KBU INTERNATIONAL COLLEGE SCHOOL OF BUSINESS

B.A (HONS) BUSINESS MANAGEMENT In Collaboration with

ASHCROFT INTERNATIONAL BUSINESS SCHOOL

ANGLIA RUSKIN UNIVERSITY, UK BA (HONS) BUSINESS MANAGEMENT, YEAR 3, SEMESTER 2, 2008

ASSIGNMENT FOR:

Advanced Strategic Management

Strategic Options Available to Malaysia Airlines

To Enhance its Growth & Development

Lecturer: Ms Malathi

Student: Chan Yee Teen (0771472)

Submission Date: 21st May 2008

Word Count: 2,949 words

CONTENTS

1. Introduction 3

2. Identification and Description of Strategic Options 3 2.1 SWOT Analysis to Identify Strategic Options 3 2.2 Description on Nature of Strategic Options 4

2.2.1 Strategic Option 1 Grow Network & Build Capacity 4 2.2.2 Strategic Option 2 Reduce Structural & Operation Cost 5 2.2.3 Strategic Option 3 Improve Passenger Pre/In-Flight Services 7

3. Evaluation of the Strategic Options 10 3.1 Suitability 10

3.1.1 Macro/Micro Environment 3.1.2 Compatibility 3.1.3 Capability

3.2 Acceptability 11 3.2.1 Stakeholders Expectation 3.2.2 Expected Risks 3.2.3 Expected Profitability & Capital 3.2.4 Expected Impact on Environment

3.3 Feasibility 15 3.3.1 Current Resources 3.3.2 External Constraints 3.3.3 Internal Constraints

3.4 Selection of Strategic Option 17 3.5 Implementation Issues 18

3.5.1 Financial Perspective 3.5.2 Customer Perspective 3.5.3 Internal Process Perspective 3.5.4 Learning Perspective

4. Conclusions 20 5. Appendices 21

Appendix 1: Macro-Environment Analysis

1A: Recent trend issue 1B: Life Cycle model-Airline Market Phases

Appendix 2: Micro-Environment Analysis

2A: Malaysia Airline Background information 2B: Malaysia Airline Historical Profile 2C: Unprofitability 2D: Malaysia Airline Group Structure & Directory

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2E: Malaysia Financial data Appendix 3: Malaysia Airlines Intangible Assets 3A: Malaysia Airlines Reward List

3B: Malaysia Human Capital 3C: Mission Statement Analysis 3D: Partnerships and Code Share Agreements

Appendix 4: Strategies Resource Capability

4A: SWOT Matrix 4B: Porter Five Forces

6. References /Bibliographic 44

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1 Introduction

This assignment has set out to perform a strategic review on the operations of Malaysia

Airlines (MAS), a full-fledge flagship international airline of Malaysia, for the purpose of

identifying strategic options that could enhance its growth and development.

The nature, generic basis and direction of each of these strategic options will first be

described. The suitability, acceptability and feasibility of these strategic options will next

be analyzed. Based on this analysis, one of the strategic options will be selected for

implementation, and issues related to its implementation will be further discussed.

2. Identification & Nature of Strategic Options

2.1 SWOT Analysis to Identify Strategic Options

A SWOT analysis was conducted on MAS based on information and data obtained from its

website (http://www.malaysiaairlines.com) and other published news concerning its

operations and performance. Analysis of the macro and micro business environment

surrounding the commercial aviation industry was also made. From the results of these

analyses (see Appendices 1, 2 & 4), three strategic options were identified as listed below.

(1) To Grow Network and Build Capacity

(2) To Reduce Structural and Operational Costs

(3) To Improve Passenger Pre-Flight & In-Flight Services

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2.2 Nature of Strategic Options

2.2.1 Strategic Option 1: To Grow Network and Build Capacity

Description

MAS should aim to further develop new routes and increase frequency on existing routes

with growth potential by the following action plan:

1. Identify high-value code share and Special Pro-rate Agreement (SPA) partners.

2. Increase agreements with partners that have positive P&L impact to MAS.

3. Discontinue agreements that are not beneficial to MAS.

4. Perform misconnect analysis to optimize network connectivity.

5. Identify new code share and SPA agreements to pursue.

Specific steps should be taken to optimize the existing network where possible via

rescheduling and redeployment of aircrafts to match individual routes. Unprofitable routes

should be stopped, while capacity should be increased on profitable routes like Jakarta,

Bangkok and Los Angeles. Similar approach should be followed for the domestic routes.

The Hub-and-Spoke strategy started earlier (see Appendix 3E) should be further

strengthened to increase the feeder traffic onto MASs trunk routes. Capacity through

existing code-share and interline partners, namely KLM for North Europe, Alitalia for

South Europe, Virgin Blue for Australia, South African Airways for Africa, China Southern

Airlines for China should be closely monitored and enlarged where possible. Additional

efforts and resources should be directed to widen capacity in MASs core network in the

ASEAN, China and India, all of which are estimated to experience higher-than-average

growth in air traffic (Based on IATAs industry data) (http://www.iata.org/index.htm).

To serve this core network better, MAS should acquire long range narrow body aircraft to

operate the new routes where the Airbus 330 is too large and the Boeing 737-400 does not

have the range.

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Generic Basis & Direction

The elements of Strategic Option 1 may be classified into the following generic basis and

direction:

Elements Generic Strategies

Optimise profitable routes, cut

unprofitable routes

Low Cost & Differentiation (Porters Generic

Strategies) ; Hybrid Strategy (Bows Strategy

Clock)

Hub-and-Spoke approach to increase

feeder traffic into MASs trunk routes,

optimize load factor, reducing fuel

wastage of both partners.

Market Development (Ansoff Matrix);

Strategic Alliance

2.2.2 Strategic Option 2: To Reduce Structural and Operation Costs

Description

To stand up to competition from rising number of low-cost carriers (LCCs), MAS should

continue to cut its cost base. The immediate challenge should be to reduce its system-wide

unit cost (CASK) by 20%, from the current 17.5 sen/ASK down to 14 sen/ASK, to achieve

a breakeven load factor of 60%-65%. Only with a breakeven load factor of 60%-65%, can

MAS expect to grow its network (http://www.malaysiaairlines.com).

This system-wide structural cost reduction effort should be carried out and monitored

closely to ensure its success. A list of initiatives for structural cost reduction is given in

Table 1 below. With lower structural costs, MAS would be able to offer more competitive

fares on routes as and when it wants to compete with other airlines.

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Department List of Initiatives

Flight Operations - Introduction of new alternate airports

- Improve accuracy of Zero Fuel Weight

- Flight Planning & Flight Following optimization

- Reduction of over flight charge rates

- Revised taxi fuel policy to minimize fuel burn off

Airport

Operations

- Jet fuel saving through the increased usage of GPU & ,minimize

APU usage

- Excess hand baggage collection at the gate

- Rationalize baggage tags & boarding passes

Operations

Control

- Variable crew deployment

- Renegotiate hotel rates

Engineering &

Maintenance

- Reduction of hanger TAT by 50%

- Optimize maintenance schedules by maximizing maintenance

during off peak season

- Improve inventory management through Integrated Material

Management

- Revised third party maintenance marketing plan

- Engineering Breakthrough Programme > Tackling manpower

productivity, process improvement, etc

Table 1 A list of initiatives for Achieving Structural Cost Reduction

(Source: Malaysia Airlines available at http://www.malaysiaairlines.com)

MAS has implemented zero commission for its travel agents in order to reduce its

distribution cost since January 2008. MAS should now aim to improve its existing internet

booking facility (IBF) and target to increase its internet sales to above 60%. This would

certainly help reduce its distribution cost by 2-3%.

It should be stressed that these cost-cutting measures should not result in shortchanging its

customers, cutting corners or compromising on safety and quality.

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Generic Basis & Direction The elements of Strategic Option 2 may be classified into the following generic basis and

direction:

Elements Generic Strategies

Cost reduction leading to cheaper tickets

for capturing new gray zone market

segment

Product Development, Market Development

(Porters Generic Strategies) ; Hybrid

Strategy (Bows Strategy Clock)

Enhance MASs competitiveness and add

value to company

Internal Development (Johnson)

2.3 To Improve Passenger Pre/In-Flight Services

(1) Passenger Pre-Flight Services

MAS should further improve its passenger pre-flight services (PPS) to offer passengers a

more convenient, efficient and hassle-free traveling experience. MAS should implement

fully the Simplifying the Business (StB) programme initiated by International Air

Transport Association (IATA) (http://www.iata.org/index.htm) in 2004 which aims to

reduce complexity and cost in PPS. Utilizing advance IT and automation processes, the

StB programme has 5 project streams (see Table 2): eTicketing, eCheck-In, eBoarding Pass,

eBaggage Management and eFreight.

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Project

Streams

Targeted Passenger Pre-Flight Services

eTicketing IATA requires all airlines to be 100% eTicket capable by 31 may 2008.

Through removing material cost and back-end processing, saving up to as

much as US$6 per ticket can be made.

eCheck-In Web check-in or kiosk check-in facilities would reduce the long queue at the

check-in counters and make the life of light travelers easier.

eBoarding Bar-coding boarding passes would simplify the boarding process and reduce

the boarding time.

eBaggage The use of radio frequency identification (RFID) would reduce mishandled

and lost baggage.

eFreight Paper-free cargo would reduce processing time and cargo turnover volume

Table 2 IATAs Simplifying the Business (StB) Programme

Source: (IATA available at http://www.iata.org/index.htm)

(2) Passenger In-Flight Services

It is well known the MAS in-flight services are among the best in the world. MAS has won

the Worlds Best Cabin Staff accolade for four consecutive years from 2001 to 2004, and

again in 2007 by Skytrax, UK. (http://www.malaysiaairlines.com) These prestigious

awards have certainly added much strength to the MAS brands tagline of Cabin Services

Other Airlines Talk About.

It is vital that MAS should keep up with its renowned in-flight services as a brand strategy

to seek growth in passenger load. Measures that need to be given attention are:

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(a) Conduct regular customer feedback surveys to find out shortcomings of in-flight

services.

(b) To add more varieties to the recipes of meals and change or rotate them more

regularly to increase the appetite of regular travelers not eating the same meals

too often.

(c) To spruce up the cleanliness and decors of the toilets, making visiting them a

pleasant experience.

(d) To station at least one air crew with nursing or medical training background to

cater for the needy passengers at any times.

Generic Basis and Direction

The elements of Strategic Option 3 may be classified into the following generic basis and

direction:

Elements Generic Strategies

Low ticket pricing retains existing

customers and attracts new customers

Product Development, Market Penetration

(Porters Generic Strategies) ; Hybrid

Strategy (Bows Strategy Clock)

Premium pricing for core customers who

appreciate comfort and extra services,

reinforcing its internal capability

Differentiation (b) with Price Premium

Strategy (5) (Bows Strategy Clock)

Internal Development Strategy

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3 Evaluation of the Strategic Options

The three strategic options identified in Section 2 are to be evaluated on the basis of their

suitability, acceptability and feasibility in implementation. Implementation issues

concerning one of the three strategic options will be discussed in some details.

3.1 Suitability

The suitability of the strategic options is assessed based on their compatibility with the

current competitive environment of the aviation industry, MASs own corporate vision and

mission and MASs internal resources and core competency.

(1) Environment Macro/Micro

All the three strategic options proposed are suitable for tackling all the competitive trends

being identified in the macro-environment analysis (see Appendix 1). Each option could

handle one or two trends which come with two main objectives: increase profitability and

reduce unnecessary cost. As the aviation industry has begun to enter into phase three

development (see Appendix 1B), MAS would have to react fast in order to survive in the

market.

(2) Compatibility with Corporate Vision, Mission & Objective

All the three strategies are consistent with MASs corporate vision of creating a 5-star low

cost carrier and the mission of pursuing consistent profitability (see mission statement

analysis in Appendix 3C). All the three strategies are also consistent with MASs

objective of improving its service/ product quality and reducing cost to maintain

profitability.

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(3) Capability Resources & Core Competency

Generally, financing the implementation of these strategies should not be a big problem as

MAS has returned to profit zone and showing healthy cash flow. However, MAS has to

exercise extreme care in planning a suitable fleet of aircrafts that could meet the eventual

growth and demand arising from new route expansion.

MASs present human resources may be a little weak to ensure satisfactory implementation

of these strategies. Intensified staff training and new talent injection will be necessary.

However, MASs current top management team appears to be dedicated and competent.

(4) Summary of Suitability

Based on the above evaluation, all the three strategic options could be regarded as suitable

for MAS in its pursuit for future growth and development. To ensure their successful

implementation, MAS must pay special attention to prudent financial planning and

strengthening of its human resources.

3.2 Acceptability

The acceptability of the three strategic options is assessed based on the stakeholders

expectations, expected profitability and capital injection, the associated risks and impact on

the environment.

(1) Stakeholders Expectations

The stakeholders of MAS are comprised of (1) Malaysian government, (2) shareholders, (3)

management, (4) employees, (5) suppliers, (6) travel agents and (7) the customers.

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The Malaysian government is likely to accept all the strategic options that will benefit MAS

and the country. A study by Khazanah and the global consulting firm, Bain & Company,

shows that aviation has a high multiplier effect of 12.5 to the Malaysian economy in terms

of tourism, infrastructure and logistics development (Malaysia Annual Report 2006).

The shareholders are likely to accept all the strategies as they have already witnessed

MASs successful turnaround and regain of profitability.

The new management team built up by MASs CEO who took over since 2006 is made up

of high-caliber professionals who would love to see MAS taking more positive steps in

achieving its vision and mission. On the other hand, the employees may not be very

supportive of the cost-cutting and business simplifying measures recommended in strategic

options 2 and 3.

The suppliers and travel agents would have learnt by now to live with MASs cost-cutting

measures and have realigned their operations to fit themselves into MASs operating style.

MASs customers are likely to welcome the cheaper air tickets and less-hassle pre/in-flight

services.

(2) Expected Risks

As mentioned in Section 2, all the strategic options are posing relatively low to moderate

risk to MASs operations. This is because these strategies are focusing mainly in changing

MASs internal structure and organization to improve efficiency and reduce cost. Given

MASs current strength in financial planning and control, the risk of building an oversize

fleet for unrealistic expansion is not likely.

The aviation industry in the Asia pacific is still remain attractive even the slow down and

the emerge of the LCCs. (See Appendix 1A)

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(3) Expected Profitability & Capital Injection

MAS suffered a loss of nearly RM1.3 billion in year 2005. However, with the launch of a

turnaround plan initiated by its new CEO in 2006, MAS has trimmed its loss to RM133

million in less than a year (see Table 3). MASs performance improved further in 2007

with a net profit of RM851 million. (http://mas.listedcompany.com/misc/MASPL-Q407.pdf)

This shows MAS has fully recovered from the red with a very healthy cash flow and able to

finance its operations and capital requirement for development. (More detail information

in Appendix 2E)

Table 3. Financial performance of Malaysia Airlines (2002-2006)

(Source: Malaysia Airlines Official Website)

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(4) Expected Environment impact

There are no significant negative ethical or environment impacts for all the three strategic

options. Even with future route expansion, MAS is likely to look for fuel efficient aircrafts

as a matter of bring down its running cost. Therefore, the effect on global carbon emission

is not going to be any issue. IATA has estimate that the current figure of 2% share in

global carbon emission by aviation is small compared with land transport.

(http://www.iata.org/index.htm)

(5) Summary of Acceptability

Based on the above evaluation, all the three strategic options could be regarded as suitable

for MAS in its pursuit for future growth and development. To ensure their successful

implementation, MAS must pay special attention to managing its stakeholders tactfully and

minimize its exposure to political interference.

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3.3 Feasibility

The feasibility of the three strategic options is assessed based on the MASs current

resources, external constraints and internal constraints.

(1) Current Resources

The actual resources required for the implementation of the three strategies are summarized

in Table 4 under four categories: (1) management systems, (2) financial systems, (3) human

resources and (4) technology.

Table 4: Current Resources of Malaysia Airlines

Category Actual Resources

1 Management

Systems

Under the competent stewardship of its current CEO, MAS has

revamped and streamlined its top management team in the past 2 years.

Its current management team is comprised on highly dedicated

professionals.

1

Financial

Systems

Under the competent stewardship of its current CFO, MAS has built up

very sound financial systems that ensure very healthy cash flow. For

example, annual cash saving of RM147m and capital expenditure

reduction of RM141m were achieved in 2006. MAS has also secured

RM1b short term loan to boost its working capital.

2 Technology

Development

MAS has started to invest in IT in 2006 to upgrade its passenger service

systems and cargo handling systems in line with IATAs

recommendations.

3 Human

Resources

MAS has started to streamline its staff in 2006, resulting in some 2,600

redundant employees being laid off through VSS. MAS has initiated

staff re-training and re-deployment programme to improve the work

culture and productivity of its workforce.

(Sources: Malaysia Airlines; Constructed by the Author Using Relevant Value Chain)

With the above-mentioned current resources at hand, MAS should be able to implement

any of the three strategies or even all of them.

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(2) External Constraints

There are some external constraints that might affect the smooth implementation of the

three strategies. The recent rapid rise of the low-cost carriers (LCCs) in the Asia pacific

region would certainly intensify competition among them and may lead to a price war

which may affect MAS in its implementation of strategic option 1. A price war is likely to

affect MASs bottom line and in turn may affect MASs capability in implementing the

other two strategic options.

In addition, the current surge of crude oil prices, rising more than 25% over a period of 3

months, is indeed a big blow to the whole aviation industry. This uncontrollable hike in

fuel price would pose a big headache to airline operators.

(3) Internal Constraints

There appears little internal factors to constraint the current MAS management team in

deciding to adopt and implement all the three strategic options.

However, the fact that MAS is one of the Malaysian government-linked companies may

present some internal constraints. As MASs major controlling shareholder, the

government has the final say on MAS will be run. At it is, the current government appears

to have given MASs top management a free hand to run MAS in a professional manner. If

there is a change of government, then something could happen to MAS management and

upset its strategic direction.

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3.4 Selection of One Strategic Option for Implementation

The above evaluation data have indicated that in fact all the three strategic options are

equally important and necessary for the future growth of MAS and should be implemented

to the long term benefits of MAS. The complexity and risks in implementation of the three

options are summarized in Table 5 below.

Strategic Option

Implementation Requirements

Complexity & Risk

(1)

To grow network & build capacity

Involves higher capital injection & management ingenuity to implement in view of competition from LCCs

Hardest with higher risks

(2)

To reduce structural & operational costs

Involves strong management will and resolve to implement. Changing staffs working attitudes and instituting a new low-cost culture would need a lot of patience and tact.

Medium hard and moderate risks, needs management will and tact

(3)

To improve pre/in- flight passenger services

Involves further improvement on current good foundation in passenger services. Injection of creative ideas needed

Easiest and little risks among the three options

Table 5 Comparison of complexity and risks in implementing strategic options

Naturally, among the three, strategic option 3 should be selected as the first choice since it

can be implemented quickly and getting faster results.

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3.5 Implementation Issues

The issues that may arise from the implementation of Strategic Option 3 (to improve

passenger pre/in-flight services) are summarized below, taking into consideration the

perspectives of finance, customers, and internal processes and learning (Kaplan and

Norton, 1996).

(1) Financial Perspective

MAS has secured a short term loan of RM 1 billion from the CIMB bank in March 2006 to

boost its working capital for its turnaround programme. With prudent management of its

cash flow and disposal of RM147 million of non-core assets, plus the over RM800 million

of profit from its 2007 operation, MAS is now in a very cash fluid position. There should

be no immediate problem to undertake all the required capital investments for improving

passenger pre/in-flight services as described in Section 2.3 above. (Malaysia Airlines

Annual Report 2006)

(2) Customer Perspective

While most business travelers have little problem to use all the electronic or internet-based

passenger pre-flight services, there is still a substantial fraction of MASs core customers

that are keyboard-shy. This means MAS has a duty to educate its customers to getting used

to all its e-services. For a reasonable period of time, MAS should station specially trained

ground crew at the airports to provide guidance to needy customers and at the same time

getting feedback from the customers on the correction of any faults or further

improvements that would make them more satisfied. Similarly, to correctly monitor the

proper implementation of its upgraded in-flight services, MAS should encourage interactive

feedback from its customers by rewarding those who provide good constructive criticisms

or suggestions with special gifts or ticket discounts.

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(3) Internal Processes

Establishing an integrated system of the internal processes is an important issue in getting

things done in an organization, especially when the organization wants to implement

changes. It is therefore important that MASs top management pay enough attention to

streamline the related internal processes during its campaign to upgrade its passenger

pre/in-flight services. Red tapes and administrative blockages must be cleared to allow

smooth and speedy actions and internal communications within the organization.

(4) Learning Perspective

The improvement and upgrading of internal skill of an organization is vital for it to

revitalize itself to attain sustained growth. This no doubt calls for the members of the

organization to go for continuous training and self-learning in order to excel in their job

positions. MAS must instill this notion of continuous learning to its staff, particularly those

who are dealing with front-line passenger services. Outstanding fast learners should be

rewarded while slow and reluctant learners should be sent for re-training. Non-learners

should be removed from positions dealing in passenger services

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4 Conclusions

In this research study, by way of SWOT analysis, three strategic options that are thought to

be useful in enhancing the future growth and development of Malaysia Airlines have been

identified as: (1) to grow network & build capacity, (2) to reduce structural & operational

costs, and (3) to improve passenger pre-flight & in-flight services

.

These three strategic options have been evaluated on the basis of their suitability,

acceptability and feasibility in implementation. All the three strategic options have been

shown to be equally important and necessary for the future growth of MAS although they

would present different degrees of challenges in their implementation.

Strategic option 1 which calls for higher capital injection in the face of uncertainties like

competition from LCCs and surging jet fuel prices may be considered as the hardest to

implement with higher risks among the three options. Strategic option 2 which calls for

strong management attitude and resolve to institute a new low-cost culture may be

considered as the second hardest to implement. Strategic option 3 may be considered as

relatively the easiest among the three options as MAS has already in the past built up a

good foundation in passenger services.

Issues that may arise during the implementation of the chosen strategic option 3 have been

discussed from the perspectives of finance, customers, internal processes and learning.

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5 Appendices List of Appendices

1. Recent trend issue 2. Life Cycle model-Airline Market Phases 3. Malaysia Airline Historical Profile 4. Unprofitability 5. Malaysia Airline Group Structure & Directory 6. Malaysia Financial data 7. Malaysia Airline Intangible Assets 8. Malaysia Human Capital 9. Mission Statement Analysis 10. Partnerships and Code Share Agreements 11. SWOT Matrix 12. Porter Five Forces

Appendix 1: Macro Environment analysis Appendix 1A: Recent Trend Issues: By using PESTAL framework and Porters five forces framework and life cycle model, successful identify some trend that might influence the future of aviation industry. Trend 1 Overcapacity i.e. massive addition to capacity by 2009 (threat) Airlines, with their optimism fuelled by the strong profits currently being generated in Asia, are competing with one another by placing large aircraft orders. The demand for new aircraft has been so good that Airbus and Boeing are seeing record orders. Emirates alone will take delivery of their huge order of the A380s and most of these planes will be deployed on the important Kangaroo route i.e. Australia- Europe. Any order made for an aircraft today will generally see delivery beyond 2012. (http://www.airliners.net/aviation-forums/general_aviation/read.main/3814984/ )

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Annual aircraft capacity in Asia Pacific, India and Middle East

Based on industry estimates, about 400 plus new aircraft have hit the skies of Asia Pacific, India and the Middle East in 2007, with another 400 plus expected in 2008. The total of 800 aircraft in 2007 & 2008 alone translate into an annual supply growth of -8% against a projected demand growth of -6%. This is likely to lead to lower price and/ or erosion of profit margins since demand does not increase in tandem with capacity (Stage 4). Although many of the planes are to replace the existing fleets; the fact is that the old planes will remain in the system. They are not going to be scrapped like cars. The older planes are deployed elsewhere for other purposes and many of them will find their way back to the soon-to-be saturated Asia market. (http://www.airliners.net/aviation-forums/general_aviation/read.main/3814984/ ) In addition to growing their fleet through new aircraft purchases, many of the traditional full-services competitors are also investing heavily to enhance their premium service offering. For instance, several mega full-service carriers have upgraded their B777s with premium business class seats and state-of-art in-flight entertainment systems. With more and more airline upgrading their aircraft, and adding new aircraft to their fleet, industry analysis predict that a product war is inevitable. The pressure on yield will be significant. Airlines (and aircraft manufacturers) have traditionally based their forecasts on assumptions of relatively large ratios between air traffic growth and GDP growth. For several decades, airline growth significantly outstripped aligned with the economic growth. However, since the 1990s, airline growth in most parts of the world has become more closely aligned with the economic growth. Nearly all additional growth in Europe, for example, has come from the low cost carrier (LCC) segment. A joint study done by Malaysia Airlines and the global consulting firm, Mckinsey & Company, shown that there has been a slowdown of global air traffic growth (Malaysia Airline Annual Report 2005) Much of the growth of the last 40 years has been driven by price declines and increases in access. Both drivers are reaching natural limits. Prices

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cannot go below zero- or not likely to- and virtually every point in the world can be reached from another in less than 24 hours. As revenue growth slow, the factor cost fuel, labor and airport charges which have been rising in the background all these years will catch up with the airlines. The good years of growth have also shielded all the inefficiencies in the airlines. These inefficiencies, which were not addressed but rather postponed, will eventually, haunt the airlines when the revenue growth slows down. Trend 2: low cost competition is on the rise (threat) In nearly every market, we see low-cost competitions dumping large numbers of very low priced seats in core markets in the hope of stimulating demand. These airlines are attempting to generate new pools of discretionary traffic. Even though these airlines do not explicitly target the business passengers from which full service carriers make their living, they create a devastating residual effect. When LCCs drop leisure fares, they also typically remove restriction such as advance purchases requirements or minimum stay. Because of this, full service carriers are faced with a choice to either match these fares and condition or lose valuable premiums from business passengers, who now have access to these lower fares. Or to continue to take premium fares from business passengers and risk losing significant market share in the leisure segment. Research shows that following the entry of a LCC on a route, the profits of the incumbent carriers on that route decline by an average of 31%. (http://ezinearticles.com/?The-Rise-and-Rise-of-Low-Cost-Airlines&id=320405) As for the Asian market, the threat from growing LCCs will mean a loss of market share for the traditional full service carrier. Projections show that LCCs in the Asia Pacific region will increase their presence, resulting in an increase capacity share form less than 10% to 25% of the available seats. Further more, LCCs are aggressively expanding beyond the traditional short-haul routes to medium-and long-haul markets. The few that have started include Oasis from Hong Kong to London, and from the Kuala Lumpur hud, 2 other airlines i.e. Jetstar and AirAsiaX have started flying to Australia.

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(Source: Extract IATA Press) Trend 3: Rising factor costs-particularly fuel (threat) Between January 2005 and December 2007, the crude oil price increased from USD38 per barrel to USD 90 per barrel which is a massive jump of 135%. In January 2008, it touched of USD per barrel. This is the highest oil price that mankind has ever known. The increase in fuel prices alone has added nearly USD 88 billion to the industry cost structure, bringing the industry total fuel bill to USD 149 billion. So severe was the impact of the increased oil price that United Airline announced in early November 2007 that it was contemplating grounding 100 places within its fleet. Giovarnni Bisignani, IATAs Director-General and CEO, when asked to forecast the outlook for the aviation industry, warned that the evaluating price of jet fuel would seriously dent airline profit margins, erode the yields and even cripple a number of airlines.(IATA Release Press available at http://www.iata.org/pressroom/pr/)

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(Source: Extract IATA Press Release 17 December 2007) Trend 4: Increased public scrutiny on environmental issues (threat) Based on the data from the United Nations, aviation is responsible for only 2% of global carbon emissions- a small quantum compared to ground transport and power plant that burn fossil fuels, IATA estimated that this figure will grow to, at most 3% by 2050. With global warming and climate changes being the topics of debate at would forums, attention is frown towards aviations role and its stand on the issue. Governments in various parts of the world are unison in supporting the global strategy i.e. to curb the increase of greenhouse gas emission; however, there is a lack of globally accepted standards and solution to the issues. There are governments or economic regions which are talking an unilateral approaches to address the issue. For example, EU is forging ahead unilaterally to design a legislation on emission trading-which is not aim tandem with developments in other parts of the world e.g. Asia, Middle East, South America, Etc, Once this law is passed in EU, it will affect a lot of non =EU airlines which are unprepared. Causing these airline to suffer financial losses as they will need to stop flying the European sectors overnight. (IATA, Building Greener Future available at http://www.iata.org/NR/rdonlyres/0B9EA28E-F311-4EFD-A24C-CCDB3AA85A71/0/Building_greener_future.pdf) IATA is currently advocating a 4-pillar strategy: invest in new technology, operate efficient infrastructure, fly planes efficiently, and introduce economic measure (Tax credits for re-fleeting, offset programmes and emission trading). It has also made public its interims fuel efficiency target i.e. 25% improvement in fuel efficiency by 2020.

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Many international airlines are rallying behind IATAs strategy because it offers more structured and palatable solutions to the environment issues. In fact, IATA;s strategy has shown positive result to date: 15 million tones of CO2 savings in 2006 and further 10 million tones in 2007. (IATA Release Press available at http://www.iata.org/pressroom/pr/) IATA is now working with the international Civil Aviation Organization (ICAO) to map out the options to achieving carbon neutral growth and to develop a strategy to guide the efforts of governments, airline and manufactures. Most airlines, Including MAS, continue to be guided by IATAs direction. Trend 5: possibility of slower global macroeconomic growth (threat) While the Asia Pacific economy in 2007 remained positive, there are early indications of turmoil ahead. The volatility of oil prices and the uncertainty of US economic growth due to a weakening housing sector may spill over and impact Asias economic growth. This could amplify the negative impact on developments in the aviation industry over the next couple of years (Tim Callen 2007). There are also rising concerns among economists with regards to the possibility of global shocks due to the continue unrest in the Middle East and Africa, and an economic downturn in China post-Olympic 2008. Historical event such as September11, the SARS outbreak and the Gulf War have proven to have devastating effects on the aviation industry, with short-term changes in demand in some regions exceeding 30%. While its is arguable whether such global shock are increasing in frequency. It is clear that when they do happen, these events will have a greater impact on our industry. Today, as much as 705 of travel are purely discretionary (http://www.imf.org/external/pubs/ft/survey/so/2007/RES1017B.htm). Simply put, many of our customers do not need to travel. In addition, with the immediacy of global media, we may end up with increasingly volatile demand. Airlines used to plan for demand shocks of up to 5%- 10%. Today, we need to have flexibility and agility to react to demand shocks of up to 30% or more (IMF Survey).

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Appendix 1B Life Cycle Model Airline Market Phases Current Phase In the early 1980s, the US began a complete deregulation of its airline, with free access to nearly all markets and a complete release of pricing controls. Europe followed in the late 1990s/ early 2000s. The US experience in the early 1980s is the archetype of this third phase. Multiple new players ended the market and supply quickly outstripped demand. The advent of the internet allowed customer to opportunity to shop around for the lowers price and the best schedule. The advent of price and schedule as key purchase drivers quickly turned the competitive battlefield into a size and cost-game. The airline with the most flights and lowest cost were able to sustain themselves in a price and schedule-shopped environment and outlast the competition. Europe is largely in Phase 3, with incumbents closely controlling costs while pursuing consolidation to maintain scale. (Malaysian Annual Report 2006 available at http://mas.listedcompany.com/misc/AR2006.pdf [accessed 15 March 2008]. Future Phase It is now clear that the deregulated environment of phase 3 leads to a natural end: new entrants proliferate-some free of the legacy cost that plagues incumbents-and low-cost supply dramatically outstrips demand. To keep planes full, all players radically reduce price, and the resulting customer bases, with its high mix of discretionary travelers become nearly 100% influenced by price. In the final, fourth market phase, it is only the player with the lowest cost that is able to make money. The only avenue to sustainable price increases in collaboration among the players to increase load factors through joint capacity reduction. It is clear that consolidation through mergers and acquisition is a strategy that many winners will have to pursue. (Malaysian Annual Report 2006 available at http://mas.listedcompany.com/misc/AR2006.pdf [accessed 15 March 2008].

(Malaysian Annual Report 2006 available at http://mas.listedcompany.com/misc/AR2006.pdf [accessed 15 March 2008].

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APPENDIX 2 Micro Environment Analysis Appendix 2A: Malaysia Airline Background Information Malaysia Airline Historical Profile The concept of creating Malaysia Airline is proposed by the Liverpool-based Singaporean Stream shipping Company and Imperial Airways Proposed to the Colonial governments in Penang and Singapore to government of the Colonial Straits Settlement to run an air service between Penang and Singapore on 12 October 1937. (Wikipedia, Malaysia Airlines available at (http://en.wikipedia.org/wiki/Malaysia_Airlines) The airlines first flight was a charter flight from the British Straits Settlement of Singapore to Kuala Lumpur on 2 April 1947, using an Airspeed Consul twin-engine aircraft. The airline continued to expand during the rest of the 1940s and 1950s, as other British Common wealth airlines (such as BOAC and Qantas Empire Airways) provided technical assistance, as well as assistance in joining LATA. In 1957, the airline became a state-run stock corporation. With the delivery of an 84-seat Bristol Britannia in 1960, the airline launched its first long-haul international flight, to Hong Kong. As Federation of Malaysia in 1963 was formed, the airlines name changed from Malaysia Airways to Malaysia Airlines, however it changed again in 1966 to Malaysia-Singapore Airlines (MSA) when Singapore separate from the federation.

In 1973, due to the differing needs of the two shareholders, it led to the break-up of the airline. The Singapore government preferred to develop the airlines International routes, while the Malaysian government had no choice but to develop the domestic network first before going regional and eventually international. MSA ceased operations in 1972, with its assets split between two new airlines; Malaysia Airlines Berhad (now Malaysia Airlines), and Singapore Airlines.

Soon after Malaysian Airline took all the domestic routes within Malaysia in 1 October 1972, its expanded rapidly toward international routes such as introducing long-haul flights form Kuala Lumpur to London. The economic boom in Malaysia during 1980s helped spur growth at Malaysia Airline. Today, Malaysia Airlines flies nearly 50,000 passengers daily to some 100 destinations worldwide and has more than 19,546 employees across the globe on its payroll. Appendix 2B: Unprofitablility

Prior to the Asian Financial Crisis in 1997, the airline suffered losses of as much as RM 260 million after earning a record-breaking RM319 million profit in the financial year 1996/ 1997. For the financial year 1999/ 2000, the airline cut its losses from RM700 million in the year 1998/ 1999 to RM259 million. However, the airline plunged into further

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losses in the following year, amounting to RM 417 million in FY2000/2001 and RM836 million in FY2001/ 2002. With these losses, the airline cut many unprofitable routes, such as Brussels, Darwin, Honolulu, Madrid, Munich and Vancouver. The airline recovered from its losses in the year 2002/2003. It achieved its then-highest profit in the year 2003/2004, totaling RM461 million.

Yet it strike again in the year 2005, Malaysia Airlines reported a loss of RM1.3 billion. Revenue for the financial period was up by 10.3% or RM826.9 million, compared to the same period for 2004, driven by a 10.2% growth in passenger traffic. International passenger revenue increased by RM457.6 million or 8.4%, to RM5.9 billion, while cargo revenue decreased by RM64.1 million or 4.2%, to RM1.5 billion. Costs increased by 28.8% or RM2.3 billion, amounting to a total of RM 10.3 billion, primarily due to escalating fuel prices. Other cost increases included staff costs, handling and landing fees, aircraft maintenance and overhaul charges, Widespread Assets Unbundling (WAU) charges and leases. (Malaysian Airline System Berhad, Annual report 2005). Available at http://mas.listedcompany.com/misc/AR2005.pdf

Appendix 2C: Physical Analysis

Malaysia Airline Group Structure & Directory Group Structure & Directory % Ownership Companies 1 100% Malaysia Airlines Cargo Sdn Bhd

MAS Aerotechnologies Sdn Bhd Syarikat Pengangkutan Senai Sdn Bhd MAS Golden Boutiques Sdn Bhd MAS Golden Holidays Sdn Bhd MASkargo Logistics Sdn Bhd MAS Academy Sdn Bhd FlyFirefly Sdn Bhd (formerly known as Kelas Services Sdn Bhd) Malaysia Airlines Capital (L) Limited Macnet CCN (M) Sdn Bhd Malaysian Aerospace Engineering Sdn Bhd MASWings Sdn Bhd FlyFirefly Holiday Sdn Bhd (subsidiary of FlyFirefly Sdn Bhd)

2 80.0% Abacus Distribution Systems (Malaysia) Sdn Bhd 3 51.0% Aerokleen Services Sdn Bhd 4 49.0 % Aerofine Meat Sdn Bhd 5 60.0% MAS Catering (Sarawak) Sdn Bhd Investment in Associates 1 30.0% Honeywell Aerospace Services (M) Sdn Bhd

GE Engine Services Malaysia Sdn Bhd LSG Sky Chefs - Brahim's Sdn Bhd (Formerly known as MAS Catering Sdn Bhd)

2 49% Hamilton Sundstrand Customer Support Centre (M) Sdn Bhd 3 23.53% Pan Asia Pacific Aviation Services Limited 4 20% Taj Madras Flight Kitchen Limited (Sources: Malaysia Airline Official website http://www.malaysiaairlines.com/investor.html) (Annual Report2006)

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Appendix 2D: No of Aircraft in Malaysia Airlines Operation as at 31 January 2007

Passenger

Boeing 747-400 13

Boeing 777-200 17

Airbus 330-300 11

Airbus 330-200 3

Boeing 737-400 37

Total 81

Cargo

Boeing 747-400 2

Boeing 747-200 4

Total 6

Firefly

Fokker-50 3

Grand total 90

(Sources: Malaysia Airline Official website http://www.malaysiaairlines.com/investor.html) Appendix 2 E: Malaysia Airline Financial analysis

Source: Malaysia Airlines Investor available at (http://www.malaysiaairlines.com/investor.html) ) [accessed 15 March 2008]

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Balance Sheet 31-Dec-06

31-Dec-05

2004 2003 2002 2001 2000 Balance Sheet

2005 2004 2003 2002 2001 Non-Current Assets Aircraft, Property and equipment

2,496,764 2,223,558 2,054,455 1,661,974 1,819,203 12,043,892 11,430,739

Others 590,744 629,576 693,714 729 745 636,426 267,328 291,181

3,087,508 2,853,134 2,748,169 2,391,719 2,455,629 12,311,220 11,721,920

Current Assets Inventories 385,769 454,720 446,038 369,419 362,342 352,127 346,345

Receivable 1,902,351 1,796,196 2,005,977 1,663,645 1,968,152 1,540,403 1,584,816

Cash and Bank balances

1,584,699 1,179,409 2,194,578 2,190,893 932,186 416,376 335,950

3,872,819 3,430,325 4,646,593 4,223,957 3,262,680 2,308,906 2,267,111

Non-current assets h eld for sale

10,647 - - - - - -

Total Assets Current Liabilities Sales in advance of carriage

1,202,060 1,473,159 1,487,752 1,153,723 842,056 632,715 576,754

Taxation 20,457 22,033 23,042 24,674 26,613 45,459 83,695

Payables 2,808,509 2,764,431 2,553,574 2,399,935 2,273,067 3,394,454 2,479,325

Borrowings 1,050,000 - - - - 4,287,720 1,321,002

5,081,026 4,259,623 4,064,368 3,578,332 3,141,736 8,360,348 4,460,776

Net Current Assets / (Liabilities)

(1,197,560) (829,298) 582,225 645,625 120,944 (6,051,442) (2,193,665)

1,889,948 2,023,836 3,330,394 3,037,344 2,576,573 6,259,778 9,528,255

Share capital 1,253,244 1,253,244 1,253,244 1,253,244 1,253,244 778,000 770,000

Reserves 620,181 756,613 2,065,488 1,770,740 1,309,597 437,290 482,148

Shareholders equity 1,873,425 2,009,857 3,318,732 3,023,984 2,562,841 1,215,290 1,252,148

Minority interest 15,246 13,152 10,706 12,098 11,082 13,779 12,347

1,888,671 2,023,009 3,329,438 3,036,082 2,573,923 1,229,069 1,264,495

Borrowings - - - - - 4,680,289 7,829,873

Deferred Income - - - - - 347,733 431,752

Deferred tax liabilities 1,277 827 956 1,262 2,650 2,687 2,135

1,889,948 2,023,836 3,330,394 3,037,344 2,576,573 6,259,778 9,528,255 Source: Malaysia Airlines Investor available at (http://www.malaysiaairlines.com/investor.html) ) [accessed 15 March 2008]

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Passenger Revenue for International and National Routes

Source: Malaysia Airlines Investor available at (http://www.malaysiaairlines.com/investor.html) ) [accessed 15 March 2008] Route Revenue

Source: Malaysia Airlines Investor available at (http://www.malaysiaairlines.com/investor.html) ) [accessed 15 March 2008]

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Malaysia Airline Expenditure Chart

Source: Malaysia Airlines Investor available at (http://www.malaysiaairlines.com/investor.html) ) [accessed 15 March 2008] Malaysia Airline Income statement

Source: Malaysia Airlines Investor available at (http://www.malaysiaairlines.com/investor.html) ) [accessed 15 March 2008]

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Appendix 3: Malaysia Airlines Intangible Assets Appendix 3A: List of Reward in 2007 The airline holds a lengthy record of service and best practices excellence, having received more than 100 awards in the last 10 years. The most notable ones include being the first airline to with the "World's Best Cabin Crew" by Skytrax UK consecutively from 2001 until 2004, "5-star Airline" in 2005 and 2006, as well as No.1 for "Economy Class Onboard Excellence 2006" also by Skytrax UK. Following is the award list that Malaysia Airlines received in year 2007. Malaysia Award List Year 2007: No Award List 1 World Travel Awards

World's Best Cabin Staff 2007

2 Skytrax, UK 5 Star Airline Award.

3 Skytrax, UK Asia's Top 1000 Brands Survey 2007 (Seventh Placing)

4 Regional Brand Consultancy Asian Integrated Media Ltd Best Airline for Cabin Service Worldwide (4th Placing)

5 SmartTravelAsia.Com - Best In Travel Polls 2007 Malaysia Tourism Awards 2005-2006 - Minister's Special Award (Individual) - Datuk Idris Jala

6 Malaysia's Most Valuable Brands Malaysia Airlines poled in 12th position, from a total of 30 top brands in the country.

(Source: Malaysia Official Website assessed at http://www.malaysiaairlines.com/getdoc/033b07a8-1ac5-4059-858d-c9af019c504a/Awards.aspx )

Appendix 3B: Human Resource Capital Unleashing Talents and Capabilities In May 2006, the company carried out a Mutual Separation Scheme for its employees to address productivity concerns, particularly after the domestic airline network rationalization exercise. Some 2,600 employees opted to leave the Company between July and December 2006 under this scheme. The company had 19,596 staff at the end of 2006: 349 in managerial grades, 1,055 in executive grades, 1,257 in technical crew, 4,725 in cabin crew, and 2,231 and 9,979 respectively in the technical and administrative grades. (Malaysian Annual Report 2006 available at http://mas.listedcompany.com/misc/AR2006.pdf [accessed 15 March 2008].

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Despite the reduction in manpower, the company continued to maintain a high quality of service to its Customers. Emphasis has also been placed on the inculcation of a performance-driven work culture and to ensure the success of the BTP. The campaign to instill the performance-driven work culture has been undertaken with the collaboration of various in house unions and associations. Memoranda of Understanding and Collective Agreements entered into with these organizations reflected a common appreciation of the need for employer and employee to work together to help the airline get out of its difficulties. A major milestone in the reorganization of the company was the roll-out of the Integrated Human Resource Management System (iHRMS) in June 2006. This has helped reduce administration costs, improved data management and increased the efficiency of the Human Resources Division. The training and development of employees competencies remain a key priority for the Human Resources Division, with major training programmes offered at the Malaysia Airlines Academy. In 2006, a number of new modules in leadership development and aviation knowledge enhancement were introduced to nurture talents and improve performance. (Malaysian Annual Report 2006 available at http://mas.listedcompany.com/misc/AR2006.pdf [accessed 15 March 2008]. Malaysia Airline Organization Human Resources List: 01. Dato' Dr. Mohd. Munir Bin Abdul Majid >>

Chairman Appointed on August 1, 2004

02. Dato' N. Sadasivan a/l N. N. Pillay >> Deputy Chairman Appointed on December 1, 2001 03. Dato' Sri Idris Jala >> Managing Director and Chief Executive Officer Appointed on December 1, 2005 04.Tengku Dato' Azmil Zahruddin bin Raja Abdul Aziz >> Executive Director and Chief Financial Officer Appointed on February 1, 2006 05. Keong Choon Keat >> Independent and Non-Executive Director Appointed on April 16, 2001 06. Martin Gilbert Barrow >> Independent and Non-Executive Director Appointed on August 29, 2001 07. Dato' Mohamed Azman Bin Yahya >> Non-Independent and Non-Executive Director Appointed on December 1, 2001

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08. Datuk Haji Yusoff bin Datuk Haji Mohd Kassim >> Independent and Non-Executive Director Appointed on January 23, 2006 09. Dato' Zaharaah Binti Shaari >> Non-Independent and Non-Executive Director Appointed on July 18, 2005 10. Dato' Mohd. Annuar bin Zaini >> Independent and Non-Executive Director Appointed on Feb 2, 2005 11. Dato' Sri Wan Abdul Aziz bin Wan Abdullah >> Independent and Non-Executive Director Appointed on Mar 20, 2007 12. Datuk Amar Wilson Baya Dandot >> Independent and Non-Executive Director Appointed on January 11, 2008 13. Datuk Haji Mohamad Morshidi bin Abdul Ghani >> Alternate Director to Datuk Amar Wilson Baya Dandot Appointed on August 4, 2006 14. Dato' Puteh Rukiah binti Abd Majid >> Alternate Director to Dato' Dr. Wan Abdul Aziz bin Wan Abdullah

ppointed on August 16, 2007 A

(Source: Malaysia Official Website assessed at http://www.malaysiaairlines.com/getdoc/033b07a8-1ac5-4059-858d-c9af019c504a/Awards.aspx )

Appendix 3C: Mission Statement Analysis It is the mission of Malaysia Airlines System Berhad, as a corporation, to provide a transport service that ranks among the best in terms of safety, comfort and punctuality, distinguished and loved for its personal touch and warmth. They aim to set new world standards continually with their enhanced in-flight services, reliable ground support and excellent infrastructure and to respond to consumer demand for worldwide coverage. Previously , The mission of Malaysia Airlines System Berhad (MAS), as a corporation is to provide the customer with transport service that ranks among the best in terms of safety, comfort and punctuality, distinguished and loved for it personal touch and warmth. Due to the pressure from the low cost carriers (LCCs) with low fares and the financial heartbreak in year 2005/ 2006, MAS modified their previous mission statement with an addition of become a consistently profitable airline, i.e. continue offering/ improve the quality of their product and services yet, reduce their costs to obtain profitability. (http://www.travelclearance.com.au/malaysia-airlines)

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(Malaysian Annual Report 2006 available at http://mas.listedcompany.com/misc/AR2006.pdf [accessed 15 March 2008]. Appendix 3D Partnerships and Code Share Agreements

Malaysia Airlines has code-sharing partnerships with 25 airlines, including four from SkyTeam, two from OneWorld and seven from Star Alliance.

Malaysia Airlines Codeshare agreements & interline partnerships Airlines Destinations

AirIndia Burbank, Hyderabad, Los Angeles, Melbourne, Mumbai Air Mauritius Mauritius

Alitalia Athens, Barcelona, Frankfurt, Geneva, Madrid, Melbourne, Milan, Penang, Perth, Rome, Sydney All Nippon Airways

Fukuoka, Kota Kinabalu, Kuching, Langkawi, Narita, Nagoya, Osaka, Penang, Sapporo, Sendai

Austria Airline Vienna British Midlands Belfast, Dublin, Edinburgh, Tesside, Lahore, London, Leeds, Glasgow, Manchester, Cathay Pacific Hong Kong, Penang China Southern Airlines Beijing, Guangzhou, Shanghai-Pudong

Continental Airlines Special Pro Rate Agreement

Dragon Air Kota Kinabalu, Hong Kong Egyptair Cairo, Kuala Lumpur Garuda Indonesia Darwin, Denpasar, Frankfrut, Jakarta, London, Medan, Paris, Surabaya Gulf Air Bahrain, Muscat, Kuala Lumpur

KLM Adelaide, Amsterdam, Auckland, Bergen, Brisbane, Brussels, Copenhagen, Gothenburg, Helsinki, Kota Kinabalu, Langkawi, Melbourne, Oslo, Penang, Perth, Stavanger, Sydney, Stockholm

Korean Air Incheon, Penang Myanmar Airways International

Yangon

Philippine Airlines Cebu, Manila

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Qatar Airways Doha Royal Brunei Airlines Brunei

SilkAir Singapore Singapore Airlines Singapore

South African Airways Johanesburg

Sri Lankan Airlines Colombo, Kuala Lumpur

Swiss International Airlines

Zurich

Thai Airways International Bangkok, Phuket

Transaero Airlines Moscow, Kuala Lumpur

Uzbekistan Airways Tashkent

Virgin Blue Balina Byron, Broome, Cairns, Canberra, Coffs Harbour, Darwin, Frasers Coast, Gold Coast, Hamilton Island, Hobart, Mackay, Newcastle, Rockhampton, Sunshine Coast, Townsville

(Source: Malaysia Offical Website assessed http://www.malaysiaairlines.com/getdoc/3f2254d9-707c-4c99-b370-9ce9502f329a/Profile.aspx# )

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Appendix 4: Strategic Resource Capabilities: Appendix 4A: External Audit: By using PEST & Value Chain, Opportunities, Threats, Strength and Weakness is being analysis through the SWOT Matrix and create the initial proposal for Malaysia Airlines growth development.

Opportunities:

1. Growth of older generation 2. Industrial research and development 3. Growth of Hispanic population 4. New technology opens the door for new products/services 5. Increased Internet advertising 6. Longer flights with new kind of plane 7. Growth of business and leisure travel 8. Competing online ticket reservation systems. Threats 1. Decline of leisure travel due to economy and terrorism 2. Liberalization policy on Malaysia air market 3. Possibility of slower global macroeconomic growth 4. Rising factor costs-particularly fuels. 5. Overcapacity in aviation Industry 6. Low cost competition is one the rise 7. Annual airline security costs have increased. 8. Increased public security on environmental issues.

Strengths 1. Named the Best Full-Service Airline leader for the last three consecutive years. 2. Diversity in upper management. 3. Dominates the Long haul segment of Airline Industry. 4. Market Experience of more than 50 years. 5. Primary user of Kuala Lumpur International Airport. 6. Provide 5 star flight services Weaknesses 1. Low capacity usage. 2. Low revenue/yield 3. Inefficient network and obtain unprofitable routes.

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4. Low productivity on front /back workforce. 5. Old procurement practice. 6. Decentralized monitoring of operational performance. 7. High distribution costs.

G. SWOT Matrix

Strengths Weakness -Named the Best Full-

Service Airline leader for the last three consecutive years. -Diversity in upper management. -Dominates the Long haul segment of Airline Industry. -Market Experience of more than 50 years. -Primary user of Kuala Lumpur International Airport. -Provide 5 star flight services

-Low capacity usage. -Low revenue/yield -Inefficient network and obtain unprofitable routes. -Low productivity on front /back workforce. -Old procurement practice. -Decentralized monitoring of operational performance. -High distribution costs.

Opportunities S-O strategies

W-O strategies

-Growth of older generation -Industrial research and development -Growth of Hispanic population -New technology opens the door for new products/services -Increased Internet advertising -Longer flights with new kind of plane -Growth of business and leisure travel -Competing online ticket reservation systems.

Strategies Option 3: S- Named the Best Full-Service Airline leader for the last three consecutive years - Market Experience of more than 50 years. - Provide 5 star flight services O- Competing online ticket reservation systems. - Increased Internet advertising - New technology opens the door for new

Strategies Option 1: W- Inefficient Network & Unprofitable routes -Low Capacity Usage O- Growth of Business & Leisure Travel -Growth of older generation - Longer flights with new kind of plane

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products/services Threat S-T Strategies

W-T Strategies

-Decline of leisure travel due to economy and terrorism -Liberalization policy on Malaysia air market -Possibility of slower global macroeconomic growth -Rising factor costs-particularly fuels. -Overcapacity in aviation Industry -Low cost competition is one the rise -Annual airline security costs have increased. -Increased public security on environmental issues.

Strategies Option 2: T- Liberalization Policy on Malaysia Air Market -Rising Factor Costs- Particularly Fuels W- Old procurement practice. - Decentralized monitoring of operational performance -High distribution cost. - Low revenue/yield

Appendix 4B: Porter Five Forces: A) Threat of Entry: According to Porter, those industries with high entry barriers will have fewer firms entering, which easier for one firm to dominate the industry. Economic rents are usually higher in such environment, this make the industry attractive. In Malaysia, airlines market is consider attractive which can be proven by the fact that there only 2 existing airlines company. Which mean the barrier to entry is high also. The following elements will help determine the level of threat from new entrants. Economies of scale: Economies of scale exist within the airline market in Malaysia, due to the fact that both airlines such as MAS and AirAsia already existed more than six years and acquire the experience to set up procedure that will achieve low cost levels. Product differentiation: Both low cost and traditional flag carrier market already taken by Air Asia and MAS, it hard for a new entrant to penetrate into those segments of market, because they already establish a strong brand value and loyalty toward the customer. Capital requirements: The capital needed to establish a new airline is up to a million digit numbers and that money such as working capital is required just to keep the doors open.

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This create a barrier that a firms must tie up large amounts of capital for maintaining its daily operation, this will deter smaller firms from entering. Brand identity: Brand identify is consider important in this industry, however due to the unstable economic and moderate inflation rate. Consumer became more prices sensitive than brand identities, which reduces the barrier to entry toward Malaysias airline market. B) Supplier: There are many suppliers for the supporting activities in an airline, but in this section, the supplier of airplane is mainly focused because it is the key item that an airline in this industry must have. The supplier consists: Boeing, Airbus and McDonnell Douglas. Suppler concentration: The bargaining power of suppliers is consider powerful because there are mainly two major airplane supplier which is Boeing and Airbus and the switching cost is high to switch alternative supplier. Switching cost: The switching cost is consider high because for an airline supplier is mainly about the time and cost for the supplier to construct a new airplane for the airline. For an airline to switch another supplier, they need to make a new contract and provide the supplier time to construct the plane. Presence of substitute input: There is no considerable substitute for airplane, which give the supplier more power in controlling the airplane prices. Importance of volume to supplier: In the airline industry perception, most of the airplanes are being produced by supplier like Boeing and Airbus. This gives us the airline industry power over the suppliers. Without the airline industry there would be no Airplane manufacturers. c) Buyers: Buyer concentration: The buyer primary classified into price oriented , and services oriented. In Malaysia, Price is mostly concentrated than services. The Aviation Industry got 2 major airlines which is MAS and Air Asia 2. Buyer switching costs: The switching cost is to establish relationship with the supplier or the time limit to build 1 plane. 3. Price to total purchases: Dependent on a constant supply of services for their survival. 4. Price sensitivity: Malaysia Buyer are considering quite sensitive with price issue, as they seek for the cheapest way to travel rather to find the best way.

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D) Substitute: There is a lot of substitute transportation available in replacing air transport in Malaysia such as train, automobile, ship and even telecommunication. Recent year, the advances in telecommunications, video-conferring become a common tool for business man to reach out to other countries rather than using face to face intercourse meeting. Other than that, the advances in automotive industry and infrastructure such as highway or road in Malaysia able the Malaysian to travel within the country by using automobile such as travels buses or cars. In the mere future, fast trains could be used to transport people within the countries to reduce the usage of petrol oils or jet fuel.

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Advanced Strategic ManagementAppendix 2D: No of Aircraft in Malaysia Airlines Operation as at 31 January 2007Balance Sheet