AIR WAR IN MALAYSIA:

OUTLINE

The future of the air transport industry is promising. Over 1.8 billion passengers travelled in 2004, with international passenger and cargo expected to grow at an annual rate of 6% until 2008. But the road ahead is challenging as air transport experiences its most difficult period. Following on losses exceeding USD30 bilion since Sept 11, soaring fuel prices will drive industry losses of at least another USD6 billion in 2005. For 2006, we expect to add another USD4.3 billion of red ink. With continuous cost reduction and efficiency gains, we may see USD6 billion profit in 2007.

~ Mr Giovanni Bisignani, Director General and CEO, International Air Transport Association (IATA)INTRODUCTION

INDUSTRY BACKGROUND

INDUSTRY BACKGROUNDThe five main forces at work in the industry There has been a slowing of global Revenue Passenger Kilometre (RPK) growth; An increase in pricing transparency is leading to commoditization; Factor costs particularly fuel have increased; Low cost competition is on the rise; The frequency and impact from global demand shocks is increasing

AIRLINE BUSINESS MODEL

INDUSTRY ANALYSIS

the demand for airline services will continue to grow strongly over the next two decades

a clear differentiation of product / services - an integral part in the marketing strategy

economic downturn, peoples spending power has been eroded which cause them to seek alternatives to reduce their cost of travelling

The impact of crisis such as September attack (2001) and SARS outbreak (2003) was able to hit the airline industry badly and as such they continue to pose serious threat to airlines.

The airline industry value chain - Inbound logistics (Yield & Pricing Management, Fuel Management, Flight Scheduling), Operations (ticketing, baggage handling, cargo management), Outbound logistics (airport communication, flight connection, critical incidents management), Marketing and Sales (advertising, promotions frequent flyers), and Service (CRM, Lost Baggage service, car rental & hotel reservation) create values that exceeds the cost of providing the services, thus generating a profit margin

Industry Benchmarking*

Chart1

0.921.30.86

4.54.348.1

2.94.445.78

0.150.190.66

0.640.770.91

Industry Rate

Air Asia

Malaysia Airlines

Sheet1

Industry RateAir AsiaMalaysia Airlines

Current Ratio0.921.30.86

Receivable Turnover Ratio4.54.348.1

Return On Assets Ratio2.94.445.78

(ROCE) Return On Common Stockholders' Equity Ratio0.150.190.66

Debt to Total Assets Ratio0.640.770.91

To resize chart data range, drag lower right corner of range.

AIRLINE BUSINESS STRATEGYSources: http://en.wikipedia.org/wiki/Malaysia_Airlines

AIRLINE BUSINESS STRATEGY

AIRLINE BUSINESS STRATEGY

AIRLINE BUSINESS STRATEGY

AIRLINE BUSINESS STRATEGY

SWOT MATRIX MAS

Strength (S)Weakness (W)Innovative business strategy plan strong commitment by stakeholders to support BTPGlobally serving customers over 100 destinations worldwide Capability to serve 40,000 passengers dailyInternational recognition of quality service (World Best Airline Crew 2008)High maintenance cost for old aircraftLow marginUnder-utilization of fleet managementOpportunity (O)SO StrategiesWO StrategiesContinuously demand growth (more customers travel via air and many bankrupt airlines)Academic and training expansionAircraft maintenance and service expansionContinuous Malaysian hospitality (S1, S2, S3, O1, O2) Strategic CRMRevival information system to facilitate sales and marketing (S1, S2, S3, S4, O1) Strategic CRMRestructure marketing and communication (S1, S2, S3, S4, O1) Strategic CRMUpgrade knowledge centre into technical service provider (S1, S4, O2) Monitoring Cost Maximization load factor by closely monitor seat ticket sales (W2, O1) Strategic CRMSystematically plan the flight schedule to ensure fuel cost efficiency (W1, W3, O1, O3) Monitoring Cost

Threats (T)ST StrategiesWT StrategiesFluctuation of fuel costForeign currency fluctuationStrong competition from low cost carrier worldwideIncrease load factor using carrot and stick approach (e.g. offer discounted seat to attract customer visit its website for sharing and communicating) (S1, S3, T3) Strategic CRMEstablish risk management division to specialist hedge cost (W2, T1, T2) Monitoring Cost

AIRLINE BUSINESS STRATEGY

BALANCED SCORECARD MAS

AIRLINE BUSINESS STRATEGYVenture into new destinations (which most of them were not viable such as Denmark, Finland, and South Africa).

Focused merely on selling their products to fill the quotas and not to improve the profit yield. Lack of management competency, e.g. MAS catering and MAS Cargo were operating at loss. Conflict of directors interests - transferring money for the directors personal use. The previous management failed to lead MAS efficiently and makes a viable decision on its expansion program.

Route network that spans through more than 20 countries Low-cost aviation through innovative solutions, efficient processes and a passionate approach to businessNow Everyone Can Fly(competitive edge in terms of creating awareness of the brand and budget airline industry as a whole)

AIRLINE BUSINESS STRATEGY

AIRLINE BUSINESS STRATEGYto be the largest low cost airline in Asia and serving the 3 billion people who are underserved with poor connectivity and high fares

AIRLINE BUSINESS STRATEGY

AIRLINE BUSINESS STRATEGY

AIRLINE BUSINESS STRATEGY

SWOT MATRIX AIR ASIA

Strength (S)Weakness (W)Low cost operationSimple proven modelSingle fleet of aircraftMulti-currency online salesPartnership with alliancesQuick turnaround timeWorlds best low cost airlines 2012 & 2013 by SkytraxSecondary airports locationsNo customer services management systemLimited aircraftWebsite downtime and errorFlight delaysOpportunity (O)SO StrategiesWO StrategiesAdding more routes in North AsiaPartnership with travel agents for ground200 new units of A320 neo aircraft in 2016 to 2026MAS cutting flights to certain destinationsEstablishing new hubs in North Asia (S4, O1, O4) Strategic Value Chain ManagementSoft bundling tour packages (S4, S5, W2) Improve Product & ServicesNew LCCT in 2013 (S1, S2, O1, O4) Strategic Value Chain ManagementExpanding fleet to increase passenger flown (W3, O3)Discontinue premium line support and outsource call centerEstablishing a tele-sales hotline Improve Product & ServicesThreats (T)ST StrategiesWT StrategiesIncreasing fuel pricesTerrorists attacksAviation rules and Government policiesFirefly offering baggageFirefly offering in-flight drinks and snacksFuel conscious aircraft (S1, S3, T1) Strategic Value Chain ManagementAllow seat allocation for groups and early bird bookings Improve Product & ServicesTrain ground crew for higher airborne time (W5, T1) Improve Product & ServicesFree baggage allowance for flight above 4 hours (W1, W5, T1, T2, T4) Improve Product & ServicesRemodel Navitaire with disaster recovery (W4, T2) Strategic Value Chain Management

AIRLINE BUSINESS STRATEGY

BALANCED SCORECARD AIRASIA

Strategy MapPerformance MeasureTargetsInitiatives PRODUCTIVITY STRATEGY:Improve cost structureIncrease asset utilisationPlane Lease Cost5% per yearReduce cash expensesEliminate defectsImprove yieldsManage capacity from existing assetsMake incremental investments to eliminate bottlenecksGROWTH STRATEGY:Expand revenue opportunitiesEnhance customer valueMarket valueSeat Revenue50% per year45% per yearNew sources of revenue streams (new products, market and partners)Improve profitability of existing customersCUSTOMER RETENTION ANDINCREASING MARKET SHARE:Attract and retain more customers

Number of repeat customers.Number of new customers

75% annual targetIncrease 10% annuallyImplement Customer Relationship Management (CRM) systemProvide sustainable promotions to attract new customersEnhance the branding image of AirAsia by leveraging on regional media and foreign partnership

BALANCED SCORECARD AIRASIA

Strategy MapPerformance MeasureTargetsInitiatives CUSTOMER SATISFACTION ANDPROFITABILITYFlights are on time. (On-time performance)Lowest pricesOn-time arrival rating: #1Customer ranking: #1Implementation of customer loyalty program and quality managementMonitor the changes in consumer trends to increase the ancillary incomeCUSTOMER MANAGEMENTPROCESSES:This process expands and deepens relationships with targeted customers.

Reduction in customercomplaints and grievances

Minimise customergrievances by 25%annuallyTo provide rapid responses to dissatisfied customers and ensure the operations are handled effectivelyBuild strategic employee competenciesDevelop effective decision support systemDevelop effective CRMOPERATIONS MANAGEMENTPROCESSES:Day-to-day processes which companies produce their existing products / services and deliver them to customers

On-ground timeOn-time departure

30 minutes90%Cycle-time optimisationAchieve HR process excellenceMaintain a reliable IT infrastructureAchieve financial process excellenceDevelop Innovative MarketingCommunication Program

BALANCED SCORECARD AIRASIA

Strategy MapPerformance MeasureTargetsInitiatives INNOVATION PROCESSES:Developing new products, processes and services to enable the company to penetrate new markets and customer segments.Growth of ancillaryproducts and servicesGrowth rate ofancillary productsand service should increase 20% annuallyDrive organisational performancePropose and deliver transformational applicationsDevelop Financial Information for improved decision makingDevelop Marketing Business IntelligenceORGANISATION CAPITAL:The ability of the organisation to mobilise and sustain the process of change required to execute this strategyStrategic brand awarenessPercentage of ground crew stockholders100% within the next 5 years40% within the next 5 yearsCommunications ProgramEmployee stock ownershipBuilding the learning cultureContinue to promote the customer focused cultureFoster creative thinking and innovative solutionsHUMAN CAPITAL:The availability of skills, talent and know-how required to support the strategyStrategic job readinessYear 1: 65%Year 3: 85%Year 5: 100%Ground crew trainingDevelop strategic and functionalfinance, marketing, human resource and information technology competencies

AIRLINE BUSINESS STRATEGY

MARKET SHAREDOMESTIC

Air Asia 51.5%MAS 40%INTERNATIONAL

Air Asia 26.6%MAS 26.5

BOSTON CONSULTING GROUP1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0+20

+15

+5

0-5

-15

-20172%72%StarsCash CowsDogsQuestion MarksBackward, forward or horizontal integrationMarket penetrationMarket developmentProduct developmentProduct developmentDiversificationRetrenchmentDivestitureRetrenchmentDivestitureLiquidationMarket penetrationMarket developmentProduct developmentDivestitureRelative Market Share PositionIndustry Growth

MASAIRASIABest long run opportunity for growth and profitabilityMarket developmentMarket penetrationBackward & forward integrationProduct development

QSPM MAS

STRATEGIC ALTERNATIVESStrategic CRMMonitoring CostKEY FACTORSWEIGHTASTASASTASOpportunity (O) 1.Continuously demand growth (more customers travel via air and many bankrupt airlines)0.140.440.42.Academic and training expansion0.110.120.23.Aircraft maintenance and service expansion 0.0520.130.2Threats (T) 1.Fluctuation of fuel cost0.240.830.62.Foreign currency fluctuation0.0540.230.23.Strong competition from low cost carrier worldwide0.542.021.0TOTAL1

Strength (S) 1.Innovative business strategy plan strong commitment by stakeholders to support BTP 0.0540.220.12.Globally serving customers over 100 destinations worldwide 0.0530.220.13.Capability to serve 40,000 passengers daily0.0830.230.24.International recognition of quality service (World Best Airline Crew 2008) 0.0220.0410.02Weakness (W) 1.High maintenance cost for old aircraft0.220.440.82.Low margin0.441.641.63.Under-utilization of fleet management 0.230.630.6TOTAL16.86.0

QSPM AIRASIA

KEY FACTORSWEIGHTSTRATEGIC ALTERNATIVESImprove Product & ServicesStrategic Value Chain MgmtASTASASTASOpportunity (O) 1.Adding more routes in North Asia0.0520.120.12.Partnership with travel agents for ground0.120.220.23.200 new units of A320 neo aircraft in 2016 to 20260.0520.120.14.MAS cutting flights to certain destinations 0.310.330.9Threats (T) 1.Increasing fuel prices0.210.220.42.Terrorists attacks0.220.440.83.Aviation rules and Government policies0.0520.120.14.Firefly offering baggage0.02530.130.15.Firefly offering in-flight drinks and snacks0.02530.130.1TOTAL1Strength (S) 1.Low cost operation0.120.240.42.Simple proven model0.120.220.23.Single fleet of aircraft0.230.640.84.Multi-currency online sales0.02520.120.15.Partnership with alliances0.02520.120.16.Quick turnaround time0.120.240.47.Worlds best low cost airlines 2012 & 2013 by Skytrax 0.02510.02510.0Weakness (W) 1.Secondary airports locations0.02520.130.082.No customer services management system0.02520.110.033.Limited aircraft0.02530.130.084.Website downtime and error0.1540.640.605.Flight delays 0.240.840.80TOTAL14.53.80

KEY SUCCESS FACTORSAncillary business spin-off.2012 & 2013 Awards won at Skytrax

KEY SUCCESS FACTORSAir Asia has the following competitive advantages low cost business model over the competitors in the airline industry, which can be summarized in the following diagram

Endless air fares competition between Air Asia and MAS where both strongly compete to promote and sell their travelling dealsAIR FARES BATTLES

AIR FARES BATTLESCONSEQUENCES TO CUSTOMERS

RECOMMENDATIONS

CONCLUSION

Thank You

BACKUP SLIDES

VALUE CHAIN OF AIRLINES

IFE MATRIX

EFE MATRIX

IFE MATRIX Based on the IFE score of 3.38,AirAsia has a strong internal positionBased on the IFE score of 2.75,AirAsia has a strong internal position

Key Internal FactorsWeightRatingWeighted ScoreStrengthsLow cost operationSimple proven modelSingle fleet of aircraftMulti-currency online salesPartnership with alliancesQuick turnaround timeWorlds best low cost airlines 2012 2013 by Skytrax0.100.050.100.050.200.100.05

43344330.400.150.300.200.800.300.15WeaknessSecondary airports locationsNo customer services toll free lineLimited aircraftWebsite downtime and errorFlight delays0.050.050.100.050.10121210.050.100.100.100.10Total1.002.75

EFE MATRIX Based on the IFE score of 3.38,AirAsia has a strong internal positionBased on the EFE score of 3.00,AirAsia has a strong ability in responding to existing opportunities and threats

Key External FactorsWeightRatingWeighted ScoreOpportunitiesAdding more routes in North AsiaPartnership with travel agents for ground200 new units of A320 neo aircraft in 2016 to 2026MAS cutting flights to certain destinations0.250.10

0.15

0.1042

3

11.000.20

0.45

0.10ThreatsIncreasing fuel pricesTerrorists attacksAviation rules and Government policiesFirefly offering baggageFirefly offering in-flight drinks and snacks0.150.050.10

0.050.05312

110.450.500.20

0.050,05Total1.003.00

COMPETITIVE PROFILE MATRIX

*Company Sales % sales $ profit % profit RMS Industry growth rate MAS 13,286,612 73% (430,738) -72% 0.9 7.00% 33.25 Airlines 4,946,091 27% 1,028,618 172% 1.0 10.00% 39.05 18,232,703 597,880 *