Contents

Contents ........................................................................................................................... i

1.0 Introduction ............................................................................................................... 1

1.1 Background of the Company ............................................................................................... 1
1.2 Current Performance .......................................................................................................... 2
1.3 Vision & Mission of AirAsia ................................................................................................. 2
1.4 AirAsia’s Values, Objectives and Strategies ......................................................................... 2

2.0 External Environment ................................................................................................. 3

2.1 PEST Analysis (Societal environment) .................................................................................. 4
Political Factor ................................................................................................................................ 4
Economic Factors ........................................................................................................................... 4
Social Factor ................................................................................................................................... 5
Technological Factor ...................................................................................................................... 5
2.2 Porter’s Five Competitive Forces (Task environment) .......................................................... 6
Bargaining power of buyers ........................................................................................................... 6
Bargaining power of suppliers........................................................................................................ 6
Rivalry among existing firms .......................................................................................................... 6
Threat of new entrants .................................................................................................................. 6
Threat of substitute products ........................................................................................................ 7

3.0 Internal Environment .................................................................................................. 7

3.1 Marketing .......................................................................................................................... 7
3.2 Financial............................................................................................................................. 8
Liquidity Ratio................................................................................................................................. 8
Leverage Ratio ................................................................................................................................ 9
Profitability Ratio.......................................................................................................................... 10
3.3 Research and Development .............................................................................................. 11

4.0 Analysis of Strategic Factors (SWOT) ......................................................................... 12

4.1 Strengths ......................................................................................................................... 12
4.2 Weaknesses ..................................................................................................................... 13
4.3 Opportunities ................................................................................................................... 14
4.4 Threats............................................................................................................................. 15

5.0 Strategy Alternatives and Recommended Strategy (TWOS) ....................................... 15

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 5.1 SO strategies .................................................................................................................... 16
5.2 WO strategies .................................................................................................................. 16
5.3 ST strategies ..................................................................................................................... 17
5.4 WT strategies ................................................................................................................... 17
5.5 Strategies breakdown ....................................................................................................... 17

6.0 Implementation ........................................................................................................ 18

7.0 Evaluation and Control.............................................................................................. 19

References ..................................................................................................................... 20

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1.0 Introduction
Most of the successful organizations in the world have been relying quite heavily on the
strategic management. This of course includes airlines industry with no exception for
AirAsia. This report will be tackling this award-winning Malaysian-based low-cost carrier by
analysing its weaknesses and strengths to come up with the best strategy plan for the
company. This analysis will of course be done with the help of strategic tools such as
Michael Porters Generic strategies, PEST analysis, SWOT matrix analysis, Porter’s
Competitive Forces Model, Financial Ratio Analysis as well as TOWS matrix. Based on this
analysis, some strategies that are relevant to be adopted by AirAsia in pursuing its
competitive differentiation and profitability will be recommended.

1.1 Background of the Company

In 1993, AirAsia was founded, and the organization launched its operations on November 18th,
1996 (AirAsia, 2011). The organization was initially owned by the DRBHicom company
which is government related and was a greatly indebted airline company which was later
purchased by Tune Air Sdn Bhd, a company that was owned by the previous Time Warner
executive, Tony Fernandes. In 2002, Tony Fernandes then made AirAsia a profitable
organization and initiated new travel routes from it Kuala Lumpur International Airport hub at
a rapid pace, weakening previous monopoly operator, Malaysia Airlines (MAS) with low fares
that go as low as RM1 which is equivalent to US$0.27 (Hutt, 2016).
In 2003, AirAsia initiated it first international flight to Bangkok when it launched a
second hub at the Senai International Airport located in Johor Bahru (AirAsia, 2014). Later
on, AirAsia then began a Thai subsidiary, added Singapore to the list of destination as well as
started flights to Indonesia. In June 2004, flights to Macau commenced, while flights to
Mainland China (Xiamen) as well as the Philippines (Manila) commenced in April 2005. Other
than that, the Vietnam and Cambodia flights only commenced later in 2005 while flights to
Brunei and Myanmar commenced in 2006 which was done by Thai AirAsia. AirAsia then took
over Malaysia Airlines’s Rural Air Service travel routes to Sabah and Sarawak on August
2006, operating under the brand, Fly Asian Xpress whereby the routes were afterward reverted
back to MAS wings after a year mentioning commercial purposes. In Asia, the presence of
AirAsia has further been enhanced and strengthened due to it route network that links all the
present cities in the region as well as the expansion into Indonesia, Indochina, India as well as

1
China. In regard to the improved rate and addition of new travel routes, AirAsia is expected to
have a growing number of passenger volume (Mutum, et al., 2013).

1.2 Current Performance

AirAsia Berhad had posted its lower earnings for the first quarter of 2017 financial year that
ended on March 31 although it has been getting higher revenue. The reason for this is because
the strong US dollar has exacerbated the soaring fuel cost which resulted in AirAsia’s fuel
expenses to jump to RM 680.8 million; an increase of 81 %. As reported to Bursa Malaysia,
AirAsia stated that its earnings for the first quarter of financial year 2017 were at RM 615.81
million, which is a decrease of 30 % although the company had experienced a surge in its
revenue by 31 % to RM 2.23 billion. This growth in revenue is said to be derived from an
increase in the total passengers carried of 6 % in addition to a strong seat load factor of 89 %
during the first quarter of 2017 compared to 85 % during the first quarter of 2016. Nonetheless,
AirAsia still experienced a fall in its total net operating profits to RM 267.1 million with a
drop worth RM 70.7 million (Star Media Group Berhad, 2017).

1.3 Vision & Mission of AirAsia

AirAsia has a vision of becoming Asia’s largest low-cost airline that will be serving the 3
billion currently underserved people as the result of poor connectivity or high fares. AirAsia
also aspires to be the leading low-cost carrier in Asian region that will be offering five-star
service with 95 % of on-time performance.
In addition to this, AirAsia also wanted to promote the hospitality and the food of
Malaysia to the world at the same time. Apart from that, AirAsia also would like to develop a
line of products and services and not just focusing on the customers while charging the lowest
fares. Due to this, AirAsia made it as its mission to be the best employer while creating an
ASEAN brand that is globally recognized. In addition to this, AirAsia also aim to be the lowest
cost budget airline that will always maintain the highest quality for their services while
embracing all the technology development that are to come.

1.4 AirAsia’s Values, Objectives and Strategies

The value system of AirAsia which revolved around its business model, core values and
vision is the centre of its success in Malaysia as the leading low-cost airline. Its core values

2
adopted maintaining highest corporate integrity’s standard, focusing on customer, safe
practices, commitment for performance excellence as well as valuing the employees. Both
the objectives and goals of this leading low-cost airline are guided by its corporate mission
and vision. In addition, this also include highlights on customer focus, safety, development
of human capital and operational excellence.
In order to maximize the value of the shareholders, AirAsia intended to generate
more profit through the business expansion to other countries in Asia. In conjunction to this,
the company has prudently been adding network and routes in a calculated way to ensure
risk reduction of business loss.
AirAsia aims to serves up to 70 million passengers annually for six consecutive years
starting from the year 2014. This is in conjunction to the development of the low-cost carrier
terminal at the Kuala Lumpur International Airport known as KLIA2. This terminal was
meant to be turned into the local hub specifically for budget travel. Apart from that, AirAsia
has been introducing more routes while adding flight frequencies to further develop the
existing routes.
Due to this, AirAsia ensure that its business strategy is aligned with its mission
statement by centring it on cost leadership. Despite this, the business strategy of AirAsia
actually only targeted a certain market such that of the price sensitive customers who need
short-haul flights. The competitive advantage of AirAsia was built and sustained by the
company through services offered at a lower price in comparison to the competitors’. For
low-cost businesses such as AirAsia, the main characteristics that they will have are the
effectiveness of the company’s operations and the outstanding efficiency of their operations.
Cost Leadership Differentiation Focus
TYPE 1
Size of Market

Large TYPE 3 -
TYPE 2
TYPE 4
Small - TYPE 3
TYPE 5
Table 1: Michael Porter’s Generic Strategies Table.

2.0 External Environment

In order to develop an effective strategy for AirAsia, it is crucial to analyse the external
environment such as societal environment and task environment in which affect the
competitive advantages and performance of the company.

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2.1 PEST Analysis (Societal environment)

PEST analysis can be used in analysing the factors that are under societal environment.
These factors can be broken down according to PEST analysis into four groups, namely
political, economic, social and technological.

Political Factor
An on-going alliance is occurring in the airline industry due to growth of privatization as well
as government-deregulation all over the world. Not to mentioned that most governments were
instrumental in the success of most Asian airlines especially since the organizations had
substantial or full state of ownership as well as control and management.
Both de-regulation and privatization of airlines have resulted in the opening of new
routes and airports that deals through open-skies agreements between countries or perhaps
through the private airlines’ entry permission that will reduce the limitations for international
airlines. This type of agreement has allowed new airlines such as AirAsia to be able to access
the domestic routes of other countries resulting in the company to be able to go for long haul
flight services as well as penetrating into the market share that is unexploited.
However, the airline industry was also affected by the global uncertainties in today’s
era of globalization. These uncertainties include accidents, terrorism attacks as well as
disasters that potentially capable of influencing the confidence of a customer to a certain level.
AirAsia will possibly be facing the threat of losing its profitability if confidence of the
customer is affected that can potentially lead to bankruptcy at worst.
As a low-cost airline, AirAsia is also subjected to the regulations in the aviation field
and government constraint, infrastructure as well as the geography of Asia and the preferences
in travelling by the customers. Generally, in terms of political, there are a higher rate of
opportunities rather than threats. Since AirAsia is required to undertake some regulations by
the government in Malaysia, the airline could simply reduce or restrain the negative effects by
choosing the most favoured routes.

Economic Factors
Due to the downturn in the world’s economy, it has resulted in the decreased business in the
airline industry which in turn also affects the budget airlines as well. Nonetheless, in regard
to the circumstances, it has produced an opportunity as the costs of airplane leasing were

4
immensely reduced by around 40%. This allowed AirAsia to lease the planes at a much
lower rate, thus offering customers cheaper fares.
In this time stagnation, the industry of air transportation also suffers instability in the
price of fuel. As the fuel price increased, it affected the costs of operation in the airline and
this would ultimately result in the reduced yield as well as worth. Hence, the economic
trends that AirAsia faces is inevitable. However, the opportunities presented by the
stagnation balanced the threats and provided AirAsia with the chance for expansion.

Social Factor
In the recent years, the growth of the economy has resulted in the quick increase in the
middle-class population, mainly in Asia and thus impacting an increased need in air travel.
The increased trade and tourism in Asia has also affected the need for increased air travel
and more people are now keening to travel at low cost as well as compromise on the food
and other kinds of services while traveling. Budget airlines attract people due to their low
costs which can go as low as 10-20% compared to charges of other service airlines. AirAsia
is given the opportunity to implement a diversity strategy in order to separate itself from
other rivals in the current circumstance by presenting good customer service of that of full
service airlines but with low traveling costs which in turn provides AirAsia with the
competitive edge. Additionally, AirAsia currently provides service; for instance, in-flight
food and drinks, online sales for hotel, holiday reservation, car, travel insurance and even
branded credit card.
In the event that AirAsia did not take precautionary measures when applying the
diversity strategy, it could cause an increase in the cost of operation in creating services that
add value. In conclusion, the opportunities presented compensate for the threats in the aspect
of cultural/social.

Technological Factor
One of the factors that can be related to technology is the utilization of information
technology by AirAsia. On the foundation of this statement, AirAsia is actually the first
airline to that incorporated e-ticketing in Southeast Asia to break through the wall of
traditional travel agents. Due to this, AirAsia managed to cut their cost to issue physical
ticket for the customers, which also eliminate the need for bookings and reservations systems
that are large and expensive as well as offering commissions to the agents. However, relying

5
heavily on online sales will also pose some risks such that of system disruption. Despite this,
the risk can be reduced if AirAsia prepared an appropriate back-up system or preventive
maintenance in addition to a contingency plan to curb the issues.

2.2 Porter’s Five Competitive Forces (Task environment)

Porter’s Five Competitive Forces can be used to analyse the next external environment; the
task environment. This can be explained based on the rivalry among existing firms,
bargaining power of suppliers, the bargaining power of buyer, the threat of substitute
products and the threat of new entrants.

Bargaining power of buyers

There is almost no cost involved if the customers intended to switch from an airline to
another especially since a lot of airlines available for them to choose from. Not to mentioned
that customers actually are able to make a comparison of the tickets prices between every
airline through the internet and thus resulted in the price to be rather elastic especially for air
travel specifically for leisure.

Bargaining power of suppliers

The bargaining power of suppliers can be defined as the market of inputs that includes
components, labour and raw materials. The bargaining power of suppliers in airline industry
is actually quite low mainly because of the existence of stiff competition between the
supplier of aircrafts. These usually involved companies such as ATR, Boeing and a few
others.

Rivalry among existing firms

Rivalry among existing firms is extremely high especially for budget airline companies like
AirAsia. The reason for this is mainly because of the growth of in competition by many
airlines as well as high exit cost. Besides, AirAsia also faced some intense competition from
a broad range of other airlines in addition to maritime services and ground transportation.

Threat of new entrants

The threat of new entrants for airline industry is relatively low mainly because the barriers
are high. These barriers include the capital requirement as well as restrictions by the

6
government such as air service agreements. Despite this, de-regulation made by Asian
governments as well as an increase in demand for affordable low fares among customers
who are budget conscious have also resulted in the competition in airline industry to
increase. Not only that, the overwhelming success of AirAsia has also prompted most full-
service airlines to launch their own low-cost airlines such as Firefly that was launched by
Malaysian Airlines Systems (MAS). Since these new entrants possess the advantage of brand
marketing as well as loyalty and a few other benefits overflowed from their parent
companies, the threat of substitutes has become sizeable.

Threat of substitute products

Airlines industry has quite a number of substitutes which may include road, rail as well as
maritime carriers or in other terms, land and sea transportations. Despite this, the threat of
substitute for AirAsia is relatively moderate especially in Asia. The main reason for this is
because AirAsia’s customers are unable to use those substitutes due to geographical reasons.

3.0 Internal Environment

Apart from external environment, AirAsia is also affected by internal environment. Internal
environment can further be grouped into several factors such as financial, information
technology marketing as well as research and development.

3.1 Marketing

As Asia’s leading low-cost carrier, AirAsia has decided to partner with Yahoo! Mobile to
promote its mobile campaign (Dadwal, 2009). The company seek to encourage their
customers via interaction with users through the platform so that they will be able to increase
the overall awareness on the company. Besides, this decision was also made for the purpose
of shouting out about their promotions throughout Asia.
Objectively, to create and retain the awareness within their extent, the mobile
marketing and advertising solutions of Yahoo generates an important benefit for AirAsia.
There has been numerous success through the campaign throughout seven targeted markets
which consist of Singapore, Malaysia, Indonesia, Thailand, Philippines, Hong Kong as well
as Taiwan (Dadwal, 2009). AirAsia then became the first organization in Malaysia on Yahoo
Mobile and the campaign success displayed how mobile marketing could aid brands
effectively communicate with the fast-rising mobile consumer base.
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3.2 Financial

Apart from marketing strategy, it is also critical to look at another important function such as
financial position of the company. This can show how the company made its decisions on
investment, financing and dividend. According to AirAsia’s annual reports of 2016, the
company’s revenues have been increasing constantly every year for the past 5 years.
AirAsia’s revenues for the year 2012, 2013, 2014, 2015 and 2016 are RM 4946000, RM
5112000, RM 5416000, RM 6298000 and RM 6846000 respectively (AirAsia Berhad,
2017). In order to further evaluate the relationships of the financial statement’s items,
financial ratio analysis will be conducted on AirAsia. For this purpose, AirAsia’s financial
ratios from the year 2015 and 2016 will be utilized to determine of its trend and
performance.

Liquidity Ratio
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑅𝑎𝑡𝑖𝑜 =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

2016 2015

𝑅𝑀 4,774,167,000 𝑅𝑀 4,286,379,000
𝑅𝑀 4,917,971,000 𝑅𝑀 5,271,716,000
= 0.970759486 𝑡𝑖𝑚𝑒𝑠 = 0.813089893 𝑡𝑖𝑚𝑒𝑠
≈ 𝟎. 𝟗𝟕 𝒕𝒊𝒎𝒆𝒔 ≈ 𝟎. 𝟖𝟏 𝒕𝒊𝒎𝒆𝒔
Table 2: Liquidity Ratio – Current Ratio.
Current ratio for AirAsia has increased from 0.81 times in 2015 to 0.94 times in
2016. This increment proved the improvement in AirAsia’s ability to meet its short-term debt
obligations as the amount of resources they possessed to be used in paying of its debts for the
next 12 months period is a lot more while the amount of liabilities has reduced. An increased
in the current ratio of AirAsia proved that the company is much more liquid in 2016
compared to its previous position in 2015.
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠 − 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑖𝑒𝑠
𝑄𝑢𝑖𝑐𝑘 𝑅𝑎𝑡𝑖𝑜 =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

2016 2015

8
 𝑅𝑀 4,774,167,000 − 𝑅𝑀 43,866,000 𝑅𝑀 4,286,379,000 − 𝑅𝑀 26,152,000
𝑅𝑀 4,917,971,000 𝑅𝑀 5,271,716,000
= 0.961839953 𝑡𝑖𝑚𝑒𝑠 = 0.808129080 𝑡𝑖𝑚𝑒𝑠
≈ 𝟎. 𝟗𝟔 𝒕𝒊𝒎𝒆𝒔 ≈ 𝟎. 𝟖𝟏 𝒕𝒊𝒎𝒆𝒔
Table 3: Liquidity Ratio – Quick Ratio.
Apart from that, AirAsia’s quick ratio has also increased to 0.96 times in 2016 from
0.81 times in 2015, which signifies the improvement of AirAsia’s ability to meet its short-
term obligations through the usage of its most liquid assets. Although AirAsia’s quick ratio
is lower than 1, it does not necessarily mean the firm is going into bankruptcy or default
state.

Leverage Ratio
𝑇𝑜𝑡𝑎𝑙 𝑑𝑒𝑏𝑡
𝐷𝑒𝑏𝑡 𝑡𝑜 𝑇𝑎𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 𝑅𝑎𝑡𝑖𝑜 =
𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠

2016 2015

𝑅𝑀 10,579,142,000 𝑅𝑀 12,612,835,000
𝑅𝑀 21,985,387,000 𝑅𝑀 21,316,257,000
= 0.481189710 𝑡𝑖𝑚𝑒𝑠 = 0.591700269 𝑡𝑖𝑚𝑒𝑠
≈ 𝟒𝟖. 𝟏𝟐 % ≈ 𝟓𝟗. 𝟏𝟕 %
Table 4: Leverage Ratio – Debt to Total Assets Ratio.
Debt to total assets ratio is used in showing the percentage of total assets that were
financed by creditors, debts and liabilities. A company with lower debt to total assets ratio
have a lower leverage level as well as lower financial risk. AirAsia’s ratio for this is 48.12 %
in 2016, which is lower than year 2015 of 59.17 %. This showed that the company is
currently not in a risky position and have improved from the previous year.
𝑇𝑜𝑡𝑎𝑙 𝑑𝑒𝑏𝑡
𝐷𝑒𝑏𝑡 𝑡𝑜 𝐸𝑞𝑢𝑖𝑡𝑦 𝑅𝑎𝑡𝑖𝑜 =
𝑇𝑜𝑡𝑎𝑙 𝑠𝑡𝑜𝑐𝑘ℎ𝑜𝑙𝑑𝑒𝑟𝑠 ′ 𝑒𝑞𝑢𝑖𝑡𝑦

2016 2015

𝑅𝑀 10,579,142,000 𝑅𝑀 12,612,835,000
𝑅𝑀 6,628,000,000 𝑅𝑀 4,451,000,000
= 1.5961288473 𝑡𝑖𝑚𝑒𝑠 ≈ 𝟏𝟓𝟗. 𝟔𝟏 % = 2.8337081555 𝑡𝑖𝑚𝑒𝑠 ≈ 𝟐𝟖𝟑. 𝟑𝟕 %

Table 5: Leverage Ratio – Debt to Equity Ratio.

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 On the other hand, debt to equity ratio actually signifies the relative proportion of
company’s debt and equity used to finance its assets which also shows the ability of the
company in repaying its obligations. Since debt to equity ratio of AirAsia has drastically
decreased in 2016 to 159.61 % in 2016 from 283.37 % in 2015, the lenders and investors that
are interested with to invest in the company can be convinced with a positive image on the
firm as its debt has keep on decreasing in addition to an increase in its equity.
𝐿𝑜𝑛𝑔 𝑇𝑒𝑟𝑚 𝑑𝑒𝑏𝑡
𝐿𝑜𝑛𝑔 𝑇𝑒𝑟𝑚 𝐷𝑒𝑏𝑡 𝑡𝑜 𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦 𝑅𝑎𝑡𝑖𝑜 =
𝑇𝑜𝑡𝑎𝑙 𝑠𝑡𝑜𝑐𝑘ℎ𝑜𝑙𝑑𝑒𝑟𝑠 ′ 𝑒𝑞𝑢𝑖𝑡𝑦

2016 2015

𝑅𝑀 7,924,550,000 𝑅𝑀 9,451,880,000
𝑅𝑀 6,628,000,000 𝑅𝑀 4,451,000,000
= 1.1956170791 𝑡𝑖𝑚𝑒𝑠 ≈ 𝟏𝟏𝟗. 𝟓𝟔 % = 2.1235407774 𝑡𝑖𝑚𝑒𝑠 ≈ 𝟐𝟏𝟐. 𝟑𝟓 %

Table 6: Leverage Ratio – Long Term Debt to Total Equity Ratio.

The proportion of the company’s long-term debt to its equity is signified by long term
debt to total equity ratio. AirAsia managed to reduce the value of this ratio to 119.56 % in
2016 from 212.35 % in 2015 by reducing the amount of long term debt it is holding through
while increasing the stockholders’ equity. This managed to offer a positive image on the
company as it is capable of increasing its equity while reducing its long-term debt the same
time.

Profitability Ratio
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 (𝑅𝑂𝐴) =
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡

2016 2015

𝑅𝑀 2,047,000,000 𝑅𝑀 541,000,000
𝑅𝑀 21,985,000,000 𝑅𝑀 21,316,000,000
= 0.09310893791 𝑡𝑖𝑚𝑒𝑠 ≈ 𝟗. 𝟑𝟏 % = 0.02537999625 𝑡𝑖𝑚𝑒𝑠 ≈ 𝟐. 𝟓𝟒 %

Table 7: Profitability Ratio – Return on Total Asset (ROA).

One of the profitability ratio is the return on total Assets (ROA) which refers to the
percentage of profit earned by a firm per ringgit of its total resources. It offers the idea on the
company’s management efficiency to utilise the assets to generate profit, although it will

10
potentially lead to the shareholders receiving lesser interest. AirAsia’s ROA for year 2016 is
9.31 % in which increased from 2.54 % in 2015. This growth showed that the management
team of AirAsia managed to get income by efficiently using its assets in 2016 compared to
2015.
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝐸𝑞𝑢𝑖𝑡𝑦 (𝑅𝑂𝐸) =
𝑇𝑜𝑡𝑎𝑙 𝑆𝑡𝑜𝑐𝑘ℎ𝑜𝑙𝑑𝑒𝑟𝑠 ′ 𝐸𝑞𝑢𝑖𝑡𝑦

2016 2015

𝑅𝑀 2,047,000,000 𝑅𝑀 541,000,000
𝑅𝑀 6,628,000,000 𝑅𝑀 4,451,000,000
= 0.3088412794 𝑡𝑖𝑚𝑒𝑠 ≈ 𝟑𝟎. 𝟖𝟖 % = 0.1215457201 𝑡𝑖𝑚𝑒𝑠 ≈ 𝟏𝟐. 𝟏𝟓 %

Table 8: Profitability Ratio – Return on Equity (ROE).

In terms of the Return on Equity (ROE) that describe the percentage of returned net
income from shareholders equity, the company’s profitability for the investment’s owner can
be measured along with how the company’s equity has been employed. AirAsia obtains a
higher ROE value of 30.88 % in 2016 compared to the one in 2015 which is 12.15 %. This
value proved that the management of AirAsia has been able to make about RM 0.31 of
income for every RM 1 being invested in the company by the shareholders. This is much
more efficient compared to the one from previous financial year which is RM 0.12 of income
from RM 1 being invested.

3.3 Research and Development

Research and development is also important for AirAsia as it will enable the company to
come up with new services/products as well as providing more promotions to the customers.
Not to mentioned that this will also be able to help the company to improve their current
products and services that they already have so that they will be able to continuously meet
the needs and tastes of their customers.

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4.0 Analysis of Strategic Factors (SWOT)
Influence to
Achieve
Helpful Harmful
Objectives
Origin
Strengths (S) Weaknesses (W)
1) Management team 1) Facility for maintenance,
2) Branding repair and overhaul (MRO)
3) Low-cost leadership 2) Good customer service
Internal 4) Usage of information 3) Aircraft financing
technology (IT)
5) Support by Malaysian
government
6) Financial position
Opportunities (O) Threats (T)
1) Increased fuel prices 1) Airport charges
2) ASEAN open skies 2) Competition from other
External
3) Partnership with other airlines
low-cost airlines 3) Fluctuating fuel price
4) Population increase
Table 9: SWOT Analysis.

4.1 Strengths

AirAsia's executive management came from various background ranging from the ex-top
government officials to the experts of the industry. Its management team is strong and are
closely linked with the leaders from airline industry and government apart from being good
at formatting and executing strategies. AirAsia adopted the strategies used by Ryanair for
work, Southwest Airline's strategy for the people as well as EasyJet’s branding strategy.
Currently, the brand name of AirAsia is very well built in the Asia Pacific region.
Other than the usual print media advertising as well as promotions, the top management in
AirAsia also benefit from the promotions via news through being "media friendly" and
openly sharing the most recent information regarding AirAsia and even the airline industry.

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 AirAsia's cooperation with other businesses that provide their service include hostels
and hotels, car rental companies, Citibank (AirAsia Citibank card) and hospitals (medical
tourism) have produced a one-of-a-kind image amongst customers. The local presence of
AirAsia in some countries such as Indonesia (Indonesia AirAsia) as well as Thailand (Thai
AirAsia) have effectively "increased" the brand to become a brand regionally and not just in
Malaysia but beyond that. The connections with Manchester United as well as AT&T
Williams Formula One team have increased AirAsia's image even more to greater heights
rather than just within this region.
Amongst other airlines in Asia, AirAsia is considered as the low-cost leader and with
the assistance of AirAsia Academy, AirAsia has accomplished the creation of the "mentality
of a low-cost airline" within their workforce. AirAsia's workforce is very adaptable and
highly committed as well as critical in producing AirAsia as the lowest cost airline in Asia.
Apart from that, utilization of information technology by AirAsia has also
contributed to the progress of the company to a greater extent. The contribution made
through this utilization of information technology includes those in promotional activities,
brand building exercise as well as direct tickets purchase by customers that lead to company
savings the cost of airline agent’s fee.
In addition to this, the support offered by the Malaysian government such as building
a dedicated low-cost carrier terminal (LCCT) as well as KLIA2 has also bring a lot of
benefits for AirAsia. However, this support did not jeopardize the national interest as well as
its flag carrier, Malaysian Airlines System (MAS) in any possible ways. Another strength of
AirAsia is its financial performance that has been very good with the its impressive revenue
keep on increasing every year.

4.2 Weaknesses

One of the weaknesses of AirAsia is that it does not have its own facility for maintenance,
repair and overhaul (MRO). Since the cost for aircraft maintenance is surging, it is best for
AirAsia to make sure that it has a proper and continuous maintenance of the planes
especially since they currently have over 100 planes. Besides this will be able to help keep
the overall costs low for the company while apprehending the competitive disadvantage of
not having its own MRO facility.
Apart from this, also need to up their game in terms of customer services. The
company has been receiving a lot of complaints about its services from the customers that

13
involve flight delays, a lot of hidden charges as well as not able to get a refund or change
flight if the customers could not make it for the time. Thus, it is best for AirAsia to invest in
a better customer service and management especially with the rivalry in the industry
becoming more intense.
Another weakness of AirAsia is in financing the cost of getting new aircrafts. As part
of AirAsia's expansion plan, the company has decided to purchase some additional aircrafts
so that it can cater to the growth of demand. However, since the cost keep on surging by
time, AirAsia has only been getting the aircrafts that are on lease rather than buying the new
ones.

4.3 Opportunities

The increase in jet fuel prices can also be viewed as an opportunity for AirAsia although it
may pose threat to the company. The reason for this is mainly because AirAsia has the upper
hand in this matter as it is the leader among low cost airline operators. AirAsia will still be
able to maintain its cost to remain as the lowest among every local airline. Due to this, the
firm will be having a greater opportunity of capturing a number of full service airlines'
existing customers as well as those from other low-cost airlines. Despite this, some reduction
in overall travel will remained to exist especially those made by budget or casual travellers.
In addition to this, the “ASEAN Open Skies” also brought quite an opportunity for
AirAsia as it allows unlimited number of flights among ASEAN’s regional air carriers. This
has been in power ever since December 2008 and has led to the ASEAN capital routes being
liberalized. Apart from this, ASEAN Open Skies has also resulted in the growth of
competition between local airlines. Despite this, AirAsia has been perceiving this agreement
as an opportunity instead of threats mainly because of its first-mover advantage. Not only
that, it is also due to the company having a strong management, formulation and execution of
the strategy, as well as strong brand image and “low-cost” culture among its workforce.
AirAsia also have the opportunity of partnering with other low-cost airlines such as
Virgin airlines. This partnership will be able to improve their existing strengths and
competitive advantages, which includes their brand name as well as their landing rights and
slots. This partnership will of course be made possible with the opportunities that come with
the increase in the population of Asian middle class that reached to around 700 million in
2010. The creation of a huge market will definitely bring a larger opportunity for AirAsia
such as the partnership with other low-cost airlines to meet the demands of their customers.

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4.4 Threats

Airport charges that are imposed on airlines by airport authorities such as the security
charges, landing charges as well as airport departure charges are actually one of the threats
faced in this industry. Although it is true that this actually poses quite a threat to all airlines,
especially for low-cost airlines, this however is beyond their control and the company such
as AirAsia will only be able to try their best to keep their cost as low as possible.
Another threat is due to the fact that AirAsia is currently reaping of a profit margin
that is more than 30 %. This has been attracting more competitors to enter the industry. Most
of the full-service airlines have already come up the strategy to directly compete with
AirAsia by creating a low-cost subsidiary such as Tiger Airways that was created by the
Singapore Airlines.
One more threat for AirAsia is the fuel price that will always be facing fluctuations.
This can be due to either economic factors, political factors or both. Fluctuations in fuel
prices can be a major threat for AirAsia since its operations rely heavily on jet fuel.

5.0 Strategy Alternatives and Recommended Strategy (TWOS)

Internal factors
External factors
Opportunities (O)
1) Globalisation
2) Increased jet fuel prices
3) Penetration
4) De-regulation of
airways
Strengths (S) Weaknesses (W)
1) Largest budget airline in 1) High cost of operation
Malaysia expenses
2) Good management team 2) Low profit margin
3) Financial position 3) Customer service
4) Marketing & 4) Outsourced MRO facility
advertisement
5) Training & development
6) Branding
SO strategies WO strategies
1) Expansion to untapped 1) Utilized more IT
market share 2) Efficiency in business
2) Diversification processes & supply chain
3) Offers new services &
products

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 5) Up-stream and down- 4) Low budget for long
stream integration distance travel
7) Increase in population
8) Middle class
population growth
Threats (T) ST strategies WT strategies
1) Strong competition 1) Penetration into new 1) Bench marking against
2) Substitutes markets strong players
3) Entry of new budget 2) Introducing new services
airlines
4) Government and IATA
regulations policies
5) Congested facility at
KLIA
6) Further increase in the
fuel price.
Table 10: TWOS Analysis.

5.1 SO strategies

These strategies will be using AirAsia’s strengths to take on the opportunities available for
the firm head on. Due to the strong branding image, AirAsia will be able to seize their
opportunities by focussing on the expansion into the untapped markets, diversification as
well as offering new products or services. Such opportunities are mainly opened to AirAsia
by globalisation and the company’s strong financial position.

5.2 WO strategies

The weaknesses faced by the company can be overcome by taking the opportunity that it has.
Due to the globalisation as well as the growth of the population, AirAsia will be able to
cover their high operating costs when providing the services. This will then result in the
company to be much more efficient in business process and supply chain especially if it is
going to integrate up-stream and down-stream.

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5.3 ST strategies

These strategies will be utilizing AirAsia’s strengths to contain or overcome the threats faced
by the company. This can be done by AirAsia through the utilization of its financial position
as well as strong branding image to compete with its competitors as well as the new entrants.
In addition to this, AirAsia will also be able to overcome any threats posed by government
regulations especially since the company is well-known by the people.

5.4 WT strategies

Finally, AirAsia need to use these strategies to be prepared for any unwanted situations.
AirAsia will have to focus on improving its weaknesses such as having high operation costs,
providing good customer service as well as the thinning of the company’s profit margin.
AirAsia will need to control these weaknesses especially with the wake of threats such as
strong competition, new budget airlines as well as further increase in fuel prices. The
company will need to come up with a great plan to minimise the impact of such situations.
This of course can be done by benchmarking against the strong players in the industry.

5.5 Strategies breakdown

The strategies as been developed by using TOWS matrix based on the result from SWOT
analysis can further be broken down into a few strategic levels. These strategic levels include
business strategy, corporate strategy and global strategy.
Business level strategies refers to the strategy applied for only one product being sold
in a single market. For this level of strategy, it is found that AirAsia will need to focus on
providing long distance travel for people with low budget. The company will be able to do so
by utilising information technology and the technological development that existed
nowadays. Not only that this will help AirAsia to reduce its operation costs, it will also be
able to make its business processes and supply chain become much more efficient while
allowing them to provide long distance travel for people with lower budgets.
Corporate level strategy on the other hand refers to the strategy used by the
executives of the organization, which may include diversification, integration, intensive or
defensive strategies. Based on the strategies developed through the use of TOWS matrix,
AirAsia might as well be applying diversification in its strategies. Not to mentioned that the
management of the company will need to introduce new services and products to be offered

17
to the consumers. This is in conjunction to the business level strategy as recommended based
on the result of the analysis.
Last but not least is the global strategy where organization will be questioning on
which new market to develop and enter as well as how far those markets should be
diversified. AirAsia might want to expand their wings into the untapped market share so that
they can penetrate new markets. This obviously can be done by benchmarking itself against
strong players such as those of full-service airlines.

6.0 Implementation
AirAsia has taken the first step on the strategy when it took advantage of the declining cost
for aircraft in global context due to the aftermath of the September 11 event. This was a great
opportunity for AirAsia to increase it fleet as the aircraft’s purchase price and leasing rate
declined during that period. Apart from that, utilising its geographical strength, AirAsia
actually have an attractive market especially since the Pacific and Asian regions are mainly
made up of a number of islands that have poor road networks.
On the foundation of Michael Porter’s generic terms, the adoption of focused cost
leadership by AirAsia is derived from its huge market size since the cost of low-cost carriers’
industry is the competitive priority that will determine the operators market position and
success. Not to mentioned that AirAsia has applied a business strategy that targeted specific
markets, which is the customers who needs short haul flights but are price sensitive by
offering offers tickets with attractive price compared to road and bus fares. AirAsia also put
its attention to functional strategies by focussing on the quality control, as well as safety,
staff training and technological development.
In addition to this, the company has also developed culture with a brand that
everyone can access with over 4,000 staff that made it possible through their dedication,
patience and determination. This has been the result from a positive culture at workplace
created by AirAsia in promoting strong team coordination and open communication to get a
level of coordination that is high between employee groups.
Apart from that the implementation of all the three types of organization structure by
AirAsia, namely functional, matrix and projected is also great for the company. This has also
led to the existence of three types of organisational control in AirAsia; the management
control, the strategic control as well as the operational control. In addition to all this, it is also
important that AirAsia have the best leadership by the AirAsia CEO, Tony Fernandez, as it is

18
one of the significant success factors, especially for the low budget airline. Since Tony
always searching for new ideas to move AirAsia to reach its vision, he adopted the Blue
Ocean strategy that make it possible for the company to avoid the red ocean.

7.0 Evaluation and Control

The last stage in strategic management process is to evaluate and control the corporate
activities of the firm along with observing its performance results so that the desired
performance can be compared to the company’s actual performance. The process will initiate
directly after the implementation of the strategies. The evaluation will generally include the
examination process of the strategy for the company’s underlying bases. AirAsia is facing a
lot of problems and issues as the Malaysian leading budget airline. This includes rivalry
between local airlines, influence of recession, fuel prices fluctuations, increase of operating
cost as well as insufficient infrastructure. However, by evaluating the effectiveness of the
strategies suggested, the company performance can be assessed and controlled.
Being strategically strong by having an organized management team, AirAsia
established the mind-set of ‘low-cost’ among the employees and becoming the leader in the
low-cost industry. Not to mentioned that the utilization of IT by the company to its
advantage has also help AirAsia to be successful.
Despite these strengths, AirAsia also have some weaknesses that does not seem to be
too dangerous. These weaknesses include higher fuel costs that are constantly fluctuating as
well as the unstable markets that resulted in higher operational costs. In addition, AirAsia
also has been getting a lot of negative review regarding their poor reputation with customers,
thus, applying the strategies of offering better customer services will be relevant for the
company to be successful. However, this will of course need to be done without increasing
its operating costs.
Opportunity will be the golden word and the main concern for AirAsia. The
significant increase in the population of middle income earners opens up a lot of potential for
the company. Despite this, the threats that AirAsia have especially from the potential new
entrants will need to be made as the company’s main priority to be focussed on. Not to
mentioned that the company will also need to commence the strategy on getting the facilities
for MRO in case if there are any occurrence of system failures.

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