Alitalia to the rescue, but what’s in it for them?

News that Alitalia will be taking a 49% stake in Air Malta was welcomed with cautious enthusiasm, especially after it was confirmed that the Abu Dhabi-based airline Etihad Airways would not be buying a direct shareholding. 

The Italian national airline Alitalia forms part of the satellite of airlines owned by Etihad Airways, which has been in advanced talks with the government over an equity investment in the ailing Air Malta.

Air Malta is in the final year of a five-year restructuring plan that the previous government had agreed with the European Commission in 2012 in return for its approval of around €130 million in state aid. Audited figures announced during the October meeting show that the airline posted a loss of €16.4 million for the year ending March 2015 and is set to reduce its losses to €4 million by 2016.

Etihad is not new to such agreements as last year it saved Alitalia from bankruptcy, reinforcing the Gulf airline’s reputation as a “rescue investor” for ailing airlines. In December 2014, Etihad bought 49% of loss making Alitalia in a €1.76 billion rescue plan, giving it access to Europe’s fourth-largest travel market and 25 million passengers.

But the news has also raised concerns on whether Air Malta will be getting the short end of the stick. 

“Why didn’t Etihad take a direct shareholding? Although it is projecting a breakeven, Alitalia is a loss-making company,” GRTU deputy president Philip Fenech told MaltaToday, questioning whether the relationship with Alitalia would benefit the national interest or whether Alitalia was simply “looking inwardly to strengthen itself”.

Terence Mirabelli, a veteran travel and tourism journalist, admitted his surprise at the Alitalia deal.

“I think I was as surprised as everyone else when it was announced Alitalia was buying into Air Malta. Then again, it does give Etihad leverage because Alitalia is an EU airline. The other question is where is Alitalia getting the money from – it was virtually broke not so long ago.”

In April, Alitalia announced that it had reduced its losses by two-thirds last year since going under Etihad, with plans to return to profit in 2017. With its extensive restructuring programme, Alitalia pared its losses in 2014 by €381 million to post a loss of €199.1 million. The airline carried 22.1 million passengers in 2015, a load factor of 76%.

Air Malta posted losses of €16 million in 2015, a reduction from the €76 million when the national airline began its restructuring plan in 2012.

Philip Lingard, a regular contributor on aviation affairs, also noted the financial situation of Alitalia.

“The government’s choice for Air Malta is either a strategic deal or oblivion. So it is no choice,” Lingard opined.

“Settling with Alitalia is perhaps not the most obvious choice – they are themselves still loss-making and are behind on their own recovery plan so will it be a case of two ailing airlines combining, hoping they can lean on each other for support?” 

Lingard argued that, from the narrow Maltese perspective, a direct deal with Etihad would have been preferable: as a non-EU carrier, its ownership is legally blocked at a 49% maximum; as EU carrier, Alitalia can buy 100%, subject to EU approval. 

“Etihad’s own management has the track record of taking another small European flag carrier – Air Serbia – and achieving a spectacular positive turn around so the portents would have been good. But then the CEO of Etihad has the reputation of being the toughest negotiator in a very tough industry and as every day passed, the Air Malta position was weakening,” Lingard said.

Tourism Minister Edward Zammit Lewis has promised that the memorandum of understanding with Alitalia will be tabled in parliament in the coming weeks, something which the GRTU is looking forward to, to gain a better understanding of the deal. 

Philip Fenech has argued that a balance should be struck between safeguarding employees but also keeping in mind the broader role held by Air Malta. 

“The airline is not there just for the workers it employs but the economy in its totality: the tourism sector and the daily routes which are important for connectivity, including cargo and routes used by people for other businesses.”

Mirabelli, on the other hand, sounded confident that Maltese customers may see minimal changes. “I don’t believe Maltese customers are going to see much difference in the way of standards of service – perhaps Alitalia will demand that the baguette is exchanged for a panino,” he quipped. “Air Malta’s pricing structure may be altered to compete more with the low cost charters that already operate to Malta.”

Fenech adds that Air Malta takes a good part, 45%, of the incoming passenger market while the other 55% is a mix of other airlines, putting Air Malta in a position of dictating priority routes (it currently operates 37) whilst striking a balance with the competition faced by the other airlines – including low-cost giants like Ryanair, who have opened up Malta to countless ‘underserved’ routes.

“Air Malta must keep on prioritizing the incoming routes to Malta or risk losing hold on priority routes,” Fenech warned, and says that ideally the airline should increase its fleet – currently nine – and not limit itself as a ‘service airline’ for Alitalia.

A win-win situation for the two airlines would be maximizing the economies of scales: the airlines could get better prices on fuel and hedging deals, and craft better pricing, or combine to win savings on spare parts.

Another sticking issue could be Etihad’s, or Alitalia’s demands, for Air Malta pilots to fly more hours in the year. 

Air Malta pilots fly an average of 600 hours a year, compared to the maximum 900 hours some European counterparts fly. 

“The airline industry is a very difficult one,” Fenech says. “We see the continuous collapse of so many and still strong growth for the few dynamic ones. Malta needs to wake up to the reality of these dynamics and not remain insular and inward looking. We do not compete alone anymore and cannot look the other way on competitive international cost structures.”

What’s good for Malta, but not for Air Malta

Philip Lingard argues that there are two separate issues sometimes mistakenly conflated: what is good for Malta and what is good for Air Malta. “They are definitely not the same thing. Access to Malta is critical to the country, but that doesn’t mean we have to have our own flag carrier.”

He cites as an example Cyprus, which enjoyed unprecedented growth in tourism numbers and passengers arriving the year after Cyprus Airways collapsed. Then here is Malta International Airport, which aggressively marketed itself with a growing diversity of carriers, more than doubling the number of routes over the past decade.

“Provided that Air Malta’s Heathrow and Frankfurt landing slots for direct Maltese traffic are protected, there is no particular overriding national interest at stake: Air Malta is very nice to have but not essential for the country’s wellbeing,” Lingard claims, perhaps controversially.

Because as he sees it, Air Malta’s main challenge will be cutting down on its staff and achieve major efficiencies. Like Lufthansa, he suggests, whose regional subsidiaries work on a ratio of 30 heads per plane and 50 in the head office: for Air Malta that would mean 260 staff, when it currently has some 900.

“On its own, Air Malta simply does not have access to the buying power Etihad has, with 700 planes under management. Ryanair takes delivery of more new aircraft every six weeks than there are planes in the Air Malta fleet; the same number of potential passengers that view the Air Malta website in a year visit the Ryanair website in a matter of hours.

“The underlying fundamentals of the travel business are that there is no future for a stand alone debt-burdened Maltese-owned Air Malta.”