After Davies, what’s next for Air Malta?

The jury is still out on whether Peter Davies is ready to extend his contract beyond April 2014.

At 64, the Welshman might just as well decide to call it a day. Under a €230 million restructuring plan mandated by the European Commission, he managed to stabilise Air Malta's balance sheet and halve the airline's losses from €78 million in 2011 to €30.9 million in 2013. He was tasked to see the airline breakeven by 2016, but his €500,000 contract expires by the next financial year: it's no secret that the new Labour government is eager to see a Maltese chief executive step in his shoes. The question is whether Davies will be asked to shepherd his successor as he takes on the reins of the restructuring programme.

Tourism Minister Karmenu Vella was not present for last week's presentation of the Air Malta financials. He said the reduced losses were "positive" but that any trend of success would become evident in 2014 and 2015. But a cursory glance at Air Malta's last two years - increased revenue, lower staffing, the inspirational rebranding - would suggest even to the harshest of critics that the airline is on the right track.

"We're not rejoicing, we're not fantastically elated. But we're confident that we've done a good job so far, even though there are more losses to reduce," Davies says. "I'd probably use Churchill's words to say that a pessimist sees the difficulty in every opportunity, and an optimist sees the opportunity in every difficulty. It's a journey: I'd be concerned if we were flying to Moscow and our plane was heading towards Casablanca. But if we're over the Alps, then we are on the right route."

So far, Air Malta's journey has been driven by enhanced revenues, with more passengers flown, and more cash coming in from ancillary services. Years back, dismal on-time performance had the airline "at the bottom of the pile" as Davies says. Now it's edging towards an 85% punctuality rate that is saving it more nickels and dimes. "It's a number of processes to cut down on wastage, keep the costs under control, and improve our efficiency," Davies says of the airline's cost-cutting mission.

So what will it take to keep the airline en route to breakeven? Under the €230 million restructuring plan, the airline levelled out the balance sheet, rebranded itself and even moved out of its colonial military headquarters into the open-plan Skyparks offices, and paying retirement pay-outs to keep staffing down. But Davies says that, even when eventually a new CEO takes over, the airline cannot afford to keep its foot off the pedal.

"We've done a huge amount in improving our revenue, and we need to increase passengers in the winter and shoulder months. We have a more attractive airline and that has had a great impact on encouraging people to come here. But the future is about driving out more cost: and that's about the way we do things, doing them better, using technology to make things more effective, how much more we can squeeze out of our suppliers, and how we can change our modus operandi to make sure we are as efficient as possible against the product we provide."

Davies chimes in with the ultimate in low-cost driven models. Ryanair. "We'll never get down to their cost base. It's impossible. Because their style of operating an airline is absolutely different," he says, citing the fact that their pilots fly some 900 hours a year (close to the maximum EU limits - Air Malta's fly an average of 600), and that their cabin crew turn around an aircraft in 25 minutes, ensuring that more aircraft is in the air, faster. In short it's about productivity (not to mention, in the case of Ryanair, lower salaries and the fact that trainees pay their own way...)

"They also have advertising all over the aircraft, and don't even carry safety cards, minimising weight. You have to admire them - every single scrap is investigated and reduced. And I think we can learn a lot from the low-cost industry, which is why we have to take all the advantages that they have created. But we will never get it down to that. I'd love to think we could get more productivity from our people."

But it's true that the irony of low-cost aviation is that the phenomenon of flying to so called 'underserved routes' is made possible through tax money financing lower landing fees, even while LCCs like Ryanair reap the gigantic profits of these economies of scale. Davies says he doesn't blame the government for welcoming any airline that brings in more tourists, but he says that Air Malta cannot afford to keep its eyes down to what's happening in the industry.

"If we don't drive costs down, there will be serious consequences," he says, mentioning a list of some 15 European airlines bleeding money and demanding state subsidies - while in the Gulf, Emirates is considering a $30 billion order to double its fleet of A380 superjumbos, suggesting that the centre of travel is converging on a point where the world's major cities are all 15 hours away.

"I implore to everyone in the company: we must drive our costs down, and we have to appeal to [pilots' union] ALPA and the union of cabin crew that we must drive down costs," Davies says as we broach the subject of unions.

But the truth is that Davies and the airline's main unions remain at loggerheads. The union says Air Malta needs more pilots, but that's surely not on the agenda - if anything Davies wants to see pilots fly more hours and cabin crew effecting the cost-cutting turnarounds Air Malta would benefit from. And that means overcoming a collective agreement that safeguards some handsome benefits (a recent MaltaToday exposé of a €750 penalty that is paid to every single pilot for cancelled leave riled the union) - not to mention the fact that ALPA resents Davies.

"I think there are opportunities for ALPA and UCC to play a more effective role. I'm not saying they don't - they do a great job. But I think they have to take a look at themselves in the mirror. Everyone has a big responsibility, and they are important people... and they should look at their own consciences, and see how they can make a difference."

Then there is the complex business of pricing. You must either snap up Air Malta's cheap seats months ahead, or expect to be charged at prices double those of Ryanair. And that includes the fact, Davies then points out, that Air Malta's new fuel hedging policy has it buying fuel at $935 per metric tonne, far cheaper than Ryanair's $980. "So when the cost that represents 30% of your costs is less than the competition's, and they are still flying at half our costs... that's down to productivity."

So - is stripped-down low cost the only way to go?

"I'm not going to plaster the airplanes with tacky adverts. I don't think it's the image Air Malta wants to portray because that's not the image Malta wants to portray. It's not a tacky destination. It's a sophisticated, elegant destination that commands a certain price premium. And a lot of people will feel comfortable travelling on Air Malta, and a lot of people are happy jumping aboard Ryanair."

Davies says he has no problem with competition. "But the biggest competition to Air Malta can be Air Malta itself," he remarks, as we get back on the subject of unions. "The point we have to make with the unions is that we have no God-given right to survive as an airline if we don't do our best. I ask people why Air Malta should be any different and there is no answer."

Davies says he is motivated by the prospect of Air Malta servicing routes that can bring new tourists - Chinese, Indian and Filipino middle-income travellers - through such Middle East gateways. He suggests that this global opportunity is Air Malta's next frontier, even though it will require "stamina and vision" to bring about. He also mentions the opportunity to have Malta become a central distribution point for cargo airlines. And a future with some sort of strategic partner in the airline seems to be a question of not if, but when.

"I won't comment on buying stakes in the airline, that's not my call. All I can say is that you don't have to be very clever to see that China is becoming one of the most significant industrial and commercial forces in the world," he says when I mention the part-privatisation of Enemalta as an example of new capital being brought into the country's industries.

"The previous chairman [Louis Farrugia] said we would require capital injection. Where it comes from is not for me to speculate upon. But from a business point of view, that will inevitably have to happen."

Davies knows that by 2014, he will look back at an airline that he strengthened with new foundations. But his words suggest that there is some finality in this journey, and that an end-point might be in view. "As far as I'm concerned, I would have done my job up to that point. I would have got a new board of directors and a new government, and presumably a new CEO... but we would have created a better base, a better chassis, that gives the airline better foundations as I'm leaving than when I found it."