Comment from the May 2013 edition of Airline Business

Profit is usually the simple subtraction of cost from revenue. But for some of Europe's older airlines, it has consistently equalled "loss".

As Malev discovered last year, these old-model carriers that have been too slow to adapt to the modern business environment have nowhere left to hide. Low-cost carriers have driven down fares while competition rules have all but banished state bail-outs.

The problem is particularly acute for the government-owned "destination airlines" that thrive mainly on leisure passengers and have found themselves directly in the firing line of LCCs that are in no mood to take prisoners.

With all the noise surrounding the financial health of Cyprus, it is interesting to compare the fortunes of that country and its national carrier, with those of another island nation - Malta.

The similarities between the two countries extend beyond their sunny climes and clear Mediterranean waters. Both have had strong links with the UK, and both joined the EU in 2004 and the euro in 2008. But Malta - so far - has avoided any hint of the financial woes Cyprus is embroiled in.

Both islands are highly reliant on tourism for their GDP and are served by state-owned airlines established back in the good old, bad old days before the budget carrier invasion.

The two airlines have struggled to find a find a niche in today's world and, with Brussels having turned off the tap to the limitless supply of state bail-outs, you have to wonder whether their business models are obsolete rather than simply outdated. But while uncertainty surrounds the future of Cyprus Airways, Air Malta is getting to grips with the new operating environment and starting to turn the corner.

Cyprus's carrier is desperately searching for foreign investors and needs government support to keep it flying through the summer.

Air Malta has also needed a government lifeline in the past. But under the stewardship of airline-turnaround specialist Peter Davies, it has bitten the bullet and its restructuring programme is beginning to bear fruit.

The problems these airlines have faced are nothing new, as illustrated by this quote by a respected industrialist about what he found when tasked with turning around a state-owned "basket case": "It was a classic situation of a company which had become a self-serving organisation rather than reacting to the demands of the market place. It was imperative we shook off the public-sector philosophy."

The executive was Lord King and the airline British Airways, when it was losing £140 million a year in 1981.

Davies joined Air Malta in 2011 and found "a bad business with all sorts of problems that needed fixing". However he insists that with the right medicine, these sorts of businesses can still have a role to play.

But vanity aside, do small nations like Cyprus and Malta really need a flag carrier when the low-cost brigade can serve up the required volume of leisure travellers to sustain and grow their tourist industries? Davies says that a properly-run destination carrier is a better alternative to leaving air-service needs in the lap of the low-cost carriers: "The values of Air Malta are Malta. The values of Ryanair are Ryanair, and there's a big difference between the two."

Davies justifies the existence of a national carrier like Air Malta as it mitigates the risk of relying on "the vagaries of EasyJet and Ryanair" to provide competition for the network carriers serving the island. "The LCCs can move their aircraft around. So strategically you could be vulnerable, and if there's no competitive element, fares would rise and passengers could have to pay more to fly on a low-cost airline than on an airline like Air Malta."

If the Air Malta experiment is not to be the exception that proves the rule, Europe's other small flag carriers must quickly get their houses in order. But the transformation will be painful and it is probably too late for some.

Source: Airline Business