Pest analysis

Introduction

Purpose
The purpose of this analysis is to conduct an environmental analysis in the context of AirAsia's international business
operations, describing the major variables involved and the impact of the specific threats and opportunities confronted by
AirAsia besides that, this analysis also helps to identify AirAsia's competitive strategy and analyse how the strategy is
implemented to gain competitive advantage.

Background on AirAsia
AirAsia was set up by Dato' Tony Fernandes in 2001. In December 2001, Fernandes and his partners set up Tune Air Sdn Bhd
(Tune Air), an airline holding company then bought over AirAsia. Now, AirAsia has become one of the most successful
airlines in the Southeast Asian region and the pioneer of low cost and no frills travel in Malaysia. The airline now flies to
over 40 destinations in Malaysia, Thailand, Indonesia, Macau, China, Philippines, Cambodia, Vietnam and Myanmar. AirAsia
has formed 2 successful joint ventures in Thailand through Thai AirAsia, and Indonesia through AWAIR. Starting from 2
aircraft till now AirAsia owns 28 and has carried more than 223 millions guest through its low fares travel.

2.0 External Environment Analysis

2.1 Political
Flying outside Malaysia is difficult. Bilateral agreement is one of the obstacles in the way of truly pan-Asia budget carriers.
Landing charges at so-called "gateway airports" and navigation charges are often prohibitively expensive, and in key
destinations like Bangkok, Beijing, Hong Kong and Singapore there are no cheaper, secondary airports. The budget airline
industry in south-east Asia has been underdeveloped because the aviation market is tightly regulated by bilateral air rights
agreements.
Threat of terrorism, people is afraid to fly after the September 11 terrorist attacks incident.

2.2 Economic
In spite of stiff competition from Malaysian Airline (MAS), AirAsia's low-cost carriers offering cheap tickets and few in-flight
services are gaining attraction in the region. In theory, Asia has most of the ingredients for making a budget airline work
which has a huge and dense population base, the emergence of underused regional airports, a growing propensity among
some upwardly mobile people to travel, and relatively high Internet usage. Rising incomes and economic growth are
empowering more Asians to board aircraft. AirAsia, Malaysia's budget airline, has sold a 26 per cent stake to three foreign
investors for US$26m as it prepares to meet increased competition in south-east Asia. . With the economy slowing down,
more people will want to enjoy its cheap tickets.

2.3 Social
Passengers are reluctant to board a no-frills airline for a long-haul flight. The longer the route, the less price-sensitive the
passenger becomes. They don't want to be crammed into a plane for six or eight hours. Especially, when there are limited
or no in-flight services. AirAsia wanted to become a company that worked on the basis of the average man in the street
being able to afford our air fares, and people who would not have considered flying, or would not fly as often as they as do
now. Outbreak of the Severe Acute Respiratory Syndrome (SARS) has scare people to fly. AirAsia commit to "Safety First";
comply with all regulatory agencies, set and maintain consistently high standards; ensure the security of staff and guests.

2.4 Technology
AirAsia provides online service that combines air ticketing with hotel bookings, car hire and travel insurance. To help keep
costs in check, Air Asia has pushed internet booking services. Particularly in parts of the region that are poorly served by
road and rail infrastructure, people will prefer to travel by airplane. In August 2003, AirAsia became the first airline in the
world to introduce SMS booking where guests can now book their seats, check flight schedules and obtain latest updates on
AirAsia promotions from the convenience of their mobile phones. AirAsia also recently introduced GO Holiday, the airline's
online programme where guests can book holiday packages online in real time AirAsia has bought in A320 to replace Boeing
737. The Airbus A320's improved fuel efficiency and extra capacity which leads to better performance and reliability.

2.5 Summary of Opportunity and Threats

Opportunity
Low fares offer by AirAsia has encourage people from all walks of life style to fly. Especially, during economy down turn.
Airbus A320 would encourage greater passenger capacity and offer comfortable service to customers.
Introduction of SMS booking allows customer to book their seat at anytime and anywhere.
With the commitment in ensuring the security of staff and customers, they will have more confident to fly via AirAsia.
Threats
There are more no-frills airlines may take off in Asia to meet increasing consumer demand following the success story of
Malaysia's budget carrier AirAsia.
Singapore Airlines plans to launch a budget carrier, they see the success of AirAsia. They know how big the market is and
how good the opportunity is in Asia.
Travelers may not choose AirAsia if they are to travel long distance flight. They will prefer airlines such as MAS or SIA which
provide better services.
Demand to fly decreased via terrorism and outbreak of the SARS.

3.0 Competitive Strategy Employed by AirAsia

According to Chee and Harris (1998, p.237) much of the work on competitive strategy is pioneered by Michael Porter of
Harvard University. Competitive strategies indicate the approaches that a company adopts in order to compete more
effectively to strengthen its market position. Competitive strategy that is being employed by AirAsia is cost leadership
strategy. Cost leadership is a low cost competitive strategy that is targeted at the broad mass market. Under this strategy,
AirAsia has lower overall costs than its competitors such as Malaysia airline (MAS) and Singapore airline (SIA).
AirAsia, Asia's leading low fair airline has under-price its competitors and has gain a big market share in Malaysia and in Asia
region as well. In the event of a price war, AirAsia who offers fares as low as RM0.99 (excluded airport tax) is in a position to
withstand the competition better. Although AirAsia offers such a low fares, it is still likely to earn above average returns. To
achieve a cost advantage, AirAsia

Porter Analysia

Threat of Entry
There is a high barrier entering airlines industry since it requires high capital to set up everything such as purchase or lease
air craft, set up office, hire staffs, and etc. Thus, this has reduced the treat to Air Asia. Moreover, brand awareness is quite
important in this industry. Hence, to enter this industry not only required high capital but also have to take some time to
create brand awareness. Consumers always choose the product or service they really trust. Thus, instead of creating brand
awareness, new entry has to create so called brand loyalty. Hence, this is reducing treat to Air Asia too.( Roy L. Simerly)
However, the government legislation is one of the barriers for entering airlines industry. For example, MAS has been
protected by Malaysia government on the route to Sydney and Seoul Incheon.(Appendix) Therefore Air Asia find itself very
difficult getting a new route from government. This not only affects the timeline set by Air Asia but also influence their
profit. Nevertheless, this has limited the new entrance due to the government policy. In overall, the treat of entry is low to Air
Asia.

Power of suppliers
Every industry has someone to play the role as suppliers. Power of the suppliers is important as it will affect the industry. In
airline industry, the power of suppliers is quite high since there are only two major suppliers which are Airbus and Boeing
hence there are not many choices to airline industry. Nevertheless, the global economic crisis has limited the new entrant and
also reducing the upgrade of planes in the immediate future. However, both suppliers provide almost same standard aircrafts
and hence the switching to Air Asia is low. Moreover, Air Asia placed a large amount of order from Airbus in order to
expand its routes to international routes. As a result, the power of suppliers may be reduced as Airbus's profit may be
influenced by Air Asia.( Roy L. Simerly) Generally, the power of supply is moderate low to Air Asia.

Power of buyers
Buyers are one of the factors which will give influence the industry whether making profit or loss. Nowadays, those buyers
are much more knowledgeable and high educated. Thus, they are very sensitive to the price no matter in what product or
service. In this case, even Air Asia always provide lowest price to customers, but they still will make comparison between
airlines. Secondly, to switch to other service is very simple because Air Asia is not the only one who provides airline service.
I.e. customers still can choose MAS, Tiger Airway, Firefly and etc.( Roy L. Simerly) Moreover, Air Asia always leaves
customers an image as they always delay the flight. Hence, as an investor or business man, they will choose more reliable
airlines instead of Air Asia. In this case, the power of buyers is quite high to Air Asia.

Threat of substitutes
Substitutes are products or services which can replace the original products or services and give almost same satisfaction to
the consumers. In airline industry, there are two types of substitutes, indirect and direct substitutes. Indirect substitutes
include train, bus, cruise and etc. On the other hand, direct substitutes indicate the other airline. Consumers usually prefer low
cost. For example, from Kuala Lumpur to Singapore, there are few transports that consumers can choose such as bus, train
and air travel. If the customer is going to a budgeted trip, definitely he will choose bus which is the lowest price among the
three. Moreover, the technology is now make information much more easily to assess. Customers can easily compare the
price among few airlines just by assessing internet as internet make information more transparency. Nevertheless, the
archipelago geographical structure in Malaysia make air travel is the most viable, efficient and convenient mode of
transportation. For example, travel from Kuala Lumpur to Bangkok, the customer may choose to take bus or air flight.
However, air plane are much more convenient and also lesser time consuming compare with taking bus to Bangkok. Thus,
the threat of substitutes is moderate to Air Asia.
Rivalry among existing competitors
In every industry, there is positive or negative trend to industry growth rate. If there is positive trend, then the firms have not
to steal the market share among them. However, in airline industry, the growth rate is really low due to limited customers.
Thus, in order to expand, Air Asia has to steal the market share from its competitors.( Roy L. Simerly) Secondly, Air Asia
leads the main battlefield in price among competitors due to its low operating costs. However, there are more competitors
enter to airline industry who have major carriers as their backers or owners which may lead to ‘unreasonable' price war in
the future. Moreover, Air Asia is not the only one who provides airline service. There are few low cost carriers such as
Firefly, Tiger Airway and etc which makes their services provided weak differentiation. Thus, it becomes a threat to Air Asia.
In this case, the rivalry among existing competitors is quite high to Air Asia.