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Recorded at CAPA Live November

Interview with Air Malta, Chairman, David Curmi

Speakers:

  • CAPA - Centre for Aviation, Chief Financial Analyst, Jonathan Wober
  • Air Malta, Executive Chairman, David Curmi

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Transcript

Jonathan:

All right. So hello and welcome to another CAPA live. I'm Jonathan Wober, CAPA's Chief Financial Analyst and lead Analyst for European Airlines. And I'm very pleased to welcome today. David Curmi. David is Executive Chairman of Air Malta, a position which I believe you've held now for almost a year. Is that right?

David:

Yeah, just under. Just under a year.

Jonathan:

Just under a year? Well, you're very welcome. Thank you very much for joining us. And I understand that your previous career has primarily been in the insurance industry, which I guess is about risk management. So, I'm assuming that skill is applicable to the airlines.

David:

Yeah, very much. So I come from a risk background and I'm finding my past career very useful in this new industry.

Jonathan:

Yes. Possibly even better had you joined the joined before the pandemic, but I don't think anybody expected that risk to come along, but I just want to start off with just asking you where Air Malta is in terms of the recovery. So if we use 2019 capacity as the benchmark, where are you now with respect to capacity recovery?

David:

Well, Air Malta is the flag carrier of an island. So we are restricted to enter European travel. So we don't have domestic flights, we don't do international long haul flights. So we're probably suffering more than some other airlines on mainland Europe, because we don't have a domestic market. At the moment we are running at about 55% less capacity than the pre COVID scenario and a 59% reduction in traffic, in passenger bookings. However, it's not a direct comparison of a like for like situation, because back in 2019 the airline had 10 aircraft, it operated 10 aircraft. And now we are operating with down to seven aircraft. We have to take this measure because, mainly of the suppression of demand due to the pandemic. So it was really a planned reduction rather than something that-

Jonathan:

Okay.

David:

We were [constraint 00:03:04] to do.

Jonathan:

And how do you expect capacity to develop in the rest of this year and also into 2022?

David:

Right, in Malta we are seeing a very late summer, our summer all though in terms of industry seasonality should really terminate at the end of October. Our summer really extends in terms of climate. It extends beyond that. So we keep getting good climate even later, even in November and December. So what we are witnessing at the moment is a very late summer, very late bookings spreading into November, and also December with a very, very short timeline between booking and travel. So I think this is something that everyone is experiencing.

Jonathan:

Yeah.

David:

We are in... I think we are in for quite a difficult winter. The tourist industry in motor is still very much seasoning and we consider the winter months to be our shoulder months. However, this year we likely to witness and experience a better December, but January, February will be difficult months.

David:

We also had to... Like most other carriers, we have taken advantage of Airports Slots Regulatory Waiver Guidelines, which allowed us to reduce our winter 21-22 operations down to 50% of pre COVID levels. We have not done this in all cases, but we have done it selectively across our network. In terms of summer, we are planning to return to full slot utilisation, with aircraft utilisation being increased to close to 11.4 hours per unit per day, which is very comparable to a pre COVID scenario. So we are gearing up to what we think is going to be a good summer, obviously with leisure travel recovering much, much faster than business travel. We're still suffering on the business side. But I believe that's the experience of most other airlines.

Jonathan:

And in the current operations, are you seeing any particular patterns of which routes, or route areas are performing better than others?

David:

Yes. Since we had more stabilisation and more consistency in health regulations across Europe, particularly after July. Up until July, we still had a few disturbances, particularly in our own country, where we introduced the double vaccination requirement. But after July, we have seen a growing pattern of some of our European routes outperforming others. So far, our experience has been that we have seen passengers numbers growing significantly across all our European routes, except for Italy. Our routes to Italy are suffering... Have been suffering. Both to Southern and central and Northern Italy. But we exclude Italy from the equation, our network has been operating at 84% full, over the past two or three months. So we're quite happy. We think that the... Our Italian operations will come back, but they seem to be coming back later than other routes.

Jonathan:

Okay. And, the network has a strong Western European focus, in terms of where your destinations are. Is that something do you think will continue into the future or will you try and balance it more with other regions?

David:

No, we've embarked earlier this year... Shortly after I came into the company, we've embarked on a new strategy. We've reduced our network considerably from our around 40 destinations through just 20. And we're concentrating on major European countries, major European cities and major European airports. That's our strategy. So we take our passengers to the important airports in Europe, and we're interested to fly to the larger European catchment areas. And as part of our strategy, the furthest we will go, is Moscow. And that's basically it. So for the next few years, our focus will would be mainly on Western Europe.

Jonathan:

Okay. And I know that you're playing to launch a Heathrow service in December. Is that still the case?

David:

Well, Heathrow is one of our long established route. It's [crosstalk 00:08:44] we've been flying to Heathrow regularly. It's the return to Gatwick, which is going to be different-

Jonathan:

Right.

David:

This year. Air Malta has some very important slots in Heathrow, which it has always protected. And in summer 22, we will be making full use of our 15 weekly rotations on the London Heathrow. Double daily, triple daily services on a Friday. However, we are adding London Gatwick after we had dropped Gatwick for some time. So we're returning to London Gatwick as a daily service and seven services per week. So this will [inaudible 00:09:30] multi serving London with 22 services per week in summer 2022, because the UK is still a very important source of tourism for the island.

Jonathan:

Great. Okay. Thanks for clarifying that. And you mentioned that you've got 84% of the capacity is filled. If I understood you correctly, 84% load factor, which is a pretty big performance compared to many airlines in the current environment. Are you paying for that with effectively a lower yield?

David:

Partly yes. During August to October 21 this year, we have seen around 4% of our cost, a travelling in business class. So it's still very low and 96% travelling in economy. Although, our business class loads are at par with 2019. Our yields in both business and economy have been suffering. Our yields on in on economy are down by around 14%. There is still a lot of competition on the price, for travelling in and out of Malta with some of our competitors actually coming out and even as recent as this month, coming out and saying that they will continue to compete on price just to fill up the capacity. So this is one reason why we're suffering on the yield. And it's why we are... We think that the next few months, particularly during winter, are going to be tough month.

Jonathan:

Yes, I mean, I was going to ask you about competitive dynamics and you've touched on it there, but obviously you've got a lot of low cost airline competition in Malta, Ryanair being one of the lowest cost of them all is obviously a very big competitor for you. So how do you compete with that kind of price led competition?

David:

We do not see ourselves to be in direct competition with Ryanair. Ryanair Is an important operator, to and from Malta. Between Air Malta and Ryanair, between us we think we have around 67% of the market. So they are an important operator. However, we do not see ourselves to be major competitors. We're not competing on the vast majority of our network. Ryanair fly mostly to peripheral airports, we don't, but they do compete with us on certain of our routes, particularly Vienna, Catania, and this year they competed with us on the Rome route. So we do overlap on certain of our operations, but we are very distinct in terms of where we fly to. We also have an extensive [codeshare 00:12:54] partnership agreements with the bigger airlines and that's part of our strategy. So we want to connect with the bigger airlines and the major European hubs through our [codeshare 00:13:06] partnership.

Jonathan:

I was going to touch on that too. You have partnerships with the Lufthansa group and other Star Alliances members. You also have partnerships with Air France-KLM and other sky team partners, as well as the three big gulf connecting-

David:

Yes.

Jonathan:

Airlines. So how has the COVID crisis affected those partnerships? Is your reliance on them greater than it was before? How has that been changed?

David:

The pandemic has not really affected our relationship, the relationship that Air Malta has previously established with these airline, what has significantly changed is the decline in volumes of connecting customers. There, we have seen a significant reduction mainly from long haul networks, feeding into key European hubs and connecting onwards to Malta via Air Malta. So this has affected us negatively, and it had a significant effect on our revenues. We have experienced a 69% decline in volumes of partner connecting traffic, which is very, very significant. So we are eagerly awaiting the return of long haul traffic, because that that will be... As I'm sure-

Jonathan:

You and many other people watching I'm sure.

David:

Our friendly partners are... Yes.

Jonathan:

Yes, of course. So you mentioned, you touched on your fleet a bit earlier on, you said, you'd come down form 10 aircraft pre-crisis to 7 aircraft. Now, it's an all Airbus narrow body fleet. And I think you have now 4. Is it 4 Neos and 3 older engined A320s? Is 7 the right size for a number of years going forward? Or do you see that expanding again? Cause you've talked about... You've covered-

David:

No, not from... We've carried out some studies internally, and we think that the optimal fleet size is eight aircraft. And we will be going for eight aircraft as from 2023. Our plan is to replace... Our plan is to have a single type homogeneous fleet. So by 2023, we will have eight homogeneous, identical aircraft. Neos. We will be going for the Neos. So we will be replacing our last 3-4 CIOs with brand new Neos. So by the last quarter of 2023, the airlines should have eight identical Airbus A320neos.

Jonathan:

OK. With what configuration on board?

David:

With =186 seats and all equipped with identical engines, which for a small airline, such as us, is very important for our operations. So we will have all our Aircrafts equipped with CFM LEAP engines.

Jonathan:

Right. Okay. So, I guess that's one... One way towards an efficient operation is a single is a single aircraft type. And I guess another big factor in efficient, talk about cost efficiency competing with low cost carriers is labour, as being the biggest cost other than fuel. Where are you with any labour force restructuring? And how has that affected industrial relations and all of those issues?

David:

Well, this is the difficult part. So when I joined the airline on the 1st of January this year, my focus was to optimise the network for profitability, that's been done. We then optimised our fleet and planned our fleet. The next step is to optimise our operations, which I'm afraid that there is a lot of work that needs to be done.

David:

This is a national airline. To some extent it has suffered from the national airline syndrome and some difficult decisions need to be taken in ensuring that we increase our productivity and make our operations more efficient. So in terms of workforce, the airline still employees around a thousand people, we've had to take measures during COVID pandemic. We've reduced our cockpit crew by around 69 [% 00:17:59]. We've had to readjust our remuneration structures to our cabin crew who are flying a lot less and we've taken measures in terms of our administration. However, there is still a lot of work that needs to be done on this third phase of our restructuring.

Jonathan:

Right. Okay. So when do you hope to be through that?

David:

That's going to take some time. It will definitely extend to next year and possibly it'll be late next year before anything major is done in that regard. We're also considering our options in terms of certain services that we produce. We have our own in-house ground handling operations. So we are looking at whether we should continue to do that, whether we should joint-venture with someone else to do that. We're looking at our engineering department where we have our own engineers providing line maintenance to seven Aircrafts. So these are things we are working on, with a view to make the airline operate more efficiently.

Jonathan:

Okay. Because it's often in the past anyway, it's often been the case that big external crisis is a good way of affecting internal change in the airline industry, as I'm sure with other industries too. Are you finding that there is an acceptance things do need to change?

David:

Yes, but... Definitely, but I don't think going back to normality is the answer. I think we should do things differently to how we have been doing them particularly at Air Malta for some time. So this is not going back to pre COVID, but it's going to be important that we do things completely differently. And we rethink what we have been doing for many years, because there is an opportunity clearly from the pandemic. This pandemic has decimated industry, but there are opportunities. It has shown us that we can do things differently and that we should.

Jonathan:

And you talked about the national airline syndrome. I think you used that expression just now, to what extent then is being owned by the government potentially a hindrance to that kind of change that you need, because we certainly saw this with Alitalia I think, over many years that the presence of the government, even when it wasn't actually a shareholder in Alitalia, the idea that the government will always step in and help out can sometimes be an impediment to cultural change. Is that a fair observation?

David:

Yes. I think that's a fair observation. Air Malta is a 100% owned by the state. And I think there is this in [certain 00:21:06] Culture that someone will come and save us at every stage. But I think as [Alitalia 00:21:18] president has shown us, this might not be the case in the future. So I think restructuring and making our airline more sustainable is going to be very important. As an island our airline is extremely important. So it is a very important source of connectivity. Unlike our [low cost 00:21:51] Airlines, we carry a lot of cargo, to and from Malta. A lot of critical cargo. Sometimes we carry patients to foreign hospitals when certain procedures can't be carried out locally.

David:

So we are doing a lot more beyond just carrying passengers. So I think the debate, whether the island should have an airline or not is past, we definitely need to have an airline, but we cannot have an airline at all costs. We should have an airline that is sustainable going forward. And this is the discussion that I am also having as executive chairman of this company with our shareholder.

Jonathan:

Okay. And where are things in terms of state support, state aid? There was obviously the crisis to be weathered and the financial situation of the company was not necessarily all that strong to begin with. So where have things got to with that?

David:

We've been negotiating and discussing and meeting with the commission for the past six months. And discussions have been quite quite tough. In the past two months, we've been focusing on COVID damage compensation because we really need to get that out of the way. And that has been also quite difficult, because of the model particularly being used by the commission, which does not necessarily benefit an airline like Air Malta. However, in terms of capital injection and financial aid, our discussions with the commission are still ongoing and they're quite difficult discussions.

Jonathan:

Okay. So [watch this space 00:23:43] , I guess, is the answer there. And we're coming towards the end of our time. The time goes so fast, but I did want to ask you your thoughts on the impact of the crisis on aviation's environmental commitments. I mean the industry broadly, but also Air Malta's own position on that.

David:

Well, I think in general and the pandemic has slowed down efforts on sustainability front, with airlines concentrating more on compliance and pandemic issues and operations. However, the pandemic has also exposed our industry's contribution to human induced climate change. Commercial aviation emissions in 2019, pre pandemic were over 900 million tonnes. They fell down to less than 500 million tonnes in 2020 because of the reduced flying. I think that has shown us that there is significant opportunity for the industry to continue to work towards the industry's environmental responsibility and commitment.

David:

Since then, we now have the IATA commitment to net zero emissions by 2050. And I don't think this can be addressed by individual airlines. I think governments, aircraft and engine manufacturers, fuel suppliers, airport operators, and air navigation service providers must work together to move away from fossil fuel and ultimately to carbon free power. Rationalising air travel or making it more or expensive, I don't think it's the answer. So I think there should be a commitment from the industry to decarbonize. And as much as possible, the industry should not be faced with punitive measures, such as taxes, to motivate change. This is my ideal.

Jonathan:

Yes. And so, yes, I mean the industry has expressed a commitment, but do you think that governments are playing their roles efficiently? Because one response of course from governments is tax, but another response from governments is to create incentives and structures so that investment can go into changing the technology in the long term. Do you think we're seeing enough of that?

David:

I think what the US are doing is probably a better approach than what Europe is doing. In the us they're incentivizing, for example, the production of SAF and the scalability of SAF. In Europe, we seem to be more taking the approach of, let's penalise so that the industry does something about it. I mean, Aircrafts can now fly on SAF. SAF is still around 5-5.5 times more expensive than normal jet kerosene. So it's not... I don't think it's a question of them telling us SAF is there, so go and use it, because we can't fly our machines sustainably on a fuel that is not readily available and it is so expensive to fly. So I would like to see more the approach of the US, where fuel supplies are being incentivized to advance the production and scalability of sustainable aviation fuels.

Jonathan:

David Curmi, thank you very much for joining us. It's a pleasure to talk to you and I'm sorry we haven't got more time to discuss these issues in greater depth and thanks for those who watched for joining.

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