Company Overview

When Fernandes and his crew relaunched Air Asia Berhad (AAB) in January 2002, it became
Asia's first no-frills, low-cost airline. AirAsia was established in 1993 as a full-service airline,
and it began operations on November 18, 1996. It was established by the government-owned
corporation DRB-HICOM. On September 5, 2001, the heavily indebted airline was purchased by
Tony Fernandes, a former executive of Time Warner (now Warner Bros. Discovery), and
Kamarudin Mera nun's company, Tune Air Sdn Bhd, for a token sum of one ringgit (roughly
US$0.26 at the time), with RM 140 million worth of debts and an agreement to pay back the
loan. Tune Air officially took over AirAsia on December 8, 2001.

Analysis of the Economy

The momentum of Malaysia's economic growth, which started in the second half of 2003,
acquired speed in 2004 thanks to the more robust growth in global commerce and domestic
demand. The real gross domestic product (GDP) grew at the greatest rate since 2000 in 2004
(7.1% vs. 5.3% in 2003). The booming global manufacturing trade and rising prices for basic
commodities boosted the economy. Stronger domestic demand gave the Malaysian economy the
push for long-term prosperity despite a little slowdown in global growth in the second half of the
year. The primary driver of economic growth was the private sector, but budgetary consolidation
by the government persisted. All sectors, with the exception of construction, had positive
development as a result of the economy's strengthening. The manufacturing, services, and
primary commodities industries served as the main engines of expansion. Manufacturing value
added increased significantly by 9.8% as a result of higher external and local demand for
manufactured products, which was reflected in increased production throughout both export- and
domestically oriented industries. The electronics industry, which benefited from the recovery in
the worldwide semiconductor cycle, experienced the largest output expansion among the sectors
that focus on exports. However, due to significant inventory buildup brought on by the year's
early high production levels, the latter half of the year saw a more moderate expansion. In
addition to the electronics sector's robust expansion, foreign demand for resource-based goods
including chemicals, rubber, and wood products has remained steady.
Analysis of the Industry

1) Threat of New Entrants (Low): The potential for new players to enter the market and the
potential challenges they pose should be understood by AirAsia. Following AirAsia, other new
airlines that have joined the market include Jet Star, Firefly, Tiger Airways, and Malinda Air.
The degree to which new entrance serves as a barrier depends on a few strengths. Customer
loyalty is the first factor that affects how far the barrier extends. Customer loyalty is a crucial
factor to take into account when a new entry is made. This is due to the likelihood that
committed AirAsia customers won't switch to a competing airline. The new arrival, however,
poses a threat if the clients are not devoted because there is possibility of grabbing customers by
the new entries. In addition, a company's start-up costs have a role in how much of a barrier a
new competitor poses to AirAsia. If somebody is interested in beginning an airline business, they
will require a lot of money because launching an airline is highly expensive. As a result of the
high cost of new entry, AirAsia faces less competition. The variation in the company's products
is another element that influences how much of a barrier there is. In addition to selling tickets to
clients who want to travel, AirAsia also offers vacation packages to customers in different
destinations. There are numerous ties between AirAsia and hotels across numerous industries.

2) Rivalry Among Existing Firms (Medium): Customers' ease of switching businesses

3) Threat of Substitute Product (Medium): The threat of alternative services can increase
depending on how well rival companies provide their services. When spending money,
customers tend to hunt for goods and services that will satisfy them the most. There are not many
noticeable changes in the cost of tickets for low-cost airlines, which is around the same. As a
result, a key consideration for customers when selecting an airline is the services offered. The
fact that AirAsia has been named the world's best low-cost airline suggests that their level of
customer service is high. In order to prevent passengers from choosing other airlines, AirAsia
must continue to give excellent service.
4) Bargaining Power of Buyers (Low): Due to the similarities of services offered by different
airlines, clients have significant negotiating leverage. Not all of the clients who are interested in
these trip packages may use AirAsia's other services, which include travel promos. The majority
of people who use airplanes as a mode of transportation are solely concerned with traveling to a
certain destination, and both high-end and budget airlines offer this service. Customer bargaining
power is also affected by the concentration of purchasing power in numerous hands. Only a
small percentage of the airline company's clients are groups of people traveling together.
Because of this, the influence of individual travelers on the airline's sales is far greater than that
of groups. This will give consumers more negotiating power with carriers, like AirAsia.

5) Bargaining Power of Suppliers (High): The concentration of suppliers in a few hands is one
of the elements that affects suppliers' negotiating power. The quantity of providers in the aviation
business limits the pool from which airlines can select their providers. For instance, Airbus and
Boeing are the only two suppliers of airplanes in the entire globe. Only two suppliers are
available to Air Asia for the manufacture of their aircraft. Suppliers' negotiating leverage is
increased by the industry's small number of suppliers. In addition, a factor that increases the
suppliers' negotiating strength is the high switching cost.

Analysis of the Company

The company had been performing well since 2002. Financial performance and associate
companies of Air Asia had been growing since then. Moreover, the number of routes, fleet, size
of the company also had been growing well. Strengths, weaknesses, opportunities and threats of
Air Aisa are described here.

SWOT Analysis

Strengths: Strong relationships with governments and key figures in the airline sector are among
the attributes of Air Asia's management team. The diversified backgrounds of the senior
management teams, which are made up of business specialists and former top government
officials, have a little role to play in this. For instance, Thai AirAsia is 50% owned by Shin Corp.
As a result, AirAsia was able to expand and take hold of a sizable market in Thailand. Since they
have an excellent working connection with Airbus, they were able to purchase an aircraft at a
significant discount that is also more energy efficient than the Boeing 737 aircraft that are used
by numerous other airlines. The management group excels at developing and implementing
strategies. Their initial plan was a deft blending of tried-and-true tactics used by other low-cost
airlines in the US and Europe. They are Easyjet's branding strategy (connecting with other
suppliers of services like hotels, car rental), Southwest's personnel approach (employee comes
first), and Ryanair's tactical approach (no frills, landing at a secondary airport). In Asia Pacific,
the name AirAsia is well known. Along with the typical print media advertising and promotions,
AirAsia's top management also profited from promotion through news by acting extremely
"media friendly" and openly disseminating the most recent information on Air Asia in addition to
the airline industry. They have developed a highly distinctive reputation among tourists thanks to
their collaboration with other service providers like hotels and hostels, car rental agencies,
hospitals (medical tourism), and Citibank (AirAsia Citibank card). Their well-known brand name
has also been aided by their alliance with Galileo GDS (Global Distribution System), which
allows travel agencies from all over the world to monitor flight information and make
reservations. Air Asia has successfully "elevated" its brand to become a regional brand outside of
Malaysia thanks to its local presence in a select number of nations, including Indonesia
(Indonesia AirAsia) and Thailand (Thai AirAsia).

Weaknesses: They could not make any change which would reduce the majority holding of
Tune Air and changing in the authorized capital was also not allowed for them. These kinds of
conditions were imposed by the lending institutions. Considering all the loans together, Air Asia
had RM 95.5 million of total debt which kept in restrictive conditions.
Opportunities: Using space of plane for advertising purpose which increases the possibility of
earning revenue. The Thai market created opportunities for promoting Air Asia’s low cost and
no frills. Air Asia launched a credit card in Singapore on 5 th April, 2004. They also launched Air
Asia MasterCard in collaboration with the DBS bank. Buying aircraft directly instead of taking
lease increases the flexibility in development.

Threats: Malaysia’s national carrier the Malaysia Airlines (MA) threatened Air Asia by
lowering their fares by 50% providing a super saver scheme. The bilateral agreements of
Malaysia and Thailand imposed restrictions that a scheduled service from Thailand could not
start by a Malaysian operator. In the Singapore market, only scheduled flights of the national
carriers were allowed to fly. The Government of Singapore did not enable the Air Asia Barhed
passengers to avail the facilities of AAB.

Problem Statement

The company already had RM 95.5 million debt and used private placements and equity
fundings to buy aircrafts earlier. So, the company needed new funds for financing aircraft and
also for paying back the debt.

The company had to decide whether to go for an IPO or not.