Cost Management in Air Asia Essays

Cost Management in Air Asia Essays Cost Management in Air Asia Essay Cost Management in Air Asia Essay 1. 0INTRODUCTION Background, History and the Business Concept AirAsia is a brand of airlines operated by AirAsia Berhad. A Malaysian based low-fare company. AirAsia established in 1993 and start the operations on 18 November 1996 (Wikipedia, 2011) Inspired by the success of Ryanair and EasyJet as low cost carrier, Toni Fernandes saw the potential of having the same concept in Asia. Air Asia executed the cost leadership strategy with introduced ticketless travelling, one type cabin, free seating, and online booking trough internet that able slash the price into 40% 60% cheaper than regular airlines (Declanegan, 2012) Now Everyone Can Fly† described AirAsia’s value. Operational effectiveness and cost advantages created efficiency go directly to end user. Customer enjoy more surplus with price falls, and encourage more air travel among Malaysians (Khoo et all, 2005) The study purpose is to analyse how AirAsia and its strategic cost management able to operate a business in low cost yet generate a profit, and able to sustain as one of the business leader in South East Asia. 2. 0LITERATURE REVIEW 2. 1What is Strategic Cost Management Cost management is a process where entities have control, monitor and manage their own cost and expenses. It covers the whole budget of the business, inflow and outflow of cash and transactions in every certain of period. This is for the entity to keep track of their business transaction, and also to estimate budgets for the future. While strategic cost management is the overall recognition of the cost relationships among the activities in the value chain, and the process of managing those cost relationships to a firm’s advantage and also known as Cost Management Theory1. 2. 2The importance of strategic cost management to the company Strategic Cost Management is one of the key business strategic planning. Dr Kalyani Srinivas C defined strategic cost management as a tool for competitive advantage and value creation that does not focus on traditional cost reduction, which entails unnecessary cost elimination. Meaney K, 2011 mentioned that cost management has purpose to ensure adequate supply of funds from the right source at the right cost, at the right time to the firm to meet its funding needs. At this point each company want to improve the profit as maximum without losing the business principle. Strategic management can be considered as one of the strategic management technique for the company to succeed in their business. 2. 3Key success factor to have good cost management in a company To have a good cost management, a company need to set a proper goal, long and short term planning. Clear target and align accountability to the target (Delloitte, 2010). Create a guide of principle was one of the critical factors of strategic cost-management-framework for the firm of foundation to achieve an effective cost management. 3. 0STRATEGIC COST MANAGEMENT FOR AIR ASIA 3. The background of Strategic Management for Air Asia (related to the concept of the business Chan, D (2000) mentioned since 1970, Asian air travel competition has been intense. The intensity has increase very significant with economic growth in Japan, China and South East Asia. When the competition in the airlines industry become hard, complex, and uneven, AirAsia need to think strategically to win the market yet able to generate profit for shareholder. With â€Å"Now Everybody Can Fly† as its tag line, AirAsia try hard to make the ticket price as low as possible to make the cost of flight affordable to lmost everybody. AirAsia also expand the fly route to most of point where Malaysia Airlines (MAS) refuse to fly. The concept of Low Cost Carrier (LCC) is based on the idea that people would fly a lot more often if they get an affordable fare. LCC make air travel the most simple, convenient and inexpensive form of transportation so that they can move maximum number of passenger at the minimum cost (DodDid, 2012) 3. 2How Air Asia Manage their cost Air Asia has several main strategies to keep the price low while price of fuel and goods keep increased. According to the official website, Air Asia managed to cut more cost in operation where regular airlines unable to do, such as : High Aircraft Utilization Air Asia only need 25 minutes to disembark and embarked passenger, include load and unload the luggage, compare to full-services-aircraft (FSC) which need minimum one hour. The minimize time spent on the ground, make Air Asia able to fly almost 12 block hours to maximise the operations. No Frills Air Asia based on the basic concept of transportation : carry passenger from point A to point B safely. Every other services like food, alcoholic beverage, and comfort kit are considered luxury and out of the main concept. Streamline Operations Air Asia make the operation as simple as possible. They only use single type of aircraft to make services persons (flight attendants, mechanic, pilot and services crews) only need to learn one type of aircraft. Compare with another airlines which has several type or aircraft, the company has to created one training department where and several maintenance and mechanic specialist according the aircraft type. Air Asia able to delete those department in the company which save a lot of cost. Basic Amenities Air Asia fly from Low Cost Carrier Terminal (LCCT) with very basic building and facilities. No special boarding gate like FSC which landed and picked up passenger from KLIA. In other country, Air Asia always landed at less busy Airport (Secondary Airport) such as Clark (Manila, Philipine instead of Ninoy Aquino) and Standstead (London, UK instead of Heathrow) to reduce tax airport for passenger. Point to point network Air Asia operate on short-haul most of the time, also do not make arrangement with another airlines or provide connecting flight to keep the operation simple and low cost. Air Asia believed with keep the operation system simple and based on basic concept of transportation would keep the cost and ticket price low enough yet still generate profit to keep the investor stay. Fig 1. Revenue per ASK, Cost per ASK and Cost per ASK exclude fuel From the fig. 1 we could see averagely for five years Available Seat Kilometre (ASK) cost without fuel is USD 0. 016 (1. cents) per kilometre seat, which is very low compared with MAS (USD 0. 07 ~ 7 cents) or Cathay Pacific (USD 0. 10 ~ 10 cents) (fig 2) while Operating cost included the fuel charges averagely USD 0. 0328 (3. 28 cents) every seat, every kilometres operated. Average from 5 years data, Air Asia operating cost around 80% from the total revenue, except in 2009 where operating cost reach 112% ( fig 3) which make the company suffer 17% loss or equal with RM -496 Million as the result of company unwinding the remaining fuel hedges and interest rates loan which taking a lot of charges. Fuel hedges had been main strategies of a big company which use large amount of oil and gas to operate their business such as manufactured and transportation. Fuel Hedges mean Air Asia has special contract with several oil and gas company to give a fix price of fuel for several period without follow any fuel fluctuation and politic situation. With Hedging the fuel, Air Asia able to press the fuel surcharge only 17% from average fuel surcharge (Unknown, 2011) theborneopost. com/2011/05/27/airasia-reduces-risk-through-fuel-hed ging/ With opening in several international destination such as Singapore, Bangladesh and India, Air Asia able to came up with clean sheet for the following years. Air Asia able to generate net profit 16% from the total revenue without change the ticket price. Average for five years, Air Asia able to generate 30% of net profit. (Karp, 2009) routesonline. com/news/24/atw/13066/airasia-suffers-128-million-2008-loss/ Profit margin is the way to compare in the net profit ratio in different entities to check the effectiveness each expenditures to generate profit. For the same line of industries, profit margin is important to compare with competitor to overtake them via pricing wars which always become a main success factor of Air Asia to gain more customers. According to Center for Aviation 2011 (CAPA) net profit margin from 2001 to forecast 2012 average are 4% from the net revenue. (CAPA, 2011) centreforaviation. com/analysis/iata-upgrades-2011-airline-industry-profit-forecast-but-warns-of-weaker-2012-59153 Air Asia in five fiscal years able to gain operates profit margin averagely 16% and nett profit margin average 19% from the net sales. It shows that on aviation industries, Air Asia consider as efficient compared with other low cost airlines company Cebu Pacific 9%, Nok Airways 6%, Tiger Airways 14% , MAS 5%, Singapore Airlines 3%, Thai Airways 9%. (CAPA, 2012) centreforaviation. com/analysis/mas-should-reconsider-lcc-strategy-as-losses-continue-while-airasia-reports-more-leading-profits-74652 Return on Shareholder Equity or ROE measures a corporations profitability by revealing how much profit a company generates with the money shareholders have invested . 4. 0RECOMMENDATIONS Compared with other aviation industries, Air Asia has big success to press the cost to keep try flight fare as low as possible. However the low fare price still able to generate profit with accumulation of sales volume and the effectiveness of aircraft operation which make the company still very attractive to investor and shareholder. 5. 0REFERENCES Chan, D. 2000. â€Å"Airwars in Asia: Competitive and Collaborative Strategic and Tactics in Action. â€Å"Emerald Management and Development, 19:473-488. Declanegan, 2012. AirAsia. http://declanegan. blogspot. com/2012/01/few-people-said-they-enjoyed-my-post-on. html Doddid, 2012. Business Model Low Cost Carrier Air Asia. http://doddid. com /2012/04/business-model-low-cost-carrier-air-asia/ Khoo, C. Hofman, S. Tjitrarahardja, C. Narayaswamy, R. 2005. Air Asia Strategic IT Initiative. University of Melbourne. Meaney, K. 2011, Importance of Cost Management for Business Success. On Website http://ezinearticles. com/? Importance-of-Cost-Management-for-Business-Success=5692129 ventureline. com/accounting-glossary/S/strategic-cost-management-definition/ deloitte. com/assets/Dcom-Ireland/Local%20Assets/Documents/ie_Consulting_ChangingYourTune. pdf