MalaysiaN Airline System Berhad annual report 2011 41st AGM

Venue Auditorium, 1st Floor, South Wing MAS Academy, No. 2 Jalan SS7/13 Kelana Jaya, 47301 Petaling Jaya Selangor Darul Ehsan Malaysia

When Thursday, 21 June 2012, 10.00 am Contents

02 Corporate Information 03 Group Corporate Structure 04 Statement by Chairman 06 Statement by Group Chief Executive Officer 09 Five Years Statistical Review of the Group 10 Performance Highlights 11 Revenue and Expenditure 12 Analysis of Airline Operations 13 Operations Review 18 Winning Back Customers 19 Corporate Responsibility 22 Route Network 24 Directors’ Profiles 29 Senior Management 30 Board of Directors’ Meetings 31 Statement of Corporate Governance 42 Statement of Internal Control 47 Audit Committee’s Report 52 Additional Compliance Information 56 Financial Reports 166 Analysis of Shareholdings 177 List of Company Properties 180 Corporate Directory 182 Notice of Annual General Meeting 184 Statement Accompanying the Notice of Annual General Meeting 185 Appendix 1 • Form of Proxy Corporate Information

02 Malaysian Airline System Berhad (10601-W)

BOARD OF DIRECTORS Registered Office Financial Calendar Tan Sri Md Nor bin Md Yusof 3rd Floor, Administration Building 1 (Chairman) MAS Complex A Sultan Abdul Aziz Shah Airport 25 February 2011 Ahmad Jauhari bin Yahya 47200 Subang Announcement of Selangor Darul Ehsan Full Year 2010 Annual Results Mohammed Rashdan bin Mohd Yusof Malaysia T: 603 7840 4550 25 May 2011 Tan Sri Wan Azmi bin Wan Hamzah F: 603 7846 3932 Announcement of @ Nik Awang 2011 First Quarter Results

Dato’ Rohana binti Rozhan WEBSITE 23 August 2011 Announcement of www.malaysiaairlines.com Tan Sri Tan Boon Seng @ Krishnan 2011 Second Quarter Results

David Lau Nai Pek 21 November 2011 Auditors Announcement of Tan Sri Dr Wan Abdul Aziz Ernst & Young (AF 0039) 2011 Third Quarter Results bin Wan Abdullah Chartered Accountants Level 23A, Menara Milenium 29 February 2012 Datuk Mohamed Azman bin Yahya Jalan Damanlela Announcement of Pusat Bandar Damansara Full Year 2011 Annual Results Eshah binti Meor Suleiman Damansara Heights (Alternate to Tan Sri Dr Wan Abdul Aziz 50490 Kuala Lumpur bin Wan Abdullah) Malaysia T: 603 7495 8000 F: 603 2095 9076 Company Secretary Shahjanaz binti Kamaruddin (LS 0009441) Registrar Symphony Share Registrars Sdn. Bhd. (378993-D) Level 6, Symphony House Pusat Dagangan Dana 1 Jalan PJU 1A/46 47301 Petaling Jaya Selangor Darul Ehsan Malaysia T: 603 7841 8000 F: 603 7841 8151

Stock Exchange Listing Main Market Bursa Malaysia Securities Berhad Sector: Trading/Services Stock Code: 3786

Principal Bankers Citibank Berhad Malayan Banking Berhad CIMB Bank Berhad RHB Bank Berhad Group corporate Structure

Malaysian Airline System Berhad (10601-W) 03

MALAYSIAN AIRLINE SYSTEM BERHAD (10601-W) ASSOCIATE COMPANIES

100% Malaysia Airlines Capital (L) Limited 30% GE Engine Services Malaysia Sdn. Bhd. (LL01132) (423679-X) 100% Malaysia Airlines Capital II (L) Limited 49% Hamilton Sundstrand Customer Support (LL07894) Centre (M) Sdn. Bhd. (301833-D) 100% Malaysia Airlines Capital III (L) Limited 30% Honeywell Aerospace Services (M) Sdn. Bhd. (LL07927) (465037-M) 100% Malaysia Airlines Capital IV (L) Limited 30% LSG Sky Chefs-Brahim’s Sdn. Bhd. (LL08669) (317281-X) 100% Malaysia Airlines Capital IV Cayman Limited 24% Pan Asia Pacific Aviation Services Limited (WK-265139) (470740) 100% MAS Sdn. Bhd. (346606-K) 20% Taj Madras Flight Kitchen Limited (formerly known as FlyFirefly Sdn. Bhd.)* (30706 State Code 18) 100% MAS Airline System Sdn. Bhd. (973371-K) 100% MAS Aerotechnologies Sdn. Bhd. (317185-K) 100% MAS Academy Sdn. Bhd. (317184-W) 100% MAS Golden Boutiques Sdn. Bhd. (317182-T) 100% MAS Golden Holidays Sdn. Bhd. (317144-A) 100% MASkargo Sdn. Bhd. (318815-M) (formerly known as Malaysia Airlines Cargo Sdn. Bhd.) 100% MASkargo Logistics Sdn. Bhd. (68121-P) 100% MASwings Sdn. Bhd. (773841-A) 100% Malaysian Aerospace Engineering Sdn. Bhd. (775412-D) # Ψ 100% MH Loyalty Programme Sdn. Bhd. (951320-T) 100% Macnet CCN (M) Sdn. Bhd. (318626-W) under Members Voluntary Winding Up 100% Delima Insurance (Labuan) Limited (LL08535) 100% Kelip-Kelip Labuan Limited (LL06736) 100% Kelip-Kelip II Labuan Limited (LL07075) 100% Kelip-Kelip II Cayman Limited (WK-225671) 100% Kelip-Kelip III Labuan Limited * MAS Sdn. Bhd. (formerly known as FlyFirefly Sdn. Bhd.) (346606-K) owns 100% equity in FlyFirefly Holiday Sdn. Bhd. (780113-P) (LL07638) # MAS GMR Aerospace Engineering Company Private Limited 80% Abacus Distribution Systems (Malaysia) (U45201KA2008PTC045463) is a jointly-controlled entity of Sdn. Bhd. (180535-T) Malaysian Aerospace Engineering Sdn. Bhd. (775412-D) Malaysian Aerospace Engineering Sdn. Bhd. (775412-D) owns 100% 60% MAS Awana Services Sdn. Bhd. (372384-D) Ψ equity in MAE Aero Services Pte. Ltd. (201100826N) (formerly known as MAS Catering (Sarawak) Sdn. Bhd.) 51% Aerokleen Services Sdn. Bhd. (277266-X) Statement by Chairman

04 Malaysian Airline System Berhad (10601-W)

Dear Shareholders, It pains me deeply to report the grave reality of a RM2.52 billion loss suffered by Malaysia Airlines in the year under review. You will also have noted the significant changes to the Board and Management of your Company since August last year. All of these confirm the severity of the turbulence your Company has found itself in and the hard challenges ahead to turn it around.

As the new Chairman of Malaysia Supporting AJ in this lengthy and leakages, repairing balance Airlines, I am focused on moving arduous task is his Management sheets and shoring up capital, and the airline back into profitability team. Efforts will continue to be managing cultural renewal and and onto a platform that will allow made to strengthen the airline’s change. for long-term stability and growth. Management with proven industry Needless to say, that is easier said professionals from outside and I myself was the Managing Director than done. But I am gratified to accelerating the elevation of home- of Malaysia Airlines from 2001 until have supporting me a revamped grown talents into positions of 2004, so I have a fair idea of the Board of Directors comprising responsibility. The Management difficulties and complexities of individuals with excellent team building is by no means running a national carrier as well credentials and experience. It is complete, and this effort will as of the challenges that lie ahead. my hope and intention that this continue to grow. For now, I believe I also know how much hard work Board will be further strengthened we have in place a Management and clear thinking has been done in with persons with airline sector organisation that is prepared to the past few months and how much experience and track record in the work with sheer determination, grit more is required to dig Malaysia near term. and strong willpower to accomplish Airlines out of its financial hole. this important task alongside the The burden of responsibility to new Board. Related to this, I give The task will be made considerably manage the turnaround has fallen a note of thanks to the previous lighter if we can look forward to on Ahmad Jauhari Yahya, the new Board and Management for their the cooperation and understanding Group Chief Executive Officer service and commitment through of the various stakeholders of Malaysia Airlines. Although very trying times. within the airline. I am gratified AJ has no claim to an airline to see continuing support from sector background, your Board, Difficult as it is for me to write this our controlling shareholder in impressed and comforted by his letter to shareholders, it will be the face of the stream of bleak excellent track record in senior many times harder to deliver the financial and operational tidings management and as CEO in his turnaround. The task means re- that the new Board had to be the previous appointments, believes he looking at the corporate structure bearer of. We look to the same is the right man for the job. Apart and organization, reviewing routes spirit of cooperation and support from his professional attainments and operations, continuing to do from our employees at all levels, and track record, he is also a long the things we do well and changing and the unions and associations distance runner and a tri-athlete, our ways in areas we have fallen that represent them. Even as qualities that demonstrate he short. It means reviving broken we promise a tough period of understands a difficult challenge. spirits and rebuilding morale, adjustment and no more business- combating wastage and plugging Statement by Chairman

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as-usual, we want all of them to However, the short relationship In ending, while the losses at understand that unless we shape did result in a mindset shift in Malaysia Airlines over 2011 come and size the airline right and return Malaysia Airlines’ operations with against a backdrop of difficult our beloved airline to financial the other Malaysian carrier, AirAsia. operating conditions in the viability, there is no guarantee of Although our Share Swap deal global aviation industry, quite a sustainability and survival. with them had to be undone after few carriers have succeeded in eight months, there were many navigating these difficulties to build The new Board has been meeting positives that Malaysia Airlines and maintain nimble and profitable every three weeks on average, to gained within the short period, businesses. Some of these include ensure that we remain focused on and indeed it is very much in both airlines that have been put through the recovery and sustainable future airlines’ plans that the cooperation Chapter Eleven-type workouts. of Malaysia Airlines, and that we shall continue. Immediately we are As challenging as it is, we are leverage our collective experience planning to cooperate with them in determined to make Malaysia and wisdom in a clear and strategic procurement, aircraft maintenance Airlines yet another successful fashion. We have cut unprofitable and training. aviation turnaround success story. routes and also pushed ahead with plans to upgrade our fleet. We will On the issue of commercial In conclusion, suffice that I state take delivery of 23 new passenger reality, I am very pleased that my Board and I and the entire aircraft for 2012 and then 16 more the Government has recently Management team are fully in 2013, 11 in 2014 and another 10 established the National Aviation absorbed and engaged on this over 2015 - 2017. Such purchases Council. Malaysia Airlines needs task of returning your Company to are highly expensive, but essential clarity from policy makers about profitability and predictability. How if we are to escape the vicious where we sit in the aviation sector, soon that may be achieved shall cycle of underfunding in our fleet how much we can run our own depend on several key factors, a replacement. I am relieved to affairs and where non-commercial few of which are not exactly under announce that we have secured considerations lie. We recognize our control. However, we would funding for the first of these that the aviation industry is consider we have failed in our purchases. important to transport, tourism, mission if a return to operational job creation, economic growth, profitability is not achieved by the It would be remiss of me not national unity, and connectivity in conclusion of the financial year to mention the matter of Tune the region and beyond. But many 2014. Air’s short presence on our share of these wider benefits do not register, the reversal of their benefit Malaysia Airlines’ bottom- presence and our intended future line and actually create systemic relationship with their carriers, losses and under funding. AirAsia and AirAsia X. With the benefit of hindsight, the kindest It is Malaysia Airlines’ bottom-line thing that I can say is both sets of that is consuming all of our energy shareholders should have taken at the present time. A record a lot more time to deliberate loss of RM2.52 billion in 2011 and the complex issues arising from losses for four of the past 10 years such linkage, both in terms of are concrete proof that difficult Tan Sri Md Nor Md Yusof competition laws as well as the decisions in all areas of operation Chairman likely emotive fallouts. Much of must be taken to re-boot our Malaysia Airlines the latter has little to do with national carrier. the business of running airline 8 May 2012 operations, which may explain why their impact was under-estimated or over-looked in the first place. It was clearly a bridge too far. Statement by Group Chief Executive Officer

06 Malaysian Airline System Berhad (10601-W)

The Market Place 2011 was a tough year for the aviation industry. Fuel price, a major cost component for airlines the world over, not only continued to stay stubbornly high but showed an upward trend as the year progressed. Fuel rose from USD99 per barrel in the fourth quarter of 2010 to USD134 per barrel in the fourth quarter of 2011.

For the year under review, fuel delivery of aircraft (RM602 million), and domestic markets. The arrival expenditure of the Group rose impairment of freighters (RM314 of 7 B737-800 aircraft in 2011 33%, equivalent to RM1.46 billion million) and stock obsolescence helped the financial performance compared to the previous year. (RM179 million). by enabling our airline to increase In addition, the impact of a weak frequencies to these destinations global economy, particularly in Operationally, Malaysia Airlines with a more fuel-efficient aircraft, Europe, resulted in fewer people saw capacity, denominated in especially important in these times travelling by air. The economic ASK (Available Seat Kilometre), of high fuel bills. This was also seen uncertainty and rise in fuel prices increase by 7% for the full year, in flights to South Asia which saw led the International Air Transport passenger traffic rise 5%, while capacity and RASK increase and Association (IATA) to report that seat factor lower to 75%. Revenue CASK decrease. Asia-Pacific airlines were expected per ASK (RASK) rose 2% to 18.5 to witness a fall in revenue of sen per kilometre while yield Routes to China saw yield increase between 5-10% in 2011 following improved 4% to 24.7 sen compared 5% with high seat factor loads. a peak in airline profitability in to the previous year. However, Similarly our short haul sectors to 2010. In 2011, Malaysia Airlines nevertheless did see revenue these encouraging trends were ASEAN and domestic destinations rise by a marginal 2% to RM13.90 insufficient to offset the higher recorded a high 9% increase in billion, still below the 17.1% increase fuel costs which saw Cost per ASK yield with steady seat factor loads. recorded in 2010, hence reflecting (CASK) increase to 24.8 sen. IATA’s pessimism. In the cargo business, despite a 14% These higher costs were drop in revenue and a 9% decline in Similarly, the cargo business was compounded by an earlier planned capacity, cargo yield increased 2%. not spared the market difficulties. expansion in capacity particularly According to the Association of on long haul routes. The higher fuel The Group operated a total of Asia Pacific Airlines (AAPA), cargo costs and lower demand in North 108,774 flights system-wide in carriers together recorded a 47% Asia in 2011 as result of the Japan 2011, an increase of 3.2% over drop in net profit in 2011 compared tsunami and low demand on flights the previous year. On-Time to the previous year. operating from the Kota Kinabalu Performance (OTP) of our core hub meant that revenue was not airline stood at 84.59% against a Impact on the Group’s able to reflect the higher costs of target of 85.0%. Financial Performance flying passengers. Our Middle East The tough market conditions routes also suffered with the rise During the year under review, saw Malaysia Airlines record in popularity and capacity of the Malaysia Airlines won recognition consecutive quarterly losses in 2011, premium Middle Eastern full service for several aspects of its resulting in an operating loss of carriers. operational excellence. These RM1.20 billion and a total net loss included Asia’s Leading Airline and of RM2.52 billion for the full year. While RASK was impacted on Asia’s Leading Airline Lounge at Operating expenditure increased routes to South Africa, South the World Travel Awards (Asia and 21% to RM16.20 billion compared to America, Europe, Australia, New Australiasia) 2011, World’s Leading RM13.41 billion in the previous year. Zealand, North Asia, and the Airline to Asia at the World Travel This steep increase was largely Middle East, Malaysia Airlines Awards 2011 and IT Innovation attributed to high fuel costs and did see improvement in RASK of the Year (joint winners with substantial provisions amounting and even a narrowing in the gap SITA) at the Centre for Asia to RM1.09 billion. These provisions between RASK and CASK in the Pacific Aviation (CAPA) Aviation were made in respect of re- China, South Asia, ASEAN region Awards for Excellence 2011. More Statement by Group Chief Executive Officer

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recently, Malaysia Airlines received 2. Win back customers – with Importantly, to ensure that Malaysia Gold at the Putra Brand Awards the scheduled delivery of 23 Airlines is sustainable over the long 2011 dubbed the People’s choice new aircraft in 2012 including term, the Group will adopt a set of awards. the A380 aircraft, Malaysia strategic game-changers. These Airlines’ average age of fleet include: Business Plan will dramatically reduce from 1. Capitalising on collaborations A significant development in the 12.2 years to 7.7 years. These and joint efforts to build last quarter of 2011 was the roll-out substantive improvements in on economies of scale of the Business Plan which charts product will be matched by towards yielding synergistic the Group’s going forward journey. service improvements aimed benefits. Areas currently This plan is based on two broad at winning back customers. being considered include strategies of recovering from its This will be further supported procurement and aircraft present financial predicament and by aggressive marketing engineering services. then sustaining performance over campaigns in Malaysia and key a longer term through a series of markets such as the UK and 2. Strategic partnerships game-changers. Australia. and alliances to improve profitability and also to Under Recovery, our major thrusts 3. Relentless cost focus – offer enhanced services to are: Management has adopted a passengers. One such example 1. Operate a smaller and relentless cost focus including is Malaysia Airlines’ membership profitable network – by March re-looking at all procurement to the oneworld alliance by the 2012, Malaysia Airlines had contracts in an effort to reduce end of 2012. reduced total passenger costs. Wherever possible, a full capacity (ASK) by 9%, review of out-sourced activities Outlook potentially saving the Group will be done to contain costs Going forward, high fuel costs, between RM220-300 million and increase staff productivity. uncertainty in the global economy per year. While the focus was and stiff competition both in on cutting loss-making routes, 4. Keeping the business simple passenger and cargo will continue we also increased frequency – the core airline business to put pressure on Malaysia Airlines on other growth routes. will receive our full attention as we work hard to fill our planes. Capacity was added through in order to become more Forecasts of oil demand and prices increased frequencies on 8 competitive. Areas deemed for 2012 suggest that the difficult routes - Beijing, Taipei, Manila, outside of this will be separated market conditions experienced in Bangkok, Phnom Penh, Jakarta, and managed as profit centres. 2011 will spill into the next financial Medan and Los Angeles. These year. changes underscore a dynamic 5. Immediate business model review of routes in response to improvements – These will IATA described the first quarter market demand to improve the be made to optimise flight of 2012