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KBU INTERNATIONAL COLLEGE

SCHOOL OF BUSINESS
B.A (HONS) BUSINESS MANAGEMENT
In Collaboration with

ASHCROFT INTERNATIONAL BUSINESS SCHOOL


ANGLIA RUSKIN UNIVERSITY, UK
BA (HONS) BUSINESS MANAGEMENT, YEAR 3, SEMESTER 2, 2008
ASSIGNMENT FOR:

Advanced Strategic Management

Strategic Options Available to Malaysia Airlines


To Enhance its Growth & Development

Lecturer: Ms Malathi

Student: Chan Yee Teen (0771472)

Submission Date: 21st May 2008

Word Count: 2,949 words


CONTENTS

1. Introduction 3

2. Identification and Description of Strategic Options 3


2.1 SWOT Analysis to Identify Strategic Options 3
2.2 Description on Nature of Strategic Options 4
2.2.1 Strategic Option 1 Grow Network & Build Capacity 4
2.2.2 Strategic Option 2 Reduce Structural & Operation Cost 5
2.2.3 Strategic Option 3 Improve Passenger Pre/In-Flight Services 7

3. Evaluation of the Strategic Options 10


3.1 Suitability 10
3.1.1 Macro/Micro Environment
3.1.2 Compatibility
3.1.3 Capability
3.2 Acceptability 11
3.2.1 Stakeholders Expectation
3.2.2 Expected Risks
3.2.3 Expected Profitability & Capital
3.2.4 Expected Impact on Environment
3.3 Feasibility 15
3.3.1 Current Resources
3.3.2 External Constraints
3.3.3 Internal Constraints
3.4 Selection of Strategic Option 17
3.5 Implementation Issues 18
3.5.1 Financial Perspective
3.5.2 Customer Perspective
3.5.3 Internal Process Perspective
3.5.4 Learning Perspective

4. Conclusions 20

5. Appendices 21

Appendix 1: Macro-Environment Analysis


1A: Recent trend issue
1B: Life Cycle model-Airline Market Phases

Appendix 2: Micro-Environment Analysis


2A: Malaysia Airline Background information
2B: Malaysia Airline Historical Profile
2C: Unprofitability
2D: Malaysia Airline Group Structure & Directory

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2E: Malaysia Financial data
Appendix 3: Malaysia Airlines Intangible Assets
3A: Malaysia Airlines Reward List
3B: Malaysia Human Capital
3C: Mission Statement Analysis
3D: Partnerships and Code Share Agreements

Appendix 4: Strategies Resource Capability


4A: SWOT Matrix
4B: Porter Five Forces

6. References /Bibliographic 44

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1 Introduction

This assignment has set out to perform a strategic review on the operations of Malaysia
Airlines (MAS), a full-fledge flagship international airline of Malaysia, for the purpose of
identifying strategic options that could enhance its growth and development.

The nature, generic basis and direction of each of these strategic options will first be
described. The suitability, acceptability and feasibility of these strategic options will next
be analyzed. Based on this analysis, one of the strategic options will be selected for
implementation, and issues related to its implementation will be further discussed.

2. Identification & Nature of Strategic Options

2.1 SWOT Analysis to Identify Strategic Options

A SWOT analysis was conducted on MAS based on information and data obtained from its
website (http://www.malaysiaairlines.com) and other published news concerning its
operations and performance. Analysis of the macro and micro business environment
surrounding the commercial aviation industry was also made. From the results of these
analyses (see Appendices 1, 2 & 4), three strategic options were identified as listed below.

(1) To Grow Network and Build Capacity


(2) To Reduce Structural and Operational Costs
(3) To Improve Passenger Pre-Flight & In-Flight Services

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2.2 Nature of Strategic Options

2.2.1 Strategic Option 1: To Grow Network and Build Capacity

Description

MAS should aim to further develop new routes and increase frequency on existing routes
with growth potential by the following action plan:

1. Identify high-value code share and Special Pro-rate Agreement (SPA) partners.
2. Increase agreements with partners that have positive P&L impact to MAS.
3. Discontinue agreements that are not beneficial to MAS.
4. Perform misconnect analysis to optimize network connectivity.
5. Identify new code share and SPA agreements to pursue.

Specific steps should be taken to optimize the existing network where possible via
rescheduling and redeployment of aircrafts to match individual routes. Unprofitable routes
should be stopped, while capacity should be increased on profitable routes like Jakarta,
Bangkok and Los Angeles. Similar approach should be followed for the domestic routes.

The Hub-and-Spoke strategy started earlier (see Appendix 3E) should be further
strengthened to increase the feeder traffic onto MASs trunk routes. Capacity through
existing code-share and interline partners, namely KLM for North Europe, Alitalia for
South Europe, Virgin Blue for Australia, South African Airways for Africa, China Southern
Airlines for China should be closely monitored and enlarged where possible. Additional
efforts and resources should be directed to widen capacity in MASs core network in the
ASEAN, China and India, all of which are estimated to experience higher-than-average
growth in air traffic (Based on IATAs industry data) (http://www.iata.org/index.htm).
To serve this core network better, MAS should acquire long range narrow body aircraft to
operate the new routes where the Airbus 330 is too large and the Boeing 737-400 does not
have the range.

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Generic Basis & Direction

The elements of Strategic Option 1 may be classified into the following generic basis and
direction:

Elements Generic Strategies


Optimise profitable routes, cut Low Cost & Differentiation (Porters Generic
unprofitable routes Strategies) ; Hybrid Strategy (Bows Strategy
Clock)
Hub-and-Spoke approach to increase Market Development (Ansoff Matrix);
feeder traffic into MASs trunk routes, Strategic Alliance
optimize load factor, reducing fuel
wastage of both partners.

2.2.2 Strategic Option 2: To Reduce Structural and Operation Costs

Description

To stand up to competition from rising number of low-cost carriers (LCCs), MAS should
continue to cut its cost base. The immediate challenge should be to reduce its system-wide
unit cost (CASK) by 20%, from the current 17.5 sen/ASK down to 14 sen/ASK, to achieve
a breakeven load factor of 60%-65%. Only with a breakeven load factor of 60%-65%, can
MAS expect to grow its network (http://www.malaysiaairlines.com).

This system-wide structural cost reduction effort should be carried out and monitored
closely to ensure its success. A list of initiatives for structural cost reduction is given in
Table 1 below. With lower structural costs, MAS would be able to offer more competitive
fares on routes as and when it wants to compete with other airlines.

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Department List of Initiatives
Flight Operations - Introduction of new alternate airports
- Improve accuracy of Zero Fuel Weight
- Flight Planning & Flight Following optimization
- Reduction of over flight charge rates
- Revised taxi fuel policy to minimize fuel burn off
Airport - Jet fuel saving through the increased usage of GPU & ,minimize
Operations APU usage
- Excess hand baggage collection at the gate
- Rationalize baggage tags & boarding passes
Operations - Variable crew deployment
Control - Renegotiate hotel rates
Engineering & - Reduction of hanger TAT by 50%
Maintenance - Optimize maintenance schedules by maximizing maintenance
during off peak season
- Improve inventory management through Integrated Material
Management
- Revised third party maintenance marketing plan
- Engineering Breakthrough Programme > Tackling manpower
productivity, process improvement, etc
Table 1 A list of initiatives for Achieving Structural Cost Reduction
(Source: Malaysia Airlines available at http://www.malaysiaairlines.com)

MAS has implemented zero commission for its travel agents in order to reduce its
distribution cost since January 2008. MAS should now aim to improve its existing internet
booking facility (IBF) and target to increase its internet sales to above 60%. This would
certainly help reduce its distribution cost by 2-3%.

It should be stressed that these cost-cutting measures should not result in shortchanging its
customers, cutting corners or compromising on safety and quality.

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Generic Basis & Direction

The elements of Strategic Option 2 may be classified into the following generic basis and
direction:

Elements Generic Strategies


Cost reduction leading to cheaper tickets Product Development, Market Development
for capturing new gray zone market (Porters Generic Strategies) ; Hybrid
segment Strategy (Bows Strategy Clock)
Enhance MASs competitiveness and add Internal Development (Johnson)
value to company

2.3 To Improve Passenger Pre/In-Flight Services

(1) Passenger Pre-Flight Services

MAS should further improve its passenger pre-flight services (PPS) to offer passengers a
more convenient, efficient and hassle-free traveling experience. MAS should implement
fully the Simplifying the Business (StB) programme initiated by International Air
Transport Association (IATA) (http://www.iata.org/index.htm) in 2004 which aims to
reduce complexity and cost in PPS. Utilizing advance IT and automation processes, the
StB programme has 5 project streams (see Table 2): eTicketing, eCheck-In, eBoarding Pass,
eBaggage Management and eFreight.

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Project Targeted Passenger Pre-Flight Services
Streams
eTicketing IATA requires all airlines to be 100% eTicket capable by 31 may 2008.
Through removing material cost and back-end processing, saving up to as
much as US$6 per ticket can be made.

eCheck-In Web check-in or kiosk check-in facilities would reduce the long queue at the
check-in counters and make the life of light travelers easier.

eBoarding Bar-coding boarding passes would simplify the boarding process and reduce
the boarding time.
eBaggage The use of radio frequency identification (RFID) would reduce mishandled
and lost baggage.

eFreight Paper-free cargo would reduce processing time and cargo turnover volume

Table 2 IATAs Simplifying the Business (StB) Programme


Source: (IATA available at http://www.iata.org/index.htm)

(2) Passenger In-Flight Services

It is well known the MAS in-flight services are among the best in the world. MAS has won
the Worlds Best Cabin Staff accolade for four consecutive years from 2001 to 2004, and
again in 2007 by Skytrax, UK. (http://www.malaysiaairlines.com) These prestigious
awards have certainly added much strength to the MAS brands tagline of Cabin Services
Other Airlines Talk About.

It is vital that MAS should keep up with its renowned in-flight services as a brand strategy
to seek growth in passenger load. Measures that need to be given attention are:

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(a) Conduct regular customer feedback surveys to find out shortcomings of in-flight
services.
(b) To add more varieties to the recipes of meals and change or rotate them more
regularly to increase the appetite of regular travelers not eating the same meals
too often.
(c) To spruce up the cleanliness and decors of the toilets, making visiting them a
pleasant experience.
(d) To station at least one air crew with nursing or medical training background to
cater for the needy passengers at any times.

Generic Basis and Direction

The elements of Strategic Option 3 may be classified into the following generic basis and
direction:

Elements Generic Strategies


Low ticket pricing retains existing Product Development, Market Penetration
customers and attracts new customers (Porters Generic Strategies) ; Hybrid
Strategy (Bows Strategy Clock)
Premium pricing for core customers who Differentiation (b) with Price Premium
appreciate comfort and extra services, Strategy (5) (Bows Strategy Clock)
reinforcing its internal capability Internal Development Strategy

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3 Evaluation of the Strategic Options

The three strategic options identified in Section 2 are to be evaluated on the basis of their
suitability, acceptability and feasibility in implementation. Implementation issues
concerning one of the three strategic options will be discussed in some details.

3.1 Suitability

The suitability of the strategic options is assessed based on their compatibility with the
current competitive environment of the aviation industry, MASs own corporate vision and
mission and MASs internal resources and core competency.

(1) Environment Macro/Micro

All the three strategic options proposed are suitable for tackling all the competitive trends
being identified in the macro-environment analysis (see Appendix 1). Each option could
handle one or two trends which come with two main objectives: increase profitability and
reduce unnecessary cost. As the aviation industry has begun to enter into phase three
development (see Appendix 1B), MAS would have to react fast in order to survive in the
market.

(2) Compatibility with Corporate Vision, Mission & Objective

All the three strategies are consistent with MASs corporate vision of creating a 5-star low
cost carrier and the mission of pursuing consistent profitability (see mission statement
analysis in Appendix 3C). All the three strategies are also consistent with MASs
objective of improving its service/ product quality and reducing cost to maintain
profitability.

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(3) Capability Resources & Core Competency

Generally, financing the implementation of these strategies should not be a big problem as
MAS has returned to profit zone and showing healthy cash flow. However, MAS has to
exercise extreme care in planning a suitable fleet of aircrafts that could meet the eventual
growth and demand arising from new route expansion.

MASs present human resources may be a little weak to ensure satisfactory implementation
of these strategies. Intensified staff training and new talent injection will be necessary.
However, MASs current top management team appears to be dedicated and competent.

(4) Summary of Suitability

Based on the above evaluation, all the three strategic options could be regarded as suitable
for MAS in its pursuit for future growth and development. To ensure their successful
implementation, MAS must pay special attention to prudent financial planning and
strengthening of its human resources.

3.2 Acceptability

The acceptability of the three strategic options is assessed based on the stakeholders
expectations, expected profitability and capital injection, the associated risks and impact on
the environment.

(1) Stakeholders Expectations

The stakeholders of MAS are comprised of (1) Malaysian government, (2) shareholders, (3)
management, (4) employees, (5) suppliers, (6) travel agents and (7) the customers.

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The Malaysian government is likely to accept all the strategic options that will benefit MAS
and the country. A study by Khazanah and the global consulting firm, Bain & Company,
shows that aviation has a high multiplier effect of 12.5 to the Malaysian economy in terms
of tourism, infrastructure and logistics development (Malaysia Annual Report 2006).

The shareholders are likely to accept all the strategies as they have already witnessed
MASs successful turnaround and regain of profitability.

The new management team built up by MASs CEO who took over since 2006 is made up
of high-caliber professionals who would love to see MAS taking more positive steps in
achieving its vision and mission. On the other hand, the employees may not be very
supportive of the cost-cutting and business simplifying measures recommended in strategic
options 2 and 3.

The suppliers and travel agents would have learnt by now to live with MASs cost-cutting
measures and have realigned their operations to fit themselves into MASs operating style.

MASs customers are likely to welcome the cheaper air tickets and less-hassle pre/in-flight
services.

(2) Expected Risks

As mentioned in Section 2, all the strategic options are posing relatively low to moderate
risk to MASs operations. This is because these strategies are focusing mainly in changing
MASs internal structure and organization to improve efficiency and reduce cost. Given
MASs current strength in financial planning and control, the risk of building an oversize
fleet for unrealistic expansion is not likely.

The aviation industry in the Asia pacific is still remain attractive even the slow down and
the emerge of the LCCs. (See Appendix 1A)

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(3) Expected Profitability & Capital Injection

MAS suffered a loss of nearly RM1.3 billion in year 2005. However, with the launch of a
turnaround plan initiated by its new CEO in 2006, MAS has trimmed its loss to RM133
million in less than a year (see Table 3). MASs performance improved further in 2007
with a net profit of RM851 million. (http://mas.listedcompany.com/misc/MASPL-Q407.pdf)

This shows MAS has fully recovered from the red with a very healthy cash flow and able to
finance its operations and capital requirement for development. (More detail information
in Appendix 2E)

Table 3. Financial performance of Malaysia Airlines (2002-2006)


(Source: Malaysia Airlines Official Website)

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(4) Expected Environment impact

There are no significant negative ethical or environment impacts for all the three strategic
options. Even with future route expansion, MAS is likely to look for fuel efficient aircrafts
as a matter of bring down its running cost. Therefore, the effect on global carbon emission
is not going to be any issue. IATA has estimate that the current figure of 2% share in
global carbon emission by aviation is small compared with land transport.
(http://www.iata.org/index.htm)

(5) Summary of Acceptability

Based on the above evaluation, all the three strategic options could be regarded as suitable
for MAS in its pursuit for future growth and development. To ensure their successful
implementation, MAS must pay special attention to managing its stakeholders tactfully and
minimize its exposure to political interference.

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3.3 Feasibility

The feasibility of the three strategic options is assessed based on the MASs current
resources, external constraints and internal constraints.

(1) Current Resources

The actual resources required for the implementation of the three strategies are summarized
in Table 4 under four categories: (1) management systems, (2) financial systems, (3) human
resources and (4) technology.

Table 4: Current Resources of Malaysia Airlines


Category Actual Resources
1 Management Under the competent stewardship of its current CEO, MAS has
Systems revamped and streamlined its top management team in the past 2 years.
Its current management team is comprised on highly dedicated
professionals.

1 Financial Under the competent stewardship of its current CFO, MAS has built up
very sound financial systems that ensure very healthy cash flow. For
Systems
example, annual cash saving of RM147m and capital expenditure
reduction of RM141m were achieved in 2006. MAS has also secured
RM1b short term loan to boost its working capital.
2 Technology MAS has started to invest in IT in 2006 to upgrade its passenger service
Development systems and cargo handling systems in line with IATAs
recommendations.
3 Human MAS has started to streamline its staff in 2006, resulting in some 2,600
Resources redundant employees being laid off through VSS. MAS has initiated
staff re-training and re-deployment programme to improve the work
culture and productivity of its workforce.
(Sources: Malaysia Airlines; Constructed by the Author Using Relevant Value Chain)

With the above-mentioned current resources at hand, MAS should be able to implement
any of the three strategies or even all of them.

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(2) External Constraints

There are some external constraints that might affect the smooth implementation of the
three strategies. The recent rapid rise of the low-cost carriers (LCCs) in the Asia pacific
region would certainly intensify competition among them and may lead to a price war
which may affect MAS in its implementation of strategic option 1. A price war is likely to
affect MASs bottom line and in turn may affect MASs capability in implementing the
other two strategic options.

In addition, the current surge of crude oil prices, rising more than 25% over a period of 3
months, is indeed a big blow to the whole aviation industry. This uncontrollable hike in
fuel price would pose a big headache to airline operators.

(3) Internal Constraints

There appears little internal factors to constraint the current MAS management team in
deciding to adopt and implement all the three strategic options.

However, the fact that MAS is one of the Malaysian government-linked companies may
present some internal constraints. As MASs major controlling shareholder, the
government has the final say on MAS will be run. At it is, the current government appears
to have given MASs top management a free hand to run MAS in a professional manner. If
there is a change of government, then something could happen to MAS management and
upset its strategic direction.

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3.4 Selection of One Strategic Option for Implementation

The above evaluation data have indicated that in fact all the three strategic options are
equally important and necessary for the future growth of MAS and should be implemented
to the long term benefits of MAS. The complexity and risks in implementation of the three
options are summarized in Table 5 below.

Strategic Option Implementation Requirements Complexity & Risk

(1) Involves higher capital injection & Hardest with higher


To grow network & management ingenuity to implement in risks
build capacity view of competition from LCCs

(2) Involves strong management will and Medium hard and


To reduce structural resolve to implement. Changing staffs moderate risks, needs
& operational costs working attitudes and instituting a new management will and
low-cost culture would need a lot of tact
patience and tact.

(3) Involves further improvement on current Easiest and little risks


To improve pre/in- good foundation in passenger services. among the three
flight passenger Injection of creative ideas needed options
services

Table 5 Comparison of complexity and risks in implementing strategic options

Naturally, among the three, strategic option 3 should be selected as the first choice since it
can be implemented quickly and getting faster results.

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3.5 Implementation Issues

The issues that may arise from the implementation of Strategic Option 3 (to improve
passenger pre/in-flight services) are summarized below, taking into consideration the
perspectives of finance, customers, and internal processes and learning (Kaplan and
Norton, 1996).

(1) Financial Perspective

MAS has secured a short term loan of RM 1 billion from the CIMB bank in March 2006 to
boost its working capital for its turnaround programme. With prudent management of its
cash flow and disposal of RM147 million of non-core assets, plus the over RM800 million
of profit from its 2007 operation, MAS is now in a very cash fluid position. There should
be no immediate problem to undertake all the required capital investments for improving
passenger pre/in-flight services as described in Section 2.3 above. (Malaysia Airlines
Annual Report 2006)

(2) Customer Perspective

While most business travelers have little problem to use all the electronic or internet-based
passenger pre-flight services, there is still a substantial fraction of MASs core customers
that are keyboard-shy. This means MAS has a duty to educate its customers to getting used
to all its e-services. For a reasonable period of time, MAS should station specially trained
ground crew at the airports to provide guidance to needy customers and at the same time
getting feedback from the customers on the correction of any faults or further
improvements that would make them more satisfied. Similarly, to correctly monitor the
proper implementation of its upgraded in-flight services, MAS should encourage interactive
feedback from its customers by rewarding those who provide good constructive criticisms
or suggestions with special gifts or ticket discounts.

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(3) Internal Processes

Establishing an integrated system of the internal processes is an important issue in getting


things done in an organization, especially when the organization wants to implement
changes. It is therefore important that MASs top management pay enough attention to
streamline the related internal processes during its campaign to upgrade its passenger
pre/in-flight services. Red tapes and administrative blockages must be cleared to allow
smooth and speedy actions and internal communications within the organization.

(4) Learning Perspective

The improvement and upgrading of internal skill of an organization is vital for it to


revitalize itself to attain sustained growth. This no doubt calls for the members of the
organization to go for continuous training and self-learning in order to excel in their job
positions. MAS must instill this notion of continuous learning to its staff, particularly those
who are dealing with front-line passenger services. Outstanding fast learners should be
rewarded while slow and reluctant learners should be sent for re-training. Non-learners
should be removed from positions dealing in passenger services

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4 Conclusions

In this research study, by way of SWOT analysis, three strategic options that are thought to
be useful in enhancing the future growth and development of Malaysia Airlines have been
identified as: (1) to grow network & build capacity, (2) to reduce structural & operational
costs, and (3) to improve passenger pre-flight & in-flight services
.
These three strategic options have been evaluated on the basis of their suitability,
acceptability and feasibility in implementation. All the three strategic options have been
shown to be equally important and necessary for the future growth of MAS although they
would present different degrees of challenges in their implementation.

Strategic option 1 which calls for higher capital injection in the face of uncertainties like
competition from LCCs and surging jet fuel prices may be considered as the hardest to
implement with higher risks among the three options. Strategic option 2 which calls for
strong management attitude and resolve to institute a new low-cost culture may be
considered as the second hardest to implement. Strategic option 3 may be considered as
relatively the easiest among the three options as MAS has already in the past built up a
good foundation in passenger services.

Issues that may arise during the implementation of the chosen strategic option 3 have been
discussed from the perspectives of finance, customers, internal processes and learning.

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5 Appendices

List of Appendices

1. Recent trend issue


2. Life Cycle model-Airline Market Phases
3. Malaysia Airline Historical Profile
4. Unprofitability
5. Malaysia Airline Group Structure & Directory
6. Malaysia Financial data
7. Malaysia Airline Intangible Assets
8. Malaysia Human Capital
9. Mission Statement Analysis
10. Partnerships and Code Share Agreements
11. SWOT Matrix
12. Porter Five Forces

Appendix 1: Macro Environment analysis

Appendix 1A: Recent Trend Issues:


By using PESTAL framework and Porters five forces framework and life cycle model,
successful identify some trend that might influence the future of aviation industry.

Trend 1 Overcapacity i.e. massive addition to capacity by 2009 (threat)

Airlines, with their optimism fuelled by the strong profits currently being generated in Asia,
are competing with one another by placing large aircraft orders. The demand for new
aircraft has been so good that Airbus and Boeing are seeing record orders. Emirates alone
will take delivery of their huge order of the A380s and most of these planes will be
deployed on the important Kangaroo route i.e. Australia- Europe. Any order made for an
aircraft today will generally see delivery beyond 2012. (http://www.airliners.net/aviation-
forums/general_aviation/read.main/3814984/ )

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Annual aircraft capacity in Asia Pacific, India and Middle East

Based on industry estimates, about 400 plus new aircraft have hit the skies of Asia Pacific,
India and the Middle East in 2007, with another 400 plus expected in 2008. The total of 800
aircraft in 2007 & 2008 alone translate into an annual supply growth of -8% against a
projected demand growth of -6%. This is likely to lead to lower price and/ or erosion of
profit margins since demand does not increase in tandem with capacity (Stage 4).

Although many of the planes are to replace the existing fleets; the fact is that the old planes
will remain in the system. They are not going to be scrapped like cars. The older planes are
deployed elsewhere for other purposes and many of them will find their way back to the
soon-to-be saturated Asia market. (http://www.airliners.net/aviation-
forums/general_aviation/read.main/3814984/ )

In addition to growing their fleet through new aircraft purchases, many of the traditional
full-services competitors are also investing heavily to enhance their premium service
offering. For instance, several mega full-service carriers have upgraded their B777s with
premium business class seats and state-of-art in-flight entertainment systems. With more
and more airline upgrading their aircraft, and adding new aircraft to their fleet, industry
analysis predict that a product war is inevitable. The pressure on yield will be significant.

Airlines (and aircraft manufacturers) have traditionally based their forecasts on assumptions
of relatively large ratios between air traffic growth and GDP growth. For several decades,
airline growth significantly outstripped aligned with the economic growth. However, since
the 1990s, airline growth in most parts of the world has become more closely aligned with
the economic growth. Nearly all additional growth in Europe, for example, has come from
the low cost carrier (LCC) segment.

A joint study done by Malaysia Airlines and the global consulting firm, Mckinsey &
Company, shown that there has been a slowdown of global air traffic growth (Malaysia
Airline Annual Report 2005) Much of the growth of the last 40 years has been driven by
price declines and increases in access. Both drivers are reaching natural limits. Prices

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cannot go below zero- or not likely to- and virtually every point in the world can be reached
from another in less than 24 hours.

As revenue growth slow, the factor cost fuel, labor and airport charges which have been
rising in the background all these years will catch up with the airlines. The good years of
growth have also shielded all the inefficiencies in the airlines. These inefficiencies, which
were not addressed but rather postponed, will eventually, haunt the airlines when the
revenue growth slows down.

Trend 2: low cost competition is on the rise (threat)

In nearly every market, we see low-cost competitions dumping large numbers of very low
priced seats in core markets in the hope of stimulating demand. These airlines are
attempting to generate new pools of discretionary traffic. Even though these airlines do not
explicitly target the business passengers from which full service carriers make their living,
they create a devastating residual effect.

When LCCs drop leisure fares, they also typically remove restriction such as advance
purchases requirements or minimum stay. Because of this, full service carriers are faced
with a choice to either match these fares and condition or lose valuable premiums from
business passengers, who now have access to these lower fares. Or to continue to take
premium fares from business passengers and risk losing significant market share in the
leisure segment. Research shows that following the entry of a LCC on a route, the profits of
the incumbent carriers on that route decline by an average of 31%.
(http://ezinearticles.com/?The-Rise-and-Rise-of-Low-Cost-Airlines&id=320405)

As for the Asian market, the threat from growing LCCs will mean a loss of market share for
the traditional full service carrier. Projections show that LCCs in the Asia Pacific region
will increase their presence, resulting in an increase capacity share form less than 10% to
25% of the available seats. Further more, LCCs are aggressively expanding beyond the
traditional short-haul routes to medium-and long-haul markets. The few that have started
include Oasis from Hong Kong to London, and from the Kuala Lumpur hud, 2 other
airlines i.e. Jetstar and AirAsiaX have started flying to Australia.

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(Source: Extract IATA Press)

Trend 3: Rising factor costs-particularly fuel (threat)

Between January 2005 and December 2007, the crude oil price increased from USD38 per
barrel to USD 90 per barrel which is a massive jump of 135%. In January 2008, it touched
of USD per barrel. This is the highest oil price that mankind has ever known. The increase
in fuel prices alone has added nearly USD 88 billion to the industry cost structure, bringing
the industry total fuel bill to USD 149 billion. So severe was the impact of the increased oil
price that United Airline announced in early November 2007 that it was contemplating
grounding 100 places within its fleet. Giovarnni Bisignani, IATAs Director-General and
CEO, when asked to forecast the outlook for the aviation industry, warned that the
evaluating price of jet fuel would seriously dent airline profit margins, erode the yields and
even cripple a number of airlines.(IATA Release Press available at
http://www.iata.org/pressroom/pr/)

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(Source: Extract IATA Press Release 17 December 2007)

Trend 4: Increased public scrutiny on environmental issues (threat)

Based on the data from the United Nations, aviation is responsible for only 2% of global
carbon emissions- a small quantum compared to ground transport and power plant that burn
fossil fuels, IATA estimated that this figure will grow to, at most 3% by 2050.

With global warming and climate changes being the topics of debate at would forums,
attention is frown towards aviations role and its stand on the issue. Governments in various
parts of the world are unison in supporting the global strategy i.e. to curb the increase of
greenhouse gas emission; however, there is a lack of globally accepted standards and
solution to the issues. There are governments or economic regions which are talking an
unilateral approaches to address the issue. For example, EU is forging ahead unilaterally to
design a legislation on emission trading-which is not aim tandem with developments in
other parts of the world e.g. Asia, Middle East, South America, Etc, Once this law is passed
in EU, it will affect a lot of non =EU airlines which are unprepared. Causing these airline to
suffer financial losses as they will need to stop flying the European sectors overnight.
(IATA, Building Greener Future available at http://www.iata.org/NR/rdonlyres/0B9EA28E-
F311-4EFD-A24C-CCDB3AA85A71/0/Building_greener_future.pdf)

IATA is currently advocating a 4-pillar strategy: invest in new technology, operate efficient
infrastructure, fly planes efficiently, and introduce economic measure (Tax credits for re-
fleeting, offset programmes and emission trading). It has also made public its interims fuel
efficiency target i.e. 25% improvement in fuel efficiency by 2020.

25
Many international airlines are rallying behind IATAs strategy because it offers more
structured and palatable solutions to the environment issues. In fact, IATA;s strategy has
shown positive result to date: 15 million tones of CO2 savings in 2006 and further 10
million tones in 2007. (IATA Release Press available at
http://www.iata.org/pressroom/pr/)

IATA is now working with the international Civil Aviation Organization (ICAO) to map
out the options to achieving carbon neutral growth and to develop a strategy to guide the
efforts of governments, airline and manufactures. Most airlines, Including MAS, continue
to be guided by IATAs direction.

Trend 5: possibility of slower global macroeconomic growth (threat)

While the Asia Pacific economy in 2007 remained positive, there are early indications of
turmoil ahead. The volatility of oil prices and the uncertainty of US economic growth due
to a weakening housing sector may spill over and impact Asias economic growth. This
could amplify the negative impact on developments in the aviation industry over the next
couple of years (Tim Callen 2007).

There are also rising concerns among economists with regards to the possibility of global
shocks due to the continue unrest in the Middle East and Africa, and an economic
downturn in China post-Olympic 2008. Historical event such as September11, the SARS
outbreak and the Gulf War have proven to have devastating effects on the aviation industry,
with short-term changes in demand in some regions exceeding 30%. While its is arguable
whether such global shock are increasing in frequency. It is clear that when they do happen,
these events will have a greater impact on our industry. Today, as much as 705 of travel are
purely discretionary (http://www.imf.org/external/pubs/ft/survey/so/2007/RES1017B.htm).

Simply put, many of our customers do not need to travel. In addition, with the immediacy
of global media, we may end up with increasingly volatile demand. Airlines used to plan
for demand shocks of up to 5%- 10%. Today, we need to have flexibility and agility to
react to demand shocks of up to 30% or more (IMF Survey).

26
Appendix 1B Life Cycle Model Airline Market Phases

Current Phase
In the early 1980s, the US began a complete deregulation of its airline, with free access to
nearly all markets and a complete release of pricing controls. Europe followed in the late
1990s/ early 2000s. The US experience in the early 1980s is the archetype of this third
phase. Multiple new players ended the market and supply quickly outstripped demand. The
advent of the internet allowed customer to opportunity to shop around for the lowers price
and the best schedule. The advent of price and schedule as key purchase drivers quickly
turned the competitive battlefield into a size and cost-game. The airline with the most
flights and lowest cost were able to sustain themselves in a price and schedule-shopped
environment and outlast the competition. Europe is largely in Phase 3, with incumbents
closely controlling costs while pursuing consolidation to maintain scale. (Malaysian
Annual Report 2006 available at http://mas.listedcompany.com/misc/AR2006.pdf
[accessed 15 March 2008].

Future Phase
It is now clear that the deregulated environment of phase 3 leads to a natural end: new
entrants proliferate-some free of the legacy cost that plagues incumbents-and low-cost
supply dramatically outstrips demand. To keep planes full, all players radically reduce price,
and the resulting customer bases, with its high mix of discretionary travelers become nearly
100% influenced by price. In the final, fourth market phase, it is only the player with the
lowest cost that is able to make money. The only avenue to sustainable price increases in
collaboration among the players to increase load factors through joint capacity reduction. It
is clear that consolidation through mergers and acquisition is a strategy that many winners
will have to pursue. (Malaysian Annual Report 2006 available at
http://mas.listedcompany.com/misc/AR2006.pdf [accessed 15 March 2008].

(Malaysian Annual Report 2006 available at


http://mas.listedcompany.com/misc/AR2006.pdf [accessed 15 March 2008].

27
APPENDIX 2 Micro Environment Analysis

Appendix 2A: Malaysia Airline Background Information


Malaysia Airline Historical Profile

The concept of creating Malaysia Airline is proposed by the Liverpool-based Singaporean


Stream shipping Company and Imperial Airways Proposed to the Colonial governments in
Penang and Singapore to government of the Colonial Straits Settlement to run an air service
between Penang and Singapore on 12 October 1937. (Wikipedia, Malaysia Airlines
available at (http://en.wikipedia.org/wiki/Malaysia_Airlines)

The airlines first flight was a charter flight from the British Straits Settlement of Singapore
to Kuala Lumpur on 2 April 1947, using an Airspeed Consul twin-engine aircraft. The
airline continued to expand during the rest of the 1940s and 1950s, as other British
Common wealth airlines (such as BOAC and Qantas Empire Airways) provided technical
assistance, as well as assistance in joining LATA.

In 1957, the airline became a state-run stock corporation. With the delivery of an 84-seat
Bristol Britannia in 1960, the airline launched its first long-haul international flight, to
Hong Kong. As Federation of Malaysia in 1963 was formed, the airlines name changed
from Malaysia Airways to Malaysia Airlines, however it changed again in 1966 to
Malaysia-Singapore Airlines (MSA) when Singapore separate from the federation.

In 1973, due to the differing needs of the two shareholders, it led to the break-up of the
airline. The Singapore government preferred to develop the airlines International routes,
while the Malaysian government had no choice but to develop the domestic network first
before going regional and eventually international. MSA ceased operations in 1972, with its
assets split between two new airlines; Malaysia Airlines Berhad (now Malaysia Airlines),
and Singapore Airlines.

Soon after Malaysian Airline took all the domestic routes within Malaysia in 1 October
1972, its expanded rapidly toward international routes such as introducing long-haul
flights form Kuala Lumpur to London. The economic boom in Malaysia during 1980s
helped spur growth at Malaysia Airline. Today, Malaysia Airlines flies nearly 50,000
passengers daily to some 100 destinations worldwide and has more than 19,546 employees
across the globe on its payroll.

Appendix 2B: Unprofitablility

Prior to the Asian Financial Crisis in 1997, the airline suffered losses of as much as RM
260 million after earning a record-breaking RM319 million profit in the financial year
1996/ 1997. For the financial year 1999/ 2000, the airline cut its losses from RM700
million in the year 1998/ 1999 to RM259 million. However, the airline plunged into further

28
losses in the following year, amounting to RM 417 million in FY2000/2001 and RM836
million in FY2001/ 2002. With these losses, the airline cut many unprofitable routes, such
as Brussels, Darwin, Honolulu, Madrid, Munich and Vancouver. The airline recovered
from its losses in the year 2002/2003. It achieved its then-highest profit in the year
2003/2004, totaling RM461 million.

Yet it strike again in the year 2005, Malaysia Airlines reported a loss of RM1.3 billion.
Revenue for the financial period was up by 10.3% or RM826.9 million, compared to the
same period for 2004, driven by a 10.2% growth in passenger traffic. International
passenger revenue increased by RM457.6 million or 8.4%, to RM5.9 billion, while cargo
revenue decreased by RM64.1 million or 4.2%, to RM1.5 billion. Costs increased by 28.8%
or RM2.3 billion, amounting to a total of RM 10.3 billion, primarily due to escalating fuel
prices. Other cost increases included staff costs, handling and landing fees, aircraft
maintenance and overhaul charges, Widespread Assets Unbundling (WAU) charges and
leases. (Malaysian Airline System Berhad, Annual report 2005). Available at
http://mas.listedcompany.com/misc/AR2005.pdf

Appendix 2C: Physical Analysis

Malaysia Airline Group Structure & Directory

Group Structure & Directory


% Ownership Companies
1 100% Malaysia Airlines Cargo Sdn Bhd
MAS Aerotechnologies Sdn Bhd
Syarikat Pengangkutan Senai Sdn Bhd
MAS Golden Boutiques Sdn Bhd
MAS Golden Holidays Sdn Bhd
MASkargo Logistics Sdn Bhd
MAS Academy Sdn Bhd
FlyFirefly Sdn Bhd (formerly known as Kelas Services Sdn Bhd)
Malaysia Airlines Capital (L) Limited
Macnet CCN (M) Sdn Bhd
Malaysian Aerospace Engineering Sdn Bhd
MASWings Sdn Bhd
FlyFirefly Holiday Sdn Bhd (subsidiary of FlyFirefly Sdn Bhd)
2 80.0% Abacus Distribution Systems (Malaysia) Sdn Bhd
3 51.0% Aerokleen Services Sdn Bhd
4 49.0 % Aerofine Meat Sdn Bhd
5 60.0% MAS Catering (Sarawak) Sdn Bhd
Investment in Associates
1 30.0% Honeywell Aerospace Services (M) Sdn Bhd
GE Engine Services Malaysia Sdn Bhd
LSG Sky Chefs - Brahim's Sdn Bhd (Formerly known as MAS Catering
Sdn Bhd)

2 49% Hamilton Sundstrand Customer Support Centre (M) Sdn Bhd


3 23.53% Pan Asia Pacific Aviation Services Limited
4 20% Taj Madras Flight Kitchen Limited
(Sources: Malaysia Airline Official website http://www.malaysiaairlines.com/investor.html)
(Annual Report2006)

29
Appendix 2D: No of Aircraft in Malaysia Airlines Operation as at 31
January 2007
Passenger
Boeing 747-400 13
Boeing 777-200 17
Airbus 330-300 11
Airbus 330-200 3
Boeing 737-400 37
Total 81

Cargo
Boeing 747-400 2
Boeing 747-200 4
Total 6

Firefly
Fokker-50 3

Grand total 90

(Sources: Malaysia Airline Official website http://www.malaysiaairlines.com/investor.html)

Appendix 2 E: Malaysia Airline Financial analysis

Source: Malaysia Airlines Investor available at


(http://www.malaysiaairlines.com/investor.html) ) [accessed 15 March 2008]

30
Balance Sheet
Balance Sheet 31-Dec-06 31-Dec-05 2004 2003 2002 2001 2000

2005 2004 2003 2002 2001


Non-Current Assets
Aircraft, Property and 2,496,764 2,223,558 2,054,455 1,661,974 1,819,203 12,043,892 11,430,739
equipment
Others 590,744 629,576 693,714 729 745 636,426 267,328 291,181

3,087,508 2,853,134 2,748,169 2,391,719 2,455,629 12,311,220 11,721,920

Current Assets
Inventories 385,769 454,720 446,038 369,419 362,342 352,127 346,345

Receivable 1,902,351 1,796,196 2,005,977 1,663,645 1,968,152 1,540,403 1,584,816

Cash and Bank 1,584,699 1,179,409 2,194,578 2,190,893 932,186 416,376 335,950
balances
3,872,819 3,430,325 4,646,593 4,223,957 3,262,680 2,308,906 2,267,111

Non-current assets 10,647 - - - - - -


held for sale
Total Assets
Current Liabilities
Sales in advance of 1,202,060 1,473,159 1,487,752 1,153,723 842,056 632,715 576,754
carriage
Taxation 20,457 22,033 23,042 24,674 26,613 45,459 83,695

Payables 2,808,509 2,764,431 2,553,574 2,399,935 2,273,067 3,394,454 2,479,325

Borrowings 1,050,000 - - - - 4,287,720 1,321,002

5,081,026 4,259,623 4,064,368 3,578,332 3,141,736 8,360,348 4,460,776

Net Current Assets / (1,197,560) (829,298) 582,225 645,625 120,944 (6,051,442) (2,193,665)
(Liabilities)
1,889,948 2,023,836 3,330,394 3,037,344 2,576,573 6,259,778 9,528,255

Share capital 1,253,244 1,253,244 1,253,244 1,253,244 1,253,244 778,000 770,000

Reserves 620,181 756,613 2,065,488 1,770,740 1,309,597 437,290 482,148

Shareholders equity 1,873,425 2,009,857 3,318,732 3,023,984 2,562,841 1,215,290 1,252,148

Minority interest 15,246 13,152 10,706 12,098 11,082 13,779 12,347

1,888,671 2,023,009 3,329,438 3,036,082 2,573,923 1,229,069 1,264,495

Borrowings - - - - - 4,680,289 7,829,873

Deferred Income - - - - - 347,733 431,752

Deferred tax liabilities 1,277 827 956 1,262 2,650 2,687 2,135

1,889,948 2,023,836 3,330,394 3,037,344 2,576,573 6,259,778 9,528,255

Source: Malaysia Airlines Investor available at


(http://www.malaysiaairlines.com/investor.html) ) [accessed 15 March 2008]

31
Passenger Revenue for International and National Routes

Source: Malaysia Airlines Investor available at


(http://www.malaysiaairlines.com/investor.html) ) [accessed 15 March 2008]

Route Revenue

Source: Malaysia Airlines Investor available at


(http://www.malaysiaairlines.com/investor.html) ) [accessed 15 March 2008]

32
Malaysia Airline Expenditure Chart

Source: Malaysia Airlines Investor available at


(http://www.malaysiaairlines.com/investor.html) ) [accessed 15 March 2008]

Malaysia Airline Income statement

Source: Malaysia Airlines Investor available at


(http://www.malaysiaairlines.com/investor.html) ) [accessed 15 March 2008]

33
Appendix 3: Malaysia Airlines Intangible Assets

Appendix 3A: List of Reward in 2007


The airline holds a lengthy record of service and best practices excellence, having received
more than 100 awards in the last 10 years. The most notable ones include being the first
airline to with the "World's Best Cabin Crew" by Skytrax UK consecutively from 2001
until 2004, "5-star Airline" in 2005 and 2006, as well as No.1 for "Economy Class Onboard
Excellence 2006" also by Skytrax UK. Following is the award list that Malaysia Airlines
received in year 2007.

Malaysia Award List Year 2007:


No Award List
1 World Travel Awards

World's Best Cabin Staff 2007


2 Skytrax, UK

5 Star Airline Award.


3 Skytrax, UK

Asia's Top 1000 Brands Survey 2007 (Seventh Placing)


4 Regional Brand Consultancy Asian Integrated Media Ltd

Best Airline for Cabin Service Worldwide (4th Placing)


5 SmartTravelAsia.Com - Best In Travel Polls 2007

Malaysia Tourism Awards 2005-2006 - Minister's Special Award (Individual) - Datuk Idris Jala

6 Malaysia's Most Valuable Brands

Malaysia Airlines poled in 12th position, from a total of 30 top


brands in the country.

(Source: Malaysia Official Website assessed at


http://www.malaysiaairlines.com/getdoc/033b07a8-1ac5-4059-858d-
c9af019c504a/Awards.aspx )

Appendix 3B: Human Resource Capital

Unleashing Talents and Capabilities


In May 2006, the company carried out a Mutual Separation Scheme for its employees to
address productivity concerns, particularly after the domestic airline network rationalization
exercise. Some 2,600 employees opted to leave the Company between July and December
2006 under this scheme. The company had 19,596 staff at the end of 2006: 349 in
managerial grades, 1,055 in executive grades, 1,257 in technical crew, 4,725 in cabin crew,
and 2,231 and 9,979 respectively in the technical and administrative grades. (Malaysian
Annual Report 2006 available at http://mas.listedcompany.com/misc/AR2006.pdf
[accessed 15 March 2008].

34
Despite the reduction in manpower, the company continued to maintain a high quality of
service to its Customers. Emphasis has also been placed on the inculcation of a
performance-driven work culture and to ensure the success of the BTP. The campaign to
instill the performance-driven work culture has been undertaken with the collaboration of
various in house unions and associations. Memoranda of Understanding and Collective
Agreements entered into with these organizations reflected a common appreciation of the
need for employer and employee to work together to help the airline get out of its
difficulties.

A major milestone in the reorganization of the company was the roll-out of the Integrated
Human Resource Management System (iHRMS) in June 2006. This has helped reduce
administration costs, improved data management and increased the efficiency of the Human
Resources Division.

The training and development of employees competencies remain a key priority for the
Human Resources Division, with major training programmes offered at the Malaysia
Airlines Academy. In 2006, a number of new modules in leadership development and
aviation knowledge enhancement were introduced to nurture talents and improve
performance. (Malaysian Annual Report 2006 available at
http://mas.listedcompany.com/misc/AR2006.pdf [accessed 15 March 2008].

Malaysia Airline Organization Human Resources List:

01. Dato' Dr. Mohd. Munir Bin Abdul Majid >>


Chairman
Appointed on August 1, 2004

02. Dato' N. Sadasivan a/l N. N. Pillay >>


Deputy Chairman
Appointed on December 1, 2001

03. Dato' Sri Idris Jala >>


Managing Director and Chief Executive Officer
Appointed on December 1, 2005

04.Tengku Dato' Azmil Zahruddin bin Raja Abdul Aziz >>


Executive Director and Chief Financial Officer
Appointed on February 1, 2006

05. Keong Choon Keat >>


Independent and Non-Executive Director
Appointed on April 16, 2001

06. Martin Gilbert Barrow >>


Independent and Non-Executive Director
Appointed on August 29, 2001

07. Dato' Mohamed Azman Bin Yahya >>


Non-Independent and Non-Executive Director
Appointed on December 1, 2001

35
08. Datuk Haji Yusoff bin Datuk Haji Mohd Kassim >>
Independent and Non-Executive Director
Appointed on January 23, 2006

09. Dato' Zaharaah Binti Shaari >>


Non-Independent and Non-Executive Director
Appointed on July 18, 2005

10. Dato' Mohd. Annuar bin Zaini >>


Independent and Non-Executive Director
Appointed on Feb 2, 2005

11. Dato' Sri Wan Abdul Aziz bin Wan Abdullah >>
Independent and Non-Executive Director
Appointed on Mar 20, 2007

12. Datuk Amar Wilson Baya Dandot >>


Independent and Non-Executive Director
Appointed on January 11, 2008

13. Datuk Haji Mohamad Morshidi bin Abdul Ghani >>


Alternate Director to Datuk Amar Wilson Baya Dandot
Appointed on August 4, 2006

14. Dato' Puteh Rukiah binti Abd Majid >>


Alternate Director to Dato' Dr. Wan Abdul Aziz bin Wan Abdullah
Appointed on August 16, 2007

(Source: Malaysia Official Website assessed at


http://www.malaysiaairlines.com/getdoc/033b07a8-1ac5-4059-858d-
c9af019c504a/Awards.aspx )

Appendix 3C: Mission Statement Analysis

It is the mission of Malaysia Airlines System Berhad, as a corporation, to provide a


transport service that ranks among the best in terms of safety, comfort and punctuality,
distinguished and loved for its personal touch and warmth. They aim to set new world
standards continually with their enhanced in-flight services, reliable ground support and
excellent infrastructure and to respond to consumer demand for worldwide coverage.

Previously , The mission of Malaysia Airlines System Berhad (MAS), as a corporation is to


provide the customer with transport service that ranks among the best in terms of safety,
comfort and punctuality, distinguished and loved for it personal touch and warmth. Due to
the pressure from the low cost carriers (LCCs) with low fares and the financial heartbreak
in year 2005/ 2006, MAS modified their previous mission statement with an addition of
become a consistently profitable airline, i.e. continue offering/ improve the quality of their
product and services yet, reduce their costs to obtain profitability.
(http://www.travelclearance.com.au/malaysia-airlines)

36
(Malaysian Annual Report 2006 available at
http://mas.listedcompany.com/misc/AR2006.pdf [accessed 15 March 2008].

Appendix 3D Partnerships and Code Share Agreements

Malaysia Airlines has code-sharing partnerships with 25 airlines, including four from
SkyTeam, two from OneWorld and seven from Star Alliance.

Malaysia Airlines Codeshare agreements & interline partnerships


Airlines Destinations
AirIndia Burbank, Hyderabad, Los Angeles, Melbourne, Mumbai
Air Mauritius Mauritius
Athens, Barcelona, Frankfurt, Geneva, Madrid, Melbourne, Milan, Penang, Perth, Rome,
Alitalia
Sydney
All Nippon Fukuoka, Kota Kinabalu, Kuching, Langkawi, Narita, Nagoya, Osaka, Penang, Sapporo,
Airways Sendai
Austria Airline Vienna
British Midlands Belfast, Dublin, Edinburgh, Tesside, Lahore, London, Leeds, Glasgow, Manchester,
Cathay Pacific Hong Kong, Penang
China Southern
Beijing, Guangzhou, Shanghai-Pudong
Airlines
Continental
Special Pro Rate Agreement
Airlines
Dragon Air Kota Kinabalu, Hong Kong
Egyptair Cairo, Kuala Lumpur
Garuda Indonesia Darwin, Denpasar, Frankfrut, Jakarta, London, Medan, Paris, Surabaya
Gulf Air Bahrain, Muscat, Kuala Lumpur
Adelaide, Amsterdam, Auckland, Bergen, Brisbane, Brussels, Copenhagen, Gothenburg,
KLM Helsinki, Kota Kinabalu, Langkawi, Melbourne, Oslo, Penang, Perth, Stavanger, Sydney,
Stockholm
Korean Air Incheon, Penang
Myanmar
Airways Yangon
International
Philippine
Cebu, Manila
Airlines

37
Qatar Airways Doha
Royal Brunei
Brunei
Airlines
SilkAir Singapore
Singapore
Singapore
Airlines
South African
Johanesburg
Airways
Sri Lankan
Colombo, Kuala Lumpur
Airlines
Swiss
International Zurich
Airlines
Thai Airways
Bangkok, Phuket
International
Transaero
Moscow, Kuala Lumpur
Airlines
Uzbekistan
Tashkent
Airways
Balina Byron, Broome, Cairns, Canberra, Coffs Harbour, Darwin, Frasers Coast, Gold
Virgin Blue Coast, Hamilton Island, Hobart, Mackay, Newcastle, Rockhampton, Sunshine Coast,
Townsville

(Source: Malaysia Offical Website assessed


http://www.malaysiaairlines.com/getdoc/3f2254d9-707c-4c99-b370-
9ce9502f329a/Profile.aspx# )

38
Appendix 4: Strategic Resource Capabilities:

Appendix 4A: External Audit:

By using PEST & Value Chain, Opportunities, Threats, Strength and Weakness is being
analysis through the SWOT Matrix and create the initial proposal for Malaysia Airlines
growth development.

Opportunities:

1. Growth of older generation


2. Industrial research and development
3. Growth of Hispanic population
4. New technology opens the door for new products/services
5. Increased Internet advertising
6. Longer flights with new kind of plane
7. Growth of business and leisure travel
8. Competing online ticket reservation systems.

Threats

1. Decline of leisure travel due to economy and terrorism


2. Liberalization policy on Malaysia air market
3. Possibility of slower global macroeconomic growth
4. Rising factor costs-particularly fuels.
5. Overcapacity in aviation Industry
6. Low cost competition is one the rise
7. Annual airline security costs have increased.
8. Increased public security on environmental issues.

Strengths

1. Named the Best Full-Service Airline leader for the last three consecutive years.
2. Diversity in upper management.
3. Dominates the Long haul segment of Airline Industry.
4. Market Experience of more than 50 years.
5. Primary user of Kuala Lumpur International Airport.
6. Provide 5 star flight services

Weaknesses

1. Low capacity usage.


2. Low revenue/yield
3. Inefficient network and obtain unprofitable routes.

39
4. Low productivity on front /back workforce.
5. Old procurement practice.
6. Decentralized monitoring of operational performance.
7. High distribution costs.

G. SWOT Matrix

Strengths Weakness
-Named the Best Full- -Low capacity usage.
Service Airline leader for -Low revenue/yield
the last three consecutive -Inefficient network and
years. obtain unprofitable routes.
-Diversity in upper -Low productivity on front
management. /back workforce.
-Dominates the Long haul -Old procurement practice.
segment of Airline -Decentralized monitoring
Industry. of operational performance.
-Market Experience of -High distribution costs.
more than 50 years.
-Primary user of Kuala
Lumpur International
Airport.
-Provide 5 star flight
services

Opportunities S-O strategies W-O strategies

-Growth of older generation Strategies Option 3: Strategies Option 1:


-Industrial research and
development S- Named the Best Full- W- Inefficient Network &
-Growth of Hispanic Service Airline leader for Unprofitable routes
population the last three consecutive -Low Capacity Usage
-New technology opens the years
door for new - Market Experience of O- Growth of Business &
products/services more than 50 years. Leisure Travel
-Increased Internet - Provide 5 star flight -Growth of older generation
advertising services - Longer flights with new
-Longer flights with new kind of plane
kind of plane O- Competing online ticket
-Growth of business and reservation systems.
leisure travel - Increased Internet
-Competing online ticket advertising
reservation systems. - New technology opens the
door for new

40
products/services
Threat S-T Strategies W-T Strategies

-Decline of leisure travel Strategies Option 2:


due to economy and
terrorism T- Liberalization Policy on
-Liberalization policy on Malaysia Air Market
Malaysia air market -Rising Factor Costs-
-Possibility of slower global Particularly Fuels
macroeconomic growth
-Rising factor costs- W- Old procurement
particularly fuels. practice.
-Overcapacity in aviation - Decentralized monitoring
Industry of operational performance
-Low cost competition is -High distribution cost.
one the rise - Low revenue/yield
-Annual airline security
costs have increased.
-Increased public security
on environmental issues.

Appendix 4B: Porter Five Forces:

A) Threat of Entry:

According to Porter, those industries with high entry barriers will have fewer firms entering,
which easier for one firm to dominate the industry. Economic rents are usually higher in
such environment, this make the industry attractive. In Malaysia, airlines market is consider
attractive which can be proven by the fact that there only 2 existing airlines company.
Which mean the barrier to entry is high also. The following elements will help determine
the level of threat from new entrants.

Economies of scale: Economies of scale exist within the airline market in Malaysia, due to
the fact that both airlines such as MAS and AirAsia already existed more than six years and
acquire the experience to set up procedure that will achieve low cost levels.

Product differentiation: Both low cost and traditional flag carrier market already taken by
Air Asia and MAS, it hard for a new entrant to penetrate into those segments of market,
because they already establish a strong brand value and loyalty toward the customer.

Capital requirements: The capital needed to establish a new airline is up to a million digit
numbers and that money such as working capital is required just to keep the doors open.

41
This create a barrier that a firms must tie up large amounts of capital for maintaining its
daily operation, this will deter smaller firms from entering.

Brand identity: Brand identify is consider important in this industry, however due to the
unstable economic and moderate inflation rate. Consumer became more prices sensitive
than brand identities, which reduces the barrier to entry toward Malaysias airline market.

B) Supplier:
There are many suppliers for the supporting activities in an airline, but in this section, the
supplier of airplane is mainly focused because it is the key item that an airline in this
industry must have. The supplier consists: Boeing, Airbus and McDonnell Douglas.

Suppler concentration: The bargaining power of suppliers is consider powerful because


there are mainly two major airplane supplier which is Boeing and Airbus and the switching
cost is high to switch alternative supplier.

Switching cost: The switching cost is consider high because for an airline supplier is mainly
about the time and cost for the supplier to construct a new airplane for the airline. For an
airline to switch another supplier, they need to make a new contract and provide the
supplier time to construct the plane.

Presence of substitute input: There is no considerable substitute for airplane, which give the
supplier more power in controlling the airplane prices.

Importance of volume to supplier: In the airline industry perception, most of the airplanes
are being produced by supplier like Boeing and Airbus. This gives us the airline industry
power over the suppliers. Without the airline industry there would be no Airplane
manufacturers.

c) Buyers:

Buyer concentration: The buyer primary classified into price oriented , and services
oriented. In Malaysia, Price is mostly concentrated than services. The Aviation Industry got
2 major airlines which is MAS and Air Asia

2. Buyer switching costs: The switching cost is to establish relationship with the supplier or
the time limit to build 1 plane.

3. Price to total purchases: Dependent on a constant supply of services for their survival.

4. Price sensitivity: Malaysia Buyer are considering quite sensitive with price issue, as they
seek for the cheapest way to travel rather to find the best way.

42
D) Substitute:

There is a lot of substitute transportation available in replacing air transport in Malaysia


such as train, automobile, ship and even telecommunication. Recent year, the advances in
telecommunications, video-conferring become a common tool for business man to reach
out to other countries rather than using face to face intercourse meeting. Other than that, the
advances in automotive industry and infrastructure such as highway or road in Malaysia
able the Malaysian to travel within the country by using automobile such as travels buses or
cars.

In the mere future, fast trains could be used to transport people within the countries to
reduce the usage of petrol oils or jet fuel.

43
6 Reference & Bibliographic

Books

Lovelock, Wirtz and Keh, 2002, Service Marketing in Asia: Managing People, Technology
& Strategy, Prentice Hall

Dess, Lumplin & Eisner, 2007, Strategies Management: Creating Competitive Advantages,
McGraw-Hill

David Hussey, 1998, Strategic Management: From Theory to Implementation, 4th Edition,
Butterworth Heinemann

Krajewski Ritzman, 1999, Operations Management: Strategy & Analysis, 5th Edition,
Addison Wesley

Malaysia Airline Annual Report:

MAS, 2004. Malaysian Airline System Berhad, Annual report 2004, [Online]: MAS.
Available at http://mas.listedcompany.com/misc/AR2004.pdf [accessed 15 March 2008].

MAS, 2005. Malaysian Airline System Berhad, Annual report 2005, [Online]: MAS.
Available at http://mas.listedcompany.com/misc/AR2005.pdf [accessed 15 March 2008].

MAS, 2006. Malaysian Airline System Berhad, Annual report 2006, [Online]: MAS.
Available at http://mas.listedcompany.com/misc/AR2006.pdf [accessed 15 March 2008].

Malaysian Airlines:

MAS, Malaysia Airlines Official website, 2008 [Online]


Available at ((http://www.malaysiaairlines.com) [accessed 15 March 2008]

MAS, Malaysia Airlines Fact Sheet, 2008 [Online]


Available at (http://mas.listedcompany.com/misc/FactSheet.pdf ) [accessed 15 March 2008]

MAS, Malaysia Airlines Traffic, 2008 [Online]


Available at (http://mas.listedcompany.com/misc/MASPL-Q407.pdf ) [accessed 15 March
2008]

MAS, Malaysia Airlines Investor, 2008 [Online]


Available at (http://www.malaysiaairlines.com/investor.html) ) [accessed 15 March 2008]

MAS, Malaysia Airlines Award List, 2008 [Online]


Available at (http://www.malaysiaairlines.com/getdoc/033b07a8-1ac5-4059-858d-
c9af019c504a/Awards.aspx ) [accessed 15 March 2008]

44
MAS, Malaysia Airlines Corporate Information, 2008 [Online]
Available at (http://www.malaysiaairlines.com/getdoc/3f2254d9-707c-4c99-b370-
9ce9502f329a/Profile.aspx# ) [accessed 15 March 2008]

MAS, Low Cost Carriers: How Are They Changing the Market Dynamics of the U.S.
Airline Industry, 2008 [Online]
Available at
(http://www.carleton.ca/economics/undergraduate%20programs/Honours%20essays/Chow
dhury.pdf) [accessed 25 March 2008]

MAS, the Business Turnaround Plan (BTP) in a Nutshell, 2005 [Online]


Available at (www.malaysiaairlines.com/getdoc/e14d592c-61a3-442d-91fc-
16ef706a69fd/300507-2007-BTP-Updates.aspx) [accessed 15 April 2008]

MAS, Five Star Value Carrier: Business Transformation Plan (BTP2), 2008 [Online]
Available at (www.malaysiaairlines.com/getfile/78aa4d9c-4963-4083-8063-
be16e50d4b5a/BTP2.aspx) [accessed 15 April 2008]

MAS, Malaysian Airline System Berhad Annual Report 04/05, 2005 [Online]
Available at
(http://stg.malaysiaairlines.com/masapp/pdf/financial_info/a_report/financials.pdf
) [accessed 15 March 2008]

MAS, Managing Directors Report and Review, 2005 [Online]


Available at
(http://www.malaysiaairlines.com/masapp/pdf/financial_info/a_report/managing_director_r
eport_and_review.pdf) [accessed 15 March 2008]

MAS, Statement of Internal Control, 2005 [Online]


Available at
(http://stg.malaysiaairlines.com/masapp/pdf/financial_info/a_report/statement_internal_con
trol05.pdf) [accessed 14 March 2008]

MAS, Malaysia Airlines Awards and Achievement, 2008 [Online]


Available at (http://www.malaysiaairlines.com/About-Us-
MAS/Investor_Relations/About_Malaysia_Airlines/Awards_and_Achievement.aspx
) [accessed 5 April 2008]

MAS, Board Audit Committee Report, 2005 [Online]


Available at
(http://cmsbak.malaysiaairlines.com/masapp/pdf/financial_info/a_report/bac_report05.pdf)
[accessed 7 April 2008]

45
MAS, Managing Directors Statement, 2008 [Online]
Available at
(http://cms.malaysiaairlines.com/mh/eng/about_us/investor_relations/financial_operational
_data/annual_reports/2005/md_statement05.pdf) [accessed 15 March 2008]

IATA:
International Air Transport Association, 2008 [Online]
Available at (http://www.iata.org/index.htm [accessed 15 March 2008)

IATA Press Room, 2008 [Online]


Available at (http://www.iata.org/pressroom/pr/ [accessed 15 March 2008)

IATA, Building Greener Future, 2008 [Online]


Available at (http://www.iata.org/NR/rdonlyres/0B9EA28E-F311-4EFD-A24C-
CCDB3AA85A71/0/Building_greener_future.pdf [accessed 15 March 2008)

IATA, Fact & Figure: Environment, 2008 [Online]


Available at (http://www.iata.org/pressroom/facts_figures/fact_sheets/Environment.htm
[accessed 7 April 2008)

IATA, Fact & Figure, 2008 [Online]


Available at (http://www.iata.org/pressroom/facts_figures/fact_sheets/ [accessed 15 March
2008)

IATA, Fact & Figure: Environment, 2008 [Online]


Available at (http://www.iata.org/pressroom/facts_figures/fact_sheets/Environment.htm
[accessed 7 April 2008)

Low Cost:

IMB, Winning at the margin: The impact of low-cost carriers in Asia, 2008 [Online]
Available at (http://www-03.ibm.com/industries/travel/doc/content/bin/ge510-3606-01f-
winning-at-margin.pdf) [accessed 15 March 2008]

Charles Najda, Low-Cost Carriers and Low Fares: Competition and Concentration in the
U.S. Airline Industry, 2008 [Online] Available at (http://www-
econ.stanford.edu/academics/Honors_Theses/Theses_2003/Najda.pdf) [accessed 15 March
2008]

Russell Reynolds Associates, German, Switzerland and Austria (GSA) Aviation Industry
Survey, 2008 [Online]
Available at (http://www.russellreynolds.com/pdf/thought/AVIATION_WP_FINAL2.pdf)
[accessed 7 April 2008)

46
David H.Treitel, ICCs and Industry Evolution, 2006 [Online]
Available at (http://www.sh-e.com/presentations/treitel_june_2006.pdf) [accessed 15
March 2008]

Nichols, Concentration and Airline Ticket Prices: How Low Cost Carriers Changed Things,
2008 [Online]
Available at (http://dnichols.wustl.edu/econ413aut2004/example%20paper.pdf) [accessed 7
April 2008)

Yose Rizal Damuri and Titik Anas, The Emergence of Low Cost Carriers in South East
Asia , 2008 [Online]
Available at (http://www.aadcp-repsf.org/docs/04-008-FinalLCCs.pdf) [accessed 7 March
2008]

MSC, Cost of doing Airline Business, 2008 [Online]


Available at (http://www.msc.com.my/xtras/business/Cost-of-
doing%20business%20in%20MSC.pdf) [accessed 15 March 2008]

Outsourcing:

Hirshman, Cords and Hunter, Strategic Direction for Air Business, October 2005 [Online]
Available at
(http://www.oliverwyman.com/ow/pdf_files/AirlineBusiness_StratDirection.pdf
) [accessed 17March 2008]

AeroStrategy, the Low Fare Carrier Phenomenon: Implications For Suppliers, 2003 [Online]
Available at (http://www.aerostrategy.com/commentaries/commentary_2.pdf
) [accessed 7 March 2008]

Other:

Travel Clearance, Fly To Malaysia With Malaysia Airlines, 2008 [Online]


Available at (http://www.travelclearance.com.au/malaysia-airlines ) [accessed 19March
2008]

Cranfield University, Air Tansport: Quarterly Report No. 12 , 2006 [Online]


Available at
(http://ec.europa.eu/transport/air_portal/observatory/doc/vademecum/atv_2006_12.pdf
) [accessed 7 March 2008]

Island Publication Limited, Aviation Trader News, 2008 [Online]


Available at (http://www.travelmalta.com/Trader/News.htm) [accessed 15 March 2008]

47
Peanuts. Aero, AirAsia to Buy Toll Holding Equity in Virgin Blue? Merger a Potentially
Killer Low-Cost Airline Combination in Asia Pacific Region, 2007 December 17 [Online]
Available at
(http://peanuts.aero/low_cost_airline_news/airline/6349/59/AirAsia+to+buy+Toll+Holding
s'+equity+in+Virgin+Blue%3F+Merger+a+potentially+killer+low-
cost+airline+combination+in+Asia+Pacific+Region
) [accessed 15 March 2008]

R. Michael Baiada, The Network Airline Production Problem, 2008 [Online]


Available at (http://www.athgrp.com/Network_Airline_Problem.pdf) [accessed 12 March
2008]

Business Wire, Malaysia Airlines and China Southern Airlines Establish Strategic
Partnership Through Code-Share Agreement, November 26 2007 [Online]
Available at
(http://news.moneycentral.msn.com/ticker/article.aspx?Feed=BW&Date=20071126&ID=7
850682&Symbol=US:ZNH) [accessed 7 March 2008]

Brussels Airlines, New Concept For Business Travelers, March 2007 [Online]
Available at
(http://www.oag.com/oag/website/com/en/Home/Travel+Magazine/Executive+Travel/Airli
ne+Briefing/Brussels+Airlines+new+concept+for+business+travellers+090307
) [accessed 12 March 2008]

Peanuts. Aero, Families First with Jetstars new Dedicated Family Webiste, May 15 2008
[Online]
Available at (http://peanuts.aero/low_cost_airline_news/airlineBlog/18/102/South-Pacific)
[accessed 13 March 2008]

Malaysia GOV, Tourism Policies 2006, December 6 2006 [Online]


Available at
(http://www.tourism.gov.my/news/docs/Media%20Release%20PRICING%20POLICIES%
206DEC2006.pdf) [accessed 15 March 2008]

Doug, Porter Five Forces, 2005 [Online]


Available at (http://chiakwongmin.blogspot.com/2005/05/porter-5-forces.html) [accessed
17 March 2008]

Yvonne Tan, MAS Goes For Lower Costs, Higher Yields, 27 November 2007 [Online]
Available at
(http://biz.thestar.com.my/news/story.asp?file=/2007/11/27/business/19585050&sec=busin
ess) [accessed 17March 2008]

Wikipedia, Malaysia Airlines , 2008 [Online]


Available at (http://en.wikipedia.org/wiki/Malaysia_Airlines) [accessed 15 March 2008]

48
The Star, MAS all out for e-Ticketing, 20 April 2007 [Online]
Available at
(http://thestar.com.my/news/story.asp?file=/2007/4/20/nation/17496665&sec=nation)
[accessed 18 March 2008]

Lauren Kerensky, Worlds Best Low-Cost Carriers, 15 August 2007 [Online]


Available at (http://www.news.com.au/travel/story/0,23483,22248345-5012160,00.html
) [accessed 7 March 2008]

P.K. Jagersma, Competing with Pirates, 5 February 2005 [Online]


Available at (http://www.managementsite.com/348/Competing-with-Pirates.aspx
) [accessed 15 March 2008]

Stephanie Overby, How to Save an Airline, 15 February 2006 [Online]


Available at
(http://www.cio.com/article/17777/US_Air_America_West_Merger_to_Cut_M_in_IT_Cos
ts/9) [accessed 15 March 2008]

Just The Flight, The True Cost of Low-Cost, 30 April 2007 [Online]
Available at (http://www.justtheflight.co.uk/features/9-the-true-cost-of-low-cost.html
) [accessed 7 March 2008]]

Atreyee Dev Roy, Low Fuel Tax Must for Flying High, 19 February 2007 [Online]
Available at (http://www.financialexpress.com/old/fe_full_story.php?content_id=155281
) [accessed 15 March 2008]

Avery Johnson, Low-Cost Airlines Raise Fares: Rising Fuel Costs and Overexpansion
Bring Discounters in Line With Old-Line Rivals, 25 April 2006 [Online]
Available at (http://www.harrellassociates.com/press/WSJ%2004%2025%2006.PDF
) [accessed 11 March 2008]

Jane Ritikos, Cut in LCCT Airport Tax, 23 May 2007 [Online]


Available at
(http://thestar.com.my/news/story.asp?file=/2007/5/23/nation/17811235&sec=nation
) [accessed 11 March 2008]

University-Essays, How To Write Porters Five Forces, 2008 [Online]


Available at (http://university-essays.tripod.com/porters_5_forces_analysis.html
) [accessed 19 March 2008]

James Dyson, The Rise and Rise of Low Cost Airline, 6 October 2006 [Online]
Available at (http://ezinearticles.com/?The-Rise-and-Rise-of-Low-Cost-
Airlines&id=320405) [accessed 7 March 2008]]

49
9MMAR, Airlines Trend on overcapacity in Asia pacific at 2010, 2 February 2008
[Online]Available at (http://www.airliners.net/aviation-
forums/general_aviation/read.main/3814984/ ) [accessed 7 March 2008]]

Tim Callen, IMF Forecasts Slower World Growth in 2008, 17 October 2007
[Online]Available at (http://www.imf.org/external/pubs/ft/survey/so/2007/RES1017B.htm
) [accessed 7 March 2008]]

50

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