Introduction To Air Asia Economics Essay

Air Asia is one of the pay victorious and utmost reduced fare airlines in the Asia escalating speedily since 2001. With a fleet of 72 aircrafts, Air Asia soars to over 61 household and international destinations with 108 paths, and functions over 400 air journey every day from hubs established in Malaysia, Thailand, and Indonesia. Today, Air Asia has flown over 55 million tourists through the district and carries on to convey ahead more substantial path world broad web through its aide companies. Air Asia accepts as factual in the no-frills, hassle-free, smallest fare enterprise notion and feels that holding reduced charges needs high effectiveness in every part of the business. Through the business beliefs of “Now Everyone Can Fly”, Air Asia has sparked a transformation in air journey with more and more persons round the district selecting Air Asia as their favoured alternative of transport (Wong, 2009).

 The Nature of Costs

 Total cost for airlines can be considered into two categories: Fixed cost and Variable cost.

Fixed Cost 

Businesses characterise fixed costs as any cost that do not fluctuate throughout the fiscal year. Fixed charges are not influenced in any way by alterations in output, income or expenses. Companies with high fixed costs, for example airlines, experience money flow difficulties when enterprise slows down because they will not cover their baseline fixed costs. Companies try to minimise fixed costs by outsourcing their work force, decreasing agency space and other strategies. Fixed charges for airline encompass items for example maintenance of property, lease payments, rent for buildings, utilities, protection, concern on borrowings, etc. (Marquis, 2012).

 

 

 

 

Variable costs

Variable costs can be characterised as costs which hold altering in percentage to the undertakings of a business. Variable charges can be calculated as the addition of marginal charges over all flats produced. Variable charges pattern one of the absolutely crucial constituents and a significant management tool in assessment of total costs. Besides, all variable charges are direct charges (costs which can be effortlessly affiliated with a specific cost object). Variable charges are, occasionally, furthermore mentioned as unit-level charges for they alter with the number of flats produced. Usually, these variable charges hold on Increasing at an unchanging rate in percentage to work and capital. Variable charges for airline commerce would encompass aircrew wages, fuel, setting down charges, and traveller refreshments. The cost varies with the number of air journey and length of journeys (Analysis, 2012).

Semi-variable cost

A semi-variable cost is a cost that comprises both fixed and variable cost elements. Thus, the fixed component of the cost will be acquired frequently over time, while the variable component will only be acquired as a function of volume. Here are some demonstrations of a semi-variable cost (Marquis, 2012).

Example

A output line may need $10,000 of work to employees it at a minimal level per day, but one time a certain output capacity is passed, the output employees should work overtime. Thus, the basic $10,000 every day cost will be acquired at all capacity level, and is thus the fixed component of the semi-variable cost, while overtime varies with output capacity, and is thus the variable component of the cost (Marquis, 2012).

 

 

 

 

Direct Costs

Direct charges are charges that can be effortlessly traced to a specific object (also called a cost object), for example merchandise, the raw components utilised to construct merchandise, or the work affiliated with the work to make the product. Direct charges are often, but not habitually, variable costs. Variable charges boost as more flats of the merchandise are manufactured. As an outcome, raw components are variable and direct costs. But, if there is a supervisor overseeing the constructing of this specific merchandise, their wages is likely the identical despite of how much of the merchandise is constructed, so it is a repaired cost. Direct cost for airline would be Flying Operations, (such as Flight Crew Salaries, Expenses and Training Aircraft Fuel & Oil Insurance & Uninsured deficiency Lease/Rental of aircraft), Direct Maintenance and overhaul (such as Labour Repairs) Materials, Depreciation & Amortisation For Flight Equipment (Such as Expense of Interchange Aircraft, Other Depreciation & Amortization) (Peavler, 2011).

Indirect Cost

Indirect charges are those which sway the whole business, not just one product. Indirect charges can be repaired or variable costs. Often, they are repaired charges with an demonstration being the lease an enterprise yield on their building. Sometimes, they are variable. A demonstration would be electrical power or water account which can change monthly (Peavler, 2011).

Indirect cost for an airline commerce would be Landing & Airport Charges, Route facility charges, Station Expenses, Ticketing, Sales & Promotion, country tax, General & Administration (Peavler, 2011).

 

 

 

Method of Cost Reduction

The procedure of cost decrease emphasises on smallest charges, though not inevitably the smallest cost, in the market (Marcus, 2010).

Low Fare, No Frills

Air Asia’s strong aim on supplying air journey with no frills directs to considerable charges saving. The nonattendance of in-flight services decreased pre-flight ground works for example the stacking of nourishment and beverages, cleansing time and the cost of repasts and management, buying into in food groundwork areas equipment for saving, heating scheme and assisting of repasts can be avoided entirely (Marcus, 2010).

Investment in newest technologies and Efficient Operations

Air Asia has very powerfully bought into in buying the most up to date airplane A-320s. The new airplane permit Air Asia to relish considerable smaller fuel cost as these up to date airplanes had smaller fuel usage by as much as 12%. Fuel accounted for nearly 50% of the total operating charges and therefore it is a significant constituent of cost keeping for Air Asia. By operating a lone airplane kind permits Air Asia to accomplish effectiveness in executing its prime and lesser activities. Consequently, this directs to higher productivity which in turn permits the business the choice to elaborate their procedures with the identical number of workers and right dimensions its manpower requirement. Improved productivity entails more income for Air Asia. The farthest propel to accomplish high effectiveness in procedures permits Air Asia to timepiece the fastest turnaround time of 25 minutes. This always directs to comparatively better productivity as the business was adept to use its airplane for a mean of 13hours per day as are against to 10.5 hours by other airlines. Again, advanced productivity means more income for Air Asia (Marcus, 2010).

 

 

 

 

Low Fixed Costs

Air Asia’s proficiency to come by reduced rates for long-run upkeep agreements and airplane leases directed to considerable cost savings. It was described that Air Asia’s mean contractual lease ascribe per airplane declined by more than 60% from 2001 to 2004. Similarly, its airplane upkeep agreement charges were furthermore described to be considerably smaller than any other airlines. In outlook of the airline’s high security and upkeep standards, Air Asia was furthermore adept to procure favourable rates on its protection policies. All these assist smaller repaired charges (Marcus, 2010).

Lean Distribution System

The use of e-ticketing assists to save the cost of handing out hardcopy permits, which were approximated at US$10 per ticket. The business furthermore kept on agents’ commissions’ and bypassed require for large and costly registration and booking systems. This too assists slower the general charges (Marcus, 2010).

Minimise Personnel Expenses

Air Asia applied flexible work directions and simplified administrative functions which permitted workers to present multiple roles. This human asset principle helped Air Asia in reducing its staff costs. In 2004, it was described that Air Asia had the smallest staff-to-per airplane ratio (106 employees per airplane as in evaluation to 110 employees per airplane listed by other reduced cost carriers) and this assists smaller staff cost (Marcus, 2010). 

Use of Secondary Airports

Typically, Air Asia functions out of lesser aerodromes, which engage lower landing, parking and ground management fees. These aerodromes were furthermore less engaged and had shorter runways, therefore assisted decrease fuel utilisation while airplane line for take-off or taxi on the ground. As numerous lesser aerodromes were older, they were often close to built-up localities and were therefore more appealing to some travellers. In short, the use of secondary aerodromes can boost sales and assist to hold functioning charges reduced (Marcus, 2010).

 

The proficiency to smaller cost and at the identical time broaden earnings margin (through increase productivity). This presents Air Asia the options to either smaller its charges and gain market share and sales from competitors or hold its charges at present market grade and make more earnings for every unit sold. This inescapably assists Air Asia in its protection contrary to hard-hitting affrays particularly when it arrives to cost conflict from powerful competitors (Marcus, 2010).

 

Adoption of Management Accounting System/Tools

The followings are couple of scheme implementations that Air Asia has finished in its trading and sales undertakings (Yield Management System and Computer Reservation System) as well as procedure undertaking (Enterprise Resource Planning System). 

Yield Management System (YMS)

It is furthermore renowned as Revenue Management System; it realises, foresees and answers to the demeanour of clientele to maximize income for the organization. This takes into account the functioning charges and aids Air Asia to optimize charges and assign capability to maximize anticipated revenues. The optimization is finished on two grades in Air Asia (Wong, 2009):

Seat (Every chair is advised an opening to maximize revenue. Seats are accessible at diverse charges in distinct points of time. A booking finished at a subsequent designated day will be ascribed more than the one finished previous – for the identical seat) (Wong, 2009).

Route (By modifying charges for routes/destinations that have a higher demand when in evaluation to others). The productive procedure although is to blend these two grades for all air journey, all paths in order that both the chair and the path are competently cost for all the flights. Air Asia has recognized expanded income (3-4%) for the identical number of aircrafts by taking benefit of the outlook of the high/low demand patterns, competently moving the demand from reduced time span to high time span and by ascribing a premium for late bookings. Over the past twosome of years, Air Asia have really let down charges (essential for LCC) as the YMS has granted them the window to boost their income by proposing higher discounts, more often throughout off-peak times while lifting charges only marginally for top times (Wong, 2009).

 

Computer Reservation System (CRS)

Air Asia’s CRS (Open Skies by Navitaire) has assisted it to augment at a spectacular stride in the past twosome of years

“Navitaire’s Open Skies expertise has really endowed Airasia’s development from 2

million travellers to 7.7 million travellers in less than two years. Open

Skies levelled effortlessly to accommodate our growth.”

– Tony Fernandes –

CEO – Air Asia

It is an incorporated web-based booking and inventory system. It encompasses Internet, call centre, airport departure control and more. It is a direct sales engine that competently eliminates the middleman (travel agents) and the sales charges that require to be paid to them. Centralized clientele facts and numbers are furthermore sustained by Open Skies and this assists Air Asia to pathway registration and agenda air journey undertakings with real-time, on-demand describing feature. The huge registration data that is supplied online to the clients actions as a force that adds more clients to use the website therefore decreasing the clientele support costs. A significant characteristic is that Open Skies seamlessly incorporates with the currently applied YMS in order that the schemes can be utilised in unison for charge and income maximization (by supplying data on bookings, agenda etc.) and driving down the charges of procedure at the identical time. This CRS endowed Air Asia to insert the first permit less journey choice and furthermore presents characteristics for example sophisticated boarding passes in supplement to online registration that endowed the development of Air Asia as these characteristics captivated clients that did not have the time for buying permits from counters and approaching in 1 hour early for protecting a chair on the aircraft. Air Asia has suggested to apply a Wireless Delivery System (WDS) to elaborate it comes to by wireless phones. With this, promise clients will be adept to publication permits by their wireless phones. This is a strategic proceed for development as the Asia-Pacific district has a bigger community of wireless telephone users other than internet users (Wong, 2009).

Enterprise Resource Planning System (ERP)

Air Asia has lately (May 2005) opted for a full-fledged ERP scheme applied by Avanade consultants. By applying this bundle Air Asia is looking to effectively sustain method integrity, decrease economic month-end concluding processing times, and pace up describing and facts and numbers retrieval processes (Wong, 2009).

 

Target on Potential Customer’s requirement

Safety First

Safety is the lone most significant criteria in every facet of the procedures, a locality that Air Asia will not ever compromise on. Air Asia complies with the situation set by controllers in all the nations where the airline operates. In supplement, Air Asia partners with the world’s most renowned upkeep providers to double-check that its fleet is habitually in the best condition (AirAsia, 2006).

High Aircraft Utilisation

 Air Asia’s high frequency air journey have made it more befitting for travellers to journey as the airline applies a fast turnaround of 25 minutes, which is the fastest in the region. This has produced in high airplane utilisation, smaller charges and larger airline and employee’s productivity (AirAsia, 2006).

Streamline Operations

Making the method as straightforward as likely is the key to Air Asia’s success. Air Asia is employed in the direction of a lone airplane fleet; this substantially decreases replicating manpower obligations as well as supplying of upkeep parts. There is only one class seating, i.e. first class, and travellers are free to sit where they select (AirAsia, 2006).

Lean Distribution System

Air Asia offers a broad and innovative variety of distribution channels to make booking and traveling simpler for its customers. Air Asia’s ticketless service presents a reduced cost alternate to issuing printed tickets (AirAsia, 2006).

Point to point network

The LCC form shuns the hub-and-spoke scheme and adopts the simple point to point network. Almost all Air Asia air journey are short haul (3 hour air journey or less). The inherent enterprise is to get an individual from point A to B (AirAsia, 2006).

 

Development and implementation of e-commerce

Air Asia was the first budget airline business which performed business-to-consumer (B2C) transaction in the airline commerce in Asia. Furthermore, it has been the large-scale stimulator of localized e-commerce activities. Since Air Asia presented online booking air permit through its website in May 2002 and utilised computer network to perform its enterprise operationally, it had noted about 40% of the total income which were made by Internet transactions. The next are some causes why Air Asia’s E-Commerce websites flourish in the latest years (AirAsia, 2012).

 

Multi-lingual

Air Asia is the first airline in Asian to insert a multi-lingual website with its new Bahasa Malaysia and Mandarin websites. It is much more convenience for all rushes, particularly in a multi-racial homeland like Malaysia, to book online and browse through the entire content of the site encompassing newest advertisements, new promotions and data about the airline for example latest quality statistics (AirAsia, 2012).

Air Asia Vista Gadget

It permits clients to instantly organise and get access to reside journey data and web-based services exactly from their Windows Vista desktop computers. With the leading-edge expertise, for example Windows Vista, it enhances the client experience with Air Asia and the value of customer service. Moreover, the collaboration between Air Asia and Microsoft permits Air Asia to elaborate their trading channels by supplying instant data on Air Asia’s promotions and advertisement to the district (AirAsia, 2012).

Air Asia online system is conducted worldwide

For certain, every individual can get their transaction finished by using telephone call, facsimile, posted letters and etc. but Air Asia online system endows persons to entire any transaction through internet. For example, a client from Bangalore, India can book air ticket to depart from Low Cost Carrier Terminal (LCCT) to Perth, Australia (AirAsia, 2012).

Air ticket can be book 24-7

As long as Air Asia has a dependable e-commerce owner, the world broad web sprints 24 hours a day and 7 days a week to develop sales. For demonstrations, Air Asia generally permits clients to reserve free air ticket throughout 12 mid nights (AirAsia, 2012).

Security and reliability

Air Asia protect data and data system from unauthorized get access to, use, revelation, disturbance, modification, or decimation in order that the customers’ information is securely kept and get access to suitably controlled. All transactions will proceed through a protected transaction line by the company’s economic institution and managed by the bank, therefore, double-checking a highly protected line that will in still clients with believe (AirAsia, 2012).

No require to wait

The Internet is developing at a fast pace. Obtaining a Web occurrence is absolutely crucial, those enterprises that were making huge earnings margins a couple of years before, are starting to see the market make flat out with expanded competition. There’s still the promise to make many of cash through e-commerce, and Air Asia is now on the pathway (AirAsia, 2012).

PART B

Ratio analysis

MAS RM’000

AirAsia RM’000

Ratio

Formula

2008

2009

2010

2008

2009

2010

Liquidity ratios

Net Working Capital =

Current assets-current liabilities

1879235

(8277550)

(1443613)

222912

315044

-167082

Current ratio =

Current Assets/

Current Liabilities

1.35x

0.85x

0.74x

1.09x

1.3x

1.56

Acid test or Quick ratio =

Quick assets/

Current Liabilities

1.27x

0.78x

0.66x

0.48

0.86

1.27x

Efficiency Ratios

Inventory Holding Days =

Inventory/ cost of sales *365

9.12

11.51

21.43

2.33

3.41

3.41

Debtor Turnover ratio =

Net credit sales/

Average debtors

45.18

45.05

45

157.87

100.42

84.32

Creditor’s Turnover ratio =

Net credit purchases/

Average Creditors

57.85

67.2

77

87.18

142.87

158.32

MAS

AirAsia

Ratio

Formula

2008

2009

2010

2008

2009

2010

Capital Structure Ratio

Gearing = Long term borrowing / (long term borrowing + equity)

0.55

0.80

1.23

0.73

0.79

0.85

Interest Cover = EBIT / interest Expense

5.03

6.33

6.23

-0.64

2.43

2.8

Debt-Equity ratio =

Long term debt /

Shareholder’s Equity

58.3%

91.2%

101.2%

-20%

35.2%

30.8%

Profitability

ratios

Gross Profit margin =

(Gross profit âˆ- 100) /

Sales

-1.10%

-7.90%

-9.42%

-13.50%

28.80%

35.6%

Net Profit margin =

Net Profit after tax before interest /

Sales

1.80%

4.10%

3.20%

-30.40%

19.90%

29.90%

MAS

AirAsia

Ratio

Formula

2008

2009

2010

2008

2009

2010

Return on

Investments

Return on Assets (ROA) =

Net Profit after Taxes âˆ- 100 /

Total Assets

2.4%

5.8%

5.8%

-5%

4%

8%

Return on Capital Employed (ROCE) =

[(Net Profit after Taxes) âˆ- 100] /

total capital employed

3.26

6.85

7.15

-4.58

9.42

10.23

Return on Total Shareholders’ Equity =

(Net Profit after Taxes âˆ- 100) /

Total shareholders’ equity

5.87%

67.02%

67.02%

-31%

19.32%

29%

MAS

AirAsia

Ratio

Formula

2008

2009

2010

2008

2009

2010

Investment

ratios

Earnings per Share (EPS) =

Net Profit of Equity holders/

No. of Ordinary Shares

-0.21

0.21

0.21

0.15

0.30

0.45

Dividend Pay-out Ratio

= Dividend per share / net profit

0

0

0

0

0

0

Dividend Yield =

Dividend per share /

Market Value per share

0

0

0

0

0

0

Price- Earnings ratio (P/E) =

Market value per Share /

Earnings per Share

-1.21

6.57

6.30

20.40

9.07

31.30%

Comparison of MAS and Air Asia

Profitability and return on Investment Ratios

MAS airline have high income comparatively to Air Asia. However, gross earnings percentage and net earnings percentage calculated above shows Air Asia develops better return than MAS from 2009 to 2010 economic year, except year 2008.

One cause is Air Asia has better procedure effectiveness, which develops gross earnings more than 20% with its leaner operation costs, in all years except 2008. MAS with enterprise strategy going beyond Expectations had over run their operation expense to the extent that is non-sustainable by centre operating revenue income.

However, MAS could rely on Other Operating Income and Derivative Gain to develop affirmative net earnings, ROCE and ROSF/ROE between economic years 2008-2010 as shown in analysis. Unfortunately the earnings profited for MAS from the non-core service enterprise (generated from sales of plane, properties, gain from hedging contrary to fuel and currency, and etc.) are not consistent.

Air Asia on the other hand, usually displays a reliable affirmative ROCE with development from 2009 to 2010(except 2008, to be clarified later) comparatively with MAS, most probable because of their increasing and profitable centre airline service operation. There is an outstanding in 2008, where Air Asia had presented badly contrary to MAS in all four profitability ratio. Looking at Air Asia 2008 earnings declaration, Aircraft Fuel Expenses was exceptionally higher than 2009 fuel expending, regardless of other functioning costs stayed smaller, in bordered with the economic year revenue. One cause is due to crude oil cost fluctuation. Crude oil cost in 2008 had ascended at considerably stride, resulted to Air Asia taking place to hedge contrary to the increasing fuel cost. Shortly after this, crude oil cost fall to reduce worth, producing Air Asia functioning with high fuel cost. Worse, when the amount of fuel hedge at high cost would flow over to next economic year, Air Asia determined to compose off the high cost fuel contrary to market cost of the time, in 2008 economic year as Loss on Unwinding of Derivatives decaying the procedure profitability, therefore the decrease described in year 2008. This is furthermore finished to permit Air Asia to contend competitively for new economic year, rather than of bearing the problem from incorrect conclusion in fuel cost hedged. MAS may or may not have taken any place in fuel cost hedging. But the any conclusion made at that time gave them the advantage of accomplishing better than Air Asia in economic year 2008. Nonetheless, MAS after adopting new Financial Reporting Standard 139 (FRS139) that sets up the values for identifying and assessing economic assets, economic liabilities and certain agreements to purchase or deal non-financial pieces, had to write-off contingency deficiency in the balance sheet producing to fall in equity to 0.74billion in 2009, from4.19billion noted in 2008. This adoption makes the ROCE and the ROE computed tough to contrast against Air Asia come back to investor. Base on the computed numbers, Air Asia can be said to present better than MAS in double-checking reliable come back to the shareholders.

Efficiency and Liquidity

Comparing 2008, 2009 and 2010 economic years, Air Asia current ratio and quick ratio had increased, while MAS in the identical years faced fallen in both ratios. Current ratio is evaluation of enterprise liquid assets with present liabilities. Hence the boost of Air Asia current ratio signified increase in business present assets considerably contrary to their present liabilities from 2008 to 2010.This is obvious for the current. The foremost increase was enormously assisted by cash construct up, accessible in pattern of down payments, money and bank balances, as we can observe from Air Asia balance sheet. MAS present assets on the other hand, fallen from RM6.6billion in 2008 to RM4.7billion in 2009, and had rapid increase in present liabilities, probably assisted from hedging undertakings contrary to fuel, currency and concern rates amounting RM584.8million as display in MAS balance sheet. Such action of assets and liabilities, can be undesirable at some continue, because with ratio of 0.86 entails MAS present assets is about ample to payback 86% of its present liabilities, so the enterprise perhaps experiencing some liquidity problem. Air Asia and MAS has a exceptional circumstance in quick ratio computation. Noticeably, its action tendency is similar to current ratio trend. Reason is because both airline businesses are service groundwork providers. Thus inventory needed to double-check enterprise continuation, comparatively to other present assets, is somewhat little, which is observable in the quick ratio calculation. Thus, we can state the quick ratio alterations are alike to current ratio changes explanation. Air Asia procedure outsource their airplane foremost upkeep, while MAS convey numerous foremost upkeep internally. This produced to Air Asia need less inventory comparatively to MAS, therefore the secondary change of Air Asia quick ratio in evaluation to its current ratio, while MAS which convey more inventories for upkeep reasons would have somewhat bigger fall in quick ratio contrary to its current ratio. Mentioned, service commerce generally conveys negligible stock. This clarified the reduced number of inventory retaining days for both airline businesses, because the worth to the supplies is somewhat reduced in evaluation to their revenue. Hence the few alterations in numbers of holding days for both airlines. MAS inventory holding days expanded from 9.1 to 11.5 days was mostly due to fall in cost of sales, a direct outcome of fall in 2009 income, while its inventory expanded somewhat in value. Air Asia and MAS traveller air journey service would obtain accelerate fee before deliverable. Such perform would inescapably convey down receivables fee days (RPD) rather substantially on mean cornerstone, with receivable earnings from cargo freight, advocating, on-line merchandising, and etc. Despite smaller in 2009 economic year by MAS, the RPD stand nearly the identical in both 2008 and 2009 years which could probably entails the receivable as an entire could drop proportionately. The alterations in Air Asia receivables would could be due to more powerful higher earnings developed from their traveller airline part which adds the other earnings income considerably smaller by percentage, or Air Asia might had enhancement in their collectibles from earnings developed from the non-core service deliverables.

Payable payments days (PPD) for both airlines had expanded though at distinct rate from 2008 to 2010. In Air Asia, the PPD expanded considerably from 87.2days to 142.9days. Air Asia was functioning with somewhat high fuel cost, this product merchandise would be paid as utilised, or be firmly granted only short-term fee period. Therefore on mean, the hedging undertakings but Air Asia would considerably decrease the PPD of year 2008. Else, Air Asia might have selected to shortened payables time span in 2008 in come back for better savings from other suppliers in alignment to decrease deficiency acquired from the hedging activities. MAS attenuating components would be alike, and may not be very difficult in the hedging undertakings; therefore the differentiation inside the two years is not as large as Air Asia. The overhead assist to the money alteration cycle’s administration, which assesses the number of days a company’s money, is joined up in the output and sales method of its procedures and the advantage it gets from fee periods from its creditors. The shorter this cycle, the more fluid the company’s working capital position is. Therefore in abstract, anything the attenuating components perhaps, Air Asia had absolutely advanced its liquidity enormously from 2008 to 2010, while MAS too made enhancement, in the capital administration, but in a lesser way in evaluation to Air Asia.

 

Capital Structure

Air Asia and MAS enterprise procedures had been financed by both internally by the shareholders as equity, and externally by borrowings borrowed. From 2008 to 2010, Air Asia had expanded their long period borrowings considerably contrary to equity expanded, therefore lifting their equipping ratio. Wi