ANALYSIS: Air Malta on profits track as losses narrow to €15m

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Air Malta is on course to achieve break-even this year after restructuring efforts helped it narrow losses in the year to 30 March 2013 to around €15 million ($19.5 million).

The airline has undergone a restructuring under the guidance of chief executive Peter Davies, who joined the loss-making airline in 2011. In parallel with the reorganisation, new company-wide branding, including a new image, was unveiled last year.

Davies says the five-year restructuring plan - agreed as part of the conditions of the EU's approval for a bail-out - called for losses at an operational level to be reduced to €15 million in its fiscal year to 30 March 2013. The state-owned airline reported an operational loss of €30 million in the ­previous year.

"We're going to come in close to €15 million [loss] if not slightly better, so at an operational level we're dead on target for the restructuring plan," he says. "This year we've got to break even." Davies adds that revenue for the last fiscal year was €218 million, up from €209 million in 2010-11.

The conditions of Brussels' rescue-aid approval in June last year required that Air Malta give up certain routes, which has accounted for a 20% reduction in its available seat kilometres (ASKs) over the last two years.

As a result of the downsizing, the airline reduced headcount by a third to around 900 full-time staff and cut its fleet by two aircraft. It now operates 10 Airbus narrowbodies: five A319s and five A320s.

With capacity cut, Davies has focused on increasing the airline's seat factor and yield, as well as on reworking its pricing structure.

"We've increased the number of booking classes, done away with the old fare rules and now manage the business by inventory and not by price," he says.

Davies adds that 20% of the restructuring is about "rewiring and replumbing the airline" and the other 80% is about bringing a cultural revolution. He says there are two stages to the restructuring strategy, the first being to tackle "low-hanging fruit" such as introducing a better approach to fuel-hedging. When Davies joined, he revamped Air Malta's "fairly poor fuel-hedging policy", which had seen it paying 30% more for its fuel than the competition.

The second stage is to focus on "nickels and dimes", he says. "We're not a BA, Lufthansa or Air France, but all the complex systems we had in place meant that Air Malta felt that it was," he says. "We've realigned ourselves for our purpose in life, which, as a destination airline, is to bring as many people to Malta as possible."

Last year's rebranding was about changing the outside perception of the airline as well as helping to bring about a cultural revolution within it, he adds.

The drive to increase seat factor has seen a double-digit percentage rise in passenger numbers from 1.5 million to just under 1.7 million in 2012-13. Next year it should rise slightly, to around 1.72 million. "What's good about it is we've increased both seat factor and yield," he says.

Looking ahead, "it is a question of looking for volume and playing the classic seat-load-factor elasticity game, along with further cost reductions", says Davies.

The Brussels ASK restrictions apply within the EU, so Air Malta is looking to expand its operations to points outside the union, such as in Russia. "We're hoping to launch Algiers soon, largely for the transfer traffic to Europe," he adds.

The conditions of the bail-out mean that once the airline "is back in profit and can prove sustainability, we can go back to the EU and have conversations about changing the ASKs", ­Davies says.

As regards the possibility of outside investment, Davies says that is up to the government, as the shareholder.

"The new Maltese government is conscious of the fact that we have a restructuring plan for five years and at some point it will require equity, and it is a question of how they furnish that. We will come up with some proposals.

"My preferred option is to look for strategic partners. Given Malta's geographic location, there is a unique opportunity as a regional centre serving sub-Saharan Africa and connections to the Middle East," he says.

There is no immediate requirement to replace the Airbus fleet as the aircraft do not begin to return off lease until 2016, but the airline is beginning to think about replacements. "We've just kicked off a network review - you have to establish what network you're looking at first, rather than the other way around," Davies says.