COLLEGE OF BUSINESS MANAGEMENT AND ACCOUNTING SULTAN HAJI AHMAD SHAH CAMPUS ASSIGNMENT (INDIVIDUAL)

SEMESTER 1 2011/2012

COURSE CODE COURSE

: :

FICB 393 CONTEMPORARY ISSUES IN FINANCE

THIS GUIDELINES AND REQUIREMENTS PAPER CONTAINS 9 PRINTED PAGES INCLUDING THIS COVER PAGE

CASE STUDY
MALAYSIA AIRLINES (MAS) The Beginning Malaysia Airways Ltd. (MAL) was founded in 1947 by British Overseas Airways Corporation (BOAC now British Airways), Ocean Steamship Company of Liverpool and the Straits Steamship Company of Singapore. By the end of 1947, Malayan Airways engaged in an expansion exercise and MAL began providing regional flight services. The presence of BOAC also facilitated MALs entry as a member of IATA. A year after the Independence of Malaya in 1957 and with the participation of BOAC, QANTAS, the government of the Federation of Malaya, Singapore and the Territory of North Borneo, MAL was launched as a public limited company. MAL then entered the jet age with the purchase of Vickers Viscount aircraft and by 1960 MAL propelled into other far-flung regions of Asia. The acquisition of an 82-seater Briston Britania in 1960 made mass transport by air a reality. This marked the first international non-stop service for MAL, which operated directly between Kuala Lumpur and Hong Kong. After the formation of Malaysia in 1963, the airline was renamed as Malaysian Airlines Limited (MAL). The formation of a new nation saw the need for MAL to be a national carrier to integrate and connect the far corners of Malaysia. Two years later, Borneo Airways merged with MAL resulting in fleet and network expansion. In 1966, the Governments of Malaysia and Singapore became the majority shareholders in the national carrier and Malaysia-Singapore Airlines (MSA) was formed. In 1971, the partnership between Malaysia and Singapore was dissolved and Malaysia Airlines Berhad was incorporated. With an authorized capital of RM100 million, the company made a final revision to its name in November 1971 and Malaysian Airline System Berhad (MAS) were born. By 1972, Malaysian Airlines System was already servicing 34 domestic routes and six international destinations. Modernization The year 1976 saw MAS enter the information age, when it computerized its whole operation. In the 1980s, MAS became the first major government agency to be privatized but a change of business practice did not change the companys focus on being customer-driven. As part of its modernization and expansion, MAS also invested in a new maintenance hangar facility, as well as extending its catering facilities in Subang, where the then international airport of Malaysia was located. As a final part of the restructuring exercise, MAS moved into its new corporate headquarters to a 36-storey building, which became the hub for the future direction of the company. Global reach The year 1986 saw MAS offer the first flight service to the United States. By the end of 1987, MAS had established itself as an international carrier of choice, offering 34 domestic routes and 27 international destinations.

MAS changed its corporate identity and became known as MAS, with the objectives to create a greater awareness of Malaysia. As part of its fleet modernization program, MAS invested RM9.6 billion to expand its fleet of aircrafts in 1991. As of March 2001; MAS had a fleet of 95 aircrafts in its network serving over 114 destinations. International Airlines Industry and Malaysia Airlines With increasing affluence of people around the world and with better flying equipment, airline industry has become a major component of travel and tourism. This has also led to intense competition. Some of the major international airlines of the world are British Airways, Lufthansa, Singapore Airlines, Cathay Pacific, Qantas, American Airlines, etc. MAS face fierce competition from all these airlines. However, its main competitors are Asian carrier like Singapore Airlines and Cathay Pacific. In the new millennium, the international airline industry confronts important trends like alliance and technology. MAS: expectations and challenges Against this backdrop, in April 2001, MAS became the first airline in the world to pilot a twin-engine commercial jet through the newly opened polar routes, passing through the inhospitable polar regions of Russia and North Alaska. At a time when collaboration and partnership prevail, MAS has forged many agreements with regional and international airlines to provide various services, including catering, maintenance and inter-airline passenger transfers. MASs efforts have also received awards from various institutions, including the Asian Institute of Management and the Boeing Aircraft Company. In the new age of technology, MAS showed its commitment as both a carrier as well as a responsible corporate citizen in the global economy. Apart from being a carrier, MAS diversified its operations into human resource development, training, catering, property consultancy, and technical ground support for aircrafts. In the limelight of having an ultra modern Kuala Lumpur International Airport (KLIA), it also provides world-class cargo management facilities. Achievements MAS received international acclaim from many independent organizations for various aspects of its services. Its top management team received an award from the Asian Institute of Management and the World Executive Digest, for its excellence in general management and success in positioning itself in the airline industry. MAS received numerous awards in the airline industry, advertising industry, world-class publications, NGOs, private institutions, and independent research groups. Even during the economic downturn, some of its achievements were notable.

What Went Wrong in Financial Year 2002? Although MAS has many notable achievements and excellence in services, it faces major financial problems. By the year 2002, MAS struggled under a debt load of RM9.2 billion. During the first half of 2001, losses nearly doubled in the first six months of 2001 with the Kuala Lumpur-based carrier reporting it was RM772.79 million (USD$203.3 million) in the red. During this period, sales fell to RM4.261 billion from RM4.540 billion, but the Malaysian Ringgit strengthened against most currencies and this translated into lower

revenue. For the financial year ended 31 March 2001, MAS reported a pre-tax loss of RM1.303 billion. This was the fourth consecutive year MAS had been registering losses. Mounting operational costs has been another factor that MAS had been plagued with. The higher operating charges were attributable mainly to the amortization of foreign exchange losses and the abnormal hike in fuel prices in the fourth quarter of 2000. The successive poor results have weakened the Companys financial condition. Despite improvements in passenger and cargo traffic and an increase of 9.7% in turnover to RM8.956 billion, the gains were offset by higher operating costs. Compared to year 2001, the overall load factor improved by 2.4% points to 66.8% - 74.8% for passenger and 55.9% for cargo; passenger traffic also increased by 8.9% to 16.7 million, whilst total freight uplift was 326,700 tonnes, a growth of 10.1%. The business environment had already weakened before the September 11 attacks on the US and the after-effects of the attacks only compounded the overall slowdown in the airline industry. This was mainly due to a decrease in tourism and higher security concerns as Malaysia is the second largest Muslim country in Asia.

EXHIBIT 1: Managing Directors Statements Year 2001 was nothing if not eventful for us, climaxing as it did with the events of September 11. This constituted one of those mercifully rare, totally unforeseen and cataclysmic disasters which demonstrate how much we are exposed to externalities over which we have to control, especially in a global business like aviation. The aftermath heavily impacted airlines in particular. For us, coming as it did, on top of an already deteriorating balance sheet, it was critical bringing Malaysia Airlines well within the definition of crisis. Our financial position was precarious. What matters in such a situation is not so much the crisis but the response to it. The year became notable and will be recorded in our corporate history as an exercise in crisis management. I am happy today to be able to assure shareholders we have not only come through but are now looking at a turnaround, having found what we believe is a solution to our problems. We began strategizing during the last quarter of the year under review which has led to a radical plan for reorganizing our business model. We did not seek the conventional remedy. Many airlines when similarly affected took the comparatively easy and obvious route of downsizing their fleet. We wished to preserve Malaysia Airlines intact without sacrificing the scale of our operations. We succeeded. I feel we have reason to be proud of what we did, it was a first for the airline and if it was somewhat unconventional, it was well within the recent tradition set by Malaysia (and abundantly vindicated) for financial unorthodoxy. Malaysia Airlines also in a small way was able to demonstrate the ability to think outside the box. I feel able therefore in introduce the current review on a note of cautious optimism. For the year ended 31 March 2002, Malaysia Airlines registered a loss after tax of RM835.6 million continuing the dispiriting saga of 5 consecutive years of heavy losses. The year had opened on a somber note with a deteriorating global economy and a sluggish domestic economy. Fuel prices were volatile, and then came the September setback. Operations were severely disrupted. We saw a sharp contraction in passenger numbers. Confidence in air travel had been sapped. The global aviation landscape had to be redrawn. We were facing an infinitely more challenging operating and competitive environment. The plan was to-rationalise both network and fleet, enhance our revenues and boost efficiency. In August 2001, the first critical step was taken when we increased domestic fares within Peninsular Malaysia a welcome move since the last fare revision went track to 1992. This years loss on the face of it companies unfavourably with that for the previous year RM835.6 million against RM417.4 million which suggest we had deteriorated further. In both cases however, the results were skewed. In the previous year we had benefited from a windfall profit of RM235.8 million through the sale of aircraft and spares and from an insurance payment of RM223.1 million (for damaged aircraft). If we adjust the results for these exceptional gains then we would still be at par in the present year. By contrast moreover and by an adverse turn of fortune last year we had to contend with the huge and unprecedented setback of September 11, the impact of which is analysed later. On balance therefore we may fairly claim to some degree to have mitigated the worst.

Malaysia Airlines had already started the year in a fairly grave position. The onset of the world economic slowdown saw the airline industry struggling under the weakened travel demand. A new Management Committee was set up in July 2001. Its immediate priority was to address the companys liquidity position to prevent any disruption of operations. Shortterms funds amounting to RM1.6 billion were raised through the issuance of Redeemable Convertible Preference Shares (RCPS) and short-term borrowings. A strategic blueprint was developed to turnaround the airline through stringent cost-cutting measures whist improving productivity. A month later everything was radically changed by September 11, the impact of which we now examine. Malaysia Airlines system wide passenger traffic, which had been growing steady for the last three years, now fell steeply and ended the year down by 9.4 % to 34,708.5 million Revenue Passenger Kilometres (RPK). The 2% decline prior to September dropped significantly to 12.9% for the remaining seven months of this financial year. Capacity had to be cut. We had planned a 4.5% increase in overall seat capacity but in the end trimmed this back to 2.6% to 52,554.9 million. Available Seat Kilometres (ASK). The toll on passenger uplift was not as severe as one may have feared. Total passengers carried stood at 15.7 million, a decline of some 6% over the previous year. The figures in the domestic and international categories registered a fall of 2.4% and 10.2% respectively. As a consequence of this Malaysia Airlines overall seat factor felt by 8.8 percentage profits to 66%, the greatest reduction being experienced by the Asian/African and the Orient/North American regions at 11.1 and 9.9 percentage points respectively. We were quick to respond. We immediately suspended flights to 12 destinations. We lost no time in introducing further test-tightening measures such as cutting contracts. But it is worth noting that they had some early success in containing operating losses. Despite the extreme speculation surrounding September 11, as things worked out the years turnover at RM8.38 billion was only 6.5% lower than last years RM8.96 billion. Predictably there had been a sharp contraction in the last few months of 2001 but in the last quarter of our financial year we are happy to report that the figures reflected encouraging signs of a return of travelling confidence. These first measures that had been out immediate priority had been largely palliative. We now began to focus on our core business. In December 2001, we revisited the blueprint to redraw our strategic plans. It was time to embark on a more fundamental turnaround initiative. Services to the suspended destinations were gradually resumed. We began some Balance Sheet restructuring by entering into various sale and leaseback agreements of aircraft. We also commenced negotiations into sale and leaseback of our properties. We entered into negotiations to dispose of up to 70% of MAS Catering Sdn. Bhd. In January 2002 we set up the Restructuring Task Force, asked with rebuilding the airline. A vigorous audit of our financial plight and all its repercussions supplied the diagnosis. We now required a prescription to return to financial health. The Task Force, in the end, came up with a truly radical proposal. They first considered an organizational restructuring. But the impasse we had reached was mainly financial. The remedy proposed was also financial, a rather ingenious one at that, which deserves a place in management literature as a case study of corporate innovation. We will know by this time next year whether it proves affective.

The Board has approved and has just formally announced the Reorganisation. Now at last we can see the light at the end of the tunnel. It is my duty and pleasure to bring shareholders more fully into the picture. The financial reordering involves separating the balance sheet from the operations, by a virtual transfer of assets, liabilities and financial responsibility for the perennially lossmaking domestic service all to a holding company. Malaysia Airlines will continue to operate the domestic sector and will own and operate the international and cargo businesses. There will be no dislocation to staff. Our social commitment to our domestic obligations will be sustained. The net result is that the balance sheet is cleared. We have returned to zero gearing which creates a platform for the more important task of greater operational effectiveness. Asset-light Malaysia Airlines will now be able to operate as a fully-commercial entity better geared to face up to the competition. It will have the potential to impact significantly on the airlines financial health and enhance both its credit worthiness and shareholder value. We have started the due process of obtaining the formal approval of the relevant authorities and will submit the plan to shareholders for final consideration and approval in due course. We are already heartened by hopeful signs of recovery sufficient for the Company to project a return to profitability, albeit, modest in the financial year ending 31 March 2003. Present projections see us turning the net loss we suffered last year at as now reported RM835.6 million to a gain of RM94.2 million resulting in an expected Earnings per Share of 9.3 sen. In support of this we are pleased to announce the first quarter results of the present financial year to June 2002. The net loss has been trimmed to RM80.8 million, a drop of 75% from the RM320.6 million for the corresponding period last year. Earnings before interest tax, depreciation, amortization and rentals rose 44% to RM408.9 million compared to RM283.3 million. We have at the same time to recognize that our financial condition is still serious, although the prognosis has improved. We are relieved of the dept overhang but not of our obligation to discharge it. The remission is for a stipulated time, pending the return to profitability. This we are confident is going to happen. The Reorganisation should not be seen as a reprieve but its having won for us a breathing space. It should in no way deter us from shaping up to the next urgent task of raising productivity and improving our products, services and quality. To this we pledge our best efforts in the year ahead. Meanwhile, I thank the Chairman Yang Berbahagia Tan Sri Dato Seri Azizan bin Zainul Abidin and Board for their support, the Management and staff for their patience and their refusal to be deterred by the hard times we have been through and to members of the Restructuring Task Force who have given us fresh hope for the future. And to shareholders, thank you for your loyalty. We now invite you to share the cautious optimism we are permitting ourselves.

EXHIBIT 2 : Financial Statement of Malaysia Airlines FY2000 http://announcements.bursamalaysia.com/EDMS/hsubweb.nsf/LsvAllByID/48256AAF00273 02C482569500018B123?OpenDocument FY2001 http://announcements.bursamalaysia.com/EDMS/hsubweb.nsf/LsvAllByID/48256AAF00273 02C48256A7A003283BD?OpenDocument FY2002 http://announcements.bursamalaysia.com/EDMS/subweb.nsf/LsvAllByID/972A6CCFE8FD4 7EC48256C3D0008FD83?OpenDocument

DATE OF SUBMISION 1st Submission: [50 marks] Dateline: 14th July 2011 [Thursday] Require: Prepare Case Analysis 2nd Submission: [50 Marks] Dateline: 4th August 2011 [Thursday] Required: Develop and prepare the measures and financial method that MAS would take to overcome the financial losses and reduce its operating costs.

ZBM