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REPOSITIONING AIR MALTA: NEW FLEET FOR THE FUTURE

4 July 2002

Air Malta has concluded a multi-million dollar agreement which involves International Lease Finance Corporation, Airbus Industrie and CFM International for the renewal of its fleet over a four-and-a-half year period. 

The deal was based on a unique model which combines the best features of two normally exclusive scenarios, namely a leasing scenario and a purchase scenario. By exploiting this innovative model, Air Malta was able to dispose of its current fleet and secure a new fleet on a leased basis but as if it were purchased.

The objectives of the model were to generate immediate cash for the airline, protect the airline's current assets from premature depreciation, acquire a low-cost but high-quality fleet, improve the airline's competitive base, and deliver higher efficiency.

The unique deal was given additional impetus by the events of 11th September 2001 that created a window of opportunity which was exploited by Air Malta. The adverse international scenario which threw up severe challenges to the whole airline industry, not least Air Malta, was turned round into a positive outlook for the future.

Two major elements of the deal involve the sale and lease back from ILFC, a major American aircraft lessor, of Air Malta's own two A320-200s and three B737-300s, and the lease of twelve new aircraft for a term of twelve years each, which will be A320 family aircraft powered by CFM engines.

The leaseback of Air Malta's owned aircraft will be for a period of about three years. The aircraft will be phased out of the fleet in a way that they dovetail with new aircraft deliveries and the expiry of other aircraft leases from three different lessors.

The average age of the fleet will go down to 2.7 years on 31st March 2008 when AirMalta receives the 12th aircraft from ILFC.

The Air Malta / ILFC deal was concluded after long and intensive negotiations with several leading lessors. As a result Air Malta was able to achieve two major objectives - the sale of its aircraft at substantially better than market and book values, particularly after the adverse events of the 11th September, and the lease of twelve aircraft at exceptionally favourable rates.

Under the deal with ILFC, which was signed a few months ago, Air Malta negotiated the option of choosing between Airbus A320 family and the B737 New Generation family. Air Malta also secured the right to choose between CFM International and International Aero Engines should it select the A320 aircraft.

In negotiations lasting several months, Air Malta secured from ILFC substantial improvements in the purchase price of the current fleet, reduced rentals and other favourable conditions for the new aircraft, and other concessions. 

Prior to final selection, Air Malta conducted intensive negotiations with Airbus, Boeing, CFM and IAE to obtain the best financial and support package for its new fleet. The package includes cash discounts, concessions on optional equipment which will be incorporated in the aircraft, credits for purchased ground support equipment, discounts on purchase of spare engines, training of cockpit crews and engineering personnel, provision of computer hardware and software and training aids, subsidies for the lease of the aircraft, and other business opportunities.

The choice between Airbus and Boeing was not an easy one, particularly because both aircraft manufacturers as well as the engine manufacturers, made very competitive and aggressive offers. However, the overall benefits and economic results of the ILFC/Airbus/CFM package proved to be the most commercially advantageous for Air Malta , and the final decision by Air Malta's Management and Board of Directors was based on this overall package.

The selection of Airbus was the outcome of an intensive and detailed aircraft evaluation study, which was conducted by an inter-departmental team of about 30 senior officials directed by a task force. The studies started from a clean sheet and included long-term traffic forecasts, performance studies of various aircraft (payload, range and fuel burn), extensive research of alternative cabin layouts (seats, galleys and toilets), seasonal scheduling by route, and economic projections. The internal Air Malta studies were confirmed by an independent study by Aircraft Leasing and Management, a prominent aviation consultant, while a health check was conducted by the external auditors.

Apart from the enhanced warranties which Air Malta was able to obtain, particularly from the engine manufacturers, the airline also secured performance and maintenance cost guarantees from Airbus and CFM, which are rarely available for leased aircraft. The model adopted by Air Malta for this deal also enabled the airline to obtain substantive improvements in its maintenance arrangements and spares support from third parties.

It is to be noted that the Air Malta evaluation addressed the issue of purchasing versus leasing. The manufacturers were in fact requested to submit formal offers for the purchase of the aircraft. In spite of the substantial concessions which they gave, it was established that the discounted cost of purchased aircraft was still considerably higher than that for leasing. A net present value analysis established that the savings of the leasing option run into several dozen millions.

Moreover, Air Malta has also secured an option which is unusual for this type of lease, namely the possibility of purchasing some of the aircraft at pre-determined prices which are attractive in the light of the current aircraft glut.

The currently anticipated fleet will consist of five A320s and seven A319s though Air Malta retained the flexibility to change some of the future aircraft deliveries from one type to the other. Moreover Air Malta has retained the right to take delivery of the A321 at some future date.

The A320-200 will be configured at 168 seats while the A319-100 will be configured at 141 seats. However Air Malta will retain its popular four-abreast Club Class arrangement in the forward part of the cabin. The new seat layout will also provide enhanced comfort through a 33-inch pitch in the Club Class section.

Other attractive features of the new interior will be larger overhead stowage bins for passengers' hand luggage and a coat compartment in the Club Section will be standard. The aircraft incorporates the latest state-of-the-art technology in avionics, communications and 'real-time' maintenance monitoring. Needless to say, they will also incorporate the most updated safety features such as Traffic Collision Avoidance System (TCAS) and Ground Proximity Warning System (GPWS). Subsequent to the recent events, new security features will also be included.

The engines installed on the aircraft will come from CFM, an international consortium made up of America's General Electric and France's Snecma. The engines enable Air Malta to comply with the very latest noise regulations, including potential Stage 1V ICAO rules even though these are, strictly speaking, not applicable to existing designs. The aircraft will be environmentally friendly, in terms of reduced emissions.

When the new aircraft are fully inducted into the fleet, Air Malta will have a one-type fleet of aircraft, thus providing substantial inherent economies in crew certification and training, reduced aircraft and engine spares inventories, and better economies of scale in the production departments such as engineering, flight operations, flight services and ground operations.

The Air Malta deal with ILFC, Airbus and CFM will deliver a brand new fleet at an exceptionally attractive cost, enabling the airline to compete in today's very aggressive market place with a superior product. It will position Air Malta to maintain its commitment to the Maltese economy, particularly the tourism industry, and perform its mission as the prime carrier to and from Malta.

Chairman Louis Grech said : "The deal is a major milestone in Air Malta's history. It will give the airline a one-type fleet within a short timespan; a fleet which combines excellent economics with a superior product, state of the art technology with reliability. It is a deal which was made possible by a concerted effort by Air Malta's dedicated professionals to whom I am thankful."

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