Strategic Analysis on Air Asia

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Assignment 3 – Individual Assignment 2 Jul 2010 Semester 2010 ____________________________________________________________


Completed By Woo Gim Chuan Marcus (J0704245)

Name of Tutor (T01) XXX

BUS 488 Strategy - T01

Question 1 AirAsia, which is one of the earliest low cost carriers (LCC) in Asia, has become a LCC since 2001. So far, it has expanded its network from Malaysia to Thailand to Singapore, Macau and even the Mainland China in 2006. In short, AirAsia “jumped out” from an intra-Malaysia and Thailand market to a “real AirAsia” in the continent. Thus, what are the possible core competencies to ensure that there is quantum leap to success? The internal analysis on the company below will answer the question. Resources, Capabilities & Core Competencies Analysis a) Accounting Ratio Analysis In 2004, AirAsia’s earnings margin before interest and taxes (16.8), return on capital employed (14.6) and return on equity (37.7) accounting ratios were above the industry average – 14.5 is the industry average for earnings margin, 11.6 for return on capital employed and 21.2 for return on equity. This above average results indicates that the company has been managed well and thus is able to achieve high above-average returns. The increase in current ratio from 1.24 (US$49. 206 million / US$39.643 million) to 5.60 (US$230.024 million / US$41.099 million) also serves as a confident booster to investors and shareholders in that AirAsia’s solvency had strengthened and thus is able to fulfill its debt obligations. In fact, the debt-to-asset ratio1 in the last 5 years was low and decreasing too. As a matter of fact, in 2005, it was merely 0.14, which was comparatively lower than many low cost carriers. b) Finance Resources AirAsia’s net profit ending Jun 2005 was reported US$29.2 million, a 126% increase year-on-year. The end of June 2005 financial summary showed that AirAsia, the leading low cost airline in Asia, had a huge reserve (bank and cash balances) of US$86.6 million. This is the company’s strength as very few low cost airlines of similar size have 1

Debt-to-Asset = Total debt / Total asset

Individual Assignment 2

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BUS 488 Strategy - T01

such large reserves. With such huge reserves and low debt-to-asset ratio, AirAsia is thus capable of generating internal funds to finance any expansion. It is certainly AirAsia’s strength. c) Organisation Design and Organisational Resources AirAsia’s organisational structure is rather simple and flat as it involves a group of staff in the company reporting to one manager. This serves AirAsia well as the business requires a structure with fewer levels of management so as to achieve more consistency and cost reduction. In addition, the cost leadership strategy that the company adopted also allows AirAsia to focus more intensely on areas such as in/out-bound logistics, operations, marketing, services and customers. This in turn helps to create synergy and capability to deliver the full spectrum of low cost carrier business. d) Physical Resources Despite having a large fleet of Boeing 737 aircraft for operation, AirAsia still continues to invest heavily. This includes the acquisition of more fuel-efficient aircraft (A320) so that the company can have sufficient capacity to meet the growing needs and demands of their customers as well as to continue to keep its cost low. The new aircraft can lower fuel usage by about 12%, an important cost saving, as fuel accounted for almost 50% of the total operating costs for the company over a period of time. e) Technological Resources AirAsia was the first airline in Southeast Asia to utilise e-ticketing so that traditional travel agents can be bypassed. This implementation saves the cost of issuing physical tickets and eliminates the need for large and expensive booking and reservation systems. To further exploit technologies, AirAsia made it possible for customers to purchase tickets either from...
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