rise to

More competition between airlines; More scope for airlines of a third country to serve on a route between two other countries More flexibility for airlines to develop their routes and networks as they choose.

In 1997, Malaysia signed an open-skies agreement with the United States; such deregulation present new airlines (i.e. AirAsia) with the opportunity to access domestic routes. Having access to domestic routes could lead to the trial of long haul flights to attain and penetrate an undeveloped market share (i.e. new routes to utilize its new aircraft). Globalization saw a trend of increased privatization and deregulation of governments across the world, which resulted in the ongoing consolidation of the airline industry. As governments were important drivers of airline success in Asia, most airlines in East and Southeast Asian countries had full or substantial state ownership, management, and control, often subsidized and protected by the governments from competition; with the pursuit of non-business goals, profits were often sacrificed for the sake of national objectives.

Privatization and deregulation of governments presented opportunities for new routes and airport deals through open-skies agreements between countries, or the permission of the entry of private airlines, reducing the constraints for international airlines. However, globalization can also result in global uncertainty (i.e. accidents, terrorist attacks, and disaster), which can affect customer confidence. Once customer confidence is affected, AirAsia would face the threat of losing its profitability, or even bankruptcy. Being a low-cost carrier, AirAsia is subjected to subjected to aviation regulations, government policy and government restraints (i.e. government protection in favor of full-service airlines), and dependent on the geography and infrastructure of Asia, and the travelling preferences of customers. Overall, there are more threats than opportunities. As AirAsia is are subjected to government interference and regulation on airport deals and passenger compensation, AirAsia can only minimize its negative impacts by selecting routes (countries) that are favorable. The call by the Government for both Air Asia and Malaysia Airlines (MAS) to cooperate will work if both airlines agree not to lobby to the Government to close or open any route, but to just allow them to fly to whichever destination they want, while slugging it out among themselves. They must liberalize the routes and let them fly to where the demand is. There can be better cooperation that way and it would also be better for connectivity, while promoting tourism. Clip their wings and at the same time ask them to cooperate on routes and frequencies air fares would only limit growth and deprive travelers of the competition that is required in the market place. Air travel has resulted in unprecedented mobility and the very premise of that was competition. Airlines should be allowed to compete in core areas and any cooperation should be in non-core areas such as training, ground handling, maintenance and engineering. This is also not the first time that the Government has urged both carriers to cooperate. Trying to make MAS and AirAsia cooperate could be a waste of time; instead, the Government should focus on opening up the routes for both parties to slug it out. Both airlines must come up with a win-win formula to start on a strategic collaboration that will enable both companies to compete at the global level. In response to that if the industry experts in the economic transformation programme (ETP) labs believes that more flights on parallel routes are in the best interests of the country then equal share division routes is the best solution. MAS-Air Asia X should focus on premium travel and AirAsia- Firefly on low cost. MAS-AirAsia should cooperate and avoid having disputes on who has the more right to choose and dictate selected routes. In their collaboration structure MAS must be willing to accept AirAsia on the maintenance jobs as well as work together on training and cargo.

The fight is really about which airline flies where, and it is understandable why each airline wants to protect its share and interest. Airlines also compete alongside many global players on the many routes they fly. Interestingly, even though the Government's ETP promotes liberalization, the plan also states that Sydney and Osaka are two out of 10 markets identified that are underserved from the KL International Airport. These are the two out of three airports that AirAsia X is hoping to fly to next year. Having a 1Malaysia airline team would mean both parties work together and openly share the economic logic of not allowing more flights to strategic priority destinations and depriving consumers of choice. Most importantly it would avoid dissatisfaction among them as the routes decided will ultimately benefit either party as they cooperate on a common goal and objective that is towards the profitability of the organization as they essentially be productive by having more than one product offering to meet the many demands of the modern day traveler.

1.2 Global/Demographic/Political/Legal
The idea for the share swap between the national flag carrier and AirAsia came from Datuk Seri Najib Razak but the prime minister did not want the deal to cause friction with employees, a Malaysia Airlines union leader has revealed. The plan was to have two national champions when the Asean open skies policy takes effect in 2015. (http://malaysia-today.net/) Given that both the airlines operate from the same country, there is no reason for MAS to fail. They have to team up with AirAsia, AirAsia is making plenty of money. They are making profit even though their fares are very low. So there is something MAS can learn from AirAsia in terms of management, cutting down costs and therefore, making profit, Tun Mahathir said. http://www.freemalaysiatoday.net/) Like it or not in Malaysia, the government has to play a catalytic role and will still have to be involved in strategic areas such as businesses dealing with national security, national infrastructure and projects. Malaysia is deemed to generally pursue a liberal, growth-oriented aviation policy. The development of air transport is viewed as an important foreign exchange earner in the services sector, while the development of a comprehensive network of airports is deemed essential for facilitating trade, tourism and to accelerate socio-economic development. (Ministry of Transport, http://www.mot.gov.my)

In the tenth Malaysia Plan 2010, ST2.3 Public-Private Partnership 34. Smart and effective partnerships between the public and private sectors will be established to drive the economic transformation agenda. This new wave of public-private partnership (PPP) will ensure equitable sharing of risks and returns. The Najibs Administrations New Economic Model stated that the government needed to rationalize its involvement in GLCs to avoid crowding out the private sector, boost liquidity in the capital markets and improve its own fiscal position. Government Linked Companies (GLC) s are legal entities created by the Malaysian Government to undertake commercial or business activities on behalf of the Malaysian Government. GLCs have played an important role in economic development especially in the developing nations. However, experience of many countries demonstrates that GLCs are usually less efficient than non GLCs as measured by their economic performance. In countries where the participation of GLCs is high, their typical low efficiency can hinder economic growth (Issham,et.al, 2008) Khazanah Nasional the government arm in charge of the transformation initiatives and which is also the main stakeholder of most GLCs are defines GLC as companies that have a primary commercial objective and in which the Malaysian Government has a direct controlling stake. Controlling stake refers to the Governments ability (not just percentage ownership) to appoint BOD members, senior management, make major decisions (e.g. contract awards, strategy, restructuring and financing, acquisitions and divestments etc.) for GLCs either directly or through GLICs.The Government-linked companies (GLCs) have been seen to play an important role in economic development especially in the developing nations. However, experience of many countries demonstrates that GLCs are usually less efficient than non GLCs as measured by their economic performance. (Issham, et.al, 2008). These inefficiencies are mainly due to ownership effects and partly to lack of competition effects. Besides, supervision by governments tends to be bureaucratic and rigid. They are more interested in seeing that regulations have been followed rather than that the opportunities have been correctly seized. In other words, unlike the non GLCs which mainly aimed to maximize profit, the objectives of GLCs are more socially and politically inclined. This is mainly the reasons why business transformation has to become part of the GLCs to ensure competitiveness and to maximize performance. In the light of the improving the performance and competitiveness of the GLC companies in Malaysia, the Transformation programme was launched. The transformation of GLCs into high-performing entities is critical for the future prosperity of Malaysia. To facilitate this transformation, the Putrajaya Committee on GLC High Performance (PCG) was set up http://www.pcg.gov.my. Its principal mandate is to design and implement comprehensive national policies and guidelines to transform GLCs into high performing entities and establish the institutional framework to program-manage and subsequently to oversee the execution of these policies and guidelines

The transformation of Government-Linked Companies (GLCs) into high-performing entities is critical for the future prosperity of Malaysia. To facilitate this transformation, the Putrajaya Committee for GLC High Performance (PCG) has undertaken two sets of actions. First; the codification of Policy Guidelines with the objective of providing an enabling environment for GLCs to perform and Second; the translation of the Policy Guidelines into specific Initiatives that are targeted to driving and enhancing GLC performance According to the former Prime Minister, Mahatir Mohamad (1995), the construction of the KLIA was needed as the Subang International Airport had experienced a growth of 14-15 per cent per annum from 1990 to 1995. This resulted in the airport reaching its designated capacity of 5,454 passenger movements per hour by the mid-1990s. Its development spanned several phases: Its first phase was completed on 30 June 1998, after seven years of conceptualization with a capacity of 25 million passengers per annum and 1.2 million metric ton of cargo. (Table 1) During the second phase (1998-2015), a temporary Low Cost Carrier Terminal (LCCT) was constructed on a fast-track basis at the beginning of June 2005 and was fully operational on March 2006, at a cost of RM108 million (www.lcct.com.my, 7 May 2007). The LCCT is located about 20 kilometers from the KLIA Main Terminal Building and has the capacity of handling 10 million passengers a year. It is projected that this capacity will be exhausted by 2012. The current facilities will be upgraded to handle up to 15 million passengers per year by 2015, thereby increasing the total capacity at KLIA to 40 million passengers per year. Phase
1

Year 1993-98*

Description Initial capacity of 25 million passengers per annum (ppa); 1.2 million tonnes cargo; one main terminal, one satellite building Addition of LCT, adding 10 million ppa by 2012; Includes the expansion of current LCCT up to 15 million ppa by 2015.Total capacity of main terminal and upgraded LCCT will be 40 million ppa. New LCCT (permanent) will be constructed to accommodate 25 million ppa, capacity of main terminal and new LCCT will be 50 million ppa; Construction of second satellite terminal and increase in passenger capacity to possibly 75 million ppa.

1998-2015

2010-2015 (Tenth Malaysia Plan)

Not Known

Construction of second terminal and increase in capacity to 100 million ppa.

Table 1: Summary of the Development of Malaysian Airlines and Infrastructure

In the (Tenth Malaysia Plan) donned by the Prime Minister in 2011 the development and more importantly the intention of having a second satellite terminal infrastructure was not even evaluated and taken into consideration. This has left private owned companies in Malaysia primarily in Air Asia to divert and invest their over capacity potential and to sustain their low cost operation with cheap resources and labor to third world developing countries such as Indonesia. If this has spark the move of the government to retain in successful homegrown companies by offering over valued share swap offers than their level patriotism of the companies ought to be question in lieu of the honest intention of the government in the formation of a 1Malaysia airline team.

1.3

Economic

Fluctuating oil prices would have an impact on operation costs when fuel prices are too high. Yield and profitability would decrease for AirAsia if fuel prices become too high. MAS and AirAsia are also jointly buying fuel to enjoy economies of scale. Besides, the latter has always hedged its fuel prices better than the former. MAS need the arrangement more than AirAsia but there are those at the national airline who are unhappy because the lucrative role of the middlemen in fuel purchases has been cut out. Although, economic downturns (e.g. global financial crisis) would result in a downturn in the industry, it can prove to be an opportunity for AirAsia. For example, as a result of the global economic downturn (i.e. worldwide stock market plunge), aircraft leasing costs were reduced by about 40%; creating an environment with lesser competition and enabled AirAsia to lease their aircraft at a cheaper rate (leading to cheaper ticket prices for customers). Overall, although such economic events are unavoidable, the opportunities outweigh the threats, presenting AirAsia opportunities to expand its business: during times of economic downturns, demand for affordable low fares would increase amongst budget-conscious travelers, especially from leisure and corporate travelers.

1.4

Social/Cultural

In recent years, rapid economic growth resulted in a burgeoning middle class within Asias large population. Together with increased in trade and tourism within and into Asia, demand for air travel increased; more people were willing to compromise on food and other services in exchange for lower prices. The attractiveness of budget airlines is primarily their low ticket prices, which can be as low as 10-20% of those charged by full-service airlines. This presents AirAsia with opportunities to differentiate itself from competitors by adding customer services or operation as full service airline with low fare, giving it a competitive advantage (i.e. provision of in-flight food and drinks, and online sales of hotel, car, and holiday reservations, as well as travel insurance), and corporate travel services, with its own branded credit card; further increasing brand awareness and value for customers.

If AirAsia is not careful in its implementation to differentiate itself from competitors, it could incur an (unnecessary) increase in operation cost in producing value-added services. The social/cultural aspect presents AirAsia with more opportunities than threats, as long as it does not unnecessarily increase operation cost in producing value added services. Malaysian Airline System Berhad is awarded with 5-Star Airline status for five consecutive years in year 2009. In spite of stiff competition from AirAsia , MASs carriers offering high-quality and premium flight services are gaining attraction from the customers especially the customers who board for a long-haul flight since they dont want to be crammed into a plane for five or six hours and require a premium services. Other than that, the lifestyle of Malaysian people has been changing. With the increase of income, they now more prefer to use the flight services as their travelling transportation. This helps to stimulate airline industry. Working together MAS-AirAsias would be able to control their cost more effectively and accurately represent Malaysian social/cultural aspects uniformly in a more common in objective without having any variances to the consumers perception.

1.5

Technological

By utilizing information technology, AirAsia was the first airline in Southeast Asia to utilize e-ticketing and bypass traditional travel agents. This enabled the airline to save on the cost of issuing physical ticket (i.e. estimated at US$10 per ticket), and eliminated the need for large and expensive booking and reservation systems, and agents commissions. An integrated one common infrastructure platform and expansion of MAS-AirAsia would mean a need to increase its e-ticketing facilities and capacity to at least a minimum of 100% since they are serving the same customers simultaneously. Initial start up cost of upgrading and integrating this infrastructure could be their obstacle but at the same time both companies would be able to minimize and share their expenditures more efficiently. The downtime cycle, if not handled properly (i.e. backup systems and maintenance); there would be risk of system disruption due to heavily reliance on online sales. Hence, the technology aspect would pose to be a threat if MAS-AirAsias systems are not properly backed up and maintained (i.e. contingency plan in the event of a system disruption).

1.6

Environment

Synchronization of mutual interest would mean both MAS-AirAsia are at par of their mission and vision statements in their quest to conserve energy and scarce resources. A go green week in the airline industry would be to have a non fly route to destination less than 300KM as it takes less than an hour by flight. In return they could offer rebates and discounts on their future travels and substitute land transportation to passengers as they enjoy the abundance of green tropical Malaysia.

2.0

Strength

Strengths reflect MAS competencies and capabilities of their core business which differentiate the company itself with other service company based on value, price and services. Personnel MAS Cabin Crews Malaysia Airlines have their own branding strategy that involves its flight attendants to promote the airline. This strategy seeks to portray cabin crews of Malaysia Airlines as representative of Malaysia hospitality and friendliness. During the late 1990s to year 2007, Malaysia Airlines has been decided to use the Going Beyond Expectations slogan to brand itself internationally by heavily promoting its service excellence. In a way to transform their business plan Malaysia Airlines have come out with the new branding strategy slogan which is MH is Malaysia Hospitality. It is to emphasize the hospitality of its cabin crew instead of the airlines extensive network and its premium cabin and economy class cabin products. Malaysia Airlines implemented an extensive training program for its cabin and flight crew. The airline holds a lengthy record of service and best practices excellence, having received more than 100 awards in the last 10 years. We are proud to

have been given rave reviews for more than just our cabin crew. Among the recent ones were the Worlds Leading Airline to Asia, Asias Leading Airline and Asias Leading Business Class Airline awards by World Travel Awards 2010, United Kingdom. However, we are focused not so much on awards but on the overall experience for our customers said Azmil Zahruddin, Managing Director of MAS (MAS on the path of transformation). The cabin crews (stewardess) wore the Malaysian traditional Sarong Kebaya to further emphasize the Malaysian Hospitality within its services. The Sarong was also used by Singapore Airline cabin crews since it shared almost the same culture with Malaysia. With its excellent cabin crew services, MAS have the upper hand against rivals such Air Asia, Thai Airways and Singapore Airlines Management Malaysia Airlines have strong and well designed organizational structure. Its talented management team always plays the most important role in planning and controlling every single action in their service system to perform the best brand experience. Although Malaysia Airlines management had face difficulties and losses several times, the management teams always have their own strategies to make sure that they are able to take this challenge as their opportunity to enhance their reputation and quality of the service. Previous CEO, Idris Jala, has been appointed as CEO in 2005 to tackled Malaysia Airlines huge losses that culminated further in 2006. Under his leadership, Malaysia Airlines unveiled its Business Turnaround Plan (BTP) in February 2006 which highlighted low yield, an efficient network and low productivity. Under his leadership, employee productivity improved and Malaysia Airlines recovered from financial turmoil within 1 year thus returning to profitability. With their strong product and quality services, Malaysian Airlines was ranked as a 5 star Airlines by SKYTRAX on par with Singapore Airlines and above Thai Airways and Air Asia. Fleet Currently, Malaysia Airlines operates 5 types of aircraft in its fleet which comprised of Boeing 747400, Boeing 777-200ER, Boeing 737-400 and 800 and the Airbus A330-200 and 300. Their long haul flights which utilized the Boeing 747 and 777 are all equipped with advanced AVOD (Audio and Video on Demand) for its passengers even in Economy Classes, an advantage over their rivals such as Thai Airways and Air Asia. Although the 747 is considered as an aging plane, Malaysia Airlines took the opportunity to refurbish and improved its in-flight entertainment which has won many appraisals from its customers. . Malaysia Airlines B777-200ER fleet has a two configuration which is Golden Club Class and Economy Class. Its B747-400 fleet has a three-cabin configuration, also including First Class. Malaysia Airlines premium cabins and Economy Class have been giving numerous awards for excellence in product and service delivery. Malaysia Airlines moving forward, planned to replace its aging 747 fleet with the new Airbus A380800 in 2012 to further compete for dominance in the Asian region.

Financials Another source of strength in Malaysia Airlines was its capability to turn losses into profits. Malaysia Airlines, had a strong financial, rebounding from their 2005 huge losses. Their Business Turnaround Plan or BTP was proven successful and the company experienced huge profitability from 2007 onwards. This was due to huge cost cutting activity implemented in the BTP. We can see in 2009 where their expenditure was the lowest post 2006 recovery thus improved their revenue to RM 493 million and better return on Shareholders Funds and Earnings per Share. Activities that turned losses back into profitability were cancelling some of the existing routes that were deemed unprofitable. Malaysia Airlines reduced its domestic routes from 114 to 22, and also cancelled virtually all unprofitable international routes. Malaysia Airlines also rescheduled all of its flight schedules and changed its operations model from point to point services to hub and spoke services. The airline also introduced the Project Omega and Project Alpha to improve the company's network and revenue consolidation. Six areas were the main focus, which were pricing, revenue management, network scheduling, opening storefronts, low season strategy and distribution management. The BTP was proven successful as profitability returned in 2007 with a record of RM 852 million. Currently Malaysia Airlines is implementing a second round of BTP called BTP 2 which concentrates on re-fleeting and alliance. MAS is focused on carrying out the BTP2 plan. Re-fleeting and alliance is part of the transformation plan said Zahruddin (MAS on the path of transformation) The main strength of Air Asia business model is focus on low cost operation which its simple goal on how to free air travel from clutches of the elites and makes it so affordable with famous tagline Now Everyone Can Fly. This low cost operation aligned with its vision to be the largest low cost airline in Asia and serving the 3 billion people who are currently underserved with connectivity and high fares. Air Asia targets guest who are prepared to do away with frills such as meals, frequent flyer miles or airport lounges in exchange for lower than those currently offered without comprising the quality and services. Guest can have choice of buying exclusively prepared meal, snack and drinks from the inflight service at an affordable price. Lean management of Air Asia attributed by fewer management levels, effective, focused and aggressive management had resulted very efficient cost efficient business model. It practices lean distribution system which offers a wide and innovative range of distribution channels to make booking and travelling easier for its guest. Air Asias ticketless service provides a low cost alternative to issuing printed ticket. Air Asia had very high aircraft utilization which optimizes the capacity of aircraft operation. The high frequencies of flight have made it more convenient for guest to travel as the airline implementation a quick turnaround of 25 minutes which is the fastest in the region.Streamline operation making the process as simple as possible is the key to Air Asia success. It worked towards single aircraft fleet, thus greatly reduces duplicating manpower requirement as well as stocking of maintenance part. This operation requires multi-skill staff and efficient workforce. The Air Asia business model adopt simple point-to-point network. All Air Asia flights are short haul four hours flight radius and less while sister airline Air Asia X focuses more on the medium to long

haul flights (more than four hours flight radius). The underlying business is to fly a person from point A to point B.

2.1

Weaknesses

We have identified Malaysia Airlines weaknesses through its offerings, personnel and financial. Introduction of low cost fares by certain airlines are certainly hurting Malaysia Airlines in the short run as they couldnt compete with these fares thus losing customers especially in the domestic market. Inefficient employees were the major contributor for Malaysia Airlines huge loss in 2005 and still continue to be an issue and financially weaker compared to its rivals such as Thai Airways and Singapore Airlines. Offerings Malaysia Airlines now needs to compete with Malaysia based companies in Malaysia such as Air Asia and international airlines such as Thai Airways and Singapore Airlines. Despite the fact where Malaysia Airlines does provides domestic and international flight services, majority of the customers of Malaysia Airline are international flight customers. If we compared with other airline companies, the cost offered by Malaysia Airlines is more expensive than others. Its domestic routes were almost completely taken over by Air Asia. With Air Asias low cost fares, Malaysia Airlines were not able to compete since its domestic offerings were more expensive. Customers willing to forgo comfort for cheap air fares and Air Asia were the customers preferred choice. Since Malaysia Airlines cancelled a few routes due to their BTP activities, customers were switching to other airlines that still maintain those destinations such as Thai Airways and Singapore Airlines. Even Air Asia is taking advantage of this situation with their flights covering most Asian destinations especially in India and China and theyre charging it cheaper. Personnel From our evaluation on Malaysia Airlines, the previous management team has set their objectives clearly and has the best strategies to obtain their objectives but at the same time, a portion of their employees did not know exactly how to implement the strategies effectively. That is why Malaysia Airlines has met many difficulties and losses in their business and need to turnaround the business to recover the problems and sometimes it needs high turnover rate among employees. Employee inefficiency was the major contributor that led to the RM 1.3 billion loss in 2005 which relates to poor management and decision making in terms of hedging increasing fuel prices and poor cost management in other areas such as maintenance, repair and air route planning. Other obvious weaknesses were inefficient planning in pricing and revenue management, sales and distribution, lack of brand presence in foreign markets and alliances with other airlines. The BTP was implemented later to tackled these employee problems but much work are still needed to improve Malaysia Airlines employees productivity especially in operations.

Financial Although Malaysia Airlines did manage to turnaround their losses in 2007, their financial performance was still mired by losses and this was proven in their 2011 first quarter loss of RM 237 million. In

comparison with rivals such as Thai Airways and Singapore Airlines which recorded almost stable profitability run and higher than Malaysian Airlines. Air Asia which was Malaysia Airlines main local rival, succeeded in overtaking their profitability performances. Malaysia Airlines is categorized as a Government Linked Company (GLC) status and Air Asia a public listed company but still Air Asia was able to overtake them with minimal government incentives. Malaysia Airlines later implemented the second BTP which was BTP 2 to improvise their financial performance and theres a plan to totally privatise the airline, free from government intervention. There are merits to a privatisation, it provides a shelter away from further downside volatility in the share price, while the company reshapes itself up for a re-listing in the future years'' reported by Maybank Investment Bank (Privatization of MAS) Air Asia weakness factors focuses on service recourses limited by lower cost with quality. Usually high quality supplies and service will need to come with premium price. Air Asia had limited access to source low cost supplies with quality application. This limited choice of supplies and services will put Air Asia at risk is there is any uncertainty occur in the future. Another weakness factor is the limited human resources that could not handle irregular situation. Lean system requires very stable employee utilization without any excess of backup system. In case of any problem arise from any employee, it wills definitely jeopardy the operation process flow as the backup system is not implemented. Most of Air Asia business had been outsourced to external party to ensure high efficiencies in business operation This factor on heavily reliance on outsource company will put a company at high level of risk. Any outsource company could not deliver their function, it will definitely affected Air Asia operation.

2.2

Opportunities (External Environment)

The areas of opportunities are concentrated in improving customer satisfaction in tandem with changes in customer preferences. We can see the trend now with customers preferences in low cost fares and better in-flight services. Customer preference Customers have different needs and desires in term of purchasing. Its because of the factors like demographic, psychographic, and geographic factor. To obtain a certain objective, Malaysia Airlines should be able to introduce a new concept of flying with Malaysia Airlines. It is because customers are human beings that can have various preferences. They can be influenced by many aspect of their life including the way of their lifestyle. For example, Malaysia Airlines are taking advantage of customers preference by serving more Malaysia and western meals in their menu and better in flight entertainment (AVOD) in their 777-200 and 747-400 fleet. A total of 37 menus are on offer over an 8 week cycle rotation to ensure that frequent travelers will be able to enjoy a variety of meals. New offerings such as Malaysian delicacies which included nasi impit with lontong, black pepper chicken balls with spaghetti, and waffles with fruit fillings. A permanent feature of this new menu is the option of western meals. Passengers will continue to enjoy unlimited in-flight beverages such as coffee, tea and fruit juices.

Low Cost Opportunity Due to uncertainty in global economy and increasing cost of living, customers nowadays are more cost averse and would seek the best deals in terms of travelling. With the low cost airlines such as Air Asia introduced low cost fares drastically, Malaysia Airlines is taking advantage of this situation by introducing its own low cost subsidiary called Firefly to cushion the impact on its domestic and South East Asia market. Firefly was able to penetrate the market and introducing its own brand of marketing and low cost packages to compete head on with Air Asia which has helped Malaysia Airlines to slowly regain its domestic and SEA customers. Malaysia Airlines itself are promoting cheaper air fares that travel on a certain date to various destinations. Customers now can log on to the Malaysia Airlines website and search for potential low fares and purchase it directly online. Medical Tourism With the Malaysian governments effort in promoting Malaysia as a medical tourism, Malaysia Airlines is currently promoting medical packages for its customers. We are expecting more than 200,000 passengers coming to Malaysia as medical tourists next year, said MAS senior general manager (network and revenue management) Dr Amin Khan (MAS for medical tourism) This is indeed an opportunity for Malaysia Airlines to introduce medical packages for potential health customers all over the world by partnering with local hospitals. Currently, most of the medical tourists are from Indonesia, Cambodia, Vietnam and Bangladesh. This trend is expected to increase by 16% over the next three years. Improved Fleets Malaysia Airlines has acquired newer and fuel efficient aircrafts such as the Airbus A380 and other Boeing aircrafts to compete further with its rival. Currently, Malaysia Airlines are still operating the aging Boeing 747-400 and by introducing better and technologically advanced aircrafts coupled with an excellent in-flight services, customers may inclined to use Malaysia Airlines as a preferred airline. Air Asia has a huge opportunity to expand its airline routing around the world. With the success of ASEAN airline market penetration, they are able to expand with bigger routing coverage around the world. Another opportunity is on fuel price volatility give a huge impact on commercial airlines business and squeeze out the unprofitable competitor. Apart from fuel hedging strategy on minimize the risk on fuel price volatility, the airline operator should be able to increase the load factor and fully optimize cost efficiencies. Another opportunity for Air Asia is the joint venture and partnership with global partner across the region. Air Asia has a very wide network and advertising coverage in the whole. As they have biggest share in Lotus F1 team and English Premier League game as both have very high potential to market Air Asia business. The F1 and EPL football fans are able to see Air Asia logo whenever they watch their favorite sport. It will indirectly attract more people to travel with Air Asia.

2.3

Threats (External Environment)

Threats are the elements from outside of the organization which could have negative effect on the company. There are some threats that will affect Malaysia Airlines such as economy, competitors, terrorism and political unrest, and technology. Economy Changes in economic conditions will adversely affect every business in many aspects. If the economy is in a crisis, it will affect the whole business globally. Malaysia Airlines has many connections throughout the world and it will give a big impact to the company if there are any changes in economy level. Thus, it is important for the organization to prepare some alternatives to overcome this problem because these unpredictable problems may occur anytime. Malaysian Airlines suffered its first unprofitability during the 1997 Asian economic crisis, a loss of RM 260 million for that financial year. Malaysian Airline did not anticipate and prepared for that crisis and suffered the consequences, though they took a cost cutting measures as a lesson-learned after the 1997 crisis. Competitors Obviously, Malaysia Airlines is not the sole Airline existed in the SEA area. Competitions were coming in from all corners, with intense rivalry from Thai Airways, Singapore Airlines and emerging low carriers such as Air Asia and Jet Star. These competitors were proven to be a major threat for Malaysia Airlines and they have to strategize so that they will not lose their market share, especially in the Asian region. Terrorism and Political Unrest. Terrorism is causing downward shift in tourism and adherently affect the confidence in airlines. It might happen in many ways of terrorism either in certain countries or it might happen in the plane itself. With threats such as hijacking and suicide bombers, consumers are adamant to fly unless the airlines could convince them otherwise such as improving security and better safety technology. Malaysia Airlines flies to 88 international destinations. In cooperation with code-share partner airlines, the airline serves more than one hundred destinations worldwide. Should terrorism happen in the Southeast Asia region, Malaysia Airlines need to stop their flight destination to that region for a certain time. Not just limited to SEA, terrorism could happen almost anywhere all over the world. Political unrest could also have an adverse effect on airlines. For example, in 2008, Thailands PAD or yellow shirts political demonstrators shut down the main international airport and flights were not able to land in Bangkok. Malaysia Airlines were severely affected by this event as Bangkok is one of its profitable routes in Asia. Technology Consumers satisfactions are the most important in any airline company, and it will be satiated if that airline commands better technology within its aircrafts and ground operations. Malaysia Airlines need to stay ahead in the market with improved technology to maintain its customers from defecting by using other airlines as a substitute. For example, Thai Airways recently announced that they are procuring newer and cost efficient planes from Boeing such as the new Dreamliner which is more cost efficient in terms of fuel consumption and bigger cabin space. Airlines will always look for better

ways to improve its services and by procuring the best technology thus Malaysia Airlines need to continuously invest in technology to maintain and improve customers satisfaction One of biggest threat in Air Asia business is government interference and regulation on airport deal and passenger compensation. Air Asia need to compromise with the local LCCT airport tax to MAHB which definitely incurred more cost to Air Asia. There is a critic on Air Asia proposal to build their stand alone airport for Air Asia in Labu, Negri Sembilan. Another biggest threat is the external factors on health disease such H1N1 which attack ASEAN region in 2009. Any disease and natural disaster will definitely affected the airline business and another factor would be impact on financial crisis which affected the whole business.

3.0

Rivalry Among Existing Competitors

All carriers develop various strategies to win market share and have adopted an aggressive promotion strategy which happens on a regular basis. The competition in airline industry is very intense as there are many airline firms operating on the same destination around the globe. In order to gain more market shares, they compete aggressively among themselves through cut price, offering special in-flight services, frequent flyer privileges and many other benefits. Competition exerted both internally and internationally. Cost leaders are also competing against premium, full service carriers.. Its consumption is also very much price sensitive and highly dependent on price. The exit cost for the industry is also high. Malaysia Airline and its main domestic competitor, AirAsia. We knew that AirAisa is positioned as a budget airline.

Many people tend to use AirAsia for domestic flight due to its lower price. In order to grab domestic customers, MAS joined into the price competition with the AirAsia by offering lower airfare while still maintain a high quality services that its competitors cannot reach.

3.1

Threat of New Entrants

There is a high barrier to entry of airline industry. Airline is very high capital-intensive, it needs a large amount of capital to start up the business. Other than that, flights between countries are very difficult due to the restriction of air right and it is difficult to obtain landing slots at the major hubs for the new entrant. Threat of new entrants is considered to be rather moderate. The threat is considered low in terms of airline industry being very much a capital intensive industry which requires costly aircrafts, expensive IT system to support it and the cost for setting up the plant, properties and equipment. Operational expenditure is also high in terms of costly fleet maintenance, hiring of pilots and cabin crews and many others. These huge capital requirements will hinder any incredible new players. The industry itself is highly regulated, especially in terms of securing routes and destination. However, the emergence of Low cost carrier business model will be able to entice more players into the market, subject to the fulfillment of items mentioned earlier. The deregulation of aviation industry in Asia Pacific region has resulted in more competitors entering the market. Furthermore, many full service airlines enter the LCC industry by launching their LCC version. For example, Nok Air set up by Thai Airways is a part of LCC industry in Thailand.

3.2

Bargaining of Suppliers

There are only two plane manufacturer in the world which are dominated by Boeing and Airbus. Due to the scarcity of plane manufacturers, the bargaining power of the supplier will be high. As air plane manufacturing is very highly skilled, hindering new entrants into the market. Backward integration by airline operators is also highly impossible, leaving most maintenance works and supply of parts to be in the hand of the supplier. The aircrafts engines are standardized so both aircraft manufacturers have similar engines. Boeing and Airbus both outsource their parts for their planes and generally use the same suppliers. The body frames and interiors is where the two manufacturers can differentiate their product. Due to the standardization of engines the switching costs of suppliers is reduced and airlines. (De Melo, 2000) However, the switching cost between two companies is very low since both of the companies can manufacture and sell the same standard of aircraft. Thus, it is better for airlines operate using different types of aircraft from two suppliers. It is benefited to the airline to get a better deal, for example, if MAS-AA found out that deal of Boeing is not lucrative, it can easily switch to Airbus. The suppliers of oil are very powerful to the airlines. Fuel price is the major cost to airline service without any substitution of energy to the oil.

However, MAS-AA can successfully hedge their fuel costs by the gain in the trade of fuel hedging contracts and jointly buying fuel to enjoy economies of scale. The latter has always hedged its fuel prices better than the former. MAS need the arrangement more than AirAsia but there are those at the national airline who are unhappy because the lucrative role of the middlemen in fuel purchases has been cut out. This will significantly reduce cost in lieu of MAS at group expenditure had gone up by 21% mainly due to higher fuel costs. MAS fuel bill for 2011 swelled by 33%, or RM1.46bil to RM5.85bil from RM4.38bil a year earlier. Jet fuel prices have risen from US$95 a barrel at the end of 2010 to US$133 at end-2011.

3.3

Bargaining Power of Buyers

The bargaining power of buyers in airline industry is relatively high compared to other industry. This is because there are many different airline services available. The customer can easily compare each airline through internet since all the information related to price and service is quite clear and detailed. For the case of MAS, it does not have any large customer that can demand concessions when purchasing airline services. Thus, even though the competition is intense, the power of the buyers can be reduced. It can focus on offering more high quality services to different segments of customer. Bargaining power is considered to be moderate due to the counteractive forces of both the switching cost and the market structure of airline operators. Airline industry is an oligopolistic market; giving buyers dont have so much to choose from. Airline operators will be able to dictate the terms to be in their favor. However, access for information is easily accessible; hence comparison can be made very easily, a disadvantage to the seller. Buyers can switch from one seller to another almost drastically. The power of buyers is low in the airline industry as switching costs are high. Most airlines are similar inside; its more the service that sets them apart. Most airlines follow each other on prices and cause buyers to pay their price, on the other hand new entrants my cause price competition and therefore a buyers market.

3.4

Threat of Substitute Products or Service

Threat of substitute services to airline is moderately low in Asian market. The geographical structure of Asia is archipelago and it is not convenient to use land transport or cruise to travel from one destination to another destination. Air travel is the faster and most convenient transport. Threat of substitutes is moderately low. Due to the archipelago geographical structure of Asia customers must have to transport by airplane or cruise. And air travel is faster and more convenient than cruise. Based on the environmental scanning performed, the demand for LCC is expanding thus LCC industry will keep growing rapidly. The LCC industry attractiveness and profitability will attract many full service airlines to launch its LCC version adding the degree of rivalry in this industry. As the implication, AirAsia, current market leader of LCC in Malaysia, Thailand, and Indonesia, will face competition from both existing and new players. In order to sustain its competitive advantage, AirAsia needs to leverage its competency in creating cost advantages across multiple value chains.

3.5

Short Term Strategy

3.6

Mid Term Strategy

3.7

Long Term Strategy

Their long term objective is they must have a strategic intent.

References Ireland, R D, Hoskission, R E & Hitt, MA 2009, The management of strategy concepts, 8th edn, South-Western Cengage Learning, USA Singh, K, Pangarkar, N & Heracleous, L 2010, Business strategy in Asia a case book, 3rd edn, Cengage Learning Asia, Singapore