Views of Air Malta perspectives

The Air Malta story has yet to unfold properly. As I write full details of the restructuring plan have not been given. It is known that 511 jobs will be lost, but not exactly in which categories. Also, that the fleet will be reduced to 10 but there are indications that manning has been worked out on eight.

I remain of the opinion that all stakeholders have to look forward, to come out with a careful plan that will make it clear that jobs have to be lost, yes, but only so that more can be saved, and that restructuring focuses on revenue generation, which has to be the lifeblood, not mostly on cost cutting, though efficiency per unit of output is paramount.

The Ernst & Young plan underlying the restructuring proposals, which cost a cool €3.3million, has been purposely leaked, but has remained formally in wraps. It reveals that the consultants chose to look back selectively, leaving out political responsibility and targeting the previous management. Details which I have collated might help to give a more rounded picture for public viewing.

For starters, Air Malta has been in an operating loss situation since 2002/3, and (the company) in a total loss situation since 2001/2. Following the rescue plan of 2004, agreed to by the unions and staff at considerable personal cost, operating losses diminished annually until 2008 when they rose again due to the increase in the price of fuel and the drop in the value of the sterling.

They improved again in 2009, but deteriorated once more in 2010. In May 2010 the government agreed with Ryanair for it to introduce a subsidised aircraft based in Malta. EasyJet, another low-cost airline, started operations from Rome and Milan.

The management, I’m told, had been advocating the following major changes for a number of years: Rationalising the network especially by eliminating loss making routes (primarily regional routes in the UK and Germany); Retaining the morning Gatwick flights but removing the daily loss-making evening / night flights; As a result, downsizing the fleet to 11 or 10 aircraft; Reducing costs in proportion to fleet size.

The management, though it is not credited for this by Ernst & Young, had taken many proactive revenue generating measures which had been successful. These included: Investing in a state-of-the-art revenue management system from Sabre including a period of consultancy to ensure its proper use; Hiring a number of young operations research analysts to reap maximum benefits from the system. (Unfortunately, many of them, including the pricing specialists, have left over the past six months due to the prevailing uncertainty); Concluding successful code sharing agreements with a number of airlines in the STAR Alliance Groups. It is estimated that these code shares increased KM’s annual revenue by up to €10 million per year.

It is now an admitted fact that subsidies to low-cost airlines hit Air Malta considerably. Directly, the following routes operated by Air Malta are being subsidised: London, Marseilles, Venice, Bologna, Palermo, Liverpool (Manchester), Birmingham and Dublin.

All subsidised routes affect outgoing traffic from Malta which, because of subsidies, can find cheaper alternatives to Air Malta destinations. These include Spain and Italy. Ryanair is being subsidised through route support schemes to the tune of €4 million per aircraft used on the Malta routes. Air Malta losses at around €30 million on a fleet of 12 aircraft are proportionally much less then what Ryanair is being paid to fly to Malta.

Although not easy, creative ways could have been found (and were suggested by the management) of how to pass these funds to Air Malta without resorting to restructuring aid.

So much for the past. What do Maltese experts in commercial aviation think of the future? The way forward, they tell me without receiving as much as a cent in fees, lies among other things in the following:

Network rationalisation: The network is the largest significant driver of costs and revenues in an airline. The network produces all the direct operating costs. For the past several years the network has been determined largely by the tourism authorities, driven by MHRA. Even closing insignificant, but loss making routes like Glasgow and East Midlands took years to achieve whereas the competitors (low-cost airlines) were opening and closing routes from one season to the next.

The network needs to make business sense for the airline. Although in the short term there may be issues for the tourism industry, in the long run a financially strong airline will benefit tourism, far outweighing the short term problems. Again, the management had been advocating this for many years but the shareholders held back due to the potential short-term impact on tourism.

A downsizing of the fleet from the above, with an equal and proportional lowering of costs as a result.

Commercialisation of Air Malta property: Air Malta has significant property holdings on long term emphytuesis, mostly extra to its needs. These include the head office (68,000 sq m) where most offices are empty due to the reduction in staff and with more planned, the old terminal including the car park, hangars and workshops.

Having a clear strategy on the product offer: Copying low cost airlines is not the way forward, say local experts. Air Malta will never have the marketing clout of Ryanair or EasyJet, nor their cost base. Passengers on Ryanair choose their destination on where Ryanair discounts most. With Air Malta the decision making process is different.

Passengers first decide to travel to Malta, and then decide which airline to use. Air Malta needs to offer a better product (club service, catering on certain routes, newspapers, and clear, transparent pricing with no hidden charges) to be able to sell at a moderately higher price then LCCs as it will never enjoy the same low cost base and high seat factors.

Air Malta should continue with the carriage of cargo and offer club class on certain business routes. It should continue with code sharing and possible STAR Alliance membership.

Focus should be placed on Air Malta’s key assets. These include being a specialist in leisure traffic to Malta, a good reputation in major European markets, a modern fleet of aircraft leased at good rates, airport slots particularly in London, Frankfurt, Milan and Paris, €100 million of unencumbered real estate mostly located in and around Malta’s only airport and some highly experienced and well trained staff.

The suggestions made to me seem reasonable. It remains to be seen how many of them, and of what is being proposed by the unions, is included in the restructuring plan.