MAB shows stable performance amidst challenging conditions

• 2% RASK improvement YoY for Q2 2018
• Load factors at 78.1% with moderation in domestic load factors due to Ramadan
• On-time performance (OTP) at 70% under pressure due to operational constraints and upgrading of runway at KLIA
• Customer Satisfaction Index (CSI) up 1 percentage point QoQ
• Pilot shortages dampens growth

KLIA, 30 August 2018: Malaysia Airlines Berhad (MAB) reported steady year-on-year (YoY) performance with a marginal yield improvement of 0.3% in Q2 2018. In the face of increased competitor capacity, coupled with weak demand conditions due to Ramadan, Revenue per Available Seat Kilometre (RASK) also remained steady, showing growth of 2% YoY.

The first half was extremely challenging with the airline hit by many factors including escalating fuel prices, up by over 37% YoY, industry wide over capacity resulting in demand and yield pressures and operational constraints from pilot shortages. Despite this the airline managed to hold its position with stable performance posted for the quarter. This was on the back of better efficiency, with the airline’s cost base now one of the lowest amongst its peer full service network carriers. To address external pressures and anticipated operational constraints, the airline also proactively conducted a capacity management exercise, reducing capacity and frequencies on non-profitable routes, which saw ASK reduce by 5% YoY.

Malaysia Airlines Group (MAG) Chief Executive Officer Izham Ismail (GCEO) said, “Malaysia Airlines has been undertaking its biggest ever transformation over the past three years, cutting comparable unit costs by 5% since then. The airline had seen good traction for the last three quarters after a weak 2017 with yield and RASK showing positive improvements. However, we are also facing pressure from escalating fuel prices, forex volatility and overcapacity in the domestic market. Overcapacity has also led to a worldwide pilot shortage, further exacerbating the situation and hampering our growth.

Despite this, relatively steady results were seen in the quarter from pre-emptive initiatives taken by the organisation. This included better capacity management as well as leveraging on the flexibility of our fleet type to navigate operational constraints.

Despite the external factors, we remain committed to drive through our planned initiatives for the remainder of this year whilst putting in place proactive and defensive strategies to deliver profitable performance in 2019. We will continue to drive yield by implementing effective pricing strategies and delivering better value products to our passengers. Malaysian Hospitality, our service promise, will continue to be our focus and guiding principle, and as our centre of gravity, will set us apart from the competition,” he added.

Q2 performance YoY

Passenger Load factor

The airline’s focus remained on improving yield through better pricing strategies, especially on premium segments of business class and corporate sales. This, coupled with improved product delivery for those segments, cushioned the slow demand in the quarter. Domestic load factor dipped due to the month of Ramadan. Yield in the quarter remained steady with a marginal improvement of 0.3% with RASK up by 2%. Moving forward the airline will continue to refine its pricing segmentation as well as yield management to improve the quality of revenue.

Pilot shortage

Malaysia airlines is currently being impacted by the worldwide shortage of pilots, which has led to operational constraints and seen an impact on growth. Pilot constraints are of particular concern for the airline’s narrowbody B737-800 fleet where the shortage is at its most acute.

MAB’s stringent criteria for qualifying captains, which is higher at 4,500 flying hours compared to the industry average of 3,500 flying hours, is further impacting constraints.

Proactive steps are being taken to address this issue as quickly as possible which includes merging and upgrading flights to be operated by our widebody aircraft to help cover gaps caused by the shortage of our B737 pilots.

The airline has also put in place an extensive pilot training programme, implemented in August 2017, alongside recruitment drives. Pilot training does however, take time but our new cadet pilots are gradually coming online.

Investing in the Customer

The single biggest focus this year has been in the customer, to provide an enhanced experience across all customer touch points.

Towards this, a new Customer Experience division was formed in the quarter grouping various departments together to be able to respond to market demand and issues faster. The division looks at the customer experience holistically and by segment, anchored on the needs and satisfaction of the different passenger types. Whether they are business travellers or leisure, students or families, the experience will be customised to suit their needs from time of booking until they board the aircraft. Every interaction is designed and geared towards leaving customers with a positive, memorable and unique experience that is distinctively Malaysian Hospitality. To this end, greater

importance has been placed on getting feedback from passengers, and over the past quarter Customer Engagement Survey respondents have been increased by 25% QoQ. This have provided more insight into the passengers experience on the airline.

In the quarter, further improvements were made on the food offerings on-board based on direct customer feedback. A special food taskforce was set up looking at quality and choice which did see improvements in CSI.

The airline’s new ‘Manage my Booking' tool, which allows for easier changes and refunds as well as dynamic currency conversions, has also garnered positive feedback from customers. The quarter also saw a range of value-added service on the website for our customers including car rentals, hotel bookings as well as Takaful insurance.

Technology driven company

Malaysia Airlines has successfully conducted two hackathons internally this quarter. This included the iCrewHack, an ideation lab for cabin crew to develop innovative inflight service solutions to improve operational processes. Also held in the quarter was the Junior Disruptors day where children of employees, aged between 11 to 16 years old, were challenged to focus on solutions for Malaysia Airlines’ future traveller.

At KL International Airport (KLIA), the airline’s Passenger Service System (PSS) team recently launched its ancillary revenue collection capabilites for all its check-in counters enabling passengers to upgrade at the last minute and pay for excess baggage. This project is estimated to be completed systemwide in the third quarter of this year. In addition to this, the PSS team also improved its Airline Disruption Management solutions via the ‘Disruption Transfer and Enhanced Re-accommodation’ solution which enables the airline’s disruption team to seamlessly transfer passengers to the next available flight without the need for contacting Malaysia Airlines’ call centre or ticket office for ticket issuance. This solution ensures that the airline is able to respond to an irregular situation quickly whilst keeping service recovery costs under control.

Fleet

Malaysia Airlines received its sixth and final A350-900 aircraft in July 2018. The A350s will be deployed on the double daily London route. The airline is maximizing its assets by using certain aircraft types, such as the A350-900 and the A380-800, opportunistically during peak seasons to high traffic markets.

The quarter also saw the arrival of three of the A330-200s bringing the airline’s current total fleet to five. The aircraft has enabled Malaysia Airlines to be more competitive in the fast growing Asia-Pacific aviation market allowing the airline to up-gauge from a narrowbody on high demand markets, significantly improving the customer experience whilst also generating better revenue. The last A330-200 is expected to arrive in September this year.

Project Amal

MAG recently signed an agreement with four umrah tour operators, KRS Travel Sdn Bhd (KRS), ATS Global Travel & Charter (ATS), Ecoriths Leisure Travel & Tour (Ecoriths) and Rayhar Travels Sdn Bhd (Rayhar), to provide air charter services for the umrah season beginning October 2018 until June 2019.

With a total of 149 flights, operated via Malaysia Airlines’ Airbus A380-800 aircraft, the agreement represents the highest number of scheduled flights for the umrah season to date for Malaysia

Airlines. The agreement will see Malaysia Airlines transporting over 70,000 pilgrims not just from Malaysia but also from neighbouring countries such as Indonesia.

Operations

The overall On Time Performance (OTP) registered for the quarter was at 69.9%, lower compared to Q1 2018. The lower OTP registered for the quarter was mainly due to consequential and technical delays and aircraft limitations. External factors, which included weather-related delays and air traffic congestion, also impacted the OTP. Other factors included KLIA runway closure from 11 May to 7 June 2018.

The total number of mishandled baggage showed a slight reduction in quarter two compared to the previous quarter. However, the airline did see an increase in June 2018 from 6.4% to 8.7% mainly due to the problems associated to the baggage handling system at KLIA. AeroDarat Services,the airline’s ground handling company, is in talks with Malaysia Airports Holdings Berhad to address this issue.

Fuel Efficiency

A total of 43 fuel initiatives is being tracked for 2018. To date 3% savings in total fuel burn has been achieved from these initiatives. The quarter saw the introduction of SkyBreathe, an innovative fuel saving solution by OpenAirlines. This system assists the airline in analysing its flight data recorders to assess a flight’s efficiency, which allows the airline to implement the appropriate best practices for fuel savings.

In all of the initiatives rolled out group-wide to drive operational excellence, safety continues to be the top priority.

Ethics and Governance

The Code of Practice training which was rolled out last quarter for all employees and vendors in Malaysia is now completed. This is in line with the Personal Data Protection Act. Meanwhile, the EU General Data Protection Regulation (EU GDPR) training is currently on-going for all Malaysia Airlines offices locally and internationally. The EU GDPR training is to comply with laws under the Extra Territorial Jurisdiction set by the EU Commissioner.

Investing in a talent pipeline and local succession planning The recruitment process for pilots was intensified in the quarter to address the shortage being faced by the airline. This included an internal referral programme. Alongside this, 27 cadet pilots were also recruited for intake between March and August 2018. The new cadet pilots will gradually come online between July until November 2018.

Various development and leadership programmes continued throughout the quarter, to train and strengthen the internal talent pool. Together with training programmes and leadership talks, mentoring programmes were held to inculcate a culture of collaboration and knowledge sharing.

People development and succession planning is an integral part for the organisation’s sustained success. The quarter saw the appointment of two internally grown talent, Boo Hui Yee (Hui Yee) and Ignatius Ong (Ignatius), as Chief Financial Officer as well as Chief Revenue Officer respectively. Hui Yee and Ignatius have been with the company for over 10 years and bring with them a wealth of knowledge and experience of the industry as well as the organisation.

Outlook

The Group maintains its cautious outlook in fiscal year 2018 with potential volatility on the horizon from forex and escalating fuel prices. Whilst the airline has seen [YoY RASK and yield] improvements in the last three quarters, growth and progress in the second quarter is being hampered by the pilot shortage, [amongst others]. Looking forward, while the global economic situation remains volatile, we remain cautiously optimistic about the demand environment, both domestically and in the Asia-Pacific region. The Group will continue to be prudent in controlling capacity and has already rationalised domestic route frequencies, allocating the Group’s aircraft where we see the best potential returns.