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Investment analysis: AirAsia Berhad

Paper Type: Free Essay Subject: Business
Wordcount: 5035 words Published: 27th Apr 2017

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1.0 Market analysis

Before we can proceed further in deciding whether investing in AiraAsia is a good choice or not, we have to do a market analysis on the market condition of the airline industry. Our market industry is based on five main elements which are:

1. Legal

Like all industries in the market, the airline industry is also tied to certain legal policy of the government so as to ensure the safety and the consumer’s rights. For the airline industry worldwide, the rules and regulation are set by the International Civil Aviation Organization and is revised from time to time. The rules and regulations are mostly about flight’s safety measurements and also the management of safety during flight such as making the providence of first-aid kit compulsory on every aircraft in case anything happen during flight. Not only that, the air stewardess and air steward must have basic knowledge of first aid.

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2. Politics

Politics play a major role in the performance of the airline company as well. Any political policy that is to the airline company’s disadvantage will affect the performance and annual profit of the airline. When the very first airline company was established in Germany, which is Deutsche Luftschiffahrts-Aktiengesellschaft(DELAG), on 16 November 1909, it was under Germany’s government service. But as the 20th century approaches, airline companies are ‘deregulated’. Airline deregulation according to the Wikipedia encyclopedia is the process of removing entry and price restrictions on airlines affecting the carriers permitted to serve specific routes. Airline deregulation began in the United States of America in 1978 and from there exist the Airline Deregulation Act 1978 whereas for Europe, deregulation only began in the 1990’s. Before deregulation happened, the airline company has to abide by the instructions of the government concerning the routes and the choice of which airports to land on and depart from. Whereas after deregulation, the airline company has the freedom to choose any routes that they want and whichever airports that they want to stopover at.

There are pros and cons to the deregulation of the airline company. The pro is the airline company has the freedom to decide on the operation of the airline whereas the con is that the entry barriers for new airline entrants are lower. Thus, creating a more competitive market for established airlines. This is when the low cost carrier airline starts to appear in the market, such as Tiger Airway (Singapore), Jetstar Airways (Australia) and Pacific Blue Airlines (New Zealand). The appearance of these airways will lower the profit margin of the existing airways as Low Cost Carrier (LCC) airlines tend to price their airfare at the very minimum price as possible.

Another political aspect is the existence of bilateral agreements between two or more countries regarding the authority of stopovers at different airports. Bilateral agreement is normally based on the concept of ‘freedom of thee air’ where it gives the airline the freedom or rights to fly in the air space of another country and also be permitted to stop at the airports of their choice. And sometimes, some country may even allow foreign airline to operate on their domestic routes, but this is very rarely to be found. This move by the government will remove many of the barriers to competition and allowing their own airlines to have foreign partners or code sharing partners. This will further increase the airline access to more international routes and also further exposed the airline to foreign countries. Both the airline deregulation policy and the bilateral agreements play a major role in determining the successfulness of an airline company. A policy set by the government may inhibit or aid in the success of an airline company.

3. Economics

When we look at the economic side of the market, we will first look at the overall Gross Domestic Product (GDP) in the world. GDP is the value of all final goods and services from a nation in a given year. GDP is the best tool to use when accessing the performance of a country as it takes all the industries and products into consideration. A few of country’s GDP and the contribution of agriculture, industry and services to the total of GDP are listed in the table below.


Growth rate (%)

Agriculture (%)

Industry (%)

Services (%)














































Source: CIA The World Factbook and Wikipedia Encyclopedia

All the countries have different GDP, some countries may have negative growth and some countries have positive growth. This is normal as during 2008 is when the financial crisis happened. But not all countries did not benefit from the global economy downturn as some countries have positive growth rate for their GDP. This may be due to the fact that the countries benefited from industries that bring losses to another country which results in a tradeoff between the benefits between countries. The services industry contributes to most of the total of the GDP of the countries listed above except for china, Nigeria and Thailand. All three of these countries are more focused on industrial industry which may be due to the fact that these countries have more labored intensive industries. Thus, this shows that service industry plays an important role in the performance of a country and service industry includes airline industry.

From the GDP of a country; we can look at the purchasing power parity (PPP) of the consumers. If the GDP of the country is low or is a negative value, this means that the PPP of the citizen is low and vice versa. The PPP of consumers can also be linked directly to the inflation rate of a country. As the inflation rate increase, the PPP of consumer will drop. Inflation rate will increase the price of goods in general as the demand exceeded the supply of the goods. Thus, decreasing the amount of extra money allocated for luxurious goods which also include travelling and entertainments. So the changes in the GDP of a country will affect all the industries, including the airline industry.

There are times when not only the GDP will affect the performance of an airline; it may be due to natural disasters which include earthquake, tsunami and flash flood which have been happening quite frequently nowadays. All of these can disrupt the operation of the airline companies as facilities and airports maybe destroyed in the process. Thus, causing an airline company to face loss in the event of natural disasters. Another event that might affect the economic performance of an airline company is terrorism such as the event of the ill-fated day of September 11, 2001where American Airlines and United Airlines was hijacked. This had caused both airways to face huge losses due to the decline in value of the airway’s stocks. This can reflect the confidence of the customers towards both the airlines had declined extremely as an aftermath of the hijacking event. Below is the graph depicting the change in stock price for both companies.

4. Social

As the years goes by, consumer demands are evolving gradually. The consumers nowadays want anything that is their convenience, cheap and can be done instantly without going through painstaking procedures. So as to accommodate the change in the demands of the customers, the airline company has to improvise themselves from time to time.

Most of the airline companies nowadays have their own websites. This is to make it easier for the consumers to check the availability of tickets, the schedule of the airline and also enabling the consumers to purchase their ticket through e-ticketing. All of these are to the customers’ convenience. So as to attract more customers, some airlines are now practicing online check-in of luggage where luggage can be checked-in within 24 hours of the scheduled flight.

Social and economic factors are closely related to each other as any changes in the market economy will directly affect the consumer behavior. As stated above under the economic factors, the event of financial crisis will affect the PPP of the customers as prices of goods have been increased due to inflation. In order to save more money, consumers will opt for cheaper goods. The same goes to the purchase of airfares. The lower the airfare is, the better it is and this even applies to business travelers travelling on premium class.

This can be proven by a study done by the International Air Transport Association (IATA) where it shows that the consumer’s choice of seats have changed as the number of premium class travelers have decreased. This can be seen clearly from the graph below.

The graph shows that the number of premium passengers had started to fall since july 2008 and keeps dropping until sometime in may 2009 before it the number of passengers travelling on premium class starts to increase gradually. Even though there is an increase of passengers travelling on premium class, it still takes time for the airline company to rebound back from the huge amount of losses that they have incurred.

5. Technology

With the advancement of the technological changes in the world, the technology used by the airline company also improvised with time. In the past, whenever the customers wanted to buy air tickets, they will have to go to either the airline’s office or any travel agency to purchase their tickets. But now, customers can just purchase their ticket with a click of the mouse. They do not even need to step out of the house, as long there is internet available. Advanced check-in can also be done through the internet 24 hours prior to the flight departure. All of these technologies are to the consumers’ convenience.

Advancement in the technology of the airline industry can also be seen on the safety and the comfort of the aircraft. Aircrafts nowadays are more comfortable, safer and in-flight entertainment is also provided for long haul flights. This is very different from the olden aircraft where the main purpose of the aircraft is just to transport passengers from one point to another. Both the Airbus and Boeing Company are improvising their aircraft from time to time in so as to ensure that their aircraft is the best in terms of safety and also the comfort level.

Airline companies in the market are also using the advancement in technology to implement risk management by providing good and reliable databases for risk analysis and targeting, providing faster and more effective business processes, more efficient recordkeeping and providing better services to the customers.

2.0 Airline Industry Analysis

The airline industry had always been a highly regulated industry from the beginning of its establishment. The deregulation or liberalization movement initially started in the US in 1978. Governments usually treat the airline industry differently compared to some other industries due to the sensitivity of the aviation business, which involve some national security and sovereignty issues.

In this report, Porter’s Five Forces Model is being used to analysis the aviation industry structure to provide an overall view of the industry. This is a well-established model, in which the industry can be simulated as a model influenced by five different factors called ‘forces’ as shown in Figure 1.1. A suitable dynamic interaction of these five forces shapes the basic structure to determine the profitability and attractiveness of the industry.

2.1 Industry Competitor

The degree of rivalry is one of the most important factors that determining profitability of the industry. The market growth and number of competitors are some of the causes that will affect the industry rivalry. For the airline industry where its fixed cost is usually very high and the variable cost is low, competition is fierce as airlines are trying to generate revenue to reach break-even level in order to survive.

Competition in the airline industry can be divided into competition between low cost carriers (LCCs) and full service carriers (FSCs) in both regional and domestic markets. There are 6 budget airlines in Malaysia which are Air Asia, Firefly, Tiger Airways, Cebu Pacific, Jetstar, and Lion Air. The competition among low cost carriers is usually fiercer as offering the cheaper airfare is utmost important for them. One of the main reasons that passengers choose to use a LCC is “cheaper airfares”. Since most of the low cost carriers do not have frequent flyer program to impose switching cost on customers, it is rather difficult for them to build up customer loyalty except constantly offering a cheaper airfare to retain their customers.

On the other hand, there are a lots of full service airline in Malaysia such as MAS, Cathay Pacific Airway, China Airlines, Eva Airways Corporation, and so on. Thus, the competition between full service carriers is more complicated. This is because FSCs are competing in many aspects of their services, such as network coverage, flight frequency, and service quality and ticket prices. While the competition between FSCs and LCCs are mainly focused on attracting each other’s market as they usually have different customer groups. Customer base of LCCs are largely made up of leisure traveler while FSCs appear to be more attractive for business traveler.

2.2 Suppliers

Suppliers are those who provide necessary raw material, equipment and labor for an airline to perform their daily operation. Supplier’s strength can greatly affect the industry’s profitability, if there is a high concentration in the supplier power, they can exert influence on airlines thus increasing their bargaining power. Major inputs for airline to provide their services to passengers are aircraft, labor, fuel and landing slots. The fleet is the most important assets for airlines to generate revenue. However, there are only two major aircraft manufacturers in the West, Boeing and Airbus, which almost monopolizing the wide-body civil transport aircraft market worldwide. Hence, the bargain power of aircraft manufacturers against airlines remains very strong, as the concentration of aircraft supplier market is very high.

Some airline employees are considered as highly specialized and professionals, such as pilots and aircraft technicians. Due to their specializations, it is almost impossible for an airline to find replacements for pilots or maintenance workers in short time, which may cause an increase in the bargaining power of their employees over the airlines. In this regard, the labor cost is one of the biggest operating costs of most airlines. However, cutting cost is the main agenda of airline nowadays, and the labor cost is always the first to be the victim.

2.3 The Buyers Power

The buyer’s power is defined as the influence that customers can have on the airlines revenue affecting ticket prices and service charges. If the buyer’s power is strong enough, customers can set the ticket price, and vice verse. Strong buyer power can bargain away potential airline profit and extract other benefits from airlines such as quality-improved services. Some of the favorable factors to strong buyer’s power in the airline industry are relatively low customer switching cost, low product differentiation, and freely available information on Internet. Nevertheless, the buyer’s power may be weaken by low buyer concentration or small purchase volume. Although fierce pricing war dispute among the airlines, it is notably that buyers do not play proactive roles in the pricing war. Current price impacts in the market is aimed to keeping the airline’s competitors out of the market rather than providing the low pricing power of the airlines to their customers. Besides, travel agents, who usually buy air tickets in large volume, yield greater power but they use this concept to strengthen their position in the market rather than transferring the cost benefit to costumers.

2.4 New Entrant

“New entrant” refers to any new player in the aviation market which will compete with the incumbents. A key criterion to analyze the threat of new entrant in the industry is to analyze the level of entry barriers. Entry barriers are obstacles that may discourage others from entering the market hence affect the competition of the industry.

New entrants will also lower the potential profits of the industry as a whole. Most common entry barriers in airline industry are regulation restrictions, labor, access to distribution channels and high capital requirement. However, the entry barriers to the airline industry had generally been lowered recently, especially on the regulation restrictions and distribution channels.

The example of new entrant to Low Cost Carrier s is Firefly airline, which was growth recently

and become a strong competitor to Air Asia airline.

2.5 Substitutes

“Substitution” represents the threat that other industries or transportation may offer a product, which can replace air transport. The threat of substitution depends on the type of flight, namely long haul or short haul, and travel purpose such as business or leisure. For short haul and leisure travel, the main substitution threat in the Asia Pacific comes from surface transport such as road and sea transport. Even though some of the airfares from LCCs are lower than bus fare, but after paying for the airport charges and insurances, customers will find that generally the total cost of air travel is still higher than that of road transport. Although surface transport is cheaper in term of money, it still costs the passenger more in terms of time and efficiency. Furthermore, road transport generally will not compete with long haul travel, especially for cross nation traveling.

On the other side, latest technology inventions such as videoconference pose a bigger threat for business travel. In the aftermath of 911, many worries that the airline industry will be substituted by video conferencing companies as they assumed that people will be less willingly to travel since then. However, the speedy traffic recovery proved them wrong. Although the international passenger flow haven’t returned to the pre-crisis level, but it seems the recovery is on the right path.

2.6 Low Cost and Budget Airline – Air Asia Berhad

Air Asia is one of the largest low fare and no frills airline. in Low Cost Carriers (LCC) industry which providing guests with the choice of customizing services without compromising on quality and services .

It operates scheduled domestic and international flights and it is also the first airline in the region to implement fully ticketless travel and unassigned seats. On 12 November 2008, Air Asia abolished fuel surcharges. In doing so, it claimed to be the ‘first airline in the world to abolish fuel surcharges’. From this statement, we can conclude that Air Asia is successful to expand their market as well as they airline had flown 55 million cumulative passengers by 2009.

In 2010, it has the world’s lowest costs for an Airline, at $3.21 per seat-kilometer. Air Asia is able to attract more customers in future since they can offer lower price tickets to flight around the world.

Last but not least, Air Asia is a corporate that potential to growth among the LCC industry due to its competence strategy holding. This corporate was emphasize on leanest cost structure; transparency in decision making and information sharing; safety; invest and enhance the Air Asia brand to maximize shareholder`s value; human capital development; and passion for guest satisfaction. Hence, investor can be confidence with their performance as well.

3.0 Company Analysis

AirAsia is one of the award winning and largest low fare airlines in the Asia expanding rapidly since 2001. With a fleet of 72 aircrafts, AirAsia flies to over 61 domestic and international destinations with 108 routes, and operates over 400 flights daily from hubs located in Malaysia, Thailand, and Indonesia. Today, AirAsia has flown over 55 million guests across the region and continues to create more extensive route network through its associate companies. AirAsia believes in the no-frills, hassle-free, low fare business concept and feels that keeping costs low requires high efficiency in every part of the business. Through the corporate philosophy of “Now Everyone Can Fly”, AirAsia has sparked a revolution in air travel with more and more people around the region choosing AirAsia as their preferred choice of transport. AirAsia creates values through the following vision and mission.

(Resources : http://www.airasia.com/my/en/aboutus/irorganizationalstructure.html?)

3.1 Mission

• To be the best company to work for whereby employees are treated as part of a big family

• Create a globally recognized ASEAN brand

• To attain the lowest cost so that everyone can fly with AirAsia

• Maintain the highest quality product, embracing technology to reduce cost and enhance service levels

3.2 Vision

To continue to be the lowest cost short-haul airline in every market we serve, delivering strong organic growth through offering the lowest airfares at a profit.

Leanest Cost Structure

• Efficient and simple point to point operations

• Attracting and retaining hardworking and smart people

• Passion for continuous cost reduction


Maximise Shareholders’ Value

• Resilient profit growth through our lower cost base

• Expansion of the AirAsia network in a prudent and disciplined manner

• Invest and enhance the AirAsia brand to increase investors’ returns



• Comply with the highest International Aviation Safety Standards and practices

• Keep operations simple and transparent

• Ensure the security of our People and Guests


Passion for Guests’ Satisfaction

• Maintain simplicity in every application

• Practice the unique and friendly AirAsia experience at every opportunity

• Recognise the linkage between guests’ satisfaction and long-term success



• Transparency in decision-making and information sharing

• Optimum disclosure – higher than industry norms

• Timeliness in disclosing information


Human Capital Development

• Invest in both hard and soft skills

• Recognize all our People as contributors to our success

• Reward excellence and individual contributions

• Maintaining one brand across the Group

(Resources : http://www.airasia.com/my/en/aboutus/irstrategy.html?)

3.3 Strategy

(Resources : http://www.airasia.com/my/en/aboutus/irstrategy.html?)

3.4 Values


Adopting a zero tolerance to unsafe practices and strive for zero accidents through proper training,work practices, risk management and adherence to safety regulations at all times.

2. Valuing Our People

Committing to our people’s development and well-being and treating them with respect, dignity and fairness.

3.Customer Focused

We care and treat everyone in the same manner that we want to be treated.


Practicing highest standards of ethical behaviour and demonstrate honesty in all our lines of work in order to command trust and mutual respect.

5.Excellence in Performance

Setting goals beyond the best and reinforcing high quality performance standards and achieving excellence through implementing best practices.

(Resources : Air Asia Annual Report 2008)

3.5 Logo

3.6 Motto


3.7 Directors Biography

Dato’ Abdel Aziz @ Abdul Aziz bin Abu Bakar(Non-Executive Chairman)


Dato’ Sri Anthony Francis Fernandes (commonly known as Dato’ Sri Tony Fernandes)


Dato’ Kamarudin bin Meranun (Deputy Group Chief Executive Officer)


Conor Mc Carthy (Non-Executive Director)

3.8 Independent Directors


Dato’ Leong Sonny @ Leong Khee Seong (Independent Non-Executive Director)


Fam Lee Ee (Independent Non-Executive Director)


Dato’ Mohamed Khadar bin Merican (Independent Non-Executive Director)


Datuk Alias bin Ali (Independent Non-Executive Director)

(Resources : http://www.airasia.com/my/en/aboutus/irdirectorsbiography.html?)

Share Registrar

Symphony Share Registrars Sdn Bhd

Level 26, Menara Multi-Purpose, Capital Square

8 Jalan Munshi Abdullah

50100 Kuala Lumpur, Malaysia

Tel: 603-2721 2222 Fax: 603-2721 2530/1

Corporate Broker

ECM Libra Berhad

Stock Exchange Listing

Main Board of Bursa Malaysia Securities Berhad

(Listed since 22 November 2004)

(Stock code: 5099)



Level 10, 1 Sentral, Jalan Travers, Kuala Lumpur Sentral

50706 Kuala Lumpur

Tel: 603-2173 1188 Fax: 603-2173 1288

Audit Committee

Dato’ Leong Sonny @ Leong Khee Seong

Fam Lee Ee

Datuk Alias bin Ali

Dato’ Mohamed Khadar bin Merican

(Resources : Air Asia Annual Report 2008)

3.9 Major Shareholders

As of 12 November 2009, about 26% of the total share capital was owned by TuneAir Sdn Bhd. AirAsia is a substantially owner managed company, the cumulative ownership by the board of directors constitutes approximately 28% of the share capital.

Shareholder name

No. of shares owne


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