Annual Report 2005 Contents

MALAYSIAN AIRLINE SYSTEM BERHAD Annual Report 2005 contents Notice of Annual General Meeting 2-3 Chairman’s Statement 5-10 Managing Director’s Statement 11-15 Board of Directors 16-23 Board Audit Committee Report 28-33 Statement of Internal Control 34-36 Statement of Corporate Governance 37-47 Group Structure 48 Senior Management 49 Financial Report 50-124 Notice of Annual General Meeting NOTICE IS HEREBY GIVEN THAT the Thirty Fifth Annual General Meeting of Malaysian Airline System Berhad will be held at the Auditorium, 1st Floor, South Wing, MAS Academy, No. 2 Jalan SS7/13, Kelana Jaya, 47301 Petaling Jaya, Selangor Darul Ehsan on Monday, 26 June 2006 at 10.00 a.m. for the following purposes:- AGENDA As Ordinary Business 1. To receive and adopt the Report of the Directors and the Audited Financial Statements Resolution 1 for the financial period ended 31 December 2005 together with the Report of the Auditors thereon. 2. To approve the Directors’ fees for the financial period ended 31 December 2005. Resolution 2 3. To re-elect the following Directors retiring under Article 139 of the Company’s Articles of Association, and who, being eligible, offer themselves for re-election:- (i) Dato’ Dr. Mohd Munir bin Abdul Majid Resolution 3 (ii) Datuk Amar Haji Abdul Aziz bin Haji Husain Resolution 4 (iii) Keong Choon Keat Resolution 5 (iv) Martin Gilbert Barrow Resolution 6 4. To re-elect the following Directors retiring under Article 137 of the Company’s Articles 2 of Association, and who, being eligible, offer themselves for re-election:- (i) Iris Jala @ Idris Jala Resolution 7 (ii) Datuk Haji Yusoff @ Hunter bin Datuk Haji Mohamed Kasim Resolution 8 5. To re-appoint Messrs. Ernst & Young as Auditors and to authorise the Directors to fix Resolution 9 their remuneration. As Special Business 6. To consider and if thought fit to pass the following Ordinary Resolution:- Resolution 10 Authority to Allot and Issue Shares “THAT subject to the Companies Act, 1965 (the Act), the Articles of Association of the Company, approval from the Bursa Malaysia Securities Berhad and other government or regulatory bodies, where such approval is necessary, full authority be and is hereby given to the Board of Directors pursuant to Section 132D of the Act, to issue shares in the capital of the Company at any time upon such terms and conditions and for such purposes as the Directors may in their discretion deem fit, provided always that the aggregate number of shares to be issued shall not exceed 10% of the issued share capital of the Company and that such authority shall continue to be in force until the conclusion of the next Annual General Meeting of the Company.” Malaysian Airline System Berhad Annual Report 2005 (10601-W) Notice of Annual General Meeting 7. To transact any other ordinary business for which due notice has been given. Resolution 11 By Order of the Board Rizani bin Hassan (LS 05125) Company Secretary 2 June 2006 Kuala Lumpur Explanatory Notes on Item 6 of the Agenda Resolution pursuant to Section 132D, Companies Act, 1965. The Ordinary Resolution proposed under item 6 of the Agenda, if passed, will empower the Directors to issue shares in the Company up to an amount not exceeding in total 10% of the issued share capital of the Company, 3 subject to compliance with the relevant regulatory requirements. The approval is sought to avoid any delay and cost in convening a general meeting for such issuance of shares. This authority, unless revoked or varied by the Company at a general meeting, will expire at the next Annual General Meeting. Notes: 1 A member of the Company entitled to attend and vote at the Meeting is entitled to appoint a proxy/proxies to attend and vote in his stead. A proxy may but need not be a member of the Company and a member may appoint any person to be his proxy and the provisions of Section 149(1)(b) of the Companies Act, 1965 shall not apply to the Company. 2. In the case of a corporate member, the instrument appointing a proxy shall be under its Common Seal or under the hand of its officers or attorney, duly authorised in that behalf. 3. A holder may appoint more than two proxies to attend the Meeting. Where a member appoints two or more proxies, he shall specify the proportion of his shareholding to be represented by each proxy. 4. The right of foreigners to vote in respect of their deposited securities is subject to Section 41(1)(e) and Section 41(2) of the Securities Industry (Central Depositories) Act, 1991 and the Securities Industry (Central Depositories) (Foreign Ownership) Regulations, 1996. The position of such Depositors in this regard will be determined based on the General Meeting Record of Depositors. Such Depositors whose shares exceed the Company’s foreign shareholding limit of 45% as at the date of the General Meeting Record of Depositors may attend the above Meeting but are not entitled to vote. Consequently, a proxy appointed by such Depositor who is not entitled to vote will also not be entitled to vote at the above Meeting. 5. The instrument appointing a proxy must be deposited at Symphony Share Registrars Sdn. Bhd., Level 26 Menara Multi Purpose, Capital Square, No. 8 Jalan Munshi Abdullah, 50100 Kuala Lumpur, not less than 48 hours before the time for holding the Meeting or at any adjournment thereof. 6. Shareholders’ attention is hereby drawn to the Listing Requirements of Bursa Malaysia Securities Berhad, which allows a member of the Company who is an authorised nominee as defined under the Securities Industry (Central Depositories) Act, 1991, to appoint at least one (1) proxy in respect of each securities account it holds with ordinary shares of the Company standing to the credit of the said securities account. Malaysian Airline System Berhad Annual Report 2005 (10601-W) Statement Accompanying the Notice of Annual General Meeting Directors standing for re-election at the 35th Annual General Meeting of the Company to be held at the Auditorium, 1st Floor, South Wing, MAS Academy, No. 2, Jalan SS7/13, Kelana Jaya, 47301 Petaling Jaya, Selangor Darul Ehsan on Monday, 26 June 2006 at 10.00 a.m. are as follows:- NAME OF DIRECTOR DETAILS OF DETAILS OF INDIVIDUAL DIRECTORS ATTENDANCE OF AND OTHER DISCLOSURE BOARD MEETINGS REQUIREMENTS Dato’ Dr. Mohd Munir bin Abdul Majid (Article 139 of the Company’s Articles of Association) 8/8 Refer to page 17 of Annual Report Datuk Amar Haji Abdul Aziz bin Haji Husain (Article 139 of the Company’s Articles of Association) 4/8 Refer to page 20 of Annual Report Keong Choon Keat (Article 139 of the Company’s 4 Articles of Association) 7/8 Refer to page 19 of Annual Report Martin Gilbert Barrow (Article 139 of the Company’s Articles of Association) 7/8 Refer to page 19 of Annual Report Iris Jala @ Idris Jala (Article 137 of the Company’s Articles of Association) 1/1 Refer to page 18 of Annual Report Datuk Haji Yusoff @ Hunter bin Datuk Haji Mohamed Kasim (Article 137 of the Company’s Articles of Association) Not applicable* Refer to page 22 of Annual Report *Datuk Haji Yusoff @ Hunter bin Datuk Haji Mohamed Kasim was appointed after the financial period ended 31 December 2005. List of General Meeting held during the financial year ended 31 March 2005 34th ANNUAL GENERAL MEETING Date : 19 September 2005 Time : 10.00 a.m. Venue : Nirwana Ballroom 1, Lower Lobby Crown Plaza Mutiara, Kuala Lumpur Jalan Sultan Ismail 50250 Kuala Lumpur Malaysian Airline System Berhad Annual Report 2005 (10601-W) Chairman’s Statement Chairman’s Statement ALTHOUGH there is still a long, long way to go in the recovery process, there are encouraging and hopeful little signs the company, in the first few months of the 2006 financial year, with new leadership in its management, may have arrested the steep decline in its performance that marked an extremely difficult 2005. The financial year under review was no doubt a tumultuous one for the global airline industry as a whole. The higher input cost largely brought about by external factors and operating pressures coming from the increased competition of no frills, budget airlines, 6 especially in our part of the world, contributed toward making 2005 the extremely challenging year that it was for full service airlines. Malaysia Airlines was certainly not spared and, additionally, had its particular set of problems that had to be addressed. The Widespread Asset Unbundling (WAU) exercise that was completed on 5 November 2002 was not followed through with the full operational transformation of the company, as envisaged, and the subsequent better financial results, largely the outcome of balance sheet transformation and of significant contribution from non-operating income, lulled the company into a false sense of security and achievement. Thus, when the sources of non- operating income dried up, with no compensating strong income from operations, which were further undermined by the sharp rise in the price of jet fuel, the true nature of the company’s situation became all too painfully evident. There was shock and disbelief. The general perception was that the company had turned the corner and recovered. The reality of still unsatisfactory operating performance and of poor quality of income was obscured by the stronger balance sheet and non-operating contribution. This perception was as true of internal as of external stakeholders. The shock and disbelief turned into a search to apportion blame, which further obstructed understanding of the true situation. The board, however, took necessary steps to ensure the company’s survival, based on a full and calm analysis of the situation.

Load more