Cost-cutting requires ‘simultaneous revenue generation’, former Air Malta CEO

Air Malta's last chief executive before the airline was put up for an ambitious restructuring plan that will shed 511 employees, said cost-cutting alone will not save the airline from collapse and that it required simultaneous revenue generation efforts.

Cappello was appointed CEO in 2006 after replacing Ernst Funk, who had been there for three years. He was put on forced leave after 34 years’ service in December 2010, soon after Ernst & Young consultants took over the restructuring of the airline.

Cappello said it remains to be seen whether Air Malta will be rationalising routes or maximising its asset utilisation. “The biggest cost-driver that an airline company has is its network. Direct operating costs are all driven by its network, meaning that cost-savings will be directly affected by how the network is run.”

He said that in the past Air Malta had often operated routes which "had tourist value but not commercial value" and said the restructuring plan should take into account the ‘seasonality’ of Air Malta’s traffic.

“The fleet is what it is,” Cappello said of Air Malta's 12 aircraft. “Nothing was said about this in the leaks, but I am sure it goes into such aspects in detail.”

With a fleet of 10 aircraft, the report says that the number of pilots and cabin crew employed by the airline should be reduced. Flying pilots would go down to 88 from 143, while the number of management pilots should go down to four from the curent six - savings of up top €3 million and a further €2 million from cutting cabin crew from 215 down to 162.

According to the leaked report, Air Malta will make €2 milliom savings in reducing employees stationed abroad from the current complement of 58 to 17; apart from cutting administration employees from 198 to 103, and commercial falling to 60 from 114. Costs per flight must be cut to €750 from €1,200. And outsourcing of ground handling will lead to savings of €9 million but concurrently a loss in revenue of €5 million. This would also mean reducing ground handing by 190 to 250 employees.

Cappello has expressed surprise as to the “accuracy” of the number of workers, 511, that the restructuring report requires the airline to shed. “During my time as chairman, we carried out a number of exercises to attempt to reduce the workforce and determined general numbers, but to present such a ‘specific’ figure is surprising.”

Referring to the leak of an early draft of the restructuring report in The Times on Sunday, Cappello expressed surprise at the degree of commercially-sensitive information revealed. “No business appreciates such details being leaked, such as the prices it is contemplating. If I had been still there, I wouldn’t have liked seeing it being made public at all. It is ammunition to Air Malta’s competitors.”

He added that the fact that the reports only ‘outed’ elected excerpts of the draft document “did not help the company either”. The same document referred to former management being lax and not adapting to changing realities.

“The company was always proactive in what it could do and what options it developed in recent years,” Cappello said, refuting the criticism. “We invested in sophisticated methods of revenue management by bringing SABRE on board as a consultative entity on board to assist in setting prices. We had good people in marketing and sales doing what they could.”

Cappello agreed with appeals voiced by the airline's pilots that the restructuring process should re-examine all of Air Malta’s contracts. "One needs to see what conditions the contracts were drawn up under. Every contract made during my time passed through cost-reduction systems and levels of management. But they were made under different conditions,” Cappello said. “Circumstances can change, so it needs to be seen what can be done within the scope of the contracts. It is something that has to be done.”

The assumptions and forecasts Air Malta makes for the near future will also be instrumental for survival. Of particular significance will be the competition from low-cost aviation. “Some agreements that government has with low cost airlines will soon expire. What action will Air Malta take regarding the relevant routes over the coming years?”

He said Air Malta will need to forecast fuel prices hedge on fuel prices for the coming years. “It will also be interesting to see what assumptions the airline will make on currency fluctuations, and what rates of exchange it will offer.”