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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

2. Identification and Description of Strategic Options


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

3
3
4
4
5
7

3. Evaluation of the Strategic Options


3.1 Suitability
3.1.1 Macro/Micro Environment
3.1.2 Compatibility
3.1.3 Capability
3.2 Acceptability
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
3.3.1 Current Resources
3.3.2 External Constraints
3.3.3 Internal Constraints
3.4 Selection of Strategic Option
3.5 Implementation Issues
3.5.1 Financial Perspective
3.5.2 Customer Perspective
3.5.3 Internal Process Perspective
3.5.4 Learning Perspective

10
10

11

15

17
18

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

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

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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

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.

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.

Department
Flight Operations

List of Initiatives
- 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
Operations

- Jet fuel saving through the increased usage of GPU & ,minimize
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.

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.

Targeted Passenger Pre-Flight Services

Project
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

Table 2

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

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:

(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

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.

10

(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.

11

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
1

Actual Resources

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.

Financial

Under the competent stewardship of its current CFO, MAS has built up

Systems

very sound financial systems that ensure very healthy cash flow. For
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.

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.

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
(1)
To grow network &
build capacity

Implementation Requirements

Involves higher capital injection & Hardest with higher


management ingenuity to implement in risks
view of competition from LCCs

(2)
Involves strong management will and
To reduce structural resolve to implement. Changing staffs
& operational costs
working attitudes and instituting a new
low-cost culture would need a lot of
patience and tact.

(3)
To improve pre/inflight passenger
services

Complexity & Risk

Medium hard and


moderate risks, needs
management will and
tact

Involves further improvement on current Easiest and little risks


good foundation in passenger services. among the three
Injection of creative ideas needed
options

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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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.

20

Appendices

List of Appendices
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.

Recent trend issue


Life Cycle model-Airline Market Phases
Malaysia Airline Historical Profile
Unprofitability
Malaysia Airline Group Structure & Directory
Malaysia Financial data
Malaysia Airline Intangible Assets
Malaysia Human Capital
Mission Statement Analysis
Partnerships and Code Share Agreements
SWOT Matrix
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/aviationforums/general_aviation/read.main/3814984/ )

21

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/aviationforums/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

22

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/)

24

(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/0B9EA28EF311-4EFD-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 refleeting, 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
100%

80.0%
51.0%
49.0 %
60.0%
Investment in Associates
30.0%

2
3
4

49%
23.53%
20%

2
3
4
5

Companies
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)
Abacus Distribution Systems (Malaysia) Sdn Bhd
Aerokleen Services Sdn Bhd
Aerofine Meat Sdn Bhd
MAS Catering (Sarawak) Sdn Bhd
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)
Hamilton Sundstrand Customer Support Centre (M) Sdn Bhd
Pan Asia Pacific Aviation Services Limited
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

Boeing 737-400

37

Total

81

Cargo
Boeing 747-400

Boeing 747-200

Total

Firefly
Fokker-50

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

Non-Current Assets
Aircraft, Property and
equipment
Others

31-Dec-06

2,496,764
590,744

31-Dec-05

2004

2003

2002

2001

2000

2005

2004

2003

2002

2001

2,223,558 2,054,455 1,661,974 1,819,203 12,043,892 11,430,739


629,576

693,714

729 745

636,426

267,328

291,181

3,087,508

2,853,134

385,769

454,720

Receivable

1,902,351

1,796,196

2,005,977 1,663,645 1,968,152

Cash and Bank


balances

1,584,699

1,179,409

2,194,578 2,190,893

3,872,819

3,430,325

4,646,593 4,223,957 3,262,680

10,647

1,202,060

1,473,159

20,457

22,033

Payables

2,808,509

2,764,431

Borrowings

1,050,000

5,081,026

4,259,623

(1,197,560)

(829,298)

1,889,948

2,023,836

3,330,394 3,037,344 2,576,573

6,259,778

9,528,255

1,253,244

1,253,244

1,253,244 1,253,244 1,253,244

778,000

770,000

620,181

756,613

2,065,488 1,770,740 1,309,597

437,290

482,148

1,873,425

2,009,857

3,318,732 3,023,984 2,562,841

1,215,290

1,252,148

15,246

13,152

13,779

12,347

1,888,671

2,023,009

1,229,069

1,264,495

Borrowings

4,680,289

7,829,873

Deferred Income

347,733

431,752

1,277

827

956

1,262

2,650

2,687

2,135

1,889,948

2,023,836

6,259,778

9,528,255

Current Assets
Inventories

Non-current assets
held for sale
Total Assets
Current Liabilities
Sales in advance of
carriage
Taxation

Net Current Assets /


(Liabilities)

Share capital
Reserves
Shareholders equity
Minority interest

Deferred tax liabilities

2,748,169 2,391,719 2,455,629 12,311,220 11,721,920

446,038

369,419

1,487,752 1,153,723
23,042

24,674

362,342

352,127

346,345

1,540,403

1,584,816

416,376

335,950

2,308,906

2,267,111

842,056

632,715

576,754

26,613

45,459

83,695

3,394,454

2,479,325

4,287,720

1,321,002

8,360,348

4,460,776

932,186

2,553,574 2,399,935 2,273,067


-

4,064,368 3,578,332 3,141,736

582,225

10,706

645,625

12,098

120,944

11,082

3,329,438 3,036,082 2,573,923

3,330,394 3,037,344 2,576,573

(6,051,442) (2,193,665)

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
1

Award List
World Travel Awards

World's Best Cabin Staff 2007


Skytrax, UK

5 Star Airline Award.


Skytrax, UK

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


Regional Brand Consultancy Asian Integrated Media Ltd

Best Airline for Cabin Service Worldwide (4th Placing)


SmartTravelAsia.Com - Best In Travel Polls 2007
Malaysia Tourism Awards 2005-2006 - Minister's Special Award (Individual) - Datuk Idris Jala

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/033b07a8-1ac5-4059-858dc9af019c504a/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/033b07a8-1ac5-4059-858dc9af019c504a/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
Royal Brunei
Airlines
SilkAir
Singapore
Airlines
South African
Airways
Sri Lankan
Airlines
Swiss
International
Airlines
Thai Airways
International
Transaero
Airlines
Uzbekistan
Airways
Virgin Blue

Doha
Brunei
Singapore
Singapore
Johanesburg
Colombo, Kuala Lumpur
Zurich
Bangkok, Phuket
Moscow, Kuala Lumpur
Tashkent
Balina Byron, Broome, Cairns, Canberra, Coffs Harbour, Darwin, Frasers Coast, Gold
Coast, Hamilton Island, Hobart, Mackay, Newcastle, Rockhampton, Sunshine Coast,
Townsville

(Source: Malaysia Offical Website assessed


http://www.malaysiaairlines.com/getdoc/3f2254d9-707c-4c99-b3709ce9502f329a/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.
2.
3.
4.
5.
6.
7.
8.

Growth of older generation


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

Threats
1.
2.
3.
4.
5.
6.
7.
8.

Decline of leisure travel due to economy and terrorism


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

Strengths
1.
2.
3.
4.
5.
6.

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

Weaknesses
1. Low capacity usage.
2. Low revenue/yield
3. Inefficient network and obtain unprofitable routes.
39

4.
5.
6.
7.

G.

Low productivity on front /back workforce.


Old procurement practice.
Decentralized monitoring of operational performance.
High distribution costs.

SWOT Matrix
Strengths
-Named the Best FullService Airline leader for
the last three consecutive
years.
-Diversity in upper
management.
-Dominates the Long haul
segment of Airline
Industry.
-Market Experience of
more than 50 years.
-Primary user of Kuala
Lumpur International
Airport.
-Provide 5 star flight
services

Weakness
-Low capacity usage.
-Low revenue/yield
-Inefficient network and
obtain unprofitable routes.
-Low productivity on front
/back workforce.
-Old procurement practice.
-Decentralized monitoring
of operational performance.
-High distribution costs.

Opportunities

S-O strategies

W-O strategies

-Growth of older generation


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

Strategies Option 3:

Strategies Option 1:

S- Named the Best FullService Airline leader for


the last three consecutive
years
- Market Experience of
more than 50 years.
- Provide 5 star flight
services

W- Inefficient Network &


Unprofitable routes
-Low Capacity Usage
O- Growth of Business &
Leisure Travel
-Growth of older generation
- Longer flights with new
kind of plane

O- Competing online ticket


reservation systems.
- Increased Internet
advertising
- New technology opens the
door for new

40

Threat

products/services
S-T Strategies

-Decline of leisure travel


due to economy and
terrorism
-Liberalization policy on
Malaysia air market
-Possibility of slower global
macroeconomic growth
-Rising factor costsparticularly fuels.
-Overcapacity in aviation
Industry
-Low cost competition is
one the rise
-Annual airline security
costs have increased.
-Increased public security
on environmental issues.

W-T Strategies

Strategies Option 2:
T- Liberalization Policy on
Malaysia Air Market
-Rising Factor CostsParticularly Fuels
W- Old procurement
practice.
- Decentralized monitoring
of operational performance
-High distribution cost.
- Low revenue/yield

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.

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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

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:
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2008]
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44

MAS, Malaysia Airlines Corporate Information, 2008 [Online]


Available at (http://www.malaysiaairlines.com/getdoc/3f2254d9-707c-4c99-b3709ce9502f329a/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]
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MAS, the Business Turnaround Plan (BTP) in a Nutshell, 2005 [Online]


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[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
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IATA:
International Air Transport Association, 2008 [Online]
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2008)
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Low Cost:
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2008]
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[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]
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Other:
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2008]
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Island Publication Limited, Aviation Trader News, 2008 [Online]
Available at (http://www.travelmalta.com/Trader/News.htm) [accessed 15 March 2008]

47

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48

The Star, MAS all out for e-Ticketing, 20 April 2007 [Online]
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49

9MMAR, Airlines Trend on overcapacity in Asia pacific at 2010, 2 February 2008


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