Air Malta reform: all up in the air? | Dominic Azzopardi

“I didn’t know what I was getting into,” Azzopardi remarks lightly, referring to his election as ALPA’s president in mid-2010, as we sit down to discuss the highly-charged (and closely-guarded) topic of beleaguered Air Malta’s restructuring process.

On-going since late last year, Air Malta shocked the nation when it suffered a €31 million loss over summer 2009. In 2010, while ironically transporting a record 3.29 million passengers, government applied with the EU for permission to inject €52 million into the company’s coffers to keep it afloat.

The loan hinges on a rescue plan that aims to see the air line restored to full stand-alone viability, something that the government (assisted by independent auditors Ernst & Young) is purportedly attempting.

But Azzopardi, employed with the company as a pilot since 1988 and a member of ALPA since day one, is sceptical.

“One of our problems is how could we have gotten to this point and not have been told about it,” he says. Only last year, Air Malta’s planes were “packed with tourists” in a record season. “And now it emerges that the company suffered a record loss? How is it possible?”

“Now that we are scraping the bottom of the barrel, it is time for immediate change,” he says, “We will not accept working through another summer and incur another loss.”

The airline is experiencing considerable developments. Former management is under seemingly ruthless review, and figures such as former Chief Executive Officer Joe Cappello and former Financial Controller Brock Freisen were unceremoniously forced out of the picture late last year.

The company’s new CEO, Peter Davies, was headhunted and appointed directly only weeks ago, in line with Finance Minister Tonio Fenech’s express (and reported) desire to avoid appointing “a Maltese fool.”

In the coming days, Malta will be presenting the restructuring rescue plan to the European Commission, but Azzopardi is confident that Air Malta’s troubles are far from over.

He says that far from taking note of the real issues, Ernst & Young chose to focus almost exclusively on Air Malta’s admittedly famously bloated workforce.

He says that ALPA called attention to areas requiring review early on, but the feedback failed to appear in Ernst & Young’s investigations, considerations, or reports.

These ‘elusive’ concerns, he said, include issues such as the tariffs that the Malta International Airport charges Air Malta on each passenger and kilo of cargo brought to Malta, the IT hardware contracts awarded to SITA, software contracts awarded to SABRE, and the cargo haulage charges.

“All of Air Malta’s contracts need to be revised,” Azzopardi says. “In almost every contract Air Malta has entered into, it is at a disadvantage. We are talking about million upon millions of euros, not one or two.”  He says that this “disadvantage” translates itself into unsustainably and “unreasonably expensive prices for the service the airline is receiving.”

But is there a reason why this is so? “I don’t know, we were never involved in negotiations on these contracts, but Ernst & Young were supposed to delve into the details pertaining to these contracts and speak to partners and stakeholders.

“Instead, we found out that the independent investigators merely relied on the company’s official audit records and spoke only with company managers,” Azzopardi says. “Ernst & Young were to examine accounts and contracts first-hand.”

“These are those same audit records that feature vague and misleading entries such as expenditure entries listed as ‘Other’ and have €50 million allocated beneath them.” These are not broken down in any way, he says.

Azzopardi cited the way Air Malta is pricing cargo hauling as one example of an area that Ernst & Young did not review.

“A kilo’s worth of cargo (such as a parcel) that is transported by Malta to, for example, the UK, costs €1.30, when even when sending the same parcel locally it costs at least €6 – not counting Courier service, which can run to around €80.”

He adds that the €1.30 is merely a starting price that does not take into consideration any further “discounts” or “negotiations” that can whittle the final charge even lower. “Air Malta could break even through well-adjusted cargo prices alone,” Azzopardi says, adding that minimum cargo charges per kilo should stand at at least €3.

He also cited abysmally low seat ticket prices, where tickets are often sold at cost-price or loss-making prices, as another area that warrants review. Asked about whom might get this ‘preferential treatment’, Azzopardi pointed to well-connected tour operators as one example. “One can’t issue tickets to tour operators that will mean a loss for the company.”

“We need to establish a minimum price to ensure a safety ‘profitability’ net,” he says, “and irrespective of how well a buyer might be connected, ticket prices do not fall below a certain minimum.” He places this minimum price at €80.

He defends existing Air Malta ticket prices – notoriously expensive – by saying that prices are actually far higher than that by pointing out that prices are driven up to balance our the low or loss-making prices that some “favoured” individuals and operators benefit from. “Other seats are ramped up to try and recoup the loss. “Everyone else is making good for the loss-making tickets,” he says.

He concedes that it is common practice for airlines to negotiate special ‘group’ or tour ticket deals, but nevertheless says that “we need to cut down on abuse. Air Malta offers tickets to some tour operators are prices that would have been viable decades ago.”

Azzopardi adds that the prices also need to reflect international trends, such as fluctuations in the price of fuel. “When fuel prices increase, everything has to also increase pro rata, not as in the case of cargo charges which remains unchanged for years.”

He says that Air Malta is subsidising Malta’s industry in terms of manufacture through its low and unsustainable cargo prices. “Government didn’t even know about this,” Azzopardi said, attributing this to “the policy of a clique of private interests that look to each other’s interests for mutual profitability.”

Azzopardi insists that there is a “network of a dozen private business individuals who are controlling the company.” There are rates that can afford to double, if not triple, and the company would still remain competitive and affordable, he says.

So what did the report touch upon, if not these issues? “On the issue of the workers,” Azzopardi replies. “With regards to the work force, the necessary corrections were carried out to the letter.”

“If four pilots were needed, not even five were tolerated,” Azzopardi says, describing the approach as extreme and bordering on ruthless. While neither confirming nor denying the originally reported 600-strong Air Malta worker layoffs figure that Minister Tonio Fenech all but confirmed weeks ago, Azzopardi says that “I think Fenech’s figure was not a ‘maximum’ figure, but rather a ‘minimum’ estimate.”

“But when it came to corrections that might affect those businesses and entrepreneurs who work with Air Malta, nothing was heard. This is why I think it was a cover-up,” Azzopardi says, dismissing any notion of a ‘genuine’ restructuring.

But why would Ernst & Young deliberately steer clear of such issues? “There were other interests at play,” Azzopardi insists. “They were given strict instructions to steer clear of certain contracts and arrangements during their review.”

He argues that a genuine review of the company would have at least touched upon the abysmally-low cargo rates as part of holistic and far-reaching corrections. “I challenge them to explain why these were not mentioned anywhere.”

But wasn’t Ersnt & Young answerable to the government? “There are controlling interests that go higher than the ministry or the government. The crux of the issue is that there is a clique of individuals that are more powerful that the government.”

He points to the rise of U.S. corporate interests that contrive to influence both industrial and political spheres to maximise their own profitability and corner markets as a sign of where Malta is headed. “It is not an issue of politics, but an issue of business.”

“The government needs to stand up to these private interests if it wants to correct the issues in Air Malta,” Azzopardi warns. He argues that by recalculating and nurturing incomes from cargo and seat pricing, and cutting down expenses by revising “unfavourable” contracts, Air Malta can be rendered viable. “There is a good €45 million that can be saved.”

But what led Air Malta to find itself in this situation today? “From day one, it was because some of those leading the company (the Board of Directors) had other interests – not that of Air Malta, but those of other companies as well,” Azzopardi says.

He says that the company is collapsing only today is because over the years, “the private interests overshadowed and superseded Air Malta’s interests.” He maintains that Air Malta cannot keep having individuals on its board of directors that have interests that go beyond, or even clash, with Air Malta’s.

He points to how instances such as Air Malta’s outsourcing its entire information and communication technology network to SITA in 2006 – at a time when Air Malta director Fenech Conti (former PBS chairman, chief executive of Datatrak, now Loqus Business Intelligence) was a SITA supervisory board member, a position held until June 2010.

MaltaToday also reported how other beneficiary of Air Malta’s business outsourcing is the Bianchi Group, Malta’s consultants to Airbus Industrie who successfully concluded the sale of aircraft and complete fleet renewal to Air Malta, which has a fleet of 11 Airbus.

The Bianchi Group’s director, Michael J. Bianchi, is also a director on the board of Malta International Airport.

Azzopardi speculates that Air Malta is being systematically dissected for the purposes of privatisation. “The company has been cut into ‘parts’ and those ‘sections’ that are declared unprofitable are ‘dropped’ – but in fact, without them, the airline risks collapsing.”

When a service is ‘dropped’ and then outsourced to a third party, it is generally more expensive, Azzopardi says, “and this outsourcing of core businesses was a factor that led to the company’s ruin.”

“We have given government time until June to correct these issues,” Azzopardi says, warning that the pilots’ union would take “action” should foot-dragging persist. “We won’t take any action that harms the company’s interest, but we will target those earning millions off the company’s back.”

Why the union is waiting until June? “With the new CEO, and will on government’s side, two months will be enough to turn things around. Now it remains to be seen.”

Asked if he had had any faith or trust in the new CEO, appointed by direct order, Azzopardi is cautiously diffident. “I don’t know him. How can I judge? I just hope he is not going to waste more time by calling for new studies or reviews – there isn’t the time.”