Recommendations for Current Challenge MOST AIRLINES AROUND THE WORLD ARE PERFORMING MAJOR RESTRUCTURING AND TRANSFORMING

THEIR OPERATIONS TO SURVIVE Around the world, airlines companies that are facing deep financial crisis only have one ultimatum. Making drastic transformations or exposing them to the risk of bankruptcy. In fact, more than 50% of the airlines operating throughout the world were operating under bankruptcy protection policy, including Northwest and Delta Airlines. They have no choice but to make drastic transformations in order to survive in a very competitive market. Some common measures taken by airlines undergoing restructuring: Reduction in manpower cost Almost a decade ago, airlines in the US have reduced employee wage, altered the structure of full-time, part-time and temporary workers to create an employment structure that is sustainable in the long term especially from the aspect of the running cost. This strategy is needed looking at the the pattern of fuel cost that is constantly changing and volatile to any political or economic turbulence around the world. Shift to automation and outsourcing Automation technology is one of the core areas that have been a focus of any major airlines around the world. Currently, most airlines are automating the process of check-ins for the convenience of the passengers. This is very economical because it has minimum human error and does not involve larger running cost. Making tough choices about strategy In the past, this has been an industry characterised by a near complete disconnect between product and network investment and returns. Marketing departments have designed product specifications based on what they believed customers wanted and network structures based on where they believed customers wanted to fly to. In recent years, airlines have been forced to take a much sharper line on these investments. Airlines in the US and Europe have been forced to recognise, for instance, that however much passengers might appreciate food onboard, it does not influence the purchase decision for short-haul flights in the US and Europe, and is therefore, an investment with negative returns. Several full service carriers now charge for food. Similarly, these airlines have rationalised their networks, focusing on destinations where they can earn acceptable returns, and look to alliance partners to fill the void left by cancelled routes. British Airways, for example, reduced its available seat departures by 7.4% over the course of the last 5 years while increasing its operating margin by 4.7 percentage points6. These examples may or may not apply to MAS, and only those which are appropriate within MAS market will be implemented. The industry evolution towards a Phase 4 market with more intense competition and liberalisation will lead to an even greater divide between those airlines that achieve sustainable profitable growth and those that do not. The former a select few will be rewarded with more customers and greater capital for growth while the latter will languish, lag further behind and perhaps even perish. For MAS to win, we must seize the day. We must take bold and quick action to ensure our survival. We have come a long way since the start of

our BTP 1. Most importantly, we were able to overcome a cash crisis to ensure our financial survival in 2006 and we are now on track to generate further profits in 2008.

We must continuously build the foundation to adapt ourselves to the needs of our immediate future. We need to fundamentally transform our business into one that will deliver lasting success. As we go into 2009 and beyond, our focus will shift upwards to secure sustained, profitable growth for MAS. The next phase of our journey is the most challenging yet for MAS this is the real mountain that we need to scale. To chart our path onwards and upwards, we have a strategy that is tailored to meet the challenges ahead. Our strategy is to transform MAS into a Five Star Value Carrier, and we are determined to achieve this.

Recommendations for Future Growth WHAT DO WE MEAN BY FSVC? The term Five Star Value Carrier conjures an image of an airline that comes first to mind when customers seek quality air travel and real value-for-money. This is an airline that people go out of their way to fly with and to recommend to their friends because the airline understands what they REALLY NEED (not what the airline thinks they need) and does its best to meet these needs. This way, there is no unnecessary cost and therefore, fares can remain low and competitive. We will offer products and services that provide our customers with more value compared to those of our competitors. Our target customers are those who want service excellence and quality, and do not make decisions solely on price. Their reasons for flying with us could revolve around connectivity, inflight service, seat comfort and a host of other reasons. This means that we will not always compete directly with the lowest fares offered by the LCCs or other full service carriers. Our aim will be to have a yield premium that is above the lowest priced competitor on our routes. At the same time, we will place a lot of emphasis on delivering value for money as we know that price is still an important consideration for many. Thus, we aim to offer very competitively priced tickets in all classes. Delivering value will require us to improve our customer service and increase the efficiency and productivity of our behind-the-scenes infrastructure. This then needs to be matched with appropriate choices about how and where we spend on product development and ensuring that there is a clear Return On Investment (ROI) on every ringgit spent.

IS THIS CONCEPT OF FSVC PROVIDING 5-STAR SERVICE WHILE MAINTAINING LOW COST POSSIBLE? There will be a lot of sceptics who will say that FSVC cannot be done. Based on some of the work we have done at Malaysia Airlines, we are confident that this is achievable. Some key examples are: Example 1: Modifications made on hot meals for long-haul sector On a particular route, we discovered that although the lamb briyani costs us more, customer satisfaction was poor compared to the nasi goreng with satay ayam (fried rice with chicken satay), a lower cost item. There are many similar examples when this approach is applied on a route by route basis. Example 2: Introduction of light meal boxes for selected short-haul sectors A second example is the introduction of the Light Meal Box (LMB) on selected routes. When we scanned the industry, we realised that many European and Asian carriers have introduced light meal boxes. When we launched ours, we did a survey based on 383 flights (35,000 passengers). The findings showed that 91% found our light meal boxes acceptable, 5% complimented them and only a small group i.e. 3% did not like them. The meal boxes have enabled us to increase inflight service efficiency, improve aircraft turnaround time, and reduce our overall inflight costs.

Example 3: Increase in Internet sales Sale of air tickets via the Internet plays a critical role in realising FSVC. With our improved Internet Booking Facility, our customers can purchase tickets from the comfort of their home without having to incur the Global Distribution System (GDS) fee which is standard for purchases made via travel agents. In other words, we can offer our customers the convenience of self-booking without charging them for services they do not really need. Our Internet Booking Facility, together with the MAS Passenger Services System (PSS), will offer customers a hassle-free travelling experience from reservations to ticketing whilst at the same time, substantially reducing operating costs. MAS transformation strategy over the next 5 years is to become a FSVC. Creating the FSVC requires us to transform the entire airline at every point. Customers have to be won and retained with our new fares, products and service offerings. Talented employees need to be developed and stretched to help us sustain our growth. Significant cost reduction challenges have to be met to deliver this. In a nutshell, to our customers and employees alike, we must look, feel and behave differently. Business Transformation Business Transformation is not about incremental change or minor tweaking of the organisation. Business transformation entails a fundamental change in the way an organisation DOES its business (Doing) as well as the CHARACTER of the organisation (Being). No business transformation will be complete and successful, in terms of creating a lasting impact, without addressing both sides of the equation. The Being is the end state. It provides the clue to where we want the transformation journey to take the organisation. In the case of MAS, The MAS Way is the Being and its 5 thrusts are the guiding principle as to where we want to go as an organisation in the next few years. The Doing points to all Key Business Activities (KBAs) that MAS undertakes to move the organisation towards the end state.

GREATER ACHIEVEMENT Today, MAS flies around 50,000 passengers daily to some 100 destinations worldwide. Since 2008, the MAS brand journey has been anchored on its airline code, MH- Malaysian Hospitality. The objective is to deliver Malaysian Hospitality all the way to the customers. On top of that, MAS are refreshing its fleet and expanding the network. Three new Boeing 737-800 aircraft has been delivered and by April this year, MAS will receive the first brand new Airbus 330-300 aircraft. There have been may efforts the streamline and popularize the brand of MAS in the last few years. These include offering convenience to customers when they book, check in and check flight status via MHmobile (flymas.mobi), the opening of MHkiosk in KL Sentral and the Enrich (MAS Frequent Flyer Proigramme) portal and many more. To connect effectively with the younger generation, MAS is actively engaging with its customers via MAS internal blog (LivingMH), Facebook pages (MAS Travel and MHdeals) as well as Twitter accounts (@MAS/@MHdeals). Recently, MAS proudly reached another milestone by becoming a Silver Winner of Putra Brand Awards. The Awards are recognized by major business institutions in Malaysia in which the Sultan of Selangor, Sultan Sarafuddin has consented to become the permanent royal patron. Raja Zamilia Raja Datuk Deri Mansur, MAS Executive vice-president of communications has given this advice when receiving the award: Focus on your strength, build on it and ensure that it is hard to be replicated.