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

MANAGING DIRECTOR’S REPORT AND REVIEW

Korea

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

Taiwan

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

China and

The services to Beijing were increased from 5x weekly to daily in Northern Summer 2004 and those to were raised to double daily. The Kuala Lumpur-Xiamen return flights were increased from 2x to 3x weekly while the service through Kota Kinabalu to Xiamen was withdrawn.

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

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

2x weekly Kota Kinabalu-Shanghai effective 28 March 2004 2x weekly Kuala Lumpur-Chengdu effective 4 September 2004 3x weekly Kuala Lumpur- effective 15 January 2005 2x weekly Kuala Lumpur-Xi’an effective 15 March 2005

Middle East

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

For Dubai, its frequencies were increased from 7x to 8x weekly through the additional Kuala Lumpur-Dubai-Beirut service in Northern Summer 2004. However, with the rerouting of Newark services through Stockholm instead of Dubai, its total frequency was reduced to 5x weekly in Northern Winter 2004. Malaysian Airline System Berhad Annual Report 04/05 41 (10601-W)

Indian Sub-Continent/

This region saw the introduction of new 3x weekly services each to Ahmedabad effective 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 Winter 2004.

In addition, weekly frequencies and capacities were added to existing destinations such as , Hyderabad, and .

Regional services

To provide the long haul feed and connectivity, additional frequencies were injected into 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 frequency grew from 9x to 14x weekly and services to increased from 5x to 7x weekly.

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

However, due to low demand, the services to Balikpapan and Manado were withdrawn effective 31 October and 2 December 2004 respectively while the operations into Pontianak from Kuching were reduced from 7x to 5x weekly. 42 Malaysian Airline System Berhad Annual Report 04/05 (10601-W)

MANAGING DIRECTOR’S REPORT AND REVIEW

Alliance Strategy and Code-Share Developments

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

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

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

In addition, Malaysia Airlines and Singapore Airlines also started the code-share on the -Singapore return sector on a bilateral basis, in which both carriers are operating. The above code-share arrangements enabled the carriers to tailor capacity on 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 better spread of services on the code-share sectors.

Malaysia Airlines has also code-share arrangements with , and Air as part of the Company’s preparation towards the eventual ASEAN open-skies.

PASSENGER TRAFFIC PERFORMANCE

During the year under review, Malaysia Airlines carried 14.1 per cent more passengers system-wide or 17.5 million passengers, of which 50 per cent were from the domestic services. In terms of capacity, the domestic and international network grew by 4 per cent 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 seat factor grew by 1.4 per cent points to 69 per cent signalling the market recovery from the previous turbulent years. Malaysian Airline System Berhad Annual Report 04/05 43 (10601-W) 44 Malaysian Airline System Berhad Annual Report 04/05 (10601-W)

MANAGING DIRECTOR’S REPORT AND REVIEW

INTERNATIONAL PASSENGER OPERATIONS

During the year, revenue passenger km (RPK) growth at Malaysia Airlines exceeded available seat km (ASK) growth within the international operations. This contributed to the improvements in passenger seat factor and yield, which improved by 1.6 points and 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 the corresponding period last year.

Indeed, the highest RPK growth was recorded in while all other international regions also recorded positive RPK growth.

The utilisation of wide-bodied and narrow-bodied aircraft improved during the year while the utilisation of the 747-400 and -200 aircraft was one of the highest within the industry. Malaysian Airline System Berhad Annual Report 04/05 45 (10601-W)

MANAGING DIRECTOR’S REPORT AND REVIEW

FLEET AND PRODUCT DEVELOPMENTS AT MALAYSIA AIRLINES

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

In late 2004, Malaysia Airlines took delivery of two new Boeing 777-200’s. Both aircraft were 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 overall customer service delivery standards for the benefit of its customers. 46 Malaysian Airline System Berhad Annual Report 04/05 (10601-W)

MANAGING DIRECTOR’S REPORT AND REVIEW

MOVING THE WORLD’S CARGO

A Better Performance

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

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

Despite the increasing fuel prices, MASkargo maintained an encouraging pre-tax profit of 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 , the Advanced Cargo Centre (ACC) in KLIA, cargo volume increased by 12 per cent to 639,764 tonnes. Transshipment increased by 8.9 per cent to 583,015 tonnes, which is in line with our goal of becoming a major transshipment hub in the region. Malaysian Airline System Berhad Annual Report 04/05 47 (10601-W)

A challenge to embrace

Cargo operations saw a more brisk performance compared to passenger with overall belly load tonne km carriage up by 11 per cent while the freighter services had an increase 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 million while the capacity injected escalated by 31 per cent to 4,434 million capacity tonne km resulting 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 532.2 million kilograms while yield improved by one per cent to 76.3 sen.

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

MASkargo will take delivery of two new Boeing 747-400 freighters in 2006, which offers improved uplift capacity and operational performance. In addition, MASkargo will expand the size of its cargo warehouse capacity in KLIA by 2007 as the existing KLIA warehouse utilisation rate exceeds 90 per cent. 48 Malaysian Airline System Berhad Annual Report 04/05 (10601-W) Malaysian Airline System Berhad Annual Report 04/05 49 (10601-W)

MANAGING DIRECTOR’S REPORT AND REVIEW

In Cargo Operations, implementation of quality-related projects such as Quality Control Circle (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 reduce cargo claims to less than RM1 million for the financial year, the best performance thus far in terms of payment against claims.

I-port, the innovative sea-air transshipment service, added another milestone when MASkargo flew 200 tonnes of theatre equipment from Kuala Lumpur to Shanghai for the “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 the opening of its facility in January 2005. The Hangzhou Cargo Centre (HCC) was jointly opened by the deputy governor of Zhejiang Province and the Malaysian deputy minister of transport. The HCC allowed MASkargo to open the first ever Priority Business Centre in China. Being the first foreign airline to establish a cargo hub in Hangzhou, MASkargo has given the cargo wing of Malaysia Airlines a lead to capture the shipment of China’s exports. Located in the Hangzhou Xiaoshan International Airport, it occupies an area of 50,000 sq metres. The cargo centre has the facilities to handle up to 110,000 tons of cargo per year and is operating a new 2,973 sq metre logistic warehouse located within the depot. 50 Malaysian Airline System Berhad Annual Report 04/05 (10601-W)

MANAGING DIRECTOR’S REPORT AND REVIEW

Far East to European Market

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

Special Cargo

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

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

MASkargo Products and Services

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

In reliving its commitment to embark on a more advanced technology system, MASkargo adopted a global e-commerce programme as the main thrust of its strategic initiative to enhance the level of its service offering to customers worldwide. MASkargo launched three 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 we became the first corporate company to transact electronically via the Financial Processing Exchange (FPX) gateway of Bank Negara.

MASkargo achieved another major milestone in its e-commerce programme when we became the first corporate company to transact electronically via the Financial Processing Exchange (FPX) gateway of Bank Negara. Malaysian Airline System Berhad Annual Report 04/05 51 (10601-W) 52 Malaysian Airline System Berhad Annual Report 04/05 (10601-W)

MANAGING DIRECTOR’S REPORT AND REVIEW

BRANDING COMMUNICATIONS, ADVERTISING AND MARKETING

Marketing Support

With the challenging air travel market environment, Malaysia Airlines is seeing the emergence of ancillary businesses as supplementary revenue streams. The trend is visible amongst 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 Holidays is also targeting high-end customers. To cater to market demand, some products were also re-defined and central marketing agencies were appointed in key international markets to enhance distribution. These strategies proved to be successful with Golden Holidays achieving double-digit growth. Malaysian Airline System Berhad Annual Report 04/05 53 (10601-W)

MANAGING DIRECTOR’S REPORT AND REVIEW

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

Some of the Enrich enhancements that will come on-stream soon are a KLIA Enrich service 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 under review, charter business contributed approximately RM25.5 million in revenue and the Haj operations approximately RM89.9 million. Malaysia Airlines is evaluating the feasibility of re-modelling the charter business to capture a larger share of the Haj and Umrah business. Charters would continue to be used as a first-mover marketing tool to penetrate and develop potential new on-line markets for Malaysia Airlines such 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 team. 54 Malaysian Airline System Berhad Annual Report 04/05 (10601-W)

Consistent Branding

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

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’ was produced. In addition, a comprehensive user-friendly guidebook, Branding Guidelines - Design Application was also developed to effectively manage the airline’s identity system-wide besides creating a consistent and impactful visual communication.

Advertising and Promotions

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

The World Park–Network campaign kick started the 2004/05 campaign of which the objective was to reinforce the depth and breadth of the airline’s network. To launch and support the Internet Booking Facility, a series of four TV commercials were produced with ‘Save Time, Book On-line’ being the underlying concept. In conjunction with the first sneak preview of the A380, a TV commercial ‘Dream’ was produced. To consolidate the campaign, the first ever 16-page poster-sized advertisement was developed, running in the TIME magazine. Malaysian Airline System Berhad Annual Report 04/05 55 (10601-W) 56 Malaysian Airline System Berhad Annual Report 04/05 (10601-W)

An Experience Redefined

The final campaign undertaken which spilled over to the next financial year was the New Experience – An Experience Redefined. The campaign was executed to create awareness and to highlight the newly retrofitted cabin upgrade and new service delivery. To ensure maximum impact, a roadblock approach was adopted in most publications. In conjunction with the launch of the New Experience campaign, two of the B747-400’s were painted with a thematic design, that of the Hibiscus flower to represent the new cabin.

In addition to the conventional media buy, Malaysia Airlines explored media innovations which among others included the 2004 Athens Olympics - an ambush media platform to closely associate the airline with the spirit of the Olympics. Malaysia Airlines World Destination on Discovery Travel & Living – that communicated the airline’s network proposition by creating a programming block ownership within a credible travel environment was also another programme. In partnership with the National Geographic Channel, Malaysia Airlines Window to the World featured Ian Lloyd’s photo exhibition showcasing destination insights. The airline has also been leveraging on media partnerships with credible international media to engage with corporate travellers, for example CNBC: The Asian Business Leader Awards 2004, Forbes CEO Conference 2004 and Bloomberg: Malaysia Forum 2004. Malaysian Airline System Berhad Annual Report 04/05 57 (10601-W)

Malaysia Airlines was proclaimed the Advertiser of the Year 2003/2004 - receiving the Kancil Award from the Association of the Accredited Advertising Agents Malaysia. This is in addition to 18 other Kancil Awards received in various categories for the creativity and quality in Malaysia Airlines advertisements produced. In addition, the airline was awarded five MC2 2004 Awards and named winner of the Best ASEAN Marketing & Promotional Campaign (Malaysia Airlines Travel Fair 2004) at the ASEANTA Awards. In collaboration with Discovery Channel, Malaysia Airlines produced vignettes that won three Gold Awards at the prestigious World 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 activities worldwide 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 destination to 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, Le Tour de Langkawi, Langkawi International Regatta and the Malaysia Airlines/MATTA Charity Golf. In addition, Malaysia Airlines also sponsored outstanding sports personalities such as the England/Wales Cricket Team, thus associating the brand name with excellence. 58 Malaysian Airline System Berhad Annual Report 04/05 (10601-W)

MANAGING DIRECTOR’S REPORT AND REVIEW

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

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

Malaysia Airlines has also been actively promoting Malaysia through joint promotions with Tourism Malaysia in international travel fairs, trade exhibitions, road shows, food and cultural events and sales missions such as Malaysia Showcase in conjunction with the 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 and media people, as well as corporate travel representatives to Malaysia to promote our country as a tourist destination. A total of 16 such events were organized during the financial year involving 2,676 agents, 1,739 media and 451 corporate travel representatives. Malaysian Airline System Berhad Annual Report 04/05 59 (10601-W)

MANAGING DIRECTOR’S REPORT AND REVIEW

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

The Company’s participation in international exhibitions has helped to promote the airline’s presence worldwide. Last year Malaysia Airlines participated in at least seven exhibitions, among them the MATTA International Travel Fair 2004; China International Travel Mart 2004 in Shanghai; ASEAN Tourism Forum 2005 in Langkawi; International Tourismus Bourse (ITB) in Berlin; and the World Expo Ai-chi in Japan. 60 Malaysian Airline System Berhad Annual Report 04/05 (10601-W)

MANAGING DIRECTOR’S REPORT AND REVIEW

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 in Penang, Putrajaya and at the main terminal building at KLIA. Ticketing offices at , and were refurbished.

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

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

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

A commitment to excel Malaysian Airline System Berhad Annual Report 04/05 61 (10601-W)

MANAGING DIRECTOR’S REPORT AND REVIEW 62 Malaysian Airline System Berhad Annual Report 04/05 (10601-W)

A statement of pride MANAGING DIRECTOR’S REPORT AND REVIEW

FLYING SAFELY, SECURELY AND RELIABLY

Safety and Security

At Malaysia Airlines, our motto is “Safety Is No Accident”. Managing safety and its related risks are core responsibilities with any airline. Safety is positioned as one of our key 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) to monitor safety and security compliance in accordance with industry and regulatory requirements for the airline as well as its contracted service providers.

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

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

The Company’s security programme has been reviewed and amended to meet or exceed the requirements of International Civil Aviation Organisation (ICAO), the Department of Civil Aviation (DCA) and the IATA Standards and Recommended Practices (ISARPs). A Joint Security Programme requested by the Department of Transport and Regional Services (DOTARS), Australia, in meeting the requirements of the Australian Aviation Transport Security Regulations 2005 for all airlines operating into Australia, is being reviewed. Compliance to the European Union Security Programme is in progress using a standard European template. Malaysian Airline System Berhad Annual Report 04/05 63 (10601-W) 64 Malaysian Airline System Berhad Annual Report 04/05 (10601-W)

MANAGING DIRECTOR’S REPORT AND REVIEW

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

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

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

A challenge to embrace Malaysian Airline System Berhad Annual Report 04/05 65 (10601-W)

MANAGING DIRECTOR’S REPORT AND REVIEW

The Company embarked on the IATA Operational Safety Audit (IOSA), one of the key initiatives outlined in SEAP. The programme was launched on 7 February 2005 to enhance on safety management, improve processes and procedures, and instill a safety culture company wide. The audit scope covers eight functional and operational areas, namely, corporate organisation and management, flight operations, engineering and maintenance, 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 through an IATA accredited organisation. 66 Malaysian Airline System Berhad Annual Report 04/05 (10601-W) Malaysian Airline System Berhad Annual Report 04/05 67 (10601-W)

MANAGING DIRECTOR’S REPORT AND REVIEW

Ground Handling Management

Several initiatives to improve operational efficiency are in the final stages of implementation, including the review of aircraft process and documentation. These initiatives will improve capture of flight and service information for billing purposes and will thus, automatically increase revenue collection. The contract management system is expected to cut over in the first quarter of 2005/06, and will facilitate management of the growing number of ground handling contracts throughout the Malaysia Airlines network.

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

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

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

A promise to be better 68 Malaysian Airline System Berhad Annual Report 04/05 (10601-W)

MANAGING DIRECTOR’S REPORT AND REVIEW

Engineering and Maintenance

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

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

Total E&M expenditure during the year was RM1.13 billion, reflecting a 4.6 per cent increase over the previous year. However in comparison to budget, the amount was 12 per cent or RM0.15 billion lower. Malaysian Airline System Berhad Annual Report 04/05 69 (10601-W) 70 Malaysian Airline System Berhad Annual Report 04/05 (10601-W)

MANAGING DIRECTOR’S REPORT AND REVIEW

ENABLING THE BUSINESS

Information Technology

Malaysia Airlines’ IT strategy focused on building an IT delivery and technology capability to enable business performance improvement through the effective application of IT for revenue improvement through enhanced customer and channel management. The Company also supported safe, efficient operations through the implementation of world-class logistics and flight management technologies. This improved employee productivity and business support capabilities through the development of integrated business systems solutions.

To achieve this, Malaysia Airlines entered into a long-term operations management partnership with IBM to move to a world class operating proficiency. The operations delivery and support calibre have improved resulting in significantly increased service levels, 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 voice response and real-time monitoring functions, has resulted in improved productivity at the workplace through faster response and problem resolution time.

The Company has also conducted a strategic procurement process that has driven cost reduction in areas of telecommunications and hardware leading to annual savings of 30 per cent on a spend of RM41 million annually.

Upgrading the IT Infrastructure

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

Improving Efficiency and Productivity

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

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

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

On 1 July 2005, Stage 1 of the operational functions of HR, Finance and IT were successfully streamlined into a new business unit called Support Services. The current focus is to drive a systematic programme to improve its efficiency, productivity and service delivery capabilities to the operating units. Other support services functions in Malaysia Airlines will also be reviewed and consolidated into the unit progressively. Malaysian Airline System Berhad Annual Report 04/05 71 (10601-W)

MANAGING DIRECTOR’S REPORT AND REVIEW

MANAGING PROPERTY AND PURCHASES

Project Management and Assurance

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

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’s purchasing volume to obtain the best value for money in procurement. During the year under review, a total of RM33.1 million in negotiated savings and RM28.8 million in cost savings were recorded from the contracts awarded by Malaysia Airlines valued at 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 on transparency of the procurement process. 72 Malaysian Airline System Berhad Annual Report 04/05 (10601-W)

MANAGING DIRECTOR’S REPORT AND REVIEW

INVESTING IN HUMAN CAPITAL

Human Resource Management

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

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

The Company has embarked on an aggressive recruitment strategy to ensure manpower requirements for the Company’s fleet expansion and replacement programme are met. 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 and engineers, Malaysia Airlines has had to resort to engaging the expertise and experience of expatriates to address the immediate business needs. Malaysian Airline System Berhad Annual Report 04/05 73 (10601-W)

A commitment to excel

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

Human Resource Development

Human capital development is a top priority in Malaysia Airlines’ strategy to ensure availability 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 to ensure that there are adequate skill sets when the A380 comes into operation. The other generic staff development programmes are in the areas of both technical and soft skills that are conducted at Malaysia Airlines Academy and by various external training providers.

In our ongoing efforts to inculcate a performance driven culture, the Company has in place programmes comprising talks, workshops and seminars that are conducted periodically. 74 Malaysian Airline System Berhad Annual Report 04/05 (10601-W)

MANAGING DIRECTOR’S REPORT AND REVIEW

BUSINESS CHALLENGES AND STRATEGIES

Cost-saving activities were implemented throughout the financial year in the wake of of high fuel costs. The Company imposed a fuel surcharge to alleviate the burden of spiralling costs. Efforts were also taken to improve fuel efficiency and safeguard consumption 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 fuel savings for the Company.

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

Many Asian carriers have announced significant aircraft orders. This greatly underscores their ambitious expansion plans from 2005 and over the next five years when deliveries begin. The large fleet orders by the Chinese, Indian and Middle Eastern carriers spell the onslaught of competition that will follow with the capacity increase. Strong capacity growth may potentially outstrip demand in some markets. For some routes especially in China and , we are seeing significant capacity injection by carriers from all regions. Hopefully orderly marketing will prevail from these outcomes. Malaysian Airline System Berhad Annual Report 04/05 75 (10601-W)

LCCs are also in the fray with some carriers announcing significant orders as well. In 2004, South East Asia had 13 new carriers. To date, there have been news of 14 new start-ups in China, five in India and Pakistan. Full service carriers are also expanding into the LCC business as well.

Cross-border joint ventures are becoming the flavour of the day and will be heavily exploited by LCCs aiming to expand their network reach in search of more revenue and 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 year 2004 has seen exciting turning points in the aeropolitical climate with liberalisation in several previously highly regulated regimes such as India and China. There were more open-sky accords and cross-border deals. Multilateralism continues to gain momentum.

Given the scenario, Malaysia Airlines will continue to capitalise on these opportunities for its growth. 76 Malaysian Airline System Berhad Annual Report 04/05 (10601-W)

MANAGING DIRECTOR’S REPORT AND REVIEW

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 growth for 2005. The Pacific Area Travel Association (PATA) has forecast an even higher visitor arrival in Asia Pacific averaging 10.6 per cent per annum until 2007. Given this confident outlook 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 various business activities. We are continuing to innovate and expand business growth strategies, and deliver a culture of quality and excellence. The transformation is also calling for a more focused, efficient and capable organisation that is to deliver more value in our brand promise to our customers and shareholders. For this I am proud that Malaysia Airlines employees are doing an excellent job. And I am appreciative of all their grit and determination, efforts and endeavours.

Reengineering at Malaysia Airlines means the establishment of priorities, identification of 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 resources in areas of growth and the identification of cost reduction through rationalisation are in gear.

The rapid changes and the need to protect and increase market share continues to force airlines to look at re-modelling their distribution to become more competitive and relevant to the customers. The movement towards a more liberal market also demands 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 and yields.

Our distribution focus for 2005 would be in three areas, namely, transforming the call centre to a full customer contact centre, growth phase of internet booking facility (IBF) on-line business, and the implementation of e-ticketing. Malaysian Airline System Berhad Annual Report 04/05 77 (10601-W)

MANAGING DIRECTOR’S REPORT AND REVIEW

Internet Booking Facility and Call Centre

The Company rolled out the Malaysia Airlines Internet Booking Facility (IBF) in April and August 2004 for domestic and international sectors respectively. The response from the public has been overwhelming. Our on-line booking and revenue have been trending upwards recording a total sales of RM37 million. Greater focus would be channelled to create and design on-line fares and products to attract the “new generation customers” who are constantly searching for travel deals especially in countries with high internet penetration. Increasing on-line sales is one of our top priorities. In Malaysia, the dismantling of the Market Development Programme (MDP) last year, spurred by liberalisation, has provided Malaysia Airlines the opportunity to extend 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 site rollout plan for the various regions is progressing in phases that started with the UK in March 2005 and Australia/New Zealand in June 2005. Other rollouts will continue till 2006.

The Malaysia Airlines Call Centre is the other major focus for enhancement. The transformation of the call centre into a full contact centre will result in substantial benefits. 78 Malaysian Airline System Berhad Annual Report 04/05 (10601-W)

Airbus A380, Technical Superiority and Safety Enhancements

The new financial year promises an even more exciting period as Malaysia Airlines gears up for the arrival of the by the year 2007. Technical superiority and safety enhancement features continue to be the main agenda as Malaysia Airlines plans to install the Electronic Flight Bag (EFB) equipment together with the Runway Awareness and Advisory System (RAAS) on-board all other aircraft throughout the year. The RAAS is an oral advisory function that provides the technical crew with supplemental information of aircraft position relative to runways during surface operations and on final approach.

The Company has embarked on several high technical solutions to enhance operational performance. One of these is through the Flight Planning/Flight Following System that prepares and monitors a flight for the best possible (least cost) route, avoiding bad weather conditions, closed airspace, contingency plans during crisis and complying with all safety procedures, as well as regulatory bodies and air traffic management requirements. Malaysia Airlines would be the first airline in Asia to have this live monitoring of all its flights at the call of a button.

With the IOSA conducted successfully in July 2005, the integrity of safety and operations at Malaysia Airlines is elevated, and the need for code-share audits will be reduced. Malaysian Airline System Berhad Annual Report 04/05 79 (10601-W)

MANAGING DIRECTOR’S REPORT AND REVIEW

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 rollout for the domestic sector by the first quarter of 2006 and subsequently in two other phases to the various regions to meet the IATA 2007 deadline.

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

Dato’ Ahmad Fuaad bin Mohd Dahalan Managing Director 18 July 2005