Malaysia Airlines Strategic Management

4.2.1 Threat of new entrants

Siegfried and Evans (1994) argue that that there are two types of entry impediments. Structural barriers which exist due to natural characteristics of the industry and behavioural barriers which originate via intentional discretionary conduct by incumbent firms.

Perhaps the strongest structural barrier that exists in the airline industry are high capital requirements which provide incumbents a natural absolute cost advantage over entrants in the short run. This is empirically supported by Dunne and Roberts (1991), and Chappell, Kimenyi & Mayer (1992) which found that high capital intensity industries such as airlines have significantly lower entry rates. This barrier is however mediated by the prospective firms cost of capital and thus dependent on economic conditions such as interest and exchange rates. This suggests that relative to other industries, the airline industry has a significantly lower capital barrier during a global boom due to its high capital intensity nature.

One behavioural barrier that MAS itself perpetuates is brand recognition and customer loyalty via the generation of customer delight. Brand loyalty increases a customer's psychic switching costs. Ong and Tang (2010) found that customer loyalty to MAS is higher in the international route markets as customers tend to place a higher priority on price on shorter routes at the expense of loyalty. Among other reasons, Air Asia capitalised on this weakness in order to successfully enter the market in 2001.

MAS also has an operational unit cost advantage over new entrants via the learning curve effect. Through over 60 years of experience, MAS holds knowledge, skill and stakeholder contacts that new entrants will need to acquire.

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4.2.2 Threat of Substitutes

For MAS, close substitutes only exist for domestic routes in the form of buses, boats and personal automobiles. However, such substitutes are perceived inferior in terms of convenience and only marginally...