Introduction

Malaysian Airlines is a government owned flag carrier of Malaysia. It operates from its home
base, Kuala Lumpur International Airpor and with a secondary hub at Kuching. Other than the
airline, the group also includes aircraft maintenance, repair and overhaul and aircraft handling(
Wikipedia)

The vision of the company is to become a preferred premium carrier, well positioned in the
Asian aviation marketplace. Even though Malaysia is relatively smaller in Asian arena, the
airline will try to harness the country’s geo economic centricity in ASEAN, and emphasise on
their own natural way of cost competitiveness as a hub and try to enter into alliance and
partnership to ‘punch above the weight’(Malaysia airlines).

Current situation of Malaysian Airlines

Malaysian Airlines are in a position of crisis. The company has incurred a net loss of RM 1.2
billion in the first three quarters of 2011 alone. Almost 40% of the total routes in which the
airline operates is incurring losses. The position of the company is even more tenuous as
compared to the crisis which the company faced in 2006. The market of aviation is becoming
competitive with the entrance of the low cost carrier (LCC) in the market and the growth of the
Middle Eastern full service carriers and even the revival in the fortunes of Asian full services
such as Garuda, Japan Airlines and Thai Airways.

Malaysian Airlines had not focused on the premium segment of the market, even the quality of
the product has fallen. The major marketing efforts of the company were focused on tactical
sales promotion instead of brand building. Even with great efforts from the side of the sales team
the profits generated is really low which is quite low to cover the increasing cost structure.

Demand in the Asian aviation industry is quite strong. Throughout Asia there is a huge growth in
the disposable income of the people, access to the credit card is increasing and a cross border
trade is very popular, with well developed infrastructure and population of south east Asia alone
is around 500 million there are huge growth potential for the aviation industry so in order to
revive from its current status Malaysian Airlines has a great plan for success.

Malaysian Airline recovery model from 2011 crisis:

To achieve its vision of becoming a preferred premium carrier begins with some fundamental
remodelling of the core business. It is based on sheer simplicity of focus and is very basic in
nature. The company will study the strategy utilised by other airlines to achieve success and
adapt it effectively in a unique way.

1) Smaller yet profitable networks: The airlines would include only those routes where the
premium travellers would like to go so that they can win competitive position and home
advantage. The company is planning to shrink in order to grow and the moment they are able to
achieve financial stability they will expand their network to cover world’s major economic
regions and hubs.
Malaysia Airlines (Kuala Lumpur) will drop the following seven routes in early 2012 from Kuala
Lumpur according to its new business plan (Airlinegallery .com, 2011) Surabaya (January 6)
Dubai (January 10) Karachi – Dubai (January 12) Dubai – Damman (January 13) Johannesburg
(January 31) Cape Town – Buenos Aires (February 1) Rome (February 2)

2) Win back customers: The company plans to take delivery of 23 aircrafts in the year 2012,
each having state of art passenger amenities. Anew sales and marketing plan will come enforce
which will help the airlines to win back its hard earned loyal customers, especially the ones from
Malaysia and convince them of the enhanced services provided by the airlines.

3) Relentless cost focus: As new aircraft would be purchased by the company it will fully
utilised the advantage of its improved efficiency which would comprise of lower fuel bills and
maintenance expense initially. The focus would be to keep the overhead and discretionary
expense to the minimum.

4) Keep it simple: The business structure of the company has become very complex with a
group of entities operating together- core full service airline, MASholiday, MAS aerospace
Engineering, training, catering, and ground handling. The company is planning to remove this
clutter and focus on its prime business activity flying so it is planning to give sufficient amount
of freedom to its ancillary business units so that even they can utilize their potential to the fullest.

5) Launch of new regional premium airline: In 2012 the company plans to launch its new short
haul brand which would be flying entirely on the new Boeing 737-800. The smaller Boeing size
would enable the airlines to fly to more places where the customer wants to travel and even
sometimes according to their convenience. A separate management structure would be brought
enforce to focus on the unique needs of the premium travel customers. The airlines would set
new standards of product service and quality which would include high degree of cost and
operational efficiency.

6) Alliances and partnership: The airlines plan to join the extensive global network and looks
forward to increasing traffic with the help of combined networks and infrastructure. The airline
plans to enter into material partnerships with major airlines to strengthen its international
presence.

7) Branded customer experience: The customer would be top priority of the airlines and an
improved experience would be provided at all touch points pre-flight, in-flight, and post-flight.

8) Continuous operational improvement: To support the vision of becoming a preferred

premium carrier the airlines would be making substantial changes at the operational level to
excel on three lines: commercial effectiveness, flight operations and cost management.

In order to determine the success of the future strategy the current market condition of the
airline industry must be brought into focus. So to analyse the market attractiveness porter’s five
force model would be best suited (Douglas).
 Porter’s Five Force Model

1. Industry competitors

 Local competitors are Air Asia, Firefly, etc

 International competitors- Singapore airlines, Garuda, Cathay Pacific, Thai International
Airways
 Other Low cost Airlines- Compass, Tiger Airways, Cebu Pacific, Jetstar Asia Airways,
Impulse, Virgin blue Airlines.
 The number of competitors is very high and with the emergence of low cost carrier and
deregulation the internal competition has increased and the only reason that reduces it is
the low and highly volatile profitability.

2. Suppliers Power

 Fuel prices are ever increasing affecting the cost so the supplier power is high.
 The Asian airline industry is very optimistic about the growth potential of the Asian
aviation industry so is placing huge aircraft orders thereby increasing the bargaining
power of the suppliers again
 The civil aircraft industry is monopolized by two major aircrafts manufacturers
 Large capital required so the leasing companies come into picture.
 Highly specialized and professional employees are required to maintain the status of five
star carrier services.
 The recent crisis in the overall airline industry has to some extend lead to a reduction in
the prices of the aircrafts.

3. Buyer’s power

 Local population (Malaysian)

 Southeast population- Indonesia, Thailand, Singapore, etc.
 There is no switching cost as the buyer can easily switch from one airline to another so
the power of the buyers increases.
 There is a very low product differentiation so to succeed providing either services at very
low cost or give a five star experience so that customer pays the price for the superior
services offered.
 The availability of information is really high and with the emergence of travel portals
who guarantee that they can search for the lowest fares out of all the options available
and book it for the client with just a click which even provides the ease of purchase, the
bargaining power of the buyer is increasing
 Frequent flyer programme and online duty free purchase services can create customer
loyalty and reduce the threat of customer switching over to other airlines to some extent.
 Low buyer concentration can also reduce the power of buyers.

4. Potential entrants
  Airline industry has a high barrier to entry and exit as once an airline is operative then
exist from the industry would amount to huge amount of loss.
 Licensing is one of the major barrier for the industry.
 JV and partnership is the most recent trend in the industry which has increased the threat
to this industry.
 High unit cost makes the entry to the industry unattractive.
 There are no economies of scale and scope available.
 Deregulation has to some extend reduced the restriction to the entry in the industry.
 Internet has again increased the new entrant possibility in the industry.

5. The substitute

 The surface transport can be substitute.

 With the advancement in technology for many thing travelling personally is not important
as with the help of web conferencing and services like online counseling the need for
travel is reduced.
 The customer can switch to modes which are reasonable in terms of fare as air travel to
some extend is expensive as compared to other modes of travel.
 The factor which alone reduces the attractiveness of the substitutes in the minds of the
travellers is the fastness and reliability of air travel.
 With the help of Porter’s model we have the various micro conditions under which the
airline operates and now I would like to discuss the macro environment of the airline
industry with the help of Pest analysis

PEST ANALYSIS

To analyze the economy in the macro perspective we need to study the Political, economic,
social and technological environment of Asia as a whole.

a) Economics

.The rapid growth of Asia fuels the growth of the air travel in Asia. The growth is also because
of the region being geographically dispersed and the countries having a large population. The
governments of the various countries have invested in the development of airlines and travel
infrastructure and have made investment in the airports to make them competitive with the rest
of the world. Again with high growth and increase in trade and business the competition has
increased which has led the full service airlines like MAS to start cost cutting. In the view of
many economists Asia would soon be on the top of the global economy growth charts.

b) Political/ Legal

Government policies are important drives for the success of Asia. In the late1990s, there was
increase privatization and deregulation of the airline industry in Asia. It was noticeable that some
Asian countries established open-skies agreements while others allowed the entry of private
airlines. For instance, in 1997, a few LLC spouted quickly after Malaysia signed an “open-skies”
agreement with the United States. Hence, it appears that although the travel market will be
expanded, in reality MAS would also have to operate in a more challenging environment with
intense competitions.

c) Social-Cultural

Surveys revealed that more people were willing to compromise on food and other services in
exchange for lower prices. In fact, it was stated that price of tickets was the single most
important consideration that influenced passengers’ decision in case of a conscious leisure
passengers who are always looking to make their budgets decrease further. This presents an
opportunity for all LCC increase their revenues by offering travelling at a much lower fare. With
the entry of such low cost carriers the competition for the full service airlines like MAS
increased so the company has to segment its market and target only those high class premium
business travels for whom service and luxury is very important and are not concerned about their
budget.

d) Demographic

In 2005, the total population in Asia stands at more than 3.5 billion. The United Nations’
statistics also show that Asia has an astonishing demographic dividend – where more than 35%
of its population is below the age of 25 and more than 55% hovers below the age of 35. This
shows that the population of middle age is group is increasing thereby increasing the number of
working population which results in the increase in the overall disposable income and so the
number of business and leisure travellers is bound to increase. This therefore presents a golden
opportunity for MAS.

e) Technological

The technological advancement including introduction of services like internet telephony and use
of various other telecommunication services ( like buying of tickets online) provides MAS a new
arena to boost up its sales by leveraging the new technology. The use of e-commerce and internet
based activities which includes reserving a holiday online and even buying tickets online opens
ways to derive ancillary revenues. Technology advancements sometimes also help in reduction
of the operational cost such as savings on commissions for travel agents.

Analysis of the Industry

MAS though currently does not have a strong presence in the region, the macro environment of
Asia presents vast opportunities to enlarge the company’s market shares. The Airline businesses
are closely linked to economic activities in Asia and the world. As such, MAS needs to be
cognisant with the business cycle so that it can to take full advantage of such effects especially
when there are changes in discretionary income and consumer spending patterns. The company
should also keep in mind that increases in the demand of fuel and limited supply can lead to
higher fuel price that will decrease the yield. Last but not least, the impact of crisis such as 9/11
(2001) and SARS outbreak (2003) was able to hit the airline industry badly and as such they
continue to pose serious threat to airlines.