Air Malta's lost €31 million in the last financial year, forcing the government to consider injecting more capital to make the airline sustainable.

Finance Minister Tonio Fenech said talks had already started with the European Commission on a recapitalisation programme, which respected the EU's state aid rules.

However, the minister would not give details on the new restructuring, saying it was premature.

Mr Fenech also confirmed a report on The Sunday Times last week that airline chairman Lawrence Zammit would be replaced by Go chairman Sonny Portelli. Mr Zammit has been chairman since 2003.

Had it not been for extraordinary circumstances, the company would have broken even, Mr Fenech said. However, the increase in fuel alone meant a loss of €18 million, which would have risen to €27 million had there not been any hedging.

The sterling's decline also dealt the airline a heavy blow, costing a further €12.8 million, but, perhaps, the biggest loss-maker was the fact that, in a bid to help Maltese tourism industry, the company increased its flights at a time when tourism was doing badly.

In fact, despite only breaking even on most flights, the airline still increased the number of routes.

Still, the minister insisted that the situation made the airline "financially unsustainable", prompting the government to look into how it could help such an important asset for the country and its tourism industry.

Projections for this year were still in the red but results should be much better than last year's.

The 2004 restructuring programme had worked and, had it not happened, the losses would have been bigger, Mr Fenech said. However, the government now was looking into a fresh exercise for the company to continue cutting operating costs and increase efficiency.

Mr Zammit said ground handling costs had to be addressed as they were 40 per cent higher than abroad, adding that talks about this had started with the trade unions with the aim of changing work practices and improve efficiency.

He said he was satisfied with the achievements the airline had made in his six-and-a-half-year chairmanship, especially through the 2004 restructuring plan which, he said, had already bore fruit. However, he insisted there was more work to be done.

Mr Portelli, who also chairs the Malta Council for Economic and Social Development, said he was entering a commitment with a company facing "serious difficulties" and promised to continue building on what had been achieved so far.

The transition for Mr Portelli to take over the helm of the company will take around three months.