Flying on borrowed time | Klaus Gossler

The next 12 to 18 months are critical for the survival of Air Malta. Chief Financial Officer Klaus Gossler exudes confidence that the national airline will reach its financial destination safely

raphael_vassallo
Raphael Vassallo
30 August 2015, 9:10am
Last updated on 31 August 2015, 8:40am
Air Malta CFO Klaus Gossler
Air Malta CFO Klaus Gossler
The last few years have not been particularly kind to the national carrier, Air Malta. Efforts to restructure the airline in line with targets imposed by the European Commission have so far been repeatedly frustrated. The last financial year (ending March) was supposed to have been Air Malta’s break-even point. Yet the airline posted losses of 15 million euros… which also means that the restructuring deadline has had to be postponed by another year.

Meanwhile, doubts have been expressed as to whether even this delayed deadline can realistically be met… with the airline rumoured to be bracing itself for similar losses at the end of this fiscal year next March.

For all this, however, I find Mr Klaus Gossler – Air Malta’s chief financial officer for the past four months – to be particularly upbeat about the prospects of an economic turnaround. 

“Financially speaking, we are one year behind target,” Gossler breezily confirms, when I ask whether it is true that 2015 may also end on another unprofitable note. “The restructuring plan is one year delayed. Why? We all know that Libya was part of the success of our business; and for reasons I would argue nobody could really have foreseen, this business was lost. Any airline in the world would have difficulties to adjust its cost-base overnight. So we are losing somewhere in the region of 10 to 12 million just because of North Africa…”

Faced with such losses, Gossler argues that one cannot quickly readjust one’s operation. “All this has a straight bottom-line impact. So obviously we are in line with the losses from the year before, and we have not improved in the way we wanted to. The losses have shifted to this financial year. So you could argue that we are still in line with the EU’s restructuring plan, if you exclude ‘extraordinary items’. Such items are in fact mentioned in the plan; there is no direct reference to North Africa, but the restructuring plan does take such unforeseen eventualities into consideration…”

Does Libya account for all the losses, then?

“Not all, no. A lot of things have changed since the restructuring plan got under way. Libya and North Africa was one factor; but let’s also look at the crisis in Russia. It is well known that there is a huge crisis between Europe and Russia. We have seen substantial business decline also from the Russian side. That’s the other part of the story. If you add those two together, you will probably cover most of the revenue issues. There are always bits and pieces which change over a timeframe of five years; but in total, that’s roughly where we are today.”

Having identified the main factors contributing to the downward spiral, the question becomes: what can be done about it? Around two years ago, Air Malta’s newly appointed CEO, Maria Micallef, made the point that Air Malta’s business model ‘had to change’. In what way does Gossler think it needs to change, specifically… and what has been done since then to achieve this transformation?

“That the ‘business model has to change’ is true for all airlines, not just Air Malta. In principle you can classify the aviation industry into two sections: long-haul, and short-haul. By definition, European flights are regarded as short-haul; if you fly to the United States or Australia, it’s long-haul.

“These are two fundamentally different models. But this wasn’t always the case. If you go back many years, the operational model was pretty much the same for both. The so-called ‘low cost carriers’ didn’t exist; you had full-service carriers operating long-haul and short-haul in much the same way. What happened in the last few years was very clearly a change towards a low-cost model – and I must specify I am talking a low COST model, not a low service one – for short distance flights. The long-haul model, however, hasn’t changed. The British Airways, the Lufthansas, the Air Frances of this world actually make their money on long-haul flights only. They don’t make any money on short-haul…”

Air Malta, he adds, has the opposite set-up. “We are actually a carrier coming from the old school, a full-service carrier suddenly trapped in competition with low-cost carriers. We only operate short-haul flights; we don’t fly more than three and a half hours in any direction. Our aircraft wouldn’t be able to fly any longer than four hours anyway; it’s the maximum we can do. By definition, then, we are now in a model where we have to accept competition with low-cost carriers. I am not saying we have to copy them; but we have to accept to compete…”

One can always compete with price, with service, and with other aspects, he continues; but the mix has to attract customers if it is work. 

“So yes, the business model has to change because of the simple fact that we now operate in an open, competitive world where people have more choice than ever. Eighty per cent of our customers come from overseas; 20% from Malta… so you can appreciate that the Ryanairs and Easyjets of this world – and also BA and Lufthansa – have a substantial impact on the perception of the people buying a ticket. And they do not buy their tickets on the basis of the food available on board. They base their purchasing decisions on quite a few other things, before it comes down to that…”

The second reason for a change of business model concerns seasonality.

“Winter and summer make a big difference for us. In winter, we cannot fly to South Africa – or wherever the sun is shining – because we have to stick to our four-hour limit. So our winter and summer models are totally different. We do not fly even half the passengers in winter that we do in summer. So obviously we need to adapt; which does not mean ‘park aircraft in the winter, just to be OK in the summer’.

“We have to look at it from a holistic point of view: what is the optimal way to use our most expensive assets, our aircraft? Currently we have 10 aircraft; but in winter we don’t fly more than six or seven of them. So do we really want to park aircraft – and pay for it – just to be OK in the peak period? Probably not. However, we want to cover the peak period in such a way as to still have the same number of passengers, if not more. We can’t do this by ‘sweating our assets’…”

Speaking of the number of aircraft, Air Malta recently announced a planned reduction in its fleet that would save the airline somewhere between eight and 10 million. This decision has been criticised in some quarters, on the basis that – with the airline staff complement remaining the same – the ratio of staff to aircraft will increase, arguably impacting profitability. How would he respond to that criticisam?

“Good question, but actually the calculation is done differently. In reality, there is no such thing as a ‘staff-to-aircraft’ ratio. Why? Let me give an example: if you fly long distance to San Francisco, the staff complement will not be the same as when you fly short distances. And besides, an aircraft can fly once a day, or four times a day. So the number of aircraft, in itself, means nothing. Or to give a more extreme example: let’s say we double the number of aircraft, and park them all. That means our ‘staff-to-aircraft ratio’ would improve substantially. But I’m not sure if that is good news. So the logic makes no sense…”

It makes more sense, he argues, to talk about capacity. “In the industry, we call this ‘available seat kilometres’ (ASKs). If you have a number of seats flying a certain distance, that’s the capacity, and that is what should be used as a basis. If we change from 10 to eight aircraft, but keep the same seat capacity by flying them more often... what’s the difference? Nothing….”

Part of the Air Malta restructuring programme, then, involves making more efficient use of a downsized fleet. But there are other aspects which may prove harder to implement. One recent example of a failed attempt at restructuring concerned a proposal to save €1 million in wage bills by transferring part-time workers to quality control specialists Inspectra. However, the plan had to be shelved following a backlash from the Union of Cabin Crew (UCC).

Doesn’t this also suggest that the national airline is up to a point held hostage by its workforce? That there are certain aspects of the restructuring process that cannot be implemented because they will be resisted along similar lines?

“Overall, restructuring is a difficult time for anyone. Whatever we do, it will definitely not be easy, however you look at it. But let’s take it one step at a time. When we say ‘restructuring’, we would look at the most expensive cost-items. For us, that is very clearly our aircraft: with maintenance and all the rest of it. As long as we keep the same ASKs, there is no direct implication for staff [in reducing the number of aircraft]…” 

Nonetheless Gossler acknowledges that the delicate rapport between management, unions and staff represents something of a tightrope for any airline.

“As for whether we are ‘held hostage’, I would say that is something the entire industry has a bit of an issue with. It is not specific to Air Malta; I don’t think we have more or fewer issues than other airlines. And we will work together to make this work. Ideally, we should be more positive.

“To me, the issue is not to have a good debate with unions; it is not to be challenged on certain items. We just need to be able to talk positively about Air Malta. The simple fact is that we shouldn’t loosely use the word ‘strike’… which can impact us far more negatively than anything else. That is the issue for me. Communication is good; we will talk, and we will find a solution. But I wouldn’t say that, in the end, we are stuck in a position where we cannot move…”

Sticking for a moment to the same issue: it also illustrates one of the core sensitivities underpinning Air Malta’s restructuring programme. Part of the problem concerns the fact that – unlike most other airlines, and certainly unlike the low-cost model it competes with – Air Malta is also perceived as fulfilling a ‘national strategic purpose’. It is for this reason that all political parties have to date rejected the idea of fully privatising the airline: as a national service provider, Air Malta is expected to (among other things) sustain unprofitable routes that a private airline would almost certainly slash.

How, then, does one restructure the airline along the private sector business model, whilst also retaining the national service side of the equation?

“I think that’s relatively easy in the following way: always under the assumption that we all work together, and that we all want Air Malta to succeed. Clearly, the trick is to get more passengers on board. Not just because we see this as a profitable revenue stream; but also because it is beneficial to Malta as a country. Every tourist who comes here spends a certain amount which is good for the economy. The trick, then, is how to combine the two…”

Though generally desirable, the idea of a ‘national service provider’ is not viable in the long-term. “We clearly cannot afford to fly loss-making routes for a long period of time. No airline can afford this, for the simple reason that paying for the losses would be classified as ‘State aid’, which is not permissible under European law.

“The only possible way forward is to be as competitive as everybody else, and to get passengers back from the other airlines. Remember that we have a 45% market share here. Why not 48? Why not 52? We don’t have to go for new clients; we basically have to regain the passengers that we have lost to other airlines over time. The only question that remains is, how do we do this? We won’t manage by sitting back and leaving everything as it is. We can only do this by getting our cost-base under control, then making sure we have attractive pricing, coupled with the right product, flying to the right places – whatever that means – and winning back passengers…”

He cites Switzerland as an example of a route where Air Malta has registered success.

“Quite a few people said that, with Swissair coming in, Air Malta would not afford to sustain the route. But no, we argued that the opposite is true. Switzerland is expensive, wages are high and the exchange rate works completely against them. And passengers are not loyal: they will compare prices, and go with the cheaper airline. They will fly Air Malta. And in fact, on this route our passenger numbers have gone up…”

The secret, then, is to emulate this success across the board.

“We have to actively manage to compete in order to get more passengers on board; and therefore, automatically we will be able to fly routes which today are loss-making… but in future, with a better cost structure, may not be loss-making any more. Sitting back and saying, ‘these routes are not profitable, let’s cut them…’ That’s too much of a quick-fix solution; it will not get us anywhere. But trying to get the cost down; working more efficiently; using our aircraft more efficiently; using better channels… not just the classic channels, but also selling more online… All this combined, in addition to being cleverer in the way we use IT… this is what will get us back into competition. People will come back to us. That’s the real solution: which, interestingly enough, is exactly in line with what the government wants as the shareholder. It’s also exactly in line with what we want as a company, which is to become profitable. And it is in line with what the employees want, which is to have a stable, secure job…”

Meanwhile, the clock is ticking on a restructuring process that may well have to be delayed again. What would happen if Air Malta does not break even by the end of this fiscal year? What are the consequences of a second failure to achieve this EU-imposed target?

“What we have to do is relatively straightforward. We have a plan in place, there are parameters set by the Commisison for us to work within… it’s a straightforward management issue. The real trick, however, is slightly different. The target of the restructuring plan is to ‘break even’: but if you look into the details, what it really means is to become ‘cash neutral’.

“There’s a difference. Breaking even means you can pay your own bills: you have enough cash to pay your suppliers, your staff, etc. It doesn’t necessarily mean you are profitable, however. So let us focus on the cash flow. That is the key. As long as we can pay our bills, the EU will leave us alone. And there is no way around the simple fact that we have to make money in order to pay our bills. There are ways to delay things a bit: if, for instance, we find an investor willing to invest in us; or find a way to get more bank loans – which is difficult to do, in today’s world – we could fly a little longer on borrowed time. But it remains borrowed time, and that’s never a good idea. We should clearly stick to the principle that we need to stand on our two feet in as far as cash flow is concerned.” 

How confident is Klaus Gozzler that Air Malta will, in fact, meet these targets?

“On the assumption that we don’t have any disruptions – and by that I mean a strike – or natural disasters outside our control, such as the volcanic ash we had a few years ago… excluding all these possibilities, I am very confident.”