29 AUGUST 2001

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Setting the record straight

Dominic R. Attard, Managing Director & CEO AZZURRAair
Bergamo - Italy

Articles have recently appeared in a section of the Maltese press concerning AZZURRAair, the Italian regional airline in which Air Malta holds substantial financial and strategic interests. Since these articles contained certain inaccuracies and since it appears that the operation of AZZURRAair is hardly known in Malta I am providing hereunder your readers with an overview of operation and its latest performance.

• AZZURRA (as it is commonly known) started Commercial Operations in December 1996 with 2 AVRO RJ 85s (92 seater) and in May of the following year a 3rd AVRO RJ85 was added to its fleet. In late 1997 and early 1998 Air Malta decided to lease its AVRO fleet composed of four RJ 70s (82 seater) to AZZURRA thus bringing the AVRO fleet at the time to 7 aircraft. All these seven units are owned by Air Malta.

• Today AZZURRA operates a fleet of 12 aircraft composed of 8 AVRO RJs (85s and 70s) and 4 B737-700 (Next Generation) aircraft. Your readers might be interested to know that this summer Air Malta itself is operating a fleet of 13 aircraft composed of the older Boeing 737 versions (commonly referred to as the "classic") and Airbus 320 and 319s.

• AVRO Regional Aircraft, of which AZZURRA currently operates eight, are built by British Aerospace and are considered as a niche aircraft. British Aerospace have built around 160 aircraft of this type including the AVRO RJ predecessor the BAe 146. The largest AVRO RJ operators in Europe are LH Cityline (part of Lufthansa), DAT (part of Sabena) and Crossair (part of Swissair).

• AZZURRA’s presently operates over 70 flight sectors every day. Its main operational base is at Malpensa although it operates flights from Bergamo, Fiumicino, Verona and Palermo.

• In spite of this heavy operation AZZURRA runs its business with a staff complement of just under 400 persons.

• There are 12 Maltese nationals engaged with AZZURRA. These include the Managing Director, five Captains, three technicians and three other specialists.

• Generale Francesco Pugliese, the ex Director General of the Italian Civil Aviation Authority, is the non-executive Chairman of the Company. The Company has a board of 11 persons five of which are Maltese nationals.

• AZZURRA managed to break-even in 1999, its third year of operation. This was a good performance as airlines tend to take longer periods to produce positive financial results.

• In the early part of 2000 the US firm Arthur Andersen, which helped the management of the Company to re-write the Business Plan and that conducted "due diligence" estimated the value of AZZURRA at between US$ 130 to US$ 150 million.

• Airline Management Magazine of May 2001 rated AZZURRA as the (a) 52nd largest regional airline worldwide – in terms of passenger numbers (b) the fastest growing regional airline in Italy and (c) the 2nd fastest growing regional airline in Europe.

• AZZURRA has a two pronged operational mission. On the one part it operates under a partnership pact with ALITALIA and on the other it operates schedule routes and an extensive number of charter operations. AZZURRA’s charter operations extend to the main resorts of Egypt, Spain, Greece, Jordan, Israel, West Africa and as far out as Cape Verde Islands located in the mid-Atlantic. Since AZZURRA is an EU airline it operates also regular programmes of flights between Iceland and Spanish Resorts. This year AZZURRA will be flying twice as many charter hours as those currently operated by Air Malta.

• Between 1998 and March 2001 AZZURRA had a franchise agreement with ALITALIA. This partnership has recently been substituted by another agreement whereby AZZURRA is now a "capacity provider" for ALITALIA . Discussions are ongoing with ALITALIA to explore our continued association for future years.

• Over 85% of the world’s regional airlines operate under different forms of partnerships with major carriers or alliance groups. Therefore there is nothing strange for an airline like AZZURRA to operate closely with a larger carrier. A classic example of this trend in the airline industry is GB Airways which flies to Malta under the colours of British Airways. In the case of Air France out of a total fleet of circa 260 aircraft, around 130 are flown by smaller companies operating in partnership with this major carrier.

• AZZURRA is a European Union carrier and due to its Italian nationality it operates freely under the liberalised EU air transport regime.

• In the year 2000 AZZURRA registered an increase in passenger traffic of more than 14% and in all carried over 1 million passengers.

• It is also interesting to look at the development in turnover. In 1997, its first year of operation, AZZURRA’s turnover was Lm 8.3 million while in 2000 (i.e. four years later) turnover reached Lm 58.3 million.

• In the year 2000 AZZURRA’s activities operated for ALITALIA accounted for 76% of total turnover. In 2001 it is estimated that only 57% of turnover will be earned from Alitalia’s related activity.

The articles which appeared in the Maltese press have quoted extracts from the authoritative Italian newspaper "Sole 24 Ore". Let me attempt to explain the events which in 2000 surrounded not only the Italian air transport industry but the whole industry world-wide.

As your readers may know the air transport industry is very much susceptible to the economic downturns prevalent in the major markets. They are also very much susceptible to spiralling costs which are beyond the control of air transport operators.

In the Year 2000 the European air transport industry has been heavily penalised by two main factors. These were the continued strength of the US$ versus the Euro-based currencies and the escalating cost of the fuel.

AZZURRAair has not been immune to these two factors. The Euro weakened by as much as 15% and the cost of fuel (which is also paid in US$) increased by around 50%. Whereas all the revenues of AZZURRA were earned in Euro currencies, 45% of its costs were incurred in US$. These two factors alone had a financial impact of around Lm 6 million.

AZZURRA’s passenger traffic carried on its ALITALIA programme in 2000 increased by 14%. However ALITALIA yields connected with AZZURRA activity fell substantially short of those achieved in 1999 thus leaving a substantial shortfall in overall revenues.

These three factors have contributed to a reversal in the bottom line trend experienced the previous year and left the Company with a negative bottom line margin. Although it is of no consolation results for all the other Italian airlines (except for Air Dolomiti) have been the same. ALITALIA itself reported a massive loss and so did the others. The article in the Sole 24 ore reflected this state of affairs in this industry. Moreover the same situation has been experienced by most European airlines that were exposed to the same problems relating to the value of the US$ and the cost of fuel.

These are the facts which the Maltese public should know. They show that AZZURRAair, which today is almost the size of Air Malta, has been built in a very short period of time into an efficient air carrier.

Current economic conditions have certainly influenced this Company’s results in the same way that they have affected most of the other European air transport operators. AZZURRA’s management and its primary shareholder Air Malta are determined to continue to exploit, to their mutual benefit, common opportunities in the European air transport market in Europe.

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