Industry Overview

 

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______________________________________ DR”,” [) I f I I’ A” ([ 1M” nK! THE BOARD OF DIRECTORS APFTBERHAD SUITE 50-5-5, WISMA UOA DAMANSARA 50 JALAN DUNGUN, DAMANSARA HEIGHTS 50490 KUALA LUMPUR, MALAYSIA.
31 JAN 2011 Dcar SirslMadam: Executive Summary of the Flight Education & Training Market in Malaysia 1l1is Executive Summary of the Flight Training Education & Trnining Market in Malaysia is prepared by Protege Associates Sdn. Bhd. for APFT Berhad for inclusion in dle Prospectus of APFT Berhad in relation to its listing on the Main Mnrket of the Bursa Malaysia Securities Berhad. Global and Malavsian Economic Overview The global economy endured a challenging year in 2009 against the backdrop of the deepest global downturns in recent history lhat dragged the world output growth into negative territory. Nevertheless, the drop in world output w~s cushioned by the implementation of extraordinary amount of policy stimulus that helped to drive the rebound in confidence ~nd global economy particularly in the second half of 2009. The rebound in global economy was mainly supported by highly expansionary fisc~l policies and monel~ry policies such ~s record lows interest rates in most ~dv~nced and in emerging economies. There were also unprecedented levels of expansion in the central bank balance sheets in key advanced economies. As a result, the world output in 2009 contracted by only 0.6 percent year-on-year based on the latest economic indicators released by the lnternational Monetary fund (HIMF”‘). Nevertheless, IMF has indicated that the global recession has appeared to be ending. The IMF expects the global economy to bounce back in 2010 with an output growth projection of 4.8 percent. According to lMF, the impetus for the rebound in global economic growth for 2010 is 6. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
expected to come from comprehensive policy steps to stabilise financial conditions, sizeable fiscal support) gradual improvement in credit conditions, a rebound in manufacturing, a turn in the inventory cycle, stabilising retail sales and firmer housing markets. Meanwhile, the Malaysian Government acknowledges that it has been a challenging year for the Malaysian economy in 2009 as it faced the full impact of the global recession, although its macroeconomic support through monetary and fiscal policies such as the announced additional RM60 billion stimulus packages has mitigated the severity of the economic downturn by boosting domestic demand. The government has committed to continued vigilance in the economy, promising continued supportive and accommodative macroeconomic policies as the economy seeks to return to high gear in 20 IO. TIms far in 2010, the Malaysian economy has exhibited the potential of realising government-sct growth forecasts. The Malaysian economy had continued its growth asccnsion in the third quartcr of 2010 albeit at a more moderate pace. Its growth moderated to 5.3 perccnt ycar-on-year in the quarter in the face of a weakening external demand. Its economic expansion was supportcd by the growth in both private consumption and capital spending that helped to spur domestic demand. All the major economic sectors except mining managed to register further expansion in thc quarter. In another development, the Malaysian Government had officially launchcd the Economic Transformation Programme (“ETP”) on 26 October 2010 in an effort to propel Malaysia towards becoming a high-incomc developed nation with a RMI.7 trillion gross national income (“GNI”) economy by 2020. Under the ETP, private-sector driven projects with invcstmcnt value ofRMI.3 trillion are to be undertaken to spearhead Malaysia’ s economic growth over the next tcn years. In the near future, the growth in the Malaysian economy is expcctcd to be driven by higher private investment from the implementation of the ETP and robust domcstic demand. The IMF has projected Malaysia’s real GDP to grow by 6.7 percent in 2010 and 5.3 perccnt in 2011. Overview ofthe Flight Education and Training Market in Malavsia The operation of a flight training school in Malaysia is a regulated activity in that its activities come within the jurisdictional ambit of the Civil Aviation Act 1969 and Civil Aviation Regulation 1996 -such that pcrsons or organisations conducting any aviation activities arc required to be accordingly compliant with the provisions of the said legislation. Ensuring its compliance and the administering of all aviation-related activities is the Dcpartment of Civil Aviation (“DCA”) -an organisation ofthc Ministry of Transport Malaysia (“MoT”). TIle Government of Malaysia recognises that the nation’s aviation industry is highly critical to national development and global integration, and is therefore fully supportive of aviation as a key 6. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
sector of business and commerce as well its significant role in nation building. To this end, the National Aerospace Blueprint (launched in 1997) followed by the August 2005 launching of Malaysia International Aerospace Centre (“MIAC”), and the re-designation of Lapangan Terbang Sultan Abdul Aziz Shah as an aerospace park to furtller develop the Malaysian aerospace industry -are key Government initiatives towards transfonning Malaysia as a global aerospace nation by 2015. Global delivery of new aircraft is projected to increase to morc than 50,000 new aircrafts for the period 2009 to 2028. The Asia Pacific region has the greatest demand for passenger aircraft with projected delivery of more than 16,000 new aircrafts or 32 percent of new aircrafts delivery (Figure 1). Regional developments such as these would spur the demand for more pilots ­providing a boon for the Malaysian flight education and training market. Figure 1: New Aircraft Deliveries by Region, 2009 -2028 , .’:~~Jc .::….., ­Asia Pacific >16,000
Europe >13,000 North America >13,000 Latin Amcrica >3,000 Middle East >3,000 Russia and Central Asi<1 >1,000 Africa >1.000 Source: Protege Associatcs With the support of the Malaysian government for the nation ‘5 aviation industry as well as the captive demand for professionally trained pilots, it is suggested that these well-timed, policy and international aviation developments augur well for providers of flight education and training in Malaysia. The flight education and training market is still relatively young. The Malaysian Flying Academy (“MFA”) was established in 1982 while the remaining seven approved flying/flight training organisations (<<AFTO”) were only established within the last decade. Between its commencements Lo the cmergence of another flying school in 2004, the flight education and training market was monopolised by MFA alone. 6. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
Market Segment The flight training of pilots in Malaysia is of two (2) main categories, viz.: • Civil (Commercial and Private Recreational) AND; • Military The training can further be segmented into two sub categories according to the aircraft type, as follows: • Fixed Wing -Propeller and/or Jets i.e. aeroplanes (“A”) AND; • Rotor-wing craft Le. helicopters (“H”) The flight education and training are provided by the following three (3) grouping: • AFTOs;
• Local Flying Clubs;

• The government via, the Royal Malaysian Air Force, the Royal Malaysian Navy, the air wing of the Royal Malaysian Police, including, the air unit of the Fire & Rescue Services Department Meanwhile the supply source of cadet pilots (non-military) for these respective flight education and training providers come from two (2) main sources, namely: • Local -(i) school leavers with SPM qualification, (ii) local universities and colleges where cadet pilots graduate with a degree in aviation/aerospace engineering. 1l1CSC include Universiti Teknologi Mara (“UiTM”), UPM and Universiti Sains Malaysia (“USM”) and; (ii) local airlines such as MAS and AirAsia. • Foreign -(i) schoolleavers or private individuals with 0’ Levels or its equivalent subject to DCA’s approval and (ii) student pilots from regional airlines such as Garuda Indonesia, Nepal Airlines, Silk Air, etc. Fixed-wing flight training in Malaysia is determined by the type of flight training sought, and in turn divided into two main categories as follows: • Commercial-as in CPL; ATPL; Multi-Engine & 1R; and, AFI. These courses and type ratings are usually provided by DCA-AFTOs;
6. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
• Non-commercial -as in private recreational flying conducted by local flying clubs. Outcomes of private recreational flight training by flying clubs would be the award of a DCA recognised PPL.

4
Figure 2 provides a schematic representation synopsis of the flight education and training market structure for civil segment (commercial and private recreational) in Malaysia. Figure 2: Market Structure of the Flight Education and Training Market in Malaysia Flight Education and Training of Pilots in Malaysia Civil
• Commercial via, simulators & actual aircraft; Private Recreational via, actual.aircr:lft;

Local SPM schoollc::J.ycrs Local Airlines -MAS; AirAsia; Local Universities & Colleges -e.g. UiTM, UPM, USM. etc.; Airlines. Silk Air; T~’pes & Outcomes of Fixed-Wing Flight Training Commercial Private Recreational CPL; PPL; ATPL; Muhi-Engine & JR; AFI and; FI Source: Protege Associates Market Dynamics Indicators A snapshot of the overall flight education and training market characteristics in Malaysia based on selected key market indicators and its respective measurements and trends arc as shown in the Market Dynamics Scorecard below (Figure 3). 6. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
Figure 3: Market Dynamics Scorecard for the Flight Education and Training Market in Malaysia, 2010 …  Market Age  Young  Upwards  2010 Market Size (RM million)  129.4  Increasing  2010 Growth Rate (%)  6  2014 Forecast Market Size (RM million)  193  Increasing  ForccnSL Period Market CAGR (2009 ­ 2014)  10  Estimated Number ofMarkcl Players  8  Stable
Soun.:e: Protege Associates Market Size and Growth Forecast The outlook for the flight education and training market in Malaysia remains positive, and steady growth is projected for the forecasted period of2010 to 2014 as illustrated in Figure 4, 11,e flight education and training market in Malaysia is expected to grow from its current size of RM 129.4 million in 2010 to RM 193 million in 2014, registering a CAGR of 10 percent. Figure 4: Market Size and Revenue Forecast for the Flight Education and Training Market in Malaysia, 2007 -2014 250m ‘6 ‘6 2JJ7 2006 2009 2JI0 201 I 2012 LOl3 2J14 Year Source: Protege Associates The flight education and training market in Malaysia experienced strong growth in 2008 mainly due to a combination of cost-pushed and demand driven factors. The sharp spike in oil prices pushed AFTOs to increase their course fees and this has helped pushed up market revenue. Mcan\l,’hilc, demand for pilots from major airlines remained unabated during the same period. More importantly, the wide availability of multiple financing options for students \l,’anting to pursue a career as a professional pilot has resulted in a sharp increase in uptakes of flight courses 6
6. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
in the country_ Government agencies such as MARA and Yayasan Terengganu in collaboration with airlines such as MAS have funded many deserving students to pursue their flight courses. This has helped created a push factor for many prospective students who took opportunity of the situation to pursue a flight course; which would otherwise be unlikely due to the prohibitively high cost necessary to do so. The market however registered slower growth in 2009 and this is projected to extend until 2010 in view of the global financial crisis which has resulted in the government bodies withdrawing or reducing funding for flight courses. This has also caused a number of prospective students to either abort or delay their plans to pursue flight training courses. Nevertheless, the market is forecasted to rebound and continue registering healthy growth as the economy improves and funds become more readily available moving forward. In addition, the market will also benefit from a direct result of higher cost-push input as market participants are expected to raise their price in 2010. Demand for pilots in l\.1alaysia and throughout the region remained intact as seen in forecasled delivery of aircraft by both Boeing and Airbus. The flight education and training market in Malaysia is also expected to benefit from the growing internationalisation of the market through aggressive promotion and marketing by certain AFTOs such as APFTSB who have successfully tapped into the Indonesian demand for pilots and is venturing into India soon. Malaysia with its competitive price advantage as well as its quality of flight training which is recognised internationally could potentially attract more foreign students and subsequently become a regional hub for flight education and training in the longer term. Demand Conditions Demand conditions arise as a combination of the market drivers and market restraints operating within the market, as discussed below. The flight education market will continue to be driven by the following market drivers:­1. Rising demand from major airlines in Malaysia In 2008, AirAsia via, AirAsia Academy expects to produce 5,000 pilots yearly which involve type rating training not limited to demands from Malaysia nlone. This serves to highlight the potenlials in demnnd for pilots and accordingly, the opportunities presented to flight education and training providers in tapping the needs for ab-initio tmining. 6. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Conl’d)
Figure 5 provides a perspective of AirAsia’s pilot needs via, its fleet expansion program. The total AirAsia fleet (including Thai AirAsia, AirAsia X and Indonesia AirAsia) consists of the following aircraft as of3l October 2010. Figure 5: Status of AirAsia’s Expanding Fleet Strength as of 31″ Oetober 2010
Opcr.ltcd by AirAsi<l including Thai AirAsia and84 91Airbus 1\320-200 50 Indonesia AirAsi<l. 0 To be removed in neet by 2010;l30cing 737~300 30 8 [8 0 Operated by ‘\irAsi<l X.Airbus 1\330-300 0 Operated by ,\jrAsia X.Airbus A3~O·300 20 5 Opcr<llcd by AirAsi<l X. Emry in service 20 16Airbus 1\350-900 0 10 Tolal 97 119 55 Source: Protege Associates Meanwhile, MAS conducts recurrent training program and type rating training for an estimated 1,400 pilots. Each pilot needs to undergo recurrent training twice a year. Similar to AirAsia. MAS’s intake of cadet pilots is only after the cadet has completed their ab-initio training with a night school. After this, cadet will then go through MAS’s Type Rating Training program using the company’s infraslructure. This time-cost effective training model is similar to that of AirAsia, and it provides opportunity for local flight education and training school to train (i.e. ab-initio) and supply pilots to MAS. Figure 6 provides a perspective ofMAS’s pilot needs via, its fleet expansion program. Figure 6: MAS’s Airlines Passenger Fleet as of31″ July 2010
Airbus 1\330-200 Airbus 1\330-300 Ajrbus 1\380·800 l30cing 737-400 l30eing 737-800 l3oeing. 747-400 Boeing 777-200ER Tolal 9 0 37 ”
10 17 82 ” 00 15 10 0 Enlry imo scrvire: 2012 00 35 20 00 00 56 30 Source: Pro((;ge Associates 6. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
2. Pro-aviation policies and measures by the Malaysian government
Pro-aviation policies and measures by the Malaysian government is expected to have a high impact on the flight education and training market in Malaysia throughout the forecast period as the continued support for the overall aviation industry will help spur the demand for more educated, skilled workers and aecordingly, boost growth for the flight education and training market.
3. Strong regional growth in aviation activities

New aircraft purchases and correspondingly, the need for morc pilots in this region would have positive spill-over effects for the fljght education and training market in Malaysia. This also translates to morc regional opportunities for local flight and education providers to cater to the rise in demand throughout Southeast Asia. As a matter of fact, there are already candidates from Southeast Asian countries currently doing their flight training in Malaysia. The Indonesian aviation industry is also expected to be boosted in the immediate term by the lifting of ban by the European Commission on its selected airlines to fly again to Europe. Since EU lifted its ban, Garuda has announced an aggressive expansion plan known as the quantum leap where it plans to double its fleet to J16 aireraft by 2014. Meanwhile, Lion Air, Indonesia’s largest private earrier will also be receiving up to 144 units of Boeing 737-900ER from 2007 to 2012 in anticipation of the lifting of ban by EC. 4. Competitive pricing advantage The competitiveness of the Ringgit could be persuasive for cadet pilots from poorer, developing economies throughout the Asian region. However, this market driver could be subdued if the Ringgit continues its upward appreciation in value moving forward. 5. Post 9/11 faetor Since the 9/11 incident, citizens of Middle Eastern origins who aspired to be pilots found it difficult to enrol in U.S. and EU-based flight training schools. This is where Malaysian flight education and training providers can help meet the un-met market need of Middle Eastern and other Muslim countries wishing to train their cadet pilots. The impact of this market driver is expected to be low throughout the forecast period. Meanwhile, the flight education and training market in Malaysia must be wary of the following: 1. Funding Difficulties for Students Pursuing Flight Training Courses 9 6. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Conl’d)
More recently, state-sponsored scholarships as well as financing arrangements by government bodies have been unexpectedly withdrawn or reduced. This could be due to the current economic crisis afflicting the country. However, for students who are determined to pursue a flight training course but are unable to obtain a study grant or scholarship, there still have the options to secure study loans from government institutions or banks, and/or sponsorship from parents -who can either privately fund their children or withdraw from the EPF for this purpose. The impact from this market restraint is likely to diminish over the forecast period as the economy recovers and the government will continue to support the growth of the aviation industry as it sees its development as an integral part of the economy. 2. Shortage of ground & flight instructors This pose as a market restraint on the flight education and training market in Malaysia as market participants need to effeetively recruit, manage and retain key talents in order to grow in this competitive market. Certain AFTOs such as APFTSB have stepped up their effort in nurturing more ground and flight instructors through their own in-house training programmes. Currently, the shortage is being met by recruitment of foreign instructors and this trend is expected to persist throughout the entire forecast period. Supply Conditions The supply eonditions within the flight education and training market are strietly governed by the DCA through the issuances of licenses for AFTOs. Malaysia is currently well-served by its existing eight (8) AFTOs hence any potential new entrants will find it difficult to get the nod from DCA to operate a new flight school moving forward. Meanwhile, certain AFTOs such as APFTSB have successfully tapped into the Indonesian demand for pilots and are venturing into India soon. Malaysia with its competitive priee advantage as well as its quality of flight training whieh is recognised internationally eould potentially attract more foreign students and subsequently become a regional hub for flight education and training in the longer tenn. Market Share and Kev PIaver Analysis The eight (8) DCA AFTOs are as follows: • TI]e Batu Berendam-based MFA;
• The lpoh-based lAA;
• The Langkawi-based HMA;

10 6. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
• The Kola Bahru-based, APFTSB;
• The Sandakan-based AASB;
• TIle Bintulu-based GGIF;
• TIle Senai-based KLIFA and;

• The Kuala Terengganu-based KISTAA Figure 7: Malaysian AFTO’s Competitive Faet Sheet
YC:lrof FOllndin~ 1982 2004 2005 2006 2006 2007 2007 2009 4.79millioll 1.23millioll IS.Smillion 2A7mil1iOll 9.46111illion O,041l1illiollRevenue (Rl\.1) 37.9 million (2010) NtA(2001) (200S) (2005) (2009) (2009) (2009) NO.orSludcllCS Gr:\llu:llcd in 82 16 \41 168 0 19 18 0 2009*
.. PPL (A): .. rrL .. PPL (A); .. PI’L(Nlij: .. PPL (A): .. PilL I’PL(A); PPl(A); .. CPL (A); (Nil); .. CPL(A): .. CPL(NI!): .. CPL(A): IA): C1’L (/I): (Pl (A); .. CPl .. CPL IR(A).. !R(A): • !R(A): .. lR (A): m(A) (NIT); (A); .. t\fl (A): .. Al’l (A): .. AI’I (A):.!R(NI!); .. ATPL­DCA Approved .. rliglJ\ .. Flight .. Flight Instructor’s .. An (A):
l’hcory COUl”5l’S 1J15lrucIQ” Instructor’s I~~ling (A) s Raring .. Flight R:Jling(A)
• Nighl VFR tA) Instructor’
R~ling (A). s R:lling (Nil): • Nigh! VFR R.1ling (I-I),
NfA NIA NfA • Diploma in NIA NfA NtA N/A A,,’ialion (Pilol Tmininl;.l: • [bchdor of AcronaulicalTertiat:-COUBC-S Engineering Technology (Profc-ssional Piloting) in collaboration …. jlh UTII/-..1’· NOle:­• Based all DCA’s All/lIIal Report 2009 •• Offered by UTHMpursuant to 011 educaliOlwJ partnership with UTHM Source: Protege Associates The flight education and training market in Malaysia can be segmented into two (2) market tiers based on the respective market participant’s capabilities as reflected by their customer base. number of students, facilities and infrastructure. Tier-l market participants include APFTSB, MFA and HMA while the resl makes up Tier-2 of the market. 6. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
Cumulatively the three Tier-l market participants command over 88 percent of the flight training and education market in Malaysia in 2009 (Figure 6). Tier-l market participants are larger in size and they possess the capabilities, scale, facilities and infrastructure, and expertise to meet the stringent demands of their airline customers such as MAS and AirAsia, and other regional airlines. All three market participants have airlines as their customers testifying to their ability and quality, which sets them apart from the rest of the market participants. In addition, all three Tier-l market participants are also approved by the DCA to conduct simulator training. In order to diversify and gain access to wider markets, some of these Tier-l market participants have successfully expanded abroad to tap onto growing regional demand for pilots. Their size, reputable customer base and track record, and financial strength of these market participants allow them to continuously attract new students including international students, and this sets them apart from the rest of the competition. Tier-2 market participants, on the other hand, are typically smaller in size and scale and they are more reliant on self-funded individuals for their customer base. As most of the Tier-2 market participants are new entrants to the market, they face huge challenges in meeting the stringent requirements and high standard of cadet pilots demanded by airline customers. Their facilities and infrastructure are similarly constrained by their generally limited financial capabilities. In the event of any downturn, they are more likely to be affected first, making consolidation and exit a probable occurrence moving forward. Figure 8 illustrates the market share within Malaysia’s flight education and training market in 2009 based on number of student graduated from AFTOs as stated in DCA’s latest available Annual Report 2009. Figure 8: Market Share Analysis of Flight Education and Training Market in Malaysia, 2009* Others 11.9%
*based on number ofstudents graduated from AFTOs in 2009 as stated in DCA’s latest available Annual Report 2009 Source: Protege Associates 12 107 6. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
APFTSB Kota Bahru based APFTSB which commenced operations in February 2006 is the country’s fourth AFTO. APFTSB registered market revenue of approximately RM37.9 million in 2010. In 2009, APFTSB accounts for 37.8 percent of ti,e flight education and training market in Malaysia based on number ofpilots graduated. APFTSB is one of the most innovative AFTO in Malaysia and they have accomplished many firsts through their endless pioneering pursuits for industry-driven innovations. APFTSB is the first AFTO in Malaysia to be approved and accredited with the IPTS status by the MOHE through which they are able to offer the Diploma in Aviation (Pilot Training), making APFTSB the first AFTO to offer a diploma course in Malaysia. APFTSB have also collaborated with UTHM to offer a degree level programme Bachelor of Aeronautical Engineering Technology (Professional Piloting) with Honours. In Malaysia, APFTSB is the first and only entity, authorised to conduct Aviation English Test by Jeppesen. The company is also the appointed representative for the marketing of Jeppesen’5 Dispatcher Training Courses. APFTSB also conducts psychomotor and psychometric test utilising the Vienna Test System, a computerised assessment system designed to evaluate the ability and personality of cadet pilots. In addition to their innovative and extensive education and training offerings, APFTSB is also Malaysia’s first AFTO to be awarded the IS09001 :2000 Quality Management System certification. This is testament to their commitment towards the provision of quality education and training for its cadet pilots. APFTSB is also one of the better equipped AFTO in terms of flight training infrastructure, in­campus ground training facilities as well as accommodation. APFTSB’s fleet strength of 35 aircraft which include the state-of-the-art Diamond aircraft is the largest among all other flight education and training providers in Malaysia. TIley have also invested and procured Alsim flight training simulators which will allow them to conduct Multi-Crew Cooperation training. The fee regime for its integrated CPL course is in the RM250,000 range. APFTSB have an outstanding reputation within the flight education and tra1l1111g market in Malaysia as evident by the fact that they can count many major airlines as their clients including MAS and AirAsia of Malaysia, Garuda Indonesia and Sri \Vijaya Air of Indonesia, and Nepal Airlines of Nepal, all whom send their cadets to train at APFTSB. APFTSB have also been recognised and approved by the DaCA to train Indonesian cadet pilots leading to a direct issuance of an Indonesian pilot license for both their ab-initio and assistant flying instructor courses, giving 13 108 6. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
them a huge competitive edge to attract and cater to the prospective Indonesian cadet pilots. More recently, Piper Aircraft Asia Sdn. Bhd in Brunei, has made the decision to offer APFTSB the position of an authorised sales agency for Piper Products. Vulnerabilities and Reliance on Imports Current market forces have seen flight schools expanding their capacities and facilities as well as introducing new programmes to keep up with demands. This has led to difficulties in recruiting and retaining key talents in particular ground and flight instructors. Certain AFTOs such as APFTSB have stepped up their efforts in nurturing more ground and flight instructors through their own in-house training programmes. Currently, the shortage is being met by recruitment of foreign instructors and this trend is expected to persist throughout the entire forecast period. The flight education and training market is also dependent on aviation gasoline (‘avgas”), a high­octane fuel used in piston-engine powered aircraft and also Jet A-I, a type of aviation fuel designed for use in aircraft powered by gas-turbine engines, for the operation of their aircraft. Whilst there arc local supplies of Jet A-I fuel, avgas arc not produced locally and arc mainly imported in small quantities from Australia, Thailand and United States. TIle availability and prieing of both the Jet A-I and avgas fuel is subject to various economic and political factors. and events occurring throughout the world that is beyond anyone’s control. For example, the price of avgas increased by more than 50 percent in 2008 due to disruption in avgas fuel supply. According to Petronas, the disruption was due to bad weather at the source and this resulted in Pctronas having to source from another supplier at a higher cost. Market players within the flight education and training market have to charge higher fuel surcharges to their cadet pilots as a result of the steep increase. Substitute ProdUcts and Services There are no direct substitutes or competing services for the provision of flight education and training as the provision of such services is a regulated activity and it comes under the jurisdictional ambit of the Civil Aviation Act 1969 and Civil Aviation Regulation 1996. Any persons or organisations conducting any aviation related activities are required to be approved and compliant with the provisions of the said legislation. The DCA, which comes under the jurisdiction of the MoT is tasked with matters related to compliance and administration of all aviation-related activities in Malaysia. 14 109 6. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
Government Regulations, Policies and Incentives The Malaysian government recognises the nation ‘5 aviation industry as being critical to national development and global integration, and therefore, is fully supportive ofaviation as a key sector of business and commerce. Among the regulation, policies and incentives introduced are as follows: Regulations The operation of a flight training school in Malaysia is a regulated activity in that its activities come within the jurisdictional ambit of the Civil Aviation Act 1969 and Civil Aviation Regulation 1996 -such that persons or organisations conducting any aviation activities arC required to be accordingly compliant with the provisions of the said legislation. Ensuring its compliance and the administering ofall aviation-related activities is the DCA -an organisation of the MOT Malaysia. Policies and Incentives The government launched the National Aerospace Blueprint (in 1997) followed by the establishment of the MIAC (in 2005) and rc-designated the Sultan Abdul Aziz Shah Airport as an aerospace park as part of the government’s initiatives towards transforming Malaysia into a global aerospace nation by 2015. The government has further identified the aerospaee sub~seetors as one of the new sourees of growth -and aceordingly, has made it a Promoted Activity under the Ninth Malaysia Plan 2006 ­20 IO. To this end~ a MIDA advisory on incentives state that, companies that establish technical or vocational training institutions are eligible for an Investment Tax Allowance of 100 percent for ten years. This allowance can be offset against 70 percent of the statutory ineome for each year of assessment. Any unutilised allowances can be carried forward to subsequent years until fully utilised. In addition, existing companies providing technical or vocational training that undertake new investments to upgrade their training equipment or expand their training capacities also qualify for this incentive. Market Outlook and Prospects TIle outlook for the flight education and training market in Malaysia remains positive~ and steady growth is projected for the forecasted period of 2010 to 2014. The flight education and training market in Malaysia is expected to grow from its current size of RM 129.4 million in 2010 to RM 193 million in 2014, registering a CAGR of 10 percent. 15 110 6. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Conl’d)
Factors priming growth within the market is likely to come from rising demand from major airlines in Malaysia, the continued pro-aviation policies and measures by the Malaysian government, the strong regional growth projected for aviation activities, the competitive pricing advantage enjoyed by local market partieipants as well as the benefits attained after the 9/11 incident. All these market drivers arc expected to boost the overall demand within the flight edueation and training market throughout the foreeast period 2009 -2014. The flight education and training market in Malaysia is currently enjoying growth as reflective of a young, growing market. The growth potential of the flight education and training market can be reflected in the increased level of participation seen in recent times. Except for MFA, the rest of the eountry’s seven AFTOs were only established in the last decade led by the entry of lAA in 2004. And Malaysia being situated within one of the fastest growing region for aviation in the world is likely to see steady increase in demands for pilots in view of demand from both local as weB as international airlines dependent on their expansion plans, and also the attrition rates afflicting the industry. Malaysian pilots, in particular those with ample flying experiences) are high in demand among international airlines. Meanwhile, the supply of pilots in Malaysia is generally stable as reflected by the number of graduated students from AFTOs for the past 2 years -401 (2008) and 444 (2009). The flight education and training market in Malaysia, under the governance and stewardship of the DCA, has over the years produced numerous high quality cadet pilots who are serving major airlines throughout the world. This has helped generated goodwill and recognition from various major airlines throughout the region for cadet pilots trained in Malaysia. Market participants within the flight education and training market in Malaysia should leverage on this to expand their market regionally leading to the emergence of Malaysia as a regional hub for flight education and training. There are various opportunities for local flight education and training providers to cater to the region’s fast growing market in tandem with growing demands for pilots. A combined factor of reputable, recognised flight training courses and competitive pricing would put the flight education and training provider in good stead to capitalise on this. Local flight education and training providers would do well to capitalise on the many opportunities available by aligning their respective operational and marketing slrategies to those of regional airlines, taking into considerations their fleet/route refurbishment/expansion plans. The convergence of Southeast Asia as one of the fastest growing markets for aviation in the world, coupled by a huge delivery of aircraft expected in the region over the next few years, including, 16 111 6. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Cont’d) j}.:Y ~-. (-~, –~-;pgP”””~_ J’–“,,~ __r. ,%~ ‘”””…… ~”””” , ” the region’s captive need for quality pilot training -bodes well for the Malaysian flight education and training market. Market Outlook and Prospects for India Given the current scenarios enveloping the air transport sector, the outlook for the flight education and training arc highly promising. Demand for pilots and instructors are expected to risc in tandem with the needs from air transport sector and the challenge for flight education and training providers lies with the ability to ensure a quick, steady delivery of qualified pilots to meet such demands. In the interim, India is likely to continue to its reliance on expensive foreign pilots to meet its current shortfall ofpilots. Meanwhile, the Indian governmcnt has taken its own steps to deat with pilot shortages by introducing a rule requiring commcrcial pilots to give at least six months) notice. TIle Ministry of Civil Aviation made the move in September 2005 and warned that pilots failing to comply could lose their licences. Thc government has also movcd to incrcase the pool of pilots available by twice incrcasing the retircment age, first to 61 from 60 and thcn to 65, although pilots agcd between 60 and 65 must fly with a co-pilot under 60. In addition, the government has tried to increase pilot numbers by reducing the total flying time required for the issue of a commercial pilot’s licence to 200 hours from 250 hours. India is also making a major push for foreign investment in some key areas within the aviation sector in particular aviation training, aircraft maintenance, cargo services and ground handling. A key instance is the lifting of the eap and allowing 100 percent foreign ownership of MRO busincsses, flying schools and technical training institutions. To this cnd, APFTSB havc agreed to set up a flight training academy in collaboration with GHIAL at the Rajiv Gandhi International Airport, Shamshabad in Hyderabad, India where it will marked APFTSB’s first foray abroad as wcll as their attcmpt to capitalisc on India’s growing dcmands for quality pilots. 6. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT (Cont’d)
Protege Associates has prepared this IMR in an independent and objective manner and has taken adequate care to ensure the accuracy and completeness of the report. We believe that this report presents a true and fair view of the industry within the boundaries and limitations of secondary statistics, primary research and continued industry movements. Our research has been conducted to present a view of the overall industry and may not necessarily reflect the performance of individual companies in this industry. We are not responsible for the decisions and / or actions of the readers of this report. This report should also not be considered as a recommendation to buy or not to buy the shares of any company or companies. Yours sincerely,
Director Protege Associates Sdn. Bhd Note: Unless othel1vise defined, the abbreviations used in this Executive Summmy reflect those as defined in the Prospectus. 18

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