LATVIA: airBaltic presents its new business strategy

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Is this a new start for the successful yet troubled Latvian national carrier airBaltic? When the Latvian government bailed out the airline, its first job was to get rid of its long-standing CEO Bertolt Flick. When it found a new CEO, former CEO of Hungarian Malev Martin Gauss, his first job was to prepare a new business plan for the airline. Now the plan has been presented, and it shows a radical change for the airline.

Before, airBaltic's trademark was its loud and aggressive expansion: entering new markets, starting new side businesses and attracting attention with publicity stunts. Unfortunately, this has come at a price: its 2011 losses reached LVL 60m. Under the new management, the key word is frugality: airBaltic aims to optimise its fleet and flight plans, closing some of the loss-making routes, cutting the number of workers and introducing other cost saving measures. Altogether, the airline plans to consolidate its expenses by LVL 330m by 2016 and return to profits in 2014.

Reckless expansion to blame

If the Latvian government wanted to show that it has made a clean break with the past, it hardly could have picked a better person than Gauss. In more ways than one, he looks like the exact opposite of Flick. For one, if Flick focused on flashy announcements, extravagant plans and vocally criticised his many opponents, Gauss prefers to talk numbers and avoids discussing his predecessor.

"As the new CEO, I will not comment on the work of the previous management," says Gauss to news2biz. When explaining how airBaltic got to its current situation, Gauss avoids criticising things like shady ownership deals and moving assets out of company; instead, he focuses on airBaltic's unsustainably fast growth.

A new beginning:
Martin Gauss aims
to get airBaltic
back to profits by 2014.
Photo: news2biz

"airBaltic's passenger growth remained rather flat until 2003, when it started a rapid growth, which continued until 2008," explains Gauss. "Between 2003 and 2008, airBaltic increased its capacity by 67%. Unfortunately, our revenues only grew by 43% during these years."

The airline now has reversed its priorities: if previously it aimed to grow, often at the expense of revenue, then now its main task is returning to profits. To that end, it plans to adopt a slower growth rate.

"We assume that the Latvian market will grow by 7% a year, and the neighbouring countries, where we have most of our business, will grow at the same rate. So we will be able to benefit from this growth rate."

"We also plan that we will have a lower yield. Already since 2003, the average ticket fares throughout Europe are dropping, and we also plan to continue decreasing our prices."

Instead of raising prices, airBaltic plans to cut costs. Here, the business plan rests on several key elements: optimised flight plan, fleet overhaul and staff cuts. The flight plan optimisation means closing the loss-making routes, but it also means strengthening its sources of revenue. It calls for improved connections and decreased connection time in Riga, thus making Riga a more attractive hub. Some of the most popular routes will also see more flights.

As part of its optimisation plan, the airline is cutting its expansion in Finland. It had previously launched domestic flights between Finnish cities, but now it admits that they are operating at loss and is closing them.
As to fleet upgrade, the airline has decided to retire its Fokkers and leave just two types of planes in its fleet: Boeing 737 and Bombardier Dash Q400. Gauss notes that the Dash Q400 has proved that it has a place in the airline and it plans to keep it. As to the jet aircraft, airBaltic is planning to upgrade its Boeings within the next six years, choosing between Boeing and Airbus.

"We are in the final stages of discussions with the manufacturers and we plan to come to a decision by summer," says Gauss.

The optimised fleet will allow airBaltic to cut fuel consumption, improve range, increase payload and lower maintenance costs.

Following the optimisation, airBaltic plans to have 26 planes, 4m passengers, load factor of 80% and  more than 60 destinations by 2016.

In 2011, airBaltic had 34 planes and carried 3.3m passengers.

The staff cuts are planned to reach 15%, as Gauss believes that the current head count is excessive.
In 2012, the airline will not require any further financial assistance from the government, other than the already confirmed LVL 57.6m injection in the airline's basic capital and, if necessary, an LVL 25m loan.

Looking for investors

The Latvian government is also looking for possible buyers for airBaltic.

"We are talking with potential investors all the time," says Anrijs Matiss, state secretary for the Latvian Ministry of Transportation. "Obviously, a business plan is a huge step ahead in attracting any investors. The talks are ongoing, but we have not yet signed any letters of intent or contracts with any of them."

Previously, Turkish Airlines was named as a potential investor. Earlier this month, representatives from airBaltic joined the Latvian PM Valdis Dombrovskis on his state visits to United Arab Emirates and Qatar, where the airline was presented to Etihad Airways, Fly Emirates and Qatar Airways. The talks are ongoing with all three airlines.