Air Malta has today presented its audited annual report and consolidated financial statements for the year ended 31st March 2012. The report said that “during this year the airline started seeing positive improvements as a result of the effectiveness of its restructuring efforts and has exceeded, albeit slightly, its budgeted figures of the restructuring plan.
“The positive improvements were achieved despite the financial conditions across Europe, the reduction in capacity and a large increase in fuel costs which impacted the level of progress that was registered.”
These results were announced in detail today during a press conference addressed by Minister of Finance, the Economy and Investment, Tonio Fenech; Air Malta’s Chairman, Louis A. Farrugia; Chief Executive, Peter Davies; and Chief Financial Officer, Nick Xuereb.
Financial Year Ended March 2012
During this financial year the airline reported an operating loss of €30 million (2011: €34 million), representing an improvement of €4.3 million over last year.
This year’s performance was adversely affected by two factors which if eliminated for comparison purposes, will result in an operating performance improvement of €21 million. As part of the Restructuring Plan approved by the Commission, Air Malta plc was obliged to reduce significantly capacity inline with the European Commission’s Community Guidelines on State Aid for Rescuing and Restructuring Firms in Difficulty. This has translated into an estimated reduction in profitability during FY2012 of €4 million. Also the average price of fuel significantly increased in FY2012 by €17 million (+30%).
The revenue from airline operations in FY2012 increased by €7million to €214 million (2011: €207 million). As part of the Restructuring Plan the airline has committed to a reduction in flight capacity of around 20% (10% in 2011 and another 10% in 2012). Notwithstanding this reduction in capacity, Air Malta managed to increase its revenue through a number of commercial initiatives that included improved yields (2012: €105 per passenger, 2011:€100 per passenger), improved seat factors of +2%, (2012: 75.2%, 2011: 73.2%), together with the commencement of various ancillary revenue initiatives. These commercial wins have pushed a gross improvement in revenue of over €20 million.
The improved performance this year was driven by the initial benefits of the Restructuring Plan as a direct result of the significant amount of restructuring activity undertaken. The effect of the restructuring projects started to influence the results in the second half of the financial year with aspects such as personnel costs reducing significantly and other charges such as airport charges which reduced on the back of the waiver of Malta landing fees in winter for all airlines.
During this year Air Malta carried 1.76million passengers a slight drop from 1.82million registered last year. Available Seat Kilometres (ASKs) were down to 3,728m from 4,034m. This drop is attributed to the drop in seat capacity that the airline had to implement.
Through early and voluntarily early retirement schemes offered by the airline, during this financial year, full time employees were reduced from 1,249 to 1,026. It is expected that this number will continue to reduce to 923 employees in Financial Year ending March 2013.
Implementation Pathway Apart from the initiatives undertaken to right size the organisation, during the first part of restructuring, the airline focused primarily on tackling its huge operating costs. During the year being reported today Air Malta has initiated several discussions with its key suppliers including Lufthansa Technik, Malta International Airport and SITA and achieved contractual savings of €8million per annum. Similar discussions are currently underway with the World Aviation Group, SkyGourmet and Sabre. Other cost related initiatives are being tackled including Global Distribution Systems fees, aircraft cleaning and reserves funding.
In line with its restructuring plan, during the next year Financial Year, Air Malta is expected to half this year’s loss and register a loss of €15million. The Restructuring Plan also sees the airline increasing again slightly its yield per passenger, and increase its load factor by another 2.3%. These initiatives are expected to continue improving the airline’s revenue. Load factor increases are estimated to contribute €10million per year, increased yield – €9million per year, pre and in-flight ancillary revenue – €10million per year whilst cargo revenue improvements are expected to generate an additional €2million per year.
Fuel
Fuel is the biggest cost items for Air Malta amounting to 30% of the airline’s revenue. Through the introduction of various measures, Air Malta has successfully managed its fuel cost over the last 12 months converting what was a substantial a cost penalty against our direct competition to now where we have a small price advantage.
Air Malta’s has introduced a new fuel strategy has three base objectives:
1) Protection of the airline’s budget and restructuring plan
2) Benchmarking against competition
3) Commercial considerations (ticket pricing etc).
The airline does not speculate on fuel and hedges this commodity according to its budgeted fuel prices.
The airline is pleased to note that this robust policy saved the airline over €3.5million in 2011 and it would have paid €10million more should it have maintained its previous strategy in place. Air Malta has hedged 79% of its fuel requirements for this financial year whilst some of its competitors have hedged up to 90%. More importantly Air Malta has secured its hedges at better rates – about 3% better.
Due to previous hedges, at the start of the last financial year, Air Malta had a 26% fuel penalty against its direct low cost competition. Through proactive management, the airline has now managed to decrease this penalty to a point where it now enjoys a hedge price advantage of 4.2% in Q4 2012 and 2.8% in financial year 2013. (See slide)
Air Malta is taking full advantage of the situation and in fact, as early as a month ago, the airline has again hedged fuel at favorable rates in the low $90s.
Conclusion
During the current Financial Year Air Malta will continue pushing forward a number of projects specifically related to cost reductions whilst spearheading new revenue enhancement projects. The airline is also reviewing and changing its process in various areas, investing in management strength and accountability, spearheading a cultural revolution, improving its pricing and developing the rebranding and re-positioning of the airline.
Air Malta is committed to continue working diligently towards achieving its turnaround plan in line with the set objectives and milestones presented to the European Commission. Despite the current financial turmoil and other issues outside its control, the airline is on track to achieving the targets set.
Air Malta’s Chairman, Louis A. Farrugia in his statement today said:
“Air Malta p.l.c. has been incurring losses on its core airline business for many years. Continued losses, especially for a commercial entity like Air Malta operating in a European Union environment, cannot be sustained by the state shareholder. The airline was thus required to take quick and decisive action to return to profitability through a wide-ranging Restructuring Plan.
“An airline turnaround, especially in this tough economic environment, is a very complex process. There is no organisation in Malta which has undergone such a massive and multifaceted exercise whilst continuing to operate its services to its customers and keep on supporting the tourism and other industries of the islands.
“The negotiations with the European Commission were highly detailed, technical, long and exhaustive and had to be in-line with the Community Guidelines on State Aid for Rescuing and Restructuring Firms in Difficulty. The Commission was guided by four principles and the right balances had to be sought.
“The Commission had to be satisfied that adequate Compensatory Measures are being implemented; that the plan presents realistic and credible measures that will ensure Long Term Viability for the airline; that the plan proposes the minimum level of capital necessary to restructure the airline and that the airline itself could match with its Own Contribution; and that the airline has not, in the preceding 10 years, received state aid.
“The Government of Malta and Air Malta have closely worked together to provide the EU Commission with all the answers they requested including replies to objections sent by interested parties.
“To do this the Government presented to the Commission a 132 page plan supplemented by tens of other documents running into thousands of pages of technical documentation.
“On 27 June 2012, the Commission communicated its decision whereby the Restructuring Plan of Air Malta was approved and it resolved that €130 million of fresh share capital can be granted to the Company for its restructuring and is in line with EU state aid rules. To this effect the company will be holding an extraordinary general meeting in the coming weeks to execute the issuing of new share capital.
“In its statement the Commission observed that the Restructuring Plan adequately addresses the financial problems of the Company. The restructuring measures foreseen, which include a significant capacity reduction and the sale of assets, should ensure long-term viability without continued state support, whilst avoiding undue distortions of competition and should enable Air Malta p.l.c. to become viable within a reasonable timescale.
“Air Malta’s Restructuring Plan is primarily aimed to save 800 jobs and for Malta to continue having a national airline that will be in a position to successfully compete and continue assisting the islands’ tourism sector and the economy in general.
“Due to Air Malta’s financial situation the airline started implementing this Restructuring Plan well ahead of any approvals. Air Malta does not have a second chance at this. The EU rules are clear on this ‘one time last time’ principle meaning that the State cannot give any form of assistance again over the next 10 years.
“The restructuring programme is being supported by an implementation plan. Air Malta’s management has taken a comprehensive review of every element of the organization. This is not just a financial turnaround. A number of positive initiatives have been communicated whilst other will be made public in the coming weeks and months.
“The survival of the Company is intrinsically linked to the ability of the airline to rapidly and successfully execute a range of cost and revenue initiatives as reflected in the Restructuring Plan. The Restructuring Plan shows that the existing level of losses can be turned around to breakeven levels by FY2014 and to profitability by FY2015. Air Malta p.l.c. has already proceeded with the implementation of initiatives contemplated within the Restructuring Plan as submitted to the Commission for the approval of the state aid, including:
significant downsizing of the head count through Voluntary and Early Retirement Schemes;
implementation of a comprehensive change agenda of more than 160 projects covering all aspects of the airline;
implementation of a more disaggregated and internet-based reservation/sales function in line with the model adopted by other carriers; and
appointment of key executives with industry expertise.
Today, we are in the midst of this restructuring exercise.
During the financial year ended 31 March 2012, the airline made noteworthy progress.
“The airline’s operating loss for the year amounted to €29.8 million. This result represents a net improvement of €4.3 million over the corresponding loss in FY2011 of €34.1 million. However, the FY2012 performance was adversely affected by the two factors described below, which if eliminated for comparison purpose, will result in an operating performance improvement of €20 million: as part of the Restructuring Plan approved by the Commission, Air Malta p.l.c. is obliged to reduce significantly its capacity. This has translated into an estimated reduction in profitability during FY2012 of €4 million; and the average price of fuel in FY2012 increased by 30%, significantly increasing fuel costs for the year by €17 million. During FY2012 the company adopted a stronger fuel hedging policy allowing it to protect its fuel cost for FY 2013.
“The improved performance in FY2012 was driven by the initial benefits of the Restructuring Plan as the company commenced a significant amount of restructuring projects.
“As part of the Restructuring Plan there will not be further capacity or slots reductions. We have already achieved the targets.
“During this Financial Year Air Malta managed to increase its revenue in FY2012 by €7million to €214 million (2011: €207 million). This has been achieved through a number of commercial initiatives including an improved yield, improved seat factors together with the commencement of various ancillary revenue programmes. These initiatives alone have driven a gross improvement in revenue of over €20 million.
“The Air Malta Group incurred losses from continuing operations before tax amounting to €37.6 million (2011: €65.9 million).
“For the first time the restructuring efforts are being reflected on the bottom line. The effectiveness of measures taken during the year has been reflected in the improved financial results.
“During the forthcoming year, the Company will continue to pursue the implementation of the next measures and phases as envisaged in the Restructuring Plan.
“I wish also to thank my fellow directors, the airline’s management under the leadership of Peter Davies, all employees and all the unions for their understanding and maturity during these difficult changes. Last but not least I wish also to thank all stakeholders in the tourism industry who have supported throughout these times.”
Photo shows Tonio Fenech – Minister of Finance, the Economy and Investment (4th left), Mr Louis Farrugia – Air Malta’s Chairman (3rd right), Mr Peter Davies – Chief Executive (3rd left), Mr Ray Hart – Chief Restructuring Officer (1st left), Mr Nick Xuereb – Chief Financial Officer (2nd right), Mr Philip Saunders – Chief Commercial Officer (2nd left) and Mr Joshua Zammit – Chief Officer Organisational Development (1st right).