MALAYSIAN AIRLINE SYSTEM BERHAD Annual Report...

MALAYSIAN AIRLINE SYSTEM BERHAD

Annual Report 2005

Notice of Annual General Meeting 2-3

Chairman’s Statement 5-10

Managing Director’s Statement 11-15

Board of Directors 16-23

Board Audit Committee Report 28-33

Statement of Internal Control 34-36

Statement of Corporate Governance 37-47

Group Structure 48

Senior Management 49

Financial Report 50-124

contents

Notice of Annual General Meeting

2

Malaysian Airline System Berhad Annual Report 2005(10601-W)

AGENDA

As Ordinary Business

1. To receive and adopt the Report of the Directors and the Audited Financial Statements

for the financial period ended 31 December 2005 together with the Report of

the Auditors thereon.

2. To approve the Directors’ fees for the financial period ended 31 December 2005.

3. To re-elect the following Directors retiring under Article 139 of the Company’s Articles

of Association, and who, being eligible, offer themselves for re-election:-

(i) Dato’ Dr. Mohd Munir bin Abdul Majid

(ii) Datuk Amar Haji Abdul Aziz bin Haji Husain

(iii) Keong Choon Keat

(iv) Martin Gilbert Barrow

4. To re-elect the following Directors retiring under Article 137 of the Company’s Articles

of Association, and who, being eligible, offer themselves for re-election:-

(i) Iris Jala @ Idris Jala

(ii) Datuk Haji Yusoff @ Hunter bin Datuk Haji Mohamed Kasim

5. To re-appoint Messrs. Ernst & Young as Auditors and to authorise the Directors to fix

their remuneration.

As Special Business

6. To consider and if thought fit to pass the following Ordinary Resolution:-

Authority to Allot and Issue Shares

“THAT subject to the Companies Act, 1965 (the Act), the Articles of Association of

the Company, approval from the Bursa Malaysia Securities Berhad and other

government or regulatory bodies, where such approval is necessary, full authority be

and is hereby given to the Board of Directors pursuant to Section 132D of the Act, to

issue shares in the capital of the Company at any time upon such terms and

conditions and for such purposes as the Directors may in their discretion deem fit,

provided always that the aggregate number of shares to be issued shall not exceed

10% of the issued share capital of the Company and that such authority shall

continue to be in force until the conclusion of the next Annual General Meeting of

the Company.”

Resolution 1

Resolution 2

Resolution 3

Resolution 4

Resolution 5

Resolution 6

Resolution 7

Resolution 8

Resolution 9

Resolution 10

NOTICE IS HEREBY GIVEN THAT the Thirty Fifth Annual General Meeting of MalaysianAirline System Berhad will be held at the Auditorium, 1st Floor, South Wing, MASAcademy, No. 2 Jalan SS7/13, Kelana Jaya, 47301 Petaling Jaya, Selangor Darul Ehsan onMonday, 26 June 2006 at 10.00 a.m. for the following purposes:-


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Notice of Annual General Meeting

7. To transact any other ordinary business for which due notice has been given.

By Order of the Board

Rizani bin Hassan (LS 05125)

Company Secretary

2 June 2006

Kuala Lumpur

Resolution 11

Explanatory Notes on Item 6 of the Agenda

Resolution pursuant to Section 132D, Companies Act, 1965.

The Ordinary Resolution proposed under item 6 of the Agenda, if passed, will empower the Directors to issueshares in the Company up to an amount not exceeding in total 10% of the issued share capital of the Company,subject to compliance with the relevant regulatory requirements. The approval is sought to avoid any delay andcost in convening a general meeting for such issuance of shares. This authority, unless revoked or varied by theCompany at a general meeting, will expire at the next Annual General Meeting.

Notes:

1 A member of the Company entitled to attend and vote at the Meeting is entitled to appoint a proxy/proxies to attend and vote in his stead.

A proxy may but need not be a member of the Company and a member may appoint any person to be his proxy and the provisions of

Section 149(1)(b) of the Companies Act, 1965 shall not apply to the Company.

2. In the case of a corporate member, the instrument appointing a proxy shall be under its Common Seal or under the hand of its officers or

attorney, duly authorised in that behalf.

3. A holder may appoint more than two proxies to attend the Meeting. Where a member appoints two or more proxies, he shall specify the

proportion of his shareholding to be represented by each proxy.

4. The right of foreigners to vote in respect of their deposited securities is subject to Section 41(1)(e) and Section 41(2) of the Securities

Industry (Central Depositories) Act, 1991 and the Securities Industry (Central Depositories) (Foreign Ownership) Regulations, 1996. The

position of such Depositors in this regard will be determined based on the General Meeting Record of Depositors. Such Depositors whose

shares exceed the Company’s foreign shareholding limit of 45% as at the date of the General Meeting Record of Depositors may attend

the above Meeting but are not entitled to vote. Consequently, a proxy appointed by such Depositor who is not entitled to vote will also

not be entitled to vote at the above Meeting.

5. The instrument appointing a proxy must be deposited at Symphony Share Registrars Sdn. Bhd., Level 26 Menara Multi Purpose,Capital Square, No. 8 Jalan Munshi Abdullah, 50100 Kuala Lumpur, not less than 48 hours before the time for holding the Meetingor at any adjournment thereof.

6. Shareholders’ attention is hereby drawn to the Listing Requirements of Bursa Malaysia Securities Berhad, which allows a member of the

Company who is an authorised nominee as defined under the Securities Industry (Central Depositories) Act, 1991, to appoint at least one

(1) proxy in respect of each securities account it holds with ordinary shares of the Company standing to the credit of the said securities

account.

Statement Accompanying theNotice of Annual General Meeting

4


Directors standing for re-election at the 35th Annual General Meeting of the Company to be held at theAuditorium, 1st Floor, South Wing, MAS Academy, No. 2, Jalan SS7/13, Kelana Jaya, 47301 Petaling Jaya,Selangor Darul Ehsan on Monday, 26 June 2006 at 10.00 a.m. are as follows:-

NAME OF DIRECTOR DETAILS OF DETAILS OF INDIVIDUAL DIRECTORSATTENDANCE OF AND OTHER DISCLOSURE BOARD MEETINGS REQUIREMENTS

Dato’ Dr. Mohd Munir bin Abdul Majid(Article 139 of the Company’sArticles of Association) 8/8 Refer to page 17 of Annual Report

Datuk Amar Haji Abdul Aziz bin Haji Husain(Article 139 of the Company’sArticles of Association) 4/8 Refer to page 20 of Annual Report

Keong Choon Keat(Article 139 of the Company’sArticles of Association) 7/8 Refer to page 19 of Annual Report

Martin Gilbert Barrow(Article 139 of the Company’s Articles of Association) 7/8 Refer to page 19 of Annual Report

Iris Jala @ Idris Jala(Article 137 of the Company’s Articles of Association) 1/1 Refer to page 18 of Annual Report

Datuk Haji Yusoff @ Hunter binDatuk Haji Mohamed Kasim(Article 137 of the Company’sArticles of Association) Not applicable* Refer to page 22 of Annual Report

*Datuk Haji Yusoff @ Hunter bin Datuk Haji Mohamed Kasim was appointed after the financial period ended 31 December 2005.

List of General Meeting held during the financial year ended 31 March 2005

34th ANNUAL GENERAL MEETING

Date : 19 September 2005Time : 10.00 a.m.Venue : Nirwana Ballroom 1, Lower Lobby

Crown Plaza Mutiara, Kuala LumpurJalan Sultan Ismail50250 Kuala Lumpur

Chairman’s Statement


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The financial year under review was no doubt a tumultuous one for the global airlineindustry as a whole. The higher input cost largely brought about by external factors andoperating pressures coming from the increased competition of no frills, budget airlines,especially in our part of the world, contributed toward making 2005 the extremelychallenging year that it was for full service airlines. Malaysia Airlines was certainly notspared and, additionally, had its particular set of problems that had to be addressed.

The Widespread Asset Unbundling (WAU) exercise that was completed on 5 November2002 was not followed through with the full operational transformation of the company,as envisaged, and the subsequent better financial results, largely the outcome of balancesheet transformation and of significant contribution from non-operating income, lulled thecompany into a false sense of security and achievement. Thus, when the sources of non-operating income dried up, with no compensating strong income from operations, whichwere further undermined by the sharp rise in the price of jet fuel, the true nature of thecompany’s situation became all too painfully evident. There was shock and disbelief. Thegeneral perception was that the company had turned the corner and recovered. The realityof still unsatisfactory operating performance and of poor quality of income was obscuredby the stronger balance sheet and non-operating contribution. This perception was as trueof internal as of external stakeholders. The shock and disbelief turned into a search toapportion blame, which further obstructed understanding of the true situation.

The board, however, took necessary steps to ensure the company’s survival, based on a fulland calm analysis of the situation. With the announcement in August of the financial resultfor the period ending 30 June, 2005, the true condition of the airline’s operatingperformance was exposed, and immediate measures were taken to check the slide,including cost control, a fuel efficiency programme and a revenue enhancement plan.These were the critical initial steps that were taken that have been expanded, deepenedand made more comprehensive with new management leadership, style and methodology.The board is determined to ensure that shareholder value is restored and towards this end,many drastic measures have been approved and taken in order to radically change the wayMalaysia Airlines does business.

ALTHOUGH there is still a long, long way to go in the recoveryprocess, there are encouraging and hopeful little signs the company,in the first few months of the 2006 financial year, with newleadership in its management, may have arrested the steep declinein its performance that marked an extremely difficult 2005.


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Financial Review

We realigned our financial year-end to 31 December from 31 March previously. As a resultof this, the shortened financial year under review is for the period from 1 April to 31December 2005. For the 9 months to December 2005, Malaysia Airlines recorded a net lossof RM1.26 billion. The losses were attributed to increases in input cost, predominantly fromhigher jet fuel cost and staff cost which increased by 40% and 21% respectively over thecorresponding period in the previous year. Included in the net loss for the financial yearunder review is also RM294 million in one-off write down of provisions. We believe 2006would represent a watershed year, and as such we have undertaken a close review of ouroperations and taken prudent steps to recognize impairments in several of the provisionswe have made earlier.

While company incurred losses in 2005, we take some heart in the fact that the number ofpassengers carried by the airline in the period increased by 10.3% to 7.1 million passengers,even if much of it came from new routes and increased frequency. This in turn has resultedin passenger revenue increasing by 14% to RM6.3 billion over the corresponding period inthe previous financial year. Other operating numbers have also shown strong increases, withload factors up 4 percentage points to 71.3% and yields, represented by sen/ revenuepassenger per kilometer (RPK), increasing by 3sen to 19.8sen/RPK. The increases in load andyields at Malaysia Airlines are occurring in an environment where many of the major globalfull service airlines are facing declining figures, but they still lag other major full serviceairlines in the world by a long chalk. As such, we must strive for sharp improvements inthese areas.

In spite of rising costs, Malaysia Airlines remains cost competitive and at USD 4.1 centavailable seats per kilometer (ASK), it is one of the most cost efficient airlines in the region– although, as always, cost must be watched closely, particularly with the jet fuel price beingsuch a menace.

Business turnaround plan

On 27 February 2006, in conjunction with the announcement of the 2005 results, weintroduced a business turnaround plan to return the company to profitability. Themanagement, with the board’s approval, has initiated a 3-year plan to achieve this goal. ATurnaround Management Office (TMO) was also set up specifically to oversee theturnaround of the company. The plan outlines the steps that will be taken to reduce lossesin 2006 to RM620 million from a projected RM1.7 billion loss, for the company to makeprofits of RM50 million in 2007 and thereafter to achieve record profits of RM500 millionby 2008. This was developed using the Government Linked Company (GLC) TransformationManual, issued by the Putrajaya Committee for GLC High Performance.

Broadly, the plan outlines the turnaround of Malaysia Airlines in 3 phases, each lasting ayear. The first 12 months will be spent addressing the company’s cash position and reducingthe losses. Toward this end, the actions that we have initiated over the 3 months since theend of the 2005 financial year have succeeded in averting an expected cash crunch by April


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2006 had nothing been done. The company has seen marked improvement in revenue overthis short period as a result of several initiatives, which includes the MAS travel fair, pricingreviews and other incentives to increase revenue collection.

In 2007, the company will focus on reducing controllable cost and on building capabilities.Thereafter, our target would be to seek new opportunities for Malaysia Airlines to explore.We view the turnaround as not just a series of quick actions, which will bring instantsuccess, but a multi-year program designed to create an organization that can respond tochanging market conditions. The journey towards a lasting turnaround will take years ofconcerted action stretching past the 3 years that we have outlined. We are at the dawn ofyears of hard work that the board believes will transform the airline into a more resilientcompany for the future.

Brand recognition

Malaysia Airlines’ brand equity continues to gain recognition. In 2005, SkyTrax, the pre-eminent airline quality monitor, awarded our national airline a “five star” status, one of onlyfour airlines in the world to be given this accolade. This is a testament to the strong brandequity we have built over the years, a result of our dedication towards providing the highestquality service possible. This recognition follows four consecutive years of Malaysia Airlineswinning the “best cabin crew” award also from SkyTrax. Besides this, Malaysia Airlines wasdesignated the “Best Airline to Asia” by TTG (2005) and the UK based travel periodical,Travel Weekly (2006). The recognition of Malaysia Airlines as the pre-eminent airline to Asiacoupled with our strong base of loyal customers should combine to form the cornerstoneon which the new management team can quickly return the company to profitability.

State of the airline industry

As highlighted earlier, the aviation industry is facing severe challenges. Since 2001 theglobal airline industry has lost over USD36 billion and this trend is likely to continue withIATA forecasting further losses of USD4.3 billion in 2006. Asian airlines, which in the pastwere able to enjoy several years of excellent returns, due to relatively light competition, arenow faced with deepening competition and worsening market conditions. Competitionarises mainly from the mushrooming of no frills budget carriers, which employ the strategyof offering heavily discounted seats in core markets to stimulate demand. While the growthof these new airlines appears phenomenal, they remain relatively insignificant to theindustry as a whole. The high growth rate is a reflection of a small firm effect and a resultof the fact that these no frills airlines are still building new markets – and hence are able toenjoy start-up growth rates. Nevertheless the challenge they pose is not to be under-estimated.

Domestic route rationalization

Malaysia Airlines, as the national flag carrier, has a social responsibility to the people of


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Malaysia, which it has discharged over many decades. We provide service to all the majorairports and secondary airstrips in Malaysia. Some of these locations with the secondaryairstrips would not have been accessible by any other means of travel if not serviced by thenational airline. As such, our domestic operations have not been operated with an exclusivecommercial profit-making mentality. There was an important emphasis on our socialresponsibility to the people of Malaysia. Unfortunately, the running of the domestic businessis a “zero sum game”. In order for the people of Malaysia to benefit to the extent they wereserved, Malaysia Airlines had to lose because of uneconomic routes and as a result of thesubsidy to those who travel with it. To keep the fares affordable, the government hasmaintained the ticket price on some of these routes for the last 13 years without the airlinehaving recourse to adjust prices in line with inflation and rising costs. These are the mainreasons why, of the 118 domestic routes flown in 2005, only 4 were profitable.

In the past couple of years or so, our running of the domestic routes has been questionedand scrutinized, especially in comparison to our commercially minded no frills domesticcompetitor. This has to be accepted and must be expected in conditions of greater and moreopen competition when market efficiency becomes the measure of performance withoutgovernment subsidy. In the commentary, however, it should also be recognized MalaysiaAirlines has been operating at a huge disadvantage when competing against a no frillsbudget airline, which was allowed to operate its domestic routes without restriction to itsfares, frequency, aircraft type, seat configuration and flight dependability. Be that as it may,on 27 March 2006, the Government announced the domestic restructuring plans whichsaw a division of the domestic network, between Malaysia Airlines and Air Asia, based ona definition of trunk and non trunk routes. Malaysia Airlines was permitted to cover 19domestic trunk routes which comprised 7 routes in Peninsular Malaysia, 6 routes betweenPeninsular Malaysia and Sabah/Sarawak and 6 routes within Sabah and Sarawak. We viewthese 19 routes as core feeder routes which encompass 95% of the airline’s internationalfeeder network. With the rationalization of the domestic routes, we have taken back profitand loss responsibility of the routes we operate from our immediate parent, PenerbanganMalaysia Berhad (PMB). Malaysia Airlines has now been given the free hand to operate thedomestic sector in a more commercially viable manner. Nevertheless, our commitment tothe people remains. We are committed to providing the best possible service at the mostaffordable price permitted under the rationalized domestic route structure. We areconfident that we would be able to turn the 19 routes allocated to us into profitable onesin the near future.

Right-sizing the staff force

As a direct result of the domestic route rationalization, we will be right-sizing the staff forcein the coming months. While this is not an immediate desire of the management, thereduction in domestic routes serviced from 118 to 19 has naturally resulted in the need toclose certain stations and cut back on operations. A Mutual Separation Scheme (MSS) hasbeen announced and, depending on take-up and acceptance, it has been estimated by themanagement as many as 5,000 members of staff may leave the company. The cost of the



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MSS will be funded by the compensation from Penerbangan Malaysia Berhad (PMB) forearly termination of the Agreement for Domestic Business Unbundling.

Even if the terms of the MSS are attractive and the approach to termination of servicehumane, such separation is never easy, how to start a new life after, what will be in manyinstances, many years of being in the Malaysia Airlines family. We will help those whodecide to leave as far as we can and, on behalf of the board, I would like to express thecompany’s gratitude and best wishes to them.

Changes in the boardroom

I am delighted to welcome En. Idris Jala, who joined Malaysia Airlines on 1 December2005, to replace Dato’ Ahmad Fuaad bin Mohd Dahalan, as Managing Director. Idrisjoins Malaysia Airlines at a critical point in the company’s fortune and possesses a proventrack record for turning around companies. The board wishes to thank Dato’ AhmadFuaad for his 32 years of loyal service, of which in the last over one year he served in thecapacity of Managing Director.

Acknowledgements

There are so many people to whom we are indebted for the faith they have shown inthe airline and for the assistance they have given us. We believe with their continuedsupport, our mission of turning Malaysia Airlines into a profitable entity can be achieved.

We express our sincerest gratitude to our loyal and valued customers. We are committedto repay their faith in us by relentlessly improving ourselves to not only meet theirexpectations but to exceed them. We thank the Government, for its support of thecompany and for providing the guidance and assistance needed to see the nationalairline through this difficult period. I would also like to thank fellow directors for theirsupport and commitment in the discharge of their duties and responsibilities.

Last but by no means least, we thank the members of staff for the support, dedicationand commitment displayed during the year. We have been encouraged by theenthusiasm our employees have shown towards the Business Turnaround Plan and itsimplementation. We recognize that only with their continued support can theturnaround of Malaysia Airlines be achieved. As one, we will face the challenges oftransforming the national airline for the better.

Dato’ Dr Mohd Munir bin Abdul MajidChairman

Managing Director’s Statement



The 2005 financial year for Malaysia Airlines saw a loss of RM1.26 billion despite revenue

increase by 9%. These losses were due to increasing input costs resulting in operating

cost escalating by 32%, of which 15%, or RM1 billion, can be attributed to increases in

fuel price. Even with a fuel surcharge imposed, Malaysia Airlines still had to bear

approximately 66% of the increased fuel price. The higher operating costs places

additional pressure on our already thin margins. The new environment will continue to

hit Malaysia Airlines hard. The projections for Malaysia Airlines for 2006 look dismal. In

fact, on its current business assumptions, course and speed, Malaysia Airlines will likely

fail, and likely incur a RM1.7 billion loss for 2006.

I took on the responsibility as Managing Director on 1 December 2005, fully aware of the

challenges in turning Malaysia Airlines around. I believe that we have the right

foundation on which to return the airline to profitability.

On 27 February 2006, we unveiled our Business Turnaround Plan in a document which

we made available in the public domain (for a copy, please visit

www.malaysiaairlines.com). I am fully aware that our stakeholders particularly in Malaysia

are very interested in the affairs of Malaysia Airlines. Whilst this document is aimed

primarily at communicating the Business Turnaround Plan to our staff, we felt that it

should be made available to selected external stakeholders. My team and I have decided

to be as transparent as possible about our problems and how we intend to address them,

without disclosing confidential and competitive information. What we are definitely NOT

disclosing is how precisely we are going to implement the plan. The key to success is

indeed in the execution of this plan and that is our secret.

An Overview

The global airline industry is in a state of turmoil and it isincreasingly clear that the survivors—and most certainly thewinners—will have to make radical changes to adapt to the newenvironment.12


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The MAS Way provides the framework for our Business Turnaround Plan:

1. Flying to win customers - we will reconfigure our network and our product portfolioto ensure that we have the tools and capabilities to be a top-tier player in each of the

markets we serve, or we will leave.

2. Mastering operational excellence - we will build a unique operating capability inline with “best in class”. This capability will be reflected not only in improved operational

reliability, but also in higher productivity and greater precision in everything that we do.

3. Financing and aligning our business on P&L - we will relentlessly increase profitswith the support of a world-class Finance function that ensures true financial

accountability, transparency and performance orientation in our business.

The Business Turnaround Plan

Our Business Turnaround Plan has been developed using the Government Linked

Company (GLC) Transformation Manual as a guide. It takes into account the

recommendations in the manual and adapts these for implementation in Malaysia

Airlines in the context of the business turnaround. The Business Turnaround Plan,

outlined in the document, has five central thrusts, each symbolised by a tail of the

venerable Malaysia Airlines symbol.

1. COMMERCIAL

2. OPERATIONS

3. FINANCE

4. PEOPLE

5. STAKEHOLDERS

Flying to Win Customers

Mastering OperationalExcellence

Financing and Aligningthe Business on P&L

Unleashing Talents andCapabilities

Winning Coalitions

The MAS Way

VISION:Going Beyond Expectations

MISSION:To be a profitable airline

STRATEGY:BUSINESS TURNAROUNDTo achieve sustained profitability by going beyond expectations on 5 thrusts


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4. Unleashing talents and capabilities - we are committed to our people. We stronglybelieve that the Malaysia Airlines employees and managers have both the passion and

talent to achieve whatever goals we set for ourselves. We will work together with our

employees to ensure that they have a working environment in which their talents can

thrive.

5. Winning coalitions - we know that we cannot achieve our goals alone. MalaysiaAirlines needs the resolute support of the government, its employees, managers,

customers, suppliers, agents and investors. It is only with the support of these

stakeholders that Malaysia Airlines can have the mandate it needs to make the changes

that will ensure our long-term success.

This Business Turnaround Plan has been carefully sequenced over the next 3 years to

deliver cash, profitability and growth—in that order of intensity and focus. At the same

time, we will continue to foster an environment that allows the talents of our people to

be unleashed and to flourish.

In 2006, we are already undertaking a series of measures to raise RM4 billion in cash

through internal and external sources to tide us through our current cash crisis. We are

also tackling the biggest immediate profitability challenge for Malaysia Airlines: low

yield. Malaysia Airlines has award-winning products and services, a competitive cost

base, and a load factor that is only slightly below average, but we are still losing money

because our yields are lower than those of our competitors. We are launching multiple

initiatives to increase our yields, as well as fundamentally reconfiguring our network -

cutting unprofitable routes and focusing on our profitable core network. At the same

time, we are rightsizing our manpower to match the new network.

In 2007, our plan will focus on improving efficiency and capabilities. In 2008, we will

focus on new growth opportunities.

Impact of the Business Turnaround Plan

The Business Turnaround Plan is expected to turnaround Malaysia Airlines in 3 years. The

turnaround of Malaysia Airlines is based on a series of specific cost and revenue actions,

forecast to result in a profit of RM500 million in 2008—an all-time high profit for

Malaysia Airlines —and position Malaysia Airlines to improve its net income even further

Starting from a base forecast loss of RM1.7 billion, the forecast result for 2006 will be a

loss of RM620 million—an improvement of RM1.1 billion. For 2007, the plan forecasts

a further improvement of about RM670 million, resulting in a RM50 million profit.


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Conclusion

We are dedicated to the creation of a company that will be a source of pride and

admiration for its employees and indeed all its stakeholders. The Malaysia Airlines of

tomorrow will maintain its five-star product, have the lowest cost structure in the region,

be renowned as being one of the best places to work in Malaysia, have closed much of

the revenue performance gap to our peers and will return to profitability in 2008. I am

convinced that with decisive action, Malaysia Airlines can be a success and emerge as a

winner.

Idris Jala Managing Director/CEO

Profit Turnaround – Forecast RM1.1 Billion Improvement in 2006

2006baseline

NIAT2006NIAT

2007NIAT

2008NIAT

2006 NIAT w/revenueimprovements

Fuelsurcharge,AdminCharge

Pricing,inv sys &mgmt

50 500

-620

-1,700

Enforce-ment

SalesStimula-tion

Networkoptimi-sation Fuel

Handling

Maint-enance

Catering& others

CutRoutes

MASkargo

270

230

120 5040

-990 20 4090

90

70

60

RevenueImprovements

CostImprovements

2006 MYR millions

Board of Directors

12

43

5

67

8 910

11

1 Dato’ Dr. Mohd Munir bin Abdul Majid

2 Dato’ N. Sadasivan a/l N. N. Pillay

3 Iris Jala @ Idris Jala

4 Dato’ Sri Izzuddin bin Dali

5 Dato’ Zaharaah binti Shaari

6 Dato’ Mohd. Annuar bin Zaini

7 Dato’ Mohamed Azman bin Yahya

8 Tengku Azmil Zahruddin bin Raja Abdul Aziz

9 Martin Gilbert Barrow

10 Abdul Rahman bin Abdul Ghani

(Alternate Director to Datuk Haji Yusoff @ Hunter

bin Datuk Haji Mohamed Kasim)

11 Keong Choon Keat

Not in picture

Datuk Haji Yusoff @ Hunter bin Datuk Haji Mohamed Kasim

Datuk Amar Haji Abdul Aziz bin Haji Husain

Datu Haji Salleh bin Haji Sulaiman

(Alternate Director to Datuk Amar Haji Abdul Aziz bin Haji Husain)


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Board of Directors

Dato’ Dr Mohd Munir bin Abdul Majid Non-Independent and Non-Executive Chairman

Date of birth : 16 February, 1948 Nationality : Malaysian

Qualification : Ph.D (International Relations) and B.Sc

(Econ) from London School of Economics and Political

Science, United Kingdom

Working Experience : 1972 – 1975 Part-time lecturer,

Department of International Relations, LSE London

1975 – 1978 Research Analyst, Daiwa Europe London

January 1979 – September 1980 Leader Writer, The New

Straits Times Press (NST) September 1980 – May 1981

Assistant Editor, NST May 1981 – January 1982 Assistant

Group Editor, NST January 1982 – November 1982 Deputy

Group Editor, NST 1982 – 1986 Group Editor (English), NST

1986 - 1993 Chief Executive Officer, Commerce

International Merchant Bankers Berhad (CIMB) [formerly

known as Pertanian Baring Sanwa] Executive Chairman,

CIMB 1993 – February 1999 Executive Chairman, Securities

Commission 2000 – 2004 Senior Independent Non-

Executive Director, Telekom Malaysia Berhad 2002 – 2004

Chairman /Director, Celcom (Malaysia) Berhad

Occupation : Chairman

Date first appointed to the Board : 1 June 2004

Board Committee : Nomination Committee (Chairman)

Other directorship of public companies :

Saujana Resorts Malaysia Berhad and PECD Berhad

Family relationship with any director and/or major

shareholder of the listed issuer : Nil

Any conflict of interest with the listed issuer : Nil

Convictions of offences within the past 10 years other

than traffic offences (if any) : Nil

No. of Board meetings attended in the financial year :

8 out of 8

Dato’ N. Sadasivan a/l N. N. PillayIndependent and Non-Executive Deputy Chairman

Date of birth : 29 February, 1940 Nationality : Malaysian

Qualification : Bachelor of Arts (Hons) Economics, University

of Malaya

Working Experience : 1 March 1963 - 31 December 1967Economist/Chief Industrial Facilities Division, Economic

Development Board, Singapore 1 January 1968 - 31 May

1972 Director of Division, Malaysian Industrial Development

Authority (MIDA) 1 June 1972 - 31 December 1975

Director, Overseas Promotion Office in Dusseldorf, Germany,

MIDA 1 January 1976 - 31 January 1984 Deputy Director-

General, MIDA 1 February 1984 - 28 February 1995

Director-General, MIDA 1 April 1995 - present Executive

Chairman, SKA Management Consultants Sdn. Bhd.

Occupation : Management Consultant

Date first appointed to the Board : 1 December 2001

Board Committee Board Tender Committee (Chairman)

Board Audit Committee, Nomination Committee and

Remuneration Committee

Other directorship of public companies :

Chemical Company of Malaysia Berhad, Petronas Gas

Berhad, Leader Universal Holdings Berhad, APM Automotive

Holdings Berhad, Pengurusan Danaharta Nasional Berhad,

Bank Negara Malaysia, Malaysian Industrial Development

Finance Berhad and Yeo Hiap Seng (Malaysia) Berhad

Family relationship with any director and/or

major shareholder of the listed issuer : Nil





7 out of 8

Board of Directors

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Iris Jala @ Idris JalaManaging Director/Chief Executive Officer

Date of birth : 21 August, 1958 Nationality : Malaysian

Qualification : B. Soc Sc (Hons) Development Studies/

Management, University Sains Malaysia Masters Degree,

Industrial Relations, University of Warwick,UK

Working Experience : 1982 Industrial Relations Officer,

Sarawak Shell Berhad 1985 Shell Sabbatical (Masters

Degree), Warwick University, UK 1987 Head Staff

Development, Sarawak Shell Berhad 1989 Human Resource

Advisor, Shell International, Holland 1993 Head HR

Planning, Sarawak Shell Berhad 1995 Business

Reengineering Manager, Shell Malaysia Ltd 1996 Retail Area

Manager, Shell Malaysia Ltd 1997 Senior Manager, National

Retail Sales, Shell Malaysia Ltd 1998 Chairman

/Managing Director (LPG),Shell Sri Lanka 2000

Vice President Business Development Consultancy, Shell Int.

Pet. Co., UK (London) 2001 Vice President Retail Marketing,

SRI, Shell Int. Pet. Co., UK (London) 2003 Managing

Director, Shell MDS (Malaysia) Sdn Bhd Executive Director,

Shell Malaysia Ltd, Gas & Power 2005 Managing Director/

Chief Executive Officer, Malaysian Airline System Berhad.

Occupation : Managing Director/Chief Executive Officer

Date first appointed to the Board : 1 December, 2005

Board Committee: Board Safety & Security Committee

Other directorship of public companies : Nil






No. of Board meetings attended in the financial year: 1

out of 1 (during his tenure as Director

for financial period ended 2005)

Tengku Azmil Zahruddin bin Raja Abdul AzizNon-Independent and Executive Director

Date of birth : 28 August, 1970 Nationality : Malaysian

Qualification : Chartered Accountant, - Associate of

Malaysian Institute of Accountants and Associate of

Institute of Chartered Accountants in England and Wales,

Associate of Association of Corporate Treasurers, United

Kingdom and Double First Class Degree in Economics from

University of Cambridge, United Kingdom

Working Experience : Audit and Business Advisory Services

Division, PricewaterhouseCoopers in London and Hong

Kong October, 2002 - 15 August 2004 – Executive

Director/Chief Financial Officer, Penerbangan Malaysia

Berhad 16 August 2004 – 22 August 2005 – Managing

Director/Chief Executive Officer, Penerbangan Malaysia

Berhad 23 August 2005 Executive Director, Malaysian

Airline System Berhad

Occupation : Executive Director and Chief Financial Officer,

Malaysian Airline System Berhad

Date first appointed to the Board : 23 August 2004

Board Committee : Board Tender Committee and

Board Safety and Security Committee








8 out of 8


19

Board of Directors

Keong Choon KeatIndependent and Non-Executive Director

Date of birth : 22 July 1944 Nationality : Malaysian

Qualification : Associate of the Institute of Chartered

Accountants in England & Wales, Member of the

Malaysian Institute of Accountants, Member of the

Malaysian Association of Certified Public Accountants

and Fellow of the Institute of Chartered Accountants in

England and Wales

Working Experience : January 1968 - July 1968 Audit

Assistant, Harrison Willis & Company Ltd., England

July 1968 - March 1969 Accountant, Bristol Myers &

Company Ltd. Middlesex, England 1969 - 1974 Internal

Audit Manager, Malaysian Tobacco Company Berhad

1974 - September 1975 Finance Controller, Pemasang

Motor-Motor Pahang Sdn. Bhd. October, 1975 - January

1977 General Manager, UMW Engineering Sdn. Bhd.

February 1977 - October 1981 Group Chief Accountant,

UMW Holdings Group November 1981 - 1987 Director,

Group Accounts, UMW Holdings Group 1988 - July 1999

Executive Director, UMW Holdings Group August 1999 -

present Accredited Consultant, DBM (Malaysia) Sdn. Bhd.

Occupation : Consultant

Date first appointed to the Board : 16 April 2001

Board Committee : Board Audit Committee (Chairman),

Remuneration Committee and Nomination Committee

Other directorship of public companies : JT International

Berhad, Pacificmas Berhad, Chin Teck Plantations Berhad,

Negri Sembilan Oil Palms Berhad and Crest Builder

Holdings Berhad







7 out of 8

Martin Gilbert BarrowIndependent and Non-Executive Director

Date of birth : 10 March 1944 Nationality : British

Qualification : Gained Oxford and Cambridge Board

Examination “A” Levels in Science and Mathematics

Attended courses in Finance and Marketing

Working Experience : 1962 – 1964 Traveled extensively in

Asia, working in Australia and Malaysia 1964 Joined

Matheson & Co., London 1965 Jardine Matheson, Hong

Kong, 1965 – 1975 Management role in the Group’s

operation in Hong Kong, Japan and Thailand,

1975 – 1980 Managing Director of the Group’s operations

in Japan 1980 – 1983 President, Olayan Saudi Holding

Company, the Group’s affiliate in Saudi Arabia 1983 –

1988 Regional Managing Director, Jardines operations in

Hong Kong and China 1989 – 2001 Director, Jardine

Matheson Ltd – Group Head Office

Key Experience in Public Service: 1979 Elected Chairman

of British Chamber of Commerce in Japan

1984 – 1994 Member of the Aviation Advisory Board

1984 – 2001 Chairman of the Sailors Home and Mission

to Seafarers 1987 – 1990 Member of Steering Group,

New Airport 1988 – 1995 Appointed by the Governor of

Hong Kong as a member of the Legislative Council

1988 – 1996 Chairman of the Hong Kong Tourist

Association 1989 Chairman of the Community Chest of

Hong Kong 1990 – 2001 Chairman of the Hong Kong

Arts Festival Society 1996 – 2001 Chairman, Committee

on Deregulation, Business Advisory Group

Occupation : Director

Date first appointed to the Board : 29 August 2001

Board Committee : Board Safety and Security Committee

(Chairman)








7 out of 8

Board of Directors

20


Dato’ Mohamed Azman bin YahyaNon-Independent and Non-Executive Director

Date of birth : 8 January 1964 Nationality : Malaysian

Qualification : B. Sc. Economics (First Class Honours),

London School of Economics and Political Science

(University of London), Member of the Institute of

Chartered Accountants in England and Wales, Member of

the Malaysian Institute of Accountants (Public Accountant)

and Fellow of the Institute of Banks in Malaysia

Working Experience : September, 1985 - December, 1988

Chartered Accountant, KPMG, London England April 1989 -

July 1990 Corporate Finance Manager / Assistant General

Manager (Finance), Island & Peninsular Berhad August,

1990 - December 1994 Manager in Corporate Finance

Department / Senior Manager / General Manager in

Corporate Finance Department, Bumiputra Merchant

Bankers Berhad December 1994 - May 1998 Chief

Executive / Executive Director, Amanah Merchant Bank

Berhad January 1998 - May 1998 Group Executive Director,

Amanah Capital Malaysia Berhad 21 May 1998 - July 2003

Managing Director / Chairman, Pengurusan Danaharta

Nasional Berhad 1 August 2001 - 31 July 2002 Chairman,

Corporate Debt Restructuring Committee

Occupation : Group Chief Executive, Symphony House

Berhad

Date first appointed to the Board : 1 December 2001

Board Committee : Remuneration Committee (Chairman)

and Nomination Committee

Other directorship of public companies : Pharmaniaga

Berhad, Khazanah Nasional Berhad, PLUS Expressways

Berhad, Symphony House Berhad, Scomi Group Berhad

and Bolton Berhad

Family relationship with any director and /or






8 out of 8

Datuk Amar Haji Abdul Aziz bin Haji HusainIndependent and Non-Executive Director


Qualification : B. EC (Bus. Adm.), University of Malaya

MBA (Finance), Syracuse University, Syracuse, New York

Working Experience : 23 July 1973 Assistant Secretary,

State Planning Unit, 1 August 1979 Principal Assistant

Secretary, State Financial Secretary’s Office 1 September

1981 Deputy Chairman, Sarawak Economic Development

Corporation 19 January 1987 Deputy State Financial

Secretary, State Financial Secretary’s Office 2 May 1990

Permanent Secretary, Ministry of Infrastructure Development

30 September 1993 Senior Administrative Officer (Special

Functions), State Secretary’s Office 29 January 1994 Deputy

State Secretary (Human Resources), Chief Minister’s

Department 25 August 2000 State Secretary, Chief

Minister’s Department

Occupation : State Secretary of Sarawak

Date first appointed to the Board : 1 January 2004

Board Committee : Nomination Committee and

Board Safety & Security Committee

Other directorship of public companies : Borneo

Housing Mortgage Finance Berhad and Sarawak

Enterprise Corporation Berhad







4 out of 8


21

Board of Directors

Dato’ Sri Izzuddin bin DaliNon-Independent and Non-Executive Director

Date of birth : 28 February 1949 Nationality : Malaysian

Qualification : Bachelor of Economics, University of Malaya

and M.A (Economics), Western Michigan University, USA

Working Experience : 1972 – 2003 Treasury, Ministry of

Finance 1993-1999 KL International Airport Berhad

2003 – 2004 Ministry of Works 2004 – present Ministry of

Finance

Occupation : Secretary General, Ministry of Finance

Date first appointed to the Board : 13 September 2004

Board Committee : Board Audit Committee and Board

Tender Committee

Other directorship of public companies : Petroliam Nasional

Berhad and Kuala Lumpur International Airport Berhad







7 out of 8

Dato’ Mohd. Annuar bin ZainiIndependent and Non-Executive Director

Date of birth : 16 October 1951 Nationality : Malaysian

Qualification : BA (Hons) Economics, University Kebangsaan

Malaysia Master of Arts in Law & Diplomacy and The

Fletcher School of Laws & Diplomacy Tufts University

Working Experience : 1977 - 1980 Assistant Director

(Research & Training), Ministry of Culture, Youth & Sports

1980 – 1981 Assistant Director (Psychological Operations &

Warfare activities), National Security Council, Prime

Minister’s Department 1981 – 1986 Senior Private

Secretary to the Minister, Ministry of Home Affairs 1986

Principal Assistant Secretary (Documentation), Ministry of

Energy, Telecom & Post 1986 – 1987 Principal Assistant

Secretary (Armed Forces Council), Ministry of Defence 1987

- 1989 Principal Assistant Secretary (Personnel), Ministry of

Health 1991Senior Program Coordinator, National Institute

of Public Administration 1991 – 1993 Principal Assistant

Director, Economic Planning Unit Perak 1993 – 1999

General Manager, Yayasan Perak 1999-2000 Fellow,

Institute of Strategic & International Studies (ISIS) Malaysia

2000 – 2001 Planner – Social Development, President’s

Office, MRCB 2001 - 2004 Executive Director, Berjaya

Group Berhad 2004 to present Chairman, Malaysian

National News Agency (BERNAMA)

Occupation : Chairman, Malaysian National News Agency

(BERNAMA)

Date first appointed to the Board : 2 February 2005

Board Committee : Board Tender Committee

Other directorship of public companies : AWC Facility

Solutions Berhad and Berjaya Corporation Berhad







7 out of 8

Board of Directors

22


Dato’ Zaharaah binti ShaariNon-Independent and Non-Executive Director


Qualification : BA (Hons), University of Malaya and M. Sc.

Transport Planning and Management Polytechnic of Central

London, United Kingdom

Working Experience : 1971 – 1973 Assistant Secretary (Civil

Aviation Planning Development, Air Transportation and

International Affairs), Ministry of Transport 1974 – 1975

Director of Air Transportation and International Affairs,

Department of Civil Aviation, Malaysia 1976 – 1982

Principal Assistant Secretary (Aviation Division), Ministry of

Transport 1983 – 1989 Undersecretary, Aviation Division,

Ministry of Transport 1989 – 1995 Deputy Director of

Budget, Ministry of Finance 1995 – August 1996 Director,

Organisational Development, Public Services Department,

Prime Minister Department August 1996 – June 1999

Director of Budget, Ministry of Finance June, 1999 – 1 July

2005 Secretary General , Ministry of Transport

Occupation : Special Transport Advisor, Ministry of Transport

Date first appointed to the Board : 1 October 1999 and

resigned on 2 November 2004. Re-appointed on

18 July 2005

Board Committee : Board Audit Committee

Other directorship of public companies : Malaysia Airports

Holdings Berhad







6 out of 7 (during her tenure as Director for financial year

2005)

Datuk Haji Yusoff @ Hunter bin Datuk Haji Mohamed KasimIndependent and Non-Executive Director

Date of birth : 18 April 1950 Nationality : Malaysian

Qualification : Bachelor in Economics, University of

Adelaide, Australia

Working Experience : 1979 – 1982 Assistant Director

Economic Planning Unit Chief Minister’s Department 1982 –

1984 District Officer, Beaufort, Sabah 1984 – 1988 Principal

Assistant Director (Scholarship Division) Chief Minister’s

Department 1988 – 1989 Principal Assistant Director

Establishment Division Chief Minister’s Department 1989 –

1994 Deputy Permanent Secretary, Ministry of Industrial

Development, Sabah April 1994 – June 1994 Deputy

Director Establishment Office (Jabatan Perkhidmatan Awam

Negeri), Chief Minister’s Department 1994 – April 2000

Under Secretary (Budget) Ministry of Finance, Sabah May

2000 – May 2001 Deputy Permanent Secretary (1)/Under

Secretary (Budget) Ministry of Finance, Sabah May 2001 –

30 December 2005 Deputy Permanent Secretary (1),

Ministry of Finance, Sabah 3 January 2006 to date

Permanent Secretary, Ministry of Finance, Sabah

Occupation : Permanent Secretary, Ministry of

Finance,Sabah

Date first appointed to the Board : 23 January, 2006

Board Committee : Board Audit Committee








Nil


23

Board of Directors

Abdul Rahman bin Abdul GhaniAlternate Director to Datuk Haji Yusoff @ Hunter bin Datuk Haji Mohamed Kasim

Date of birth : 2 October 1950 Nationality : Malaysian

Qualification : BA, University of Queensland, Australia

Working Experience : 1977 - 2000 Served in the State Civil

Service including statutory bodies and agencies for over 24

years. Last served as Government Printer, Sabah

Government Printing Department and retired a civil servant

on 2 October 2001

Occupation : Chief Executive Officer, Warisan Harta

Sabah Sdn. Bhd.

Date first appointed to the Board : Ceased as Alternate

Director to Datuk Haji S Abdillah bin Hassan @ S Hassan on

19 January 2006. Appointed as Alternate Director to Datuk

Haji Yusoff on 23 January 2006

Board Committee : Nil

Other directorship of public companies : Borneo Housing

Mortgage Finance Berhad







3 out of 8 as Alternate Director to Datuk Haji S Abdillah bin

Hassan @ S Hassan

Datu Haji Salleh bin Haji SulaimanAlternate Director to Datuk Amar Haji Abdul Aziz bin Haji Hussain

Date of birth : 7 May 1950 Nationality : Malaysian

Qualification : Bachelor of Science, University of Malaya,

Diploma Education, University of Malaya, Advanced

Diploma Science Education, London University, United

Kingdom, Master of Education, University of London,

United Kingdom, Certificate in Financial Management,

University of California, Berkeley, USA and Fellow of the

Kennedy School of Government, Harvard University,

Cambridge, USA.

Working Experience : 1975 Education Officer/Teacher 1977

to 1978 Vice Principal 1978 – 1980 Principal 1980 - 1982

Development Officer, Department of Education 1982 –

1983 Senior Project Officer, Sarawak Economic

Development Corporation (SEDC) 1983 – 1987 Director,

SEDC 1987 – 1992 General Manager, Borneo Development

Corporation Sdn. Bhd. (BDC) 1992 – 1993 General

Manager, Bintulu Development Authority (BDA) 1993 –

1997 Senior Assistant Director, Sarawak Foundation 1994 –

1997 Managing Director, Centre Modern Management

1997 – 1999 Deputy Director, Sarawak Foundation 1999 –

2001 Permanent Secretary of Ministry of Infrastructure

Development and Communication

2001 – present Deputy State Secretary of Sarawak

Occupation : Deputy State Secretary of Sarawak

Date first appointed to the Board : Appointed as Alternate

Director to Datuk Amar Haji Abdul Aziz on 1 January 2004

Board Committee : Nil








Nil

Ten Years Statistical Review of The Group

24


31 Dec 2004 2003 2002 2001 2000 1999 1998 1997 19962005 2005 2004 2003 2002 2001 2000 1999 1998 1997

FINANCIAL*

Total Revenue (RM'000) 9,081,907 11,364,309 8,780,820 8,864,385 8,695,150 9,712,097 8,288,273 7,536,510 7,154,024 6,563,799Total Expenditure (RM'000) 10,335,203 11,046,764 8,591,157 8,872,391 9,569,435 10,336,829 9,566,041 8,647,874 7,991,746 6,258,561Taxation (RM'000) (20,011) (35,707) (117,543) (5,017) (14,898) 26,683 18,813 26,961 31,277 15,434Profit/(Loss) after Tax

And Exceptional Item (RM'000) (1,264,787) 326,079 461,143 336,531 (835,562) (417,428) (258,574) (700,051) (259,851) 333,018Shareholders' Funds (RM'000) 2,022,614 3,318,732 3,023,984 2,562,841 1,215,290 1,252,148 3,222,276 3,496,250 4,211,701 4,486,952Profit/(Loss) as a % of Revenue (%) (13.9) 2.9 5.3 3.8 (9.6) (4.3) (3.1) (9.3) (3.6) 5.1Return on Shareholders' Funds (%) (62.5) 9.8 15.2 13.1 (68.8) (33.3) (8.0) (20.0) (6.2) 7.4Earnings/(Loss) Per Share (sen) (100.90) 26.0 36.8 38.7 (108.5) (54.2) (33.6) (90.9) (33.7) 43.8

PRODUCTION

Network Size (KM) 505,376 504,051 445,263 439,547 453,720 488,243 366,578 361,203 362,997 352,703Time Flown (Hours) 314,087 411,134 352,540 357,328 340,741 349,352 330,205 306,949 303,569 291,418Distance Flown (000 KM) 207,117 265,050 227,865 228,762 201,189 191,668 200,223 189,754 174,659 166,777Available Capacity (000 TKM) 7,716,059 10,299,867 8,413,110 7,977,845 7,823,943 8,054,870 7,531,473 6,649,146 5,528,737 5,246,353Available Passenger Capacity (000 Seat KM) 49,785,977 64,115,190 55,692,377 54,265,627 52,594,942 51,237,536 48,905,537 45,442,288 42,293,932 40,096,883

TRAFFIC

Passenger Carried (000) 13,852 17,536 15,375 16,325 15,734 16,745 15,371 13,709 15,117 15,371Passenger Carried (000 Pax KM) 35,604,763 44,226,090 37,658,910 37,652,955 34,708,514 38,312,570 34,930,136 30,592,900 28,698,112 27,903,706Passenger Load Factor (%) 71.5 69.0 67.6 69.4 66.0 74.8 71.4 67.3 67.9 69.6Cargo Carried (000 TKM) 1,948,761 2,686,783 2,184,226 2,071,271 1,759,209 1,837,426 1,664,600 1,477,403 1,005,465 925,227Mail Carried (000 TKM) 2,131 3,004 2,840 2,054 2,014 1,830 2,828 2,006 2,726 3,832Overall Load Carried (000 TKM) 5,205,283 6,728,547 5,628,573 5,496,735 5,149,942 5,379,101 4,853,377 4,246,894 3,361,408 3,212,436Overall Load Factor (%) 67.5 65.3 66.9 68.9 65.8 66.8 64.5 63.9 60.8 61.2

STAFF

Employee Strength (At 31Dec/31March) 22,835 22,513 20,789 21,916 21,438 21,518 21,587 23,076 23,436 22,546Revenue Per Employee (RM'000) 398 505 422 429 406 451 384 327 305 291Available Capacity Per Employee (TKM) 337,907 457,508 404,690 364,019 364,957 374,332 348,889 288,141 235,908 232,696Load Carried Per Employee (TKM) 227,953 298,874 270,748 250,809 240,225 249,981 224,829 184,039 143,429 142,484

*As per Audited Financial Statements for the financial year under review


25

Ten Years Statistical Review of The Group

2001 2000 1999 1998 1997 19962002 2001 2000 1999 1998 1997

8,695,150 9,712,097 8,288,273 7,536,510 7,154,024 6,563,7999,569,435 10,336,829 9,566,041 8,647,874 7,991,746 6,258,561

(14,898) 26,683 18,813 26,961 31,277 15,434

(835,562) (417,428) (258,574) (700,051) (259,851) 333,0181,215,290 1,252,148 3,222,276 3,496,250 4,211,701 4,486,952

(9.6) (4.3) (3.1) (9.3) (3.6) 5.1(68.8) (33.3) (8.0) (20.0) (6.2) 7.4

(108.5) (54.2) (33.6) (90.9) (33.7) 43.8

453,720 488,243 366,578 361,203 362,997 352,703340,741 349,352 330,205 306,949 303,569 291,418201,189 191,668 200,223 189,754 174,659 166,777

7,823,943 8,054,870 7,531,473 6,649,146 5,528,737 5,246,35352,594,942 51,237,536 48,905,537 45,442,288 42,293,932 40,096,883

15,734 16,745 15,371 13,709 15,117 15,37134,708,514 38,312,570 34,930,136 30,592,900 28,698,112 27,903,706

66.0 74.8 71.4 67.3 67.9 69.61,759,209 1,837,426 1,664,600 1,477,403 1,005,465 925,227

2,014 1,830 2,828 2,006 2,726 3,8325,149,942 5,379,101 4,853,377 4,246,894 3,361,408 3,212,436

65.8 66.8 64.5 63.9 60.8 61.2

21,438 21,518 21,587 23,076 23,436 22,546406 451 384 327 305 291

364,957 374,332 348,889 288,141 235,908 232,696240,225 249,981 224,829 184,039 143,429 142,484

Corporate Information

26


Company SecretaryRizani bin Hassan (LS 05125)

Registered Office3rd Floor, Administration Building 1, MAS Complex A, Sultan Abdul Aziz Shah Airport, 47200 Subang, Selangor Darul Ehsan, Malaysia

Tel: 603 7840 3702 Fax: 603 7840 3932www.malaysiaairlines.com

AuditorsMessrs. Ernst & YoungLevel 23A, Menara Milenium, Jalan Damanlela, Pusat Bandar Damansara, Damansara Heights,50490 Kuala Lumpur, Malaysia

Tel: 603 2087 7000Fax: 603 2095 9076 main 603 2095 9078 audit

Share Registration OfficeSymphony Share Registrars Sdn. Bhd.Level 26, Menara Multi Purpose, Capital Square,Jalan Munshi Abdullah, 50100 Kuala Lumpur, Malaysia

Tel: 603 2721 2222Fax: 603 2721 2530

ListingBursa Malaysia Securities Berhad

SolicitorsMessrs. Lee Hishammuddin and Allen & GledhillAdvocates & SolicitorsLevel 16, Menara Asia LifeNo. 189 Jalan Tun Razak50400 Kuala Lumpur, Malaysia

Tel: 603 2161 2330Fax: 603 2161 3933

Messrs. Zaid Ibrahim & Co.Advocates & SolicitorsLevel 19, Menara MileniumJalan DamanlelaPusat Bandar Damansara50490 Kuala Lumpur, Malaysia

Tel: 603 2087 9999Fax: 603 2094 4888

BankersMalayan Banking BerhadMenara Maybank100, Jalan Tun Perak50050 Kuala Lumpur, Malaysia

Tel: 603 2074 7037Fax: 603 2078 9761

Bumiputra-Commerce Bank Berhad6, Jalan Tun Perak50050 Kuala Lumpur, Malaysia

Tel: 603 2693 1722Fax: 603 2698 6628


27

Details of Board of Directors Meeting

Date Time Nature Venueof Meeting of Meeting of Meeting

30 May 2005 1.15 p.m. Board of Directors’ Meeting The Conference Room[No. 01-05] 34th Floor, Bangunan MAS

Jalan Sultan Ismail50250 Kuala Lumpur

18 July 2005 9.00 a.m. Board of Directors’ Meeting The Conference Room[No. 02-05] 34th Floor, Bangunan MAS


22 August 2005 9.00 a.m. Board of Directors’ Meeting The Conference Room[No. 03-05] 34th Floor, Bangunan MAS


8 September 2005 1.15 p.m. Special Board of Directors’ The Conference RoomMeeting 34th Floor, Bangunan MAS[No. 04-05] Jalan Sultan Ismail

50250 Kuala Lumpur

19 September 2005 2.30 p.m. Board of Directors’ Meeting The Conference Room[No. 05-05] 34th Floor, Bangunan MAS


24 October 2005 9.00 a.m. Special Board of Directors’ The Conference RoomMeeting 34th Floor, Bangunan MAS[No. 06-05] Jalan Sultan Ismail

50250 Kuala Lumpur

30 November 2005 9.00 a.m. Board of Directors’ Meeting The Conference Room[No. 07-05] 3rd Floor,

Administration Building 1,MAS Complex ASultan Abdul Aziz Shah Airport47200 SubangSelangor Darul Ehsan

1 December 2005 8.00 a.m. Special Board of Directors’ The Conference RoomMeeting 34th Floor, Bangunan MAS[No. 08-05] Jalan Sultan Ismail

50250 Kuala Lumpur

Board Audit Committee Report

28


The Board Audit Committee (BAC) of Malaysian Airline System Berhad is pleased to present the AuditCommittee Report for the financial period 2005.

A. Establishment and Composition of Board Audit Committee

The Board Audit Committee was established in 1992, with the terms of reference approved by the Board of Directors.

The terms of reference provide for the Board to elect the Board Audit Committee members from amongst themselves, to comprise no fewer than three Directors, the majority of whom shall be Independent Directors. Appointment to the Committee is referred to the Nomination Committee, prior to approval by the Board of Directors. The Board shall then ensure that the composition of the Committee meets the independence and experience requirements set out by Bursa Malaysia Securities Berhad (BMSB).

The term of office of a Member of the Committee shall be three years, after which he or she may be re-nominated and appointed by the Board of Directors. The Board of Directors shall review the performanceof the Committee and its members at least once every three years.

During the financial period, Dato’ Zaharaah Shaari was appointed as a member of the Committee.

At as the end of the financial period, the BAC comprised the following:

Name of Directors Classification

Keong Choon Keat (Chairman) Independent Non-Executive Director

Dato’ Sri Izzuddin bin Dali Non-Independent Non-Executive Director

Datuk Haji S. Abdillah @ Abdullah bin Hassan @ S Hassan Independent Non-Executive Director

Dato’ N. Sadasivan a/l N.N. Pillay Independent Non-Executive Director

Dato’ Zaharaah binti Shaari Non-Independent Non-Executive Director

The Chairman of the Committee is a member of the Malaysian Institute of Accountants. The profiles of theChairman and Committee Members are set out on pages 17 to 23 of this Annual Report.


29


B. Objectives

The Committee’s principal objective is to assist the Board of Directors in discharging the Board’s statutory duties and responsibilities relating to the accounting and reporting practices of the Holding Company and each of its subsidiaries. In addition, the Board Audit Committee shall:

l Evaluate the quality of the audits performed by the internal and external auditors;

l Provide assurance that the financial information presented by management is relevant, reliable and timely;

l Oversee compliance with relevant laws and regulations and observance of a proper code ofconduct; and

l Determine the quality, adequacy and effectiveness of the Group's internal control environment.

C. Authority

The Board Audit Committee shall, in accordance with procedures determined by the Board of Directors andat the expense of the Company:

l Investigate any activity within its terms of reference,with the cooperation of all employees as directed by the Board and the Committee;

l Have full and unrestricted access to all information, documents and resources required to perform its duties, as well as to the internal and external auditors and senior management of the Company andGroup;

l Obtain independent professional advice and to secure the attendance of external parties with relevant experience and expertise, if necessary;

l Convene meetings with the internal or external auditors, without the attendance of theExecutive Directors, whenever deemed necessary; and

l Make reports when necessary to the relevant authorities if a breach of the Listing Requirements has occurred.


30


D. Duties and Responsibilities

The duties and responsibilities of the Board Audit Committee are to undertake the following and report accordingly to the Board of Directors:

l Review the audit plan and audit reports, including the evaluation of the internal control system withthe external auditors;

l Review the quality of the external auditors and to make recommendations on their appointment, termination and remuneration;

l Review the liaison between the external auditors, Management and Board of Directors, and the assistance given by Management to the external auditors;

l Assess the adequacy of the scope, functions and resources of the internal audit function and ensurethat internal auditors have the necessary authority to do their work;

l Review the internal audit programme, processes and results of the audit, and assess whether appropriateactions have been taken on the recommendations of the internal auditors;

l Review the quarterly reporting to BMSB and year-end annual financial statements before submission tothe Board of Directors, focusing on major accounting policy changes, significant audit issues in relationto the estimates and judgmental areas, significant and unusual events, and compliance with accountingstandards and other legal requirements;

l Monitor any related party transactions that may arise within the Group and to report, if any, transactionsbetween the Group and any related party outside the Group that are not based on arms-length terms and are disadvantageous to the Group; and

l Review any related party transaction and conflict of interest situation that may arise within the Group including any transaction, procedure or cause of conduct that may raise questions of management integrity.


31


E. Meetings of the Committee

The BAC shall meet at least four times annually, or more frequently as circumstances dictate.The Committee held 7 meetings during the financial period, and the attendance record of each Member isas follows:

Name of Directors No. of MeetingsHeld* Attended

Keong Choon Keat 7 7

Dato’ Sri Izzuddin bin Dali 7 5

Datuk Haji S. Abdillah @ Abdullah bin Hassan @ S Hassan 7 6

Dato’ N. Sadasivan a/l N.N. Pillay 7 7

Dato’ Zaharaah binti Shaari 5 3

* Number of meetings held are applicable meetings for each director and varied based on their dates of appointment

Representatives of Senior Management, Head of Internal Audit and External Auditors representativesattend the meetings as and when appropriate. Minutes of each meeting are kept and distributed to each Member of the BAC as well as to the other members of the Board of Directors. The Chairmanof the Committee makes a report on each meeting to the Board.

F. Activities in the Financial Year

The activities of the Committee during the financial period 2005 were as follows:

Risks and Controls

l Reviewed the progress of the risk management functions and its ongoing activities for identifying, evaluating, monitoring and managing risks; and

l Reviewed the adequacy and effectiveness of internal controls through the evaluation of results of workperformed by internal and external auditors as well as through discussions with Management.


32


Internal Audit

l Approved the audit plan, scope and budget for the financial period ;l Reviewed the results of internal auditors’ work and monitor the implementation of

management action plans in addressing and resolving issues;l Reviewed the adequacy of resources and the competencies of staff within the Internal

Audit Department to execute the plan; andl Reviewed the performance of the Internal Audit Department and recommended improvements.

External Audit

l Agreed to the external auditors’ terms of engagement, audit plan and scope for the financial period ;

l Reviewed the results and issues arising from their audit of the financial period and the resolution of issues highlighted in their report to the Committee; and

l Made recommendations to the Board of Directors on the appointment and remuneration ofthe external auditors.

Financial Reporting

l Reviewed and deliberated on the Quarterly Financial Announcements and Annual Financial Statementsto BMSB and recommended them for approval by the Board of Directors

Related Party Transactions

l Reviewed related party transactions for compliance with the Listing Requirements of BMSB andthe procedure and the adequacies relating to the capture and recording of such transaction .

G. Internal Audit Function

The internal audit function is performed through the Internal Audit Department (IAD) of Malaysia Airlines Group that reports to the BAC. The function is governed by an approved Charter that provides forits independence in the review of the internal control system of the Group. The IAD also assistsSenior Management in ascertaining the level of adequacy, integrity and effectiveness of the internal controlsand enhancing the internal control system within the Group.


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The IAD adopts established auditing standards and performs an annual self-assessment against applicable guidelines to maintain its proficiency and ensure due professional care. The Head of the IADis a Chartered Accountant and also a member of the Executive Committee of the International Associationof the Airlines Internal Auditors (IAAIA). Malaysia Airlines is a Corporate Member of the Institute of InternalAuditors .

The objective of the IAD is to provide independent and objective assurance as well as other consultative activities designed to add value and improve the Group’s operations. IAD carries out its functions in a manner that should meet or exceed requirements by the Standard for Professional Practiceof International Auditors.

The risk based audit plan approved by the BAC has been developed to cover key operational and financialactivities that are significant to the overall performance of the Group on a cyclical basis. The IAD continuously identifies and prioritises risk and control areas to ascertain the scope of its audit activities.The audit activities are categorised within the assigned audit universes to support the following objectives:-

l Revenue Enhancement and Protection

l Operational effectiveness and efficiency, including cost containment

l Asset and services management, including effectiveness of management assurance functions

l Human resources management

l Financial reporting integrity; and

l Information system management

Internal audit activities covering all the above objectives are undertaken for both Passenger and CargoBusinesses at Corporate Headquarters, Station Systemwide and MAS Subsidiaries. The IAD also conducts specialaudits on an ad-hoc basis based on specific requests either from the Board, Board Audit Committee or theSenior Management. In addition, the IAD works closely with the external auditors to resolve any internalcontrol issues and assists in ensuring that appropriate management actions are taken. The IAD continuouslymonitors the execution of the audit recommendations through periodic follow up review. During the financialperiod, Audit Activity Report has been introduced to update the members of BAC on the status of auditassignments on a periodic basis. The BAC also receives regular reports from the Head of Internal Audit on theresults of audit performed.

During the financial period, the IAD undertook 66 audit assignments and 11 project advisory and consultancyservices rendered within the financial period. The BAC reviews and approves the IAD’s annual budget to ensurethat the function is adequately resourced with competent and proficient internal auditors. As at 31 December2005, the IAD has 42 internal auditors of various mix of expertise and experiences with approximately 49,800available man hours throughout the financial period.

On 22 September 2005, the IAD unveiled its dictum, “Beyond Conformance, Towards Performance” in settingforth the department’s direction to achieve the value for auditing which is considered critical to be effective inproviding value added advisory and consultancy services to the organisation. On 26-28 September 2005, theIAD, on behalf on Malaysia Airlines, hosted the 14th International Association of Airlines Internal Auditors(IAAIA) Conference in Kuala Lumpur participated by about 100 auditors from 45 airlines worldwide.

Statement of Internal Control

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INTRODUCTION

It is a requirement of the Malaysian Code of Corporate Governance (“the Code”) that the Board of Directorsshould maintain a sound system of internal controls to safeguard shareholders’ investments and the Group’sassets. In compliance with Bursa Malaysia Listing Requirements under para 15.27(b) and Statement on InternalControl: Guidance for Directors of Public Listed Companies, the Board of Directors are pleased to present theStatement on Internal Control during the period under review.

RESPONSIBILITIY

The overall responsibility for the Malaysian Airline System Berhad’s (MAS) system of internal control group-wide,including the review of its effectiveness, resides with the Board of Directors. The Board of Directors iscommitted to ensure there is in place a sound system of internal control and risk management within theGroup. Recognising the importance of maintaining a sound system of internal control to safeguardshareholders’ investments and the Group’s assets, the Board has instituted an internal control system, thedetails of which are set out below.

The risk management framework has also been formalised, adopted and continuously reviewed to reaffirm keysignificant risks, identify new risks, evaluate current controls and determine appropriate management actionplans to manage the said risks.

The Management is responsible for implementing the Board’s policies on risks and controls. All employees havea responsibility for internal control as part of their accountability for achieving the Group’s overall objectives.

INTERNAL CONTROL PROCESSES

Both the Board and Management of MAS continue to strive in enhancing and implementing the internal controlsystem to manage those risks that could affect the Group’s continued growth and financial viability. Accordingly,actions are continually taken to improve the policies, processes and structure relating to internal control, andensure that the people tasked with the responsibilities are qualified and trained. This continual improvementenhances the management of existing risks and, by taking into consideration the changes in the risk profile ofthe industry and the Group, helps to anticipate and manage potential risks.

The key elements in MAS’ internal control system, including the processes in place to review its adequacy, areas follows:

l An organisation structure, which is aligned to business and operations requirements and led by Division Heads with defined responsibility, accountability and delegation of authority, is in place.

l Integrated business planning and budgeting processes are driven by commercial objectives. Actions were taken to enhance these processes by assigning a single driver that focuses on revenuetargets. Operational budgets work towards achieving these targets. The Board reviews and approves the Company’s Business Plan and Budget on an annual basis.

l In August 2005, the Executive Committee was set up as an interim management structure followingthe retirement of the Managing Director then. It comprised members of Senior Management which is responsible for, amongst others:

l Development and monitor the implementation of the change programmel Review of financial and operating performancel Review of progress of short term improvement programmel Discussion on long term operations delivery improvement plansl Management of strategic airline issues.


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l The Corporate Approving Authority Manual (CAAM) that has been approved by the Board defines the authority and accountability for key decision making areas. The Company’s financial approving authority and the subsidiaries’ approving authority manuals are currently being reviewed to alignto the revised CAAM.

l Procedures with embedded internal controls are documented in a series of Standard Operating Manuals. There is a structure for organisation-wide control and the Organisation & Methods Department has been identified to hold the custodianship of all the manuals. The manuals are regularly reviewed to ensure the alignment, standardisation and comprehensiveness of the procedures. Greater communication is ensured on key internal control procedures, including those relatingto authorisation, accountability, monitoring and reconciliation processes. Organisation & Methods Department also assists Management to establish and review corporate policies, as deemed necessary for the continuous improvement of the Company’s corporate governance profile.

l Key manuals at corporate level are in place as source of reference and subject to adherence by the staff systemwide. Corporate level manuals are subject to periodic review.

l Performance Measurement System has been established and implemented for the SeniorManagement during the financial period.

l Regular training, workshop and awareness programmes for the employees are conducted to emphasize on the importance of governance, risk management and internal control.

l The Internal Audit Committee (IAD) reports to the Board Audit Committee (BAC), performs systematic reviews of key processes relating to high-risk areas and assesses the effectiveness of internal controls, including compliance. Recommendations for improvement are highlighted to Senior Management and the Committee, with periodic follow-up reviews of actions taken.

l The BAC regularly reviews, on behalf of the Board, with Senior Management those internal control issues identified in reports by the internal and external auditors and the actions taken. The internal auditorsassist the Committee in periodically reviewing the measures taken to address their concerns on internal control. The scope of this review includes any significant internal control aspects of issues identifiedin the financial statements as disclosed in this Annual Report.

l The Board of Directors reviews the operational and financial performance of the Group. The scope of this review also covers any significant internal control aspects of issues identified in the monthly performance reports and any areas disclosed in this Annual Report.

RISK MANAGEMENT

The Group has in place an ongoing process for identifying, evaluating, monitoring and managing principal risksthat may impact on the achievement of business objectives and evaluating the adequacy and effectiveness ofcontrols in place to mitigate these risks.

During the year under review, the Group completed Risk Profiling exercises at the divisional level to reaffirmexisting risks and identify emerging risks which may impact the key business processes; evaluate current controlsand determine appropriate management action plans to manage the said risks. Risk Management Unit (RMU)had also provided updates on Risk Management to the BAC and the Board Safety and Security Committee(BSSC). Quarterly reviews were also conducted by RMU as planned and reports distributed to the respective riskowners. Regional Risk Profiling sessions have been rescheduled to better align this exercise with the BusinessTurnaround Plan implementation timelines.


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Risk Management Oversight

The Risk Management oversight structure was revised to reflect changes in the Management Structure wherethe Executive Committee held the responsibility for monitoring the effectiveness of the processes in theorganisation, and reporting to the Board on actions taken in managing current and emerging risks.Management are responsible for managing their risk profiles including ensuring implementation and monitoringof action plans, with the support of the respective Divisional and Departmental Risk Managers (DRMs). TheRMU will facilitate the implementation of a consistent methodology and approach organisation-wide, and assistthe Board and Management in the development and recommendation of suitable policies and strategies tomanage risks.

Going forward, as part of embedding risk management into the work culture, RMU will continue to coordinateprogrammes to enhance understanding and awareness of risks such as risk management training and riskawareness sessions, as well as disseminate risk management information via the company internalcommunications media such as newsletters and intranet. An increased role is planned for DRMs in thecoordination of risk profiling sessions and consolidation of reports, with a view to them taking the lead in theseactivities in the next financial period. It is envisaged that the above initiatives will provide the platform for theorganisation to embrace risk management in their daily operations.

DESIGN OF INTERNAL CONTROL SYSTEM

The Board of Directors and Senior Management constantly endeavour to maintain an adequate system ofinternal control designed to manage rather than eliminate risk throughout the organisation. It is recognised,however, that such a system will only provide reasonable assurance, and not absolute assurance, against theoccurrence of any material loss.

MAS’ internal control system does not apply to its associated companies, which fall within the control of theirmajority shareholders. Nonetheless, the interests of MAS are served through its representation on the Board ofthe respective associated companies and through the review of management accounts received. These providethe MAS Board of Directors with performance-related information to enable timely decisions in regard to theGroup’s investments in such companies.

The Board confirms that the system of internal control, with the key elements highlighted above, is in placeduring the financial period, except where otherwise stated. The system is subject to regular reviews by theBoard.

Malaysian Airline System Berhad Annual Report 2005(106

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