Air Malta – managing expectations

We should not lose sight of the prevailing financial situation of the airline, irrespective of how painful to our patriotic self this may be

Air Malta needs to play the game of commercial business if it is to consider itself as a commercial entity
Air Malta needs to play the game of commercial business if it is to consider itself as a commercial entity

This week the last new collective agreement out of a set five was finally agreed between Air Malta and its flight crew. The previous four with the other employee segments of Air Malta were negotiated more or less in an uneventful way and before 2017 came to a close. As expected – drawing from how similar negotiations unfolded at other legacy airlines, and due to Air Malta’s very own past experiences - the one with the pilots proved to be tougher to sort out; with the government – as the airline’s shareholder – leaving it until last and into the beginning of 2018. Thankfully, both sides are now in agreement, with the airline entitled contractually to an increase in flying hours from its pilot complement, and in return the pilots are contractually entitled to defined salary increases.

From an industrial relations point of view, this is accepted practice, particularly within countries which grant workers the legal right to have their interests represented by a trade union. Proudly, Malta is one of them and therefore Air Malta is no exception. Actually, being government owned, it is somehow expected that the employer respects this enshrined right without any capitalist hints of reservations.

If there is an industry which can change poles diametrically in the blink of an eye, it is the airline industry

The government was also strategically correct in seeking stability to the airline’s industrial relations during a sensitive phase. Last spring Alitalia was sent to bankruptcy once its staff rejected jobs and salary cuts. With these agreements in place, the government as shareholder, can move forward with the implementation of the hopeful business plan without unforeseen resistance. Of course, it would have made more sense had the airline sought to entrench productivity increases from the workforce without new costs added, particularly when the airline is weighed down with debts, has a weak balance sheet against which it is very difficult to finance the pending fleet renewal through discounted purchase agreements but on costlier leasing terms, and when the airline has reached a make or break point. Yet, donning the government hat for a while, the government handled it very well, not least because it treated the airline’s workforce with dignity, whilst keeping its word with the electorate of doing its best for the airline.   

From an airline business perspective on the other hand, this comprehensive business operations coverage by collective agreements is a sign that the national airline does not have the flexibility a good number of its competing peers have. In 2016 Ryanair overtook Air Malta at its own single hub on its own soil as the largest operator by passengers carried. In 2018, Ryanair will add its 5th aircraft to its Malta base from where it will operate twelve new routes. Whilst in the last quarter of 2017, Ryanair for the first time in its history, accepted to recognise pilot unions or union membership amongst flight crew, it is being cautious vis-à-vis other employee segments. More importantly, however, unions or no unions, Ryanair’s leaping growth to one of Europe’s largest, has been partially due to the airline being in a dominant position vis-à-vis its crews.

Furthermore, unconventionally (back then) it sourced crews by tapping into external flight and cabin crew pools. Other low cost carriers (LCCs) followed in its footsteps, and such a number is on the increase. Of concern - Ryanair apart - these airlines also compete with Air Malta in and out of Malta, increasing their operations year on year. Indeed, the exceptional growth witnessed by Malta International Airport over the past two years can be fairly attributed to new or existing LCCs operations, with Ryanair registering an increase of more than half a million passengers in 2016 over 2015. Over the same period, Air Malta carried around 100,000 passengers less.

Emirates, operating daily in and out of KM turf, registered a little less than USD 1 billion profit in one of its lacklustre years (2016-2017). In no way is it to be considered as part of the low cost family, or lacking a polished service, or even an unsafe airline, yet its workforce is non-unionised. In the first part of the last decade, Air Malta competed with Emirates on the Malta-Dubai route but later discontinued the service due to financial reasons and an onboard service which was far from competitive. Like Emirates, a number of highly profitable leading airlines worldwide do not have unionised staff in the Western sense, or else they are not unionised at all.

Ironically, whilst the new collective agreements were projected as crucial for the airline to put its financials in order and to embark on a new growth phase, in the light of the unfolding airline industry scenario they may have actually weighed the airline down. The airline is now committed to honour the agreed salary increases for the next five years when its future is not yet certain. Just relieved from executing an EU Commission-approved restructuring plan over the past years, the airline is yet to experiment with a new growth strategy.

Five years is also a long period in the aviation industry, with the standard duration being three. And in the cut-throat airline industry of today where yields are wafer thin, more so in liberalised Europe, where most of Air Malta’s markets lie, profitability is far from certain. This is further compounded when Air Malta’s main customer base is a price-sensitive one, with the airline suffering an increasing encroachment on its routes by aggressive, more nimble and far better capitalised competitors, and with a productive capacity much larger than Air Malta’s. I must add, and with a more flexible workforce.

For the year 2017/2018, the shareholder report announced in the most categorical way that Air Malta will break even. Whilst I augur this will be the case, I would have exercised caution in the interests of the airline itself. I have even drawn the attention of a local media channel which announced the forecast in this way, having provided myself a suggestion of “...is expected to break even”; only to be completely disregarded.

The expectations from its workforce and from the Maltese taxpayer need not be raised too high at this stage

If there is an industry which can change poles diametrically in the blink of an eye, it is the airline industry. We do not know whether a disease outbreak, or a sudden and prolonged climate issue, or the materialisation of brewing global political risks, are in the pipeline, disrupting the current booming travel trends in a matter of days. Those in the industry know well that our greatest nemesis in the airline macro environment is volatility, which in itself prevents us from being categorical at all when treating the future.

Honouring collective agreements over the next five years sustainably has compounded the onus in no uncertain terms of profitability. It has been reported that Air Malta needs to increase its revenue by a further EUR 100 million to meet its committed salary increases of EUR 16 million. Whether through an increase of revenue, or through the pursuit of more ‘quality’ revenue, what matters most for the viability of the airline is profitability.

Air Malta needs to play the game of commercial business if it is to consider itself as a commercial entity. This requires operating profitably in order to survive. Without profits, there will be no money to invest. Without investment, an airline loses the ability to make money. Air Malta is not a charitable organisation or a government department; it is a player in the commercial arena. If it does not play the same game, its competitors will decimate it. And its competitors won’t forgive it for its multiplier-effect benevolence to the Maltese economy, or for the career progressions or opportunities it may have bound itself to provide. Within the present regulatory framework and the commercial realities of today’s industry, Air Malta has reached a juncture where its sole lifebuoy is profit. Once that is not achieved and sustained, the airline is gone.

It is within this context that the viability of Air Malta may very well depend on managing expectations well. The expectations from its workforce and from the Maltese taxpayer need not be raised too high at this stage. This is not about negativity, or not wishing well to our flag carrier and its workforce, but about not weighing and harming it unnecessarily.

The collective agreements in place do inject industrial relations stability but do not automatically mean black ink either. We should not lose sight of the prevailing financial situation of the airline, irrespective of how painful to our patriotic self this may be. The airline business is ruthless and in no way emotional; managing expectations is key.     

  

Clive Aquilina Spagnol is a commercial aviation executive working in the Middle East. He has also been engaged in airline management with carriers in the region and Asia. He also served as Head Air Transport Regulation at the Malta Civil Aviation Directorate

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