Air Malta – an industry perspective - Clive Aquilina Spagnol

As a professional in the aviation industry, I have followed the developments at Air Malta with particular attention. My interest stems from my professional and academic engagements in aviation – partisan political interests are not my business.

After a new minister took the helm of Air Malta (KM) last June, I could not help but observe the commendable efforts in the following months. Around a year ago I said on TV that the decision to sell a sizeable KM equity to Alitalia (subject to the conclusion of talks) was not only against the interests of Air Malta but founded on bad professional advice. It was an attempt to find whatever buyer came along within a context of beggars not being choosy.

Worse still, the sale was marketed as being carried out to Etihad, when Etihad was set to dispose of failed equity stakes in almost bankrupt European carriers and had little interest in buying a KM stake. I was relieved when this sale was no longer pursued, and excited at the change of approach in June. The airline embarked on a restructuring process, or rather restructuring in areas which should have long been dead and buried, and on a sensible attempt at growth, mainly in relaunching routes earlier discontinued.

The criticism levelled at the approach adopted by the previous minister was at times unfair. KM was suffering a financial haemorrhage. The more it flew, the more money it lost, so it made sense to shrink to stop the haemorrhage. Without the cost cutting of the past years, the business growth contemplated today would not have been possible. It would have been better had Air Malta sought to grow at the same time, but, better late than never, the growth phase seems finally with us.

Yet, two decisions which have been announced – on ground handling and airport slots – are difficult to digest.

Shifting 450 ex-KM employees to a government-owned company to provide ground handling services may give breathing space to KM’s books but fails to provide a solution to production inefficiencies and the high cost of the service. KM paid above average market rates in the sector and productivity was low. I do not have high hopes that the new company will have much success unless the way it operates is radically overhauled and preferably taken over by the private sector or MIA. With the ground handling business in Europe changing, repackaging it in new government hands and adding some new equipment will not turn a profit.

KM also divested itself of its airport slots. From what has been made public, these were transferred to a government-owned company with an air operating certificate (AOC) which will then lease the required slots to Air Malta. In other words, Malta now has two airlines.

Difficult decisions need to be taken

The new one will even have an operating aircraft, otherwise it will not be able to sustain a current AOC. Once in possession of an AOC and an air operating licence (AOL), it will need to fulfil all the obligations imposed by European legislation, including the ability to operate profitably without State aid – the same ‘constraints’ the government has with Air Malta.

An AOC-holding entity cannot be set up for the sole purpose of holding and leasing slots but has to carry out air transport business, otherwise it will lose its AOC and AOL. The decision to opt for this ‘burdensome’ and costly route baffles me. It must have been some overly optimistic accounting engineering. Sound airline business requires the guidance of expert industry professionals and cannot be driven purely by accounting principles.

I do not agree with the justification provided: that these slots had to be transferred to another company for KM to realise their value. The value was there and could have been used, for instance, to secure more credit in its favour. While it has become common practice for airlines to lease European slots, it is highly unusual for an airline to lease slots from its government, let alone a government-owned carrier.

I can understand the reasoning given: that transferring the slots to another  State-owned company will prevent them being acquired by a potential buyer of the airline but keep them in the hands of the taxpayer. That said, there are other caveats to this which I won’t mention here.

Slot leasing is an added cost to KM and slots were its only asset, the only thing making KM attractive to potential suitors. Should the government decide to sell an equity stake, the price is now considerably reduced. The decision on whether and when to sell a KM stake will depend on a number of factors, the main one being the ability of the airline to survive on its own in the medium term. Air Malta has the challenge of finding its feet; keeping them will be an even tougher act. Without jumping the gun – and contrary to my patriotic self – if I were to be guided by industry data, trends and forecasts, I do not see any other way for KM to survive unless a partial stake is sold to a larger airline group.

I would like to see Air Malta regain momentum and sincerely wish its shareholder would exert utmost caution when heeding advice. At this juncture, multiple advice streams may make sense, and indeed may be grounded on good industry knowledge, but only a handful, or even just one, will mean viability and success.

We have had enough of past failed outcomes, most of them stemming from genuine decisions taken on the assumption they will do Air Malta good. The result is the dire situation it is in today, gasping for breath with every inch forward.

I commend the government’s efforts and zeal to put KM back on track. Likewise, one must not discount the tireless efforts of the airline’s executives in trying to secure the best in the circumstances. Yet, difficult decisions either need to be taken or would have been better taken differently. In the airline industry of today, there are no in-betweens.

Clive Aquilina Spagnol is a commercial aviation executive in the Middle East. He has been engaged in airline management and was Head, Air Transport Regulation, at the Malta Civil Aviation Directorate.

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