The correct flight plan

Air Malta chief executive Joe Cappello feels the national airline could still put up a stiff fight with low-cost airlines if these were to enter the market. In an interview with Herman Grech, Mr Cappello, however, warns against simplistic claims that low-cost airlines would rescue Malta's tourism.

It's been nearly two years since the restructuring within the airline started but there seems to be little indication of a lift off. Am I being too negative in my assessment?
Yes, you are. The most crucial part of restructuring is the top management, which is down from 63 individuals to 31. That makes the company more manageable and decisions are filtering through faster. We are living up to the rescue plan we signed two years ago.

All the savings contemplated in the rescue plan are completely on track. A lot of other initiatives have been taken. For example, we've got two aircraft based in the UK, we're operating from Italy, we've consolidated all our foreign handling agents into one, and work practices have changed. All these are giving us substantial cost savings. We have saved about Lm700,000 from our overseas offices; another Lm600,000 in travel agents' commissions.

So do you think the recovery plan has been swept aside by events such as the exorbitant cost of fuel?
If it hadn't been the cost of fuel, we'd be smiling. The impact of fuel on the airline has been tremendous.

To what extent?
It's been substantial, millions of liri. We are trying to mitigate it through fuel hedging and, secondly, by putting surcharges on airfares. However, even though the hedging agreement has saved us Lm3 million, our fuel bill has in reality been inflated by millions of liri. Even though we have a surcharge, on the other hand we reduced airfares.

Our non-fuel costs have been reduced by 10 per cent. One cannot say the recovery plan was swept aside because without it the airline would have been in a more vulnerable position. At least the recovery plan has helped us to trim our cost base.

Have any other factors derailed your plans?
Our average fares are down substantially, by over 25 per cent, and the number of passengers has remained the same. We did this primarily because of competitive pressures. There is excessive airline seat capacity on the Malta route.

Is Air Malta considering downsizing its fleet as a result of restructuring?
Fleet downsizing is not on the cards at the moment.

How come some national airlines overseas are doing well, despite the increase in fuel prices?
Very few airlines are doing well. However, one area we want to fine tune is the seat factor. We still have too many empty seats and need to fill up excessive capacity by better distribution of our products and better penetration of the various markets.

We're tackling these issues by introducing revenue management, a system that allows us to know at which price to float seats on individual flights. It will help us to maximise price when there is high demand and push prices down when there is low demand. A one percentage point change in average fare for Air Malta makes a difference of Lm600,000 to the bottom line.

We're also distributing our products better. Our web sales are doubling every year and about 120,000 seats a year are now sold online. But we have also taken a strategic decision not to emulate other airlines and go completely online. We want to continue working with our traditional partners - the travel agents and tour operators.

In one of his final speeches, your predecessor Ernst Funk said that although we do have intra-European operations it is significantly more difficult for Air Malta to take this course. Why should it be so?
Geographically, since we're not in the heart of Europe it's more difficult to base our aircraft overseas. But we now have two aircraft in the UK which are operating mostly to Greece and Spain. We're also operating some domestic flights in Italy.

Are they successful?
The Catania - Gatwick route is doing well, we're averaging a 70 - 75 per cent seat factor. In the UK, Air Malta is a chartered carrier, but this doesn't mean these operations are to the detriment of the Malta market. The aircraft we have in the UK are over and above our requirement. We are not diluting our marketing efforts for Malta either because of the UK operation.

Is Air Malta looking at other new ventures?
Yes, we're looking at basing aircraft in Sicily from next year.

Do these intra-European operations render a lot of revenue for the airline?
We absorb our overheads better with these operations. We are spreading the overheads of the company over a larger volume of business.

The low-cost airlines debate never stops. Did Air Malta exert any pressure on the government to ensure charges dissuade low-cost airlines from operating to Malta?
No, Air Malta is not exerting any pressure on anybody. Air Malta has never asked anyone to keep artificially high charges to protect itself. We would welcome any reduction in costs, of course. Having said that, landing fees in Malta are among the cheapest. I prefer to work with a cheap landing fee and a passenger charge because that makes it a variable cost - which means if we have fewer passengers on a flight we pay less. In other airports we have to pay a global fee per aircraft.

The only thing we have consistently asked for is a level playing field. We are against introducing special charges for special airlines as that would be an unfair advantage. On a level playing field, Air Malta isn't worried about competing. What would make it difficult, if not impossible to compete, would be some subsidy or fee reduction to certain airlines.

But that isn't on the cards. What airlines like Ryanair have asked for is a kind of volume discount scheme. Wouldn't that also benefit Air Malta?
Air Malta doesn't need to promise numbers of passengers, because it already is doing so. We have a track record - we carry 1.5 million passengers a year. We have to be careful with certain commitments being made. Is it new traffic being generated or is it being shifted from one airline to the other?

We have to watch out for the way low-cost airlines use certain airports construed as "new" airports. For us that would be cannibalising existing traffic.

If low-cost airlines decide to operate to Malta anyway, with the existing charges, do you think Air Malta can still compete?
I think we have a fighting chance to compete. The basic measurement of airline revenue is what is known as revenue per passenger kilometre and in that respect Air Malta's revenue is in line with one of the major low-cost airlines. On average, our fares are also in line with one of the major low-cost airlines.

We have other strong points - we carry cargo while low-cost airlines don't, and that's a revenue generator plus a service to local industry. We also interline, when low cost airlines sell from point to point.

What do you make out of claims, especially by the Chamber of Small and Medium Size Enterprises - GRTU, that low-cost airlines are needed to rescue Malta's tourism?
I think these are facile statements which don't dig deep into the possible repercussions. What will happen if the introduction of low-cost airlines signals the exit of established airlines and tour operators? Low-cost airlines have built up routes and closed them when they find out they're not feasible. It will take years for the industry to rebuild itself. I'm not being alarmist. It's a real scenario.

I can imagine GRTU members feeling they could benefit from such airlines because numbers possibly matter, even though the passengers might not spend a night in a hotel. It is a well-known fact that a number of low-cost passengers could spend the night in a club and return the next morning.

Low-cost airlines are successful in their own right, however Malta is not a tourism destination that is still being built up. It has a track record which was built up among stakeholders. One has to be very careful before going for a quick fix without contemplating the repercussions.

The government has in the meantime given fiscal incentives to entice airlines to routes like Girona. Why doesn't Air Malta take up the offer?
Air Malta has a network of 50 destinations, made up of mainland and minor routes - all of which are important for our tourism industry. Switching around a few routes will not help anybody, though we are evaluating the proposals.

Official statistics show that the number of outbound passengers is constantly on the decline and many believe the departure tax is to blame. This must also have an impact on Air Malta's pocket.
Of course, anything which is making it difficult for people to travel will have an effect on us. Nowadays, we also have to take into consideration the number of people who choose to start a cruise from Malta.

Have you tried putting pressure on the government to reduce this tax? Ultimately it's impacting a government-owned company.
We have various discussions with our shareholders on a number of issues.

And this is one of them.
Yes.

When Mr Funk ended his tenure he hinted that his hands had not been free to do all that needed to be done. Do you personally have space for manoeuvre to do what needs to be done within the airline?
I report to the chairman and the board of directors. The government is a shareholder. As long as I've been in a senior position I've found cooperation from the shareholder, the chairman and the board of directors. Of course, there are sometimes different points of view in what is ultimately a complex sector. As management we walk the tightrope between the commercial realities and social obligations. However, I never had any pressures which were against my wishes for the company. There are no impositions.

All things remaining equal, given the existing problem of the fuel prices, will Air Malta's financial situation remain status quo this year?
If I hadn't been seeing a future for this airline, I wouldn't have applied for this post. I would not have done this if I didn't think the airline had a sustainable future. I believe Air Malta fulfils a need. I believe we have the right team of people. We have a three-year business plan to reach sustainable viability and I believe we are moving in the right direction.

There is still a lot of hard work; we need to concentrate on revenue generation, cost control and customer centricity. I want to see repeat business. We look at areas where we can make money even if we had to enter and exit later. There could be short-term fixes but our main commitment is to Malta as a tourist destination. I think a better financial position is possible by the end of the year.