VALUE CHAIN OF AIRAISA

To better understand and analyze the specific activities through which AirAsia can create a
competitive advantage, a value chain analysis for airline industry has been conducted as below to
model AirAsia as a chain of value creating activities. The goal of these activities (Inbound
logistics, Operations, Outbound logistics, Marketing and Sales, and Service) is to create value
that exceeds the cost of providing the product or services, thus generating a profit margin.


Figure: Sample Value Chain of Airline Industry
Value Chain of AIRASIA
Inbound Logistics:
As inbound logistics involves different categories in airline industry for example how to
schedule flights, keeping an eye on their competitors that what strategy they are adopting how to
sustain in market, and how to cut off their price as they manage fuel efficiency by purchasing it
advance when prices are low, and how to plan routes as they mostly plan short routes so that
their costs are low.
Outbound Logistics: As air Asia mostly uses their operations through online as their ticketing
process is totally online and customer can get their tickets book online and they can also print
their boarding card from their homes, Air Asia uses general electric engine for their customer
safety as customers are the main preference of the company.
Sales & Marketing: Air Asia has a strong brand name, now days marketing have a significant
impact on any organizations sales, so Air Asia do advertisement by sponsoring THE
AMAZING RACE, and famous MANCHESTER UNITED (MU) FOOTBALL CLUB, painting
some of its aircraft with club colors and sports star, and most importantly chief executive
Fernandes himself wear Air Asia official red cap and T shirt in almost every official function.
Services: Now a days retaining a customer is a difficult task so to overcome this Air Asia
provide different type of services to its customer like if flight is delayed by more than three hours
then e-gift voucher is given, passenger can also pre-book their checked baggage for a lower rate,
and customers can also online book hotels, hostels, rent a car and medical services.
Support Activities: The value chain analysis has some$ support activities as well. The support
activities that Air Asia has to follow in order to keep their business clean and operational are;
1. Firm Infrastructure: Air Asia has a strong firm infrastructure they have evolved from a
classic LCC into an integrated service provider, they are focusing towards their goals,
they are providing the cheapest fare, they are exploring new markets, and decision
making process is simple.
2. Human Resource Management: Air Asia hire capable workers and they assign multi
skilled people so that they can overcome their price in term of human resource and can
maintain their company mission of low price airline, and they also compensate their
employees in terms of performance.
3. Technology Development: Air Asia uses different type of technology to minimize its
cost and to make their operation easy and efficient, they are using yield management
system (YMS) which takes into account the operating cost and expected revenues, and
they also use computer reservation system (CRS) as it is web-based reservation and
inventory system as it is a direct sale engine which eliminates the middle man, and they
also implemented enterprise resource planning system (ERP) which helps to save the
time at month end closing, and speed up reporting and data retrieval processes.

Cost and Revenue Implication:

Operating Revenues of the Airline Industry

The major sources of revenues for AirAsia are from passengers, which accounted as operating
revenues. The fare system in the airline industry has become very complex with the usage of
yield management systems trying to optimize income by constantly changing the fares. The
outcome is on a flight many passengers have paid very different fares depending on the
circumstances in which they bought their tickets. Business and first class tickets come at a high
price partially because of the amenities they provide (e.g. lounge, boarding priority, comfort and
food) and also that they tend to be booked much later.

The revenue recognition policies varies based on nature of services provided by airline
companies. Overall, the treatment of passenger and freight revenue is similar. To attract
customer, the airline companies issues airline passenger tickets or freight airway bill in advance
of the service or transportation date.
Further, the amount paid as air fare on booking air tickets has two components refundable fare
and non-refundable fare, the proportion of two varies with passage of time. All amount received
in advance from prospective customer is accounted as unearned revenue.
1) Passenger and freight revenue: On date of travel of the passenger or when freight is
uplifted
2) Non-refundable tickets: On the same date the ticket booking for flight is closed
3) Limited refundable or exchangeable unredeemed tickets: significant time (determined
based on historic trend) after the booked date of travel has lapsed or terms of the tickets
4) Commission and discounts: Commission is recognized as expenses and discount is
recognized as reduction in revenue, when the sale is recognized.
Passenger, Freight and Tours and Travel Revenue:
Passenger and freight revenue is measured at the fair value of the consideration received, net of
sales discount, passenger and freight interline/IATA commission and Goods and Services Tax.
Other sales commissions paid by the Qantas Group are included in expenditure.






Frequent Flyer Revenue (Redemption Revenue):
Revenue received for the issuance of points is deferred as a liability (revenue received in
advance) until the points are redeemed or the passenger is uplifted. Redemption revenue is
measured based on managements estimate of the fair value of the expected awards for which the
points will be redeemed. The fair value of the awards is reduced to take into account the
proportion of points that are expected to expire (breakage).
Marketing Revenue:
Marketing revenue associated with the issuance of points is recognized when the service is
performed (typically ticket issuance of the point). Marketing revenue is measured as the
difference between the cash received on issuance of a point and the redemption revenue.
Taxes and airport charges:
When tickets are sold, airlines companies act as collectors of taxes on behalf of governments.
Amounts received from customers have to be distinguished between amounts for airline services
and amounts for third parties (governments or airports). Additionally, taxes and airport charges
should be accounted as a payable in the liabilities of the balance sheet and therefore should be
excluded from the amounts collected from passenger revenue.
Fuel surcharges:
Due to the recent continuous increases and fluctuations on the oil prices, many airlines
companies have decided to add fuel surcharges to the tickets price, in order to minimize the
impacts of the oil price. Fuel surcharges are a component of the ticket fare and they are
recognized as revenue at the time when the passenger flies.

Revenue Recognition Criteria for AirAsia
Airline tickets paid for before the flight represent unearned revenues for the Airline until the
flight is delivered. Upon ticket purchase, airline accountants credit an unearned revenue account.
That account is debited when the flight occurs. Unearned revenue (deferred revenue) refers
to funds received by a seller for goods or services not yet delivered to the buyer. This entry
further defines and explains unearned revenue and deferred revenue.

Collection method
When there is considerable uncertainty regarding whether the service provider will be paid, use
the collection method. This approach mandates that you do not recognize any revenue until cash
payment is received from the customer. This is the most conservative revenue recognition
method.
Completed performance method
In situations where a series of services are performed, but completion of the contract hinges on a
specific activity, use the completed performance method. Under this method, do not recognize
any revenue until the entire set of services have been completed. For example, a moving
company is hired to box up, transport, and redeploy the assets of a company; although there are
several services provided, redeployment is the key part of the contracted services, so it may not
be appropriate to recognize revenue until this task has been completed.
Specific performance method
When the customer pays for the completion of a single specific activity, recognize revenue when
that activity has been completed. For example, a doctor is paid for a specific office visit. This is
the most common type of revenue recognition used for services.
Proportional performance method
When a number of similar activities are completed as part of a service contract, use the
proportional performance method to recognize revenue. There are two ways to use this method.
First, if each of the services provided are essentially identical, then recognize revenue
proportionally across the estimated number of service events. Second, if each of the services
provided is different, then recognize revenue based on this formula, where revenue is related to
costs expended: