Air­baltic Ceo:“com­pany back to growth, a new in­vestor will have to main­tain the in­fra­struc­ture”

The Baltic Times - - FRONT PAGE - Li­nas Jegele­vi­cius

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

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