Deal or no deal for Air Malta? | Edward Zammit Lewis

Having invested so much in a ‘strategic partnership’ with Alitalia, the collapse of this deal comes as a blow to Air Malta’s future prospects. But tourism minister Edward Zammit Lewis is confident that Air Malta can still be saved and made profitable

raphael_vassallo
Raphael Vassallo
15 January 2017, 10:00am
Last updated on 16 January 2017, 8:05am
These are dark times for Malta’s national airline... or so it seems. Already shy of two EU restructuring target-dates, and (by the government’s admission) in urgent need of a ‘strategic partnership’ to overcome its financial difficulties... news that a planned merger with Alitalia fell through this week must have felt like an axe-blow to Air Malta’s roots.

Though the problems are complex, the main issue remains the exorbitant cost-base of an airline that has (in the past) been treated as more than just an ordinary aviation service. Over the years, Air Malta’s staff complement has grown to considerably more than a company would need to remain competitive in such a cutthroat market. Work practices, zealously defended by unions, have over-inflated the company’s base expenditure... translating into higher costs for the consumer, and therefore lower competitiveness.

These issues are by no means new; but never before have they been more urgent, as time to implement the European Commission’s restructuring plan appears to be running out. So... has this latest setback sealed the national airline’s doom? Is it a case of ‘No Alitalia, no party’?

Tourism Minister Edward Zammit Lewis (also responsible for Air Malta) certainly doesn’t think so. 

“First of all, this government has in my opinion tried to do something that was never tried before. I think preceding administrations understood that the only road for Air Malta – as a very small airline by European and global standards: even more so, at a time when all airlines were undertaking cost-cutting exercises across the board – was to seek a strategic partner.

“I know for a fact that previous administrations – in particular the last Gonzi administration – had received offers: there were those who really believed in a strategic partnership at the time. This is confirmed by the previous Air Malta chairman Louis Farrugia, who wrote some time ago that he agreed that Air Malta needed a strategic partner. I believe this government has been clear and consistent on this, and in the two years nine months I have been the minister responsible for Air Malta, we began talking seriously about a strategic partner: even if this project [the Alitalia merger] has failed to materialise...”

The issue however does not concern whether there is consensus regarding the policy, but whether the policy can work in practice. It is one thing to agree that a strategic partner is necessary; quite another thing to actually secure one. Why did the attempt to merge with Alitalia fail? Was it because of any particular unresolved negotiation issue... or is it simply a reflection of the fact that no other airline would want to buy into Air Malta in its present financial circumstances?

Zammit Lewis acknowledges that part of the problem concerns the nature of the airline itself.

“Air Malta falls between two stools. It’s not a low cost airline, so it doesn’t have the advantage of controlled overheads like RyanAir – and it’s not Turkish Airways or Emirates, which are unfettered by EU rules, so can take certain decisions we can’t. We’re somewhere in between. So we need to find our own identity. Maybe I’m being a little philosophical... but I believe our choice of direction is right. But of course, it has to be a strategic partnership that is suitable for our needs...”

At the same time, however, the government seems to be hinging everything on this ‘strategic partnership’ as if it were a sort of panacea. Aren’t there also structural problems? For instance: he describes Air Malta as ‘small’ (which it undeniably is)... but in terms of what an airline that size actually needs to be, it also has a massively overinflated workforce. 

“When I say it is a ‘small airline’ I mean by international standards. For Malta, it is not small. It is a vital strategic asset from a tourism, trade and also social perspective. But in a context of a discussion of strategic partnership with other international airlines... then yes, it is small. This does not mean that we shouldn’t do all in our power – and politically, that is what I intend to do – to save it, and get it back onto the path of commercial viability.”

 But my question was about what can be done to achieve that goal. Isn’t part of the difficulty in merging with other airlines also due to endemic managerial issues... such as the (near) impossibility of downsizing the workforce for political reasons? Or taking any other ‘unpopular’ decisions, for that matter?

“As minister I have no say in managerial decisions... but the management did take courageous decisions: such as the discontinuation of the Frankfurt and Manchester routes. The decision was criticised, but it enabled us to utilise the aircraft in profitable routes instead. If the airline was yours, what would you prefer: investing in routes which are profitable, or routes which lose money?”

That question overlooks the fact that the discontinued routes were considered important for incoming tourism... and this is also part of the ‘tourism, trade and social’ strategic value of the airline that Zammit Lewis himself mentioned earlier.... 

He nods. “But I can tell you confidently, that while the decisions taken were ones that made sense for Air Malta on a commercial level... they did not negatively affect the tourism sector. Why? Because we have diversified our source markets so much, and because we have availed of the EU’s Single Skies Policy, whereby the European aviation industry has been liberalised. So I can confidently assert that over Winter 2016/17 we will have more carrying capacity – not just Air Malta, but other airlines too – and even more in Summer 17/18. Tourism is set to grow. I say this with the utmost responsibility, but this year’s arrivals will exceed two million. I can guarantee this. But at the same time – and this is the pity – Air Malta has also been damaged by the fact that it is in the newspapers so much, always in a bad light...”

He breaks off to go over the mandatory disclaimers: “I’m not saying that newspapers shouldn’t talk about Air Malta; on the contrary, that is a democratic right and prerogative, and I wouldn’t dream of taking it away. But commercially, it affects Air Malta when every negative thing about tourism is associated with the national airline. And it’s not true, either. In this administration – and in others, too: the sun did not rise in March 2013 – decisions were taken which may not have been popular. But the fact that we closed the financial year with an imbalance of only €4.2 million is a source of satisfaction to me. We are not far from the turning point towards commercial viability. Some challenges remain: challenges that nobody to date has had the courage to face. We will face them.”

One of those challenges must surely be the spectre of government interference in the airline’s management...

“No, I can assure you there isn’t any.”

Not directly, perhaps; but there is evidence that indirect pressures do exist. Chairpersons are after all appointed by the government, and may feel that their hands are tied when taking politically sensitive decisions...

Zammit Lewis has been shaking his head throughout. “No, it’s the other way round. More than ever before we have reduced the headcount, and we are letting the airline take its own decisions... even when they may not make me popular as a tourism minister.  Discontinuing the Manchester route did not make me popular, because – let’s be honest – certain hoteliers rely on that sector. But as the minister responsible for both tourism and Air Malta, should I aim to please four hoteliers at such a critical moment for the company? Not if the priority is to make our national airline commercially viable. In that sense, there is no political interference...”

All the same, there has been in the past: wouldn’t it be fair to say that Air Malta is now saddled with these problems, and this is what is hindering its competitiveness?

“Historically, yes, there have been times when Air Malta admitted more staff than it needed. This needs to be addressed. But politically, it must be done in cooperation with the unions, so that the families which depend on Air Malta are safeguarded. I cannot be expected to undo in a few months what has taken a quarter of a century to accumulate. But I must also take cognisance of the workers, their families... and also the airline itself, which from its inception has always provided a living to a lot of people. This has to be considered, too.”

At what cost, however? If Air Malta goes bankrupt, those families can no longer be safeguarded anyway. And if the turnaround point can’t be reached precisely because of the size of the workforce: aren’t we in a Catch-22 situation?  

“We need to explore ways to ensure that the airline can be turned around, without causing too much upheaval. I’m not saying this merely because the Alitalia deal fell through. I don’t want to take your readers for a ride, by saying that another airline will step in and buy into Air Malta as it is.  It needs to be internally restructured first. No doubt about it. We need to look at the shape it is in, and the shape it should be in. Nobody is going to come in from the outside and clean up our mess for us. We have to do that: the management, the board of directors, the government, the employees, in cooperation to find the best way forward...”

Speaking of the ‘shape it should be in’... what is that shape, anyway? Zammit Lewis earlier said the airline falls between two stools. What model does he think should be adopted to ensure (at least) survival?

“Before answering, I must say that it is a pity we only ever discuss the negative things about Air Malta. Why do we never talk about the airline’s security record, for instance? Or the service it offers? People tell me they continue to fly Air Malta because of the quality. The problem, however, is the flight fares: how much you pay for a ticket. Because the cost-base is so high, Air Malta cannot compete with other airlines in that department. The answer has to be a reduction in the cost structure... something that no one has ever wanted to address. I see two fundamental problems: one, that a number of flawed decisions were taken in the past – and I believe there are former chairpersons and ministers who should be held responsible. Two, some of the right decisions were never taken...”

To my surprise, his first example of such a decision concerned the reduction of the in-flight meal to a bread-roll.

“On the Opposition newspapers, they measured the bread-roll, criticised the quality, and so on. But I know for a fact that the preceding administration had spent two years trying to solve that issue with the caterers, without success. How long have I been a minister? Within months, we solved it – not just me, but the whole team, the board etc – and saved the company €4 million in one year. Now: is that bread-roll of the finest quality? I think the question should really be: should we be talking about meals at all, on an hour-and-a-half flight? It is debatable. But either we are going to talk seriously about what decisions need to be taken to save Air Malta... or else criticise each and every decision we take on a political level.”

With all due respect, most people would look at the bread-roll issue as only a minor detail. We were talking about the structure and business model of Air Malta as a whole: its work practices, its current staff complement, its strategic direction as an aviation company... what model is the government pursuing?

“Fair enough, I got sidetracked. To answer your question: Air Malta can never be a low-cost airline; nor do we aspire to turn it into one. But there is a model for a quality, reliable airline that controls its cost-base. We have trimmed away a lot of the excess fat [xaham]. There was a lot of over-spending that has been eliminated.   In the IT contract, for instance, we saved a million a year. But there are also external factors. Just as I became minister, we lost the Libya route. That route alone gave us a bottom-line profit of €10 million a year. Now: I hope we will not get blamed for what happened in Libya, too. But without the loss of that single route, Air Malta would be making a profit today. If you add those €10 million to the minus €4.2 million with which we closed the year... we would have made just under €6 million.”

Libya was not the only loss, he adds. “We lost Russia, also for political reasons. Then there’s the fuel problem. We buy fuel by the US dollar, and the dollar is once again rising in value...”

All this seems to confirm that a strategic partner is indeed necessary: but that only brings us back to the present scenario. Now that the deal has fallen through, what’s the next step? Is there any truth to the rumour, for instance, that talks are already under way with either Turkish Airways, Air China or both?

Zammit Lewis refuses to go into specifics, but confirms that talks are underway to at least initiate negotiations with other strategic partners.  

“What I can say is this: we are pursuing other avenues for a partnership, but we will not sell ourselves cheap. We want a partnership that is beneficial to Air Malta. And I might add that today, though the failure of the deal may be interpreted as a failure for the government, we have proved a lot of people wrong. We disproved the suggestion, made in many newspapers, that the idea was all along to sell Air Malta to Alitalia on the cheap. Everyone can now see this is not true at all...”

Perhaps, but we can also see how difficult securing such a deal may prove; and Zammit Lewis himself has repeatedly stressed that the airline needs a strategic partnership for its survival. Does the collapse of this deal make the possibility of Air Malta going bankrupt more realistic? And if so, what other options are available?

“Not at all... in the sense that, we have never excluded other options. We do not exclude the possibility of reaching agreements with other airlines: nor even to turn to local investment, as some have suggested. But we were always cautious, because we believe that local investment, on its own, will not address all problems. But we have also worked on a stand-alone option. We don’t exclude that, either.”

Can Air Malta really stand alone, though?

“Yes, if the necessary reforms are implemented. But this has to be qualified. If we want the national airline to grow, and not just survive... then it must be part of a strategic alliance that would give us a larger network, better IT systems, more advantages in procurement. So the way I see it is: we need to work on a stand-alone option, because nobody else can clean up the sins of the past for us. It’s something we must do ourselves.  But with the right deal – and the deal has to be the right one – only a strategic partnership can give us growth.”