22 February 2006

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Business Today

Adopting to the new reality of low cost airlines

A speach by Minister for Tourism and Culture Francis Zammit Dimech at Radisson Business Today Seminar organised by the MediaToday on the 15 February

Low cost airlines represent the most daunting single challenge that our tourism industry had to face since its inception a mere forty years ago. Unlike the challenges we had to face to date, challenges borne out of national or international crises or threats, this challenge is based on an opportunity.
The travel element of the tourism industry over the past six years was remodelled with deregulation of our skies. A more competitive market in the skies married with the marketing opportunities of the internet led to the availability of cheaper travel. Statistics and the financial performance of companies like Ryan Air and Easy Jet show that there was a demand for cheap travel. So much so that today these airline companies are competing in terms of passenger movements, aircraft owned and routes flown with the traditional established airlines. Can Malta be immune to all of this?
The truth is that it cannot and it isn’t. The traditional carriers operating to and from Malta have introduced low fares on certain routes in order to attract a slice of this business. A local entrepreneur also launched a low fare operation which judging by its performance last year is proving successful. The over six per cent increase we had of UK tourists last year is in part due to the Malta Tourism Authority’s intensive efforts in this market but it is also due to the pricing policies of these airlines. Malta therefore is adapting to this new reality but some would argue we are doing so in a limited fashion. The unlimited fashion would be to remove the one difficulty that is keeping low cost airlines from including Malta in their schedules, that is the airport charges and taxes that currently make it prohibitive for some of these companies to operate to and from Malta.
Put simply, Government is being asked to stop charging an entrance fee at the door and make its profit from the hotels, bars and other tourism related activities. The increased takings will in theory more than compensate for the loss in gate money. So why didn’t government go for this strategy? What is on Government’s mind?
In very simple words, Government is after ensuring the sustainability of our tourism industry. From the analysis carried out to date, and trust me there has been no shortage of this, we have seen cases for immediate growth both with and without low cost airlines. However we need to look further at the long-term implications of either strategy. Yes we will grow if Ryan Air and or Easy Jet come to Malta. Yes we can grow if our branding and intensive marketing strategies bear fruit. In both cases, we must ask ourselves: at what price and for how long?
Consider this, low cost carriers will hit hard at existing formulas that sustained our industry. Related to this is the issue of our carrying capacity. How many more tourists can we actually carry over the 1.2 million we are managing to attract year in year out. MTA puts our carrying capacity at around 1.5 million. Therefore one can argue that all we need to do is to attract an extra 300,000 tourists. This of course is wrong reasoning. Every January we start off with zero arrivals. We do not carry forward last year’s tourists and simply add on to them additional business. Every year we have to battle for our share and try our best against competition to increase our numbers and earnings. By “we” I am not only referring to Government and MTA but also to each and every institution and organisation, public or private that through its efforts is managing to bring tourism business to Malta. We will have to remodel in a drastic fashion the way we do business. Some players might find the change too drastic and opt to move out. I am not referring simply to our national carrier, which admittedly will be the hardest hit of all but also to tour operators, other national carriers which operate to Malta and our hotel industry which will need to adapt as necessary to be able to take on this new business. I am not saying that this is necessarily a bad thing but I am saying that as Government we are fully aware that change comes at price and before committing ourselves we want to be sure that the price we are paying will not be so high that it will ruin our industry.
Consider also that the door is not in government’s control, that it is not only government that sets the entrance price. I would say even the airport operator’s hand is tied in this regard. The way our airport is run and the costs associated with running an international airport to the standards we came to expect cannot be easily benchmarked against other regional or secondary airports from which most of the low cost carriers operate. Any argument or calculation that departs from this premise is flawed. This is not to say that there isn’t room for increased efficiency in the running of our gateway. For instance I believe that our airport has immense potential to spread its costs over longer active operating times. But it is a fact that even if we manage to achieve these efficiency gains we will still not be able to meet the operating costs of some of the other airports being quoted. There will be a gap to be bridged. Our ability as Government to subsidise by any other means is limited – and that’s putting it mildly - because of EU competition rules which must be followed.
I do not wish at all to sound negative. In fact I firmly believe that low cost carriers can help us address some structural shortcomings in our tourism operations. For instance low cost carriers can be the solution to the seasonality issue that we have long been seeking. They can also provide the necessary impetus for putting Malta in an effective manner on the internet, the market place of the present and future. They could also open Malta to new markets, particularly the Iberian Peninsula and Eastern Europe where we failed to penetrate because of lack of seat capacity. Low cost carriers I believe offer the best opportunity to make a volume leap in our tourism industry, in achieving a substantial growth in a relatively short time. No marketing campaign, no amount of product improvement will give us such quick gains. Nonetheless, getting our standards to the highest level in all our tourism offer remains the best guarantee in favour of a sustainable tourism industry. Therefore we have to keep up the intensive programme of upgrading we launched in these last years. Still, our work will only be fruitful if we manage to enter into the customers’ mind at the moment of choosing between one destination and another.
Government, through a specifically set-up core group, will be intensifying its efforts to determine the way forward. This issue cannot and should not be resolved without due thought and consideration. After all what is at stake is not the cost of our airport but nothing less than our national economy. Any decision we take will have long lasting and deeply felt effects. Those who expect Government to act swiftly will not be happy with our cautious approach. My appeal to these people is not to interpret our caution as lack of interest in low cost carriers. What we aim to achieve is a sustainable introduction of low cost carriers that will ensure a future which does include low cost carriers not as a new and dangerous monopoly but as a new partner in a thriving all year round tourism business where we equally ensure that the national carriers and tourism operators who have stood alongside us for all these past years to build up our tourism industry are not pushed out of the scene in such a way that our country at its peril becomes totally dependent on low cost carriers that would not hesitate at all to dictate to us new terms and conditions whenever it so suits them. The fact that there are some of them who already talk to us in such a manner can only be considered as an appetiser in comparison to the kind of menu we would be subjected to if we had to succumb to pressure without having the courage to safeguard the national interest even at the price of being unpopular with certain lobbyists.

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