I feel duty bound to express some of what I consider to be the most important points on the state of play with regard to the restructuring process and plan currently being undertaken at Air Malta.

Incentivising low cost airlines to compete against routes that Air Malta already covers (without any specific aid) is not the right strategy going forward- Louis A. Farrugia

When appointed chairman in late May 2011, I very quickly discovered the airline’s weak financial health. Air Malta was technically bankrupt and the ‘going concern’ principle that needed to guide directors to ensure good corporate governance, depended entirely on the granting of the EU Commission’s approval to allow Government funding by way of new share capital to shore up the sick and weakened balance sheet.

The fact is that on my arrival in May 2011, the emergency loan of €52 million extended to the airline by Government in November 2010, had already been materially consumed in paying overdue creditor dues and repayments to the banks for lifeline loans that had been given in anticipation of the Government emergency loan.

Given the fact we did not anticipate that the Commission would pronounce itself on the restructuring plan in the poor cash flow months of the winter of 2011/2012, Air Malta had to arrange for further private sector funding from our local banks during these critical months.

I wish to highlight that the board-approved budget we inherited projected an operating loss before restructuring costs for the financial year to March 31, 2012 in the region of €50 million.

The actual operating loss for the year ended at €30 million – an improvement of €4 million on the results of the previous year while incurring an additional €17 million in fuel costs and the loss of another €4 million from EU Commission imposed flying restrictions.

The Government had submitted its restructuring plan proposal for approval to the EU Commission a few days before my appointment in late May 2011, and my first weeks were engulfed in digesting this complex document. The fact that my own business background is from a different sector, made the learning curve that much steeper.

A new CEO had just been appointed, with whom I naturally had to establish a good working relationship – and an understanding of the main critical issues at hand. Senior and very important executive positions such as the chief financial officer and the head of HR were vacant.

These posts are now both occupied by Maltese professionals with a private sector career background. A largely new board of directors was appointed at the same time, and we all had to become critically aware of the state of health of the airline in a hurry.

We got to work in our own quiet way, and did not allow the external noise in the press disturb our commitment and our focus. The airline was about to negotiate a reduction in its workforce of 450 persons; new contracts had to be negotiated with critical providers.

This was to be done within the new structures with the aid of outside consultants. A daunting task for the new team on board!

We were not sure whether we would secure the support of the unions and other stakeholders. Through goodwill from both sides and good tactical negotiations with the unions, agreement on voluntary schemes was reached. Clearly, there were many guns directed towards us – and many actually fired shots but these were deflected away without losing focus on the tasks at hand.

Thirty board meetings and 20 months later I can confidently state that much has been achieved. The ‘actions taken’ list is impressive, and the most important of all actions taken was that in June 2012 when we obtained EU Commission approval for the restructuring plan – and so won access to the crucial lifeline to funds from Government to pay our dues and to finance the current losses and restructuring costs needed to turn our fortunes around.

Credit is also very much due to Malta’s Permanent Representative in Brussels and the Finance Minister for their direct interventions and effort in obtaining the Commission’s approval.

We are substantially on track in terms of operating performance in the three quarters trading ending December 2012. These figures will be published towards the end of January, in line with the board’s transparent policy of publishing the results every quarter.

Our revenue numbers are steady and ahead of budget and last year’s performances (despite flying fewer sectors). We are however behind schedule in reducing certain essential supplier costs, such as our net catering costs and other third party supply costs which remain at the centre of our current focus.

Furthermore, we have to find solutions to reduce our pilot community headcount down to 110, some of our pilots were subcontracted to a Polish airline (OLT) and our wet lease with the airline fell through due to the unfortunate bankruptcy of that airline last summer.

We have still to succeed in these important tasks in the coming few months so as to ensure that we achieve the targeted operating break-even figures in the next financial year starting April 2013 and ending March 2014.

As published in our six monthly results to September 30, 2012, the net result position after restructuring costs (largely one-time charges) and interest costs is that of a loss of a little over €5.5 million – as anticipated in the restructuring plan approved by the Commission.

Our anticipated operating loss for the year to March 13, 2013 will be around €16 million, an improvement of €14 million over results of the previous year. The net loss will also include a further €10 million of restructuring and interest costs made up of pilots’ termination costs and other one-time costs needed to terminate other onerous supply contracts.

Clearly the operating performance is the most important reference point, because if and when the airline achieves an operating break-even (planned for year ending March 31, 2014) it is ‘de facto’ that much more attractive to private capital, which is the only form of new funding that can be secured by the airline over the next 10 years.

This should not become a controversial issue, since if private capital is ever sought and secured it would essentially mean the airline is profitable or has profit potential. That will be good news for the country and for the tourist sector.

The restructuring plan contemplates that the airline will break-even operationally in the next financial year starting April 1, 2013. If we are to be successful this will mean the airline would have reduced its operational loss from €34 million for the year to March 2011 to break-even in just three years. Credit is due to all. We have worked as a team along with all our stakeholders.

The task remains difficult, especially given the world’s current turbulent economic climate. We need to succeed in the cost reductions mentioned above and ensure that our revenue numbers remain robust. Due care and correct judgement should also be applied by future Administrations to ensure the maintenance of the right balance of destinations that low cost and legacy airlines fly to and from Malta. Incentivising low cost airlines to compete against routes that Air Malta already covers (without any specific aid) is not the right strategy going forward.

Much work remains to be done, but the good news is that we have established the organisational framework and the business plan as platforms on which the task can be achieved.

We have a commercially minded board of directors working with a committed, focused and professional executive management team. The remit of the current and any future board and senior management teams must always be to turn the airline into a viable and profitable business.

No political interference is being exerted on decisions on recruitment, or commercial matters – which is as it should be. We are slowly building a ‘non-politically’ minded workforce appointed on the basis of merit and ability, a meritocracy which has one aim in mind – to strive to operate a sustainable business which will allow Air Malta to survive on its own two feet.

As this becomes a reality our employees will become even more passionate and loyal and proud of our successes. This will release new energy and adrenaline, as I believe the move to the new office environment has done already.

The future therefore depends on staying the course and sticking to these principles. I believe that both of the major political parties should be committed to this strategy. I shall be coming to the end of my two-year term as chairman in May.

It is my intention to step down at that time due to the enormous amount of time and mental as well as emotional energy that the position has demanded. Before being asked to become chairman, I had made tangible plans to reduce my already heavy work schedule and to spend more time with my family. I now wish to pursue this objective.

Naturally, I shall remain committed to the tasks highlighted above until my term ends, and will remain more than willing to support the new appointee in any way needed. I shall always have the welfare and well- being of Air Malta at heart.

Louis Farrugia is Air Malta chairman.

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