CREATIN G, DEV EL OP IN G, AN D MAIN TAIN IN G C OMP ETITIV E ADVAN TAG E
END-OF-CHAPTER CASE STUDY Malaysia Airlines: Vying for a stronger global presence
Malaysia Airlines (www.malaysiaairlines.com) was incorporated
as Malayan Airways Limited (MAL) on 12 October 1937 as a
joint initiative of the Ocean Steamship Company of Liverpool, the
Straits Steamship of Singapore, and Imperial Airways to run an air
service between the cities of Penang and Singapore. On 2 April
1947, MAL took to the skies with its first commercial flight as the
national airline.
With the formation of Malaysia in 1963, the airline changed its
name to Malaysian Airlines Limited. Soon after, Borneo Airways
was incorporated into MAL. Fuelled by a young and dynamic team
of visionaries, the domestic carrier turned into an international
airline in less than a decade. Within 20 years, MAL grew from a
single aircraft operator into a company with 2,400 employees.
In 1965, with the separation of Singapore from Malaysia, MAL
became a bi-national airline and was renamed Malaysia-Singapore
Airlines (MSA). A new logo was introduced and the airline
grew exponentially with new services to Perth, Taipei, Rome, and
London. However, in 1973, the partners went separate ways.
Malaysia introduced Malaysian Airline Limited, which was sub-
sequently renamed Malaysian Airline System (MAS) or in short,
Malaysia Airlines. Today, MAS flies around 50,000 passengers
daily to some 100 destinations worldwide and holds a lengthy
record of service and best practices excellence, having received
more than 100 awards in the last ten years, including World’s Best
Cabin Crew (2001–2004, 2007, 2009) awarded by Skytrax UK
(www.airlinequality.com).
In its 70 years of service, it has not been ‘plain sailing’ for MAS.
The company has been through some tough times and slipped
into massive financial losses at several points in its history. Despite
its multiple-award winning customer service, it has yet to produce
the kind of sustained profitability that other successful airlines
have achieved.
In 2011, MAS slipped into an operating loss of RM267 million
(US$87.6 million) in the first quarter of the year. This news shocked
its investors who thought that the worse was over when the airline
reported RM225 million (£73.8 million) in net profit for 2010. The
company is confronted by a combination of internal and external
problems, including an ageing fleet of aircrafts, escalating cost
structure, high leasing cost, and a network of routes which is not
far-reaching enough.
In today’s volatile aviation landscape, MAS is not alone in having
its revenue impacted negatively by in recent years. For instance, the
‘Arab Spring’ political unrests in the Middle East and North Africa,
and the earthquake and tsunami in Japan have severely depressed
the demand for air travel in certain regions. In addition, the air
travel markets are typically more exposed than air cargo markets
to fuel price fluctuations as they represent 40% of all air freight
volumes. The accelerating world’s oil prices, on which the jet fuel
price is set, have further depressed the profitability of airlines. The
prices of jet fuel have escalated as much as 50% year on year and
reached US$130.2 per barrel in June 2011. No one can predict
the direction of jet fuel prices but further price rises are likely to be
a reality which all airlines will have to live with for years to come.
The revenue of an airline is dependent on its total capacity,
number of routes on offer, capacity utilization and pricing. This
283
is then juxtaposed with
operating costs. MAS is
operating on comparably
higher fixed costs which
put it at relative disadvan-
tage to other airlines. For
instance, jet fuel makes up
38% of total cost, aircraft
leases (20%), staff (12%–
15%) and the rest are for
maintenance, landing, and
parking. Its cost per avail-
able seat km (CASK)
is US$0.0825 against
Singapore Airlines’
US$0.0713. Further, the
fuel and maintenance
costs of its ageing fleet are © istockphoto.com/pei ling hoo
higher as they consume
more fuel than the newer generation of aircraft.
To help manage its costs, MAS has opted to: (a) reduce its
total capacity by cutting some of its flight routes including some
lucrative destinations such as New York; and (b) increase capacity
utilization by cutting the number of flights on selected routes.
Consolidation of total capacity and increased selectivity of flight
destinations are perceived as logical steps to improve capacity
utilization—i.e. less empty seats on each flight and higher earn-
ings per seat. Critics have criticized MAS’s cost reduction decision,
arguing that it compromises its bargaining as well as pricing power
as the company would struggle to increase its market share when
it scales back on routes and flight frequencies. For instance, if an
airline offers three flights to a destination while its competitor
offers seven flights to that same destination, it will find it very
difficult to raise fares due to reduced bargaining power.
Throughout the second half of twentieth century, MAS enjoyed
a near monopoly in Malaysia and uninterrupted year-on-year
growth in profits alongside Malaysia’s miraculous economic
growth in the same period. All this was about to change at the
turn of the millennium. In 2002, a former Time Warner executive
named Tony Fernandes launched not just Malaysia’s first ever
budget airline but an airline that would become the world’ most
successful low-cost carrier within a decade, AirAsia (www.airasia.
com). The meteoric rise of AirAsia has been nothing short of a
miracle. In the first nine years, the airline grew from a fleet of 2 to
85, with 27 million passengers boarding its flights each year. It
manages to make a profit even during the hardest times in the
aviation industry and has built one of the strongest global brands
in budget travel. With an annual revenue of RM3 billion (US$0.98
billion), it enjoys the world’s lowest unit cost of US$0.036 per
CASK. By 2011, AirAsia has cemented its dominance in Malaysian
airspace when it overtook MAS in terms of market value at
RM8.8 billion (US$2.89 billion) against MAS’s RM4.8 billion
(US$1.57 billion).
The success of AirAsia is widely perceived to be the cause
of MAS’s demise. In its attempt to win back customers, MAS’s
284 T HE DEV E LO PME NT O F GL O BAL M ARKETING STRATEGIES

leadership has developed an unhealthy obsession in competing
with AirAsia’s low prices, rather than focusing on innovative
growth strategies. Until recently, it diverted significant investment
and energy into launching its own low cost carrier, Firefly (www.
fireflyz.com.my). In 1997, British Airways (www.britishairways.com)
launched its own low cost carrier GO Fly, which turned out to
be one of the most expensive mistakes in its corporate history.
Running a low cost carrier within the corporate structure of a full-
service carrier proved to be impossible, while customers became
confused about what the core values of British Airways were. Like
British Airways, MAS eventually came to a realization that it could
not fend off competition by trying to be both a premium and a
budget carrier simultaneously. Firefly remains a subsidiary of MAS.
In the crowded air travel market, it is crucial for any airlines
to invest in developing a clear market differentiation in a way
which is valued by customers. For example, Singapore Airlines
(www.singaporeair.com) and Cathay Pacific (www.cathaypacific.
com) focus their brand strategy on positioning itself as a premium
airline targeted at the higher end of the market. Both airlines
generate 45% of passenger revenue from first-class and business-
class travellers, making them less dependent on price-sensitive
economy-class travellers. By targeting customers who are less
price-sensitive can also mean that these airlines are less vulnerable
to competitive pressure from budget airlines.
MAS is currently embarking on a fleet modernization and capa-
city expansion plan to stay ahead of its competitors. It has placed
a huge order for a number of new aircraft (including A380, A330-
300 and B737-800) to replace older ones to improve customer
experience. Owning the world’s largest aircraft can be a ‘double-
edged sword’ for an airline business. On the one hand, it is true
that customers have come to expect and are willing to pay for
high quality in-flight experience such as more spacious seats and
on-demand digital entertainment system. Having the A380 will
put MAS in the same rank as other world leaders such as Singapore
Airlines, Cathay Pacific and Emirates. On the other hand, an airline
would need over 500 passengers each flight in an A380 aircraft to
optimize its utilization, which is no easy task in a highly competi-
tive international air travel market. To address this, many airlines
are focusing on filling the front end of their A380 aircraft with
more premium seats in the first-class and business-class cabins.
However, even the budget airlines such as AirAsia have now
caught on to this latest trick by offering business-class comfort at
a fraction of the cost.
Geographically, MAS is well placed to take advantage of the
projected traffic growth in Asia and South East Asia, as countries
such as China and India take the global economic centre stage
in the twenty-first century. According to the International Air
Transport Association (IATA), passenger traffic across Asia has out-
stripped that of North America in 2009. Despite this robust market
projection, winning customers and keeping them will not be easy.
The size of MAS by market value (US$1.57 billion) is dwarfed by
Air China’s (www.airchina.com.cn) US$20 billion, followed by
Singapore airlines at US$14 billion and Hong Kong-based Cathay
Pacific at US$12 billion. Even China Southern (www.csair.com), a
China-based domestic airline, has a market capital of US$11 billion.
There is no denying that MAS’s corporate leadership has re-
peatedly failed to provide a vision for the company’s future stra-
tegic direction. The inconsistency in MAS’s strategic direction and
financial performance would only dampen investor’s confidence
in its ability to turn around the company’s fortune. For as long as
MAS does not know where it is going, it will continue to have
issues going forward.
Sources: Based on materials sourced from the Starbizweek (http://biz.
thestar.com.my); and Malaysia Airlines (www.malaysiaairlines.com)
Case discussion questions
1 What are the internal and external challenges confronting the
management at Malaysia Airlines? Explain how these challenges
present a threat to the airline’s long-term survival.
2 Discuss how, in your opinion, Malaysia Airlines should respond
to each of these challenges?
3 The ability to create and sustain a competitive advantage is vital
to success in the global air travel market. Explore and evaluate
the sources from which you think a small global player such as
Malaysia Airlines should seek to build sustainable global com-
petitive advantage.

E ND- OF- CHAPTER EXERCISES

1 Briefly describe the two interrelated areas that determine the competitiveness of an industry at the
microeconomic level.
2 What are the major environmental factors driving increased global competition?
3 What is competitive advantage? Why is it important for organizations to develop and maintain
a competitive advantage in the marketplace?
4 Briefly discuss how to use the SELECT framework to analyse the competitive advantage of an
organization.
5 Explain how an organization can adopt the generic strategies of cost leadership, differentiation,
and focus to create a posture to outperform its rivals.
6 What is the so-called resource-based theory of competitive advantage? In what ways does it enable
an organization to acquire a competitive advantage?
7 Why do you think there is a need for today’s organizations to seek new sources of competitive advantage?