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| MAS Airlines Logo |
Introduction
Malaysia Airlines System Berhad (MAS) is currently a globally well-known high quality air travelling service in which the company is worth over billions today. It is the holding company for Malaysia’s national airline carrier and is also recognized as one of Asia’s fastest growing airlines. Tan Sri Mohd Nor Yusof and Ahmad Jauhari Yahya are the chairmen and managing directors of the MAS Airlines respectively and has an overall of 22835 employees in the company (securities.com, 2013). Unfortunately, MAS Airline had once been on the edge of bankruptcy with over RM 12 billion worth of debts when Malaysia’s currency depreciated in 1998 (referenceforbusiness.com, 2013). Tajudin Ramli, former CEO of MAS Airlines foresaw the future of MAS and he took the risk of deferring new aircraft purchases, sold old planes as well as slashed underperforming routes (referenceforbusiness.com, 2013). In addition, Tajudin Ramli believed that transport by flight would still be a necessity in which the demand for air flight would be inelastic, but he was wrong.
Elasticity of Demand
Malaysia Airlines System Berhad (MAS) is currently a globally well-known high quality air travelling service in which the company is worth over billions today. It is the holding company for Malaysia’s national airline carrier and is also recognized as one of Asia’s fastest growing airlines. Tan Sri Mohd Nor Yusof and Ahmad Jauhari Yahya are the chairmen and managing directors of the MAS Airlines respectively and has an overall of 22835 employees in the company (securities.com, 2013). Unfortunately, MAS Airline had once been on the edge of bankruptcy with over RM 12 billion worth of debts when Malaysia’s currency depreciated in 1998 (referenceforbusiness.com, 2013). Tajudin Ramli, former CEO of MAS Airlines foresaw the future of MAS and he took the risk of deferring new aircraft purchases, sold old planes as well as slashed underperforming routes (referenceforbusiness.com, 2013). In addition, Tajudin Ramli believed that transport by flight would still be a necessity in which the demand for air flight would be inelastic, but he was wrong.
Elasticity of Demand
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| MAS Airlines Flying |
Although flying can be called as necessity for some people, however, the demand of flying is still fairly elastic because the mode of transportation is expensive.For instance, many people would love to travel all over the world, but as the price for flying rise tremendously, the demand for flying will depreciate as the customers will prefer to fly
locals as compared to overseas.
Demand & Supply
Demand & Supply
According to the
law of demand, it states that there is a negative relationship between price
and quantity demanded. This means that when the price increases, quantity
demanded decreases while when price decreases, quantity demanded increases. For
example, from Diagram 1 (below); we can clearly notice that when the prices of
the air tickets of MAS Airline increase from P1 to P2, the quantity demanded
for air tickets of MAS Airline will decrease from Q1 to Q2. Besides that, the
demand of MAS Airlines will also increase as it is the most reliable airline
and customers don’t have any choices to choose the airline (Bang bang econs, 2013).
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| Diagram 1 |
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| Diagram 2 |
Besides that,
there are several determinants of demand and one of them is the prices of
related goods. Prices of related goods can be separated into two types, one is
substitute goods and another one is complementary goods. Based on the fact, it
stated that when the prices of substitute goods increase, demand for the goods
increase while when the prices of substitute goods decrease, the demand for the
goods decrease. This is clearly shows that there is a positive relationship
between substitute goods and demand. For example, Air Asia is one of the
competitors of MAS Airlines and therefore, the air tickets of Air Asia are considered
as the substitute goods of MAS Airlines. When the price of air tickets of Air
Asia increase, the demand for air tickets of MAS Airlines will increase as the
customers are smart enough to buy cheaper air tickets. As the demand of its air
tickets increase, the demand curve will shift rightward which is same as
Diagram 3 (below), from AD1 to AD2.
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| Diagram 3 |
.JPG) |
| Diagram 4 |
The complementary goods on the other hand, have negative relationship towards demand. This means that when the prices of complementary goods rise, the demand of the goods fall while when the prices of complementary goods fall, the demand of the goods rise. For example, kerosene is the complementary goods of airplane, which is related to MAS Airlines. When the prices of kerosene increase, the demand of airplanes will decrease which will cause the demand of MAS Airlines decrease. And eventually the decrease in the demand of MAS Airlines will cause the demand curve of MAS Airlines shift leftward, which is similar to Diagram 4 (left), from D1 shift to D2.
Expected future prices are the next determinant of demand after prices of related goods. If the prices of goods are expected to increase or decrease in the future, then the current demand for the goods will increase or decrease respectively. Through this statement, we can see that there is a positive relationship between expected future prices and demand. For example, if the prices of the air tickets of MAS Airlines are expected to increase in the future, then the current demand for air tickets of MAS Airlines will increase because the customers will buy more air tickets at current as compared to future. As the demand for air tickets of MAS Airlines increase, the demand curve of will shift rightward which is similar to the condition in Diagram 3 (above), from D1 to D2.
On
the other hand, supply has several determinants and one of them is the state of
nature. The state of nature refers to all the natural forces such as weather,
disaster and many more. When natural disaster occurs within a country, the
supply of all firms, companies, industries and organizations within the country
decrease and this will cause the supply curve of all firms, companies,
industries and organizations shift rightward. For examples, if there is an
earthquake occurs in Malaysia, it will eventually cause much destruction and
effects towards a lot of firms and companies in Malaysia which MAS Airlines is
not excluded, therefore the supply of MAS Airlines will decrease sharply. As
the supply of MAS Airlines decrease, the supply curve will shift leftward which
is same as Figure 1 (below), from S1 to S2.
Besides that, technology is the second determinant of supply. With the
advancement and improvement of technology, it will get to create new products
which can lower the cost of manufacturing or producing existing products and
therefore; the increase or decrease in the advancement of technology will cause
the increase or decrease of supply respectively. As the supply increases, the
supply curve will shift rightward
while when the supply decreases, the supply
curve will shift leftward. For examples, when the technology of aircrafts of
MAS Airlines increase, the supply of MAS Airlines will increase and this is due
to the suppliers of MAS Airlines will try to supply as much aircraft as
possible in order to make more profit as well as get more attraction or interest
from the customers. When the supply of MAS Airlines increases due to the
improvement of the technology, the supply curve will eventually shift to the
left which is similar to the condition in Figure 2 (right), from S0 to S1.
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| Figure 1 |
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| Figure 2 |
Market Equilibrium
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| Figure 3 |
Market Structure
Since Malaysia Airlines (MAS) is an airline industry, it operates in an
oligopoly market structure. An oligopoly market is defined as an economic
market condition where many sellers have their presence in a single market (Diffen.com, 2013). This also means that there are
only few of companies or firms that compete in the airline industry which leads
to the competition within the airline industry less competitive and therefore
make MAS Airlines one of the competitors (Slinger,
2013). There are numerous characteristics that we could notice from
oligopolistic market and one of them is that the barriers entries to the market
are high and this makes other companies or industries face difficulties for
entering or joining the market (Diffen.com, 2013).
For instance, MAS Airlines will set up barriers to entries to other airline
industry such as licensing, patents, air routes, location for landing and many
more. With the existing barriers
entries, there are only few firms or industries are allowed to enter MAS
Airlines to achieve economies of scale, but these firms or industries cannot go
further than that.
Besides that, the next characteristic of oligopoly is
that it produced identical or differentiated products, very much like MAS
Airlines compared to its competitors. For identical products, industries or
firms in this market produce intermediate goods which are used as the inputs by
the other industries that are later on for manufacturing the products. On the
other hand, as for differentiated product, industries or firms in this market
focus on goods manufactured and sold for personal consumption as their needs
and wants are not alike (Amoweb.com, 2013). For
instance, due to the lack of experienced pilot and air routes, therefore MAS
Airlines have to provide identical and differentiated services to its consumers
in order to compete with their compliant as well as utilize their satisfaction.
Government Intervention
Finally, in terms of government intervention, Widespread Asset Unbundling (WAU) was designed in 2002 as the financial restructuring to help MAS Airline to fly again as Mas Airlines faced financial crisis by that time. WAU helped MAS Airlines to shift 73 aircrafts as well as its RM 7 billion debts to Penerbangan Malaysia Berhad (PMB), a government holding company. By doing this, the government will get a chance to gain from potential appreciation in MAS Airlines in a corporate press release. Unfortunately, MAS Airlines make losses back in 2002 due to some problem of domestic flight service and therefore the financial burden of MAS Airlines was finally transferred to PMB (123helpme.com, 2013).
Credits:
Finally, in terms of government intervention, Widespread Asset Unbundling (WAU) was designed in 2002 as the financial restructuring to help MAS Airline to fly again as Mas Airlines faced financial crisis by that time. WAU helped MAS Airlines to shift 73 aircrafts as well as its RM 7 billion debts to Penerbangan Malaysia Berhad (PMB), a government holding company. By doing this, the government will get a chance to gain from potential appreciation in MAS Airlines in a corporate press release. Unfortunately, MAS Airlines make losses back in 2002 due to some problem of domestic flight service and therefore the financial burden of MAS Airlines was finally transferred to PMB (123helpme.com, 2013).
Credits:
MAS Airlines Logo - http://iklanpeluangkerja.blogspot.com/2011/09/vacancy-at-malaysia-airlines-system-mas.html
MAS Airlines flying - http://www.themalaysiantimes.com.my/mas-offers-over-13000-extra-seats-for-hari-raya/
Figure 3 – http://www.raybromley.com/notes/equilchange.html
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