Company Background
Malaysia Airlines started on 12 October 1937 as a result of a joint initiative of 3 organizations which are Ocean Steamship Company of Liverpool, the Straits Steamship of Singapore and Imperial Airways. This initiative led them to a proposal to the Colonial Straits Settlement government to operate an air service between Penang and Singapore. Within a decade they manage to shift from a local airline to an international airline due to an incredible young, talented and dynamic team of visionaries and Malaysian Airlines took its first commercial flight as the national airline on the 2nd April 1947. Malaysia Airlines or formerly known as Malayan Airways Limited changes their name with the formation of Malaysia in 1963.
Later on, Borneo Airways decided to merge into MAL and from that point they grew from a single aircraft operator and turn into a company that consists of over 2400 employees and a fleet operator using the then latest Comet IV jet aircraft, six F27s, eight DCs and two Pioneers. All of that happen in 20 years and that is a pretty good improvement. Due to the separation of Singapore from Malaysia in 1965, MAL also pay for the price by turning into a bi-national airline and this result in the renamed of Malaysia-Singapore Airlines (MSA). They introduces new logo this also part of the rapid growth of the airline company besides offering new services to Perth, Taipei, Rome and London (Malaysia Airlines, 2013).
Malaysia Airline Limited decided to rename into Malaysia Airline System after their partners decided to move separate ways on 1st October 1972 and later on continues to be the country national flag carrier and branded as Malaysia Airlines. Many achievements have been made throughout the years. Their achievement have become more significant when they received its first airbus A380-800 in 2012 accompanied by historic Malaysian record on July 1st. Until February 1st, 2013 shows that Malaysia Airlines is officially a oneworld alliance and it is connected to over 850 destination in more than 150 countries worldwide. Malaysia Airlines (MAS) is now located at its main branch at Kuala Lumpur City Air Terminal (KLCAT), Kuala Lumpur Sentral Station and also a couple of branches at East Malaysia which is located at Kota Kinabalu, Sabah and Kuching, Sarawak (Malaysia Airlines).
Market Structure
The market structure for Malaysia Airlines is an oligopoly which means that there are only several companies compete in the market and it is more competitive than monopoly that only consists of one seller (Sloman, Wride, and Garratt, p. 197, 2012) . In Malaysia, earlier we had 2 huge airlines company which is the Malaysia Airlines and AirAsia but now it is just announced that there is a new airline that just join the market which is the Malindo Airlines. Before AirAsia and Malindo joined the market, Malaysia Airlines is considered as the monopoly type of market structure because they have the abilities to exploit all buyers but that structure ends with the appearance of AirAsia and Malindo Air in 1993 and 2012 respectively.
In an oligopoly, MAS has some power in setting up the price which they can set at any price (Agarwall, 2011). In other words, when it changes its price or marketing strategy it will definitely give an impact to the substitute firm. For instance, when AirAsia lowers is price, MAS will be affected and if MAS does not take any action it will lose its market share. The start-up cost for an airline industry is not cheap but are extremely-high thus, it is not easy for people to enter the market and it would be an extremely difficult to enter the market especially to compete with an airline that had been in the market for so many years. With the appearance of AirAsia, MAS is having a big problem in their financial and they experienced their worst loss in the year 2005 where their total expenditure is so much greater than the total revenue. Since, this firm is interdependent they have the abilities to compete with other firms.
The theory of oligopoly states that when an airline drops its price, it will force rivals to fall in price in their response and this causes MAS lose its sales revenue and market share. In this context, according kinked demand theory the demand curve is made of relatively inelastic demand curve and relatively elastic demand curve. Based on this theory, it is assume that when MAS raises its price, its rivals, for instance AirAsia will not follow by keeping their price constant. This can be seen in the graph where it is relatively elastic with the change of price or in other words it is responsive to that change. However, when MAS reduce its price this leads others to cut their prices to prevent from losing their customer. It is relatively inelastic when the price fall because it is less responsive towards the change in price. Demand is relatively elastic above the kink where their sales will fall as price increases. On the other hand, demand is relatively inelastic below the kink because as price falls, the sales increase (Sloman, Wride, and Garratt, p. 206, 207, 2012).
Besides that, marginal revenue will continue decreases until the point where there is no change in the total revenue and remain decreasing after that. However, since the demand curve is kinked there is a gap between the marginal revenue which indicates that there is no change in total revenue (Bouman, 2011). Regardless of the shape of demand curve, we can say that MAS economic profit is possible in the long run because of the difficulties entry to industry. However, to achieve an extremely high profit seems impossible due to the fact that if the price set is high, people can easily enter the market and eventually cut down the firm’s price and lower the industry profit. This is similar to Malaysia Airlines case where AirAsia enter the market by lower down the price and result in the industry profit. Kinked demand theory can be summarized in the following graph:
Looking back in the year 2005, Malaysia Airlines was facing the most testing time where losses were made for 1.3 billion (Rosnan and Mahmood, 2012). However, the revenue for that year increase by 10.3% or RM 826.9 million and at the same time the amount of expenditure are also increased byb 28.8% primarily because of the increments of fuel prices. Other factors are also included such as staff costs, handling and landing fees, aircraft maintenance as well as the overhaul charges. Due to the massive loss, Malaysian government decided to step in before things got worst.
Therefore, they appointed Datuk Idris Jala as who was the former managing director of Shell (MIDS) Malaysia Sdn. Bhd. as the new CEO to make changes in terms of the operation and corporate culture (Dichter, Lind, and Singham, 2008) . At that time, the bad environment keeping on hit MAS hard and it seems impossible to make a drastic change. This was proven by Datuk Idris Jala where an interview was made on his first impression when he took over Malaysia Airlines and he said that company is in the worst shape ever and they had just enough cash to last 3 to 4 months top (Dichter, Lind, and Singham, 2008).
Therefore, they appointed Datuk Idris Jala as who was the former managing director of Shell (MIDS) Malaysia Sdn. Bhd. as the new CEO to make changes in terms of the operation and corporate culture (Dichter, Lind, and Singham, 2008) . At that time, the bad environment keeping on hit MAS hard and it seems impossible to make a drastic change. This was proven by Datuk Idris Jala where an interview was made on his first impression when he took over Malaysia Airlines and he said that company is in the worst shape ever and they had just enough cash to last 3 to 4 months top (Dichter, Lind, and Singham, 2008).
Datuk Idris Jala changes the airline company and not by make adjustment to the structure or the culture or even the system instead he did a business-process mapping which probably take a few years to settle. But they had only 3 ½ months to fix the problem therefore, he make an announcement during the board meeting a business-turnaround blueprint whereby looking at P&L statement in which he cut off a lot of cost. He never thinks twice when getting rid of any inefficient routes. With the launching of BTP or Business Turnaround Plan and the appointment of a new CEO, the results turn out to be a success (Rosnan and Mahmood, 2012). Route rationalizing was definitely the main contribution that changes Malaysia Airlines losses into profits.
Generally, fuel plays important roles in the economy and it is the main resource for many types of industry. Any changes in price of resources will definitely affects the industry profitability. This goes the same thing to airline company where the rise in fuel costs causes Malaysia Airline profits drop terribly and in fact it turn into losses in the year 2005. Recent report in 2012 states that MAS made another loss again the main contribution to this situation is because of high fuel price and this force them to continue explore options including joint ventures or other option for MASkargo to cover up their losses (The Sydney Morning Herald, 2012). Thus, when there is an increase in fuel price the quantity demanded and supplied will be decreased. As a result, both curves will shift to the left and this will reach to a new equilibrium market price. Higher fuel price will definitely increase the price of ticket fare and this cause for demand to decrease. However, fuel price will never be constant, it changes all the time. Therefore, MAS have to react quickly according to the price changes.
References List
Agarwal. (2011). Market Structure : Oligopoly (Online) Available from : http://www.intelligenteconomist.com/market-structure-oligopoly/
Bouman. (2011). Characteristics of an Oligopoly Industry (Online) Available from:
http://www.inflateyourmind.com/index.php?option=com_content&view=article&id=134:section-3-united-states-federal-government-expenditures&catid=18:unit-8&Itemid=165
Ditcher, Lind and Singham (2008). Turning around a struggling airline : An interview with the CEO of Malaysia Airlines (Online) Available from: http://www.mckinsey.com/insights/leading_in_the_21st_century/turning_around_a_struggling_airline_an_interview_with_the_ceo_of_malaysia_airlines
Malaysia Airline System Berhad (2013) Available from : http://www.malaysiaairlines.com/my/en/corporate-info/our-story.html
Rosnan and Mahmood. (2012). Business Turnarond Plan : The Experience of Malaysia Airlines. (Online) : SAGE Publications Available from: http://bmc.sagepub.com/content/1/2/211.abstract
Sloman, Wride, and Garrant. (2012). Economics. 8th ed. England: Pearson Education Limited
Ditcher, Lind and Singham (2008). Turning around a struggling airline : An interview with the CEO of Malaysia Airlines (Online) Available from: http://www.mckinsey.com/insights/leading_in_the_21st_century/turning_around_a_struggling_airline_an_interview_with_the_ceo_of_malaysia_airlines
Malaysia Airline System Berhad (2013) Available from : http://www.malaysiaairlines.com/my/en/corporate-info/our-story.html
Rosnan and Mahmood. (2012). Business Turnarond Plan : The Experience of Malaysia Airlines. (Online) : SAGE Publications Available from: http://bmc.sagepub.com/content/1/2/211.abstract
Sloman, Wride, and Garrant. (2012). Economics. 8th ed. England: Pearson Education Limited
