Evolving The Business - ChartNexusir.chartnexus.com/mas/website_HTML/attachments/attachment_18598... · Evolving The Business Widespread Asset Unbundling (WAU) On 30 July 2002, Malaysia

42 ANNUAL REPORT 2002 / 2003

Evolving The Business

Widespread Asset Unbundling (WAU)

On 30 July 2002, Malaysia Airlines announced details of its

proposed Reorganisation of the Group Corporate Structure

in what was to be a landmark transaction, substantially

transforming the financial standing of Malaysia Airlines

and preserving the national flag carrier. The proposed

reorganisation was finalised on 5 November 2002, following

approval from shareholders, the Securities Commission, the

Kuala Lumpur Stock Exchange and the Foreign Investment

Committee and came into effect on 6 November 2002.

The reorganisation separated the balance sheet from

operations by unbundling and transferring the 73 aircraft on

the balance sheet at an ascribed value of RM5.109 billion

together with associated liabilities amounting to RM6.966

billion to Penerbangan Malaysia Berhad (PMB). Upon

completion of the exercise, PMB, wholly-owned by the Minister

of Finance Incorporated, became the designated Government

holding company of Malaysia Airlines. The transferred aircraft

fleet was simultaneously leased back to Malaysia Airlines.

WAU represented atruly strategic approachthat allowed MalaysiaAirlines to focus fullyon operations.

MAS 00519 RevOp-Eng-FA-TheFinal 2/1/04 5:45 AM Page 42

Asian Corporate Finance Deal of the YearAsian Corporate Finance – The Airfinance Journal

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The liabilities transferred to PMB include the Company’s

redeemable convertible preference shares (RCPS), whereby PMB

became contractually bound to bear the cost of the eventual

redemption of the RCPS and therefore changing the substance

of the RCPS from equity to debt.

Malaysia Airlines operates domestic airline services on behalf of

PMB, through an arrangement that transfers the financial

effects of the revenue and costs of the domestic airline

operations to PMB. Malaysia Airlines continues to own and

operate the international and cargo businesses.

The reorganisation resulted in the issuance of 483.2 million

new shares at the weighted average market price of the

previous five days of RM3.85 per share to PMB in consideration

for its assumption of net liabilities of RM1.857 billion, being

the difference between the ascribed value for the aircraft fleet

and the transferred liabilities. After the exercise, PMB holds a

69.34% stake in Malaysia Airlines.

The reorganisation also allowed for the disposal of non-core

assets and businesses consisting of

(i) the proposed sale of 70% of Malaysia Airlines Catering

Sdn. Bhd. (MCSB) for a cash consideration of RM175

million to Gubahan Saujana Sdn. Bhd. (GSSB). GSSB is

owned 51% by Fahim Capital and 49% by LSG Asia.

Malaysia Airlines retains a 30% stake in MCSB

(ii) the proposed sale of Malaysia Airlines properties at

Subang Airport to Asset Global Network Sdn. Bhd. (a

wholly-owned special purpose vehicle of the Ministry of

Finance)

(iii) the sale of Malaysia Airlines properties at the Kuala

Lumpur International Airport to Asset Global Network

Sdn. Bhd. for an amount of RM1.011 billion



A New Business Plan for Malaysia Airlines

Upon completion of the successful WAU exercise, Malaysia

Airlines announced its Business Plan in March 2003 with the

Vision of being ‘An Airline uniquely renowned for its Personal

Touch, Warmth and Efficiency’ and the Mission ‘To provide Air

Travel and Transport Service that Ranks among the Best in

terms of Safety, Comfort and Punctuality’.

WAU represented a truly strategic approach, that by forming a

symbiotic relationship between Malaysia Airlines and PMB,

allowed Malaysia Airlines to focus fully on operations.

The Business Plan comprises six key pillars:

(i) Amplification of Malaysia Airlines presence and growth

through strategic and aggressive expansion to areas with

strong market potential and profitability in order to build,

fortify and develop competitive advantage

(ii) Maintenance of good financials by achieving and

sustaining profitability

(iii) Adopting a customer-obsessed culture to achieve customer

satisfaction through excellent hospitality and reliability

(iv) Ensuring Safety and Security throughout all operations

(v) Using technology as a key strategic business enabler, and

(vi) Focusing on employees by enhancing the human capital of

the airline.


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Revenue Management

Work on establishing operable revenue management capability

system began a few years ago. A major breakthrough was

made in 2002, during which substantial process changes were

adopted and a revenue management system, a decision

support system crucial to revenue management function were

successfully rolled out to enhance revenue maximisation.

In 2001, AirMax, a revenue management system developed by

Sabre Inc, USA was selected by Malaysia Airlines. The first

module called AirMax (leg & segment) was rolled out and

today, the seat inventory of all flights, with the exception of

Rural Air Service, is managed using this system. With the

implementation of this module, Malaysia Airlines is able to

efficiently forecast demand, booking cancellations, and

no-shows thus achieving better revenue optimisation of our

flights. The end-result is a reduction in seat spoilage, improved

seat factor and maximum revenue potential for each flight.

The second module, the Group Management System is

targetted for cutover in the first quarter of 2003/04. This

module will assist the Inventory Analysts in evaluating group

booking requests and in monitoring confirmed group booking

materialisation rates by group types, travel agents and markets.

The last module, the AirMax (Origin & Destination) will enable

Malaysia Airlines to manage seat inventory using origin and

destination (O&D) forecasting and optimisation. This module is

more complex because it requires major process changes and

modifications to the reservations system KOMMAS. The

implementation work, which is expected to take about two

years, will begin in the fourth quarter of 2003/04.

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Spreading Our Wings

Fleet Development

During the year under review, Malaysia Airlines took delivery of

one B747-400 in April 2002, two B777-200 in April and June

2002, and leased two A330-200 in February 2003. The two

A330-200 delivered recently are planned to be utilised for

expansion into Asia.

Malaysia Airlines sold one B747-400C, one B747-300C and

one B737-700 (BBJ) during the year. Except for one B747-400

Combi aircraft which will be returned to Boeing later this year,

Malaysia Airlines under the ‘Widespread Asset Unbundling’

(WAU) restructuring programme sold to and leased back all its

other aircraft from Penerbangan Malaysia Berhad (PMB) and

Aircraft Business Malaysia Sdn. Bhd. on 6 November 2002.

As at 31 March 2003, Malaysia Airlines’ fleet stood at 100

aircraft of which 48 are wide-body passenger aircraft

comprising 17 B747-400, four B747-200(F), one B747-400C,

15 B777-200, nine A330-300 and two A330-200, and another

52 narrow body aircraft consisting of 37 B737-400, 10 F50 and

five DHC-6.

Malaysia Airlines’ cargo division, MASkargo, operates a fleet

of four B747-200 freighters, two of which are under a sale

and leaseback agreement with PMB.

Traffic Rights Development

In pursuit of its network growth strategy to countries in Asia,

Malaysia Airlines, working in tandem with the Ministry of

Transport, has secured the following additional rights in the

year under review.

The restructuring ofMalaysia Airlines’routes continued withgreater focus onincreasing frequencyand capacity to Asiaand other regions.


Top Five Airlines of the Year 2003Airline of the Year – Skytrax, UK

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China

Malaysia and the People’s Republic of China signed a new

MoU on 17 December 2002 which revised the traffic rights

entitlements provided under the 1989 agreement. The new

MoU provides for multiple designation of airlines, ten new

points in China for the designated airline(s) of Malaysia, of

which any five points can be operated with immediate effect,

and the rest from 2005. However, a minimum of five of the

additional ten points should be selected from the central and

western provinces of China.

In addition, airline(s) of both countries are permitted to

operate a maximum of 108 units per week for all routes with

immediate effect instead of 82.5 units as previously for 2003.

With regard to freighter services, the MoU allows the

designated airline(s) of Malaysia and China to operate between

points in Malaysia and any seven points in China without any

frequency or capacity restrictions, except that initially the

freighter services for Beijing and Shanghai will be limited to

seven times weekly and 14 times weekly respectively.

India

Malaysia Airlines also received additional traffic rights to India

in January 2003 after its inauguration of new services into

Bombay, Bangalore and Hyderabad in May 2001.

The revised entitlements include one additional frequency into

Bangalore and two more flights to Hyderabad and Bombay

respectively. In addition, all seven-times A330-200 weekly services

into Madras can be upgraded to B747-400 by December 2003,

and three times weekly services can be introduced to Calcutta.

For the new fiscal year, Malaysia Airlines will be working closely

with the Ministry of Transport to secure additional traffic rights

required to penetrate new growth markets in Australia,

Indochina and Philippines.

South Korea

On 29 November 2002, Malaysia and South Korea signed a

new Memorandum of Understanding (MoU) whereby the

designated airlines of both countries are allowed to operate a

maximum of 22 weekly frequencies on any aircraft type for

both passenger or freighter services instead of seven times

weekly as previously agreed.

The revised agreement also provides for third – country code-share

while further expansion of air services, including the exchange of

fifth freedom rights, will be discussed in the near future.

Network Development

The restructuring of Malaysia Airlines’ route network continued in

the year under review with greater focus on increasing frequency

and capacity to Asia and other regions. With the improved global

economy and rebound in air travel, the three times B777-200

weekly services to Newark operated via Dubai, suspended since

11 September 2001, were reinstated effective 30 May 2002. The

two times weekly B747-400 services to Buenos Aires operated via

Johannesburg and Cape Town were also resumed as of 1 May

2002 with a corresponding reduction of the two times weekly

B777-200 Kuala Lumpur– Johannesburg–Cape Town return

services to one time weekly B747-400.



In conjunction with the operation of seven times B747-400

Kuala Lumpur–Taipei–Los Angeles return services, two times

A300-200 weekly Taipei flights were withdrawn while two of

the four times A330-200 weekly Kuala Lumpur–Kota Kinabalu–

Taipei return services were downgraded to B737-400. However,

the total weekly services to Taipei via Kota Kinabalu were

increased to five times weekly with the addition of one time

B737-400 frequency in winter.

Other schedule changes for Asia include the operating of daily

services into Seoul from five times A330-200 weekly, daily into

Shanghai from five times B777-200, daily into Guangzhou

as well as Beijing from five times weekly A330-200 between

1 July 2002 and 27 January 2003.

In the Middle-East, the two times B777-200 weekly Kuala

Lumpur–Dubai–Istanbul return and two times B777-200 weekly

Kuala Lumpur–Cairo–Beirut return services, which were both

suspended from 1 January 2002, were reinstated effective

31 March 2002 and 3 April 2002 respectively. These services

were revised to operate as two times weekly B777-200

Kuala Lumpur–Cairo– Istanbul return and two times weekly

Kuala Lumpur–Dubai–Beirut effective 27 October 2002.

In the Indian subcontinent, Dhaka services were increased to

four times A330-200 from three times weekly A330-200

from 18 December 2003, and the two times A330-200

Kuala Lumpur–Male return services were rerouted as Kuala

Lumpur– Male–Colombo–Kuala Lumpur following the

commencement of services to Colombo from 1 August 2002.

Similarly, the Vienna flights that were withdrawn since

1 June 2001 also recommenced on 1 July 2002, and operated

as three times weekly B777-200 via Rome. Arising from this,

the three times weekly B777-200 Zurich services were de-linked

from Rome. The other changes to the European routes were to

Frankfurt, which saw its increased in frequency from five times

B777-200 to a daily service, also from 1 July 2002.

The Australia and New Zealand network was revamped, tailoring

capacity to traffic demand. Consequently, the four times weekly

Kuala Lumpur–Melbourne–Adelaide vice versa and three times

B747-400 weekly Kuala Lumpur-Melbourne return services were

revised to operate as seven times B777-200 weekly and three

times B777-200 turnaround flights to Melbourne and Adelaide

respectively from 31 March 2002 while the four times A330-200

weekly Brisbane and three times B747-400 weekly Auckland

services were combined into five times B747-400 weekly Kuala

Lumpur– Brisbane–Auckland return, effective 1 July 2002.

Additional services were mounted to Perth on 12 November

2002, bringing its total to nine times per week and another

two times B747-400 weekly non-stop services were added to

Auckland from 27 October 2002.

In line with the growth strategy for Asia, the nine times weekly

services to Tokyo were increased to 14 times B777-200, with

two of the flights operated via Kota Kinabalu from 18 April

2002 following the opening of the second runway at Narita

and the routing of all the seven times B747-400 Los Angeles

services via Taipei instead of three times weekly via Tokyo.

Subsequently in northern winter, two of the Tokyo–Kuala

Lumpur services were rerouted via Penang.


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In the regional network, services to Saigon and Phnom Penh

were increased to daily from five times weekly B737-400, and

a fifth flight to Hanoi was added during the year. Poor loads to

Jakarta led to its frequency being reduced from 28 times to

21 times per week from 27 October 2002.

On the domestic front, the closure of the Sultan Abdul Aziz

Shah Airport to jet operations and the shift of B737-400

services to KLIA resulted in frequency changes to Langkawi,

Penang, Johor Bahru and Kota Bahru. Notwithstanding this,

additional capacity and frequency were added for services in

Peninsular Malaysia and within Sabah and Sarawak as well as

to Kota Kinabalu, Kuching, Labuan, Miri and Sibu in East

Malaysia from Kuala Lumpur during the summer season.

As at 31 March 2003, Malaysia Airlines’ route network covers a

total of 109 destinations of which 32 are domestic and 77 are

international (including code-share flights operated by its partners).

Commercial Arrangements

Over the years, Malaysia Airlines has developed commercial

arrangements with various airlines as part of its strategy to

make KLIA an aviation hub. Foreign carriers are encouraged to

operate into Kuala Lumpur so as to promote traffic movement

to and from Malaysia as well as improve connectivity and the

number of destinations available from its home base.

Towards this end, Malaysia Airlines has developed and

strengthened bilateral ties with various partner airlines.

Significant progress was seen in May 2002 with the

reinstatement of commercial arrangement with Swiss

International Airlines, Uzbekistan Airways and Middle–East

Airlines. In addition, existing joint services arrangements with

Air Mauritius and Sri Lankan Airlines were converted into

blocked space arrangements while better prorate levels were

agreed with Royal Dutch Airline last year.

During the year under review, meetings were held with Royal

Air Maroc and Gulf Air in May 2002 to explore potential

cooperation and new market opportunities for the future.

Efforts are continuously made to improve existing commercial

arrangements and streamlining of Sales and Marketing,

Reservation, Pricing, Traffic Handling and Accounting

procedures to ensure good support from partner airlines

for Malaysia Airlines’ operations.

In line with the company’s mission to emerge as the premier

carrier in the Asian region, code-share arrangements and other

regional cooperation initiatives will remain a part of its strategy

to enhance its route network expansion and make KLIA a

regional hub for Asia. In this regard, Malaysia Airlines will be

evaluating areas of cooperation with Garuda, All Nippon

Airways and other carriers in Europe, China and Oceania

in the new financial year.

By end of the year under review, Malaysia Airlines has 30

commercial agreements with 26 partner airlines comprising

four joint services agreements, 20 code share agreements,

one pool service agreement and five cargo blocked space

arrangements.

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As a result of improveddemand, Malaysia Airlines’system wide traffic roseby 8.5%

Reaching Out To Our Passengers

Passenger Performance

The airline industry, especially operators in Asia, showed

significant recovery in 2002, overcoming weakened demand

caused by global economic slowdown in 2001 and the

September 11 incident in the United States.

As a result of improved demand, Malaysia Airlines’ system wide

passenger traffic rose by 8.5% to 37,652.9 million in revenue

passenger per kilometres in 2002/03 against a capacity growth of

3.2% to 54,265.6 million available seat kilometres. The growth

was, however, affected in the latter part of the year by the Bali

bombing in October 2002 and the prospect of war in Iraq.

In terms of total passengers carried, Malaysia Airlines uplifted

16.3 million in the year under review or 3.8% growth over the

previous year.

The overall number of domestic passengers recorded a

marginal increase of 0.4% to 8.68 million, despite the

expansion of competitor services and the domestic fare

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International passenger carriage, has also performed well; rising

by 7.9% to 7.65 million, albeit from a lower base last year.

Apart from Australia/New Zealand and South Africa, which

registered marginal decrease in passenger carriage due to a

cutback in capacity, most international regions recorded

impressive growth with 28% increase for Orient & North

America and 16% for Asia & Africa. The high achievement

on North American and Middle Eastern routes of over 40%

is attributed to the resumption of services following a

temporary suspension in the previous year.

As a consequence of increased passenger uplift, Malaysia

Airlines’ overall seat factor improved by 3.4 percentage points

to 69.4% with India, Australia/New Zealand, China and

Regional services achieving commendable increase in their

seat factors.

Sales, Distribution & Marketing

Some of the promotional initiatives undertaken in the home-

base market during the year included the following:

— As part of the National Carrier’s commitment in promoting

domestic tourism within Malaysia, special promotional

fares called ‘SUPERSAVER’ at 50% discount on normal

Economy class published fares were introduced on all

domestic flight routes within Malaysia, effective 15 August

2002. The response was very encouraging and a total

of 230,000 tickets were sold under the scheme.

— In conjunction with Visit Sarawak Year, the Discover

Sarawak Pass was introduced effective 28 March 2003

offering four sectors within Sarawak from RM299.

World’s Best Cabin Staff 2002 & 2003World Class Survey – Skytrax, UK

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Under the leadership of Malaysia Airlines, the Market

Development Programme (MDP) in Peninsular Malaysia, which

was partially suspended as of 12 November 2001 following the

September 11 incident, was reinstated in total, effective 15

September 2002, to provide market stability and yield

improvement opportunities out of Peninsular Malaysia. The

programme, including its fare structures, was redesigned to be

more flexible, market-driven and customer focused.

The MDP is basically a programme drawn up by member

airlines and MATTA to stabilise market practices of participating

Airlines and Agents to ensure reasonable return on investment

for Airlines and Agents whilst providing consumers with

competitive tickets and tours. It is a voluntary and self-imposed

compliance programme, whereby the participating airlines shall

determine the market practices on identified routes which all

participating airlines and agents must observe whilst

conducting sales of airline passenger tickets.

— Following the Bali bombing tragedy in October 2002,

promotional fares and packages were introduced to

encourage travel demand to the destination. This proved

successful, achieving the desired results and going some

way in rebuilding consumer confidence.

— Participation in the Malaysian Association of Tours & Travel

Agents (MATTA) International Travel Fairs in October 2002

and March 2003 offering special promotional air fares and

packages to stimulate travel demand during lean periods

and in weaker sectors. The two travel fairs realised total

sales of 1,582 Golden Holidays packages, and generated

around 40,000 passenger bookings. A total of 1,543

students were also enrolled under the Grads membership

drive held during the event.

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As part of a focused and deliberate strategy to generate

front-end traffic – with a particular emphasis on Corporate

Accounts – a Global Corporate Sales unit has been established

within Head Office. This unit is responsible for overseeing and

driving the Corporate Account Development strategy, targeting

local, regional and global corporate accounts.

The Airline launched a new worldwide communications

campaign on 30 July 2002 with the theme “Going Beyond

Expectations” that captures the spirit of the revitalised airline,

its new aspirations and its new positioning in the international

aviation industry. The campaign commenced in Malaysia on

21 August 2002 with a series of print and TV advertisements,

followed by worldwide coverage in key markets in the Asia-

Pacific, Europe and United States beginning September 2002.

To promote Malaysia Airlines as a world class airline and

position the company as a preferred airline, Malaysia Airlines

sponsored several high profile international events in selected

key markets. In sports, Malaysia Airlines sponsored events such

as the Hong Kong Golf Open, Le Tour de Langkawi, Asian X-

Games Tour, and the English Cricket Board Tour.

Sponsorship of world class Performing Arts was also a priority

with the Sydney Festival in Australia and the regional tours of

FAME, CATS, OLIVER and Witches of Eastwick. As a result of our

sponsorship in Australia, Enrich members and the travel industry

were very welcoming of Malaysia Airlines’ market presence. Joint

promotions with the Malaysia Tourism Promotion Board (MTPB)

included sales and tourism missions to key markets in Australia,

China, Japan, Middle East and Europe and participation in

international exhibitions, such as the World Travel Mart (WTM),

London and the International Tourisma Bourse (ITB), Berlin.

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Going Beyond Expectations2002 – 60 sec TVC



Malaysia Airlines also sponsored the promotions of Malaysia

products abroad in cooperation with MATRADE and FAMA.

The Airline participated in the sponsorship of meetings,

conferences and exhibitions in Malaysia and overseas, through

effective communication, promotion and networking with

conference organisers, associations, government bodies and

private organisations. Marketing activities at Meeting,

Incentives, Convention and Exhibition (MICE) Trade Shows

and joint promotions with MTPB have, in addition to

promoting Malaysia Airlines products and services, also

contributed in enhancing awareness of Malaysia as an

attractive MICE destination.

Incentive group movements generated 41,350 pax with the

majority from Far East and South East Asia countries. An

additional 14,000 pax also participated in 75 conferences and

exhibitions. Joint promotional initiatives with Tourism Malaysia

include Global Meet Kuala Lumpur, AsiaPacific Incentives and

Meetings Expo (AIME) – Melbourne, Worldwide Exhibition for

Incentive Travel, Meetings and Events (IMEX) – Frankfurt,

European Incentive Business Travel and Meetings (EIBTM) –

Geneva, Incentive Travel and Conventions, Meetings Asia

(ITCMA) – Bangkok.

In terms of product development, the following enhancements

were made:

— Food and Beverage services have been upgraded with

the introduction of the Noodles Service, Light Supper,

extended Beverage List and Japanese Meal on

Kuala Lumpur-Japan flights.

— Inflight entertainment enhancements e.g. video

and audio programmes with monthly programme change,

introduction of short features in Video On-Demand mode,

increase in Audio On-Demand selections with jukebox

functionality and a monthly Entertainment Guide.

— Recruitment of Mandarin-speaking crew on

board to boost service quality to native-speaking

passengers. The need for Japanese, Korean, Spanish,

South African, German and French-speaking crew has also

been identified as a priority to improve inflight services.

— A new Golden Lounge in Perth opened in early

September 2002. Other Golden Lounge enhancements

include a revised menu with more menu cycles and

improved quality, Wireless LAN internet access at

Golden Lounge International/ KLIA for the convenience

of guests, reflexology and massage services, and

additional ASTRO channels.

— KLIA Premier Lane for First and Business class passengers

arriving KLIA was introduced in November 2002.


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Recognising that areas of Marketing Support are significant

revenue earners for the airline, the Marketing Support

Department embarked on an intensive repositioning exercise

for all product areas of Enrich, Golden Holidays and Golden

Boutique, aimed at enhancing the brand awareness of each

of these products.

— Enrich membership has been growing steadily, registering a

total of 455,104 members up to 31 March 2003, reflecting

a significant growth of 68%. A variety of product

enhancements continue to be introduced to maximise

membership privileges, including the introduction of the

elite Platinum card in August 2002. Plans are underway to

implement a holistic re-launch of Enrich catering to the

various life segments from infants to senior citizens. This

will also include the incorporation and repositioning of

Grads, the privilege card for students. Grads membership

as at the end of March 2003 stood at 22,704.

— Golden Holidays is being promoted as the leading brand in

airline travel and tours. Spinning off from the airline’s

current advertising theme “Going Beyond Expectations”,

an array of new destinations skewed towards the

experiential segmentation of travel are being gradually

introduced incorporating elements which include, but are

not restricted to, shopping, culture, spa retreats and

adventure. Golden Holidays actively participated in eight

domestic consumer fairs throughout the year, the major

ones being the MATTA International Trade Fairs held in

October 2002 and March 2003.

Golden Holidays also remained in the forefront in promoting

domestic tourism in cooperation with various state tourism

authorities. Of prime substance, is the special joint

collaboration between Golden Holidays and the state

government of Johor and Sarawak in launching promotional

packages aimed at boosting tourism in their respective states.

The “Showcase Malaysia” programme was extended for the

period April-June 2002 to entice tourists into Malaysia with a

value-for-money offer of a three, free-night hotel package,

recording 6,820 passenger sales during the period.

Inflight shopping was reintroduced with a new concept of

providing customers the excitement of a “shopping avenue in

the air”, and was further enhanced with a refreshed look and

feel for its Inflight Shopping Guide, “Temptations”, launched in

January 2003. The concept aims to tempt travellers to indulge

in the array of travel retail items on offer inflight, projecting an

upbeat and innovative image for Malaysia Airlines away from

the previous conventional approach to inflight shopping.

Inflight sales recorded since January 2003 showed a marked

increase from the previous corresponding period averaging

within a range of RM1.2 million sales per month.

Top Three Airline Lounge Worldwide 2002World’s Best Airline Lounge – Skytrax, UK

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MASkargo recorded aprofit of RM81 million,to sharply turn aroundfrom a loss for the2001/02 fiscal year.

Cargo Division

The period under review has been an outstanding year for the

Cargo Division, showing tremendous improvement in terms of

service reliability and revenue performance, compared to a

weak performance in fiscal year 2001/2002.

Cargo-handling glitches were identified and rectified, and

cargo shipment moved on time and securely as operational

staff were better trained to familiarise themselves with a fully-

automated operational process.

Measures implemented in the last 12 months include

improvement of cargo handling procedures, the introduction of

measurable performance standards, minimizing mishandling

figures and the reduction of pilferage levels to very low levels.

The management also focused on increasing the value of

human resources by training and upgrading staff skills to be

able to undertake greater areas of responsibilities.

The launching of new freighter services, the establishment of

joint ventures with other airlines and the implementation of

world-class services, focusing on schedule integrity, service

reliability and interpersonal ties with business partners,

played a major role in ensuring MASkargo’s turnaround process.

Moving Cargo, Moving The World


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The year 2002 is also a milestone in KLIA ACC’s

history as it was the first time where tonnage handled

exceeded 500,000 tonnes. This was achieved even with a 3.9%

drop in capacity available on belly and freighter services.

Import volume increased marginally by 3.7% while the export

volume remained flat. At the same time, there has been a

significant improvement of 35% in transhipment volume,

consistent with network strategy. Warehouse revenue

increased by 18% to RM165.1 million for fiscal year 2002/03,

compared to the corresponding period in the previous year.

This augurs well for the development of KLIA ACC as a

prominent regional cargo hub.

In the international sector, air cargo international traffic based

on ICAO figures recorded a growth in 2000 of 8%, but

declined 5% in the first six months of 2001 due to the global

economic slowdown. Based on the IATA 2001-2005 Special

Interim Edition, there was a negative 7.7% growth in 2001.

For year 2002 and 2003, IATA forecasted a positive growth

of 2.7% and 5.3% respectively.

MASkargo recorded a profit of RM81 million, to sharply turn

around from a RM243 million loss for the fiscal year 2001/02.

This achievement was recognised by the air cargo industry,

which nominated MASkargo for various awards. It won Best

Cargo Airport in Asia (for below 500,000 tonnes), top three for

Best Air Cargo Carrier (Asia) and was nominated for the Best

Terminal Operator in Asia. In addition, MASkargo has been

named as one of the top five cargo carriers into Australia.

For the period under review, cargo volume achieved a record

of 533,000 tonnes, breaking the 500,000-tonne barrier for

the first time, compared to 445,000 tonnes for the fiscal year

2001/2002, an increase of 16.5%. The industry’s annual

growth average is around 4% to 5%.

The Advanced Cargo Centre (ACC) has shown significant

improvement in this financial year. At the beginning of

financial year 2001, the monthly mishandling volume was

above 6% and has of late dropped consistently to 0.2% in

2002. The average throughput time for cargo into the ACC

was about six hours in early 2001. Standard throughput time

has been reduced to four hours. For Priority Business Centre

clients, the throughput time has been reduced drastically to

below two hours.

Top Three Best Air Cargo Carriers in Asia 2003Asian Freight & Supply Chain Awards – Singapore



The labour strike by the dock union workers in the United

States created greater airfreight demand into the US from Asia,

and this spilled over from Asia into Europe. This incident

occurred in October and November 2002, and pushed the

year’s growth rate beyond IATA projections.

In this financial year, there has been a successful improvement

in the freighter services network. The expanding network

further complements the passenger flights’ cargo capacity to

provide better connectivity and capacity management, thus

enhancing the overall cargo uplift. Timing proved important,

as MASkargo was able to capitalise on the growth in airfreight

traffic. The improvement in load factor was above 9.0%.

Improvements to freighter schedules were introduced including

increasing the number of flights to Frankfurt, Dhaka, Taipei,

Narita, Sydney, Amsterdam and Shanghai.

A further realignment of freighter services will be introduced to

complement passenger flights providing better connectivity,

thus enhancing overall cargo uplift capacity and revenue. The

introduction of a fifth freighter has improved service reliability

and allowed more flights to be mounted responding to market

demand. MASkargo will also have the opportunity to mount

more charter flights. As a result of the alignment, the revenue

from both belly and freighter sources improved considerably.

During the year under review, MASkargo has developed new

business initiatives that have played a major part in the

turnaround process. Some of these new developments include

the implementation of the Priority Business Centre. Perishable

One-Stop Centre, expansion of Penang Airport’s cargo facility,

the I-Port programme and the introduction of e-Commerce.

The implementation of the Priority Business Centre (PBC)

concept, which began in April 2002 with the setting up of

PBC at the Advanced Cargo Centre in KLIA, has been

generally considered a success. Its prime objective is to have

a seamless acceptance procedure, including payment for

MASkargo’s nine key account clients in Malaysia, contributing

approximately 60% of the total locally-generated revenue.

This programme creates advance sales with long-term

contracts, enabling monitoring of key shipments to meet flight

departure schedules and maintaining the atmosphere of a

cordial working relationship. As part of the expansion

programme, the Priority Business Centre concept will be set

up in Penang beginning April 2003.


59

The launch of the Perishable One-Stop Centre at the ACC in

May 2002, allows both acceptance and delivery of perishable

cargo under one roof. This centre provides a complete facility,

moving cargo as soon as possible to cold storage rooms.

Up to 16 units of ULD can be stored directly into the cold

rooms, meaning the cargo will remain fresh in transit.

The expansion of Penang Airport’s cargo warehouse, involving

an additional 20,000 square feet of floor space, was completed

in October 2002 in order to resolve the problem of congestion,

which was previously a major issue. With the extension, the

total warehouse area in Penang Airport is now 100,000 square

feet, which enables MASkargo to handle up to 200,000 tonnes

of cargo annually.

The Air – Sea Transhipment programme jointly launched in

December 2002 with Northport, is the world’s first ‘airport

within a seaport’ programme. This programme, with the

establishment of an ‘air zone’ at the Northport Distripark, allows

sea shipments to be uplifted by air and vice versa without the

need to raise any Customs forms or bank guarantees. This

unique programme will be expanded to other ports in Malaysia.

IATA has also awarded the XPQ code for Port Klang.

To enhance the competitiveness of this air – sea programme,

MASkargo has taken the initiative to establish the brand name

‘I-Port’ for this project. ‘I-Port’ communicates that the

transhipment service from MASkargo is different from all

others on offer, depicting ‘I’ as ‘integrated’, ‘intermodal’,

‘international’, ‘innovative’ and ‘ideal’.

As part of its efforts to promote this innovative concept,

MASkargo has embarked on an extensive joint-roadshow

with Northport all over the region. In addition to Peninsular

Malaysia, roadshows were held in Pekan Baru, Sumatera

(Indonesia), Mumbai / Chennai (India) and Sabah / Sarawak

(East Malaysia).

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Heightened securitymeasures remaineda priority. Selectedflights are alsosecured in responseto current threats.

Keeping on Flying, Safely

Security and Safety Department

The Security and Safety Department is in the forefront of

aviation security and ground safety within the Company,

having responsibility for aircraft and passengers. This is over

and above security services provided by the airport operator,

Malaysia Airports Berhad (MAB). The terrorist attacks of

11 September and the bombings in the region particularly the

incident in Bali, Indonesia in 2002 have highlighted

vulnerabilities in airport security.

Heightened security measures on US bound flights remained a

priority in the period under review. Selected flights are also

secured in response to the current threats. Alerts from the

Transport Security Administration of the US and other foreign

airport authorities are major reference points. Similarly, advice

from the Royal Malaysia Police force is sought on current threats.

A major issue for the department has been the emphasis on

reducing baggage and cargo pilferage which can have a

negative impact on the Company. Complaints received are

monitored and frequent impromptu checks conducted,

ensuring security presence.


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Passport profiling checks, where a total of 1156 passengers

attempting to travel on Malaysia Airlines services fraudulently

were denied boarding, has resulted in avoidance cost to the

Company of more than RM10 million. Security agreements

with 10 foreign airlines during the year under review,

generated revenue of approximately RM722,500.

In an increased momentum to reduce ground accidents, the

Safety and Security Department introduced a series of safety

campaigns in 2002, and placed greater emphasis on improved

surveillance. This programme is aimed at reducing damage to

company property and any possible interruption to service.

Technical and Ground Operations

During the year under review, the Technical and Ground

Operations Division continued with its pursuit to attain world

class standards in terms of safety, operational productivity,

service levels and costs. It undertook various initiatives that

focused on prudent decision-making, quality improvement, cost

reduction and going beyond customer needs and expectations.

Flight Management Center (FMC)

For the period under review, FMC was able to lead in the

streamlining of the various processes responsible for on time

departure (OTP). By employing Six Sigma methodology, specific

problem areas were focused on, as a result of which certain

repetitive delays were eliminated. Through effective coordination,

Malaysia Airlines’ OTP performance worldwide had improved

from 87% in 2001/2002 to 90.74% in 2002/2003.

As the centre of operations, FMC had played an effective role

in coordinating the management of emergency and crisis as

shown by the smooth execution of contingency plans and

recovery, such as the period during the Iraq conflict and the Air

Crash exercise in KLIA in October 2002. In perfecting the

system, FMC was in the process of setting up a Crisis

Management Centre that aimed to be ever-ready in executing

emergency response and ensuring business continuity.

Top Three Best Airlines – Asia, 2003Best Airline / Asia – Skytrax, UK



Engineering and Maintenance

Engineering and Maintenance (E&M), adhering to its three-year

business plan, implemented the first year of the plan by

introducing a Key Performance Indicator (KPI) measurement

system to focus on achieving operational excellence.

In 2002/03, the department introduced improvement initiatives

focusing mainly on cost reduction in airframe and engine

maintenance, elimination of wastage, enhancement of

technical training, optimising inventory value, improving the

reliability of in-flight entertainment systems and standardisation

of fleet interior upholstery. It also introduced a dispatch

reliability improvement programme that had led to an improved

technical dispatch surpassing industry’s average of 99%.

Implementation of the “Block Maintenance Checks” system on

narrow body fleet resulted in an improved aircraft turnaround

time by 73% compared to the preceding two year period

between 2000 and 2002.

E&M business process improvement initiatives focused on

detailed methods of improving KLIA’s technical operations and

processes, especially in cost effectiveness and efficiency. Forty

one (41) recommendations were proposed covering areas of

aircraft maintenance, aircraft servicing and maintenance control

centre. To date, one-fifth of the recommendations had been

fully implemented with the rest being actively pursued.

In the year under review, E&M also performed third party

maintenance mainly, ‘C’ and ‘D’ maintenance checks. This

contributed to about RM23.3 million in revenue.

Customer Services

Overall improvement in customer service was made possible

through recruitment of additional staff, introduction of a

refined training programme and the implementation of “going

beyond expectations” initiatives. This included the set-up of a

grooming section to standardise and control the appearance of

frontliners, delegating senior staff to handle First Class and

Business Class passengers, introducing dedicated staff to

handle customer airlines, and implementing special handling

procedure for golf bags, to name a few. The introduction of

“queue combers” to expedite passenger flow to boarding

gates for example had reduced flight delays caused by late

passenger boarding by 6.1%. Stringent but consistent checks

on excess baggage too had improved customer perception as

well as revenue collection at check-in counters. As a result

there was an increase of 3.5% in excess baggage revenue,

totalling RM45 million for the year under review.

Rapport with other operating departments such as Department

of Civil Aviation (DCA), Malaysia Airports Berhad (MAB),

Immigration, Customs, Police, Health authorities and other

bodies was also enhanced through regular interaction resulting

in smoother passenger handling process at the airport.


Best Airline Signature Dish 2003Malaysia Airlines / Satay – Skytrax, UK

63

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Ground Handling Management (GHM)

GHM continued to be aggressive in marketing Malaysia

Airlines’ ground handling services to foreign airlines operating

into KLIA and Penang. By March 2003, the department was

able to win four more airlines, bringing the total number of

customer airlines to 41 and additional revenue of RM3.6

million. Apart from scheduled services, GHM was also able

to secure two major ad hoc businesses, namely the Haj

operation and the Non-Aligned Movement (NAM) Summit.

GHM also embarked on a joint-marketing programme with ERL

Sdn. Bhd. by offering check-in services at the Kuala Lumpur

City Air Terminal (KLCAT). Cathay Pacific and Royal Brunei

Airlines were the first to sign on, and more airlines are

expected to follow in the future.

As part of its responsibility, GHM had managed to review the

ground handling contracts at international line stations. As a

result, a total savings of RM21 million was achieved from a

concerted effort in renegotiating the existing contracts, and

in some stations, by appointing an alternative ground

handling agent.

Catering

In the period under review, MAS Catering Sdn. Bhd. (MCSB)

continued with its business process improvement. Continuous

implementation of various cost reduction measures in

manpower, meal wastages and equipment maintenance

resulted in a direct savings of RM4.9 million, which was 6.6%

more, than the previous year. Apart from supplying Malaysia

Airlines, MCSB also gained four more customer airlines by

March 2003, bringing the total number of foreign airlines

contracted to 27.



Flight Operations

During the period under review, the Flight Operations Division

has successfully fulfilled the Company’s business plan and

strategy which included the reinstatement of certain routes and

increased flight frequencies to several destinations. In terms of

on time departures (despatch reliability), the division achieved

an increase percentage of overall average due to excellent crew

punctuality. Diligent tracking of crew movement will help

maintain and improve this statistic.

The Malaysia Airlines Flight Crew Training Centre is gaining

reputation as a renowned pilot training centre in the region; a

position further enhanced by the agreement signed in February

2003 for the purchase of a new advanced simulation

technology B747-400 Flight Simulator to replace the existing

one. The Centre currently conducts pilot training for Malaysia

Airlines pilots as well as for several airlines in the region,

promoting Malaysia Airlines’ expertise, and realising revenue

for the Company.

As a vital element of the group responsible for the safety of

Malaysia Airlines operations, the Flight Operations Division has

implemented the Flight Operations Quality Assurance (FOQA)

programme, a system that analyses recorded inflight data.

FOQA allows immediate access to flight records, with constant

review of flying technique, developing proactive flight crew

performance and ensuring the highest standards in operating

procedures.

A special programme has been established in conjunction with

Malaysian Security Forces in late 2001 and early 2002 to review

on board security, focusing on anti-hijacking or act of terrorism

and disruptive passengers. This course augurs well with the

enhancement of flight safety and security for the airline and

travelling public.

The Flight Operations Division fully endorses and promotes the

“Going Beyond Expectations” theme adopted by the Company

in July 2002, and the airline’s vision of being renowned for its

personal touch, warmth and efficiency. Currently, the training

of crew in soft skills; contributing to operational efficiency, is in

line with the worldwide industry, testimony to which are the

recent accolades received by the airline.


65

Malaysia Airlines was awarded “Best Cabin Staff for 2001 and

2002” consecutively by Skytrax UK, in a survey measuring

efficiency, cabin presence, service attentiveness, friendliness,

consistency, warmth and sincerity by the Flight Crew. Practical

training on inflight announcement delivery has been stepped

up and a new version of the inflight announcement text will be

implemented soon. This is a position it aims to maintain to

ensure continued provision of excellent inflight services to

Malaysia Airlines customers.

The Flight Operations Division carried out a thorough review of

inflight announcement content and delivery. Increased

communications training is carried out annually for cabin crew,

and a recent initiative has seen the formation of three

Toastmasters Clubs within the Division under the auspices of

Toastmaster’s International in a move to further enhance the

communication skills of the flight crew.

Further steps in improving inflight services are underway with

the planned Computer Based Training for cabin crew training

and safety recurrent and conversion courses. This training

initiative will replace traditional methods and provide a virtual

experience in inflight services simulation. All of this contributes

to heightened operational efficiency; importing ground

management theory into the aircraft cabin.

The Flight Operations Division is working closely with Human

Resources to build a truly multicultural crew. All crew currently

speak at least two languages, but to add to passenger comfort

and ease of communication, recruitment is being undertaken in

India, Indonesia, China, Spain, France and Germany.

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The primary aim of Malaysia Airlines Academy (MAA) is to

develop and maximise the potential of the Malaysia Airlines

workforce for improved competitive edge in the airline industry.

The primary activities of MAA are the provision of skills,

development training, management development programmes

and airline related education to increase Malaysia Airlines’

performance. These include the Executive Development

Programme, Managing Employment Relations and Know Your

Company, Know Your Product. During the period under review, a

total of 10,532 staff have attended various training programmes

conducted by MAA, 48% of the total staff strength.

MAA is among the first of the professional training institutions

in Malaysia to be accredited with ISO 9001:2000 Certification

in January 2003. MAA also received the prestigious ‘Anugerah

Pembangunan Sumber Manusia 2002’ awarded under the

large companies’ service sector, from the Minister of Human

Resources, Datuk Dr. Fong Chan Onn in October 2002.

Human Resources

The staff strength of the company stood at a total of 21,916

as at 31 March, 2003, comprising 250 managerial staff, 1,232

executive staff, 1,267 technical crew, 4,310 cabin crew, 2,164

technical staff and 12,693 support staff.

During the year, the Company moved further to create a

customer oriented workforce that would strengthen its

organisational capability to achieve both short and long term

goals of the Company. A Job Rotation Programme was

implemented to expose as many staff as possible to the

many facets of the airline business.

Training and development activities have gained momentum in

the period under review at the Malaysia Airlines Academy

(MAA) in Kelana Jaya with the introduction of new programmes

aimed to further develop employees’ competencies in the

various areas of the business.

Investing in Technology and Quality


67

Human Resources Development AwardLarge Companies Sector – Ministry of Human Resources Malaysia

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MAA has taken upon itself to ensure that its customers’ needs

are met more effectively. Thus, it serves as a bridge with other

training institutions for free exchange of management

knowledge and experiences.

The staff Establishment Committee continues to review the

manpower requirements of the various Divisions in order to

achieve the optimum level of staffing for the Company.

With the expiry of various collective agreements and

memorandums of understanding during the year, the Company

has commenced negotiations with the respective in-house

unions and associations. The objective is to jointly develop

collective agreements that would assist the Company to

manage its business in a more efficient and cost-effective

manner. Negotiations are still under way at the end of the year.

MAS Gemilang

The MAS Gemilang Programme, established to support the

Turnaround Plan, consists of three main initiatives – Six Sigma,

Quality Control Circle (QCC) and Change Acceleration

Process (CAP).

As of 31 March 2003, the engagement rate for Six Sigma and

QCC is 10.3% (256 participants) and 1.6% (275 participants)

respectively, based on the total staff strength based in

Malaysia. The Company’s main objective is to have 30%

engagement for Six Sigma and 10% engagement for

Malaysia-based staff by end of the financial year 2003/04.

Currently there are 65 active Six Sigma projects and 22 QCC

circles. Eighteen Six Sigma projects and two QCC circles have

been successfully closed in for the year under review.



Information Technology

In the year under review, Information Technology Planning

Services (ITPS) has embarked on three key programmes; the IT

Infrastructure Project (ITI), Strategic IT Outsourcing (SITO) and

Application Programme.

IT Infrastructure Programme

ITPS strategic initiative, ‘Global IT Infrastructure Upgrade

Programme’ is now in its roll-out phase, with the plan

to upgrade 177 sites within the Malaysia Airlines system

wide network.

This RM150 million project encompasses a worldwide network

upgrade and technology refreshment process of the

corporation’s desktop environment to leverage current and

emerging technologies.

As of March 2003, 79 sites, from a total of 177 worldwide,

have been successfully upgraded and are now running on the

new infrastructure. These include major sites such as KLIA and

Head Office, Kelana Jaya offices, all domestic stations in

Peninsular Malaysia (except Kuantan), major stations in East

Malaysia and major international stations such as London,

Manchester, Amsterdam, Frankfurt, Rome, Sydney, Melbourne,

Brisbane, Adelaide, Hong Kong, Tokyo, Osaka, Fukuoka,

Nagoya, Seoul, Taipei, Saigon and Madras.

Strategic IT Outsourcing Programme

The effective and cost efficient use of Information Technology

is key to the ongoing success of Malaysia Airlines in the

marketplace. The project seeks to establish a long-term value-

based strategic partnership in the form of a full service

outsourcing arrangement to deliver immediate business

performance impact, transforming IT service delivery from a

technology driven model to a service driven model. It is

believed that outsourcing will allow for the best possible

outcome in an area that is not Malaysia Airlines’ core business.

The project has accomplished several key milestones in the

period under review. The first significant milestone is the

Board’s approval for the engagement of professional services to

facilitate Malaysia Airlines in defining the outsourcing

partnership. A structured Request for Information (RFI) process

was employed to assess potential market players. The next key

milestone achieved is the issuance of Request for Proposal (RFP)

to the recommended parties resulting from the evaluation of

the RFI process. Evaluation and negotiation are currently under

way, and will progress into the new financial year. Subject to

approval by Malaysia Airlines Board, the partnership is expected

to be formalised by July/August 2003 timeframe.


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Application Replacement Programme

The objective of this project is to upgrade airline IT systems,

enhancing functionality of business operations and increase

revenue. The review of the existing application portfolio was

completed in November 2002, and an application framework

has been defined; consolidating multiple applications into

significant programmes of activities that can be implemented in

a coherent manner. These Application Programmes will drive

the initiative to align IT with the Business Plan. A significant

refreshment of the application portfolio is planned over the

next several years to equip Malaysia Airlines with a more

integrated suite of applications. Seven core programmes have

been identified, and they are now engaged in the initial phase

of strategic planning and analysis.

The seven core programmes are:

— Integrated Passenger Services System (iPSS)

— Integrated Cargo (iCargo)

— Integrated Maintenance and Engineering (iM&E)

— Integrated Human Resources System (iHR)

— Integrated Finance (iFIN)

— Integrated Operations (iOPS)

— Integrated Personal Productivity Workspace (iPPW)

Several application projects such as Internet Booking Facility

and others have completed the requirements definition phase,

and are in the solutioning phase with RFPs issued for

development and implementation.

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Group Financial Highlights

(0.5)

0

2.5

93/94 94/95 95/96 96/97 97/98 99/00 00/01 01/02 02/0398/99

1.5

2.0

1.0

0.5

(0.0

4)

1.20

1.10

2.17

1.46

2.22

1.30

0.60

1.49

0.85

Cash Flow Per Share (RM)

(200.0)

80.0

93/94 94/95 95/96 96/97 97/98 99/00 00/01 01/02 02/0398/99

(120.0)

(80.0)

(40.0)

0

40.0

(160.0)

1.0

20.0

33.3

43.8

(173

.2)

(33.

7) (90.

9)

(33.

6) (108

.5)

38.9

Earnings / (Loss) Per Share (Sen)

Financial year is from 1 April to 31 March


71

0

8.00

93/94 94/95 95/96 96/97 97/98 99/00 00/01 01/02 02/0398/99

4.00

6.00

2.00

0.89

5.01

5.67

6.23

6.76

2.81

1.68

1.74

1.98

2.09

Net Tangible Assets Per Share (RM)

0

2

12

93/94 94/95 95/96 96/97 97/98 99/00 00/01 01/02 02/0398/99

8

10

6

4

l2.0

7.0

7.5

10.0

2.0

2.0

2.0

l l

Dividends Per Share (Sen)G

roup

Fin

anci

al H

ighl

ight

s


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Evolving The Business - ChartNexusir.chartnexus.com/mas/website_HTML/attachments/attachment_18598... · Evolving The Business Widespread Asset Unbundling (WAU) On 30 July 2002, Malaysia