Remaking Air Malta

Turnaround hopes hinge on structural revamp, company culture change.

By Leonard Hill
Air Transport World, November 2004     Buy this issue

With losses of close to $58 million over the past two years-including an estimated $32 million in the fiscal year ended last July 31-Air Malta cannot continue to operate with a business-as-usual attitude. That is the message coming out of the executive office, where CEO Ernst Funk, a Swiss transplant who took over in fall 2002, and Air Malta Group Chairman Lawrence Zammit are shaking things up at this formerly sleepy Mediterranean carrier.

With 41 years at Swissair behind him, Funk knows what it means for an airline to fail. "We have to introduce fundamental changes in the way the company functions," he told shareholders after he joined Air Malta in mid-October 2002, more than a month after actually being named to the position. Echoes Zammit, who arrived 17 months ago, "We must place the customer at the center of each and every decision . . . We have to change the culture where each department exists as an individual entity, independent of the rest of the organization."

Steps taken so far include streamlining the executive leadership ranks from a 24-person group to a six-member team of "chief officers," along with a three-year wage freeze for staff plus improved work practices and other elements. Savings are projected at $4.3 million and the aim is to trim operational and administrative costs by a further $10.7 million. Essential to the rescue scenario is a $72.9 million government recapitalization that props up the balance sheet, a restructuring that took place shortly before Malta in May joined the European Union, which might have looked askance at the state aid.

"I am right on schedule with the turnaround, and would be ahead of plan but for the rise in fuel costs," Funk tells ATW, citing a $5.7 million core-business cost reduction forecast through next March 31 (the airline will transition to an April 1 financial year in 2005). He calculates overall savings from various initiatives in progress as $3.7 million from the wage agreement coupled with $8.5-$11.4 million in revenue enhancement through foreign-base operations. Various other unspecified measures bring the total to $27 million. Among them are a review of distribution channels, accelerated online booking and renegotiation of contracts with suppliers. Responding to the still-rising price of oil, a E5-per-sector fuel surcharge levied in July was increased to E8 from the end of September.

But there are limits to what Air Malta's 98% owner, the Maltese government, will accept in the interests of righting the carrier. Thus, although there is a wage pause, workers will be remunerated retroactively between 2008 and 2010 for forfeited raises and there have been no layoffs among the 1,763 employees who support a fleet of just 15 jets, a ratio of better than 115 employees per aircraft.

No doubt the carrier needs to increase efficiency. With the country's accession to the EU, the airline is losing its lucrative monopoly as sole provider of ground handling services at Malta International Airport, which is served by 61 carriers. GlobeGround is poised to enter the market this month. The airport averages 72 aircraft movements daily, 52.3% of them Air Malta flights, according to Chris Fenech, the airport's marketing and business development manager.

The country's size also presents a challenge. With fewer than 400,000 people spread across three minuscule Mediterranean islands with a total of 124 sq. mi. of dry land, the airline has a scant population base to build on. That leaves the currently stagnant leisure market of 1.2 million visitors a year as its primary income source in a nation where tourism is the major driver of growth, accounting for an estimated 45% of GNP.

In addition, Air Malta has to cope with a high degree of seasonality in its traffic flow, which burdens it with excess capacity during winter months. One way to address this is to look elsewhere: Since May it has based two leased A320s in the UK for charter flights to, among others, points in Greece, Italy, Spain and Portugal. It is operating seventh-freedom flights from Catania in Sicily to London. In a move to preempt low-cost carriers from entering the market, it is operating thrice-weekly redeye flights to London Stansted branded Fare 4U. These could be extended to daily service plus expanded to Central Europe points. Also, from Nov. 1 it is introducing a one-way fare concept called FlexiFly, competitively priced and capacity controlled, encompassing the entire network of scheduled services.

The airline claims to control about 65% of scheduled traffic and 32% of charters at Malta International, operating 183 scheduled and 35 charter departures during a typical week in August serving 45 destinations. Business class has been cut back to 11 cities as a cost-saver by what is basically a point-to-point, tourism-driven airline. About 35% of scheduled traffic revenue comes from the UK, with Germany, Italy and France being the next most important markets. About 80% of total revenue is generated through sales outside Malta.

In July 2002, Air Malta concluded a multimillion-dollar accord with ILFC, Airbus and CFM International for renewal of its fleet over 4.5 years. Major elements are the sale and leaseback from ILFC of its two A320-200s and three 737-300s, plus the lease of 12 new A320 family aircraft for 12 years each. As of September, the airline was operating four A320s, three A319s and six 737-300s plus the two leased A320s stationed in the UK. Further Airbus deliveries were scheduled for October and November 2004 and February 2005 as the 737s gradually are phased out.

As yet undetermined is the disposition of the carrier's remaining six Avro RJ85s/70s-a seventh was sold-formerly operated under sublease by AzzurraAir, which is 49% owned by Air Malta. The Italian Regional was declared insolvent in July and the planes are parked in the UK while Air Malta seeks buyers. It is bound by lease agreements for another four years, a painful financial albatross. It planned to rid itself of another albatross by halting as of Oct. 31 its helicopter passenger flights to neighbor island Gozo by subsidiary Malta Aircharter Co., a service with leased Russian copters that lost $712,000 a year.

As a whole, the widely diversified airline group, which includes a long string of affiliated enterprises from insurance companies to tourism firms and hotels (that are to be divested), reportedly lost $71 million in its just-ended fiscal year. Detailed results, including traffic performance, were unavailable at this writing. For the first half through Jan. 31, total airline revenues dipped to $91.7 million from $99.1 million in the prior-year period. Seat load factor declined from 69.3% to 66.6% on 662,000 passengers in the period compared with 685,900 the year before.

Rescue efforts are starting to make an impact, says Funk, despite caveats such as the influence of market forces on business processes. "We are determined to continue with our proactive approach," he states, before adding, "there is still a lot of ground to gain."

MRO Joint Venture Beats Forecast

Lufthansa Technik Malta, a 51/49 MRO joint venture between LHT and Air Malta, completed its 100th C check in September, three months ahead of its end-of-2004 target for the century mark. The aircraft, a Spanair A320-200, returned to scheduled operation after four days.

As a Center of Excellence within Lufthansa Technik Group, LTM specializes in 737 and A320 family C checks. It has 118 employees, nearly all of them Maltese. Since the start of operations in January 2003, it has performed MRO services not only on Airbus planes of various operators but also on 737-300s/500s of Air Malta and Star Alliance partners Lufthansa and Spanair.

The main customer continues to be LH, which has sent 63 aircraft to LTM. In recent months the product portfolio has been expanded to include 737 forward pressure bulkhead replacements. Other customers to date include Travel Service (Czech Republic), WindJet (Italy), Air Bulgaria and Alitalia.

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