Turning it around | Louis Farrugia

This week, Air Malta announced that it had made an operating loss of €29.8 million for the financial year, which ended in March.

Although no company would call this a success, this year's financial results mark an 'improvement' of €4.3 million over the previous year.

Shortly after the announcement, the airline's soft-spoken chairman, Louis Farrugia sits down with me and shares his thoughts on the airline's future.

Farrugia, who also holds chairmanships at a number of other companies, including Simonds Farsons Cisk and Liquigas Malta, stresses that the most important thing to take the restructuring "step by step".

The company plans to break even by 2014 and return to a state of profitability by 2015. Is this realistic?

He points out that the airline does not work in isolation. "Interesting things are happening at the moment with record tourist arrivals which is a result of a planned tourism policy. The policy is allowing low cost airlines to operate and making Air Malta compete in this kind of environment. The policy will not survive if Air Malta goes bust."

He adds that if the country becomes more popular, albeit thanks to low cost carriers, Air Malta stands to gain.

Farrugia says that new markets such as Russia and Israel are already opening up and cites North Africa as a market with enormous potential for Malta. He says this is already happening and Malta could become a hub for the region in the same mould of Hong Kong and Singapore in Asia.

The airline cannot however expend its operations within the European Union market before it becomes profitable again. According to the agreed restructuring plan, this should happen by 2015. A few weeks ago the airline was given a lifeline, following the European Commission's approval of the restructuring plan.

In June, Labour MEP Edward Scicluna claimed that EU Competition chief Joaquin Almunia accused the Maltese government of failing to provide information needed to agree to its €130 million state aid rescue plan.

However, barely a week later, the European Commission declared that the multi-million State aid injection is in conformity with European state aid rules, and that mitigating measures to reduce the airline's capacity and sell off assets would ensure long-term viability for the national airline.

So naturally, one wonders what happened in that week and why the Commission changed its mind.

"I don't think reports that the Commission was not happy were a true reflection of what was really happening. Nothing changed. Air Malta did not submit anything new and we had a positive feeling at that time. We were confident that the Commission would approve the plan," Farrugia says.

Asked whether something changed on a political level, Farrugia says "I don't think there was anything even happening on a political level. I believe that the reports that the commission was asking for more information were not chronologically correct. It may have been a quotation from six months before."

The Commission's go-ahead sanctioned the restructuring programme that had already started back in 2011 to bring Air Malta back to profitability by 2016.

In November 2010, the Commission had already authorised a €52 million government loan to Air Malta, and then was notified in May 2011 of an increased share capital of €130 million to assist the company in recouping losses and make a turnaround.

Although the restructuring plan has been headline material for many months, the details of the restructuring remain largely unknown.

Asked to explain the process in a nutshell, Farrugia puts it this way:  "A realisation that the only way the airline can survive is through a good commercial plan. What is a good commercial plan? A good plan is offering a product your customers want, by choice and not because they have to.  They must be prepared to pay for your services at a cost that is market competitive and at a cost that allows the airline to make a profit."

He says Air Malta must move from a situation where the company was a national airline supported by the State and did not need to be competitive, to a situation where it has to be commercially competitive.

"This transformation is the realisation that is this is a real thing and the work force are now understanding that this aid is a 'one time, last time' for the next 10 years."

Farrugia says the airline must go through a commercial and cultural transition and adds that Air Malta can only move forward if there is "no interference" in its commercial policy.

He cites the choice of routes as an example and notes "routes cannot be enforced on the airline for political reasons but they must make commercial sense."

Asked whether the airline has been subject to unwarranted political interference,

Farrugia answers with an unequivocal: "Yes."

This week, Finance Minister Tonio Fenech said the government will not interfere in the running of the airline. An optimistic Farrugia says that he expects this attitude to continue whoever is in government.

He says that given the lifeline the airline has been given by the Commission, and the fact that it cannot receive any State aid for the next ten years - regardless of who runs the company - must first and foremost secure its commercial survival.

Farrugia adds that whoever is at the helm of the company cannot go against the rules set by the Commission unless there is a political decision to do otherwise.

On the possibility of privatising the company, Farrugia says he believes it is "essential to have part of the company in the hands of private investors who will ensure that commercial thinking prevails at the airline".

While making it clear that he has no intention to personally buy any shares if Air Malta is privatised, Farrugia adds: "I would favour a percentage of Air Malta to be private, but it is only my personal opinion. I don't know what the two parties have in mind on this... clearly the priority is to turn around the company at the moment."

Turning on the airline financial results, Farrugia explains that the overall performance was adversely affected by €21 million in losses incurred by increased fuel prices of €17 million and €4 million losses from the reduction in flight capacity.

Apart from the unpredictable fluctuation of oil prices, what is the company doing to become more fuel efficient?

Farrugia says the airline is working in that direction and the board of directors is aware of the importance to reach such goals over the next few years but "the priority is to turn the airline around".

He explains that the main targets to turn the airline's fortune around are to re-negotiate contracts with its suppliers, increase the annual yields per passenger and improve seat capacity, control the operating costs and improve the product.

Farrugia points out that apart from reducing costs and enhancing revenue the airline must emphasise what the product is.

"In business, one always tries to differentiate. Any entrepreneur will say that if I have a product which my competitor cannot have,  then I can have an advantage. Air Malta is different to other airlines in that it is the only one competing on the Malta route which is Maltese."

Farrugia says that other carriers operating in Malta are either low-cost or other national airlines, and Malta is not their main focus.

"That is what Air Malta is going to do. It is going to make sure that it is different from other competitors by emphasising the Maltese aspect. It must bring Malta to the customer from the moment they have a look at our website not only from the moment they set foot on our aircraft. This is a whole new product repositioning. More of that will come in the coming weeks."

Asked whether we should expect major changes, Farrugia says that there will be big changes in the re-branding of the airline but he cannot reveal them at the moment.

Going back to the restructuring plan, Farrugia says that whoever thought that the process was an easy ride was completely off the mark.

"The EU cannot approve anything which can be later challenged by competitor airlines. We passed the test but on the other hand the Commission will continue monitoring. Although we got what we asked for, the targets are tough."

The restructuring process was met by strong resistance from some quarters, most notably from unions representing the company's employees.

"I hope workers are starting to believe that we can turn things around.

"Unions have certainly corporated. When we explained what the whole plan was about it was met with a lot of cynicism and scepticism but hopefully hopefully that has been overcome now."

He notes that some people still believe that Air Malta should go back to how it was run 20 years ago and some would argue that low cost companies should be banned.

But he says that the company must learn to live with the reality of low cost competitors. Farrugia says that the advent of competition  always creates shockwaves when a company is not accustomed to the idea.

"It does a lot of good. There is no harm in introducing a culture and philosophy of 'yes we can'.

"With proper coordination between the management and employees, it is possible.

"If you choose the right people at the top, it trickles down. Good appointments bring good decisions."

The chairman believes that the much-criticised appointment of a foreign management team, led by British CEO Peter Davies, was a wise move.

Farrugia says the management team has the right blend of experience in restructuring airlines and commitment.

He also says that nationality is not an issue.

Farrugia explains that looking for somebody with experience in restructuring an airline would restrict the number to very few people in the world let alone in Malta.

"The combination of a management team with such experience with the local board of directors is working.

"There was no guarantee it was going to work.

"There is a meeting of minds. Judgments must not be made according to who the person is but from the decisions taken."

Farrugia describes Peter Davies - who is on a €500,000 salary - as "a particular character with a British mentality".

He says that Davies has "the drive, clear ideas and the experience. He also loves the business and is very proud to be CEO of the company. And he also likes Malta".

However, the chairman says that he longs to go back to a more local management team "at the right time".

 "My view is that having a percentage, say 20 or 25 per cent - even possibly more if you float it on local stock exchange in a similar way to Bank of Valletta - would be a good thing."

Farrugia says this would change the mentality to one where everybody is aware of the need to earn an own living. But, he underlines: "It's early days yet."