CONTEMPORARY ISSUES IN FINANCE (FICB393)

PREPARED FOR: DR. BAHARUDDIN BIN BUDIT @ MOHD HUSSIN

GROUP’S MEMBERS:
AZDZAM ASYRAF BIN MALEK (BF099962)
FATIN DAMIA BINTI ZAINUDDIN (BF0100012)
AIREEN RAZLEEN BINTI A RAZU (BF098884)
NUR ATIKAH BINTI ISMAIL (BF098769)
 CASE STUDY 4:

Air Asia: Flying Low-Cost with High

Hopes
 BACKGROUND
 Private entrepreneur, Tony Fernandez took over the debt ridden AirAsia airlines from the
Malaysian government in December 2001, months after the terrorist attacks of 9/11.
 One month later, he relaunched the airline as South-East Asia's first low-cost carrier (LCC)
and achieved an instant success with increased profitability and rapid route expansion.
 Under the tagline of "Now Everyone Can Fly", AirAsia was able to keep the lowest cost
structure among its competitors and offered low airfare to customers.
 In 2007, AirAsia was ranked as the best LCC in the Asia region. Its success had not only
inspired many LCC followers in the Asia Pacific region, but also severely threatened the
well-being of full-service operators, especially its major competitor at home, Malaysia
Airlines ("MAS").
 In May 2008, MAS initiated an unexpected price war by launching the "Everyday Low Fare"
campaign, offering zero fare for domestic and short-haul flights, which were largely
dominated by AirAsia.
 1. Liquidity Ratio: to measure Air Asia
Berhad ability to pay off short term debt
using their company’s quick asset

2. Solvency Ratio: to compare Air Asia

Berhad’s debt levels with asset, equity and
earnings to evaluate whether the company
can stay afloat in long-term by pay long-term
Financial debt interest on debt
Ratio
Analysis

3. Profitability Ratio: to measure how well

Air Asia Berhad can generate profit from the
operation

4. Efficiency Ratio: to evaluate how well Air Asia

Berhad uses its asset and liabilities to generate
sales and maximize profit
1. Liquidity Ratio for Air Asia Berhad (2006-2010)
(Cash)
16,000,000
Liquidity Ratio:
4.5
14,000,000
4

12,000,000
3.5

3
10,000,000

2.5
8,000,000
2

6,000,000 1.5

1
4,000,000
0.5

2,000,000
0
2006 2007 2008 2009 2010
Current ratio 2.02 4.12 1.09 1.29 1.47
0 Working Capital Ratio 0.23 0.53 0.017 0.04 0.07
2006 2007 2008 2009 2010 Quick Ratio 1.94 4.05 1.02 0.86 1.08

Curent Asset Current Liabilities Total asset Total Liabilities Current ratio Working Capital Ratio Quick Ratio
 2. Solvency Ratio For Air Asia Berhad (2006-2010)
(Debt)
16,000,000
Solvency Ratio
6
14,000,000
5

12,000,000 4

3
10,000,000
2

8,000,000 1

0
6,000,000
-1

-2
4,000,000

-3

2,000,000
-4
2006 2007 2008 2009 2010
Debt Equity Ratio 1.31 1.86 4.88 1.65 2.72
0 Debt Asset Ratio 0.57 0.65 0.83 0.38 0.73
2006 2007 2008 2009 2010 Interest Coverage Ratio 0.9 2.67 -2.92 1.92 2.88

Curent Asset Current Liabilities Total asset Total Liabilities Debt Equity Ratio Debt Asset Ratio Interest Coverage Ratio
 3. Profitability Ratio For Air Asia Berhad (2006-2010)
(Profit)
4,500,000
Profitability Ratio
4,000,000 0.4

3,500,000 0.3

3,000,000 0.2

2,500,000 0.1

2,000,000
0

1,500,000
-0.1

1,000,000
-0.2

500,000
-0.3

0
2006 2007 2008 2009 2010 -0.4
2006 2007 2008 2009 2010
-500,000 Profit Margin 0.095 0.313 -0.188 0.163 0.273
Return on equity 0.08 0.3 -0.306 0.19 0.29
-1,000,000 Return on Asset 0.0095 0.059 -0.06 0.06 0.13

Sales/ Revenue Net Income Profit Margin Return on equity Return on Asset
 4. Efficiency Ratio For Air Asia Berhad (2006-2010)
(Expenses & Collect)
8,000,000
Efficiency Ratio
250
7,000,000

212.82
6,000,000
200
186.08
5,000,000

4,000,000 150
135.09

3,000,000

100
2,000,000 75.79

1,000,000
50 38.54

0
2006 2007 2008 2009 2010
Sales/ Revenue 839,007 1,593,978 2,635,978 3,072,099 3,864,459 0.8 0.95 1.63 0.43 1.06
0
Net Asset 1,049,368 1,671,945 1,615,478 7,071,712 3,640,405 2006 2007 2008 2009 2010
Operation Expenses 587,996 1,156,344 2,635,977 2,061,137 2,839,209 Asset Turnover 0.8 0.95 1.63 0.43 1.06
Inventory 9,868 8,962 20,137 20,316 17,005 Inventory Turnover 38.54 75.79 212.82 135.09 186.08

Sales/ Revenue Net Asset Operation Expenses Inventory Asset Turnover Inventory Turnover
Analysis Based on Financial Ratio Result:
 For the liquidity ratio (current ratio, working capital ratio and quick ratio) there was an increasing
result for 2 years before 2008 (2006 &2007) but otherwise for 2008 liquidity ratio for Airasia Berhad
significantly drop and recover back for two years after 2008 (2009 &2010). Hence, higher liquidity ratio
indicates that AirAsia Berhad was more liquid and has better coverage of outstanding debts.
 If Airasia Berhad has lower solvency ratio, the company has greater probability for default on its debt
obligations. As shown on the graph, Debt equity ratio for 2008 indicates that larger debt a company is
using to finance its assets relative to the value of shareholders' equity with higher value of D/E ratio
(4.88). For the year 2008, Airasia Berhad has lower interest coverage ratio which is (-2.92) shown that
Airasia Berhad company has lower ability to meet its interest payments.
 To be analyzed, 2008 result shown that profitability significantly drop to negative value instead of two
years before 2008 (2006 & 2007) and two year after 2008 (2009 & 2010) which is in positive value. If
we’re looking at the sales/revenue during 2008, it quite high but profitability still low/negative
because net income maybe lower due to the high expenses instead of income.
 For the efficiency ratio, inventory turnover ratio for Airasia Berhad shows that how many times a
company's inventory is sold and replaced over a period of time. Thus, 2008 shown that the greater the
time company’s inventory sold and replaced over a period of time. In other hand, Companies with low
profit margins tend to have high asset turnover, while during 2008 indicate lowest profit margins with
highest asset turnover (1.63) among the other years.
RECOMENDATION

 Emphasis on more effective safety and security to avoid accident.

 Improved more of internet on board.
 Arrangement of seating should be organized.
 AirAsia Berhad should cut down the additional charge that customer need to pay.
 AirAsia Berhad should also introduce smartcard which is compatible with existing ticketless booking.
 Airasia Berhad should concern on the competitor planning that can affected the company
performance.
 Airasia Berhad Should alert on the economic condition such as economic crisis that can affected the
company performance

 Airasia Berhad should consider the risk exposure towards the company such as political risk, foreign
exchange risk, interest rate risk and so on.
Conclusion

 The strategy of AirAsia focus more on the management and access of

information rather; the creation of irrelevant airline services.
 AirAsia has developed a unique set of guiding principles in simplicity, cost
efficiency and effectiveness.
 AirAsia is fully determine to exploit these opportunities and convert more
threats into opportunities for success.