Air Malta presented its annual report and consolidated financial statements for the year ended 31st March 2011 and its interim results up to September 2011. The year under review has been a very difficult year for the airline with various internal and external factors having a negative effect on the Group’s bottom line. Exceptional one-off items relating to restructuring costs and the revaluation of property assets were included in this year’s report and have thus negatively affected results. However there are encouraging signs that the situation is improving and positive figures started being registered. Their financial effects are being reported today and cover the post six-month period (April-September 2011) following the audited financial statements being reported.

The long road to recovery has started but the airline is not yet out of the woods. These results were announced during a press conference addressed by Air Malta’s Chairman, Louis Farrugia; Chief Executive, Peter Davies; and Chief Financial Officer, Nick Xuereb.

Financial Year Ended March 2011
During the financial year ended March 2011 the Group reported an operating loss before one-off items of 33.9 million euros (2010 21.6 million euros) representing a 57% increase over the prior year. When adjusted for non operating items such as profit on sale of capital assets, property re-evaluation changes including related income tax charges and restructuring costs, the Group has reported a total loss from continuing operations of 76.7 million euros (2010: 11.6 million euros).

These figures require careful examination to understand the airline’s underlying performance for the period. In line with International Financial Reporting Standards (IFRSs) as adopted by the European Union and the Group’s Restructuring Plan submitted to the European Commission, this year’s total loss includes the exceptional one-off charges related to the staff severance schemes which amount to 28.2 million euros, notwithstanding that the amount has not been paid as at 31 March 2011.

The operating figures were also negatively affected by the cost of fuel which increased by 10.4 million euros over the previous year and which was the main factor that increased the operating loss. The results were also affected by a Promise of Sale Agreement with Government in December 2011 to sell the majority of its property assets for 66.2 million euros. This was necessary as part for the airline’s holistic recapitalisation and refinancing plan pursuant to the Restructuring Plan. As part of the sales process, an independent valuation by an International expert was conducted. This valuation was substantially less by €18 million than that recorded in the airline’s accounts and accordingly the financial statements as at 31st March 2011 have been adjusted, including tax effect, to reflect the latest (November 2011) valuation.

The Group’s operating performance; restructuring transactions and the property revaluation have put the Group’s equity base under significant strain. The Group’s liabilities exceeded its assets as at 31st March 2011 by €68.8 million and its current liabilities exceeded its current assets by 62.7 million euros as at that date, excluding the impact of sales in advance from the Group’s current liabilities.

On a macro level, the aviation sector, like many, has experienced a difficult year with escalating economic uncertainty and continuing geopolitical unrest; both of which are expected to continue this year. For the aviation sector specifically, the volcanic ash disruption and airport closures from severe weather conditions and industrial action across Europe have exacerbated the already difficult trading conditions in the aviation industry during the financial year being reported.

Restructuring Plan
The operating performance and financial position of the Group has deteriorated from the previous reporting period, and over the last 6 years amassed operating losses in excess of 100 million euros. On the 15 November 2010, the airline successfully applied for financial support from its principal shareholder the Government of Malta, through the provision of a European Commission approved €52 million Rescue Aid Loan. The basis of the loan is to allow the airline sufficient time to prepare the Restructuring Plan for European Commission approval in accordance with the Community Guidelines on State Aid for Rescuing and Restructuring Firms in Difficulty. The approval of the Restructuring Plan will allow the Government to recapitalise the airline through a fresh equity injection.

Restructuring the Group commenced in November 2010, and with increasing pace, the airline has now put in place the foundations for its recovery. Key restructuring milestones since then have included the:
- Appointment of a new management team with specific airline turnaround experience;
- Preparation and lodgement of a Restructuring Plan with the European Commission;
- Negotiated sale of the Group’s property assets;
- Agreed financing plan with the principal shareholder and banks;
- Agreements with Unions to changes in work practices that are necessary to support a headcount reduction plan of approximately 500 staff;
- Closure and planned disposal of non-core loss making operations; and
- Identification, management and commencement of a holistic business change agenda incorporating more than 160 internal projects.

As part of the Restructuring Plan the Group has successfully negotiated a refinancing plan with its banks and principal shareholder that will be implemented over a five year term involving:
- Bridging finance from banks for 30 million euros over the next 3 years. This facility was secured in December 2011;
- The sale of property for 66.2 million euros. A 20 million euros deposit will be received in January 2012 and the balance due within three years as the Group restructures its property requirements;
- The shareholder is also committing new equity of €78 million and the eventual conversion to equity of a commercial loan of 52 million euros on the approval of the Restructuring Plan by the European Commission. These commercial loan funds will be used by the Company to pay back the EU Rescue Aid Loan in line with Rescue and Restructuring Guidelines. The commercial loan will be converted to equity in the later part of the five year financing plan. The capital will be called up in due course in accordance with the program established in the Restructuring Plan.

The Air Malta Board is now focussed on gaining European Commission approval for the Restructuring Plan and the continued implementation of the necessary measures to secure the long term future of Air Malta.

Next Steps and Trading Outlook
Despite the pending European Commission approval the airline is moving ahead with the implementation of the Restructuring Plan. In the next couple of months, as staff take-up redundancy schemes and vacant posts are filled in the new organisational structure, Air Malta will embark on a cultural transformation and business re-engineering process. This will reposition the airline and change it into a modern carrier able to successfully compete in the ever evolving aviation business.

Important decisions need to be taken. The airline’s property needs have also been re-evaluated. Air Malta’s fleet requirements for the coming years have also started to be reviewed in line with the new business model. The airline will keep its focus on its core-operations - to transport passengers, mail and cargo - and further the divestment of non-core operations will continue.

In the coming months Air Malta will continue spearheading the 160 individual projects that span various areas related to cargo, finance, corporate and financial restructuring, contracts management, ground handling, human resources, information technology and revenue enhancement.

Overall the restructuring process is aiming to increase the airline’s revenue by 30 million euros, decrease costs by the same amount and return to profitability by 2015. To achieve Air Malta is leaving no stone unturned and is working diligently to identify solutions for the benefit of the company, customers and its employees.

Commission opens in-depth investigation into restructuring aid for Air Malta
The European Commission has opened an in-depth investigation to assess whether a 130 million euros restructuring aid for the Maltese state-owned airline Air Malta is in line with EU state aid rules. The Commission will examine in particular whether the planned measures are appropriate to restore the company's long-term viability and whether they ensure sufficient compensation for the distortions of competition triggered by the state support. The opening of an in-depth investigation allows interested third parties to comment on the measures under investigation. It does not prejudge the final outcome.

In November 2010, the Commission authorised a loan facility of 52 million euros for Air Malta as rescue aid (see IP/10/1509). The Maltese authorities committed themselves to notify a restructuring plan within 6 months after the rescue aid decision.

In May 2011, Malta notified the Commission a 130 million euros capital increase. This is to help restructure the company, which has experienced financial difficulties for several years. The underlying restructuring plan covers a five year restructuring period from 2011 to 2016.

The Commission has doubts whether the notified restructuring plan complies with the requirements of the 2004 EU Rescue and Restructuring Guidelines (see IP/04/856 and MEMO/04/172). In particular, the Commission is concerned that the forecasts on long-term viability may not be realistic enough and that the proposed capacity reduction may not be appropriate to compensate for the distortions of competition created by the state support. The Commission also has doubts whether Air Malta's own contribution to the restructuring cost is sufficient.

Finally, the Commission needs more information to determine whether Air Malta is eligible for restructuring aid in view of a capital injection carried out by Malta in 2004.