Air Asia's Strategy

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{draw:frame} MGMT102 - Strategy Term Project An In-Depth Analysis into AirAsia Team Members: Arlianawati Binte Abdul Rahman Bek Wei Da Edmund Lee Jing Yang Loo Wen Xiang Seah Suat Peng Serene Yeo Kok Wee Eugene Table of Contents 4.6.4 - Threats Fuel Cost AirAsia’s ability to increase profitability is largely dependent on how well the group succeeds in maintaining cost-efficient operations. Price of jet fuel has increased to levels that only two or three years ago would have seemed impossible. This will result in increase in cost as fuel represents a huge portion of the costs of an airline industry. However, a portion of this threat has been mitigated due to its procurement of A320, which is more fuel-efficient. However, this threat should not be neglected and the costs of fuel should be keep tracked closely. Financial Risk AirAsia is also exposed to a numbers of risks related to liquid funds, trade receivables, borrowings, commodities and derivative instruments. The group employs a wide range of financial instruments to manage these risks. AirAsia’s exposure is especially great as 70% of operational costs are USD linked. AirAsia tries to reduce this threat by constantly looking for opportunities to hedge more aircraft and to hedge receivables. Regulations AirAsia’s success is subject to various regulatory approvals. Changes in interpretation of current regulations or introduction of new laws or regulations will have a adverse impact on the company. Geographical AirAsia is subjected to risks associated to each country it serves. This geographical risk exposure will be reduced as AirAsia continues to expand its network and diversify the revenue stream to a wider market. {text:bookmark-start} {text:bookmark-end} 5 ' Issues & Recommendations {text:bookmark-start} {text:bookmark-end} 5.1 - Type of Customer AirAsia derives almost 100% of its revenue from regional leisure travelers. In poor economic climates, such customers might hold back their discretionary air travels altogether, setting back ticket sales severely. Arguably, this decline in business could be supplanted by business travelers trading down from full-service airlines. However, we believe that the migration of such travelers would not be enough to mitigate the loss of discretionary leisure travelers, especially in the current depressed state of the economy. AirAsia’s is not alone in its almost full dependence on leisure travelers. Tiger Airways and Jet Star face the same problem. To stay on top of the competition, AirAsia has to attract customers from other budget carriers on traditional routes or expand into new routes not served by any budget carrier. This it has done so by offering the region’s first long haul budget flight from Kuala Lumpur to London. {text:bookmark-start} {text:bookmark-end} 5.2 - Increased Competition AirAsia was the first to launch budget air travel in the region in 1996. The airline failed terribly when it started only to be bought over by current CEO Tony Fernandes in December 2001. In 2002, the airline turned profitable. In quick succession, Jet Star and Tiger Airways entered the budget scene in 2003 supported by full-service carriers Qantas and Singapore Airlines respectively. These airlines competed head on with AirAsia in popular routes within Southeast Asia. AirAsia, however, still has a monopoly over many domestic routes within Malaysia for the budget conscious traveler. Recently, Malaysian Airlines entered into the budget scene with its ‘Everyday Low Fares’ campaign which entails zero fare tickets for domestic and regional routes, putting it in direct competition with AirAsia. AirAsia responded with even lower fares, typical of a ‘price war’ that could ultimately hurt the company’s margins. The ASEAN open skies agreement reached in 2007 will add further pressure to the company as bigger national carriers sought to saturate and capture market share. {text:bookmark-start} {text:bookmark-end} 5.3 - High Risk...
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