News & Events

Network News - 22/09/2014

Airmalta – glorious tale of a ‘cuc’ Malti



Article author: George Mangion
Published on Malta Today, 19 September 2014

It is a mystery how the success in increased traffic does not directly help the national airline to turn into the black, notwithstanding that following the EY plan it painstakingly trimmed its payroll and reduced capacity.

Airmalta has again been in the news following comments on the success or otherwise of the root and branch overhaul which started three years ago by the PN-led government, based on a report by the external consultants Ernst and Young.

Projections in this consultancy plan (reputed to have cost around €3m) forecast that the airline’s profitability is to return in 2016 and is expected to be comparative on a size per size basis as those registered by  major carriers.

More grey clouds are gathering since it is rumoured that around €30m will be reported as losses in 2015. It appears that the much hyped profitability to be reached in 2016 is still illusory although improvements have been registered.

Airmalta went through a massive restructuring approved by the EU after the PN government boldly saved it from bankruptcy in 2010 with a €52 million loan. The EU approved €130 million in State aid on condition that the airline was restructured, which meant almost halving its workforce, reducing the number of planes in operation and cutting capacity. More turbulence was felt in the cockpit as the government wanted to remove Davies – the aviation expert at the helm on a tax free annual salary of €500,000 to replace him with former EneMalta chairman Louis Giordimaina.

The latter resigned last month. Another resignation was that of the chairman, Ray Fenech, of the Hilton Malta stable, to be replaced by a general manager of a soft drinks company… certainly both political appointments.

The Jeremiahs have loudly criticised the largesse of Davies and are now looking for a scapegoat as to why the €230 million restructuring plan mandated by the European Commission has not borne the desired fruit. At the onset of the E&Y rescue plan the Airline Pilots Association had doubted that the study will succeed to resuscitate Air Malta, criticising the fact that the airline has sacrificed 20% of its capacity, including the surrender of certain profitable or potentially profitable routes.

The EY plan mentions a capital injection 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. With a whimper, we read about the Malta Hotels and Restaurants Association suggesting that the government should maintain a “strategic interest” in the national carrier that should remain Maltese-owned. They argue that the solution to Airmalta ’s future governance structure should be modelled on that of the Bank of Valletta.

This means a majority shareholding would be floated for the Maltese public but the government would retain a strategic, substantial share. But a blogger in a local newspaper disagrees. Quoting David Youngman he says that the MHRA’s proposals are based on what would be best for their members, not what is best for Airmalta , which they continue to see as a free resource for their businesses.

Many agree that Airmalta is in the last chance saloon, as the EU will not allow any more fudges or bailouts. The alternatives are full privatisation or a substantial sale along the lines of the Alitalia/Etihad deal. Recently Alitalia entered into an agreement with Etihad Airways of Abu Dhabi who by the end of this year will own 49 per cent of the Italian airline. The social cost of restructuring Alitalia may reach as many as 3,000 jobs from Alitalia’s original workforce of 14,000.

Another airline which is seeking external partners is Cyprus Airlines, which is being investigated ‘over possible violations of State-aid rules in a €31 million capital increase by the Cypriot government and a €73 million state bailout over the past two years. Moving on we read how recently the Cypriot government has issued a request for proposals from potential ‘strategic partners’ to take over the 94 per cent shareholding it owns in Cyprus Airways.

This request attracted 15 potential ‘strategic’ partners, including Ryanair, with the latter proposing that it could boost the airline’s passenger numbers to three million per year from 600,000 currently in force. But many remember how in Malta before low cost airlines were allowed to compete with Airmalta some boasted that they would generate new business by way of an extra two million visitors in the first year.

Critics of the rescue plan say that having sold its family silver on the cheap Airmalta is now denuded of any assets (a number of subsidiary companies) that in the past generated good profits when times were hard. Will Airmalta’s destiny suffer the same misfortune as Cyprus Airlines? Perhaps not, but jokingly one must wonder whether this will only happen if it manages to avoid the curse of employing the proverbial ‘Cuc’ Malti at the helm?

However one 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 subsequent leasing to Azzurr Air.

It is pertinent here to give some background about Azzurra Air. This is 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 Airmalta were principally deployed on the network covered by the franchise agreement with Alitalia.

The connection with Airmalta goes back a few years when Airmalta ’s board came up with the novel idea of investing heavily in the purchase of seven Avro Liners ostensibly to turn Airmalta into a regional hub. Much chutzpah was created at that time by the chairman claiming that the investment would turn the tide and Air Malta would reap untold financial booty.

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.

Another enigma is that Malta International Airport (MIA) is constantly reporting record results when Airmalta , which carries around 50% of total passenger traffic, is in the doldrums. It is a mystery how the success in increased traffic does not directly help the national airline to turn into the black, notwithstanding that following the EY plan it painstakingly trimmed its payroll and reduced capacity.

We can praise the management at MIA who proudly announce that increased traffic achieved during the past season demonstrates how Malta continues in its trend as an all-year round popular destination. This is all very encouraging for the Viennese owners of MIA and one expects that the low cost airlines together with all legacy airlines operating out of Malta are also sharing in this success story.

Nostalgically we are all very proud of the humble origins of our national airline, which started operations with two wet leased Boeing 720B’s that served Rome, Tripoli, London, Manchester, Frankfurt and Paris. Courageously it invested in three more Boeing 720Bs and bought the original two.

Those were pioneering days for a small nation which in the early 1970s was led by a brave government which set up an airline. It had a vision to mould the airline business as a cornerstone to build a sustainable tourist industry and serve other social purposes as a reliable link to mainland Europe.

We read how the government had placed a call for an international airline partner to help set up an airline which it later signed with Pakistan International Airlines, once regarded as Asia’s best airline. To conclude, only  time can tell if the restructuring exercise initiated three years ago by EY consultants has borne fruit – if not then something has to give – either an injection of more capital via a public issue of shares or a strategic partner takes over.

A Stoic will tell us the future is written on the wall and sooner or later Airmalta must be privatised, if it is going to exist in the future. It is my guess that only a few legacy airlines would be interested in buying 51% of Airmalta in its current state, but hope springs eternal – we must continue trying to save the Ghasfur Tac-Comb.

Author: George Mangion
Published on Malta Today, 19 September 2014