BUSINESS PERFORMANCE IN 1998

The Kowloon Motor Bus Company (1933) Limited ("KMB") In the year under review, KMB saw a slight decrease in daily ridership of 1.6% compared with 1997. A total of 1,034.4 million passenger trips was made on KMB buses in 1998 compared with 1,051 million in 1997. This reflected the economic downturn in Hong Kong and the region that led to higher unemployment, which had an impact on our commuter passengers, and the decrease in visitors to Hong Kong. At the same time, this was offset to some extent by the influx of newcomers from the Mainland and the growth of new towns. New routes were introduced and frequencies were increased on some current routes to accommodate these users. Long Win Bus Company Limited ("LWB") LWB performed satisfactorily during the year and the future is bright for this new business that began on a small scale in 1997 with two routes. The opening of Hong Kong's new International Airport at Chek Lap Kok marked the full scale launching of LWB. Eleven new routes were launched between April and July 1998 to service Tung Chung new town and the airport, and a fourteenth route was introduced in November 1998. Total ridership for the year was 14.4 million passengers, or a daily average of 39,500. This made LWB one of the largest non-rail, land-based operators serving North Lantau and the airport. The Government's plan for new towns in the New Territories will see a steady population increase in the LWB service area where we have a competitive edge in direct routing and attractive pricing.		Total service improvement items for the year KMB Including frequency and capacity improvements and operating periods. Total number of bus routes operated as at the end of the year KMB Including normal, special, recreational and overnight services.
Non-Franchised Service Our non-franchised service made great strides during the year toward becoming one of the leading operators in this sector of the market. Sun Bus Limited ("SB"), one of the business units in the Group's Non-Franchised Transport Operations Division, began operations on 1 January 1998. The monthly turnover grew from zero to HK$2.5 million by year-end. Servicing urban and sub-urban areas, including the new airport, SB caters to large residential estates, shopping centres and major employers. To further advance its position in the market, SB with a current staff force of less than 80 full time employees, is highly competitive and emphasises high productivity, flexibility and efficiency. The upward trend in demand for residential, commercial and employee bus services in areas with no direct mass transit link is expected to continue. SB will capitalise on this by expanding its presence in the market.

SHARPENING OUR COMPETITIVE EDGE

Responsive Management

Following our corporate re-organisation towards the end of 1997, the Group undertook a comprehensive review of its management structure and processes during 1998. The aim was to streamline management and the decision-making processes to ensure greater responsiveness, and to adopt best corporate governance practices. In the process, we also sought to ensure the continued smooth running of the franchised bus business following the scheduled retirement of KMB's General Manager and Deputy General Manager in mid-1999.

A new headquarters management structure for KMB was activated on 2 January 1999 that grouped existing departments under three main divisions (Finance and Administration, Operations, and Commercial) each headed by a Divisional Director. In tandem with this, more precise definition of job responsibilities and accountabilities was instituted to provide a more effective basis for performance assessment.

A second phase of restructuring will be in effect as of July 1999 whereby KMB's day-to-day operational decision-making will be devolved to four Depot General Managers. By being closer to the market, they will be in a better position to deal with day-to-day operational issues and respond to the needs of our customers.

Committed to Standards of Excellence

ISO certification was attained by KMB's Traffic Department in 1998, following the earlier certification of the Service Department. This means that all KMB operating and maintenance depots have been certified as meeting internationally recognised quality standards. A programme is underway to prepare all other headquarters departments for ISO certification. We are confident that we shall have gained certification for them by the end of 1999, thereby making KMB probably the first bus company in the world to have achieved ISO certification on such a large scale.

With ISO certification KMB will strive for continuous improvement and periodic reaffirmation to ensure that we achieve the highest possible standards of quality. This represents a bold and irrevocable commitment to world class standards of excellence.

Increasing Network Efficiency

To remain competitive, we need continuously to drive towards greater cost-effectiveness. A key element in this is continuous improvement in the overall efficiency of our network by ensuring that all available resources are put to the best use through elimination of unnecessary and wasteful duplication. This will enable us to hold down costs and fares to the benefit of our customers. In addition, the community at large will benefit from the subsequent reduction in congestion and pollution.

We have successfully implemented several route rationalisation packages in recent years and we are continuing to explore additional ways to institute further efficiencies.

In May 1998 KMB took the initiative to extend bus-bus interchanges to Tai Lam Tunnel upon its opening. This development was warmly welcomed by residents of Tin Shui Wai and Yuen Long new towns as demonstrated by the 40% increase in average daily usage since the beginning of operation. Moreover, the number of daily interchanging passengers has increased five-fold. This followed the example set in 1990 when KMB established a large-scale bus-bus interchange at Shing Mun Tunnel.

This system provides an efficient bus network that eases traffic congestion, reduces noise and air pollution, and compensates for the shortage of terminal space in urban areas. These bus-bus interchanges and the size and comprehensive coverage of our network benefit our customers and the community in general.

But such interchanges require special fare collection arrangements. The Octopus Smart Card system will remove these constraints and help provide opportunities for innovation and more imaginative means of route rationalisation. By encouraging people to transfer from one bus to another, we can eliminate overlapping routes. In addition to providing passengers with greater convenience, the vehicles and the drivers become more productive and traffic congestion is reduced.

Increasing Quality of Service and its Delivery KMB is the leader in introducing newer and more comfortable buses to Hong Kong. In recent years we have introduced, in rapid succession, the first single-deck, super-low floor 'Easy Access' bus, and the world's first double-deck, super-low floor bus with wheelchair access. KMB takes pride and satisfaction in having originated the concept of the double-deck super-low floor bus and in playing a significant role in its design and development. KMB now orders 200 to 300 of these buses each year for replacements of older buses and for service improvements and new routes. KMB also was one of the founders of the consortium that started the Octopus Smart Card System, currently the largest and most sophisticated fare payment system of its kind in the world. Since the launch of the system in September 1997, the Group has installed Octopus equipment on 1,510 KMB and 160 LWB buses, representing 38% and 100% of their respective fleets. We now have the largest number of Octopus card fare collection readers amongst Hong Kong's public transport operators.

Million Total number of passengers carried during the year Franchised Public Bus Operations

Currently, on average, about 370,000 passengers use the card daily. Installation of Octopus equipment on the entire KMB fleet is scheduled for completion by the end of the year 2000.

In the area of environmental protection, we introduced 345 buses with the environmentally friendly Euro 2 standard engines during the year.

Enhancing Customer Satisfaction

We have continued to upgrade various aspects of service delivery such as bus shelters, passenger information systems and instilling a strong sense of courtesy among staff. Seeking opportunities for further improvements is a continuous process. We will explore how new technology can be applied to enable us to better serve our customers. But in so doing, we will seek practical and cost-effective solutions that meet high standards of reliability while at the same time minimising the cost to the customer.

We are making continued improvements in the design, attractiveness and comfort of our buses and we are adding more air-conditioned buses to our fleet. Over half of the KMB fleet is so equipped.

Listening to the Customer

In pursuing our goal of retaining passenger loyalty and winning new customers, we fully recognise the importance of listening to our customers so we can respond to and anticipate their needs and expectations. This involves hosting community meetings to discuss public transport, organising passenger liaison groups, and maintaining other channels of communications with our customers.

Tackling the Millennium Issue

This is a major issue facing all businesses. The management is fully aware of the impact of the Year 2000 issue and has rigorously conducted contingency planning including scenario analysis and impact assessment. Appropriate actions have been taken, including the adoption of the Year 2000 conformity requirements issued by the British Standards Institution (DISC PD2000-1), i.e. neither performance nor functionality is affected by dates prior to, during and after the Year 2000.

A Year 2000 programme was implemented to address all critical areas. The programme is closely monitored by a project team led by a Year 2000 co-ordinator who provides regular progress reports to the management. The programme covers all relevant computer systems and applications, including equipment with embedded systems. Also, business partners and major suppliers were requested to provide assurances that the Group is not exposed to risk arising from any Year 2000 non-compliance on their part.

Information technology ("IT") is widely used by the Group and most applications were self-developed. Since 1997, the Group's IT staff have been converting those applications which were not Year 2000 compliant. As at 31 December 1998, 91% of the applications conversion was completed, including all mission critical applications. The Group intends to achieve Year 2000 compliance by 30 June 1999. Such date is extended from the previous target date of 31 March 1999 due to more time being required to complete the rectification and testing of certain non-critical systems.

It is expected that the total additional costs for the Year 2000 modifications will not have a significant effect on the Group's operating results. As at 31 December 1998, there were no material commitments and no major financial implications in respect of the Year 2000 modifications.

Right Team for Changing Times

In my role as Managing Director, I have been most fortunate in having the support of a strong and loyal first-class management team and a dedicated, highly professional workforce. The spirit of teamwork that has been forged over the years is one of our most invaluable assets. I want to thank all my colleagues for their contribution to the Group's success.

The Group has a strong foundation and a long history of solid professionalism, adherence to high quality standards, commitment to public service and a progressive spirit. Our team looks forward with confidence to our continued success in meeting future challenges and taking advantage of every opportunity to propel the Group forward.

John Chan Cho Chak
Managing Director
15 April 1999

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