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40 Malaysian Airline System Berhad Annual Report 04/05(10601-W)

Korea

The daily A330-200 services to Seoul were increased to 9x weekly in Northern Summer2004 and revised to operate on A330-300 aircraft. Subsequently these services wereincreased to 10x weekly effective 1 May 2004. The 10x weekly A330-300 services intoSeoul were reduced to 7x weekly effective 31 August 2004 and were operated as 3xKuala Lumpur-Seoul return, 2x Kuala Lumpur-Kota Kinabalu-Seoul-Kuala Lumpur and2x Kuala Lumpur-Seoul-Kota Kinabalu-Kuala Lumpur.

Taiwan

The 5x Kuala Lumpur-Kota Kinabalu-Kaohsiung services were increased to 7x weeklyfrom 28 March 2004.

China and Hong Kong

The services to Beijing were increased from 5x weekly to daily in Northern Summer2004 and those to Shanghai were raised to double daily. The Kuala Lumpur-Xiamenreturn flights were increased from 2x to 3x weekly while the service through KotaKinabalu to Xiamen was withdrawn.

In the case of Hong Kong, the services became double daily from 7x weekly while theHong Kong flights via Kota Kinabalu/Kuching were increased from 4x to 6x weekly.

In line with the expansion to China, the following new services were introduced:

2x weekly Kota Kinabalu-Shanghai effective 28 March 20042x weekly Kuala Lumpur-Chengdu effective 4 September 20043x weekly Kuala Lumpur-Kunming effective 15 January 20052x weekly Kuala Lumpur-Xi’an effective 15 March 2005

Middle East

The services to Beirut operated through Dubai were increased from 2x weekly to 3xweekly in Northern Summer 2004. To improve the capacity to the Middle East, the 2xweekly Kuala Lumpur-Cairo-Istanbul services were delinked so that both Cairo andIstanbul have a 2x weekly direct service to Kuala Lumpur.

For Dubai, its frequencies were increased from 7x to 8x weekly through the additionalKuala Lumpur-Dubai-Beirut service in Northern Summer 2004. However, with thererouting of Newark services through Stockholm instead of Dubai, its total frequencywas reduced to 5x weekly in Northern Winter 2004.

MANAGING DIRECTOR’S REPORT AND REVIEW

41Malaysian Airline System Berhad Annual Report 04/05(10601-W)

Indian Sub-Continent/Bangladesh

This region saw the introduction of new 3x weekly services each to Ahmedabadeffective 16 December 2004 and to Kolkata from 28 January 2005. The Kuala Lumpur-Dhaka return services were also increased from 4x to 5x weekly in Northern Winter2004.

In addition, weekly frequencies and capacities were added to existing destinationssuch as Bangalore, Hyderabad, Chennai and Mumbai.

Regional services

To provide the long haul feed and connectivity, additional frequencies were injectedinto our regional destinations. Phuket’s services were increased from 7x to 14x weekly(subsequent to the tsunami disaster, it was reduced to 7x weekly). Saigon’s frequencygrew from 9x to 14x weekly and services to Hanoi increased from 5x to 7x weekly.

Cambodia saw the introduction of 3x weekly services to Siem Reap and increasedweekly frequency to Phnom Penh. Yangon’s services were increased from 3x to 4xweekly. Medan’s services from Kuala Lumpur rose from 10x to 14x weekly.

However, due to low demand, the services to Balikpapan and Manado were withdrawneffective 31 October and 2 December 2004 respectively while the operations intoPontianak from Kuching were reduced from 7x to 5x weekly.


Alliance Strategy and Code-Share Developments

Our alliance strategy at Malaysia Airlines is two-pronged. Whilst pursuing globalalliances to achieve multi-lateral opportunities, the Company is also focused on buildingnew and strengthening existing bilateral relationships to increase competitiveness,especially in the ASEAN region.

Consistent with our ongoing strategy of developing regional partnerships with variousnational carriers in the region, a Malaysia-Singapore arrangement to strengthen theexisting co-operation was undertaken.

Malaysia Airlines, Singapore Airlines and Silk Air signed a Tripartite Code-shareAgreement on 24 February 2005. The code-share arrangement which was launchedeffective 27 March 2005 (Northern Summer 2005) allows the three carriers to jointlycode-share on the Kuching-Singapore return and Kota Kinabalu-Singapore returnsectors. Malaysia Airlines operates on both sectors, whilst Silk Air operates on theSingapore-Kuching return sector.

In addition, Malaysia Airlines and Singapore Airlines also started the code-share onthe Penang-Singapore return sector on a bilateral basis, in which both carriers areoperating. The above code-share arrangements enabled the carriers to tailor capacityon the respective sectors based on demand so as to avoid wasteful competition.However, the biggest beneficiary will be the travelling public who will enjoy a betterspread of services on the code-share sectors.

Malaysia Airlines has also code-share arrangements with Garuda Indonesia, PhilippineAirlines and Vietnam Air as part of the Company’s preparation towards the eventualASEAN open-skies.

PASSENGER TRAFFIC PERFORMANCE

During the year under review, Malaysia Airlines carried 14.1 per cent more passengerssystem-wide or 17.5 million passengers, of which 50 per cent were from the domesticservices. In terms of capacity, the domestic and international network grew by 4 percent and 17 per cent to 6,684 million seat km and 57,431 million seat km respectively.With a total carriage of 44,226 million passengers km, the system-wide passenger seatfactor grew by 1.4 per cent points to 69 per cent signalling the market recovery fromthe previous turbulent years.



INTERNATIONAL PASSENGER OPERATIONS

During the year, revenue passenger km (RPK) growth at Malaysia Airlines exceededavailable seat km (ASK) growth within the international operations. This contributedto the improvements in passenger seat factor and yield, which improved by 1.6 pointsand 2.7 per cent to 68.7 per cent and 18.9 sen respectively. In the fourth quarter,international seat factor also improved to 73.1 per cent from 70.0 per cent in thecorresponding period last year.

Indeed, the highest RPK growth was recorded in Asia while all other internationalregions also recorded positive RPK growth.

The utilisation of wide-bodied and narrow-bodied aircraft improved during the yearwhile the utilisation of the Boeing 747-400 and Boeing 777-200 aircraft was one ofthe highest within the industry.



FLEET AND PRODUCT DEVELOPMENTS AT MALAYSIA AIRLINES

Malaysia Airlines would have retrofitted five of 17 Boeing 777-200’s and two of 17Boeing 747-400’s by mid 2005. The retrofit exercise on the 17 Boeing 747-400 and 17Boeing 777-200 aircraft is on track for completion by September 2006 and July 2006respectively.

In late 2004, Malaysia Airlines took delivery of two new Boeing 777-200’s. Both aircraftwere also the first in the region to be equipped with the electronic flight bag (EFB),that replace hard copy charts and manuals used earlier.

Malaysia Airlines remains focused on continuing to improve its product and overallcustomer service delivery standards for the benefit of its customers.



MOVING THE WORLD’S CARGO

A Better Performance

MASkargo, the air cargo division of Malaysia Airlines, managed to maintain itsperformance in the fiscal year 2004/2005 despite the various challenges in the globalmarket. MASkargo continued its expansion into key markets and concentrated onquality. As a result, it was able to hold on to its position as one of Asia’s top three aircargo carriers.

MASkargo has managed to maintain its growth by introducing additional freighterflights in key markets, expanding the secondary hub concept, installing new e-commerce strategies and enhancing safety and security. As a result, MASkargo wasable to register double-digit revenue growth.

Despite the increasing fuel prices, MASkargo maintained an encouraging pre-tax profitof RM95.8 million for fiscal year 2004/2005, from total revenue of RM2.6 billion.

MASkargo carried a total of 526,181 tonnes of cargo worldwide during this period,compared to 438,252 tonnes in the same period of last year. At its home base in , theAdvanced Cargo Centre (ACC) in KLIA, cargo volume increased by 12 per cent to 639,764tonnes. Transshipment increased by 8.9 per cent to 583,015 tonnes, which is in linewith our goal of becoming a major transshipment hub in the region.



Cargo operations saw a more brisk performance compared to passenger with overallbelly load tonne km carriage up by 11 per cent while the freighter services had anincrease of 39 per cent compared to the previous year.

The total system-wide load tonne km carriage was 23 per cent higher at 2,690 millionwhile the capacity injected escalated by 31 per cent to 4,434 million capacity tonne kmresulting in an overall cargo achieved load factor of 60.7 per cent.

During the year, MASkargo load tonnage flown improved by 21 per cent to 532.2million kilograms while yield improved by one per cent to 76.3 sen.

During the year, the freighter network was extended to Basel, Switzerland andManchester, United Kingdom, while it increased frequencies into Amsterdam,Netherlands and Frankfurt, Germany.

MASkargo will take delivery of two new Boeing 747-400 freighters in 2006, whichoffers improved uplift capacity and operational performance. In addition, MASkargowill expand the size of its cargo warehouse capacity in KLIA by 2007 as the existingKLIA warehouse utilisation rate exceeds 90 per cent.

A challenge to embrace


In Cargo Operations, implementation of quality-related projects such as Quality ControlCircle (QCC) for import processes and Six Sigma for Build Up and Export Processes,have helped improve cargo-handling quality. As a result, MASkargo managed to reducecargo claims to less than RM1 million for the financial year, the best performance thusfar in terms of payment against claims.

I-port, the innovative sea-air transshipment service, added another milestone whenMASkargo flew 200 tonnes of theatre equipment from Kuala Lumpur to Shanghai forthe “Phantom of the Opera” musical show on 1 December 2004.

Warehousing Capacity

MASkargo continued to innovate, by expanding its secondary hubs around the world.It became the first foreign airline to operate a cargo warehouse in Hangzhou with theopening of its facility in January 2005. The Hangzhou Cargo Centre (HCC) was jointlyopened by the deputy governor of Zhejiang Province and the Malaysian deputy ministerof transport. The HCC allowed MASkargo to open the first ever Priority Business Centrein China. Being the first foreign airline to establish a cargo hub in Hangzhou, MASkargohas given the cargo wing of Malaysia Airlines a lead to capture the shipment of China’sexports. Located in the Hangzhou Xiaoshan International Airport, it occupies an areaof 50,000 sq metres. The cargo centre has the facilities to handle up to 110,000 tons ofcargo per year and is operating a new 2,973 sq metre logistic warehouse located withinthe depot.



Far East to European Market

To increase our share of the Far East to the European Market, MASkargo plans toaggressively expand its freighter services from China. In October 2004, Shanghai becamethe number one station for MASkargo worldwide, surpassing even our home basemarket at KLIA. The Shanghai market currently provides the best yields in the airfreightindustry globally.

Special Cargo

In September 2004, MASkargo experimented and transported durians and cut flowersto Australia, a country renowned for its tight quarantine procedures. This is in linewith the Government’s drive to promote local fruits in international markets.

The ‘whole durians’ were frozen before export, and were accepted in the Australianmarket. Following the science-based procedures of the Sanitary and PhytosanitaryMeasures (SPS), MASkargo believes that these products could break into the globalmarket and explore the vast markets in China, South Korea, the United States, Canadaand European countries.

MASkargo Products and Services

During the year under review, MASkargo’s website at www.maskargo.com was furtherenhanced to support a wide spectrum of e-commerce processes. With theimplementation of e-commerce, it became the crucial mechanism to lower costs andthus provide value added benefits to the customer and cargo communities. The e-business systems had also been enhanced to meet US Customs requirements in whichall shipments bound to US destinations are reported electronically prior to aircraftarrival.

In reliving its commitment to embark on a more advanced technology system, MASkargoadopted a global e-commerce programme as the main thrust of its strategic initiativeto enhance the level of its service offering to customers worldwide. MASkargo launchedthree new e-commerce initiatives as part of its ongoing global e-commerce programme- the enhanced MASkargo website; the e-Sales facility; and the electronic billing,presentment and payment (EBPP) system.

MASkargo achieved another major milestone in its e-commerce programme when webecame the first corporate company to transact electronically via the FinancialProcessing Exchange (FPX) gateway of Bank Negara.


MASkargo achieved another major milestone inits e-commerce programme when we became thefirst corporate company to transact electronicallyvia the Financial Processing Exchange (FPX)gateway of Bank Negara.


BRANDING COMMUNICATIONS, ADVERTISING AND MARKETING

Marketing Support

With the challenging air travel market environment, Malaysia Airlines is seeing theemergence of ancillary businesses as supplementary revenue streams. The trend is visibleamongst competitors who are re-positioning their sub-brands and support businesses.

Over the last two years, Malaysia Airlines has been continuously deploying its sub-brands Enrich, Golden Holidays and Temptations in-flight shopping. Golden Holidaysis also targeting high-end customers. To cater to market demand, some products werealso re-defined and central marketing agencies were appointed in key internationalmarkets to enhance distribution. These strategies proved to be successful with GoldenHolidays achieving double-digit growth.



Our in-flight shopping brand ‘Temptations’ achieved international brand recognitionby winning the frontier ‘In-flight Retailer of the Year’ and the ‘World In-flight SalesPerson of the Year’ awarded by joint organisers Alpha, the UK’s largest supplier ofaviation support services and Travel Retail Training Ltd.

Some of the Enrich enhancements that will come on-stream soon are a KLIA Enrichservice centre, and more cross-participation to strengthen our Frequent Flyer Progrmme(FFP) to support our drive for customer ownership.

Our charter operation is another important revenue stream. During the year underreview, charter business contributed approximately RM25.5 million in revenue andthe Haj operations approximately RM89.9 million. Malaysia Airlines is evaluating thefeasibility of re-modelling the charter business to capture a larger share of the Hajand Umrah business. Charters would continue to be used as a first-mover marketingtool to penetrate and develop potential new on-line markets for Malaysia Airlinessuch as in China. The promotion of niche or high profile charters would continue.Some of the niche-charters handled include ferrying Bill Clinton and the Real Madridteam.



Consistent Branding

Today Malaysia Airlines has become more focused in its effort to create presence andawareness of its brand through aggressive advertising and promotional activities.Governed by the branding guidelines, all communications, promotions and sponsorshipactivities were planned with fundamental objectives to increase brand equity, customeras well as market ownership. To balance up the external communication, MalaysiaAirlines has also embarked on an internal campaign of Internalising Going BeyondExpectations with constant communication and engagement with employees to ensurethat they are committed and in tandem with the brand promise of Going BeyondExpectations.

The airline has embarked on a brand revitalisation project that incorporates a new‘look and feel’ in all its visual and verbal communication, applying to all customers’touch points. To further strengthen the corporate culture (friendly, gentle, warm,committed and hospitable), the Brand Book ‘Nadi Diri Anda’ or ‘Naturally You’ wasproduced. In addition, a comprehensive user-friendly guidebook, Branding Guidelines- Design Application was also developed to effectively manage the airline’s identitysystem-wide besides creating a consistent and impactful visual communication.

Advertising and Promotions

During the year under review, Malaysia Airlines undertook several major advertisingcampaigns to promote the company’s goal of being recognised as the Best ServiceAirline in the world. All campaigns were strategised to underscore the airline as alegitimate competitor on the worldwide stage; to credentialise its product, experienceand corporate attitude; and to optimise the differentiating assets to drive trial andongoing loyalty.

The World Park–Network campaign kick started the 2004/05 campaign of which theobjective was to reinforce the depth and breadth of the airline’s network. To launchand support the Internet Booking Facility, a series of four TV commercials were producedwith ‘Save Time, Book On-line’ being the underlying concept. In conjunction with thefirst sneak preview of the Airbus A380, a TV commercial ‘Dream’ was produced. Toconsolidate the campaign, the first ever 16-page poster-sized advertisement wasdeveloped, running in the TIME magazine.


An Experience Redefined

The final campaign undertaken which spilled over to the next financial year was theNew Experience – An Experience Redefined. The campaign was executed to createawareness and to highlight the newly retrofitted cabin upgrade and new servicedelivery. To ensure maximum impact, a roadblock approach was adopted in mostpublications. In conjunction with the launch of the New Experience campaign, two ofthe B747-400’s were painted with a thematic design, that of the Hibiscus flower torepresent the new First Class cabin.

In addition to the conventional media buy, Malaysia Airlines explored media innovationswhich among others included the 2004 Athens Olympics - an ambush media platformto closely associate the airline with the spirit of the Olympics. Malaysia Airlines WorldDestination on Discovery Travel & Living – that communicated the airline’s networkproposition by creating a programming block ownership within a credible travelenvironment was also another programme. In partnership with the National GeographicChannel, Malaysia Airlines Window to the World featured Ian Lloyd’s photo exhibitionshowcasing destination insights. The airline has also been leveraging on mediapartnerships with credible international media to engage with corporate travellers,for example CNBC: The Asian Business Leader Awards 2004, Forbes CEO Conference2004 and Bloomberg: Malaysia Forum 2004.


Malaysia Airlines was proclaimed the Advertiser of the Year 2003/2004 - receiving the KancilAward from the Association of the Accredited Advertising Agents Malaysia. This is in additionto 18 other Kancil Awards received in various categories for the creativity and quality inMalaysia Airlines advertisements produced. In addition, the airline was awarded five MC22004 Awards and named winner of the Best ASEAN Marketing & Promotional Campaign(Malaysia Airlines Travel Fair 2004) at the ASEANTA Awards. In collaboration with DiscoveryChannel, Malaysia Airlines produced vignettes that won three Gold Awards at the prestigiousWorld Promax Awards 2004, making it the single largest haul by any advertiser.

Promotions and Sponsorship

Malaysia Airlines has undertaken several high profile promotions and sponsorship activitiesworldwide to promote and further enhance the awareness of the Malaysia Airlines brand,products and services apart from positioning Malaysia as a ‘top of mind’ holiday destinationto both the front-end and consumer at large.

During the year, the Company was the official airline in a number of major sporting events,namely, the F1 Powerboat Malaysian Grand Prix, KL Grand Prix-International Horse Show, LeTour de Langkawi, Langkawi International Regatta and the Malaysia Airlines/MATTA CharityGolf. In addition, Malaysia Airlines also sponsored outstanding sports personalities such asthe England/Wales Cricket Team, thus associating the brand name with excellence.


Malaysia Airlines also created its brand awareness through the performing arts andentertainment-based sponsorship (Saturday Night Fever the Musical Malaysia Tour inKuala Lumpur; Rainforest Music Festival; the Phantom of the Opera in South Africa,Shanghai and Seoul; Cirque de Soleil in Sydney and Brisbane; Malaysian PhilharmonicOrchestra Tour of Australia; The Sound of Music in Japan and Kuala Lumpur; Force ofNature concert in Kuala Lumpur; and Sleeping Beauty on Ice in Singapore and London).As the official airline and the presenting sponsor for these events, the alliance havestrengthened the airline’s association with fine lifestyle.

For its second year, Malaysia Airlines received great exposure and brand presencefrom its sponsorship of the Explorace 2 - a highly-rated programme that attracted anincreased audience level nationwide.

Malaysia Airlines has also been actively promoting Malaysia through joint promotionswith Tourism Malaysia in international travel fairs, trade exhibitions, road shows, foodand cultural events and sales missions such as Malaysia Showcase in conjunction withthe Malaysia prime minister’s visit to Beijing; the Sales Mission to China and Australia;World Travel Market (WTM) 2004 in London; and Vakantierburs 2005 in Amsterdam.Another major joint effort was MEGA FAM, a programme to bring agents, press andmedia people, as well as corporate travel representatives to Malaysia to promote ourcountry as a tourist destination. A total of 16 such events were organized during thefinancial year involving 2,676 agents, 1,739 media and 451 corporate travelrepresentatives.




Malaysia Airlines was also the official airline for 63 major meetings, conferences andexhibitions during the financial year under review. In addition to the media exposureand publicity returns to Malaysia Airlines from the MICE (Meetings, Incentives,Conventions, Exhibitions) market, these sponsorships provided Malaysia Airlines witha platform for corporate hospitality programmes to strengthen customer ownershipand loyalty amongst Enrich members and corporate clients.

The Company’s participation in international exhibitions has helped to promote theairline’s presence worldwide. Last year Malaysia Airlines participated in at least sevenexhibitions, among them the MATTA International Travel Fair 2004; China InternationalTravel Mart 2004 in Shanghai; ASEAN Tourism Forum 2005 in Langkawi; InternationalTourismus Bourse (ITB) in Berlin; and the World Expo Ai-chi in Japan.


A commitment to excel


OFFERING PASSENGERS BETTER PRODUCTS

New Product Initiatives in Ticketing Offices, Lounges and Airports

During the year under review, new ticketing offices were acquired and developed inPenang, Putrajaya and at the main terminal building at KLIA. Ticketing offices at Miri,Bintulu and Sibu were refurbished.

To enhance the front-end service level at KLIA, the washroom facilities for the GoldenLounges were upgraded and Special Check-in Facilities for the First/Business andPlatinum Club passengers were created.

In anticipation of the arrival of the new A-380 aircraft, the tender for the constructionof the A-380 hangar/workshop facilities at KLIA were called. Construction work isexpected to commence soon.

To cater for the expansion of the Advanced Cargo Centre at KLIA, logistics consultantswere appointed to assist in developing the expansion programme.


FLYING SAFELY, SECURELY AND RELIABLY

Safety and Security

At Malaysia Airlines, our motto is “Safety Is No Accident”. Managing safety and itsrelated risks are core responsibilities with any airline. Safety is positioned as one of ourkey business strategies. The establishment of a Board Safety and Security Committee(BSSC), and a Corporate Safety and Security Department (CSSD) reflect Malaysia Airlines’strong commitment at ensuring customer confidence in air travel and transport service.Both the BSSC and the CSSD apply the Safety Enhancement Action Plan (SEAP) tomonitor safety and security compliance in accordance with industry and regulatoryrequirements for the airline as well as its contracted service providers.

The ‘one cabin baggage policy’ was implemented to ensure passenger safety in thecabin. The passenger’s baggage and carry-on luggage screening has been tightened aswell. The checking of passenger’s identity for domestic flights has also been carriedout to eliminate security breaches.

An ongoing effort to prevent improperly documented passengers from travelling viaMalaysia Airlines is vigorously undertaken. As a result of our vigilance, a total of 651joining and connecting passengers were denied boarding in KLIA. Approximately 80per cent of the cases were due to forged documents.

The Company’s security programme has been reviewed and amended to meet or exceedthe requirements of International Civil Aviation Organisation (ICAO), the Departmentof Civil Aviation (DCA) and the IATA Standards and Recommended Practices (ISARPs).A Joint Security Programme requested by the Department of Transport and RegionalServices (DOTARS), Australia, in meeting the requirements of the Australian AviationTransport Security Regulations 2005 for all airlines operating into Australia, is beingreviewed. Compliance to the European Union Security Programme is in progress usinga standard European template.

A statement of pride



During the year, Malaysia Airlines also conducted regular fire drills, ground safetycampaigns, first-aid training, and apron driver training for its employees.

The intelligence sharing and close cooperation with local and international authoritiesare ongoing to ensure that threats are assessed and countered. Passenger profilingthrough a No Fly List (NFL) and document checks are ongoing. Similarly, cargooperations with emphasis on ‘known shipper’ regime and requirement of the USATransportation Security Administration (TSA) are complied with.

During the year under review, all TSA issued Emergency Amendments were compliedwith, the latest being the ban on all lighters (Prohibited Item List). This regulationtook effect on 14 April 2005.

A challenge to embrace



The Company embarked on the IATA Operational Safety Audit (IOSA), one of the keyinitiatives outlined in SEAP. The programme was launched on 7 February 2005 toenhance on safety management, improve processes and procedures, and instill a safetyculture company wide. The audit scope covers eight functional and operational areas,namely, corporate organisation and management, flight operations, engineering andmaintenance, operational control and despatch, cabin operations, ground handling,cargo (dangerous goods) and operational security.

The IOSA is a continuous programme requiring biennial audits and is conducted throughan IATA accredited organisation.



Ground Handling Management

Several initiatives to improve operational efficiency are in the final stages ofimplementation, including the review of aircraft process and documentation. Theseinitiatives will improve capture of flight and service information for billing purposesand will thus, automatically increase revenue collection. The contract managementsystem is expected to cut over in the first quarter of 2005/06, and will facilitatemanagement of the growing number of ground handling contracts throughout theMalaysia Airlines network.

The Company continued its aggressive review and evaluation of the fast-changingground handling market at line stations. Whilst not sacrificing service quality,agreements were reviewed for a more efficient cost structure, resulting in an estimatedreduction in annual ground handling and airport rates of RM8.87 million, mainly fromAustralia and China.

To enhance operational efficiency, Service Level Agreements (SLA) have been executedin more than 72 per cent of line stations and now forms an integral part of the groundhandling agreement. Where possible and where cost effective, penalty clauses forservice failures were implemented. A structured monitoring and tracking process ofthe SLA will soon be introduced.

During the year, Malaysia Airlines undertook a service upgrade of front-end check-incounters at five selected stations.

A promise to be better



Engineering and Maintenance

During the year under review, the revenue generated from Engineering andMaintenance (E&M) activities was RM92 million compared to RM59 million recordedin the previous year reflecting an increase of 56 per cent. The increase was the resultof different marketing strategies used and the ability to sell its excess capacity tomaximize revenue.

The main contributor was from third-party Airframe and Component services whichregistered RM42 million, an increase of 163 per cent over the RM 16 million generatedin the previous year. The third-party customers included the Royal Bank of Scotland,Air Mandala, Air Atlanta, China United Airlines and others.

Total E&M expenditure during the year was RM1.13 billion, reflecting a 4.6 per centincrease over the previous year. However in comparison to budget, the amount was12 per cent or RM0.15 billion lower.



ENABLING THE BUSINESS

Information Technology

Malaysia Airlines’ IT strategy focused on building an IT delivery and technologycapability to enable business performance improvement through the effectiveapplication of IT for revenue improvement through enhanced customer and channelmanagement. The Company also supported safe, efficient operations through theimplementation of world-class logistics and flight management technologies. Thisimproved employee productivity and business support capabilities through thedevelopment of integrated business systems solutions.

To achieve this, Malaysia Airlines entered into a long-term operations managementpartnership with IBM to move to a world class operating proficiency. The operationsdelivery and support calibre have improved resulting in significantly increased servicelevels, reduced risks in mission critical systems, reduced project delivery time and on-site support functions and consolidation of the IT environment.

A new IT helpdesk facility, complete with an advanced phone system, interactive voiceresponse and real-time monitoring functions, has resulted in improved productivity atthe workplace through faster response and problem resolution time.

The Company has also conducted a strategic procurement process that has driven costreduction in areas of telecommunications and hardware leading to annual savings of30 per cent on a spend of RM41 million annually.

Upgrading the IT Infrastructure

During the year, Malaysia Airlines adopted a focused IT Infrastructure upgrade (ITIPhase 2) to improve the business productivity in the areas of desktop, network andinternet connectivity across 256 sites globally.

Improving Efficiency and Productivity

The Support Services Improvement Programme was initiated by the Board to reviewand streamline the support service functions of the airline starting with finance, HRand IT.

The programme’s main objective is to allow senior management to increase their focuson the strategic issues of the Company while delivering effective and efficientoperational services. This is a critical component in the ongoing plan to drive costreduction and improve the efficiency of the administrative functions in the airline.

The concept, strategy and approach were approved by the Board in January 2005 forimplementation. Implementation and resource planning commenced from February2005.

On 1 July 2005, Stage 1 of the operational functions of HR, Finance and IT weresuccessfully streamlined into a new business unit called Support Services. The currentfocus is to drive a systematic programme to improve its efficiency, productivity andservice delivery capabilities to the operating units. Other support services functions inMalaysia Airlines will also be reviewed and consolidated into the unit progressively.



MANAGING PROPERTY AND PURCHASES

Project Management and Assurance

MAS Hotels & Boutiques Sdn Bhd, a wholly-owned subsidiary of Malaysia Airlines ownsthe Four Seasons Resort Langkawi. The resort commenced operations during the monthof February 2005 which saw a promising “soft-opening”. The Resort is now fullyoperational.

Centralised Procurement

Malaysia Airlines continues to engage the various purchasing units across the Company,consolidating common purchases to ensure that leverage is made on the Company’spurchasing volume to obtain the best value for money in procurement. During theyear under review, a total of RM33.1 million in negotiated savings and RM28.8 millionin cost savings were recorded from the contracts awarded by Malaysia Airlines valuedat RM525.5 million.

Business Process Improvement Initiatives

Malaysia Airlines is endeavouring to automate the Company’s procurement systems.The Company aims to install on-line workflow management systems in which the real-time on-line bidding process can be carried out resulting in greater emphasis ontransparency of the procurement process.



INVESTING IN HUMAN CAPITAL

Human Resource Management

As at 31 March 2005, the staff strength of the Group stood at 22,513 comprising 238managerial staff, 1,338 executive staff, 1,247 technical crew, 5,449 cabin crew, 2,273technical staff and 11,968 support staff.

Human Capital management remained the central focus of activities based on MalaysiaAirlines’ new routes, fleet expansion and replacement programmes for the year 2007and 2008. The management of human capital is an ongoing challenge due to similarfleet expansion programmes by other airlines, thus, creating an exceptional increasein demand for specific-skills sets.

The Company has embarked on an aggressive recruitment strategy to ensure manpowerrequirements for the Company’s fleet expansion and replacement programme aremet. The focus of recruitment has been in industry-specific skills, which include pilots,engineers, cadet pilots, trainee aircraft engineers and cabin crew.

As a result of current acute shortage of industry-specific skills such as pilots andengineers, Malaysia Airlines has had to resort to engaging the expertise and experienceof expatriates to address the immediate business needs.



The Company has adopted a proactive stance in its union management by havingtripartite, regional and joint consultative council meetings. The year saw thecommencement of negotiations of new collective agreements and memoranda ofunderstanding with the various unions and associations, namely, Malaysian AirlineSystem Managerial Staff Association (MASMA), Malaysian Airline System ExecutiveStaff Association (MESA), Malaysian Airline System Employees’ Union PeninsularMalaysia (MASEU) and the Malaysian Airline Pilots’ Association (MAPA).

Human Resource Development

Human capital development is a top priority in Malaysia Airlines’ strategy to ensureavailability of competent manpower to support the Company’s expansion initiatives.The immediate focus in training is the induction of the A380 into operation. This is toensure that there are adequate skill sets when the A380 comes into operation. Theother generic staff development programmes are in the areas of both technical andsoft skills that are conducted at Malaysia Airlines Academy and by various externaltraining providers.

In our ongoing efforts to inculcate a performance driven culture, the Company has inplace programmes comprising talks, workshops and seminars that are conductedperiodically.

A commitment to excel


BUSINESS CHALLENGES AND STRATEGIES

Cost-saving activities were implemented throughout the financial year in the wake ofof high fuel costs. The Company imposed a fuel surcharge to alleviate the burden ofspiralling costs. Efforts were also taken to improve fuel efficiency and safeguardconsumption by reviewing the Fuel Price Index that requires lesser fuel uplift,improvement to the route management. The introduction of ‘Zero Flight Time Training’for Conversion Training on simulators instead of actual aircraft enabled better fuelsavings for the Company.

The whole travel industry is experiencing a changing competitive environment. Theexpansion of Middle Eastern carriers to make Dubai International Airport the hub forthe Kangaroo traffic has sparked off the battle for market share in this highly lucrativeand huge market. The emergence of Low Cost Carriers (LCCs) in the regional marketalso signalled the change in competitive environment closer to home and this willaccelerate with more than 50 LCCs ready to be launched.

Many Asian carriers have announced significant aircraft orders. This greatly underscorestheir ambitious expansion plans from 2005 and over the next five years when deliveriesbegin. The large fleet orders by the Chinese, Indian and Middle Eastern carriers spellthe onslaught of competition that will follow with the capacity increase. Strong capacitygrowth may potentially outstrip demand in some markets. For some routes especiallyin China and India, we are seeing significant capacity injection by carriers from allregions. Hopefully orderly marketing will prevail from these outcomes.



LCCs are also in the fray with some carriers announcing significant orders as well. In2004, South East Asia had 13 new carriers. To date, there have been news of 14 newstart-ups in China, five in India and Pakistan. Full service carriers are also expandinginto the LCC business as well.

Cross-border joint ventures are becoming the flavour of the day and will be heavilyexploited by LCCs aiming to expand their network reach in search of more revenueand better yields. Joint-ventures in China and India are drawing the most attention.Last year, we saw some interesting joint ventures that have shaped up.

The region’s aeropolitical landscape has been undergoing rapid changes. The year2004 has seen exciting turning points in the aeropolitical climate with liberalisation inseveral previously highly regulated regimes such as India and China. There were moreopen-sky accords and cross-border deals. Multilateralism continues to gain momentum.

Given the scenario, Malaysia Airlines will continue to capitalise on these opportunitiesfor its growth.


MOVING FORWARD

We have confronted the most difficult times in the airline industry - terrorism, disease,war, and fuel price escalations. And we at Malaysia Airlines have come out stronger.

Growth

The airline industry in Asia, according to IATA, can look forward to a six per cent growthfor 2005. The Pacific Area Travel Association (PATA) has forecast an even higher visitorarrival in Asia Pacific averaging 10.6 per cent per annum until 2007. Given this confidentoutlook and the positive growth forecast of the Malaysian economy by our Government,Malaysia Airlines is therefore continuing to tap on the opportunities.

Metamorphosis

The Company’s business model is continuously being reshaped to redefine goals,operations, significantly reduce costs and expand profit margins from our variousbusiness activities. We are continuing to innovate and expand business growthstrategies, and deliver a culture of quality and excellence. The transformation is alsocalling for a more focused, efficient and capable organisation that is to deliver morevalue in our brand promise to our customers and shareholders. For this I am proudthat Malaysia Airlines employees are doing an excellent job. And I am appreciative ofall their grit and determination, efforts and endeavours.

Reengineering at Malaysia Airlines means the establishment of priorities, identificationof critical implementation paths, and the review of the right size for manpower levels.The right people with the right skills have been put in place. Focus on Company resourcesin areas of growth and the identification of cost reduction through rationalisation arein gear.

The rapid changes and the need to protect and increase market share continues toforce airlines to look at re-modelling their distribution to become more competitiveand relevant to the customers. The movement towards a more liberal market alsodemands for greater transparency by the customers in terms of pricing information.On-line distribution is a catalyst of change on how airlines manage their revenue andyields.

Our distribution focus for 2005 would be in three areas, namely, transforming the callcentre to a full customer contact centre, growth phase of internet booking facility(IBF) on-line business, and the implementation of e-ticketing.



Internet Booking Facility and Call Centre

The Company rolled out the Malaysia Airlines Internet Booking Facility (IBF) in Apriland August 2004 for domestic and international sectors respectively. The responsefrom the public has been overwhelming. Our on-line booking and revenue have beentrending upwards recording a total sales of RM37 million. Greater focus would bechannelled to create and design on-line fares and products to attract the “newgeneration customers” who are constantly searching for travel deals especially incountries with high internet penetration. Increasing on-line sales is one of our toppriorities. In Malaysia, the dismantling of the Market Development Programme (MDP)last year, spurred by liberalisation, has provided Malaysia Airlines the opportunity toextend customer reach as well as cost savings against rising computer reservation fees.

In 2005, IBF will be further enhanced with more features and capabilities. Country siterollout plan for the various regions is progressing in phases that started with the UK inMarch 2005 and Australia/New Zealand in June 2005. Other rollouts will continue till2006.

The Malaysia Airlines Call Centre is the other major focus for enhancement. Thetransformation of the call centre into a full contact centre will result in substantialbenefits.



Airbus A380, Technical Superiority and Safety Enhancements

The new financial year promises an even more exciting period as Malaysia Airlinesgears up for the arrival of the Airbus A380 by the year 2007. Technical superiority andsafety enhancement features continue to be the main agenda as Malaysia Airlinesplans to install the Electronic Flight Bag (EFB) equipment together with the RunwayAwareness and Advisory System (RAAS) on-board all other aircraft throughout theyear. The RAAS is an oral advisory function that provides the technical crew withsupplemental information of aircraft position relative to runways during surfaceoperations and on final approach.

The Company has embarked on several high technical solutions to enhance operationalperformance. One of these is through the Flight Planning/Flight Following Systemthat prepares and monitors a flight for the best possible (least cost) route, avoidingbad weather conditions, closed airspace, contingency plans during crisis and complyingwith all safety procedures, as well as regulatory bodies and air traffic managementrequirements. Malaysia Airlines would be the first airline in Asia to have this livemonitoring of all its flights at the call of a button.

With the IOSA conducted successfully in July 2005, the integrity of safety and operationsat Malaysia Airlines is elevated, and the need for code-share audits will be reduced.



Electronic Ticketing

IATA regulation requires all airlines to have full electronic ticketing capability by 2007.The e-ticketing project will commence in the first quarter of 2005 with the first rolloutfor the domestic sector by the first quarter of 2006 and subsequently in two otherphases to the various regions to meet the IATA 2007 deadline.

In Going Beyond Expectations, Malaysia Airlines aims to provide An ExperienceRedefined in as many ways as possible.

Dato’ Ahmad Fuaad bin Mohd DahalanManaging Director18 July 2005

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