It is indeed a pleasure to submit to our Shareholders the Annual Report and Accounts of the Air Malta Group of Companies for the year ending 31 March 2000. The Group achieved a very healthy profit before tax of Lm6.3 million thereby exceeding last year's levels.
These results are remarkable when one takes into account the various exceptional, negative variables that eroded substantially the overall profitability of the aviation industry, including that of Air Malta.
Turnover for the Group reached a record high of Lm124 million. Shareholders' equity stood at Lm52 million, 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. The Group's gearing, debt-to-equity ratio improved considerably from 74% to 46%.
Moreover the Group maintained its record of delivering a healthy return to Shareholders. Cashflow Return on Investment for the year was 20% while Return on Capital Employed was 9%. 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.
Last year we celebrated Air Malta's 25th year of operation. Now we look forward with confidence and cautious optimism. The results above mentioned have been achieved through sustained effort and judicious management in key spheres of the Group's operation. This year Air Malta carried 1,775,883 passengers (210,000 more than the previous year) gaining 5 percentage points in market share. Last year we reported an 11% increase in passengers carried on scheduled services.
This year we are pleased to announce a further growth of 22%. With the lifting of the UN sanctions on Libya and the re-introduction of direct services to Tripoli and Benghazi, our North African region experienced a growth of 113,000 passengers. Growth was also registered in Germany and the United Kingdom. This is indeed an encouraging performance when compared to the 4.5% growth registered by AEA airlines in respect of intra-European routes.
However 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. The costs of readjustment have been carried in this yearýs accounts. Moreover the increase in German passenger traffic came about at very competitive rates that depressed overall yield. Cargo revenue improved. However tonnage of cargo and mail carried dropped slightly when compared to the previous year. CargoSystems have been investing in new systems, introducing new products and providing better service to their clientele. Cargo carriage is an area that is earmarked for further expansion and where better operating economics may be achieved. Additional aircraft had to be leased in to cater for the increase in passengers which was very heavily skewed towards the summer months.
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%. In its annual review, AEA highlighted the escalating price of fuel as being the key factor that impacted costs for all airlines. From a low 30 US cents per gallon at the end of 1998, Rotterdam spot prices for jet fuel rocketed to over 80 US cents in the first quarter of 2000 exceeding the previous peak level of mid-1996. During the year under review Air Maltaýs fuel bill increased by over Lm3 million. No doubt this was the major factor which
It has been estimated that during summer 2000 they would have doubled their capacity in as many years. Charter airlines are equally if not more aggressive. They are undergoing a complex metamorphosis characterised by cross-boarder mergers, take-overs and vertical integration. In the midst of all this and in spite of its relatively small size, Air Malta has to maintain and enhance its market position.
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.
This year was marked by the political crisis in Kosovo culminating in war in the Balkans. This had a negative impact on Europe's already deteriorating air traffic control system. 1999 was the year when delays experienced by airlines operating in Europe exceeded all records, with an average 30% of intra-European departures being delayed by more than 15 minutes. The worst month was June 1999 with delays affecting 37.5% of departures. France, Switzerland, Spain and Italy were amongst the worst hit National Systems in terms of imposed delays every single month. These countries form an arc crossed by the greater part of Air Malta flights. Inevitably Air Maltaýs punctuality performance reflects this scenario and dropped from 78% to 71%. This obviously affects our passengers and costs us dearly in terms of disruption.Air Malta joined the 27 AEA airlines in calling upon Transport Ministers to support the initiatives undertaken by European Com-missioner, Vice-President de Palacio, to pave the way for a Single Sky over Europe.
In spite of financial constraints, Air Malta maintained its investment programme in aircraft improvements. This is an ongoing requirement to retain the standard of the product and service offered. The airline needs to rationalise its fleet and limit different aircraft types and variations within the same type. We are not yet close enough to taking a firm decision on aircraft fleet renewal. However last year we operated a fleet of aircraft that fully complied with Chapter 3 noise standards.Air Malta is conscious of the environment. We have complied ahead of time with new standards.
This year was also characterised by the unprecedented mobilisation of IT and risk management resources to deal with the 'Y2K bug'. Air Malta worked hand in hand with IATA and closely with local and foreign business entities. The unprecedented and essentially costly effort ensured that the rollover of the millennium was glitch-free.
Relations with key business partners such as ATC authorities and airports were strengthened. Most significant is the operational value of contingency plans created and which will be kept current. The same kind of co-operation over Y2K matters that international airlines experienced needs to be fostered in other spheres of airline operations. Relatively small, niche airlines, whether belonging to an alliance or otherwise, do not own the resources that mega carriers wield. Neither do they benefit from the economies of scale necessary to undertake certain initiatives. We see the need for co-operation in creating affordable and effective distribution channels to reduce escalating GDS costs. Airlines need to develop tools to counteract the damaging effects of fluctuating and escalating fuel prices. Such co-operation would benefit the aviation industry world-wide.
We look ahead at other areas of IT development. E-commerce is breaking frontiers. The well known CRS evolved into GDS. We have seen the likes of Travelocity and Expedia coming on the internet creating online distribution systems aimed directly at consumers. Airlines have very recently been grouping along different lines than those established by traditional alliances, setting up travel portals on the Internet and, in the process, raising concerns within the travel agency community. New lines are being drawn in the market place modifying roles that had been established for decades. Underlying expert thinking in international fora such as IATA indicates that the roles of different participants in the distribution chain will be changed and defined by the value each can add to the transaction.
1999 has been a particularly active year in the field of alliances. Equilibrium is hard to achieve since the business environment remains fluid. Established alliances gain and lose airlines as airlines swap allegiances. Airlines watch and evaluate, as none can afford the expense of wrong partnering.
In my opinion small airlines like Air Malta need to be very careful. Their economies of scale do not allow them costly alignment and realignment programmes. Whereas their small size makes it difficult for them to significantly impact the workings of the global alliance, the reverse impact could be very significant. Small carriers need to identify carefully their niche markets, avoid acting prematurely and work mainly through co-operation agreements with other carriers. 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.
Air Malta is forward-looking and commercially innovative. It takes calculated risks which transcend the attraction of the moment and withstand the test of time.
Air Malta has started to foster solid commercial relations within the US market. A code-share agreement was concluded with TWA linking points in each airlineýs network over London Gatwick and Milan Malpensa. The 23rd June 2000 was another landmark for Air Malta when the first flight was undertaken between New York and Malta. This was achieved through the agreement reached with American Trans Air that operate our service with their B757 aircraft. These positive developments in the US market are still in an experimental phase, allowing time for the development of a longer term commercial strategy.
In the year under review Air Malta signed an agreement to overhaul all CFM engines powering its fleet of B737 and A320 aircraft. Another agreement was entered into covering the management, repair and overhaul of aircraft components supporting Air Maltaýs fleet. Air Malta needs to continue to target and build strong relationships with expert partners in the industry. A review of our subsidiary and associate companies also bespeaks of improved performance. Notably Air Supplies enhanced its profitability even further. Holiday Malta, Shield, Osprey, Medavia and Sterling made sound contributions to Group profitability. The hotelsý performance showed an improvement over the previous year and we expect still better performance.
Malta Air Charter increased its losses as it struggled with rising fuel prices and other costs that could not be reflected in its fares. AZZURRAair registered its best financial year. At the end of December 1999 it broke even and made a token profit.
This year Air Malta re-engineered its aircraft components ownership with operating and cash flow benefits. Following sustained efforts by the airline and the unwavering support of the Malta Government, the repatriation of funds from Libya was accelerated. Consequently Cash flow has improved. Our work to improve our balance sheet and to prepare the airline for the even tougher years ahead will continue.
In the area of industrial relations, a new collective agreement was signed with UCC, the Union of Cabin Crew. Difficult negotiations have been undertaken with ALPA, the pilots union and we are now about to commence discussions with the GWU on the collective agreement covering most of the workforce. Claims have to be considered within the perspective of current and future potential costs to the airline. A fair balance must be struck between Union demands and the reality of international airline business developments.
Last year we highlighted Air Malta's contribution towards the Maltese economy. During that year and taking into account the multiplier effect, the airline generated 24% of total expenditure by tourists, accounted for 7% of the Gross National Product, generated 5% of Government income and was responsible for 5% of the full-time equivalent gainfully occupied population. This contribution improved even further as Air Malta gained significant market share during the year under review.
In our report last year we indicated that 1999/2000 was going to be a very tough year. In fact we did face up to the challenges we predicted as well as others that developed during the year. Were it not for certain key, adverse parameters that developed in the market, we would have registered an even more notable financial result. However the airline requires more than a 2.4% operating profit margin to undertake the necessary investment in growth and fleet renewal. Unfortunately the indications in the first part of financial year 2000/2001 are that our operating margins will be impacted directly and even more drastically than has been the case this year. In keeping with its role of stimulating business activity in the local economy, Air Malta is developing new business ventures, capitalising on its strengths and resources.
Liberalisation and competition are increasing in Europe and world-wide. New rules on aircraft noise and emissions, navigating technology being introduced in the cockpit and other factors will necessitate fleet renewal in the not too distant future. IT and automated management systems involve another area of investment we need to look into with more vigour.
Profits should not be taken for granted. Stakeholders in the airline need to understand the vulnerability and complexity of the business and the severity of the shocks the Company continues to sustain as a result of internal and external developments. It takes very little for a positive situation to transform itself into a negative one with dire and far-reaching consequences for all concerned. Stakeholders can be creative and can contribute towards the effective management of costs and improvement of the product. It is ultimately they who will benefit from their airline's survival and growth. The airlineýs integrity and its working synergies need to be safeguarded while it undergoes the restructuring necessary for it to meet future competitive challenges.
We know for a fact 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. AEA expressed its concern about last yearýs significant decline in European airlines' profitability. The main factors underlying the airlineýs 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.
The challenge is formidable. With my Board I look ahead with confidence and the will to succeed. Air Malta is executing the right strategies. We need to proceed in an innovative and intelligent manner, exercising due diligence on all fronts and ensuring the right decisions are made. In concluding, I wish to express my gratitude to our Shareholders and to the Authorities. I solicit their continue support. I also wish to thank my fellow Directors, Management and all employees of the Group for their hard work and understanding. My thanks also go to the travel trade and general public for their custom. Co-operation and support in the difficult days ahead will be key in meeting the challenges of our times.
Louis Grech
BA, MA (Oxon)
Group Executive Chairman
7 August 2000
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