Air Malta, the island nation’s government-owned flag carrier, was facing serious liquidity issues in 2010 that threatened its very future.  A year later, it posted a loss of €78 million ($96 million), prompting the government to dip into treasury coffers with aid to prop up the carrier.  Its importance to the island’s economy meant the airline could not be allowed to fail.

The move inevitably caught the attention of European Commission competition watchdogs monitoring the contentious issue of state aid to airlines. The Commission gave the go-ahead for a €52 million loan provided by the government of Malta, but in return required a restructuring plan that would move Air Malta back into profitability.

The restructuring plan was submitted in late 2011 and accepted by the EC in June 2012. In October 2014, Air Malta reported a loss of €16.2 million for the financial year ending March 31, 2014—a figure that left it well short of its planned target of €3.3 million profit, but nevertheless halved the loss of €31 million declared for the previous financial year.

Air Malta chairman Maria Micallef acknowledged: “Yes, we are not on target for this year, but the result still sends a very positive message because the loss was halved from the previous year.  It reflects a good improvement in the bottom line of the operation of the company and I feel quite positive that by 2016 we will get this airline to breakeven in line with what we promised in the [plan].”

The only time performance has been on target was in 2012 when Air Malta met its commitment to reduce the loss to €40 million.  That loss was further reduced to €31 million in 2013, but was again still well short of the plan forecast of €15 million.  The commitment was for the airline to turn a small profit in 2014. 

Nevertheless, Micallef remains upbeat and insists the figures are moving in the right direction.

In total, the European Union has approved government aid of €130 million for Air Malta over the restructuring period.  This includes a cash injection of €78 million by the Maltese government to increase Air Malta’s equity, plus a commitment to convert the original €52 million rescue loan into equity in two tranches: €40 million in January 2015 and €12 million in January 2016.

“This equity injection was agreed with the EU in the [plan], and as far as aid from the government is concerned, the game is now over,” Micallef said. “That is the maximum amount that was promised and we now need to stand on our own two feet.”

Micallef highlights several reasons why the airline has fallen short of its targets in the last couple of years.

“Our revenue was forecast to increase by €32 million per annum by the end of the restructuring period, but by 2014 revenue had actually increased just €22 million compared to 2011.  In addition, we were targeting cost rationalization of €24.5 million per annum which has so far been substantially under achieved,” she said.

The plan budgeted a €9 million drop in employment costs, with a head count reduction of 470.  Although the actual count was achieved—largely through early and voluntary retirement schemes—the cost of achieving it was higher than anticipated.  The real cost was €32 million, €4 million more than the €28 million budgeted.

In addition, contract negotiations failed to reduce contract values by the targeted €9 million, and have achieved savings of only €6 million per annum to date.

Maintenance costs

Micallef also pointed out that the plan did not anticipate an increase in aircraft maintenance costs, despite the increasing age of the fleet.

“That worked against us and was one of the biggest areas of deviation,” she said.  “Except that it wasn’t really a deviation.  There was an increase in maintenance costs, but that should have been budgeted.”

Air Malta has 12 Airbus aircraft (seven A320s and five A319s), 10 of which are used for airline activities with the remaining two contracted out.

Other unaccounted for increases in landing charges, overflight charges and fuel also caused deviations from the restructuring plan.

“There were some things that were not anticipated that we needed to address. There were others that were anticipated that we achieved, and there were others anticipated that we did not achieve. But we submit regular update reports to the EU and our shareholder—the government—informs us that the EU is happy with the progress.  There is a firm commitment from the airline’s board of directors and government that we are going to achieve our target by 2016 despite these stumbling blocks.  If we manage to do that, this will have been a very good business case,” Micallef said.

For 2015, Micallef is targeting a flat result and said the airline was working hard to ensure that it would keep losses to no more than €16 million for the full year end March 2015.

She said there had been “two significant hits on our revenue for 2015.”  The first was the loss of the Libyan market due to the deteriorating security situation there, which had been a lucrative contributor to Air Malta’s bottom line.

“It was lucrative not only in terms of the direct contribution of our Tripoli and Benghazi routes, but also because the type of passenger that we used to carry to Malta in transit to other European destinations would often travel club class all the way. We were badly hit by [the loss of] Libya, taking a direct hit in contribution of approximately €1 million a month, but we are reacting. We are trying to develop other routes in the region, such as Djerba in Tunisia, which is generating some interesting contributions, and Algiers, particularly for the winter season. Load factors so far are not very high, but yields are very interesting making Algiers viable on a contribution basis.”

The turmoil in Russia and conflict in Israel also affected Air Malta’s bottom line, as these have traditionally been key markets.  But Micallef acknowledged that these were “the realities of life and these markets will eventually come back.” 

Competition surge

The second hit was a sudden and unanticipated boom in seat capacity this summer by other airlines operating to Malta.  This boosted overall seat capacity by 20%, shaving about 10% off Air Malta’s peak season earnings.

Micallef acknowledged that many of these airlines operate to Malta only in the summer, leaving Air Malta to dominate the market in the winter months.  “We need to maximise the amount of tourists we can carry during the winter months and a lot of ground work has been done to build new markets.”

This includes working more closely with tour operators, which has already doubled or in some cases tripled the number of committed seats from markets such as Germany, the Netherlands and Brussels over the winter months; an aggressive end of summer promotion for the coming winter—mostly for the Maltese market—that has generated a firm base of bookings for the winter season; and a website revamp. Air Malta is also marketing outbound day return trips for shopping, attending football matches, other sporting events, etc.

The restructuring plan envisaged that Air Malta would start making money in 2014, 2015 and 2016, with the delivery date being March of the final year.  Micallef believes that if it can sustain the same level of loss in 2015 as in 2014, the airline should still have reached breakeven by 2016, despite falling short of its intermediate targets.

New management

It is a short-term set of business goals and Micallef is well aware that the plan has just 17 months to run. Beyond the 2016 deadline, plans are already in place to equip the airline with a new management structure and development strategy to take it into the long-term future.

The new management structure includes a new CEO, Philip Micallef, who took up his new role in mid-October.  Below him, the airline is appointing two expatriate aviation specialists as COO and CFO, who will each be supported by a Maltese deputy they will groom to take over.  The expatriate contracts will run for three years during which time they will lead for the first two years, and shadow their Maltese deputy for the final year.

Two crucial challenges for the new management team are creation of a route development plan that will take the airline beyond 2016, followed by a fleet renewal plan to support it. The main framework of this plan will need to be in place in six months because fleet renewal is a pressing issue.

“We don’t have the luxury to postpone the route development plan further. So we will exploit the aviation expertise of the new CCO and CFO to put in place the best route development plan for Air Malta and once that is defined to ensure we have the right fleet to serve it,” Micallef said.  She said that initial approaches to the aircraft manufacturers had been made in July and August, and stressed, “no manufacturer has or will be ruled out. We have a very open mind. We need to make sure we get the right fleet at the right price.”

She pointed out that under the terms of the restructuring plan Air Malta is restricted from operating in certain markets and on certain routes, so the route development plan will initially have to work within these constraints.

“However, beyond 2016, I believe we need to get out of this RP mode and give the airline a long-term viability plan and it is very clear that volume is needed in this operation,” she said.

And a key focus of that strategy includes finding a strategic partner to help the airline spread its wings and fulfill its potential into the long term.

“Operating just 10 aircraft means we do not have the economies of scale needed, so we need to align ourselves with the right strategic partner,” Micallef said. “The government has stressed that it wants to retain a majority shareholding of the airline, but is open to plans that are going to increase the economies of scale of the airline.”

Essential air link

As an island nation, air links are crucial to Malta so Air Malta is an essential resource. Tourism currently contributes about 30% to Malta’s GDP, with Air Malta carrying about 1.8 million passengers or half of the tourists coming to the islands.  The airline is therefore indirectly responsible for approximately 15% of GDP.  But the tourism industry is highly cyclical, and concentrated on the summer months.  In winter, the GDP weighting is greater and the importance of Air Malta more relevant.

“It is clear we need to create a business model to connect people coming from the east [Asia] and south [Africa] of us into Europe,” Micallef said.  But the airline itself has no ambitions to go long-haul.  “We don’t have the expertise to operate long-haul and there are no aspirations to move into that market. We’ve got to understand what we can do and do that right.  However, partnering with a player that can give us the option to be part of a long-haul network would be one option that we might consider.”

Full privatization is not in the cards and political consensus is that it would be a risky move for both Air Malta and Malta.  The carrier is so important to the economy of the islands, especially during the off-peak season, the government believes it needs to be in a position to strategically influence what happens next. Similarly, Micallef believes Air Malta could never be a low-cost carrier.  “They operate in a completely different niche from us,” she said. “I like to define us more as a network carrier—we make sure that we get people at the right times to the right airports.  We need to continue focusing on that and building on that.”

“My message is that Malta needs this airline to survive,” Micallef said. “We really want this airline to work.  We have 17 months to get it right because by 2016 we need to break even and have our strategic long-term plan in place. We want Air Malta to survive, but we all understand that it cannot survive on taxpayer’s money and we want to give it long-term viability.  The airline has improved and we need to continue the process.  I feel full of strength that we can do it, but we need to press the pedal and make it work.  The passion is there, but we need to make sure we start delivering.”