malaysia airlines vision and mission -...

1Malaysian Airline System Berhad Annual Report 04/05(10601-W)

Vision‘An airline uniquely renowned for its personal touch,warmth and efficiency’

Mission‘To provide air travel and transport service that rankamong the best in terms of safety, comfort andpunctuality’

malaysia airlinesvision and mission

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

AGENDA

As Ordinary Business

1. To receive and adopt the Report of the Directors and the Audited Accounts forthe financial year ended 31 March 2005 together with the Report of the Auditorsthereon.

2. To approve the declaration of a final tax-exempt dividend of 2.5 sen per share inrespect of the year ended 31 March 2005.

3. To approve the Directors’ fees for the financial year ended 31 March 2005.

4. To re-elect the following Directors retiring under Article 139 of the Company’sArticles of Association, and who, being eligible, offer themselves for re-election:-

(i) Dato’ Mohamed Azman bin Yahya(ii) Dato’ N. Sadasivan a/l N. N. Pillay(iii) Datuk Abdillah @ Abdullah bin Hassan @ S Hassan

5. To re-elect the following Directors retiring under Article 137 of the Company’sArticles of Association, and who, being eligible, offer themselves for re-election:-

(i) Dato’ Izzuddin bin Dali(ii) Dato’ Mohd. Annuar bin Zaini(iii) Dato’ Zaharaah binti ShaariResolution 9

6. To re-appoint Messrs Ernst & Young as Auditors and to authorize the Directors tofix their remuneration.

As Special Business

7. To consider and if thought fit to pass the following Ordinary Resolution:-

Authority to Allot and Issue Shares

“THAT subject to the Companies Act, 1965 (the Act), the Articles of Associationof the Company, approval from the Bursa Malaysia Securities Berhad and othergovernment or regulatory bodies, where such approval is necessary, full authoritybe and is hereby given to the Board of Directors pursuant to Section 132D of theAct, to issue shares in the capital of the Company at any time upon such termsand conditions and for such purposes as the Directors may in their discretiondeem fit, provided always that the aggregate number of shares to be issued shallnot exceed 10 per cent of the issued share capital of the Company and that suchauthority shall continue to be in force until the conclusion of the next AnnualGeneral Meeting of the Company.”Resolution 11

8. To transact any other ordinary business for which due notice has been given.

notice of annual general meetingNOTICE IS HEREBY GIVEN THAT the Thirty-Fourth Annual General Meeting ofMalaysian Airline System Berhad will be held at Nirwana Ballroom 1, Lower Lobby,Crowne Plaza Mutiara Kuala Lumpur, Jalan Sultan Ismail, 50250 Kuala Lumpur onMonday, 19 September 2005 at 10.00 am for the following purposes:-

Resolution 1

Resolution 2

Resolution 3

Resolution 4Resolution 5Resolution 6

Resolution 7Resolution 8Resolution 9

Resolution 10

Resolution 11

Resolution 12

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NOTICE OF BOOK CLOSURE FOR PAYMENT OF DIVIDENDS

Subject to the approval of shareholders at the Thirty-Fourth Annual General Meeting, a final tax-exempt dividendof 2.5 sen per share in respect of the year ended 31 March 2005 will be paid on 18 October 2005 to shareholderswhose names appear on the Register of Members and the Record of Depositors at the close of business on 7October 2005.

NOTICE IS HEREBY GIVEN that the Share Transfer Books, the Register of Members and the Record of Depositorsof the Company will be closed from 8 October 2005 to 11 October 2005 (both dates inclusive) to determineshareholders’ entitlements to the dividend payment.

A Depositor shall qualify for entitlement only in respect of:-

a. shares deposited into the Depositor’s Securities Account before 12.30 pm on 5 October 2005 (in respect ofshares which are exempted from mandatory deposit);

b. shares transferred into the Depositor’s Securities Account before 4.00 pm on 7 October 2005 (in respect ofordinary transfers);

c. shares bought on Bursa Malaysia Securities Berhad on a cum entitlement basis according to the Rules of BursaMalaysia Securities Berhad.

By Order of the Board

Rizani bin Hassan (LS 05125)Company Secretary

26 August 2005Kuala Lumpur

NOTICE OF ANNUAL GENERAL MEETING


Explanatory Notes on Item 7 of the Agenda

Resolution pursuant to Section 132D, Companies Act, 1965.

The Ordinary Resolution proposed under item 7 of the Agenda, if passed, will empower the Directors to issueshares in the Company up to an amount not exceeding in total 10% of the issued share capital of the Company,subject to compliance with the relevant regulatory requirements. The approval is sought to avoid any delay andcost in convening a general meeting for such issuance of shares. This authority, unless revoked or varied by theCompany at a general meeting, will expire at the next Annual General Meeting.

NOTICE OF ANNUAL GENERAL MEETING

Notes:

1. A member of the Company entitled to attend andvote at the Meeting is entitled to appoint a proxy/proxies to attend and vote in his stead. A proxy maybut need not be a member of the Company and amember may appoint any person to be his proxy andthe provisions of Section 149(1)(b) of the CompaniesAct, 1965 shall not apply to the Company.

2. In the case of a corporate member, the instrumentappointing a proxy shall be under its Common Sealor under the hand of its officers or attorney, dulyauthorised in that behalf.

3. A holder may appoint more than two proxies toattend the Meeting. Where a member appoints twoor more proxies, he shall specify the proportion ofhis shareholding to be represented by each proxy.

4. The right of foreigners to vote in respect of theirdeposited securities is subject to Section 41 (1) (e)and Section 41 (2) of the Securities Industry (CentralDepositories) Act, 1991 and the Securities Industry(Central Depositories) (Foreign Ownership)Regulations, 1996. The position of such Depositorsin this regard will be determined based on theGeneral Meeting Record of Depositors. SuchDepositors whose shares exceed the Company’sforeign shareholding limit of 45% as at the date ofthe General Meeting Record of Depositors mayattend the above Meeting but are not entitled tovote. Consequently, a proxy appointed by suchDepositor who is not entitled to vote will also notbe entitled to vote at the above Meeting.

5. The instrument appointing a proxy must bedeposited at Symphony Share Registrars SdnBhd, Level 26, Menara Multi Purpose, CapitalSquare, No 8 Jalan Munshi Abdullah, 50100Kuala Lumpur, not less than 48 hours before thetime for holding the Meeting or at any adjournmentthereof.

6. Shareholders’ attention is hereby drawn to theListing Requirements of Bursa Malaysia SecuritiesBerhad, which allows a member of the Company whois an authorised nominee as defined under theSecurities Industry (Central Depositories) Act, 1991,to appoint at least one (1) proxy in respect of eachsecurities account it holds with ordinary shares ofthe Company standing to the credit of the saidsecurities account.

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statement accompanying thenotice of annual general meeting

General Meeting held during the financial year ended 31 March 2005

THIRTY-THIRD ANNUAL GENERAL MEETING

Date : 13 September 2004Time : 10.00 amVenue : Nirwana Ballroom 1

Lower LobbyMutiara Hotel Kuala LumpurJalan Sultan Ismail50250 Kuala Lumpur.

DETAILS OF ATTENDANCEOF BOARD MEETINGS

9/11

11/11

9/11

4/5

3/3

4/7

Directors standing for re-election at the Thirty-Fourth Annual General Meeting of the Company to be held atNirwana Ballroom 1, Lower Lobby, Crowne Plaza Mutiara Kuala Lumpur, Jalan Sultan Ismail, 50250 Kuala Lumpuron Monday, 19 September 2005 at 10.00 am are as follows:-

DETAILS OF INDIVIDUAL DIRECTORSAND OTHER DISCLOSUREREQUIREMENTS

Refer to page 88 of Annual Report






NAME OF DIRECTOR

Dato’ Mohamed Azman bin Yahya(Article 139 of the Company’sArticles of Association)

Dato’ N. Sadasivan a/l N.N. Pillay(Article 139 of the Company’sArticles of Association)

Datuk Abdillah @ Abdullah BinHassan @ S Hassan(Article 139 of the Company’sArticles of Association)

Dato’ Izzuddin bin Dali(Article 137 of the Company’sArticles of Association)

Dato’ Mohd. Annuar bin Zaini(Article 137 of the Company’sArticles of Association)

Dato’ Zaharaah binti Shaari(Article 137 of the Company’sArticles of Association)

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corporate reportTen-Year Statistical Review of the Group - 8

In A Class Among The World’s Best - 10Chairman’s Statement - 12

Managing Director’s Report and Review - 26Corporate Information - 80

Details of Board of Directors’ Meetings - 81Board of Directors and Profile - 82

Board Audit Committee Report - 96Statement on Internal Control - 100

Statement on Corporate Governance - 104Group Structure - 116

Organisational Structure - 118Management Committee and Profile - 120

Management Team - 128Corporate Social Responsibility - 132

Corporate Calendar of Events - 138Employee Calendar of Events - 140

Fleet Status - 142Route Network - 144


ten-year statistical review of the group

2004 2003 2002 20012005 2004 2003 2002

FINANCIAL*

Total Revenue (RM’000) 11,364,309 8,780,820 8,864,385 8,695,150Total Expenditure (RM’000) 11,046,764 8,591,157 8,872,391 9,569,435Taxation (RM’000) (35,707) (117,543) (5,017) (14,898)Profit/(Loss) after Tax and Exceptional Item (RM’000) 326,079 461,143 336,531 (835,563)Shareholders’ Funds (RM’000) 3,318,732 3,023,984 2,562,841 1,215,290Profit/(Loss) as a % of Revenue (%) 2.9 5.3 3.8 (9.6)Return on Shareholders’ Funds (%) 9.8 15.2 13.1 (68.8)Earnings/(Loss) Per Share (Sen) 26.0 36.8 38.7 (108.5)

PRODUCTION

Network Size (KM) 504,051 445,263 439,547 453,720Time Flown (Hours) 411,134 352,540 357,328 340,741Distance Flown (000 KM) 265,050 227,865 228,762 201,189Available Capacity (000 TKM) 10,299,867 8,413,110 7,977,845 7,823,943Available Passenger Capacity (000 Seat KM) 64,115,190 55,692,377 54,265,627 52,594,942

TRAFFIC

Passengers Carried (000) 17,536 15,375 16,325 15,734Passengers Carried (000 Pax KM) 44,226,090 37,658,910 37,652,955 34,708,514Passenger Load Factor (%) 69.0 67.6 69.4 66.0Cargo Carried (000 TKM) 2,686,783 2,184,226 2,071,271 1,759,209Mail Carried (000 TKM) 3,004 2,840 2,054 2,014Overall Load Carried (000 TKM) 6,728,547 5,628,573 5,496,735 5,149,942Overall Load Factor (%) 65.3 66.9 68.9 65.8

STAFF

Employee Strength (As at 31 March) 22,513 20,789 21,916 21,438Revenue Per Employee (RM’000) 505 422 429 406Available Capacity Per Employee (TKM) 457,508 404,690 364,019 364,957Load Carried Per Employee (TKM) 298,874 270,748 250,809 240,225

*As per Audited Financial Statements for the financial year under review

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TEN-YEAR STATISTICAL REVIEW OF THE GROUP

2000 1999 1998 1997 1996 19952001 2000 1999 1998 1997 1996

9,712,097 8,288,273 7,536,510 7,154,024 6,563,799 5,766,36510,336,829 9,566,041 8,647,874 7,991,746 6,258,561 5,515,895

26,683 18,813 26,961 31,277 15,434 18,131(417,428) (258,574) (700,051) (259,851) 333,018 247,666

1,252,148 3,222,276 3,496,250 4,211,701 4,486,952 3,685,372(4.3) (3.1) (9.3) (3.6) 5.1 4.3

(33.3) (8.0) (20.0) (6.2) 7.4 6.7(54.2) (33.6) (90.9) (33.7) 43.8 33.3

488,243 366,578 361,203 362,997 352,703 353,443349,352 330,205 306,949 303,569 291,418 279,416191,668 200,223 189,754 174,659 166,777 156,795

8,054,870 7,531,473 6,649,146 5,528,737 5,246,353 5,381,92551,237,536 48,905,537 45,442,288 42,293,932 40,096,883 35,161,376

16,745 15,371 13,709 15,117 15,371 14,31138,312,570 34,930,136 30,592,900 28,698,112 27,903,706 24,565,816

74.8 71.4 67.3 67.9 69.6 69.91,837,426 1,664,600 1,477,403 1,005,465 925,227 1,328,061

1,830 2,828 2,006 2,726 3,832 3,2995,379,101 4,853,377 4,246,894 3,361,408 3,212,436 3,354,670

66.8 64.5 63.9 60.8 61.2 62.3

21,518 21,587 23,076 23,436 22,546 19,925451 384 327 305 291 289

374,332 348,889 288,141 235,908 232,696 270,109249,981 224,829 184,039 143,429 142,484 168,365


in a class among the world’s best

“Malaysia Airlines has joined the most exclusive groupof world airlines, being ranked as a 5-Star airline by theaviation rating organisation, Skytrax. There are just fourairlines in the world that merit this prestigious 5-Staraccolade, and we are delighted to be in this coterie thatrepresents the very best in air travel today.”

Dato’ Dr Mohd Munir bin Abdul MajidChairman

Malaysian Airline System Berhad

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STAR RANKING Certification

Excellent

Good

Fair

Poor

Very Poor

N/A not applicable

U not ranked

SUMMARY RANKING

Combined Quality of Product / Staff service in airport and onboard

environments

First Class

Business Class

Economy Class

AIRPORT SERVICES

Check-In service - First / Business

Check-In service - Economy Class

Transfer Services - First / Business

Transfer Services - Economy Class

Arrival Services

Business Class Lounge - product facilities

Business Class Lounge - staff service

First Class Lounge - product facilities

First Class Lounge - staff service

ONBOARD FEATURES

Inflight entertainment may vary according to aircraft type

Cabin Safety Procedures

Inflight Entertainment

Amenities, Blankets, Pillows, Towels etc

Airline Magazine, Newspapers & other mags

CABIN SEAT COMFORT

Seating may vary according to aircraft type

First Class - long haul

Business Class - long haul

Business Class - regional

Economy Class - long haul

Economy Class - regional

ONBOARD CATERING

First Class meals - long haul

Business Class - long haul

Business Class - regional

Economy Class meals - long haul

Economy Class meals - regional

CABIN STAFF SERVICE

First Class - service efficiency

First Class - staff attitude & friendliness

Business Class - service efficiency

Business Class - staff attitude & friendliness

Economy Class - service efficiency

Economy Class - staff attitude & friendliness

Responding to Passenger requests

Cabin presence through flights

Assisting Parents with children

Staff Language Skills

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OUR PERFORMANCE IN 2004/2005

An Accolade

Malaysia Airlines has joined the most exclusive group of worldairlines, being ranked as a 5-Star airline by the aviation ratingorganisation, Skytrax. There are just four airlines in the worldthat merit this prestigious 5-Star accolade, and we are delightedto be in this coterie that represents the very best in air traveltoday.

It is a great honour because it is such a world-class award. The world airline star rankingprogramme applies quality assessment for more than 375 airlines across the globe,rating the standards of each airline’s front-line product and service. This ispredominantly based upon international flight operations. A 5-Star rating testifiesnot only to the quality of product Malaysia Airlines provides to customers, but also tothe very high standards of staff service. Malaysia Airlines cabin staff service is renownedas one of the world’s best - it has the required hallmarks of efficiency, but what sets itapart is a most distinctive charm and character so reflective of the Malaysian culture.According to Skytrax, our service philosophy of Going Beyond Expectations is wellportrayed by our front-line staff, and is a defining element of our elevation to 5-Starairline status.

chairman’s statement

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CHAIRMAN’S STATEMENT

I would like to congratulate the management and employees whose professionalismand dedication to excellence made this great achievement possible. We must seek toimprove on those standards and have them spread more evenly across the network.Being a 5-star airline reflects our commitment to consistently deliver high standardsof service wherever we are around the world. It also underscores our ongoing effortsto make Malaysia more attractive to the world as a favourite tourist destination andour determination to rank Malaysia Airlines top of the class.

Malaysian Economy

In 2004, the Malaysian economy experienced its most rapid growth in four years,expanding as a result of robust growth in both global trade and domestic demand.Real gross domestic product (GDP) increased by 7.1 per cent in 2004 against 5.3 percent in 2003, the fastest growth since 2000. Growth was led by the private sectorwhile the Government made further progress in fiscal consolidation. The services sectorrecorded a stronger growth of 6.7 per cent in 2004. Expansion was driven mainly byhigher consumer spending as a result of rising disposable incomes, higher tourist arrivalsand increased trade-related activities that were spurred on by a buoyant exportperformance.

While growth was positive in 2004, the business landscape was also increasingly beingreshaped and transformed by the rapid pace of globalisation, market liberalizationand advances in technology. On the global front, there were notable shocks to theworld economy in 2004, namely, high oil prices, revival in inflationary pressures,tightening of the global monetary cycle, measures to reduce overheating in the People’sRepublic of China, sporadic outbreaks of avian flu and the effects of the tsunami inDecember.

Although the Malaysian economy remained resilient, most businesses focused oninnovating and improving to compete in the rapidly changing global environment.

A Good Basis, But ...

Malaysian Airline System Berhad (Malaysia Airlines/the Company) had initiated astrategic move three years ago with the implementation of the Widespread AssetUnbundling (WAU) exercise in November 2002 which brought Malaysia Airlines backto good and strong financial standing. This has to be followed through, as was theplan, with high level operating performance to ensure and sustain earnings.

The strong balance sheet, in other words, has to be matched by operational efficienciesthat deliver excellent financial result. We have other strengths too, such asacknowledged world-class air travel service quality, from which to leverage strongoperating performance, but there are many areas of doing business which we canimprove upon in the challenging airline industry.

Let me now present the highlights for the Company in the financial year ended 31March 2005.



FINANCIAL PERFORMANCE

Revenue

Malaysia Airlines’ total revenue in 2004/2005 improved by RM2.6 billion to RM11.4billion due primarily to the record 24 per cent increase in international passengertraffic growth of 1.7 million passengers and a 21 per cent increase in cargo tonnageflown. International passenger revenue grew by 29 per cent to RM7.9 billion whilecargo revenue increased by 44 per cent to RM2.4 billion.

Operating Expenditure

The Group’s total operating expenditure however increased by 29 per cent or RM2.4billion to RM11.0 billion, primarily due to the RM1.5 billion increase in fuel cost whichrose sharply and became a major concern during and as the year ended, and to asignificant extent also to network expansion that covered new destinations. Totalpassenger traffic which rose to 17.5 million compared to 15.4 million in the previousyear, reflecting a 14.1 per cent increase, further contributed to the increased operatingexpenditure.

Profit

Profit before tax (PBT) for the financial year ended 31 March 2005 improved to RM364.5million from the RM345.2 million registered in the previous year. Profit after tax (PAT)registered RM326.1 million, a decrease from RM461.1 million recorded in the previousyear. The previous year’s PAT included a deferred tax asset of RM127.3 million.

Dividend

The Board has proposed for shareholder approvalat the Thirty-Fourth Annual General Meeting a finaldividend of 2.5 sen per share (tax-exempt). Thistranslates into a gross dividend payout ratio of 13.3per cent for the year compared to 9.4 per cent inthe previous financial year. This is the secondconsecutive year a dividend has been declared forMalaysia Airlines shareholders. The dividend willbe paid on a date to be determined.


Earnings Per Share

For the year under review, Malaysia Airlines registered basic earnings per share of26.02 sen compared to 36.80 sen in the previous year.

Financial Position

As at 31 March 2005, the cash balance at Malaysia Airlines improved to RM2.19 billion.The primary use of cash during the year was to finance capital expenditure that includedinvestments to improve product and service standards, and improvements to variousoperational and support service systems.

Shareholder Funds

During the year, shareholder funds at Malaysia Airlines increased by 10 per cent toRM3.3 billion.

Assets

Total assets increased by 12 per cent to RM7.4 billion while net tangible assets pershare rose 10 per cent to RM2.66 per share.


Total assets increased by 12 per cent toRM7.4 billion while net tangible assets pershare rose 10 per cent to RM2.66 per share.



THE AIRLINE INDUSTRY

Big Business

The global airline industry is big business. Airlines the world over, employ 4 millionpeople and generate US$400 billion in economic output. While this is a colossal sum,losses between 2001 and 2004 exceeded US$36 billion. According to an InternationalAir Transport Association (IATA) report, the industry is expected to lose another US$6billion in 2005. The extraordinary price of fuel is affecting profitability. The latest risein oil prices in June 2005, taking the price of a benchmark barrel past the US$60 markfor the first time, is having an impact on airline ticket prices as carriers slap on freshfuel surcharges. Many airlines are also increasing their freight charges. The increase infuel costs has indeed had a dramatic impact on the bottom line of airlines as fuelrepresents an average of 20 per cent of their overall costs. Last year alone, the industrylost US$4.8 billion.

However, regional differences are astonishing. For example, North American carrierslost US$9 billion. Efficiency gains could not make up for structural problems. Labourcosts remained high and low cost competition at major hubs drove yields down.European carriers posted a profit of US$1.4 billion. Yields were better and consolidationhelped capacity management. Middle Eastern carriers made US$100 million. Strongtraffic growth led to profitability but the economics of matching capacity to demandis a challenge for this region. Latin American carriers were near break-even. Thesituation is changing fast with some of the region’s airlines making money, but a largenumber are technically bankrupt. African airlines were reported to have lost overUS$150 million. This region has major safety problems and is not investing ininfrastructure. Asian carriers on the other hand posted a hefty US$2.6 billion in profit.Strong growth fuelled by China and low labour costs were the competitive advantage.India may be the next great market for the industry.

Overall, during the year under review, the global airline industry saw positivedevelopments. Air transport has never been safer with over 1.8 billion passengersflying safely. Indeed 2004 was the airline industry’s safest year. Airlines areenvironmentally responsible with modern aircraft having a fuel efficiency of 3.5 litresper 100 passenger kilometres, the same as a small compact car. More people than everare flying with new business models meeting consumer expectations for lower airfares.

And airlines are vital to the global economy. The airline industry makes global businesspossible. Forty per cent of the value of goods traded in the world, are flown on aircraft.Without air transportation, you would have a different world.

Closer To Home

Our financial year saw the travel industry rebounding strongly with the return oftraffic into the region following the scare of SARS in 2003. Economically, Chinacontinued to dominate, providing much of the optimism in Asia. Forecasts from leadingsources agreed that Asia, particularly China and India will fuel much of the economicexpansion in the region with traffic growth projected to be at 2 percentage pointsabove the world’s average of 5 per cent. The promise of good profitability was, however,dampened by the unprecedented high fuel prices which have been soaring.



CORPORATE DEVELOPMENTS

On 4 October 2004, Malaysia Airlines and Asset Global Network Sdn Bhd (AGN) agreedto end the conditional reimbursement agreement dated 26 March 2003 for thereimbursement of Subang Complex A buildings. The deposit of RM1.0 million wasrefunded by the Company and AGN was also reimbursed RM580,000 for the costincurred.

The Board of Directors approved on 2 February 2005 that the financial year end ofMalaysia Airlines after 31 March 2005, be changed to 31 December effective 2005, tobe co-terminous with that of the ultimate holding company, Khazanah Nasional Berhad,and to comply with Section 168(1) of the Companies Act, 1965.

HUMAN CAPITAL AND PRODUCTIVITY

During the year under review, productivity at Malaysia Airlines saw a 19.5 per centincrease to RM504,789 per employee compared with RM422,378 per employee recordedin the previous year. This is a result in the right direction, even if there is room forimprovement.

The Company continues to develop its human capital through investments in relevanttraining programmes and has also implemented a career development and successionplanning system. In addition, Malaysia Airlines also intends to increase the supply ofits pilots and ground engineers to ensure a continuous and sufficient availability forthe current and future requirements of the business, bearing in mind the problemsfaced in this area in the past year.

Your Company will continue to implement measures to develop its human capital andto ensure organisational readiness in realising business objectives.

CORPORATE GOVERNANCE

To protect and enhance shareholder value, the Board of Directors remains committedto ensuring that the highest standards of corporate governance are observedthroughout the Company and Group as an imperative part of discharging itsresponsibilities. In a separate chapter of this Annual Report, a comprehensive disclosureon corporate governance by Malaysia Airlines is presented.



CORPORATE SOCIAL RESPONSIBILITY

At Malaysia Airlines, we recognise the need to strike a harmonious balance betweenprivate sector pursuits and community pursuits – both of which provide the combinedforce that wins not only customer loyalty and support, but also the support of theworld community at large.

A full and dedicated report on our corporate social responsibility pursuits is outlinedin a separate section of this Annual Report.

COLLABORATION

During the year under review, Malaysia Airlines entered into partnerships with twoleading international Maintenance, Repair and Overhaul (MRO) operators, LeadingEdge and Aviation Partner Boeing. The collaboration with Leading Edge will offerspecialised boutique external aircraft painting services. The tie-up with Aviation PartnerBoeing will offer installation of fuel-saving wing extension (winglets) services on Boeing737 aircraft.

The development of the MRO activities are synergistic to current operations and willsupport the government initiative to transform Subang into a regional hub for MROactivities.



AWARDS

During the year under review, Malaysia Airlines was honoured with the World’s BestCabin Staff Award for 2004 for the fourth consecutive year by Skytrax of London. Theaward recognizes Malaysia Airlines as an airline that fulfils the sincerity, warmth,friendliness, attentiveness, efficiency and overall best services criteria that passengersseek in an in-flight experience. Skytrax also awarded Malaysia Airlines with a thirdplacing for best on-board catering in the economy class category for 2005.

In a web-based poll by Smart Travel Asia in 2005, Malaysia Airlines emerged numberone in the category for Favourite Airline Food.

In March 2005, our freighter division MASkargo received two international standardscertification from SIRIM QAS International (SIRIM). The two certificates are the OHSAS18001:1999 for MASkargo’s Advanced Cargo Centre (ACC) in KLIA, and the ISO9001:2000 certification for the Penang Cargo Centre (PCC) facility. MASkargo was thefirst airline to receive the OHSAS 18001:1999 certification.

During the year, MASkargo was also recognised as ‘Asia’s Top 3 Air Cargo Carrier’ fora third consecutive year during the Asian Freight & Supply Chain Awards ceremonyorganized by Cargonews Asia.

In the Asia Money-Malaysia “Best Managed Company” polls for 2004, Malaysia Airlinesemerged as Most Improved Investor Relations Company, a joint first for Most ImprovedAnnual Report, a joint second for Best Annual Reports, a joint second for Best ChiefFinancial Officer conferred on Mr Low Chee Teng and a joint second for Best InvestorRelations Officer conferred on Mr Senthil Balan Danapalan.

Malaysia Airlines was also listed within the top 5 in the Best Investor Relations categoryin the FinanceAsia Best Companies Poll 2005 for Malaysia.

Malaysia Airlines front-line crew showed remarkable product skills and effort in raisingthe profile of in-flight merchandise selling and marketing by winning the Best In ProductKnowledge Award in the In-flight Sales Person of the Year (ISPY) 2004 competitionheld in London. This effort had contributed to a 38 per cent increase in the overall in-flight sales for the Company in the last financial year.



PROSPECTS

China, India and ASEAN will be the focused markets of our capacity growth in 2005 asup to five additional long range narrow-bodied aircraft are planned to be leased inthe last quarter of 2005.

Competition, however, will remain strong as airlines continue to inject additionalcapacity with delivery of new aircraft and more low cost carriers poised to be launchedthis year in this region. New traffic rights granted by China and India to the UnitedKingdom, Europe, Canada and the United States will result in greater capacity andfrequencies being redirected by European and North American carriers to Asia.

According to IATA, traffic demand is expected to remain buoyant in Asia Pacific. Theforecast growth is above 6 per cent for 2005 despite slightly lower economic growthand capacity expansion. The Pacific Association of Travel Agents (PATA) has forecasteven higher visitor arrivals in Asia Pacific averaging 10.6 per cent per annum until2007.

The Company will continue to broaden regional cooperation through collaborationwith other full service carriers within the region. During the year, Malaysia Airlinesforged collaborations with Singapore Airlines, Silk Air and Korean Air.

The Malaysia Airlines Travel Fair (MASTF) generated RM115 million in February 2005and will continue to be an annual event for distribution. The Company will alsocontinue to diversify its distribution channels to increase its market reach and enhanceits customer loyalty and ownership. The Internet booking facility (IBF) will continue tobe enhanced with global partnerships, such as the recent tie-up with GRS Networks inMay 2005.

The ongoing upgrading of the First and Business Class cabins of the B747-400 andB777 fleet, the re-branding of the front-end experience coupled with the newadvertising campaign will help strengthen Malaysia Airlines’ competitive position thishighly competitive year.

The uncertainties surrounding the US currency, instability in the Middle East, higherinterest rates, slower economic growth in Asia Pacific, high fuel prices and strongdemand for technical crew and engineers are the key concerns of the airline industrypresently. Slower demand for cargo space and increase in available capacity in themarket will result in pressure on yields. Make no mistake, 2005 will be a challenging,potentially difficult year.



On a brighter note, the Malaysian government has revised upward its projected touristarrivals for this year from 16.6 million to 20 million. Malaysia Airlines is tapping thisgrowth forecast.

The Company hopes to exploit the various opportunities in China and India. In 2005,Malaysia Airlines intends to reinforce its presence and expand further into China andIndia, to include Shengyang, Chongqing, Fuchou, Haikou, Amritsar, Cochin, Trivandrumand Trichi. In the same period, Malaysia Airlines proposes to increase its capacity intoGuangzhou, Hyderabad, New York and Stockholm, and its frequency into Singapore.

Within China and India, our expansion strategy is designed to ensure we reach thevarious lucrative points there. Malaysia Airlines currently operates into all key metropoints in China and India. We will continue to expand into key secondary points inChina and India to further tap these growing markets.

In spite of high fuel prices, heightened competition from full service carriers andincreasing proliferation of low cost regional carriers, the Company continues to remaincommitted to improving and growing from our current position. Our networkexpansion strategy is focused on strengthening our regional connectivity to grow andfeed our international network, without taking our eye off cost and return. MalaysiaAirlines is focused on ensuring that the upgrade of its product and service standardstranslate into further improvements in yield, seat factor, customer loyalty and overallrevenue performance.

Malaysia Airlines will also continue to look at its operations as a whole and increaseefficiencies and productivity of our existing resources to drive cost savings. During theyear, fuel cost as a percentage of total cost increased from 27 per cent to 34 per cent.The fuel surcharge and hedging of fuel requirements will continue to provide a cushionto the Group’s performance, although they cannot fully meet the punishing costimposition.

The Company will take all measures to adapt to the high fuel price environment toprotect our financial position and performance while maintaining our competitiveposition. We have a commitment to manage our responsibility to both shareholdersand customers alike.



APPRECIATION

As always, I am extremely grateful to the many loyal and valued customers for theirsupport in flying Malaysia Airlines. Your allegiance and the valuable feedback offeredhave helped the Group to better serve customers. Malaysia Airlines’ performance forthe year ended 31 March 2005 would not have been what it was if not for the continuedconfidence in our brand. For this, I wish to thank you very much.

To our shareholders, travel agents, service subscribers, suppliers and contractors, theGovernment and all stakeholders involved in the performance of Malaysia Airlines, Iwould also like to express my appreciation and gratitude for your contribution andsupport in making it another good year for Malaysia Airlines.

I would like to thank Dato’ Gumuri bin Hussain and Dato’ Zaharaah binti Shaari whoresigned as directors with effect from 16 August 2004 and 2 November 2004 respectivelyfor their invaluable contributions.

I would like to welcome Dato’ Izzuddin bin Dali, Tengku Azmil Zahruddin bin RajaAbdul Aziz and Dato’ Mohd Annuar bin Zaini who have been appointed to the Boardwith effect from 13 September 2004, 23 August 2004 and 2 February 2005 respectively,and look forward to their contributions. I am also pleased to welcome back Dato’Zaharaah binti Shaari who rejoins Malaysia Airlines as a director effective 18 July 2005.

In closing, the performance of Malaysia Airlines has again been driven by the dedicationand commitment of the management and employees. I wish to record my gratitude tothem, and look forward to their full support in the coming challenging year.

Dato’ Dr Mohd Munir bin Abdul MajidChairman18 July 2005


OVERVIEW

The year ended 31 March 2005 was another great yearfor Malaysian Airline System Berhad when the Companyreported a profit after tax (PAT) of RM326.1 millionachieved on the back of a RM11.4 billion turnover, a29.4 per cent increase over the RM8.8 billion turnoverreported in the previous year.

It was also a period when we were measured for our very high staff service standardsas well as enhanced product levels being offered by the airline. As a result, MalaysiaAirlines was elevated to a 5-star status by Skytrax in June 2005. This prestigiousconferment confirms that our formula for excellence works. Indeed everybody atMalaysia Airlines is proud of this elevation as we are among only four in the world tobe in this class. A detailed profile of our ranking is outlined in this report.

Great effort continues to be made towards our ultimate goal of positioning MalaysiaAirlines as a truly global brand. The airline is uniquely renowned for its personal touch,warmth and efficiency. Indeed, our customers bear testimony that Malaysia Airlines isgoing the extra mile to provide air travel and a transport service that rank among thebest in terms of safety, comfort and punctuality.

During the year under review, Malaysia Airlines delivered on its brand promise inGoing Beyond Expectations. And I am pleased to report on our many initiatives andendeavours that helped build a great airline to be among the top four in the world.

managing director’s reportand review

26


GOING BEYOND EXPECTATIONS

As at 31 March 2005, the total fleet size at Malaysia Airlines was 111 comprising 50wide–bodied and 54 narrow-bodied passenger aircraft, and seven wide-bodied B747-200 freighters. It was this magnificent fleet that afforded Malaysia Airlines the goldenopportunity to report a profitable year. This fleet size represented a net increase oftwo wide-bodied aircraft over the previous financial year. The Company took deliveryof two B777-200 aircraft from Boeing on 22 November and 13 December 2004. OneA330-300 was leased from ILFC on 17 May 2004.

To ensure the highest standards of customer satisfaction, emphasis on maintainingon-time departures, minimal delays and the reduction in mishandled passengers wereundertaken at our main hub at the Kuala Lumpur International Airport (KLIA). In allthree aspects, satisfactory performance was achieved despite the substantial increasein flights out of KLIA.

As our customer service operations expanded to cope with the higher passenger loadand additional flights, our operational budget also increased. The total operatingexpenditure expanded by RM28.5 million to RM249.5 million during the financial yearunder review. This 12.9 per cent increase was attributed to higher staff costs, hire andmaintenance of equipment, passenger layover and delay costs, other passenger salesexpenses, and other expenses. These costs were necessary to enable Malaysia Airlinesto uplift 17,535,823 passengers, an increase of 14.1 per cent from the previous year.

Revenue from cargo and traffic handling increased by 30.5 per cent to RM42.4 millionduring the year under review. The higher traffic handling was due to the increasedfrequency by customer airlines, and the addition of new airlines. As the KLIA operatorMalaysia Airports Berhad and the government continue to woo more airlines tosubscribe to KLIA as its hub, Malaysia Airlines expects a further boost to our revenuefrom customer airlines in the next financial year.

The Company’s strategy to pamper our customers with new offerings in our productsand services continued with the introduction of new menus. Even new menus designedfor the children that fly Malaysia Airlines, were introduced. Advanced in-flightentertainment (IFE) systems to complement the installation of new sleeper beds onour wide-bodied fleet were also introduced. Additional enhancements for our in-flightservices will be the introduction of new dinnerware, cutlery, glassware, linen and seatcomfort items. Our enhanced products and services will enable Malaysia Airlinespassengers to enjoy facilities and amenities that are on par or above that of ourcompetitors.

In our efforts to enhance service quality, Malaysia Airlines is now participating in theIATA Global Airline Performance (GAP) survey. For the period from July to September2004, in terms of “overall rating on airline performance” on the Europe-Asia routes,Malaysia Airlines achieved third position amongst the airlines. In terms of the airlinelounge, Malaysia Airlines emerged top in the first and business class lounge categoryon the Europe-Asia routes.

A commitment to excel

MANAGING DIRECTOR’S REPORT AND REVIEW


THE FULL REVIEW OF OPERATIONS OF MALAYSIA AIRLINES

Flights Handled

During the year, Malaysia Airlines managed a total of 179,715 flightdepartures system-wide compared to the previous year of 166,025 flightdepartures system-wide. Malaysia Airlines at KLIA handled a total of 46,732flight departures, an increase of 10.8 per cent as compared to the previousyear, and also an increase of 4.9 per cent from the estimated flights handledfor the year 2004/2005.

Malaysia Airlines has also managed to handle the increasing frequency ofcustomer airlines, both existing and new, such as First Cambodia Airlines,Lufthansa, China Eastern Airlines, PT Riau and Shenzen Airlines.

On Time Performance

On time performance for Malaysia Airlines flights recorded an average of86.8 per cent for international flights and 90.5 per cent for domestic flights.


Malaysia Airlines managed a total of 179,715 flightdepartures system-wide compared to the previousyear of 166,025 flight departures system-wide.


A statement of pride


In the year 2004/2005, the system-wide passenger upliftedincreased by 14.1 per cent to 17,535,823 passengers ascompared to the previous year.


Passengers Handled By Malaysia Airlines

In the year 2004/2005, the system-wide passenger uplifted increased by14.1 per cent to 17,535,823 passengers as compared to the previous year.The increase in the number of passengers was partly due to the highernumber of flights handled as a result of an expansion of current routesand the launching of new destinations. Malaysia Airlines at KLIA recorded6,621,300 passengers uplifted, an increase of 14.6 per cent compared tothe previous year.

Integrated System For Regulatory Compliance

Passenger clearance through the immigration at their arrival destinationwas also part of Malaysia Airlines’ concern. In view of the strict bordercontrols, Malaysia Airlines as with other airlines, was also being subjectedto the stringent regulatory ‘Advance Passenger Processing’ (APP)requirement.

The Company is in compliance with the Australian APP and New Zealand‘Advance Passenger Screening’ (APS) through the integrated functionsimplemented within the Departure Control System applications in early2004. For the Australian APP, Malaysia Airlines achieved the highestcompliance level of 98 per cent. Indirectly, passengers can be processedspeedily at the immigration checkpoints as their data have been pre-verified and captured by the authorities.



Malaysia Airlines Travel Fair

The Company scored yet another success with its second Malaysia Airlines Travel Fairheld in February 2005 that attracted an overwhelming 180,000 visitors and generateda turnover of RM115 million in ticket sales, excluding our packages. The Companyintends to use this event as a platform to raise the Malaysia Airlines brand awareness.The Company will explore opportunities of replicating the travel fair initiative inselected international markets.




A challenge to embrace

The Company scored yet another success withits second Malaysia Airlines Travel Fair held inFebruary 2005 that attracted an overwhelming180,000 visitors and generated a turnover ofRM115 million in ticket sales, excluding ourpackages.


INNOVATING FOR COMPETITIVE ADVANTAGE

New Service Delivery

In line with the cabin upgrade for First Class/Business Class on B747/B777 aircraft, totalchange of equipment of dinnerware, cutlery, glassware, linen and seat comfort itemswere introduced on two B747 aircraft and on five B777 aircraft under phase one.From 29 March 2005 the new service delivery was introduced on the Kuala Lumpur/London/Kuala Lumpur and Kuala Lumpur/Sydney/Kuala Lumpur sectors using theretrofitted B747 aircraft. At the same time, the new service delivery was also introducedon the Kuala Lumpur/Zurich/Kuala Lumpur sector using the retrofitted B777 aircraft.

This new service delivery was also extended to the Kuala Lumpur/Sydney/Kuala Lumpurnon-stop B777 flights from 1 May 2005 and to the Kuala Lumpur/Tokyo/Kuala Lumpurnon-stop flights effective 18 May 2005.

Under phase two, the new service delivery will be further extended to the KualaLumpur/Manchester/Kuala Lumpur and the Kuala Lumpur/Amsterdam/Kuala LumpurB747 flights effective July/August 2005.

In-flight Entertainment (IFE) Upgrade on B747 and B777 with MatsushitaSystem 3000i

Malaysia Airlines is expected to lead in its delivery of top of the line high quality in-flight entertainment system with the Matsushita System 3000i. Our valued customerswill now have digitized on-demand audio and video media on all classes. The otherfeatures of the system include new games, SMS, interactive flight information and pclaptop power.



IFE Re-Branding

To ensure a consistent look and feel, Malaysia Airlines revamped its interactive screendesigns, navigation and entertainment guide for all IFE systems. This exercise wasimplemented in December 2004.

Better Reading Pleasure

Our in-flight magazine Going Places was revamped with a trendier look and feel, withmore feature articles and better pictures. The first issue with the new design layoutand concept was distributed on board our aircraft in August 2004. There has also beena review of the current in-flight reading materials to accommodate the demand formore variety.

Kerb Side Drop Off Facility

At KLIA, a new Kerb Side Drop-off and Front-end Check-in services have beenintroduced. The Kerb Side Drop-off provides our premium class passengers with adesignated drop off point at the departure lane in KLIA with porter service to assist inthe baggage handling.


A statement of pride


EXTENDING HORIZONS FOR MARKET REACH

Destinations

As at 31 March 2005, the Malaysia Airlines global network comprised 32 domestic and86 international destinations. Of the 86 international destinations, 17 were operatedin collaboration with our airline partners.

The Network Strategy

The strategic focus during the year under review was to build a viable and sustainablenetwork while focusing on capturing our share of the Asian market. Efforts wereaimed at increasing our market span into India and China and improving marketpenetration through frequency increases in ASEAN, North Asia and the Middle East.

Highlights of Network Changes

North America

The 3x weekly services to Newark via Dubai were rerouted via Stockholm effective 1November 2004 to improve the viability of the Newark service and to cater to thegrowing outbound Scandinavian market.

United Kingdom

The 4x weekly Kuala Lumpur-Manchester return B747 services were retimed to departKuala Lumpur in the morning instead of evening in order to provide connectivity forthe Brisbane, Sydney and Melbourne morning arrival services. Manchester AirportAuthorities offered reduced charges on landing, parking, and passenger handling forthese arrivals, giving Malaysia Airlines also the benefit of such incentives.

A promise to be better


Continental Europe

For Europe, the services to Paris were increased from 3x to 5x weekly effective 1 May2004 while the 7x weekly services to Frankfurt were rescheduled as 4x weekly KualaLumpur-Frankfurt return and 3x weekly Kuching-Kuala Lumpur-Frankfurt return fromNorthern Summer 2004.

The 3x weekly Kuala Lumpur-Vienna return services that were suspended in 2003 werereinstated in Northern Summer 2004. Stockholm was introduced as a new destinationreplacing Dubai in the rerouting of the Newark flight.

The total weekly frequencies to Continental Europe were increased from 24x weeklyto 28x weekly in Northern Summer 2004 and to 31x weekly in Northern Winter 2004with the operation of the 3x weekly Kuala Lumpur-Stockholm-Newark return on B777.

Australia/New Zealand

To strengthen our position in Australia, the services to Sydney and Melbourne wereincreased and rescheduled to operate 14x weekly to each destination. In addition, the3x weekly A330-200 Kuala Lumpur-Brisbane return and 3x weekly B747 Kuala Lumpur-Brisbane-Auckland return services were rerouted as 5x weekly B777 Kuala Lumpur-Brisbane return in Northern Summer 2004 and a sixth Brisbane service on day 7 wasintroduced in Northern Winter 2004. For Kuala Lumpur-Auckland return, the serviceswere increased to daily from 1 May 2004 with 3x weekly operated on B747 and 4xweekly on B777.

Japan

The 3x weekly Kuala Lumpur-Nagoya services were increased to 5x weekly effective18 February 2005 and the 5x weekly Kuala Lumpur-Osaka services were increased to7x weekly with the introduction of 2x weekly Kuala Lumpur-Kota Kinabalu-Osakareturn services in Northen Summer 2004. Meanwhile, the Kuala Lumpur-Fukuoka returnservices which were suspended from 15 May 2003, were reinstated on 9 November2004 with 3x weekly services.

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