THE HISTORY OF MALAYSIA’S AIRLINE
The Malaysian Airline System Berhad was founded 76 years ago on 12th October 1937 as Malayan Airways Limited (MAL). On 2nd of April 1947, MAL took the first flight with its first commercial flight as the national airline. After that, Malayan Airways changed their corporate name into Malaysian Airline Limited during the formation of Malaysia in year 1963. (Malaysia Airlines, 2013) Borneo Airways sooner was incorporated into MAL and grew from a single company to become a huge company that consists of 2,400 employees within 20 years. In year 1972, MAL was a bi-national airline as Malaysia-Singapore Airlines and grew further with new services to Perth, Taipei, Rome and London. However, in 1972, both Singapore and Malaysia went separate ways and became Malaysia Airlines and Singapore Airlines. Malaysia Airlines then continue to become the country’s national flag carrier and was awarded grandly for its excellence services. It was awarded by Skytrax UK as the World’s Best Cabin Crew, 5-star Airline, Best Airline Signature Dish, World’s Best Economy Class Award and Staff Service Excellence for Asia Award. Besides that, the World Travel Awards had also award MAS as the World’s Leading Airline to Asia, Asia’s Leading Airline and Asia’s Leading Business Class Airline in year 2010 and 2011. These are the most notable awards among all the 100 awards in the past 10 years.
MAS’ main hub is located in Kuala Lumpur International Airport. MAS provides a
wide range of pre-flight and on board services. As they operate a full network
carrier, they use higher end of cost of production compare to lower cost
carriers.
MARKET STRUCTURE
Oligopoly exists when a few firms are competing in a market by
selling the similar product or service.
MAS is considered as an oligopoly
because there are only a few airlines company in the Malaysia’s airline industry.
As everyone can see, AirAsia is the biggest competitor of MAS ever since it is
operating and also Malindo Airlines which was just recently interfered. AirAsia,
as the world’s best low-cost airline in Annual World Airline Survey for five
years from year 2009 to 2013 (World Airline Awards, 2012) but they have different business models. In the other way,
Malindo Airlines and MAS have more similar kind of services. As they are all
oligopoly corporations, and they also supply a large amount of air
transportation services to the people, thus when any actions are taken by any
one of them to improve either their sales or their company’s share within the
market of the airline industry will easily affect each other.
For instance, MAS was the considered
the first airline company in Malaysia, and also known as the monopoly has then
facing the rival AirAsia which has just entered the industry about 15 years
ago. AirAsia is then grown to be very successful as a low cost carrier in the
world, and this has given a huge impact to MAS’ shares in the airline industry.
Their shares has been on the down low since until recent improvements with
positive cash balance of RM 147 million in the year 2013 (Malaysia Airlines,
2013).
Although AirAsia offers a lower-fare
product and MAS offers higher-end product, AirAsia still has higher portion of
total market share comparing to Malaysia Airlines.
Ever since AirAsia has launched and providing low fares in
airline industry, MAS has then changed their prices to prevent AirAsia
from gaining MAS' sales.
As MAS was trying to match its
competitor’s price scheme. As an explanation for the graph above, D1 and MR1
represent the Airasia’s demand curve and marginal revenue curve. AirAsia and
MAS often compare their selling price with each other. MAS will always go with
AirAsia’s price range. For instance, whenever AirAsia reduces its price, it may
increase its sales but just very little because MAS will also reduce its price
to prevent AirAsia from gaining any price advantage from them. If Airasia
raises the selling price, its sales will only decrease a little because MAS
will also increase its selling price to match with AirAsia. Therefore, AirAsia
neither gain nor loss any price in the airline industry.
When
Airasia just started operating and selling in low fares, MAS did not bother the
low fares launched by AirAsia as they did not expect any harm to their own
sales. From the graph shown above, D2 and MR2 now represents the demand curve
and marginal revenue curve or AirAsia. The demand curve is now more elastic
comparing to D1. If AirAsia is selling low airfares and MAS still remains at a
high price of airfares, MAS will lost a lot customers to AirAsia because people
always look for cheaper fares. Besides that, when AirAsia lowers their price
again and MAS did not, AirAsia will gain a lot of sales because there is no
other firm that is affecting them. However, the sales of MAS will not fall to
zero even though its prices are higher. It is because there are some customers
who are willing to pay higher price for a higher end of services from MAS. (Jackson,
McIver & Wilson, 2012)
PRICE ELASTICITY OF DEMAND
Price elasticity of demand is a
measure of responsiveness, or elasticity of the quantity demanded of a product
or service when the price changes. (Price Elasticity of Demand, 2012)
In terms of demand for air travels,
it is sensitive to the changes in the prices and incomes. There are six
different markets for demand of air travels which is business and leisure,
domestic and international, and short haul and long haul flights to determine
its price elasticity of demand for each market.
As MAS is one of the high end air
flight companies, they actually do provide all of the services available for
the six different markets. Firstly, business class which is for business
persons that travels frequently. Secondly, economy class which is for normal
and leisure travelers, Firefly and MASwings is the subsidiary airlines of MAS,
they operated short-haul and domestic flights as well as long-haul and
international flights. AirAsia which provides low fares air tickets also
operated short haul and domestic flights. While its subsidiary airlines AirAsia
X, provides long haul and international flights but in a cheaper price too.
From the perspective of elasticity demand of air
travels, the demand for long haul flights are less elastic comparing to short
haul flights. However, an international flight will definitely has longer hour
of flight comparing to domestic flight. As MAS provides more comfortable
accommodations, people will choose to fly with MAS instead of AirAsia when it
comes to international flights because AirAsia is less comfortable to travel
for long hours of flight. Even though there is a difference in the price, but
it does not affect much to the consumers as MAS has its own advantages.
In
the other hand, the demand for leisure
travel is more elastic comparing to business travel. AirAsia will become the
option when it comes to leisure travelling. It is because they would rather pay
at a lower price as it is affordable to their trip.
POTENTIAL MERGER
Collusion is an agreement where firms or individuals
to divide the market differentiation, set prices, product or opportunities
limitation. (Sheffrin, 2003)
AirAsia’s part parent, Tune Air has
false an agreement of landmark in August 2011 with a Malaysian Government
controlled investment company, Khazanah Nasional, which holds 70% of stake of
Malaysia Airlines. In the agreement, it gives Tune Air a 20.5% of stake of MAS
and Khazanah a 10% stake in AirAsia through a swap of share. (Airline Leader, 2012) This
has shown the collusion between the two competitors.
Back in month September of year
2013, Malaysian Competition Commission (MyCC) has fined both AirAsia and MAS
with RM10 mil each company as they had breached the competition laws for the
share swap in year 2011. (The Star Online, 2013).
As in the agreement, it was stated that MAS-AirAsia alliance were
about to form, if it is so, 80% of the total share in market for air
travels will be taken over by them. They will be setting the prices over
the expenses of the consumers. However, MAS have
been facing losses in sales ever since AirAsia was operated, if both MAS
and AirAsia cooperated together, it means that their route networks can
be combined together and it will increase MAS' profitability. (Airline
Leader, 2012).
Besides
that the collusion between both the airlines will decrease the social's
welfare. It has also some advantage where merger can be bring to
public. For instance, merger causes economies of scale (as seen from
graph above). Economies of scale exists when number of flights increase,
the average cost will decrease to absolute minimum. As if the average
cost is lower, the airfare price will then be lower too.
Reference
List:
1. AIRASIA is named as the World’s Best
Low-Cost Airline at the 2012 World Airline Awards held
at Farnborough Air Show (2012) The World Airline Awards. Available from: http://www.worldairlineawards.com/awards_2012/lowcost2012.htm
[Accessed 23 October 2013]
2. Our story (2012) Malaysia Airlines. Available from: http://www.malaysiaairlines.com/my/en/corporate-info/our-story.html
[Accessed 23 October 2013]
3. Jackson, J.,
McIver, R. and Wilson, E. (2012) Microeconomics. 9th ed.
Australia: Mcgraw-Hill.
4. Price
Elasticity of Demand. (2012) Wikipedia [online].
20 October. Available from: http://en.wikipedia.org/wiki/Price_elasticity_of_demand
[Accessed 23 October 2013]
5. AirAsia-MAS
alliance could lead to more strategic changes across Asia (2012) Airline Leader. Available from: http://www.airlineleader.com/regional-focus/airasia-mas-alliance-could-lead-to-more-strategic-changes-across-asia
[Accessed 23 October 2013]
6. Sidhu
B.K., (2013) MyCC likely to fine AirAsia and MAS over share swap deal. The Star [online] 7 September. Available
from: http://www.thestar.com.my/News/Nation/2013/09/07/MyCC-likely-to-fine-airlines-AirAsia-and-MAS-in-the-soup-over-share-swap-deal.aspx
[Accessed 23 October 2013]
