Air Malta chief executive Joe Cappello sees Ryanair's influence as a negative factor for the economy but insists he is not afraid of competition. He tells Kurt Sansone Air Malta just wants a level playing field.
You recently said Malta was dependent on Ryanair and this was not good for the country. With Air Malta still enjoying 55 per cent of the market share, how do you justify this claim and what is wrong with such a situation if it is the case?
My point of departure is that tourism is important for the economy and Malta being an island needs air transport links much more than a mainland country. Air Malta does have a market share in excess of 50 per cent of total traffic into and out of Malta; however, the low cost market share for 2010 has increased to 30 per cent of capacity. One low cost airline alone, Ryanair, has 20 per cent capacity of the total share and for me this puts that airline in a very strong position given we are an island dependent on tourism.
It worries me because we have seen what has happened in other countries where the share of low cost airlines has tipped the balance. Marseille airport built a terminal for low cost airlines but there is a dispute between Ryanair and the local government over the interpretation of labour laws and the Irish carrier is threatening to pull out, transferring 120 jobs abroad.
An airline holding 20 per cent of your capacity and which is owned by foreign shareholders is worrying. Ryanair's strategy, like any other company, is to maximise returns for its shareholders, while Air Malta's shareholder is the Maltese government.
Our strategy follows the country's strategy. Malta cannot be over-dependent on Air Malta because we are owned by Malta. Over the past 30 years we have never had a situation where a single airline, apart from Air Malta, held 20 per cent of the market share.
Is it Ryanair that worries you or low cost airlines in general?
What worries me is one particular company, whoever that may be, holding a 20 per cent share of capacity to Malta because that company would be in a position to set its own terms and conditions and the country has never been in such a situation.
This does not worry me so much in terms of its impact on Air Malta. I am worried because of the implications such a situation has on tourism.
Customers do not really care whether one airline owns 20 per cent of the market share or not, as long as they are getting their cheap flights out of the country. How do you counter this argument?
Do not underestimate the intelligence of customers because they are not just travellers. A customer whose livelihood depends on tourism would also be concerned about a situation where a particular company can call the shots on a number of issues.
In the short term customers are enjoying relatively low cost flights but nowadays Air Malta and other airlines' flights are extremely competitive. We would not be selling all the traffic that we sell if our rates were not good.
However, Ryanair has seen its share go up and the likelihood is that it will increase further with the company basing an aircraft in Malta. There is migration of customers to low cost airlines.
As far as Air Malta is concerned the advent of Ryanair has not affected our passenger numbers. Admittedly, low cost airlines have brought growth in tourism, but they have also led to cannibalisation with a migration of passengers from chartered airlines to low cost. The departure of British Airways last year was a case in point.
The Chamber for Small and Medium Enterprises - GRTU, Malta International Airport and the government do not seem to share your apprehension on Ryanair and the risk of dependency. Why?
They would have to answer that question. However, I also have Air Malta's interests to uphold. The company is not in the best of financial positions and in order for us to become viable again we need to have a level playing field when it comes to competition.
Air Malta is not concerned about competition because in its 36 years of existence it has always competed with international companies. Today the competition is low cost airlines, but in the past it was large scheduled airlines and from time to time major European chartered airlines. However, it is important for us to compete on a level playing field.
Are you saying there is no level playing field at the moment?
I do not think so. Air Malta is an established airline that has gradually built up its route network over 36 years. We operate to 40 destinations around Europe, north Africa and the Middle East. Our network covers main airports because that has always been our strategy. We developed these routes without any financial support or subsidies.
The new entrants, low cost airlines in particular, are benefitting from support schemes to establish new routes. These schemes are perfectly legal and allowable under EU regulations since they are intended to help the airline market the new route. It is very easy for a low cost airline that is new to Malta to find new routes because any route for them is new.
Air Malta cannot do this because it has a history and a structure. I wouldn't be fooling the authorities if I close the Gatwick route and instead operate from Stansted and claim Stansted is a new route. It would simply be a shift of demand and I will not do anything that harms the economy or the tourism industry.
If low cost airlines are operating on new routes from airports not serviced by Air Malta, why should you be bothered?
Europe is a relatively small place and any airport within 200 to 300 kilometres of another airport is bound to affect your catchment area. For example, Liverpool airport is a new route but it is only 30 miles away from Manchester, where Air Malta operates from. This means that within the same catchment area one route is supported by the government schemes while the other established route is not. This is not fair because there is an overlap of markets.
The same holds for Trapani airport in Sicily, which is a new route, and Palermo, the established route that is only one hour away and Luton in London, which is new but still caters for the market serviced by the established routes in Heathrow and Gatwick.
The matter also applies to outbound traffic, which for Air Malta is an important factor since it constitutes 20 per cent of our business. I am not saying that Maltese should not have the opportunity of travelling at reasonable fairs, but having a level playing field is important.
Does Air Malta play up its importance to the economy?
If anything we understate its importance. Malta depends on air transport for its communication to the outside world and not just for tourism-related purposes.
Malta also depends on air links to transport cargo. As a matter of policy to cut down on costs and render their operations more efficient, low cost airlines do not carry cargo. Air Malta carries substantial amounts of cargo like other full service airlines. Cargo transport is particularly important for pharmaceutical companies and the microchip industry, as well as other businesses that depend on imports and exports by air.
But Air Malta also has a social commitment to the country. We are the only airline that carries medical cases because no other airline in Europe is equipped for stretcher cases or child incubators. This is part of the social service we offer. Air Malta offers this service at a good discount and the costs are never recouped, but we will continue to carry these cases because it is important for Malta to be able to send patients overseas for those medical conditions that cannot be treated domestically.
Furthermore, low cost airlines do not accept unaccompanied minors travelling on their flights because it is not part of their strategy. Unaccompanied minors are expensive clients to handle because the airline has to give them dedicated staff at both ends of the journey and it is not worthwhile. However, Air Malta offers this service as well.
Another point that reinforces Air Malta's importance is our marketing. After the Malta Tourism Authority we are the company with the largest budget to market the country abroad. Our marketing spend is in excess of €23 million, including advertising and on people based overseas, who are mainly sales people.
The ability to market Malta is also an argument in favour of low cost airlines, since they have very popular websites.
The strength of low cost airlines is their websites and I accept that. Tourists travel with Air Malta not because they want to travel with us but because they want to come to Malta. In our case the decision-making process starts with choosing the destination and then the adequate transport route to it.
With low cost airlines the mindset is different. People first choose the airline and then decide on the destination. This is a fact of life that I understand and accept.
My contention is otherwise. I question the dependency that an airline with a 20 per cent market share can create with all its ramifications and the lack of a level playing field, which can hinder Air Malta's survival and sustainability.
Air Malta registered a loss of €30 million in the past financial year. What is the situation this year?
The accounts for the current financial year have not yet been finalised but the indication is that although we will be operating at a loss, the situation should improve.
The performance will be better because the cost of fuel was nowhere near what it was between 2008 and 2009. The price of fuel was the single major reason why Air Malta suffered a loss of €30 million.
This year will also register the impact of the recession. Although our costs were lower, our revenue was also lower.
The loss in revenue did not come from lower passenger carrying because that only dropped by some four per cent, but our average fares went down by five per cent. This double impact equates to a loss of around €15 million in revenue.
However, in the summer of 2009 while other European airlines reduced costs by cutting back capacity in anticipation of lower passenger numbers because of the recession, Air Malta did the opposite. We took the conscious decision to increase capacity because in no way did we want to have an impact on the tourism industry.
Air Malta did not want lack of capacity to be a bottleneck for tourism growth. We operated one aircraft more than was necessary and increased capacity by around five per cent. This also demonstrates Air Malta's commitment to the economy, which came at a cost to our bottom line.
With two successive years registering losses, what is Air Malta doing to cut costs?
We are doing a lot. In 2004 we had signed a rescue pact with the unions, which yielded about €30 million in cost savings from increased productivity and lower expenditure such as drops in overtime costs. Unfortunately, the savings were completely obliterated by the rising cost of fuel over the period. Although non-fuel costs decreased, the total expenditure remained the same. If we had not committed ourselves to a rescue plan we would have been €60 million worse off.
Manpower has also dropped. From a staff complement of around 1,900 six years ago the company now employs just over 1,300 without making anybody redundant. We had a number of early and voluntary retirement schemes and all the collective agreements still include clauses for early retirement. These schemes are expensive in their own right but their cost is recouped over a two or three year period because the company saves on its wage bill.
In 2004 the four unions at Air Malta joined forces and collectively negotiated a rescue package with management. When this expired, pilots, cabin crew and engineers wanted individual collective agreements, insisting they did not want to shoulder the burden of the section represented by the GWU - ground handling - which they claimed employed excessive staff. Were they correct?
I cannot say whether they were correct. We tried having another collective agreement incorporating the four unions but three unions did not want it. We respected that and have concluded agreements with the pilots, the cabin crew and engineers. We are still having discussions the General Workers' Union and progress has been made.
Where is the bottleneck?
I will not answer that because we do not have a dispute with the GWU. We are discussing a number of things. The company is particularly insisting on flexibility, which the union understands, but we have to reach an agreement that covers a lot of detail including individual rosters.
Does Air Malta have any plans to hive off its ground handling operations?
I hope not. Ground operations are an issue that require serious addressing. In handling ourselves we have 55 per cent of the market, but this is very expensive for us. It costs Air Malta much more to handle itself in Malta than to have its aircraft handled overseas because here we have a fixed staff complement and equipment immaterial of the number of flights we operate.
Overseas we only pay a handling fee for the number of flights we operate. In Malta we also handle other airlines but if we lose a third party client we will still be paying the wages of our own handling staff.
This is an issue management is discussing with the GWU and everything hinges on the type of agreement we reach with the union.
What was the cost of the ash cloud for Air Malta?
In those five days in April when the bulk of Europe's airspace was closed because of the ash cloud Air Malta lost 25,000 passengers, which resulted in a direct loss of €3.5 million. However, this is not the end of the story because we still have a number of claims coming in from the trade and individual clients. Apart from this, some weeks later there was a repetition, although this had less of an impact on Air Malta.
Part of the problem was the way the situation was handled by the UK civil aviation authorities, which overreacted.
They were working on computer and mathematical models and not on actual data. At the moment there is a lot of discussion between airline companies, civil aviation authorities and engine manufacturers on the best way to handle similar occurrences and the acceptable limits of ash that would not harm jet engines.
At the end of the day ash clouds are unknown in Europe but they have occurred in other parts of the world.