Malaysia Airlines sees steady progress in Q3 2017

• Tough competition, rising fuel and unfavourable currency conditions continue
• Passenger Load Factors remain stable at 77.5%
• Passenger revenue saw an increase of 3.5% YoY
• IT transformation ahead of schedule
• First A350 arrival for more efficient operating costs

KLIA, 8 December 2017: Malaysia Airlines experienced a tough third quarter with stiff competition, rising fuel and adverse foreign exchange movement against budget. Load factors continued to be resilient and passenger revenue saw positive year on year (YoY) growth amidst the tough operating environment. Revenue average seat per kilometer (RASK) improved by 2% YoY on the back of higher passenger revenue of 3.5% in the same period.

Group CEO Captain Izham Ismail said: “The third quarter continued to be challenging with overcapacity in the markets we are in. Whilst our peers in the region seem to show trends of declining yields, putting pressure on overall RASK, I am happy to see Malaysia Airlines buckle this trend by showing improvements in both areas. RASK saw an increase of 2%, compared to the same period last year, on the back of average fare increase. Despite the increase of average fares, load factors were not unduly impacted, remaining stable at 77.5%.

“We have seen some progress but there is still a long way to go. Moving forward we will be renewing focus on yield with clearer customer segmentation and improved revenue management practise. Revenue is improving but we need to step this up to address rising costs from fuel and forex volatility.

We do acknowledge that customer experience needs to be improved in certain areas. Technical issues, severe weather, air traffic control delays and operational constraints led to a 3% reduction in on time performance (OTP). These issues are being addressed with a particular focus on operational efficiencies in engineering and ground handling. I am also personally paying close attention to customer experience.

Processes need to be simplified for better operational efficiency. The foundations have been put in place and we are confident to see improvements soon.

The network expansion is on track, with two new routes introduced in the quarter, Chongqing and Surabaya. We are looking forward to the arrival of the 6 widebody A330s to facilitate further growth plans. The 6 widebodies will enable us to significantly improve the customer experience whilst also generating better revenue,” said Captain Izham.

Q3 performance

Malaysia Airlines Berhad

Passenger load factors remained steady for Q3 2017 with Malaysia Airlines maintaining fare discipline

despite competitor fares dropping significantly. RASK improved 2% YoY on the back of better focus on

yield although load factor did dip, especially on domestic sectors. With a concerted focus, and closer

oversight from the Board of Directors, yield in Q3 did see an improvement relative to the weaker yields in

Q1 and Q2. This will continue to be a focus area moving forward. Forward bookings in the next quarter

remain healthy with better passenger revenue.

Passenger Load Factor

Fleet

The lease of six Airbus 330-200, as replacement for six Boeing 737 that are being returned to lessors, will

be an important part in addressing profitable demand. The A330-200 aircraft are expected to begin

arriving from early 2018, and will enable the airline to up-gauge its longer and high demand business

routes. The aircraft features are very similar to Malaysia Airlines’ current A330-300 fleet with the same

Pratt & Whitney engines. The six aircraft will have a two class configuration, 287 seats with 19 fully lie flat

Business Class seats, brand new IFE on all seats and WiFi.

Malaysia Airlines received the delivery of its first Airbus 350-900 aircraft from Air Lease Corporation (ALC)

on 30 November. Launched in the presence of Yang Berhormat Datuk Seri Haji Johari Abdul Ghani, Second

Finance Minister of Malaysia, the aircraft is configured in a three-class layout with a total of 286

seats. Malaysia Airlines’ A350-900 is the first carrier to feature a First Class cabin and is equipped with

the latest cabin products. This includes more spacious seats, even in Economy Class, all-new inflight

entertainment and, for the first time, inflight WIFI connectivity. The aircraft also introduces new features

such as higher ceilings, larger windows and special ambient LED lighting that is designed to reduce jetlag

which all combines to give new levels of comfort to the passenger experience.

The A350-900 is the world’s latest generation airliner featuring the latest aerodynamic design, carbon fiber fuselage and wings, plus new fuel efficient Rolls-Royce Trent XWB engines. With the latest in technology, the aircraft provides unrivalled levels of operational efficiency, with a 25 percent reduction in fuel burn and emissions and lower maintenance costs.

The first A350 will operate Malaysia Airlines’ flagship service to London Heathrow on 15 January 2018.

Cost control

Optimising costs remains a priority. This is especially in light of the adverse impact on foreign exchange against budget. The quarter saw continued cost management initiatives to generate more savings in several areas across the various divisions which, as of 30 September 2017, has registered an estimated savings of around RM96 million. This included a total of 77 Operations initiatives registered and tracked for FY2017.

Operations

Lower OTP of 70% was registered for Q3 2017. This was mainly due to high consequential delays resulting from late arrival of aircraft, external delays due to air traffic control restrictions especially in China and aircraft constraints. Concerted focus has been given to improving OTP through several initiatives including enhanced monitoring and tracking of performance.

Investing in the Customer

Customer satisfaction and experience continue to be a key priority for the airline.

Malaysia Airlines has continued investing in aircraft, products, service and technology as a core principle of its transformation programme. A key initiative rolled out in the quarter was the upgrade of the airline’s website which now allows for a faster and more intuitive experience. The website introduces new features which for the first time enables customers to change and refund their tickets online. The new booking engine introduced dynamic currency conversion, giving customers the option to pay for flights in their preferred currency. The latest release of the mobile app dynamically adapts to the customer’s travel journey proactively notifying to check-in for a flight or add additional services. Other features such as simplified feedback from customers and tracking of unaccompanied minors are in development to enhance and simplify the customer journey.

A new Duty Free shopping site (temptations.malaysiaairlines.com) was also introduced which lets customers pre-order online for deliveries direct on to their flight.

Other initiatives include new menus on the domestic and regional sectors with more emphasis on Malaysian and Asian dishes. Malaysia Airlines has collaborated with Masterchef Australia winner 2017, Diana Chan, to introduce dishes on-board designed by her with a unique Malaysian flavour. The dishes will be introduced on the airlines’ Australian sectors beginning December 2017.

The airline has also commenced work on the upgrading of the lounges in Kuala Lumpur International Airport (KLIA) with the regional and domestic lounge both completed in the third quarter. The satellite lounge is expected to be reopened in January 2018.

Efforts to further improve customer service include the development of the MH Service Excellence training programme. This will be progressively rolled out to over 1,000 service leaders across all customer touch points.

Technology driven company

The successful implementation of Information Technology (IT) is key to the turnaround with IT being an important tool in improving the airline’s customer experience and overall operational efficiency. The IT transformation programme continues to be ahead of schedule with Phase 1 (Technology replacement) and Phase 2 (Information Systems replacement) for 2017 completed. The Data Center Transformation project has won numerous awards, with Malaysia Airlines among the first full service airlines with 100% of the workloads in the cloud, minimising any risks of system disruptions.

The PSS Reservation, Inventory and Ticketing (RIT) successfully cutover within the planned timeframe, setting a new record for the fastest Amadeus PSS deployment with minimal disruption. The Departure Control System (DCS) was immediately launched after the RIT cutover. In the third quarter, the airline successfully completed DCS cutover for seven pilot stations, major hubs such as KLIA, Kuching and Kota Kinabalu, and all domestic stations including MASwings. We are targeting to complete the DCS cutover ahead of schedule. Once completed, the Group will move to Phase 3 of its digital transformation which will strengthen the airline’s product offerings. This includes the ability to offer multiple services to customers such as car rentals and hotels. The Group’s innovation lab will be fully operational in the coming quarter to deliver innovative solutions to enhance the customer experience, which includes real time flight status updates and prepaid excess baggage.

Expansion in Asia

The airline’s expansion to China continued with new services to Chongqing launched on 30 October, operating three times weekly from Kuala Lumpur. Chengdu will follow suit by the first quarter 2018.

The airline’s new route to Surabaya was also introduced on 29 October. Operating four times a week from Kuala Lumpur, the new route is the airline’s fourth Indonesian sector, after Jakarta, Bali and Medan.

Enhancing corporate governance

The Business Integrity unit achieved several milestones in the quarter towards a more transparent and accountable Group. Malaysia Aviation Group recently re-enforced its zero tolerance for human and wildlife trafficking, with a three day exhibition at Kuala Lumpur International Airport. Aimed at educating the public on human and wildlife trafficking issues, the exhibition was launched by the Deputy Minister of Home Affairs, Yang Berhormat Dato’ Masir Kujat, and the Ambassador of the United States to Malaysia, Her Excellency Madam Kamala Lakhdhir.

Investing in a talent pipeline and local succession planning

More activities relating to human capital management were ramped up in the third quarter, gearing up towards the end of the financial year. The Group’s employees talent profiling and assessment was rolled out to a further 172 Senior Executives, with another 519 executives scheduled to attend the programme over the next 5 months.

A business simulation programme for senior management was implemented, towards building business leadership capability, with a total of 44 employees attending the 2-day pilot programme.

A mid-year review exercise was rolled out as part of a drive to build a high performance culture. Ongoing syndication and clinic sessions were held with a total of 59 review sessions conducted for 768 supervisors/line managers. A group wide succession planning initiative was also put in place with a talent mapping exercise concluded in the quarter. The exercise reviewed the performance and potential of all general managers and senior managers to ensure a strong leadership bench for business sustainability purposes.

Passenger Service Charge

Malaysia Airlines welcomes the Malaysia Aviation Commission’s (MAVCOM) announcement in November 2017 relating to the equalisation of passenger service charge (PSC) at KLIA and klia2 effective 1 January 2018. This follows on from MAVCOM’s earlier levelling of PSC at KLIA and klia2 for domestic flights and the introduction of a new and equalized PSC for travels to ASEAN countries effective 1 January 2017.

This creates a level playing field for airlines operating out of Malaysian airports. This move is fully supported by the International Air Transport Association (IATA), the world association of airlines and the other 51 airlines that use KLIA and ensures alignment with international standards of non-discrimination and transparency as set out by the International Civil Aviation Organization (ICAO).