There were significant changes in Air Malta's passenger traffic results in 1999-2000 which increased by more than 13% reaching a record level of 1,775,883 passengers. The airline experienced a marked shift from charter to scheduled services, with passengers on the latter increasing by 22%. At 62% Air Malta gained 5 percentage points in market share in a growing market.
This year direct operations to Libya were resumed. During the embargo Air Malta had maintained a significant commercial presence in this market. Immediately upon the lifting of the sanctions, Air Malta launched fully fledged air services offering an array of connections over its route network. Consequently the North African sector of Air Malta's network experienced a growth of 113,000 passengers.
Air Malta's passenger traffic profile was significantly altered as a result of an increase of 85,000 passengers flying on scheduled services to and from Germany. Simultaneously 54,500 less passengers were carried on charter flights. This brought about a net increase of 11% while traffic carried by the competition dropped by 5.6%.
The main German scheduled and charter carriers retrenched on their services to Malta by removing 80,000 seats from the market. At short notice and at substantial cost, Air Malta stepped in to plug the shortfall in capacity by leasing in more aircraft.
In winter 1999/2000 a different scenario developed as a German tour operator floated 8 weekly flights from various German cities to Malta while releasing capacity it had on allocation from Air Malta. Matters deteriorated further as this operator dropped its prices in an effort to sell its own capacity.
This situation extended itself into summer 2000 with grave consequences known to all in the industry. Air Malta succeeded in cushioning the effects of this upheavel and shielding the Maltese tourism industry effectively. However in doing so it had to compromise on its operating profit. The current market situation is not tenable. Air Malta is reviewing its long term strategy in this market.
A similar shift occured in the UK market where Air Malta's scheduled services increased by almost 25,000 passengers alongside a drop of just 1,200 on charter flights. This resulted in an overall increase of 5%, while the competition in this key market primarily led by charter carriers, suffered a drop of 16%.
As part of its strategy this year Air Malta secured slots for scheduled services out of Stansted airport. In the past Gatwick was developed as an alternate London airport to Heathrow. With growing congestion, Stansted now mirrors Gatwick's role. At the same time the catchment area of Northern London is being developed.
Competition on scheduled services on UK routes intensified. Sabre Airlines, formerly a charter carrier, commenced three weekly scheduled flights out of Gatwick and one weekly out of Manchester.
British Airways, through its franchisee GB Airways, resumed Heathrow services after a 15 year absence from the route, with six weekly flights, as well as another weekly service out of Manchester.
Air Malta is currently the only carrier investing in the Irish market to Malta. Its latest addition was the service to Cork, the gateway to Ireland's dramatic southern coast, promoting the existing tourism potential from both Malta and Ireland. In the year under review passenger numbers between Malta and Ireland increased by 36%.
Both the Scandinavian and Dutch markets performed well registering growth of 36% and 34% respectively on scheduled services. Air Malta still leads in the Scandinavian market with a share of 60%, while it has made significant inroads in the Dutch market overtaking the competition. Air Malta increased capacity on the Stockholm, Oslo, Gothenburg and Copenhagen routes, at times doubling it or extending operations into the winter months. This drive in the Scandinavian market was reinforced with the opening of an office in Oslo. These moves benefited the market as the offer was substantially increased. It is hoped that the Malta Tourism Authority will supplement and take the lead in this market.
Facing constraints in the availability of slots at Amsterdam airport, Air Malta started operations out of Rotterdam as a second Dutch airport in the process gaining a new catchment area.
Air Malta registered an 18% increase in scheduled traffic into and out of Austria holding onto 91% of the total market.
Few changes occurred in the Italian and Sicilian markets. In the latter Air Malta's scheduled services provided varied and convenient connections all over its network. Competition shifted away from Rome onto Milan. Air Malta gained ground on the Rome service and reduced its dominant position over Milan as another scheduled carrier commenced operations.
Scheduled services to Belgium performed well but admittedly not as well as those of the competition that now hold 36% of the market. The overall market increased by 40% after extensive promotion was undertaken including the sponsorship by Air Malta of the Belgian International Boat Show.
Very tough competition was encountered in the Swiss market where Air Malta lost market share in a shrinking market. Similarly Air Malta carried 5% less passengers to and from France while the competition gained some ground. However Air Malta still holds 75% of the market.
Twice-weekly services commenced to Charles de Gaulle airport, cultivating it as a distinct airport from Orly, the traditional gateway for leisure passengers to Malta.
The East European market is developing slowly but surely. A second frequency to Budapest was introduced. Moscow and Prague were added to the scheduled network. In both destinations Holiday Malta, Air Malta's overseas based tour operating arm, played a key role in opening up these markets to Malta.
Direct flights to Libya immediately began to absorb traffic that was otherwise moving via other points. Air Malta's services to the Gulf region were indeed affected by this development in the market. Competition was stepped up in a frantic effort to corner as much as possible of a contracting market. This affected Air Malta's share of the traffic, albeit it still serviced more than half the market, thanks to the direct services it offers.
Marketing efforts in Malta were reinforced with innovative and competitive offers to stimulate the local market even further and to offer the travelling public more opportunities for competitively priced services. This effort resulted in a 16% increase in revenue generated from what is essentially a limited home market. Charter services out of Malta, particularly the programme to Lourdes, did well to the satisfaction of the Maltese travelling public taking organised tours.
Hubbing traffic through Malta, primarily being promoted in the Sicilian and Libyan markets but also including East and West Mediterranean destinations, has been sustained. However as had been predicted, this segment of the market is undergoing significant change since commencement of direct services out of Libya. Only Air Malta has invested in the development of these markets and the Gulf routes.
The Malta Tourism Authority has so far not fully considered these areas as source markets for tourism business. Moreover the transit tax levied on transit passengers hinders the promotion of this business through Malta.
A very important goal has been achieved this year with the inauguration of services to New York. For the first time Air Malta added a US destination to its route network, operating a B757-200ER trip leased from American Trans Air. The US market is being exploited further through a code-share agreement with Trans World Airlines. This will effectively link a number of US gateways with Malta through London Gatwick and Milan Malpensa airports. Air Malta's performance overall confirms its commitment to the promotion of tourism to Malta and the development of the islands into a business hub. While the priorities of other airlines operating into Malta causes them to shift their resources to more lucrative markets, Air Malta continues to invest and takes the risk necessary to safeguard national interest. Air Malta is key to the development of the Maltese economy.
Cargo
Air Malta supports the local manufacturing, horticultural and fishing industries through the services of CargoSystems. Air Malta carried 6,529 tonnes of freight and 727 tonnes of mail over its entire scheduled network. This year's results represent a drop of 2% and 12% respectively over the previous year. The drop in cargo carried is attributable to increased competition on the export side of the business. When necessary the regular B727-200 freighter operation between Malta and Brussels was upgraded to higher capacity aircraft. This service brings to the market significant capacity needed over the weekend. In the meantime CargoSystems kept up its efforts to promote cargo hubbing over the airline's network through Malta. Revenue generated from the carriage of freight, mail and excess baggage increased by 17%.
Due to the dedicated and quality services offered by AeroSpeed Courier Express, this line of business also registered a significant increase in custom. Air Malta introduced new cargo products such as the Time Definite Cargo and Premium Cargo on the UK market. It is planned to offer such products in other markets where demand is developing. Cargo and mail warehousing also increased by 4.8% over the previous year. Air Malta CargoSystems continues to respond to clients' needs by reviewing and enhancing its systems. In October 1999 the SITA SuperCargo airline reservations and warehousing system was introduced. This system enables efficient electronic interaction among airlines, shippers, forwarders and cargo agents. Together with TRAXON, users can now retrieve information on Air Malta flights and cargo shipments via the Internet.
Cargo services draw their due share of management resources. This is an area where Air Malta strives to achieve incremental improvements. Indeed Air Malta is actively seeking to forge alliances in this area of business in order to improve the service it provides to local shippers and forwarding agents.
Fleet and Economics
The key developments in Air Malta's markets impacted the fleet as well as its operating economics. Air Malta had to lease in two additional aircraft not least to meet the capacity suddenly required to service the German market. At the time aircraft availability was tight, more so for summer only leases, such that the best option was a longer term dry lease. Despite these difficulties Air Malta still committed to such capacity. Otherwise the local tourism industry would have suffered. Every possible effort was made to make best use of the additional aircraft in winter. However prevailing market conditions were not conducive to Air Malta fully achieving it's objective.
Two B737-300 aircraft were added to the core fleet, preceded by expensive short leases to bridge the gap between the start of the summer season and the time when the leased aircraft were available for delivery. Seasonality became more pronounced, as passengers carried in summer 1999 increased by 184,000, while in the winter that followed they increased by only 26,000. One aircraft was leased out to AZZURRAair but earned only marginal revenue. Limited use was made of the other aircraft primarily to support the relatively heavier maintenance programme on the rest of the fleet. Consequently core aircraft fleet utilisation dropped by 48 minutes per aircraft per day. Having gained one and a half hours in aircraft utilisation in the previous two years this represented a set back for Air Malta.
Air Malta's unit costs rose by 8%. This was attributable mainly to the escalation in the price of aviation fuel. No fuel price increases were passed on to the consumer. Increased competition in the market place forced yields down a further 3%. The twin adverse movement in unit costs and revenues pushed break-even seat factors to 78.4%, an increase of 6 percentage points over the previous year. Operating profit would have been hit even harder were it not for an improvement of 2.7 percentage points in the actual seat factor achieved. In order to tap into a new revenue source and make profitable use of its leasing expertise, in the summer months, Air Malta wet leased aircraft to Air Holland and Macedonian Airlines, combining sourced dry leased equipment with in-house flight crew and engineering support. Both leases proved successful and opened a window of opportunity for Air Malta's well trained technical personnel.
Operations
The additional units in the core fleet called for more resources in all operations departments, especially crews and engineering staff, since they also operated and supported aircraft that were leased out to third parties. There was an intense programme of training for newly hired crews, cadets to take up the position of First Officer, Senior First Officers to become Captains and switching of crews between B737 and A320 types in order to have the necessary personnel ready to operate different aircraft types. All class room and line training was done in-house. At one time the induction and training of crews was so intense that simulator training sessions were running concurrently in London, Brussels and Seattle. Since for the first time Air Malta leased in two new generation B737-700 aircraft, this training requirement extended into the current year.
The restructuring of European airspace and the planned introduction of Reduced Vertical Separation Minima (RSVM) necessitated the installation of avionics upgrades across the fleet. Air Malta's Engineering department worked closely with the Technical Pilots to effect these upgrades that included 8.33 mHz spacing on the communication radios and the installation of Traffic Collision Avoidance System (TCAS) well before the compliance date of January 2000. Flight Dispatchers were given refresher courses on TCAS as well as JAR-OPS1. On 1st January 1999 JAR-OPS came into force in Malta. Following intensive audits, the UK CAA accorded the Training Division the status of a Type Rating Training Organisation (TRTO), allowing it to rate pilots in Malta and other JAA member countries to fly specific types of aircraft. Prior to the wet leasing of aircraft to Air Holland, the Dutch carrier audited Air Maltaýs Operations to verify its conformity with JAR-OPS 1 requirements. Meeting such standards made it possible for Air Malta to lease aircraft to Macedonian Airlines and AZZURRAair. Air Malta was again audited by TWA to verify standards before becoming a code-sharing partner. Air Malta had to undertake a reciprocal audit. Similarly Air Malta had to verify ATAýs operations in view of the trip leasing of the B757 aircraft for the Malta-New York run. JAR-OPS 1 necessitated the setting up of a Quality System across the airline's operations departments. An operating Captain was appointed Manager Flight Safety & Quality to run the Quality System. Quality Auditors were also appointed. The Training Division in Air Malta's Flight Operations department was upgraded and extended its facilities at the Air Malta Training Centre. Specialised courses were also organised in Crew Resource Management and to further qualify instructors. Two important developments have taken place in the Engineering department. Over the last few years the cost of maintenance has been closely monitored. Following an extensive evaluation of various options, it was decided to cover aircraft components by a power-by-the-hour agreement. A reputable aerospace firm, guaranteeing immediate serviceable exchange of aircraft components for a fixed rate per flying hour, was contracted to provide Air Malta with component overhaul and spares support. This arrangement has given Air Malta a cost effective and focused component maintenance service with immediate and long-term financial and operational benefits. Another agreement was signed with a reputable engine overhaul agency. Air Malta pays a fixed rate per flying hour for its own engines, guaranteeing fixed costs for all scheduled and unscheduled engine overhauls. Engines powering leased aircraft are covered by a Time and Material agreement that, together with the maintenance reserves paid to the lessor, cover and fix all leased engines maintenance costs. Both the above mentioned agreements include a memorandum of understanding for the exploration and development of mutually advantageous business opportunities in the Mediterranean region thus capitalising on Air Malta's and Malta's resources and location. The Engineering department is currently concentrating its efforts on obtaining JAR-OPS Subpart M certification from the Department of Civil Aviation. The high standard of competence achieved by Air Malta's Engineering department is reflected in the 99.23% aircraft technical dispatch reliability achieved during the financial year under review, a further improvement over previous years of good performance. The Passenger and Ground Handling departments also had to increase and extend their resources to deal with the increased volume of passengers carried. Additional airfield equipment was commissioned and purchased. Moreover electrically powered tractors were introduced to provide a healthier working environment in the baggage sorting area at Malta's airport terminal. Closer liaison is being forged with the Motor Transport Workshop at Engineering where ground equipment is maintained and repaired. In order to achieve higher operating standards and better quality of service further training was programmed for all grades of staff. Safety on the ramp, ground handling procedures, leadership, customer relations and quality were specially targeted. This year Air Malta's punctuality performance suffered a setback when it dropped from 78% to 71%. AEA airlines experienced a slightly higher deterioration as the number of delayed flights increased from 22.8% to 30.4%, an increase of 7.6 percentage points. This is primarily attributable to air traffic control delays experienced across Europe which have deteriorated over recent years, more so last year, due to war in Kosovo. This situation underscores the fact that, in spite of efforts the airline makes to deliver a certain level of service, it remains exposed to external factors which at times frustrate its goals.
Y2K
Preparations for Y2K were both extensive and intensive throughout the airline, especially in the operations departments, entailing extraordinary expenditure and investment. Senior officials participated in IATA workshops and interacted with various civil aviation and airport authorities. They audited and continuously monitored the state of readiness of all Air Malta's systems and those at destination and alternate airports. The state of readiness culminated in the successful test flights for both the A320 and B737 fleets. Key operations were backed by well prepared contingency plans. Thanks to the high level of preparedness, the millennium rollover was smooth in all areas of the airline's operations.
Legislation and Corporate Governance
The International Affairs department continued to liaise closely with the Department of Civil Aviation in updating and negotiating air services agreements. It also stepped up participation in AEA and IATA fora that were particularly active this year in the areas of aircraft slot allocation and the protection of consumer rights. This department evaluated the implications of harmonising Malta's civil aviation legislation with that of the EU and the effects this would have on all departments within the Company. Representations were also made on Maltese air transport and Air Malta in connection with the National Programme for the Adoption of the Acquis as well as the drawing up of position papers connected with forthcoming negotiations. A SWOT analysis was undertaken of Air Malta's position in a Third Package context.
This was an important exercise that defined the changes the airline needs to effect before operating in a different regulatory environment. Seminars were organised to acquaint key staff with the finer legal points. Consultants were commissioned to draw up studies on various aspects of EU Regulations. Attention was also given to the screening and re-screening process connected with Malta's application to the EU for membership as a result of which a fair amount of documentation had to be prepared. The Internal Audit department was reconstituted with the assistance of external consultants. Air Malta personnel are undergoing retraining to take over the running of the new set-up.
Various departments and outstations were audited during the year and changes made to their control structures. Existing documentation will be collated and evaluated, gaps in the Company's processes and procedures identified and a new comprehensive financial procedures manual drawn up. Apart from an Audit Committee, Air Malta set up other key non-executive committees manned by members of the Board of Directors and Management to oversee certain sensitive functions of the airline. On the financial side the Purchasing and Contracts Committee was reconstituted with wider terms of reference than previously the case. In the social and industrial relations area, the Recruitment, Promotions and Discipline Committee, the Safety, Health, Welfare and Environment Committee, as well as the Industrial Relations and Human Resources Committee, were set up.
Personnel and Social
Air Malta's staff count reached 1,863 this year and incorporates a wide array of skills and professions. Training is key to the airline's continued high standards of performance. This need is particularly felt among part-time and temporary staff who are engaged to meet seasonal peaks in workload. Training is indeed an ongoing process covering routine and refresher training, as well as specialised professional training, leading to higher qualifications and certification of personnel.
The Company's image has been enhanced through the introduction of a new uniform for all staff. Designers of International standing were engaged to design it. The new uniform was worn for the first time at the start of the summer 2000 season. Air Malta always attracts numerous applicants when calls for job applications are issued. This interest is even more apparent during the annual Careers Convention. The airline offers wide ranging opportunities and prospects for career development. A new collective agreement was signed with the Union of Cabin Crew (UCC). Negotiations are still ongoing with ALPA, the pilots union and fresh negotiations are being initiated with the General Workers Union. Obviously staff expectations are varied and it is always difficult to reconcile demands and at the same time ensure that the airline retains its competitiveness. Management has the difficult task of striking the right balance between, offering the best conditions of work and containing payroll costs in sustainable proportions, in the face of escalation in other costs, such as fuel and user charges. Social needs are not neglected. The Sports and Social Club has become an institution in itself. The airline built and inaugurated a Child Care Centre that will be run by employees. This caters for the staff's pre-school age children, offering child care and development in a secure, safe and pleasant environment, close to the staff's place of work. Air Malta is now also offering a pre-retirement course for its more mature employees to help them adjust to their new way of life.
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