Air Asia share price has been volatile, with the possible reasons for this volatility. Marketing: Discuss the Market Strategy and recommendations to enhance the USP by using Models and diagrams.

Operation Management:

Analysis of prioritise operations issues which are of strategic nature for the company and possible solutions.

Module Code: MGTM IM 002

Submitted to: Programme Administration Team (Kaplan Financial)

Submitted by: Group 11

Group members Name: Student ID No.

Chanakya C0346816

Buddha C0364220

Musharaf C0361333

Saif C0360683

Submission Date: Friday 23rd April, 2010

Table of Contents

Table of Contents 2

1. Introduction: 3

2. Company Background 3

3. Meaning of Share Price Volatility: 3

3.2. Possible reasons for this volatility: 4

4.2. Mareketing Strategy of Air Asia: 8

4.3. Environmental Analysis of Air Asia on the basis of Porter’s Five Forces (Chart-3) 9

5.1. Air Asia Business Process 11

5.2. Air Asia prioritises issues: 12

5.3. Possible solutions 13

6. Conclusion 14

7. References: 14

1. Introduction:

The company chosen for this report is Air Asia assigned by Kaplan Financial and assignment requirements as follow:

A report of no more than 3500 words

Possible reasons for the share volatility

Market strategy to enhance USP

Operational issues and possible solutions

2. Company Background

Air Asia was initially established in 1996 as a full-service regional airline offering slightly cheaper fares than its competitors. It was not performing well and its turning point was 2001 when it was bought by Tony Fernandes.

Tony Fernandes restructured the company and re-established in Malaysia by enrolling some low cost airline expert like Connor McCarthy (formal director of successful European LCC Ryan air) in late 2001 as first no -frills, low cost carrier(“LCC”) in Asia, then it got huge success and become awards winner and largest low fare airlines in the Asia. Now Air Asia flies to over 61 domestic and international destinations with 108 routes with its own 72 aircrafts and operates over 400 flights daily.

Air Asia believes in the no-frills, hassle free, low fare business concept and feels that keeping costs low requires high efficiency in every part of the business. Through its unique selling point (USP), “NOW EVERYONE CAN FLY”, Air Asia gained a revolution in airline business with more and more people choosing as their preferred choice of transport.

3. Meaning of Share Price Volatility:

Many of us use the word volatility in a loose sense, in a way that belies the accuracy with, which it can be calculated. In fact, volatility is a statistical measure of the scale of fluctuations in the price of a share, a commodity or a stock market index in the recent past. It is generally taken to be a good measure for the relative riskiness of an asset – the higher the volatility, the greater the risk of losing money. Volatility, however, is not a static thing. It fluctuates – sometimes quite sharply – over time. (Peter Temple 02.08.2007)

3.1 Air Asia Share Price Volatility:

As per Air Asia case study the share price of Air Asia has been volatile.

Exhibit 5: Case Study

Airline

Price on

3Dec 2007

US$

Price on

11 Jan 2008

US$

Share Price

Change

Air Asia

0.52

0.43

-16%

Period of Change in Share Price:

In a very short term of a period share price of Air Asia goes down by -16% in a period of 1 month and 1 week this is extreme change in share price so this is the sign of high volatility in share price.

Air Asia Volatility from 2005-2009 (Chart -1)

3.2. Possible reasons for this volatility:

There are lots of reasons for share volatility here in our case study of Air Asia. We have calculated on the basis of each year that volatility graph of Air Asia shown above.

Latest Information in Stock Market: Investing on share price needs lots of information about company’s present situation. Investor always invests their money if they saw the potential of getting good return from that investment. So information plays vital role to attract the investors. |Market adjusts the prices up or down depending on the way the market interprets that the information will affect the company’s future earnings ability.

In Air Asia case study in November 2004 they listed in Malaysia Stock Exchange that air Asia is going to purchase 175-aircrft airbus A320-200 to replace Boeing 737-300s because A320-200 more fuel efficient.

This information attracts the investors to invest their money because market interprets that this will affect the company’s future earnings ability.

We can see in chart-1 in 2005 how share price go up by +0.63% so it shows the latest information has direct impact on share price volatility.

Uncertainty: Future is always uncertain some decision is made on the basis of future predictions. Investors are always keen on the past experience, current performance and future expectations of the company. Uncertainty is a major barrier for investor to make their mind to invest in share market.

What exactly had happened in the Air Asia, in 2006 they choose to enter in to a domestic-route rationalising arrangement with MAS. Under this contract Air Asia took over more than two-thirds of MAS’s loss making routes assuming they can make profit from it as they are the LCC but this decision turns wrong because of uncertainty which is clear in chrat-1 that company’s share price goes down by -5.03% .

Psychological Issues on Stock Prices: Human behaviour is one of the important factor that affect the share price of the company how investor think about the company will determine whether to invest in it or not.

Entering the British tycoon, founder and chairman of the Virgin Group Sir Richard Branson with 20% stake in Air Asia X in 2007. Expansion of business with Sir Richard Branson attracts the large numbers of investors in the company because psychology of people believes the successful image of Richard Branson which as a result there is hike of share price by +6.62% in the year 2007.

Inflation: The overall general upward price movement of goods and services in an economy, usually as measured by the Consumer Price Index and the Producer Price Index. Over time, as the cost of goods and services increase, the value of money is going to fall because a person won’t be able to purchase as much with that money as they previously could.

Inflation is also one of the factors that affects the share price and leads to share volatility. As from the case study fuel cost had a significant impact on Air Asia, as it was the recession time occurs during the year 2008 were the international oil price reached at the high of about US $150 per barrel. So it was very costly for the airlines to purchase fuel at that high price which leads to increase the price of the tickets. As it was the recession time customers also could not afford the increased price plane fare so they used the alternatives way. Where there is less numbers of customers airline industries had lost Billions of dollars due to that occurrence. So inflation affected the share prices a lot.

Although Air Asia tried to cover its operational cost by hedging, buying fuel-efficient airbus A320-200 and cutting fuel consumption by nearly and doubled the number of landing that we get from the tyre. They were not able to sustain on the same price of tickets.

As per exhibit 6: case study.

Following are the calculation:

Fuel and oil ratio = fuel and oil cost ÷ Revenue

(2008) Fuel and oil ratio= 74164.88÷146731.5

(2008) Fuel and oil ratio= 50.5%

(2007) Fuel and oil ratio= 44488.62÷111346.3

(2007) Fuel and oil ratio= 40.0%

Δ% = Current year ratio-base year ratio ÷ Base year ratio

Δ% = 50.5-40.0 ÷ 40.0

Δ% = 26.25%

So cost of the fuel increased by 26.25% due to hike in oil price in 2008 the cause of inflation has direct impact on company’s net profit ratio if net profit is going to decrease so investor don’t want to invest their money in non profit company. See chart-1 due to inflation the share price decreased by-45.34% in 2008.

Demand and Supply: It is another important factor that affects the share price. Demand is willingness and ability to pay where as supply depends on the market demand and suppliers ability. When demand is high supply is less and vice versa and when demand is high price of the product is also high and is low.

In case of AirAsia recession caused its demand per share down in 2008, entering of British tycoon Richard Branson increased the demand of share because of investor’s psychological beliefs. Restructuring of the no-frills, low cost in Asia increased the numbers of customers travelling with Air Asia which gives the US$6 million of profit December 2002 which obviously rise of demand of share which leads to increased in share price.

Economic Strength of Market and Peers: Doing business in current market everyone should know the market strengthens and the competitors of the business without considering these things it is impossible to do business. The economic strength of the peers heavily affected the share price of the company.

The strong competitor of the Air Asia is MAS, as it is national carrier of Malaysia. To promote healthy competition in 2006 Malaysian government brought MAS and AIRASIA together then government starts with route rationalisation of MAS where Air Asia took 96 loss making routes of MAS while these routes were operated by MAS government used to provide subsidies for the fuel cost. This is totally unfair competition which leads share price down of Air Asia in 2006 you can see in chart 1.

In 2008 MAS come up with the unaccepted “everyday low fare” Campion .It received an over whelming response which was funded by the government it was totally win-win position for MAS and that caused negative impact on Air Asia in 2008 which is clear from chart-1.

4. Definition of Marketing Strategy:

A marketing strategy is a process or model to allow a company or organization to focus limited resources on the best opportunities to increase sales and thereby achieve a sustainable competitive advantage.

4.1. Porter generic strategies:

Strategy on the dimensions of strategic scope and strategic strength. Strategic scope refers to the market penetration while strategic strength refers to the firm’s sustainable competitive advantage. The generic strategy framework (porter 1984) comprises two alternatives each with two alternative scopes. These are Differentiation and low-cost leadership each with a dimension of Focus-broad or narrow.

Product differentiation (broad)

Cost leadership (broad)

Market segmentation (narrow)

(Chart-2)

4.2. Mareketing Strategy of Air Asia:

After the restructured of the airline, the foundation is based on Low Cost and Strong Cash Flow,strategy is based on Low fare and service so goal is obviousely on high margin and sustainable growth and vision is continue to be LOWEST cost. So you can see they are totaly focusing on the Low cost & Low Pricing so they getting strong cash flow & sustainable growth.

So they are following porter’s generic strategy. Their strategic scope is referring to market penetration and while strategic strength refers to the firm’s sustainable competitive advantage. (On the basis of chart-2)

Product differentiation: Air Asia was the first airline operator in Asia to adopt with the low-fare, no-frills concept. It also becomes the regions first airline to introduce fully ticketless travel and implements free seating policy. That’s Product differentiations makes It a successful airline in the market.

Cost leadership: Air Asia become the businesses that fully adopted cost leadership through operational effectiveness and efficiency. The cost advantages were enabled Air Asia to offered airfares 40% to 60% lower than those of its rivals. Some even cost less than bus fare. Even in 2008 when oil prices gone up they controlled over the cost by layered-hedge strategy to pay for fuel in advance and qualify for low price its pilots have cut fuel consumption by nearly 20%.

Market Segmentation: Air Asia changes the human psychology in Asia by offering low fare and targeting middle class society. Earlier people think that only rich people can fly but then come with the No Frills, Low Cost Carrier under the tagline “Now Everyone Can Fly”. This whole idea captured the middle class and now no one is felling faired to fly.

4.3. Environmental Analysis of Air Asia on the basis of Porter’s Five Forces (Chart-3)

The threat of the entry of new competitors: Air Asia is using penetration strategy under this there is always threat of the new entry exist because Air Asia is get success in the field of LCCs so now everyone want to do same business with same strategy.

The intensity of competitive rivalry: Competition rivalry is currently in Air Asia’s favour. With price being the main battlefield of competition, Air Asia leads the way due to its low operating costs. However, there are more competitors entering the market that have major carriers as backers or owners which may lead to an ‘unrealistic’ price war in the future.

The threat of substitute products or services: Air Asia is domestic carrier so there is existence of substitute services are high customer can go for Bus services either for Railways or for their own transport facilities because of low distance if their services and prices are not effective.

The bargaining power of customer: Today is world of Information Technology and communication everyone can find the world easily so easy availability of information and knowledge can make the bargaining power of consumer strong. E.g. customer can easily switch to other airlines by comparing the fares of different airlines. Even there are now lots competitors in LCCs so customer can easily move.

The bargaining power of suppliers: For Air Asia bargaining of suppliers is major factor. In the airline industry basically there are only two major aircraft provider Boeing and Airbus. Although Air Asia is major customer of Airbus even than the bargaining power of suppliers is high due to expertise and few substitutes.

4.4. Unique Selling Proposition of Air Asia: Fernandes restructured Air Asia in 2001 , with the No Frills, Low Cost Carrier under the tagline “Now Everyone Can Fly” this unique selling point for Air Asia. This new business model was huge success. With this new unique selling point the company gained impressive profit. Then they come with “Easy to Book, Easy to Pay & Easy to Fly” to encourage sale through online booking, telephone booking and through co-partner local banks and post offices.

4.5. Recommendation: Some modification in current market strategy on the bases of Marketing Mix (7Ps) to enhance Unique Selling Point.

Product (service): There is a huge opportunity for Air Asia to expand its route and service and numbers of flights, they also lacking in good service in terms of flight delay. Because of it they get lots of complaints they should work on that to enhance good service

Price: They are working on penetration price strategy and under this they are providing the cheapest price in the market and that is a strengths but if you see the margins per seat is very low it makes turn over high but not the net profit so they should control the operating cost to cover up that margin. So they should go with penetration.

Place: Presently Air Asia’s putting more stress on Malaysia. Singapore, Thailand and Indonesia wherever Air Asia X only on Australia but low cost concept can also capture the market of India, China, Pakistan and Bangladesh and for long haul they can go for Europe and US.

Promotions: As LCCs they are moreover targeting the middle class so to keep up the sale and to enhance USP they should come up with the new promotions scheme after a certain period of time because middle class is major customer, they should know they like changes and savings in their purchasing.

People: From the starting they are only providing standard-class service on board its seems they are not targeting business class so if they come up with some of its more business concerned routs with business class they must get positive response.

Process: Refers to the systems used to assist the organisation in delivering the service. Process must be very easy so that customer feels comfortable and convenient and preferred again and again.

Physical Evidence: Where the service is provided. Physical Evidence is factor which makes customer to make judgement on the company or service. E.g. Customer accept what he/she spent so from the starting Air Asia’s tag line is No Frill airline but if you provide the frills even in the low cost it makes everyone happy. My meaning for frills is good service with the outstanding staff presentation and an unexpected interior of the craft.

5. Operation Management:

The collection of people knowledge, technology, and systems within an organisation that has primary responsibility for producing and providing the organization’s products or services is referred to as operations. Operations management is the planning, scheduling, control and co-ordination of the activities that transform inputs into finished goods and services. It is important because it can reduce costs, differentiate the organization’s products and services and impact upon quality and therefore may increase revenue through increased customer satisfaction. (Phil Kelly 2009).

This section is a process analysis to identify and prioritise current strategic operation issues and possible solution for Air Asia.

5.1. Air Asia Business Process

Air Asia’s Operations management is focusing carefully on managing the processes to produce and distribute its services.

These processes include:-

Procurement:- buying various materials from suppliers and vendors

Management control and coordinating functions to ensure goals are being met.

Product (service):- managing the service- creation, development, distribution and sales.

Quality management: – important to effective operations management by continuous improvement.

Inventory management:-Method like JUST-IN-TIME inventory control saves costs and improves on quicker delivery to end customers.

Logistics management: – focuses on the flow of services from Air Asia to its customer prioritizing on efficiency and cost effectiveness.

Distribution channels.

8) Booking by mobiles is also available.

5.2. Air Asia prioritises issues:

1. Air Asia always focused on how to reduce inefficiency and make it low possible fare in the airline business: As we know they are operating penetration on market strategy to reduced costs, they even reducing the salaries and incentives of the employees, cutting down the staffs and even cutting down this facilities given to staffs and implementing the new efficient system like YMS, CRS AND ERP, which were helpful to reduced the cost but not to that extent.

2. Higher fuel cost around the world: Frequent fluctuation in fuel cost is one of the major problem for Air Asia as its emphasis on low cost their profit margin per ticket is low as price of fuel goes up they have to charge tickets price which creates negative effects in customers eyes.

3. Complain: It’s because of delay in flight and even cancellation is one of the major current issues in Air Asia.

4. No maintenance, repair and overhaul: As we know they don’t have their own maintenance, repair and overhaul so they have to spend on maintenance, repair and overhaul.

5. Incresing competition: At present competition in the airline industries growing day by day many full service airlines start cut costs to compete and new entry of LCC.

6. Aviation regulation and government policy: Changing rules and regulation in aviation industry and government policies is also one of the issues that Air Asia facing today.

7. Easy to buy, easy pay and easy to fly: In Malaysia Air Asia company was the first internet ticket seller airlines company. They are offering “Easy to Book, Easy to Pay & Easy to Fly” system for their customers. So customers are easily paying and booking their ticket by online

5.3. Possible solutions

1. Cost control: As we know cost is one of the main possible solutions that can save any organisation from loss and compete in the competitive market. Air Asia can save their cost by starting their own maintenance and repair wing and overhaul routes.

2. Implementing the APS system: Implementation of APS system will provide several new functions to Air Asia. The followings are several APS’ functions that can help Air Asia in increasing its performance:

APS system will help Air Asia in assessing suppliers’ performance and providing the capability to streamline monitoring process. (Aberdeen Group, 2004).

Supplier portal will provide information hub for airlines and their suppliers to prevent errors happened during operational activities such as order processing (Aberdeen Group, 2004)

These functions enable airlines and aircraft manufacturers and other suppliers to have collaboration strategy in managing inventory (e.g. spare parts), maintenance schedule, and design collaboration. Route profitability analysis tools enable airline companies to conduct analysis for planning efficient routes.

3. Outsourcing: Air Asia can use outsourcing strategy to be a lowest carrier in airline industry. If they can implement outsourcing strategy then they will get some benefits like,

Cost benefits

It will reduce risk.

Outsourcing can give competitive advantage in Air Asia.

Air Asia can reduce cost for IT.

4. Expansion of Air Asia business: As Air Asia is focusing on middle class people its expansion towards Indian and China has potential to gather the huge success. We know the population of Asian middle class are rising very fast. So it is a great opportunity for LCC cost airlines including Air Asia to expand their business in Asia.

6. Conclusion

As we know Air Asia is a leading low fare airline in Asia. Its low cost attracts more and more customers and its market value and has increased its revenue. But knowing it from near its share price is volatile so management should focused on sustainable development with utilising marketing mix as we discussed above and should focused on customers as customers are key point for the company’s success. Only low cost will not sufficient to survive in the competitive market. Providing good services like as they are saying easy to book, easy to buy and easy to fly but it is not always the facts as they are getting complains of delaying flight and even cancellation which makes bad reputation in the eyes of customers. That’s why they need to operates APS systems to overcome such a problems.