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CEO Interview - Air Malta - Flying on a Mission

Peter Davies - CEO Air Malta

In this interview Peter Davies, CEO, Air Malta, says the industry must be more effective in getting its voice heard.

Can you detail the restructuring process that Air Malta went through recently?

We went through a very thorough and robust process, which the European Commission (EC) took very seriously. Our task was to prove that we can turn this airline into a sustainable business within three years in an extremely challenging marketplace. Our five-year business plan was probed extensively and will take us from a $42.6 million (EUR35 million) loss in 2011 to a profit of $9.7 million (EUR8 million) in 2016.

On an annual basis and by the end of the plan, we will have reduced costs by more than $36.5 million (EUR30 million) and increased revenue by the same amount.

Every area of the company is playing a role in this. We are united as a team in eradicating waste and inefficiencies.

We’ve reduced our fleet from 12 to 10 aircraft and staff numbers by more than 450. We have cut capacity by about 20%, which is a compensatory measure as required by the EC.

The business plan will bring the company into the 21st century and allows us to continue as the standard bearer for Malta.

About 30% of what we’re trying to achieve depends on what I refer to as a “rewiring and re-plumbing job”. The other 70% is all about delivering a cultural revolution at every level of the organization. We are determined to win the hearts and minds of the staff at Air Malta.

This is going to be a radical overhaul and, following the recent approval from Brussels, I am encouraged by the EC’s confidence in our capability to deliver.

What is the extent of the loan being given by the EC?

The EC has approved aid of about $158.3 million (EUR130 million) to increase the airline’s share capital. The company has contributed a matching sum. To achieve this, we are selling off a number of non-core subsidiaries so we can concentrate on running the airline.

We have made big decisions and we now have the funding to match our ambition.

How are union negotiations going?

We work with four unions representing our staff. We have to ensure that they understand the rationale behind our arguments and that we all need to work together on behalf of Air Malta’s employees.
We have renegotiated contracts and this focused on changing work practices, which were either outdated or inefficient.

Overall, it was a very constructive process. For example, we were able to outsource the extra pilots we don’t need right now to other carriers, such as Qatar Airways and Emirates. We achieved this by working together with Air Line Pilots Association (ALPA).

How important is the airline to Malta’s economy?

Malta still relies heavily on tourism. More than 25% of GDP—as well as some 35,000 jobs—depend on the tourism sector. And naturally aviation plays a major role in bringing visitors to the island.

The government has made strides in diversifying the economy. Malta is developing as a financial center and is growing manufacturing with companies specializing in hi-tech and pharmaceuticals.

Air connectivity is a key ingredient in supporting this strategy. Our recent investment in a new, state-of-the-art chiller facility in cargo is vital for the success of pharmaceutical companies based here.

Competition is fierce. Can small carriers survive in a consolidating market?

We welcome competition and the development of more connections for Malta. We feel more than confident that we can rub shoulders with our competitors, including low-cost carriers. We’ve read a lot about Heathrow recently and how a reduced number of destinations from the London hub is hurting the UK economy.

Smaller carriers definitely have their place in the market. An island such as Malta benefits enormously from having a carrier uniquely focused on developing the market as a destination airline serving the nation.

Of course, any airline could in theory supply that capacity. But our advantage—and the advantage of airlines in a similar position—is that we can reflect the values of our home base and we can be very focused in the services we provide.

This is about selling the best Malta has to offer. It is not about a nation’s desire to see its flag on the tail. Our mission is to attract people to the island and we believe we can do a better job than other airlines. In that sense, a national airline does still have a role to play.

It’s why I don’t agree with those who say air travel has become a commodity—and this is particularly true for an island economy. We still compete on service and not just price. You have to find the right balance.
Our service values are based on Maltese hospitality and Malta most certainly isn’t a commodity. And it’s very difficult for a foreign airline to copy our Maltese experience.

The problem for many small carriers is that they have substantial fixed costs and this is often why they don’t perform well. Smaller carriers need to be a very lean operation and offer sufficient capacity.

What about investment? Can small airlines make the money necessary to invest in the right technologies?

Of course, like in any business, airlines will continue to invest in technology. But it’s essential to use that technology properly. For example, we need to make sure that we keep things as simple as possible while exploiting far more of the functionality available in the systems we already have in place. We have also been working with SITA to get the most out of the IT services they provide.

Technology designed well and efficiently makes a real difference in this business. For example, engines are much better and airframes are much lighter these days. Together, these innovations can help generate savings of up to 20% on fuel.

There are a number of challenges facing the European market. Can airlines in the region thrive again?
With my fellow airline CEOs and IATA, I am extremely concerned about the state of European aviation.
We need to get the right building blocks in place and that means starting with infrastructure. More runways are essential, particularly in London.

Sometimes I am amazed at the level of subsidies given to rail projects, while aviation has to provide the funding for its own infrastructure. If we get the infrastructure right, then there are clear savings to be made.

There is a distinct lack of coordination when it comes to European aviation policy. If you consider the objective of a Single European Sky, there are real cost benefits. And a positive contribution can be made to the environment with significant CO2 savings. It cannot be right to compromise these benefits simply because we aren’t able to fly in a straight line across Europe!

At the same time, airlines are getting charged for CO2 emissions through the EU’s Emissions Trading Scheme. And this unilateral scheme is upsetting so many countries inside and outside Europe for lack of a multilateral solution.

This makes no sense when just adopting straight-line flying would reduce CO2 emissions. Yet no one seems to consider progress in this area as a priority!

Clearly, our arguments aren’t being properly understood. Given the size and stature of the aviation industry today, it has been very frustrating that we haven’t made the progress we should have. It does appear that our industry just gets taken for granted in political circles.

That’s not to say we shouldn’t look at the many areas in which the airline industry can make improvements.

So can the industry ever return a profit margin that covers the cost of capital?

If airlines are managed effectively—and there’s the right regulatory environment—then there is every reason to believe that the industry can succeed, return a decent profit and cover the cost of capital.
Again, we must first look at what more we can do for ourselves. Ancillary revenues and retail opportunities online and on-board is one example where we can generate much more revenue. Airports do well in this area, but airlines still have much to learn.

Although we’ve lowered the unit cost per available seat kilometer, we’re still held to ransom by bureaucracy. We’re a heavily regulated industry. Some rules—such as those involving safety—are understandable, even necessary, while others—such as bilateral agreements between governments—can make life much more difficult than necessary.

Airlines have to spend too much time focusing on regulation compliance and other issues instead of focusing on the customer.

We must also be more aggressive in tackling monopoly positions in the value chain. Airlines want to do a good job but others need to come to the table in a serious manner and ready to do business.

In most industries, there is a good choice when it comes to sourcing raw materials. But in Malta I have no choice of airport and, at the moment, just one fuel supplier.

Dealing with monopolies once and for all is not just about benefiting the airlines. It’s a competitive industry so any savings that we make will be passed on in part to the consumer. So consumers are missing out because of the industry structure imposed by the authorities.

Governments urgently need to start taking better long-term decisions in favor of a healthy aviation sector. Commercial aviation shouldn’t be about satisfying the rule-makers. Commercial aviation should be about satisfying customers time after time.

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