MAS-AirAsia market structure

Since AirAsia and MAS inked a Comprehensive Collaboration Framework (CCF) in August last year to mutually benefit both airlines. But the question remains as to whether consumers would benefit from it. Consumers naturally perceive a lack of competition in the market as it appears as if a monopoly has been created, which may result in higher air fares. But, what about the impacts of the collaboration on consumers in the future?RAM Holdings Berhad economist Dr Yeah Kim Leng, however, sees a positive aspect to the CCF. “If the collaboration between AirAsia and MAS that formed a monopoly that results in some kind of rigidity in prices because of the lack of competition, consumers will be worse off. But if it results in greater efficiency, then some of the cost savings and productivity could be passed on to consumers and we could see Malaysian consumers benefit,” says Yeah. However, he adds that a lot depends on what kind of efficiency is gained through this airline alliance.“From a national perspective, if both carriers survive and are profitable, it will benefit the economy through increase of value added services and higher employment generation.”“The consumer loses at the end of the day. By killing off Firefly (an AirAsia competitor), it’s preventing another low cost carrier option from developing. This decreases choice for the consumer,” says UCSI University policy analyst Ong Kian Ming.The collaboration, however, raises a number of concerns.

            Initially, the Air Asia and MAS are large firms that competing with each other over the time and an oligopoly existed in our country, an oligopoly market structure is defined as a market where there are few large sellers competing with each other. Both of these large firms are doing identical business which is providing air line services to the customers. As an oligopoly market structure, both of these firms have the ability to control over their price in order to maximize their profits since they are considered as a price maker such as by doing high price policy when there are only a few of competitors. In order to set up a price, they are mutual interdependence with each other too as they must consider the reactions of its competitor when it determines its price policy. For instance, a mutually interdependence firm realizes that its price declines will be more likely to be matched by its competitors than its price increases. However, the aims of both the firms are MAS focuses on premium full service passenger air travel, whereas Air Asia focuses on routes with low cost value, therefore their prices and services are in different ways that could affect consumer decision.

             In oligopolies, both of these firms have formed high entry barriers preventing the entry of new firms. These entry barriers may be due to the economies of scale and limited licenses issued by government to restrict the rate of forming a new air line firm. However, firms could compete along other dimensions as well; such as by doing advertises to capture the market quickly; both of the firms Air Asia and MAS have advertised much kind of promotions or season seats price and promoting their brand value via internet and so forth nowadays. Moreover, new firms will find hard to enter as they requited to have a large initial investment cost before starting the air lines firm and also difficulty to capture a large market share as consumers may find unsafe and strange to new air line firm.

             “TO COMPETE OR TO COLLABORATE?!” this is also a dilemma faced by the oligopolies. There is a reason oligopolies have to decide is whether to compete or collaborate with their rivals, if they decided to collaborate then they are able to create a large monopoly. The positive feedback is that they can jointly restrict their output level and enjoy the monopoly profits. Come to the decision made by Air Asia and MAS, both of the firms have decided to collaborate forming a large monopoly, whereby they still formed a high entry barriers that similar with oligopoly and also earning supernormal profits.

Throughout my research is that, the MAS-AirAsia ( after collaboration ) deal had identified the important areas to achieve savings, increase revenue and given the huge volume expected from the two airlines in these areas, economies of scale can be achieved, thus reducing operational costs that will indeed welcomed and benefit the customers or flyers. For example, in the catering area, MAS is known for its good food served on board while AirAsia's food needs to be purchased on board. This collaboration can lead to an extension of this section where now its food will be sold on AirAsia planes, resulting in revenue increase.  From my opinion, collaboration enables both of these big firms to offer wider destinations, therefore attracting more passenger volume. Moreover, if both firms do well in their respective market segments, this will help stimulate consumers’ demand for air tickets. However, the collaboration raises a number of concerns. One of them is that there is a possibility that a monopoly has been created due to the lack of competition in the industry. Consumers would be left with no choice but to accept whatever service or price that is offered to them, due to a lack of alternatives.

By, Christina Yap  =)

References :

http://biz.thestar.com.my/news/story.asp?file=/2012/4/26/business/11176327&sec=business

http://www.theedgemalaysia.com/highlights/210706-mas-airasia-collaboration-part-of-solution-not-problem.html

http://www.preservearticles.com/201106178093/6-essential-characteristic-features-of-oligopolistic-market.html