Why Brussels said no to Air Malta refinancing plan in 2009

MaltaToday has learnt that the initial request to invest €100 million into Air Malta, to purchase eight of its 12 leased Airbus in a bid to save on leasing costs, was turned down by Brussels after it applied the so-called ‘Market Investor’s Principle’ that compares the proposal to what a private investor would do in the same circumstances.

While government defended the viability of such a move, Brussels insisted that it wouldn’t make any financial sense, unless a clear restructuring plan was in place.

However government hoped that Brussels would eventually back down on its position and kept contact with leasing company ILFC – a subsidiary of AIG – until just a few months ago.

In comments to MaltaToday, a Finance ministry spokesman said: “following the losses of 2009, management made an extensive review as to what measures can be taken to address the financial position. A business plan in 2009 had considered a number of options, including the option to acquire a number of aircraft to save on leasing costs. However the proposals presented, which included a €100 million  investment to acquire the aircraft, was not considered allowable by the EU, since a number of proposals were not considered as acceptable within  state aid rules.”

The spokesman added: “Airmalta’s restructuring programme had started way back in 2004 when a process of reform was agreed with the Unions with significant efforts in cost reduction. It is important to appreciate that from that date Air Malta’s head count was reduced by 600 employees, it managed to increase its core business revenue despite this reduction in resources and it invested in its online presence with positive results.

“Indeed, up to 2007/2008, losses were reduced to €8 million, however post-2008 a number of international events brought about a significant deterioration in the company’s performance, including the significant increase in oil prices, the drop if the sterling which hit Air Malta’s main market (UK) and the increase in pricing pressures brought about by low cost carriers. To add insult to injury, the ash cloud accentuated such pressures,” the spokesman said.

But government reportedly remained non-committal on the alarm bells that were sounded by Air Malta since 2008.

Air Malta management had addressed senior government members and the board at the Malta Tourism Authority (MTA), warning that the situation at the airline was becoming dramatic since the advent of low cost airlines.

Senior Air Malta sources expressed frustration that the crisis the airline was facing was seemingly shelved for too long, while Low Cost Carrier’s (LCC’s) continued to bite into Air Malta’s market share through 2009 and 2010.

It was furthermore frustrating for them to see that the London based Ernst & Young consultants Robert Palmer and Alan Hudson - who were brought in to assist government in April - highlighted the same problems identified by Air Malta two years earlier.

The crisis that has escalated since the record losses incurred over the summer routes, estimated at €12 million alone, reportedly led government to hit the panic button and formally request the European Commission to allow an emergency loan of €52 million to salvage the airline.

Palmer and Hudson who are former EasyJet and British Midlands International (BMI) executives, are reported to have clearly identified the problem that too many routes were competing with Air Malta’s core catchment markets, causing a dramatic drop in revenues.

One of the findings spelt to government was the opening of the Eindoven route in the Netherlands  to Ryanair, basically attacking Amsterdam, Brussels and Dusseldorf which are Air Malta’s main catchment routes in Europe at one single go.

The initial findings by the foreign experts consolidated the fears expressed by Air Malta in 2006, whereby a PricewaterhouseCoopers report had clearly stated the impact LCC’s would have had on the national airline.

According to the 2006 PwC report, 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 scheme ‘dangerous’.

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

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.

Coupled with all this, is the workers’ frustration at the granting of bonuses to senior managers in 2009.

An average €2,000 per head were distributed in bonuses to around 30 managers in the financial year 2009/2010 when the financial situation was already become dire.

Meanwhile, government remains non-committal on his plans to restructure Air Malta on how many jobs will have to be axed for the airline to be viable.

In 2009, government seemingly shelved the proposal by Air Malta management to absorb 150 extra employees, and has so far discarded as “speculation” reports about possible lay-offs.

MaltaToday is informed that talks are under way between government ministries on how to coordinate a ‘migration’ of a number of Air Malta workers to the IPSL company that was set up to absorb redundant governmental employees and find placings in other sectors.

A statement issued yesterday from Brussels confirming the “authorisation of a loan facility worth €52 million for Air Malta” has hit the international wires, with news agencies like Dow Jones, Reuters, Bloomberg and AFP all reporting that the EU has imposed a “short-term” approval of the loan, intended to “avoid a sudden disappearance of the airline which would lead to serious disturbances in the Maltese economy.”