Boosted by its new Bombardier C Series jets, Air Baltic is strengthening its Riga hub as it seeks a private investor. Dominic Sipinski reports
COMMERCIAL AIR BALTIC
In 2016, some 5.4 million passengers travelled through Riga Airport. That is two-and-a-half times more people than the population of Latvia, of which Riga is the capital. In fact, it is only slightly less than the population of all three Baltic states, Latvia, Lithuania and Estonia, combined.
A big contributor to these numbers is Air Baltic. The Latvian flag carrier has got over 55% share in capacity to and from Riga. Last year it carried 2.9 million passengers, a growth of over 11% in comparison to 2015. In 2017, it increased its capacity by a further 18% and is poised to carry nearly 3.5 million passengers.
Air Baltic’s strength is not only Riga, although the Latvian capital is by far the largest hub for the airline. It has also got a 17% share in capacity to and from Tallinn, the capital of Estonia (where it is the second largest carrier after Nordica together with LOT Polish Airlines, both operating on LOT’s air operator certificate) and 11% in Vilnius (where it is third behind Wizz Air and Ryanair).
Martin Gauss, Air Baltic’s Chief Executive Officer explained to AIR International: “Our goal is to connect the Baltic states, not just Latvia. We do something that no other carrier can copy without a network in all three countries.”
Gauss went on to explain how thanks to its unique network, Air Baltic can offer connecting flights in all directions. On top of high-frequency flights between all three Baltic states’ capitals, the airline offers a number of European destinations directly from Tallinn and Vilnius.
Consequently, Air Baltic’s passengers can, for example, fly from Amsterdam to Vilnius directly, via Riga or via Tallinn. Someone trying to get from the Netherlands to Riga can just fly directly or via either of the other capitals. This gives Air Baltic a competitive edge as it can offer many more services than any other carrier would be able to sustain.
Connectivity in general, not just between the three Baltic capitals, is key for Air Baltic. Gauss said throughout the year the ratio between connecting and direct passengers in Riga is nearly 50:50, with slightly more passengers travelling on point-to-point routes in the summer months. To build such a strong hub in a small country, Air Baltic has had a combined focus on its fieet and network.
Air Baltic’s headquarters is located inside the airport terminal in Riga in wooden-clad offices, unmistakeably Baltic in style. When Gauss, a down-to-earth German pilot and former executive of Malév Hungarian Airlines, first entered his new office in Riga in 2011, the airline’s future was not bright.
At that time, Air Baltic had just requested a 60 million lats (around €85 million) bailout from the Latvian Government and the local media speculated on an imminent bankruptcy. The airline lost €121.5 million in 2011.
But a radical cost-cutting approach, combined with a focus on building a strong hub in Riga, quickly brought profitability back. In 2012, the losses were reduced to €27.2 million and in 2013 the airline earned €1 million net; it has been in the black ever since. Passenger numbers dropped from 3.3 million in 2011 to 2.6 million in 2014, as the airline’s capacity was limited by European Union constraints for receiving state aid, but since then it has rebounded to pre-crisis levels.
Fleet replacement was and remains a strong driver of Air Baltic’s recovery. In 2013 the airline ceased operating its last remaining Fokker 50 turboprops and a year later the Boeing 757-200s met the same fate. Deliveries of new Bombardier Dash 8 Q400 turboprops commenced in 2010; the last of 12 on order arrived in Riga in August 2013. And an even more revolutionary step was taken in November 2016, when the first of 20 ordered Bombardier C Series CS300s landed in Latvia. Air Baltic was the launch customer of the bigger variant from the C Series family.
Game-changing C Series
While the C Series was severely delayed, Gauss stressed it was a game-changer for the airline and performs exceptionally.
He said: “These are very good planes, both passengers and our crews like them. But they are also very efficient. Efficiency was the reason we ordered them and their operational results are even better than predicted. According to the delivery schedule, we should get the last CS300s in 2019, but we would be very glad if this could happen earlier.”
Gauss underlined the reliability of the C Series. In June, Air Baltic broke a record, flying a CS300 for 16 hours in a day. In July, it only took 50 minutes between the arrival of a brand new CS300 from the assembly line in Canada to the first commercial take-off.
Gauss said: “Even Bombardier tells us we use the aircraft very intensely, but I see no reason to keep them on the ground.”
He accepts that as a new model the aircraft might have some teething problems, but stressed that as a launch customer Air Baltic gets additional support from the manufacturer. It also helps the airline already had experience with Bombardier aircraft, being a Q400 user for seven years.
For the time being there are still 11 older Boeing 737 Classics flying for Air Baltic. The aircraft are being gradually replaced with CS300s, but given the pace of growth the deliveries of Canadian-made jets are simply not quick enough.
Gauss said: “We bought the 737s back from leasing companies, so now we have got more flexibility. We can choose when to sell them, as we are not limited by expiring leases. The goal is to have no more Boeings by 2020.”
Despite the continuing use of older 737s the Bombardier-based fleet has allowed Air Baltic to transform its network. Smaller, fuel efficient aircraft can operate on some routes with higher frequency, which allows the airline to build an optimal schedule for business travellers, particularly on cross-Baltic routes. It also helps to create a steady flow of traffic through Riga. The airport positions itself as a strong hub especially on connections from western and central Europe to the Baltic and Scandinavian countries.
Traffic growth necessitates further changes. Gauss admitted the Q400s are already too small on many routes. He said: “We will replace them with jets with more than 100 seats. We have not decided yet, whether these will be Bombardier CS100s or Embraer E2s. These are the two options available on the market.”
Gauss is a realist; he does not intend to expand Air Baltic beyond what is sustainable in the Baltic market. For instance, he does not plan to offer longhaul services, although such an offer from the Baltic states is currently very limited, with the only such route being the Uzbekistan Airways fifth freedom connection from Tashkent via Riga to New York JFK. Latvian passengers, like Estonians and Lithuanians, need to use the hubs of LOT Polish Airlines, Finnair, Lufthansa or SAS to travel long haul.
But when it comes to regional and European connections, the airline’s CEO believes Air Baltic is uniquely placed to serve the market. He is confident his company’s position will not be undermined even in light of LOT’s expansion in Tallinn.
Air Baltic currently flies to around 60 destinations. Despite its location at the outskirts of the EU, Riga is still more or less at the geographical centre of the airline’s network. While there are more connections to the southwest, where the core of the continent lies, Air Baltic also offers flights to three cities in Finland, two each in Sweden and Norway, Iceland and Aberdeen in Scotland. It also flies to the east and southeast, including three cities in Russia as well as Baku, Tbilisi and Abu Dhabi. Many of the key connections, such as Stockholm or Helsinki, are offered as high-frequency routes which increase their appeal to both business customers and transfer passengers.
Gauss explained: “Thanks to this network, we can offer the passengers the best service. For example, LOT offers low prices from Estonia, but for many people flying from Tallinn via Warsaw to western Europe makes little sense. It just takes longer. Somebody might do it once, but will not do it again. Flights via our hubs are simply shorter.”
He still sees untapped potential in flights both from and via Riga. The terminal in the Latvian capital is undergoing expansion to handle up to seven million passengers a year and, according to Gauss, in the future might handle up to ten million. Surface transport is being improved, too, with new motorways and railways widening the catchment area in the Baltic states and even to northeastern Poland, which does not have its own airport.
The airline also relaunched domestic flights to Liepaja which, Gauss is quick to point out, make sense only due to transfer traffic. The current pace of growth of the airline is extraordinary.
Gauss said: “Since the beginning of this year, we are finally no longer limited by the compensatory measures imposed by the European Commission in return for us receiving state aid. So the only factor which slows our growth is the availability of jets in our fleet.”
In the longer term, there will be some slowdown. But Gauss estimates 10% annual growth is a sustainable rate which could be maintained over a number of years.
Such good results and forecasts are a draw for investors. Air Baltic is now majority owned by the Latvian state, which holds 80% of shares. The remaining 20% is owned by Lars Thuesen, a Danish entrepreneur and owner of the airline Jet Time. The government in Riga is looking for options to sell its stake.
Gauss said, “The Latvian state was a good shareholder in difficult times, and it always ran the airline as a business rather than a political tool”, pointing out for example the extensive network to Russia, with which Latvia has tense political relations. “But the ownership will soon change,” he added.
The privatisation process should conclude by the end of 2017. There are undisclosed bidders and while currently it is hard to predict who might buy Air Baltic, it seems clear the Latvian airline is a good investment. Gauss said currently he does not see Air Baltic joining any of the major groups or alliances but with a new investor things may change.
One thing is clear, though. With its unique geographic position, increasingly modern fleet and tailored business model, Air Baltic will remain a major player in the northeastern part of Europe, regardless of who buys it.