Updated | Brussels confirms doubts on Air Malta’s optimistic forecasts

Updated at 9:30pm.

Air Malta will become a 'hybrid' carrier, combining the style of low-cost carriers together with the legacy carrier techniques to create more revenue from better pricing.

But the European Commission has expressed its doubts concerning the compliance of some €130 million in state aid for Air Malta, with the conditions of its rescue and restructuring guidelines.

The Maltese finance ministry today "welcomed" the EC's publication of the Air Malta restructuring programme in its Official Journal - which officially launches the EC's formal investigation into the state aid for the national airline - even though Brussels confirmed its over the "optimistic forecasts" by the airline to achieve profitability by 2016.

Specifically, the EC is doubtful as to how realistic estimates are for Air Malta's new 'low-fares style' charges for pre-flight and in-flight services, which should generate as much as €11 million; whether renegotiating contracts with third parties will bring in the savings the airline expects; and how realistic its assumed 5.9% market growth is.

Additionally, the EC has pointed out that Malta has not provided an overall analysis of the overall impact on the profit and loss situation for both best and worst-case scenarios.

On this, the worst-case scenario would see Air Malta stopping operations three months if fuel climbs to $150 per barrel, redundancy costs increase, load facto is reduced, and less revenue can be generated per person.

Cutting routes, even profitable ones

Air Malta is planning to create a more cost-effective schedule by terminating certain routes, both loss-making and profitable. These are compensatory measures that must be taken to compensate for state aid, but cutting the loss-making routes will not be considered as a compensatory measure.

This will mean releasing pertinent slots in foreign airports, with Air Malta so called 'grandfather rights' it currently has on slots at London-Gatwick and London-Heathrow, Manchester, Amsterdam, Frankfurt, Geneva, Catania, Stuttgart, and Munich. "Through the withdrawal or reduced frequency other airlines will be able to benefit from potentially increasing their load factory and yields."

The changes in the route network between 2010 and 2013 will reduce overall capacity by 20.2%, apart from reducing the fleet from 12 to 10 aircraft: both aircraft will be sub-leased at cost.

But the EC claims the overall closure of loss-making routes cannot be regarded as compensatory.

And it is also asking the government to include more data on its estimated capacity reductions on profitable routes.

There are even doubts on whether Air Malta's divestment of non-loss making assets such as insurance firms Shield, and Osprey, can be considered as compensatory measures.

Cutting costs

Lower capacity from reduced routes will also mean some 1.7 million passengers less in 2013, which translates into €13 million less revenue for the airline. But by 2016, targeted marketing will see more passengers filling seats in troughs for the winter and shoulder seasons. Air Malta claims it will see €240 million in revenue in 2016 from growth in passenger volumes.

The company is seeking to decrease costs by 12% by achieving €52 million from more efficiency in operations and streamlining core businesses. These include network reductions of €27 million, redundancies of some 430 full-time employees (€11 million in annual savings), and renegotiation of third party contracts generating €9 million: the latter review has already started with ten business partners.

The main revenue initiatives will be increased load factor (€11 million), changing pricing (€10 million) and charge new fees for pre-flight and in-flight services (€11 million).

Rescue aid

In April 2004 before EU accession, Malta carried out a €57 million capital increase which is now being taken into account for the application of its 'one time, last time' principle when it comes to aid.

That's because the capital injection involved the transfer of the Air Malta headquarters under a 63-year lease in return for more shares in the airline.

Air Malta will now finance €108 million of its own restructuring by selling its head office for €66.2 million, as well as its subsidiaries and engines (€24 million); a bank loan of €25 million; and receive a total of €130 million from the State. This includes a debt-to-equity swap of €52 million; €60 million in a fresh share issue in 2013; €15 million in 2014; €3 million in 2015 in addition to the €52 million already disbursed.

UPDATE: Air Malta encouraged by EU report

Air Malta's official response to the publication of the European Commission's response to the restructuring plan, issued late last night, considered it important to clarify three fundamental points.

"First, the airline is encouraged by the EU's response to its plans and, as part of the process, it is normal for assumptions and arguments made to be challenged in this manner. As a result, Air Malta is in the process of submitting further responses to the Commission.

"It is important to understand that a number of initiatives stated in the official Journal have already been enacted and that Air Malta has already started to reduce its flight schedules in line with the restructuring plan.

"The airline's management remains confident that the positions stated are realistic and represent attainable objectives which will place the airline on a secure footing. As communicated recently, the results for April-September 2011 illustrate that the airline is on the right path and that the management is committed to pursuing a rigorous restructuring.

"For example, the targets set for generating ancillary revenues are already supported by positive results achieved over recent months. The company will be launching several new initiatives in this area and is confident that experience gained illustrates that revenues will continue to grow steadily.

"Furthermore, our cost reduction programme is already underway. For example, benefits are already being realised as a result of the new organisational structures and the resulting reduction in headcount.

"As stated by Air Malta CEO Peter Davies on Monday, the airline remains committed to its routes to London Heathrow and Gatwick. During summer 2011 and as part of the restructuring plan, Air Malta has already released a limited number of slots in line with its commitment to reduce capacity as a compensatory measure. These slots did not have an exchange value and were therefore released.

"The airline has no intention to release or exchange any further slots to either London Heathrow or Gatwick.

"The Malta Tourism Authority is an important partner for the airline and senior management in both organisations have met regularly in recent months. Discussions have included both the airline's network plans and capacity reductions, and the airline remains committed to an ongoing dialogue."