Time is running out for Air Malta

Prime Minister Joseph Muscat recently gave the clearest indication yet that not all is rosy in the ongoing negotiations with Alitalia regarding a future merger with Air Malta. 

Alitalia forms part of the satellite of airlines owned by Abu Dhabi based airline Etihad Airways, which has been in advanced talks with government over an equity investment in the ailing Air Malta since November 2015.

The acquisition comes at an important juncture for Air Malta, where low cost giant Ryanair is close to taking the majority market share of the incoming passenger market to Malta. This prompted the Malta Hotels and Restaurants Association to sound the alarm over the potential loss of a critical strategic asset for the tourism sector (and also, it must be said, for the country as a whole).

“This is our national airline,” MHRA president Tony Zahra said. “It is what we have, and we must safeguard it.”

Zahra is not alone in expressing this statement. There is widespread consensus on the strategic importance of the national airline. But so many years later, its future does not seem more secure. Air Malta has been undergoing a restructuring process costing some €230 million ever since it was given the green light for state aid under strict European Commission rules. Targets for a financial turnaround have been missed on more than one occasion. Now in its fifth year of the restructuring plan, the company was supposed to break even and return to profitability by 2016, 

Meanwhile, the negotiations with Alitalia appear to have hit a snag. A business plan that was supposed to be complete by the end of August has not materialised. Muscat himself has now confirmed that he would pull out of negotiations, and consider ‘other alternatives’, if the agreement proves disadvantageous to Malta. 

The Prime Minister is right to hold out for a deal which is more beneficial for Air Malta: especially if the Alitalia agreement would have reduced Air Malta to the status of a feeder airline: i.e., a regional airline, which carries passengers from destinations not served by large carriers to hub airports. There is unanimous political consensus that this would be far from an ideal situation for Air Malta.

Whatever the final decision it is of critical importance that Malta remains well-connected to major airports: especially in Europe, whence so much of our tourism originates; and that the possibility of extending flights to North Africa and the Middle East does not come at the expense of affordable accessibility to Europe.

But it is debatable whether Muscat’s concern is motivated by these or similar factors. The unspoken truth about the national airline is that any agreement would almost certainly envisage downsizing the workforce. Coming before an election, this could explain Muscat’s desire to delay the decision. 

Sadly, however, time is not Muscat’s ally on this issue. Prolonged uncertainty about the fate of the airline could conceivably destabilise the economy, since Air Malta is vital for many local businesses.

 However, given that Air Malta’s ailing financial situation is in part due to its bloated workforce, some downsizing is inevitable... even if a beneficial strategic partnership is struck with another airline.

One must also consider all alternative solutions, not just different strategic partners. Nationalisation or local investment may sound attractive, though the former would be a hard-sell with the European Commission. But the most vital step is to have an airline which is no longer an electoral tool in the hands of parties. If Air Malta was allowed to become so unmanageable in the first place, it is because more consideration was given to political rather than economic issues.

Apart from stemming a financial haemorrhage the ultimate goal should also be an airline management that is fully independent of political influence.

One model which could be looked into is BOV, where government reduced its stake in to 25% by issuing and offering shares to the public, and a foreign bank (Unicredit) which has a 14% stake. The Nationalist Opposition has in the past proposed selling the airline’s shares, while suggesting that local investors should contribute to improve the airline’s situation. The present government has not ruled out the latter option.

But this could be problematic, since financial advisers have said that Air Malta could not be floated on the stock exchange due to its financial predicament. Air Malta posted a loss of €16.4 million for the year ending March 2015, and was set to reduce its losses to €4 million by 2016. In its present plight, Air Malta cannot even qualify for a listing of its shares on the stock exchange. 

Moreover, Muscat has also warned that a financial injection into the airline would not be enough to make Air Malta competitive enough to fight the much bigger international airlines. “Air Malta needs to find a way to tap into the international markets and this can only be achieved through a strategic partner,” the Prime Minister said.

If the Alitalia deal falls through, the question will become: can a change of strategic partner achieve the desired turnaround? And at what cost?

It is a question that must be faced sooner rather than later.