Air Malta | Reform to 'leave no stone unturned' as EU approves €52m loan

Speaking about the impending restructuring plan that needs to be presented to the European Commission by the very start of next year (2011), Finance Minister Tonio Fenech said that the only way to ensure long-term viability for the company is to contemplate changes “from top to bottom.”

He emphasised that the situation calls for drastic and holistic changes that will revamp the carrier entirely and that the crisis the carrier finds itself today means that the revamp will not be a case of ‘pick and mix’ reforms.

“If there are ten recommendations, all ten must be implemented, and not just some of them, if the company is to remain viable,” Fenech maintained.

During his address, Fenech referred to various reports and speculation on Air Malta’s financial position, saying that these speculations often do not help the line to find a way to sustain its operations.“Caution in discussions is important so that what happens keeps on ensuring that it has a position where it keeps servicing the country.”

Fenech said that in the eyes of government, Air Malta is very different from any other private company or enterprise because of its relevance that goes beyond its mere interests but deal with strategic importance for the country – not just tourism – but also industry, financial services, and the economy in general.

Fenech affirmed that while everyone is committed to ensure the greatest viability to the carrier. “We need to understanding that what we can do as a country is within existing regulations of the EU’s aviation sector framework.”

He affirmed that government “cannot simply step in to help without recognizing certain regulatory parameters.”

Fenech also emphasised how government has not “’woken up’ now and is trying to find solutions – in reality this is not the first attempt to bring back the carrier into sustainability.”

He referred to the 2004 restructuring process, adding that this had results that extended the carrier’s lifetime. Fenech said that “we need to recognize that even in that reform a number of sacrifices were asked of works and these were done.”

Nevertheless, Fenech pointed out that the reality is that the way the aviation market developed, the advantage gained in the restructuring, “external factors brought the carrier back into crisis situation and now facing losses.”

Fenech said that the government is today discussing the loan to the national carrier “so that over the next six months, it can keep operating as long as government presents the EU with a restructuring process by the start of 2011. Once approved, the assistance provided today will be permanent as part of the restructuring process.”

Fenech said that the current prospect was the government’s “last resort” that was preferably avoided. Fenech referred once to the failure of the 2004 reforms to address the situation, scuppered further “number of international events that complicated the aviation sector - not only for Air Malta.”

Fenech affirmed that many airlines around the world – especially in the EU – also faced similar troubles. “Even what are known as ‘legacy carriers’ have not had an easy time,” Fenech said. “The market is not what it was years ago.”

He pointed to events such as the  9/11 terrorist attacks, the hikes in the price of oils, the international crisis and subsequent recession, the instability of the UK’s sterling, as well as the competition in EU markets by Low Cost Carriers. “All these came together to create huge difficulties for airline carriers around the EU and their effective operation – due to the cost structures these possess.”

The EU market seems to be hardest hit, particularly by shorter-haul low cost flights that form an integral part of the European market, Fenech said.

Fenech also said how consumers will have new expectations of how much they are willing to pay. “These mean that EU consumer perceptions are of far lower costs for flights and this of course impacts how much the national carrier can expect to charge.”

“Air Malta is not competition in an easy market – especially considering the size of the air lines and what is happening on an international level,” Fenech emphasised.

Fenech quoted the Association of European Airlines (AEA) who said that “dimensions of this downturn are unprecedented,” and that “we will not return to normal again.” He also pointed out how the AEA noted that “consumers are changing their expectations and this will continue. What we are facing today is not a cyclical, but an upheaval.”

Fenech said that now, consumers will want holidays that give best value for money and the LLCs invariably provide far cheaper flights that lead to natural consequences of consumers going to other counties.  “The country could not afford to not find the space to allow the operation of LCCs for Malta to remain competitive as a touristic destination.”

He emphasised how “what is occurring in the greater market cannot be escaped – it’s a reality that needs to be faced.”

“To have a sustainable national airline carrier with a place in the European market, Air Malta needs to look at the way it operates from the ground up to see how to increase efficiency, revenue, and re-evaluate the carrier’s role in the market,” Fenech maintained.

Fenech spoke of the government’s proposal at the end of 2009 to buy eight planes from the 12 Air Malta was leasing, in order to help with the liquidity of the company, improving its profit and loss by roughly 7 million.

This would have meant a 100 million increase capital so that it could invest in these eight planes. The discussions considered the potential capital injection both as government as a private investor, or as part of state aid.

Fenech said how after long discussions, the Commission’s conclusion was that the capital injection would not be enough. The EC maintained that no logical investor would have invested in a failing company, emphasising that for state aid to be warranted, a restructuring plan would be required.

Essentially, the situation allowed for rescue and restructuring aid, but within the EU’s framework, but not for the purchase of planes, Fenech said.

“In these extraordinary circumstances, the government has no option but to go to people who are tried and tested in this sector on an international basis,” Fenech said.  “This is not a situation that allows for ‘experimentation’.”

Fenech maintained that the consequences of Air Malta failing in a proper restructuring are “serious”.

“The EU’s rules are clear in that rescue and restructuring can be given only once every 10 years. If it fails in that period the government will not be able to intervene once more, with the logical conclusion that the carrier would fold,” he said.

He explained that the restructuring team has started work three weeks ago, led by Allan Hudson, a and consultant named Robert Palmer

Fenech said the work the team is covering includes an analysis of the routes Air Malta covers, the accessibility these offer (in terms of flight times and frequency), the facilities Air Malta offers passengers in airports, and its entire product package.

The team is also looking at ways to increase the company’s revenue stream.

Fenech maintained that “restructuring is not simply an issue of cost reduction, because this does not address the ‘loss’ gap. Air Malta also needs to expand on revenue and how this is generated.”

Fenech also said the restructuring would also look at employees across at all levels. “The Commission is demanding measures that are ‘doable’ from this very moment and expecting these decisions to be made now.”

Same as decisions are already being made, Fenech added, amongst which being evaluations of operations, including present contracts.

However, Fenech maintained that, despite what he referred to as misleading and speculative media reports, the government has finalised no plan on how the restructuring would take place as yet – effectively denying the position that Air Malta has to shed 1000 workers to remain viable.

Fenech explained that while the 100 million proposal was tied to an investment to purchase planes. “While the EC considered that proposal, the EC’s conclusion was that the government should go for a restructuring process supported by state aid.”

“What is being proposed now is that not more than 52 million are put at Air Malta’s disposal for the next six months at commercial and pre-determined loan rates,” Fenech said.

“The restructuring plan that would follow within the next six months is what will bring viability to the carrier,” he augured.