Malaysia Aviation Group (MAG) saw steady progress in Q1 2017

Group CEO Peter Bellew said that Malaysia Airlines passenger bookings continued to accelerate in quarter one.

He added: “The quarter was tough with higher fuel prices and adverse foreign exchange impacting our performance. However, customers increased by 12.9% YOY to 3.57 million passengers and load factor at 79.4% versus 68.9% last year. Yields were lower due to intense competition and a price war. The quarter saw a further rapid improvement in international business due to an equalisation of certain KLIA airport charges.

“Malaysia Airlines continues to see strong bookings with a 45% improvement in forward bookings for the next six months (from June to November 2017) compared to the same period 2016.

“The network expansion is on track, with the second flight to Shanghai and upgauged Hong Kong flight (from the Boeing B737 to Airbus A330) showing immediate results. The airline is seeking more widebody aircraft on short- to medium-term leases to facilitate growth.

“The airline’s customer service index continued to recover as product improvements were steadily introduced in the quarter. We have introduced the ‘Golden Rule - treat customers as you would wish to be treated yourself’. The Golden Rule will be supported by simpler customer service policies and a large investment in training in 2017.

“Malaysia Airlines will continue to offer great value all-inclusive business and economy fares while other carriers around the world continue to add extra charges and unbundle their fares.“

Bookings

Bookings Passenger load factors remained robust for Q1 2017 with Malaysia Airlines maintaining fare discipline despite competitor fares dropping significantly. The rapid recovery in international business continued in the quarter with a load factor of 81.1% in 2017 versus 69.6% in 2016. Domestic business load factor also improved by 9.5% in the quarter. The airline is expecting the ongoing price war in Malaysia to suppress average fares for the remainder of 2017.

Fleet

The airlines’ current fleet comprises 54 Boeing 737-800, 15 Airbus A330-300 and 6 Airbus A380. The rapid growth in international sales requires additional widebody aircraft in 2018 and 2019 to address profitable demand. The group is exploring various options for widebodies for possible delivery in 2018 and 2019. There is a good value in the current market for suitable aircraft in the airlines’ delivery timetable.

Malaysia Airlines’ existing A330-300 widebody planes will require replacement and additional capacity from late 2019. Discussions are ongoing with Airbus on the A330neo and Boeing on the 787-9 for direct purchase or lease to enhance the fleet.

Delivery is currently scheduled for six leased new A350 aircraft from Air Lease Corporation (ALC). The first aircraft is planned to arrive at the end of 2017. The A350s will operate Malaysia Airlines’ flagship service to London Heathrow from Q2 2018.

The six Airbus A380 aircraft currently operate to London, Jeddah and Medina. The sixth aircraft will complete its heavy maintenance check in June 2017 at the airlines’ own hangar in Kuala Lumpur. In Q3 2017, the aircraft will operate in the peak period to Korea and Japan to address excess demand and offer an enhanced product experience.

A firm order for 25 Boeing 737 MAX-8 aircraft is in place with delivery from Q4 2019. Based on feedback from Boeing, results from the test programme on the Boeing 737 MAX-8 show excellent fuel and performance figures. The Boeing 737 MAX-8 is anticipated to be a game changer on costs for Malaysia Airlines.

Cost control

A heightened focus in 2017 will be on further reducing cost, especially given the adverse impact on foreign exchange and challenging competitive environment, as well as on improving customer experience. The quarter saw an accelerated cost management approach to generate more savings specifically in areas such process re-engineering, fuel efficiency initiatives and in the renegotiation of supply contracts, which will contribute to the group’s long term profitability and sustainability. This is especially critical in light of material change in market conditions.

Operational improvements continue

Punctuality improved slightly from the previous quarter at 78%. On time performance (OTP) was impacted mainly by consequential delays, external factors (weather in Kuala Lumpur and air traffic control at international stations) and technical delays. Total mishandled baggage reduced by 17% compared to the previous quarter. Aircraft utilisation also improved in the quarter with all fleet registering a higher than planned daily average aircraft utilisation. A total of 18 fuel initiatives have been registered for 2017 with six running initiatives in the quarter. Actual burn off registered better than budget for quarter one of 2017.

Investing in the Customer

Customer satisfaction and experience will be key for the airline and Malaysia Airlines has returned to the Skytrax quality scheme this year, aiming to restore its previous high ratings by the end of 2018. Malaysia Airlines has continued investing in aircraft, product, service and technology as a core principle of its transformation programme. Customer satisfaction did see some improvements with an overall customer service index (CSI) rating of 71% for the quarter, compared to 68% in the previous year.

Moving forward, the airline will continue to emphasis on improvements to food and beverage as well as OTP. One of the initiatives that have already been rolled out include new menus on the domestic and regional sectors which started on 1 May 2017, with more emphasis on Malaysian and Asian dishes, which has received encouraging response thus far. The airline will continue to refresh our menu selection on selected sectors, to reflect classic Malaysian dishes like Nyonya Fish Curry, Hainanese Chicken Rice and Nasi Lemak.

Significant efforts are also being put in to improve OTP, specifically across customer touch points such as check in, arrival and boarding process as well as the lounge and service disruption. This quarter saw the airline’s ground handler (AeroDarat Services), completing a workshop to address process improvements across all customer touch points.

The airline has also commenced work on the upgrading of the domestic and regional lounges in KLIA.

This will be progressively rolled out to cover the international lounge in the satellite terminal as well as the lounge in London Heathrow.

A380 Ultra High Capacity Value Airline

The airline’s six A380 aircraft will be operated by a new airline company in Q3 2018. The initial market sector will be the growing global traffic on the Hajj and Umrah to Saudi Arabia. While the new airline will be based in Kuala Lumpur, it is anticipated that a significant portion of the revenue will originate outside South East Asia. Recruitment of the CEO is in progress and all of the senior management is in place. A Board of Directors will be appointed shortly, and in the interim the management team will be led by the Group’s Chairman and CEO. The airline will be the world’s first ultra-high capacity value airline. It will offer high quality service with low seat costs to customers worldwide.

Technology driven company

The new passenger sales system from Amadeus is on target to be completed by June 2017. The quarter saw the successful migration to the new system in 11 markets with the United States, UK, Thailand and Indonesia now using the new Amadeus internet booking engine and payment platform. The airline launched the new mobile application in May 2017 with the major cutover for reservation, inventory, and ticketing planned for 10 June 2017. Once completed, the airline will be able to offer customers enhanced speed and convenience, a more intuitive web booking experience, state-of-the-art mobile applications and offers to suit individual needs.

Passenger Service Charges

The Malaysian aviation regulator levelled the passenger service charges at KLIA and KLIA2 for ASEAN and domestic flights from 1 January 2017. This created a significant boost to the number of bookings across our ASEAN routes and allowed Malaysia Airlines to compete fairly for the first time in 9 years. Malaysia Airlines still pays RM73 vs. RM50 which is approximately USD$5 more to fly passengers on international routes from KLIA than its competitors do from KLIA2. The regulator has confirmed that the charges will be equalised from 1 January 2018 but with the current increased fuel prices the airline has requested an early equalisation of the charges to 1 September 2017. The equal charges campaign is supported by IATA and the other 51 airlines that use KLIA.

Kuala Lumpur Airport

The airlines’ main hub operations at KLIA has enjoyed strong growth in passenger numbers over the last nine months which has put pressure on the local infrastructure. The 20 year old KLIA terminal has also seen the transfer of some 6 million extra passengers in 2016 from the new KLIA2 terminal. Malaysia Airlines will continue to work closely with Malaysia Airports Holdings Berhad to find urgent solutions to improve customer service in Kuala Lumpur.

Expansion in China

Throughout 2017, an expansion of 11 new routes will commence to China from Kuala Lumpur, Penang and Kota Kinabalu. The up gauge of Hong Kong to A330-300, the second Shanghai service and a new service to Haikou have already commenced. In Q2, three new destinations to Wuhan, Fuzhou and

Nanjing will start in June / July with additional services to Chengdu and Chongqing in October 2017. Services from Kota Kinabalu to Tianjin are targeted for launch in Q3 as well as two new additional services from Penang to new Chinese markets.

Enhancing corporate governance

The Business Integrity unit achieved several milestones in the quarter towards a more transparent and accountable Group. This included the introduction of the Business Integrity Dashboard launched in March 2017 for declarations of conflicts of interest, gifts and hospitality, family interest within MAG and family members working for MAG. The Knowledge Management Unit, set up to ensure understanding by staff on all policies within the group including fraud and wildlife trafficking, has seen positive traction with over 2000 staff now trained in various areas such as money laundering, wild life and human trafficking, as well as bribery and corruption.

Investing in a talent pipeline and local succession planning

To ensure a high performing culture, the group has put in place a structured performance management system (PMS) for all employees group-wide. To support the capability development, PMS workshops and clinics have been conducted across the group to ensure readiness and understanding of the process. As of Q1 2017, a total of 70% of executives and above have completed the PMS workshop. Concurrently, PMS clinics for support staff are also being conducted across the group.

As part of leadership development and succession planning, the group has also introduced its own Senior Leadership Development Programme (SLDP) where identified talent for leadership positions are sent to various prestigious education institutions as part of their learning and development. The SLDP is designed to accelerate their readiness for leadership positions and ensure a strong leadership bench strength for the group.

The Works Council continued meetings in the quarter which has led to the identification and quick resolution of several employee issues. The quarter also saw a Works Council representative democratically elected to serve each station in Sabah, Sarawak and Peninsular Malaysia. They will serve as focal points at station level to ensure issues are effectively and efficiently identified, raised and managed.

The first Works Council conference of the year was conducted on 11th April as a forum to share business updates and discuss employee issues that require attention and management. The forum also enabled participants to share information, learn from each other and obtain clarification and information to be cascaded to employees. Participants of the conference included the GCEO, Chief Human Resources Officer, Subsidiary Heads, Division Heads, Works Council Representatives and HR Business partners

Outlook

The Group maintains a cautious outlook in fiscal year 2017. A more aggressive price war on the domestic market has happened earlier than initially predicted, ahead of the anticipated large increase in aircraft from competitors in Q2 and Q3 of 2017. A weak Ringgit and increased fuel prices create a challenging cost environment. Advance bookings are far stronger in 2017 than 2016, but the airline is seeing yield pressure across all routes as low fares are available from many legacy carriers as well as the traditional low cost carriers. For Malaysia Airlines, the market is diverging with consistent growth and improvement on international services, but a loss of market share domestically where fares are increasingly low. The Group will continue to be prudent in controlling capacity and will allocate the Group’s aircraft where we see the best potential returns. The airline is still on track to be profitable in 2018.