KM nth restructuring: moral hazard, standard folly or both.

How can anyone justify paying millions to Air Malta employees who opt for early retirement when they were a significant part of the problems that led Air Malta to its present state of financial distress?  It is a typical case of rewarding failure and creation of dangerous moral hazard.   It is a text book example of failed half baked restructurings that Air Malta went through these least 2 decades, in the process absorbing hundred of millions of scarce resources, without actually addressing the underlying problems of inefficiencies and uncompetitive cost structures. 

Here is what I had written on 28.11. 2010 ( almost 12 years ago):

________________________________________________________________

Can Air Malta Restructuring Fly?

The Malta Independent on Sunday

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 travellers, 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.

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.

__________________________________________________________________________________________

And yet again this is what I had written on 13.03.2011 

The Malta Independent on Sunday:

__________________________________________________________________________________________

As Air Malta continues to sink further into the red, and the rescue money taxpayers invested continue to be eroded by accumulating losses rather than restructuring investments, we are gradually sliding into a blame game where parties with vested interests attempt pain distribution on the basis of blame apportionment as they perceive it. I hope that while negotiations are going on with unions defending the workers and the government defending its legacy, there will be a voice for the taxpayer. 

We cannot have another shipyard, even if the EU were to permit it. The moment the government took a (good) decision to allow low cost airlines to operate to Malta in the wider interest of our tourist industry, it should have immediately pre-empted a thorough restructuring of Air Malta to permit it to compete in the radically changed environment without being burdened by its heavy legacy costs. 

Now that we have wasted valuable time and precious money watching Air Malta sink under the burden of its legacy costs, it would lead to nowhere if we base Air Malta’s restructuring on a deadly blame game. I honestly doubt if Air Malta is still in a state of repair. Maybe it is better to consider the formation of a new Air Malta which would buy from the old Air Malta its valuable assets, including fleet, slots and intellectual rights, and re-build it from scratch on a competitive cost structure without its legacy burdens. The GM model used by the US government is worth bearing in mind. The rest can wait.

___________________________________________________________________________________________

Pity the taxpayers who had to spend hundred of millions to keep it alive and many more millions now that it is quite unavoidable that it gets buried.