Essay: volatility of Airasia share price

Finance Section

Introduction

The report discusses the reason behind the volatility of Airasia share price. The main area of concern regarding the volatility of the share price will be highlighted and that include; the high fluctuation in cost of aviation fuel, the global economy downturn, the global treat of terrorism, the high cost of purchasing aircraft and the stiff competition in the business environment. Apparently, the influence of the strategic management, the analysis of different business environment, and the marketing strategies the AirAsia was able to establish the low-cost fare strategy while at the same instance, maintaining their effectiveness in the competitive market environment.

To justify the share price volatility and the marketing strategy, report adopts the marketing models SWOT analysis and diagrams to emphasise the propositions. The assignment concludes by summarising the key areas identified and what are the lessons learnt.

The volatility in share price, commodity or a stock market index is the fluctuation and the risk-ness of assets, which implies that the higher the volatility, the higher the risk of the investor losing money in the value of the share price (Temple, P. 2008). Also, volatility is a normal business scenario that simply measure the standard deviation of the fluctuations or movement in the price of the share held by the company or the investor. The Bizweek (2004) stated that Airasia is facing enormous challenge in its operating cost as a consequence of the hike in aviation fuel and as reported “Fuel cost now takes up about 43% of its operating expenses, compared with one third of costs during its first three years of operations”. The operating cost was too high and this could generate lack of confidence from investors and could trigger the cost of the share price. The estimated projection categorise the cost as forever $1 increase in the fuel cost, will lead to about RM5.79 million and will reduce the consolidated profit after tax and minority interest for the airline.

Apart from the fuel cost hike in the airline industries, Airasia was facing rigid competition from the external environment. The Airasia is continuously treading in a dangerous market as a result of the price war mechanism associated with Asian airliners (Ng, E. 2008). The Bizweek (2004) agree with this argument by emphasising on the market competition of Airasia with other 12 major low budget carrier operating in the same region, this has generated in a price war environment irrespective of the operation expenses and cost. Also, the increase in the cost of purchasing airline, created a high risk in the industry without running assets, has seen operating expenses going too high. Effectively, speaking this development contributed immensely to the sporadic fluctuation in the value of the share price of Airasia. Another critical factor affecting the volatility of the share price is the global economic downturn. See the financial statement of 2007 and 2008

According to a reported obtain from Airasia.com (2008) that Airasia made a loss of (176,905) on net profit for the year 2008 which represent a total of -21% cumulatively compare to that of the preceding year of 2007 of 38.8% rise in profit margin. The passengers are more conscious and reluctant due to the economic downturn which impacted heavily on the performance of the industry. Also, the financial meltdown has contributed in the decline of the numbers of air passengers, who prefer opportunity cost in the time of the crisis. The figure below shows the decline in marginal propensity of air travellers in Asia pacific region where Airasia is a dominant force as a consequence of the global downturn. The growth rate of the Asia pacific was very low and it reveals why the company performance was in turmoil.

According to Airasia.com (2008), the threat of global terrorism that befell the aviation industry especially the Asia pacific region is a critical factor that hampers the stability of the Airasia share price, the tsunami in that region equally contributed and the high cost of borrowing i.e. the interest rate, all play a major role in the making the share price highly volatile, this is a worrisome concern for investors and market players. However, despite the dark gloom surrounding airline industry in the Asian region, Airasia has been able to pull the plough in the wheel and steer the ship to safety.

The company has reported huge profit, high numbers of customers and a better performance as the world economy recovers from recession. The airliner has adopted some major strategic advantage to reposition itself as a major player in the sector. The adoption of total quality management, offers to customers, delivery of brand new airbus A320 aircraft and on time guarantee to their esteem customers. The year 2009 outlook is very impressive performance especially, the continuous growth rate of its passengers as shown in the table below.

Strategic analysis of Airasia using SWOT analysis

In analysing the business environment, SWOT analysis was used. CMI (2010) reported that SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis is a platform that organisation adopt to analyse its market position. The analysis help organisations to assess its capabilities explore opportunity and identify potential and actual threats to its success.

Strength: The company main strength is the low cost value for money it offers customers, the ability to innovate and diversity its operational route. The reverse outlook for 2009 show increase in demand of new routes and tickets sales, as at December 2009, the company has sold well over 90% of tickets in the new routes and increased numbers of passenger surge.

Performance of new routes and ticket sales: AirAsia has strategically expanded its operating routes with the same measure of quality standard and low cost to customers.

Weaknesses: The main weakness noticeable of Airasia is the high operating cost of purchasing new aircraft, using pricing mechanism strategy to acquire new customers.

Opportunities: The biggest opportunity available to Airasia is the large number of customers available in the Asia pacific markets. The main factor for the continuous increase of customers is the image re-branding, low cost fares and competitive prices of its products and services

Threats: The main threats are from competitors who are offering the same low cost price strategy and expansion of their products and services in the Asian region. Another factor worthy of mentioning is the continuous surge of the cost of aviation fuel which is threatening to cripple the activities of domestic and internal airlines and undermine their growth

Marketing

MARKETING STRAGERY

The emergence of budgeted airline industry or low cost carrier (LCC) is the biggest and most momentous changes in decades that Airline industry has gone under and Airasia is one of best the LCC in South East Asian region. Its USP “now everyone can fly” has proved to be more than a rambling promise. AirAsia’s success is entirely built around on its Forward-thinking Strategy. Tony Fernandes, group CEO of Air Asia has redefined the marketing concepts as the way he built Air Asia brand into a house hold name in Malaysia is marvellous (Air Asia is the among the 30 Most valuable brand in 2008 [1] ).

HOW AIRAISA CAN IMPROVE ITS UNIQUE SELLING PROPOSITION FOR THE FURTURE?

“Now everyone can fly” the USP of the Airasia that drive it’s every marketing campaign into the heart of the South East Asian’s People. This is the biggest, most clear benefits that have been carved in people’s minds during last 5 years. Airasia is well known about this fact and using this as its sole headliner to maximize the number of its customer and expanding its base stations in new countries. Airasia offers just one thing that is cheap flights, nothing else, no frill at all. It’s clearly defined and remarkably lower prices have enabled Airasia to claim [2] that their name has become synonymous with low cost travel.

Their service and low fares has outraged the other means of travelling in Asia. Mr. Fernandes said economic slowdown is best time to build a brand it is when everyone else is cutting; Airasia will continue in putting extra resources to add new services in their portfolio. The winning formula in improving its unique selling proposition for the Airasia can be embedded in by using the Porter’s generic strategy i.e. Airasia should give a considerable amount of influence for cost leadership, focus and differentiation in their overall marketing strategy.

COST LEADERSHIP

Before the emergence of Airasia the traditional methods for air travel were in practice in
Malaysia i.e. booking through travel agents, paper tickets & its postage and list goes on but Airasia revolutionized the whole process by disintermediating all these elements and adopted the best and most cost-effective alternate for these. It saves huge amount of cost by replacing brick and mortar outlets with call centres for booking and through its website. There are some areas for improvement where it can work to reduce its cost. It can use the popularity of its website that attracts more than 20 million unique visitors [3] every month to generate ancillary revenue and thus using this revenue in subsidizing cost. Airasia can also use this huge traffic to market its product, festive promotions, and brochures and can increase the significant amount load capacity by announcing vacant seats as well.

Although 2008 is considered to be the most troublesome year for the airline industries that of which fuel is the main cost as the fuel rates were recorded at the highest moreover this was not the only problem to maintain the cost; the history’s worst recession struck with its venomous force in this year. Despite this Airasia continued to grow and indeed it carried 22 percent more people this year and added more new routes. One thing is clear about the future pricing strategy of Airasia will be much more consumer focused and make it stand out of crowed in competitive market because the Airasia started to buy fuel on the spot market and consequently its unit cost will be lower and it will be in good position pass this direct effect to its customers.

Differentiation Strategy

Simple and one liner differentiation strategy of Airasia is to offer lowest fares without compromising on quality and services. Airasia has been awarded world 3Star low cost airline according
to SKYTRAX [4] . This rating is awarded upon the quality performance and refers to a satisfactory standard of core Product for most travel categories. Most of the LCC are categorized in 2Star like Europe biggest low cost airline Ryanair. Their distribution system is wide, innovative, flexible and easily; designed according to the consumer’s ability to access. Nearly all of Airasia’s flights are booked online or telephone booking; it is operating at industry’s most desirable figure for online sales. They are not only using their website for their core reason selling tickets but they have integrated it with social networking sites (see Appendix) this helps to retain not only the customer’s loyalty but also works as cost effective promotion. Airasia has its own blogging site and have even opened a YouTube channel. All these measurement simply locks in the customers because more and more people are spending their time on these social networking sites.

Focus

Airasia is successfully implementing focus strategies to retain its position by share force of its well defined focus on market segment. Airasia knows what the consumer’s need is and moreover consumer’s perception about their product is very clear and they are becoming more discriminating in their purchase. For them cheap fares is the only concern and Airasia is well focused in cutting cost in every possible in order to provide lowest fare and the fact is, it is operating at industry’s lowest unit costs per available seat mile.

Input

The input of the Airasia consist staffing of employees,, offices, aircrafts, ground crews, pilots, flight attendants, customer services centre, air mile vouchers and other activities like outlets and promotions. Airaisa’s consumers can now have a brand new experience with Airasia’s newly acquired fleet, more customer friendly staff, and improved promotional campaign. Airasia has acquired Airbus 320 for short haul flights and airbus 330 and 340 for long haul flights as these planes are industries most fuel efficient and therefore results in optimised operational management.

AirAsia’s operational activity will be boosted and expanded to new destinations by the delivery of 29 new Airbus A320 aircrafts. “Brand new planes promise to be a wonderful experience with spacious cabins, reclining seats and extra overhead baggage space.
Airbus 320: You can choose from Hot Seats for extra legroom or keep your travel party together with Standard Seats Airbus 330 and 340: Enjoy in-flight entertainment, comfort kits or choose from Premium Economy Seats for more legroom and extra large seats.”

Their employees represent the true brand image of Airasia along with their operational policies that how Airasia improve their work efficiency by providing them more relaxed working environment. Airasia’s flight attendants and ground crew members have much more relaxed and refreshing image than its competitors’ staff. The hairstyle, makeup and uniform colour of their cabin crew also reflects broadly company’s brand image.

Process

Processes are involved any activities which enable the provision of the service, the provision of the products that facilitate the use of the service and customer care services or online booking procedure. Airasia’s whole business process is designed in a way that it serves every possible customer needs that arise through online and telephonic booking and reservation as majority of their sales are through this channel and Airaisa assures that this systems keeps running smoothly. Growth in the number of internet shoppers and the percent of internet sales are expected to continue (Maloy, 2003; Siddiqui et al., 2003).

What AirAsia’s customer need is the internet, a printer and travel itinerary and after that customer be able to check-in 48 hours prior and up to 4 hours before the schedule departure time using Web Check-In process offered by Airasia website. Consumer can not only manage their bookings online but also they perform further amendment if necessary. One more aspect of Airasia that stand it out of the overcrowded market that is it has started offering baggage tracking service, in which a customer can check the status of the baggage and find out where it is in case of mishandling.

Booking Process

Airasia considered as a pioneer in South East Asia in adopting e-commerce strategy because it has foreseen the socio-technological changes by Internet. It was far beyond the effect of Information Technology, where the connection to the communication technology in mobile has provided Air Asia with a new business activity (Feldman, J.M., 2002).Traditional method of booking and generating tickets and then delivering it to the customers consume huge resources in terms of cost but Airasia has successfully removed these element from its process and simply saving on these costs allowed Airasia to pass these savings to customers vice versa.

To book a flight with AirAsia, customers can choose the following channels

1. Call centre
2. Sales office and airport sales counter
3. Authorized travel agents
4. Mobile booking via mobile.airasia.com

Or simply by visiting their where customer can book and confirm in 5 effortless steps as shown below.

Choose your tip type, select the departing and arriving cities, departure and return date, and select number of guest and infants and starts searching the fights.

Select a departing flight with the chosen fare and time the available list to fare and time from the available list to show the summary information of the flight and cost break down

Login with AirAsia member account, enter the guest information, and contact person details

The name of the guest will be displayed and verity the total price of the flight(S), and select one of the payment methods (S): credit car, direct debit, and e-gift voucher

Once the payment has been processed, your flight itinerary will be displayed on the screen and send to your email.

Output

The Strategy that AirAsia practicing to keep its customer happy is simply remarkable. Even employees are encouraged to put forward any suggestions that help that customer locked in with it. Likewise its business process, it is utilizing the full potential of all internet and social networking site to strengthen the bond. For instance, it is running ‘Have You Flown AirAsia Lately? Contest’ on facebook that has 215000 fans so far. Along with this, it has many promotional activities and offering wonderful tour packages, air gifts, home appliances, air miles and exclusive offers and tariffs to lock-in its customers.

AirAsia successfully maintaining its huge data base system to retain customer data and then using this data to inform and promote their ongoing offers and discounts. Airasia also give chance to participate in contests and survey to its existing customers. Charter flights and travel agents services are also a good source of providing products and services for its customers. Exclusive bookings for Citibank cardholders, exciting tales of India with blog of Airasia with madam Airasia, passes to a GP race to participate and win, pre-book meal online to save money are part of output activities that Airasia is doing to strengthen the customer relationship.

Volume

Airasia is a low-cost airline. It is famous for its “no frill” offerings. Airasia is not a labour intensive sort of company. Company’s business model has a low repetition in its operations.

Variety

Airasia offers a variety of products, tariffs and packages according to the needs of its customers. All the travel packages and tariffs are low-cost and flexible Along with its core activity of air travel, it also integrate its subsidiaries’ products such as car rental by tune care, budgeted accommodation by its Tune Hotels , Airasia cargo, Airasia courier, Tune Money, and redtix entertainment and redmegastores.

Variation in demand

AirAsia group had a fleet of 42 aircraft, of which 25 were operated by AirAsia,10 by Thai AirAsia, and eight by Indonesia AirAsia. The group’s fleet is planned to increase to 83 aircraft .AirAsia has been taking delivery of one to two new Airbus A320s per month since December 2005, as part of its purchase commitment for 100 new A320s, and has an option to purchase a further 40 A320s. AirAsia currently serves 70 point-to-point domestic and international flights from six hubs: Kuala Lumpur, Johor Bahru, Kuching, Kota Kinabalu, Bangkok and Jakarta. Since its inception in 2001, AirAsia group has carried 20 million travellers to meet the demand of this large-scale market and airline industry.

Visibility

Low Fares, No Frills

Pay for only what you need! AirAsia lets you choose what you truly need on every single flight.The World’s Best Low Cost-Carrier is unlike any legacy carrier. Flying is now affordable with Airasia’s amazingly low fares. Forget about the steep fares from luxurious airport lounges and other frills – with AirAsia, you get to choose exactly what you need. Customize the way you fly and opt to add-on hot, delicious in-flight meals, seat selection or comfort kits. You will only need to pay for what you want.

References:

1. Temple, P. (2008) ‘How to measure volatility’ Available at http://www.iii.co.uk/articles/articledisplay.jsp?section=Planning&article_id=7338207&catEnforce=YourStories, (Accessed 4th March, 2010)
2. BizWeek, The Star (2004), AirAsia Takes Wings, Available at http://www5.airasia.com/site/my/en/pressRelease.jsp?id=fe00f378-ac1e2082-1f854bd0-9650f575&type=read(Accessed 1st April, 2010)
3. Ng, E. (2008), Malaysia Air offers a million free seats on Regional flight, Available at http://www.usatoday.com/travel/flights/2008-05-14-malaysia-air-free_N.htm,( Accessed 25th March, 2010)
4. Chartered Management Institute, Management models, SWOT analysis in an organisation” Available at http://membersmd.managers.org.uk/UserControls/ViewPDF.ashx?docID=1132771, (Accessed 27th March, 2010)
5. Airasia.com, October-December quarter 2008 result, Available at http://www.airasia.com/iwov-resources/my/common/pdf/AirAsia/IR/AA_4Q08_Analyst_Presentation.pdf, (Accessed 8th April,2010)
6. interbrands.com (2008), Malaysia’s Most Valuable Brands 2008, Available from http://www.interbrand.com/images/studies/MMVB_2008.pdf (Accessed 18 March, 2010)
   

7. airasiafansclub.blogspot.com (200), AirAsia’s forward-thinking marketing strategies key to success, Available from http://airasiafansclub.blogspot.com/2009/05/airasias-forward-thinking-marketing.html (Accessed 28 March, 2010)
8. Bowman, C. and Faulkner, D. (1996) Competitive and Corporate Strategy , Irwin
9. Airasia.com, (2010), About AirAsia, Available from, http://www.airasia.com/welcome/index_en.htm , (Accessed 24th March, 2010)
   

10. Airasia.com, (2010), Web Check-In, Available from, http://www.airasia.com/my/en/myflights/webcheckin.html, (Accessed 15th March, 2010
11. Airasia.com, (2010), Exclusively for Citibank Credit Card members only, Available from, http://www.airasia.com/card/my/citibank_exclusivegold_fares.htm, (Accessed 15th March, 2010)
12. Airasia.com, (2010), Pre-book meal, Available from, http://www.airasia.com/my/en/myflights/akmealdesc.html, (Accessed 13th March, 2010)

Bibliography:

1. Michael E.Porter, 1998, Competitive Strategy: Techniques for Analyzing Industries and Competitors, 1st edition, Free Press

   Image Sources:

2. http://indahnesia.com/Images/20080415_air_asia_diskon.jpg
3. http://www.sgrate.com/forum/attachments/month_0908/20090805_66fe3af93f3d440cc2c6ayoWgyVJFw9S.jpg
4. http://1.bp.blogspot.com/_l5OM3OirUuE/RgkQJ7Z-6hI/AAAAAAAAAEU/lHwXL5mFV9c/s400/school07_en.gif
5. http://travelmalaysiaguide.com/images/airasia-promo.gif
6. http://upload.wikimedia.org/wikipedia/en/5/52/AirAsia_Logo.svg

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[1] www.interbrand.com

[2] www.airasiafansclub.blogspot.com

[3] www.alexa.com

[4] www.airlinequality.com