The state of Malta’s national air carrier is very serious and the company requires major surgery if it is to survive after next May, according to the European Commission.

The Commission’s decision on Malta’s application to throw Air Malta a €57 million lifeline has been released under the EU’s state aid rules, although it omits confidential information. It depicts a bleaker picture of the company’s future than what has been said publicly so far.

At the same time, Brussels is expressing doubts about the island’s ability to meet its deficit targets for 2011 due to the help being granted to Air Malta to help it avoid bankruptcy.

According to the document, the company has been in the red since at least 2003 but the situation worsened from 2009 due to rising fuel costs and the loss of market share to low-cost airlines.

The company employs 1,512 workers and its collapse may affect another 2,672 workers employed with various suppliers, the Commission says.

“While the Maltese authorities have indicated that at this point in time, Air Malta is not subject to any collective insolvency proceedings, in the absence of rescue aid it is likely it will become subject to such proceedings.”

The Commission adds: “Already at the end of 2009 (ending March 31, 2009) Air Malta had accumulated total losses amounting to more than half of its registered capital and more than one quarter of that capital had been lost in the previous year. Its registered capital was €68.7 million while its 2009 losses amounted to €23.7 million, its accumulated losses as of the end of 2009 had reached €61.7 million.”

Although Brussels consented to granting immediate emergency aid to keep the company afloat until next May, the Commission cast doubts over whether this was the first time aid was being given, as the government has claimed. According to EU rules, state aid can only be granted once over a 10-year period.

Just a month before the island’s accession to the EU in 2004, the government transferred land to the airline worth €57 million to boost its capital.

The report says: “According to the Maltese authorities, the 2004 transaction does not constitute state aid. However, based on the information transmitted by the Maltese authorities, the Commission cannot arrive to a definite conclusion about compliance of the 2004 transaction with the private investor principle.”

Despite its reservations, the Commission approved the loan as it agreed the sudden collapse of Air Malta would have a negative effect on the island’s economy.

“Due to the need to approve this rescue aid rapidly, to avoid the serious social consequences that would result from the closure of Air Malta, the Commission considers that for the purposes of this decision it is not necessary to decide whether Air Malta received a restructuring aid in 2004.”

The 2004 land transfer turned out to be providential for the company’s survival, as according to Brussels “the company’s equity was positive at the end of the 2010 financial year only because of revaluation of its real estate value at the beginning of 2010”.

Commission sources told The Times Air Malta could only survive if the restructuring plan being prepared was bold enough to overhaul the airline. “The Commission expects no half-measures. Tough and painful action is needed if Malta wants to save its airline,” the sources said.

Separately, although intrinsically related to the ongoing Air Malta exercise, the Commission is doubtful whether Malta would be able to keep its target to trim its deficit to under three per cent of GDP by the end of 2011, due to the expected costs related to helping Air Malta.

According to the recent autumn economic forecasts, published a few weeks ago, the Commission is in fact predicting a slight increase in the country’s deficit.

A Commission spokesman said Brussels feared the costs of saving Air Malta could dent Malta’s deficit reduction efforts, mainly pertaining to repaying the airline’s loan, and possible measures that will be introduced in the forthcoming restructuring plan.

Asked for a reaction to these claims, a Finance Ministry spokesman said since the negotiations on the company’s future were still ongoing it was still premature to comment.