Air Malta faces another major challenge in its history: proving it can survive without state aid. The national airline registered a loss of €31 million for 2009. Unless the company is recapitalised, it may face serious problems.

Understandably, neither the government nor the European Commission are prepared to divulge details on the talks reportedly going on between them in Brussels to address this issue and define the way forward. However, there are clear indications of what the outcome of these discussions is likely to be as Air Malta is not the first airline operating in the EU that has faced problems if state aid is denied.

The restructuring of Air Malta started some years ago when the company decided to shed its non-core business, including the running of the airport duty free shops and a number of hotels. This helped it to cut debts and concentrate on its core business. At the same time, it replaced its aging fleet of aircraft with more modern and economical ones. It also introduced an early retirement scheme to shed some of its excess labour, even if this scheme was not as successful as management had hoped.

This period of restructuring coincided with the introduction of low-cost airlines in the Maltese air travel market. These airlines adopted a cherry picking strategy that arguably deprived Air Malta of important income from its more lucrative routes. The national carrier met the threat of competition by often matching the pricing of the low-cost airlines in many of its routes, especially those where it was in direct competition with the likes of Ryanair and easyJet. However, it continued to carry high operational costs that characterise a legacy airline.

The measures taken so far are evidently not enough to save Air Malta from the need of further restructuring to achieve economic viability. While other European airlines like Alitalia have avoided the consequences of insolvency by reforming the way in which they operate, Air Malta's impact on the Maltese economy raises issues beyond the operations of a legacy airline.

The tourism industry in Malta is still dependant on the seat capacity Air Malta provides on various routes in Europe and North Africa. Low-cost carriers have reduced this dependence on Air Malta to fill hotels but private airlines do not have any specific commitment to support tourism in Malta. When demand for travelling to Malta from a particular destination falls below the airline's preset benchmark it is likely that a low-cost airline will drop that service. The country's tourism industry's dependence on Air Malta will undoubtedly be explained fully to the European Commission when plans are drawn up to restructure the carrier's operations.

The Commission is likely to allow the government to increase Air Malta's share capital to avoid insolvency but the company will have to produce a credible business plan aimed at improving its operating efficiency.

Such plans inevitably contain cost cutting measures that also affect staff. It is hoped that acrimonious confrontation between management and employees' unions are avoided. This difficult situation calls for a cold clinical analysis by all stakeholders of what the consequences will be if they fail to steer the company out of this turbulence.

Those negotiating Air Malta's future in Brussels should aim at securing the continued existence of the airline to support the economy in a sustainable way.

Sign up to our free newsletters

Get the best updates straight to your inbox:
Please select at least one mailing list.

You can unsubscribe at any time by clicking the link in the footer of our emails. We use Mailchimp as our marketing platform. By subscribing, you acknowledge that your information will be transferred to Mailchimp for processing.