Porter's 5 forces analysis on Air Asia

Porter's 5 forces analysis on Air Asia

Threat of new Entrants

The extent of barriers to entry depends on the strength of:

• Customer has little brand loyalty. If consumers of Air Asia do not have brand loyalty, then the strength of the threat of new entrants is very high. The high numbers of competitors in the industry also decrease Air Asia customer loyalty. Most of the travelers prefer low cost. New competitors which want to come in the industry have to spend little to compete with Air Asia. 
• High capital requirement. The industry of airline needs large volume of start-up capital. The cost of setting up of offices, buying or leasing aircraft, hiring pilots and other staffs like air stewardess and etc incur a high start-up cost. Thus, the threat is low for Air Asia. 
• Different product offered. Air Asia offers different product compared to other competitors in Asia like Bangkok Airways, Tiger Airways, and Air Philippines. Other than the passenger sales ticket, Air Asia also include holiday packages which is affordable around Asia. Air Asia has good connection with hotels and tourism companies around Asia, which it is hard for new competitors to compete. 
• Low switching costs. Customers do not need to spend more on switching to another airline. The price would not be very significant in differences, which it depends on the availability of competitor’s services and suitability of the flight time that prompts them to switch. 
• Moderate access to distribution channel. Air Asia is the first airline company to enable customer book and purchase air tickets online in Malaysia. This makes its website www.airasia.com very famous among frequent travelers. Although new competitors can create a website for their company, it is quite difficult to compete with Air Asia website. The website is known of its simplicity and user friendly. Thus, new competitors are difficult to make known their websites to travelers. 
• Strict government regulations. In obtaining license and permit to operate an airline company is quite restricted. This is because in Malaysia, the airline industry is very competitive already and that the government also wants to protect the interest of its national airline, MAS which is operating on loses a few years back. 

Rivalry among existing firms

The strength of this factor depends on:

• High numbers of rivals. There are approximately 59 low fares and no frills airlines compete with Air Asia Among of them are Tiger Airways, JAL Express, Jet Star Airways, Air Arabia and etc. Some of the airline does not compete directly with Air Asia, but it competes indirectly in routes that Air Asia does not fly. Thus, the higher the number of competitors, the more fierce the competition. 
• High fixed cost. The airline industry incurs high fixed cost which consists of finance cost, hire purchase, and staff costs. The airline companies have to gain more market share to cover the fixed costs. In doing that, constant price reduction is done by them to compete with others. Thus, the rivalry is strong. 
• Customers easily switch. The nature of airline industry is that customer’s priority is to look at price and flight schedule that suits them the best when buying air tickets. The main purpose of using the airline services is to get to the destination intended. Customers can switch to other airline easily which makes the industry so competitive. 
• High exit cost. It is hard for an airline company to exit the industry. It is because the cost is high in paying the loans, staff retrenchment and flight cancellation refunds. Even making losses, the companies have to get running to cope with fixed costs. This makes the industry very competitive. 
• Products are similar. As mentioned earlier, the main purpose of using airline services is to reach the destination. Every airline provides similar services to customers. Though Air Asia provides other added services like hotel booking, and tour packages, it is subject to the customer’s choice. An industry with similar products offered is highly competitive 

Threat of Substitute product. 

• Easy to switch. There are about 59 low cost airlines competing in the industry. The airlines serve over one hundred cities and islands across the sub-continental regions of South Asia, Southeast Asia and Northeast Asia. Although some of the budget carriers only fly domestic routes within the country of origin, while only a few operates international routes connecting nearby countries, customers will always look for alternatives. 
• Performance of substitutes. Performance of other airlines are quite similar with Air Asia given there is no obvious product differentiation. Performance of airlines normally consists of the accuracy of take off time, aircraft performance and staff services. So far, Air Asia had constantly reviewed its performance and improve its services. 
• Relative price. The prices of substitutes are about the same with Air Asia. Some of the airlines offers cheaper price to achieve profitable passenger loads. The price offered depends on the time gap between the booking date and flight date. The longer the date, the cheaper will be the price. If the tickets are purchased last minutes, the price will be about the same with premium airlines like MAS and Singapore Airlines. Thus, in this situation customers would switch to the premium airlines. 

Bargaining power of buyers

• No significant product differentiation. The only difference Air Asia product with others airlines is the holiday packages offered. Most of the low cost airlines concentrate on providing flight services only to customers. There is some offers hotel booking at the city that the airline flies to. However, Air Asia makes the difference by providing holiday packages like example 3 days and 2 nights to Bali at RM 800 per pax includes flight ticket, accommodation and travel guides. For customers who do not want to follow the travel agencies and enjoys freedom, they will look for Air Asia packages, but the customer’s portion of this type is small. Thus the bargaining power of buyers is strong as the main thing they look for is to fly to destinations. 
• Low switching costs. Cost of switching to other airlines is low, so bargaining power of buyers is strong. Air Asia is not the only airlines operates in Asia. Other than that the price offered by other competitors are not much different. The customer choice is subject to their convenience and flight schedule that fit them best. 
• Portion of buyers expenditure on airline is moderate. This factor depends on portions of income an individual earns. The higher the portion, the more the customer look for cheaper price and thus, the stronger the bargaining power of buyers. E.g. when a student without earning any income, will look for the cheapest price available as the portion of his expenditure will be very substantial. 
• Customers have access to market information. The IT world had emerged since 20th century. Many big and success companies in the world uses IT and e-commerce to operate. Without IT, the business had boundaries and international business will be prohibited. With worldwide web, information can be gathered on one click. Customer’s access to the current airline market information is easy and available all the time. The airline companies have less room for negotiation. Thus, customers had strong bargaining power. 
• Buyer’s power concentration in many hands. Most of the airline company customers are individual travelers, only some travel in groups. So the air tickets are purchased individually. The airline companies are not relying on a few groups of customers only. Thus, the bargaining power of buyer is strong, 

Bargaining Power of Suppliers

• Supplier concentration in a few hands. The supplier of airline companies is the fuel supplier, foods supplier, merchandise supplier and aircraft supplier. There are few suppliers in the market, e.g the aircraft supplier; the companies are either Airbus or Boeing. In this case the power of supplier is strong. Other supplier like foods supplier and fuel supplier, the term of the supply must be based on the market condition. The supplier cannot increase too much of its price or risk losing long term business with the aircraft companies. 
• High switching costs. Most of Air Asia aircraft are Airbus models. Previously the company used Boeing models, which they lease it and the company had since phased out most of the models and replace with Airbus. If Air Asia is to switch to Boeing again, then the cost will be high, because training cost for employees to suit the aircraft features must be provided. Other than that, the technology used by Airbus is the most advanced, thus Air Asia must rely to the Airbus engineers to do maintenance of the aircraft and seek advice Thus, bargaining power of suppliers is strong. 
• Relative lack of importance of buyers to supplier. Airbus is a UK based aviation company. Its customers come from around the world. So far 9,113 aircraft had been ordered, out of which 5,408 aircraft had been delivered by the company. Air Asia had ordered 200 aircraft from Airbus and so far only 54 aircraft had been delivered. The percentage of less than 1%, 0.99% proves that Air Asia is not Airbus’s important buyer. Thus, Airbus had strong power over Air Asia. 

sources:

www.airasia.com 

http://www.markedbyteachers.com/international-baccalaureate/business-studies/porter-s-5-forces-analysis-on-air-asia.html

http://essaysforstudent.com/Business/Porter-five-forces-AirAsia/83826.html

http://www.freeonlineresearchpapers.com/competetive-porter-five-forces