Airbaltic Ceo:“company back to growth, a new investor will have to maintain the infrastructure”
The Latvian airline airbaltic has set off on its first year of growth since the start of the make-or-break overhaul in 2012, demonstrating cheerful results - both on EBIT, net income and the passenger flow.“after an intensive period of turnaround, airbaltic is back on a profitable growth path and is able to offer lower prices and more destinations with our brand new aircraft. We look forward to new milestones in the future, although a lot now depends on a new strategic investor, as the Latvian government is set to give up its stake, or part of it, in the company,” says Martin Gauss, Chief Executive Officer and the Chairman of the Board at airbaltic. He kindly agreed to take The Baltic Times questions.
You have some good news to share, don’t you?
The airline has been under a five-year Ec-monitored restructuring plan, known as “Reshape”, in order to put it back to growth. Throughout the years, we had to adhere to certain EU demands, which, for example, forced us to give up 16 profitable routes as part of the EC’S limitation on the seat numbers. On April 18, 2016, the first phase of the airline restructuring was completed as we rolled out our new business plan, “Horizon 2021”, aiming to continue the growth we registered in 2016.
We take pride in the fact that last year has marked a year of turnaround for us. In 2016, airbaltic maintained its revenues at the level of the previous business year, and improved its operational result (EBIT) by 13 million Euros, compared to a year earlier, at the level of 3.4 million Euros. The net income reached 1.2 million Euros ,with the airbaltic revenues being influenced by declining yields, at the same time airbaltic increased its passenger numbers by 10 per cent, to almost 3 million travelers. The total number of flights in 2016 was 44,000, up from 43,000 in 2015.
It was easier to put the company back on the growth path after the previously taken purposeful steps to control the expansion, in order to mitigate the side effects of the restructuring.
We put additional passenger seats on the market in 2016, and importantly, were able to sell them. To be competitive with low-budget carriers, we lowered our ticket prices- they were down 10 per cent last year against 2015 – which helped us increase the seat occupancy. With the ticket price reduced, the sales went up by 10 per cent last year.
So overall, the business was growing and the operational results were improving, although the net results may seem bleaker to some. I am a little disappointed that some Latvian media has focused on them, giving little consideration, or none at all in some cases, that they were due to all the business activities, which have to do not only with the direct business activities, but also with the loan interests, even court cases, settlements, etc., i.e.an aftermath of the past.
In terms of operational results, we’ve never had such a good year as 2016.
How much has airbaltic lost in competition to the
low-budget carriers due to the restructuring?
From 2011 to 2016, airbaltic lost a market share in Latvia, unfortunately. The other companies were flying in and out of Riga more, and we just could not do it, due to the adherenceofthe restructuring plan. However, with the restrictions on us lifted last year, we started gaining and actively taking back what we had lost during the overhaul.
To answer your question, at the peak, we had had almost 60 per cent of the Baltic passenger air market, but the share shrank below 50 per cent during the restructuring. However, I am glad we bottomed out last year and went above 50 per cent in that regardat Riga International Airport, and were in the range of 36 per cent in the entire Baltics, alsolast year. A single percentage point makes a huge difference in the Baltic market.
That coupled with the fact that we netted profit, and are back on the growth trajectory is a strong message to the industry, and the competitors, too.
Can you speak of any other setbacks through the years of restructuring?
With the negative equity we had during 2012-2016, the company had a difficult time in dealing with banks. It was hard to borrow, but all of it changed with airbaltic’s capitalization in 2016, meaning that fresh capital was brought in. Nowthat the company’s ratings are high internationally, the creditors see us again as a credible, solid customer with capital, cash and profits.
Looking back as to how the Latvian media had highlighted our performance during our good and worst times, I sometimes cannot hide the regret I feel. Many times the criticism we’d been subject to was not justified.
Can you elaborate on the company’s striving to renew its jet fleet?
In 2016, airbaltic was the first airline in the world to introduce Bombardier Cs300 aircraft, delivered to us by the Canadian aircraft manufacturer, Canadian Bombardier.
Indeed, airbaltic is the launch customer for the larger model jets and plans to add another 20 jets of the type by the end of 2019. With our average jet fleet age being just at two years, it will put us on the list of the youngest jet fleets in Europe.
We took two Bombardier jets last year, another six are coming in 2017 and we are expecting six in 2018. The last six will land in Riga in 2019.
The order of the jets is in line with airbaltic’s business plan during 2016-2021, Horizon 2021, which aims, among other things, to replace our 12 Bombardier Q400 turboprop aircraft.
To give you a glimpse into the history, the decision to completely renew the airbaltic fleet, which until now mostly consisted of Boeing planes, was taken in 2011. In selecting a supplier of new planes, we held a tender in which Boeing, Airbus and Bombardier participated - we also looked into the proposal by Brazil’s Embraer S.A., a jet manufacturer. In 2012, we signed a contract with Canadian Bombardier.
As Bombardier CS300 aircraft were not on the manufacturing line back then, we had to wait another four years, until 2016, to see the first jet arrive in Riga. It was worth the wait.
As we are bound to contractual obligations, I am not in a position to disclose the price of the jets, just let me tell you that the market price of such an aircraft is around 80 million euros.
How is airbaltic going to pay 1.6 billion Euros for the delivery of 20 Bombardiers?
Those 20 new jets will go onto our balance sheets, so, in other words, we will own them. To pay for them, we’ve made, like in the case of a home purchase, a down payment and we will be paying for them for the course of 12 years. It’s not exactly leasing, to be precise with the terms –we use the model of finance lease, which makes us the jets’ owner.
Is the striving to lower ticket prices compatible with the multimillion acquisition?
These things are completely separate. The lower prices are being driven by the market competition. The major factor that helped reduce them was the lower fuel costs we enjoy now as a result of fallen oil prices on international oil markets, as well as the acquisition of the ecology-friendly Bombardier jets, which demand for jet fuel is 21 per cent lower than that by their predecessors. The maintenance and the other costs of the new jets are lower, too.
So the ticket prices are a primary reflection of the competition in the industry. Ticket prices will be on a lower end as long as we see lower operational costs, i.e. the lower price of oil.
Due to the Bombardier CS300 economic parameters, our operational costs will edge down with the yearly addition of the aircrafts.
With airbaltic adding more than 12 new routes this year, it will see the fastest expansion of new itineraries since the start of the company’s overhaul in 2012. How important do you believe is the new flight geography?
We put 9 per cent more passenger seats in the market last year and we’re putting 15 per cent more seats (in the market) this year. We will have to reduce it below 10 per cent in 2018 though, which is in accordance with our plans, before going back to 15 per cent in 2019. The total passenger growth over the course will be from 2,6 million in 2016 to 4,3 million in 2021, a significant increase for a period of five years.
How many passengers out of 10 onboard of airbaltic planes are likely to be from the Baltics?
It would be hard to tell how many of them would be from the Baltic States, but what I can say definitely is that 56 per cent of airbaltic passengers are flying from or to Riga, while 44 per cent are transferring in Riga.
Yet you have to agree that a lot, if not all, depends on the Latvian Government, which holds an 80 per cent stake in airbaltic. As it readies to sell it, or part of it, how important is it that a new investor takes proper care of the Riga airport infrastructure and maintains what airbaltic has achieved under your supervision?
Indeed, this is a major development that can have a big impact on the company’s future. As a matter of fact, the government is selling its stake, although it remains yet to be seen what part of it- 50 per cent or 70 per cent - it will put up for grabs. It is extremely important both for the State of Latvia, Riga, and certainly, for airbaltic, that the created infrastructure is maintained. We’ve gotten the g,overnment’s assurances that it will be done, meaning that a new buyer will not be able to make any drastic changes, like, move some of the infrastructure somewhere else. I hope that a new major airbaltic shareholder will appreciate what has been done, and take it from there benefiting from the expertise we accumulated.
By the end of the year, the government should have the list of bidders willing to become a part of airbaltic. As far as I know, the list is growing.
Has the Latvian government set any regulatory filters as to who can become a new strategic investor and who cannot?
No, it has not. The only limitation is that the airlinecreated infrastructure is maintained until 2017. We’re talking about 44,000 flights we conduct yearly, the base airport has to be Riga, so that airbaltic stays in Latvia and keeps growing.
Where do you see room for the company’s growth?
Horizon 2021 envisions that the number of aircrafts will go from 25 now to 34 in 2021, while the passenger number is expected to go up from 2.5 million now to 4.3 million in 2021. Notably, the growth is projected from flights mostly within the Baltic region. We see a good potential of the market and it has not been tapped fully yet.
If you were not the airbaltic CEO, but an aviation industry expert, how would you size up airbaltic?
In fact, I do it on daily basis, I mean compare airbaltic against other companies in the industry. If I were to stack airbaltic against Ryanair in profitability, well, we are doing not so well, I am being honest. But, if we were to match the profitability of airbaltic and that of SAS, we are doing quite well. We are even better against Estonia’s Nordica in some key parameters. The bottom line is who you compare yourself against, but with our equity, profits and generally good prospects, we are among growing companies. The only problem that cannot be much addressed is that we’re small.
Yet you’re defying the stereotype that size always matters…
As an airline, we’re not limited to Europe, let me tell you this. We could theoretically put our planes to Portugal and carry out flights from there to, say, France. The question, however, remains how well we could do it on the route with the competition.
We ought to change our business model f we want to do more in the business. For example, start long hauls, flying from Riga to New York, let’s say. However, a lot should be taken into consideration to see whether the route can be economically viable. Anyway, in five years, we are ambitiously looking to putting airbaltic on a new level – possibly with long haul flights, not only to the US and Canada, but Asia and Africatoo.
I personally see a huge potential for flying long haul out of the Baltics, namely Riga. Certainly, the Finns’ purchasing power with the long-haul hub in Helsinki airport is higher than that of the Baltic flyers, yet it is not zero here. In fact, with the three Baltic States’ GDP growing, the demand for long haul will come sooner or later, as it is very important for the local infrastructure. The question is when and who will take on the new opportunity. airbaltic wants to be among those aiming for the quest.
For a country with a population of two million people, having 4.3 million passengers yearly and earning an estimated over 400 million Euros, which is our projection for 2021, it would be a commendable accomplishment. Internationally, we are a small airline, but on the scale of thelatvian economy, we’re a very important revenue and tax money generator.
How often do you fly airbaltic?
At least twice a week, as I fly to Munich, my hometown, every Monday and Friday usually.
Does the crew indentify you?
Well, it does, always.
Do you get special treatment?
No, I receive treatment as any airbaltic business class passenger. I try to be a courteous passenger, one complying with all the rules (grins). In addition, I use a lot of services of other air carriers, too. Sometimes out of curiosity – to see their product.
As a passenger, what would you like to see upgraded on airbaltic jets?
We should have Internet interconnectivity onboard. We are working on it and we look forward to offering it to our passengers next year. High-speed Internet connection will be a standard thing on all airlines in the near future.
Among other things, airbaltic jets-all of them- have to be modern, with bright lights inside, spacious lavatories and good air conditioning. This is how our planes will look after the fleet renewal.
I perhaps cannot wish more from the airbaltic cabin crew, as it is listed universally among the very best in the industry.
The basic air fare starting at 19.99 Euros for many of our flights is definitely one of our advantages, as well as the dedicated crew for business class passengers.
I see more of our passengers flying business class in the future, especially since we provide something very substantial - ticket flexibility, easy rebooking, availability of the fast-track at Riga airport, a hot meal onboard and the business lounge at the airport. I still see room in the segment. If we were not offering the services, the passengers would opt out for other airlines out there, no doubt about it.
“For a country with a population of two million people, having 4.3 million passengers yearly and earning an estimated over 400 million Euros, which is our projection for 2021, it would be a commendable accomplishment. Internationally, we are a small airline, but on the scale of thelatvian economy, we’re a very important revenue and tax money generator.”
Martin Gauss, Chief Executive Officer and the Chairman of the Board at airbaltic
airbaltic office at Riga International Airport