The half-million euro man | Peter Davies

Peter Davies flew in to Malta to find an oversized national carrier in need of urgent surgery. Now he says he is confident he can manage a turnaround by 2016.

Air Malta CEO Peter Davies
Air Malta CEO Peter Davies

Expectations for the British chief executive head-hunted to carve up the national airline into a smaller, profit-making outfit were set high when Minister of Finance Tonio Fenech privately declared he was not employing the proverbial Maltese cuc to put Air Malta back on its feet.

With a salary package of €350,000 and an additional €150,000 performance bonus, Davies had come to Malta with a mission to effect the necessary changes the European Commission was demanding if Air Malta was to be allowed a €130 million state-aid injection.

The jingoists disapproved: Davies's heartstrings were not tied to the much-loved airline, though bloated as she was by decades of surplus employment dished out by ministerial blessing. Three weeks after I interview Davies, which was when the European Commission had just outlined the details of the airline's restructuring plan, stories of soured relationships with the tourism industry are being leaked to the press. Davies allegedly thinks of Air Malta to be a 'crap' airline, which to give him the benefit of the doubt is perhaps saying it's not yet as good as it can possibly be after he's done with it. The tourism industry speaks of frayed communication lines with the boutique hotelier (Davies's other project is a 15-room cottage hotel in Dartmoor).

It is only at the end of our encounter at Air Malta's soon-to-be-sold headquarters (which will yield €66 million for the airline by selling it back to the government) that I ask Davies why even people like Tourism Minister Mario De Marco and the Malta Tourism Association's chief executive Joseph Formosa Gauci are complaining of communication problems with Air Malta.

"All I can say, from my point of view, is that we meet the MTA and the minister on a regular basis. Philip [Saunders - chief commercial officer) sits on the MTA board and attends its meetings," a towering Davies says.

But surely there must be a problem if de Marco and Formosa Gauci actually state it on television, then it's nothing short of a fair and true assessment of the state of relations between the two sides.

"I don't know... whenever I met the minister it's always been a good conversation. You have to ask him, I'm afraid... I don't understand that statement. From my point of view, we have a good relationship, we're proactive, we understand MTA's huge influence on tourism here and we have a huge influence since we bring the people in. For us not to be working together would be crazy.

"I don't know where that is coming from... maybe he's been misquoted."

He hasn't been misquoted, and as I gather from other members in the industry, Davies and Saunders are viewed as clinical technicians who, quite understandably, are not attuned to the same 'holistic' vision that the other players in the industry have. Their terms of reference are only Air Malta's after all.

Davies's answer still does not sound as convincing a denial as one might expect. Unsurprisingly enough, a week after speaking to Davies, the airline will issue a terse, three-paragraph non-news statement outlining a "cordial" meeting with the Malta Hotels and Restaurants Association; to be embarrassingly followed up the week after by a revelation by Labour's online portal, that MHRA president Tony Zahra actually walked out of a meeting with Davies, whose scatological reference to the national airline must have hurt some ears, while Air Malta chairman Louis Farrugia had to make his apologies for the blunt Englishman and bring Zahra's delegation back for talks.

Davies is probably less interested in playing nice, having to carry out the anaesthetic-free surgery Air Malta needs. Which is the kind of sentiment he conveys when I ask him how he justifies the salary that effectively makes him the highest-paid executive employed by the government - Air Malta's main shareholder.

"You know what I earn, and you also know I do pay tax," Davies says in a wry reference to reports that his salary was tax-free. "I changed the fuel-hedging policy when I came here. There was this policy which I disagreed with, and I changed it. As a result of that decision, we have saved the company the amount of around €3.5 million," Davies points out, by way of illustrating whether the airline is getting its value for money.

 "So I think I have justified my salary on that one decision... I don't have to justify my salary, but you asked a fair question, and yes, I have to look at myself in the mirror sometimes and ask whether I'm really worth it. Could have someone else have taken that decision? They could have, but they didn't. I did. I feel comfortable that I am covering my costs," Davies says.

With Davies came other of his trusted men and women, artists in the airline turnaround business. Among them was Philip Saunders, who had followed Davies at BWIA in its rebrand to Caribbean Airlines and upon recent reports, left it in better shape than he found it, even though the sale of the airline's slots at Heathrow are allegedly under inquiry by the Trinidad and Tobago government.

But why did Davies need an international fleet of chief officers to carry out his job at Air Malta?

"Clearly, we have to work on the restructuring to get the approval we need from the European Commission, and there is a lot that needs to be done in terms of organisation. We had to compress that in the shortest time possible so I had to bring in people who could hit the road running, who had the expertise and knowledge of airline turnarounds from all parts of the world, and who had the experience of understanding such issues and bring about change.

"Secondly, we had to do this in conjunction with people already working for the company. If we did it in isolation, we would never pass any of our experience on. One of the significant objectives is that what expertise we have, we pass on that knowledge through our training programmes.

"So it was all down to the speed of making the changes. And we haven't got much time to bring about change."

Indeed, Davies's mission is to bring profitability to Air Malta by 2016 but that will be accompanied by a massive downsizing of 600 employees, two less aircraft, new work practices, renegotiated third-party contracts, as well as the loss of some profitable routes as compensatory measures to receive €130 million in 'one-time-only' state aid. The verdict of the European Commission so far has not been encouraging - Brussels has its doubts on the success of the measures taken and whether they will satisfy the EU's state aid rules (which demand that companies that get state aid must cede part of their market share as compensation).

But we are already speaking in the past tense, since Air Malta has already responded to the Commission's 'doubts' and it's now up to the maths to prove Brussels wrong. As Davies tells me, the Commission's 'investigation' into Air Malta's restructuring is a dialogue between the two sides that is not as adversarial as it sounds.

"The EC will always question whether those figures are incorrect or not, and it's a fair position to be in. We feel confident that we have answered those questions well, because we have submitted additional documentation which indicates the figures we want to achieve, are exactly on track. We are in the process of showing them the key indicators of this progress, and they will understand what we are trying to achieve."

Davies counters statements in the EC's investigation that question whether the restructuring plan's "optimistic forecasts on long-term viability are realistic to achieve" and even whether Air Malta's reduction in routes will be enough to satisfy EU state aid rules.

"We have already answered to them, saying we don't think they are too optimistic, otherwise we wouldn't have put forward such figures. Like anything else in life, we have to justify what to say, and they want further evidence from us to justify our position."

One of the main changes in Air Malta's core business will be the creation of a more cost-effective schedule. Gone are loss-making routes that flew to Leipzig, Tunis, Palermo and Turin. Damascus, a suspicious decision that came from a zealous international relations strategy inside government, was also dumped.

But Air Malta will also have to reduce capacity on certain profit-making routes as well, which is why this will release slots in foreign airports and even grandfather rights the airline has on current slots. According to the proposed restructuring plan, by 2013 Air Malta would even release slots in London Heathrow and Gatwick. Peter Davies however is adamant to state that no slots will be sold.

"We have no intention of reducing our slots in Heathrow or Gatwick or indeed any other important. The EC's document has been around for some time... reducing seat capacity was a prerequisite to get approval for State aid, and so we had to decide what routes to take out."

In this case, slots at coordinated airports - where slots are allocated by a coordinator under EU rules - will be released back to the pool.

"The majority of slots we were already contemplating have already been released and no financial transaction was involved in that action... while the report says we're going to do this, we've already done it because I felt we would have been in a financially worse-off position hadn't we done it."

Davies insists that Air Malta's six-monthly figures from September 2011 through to 2012 are tracking much better than the 2010-2012 period (in the year ended March 2011, the Air Malta group reported a €34 million loss, 57% over the past year).

Air Malta's summer schedule now reflects the changes the airline has made, to coincide with the reduction in seat capacity the European Commission has asked for if state aid should be granted.

But it's quite an opportunity cost for the Maltese public itself, having been used to a national airline that caters for the demands of the country as and when it sees fit, that now must cut some of its competitive edge if it is to fulfil EU rules for state aid and survive. Is that the right way to describe the situation?

"State aid is not allowed to distort the market, so Air Malta should not have any more privileges than anyone else in flying certain routes. We made a decision on what routes to fly and those we didn't want. If there is a market opportunity for someone else to take up that route, I don't have a problem with that. Competition does not worry me in that sense. The marketplace will find a natural balance."

But it will mean a diminished market presence for Air Malta.

"Our market share has gone down but this has happened in every country where low-cost happened. However, as a result of low-cost, the actual number of people flying has increase and that means that the market has grown in absolute terms. So even companies like Air Malta can take advantage of this fact alone. What we are doing positively, which was not done in the past, is to react to this change."

Davies comments that playing catch-up, especially given his three-year quest to achieve profitability, means having to accelerate the process.

When I ask him whether he was surprised at the state of Air Malta when he took up the job, Davies points out that the situation was not unlike many other oversized state-owned airlines.

"If you look at Europe, low-cost has been there for many years and many of the legacy airlines have had a lot of time to adjust. Low-cost's history in Malta is much shorter, so the adjustment has to be compressed and that does take its toll in creating change in the company. I would say it is more a question of adaptability and the speed of change than anything else.

"We're playing catch-up and accelerating that change so when the expats leave, they will hand it over to the Maltese."

That is expected to be in 2015, when Air Malta will be turned into a "hybrid carrier", having combined the style of low-cost carriers (charging for ancillary services, for example) and improving pricing and revenue generation, supposedly a 'legacy carrier technique'. So is Air Malta going down the Ryanair way?

"Well, I'm a simple airline man," Davies says. "Whether it's a hybrid, legacy or low-cost airline, what I know is that the values of Air Malta must represent the values of the country.

"We have a responsibility to bring in as many people, tourists, businesspeople and industrialists as possible, safely and on time and at a profit for Air Malta. We're asking the customer what their expectations are, and reflect that through the generation of more revenue.

"Their expectations are to get good value for money. Whether it is through a perceived 'cheap fare' I don't know... but what customers don't expect is to be ripped off."

Oooooooooooooooh! 2016 ........ at €500.000/year that sums up to a cool €2 million plus the €1 million already pocketed. Could easyily provide a good pension for a number of people or build a couple of old age homes. I bet that should gonzipn be returned to power the turn around would be extended by a further 4 or five years.