The fleet and its match to the market is a core factor for an airline to operate at a profit. Every airline, including Air Malta, has to constantly monitor developments and be some years ahead in its planning of fleet renewals. This is already apparent from a move in its management structures, as we have read recently.

Air Malta’s present fleet leasing contracts expire between 2016 and 2018. Due to overcapacity, the fleet is being reduced, with one aircraft already in Mexico for two months, with Interjet, a growing low-cost airline that is building its fleet on Airbus A320s for the 160-180 seat segment, and now the just-coming-into-service, efficient and bargain-priced 100-seat Sukhoi SSJ, a Russian-Italian-French jet aimed at maintaining and developing ‘thinner’ routes and frequencies.

Actually, many years ago a good amount of extra cash could already have been made through a sort of arbitrage deal, meaning one secured the leasing contract at a low price in 2002, and could have sold this contract on at a much higher price when demand went up again. One could have cashed in the difference, and then acquired a fleet more suitable for daily loads, with accordingly lower costs, meaning one could already pay for that to a great extent with just the arbitrage profit and then operate at largely variable cost levels (see this explained in an item by yours truly in 2004, since the problem already existed).

While there are also interesting projects from (re) emerging aircraft-manufacturing countries, not least the Sukhoi mentioned above, in the following we will look at just the two big and two smaller western jet aeroplane manufacturers offering aircraft with a capacity of more than 100 seats.

The competitors

Airbus has now launched the A319/320/321NEO (new engine option), which will reduce costs by 20 per cent each, primarily due to a new generation of engines. That this significant progress is appreciated is obvious from the many new orders for the jet that is to be delivered in a few years time. Boeing is presenting yet another upgraded version of the B737, called the 737MAX, as the successor to the current 737NG series, the Americans claiming that the MAX, to be delivered from 2017 onwards, will have a seven per cent overall advantage over the future competing product (an obvious reference to Airbus), with four per cent on the fuel side, and the rest on other costs, such as maintenance. In a nutshell, both are the same planes with new technology engines stuck to them and some interior cabin cosmetics. But why change winning workhorses?

Competing at the lower end of the Airbus/Boeing product range, one will see how Brazilian aircraft manufacturer Embraer will react as regards its E-jets, since the E195 competes with the A318 and the A319, and from an economic point of view is far more fit for purpose as the only true B737-500 replacement. Embraer offers planes with seating capacities of 80, 90, 105 and 120 in this E-jet ‘family’. The C-Series (100-150 seats) of Canadian plane-maker Bombardier, which is positioned a bit above the E-jets with an intended capacity of up to 125-145 seats, is still at the development stage and seems to have been struggling a bit in recent years. This aircraft pioneered a lot of new technologies that feature in the A320NEO and will now be seen in the B737MAX.

Airbus versus Boeing

With the current two models Boeing 737-700/800 versus Airbus A319/320, the Boeing already seems to have a slight cost advantage, particularly for carriers more oriented towards low-cost/leisure loads (some operators claim this to be five to seven per cent). It also appears that the Boeings have quite an advantage when a carrier intends flying really longer-range missions in standard outfits (so no special tank-equipped planes, no business class flights, etc., just bread-and-butter flights). Examples include the numerous routes of Copa (the state airline of Panama, a 49 per cent Continental/United Airlines company) like Panama-Buenos Aires, 5,300kms, or Montevideo with even 5,400kms, or Kenya Airways Rome-Nairobi at 5,400kms, all non-stop. Kenya Airways, which is very profitable, has structured its short to medium-haul fleet around the Boeing 737-700/800 as well as adding the Embraer 170/190 to its long-haul planes. Copa, with its main operation in Panama and its subsidiary in Colombia combined, made a $212m profit in 2010 in a competitive environment, and has a fleet consisting entirely of the B737-700/800 (37 planes) and the Embraer 190 (26 planes).

For even longer routes, one can simply look at Travel Service or XL France who operate from the EU to Asia or Latin America with a refuelling stop. In the case of Malta, it would (have) mean(t) that charters from, for example, Beijing, would be possible without any problem, even with headwinds, etc., with just a short refuelling stop in Kazakhstan; (just in case one wanted to, and obtained a suitable and financially sustainable charter contract).

So from the cost and range point of view, Boeing might indeed have an edge at present and it claims that it will continue to do so.

The A320, on the other hand, does have some advantages for cargo compared to the B737-800 due to the more spacious design and loading aid interior equipment of the hold (even though Air Malta does not make use of the capabilities). On the other hand, the Boeing has a sliding luggage hold door rather than an opening up door, which is easier when using a small forklift.

In the event of a considerable amount of growth, one could also get the very efficient 220-seat A321, while Boeing now offers the yet again stretched Boeing 737-900ER, which was not available when Air Malta placed its order for the present fleet.

For the ‘self-loading cargo’ (passengers), Boeing so far has offered an built-in gangway that some carriers have installed to save using an external one – a plus if one has many short flights a day as it is cheaper than having to pay for a gangway from ground handling.

There can, however, be no doubt that the cabin of the A320 family is wider and it feels as if the windows are positioned slightly higher, which is good for taller passengers who want to look out. Boeing has now come up with a new interior design to make up for most of that.

Pilots can very easily move from the narrow-body A320 family to modern Airbus wide-body aircraft such as the A330, if Air Malta ever wanted to get one (Cyprus Airways did, and got into huge financial trouble over their too large A330s and so is now counting the days till the end of the leasing bills). While the side stick (Airbus) versus traditional yoke (Boeing) ‘steering’ is open to debate, the Airbus cockpit feels more spacious – a working environment plus.

One should also not forget one’s experiences regarding product quality and the cost of spare parts, nor that a plane that first appeared cheaper through a soft loan ends up spending a lot of time in a hangar, or manufacturers recover part of the cost through expensive spare parts.

It might also be interesting to compare the percentage of aircraft manufactured since, say, 1998 that are permanently stored or have already been scrapped for some reason. This can also be due to financial constraints, as was the case with the two-four-year-old Frontier Airlines A318s that were scrapped because they were so uneconomical for their low-cost airline owner that they are worth more in parts than as a flying asset, (Incidentally, with the loads Air Malta has been flying, their A319s – even an A318 – would be too big.) On the other hand, such young A318s sold at scrap value can also be a real bargain for the new owner if one is a carrier that just needs the capacity – and an Airbus standard cabin product complementing an A320 fleet – but does not fly too many hours a year. Avianca, for example, snatched up some young second -hand examples that, like this, were a real bargain alternative to the new A319s which are, after all, only 18 or so seats larger (so with minimal extra revenue, if any).

Airbus certainly has an advantage, being already the current aircraft of Air Malta – in fact, since 1990 – meaning few transition costs. Yet in the case of fleet roll-overs, the training of staff, etc., is usually part of an attractive all-inclusive package: after all, it means many yeas of product support business for the manufacturer. So one should not expect this to be a done deal.

Are one-to-one

replacements the only way?

As early as 2004 (in the item referred to earlier pointing out the solution of the then new-on-the-market Embraer E-jets), just when deliveries of the present fleet started, but surely also before, and as pointed out in articles in TMIS and MBW, there was an obvious load factor problem. In addition, with the growth of the internet the market was moving away from the concept of full weekly charters towards individualised travel solutions.

Over the years that followed, Air Malta indeed continued at an average annual load factor of about 65 per cent. If one takes this figure and projects it onto their A319/A320 fleet, this means that only 90 of 120 seats on average have been bringing in revenue, so far more congruent with even just an Embraer 175 (90 seats) and E195 (120 seats) mix. Compared to an A319, the E175 even has a trip cost around 40 per cent lower for the same amount of revenue generated – empty seats make no money. If one assumes somewhat higher loads in summer, and lower loads in winter, then the E195 as standard would be able to catch most of the summer market for a much lower cost during the other nine or 10 months.

One option is a melting down of the network as regards routes/frequencies/markets for which existing aircraft are simply too big, which indeed for some routes was really overdue and has now finally been done. Even with trash fares, one could not generate according to loads or the flights are just too unprofitable. This of course means disposal of capacity. But, apart from routes that were retained just for other (such as political) reasons, for tourist-source markets this also means that destination Malta will have fewer points of access to generate tourism, which is, after all, one of the core functions on which Air Malta’s existence was founded and for which its support can be justified.

Destination Malta has room for growth – not so much in July and August as pricing for accommodation shows, but primarily during the shoulder and off-peak season. With a fleet of aircraft of too much capacity (trip costs), one has to reduce routes or frequencies earlier in the autumn or start them again later in the year. And the higher the trip costs, the higher the commercial risk, thus less likelihood of starting new routes/frequencies.

Connectivity is a necessity for the generation of tourism.

With lower trip costs at the same effective load (seats actually sold) one could keep routes open much longer, or maintain frequencies, in a financially more sustainable way, thus in effect growing, right during the period one needs the growth. Parked seats don’t earn money, and empty seats flown around, or seats only filled almost for nothing (without subsidy!) lose money.

With aircraft size more suited to the market reality as regards route distribution, during summer we might see:

• additional source markets connected that cannot sustain a larger capacity aircraft profitably, thus diversifying the geographic sourcing base

• additional frequencies on routes already served with larger aircraft on days that would not financially sustain the Airbus but could sustain an 90-120-seater, thus providing more flexibility to both individual customers and tour operators – or right-sizing on these frequencies rather than removing them

• the retention of some larger planes on routes that currently occupy larger capacity core fleet aircraft that are under-occupied seat-wise in these sectors during summer. Capacity could then be re-allocated to markets that can take it, meaning there would be a capacity increase from these core routes and, hopefully, more arrivals.

During winter one could:

• keep open routes that so far have only been seasonal, thus improving connectivity and, hopefully, arrivals in the critical winter season, also at low frequency

• help maintain frequency on routes that during winter traditionally see a lower frequency than during summer

Generally, the use by Air Malta of an efficient smaller jet would:

• reduce trip costs by 20-40 per cent, thereby improving financial performance by cutting the losses that are generated by empty capacity being flown around/not enough revenue generated per seat

• offer customers a broader mix of airports

The lighter Brazil bird

The advantages of the E-jet family for Air Malta are clear if one compares the operating empty weights (OEW). This is the weight of the aircraft ready to go but without fuel and load: E175 21.8t and E195 29.0t compared to A319 39.7t and A320 41.2t.

Generally, while the A320 has just a four per cent higher OEW than the A319, it can seat 19 to 28 per cent more passengers (if one can fill it), while an A321 can seat up to 56 per cent more passengers than a standard A319 at just 20 per cent on OEW. This is because the A320 was the original plane, with a stretch design in mind, that became the A321, an extremely efficient plane. However, the shortened A319 and the again shortened A318 carry the basic heavy structures of an aircraft double their size (A318 vs A321).

Without doubt, Air Malta has been flying passenger loads (revenue), which in the most dramatic comparison suit a 22t jet, using a 40t jet (E175/A319), so 18t extra metal (+80 per cent empty weight, OK, at +55 per cent remaining empty capacity). So just on average, one could generate the same revenue for around 40 per cent lower trip costs. Even comparing the A319 to the E195, still means 11t or 37 per cent extra metal for just 17 per cent extra seat capacity – useless as the extra seats remain unsold, and even if they were. So the least one can do is prune the network of unsustainable under-loaded flights. The next question is what to do with the planes for which leasing bills need to be paid even when they are parked?

On the E-jets, passengers always enjoy a window or aisle seat due to the 2+2 seating configuration. Overhead hand luggage bin volume per passenger compares to Airbus, and the luggage hold volume is the same as on the A319, partly way higher on a per seat basis: 218 litres volume per available seat (E195) versus 1,96l (A319 Air Malta) or 1,64l (Easyjet). The E175 compares per seat to the A319 in Air Malta layout, and the A320s to the E195s on a per seat basis. But to what extent does Air Malta make use of the excess belly capacity and if it does, does it really raise the big sums even after the (indeed well-done) revised cargo rates?

The range of the E-jets is sufficient for the current network, since Air Malta’s longest route is 3,000kms (Moscow), with potential beyond, while not being able to fully compete in range with the A319, let alone the B737-700W. But then it depends what an airline needs. Air Canada, with 60 E-jets, has been able to cut costs by 20 per cent on many sectors cent without any loss in revenue by switching (right-sizing) from Airbus A319s to Embraer E190s on short flights, but also on longer routes such as Toronto-Seattle, 3,300kms (longer than Malta-Moscow), or Toronto-Havana, 2,300kms – a tourist route comparing exactly to Manchester-Malta.

Are 35m USD extra

for 20 seats extra sustainable?

Then there are the list prices. In 2011, this means around $78m for a current model A319, with a plus on the enhanced NEO on that (which, however, will be more than compensated by fuel savings), roughly the same being the case for the B737-700/MAX-7. On the other hand, there are around $40m with an E195, or around $30m with an E175 (90 seats which, in recent years, was the average load for Air Malta’s A319s) and $36m for the 100-seat E190 (range 4,300kms). Add to this the big saving on fuel, airport charges and maintenance/spare part costs. There are product support programmes that keep costs low, especially for smaller airlines through outsourcing to the manufacturer/engine makers. One will indeed have to ask if the 20 seats extra that an A319 or B737-700 have, and thus the extra revenue generated on those flights with load factors beyond 86 per cent (are there any?), can justify a whopping difference of $35m extra per aircraft to which, again, have to be added the saving on fuel, maintenance and airport charges.

However, if one deems the range an absolute necessity and insists on larger capacity planes for some reason, let alone even larger ones, then one has other cost factors to consider. While the Canadian Bombardier C-Series CS300 costs more than the E195, there still remains a good $20m difference with the equally-sized A319/B737-700, which makes it not surprising that Easyjet, working at a loss, is looking very closely at the C-Series. The C-Series’ composite material fuselage, similar to that of the B787 Dreamliner, will be built in the PRC for final assembly in Canada along with parts from the UK and Italy, while Embraer gets parts of its conventional metal fuselage from France for final assembly together with the Brazilian-made fuselage sections and other parts in Brazil, powered by General Electric engines. Airbus, Boeing and Embraer certainly have the advantage that their basic plane is already proven and flying and is just being updated.

E-jets have a projected life of 80,000 flight cycles, a 99.9 per cent technical completion rate, meaning only one out of 1,000 flights is cancelled/needs another plane instead, and a 99.2 per cent technical schedule reliability, which means only eight out of 1,000 flights are delayed for more than 15 minutes for technical reasons. One has operators in basically all countries Air Malta flies to: the big Euro spare parts centre is in Paris, and there are numerous maintenance bases around – and why not even aim to complement Malta’s aircraft maintenance portfolio?

The big question of

long -term strategy

At present, a standard all-Embraer 195 fleet might be the most cost-friendly solution to keeping more routes open. The aircraft has proved very successful with low-cost airlines like FlyBe, Azul and JetBlue, legacy concerns like Lufthansa, Air France/KLM and Air Canada, and budget legacy carriers like Copa or Royal Jordanian. The jet is a crucial part of the restructuring process of LOT Polish Airlines as a replacement for their B737 classic models on the Euro routes, while the B787 will replace the B767 on long-hauls.

One will have to see how much better the A319NEO and B737-700MAX are when it comes to cost, and what Embraer and Bombardier might offer. A crucial question will be over the necessity of a 160-190 seater, a segment that Air Malta currently covers with the A320 – which are, however, the planes currently being partially disposed of.

Will (Air) Malta need planes capable of 5,000kms non-stops and with the possibility of larger family examples seating up to 220 passengers, thus having the weights and structures but also ‘upwards flexibility’? Or will it just concentrate on the euro market and Moscow, so a distance of 3,000kms at most (with Manchester at 2,300kms and Hamburg at 2,000kms), served frequently, year-round, at low cost? If it wants both, the challenge is to optimise structures to keep costs sustainable.

The decision, which might still be a few years ahead, must be based purely on the commercial necessities of the carrier, nothing else. Air Malta must make a profit again, first and foremost. Malta and its people need a strong Air Malta.