Air Malta forecasts €130 million in COVID-19 losses

Government sources privy to the airline’s financial situation say they forecast a gradual return to business in 2021 

Air Malta is bracing itself for maximum damage from the COVID-19 outbreak, as grounded aircraft and a zero-revenue situation will mean it will suffer well over €130 million in losses by the start of the summer season. 

The scale of losses represents the greatest challenge the national airline will face, with government sources privy to the financial situation inside Air Malta saying they forecast a gradual return to business in 2021. 

Until then, the pandemic will keep Air Malta’s aircraft grounded, costing it some €30 million just in ticket refunds. Another €100 million will be direct losses from COVID-19 costs. 

Apart from its troubles with the unions, notably cabin crew and pilots who refused pay cuts and forced the airline to forge ahead with redundancies, Air Malta will be seeing budgeted revenues fall by over €180 million in 2020, three-quarters of which represents its summer business. 

“It’s devastating. The airline will transition from its breakeven position into massive losses, not counting certain costs associated with third-party contracts, pending salaries and taxes, and other ancillary costs on fuel,” said the government source with knowledge of the airline’s predicament. 

But Air Malta is also hoping it will weather the COVID-19 thunderstorm with a raft of unprecedented reforms inside the airline that it was previously unable to do so. 

The airline went on the warpath with the Airline Pilots Association (ALPA) when union representatives refused to meet Air Malta to discuss a €1,200 monthly salary offer while all aircraft was grounded. The airline called the union’s bluff by forging ahead with the redundancies of 108 pilots out of a workforce of 139. Similar cuts took place with cabin crew personnel, after the UCC refused the €1,200 salary, with personnel on definite contracts claiming union representatives were fighting their patch to preserve higher salaries for crew on indefinite contracts. 

“The management has the upper hand in as many years. The crisis affects all of Air Malta’s competitors equally, in a certain sense, but allows the airline to rebalance itself and then scale up once the clouds of this pandemic clear up,” the government source said. 

Credit rating agency Fitch yesterday Malta’s real GDP will contract by 5.9% in 2020, a more austere outlook than a recent IMF prediction, reflecting the health crisis shock to the global economy and tourism, coupled with the government’s containment measures, and a stop on consumer spending. 

With shuttered airports and grounded airliners, tourism will sharply contract with hotel occupancy in 2020 to be close to 50% of 2019 levels, with the remaining sectors dependent on tourism to be harshly affected as well. All this could go further south if the pandemic’s effects linger for longer than expected and affects Malta’s trading partners. 

“The government has responded swiftly to health risks associated with coronavirus. The authorities mobilised the healthcare system and implemented comprehensive containment and mitigation measures, including full suspension of inbound flights, social distancing and closure of non-essential shops and services and the lockdown of vulnerable pockets of population,” Fitch said. 

On the positive side, the pandemic’s impact will be partially softened by government relief measures of €120 million in direct spending, €700 million in tax deferrals and loan guarantees of €900 million. Other wage subsidies will cost €61 million. 

Fitch estimates the general government balance to deteriorate to a deficit of 8.2% of GDP in 2020, from a surplus of 0.8% in 2019, based on the operation of automatic stabilisers and the direct budget impact of close to €600 million (4.5% of GDP) from the government measures. Lower spending and a rebound in economic activity would partly shrink the deficit in 2021 to 5% of GDP. 

Debt could increase to 55.7% of GDP in 2020, from an estimated 43.4% in 2019. The authorities estimate up to €2 billion (15.1% of 2019 GDP) will be borrowed in 2020, in line with Fitch’s expectations. Malta already has €379 million in cash buffers that will be partly used to help finance the large deficit. 

“The extent of the increase in public borrowing this year, and the pace at which it will unwind, remains uncertain, and crucially depends on the time it will take for economic activity to return to pre-pandemic levels. While Malta is likely to emerge from this crisis with a higher level of public debt, its recent track record of sound fiscal performance, including consecutive fiscal surpluses between 2016 and 2019, means it is better prepared than some of its peers to face the challenges in consolidating public finances over the medium-term,” Fitch said. 

“We expect the labour market will deteriorate markedly this year, with the unemployment rate set to increase to 6.1% in 2020 from 3.4% in 2019, before edging down to 5.1% in 2021. This would match the level from 2013 but would come short of the maximum registered during the global financial crisis in 2009 at 6.9%. We see upside risks to these projections given that the accommodation and food services employ a large share of foreign labour.” 

In spite of the external shock, Fitch projects Malta to maintain a current account surplus of 2.9% of GDP in 2020, albeit markedly down from 2019 (8.1%), as the contraction in imports would not be sufficient to offset the weaker service exports. Nevertheless, Malta has one of the largest net international investment positions in the EU, estimated at 62.7% of GDP at end-2019 and this is expected to continue increasing in the coming years.