Of course, MAD seems a more wanted destination. But when a carrier leaves a route, it's a rolling start: they don't need to build up a customer base, but can immediately fill their planes with frequent flyers on the route.
I'd think, however, that Ryanair would fly FRL-MLA iso BLQ-MLA. Maybe on some W-pattern?
I think that if Air Malta is interested in the MLA-BLQ route, it will be the one getting it, leaving FR high and dry with its wishes to operate on the MLA-FRL route (in the sense that there will be no incentives offered to FR to operate this service).
I think that FR should concentrate on other more important - and probably more profitable - routes such as Malta-Madrid, where there is a clear lack of service throughout the shoulder months.
It wouldn't surprise me at all if in H2 of 2008 Ryanair announces a new base at MLA (especially if there's no change in government following the general elections). I'm sure that it would be a successful operation.