Air Malta troubles worsen as unions flex muscle and LCCs grow

Since the Maltese government was cleared in Nov-2011 to inject EUR52 million in rescue aid into the ailing national carrier, Air Malta appears to have made few steps towards launching its turnaround effort, which is expected by the end of the 2011 summer schedule and integral in the airline's plans to return to profitability by 2015. If anything, the situation has gone from bad to worse, as both sides of Maltese politics weigh in on debates about the airline and the restructuring plans, drafted by consultants Ernst & Young, have been met with widespread opposition from unions concerned about large-scale redundancies. Slowing the airline's much needed and long overdue restructure is an enormously convoluted steering committee, comprising the current government, the opposing Labour Party, current Air Malta management and four unions. An inflexible workforce and rigid labour laws further complicate this problem, risking further damage to a company already teetering on the brink of collapse.

Change required as cash bleeds

Chairman Louis Farrugia and CEO Peter Davies advised Air Malta's workforce in Jun-2011 that the airline has no option but to carry out a significant restructuring to save the airline and hundreds of jobs. "We're doing all that is possible to carry out this very difficult but mission critical task. Every stakeholder needs to embrace change in order to survive and rebuild the future," Mr Farrugia said. Mr Farrugia also announced that the airline has already started implementing the restructuring plan that has been presented to the European Commission, which approved the initial cash injection in Nov-2010, with a key milestone being the reducing costs by EUR30 million p/a, while simultaneously increasing revenue by EUR30 million annually. CEO Peter Davis stated at the meeting that in the 12 months to Mar-2011, Air Malta made a loss of EUR36 million. Air Malta registered a loss of EUR31 million in 2009 and EUR50 million in 2010. Prime Minister Lawrence Gonzi stated the government will see the benefits of Air Malta's restructuring plan in four years time (2015), when the national airline is expected to return to profitability.

Cost savings are expected to come through come through a Voluntary Redundancy Scheme. Mr Davies stated the airline will eliminate up to 600 positions, about half the workforce, across the company. All contracts and entitlements and examined will also be examined. The restructuring plan calls for the dismissal of 57 pilots, 53 cabin crew, 21 engineers, 190 ground handlers and 190 office workers. The airline's fleet will be reduced from 12 to 10 aircraft.

New revenue opportunities will be evaluated by a new team of five executives, each focussing on the areas of IT, Revenue Management, Finance, Engineering and Cargo. This team is appointed on a temporary basis, specifically focussed on accelerating the pace of change during these six months. Former CEO Joe Cappello has stated that the airline must rationalise routes and/or try to maximise aircraft utilisation, saying that in the past Air Malta had often operated routes which "had tourist value but no commercial value", adding that the restructuring plan should take into account the "seasonality" of Air Malta's traffic. "The biggest cost-driver that an airline company has is its network. Direct operating costs are all driven by its network, meaning that cost-savings will be directly affected by how the network is run," Mr Cappello said. Air Malta's restructuring plans reportedly include asking the government for an additional EUR25 million to recapitalise the airline, and it will also require EUR51 million in either bank loans or bonds

Cost savings key area of concern

Air Malta is a short-haul European carrier that has been caught up in the structural change in the industry but has failed spectacularly to adapt. For a carrier with a dying business model and one that has been enormously exposed to competition from LCCs, Air Malta's cost base and bloated workforce has been the key area of concern. As an example, Ryanair, Air Malta's major rival, has 32 staff per aircraft and easyJet has 36. Air Malta, even with a far smaller route network and centralised hub, has 108 staff per aircraft.

Naturally Air Malta's plans to lower costs primarily through sharp job cuts has taken come under spotlight. Powerful unions and rigid labour laws have complicated efforts to lower headcount. Malta's Airline Pilots Association (ALPA) and the General Workers Unions (GWU) have been increasing their opposition to proposed job cuts at the airline in recent weeks. The airline's pilots have voted in favour of grounding aircraft from 16-Jul-2011 if the carrier's restructuring programme does not renegotiate its third-party contracts. ALPA insists that before dismissing any pilots, Air Malta must make substantial savings by renegotiating contracts, particularly with the highly profitable and cash generative Malta International Airport. Shortly after the announcement of ALPA's decision, Malta's Finance Ministry stated the EUR52 million loan given to the carrier was close to being exhausted. The Ministry advised ALPA that industrial action by pilots would push the company into bankruptcy.

"This is the last straw. We cannot go on like this. The work is not being done well. We have been ignored and now we are taking a stand so we will not be ignored any longer," Airline Pilots Association President Domenic Azzopardi said. The pilots are also demanding a three-year moratorium on Malta International Airport (MIA) charges. "MIA has drained us. They charge us for everything: the car park, security, cargo, passengers and our offices. Cutting the (airport) fees by EUR2 is not nearly enough...we need a moratorium of three years until we get back on our feet," Mr Azzopardi said. Malta International Airport stated that pilots are incorrectly continuing "with their misguided efforts to place the onus of the current need for restructuring at the national airline on Malta International Airport." The government owns 20% of Malta International with 40% of the airport's equity listed on the Malta Stock Exchange.

Air Malta has also warned the GWU that its declaration of an industrial dispute did not fall within the definitions of the law, and that it would hold the union responsible for any consequences that may arise from its actions. The union had registered an industrial dispute against Air Malta because no job guarantees had been given. The carrier's restructuring plan includes 511 employees losing their jobs, and the government pledging EUR10 million to finance voluntary retirement. Air Malta stated it is not able to give such guarantees as the restructuring process is controlled by the company's financial position. Air Malta maintains the right to sue the GWU for damages and has called on the union to not take actions that would further weaken the country.

"I can imagine life is somewhat frustrating and difficult for you at present given the financial uncertainty of the airline," CEO Peter Davis said in Jun-2011. "We live in an aviation industry that has radically changed and, to survive, Air Malta must change. We have no rear-view mirrors, we need to acknowledge the past but prepare for the future. That is life and we have to accept it ... It will be tough as we need to seek a reduction in the number of people working for Air Malta. That is unfortunate but our internal processes, what we do every day and the way we do them are out of date, expensive and not providing the right level of service for our passengers."

Prime Minister Gonzi has said that meetings with union representatives will work with the airline and the government to help find the best solutions for the company's employees. He also revealed that those who will make use of Air Malta's voluntary redundancy scheme can expect a "generous" financial package.

Staff expenses would undoubtedly be the largest single expense on the income statement. Reductions in headcount must be forced through. If cost reductions are not, Air Malta will continue to bleed cash and will only keep operating after receiving further cash injections, something that would not be tolerated by taxpayers or the European Commission.

Air Malta a victim of LCCs: E&Y

Ernst & Young, which was hired by the government to assist in the restructuring efforts, stated in its draft plan that Air Malta's troubles are "a direct consequence" of competition from LCCs, particularly on routes to the UK, and the airline's management was "unable to react" to the new competition. Labour Party Leader steering committee member Joseph Muscat supported the unsurprising finding, adding that the committee has "nothing against low cost airlines operating from Malta, [but] what is wrong is the government's policy on low cost airlines".

LCCs launched services to Malta in 2006 following the government's introduction of a five-year route support scheme, due to expire this year, which offered subsidies to carriers that launched new services to the island nation, as part of plans to increase capacity and tourism to the country. Ernst & Young said Air Malta did not reap any benefits from the scheme despite it being open to all airlines. LCCs are also not the cause of Air Malta's problems, the real cause is the airline's inability to, or failure to, act proactively and adapt to changing market conditions. This is likely reflection of public sector ownership and the airline's role as an (un)economic tool of the government, rather than as a commercial enterprise. In fact, it is highly probable the Air Malta problem only came became a priority after it emerged just how unprofitable the airline had become following LCC competition in 2006. Ernst & Young stated that a for-profit, commercially driven enterprise would have taken steps to reduce the network by dropping less- or unprofitable routes and move into new or underserved markets.

"Since the growth of low-cost carrier operations in Malta, the company's product positioning and market offering has become increasingly confused," the consultancy said in their report. "[Air Malta's] service is still promoted as quality, yet, it is not clear that customers perceive this quality as they remain very price sensitive on key routes. This has meant that the company continues to provide quality based products but on many routes has a pricing structure which has been set to compete with low-cost carriers rather than reflect its premium offering."

Ryanair deputy CEO Michael Cawley stated the LCC should not be blamed for Air Malta's difficulties because the two airlines are not in direct competition. Mr Cawley said Ryanair has opened new routes and is attracting a new market of passengers. In contrast, Air Malta was operating on long-established routes and therefore could not benefit from assistance given to all other airlines that were busying opening new routes, he said. He also stated that Air Malta's difficulties had commenced "before Ryanair appeared on the scene". Mr Cawley blamed inefficiency within Air Malta and its overall business model which needed to be improved. Ryanair hopes to operate 17 new routes to Malta in the coming years, with the process starting in 2012 and a second aircraft based in Malta. He did not mentioned what new areas would be serviced but mentioned Latvia and Lithuania as possible areas of growth. Ryanair, he said, hoped to attract 200,000 more tourists to Malta.

Ryanair's position is broadly similar to comments made in other LCC vs. full-service debates. The fact remain, however, that intra-Europe routes have continued their "structural decline", with business passengers increasingly travelling economy class. Premium travel within Europe continues to exhibit slower growth patterns than economy travel, according to IATA's Premium Traffic Monitor, a trend that is expected to continue.

Air Malta and LCC competition

Tourism generates some 25% of Malta's economic activity and it among its largest exports, and understandably, the Maltese government has in place various policies aimed at increasing tourism activity, many of which include air transport. The government actively promotes and attract new services and provides benefits to carriers that launch new services to the island state. Air Malta's pilots clashing with Malta International Airport is not altogether surprising. The airport's marketing is not done in isolation but is carried out in tandem with the Malta Tourism Authority to ensure that the synergies needed for a small destination like Malta are maximised.

This policy, perhaps inadvertently although not altogether surprising, has gained enormous traction among Europe's largest LCCs, which have been facing the prospect of a slower-growth market on the continent and are keen to exploit longer sectors and new markets. Malta, with its government subsidising new services, became a market perfectly suited to low-cost operations. Adding to the attraction was the fact that there are essentially no competing modes of transport (98% of Malta's visitors come by air), the vast majority of visitors are from short-haul markets and are leisure passengers (85% of total visitors are from nearby Europe and 80% come for leisure purposes), and there was really only one major, high-cost competitor. For LCCs, serving Malta must be as close no a "no brainer" decision as is currently possible to achieve.

The table below shows the routes and weekly frequencies from Malta International Airport by the airport's three largest carriers: Air Malta, Ryanair and easyJet, which together account for about 80% of all passenger movements. Cities in bold font are where Air Malta faces competition on a route from either Ryanair and/or easyJet. These routes include London, Manchester (note: Leeds/Bradford is considered here as as serving the Manchester region), Marseille, Milan and Rome.

Air Malta, Ryanair and easyJet routes and weekly frequencies from Malta International Airport, 04-Jul-2011 to 10-Jul-2011

	Amsterdam (5), Athens (5), Brussels (7), Budapest (9), Duesseldorf (9), Frankfurt (13), Geneva (1), Hamburg (2), Hannover (2), Istanbul Ataturk (1), London Gatwick (16), London Heathrow (29), Lyon (2), Manchester (5), Marseille (2), Milan Linate (11), Moscow Domodedovo (6), Moscow Sheremetyevo (1), Munich (12), Naples (2), Paris CDG (6), Paris Orly (16), Prague (2), Reggio di Calabria (7), Rome Fiumicino (5), Stuttgart (2), Verona (2), Vienna (8), Zurich (7)
	Bari (3), Billund (2), Birmingham (2), Bologna (2), Bristol (3), Dublin (5), Edinburgh (3), Eindhoven (2), Barcelona Girona (2), Glasgow Prestwick (2), Krakow (2), Leeds/Bradford (2), London Luton (7), Madrid Barajas (2), Marseille (2), Pisa (3), Seville (2), Stockholm Skavsta (3), Trapani (3), Valencia (3),Venice Marco Polo (3)
	Belfast International (2), Liverpool (2), London Gatwick (10), Manchester (5), Milan Malpensa (4), Newcastle (2), Rome Fiumicino (4)

Source: Centre for Asia Pacific Aviation and Innovata

Worth noting is that Air Malta actually increased passenger numbers in 2010. The airline carried 1.68 million passengers at Malta International, a 2.6% year-on-year increase. Air Malta's growth figure, however, pales in comparison to the growth put up by Ryanair and easyJet. Ryanair, the larger of the two LCCs at Malta, increased passenger numbers 52% year-on-year to 675,637. easyJet grew even faster, carrying 303,000 passengers for an annual growth rate of 66%.

Malta International Airport top five airlines 2010 vs 2009

Source: Malta International Airport plc

While the overall level of direct competition between Air Malta and the LCCs does not appear excessive, both Ryanair and easyJet have a much a much wider coverage of key Maltese tourist markets, most notably the UK. Ryanair serves six ports in the UK, with 19 weekly frequencies, and easyJet serves five, also with 19 weekly frequencies. Air Malta serves three UK ports (in two cities) with 50 weekly frequencies. Despite Air Malta's higher frequencies, it is highly likely the LCCs are able to cherry pick passengers from across the UK and Ireland that would otherwise have to travel to London or Manchester to travel to Malta with the national carrier. Ryanair, for example, serves Birmingham, Bristol, Edinburgh, Glasgow in the UK, none of which are served by Air Malta. Add to this Liverpool, Newcastle and Belfast, which are served by easyJet, and the major London and Manchester-area airports that both LCCs serve, and it becomes clear that the two have the UK far more comprehensively covered than Air Malta. Air Malta's London-centric strategy is also a cause for concern. Of the 50 weekly services, 45 of them are to London. Having a mix of regional (and lower-cost) airports and major hub airports is a sound strategy when serving Malta, which is largely a leisure, not a business, market.

Malta international passenger arrivals 2010 vs 2009

Source: Malta International Airport plc

Interestingly, despite the fact that the UK is Malta's largest source of inbound tourism, the size of the UK-Malta travel market has fallen in the past decade, even with the entrance of low-cost carriers to the market.

Malta International Airport passenger numbers for the month of August, 2001-2010

Source: Centre for Asia Pacific Aviation and Malta International Airport plc

Two markets demonstrating strong growth in recent years is the Italian and Spanish markets. Monthly traffic from Italy has nearly doubled in the past decade and Spanish traffic in the same period has grown nearly 600%. Strong growth was recorded in both of these markets following the entry of low-cost carriers in 2006. Air Malta's network is not optimised to capitalise on this strong increase in demand. The carrier's network continues to serves the UK, France, Greece, the Netherlands, Russia and Switzerland. These markets, according to passenger data from Malta International Airport, have either shrunk or exhibited only minor growth in the past decade.

According to data from Malta International Airport, there is scant evidence to suggest the introduction of LCC services to Malta has affected the overall growth trend to/from the country. The graph below shows Air Malta's decade-long underperformance relative to rivals, particularly in 2003, 2004 and 2005. The carrier's annual passenger traffic, all of which comes from European destinations, has fallen slightly over the past ten years, while passenger traffic from the EU has grown 27%. While the overall size of the pie has grown, Air Malta has failed to keep pace. The average annual growth of EU traffic in the past decade is 3.2%, while Air Malta's average annual growth is a paltry 0.3%.

Malta's total annual passenger numbers from the EU (,000s), 2001-2010

Source: Centre for Asia Pacific Aviation and Malta International Airport plc

Ryanair's deputy CEO Michael Cawley's claim, that Ryanair is opening new routes and is attracting a new market of passengers and therefore is not the primary cause of Air Malta's troubles, may be true. Legacy carriers are actually maintaining their passenger numbers to and from Malta. Indeed Air Malta's passenger numbers have hardly changed in the past decade. As a group, however, they are failing to stimulate new markets. Legacies, unsurprisingly, are not participating in the growth in passenger traffic to and from Malta. It should be noted that over 80% of legacy passenger traffic at Malta International is carried by Air Malta. Legacy market share fell from 71% in 2009 to 62% in 2009. Passengers carried fell slightly to 2.0 million. LCC market share grew from 23% in 2009 to 32% in 2010. Passengers carried increased 57.7% to 1.0 million.

Malta International Airport passenger mix 2010 vs 2009

Source: Malta International Airport plc

Air Malta: time to change

Air Malta is Europe's foremost example of a carrier falling victim to structural changes but failing to adapt. Drastic changes need to be forced through if Air Malta is to have any chance of surviving. Slowing this process, however, are the airline's rigid labour force and the convoluted oversight of its restructuring. The management team has repeatedly warned that the airline "must be given the time and space to manage the difficult situation and be allowed time to manage the multifaceted problems it is facing," adding that "industrial unrest at this time is irresponsible and can permanently damage the airline. Management has appealed to the workforce's "common sense to prevail and allow management the time and space to restructure the airline for the benefit of employees and the country at large, especially the tourist industry". The airline must transform itself from an arm of the government and its role as a public service into a commercially driven enterprise. If it fails, there are other airlines eager to take up the slack.