Malaysia Airline Analysis - Case Study Example

Name: Lecturer: Course: Semester: Date: Table of contents 1.0 Introduction……………………………………………………………………….2 1.1 Background ……………………………………………………………………….2 2. Porter’s five forces analysis ……………………………………………………….3 3. PESTLE analysis……………………………………………………………………6 4. Porter’s generic strategies…………………………………………………………..10 5. Porter’s value chain…………………………………………………………………11 6. Conclusion……………………………………………………………………………13 7. Recommendations…………………………………………………………………….14 References ………………………………………………………………………………16 Can Malaysia Airline be the World’s Best Airline? 1.0 Introduction The aviation industry is a very competitive market for airlines all over the world. The industry is highly sensitive to global economy climate and very much affected by fuel fluctuations. It therefore poses a great challenge to predict the future of a company by merely looking at its past performance. We can see from this paper how Malaysia Airline is struggling to remain profitable in a highly competitive market. This paper tries to analyze the positioning of Malaysia Airline in the global air transport industry currently and in the future. It starts by giving a brief background of Malaysia Airline and then proceeds to analyze the company using, Porters five forces, Porters value chain, Porters generic strategies and PESTEL models. The paper then concludes the main findings of the analyses and offers some recommendations. 1.1 Background Malaysia airlines Limited, previously known as Malayan Airways Limited as incorporated on 12 Oct 1937 as a joint initiative of the Ocean Steamship company of Liverpool, the Straits Steamship of Singapore and Imperial Airways. The airline was initially operating between Penang and Singapore relying on only a single aircraft. Within a decade the airline had become an international airline with over 2400 employees and a fleet of 16 aircrafts. In 1965 Malaysia Airline operated as a bi-national airline serving the separated Singapore and Malaysia nations. This was not for long as in 1972 the partners went different ways. Malaysia introduced Malaysia airline limited which became the national airline and holds the position up to today (Malaysiaairlines.com, 2013). The airline has received several accolades as to commend its excellent services. Since 2001 the airline has received World’s Best Cabin Crew award by Skytrax UK. In 2010 it received world’s best economy class award and staff service excellence for Asia award. World Travel Awards awarded the airline The World’s Leading Airline to Asia for 2010 and 2011. Towards the close of 2012, the airline made a net profit of $ 16 million which is a small profit but a relief to the airline having made a loss of $426 operating loss it made in 2011. The Asian market is very competitive and the rising fuel prices don’t make the situation any better. The company released its business plan recently which it hopes will take it back to profitability and ensure longer term cost reduction for sustainability. The vision of the airline is to become the preferred premium carrier through a strict implementation of its business plan which has in it a recovery plan, a list of game changers and foundations (Malaysiaairlines.com, 2013). 2. Porter’s five forces analysis The porters five forces model was developed by Michael porter. According to Porter’s Model of competition, any business that wants to survive and succeed in a competitive market must develop and implement strategies to effectively counter the following forces (Hooley G. Piercy N. F. & Nicoulaud.2008): The rivalry of the competitors in the industry The threat of new entrants into an industry and its markets The threat posed by substitute products which might capture market share The bargaining power of customers Bargaining power of suppliers The porter’s five forces model is usually used to understand the position of the company is relation to strengths and the weakness as far as the market is concerned. By utilizing the five generic drivers of competition in the industry, one can be able to understand the balance of power and how it can impact on the performance of a product in the market (Porter, M.E. 1999). Rivalry of competition in the industry Rivalry of the competition can be described as the extent of competition being faced by a business from businesses offering the same product or service in the industry. Businesses should respond to increased rivalry in the industry by being innovative and creative to differentiate their service in order to stay ahead of the competition and survive if not grow. There is intensified rivalry for customers in the domestic and intra-Asia market that is facing the Malaysia Airline especially coming form Low cost carrier segment of the market. Currently Air Asia controls 52% of Malaysia domestic market as compared to Malaysia Airline share of 47%. Malaysia Airline has a 39% share of the Malaysia-southeast Asia market which includes the international flights. Other Gulf airlines like Fly emirates have also intensified competition in the Asian market making rivalry so intense in the Asian airline industry (Centre for aviation (CAPA), 2013). The threat of new entrants into an industry and its markets The threat of new entrants in the industry is considerably low for small carriers however the threat is real considering the opening up of markets by the lowering of entry barriers to just regulatory controls. Emirates, Etihad and Qatar Airways have taken a big chunk of Malaysia Airline’s long-haul market carrying most of the west bound travellers from Malaysia. The threat of new entry into the market has forced the company to concentrate on short haul services in the intra-Asia region where it hopes to solidify its position as a premium carrier (Centre for aviation (CAPA), 2013). The threat posed by substitute products which might capture market share With the ever increasing costs of domestic flights, there exists the threat of travelers substituting air travel to other means of travelling like high speed trains and faster broadband connection that are reducing the need for travelling (Shaw, 2007). However the greatest substitute for the Malaysia Airline premium service is the low cost carrier program that is offering an alternative to the Malaysia Airline’s service (Malaysiaairlines.com, 2013). The threat for substitutes is very high such that the company has recognized its magnitude and went ahead to craft a business plan to counter the threat of its shrinking market. The bargaining power of customers With the intensified competition in the airline industry, customers have a variety of prices and airlines to choose from thereby having a considerable amount of power. Even as airlines try to win over customers through excellent service and fleet renewal programs, the price oriented customers will still wield more power in the market Power of suppliers The airline industry is dominated by a few big manufacturers who supply almost all the airlines in the world. Boeing, airbus and Comac are the leaders in the aircraft industry. Malaysia airline currently has fleet of 102 aircrafts 25 from airbus and 77 from Boeing (Centre for aviation (CAPA), 2013). This arrangement ensures the suppliers don’t wield so much power to interfere with the development plans of the company. All the same sticking with these two suppliers is commendable as it reduces costs associated with spare parts and training of staff when an airline deals with many suppliers. The Porter’s five forces model paint a gloomy picture of the industry in which Malaysia Air operates. There is stiff competition especially coming from established big carriers like emirates and Qatar Airlines which are state backed. The domestic market is still very competitive with the company coming in second after Air Asia. Threat of new entrants is very real and doesn’t offer a near stable market for the airline for as long as the industry opens up top international airlines. With this competition level, the consumers have a very high bargaining power further eroding profits for the company. Becoming a global brand is still a long way ahead since the company has had to adopt a strategy of focusing on the short-haul flights within Asia, a strategy that has proved to be profitable for the last two quarters of 2012. The company’s concentration on the premium market is leaving it vulnerable to stiff competition from low cost carriers who are proving to provide the much needed break to financially constrained customers. 3. PESTLE analysis PESTLE stands for Political, Economic, Sociological, Technological, Legal, and Environmental. The analysis is an audit of an organizations external environment which has an impact on the business/organization. The information can then be used for the benefit of the company in strategic decision making. An organization has to understand the effect of macro-factors to its profitability. Understanding these factors gives a big picture of the environment and will thus guide a strategic position adopted by the company (Barney and Hesterly, 2008). Political Politics affect business in every sphere of the economy. The airline industry is a closely monitored sector especially since the threat of terrorism became so much a headache in the 21 century. The rise of terrorism has led to increased security measures especially for airlines operating direct flight to US and other European countries. The strict barriers in the airline industries around the world are easing and being replaced by regulatory frameworks that seek to open up the skies for airlines to operate freely (Directory, 2007, Hitt & Ireland, 2010). However, crucial alliances like one-world which Malaysia Airline joined lately are still vital in ensuring access to global markets. Prolonged EU politics regarding the future of the Euro Zone have had an effect on Malaysia Airline long haul flights to the region. Airlines operating the European routes have been forced to rethink their investments on the route following poor economic climate in the region which seems to be prolonged by the politics revolving around monetary unity. Political interference in the management is always a big factor in Malaysia Airline. For 2013, the threat is even real as there is a possibility of new management that will come in with a new prime minister when Malaysia holds its general elections in 2013. A new management will mean a new strategy which presents new uncertainties about the feature of the airline. Economical The airline industry is closely attached to the performance of world economies, as world economies plunge and so does the demand for air transport as businesses experience low growth and thus little movement of people doing business (Delfmann , 2005). Malaysia Airline long haul program has been hit hard by the Euro zone economic downturn (bbc.co.uk, 2012). The company has had to revert back on concentrating its effort within the Asia pacific region which is showing great economic growth and turning in good profit for the company. In the first three quarters of 20112 the company posted $158 million (MYR 484 million) which was a massive reduction of its net loss at the same period in 2011 which stood at $ 418 million (MYR 1.247 billion). The carrier has embarked on sustained effort to cut costs since it had made a net loss of $834 million for 2011 (MYR 2.521 billion). Much of the company’s revenue is eaten up by the high cost of fuel which stands at 38% for 2012 followed by staff expenses which stood at 17% for the same year (Malaysiaairlines.com, 2013). Economically, it can be seen the company is struggling with high costs of operation and a competitive domestic market that are having a toll on its profitability Source: Malaysia airlines Sociological Malaysia Airline is positioning itself as a premium carrier concentrating its efforts particularly in the Asia-Pacific market. This region is experiencing an economic boom resulting in people with high disposable incomes; and can thus provide a good clientele for the airline if it markets it brand effectively (Graham & Papatheodorou, 2012). However low end travelers will have to be sacrificed by the airline if it’s to maintain its positioning as a premium airline. The airline could as well tap into the European market through partnerships with oneworld members such as British Airways. A lot of business class travelers are using the Europe Asia route as economies in Asia improve so this could be a viable market for Malaysia Airline. It is a valuable market segment that can turn the fortunes around for Malaysia air if well covered through high quality service and partnerships with oneworld members. Technology After joining oneworld, Malaysia Airline has had to overhaul its entire IT system to ensure compliance with the alliance (Malaysian insider, 2013). This is a worthy investment as it assures clients of their safety and security and smooth operations without hitches in communication or flight cancelations. Internet booking is also a competitive edge as far as the premium segment of the market is concerned (Jiang, 2003). Malaysia Airline is committed to offering this and other conveniences to its premium customers. The company maintains a fleet of just two suppliers to lower maintenance costs of the aircrafts. In the future though, the company will have to pursue low fuel consumption planes to cut on its fuel expenditure. Environmental Some of the environment issues facing the airline industry is the amount of pollution the air transports impacts on the environment. According to the European aviation safety agency website (easa.europa.eu, 2013) global air traffic is growing at an average of 5%. This presents a challenge of reducing the environmental impact left by the air travel. The agency proposes technological and operational improvements to lower the level of impact on the environment by airline operators. Noise and carbon emission remain to be the greatest concern for environmentalists and the global community at large. The two have a great impact on the local air quality and climate change and may soon be a major issue for airline operators. Peter (2008) contends that the environment factor is not too problematic but may in the near future cause problems for companies if they don’t portray an image of caring for environment. If Malaysia airline is not compliant with measures to reduce climate change it can face difficulty attracting customers. Legal Operating at international level means Malaysia airline will have to comply with various regulatory issues such as safety and security features for all oneworld members (Malaysian insider, 2013). Threat posed by terrorism means the company has had to have tighter policies to comply with international airlines requirements (Robbins and Maynard, 2009). Malaysia Airline is not currently into any legal problems as regards its industry conduct. However the company must adhere to industry regulations on safety and security standards, air traffic regulations and treatment of disabled travelers. 4. Porter’s generic strategies The Porter’s generic strategies approach comprises of cost leadership, differentiating and focus. Through this approach a company can be able to analyse its position in relation to its ability to compete in the market (Wilson & Gilligan. 2005). Currently as it stands, Malaysia Airline is not a price leader in the market due to a multiplicity of factors among them being high cost of operation, meaning the company cannot compete on price based strategy. In fact the company has decided to concentrate on premium travelers. This is a sort of differentiation to their service. Malaysia Airline caters specifically for these niche market although plans are underway to go into low cost carrier segment however for now it has to improve is outlook and service to suit the kind of clientele it is serving in the premium market (Temporal, 2012). Malaysia Airline has also focused its efforts in the Asian market. This has enabled it to reduce on expenses associated with long haul operations such as minimal traffic that is costly to operate with. The focus ensures the company understands the market perfectly and can thus come up with appropriate strategies that will work in the market. This analysis reveals one weakness of Malaysia Airline, the disadvantaged position it lies in terms of dictating price in the market. Thus means the company cannot attract travelers based on low cost carrier advantage but can rather compete on a different strategy. The analysis goes on to reveal the airlines competitive advantage which is the focus on the Asian market and differentiation of its service through price and quality of service to serve only the premium market. If this strategy can work, then airline can become a global premium carrier with strong presence in the soon to be powerful Asian continent. 5. Porter’s value chain The value chain concept was developed by Michael Porter views a firm/enterprise as a tool to analyze the network of basic activities that add value to a company’s products and services. The value chain concept framework consists of primary business process activities which are directly related to the production of a products or delivery of services to the customer; and business support processes in the running of the business that indirectly contributes to the production of the products and services (Layton, Meng and Roger 2010). Currently Malaysia Airline has a strong employee force which is well trained judging for the service awards it has received recently. The airline is also trying to advance its fleet numbers from its current position of 102 aircrafts, Malaysia Airline has a total of 54 aircrafts on order meaning they are going to boost their capacity to deliver value to their customers through increased frequency. The company is experiencing much headache in relation to primary process especially due to high cost of fuel. This has made the airline competitiveness limited on other factors and not price based competition since much of the losses can be attributed to high cost of fuel and employee salaries and benefits. The company is doing well by joining a powerful alliance like oneworld which will increase its market reach and make it a global brand. From the Porter’s value chain model we can see that Malaysia Airline has to dedicate a lot of effort in cost cutting as it is the only problem hindering its profitability as far as this model is concerned. To dominate the premium segment, then excellent customer service has to be adopted and technological advancement since this market is won over by these factors 6. Conclusion It is evident from these strategic analyses that Malaysia Airline is currently faced with a very competitive market although with great potential for growth. The airline reported loss for the 2011 financial year but went ahead to report small profits for the last two quarters of 2012, this maybe an indication of things finally improving for the airline. It may also a point to the fact that the final quarter of the year is usually very strong for the airline. The biggest competition is coming from the low cost carrier segment. The company acknowledges this and instead of introducing a low carrier segment it has decided to bank on premium services to deliver profitability and growth for the company. In fact it is the vision of the company to become the preferred premium carrier. This strategy seems to be working well for the company sine it posted good results after adopting it. The threat of competition is very high and the company cannot only rely on this market segment to be competitive in the market it has also to venture creatively in the low cost carrier segment without hurting its premium operations. The environment is not very conducive in the international market as regards the economic performances in traditional markets of north amerce and Europe. The company has therefore been forced to review its global strategy and concentrate on a few global destinations which are profitable to the airline. This means it will reduce its global presence and concentrate much on the Asian market which proves to be cost effective and profitable for the company. Politically it remains to be seen how the coming in of new government in Malaysia will affect the management and strategy in the national carrier so high political uncertainty is associated with the airline. From these analyses therefore it can be seen that Malaysia Airline is far from becoming the world’s best airline. It is making far great loses currently and it is yet to reverse the trend to profitability. The cost of fuel is very high and the company seems to lack ways to reduce it. The market share both at home and international is lower than expected for a national carrier. It remains to be seen whether its business plan will return it back to profitability. 7. Recommendations For Malaysia Airline to become the world’s best airline it has to considerably cut the cost of operations especially from fuel related expenses and employee costs. These high cost are eating away its profits and thereby reducing its capacity to grow by reinvesting its revenues. The company must also adopt a multi-brand strategy to counter competition from low cost carriers; it is not enough relying on premium market to sustain growth and profitability in so volatile a market. The fact that Malaysia Airline has entered into the oneworld alliance means that it can now exploit partnerships with other airlines in the world as it is the first airline in the Southeast Asia to join the alliance. It pits it at a favorable position to attract Long haul travelers form profitable routes into the Asian region. If Malaysia Airline continues to cut costs, differentiate service and diversify its revenue stream, then it will be on its way to becoming the best airline in the world. References Barney, J. B., and Hesterly, W. S. 2008 Strategic Management and Competitive Advantage, Pearson Prentice Hall. Bbc.co.uk. 1 march 2012, Malaysia Airlines shares dip on 2011 loss, [Article] viewed 30 April 2013, online at http://www.bbc.co.uk/news/business-17216510 Centre for aviation (CAPA), 2013, Malaysia airlines 2013 outlook clouded by increasing competition and launch of Malindo, [Article], available online at http://centreforaviation.com/analysis/malaysia-airlines-2013-outlook-clouded-by-increasing-competition-and-launch-of-malindo-99945 Delfmann , W 2005, ‘Strategic Management in the Aviation Industry ,Ashgate Publishing Ltd., pp 229-230. 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