Asean Airline Case Study

Course : Master of Science (MSc) in Management

Module : Managerial Economics

Lecturer : Suandi Roswitha (Andy)

Coursework : Individual Assignment

Due Date : December 2, 2011

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Presented by: Ibragimova Alina

Content

Introduction......................................................................................3

Generic Competitive Strategies ..............................................................4

Pre-2000 Period ..................................................................................6

Post-2000 Period ................................................................................8

Conclusion.......................................................................................11

References.......................................................................................12

INTRODUCTION

Initially, ASEAN airline industry was set up not only to satisfy transportation needs, but to strenghthen the ASEAN countries' international profile. However, the industry was growing rapidly as the rate of growth of ASEAN economies was high as well. Moreover, Southeast Asian countries were recognized as attractive tourist destinations. The airline companies could offer several classes of services, provided full ground an on-board services, flew domestic routes, short-haul regional and international flights from the 1970s through the early 1990s(Maleghetti et al, 2009).

The 1997 crisis affected ASEAN countries' airline industry in a severe way. It resulted in dramatic fall of number of customers traveling domestic and international routes. All survived companies had to restructure to a certain extent. As a result, a new competitive environment has been built up that was ensured by liberalization and deregulation in some of ASEAN countries. There emerged new Southeast Asian airlines that were operating in the cut-fare sector. There are seven major companies proclaiming themselves to be Low-Cost Carriers (LCCs): Malaysia's AirAsia, Singapore Tiger Airways, ValueAir and Jetstar Asia, Thailand Orient Thai and Bangkok Airways, Indonesian Lion Air, and Philippines Cebu Pacific. As low-cost carriers appeared in ASEAN, it has prompted more people to use air transport due to the substantially decreased airfares. The reasons why LCCs are able to offer lower prices lies in the strategy that implies eliminating some services and comfort that are traditionally guaranteed by Full-Service Carriers (FSCs) (Maleghetti et al, 2009). In addition, in order to remain profitable and survive, full-service carriers have to adapt dramatically to the new circumstances, restructuring or establishing low-cost subsidiary carriers to remain compatible with the new entrants (Damuri and Anas, 2005).

This essay is aimed at discussion of generic competitive strategies employed by Low Cost Carriers, description of the market before and after the entry of LCCs.

GENERIC COMPETITIVE STRATEGIES

The generic competitive strategies should be examined taking into consideration three models of competition existing within the industry of the interest. Models of competition:

1. LCCs compete with LCCs

2. FSCs compete with FSCs

3. FSCs compete with LCCs

Competitive strategies that are use by LCCs will be discussed considering cost advantage, differentiation advantages and broad coverage together with the related Michael Porter's forces.

Entry Barriers:

LCCs are able to offer their potential customers lower costs as they replace some luxury and costly product services with simplified airport ground and in-flight service items. Thus, LCCs can reduce the operating costs and gain cost leadership. It suggests that new potential competitors represent a threat to the profitability of established FSCs. Cost advantage of offering low prices may protect their share of the market and avert some potential competitors from entering the market.

Low-cost carriers charge for the extra services; however it results in lower prices which make LCCs different from their full-service competitors. The matter is that the strategy allows the companies to lower prices at the expense of limited services. In general, FSCs suggest such extra-services as in-flight meals and drinks, pre-seating assignment, extra-baggage allowance, cabin entertainment etc. LCCs, on the contrary, do not include all these into their operating cost. LCCs follow the concept of simple service design.

Rivalry among Established Companies:

As Jones and Hill (2010) view, the term rivalry relates to the competitive struggle between established companies in a certain industry to conquer the bigger share of market. In such competitive struggle, fighters may use the weapons such as price, product design, advertising and promotional spending, direct selling efforts and support. The industry of our interest is a fragmented industry. Thus, none of the companies determinates the price. Moreover, LCCs are able to compete on more attractive prices, with FSCs.

Brand extension can be employed as well to broaden coverage, as it was done in case of the