Sunday, 28 November 2010

Can Air Malta restructuring fly

The Malta Independent on Sunday - 13.02.2011

Can Air Malta restructuring fly?

There is one thing worse than allowing Air Malta to go bankrupt. It is Air Malta going bankrupt after it burns through a palliative loan of €52 million which taxpayers will be advancing it as a liquidity breathing space till the re-structuring plan is executed.

Our record for organising effective and timely restructuring of loss making state-owned commercial enterprises is awful. It took us more than 20 years to restructure our shipyards and only after burning through some one and a quarter billion (nine zeros!!) euro. In the case of the shipyards, the government adopted a death by a thousand cuts strategy to avoid the harsh reality of deep cuts needed to restructure quickly and effectively.

Air Malta cannot be allowed to go the shipyards route. Not only because EU competition rules won’t allow it, but mostly because resources are scarce and we have none to waste. Air Malta has to be a one shot thorough restructuring or not at all.

The government has appointed a steering committee to oversee the restructuring. What does ‘oversee’ mean?  Does the committee have an executive role or is it just consultative? If it is purely consultative (as such steering committees normally are, given that governments cannot abdicate their responsibility towards taxpayers who would be funding the restructuring), what are the chances of all represented parties focusing on “where do we go from here” and “how do we get there” rather than getting bogged down in blame sharing of “how and who got us where we are?”

Not that we should not, when the time is right, indulge in a blame apportionment exercise to examine who is responsible for Air Malta’s ailments. Probably the best time for this would be at election time when workers and taxpayers will have both an opportunity to assess overall government performance in managing the economy, rather than just its record at Air Malta, as well as the possibility to take corrective action through their vote. But at present Air Malta is on fire and the priority is to put out the fire and rebuild on sound foundations rather than defensively guard one’s patch purely on the hypothesis that others are responsible for the sad state of affairs.

 Don’t get me wrong. It is hard for workers who have been through one austerity round after another to stomach yet more cuts. But Air Malta cannot be saved with its current cost structures if it is to compete effectively with airlines with a lower cost base. Just last month I was one of the last passengers descending an Air Malta flight which had just landed. A swarm of cleaners made their way up the plane to clean it and turn it around for its next leg. Air Malta cannot compete with such cost structures when competitors have their normal cabin crew clean the plane as part of their regular duties. Air Malta’s front cabin, reserved for the lucrative premium business travelers, is too small to afford such overheads.

Expecting taxpayers to fund a half-baked restructuring is just not on. If, as it was reported, Air Malta made losses even during the peak summer tourist season then the restructuring required is truly deep and raises grave doubt in my mind whether the government, steering committee, management or whoever is involved can deliver true change in the time available.

The steering committee could do worse than take a deep look at one of the most effective corporate restructurings carried out since the financial crisis. General Motors, which had been losing money in the best of times, was forced into bankruptcy by the evaporation of the market for new cars as soon as the financial crisis snapped in the fourth quarter of 2008.

Last week it was back in action under a new corporate profitable structure gaining confidence from private investors as its shares were again floated on the US and Canadian exchanges. The governments of the US and Canada bailed out GM on strict conditionality of true restructuring. Product lines were dropped, factories closed, agency and dealerships terminated, workforce slimmed down to levels permitting efficiency, work practices streamlined, bondholders and pension funds claims converted into equity positions in the new GM. This was a painful exercise. Problems that are neglected for a long number of years never have easy solutions. But the alternative would have been even more painful as the collapse of GM would have transmitted problems down the supplier chain sending into bankruptcy a string of component suppliers on whose health other car manufacturing companies also depended. Small wonder that competitor FORD fully supported the government bailout of GM to safeguard the existence of component suppliers on which it also depended.

 Air Malta today is much in the same position that GM was in November 2008 when it went cap in hand to US lawmakers lobbying for an urgent bailout. If Air Malta folds up it will not only be the employees and stakeholders of Air Malta that lose; it will be entire tourist industry that depends on Air Malta’s seat capacity. Blind believers in the free market, like competitor low cost airlines, will argue that they can fill the slack left by Air Malta. In so doing they would be talking their book. The death of a worthy competitor like Air Malta will give them pricing power to demand better terms from their customers or from government subsidies directly or through the NTOM budget. Much as we value low cost airlines’ contribution to our tourism sector, we cannot allow them to have the concentration of commercial power that would come their way through the demise of Air Malta.

 This is a typical case where policy change is not sufficiently thought through all its consequences. The restructuring Air Malta that now has to be done under a crisis scenario should have been undertaken in calmer waters when the government changed its policies to permit the operation of low cost airlines. That was the time to ease off all burdens which were politically loaded on Air Malta when it was a quasi-monopoly operator; burdens like free tickets to VIPs, excess labour in overhead departments, inflexible work practices, and involvement in activities that are cheaper to outsource rather than provide internally.

 Or is it that our Mediterranean temperament is not suitable for long term planning and we can only deliver under pressure of an impending crisis` Whatever it is, the dice is set. We now have no choice other than effective and painful restructuring under pressure from an acute crisis. The alternative is even more painful well beyond Air Malta’s confines. Burning through millions of euros without change to the final destination, which would sound the death knell for a national champion that made us proud in the 37 years of its existence, is simply unacceptable.

 I will continue contributing my bit by continuing to choose Air Malta even if it is not the cheapest offer.

Sunday, 14 November 2010

Who wants to kill the euro

The Malta Independent on Sunday - 14.11.2010

Who wants to kill the Euro?

“Will the euro be around in 20 years” was the title of this column on 21 March. I followed this up with a contribution entitled “Plan C for the Euro” carried by The Malta Business Weekly on 10 June. On 24 June, in a letter to the Financial Times, I suggested that some euro members ought to “Revert to old currencies temporarily” to save the euro. There can be no doubt: I consider the current euro set-up as unsustainable, and unless some thorough restructuring is carried out pretty soon, the euro’s days, months, or at best years, are numbered.

I am not alone in reaching such conclusions. A prominent British economist Samuel Brittan wrote a piece in the Financial Times on 5 November starkly entitled “The futile attempt to save the eurozone”. Many other leading economists share these views but are less dire in their prognosis. They argue that the Euro is mainly a political not an economic project and that while the economic structure for the single currency is unsustainable, the political commitment to change it, probably in the face of a deep crisis during some marathon weekend meeting where failure would force markets to rip the euro apart, would not fail when it matters.

 It is however difficult to feel positive about such political commitment considering events happening around us. It is as if the Germans are determined to destabilise the euro and bring about its early demise. Last May, at the peak of the Greek sovereign bond crisis, the EU agreed to set up a €750 billion rescue fund to help euro members who were having difficulty managing their debt through normal capital markets at anywhere near sensible interest rates. Primarily, this concerned Greece but other members like Ireland, Portugal and Spain were in the queue right behind it. At the same time, the European Central Bank (ECB) stepped in through market operations purchasing sovereign bonds in a direct measure aimed to create demand and narrow the interest rate spread over the benchmark German Bund. The ECB also continued its programmes of extending nearly unlimited credit to euro area banks, particularly Irish and Spanish banks, which were finding it difficult to fund themselves normally on the wholesale financial markets. This rescue brought some calm to debt markets and provided valuable time to countries in crisis to conduct extensive and painful restructuring in order to win back the confidence of international investors.

Even the Greek colonels, Franco and Salazar would have had problems pushing through the sort of pay and benefit cuts, the abolition of subsidies and tax increases that are being implemented in Greece, Spain and Portugal. Yet nothing compares to the harsh measures with which Ireland is forced to punish its people, not only to address the sudden deterioration in public finances but also to save its main banks from outright bankruptcy.

Amid all this restructuring pain and valiant efforts by the ECB to calm the markets and rebuild confidence on the feasibility of the painful and harsh adjustment programmes adopted by Ireland, Greece, Spain, and Portugal, the Germans seem to be working at cross purposes and seem to be doing their damn best to blow the whole system apart. How can one otherwise explain why the President of the Bundesbank, Axel Weber, who the Germans are promoting to take over from Trichet the presidency of the ECB this time next year, is rocking the boat by openly dissenting and criticising ECB’s policies as decided in a collegiate manner by its central board of governors on which Weber himself sits as a prominent member?

 How can one explain the change of heart on Germany’s part to dismantle the Rescue Fund agreed last May as soon as possible to replace it by a permanent crisis mechanism, which would force losses on investors holding sovereign bonds of euro area governments, even though this would require a laborious change to the EU treaties in order to set it up?  While the ECB works hard to reassure sovereign bond holders that there will be no default and therefore should not demand high risk premiums for lending to periphery euro members, the Germans promote the setting up of a mechanism to enforce default costs on sovereign bond investors. Little wonder that the spreads for Greece, Ireland, Spain and Portugal have gone back or exceeded the levels at the peak of the crisis last May and this in itself puts obstacles on the path of their tough adjustment programmes.

 Wolfgang Schauble , the German Finance Minister is quoted as saying: “Should a eurozone member ultimately find itself unable to consolidate its budgets and restore competitiveness, this country should as a last resort exit the monetary union while being able to remain a member of the EU.” Certainly Schauble should realise that if a weak member is forced out of the euro the market will inevitably ask who’s next. The whole system will disintegrate before there is time to suggest an answer.

If any country should exit the monetary unit without risking its disintegration, it has to be strong countries that are running a strong balance of payments surplus with other euro area countries. It has to be countries whose economic performance can sit well with a much higher foreign exchange value of their currency. So Ireland, Spain, Portugal and Greece should tell Minister Schauble that “Should a eurozone member ultimately find itself unable or unwilling to run down its structural surplus with other member states and with the rest of the world because it has become extremely competitive, then this country should, as a last resort, exit the monetary union to allow its domestic currency to appreciate reflecting its level of competitiveness, while being able to remain a member of the EU”.

 A recent research study I have access to, shows that while Germany will remain competitive with an exchange rate of US$1.50 for each euro, Greece would need a rate of 1:1, while Portugal, Italy and Spain would need a rate of 1.18. The nearest to Germany would be France and Austria with a rate of 1.25. So if Greece is an outlier on the negative side, Germany is an outlier on the positive side and outliers from both ends should embark on adjustment programmes.

 The eurozone, and by implication also the EU, is at a crossroad. It must choose between a Germanic Europe or a European Germany. The former is unacceptable, flies in the face of what the EU stands for and resurrects painful memories of German arrogance in the first half of the last century. A European Germany should understand that it is the main beneficiary of the euro monetary union and that it has much to lose if its irresponsible acts lead to its disintegration. A European Germany would understand that benefits from the euro monetary system come with a responsibility to keep the rest of the pack moving forward in sync through policies that bring about sustainable restructuring rather than force the weakest through a sausage machine.

Lest they forget, the Germans should remember that along with the French they were the first to throw away the euro rule book when it suited them and that Ireland is partly suffering due to a lax monetary policy adopted by the ECB to accommodate Germany when it was suffering the pain of integrating the former East German economy, at a time when Ireland needed much higher interest rates to prevent the real estate boom that nearly killed it when the bubble burst. Rather than destabilise the euro, German leaders should remind their electorate of the huge benefits they are getting by being a European Germany.

They should remember the distaste they would generate if Germany continues with its march to enforce a Germanic Europe.