OPERATIONS MANAGEMENT

GAB 4013

OPERATIONS MANAGEMENT PRACTICES

IN

AIRASIA BHD.

DANIEL YEO REN WEI 7851HOSSAM MAHMOUD ELANZEERY 8007KUMANAN A/L RAMAN 7935MOHAMED ABDELAZIZ ELBAGOURI 8001VINOD A/L CHANDRA SAYAKARAN 7961

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TABLE OF CONTENTS

CHAPTER 1 INTRODUCTION............................................................................................1

CHAPTER 2 LOCATION STRATEGY...............................................................................2

2.1 Factors Propelling Aviation in Southeast Asia.............................................2

2.2 Population of Selected Countries in Asia.....................................................3

2.3 Point-to-Point................................................................................................3

2.4 Hub-and-Spoke.............................................................................................3

2.4.1 Multiplier Effect...................................................................................4

2.4.2 Advantages...........................................................................................5

2.4.3 Disadvantages.......................................................................................5

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

CHAPTER 3 PROCESS STRATEGY..................................................................................7

3.1 Large Quantity and Small Variety of Services.............................................7

3.2 Special Purpose Equipment..........................................................................7

3.3 Less Broadly Skilled Operators....................................................................8

3.4 Standardized Work Orders and Job Instructions...........................................8

3.5 Low Inventories............................................................................................8

3.6 Low Work-in-Process Inventory...................................................................8

3.7 Swift Movement of Units..............................................................................8

3.8 Goods Made to a Forecast.............................................................................9

3.9 Simple Scheduling........................................................................................9

3.10 High Fixed Costs.........................................................................................9

3.11 Utilization of Capacity................................................................................9

CHAPTER 4 DESIGN OF GOODS AND SERVICES......................................................11

4.1 Phase 1: Hotel B-E & Hotel Distribution Management Systems...............11

4.2 Phase 2: Pre-Defined Packaging Solution..................................................12

4.3 Phase 3: Dynamic Packaging Solutions (DPS)...........................................12

4.4 Achievements..............................................................................................13

4.5 Recommendations.......................................................................................13

CHAPTER 5 SCHEDULING...............................................................................................14

5.1 Important Factors........................................................................................14

5.2 Schedule Planning.......................................................................................14

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5.3 Risk Factors.................................................................................................15

5.3.1 Economic conditions..........................................................................15

5.3.2 Daily Utilization Rate.........................................................................15

5.3.3 Reliance on Technology.....................................................................15

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

CHAPTER 6 MAINTENANCE SYSTEM..........................................................................18

6.1 Revenue and Block Hours...........................................................................18

6.2 A, B, C & D Inspection System..................................................................19

6.3 Maintenance Operation Strategy.................................................................19

6.4 Maintenance-By-The-Hour & Time- Material Program.............................20

6.5 Risk Factors & Recommendation...............................................................21

CHAPTER 7 CONCLUSION...............................................................................................22

REFERENCES.......................................................................................................................23

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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. AirAsia’s main business is air transport, making it a service-

type company. A deeper look into the AirAsia’s 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.

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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 2003-

2008.

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 region’s 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

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2.2 Population of Selected Countries in Asia

PopulationPopulation in cities >

1 million

Country 2002 (actual)2002 to 2015

annual growthUrbanization

20022002

(actual)2015

(forecast)

Bangladesh

135,684,000 1.5% 26% 13% 18%

Brunei 351,000 N/A n/a n/a n/a

Cambodia 13,172,000 1.5% 18% n/a n/a

China1,280,400,00

00.6% 38% 14% 17%

India1,048,641,00

01.2% 28% 10% 12%

Indonesia 211,716,000 1.1% 43% 10% 13%

Laos 5,530,000 2.1% 20 % n/a n/a

Malaysia 24,305,000 1.5% 59% 6% 6%

Myanmar 48,786,000 1% 29% 9% 11%

Philippines 79,499,000 1.6% 60% 16% 17%

Singapore 4,164,000 1.1% 100% 100% 100%

Thailand 61,613,000 0.6% 20% 12% 15%

Vietnam 80,424,000 1.1% 25% 13% 14%

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.

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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 city-

pairs 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 city-

pairs 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.

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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.

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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.

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CHAPTER 3

PROCESS STRATEGY

AirAsia’s 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 AirAsia’s 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 group’s 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.

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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.

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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. AirAsia’s 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 group’s 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.

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Another feature of AirAsia’s 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.

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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, no-

frills, 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 AirAsia’s B2C customers (F.I.T travelers) to

reserve hotel rooms online. Hotel Distribution Management Systems (HDMS) allows

AirAsia’s 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 AirAsia’s operation handling.

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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 customer’s 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.

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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.

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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.

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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.

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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.

Report Manager: Allows accurate, timely, targeted and informative reporting.

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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.

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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.

AirAsia’s 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 plane’s 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.

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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. Malaysia’s 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.

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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 group’s fleet is maintained in accordance with a program prescribed by Boeing

and Airbus, the manufacturer of the group’s aircraft. Since it began operation in 1996, none

of the group’s 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.

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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 down-

time. 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 AirAsia’s

aircraft was approximately 16 years at June 30, 2004. If AirAsia does not proceed with the

proposed acquisition of 150 Airbus A320 aircraft, the group’s 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.

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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 AirAsia’s 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.

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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.

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