External Analysis of AirAsia
An industry analysis was performed to assess the budget airline industry.
1. Bargaining Power of Supplier
Overall, power of supplier is high as there are limited (availability of) suppliers (only Boeing and Airbus), the switching cost is high (i.e. airplanes and their maintenance are costly), and there are few substitutes for airplanes (i.e. air travel covers longer distances in a shorter period of time).
2. Bargaining Power of Buyer
As there are almost no switching costs for customers switching from one budget airline to another, the bargaining power of buyer is moderately high. Moreover, customers are able to compare prices of budget airline via the Internet, giving them more choices.
3. Threat from Substitutes
Although there are several substitutes (i.e. trains and ships), the geographical structure of Asia has made air travel an efficient, viable, and convenient mode of transportation. Hence, threat from substitutes is moderately low.
4. Threat from New Entrants
Though the entry barriers are high (i.e. capital requirement and government restrictions such as air service agreements), threat from new entrants is moderately high. With increased deregulation by Asian governments, and growing demand for affordable low fares amongst budget-conscious travelers, competition increased (i.e. more full-service airlines launched their own budget airlines). For example, AirAsia’s success prompted several incumbents to start or being to consider starting their own budget airlines, which had the advantages of brand marketing and loyalty, and other benefits which overflowed from their parent companies.
5. Rivalry Intensity
Intensity of rivalry is moderately high due to the increased competition (with more competitors wanting a part of this growing lucrative market), and high exit cost. Exhibits 8 and 9 provide information on low-cost carries in Asia: from 1 budget airline (Cebu Pacific Air) in 1996 to 16 budget airlines by 2005, the entry of more low-cast airlines dramatically increased competition. AirAsia also faced competition from a broad range of airlines, ground transportation, and sea services.
Below are the opportunities and threats that have been identified using the PESTL model:
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).
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.
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.
In recent years, rapid economic growth resulted in a burgeoning middle class within Asia’s 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.
Overall, 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.
By utilizing information technology, AirAsia was able to the first airline in Southeast Asia 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.
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 AirAsia’s systems are not properly backed up and maintained (i.e. contingency plan in the event of a system disruption).
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. For instance, 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).
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.
• 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