Brussels is still unsure whether a total revamp of Air Malta over the next five years, as is being proposed in the government’s restructuring plan, will be enough to save the ailing company from total collapse.

In a still unpublished 26-page letter sent to the Maltese authorities two weeks ago, Competition Commissioner Joaquin Almunia asked Malta for further details on the plan as the European Commission still has doubts over whether it is “realistic” and not based on too many “optimistic forecasts”.

Commission sources told The Times yesterday that the letter, detailing the Commission’s doubts on the restructuring plan, was a “normal routine exercise” in state-aid inquiries and would soon be published in the Official Journal of the EU. However, the points raised need to be answered clearly for the Commission to give its green light.

The future of the company now hangs on the final decision by the Commission over whether to clear the state aid required by the airline. This is expected to take a few more months, probably not before the end of May.

If the Commission turns down this “one time, last time” request, the company will have to fold and declare bankruptcy.

The letter details the restructuring plan proposed by Malta, which shows that €238 million are being allocated to shore up the company’s capital requirements and implement the plan, with €130 million of them coming directly from state coffers and the rest (€108 million) from Air Malta’s own contribution and commercial loans.

The company is aiming to make a full turnaround by the end of the five-year programme in 2016, breaking even in 2014 and registering its first profits in 2015.

According to the plan, these aims are to be reached by various measures including a substantial reduction in expenditure and an increase in revenue. On the side of cost reduction initiatives, Air Malta is planning to slash its costs by around 10 to 12 per cent annually.

The savings will include a reduction in the airline’s fleet from the current 12 to 10 planes and an overhaul of the current route and network strategy – saving a projected €21 million annually.

This latter move will see the airline stopping operations to various routes, not necessarily only those losing money, and selling slots in major airports, including London.

At the same time, Air Malta plans to shed some 500 workers, currently costing the airline about €9 to €11 million annually. On top of this, revising major contracts, including those with the airport and major suppliers, should see Air Malta reducing its costs by a further €7 million.

The reduction in flights to various destinations is however estimated to reduce capacity by 20.2 per cent which, during the first years, is expected to im-pact the company’s revenue and potentially Malta’s tourism industry.

On the other hand, the company is proposing other initiatives aimed at com-pensating for the loss of passengers.

In fact, on the revenue side, Air Malta is planning to increase its load factor and revenue per passenger by introducing better offers and management of seat sales and an increase in pre-flight and in-flight revenues through additional baggage fees, seat reservation fees and even paid catering services on flights.

Besides the €130 million injection from the government, Air Malta will need to contribute some €108 million from the sale of its current head office and its land to the state for €66.2 million, sell its subsidiaries – many of them loss making – and sell spare aircraft engines. The company will also be taking a loan of up to €25 million from banks.

According to the plan, the restructuring costs will include up to €30 million for the redundancy schemes introduced to reduce the airline’s staff by some 500 workers.

However, despite the progress made on the restructuring plan, the Commission is still not certain whether all this will be enough to save the national airline.

In its letter to the Maltese authorities, the EU executive says that it needs further details as to date it still “has doubts whether the optimistic forecasts are realistic to achieve.”

Among its concerns, the EU executive questions whether the revenues from in-flight and pre-flight services are realistic “and reflect the growing price consciousness in consumer behaviour on short range flights” and whether the “assumed cost reduction through contract management can be achieved”.

The Commission also expresses doubt on assumptions made in the plan on passenger “market growth”, the projected revenue from the sale of subsidiaries and on whether the shedding of particular earmarked routes fall in line with the Commission’s strict rules on this type of restructuring. Doubt is also cast on whether the revenue from the sale of aircraft engines could be included in the plan.

Before a final decision is taken, the Commission will give Maltese authorities and all interested parties time to send in their comments. This process will start once the plan is published in the EU’s Official Journal.

Sources and uses of funding 2011-2016 (in € million)

Factbox

Air Malta was established in 1974 and is owned by the Maltese government (98 per cent) and private investors (two per cent). It employs 1,300 employees, operates 12 aircraft and serves 43 destinations. In 2010 it carried 1.8 million passengers – 0.25 per cent of entire EU airline industry.