Air Malta | A deja’ vu in the making

Tomorrow, Finance Minister Tonio Fenech will ask Parliament to approve an emergency loan in a bid to save Air Malta from imminent collapse, as the airline estimated losses for 2010 – revealed by MaltaToday last Wednesday – are expected to reach an unprecedented €50 million: €12 million of which incurred on the peak summer routes alone.

Hundreds of the current 1,400 workforce may face the axe in a bid to keep the airline afloat, and it is now a race against time for a workable restructuring plan to be put into place.

Prime Minister Lawrence Gonzi recently admitted that Air Malta’s restructuring should have been “more aggressive” over the last five years. But this statement may well prove to be somewhat late in the day.

Too little, too late?

In 2006, a confidential PricewaterhouseCoopers report on Air Malta – commissioned by the government, and presented to Gonzi and Minister Austin Gatt – painted a devastatingly negative scenario for the airline, warning government about the ‘high risk’ of dominance by low cost carriers (LCC’s) on Malta.

According to the 2006 report, PwC had warned that Air Malta stood to lose €50 million by around this time, should LCC’s be granted “commercial influence far higher than that ever enjoyed by the largest tour operator”.

The report also shot down the prospect of a discounted passenger handling cost for LCC’s, branding any such volume discount scheme “dangerous.”

It warned that this “would create and entrench a dominant market player which would be able to maximise aircraft utilisation and its own profitability,” adding that it would be “wrong public policy, and possibly illegal” to give discriminatory treatment in favour of an LCC.

Four years on, LCC’s have become a reality and PwC’s predictions have returned to haunt the present administration.

Market dominance

While LCC market share has this year increased to 30%, Ryanair alone holds a 20% share of capacity to Malta, and may today be considered to enjoy a dominant position.

It can lay down its own terms and conditions, and like any other commercial company it aims only to maximise return on its shareholders’ investments. Malta, an island with one single airport and tourism a main pillar of its economy, has proved to be an amenable client.

Being an island, Malta needs a reliable airlink more than a mainland country. But while Air Malta has so far retained a share in excess of 50%, the ever growing LCC market is tipping the scales of Malta’s economy.

In the 34 years of Air Malta’s operations, there has never been a situation where a single airline, apart from the national carrier, held 20% of the market.

In four years, the growing reality of LCC’s has turned Air Malta’s concerns from costs to revenue, and this is where the real problem lies.

This year’s budget has allocated a record €35 million to the Malta Tourism Authority – the singular increase of €4.5 million will be allocated to route development, which LCC’s benefit from to service Malta.

That leaves other legacy airlines like Air Malta fuming over the competitive pricing of LCC’s.

Air Malta says it is looking into how aircraft can be deployed in the most cost-effective way. “The global aviation industry – in these turbulent times – is always looking at optimising its fleet. It is normal business to have route-by-route strategy… Air Malta is looking at existing routes and at possible new routes to ensure maximum return for Air Malta at these difficult times,” a spokesperson for the airline said when asked about the announced reduced UK flights that have fallen victim to the price battle with LCC’s.

Speaking to MaltaToday recently, a UK-based tour operator said that leaving room for Ryanair to capitalise on reduced capacity, actually “encourages them to demand more subsidies.”

“The subsidies to LCCs are enough to operate a flight at a profit, even if seats aren’t charged at all. What I don’t understand is how an organisation like Air Malta, so profitable just five years ago, fails to turn a profit over the summer.”

‘No real strategy’

The available data shows Air Malta operated at 78% of capacity on average flights while other airlines reached well over 80%. Would reserving the additional 20% of seats to tour operators change things?

“As things stand today, as tour operators we pay the same price for a seat as anyone else trying to book one. The airline is trying to be too many things – British Airways, a low cost airline, a national airline and a tour operator all at once, simply because government has no real strategy for Air Malta” the tour operator says.

With hindsight, PwC was correct to predict a calculation whereby “Air Malta would have sustained an aggressive attack on its market share on flights to Luton and Stanstead, and in a more ominous prediction, withdraw from operating loss-making routes to Ireland, Sweden, Norway, Spain and Portugal. Charter withdrawals would be expected on routes such as Turin, Hamburg and Marseilles.”

But could Air Malta ever benefit from EU-approved route development funds?

Speaking to MaltaToday Air Malta Chief Executive Joe Cappello replies with a categoric ‘no’.

“How could a national airline with established routes to main airports ever qualify for these funds?” he asks, adding that it would never make any commercial sense to go for other smaller airports around London, when the airline already services Heathrow and Gatwick.

“It would be outright madness for Air Malta to shut down Gatwick, operate from Stanstead instead and claim it to be a new route,” he said.

So Air Malta’s 11 fleet serves 40 destinations around Europe, North Africa and the Middle East; but its main headache is the LCC’s penetration of airports around European capitals and main cities.

Pressured by lobby-groups

In the absence of a national strategy on tourism, the Malta Tourism Authority, strongly influenced by hoteliers, continues to open up to LCC’s who continuously request new routes. Liverpool is a new route, but is only 30 miles away from Air Malta-operated Manchester. Trapani in Sicily is just a few miles from Palermo, another established Air Malta route; not to mention Luton, when Air Malta operates from Heathrow and Gatwick.

All this was predicted in the PwC report in 2006: shelved by a government under pressure from a powerful private-sector lobby, that pursued numbers and beds in the absence of a clear national strategy for tourism.

In 2006, MHRA was adamant with government to grant Ryanair a base, and scare-mongered on the “period of decline” the tourism industry was certain to face.

While the PwC report was ignored, Air Malta continued to struggle through the oil crisis that cost the airline €30 million in losses alone last year, and worse, government interference.

Government interference

Every Chairman since Air Malta was set up in 1974 insists on the perpetual disease that has plagued the airline.

From Bertie Mizzi to Joe N. Tabone, to Louis Grech and today’s Sonny Portelli, all have gone on record to say that subsequent governments have always interfered in Air Malta’s business. (All except Lawrence Zammit, who adamantly refused to make any comments.)

The company is top heavy with employees, most of whom were engaged by politicians from both sides of the political divide.

“It’s a pity that every government assumed that Air Malta was a sort of job-centre,” Bertie Mizzi told MaltaToday.

Joe N. Tabone, who bears the brunt of the GWU’s accusations on the state of Air Malta today, says that although he always did his best to fend off political pressure, “governments tried to buy peace with unions by giving in to trade union pressures for exorbitant demands which still carry a price today on the high wage bill Air Malta still pays.”

Tabone stands accused by the GWU of causing of problem when he acquired the ‘infamous’ Avro RJ70’s in 1992.

But the propped-engine aircraft serviced mainly the short distance destinations, mainly to fulfil the reasonable vision of making Malta a hub in the Mediterranean. Moreover, the decision to purchase was unanimously agreed during a board meeting, attended also by the GWU worker-director.

The acquisition of the Avro RJ70’s was not completely an Air Malta choice, but a political decision by an Eddie Fenech Adami-run administration that was paying the price for lobbying the British government for support of its EU accession bid.

The choice of the aircraft and the subsequent sale of the RJ70’s, as well as the creation and dissolution of subsidiary airline Azzurrair, are reported to have cost the airline €150 million in losses.

Wage bill

With a fleet of 12 leased aircraft, and 1,400 employees, Air Malta today has a €52 million annual wage bill.

In 2004, the four unions at Air Malta joined forces and collectively negotiated a rescue package; but when it expired, pilots, cabin crew and engineers wanted individual agreements, insisting that they did not want to shoulder the burden of the ground-handling section represented by the General Workers’ Union.

An agreement with GWU is still pending, and given the current scenario, the prospects – especially for the ground-handling section – look bleak.

Irrespective of the salaries and perks enjoyed by senior management – also being blamed for the lack of strategic decisions – Air Malta carries the high price of servicing the political class.

Ministers, MPs as well as former parliamentarians, are privileged to a number of tickets yearly. The commitments that government has saddled Air Malta with over the years are estimated to cost €1 million yearly.

Social function

But Air Malta is also the only airline that carries medical cases, because no other airline that flies to Malta is equipped for stretcher cases or child incubators.

Air Malta always honoured its social commitment to the country and while it transported patients overseas for treatment, it sponsored and aided all local sports associations by reducing their group fares. Several cultural activities in this country would not have taken place with the support of Air Malta.

Air Malta carries cargo, serving as an important lifeline for advanced technology companies operating from Malta, like ST Microelectronics and the pharmaceutical industry.

Uncalculated for this year was the loss of €3.5 million in five days for Air Malta as Europe’s airspace was shut down last April over the Icelandic ash cloud, costing the airline an estimated 25,000 passengers.

The EU’s rules

As government struggles to convince the European Commission to accept its proposal to assist Air Malta through this difficult moment, experts in Brussels are unlikely to be duped into easily accepting such institutionalized rescues.

Being taxpayer’s money, the EU needs to be convinced that the money injected into Air Malta will be a ‘one-off’, and most of all lead the company to be viable.

But the question remains: how can Air Malta become viable with the same worker compliment?

MaltaToday is reliably informed that informal contacts between government and unions, have led to assurances that “no worker will lose his job,” but how this will be achieved – short of re-absorbing workers into the public service, thereby creating problems elsewhere – remains a mystery.

Meanwhile, government’s sudden confirmation of the dire situation at Air Malta has government, airline and trade unions to ask the media to be “cautious” at how it reports on the situation.

But can the media be silent in the wake of such a crisis?

Government – as admitted by Finance Minister Tonio Fenech – is so far not excluding the possibility that, should the airline not be sustainable in future, shareholding  may be opened up to other airlines, or to local investors.

The suggestion of a partial take-over by local businessmen has been touted in certain circles, and confirmed by former Air Malta chairman and property magnate Bertie Mizzi.

Private interest

“I would be interested in buying Air Malta because I believe in the company, but at my age, it’s not something that I would pursue today,” Mizzi said, adding that he has “contacts” in Malta who would be “prepared to buy into Air Malta at any time.”

And at what price-tag would Air Malta be sold to the private sector in this present condition?

This point calls to mind as aspect the PwC report that seemingly went ignored for four years: that there may exist a lobby with a vested interest in weakening Air Malta, in order to later buy it out at a convenient price.

London based Ernst & Young partners Alan Hudson and Robert Palmer, respectively former easyJet Group Financial Controller and British Midlands International (BMI), have meanwhile been brought in to salvage the situation.

Their task is to recommend the urgent restructuring needed to save Air Malta from the fate airlines much bigger than it like Belgium’s Sabena and Geneva’s Swiss Air faced, only to be brought to extinction.