INTERNAL RECONSTRUCTION

By Abhilash N 500

Malaysia Airlines
Malaysia Airlines(abbreviated MAS), is the government-owned flag carrier of Malaysia. Malaysia Airlines operates flights from its home base, Kuala Lumpur International Airport. It has its headquarters on the grounds of Sultan Abdul Aziz Shah Airport in Subang, Selangor. Malaysia Airlines operates flight in Southeast Asia, East Asia, South Asia, Middle East and on the Kangaroo Route between Europe and Australasia. It operates transpacific flights from Kuala Lumpur to Los Angeles, via Taipei.

Founded

1947 (as Malayan Airways), October 1, 1972 (as Malaysian Airline System)

Hubs

Kuala Lumpur International Airport Kota Kinabalu International Airport(closing 21 February 2012)

Secondary hubs Kuching International Airport Frequent-flyer program Airport lounge Alliance Subsidiaries

Enrich Grads

Golden Lounge Oneworld (future)

[1]

Firefly MASwings MASkargo

Fleet size Destinations Company slogan

108 (+53 orders, 20 options) 60 exl. code-share and subsidiaries "MH" is Malaysian Hospitality

Parent company Penerbangan Malaysia Berhad (Government Holding Company) Headquarters Sultan Abdul Aziz Shah Airport

Subang, Selangor, Malaysia Key people Tan Sri Md Nor Yusof (Chairman) Ahmad Jauhari Yahya (Managing Director) Mohd. Rashdan Mohd. Yusof (Executive Director) Website
[2]

www.malaysiaairlines.com

Malaysia Airlines commenced operations in 1987 after the airline changed its name from Malaysian Airline System. The airline began in 1947 as Malayan Airways, being renamed Malaysian Airways after Malaysia gained independence. After that, it changed its name once more to Malaysia-Singapore Airlines and thereafter ceased its operation. It was then divided into Malaysia Airlines and Singapore Airlines.

Incorporation
The differing needs of the two shareholders, however, led to the break-up of the airline just 6 years later. The Singapore government preferred to develop the airline's 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; Malaysian Airline System (MAS)(now Malaysia Airlines), and Singapore Airlines.

What is Internal Reconstruction?

Internal reconstruction is an arrangement made by companies whereby the claims of share holders, debenture holder, creditors and other liabilities are reduced or altered, so that the accumulated losses are written off, assets are valued at its fair value and the balance sheet shows the true and fair view of the financial position.

First period of unprofitability

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. The airline then introduced measures to bring its P&L back into the black. 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 losses in the following year, amounting to RM417 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.

Second period of unprofitability

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. The Government of Malaysia appointed Idris Jala as the new CEO on 1 December 2005, to execute changes in operations and corporate culture. Several weaknesses in airline operations were identified as the causes of the RM1.3 billion loss. These included esclating fuel prices, increased maintenance and repair costs, staff costs, low yield per available seat kilometre ("ASK") via poor yield management and an inefficient route network. Under the leadership of Idris Jala, Malaysia Airlines launched its Business Turnaround Plan in 2006, developed using the Government-linked company (GLC) Transformation Manual as a guide. The most substantial factor in the losses was fuel costs. For the period, the total fuel cost was RM3.5 billion, representing a 40.4% increase compared to the same period in 2004. Total fuel cost increases comprised RM977.8 million due to higher fuel prices and another RM157.6 million due to additional consumption. In the third quarter, fuel costs were RM1.26 billion, compared to the RM1.01 billion in the corresponding period in 2004, resulting in a 24.6% increase or RM249.3 million. Another factor for the losses was poor revenue management. MAS substantially lagged its peers on yield. Some of this gap was due to differences in traffic mix, with less business traffic to and from Malaysia than to and from Singapore, but much of it was due to weaknesses in pricing and revenue management, sales and distribution, brand presence in foreign markets, and alliance base. Malaysia Airlines has one of the lowest labour costs per ASK at USD0.41, compared to other airlines such as Cathay Pacific and Singapore Airlines at USD0.59 and USD0.60 respectively. However, despite low labour costs, the ratio of ASK revenue to this cost was, at 2.8, much lower than Singapore Airlines, where the ratio is 5.0, and slightly higher than Thai International Airways There are other factors listed in the Business Turnaround Plan of Malaysia Airlines, all leading to the net loss of RM1.3 billion in the year 2005.

Recovery from unprofitability (Internal Reconstruction)

Under the various initiatives, launched together with the Business Turnaround Plan, Malaysia Airlines switched from losses to profitability between FY2006 and FY2007. When the Business Turnaround Plan came to an end, the airline posted a record profit of 851 million Ringgit (265 million dollars) in 2007, ending a series of losses since 2005. The result exceeded the target of RM300 Million by 184%. Route rationalising was one of the major contributors to the airline's return to profitability. Malaysia Airlines pared its domestic routes from 114 to 22, and also cancelled virtually all unprofitable international routes (such as Kuala Lumpur-Manchester, that required a 140% load factor to break even). Apart from

that, Malaysia Airlines also rescheduled all of its flight timings and changed its operations model from point to point services to hub and spoke services. Additionally, the airline started Project Omega and Project Alpha to improve the company's network and revenue management. Emphasis has been placed on six areas: pricing, revenue management, network scheduling, opening storefronts, low season strategy and distribution management. Malaysia Airlines has been involved in discussions for new aircraft purchases, using its cash surplus of 5.3 billion Ringgit to eventually purchase 55 narrow-body aircraft and 55 wide-body aircraft. Despite these achievements, critics continue to deride the carrier for lagging behind its competitors in the region. This notion is not helped by the fact Malaysia Airlines has not made substantial investments in customer service, especially compared to Thai Airways or Singapore Airlines. On 22 December 2009, Malaysia Airlines announced the purchase of 15 new Airbus A330 aircraft, with options for another 10. Expected to be delivered between 2011 and 2016, they are intended to operate on medium-haul routes to eastern Asia, Australia, and the Middle East. The airline's plans are to run Airbus A380 planes, which will be introduced into service in 2012, on long-haul routes, A330s on medium-haul routes, and Boeing 737 aircraft on short-haul routes. Under this plan, it is unclear where Boeing widebodies currently in the fleet would fall.

Financial highlights
Malaysia Airlines experienced its worst lost in FY2005, with RM1.25 billion losses. Since then, the Business Turnaround Plan was introduced to revive the airline, in the year 2006. At the end of the airline's turnaround program, in financial year 2007, Malaysia Airlines gained RM851 million net profit: a swing of RM987 million compared to RM134 million in losses in FY2006, marking the national carriers highest-ever profit in its 60-year history. The achievement was recognised as the worlds best airline-turnaround story in 2007, with Malaysia Airlines being awarded the Phoenix award by Penton Media's Air Transport World: the leading monthly magazine covering the global airline industry.[29]

Malaysia Airlines Financial Highlights.

[30]

Year ended/(Quarter Ended)

Revenue (RM '000)

Expenditure Profit/(Loss) (RM '000)

Shareholders

EPS after tax

after Tax (RM '000) Fund (RM '000) (cents)

31 December 2002

8,864,385

8,872,391

336,531

2,562,841

38.7

31 December 2003

8,780,820

8,591,157

461,143

3,023,984

36.8

31 December 2004

11,364,309 11,046,764

326,07

3,318,732

26.0

31 December 2005

9,181,338

10,434,634

(1,251,603)

2,009,857

(100.20)

31 December 2006

13,489,549 13,841,607

(133,737)

1,873,452

(10.90)

31 December 2007

15,288,640 14,460,299

852,743

3,934,893

58.05

31 December 2008

15,503,714 15,259,027

245,697

4,186,000

14.62

31 December 2009

12,782,086 12,288,980

493,106

747,596

28.64

31 December 2010

13,587,610 13,462,139

237,346

3,524,166

7.2