Air Malta suffered as “a direct consequence” of the introduction of low-cost carriers on the UK routes but the airline’s management was “unable to react” to the competition, according to the draft restructuring plan.
Low-cost carriers started operating in 2006 when the government introduced a route support scheme, which was scheduled to last five years, to subsidise airlines that opened new routes in a bid to increase seat capacity and boost tourism.
However, the restructuring plan drawn up by government consultants Ernst and Young says Air Malta did not reap any benefits from the scheme despite it being open to all airlines.
“Air Malta has not realised any direct benefit from this scheme due to its high cost structure while the scheme has enabled competing carriers with more competitive pricing to increase passenger numbers and gain market share,” Ernst and Young say.
The report says that low-cost operations on the UK routes, particularly Ryanair and Easy Jet, meant Air Malta suffered significant reductions in fares and contributions across the board. It also highlights the company’s shortcomings in not being able to respond to the new challenge posed by its competitors.
“A commercial company would have taken steps to reduce the network by dropping less profitable routes and find new opportunities to grow as there are a number of underserved markets to operate to. However, the company simply did not have the appropriate commercial skills to act proactively,” the report says.
Analysing airport statistics for the period between 2006 and 2010, Ernst and Young say passenger traffic at Malta International Airport grew by an average of 5.2 per cent per year. However, the report says growth in the UK market was just 17,000 passengers per year for the whole period. As a result, the increased market share enjoyed by Ryanair and Easy Jet came at the expense of other airlines, most notably Air Malta.
Ernst and Young say Air Malta’s inability to react in an effective way was compounded by a confused product offering that tried to reduce prices while still providing services unavailable on low-cost carriers at no premium.
“Since the growth of low-cost carrier operations in Malta, the company’s product positioning and market offering has become increasingly confused. Its service is still promoted as quality, yet, it is not clear that customers perceive this quality as they remain very price sensitive on key routes. This has meant that the company continues to provide quality based products but on many routes has a pricing structure which has been set to compete with low-cost carriers rather than reflect its premium offering.”
The report says Air Malta was reluctant to change prices in some markets to reflect the difference of the service provided and the convenience of its schedule.
The “premium” services mentioned in the report include catering options, free carriage of baggage and access to a number of airports with premium locations like London Heathrow, which are not offered by its primary competitors Ryanair and Easy Jet.
Ernst and Young argue that the pricing strategy “promotes a perception of a homogenous product” when significant differences exist in terms of quality of service between the company and its low-cost competitors.
The report also highlights Air Malta’s strategic role for the country saying it is one of the few airlines that can convert seats for the transportation of stretcher cases and incubators.
“Air Malta provides essential social support for health care... and essential business links to Europe’s most important business destinations such as London, Frankfurt, Brussels and Paris,” the report says, noting these airports were not served by low-cost airlines.