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M O V I N G T H E W O R L D ’ S C A R G O

O P E R A T I O N S R E V I E W : C A R G O

A Better Performance

MASkargo continued its revenue growth andconsolidated its position in major markets duringthe financial year. The market situation was veryvolatile for the cargo business due to the SARSoutbreak, the Middle East crisis, the appreciationof 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 dominatecertain key markets, expanding the PriorityBusiness Centre to Penang and exploiting e-commerce, helped the Company in registeringdouble-digit growth. The Company also addedthree more leased B747-200 freighters into service during the financial year, making it afleet of eight B747-200F. The eighth B747-200freighter entered service in late March 2004.

For the year under review, MASkargo recordedan 18% increase in profit over that of the previous financial year. Cargo volume increasedby 10.4% to 569,068 tonnes, a commendablegrowth when compared with the industry’saverage annual growth of around 4% to 5%.Trans-shipment growth increased from 49.8% to53.8%, which augurs well for the developmentof Kuala Lumpur International Airport (KLIA) as a major trans-shipment hub. Such growth wasdriven 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 EastMalaysia. The improvement in operational quality at the Advanced Cargo Centre, whichsaw the reduction of mishandled cargo to an

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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

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internationally acceptable level of 0.19%, alsohelped. The sudden surge in capacity had puttremendous pressure to yield and load factor.The surge in cargo demand happened duringthe 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 growstrongly. The forecasted world average cargotraffic annual growth rate for the next 20 yearsis 5.5% (Airbus Industrie air cargo forecast of 12 August 2003). Asia will lead the growth inairfreight demand. The fastest growing airfreightmarkets have been, and will remain, those linking the Asia-Pacific region to Europe andNorth America. Seven of the top ten flows servethis region. MASkargo freighter services will further build on its strength in the Orient stations, with emphasis on the Chinese marketsto 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 AdvancedCargo Centre (ACC) at KLIA was already operating at about 85% capacity and exceeding90% during peak periods. The existing warehouse is reaching its capacity limit of650,000 kg per annum. Plans are underway to extend the ACC, scheduled for completion by 2007, to accommodate the projectedincrease in cargo volume. There is also a direneed for immediate expansion to achieve theobjective 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 from30% in the last financial year to 53.8% duringthis 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)

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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 aviable cargo hub for this region. The role of the Priority Business Centre (PBC) will be furtherenhanced to achieve this target.

First introduced in 2001 at KLIA, the PBC hasproven to be successful and was replicated inPenang in 2003, in line with the expansion of the warehouse facility and the renaming ofthe whole cargo and Free Commercial Zone complex into Penang Cargo Centre (PCC).During the review period, there were 70appointed agents in KLIA, with the eight PBC members in Kuala Lumpur contributingapproximately 70% of the total revenue. The value-added services and membership status of the PBC will be continually reviewed.

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Products and Services

The introduction of additional direct flights from Penang to Europe, Japan and Hong Konghave resulted in a more than 50% year-on-yearimprovement in revenue and more than 50%increase in market share. This strategy was notonly limited to Penang. With the introduction of more wide-body passenger aircraft into KotaKinabalu and Kuching, capacity and sales plan-ning will be intensified to take advantage of theadditional capacity out of these stations.

The “sea to air”, I-port programme, introducedto simplify procedures for trans-shipment cargothat uses a multimodal mode of transportationthrough Malaysia, will be more aggressivelymarketed to make KLIA an attractive regionalcargo hub. A series of road shows were conducted in Semarang, Surabaya and Jakarta in Indonesia, and in Vietnam and Cambodia. Forthe period under review, the I-port programmewas expanded to the Port of Tanjung Pelepas(PTP) in Johor on 24 May 2003 and to the Port of Kuantan on 19 January 2004. While theexpansion to PTP will take advantage of theIndonesian market, the Kuantan I-Port will allowairlines flying into KLIA to tap into the lucrativeIndo-China market. During the financial year,more than 1.2 million kilos of cargo have beenmoved through this innovative initiative.

MASkargo’s additional aircraft will place it in a better position to capitalise on the lucrativecharter business. Traditionally, MASkargo hasbeen flying the charter flights for the F1 andMotoGP events. The ISO 9001:2000 standardcertification 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 cargoto anywhere in the world. On 24 Arpil 2003, it safely transported a homograft transplant(human tissue) for Hepshibah Jeyabalan, whowas suffering from heart problems. The journeybegan at Los Angeles International Airport viaMalaysia Airlines and landed in Penang. Thehandling of such a sensitive cargo requires special care and proved that MASkargo is up tothe 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 theinaugural Kuala Lumpur International GrandPrix, a major equestrian event, in late September2003. MASkargo provided special care for thehorses to ensure that they were always safe and comfortable throughout their journey.

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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

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

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

A Resource Management Programme, initially

introduced to flight crew to reduce incidents

related human factors, has been extended to

all categories of employees

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A commitment to excel

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Safety and Security

The establishment of a Board Safety and SecurityCommittee and Corporate Safety and SecurityDepartment reflects Malaysia Airlines’ intent atensuring customers’ confidence in air travel.Both the committee and the department monitor the Airline’s safety and securitycompliance with commercial and regulatoryrequirements, as well as that of its contractedservice providers, through the Safety andSecurity Enhancement Action Plan. At the same time, an open and active safety and security culture is being promoted amongst all employees. Staff are continually remindedto openly report any related concerns or deficiencies that may need to be acted upon.

A Corporate Safety and Security Managementmanual is available to assist departments in formulating operating procedures that conformto corporate policies. A Safety ManagementSystem is being put in place in line with bestaviation practices. A Resource ManagementProgramme, initially introduced to flight crew to reduce human-related incidents, has beenextended to all employees. The performance of flight crew has been further reinforced with the implementation of Flight OperationsQuality Assurance and Line Operations SafetyAssurance programmes.

Ground safety was also not neglected. Duringthe period under review, ground safety campaigns that were undertaken included road, industrial and personal safety. Industrialground safety audits were also conducted toensure a hazard-free work environment.

Security issues have been given an unprecedent-ed focus in the aviation industry. Heightenedsecurity measures continued to be enforced.Information sharing with local and internationalsecurity authorities is ongoing to ensure thatthreats are assessed and countered. In addition,the ‘one passenger one bag’ policy has beenimplemented to ensure passenger safety in thecabin. The checking of passenger identificationfor domestic flights will be introduced to eliminate security breaches. A Critical IncidentStress Management group has been formed toprovide peer support to employees experiencingtraumatic stress at the workplace.

At MASkargo, plans are underway to install x-ray machines at Kota Kinabalu, Kuching andPenang airports. KLIA ACC will be equipped with x-ray facilities to accommodate lower deckpallets, which will allow early uplift of cargowithout the cooling period requirement. TheCCTV installation already introduced in Penangwill be expanded to KLIA, allowing speediercargo tracing via the Internet.

To reinforce the Company’s commitmenttowards safety and security, MASkargo appointed Safety Executives and initiated variousenhancements to ensure compliance to therequirements of safety and other regulatory bod-ies. These projects included the formation of anin-house fire squad and its first fire drill exerciseat ACC was held in February 2003. Fire drillswere also held at the ACC’s Animal Hotel inFebruary 2004 and in Penang in March 2004. Asafety audit was conducted at domestic stationsin June 2003 and on the Company’s vendors inMarch 2004.

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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’sproducts and services is consistent, repeatableand of a defined level. As testament to theAirline’s dedication towards providing qualityservice, Skytrax of London awarded MalaysiaAirlines the coveted ‘World’s Best Cabin Staff2003’ for the third successive year. This awardwas based on the responses to a survey measuring the efficiency, cabin presence,attentiveness, friendliness, consistency, sincerityand attitude of cabin staff. Malaysia Airlinesgained further recognition during the financialyear when it ranked amongst the top two airlines (out of 65) that achieved 99% on

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 concernas 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 LineOperations Safety Audit and the University ofTexas has been undertaken to address thehuman 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

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track performance for Standard InstrumentDepartures from the Manchester AirportAuthority, United Kingdom.

Programmes are continually undertaken to further enhance in-flight services. In 2003, an In-flight Supervisors Development Programmewas extensively launched, with special emphasison communication and crew relationshipsbetween in-flight crew and divisional manage-ment. Work was also undertaken to improve the content of in-flight announcements, whichbrought positive results as indicated in in-flightmarket 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 over-all 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 fromIndia, Indonesia, China, Japan, Korea, SouthAfrica and Mexico. Such efforts make MalaysiaAirlines a truly multinational global airline.

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Technical & Ground Operations

The Division’s pursuit for operational and serviceexcellence continued with focus on improvingquality, productivity, reducing costs but yetoffering service levels and customer care thatwent beyond expectations

Engineering and Maintenance (E & M)

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 reliabilityand passenger comfort resulted in an overalltechnical dispatch reliability exceeding 98% andserviceability of the fleet’s in-flight entertainmentconsistently hovering above 99.5%. It was inrecognising the 99.4% dispatch reliability of the B737-400 fleet that Boeing presented MASwith the Boeing Pride Of Excellence Award inJanuary 2004.

Stringent cost control measures yielded afavourable variance of RM59.1 million comparedto budget, whilst cost savings derived fromrefined processes, innovative negotiations andold warranty claims exceeded RM100 millionduring the financial year under review.

One of the major business process improve-ments achieved was in block maintenance where B777 and B737 ‘B’ checks were eachreduced to one day, enabling aircraft utilisation

Partnering with a major player such as PEMCO will fast-

track MAS’ mission of becoming a major maintenance,

repair and overhaul centre in the region