Struggling national carrier Air Malta is cutting capacity by a fifth under compensatory measures drawn up to support its restructuring.
Details of the cut in capacity are included in European Commission documents, published in the European Union's Official Journal, inviting comments into whether Air Malta's restructuring aid complies with European state aid rules. The Commission last month announced it was launching an investigation into the compatibility of the airline's restructuring aid.
The Commission had in November 2010 already authorised €52 million ($69 million) in rescue aid and in May last year Malta outlined its plans for a €130 million capital injection as part of a restructuring plan which would also see the airline contribute €108 million through the sale of various assets. The plan envisages a return to profit by 2015.
"The Commission has several doubts concerning compliance of the aid with the conditions of these [European] guidelines, especially with regards to the criteria of the long-term viability, compensatory measures, own contribution and the one-time/last-time principle," the Commission said in the Official Journal. "The Commission's major concerns are whether the optimistic forecasts on long-term viability are realistic to achieve, whether the proposed capacity reductions involve genuine compensatory measures, and if these measures are sufficient to compensate undue distortions of competition."
For its part Air Malta chief executive Peter Davies, who is leading implementation of the new business plan, is unphased by the Commission probe. "We are confident that the plan is viable and are satisfied with the progress achieved so far," he said. "It is a normal procedure that arguments are challenged. The company is expected to submit further clarification in the coming weeks.
"Our plan, which adheres to the Commission's strict Community Guidelines on State Aid for Rescuing and Restructuring Firms in Difficulty, aims at finding the right balance between the Commission's requests, the need for the airline to operate on a sound commercial footing and to minimise any impact on local tourism operators."
Air Malta lost a further €11.5 million in 2010, but under Davies' new management team has begun implementing measures in line with its restructuring plan. Air Malta recently highlighted a 4.5% increase in revenues for the six months to September 2011, and cut €6 million from its operating losses to €9 million for the same period, despite increased fuel costs. Davies points to a number of key restructuring milestones including productivity deals with its unions, disposal of non-core loss-making operations and the launch of a "holistic business change agenda" incorporating more than 160 internal projects.
Under its five-year plan the airline is targeting breakeven in 2014 and a profit in 2015.
Air Malta also plans to cut capacity 20.2% in the 2013 full-year, compared to the level in the 2010 schedule, as part of its restructuring. This will see it cut its Airbus A320 fleet from 12 to 10. Davies said the airline already cut around 10% of this capacity last summer - the remainder will be achieved this year - but crucially has managed to offset this by lifting load factor. "We managed to carry 1.75 million passengers - almost the same number of passengers, with less flights and reduced cost," Davies said.
Overall Air Malta will have cut existing capacity by around a third and restricted new flight capacity to about 10%. Air Malta argues more than half of the capacity to be cut will come from profitable services, or routes that will become profitable under its restructuring - and should be considered compensatory measures. The Commission says it has doubts over whether these routes are profitable.
The EC is also putting the one-time/last-time principle - which limits restructuring aid to once within a 10-year period - under scrutiny due to a €57 million capital injection carried out at the airline in 2004. While this was carried out prior to Malta joining the EU - and thus did not require Commission approval - it will be taken into account under the Commission's investigation. For their part the Maltese authorities considered it to be a capital injection in line with the market economy investor principle - ie that it invested in the same way a private investor would have.