Fly the national flag? Or go low-cost at all costs?

As Air Malta flounders in debt – its future uncertain and a strategic partnership with a big airline still only a pipedream – Ryanair celebrates 10 years of operations in Malta, announcing further routes and plans to base a fourth aircraft in Malta.

It was November 2006 when the first outbound Ryanair flight from Malta left for London, followed soon after by a flight to Pisa. Those were the first two routes that Ryanair started operating from Malta, quickly growing over the last 10 years to 42 routes and over 140 weekly flights.

Some people argue that that day marked the beginning of the end for Air Malta, and question why successive governments have spent so much on trying to ensure the survival of the Maltese national airline.

David O’Brien, Ryanair’s chief commercial officer, said this week that with a fourth aircraft to be based in Malta from next year – and with the airline projecting to carry 2.1 million passengers to and from Malta next year alone – Ryanair could soon be considered Malta’s national airline.

Tourism Minister Edward Zammit Lewis told MaltaToday that Ryanair has played an important role in the transformation of Malta’s tourism industry, not only by opening new routes and growing existing ones, but also by spearheading the rapid expansion of the off-peak months by introducing several new services during the winter season.

But he also stressed the strategic importance of Air Malta.

“Air Malta remains the only national asset for our tourism industry and the country’s strong economy in general,” he said. “It is precisely why the government is committed to build a successful relationship with a strategic partner which ensures a positive turnaround for Air Malta.”

Air Malta is the country’s only national asset in the tourism industry, which raises the point: Why allow competition to come in and take over a huge chunk of the market?

And that raises another – possibly the most contentious – argument in this whole debacle.

Minister mum on low-cost subsidies 

Air Malta is in financial limbo because the government is no longer allowed, under EU rules, to inject money into the company. In plain terms, the government can no longer subsidise Air Malta.

The issue in contention is not whether one agrees with subsidies or not. 

The problem is that while the government can no longer subsidise Air Malta, not even to save it from bankruptcy, it pays low-cost carriers (LCCs) like Ryanair millions of euros each year under regional development programmes, that are allowed – and encouraged – by the EU.

LCCs benefit from these funds since most of the destinations they fly to are considered second-tier destinations, thus falling under ‘regional development’.

In 2015 alone, the Maltese government paid over €16m to LCCs in regional development funds, most of them to Ryanair, which has the largest LCC presence in Malta.

The tourism minister would not disclose how much has been paid out to LCCs in 2016 so far, and would not comment on how a level playing field could be guaranteed in the industry, when such funds were given the EU’s blessing while the government could not pitch in to save the national airline.

“While one can understand that information about ‘route development’ or ‘strategic marketing support’ is of a sensitive commercial nature and bound by confidentiality clauses with respective airlines, based on our active engagement with airlines, the government has in fact encouraged route expansion in a way which opened up new markets,” he said.

Air Malta or bust?

Zammit Lewis said that Malta and Ryanair crossed paths at an important juncture in the country’s tourism development strategy.

“Malta has grown its tourism volume overnight, and tourism expenditure levels on an annual record basis almost every year,” he said.

This view is shared by Tony Zahra, president of the Malta Hotels and Restaurants Association (MHRA) who insisted that LCCs had been extremely beneficial to Malta’s tourism industry and other ancillary sectors.

“When Ryanair came to Malta, low-cost airlines were gaining market share across Europe and worldwide,” he said. “This world is beautiful because it changes constantly, and low-cost air travel was a natural progression in the aviation industry.”

Zahra pointed out that he has been saying for at least the last seven years that the business model adopted by Air Malta had expired, that it was no longer financially feasible in today’s market and that it no longer made sense in a reality no longer governed by the Air Services Agreement that all legacy airlines used to base their model on.

“Low-cost airlines presented a new model that highlighted the major shortcoming of most legacy airlines, mainly a large number of employees, exorbitant costs and low levels of service,” he explained.

As for the regional development funds, Zahra insisted they were not comparable to subsidies and that they were, in essence, replacing the funding that used to be given to travel agencies and tour operators when they still controlled 100% of air travel bookings.

With most air passengers today booking their flights directly with the airlines online, the money that used to be spent to help tour operators with their marketing and promotion of Malta, was now being given to those low-cost airlines that linked Malta to new, undeveloped destinations.

And that is primarily why so many LCCs fly to second-tier (less popular) destinations. But that does nothing to counter the criticism of those who say that LCCs are using these funds to compete with legacy airlines on main routes.

A case in point is that Ryanair offering flights connecting Malta to Brussels’s Zaventem Airport and Catania’s International Airport, two of Air Malta’s most popular routes.

But Zahra believes strongly that Malta needs Air Malta and that the country would suffer greatly – “And how!” – if the national airline were to fold up.

“In an ideal world, Air Malta would retain 50% of the market, with other airlines operating to and from Malta not gaining more than 10%,” he said.

But the situation is already way beyond that, with Ryanair chipping away at Air Malta’s share year on year.

“And yet, I remain optimistic that the situation can, and will in fact, be salvaged,” Zahra said.

Philip Fenech, president of the Tourism, Hospitality and Leisure Sector of the GRTU, the small and medium sized enterprises chamber, was more vocal in his criticism of Air Malta. 

“I always believed in low-cost airlines and the benefit they could have for our country,” he told MaltaToday.

“But back then, everyone was over-protective of Air Malta, and it took me three years of meetings and negotiations with the authorities before low-cost airlines were allowed in.”

Fenech insisted that if Air Malta, and the authorities, had understood how LCCs operated and how they would influence the industry, they could have taken steps to ensure Air Malta would be in a position to survive and compete against them successfully.

“Not enough was done when we could have done so much, and when we still could,” he said. “Despite the continuous efforts in the last years, not enough has been done to make Air Malta sustainable.”

As to whether LCCs and legacy airlines did not compete on a level playing field, because of the funds given to LCCs under the regional development programme, Fenech said these funds were indispensable to help develop emerging markets.

“Let us not forget that these funds are only given to assist airlines develop new routes and not to compete with other airlines on established routes,” he said.

But Fenech acknowledged that Air Malta – and other national airlines like it – often served a more noble purpose beyond the romanticised notion of having one’s own national airline.

“Sometimes, a national airline would have to look beyond market forces, and choose a destination that – while not financially beneficial to the company – could be of extreme importance to the country,” he said.

That onus fell on national airlines alone, since other airlines would only consider financial viability when deciding which routes to operate and where to base their aircraft.

Iain R. Tonna, president of the Federated Association of Travel & Tourism Agents (FATTA), agreed that low-cost airlines were an important part of the mix for accessibility to and from Malta, particularly for the tourism sector.   

“I don’t believe low-cost airlines per se are directly driving other airlines into financial difficulties,” he told MaltaToday. “Arguably it is more the subsidies that the low-cost business model attracts which creates an imbalance leading to an uneven playing field.”

Tonna said he did not believe that any specific low-cost airline was to blame for Air Malta’s financial woes.   

“It was more the sluggishness with which Air Malta reacted to the market developments and responded to losing its protection and the EU’s open skies policy,” he said.

Tonna said that granting funds to LCCs while the government was not permitted to assist Air Malta ignores the social responsibilities that Air Malta willingly performs.

“I certainly subscribe to the idea that the EU law permitting subsidies to airlines under regional development programmes and that prohibiting state subsidies to companies such as airlines conflicts glaringly with the principle of a free market and a level playing field.” 

Tonna said it was clear that certain LCCs had a strategy to attack Air Malta’s key routes, and that although – officially – no subsidy was being paid directly for these routes, he believed that the funds being given to promote other routes were indirectly assisting these competitive routes too.  

“The subsidies are certainly supporting the basing of Ryanair aircraft in Malta and this also assists the airline to fly on unsupported routes,” he said.

Tonna said that FATTA had always advocated a cautious approach on the mix of airlines servicing Malta.   

“The ‘low cost at all costs’ approach was dangerous and dependence on any single airline was not desirable,” he said.

“It seems that the scales are now tipped in this direction and our dependence is on a carrier that has no real commitment to Malta if it weren’t for the subsidies it is getting.

“Unfortunately this is the situation we feared, and we believe Malta is now between a rock and a hard place when it comes to negotiating subsidies,” he said.