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Air Asia: Penetrating into the South African Airline Industry

Research Paper (undergraduate) 2009 28 Pages

Business economics - Marketing, Corporate Communication, CRM, Market Research, Social Media

Excerpt

Table of Contents

1.0 Introduction

2.0 Strategic Analysis
2.1 Industry and competitive conditions
2.1.1 The immediate environment
2.1.1.1 Intensity of rivalry among established airlines
2.1.1.2 Risk of entry by prospective competitors
2.1.1.3 Threat of substitutes
2.1.1.4 Bargaining power of suppliers
2.1.1.5 Bargaining power of buyers
2.1.2 The macroeconomic environment
2.1.2.1 The economic environment
2.1.2.1 The social environment
2.1.3 Key success factors (KSFs)
2.2 Internal environment
2.2.1 Distinctive competencies
2.2.1.1. Ability to maximise aircraft space utilisation
2.2.1.2 Lean product line
2.2.1.3 Good management foresight
2.2.1.4 Fast turnaround time
2.2.1.5 Good supplier relations
2.2.2 Drawbacks
2.2.2.1 Security
2.2.2.2 Questionable on-time performance
2.3 Business and corporate level strategies
2.3.1 Current market positioning
2.3.2 Growth and development strategies
2.3.3 Obstacles

3.0 Recommendations

4.0 Conclusion

References

1.0 Introduction

Air Asia is a low-cost carrier based in Malaysia which seeks to expand its operations across the globe. With its affiliates - Thailand Air Asia, Indonesia Air Asia, and Air Asia X, typical ‘average’ people can now fly to over 66 successfully penetrated destinations in 18 countries worldwide (Air Asia, 2009a). Nevertheless, not all countries are an attractive prospect for a new investment.

This book presents the attractiveness of the South African airline industry for a new investment penetration by Air Asia.

The scope focuses on the airline industry and competitive conditions in South Africa, Air Asia’s internal environment, Air Asia’s business and corporate level strategies, and the resulting investment recommendation. Methodologically, the analysis presented uses secondary data sources from academic journal articles, organisational websites and reports, online newspapers, and various databases. No assumptions were made while the on going global financial crisis could present a weakness of the analysis as forecasts may defer according to fluctuating global conditions.

2.0 Strategic analysis

2.1 Industry and competitive conditions

2.1.1 The immediate environment

The immediate environment is the industry in which Air Asia would be competing in – South Africa’s airline industry. To determine its attractiveness, an understanding of the competitive pressures is vital. The five forces model by Porter (1979) is a key analytical tool to develop this understanding.

illustration not visible in this excerpt

Figure 1: Michael Porter’s five forces model

2.1.1.1 Intensity of rivalry among established airlines

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Figure 2: Leading airlines in South Africa

SAA is a government-owned national flag carrier of the country and is regarded as one of the largest airlines on the African continent (South African Airways, 2009). Despite the company’s prestigious position, the fairly recent low-cost airlines – 1Time and Kulula.com, are both growing significantly faster than SAA and the other standard established carrier competitors (Datamonitor, 2005). The rationale behind this significant growth is the low pricing strategies adopted by these carriers (1Time, 2009). Subsequently, this suggests a growing trend of intense price competition among airlines in South Africa. Although the high end players highly differentiate their offerings in terms of quality to manoeuvre one another, the fact that customers can now switch between airlines rather easily due to the price comparison online has resulted in high end players having no choice but to abandon some of their more expensive services and provide low-budget alternatives in order to remain competitive (Datamonitor, 2008). Thus, these events imply a high degree of rivalry in the South African airlines industry.

2.1.1.2 Risk of entry by prospective competitors

To a certain degree, the South African airlines industry had been deregulated (Datamonitor, 2008). As entry barriers are lower in a deregulated market, it places the market as an attractive prospect for new entrants (Porter, 1979) – such as Firefly and Jetstar. Nevertheless, setting up an airline company requires the compliance of rules and bureaucracy (Dana & Vignali, 1999). For instance, the South African Civil Aviation Authority (2009) requires an airline company to apply for an operating certificate prior to their establishment in the state. Unfortunately, this is rather a complex process and creates a problem of generating revenue in the application period (Datamonitor, 2008). Furthermore, a new entrant would require a considerable amount of capital to penetrate a market (Cuomo & Vignali, 1998), such as to acquire a new fleet of planes. Even if a firm has the capital required, they may face a problem of accessing good distribution channels – infrastructure in South Africa is lagging behind the growth in air traffic (Datamonitor, 2008). In addition, Massango (2007) projects the growing problem of congestion at major South African airports. Subsequently, the slot’s right to take off or land at a designated time, particularly primetime slots, becomes an essential commodity for airline companies in South Africa. In addition, the global economic crisis creates a hard time for the airlines industry, including South Africa (Datamonitor, 2008). Therefore, although South Africa’s airlines market is rather attractive in terms of deregulatory, the bureaucracy, slot problems, and large financial outlay results in the likelihood of new entrants to be moderately low.

2.1.1.3 Threat of substitutes

Transportation by road, rail and marine are forms of substitutes for air travel. Intercity train services in South Africa run between towns - Johannesburg and Durban (Datamonitor, 2008). Although travelling by train is cheaper, most journeys may go overnight. Bus operators such as Greyhound and Intercape are found to efficiently run intercity express links across the nation (Datamonitor, 2008). However, many bus services may arrive at inconvenient times and may also travel overnight. In international travels, there are ships which connect the South African port with neighbouring ports – Nigeria and Ghana (Datamonitor, 2008). Nevertheless, this is rather time consuming. In contrast, despite the time taken to reach the airport and check in for flights, the overall journey times may be relatively much shorter than the travel substitutes above (Datamonitor, 2007a), but obviously attached with a slightly higher price. However, with the intense competition in price, air travel may soon be as economically priced as its substitutes. Nevertheless, the factor of longer and overnight travels may cause a drawback for these substitutes. As a result, the threat of air substitutes is moderately low.

2.1.1.4 Bargaining power of suppliers

According to Primo, Dooley and Rungtusanatham (2007), switching suppliers after signing a contract often result in penalties. Relationally, airlines usually engage in long term contracts in the production or leasing of aircrafts over a period of time and any breach of the contract would incur financial penalties (Techagreements, 2009). The power of suppliers in the airline industry is further boosted by the presence of a duopoly upstream – Airbus and Boeing represents the only significant airliner manufacturers (Harbison, 2007). Thus, this projects the limited choice of airliner suppliers to South African airlines. Fortunately, airline fuel is not taxed due to a series of treaties between countries, including South Africa (Datamonitor, 2008). However, airlines have little control over fuel prices – the only way to mitigate the impact of price fluctuations is through hedging (Aretz, Bartram & Dufey, 2007). Furthermore, the fact that there is no substitute for jet fuel further increases supplier power (Datamonitor, 2007a). In turn, this reflects a difficulty in finding substitutes for the airlines inputs. Consequently, these events would suggest that the supplier power is rather strong.

2.1.1.5 Bargaining power of buyers

As airlines are the players in the airline industry, leisure and business travellers can be considered as the main buyers. There are a large number of individual consumers in the South African airline industry which diminishes buyer power (Datamonitor, 2007a). In turn, losing one customer is marginal to the airline. Potential buyers have no switching costs when switching from one player to another and therefore, they are free to shop around for the best deals for their journey. Buyer power is increased marginally by the presence of online booking sites (Datamonitor, 2008), allowing them to search for the best deals. On the whole, this industry was found to be highly price sensitive and the majority of customers were keen to find the lowest priced ticket for their journey (Datamonitor, 2008). Consequently, buyer power is assessed as high overall.

2.1.2 The macroeconomic environment

The external environment consists of a wide array of macro environmental factors – which may include the economic and social forces (Myers, 1998).

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Details

Pages
28
Year
2009
ISBN (eBook)
9783656123743
ISBN (Book)
9783656124276
File size
800 KB
Language
English
Catalog Number
v188545
Institution / College
Monash University Malaysia, Sunway Campus
Grade
High Distinction
Tags
Air Asia South Africa Airline industry Strategic management Weng Marc Lim Monash University

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Title: Air Asia: Penetrating into the South African Airline Industry