On Friday, Air Malta presented its audited annual report and consolidated financial statements for the year ended 31 March 2012. During this year, the airline began to see improvements as a result of the effectiveness of its restructuring efforts and has exceeded, albeit slightly, the figures budgeted in 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 on the level of progress that was made.

These results were announced in detail at a press conference addressed by Finance, the Economy and Investment Minister Tonio Fenech, Air Malta 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 the previous 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 in line 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 costs 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 1.76 million passengers – a slight fall from the 1.82 million registered last year. Available seat kilometres (ASKs) were down to 3,728 million from 4,034 million. This fall is attributed to the reduction in seat capacity that the airline had to implement.

As a result of early and voluntarily early retirement schemes offered by the airline during this financial year, the number of full-time employees was reduced from 1,249 to 1,026. It is expected that this number will continue to fall to 923 employees in the 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 under review, Air Malta 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 expects to halve this year’s loss and register a loss of €15million. The Restructuring Plan also sees the airline again slightly increasing its yield per passenger, and increasing its load factor by another 2.3 per cent. 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, while cargo revenue improvements are expected to generate an additional €2million per year.

Fuel

Fuel is the biggest cost item for Air Malta, amounting to 30 per cent of the airline’s revenue. With the introduction of various measures, Air Malta has successfully managed its fuel costs over the last 12 months, converting what was a substantial cost penalty against our direct competition to a situation where it has a small price advantage.

Air Malta’s has introduced a new fuel strategy with 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. It is pleased to note that this robust policy saved the airline over €3.5million in 2011 and it would have paid €10million more, had it continued with its previous strategy. Air Malta has hedged 79 per cent of its fuel requirements for this financial year, whilst some of its competitors have hedged up to 90 per cent. More importantly, Air Malta has secured its hedges at better rates – about 3 per cent better.

Due to previous hedges, at the start of the last financial year Air Malta had a 26 per cent fuel penalty against its direct low-cost competition. Through proactive management, the airline has now managed to reduce this penalty to the point where it now enjoys a hedge price advantage of 4.2 per cent in Q4 2012 and 2.8 per cent in financial year 2013.

Air Malta is taking full advantage of the situation and, in fact, as early as a month ago, the airline again hedged fuel at favourable 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 beyond its control, the airline is on track to achieve the targets set.