ROUTES EUROPE: airBaltic Completes Business Turnaround

Martin Gauss had some good news to tell delegates at this year’s ITB travel trade show in Berlin. The airBaltic chief executive officer was able to report that, thanks to a cost-cutting programme initiated last year, the Riga-based carrier had slashed its heavy losses of 2011 and is expecting to make a modest profit in 2014. This was confirmed in mid April when airBaltic’s 2012 financial results revealed losses had fallen to €38 million, a 75 per cent improvement on 2011. It is now expecting to make a profit of some €5.7 million in 2014.

“I am very happy. I was not expecting to close last year that well and we are already performing this year better than our own plan so the target is to reach a profit in 2014 and we are in a good way,” he explained. “If you look at the EBIT change from 2011 to 2012, I think we will be one of the leading airlines in Europe.”

It’s all a far cry from the airBaltic of just a few years ago. In November 2011, when Gauss was brought in, he found a carrier haemorrhaging money that had been almost torn apart by disagreements between its government and private shareholders over the future of the company. Gauss, who replaced previous CEO Bertoldt Flick to help to put an end to the shareholder dispute, presented a sombre appraisal of the airline’s position and what would need to be done to turn around.

“The initial priority was to stabilise as there wasn’t a management at that point, then evaluate the situation and within four weeks to give an overview of the options – that could have been to shut down. I said to shut down will need the least money, but there were three other options that I presented; that was the shrinking [of airBaltic] to a very small size, the second was to do what we are doing today, and the third was investing a lot of money and grow the airline even faster than we had been growing before,” he explained. “Our shareholders went for the second option which was also my preference. I said it would only work if we choose an option that provides the funding from the management team and the shareholder, you can not work against the shareholder.”

“According to IATA and Eurocontrol, our region is growing by some seven per cent a year, so from that it’s good, but the pressure coming from the low-cost carriers will stay and I personally see a lot of deregulation happening yet so I can see more airlines coming together or disappearing from the pressure coming from short-haul flights being in the hands of low-cost carriers now.”

Martin Gauss
Chief Executive Officer, airBaltic

Both the Latvian government and then stakeholder Baltic Aviation Systems (BAS) agreed to a major cash injection to keep the carrier afloat. With the government then effectively renationalising the carrier, it seemed the airline had the backing it needed to continue operating, but it was Gauss’ job to make sure it turned into a going concern.

Gauss attributes his carrier’s dramatic turnaround to the root and branch changes enacted as part of its ‘reshape’ programme, which saw airBaltic cutting costs by downsizing its fleet and increasing its aircraft utilisation, cutting its workforce and scaling back its operations to focus on profitable routes. Among the changes introduced was a new network and flight timetable which airBaltic’s route development team believe maximises the utilisation of its aircraft and the attractiveness of the product to passengers.

Rather than offering midday flights that proved unattractive to business as well as leisure passengers, airBaltic now seeks to offer early morning services and a same day return flight on both weekdays and weekends. Tested for the first time during this winter schedule, the new structure sees airBaltic reduce its bank structure from four waves a day to three waves, which does away with the very early morning flights that can no longer be operated because of a new night curfew which comes into force at Riga Airport this summer.

“If you go for business, you don’t choose a flight in the middle of the day and this was affecting the revenue management and pricing policy as it was difficult to generate the revenue for this unattractive product,” explained Manuel Esu, VP of network planning and development. “At the same time it was not very attractive for leisure passengers because if you wanted to have a weekend in Rome or Paris, same issue: if you are flying at eleven you are losing half a day, arrive in the middle of the day, when you have to come back a day after you lose half a day. How we dealt with this was to cut the number of waves; before we had four banks in our hub structure, one early morning, late evening and midday banks.”

“If you assume the same fuel prices as we had this year, if we had the 10 CSeries, just 10 of the 20 ordered in the fleet, then we would have finished the year with a profit.”

Martin Gauss
Chief Executive Officer, airBaltic

airBaltic has also beefed up frequencies on some of its busiest routes with Paris Charles de Gaulle (+5), London Gatwick (+4), Barcelona (+2) and Rome Fiumicino (+1).  With its new network in place, airBaltic is aiming for a nine per cent increase in aircraft utilisation, a 150 per cent improvement in connectivity leading to a 15 to 20 per cent improvement in results for the summer.

Another important innovation in the airBaltic network was to decrease the frequency of business routes in the peak summer season and replace them with leisure destinations. With this in mind, the Latvian carrier drew up a shortlist of some 30 potential destinations, from which five destinations were chosen after discussions with their airports and tourism authorities: Larnaca, Cyprus; Heviz-Balaton, Hungary; Olbia, Italy; Malta; and Rijeka, Croatia.

“This is something we have never done before at airBaltic; the only summer route we used to operate was with charter flights,” explained Esu. “Southern Europe is very popular; Spanish and Greek islands are very successful. I remember during my time in Italy we were making more money in summer months than any other time of the year.”

As airBaltic has downsized, its operations have been reduced and the carrier experienced an eight per cent decline in flights in 2012 and carried 3.08 million passengers, compared with 3.3 million the year before. The airline is now set to become the only national airline in the world to operate an all-Bombardier fleet in the coming years as it phases out its Boeing 737s and Fokker 50s in favour of four additional Q400s NextGen aircraft and 20 new CSeries 300.

13052013 airBaltic CSeries
airBaltic has an outstanding order for 20 Bombardier CSeries 300s which will be operated in a 148-seat configuration from Q4 2015.

Offering a significant fuel cost saving and with a 148-seat configuration, the new CSeries, which will begin to enter service in the airBaltic fleet in Q4 2015, is expected to make a significant difference to the carrier’s profitability, as Gauss explained. “If you assume the same fuel prices as we had this year, if we had the 10 CSeries, just 10 of the 20 ordered in the fleet, then we would have finished the year with a profit.”  airBaltic can also expect more fuel savings when it introduces continuous descent approach vectors for its Q400s from this summer, becoming the first carrier in the world to introduce it for a turboprop aircraft.

With airBaltic seemingly back in financial health, the government is keen once again to find a new private backer and Gauss explained that the Latvian Prime Minister had discussions recently with Japan’s two main carriers. “We will have to stabilise. Either we will grow again or we will have to find a partner to become bigger, because from our size I do not think we can maintain with just 20–25 aircraft,” he said.

While the growing threat of low-cost carriers to its operations means airBaltic cannot stand still, explained Gauss, he is not prepared to compromise on the independence of his carrier and as such airBaltic is not looking to join one of the main airline alliances. Instead, airBaltic is prepared to consider more regional partnerships, such as with neighbouring Estonian Air.  “We have a small neighbour airline but of course what I would like to see is one strong Baltic carrier. That doesn’t mean there isn’t the possibility of doing things together [with Estonian Air] rather than competing.”

So what are Gauss’s future ambitions? While the short-term priority is to continue to reduce the carrier’s costs and improve yields, long-term he is more confident, expecting the carrier to become the premier airline of the Baltic states and potentially offering long-haul routes to Asia by partnering with an Asian carrier. He is confident about the general outlook in the region and opportunities to grow from its Riga base.

“According to IATA and Eurocontrol, our region is growing by some seven per cent a year, so from that it’s good, but the pressure coming from the low-cost carriers will stay and I personally see a lot of deregulation happening yet so I can see more airlines coming together or disappearing from the pressure coming from short-haul flights being in the hands of low-cost carriers now,” he concluded.


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