1. INTRODUCTION (200)
The company that the paper will be researching on is AirAsia in Indonesia. Air Asia is a budget airline that flies routes around Asia. It’s headquarters are in Kuala Lumpur and has the largest fleet and destinations available. PT. Indonesia AirAsia is a low cost airline subsidiary from the main airline AirAsia and operate out of Tangarang, Indonesia. They currently handle 16 different destinations. As a budget airline they are facing the problem of a saturated industry in Indonesia alone there are other airlines such as Garuda Indonesia, Lion Air, Tiger Air, Wings Air and many others. Because there are so many different budget airlines it becomes very important for businesses to be able to stand out and gain a market share in the budget airline industry. The aviation industry in 2015 shows that the main market share still goes to Lion Air (41.6%) followed by Garuda Indonesia (23.5%) leaving Indonesia AirAsia at only 4.4% market share. This project will use PESTLE analysis as well as Michael Porters 5 forces to be able to better understand the budget airline market in Indonesia. We will also then give suggestions on how AirAsia can gain a better market share based on the current competitiveness of the market. (Yashodha, Y., 2012.)
2. PESTLE
2.1 Explanation of PESTLE (314)
The main three factors within PESTLE that we feel affects AirAsia Indonesia the most will be the Economic, Social and Technological areas as explained below.
Economic
The economic performance of the country that the business is in is important because the buying power of the people that purchase the product will have to be enough in order to sustain the sale of a product for a company to be profitable. In this case things like GDP does effect the amount that the people will be comfortable to spend. This affects the transportation industry specifically since people in a big country will still need to travel however they will have other options on how they will want to travel depending on how much they will have to spend. (Ahmad, R., 2010.)
Social
The social environment identifies the different cultural trends and demographics to analyze if there are specific trends such as migration patterns or travel back home during the holiday season. For airlines in particular understanding the social patterns of people and when they travel is very important when it comes to the pricing strategy and how much they will need to accommodate for in terms of the number of seats to allocate per flight so that they will optimize the number of people flying during the specific times and cater for both high as well as low demand seasons.
Technological
There are certain technological enhancements that will help keep costs low and certain automation processes that will help to reduce the amount of human error within the registration process. Because technology is on 24/7 this means that operations can be kept running at a consistent pace. Another area that technology is beneficial in this case is in the area that technology follows certain processes in the case of budget airlines this may be in the areas of closer monitoring of baggage weights as well as luggage allowances.
2.2 Impact of PESTLE on the company (305)
As the airline industry involves high investment to enter the market it is important to understand the overall environment of country that they have set up in. In this case being an Indonesian budget airline we will be placing emphasis on the three key areas, Economic stability of Indonesia, the social behavior of the country and their citizens as well as the technological enhancements that will be able to help the business to gain more profits.
Economic
From an economic standpoint there is high competition from low cost airlines and also due to the weak currency we can see that there is high competition for the most affordable airline. AirAsia will need to leverage on balancing the operating and maintenance costs to be able to continue to provide low cost tickets to seem viable towards the local Indonesians who are flying out of the country.
Social
Many of the wealthy Indonesians take the opportunity during the school holidays to fly out of Indonesia. Also having a low currency also means that people from outside of the country would want to visit Indonesia for holidays as well. This means that AirAsia should be able to plan the number of seats for their aircraft to allocate for more people to travel during the holiday season.
Technological
Although labor is cheap in Indonesia certain things can be overlooked if the process is not automated. If those people who are working at the check-in counter do not take their jobs seriously they can allow people with overloaded luggage to check in their items without declaring or under declaring the weight of the luggage. In order to ovoid this AirAsia can invest in having automated check-in processes with will help to increase the efficiency of the check in process as well as to allow for the business to be profitable. (Bloch, M. and Segev, A., 1997, January.)
3. PORTER’S 5 FORCES
3.1 Explanation of PORTER’S 5 FORCES (436)
Michael Porter’s 5 forces explain where the business potentials lie within the organization it will help a business to better understand the competitive position of the business in relation to the current business environment and it’s competitors. By understanding Michael Porter’s 5 forces we can better understand the different flaws and how the business can better improve themselves in the future. (Porter, M.E., 2008.)
Competitive Rivalry
By understanding the market and their competitors the company can understand how saturated the market is for the product. If the product and services are similar then there will be less control over the market and buyers as well as the suppliers will have the option to go somewhere else for a better deal. If the market is not saturated then the business will have more power in the market and will need to continue to stay innovative to stay in the forefront of the industry.
Supplier Power
The supplier power talks about how many suppliers are controlling the purchasing environment. For businesses who do not have many suppliers such as products that company can control the full production of the product may not find themselves in a situation where they are being held by the supplier in terms of the cost of supplies. If the company requires many working parts and the products rely on the supplier and there is little substitutes then the supplier control and supplier power becomes much stronger.
Buyer Power
This is when the power of the buyer has the opportunity to negotiate the pricing of the product or services. In this case if there are a few dedicated buyers who buy a lot from the company then the buyer power becomes more powerful because their purchases actually help to dictate the profit or the losses of the business.
Threat of Substitution
Will the customer be able to find a substitute for the product or services? The threat of substitution is easy when there is an easier process to gain the product or if outsourcing for the product becomes easy. When this happens the power of the company becomes weaker because the consumers will have an alternative to the product or services. (Kwoka, J. and Shumilkina, E., 2010.)
Threat of New Entrants
The number of entrants in the market will also affect the environment. If the knowledge of the product or services are easily available it lowers the barriers to entry for the product or service. This will weaken the market position. However if there are less entrants due to the cost of entry into the market. (Mak, B. and Go, F., 1995.)
3.2 Impact of Porter’s 5 Forces on the Company – All 5 Forces (217)
Competitive Rivalry
The competition from other budget airlines are much higher especially in Indonesia. Because of this AirAsia needs to gain more market-share by doing more advertising of their brand and stand out from the competitors.
Supplier Power
As airlines rely on fuel to run it’s operations there is nothing much that they can do but to accept that the price of the fuel that the suppliers provide. In this situation suppliers have a higher power on the company as they will not have much alternatives.
Buyer Power
The nature of a budget airline is to provide for the cheapest flight option for the customer. Because of this the buyer power is much higher because customers who choose to fly budget airlines will usually find for the best and cheapest price. (Natalisa, D. and Subroto, B., 2003)
Threat of Substitutes
In Indonesia there are a number of substitutes for airlines that fly the same routes both in domestic as well as international flights. It is because of this that the threats of substitutes is high.
Threat of New Entrants
The cost to start an airline is considerably more expensive than any other business. There is also the maintenance of the aircrafts and high cost to pay to the airports for landing rights. It’s because of this that the threat of new entrants is considerably lower. (Graham, B. and Vowles, T.M., 2006.)
4. RECOMMENDATIONS
4.1 Expansion of Routes (103)
For the airline to remain competitive it is important for the airline to consider the expansion of routes. This is in comparison to the expansion overseas for a new business. By expanding the routes they can then increase possibility of people taking flights to new destinations because of holidays or business purposes. It also helps to open up for new visitors to the Indonesia from countries outside. It’s important to consider which routes will be more profitable to the company and to consider as well that short turn around flights may actually be much more profitable to the business in the long run. (Natalisa, D. and Subroto, B., 2003)
4.2 Merger and Acquisition (100)
Airlines like AirAsia can take the opportunity to acquire other smaller airlines or even code share with other airlines in order to share their seat inventory with one another. It’s through merger and acquisitions that they can not only increase their routes but also to increase the number of airplanes in their fleet. By increasing their fleet they can then take up more routes and increase the frequency of flights. Mergers can help the business as well as they will be able to have more turn around in a shorter period of time increasing the overall profitability of the business. (O’Connell, J.F. and Williams, G., 2005.)
4.3 Changes to Organizational Structure (101)
By centralizing the organization structure there will be more control for the business as decisions will be better executed in the future. Decisions doesn’t need to be going through many people in order to get things done. For a large organization like AirAsia having some of the management decision decided from one same management in one area will help the business move in one direction instead of the current organization structure that is decentralized and have multiple management in different countries making their own individual decisions. This will also cut down the cost of having different offices in the different countries.
4.4 Introducing New Products (100)
AirAsia will need to increase their product ranges if they intend to stay market leaders. Because the environment is oversaturated with budget airline competitors it may be more beneficial to the company to expand their business to feature more premium services such as pre-check in processes or even perhaps having only business seat airlines in order to accommodate for the businessmen who may have more money to fly around the region. By expanding to a business product line they can also get away from the budget airline industry and become a full fledged airline. They can also have an opportunity to earn more considering that they can leverage on the short and medium range flights that they already have from their budget airline.
5. CONCLUSION 210
Based on the research of the paper it shows that there is an opportunity to target the wealthier businessmen who travel out of the country for work. Giving premium services for these businessmen will allow for a bigger growth in for AirAsia and to not allow them to constantly fight for market position in Indonesia. This will help them to expand their business. Because airlines are much different as they are expensive to start up. The option to merge their seat inventory or have a merger with another airline becomes more feasible. In this case they can further expand their airline to incorporate more routes for the customers. These route options will allow them to transfer within the same airline to avoid issues like having to recheck in their luggage to another airline. (Shuk-Ching Poon, T. and Waring, P., 2010.)
Whereas to attract people into Indonesia, Air Asia Indonesia could provide people with more routes that they are able to travel into Indonesia. With more routes they will be able to give passengers access to places that they might want to take a holiday to. The recommendations that are made will help Air Asia get out of their current situation of just being part of the budget airline industry and move into a full fledged airline instead.
6. REFERENCES 10
Graham, B. and Vowles, T.M., 2006. Carriers within Carriers: A Strategic Response to Low‐cost Airline Competition. Transport Reviews, 26(1), pp.105-126.
Natalisa, D. and Subroto, B., 2003. Effects of management commitment on service quality to increase customer satisfaction of domestic airlines in Indonesia. Singapore Management Review, 25(1), p.85.
Mak, B. and Go, F., 1995. Matching global competition: cooperation among Asian airlines. Tourism Management, 16(1), pp.61-65.
Kwoka, J. and Shumilkina, E., 2010. The price effect of eliminating potential competition: Evidence from an airline merger. The journal of industrial economics, 58(4), pp.767-793.
Porter, M.E., 2008. The five competitive forces that shape strategy. Harvard business review, 86(1), pp.25-40.
Bloch, M. and Segev, A., 1997, January. The impact of electronic commerce on the travel industry an analysis methodology and case study. In System Sciences, 1997, Proceedings of the Thirtieth Hawaii International Conference on (Vol. 4, pp. 48-58). IEEE.
Yashodha, Y., 2012. AirAsia Berhad: Strategic analysis of a leading low cost carrier in the Asian region. Elixir International Journal of Management Arts, 51, pp.11164-11171.
O’Connell, J.F. and Williams, G., 2005. Passengers’ perceptions of low cost airlines and full service carriers: A case study involving Ryanair, Aer Lingus, Air Asia and Malaysia Airlines. Journal of Air Transport Management, 11(4), pp.259-272.
Ahmad, R., 2010. AirAsia Indeed the Sky’s the Limit!. Asian Journal of Management Cases, 7(1), pp.7-31.
Shuk-Ching Poon, T. and Waring, P., 2010. The lowest of low-cost carriers: the case of AirAsia. The International Journal of Human Resource Management, 21(2), pp.197-213.