Air Malta turnaround attempt: fleet renewal and network consolidation

Summary

• Air Malta plans to take delivery of two A320neos in Aug-2019, accelerating a fleet renewal initiative that will eventually result in replacing all its A319/A320ceos with A320neos.
• Air Malta has introduced an improved business class service, but with the new A320neo fleet the airline is maintaining a convertible business class cabin with blocked middle seats.
• Air Malta has slowed network expansion and is launching only three routes in 2019 - after launching 28 routes in 2018.
• Air Malta is shifting focus to adding frequencies to existing markets, a sensible strategy, given that most of its routes are operated less than daily.
• Fleet renewal and network consolidation should help Air Malta achieve sustainable profitability and complete a turnaround which began in FY2018, with its first profit in nearly 20 years.

Malta will host the 2019 CAPA World Aviation Outlook Summit on 4/5-Dec-2019. For more details on the summit click here.

Air Malta chairman Charles Mangion discusses the airline's new A320neo fleet, recent improvements to its business class product, and network expansion

Source: CAPA TV.

Air Malta has not grown over the past decade, while Malta's market has doubled

Visitor numbers to Malta have more than doubled over the past decade with the island's surging popularity as a tourist destination.

Malta reported 2.6 million visitors in 2018, representing a 14% increase compared to 2017 and a 119% increase compared with 2009.

Malta visitor arrivals and year-over-year growth: 2008 to 5M2019

Source: CAPA - Centre for Aviation and National Statistics Office Malta.

Passenger traffic at Malta International Airport has doubled over the past decade, mirroring the growth in visitors.

Malta handled 6.8 million passengers in 2018, representing 13% growth compared with 2017 and 133% growth compared with 2009, when the airport handled only 2.9 million passengers.

Passenger traffic at Malta International was up another 6% in 1H2019, to 3.25 million. The airport is also expecting 6% growth for the full year, to 7.2 million.

Malta International Airport passenger traffic and year-over-year growth: 2008 to 1H2019

Source: CAPA - Centre for Aviation and airport reports.

Malta's rapid growth has been fuelled largely by European LCCs, creating stiff headwinds for Air Malta in its growth aspirations.

Air Malta carried 2 million passengers in the fiscal year ending 31-Mar-2019 (FY2019), matching the 2 million carried in FY2009. Its passenger traffic peaked in FY2008, at 2.15 million.

Air Malta's market share has dropped by 40ppts over the past decade

As the market has expanded, Air Malta's market share has dropped over the past decade by 40pts - from approximately 70% to approximately 30%. Air Malta currently accounts for 31% of seat capacity in Malta (based on CAPA and OAG data for the week commencing 29-Jul-2019).

Ryanair is now the market leader, with a 32% share. Other LCCs account for 17%, led by easyJet with 6% and Wizz Air with 5%.

LCCs accounted for 51% of total seat capacity at Malta in the first eight months of 2019, according to OAG data. The LCC penetration rate in Malta has increased from only 23% in 2009 to 48% in 2018. Over the past decade LCC capacity at Malta has increased fivefold.

Foreign FSCs currently account for a 21% share of total capacity in Malta, led by Lufthansa (with nearly 5%) and Emirates (with more than 2%). FSC capacity has increased by almost 50%, driven by foreign airlines.

Of the 10 largest airlines in Malta, five are FSCs (Air Malta, Lufthansa, Emirates, Turkish and Alitalia) and five are LCCs (Ryanair, easyJet, Wizz, Jet2 and Vueling). These 10 airlines currently account for 89% of seat capacity; another 20 airlines (six LCCs and 14 FSCs) account for the remaining 11%.

Malta top 10 airlines ranked by seat capacity: week commencing 29-Jul-2019

Rank	Airline	IATA	ICAO	Seats	Seat share
1	Ryanair	FR	RYR	66,906	32.2%
2	Air Malta	KM	AMC	64,767	31.2%
3	easyJet	U2	EZY	12,174	5.9%
4	Wizz Air	W6	WZZ	10,590	5.1%
5	Lufthansa	LH	DLH	9,184	4.4%
6	Emirates Airline	EK	UAE	5,138	2.5%
7	Turkish Airlines	TK	THY	4,490	2.2%
8	Jet2.com	LS	EXS	4,356	2.1%
9	Alitalia	AZ	AZA	4,002	1.9%
10	Vueling	VY	VLG	2,548	1.2%

Source: CAPA - Centre for Aviation & OAG.

Ryanair has doubled its Malta operation over the past four years

CAPA analysed Ryanair's continued expansion and impact on the Malta market in a recent report.

See related report: Malta aviation: Air Malta, Ryanair and now Malta Air

This report will focus on Air Malta, including its strategy for responding to intensifying LCC competition.

On 11-Jun-2019 Ryanair announced the acquisition of the privately owned start-up Malta Air in a deal supported by the Maltese government. Malta Air has already started operating Ryanair's six Malta-based 737-800s and will also be used to operate aircraft based at other European airports (a move driven by Malta's lower tax rate).

Ryanair has stated that it now carries 3 million passenger per annum to/from Malta, which would make it broadly 50% bigger than Air Malta based on passengers carried. Given Ryanair's very high load factors, the gap between the two airlines is narrower - and fluctuates depending on the time of year.

Ryanair is currently operating 62 routes from Malta while Air Malta is operating 41 routes (based on OAG schedules for the week commencing 29-Jul-2019). Ryanair has doubled its Malta capacity over the past four years, including 14% growth over the past year (based on CAPA and OAG data for the peak summer season).

Air Malta resumes growth

Air Malta resumed growth in 2018, enabling it to regain a small amount of market share. Its passenger traffic increased by 300,000 in the year ending 31-Mar-2019 (FY2019), representing growth of nearly 20%.

However, Air Malta is slowing expansion in the current fiscal year and its seat capacity is currently up only 3% year-over-year (based on CAPA and OAG data for peak summer 2019 versus peak summer 2018). At this time in 2018 Air Malta's seat capacity was up by 30% year-over-year (peak summer 2018 versus peak summer 2017).

Air Malta chairman Charles Mangion stated in a CAPA TV interview on the sidelines of the Jun-2019 IATA AGM that the airline had launched 28 routes in 2018 and also increased frequencies on most of its existing route.

"This year we want to consolidate and improve on those new routes in terms of frequency where we see the demand increasing", Mr Mangion said.

Network expansion slows

Air Malta is only launching three routes this year - Cairo, Tbilisi and Warsaw.

Tbilisi and Warsaw are only being served with one seasonal frequency - three peak summer months for Tbilisi and five summer months for Warsaw. Cairo will be launched in Sep-2019 as a twice weekly service.

"We will see how these develop", Mr Mangion said. "It is more a soft entrance to the market. Obviously if the market responds we will expand further."

Air Malta is competing against Wizz on the Warsaw route, whereas it is the only nonstop competitor from Malta to Cairo and Tbilisi.

Air Malta continues to evaluate potential new destinations, particularly in Russia, where it only currently serves Moscow and Saint Petersburg. The airline is keen to deepen its presence in some of its smaller markets (such as Russia) that have tourism potential, as well as establishing a presence in new markets that are important to a tourism industry diversification initiative.

However, Air Malta is primarily focusing on adding capacity to existing destinations. Many of these should be able to support capacity increases due to the rapid growth in Malta's main source markets.

Europe dominates Air Malta's network

Air Malta's eight largest markets are all in Western and Central Europe - Italy, Germany, the UK, France, Austria, Belgium, Switzerland and the Netherlands.

The UK, Italy, Germany and France are also Malta's top four source markets (based on 2018 visitor numbers). Belgium, Netherlands, Australia and Switzerland are among Malta's 13 largest source markets.

Europe currently accounts for 95% of Air Malta's seat capacity and 38 of its 41 international destinations. Tel Aviv in Israel accounts for another 2.5% of its seat capacity, and its two North African destinations - Casablanca and Tunis - account for the remaining 2.5%.

Of Air Malta's 41 destinations, only 13 are currently served with at least one daily service and only five have at least two daily services. Air Malta is operating 19 routes this summer that have only one or two weekly frequencies.

Air Malta number of routes based on number of weekly one-way frequencies: week commencing 29-Jul-2019

Source: CAPA - Centre for Aviation & OAG.

It is a sensible strategy to start focusing on increasing frequencies rather than investing in more new destinations. The focus on network expansion in 2018 had a negative financial impact, as Air Malta swung back into the red in FY2019 after recording its first profit in nearly 20 years for FY2018.

Air Malta focusing on short haul segments

Air Malta has reportedly been considering the launch of long haul services, potentially with A321neoXLRs. However, this is not a priority at the moment.

Long haul routes would be risky and would make it more difficult for Air Malta to restore profitability.

Almost all of Malta's traffic is heading to or from markets within a four-hour radius. Air Malta currently does not have any routes with a flight time of more than four hours, and has just one route with a flight time of more than three hours (Moscow).

Air Malta plans to operate an all-A320neo fleet

Air Malta is also not currently considering A220s, despite previous reports indicating that smaller narrowbody aircraft could be acquired for thinner routes.

The A220 would make sense, given that Air Malta's network consists mainly of thin low frequency routes. An all-A220 fleet would be a potentially attractive solution, similarly to the fleet strategy adopted by airBaltic. However, Air Malta has already committed to an initial batch of A320neos and the airline is too small to justify a split fleet of A320neos and A220s.

Air Malta received its first A320neo in 2018 and two more are slated to be delivered in Aug-2019. The company currently also operates seven A320ceos and one A319ceo, which are expected to be phased out over the next few years as more A320neos are leased.

All of Air Malta's existing aircraft are leased, according to the CAPA Fleet Database. The A319ceo is 15 years old and six of the seven A320ceos are 12 to 15 years old. One A320ceo is seven years old and will likely be the last of the aircraft to be returned.

A320neo to generate 17% cost savings per flight

Mr Mangion said that the transition to an all-A320neo fleet would enable Air Malta to focus on a single configuration, driving improvements to its inflight product and increased efficiency.

Efficiency improvements are being generated as a result of the A320neo's better fuel economy, reduced noise and lower emissions. Mr Mangion said the overall costs saving of an A320neo compared to an A320ceo is 17% when the lower fuel burn per trip, reduced emission charges and noise penalties at European airports are factored in.

The single configuration is important as it provides its passengers with a consistent offering and avoids some of the issues now encountered when Air Malta switches aircraft before a flight.

In recent years Air Malta has had three configurations: its A320ceo fleet has two configurations (180 seats and 168 seats) and its A319ceo has 141 seats. The airline is configuring its A320neos with 180 seats, matching the configuration on some of its A320ceos.

Air Malta is improving the inflight product on all its A320neos with WiFi. All Air Malta services will offer WiFi once the transition to A320neos is completed.

Air Malta introduces improved business class product

Air Malta also recently introduced improvements to its business class product, which is now available on all services.

Air Malta's business class seat has not changed with the A320neo; the airline continues to have a flexible business class cabin with a movable curtain and blocked middle seats. However, there have been significant improvements in areas such as catering, check-in and lounges, aimed at attracting more business and corporate traffic.

"We have improved the service on board. We have also improved the service from the moment the individual enters the airport until he leaves on the other side at the end of his voyage", Mr Mangion said. "Small details which weren't up to scratch in my opinion we are improving."

He added that the improvements were "doing very well" and pointed out that even for short flights there is demand in the Malta market for a more premium-focused service.

"Even within those three hours people want a little more of their privacy … and to be pampered on board. We are having a very good response and comments since we have introduced it".

Rapid economic growth driving strong outbound premium demand

Inbound tourists are, and will remain, Air Malta's largest segment. However, the outbound market is also growing due to Malta's rapid economic growth.

Malta's GDP grew by more than 6% in 2017 and by more than 5% in 2018, and is projected to grow by another 5% in 2019. Malta has a small population (approximately 500,000) but a growing population of expat executives.

"Many executives reside on the island now permanently - and even with their families - and they need to travel a lot. And they always prefer to travel on our planes in business class", Mr Mangion said. "The business class is a good source of revenues for the company and we intend to improve that as much as possible."

The business class product is a differentiator for Air Malta, given that LCCs are the only nonstop competitors on many of its routes. For those routes that are also served by European FSCs, Air Malta's soft product is arguably better, although the seat is the same.

Air Malta adopts hybrid model

Air Malta recognises that it needs to compete more effectively against LCCs, since most of its traffic consists of price sensitive leisure passengers.

The airline adopted a hybrid model as part of its turnaround plan and is now offering a basic fare that excludes food, seat assignments or checked bags.

"I am aiming Air Malta to be a hybrid airline where it is competing with prices but it will continue to offer good services to passengers to meet their aspirations," Mr Mangion explained.

Ancillaries have become an important component of Air Malta's model and - along with cost reductions and efficiency improvements - have helped to drive the turnaround that was achieved in FY2018. In Nov-2018 CAPA awarded Air Malta the 2018 Turnaround Airline of the Year, recognising the achievements accomplished in turning its first profit in two decades, despite intensifying LCC competition.

"Air Malta has rebuilt its operations with a financially viable business model and a hybrid product that now allows it to compete with LCCs", CAPA stated in announcing the award. "The transformation included a cost control mind-set, increased aircraft utilisation, improved staff productivity and the move to a hybrid business model to serve today's increasingly price-driven industry."

Air Malta improves aircraft utilisation

CAPA noted that Air Malta had incurred more than USD300 million in operating losses in the 10 years prior to FY2018, when it turned a small operating profit. Profitability and a resumption of growth were achieved despite shrinkage of the fleet as Air Malta significantly improved aircraft utilisation, resulting in significant efficiency improvements.

Mr Mangion said Air Malta is now achieving average aircraft utilisation rates of 12 to 13 hours per day, compared to only seven hours previously.

The A320neo is not expected to generate significant further improvements, given the now high level of utilisation achieved with the A320ceo. However, the new fleet will result in efficiency improvements in other areas, helping the bottom line.

Air Malta will need to overcome several challenges to complete its turnaround

Network consolidation, fleet renewal and a slowdown in the growth rate compared to 2018 should help Air Malta complete its turnaround and achieve sustainable profitability. However, it could struggle to restore profitability until the fleet transition is completed, particularly in the context of intensifying competition in Malta.

"Competition is increasing every day. Capacity is increasing every day. We have 36 airlines operating to the island", Mr Mangion said. "We consider competition as a challenge that we have to face. We have to ride it rather than surrender to it."

Air Malta and its government shareholder have adopted a sensible approach. It is never easy for a small flag carrier to compete - and survive - in a market dominated by short haul services and served by large, fast expanding LCCs.

The government has to support LCC growth, which has a tremendously positive impact on tourism and the overall economy. For Air Malta this leaves a niche that is - following a decade of sharp market declines - small and fragile, but still potentially viable.