The Enhancement of the Strategic Ability of Air Asia - Term Paper Example

A position paper for The Enhancement Of The Strategic Ability Of Air Asia Table of Contents Executive Summary 2 Introduction 3 1. To control costs and determine sources of funds for purchase of new fleet of aircraft 3 2. To maintain an inventory management and RFID technology 6 3. Identification of cost savings on the on line booking service 8 4. To derive a marketing plan to enhance passenger capacity 9 5. To have a continuous human resource development 10 6. Patent rights to protect brand image 12 Conclusion 13 List of references 14 Executive Summary Air Asia is considered as the number one low cost carrier in Asia. Over the years, it has maintained its competitive advantage over other low budget fares airlines that followed its example. However, Air Asia should not be complacent in its position as my analysis in the operations of the company show that the strategies still stand some more enhancements. This paper looks at the core competencies of Air Asia with the hope to find issues that need refinement and enhancement of its strategies. The position paper looks at the strength of the company particularly in finance, human resources, technology and intangible resources, and draw upon them the weaknesses in the strategies used in the operation. The study has arrived at six positions that aim to enhance the strategies of Air Asia. Further studies along this line are also recommended to broaden scope of the study. A position paper for the enhancement of the strategic ability of Air Asia Introduction This position paper presents Proposals For Enhancement Of The Core Competencies Of Air Asia particularly those concerning its long term prospects. When we talk of resources and strategies, there is a need to review what these resources are that a business needs in order to pursue a chosen strategy. Particularly, this position paper will look at how Air Asia manages the key resources together to become the number one low cost carrier in Asia. These resources are the financial, human and physical resources. Strategies used by Air Asia in its operations will first be presented and an evaluation of the management strategies to support these strategies is correspondingly done. In our case, analysis will be performed in order to evaluate the effectiveness and suitability of controls by looking at the underlying rules, procedures and methods. Following sections presents the strategies and the enhancement proposed accordingly. 1. Air Asia to control its costs and source of funding for purchase of new fleet of aircrafts. Increase of fleets’ strategy. Air Asia wants to continue to be the lowest cost short-haul airline in every market it goes in. In considering this vision, the action required is significant investment in aircrafts, distribution channels, production capacity and working capital. In this situation, there is a need to determine first if Air Asia has the capability to raise funds and its financial worth. Financial resources. Financial worth of Air Asia as of 2009 shows current net assets of RM 511,284 million which is an improvement from its RM 263,085 million current net assets in 2008. It has the ability to raise funds from creditors and shareholder, its debt/equity ratio is 2.61 and a net profit margin of 16.2%. A debt equity ratio is a measure of the company’s financial leverage and indicates what proportion of debt and equity the company is using to finance its assets. A high debt ratio means that the company is using a lot of debt in financing its assets as in the case of Air Asia. However, in further analysis, capital intensive industry generally has a high debt ratio of 2 (Investopedia, n.d.) Air Asia has a net cash flow of RM598million, equivalent to $181.2 million (Air Asia.com). Air Asia reports of 21.1% profit after tax margin in Malaysia, 1.8% profit after tax margin in Thailand and 17% profit after tax margin in Indonesia (Centre for Asia Pacific Aviation, 2010). Chart 1 shows the EBITDAR margin and profit after tax margin in 2Q2010 for year 2010l. It will be noted that after deducting EBITDAR, profit has been considerably reduced EBITDAR is defined as earnings before interest, taxes, depreciation, amortization and restructuring or rent costs. This is an indication that company must control its costs in order to maintain a high profit margin. In this concern, proposal here is tied up with proposal no.2 that recommends perpetual inventory to track sales, costs and inventory. Chart 1. Air Asia EBITDAR margin and profit after tax margin in 2Q2010 Source: Centre for Asia Pacific Aiation Physical Resources. As of 2009, Air Asia operates 70 Airbus A320 aircraft 14 Boeing B730 Aircraft in its Malaysia, Thailand, Indonesia and Asia X hubs. The 14 Boeing B730 are scheduled to be replaced by brand new, higher capacity Airbus A320 as Air Asia believes that maintaining one brand will reduce inventory cost and increase fuel efficiency aside from bringing in comfort to customers (Air Asia Annual Report 2009). A unit cost of an Airbus A320 is $8.41m, and total cost for 14 units is $117.4million. With a net cash flow of $181.2 million, this amount is sufficient to fund new aircrafts. However, this is not possible as this fund cannot all be channeled to the purchase of the needed aircraft in 2011 because of operational expenses, so there would be a need for financing either coming from debt borrowings or additional equity of shareholders. Debt borrowings and equity are readily available for Air Asia because it has sustained a good relationship with creditors and its stockholders. However, there are more advantages in getting funding from debt financing as shown in the study of Baum, Schafer & Talavera (2007, p. 4). Accordingly, in the review of literature found in the authors study, that firms using more long term debt structure show positive slope. Furthermore, an argument in this case is that high-priced long term debt enables the company to take avoid more taxes that in effect increases profitability of the company. In this premise, funding of purchase of new aircraft through long term debt is proposed as it is argued that the scheme will be more profitable for Air Asia in the long run. 2. To keep a perpetual inventory management system and RFID technology The low fare strategy. To maintain the low fare strategy of Air Asia, it has resorted to the no frills system. Here, Air Asia’s guests are ready to do away with flight comforts such as food and snacks during flights, airport lounges and frequent flyer miles in exchange for low fares. Guests are given the choice of buying snacks, drinks and prepared meals from the in-flight services at reasonable prices. Air Asia has benefitted from this system as ancillary services have become another source of income for the company. In 2009, the ancillary products and services generated RM29.1million, an increase of 46% from its previous revenue of RM19.9 and earn RM29 per passenger. (Air Asia Annual Report 2009). The ancillary services of Air Asia includes supersize baggage charge, in-flight food and beverage choices, Air Asia Courier, travel insurance, e-gift vouchers, charter flights, holiday booking portal, credit card, airspace advertising and Air Asia TX (ticket booking for sports events, concerts, musicals and others in Asia). Chart below shows growth of ancillary income in 2010. Air Asia revenue growth and ancillary income growth in 2Q2010 Source: Centre for Asia Pacific Aviation, 2010 As the ancillary services expands to various broad branch of services from retail merchandising in grocery stores, there is a possibility that management finds it difficult to track all of its activities in the different segments of its operations. Particularly, it could be sensed that there is a need for stepping up of inventory management so that it could trail the purchasing, inventory turn over, scheduling and negotiations with is suppliers and service providers. Inventory management is an important aspect of business operation because it is a measure to meet anticipated customer demand, to smooth product requirements and an ideal system to decouple operations. This is also a best practice for protection against stock outs, order cycles, hedging against price increases, and assurance of continued operations. Santos & Santos II (2000, p. 73) stated that inventory management are also done to control supplies, control suppliers and confuse competitors. In this context, a perpetual inventory system using an RFID technology is proposed to monitor the ancillary services performances. A perpetual inventory system updates inventory accounts after each purchase or sale and quantities of the inventories are updated continuously The perpetual inventory system should be combined with technology such as the radio frequency identification tags (RFID). According to Bonsor and Keener (p.1, n..d.), an RFID are intelligent bar code that is connected to a network system that tracks every product purchased. It is a system that alerts retailers, manufacturers and the customer’s bank about the purchase. It gives information to the retailers on the shelf level of the product, gives signal to the manufacturer that it is time to produce and a bill to the bank that automatically debits the account of the customer. 3. Identification of cost savings on the on line booking service The Lean Cost structure strategy. To maintain the lean cost structure policy of Air Asia, it has come up with a marketing program and a wide distribution channel to make booking easier for its customers. Through the Information technology and internet system, Air Asia offers mobile phone booking and on-line system of booking of passengers. This lessens the time consumed by customers in going to airline booking offices to book for flights. Furthermore, the ticketless booking eliminates commissions of travel agents, wages of customer relations staff and cost of printed tickets. This marketing plan has saved operational costs of Air Asia and has generated a 76% sales for year 2009.. Figures on cost savings of the company thru this system are not available, hence computations on benefits cannot be provided for the study. However, for purposes of report to stakeholders, it is proposed that identification of the savings be done so that further action to enhance internet bookings and marketing could be planned. 4. To derive a marketing plan to enhance passenger capacity Strategy of operations the point to point network. Air Asia operates in two segments: the short haul, (four-hour flight) or fewer radiuses, and the medium to long haul (the four hour flight or more radiuses) operated by its sister company, Asia X. The underlying principle behind this is to transport passenger from point A to point B. It has a route network that spans in more than 20 countries. Air Asia has associate companies, the Thai-Air Asia, Indonesia-Air Asia and the Air Asia X. The low cost fare is continued in Air Asia X operations in Australia, China, India, Middle East and Europe. Under this strategy, Air Asia has transported 14,253,244 passengers as of 2009. It has an airline capacity of 19,016,280, a load factor of 75%, aircraft utilization of 12.0 hours per day and has 22,159 ASK (available seat per kilometer). Noting that the load factor and the airline capacity are not utilized fully, further marketing plans should be done by management For instance, advertising and promotions are proposed to enhance passenger capacity to at least 85% since 100% is not possible. Distribution channels, internet and mobile bookings so far have been effective driver for sales, but marketing promotion is found lacking. One thing to consider here is that there are competitors who are strongly competing in tourism and travelers market and are using promotions to attract them. Sometimes, customers will not compromise comfort, service and safety if fare prices are almost identical. In this context, Air Asia should be concerned with what competitors are doing and beef-up its own marketing efforts. 5. To have a continuous human resource development Strategy on Human Resources. Air-Asia is a skill-based business as it relies mostly to the airline pilots, safety engineers and other maintenance staff to deliver customers in their flight to their destinations safely. As of 2009, according to Asia’s boss, Tony Fernandez, Air Asia employs nearly 8000 employees which is more than the number employed by other LCC in Asia. (Business Desk, Strait Times, 2010). A young man at 46, Tony Fernandez has been chosen by Forbes.com as the Businessman of the year because of his achievements in bringing in changes to the once failed business of Air Asia to become a highly profitable and competitive airline in Asia. The interesting story of Tony Fernandez’ life was when he could not go home frequently to Malaysia because of the high costs of fares when he was still a student in England. This experience initially became his inspiration and drives to launch the low-cost airlines in Malaysia. We all know that technology shows rapid change and that there is always a need to upgrade skills particularly in areas of human resource development. In this context, in order to fully utilize employees’ capability in the operations, a continuous training is proposed particularly in skills that would enhance safety performances of the staff. There might be considerable costs attached to training 8000 employees, if not all, but this will bring about efficiency, loyalty and pride to the employees. Unfortunately, this paper could not present an extrapolation of cost and benefits, but there are several studies that show beneficial effects of training. For instance, Boyes and Melvin (2002, p. 356-357) believe that investment in human capital leads to higher productivity of employees because education and training is likened to an investment that are purchased in order to generate output and income in the future. Perhaps by way of a proposal, an audit of human resources should be done to know the following: What skills does the business already possess? Are they sufficient to meet the needs of a chosen strategy Could the skills-base be flexed / stretched to meet the new requirements? In the heart of this audit, a staffing pattern should be done that contains numbers of staff by function, location, grade, experience, qualification and remuneration. It should also include the existing rate of staff loss, the overall standard of training and specific training standard in key roles. Next thing to do is to determine what changes are needed to implement a strategy. For example, change of location, new location, services and products. Knowing this, the incremental human resources are determined, and how they should be sourced. Strategies on this effort could be employment, outsourcing or joint venture, to name some. There are other options that management could think of depending on the business strategy. 6. Patent rights to protect brand image Intangible resources. One of the factors in business that management fails to notice is the intangible resources such as brand image, goodwill or patents. Business Resources (n.d.) article points to the importance of maintaining a good brand image as some businesses have gained competitive advantage and carry on because it has excelled in brand image. One of the intangible resources of Asia Mart is its brand image that has received continuous recognition from numerous sectors. Air Asia has been the first to implement the low cost strategy in airlines. Soon enough, competitors follow this business strategy and adopted similar scheme. This only goes to show that many competitors spend huge amounts in trying to imitate Air Asia but still gets unimpressive results because Air Asia remains to be on top of the LCC industry today. Recent data showed that there are at least ten airline companies imitating the LCC scheme of Air Asia (rediff.com, 2008). Perhaps the reason for attaining this market share is that Air Asia has retained brand loyalty. It could be argued that Air Asia helped create a totally new concept for flying in Asia so well that it seemed to control the market. Since its change of image under the management of Tony Fernandez, Air Asia has maintained the brand image of low-cost carrier that has been successfully imprinted on the minds of travelers. Clearly, this defines the importance of brand because by maintaining a clear relationship with people, they may either preserve it or cut it. Gumport (1994, p 144) In this perspective, what could be done here is to keep doing what has made Air Asia successful and try to do it better. In this aspect, patent or rights to use the low cost carrier image started by Air Asia should be applied for to protect its brand image. It is proposed that a separate study be done along this line to know if patent rights could be given to Air Asia. Conclusion. The study arrives at six separate proposed positions to enhance the strategic abilities of Air Asia’s operations. First, the study looked at the core competencies of the airlines and figured out if there are substantive factors that could further strengthen these competencies. The study reviewed the strategies used by Air Asia in achieving its mission to be lowest cost airline in Asia. The study analyzed the strategies used in each strategy of Air Asia, had seen its strength as well as weakness in achieving targets. On this, proposals for enhancement have been recommended. On the first position that requires funding for purchase of additional new aircrafts for new routes and replacement of old ones, recommendation is to get funding from long term debt because of tax advantages.. Getting funds from outside sources will save the cash flows for internal operations of the company. Second position pertains to inventory management that will require management to maintain an RFID technology along with a perpetual inventory system that will track inventory and supplies of the airline company in its various segments. The third position calls for a study on the cost saving realized by the on line system of booking to properly explain to stakeholders the benefit of the strategy and to outline further enhancements. The fourth proposition is a recommendation for promotions and advertising to attract more customers in order to maximize use of airline capacity. The fifth position is the continuous training and skills development of employees as airline business is dependent on skills of employees particularly in aircraft flying and maintenance. Lastly, a position is presented that needs government approval for a patent to protect brand image of Air Asia as the lowest cost airline carrier in the region. The above position has been derived from the weaknesses seen from the present strategies of Air Asia and is meant to enhance the core competencies of the airline. It is also meant to maintain the strategy of keeping the prices and bring in more output and profit to air Asia. List of references Air Asia.com. Five Year Financial Highlights. Retrieved 22 January 2011 from. http://www.airasia.com/my/en/corporate/ir5yearfinancialhighlights.html Air Asia Annual Report 2009. Retrieved 22 January 2010 from www.airasia.com/my/en/corporate/irannualreport.html Accounting for information, n.d. Perpetual inventory definition, retrieved 22 January 2011 from, accountinginfo.com/study/inventory/inventory-110.htm Baum, Christopher, Schafer, Dorotea, and Talavera,Oleksandr. (2007). The effects of long term debt on the profitability: a comparison of German and US firms. Research study. Retrieved 22 January 2011 from fmwww.bc.edu/ec-p/wp636.pdf Boyes, William and Melvin, Michael. Investment in Human Capital. Chap. 16/The Labor Market. Micro Economics. Houghton Mifflin Co., Boston, NY, 2002, pp.Boyes, William and Melvin, Michael. Investment in Human Capital. Chap. 16/The Labor Market. Micro Economics. Houghton Mifflin Co., Boston, NY, 2002, pp.56-358. Business Desk, Strait Times, 05-12-2010, Air Asia Boss is Forbes Asia’s Pick for 2010. News article. Retrieved 22 January 2011 http://www.asianewsnet.net/home/news.php?id=15915. Business Resources, n.d. Intangible resources, Definition | Retrieved 22 January 2010 from eHow.com http://www.ehow.com/about_5089164_business-resources-definition.html#ixzz1BvGTGij3 Center for Asia Pacific Aviation, 2010. AirAsia reports ‘record quarter’ in 2Q2010,43% surge in profits; ancillary revenue and pax up. Center for Asia Pacific Aviation, Retrieved 22 January 2011 from http://www.centreforaviation.com/news/2010/08/19/airasia-reports-record-quarter-in-2q2010-43-surge-in-profits-ancillary-revenue-and-passengers-i/page1 . . .Air Asia revenue growth and ancillary income growth in 2Q2010, Center for Asia Pacific Aviation, retrieved 22 January, 2010 from http://www.centreforaviation.com/news/2010/08/19/airasia-reports-record-quarter-in-2q2010-43-surge-in-profits-ancillary-revenue-and-passengers-i/page1 Gumport, David E. Assessing the Competition. Chap. 7. How to Create a Successful Marketing Plan. Goldhirsh Group, Inc. USA, 1994, p.143-144. Investopedia, n.d. Debt/equity ratio definition, Retrieved 22 January 2010 from .http://www.investopedia.com/terms/d/debtequityratio.asp Kevin Bosnor and Candace Keener, n.d. p.1, How RFID works. HowStuffWorks, Retrieved 22 January, 2010 from http://electronics.howstuffworks.com/gadgets/high-tech-gadgets/rfid.htm Rediff.com, 2008. Asia’s Top Ten Budget Airlines. The Low Cost Flights. Retrieved 22 January, 2010 from http://thelowcostflights.com/asia-top-10-budget-airlines/ Santos II, Emmanuel and Santos Emmanuel, Inventory Management. Chap. 3, Production and Operations Management, International Academy of Management and Economics, IAME Design Studio, Makati, MM, Philippines, 2000, p. 73. Read More