1

1.0 Introduction
1.1 Purpose of report
The purpose of this report is to discuss relevant internal and external factors that can be identified as threats and opportunities for AirAsia which are political-legal factor, economic factor, technology factor and sociocultural factor. The report also included the competitor’s analysis and Porter’s five analysis of Air Asia. The AirAsia Company has the resources include intangible resources and tangible resources, then combine its resources to create capability. This report will discuss how AirAsia uses its dynamic capability to enhance its competitive advantage. Besides that, this report also discusses to identify AirAsia’s competitive strategy and analyse how the strategy is implemented to gain competitive advantage.

1.2 Company Background
AirAsia originally was founded by government and on 2 December 2001 was bought by Tony Fernandes. AirAsia was established in 1993 with commenced operations in 1996. AirAsia never looks back after that. Air Asia’s first and main base is the Low Cost Carrier Terminal (LCCT) at Kuala Lumpur International Airport, while its secondary hubs are at Kota Kinabalu International Airport, Senai International Airport and Penang International Airport. Air Asia is well known as Malaysian low cost airline and even Asia’s largest low fare, no-frills airline. The airlines claims ‘No Admin Fee’, but has some fees for services which are free on other airlines. AirAsia slogan is ‘Now Everyone Can Fly’. Being the home of AirAsia, the LCCT is the budget terminal in KLIA, opened on 23 March 2006. LCCT is said to be carried about 10 million passengers a year. The AirAsia subsidiaries are the likes of Thai AirAsia, Indonesia AirAsia, Viet Jet Air Asia and AirAsia Red Tix. Meanwhile, AirAsia associate companies are AirAsia X, Tune Hotel and Tune Money (UK Essays, 2017).

1.3 Key Strategic Issues
The Malaysian leading budget airline is facing many problem and issues which includes impact of recession and competition among regional airlines.
Airline customers decrease because of poor economy. However, despite recession, AirAsia has grown rapidly in recent years while some airlines faring well, the sector faces a bumpy ride as economic turbulence hits both domestic and international travel. AirAsia’s low cost airlines, which took off in good economic times, are facing the stiff headwinds of the global economic downturns.
The airline industry today operates in a competitive environment whereby firms set prices and domestic routes given derived from market conditions, buy where access to some key inputs, such as airport boarding gates, are determined by non-market mechanisms. Competition increases because of increasing number of low cost airline competitors, aggressive competition against the large and traditional airline companies.

2.0 Contents
2.1 External Environment Analysis
The understanding of the general environment, Porter’s five industry forces and competitor analysis are included in the external environment analysis.

2.1.1 General Environment
The general environment dimensions consist of demographic, political-legal, economic, technological, sociocultural and environmental, which affects an industry and the firms within it (Hitt, Ireland, ; Hoskisson, 2015).

2.1.1.1 Political-Legal Forces
AirAsia is backed by Malaysian government and Prime Minister Mohammad Mahathir. However, foreign regulations and policies on which AirAsia relies will have a negative impact on its growth. The regulatory reduction of the aviation industry in Southeast Asia also has made a positive contribution to the development of the aviation industry, providing new opportunities for the expansion and niche markets in the aviation industry.

2.1.1.2 Economic Forces
The economic environment refers to the nature and direction of the economy in which a firm competes or may compete (Hitt, Ireland, ; Hoskisson, 2015). AirAsia’s low-cost carriers offering cheap tickets and few in-flight services. These may help in obtaining the attraction in the area despite having the strong competition from MAS (Malaysia Airline) or the current depression will hit on the aviation business. For example, AirAsia, Malaysia’s budget airline, has sold a 26 per cent stake to three foreign investors for US$26 million as it prepares to meet increased competition in south-east Asia. With the economy decelerating, more people will want to enjoy its cheap tickets.

2.1.1.3 Sociocultural Forces
Sociocultural factors relates to the cultural aspects, attitudes, beliefs, that will affect the demand for a company’s products and how the business operates (Process Policy ltd, 2018). Malaysia is always considered truly Asia and has multi-ethnic people who speak diverse languages. This is also one of the reasons why the tourism rate is on hike now for the country apart from the features of the land. There is also an increased awareness in the people where holiday and travels are concerned.

2.1.1.4 Technological Forces
AirAsia and Akamai Technologies Inc. are partnership. AirAsia’s main goal is to boost its online performance and achieve a best of class online experience. The alliances therefore will enable AirAsia to provide a better online experience to customers with enhanced site speed and performance.
For example, AirAsia provides the online service which can combine the air ticketing with hotel bookings, car hire and travel insurance. AirAsia had pushed the internet booking services in order to keep costs in check. In the same times it creates a platform to ensure the brand image of the group remains relevant through its website and varied social media networks. Besides, AirAsia also introducing the GO holiday, the online programmed where consumers can book the holiday package online in real time (UK Essays, 2017)

2.1.2 Porter’s Five Industry Forces
2.1.2.1 Threat of New Entrants
Threat of new entrants refers to the threat new competitors pose to existing competitors in an industry (Wilkinson, 2013). The threat of new entrant is moderately high. With increased deregulation by Asian governments, and growing demand for affordable low fares amongst budget-conscious travellers, competition increased (i.e. more full-service airlines launched their own budget airlines). For example, AirAsia’s success prompted several incumbents to start or being to consider starting their own budget airlines, which had the advantages of brand marketing and loyalty, and other benefits which overflowed from their parent companies.

2.1.2.2 Threat of Substitute
Threat of substitutes refers to the availability of a product that buyers can purchase rather than the industry’s product (Wilkinson, 2013). For the substitute products of AirAsia are busses or train. But, busses are not viable due to the geographical factor. Besides, business traveller’s telecommunication and video conferencing was also seen as the substitute. Cisco Webex offers unlimited meeting as low as USD 19 per month and the substitutes moderate (Cisco Webex, 2018).

2.1.2.3 Intensity of Rivalry Among Competitors
The intensity of rivalry among competitors in an industry refers to the extent to which firms within an industry pressure each other and limit each other’s profitability (Wilkinson, 2013). In airline industry, the intensity of competitive rivalry is high. This is because in these day and in every industry there is some negative and positive trends, airline industry has limited customer so growth rate is not too high, and so AirAsia has to try to be winner between its competitors. AirAsia offers flights with lower price that other companies, but there are some companies that also offer service by the same price such as Tiger Airways and Firefly. These companies provide service with the same level of AirAsia.

2.1.2.4 Bargaining Power of Customers
Bargaining power of customers is when buyers can reduce their cost by bargaining for higher quality, superior services and lower prices (Hitt, Ireland, & Hoskisson, 2015). The bargaining power of customers of AirAsia is high. Recently, Malaysia Airlines launched a new travel program (MH explorer), which allows college students to enjoy up to 20% discount. Malaysian students aged between 18-26 years of age, are eligible to apply for this program. They can enjoy up to 20% discount o all-year fares, extra 10 kg of baggage benefits, and a free replacement flight date for each booked ticket and also can enjoy special offers for family and friends and Enrich Miles travel plan. So a student can look for the cheapest price available as the portion of his expenditure will be very substantial. Besides, cost of switching to other airlines is low, so bargaining power of buyers is strong. AirAsia is not the only airlines operates in Asia. Other than that the price offered by other competitors such as Malindo Air are not much different. The customer choice is subject to their convenience and flight schedule that fit them best.

2.1.2.5 Bargaining Power of Suppliers
The bargaining power of suppliers is high and availability of suppliers (only Boeing and Airbus) is limited. Aircraft supplier could be the one who gaining most bargaining power as there is only two in operation, Boeing or Airbus. The switching cost is high where the airplanes and their maintenance are costly and there are few substitutes for airplanes such as air travel that covers longer distances in a shorter period of time (Zhu, 2010). For example, AirAsia’s flying machine are utilizing Airbus display which utilizing Boeing model beforehand and Air Asia is then rent it and supplant with Airbus demonstrate.
Forces Level of Threat
Threat of Entrants High
Threat of substitutes Moderate
Intensity of Rivalry among Competitors High
Bargaining Power of Buyers High
Bargaining Power of Suppliers High
Table 1: Summary of the Porter’s Five Forces of the Air Asia
2.1.3 Competitor Analysis
One of the competitors of AirAsia is Tiger Airways Holdings operating in Tigerair. Tigerair is Singapore’s largest lower-cost carrier (LCC) and founded in 12 December 2003 (Chan, 2013). It headquartered in Singapore and had operated international services from Singapore Changi Airport (Tigerair, 2018).

2.1.3.1 Reason of Choosing Tigerair
Tigerair is a low cost airline same as AirAsia and most of the reviews from their customers are good (Tigerair Singapore, n.d.). Tigerair and AirAsia have high market commonality and high resources similarity as they both serve aviation services, therefore creating competition.

2.1.3.2 Strategic Group Map

Chart 1: Strategic Group Map of ASEAN Airlines

2.1.3.3 Key Resources
i. Physical Resources
Tigerair has its own aircrafts such as Airbus A319-100 with 144 seats and Airbus A320-200 with 180 seats (Tigerair, 2018). The Airbus A320-200 have narrow bodies and able to turn around fast. The airlines usually have hangars at their hubs, Tigerair also owns hanger at Singapore Changi Airport.

ii. Human Resources
All employees and employers in Tigerair need to involve in the organisations’ activities, such as staffing, and training (Essays, 2013). The management also concern the employee and labour relations. They use the fundamental corporate strategy: compensation to attract the right talent (Fermin DIEZ, 2016). Compensation is an important source of employees’ motivation. Tigerair train its cabin crew team from mix nationality for better customer services (Essays, 2013).

iii. Technological Resources
Tigerair has social media sites such as Facebook to introduce itself and post any advertisements and promotions on Facebook (Tigerair, 2018). Customers of Tigerair are able to do internet check-in, booking ticket and purchase insurance through online portal (Essays, 2013). This can help Tigerair reduce the requirement of staffs.

2.1.3.4 Capabilities
i. Low Cost Capabilities
Tigerair can keep labour cost low as its flight booking services and check-in services is via e-commerce. Its advertisements and promotions also promote through online portal, so Tigerair no need to find promoters. Tigerair always keep minimize size of employees size to reduce the training fees (Nguyen Huyen Trang, n.d.).

ii. Partnership Capabilities
Tigerair have joint venture with Taiwan and creates a Taiwan-based budget carrier (Tigerair Taiwan, 2018). On 2017, Tigerair was merged into Scoot. Although Tigerair’s Air Operator’s Certificate (AOC) changed but ‘Scoot’ brand still remain. Both airlines will achieve synergies in fare costs and revenue (Scoot, 2018).

2.1.3.5 Competitive Advantage
Tigerair gains competitive advantage by cost-leader strategy. Tigerair is one of the low-cost carrier (LCC), so it always on the list of the AirAsia’s competitors. After all, people always seek for lower cost. Besides, it has strong alliances strategy with others countries such as Taiwan, Philippines, Malaysia and so on. This will help a lot in attract their own locals because differences countries have different culture.

2.1.3.6 SWOT Analysis of Tigerair
Strength:
– Low cost airline.
– First low-cost carrier (LCC) in Singapore.
– Second largest airlines in Singapore.
– Strong partnership.
– Has own aircrafts (Airbus A319-100, Airbus A320-200).
– Offer international flights.
– Has online portal.
– Low maintenance costs. Weaknesses:
– Poor customer satisfaction and safety.
– High percentage of flights delaying.
– Small range of foods and beverages.
– Limited volume of the baggage.
– Lack entertainments.
– Cheap brand sensitivity.
Opportunities:
– Grow in domestic market.
– Technological and social media trends.
– Provide premium services and give a higher charges. Threats:
– High competition with other low-cost airlines, such as Jetstar, Thai Airways, Virgin and so on.
– Increase in aviation fuel prices.
– Changes in Aviation regulations in different countries.
Table 2: SWOT Analysis of Tigerair

2.2 Internal Environment Analysis
2.2.1 Resources of AirAsia
2.2.1.1 Tangible Resources
i. Physical Resource – Employees are from diversified background
The employees are the resources of the AirAsia. AirAsia hires different geographical area workers, because it believes that diversify workforce can bring the benefits to the AirAsia as they have different perspectives and ideas in solving problems. XO Group is the largest wedding planner in American. Because of XO Group merge with WeddingWire, so employees are from diversified background and it lead XO Group growth in their business (XO Group Inc, 2018). According to the data of year end 2015, AirAsia employs 7171 employees in Malaysia, and 63.0% are Bumiputra. There was 93.0% of the employees were from Malaysia, and 87 Indonesians, 82 Filipinos, 80 Singaporeans, 66 Indians, 62 Chinese, 17 Thais and some are outside the Asia, such as Australia, HK, and Serbia (AirAsia Berhad, 2016). (Refer appendix clara1 ).

ii. Organizational Resource – Supportive management and strong corporate value
AirAsia corporate culture is people oriented. It creates fresh working environment to the employees and encourage open communication for the employees. When leaders share their ideas, employees can free to voice up their ideas so that the management can take the initiatives to implements employees’ ideas (My Star Job, 2014).

2.2.1.2 Intangible Resources
i. Reputational Resource – Strong Brand Image
Brand image manipulates what is already in the prospect’s mind rather than creating something new or special. AirAsia introduced cheap flight fares such as Zero Fare promotion through Facebook, Twitter to create a brand image which is low-cost carrier in Asia (Karisma Kreatif, 2013). AirAsia won the awards of low-cost Airline for sixth years in 2018 World Travel Asia (AirAsia Berhad, 2018).

ii. Innovation Resources – Capacity to Innovation
AirAsia has the capacity to innovate the resources in order to lead the loyalty program, and turn the normal customers to loyalty customers. AirAsia used their innovations to provide the best services for the customers. By the way, AirAsia won the awards of Best Use of Technology in 2018 Loyalty Awards (AirAsia Berhad, 2018).

2.2.2 Capabilities of Air Asia
i. High Aircraft Utilization
AirAsia use its resources more efficiency than its competitors. High efficiency and utilization means that fixed costs needed for each aircraft is lower than per flight basis. AirAsia’s Boeing 737-300 aircraft is fully utilized which have more 16 seats than competitors’ standard configuration (Zhu, Knoji, 2010).

ii. Minimize turnaround time
AirAsia kept point-to-point services lower than 4 hours which is more efficiency than competitor. AirAsia average lesser 25 minutes than competitors which need 45-120 minutes of the turnaround time. In 2004, AirAsia point-to-point services allow the aircraft functions around 13 hours per day. It was 2.5 hours more than competitors, which the competitors con only functions for 10.5 hours per day (Zhu, Knoji, 2010).

iii. Minimize cost
AirAsia minimise the cost to achieved low distribution costs. It utilized technology information to reduce the high price of booking and reservation systems, and agent commissions by using the e-tickets, which is the first airline in Southeast Asia use technology. It saved the airline cost around RM45 for issuing the physical ticket (Zhu, Knoji, 2010).

2.2.3 Core Competencies
i. Efficiency On Managing Departure
The longer aircraft on the ground means that the less productive it will be. By shortening the turnaround time, AirAsia was able to gain more profits. It was gained by removing frills service and removing chair booking and extensive crew drilling on performing quick turnaround (Aruan, 2005). According to the punctuality figures provided by AirAsia.com, 2018, the percentage of AirAsia depart from airport on-time is very high.

Chart 2: Punctuality Figures of AirAsia Airplane (AirAsia Berhad, 2018)

ii. One Stop Customer Fulfilment Service
AirAsia is offering its customers a variety of products through partnership with agencies such as hotels and travel, express delivery, goods, online shopping and entertainment (AirAsia Berhad, 2017). In addition, for the convenience of customers, AirAsia has its own homepage, which makes people interested in checking flight information, arranging their own travel schedules and booking sky gardens. For any enquiries about bookings, they can find Frequently Asked Questions (FAQs) on the homepage or contact AirAsia with specific locations and phone numbers. They can also make online check-in or mobile check-in as they can save time waiting in the airport counter. For the comfort of their customers, they can even choose their own seats, increase the size of their luggage, book or buy meals on board. AirAsia also provides handrails and aisle chairs for wheelchair-bound or disabled passengers at no charge.

iii. Streamline The Operation Processes As Simple As Possible
Operating a single aircraft type enabled AirAsia to have substantial cost savings: maintenance was simplified (i.e. made cheaper), spare parts inventory was minimized, infrastructure and equipment needs were reduced, staff and training needs were lowered (i.e. easy for pilot dispatch), and better purchase terms could be negotiated (Fernandes, 2017).

2.2.4 Competitive Advantages
i. Maintain low cost to ensure low fares for customer
AirAsia keeps its operating costs low thus ensuring lower fares for customers. Dato Tony Fernandes pointed out the most important metric for a low-cost carrier like AirAsia is the cost per available seat kilometre (CASK). AirAsia’s CASK has decreased from 2012 to 2016.

Chart 3: Cost per Available Seat Kilometre (AirAsia Berhad, 2016)
ii. Advantage In Abolishing Fuel Surcharge
On fuel hedging, AirAsia usually hedges its fuel cost according to its booking curve. AirAsia will hedge the sales if they sell air tickets in advance. This will allow them to lock in profit without being affected by the volatility of oil prices. When hedging goes wrong, it can be costly for the company. The company nearly went bust for betting too much on hedging few years ago. Therefore, AirAsia does not believe in taking large hedges (beyond its booking curve). However, when oil prices plunged to a record low, AirAsia opportunistically took a large hedge in 2016/17. As oil prices continue to recover, Tony Fernandes thinks that it is better to return to their original policy of hedging according to its booking curve. So when oil prices increase, AirAsia will pass it down to customers by altering the surcharges (The Edge Communications Sdn. Bhd., 2015).

iii. Focus On Making Guests Happy
AirAsia chosen Salesforce, the global leader in customer relationship management, to be its strategic technology partner as the airline revamps its customer care for the digital era. The Salesforce Community Cloud powers the AirAsia support community in eight different languages and empowers guests to self-serve with a knowledge database, allowing AirAsia to boost service standards, raise productivity levels and the capabilities of their service agents and continue to raise the bar for the airline industry. (AirAsia Berhad, 2018)

Resources/ Capabilities Valuable Rare Costly-to-imitate Non-substitutable Competitive
Implications
Physical and organization resources Yes Yes No No Competitive Parity
Innovation Yes Yes Yes Yes Sustainable Competitive Advantage
Brand image Yes Yes Yes Yes Sustainable Competitive Advantage
Customer loyalty Yes Yes No No Temporary Competitive Advantage
Operations Yes Yes No No Temporary Competitive Advantage
Company Culture Yes Yes Yes Yes Sustainable Competitive Advantage
Table 3: The Competitive Implications of the Resources or Capability of Air Asia

2.2.5 SWOT Analysis of AirAsia
Strengths
• Low cost operations
• Brand Images
• Talented Employees
• Innovative in services Weaknesses
• Service limited by low cost
• Low profits
• Sustaining costs
Opportunities
• High fuel price will squeeze out unprofitable competitors
• Long haul flight to get undeveloped market
• Opened up new routes Threats
• Competitors enter market by offer low cost tickets
• High fuel price
• Aviation regulations and government policy
• Accidents, terrorist attack affect customers’ confidence
Table : SWOT Analysis of Air Asia (Bhasin, 2018)

2.3 Strategy and Competitive Risk of AirAsia
2.3.1 Strategy Used By Air Asia
Air Asia adopted cost-leadership strategy as their business strategy which brings Air Asia become successful pioneers in the airline industry. Cost leadership strategy issues are mostly related to the source of cost advantages, for example usage of raw materials, economy of scales, and technological advance. (Barney, 2012).

i. Cost Optimization
According to Tony Fernandes, he said that the key to Air Asia growth is focus on keeping the costs as low as possible. So, he instil among all of the employees a cultures of increase the productivity with minimum expenses, and make the process as simple as possible (Aviation- Air Asia, 2017). To truly achieve low fares, Air Asia participated in market competition through price advantage, and gain market shares. Air Asia choose the right target market and target customers, optimizing routes, utilize each of the aircraft by flying more than 13 hours per day, and minimize the time on the ground and increased seats of the aircrafts. These can directly or indirectly reduce the fixed cost per flight.

ii. Self-automation
Air Asia introduces company’s direct sales to customers to reduce the sales expenses. Air Asia cultivated the habits of passengers purchasing tickets through company’s website in order to reduce the agent sales ratios. The passengers can pay less or save more when they book tickets by their own, check in and so on.

iii. No Frills
It is the concept of “pay what you want”. Air Asia allowed the passengers to make choices of the service and operate single class-service. They can only pay for the service which they need for more comfortable services, such as flight meals, without compromising on quality and services (Air-Asia).

iv. Lean Distribution System
Air Asia makes the process of the business as simple as possible in order to reduce the expenses and at the same time can collect the passengers’ information. Three quarters of the air tickets of Air Asia are generate from website. Passengers also can book the air tickets through phone calls. And it allowed the customers pay by using credit card and debit card. It’s convenient for the passengers. By the way, Air Asia does not have much sales offices but it established more call centres (S.ST, 2013).

v. Tag lines
As we know, Air Asia taglines “Now Everyone Can Fly” support its’ brand name, and people can understand the meaning without any explanation. Customers expect they can go everywhere by aircraft with low-cost. A research showed the standard deviation among 120 Malaysian passengers satisfaction is 0.4214, which means the variance among them is low. It showed that Air Asia had created a strong brand as the lowest accost airlines with good services (Ming, 2018).

2.3.2 Competitive Risks Associated with Air Asia’s Chosen Strategy
One of the competitive risks associated with Air Asia’s strategy is the alliance of the others airlines to establish the much low price of air tickets for the passengers. Passengers’ loyalty is very low as they will choose the lowest price. Therefore, if there is the company offers lower price, Air Asia would face competitive risks.
By the way, the next competitive risk associated with Air Asia’s cost leadership strategy is the flight fly over much more countries than Air Asia. Air Asia flight over 15 countries and around 100 destinations, and if the competitors provide more destinations or countries, and it will satisfy the customers’ needs and wants.
Lastly, the competitive risk associated with Air Asia’s cost leadership strategy is the cost of the fuel and the currency of Malaysia. The fluctuation of the fuel and Malaysia currency can affect the expenses, and the revenue of Air Asia, and will affect the market shares.