OPERATIONS MANAGEMENT

GAB 4013

OPERATIONS MANAGEMENT PRACTICES

IN

AIRASIA BHD.

DANIEL YEO REN WEI HOSSAM MAHMOUD ELANZEERY KUMANAN A/L RAMAN MOHAMED ABDELAZIZ ELBAGOURI VINOD A/L CHANDRA SAYAKARAN

7851 8007 7935 8001 7961

TABLE OF CONTENTS
CHAPTER 1 INTRODUCTION.........................................................................................................1 CHAPTER 2 LOCATION STRATEGY.............................................................................................2 2.1 2.2 2.3 2.4 Factors Propelling Aviation in Southeast Asia..............................2 Population of Selected Countries in Asia......................................3 Point-to-Point.................................................................................3 Hub-and-Spoke..............................................................................3 2.4.1 2.4.2 2.4.3 2.5 Multiplier Effect.................................................................................4 Advantages.........................................................................................5 Disadvantages....................................................................................5

Locations and Destinations............................................................6

CHAPTER 3 PROCESS STRATEGY................................................................................................7 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 3.10 3.11 Large Quantity and Small Variety of Services..............................7 Special Purpose Equipment...........................................................7 Less Broadly Skilled Operators.....................................................8 Standardized Work Orders and Job Instructions...........................8 Low Inventories.............................................................................8 Low Work-in-Process Inventory....................................................8 Swift Movement of Units...............................................................8 Goods Made to a Forecast..............................................................9 Simple Scheduling.........................................................................9 High Fixed Costs..........................................................................9 Utilization of Capacity.................................................................9

CHAPTER 4 DESIGN OF GOODS AND SERVICES....................................................................11 4.1 4.2 4.3 4.4 4.5 Phase 1: Hotel B-E & Hotel Distribution Management Systems 11 Phase 2: Pre-Defined Packaging Solution...................................12 Phase 3: Dynamic Packaging Solutions (DPS)............................12 Achievements...............................................................................13 Recommendations........................................................................13

ii

CHAPTER 5 SCHEDULING............................................................................................................14 5.1 5.2 5.3 Important Factors.........................................................................14 Schedule Planning........................................................................14 Risk Factors.................................................................................15 5.3.1 5.3.2 5.3.3 5.4 Economic conditions........................................................................15 Daily Utilization Rate......................................................................15 Reliance on Technology..................................................................15

Operating Strategy.......................................................................16

CHAPTER 6 MAINTENANCE SYSTEM.......................................................................................18 6.1 6.2 6.3 6.4 6.5 Revenue and Block Hours...........................................................18 A, B, C & D Inspection System...................................................19 Maintenance Operation Strategy..................................................19 Maintenance-By-The-Hour & Time- Material Program..............20 Risk Factors & Recommendation................................................21

CHAPTER 7 CONCLUSION...........................................................................................................22 REFERENCES........................................................................................................................23

iii

CHAPTER 1 INTRODUCTION
AirAsia is the leading low-cost carrier in Southeast Asia, providing high-frequency services on short-haul, point-to-point domestic and international routes. AirAsia has carried over 2.6 million passengers to date and is dubbed the most efficient and lowest unit cost airline in the world. The purpose of this report is to highlight the operations management practices in AirAsia in the areas of location strategy, process strategy, design of goods and services, scheduling and maintenance. AirAsias main business is air transport, making it a servicetype company. A deeper look into the AirAsias process strategy shows that it also follows a product-focused strategy. Schedules represent one of the primary products of an airline, and scheduling is one of the most crucial functions in the business. Passenger and crew safety are prioritized in airlines. The Department of Civil Aviation (DCA) of Malaysia mandates AirAsia for certain inspections and parts replacements after specified hours of flying.

CHAPTER 2 LOCATION STRATEGY

The aviation industry in Southeast Asia has grown rapidly in recent years, propelled in mainly by economic development in the region and the liberalization of the regional aviation industry. From 1985 to 2000 passenger activity within the region increased at the average yearly rate of 7.5%, one of the highest in the world. Growth is forecasted to continue, and intra-regional passenger volume is expected to grow at 8.6% on an yearly basis from 20032008. Low-cost carrier activity in Southeast Asia is only beginning to develop, but is growing very rapidly. Several factors, including rising per capita incomes and broadly available low airfares, provide opportunities for rapid growth and market share gain for the regions low cost carriers.

2.1

Factors Propelling Aviation in Southeast Asia

Various factors are expected to drive continued aviation activity growth in Southeast Asian region, including: Geography Increasing number of business travelers Increasing urbanization Large demographic area with good per capita income growth Liberalization of the aviation industry

2.2

Population of Selected Countries in Asia Population in cities > 1 million Urbanization 2002 26% n/a 18% 38% 28% 43% 20 % 59% 29% 60% 100% 20% 25% 2002 (actual) 13% n/a n/a 14% 10% 10% n/a 6% 9% 16% 100% 12% 13% 2015 (forecast) 18% n/a n/a 17% 12% 13% n/a 6% 11% 17% 100% 15% 14%

Population Country Bangladesh Brunei Cambodia China India Indonesia Laos Malaysia Myanmar Philippines Singapore Thailand Vietnam 2002 (actual) 135,684,000 351,000 13,172,000 1,280,400,00 0 1,048,641,00 0 211,716,000 5,530,000 24,305,000 48,786,000 79,499,000 4,164,000 61,613,000 80,424,000 2002 to 2015 annual growth 1.5% N/A 1.5% 0.6% 1.2% 1.1% 2.1% 1.5% 1% 1.6% 1.1% 0.6% 1.1%

2.3

Point-to-Point

In the past, there was constant pressure for more direct, point-to-point nonstop flights. Many city-pair markets, however, could not support nonstop service in terms of their own origin/destination traffic; economy viability frequently depended on adding traffic flows from backup markets on either end of a nonstop route. The nonstop system could be expected to remain relatively stable over long periods.

2.4

Hub-and-Spoke

Carriers rapidly replaced the old structure with a hub-and-spoke system due to several reasons.

2.4.1

Multiplier Effect

The main advantage of the hub-and-spoke operation is the multiplier effect. The number of city-pairs an airline can serve with a given amount of flight mileage. The figure below shows eight hypothetical cities, linked in paired with direct nonstop service. The number of citypairs receiving air service in this pattern is four.

The figure below now shows what happens when approximately the same amount of mileage flown, each of the cities is linked to a centrally located hub.

With the permutation of routing possible via the hub, there would now be a total of 24 citypairs served, the 16 pairs obtained by the connection linkage of each of the four eastern cities with the four western cities to the hub itself. This multiplication of traffic greatly increases the chances of obtaining strong load factors. Full airplanes result in lower costs, which permit lower fares, and these saving have also allowed the airlines to increase the frequency of flights.

2.4.2

Advantages

Once the carrier establishes itself with a solid network of spokes at a particular hub, it becomes arduous for any other carrier to challenge it competitively, unless the other carrier has the resources to undertake a similar feed network. Hub also offers advantages to travelers. Passengers flying in low traffic markets might not enjoy low affaires or fly in large jets if the airlines were to fly them nonstop between the end cities. Small planes cost more per seat-mile to operate and may require multiple stops for refueling. Passengers from small cities can fly to many small or large cities in the word with relatively low airfares via the multiple-hub systems. By linking at a hub, passengers can also enjoy the convenience of frequent flights to and from that hub. This usually results in lower schedule delay. The use of the large jets also increases travelers chance of finding a seat on their desired flight.

2.4.3

Disadvantages

The extent of excessive concentration at the hub can result in some negative economic impacts, namely, congestion delay. As aircraft volume approaches the capacity of the hub airport, congestion delay increase rapidly, which may outweigh some of hubbing is benefit to both airlines and passengers, moreover, for each city feeding into the hub, a separate gate is required, and adding more cities requires more gates. Congestion delay also creates additional work for air traffic controllers and increases their stress levels; finally excessive aircraft concentration at the hub can have negative environmental impact, such as noise and pollution. These negative economic effects of aircraft concentration must be into account when conducting cost benefit analyses into building or expending major hubs.

2.5

Locations and Destinations

AirAsia presently operates out of six hubs in Thailand, Malaysia and Indonesia serving 78 destinations in Southeast Asia as shown in figure below.

CHAPTER 3 PROCESS STRATEGY

AirAsias main industrial function is air transport, which makes it considered as a service type of company and makes it quite hard to differentiate between the design of services and the process strategy. Taking a deeper look into the process strategy of AirAsia it can be clearly demonstrated that it follows a product focus strategy, in the coming lines it will be explained how AirAsias processes fall under the product focus area. It fulfills the following 11 characteristics that describe a product focus strategy, which will be discussed in this chapter.

3.1

Large Quantity and Small Variety of Services

AirAsia provides a limited variety of services, which can be represented by the routes it serves through its flights. AirAsia operates from six different hubs. The groups strategy is to target markets within three-and-a half hours flights from hubs, which limit the routes to Southeast Asia and greater China. It provides so frequent flights, which can be considered as large quantity service, AirAsia was recognized by Boeing as a leader in utilization rates among airlines. They are capable of having several round trips per aircraft per day because they maintain low turnaround times.

3.2

Special Purpose Equipment

As with any airlines the equipment used by AirAsia is very purpose oriented consisting mostly of aircrafts. Moreover AirAsia uses only two types of aircraft which results in cheaper costs in term of spare parts inventory, trainings, reduced requirements and makes scheduling more efficient.

3.3

Less Broadly Skilled Operators

As mentioned in the previous section AirAsia is using two types of aircraft, which minimizes the cost for training. The pilots will only be more skillful in operating on a single type of aircraft which either is the Boeing 737 or the Airbus A320.

3.4

Standardized Work Orders and Job Instructions

Work orders and job instructions are few because they are standardized. As schedules and routes are predetermined, the number of orders needed is negligible comparing to other industries that are higher in variety.

3.5

Low Inventories

Inventories are low relative to the value of the product. The inventory AirAsia possesses consists of a spare parts inventory for the aircrafts they own. This type of inventory is considered negligible relative to the amount of flights each aircraft performs.

3.6

Low Work-in-Process Inventory

Work-in-process inventory is small compared to output. As the aircrafts are already delivered from other companies like Boeing and Airbus they just need normal routine maintenance and repair if necessary which is considered as very low work-in-process compared to the frequent flight service they provide.

3.7

Swift Movement of Units

Swift movement of units through facility is typical. AirAsia operates point-to point services and maintains low turnaround times. It operated 13 block hours a day in 2004; its average turnaround time is 25 minutes compared to 45 to 120 of typical turnaround in other airlines. That explains how swift the movement of airplanes is through hubs.

3.8

Goods Made to a Forecast

Finished goods are usually made to a forecast. AirAsia targets the region of Southeast Asia, a market that covers a population of 500 million people where a small percentage of the market regularly travels by air. AirAsia especially designed its services to be through specific hubs going to specific countries at specific times according to the number of people expected to be traveling to certain destinations at certain times of the year. Also during peak times and holidays, the flights are more often and forecasted to suit the huge number of travelers.

3.9

Simple Scheduling

Scheduling is relatively simple and concerned with establishing a rate of output sufficient to meet sales forecast. As discussed in the previous subsection and the scheduling chapter we can easily notice that the scheduling is almost standardized and varies according to specific reasons but does not change drastically since the services are well defined and made to make the best sales.

3.10

High Fixed Costs

Fixed costs tend to be high and variable costs tend to be low. AirAsias fixed costs are relatively higher than their variable costs. It is so clear that the prices of aircrafts are relatively high. However, AirAsia is always trying to reduce the fixed costs by negotiating charges for the groups aircrafts, lower rates for long-term maintenance contracts, and lower airport fees. AirAsia's average monthly contractual lease charge per aircraft decreased by more than 60% from 2001 to 2004; aircraft maintenance contracts with third parties were obtained through competitive bidding process, which resulted in lower rates. Moreover, AirAsia actively seeks to enter into the jet fuel derivative contracts to lessen the impact of rising fuel prices.

3.11

Utilization of Capacity

Costs are highly dependent on the utilization of capacity. AirAsia is always concerned about the high utilization of their aircrafts and they are proud of having the shortest turnaround time and highest utilization. The higher the utilization the more profit and variable costs increase.

Another feature of AirAsias process strategy is their high dependence and leverage of technology especially in booking as described in the design of goods and services in another chapter.

10

CHAPTER 4 DESIGN OF GOODS AND SERVICES

Air Asia Berhad (Air Asia) is considered the first low fare no frills airline to introduce the idea of ticketless traveling in Asia. Since the conversion of AirAsia into a low fare, nofrills, ticketless airline in January 2002, the airline has singularly grown the Malaysian air travel market through its revolutionary low fares, frequent, reliable flights and offering innovative internet-based booking at www.airasia.com. To date, the airline has carried over 2.6 million passengers and is dubbed the most efficient and lowest unit cost airline in the world. Having gained strong air-footing locally, AirAsia is going regionally and internationally as well. Moreover, explore other expansion possibility to complement its total air offering. AirAsia has seen a great opening and invaluable assets a hotel component would offer and would like to sell hotel rooms, air inclusive packages via its website to realize its vision of becoming a one-stop flight, hotel and holiday portal that offers good value for money travel products.

4.1

Phase 1: Hotel B-E & Hotel Distribution Management Systems

Hotel Booking Engine (Hotel-BE) enables AirAsias B2C customers (F.I.T travelers) to reserve hotel rooms online. Hotel Distribution Management Systems (HDMS) allows AirAsias procurement team to maintain room data as well as providing its hotel partners & affiliates restricted login access to maintain their own inventory & cost price. AirAsia procurement team will then set specific markup and related policies for each of its client group accordingly thus streamlining AirAsias operation handling.

11

4.2

Phase 2: Pre-Defined Packaging Solution

Pre-Defined Packaging Solution was set up for AirAsia to pre-assign hotel and flight component for a package. For example, after customer enters his desired destination and travel date, he can choose a travel package with combination of flight and hotel from a predefined list. Any combination of flight and hotel will always remain at one fixed price predetermined by AirAsia.

4.3

Phase 3: Dynamic Packaging Solutions (DPS)

Based on customers selection of travel destination, DPS will automatically present the lowest priced package option (with flight & hotel in a single package). However, customer is allowed to modify the travel product selection based on their budget & preferences. Package price will then vary dynamically according to the new selection made.

12

4.4

Achievements

One of the major benefits that AirAsia has reaped by implementing AFOOFA Solutions technology is the substantial increased revenue from hotel bookings. No longer are they simply flight-centric, but now focusing on both flights and hotels to become a convenient one-stop holiday portal catering to a larger target audience. This has given AirAsia the ability to transform themselves into a travel merchant and profit center, better positioned to compete with both online and offline channels. In addition to that, Air Asia has started opening new roots to middle east such as Abo Dhabi, not only that but it is spreading its network outside the continent by opening new route to London which is considered a great step for putting Air Asia as a leading low cat airline in the whole world.

4.5

Recommendations

Air Asia is only serving its B2C customers at the moment. However, when AirAsia is ready to roll out its strategy to target on the B2B group of customers, such as travel Agents, Corporate Customers, Reservation Centers, Sales Offices and Ticketing Offices regionally the solutions are ready for such implementation.

13

CHAPTER 5 SCHEDULING
One of the most important functions in a business is scheduling. The airline management needs to continuously find a balance between economic strength and adequate service quality.

5.1

Important Factors

Amongst others, the following factors are influential in the scheduling of an airline company: Airport Authorities: Curfews, Slots and Regulations. Crews: Certain crew routings must be followed to maintain efficient monthly utilization. Equipment maintenance: Scheduled and Unscheduled Facilities: Airport capacity establishes an upper limit on operations. Flight Operations: Airport Runway Length, Fuel Capacity, Air Traffic Control and Routings. Marketing Factors: Traffic flow and Load factors.

Complex mathematical algorithms have been utilized to develop computer programs capable to complete the complex scheduling task required for airline companies.

5.2

Schedule Planning

Schedule planning poses several challenges, amongst which are: Attempting to forecast what the competition (MAS, Singapore Airlines, and THAI) may do and developing a plan of action to meet such competition. Determining the size of the South East Asia market and projecting its future growth.

14

Estimating the costs and revenues of the alternative plans of action to determine which will be profitable. Estimating the effect of planned product changes on the size of the total market and on the carrier's share of the market.

5.3

Risk Factors

There are several risk factors involved in scheduling:

5.3.1

Economic conditions

The airline operations are subject to the supply and cost of jet fuel, the fluctuation of economy in the countries in which business is done and labor costing in the related countries, which would affect the profit margins.

5.3.2

Daily Utilization Rate

Air Asia depends on a strategy to maintain a high daily aircraft utilization rate, which enables more revenue generation from the aircraft. This is achieved by reducing turnaround time at airports and the delays involved. Usual causes of delay are adverse weather conditions, security and safety, air traffic control related requirements and unscheduled maintenance. However, the downside to high daily aircraft utilization is that, in the event that an aircraft falls behind schedule during the day, it could remain behind schedule during the remainder of that day, which can disrupt timely operations and lead to guest dissatisfaction.

5.3.3

Reliance on Technology

Air Asia relies heavily on the Internet and automated systems to operate its business. Any failures in either system would have an adverse effect on the company itself. Therefore, Air Asia ensures that it has high capacity redundant systems that are backed-up on a daily or weekly basis in order to avoid the loss of data and disruption of operations.

15

5.4

Operating Strategy

Air Asia directly lowers costs, enables scalable operations and improves efficiency by investing heavily in information technology. An important operating software used by Air Asia is the Geneva Optimum Airline Performance (OAP) software for flight scheduling and crew rosters by Navitaire. The Geneva system enables Air Asia to organize, plan, predict, measure and report on activity to optimize daily aircraft and crew utilization. The benefits of using this software are to: Accurately measure and report key performance indicators to management Address business problems Incorporate rules into route development Increase the efficiency and integrity of operations Optimize the utilization of staff and aircraft resources Plan for action on events before they become critical and measure planned performance vs. actual Seamlessly integrate business units and processes and reduce errors Test multiple scenarios and solutions before committing to a schedule

The Geneva software used by AirAsia is utilized for these various tasks: Crew Management System: Delivers fast, workable solutions to react to disruptions quickly. Database: Central database housing crew and daily operations data to support daily operations and crew data and related reporting. Day of Operations Manager: Provides fast decision support essential for managing daily disruptions. Flight Log Manager: Gathers and verifies actual flight information and makes it available for comprehensive management reporting. Pairing Manager: Establishes the most effective commercial operating framework for crew pairings from a commercial flight schedule. The application optimizes crew and saves money by reducing operating costs.

16

Report Manager: Allows accurate, timely, targeted and informative reporting. Resource Planning Manager: Provides the tools to plan and monitor all crew administration needs. Roster Manager: Allows schedulers to generate efficient crew rosters and manage changes that achieve business goals while meeting crew needs and allows crew to participate in schedule bidding, view their work schedules and receive crew administration messages via the Internet.

Routing Profitability Manager: Develops and maintains profitable routes using advanced planning and analysis tools to maximize aircraft utilization of a proposed flight schedule.

Scheduling Manager: Allows AirAsia to automatically plan and maximize the flight schedules to produce the best commercial return. System Controller: Provides complete access to AirAsia's procedures, rules and regulations and core data.

17

CHAPTER 6 MAINTENANCE SYSTEM

AirAsia considers safety to be the single most important aspect of our operations and it is a characteristic that will never be compromised. AirAsia is stringent about complying with the highest international standards and procedures set by the Malaysian civil aviation regulations. AirAsias technicians and engineers make up one of the most experienced teams in Malaysia, with years of experience in the aviation industry. Safety procedures include strict aircraft maintenance, constant updating and training of technicians and flight crew. Together with Boeing and Airbus, and with the authorization of the regulatory agencies, AirAsia has developed an ergonomic way to maintain its aircraft without impacting operations. Using a modern sophisticated system, a highly skilled technical team and the most advanced technology, AirAsia conducts periodic check-ups of its aircraft via a scheduled maintenance system. With this scheduled maintenance system, preventive maintenance can be integrated smoothly into the operations, thus increasing BLOCK HOURS and reducing costs. AirAsia can therefore keep its aircrafts fully operational for the entire year, and more importantly with enhanced safety. According to the Civil Aviation Act 1969 and Civil Aviation Regulation 1996, if the maintenance process on a plane is not done accordingly, the planes services are liable for suspension or better known as grounded.

6.1

Revenue and Block Hours

Common aircraft maintenance is based on hours of operation rather than miles flown. Therefore, AirAsia practices a concept where it measures its REVENUE HOURS from takeoff (wheels up) to landing (wheels down).While BLOCK HOURS is measured gate to gate and so count the time spent taxiing at both ends of the flight. "Block" refers to the placement and removal of a block under the wheel at the gate. For AirAsia, analysis of the direct costs of operating an airplane, which includes flight crew, fuel consumed, maintenance cost, depreciation values and/or rent and insurance, is done in terms of costs per block hour.

18

Similar calculations are also used to compare the relative economic performance of one type of airplane to another or also known as the Key Performance Index. A related measurement is "cycles" with a cycle consisting of one takeoff and landing. Malaysias department of civil aviation (DCA) requires special inspections to be made on many old aircraft that have been operated for a specified number of cycles .These aircrafts are been monitored more critically compared to the other newer aircrafts.

6.2

A, B, C & D Inspection System

AirAsia adopts the A, B, C & D Checks systems in order to maintain its aircrafts .Aircraft maintenance is considered to be one of the most crucial business strategies of the company. This is because large amount of the revenues of the company is spent on aircraft maintenance and it is also crucial in providing a safe and confident service to the passengers. All A, B", C & D are the various level of maintenance type to be done on the aircrafts. Both the A and B checks are done overnight at the airport or at an established maintenance base and are carried out every few days or weeks. It is usually a simply and routine check. While, C check is more extensive, is performed about every fifteen months, and takes the airplane out of service for several days. The D check is the most comprehensive of all and is done about every six to eight years and it takes a month or more to complete. The time limit to complete the C and D work is largely determined by the number of hours of operation or the number of cycles. However, some airlines do them on a strict calendar basis. For example, every 3 month, the plane must be sent for servicing even though the aircraft only completed two flights within the period. The terms "Zero Time" or "Half Life", refer to the number of hours the airplane or engine has operated since its last D check.

6.3

Maintenance Operation Strategy

AirAsia may be Asia's leading low fare budget air carrier. However, in no way does AirAsia tolerate on caring for the fleet. DCA Malaysia strictly checks and requests for an update for the maintenance of the fleets. AirAsia cannot navigate a fly if they break the standards set by the DCA. Which positively results in a fleet of AirAsia safeguarded airplanes of premier quality.

19

AirAsia conducts line checks at transits, night-stops, and "A" checks once a month. Heavy checks are "C" and "D" checks conducted once yearly for between 10 to 21 days. During these processes, the entire aircraft is stripped and examined with surgical precision. The line check crew is AirAsia's very own fully-trained maintenance crew and the hangar check crew is ST Aero, one of the world's best. It did not take too long for the DCA Malaysia to spot the high maintenance standards of AirAsia. The engineering teams attained jar ops1 or better known as m1 status within just 9 months. Not bad, considering the rank is usually extended in two years. AirAsia's high maintenance standard has become more an expectation than a requirement. It is a high expectation and not at all bad for Asia's leading low fare budget carrier. The groups fleet is maintained in accordance with a program prescribed by Boeing and Airbus, the manufacturer of the groups aircraft. Since it began operation in 1996, none of the groups aircraft have been involved in any major accident involving personal injury to its guests and employees or other disasters. AirAsia's maintenance and overhaul cost was RM26,096,000 in the period from July-Dec 2007 which represents 2.4% of AirAsia's revenue compared to RM35,874,000 in the same period from 2006 because they use newer aircraft now.

6.4

Maintenance-By-The-Hour & Time- Material Program

AirAsia aims to ensure that safety standards of its aircrafts are adhered to while achieving the lowest cost possible. AirAsia follows the maintenance program prescribed by Boeing and Airbus. Engine maintenance of AirAsia's various aircraft currently fill within one of two engine maintenance programs, a "Maintenance-By-The-Hour" program and "Time and Material" program. The "Maintenance-By-The-Hour program obliges AirAsia to pay a fixed hourly rate to the contractor based on the number of flight hours of each aircraft. By basing the cost of engine maintenance on the number of flight hours rather than the level of maintenance required at any given time, budgeting is more predictable and simplified. The "Time and Material" program requires AirAsia to pay to the contractor a rate to be negotiated at the time of execution of maintenance performed by the contractor. Two of AirAsia's engines are maintained by GE Engines Services Malaysia SDN. BHD. pursuant to a "Time and Material" contract, 32 of AirAsia engines are maintained by ST Aero pursuant to a "Maintenance-By-The-Hour" contract.

20

All heavy maintenance is performed by ST Aero and MAS pursuant to "Time and Material" contract. In November 2002, the DCA granted approval to AirAsia to perform its own light maintenance. AirAsia currently employs 78 type-rated licensed engineers to perform the light maintenance on its aircraft. AirAsia's aircraft maintenance hanger, located at KLIA, was completed in December 2003 at a cost of RM2.1 million. As a result, AirAsia is less dependent on third party maintenance provider, which reduces costs as well as aircraft downtime. AirAsia's dedicated quality assurance team ensures that DCA's regulations are strictly adhered to, which in turn helps ensure that DCA's approval under which it performs its own line maintenance, will not be withdrawn. In November 2002, AirAsia entered into seven year component management and support services agreement with Air Rotables Limited, United Kingdom, a wholly own subsidiary of ST Aero, for the repair of most of its aircraft components.

6.5

Risk Factors & Recommendation

AirAsia's maintenance cost will increase as its fleet ages. The average age of AirAsias aircraft was approximately 16 years at June 30, 2004. If AirAsia does not proceed with the proposed acquisition of 150 Airbus A320 aircraft, the groups fleet will require more maintenance as its ages and its maintenance and overhaul expenses will increase on an absolute basis, on an available seat kilometer basis and as a percentage of its operating expenses. Any significant increase in maintenance and overhaul expenses could have a material adverse effect on AirAsia. AirAsia currently incurs low maintenance and overhaul expenses because it procures maintenance services from third-parties through a competitive bidding process and performs its own light maintenance pursuant to approval granted by the DCA. AirAsia is recommended to use the Active Flight Data Analysis Program whereby all the parameters of the flights are recorded. Analyst can examine the parameters of each flight to determine if there are any traces of irregularity. Therefore, complications can be detected even before it happens. This is a preventive maintenance program being implemented by the Air Force Army of United States Of America.

21

CHAPTER 7 CONCLUSION
A case study of the operations management practices in AirAsia Bhd. was successfully done, researching the following five operations management strategy decisions: location strategy, process strategy, design of goods and services, scheduling strategy, maintenance strategy. Upon analyzing the strategies used, there were certain drawbacks and risks ascertained that could pose problems for this company. AirAsia relied heavily on high daily aircraft utilization rate to optimize its revenue, which makes it especially vulnerable to delays that can disrupt timely operations and lead to guest dissatisfaction. In addition, any failure of the Internet or automated systems used could result in adverse implications. Furthermore, an increase in maintenance cost could affect the company financially. As AirAsias fleet ages, there will be need for overhaul and even the usual maintenance cost would increase. Some possible ways to prevent or overcome such drawbacks were also identified. AirAsia invested in high capacity redundant systems that are backed-up on a daily or weekly basis to avoid the loss of data and disruption of operations. Another solution was to proceed with the acquisition of 150 Airbus A320 aircraft.

22

REFERENCES
[1] A. T. Wells, Air transportation, a management perspective. California: Wadsworth Publishing Company, 1999. [2] AirAsia Bhd. (2007). Welcome to AirAsia.com, The World's Best Low-Cost Airline. Available: http://www.airasia.com/. Last accessed October 16, 2009. [3] Credit Suisse, CLSA Asia-Pacific Markets, DBS Bank Ltd, Citigroup, AirAsia International Institutional Offering. Boston, 2004. [4] Navitaire, "Geneva: Airline Operations Management System", October 2008,

http://www.navitaire.com/ [5] Wikipedia. (2003). AirAsia Wikipedia, the free encyclopedia. Available:

http://en.wikipedia.org/wiki/AirAsia. Last accessed October 9, 2009.

23