The future of Air Malta is looking bleak after suffering massive losses two years on the trot. Kurt Sansone asks whether the national airline is a millstone on the economy or a sacrificial lamb for industry’s prosperity.
Air Malta’s decision to axe 40,000 seats from its UK routes in summer next year amounts to a reduction of almost eight per cent in seat capacity for the period from a major source market for tourism.
The airline’s decision, intended to cut costs, reverses a decision taken in April this year to increase the seat capacity on the UK routes by almost 15,000 after Air Malta increased its flights to Gatwick, making up for British Airways’ withdrawal.
It is this symbiotic relationship between Air Malta and tourism that makes restructuring of the airline a very difficult exercise.
With Air Malta posting losses for two years running, cutting seat capacity on unprofitable routes seems to be a logical commercial decision. However, with the airline carrying 60 per cent of tourists visiting the island this is not just the story of one company alone.
For business analyst John Cassar White, Malta will “suffer economically” without Air Malta and it is not just tourism that will be hit if the airline is scrapped.
Air Malta was also important for manufacturing companies like ST that use it to transport cargo, he said.
Although Mr Cassar White acknowledged that industry’s needs could be met by other airlines, he insisted they would not provide the certainty required for a stable business environment.
“If shareholders deem the routes unprofitable they will simply close them. Industry cannot function properly without a level of certainty and Air Malta provides that certainty,” he said.
A similar sentiment was expressed last month by Malta Tourism Authority chief executive officer Josef Formosa Gauci when reviewing the positive tourist figures for August.
“The national airline, on many occasions, has been obliged to take certain decisions that may not have been commercially viable but which, at times, have made a huge difference to the sustainability of our industry,” Mr Formosa Gauci had said.
This is the reality that haunts policy makers as they determine the future of the airline.
After years of posting a profit, Air Malta’s fortunes have turned and the relationship with the tourism sector seems to have shifted to what mathematicians would describe as inverted proportion: tourism’s gain is Air Malta’s loss and vice versa.
Growth in tourism is intrinsically linked to seat capacity and according to Mr Formosa Gauci it is “pointless creating demand through effective marketing without having the means to satisfy that demand”.
Over the past three years, the MTA has made it a priority to secure a sufficient and sustainable flight capacity to Malta. This is what drove the decision to subsidise new routes and encourage low-cost airlines to fly to Malta. Route development this year cost public coffers €2 million and is expected to increase to €4.5 million next year. Most of this money financed the operations of low-cost carriers such as Ryanair, which opened new routes to airports some of which are only a few kilometres away from central airports already serviced by Air Malta and other legacy airlines.
The advent of low-cost giants is touted by people in Air Malta as one of the contributing factors to the national airline’s woes.
When interviewed by The Sunday Times in May, Air Malta chief executive officer Joe Cappello said the airline was not against low-cost carriers operating to and from the island but insisted on having a level playing field. He listed the example of Liverpool airport, a new route subsidised by the MTA’s scheme. “Liverpool airport is a new route but it is only 30 miles away from Manchester, where Air Malta operates from. This means that within the same catchment area one route is supported by the government schemes while the other established route is not. This is not fair because there is an overlap of markets,” Mr Cappello had said.
Five months later, Manchester was one of the routes on which Air Malta reduced its seat capacity for next year.
It is this drive to become financially viable that has employees on edge, more so with Brussels breathing down the country’s neck making sure the airline is not shored up through state subsidies. But there are two crucial decisions that have to be made.
Policy makers have to decide how important Air Malta is for the economy and whether a national airline is a must. This decision has to be taken in the light of what is happening across Europe with legacy carriers folding up or merging and keeping in mind the realities of an island nation.
There seems to be political consensus on Air Malta’s importance to the country.
In Parliament, Prime Minister Lawrence Gonzi described Air Malta as “a lifeline” and insisted it was strategically important for Malta to have an airline “it could control”.
Similarly, Opposition Leader Joseph Muscat said the country had to consider the cost of “non-Air Malta” before deciding whether it should be privatised or shut down. Both agree the airline is important for tourism and also for the economy.
This consensus is also shared by people in the private sector. According to the Malta Employers’ Association’s director general, Joe Farrugia, it is important Air Malta continues operating. However, he insisted the carrier had to run a sustainable operation.
“An effort has to be made to increase efficiency so that the airline contributes to the economy in a direct way by being there for private sector operators and indirectly by not being a burden on public finances,” Mr Farrugia said.
Despite the bold talk, the government has not yet outlined its blueprint for reform. No indications have been given on whether the airline will downsize or have sections of it hived off
In 2004, a rescue plan agreed to with the four unions representing airline staff managed to stave off costs and put the company back on a profitable route. However, higher fuel prices, an unfavourable exchange rate for the sterling and a global recession that dampened tourist travel saw Air Malta suffer big time. Unlike other airlines, it did not make people redundant or resort to any sort of amputation.
Those prospects loom heavily over the company’s immediate future and for most it is a question of how much and how deep rather than if.
“Restructuring is necessary in all private and public entities because the economic context is continuously changing. We cannot expect the Air Malta of 20 years ago to remain the same company today,” Mr Farrugia said.
Even if restructuring is a necessity, according to Mr Cassar White the government must try to convince the EU Air Malta is a case on its own given the country’s particular circumstances.
“The rules of state aid cannot apply to Air Malta as they do for other sectors,” Mr Cassar White said, ruling out any comparison between the national airline and Malta Shipyards. People who compared both entities, he added, were simply confusing matters and trying to subvert the calm atmosphere necessary to map out the airline’s future.
What happens next is the question everybody is asking. The reply is one only a very few will know, at least for now.
Air Malta in numbers
€11 million: the profit generated in 2007/2008
€31 million: the loss generated in 2008/2009
€28 million: cost of fuel in 2003/2004
€86 million: cost of fuel in 2008/2009
€217 million: turnover in 2003/2004
€250 million: turnover in 2008/2009
400,000: increase in passengers carried between 2004 and 2009
1,942: employees in 2003
1,427: employees in 2009
€51 million: the cost of wages in 2009
Source: Air Malta latest published annual report March 2009