While pursuing a rapid expansion of its fleet and network on its own merit, Air Baltic CEO Martin Gauss is not giving up on his long-standing objective for the Latvia-based regional carrier to become part of a larger European airline or airline group as consolidation on the continent continues. “There are lots of benefits in having a strong partner: aircraft purchase, cash management, and distribution power. The question is what do you lose,” he told AIN on the sidelines of the recent IATA AGM in Seoul. But, he emphasized, it will all depend on a “shareholders’ decision, not mine.”
“I think we need to grow a little bit more before we have the size where it makes sense for one of the big ones to look at us,” Gauss also conceded.
Air Baltic last year devised an ambitious business plan backed by a new firm order for 30 Airbus A220-300s plus an option for a further 30 of the type. Under its Destination 2025 growth plan, the carrier targets a transition to an all-A220 fleet and to operate 80 examples by 2025—a doubling of its current fleet size—if it exercises all the options. “Little Air Baltic was launch operator [of the A220-300] and holds 75 percent of the European [A220-300] order book,” noted Gauss.
At the end of May, the Airbus order book showed firm orders for 451 A220-300s, formerly known as the Bombardier CS300, and 85 of the smaller A220-100. European customers have signed for 70 A220-300s, of which Airbus has delivered 39, including 19 to Air Baltic. An Air Baltic A220 will appear on display at the Paris Air Show next week, but the airline does not plan to announce any orders.
“Our Destination 2025 business plan calls for 50 aircraft by 2022 and our options have an 18- to 24- month lead time, so there is no need to exercise an option this year,” said Gauss. As part of its firm order delivery schedule, Air Baltic will receive a further three examples in the fall, followed by 12 each in 2020 and 2021, and the remaining four in 2022. It would base all 50 aircraft in the Baltics, mainly at its Riga home base, except for some occasional ACMIs; this summer it is wet leasing two units to Lufthansa. The options, if converted, will support the establishment of bases across Europe but outside the Baltic region. Gauss declined to disclose which airports would serve as an Air Baltic base, noting “it would not be wise to do so.”
The airline’s current network spans some 80 routes—seasonal and year-round—in Europe, Russia/CIS, and the Middle East from the three Baltic capitals: Riga in Latvia, Tallinn in Estonia, and Vilnius in Lithuania. Including codeshares, the network extends to 300 one-stop destinations from Riga, according to Gauss. He described the market at the moment for Air Baltic as “very good,” thanks to its focus on connecting all major cities over Riga and its “unique” service model that combines an ultra-low-cost concept in economy with a fully fledged business class.
The A220s carry 145 seats. All routes take the A220 within a seven-hour radius from Riga, the model's maximum range. Gauss said he sees no need to add A220s with the increased maximum takeoff weight (mtow) of 2.3 tonnes Airbus plans to offer from the second half of 2020 as an option. The higher mtow will give the A220-300 an additional range of around 450 nm, enabling it to fly routes of up to 3,350 nm.
Air Baltic carried 4.1 million passengers in 2018, up 17 percent from 2017. It operated 56,261 flights last year, up 12 percent on 2017, and the number of seats offered rose almost 22 percent year-on-year. While this year’s plans call for another 20 percent growth in seat capacity, next year capacity expansion will slow to 10 percent, but then climb again to 20 percent in 2021.
Gauss dismissed criticism that the airline is growing too fast. Air Baltic nearly went bankrupt in 2011 following a period of rapid expansion and needed a bailout from the Latvian government to keep afloat. The planned growth by some 800,000 passengers per year is negligible compared to the volumes added by Ryanair, Wizz Air, or Lufthansa, he asserted. So far, Air Baltic has managed to grow profitably. It posted a net profit of €5.4 million ($6.1 million) last year, compared with a €3.7 million showing in 2017.
As Air Baltic moves to a uniform A220 fleet, its eight Boeing 737-300/-500s and 12 Bombardier Q400s will go. The airline already disposed of three 737s in late 2018 and six more—all owned—will leave the fleet after the summer. The remaining two will return to their lessors next year. The Q400s will exit Air Baltic in 2022 and 2023, when their leases expire.
The company will need fresh capital if it wants to exercise the A220 options. The Latvian government—which owns 80 percent of Air Baltic—engaged U.S. investment bank Greenhill & Co. to evaluate financing possibilities. Gauss said he could not comment on the state of play, but possible scenarios include an initial public offering and selling a stake to a private equity firm or an airline. The plan would offer the Latvian state “a nice exit,” Gauss pointed out. Latvia became a 99.8 percent shareholder of Air Baltic through its 2011 rescue operation, though the government has always insisted the arrangement would prove temporary. Danish businessman Lars Thuesen holds around 20 percent.