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As the Malta Hotels and Restaurants Association and Air Malta promise two completely different scenarios on low-cost carriers, STEPHEN MUSCAT says a more cautious approach will be required over Malta’s tourism future
If there’s one thing for sure about the reports MHRA and Air Malta have produced to push their case on LCCs is that, for all the lip service given to the national interest, all we are left to base a decision on are two biased reports drawn up within the space of a few weeks.
Too many shaky predictions and assumptions rattle the reports. Deloitte’s analysis of MHRA’s proposals offer an over-optimistic vision of the future, while PricewaterhouseCooper’s doubts warn us to be cautious over such expectations. And yet, it is clear that doing nothing about the LCC issue is no safe option at all. Air Malta will have to downsize its operations, and hotels will have to switch to search engines to attract LCC traffic – this is a market which sooner or later Malta will have to be part of.
The least that could have been done by both parties was to sit down together, and maybe iron out the differences in the assumptions they have made of each other. Air Malta has its own reasons to fear it will lose 50 per cent of its business, even though this sounds drastic – PWC knows that displacement projections for Malta cannot be based on European trends, where displacement takes place not just from air carriers, but also from roads and railway. Where travel comes solely by air and to one airport, PWC knows full well that displacement will come just from traditional air carriers.
And yet, Air Malta’s report is also a hasty commentary based on Deloitte’s projections. Deloitte’s report now happens to be outdated, because it was built on the assumption that the management at the Malta International Airport was ready to approve hefty discounts for LCCs and increase the routes eligible for these discounts.
And that means the initial shortfall of Lm2.65 million needed to fund LCC operations now has grown to Lm5.3 million, plus another Lm4 million which the government has to incur by removing the departure tax, a condition for one of the major LCCs to operate here.
PWC indeed pointed out that Deloitte was basing itself on figures obtained “from an MIA source”, showing that such optimism could not be based on just one scenario. When that assumption was put paid by MIA’s refusal to cut charges any further for LCCs, it was time to look at the figures again and start a fresh rethink process.
Seasonality
Deloitte bases itself on certain predictions of how LCCs will affect the national carrier. In such a sensitive area like tourism, given the state it is in, it should be expected that Air Malta had to be consulted, at least by providing a few answers to some questions. Air Malta would have at least obliged with a sour look or some poker faced insouciance, but that still would have left Deloitte with a better idea of what it was basing its projections upon.
There is also the assumption that Ryanair will accept MHRA’s scaled-down proposal for a four, rather than a six-aircraft base, and that they would accept to operate a selection of underserved routes eligible for discounts.
In reality we are still left with some doubt on the LCC scenario as depicted by Deloitte.
The first is that LCCs will solve Malta’s seasonality problem to attract enough tourists during the winter.
PWC says a sample of 31 Mediterranean holiday destinations shows that in summer both Ryanair and easyJet operate twice the capacity they do in winter. Deloitte instead claim Ryanair can achieve “load factors” of 83 per cent in winter.
What this means is that Ryanair can fill each of their winter flights with a good 168 passengers. But that also depends on how many flights they will actually operate in winter. If these flights are far less than those in summer, where it will reach a load factor of 90 per cent, it still doesn’t solve the dearth of winter tourism. Full planes but not enough flights to bring the volumes.
If the seasonality test is not passed, further doubts come into play over why hotels should favour a switch from tour operators to the bed bank which will be operated by Ryanair’s strategic partner Cendant. Cendant will basically buy the room nights up front and sell them off on its search engines.
If winter tourists do not increase, what reason would there be to discard tour operators that already give hotels occupancy for 90 per cent of their nights in summer?
That is why PWC claims that talk of LCCs generating traffic of 2 million tourists, a million each way, and requiring a turnaround of three routes daily for each plane, has to be taken cautiously.
Funding gap
So we are left with the question of who will be footing the bill for LCCs. First it is government who has to front more cash, considering that it will be losing out on departure tax, although more VAT is expected.
Then there is how much more aid will be propped up by the private sector, which does not only include hotels but also, Deloitte surmise, real estate agents. That is to say if estate agents really see the potential of more home-buyers in LCC traffic, at a time when foreign buyers are now decreasing.
And there is also the bed bank, also one of the ways a Lm2.65 million shortfall will be paid off, which would still have to be supported by a confident projection that seasonality will not be an issue.
Deloitte’s conclusion is for MIA to reconsider its proposal, although this did not happen, and Ryanair is now faced with a counter-proposal for a four-aircraft base and a hybrid volume and route discount scheme. easyJet’s talks seem rather straightforward as their funding gap is lower and may counteract the expected loss in tourists next year. MTA will need a strong short-term plan to change the industry’s strategies and mechanisms.
But there are also the EU guidelines that will determine what type of aid any routes can get. Any aid has to be an incentive for a new route to start, and not to continue. Aid beyond five years is impossible, and aid must be regressive with time. The existing guidelines would mean that possible aid for the London Stansted route would not be possible, because it is not a new route. Any such proposal for aid will have to be buttressed by a stand-alone business plan on the long-term projections.
Neither study provides model permutations to give comfortable predictions. All the effects of LCC traffic on Air Malta are on in its bottom line. While Ryanair’s four-aircraft base and easyJet would bring Lm23.6 million in revenue, assuming no other carrier moves out, Air Malta will still have to downsize their fleet, redeploy assets elsewhere, downsize its manpower and revise administrative procedures and discontinue routes. Air Malta will need assistance while the industry gains 5.4 per cent more in hotel occupancy.
The word is caution. We can’t depend on over-optimistic assumptions based on unproven promises, whilst on the other hand see a very bleak picture with airtight barriers to risk.
The economic balance tilts in favour of LCCs, but the way this tilt is taking place is based on too many unknowns: it is what’s called paying up to get a client, but then the client turns into a liability when business expectations are not met.
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