Malta's unexpected shift to the Left at the national elections in November 1996 took flag carrier Air Malta somewhat by surprise. Not only did the new political environment result in the demise of Air Malta's pugnacious chairman and chief executive officer, Joseph Tabone, but it also signalled a likely change in strategy and cast doubt on one of Tabone's favourite airline diversification projects.
Since Labour's landslide victory over Edward Fenech-Adami's Nationalist Party, the new prime minister Alfred Sant has put a new complexion on how the Mediterranean island nation should run its economy and deploy its resources. Having campaigned against the previous government's wish to join the European Union, the new leader has promised to remove value added tax within six months and end Malta's quest for full EU membership. 'They introduced 15 per cent VAT even before negotiations for Malta's accession had started,' he complained.
At the same time, Sant has upgraded the tourism portfolio to full ministerial status and given new incumbent Karmenu Vella additional responsibility for Air Malta. Insiders say that the resignation of Air Malta's chairman and chief executive, Joseph Tabone, was accepted because of allegations that he was acting too independently and not focusing sufficiently on the needs of Malta's ailing tourism sector or on collaboration with other facets of the local economy.
Tabone vigorously refutes these criticisms. 'When I took over Air Malta in 1992 there were no management accounts and the chairman's office didn't even have a fax machine or computer', he tells Airline Business. 'By turning Malta into a scheduled traffic hub, we were able to offset the decline in tourist arrivals in 1995 and 1996 and turn Air Malta into one of Europe's most profitable airlines for its size.
'I spent most of my time fighting to keep the airline lean and never succumbing to the unions,' he adds. 'But with a Labour government this is not possible because they are so closely aligned with the unions. So I resigned. Unless I have a free hand the airline cannot be run profitably.
'I had problems with the previous government but I fought my corner and they accepted my right to be independent in the best interests of Air Malta.'
The former Air Malta boss also worries that the new administration does not understand the airline hub concept and may seek to undo a strategic formula that he feels has worked well. 'You have to create the routes and onward links which passengers and not the airline wish to fly,' he insists. 'The needs of Air Malta cannot be met by only serving the sectoral interest of the Ministry of Tourism. We have already increased Air Malta's share of inbound traffic to 56 per cent of arrivals.'
Under Tabone, Air Malta has converted many charter routes to scheduled status and the airline now serves 36 international destinations on a scheduled basis. As well as flying to 27 European points, Air Malta also operates to Casablanca, Tunis, Cairo, Damascus, Tel Aviv, Istanbul, Dubai and Bahrain.
The routes to the Middle East represent the first stage of Tabone's long-held ambition of flying to Australia, where there are more Maltese residents than on Malta itself. In November 1995, Tabone began a cooperation deal with Balkan Bulgarian under which the Bulgarian flag carrier operates a Boeing 767 from Sofia to New York via Malta once a week.
Air Malta owns 11 aircraft - two Airbus A320s, five Boeing 737s and four Avro RJ70s - and leases a DHL Boeing 727 for twice-weekly cargo flights to Brussels. The airline carried over 1 million scheduled passengers for the first time in the financial year ending 31 March 1995, as well as 336,000 charter passengers.
In that year, Air Malta made a net profit of LM3.9 million (US$10.3 million) on revenues of $253.1 million. Air Malta has returned a profit every year for 20 years, but recently the airline has suffered from heavy investment costs, poor yields on the Middle East routes, and competition in the tourist markets, particularly from charter airlines which are owned by tour operators. In 1993/4 the airline made a much healthier net margin of 9.7 per cent.
In place of Tabone, Sant has reinstated former general manager Louis Grech as acting chief executive with a brief to advise the tourism minister 'on matters that fall within the functions of the ministry of tourism' and to oversee all airline and group executive functions. Grech joined Air Malta in 1973 prior to its inauguration but fell out with Tabone in 1992 over policy and left.
Thereafter, Tabone assumed the functions of chairman and chief executive and was widely understood to be readying the airline for some degree of privatisation. In an earlier incarnation as chairman of the Bank of Valletta, he had earned the reputation of a tough negotiator in steering the state-run bank and its highly unionised workforce into private ownership. It was assumed Fenech-Adami wished him to perform a similar task at Air Malta.
But the new government has no such plans. In an interview with Airline Business, Sant says: 'We do not believe Air Malta should be privatised. We believe it should be an integral component of the tourism industry. Under the new ministerial portfolio, Air Malta falls under the tourism ministry.' At this stage, he adds, 'I think we should consolidate. We are looking very closely at what was done over the last two or three years at Air Malta.'
Malta's new leader is said to feel that the national carrier has not been well managed in recent years. Much of this sentiment stems from the Azzurra Air project, which he feels runs the risk of over-extending Air Malta and diverting too much management time away from the immediate interests of the island's tourism needs.
Launched in mid-December 1996, Azzurra Air operates twice-daily Avro RJ85 flights from its base at Bergamo near Milan to Rome/Ciampino, Paris/Charles de Gaulle, London/City and Munich. This year, Azzurra plans to add Zürich and Cologne to its network and open a second operation at Turin. There are suggestions that Azzurra Air might be a potential franchise partner for Alitalia on regional routes in a deal similar to that between the Italian flag carrier and AlpiEagles.
Described by the ex-chairman as 'a strategic investment aimed at giving Air Malta a hub at either end of the Italian peninsula', Azzurra was founded on an assumption that Malta would soon become a member of the European Union. Tabone assigned Dominic Attard, a 23-year veteran of the parent airline, to Project Azzurra as managing director. He created the airline around an Italian corporate structure that gives Air Malta a 48 per cent stake in the new venture, major Italian bank Banco Medio Credito Centrale 25 per cent, and Italian consulting firm IMS 26 per cent. The remainder is held by private individuals.
As it is majority owned by Italians, Azzurra qualifies as an EU airline, enjoying all the attendant benefits of a market which will be fully deregulated as of 1 April this year. Sources say that the Maltese carrier had hoped eventually to take a controlling stake in the new airline once Malta was a member of the EU.
Meanwhile, Air Malta purchased three Avro RJ85s for onward lease to Azzurra Air, and assumed day to day responsibility for the fledgling airline through a management contract. As part of the project, Air Malta established special finance and operating lease subsidiaries - Malta Falcon Finance provides the three RJ85s on finance leases to Peregrine Aviation Leasing, which leases them on to Azzurra Air on operating leases. Air Malta has said that Peregrine will take on third-party leasing work in the future.
In levelling criticism against Azzurra Air, Sant is mindful of Tabone's disastrous investment in the UK charter carrier Excalibur Airlines. Air Malta took a 30 per cent stake in Excalibur when it was launched but sold its $5 million holding six months before the company went bankrupt in June 1995. Insiders say the Excalibur experience is another reason why Air Malta's latest offshore foray includes full management authority. Sant, on the other hand, questions the need for such international risk taking.
Charged by the new government to reassess all aspects of Air Malta's current business plan, Grech is paying close attention to Azzurra Air. 'We are looking into the whole project', says Grech. 'We are looking at all the documents and all the feasibility and sensitivity studies before proceeding further. Obviously, there are commitments we must honour.'
The advanced stage of the project, and the $75 million commitment to three RJ85s, meant that Air Malta's new chief could not withdraw from Azzurra Air immediately even if he had wanted to. Even in the longer term he will have to consider carefully whether Air Malta needs to use Azzurra Air to develop an EU presence to offset the new government's anti-membership policy. 'With Malta now opting out of EU membership, there is even more reason to have a toehold in this massive, deregulated market,' insists Air Malta's finance director, Ray Sladden. Drawing a comparison with Swissair's investment in Sabena, Sladden says that Air Malta will need its Azzurra stake to maintain EU political contact and market access.
As the architect of Azzurra Air, Tabone also believes the Italian venture is too far advanced to end. 'It is a very good project', he insists, 'and it would be stupid if the new government didn't continue with it'.
Whether it succeeds, however, is another matter. 'What Azzurra now needs is the drive and commitment to keep it going, especially when it's a project that is not in your own country and home base,' concludes Tabone. With Air Malta confined to domestic aspirations by its new political masters, its commitment to Azzurra Air, and perhaps to some of Tabone's other ambitions, must be questioned.
Source: Airline Business
