13 July 2005


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The rationale against low cost fares

The much discussed “Open Skies” arrangement between Europe and the US presented great economic opportunities for air travel, according to an economic impact study drawn up by the European Commission.
Open Skies will supersede existing bilateral agreements between the US and individual European countries that favour national carriers. Indirectly the liberalisation of air traffic on transatlantic flights has benefited low cost airlines operating in mainland Europe. Such airlines openly boast that their average fare is over 50 per cent less than the next scheduled flight ticket. This huge advantage in the competitive cost base is due largely to low cost airlines’ own efficiencies such as higher people productivity, larger and more efficient aircraft and stronger ancillary sales marketing over the internet. In Germany alone there are more than 10 commercial airlines that offer flights at ridiculously low prices between the country's major cities and to tourist destinations like the French Riviera or Spain's Majorca and Costa del Sol. European airlines, like Easyjet, Ryanair and Germanwings, can afford the low airfares because of generous subsidies from national governments, which in the days of stable oil prices did not tax jet fuel, the only tax-free fuel in the world. In addition, commercial aviation does not have to pay the value-added tax on inflight merchandise.
For example: to book a weekend on the French Mediterranean coast, a holiday maker can fly from Berlin, Cologne or Frankfurt, on any one of at least 10 airlines, for less than 20 euro round trip. This obviously begs the question, why do I have to pay Lm253 for an economy ticket with Lufthansa for a Malta /Frankfurt /Copenhagen round trip with the Sunday route included ( inclusive of a cost of one night overnight stay ) when an alternative low-cost connection can be more affordable?
Recently, Michael Crawley CEO of Ryanair did not mince his words when he lamented on the uphill climb that low cost airlines have to surmount. He hints at the resistance to entry in destinations dominated by national carriers. Equally he reiterated that Ryanair were merely trying to drag the dwindling tourism industry into the 21st Century of air travel and they do not intend to draw blood from anybody least of which the partially privatised “ monopoly” MIA which is currently running Malta international airport.
Voicing dissent to the statement made by Ryanair we note that Matthias A. Merzhäuser reiterated his objection to the claim made by low cost airlines about attracting the magical number of an extra three million arrivals. In his opinion this traffic means an extra 44 landings and take-off per day. On the negative side this means more hectic use of our air traffic controllers and of course our ground handling staff have to double their output.
Can we achieve this expansion? Certainly MHRA is continuously begging for more arrivals to fill its members hotel beds. On the other hand one may well ask about the present capacity utilisation of Malta Airport. Will MIA invest in a larger ramp and additional parking bays to accommodate the expansion of tourist potential which is so crucial for the revival of the economy? So in the context of the effect of undue competition on the national carrier are we tempted to block the entry of low-cost airlines?
It is fact that AirMalta is registering losses in the region of Lm24 million annually. Of course, a national airline is an important link for us to overcome island insularity. On the social aspect one cannot ignore so many families that depend for a living on the economic survival of Air Malta. The solution is not easy to give especially when the restructuring exercise is currently underway and the national airline is grappling to dispose of its non core loss making subsidiaries. But why is there so much fuss about the advent of lowering the cost of travel made so draconian by government surcharges.
It is taxing air travel until the pips squeeze? Why do citizens have to resort to flying in cramped budget airlines mostly during ungodly hours to afford taking a decent break out of the confines of our tiny enclave? What about burgeoning travel costs suffered by myriads of businessmen who have to keep in touch with latest developments in overseas markets. Certainly they have to dig deep into their pockets to pay exorbitant travel costs in their quest for export opportunities. Theirs is a proactive approach which demands taking action rather than waiting for manna to fall from heaven. Regrettably there are no tax incentives to entrepreneurs towards attending export driven seminars and fairs. How can we otherwise successfully win the battle against stiff competition from an emerging Eastern block with lower manufacturing costs?
The answer is simple - the early bird catches the worm and likewise our erstwhile entrepreneurs have to travel most of the time to source business niches. But can the horrendous cost of travel hinder such initiatives? Definitely one cannot wait until the no-frills airlines are permitted to land and government concedes the use of our airport at preferential rates. Paradoxically, the European boom in ''low-cost'' airlines, fuelled by tax incentives, is increasing the level of market share changes that are driven by low-cost, “no-frills” carriers capitalizing on structural cost efficiencies and leveraging other advantages in the marketplace.
For example, Ryanair and Easyjet enjoy higher labour efficiency coupled by the use of cheaper landing rights at secondary airports on routes, as well as high seat density and fast “at-gate” aircraft turnaround time. With hindsight we note that the introduction of low-cost carriers in Malta did contrast with the vision of Air Malta during the 1990’s to invest in the creation of a hub concept. This was followed by the purchase and operation of eight low capacity Avro liner jets. The project was a pet idea of the directors at the time and was politically trumpeted that it will crystallize the island into a regional hub in the Mediterranean. It was a political phenomenon of the 1990s but regrettably it did not succeed.
To cut losses the Avro Liners had to be leased to an Italian subsidiary on the Milan internal routes which in the end cost the public purse upwards of Lm60 million. Certainly the project was amply researched by independent studies from well known consultancies however the hub concept did not achieve the critical mass to match the success then being registered by low-cost airlines. As a result of intensifying price competition and oil price hikes, most national carriers have suffered a decline in revenue per seat mile. Government as the main shareholder of Air Malta has recently invested Lm30 million in return for the acquisition of certain non-core assets. It goes without saying that for Air Malta to expand its fleet it is harder to attract fresh injection of capital because of the losses incurred although the restructuring exercise has made a tangible effect on reducing overheads.
But can we blame Air Malta for enjoying the protection of local government and sitting on its exclusivity on certain routes?
Certainly there has been a time when Air Malta maximised its potential as a national carrier with control over ground handling and passenger arrivals prior to the partial privatisation of MIA. It reported rich cash pickings by which directors could afford to swell its employment registers and award generous salary increments. AirMalta’s critics argue that it enjoyed exclusive rights over certain routes including the handling of cargo while its extensive reach of commercial activities by way of its subsidiaries are characteristic of a nationalisation policy so popular in the Socialist days. In the mid eighties Air Malta had expanded its role as a national airline to provide diverse services loosely related to the aviation industry. For example it acquired overseas real estate to act as representative offices and to better promote Malta as a destination.
It entered into shareholding of a number of state companies providing entertainment, cargo handling, hotel accommodation, catering and tourist handling services. The rude awakening of the current operating losses suffered by the national airline has triggered a restructuring plan that includes the timed divestiture of its non-core business assets. Hopefully within a number of years we shall see a revival of Air Malta.
Meanwhile, can you blame citizens who clamour for the privileges enjoyed by other Europeans in the form of low-fare travel?
gmm@pkfmalta.com
The author is a partner in PKFMALTA an audit and business advisory firm.



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