M O V I N G T H E W O R L D S C A R G O

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1 74 O P E R A T I O N S R E V I E W : C A R G O M O V I N G T H E W O R L D S C A R G O A Better Performance MASkargo continued its revenue growth and consolidated its position in major markets during the financial year. The market situation was very volatile for the cargo business due to the SARS outbreak, the Middle East crisis, the appreciation of the Euro against the US dollar and the escalation in fuel prices. Nonetheless, a series of initiatives put in place, such as realigning the Company s freighter services to dominate certain key markets, expanding the Priority Business Centre to Penang and exploiting e-commerce, helped the Company in registering double-digit growth. The Company also added three more leased B freighters into service during the financial year, making it a fleet of eight B F. The eighth B freighter entered service in late March For the year under review, MASkargo recorded an 18% increase in profit over that of the previous financial year. Cargo volume increased by 10.4% to 569,068 tonnes, a commendable growth when compared with the industry s average annual growth of around 4% to 5%. Trans-shipment growth increased from 49.8% to 53.8%, which augurs well for the development of Kuala Lumpur International Airport (KLIA) as a major trans-shipment hub. Such growth was driven by a combination of tonnage growth and stabilising improvements in value creation. Load tonne kilometer (LTKM) and revenue for belly domestic flights increased due to the introduction of wide-body flights into East Malaysia. The improvement in operational quality at the Advanced Cargo Centre, which saw the reduction of mishandled cargo to an

2 75 During the year under review, the Advanced Cargo Centre (ACC) at KLIA was already operating at about 85% capacity and exceeding 90% during peak periods A promise to be better

3 76 internationally acceptable level of 0.19%, also helped. The sudden surge in capacity had put tremendous pressure to yield and load factor. The surge in cargo demand happened during the traditional peak periods of November and part of December. However, throughout the year, demand out of Europe continued to be weak. The demand for airfreight is expected to grow strongly. The forecasted world average cargo traffic annual growth rate for the next 20 years is 5.5% (Airbus Industrie air cargo forecast of 12 August 2003). Asia will lead the growth in airfreight demand. The fastest growing airfreight markets have been, and will remain, those linking the Asia-Pacific region to Europe and North America. Seven of the top ten flows serve this region. MASkargo freighter services will further build on its strength in the Orient stations, with emphasis on the Chinese markets to improve yield and overall revenue. The main trade lanes will be from the Orient and Far East into Europe and Australia. Warehousing Capacity During the year under review, the Advanced Cargo Centre (ACC) at KLIA was already operating at about 85% capacity and exceeding 90% during peak periods. The existing warehouse is reaching its capacity limit of 650,000 kg per annum. Plans are underway to extend the ACC, scheduled for completion by 2007, to accommodate the projected increase in cargo volume. There is also a dire need for immediate expansion to achieve the objective for KLIA to be a trans-shipment centre. As an interim measure, the establishment of offshore hubs will ease the congestion at KLIA. The percentage of trans-shipment cargo flowing through KLIA ACC has increased from 30% in the last financial year to 53.8% during this review period. The demand for airfreight is expected to grow strongly. The forecasted world average cargo traffic annual growth rate for the next 20 years is 5.5% (Airbus Industrie air cargo forecast of 12 August 2003)

4 Priority Business Centres In line with the Government s objectives, the added airfreight capacity combined with the consistent efficiency of the KLIA ACC will be the catalyst to further develop KLIA into a viable cargo hub for this region. The role of the Priority Business Centre (PBC) will be further enhanced to achieve this target. 77 First introduced in 2001 at KLIA, the PBC has proven to be successful and was replicated in Penang in 2003, in line with the expansion of the warehouse facility and the renaming of the whole cargo and Free Commercial Zone complex into Penang Cargo Centre (PCC). During the review period, there were 70 appointed agents in KLIA, with the eight PBC members in Kuala Lumpur contributing approximately 70% of the total revenue. The value-added services and membership status of the PBC will be continually reviewed.

5 78 Products and Services The introduction of additional direct flights from Penang to Europe, Japan and Hong Kong have resulted in a more than 50% year-on-year improvement in revenue and more than 50% increase in market share. This strategy was not only limited to Penang. With the introduction of more wide-body passenger aircraft into Kota Kinabalu and Kuching, capacity and sales planning will be intensified to take advantage of the additional capacity out of these stations. The sea to air, I-port programme, introduced to simplify procedures for trans-shipment cargo that uses a multimodal mode of transportation through Malaysia, will be more aggressively marketed to make KLIA an attractive regional cargo hub. A series of road shows were conducted in Semarang, Surabaya and Jakarta in Indonesia, and in Vietnam and Cambodia. For the period under review, the I-port programme was expanded to the Port of Tanjung Pelepas (PTP) in Johor on 24 May 2003 and to the Port of Kuantan on 19 January While the expansion to PTP will take advantage of the Indonesian market, the Kuantan I-Port will allow airlines flying into KLIA to tap into the lucrative Indo-China market. During the financial year, more than 1.2 million kilos of cargo have been moved through this innovative initiative. MASkargo s additional aircraft will place it in a better position to capitalise on the lucrative charter business. Traditionally, MASkargo has been flying the charter flights for the F1 and MotoGP events. The ISO 9001:2000 standard certification for the Charter and Planning section, as well as Express Handling unit, will be an added boost to the improvement in service levels. Special Cargo MASkargo is reputed to be able to fly any cargo to anywhere in the world. On 24 Arpil 2003, it safely transported a homograft transplant (human tissue) for Hepshibah Jeyabalan, who was suffering from heart problems. The journey began at Los Angeles International Airport via Malaysia Airlines and landed in Penang. The handling of such a sensitive cargo requires special care and proved that MASkargo is up to the task of ensuring safe and smooth passage of such items. MASkargo was fully involved in the passage of about 60 horses and their grooms for the inaugural Kuala Lumpur International Grand Prix, a major equestrian event, in late September MASkargo provided special care for the horses to ensure that they were always safe and comfortable throughout their journey.

6 79 The sea to air, I-port programme, introduced to simplify procedures for trans-shipment cargo that uses a multimodal mode of transportation through Malaysia, will be more aggressively marketed to make KLIA an attractive regional cargo hub

7 80 O P E R A T I O N S R E V I E W : S A F E T Y, S E C U R I T Y & Q U A L I T Y F L Y I N G S A F E L Y, S E C U R E L Y & R E L I A B L Y A Resource Management Programme, initially introduced to flight crew to reduce incidents related human factors, has been extended to all categories of employees A commitment to excel

8 81 Safety and Security The establishment of a Board Safety and Security Committee and Corporate Safety and Security Department reflects Malaysia Airlines intent at ensuring customers confidence in air travel. Both the committee and the department monitor the Airline s safety and security compliance with commercial and regulatory requirements, as well as that of its contracted service providers, through the Safety and Security Enhancement Action Plan. At the same time, an open and active safety and security culture is being promoted amongst all employees. Staff are continually reminded to openly report any related concerns or deficiencies that may need to be acted upon. A Corporate Safety and Security Management manual is available to assist departments in formulating operating procedures that conform to corporate policies. A Safety Management System is being put in place in line with best aviation practices. A Resource Management Programme, initially introduced to flight crew to reduce human-related incidents, has been extended to all employees. The performance of flight crew has been further reinforced with the implementation of Flight Operations Quality Assurance and Line Operations Safety Assurance programmes. Ground safety was also not neglected. During the period under review, ground safety campaigns that were undertaken included road, industrial and personal safety. Industrial ground safety audits were also conducted to ensure a hazard-free work environment. Security issues have been given an unprecedented focus in the aviation industry. Heightened security measures continued to be enforced. Information sharing with local and international security authorities is ongoing to ensure that threats are assessed and countered. In addition, the one passenger one bag policy has been implemented to ensure passenger safety in the cabin. The checking of passenger identification for domestic flights will be introduced to eliminate security breaches. A Critical Incident Stress Management group has been formed to provide peer support to employees experiencing traumatic stress at the workplace. At MASkargo, plans are underway to install x-ray machines at Kota Kinabalu, Kuching and Penang airports. KLIA ACC will be equipped with x-ray facilities to accommodate lower deck pallets, which will allow early uplift of cargo without the cooling period requirement. The CCTV installation already introduced in Penang will be expanded to KLIA, allowing speedier cargo tracing via the Internet. To reinforce the Company s commitment towards safety and security, MASkargo appointed Safety Executives and initiated various enhancements to ensure compliance to the requirements of safety and other regulatory bodies. These projects included the formation of an in-house fire squad and its first fire drill exercise at ACC was held in February Fire drills were also held at the ACC s Animal Hotel in February 2004 and in Penang in March A safety audit was conducted at domestic stations in June 2003 and on the Company s vendors in March 2004.

9 82 Malaysia Airlines emphasis on quality is reflected in the setting up of a quality assurance department specifically tasked with ensuring that the quality of the Airline s products and services is consistent, repeatable and of a defined level Flight Operations The flight crew s commitment and diligent monitoring by support staff have greatly contributed to the divisional dispatch reliability averaging 99.94% of the total flights. Safety remained of paramount concern as improvement activities took place during the financial year. A quality tracking programme, Flight Operations Quality Assurance, was introduced to monitor the performance of technical crew by analysing data collected. The system also enabled a review of various flying techniques in order to produce the highest standards in technical aviation procedures. A collaboration between the Line Operations Safety Audit and the University of Texas has been undertaken to address the human factors affecting aviation issues. Malaysia Airlines emphasis on quality is reflected in the setting up of a quality assurance department specifically tasked with ensuring that the quality of the Airline s products and services is consistent, repeatable and of a defined level. As testament to the Airline s dedication towards providing quality service, Skytrax of London awarded Malaysia Airlines the coveted World s Best Cabin Staff 2003 for the third successive year. This award was based on the responses to a survey measuring the efficiency, cabin presence, attentiveness, friendliness, consistency, sincerity and attitude of cabin staff. Malaysia Airlines gained further recognition during the financial year when it ranked amongst the top two airlines (out of 65) that achieved 99% on

10 83 track performance for Standard Instrument Departures from the Manchester Airport Authority, United Kingdom. Programmes are continually undertaken to further enhance in-flight services. In 2003, an In-flight Supervisors Development Programme was extensively launched, with special emphasis on communication and crew relationships between in-flight crew and divisional management. Work was also undertaken to improve the content of in-flight announcements, which brought positive results as indicated in in-flight market surveys throughout the financial year. The Toastmasters methodology has been incorporated in the inflight training modules as a step ahead in the enhancement to the overall communication skills of our flight crew. In support of the company s marketing strategy, expatriate cabin crew were recruited to improve communication and cultural understanding of passengers originating from India, Indonesia, China, Japan, Korea, South Africa and Mexico. Such efforts make Malaysia Airlines a truly multinational global airline.

11 84 Technical & Ground Operations The Division s pursuit for operational and service excellence continued with focus on improving quality, productivity, reducing costs but yet offering service levels and customer care that went beyond expectations Engineering and Maintenance (E & M) Partnering with a major player such as PEMCO will fasttrack MAS mission of becoming a major maintenance, repair and overhaul centre in the region This financial year saw the implementation of E&M s three-year business plan and the establishment of key performance indicators. MAS continual emphasis on aircraft reliability and passenger comfort resulted in an overall technical dispatch reliability exceeding 98% and serviceability of the fleet s in-flight entertainment consistently hovering above 99.5%. It was in recognising the 99.4% dispatch reliability of the B fleet that Boeing presented MAS with the Boeing Pride Of Excellence Award in January Stringent cost control measures yielded a favourable variance of RM59.1 million compared to budget, whilst cost savings derived from refined processes, innovative negotiations and old warranty claims exceeded RM100 million during the financial year under review. One of the major business process improvements achieved was in block maintenance where B777 and B737 B checks were each reduced to one day, enabling aircraft utilisation