08 -14 November 2000

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Good results but greater challenges

Last Saturday, Air Malta Chairman Louis Grech gave details of Air Malta’s Annual Report and Accounts for the year ending 31 March 2000. Mr Grech explained that the Group achieved a very healthy profit before tax of Lm6.3 million, despite challenges produced by an increased fuel bill of Lm3 million and a market that is continually becoming more competitive

Air Malta chairman Louis Grech announcing the results. Economic Services Minister josef Bonnici is on yhe left
In his address, Air Malta Chairman Louis Grech described the national carrier’s achievements as "remarkable", taking into consideration the hurdles encountered this year.

He explained that turnover for the Group reached a record high of Lm124 million, while shareholders' equity stood at Lm52 million, which was Lm8.8 million higher than the previous year.

"Cash generated from operations amounted to Lm14.2 million, higher than last year’s Lm9.9 million, enabling the airline to reduce its debt," Mr Grech said.

He also pointed out that Air Malta had once again delivered a healthy return to shareholders.

"Cashflow Return on Investment for the year was 20%, while Return on Capital Employed was 9%," he said.

Mr Grech admitted that the operating profit for the holding company was Lm2.3 million against Lm2.7 million the previous year. "However its profit before tax increased by Lm0.7 million to Lm5.7 million," he added.

Mr Grech said that Air Malta carried 1,775,883 passengers, which was 210,000 more than the previous year, gaining 5 percentage points in market share.

He added that last year, the airline registered an 11% increase in passengers carried on scheduled services, while this year there was a further growth of 22%. The lifting of the UN sanctions on Libya and the re-introduction of direct services to Tripoli and Benghazi, brought a growth of 113,000 to the North African region.

"Growth was also registered in Germany and the United Kingdom," he said. "This is indeed an encouraging performance when compared to the 4.5% growth registered by AEA airlines in respect of intra-European routes."

But Mr Grech admitted that traffic performance has been achieved at a cost.

"Recommencement of operations to Libya by a number of carriers meant a redistribution of traffic and a change in the parameters of competition in the region," he said. "The costs of readjustment have been carried in this year’s accounts. Moreover the increase in German passenger traffic came about at very competitive rates that depressed overall yield."

He explained that cargo revenue improved, but tonnage of cargo and mail carried dropped slightly when compared to the previous year. Moreover, additional aircraft had to be leased in to cater for the increase in passengers which was very heavily skewed towards the summer months.

Mr Grech explained that aircraft utilisation of the core fleet decreased by 48 minutes per aircraft per day as seasonality in traffic was accentuated.

"However within this fluid scenario the seat factor for scheduled passenger services improved by 2.7 points reaching 70.2%," he said. In its annual review, AEA highlighted the escalating price of fuel as being the key factor that impacted costs for all airlines.

"During the year under review Air Malta’s fuel bill increased by over Lm3 million. No doubt this was the major factor which eroded directly and substantially Air Malta’s profitability."

Mr Grech said that the pressures of cost escalation, attributable mainly to fuel, yield erosion and payroll, caused the break-even seat factor to shoot up by just over 6 percentage points to 78.4%, widening the gap with the actual 70.2% achieved.

"Clearly this adverse effect on our core operation is not sustainable and a rationalisation programme has been initiated to safeguard future financial performance," he said.

Mr Grech pointed out that this year was also characterised by the unprecedented mobilisation of IT and risk management resources to deal with the Y2K bug.

"The unprecedented and essentially costly effort ensured that the rollover of the millennium was glitch-free," he said.
He warned that small airlines like Air Malta needed to be very careful since their economies of scale do not allow them costly alignment and realignment programmes.

"Small carriers need to identify carefully their niche markets, avoid acting prematurely and work mainly through co-operation agreements with other carriers," he said. "Having said this, small carriers should also be courageous enough to grasp opportunities whenever these present themselves and as long as serious economic justification exists benefiting both parties to the prospective arrangement."

Looking to the future, Mr Grech warned that market forces will continue to depress yields and pressure will mount for costs to increase.

"Airlines need to maintain and improve their product quality and service standards and at the same time deal with external forces that render the industry vulnerable," he said. "AEA expressed its concern about last year’s significant decline in European airlines’ profitability. The main factors underlying the airline’s winning formula last year were, a more efficient fleet combined with quality of service, stronger distribution capability, revenue maximisation and, more important, maintaining costs at sustainable levels. In the circumstances I firmly believe that these points are of even more relevance today."

Air Malta’s contribution towards the Maltese economy

During 1998 and taking into account the multiplier effect, Air Malta generated 24% of total expenditure by tourists, accounting for 7% of the Gross National Product and generating 5% of Government income.
It was responsible for 5% of the full-time equivalent gainfully occupied population and this contribution improved even further as Air Malta gained significant market share during the year under review.

Looking at the financial picture

Group turnover in Air Malta increased by almost 15% to Lm124 million which was largely due to the increase in airline business of the parent company. Passengers carried increased to 1.8 million from 1.6 million in 1999.

The Group’s pre-tax profit was Lm6.3 million as compared to the previous year’s Lm6.2 million.

The significant expansion in the company’s airline business sector was met by lower yields and an increase in costs. Total airline operating costs increased by Lm14 million.

Capital gains of Lm1.9 million and Lm2.5 million were earned from the sale of investments and aircraft equipment respectively. These were partly offset by provisions against the Group’s investment in its main associate, Azzurra Air. Net interest cost amounted to Lm2.2 million.

The growth in the local economy and in that of our major European markets continued to stimulate demand for air transport. This was reflected in the 5% increase in tourist arrivals and a 4% increase in air cargo. The excess capacity in the airline industry has fuelled further competition and introduced new pressures on yields. At the same time, the price of fuel oil doubled over the 12-month financial period.

Airline operating results

The airline registered a turnover of Lm99 million, an increase of Lm13 million over the previous year. This was largely due to a 13% growth in passenger traffic which exceeded the overall market growth rate and therefore resulted in a higher market share. Competitive pressures had a significant effect on yields. The airline’s success in achieving growth in sales volumes and efficiency in resource utilisation was met by a lower average

The single biggest increase in variable costs was that in respect of fuel. At just under Lm11 million, fuel cost accounted for 11% of total operating costs. Fuel price inflation has resulted in an additional cost of Lm3 million during the year under review, representing a 44% increase over the average cost in the previous year. Payroll costs also increased by 22% to Lm21 million. This increase was partly due to additions to crew complement to operate the expanded fleet and to fly the other aircraft which were leased out to other airlines. In a nutshell, the increase in turnover was offset by the effect of lower average yields and higher operating costs. Consequently the airline’s operating profit dropped by 12% to Lm2.3 million despite an increase of 15% in turnover.

The Group’s financial position continued to strengthen as a result of the positive operating and financial results for the year. Net equity increased by 20% to nearly Lm52 million. Cash generated from operations was also higher at Lm14.2 million, up from Lm9.9 million in the previous year, mainly due to favourable working capital movements.

The Business Times, Network House, Vjal ir-Rihan San Gwann SGN 07
Tel: (356) 382741-3, 382745-6 | Fax: (356) 385075 | e-mail: editorial@networkpublications.com.mt