Air Malta – privatisation or bust?

Air Malta has been in the news again following comments on the success or otherwise of the root and branch overhaul which the PN government started three years ago based on a report by external consultants Ernst and Young (E &Y). Projections in this plan

However, more grey clouds are gathering after a heavy rightsizing exercise was concluded (this cost about €30 million) as the much acclaimed profits are still illusory although some improvements have been registered. At the onset of the E &Y rescue plan, the Airline Pilots Association had doubted that it would succeed in resuscitating Air Malta. Due to restructuring, the airline sacrificed 20 % of its capacity, including the surrender of certain profitable or potentially profitable routes. The solutions included another capital injection (as approved by the Commission) of €108 million, which consisted of proceeds from selling its head office for €66.2 million, as well as its subsidiaries and engines (€24 million); a bank loan of €25 million; and a smart package of a debt-to equity swap of €52 million; €60 million in a fresh share issue in 2013; €15 million in 2014; €3 million in 2015.All this comes alongside many cost cutting exercises and a sharp rightsizing of the staff complement.

Still, the Commission had sown doubts on whether the rescue plan as advised by E &Y and its implementation would succeed in reviving the airline, saying it was based on unrealistic assumed market growth of 5.9 %. In particular, projected revenues through catering and on-board sale seemed to be too optimistic. Critics of the rescue plan say that having sold its family silver on the cheap, Air Malta is now denuded of any assets that in the past generated good profits when times were hard.

One cannot forget that in the first years of operation when it enjoyed a quasi monopoly, it registered respectable returns. However, one also cannot forget when disaster hit the airline as a consequence of losses generated by the regional hub concept so triumphantly promoted in the early nineties by the politically appointed board .It certainly proved expensive as it accumulated massive losses to dispose of seven Avro Liner Jets and their subse- quent leasing to Azzurra Air.

Azzurra Air was an Italian airline with an operational base at Milan Malpensa. It operated a fleet of 10 aircraft, eight of which were British Aerospace Avro RJ85 and RJ70 units and two Boeings 737-700s. The latter were mainly intended to supplement charter operations while the Avro Liners on loan from Air Malta were principally deployed on the network covered by the franchise agreement with Alitalia. The connection with Air Malta goes back a few years when Air Malta’s board came up with the novel idea of investing heavily in the purchase of seven Avro Liners, ostensibly to turn Air Malta into a regional hub. With great chutzpah, the chairman of the time said that the investment would turn the tide and Air Malta would reap untold financial rewards. This advice was also supported by professional studies and reports by consultants the board had commissioned as a basis to justify the selection of this particular type of aircraft.

In 1994, the airline purchased the first of four Avro RJ70s. The ill-fated regional jets were the cause of so many operational headaches and losses that, as a short-term solution, they were absorbed in a joint-venture company called Azzurra Air. One can comment that the Fokker 70, the economically better alternative to the Avro RJ70, could have been a better choice for the national airline even today provided production really reopened. Aviation experts had warned the company that the book value of Avro Liners deteriorated rapidly. Their resale price in fact plummeted after British Aerospace decided to terminate production. But shedding tears over spilt milk will not revive the national airline.

This week, the Malta Hotels and Restaurants Association suggested that a new business model, like that applied at BOV, should be considered for Air Malta. By applying this model, majority shareholding would be floated for the Maltese public but the government would retain a strategic, substantial share. However, a blogger in a local newspaper disagrees. David Youngman says that MHRA’s proposals are based on what would be best for their members, not what is best for Air Malta which they continue to see as a free resource for their businesses. Air Malta is in the last chance saloon, as the EU will not allow any more fudges or bailouts. If it does not make a profit, it will be sold. Profit not market share is the sole priority.

The alternatives are full privatisation or a substantial sale on the lines of the recent Alitalia/Etihad deal. The majority of Air Malta’s problems are political in origin as both parties when in government have and continue to load it with non-commercial burdens and poor management decisions. It will not have a secure future until it is free from government interference. The path to hell is paved with good intentions.

Another enigma is that Malta International airport (MIA) is registering record results and showing a good profit, while Air Malta, which carries around 50% of total passenger traffic, is in the doldrums. MIA reports that its financial performance so far was better than the projected results, with passenger traffic for the first four months of the year reaching 1,033,023 movements; an overall growth of 10.3% over the same period last year, equivalent to 50,800 additional passenger movements. Can this bonanza of traffic impact Air Malta too? NSO states that there was a 9.0% increase in seat capacity as aircraft movements reached a total of 8,447 or 8.8% more than last year with seat load factor fully sustained whilst also registering a 1.0% improvement in the first four months to reach an overall average of 74.1%.

It is a puzzling how the success in increased traffic does not directly help the local airline’s finances turn black after it painstakingly trimmed its payroll and reduced overheads. Can we blame MIA, which proudly announces that increased traffic achieved in the past season demonstrates that Malta contin- ues to trend as an all-year round destination among holidaymakers. This is all very encouraging for the Viennese owners of MIA and one hopes that the low cost airlines together with all legacy airlines operating out of Malta can also partake of this success.

Undoubtedly, we are all very proud of the humble origins of our national airline. Air Malta started operations, with two wet leased Boeing 720B that served Rome, Tripoli, London, Manchester, Frankfurt and Paris. It later invested in three more Boeing 720Bs and bought the original two. Those were pioneering days for a young nation. It had a vision to create a sustainable tourist industry and to serve other social purposes as a reliable link to mainland Europe. The government had placed a call for an international partner to help set up the airline. It signed with Pakistan International Airlines, once regarded as Asia’s best airline, and the rest is history.

To conclude, facts show that Air Malta registered an operating loss of €13.7 million in the financial year which ended in March 2013, down from €29.7 million in the previous year and €34.1 million in 2011. Passenger revenue till March this year reached €193.4 million (€185.7 million in the previous year) while revenue from cargo rose to €27.9 million from €24.8 million the year before. All this seems promising, but is it enough to recue Air Malta? Not so easy – it seems that over the past three years all the king’s horses and all the king’s men could not help the airline recoup its past losses. In an interview, chairman Mr Fenech told timesofmalta.com that he could not exclude that some form of privatisation would be considered in the future if the airline wanted to expand, but this was a decision the government would take. Only time can tell if the expensive restructuring exercise initiated three years ago has borne fruit – if not, something has to give –either an injection of more capital via a public issue of shares or a strategic partner takes over .