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

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

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).

Diagram 1

 The law of supply, on the other hand states that there is a positive relationship between price and quantity supplied. This means that when price increases, quantity supplied increases while when price decreases, quantity supplied decreases. For example, from Diagram 2 (below); when the prices of air tickets of MAS Airline increase form P1 to P2, the quantity supplied for air tickets will increase from Q1 to Q2, while on the other hand, when the price of MAS Airline air tickets decrease from P1 to P3, the quantity supplied for its air tickets will decrease from Q1 to Q3. 

Diagram 2

Determinants of Demand

           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.

Diagram 3

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.

 Determinants of Supply

            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.

Figure 1

           

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

Figure 2

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.

Market Equilibrium     

Figure 3

              Furthermore, market equilibrium may occur in some situation where the price balances of sellers and buyers are even. This also means that the quantity demanded is similar to the quantity supplied, and when it does, equilibrium price will be form. Apart from that, equilibrium price will change due to some situations such as the shift in demand and supply curve. Figure 3 (above) illustrates the change in equilibrium prices of goods due to the shift in the demand and supply curve. As the demand and supply curve shift to the right, from the demand to new demand curve and from supply to new supply curve respectively, it will cause the equilibrium price of goods to fall. For example, many people go vacation by MAS Airlines during holidays, and therefore the demand of MAS Airlines rise which will also cause the supply of MAS Airlines increase as MAS Airlines needs to give more service to their customers due to the increase in its demand (Bang bang econs, 2013).

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:

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/

Diagram 1 - http://studypoints.blogspot.com/2011/05/what-is-law-of-demand-explain-it-with_4680.html

Figure 2 – http://www.investopedia.com/exam-guide/cfa-level-1/microeconomics/supply-demand.asp

Figure 3 – http://www.raybromley.com/notes/equilchange.html

References:

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http://www.diffen.com/difference/Monopoly_vs_Oligopoly

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http://www.securities.com/Public/companyprofile/MY/Malaysian_Airline_System_Berhad_en_1662135.html

4)      Malaysian Airlines System Berhad – Company Profile, Information, Business Description, History, Background Information on Malaysian Airlines System Berhad. [ONLINE] Available at: http://www.referenceforbusiness.com/history2/84/Malaysian-Airlines-System-Berhad.html

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