Both the Air Malta restructuring process and the ‘RCC showdown’ have brought the Avro RJ70 saga back into the limelight. Having already dealt with the Avro Air Malta operation earlier, now we will look at Azzurra Air, the Italian subsidiary set up by Air Malta, which folded with high losses and about which we have read again recently.

With Malta not part of the EU, the then chairman J.N. Tabone voiced his opinion that the firm would only survive if it had some opportunity to grow within the EU, not just depending on Malta. This was nothing new, as in the early 1990s Air Malta had already had a UK holiday airline called Excalibur Airways. Partners were sought for such a set-up, which came to be called Azzurra Air. Air Malta held 49 per cent of the shares, 26 per cent were held by a firm called IMS International and 25 per cent by SO.FI.PA Mediocredito Centrale, with investors including the local Banco Popolare di Beragmo as well as Credito Varesino – local banks as the airline was to be based in the Milan region. Azzurra was to have three Avro RJ85 aircraft.

Starting off as a regional operator for larger carriers, Azzurra Air’s operational structure was later basically split: the Avros for regional franchise and special charter work, and a Boeing/Airbus operation aimed at the tourism sector.

Let’s begin with the latter, since something very noteworthy evolves there.

The Azzurra charter part

The core aircraft of this section was the Boeing B737-700, which had just appeared on the market and had a significant range increase of 300 km over its predecessor.

From 1999 until the end of the winter season 2001/02, the firm had two brand-new leased planes, which were joined in 2001 by two further planes, leased from German charter and leasing firm Germania, that remained with the firm until the end of January 2004. As replacements for the two first B737-700s three more were leased, two from GECAS, which remained until December 2003 when ‘the end was nigh’, and one from Danish carrier Maersk, just for the summer 2002 season. Operations for serial charters apparently went as far away as Sal in Cape Verde.

Towards the end of the firm’s life, the firm switched to the Airbus A320s. Two were taken up for summer 2003 on lease from external providers, one of which was completely new, and the other less than a year old. But trouble was on the horizon and four additional places were not delivered. In January 2004, the two Azzurra A320s were ferried to Malta for their owners before moving on to a British holiday airline.

The Airbuses, but already the Boeings as well, were used on charters to – for example – Spain from a base in Manchester, making use of intra-EU-rights. It seems this was actually a separate set up − a sort of Azzurra Air UK, and this way not depending on Italy as its source market. Azzurra also took small contracts such as between Spain (Alicante) and Iceland. There was occasional work, like football charters or ferrying illegal immigrants around, which certainly brought in money but was no regular income like that from a serial charter.

The special sublease model – Azzurra as Air Malta cash-cow?

Apart from this, for some time the firm also had a B737-300 which was offloaded by Air Malta during the winter.

And this is an illustration of the way Azzurra acted as a special purpose vehicle for the offloading of unwanted aircraft by Air Malta and the “smart” (buzzword) financial move behind it.

The aircraft in question, 9H-ADH, was leased to Air Malta from leasing concern AWAS. It was then sub-leased to Azzurra during the winters of 1999/2000 and 2000/2001, each time from December to March, when there is not much to do at Air Malta.

But was there much more work for Azzurra in the winter? One might thus even critically argue that Azzurra was used as a kind of “special purpose vehicle” to offload the leasing bills for that seasonal over-capacity, plus the four Avro RJ70s that were unsuitable for tourist work.

In this way, Air Malta could generate revenue from the aircraft during the winter. While Air Malta’s accounts cashed the leasing from Azzurra (to in turn pay AWAS), Azzurra then had to see how to use this plane during the winter, in addition to the rest of its fleet which was also thrown into its lap. It could not pass the buck on.

So losses to be incurred by the under-utilised Boeing plane were placed on the Italian subsidiary rather than on Air Malta itself.

The group accounts should have shown these leasing payments as favouring Air Malta (income received from leasing the aircraft to Azzurra) at the expense of Azzurra. The Azzurra part of the costs, however, was then halved as it had to be shared with the Italian investors who were partners in Azzurra – but not in Air Malta, of course, which received the sub-leasing income from the one plus four jets.

And so the system used for the “winter Boeing” should have worked on a much larger scale with the four Avro RJ70s.

Surprise, surprise! The aircraft had proved unsuitable for the hub concept, with technical problems and fuel and maintenance costs of which there must have been awareness before they were purchased. Fuel performance and regular maintenance programme specifications are provided by the manufacturer, and just as when buying a car, the purchaser checks such things as fuel consumption and regularity of maintenance intervals. Actually, in publications at the time it was boasted that the order for four RJ70s was the biggest ever investment by Air Malta – which makes it something quite noteworthy, as this means it was a bigger contract than the one for the three Boeing 737-300s that were delivered just a year earlier. However, there is a four x 82 seats versus three x 144 seats capacity/price ratio.

After roughly two to three years with Air Malta, the RJ70s were withdrawn from service in the winter of 1997/98 and leased to Azzurra Air, who found themselves with four additional planes.

The Avro RJ85s were not bought by Azzurra itself (so are not Azzurra’s assets), but were leased from a company called Peregrine Aircraft Leasing of Ireland, which in turn was a tax and registration leasing set-up run by Air Malta. The aircraft were delivered in 1997 and leased to Azzurra for five years. The RJ70s were de-registered in Malta and given Irish registration when they were leased on to Azzurra (obviously via the Peregrine setup).

And thus Air Malta, via its letterbox subsidiary Peregrine in Ireland, started receiving leasing payments from Azzurra for the four RJ70s which nobody else wanted. Azzurra had to see to how it could gainfully occupy these jets that had been “bestowed” on it, while paying the bills.

Azzurra’s basic business model

Reasonably enough, the basic business model of Azzurra was more suitable for the aircraft than Air Malta’s. The firm operated regional flights feeding into hubs, starting off partly also on behalf of Air One and Swissair (but in its own colours). When this work ran out and the RJ70s arrived, Azzurra flew on behalf of Alitalia as “Alitalia Express” (with the Alitalia tail logo and mixed titles) on smaller/thinner routes as well as at low-demand times – in such cases also, for example, Milan-Frankfurt, Stuttgart or Düsseldorf at around noon (when demand for Alitalia’s own big MD-80s was too low), or for ultra-short hops like Milan-Zurich, from 1997 onwards.

It must have worked all right, because in 1998/1999 they leased a BAe 146-200 (an older version of the RJ85) for a year, and in 2000 a ‘lighter weight’ RJ70 for one-and-half years from a British leasing setup called Trident. Or it may have been simply that there were so many breakdowns that it needed back-ups.

This went on till around 2002, but when the Alitalia franchise/contract did not continue, Azzurra had a big problem.

Sale and lease-back

By then Air Malta had already sold the aircraft to a locally very well-known international bank, who then leased the planes back to Air Malta, who then leased them on to Azzurra possibly again via Peregrine. This lasted until December 2003, when Azzurra was running dry on cash and Air Malta took the planes to store them abroad.

Now it was Air Malta’s turn again to pay for lazy planes that had, after all, come up with liquidity in return for the sale and lease-back. Air Malta temporarily managed to sub-lease some of the aircraft to EuroManx (the airline of the Isle of Man that had previously operated successfully with turboprops and now wanted to increase capacity by adding two RJ70s), and then ClubAir, a small regional and charter carrier from Italy. Both airlines were soon killed by the prohibitive operating costs, and the planes went back to Air Malta for storage abroad.

Of the four RJ70s, two have eventually now been converted to executive/military jets in Eastern Europe and the Gulf, and one operates for a Swedish ad-hoc charter firm. From the three RJ85s, one became an executive/military jet on the Gulf, while the two others have been resting at airports in Europe for a couple of years along with the fourth RJ70 – which since 2011 has been registered with a firm whose name includes “Spares and Services”, so is clearly awaiting break-up for spares and scrap.

What could Azzurra actually do with the Avros beyond the franchise?

With the Alitalia contract gone, Azzurra’s Avro section came under pressure. Apart from ad-hoc charter work, the only application in the tourism charter field for this part of Azzurra was very small niches on very short routes where not many seats and the special short-field performance were required and where money for fuel was no problem due to low prices as well as short sectors with high yields. As can be imagined, there are not many such markets.

But on the east coast of Sardinia, for example, there is Arbatax (Arbatax Tortoli), with a runway length of just 1,000m plus 250m overrun/turn-zone. For this, the RJ70/85 was ideal. Thus the firm found a niche operating some flights to there from the Italian mainland, for example for holidays in Ferragosto. Rome is only 300kms away (comparable to Malta-Palermo), Milan, which was a core focus of Azzurra, 600kms (comparable to Malta-Naples). But on other routes, where it had to compete with more efficient Boeing, Airbus, Fokker or McDonnell Douglas jets, there was little chance. Arbatax was only peak summer business. Business opportunities were clearly limited.

In the case of a company with just occasional work, there is usually a plane that cost very little in capital and is maybe more expensive when it actually flies. Thus ad-hoc charter firms often have a slightly older, cheaper planes that might burn more fuel (such as the Swedish firm and the Bulgarian executive charter now with one RJ70 each that they must have got at give-away prices). The other combination is a more modern plane that costs a lot on the capital side but is more efficient on the operational side – like the many hours of flying per day with ‘normal’ airlines. Azzurra had planes that were surely not cheap combined with high operating costs (fuel, maintenance) and an allocation problem. Add the post-911 scenario and no wonder the firm was in trouble.

Why buy the RJ70s?

This is indeed an interesting question. As an observer, one can only try to find possible answers from public evidence and reason.

A key characteristic of the RJ70s was its exceptional short-field performance, meaning the required runway length was much shorter than that required by other jets, with its four-engine layout also requiring less power reserve in the event of an engine failure during take-off beyond V1 (the safe abort-of-take-off-speed) to continue with a safe-take-off so helping on runway length reserve.

A quote from an article published in March 1995 written by an Air Malta first officer gives a hint at why maybe exactly the RJ70s were chosen over commercially more suitable planes:

“With a sufficient runway, MAC [Air Malta’s helicopter division that ran the Gozo shuttle] can make use of Air Malta’s brand new RJ70s which are fully equipped, certified and with fully-certified professional Maltese crew.”

For this a 1500m runway would have had to be built (where? which village was to be erased?) in Gozo. This should have been the only motivation for choosing this type: having the capability to run such an operation, just in case, notwithstanding the fact that the aircraft would not have been able to reach the core markets without a fuel stop in-between during the summer (heat makes take-off length longer).

The second argument coming in back then was the possibility of operating flights to London’s City Airport in highly risky head-on competition with, for example, Air France or Lufthansa, had Malta been a member of the EU in 1995 (hindered in core by Germany’s Kohl government as we know now over concern about Malta’s close relations with Libya, so far however for the idea of buying British to convince Britain who otherwise would not have supported Malta it was alleged). Did this really make sense, to enter this very risky niche market against the network carriers instead of making the core business run robustly against EU competition on the Maltese core markets? After all, the declared purpose of Air Malta is the connectivity of the island state.

For the hub idea, clearly first of all Boeing’s B737-500, which would have provided full commonality with the B737-300s acquired in 1993 (which were later also supplemented by the stretched B737-400) and more flexibility than the RJ70s also as regards range (with the UK routes being important back then), or otherwise the Fokker 70/100 (for an efficient, slightly smaller jet) were alternatives. Not to mention modern, fuel-efficient turboprops such as the BAe ATP, which had proven itself with the company, or the ATR72, if it was just for the central Mediterranean region (Sicily, Tunisia, Greece, Italy Naples and south) that one needed a 70-seater for, with the rest of the routes going to a standardized single-type Boeing 737-300/400/500 fleet. So instead of a one or two plane type fleet, as described back in 1995, Air Malta had a fleet of five different aircraft types within its just dozen planes.

None of these possible reasons really made commercial sense.

And so, even today, we can only wonder why Air Malta decided to handle things the way it did.