Although by Maltese standards Air Malta is a large company, it is actually a small airline, according to CEO Joe Cappello. Interviewed by The Times Business on the occasion of the national airline's 35th anniversary, Mr Cappello says: "We are a niche operator and our niche is Malta. We know the Maltese market, we know Malta's tourism markets and this is why we have succeeded. Since the Malta market is finite, we need to find other avenues of growth and thanks to our EU membership there are plenty of such avenues as we can fly freely within Europe."
Mr Cappello said the airline remains strongly committed to the Maltese tourism industry and to Malta as a destination. "It is a cycle - Air Malta helps tourism grow and tourism helps Air Malta grow."
Asked about the company's social commitments in an age of globalisation, he says the airline has always walked a very fine line between social obligations and commercial realities.
"We have managed to know exactly where to draw the line, to meet our social obligations but at the same time fulfilling our commercial needs. Air Malta has always stood on its own two feet, we have never been subsidised, and we will continue to work this way," he said proudly.
Mr Cappello explains that the global economic and financial crisis affected Air Malta "strongly" in 2008.
"In my 33 years at Air Malta I have never seen such a difficult year. We have been hit on three fronts. In the summer of 2008 we were hit by the rising cost of fuel - the price reached $147 (€111.18) a barrel. This could not have come at a worse time - it was our peak season and that is when we buy most of our fuel. At that time demand was strong, traffic was increasing, at least up until September, so the revenue side compensated slightly for the rising price of fuel.
"Later on in the year we were also hit by the drop in the value of sterling against the euro, as 35 to 40 per cent of our traffic comes from the UK, which we sell in sterling. This means that when we convert sterling to euro we got hit by as much as 25 per cent on our revenue in the UK. Then when the price of fuel started falling, so did demand. In January to March of this year we were hit by a fall in demand in our core markets which were all being affected by the economic crisis.
"So 2008 has unfortunately been a year which one has to write off. Demand in April seems to be holding up a bit and we are beginning to feel the first part of the effect of the drop in the price of fuel. Sterling is still low, however."
He points out that although the year-end accounts have not yet been finalised, Air Malta was hit by an additional €30 million through the price of fuel in 2008. He adds: "There was a further cost due to the value of sterling which I cannot yet quantify, but it would exceed €10 million. There was no way we could have passed on the additional costs to our clients."
The company made a loss in both years ending March 2006 and March 2007 and for the financial year ending March 2008 a profit of €3.7 million was made out of a turnover of €274 million. Was there something structurally wrong with Air Malta?
"No there isn't anything structurally wrong with the company. This year, if it wasn't for the price of fuel and the drop in sterling - two items over which we had absolutely no control - Air Malta would have ended up in the black. However, we have to restructure our company and we started to do this a few years back. In 2003 we negotiated a rescue plan for the company with the four unions who represent Air Malta employees, which resulted in the shedding of €30 million in costs.
"We have continued to hit at our cost base, as long as it does not affect operational efficiency or safety. Even though demand is slow we are managing to increase our revenue, year after year this is increasing, and this is a result of more professional marketing and a sophisticated means of distribution of our product.
"We have invested heavily in technology, particularly in the distribution of our products. We have employed a number of specialised personnel in order to help us better sell our product. We have a state of the art internet booking engine, through which we are selling, and 30 per cent of our revenues are coming through that. We have invested in an international call centre, which is open seven days a week, and which is making our sales all that much easier," he said.
He adds: "We still channel a good part of our business through travel agents and tour operators. We still do conference and incentive travel business and a good part of our revenue comes from cargo transportation. Quite a few other airlines do not carry cargo at all. We are the only airline in Europe that still carries patients on stretchers and babies in incubators for medical treatment. We are an airline that belongs to an island that is also a country. Air transport is virtually the only way of communicating Malta with the outside world, both as regards passengers and urgent cargo. It is therefore import for us to align our strategy with that of our shareholder."
Mr Cappello explains that the company has a team of 70 people from various departments looking at the airline's costs. Among the cost cutting measures the airline undertook were the removal of all administration and financial operations from the airline's overseas offices and the saving of €3 million in ground handling costs overseas through an agreement with a company called Swissport. Furthermore, the company has outsourced a number of functions such as IT, aircraft cleaning, cabin cleaning, in-flight catering, in-flight entertainment and the reading material on the aircraft.
He adds: "We have also trimmed our commission levels paid to travel agents. Previously we used to have a mini-call centre at each of our overseas offices. This has now been stopped and all reservations are now centralised in a new call centre, Centrecom, located at the old terminal building. We have a task force on fuel saving and we have trimmed the weight on our aircraft as extra weight makes us burn more fuel. We also have procedures on our planes in which our pilots help us save fuel, for example when the aircraft is on the ground we don't run it on its engines, but on ground power units, which are more efficient and more environmentally friendly."
Despite these cuts, however, the airline still employs just under 1,500 employees. Has the time come to shed some labour?
"We have shed labour. In 2003 Air Malta had 1,900 people and operated one less aircraft than we do today. Since then we had two voluntary redundancy schemes, one of which ended last week. We had another one two years ago. There has been a lot of natural wastage and people leaving without being replaced unless it was operationally necessary to do so. A number of people have also taken up boarding out schemes.
"In agreement with the unions, we have early retirement schemes, for those aged 55 and over. We have not forcefully made anyone redundant, however, we have made it attractive for people to take up early retirement or voluntary retirement. In a lot of areas we are now at the right numbers."
Mr Cappello acknowledges, however, that there are still areas where the airline is over-staffed.
"I strongly believe that over-staffing can also be tackled by agreements with the unions where we obtain operational flexibility which is so important in order to be in line with our competition. The airline industry is a seasonal business because we operate in tourism - we don't need as many people in winter as we do in summer. This is what we are discussing at the moment with the major unions," he said.
Asked whether the new routes Air Malta is about to introduce in order to increase seat capacity will be profitable, Mr Cappello says one can never be certain.
"These are risks. We obviously did our homework and carried out feasibility studies. It's very difficult to open a new route and break even in year one. However we need to be brave enough to dip in and out as necessary. It is suicidal to keep a route which is chronically losing money. After all, there have been a number of routes in the past which we have dropped. At the same time we are constantly looking for new possibilities."
Air Malta's CEO says the company had been preparing for low cost travel long before such airlines began operating in Malta.
"We knew low cost airlines would come to Malta when we joined the EU, as that meant that any European airline could fly freely within the European Union without requesting authorisation. It is important to note that Air Malta has always been a low cost airline. However, we used to make the low end of the price range available only to tour operators. Before, Air Malta used to sell between 60 to 70 per cent of its seats through tour operators. This number is now down to 30 per cent. So we have to be more active in selling directly to the public through the web and our call centre," he said.
He explains that Malta's EU membership gave the airline the possibility of operating within Europe.
"We now operate a number of routes which are not Malta based, such as Catania to London, Munich, Geneva. We also operate between Reggio and Rome. These routes help us market Malta more. The fact that we are building up a base in Italy makes sense strategically, it is a way of helping Air Malta grow. These routes have been successful and are well established."
He adds: "Sixty per cent of Air Malta's route network is code-chaired with other airlines such as Lufthansa and other members of the Star Alliance, including Turkish, bmi and Swiss. In this way the airline is really connecting Malta with the world.
"Whether this will eventually lead to membership or associate membership of the Star Alliance is still something which has to be decided, we have to see whether it fits into our overall strategy."
He says he is "very confident" about Air Malta's future.
"We have been here for 35 years and I'm sure we'll be around for at least another 35 years. As long as Malta has a viable tourism industry, it will have a viable and valid airline."
Mr Cappello said the airline remains strongly committed to the Maltese tourism industry and to Malta as a destination. "It is a cycle - Air Malta helps tourism grow and tourism helps Air Malta grow."
Asked about the company's social commitments in an age of globalisation, he says the airline has always walked a very fine line between social obligations and commercial realities.
"We have managed to know exactly where to draw the line, to meet our social obligations but at the same time fulfilling our commercial needs. Air Malta has always stood on its own two feet, we have never been subsidised, and we will continue to work this way," he said proudly.
Mr Cappello explains that the global economic and financial crisis affected Air Malta "strongly" in 2008.
"In my 33 years at Air Malta I have never seen such a difficult year. We have been hit on three fronts. In the summer of 2008 we were hit by the rising cost of fuel - the price reached $147 (€111.18) a barrel. This could not have come at a worse time - it was our peak season and that is when we buy most of our fuel. At that time demand was strong, traffic was increasing, at least up until September, so the revenue side compensated slightly for the rising price of fuel.
"Later on in the year we were also hit by the drop in the value of sterling against the euro, as 35 to 40 per cent of our traffic comes from the UK, which we sell in sterling. This means that when we convert sterling to euro we got hit by as much as 25 per cent on our revenue in the UK. Then when the price of fuel started falling, so did demand. In January to March of this year we were hit by a fall in demand in our core markets which were all being affected by the economic crisis.
"So 2008 has unfortunately been a year which one has to write off. Demand in April seems to be holding up a bit and we are beginning to feel the first part of the effect of the drop in the price of fuel. Sterling is still low, however."
He points out that although the year-end accounts have not yet been finalised, Air Malta was hit by an additional €30 million through the price of fuel in 2008. He adds: "There was a further cost due to the value of sterling which I cannot yet quantify, but it would exceed €10 million. There was no way we could have passed on the additional costs to our clients."
The company made a loss in both years ending March 2006 and March 2007 and for the financial year ending March 2008 a profit of €3.7 million was made out of a turnover of €274 million. Was there something structurally wrong with Air Malta?
"No there isn't anything structurally wrong with the company. This year, if it wasn't for the price of fuel and the drop in sterling - two items over which we had absolutely no control - Air Malta would have ended up in the black. However, we have to restructure our company and we started to do this a few years back. In 2003 we negotiated a rescue plan for the company with the four unions who represent Air Malta employees, which resulted in the shedding of €30 million in costs.
"We have continued to hit at our cost base, as long as it does not affect operational efficiency or safety. Even though demand is slow we are managing to increase our revenue, year after year this is increasing, and this is a result of more professional marketing and a sophisticated means of distribution of our product.
"We have invested heavily in technology, particularly in the distribution of our products. We have employed a number of specialised personnel in order to help us better sell our product. We have a state of the art internet booking engine, through which we are selling, and 30 per cent of our revenues are coming through that. We have invested in an international call centre, which is open seven days a week, and which is making our sales all that much easier," he said.
He adds: "We still channel a good part of our business through travel agents and tour operators. We still do conference and incentive travel business and a good part of our revenue comes from cargo transportation. Quite a few other airlines do not carry cargo at all. We are the only airline in Europe that still carries patients on stretchers and babies in incubators for medical treatment. We are an airline that belongs to an island that is also a country. Air transport is virtually the only way of communicating Malta with the outside world, both as regards passengers and urgent cargo. It is therefore import for us to align our strategy with that of our shareholder."
Mr Cappello explains that the company has a team of 70 people from various departments looking at the airline's costs. Among the cost cutting measures the airline undertook were the removal of all administration and financial operations from the airline's overseas offices and the saving of €3 million in ground handling costs overseas through an agreement with a company called Swissport. Furthermore, the company has outsourced a number of functions such as IT, aircraft cleaning, cabin cleaning, in-flight catering, in-flight entertainment and the reading material on the aircraft.
He adds: "We have also trimmed our commission levels paid to travel agents. Previously we used to have a mini-call centre at each of our overseas offices. This has now been stopped and all reservations are now centralised in a new call centre, Centrecom, located at the old terminal building. We have a task force on fuel saving and we have trimmed the weight on our aircraft as extra weight makes us burn more fuel. We also have procedures on our planes in which our pilots help us save fuel, for example when the aircraft is on the ground we don't run it on its engines, but on ground power units, which are more efficient and more environmentally friendly."
Despite these cuts, however, the airline still employs just under 1,500 employees. Has the time come to shed some labour?
"We have shed labour. In 2003 Air Malta had 1,900 people and operated one less aircraft than we do today. Since then we had two voluntary redundancy schemes, one of which ended last week. We had another one two years ago. There has been a lot of natural wastage and people leaving without being replaced unless it was operationally necessary to do so. A number of people have also taken up boarding out schemes.
"In agreement with the unions, we have early retirement schemes, for those aged 55 and over. We have not forcefully made anyone redundant, however, we have made it attractive for people to take up early retirement or voluntary retirement. In a lot of areas we are now at the right numbers."
Mr Cappello acknowledges, however, that there are still areas where the airline is over-staffed.
"I strongly believe that over-staffing can also be tackled by agreements with the unions where we obtain operational flexibility which is so important in order to be in line with our competition. The airline industry is a seasonal business because we operate in tourism - we don't need as many people in winter as we do in summer. This is what we are discussing at the moment with the major unions," he said.
Asked whether the new routes Air Malta is about to introduce in order to increase seat capacity will be profitable, Mr Cappello says one can never be certain.
"These are risks. We obviously did our homework and carried out feasibility studies. It's very difficult to open a new route and break even in year one. However we need to be brave enough to dip in and out as necessary. It is suicidal to keep a route which is chronically losing money. After all, there have been a number of routes in the past which we have dropped. At the same time we are constantly looking for new possibilities."
Air Malta's CEO says the company had been preparing for low cost travel long before such airlines began operating in Malta.
"We knew low cost airlines would come to Malta when we joined the EU, as that meant that any European airline could fly freely within the European Union without requesting authorisation. It is important to note that Air Malta has always been a low cost airline. However, we used to make the low end of the price range available only to tour operators. Before, Air Malta used to sell between 60 to 70 per cent of its seats through tour operators. This number is now down to 30 per cent. So we have to be more active in selling directly to the public through the web and our call centre," he said.
He explains that Malta's EU membership gave the airline the possibility of operating within Europe.
"We now operate a number of routes which are not Malta based, such as Catania to London, Munich, Geneva. We also operate between Reggio and Rome. These routes help us market Malta more. The fact that we are building up a base in Italy makes sense strategically, it is a way of helping Air Malta grow. These routes have been successful and are well established."
He adds: "Sixty per cent of Air Malta's route network is code-chaired with other airlines such as Lufthansa and other members of the Star Alliance, including Turkish, bmi and Swiss. In this way the airline is really connecting Malta with the world.
"Whether this will eventually lead to membership or associate membership of the Star Alliance is still something which has to be decided, we have to see whether it fits into our overall strategy."
He says he is "very confident" about Air Malta's future.
"We have been here for 35 years and I'm sure we'll be around for at least another 35 years. As long as Malta has a viable tourism industry, it will have a viable and valid airline."